2016 April 28 16:15

Bunker market: no consensus on whether prices move up or down

The Bunker Review is contributed by Marine Bunker Exchange

World fuel market continued upward trend during the week. The supportive factor at the moment is the signals that oil producers are still considering the chances for an accord on limiting supplies. Discussions in Doha on Apr.17 failed after Saudi Arabia said it wouldn’t restrain supplies without commitments from all members including Iran. But now OPEC and other crude producers are preparing to meet in Vienna in June in a new push to agree on an output freeze.

Falling output, especially in the United States, where many producers are shutting down following an up to 70 percent price rout since 2014, is also helping to lift the market. It is expected U.S. oil production to drop by at least 500,000 to 600,000 barrels per day (bpd) this year, compared with 2015, and by another 500,000 bpd in 2017.

This is probably a sign that fuel prices are gaining ground on the back of rising demand and shrinking supply. The market is projected to rebalance by the end of this year, or in 2017 at the latest. However, group of investment banks cautioned not to get too excited about the rebalancing outlook. Barclays said that it is not yet convinced that prices will remain here or go even higher. Morgan Stanley assumed the rally had more to do with macro factors as well as speculators trying to profit.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) continued firm upward trend in the period of Apr.22 - 28:
380 HSFO - up from 177,50 to 192,93 USD/MT (+15,43)
180 HSFO - up from 222,36 to 230.79 USD/MT (+8,43)
MGO         - up from 418,79 to 437.64 USD/MT (+18,85)

Despite the recent rally, oil markets remain oversupplied: 1 - 2 million barrels of crude are being pumped out every day in excess of demand. Russia and major producers in the Organization of the Petroleum Exporting Countries (OPEC) indicated they will raise output:  Russia might push oil production to historic highs, Iran reiterated its intention to boost output to 4 million barrels per day, Saudi Arabia and Libya also threatened to raise production.

Saudi Arabia will complete an expansion of its Shaybah oilfield by the end of May. It is expected that production capacity of the Shaybah oilfield will rise to 1 million barrels a day from 750,000 barrels. That allows the kingdom to maintain total capacity at 12 million barrels a day.  

Kuwait plans to increase oil production to at least 3.15 million barrels a day by June after a three-day strike by Kuwaiti oil workers sent crude production to 1.5 million barrels a day last week. Kuwait produced 3 million barrels a day before the strike. It was agreed to end the walkout after the government refused to negotiate while labor was off the job. Kuwait is targeting capacity of 4 million barrels a day by 2020, including 350,000 barrels a day from oil fields it shares with Saudi Arabia.

Iran has increased output by 1 million barrels a day since sanctions were lifted in January while Iran oil exports seen reaching pre-sanctions levels by the end of May. At the same time, separate sanctions imposed by the United States on financial transactions remain in place, hampering attempts to do business with the Islamic Republic.

U.S. crude supplies rose 2 million barrels to 540.6 million barrels last week, the most since 1929. Supplies at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, climbed by 1.75 million barrels.

Meantime, crude production in the U.S. down about 650,000 barrels from the peak and it’s going to keep dropping because companies stooped to invest any money to drill new wells . The number of active oil rigs fell to 343 last week - a fifth week in a row and the least since November 2009. That compares to over 700 this time last year. There is the possibility that some U.S. shale companies bring production back as oil prices inch higher. The number of drilled but uncompleted wells (fracklog) could start to pump as they become profitable again. It may bring more supply back into the market weighing on any price rally.

China may be poised for another increase in imports: there were 83 supertankers headed to China, the most since December 2014. Taking into consideration standard cargo sizes, they would be able to deliver about 166 million barrels. The nation added 787,000 barrels a day to stockpiles in the first quarter, the most for the period since at least 2004. China’s total imports in March jumped to 32.6 million metric tons, or about 7.7 million barrels a day. Imports climbed in March from countries including Iran, Venezuela and Brazil.

At the moment there is no consensus on whether prices move up or down. But supply is falling and demand is rising.  In a long-term the market will have to balance out; the only question is how quickly that happens. We expect irregular changes of bunker prices next week.

All prices stated in USD / Mton
All time high Brent = $147.50 (July 11, 2008)
All time high Light crude (WTI) = $147.27 (July 11, 2008)