1. US-China Trade War
The US-China trade war has directly and indirectly impacted crude oil and refined product prices all year. The United States and China announced a tentative Phase One trade deal that postponed tariffs scheduled for mid-December among other concessions. Even after the Phase One deal, tariffs on propane and crude oil remain in place and have reduced exports of those products to China. The deal is similar in scope to proposals that China has been making since mid-2018 and still fails to address systemic issues with the trade deficit and corporate subsidies. However, the deal will certainly help sentiment throughout 2020 as it lowers the risk of any further tariffs which should be positive for economic activity and price expectations. President Trump has said that Phase One will remain in place through November elections and a full deal could be negotiated after the elections.
Further Reading: Global Macroeconomic Overview - 4Q19
2. OPEC Commits to Cuts
OPEC has held fast to its commitment to manage supply in an effort to reduce global stock levels and support prices. Compliance has been better than initially expected, although Saudi Arabia has had to make deeper cuts in order to compensate for worse-performing members. At the latest OPEC+ meeting in December the Organization surprised markets by deepening cuts for the first quarter of 2020 but not extending the agreement through June of 2020. Due to the very short timeline for the deeper cuts, compliance will be especially important, and even December numbers will be evaluated as proof of compliance.
3. Sanctions Intensified Against Iran
The United States tightened sanctions against Iran, further squeezing Tehran’s finances. After sanctions were re-imposed in late-2018 waivers were granted to eight countries allowing them to continue purchases but at reduced rates. Early in 2019, the White House announced that it would not be renewing those waivers in an effort to force Iranian exports to zero. Since the waivers expired, Iranian exports have reportedly fallen below 200 mb/d. In November, Tehran leadership announced that fuel prices, typically heavily subsidized, would be sharply increased in order to fill budget gaps and fund handouts to the poor. Protests swiftly erupted, but were met with a violent response from security forces. US sanctions have not been enough to force regime change in the country, but could lead to more protests in 2020.
4. Sanctions Against Venezuela
At the start of the year the US sanctioned Venezuelan crude oil sales for the first time ever. Prior to the US sanctions taking effect, US refiners imported approximately 500 mb/d of Venezuelan crude oil and were Venezuela’s largest cash purchaser. Additionally, the United States was a critical source of naphtha, needed to dilute Venezuela’s heaviest grades for transportation. The sanctions have not forced Venezuelan President Maduro out of office as hoped, but they have worsened the financial crisis in the state. Restricted flows of heavy crude oil from Venezuela have added to the shortage of heavy crude oil globally, helping to tighten light-heavy differentials.
5. Shippers Prepare for IMO 2020
Global bunker fuel markets have spent the latter half of 2019 preparing for upcoming IMO sulfur regulations. Since the change was formally announced, Stratas Advisors has released a bevy of reports detailing expectations for the impact on the refining and shipping sectors and benchmark prices. Low-sulfur alternatives need to be provided for most of the 4.2 mmb/d high-sulfur fuel oil market. The two main replacement options were likely to be Very Low Sulfur Fuel Oil (VLSFO) and Marine Gasoil (MGO). We declared an early winner at the beginning of this year – predicting that VLSFO blends will account for a large share of the compliant fuel demand displacement, providing roughly 3.6 mmb/d of necessary fuel. We thus continue to believe that the remainder of the displaced high sulfur fuel oil (HSFO) will be replaced by marine gasoil, to the tune of roughly 600 mb/d. This was an out-of-consensus view at the time, as the global shipping industry was initially skeptical of the quality of future VLSFO supplies. We reflected this risk in our price expectations. In our Marine Fuels Short Term Price Assessment, we expected MGO to average for $80.40/bbl in our third quarter while VLSFO averaged only $73.80/bbl. Less than a week out and market participants are now much more confident in VLSFO supplies and prices and adoption rates have been even better than expected.
Further Reading: Final Countdown to IMO 2020
6. Increased Attacks on Oil Facilities
This year saw several violent attacks on oil facilities and shipping infrastructure. It is widely believed that Iran carried out the attacks as a response to crippling sanctions in place against the country. The attacks were the first time in several years that security of global supply was truly in question yet even with 5.7 mmb/d of production offline price increases were short-lived. Attacks remain a possibility heading into 2020, although strong global production and slowing demand growth mean that price impact will remain muted.
Further Reading: Attack on Saudi Arabia-What We Know So Far; Attack on Saudi Arabia: Update; Abqaiq Attack Has Small Fundamental Effect on NGL and Natural Gas; Oil Infrastructure Attacks Likely To Continue; Another Tanker Struck
7. Mexico Cracks Down on Fuel Theft
At the start of the year, newly-elected President Andres Manual Lopez Obrador enacted a plan to cut down on fuel theft in Mexico. All major fuel pipelines were shutdown and products were transported via truck while security forces removed illegal taps and secured exposed sections of pipeline. In recent years, the rate of fuel theft has increased exponentially and now costs PEMEX more than $3 billion a year. Mexico is the sixth largest motor fuel market in the world, and a decision by previous President Nieto to open markets to international firms led to substantial price increases. This created an opportunity for thieves to increase black market sales at a time when many cartels where seeking to diversify income streams due to a government crackdown on drug activity. The government had never previously made protecting pipelines a strong priority and endemic corruption inside of Pemex meant that theft was occurring even directly from refineries. The government has declared the operation a success although critics say fuel thieves are merely waiting until government attention is redirected and security forces are removed from installations. If Mexico was able to secure domestic fuel supplies, it would increase revenue to PEMEX, potentially allowing for much-needed refinery investments.
Although the crackdown in Mexico had a minimal impact on global oil markets, fuel theft is a prevalent issue in many major developing markets, and Mexico is one of the first to attempt a coordinated effort meant to reverse years of mismanagement. The success of Mexico’s efforts could provide inspiration to other Latin American and African markets to also tamp down fuel theft in an effort to increase government revenues.
Further Reading: Mexican "Petroleum" Broken Model
8. PES Refinery Destroyed
At the end of June, the 335 mb/d Philadelphia Energy Solutions refinery suffered a series of damaging explosions and was completely shut down. The site has hosted some sort of oil processing or storage facility for the last 150 years and by the end of the year potential buyers were touring the site to decide if the refinery would be purchased and reopened. The facility accounted for 27% of PADD 1 refining capacity. The closure of the facility firmed product prices in the region and created an opportunity for additional imports from Europe. Until the facility is reopened, traders will need to source additional supplies to fill the gap, and product prices could see additional support, especially in peak demand periods.
Further Reading: Refinery Outage Firms East Coast Product Prices
9. Midstream Constraints Lead to Price Dislocations
Refined product prices on both sides of the United States suffered from price spikes due in part to midstream constraints. On the West Coast spring gasoline prices saw a dramatic increase after inclement weather shut down pipelines and trucking routes. Due to differing regulations, West Coast marketers have few domestic options when regional refinery capacity is impacted. Imports from Saudi Arabia have historically provided some backup but many of these are now being routed to Asia instead. A lack of midstream expansions from the Gulf Coast to the East or West coasts mean that price dislocations will remain a problem into 2020.
Further Reading: California Gasoline Spike
10.Saudi Aramco IPO Occurred
The much-lauded Saudi Aramco IPO finally occurred but in a significantly reduced format. Although the stock market debut of one of the world’s biggest companies certainly grabbed headlines, it had little direct impact on crude oil prices.
Further Reading: Evaluating Saudi Aramco's Long-Term Expectations
|This report was first made available to subscribers of our Short Term Outlook Service. Not a subscriber? Create an account.