Egypt’s increasing use of natural gas in the power sector will continue to reduce its use of fuel oil. From 260,000 b/d in 2016, North African fuel oil demand declined to 180,000 b/d in 2018 and will fall further to 160,000 b/d in 2019. A larger exportable surplus will help alleviate some of the current tightness in the fuel oil market.
Fuel oil strength and gasoline weakness have contributed to narrow light-heavy crude differentials, which will weigh heavily on cracking refinery margins early in 2019. Tight fuel oil supply and gasoline weakness globally will limit the profitability of cracking and coking refineries. This is particularly bearish for margins in the USGC where many refiners rely on cracking margins and gasoline yields are high.
Last year, Asia Pacific saw the strongest throughput growth and yet the weakest oil demand growth in the past few years. ESAI Energy expects throughput to grow modestly by 300,000 b/d in 2019, due to high inventories and continued economic deceleration.
OPEC+ have not quite done enough. More crude will have to come off the market, otherwise the 2018 surplus will not be rolled back and prices will be under pressure all year.
Saudi Arabia is carrying the heaviest load as the OPEC+ production cuts begin. The Saudi cuts will have to remain deep to keep OPEC+ in compliance with the deal. Other OPEC countries – notably Iraq and Nigeria – are set to raise productive capacity by as much as 350,000 b/d by the middle of 2019. Non-OPEC parties to the deal are also cutting far less than promised, adding to the pressure on Riyadh.
The Middle East will import 110,000 b/d of fuel oil in 2019, roughly double the level of 2018. Refinery upgrades in the UAE will cut fuel oil output early in the year, and Kuwait’s Clean Fuels Project will cut additional output towards the end of the year. A higher fuel oil import requirement in the Middle East will be one of the factors supporting fuel oil spreads in 2019.
U.S. refiners will likely replace just over half of the 500,000 b/d of Venezuelan imports with Canadian crude by rail and potentially some crude from the Arab Gulf but may still lower USGC refinery throughput for a few weeks. Venezuela will have a harder time adjusting, as China and India will only take a portion of the displaced volume. Venezuela’s 100,000 b/d of imports of naphtha, diesel, and gasoline from the US will need to be diverted to other destinations or could encourage slightly lower runs in the Gulf Coast. Lower naphtha exports and perhaps marginally less blending of shale with heavy crude will put a bit more pressure on U.S. crude production.
Venezuela now has two heads of state, Juan Guaidó and Nicolás Maduro. The US firmly backs Guaidó and has promised economic and diplomatic support. Maduro, meanwhile, still retains the support of the Venezuelan military. The situation will evolve over the coming days and weeks. The US remains undecided on whether to ban the 500,000 b/d of US imports of heavy Venezuelan crude. Venezuela crude production will decline by 250,000 b/d in 2019 to average 1.1 million b/d.
After growing by almost 1.6 million b/d in 2018, US crude production will slow down this year, but will still rise by 1 million b/d. That year on year average growth however, translates into only 500,000 b/d of growth between December 2018 and December 2019. Growth continues to be led by shale, which rises by roughly 850,000 b/d year on year. New projects are also ramping up in the Gulf of Mexico (GOM), contributing another 150,000 b/d. Total US output will reach over 12 million b/d in the second half of the year, lifting exports of crude oil higher, to average close to 2.5 million b/d in 2019.
Venezuela now has two heads of state, Juan Guaidó and Nicolás Maduro. The US firmly backs Guaidó and has promised economic and diplomatic support. Maduro, meanwhile, still retains the support of the Venezuelan military. The situation will evolve over the coming days and weeks. The US remains undecided on whether to ban the 500,000 b/d of US imports of heavy Venezuelan crude. In the meantime, these developments will continue to provide support to heavy crude prices.
In an effort to reduce fuel theft, Mexico closed several pipelines serving the central and western part of the country for the better part of January. This has caused fuel shortages. Demand will fall in January. More refinery problems mean Mexico’s gasoline import requirement will rise
In 2019, North Sea crude and condensate production will average 2.6 million b/d, roughly equal to 2018 output, as declines in Norwegian supply are offset by gains in the U.K. By the end of the year, North Sea production will return to year-on-year growth as the Johan Sverdrup mega-project starts up.
Changes to IMO specification and bunker market demand are fast approaching, but refiners in Europe and Russia have slowed upgrading capacity investments to reduce high sulfur fuel oil output.
This year, global gasoline and diesel trade flows will shift due primarily to a significant increase in Middle Eastern production of both products. Inflows of gasoline into the Middle East from both Europe and Asia will fall by a combined 160,000 b/d, while outflows of diesel, primarily destined for Europe and Africa, will rise by roughly 150,000 b/d.
Import substitution in China’s polymers and paraxylene markets will negatively affect feedstock demand in markets that export to China, exacerbating oversupply in the naphtha market.