GLOBAL OIL

Asia-Pacific Oil Market Forecast

Global oil demand is expected to grow by 1.5 MMB/D in 2019, before rising to 1.7 MMB/D in 2020. Asia, despite moderating, will account on average for more than half of the global growth over the next two years. East of Suez had added substantial CDU capacity to meet growing demand, and its rising prominence as a refining region is reflected by its share of global CDU capacity, which is expected to rise from 41% in 2010 to 46% in 2019. Mideast cracking-to-CDU ratios have improved over the past few years, but Mideast refineries are still less complex compared to Asia. The Middle East is expected to become a minor net exporter of gasoline in 2019, and regional net diesel exports are expected to rise further. In fact, Mideast net exports of key products, such as gasoline, kero/jet and gasoil/diesel, are expected to surpass Asian volumes for the first time in 2019. East of Suez refiners will have to battle for product export outlets as supply surges in the region. Overall, Asian refining margins are facing challenges at times and will recover only gradually during 1H19, but there are brighter prospects ahead as IMO 2020 comes to the rescue, with margins improving from $3/Bbl this year to above $7/Bbl in 2020.

China Oil Market Forecast

China’s crude runs rose by around 340 MB/D year-on-year to a record high of 12.8 MMB/D in January. NOCs increased their processing volumes by 320 MB/D year-on-year during the month despite high domestic inventories and seasonally weaker end-user demand from exporting more products abroad. Meanwhile, higher NOC outages between March and June will challenge further runs growth in 1H, especially with delays to the start-up of new refineries. More and lengthier turnarounds may also occur at the independent refineries due to tighter regulations. As such, China’s crude runs growth could increase by just 267 MB/D in 1H and 474 MB/D for the full year. We expect crude processing volumes to rise by 446 MB/D in 2020 due to higher demand from the bunker sector and the ramp of new mega refineries. China’s crude imports surged 1.83 MMB/D year-on-year to 10.3 MMB/D in February – the fourth straight month inflows rose above the 10 million b/d mark due to strong demand from independent refineries’ higher storage activity. Higher crude appetite from these private players continues to underpin strong inflows from Russia and Brazil. Imports from the latter were up 284 MB/D to a record high of 892 MB/D during the month, a growth trend we expect to persist.

DOE Weekly Analysis

The unpredictable EIA crude supply adjustment factor added another major distortion this week. For the week ending February 2, it was a negligible -4, then jumped to a + 701 the following week. For the latest week ending March 8 it reverted to a negative 731, more than erasing the prior week’s gain. For the coming week we are using a factor of + 350 MB/D. This certainly contributed to a surprising around 3.9 MMB crude stock draw. Field production was also marked down by 100 MB/D likely due to some field maintenance, to 12 MMB/D. Production moves back to 12.1 MMB/D for the coming week. Crude imports were lower than expected at 6.75 MMB/D, largely due to fog. Exports fell to 2.55 MMB/D. For the next week imports are anticipated to increase to 7.15 MMB/D, as exports rise to 2.75 MMB/D. Cushing storage fell by 0.7 MMB, driven by a large decrease in net flows. For next week flows are expected to increase resulting in a 0.8 MMB build. Overall crude stocks are expected to build by 4.4 MMB for next week, given rising field production and exports. Gasoline stocks have now dropped for four consecutive weeks, with the latest week contributing 4.6 MMB to the drop, the largest decline of the past few months. For the next week we are looking for a more modest nearly 1 MMB decline. Distillate inventory saw a modest increase. A more substantial 3.5 MMB drop is expected for the next week.

Hangs in the balances – Demand easing, product stocks bottoming in Japan

Aggregate demand rose 22 MB/D, but the four-week average lost another 79 MB/D. Seasonal demand is now easing and finished product stocks are in the process of bottoming. Finished product stocks built slightly this past week with a sizeable build in jet and smaller builds in gasoil and gasoline. Finished products are near seasonal means and should support the continuing recovery in refinery margins. Gasoline cracks have improved notably. Crude stocks drew 1.4 MMBbls and remain contained. The implied marketing margin eased again, with gasoline remaining above its statistical high, but gasoil/diesel below.

Is there enough Permian oil and gas takeaway capacity in 2019?

Based on recent 2019 guidance, most Permian operators are planning a reduced drilling program, but are still expecting to grow crude production at a substantial rate (+25% year-on-year). Oil takeaway capacity constraints are relieved in 2H with the start-up of nearly 1.2 MMB/D of pipeline capacity. However, handling the associated natural gas is a potential issue, as gas takeaway in the Permian stays constrained until the Gulf Express pipeline (~2.0 BCF/D) is brought online in October 2019. Fortunately, the issue is temporary (< 6 months) and regulations allow for up to 6 months of flaring. Gas flaring required to avoid oil curtailment would take place between May and September, with a maximum volume of around 600 MMCF/D of gross gas. The risk of flaring extending beyond September is unlikely since the key oil and gas pipelines are being built and remain on schedule. We forecast robust oil and dry gas Permian production growth in 2019: 4,270 MB/D average (+850 MB/D Y/Y) and 9.7 BCF/D average (+1.7 BCF/D Y/Y).

March weather: US is colder than normal, Europe and Japan warmer

March is forecast to be 3% warmer than normal for the three major OECD markets. In term of demand impact, March’s heating oil fuels’ demand is expected to be 290 MB/D weaker than last year and 150 MB/D below the 10-year average. From a seasonal perspective, so far 4Q18/1Q19 has been100 MB/D weaker than normal and 155 MB/D weaker than last winter (4Q17/1Q18).

The upcoming global bunker spec changes will challenge Mexican refining

The upcoming IMO 2020 global bunker spec change will pose additional challenges to Mexican refining. Mexico is a relatively large producer of high sulfur fuel oil (HSFO) even though output has declined over the last few years along with refinery runs. About half of the production is consumed internally while the surplus is exported. Come January 2020, outlets for high sulfur residuals will be more difficult to find and differentials for these products are expected to collapse, possibly to compete with burn for power generation. This is one potential home for the Mexican HSFO, both locally and internationally. Additionally, some HSFO might be placed in the USGC as a feedstock in complex refineries. Alternatively, Mexican refineries could increase runs of light-sweet crude to limit HSFO production but that requires the country to import those grades since local production is very limited.

Monetary policy and its impact on oil prices

After a key dovish announcement made by Jerome Powell, Chair of the Federal Reserve, in early January, monetary policy has again taken center stage as the essential policy tool affecting the US and world economies in the coming months. Equity markets have been in celebratory mode, with the S&P500 gaining 10% since Dec 31st and the Shanghai Comp. 24% over the same period, after the large drops in Q4. Although there are numerous pathways through which changes in monetary policy affect the macro-economy, we reckon that the full impact takes about 18 months to be realized. Now that the Federal Reserve has stated it would be more accommodative to the economy’s needs and made it crystal clear it will sustain US economic growth in 2019, the necessary macroeconomic groundwork for higher oil prices appears to have being laid.

MACROECONOMICS

Stagnant February US jobs data not all that worrisome; ECB’s surprise policy easing

US payrolls were essentially stagnant in February, but this followed stronger-than-expected readings in the past two months. The underlying picture of the US labor market, in all likelihood, is still bright. Data on job and wage growth by industry suggested a slack in the labor market. The European Central Bank unexpectedly eased monetary policy, as it downgraded its forecast for 2019 European economic growth. Chinese trade data for February pointed to continuing weakness.

Credit conditions remain constructive

The S&P 500 recovered back above the 2,800 level and gained almost 3% for the week. Credit metrics performed well, while implied inflation also rose noticeably. Commodities rose 1.39%, with energy gaining 1.28% and ags adding nearly 2%. The dollar was lower by 0.75%. The leveraged loan indicators continue to show lessening stress, while the St Louis financial stress indicator was little changed after several straight weeks of lessening stress.

GLOBAL NGLS

US propane stock decline but remain above five-year average

US propane/propylene stocks declined by 1.2 million barrels to 50.2 million barrels during the week ended March 8, according to EIA data. After narrowing in the last two consecutive weeks, the supply surplus to year-ago levels widened this past week by just under 1.1 million barrels, to 11.3 million barrels. Declines were mostly accounted for in PADD 1 and PADD 2, which saw inventories fall by 788,000 barrels and 1.3 million barrels, respectively. PADD 4 and 5 inventories also experienced a drop of 265,000 barrels from the week prior. A large portion of declines across all other PADDs was offset by an increase of 1.2 million barrels in PADD 3 inventories. Total domestic demand was down 327,000 b/d week-over-week to about 1.3 million b/d, although temperatures were well-below-normal in both PADD 1 and PADD 2, likely contributing to elevated draws between the two regions. Population-weighted temperatures averaged 10 degrees and 15 degrees Fahrenheit below-normal in the Northeast and Midcon Markets through March 8, respectively. Imports were just 5,000 b/d lower week-over-week, averaging 42,000 b/d. EIA reported exports were up an average 198,000 b/d from the previous week to 1.0 million b/d. Platts Analytics estimates exports for the current week, through March 12, are averaging lower at 661,000 b/d. Front-month non-LST propane gained 1.25 cents/gal, or 2%, ending the week at 67.75 cents/gal.

GLOBAL BIOFUELS

Near-record inventories drive down ethanol prices in the US

US ethanol inventories soared to the second highest level ever reported, driving down domestic ethanol prices. The industry is awaiting the EPA’s proposed rule on E15 and RIN reform, which was submitted to the White House Office of Management and Budget (OMB) for review on March 4. In 2018, the US manufactured 16.1 billion gallons of ethanol, over 1.7 billion of which was exported to 40+ countries. Hydrous ethanol prices in Brazil's key Center-South region rose last week despite decreased trading activity. Over two-thirds of the 132.5 million liters of ethanol shipped from Brazil in February went to the US.

US ethanol stocks fall from near-record high

US ethanol inventories declined sharply last week, falling by 530 thousand barrels to 23.7 million barrels. Over the course of one week, stocks went from being up 1.1 million barrels year-on-year to being down 0.6 million barrels year-on-year. Domestic ethanol production dropped by 19 MB/D to 1,005 MB/D. Ethanol-blended gasoline production rose for the second consecutive week, increasing by 263 MB/D to 9,126 MB/D.

POLITICAL RISK

Venezuelan political uncertainty creates a wide range of oil production scenarios

Our Reference Case assumes President Maduro retains power, sanctions stay intact, and additional restrictions on PDVSA go into effect as planned in the months ahead. We forecast crude output to fall from 1.25 MMB/D in 4Q18 to 825 MB/D in 4Q19, and 750 MB/D in 2020. Our High Case assumes a near-term transition to an internationally-recognized government and new elections, which would be the best scenario for oil production. The removal of US sanctions on Venezuelan oil trade flows would restore 4Q18 production of 1.25 MMB/D by October. Subsequently, unblocked assets and financial assistance could allow equipment maintenance and payments to service providers, and experienced PDVSA technicians and management may return. This case sees crude output reaching 1.7 MMB/D in 4Q20.

AGRICULTURAL COMMODITIES

Opening Print

The only highlight of the export week was soybean sales. Of the 1.9M MT sold, 1.7 was bought by China which is great but 1.6M MT of that total had been previously released through overnight sales reports during the week ending March 7th. 200K above the Chinese buys just isn’t going to get the job done in our opinion, and neither are those wheat and corn sales from last week.

NORTH AMERICAN NATURAL GAS

4Q18 US Producer Survey: Production growth looking to slow after historic 2018

After a strong Q3 where production averaged 82.1 Bcf/d, Q4 showcased another solid quarter, averaging 85.2 Bcf/d through the end of the year. Quarter-over-quarter, the major plays driving gas production growth were Appalachia, the Haynesville and the Permian, which averaged 2.1 Bcf/d, 0.7 Bcf/d, and 0.4 Bcf/d of growth respectively over that period. Although 2018 ended as a historic year for US natural gas production, this quarter’s production growth is turning out to be more lackluster than the previous one, as total US production has averaged 85.8 Bcf/d YTD, flat to 4Q2018’s average. Flat quarter-over-quarter production can be tied to freeze-offs, along with a 4Q slowdown in completions across key basins such as Appalachia. More modest completions could be a sign of things to come, as signs from many top operators are pointing towards a more conservative growth outlook across the board. Among top producers, CAPEX for drilling and completions is being cut year-on-year as they look to weigh free cash flow over production growth.

March 2019 recalibration changes

As part of S&P Global Platts Analytics’ monthly recalibration process, estimates for historic natural gas supply and demand have been changed. US power burn demand was revised up an average of 874 MMcf/d since December 2018, due to the addition of twelve new points to the Northeast flow sample. Also, since January 2018, US production was revised up an average 513 MMcf/d, and US res/comm demand was revised up an average of 249 MMcf/d. The largest regional change in production was in the Southeast, where onshore production was revised up by 289 MMcf/d since June 2018. Production and res/comm changes in the Rockies are Southwest are due to a change in the reporting of data from the San Juan basin. To more closely match the benchmarks, West Canada production and demand have been revised up by 423 MMcf/d and 308 MMcf/d, respectively, since January 2018. Finally, US industrial demand was revised down by an average of 331 MMcf/d since March 2018.

EUROPEAN NATURAL GAS

Robust NCG premium drives NCS flows to Germany despite lack of bookings

The most significant price anchors for NWE gas (JKM, carbon and coal) were all bearish this week, although carbon could benefit from a boost in the next few days if a no deal Brexit is confirmed to be off the table. The power market could as well boost gas demand as wind is forecast to drop next week, as gas becomes increasingly competitive against coal on the Continent. Slightly colder temperatures triggered an increase in demand, but this failed to curb storage injections on the Continent. Dutch production responded (through Norg withdrawals), whilst in the UK, high wind generation put pressure on CCGT demand, which compensated for the change in LDZ demand. Storage withdrawals were seen in the UK as NCS and UKCS turned down on maintenance and technical issues respectively. These withdrawals are unlikely to be sufficient to bring MRS stocks to levels that would allow NBP to face lower demand levels without a severe price impact. Europe as a whole benefits from high LNG flows and the gas surplus finds ways to flow to the markets not connected to LNG (NCG, GPL, CEGH). The ramp-up in sendouts has recently widened the spreads between these non-LNG hubs and TTF, but higher spreads should in turn mean that more of the gas that typically transits through Germany and Austria, stays in (or is re-exported to) these markets.

GLOBAL LNG

Global LNG Five-Year Forecast

The unpredictable nature of utilization rates at old vs. new LNG plants will inject a large degree of uncertainty to the supply side of the balance. Declining production rates in older fields are offsetting some of the growth from new trains, yet rates are inconsistent and difficult to forecast. The extent to which European markets can absorb and efficiently disperse LNG flows will play a key role in global LNG balancing over the Five-Year period. In Asia beyond China, a slowdown in new nuclear capacity could support LNG. In the Five-Year outlook, we will see a firm disconnect between JKM and oil as crude oil prices (and thus oil indexed contracts in Asia) are buoyed by International Maritime organization (IMO) restrictions on sulphur content in bunker fuel. JKM prices bottom out in 2020 as more and more new volumes are pumped into the market.

Global storage stocks are encouraging ever tightening global spreads

With high storage stocks in Europe and Asia and low storage in the US, the global market is left with a situation for further potential tightening of global price spreads – particularly if mother nature doesn’t come through with a hot cooling season. JKM’s premium to Henry Hub has already dropped by more than $6.50/MMBtu since late September, thanks in large part to unsupportive weather in East Asia and Europe.

EUROPEAN ELECTRICITY

Bearish hydro outlook supportive of prices and volatility in the summer

Warmer than normal weather and subdued precipitation have turned the poor hydro performance of Jan and Feb into a serious deterioration month-to-date across France, Italy and Spain. In France, low hydro output appears to bring also lower downward flexibility, as a floor just below 4GW, touched over both weekends this month, historically applied also during all 2Q. With renewable capacity on the rise, this limit is expected to be hit with increased frequency and, together with low hydro output overall, supports volatile prices in the summer both on the positive and (potentially) negative side of the spectrum.

GLOBAL COAL

Prices slide across the board this week as CIF ARA drop on lower gas

Physical CIF ARA spot prices fell by more than 5% last week, resuming the downward trend of the last couple of months. Another fall in European gas prices was the major factor behind last week’s drop in CIF ARA prices, as low gas prices are displacing coal burn. Weak demand in Northeast Asia on mild weather, and uncertainty over China’s import policy were strong factors pulling FOB Newcastle lower last week. We maintain that falling Chinese imports in 2019 will be a major factor putting downside pressure on seaborne coal prices in both the Pacific and Atlantic Basins.

SCENARIOS

EV Essentials

January 2019 light duty plug in electric vehicle sales saw double-digit year-on-year growth in China, EU, and the US, totaling 155,000 units sold. China, despite a 16% year-on-year retraction in their auto market, still experienced 137% year-on-year sales growth in light duty EVs. Year-on-year sales-weighted BEV purchase price reduction sunk to only 3% in Jan 2019 after an average year-on-year decline of 11% in 2018. Price stabilization is likely short lived as more ‘midrange’ PEVs are expected to hit the US market throughout 2019-2020, including the launch of the $35,000 Tesla Model 3.

POLICY & ENVIRONMENTAL

California carbon trades higher; renewed calls to reduce the bank

WCI carbon allowance prices have traded up significantly since the February auction, on heavy volumes. Benchmark contract (V-19 Dec 19) pricing has reached $16.60/metric ton. Interest in V-21s and “vintage-specific contracts” continues. Although annual balances are tightening, the bank continues to grow, constraining prices. However, in-state power generation emissions and transportation emissions are expected to rise year-on-year in 2019. Auction quantities are lower going forward, and CITSS registrations indicate new speculative players entering the market. CARB will need to act this year on recommendations to develop metrics to track the large allowance bank. It is possible pressure from the Legislature and an evaluation of the surplus could prompt a rulemaking to reduce the bank. This would lead to higher allowance prices in the near-to-medium term. Allowance prices moving to the hard price cap would essentially shift the burden to CARB to find emissions reductions (and could scare off potential linking partners).

With Brexit ever-looming, near-term EUA demand-side weakness overshadowing longer-term supply-side bullishness

Lower gas prices continue to help coal-gas switching, which will add downward pressure to EUAs through the upcoming summer, although the ongoing poor hydro situation in is increasing overall thermal requirements in some regions. Incremental purchases during the upcoming 2018 compliance period in April can also lift demand (although we currently expect that 2018 emissions were down 3% year-on-year). However, the generally bearish current demand-side picture is balanced by tight annual supply, leading to higher EUA prices after the summer. EUA price trajectories will also remain at risk to market shocks resulting from Brexit announcements. This week’s votes in the UK House of Commons provided no clarity as to whether the UK will be participating in the EU ETS this year. A No Deal Brexit, whereby the UK is not participating, remains the legal default and would be bearish for EUA prices. A more detailed assessment of 2018 emissions expectations will be released next week.

RGGI auction clears above secondary market on compliance purchases; auction sees no new participants despite upcoming VA/NJ program entrance

The March 2019 RGGI carbon allowance auction cleared at $5.27/short ton, down 1% from the December 2018 auction. While the clearing price was 2% above secondary market prices for prompt-month delivery, though it was also 1% below benchmark prices for Dec 2019 delivery. This was the first time in at least three years in which the auction clearing price was at a premium to the prompt-month contract and at a discount vs. the benchmark contract. This auction result follows secondary market prices that have moved considerably lower throughout 2019. Entities with compliance needs took 74% of the winnings, similar to the prior auction. However, this proportion appears driven by a strong performance from a subset of “investors that also have a compliance obligation”. All registered bidders in this auction had previously participated in RGGI auctions. On the policy front, Virginia continues to consider a 2020 starting cap of 28 MsT that is 5 MsT lower than its 2018 emissions. The Virginia Governor was forced to veto legislation that would forbid the state from joining RGGI, highlighting the risk of using agency regulations to join the program. We still expect Virginia and New Jersey (with an 18 MsT cap) to join RGGI in 2020.

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