USGC refining investment reveals an industry more focused on adapting to a changing market rather than expanding. Beside Magellan’s 50,000 b/d condensate splitter, there is not much new in terms of near-term additions to distillation capacity. Investments in secondary units reveals a refining sector preparing to process more light crude, chase high diesel spreads, minimize output of high sulfur fuel oil and change the way they produce gasoline.
In Nigeria, several national issues, including violent clashes between herdsmen and farmers, have increased the likelihood of another wave of attacks from the Niger Delta Avengers. Given growing security concerns, ESAI Energy forecasts that production will average no more than 1.75 million b/d in 2018.
Between the resurgence of NGL supply in several markets and the readiness of the petchem sector to absorb those NGLs, 2018 will go down as the biggest year yet for NGL demand growth. When one factors in the increase in ethane extraction, it will be an equally big year for supply. Demand-side developments will do little to lift NGL prices relative to crude though, as a weak naphtha market will limit the upside for LPG and low natural gas prices and abundant ethane will prevent anything resembling a spike in Mt Belvieu ethane prices.
In 2018, Europe’s imports of crude and condensate from non-European sources will fall by over 120,000 b/d to an average of under 9.5 million b/d as regional throughput declines and crude production remains flat. Even so, imports from the United States will likely grow even as total imports fall. Europe’s falling import requirement will exert slightly bearish pressure on global fundamentals as producers face tougher competition placing crude in the region.
After two years of significant growth, U.S. exports of gasoline and diesel to Latin America will remain stable in 2018, near historic highs of over 1.6 million b/d combined. Latin America’s yawning import requirements for both diesel and gasoline will continue to be a boon for Gulf Coast refiners and support regional product spreads. In this context, global diesel fundamentals will tighten as demand growth outpaces production gains, particularly in the Asia-Pacific region. Meanwhile, continued cuts in global residual supply will keep fuel oil markets tight and discounts to crude narrow. An acceleration in global gasoline supply growth from 270,000 b/d last year to 480,000 b/d in 2018 will exert slightly bearish pressure on product markets, partially offsetting the strength of diesel and fuel oil.
Iraq and Iran continue to inch towards closer cooperation between their oil industries in large part for economic reasons, but there are political benefits to both if promises and plans eventually pan out. At the moment, the nearest-term cooperation slated to start any day is a swap of 60,000 barrels per day between the two countries with the Iraqi oil coming from its Kirkuk fields and Iran returning the export from its southern fields. However, if this linkage not only comes to fruition but also portends larger cooperation, it could have political effects on the Kurdistan Regional Government (KRG), Turkey, Saudi Arabia, Syria, and possibly even Israel.
Additional pipeline capacity out of Cushing and reduced flow on Keystone means more crude will flow out of the Cushing storage hub than what comes in, supporting WTI prices through 2018. Pipeline expansions from Cushing also further chip away at the demand for crude to flow north from Louisiana, increasing the likelihood that the underutilized 1.2 million b/d Capline will be reversed.
Middle East exports of diesel and jet fuel will stall at 520,000 b/d in 2018, after four consecutive years of growth. This will create opportunities for Russian and U.S. Gulf Coast refiners to increase their diesel market share in Europe – at least until 2019, when Saudi Arabia commissions the new Jazan refinery.
After growing by an average of over 50,000 b/d annually in the last four years, ESAI Energy expects European jet fuel demand to increase by an additional 40,000 b/d in 2018 and reach 1.4 million b/d as both passenger and freight air traffic continue to rise. Europe’s growing jet fuel deficit will provide bullish support for already-strengthening middle distillate fundamentals and an increased opportunity for Asian and Middle Eastern exporters.
Uncertainty and speculation surrounding an E15 waiver and a biodiesel tax credit for 2018 have undermined overall RIN prices early in 2018. The biodiesel tax credit will likely be approved retroactively for 2017 after recent federal budget negotiations but if a 2018 biodiesel tax credit is not approved, look for a sharp rebound in RIN prices in 2018 on bullish fundamentals.
Brazil’s crude production will rise by 190,000 b/d in 2018, to 2.8 million b/d, with new units added in the pre-salt Santos basin. Outside of Brazil, however, Latin America’s crude production will continue to decline. In 2018 we expect the region’s total production to fall by 260,000 b/d, to 8.4 million b/d.
Pipeline politics in the Middle East have again risen to the fore. Turkey’s conflict with Kurdish militants in Northern Syria, to some degree, is a distraction from other regional issues such as oil flows. Turkey may have to declare victory and walk away.
China’s January crude imports reached an all-time high of 9.6 million b/d. ESAI Energy forecasts that China’s crude deficit in 2018 will rise to 8 million b/d, which will be 550,000 b/d higher than 2017 levels. Diesel exports will fall slightly in the second quarter as demand increases after the current environmental campaign ends in late March.
Delayed refinery restarts will keep Mexico’s gasoline imports at 520,000 b/d in 2018, only 20,000 b/d below last year’s record levels. Within Mexico, the southeastern Atlantic coast will continue to receive the majority of imports, even after refineries restart.
China’s crude distillation capacity equaled 15 million b/d in 2017 and will add another 500,000 b/d in 2018. The seven biggest state-owned oil companies have a combined capacity of 12 million b/d and independent refiners represent 3 million b/d. ESAI Energy believes at least 200,000 b/d of independent refining capacities will be the focus of tough scrutiny with a risk to be closed in 2018.