Bearish fundamentals were already in place before the Trump administration announced exemptions to Iranian export sanctions, so 2018 will end with the oil market in surplus. The surplus could increase in 2019 but we believe OPEC+ will put together a deal to cut production and lift prices.
Recent RFS developments point to even lower RVO costs for refiners in 2019. Larger than expected volume obligation waivers for small refineries and the increased likelihood of an E-15 summer waiver will both weigh on D6 RIN prices in 2019, by far the largest percentage of RVO costs.
Diesel and gasoline production in the Middle East will rise next year, as new refining capacity ramps up in Saudi Arabia and Iran, and a damaged unit returns in the UAE. With supply growth of both fuels outpacing demand, the region’s diesel exports will rise and gasoline imports will fall in 2019. This will add bearish pressure to transportation fuel spreads to crude.
Many in the oil patch have pointed to President Trump’s recent statement on Saudi Arabia as a signal to Saudi Crown Prince Mohammad bin Salman (and the world), absolving the prince of guilt for the execution of Jamal Khashoggi and somehow setting up a quid pro quo that requires the Saudis to facilitate President Trump’s perceived preference for low oil prices. That is far too oil-centric an interpretation. President Trump’s statement is for the American people and his own foreign policy team. He wants the focus back on Iran, and knows Saudi Arabia is key to his policies with regard to Iran, not to mention China and Russia. The oil market should resist the temptation of seeing this statement as oil policy. The Saudis still have considerable leeway to pursue their own production policy, notwithstanding President Trump’s oil price tweets.
Latin America’s crude production will increase in 2019. This change will see Latin America’s crude continue to get lighter and sweeter, as Venezuela’s share continues to fall and Brazil’s increases. A lighter, sweeter barrel will be a boon for Brazil once IMO sulfur changes hit but also help support global heavy crude prices relative to light.
Investment in the second half of 2018 and 2019 will enable Middle East refiners to increase diesel production and clean gasoline. Projects will also eliminate the production of nearly 180,000 b/d of fuel oil, including a large amount of low sulfur/straight-run product
Lower outright naphtha prices could ignite a bullish demand response, but LPG will not easily be priced out of the petchem feed slate. LPG will continue to be priced competitively, sustaining naphtha cracker’s love affair with LPG.
Pipeline constraints will slow the pace of shale production for most of 2019 until new capacity is added. Recent acquisitions and divestitures show a move toward consolidation, especially in the Permian. Larger acreage positions will help maintain cost control and protect future production growth by achieving scale.
Despite accelerating demand growth, transportation fuel spreads will remain relatively weak in the first half of 2019. The global gasoline market is forecast to remain oversupplied, and distillate spreads will come under bearish pressure early in the year because of increased supplies from the Middle East and Russia. By the second half of the year, the looming IMO rule-change will start to lift middle distillate spreads.
Brazilians will opt for pure ethanol over gasoline again next year when they fill up at the pump. This year’s huge demand swing toward E100 will not repeat itself, but ethanol-favoring fundamentals will persist, preventing a gasoline recovery.
The Chinese gasoline surplus will grow in 2019, while the diesel surplus will stay flat, driven by the new refining capacity & a mild demand recovery, putting pressure on Singapore margins.
After years of growth, Europe’s distillate deficit is slated to remain flat next year. As a result, Europe’s distillate imports will also remain steady. However, steady trade volumes belie a shift in flows, with the Middle East continuing to gain market share at the expense of Asia and North America.
With President Trump actively interested in U.S and Iranian production, President Putin in Russian production, and Crown Prince Mohammad Bin Salman (acting on behalf of his father King Salman) in Saudi production, these three leaders are shaping over 40 percent of global crude oil supply. Oil prices should remain soft unless or until there is a new supply disruption or the OPEC producers, who have recently cranked up production, dial back. Alternatively, fewer waivers may be granted in 6 months or Russia might cutback output growth. There is a broad range of possible outcomes, even as all parties claim diplomatic collaboration. This much head of state interest in crude oil markets will muddy the waters for supply and prices in the months ahead.
As the Asia-Pacific gasoline surplus grows, the middle distillate surplus will tighten, squeezing gasoline spreads to crude in Singapore, while a tighter distillate balance supports diesel spreads with China as the major factor in both movements
Kazakhstan has achieved gasoline self-sufficiency, which combined with other regional developments push more Russian and Belarusian gasoline into the Atlantic basin and have a bearish impact on gasoline markets.