Bearish Naphtha & LPG Dominate NGL Outlook

For the LPG and naphtha markets, there will not be enough global demand to absorb available supply in 2019. The result will be continued bearish pricing for both products. This month’s outlook singles out the potential for China to impact the balances of both products. In the LPG market, accelerating Chinese growth will provide a helpful outlet for more LPG. In the naphtha market, however, Chinese imports of reformate for gasoline blending are rapidly vanishing, adding to the long list of bearish factors shaping naphtha fundamentals. Ethane stands alone on the bullish side of the ledger.

Crude Alters Immediate Product Availability

Changes in the quality of crude production globally have had a significant impact on the production of intermediates from distillation. Naphtha components are growing quickly but the heaviest component of the barrel, vacuum residue, declined in 2018. These trends have significant implications for how refiners operate refineries, gasoline blending and heavy fuel oil production ahead of IMO.

The U.S. Turning Away from the Middle East

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.

Ethanol Undermined by Weak Gasoline

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.

Brazil Leads Region’s Growth

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.

Permian Bottlenecks Disappear by Summer – Excess Capacity Next

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.

Latin America’s Import Requirement Still Growing

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.

Gasoline – FO Spread Tempers Cracking Margins

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.