Prices have been falling steadily since the middle of May. Image Credit: Ship & Bunker

Bunker fuel buyers should consider hedging for their consumption over the next year if the news of a breakthrough in negotiations between the US and Iran delivers a reprieve in prices in the coming days, according to hedging firm GRM.

Late on Sunday it was announced that the US and Iran had provisionally agreed to a framework for ending the war between the two countries, with a memorandum of understanding due to be signed on June 19. The agreement includes a 60-day deadline before which more complex issues including Iran's nuclear ambitions will need to be negotiated.

ICE Brent crude futures traded at $83.38/bl as of 6:24 AM in London on Monday morning, down from $87.33/bl at Friday's close, but up from $70.88/bl on February 27 before the start of the war.

The market should not expect a return to pre-war prices any time soon, GRM said in a note to clients on Monday.

"We argue that Brent could fall to USD 80-82, or even lower, in the very short term," the company said.

"We may see an undershoot.

"The oil market remains illiquid, and a further fall in Brent is likely when European and US participants enter the market later today.

"We also argue that oil prices are unlikely to return to the USD 60-70 level seen before the war."

Rebuilding Global Oil Supply

Prices cannot return to previous levels in the immediate term because of the time needed to repair the damage done to global oil markets by the outage over the past three months while the Strait of Hormuz has been closed.

"Fundamentally, the market has borrowed a large number of barrels of oil from the future," the company said.

"Inventories now need to be replenished, new strategic reserves may need to be built, and there is postponed demand.

"This is happening at a time when it will take a long time for the market to normalise.

"Oil production in the Middle East needs to be restarted, and global tanker traffic needs to normalise. A larger risk premium will likely also need to be priced in over the next 60 days if the negotiations break down."

Hedging Opportunity

Relief in the market following the weekend's deal may deliver prices low enough for buyers to consider locking in prices for the months ahead, GRM argued.

"It is therefore our expectation that Brent will trade within a USD 75-100 range over the next 6 to 12 months," the company said.

"However, it is more likely that the market will trade in the lower end of that range.

"This also means that buyers should consider hedging their exposure over the next 6 to 12 months following the latest price decline, especially if Brent falls further in the coming days."

Ship & Bunker's G20-VLSFO Index of prices at 20 leading bunkering ports stood at $805/mt on Friday, down from a recent peak of $1,053/mt on March 20 but up from $543.50/mt on February 27.

The index has been at an average premium of 18.8% to Brent crude since the start of the war. Applying that premium, a Brent price of $75/bl would produce a G20-VLSFO price of about $670.50/mt.