MABUX: Geopolitics is a key driver for bunker prices’ upward trend
The Bunker Review is contributed by Marine Bunker Exchange
World oil indexes increases in recent days have been driven by speculation over the fate of the Iran’s nuclear deal and its possible impact on global oil supply, as well as rising geopolitical tensions in other parts of the Middle East. Prices have also been supported by the Organization of Petroleum Exporting Countries and its allies including Russia persisting with output curbs to clear a global glut.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) also demonstrated firm upward trend in the period of May.03 – May 10:
380 HSFO - up from 401,79 00 to 421,36 USD/MT (+19.57)
180 HSFO - up from 440,36 to 460,64 USD/MT (+20.28)
MGO - up from 672.29 to 692,86 USD/MT (+20.57)
The main driver on the market is U.S. President Donald Trump’s decision to withdraw from the Iran nuclear deal and re-impose economic sanctions of the highest level. The forecasts diverge as to how a no-waiver would impact Iran’s oil exports and global oil prices. Estimates vary from a zero to one million bpd loss of supply out of Iran, and a premium to oil prices of between $2 and $10. It is also possible that the effect of the sanctions has already been factored into prices, so any immediate impact will be limited. Iran’s top oil customers are China, India, and South Korea. Russia, China, Turkey and India will likely all oppose the sanctions and keep their current levels of Iranian crude purchases. Besides, under U.S. law Trump must wait at least 180 days before imposing furthest-reaching measure, which is to target banks of nations that fail to significantly cut their purchases of Iranian oil. During the last round of sanctions, Iran's oil supplies fell by around 1 million barrels per day (bpd), but the country re-emerged as a major oil exporter after sanctions were lifted in January 2016.
Asia's petroleum refiners are seeking alternative supplies as they prepare for renewed U.S. sanctions against major oil exporters amid a tight market. The biggest single buyer of Iran's crude is China, whose imports peaked at about 900,000 bpd in mid-2016 but have dropped to around 600,000 bpd in 2018. But Chinese refiners said there were alternative suppliers, especially in Russia, Saudi Arabia and West Africa. In India, refiners also hope they can continue importing Iranian oil. During the last round of sanctions, India enjoyed waivers allowing limited Iranian oil imports paid for in rupees instead of U.S. dollars.
Meantime, it seems that the oil market is already in a bit of a supply/demand deficit. According to the International Energy Agency (IEA), oil inventories fell by 26 million barrels in February, a larger-than-expected decline. That put total stocks just 30 million barrels above the five-year average, which means that market is close to arriving at OPEC’s long-sought goal of achieving balance. This was confirmed by the latest data of OPEC production showed it produced around 32 million barrels per day (bpd) in April, slightly below its target of 32.5 million bpd, due largely to plunging output in Venezuela.
Saudi Arabia increased official oil selling price to Asia. It may signal stronger-than-expected demand in Asia and underpin prices. State-owned producer Saudi Aramco on May 02 raised the June price for its Arab Light grade for Asian customers to a premium of $1.90 a barrel to the Oman/Dubai average, the highest since August 2014.
The Iran-Saudi conflict in Yemen looks to have escalated. The Iran-aligned Yemeni rebels (have been fighting a Saudi-led Arab coalition in Yemen since 2015) have been targeting Saudi Aramco oil facilities and the Saudi capital Riyadh with missiles and have been trying to attack Saudi oil tankers in the sea. A possible further escalation of the Saudi-Iran proxy war in Yemen is one of the geopolitical risks in the Middle East that could add premium to oil and fuel prices.
Iraq (OPEC’s second-largest producer behind Saudi Arabia) is holding parliamentary elections on May 12 amid still unresolved issues with the Kurdish region that have hit Iraq’s oil exports from the north to Turkey’s Mediterranean coast. The election is a short-term risk as it could delay assigning oil contracts: Iraq is pushing for recovery of its oil, refining, and civil infrastructure sectors after it declared victory over ISIS at the end of last year.
Libya has managed to lift its production to around 1 million bpd but risks still persist with rival factions fighting for control and suddenly disrupting oil facilities’ operations and oil export terminals.
Adding to those worries are the supply disruptions in Venezuela. The oil market is likely already pricing in large supply losses from Venezuela, with forecasting declines of several hundred thousand barrels per day to 1 million bpd by the end of this year. Production is already down to about 1.4-1.5 million barrels per day, or about 600,000-700,000 bpd lower than 2016 levels. Besides, there are a series of potential disasters facing Venezuela that could accelerate declines: a full-blown debt default, U.S. sanctions, and asset seizures from creditors.
Russia lacks the expertise to develop complicated new projects, which could result in output peaking in 2020 and declining thereafter. As per forecasts, there was a dearth of new discoveries in Russia and even the discoveries that have been made over the past decade have not been given the greenlight because of cost and complexity. As a result, Russia’s oil production may erode beyond 2020.
Market also continue to weigh a steady increase in U.S. production levels as the rise in U.S. drilling marked one of the few factors pressing back crude/fuel prices. U.S. drillers added 9 oil rigs in the week to May 4, bringing the total count to 834, the highest number since March 2015. That was the fifth consecutive weekly increase in the rig count, underscoring worries about rising U.S. output. Domestic oil production also rose to an all-time high of 10.703 million barrels per day last week. Only Russia currently produces more, at around 11 million bpd.
Top officials from China and the United States reached a consensus on some aspects of the countries’ trade row, but disagreements over other issues remain relatively big. The Trump ad-ministration has drawn a hard line, demanding a $200 billion cut in the Chinese trade surplus with the United States, sharply lower tariffs and advanced technology subsidies. China’s trade surplus with the United States widened to $22.19 billion in April, from $15.43 billion in March. For January-April, it rose to $80.4 billion, compared with about $71 billion in the same period last year.
The geopolitical risk premium has become one of the key drivers on the global fuel market in the recent weeks and could further boost oil and fuel prices in a medium-term outlook. The main risks to oil supply could come from the Middle East, North Africa and Venezuela.
We expect bunker prices will continue upward evolution 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)
