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US crude production ticked up 80,000 b/d m-o-m to 12.85 million b/d in February, according to the EIA’s latest monthly data release (see Americas Weekly – Issue 18).
- February saw the first uptick in production after two months of seasonal declines, helped by a 40,000 b/d downwards revision to January figures (EIA). The main growth areas were the Gulf of Mexico and once again the Permian Basin.
- March is set to be the last month in which we see a slight uptick before steep declines towards 11 million b/d materialise over April and May.
- Declines have been driven by well shut-ins and natural shale declines, but also helped by early maintenance in Alaska and the Gulf of Mexico.
- From June onwards, we see a stabilisation in US output and only slower declines to 11.75 million b/d by year’s end.
The events of the last few months have proven how difficult it can be to forecast in this environment, which has led us to consider a number of recovery scenarios for gasoil/diesel demand (see Middle of the Barrel – Issue 5).
- Whilst our base case is currently on the bullish end of the spectrum, there may yet be cause to consider an upside scenario to diesel demand recovery.
- Given the unprecedented level of fiscal and policy support flooding economies currently, any positive surprises in terms of the speed and extent to which current restrictions on economic activity can be rolled back could allow demand to surprise to the upside, returning to 2019 levels through the end of 2020.
- On the flip side, the need for coronavirus containment over the summer months or further lockdowns come winter would delay any return to 2019 levels as economic damage becomes more difficult to reverse and the recovery flattens.
Oil demand growth globally continued to see downside pressure as we moved through Q3 (see Market Watch – Issue 9).
- While August data from early reporters has been positive overall, the US in particular will face a tough time beating last year’s peak, given an apparent lack of support for oil demand across the board ytd, bringing the total global estimate for August level with last year’s annual high.
- As such, our ytd figure remains rather tepid, with further downwards adjustments to historic data now putting demand growth at below 500,000 b/d through January-August.
- In response, we have cut our 2019 average further, as well as our outlook for 2020, which now stands at 1.05 million b/d vs 1.15 million b/d as of September.
Based only on the already announced VLSFO projects, we can already outline the major VLSFO trade flows in 2020 (see Benigni On Oil Markets – Issue 8).
- The US appears to be best-positioned as of now to take advantage of the upcoming VLSFO demand rally in early 2020, with estimated VLSFO supply out of PADD-3 standing somewhere between 300,000 b/d and 350,000 b/d next year and some additional 75,000 b/d coming from PADD-1 (see Benigni On Oil Markets – Issue 7).
- Despite some sizeable new VLSFO production capacities coming online next year in China, Singapore, South Korea, and Japan, Asia will still need to find some additional 550,000-600,000 b/d of VLSFO next year.
- We estimated the missing 410,000 b/d of VLSFO supply next year to come from projects that have not been announced yet.
Crude supply disruptions on geopolitical grounds have reached a stunning 5.3 million b/d, according to our assessments (see Market Watch – Issue 7).
- Although a bit overlooked due to the focus on discussions surrounding OPEC+ market management, we must not forget other sizeable amounts of production currently locked away temporarily due to geopolitical issues. Including the OPEC+ cuts, we see some 5.3 million b/d of unused crude and condensate supply potential.
- It is also important to note that this figure represents a realistic potential, which could be achievable within a couple of months, and not simply a theoretical maximum capacity. Besides the deliberate OPEC+ cutback, the largest contributors to this are undoubtedly Iran and Venezuela.
- The civil wars in Syria and Yemen are still ongoing, with no solution in sight. In the case of the Neutral Zone, it remains unclear whether production will be ramped up in the event of an agreement between Saudi Arabia and Kuwait, as the barrels would fall under OPEC targets.
Last week, PES confirmed its decision to permanently shut its 335,000 b/d Philadelphia refinery, following an explosion in late June – a move that has so far been a boon to the Atlantic Basin gasoline market (see Americas Weekly – Issue 26).
- According to our estimates, close to 600,000 b/d of refining capacity in Central and Eastern Europe (CEE) has been strongly impacted by the disruption of Druzhba flows. Outside of Belarus, and to some extent the Czech Republic and Hungary, however, other affected countries should be able to find alternate sources of crude supply.
- We know that a partial restart of the pipeline is expected by the end of May, but assuming a worst-case scenario, in which Druzhba operates at reduced rates through the end of the year, this could see European crude runs come in some 200,000 b/d lower y-o-y on average over 2019.
- We see a relatively limited impact on most refined product markets, with diesel supply being by far the most vulnerable. Based on the product output of affected refineries and our estimated reduction in intake in this scenario, we could see diesel volumes reduced by around 100,000 b/d on annual average this year, forcing affected countries to source additional supply from neighbouring nations