Refining activity by Russia’s independent simple refineries is expanding. Yet, almost all of them will lack the coking and cracking capacity that ensures their ability to successfully navigate 2020 changes in IMO regulations. Nevertheless, after 2020 distillation capacity and refining activity by this group of refineries will expand further, strengthening competition from Russian refiners in Europe and beyond.
At the end of this year a diesel spec change in Mexico should, in theory, open a 100,000 b/d window for additional ULSD imports. It won’t. Rather than cut domestic supply of higher sulfur diesel, Mexico’s government will look the other way on enforcement until investments are finished in 2020.
With refinery throughput growth slowing to just half what it was last year, Asia’s surplus of transport fuels will shrink in 2018. The distillate surplus will narrow most, as refiners in China and elsewhere trim diesel yields. Diesel inventories should fall, supporting middle distillate spreads to crude in Singapore.
The last three projects of China’s second phase of strategic petroleum reserve development will potentially add 90,000 b/d to government stocking in 2018 and 2019. A change of policy to focus on commercial stocks, however, suggests that China may not launch the third phase of government stocking until after 2020.
Russia delivered by overland pipeline nearly 800,000 b/d of crude to China in January, a 240,000 b/d increase compared to last year. While several developments will prevent a further increase in Russian crude deliveries to Asia this year, Russia has planted its flag as another light crude producer eyeing the Chinese and Asian market.
After a bullish run in late 2017, during which Singapore cracking margins rose to nearly $9.50 per barrel, weakness at the light end of the barrel will erode refining profitability. Consequently, 2018 growth of Asian refinery throughput will be just half what it was last year.
Global oil demand is growing at a healthy pace even as higher oil prices might be expected to rein in demand on the margin. Demand growth will be a little slower than last year, but still sufficient to soak up significant increases in non-OPEC crude oil supplies. If OPEC+ sticks to their production restraint, the market will remain tenuously balanced this year and keep a price-destabilizing inventory build at bay.
USGC refining investment reveals an industry more focused on adapting to a changing market rather than expanding. Beside Magellan’s 50,000 b/d condensate splitter, there is not much new in terms of near-term additions to distillation capacity. Investments in secondary units reveals a refining sector preparing to process more light crude, chase high diesel spreads, minimize output of high sulfur fuel oil and change the way they produce gasoline.
In Nigeria, several national issues, including violent clashes between herdsmen and farmers, have increased the likelihood of another wave of attacks from the Niger Delta Avengers. Given growing security concerns, ESAI Energy forecasts that production will average no more than 1.75 million b/d in 2018.
Between the resurgence of NGL supply in several markets and the readiness of the petchem sector to absorb those NGLs, 2018 will go down as the biggest year yet for NGL demand growth. When one factors in the increase in ethane extraction, it will be an equally big year for supply. Demand-side developments will do little to lift NGL prices relative to crude though, as a weak naphtha market will limit the upside for LPG and low natural gas prices and abundant ethane will prevent anything resembling a spike in Mt Belvieu ethane prices.
In 2018, Europe’s imports of crude and condensate from non-European sources will fall by over 120,000 b/d to an average of under 9.5 million b/d as regional throughput declines and crude production remains flat. Even so, imports from the United States will likely grow even as total imports fall. Europe’s falling import requirement will exert slightly bearish pressure on global fundamentals as producers face tougher competition placing crude in the region.
After two years of significant growth, U.S. exports of gasoline and diesel to Latin America will remain stable in 2018, near historic highs of over 1.6 million b/d combined. Latin America’s yawning import requirements for both diesel and gasoline will continue to be a boon for Gulf Coast refiners and support regional product spreads. In this context, global diesel fundamentals will tighten as demand growth outpaces production gains, particularly in the Asia-Pacific region. Meanwhile, continued cuts in global residual supply will keep fuel oil markets tight and discounts to crude narrow. An acceleration in global gasoline supply growth from 270,000 b/d last year to 480,000 b/d in 2018 will exert slightly bearish pressure on product markets, partially offsetting the strength of diesel and fuel oil.
Iraq and Iran continue to inch towards closer cooperation between their oil industries in large part for economic reasons, but there are political benefits to both if promises and plans eventually pan out. At the moment, the nearest-term cooperation slated to start any day is a swap of 60,000 barrels per day between the two countries with the Iraqi oil coming from its Kirkuk fields and Iran returning the export from its southern fields. However, if this linkage not only comes to fruition but also portends larger cooperation, it could have political effects on the Kurdistan Regional Government (KRG), Turkey, Saudi Arabia, Syria, and possibly even Israel.
Additional pipeline capacity out of Cushing and reduced flow on Keystone means more crude will flow out of the Cushing storage hub than what comes in, supporting WTI prices through 2018. Pipeline expansions from Cushing also further chip away at the demand for crude to flow north from Louisiana, increasing the likelihood that the underutilized 1.2 million b/d Capline will be reversed.
Middle East exports of diesel and jet fuel will stall at 520,000 b/d in 2018, after four consecutive years of growth. This will create opportunities for Russian and U.S. Gulf Coast refiners to increase their diesel market share in Europe – at least until 2019, when Saudi Arabia commissions the new Jazan refinery.