Asian Diesel Cracks to Outperform Gasoline on Stronger Demand Growth

Global oil demand is expected to grow by close to 2 MMB/D in 2018, and Asia will account for about half of the growth. In the Asia-Pacific region, gasoil/diesel demand growth this year is expected to surpass gasoline for the first time since 2011. In India, refinery runs growth will not fully keep pace with demand growth this year, leading to a small reduction in net product exports. Asian diesel cracks have been supported by improving regional demand, and they are expected on average to outperform gasoline cracks for the first time this year since 2014. Overall, Asian refining fundamentals should continue to be moderately supportive, and Singapore cracking margins healthy.

US Gas Short-Term Forecast

Prices at Henry Hub are up $0.14/MMBtu this month versus May, but further price increases to the balance of the summer remain warranted in light of the still atypically low US storage inventory. Platts Analytics increased the balance of the summer strip (July-Oct) to $3.06/MMBtu, and the winter now stands at $3.19/MMBtu.

The What if vs. the What is in Global Liquefaction Drives JKM Up Towards Oil Parity

The expectations for new supply vs. the reality of severe shortfalls have given considerable support to JKM where 2Q slopes to Brent have risen compared with the recent years. Severe supply losses owing to unexpected maintenances in both the Atlantic Basin and Asia have forced Asian buyers to compete more aggressively for Mideast and AB cargos, even in the low season. This has all but eliminated any expected storage requirement in Europe for global low season LNG cargos that normally would be pushed out of the region. The strong gains in JKM will be supported through 2H as the peak summer cooling season ramps up and injections start up in Sept/Oct.

Cape Freight Rates Rebound on Record Chinese Steel Production

The Cape market has moved back up this month to levels well above those seen in the last three years during the same period of the year. China’s steel production hitting record levels has helped, although there were signs of the market easing. The strength of the Chinese steel market and the absence of any resurgence in Chinese domestic iron ore production is a clear bullish risk for the market, although we still do not anticipate the recovery in the second half of this year will be as strong as in 2017. Lurking in the wings is the specter of Trump’s Trade War which could start to damage economic growth and sap market sentiment.

U.S. Power Storage Outlook

The U.S. Power Storage Outlook examines developments in the power storage industry, provides a forecast for market penetration through 2022 and offers a long-term view of the economic potential for storage. A combination of supportive policies in CA, NY, NJ and MA, FERC’s Order 841 (that will open-up wholesale markets to storage) and significant cost reduction for lithium batteries (driven by electric vehicles growth) is expected to drive installation of 7 GW+ of utility scale battery storage by 2022. Interest in battery storage is growing in all markets with 15+ GW currently in RTO/ISO interconnection queues. We expect from $20B to $50B of battery storage investment by 2030 – more weighted towards distributed storage applications.

U.S. – China Trade Tensions Turning into Potential Major Risk

Trade tensions between the U.S. and China have continued to intensify, and remain a key downside risk for global economic growth. The current tariff plans by both countries cover relatively small shares of trade, and they are unlikely to do major damage to economic growth even if they are implemented. But if the situation escalates and new tariffs are proposed for more goods, it may begin to pose a serious threat for the outlook. Last week’s key data releases (European business confidence and export orders in Taiwan) were constructive.

Propane Prices Decline for 5th Consecutive Week

Front-month non-LST propane lost 0.5 cents/gal, or 0.6%, ending the week at 85.25 cents/gal. Ethane prices strengthened on exports and steam cracker demand. Front-month non-LST ethane prices gained 5.5% last week and are approaching a four-year high. US raw mix NGL production came in strong at 4.19 million b/d and not surprisingly most of the growth comes from PADD 3’s Permian basin. Propane/propylene stocks increased 3.2 million barrels to reach 54.1 million barrels for the week ending June 15. Propane exports increased 300,000 b/d to once again push over 1.0 million b/d. The increase in exports comes as the arbitrage to both Asia and Northeast Europe opened late in the week. Steam cracker feedstock margins continue to be squeezed by increasing ethane prices and low ethylene prices. Cracker margins are under 4 cents/lb ethylene and do not incentivize the rapid commissioning of new crackers that are due to come online this year.

The week ending June 15, U.S. ethanol prices continued to drop

U.S. ethanol manufacturing margins were slightly lower due to the drop in co-product DDGs value. RIN values were steady after dropping to a five-year low. LCFS credits climbed to an all-time high. The trucker strike in Brazil temporarily suppressed ethanol supply and demand. EU regulators have agreed to a provisional deal with a target of 14% renewables in transportation for 2030 with crop-based biofuels capped at 7%.

Too Wet

Excessive rainfall was a constant companion between last Wednesday and Friday as Platts Analytics took a closer look at eastern Iowa and west central Illinois. Rainfall amounts of over 6 inches were all too common in an area from Galesburg, Illinois NW towards the Quad Cities and beyond. The Mississippi River at Rock Island, Illinois is expected to breech the flood level of 15 feet this Wednesday and peak at 16.4 feet Saturday for a few days. To the west, the Missouri River at Omaha is expected to crest at 27.5 feet on Wednesday, 1.5 feet below flood stage. What started out 2 weeks ago as a trip to assess dryness issues in Indiana and central Illinois has turned into an assessment of flood conditions and possible ramifications of an impending heat wave for the start of pollination.

OPEC Preview: 600 MB/D Production Increase Insufficient to Offset Losses Elsewhere

Ahead of the June 22 OPEC meeting, Saudi Arabia and Russia were reportedly prepared to offer a production increase as high as 1.5 MMB/D in 3Q18. S&P Global Platts Analytics believes the quota hike will be a far more modest 600 MB/D, as OPEC would like to ensure $70-$80/Bbl Brent, while resistance from Iran, Iraq, and Venezuela will prevent a unified front for a larger increase. Given that many countries already produce at capacity (in some cases well below their pledged level), a proportional quota increase of 600 MB/D translates to 435 MB/D in reality. However, Saudi Arabia does not want prices to heat up to above $80/Bbl Brent, so is likely to make up the difference between any agreed increase in quotas and supply shortfalls from other participating countries. This implies a new Saudi production level around 10.4 MMB/D. Even so, all signs point to tighter oil markets as we get closer to 2019. Iranian losses will begin to mount in 3Q18, Venezuelan declines look certain to continue, and recent clashes for control of Libyan export terminals could be just the beginning. Crucially, any voluntary increase will reduce OPEC spare capacity, which we optimistically estimate at 2.0 MMB/D. Sustainable spare may be lower, which is an uncomfortable cushion given rising geopolitical risks in Libya, Nigeria, Syria, and Yemen.

U.S. Commercial Stocks Roughly Flat

Overall commercial stocks showed just a very modest build for the latest reporting week adding 0.2 million barrels, one of the lowest changes of the year-to-date. A large build of 6.1 million barrels in product stocks was largely offset by a 5.9 million barrel crude stock decline. Higher crude runs and relatively soft demand led to large builds in both gasoline and distillate inventory of 3.3 and 2.7 million barrels respectively. Builds for both products are expected for this week as well. A modest increase in crude imports and high levels of exports, along with crude runs moving up to 17.7 MMB/D, led to a sharp drop in crude storage. This will show similar results, with a 6.9 million barrel drop anticipated. Cushing storage drew by 1.3 million barrels for the week ending June 15th with a 1.5 million barrel decline expected for this week.

North American Gas Regional Short-Term Forecast

After experiencing some strength over the May and early June, cash basis at West Texas Waha has again shown signs of weakening.

Tight Coal Markets Support South Asian LNG Prices

Tighter coal conditions in South Asia are supporting DES West India pricing as well as bringing significant volumes to the region. Pricing in South Asia has nearly converged completely with its eastern neighbors at $0.10/MMBtu. This spread is the tightest it's been on a consistent basis since November of last year. This tightness in South Asia mirrors coal pricing between Northeast Asia and West India, which has also seen significant convergence.

Belgian Tightness Pushes France Up, but 4Q Prices Harder to Justify

The announcement this week of a major revision in the availability of the Belgian nuclear fleet will have a notable impact on 3Q and winter prices not only in Belgium, but across NWE. The year-over-year change would be fairly limited in October, about 0.6 GW, but will average almost 3 GW in 3Q, with the output falling towards the bottom end of the historical range. Particularly surprising was the move of the 4Q-18 French baseload contract, with the CSS still around €13/MWh, or levels not far off the spot observed last year.

Coal Prices Dip with Oil Markets and Rising Chinese, Indian Stockpiles

Seaborne coal prices in the Atlantic and Pacific Basins cooled last week across the forward curve, with near-term prices falling by ~$4/mt. A dip in oil and LNG prices and week-over-week increases in stockpiles in both China and India were likely behind the decline in pricing.

Ontario Exit from WCI Carbon Market Followed by Quick California Response

In the wake of the PC victory in the June 7 Ontario elections, Premier-Designate Rob Ford moved quickly to make good on the promise to exit the WCI carbon cap and trade program. Ford announced on June 15th that ON would not participate in the August joint auction with CA and QC. In turn, CARB moved with impressive haste to bar allowance transfers to/from ON entities, aiming to prevent a sell-off of unneeded allowances. While additional challenges will arise over ON’s withdrawal, the removal of ON from the next auction allows CA and QC to continue to re-offer unsold allowances in August without uncertainty over whether or not ON entities will bid – a question that plagued the first two auctions this year. CA is also continuing its regulatory process to adopt amendments to align the cap and trade program with AB 398, though with little new on the key market issues of cost containment, addressing “overallocation” or in-state benefits for offsets.

Japan Margins Weaken Further Amid Rising Product Stocks

Runs took a noted drop to a new low on earthquake related disruptions and planned maintenance. Despite the run decline, crude stocks drew a sharp 6 MMBbls on ultra-low imports. Finished product stocks rose modestly, but have not tightened despite low runs. Demand continues to generally underperform expectations. Refining margins remain under extreme pressure, with all the light product cracks at or below statistical lows. Marketing margins have improved further as a minor offset and remain near or above statistical highs.

Financial Stresses Remain Contained

Financial stresses continue to remain elevated in certain areas, but they are not increasing. The S&P 500 fell by 0.9%, while as the trade frictions weigh global performance. Overall commodities were lower by -0.4%, but energy rose 1.8%, and was the lone gainer for the week. Emerging market debt performed better. The dollar weakened 0.3%, but some currencies that had been stressed, performed better. The St. Louis financial stress indicator was modestly changed and overall stress levels remain low.

Ethanol production rises again

U.S. ethanol production rose again the week ending June 15, increasing by 11 MB/D to a four-month high 1,064 MB/D. Total ethanol inventories declined by 527 thousand barrels to 21.6 million barrels. Stocks fell in every region except the Midwest where inventories rebounded from an eight-month low. Ethanol-blended gasoline dropped 124 MB/D to 9,245 MB/D as overall gasoline manufacture waned.

US Gas Weekly Report

Since the start of the injection season, the spread between the July and December contracts has come in. In April, the December contract was trading at more than a 20¢ premium to July. As of Friday, it is less than 13¢. Over this same period, the Mar/Apr spread has widened by ~10 cents. Thus, it appears the market is attempting to price out some summer burns, while also acknowledging the potential for a sizeable storage deficit entering the upcoming heating season. Henry Hub cash prices for June have averaged ~$2.92/MMBtu month-to-date (MTD), which is close to parity with last year. This is a big increase from last month where NYMEX prices were ~11% lower year-over-year.

Could a return of NCS flows alleviate some of the supply tightness in Q3?

Since the beginning of Q2, we’ve seen a record amount of NCS unplanned maintenance. Average unplanned maintenance sits at 13mcm/d, considerably above Q2-17 (1mcm/d) and Q2-16 (6mcm/d). This reduction has contributed to the extreme tightness for this time of the year. A strong incentive exists for Norwegian production to rebound in Q3-18. As LNG diverts to Asia it leaves a supply gap, and the gas curve remains strongly backwardated. NCS production will depend on two factors: will we continue to see record levels of unplanned maintenance? And will Norway’s key source of flexible supply, the Troll field, turn up this year?

Asian Oil Demand: Growth Drops Sharply on China Balances, Rebound Expected

Our monthly snapshot of major country Asian oil demand growth again fell sharply to only 188 MB/D vs. the 560 MB/D seen in May, and 1,013 MB/D seen in April. While the June snapshot was expected to be soft, it came in well under expectations. Data for April and May revised growth higher by 40-60 MB/D, while our expectation for the July snapshot should show acceleration to 660 MB/D, with further improvement in August to 840 MB/D and 960 MB/D in September. Major country demand growth for 2018 is slated at 764 MB/D vs. 903 MB/D seen in 2017, while total Asian demand growth in 2018 is expected to be 975 MB/D vs. 1,122 MB/D seen in 2017. Relative to expectations, the big variance was for China, which is a function of our assumed inputs in calculating apparent demand. India’s growth, while slowing from 295 MB/D in May, to 245 MB/D in June, was only fractionally below expectations.

Global Equities Mostly Lower

Global equities were down -1.9% on the week, with broader weakness seen outside U.S. markets. In the U.S., the S&P 500 was lower by -0.8%, with retail, utilities, and energy all still able to post gains, while industrials, housing and materials, all lagged. International tracking indices were broadly lower with losses of 2-4% common in many of the tracking indices.

May RIN generation increases; RFS announcement is delayed as the EPA debates RIN Reallocation Issue

A total of 1.67 billion liters were generated in May, up 5.2% from 1.59 billion in April. RIN values rebounded late last week.

Fading Supply Growth and Stronger Demand in Asia Provides Mismatch in Support of JKM Prices

While Chinese demand growth commands plenty of attention, it has reduced supply availability, particularly in Asia, that is the main driver for the recent spike in JKM. For the second time this year, the 30 day moving average LNG supply is down y-o-y despite additional capacity of ~65 mcm/d, with the current supply shortfall amounting to 55 mcm/d as of today. That’s a 14% reduction from January winter volumes. April 2018 also saw production declines that lasted all month with the 30 day moving average down 18 mcm/d y-o-y on average. Supply outages were seen in both the Atlantic Basin and Asia Pacific.

US Gasoline demand to stay flat this year and next despite continuous growth in VMT

US Vehicle Miles Travelled (VMT) will continue to rise this year, but at a slower pace than recently. As a result, US gasoline demand will stay flat this year and in 2019, due to underlying efficiency improvements in the car fleet.

Venezuela’s dire economic and political situation continues to erode domestic oil demand

The Venezuelan economy has been on a steep decline since 2014. After shrinking by 14% in 2017, Platts Analytics expects the country’s GDP to fall by 6% in 2018 and 2% in 2019. The collapsing economy, hyperinflation, international debt and claims, social unrest and political complexities have led to a mass exodus of Venezuela’s population to other countries. As a result, Platts Analytics decided to revisit its oil demand outlook on Venezuela.

Further Stress in Emerging Markets: Pakistan under the Gun?

Currency weakness will ripple through the economy, resulting in downside risk to economic and oil demand growth. Vulnerabilities exist via both the government fiscal and current account deficits. Such deficits require an influx of capital to maintain stability at a time where tightening global monetary policies are lessening capital inflows to emerging markets, which is producing heightened strains on vulnerable economies. Higher oil prices place an additional burden on countries, such as Pakistan, which rely on imported petroleum to meet domestic consumption. Currency weakness vs. the U.S. dollar is a double negative. Oil implications for Pakistan are minor, as annual growth was only expected to be 13-17 MB/D per year, but the issue for Pakistan is similar to that in many other emerging markets, which ultimately becomes highly significant from a volume and growth standpoint.

The rise in Egypt’s gasoline and diesel prices is bearish for demand in the country

The Egyptian government hiked fuel prices on June 16 to meet loan requirements set by the IMF. The government plans to lower subsidies on petroleum products, electricity and food. This is the third time it has increased fuel prices since austerity measures were announced late 2015. The latest price hike was in June 2017. To comply with the IMF’s loan requirements, these cuts must ultimately save 50 billion pounds (= US$ 2.8 billion). Of this amount, one third is projected to come from reducing fuel subsidies in fiscal year 2018-19 alone.

The information above is part of S&P Global Platts Analytics weekly Energy Market Recap – which alerts readers to our current analysis of energy markets around the world as well as the key economic and political factors driving those markets. To read S&P Global Platts Market Recap first, subscribe here.

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