In its latest weekly report, shipbroker Gibson said that “sentiment in the oil market has changed. Brent, which just a few months ago struggled to stay above $50/bbl now seems firmly above $60/bbl having set a 29 month high earlier this week. For some time, many doubted OPEC’s willingness, commitment and ability to rebalance the market in the face of rapidly growing non-OPEC supply. Indeed, prior to the implementation of the deal, many OPEC members increased production, which boosted the volumes of oil on the water, and even with strong compliance, crude oil stocks grew throughout the first quarter, denting market confidence and sending prices lower into the summer. However, this should have hardly come as a surprise, particularly when it is considered that seasonal demand is typically softer in the first quarter. It was always going to be about the second half of 2017, even if some market participants were slow to recognise this. Now, with strong demand, and discipline from OPEC, oil stocks are finally drawing”.
According to the shipbroker, “the road to rebalancing has been far from smooth. Hurricanes and refinery outages have led to short term distortions in supply and demand, whilst going forwards other hurdles can be expected. Nevertheless, the trend is now clear. Crude oil futures are in backwardation and floating storage, which is often a leading indicator of oversupply in the oil markets, has consistently reduced over the past 4 months. Shore based stocks also appear to be falling but the data for many regions is lagged and subject to constant revisions”.
Gibson noted though that “however, despite demand surprising to the upside, it is expected to seasonally weaken into Q1 2018, which could lead to stock builds and with that, short term pressure on pricing. Risk is also influencing prices, perhaps more so than it has in recent years. The dispute in Kurdistan, Trump’s stance on Iran, continued instability in Libya, financial strife in Venezuela and a latent threat of insurgency in Nigeria, have all contributed (even if marginally) to higher prices”.
Meanwhile, “support is also being found from OPEC and Russia’s longer-term commitment to the cause. Consensus is growing that OPEC will extend its current arrangement beyond March 2018, quite possibility until the end of next year. Of course, compliance is critical, but provided it remains high enough, OPEC should see continued progress towards its goal. There is, however, a wildcard in the pack; US shale. In theory,$60/bbl price should stimulate more marginal production. But the expectations for the sector are constantly evolving. Costs are reported to be rising, and whilst most still expect production growth, some are starting to revise forecasts downwards in line with a falling rig count, among other factors. However, the rig count often lags oil price changes by a few months, so the response to higher prices may not be apparent just yet. In any case, US supply continues to flood the market, with exports hitting a record 2.133 million b/d last week. Shale remains a formidable challenge to OPEC but also an opportunity for the crude tanker sector. Prices are moving in the right direction but production from within and outside OPEC remains a threat in the longer term”, Gibson concluded.
Meanwhile, in the crude tanker market this week, in the Middle East, Gibson said that “for the third week in a row VLCCs failed to break through, or even challenge, previous peaks and are now operating in defensive mode as the last quarter of the November programme becomes ‘in play’. Next week there is widespread personnel displacement to the Dubai functions and a likely disrupted cargo, and information, flow is unlikely to work in Owners’ favour. For now, modern units hold at close to ws 70 East with older units moving into the mid ws 50’s with West runs marked at around ws 27 Cape/Cape. Suezmaxes flattened off after last week’s slight gains but rate ideas still hold at around ws 85 East and ws 42.5 to the West upon hopes/expectations of a busier week to come. Aframaxes remained steady with occasional upside for prompter needs and Owners are optimistic for next week’s campaign. Rates operate at no lower than 80,000 w127.5 to Singapore now, and for the next fixing phase too”, the shipbroker concluded.