China’s crude imports were 9.6 million b/d in June. In the next few months, crude imports should stay around 9.5 million b/d given more refinery maintenance and reduced non-state import quotas.
Latin America gasoline demand will decline by 90,000 b/d in 2019 and then remain flat in 2020, but this is not the whole picture, as hydrous ethanol consumption will increase by roughly offsetting amounts. While supply cuts will leave the gasoline deficit unchanged at 1.1 million b/d this year, capacity additions will narrow the import requirement in 2020.
Based on the analysis of non-state crude import quotas, we estimate that crude oil imports by the non-stateowned sector could decline by 640,000 b/d from 3.4 million b/d in January-June to 2.7 million b/d in the second half of the year. This analysis also suggests that Hengli Petchem will reach high utilization rates in the next few months, while Zhejiang Petchem will not be commercial this year. Overall, this means total crude oil imports should average about 9.3 million b/d for the rest of 2019, having a significant impact on crude oil demand.
Russia will sustain fuel oil exports at more than 700,000 b/d in 2020 even as global demand collapses. There will be a place in the market for this fuel oil due to its relatively low sulfur content. However, Russian exports will make it challenging for other exporters of fuel oil with higher sulfur content.
Russian embrace of OPEC+ is about both the oil price and Russian power. Collaborating with OPEC members has brought Russia much success in terms of its ability to insert itself as a regional powerbroker and otherwise expand its influence in the Middle East. This secondary goal decreases the likelihood of Russia breaking with the Saudis in coordinating production policy anytime soon.
As predicted in our Global Crude Oil Outlook last week, both the G20 and OPEC meetings delivered results that are pertinent to the global oil balance. We expect crude oil prices to rise in 2019 as the global balance moves into deficit. The outlook for 2020 is not as rosy. The extension of the OPEC deal by 9 months is helpful, but the difficulties will really come later in 2020.
Although diesel production in Asia Pacific will grow by only 60,000 b/d this year, higher diesel yields driven by IMO sulfur rules have already emerged in Japan and South Korea. This, together with a ramp up of new refineries in Southeast Asia and a potential recovery in China, will boost regional diesel output by 260,000 b/d to 10 million b/d in 2020.
The explosion and reported permanent closure of New York Harbor’s largest refinery will be bullish for New York Harbor and Northwest European cracking margins to Brent this summer. The need to replace PADD I gasoline supply during peak demand periods will raise near-term gasoline spreads, supporting higher refining margins in the Atlantic Basin. Gasoline support will be short-lived though, as demand softens beyond the summer.
Crude oil prices remain caught between two supply and demand narratives. On balance, the market is heading towards deficit. The market will need more Arab Gulf (and/or Russian) production.
This month, OPEC members produced about 25.5 million b/d, roughly 1.1 million b/d less than the October 2018 baseline production, exceeding compliance with their pledged cuts by about 300,000 b/d. Given concerns over weak oil demand and soft oil prices, OPEC is likely to extend the current production restraint at the July 1-2 meeting. The G20 Osaka summit in the meantime is unlikely to change this outcome, although it bears watching as some participants have lobbied for deeper cuts.
Steep declines at mature fields and slow-to-start offshore production units have caused Brazil’s crude production to grow more slowly than expected in the first half of 2019. The second half of the year will be different. Brazil’s production will increase by 150,000 b/d in 2019 to reach 2.7 million b/d.
European demand slipped by only 10,000 b/d year-on-year in the first quarter, a reprieve from the fast decline reported in late 2018. With demand expected to improve further, Europe could log a slight increase in 2019 despite its fragile economy. Europe’s outlook is material, as its stabilization is one of the key factors behind the strengthening in global demand expected for the second half of this year.
Since dropping 20,000 b/d in 2017, non-OPEC Africa supply of crude and condensate halfway recovered with growth of 10,000 b/d in 2018 and is on track to grow another 5,000 b/d, reaching 1.23 million b/d in 2020. Ghana’s improved investment climate has offset the decline in other non-OPEC countries, and several OPEC participating countries are overhauling petroleum laws to stimulate competition.
June marked a low point for North American NGL prices. On the one hand, low outright crude and naphtha prices and sluggish Far East LPG demand conspired to bring Japan propane prices back into the low $30s. Meanwhile, a lack of infrastructure has de-linked North American prices from export netbacks. But soon these bumps in the road will vanish. Enterprise’s new LPG terminal enable will exports to flow more freely. When that happens, strong Asian demand will fuel a surge in U.S. deliveries to that market.
Over the next two years, crude and condensate production from the Bakken will reach record high levels despite a temporary lack of infrastructure to handle gas processing and NGL takeaway. Bakken production is forecast to average 1.4 million b/d this year, and 1.5 million b/d in 2020. Increased rig efficiency and enhanced completion methods are helping the economics outside the core.