Demand Growth Succumbs to Economic Pressures

In this month’s Global Fuels Two-Year Outlook, we turn our attention to product markets through 2020, with special attention given to the impact of the IMO’s 0.5 percent sulfur cap on marine fuels, which will be implemented globally in January 2020.

Next year, global demand for gasoline, gasoil, jet fuel, kerosene, and fuel oil is expected to rise by 770,000 b/d, following an increase of just 440,000 b/d this year. This acceleration will be driven primarily by a return to demand growth in China. However, in 2020, a slowdown in global economic growth, in combination with relatively high petroleum product prices, will limit product demand growth to just 450,000 b/d.

Meanwhile, the impact of the IMO sulfur rules will be felt in product markets by October 2019 when companies begin to switch over their tanks. In 2020, MGO demand, consumed directly and in a blend, will reach 1.9 million b/d, up from 800,000 b/d in 2018. Demand for LSFO bunkers will reach 900,000 b/d, up from 300,000 b/d in 2018. HSFO bunker demand will average 1.4 million, down from 2.9 million b/d, with 250,000 b/d consumed legally through scrubbers, the rest through non-compliance. The increases in refinery throughput and yield shifts necessary to meet the surge in gasoil demand will have bearish consequences for other markets, especially HSFO.

In response to the IMO’s sulfur cap on marine fuels, middle distillate spreads to crude will begin to rise sharply toward the end of 2019 and remain wide through 2020. Meanwhile, fuel oil prices, particularly for HSFO, will collapse and the fuel oil discount to crude will remain wide through the forecast period. Gasoline’s premium to crude will remain weak through 2020 after narrowing in 2019 due to an oversupplied market.

Over the next two years, global gasoline and middle distillate trade flows will shift as Europe exports less of the former and imports less of the latter, but these changes will be overshadowed by a dramatic re-ordering of the global fuel oil trade in the wake of the IMO’s 2020 sulfur cap. In 2020, HSFO trade volumes will diminish rapidly, while LSFO trade flows shift to supply adequate bunker blending components to various regions, as detailed in this publication’s Trade Insight.

Brazil Flips Regional Product Demand to Growth

Latin America’s total refined product demand will increase by 90,000 b/d next year to 9.2 million b/d after falling by an average of 80,000 b/d each of the last three years. Much of the demand change stems from one-time events that happened this year and won’t recur, such as a surge in hydrous ethanol consumption in Brazil and a steep drop in Argentina’s fuel oil use.

E15 Will Have Limited Near-Term Impact

The E.P.A. will begin the process of allowing sales of E-15 gasoline year-round. Although the waiver will increase ethanol more significantly in the long term, short term demand impacts will be limited by investment requirements and consumer preferences. As a result, ESAI Energy forecasts a high of just 60,000 b/d of additional E-15 sales by 2020, or just 10,000 b/d of additional ethanol blending.

Product Export Quotas Suggest Lower Gasoline and Diesel Exports

China’s September crude imports remained unchanged from August at 9 million b/d. In the fourth quarter, ESAI Energy estimates that China’s throughput could boost crude imports by at least 150,000 b/d, based on analysis of refining capacity increases, maintenance, and seasonal utilization. Meanwhile, China’s new product export quotas suggest that gasoline and diesel exports between September and December would both fall by 60,000 b/d, compared to January-August levels.

U.S. Unlikely to Take Significant Action Against Saudi Arabia

The presumed execution of Saudi Journalist Jamal Khashoggi at the Saudi consulate in Turkey has seriously rattled U.S.- Saudi relations and led to the discussion of sanctions in the U.S. Congress. Even so, the complex relationship between the two countries, and especially the joint effort to contain and weaken Iran, tilt against a significant economic response from the Trump Administration.

China’s Naval Power Grows

Over the last several years we have written about the growing imbalance between U.S. and Chinese dependence on the Persian Gulf for oil. Chinese oil demand growth and U.S. oil supply growth have shifted the importance of the region for both importers. A significant and lengthy disruption in the Persian Gulf could still impact all oil consumers through the price mechanism, but the U.S. economy is now far more insulated from energy disruptions than the Chinese economy. Not surprisingly, China’s naval capabilities have grown considerably to address this vulnerability to the flow of oil and other goods