MABUX: OPEC has extended cut production deal, what is the next?
The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes have dropped during the week. At its conference in Vienna, OPEC announced a nine-month extension of its November 2016 deal to cut production. Markets were unimpressed with the decision: the expectations had supported the prices for at least week before, following considerable speculation and positive rhetoric from Saudi Arabia, Russia and other major OPEC and non-OPEC producers. The general consensus now is that the organization delivered what it had promised, agreeing to keep production cuts in place until March 2018 rather than mandating additional cuts or pushing the end of cuts to May 2018.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has dropped in the period of May 25 – Jun. 01 following the general downward trend on global oil market:
380 HSFO - down from 308.86 to 288.43 USD/MT (-20.43)
180 HSFO - down from 349.93 to 327.43 USD/MT (-22.50)
MGO - down from 520.50 to 496.57 USD/MT (-23.93)
OPEC agreed to extend the current cuts for nine months until March 2018. As a result crude prices dropped as it became apparent that a much more aggressive move - a lengthier extension or deeper supply cuts - was off the agenda. None the less both Saudi Arabia and Russia dismissed the immediate drop as momentary changes, assuring that prices would recover in time. Russian Energy Minister Novak later hinted that deeper cuts could be considered, depending on how the supply situation changed in the immediate future.
Nigeria and Libya will remain exempt from making cuts while Iraq has generated considerable speculation regarding its potential for sinking the whole deal by ignoring quotas.
One more risk for OPEC deal: Iran said its current crude oil output level will not be reduced under the extension of the OPEC production cuts. In the initial OPEC deal, Iran was allowed to slightly raise output and keep it capped at 3.797 million bpd. Four months into the deal the Islamic Republic has been sticking to that production ceiling. But now it wants to increase its output to 5 million bpd by 2021.
Goldman Sachs Group Inc. considers the OPEC will face the test of de-fending market share. Additionally, backwardation - when near-term crude prices are higher than those for later months - will be needed for the cuts to achieve their goal of shrinking an oil inventory glut and prevent an increase in U.S. shale production. Bank also considers that the 9-month extension in production curbs will achieve a normalization in OECD inventories by early 2018, even with gradually declining compliance.
Meantime, according to some analysis (t.ex. management company AB Bernstein), even if the market is in a deficit and inventories are in decline, the normalization process will stretch into 2018. If inventories declined by 1 million barrels per day, it would take 11 months until stocks fell back to the five-year average. As a result, the OPEC nine-month extension was necessary and appropriate, but probably not a radical step that could initiate a major fuel price rally in the short run.
Another question is what happens after the deal expires in 2018 - there are some warnings that the glut would simply return. If that appears to be the case at the end of the first quarter of 2018, OPEC might be forced to extend once again.
Representatives from the U.S. shale sector attended the Vienna conference, in-dicating that cooperation between American producers and OPEC could be a possi-bility in the future. However, there are not so many chances for it: some OPEC pro-ducers are rather hostile to the new challenge from the U.S., while more and more American companies are very interested in raising production.
Taking this into consideration, one of the aspects of the OPEC’s new strategy to balance the oil market could be to cut oil exports to the U.S. As per some sources, Saudi oil exports to the U.S. will drop below 1 million barrels per day in June, a reduction of 15 percent below the average so far in 2017. If the Saudis will do so, it will be the lowest level of exports to the U.S. in years.
Meanwhile, U.S. explorers added two rigs last week to 722, the highest level since April 2015. While the number of working rigs has more than doubled from last year’s low of 316, it was the smallest increase this year. U.S. inventories in turn dropped eight weeks in a row, though they still remain above the five-year average and production rose to the highest since August 2015.
Anyway, the real impact of OPEC and non-OPEC cuts, totaling 1.8 million bpd, could be felt later in the year or even next year. Global fuel market turns its focus back on macroeconomic data and possible geopolitical issues. We expect bunker prices will continue slight downward evolution next week while market is searching for the new supportive factors.
* 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)
