Russian embrace of OPEC+ is about both the oil price and Russian power. Collaborating with OPEC members has brought Russia much success in terms of its ability to insert itself as a regional powerbroker and otherwise expand its influence in the Middle East. This secondary goal decreases the likelihood of Russia breaking with the Saudis in coordinating production policy anytime soon.
As predicted in our Global Crude Oil Outlook last week, both the G20 and OPEC meetings delivered results that are pertinent to the global oil balance. We expect crude oil prices to rise in 2019 as the global balance moves into deficit. The outlook for 2020 is not as rosy. The extension of the OPEC deal by 9 months is helpful, but the difficulties will really come later in 2020.
Although diesel production in Asia Pacific will grow by only 60,000 b/d this year, higher diesel yields driven by IMO sulfur rules have already emerged in Japan and South Korea. This, together with a ramp up of new refineries in Southeast Asia and a potential recovery in China, will boost regional diesel output by 260,000 b/d to 10 million b/d in 2020.
The explosion and reported permanent closure of New York Harbor’s largest refinery will be bullish for New York Harbor and Northwest European cracking margins to Brent this summer. The need to replace PADD I gasoline supply during peak demand periods will raise near-term gasoline spreads, supporting higher refining margins in the Atlantic Basin. Gasoline support will be short-lived though, as demand softens beyond the summer.
Crude oil prices remain caught between two supply and demand narratives. On balance, the market is heading towards deficit. The market will need more Arab Gulf (and/or Russian) production.
This month, OPEC members produced about 25.5 million b/d, roughly 1.1 million b/d less than the October 2018 baseline production, exceeding compliance with their pledged cuts by about 300,000 b/d. Given concerns over weak oil demand and soft oil prices, OPEC is likely to extend the current production restraint at the July 1-2 meeting. The G20 Osaka summit in the meantime is unlikely to change this outcome, although it bears watching as some participants have lobbied for deeper cuts.
Steep declines at mature fields and slow-to-start offshore production units have caused Brazil’s crude production to grow more slowly than expected in the first half of 2019. The second half of the year will be different. Brazil’s production will increase by 150,000 b/d in 2019 to reach 2.7 million b/d.
European demand slipped by only 10,000 b/d year-on-year in the first quarter, a reprieve from the fast decline reported in late 2018. With demand expected to improve further, Europe could log a slight increase in 2019 despite its fragile economy. Europe’s outlook is material, as its stabilization is one of the key factors behind the strengthening in global demand expected for the second half of this year.
Since dropping 20,000 b/d in 2017, non-OPEC Africa supply of crude and condensate halfway recovered with growth of 10,000 b/d in 2018 and is on track to grow another 5,000 b/d, reaching 1.23 million b/d in 2020. Ghana’s improved investment climate has offset the decline in other non-OPEC countries, and several OPEC participating countries are overhauling petroleum laws to stimulate competition.
June marked a low point for North American NGL prices. On the one hand, low outright crude and naphtha prices and sluggish Far East LPG demand conspired to bring Japan propane prices back into the low $30s. Meanwhile, a lack of infrastructure has de-linked North American prices from export netbacks. But soon these bumps in the road will vanish. Enterprise’s new LPG terminal enable will exports to flow more freely. When that happens, strong Asian demand will fuel a surge in U.S. deliveries to that market.
Over the next two years, crude and condensate production from the Bakken will reach record high levels despite a temporary lack of infrastructure to handle gas processing and NGL takeaway. Bakken production is forecast to average 1.4 million b/d this year, and 1.5 million b/d in 2020. Increased rig efficiency and enhanced completion methods are helping the economics outside the core.
Although heavy maintenance and outages in the third quarter of 2019 will temper UK production growth in the North Sea this year, new projects will help maintain total output of just over 1 million b/d for the next several years. Annual production growth from the UK North Sea will average close to 50,000 b/d in 2019 and 2020. Seven new projects are expected to ramp up through 2020, adding a total 245,000 b/d of new productive capacity. Areas west of the Shetland Islands are seeing the most activity.
ESAI Energy expects the region’s downtrend in operating capacity will turn a corner in 2019. Although maintenance and outages will continue to hinder operating capacity, the continued slow recovery in Mexico’s refineries and the restart of a U.S. Virgin Island refinery early in 2020 will contribute to the first rise in operable capacity and throughput in more than five years.
Though global in scope, the effect of the IMO sulfur cap on product fundamentals will be largest in Asia, where refiners and distributors will have to carry out a tremendous shift between bunker fuel oil and bunker gasoil in a short period beginning in the fourth quarter of this year. Trade flows will be rerouted as supply and demand balances suddenly change.
Europe and India’s gasoline deliveries to the Middle East are in the crosshairs as higher refinery output backs out imports. Since India’s refineries have a competitive advantage, especially when compared to Europe’s less sophisticated refineries, Europe’s 140,000 b/d will be more than halved by 2020.