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.
April’s Global NGL Two-Year Outlook focuses on the naphtha and NGL markets in 2019. The outlook is for robust expansion of NGL supply. Yet, in a market prone to imbalance, the outlook for supply and demand is rather balanced. On the supply side of the ledger, the Middle East, Russia and Australia ensure another big year for NGL supply in 2019 even as growth in the Permian slows from the breakneck pace in 2018. Meanwhile, petchem investment in 2019 features more “investment waves” for NGL-fed capacity. Not only will the U.S. add more ethane crackers, but there will be another “wave” of new Chinese PDH capacity. Consequently, there will be much new petchem demand for ethane and LPG. The flurry of growth in NGLs has bearish implications for naphtha demand and pricing.
Declining gasoline imports in the Middle East will add bearish pressure to gasoline spreads this year and next. New refining capacity in Saudi Arabia and Iran will help increase regional gasoline output by 130,000 b/d to 1.62 million b/d in 2019. This will reduce imports by nearly 100,000 b/d, meaning shrinking opportunities for exporters in Europe and Asia.
Growing tensions between the U.S. and Russia, punctuated by new sanctions against Russia, a more hawkish White House foreign policy team, and a changing policy towards the Iran nuclear deal are the backdrop to Friday’s missile strike on Syrian chemical weapons sites by the U.S., France and the U.K. The situation in Syria could escalate U.S. confrontations with Russia and Iran, although heightened rhetoric seems more likely than action, at this point. The next event may be in May when the decision on waiving extraterritorial sanctions related to the Iran nuclear deal comes up again. Note, the Administration may not be ready to take action by then, kicking this issue into the summer. Clearly, underlying tensions in the region will not dissipate in 2018. The geopolitical premium will continue to support crude oil prices even as U.S. shale output continues to climb.
Following a period of strong product demand and relatively low prices, demand growth for all transport fuels will decelerate in 2019. Global transport fuel demand growth will slow from 1.2 million b/d in 2017 and 2018 to 1.0 million b/d in 2019. Diesel and jet fuel will account for the majority of this slowdown.
Brazil’s crude output is growing lighter and sweeter, as Santos Basin output increases and Campos declines. ESAI Energy projects that the Santos Basin will produce 1.4 million b/d of crude in 2018, an increase of 300,000 b/d over last year. This will bring Brazil’s total production up to 2.8 million b/d.
Following very high growth of roughly 280,000 b/d in 2017, European transport fuel demand growth will slow in 2018 to a still healthy 180,000 b/d as consumption of diesel and jet fuel keeps surging. This sustained rise in European demand will provide bullish support for global middle distillate markets.
The International Maritime Organization is expected to ban ships from carrying fuel oil with sulfur levels above 0.5 percent unless they have a scrubber installed. The carriage ban, effective March 2020, will help boost compliance rates with the IMO sulfur change beginning that year.
Brazil plans to raise throughput this year to regain market share. Its increase, however, will be bound by imports from the Gulf Coast and lower refinery margins from its own price adjustments. We expect refinery throughput to average 1.69 million b/d in 2018, 30,000 b/d more than last year. Meanwhile, demand is growing faster than supply, so imports will remain high, around 190,000 b/d.
With Asia’s economies growing at a good-but-not-great pace, demand for diesel, jet fuel, and kerosene will grow more slowly than last year, expanding by 330,000 b/d to reach 12.03 million b/d. Still, with refinery throughput growth slowing substantially, Asian middle distillate markets will tighten this year, supporting spreads to crude.
In April, Russia moved a step closer to fundamentally reforming taxation of the oil industry. The Duma’s approval of a draft law paves the way for a pilot project of the new tax system. Its eventual full implementation dramatically raises the prospects for Russia’s long-term oil production.
The new Chinese crude oil futures contract on the Shanghai INE was launched last week and attracted significant interest. There are many concerns over the viability of this contract given uncertainties related to foreign exchange and the centralized control of the oil industry. But, China has worked hard through tax regulations to lure foreign traders to the contract. It is too early to know if the contract will evolve into a credible pricing benchmark, but it has a chance to do so, and also drive market reform in China.
Proposed Chinese tariffs on imports of U.S. polyethylene would negatively affect U.S. ethylene production, ethane demand and ethane prices. Tariffs on propane imports would be disruptive to trade and U.S. market share in China and would even undermine Chinese propane demand. In the context of oil demand, the loss of some ethane and propane demand would lift petchem demand for refined naphtha.