OPEC+ meeting may set up further upward trend for oil and bunker prices
The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes have been falling since the beginning of the week as doubts mount about Russia’s willingness to extend the OPEC+ production cuts by nine months instead of six, and after TransCanada announced that it is restarting its 600,000-bpd Keystone pipeline.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) followed the general trend of global fuel market and final-ly slightly decreased in the period of Nov.23 – Nov.30:
380 HSFO - down from 360.21 to 354,43 USD/MT (-5.78)
180 HSFO - down from 401.50 to 396,93 USD/MT (-4.57)
MGO - down from 590.29 to 589.21 USD/MT (-1.08)
The single most important driver for fuel prices was OPEC meeting on November 30 and the deal extension expected to result from it. Rather short agenda (only a 3-hour meeting) suggested that a broad consensus has been built and the meeting would be just a formality to agree the extension of the Saudis’ favored 9-month extension period.
However, after OPEC meeting oil ministers will meet with their non-OPEC partners. The big-gest among these partners, Russia, has hinted that it may yet have to be convinced of the need for another extension. One of the reasons claimed by Russia is that the production cut deal was adversely affecting the country’s economy including low investment activity due to production limits. Besides, Russian oil producers are against a long extension because stronger oil prices will strengthen U.S. shale production. Anything less than nine months will probably have a negative impact on prices although this effect will likely be short-lived until the market adjusts.
So, discussions are ongoing as to how OPEC could meet Russia's demands. One idea in-cludes linking the amount of production cuts to the overall supply/demand balance in the market. Another idea would be to make explicit the fact that the deal could be renegotiated early next year in case market conditions change.
Meantime, the determination to keep the cuts in place comes at the same time that U.S. shale seems to be accelerating in response to higher oil prices. The difficulty is that the estimates for how much supply the U.S. will add next year differ by a wide range. The IEA predicts non-OPEC supply growth by about 1.4 million barrels per day (bpd) in 2018 (that would overwhelm demand). OPEC is more hopeful: the car-tel only predicts non-OPEC supply growth of less than 900,000 bpd next year. So the problem is that it is too difficult to forecast with any accuracy what to expect from shale drillers over the next year.
As for now, U.S. crude production has risen by 15 percent since mid-2016 to 9.68 million barrels per day (bpd), not far from top producers Russia and Saudi Arabia. After several consecutive months of sharp declines in the rig count, the U.S. oil industry added 9 rigs back into operation (for the third week in a row) to 747 active rigs. There is growing evidence that the rig count bottomed out again, and is now on the rise, moving parallel with the resurgence in oil/fuel prices.
The increased production is likely to translate into higher exports. As a case in point, U.S. crude oil exports to Asia hit the highest in two months, and the second-highest on record, at 877,000 bpd. The biggest buyer of U.S. crude in Asia was South Korea, which took 357,000 bpd, China came in second (222,000 bpd) and India is the third (151,000 bpd).
The fuel indexes were also supported by the outage of the Keystone pipeline, one of Canada’s main crude export routes to the United States. The pipeline ruptured and spilled more than 200,000 gallons of crude oil in South Dakota. Despite of the announcement that Keystone pipe-line was restarted under reduced pressure on Nov.28, the outage may accelerate the inventory drawdowns in the U.S. (as refiners rely more on storage) and also cut shipments to the U.S. by about 7 million barrels through November.
The factor of risk for the global fuel market is also Venezuela. After defaulting on debt, Venezuela’s crisis continues to unfold, threatening to worsen the state-owned oil company PDVSA’s production. This year, daily crude production in Venezuela is set to fall by at least 250,000 barrels, and next year the pace of decline may accelerate, reaching 300,000 bpd. The monthly rate of decline this year has been 20,000 bpd. Last month, oil production fell to the low-est in almost three decades, and it looks like the trend will continue as the recession deepens.
All in all, we expect the OPEC+ will eventually extend the production limits through the end of 2018, although it could be done in a series of announcements rather than all at once. If so, bunker prices have a potential to resume upward trend 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)
