Europe Leads Fuel Oil Upgrades

In the fast-moving NGLs, opportunities and threats lurk around every corner. China, the prize sought by North American and Middle Eastern exporters, has built a terminal that could open the door to 100,000 b/d of overland LPG supply from Russia. The ramifications are far-Europe and the FSU will add more than 250,000 b/d of capacity to upgrade heavy high sulfur fuel oil at existing refineries by the end of 2020. These investments will help reduce the surplus of high sulfur fuel oil that is more costly to upgrade or desulfurize as demand shifts to lower sulfur fuels under new IMO sulfur specifications for the bunker fuel market.

China to Tap Stranded Russian NGLs

In the fast-moving NGLs, opportunities and threats lurk around every corner. China, the prize sought by North American and Middle Eastern exporters, has built a terminal that could open the door to 100,000 b/d of overland LPG supply from Russia. The ramifications are far-reaching, ranging from the geography of trade flows to demand for VLGCs, and North American and Middle Eastern market share in China are in the crosshairs. This issue provides insight into the reality of progress and actual market impact. In the current market of plenty, bearish factors continue to weigh on NGL prices relative to crude. For the balance of 2018, soaring petchem demand for ethane and LPG will be the main source of support for prices. However, the upside in the Mt Belvieu composite NGL price is limited and will only fully emerge at the end of the year.

Transport Fuel Markets Remain Strong

2018 will be another good year for refiners, as strong global economic growth continues to support petroleum product demand. Despite an increase in absolute prices, global demand for transport fuels will rise to 65.4 million b/d, almost 1.3 million b/d higher than last year. This increase represents a slight acceleration from last year when transport fuel demand rose by 1.2 million b/d. Higher gasoline and diesel demand growth will drive the acceleration.

End of Iran Deal May Not Lead to Multilateral Sanctions on Oil Exporter

Changes to President Trump’s cabinet, especially the nomination of Mike Pompeo to Secretary of State suggest President Trump may be closer to his campaign pledge of scrapping the Iran nuclear deal. That outcome, however, has perhaps deleterious implications for other aspects of U.S. foreign policy. Moreover, re-imposing multilateral sanctions has gotten a lot harder given rising conflict over trade between the U.S. and its allies. Arguably, it was the embargo on crude imports from Iran by countries other than the U.S. that led to Iranian concessions at the negotiating table. Without similar multilateral sanctions, President Trump could scrap the nuclear deal and not regain leverage over Iran.

Europe Leads Stronger Atlantic Basin Distillate Market

In 2018, Europe’s distillate deficit will increase by about 100,000 b/d to nearly 1.7 million b/d as demand growth for both diesel and jet fuel is only partially offset by a slight increase in domestic supply. This expanding import requirement will result in a tighter Atlantic Basin distillate market and provide support for diesel and jet fuel spreads to crude throughout the region.

Russian Teapots on Expansion Path

Refining activity by Russia’s independent simple refineries is expanding. Yet, almost all of them will lack the coking and cracking capacity that ensures their ability to successfully navigate 2020 changes in IMO regulations. Nevertheless, after 2020 distillation capacity and refining activity by this group of refineries will expand further, strengthening competition from Russian refiners in Europe and beyond.

Inventories will Not Spoil the Recovery

Global oil demand is growing at a healthy pace even as higher oil prices might be expected to rein in demand on the margin. Demand growth will be a little slower than last year, but still sufficient to soak up significant increases in non-OPEC crude oil supplies. If OPEC+ sticks to their production restraint, the market will remain tenuously balanced this year and keep a price-destabilizing inventory build at bay.