GLOBAL OIL

World Oil Market Forecast

The recent run up in oil prices, with Brent up some $5/Bbl to $67/Bbl in matter of a week or so, has been fast and aggressive. We have always been constructive for 2019, but recent events have us now forecasting $70/Bbl Brent faster than expected. Business sentiment has improved and our outlook for 2019 has changed from negative to neutral. Our 2019 oil demand forecasts are unchanged from January since latest actuals confirmed our forecasts. The global oil supply story has turned much more bullish in recent weeks with surprise U.S. sanctions on Venezuela, growing concerns ahead of the May 4 deadline for U.S. Iran sanctions waivers, and the unexpected Saudi 9.8 MMB/D March crude production announcement, which above all else signals Saudi Arabian barrels cannot be depended on ahead of Venezuela sanctions and more Iran sanctions to come, as they were last October and November (when Saudi crude output was 11.3 MMB/D). An improved outlook on U.S. shale offsets some of the declines, but the Saudi announcement signals a distinct intent to keep oil markets tight, and given that it is widely understood that the Saudis want $70/Bbl oil, this is bullish for prices. Our balances show directionally tighter 1H and a mildly looser 2H compared to last month, although overall 2019 remains mostly balanced (minor draws) on the year. 2Q in particular shows a mere 200 MB/D build in total commercial oil stocks. We do see some room for pull back in coming days given that we are in peak refinery maintenance season, refinery margins remain weak, and the release of oil bottled up in the Turkish Straits continue. But financial net length remains relatively low and suggests room for upside. Markets will once again look to Saudi Arabia for signals on production increases or price supports. Near term gasoline cracks starting to improve seasonally but will remain lackluster; middle distillate cracks will ease over the next few months; HSFO will stay firm through mid-year as IMO 2020 demand effects have not yet begun. Later in 2019, middle distillates will soar sharply while HSFO cracks will plunge with September likely being the start of the major market changes leading up to IMO 2020.

Freight Market Outlook

The seasonal improvement in tanker rates during 4Q 2018 came to an abrupt end in January when the OPEC production cuts were implemented. The reductions were led by Saudi Arabia where output was lowered from a recent high of 11.3 MMB/D in November to 10.1 MMB/D in January, with further reductions to 9.8 MMB/D planned in March. Meanwhile refiners, traders, marketers and shippers are implementing steps in 2019 to prepare for the transition to the lower global sulfur spec on bunker fuel commencing January 1, 2020, which is expected to be highly disruptive.

Demand underperformance a headwind for refining margin improvement in Japan

Aggregate demand fell 198 MB/D, while the 4-week average slipped 42 MB/D. The seasonal uplift to demand looks complete, muted, and an underperformance to expectations. While finished product stocks drew, the decline was less than seasonal norms. All this is hampering any improvement in refining margins. Crude stocks built a sharp 3.3 MMBbls on a rebound in imports. The implied marketing margin eased again, with gasoline remaining above its statistical high, but gasoil/diesel below.

DOE Weekly Analysis

Total commercial stock draw was led, as expected, by distillate (-1.5 MMB) and gasoline (-1.5 MMB), and also by the “other products” (-3.5 MMB). On the other hand, crude stocks built (+3.7 MMB), but this increase was less than anticipated due to surprisingly high exports of crude (3.61 MMB/D). For next week, we anticipate a sizeable crude stock build (+6.65 MMB) driven by a still low - albeit slightly higher than last week - refinery runs (15.95 MMB/D), crude production increasing to 12.0 MMB/D and crude exports likely dropping below the 3.0 MMB/D threshold. Meanwhile crude imports should stabilize at 7.4 MMB/D. Cushing stocks built by 3.4 MMB last week, increasing to 45 MM barrels. This build was driven by barrels being diverted to Cushing following an outage on the Steele City to Patoka leg of the Keystone pipeline, combined with a large rebound in Canadian crude flows entering PADD II. With the Patoka segment of Keystone remaining down for most of the week ending Feb. 22, we expect strong inflows to continue into Cushing. Yet, PADD II runs are expected to slightly increase. Hence, we forecast Cushing to build by 1.0 MMB. Crude production reached a new peak of 12.0 MMB/D, after being stable at 11.9 MMB/D for the past five weeks. Given that US production reached 11.9 MMB/D back in November — according to the EIA monthly actuals — this number still seems rather low and revisions will be likely. We expect next week’s US total crude production to remain at 12.0 MMB/D. Crude imports were very close to our expectations of 7.6 MB/D. Canadian imports recovered slightly slower than expected. For next week, we anticipate crude imports to arrive at 7.4 MMB/D. We see Venezuelan imports to wean off to 250 MB/D next week. Crude exports, on the other hand, were a big surprise as they came in at 3.6 MMB/D. Although we project another big export number for next week at 2.9 MMB/D, domestic crude arbs are tightening as foreign grades price to compete, especially in Europe.

Asia-Pacific Oil Market Forecast

Asia-Pacific oil product demand is expected to grow by 800 MB/D in 2019, down from 970 MB/D in 2018, with China slowing and Japan continuing to decline. The region’s oil import dependency is expected to rise to 80% this year, up by one percentage point from last year, as regional oil production is set to decline further while demand will continue to grow. The Middle East is the dominant source of supply for the region, but IMO 2020 will create some pressure on sour crudes like those from the Middle East and their share in Asia may negatively be affected later this year. Asia’s net exports of key products including gasoline, kero/jet, gasoil/diesel and blending components are expected to average 1.1 MMB/D in 2019, up from 1.0 MMB/D last year. China is well-placed to benefit from the IMO bunker spec change with its high level of coking/HCU capacity, and we expect the country to increase its share of the global bunker supply market come 2020. Overall, Asian refining margins may be challenged at times in 1H19, but there is light at the end of the tunnel as IMO 2020 comes to the rescue, with Singapore cracking margins rising above $7/Bbl in 2020, up from $3.65/Bbl this year.

Australia’s Petroleum Product Imports to Rise Sharply in 2019

Australia’s net imports of total petroleum products averaged 570 MB/D in 2018, up by 12 MB/D (or 2.1%) year-on-year, driven by stronger demand growth even as domestic production edged slightly higher. Australia imported some 632 MB/D of refined products, largely diesel (56%), gasoline (17%) and jet fuel (17%), and exported 62 MB/D of products (mainly LPG). Diesel imports posted strong year-on-year growth of 7.1%, with jet fuel and gasoline imports down by 0.4% and 6.4%, respectively. Traditional top Australian suppliers largely maintained their market shares for diesel and jet fuel, but there emerged new entrants to the gasoline market from the Atlantic Basin. Going forward in 2019, Australia’s product demand is likely to moderate on slower economic activity and weaker vehicle sales, driven by diesel. But product imports could see a sharp rise due to economic run cuts of some domestic refineries as margins will be pressured downward by weak gasoline cracks. Overall, Platts Analytics expects Australia’s net total product imports to rise sharply by 45 MB/D (or 7.8%) to 615 MB/D in 2019.

India’s oil product demand started strongly in January, with robust growth expected for 2019

India’s oil product demand started the year on a strong note, with January growth at its strongest in seven months. India’s product demand increased by 300 MB/D (or 6.6%) year-on-year in January, driven by gasoil/diesel, LPG and gasoline. For 2019, Platts Analytics expects India’s total product demand to grow by 235 MB/D (or 4.8%) on healthy economic activity, with GDP to grow at 7.2%. Lower oil prices and improving rupee will also be supportive for India's demand growth of petroleum products. Total vehicle sales are expected to remain healthy this year, after growing at double-digit rate in 2018. Further expansion in air travel demand is also expected for 2019. The Indian government will continue to push for the use of LPG as a cooking fuel across the country. Overall, gasoil/diesel, gasoline, LPG and jet fuel will drive demand growth this year.

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MACROECONOMICS

Is it time to worry about the US economy?

The latest figures for US retail sales and industrial production disappointed significantly relative to expectations. It does not seem plausible, however, that the US economy is slowing sharply, given how other key data (such as job growth and wage gains) have trended lately. Meanwhile, US consumer inflation was benign in January. In China, trade data for January were better-than-expected, but the producer price index disappointed. Japanese GDP growth for the fourth quarter was solid, while the euro area remained sluggish.

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GLOBAL NGLS

Propane stocks resume weekly draws

US propane/propylene stocks declined by 3.6 million barrels to 54.6 million barrels during the week ended February 15, after an atypical build in the week prior, according to EIA data. Total stocks are 11.5 million barrels above year-ago levels, though the surplus to last year declined by 1.0 million barrels week-over-week. Inventories fell across all regions, while PADD 2 and PADD 3 accounted for the largest declines, drawing 1.8 million barrels and 1.7 million barrels, respectively. Draws were supported by higher domestic demand, which rose by about 674,000 b/d week-over-week to 2.0 million b/d, whereas imports were mostly flat from the week prior, rising just 2,000 b/d to 185,000 b/d. EIA reported exports for the week ended February 15 fell 161,000 b/d from the previous week to 687,000 b/d, and Platts Analytics estimates exports for the current week, through February 22, are averaging 812,000 b/d. Production continues to maintain its 2019 trend, averaging close to 2.1 million b/d, after last week saw an upward revision reaching nearly in line with record highs touched in the last week of 2018. Front-month non-LST propane gained 6.875 cents/gal, or 11%, ending the week at 71.38 cents/gal.

GLOBAL BIOFUELS

In the US, the spread between gasoline and ethanol prices widens

The EPA is likely to propose a rule allowing year-round E15 before the end of this month. Time is needed to allow the rule to be in place before the summer. In Chicago, gasoline was 24¢/gal more than ethanol last Friday, compared to 13¢/gal on the previous Friday. This was the largest spread since last November. Total ethanol production in Center-South Brazil between April 1 and January 31 surged 19.6% on the year to 30.3 billion liters.

US ethanol production sinks again

One week after rebounding from a 14-month low, US ethanol production sunk again, falling by 33 MB/D to 996 MB/D. Output in the Midwest decreased by 23 MB/D to 936 MB/D, while production elsewhere dropped by 10 MB/D to five-year low 60 MB/D. Stocks increased for the first time in three weeks, rising by 447 thousand barrels to 23.9 million barrels. Total inventories are up 1.2 million barrels year-on-year. Ethanol-blended gasoline production increased by 155 MB/D to 8,793 MB/D, following a 186 MB/D decline in the preceding week.

AGRICULTURAL COMMODITIES

2019 USDA Outlook Forum

soybean acreage is expected to decline by 4.2 million acres. It would be easy to “pick at” USDA supply and demand estimates line by line when compared to our previously published estimates, but it’s only February and a lot can obviously change in a relatively short period of time. Briefly the highlights included low trend line yields in an attempt to “help” the balance sheets, aggressive corn ethanol and export demand, along with reasonable expectations for soybean demand although acreage and yield will play a big role in the bean carry out given what we expect to be “capped” demand in exports and crush. Year-over-year comparisons show a 230% increase in corn demand when measured against the increase in supply while soybean demand is 260% of the same increase in supply. Historical regression studies discussed previously average a roughly 85% correlation for both corn and soybeans.

NORTH AMERICAN NATURAL GAS

US Gas Short-Term Forecast

Platts Analytics has raised its price outlook for summer 2019. Slowing production gains paired with LNG ramp in the second half of the year are the impetus for the increase. MTD US gas production is down 0.4 Bcf/d from the January average, as February has been riddled with maintenance events and outages. Reductions in well completions and new operator guidance point to a slowdown in production growth rates in the Northeast this year. February power burns have come in much stronger than expected, as lower cash prices have helped gas to take incremental market share of thermal loads.

North AmericanGas Reginal Short-Term Forecast

Westcoast’s updated outage plan for the coming summer will cut capacity at Sumas by 0.3-0.4 Bcf/d, likely driving price premiums at Western price hubs, including Sumas, Malin, PG&E Citygate, and Opal. Platts Analytics substantially lowered its outlook for Northeast production this month, bringing down the summer 2019 average by approximately 1.1 Bcf/d in light of muted production growth guidance from major Northeast producers, on top of ongoing conservative rig deployments and well completions. After stalling through the fourth quarter of 2018, Haynesville production has begun to rise again, reaching new daily highs above 11.1 Bcf/d over the past month.

US Gas Weekly Report

Henry Hub cash prices remain soft, averaging below $2.65/MMBtu for the week-ended February 21. For the month, prices have not faired any better, averaging ~$2.64/MMBtu — a decrease of roughly 14% month-on-month. Lower cash prices have helped drive very robust weather-adjusted power burns, with burns up ~0.8 Bcf/d month-on-month, despite a ~7.0% increase in temperatures. Looking ahead, burns will remain robust as current market forwards continue to favor gas dispatch at the expense of coal. There are increases from all contributors to US supply this week, resulting in an additional 1.4 Bcf/d of supply week-on-week. Onshore production is up ~0.7 Bcf/d; gains are mostly out of the Northeast and Texas where production is up a quarter of a Bcf/d week-on-week each. Destin appears to have returned to full service, lifting offshore production 0.2 Bcf/d to 3.2 Bcf/d. Net imports from Canada contributed an additional 0.3 Bcf/d to US supplies week-on-week. And finally, in the Northeast, LNG sendout increased by 0.1 Bcf/d with most of the increase from Northeast Gateway.

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EUROPEAN NATURAL GAS

European Gas Analytics Weekly

Oil prices, stirred by supply cuts, recovered above $65/b but NWE gas prices having become relatively de-linked to oil are unlikely to be supported structurally. Other commodities have remained stable last week (carbon, coal), or decreased further (JKM). Increasing temperatures and a very strong supply increase from LNG and, to a lesser extent, NCS (somewhat mitigated by a decrease in Russian and Dutch supply), left NWE markets with seasonally low withdrawal rates, pushing UGS stocks to 7.7bcm above GY-17 (continental NWE). LNG deliveries to the UK did not translate into additional sendouts given the current balance situation and went into storage. BBL flows to the UK fell off l on low NBP-TTF spreads, with MRS withdrawals providing flexibility. As TTF continued to fall, PEG and NBP fell faster as the former saw continued strong withdrawals and high LNG deliveries despite a shrinking demand and the latter had an even stronger decrease in LDZ and power demand that required drove NBP-TTF below BBL SRMC. The absence of LNG facilities in Germany leave NCG and GPL at significant but stable premiums to TTF and these are expected to be maintained into March.

NORTH AMERICAN ELECTRICITY

Renewables additions soften, but continue to lead in the power capacity mix

Renewables still accounts for the largest component of power capacity additions, based on provisional 2018 data, a continuation of the trend in recent years. However, what has changed is that growth in both solar and wind additions have softened, following changes to the supporting mechanisms in key countries, notably China. A rebound in solar installations emerged in the fourth quarter, especially in the US, but it will take another year or so for global installations to move back toward the 100 GW+ seen in 2017.

China brought online a large amount of new coal plant capacity – 38 GW in 2018 alone – with a handful of GW also added in India and other Asian countries. However, this capacity was the lowest amount of coal commissioned in at least a decade, with more coal projects reported to be deferred. Gas capacity additions lagged behind, as 35 GW started generating across the globe, with the US accounting for about half of this amount and another 20% in the Middle East/North Africa. The appetite to invest in large scale gas-fired units has been fairly limited in other regions, especially in Europe and Russia. Although nuclear capacity connected to the grid rebounded in 2018, nuclear additions remain marginal in terms of total incremental capacity. The report below summarizes the key takeaways from the recently updated S&P Global Global World Electric Power Plants database, together with the latest statistical releases of capacity changes for the major power markets.

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GLOBAL LNG

Global LNG Monthly Forecast

Despite an expanding buyer base in Asia that now includes the top four buyers in the world from 11 countries from five a decade ago, Asia’s ability to balance markets when gas demand is weak, whether on a seasonal or other basis such as a brighter nuclear generation picture, is severely constrained, no matter what the price. With JKM spot prices in Asia now firmly entrenched below contract prices, flexibility in contracts will be tested and spot buying could pick up and keep a floor on JKM prices this summer. If not, relative netbacks to the USG could be under threat.

Declining Indonesian production and growing demand is easily overlooked in the current weak market, but will be felt in the years ahead

Recent issues at the 42-year old Bontang LNG facility are highlighting longstanding concerns with regard to Indonesia. These issues are part of an important theme that we have been consistently highlighting: a lot of exciting new projects are building global supply, but significant legacy production is also at risk. Indonesia is facing a long uphill battle just to maintain exports. Net exports are down by 43% over the 30-days versus a year ago – a loss of nearly 30-Mcm/d. There is perhaps an economic element (low JKM prices) to the turndown, as the country has significant spot exposure, however not enough to explain production weakness over the last several years.

EUROPEAN ELECTRICITY

Interconnector flows emerging as another bearish element for NWE prices

The impact of sliding gas prices is not limited to coal-to-gas switching but, combined with mild weather, extends also to interconnector flows. Those in NW Europe are particularly impacted. French exports across its various borders are nearly maximized, forcing France to cap its imports from Germany. High Dutch exports to Belgium and the UK prevent German imports from going much higher as gas and high-efficiency coal generation would be difficult to displace by German gas/coal plants. Belgium increasingly acts as a transit country but again, high exports to the UK limit French and Dutch imports. With such bottlenecks in NW Europe, downside risk for prices extend across all of Western Europe as the seasonal increase in German solar output, if exported, might have only Eastern Europe and potentially the Nordic area available to absorb it.

GLOBAL COAL

Pacific continues slide; even with end-week CIF ARA rebound, price action subdued

CIF ARA spot prices fell to a nearly 2-year low earlier this week below $70/mt, before rebounding alongside the European energy complex later in the week. In total, CIF ARA spot prices ended the week up less than 2% and the forward curve generally moved in sympathy with spot prices. Data show that South African exports to Europe increased month-on-month in December, a warning sign that as the Pacific Basin slows, swing suppliers will look to place tonnage in the Atlantic Basin and we believe that CIF ARA prices will be under further downward pressure. FOB Newcastle 6,300 kcal/kg GAR physical prices dropped by 6.5% week-on-week and the forward curve over the next year also declining by roughly 1.5% week-on-week. With Chinese and Indian stockpiles simultaneously hitting more than 2-year highs recently, pressure is growing on seaborne exporters to throttle back supply.