Since replacing the British Navy as the guarantor of regional peace after World War Two, the United States has had a heavy presence in the Middle East. Now, as the U.S. comes closer to net oil exports, the country’s engagement with the Middle East, especially under President Trump, is diminishing. Even more than the Obama pivot to the East, the Trump Administration is moving the United States out of the region. That will implications for U.S. influence in the region, not to mention military conflict.
Weaker U.S. gasoline demand will limit additional ethanol blending in 2019 due to the slow penetration of higher ethanol blends. Meanwhile, expanded production capacity will keep U.S. domestic fundamentals bearish in 2019. Export markets are unlikely to provide much relief with protective trade policies limiting U.S. export opportunities in Asia. Strong hydrous ethanol demand in Brazil is the only bright spot.
Latin America’s non-OPEC crude and condensate production will rise by 260,000 b/d in 2019 as several new production units ramp up in Brazil, Argentina and Colombia grow slowly, and Mexico limits declines. Overall regional production will fall by 250,000 b/d, though, as Venezuela will decline by 500,000 b/d. These shifts in production will help the region’s crude quality grow lighter and sweeter.
Booming production in 2018 filled pipeline capacity out of the Permian basin to the brim, depressing Midland basin prices for much of the year. These bottlenecks will disappear by the end of 2019, as over 2 million b/d of new takeaway capacity will come online, moving more crude to the USGC. But decelerating production growth will exacerbate under-utilized pipeline space.
Accelerating transportation fuel demand will provide little relief for refining margins in 2019. Middle distillate demand growth is forecasted to plateau. Fuel oil will remain a bright spot with spreads expected to remain strong
Latin America’s import requirement for gasoline, diesel, and jet fuel will expand by 90,000 b/d in 2019 to 2.3 million b/d, a slowdown from 2018 when the import requirement grew by 150,000 b/d. Mexico’s import requirement for gasoline and distillate will grow by 30,000 b/d, while Brazil’s will contract by 20,000 b/d. The closing of Trinidad’s refinery will increase the import requirement there by 70,000 b/d.
Russia’s South ULSD Pipeline is taking another step toward filling phase one capacity. However, investment in hydrocracking is losing steam. For the next couple of years, European refiners stand to profit from the very limited growth of Russian ULSD production and exports
Russian crude exports, which fell to 5.2 million b/d in January, will actually increase to an average 5.4 million b/d in the February-May period. That said, Russia is gradually moving toward compliance. Kazakhstan will only move toward compliance when previously planned maintenance begins.
Egypt’s increasing use of natural gas in the power sector will continue to reduce its use of fuel oil. From 260,000 b/d in 2016, North African fuel oil demand declined to 180,000 b/d in 2018 and will fall further to 160,000 b/d in 2019. A larger exportable surplus will help alleviate some of the current tightness in the fuel oil market.
Fuel oil strength and gasoline weakness have contributed to narrow light-heavy crude differentials, which will weigh heavily on cracking refinery margins early in 2019. Tight fuel oil supply and gasoline weakness globally will limit the profitability of cracking and coking refineries. This is particularly bearish for margins in the USGC where many refiners rely on cracking margins and gasoline yields are high.
Last year, Asia Pacific saw the strongest throughput growth and yet the weakest oil demand growth in the past few years. ESAI Energy expects throughput to grow modestly by 300,000 b/d in 2019, due to high inventories and continued economic deceleration.
OPEC+ have not quite done enough. More crude will have to come off the market, otherwise the 2018 surplus will not be rolled back and prices will be under pressure all year.
Saudi Arabia is carrying the heaviest load as the OPEC+ production cuts begin. The Saudi cuts will have to remain deep to keep OPEC+ in compliance with the deal. Other OPEC countries – notably Iraq and Nigeria – are set to raise productive capacity by as much as 350,000 b/d by the middle of 2019. Non-OPEC parties to the deal are also cutting far less than promised, adding to the pressure on Riyadh.
The Middle East will import 110,000 b/d of fuel oil in 2019, roughly double the level of 2018. Refinery upgrades in the UAE will cut fuel oil output early in the year, and Kuwait’s Clean Fuels Project will cut additional output towards the end of the year. A higher fuel oil import requirement in the Middle East will be one of the factors supporting fuel oil spreads in 2019.
U.S. refiners will likely replace just over half of the 500,000 b/d of Venezuelan imports with Canadian crude by rail and potentially some crude from the Arab Gulf but may still lower USGC refinery throughput for a few weeks. Venezuela will have a harder time adjusting, as China and India will only take a portion of the displaced volume. Venezuela’s 100,000 b/d of imports of naphtha, diesel, and gasoline from the US will need to be diverted to other destinations or could encourage slightly lower runs in the Gulf Coast. Lower naphtha exports and perhaps marginally less blending of shale with heavy crude will put a bit more pressure on U.S. crude production.