The staff of FUELSNews presents FUELSNews 360° Q4 2016
Quarterly Report: Market News & Information.
FUELSNews 360°, published four times a year by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity in the oil, natural gas, renewables and refined products industries. The purpose of this report is to provide our customers industry market data and trends both domestically and globally and deliver some insight into upcoming challenges facing the energy supply chain.
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Oil prices ended 2016 on a high note, led by the OPEC agreement to cut production by 1.8 million barrels per day, or 1.5% of global production. Prices remained in the mid-$40s to mid-$50s range, falling from $50/bbl following the Algiers agreement in September to lows of $43/bbl amid oversupply concerns, only to resurge after the November agreement to 18-month highs of nearly $55/bbl. After two years of unrestricted production, analysts are optimistic that the agreement will bring supply and demand back into balance. Most experts now agree that $60/bbl is a reasonable expectation for 2017.
While international events drove the majority of price movements across the U.S., regional factors also drove volatility in local fuel prices. A second leak in the Colonial Pipeline temporarily cut off the Southeast’s supply once again and generated a 15-cent price surge, while product quality concerns in West Texas led to a pipeline shutdown and 20-cent premiums on local fuel.
Hurricane Matthew caused extensive destruction in Florida, Georgia, and the Carolinas, causing fuel logistics concerns. Most regions saw overall prices rise in response to OPEC’s production, though the West Coast, isolated from national supply trends due to its different regulatory policies, has yet to experience those price hikes. Inventories in most regions remain high, preventing prices from rising too quickly, but international supply cuts may cause those stocks to dwindle faster than expected.
Looking to the first quarter of 2017, numerous factors are at play that will affect prices. All attention remains on the OPEC deal and whether the organization will be able to prevent individual countries from “cheating” and raising production. Countries not party to the agreement, such as the U.S., are expected to raise output, which may mitigate some of the upward pressure the deal is expected to place on prices. As we move through the first half of 2017, expect markets to react more strongly to the EIA’s weekly fuel stock reports, which will show whether production cuts are truly taking place.
With the end of 2016 comes the end of the Obama administration, along with the uncertainty of what energy policies President Trump will enact. Trump’s statements appear supportive of fossil fuel development, which could help producers in the U.S. compensate for OPEC cuts.
Trump’s appointments of Rex Tillerson, former CEO of ExxonMobil, as Secretary of State and Scott Pruitt, former Oklahoma Attorney General who is best known for fighting against the regulatory power of the EPA, as the new Administrator of the EPA indicate that he will be friendly toward the oil and gas industry, but specific energy policies are yet to be seen. Renewable fuel markets have been shaken, with biodiesel RIN values experiencing extremely high volatility following the election.
Global economic growth, led by growth in China and emerging markets, is forecast to rise to 3.4% in 2017. Consumer sentiment in the U.S. is high on the heels of the election, and unemployment is at its lowest point since 2007. These factors are expected to drive strong oil demand in 2017, which should help deplete high inventories and push oil and finished product prices higher. Conversely, the market expects two interest rate hikes by the Federal Reserve in 2017, which could have a bearish effect on prices.
Overall, the market is setting up to be net bullish heading into 2017, especially as inventories are drawn down to their historical five-year average range. The market will be almost entirely directed by the outcome of the OPEC deal. If the deal proves effective, analysts expect crude prices to rise into the low- to mid-$50s during Q1 as the market adjusts to supply deficits, rising to the high-$50s and low-$60s once inventories are drawn down.
New U.S. production will likely cap prices around $60/bbl. Should evidence of widespread OPEC cheating be uncovered, prices are expected to drop into the $40 – $50 range once again, or possibly lower, depending on the extent of the abuse. OPEC has historically failed to achieve compliance, and many believe cheating is a question of “when,” not “if.”
In this edition of FUELSNews 360, we have some exciting articles that you won’t want to miss. Dr. Yamaguchi’s article, “The End of the Oil Price War,” which can be found on page 40, provides in-depth analysis on the OPEC deal and why it has had such a profound impact on fuel markets. For fleet managers, be sure to read Jeremiah Cooke’s “Four Steps to Creating a World-Class Mobile Refueling Program” on page 48, which contains valuable insight regardless of your current fueling method.
We hope you enjoy this quarter’s issue of FUELSNews 360. Please feel free to email us at email@example.com with feedback or questions. Thanks for reading!