OPEC Takes Small Step…or Maybe Not

OPEC has agreed to rollback overcompliance with the original production deal of November 2016. This appears to mean an increase of 450,000 b/d among the voluntary over-complying countries, with the bulk coming from Saudi Arabia, Kuwait, and the UAE. However, the communique could also be interpreted as enabling an increase of as much as 1 million b/d, with some members replacing lost volumes from involuntary over-complying countries like Venezuela. At this point, the small step interpretation is more likely.

U.S. Exports to Latin America to Drop

Over the next twelve months, global demand growth for both gasoline and diesel is expected to decelerate. The rapid growth of diesel demand in the first half of 2018, particularly in the United States, is set to diminish as higher interest rates and trade tensions create headwinds for the economy. Economic headwinds in combination with higher absolute prices will also be a drag on gasoline demand growth. In China, an expanded “blue sky” policy on retiring polluting diesel vehicles will shift more freight transport to rail, limiting distillate demand.
Meanwhile, global production of transport fuels is expected to continue accelerating as throughput rises, particularly East of Suez. As a result, global transport fuel market fundamentals will loosen and fuel spreads to crude will weaken globally. Downward pressure on gasoline spreads will be particularly pronounced.

Shrinking Latin American diesel and gasoline deficits will also exert bearish pressure on global product markets. Over the next twelve months, Latin America will absorb less U.S. diesel and gasoline as Latin American deficits of the two products narrow.

North Korea Summit Reduces Tensions for Now

The summit between President Trump and the Supreme Leader of North Korea, Kim Jong-un, has come and gone in a flurry of photographs and a very short and very vague agreed statement. The meeting was largely symbolic and strict U.N. sanctions remain in place, but reduced tensions could eventually create an environment for stronger trade links between North Korea and China, Russia, and South Korea

U.S. Gasoline Surplus Keeps Expanding

After growing by 60,000 b/d year-on-year to an average of 180,000 b/d in the first half of 2018, the U.S.’ exportable gasoline surplus is expected to continue expanding through 2019. This growing surplus will be bearish for the Atlantic Basin gasoline markets and exert downward pressure on spreads to crude as Latin America’s import requirement shrinks and U.S. exporters compete more intensely with European producers to place volumes within the region.

Beijing Plays the Iranian Card in the Sino-US Trade Talks

Iranian President Rouhani recently met with President Xi at the SCO Summit. This meeting comes shortly after the withdrawal of the U.S. from the JCPOA, and the threat of U.S. sanctions on companies doing business with Iran. It is tempting to assume that China will strengthen ties with Iran, expanding oil trade with the Islamic Republic. However, China’s interaction with Iran is likely to be more symbolic than substantive.

Subsidy Helps Petrobas Raise Runs

Aggressive fuel price increases caused Brazil’s truckers to strike in May. The resulting government subsidy to smooth out diesel prices for consumers will help Petrobras raise runs and avoid sacrificing market share to importers. At the same time, demand is expected to grow by 20,000 b/d to 960,000 b/d. ESAI Energy expects Brazil’s diesel import requirement to remain flat in the second half of 2018 at 210,000 b/d.

California to Boost Renewable Diesel Use

Later this year, California regulators will vote whether to extend the state’s Low Carbon Fuel Standard(LCFS) from its current expiration in 2020 to 2030. If it passes, renewable diesel would be the biggest winner among biofuels. A shortage of renewable diesel in California would create a strong incentive for producers to build new capacity in the next decade, particularly in feedstock-rich Asia.

Kazakh Growth Hits Brakes

Kazakhstan’s production growth will slow from 175,000 b/d last year to about 70,000 b/d this year and 40,000
b/d in 2019. Due to Kazakhstan’s slowing production growth, overall FSU production will increase by only 60,000 b/d this year. In 2019, the continued deceleration in Kazakhstan means the prospects for FSU production growth will hinge on Russia’s role in the OPEC+ deal. In that country, the Kremlin’s consideration of an agreement to loosen restrictions signals that political leaders are aligning more closely with producers who are eager to raise output.

Russian Refining Expansion Moves Ahead

The strength of Russian crude demand and improving notional refining margins contrast with reports of weak Russian refining margins. Despite the tax maneuver and other setbacks to refineries, annual crude demand will bounce back from its recent low of 5.6 million b/d in 2016 to 5.75 million b/d in 2018. Coupled with secondary unit investment, higher throughput assures growing gasoline and diesel exports.