The impact on US refiners from Harvey is still unfolding and therefore we continue to see long-lasting impact on the products markets. Distillates and LPG are the key focus points, with Europe sending 0.70 Mt of diesel to Latin America since Harvey at a time when it needs to build stocks.
But even before Harvey, product stocks were drawing due to impressive demand growth. Global refining capacity additions last outpaced demand growth in 2014. Since then, demand has grown by more than combined refining and splitter capacity additions by an average 1 mb/d each year. A slew of product spec changes over the last two years has tightened refining capacity further.
New refinery starts and the end of maintenance will mean refinery runs will rise from November onwards and this will support crude demand, as will new Chinese storage capacity start-ups. Already, Asian buying for November and December arrival barrels is rising. This, together with lower OPEC arrivals to Europe, will support Brent spreads and help absorb higher US exports.
But we still see demand growth outpacing product supplies, and hence stronger crude will not jeopardise refining margins. Over 2017 and 2018, demand growth will outpace refinery capacity additions by an average 0.4 mb/d and 2018 new refinery start-ups are back-loaded.
If so, products will be trading in a new, higher paradigm in 2018, pulling crude up with them, as long as OPEC does not go back to a market share war. In other words, cumulative refining additions of 2.5 mb/d across 2017 and 2018 is still more than our expected non-OPEC and OPEC supply growth over the two years. As long as demand holds up, products will lead again in 2018.
|Fig 1: Refining vs demand, y/y change, mb/d||Fig 2: OPEC arrivals to Europe, y/y, mb/d|
|Source: Company reports, Energy Aspects||Source: Kpler, Energy Aspects|