After growing by an average of over 50,000 b/d annually in the last four years, ESAI Energy expects European jet fuel demand to increase by an additional 40,000 b/d in 2018 and reach 1.4 million b/d as both passenger and freight air traffic continue to rise. Europe’s growing jet fuel deficit will provide bullish support for already-strengthening middle distillate fundamentals and an increased opportunity for Asian and Middle Eastern exporters.
Uncertainty and speculation surrounding an E15 waiver and a biodiesel tax credit for 2018 have undermined overall RIN prices early in 2018. The biodiesel tax credit will likely be approved retroactively for 2017 after recent federal budget negotiations but if a 2018 biodiesel tax credit is not approved, look for a sharp rebound in RIN prices in 2018 on bullish fundamentals.
Brazil’s crude production will rise by 190,000 b/d in 2018, to 2.8 million b/d, with new units added in the pre-salt Santos basin. Outside of Brazil, however, Latin America’s crude production will continue to decline. In 2018 we expect the region’s total production to fall by 260,000 b/d, to 8.4 million b/d.
Pipeline politics in the Middle East have again risen to the fore. Turkey’s conflict with Kurdish militants in Northern Syria, to some degree, is a distraction from other regional issues such as oil flows. Turkey may have to declare victory and walk away.
China’s January crude imports reached an all-time high of 9.6 million b/d. ESAI Energy forecasts that China’s crude deficit in 2018 will rise to 8 million b/d, which will be 550,000 b/d higher than 2017 levels. Diesel exports will fall slightly in the second quarter as demand increases after the current environmental campaign ends in late March.
Delayed refinery restarts will keep Mexico’s gasoline imports at 520,000 b/d in 2018, only 20,000 b/d below last year’s record levels. Within Mexico, the southeastern Atlantic coast will continue to receive the majority of imports, even after refineries restart.
China’s crude distillation capacity equaled 15 million b/d in 2017 and will add another 500,000 b/d in 2018. The seven biggest state-owned oil companies have a combined capacity of 12 million b/d and independent refiners represent 3 million b/d. ESAI Energy believes at least 200,000 b/d of independent refining capacities will be the focus of tough scrutiny with a risk to be closed in 2018.
Not to be outdone by tax and other reform efforts in the United States and Saudi Arabia, Russia is close to approving a new tax system that will be a game-changer for long-term oil production. Meanwhile, government tinkering with the taxes affecting refining profitability will stymie refinery modernization.
The start of a new refinery in Egypt will chip away at North Africa’s diesel deficit this year. Gains across the continent, however, will be undermined by sputtering refinery activity in Nigeria and increasing demand in South Africa. Africa’s diesel deficit will remain just above 800,000 b/d in 2018. Africa’s continued reliance on external supply will reinforce the recovery of global diesel fundamentals.
In 2018, ESAI Energy expects North Sea production of crude and condensate to rise by roughly 50,000 b/d, and approach 2.3 million b/d. This growth will be led by a 120,000 b/d increase in U.K. output, which will more than offset a 70,000 b/d decline in Norwegian supply.
Even as U.S. crude oil production continues to rise, that increase in output, coupled with growth elsewhere will not be enough to yield a surplus and rebuild global crude oil inventories in 2018. The current crude oil market is close to balance with floating storage essentially liquidated and on-land inventories falling. Meanwhile, any supply disruption will encourage a price spike, and Venezuelan production continues to fall.
Refiners typically pay effective tax rates close to the statutory 35 percent corporate rate, due to the limited number of deductions available to them. Even with a key deduction being repealed, after tax refinery profitability would be significantly higher under the tax reform.
Oil and NGL prices are beginning to resemble the sort of market investors in NGL-fed olefins capacity were counting on. NGL supply growth is regaining momentum and, simultaneously, Brent crude is flirting with $70. These developments are enabling the gap between naphtha and LPG prices to widen, which is reflected in price movements from December to January. Since olefins are priced off naphtha, the widening discount of NGLs will benefit the profitability of NGL-fed petchem capacity.
This week, representatives from the three NAFTA countries reconvene in Montreal for the sixth round of negotiations. It is possible that the talks will not end in agreement, and negotiations will be extended past the March deadline. Yet, a strong consensus is building among business and industry groups in support of a “do no harm” approach that could preserve NAFTA and its key elements.
Due to delayed capacity expansions and maintenance in the Middle East, the region’s operable capacity will be just 8.97 million b/d in the first five months of the year. The loss of capacity will peak in February, when up to 700,000 b/d could be offline. This capacity constraint will limit throughput growth and create additional room for marginal refiners in other regions to maintain higher utilization rates.