China is set to add more than 1 million b/d of refining capacity in late 2018/early 2019, translating into substantially higher Chinese exports of gasoline and diesel. This is more than Asia’s main fuel importing countries, in the Southeast, can absorb. The oversupply will put pressure on regional gasoline and diesel spreads to crude next year.
Oil & Gas Journal:
Russian oil producers are ready and willing to expand output beyond the 200,000 b/d implicit in Russia’s recent agreement to relax production limits, according to ESAI Energy.
For the past three years, Russian upgrading investment caused fuel oil production to plummet but generated roughly 230,000 b/d of additional VGO for export. In 2018-2019, VGO exports will now fall by the same amount. Meanwhile, the decrease in fuel oil production and exports will be quite small.
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.
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
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.
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.
Following President Trump’s decision to withdraw the United States from the JCPOA, the response of Iran, Europe, Russia and China over the next several weeks will be closely watched. The U.S. and Europe are likely to continue discussions regarding joint action on Iran and the imposition of secondary sanctions on European companies. Whether China, Russia and, one day, Iran can be brought back to the negotiating table will depend on statements, actions and likely exogenous events over the wind down period.
East Coast drivers could be putting Russian gasoline into their fuel tanks without even knowing it. Already strong imports of blending components like naphtha will be paired with gasoline after Soviet refining tax breaks and investments give Russia surplus fuel to sell. Exports into Europe and the U.S. Atlantic basins will rise by 75,000 barrels a day, Energy Security Analysis, Inc. principal Andrew Reed says.
Growing spare productive capacity at Rosneft and Gazprom Neft will soon lead to weakening Russian compliance, according to ESAI Energy.
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.
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.
Wall Street Journal–December 13, 2017
Officials urge international offering for Aramco, rather than selling a stake to Beijing, which they fear would boost its standing in Middle East
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.
Hydrocarbon Engineering–November 9, 2017
Russian refiners will increase production of transport fuels by 110 000 bpd next year, according to ESAI Energy’s recently published ‘CIS Watch One-Year Outlook.’