Can the U.S. and Europe Come to an Agreement on Iran?

If Washington refuses to waive sanctions on Iran under the JCPOA, how quickly and comprehensively will it choose to re-impose them – particularly against European entities? The answer to this question is critical to knowing how much oil might come off the market, and when. Europe is currently importing over 750,000 b/d of crude oil from Iran. A 20 percent reduction would equal 150,000 b/d. Yet, with the Arab Gulf producers (and Russia) holding crude oil off the market under their current production deal, there is spare capacity to replace Iranian volumes to Europe, and to most of Iran’s Asian customers. So, the biggest impact of a U.S. rejection of the sanctions waiver may be the end of the OPEC Deal. But, for the moment, negotiations with Europe can still shape the outcome of this issue.

Crude Demand and Iran Support Prices

The pace of global oil demand continues to accelerate this year. Growth will be close to 2.0 million b/d in 2018, although 400,000 b/d of that will be ethane. In 2019, ethane demand growth slows, bringing total growth down to about 1.5 million b/d. If we isolate demand for crude-derived products, it is 1.3 and 1.1 million b/d in 2018 and 2019, respectively. Demand for crude derived products will decelerate in 2019, but not as fast as total oil demand, which includes ethane.

More Canadian Rail or Stock Builds? Both!

The Canadian Oil Sands are forecast to grow by 200,000 b/d in 2018, and with no additional pipeline takeaway coming until late 2019 at best, Canadian bitumen will continue to face steep discounts until more pipeline capacity is brought online. Crude stocks in Canada are on the rise, and the call on rail delivery is expected to increase from an average of 140,000 b/d in 2017 to about 260,000 b/d in the second half of 2018.

Europe Leads Fuel Oil Upgrades

In the fast-moving NGLs, opportunities and threats lurk around every corner. China, the prize sought by North American and Middle Eastern exporters, has built a terminal that could open the door to 100,000 b/d of overland LPG supply from Russia. The ramifications are far-Europe and the FSU will add more than 250,000 b/d of capacity to upgrade heavy high sulfur fuel oil at existing refineries by the end of 2020. These investments will help reduce the surplus of high sulfur fuel oil that is more costly to upgrade or desulfurize as demand shifts to lower sulfur fuels under new IMO sulfur specifications for the bunker fuel market.

China to Tap Stranded Russian NGLs

In the fast-moving NGLs, opportunities and threats lurk around every corner. China, the prize sought by North American and Middle Eastern exporters, has built a terminal that could open the door to 100,000 b/d of overland LPG supply from Russia. The ramifications are far-reaching, ranging from the geography of trade flows to demand for VLGCs, and North American and Middle Eastern market share in China are in the crosshairs. This issue provides insight into the reality of progress and actual market impact. In the current market of plenty, bearish factors continue to weigh on NGL prices relative to crude. For the balance of 2018, soaring petchem demand for ethane and LPG will be the main source of support for prices. However, the upside in the Mt Belvieu composite NGL price is limited and will only fully emerge at the end of the year.

Transport Fuel Markets Remain Strong

2018 will be another good year for refiners, as strong global economic growth continues to support petroleum product demand. Despite an increase in absolute prices, global demand for transport fuels will rise to 65.4 million b/d, almost 1.3 million b/d higher than last year. This increase represents a slight acceleration from last year when transport fuel demand rose by 1.2 million b/d. Higher gasoline and diesel demand growth will drive the acceleration.

End of Iran Deal May Not Lead to Multilateral Sanctions on Oil Exporter

Changes to President Trump’s cabinet, especially the nomination of Mike Pompeo to Secretary of State suggest President Trump may be closer to his campaign pledge of scrapping the Iran nuclear deal. That outcome, however, has perhaps deleterious implications for other aspects of U.S. foreign policy. Moreover, re-imposing multilateral sanctions has gotten a lot harder given rising conflict over trade between the U.S. and its allies. Arguably, it was the embargo on crude imports from Iran by countries other than the U.S. that led to Iranian concessions at the negotiating table. Without similar multilateral sanctions, President Trump could scrap the nuclear deal and not regain leverage over Iran.

Europe Leads Stronger Atlantic Basin Distillate Market

In 2018, Europe’s distillate deficit will increase by about 100,000 b/d to nearly 1.7 million b/d as demand growth for both diesel and jet fuel is only partially offset by a slight increase in domestic supply. This expanding import requirement will result in a tighter Atlantic Basin distillate market and provide support for diesel and jet fuel spreads to crude throughout the region.