Europe’s IMO Vulnerable Refining Capacity

Europe has at least 1.2 million b/d of refining capacity that are at greater risk from new IMO specifications.  These refineries’ high yields of heavy fuel oil, smaller and less-efficient size, and lack of plans to invest in upgrading make them vulnerable to weaker demand for heavy fuel oil and widening spreads once IMO changes take effect. Other bigger refineries are investing to adapt to market changes and remain viable.

North Sea Output Rises

Over the next twelve months North Sea crude and condensate production will increase by about 30,000 b/d to an average of over 2.7 million b/d, after falling by roughly 100,000 b/d in the previous twelve months. This recovery will be driven by the U.K., where output growth is slated to accelerate. Nevertheless, on a calendar year basis North Sea output will fall marginally in both 2018 and 2019.These developments are the most public display of substantial change underway, which we wrote about last month. For a number of reasons, OPEC and Russia will likely raise production, although maybe not until the end of the year. Meanwhile, U.S. shale producers show no signs of slowing down. So, the market is caught between geopolitical events that can be read as bullish and supply/demand developments that can be read as bearish. We believe the supply/demand developments will generally guide the market to lower prices by 2019. Shale producers will eventually have to take a breath, and that will temper the price decline in 2019. In other words, this is not 2014 all over again, so not quite deja vu.

Exemptions and Waivers Likely to Shape Rift between US and Europe

Europe has signaled that the rift with the U.S. over Iran is significant even if both sides would like to see change in Iranian behavior. It is unclear how this rift will play out with regard to sanctions on European companies doing business with Iran, especially those buying oil. Both sides are likely to take stands on sanctions in principle, but then negotiate a series of individual time or condition-based exemptions or waivers. This may limit any reduction in European oil imports, even without a Saudi guarantee to make up a shortfall.

Not Quite Déjà Vu

Geopolitical developments have been center stage. The continued implosion of Venezuela, and its impact on the oil producing sector is striking. New U.S. sanctions following Maduro’s reelection will only make things worse for producers. The implications of U.S. withdrawal from the Iran nuclear deal are still shaking out. The response of OPEC, to officially discuss higher output in June, underscores the transition the global oil market has begun. A little further afield, trade talks with China, and a possible summit between the U.S. and North Korea will keep the global economy guessing.
These developments are the most public display of substantial change underway, which we wrote about last month. For a number of reasons, OPEC and Russia will likely raise production, although maybe not until the end of the year. Meanwhile, U.S. shale producers show no signs of slowing down. So, the market is caught between geopolitical events that can be read as bullish and supply/demand developments that can be read as bearish. We believe the supply/demand developments will generally guide the market to lower prices by 2019. Shale producers will eventually have to take a breath, and that will temper the price decline in 2019. In other words, this is not 2014 all over again, so not quite deja vu.

Europe Wrestles with Iran Sanctions

Europe faces a choice: fight US sanctions and continue buying oil from Iran, or cave to US pressure? Early signs are the EU will fight. The European Commission has reopened the 1996 Blocking Statute that prohibits EU companies from observing US extraterritorial sanctions and is considering paying Iran for its crude oil in euros. On the face of it, the Blocking Statute has teeth – yet implementing it would be messy. It will do little to blunt the impact of US sanctions, but as a negotiating tool it could help Europe extract concessions from President Trump.
Monthly Permian production growth (conventional and shale) has averaged almost 70,000 b/d since the start of the year.  But by this summer, ESAI Energy expects this growth will face increasing pressure from full pipelines and labor shortages. The pressure will last through the next twelve months, until additional takeaway capacity starts to come online.

Eagle Ford Growth adds to Corpus Christi Exports

While the Permian battles pipeline constraints, Corpus Christi will benefit from growth returning to the Eagle Ford. Higher production will lift exports from Corpus Christi to around 450,00 b/d over the next 12 months. But bottlenecks are likely in the second half of 2019 as port expansion plans do not keep up with the expected influx of crude from new Permian Basin pipeline projects coming online in 2H 2019.

Monthly Permian production growth (conventional and shale) has averaged almost 70,000 b/d since the start of the year.  But by this summer, ESAI Energy expects this growth will face increasing pressure from full pipelines and labor shortages. The pressure will last through the next twelve months, until additional takeaway capacity starts to come online.

NGLs Stranded Again

As U.S. NGL production, extraction, processing and exports grow in leaps and bounds, some of the hiccups experienced along the way are bound to repeat themselves. Less than six months from now, a lack of LPG export infrastructure will strand propane and butane in the U.S., causing the North American and international markets to decouple – again. But the market is different now than it was when stranded propane in North America led to negative pricing in Edmonton, and things will play out differently. Inside, we highlight the infrastructural limit to U.S. exports and the consequences for markets from the U.S. Gulf Coast to North Asia, highlighting the implications for NGL pricing, demand and trade.

Venezuela Decline Pits Exports against Throughput

Venezuela production has declined steeply and should fall under 1.2 million b/d by the end of 2018, to average 1.4 million b/d this year, 500,000 b/d below 2017 levels. The ConocoPhillips court rulings will help expedite the decline by complicating transport and logistics operations in the Caribbean. Already, PdVSA’s production has fallen far enough to force a choice between refinery throughput and exports. Meanwhile, President Maduro’s re-election invites more US sanctions but otherwise will not alter the production outlook.

Refined Fuels Market Tightness Unwinds Through Mid-2019

After more than two years of tightening, global transport fuel market fundamentals will loosen over the next twelve months as overall supply growth accelerates to 1.5 million b/d and demand rises by 1.1 million b/d.

The global loosening of transport fuel fundamentals will be driven by gasoline and diesel. Gasoline markets will weaken over the forecast period, particularly East of Suez where a combination of a major production expansion and decelerating demand growth will bring that region’s market into balance. The global diesel market will also weaken over the forecast period as demand growth slows, particularly in the U.S. and Asia-Pacific, and production growth accelerates.

As the market moves from undersupply to oversupply, product spreads to crude will weaken across the board over the next twelve months. As a result, refining margins will shrink after an extended period of strength.

Latin America Gasoline Demand Sustains Trade Flow

Robust gasoline demand in Mexico will sustain the need for imports at last year’s levels through 2018, despite some recovery in Mexico refinery runs. Demand will grow by 20,000 b/d this year to reach 790,000 b/d. For the region as a whole, demand will remain flat at 2.6 million b/d, with contractions in Brazil, Venezuela, and the Caribbean offsetting Mexico’s growth.

New Projects in China to Boost Imports of Middle Eastern Crudes

China’s stockpiling in government depots will contribute 55,000 b/d to imports in 2018, and 140,000 b/d in 2019, when the delayed Zhanjiang SPR depot starts. Hengli and Zhejiang Petrochemical will process Middle East crudes, driving up imports towards the end of 2018. Meanwhile, ESAI Energy expects at least a third round of export quotas in the second half of the year due to capacity additions.

What’s Next for Iran

Following President Trump’s decision to withdraw the United States from the JCPOA, the response of Iran, Europe, Russia and China over the next several weeks will be closely watched. The U.S. and Europe are likely to continue discussions regarding joint action on Iran and the imposition of secondary sanctions on European companies. Whether China, Russia and, one day, Iran can be brought back to the negotiating table will depend on statements, actions and likely exogenous events over the wind down period. 

European Gasoline Exports Begin to Fall

In the first quarter of 2018, European net exports of finished gasoline and blending components averaged nearly 1.4 million b/d. As Europe’s exportable surplus shrinks, import requirements especially East of Suez narrow, and competition to place gasoline in the Atlantic Basin intensifies due to growing U.S. and Russian surpluses, European exports will fall by more than 100,000 b/d over the next year.