Gasoline weakness and narrow light-heavy crude differentials early in 2019 has significantly reduced the large comparative advantage that U.S. refiners have enjoyed in recent years. Gasoline weakness and narrow light-heavy crude differentials will persist and will continue to minimize the comparative advantage of U.S. refiners for much of 2019.
In 2019, North Sea crude and condensate production is expected to remain more or less flat compared with last year. Over the course of 2019, U.K. output growth will slow and declines in Norwegian supply will narrow, before Norway returns to year-on-year growth in the final quarter of 2019 due to the start-up of Equinor’s Johan Sverdrup mega-project.
Supply reductions in Venezuela, Iran, and Libya continue to help the OPEC+ effort, while recent statements by Saudi Arabia and Russia indicate a bit more persistence and commitment among the heavy weights. As IMO draws closer, crude demand will pick up, however, underlying demand for petroleum products remains weak
For the LPG and naphtha markets, there will not be enough global demand to absorb available supply in 2019. The result will be continued bearish pricing for both products. This month’s outlook singles out the potential for China to impact the balances of both products. In the LPG market, accelerating Chinese growth will provide a helpful outlet for more LPG. In the naphtha market, however, Chinese imports of reformate for gasoline blending are rapidly vanishing, adding to the long list of bearish factors shaping naphtha fundamentals. Ethane stands alone on the bullish side of the ledger.
Changes in the quality of crude production globally have had a significant impact on the production of intermediates from distillation. Naphtha components are growing quickly but the heaviest component of the barrel, vacuum residue, declined in 2018. These trends have significant implications for how refiners operate refineries, gasoline blending and heavy fuel oil production ahead of IMO.
Since replacing the British Navy as the guarantor of regional peace after World War Two, the United States has had a heavy presence in the Middle East. Now, as the U.S. comes closer to net oil exports, the country’s engagement with the Middle East, especially under President Trump, is diminishing. Even more than the Obama pivot to the East, the Trump Administration is moving the United States out of the region. That will implications for U.S. influence in the region, not to mention military conflict.
Weaker U.S. gasoline demand will limit additional ethanol blending in 2019 due to the slow penetration of higher ethanol blends. Meanwhile, expanded production capacity will keep U.S. domestic fundamentals bearish in 2019. Export markets are unlikely to provide much relief with protective trade policies limiting U.S. export opportunities in Asia. Strong hydrous ethanol demand in Brazil is the only bright spot.
Latin America’s non-OPEC crude and condensate production will rise by 260,000 b/d in 2019 as several new production units ramp up in Brazil, Argentina and Colombia grow slowly, and Mexico limits declines. Overall regional production will fall by 250,000 b/d, though, as Venezuela will decline by 500,000 b/d. These shifts in production will help the region’s crude quality grow lighter and sweeter.
Booming production in 2018 filled pipeline capacity out of the Permian basin to the brim, depressing Midland basin prices for much of the year. These bottlenecks will disappear by the end of 2019, as over 2 million b/d of new takeaway capacity will come online, moving more crude to the USGC. But decelerating production growth will exacerbate under-utilized pipeline space.
Accelerating transportation fuel demand will provide little relief for refining margins in 2019. Middle distillate demand growth is forecasted to plateau. Fuel oil will remain a bright spot with spreads expected to remain strong
Latin America’s import requirement for gasoline, diesel, and jet fuel will expand by 90,000 b/d in 2019 to 2.3 million b/d, a slowdown from 2018 when the import requirement grew by 150,000 b/d. Mexico’s import requirement for gasoline and distillate will grow by 30,000 b/d, while Brazil’s will contract by 20,000 b/d. The closing of Trinidad’s refinery will increase the import requirement there by 70,000 b/d.
Russia’s South ULSD Pipeline is taking another step toward filling phase one capacity. However, investment in hydrocracking is losing steam. For the next couple of years, European refiners stand to profit from the very limited growth of Russian ULSD production and exports
Russian crude exports, which fell to 5.2 million b/d in January, will actually increase to an average 5.4 million b/d in the February-May period. That said, Russia is gradually moving toward compliance. Kazakhstan will only move toward compliance when previously planned maintenance begins.
Egypt’s increasing use of natural gas in the power sector will continue to reduce its use of fuel oil. From 260,000 b/d in 2016, North African fuel oil demand declined to 180,000 b/d in 2018 and will fall further to 160,000 b/d in 2019. A larger exportable surplus will help alleviate some of the current tightness in the fuel oil market.
Fuel oil strength and gasoline weakness have contributed to narrow light-heavy crude differentials, which will weigh heavily on cracking refinery margins early in 2019. Tight fuel oil supply and gasoline weakness globally will limit the profitability of cracking and coking refineries. This is particularly bearish for margins in the USGC where many refiners rely on cracking margins and gasoline yields are high.