Russian production growth has led to higher crude exports. Lately, export growth has been in pipeline deliveries to China, but growth will shift to seaborne outflows from Europe.
U.S. sanctions on Iran’s exports of crude oil and condensate came into effect today, with waivers granted to eight of Iran’s traditional customers in Asia and the Mediterranean. It seems the waivers may be a useful negotiating tool for the Trump Administration and, thus, although they expire in 6 months, it is likely they will be extended. Even with these waivers, Iranian exports will still fall by roughly 1.2 million b/d in 2019.
Calls for a cease-fire in Yemen reflect the complicated relationship between the U.S. and Saudi Arabia, which, at least outwardly, took a turn for the worse following the execution of Jamal Khashoggi. Still, opposition to Iran will continue to trump all other issues between these two countries. This does not bode well for Yemen.
Mexico’s throughput fell suddenly this month, suggesting there are even more structural problems with refineries than originally thought. Lower throughput will boost the country’s exportable surplus in the fourth quarter, before falling in 2019 as AMLO has Pemex raise runs.
In 2020, changing contributions from gasoil, gasoline, and fuel oil to refining margins will effect refineries based on geography and profile. Cracking refiners that can upgrade heavier high sulfur material will benefit, while less sophisticated refiners that produce heavier sour grades of crude oil and rely on HSFO bunker demand, will struggle.
Due to U.S. sanctions, Iran will reduce fuel oil exports next year with flows to Asia falling most. Iran’s power sector will consume the excess fuel oil, reversing a multi-year trend in which power plants have replaced fuel oil feedstocks with natural gas. This will contribute to a larger regional deficit of fuel oil, supporting spreads to crude before IMO hits
Sustained growth of NGLs in the period through 2020 will leave LPG struggling to catch up.
After remaining flat this year, Africa’s diesel deficit will grow by 20,000 b/d in 2019 to reach 885,000 b/d as demand growth of more than 40,000 b/d outpaces supply increases.
In Q3, North Sea crude and condensate production remained more or less stable year-on-year after consecutive quarters of declines. Looking to 2019, output will remain flat year-on-year, as Norwegan declines narrow and U.K. growth stalls. But, the startup of Equinor’s Johan Sverdrup megaproject will lead to growth in 2020.
Saudi Arabia accounts for about half of the spare crude oil productive capacity in the Middle East. In the period to 2020, declines at mature fields will offset some planned capacity additions in Saudi Arabia, Kuwait, the UAE, and Iraq. How will this impact the region’s spare productive capacity?
The global supply demand fundamentals over the next two years will be generally balanced with product market weakness building in, later in 2020. Waivers, tankers, and condensate splitters will shape the volume of crude oil Iran will export after the sanctions are imposed, while refiners drive the shift to gasoil blends in the bunker sector due to IMO.
Global capacity will increase by more than 3.5 million b/d by 2020. It will outpace strong IMO-related throughput growth and temper any bullish rise in utilization rates.
After much debate and drama, the chairman of the IMO’s Marine Environment Protection Committee rejected a proposal today to phase in the sulfur regulations through an “experience building phase.” The proposal was vaguely defined in scope and timing and would have created significant uncertainty ahead of the January 2020 start date. Still, ESAI Energy expects the market will phase in the regulations on its own through a combination of waivers and discretionary enforcement, as well as some outright cheating. We expect just under three-quarters of bunker fuel consumed in 2020 to be compliant.
Both the Canadian Oil Sands and the Permian Basin face takeaway constraints and discounted prices due to full pipelines. Increased crude-by-rail will be necessary until additional pipeline capacity comes online, and the pace of production will decelerate in the near-term.
After growing by a record 1.4 million b/d in 2018 led by the Permian Basin, total US shale production will increase by an annual average of 680,000 b/d in 2019 and 700,000 b/d in 2020. Output from the Canadian Oil Sands will also slow as investment and project expansions are deferred until new pipelines are built. Oil Sands production will increase by only 60,000 b/d in 2019 and 130,000 b/d in 2020, after growing by over 200,000 b/d this year.
In this month’s Global Fuels Two-Year Outlook, we turn our attention to product markets through 2020, with special attention given to the impact of the IMO’s 0.5 percent sulfur cap on marine fuels, which will be implemented globally in January 2020.
Next year, global demand for gasoline, gasoil, jet fuel, kerosene, and fuel oil is expected to rise by 770,000 b/d, following an increase of just 440,000 b/d this year. This acceleration will be driven primarily by a return to demand growth in China. However, in 2020, a slowdown in global economic growth, in combination with relatively high petroleum product prices, will limit product demand growth to just 450,000 b/d.
Meanwhile, the impact of the IMO sulfur rules will be felt in product markets by October 2019 when companies begin to switch over their tanks. In 2020, MGO demand, consumed directly and in a blend, will reach 1.9 million b/d, up from 800,000 b/d in 2018. Demand for LSFO bunkers will reach 900,000 b/d, up from 300,000 b/d in 2018. HSFO bunker demand will average 1.4 million, down from 2.9 million b/d, with 250,000 b/d consumed legally through scrubbers, the rest through non-compliance. The increases in refinery throughput and yield shifts necessary to meet the surge in gasoil demand will have bearish consequences for other markets, especially HSFO.
In response to the IMO’s sulfur cap on marine fuels, middle distillate spreads to crude will begin to rise sharply toward the end of 2019 and remain wide through 2020. Meanwhile, fuel oil prices, particularly for HSFO, will collapse and the fuel oil discount to crude will remain wide through the forecast period. Gasoline’s premium to crude will remain weak through 2020 after narrowing in 2019 due to an oversupplied market.
Over the next two years, global gasoline and middle distillate trade flows will shift as Europe exports less of the former and imports less of the latter, but these changes will be overshadowed by a dramatic re-ordering of the global fuel oil trade in the wake of the IMO’s 2020 sulfur cap. In 2020, HSFO trade volumes will diminish rapidly, while LSFO trade flows shift to supply adequate bunker blending components to various regions, as detailed in this publication’s Trade Insight.