Not to be outdone by tax and other reform efforts in the United States and Saudi Arabia, Russia is close to approving a new tax system that will be a game-changer for long-term oil production. Meanwhile, government tinkering with the taxes affecting refining profitability will stymie refinery modernization.
The start of a new refinery in Egypt will chip away at North Africa’s diesel deficit this year. Gains across the continent, however, will be undermined by sputtering refinery activity in Nigeria and increasing demand in South Africa. Africa’s diesel deficit will remain just above 800,000 b/d in 2018. Africa’s continued reliance on external supply will reinforce the recovery of global diesel fundamentals.
In 2018, ESAI Energy expects North Sea production of crude and condensate to rise by roughly 50,000 b/d, and approach 2.3 million b/d. This growth will be led by a 120,000 b/d increase in U.K. output, which will more than offset a 70,000 b/d decline in Norwegian supply.
Even as U.S. crude oil production continues to rise, that increase in output, coupled with growth elsewhere will not be enough to yield a surplus and rebuild global crude oil inventories in 2018. The current crude oil market is close to balance with floating storage essentially liquidated and on-land inventories falling. Meanwhile, any supply disruption will encourage a price spike, and Venezuelan production continues to fall.
Refiners typically pay effective tax rates close to the statutory 35 percent corporate rate, due to the limited number of deductions available to them. Even with a key deduction being repealed, after tax refinery profitability would be significantly higher under the tax reform.
Oil and NGL prices are beginning to resemble the sort of market investors in NGL-fed olefins capacity were counting on. NGL supply growth is regaining momentum and, simultaneously, Brent crude is flirting with $70. These developments are enabling the gap between naphtha and LPG prices to widen, which is reflected in price movements from December to January. Since olefins are priced off naphtha, the widening discount of NGLs will benefit the profitability of NGL-fed petchem capacity.
This week, representatives from the three NAFTA countries reconvene in Montreal for the sixth round of negotiations. It is possible that the talks will not end in agreement, and negotiations will be extended past the March deadline. Yet, a strong consensus is building among business and industry groups in support of a “do no harm” approach that could preserve NAFTA and its key elements.
Due to delayed capacity expansions and maintenance in the Middle East, the region’s operable capacity will be just 8.97 million b/d in the first five months of the year. The loss of capacity will peak in February, when up to 700,000 b/d could be offline. This capacity constraint will limit throughput growth and create additional room for marginal refiners in other regions to maintain higher utilization rates.
The passage of the Tax Cut and Jobs Act will support U.S. transport fuel consumption this year and prevent any deceleration in demand growth. In 2018, ESAI Energy expects total U.S. consumption of transport fuels to rise by 160,000 b/d to over 15.4 million b/d after growing by 150,000 b/d last year. The effect of the tax cut will be particularly pronounced for gasoline but also provide a boost for diesel, jet fuel and bunker fuel. Rising U.S. gasoline consumption will help to sustain global demand growth at over 400,000 b/d. Meanwhile, global diesel demand is expected to rise by a similar amount in 2018, outpacing supply gains, and providing modest support for spreads.
In 2018, global gasoline demand growth will remain steady at roughly 410,000 b/d as resurgent consumption growth in the U.S. and other OECD nations offsets a slowdown in non-OECD countries. With demand gains largely expected to keep pace with supply, gasoline spreads to crude will narrow only marginally. The NYH RBOB spread to Brent is expected to narrow from $13 per barrel in 2017 to $12 in 2018.
After remaining flat at about 1.6 million b/d in 2017, EU imports of middle distillates are expected to increase by 140,000 b/d this year, with ULSD and jet fuel accounting for 110,000 and 30,000 b/d of the total, respectively.
Asian consumption of gasoline, diesel, jet fuel/kerosene, and fuel oil will grow by 470,000 b/d in 2018 to reach 21.8 million b/d. This marks a deceleration from growth of 550,000 b/d last year, and will translate to weaker gasoline and fuel oil spreads to crude in Singapore in 2018. Diesel spreads will still receive support from tightening regional distillate balances.
After backtracking last year, Russia’s ULSD exports will increase by 50,000 b/d in the next two years, reaching 670,000 b/d in 2019. Greater ULSD exports will pave the way for Russia to expand its share of the European market – to the detriment of U.S. and Middle East diesel exporters.
If protesters, now or in the future, are looking to bring additional pressure onto the ruling elites and the security forces, they will have to either coopt some segment of both or target the sources of their power and revenue, including the oil sector. It seems a long fuse has been lit.
Heavy crude from Latin America will fall as much as 380,000 b/d this year to 4.4 million b/d as important production complexes in Venezuela, Mexico, and Brazil see output shrink. Lower regional production of heavy crude will have consequences for refineries in the US and Asia as well as producers of heavy crude elsewhere, such as Canada and Iraq.