Research Highlights

Here you will find regular updates on some of the most notable research outcomes generated by our team of analysts.

sample-image-twoDiesel’s long term outlook mired by constrained demand potential (see Market Watch – Issue 02)

  • Long term gas oil/diesel demand has more numerous downside risks than upside risks
  • In Europe and North America we are looking at a continued slowdown in gas oil/diesel demand per capital and increasing efficiency in the auto fleet
  • The biggest source of growth in the coming 7 years should of course be India and China, but the outlook for the latter is more uncertain, especially with the government’s increasing focus on environmental clean-up. The shift to EVs in the transportation sector, as well as the broader shift away from an industrial-based economy, will be an increasing drag on gas oil growth in China going forward
  • These factors are part of the basis for a fairly muted demand outlook between now and 2025 for diesel


US Supply Gains Close to Cancelling out Cuts (see Crude Oil Barrel – Issue 02)

  • Increases in US crude supply are squeezing the net negative effect of OPEC/non-OPEC supply cuts to a globally insignificant amount.
  • This is occurring despite over-compliance in the producer group, in many cases due to production or logistical issues (Nigeria, Venezuela) rather than voluntary supply curtailments.
  • Especially given the price increases in recent months, this might leave core OPEC members with easily-accessible spare capacity and some room to raise output in the next couple of months.
  • At the same time, our US supply growth path, though firm, is relatively conservative over the middle portion of 2018.
  • As such we would see risk skewed to the net effect climbing further in the coming months and maybe even climbing into positive territory vs 2016 baselines.

sample-image-twoRecent builds in product inventories in the US no cause for alarm (See Global Inventory Report– Issue 01

  • The product builds reported by the EIA in recent weeks, particularly in gasoline stocks, are not as bearish as they may seem at first glance. Gasoline inventories remain slightly below the 3-year average. However, we are likely at the peak of seasonal bearishness as the refinery maintenance season is about to begin and a seasonal rebound in driving will draw on stocks.
  • US nationwide crude inventories have been falling for 10 weeks in a row bringing stocks to the lowest level in almost three years despite rising domestic production. Cushing levels were drawn by 12 million barrels m-o-m on the last four points of weekly EIA data due to high refinery intake.
  • Draws on other oil and propene/propylene stocks combined with low fuel oil inventories has brought total US crude and product stocks to the lowest point since early 2015.

Fuel  oil margins hit sticky times (see Asian Oil Monthly – Issue 1)

  • Asian fuel oil cracks have trended steadily downwards since peaking in June 2017, with weakness intensifying since the turn of the year.
  • The power generation and industrial sectors continue to move away from fuel oil use, with rising oil prices, relatively cheap natural gas, and environmental concerns the main causes.
  • Bunker demand on the other hand continues to grow strongly, boosted by strong macroeconomic performance, as demonstrated by rising container throughput at major ports.
  • Growth in bunker demand continues to just about match falling demand in other sectors, and our balances tighten again y-o-y post Q1-2018.

sample-image-twoOur oil demand forecast for 2018 is currently 1.33 million b/d (see Market Watch– Issue 01)

  • One of the reasons for the slowing projected in oil demand growth in 2018 is baseline-driven.
  • This is supported by a closer look at demand forecasts by country and product: considering only the cases with expected y-o-y declines, in no instance does our forecast fall below a 40,000 b/d contraction y-o-y. In other words, we see oil demand as very robust in 2018.
  • Of course, an upside to our forecast is certainly possible, particularly if economic expansion surprises further to the upside or if US shale supply growth and other anticipated non-OPEC supply additions trigger a larger than currently anticipated price drop later in the year.

Next year’s demand outlook has strong upside potential (see  Market Watch – Issue 11)

  • We see this year’s global demand growth at 1.5 million b/d y-o-y. It is relevant to point out that this is some 300,000 b/d more than we expected at the end of last year, as global economic expansion turned out to be stronger than expected.
  • In the event that economic expansion surprises to the upside once again in 2018, oil demand might react to the degree of an additional 150,000 b/d according to our calculations. Additional upside risk stems from prices.
  • An annual decline in oil prices of five percent could trigger an additional 100,000 barrels of oil consumption.
  • Therefore, oil demand growth in 2018 could easily reach this year’s level instead of the baseline view of 1.25 million b/d.

Our Mid-Term Outlook 2017-2022 (West of Suez Issue) analyses demand growth, supply developments and the impact on prices over the next five years

  • We see total global liquids supply growing by 6 million b/d to 103 million b/d by 2022
  • Our base case for supply consists of the following general assumptions: with the OPEC/non-OPEC deal being extended beyond Q1-2018 throughout 2018, we see compliance fading only towards the end of next year. As of 2019, OPEC Middle East output will return to normal levels, while we do not see Saudi Arabia producing more than 10.5 million b/d on annual average in the following years
  • With an additional 2.8 million b/d, North America is the main growth region, followed by the Middle East with 1.8 million b/d, and Africa with 0.7 million b/d
  • In the FSU East region, Kazakhstan is the main driver of growth
  • Due to unfavourable cost conditions, we see Asian liquids supply declining across the board

OPEC: Walking a Fine Line (see Benigni on Oil Markets – Issue 9)

  • The oil market has become much tighter in recent months, however most market participants see supply side pressure intensifying again in the 2018-2019 timeframe
  • We think that the discussion around the extension of the OPEC/non-OPEC supply deal is primarliy driven by bigger-picture politics and tactical considerations and ultimately any decision will hinge on the agreement of Russia and Saudi Arabia
  • The most likely outcome of the 30 November OPEC/non-OPEC meeting is a prolongation of the deal for another 6-9 months, an outcome which should be largely priced in
  • While our balances suggest the need of continued market management, taking various other implied stockbuild scenarios into consideration, a permanent high-compliance policy risks to over-tighten the market
  • This entails potential for higher price volatility going ahead

Asian refiners are developing quite a taste for US exports barrels  (see Asian Oil MonthlyIssue 11)

  • Crudes like ultra-light Eagle Ford condensate are a good match for East Asian refiners hungry for light naphtha to feed their petrochemical units.
  • But the future of US crude exports hinges on arbitrage spreads, notably the WTI/Dubai spread. The strength or weakness of the US crude benchmark is therefore of paramount importance.
  • This week’s chart shows the average API gravity of US crude intake (so including both imported crude and domestic) as reported by the EIA. The July spike is the highest level in 28 years and raises questions as to how much higher it can go. The modern USGC refinery of today is not built to process high volumes of light crude as it quickly becomes difficult to fill conversion units with residue. If these refiners prefer a heavier crude over some of the lighter domestic barrels then consumption weakens eventually resulting in price pressure and elevated export availability.
  • The other line in the chart shows domestic shale production, which we expect to continue to exhibit strong growth. We see an additional 670,000 b/d coming online between June 2018 and the last available monthly EIA estimate in August. It is possible that this wave of production will overwhelm US refiners, boosting export availability.

Our current forecast for the 2018 liquids balance is almost 0.5 million b/d (this includes OPEC/non-OPEC extension up to end-2018), up from a 300,000 b/d deficit this year (see Market Watch– Issue 10)

  • In the run-up to the OPEC/non-OPEC meeting on 30 November, current indications and clear potential for a massively oversupplied market in 2018 without market management are supportive of an extension of the deal beyond Q1-18.
  • However, a continuation of the cut would bring a flat balance taking into consideration Chinese continued stockbuilding needs.
  • In other words, any supply disappointment or demand surprise brings with it the potential for higher prices unless OPEC/non-OPEC start to work on a staged exit strategy. We do deem prices above $60 per barrel to be detrimental to OPEC interests, as they are likely to trigger additional supply (e.g. US shale) and demand (e.g. more hybrid/electric car sales).