Trends to watch – expecting the unexpected

April 1, 2018 – By Tim Fitzgibbon

By most accounts, 2017 turned out to be a better year than many were expecting. Renewed OPEC discipline and cooperation helped boost global crude prices. Most refining markets saw higher utilization and wider margin, as global refined products demand growth exceeded expectations and refinery additions remained low. But will the party continue in 2018? Here are some of the market trends that we will be watching closely:

Permian supply growth – Resumed growth in US LTO is pushing up US crude imports, lowering crude prices for US refiners, and lightening the global crude slate. With continued growth we could see a re-emergence of bottlenecks in the pipelines to get crude to market and a wave of new capacity additions. Prices on the Gulf Coast could also move lower, falling to full net-back pricing from the Asia market as lower-cost backhaul opportunities are exhausted. Also, with continued growth we may start to see tightness in the supply chain increasing service and equipment costs, adding to the cost of production.

OPEC discipline – OPEC coordination has helped raise global crude prices in 2017, but also tightened the market for medium/heavy crude and narrowed refinery conversion margins. Higher prices are likely to increase development in unconventional crude supply, requiring greater OPEC crude cuts to maintain prices. Continued LTO growth may require cuts that go beyond what OPEC is able to manage.

Offshore development – Even with the increase in oil price over the last quarter of 2017, there has yet to be a major increase in FIDs. The number of contracted rigs continues to remain flat at historical lows. Will we see an uptick in project approvals as operators get more comfortable with the resilience of the oil price recovery.

IMO/MARPOL – Implementation of low-sulfur specs for bunker fuel in 2020 has the potential to increase global refinery utilization and margins, and blow out the light/heavy differential. This however requires strong compliance measures to be in place and some more certainty about how it will play out. If that comes in 2018 we should see a greater willingness by refiners and/or shippers to make capital investments to capture value from IMO driven market shifts.

Product demand – Surprisingly strong product demand growth in 2017 was a big boost for global refining market conditions. In the short term continued strong economic growth globally should keep the market tight, but longer-term trends are less positive. Governments are seeking to limit use of diesel, electric vehicle technology is becoming more economically attractive, and consumer preferences in transportation show signs of shifting away from direct car ownership and car usage. 2018 could be a year when we see the initial impact of some of these trends.

Refining capacity – Refining capacity growth slowed dramatically through 2016, prompting the market to tighten. Adding to this was a higher than usual number of unexpected outages. A new wave of capacity is now starting up and better market conditions could accelerate and expand the wave.

Offtake capacity for US gas – Growing supplies of natural gas from the Permian are likely to require pipeline capacity in addition to Kinder Morgan Gulf Coat Express expected online in 2019. FID on another line could happen in 2018.

The question for 2018 will be whether the positive trends can continue to outweigh the negative, and if so, for how long. History suggests that some of these trends will take a turn that the industry doesn’t expect.

Tim Fitzgibbon is a senior industry expert based in Houston.

https://www.mckinsey.com/industries/oil-and-gas/our-insights/petroleum-blog/trends-to-watch-expecting-the-unexpected


@energia @Petróleo