June marked a low point for North American NGL prices. On the one hand, low outright crude and naphtha prices and sluggish Far East LPG demand conspired to bring Japan propane prices back into the low $30s. Meanwhile, a lack of infrastructure has de-linked North American prices from export netbacks. But soon these bumps in the road will vanish. Enterprise’s new LPG terminal enable will exports to flow more freely. When that happens, strong Asian demand will fuel a surge in U.S. deliveries to that market.
Over the next two years, crude and condensate production from the Bakken will reach record high levels despite a temporary lack of infrastructure to handle gas processing and NGL takeaway. Bakken production is forecast to average 1.4 million b/d this year, and 1.5 million b/d in 2020. Increased rig efficiency and enhanced completion methods are helping the economics outside the core.
Although heavy maintenance and outages in the third quarter of 2019 will temper UK production growth in the North Sea this year, new projects will help maintain total output of just over 1 million b/d for the next several years. Annual production growth from the UK North Sea will average close to 50,000 b/d in 2019 and 2020. Seven new projects are expected to ramp up through 2020, adding a total 245,000 b/d of new productive capacity. Areas west of the Shetland Islands are seeing the most activity.
ESAI Energy expects the region’s downtrend in operating capacity will turn a corner in 2019. Although maintenance and outages will continue to hinder operating capacity, the continued slow recovery in Mexico’s refineries and the restart of a U.S. Virgin Island refinery early in 2020 will contribute to the first rise in operable capacity and throughput in more than five years.
Though global in scope, the effect of the IMO sulfur cap on product fundamentals will be largest in Asia, where refiners and distributors will have to carry out a tremendous shift between bunker fuel oil and bunker gasoil in a short period beginning in the fourth quarter of this year. Trade flows will be rerouted as supply and demand balances suddenly change.
Europe and India’s gasoline deliveries to the Middle East are in the crosshairs as higher refinery output backs out imports. Since India’s refineries have a competitive advantage, especially when compared to Europe’s less sophisticated refineries, Europe’s 140,000 b/d will be more than halved by 2020.
Soaring output of ethylene and paraxylene in early 2019 has set China’s naphtha demand on a steep upward trajectory. Naphtha use, largely “hidden” within integrated refinery- petrochemical units, will grow by 250,000 b/d and 190,000 b/d in 2019 and 2020, respectively. Among other things, growing use of non-marketed naphtha provides context for Chinese oil demand amid declining transport fuel use.
Demand for middle distillates – diesel, jet, and kerosene – will grow by a cumulative 50,000 b/d in the next two years to reach 3.2 million b/d by 2020. Venezuela has been a drag on regional demand while Brazil and several other countries have contributed modestly to fragile growth. Overall, the region’s distillate demand will get a modest boost from bunker gasoil in 2020 due to the IMO sulfur rules.
As we expected, China’s crude imports came down to 9.5 million b/d in May. In the next few months, crude imports should stay below 10 million b/d given more refinery maintenance and already high inventory levels.
Despite his tough talk, President Trump has typically leaned towards isolationism, making him less likely to pursue large scale military intervention. At the same time, the Iranian leadership will be very cautious about escalating conflict in the Gulf. So, the bar for significant conflict in the region is high. Even so, Iran may see domestic or regional political benefits from further small-scale attacks or disruptions. The implicit threat of escalation, therefore, is here to stay.
E.P.A. finalized a rule providing a waiver for year-round sales. However, slow growth in an already small number of stations selling E15 outside PADD II will hinder sales. Meanwhile, D4 RIN prices will decline in the second half of the year. It will lower compliance costs for refiners in the second half. Significant upside risk remains, though, with the impact of small refinery waivers and recent storms uncertain.
Until now, the oil contamination had a bigger impact on Russian exports than production. Among other things, this led to the accumulation of an estimated 20 million barrels of inventories. Transitioning to June, Russia has re-routed some exports and partially restored pipeline deliveries. Consequently, Russia will leverage inventories to push more crude exports into the market.
The recovery of gasoline spreads in April and May have returned margins to more typical and sustainable levels, particularly those in the U.S. However, that recovery will be fleeting. Gasoline spreads will soften again by the fourth quarter and remain weak in 2020. Unlike recent months, however, stronger distillate spreads heading into 2020 will keep margins from falling.
There are ways to avoid the tariff on imports of Mexican crude oil, but at this point it is unclear whether those will succeed. If not, some refiners will pay more and some crude will head to Asia.
With a historic mandate, the Modi government aspires to develop the Indian economy based on an investment-driven model with welfare measures to lift the rural population out of poverty. Policy continuity and large expenditure on infrastructure projects will support the country’s total oil demand to rise by 230,000 b/d this year, with robust increase in diesel, LPG and gasoline.