Research Highlights

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

Soaring crude and natural gas production amid expected low ethane rejection levels are set to drive NGL production in the Permian Basin above the 1.2 million b/d offtake capacity by September this year (see Market Watch – Issue 6)

  • Some 1.8 million b/d of pipeline capacity are scheduled to come online over the next two years, but the majority will not enter service before Q2-2019.
  • Hence, prices are likely to come under pressure, in particular in Q1-2019.
  • This could be exacerbated should mid-streamers decide to convert NGL to crude pipelines before new capacity comes online.

sample-image-twoUS supply growth is still dominated by shale oil additions from the Permian Basin (see Crude Oil Barrel– Issue 06)

  • Looking back to our forecast from the beginning of the year, we can see that Permian Basin output has historically been underestimated, while other shale plays have been a bit disappointing.
  • The limitations in takeaway capacity in the Texas Midland could become more of an apparent issue, with rebalancing in midstream not expected before mid-2019 at the earliest.
  • Looking ahead, we expect the oil patch will focus on other shale plays in the meantime.

Russia, Saudi Arabia, and the US Supply Comparison (see Benigni on Oil Markets  – Issue 5)

  • The US pulling out of the JCPOA and snapping back sanctions on Iran could pull 500,000 b/d of Iranian exports out of the market.
  • There is increasing pressure on the political side for OPEC members to cap the rising outright crude price as demand-side implications are already being felt.
  • We expect some 500,000 b/d more output from members to the OPEC/non-OPEC deal to come back into the market through Q3-2018.
  • Russia and Saudi Arabia are the most likely players to increase production over that period, based on spare capacity and compliance with the deal to date.
  • For the moment it looks as if the march to $100 per barrel has been cancelled.

The global fuel oil balance lengthened y-o-y at the beginning of 2018 for the first time since 2015.

  • Fuel oil supply is forecast to fall by 110,000 b/d y-o-y in 2018, the lowest decline since 2010.
  • Strong demand declines are expected to come from Egypt and Pakistan, as the two countries are turning to natural gas for power generation.
  • In line with the IMO bunker specification, we assume a decline in HSFO bunker demand of 2.5 million b/d from the start of 2020.
  • In 2020 we expect the forecast low HSFO prices to cause a spike in fuel oil demand for power generation.

Refining economics in Russia have been strengthening since the beginning of the year (see FSU/CEE Insight – Issue 19)

  • High outright crude prices have pushed the implied refining subsidy to multi-year highs.
  • Meanwhile, export margins have also improved, particularly for complex refiners, on the back of higher clean product cracks in Europe.
  • With strong crude prices looking increasingly likely to persist over the coming months, Russian refiners are likely to benefit from a more favourable economic environment compared to last year.
  • We expect Russian crude intake to grow by about 100,000 b/d y-o-y in H2-2018.

Renewed sanctions on Iran are unlikely to directly affect the country’s crude supply (see Energy Market Report 8 May 2018).

  • Even in a dovish scenario, Iranian crude exports should decrease by at least 100 – 150,000 b/d, which may be compensated for by higher export of products.
  • A hawkish scenario would see exports drop by as much as 500-700,000 b/d over a couple of months.
  • Either way, the downside to Iranian export volumes would come at a time of seasonal tightness, exacerbating the effect on markets.

A suite of bearish factors for gasoline cracks are coming together this year (see Top of the Barrel– Issue 05).

  • Additions of new units associated with gasoline product are due to spike in historical terms in 2018.
  • Delays are always possible, but we see refiners struggling at the margin to control gasoline yields in spite of weak incentives to produce light ends versus middle distillates.
  • This may be exacerbated by the lightening of the global crude slate, particularly in areas such as the US.

sample-image-twoUS fuel oil inventories and production remain suppressed (see Global Inventory Report – Issue 4)

  • Residual fuel oil production stood 10% lower y-o-y over Q1 despite high crude runs.
  • The lightening crude slate limits residue volumes, with February API gravity up another 0.25 points m-o-m.
  • US fuel oil inventories continue to trend lower y-o-y and well below multi-year ranges.
  • This reflects a pretty tight physical fuel oil market but comes at a time of ongoing needs to shed residue stocks ahead of the IMO spec switch.

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Exploring the limits of China’s spare refining capacity (see Benigni on Oil Markets – Issue 03)

  • In light of a tight global spare capacity situation, with demand having eclipsed distillate capacity growth, we see China as the last country with significant amounts of spare capacity available
  • To achieve the runs required to keep global product stocks from drawing further, Chinese refiners would need to run close to the levels registered in Q4 last year
  • In light of last year’s capacity expansions, our current forecast is of an uptick in crude intake of 440,000 b/d y-o-y, but risks are clearly stacked to the downside.
  • Some key downside risks would be a slowing by independent refiners and unexpected turnarounds

sample-image-twoJet/kero demand growth in the Americas is continuing its robust path of the previous three years (See Americas Weekly– Issue 15

  • In terms of demand per capita, Latin America’s jet consumption remains well below the global average, so there is still quite a lot of room for growth.
  • The International Monetary Fund expects the economic recovery in Latin America and the Caribbean to continue, with GDP increasing by 2% and 2.8% y-o-y in 2018 and 2019, respectively, following growth of 1.3% in 2017. This should support jet demand.
  • Nevertheless, infrastructure and capacity upgrades are necessary to keep up with rising interest in air travel.