European Jet Fuel Adds Support for Distillate

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.

Optimistic RINs Market

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.

200,000 b/d of Chinese Refining Capacities At Risk of Closure

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.

North Africa’s Diesel Supply Surges

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.

Crude Prices Finally Respond

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.

Stars Align for NGL-fed Petchems

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.

Business Group Support Will Likely Preserve NAFTA

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.

Lower Middle East Operable Capacity in 2018

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.