EU-16 transport fuel demand is expected to increase by an annual average of less than a 60,000 b/d in 2016 and 2017, a far cry from growth of nearly 130,000 b/d in 2015. Diminishing demand growth will limit the recovery of a weak global distillate market and keep regional diesel refining margins low.
An OPEC-non-OPEC production freeze will be too little too late to impact the crude oil surplus in a manner that liquidates inventories. The upside for crude prices is limited, but even so, crude prices will rise seasonally along with still healthy gasoline markets.
ESAI Energy estimates that the amount of refining capacity at risk of closure will rise back to more than 800,000 b/d in 2017 after falling to almost zero in 2015. OECD refiners will cut runs by 100,000 b/d in 2016 after a nearly 1.1 million b/d year-on-year rise in 2015.
NYH gasoline spreads will rise above $20 per barrel this summer. Demand growth, which will be smaller this year compared to 2015, is only part of the reason behind anticipated gasoline strength in 2016. More notably, weak demand and oversupply for other refined products, especially diesel, will limit throughput and constrain gasoline supply.
The EU-16’s crude import requirement will remain unchanged at about 8 million b/d from 2015 to 2016 as a forecast drop in refinery throughput is mostly offset by a decline in North Sea production. Meanwhile, a resurgent Iran, intent on restoring European market share, will push barrels into Europe, and thus place downward pressure on European crude prices. As a result, Russia and other suppliers will have a portion of their exports crowded out of the European market.
After falling in 2016, crude oil output growth should return to Latin America and reach 100,000 b/d by 2020. Growth will come as a liberalization trend sweeps the region’s oil industries in the short term due to low oil prices and a political shift to the right. As a result, foreign investment and participation in Latin America’s upstream will be a key component of production increases in the second half of the decade.
Russia will export about 180,000 b/d more crude in 2016 compared to last year. Exports via pipelines and Far East ports leading directly to Asia will only increase 50,000 b/d, with the remainder of the growth coming in outflows from European ports. Higher exports from European ports will encourage greater outflows of Russian crude from Europe to Asia, intensifying the battle for market share there as well as in Europe.
The ongoing civil war and the rise of ISIS in Libya will carry on for years. Western powers are taking steps consistent with counter-terrorism but not necessarily supportive of reconciliation or the establishment of a functioning government. This means Libya’s crude production will remain constrained by realities on the ground perhaps for years.
A 900,000 b/d drop in non-OPEC crude and condensate production in 2016 will encourage a price rally later this year. If that rally coincides with seasonal summer gasoline strength, then it could be quick and strong. Ample crude and product inventories, however, will temper the duration of the price rally. Even so, the market will return to the 40s in 2016.