World fuel indexes were steady in the beginning of the week but turned into sharp downward evolution recently: U.S. inventories surge to record highs every week, fueling doubts about the effectiveness of the Organization of Petroleum Exporting Countries’ strategy to curb production in order to deal with the global supply glut. U.S. oil production also continues to rise. OPEC in turn said to be prepared to extend the deal for another six months through the end of 2017 – the step which may help move the market at least in the direction of a supply/demand balance. Moreover, cartel may also increase the cuts, if inventories fail to drop to a specified level. But despite of that, there is a growing consensus that fuel prices will remain steady and oil prices will stay below $60 per barrel in 2017 even if OPEC decides to extend its production cuts.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) dropped in the period of Mar.02 – Mar.09:
380 HSFO – down from 308.57 to 298.93 USD/MT (-9,64)
180 HSFO – down from 350.21 to 341.21 USD/MT (-9,00)
MGO – down from 527.86 to 517.93 USD/MT (-9,93)
The International Energy Agency predicts OPEC will increase its production capacity by about twice as much as previously thought, led by expansion in Iran and Iraq: output capacity will raise by 1.95 million barrels a day from 2016 to 2022, with a third of the gains concentrated in Iraq.
As per IEA, Iraq will retain its position as OPEC’s second-biggest producer, adding 700,000 barrels a day to reach 5.4 million a day in 2022. Most of the increase will come from oil fields in the south of the country. Iran will expand capacity by 400,000 barrels a day to reach 4.15 million in 2022. Having been released last year from trade restrictions, the country has introduced a new contract model to attract foreign investors.
But as for now, OPEC’s deal has succeeded in creating optimism in the global fuel market. Saudi Arabia continues leading a pact between the Organization of the Petroleum Exporting Countries and other major producers, including Russia, Mexico and Kazakhstan, to cut global crude output by about 1.8 mil-lion barrels per day (bpd) from Jan. 1, and bring supply closer to demand. Kingdom’s output fell to 32.17 million barrels a day in February, a 65,000 barrel-a-day drop from January, the first month of the agreement.
Nigeria was exempted from the cut deal because of militant attacks on oil infrastructure in the Niger Delta. However, government efforts to appease the militants seem to be working, and it was reported last week that the country’s daily output has risen to 2.1 million barrels of crude with the further plans to raise output to 2.2 million bpd by the end of the year.
Rising Nigeria’s output was compensated at the moment by Libya which halted exports from two of its biggest oil ports and reduced production from some fields due to resumed clashes. As a result, the country’s production fell to 650,000 barrels a day from about 700,000. Crude shipments from Es Sider, the nation’s largest oil port, and Ras Lanuf, its third-biggest, have been suspended until security improves.
Russia’s crude oil output dropped in February to some 11.10 million bpd from 11.11 million bpd in January – just 100,000 barrels lower than the country’s starting output used to settle the terms of the agreement. Moscow agreed to cut 300,000 barrels per day of production during the first six months of 2017, with the first 200,000 down within the first three months of the year. This means Russia still has a month left to cut another 100,000 barrels per day to stay on track.
Another factor of risk for the implementation of OPEC/non-OPEC output cut agreement is that OPEC has lost already around 5 percent market share in Asia since October. The U.S., Brazil, Britain and Libya have increased their supply to Asia from 10.4 million barrels in October 2016 to over 35 million barrels in February of this year. So, under current fuel market conditions, OPEC risks losing market share with further production cuts beyond the stipulated six-month period.
The rise in U.S. oil production since output bottomed out at the end of last summer has been swift. Since September, U.S. production has climbed roughly 125,000 bpd on average each month, pushing total production above 9 million barrels per day. That is a much faster pace of growth than the original shale boom that began years ago (the corresponding period for the 2011-2014 shale boom saw monthly growth of just 93,000 bpd). The estimations are quite positive for shale drilling: shale production may add from 400,000 bpd up to 900,000 bpd by the end of 2017, which may significantly offset the OPEC cuts too. Looking for the compromise, OPEC has moved to bring U.S. shale producers and hedge funds into widening talks about how best to tame a global oil glut. The group held unprecedented talks with fund executives and shale producers in Houston this week.
China aims to expand its economy by around 6.5 percent this year, which is lower than the 6.7 percent growth achieved last year – another factor pushing fuel prices down. China also plans to cut steel and coal output this year in an effort to tackle pollution while China’s newly appointed banking regulator vowed on to strengthen supervision of the lending sector.
All in all, OPEC’s supply-cut deal and rebound in U.S. drilling activity – two main drivers on global fuel market – continue neutralizing each other despite of some single-moment fluctuations. We expect irregular changes will prevail in bunker prices’ evolution next week.
* MGO LS
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)