OPEC’s New Swing Producer?

Between capacity at new fields and production cuts at mature fields, Russian producers have more than 500,000 b/d of spare capacity, much more than is needed to increase production by the 200,000 b/d implicit
in its latest agreement with Saudi Arabia. If Russia and the Saudis decide to further relax production limits, Russian oil producers will be ready and willing to expand output further.

More Severe Iranian Disruption

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.

OPEC Agrees to Raise Production

OPEC will start to raise crude oil output this summer, with Saudi Arabia, Kuwait, and the UAE contributing the majority of new production. The increase will be at least 450,000 b/d but could be substantially larger if OPEC attempts to replace more of Venezuela’s lost volumes. Russia and other non-OPEC parties to the November 2016 production deal will also increase output in the next several months.

OPEC Takes Small Step…or Maybe Not

OPEC has agreed to rollback overcompliance with the original production deal of November 2016. This appears to mean an increase of 450,000 b/d among the voluntary over-complying countries, with the bulk coming from Saudi Arabia, Kuwait, and the UAE. However, the communique could also be interpreted as enabling an increase of as much as 1 million b/d, with some members replacing lost volumes from involuntary over-complying countries like Venezuela. At this point, the small step interpretation is more likely.

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.

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.

Crude Oil Quality Threatens US Shale

OilVoice:
In its May Global Crude Oil Outlook ESAI Energy points out that the growth in medium and heavy refiner demand was already pushing the OPEC+ deal towards an end by 2019. The U.S. request for more crude oil and Saudi Arabia and Russia’s apparent willingness to respond provides additional rationale. How this “end” is finessed remains to be seen, but clearly the medium and heavy producers of OPEC (besides Venezuela and Iran) will increase production in 2019.

Not Quite Déjà Vu

Geopolitical developments have been center stage. The continued implosion of Venezuela, and its impact on the oil producing sector is striking. New U.S. sanctions following Maduro’s reelection will only make things worse for producers. The implications of U.S. withdrawal from the Iran nuclear deal are still shaking out. The response of OPEC, to officially discuss higher output in June, underscores the transition the global oil market has begun. A little further afield, trade talks with China, and a possible summit between the U.S. and North Korea will keep the global economy guessing.
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.

Global Crude: Change Coming in 2019 and OPEC+ Deal Looks Vulnerable

The impact of perhaps a year and a quarter of OPEC+ production restraint has been impressive, and finally there is consensus that the oil market has returned to balance. Some believe that balance is precarious and vulnerable to decelerating demand and rising non-OPEC production in 2019. Others believe the balance is headed towards tightening in a way that will lift prices above $80. Add to that the possible end of the Iran nuclear deal and price expectations go even higher. Clearly with inventories way down, demand quite strong and the OPEC+ deal working with help from Venezuela’s production decline, it is quite easy to be bullish on 2018. We have revised our 2018 price forecast up, especially during the seasonally strong months of the year.

Does the market need more production restraint in 2019? There are two notable developments that will shape crude supply and demand. First, there is a tremendous volume of new distillation capacity coming online between now and the end of 2019. There is a little bit of splitter capacity in these volumes, but most of this increase in capacity is designed to run medium or heavy crude. Russian and Arab Gulf production, rather than U.S. shale, will meet this demand as it emerges. The second is the change in bunker specifications starting in 2020. Bunker suppliers will have to replace high sulfur product with lower sulfur product before January 2020. This will mean higher runs and sweeter crude input as a first response, lifting demand for U.S. shale in some locations, including the USGC and Europe.

Significant volumes of crude oil will chase quality-driven opportunities in 2019. Crude price differentials will be volatile and light sweet crude prices will find support despite weakening overall supply demand fundamentals in 2019.