New Quotas Mean Crude Oil Imports will Fall

Based on the analysis of non-state crude import quotas, we estimate that crude oil imports by the non-stateowned sector could decline by 640,000 b/d from 3.4 million b/d in January-June to 2.7 million b/d in the second half of the year. This analysis also suggests that Hengli Petchem will reach high utilization rates in the next few months, while Zhejiang Petchem will not be commercial this year. Overall, this means total crude oil imports should average about 9.3 million b/d for the rest of 2019, having a significant impact on crude oil demand.

Russian Romance with OPEC Blossoms

Russian embrace of OPEC+ is about both the oil price and Russian power. Collaborating with OPEC members has brought Russia much success in terms of its ability to insert itself as a regional powerbroker and otherwise expand its influence in the Middle East. This secondary goal decreases the likelihood of Russia breaking with the Saudis in coordinating production policy anytime soon.

Yields Begin to Shift from Fuel Oil To Diesel in Japan and South Korea

Although diesel production in Asia Pacific will grow by only 60,000 b/d this year, higher diesel yields driven by IMO sulfur rules have already emerged in Japan and South Korea. This, together with a ramp up of new refineries in Southeast Asia and a potential recovery in China, will boost regional diesel output by 260,000 b/d to 10 million b/d in 2020.

Gasoline Supports Atlantic Basin Margins

The explosion and reported permanent closure of New York Harbor’s largest refinery will be bullish for New York Harbor and Northwest European cracking margins to Brent this summer. The need to replace PADD I gasoline supply during peak demand periods will raise near-term gasoline spreads, supporting higher refining margins in the Atlantic Basin. Gasoline support will be short-lived though, as demand softens beyond the summer.

OPEC Likely to Extend Production Restraint

This month, OPEC members produced about 25.5 million b/d, roughly 1.1 million b/d less than the October 2018 baseline production, exceeding compliance with their pledged cuts by about 300,000 b/d. Given concerns over weak oil demand and soft oil prices, OPEC is likely to extend the current production restraint at the July 1-2 meeting. The G20 Osaka summit in the meantime is unlikely to change this outcome, although it bears watching as some participants have lobbied for deeper cuts.

Regional Demand Stabilizes after Last Year’s Decline

European demand slipped by only 10,000 b/d year-on-year in the first quarter, a reprieve from the fast decline reported in late 2018. With demand expected to improve further, Europe could log a slight increase in 2019 despite its fragile economy. Europe’s outlook is material, as its stabilization is one of the key factors behind the strengthening in global demand expected for the second half of this year.

Revised Petroleum Laws Support Crude Production Growth

Since dropping 20,000 b/d in 2017, non-OPEC Africa supply of crude and condensate halfway recovered with growth of 10,000 b/d in 2018 and is on track to grow another 5,000 b/d, reaching 1.23 million b/d in 2020. Ghana’s improved investment climate has offset the decline in other non-OPEC countries, and several OPEC participating countries are overhauling petroleum laws to stimulate competition.

U.S. LPG Exports to Surge

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.

Bakken Output to Reach New Highs

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.