Four weeks after the contamination of Russian oil disrupted the flow of 1.3 million b/d of crude to Belarus and via the Druzhba pipeline to Europe, it appears Russia is fully restoring those pipeline deliveries. To compensate for the loss of as much as 1 million b/d of overland crude deliveries, Russia managed only a small net increase in seaborne exports. This disruption to production, exports and revenues may have strengthened Russian resistance to an extension of the OPEC+ deal.
Crude may be at a six-month high this month, but feedstock prices are falling like dominoes. As naphtha lost ground on crude, Far East spot propane and butane prices traded at wider discounts to naphtha. Back at Mt Belvieu, a temporary de-linking of propane and butane from the international market caused those prices to fall even more than international benchmarks. For some product markets, the 12-month outlook is anything but “more of the same.” Among other things, new LPG export terminals and higher demand growth will be supportive of U.S. LPG exports and Mt Belvieu pricing.
After rising by 1.2 million and 660,000 b/d in 2017 and 2018, respectively, global demand for transport fuels will rise by just 440,000 b/d this year due to an outright decline in Chinese consumption, further deceleration in European demand growth, as well as a slowdown in U.S. and Indian demand growth.
Yesterday, the Joint Ministerial Monitoring Committee (JMMC) of OPEC met to assess the oil market and the impact of the OPEC+ production restraint. The committee commended the “agile and flexible approach” of the OPEC+ countries, but made no specific recommendations beyond continuing to monitor the oil market until the next meeting in June. That JMMC meeting will take place just before the full Ministerial meeting at which the member states will decide whether to continue the current production restraint. The JMMC communique pointed out “critical uncertainties” such as trade negotiations, monetary policy and geopolitical challenges. Among those geopolitical challenges are rising tensions between Iran and the U.S. since the non-renewal of sanctions waivers early this month. The possibility that the two countries could stumble into direct military conflict is rising.
Brazil’s crude production will reach 3.0 million b/d by the end of 2019, with output surging in April and beyond as maintenance subsides and offshore units deployed in 2018 continue to ramp up. Brazil’s exportable surplus will rise by 300,000 b/d in the second half of 2019, even as the region’s surplus shrinks on Mexico and Venezuela’s declines.
Anticipating more restrictive drilling regulations in Colorado, production of crude and condensate from the Niobrara surged in the second half of 2018, raising annual output by 145,000 b/d. Production will grow by another 125,000 b/d in 2019 then slow down to an increase of 85,000 b/d in 2020 as well completions return to a less rapid pace.
After growing by an annual average of 60,000 b/d over the last five years, European jet fuel demand is expected to rise by a similar amount this year, as the region’s air traffic continues to grow steadily. However, jet fuel will represent the lone bright spot in the broader European transport fuel market, as non-jet fuel consumption growth slows to 40,000 b/d this year from 100,000 and 195,000 b/d in 2018 and 2017, respectively.
Regional gasoline demand is set to decrease for the third year in a row in 2019. Eating into fuel demand are once again Venezuela’s economic collapse and, to a lesser extent, Brazil’s hydrous ethanol. The rest of the region will not see gasoline demand rise either. Latin America gasoline demand will fall by 100,000 b/d, from 2.5 million b/d in 2018 to 2.4 million b/d for 2019 and 2020.
We expect record-high crude imports of 10.6 million b/d in April to be a one-off event due to stocking before the end of the Iranian oil waivers. In the next two months, crude imports could fall below 10 million b/d given more capacity loss during maintenance, as ESAI Energy’s refinery-level research shows. Meanwhile, Beijing’s second batch of quotas suggest exports could be as high as 390,000 b/d for gasoline, 600,000 b/d for diesel, and 590,000 b/d for jet between now and October.
As the U.S. deploys military assets to the Arab Gulf region, and continues to increase the pressure on Iran, will Iran retaliate? Closing the Straits of Hormuz is what first comes to mind, but that step would not really help Iran beyond showing its resistance to the U.S. and its allies in the Gulf. Moreover, it can be overcome by a U.S. military response. Cyber-attacks on its neighbors, especially their oil facilities, would be more subtle and deniable. As Iran’s economy deteriorates, the likelihood of some form of retaliation is growing.
Vertically-integrated oil companies’ acquisitions of struggling independent refineries will avert a contraction of Russian distillation capacity. However, the demise of New Stream is just one more development dampening the prospects for the addition of upgrading capacity by the time new IMO regulations take effect. A maximum of two hydrocrackers will enter into operation by the end of 2019. For many refiners, adapting to IMO will consist of the vacuum units already in place.
With the economy still weakening and in need of a trade deal with the U.S., China is expected to bargain with Iranian imports and make compromises. Major state-owned companies are likely to comply, while Zhuhai Zhenrong may continue importing Iranian crude at about 270,000 b/d between now and August.
The contamination of Russian oil will cause Druzhba exports to fall in May-June and possibly beyond. Normally, the Spring maintenance season leads to a spike in Russia’s overall crude exports, but the disruption is preventing that spike in April-May. April’s 5.4 million b/d of overall exports were a little higher than in the first quarter average, and we tentatively expect Russia to maintain exports at that level in May. To compensate for lower Druzhba flows, we believe Russia will increase seaborne exports, especially from the Black Sea.
According to preliminary estimates, OPEC countries produced just under 25.4 million b/d of crude oil in April 2019, roughly 40,000 b/d less than in March. This marked the second consecutive month, in which OPEC cuts were 800,000 b/d in excess of the pledged amount. This represents considerable spare capacity to replace lower Iranian exports. In May and June, OPEC+ will meet to discuss and then decide whether to abandon this production restraint. The members may try to keep the structure of the agreement but raise production as the Iran situation becomes clear.
In 2019, general elections in India will contribute to the country’s robust demand growth of transport fuels. Despite Beijing’s stimulus, diesel demand in the first quarter collapsed to a decade-low and may decline by 100,000 b/d this year. But strong demand in India and a boost from IMO will more than offset the weakness in China’s inland diesel, resulting in an overall diesel growth of 100,000 b/d in Asia.