Petchem Underpins Oil Demand Growth

Soaring output of ethylene and paraxylene in early 2019 has set China’s naphtha demand on a steep upward trajectory. Naphtha use, largely “hidden” within integrated refinery- petrochemical units, will grow by 250,000 b/d and 190,000 b/d in 2019 and 2020, respectively. Among other things, growing use of non-marketed naphtha provides context for Chinese oil demand amid declining transport fuel use.

Middle Distillate Growth Steady

Demand for middle distillates – diesel, jet, and kerosene – will grow by a cumulative 50,000 b/d in the next two years to reach 3.2 million b/d by 2020. Venezuela has been a drag on regional demand while Brazil and several other countries have contributed modestly to fragile growth. Overall, the region’s distillate demand will get a modest boost from bunker gasoil in 2020 due to the IMO sulfur rules.

Undercurrent of Tension Remains in Arab Gulf

Despite his tough talk, President Trump has typically leaned towards isolationism, making him less likely to pursue large scale military intervention. At the same time, the Iranian leadership will be very cautious about escalating conflict in the Gulf. So, the bar for significant conflict in the region is high. Even so, Iran may see domestic or regional political benefits from further small-scale attacks or disruptions. The implicit threat of escalation, therefore, is here to stay.

Station Growth Limits E15 and ULSD Undermines D4 RINS in 2019

E.P.A. finalized a rule providing a waiver for year-round sales. However, slow growth in an already small number of stations selling E15 outside PADD II will hinder sales. Meanwhile, D4 RIN prices will decline in the second half of the year. It will lower compliance costs for refiners in the second half. Significant upside risk remains, though, with the impact of small refinery waivers and recent storms uncertain.

OPEC+ Overcompliance Continues Through May

This month, members of the OPEC+ deal will produce nearly 43.3 million b/d, roughly 1.3 million b/d less than in October 2018, the baseline production month for the current deal, and in compliance with the deal’s pledged cuts of 1.2 million b/d. May marks the third consecutive month of overcompliance. While Saudi production drove compliance earlier, falling Russian production due to the temporary closure of the Druzhba pipeline has contributed to compliance in April and May.

North Sea Production Declines Finally End in 2020

In 2019, North Sea crude and condensate output will fall for the third consecutive year, by roughly 70,000 b/d to an average of 2.5 million b/d as declines in Norway continue to outpace gains in the U.K. However, in 2020, North Sea output will rise by 200,000 b/d to more than 2.7 million b/d due primarily to the ramp-up of production at the Johan Sverdrup project.

Resid Hydrocracking Expands Quickly

As IMO specification changes approach quickly, ESAI Energy takes another look fuel oil upgrading projects through 2020. Current investments are not enough to eliminate a large surplus of heavy fuel oil components by 2020. Identifying fuel oil upgrading investments by type is critical to understanding the quality and quantity of fuel oil that will be both consumed in bunker markets and in surplus.