Impact of 2020 IMO Spec Change on Asia: Which Countries Will Benefit?
Asian oil demand growth looks set to average 0.85 MMB/D this year, before rising to 0.94 MMB/D in 2019. Asian gasoil/diesel demand growth is expected to surpass gasoline for 2018-19, and will be driven by South Asia, Southeast Asia and China. Asia continues to add cracking capacity, with India’s refineries getting more sophisticated. Asia’s net exports of key products are expected to rise sharply this year, and they are likely stay high next year before dropping significantly in 2020 as local gasoil/diesel demand picks up due to the bunker spec change. Major gasoil/diesel exporting countries, such as China, India and South Korea, will stand to benefit from the change with complex refiners seeing the most benefit from the expected widening of clean product spreads, and discounts for sour medium/heavy crude. Overall, Asian refining fundamentals should continue to be moderately supportive through 2019 with healthy Singapore cracking margins at above $6/Bbl on average for both 2018 and 2019.
U.S. August job growth meets market expectation; ISM confidence index exceeds it
According to U.S. August labor market data, the pace of job creation was neither too hot nor too cold; meanwhile, the unemployment rate stayed flat. Wage growth appears to be accelerating, but there are yet no hints of labor market overheating. There are also tentative signs that a large portion of recent wage gains are accruing to those workers who are at the low end of the wage scale. Recent U.S. economic confidence data have been solid, pointing to constructive gains for business investment and trade activity.
US propane stock builds while Asian crackers shift out of LPG
Front-month non-LST propane gained 1.375 cents/gal, or one percentage point, ending the week at 105.5 cents/gal. Propane inventories were 149,000 barrels below their year-ago level and 10% below the five-year average for the week. US propane/propylene stocks rose by 2.0 million barrels during the week ending August 31, ending the month at 73.4 million barrels, according to EIA data. At their peak, propane stocks reached 82.2 million barrels in early September 2017. Weekly draws began in the middle of September last year. Reported US exports fell by a greater-than-expected 256,000 b/d to 721,000 b/d, well below Platts Analytics' estimate of 900,000 b/d. Meanwhile, the naphtha-propane premium in Asia—a measure of the petrochemical market’s preference for propane over naphtha in its steam crackers—has continued to narrow over the week, with front-month naphtha's premium to propane losing $18.25/mt, ending the week at $25.5/mt. At premiums above $50/mt propane is considered preferential to naphtha.
U.S. Ethanol Prices Rebound; Imports Arrive from Brazil
U.S. ethanol prices rebounded late last week after reaching an eight-month low. A shipment of 11.6 million gallons of Brazilian ethanol was received in California on the Muhut Silver. The product originated from Santos, Brazil. Demand for hydrous ethanol surged 40% year-on-year in July to 1.55 billion liters. U.S. biodiesel producers manufactured a record 156 million gallons in June.
The September WASDE
As the markets brace for updated 2018/’19 U.S. production estimates this coming Wednesday, and the certain onslaught of “no way’s” and “I told you so’s” from everyone and anyone who claim to have some sort of yield modelling, the World Board will also have a chance to update demand. While new crop yields will certainly get the bulk of publicity and market reaction, the Board is staring straight into the face of a “new world” as the 2018/’19 Marketing Year gets underway for corn and soybeans. This new world has no NAFTA agreement despite the fact that “it’s close” according to some, a continuing trade war with China that could see another $200 billion in tariffs imposed by the U.S. any day, an African swine fever outbreak that seems destined to spread throughout Asia, a strained relationship with Japan, an extremely weak ethanol market as the U.S. driving season comes to an end, and a whole myriad of other demand issues that USDA economists must somehow try to navigate.
US Gas Weekly Report – Week ending Sept. 7
Thursday’s prompt month NYMEX Henry Hub futures settlement at $2.795/MMBtu resulted in a decline in price relative to the Friday ahead of the holiday weekend of ~$0.12/MMBtu. Henry Hub cash prices were down as well, but to a lesser extent – $0.055/MMBtu for the same period. The more interesting dynamic at play this week was the contraction in the cash to winter prices. This spread is a proxy for the value of storage. Last week, the spread between Henry Hub cash and the January futures contract came in by $0.08-0.10/MMBtu. The devaluation of this spread further underscores market participants’ lack of concern over storage inventory heading into the winter.
PVB-TRS spread set to remain elevated as tightening Spain pulls on more relaxed Southern French balance
French exports to Spain jumped to a five-month high at 9.7mcm/d as of September 3 and continued to be strong in the next days, on the back of a widening PVB-TRS spread and low LNG sendouts. Tight supply/demand fundamentals, coupled with bullish sentiment across the Continent, has pushed up the PVB curve. PVB-TRS spread widened the most since March at €1.4/MWh last week, incentivizing strong imports from France. Further tightening in the Spanish market came from increased storage injections that provided additional supply pressure on the prompt. Our view is prolonged tight conditions in Spain will widen PVB-TRS even further, with storage stocks in the southern French hub far more comfortable than a year ago.
SOEs cut product exports to ensure domestic supply in China
Economic activity in China was broadly weaker in July as growth in industrial output, retail sales and capital spending moderated. Crude runs grew 7.4% year-over-year to 11.99 million b/d, the quickest in 10 months due to new refineries, lower turnarounds and better demand / margins. Crude imports continued to underwhelm in July at 8.5 million b/d on broad-based destocking activity. Strong gasoline demand sustained in July while gasoil demand growth remained weak on less freight turnover and softening diesel car sales. Jet kerosene demand remained robust in July on stronger passenger turnovers of domestic flights; LPG demand dropped on weaker residential consumption; naphtha demand remained healthy on strong petrochemical margins; and fuel oil demand slipped on weaker domestic waterway turnover.
Winter JKM Slopes are Conflicting with Chinese LNG Spreads to JKM
JKM pricing for winter is now over oil, a key indicator of market tightness. At the same point last year, the Brent slope for January JKM was only 14.1% where now it is 17.3%. Amazing because last winter regional pricing in China reached the $30/MMbtu mark to pull JKM LNG prices upwards of $0.80/MMbtu over oil equivalency or a Brent slope of 18.47%. As China seeks to have increased volumes and potentially drives prices to ever higher prices versus Brent, much of the world does tend to step aside to allow the likes of China, Korea, Taiwan, and Japan to procure their needed supplies. Gas pricing itself over oil economically indicates potential switching possibilities. However, China, may be limited in its abilities to shift fuels due to environmental restrictions.
Gas price gains mean increase in UK winter coal share, despite closure
Steep gains in the fuel and carbon markets, combined with new issues round French nuclear availability, have resulted in European power markets seeing their largest weekly gains in years. Expectations of a correction in the carbon market in September as auction volumes pick up have so far been dashed, with the Dec-18 EUA contract rising above €23/t on Friday, a new ten-year high. Meanwhile EU gas prices have reached new five-year highs, as Norwegian supply issues have compounded concerns around low LNG deliveries and storage fill rates. The French 4Q-18 power price fell at the start of the week, but news that EDF had extended the outage at Dampierre-4 (until the end of Nov-18) supported the contract, while news on Friday that EDF would stop six nuclear reactors ahead of their planned maintenance outages over a period from Sep-18 to Jan-19 lifted the front quarter further. Expectations of warmer weather moving into next week adds upside to southern European power demand, while further north higher than average rainfall should lift run-of-river generation and help replenish Nordic hydro stocks.
Coal Prices Push Higher, Buyers Eye Winter Demand
Seaborne coal pricing was volatile last week, with forward pricing rising by several dollars per metric ton early on, while a sizeable drop at the end of the week was not enough to offset the previous gains. Despite recovering stockpiles in several markets, the market remains concerned that the strength in coal demand over the Northern Hemisphere summer will bring about tightness during the winter peak. With swaps for Platts JKM LNG marker at or above $13/MMBtu for December and January, the penalty for running short of coal this winter in the Pacific Basin will be severe. India’s electricity demand growth decelerated in August, and a surge in hydro kept coal-fired generation flat year-over-year, the first instance of a lack of growth in 2018.
Upcoming EUA Price Uncertainty on Prospects (and Timing) of Brexit Talks
The lack of a final Brexit deal raises the prospect that the U.K. could leave the EU Emissions Trading System (EU ETS) at the start of the 2019 compliance year on January 1st – despite an informal agreement for U.K. emitters to remain in the EU ETS through 2020. Current outlooks of EU ETS supply and demand balances (including ours) assume continued U.K. participation, but a late deal on Brexit (late-2018 or early-2019) could delay short-term EU Carbon Allowance (EUA) supply, with upward EUA price risk. There is downside EUA price risk should the U.K. leave the EU ETS, due to unwinding of hedged positions/surplus currently held by U.K. entities. The base year chosen for adjusting ETS caps/supply to remove the U.K. share has implications for future ETS balances, Market Stability Reserve trigger levels, and potentially EUA price expectations. Upcoming EU Council meetings offer the possibility of EUA price swings as market participants digest Brexit negotiations – and the prospects of ongoing U.K. participation in the EU ETS.
Brent/WTI Spread Widens as Cushing Begins to Build
U.S. midcontinent production rose in June, while production in Western Canada fell. Inventories at Cushing increased during August after 3-months of declines, and are expected to continue building in September. The WCS differential declined in August in anticipation of lower demand for Canadian barrels in the Midwest during the fall due to refinery maintenance. Takeaway from the Permian basin became increasingly constrained during the month, causing the differential to widen further. U.S. commercial crude oil inventories are expected to increase for the next few months.
Emerging Market Stresses Stabilizing, but Still Elevated
While stresses remain generally low, there continue to be issues concentrated in a handful of emerging markets, but even here, there is evidence of stabilization and contagion is not apparent. Commodities were lower on the week by 1.4% and energy was lower by 2.5%. There is still downward pressure apparent in the industrial metals and precious metals complexes. The dollar was higher by 0.3%, but the Turkish lira and Brazilian real strengthened, while the Argentine peso was stable.
U.S. Ethanol Production Rise to Near-Record Level
U.S. ethanol production increased by 17 MB/D last week to 1,087 MB/D, the fifth highest level ever reported. Stocks fell for the second week, dropping by 358 thousand barrels to 22.7 million barrels, with all of the decline occurring on the Gulf Coast. PADD V received 32 MB/D (9.4 million gallons) of imports. Ethanol-blended gasoline production decreased by 47 MB/D to 9,316 MB/D along with lower gasoline output.
Balancing act: Maybe low salt inventories are just what the market needs this winter
As the US gas markets prepare for another winter demand season, all eyes have turned to gas storage inventories, which have been brushing up against—and in some cases breaking through—previous record lows. Of particular interest is the EIA South Central region—which broadly encompasses what we define as our Southeast and Texas Cell regions – because of its proximity to robust US demand growth along the Gulf Coast, and because of its high concentration of salt dome storage. While salt storage inventories are trending well below normal, this may be a blessing in disguise – especially during lower-demand periods – because of its ability to absorb excess supplies while the non-salt facilities are stuck in withdrawal mode.
RGGI Auction Comes in Strong – Even As Speculative Players Sit Out
The September 2018 RGGI carbon allowance auction cleared at $4.50, up 12% from the June 2018 auction, and up 19% from the March 2018 auction – and the highest clearing price since September 2016. It was one of only three auctions since the start of 2016 to clear above prompt-month secondary market contract prices, and the only auction to clear above prompt-Dec contract prices. The strong results (including a coverage ratio of 3.2) came despite lower speculative interest than in the last few auctions. Entities with actual compliance needs took 61% of the winnings, vs. 36% at the prior auction. Meanwhile, efforts by New Jersey and Virginia to join RGGI at the start of 2020 continue to proceed, and the Massachusetts State Supreme Court upheld that state’s in-state CO2 market, with (mild) implications for RGGI allowance demand.
Expect large crude stock draws to be more than offset by products builds in the U.S.
Total hydrocarbon inventories increased by 3.5 MMB last week. Crude stocks dropped by 4.3 MMB, closely aligned with our expectations, while aggregate clean products’ inventory built by 5.67 MMB, which was slightly above our forecasts. “Other products” stocks built by 2.5 MMB. Crude stocks at Cushing increased by 0.55 MMB (slightly below our forecasts of 0.8 MMB). Total inventories in PADD 2 decreased by 1.6 MM barrels, partially driven by lower inflows from Canada. These lower flows are expected to hit Cushing in the upcoming week. However, refinery maintenance in the region is expected to reduce local demand. As a result, we expect Cushing stocks to build slightly by 0.1 MMB.
Emerging Market Stresses Stabilizing, but Still Elevated
While stresses remain generally low, there continue to be issues concentrated in a handful of emerging markets, but even here, there is evidence of stabilization and contagion is not apparent. Commodities were lower on the week by 1.4% and energy was lower by 2.5%. There is still downward pressure apparent in the industrial metals and precious metals complexes. The dollar was higher by 0.3%, but the Turkish lira and Brazilian real strengthened, while the Argentine peso was stable.
Divergence Remains Between U.S Equities and World, Ex-U.S
Global equities fell 1.9% on the week, while U.S. markets fell only about 1%. There remains noted divergences between U.S. markets and many of the overseas markets. The broad U.S. market still appears in an uptrend, while most of the international markets are in a correction. In the U.S, the growth indictor moved into negative territory, while the defensive indicator gained and remains positive. Consumer staples and utilities posted gains of 1%, while technology and energy lagged and lost over 2%. Internationally, all the tracking indices were notably weaker, with China, emerging Asia, and emerging markets lower by 3-4%. Europe and Japan, also declined over 2%.
CA Low Carbon Fuel Standard Prices Cool in August, Ahead of Key Vote
CA LCFS Credit prices climbed significantly over 2018, though they lost a bit of ground in August. CARB expects to vote to adopt LCFS (and ADF) program changes this month to take effect Jan 2019. Key proposed LCFS changes include relaxing the near term trajectory (with a tighter 2030) – along with increased crediting opportunities. 2018 data show declines in ethanol and biodiesel crediting were offset by electricity and renewable diesel, but there was still a draw on the bank. While Platts Analytics’ modeling sees continued tightening balances, the risk of a cumulative program deficit is still years away, with the credit bank providing a buffer. Key wildcards for the market over the near to medium term include growth in RD availability, biodiesel penetration and whether the expected supply of project-based credits materializes.
Saudi Capacity Expansions Required to Offset Natural Declines
On September 4, Saudi Aramco announced a drilling contract to expand the offshore Marjan field by 300 MB/D. The award is part of a reported medium-term plan to add ~1.0 MMB/D of capacity at three fields by 2023, although the precise volumes and timing of field expansions remain unclear. The headline addition number may appear large, but by our calculations is the minimum requirement to offset natural decline rates at existing fields. Using our ~11.4 MMB/D estimate for current Saudi crude production capacity (excluding the Neutral Zone), even a modest 2% natural decline rate would reduce base capacity by 1.1 MMB/D by 2023. In reality, declines are probably larger. In June 2015, Oil Minister Naimi cited decline rates of 4-6%, the lower end of which would reduce capacity by 2.1 MMB/D by 2023. Meanwhile, a larger near-term concern for oil markets comes with the snapback of U.S. oil sanctions on November 5, which will cause a dramatic reduction in Iranian exports by October loadings. As a result, we forecast Saudi crude production to reach 10.6 MMB/D in 4Q18, up 280 MB/D vs. 3Q18, an all-time high.
Saudi Arabia: Latest FX reserves Surprisingly Draw
Saudi Arabia reported their end-July foreign exchange reserves last week. Reserves drew a surprising $5.05 billion USD on the month after having built $1.8 billion USD in June. The draw is seen as a single month phenomena, with the Saudi fiscal balance thought to be in much better shape than earlier in the year. While maybe not perfectly balanced in any given month, the situation is much closer to balance. The three-month average change in reserves slipped $1.8 billion USD, after three months of positive performance. The recovery and strength in oil prices has probably fostered a pickup in domestic government spending, so to sustain their economic momentum.
Aramco Pricing for October: Asia More Generous, Europe Raised
Saudi Arabia released their pricing for October liftings on Wednesday. Asia OSPs were lowered on Arab light and heavier grades. The change in market structure on Dubai would have suggested an increase in OSPs, but other factors appear to have come into play. European OSPs were raised in line with a narrowing discount on Urals crude. U.S. pricing was raised $0.10/Bbl on all but the lightest grade. Saudi barrels still remain priced at a premium to domestic barrels by $1.25-1.45/Bbl. The overall pricing adjustments will accommodate an assumed rise in Saudi 4Q production, as Iranian avails will lessen. Less domestic crude burn in Saudi will provide additional volumes for export. Saudi is not pushing volume into the market beyond what will be seasonally required, given the reduction in Iranian supply.
The Last Jebi…Big Crude Stock Build, Runs Lower in Japan
Super typhoon Jebi wreaked havoc on Japan. It was the strongest storm to hit Japan in 23 years. Runs dropped 90 MB/D, with further declines likely. Crude imports expectedly surged and crude stocks built 5.6 MMBbls. Demand performance was solid with a jump in jet-kero, gasoline, and fuel oil demands. Refinery margins slipped slightly from their August average, but the August average showed noted improvement from July. Implied marketing margins have eased of late, but remain supportive to the profitability of the downstream value chain.
Earthquake shuts refinery in Hokkaido, Japan, two days after typhoon Jebi damaged another refinery
Idemitsu shut its 144 MB/D Hokkaido refinery immediately following a 6.7 magnitude earthquake Thursday morning, with epicenter in Hokkaido, Japan. A restart date is unavailable at this time. The refinery is estimated to process 45% Medium Sour and 40% Light Sour crudes. The affected capacities roughly are 50 MB/D Gasoil/Diesel, 35 MB/D Gasoline, 20 MB/D Jet/Kero, 15 MB/D Naphtha, 10 MB/D LPG, and 5 MB/D HFO.
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.
