With Brent crude trading over $90 per barrel, there is strong momentum behind the oil market. We believe bunker prices will remain high in 2022, and have the potential to go much higher from where they are currently.
There are two main reasons for that in our view. Firstly, global oil markets are tighter than they have been for a long time. Global oil supply growth is lagging demand due to years of underinvestment in upstream exploration and production capacity.
9 out of 19 OPEC+ producers are producing below their quota owing to capacity constraints. While Saudi Arabia and UAE partially compensate for the under-producing members, their ability to do so may diminish if the call on OPEC+ crude continue to increase.
The two major producers (Saudi Arabia and UAE) currently have a combined spare capacity of 3.3mbpd - down from 4.4mbpd a year ago. If the call on Saudi and UAE crude continue to rise, the spare capacity could shrink towards - or below - 2mbpd, a level that would amplify existing concerns over oil supply and push oil well above $90 per barrel.
$90pb is also a critical threshold above which technical factors, mainly stemming from the options market could easily shoot oil prices to three-digit figures.
Higher prices warrant higher investment in new production capacity, and we are already seeing CAPEX rising. However, higher capital spending does not immediately translate into new oil supply.
Secondly, dwindling supplies of Vacuum Gasoil (VGO) could push low-sulphur bunker prices higher. VGO is a typically niche product and used as a feedstock in gasoline and very-low sulphur fuel oil (VLSFO) production.
Heavy refinery rationalisation in Europe during the pandemic resulted in limited supplies of VGO. While investments are being made for new production capacity in Russia, it is yet unclear how much new supply will come into the market over 2022-23.
By contrast demand for VGO is on the rise. Global gasoline demand surged during the pandemic and expected to remain high in 2022. So will demand for VLSFO. This fight between gasoline and bunkers could see VGO prices skyrocket in 2022. This situation, in turn, would have knock-on effects for gasoline and VLSFO bunker prices as they compete for this increasingly scarce feedstock.
High bunker prices would push freight costs for shippers higher and contribute to the global inflationary pressures. It would also force fleets to slow steam, especially in those sectors where vessel earnings are under pressure. High bunker prices also benefit scrubber fitted ships as they can continue to burn cheaper heavy fuel oil bunkers instead of VLSFO.
The opinions expressed herein are the author's and not necessarily those of The Xinde Marine News.
Please Contact Us at：
media@xindemarine.com
.gif)
