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.

Market Alert: Year-Round E15

The latest talks over the RFS resulted in the announcement that the Trump administration will allow E15 gasoline to be sold year-round. Although policy details remain unclear, this development will move the RIN market into surplus, reduce D6 RIN prices, increase blending of ethanol into the gasoline pool at the expense of petroleum based components, and temper the recent crude-led rise in gasoline prices.

Bearish Refining Margin Pressure Temporary

Plentiful crude, big increases in distillation capacity and decelerating petroleum product demand growth will pressure petroleum product spreads in 2018 and early 2019. The bearish pressure will not last long though. In the second half of 2019, there will be a diesel-driven recovery of refining margins as the market anticipates a spike in demand for gasoil and low sulfur fuel oil.

North Africa Fuel Reforms Stall Growth

Subsidy reform in Egypt means that despite a growing economy, higher prices will leave gasoline demand flat this year, at 170,000 b/d. With no other large engine of growth in the region, North Africa’s total gasoline demand will also remain flat this year, at 400,000 b/d. Meanwhile, a modest increase in supply means the region’s import requirement will shrink slightly to 210,000 b/d.

North Sea Production Drops in 2018 and 2019

After dropping by 40,000 b/d in 2017, North Sea crude and condensate production will continue to fall through 2018 and 2019 as declining Norwegian output outweighs UK supply growth. By 2019, ESAI Energy expects North Sea output to have fallen below 2.7 million b/d, 65,000 b/d less than 2017 supply. However, these North Sea declines will be reversed by the late-2019 startup of the Johan Sverdrup mega-project.