Latin American Refined Product Demand Set to Grow in 2018

 

Latin American refined product demand is set to grow in 2018, boosted by GDP growth of 2.5%. In 2Q18, S&P Global Platts Analytics expects gasoline demand to average at 2720 MB/D, 30 MB/D higher year-over-year. Mexican gasoline sales in January were 15 MB/D higher year-over-year, the first gain in 12 months. Latin American diesel demand is also forecast to improve. 2Q18 regional diesel demand is projected at 2745 MB/D, around 40 MB/D higher year-over-year. Brazilian diesel demand is rising, 2Q18 consumption is expected 30 MB/D higher year-over-year. On the supply side, Latin American runs remain under pressure. We expect 2Q18 utilization in the mid-50s % with runs 385 MB/D lower year-over-year. Ciudad Madero & Minatitlan refineries are now expected to restart in March and shall provide some relief to Mexican product output as they ramp up in 2Q18. Brazilian January runs were a weak 1530 MB/D, 100 MB/D lower year-over-year, 2Q18 crude runs are expected to reach 1640 MB/D, 35 MB/D lower year-over-year. As a result of mediocre refined product output, gasoline and diesel imports are set to stay robust. 2Q18 gasoline imports into Latin America expected 195 MB/D higher year-over-year while distillate imports are projected 200 MB/D higher year-over-year.

U.S. Labor Market Data Surprise Positively, but Tariff News is Potentially Negative

The U.S. labor market data for February contained many positives. The headline payroll figure was much better than expected, and accelerating job growth was a sign of good health for the economy. The labor force participation rate rose markedly, and wage data were benign. Meanwhile, the U.S. trade deficit rose in January, continuing a recent trend. The U.S. decided to impose tariffs on steel and aluminum imports, but the decision is not likely to lead to meaningful changes in trade balances. There are concerns that this action will result in a chain of escalating trade confrontations.

RGGI Carbon Lower Going Into March Auction

RGGI allowance prices climbed in January 2018, but have lost ground since. The March auction will likely clear closer to December, rather than the September high mark following the states' agreement on the post-2020 program. After a large decline in emissions last year, 2018 will see an increase, with 1Q up strongly YOY on the cold weather. There is little compliance pressure in the market. Platts Analytics’ outlook has initial RGGI pricing below the ECR triggers, though reduced auction quantities (and large non-compliance holdings) may lead to demand for the ECR supply. As an alternative scenario, Platts Analytics modeled the RGGI system for 2030 in the absence of national carbon prices and found very low RGGI pricing. Adding VA and NJ to the RGGI region raises expected allowance pricing.

U.S. Gas Weekly Report

The NYMEX April futures contract traded higher this week (+2%), with prices pushing through the 50-day moving average on Tuesday after failing to do so three times last week. The next area of resistance appears to be the 100-day moving average, set at ~$2.80/MMBtu. The April - October NYMEX strip has rallied up to $2.80/MMBtu from the recent February 12 low of $2.66/MMBtu. The move higher appears to be in response to cooling March forecasts and more moderate production growth. Yet, despite the higher pricing levels, strong year-on-year gains in summer power burns are expected.

NGL Production Increases with Appalachia Leading the Way

NGL production returned to over 4 million b/d last week with Appalachian production increasing 18 Mb/d. Year-on-year NGL production has increased nine percent. Propane stocks fell by 1.6 million barrels last week according to EIA data. Propane demand remains strong at 1.6 million b/d, and res/com propane demand will likely remain strong this week as another winter storm bears down on the Northeast. NGL prices rose last week with propane’s price increasing 0.5%. Last week, the EIA reported propane exports of 668,000 b/d. Platts Analytics expects propane exports to top one million b/d this week. Steam cracker feedstock margins declined across the board last week due to strength in feedstock prices coupled to soft olefin and aromatic prices.

RIN Values Tumble as the U.S. Reviews Biofuels Policy

President Trump’s meetings on biofuels policy resulted in no decisions but the administration is committed on lowering RIN values. The U.S. had record production and consumption in 2017. Ethanol’s manufacturing margins worsened the week ending March 2 due to lower product prices and higher corn cost, Brazil’s South- Central Region is in its inter-harvest period. The country remained a net importer in February.

Crude Tanker Markets Remain in Doldrums

Crude tanker markets got off to a poor start in 2018 as OPEC cuts and excess supply weighed on rates, with little relief in sight. In contrast, product tanker rates have been healthy as U.S. and European product exports remained strong despite an uptick in refinery maintenance.

A Modern Day Nero?

Over sixty years ago President Dwight D. Eisenhower uttered his well-known “farming looks mighty easy when your plow is a pencil, and you’re a thousand miles from the corn field” phrase to a farmer-heavy audience at Bradley University in Peoria, Illinois. While less publicized, Ike added “no farmer-no citizen-really believes in any theory of our nation divided into sealed compartments-so that a political promise made in one area is not supposed to be heard in another”. Political promises cannot truly be compartmentalized so while no farmer seeks ill-will upon those in the domestic aluminum and steel industries, or those trying to protect intellectual property, the current Washington rhetoric sounds a bit like violin strains to ears in the Midwest as planters begin to roll under a cloud of Chinese retaliation.

U.S. SPR: About Six Million Barrels to Hit the Market in April and May

On March 8, the DOE issued a Notice of Sale for $350 million of SPR sales in May 2018, with early deliveries also possible in April. The transaction was expected, as it was included in the budget bill passed by Congress in February 2018. Our balances already assumed ~6 MMBbl will be sold in the second quarter. The proceeds will go to upgrade SPR infrastructure, as originally authorized by the Bipartisan Budget Act of 2015 (which approved up to $2 billion of such sales from Fiscal 2017-2020). ~6.3 MMBbl of Fiscal 2017 sales already took place between February and early May 2017, and we anticipate ~6 MMBbl of additional sales in both Fiscal 2019 and Fiscal 2020. In addition, the current SPR balance indicates that around 300 MBbl of the 14 MMBbl of separate, Congressionally-mandated sales in October and November 2017 were not completed. We expect these barrels to be added to the sales in April and May. No further SPR sales are expected until fiscal 2019, which begins in October.

Storage Injections and the Summer/Winter Spread Do Not Line Up

Two pricing principles appear to be at odds with each other with injection season around the corner. Record low stock levels for this time of year are saying one thing about prices and the emerging summer/winter spreads for 2018 are saying something completely different on the Continent. The current summer/winter spreads are not wide enough to induce higher levels of gas injections from a financial standpoint and do not reflect the relatively low levels of storage currently in the ground. The question then becomes if and when the summer/winter spread will widen enough in order to incentivize higher than normal injections in 2018. If storage injections proceed at a normal rate (based on the 5-year average), end October storage will come in at more or less the bottom of the 5-year range.

Qatar Quietly Enters What Appears to be a Maintenance Cycle, Adding to Supply Woes

Qatar will always be a very key producer and price setter to global gas. During the tail end of this winter season, the turndown in Qatari production has been a great early sign of weakening Chinese demand – which makes perfect sense. Qatar is both a big spot seller and very far from China, so in the case of lower demand, you’d guess that Qatar is a bit hamstrung when it comes to Chinese sales due to the extra voyage costs associated with their supplies. Either way, ramping down in late February/early March is not unprecedented for Qatar and closely mirrors their 2016 trajectory. However, when we overlay this on both planned and unplanned maintenance, underway and expected to start soon, we can easily understand how there has been consistent upward pressure on shoulder month pricing.

U.S. Commercial Stocks Little Changed

Overall commercial oil inventories were flat last week as a moderate crude stock build of 2.4 million barrels was offset by a product stock decline. Adjusted demand growth was strong at 5.6%, or 1.1 MMB/D, over the last four weeks, and it should slow from here. Both gasoline and distillate stocks drew modestly (0.8 to 0.6 million barrels) last week and gasoline inventories are now above year ago levels for the first time this year. This week’s data are forecast to show a slight gasoline stock decline of just 50 MB/D while distillate draws 370 MB/D; the demand for both products (and jet fuel) were negatively impacted by the harsh weather conditions. Crude inventories build again next but at a modest rate of 330 MB/D while Cushing crude stocks continue to show a decline (-0.45 million barrels), although the turn to Cushing crude stock builds is quickly coming this will be after stock declines of 37 million barrels during 17 of the last 18 weeks.

Financial Stressed Remain Contained

Cross currents continue, but the week was generally positive. The S&P 500 rebounded 3.5% on the week, while VIX volatility eased 26%. Overall commodities fell slightly, but the energy index had a positive week. Credit metrics were generally better. The dollar was modestly higher. The St. Louis financial stress indicator blipped marginally higher.

Ethanol Stocks Built in Every region the week ending March 2

Ethanol inventories built in every region last week, rising by a total of 165 thousand barrels to 23.1 million barrels. Midwest stocks are at the second-highest level ever reported. Domestic ethanol production continued its saw-toothed pattern, rising 13 MB/D to 1,057 MB/D after falling in the preceding week. Ethanol-blended gasoline output jumped to 8,874 MB/D from 8,701 MB/D as overall gasoline production increased.

Rally in Carbon Prices Poses Bullish Risk for German 2Q Prices

With the carbon price closing above €11.1/MT on Friday, the rally that has started at the beginning of the year has also continued this week, lifting the back of the curve for most of the European markets. Although we’re bullish across the curve, the near-term contracts offer some clear upsides, particularly for Germany. In fact, the May baseload clean dark spread (CDS) for 45% efficient coal plants, as well as the 2Q contract, is so compressed to the point that it has moved into negative territory, an outcome that has never occurred in prior years (see chart opposite). While the CDS for the April contract is still positive, the level is below the estimated margin needed to cover running costs associated to fuel transportation and maintenance.

Coal Prices Correct, Atlantic/Pacific Spread Narrows

Coal pricing moved largely as Platts Analytics expected last week, with FOB Newcastle forward prices continuing to correct lower, while front end CIF ARA forwards largely climbed higher. We had previously identified that the Pacific Basin market was overvalued as Chinese import demand will be declining. At the same time, we believed that CIF ARA prices were oversold, as a price below $80/mt would cut off virtually all of U.S. supply into Europe, and the arbitrage window of Atlantic Basin supply into the Pacific was too wide. The potential upside for CIF ARA is limited as European coal demand will again decline significantly in 2018 and 2019 as more coal-fired generating capacity is retired and renewables continue to penetrate the electricity mix in Europe.

Japan Products Stocks Increase from Record Lows, Crude Imports Rebounded

Runs increased marginally, but crude imports increased significantly causing a 1.46 MMBbls crude stock build. Product stocks built modestly for the first time in weeks after drawing to record lows and spending all of 2018 below 4-year minimums. Balances remain constructive to cracks. Kerosene demand was again disappointingly lower by 60 MB/D and with higher yield and higher refinery output of 66 MB/D. As such, stocks built 78 MB/D and reduced the deficit to last year to only 0.34 MMBbls. The implied refining margin improved on the week by $0.15/Bbl and looks very acceptable. Low product stocks are providing support. Retail prices were little changed. The indicative marketing margin remains very strong and above statistical highs. The overall downstream value chain looks pretty healthy.

Global Equity Markets Rebound Strongly

Global equities rebounded on the week by about 2.5%. In the U.S., the S&P 500 gained about 3.5%, with industrials (+4.4%), housing (+4.3%), technology (+4.2%), and materials (4.1%), all outperforming. Energy was higher by 2.2%. Internationally, all the tracking indices posted gains, with China doing the best, higher by 4.1%.

Steel Tariffs to Increase Cost of U.S. Shale Drilling

We estimate that the recently announced 25% tariffs on imports of steel would marginally increase the cost of drilling U.S. shale wells by about 3%. Steel is widely used in oil and gas drilling and production from tubulars (drill pipe, casing and tubing) to more manufactured equipment such as wellheads, processing facilities and artificial lift equipment. The tariffs will impact primarily tubulars since steel is a small percentage of the more manufactured equipment. As a result of the tariffs, tubulars, which constitute about 10% of a completed well cost, will increase by about 25% resulting in a 3% increase in the cost of an average shale well. This translates into $1/Bbl increase in average well breakevens from the current $41/Bbl to $42/Bbl WTI. With WTI prices in the low $60s/Bbl, economics of shale oil drilling would still remain very attractive.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.