Despite the new president’s promises, next year, Mexico’s throughput will be limited by extensive repairs and maintenance. With demand flat, the impact on product imports will be modest, which means another strong year for US Gulf Coast exporters.
The threat to Europe from the expansion and modernization of Russian refineries is looking less ominous. As Russia’s tax reform unfolds, refining interests are increasingly losing out. These developments have negative implications for the expansion and modernization of Russian refining.
Russia will be fully compliant with production cuts by March 2019, according to ESAI Energy projections. Producers have demonstrated an ability to manage output at mature fields. That said, new projects and upcoming haggling over production quotas could lead to bumps in the road, including for Rosneft.
China’s total oil demand is expected to rise next year. And thanks to new petrochemical projects, China’s demand for non-marketed naphtha and LPG will grow. Beijing’s policies to prevent economic growth from worsening should boost gasoline and middle distillate demand
The OPEC+ decision to cut crude oil output by 1.2 million b/d (from October) should be enough to balance the global oil market for the next six months, and possibly the entire year if extended. Yet, it will not fully counteract the surplus that accumulated in the latter half of 2018. So, while this agreement is clearly supportive of prices, the magnitude of the upside in 2019 will depend on compliance with the agreement, future changes to Iran sanctions waivers, product demand growth meeting expectations, and IMO preparations later in the year.
The Mostorod refinery’s new secondary units will boost Egypt’s transportation fuel output and reduce the need for diesel imports. With Egypt taking fewer barrels from exporters in Mediterranean Europe and the Middle East, this will add some bearish pressure to European distillate spreads.
The kind of OPEC output restraint we are reading in today’s tea leaves will help the market dig out from the 4th quarter surplus, but likely not lead, by itself, to a supply/demand deficit in 2019.
Suggestions that EPA is reviewing its small refinery waiver methodology and low RIN prices at the end of 2018 point to the possibility of a significant curtailment in waivers going forward. If this does happen, D6 RIN prices could rebound significantly in 2019.
In response to a glut in oil supply in the province, the government of Alberta is mandating a temporary production cut of 325,000 b/d. If the mandate is followed to the letter, it would eliminate close to 20 million barrels of inventories by March 2019, roughly the amount of stock build from the past twelve months. Further production curtailments of 95,000 b/d could last until the end of 2019 if stocks do not draw down significantly. We had forecast Canadian production to fall by 30,000 b/d in 2019. In light of these developments, we are accelerating the decline to 90,000 b/d.
Sudan and South Sudan are optimistic after a peace deal halted a civil war that has decimated crude oil production. The two countries hope to raise combined output to pre-war levels nearly double what they are today. But the peace is fragile. More realistically, they will manage to lift combined output to 300,000 b/d in 2019.
Iraq is likely to lobby for a pass if OPEC+ agrees to a production cut. Baghdad’s agreement with Iraqi Kurdistan to restart northern exports of Kirkuk crude will enable Iraq to increase crude oil production by the end of 2018. Capacity gains in Iraq’s south will be constrained by the limited export infrastructure at Basrah.
Gongreville Refinery in France shut down entirely on November 21st and production continues to be curtailed at Total’s Grandpuits and Feyzin. These disruptions, which will likely last into December, will reduce French throughout.
Bearish fundamentals were already in place before the Trump administration announced exemptions to Iranian export sanctions, so 2018 will end with the oil market in surplus. The surplus could increase in 2019 but we believe OPEC+ will put together a deal to cut production and lift prices.
Recent RFS developments point to even lower RVO costs for refiners in 2019. Larger than expected volume obligation waivers for small refineries and the increased likelihood of an E-15 summer waiver will both weigh on D6 RIN prices in 2019, by far the largest percentage of RVO costs.
Diesel and gasoline production in the Middle East will rise next year, as new refining capacity ramps up in Saudi Arabia and Iran, and a damaged unit returns in the UAE. With supply growth of both fuels outpacing demand, the region’s diesel exports will rise and gasoline imports will fall in 2019. This will add bearish pressure to transportation fuel spreads to crude.