Brent & WTI Both Close Over $50 for First Time Since Last July, but Where are Crude and Bunkers Headed Now?

by Ship & Bunker News Team
Wednesday June 8, 2016

With Brent and WTI both closing over $50 per barrel Tuesday for the first time since last July, and worries about potential supply shortages prevailing, the question is how oil will perform in the near future – and a survey of investors shows a price range of anywhere between below $40 and above $60.

As expected, bunker prices have risen along with crude over the last several months, and unsurprisingly Ship & Bunker's global average bunker price indices for both IFO380 and MGO Tuesday were at their highest point of the year so far.

What is notable, though, is that bunker prices relative to crude are much lower today than they were last July, with bunkers in the primary ports priced today at around $240 per metric tonne (pmt), or 61 to 64 percent of Brent's pmt price, compared to 71 to 76 percent of Brent last July.

Where is Crude Heading?

RBC Capital Markets surveyed 600 energy investors and CEOs on where they expect prices to be at the end of the year: 9 percent said below $40; 23 percent said between $40 and $49; 51 percent said between $50 and $60; and 17 percent said $60-plus.

One survey respondent, David Dunlap, president and CEO of Superior Energy, told CNBC that he's biased towards prices of $60 per barrel: "I think in the second half we'll continue to see prices migrate up, as the market begins to realize that non-OPEC production is coming down, including shale production here in the U.S., and we'll be getting closer and closer to that supply demand balance."

When asked if higher prices beget more production and that the oil industry thus dooms itself, Dunlap replied, "There's no question this industry has a history of dooming itself ... but it'll be difficult for many companies to be responsive as commodity prices get better."

When asked if drilling rigs have hit bottom, the CEO replied, "I think probably so" - but he added that while "we're likely to see a bit more activity in the second half of this year" as oil climbs to $60 per barrel, a full investment back in shale is "still a few years out."

If crude does climb to $60 per barrel, at the current trend that would add about $50 pmt to IFO380, putting bunkers at around $290 pmt in the primary ports.

But if bunkers return to being around 76 percent of crude as they were last July, then IFO380 would jump $100 from today's level to around $340 pmt in the primary ports.

Other Factors

Although the U.S. Energy Information Administration expects crude production declines of 830,000 barrels per day (bpd) this year to 8.6 million bpd, and 410,000 bpd to 8.19 million bpd next year, Norbert Rücker, head of commodities research at Julius Baer, maintains that "Oil prices at $50 a barrel could revive shale drilling activity and stabilize declining U.S. oil production, possibly already harbingered by the recent uptick in rig counts" - a reference to weekly data from Baker Hughes showing that U.S. drillers added rigs for only the second time this year.

Militant attacks in Nigeria also continue to be a source of fear for investors, and a typical comment was made earlier this week by Scott Shelton, energy broker with ICAP, who said, "At this point, there is no sign that the Nigeria (situation) is getting any better, and it's looking worse," adding that any spare U.S. refining capacity from optimum refinery runs might not be enough to balance the market without deeper stock drawdowns.