Tag: Refining

Deteriorating Turkish Oil Demand Outlook

Turkey has remained a key culprit in the current emerging market mayhem that has become an investment theme and concern over the past couple of months.  Along with the Argentina Peso, Indonesian Rupiah and the South African Rand, the Turkish Lira has led an emerging market currency rout, with August average spot values representing a 41% yoy decline versus the US Dollar, as shown in the chart below.

This currency collapse reflects several perversities of Turkish economic mis-management, and has already driven 17.9% yoy retail inflation in August.  With this plunge in the Lira, the local currency price of oil has skyrocketed, as illustrated below:

 

The indexed price of Brent crude in Lira has tripled yoy and is double the previous peak in early-2014, while Brent in USD terms remains stuck well below those peaks.

Until the current oil price shock, Turkey had enjoyed several years of sustained oil demand growth, from both income and price elasticities, as real GDP growth crested at 7.05% yoy in 2017.  Middle-distillate demand, driven by economically-sensitive diesel, dominated this growth.

 

In fact, during 3q17, Turkish mid-distillate demand represented 26% of total European yoy growth in these grades, as local demand growth hit 15% yoy.  During the quarter, Turkish total oil demand exceeded 1.1 mbpd.  Still, even before the recent crisis, Turkish oil demand was already weakening, with yoy declines in total demand during May and June 2018.

 

This weakness should continue, from both price and income elasticities, given the sharp spike in Lira-denominated oil prices and the deepening economic crisis.  The IEA should be revising their Turkish oil demand forecasts downwards, but as a policy, remain constrained by IMF country outlooks.  In its April 2018 World Economic Outlook (WEO), the IMF had forecast Turkish 2019 real GDP growth at 3.97%, while the current consensus is calling for a 0.5% yoy decline and is slipping.  This drop in real GDP should be worth about 80 kbpd of total oil demand from the previous IMF income levels, but we will wait for the July demand numbers before refining our forecasts.

 

 

Crude Tanker Outlook Oct16

Crude tanker market may face lower earnings for longer than consensus — Although analysts are finally marking down their crude tanker spot earnings forecasts for 2017-18, they may be under-estimating the depth and duration of the downturn.  The current market view continues to deteriorate, but it still expects earnings to remain above break-even rates, before rebounding in 2018.  Our Base Case suggests that rates will slide below these levels in 2017-18 and remain near breakeven in 2019, before a recovery finally arrives in 2020.

The key market disconnect may be an over-estimation of tanker demand — Arguments from tanker owners and equity analysts that moderate oil consumption growth should support tanker demand growth of 3-5% are relying upon an extrapolation of previous relationships.  As we have stressed during the past several years, oil product demand is not crude tanker demand, and a simple extrapolation of previous trends may prove painful.

Crude tanker tonne-mile demand is peaking for the next several years — Although crude tanker tonne-mile demand in 2017 may rival the peak in 1h16, demand is unlikely to return to these levels until early in the next decade.  Crude trade volumes should decline after 2017, pressured by continued growth in liquids bypassing the refining system and rising domestic crude runs.  Additional growth in land-based imports and a pause in eastbound Atlantic Basin exports should dampen tonne-miles.

Download cover page and executive summary of 43-page report here.

Rising Crude Runs in Producing Countries & Crude Exports Oct15

Where exports come from…  Severe drop in refinery utilisations among eight key oil producers and exporters provided an additional 500-700 kbpd of crude exports during 1h16.  These eight producers account for more than half of global crude exports.  Recovery in utilisations should remove this extra crude from the market in 2016, and the Latin American impact alone could approach 200 billion tonne-miles, or 2% of tanker demand.  Refinery utilisations do not recover fully, however, due to the destruction of the Baiji refinery in Iraq, as ISIS forces retreated, and from continued operating upsets in Venezuela.