Venezuela production has declined steeply and should fall under 1.2 million b/d by the end of 2018, to average 1.4 million b/d this year, 500,000 b/d below 2017 levels. The ConocoPhillips court rulings will help expedite the decline by complicating transport and logistics operations in the Caribbean. Already, PdVSA’s production has fallen far enough to force a choice between refinery throughput and exports. Meanwhile, President Maduro’s re-election invites more US sanctions but otherwise will not alter the production outlook.
The Middle East’s fuel oil import requirement will increase by 50,000 b/d this year and by a further 100,000 b/d in the first half of 2019 to reach 340,000 b/d. Kuwait and the UAE’s imports will rise the most, as refinery upgrades and repairs cut fuel oil output this year and next. Strong Iraqi demand will also support fuel oil spreads to crude this year, but not in 2019.
Robust gasoline demand in Mexico will sustain the need for imports at last year’s levels through 2018, despite some recovery in Mexico refinery runs. Demand will grow by 20,000 b/d this year to reach 790,000 b/d. For the region as a whole, demand will remain flat at 2.6 million b/d, with contractions in Brazil, Venezuela, and the Caribbean offsetting Mexico’s growth.
China’s stockpiling in government depots will contribute 55,000 b/d to imports in 2018, and 140,000 b/d in 2019, when the delayed Zhanjiang SPR depot starts. Hengli and Zhejiang Petrochemical will process Middle East crudes, driving up imports towards the end of 2018. Meanwhile, ESAI Energy expects at least a third round of export quotas in the second half of the year due to capacity additions.
Following President Trump’s decision to withdraw the United States from the JCPOA, the response of Iran, Europe, Russia and China over the next several weeks will be closely watched. The U.S. and Europe are likely to continue discussions regarding joint action on Iran and the imposition of secondary sanctions on European companies. Whether China, Russia and, one day, Iran can be brought back to the negotiating table will depend on statements, actions and likely exogenous events over the wind down period.
In the first quarter of 2018, European net exports of finished gasoline and blending components averaged nearly 1.4 million b/d. As Europe’s exportable surplus shrinks, import requirements especially East of Suez narrow, and competition to place gasoline in the Atlantic Basin intensifies due to growing U.S. and Russian surpluses, European exports will fall by more than 100,000 b/d over the next year.
The latest talks over the RFS resulted in the announcement that the Trump administration will allow E15 gasoline to be sold year-round. Although policy details remain unclear, this development will move the RIN market into surplus, reduce D6 RIN prices, increase blending of ethanol into the gasoline pool at the expense of petroleum based components, and temper the recent crude-led rise in gasoline prices.
As expected, President Trump withdrew the U.S. from the nuclear agreement and re-imposed sanctions on
Iran and companies that do business with Iran. This includes companies who buy crude oil from Iran. This
could reduce Iran’s crude exports by about 300,000 b/d by late this year – a significant volume, but not as
large as press reports have indicated.
As a response to increasingly strict gasoline standards, China’s reforming capacity grew 180,000 b/d in 2017. This year, the growth will be 400,000 b/d to reach a total capacity of 2 million b/d. ESAI Energy expects that the surge in reforming capacity will displace more than 100,000 b/d of mixed aromatics imports.
Plentiful crude, big increases in distillation capacity and decelerating petroleum product demand growth will pressure petroleum product spreads in 2018 and early 2019. The bearish pressure will not last long though. In the second half of 2019, there will be a diesel-driven recovery of refining margins as the market anticipates a spike in demand for gasoil and low sulfur fuel oil.
Subsidy reform in Egypt means that despite a growing economy, higher prices will leave gasoline demand flat this year, at 170,000 b/d. With no other large engine of growth in the region, North Africa’s total gasoline demand will also remain flat this year, at 400,000 b/d. Meanwhile, a modest increase in supply means the region’s import requirement will shrink slightly to 210,000 b/d.
The impact of perhaps a year and a quarter of OPEC+ production restraint has been impressive, and finally there is consensus that the oil market has returned to balance. Some believe that balance is precarious and vulnerable to decelerating demand and rising non-OPEC production in 2019. Others believe the balance is headed towards tightening in a way that will lift prices above $80. Add to that the possible end of the Iran nuclear deal and price expectations go even higher. Clearly with inventories way down, demand quite strong and the OPEC+ deal working with help from Venezuela’s production decline, it is quite easy to be bullish on 2018. We have revised our 2018 price forecast up, especially during the seasonally strong months of the year.
Does the market need more production restraint in 2019? There are two notable developments that will shape crude supply and demand. First, there is a tremendous volume of new distillation capacity coming online between now and the end of 2019. There is a little bit of splitter capacity in these volumes, but most of this increase in capacity is designed to run medium or heavy crude. Russian and Arab Gulf production, rather than U.S. shale, will meet this demand as it emerges. The second is the change in bunker specifications starting in 2020. Bunker suppliers will have to replace high sulfur product with lower sulfur product before January 2020. This will mean higher runs and sweeter crude input as a first response, lifting demand for U.S. shale in some locations, including the USGC and Europe.
Significant volumes of crude oil will chase quality-driven opportunities in 2019. Crude price differentials will be volatile and light sweet crude prices will find support despite weakening overall supply demand fundamentals in 2019.
All signs from the Jeddah meeting point to OPEC and its partners continuing their over-compliance with the crude production deal. OPEC has cut 2.08 million b/d from its baseline, nearly twice the original target. OPEC’s cuts will deepen in the coming months, with Venezuela’s collapsing output more than offsetting small increases in other members’ production.
After dropping by 40,000 b/d in 2017, North Sea crude and condensate production will continue to fall through 2018 and 2019 as declining Norwegian output outweighs UK supply growth. By 2019, ESAI Energy expects North Sea output to have fallen below 2.7 million b/d, 65,000 b/d less than 2017 supply. However, these North Sea declines will be reversed by the late-2019 startup of the Johan Sverdrup mega-project.
Oil Sands Growth a Casualty of Pipeline Wars: The provincial standoff in the Trans Mountain Expansion (TMX) pipeline dispute will end up in a delay of one year, but the project will go forward with the backing of the federal government. The Line 3 project is also facing an uncertain timeline as regulators review the project. With existing pipelines full, large discounts for Western Canadian crude will remain through 2019 and surplus crude will get to markets by costlier rail.
US Shale Growing at Record Pace (Again): Higher prices are incentivizing increased drilling activity in the US shale basins. Producers are moving out of Tier 1 acreage as more wells are now economic even as inflationary cost pressure has crept in. Total US shale output will grow about 1.2 million b/d year-over-year in 2018, surpassing previous record growth in 2014. The largest gains will continue to be dominated by the Permian Basin, with total US shale growth of 720,000 b/d in 2019.