North Korea Summit Reduces Tensions for Now

The summit between President Trump and the Supreme Leader of North Korea, Kim Jong-un, has come and gone in a flurry of photographs and a very short and very vague agreed statement. The meeting was largely symbolic and strict U.N. sanctions remain in place, but reduced tensions could eventually create an environment for stronger trade links between North Korea and China, Russia, and South Korea

U.S. Gasoline Surplus Keeps Expanding

After growing by 60,000 b/d year-on-year to an average of 180,000 b/d in the first half of 2018, the U.S.’ exportable gasoline surplus is expected to continue expanding through 2019. This growing surplus will be bearish for the Atlantic Basin gasoline markets and exert downward pressure on spreads to crude as Latin America’s import requirement shrinks and U.S. exporters compete more intensely with European producers to place volumes within the region.

Beijing Plays the Iranian Card in the Sino-US Trade Talks

Iranian President Rouhani recently met with President Xi at the SCO Summit. This meeting comes shortly after the withdrawal of the U.S. from the JCPOA, and the threat of U.S. sanctions on companies doing business with Iran. It is tempting to assume that China will strengthen ties with Iran, expanding oil trade with the Islamic Republic. However, China’s interaction with Iran is likely to be more symbolic than substantive.

Subsidy Helps Petrobas Raise Runs

Aggressive fuel price increases caused Brazil’s truckers to strike in May. The resulting government subsidy to smooth out diesel prices for consumers will help Petrobras raise runs and avoid sacrificing market share to importers. At the same time, demand is expected to grow by 20,000 b/d to 960,000 b/d. ESAI Energy expects Brazil’s diesel import requirement to remain flat in the second half of 2018 at 210,000 b/d.

California to Boost Renewable Diesel Use

Later this year, California regulators will vote whether to extend the state’s Low Carbon Fuel Standard(LCFS) from its current expiration in 2020 to 2030. If it passes, renewable diesel would be the biggest winner among biofuels. A shortage of renewable diesel in California would create a strong incentive for producers to build new capacity in the next decade, particularly in feedstock-rich Asia.

Kazakh Growth Hits Brakes

Kazakhstan’s production growth will slow from 175,000 b/d last year to about 70,000 b/d this year and 40,000
b/d in 2019. Due to Kazakhstan’s slowing production growth, overall FSU production will increase by only 60,000 b/d this year. In 2019, the continued deceleration in Kazakhstan means the prospects for FSU production growth will hinge on Russia’s role in the OPEC+ deal. In that country, the Kremlin’s consideration of an agreement to loosen restrictions signals that political leaders are aligning more closely with producers who are eager to raise output.

Russian Refining Expansion Moves Ahead

The strength of Russian crude demand and improving notional refining margins contrast with reports of weak Russian refining margins. Despite the tax maneuver and other setbacks to refineries, annual crude demand will bounce back from its recent low of 5.6 million b/d in 2016 to 5.75 million b/d in 2018. Coupled with secondary unit investment, higher throughput assures growing gasoline and diesel exports.

Bullish 2019 Advanced Biofuel Target

Proposed RFS targets for 2019 are circulating, though they are not yet official. The use of a cellulosic waiver limits any reduction in the overall advanced biofuels volume requirement. The result is a more than 400 million gallon increase in the requirement for “other” advanced biofuels. This advanced deficit will provide additional support for D4 and D5 RIN prices in 2019 and will widen D5 – D6 price differentials during the second half of 2018 and into 2019.

Europe’s IMO Vulnerable Refining Capacity

Europe has at least 1.2 million b/d of refining capacity that are at greater risk from new IMO specifications.  These refineries’ high yields of heavy fuel oil, smaller and less-efficient size, and lack of plans to invest in upgrading make them vulnerable to weaker demand for heavy fuel oil and widening spreads once IMO changes take effect. Other bigger refineries are investing to adapt to market changes and remain viable.

North Sea Output Rises

Over the next twelve months North Sea crude and condensate production will increase by about 30,000 b/d to an average of over 2.7 million b/d, after falling by roughly 100,000 b/d in the previous twelve months. This recovery will be driven by the U.K., where output growth is slated to accelerate. Nevertheless, on a calendar year basis North Sea output will fall marginally in both 2018 and 2019.These developments are the most public display of substantial change underway, which we wrote about last month. For a number of reasons, OPEC and Russia will likely raise production, although maybe not until the end of the year. Meanwhile, U.S. shale producers show no signs of slowing down. So, the market is caught between geopolitical events that can be read as bullish and supply/demand developments that can be read as bearish. We believe the supply/demand developments will generally guide the market to lower prices by 2019. Shale producers will eventually have to take a breath, and that will temper the price decline in 2019. In other words, this is not 2014 all over again, so not quite deja vu.

Exemptions and Waivers Likely to Shape Rift between US and Europe

Europe has signaled that the rift with the U.S. over Iran is significant even if both sides would like to see change in Iranian behavior. It is unclear how this rift will play out with regard to sanctions on European companies doing business with Iran, especially those buying oil. Both sides are likely to take stands on sanctions in principle, but then negotiate a series of individual time or condition-based exemptions or waivers. This may limit any reduction in European oil imports, even without a Saudi guarantee to make up a shortfall.