Current Geopolitical Factors Impacting Global Fuel Prices

Written by MABUX – Marine Bunker Exchange, an Aspect Partner, provides traders, operators, buyers and suppliers with current data on the bunker fuel industry.

World oil indexes have changed irregularly during the week as the market treads carefully after OPEC committed to increasing production in order to more closely stick to its production cut agreement after months of under producing, and despite rising US production. Meantime, escalating tensions between the United States and Iran rendered some support to oil and fuel prices.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), however, turned into upward trend in the period of Jul.19 – Jul.26:

380 HSFO – up from 427.43 to 444,71 USD/MT (+17.28)

180 HSFO – up from 471.71 to 491,36 USD/MT (+19.65)

MGO – up from 656.79 to 673,86 USD/MT (+17.07)

There are signs that Brent is becoming more attractive to Asian buyers. It was reported that oil cargoes from Europe, the Mediterranean and Africa have suddenly become attractive to Asian refiners because Brent fell relative to the Dubai benchmark. As oil from the Middle East becomes a bit scarcer on falling Iranian exports, there is an arbitrage opportunity in moving oil from the Atlantic basin to Asia.

Last month the 2018 BP Statistical Review of World Energy revealed that global oil production has now grown for eight straight years. Oil consumption rose to a new high as well, and has increased in 31 of the past 34 years. As per BP, there are three major demand centers for oil in the world: The U.S., the European Union, and the Asia Pacific region. Cumulatively, these three areas are responsible for two-thirds of global crude oil demand.

Rosneft expects Brent could reach US$80 a barrel by this year’s end. The company’s budget for the year is based on a much lower price, at US$63 a barrel. Rosneft accounts for about 40 percent of Russia’s total oil production, which has made it key for the production cut Russia agreed to with OPEC. The company has made it clear that despite the production cuts, it was eager to boost production both domestically and internationally.

Iran’s President Hassan Rouhani has threatened the United States if Washington continues pressuring it with sanctions and attempts to provoke unrest among the population. It refers to an offensive by Washington aimed at stimulating more unrest among Iranians using speeches and online platforms. Donald Trump in response warned Iran to never, ever threaten the U.S. again, or Iran would suffer the consequences. Washington slapped economic sanctions on Iran earlier this year. They will come into effect in early November and will specifically target crude oil exports.

Yemen’s Iran-aligned Houthis had attacked two Saudi Very Large Crude Carriers (VLCCs) in the Red Sea on the morning of Jul.25, sustaining minimal damage. Saudi Arabia in response said that it was temporarily halting all oil shipments through the strategic Red Sea shipping lane of Bab al-Mandeb. An estimated 4.8 million barrels per day of crude oil and refined petroleum products flowed through this waterway in 2016 toward Europe, the United States and Asia. The news supported fuel indexes.

Venezuela said, that Saudi Arabia does not have the capability to ramp up its oil production to the level of 2 million barrels per day. Saudi Arabia had assured President Donald Trump in early July that it could raise oil production if necessary, stating that it had sufficient spare capacity to bring to the market an additional 2 million barrels per day. This promise was not well received by all members of the cartel, particularly Iran and Venezuela.

Russia and China are blocking a U.S. effort at the United Nations to halt all deliveries of refined oil products to North Korea amid charges that Pyongyang is smuggling fuel into the country. Under a UN sanctions resolution adopted last year, crude oil supplies to North Korea were limited to 4 million barrels per year, with a ceiling of 500,000 barrels put on refined oil products. The smuggling typically involves North Korean tankers siphoning stealthy cargoes of oil in international waters from ships that often switch off their satellite tracking system to prevent any monitoring of their activities.

Norwegian drilling rigs workers agreed to call off their 10-day strike on Jul.19. The strike had limited impact on Norway’s output, affecting about 1 percent of its production, but some drillers warned of possible contract cancellations if the dispute goes on for a month or more. Some other oil rigs involved in drilling or exploration, and support vessels were also affected.

President Trump said that he’s ready to put a tariff on every single Chinese good coming into the United States and up to $505 billion of U.S. imports from China. The comment does not indicate an official policy change, but suggests the White House is willing to go to extreme lengths in its trade confrontation with China.

U.S. oil production stayed on a level of 11 million bpd last week. A separate EIA report predicts that shale output will grow by another 143,000 bpd in August, compared to July. Meanwhile, the number of drilled but uncompleted wells (DUCs) increased by 193 in June from a month earlier, most of which were concentrated in the Permian basin.

A decreased number of active oil and gas rigs was also reported in the United States last week. Oil and gas rigs decreased by 8 rigs with the number of active oil rigs falling by 5 to 858. The oil and gas rig count now stands at 1,046—up 96 from this time last year, with the number of oil rigs accounting for 94 of that 96.

The U.S. Congress, in an effort to undercut Russian supplies in Europe, is looking at legislation to accelerate LNG exports. The bill would also authorize sanctions on Russian energy projects, including the Nord Stream 2 pipeline.

We expect bunker prices may continue a moderate upward trend next week: escalating tension between Iran and the United States is the main upward driver in the market at the moment. If Iran shuts the Strait of Hormuz, as Iranian officials hinted at, it would cause a painful shock to the global fuel market.