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.
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.
As we expected, China’s crude imports came down to 9.5 million b/d in May. In the next few months, crude imports should stay below 10 million b/d given more refinery maintenance and already high inventory levels.
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.
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.
Until now, the oil contamination had a bigger impact on Russian exports than production. Among other things, this led to the accumulation of an estimated 20 million barrels of inventories. Transitioning to June, Russia has re-routed some exports and partially restored pipeline deliveries. Consequently, Russia will leverage inventories to push more crude exports into the market.
The recovery of gasoline spreads in April and May have returned margins to more typical and sustainable levels, particularly those in the U.S. However, that recovery will be fleeting. Gasoline spreads will soften again by the fourth quarter and remain weak in 2020. Unlike recent months, however, stronger distillate spreads heading into 2020 will keep margins from falling.
There are ways to avoid the tariff on imports of Mexican crude oil, but at this point it is unclear whether those will succeed. If not, some refiners will pay more and some crude will head to Asia.
With a historic mandate, the Modi government aspires to develop the Indian economy based on an investment-driven model with welfare measures to lift the rural population out of poverty. Policy continuity and large expenditure on infrastructure projects will support the country’s total oil demand to rise by 230,000 b/d this year, with robust increase in diesel, LPG and gasoline.
After falling by roughly 20,000 b/d last year, North African transport fuel demand is expected to increase by a similar amount this year to an average of roughly 1.2 million b/d. Despite growing demand, the North African transport fuel deficit will fall this year due primarily to Egyptian refinery upgrades.
Russian production fell by 170,000 b/d from April to May, as the disruption to oil exports caused output to fall to 60,000 b/d less than the OPEC+ commitment. The last hurdle is restoring 750,000 b/d via the northern leg of Druzhba. Due to spare export capacity, however, Russian production will recover in June after falling to 11.1 million b/d in 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.
This year, Middle Eastern demand for transport fuels is on track to rise by 50,000 b/d to an average of nearly 4.2 million b/d, following two consecutive years of contraction. This turnaround will be driven by Saudi Arabia, where a return to gasoline demand growth and flat diesel consumption following substantial declines last year will help boost regional demand.
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.
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.