Bearish Refining Margin Pressure Temporary

Plentiful crude, big increases in distillation capacity and decelerating petroleum product demand growth will pressure petroleum product spreads in 2018 and early 2019. The bearish pressure will not last long though. In the second half of 2019, there will be a diesel-driven recovery of refining margins as the market anticipates a spike in demand for gasoil and low sulfur fuel oil.

North Africa Fuel Reforms Stall Growth

Subsidy reform in Egypt means that despite a growing economy, higher prices will leave gasoline demand flat this year, at 170,000 b/d. With no other large engine of growth in the region, North Africa’s total gasoline demand will also remain flat this year, at 400,000 b/d. Meanwhile, a modest increase in supply means the region’s import requirement will shrink slightly to 210,000 b/d.

Global Crude: Change Coming in 2019 and OPEC+ Deal Looks Vulnerable

The impact of perhaps a year and a quarter of OPEC+ production restraint has been impressive, and finally there is consensus that the oil market has returned to balance. Some believe that balance is precarious and vulnerable to decelerating demand and rising non-OPEC production in 2019. Others believe the balance is headed towards tightening in a way that will lift prices above $80. Add to that the possible end of the Iran nuclear deal and price expectations go even higher. Clearly with inventories way down, demand quite strong and the OPEC+ deal working with help from Venezuela’s production decline, it is quite easy to be bullish on 2018. We have revised our 2018 price forecast up, especially during the seasonally strong months of the year.

Does the market need more production restraint in 2019? There are two notable developments that will shape crude supply and demand. First, there is a tremendous volume of new distillation capacity coming online between now and the end of 2019. There is a little bit of splitter capacity in these volumes, but most of this increase in capacity is designed to run medium or heavy crude. Russian and Arab Gulf production, rather than U.S. shale, will meet this demand as it emerges. The second is the change in bunker specifications starting in 2020. Bunker suppliers will have to replace high sulfur product with lower sulfur product before January 2020. This will mean higher runs and sweeter crude input as a first response, lifting demand for U.S. shale in some locations, including the USGC and Europe.

Significant volumes of crude oil will chase quality-driven opportunities in 2019. Crude price differentials will be volatile and light sweet crude prices will find support despite weakening overall supply demand fundamentals in 2019.

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.