VLSFO prices back above $600.

 

When VLSFO was fully introduced in December 2019/ January 2020, Singapore prices were in the range $615-660/mt; so far in November have averaged $620/mt – we are back to where it all started!

Events over the past 22 months are well documented and will be written about for many years to come. The oil industry will be a mere microcosm of all this, but when you are involved in the bunker market these oil industry details become significant. The collapse in oil demand at the start of the pandemic led VLSFO prices down to around $250/mt. The subsequent cutbacks in OPEC+ crude production, combined with the loss of US crude supplies and the eventual rebound in oil demand have all contributed to the rise in oil prices and the reason why VLSFO has moved back above $600/mt. The clear question is: Where do we go from here?

Analysts foresee prices falling from here
Some analysts are indicating that we are currently at a peak, and that prices will ease from here. Brent crude futures (front month) hit a high of above $86/bbl in late October and are currently trading around $82/ bbl. The pointers now are towards $75/bbl in Q1 next year and $70/bbl by Q2. On this basis, it would imply Singapore VLSFO down from around
$610/mt currently, to around $565/mt in Q1 and $530/mt by next June.

The fundamentals always ‘win out’
The recent price highs have come about as oil demand continues to rebound and OPEC+ maintain their planned, and constrained increases in production. Despite some pressure from the US on OPEC+ to go beyond this, there has been no shift in OPEC+ (nor Saudi) policy for countries with spare capacity to raise output in light of current prices. This is despite some member countries producing below their allocated quotas because of previous low prices and a lack of spending in their upstream sectors.
This rise in demand and constraints on supply has left oil stocks at low levels, and markets fundamentally tight. Also, although US crude production is rising in the wake of higher oil prices, the gains are considered relatively low, with a number of upstream companies ‘forced’ to reduce debts or pay shareholder dividends rather than go out on a massive expansion in drilling activity.
The overall result has been that oil demand has exceeded oil supply so far this year, and we have been in an extended period of stockdraws, leaving the market tight and Brent prices well in to the $80s.
The expectations now are that oil supply will continue to increase, even under the current OPEC+ strategy. On the demand side, total consumption is now back close to pre-pandemic levels and so future gains are seen as far more modest, stalling at just above 99 million b/d through to the middle of next year.

 

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VLSFO: Back To Where We Started on ‘Day 1’ – What’s Next?