Transport Fuel Demand to Grow Through 2019

In 2018 and 2019, European transport fuel demand growth will slow to an annual average of roughly 160,000 b/d. This slowdown is driven by a deceleration in diesel and jet fuel demand growth, particularly in Germany, where for the first time in a decade diesel demand will contract. Nevertheless, with demand for all three major transport fuels continuing to rise through 2019, and regional refinery throughput expected to slow, Europe’s distillate deficit will expand and gasoline surplus will narrow. These developments will be bullish for global product markets.

Capacity Glut to Trigger Refinery Closures after 2021

Hellenic Shipping News:

An excess of global refining capacity looms after 2021, according to ESAI Energy’s newly released, Global Refining Capacity Five Year Outlook. ESAI Energy projects a significant increase in new distillation capacity to 2023. After lagging demand growth in recent years, the coming capacity build cycle will significantly outpace demand. The resulting rise in spare capacity will reduce global utilization rates and put pressure on margins, particularly beyond 2021.

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.

Crude Oil Outlook Shows Ample Supplies

Oil & Gas Journal:

The outlook highlights three trends that underscore the expectation that non-OPEC crude and condensate supply will increase by an average of 1 million b/d/year during 2019-23:

• Infrastructure catching up with US shale growth.

• Streamlined, cost-effective offshore projects from the Gulf of Mexico, Latin America, and the North Sea brought to production.
• Russia moving to a “coordinated” growth strategy.

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.

Is Market Ready for Mariner East 2?

Any delay to the Mariner East 2 project would impact LPG markets from Applachia to Asia, according to ESAI Energy’s analysis of the Mariner East expansion’s impact on U.S. NGL exports. In contrast, ethane exports are emerging much more slowly, according to ESAI Energy’s newly released Global NGL Outlook.

Eastern Power Play Disrupts 850,000 b/d in Libya

Haftar and the Libya National Army have declared that NOC East is now the body responsible for handling the export of the crude through five key ports – Ras Lanuf, Es Sider, Zuetina, Hariga, and Brega. Buying Libyan crude from a company other than NOC violates a 2014 UN Security Council Resolution. As a result, exports from these ports have stopped and production is shutting in. NOC confirmed that 850,000 b/d of production will come offline, bringing Libya’s crude production down toward 150,000 b/d. It’s early to say, but we estimate this disruption will last three to six weeks.

Harder U.S Line on Iran with Higher Stakes

The Trump administration is taking an even harder line on Iranian oil exports than the Obama administration did prior to the nuclear deal, resulting in what amounts to an extraordinarily high stakes game of chicken over the next several months. In the longer term, the U.S’s application of unilateral sanctions risks states and coalitions developing alternative methods to purchase crude oil outside of linkages to the U.S. banking system