A weekly look at what occurred in the oil markets of the U.S. and the world this past week.
Anybody trying to figure out which way oil prices are headed needs to produce some sort of estimate on how to account for Venezuela. What is its production? How much oil is it holding? And can it find a way around U.S. sanctions against its state oil company, PDVSA, to find buyers for it?
The answer to the latter question appears to be no, given the buildup of oil in the country. One thing about technology today is that it becomes very difficult to hide oil. Ships have transponders and they are tracked every nautical mile they travel or whether they’re sitting in a port, waiting to unload. Based on a report this week from a company called Orbital Insight, the amount of oil sitting in Venezuela waiting to find a customer is 32.8 million barrels, a record level in a data stream that admittedly goes back to only the start of 2014. Still, compare the 32.8 million barrels to what is generally estimated to be Venezuela’s January output of about 1.1 million barrels per day (b/d).
That figure already was high, Orbital Insight said, but it is up 2 million barrels since the end of January. An article in The Wall Street Journal quoted an Orbital Insight energy specialist as saying that their data is also showing that inventories in India and China are running at high levels, and those two countries have been the biggest buyers of Venezuelan crude of late since U.S. purchases from the country are effectively banned. Will they want to buy more Venezuelan crude?
What is the country producing? If we start with the estimate of 1.1 million b/d in January, the Fitch ratings agency said this week that it expected Venezuelan production to drop to less than 900,000 b/d this year. Rystad, a Scandinavian research firm, was a little more optimistic but saw output in the 800,000 b/d territory by next year. But those are long-range forecasts. The country’s industry this past week was hit by a fire at a pumping station that has the capacity to move 300,000 b/d of crude, and the assumption is that will slow the movement of oil for an indeterminate period.
And while it isn’t related to the sanctions per se, a story out of Portugal so perfectly exhibits what a mess that Venezuela is in that it becomes almost a poster child for the country’s overall oil disaster. Reuters reported this week that the crew of a Venezuelan oil tanker, the Rio Arauca, will be released after its ship was held for nonpayment…for two years. It’s been sitting in a Portuguese river all that time.
Between Venezuela and Libyan production that swings up and down depending on what group of rebels or the army controls what key field or facility, you can see why oil forecasters are faced with a difficult landscape to estimate the world’s supply of oil.
We’re watching closely any signs of what might happen in the market for marine fuels as the start date for IMO 2020 draws closer on January 1. To remind you of why it is important for the trucking sector, IMO 2020 will implement more stringent standards on sulfur content in marine fuels, pushing ships away from high sulfur fuel oil (HSFO). One possible solution is to turn to a distillate such as marine gasoil with the question then of what that means for other distillates, like over the road diesel.
Key price reporting agencies and commodity exchanges this year have added prices for a low sulfur fuel oil that meets the standard of no more than 0.5 percent sulfur. A few weeks ago, we reported that the first trade in the S&P Global Platts Market on Close (MOC) process put the new fuel oil product, which is becoming known as VLSFO (very low sulfur fuel oil), went for $175/metric ton (mt) more than the existing high sulfur benchmark for bunker fuel, which is the fuel oil used on ships. But late this past week, there were bids and offers – but no deals – in the Platts MOC at a spread of about $40 per mt, a significant drop. Part of the reason is that there still is a market for HSFO, an active one, and it’s moved sharply higher in recent weeks because the primary crudes used to make HSFO, like those from Venezuela (sanctions) and Canada (self-imposed cuts) have been in such short supply. So the significant drop in the spread has other factors at work that may be short-lived. But any price indication is important. In this case, the price of an alternative coming back in closer to the broader market is good news for companies that need to buy diesel. January 1 draws closer every day.
Markets mostly moved higher this past week. The March WTI contract expired without any signs of significant hedge-related buying or selling, viewed in some quarters as the primary driver behind the December collapse. That sort of hedge-related activity tends to pick up as a contract’s expiration nears; it didn’t happen this month. For now, the market has digested the steep cuts that OPEC countries implemented in December and January – and indications that the reductions continued in February – and seems unconcerned that there are few few signs out of Russia that its much-vaunted plan to cooperate with OPEC’s efforts has amounted to much of anything. With OPEC cuts in January near 900,000 b/d, the 400,000 b/d reduction that was to come out of a Russia-led group of non-OPEC members were “led” by a Moscow reduction of just 42,000 b/d. While even Nigeria said this past week that it was determined to assist in OPEC’s efforts to cut supply to bolster prices – the country’s record in that regard is spotty – any noises coming out of Russia have been tepid. This past week, in a CNBC report, Torbjorn Soltvedt, the principal MENA politics analyst at the U.S.-based risk assessment firm of Verisk Maplecroft was quoted as expressing to clients skepticism about Russia’s role in restraining production. “Although our base case is still that Riyadh and Moscow find a compromise to extend the agreement, the pact is now looking more fragile than ever,” Soltvedt was quoted as saying. He said the company’s “base case” still has Russia cooperating but cautioned that OPEC and Saudi Arabia might need to accept “low levels of (Russian) compliance to save the pact.”