Low water levels on the Rhine and a strike at French refineries converged to cause a spike in refining margins in Northwest Europe in November. That isolated support was short-lived,though, and margins will remain soft until the second half of 2019 when new IMO specifications for bunker fuel markets bolster diesel and low sulfur fuel oil spreads to crude.
Mexico’s refining needs will drive growth of light crude imports
New pipelines in 2H 2019 will bring a flood of Permian crude to Corpus Christi. Exports from the port will double by the end of next year as terminals expand loading capabilities.
Global demand growth for transport fuels will accelerate next year due to turnarounds in China,Saudi Arabia, and Brazil. Yet, next year’s transport fuel demand growth will still be modest, especially when compared with the 2015-2017 period.
Two U.S. Senate votes last week highlight Congressional opposition to President Trump’s foreign policy regarding Saudi Arabia. Although neither will bring about change in the short-term, they reflect bipartisan support in opposition to the president, which could eventually impact the President’s foreign policy initiatives.
ESAI Energy expects elevated maintenance activities again in 2019, despite already high levels in the second half of 2018. Large scale maintenance programs in India and Mexico along and with last minute preparations for IMO specification changes in 2020 will keep turnaround activity elevated next year.
Despite the new president’s promises, next year, Mexico’s throughput will be limited by extensive repairs and maintenance. With demand flat, the impact on product imports will be modest, which means another strong year for US Gulf Coast exporters.
The threat to Europe from the expansion and modernization of Russian refineries is looking less ominous. As Russia’s tax reform unfolds, refining interests are increasingly losing out. These developments have negative implications for the expansion and modernization of Russian refining.
Russia will be fully compliant with production cuts by March 2019, according to ESAI Energy projections. Producers have demonstrated an ability to manage output at mature fields. That said, new projects and upcoming haggling over production quotas could lead to bumps in the road, including for Rosneft.
China’s total oil demand is expected to rise next year. And thanks to new petrochemical projects, China’s demand for non-marketed naphtha and LPG will grow. Beijing’s policies to prevent economic growth from worsening should boost gasoline and middle distillate demand
The OPEC+ decision to cut crude oil output by 1.2 million b/d (from October) should be enough to balance the global oil market for the next six months, and possibly the entire year if extended. Yet, it will not fully counteract the surplus that accumulated in the latter half of 2018. So, while this agreement is clearly supportive of prices, the magnitude of the upside in 2019 will depend on compliance with the agreement, future changes to Iran sanctions waivers, product demand growth meeting expectations, and IMO preparations later in the year.
The Mostorod refinery’s new secondary units will boost Egypt’s transportation fuel output and reduce the need for diesel imports. With Egypt taking fewer barrels from exporters in Mediterranean Europe and the Middle East, this will add some bearish pressure to European distillate spreads.
The kind of OPEC output restraint we are reading in today’s tea leaves will help the market dig out from the 4th quarter surplus, but likely not lead, by itself, to a supply/demand deficit in 2019.
Suggestions that EPA is reviewing its small refinery waiver methodology and low RIN prices at the end of 2018 point to the possibility of a significant curtailment in waivers going forward. If this does happen, D6 RIN prices could rebound significantly in 2019.
In response to a glut in oil supply in the province, the government of Alberta is mandating a temporary production cut of 325,000 b/d. If the mandate is followed to the letter, it would eliminate close to 20 million barrels of inventories by March 2019, roughly the amount of stock build from the past twelve months. Further production curtailments of 95,000 b/d could last until the end of 2019 if stocks do not draw down significantly. We had forecast Canadian production to fall by 30,000 b/d in 2019. In light of these developments, we are accelerating the decline to 90,000 b/d.