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Insight Weekly Market Report Market report - 14.05.2024

Market Report Week 20 - 14.05.2024

Other insights May. 14, 2024
Market Report Week 20 - 14.05.2024 Download the report here

Summary

Next week will be important for the oil market with the release of the OPEC and IEA monthly reports, which could influence prices, especially if the IEA revises its views on the market balance. Inflation rates from various countries will also be released, with notable forecasts including a drop in Saudi Arabia to 1.5%, France to 2.2% and Italy to 0.9%, while US inflation is expected to rise to 3.5%. Alarmingly, Argentina's inflation is projected to be just under 300% per annum. Trade balances show Indonesia's surplus falling slightly below $4bn, India's deficit improving to $15bn and Singapore's surplus falling slightly. Eurozone GDP growth is estimated at 0.4% in Q2, while Japan's GDP is expected to have contracted by 1.3% in Q1, with significant declines in industrial production in both regions.

In the oil market, Baker Hughes reported a decline in the US oil rig count, while WTI prices fell to $78.7 per barrel. The EIA forecasts balanced markets in 2024 due to OPEC+ production cuts and an increase in non-OPEC production, particularly from Canada. US crude oil production is expected to increase and the consolidation of US shale is expected to moderate growth but prolong production stability. The EIA expects oil markets to tighten gradually, depending on demand growth, with oil prices falling from $90 per barrel in Q3 2024 to below $83 per barrel in Q4 2025. Argentina's shale development in Vaca Muerta is expected to increase significantly by 2028, potentially easing economic problems.

The Bank of England maintained its interest rate at 5.25% with a focus on controlling inflation, which fell to 3.2% in March. The Bank expects GDP to be flat in 2023, modest growth in 2024 and inflation to fall further by 2027, with interest rates remaining higher for longer. Geopolitical risks, particularly in the Middle East, could affect oil prices and inflation, although weakness in Chinese export prices could provide a counterbalance. The BoE uses market forward curves for its oil price outlook, projecting $85/bbl in 2024, falling to $75/bbl by 2026.

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Oil

- The EIA forecasts that OPEC+ production cuts will offset non-OPEC growth by 0.8 mb/d, resulting in a balanced oil market in 2024. Canadian production is expected to increase by 0.2 mb/d as the Trans Mountain pipeline expansion reduces distribution bottlenecks.

- In 2025, OPEC+ is expected to lift production cuts, leading to a 1.9 mb/d increase in global oil production. OPEC's spare production capacity of around 4 mb/d should help stabilise oil prices.

- US net oil imports are projected to decline from 2.4 mb/d in 2023 to 1.3 mb/d in 2025, with US crude oil production increasing by 0.3 mb/d in 2024 and 0.5 mb/d in 2025. Other liquids are expected to add 0.4 mb/d in 2025.

- Despite challenges in increasing conventional oil production, US shale oil has grown significantly. However, industry consolidation, such as the merger of Exxon and Pioneer, may slow future growth but prolong production stability.

 

- The EIA projects a gradual tightening of oil markets due to increased demand for spare production capacity, with demand growth forecast at 0.9 mb/d in 2024 and 1.4 mb/d in 2025. Oil prices are expected to fall from $90/bbl in Q3 2024 to below $83/bbl in Q4 2025. Argentina's Vaca Muerta shale region will also boost production, potentially exceeding 1 mb/d by 2028.

 

The Economy

- Last week the Bank of England kept its interest rate unchanged at 5.25%, with discussions now focusing on potential rate cuts based on the number of committee members voting in favour. The Bank's Monetary Policy Report highlighted the minimal impact of the Red Sea disruptions on inflation and oil prices, noting a significant fall in goods price inflation but persistently high inflation in services.

- The Bank's strategy of curbing inflation by raising interest rates has reduced inflation to 3.2% in March by making borrowing more expensive and saving more attractive, thereby reducing economic activity. However, savings continue to fuel the economy by being reinvested in financial markets.

- The Bank of England is forecasting flat GDP growth in 2023, with a modest increase to 0.5% in 2024 and 1% in 2025. Inflation is expected to fall to 1.9% by mid-2026 and further to 1.6% in 2027, with Bank Rate expected to remain elevated: 4.8% in 2024, 4.3% in 2025 and 3.8% in 2026.

- The Bank warns of potential global shocks that could push up inflation, notably geopolitical developments in the Middle East that could increase oil prices. While other sources of oil could mitigate these effects, significant short-term increases in oil prices remain a risk.

- The Bank of England's oil price outlook, based on market forward curves, forecasts prices of $85 per barrel in 2024, falling to $79 per barrel in 2025 and $75 per barrel in 2026. The report also notes that lower Chinese export prices could help reduce UK inflation, despite accusations of Chinese price dumping.

 

Vessel rates

  • New York

    HSFO demand heavy on term, VLSFO demand is sideways. MGO demand is sluggish. HSFO demand heavy on term, VLSFO demand is sideways. MGO demand is sluggish.

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  • Fujairah

    Recent VLSFO cargoes totalling appx 300kt have landed in Fujairah in the past week and barge slots have opened up. The tightness has eased, and premiums have followed. VLSFO pricing at MOPS 0.5 low double digits. HSFO still remains tight with some suppliers’ barge slots booked up for the coming 2 weeks ahead. Bunker premiums are at a 4-month low and May supply situation looks to be well covered.

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  • ARA

    Exxon are still having refinery problems resulting in much lower MGO discounts. As a result of the issues, the market is slightly more balanced, but still well supplied. Fuel oil is still well supplied.

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  • Singapore

    The LSFO market will be partially supported by tight arbitrage arrivals from 13-17 May, although weak downstream demand will pressure delivered premiums. A lack of LSFO exports from Kuwait and unprofitable European arbitrage economics will help to reduce stocks. LSFO bunker demand in Singapore has plateaued, with limited enquiries expected to keep delivered premiums under pressure. Cargo availability around Singapore is adequate, with no shortages expected and ample barge schedules for prompt refuelling. In the HSFO market, tight supplies and stable bunker demand are expected to keep the market firm. Summer power generation demand in South Asia will continue to support HSFO fundamentals. Steady spot HSFO demand around Singapore should continue to support bunker premiums and keep inventories balanced. In the gasoil market, supply pressure may increase following the release of new export quotas by China. Middle distillate stocks in Singapore fell by 2.46% to 11.1 million barrels between 2 and 8 May.

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  • New York
  • Fujairah
  • ARA
  • Singapore

Forward Curves

3.5% Barges R'Dam Curve

Weekly Report 140524 Page 0033

The 3.5% barges’ curve is in contango for the first three months of the curve (one more than last week) but shows an $18 backwardation on the 6-month contract (front month minus the six-month contract). Contango is $3.5/mt at the two-month horizon but shows the already mentioned $18 backwardation at the six-month time-spread. The front fell $2.3/mt while the six-month fell $0.5/mt.

VLSFO 0.5% R'Dam Curve

Weekly Report 140524 Page 0034

The VLSFO 0.5% backwardation increased $3/mt to -$23/mt, compared to a week prior.

ICE Light Gasoil Curve

Weekly Report 140524 Page 0035

The ICE Gasoil curve rose $14.3/mt at the front compared to last week in absolute terms (May 10th compared to May 3rd). Due to the front month jump, the curve moved into backwardation against the second month through the fourth month. But seen from the second month, the curve shows a contango structure through the seventh month. The six-month rose by $1/mt. The time spread for the 6-month period decreased $10.8/mt to plus $3.8/mt.

VLSFO 0.5% VS LGO and 3.5% Barges

Weekly Report 140524 Page 0036

The relative value of VLSFO compared to LGO at 6 months flat at 70% and in absolute terms up $1 at -$228/mt compared to 73% or $202/mt below LGO at the front. That $202/mt is up $9/mt on last week’s reading when the front was at 74% of LGO.

Weekly Report 140524 Page 0033 Weekly Report 140524 Page 0034 Weekly Report 140524 Page 0035 Weekly Report 140524 Page 0036

Our point of view

Inflation data is starting to show more and more reversals in more countries. In India, April inflation came in above forecast at nearly 5%, with wholesale price inflation up 1.3% year on year, Korean import and export prices rose well above forecast, Japan’s producer price index for April was above expectations, and the most watched is the US PPI, which came in at 0.5% over March, or 2.2% year on year. the expectation was for a 0.2% monthly increase. So now definitely, Fed watchers will conclude that the US Fed is going to wait even longer with cutting rates. Connected to that wating with cutting rates, is the potential strengthening of the US dollar, especially if other countries start to cut rates. Investment banks are starting to warn about “sinister” dolaar strength, that would create problems in emerging markets, especially those with substantial US dollar denominated debt and exports in dollars. Typically, on a strengthening dollar, commodity prices come under pressure. So far, the economic outlooks being published are quite optimistic about the global economy, but this development could actually have a slowdown effect.

 

Download the report here

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