New Refining Subsidies Take Shape

Progress on Russia’s oil tax reform hints at its likely impact on the future of refining. Most but not all refineries will be subsidized. Distillation capacity will level off after a prolonged period of expansion. Lastly, the new system will eliminate the incentive for investment in fuel oil destruction. However, the consequences for investment will be offset by market incentives stemming from new IMO regulations.

And So, the Sanctions Drama Begins

Today, the first tranche of sanctions on Iran go into effect. Iran will struggle with the economic implications but is unlikely to concede to the extensive demands of the Trump Administration. In November, the sanctions will turn to crude oil, complicating U.S. relations with a host of countries who import Iranian crude. The drama, therefore, is not just between the U.S. and Iran, but also between the U.S. and Iranian crude importers. Look for intended and unintended linkages between waivers to the sanctions and other economic or diplomatic objectives of the Trump Administration.

Tail Wagging Russian Production

The 250,000 b/d increase in Russian production from May to July eclipses the growth hinted at by the Russian Energy Ministry. The opportunity to replace Iranian barrels undoubtedly is encouraging higher Russian output. In response, we now estimate annual Russian growth of 130,000 b/d in 2018 and 210,000 b/d in 2019. However, President Putin will eventually establish a new temporary production ceiling and resume coordination of production in the OPEC+ format.

Venezuela Shrinks Latin America’s Surplus

In 2019, Latin America’s regional crude surplus should average 3.4 million b/d, down 400,000 b/d from 3.8 million b/d in 2017. Over the two years, production will fall by 380,000 b/d, led by the collapse in Venezuela. Meanwhile, regional refinery throughput will rise by 20,000 b/d. Free of the weight of Venezuela, the non-OPEC Latin America balance would rise by 250,000 b/d in the same period.

Saudi Diesel Exports to Rise

The Middle East’s exportable surplus of diesel will grow by 90,000 b/d in the second half of 2018 to reach 490,000 b/d, with Europe absorbing most of the increase. New refining capacity in Saudi Arabia and Kuwait will boost the region’s surplus further in the first half of 2019, but stagnating import needs in Europe in that period could lead to an oversupply, putting pressure on diesel spreads to crude.

Sverdrup to Lead North Sea Recovery

After falling for the second straight year to 2.6 million b/d in 2018, North Sea crude and condensate production will plateau in 2019 before rising sharply in 2020 as a result of the start-up of Equinor’s Johan Sverdrup mega-project. Led by Norway, North Sea output will continue to grow at an average annual rate of 70,000 b/d from 2020 to 2023, when it will reach 2.9 million b/d.

No Change on Sanctions on Iranian Importers

Following a week during which President Trump met with most of the signatories to the JCPOA, there appears to have been no movement on a concerted approach to Iran that would replace the JCPOA. Moreover, despite somewhat contradictory reporting, the Trump Administration continues to indicate that waivers on sanctions would be limited at best. The loss of Iranian exports continues to look inevitable. This is consistent with the President’s urging of producers to increase output and the discussion of an SPR release.

Distillate Imports to Surge in Second Half of 2018

Despite a growing deficit, in the first half of 2018 European distillate imports remained flat year-on-year at roughly 1.6 million b/d. With regional distillate inventories depleted and the distillate deficit slated to keep expanding, European distillate imports will rise by about 240,000 b/d in the second half of this year and provide bullish support for global markets.

AMLO Price-Freeze Supports Gasoline Demand

President-elect Lopez Obrador’s promise to freeze gasoline prices will support gasoline demand, which is on track to grow by 15,000 b/d this year. An increase in refinery throughput will more than offset the impact on Mexico’s imports though. We expect a modest increase in utilization rates in the second half of the year, increasing gasoline supply by 60,000 b/d compared to the first half of 2018 and reducing Mexico’s import requirement by 40,000 b/d.