New Quotas Mean Crude Oil Imports will Fall

Based on the analysis of non-state crude import quotas, we estimate that crude oil imports by the non-stateowned sector could decline by 640,000 b/d from 3.4 million b/d in January-June to 2.7 million b/d in the second half of the year. This analysis also suggests that Hengli Petchem will reach high utilization rates in the next few months, while Zhejiang Petchem will not be commercial this year. Overall, this means total crude oil imports should average about 9.3 million b/d for the rest of 2019, having a significant impact on crude oil demand.

Russian Romance with OPEC Blossoms

Russian embrace of OPEC+ is about both the oil price and Russian power. Collaborating with OPEC members has brought Russia much success in terms of its ability to insert itself as a regional powerbroker and otherwise expand its influence in the Middle East. This secondary goal decreases the likelihood of Russia breaking with the Saudis in coordinating production policy anytime soon.

Yields Begin to Shift from Fuel Oil To Diesel in Japan and South Korea

Although diesel production in Asia Pacific will grow by only 60,000 b/d this year, higher diesel yields driven by IMO sulfur rules have already emerged in Japan and South Korea. This, together with a ramp up of new refineries in Southeast Asia and a potential recovery in China, will boost regional diesel output by 260,000 b/d to 10 million b/d in 2020.

Gasoline Supports Atlantic Basin Margins

The explosion and reported permanent closure of New York Harbor’s largest refinery will be bullish for New York Harbor and Northwest European cracking margins to Brent this summer. The need to replace PADD I gasoline supply during peak demand periods will raise near-term gasoline spreads, supporting higher refining margins in the Atlantic Basin. Gasoline support will be short-lived though, as demand softens beyond the summer.

OPEC Likely to Extend Production Restraint

This month, OPEC members produced about 25.5 million b/d, roughly 1.1 million b/d less than the October 2018 baseline production, exceeding compliance with their pledged cuts by about 300,000 b/d. Given concerns over weak oil demand and soft oil prices, OPEC is likely to extend the current production restraint at the July 1-2 meeting. The G20 Osaka summit in the meantime is unlikely to change this outcome, although it bears watching as some participants have lobbied for deeper cuts.