North Africa’s Diesel Supply Surges

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.

Crude Prices Finally Respond

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.

Stars Align for NGL-fed Petchems

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.

Business Group Support Will Likely Preserve NAFTA

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.

Lower Middle East Operable Capacity in 2018

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.

Tax Cuts Sustain U.S. Demand Growth

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.

Global Demand Growth Plateaus in 2018

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.