As Brent partially recovered and WTI climbed steadily upward in recent months, oil product prices have also partially rebounded, though we still see weakness in naphtha and bunker fuel prices in particular. We maintain our view that as a result of lower Brent prices and relatively muted demand, oil product prices will average lower in 2013 than in 2012. In the longer term, downward pressure on product prices are likely to persist - a result of our forecast for crude prices to average lower from 2014 to 2017, a comfortable supply-demand picture in downstream production and consumption, and more importantly, weak demand in oil-based products. Nonetheless, despite the downtrend from 2012 peaks, crude prices in the US$90-100 per barrel range should keep oil product prices at historically elevated levels.
Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices.
Our estimates of the spread between crude prices and individual oil products are determined by the following:
Supply: This will be affected by changes in regional and global refining capacity.
Demand: This is partly a function of our expectations of the trajectory of the global economy. With regard to customers, we have identified four main sectors/users for the respective products: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide range of industry data.
Crude Price Forecasts
In early June and July we revised our forecast for Brent and WTI for 2013. We no w expect Brent to average US$106 per barrel ( bbl ) and WTI at US$99 /bbl. Our forecast for Dubai, which takes into account the estimated spread between Dubai and Brent , is US$102.50 /bbl ( see BMI 's Oil Price Outlook , 'WTI Pushed Higher As Upside View Plays Out', July 26 ) .
BMI's Oil Price Forecasts, Average Price (US$/bbl)
| || 2013f || 2014f || 2015f || 2016f || 2017f |
|f = forecast. Source: BMI |
|WTI - BMI Forecast ||99.0 ||101.0 ||101.0 ||96.0 ||94.0 |
|Brent - BMI Forecast ||106.0 ||103.0 ||102.0 ||101.0 ||99.0 |
|Dubai - BMI Forecast ||102.5 ||101.5 ||100.5 ||98.5 ||96.5 |
Product Prices Move Back Up But No Spikes Expected
Economic concerns in Q213 saw the unwinding of the rally in oil prices witnessed in the first two months of 2013. As crude prices fell, oil product prices followed suit. However, a slight recovery in crude oil prices from mid-April has also led to a corresponding increase in oil product prices.
| Brent Makes Mild Recovery, WTI Bounces Right Up |
|Front Month Price Of Brent & WTI, January - Present (US$/bbl)|
The return of most product prices to March- April levels reinforces our view that oil product prices are likely to even out over 2013 following wild fluctuations in Q113. A moderation of prices in the Asia n and European markets should be seen as the price of Brent stabilises at around US$100-105/bbl through out the remainder of the year, barring any supply shocks to the market caused by the eruption of tensions in the Middle East or major unplanned refinery outages.
| … And Oil Products Follow Suit |
|Prices Of Selected Oil Products In Rotterdam, New York & Singapore|
Narrower US Market Crude-Product Spreads
However, as the graph above shows, prices of gasoil and gasoline in particular have seen stronger rebounds in New York than in other markets. This mirrors overall optimism regarding US economic growth, as well as the steep rise in the price of WTI that has wiped out much of the crude feedstock discount that US refiners had enjoyed over competitors elsewhere.
Nonetheless, as US refiners have to compete with other producers in the global market, we expect the gains in product prices to be capped relativ e to gains in WTI. In view of higher WTI prices, we therefore anticipate a narrowing of the spread between New York product prices and WTI . Thus we have revise d our spread forecasts downward for the US market. This will in turn diminish the r efining margins of US refiners, though we note that they would still benefit from larger crude-product spreads than their Europe an and Asian counterparts. The latter two are expected to see relatively stagnant crude-product spreads.
| Falling Over Time |
|Expected Crude-Product Spread* In New York, Rotterdam & Singapore (US$/bbl)|
Weak Demand Persists
Despite the recovery in crude prices, we maintain our outlook for lower prices for oil products as demand is expected to be muted over our forecast period from 2013 to 2017:
China worries: Consecutive months of weak PMI data coming from the Asian giant confirms our Country Risk team's below-consensus view on Chinese growth in 2013. Moreover, we have also consistently highlighted in our Commodities team's monthly write-up on Chinese industrial imports that China's refined product imports could follow a downward trend - both a result of slower growth and an increase in domestic refining capacity. As the world's second-largest oil consumer, slower Chinese demand would further loosen up the global oil products market. Our Country Risk team reiterates that the loss of momentum in the Chinese machine will also have knock-on effects for other economies.
Upward fuel price revisions: Some of the fastest growing oil markets have adjusted fuel prices at the pump in the past quarter in order to correct economic imbalances: China (March), Indonesia (June) and Vietnam (July). Higher prices are likely to see a cutback in oil consumption, and consequently oil product imports in these countries.
Other emerging market problems: Fiscal and monetary problems faced by Brazil and Argentina - where subsidies fuelled a boom in oil consumption - could eventually make subsidies unsustainable. This could hit oil product demand from Latin America.
Limited upside from US and Japan: Despite rising optimism in both the US and Japanese economies, we expect energy efficiency measures to limit oil demand growth that should accompany economic recovery. Moreover, Japanese oil consumption had been propped up in 2011 and 2012 by a switch to fossil fuels for power generation in the wake of the Fukushima nuclear meltdown. Tokyo is still considering the return of nuclear power, which could in turn reduce the power sector's demand for heavy fuels.
Weak consumption growth from Europe: Weakness in the eurozone, together with energy efficiency measures, will limit demand from this large market.
Increase in global refining capacity: The impact of this would be especially strong in the Asian market, thereby keeping margins depressed.
Beginning of a switch to alternative fuels: Liquefied natural gas (LNG) and biofuels can be expected to play a larger role, particularly in the transport sector as governments move to cap carbon emissions and as supplies of LNG and biofuels begin to grow.
Our short-term forecasts for 2013 - which we have revised this quarter - show a year-on-year (y-o-y) decrease in prices across all products. This forms part of our view that an upward price trend that began in 2009 has reversed into a downtrend from 2012. This change is particularly pronounced in the bunker fuels market, for both 180 and 380 fuel grades. Nonetheless, , in the longer term, we expect prices to remain above levels seen in 2010 through to the end of our forecast period in 2017 as a result of high crude prices.
| … And Bunker Prices Go Tumbling Down |
|Bunker Fuel 180 Price Movements in Singapore, Rotterdam & New York, January 2012-Present (US$/tonne)|
The risks we highlight to our forecasts are:
Crude oil prices: Although we have already priced in OPEC support for prices in our crude oil price forecasts, we assume that the OPEC price floor will be set at US$100/bbl. Any larger-than-expected cuts in OPEC output, together with security risks in the Middle East, could support oil product prices.
Regional discrepancies in the fall in prices: As such, broad generalisations should be taken with caution.
Slower-than-expected downward trend in prices: Falling prices may delay the rise of alternative fuels, including some early movement towards LNG and biofuels in the transport sector and the power sector, which we have already seen in the shipping and air freight industries. This could in turn taper the downward trend in fuel prices.
BMI's Refined Products Forecasts, US$/bbl
| || 2011 || 2012 || 2013f || 2014f || 2015f || 2016f || 2017f |
|f = forecast. Source: BMI, Bloomberg |
| || Jet Fuel |
|Rotterdam ||129.18 ||131.41 ||125.12 ||122.12 ||120.74 ||119.36 ||117.36 |
|New York ||128.23 ||130.74 ||124.00 ||121.00 ||119.00 ||117.60 ||115.60 |
|Singapore ||125.67 ||126.90 ||121.43 ||119.10 ||116.87 ||114.54 ||112.06 |
| Global || 127.70 || 129.68 || 123.52 || 120.74 || 118.87 || 117.17 || 115.01 |
| || Gasoil/Diesel |
|Rotterdam ||123.77 ||126.78 ||120.32 ||116.61 ||114.93 ||113.28 ||110.67 |
|New York ||126.64 ||130.79 ||126.37 ||122.89 ||120.70 ||119.64 ||117.64 |
|Singapore ||126.26 ||128.18 ||122.77 ||120.50 ||118.50 ||115.50 ||113.50 |
| Global || 125.56 || 128.58 || 123.15 || 120.00 || 118.04 || 116.14 || 113.94 |
| || Gasoline |
|Rotterdam ||114.94 ||121.28 ||116.53 ||114.59 ||113.59 ||112.59 ||109.43 |
|New York ||119.30 ||124.79 ||121.04 ||118.63 ||116.87 ||113.46 ||111.46 |
|Singapore ||119.91 ||123.47 ||117.10 ||115.51 ||114.51 ||112.51 ||109.81 |
| Global || 118.05 || 123.18 || 118.22 || 116.24 || 114.99 || 112.85 || 110.23 |
| || Naphtha |
|Rotterdam ||106.07 ||106.75 ||99.08 ||98.15 ||98.61 ||98.63 ||96.86 |
|Singapore ||102.46 ||102.87 ||97.09 ||98.80 ||97.50 ||95.80 ||94.07 |
| Global || 104.26 || 104.81 || 98.09 || 98.48 || 98.05 || 97.21 || 95.47 |
| || Bunker Fuel 180 |
|Rotterdam ||97.27 ||101.52 ||94.80 ||91.69 ||90.58 ||89.46 ||87.46 |
|New York ||101.09 ||104.67 ||96.44 ||93.32 ||92.56 ||87.56 ||84.71 |
|Singapore ||100.14 ||102.46 ||93.52 ||92.07 ||92.01 ||90.86 ||89.63 |
| Global || 99.50 || 102.88 || 94.92 || 92.36 || 91.72 || 89.29 || 87.27 |
| || Bunker Fuel 380 |
|Rotterdam ||94.03 ||97.47 ||92.20 ||88.99 ||86.28 ||83.46 ||79.96 |
|New York ||97.13 ||100.32 ||91.63 ||88.63 ||86.63 ||79.63 ||75.63 |
|Singapore ||98.94 ||101.08 ||92.42 ||90.97 ||91.11 ||89.96 ||88.73 |
| Global || 96.70 || 99.62 || 92.09 || 89.53 || 88.01 || 84.35 || 81.44 |
| || Bunker Fuel Average |
|Rotterdam ||95.65 ||99.50 ||93.50 ||90.34 ||88.43 ||86.46 ||83.71 |
|New York ||99.11 ||102.50 ||94.04 ||90.98 ||89.59 ||83.59 ||80.17 |
|Singapore ||99.54 ||101.77 ||92.97 ||91.52 ||91.56 ||90.41 ||89.18 |
| Global || 98.10 || 101.25 || 93.50 || 90.95 || 89.86 || 86.82 || 84.35 |
Supply: Supported By Global Refining Capacity
A slight increase in global refining capacity vis-à-vis demand between 2012 and 2017 will help contain dramatic increases in oil prices. According to our forecasts, based on refinery changes in our downstream database, refining capacity is expected to rise by approximately 10% between 2012 and 2017 - which is two percentage points higher than the growth we project for global oil consumption over the same period. Nonetheless, this expansion alone is insufficient to account for the fall in fuel prices that we expect to see.
| A Comfortable Supply-Demand Picture |
|Global Refining Capacity And Oil Consumption, 2010-2017 ('000b/d)|
The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are building up their capacity. However, developed economies such as Japan and Europe will see more refinery closures, which will in turn negate some of the loosening of the global fuels market that the former should have brought about.
Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large 300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace in China and India, while Indonesia considers at least four large newbuild refinery projects. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastest- growing market for oil in Europe - will also see significant refinery expansion s .
| Market Growth Spurs Refining Expansion |
|Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d)|
Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel demand and will have spare capacity for export, especially the Middle East and Russia. Even China, which is set to overtake the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and in turn prices, particularly in the Singapore market.
Among developed markets, the outlook is brightest for US refiners which are amply supplied by cheaper crude feedstock available in the North American markets, thanks to a production boom in the US and Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are expected to remain elevated and follow international trends. This will create an uneven market with prices that can vary vastly from region to region, reflecting differences in the crude baskets that refiners have access to.
Lower runs and refinery closures in developed markets outside of the US will be the main factor propping up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker domestic demand (the cause of which will be further elaborated) also makes them dependent on external markets for support. However, their export competitiveness will be challenged by the smaller scale of their plants relative to newbuild and sophisticated facilities in emerging markets, and cheaper fuel exports coming out from the US. For example, European refiners are increasingly challenged by US competition in their traditional stronghold in West Africa, while cheaper Russian products are displacing local output in the Central European and Mediterranean markets.
| Struggling Against The New Challengers |
|Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d)|
This is already taking shape. At least three Japanese refineries - Sakaide, Tokuyama and Muroran - will end processing operations in 2014 on the back of a weak domestic market and legislation forcing the rationalisation and modernisation of refining operations. A Bloomberg survey highlights similar woes facing European refiners, showing that executives interviewed expect at least 10 plants in the region to permanently shut down by 2020.
Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such that the global fuel markets will not be oversupplied and prices will not be forced down significantly. Slower demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel subsidies and alternatives to oil products - explains the extent to which individual oil product prices will fall.
Naphtha: Gas Renaissance Hits Demand
Weak growth in some of the world's most industrialised economies will affect demand and its effect seems to be particularly pronounced for naphtha. Although most product prices have seen some partial recovery following a sell-off in April, naphtha has been the slowest to rebound. At the time of writing, the average price of naphtha is 13% less than its mid-February peak price level - the lowest among all products.
| Slow To Rebound |
|Differential Of Product Prices (At Time Of Writing) From 2013 Peak (%)|
As a key feedstock for the petrochemicals industry - for which final demand is heavily reliant on industrial needs - naphtha is greatly exposed to wider macroeconomic trends. With the exception of the US, we expect tepid growth in key industrialised countries - growth in the eurozone and J apan is projected to average 1.0 % and 1.1% respectively between 2013 and 2017. China's growth is also expected to slow from an average of 9.2% between 2008 and 2012 to 6.4% between 2013 and 2017.
Although the US is expected to register 2. 4% average growth over the same period, naphtha is not likely to benefit from it. This is largely because much of the petrochemical sector in the US is increasingly switching to gas-based ethane as feedstock for ethylene production instead of naphtha to capitalise on l ower gas prices ( see 'Gas Price Movements Present Risk To Shale Bet', July 19 ). With fiercer competition from the US, Asian petrochemical giants may be forced to roll back production to maintain their bottom lines , which will further dampen demand for naphtha.
| Naphtha Losing Competitiveness Versus Ethane |
|Diverging Trends In Contract Margins For Naphtha-Based Ethylene (South Korea) & Ethane-Based Ethylene (US), USd/gallon|
We forecast an average price of US$99.08/bbl for naphtha in 2013 - a 7.2 % fall from 2012 when economic pros pects were equally bleak. Over the longer term the fall in crude prices , alongside slow growth in key countries , will see naphtha prices fall by 2 % between 2013 and 2017. An exacerbation of the eurozone crisis or economic shocks elsewhere pose downside risk to this forecast, though we note that the negative spread between crude benchmark prices and naphtha prices limit s the extent to which prices can fall further.
Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement
Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weak global economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in developed countries. Oil-based fuels could also see a growing challenge from alternative power sources such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the transport sector towards the tail-end of our forecast period, both in emerging and developed markets.
For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for transportation, while China has already started a pilot programme to run public buses and taxis on LNG in selected cities. A rollback of fuel subsidies or price controls on fuel - which China, Indonesia and Vietnam have enacted under budgetary and monetary pressures - would also slow demand growth significantly in these key growth markets. Together with an anticipated increase in regional refining capacity (and associated output), we expect a move towards convergence in prices at Rotterdam and Singapore as the Asian market loosens.
Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. Other major transport companies could follow suit, given the low price of domestic gas in the US and under a small but growing shift towards green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that will pit cars powered by CNG against each other - could also indicate a growing embrace of gas-powered cars at the household level. The challenge posed by gas to oil-based fuels will likely grow, especially if supported by a further fall in gas prices globally.
Our average global gasoline price for 2013 is US$118.22/bbl, compared to an average of US$123.18/bbl in 2012. The average global gasoil/diesel price for 2013 is forecast at US$123.15/bbl - a 4% y-o-y fall. Over the longer term, we expect gasoline and gasoil/diesel prices to fall about 7% between 2013 and 2017.
| Demand Pressures And Crude Price Changes Support Downward Trend |
|Average Price Of Gasoline, 2012-2017 (US$/bbl)|
Jet Fuel: Slump Restricts Upward Movement
We forecast that jet fuel prices will fall steadily through to 2017, in line with our other fuel products forecasts. Between 2013 and 2017, prices are forecast to fall by 8% in Singapore, 7% in Rotterdam and 6% in New York.
| No Take-Off Expected |
|Average Price Of Jet Fuel, 2012-2017 (US$/bbl)|
We expect that European, North American and Asian air freight carriers will continue to be squeezed in 2013 and going into 2014, by a challenging global economic picture and the continued growth of Middle Eastern carriers and their new hubs in the Gulf. This will have knock-on effects on jet fuel demand. Indeed, the industry's troubled run continues into 2013 with year-to-date (ytd) figures from IATA to the end of May 2013 showing a global decline in freight tonne-km (FTK) of 0.2%. The only bright spot remains the Middle East, which posted positive growth.
IATA did, however, continue to record an increase in passenger demand going into 2013. At the time of writing, passenger traffic for May 2013 (the most recent data available) saw 5.6% y-o-y growth, marking year-to-date growth of 4.3%. Nonetheless, it warned that a decrease in consumer confidence owing to macroeconomic developments will affect this upward trend. Moreover, even at these higher levels, load factors were at 78.1%, implying that spare capacity remains. Hence, it will take a significantly large increase in passenger traffic to translate into more flights and jet fuel demand. Thus we see little upside risk to our short-term jet fuel price forecast.
Total Air Freight And Passenger Volumes
| ||May 2013 vs. May 2012 ||YTD 2013 vs. YTD 2012 |
|RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA |
| ||RPK |
(% change y-o-y)
(% change y-o-y)
(% chg y-o-y)
(% chg y-o-y)
|International ||5.7 ||0.8 ||4.5 ||0.1 |
|Domestic ||5.6 ||0.6 ||4.0 ||-0.8 |
|Total Market ||5.6 ||0.8 ||4.3 ||0.1 |
Bunker Fuels: No Rest To Downward Movement In Sight
Our global average forecast for bunker fuel (the average of the 180 and 380 grades ' global price s ) has been revised downwards to US$93.50 /bbl for 2013 ( following a downward revision in our Brent price forecast ). This marks a 7.7 % decrease fr om the 2012 average of US$101.25 - the highest average price recorded over the last three years.
Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009.
| End Of The Uptrend |
|Bloomberg Average Weighted Price Of Bunker Fuel 180 & Bunker Fuel 380, 2010-Present (US$/bbl)|
Downward pressure on bunker fuel prices is chiefly a result of weakness in the global shipping industry. We have also been highlighting three key risks to shipping, each of which will have a knock-on effect on bunker fuels demand:
High risk of global overcapacity: This threat is complicated by an expected increase in new and more fuel-efficient ships - especially container ships. 2013 has seen ships with new mega-vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit (TEU) vessel, the largest ship to date, come online. Importantly, these ships are not just larger, but are also more fuel-efficient than those currently employed around the globe, thereby reducing bunker fuels demand.
Overall cleaner shipping industry: These efficiency trends are also part of a broader push for a greener industry by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships utilise cleaner bunker fuels than today's standards.
Separate push to increase the utilisation of LNG as a shipping fuel: Several European ports have invested in LNG shipping infrastructure to support this new industry. Singapore has also engaged Lloyd's Register to help develop its port's LNG bunkering capabilities. 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. While this remains a long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based bunker fuel demand in the long term.
Although prices will remain elevated by historical standards, our forecast for a decline in bunker fuel costs should offer shipping companies some short-term relief and take the pressure off their bottom lines in the coming years. 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.