North Sea Production Drops in 2018 and 2019

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

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.

Global NGL Two-Year Outlook: Making Waves

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.

Tensions in Persian Gulf Will Continue to Support Crude

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.

Latin Diesel Continues to Flow

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.

China Lures Overseas Traders for Shanghai Crude Futures

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.

China Tariffs Ripple Ethane, Propane and Naphtha Markets

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.