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.
Crude markets are already reacting to the Trump Administration’s hardening policy towards Iran, but the impact of any new sanctions if the Trump Administration chooses not to recertify the JCPOA may have been overstated last week. Several factors suggest the impact on Iranian crude exports is likely to be less than 200,000 b/d by the end of 2018.
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.
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.
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.
Pemex will work to keep Mexico’s production flat in 2018, at 1.9 million b/d. Higher prices, narrow WTI-Maya price differentials, and increased upstream investment will all play a role in stopping the drop in Mexico’s crude output. Flat output is a major change for a country where production has declined by an average of 160,000 b/d each of the last three years.
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.
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.
At the end of this year a diesel spec change in Mexico should, in theory, open a 100,000 b/d window for additional ULSD imports. It won’t. Rather than cut domestic supply of higher sulfur diesel, Mexico’s government will look the other way on enforcement until investments are finished in 2020.
With refinery throughput growth slowing to just half what it was last year, Asia’s surplus of transport fuels will shrink in 2018. The distillate surplus will narrow most, as refiners in China and elsewhere trim diesel yields. Diesel inventories should fall, supporting middle distillate spreads to crude in Singapore.
The last three projects of China’s second phase of strategic petroleum reserve development will potentially add 90,000 b/d to government stocking in 2018 and 2019. A change of policy to focus on commercial stocks, however, suggests that China may not launch the third phase of government stocking until after 2020.
In its recently published ‘One-Year Global Fuels Outlook’, ESAI Energy notes that US exports of gasoline and diesel to Latin America will remain stable this year, near historic highs achieved in 2017 of over 1.6 million bpd combined.
Russia delivered by overland pipeline nearly 800,000 b/d of crude to China in January, a 240,000 b/d increase compared to last year. While several developments will prevent a further increase in Russian crude deliveries to Asia this year, Russia has planted its flag as another light crude producer eyeing the Chinese and Asian market.
After a bullish run in late 2017, during which Singapore cracking margins rose to nearly $9.50 per barrel, weakness at the light end of the barrel will erode refining profitability. Consequently, 2018 growth of Asian refinery throughput will be just half what it was last year.
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.