Oil Products: Consumers Benefit From Falling Fuels Prices
BMI View: We are forecasting crude prices to fall steadily through 2016, having a knock-on effect for refined fuel products. C onsumers will continue to benefit from these lower prices, as we anticipate a tepid global economic recovery, with downside risks to our European outlook partially offsetting positive Chinese and US growth. As such, and as a result of infrastructure developments in North America and excess European refining capacity, some of the record-high margins that refiners enjoyed in 2012 will begin to normalize.
Brent is set for a slight fall from an average of US$111.70 per barrel (/bbl) in 2012 to US$107.00/bbl in 2013, according to our latest oil price forecast. Supply pressures from OPEC could negate an expected increase in global oil production, while an upward revision of our forecasts for US and Chinese economic growth will keep demand relatively strong. A continued boom in North American production, set to outpace GDP growth, will keep WTI relatively subdued at an average of US$92/bbl for 2013. Nonetheless, the easing of infrastructure bottlenecks in the US will prevent a further widening of its discount to Brent. Indeed, we hold on to our view that the market is adjusting to oil supply and demand fundamentals; we see short-term rallies tempered by realistic expectations about tepid global economic recovery in an adequately-supplied market.
|f = forecast. Source: BMI, Bloomberg|
Our refined products forecasts methodology is based on estimating the future spreads between each product and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. We had adjusted our spreads in June 2012, primarily at the light end of the barrel in Europe and Asia. No further changes have been made to the spreads since.
|f = forecast. Source: BMI, Bloomberg|
|Bunker Fuel 180|
|Bunker Fuel 380|
|Bunker Fuel Average|
The coming year will see a fall in average fuel prices, reinforcing the forecast that refining margins will shrink from their 2012 levels, which for many, and particularly in the US, was a good year indeed. Although prices will remain elevated from their 2010 levels, global gasoil/diesel prices will be, on average, 4.8% lower than last year, while gasoline and jet fuels will be 5.1% and 3.8% lower, respectively. This reinforces the recent trend of sustained high surplus production volumes, as global demand growth expectations remain depressed. Although this fall in prices will occur globally, regional discrepancies do exist. As such, broad generalisations should be taken with caution.
With regard to customers, we have identified the four main markets using the products they each utilise most often: kerosene in the aviation sector; gasoline and diesel for retail users and land freight operators; naphtha in the petrochemicals industry; and bunker fuel for the shipping sector. All of these sectors are set to suffer from record-high fuel prices in both the short term and the longer term. Indeed, although we anticipate prices will begin to recede in 2013, our forecasts suggest that they will remain elevated above 2010 levels for the foreseeable future due to high crude prices and wider crack spreads.
Consumers will be grateful for falling diesel and gasoline prices over the coming years, although European and Asian prices will fall faster than those in the United States on the back of higher demand. Falling prices may delay the rise of alternative fuels, however, including some early movement towards LNG and biofuels, which we have seen in the shipping and air freight industries.
Refiners: Is The Party Over?
With regard to downstream operators, BMI sees three main geographical blocks emerging: North America, emerging markets and Europe.
In the US, cheap domestic crudes in the Midwest, Rockies and on the Gulf Coast have generated very high margins for refiners. The country's evolution into a net exporter of refined products is also highly supportive of the downstream segment, which enjoyed record-high utilisation rates of more than 90% in the summer of 2012.
The recovery in refining margins over the last couple of years has been especially pertinent in the US, as those refiners with access to cheap unconventional production have benefitted significantly ( see our online service, August 3 2012, 'Refiners Enjoying Strong Margins...For Now'). However, we have been noting for some time that we expect the outperformance of US refiners to moderate in line with a forecast narrowing of the Brent-WTI spread. Indeed, we forecast the Brent-WTI spread will shrink from US$18.40 in 2012 to US$15 in 2013, and US$10 in 2013 and 2014 respectively, as additional oil transportation infrastructure comes online in the US.
Indeed, active steps have been taken to ease the supply glut at Cushing. Producers have taken to rail, water barges and road transport to transport their crude output across the US, while the 150,000 barrels per day (b/d) Seaway pipeline - which delivers crude from Cushing to the US Gulf Coast - expanded its capacity to 400,000b/d in January 2013. As a result of the increased amounts of crude available to markets, the price of WTI will remain supported over the next year, reducing the strong advantage US refiners had over their competitors in other regions due to increasingly inexpensive feedstock.
Additionally, Gulf Coast refiners, which have benefitted strongly from the boom in US crude production, must still address many challenges. The most prominent of these is the inadequacy of the region's high-complexity infrastructure, which has been adapted for the processing of heavy crudes amid the growing domestic supply of light shale oil. Processing light crudes would leave many new and expensive units underutilised. Therefore, the Rockies and Midwest downstream sectors are best placed to benefit from the current US downstream trends as they have access to secure feedstock from Canadian tar sands, adequate infrastructure, and a captured local market.
As such, we also highlight the equity performance of US refiners, which has experienced a long, positive run, and the risk that it might retreat some in 2013. Such a risk is largely on the back of expectations related to the shrinking Brent-WTI spread and falling margins from previous highs.
|A Reversal Of Fortunes?|
|S&P Downstream Index, 5-Year Weekly Chart (US$)|
The multi-year trend for rising crude prices has forced many governments to revise their fuel subsidies, or spend increasingly large amounts of money on maintaining them. Although we still expect many refiners to incur losses in 2012, as they will still be expected to perform their 'national duty' and provide cheap energy to fuel growth, their prospects are clearly improving. Indeed, Brazil, India, Iran, Nigeria, Indonesia and China, among others, have all - or are expected to - liberalise prices (to different degrees). In other states, particularly those in the Middle East, fears of domestic unrest since the Arab Spring have stalled fuel and further price liberalisation.
This price effect is nonetheless likely to be offset by the significant expansion in refining capacity which is expected to take place over the coming years. Indeed, OPEC expects global refinery capacity growth of 1.3mn b/d and 1.7mn b/d in 2012 and 2013 respectively, the lion's share of which will be located in non-Organisation for Economic Cooperation and Development (OECD) countries. The diversity of planned projects underscores this trend: in July 2012 Sinopec announced plans to build a 642,000b/d refinery in Jiangsu province ( see ' Downstream Ambitions May Lead To Drowning ' , July 10 2012). If realised, this facility would be the nation's largest. Additional refinery projects are being financed around the world, including recent examples ranging from a US$3.6bn refinery in Egypt, a US$6.5bn refinery in Nicaragua, and US$25bn in downstream investments in Qatar. With all of this new investment into downstream capacity, there is an emerging risk of overcapacity, particularly as demand growth continues to slow.
Importantly, cracks are beginning to show with regard to investment in the maintenance of downstream capacity in some emerging markets. The most recent and glaring example of this was the Amuay refinery explosion in Venezuela, which poses considerable risks to our forecasts for the downstream segment ( see ' Refinery Blast Presents Downside Risk To Forecasts ' , August 27 2012). While an extreme example, it underscores the need for ongoing investment into maintenance at existing plants amid a broad-based push for the expansion of nameplate refinery capacity worldwide.
|Emerging Markets Refining Capacity To Increase|
|Refining Capacity Growth By Region, 2001-2021 ('000b/d)|
Last year was difficult for European refiners, with low margins and slumping demand forcing many plants to shut down or be mothballed ( see ' Eni's Stoppage Signals More Woes For Europe's Refiners ' , April 18 2012). Europe's largest independent refiner, Petroplus, was forced to file for insolvency in January 2012 ( see ' Credit Crisis To Trigger Downstream Supply Squeeze ' , January 4 2012). High financing costs also became a significant issue, as the eurozone debt crisis weighed on credit in addition to demand. Furthermore, neighbouring emerging markets, rather than offering greater potential for the export of volumes, increasingly became a source of competition, as Russia, the Middle East, North Africa and even India, enjoyed cheap feedstock and are constantly raising capacity and standards. Mediterranean refiners will continue to suffer much more than their north-west European counterparts, as they are more exposed to this direct competition.
The second half of 2012 did see an improving picture for European refiners, although some of their gains are also likely to unwind in the coming year. Looking to the year ahead, there is the possibility of some excess European refining capacity, as those who had committed to lengthy maintenance periods come back online. This could lead to some disappointment by recent investors, including those trading houses that purchased three former Petroplus refineries in early 2012. Additionally, significant refining accidents in the US and Venezuela, which had resulted in the reduction of diesel to Europe in late 2012, created additional shortages and provided further support to margins. As production from these facilities rebalance the market, demand for European diesel will also moderate relative to 2012.
Jet Fuel: Middle East & Africa Remain Positive As Global Air Traffic Slumps
We forecast that jet fuel prices will fall steadily through to 2016, in line with our other fuel products forecasts. Between 2013 and 2016, prices are forecast to fall 10.8% in Singapore, 10.0% in Rotterdam, and 8.3% in New York.
In terms of freight transport, we forecast European, North American and Asian air freight carriers will continue to be squeezed in 2013, by both the challenging global economic picture, and the continued growth of the Middle Eastern carriers and their new hubs in the Gulf, having knock-on effects on jet fuel demand. Indeed, the industry had a torrid 2012, with year-to-date (ytd) figures from IATA to the end of November showing a global decline in freight tonne-km (FTK) of 2.1%, and carriers are not much more optimistic for 2013. The only bright spot remains the Middle East, as well as Africa, which posted positive growth amid an otherwise negative sector. The Asia Pacific region suffered from a fall in demand for exports of hi-tech consumer goods to markets in the West, as the eurozone struggled with debt crises and the US economy continued to recover sluggishly.
|Global & Asia Pacific FTK (% chg y-o-y)|
The IATA did, however, record an increase in passenger demand in the last months of 2012. Indeed, at the time of writing the most recent data available for passenger traffic is for November, which saw a 4.6% year-on-year (y-o-y) increase, as well as a 2.9% increase from October. This increase is partially due to a rise in US consumer confidence and a strong year-end seasonal peak. Furthermore, Latin American and Middle Eastern carriers saw respective 11.0% and 10.5% increase s in passenger travel, which resulted in growth in capacity by regional carriers. In China, passenger demand was 7.7% higher than in the previous year. If this trend remains in place, it stands to partially offset some of the weaker demand in the air freight segment.
|November 2012 vs. November 2011||January-November 2012 vs January-November 2011|
|RPK: Revenue-Passenger-Kilometers; FTK: Freight-Tonne-Kilometers. Source: IATA|
|FTK (% chg y-o-y)||RPK (& chg y-o-y)||FTK (% chg y-o-y)||RPK (& chg y-o-y)|
Gasoline And Diesel: Demand Destruction Takes A Toll
Our average global gasoline price for 2013 is US$116.70/bbl, as compared to US$123.01/bbl in 2012. Our forecast also suggests a price lower than the 2011 average price of US$117.89, although this is much higher than in 2010, which saw the average price remain below US$88.00.
The EIA is forecasting that US gasoline consumption will remain flat at 8.73mn b/d in 2013 and 2014, and therefore will not be a source of new growth for refiners.
|Flat US Gasoline Demand|
|US Motor Gasoline Consumption, 2010-2014 (mn b/d)|
In Europe, demand destruction has mostly been the result of the ongoing debt crisis, and the austerity measures that have been introduced. However, retail prices for both gasoline and diesel remain high as the shutdown of many refineries across the continent caused supply to shrink in 2012.
In the medium-to-long term both sectors offer opportunities. Growth in diesel demand will continue to be buoyed by tightening fuels standards across the globe. Hart Energy estimates that diesel engines carry vehicles 25% further per tank than gasoline engines. Although diesel only powers about 3% of US passenger vehicles, this figure could reach 8% by 2025, according to Allen Schaeffer, executive director of the Diesel Technology Forum. Meanwhile, gasoline production could be boosted by the growing availability of cheap unconventional light oil production. The case for growth in car fuels consumption is weakest in Europe, where austerity measures and the ongoing debt crisis will continue to take their toll.
Naphtha: Asia Stays Afloat While Europe Sinks
Unlike light and middle-distillates, naphtha trends closer to benchmark crudes. We are projecting an average global price of US$103.94/bbl in 2013 compared to US$104.79/bbl in 2012. According to our forecasts, Rotterdam will see its naphtha crack spread (compared to Brent) increase from US$-4.98/bbl in 2011 to US$0.50/bbl in 2014, while Singapore will see its naphtha crack spread rise (compared to Dubai Fateh) from US$-3.69/bbl in 2011 to US$0.33/bbl in 2014.
A stronger appreciation of naphtha in Europe will hurt the continent's already-ailing petrochemicals markets. In reality, naphtha's relatively small price differential with regional benchmark crudes implies similar trends for profit margins in the petrochemicals industry and in the refining sector.
Much like the downstream segment, the European petrochemicals industry is facing a cyclical downturn, which implies that Indian and Middle Eastern operators could strengthen their presence on the continent. Furthermore, as our Asian naphtha forecast is indexed to Dubai Fateh crude, Middle Eastern petrochemicals operators will benefit from lower feedstock costs than their European counterparts that use Brent-indexed naphtha.
Bunker Fuels: Trans-Pacific Route Rebound Amid High Prices
Our global average forecast for bunker fuel (the average of the 180 and 380 grades global price) now stands at US$96.36/bbl, which is down 4.2% from the 2012 average of US$100.63 - the highest average price over the last three years.
We predict a brighter demand outlook for the container shipping sector in 2013 - a key proxy for bunker fuels demand - with growth in throughput at the global bellwether ports set to strengthen y-o-y. Growth indicators in the key container shipping demand markets of the US and Europe are looking up, with the US' steady recovery set to continue and the European consumer outlook improving. Indeed, there is positive demand growth for both Asia-Europe and Transpacific routes.
|Global Top Five Container Ports Total Throughput, 2007-2013 (TEU & % chg y-o-y)|
We have been highlighting two key risks to the global shipping industry, each of which will have a knock-on effect on bunker fuels demand. The first is that there is a high risk of global overcapacity, as new ships, and especially container ships, hit the marketIn 2013, this issue will be especially true with new mega vessel capacity, including Maersk's Triple E-Type 18,000TEU vessel, the largest ship to date coming online. Importantly, these ships are not just larger, but they are actually more fuel-efficient than those currently employed around the globe. Not only will they be able to carry more goods, but they will be able to do so with less fuel, therefore reducing bunker fuels demand.
These efficiency trends are also part of a broader push for an overall cleaner shipping industry, as demanded by both governments with forward-leaning environmental policies and major ports themselves. Indeed, Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships utilize cleaner bunker fuels than today's standards. Furthermore, we have previously highlighted a separate push to increase the utilization of liquefied natural gas (LNG) as a shipping fuel, with several European ports investing in LNG shipping infrastructure to support this new industry. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile Maersk Line wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. We believe that the most likely alternative to bunker fuel will ultimately be LNG. However, this remains a long-term prospect, most likely within the next five to ten years.
Our forecast for a decline in bunker fuel costs will offer shipping companies some short-term relief and take the pressure off their bottom lines in the coming years, although prices will remain high by historical standards. As such, we believe that companies will continue to slow steam in an effort to conserve fuel and cut expenditures, as well as embrace the push towards cleaner burning fuels. All of this is to say that the overall trend for bunker fuels will be that of reduced demand over the medium term.