Trends in EIA weekly fuels demand data are improving, despite ongoing concerns on the pace of global demand growth. Typical drivers of gasoline and distillate demand in the US imply some potential for 2H19 mean reversion higher in demand, while the current trends do not resemble 1H08 in any way.
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Underlying figures and additional commentary inside. Overall takeaways are neutral. Our above consensus draw is somewhat offset by June AG OPEC exports ending nearly level with May. “Other Supply” still appears elevated, but massive aggregate OPEC cuts (both discretionary and decline-driven) are keeping the market balanced.
2Q refining earnings could show a dispersion in “capture rate” – margin performance vs benchmarks – between regions, with strength in the Mid-Continent and headwinds in the Gulf Coast and West Coast. This dispersion could drive a sustainability debate, but we note idiosyncratic drivers of the headwinds, particularly this quarter.
Gasoline value in June was materially affected by the Philadelphia outage mid-month. In early June, East Coast gasoline cracks compressed sharply vs Brent, reversing to a multi-year high to close out the month. A similar trend is evident in the Gulf Coast (LLS margins), although diesel cracks remain within the long-term range, and Mid-Continent margins are more influenced by tightening Brent/WTI differentials recently.
OPEC+ agreed to extend current quotas through 1Q20 as opposed to YE19, a modest surprise. However (as we previewed HERE) the meeting did little to address longer term oil supply questions more intensely debated than the rest of the year’s inventory balance. Bottom Line: we remain constructive on 2020 and maintain our $80 Brent forecast for next year, but long-term market confidence will remain a struggle.
Underlying figures and additional commentary inside. Overall oil market takeaways are neutral. We have low conviction on our EIA forecast this week because timing errors reversed from last week could materially enhance the import forecast. Mid-East OPEC exports have probably bottomed, considering OPEC commentary this week. “Other Supply” still appears elevated, but massive aggregate OPEC cuts (both discretionary and decline-driven) are keeping the market balanced.
The EIA’s weekly adjustment factor was a cumulative 11.8MM bbl in June reports, inclusive of last week’s major inventory draw that was primarily driven by lower than expected imports. The cumulative adjustment was down from May’s 22MM bbl, tracking our methodology of the ratio of Rystad’s completions count against the Baker Hughes oil rig count. As a reminder, since the EIA’s modeled production number is driven by the rig count, when the trajectory of completions (on a two month lag) disperses from the trajectory of the rig count, it is likely to lead to oil supply unaccounted for, expressed through the “adjustment.”
Circa 2014, the “super-congestion” investment thesis for US refining had mindshare, arguing US light/sweet crude production would overwhelm Gulf Coast refining capacity (configured for heavier crudes) and create light crude discounts vs Brent on the Gulf Coast comparable to the highs of Brent-WTI (>$20/bbl). It never materialized, but a rash of Refiner investments in new Midstream capacity – largely aimed at bringing massive amounts of light/sweet crude to the Gulf Coast – necessitate re-engagement with the idea.
Underlying figures and additional commentary inside. Overall oil market takeaways are neutral. Still no change in the East/West AG OPEC export trends which should keep US imports low, notwithstanding this week’s upward mean reversion. Iran exports are suppressing overall AG OPEC exports, however Russia and Brazil remain an offset with added seaborne supply.
PSX has initiated several projects and has been the subject of chemical M&A rumors. While spending as little as possible is in fashion within Energy, we believe PSX’s growth opportunities may be under-appreciated.
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