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.
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.
All signs from the Jeddah meeting point to OPEC and its partners continuing their over-compliance with the crude production deal. OPEC has cut 2.08 million b/d from its baseline, nearly twice the original target. OPEC’s cuts will deepen in the coming months, with Venezuela’s collapsing output more than offsetting small increases in other members’ production.
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: 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.
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.
If protesters, now or in the future, are looking to bring additional pressure onto the ruling elites and the security forces, they will have to either coopt some segment of both or target the sources of their power and revenue, including the oil sector. It seems a long fuse has been lit.
The EPA announced final 2018 biofuel requirements for RFS. Despite only a small change in renewable fuel
volume requirements, RIN prices will rise in 2018.
The deal with OPEC has lifted oil prices, liquidated a global oil glut, and paid dividends in the form of improved relations with Saudi Arabia, boosting Russia’s real and perceived influence in the Middle East.
The final approval for 830,000 b/d Keystone XL was obtained as the Nebraska Public Service
Commission voted in favor of the pipeline.
Over the last few days, Saudi Crown Prince, Mohammad bin Salman, has arrested or detained individuals
under the charge of corruption. Yet, these efforts are intended to consolidate his power before he becomes
King. Perhaps this consolidation is essential to the successful execution of his Vision 2030, but it does fly in
the face of projecting a transparent, increasingly liberal economy worthy of foreign investment.
King Salman is the last of the Sudairi Seven to rule Saudi Arabia before the next generation (grandsons of King Abdulaziz ibn Saud) takes power. If Crown Prince, Mohammad bin Salman, ascends the throne in the next one to two years, he will rule – absent medical issues or political upheaval – for decades. This will include the period when judgment will be rendered on his Vision 2030 for diversification of the Saudi economy. The oil market’s focus on the Saudi Aramco IPO and its perceived connection to Saudi oil policy should be seen within the context of larger issues related to internal stability.
On Thursday, President Trump will make a speech on Iran in which he is expected to not certify that Iran is in compliance with the Nuclear Deal, as required every 90 days. This will give the Congress 60 days to take up the issue of putting sanctions back in place. At this juncture, a return to the status quo ante “the Deal” is impossible given the positions of the other P5+1 countries. But, Congress may take other steps to turn up the heat on Iran.
The autonomous Kurdish region of Iraq voted for independence last week in a resounding – but non-binding – referendum. Baghdad has dismissed the vote. Turkey and Iran, with large Kurdish populations themselves, have threatened a blockade. Turkey’s threat to shut the Kirkuk-Ceyhan crude oil pipeline puts Kurdistan’s nearly 600,000 b/d of crude exports at risk. Ongoing tensions have already encouraged a temporary run-up in Brent prices, and will keep a small geopolitical premium on the price of crude.
Even as President Trump continues to oppose the Nuclear deal with Iran, we expect him to certify the Nuclear Accord on October 15th (i.e., keep it as is) while increasing pressure on Iran in other ways. But certification comes up every 90 days, so this will be an ongoing issue.