Mexico Fighting to Stay Put

Mexico’s incoming administration says it will increase Mexico’s crude production by 600,000 b/d in two years to reach 2.5 million b/d by 2021. We see gains this size as out of reach in such a short time frame. Instead, we assess that a $4 billion shot in the arm will help Pemex reverse declines and boost production by closer to 20,000 b/d next year, to 1.88 million b/d, and then by perhaps 100,000 b/d in 2020.

Eliminating Permian Bottleneck by 2020

Oilfield Technology:

In the next five years, potential pipeline projects could add over 5 million bpd to US destinations at Cushing and to USGC port locations, significantly increasing US crude oil exports. Elisabeth Murphy, analyst at ESAI Energy, however, points out that “not all of these projects may go forward, but the race to bring more capacity will be key in determining the amount and timing of production growth, not only for the Permian, but for the other US shale basins and the Canadian Oil Sands”.

IMO Bullish for Q419 European Margins

The relative strength of gasoil to high sulfur fuel oil (HSFO) in Northwest Europe will rise to nearly $40 per barrel by the end of 2019 as new IMO fuel specifications begin to impact the market and pricing. During the final quarter of 2019 and in early 2020, gasoil strength will be bullish for refining margins in Europe and globally. It will create a strong incentive for refiners to raise throughput during the final quarter of 2019.

Coincidence Amid Chaos

From NGL pipeline and fractionation contraints and run-away ethane prices in the U.S. Gulf Coast to China’s tariffs on U.S. LPG, uncertainties in the NGL market border on chaos. Nearly six months ago, our monthly updates highlighted robust petchem demand fueling high U.S. LPG exports, cautioning that U.S. LPG terminals will be unable to keep up with export demand. We continue to believe this export constraint will rear its head, at least temporarily, in the next few months. In this month’s Insight chapter, we shift our analysis to NGL takeaway and fractionation capacity constraints and the outlook for

Permian and PADD III NGL production, and especially for Mont Belvieu ethane. Meanwhile, the LPG chapter highlights the latest developments in Chinese and Indian LPG demand and imports.  Coincidentally, just as U.S. LPG exports run into constraints, it seems Chinese and Indian LPG imports are cooling off.

GOM Adding Significant Capacity to Support Several Years of Growth

The production outlook from the Gulf of Mexico (GOM) is brightening due to stabilizing oil prices and producer confidence in bringing new projects on-time and within budget. New projects will help offset decline from ageing fields and will add roughly 500,000 b/d in new capacity that will lift output over the next 3 years with production increasing by over 140,000 b/d in 2019.

Transport Fuel Demand Growth Rebounds in 2019

Next year, global demand for transport fuels will rise by nearly 1.1 million b/d, after increasing by just 800,000 b/d in 2018. This acceleration will be driven by rebounding gasoline and diesel demand growth.

Gasoline demand, which is slated to increase by just 150,000 b/d this year, is expected to rise by 350,000 b/d. The turnaround in the gasoline market will be particularly pronounced in China and Brazil.

Meanwhile, diesel demand growth is forecast to rise to 470,000 b/d in 2019 from 330,000 b/d in 2018 as consumption in China and Saudi Arabia plateaus after collapsing this year.

In spite of rebounding global gasoline demand growth, increases in output, particularly East of Suez, will far outstrip demand gains. This loosening of fundamentals will exert bearish pressure on gasoline

fundamentals and further narrow gasoline spreads to crude in 2019.

Similarly, in spite of accelerating demand growth, the global diesel market will weaken prior to the implementation of the IMO’s 0.5 percent sulfur content cap on marine fuels. As a result, and global

trade flows of diesel will shift.

Refining capacity increases will help the Middle East raise diesel exports to Europe from 350,000 b/d in 2018 to 450,000 b/d in 2019, while U.S. and Asian exporters will trim their deliveries to Europe. With

Europe’s import requirement shrinking, Middle East barrels will add downward pressure on global distillate spreads to crude, particularly in the first half of 2019.

Demand Stable despite Price Threats

Higher oil prices and currency devaluations have increased the cost of fuel imports in Latin America. The worst affected, based on volume and cost, is Brazil’s diesel imports. We expect regional demand growth to flatten out in several key countries in 2019. Other changes will help reverse 2018 slowdowns, however, and regional gasoline and diesel demand will grow by more than 40,000 b/d each next year.