Following very high growth of roughly 280,000 b/d in 2017, European transport fuel demand growth will slow in 2018 to a still healthy 180,000 b/d as consumption of diesel and jet fuel keeps surging. This sustained rise in European demand will provide bullish support for global middle distillate markets.
The International Maritime Organization is expected to ban ships from carrying fuel oil with sulfur levels above 0.5 percent unless they have a scrubber installed. The carriage ban, effective March 2020, will help boost compliance rates with the IMO sulfur change beginning that year.
Brazil plans to raise throughput this year to regain market share. Its increase, however, will be bound by imports from the Gulf Coast and lower refinery margins from its own price adjustments. We expect refinery throughput to average 1.69 million b/d in 2018, 30,000 b/d more than last year. Meanwhile, demand is growing faster than supply, so imports will remain high, around 190,000 b/d.
With Asia’s economies growing at a good-but-not-great pace, demand for diesel, jet fuel, and kerosene will grow more slowly than last year, expanding by 330,000 b/d to reach 12.03 million b/d. Still, with refinery throughput growth slowing substantially, Asian middle distillate markets will tighten this year, supporting spreads to crude.
In April, Russia moved a step closer to fundamentally reforming taxation of the oil industry. The Duma’s approval of a draft law paves the way for a pilot project of the new tax system. Its eventual full implementation dramatically raises the prospects for Russia’s long-term oil production.
The new Chinese crude oil futures contract on the Shanghai INE was launched last week and attracted significant interest. There are many concerns over the viability of this contract given uncertainties related to foreign exchange and the centralized control of the oil industry. But, China has worked hard through tax regulations to lure foreign traders to the contract. It is too early to know if the contract will evolve into a credible pricing benchmark, but it has a chance to do so, and also drive market reform in China.
Proposed Chinese tariffs on imports of U.S. polyethylene would negatively affect U.S. ethylene production, ethane demand and ethane prices. Tariffs on propane imports would be disruptive to trade and U.S. market share in China and would even undermine Chinese propane demand. In the context of oil demand, the loss of some ethane and propane demand would lift petchem demand for refined naphtha.
New gasoline units will enable Russian gasoline exports to jump by 30,000 b/d in 2018, while naphtha output will fall. Meanwhile, greater self-sufficiency in other FSU countries will cause even more of Russia’s surplus barrels to flow to Atlantic basin markets, contributing to weaker gasoline fundamentals.
Sulfur specification changes in West Africa would have major effects for European exporters that supply fuels to the region. 40,000 b/d of diesel and 270,000 b/d of gasoline imports are at stake. But these changes are likely to be delayed again. Meanwhile, West Africa diesel demand will rise slightly to 250,000 b/d this year. Gasoline demand will rise by 30,000 b/d to 400,000 b/d.
If Washington refuses to waive sanctions on Iran under the JCPOA, how quickly and comprehensively will it choose to re-impose them – particularly against European entities? The answer to this question is critical to knowing how much oil might come off the market, and when. Europe is currently importing over 750,000 b/d of crude oil from Iran. A 20 percent reduction would equal 150,000 b/d. Yet, with the Arab Gulf producers (and Russia) holding crude oil off the market under their current production deal, there is spare capacity to replace Iranian volumes to Europe, and to most of Iran’s Asian customers. So, the biggest impact of a U.S. rejection of the sanctions waiver may be the end of the OPEC Deal. But, for the moment, negotiations with Europe can still shape the outcome of this issue.
The OPEC/non-OPEC production deal is gaining momentum as the producer group signals it is open to extending the deal beyond December 2018. Non-OPEC compliance has slipped in recent months, but should strengthen again by summer. On balance, we believe another short-term extension of the deal is likely.
Demand growth for refined products will accelerate to 180,000 b/d this year, reaching 7.7 million b/d, following two years of relatively sluggish growth. The region’s crude exporters are on stronger economic footing than previous years. Easing austerity measures in Saudi Arabia will lead to healthier fuel demand, particularly for diesel.
The pace of global oil demand continues to accelerate this year. Growth will be close to 2.0 million b/d in 2018, although 400,000 b/d of that will be ethane. In 2019, ethane demand growth slows, bringing total growth down to about 1.5 million b/d. If we isolate demand for crude-derived products, it is 1.3 and 1.1 million b/d in 2018 and 2019, respectively. Demand for crude derived products will decelerate in 2019, but not as fast as total oil demand, which includes ethane.
After growing year-on-year by roughly 50,000 b/d in the first quarter of 2018, North Sea crude and condensate production is expected to rise at a pace of 70,000 b/d in 2018 as a whole. With production rising and regional throughput forecast to fall marginally this year, Europe’s call on non-European crude will drop.
The Canadian Oil Sands are forecast to grow by 200,000 b/d in 2018, and with no additional pipeline takeaway coming until late 2019 at best, Canadian bitumen will continue to face steep discounts until more pipeline capacity is brought online. Crude stocks in Canada are on the rise, and the call on rail delivery is expected to increase from an average of 140,000 b/d in 2017 to about 260,000 b/d in the second half of 2018.