Latin American refinery crude runs to remain subdued in 2019, keeping healthy product import flows into the region

After another year of numerous refinery outages, 2018 Latin American refinery crude runs are expected to average 4230 MB/D, 470 MB/D lower year-over-year. Very little improvement is expected for 2019.

For 2018, we expect Mexican runs to average 630 MB/D, 140 MB/D lower year-over-year and expect only a slight improvement to 670 MB/D in 2019. Also, 2018 Brazilian crude runs are projected at 1660 MB/D, 15 MB/D lower year-over-year with 2019 runs forecast at 1780, 120 MB/D higher year-over-year. On the demand side, we project 2018 L. American gasoline demand (incl. ethanol) at 2680 MB/D, 45 MB/D lower year-over-year, set to barely improve to 2690 MB/D in 2019. Mexican gasoline demand is set to average 795 MB/D in 2018, flat year-over-year and is expected to be about 10 MB/D lower in 2019. By contrast, Brazilian gasoline/ethanol demand is projected 20 MBGE/D stronger year-over-year in 2019. Latin American distillate demand (including biodiesel) in 2018 is projected be 35 MB/D lower year-over-year and expected to be modestly lower year-over-year in 2019 at around 2740 MB/D.

Finally, with the expectation of relatively low refinery crude runs/product output in the region, imports are set to remain strong next year: gasoline imports are forecast to average 1360 MB/D, 110 MB/D higher year-over-year. Likewise, 2019 diesel imports are forecast at 1315 MB/D, 30 MB/D higher year-over-year.

U.S. stock levels stay flat in spite of crude build

The commercial stocks were almost flat (-0.22 MMB) yet crude stocks built significantly (+4.9 MMB), while products stocks drew (-5.1 MMB), as anticipated. For this week we forecast an even larger crude stock build (+6.2 MMB), as crude field production continues its relentless growth to an all-time-high of 11.8 MMB/D, SPR releases pick up speed (0.26 MMB/D), and crude imports bounce back to 7.9 MMB/D. At the same time, crude exports pick up only slightly to 2.2 MMB/D. Refinery runs were finally up significantly to 16.86 MMB/D as maintenance season is drawing to a close. Since an additional 400-600 MB/D in CDU capacity is supposed to come back on line by Nov 23rd, we forecast runs to increase by 0.29 MMB/D to 17.15 MMB/D. Distillate stocks were surprisingly flat last week as exports were lower than anticipated. For this week, we expect distillate stocks to build on the back of increasing distillate production and seasonally weakening demand. Gasoline inventory fell by 1.3 MMB, a slightly slower pace than we had anticipated, as demand was reported at a rather weak 9.2 MMB/D. This week, despite increase refining production and imports, gasoline stocks should continue to draw (-0.92 MMB) as exports remain well above 1.0 MMB/D and demand picks up slightly (to 9.25 MMB/D). Cushing stocks drew by 0.1 MMB last week, and this was the first time after eight straight weeks of builds. Flows into Cushing are now expected to decrease, and refinery runs to slightly increase. Therefore, we expect Cushing to draw again this week by 0.3 MMB.

In Japan, demand still impaired, product length continues to build, runs too high

Crude runs moved still higher by 164 MB/D as restarts out of maintenance continue. Crude imports fell sharply, such that crude stocks drew 5.3 MMBbls. Finished product stocks built another 2.64 MMBbls, as the seasonal increase in demand is lagging the run increase. All the major product stocks posted builds, with only naphtha showing some degree of restraint. Product stock length continues to grow and is keeping refinery margins weak. Cracks remain bi-modal with fuel oil and middle distillates strong, while gasoline and naphtha are abysmally weak. Implied marketing margins remain very strong, particularly gasoline.

California wildfires removing around 30 MB/D of demand for the next four weeks

Platts Analytics estimates that demand losses are 20-30 MB/D for gasoline and 5-10 MB/D for distillate. The low estimate is based on the 440,000 people who have been evacuated and the population adjacent to the areas directly affected by fires, while the higher estimate is based on a broader indirect regional impact. In fact, economic activity outside the fire zone has clearly been impacted, since even some distant schools have been closed. Meanwhile, jet fuel losses are seen as minimal, with LAX and SFO airport hubs remaining largely unaffected. Losses will persist for a few weeks and then decline exponentially as economic activity recovers quickly.

Will 2019 be a darker year for China’s independent refineries?

2018 has been a dismal year for China’s independent refineries on the back of fading government support, weakening margins, worsening economic fundamentals and incoming pressure from integrated refining complexes. This will set the tone for a bleaker outlook of independents’ crude imports in 1Q19 and fuel reshuffling of the refining landscape in China.

China maintains record gasoline output despite plunging cracks

Despite negative margins for exporting gasoline, Chinese NOCs have maintained record output as integrated chemicals profits and positive export jet netbacks have provided refineries with positive margins done at the expense of independents.

Global equities fall further

Global equities fell 2.3% on the week, with the U.S. S&P 500 losing 3.8%. In the U.S., the declines were broad based, but housing managed to post a gain of 0.9%. Technology was lower by 6.1% and energy fell 4.9%. Many of the sectors, other than consumer staples, are flashing red or yellow. Internationally, all the tracking indices lost ground. Japan fell the least at 1.2%, while Latin America was the worst performer and lost 4.6%.

Propane stocks fall by 2 million barrels

Front-month non-LST propane gained 1.125 cents/gal, or 2%, ending the week at 73.25 cents/gal. Propane has strengthened from 51% of crude last week to nearly 60% of crude since the stocks draw reported last week. US propane/propylene stocks fell by nearly 2 million barrels during the week ended November 16. Total stocks remain healthy for this time of year at 81.8 million barrels, 11% above year-ago levels and 3% below the five-year average. The drawdown was led by PADD 3, where stocks fell by 1 million barrels, followed by a 511,000 barrel draw in PADD 1 and 248,000 barrel decline in PADD 2. Reported propane/propylene production rates have been somewhat volatile recently, particularly in PADD 2, where production increased nearly 60,000 b/d last week after falling by 50,000 b/d the prior week. The EIA reported exports of 1.14 million b/d for the week ended November 16, compared with Platts Analytics’ estimate of 1.05 million b/d based on ship tracking data. Amid volatile prices recently, the arbitrage for moving US propane to Asia and Europe has been intermittently open.

Chicago ethanol prices tumbled to lowest level in over 13 years

U.S. ethanol prices plunged to the lowest level in 13 years due to high stocks and production. Downside pressure from RBOB and corn also weighed on the market. A total of 1.68 billion RINs were generated in October, bringing the total for the first ten months of 2018 to 16.11 billion. Green Plains announced it will close and dismantle its 60 million gallon per year ethanol plant in Hopewell, Virginia because of low margins. In Brazil, hydrous ethanol prices fell for the fifth consecutive week. The European Parliament approved the Renewable Energy Directive (RED II) for post-2020.

U.S. ethanol production and stocks decline the week ending November 16

U.S. ethanol production fell by 25 MB/D last week to 1,042 MB/D as some plants reduced output due to poor margins. Stocks declined in every region, with total inventories dropping by 723 thousand barrels to 22.8 million barrels. Ethanol-blended gasoline production increased by 13 MB/D to 9,202 MB/D. December ethanol futures were up 2.9¢ today to $1.279 per gallon, following corn prices higher.

North American Gas Regional Forecast - November

Basis at Sumas this winter is currently forecast to average just below $4/MMBtu, reaching a high of $6.80/MMBtu above Henry Hub in December. The pricing surround Sumas will be highly contingent on available capacity in the surrounding area as any further restrictions will likely strengthen prices significantly, especially in the advent of below-normal temperatures.

3Q18 U.S. Producer Survey: Production growth dependent on winter demand, pricing

After a strong Q2, US gas production continued its aggressive growth pace in 3Q2018, gaining 3.9 Bcf/d quarter-on-quarter to average 81.8 Bcf/d. In percentage terms, quarter-on-quarter and year-on-year growth was 5.0% and 12.9%, respectively. On aggregate, Appalachia, the Permian, and the Haynesville grew 2.9 Bcf/d quarter-on-quarter, accounting for the largest basin-level increases. Appalachia far outpaced the Permian and Haynesville this quarter, making up almost 2.0 Bcf/d of the total increase, after the Haynesville had assumed the top spot for quarterly gains in Q2. Accelerated growth in Appalachia may be the result of incremental pipeline capacity that was phased in-service over Q3. Permian growth continues despite concerns that pipeline takeaway is nearing full utilization, adding another 0.3 Bcf/d quarter-over-quarter. US production continues to rise on growth in multiple basins, which should be supported through the end of the year and into 2019.

European Gas Analytics Weekly

The start of the well-anticipated colder weather has seen a strong response from Dutch production and NCS exports. Whilst LNG is down week-on-week in our tables, this is because our date range for last week finishes on the 19th Nov, whereas since this date we have witnessed a marked increase in UK LNG sendout.

Global LNG Monthly Forecast

Warmer than normal weather across North Asia is compounding the bearish fundamentals out of Japan and Korea to squeeze JKM closer to TTF. The promise of significant numbers of floating cargos is adding to downward pressure.

East Asian weather is weighing on demand and pricing, but not deterring China

The extent of the mild weather in Japan and South Korea is creating some of the weakest LNG demand we’ve seen in years. LNG imports into the two nations are down 4.5% year-on-year. Being that these are two of the top 5 biggest buyers of LNG in the world – this amounts to 19-Mcm/d or a standard sized train of demand that is lost year-on-year or over 2.5-trains worth of demand vs. 2016. The fact that mild weather is hitting these two nations is not just bearish because of their overall share of global LNG demand, but also because these two nations are some of the largest gas storage holders in Asia.

Recovery in hydro insulates Spain from bullish elements in rest of Europe

The cold spell that hit Europe in Week 47 had a significant impact on the continent, with Belgian prices peaking at €499/MWh in the evening of Nov.21 while French prices exceeded €260/MWh. The spike was replicated in other markets too but a notable exception was Spain, where the price settled around €70/MWh. Further confirmation of a comfortable Spanish system was evident from the daily CSS, going from €7.3/MWh on Nov.19 to €3.5/MWh on Nov.20 to €3.3/MWh on Nov.21 – and this is just another example of a trend that has characterized Spain throughout the year.

Coal supply chain to respond to potential gas-to-coal switching this winter but PRB prices may surge

It appears as though there has not been material switching from gas-fired generation to coal-fired generation so far in 4Q18, even as coal-fired units have become increasingly cost competitive with gas-fired units due to soaring gas prices. However, our modeling suggests that, should gas-to-coal switching occur in a scenario where December-February gas prices come in near the $5/MMBtu mark, both coal-fired power plants and the coal supply chain will be able to respond. The increase in coal consumption may send both PRB and ILB coal prices up more than 10% from current levels (to $14/st and $53/st, respectively) as those basins will be primarily called upon to respond to higher coal demand in such a scenario.

Price fall slows modestly, but China uncertainty still weighing on markets

CIF ARA forward prices fell again last week on the back of uncertain Chinese import demand and high European stockpiles. It was the fourth consecutive week of declines, though the slide in prices has slowed from the prior week’s plunge of roughly 4% across much of the forward curve. There are fundamental reasons to believe that declines along the CIF ARA forward curve may slow even as the front of the curve remains under downward pressure due to constrained demand in the near term. Additionally, we reassert that FOB Newcastle prices appear overvalued in view of declines in Newcastle 5,500 NAR prices, falling Japanese imports in October, and the expectation that Northeast Asian imports will dip year-over-year in CY19.

The Cape freight rate slump bottoms out with hope of a modest rally

Capesize dry bulk freight rates dropped sharply over the past month, with rates falling from over $20,000/day to briefly below $10,000/day. Weakening Chinese steel demand, a downshift in bunker prices, a temporary disruption to Australian iron ore supply, and continued trade tensions between the United States and China have all driven rates lower. Prices have since recovered slightly, and we expect that prices will continue to show buoyancy over the short-term.

RGGI prices move up after Sep auction and stay stable in Nov; rising emissions and upcoming NJ/VA linkage driving prices

Benchmark RGGI prices moved upwards following a strong result at the Sep auction, to average $5.35 in Oct and ~$5.50 in Nov to date. However, prices flattened out in Nov on thin volumes. Coverage ratios have moved up in the last few auctions, and another strong result at the upcoming Dec 5th auction could again push secondary market prices upward. Speculative interest remains a major wildcard for auctions.

Emissions have risen year-over-year through 3Q2018, with the full year expected to be up ~6% year-over-year. Higher demand can support allowance prices. Near-term, prices can also react positively to developments related to the entrance of NJ and VA into the program starting in 2020. This includes indications that VA could enter with a starting program cap below initial expectations.

CA LCFS prices stable in wake of 2Q data release; amendments take effect in 2019

LCFS credit price growth has slowed in 2H 2018. CARB has finalized the program amendments to take effect in 2019, relaxing the near-term LCFS target trajectory, tightening the long-term target, and allowing for expanding crediting. The final amendments also pave the way for the freeze on the diesel LCFS standard to be lifted after 2018. Platts Analytics projects a moderate 2018 bank draw, with larger draws in 2019/20 and a risk of a cumulative deficit after 2020, translating to intensifying bullish price pressure. The large bank serves as a buffer, but a small number of players hold the majority of the bank. Implications of expanded credit opportunities begin to come into focus next year – other wildcards include RD availability/biodiesel blending and sugarcane ethanol volumes. The Credit Clearance Market (CCM) soft price cap rises to about $220 by 2020. Platts Analytics expects CARB would take action should LCFS credit prices persist above the CCM cap in the future.

V-21s clear higher than current vintages at November WCI carbon auction

The final WCI auction of 2018 saw the current vintages clear at $15.31, with strong interest in the V-21s pushing the future auction clearing price to $15.33, higher than the current vintages. While secondary market prices for Dec delivery had been stagnant in early November, they climbed going into the auction. Prices rose further following the auction and were closing in on the projected 2019 auction floor price. The current vintage result is 1.4% below the comparable secondary market price on the day of the auction – secondary market prices slipped somewhat the day the auction results were released.

Road to U.S. national carbon pricing faces obstacles in the Senate

Efforts to pass national carbon pricing legislation in the U.S. face an uphill battle in the coming years. Despite support among Democrats for a national carbon price and concern over climate change, the Senate will remain a significant obstacle to passing comprehensive climate legislation in the coming years. The Senate’s structure, weighting each state equally, favors more rural, carbon-intensive, states that typically oppose carbon prices. The path to a carbon-pricing friendly majority appears challenging in 2020, with the path to a supermajority very unlikely. To pass climate legislation, Democrats, in addition to holding the House and winning the White House, will look to either take advantage of a favorable 2022 electoral map and/or break Senate protocol by passing significant legislation with a simple majority. Otherwise, Democrats will have to defend against a more challenging electoral Senate map in 2024.

S&P Global Platts University New York City is next week

Do you need your team to understand the landscape, drivers, mechanisms, price dynamics, functions, and overall fundamentals of the global oil market? This two-day training session will be held December 4-5, 2018 at the S&P Global Headquarters in NYC. Take advantage of this year’s introductory price, which can be combined with the team rate. Visit the event website to learn more, see the full agenda, list of speakers, and register to attend.

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.

Click here for additional information on S&P Global Platts Analytics global energy commodity market research services.