Market Alert: Alberta to Cut Over-Supply of Crude

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.

New Refining Capacity Weakens Fuel Spreads in Middle East

Diesel and gasoline production in the Middle East will rise next year, as new refining capacity ramps up in Saudi Arabia and Iran, and a damaged unit returns in the UAE. With supply growth of both fuels outpacing demand, the region’s diesel exports will rise and gasoline imports will fall in 2019. This will add bearish pressure to transportation fuel spreads to crude.

Trump Statement Not Oil Policy

Many in the oil patch have pointed to President Trump’s recent statement on Saudi Arabia as a signal to Saudi Crown Prince Mohammad bin Salman (and the world), absolving the prince of guilt for the execution of Jamal Khashoggi and somehow setting up a quid pro quo that requires the Saudis to facilitate President Trump’s perceived preference for low oil prices. That is far too oil-centric an interpretation. President Trump’s statement is for the American people and his own foreign policy team. He wants the focus back on Iran, and knows Saudi Arabia is key to his policies with regard to Iran, not to mention China and Russia. The oil market should resist the temptation of seeing this statement as oil policy. The Saudis still have considerable leeway to pursue their own production policy, notwithstanding President Trump’s oil price tweets.

Latin America Crude: Out with the Heavy, in with the Medium

Latin America’s crude production will increase in 2019. This change will see Latin America’s crude continue to get lighter and sweeter, as Venezuela’s share continues to fall and Brazil’s increases. A lighter, sweeter barrel will be a boon for Brazil once IMO sulfur changes hit but also help support global heavy crude prices relative to light.

Transport Fuel Spreads Weak Until IMO

Despite accelerating demand growth, transportation fuel spreads will remain relatively weak in the first half of 2019. The global gasoline market is forecast to remain oversupplied, and distillate spreads will come under bearish pressure early in the year because of increased supplies from the Middle East and Russia. By the second half of the year, the looming IMO rule-change will start to lift middle distillate spreads.