Global Bunker Price Hits 2016 High, but Don't Worry, Analysts Say Oil Price Rally Isn't as Spectacular as it Seems

by Ship & Bunker News Team
Thursday May 5, 2016

Bunker buyers need not worry about last month's surging crude prices that pushed the Average Global Bunker Price for IFO380 from $206 per metric tonne (pmt) on April 1 to a 2016 high of $237 pmt on May 2.

At least not if the latest thinking from some oil analysts Wednesday is to be believed, who said a look at the front-month futures and five-year-forward data shows that the current oil price rally isn't as spectacular as some might think, and that the "lower-for-longer" market approach to pricing is still very much the same as it was in the beginning of 2016.

Bloomberg points out that while front-month futures for West Texas Intermediate (WTI) have risen about $7.31 per barrel or 21 percent to date in 2016, the five-year-forward WTI contract has fallen almost 70 cents or 2.6 percent over the same period, "reflecting the view that shale oil production could rebound as prices recover, capping any rally."

At $45 per barrel, front-month WTI is now at the same level as six months ago, while the price of the longest-dated contracts has fallen about $6, the latter partly due to slower growth in emerging markers and lower production costs.

Bloomberg notes that if prices were to stabilize at $55 in the long-term, it could galvanize U.S. producers – who have adapted to lower prices by improving fracturing efficiencies – into resuming spending and restarting drilling.

In fact, JBC Energy GmbH this week stated that oil prices have actually "risen enough" to make some shale wells profitable again: "We are now reaching the point at which we could begin to see a rebound" in activity.

For his part, Michael Wittner, an oil analyst at Societe Generale SA in New York, thinks the markets may be getting ahead of themselves, and in a note to clients he stated,  "We still believe sustained front-month WTI at $45 to $50 will be self-limiting, as U.S. shale-producer spending and drilling would stabilize and perhaps recover."

In March, Continental Resources Inc. and Whiting Petroleum Corp. said they would increase spending and output if oil prices reach the low to mid-$40 per barrel range, compared to a year ago when they said the threshold was above $60 per barrel.