Global fuel market: still many uncertainties in both demand and supply
Despite troubling economic data from China which weighed on oil prices in the beginning of the week, improving fundamentals are beginning to push crude prices upward. Strengthening confidence in OPEC and its allies’ ability to do whatever it takes to keep the markets balanced, and in a de-escalation of the trade war between China and the United States, rendered support to fuel indexes as well.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), has demonstrated irregular changes in the period of Jan.10 – Jan.17:
380 HSFO – down from 373.71 to 372.64 USD/MT (-1.07)
180 HSFO – up from 418.07 to 418.43 USD/MT (+0.36)
MGO – up from 592.79 to 604.50 USD/MT (+11.71)
The World Bank expects oil prices to average $67 a barrel this year and next, down $2 com-pared to projections from June last year. This year, oil demand growth is expected to stay robust, but expected slowdown in emerging market and developing economies (EMDEs) could have a greater impact on oil demand than expected. The outlook for the supply-side is also uncertain as it largely hinges on OPEC and allies’ decisions about production levels, especially after the first half of 2019. The other key uncertainties about oil prices will be the impact of the U.S. sanctions on Iran when the waivers end in early May, as well as the production in Venezuela, which has been steadily falling over the past two years.
U.S. bank Morgan Stanley in turn cut its 2019 oil price forecasts by more than 10 percent, pointing to weakening economic growth expectations and rising oil supply, especially from the United States. The bank now expects Brent to average $61 a barrel this year, down from a previous estimate of $69, and U.S. crude to average $54, against a prior forecast of $60.
OPEC plans to publish the quotas for individual countries under the new OPEC/non-OPEC production cut deal agreed upon on December 7 and in force since January 1. The publishing of the quotas for each country could help overcome the skepticism in the market regarding the re-solve of OPEC and its allies to implement the decision made in early December. It is expected, that during the current period of the cuts, until June 2019, OPEC and allies will remove a total of 1.195 million bpd off the market and keep production at 43.874 million bpd.
Despite renewed hopes that a trade deal could be reached between the U.S. and China by the March 2 deadline, it may still not be enough to offset the negative impact on China’s economic growth. China saw its exports fall unexpectedly in December by 4.4 percent, the most in two years, with imports also falling 7.6 percent in their biggest decline since July 2016. The country also said that its trade surplus with the U.S. in 2018 grew by 17 percent to $323.32 billion, a figure likely to put more pressure on Beijing during ongoing trade talks with the U.S. In a worst-case scenario, where a trade deal can’t be reached, the outcome for global economic growth and oil/fuel demand will be a bearish market.
British lawmakers defeated Prime Minister Theresa May’s Brexit divorce deal by a crushing margin, triggering political upheaval that could lead to a disorderly exit from the European Un-ion or even to a reversal of the 2016 decision to leave. Parliament voted 432-202 against her deal, raising economic uncertainty that weighed on markets.
Falling oil exports from Iran due to U.S. sanctions that were reimposed in November, have offered some support to fuel prices. At the moment the United States has no intention of granting any further sanction waivers to Iran crude oil buyers. In November, waivers were announced for eight major Iranian oil importers, among them China, India, Japan, South Korea, Turkey, Taiwan, Italy, and Greece. Some of these importers (notably South Korea and Japan) reduced their Iranian oil imports to zero ahead of the sanctions’ entry into effect. Meantime, China and India declared that their preference is to continue buying Iranian crude even after the expiry of the waivers. India, in particular, even announced a payment settlement mechanism for Iranian oil that may allow it to avoid breaching the U.S. sanctions.
Venezuelan President Nicolas Maduro was inaugurated for a second term on Jan. 10. However, a coalition of 13 countries in the Americas (the Lima Group), announced in early January that they would not recognize Maduro as legitimate. The Lima Group includes Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Guyana, Honduras, Panama, Paraguay, Peru and St. Lucia. The countries issued a statement that said the May 2018 reelection of Maduro lacks legitimacy, and they condemned the breakdown of the constitutional order and the rule of law in Venezuela. The EIA says Venezuela’s production could fall below 1 million bpd in the second half of this year before declining further to 700,000 bpd by 2020.
Russia’s refiners have started to upgrade oil refineries to produce more higher-value oil products and less high-sulfur fuel oil (HSFO), but there are concerns that the country won’t be ready in time to meet the new IMO regulations on January 1, 2020. Moreover, even if Russian refiners sell their high-sulfur fuel oil to industries other than the shipping sector, they would still be unable to fully offset lost revenues from decreased demand and depressed prices of HSFO. As per some estimations, Russia’s lost revenue from fuel oil sales could reach US$3.5 billion: more than a third of Russia’s US$9 billion export revenues from fuel oil in 2017.
According to EIA, IMO sulfur regulations could lead to a glut of HSFO of around 1.1 million bpd along with a corresponding deficit in low-sulfur fuel, leading to unfavorable margins for the less complex refineries, especially those constrained in terms of desulphurization capacity. Switching to low-sulfur crudes is one option for refiners globally to meet the new limits, but most Russian refineries are stuck with using Urals and won’t have the option to switch to sweeter crude grades.
There was no change to the number of active oil and gas in the United States last week. The total number of active oil and gas drilling rigs is holding steady at 1,075, with the number of active oil rigs decreasing by 4 to reach 873 and the number of gas rigs increasing by 4 to reach 202. The oil and gas rig count is now 136 up from this time last year, 121 of which is in oil rigs. U.S. crude production rose last week to a record 11.9 million barrels per day, as crude exports jumped close to record highs near 3 million bpd.
Outlook for the coming week
There are still many uncertainties in both demand and supply while global fuel market is looking for some direction. We expect bunker prices may turn into the phase of irregular changes 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)