After years of growth, Europe’s distillate deficit is slated to remain flat next year. As a result, Europe’s distillate imports will also remain steady. However, steady trade volumes belie a shift in flows, with the Middle East continuing to gain market share at the expense of Asia and North America.
With President Trump actively interested in U.S and Iranian production, President Putin in Russian production, and Crown Prince Mohammad Bin Salman (acting on behalf of his father King Salman) in Saudi production, these three leaders are shaping over 40 percent of global crude oil supply. Oil prices should remain soft unless or until there is a new supply disruption or the OPEC producers, who have recently cranked up production, dial back. Alternatively, fewer waivers may be granted in 6 months or Russia might cutback output growth. There is a broad range of possible outcomes, even as all parties claim diplomatic collaboration. This much head of state interest in crude oil markets will muddy the waters for supply and prices in the months ahead.
As the Asia-Pacific gasoline surplus grows, the middle distillate surplus will tighten, squeezing gasoline spreads to crude in Singapore, while a tighter distillate balance supports diesel spreads with China as the major factor in both movements
Kazakhstan has achieved gasoline self-sufficiency, which combined with other regional developments push more Russian and Belarusian gasoline into the Atlantic basin and have a bearish impact on gasoline markets.
Russian production growth has led to higher crude exports. Lately, export growth has been in pipeline deliveries to China, but growth will shift to seaborne outflows from Europe.
U.S. sanctions on Iran’s exports of crude oil and condensate came into effect today, with waivers granted to eight of Iran’s traditional customers in Asia and the Mediterranean. It seems the waivers may be a useful negotiating tool for the Trump Administration and, thus, although they expire in 6 months, it is likely they will be extended. Even with these waivers, Iranian exports will still fall by roughly 1.2 million b/d in 2019.
Calls for a cease-fire in Yemen reflect the complicated relationship between the U.S. and Saudi Arabia, which, at least outwardly, took a turn for the worse following the execution of Jamal Khashoggi. Still, opposition to Iran will continue to trump all other issues between these two countries. This does not bode well for Yemen.
Mexico’s throughput fell suddenly this month, suggesting there are even more structural problems with refineries than originally thought. Lower throughput will boost the country’s exportable surplus in the fourth quarter, before falling in 2019 as AMLO has Pemex raise runs.
In 2020, changing contributions from gasoil, gasoline, and fuel oil to refining margins will effect refineries based on geography and profile. Cracking refiners that can upgrade heavier high sulfur material will benefit, while less sophisticated refiners that produce heavier sour grades of crude oil and rely on HSFO bunker demand, will struggle.
Due to U.S. sanctions, Iran will reduce fuel oil exports next year with flows to Asia falling most. Iran’s power sector will consume the excess fuel oil, reversing a multi-year trend in which power plants have replaced fuel oil feedstocks with natural gas. This will contribute to a larger regional deficit of fuel oil, supporting spreads to crude before IMO hits
Sustained growth of NGLs in the period through 2020 will leave LPG struggling to catch up.
After remaining flat this year, Africa’s diesel deficit will grow by 20,000 b/d in 2019 to reach 885,000 b/d as demand growth of more than 40,000 b/d outpaces supply increases.
In Q3, North Sea crude and condensate production remained more or less stable year-on-year after consecutive quarters of declines. Looking to 2019, output will remain flat year-on-year, as Norwegan declines narrow and U.K. growth stalls. But, the startup of Equinor’s Johan Sverdrup megaproject will lead to growth in 2020.
Saudi Arabia accounts for about half of the spare crude oil productive capacity in the Middle East. In the period to 2020, declines at mature fields will offset some planned capacity additions in Saudi Arabia, Kuwait, the UAE, and Iraq. How will this impact the region’s spare productive capacity?
The global supply demand fundamentals over the next two years will be generally balanced with product market weakness building in, later in 2020. Waivers, tankers, and condensate splitters will shape the volume of crude oil Iran will export after the sanctions are imposed, while refiners drive the shift to gasoil blends in the bunker sector due to IMO.