Sulphur ’17: Oil and gas market outlook

ATLANTA — James Preciado, liquid fuel markets team leader, US Energy Information Administration (EIA), spoke about an “in-balance” global oil market, but at what price, during the CRU Group’s Sulphur 2017 conference in Atlanta. In Q4 2017, the market is tight, but in future years oil may need to go over $100/bbl to meet supply demands.

James Preciado, liquid fuel markets team leader, EIA.
James Preciado, liquid fuel markets team leader, EIA.

In the short term, non-OECD are expected to drive the demand for liquid fuels, which is expected to grow in 2018, due in part to diesel for trucks supporting onshore drilling, fracking and waste disposal. Associated liquids should grow in parallel with increased drilling. Going beyond the short term, demand is expected to flatten. This is not due to “peak supply,” a theory that EIA does not subscribe to. Motor gasoline and diesel still dominate the transportation mix, but jet fuel, natural gas and electricity are growing faster. North America and OPEC are expected to supply most of the extra crude production needed.

Changes in global supply sources have also affected the differential between light and heavy oil, in part due to a light sweet oil increase from Libya and Nigeria. The Brent/Dubai-Maya differential has been drifting down, but may not hold much longer. Refineries that were built to process heavy sour crudes are disadvantaged with small differential, but OPEC producers may come back if the price rises.

Within the US, tight oil—specifically Permian basin—will dominate production growth, but other sources will contribute to US production. OPEC growth is expected to be mainly Middle East. Next edition of EIA outlook comes out in Jan 2018, and it is likely it will show US to be a net exporter. On pricing, market-derived intervals around WTI prices show wide estimates even in the next 6 mos, representing a multitude of risks, such as supply disruption, geopolitical forces and regulatory issues like the IMO 2020 rule. OPEC surplus oil production in 2018 is expected to drop below 1.5 MMbpd, low by historical precedents, so any supply disruption would be problematic in a time of tight supply.

In response to IMO 2020, the light/heavy price spread should widen. Simple topping refineries are likely to choose to run light, sweet crude, while the more complex refineries might take advantage of their desulfurization units to produce 0.5% sulfur residual oil.

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