MABUX: Global fuel market in the midst of adjustment

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Talks in Doha on Apr.17 between the world’s largest producers about capping production failed after Saudi Arabia insisted it wouldn’t restrain output without commitments from all Organization of Petroleum Exporting Countries members, including Iran, which has ruled out freezing for now. In the beginning many thought the collapse of Doha would have provided that catalyst, leading to a sell off when the markets opened on Monday. Instead, prices only moved down briefly before bouncing back up.

And now global fuel market has already seem to have forgotten about the failed Doha summit, with WTI and Brent regaining it lost over the past three days or so. The most likely reason is that the market saw other geopolitical events that more than made up for Doha. First was the news about labor strike of oil workers in Kuwait, and then EIA estimated in its April Oil Market Report that the global supply overhang is only set to be 1.5 million barrel per day (mb/d) through the first half of 2016, and could fall to only 0.2 mb/d in the third and fourth quarters.

Besides, the important thing was that the spread between futures prices for oil delivered in June and July has moved into a backwardation from a contango. Contango tends to be associated with an oversupplied market and high and rising stocks, while backwardation is associated with the opposite. The rapid tightening of the June-July spread can be put down to a series of short-term output disruptions, tanker loading delays and other events like oil workers’ strike in Kuwait.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) in the period Apr.15 – 21 has climbed:

380 HSFO – up from 175,71 to 180,00 USD/MT (+16,14)
180 HSFO – up from 218,07 to 226.36 USD/MT (+13,43)
MGO – up from 411,50 to 423.50 USD/MT (+23,86)

The meeting in Doha was the first significant attempt at coordinating oil output between the Organization of Petroleum Exporting Countries and nations outside the group in 15 years. Its failure set up new round of speculations if the participants will try to get consensus on a freeze again by the time OPEC meets in June or earlier in Moscow in May.

Saudi Arabia said it could respond to rising production from any country with an increase of its own. As per some statements, the kingdom could immediately boost output by more than 1 million barrels a day – about 10 percent – and double that amount in six to nine months.

Oman, the biggest non-OPEC oil exporter in the Persian Gulf, offered to narrow differences between Saudi Arabia and Iran that scuttled a planned crude output freeze.

Russia’s oil shipments may rise as the country is freed from a plan to coordinate output with OPEC members. Daily production may increase by 100,000 barrels to 10.81 million in 2016.

The failure at Doha was compensated as well by a labor strike in Kuwait that began on Apr. 17 and was called off on Apr. 20. The strike had temporarily cut Kuwaiti crude production by nearly half: as little as 1.1 million barrels per day (bpd), down from a normal level of about 3 million bpd. The trade union pledged now to make every effort to immediately return production to its previous level (by Apr. 19 output had already recovered to around 1.5 million bpd). Although the strike pointed to a momentary easing of supply conditions, its end revived the bearish mood while the general trend of oversupply remains unchanged.

The decline in U.S. production is one of the main factors driving fuel prices at the moment as well. The U.S. active drilling rig count has dropped off to the lowest level in more than 70 years. On April 15 that there were only 351 rigs drilling for oil in the United States, compared to 1,609 in October, 2014.

Many investors are still concerned that Iran is going to rapidly increase production. The fact is that they will increase production by 400,000 to 500,000 barrels per day by the end of 2016. They may add an another 100,000 to 200,000 barrels per day in 2017, but these are not much more than rounding errors in a world that will be consuming over 98 million barrels per day in 2017.

Venezuela’s oil production is already falling, down from an average of 2.65 mb/d in 2015 to 2.52 mb/d in February. The electrical blackouts in the country, which stems from low water levels at some of the nation’s dams, could result in the loss of another 100,000 to 200,000 barrels per day this year.

Nigeria, another OPEC member, has suffered from supply disruptions as well. Attacks on a key pipeline in February knocked off 250,000 barrels of oil production per day, and left the key oil terminal of Forcados offline.

The present situation shows that the fuel oil market is already in the midst of adjusting, as global supply continues to drop off. We expect bunker prices will continue changing irregular next week looking forward to new firm trend.

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* 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)

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Source: Marine Bunker Exchange