ESAI Energy: product markets will undermine crude

The analysis projects a 2019 recovery in oil demand from quite slow growth in 2018 due to weak demand in China and demand contractions in the Middle East and Latin America. After recovering in 2019, however, oil demand growth will decelerate in 2020. In the midst of this deceleration, the reduction in sulfur content of bunker fuels will result in a dramatic shift in consumption from high sulfur fuel oil to low sulfur marine gasoil.

This shift in demand from the bottom of the barrel to the middle of the barrel will initially be a boon to refiners who will run harder to make the new valuable bunker fuel. But, inventories of other products will grow. The underlying imbalances in the non-bunker markets will not be completely mitigated by shifting refinery yields or blending fuels, at least not in 2020.

A notable divergence between crude and product fundamentals will emerge. Crude demand will stay strong and absorb booming non-OPEC supply, but the non-bunker product markets will reach a tipping point that will chip away at refinery margins, and eventually undermine crude prices.  “The crude and product markets will send different signals, which will only complicate the response of OPEC,” points out Sarah Emerson, Principal at ESAI Energy.