Industry Insight: Bunker Prices Could Fall Further as Analysts Predict Crude Has Yet to Reach Bottom

In recent months bunker prices have been getting cheaper relative to crude.

Oil market analysts are predicting that oil prices have still not reached bottom and could dip into the $20 per barrel range, meaning bunker prices - that in some instances have already crashed to their lowest levels in over 10 years - could also be heading down even further.

Any recovery through to the end of 2016 will also be minimal, according to current predictions, with few believing crude prices next year will be much higher than those seen in 2015.

The sentiment seems to be one shared buy bunker buyers, with suppliers in markets across the globe telling Ship & Bunker they have been seeing lower than usual demand.

"I thought shipowners would be taking advantage of the low prices but we are all wondering when they are going to buy," an Americas based bunker supplier told Ship & Bunker.

"It think they are holding off because they think prices will fall even further."

And based on current predictions, shipowners have plenty of reason to believe further savings can be made.

"The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016," Goldman Sachs analysts said last Friday, who believe crude could dip as low as $20 per barrel.

"We now believe the market requires non-OPEC production to shift from our prior expectation of modest growth to large declines in 2016."

The view echoes that of the International Energy Agency (IEA) who, as Ship & Bunker reported last week, predicts non-OPEC oil production next year to fall by nearly half a million barrels per day (bpd), the biggest decline in 24 years.

Goldman Sachs are not alone in their price outlook, with John Kilduff, Partner, Again Capital LLC, last month predicting $30 per barrel crude, with a caveat that a slide to the mid-$20's could not be ruled out.

Citigroup analysts, meanwhile, last month also said crude slipping to $32 per barrel "is a conceivable reality," while Kuwaiti oil analyst Abdulhameed Al-Awadi this week predicted the year would end with oil at $40 to $45 per barrel.

2016

Moving into next year, the outlook is equally downbeat, and on Monday Barclays said it thought that "most producers seem to be coming around to the fact that 2016 oil and gas prices are unlikely to see a significant recovery."

Goldman Sachs is now estimating WTI to average $45 a barrel next year, down from its May projection of $57 per barrel, while Vitol Group, the world's biggest independent oil trader, puts 2016 oil prices in the $40 to $60 per barrel range.

Vitol CEO Ian Taylor also believes the current oil glut will take until at least 2017 to clear.

"I don't see much reason to go higher, and we can go lower," he said earlier this month.

Market commentators in Kuwait this week also put crude in a similar range for 2016, with oil analyst Mohammad Al-Shatti estimating Brent at between $45 and $55 per barrel next year.

Bunker Price Outlook

So far this year Brent has closed between $42.69 and $68.40 per barrel, which according to Ship & Bunker data has resulted in the average IFO380 bunker price across Singapore, Houston, Rotterdam, and Fujairah to be between $202.00 and $377.50 per metric tonne (pmt).

With similar market conditions and crude prices set to be in a similar range next year, it seems reasonable for bunker buyers to expect marine fuel prices to do the same.

However there is evidence to suggest bunker prices may even be slightly lower next year, as in recent months they have been getting cheaper relative to crude.

During H1 2015, the daily average IFO380 price across Singapore, Houston, Rotterdam, and Fujairah has averaged at 73.3 percent of the Brent price, adjusted at 7.53 barrels of Brent per tonne (37.5API).

This compares to 73.8 percent for full year 2014 and 74.4 percent in 2013.

So far in 2015 H2 the price differential between Brent and Bunker prices has widened, putting the four port's average bunker price at 68.2 percent of the Brent price, having dipped as low as 57.7 percent in that time.

If the bunker - Brent relationship remains this low, should crude dip under $30 per barrel as some predict, it could well push bunkers under $150 pmt.