Business Environment

Macroeconomic environment¹ and the petroleum industry²

2016 was a year characterized by weak international trade activity, low investment growth and increased political uncertainty globally, highlighting a difficult year for the international economy. Global growth in 2016 is estimated at 2.3% (down from 3.1% in 2015) and is expected to increase to 2.7% in 2017 with low investment affecting the medium-term prospects of many emerging markets and developed economies. Although the fiscal stimulus packages in large economies, if implemented, may boost global growth beyond expectations, risks re. growth forecasts remain with significant risks stemming from increased political uncertainty in major economies. From the emerging economies, it is worth noting that China’s growth slowed further in 2016, to 6.7% (from 6.9% in 2015), with the negative trend expected to continue in 2017 and 2018. Conversely, Russia’s economy shows signs of recovery from the financial sanctions imposed by the US and the EU, as the recovery in oil prices has had a direct positive impact on Russia’s GDP, which is projected to drop by 0.6% in 2016 (compared to -3.7% in 2015) before recovering by 1.5% in 2017.

In the eurozone, growth is estimated to have declined in 2016 to 1.6% (compared to 2% in 2015), returning to 2014 levels. Growth forecasts for 2017 and 2018 have been revised downwards for the eurozone and even more for the United Kingdom. Despite the Brexit vote in June 2016, confidence in the eurozone continued to improve. However, investment indices are low, especially in the countries most affected by the eurozone debt crisis. While borrowing costs have declined significantly since the start of the negative interest rates policy in June 2014, worries about the banking industry’s profitability increased in 2016. Despite the relaxed monetary policy, inflation remains close to zero, with long-term forecasts expected to be less than the ECB’s objective.

Exchange rate evolution €/$

¹Source: World Bank, World Economic Outlook Update, January 2017
²Source: OPEC, “Monthly Oil Market Report”, December 2016

In 2016, global demand for oil amounted to 95.05 mbpd, representing an increase of 1.38 mbpd, mainly due to the higher than expected increase in consumption in OECD Europe and Asia, as well as China. For 2017, global demand is expected to increase by 1.26 mbpd, to reach 96.31 mbpd.

Crude production from non-OPEC countries in 2016 declined by 0.66 mbpd, mainly due to declining production in the USA, Nigeria, China and Venezuela. In 2017, production from non-OPEC members is expected to increase by 0.40 mbpd, mainly due to growth in North America, while NGL production growth is expected to remain at the same level as in 2016.

The increased supply of crude oil in international markets, mainly due to the lifting of sanctions in Iran in early 2016, as well as the significant increase in production in Iraq, and more recently in Libya - led crude oil prices to a twelve year low despite low availability from the US and other non-OPEC producer countries.

The average international Brent crude price was $46 a barrel in 2016, down $5.4/ barrel compared to 2015. The historic decision made by both OPEC member states and non-members to cut their production by 1.8mbpd led to a recovery in crude prices, exceeding $50 a barrel, leading to prices averaging $49 a barrel in the last quarter of 2016.

Brent Crude oil price ($/barrel)

Mediterranean benchmark refining margins³

Refining margins in Europe have weakened due to the oversupply of both gasoline and diesel, which has widened supply-demand balances globally. During 2016, margins lost ground, as wider crude differentials, only partly offset weaker gasoline and middle distillate cracks. More specifically, according to Reuters, Cracking margin averaged $3.9/bbl, $1.0/ bbl lower y-o-y while the Hydroskimming margin dropped to $2.4/bbl, down $0.9/ bbl vs. 2015. The Brent-Urals spread rose by $0.7/bbl in 2016 to $1.6/bbl as Urals faced high levels of competition in the Mediterranean, especially following the return of Iranian barrels.

Brent – Urals Differential ($/bbl)

³Source: Reuters

International fuel cracks ($/bbl)⁴

Gasoline and middle distillate cracks were weaker in 2016 due to significant oversupply in the markets, mainly due to the production increase by Chinese refineries, which exceeded demand and resulted to a stock built in Europe and the USA. Gasoline demand got positively affected by crude prices and arbitrage opportunities (e.g. during shutdowns at logistics facilities). On the other hand, middle distillates were positively affected by the French refineries’ strikes in May and June, following a mild winter in 2015-16, which reduced the demand for heating gasoil. During the summer season, demand increased supporting margins; strong benchmarks sustained through autumn 2016, due to major turnarounds in Russian refineries and lower exports from the US due to temporary product logistics disruptions. Conversely, fuel oil cracks ended up in historical highs due to higher demand in the Med. Naphtha cracks reached a 5-year high due to increased demand for gasoline blending and reforming. However, the continuous competition with LPG for petrochemical feedstock limited the upside for naphtha cracks.

⁴Based on Brent prices

The Greek Market⁵

The Greek economy showed signs of stabilization in 2016. Progress in the implementation of the program during the year had a positive effect both on liquidity and confidence, reflected in positive fiscal developments, as well as the Greek banks’ results improvement. However, the economic climate and recovery continue to be affected by a level of uncertainty, since risks around the implementation of the program, in relation to new fiscal measures legislation, in the context of periodic reviews, as well as execution of legislated measures, especially as far as reforms are concerned, remained. Progress on those could have a positive impact on debt sustainability assessment (DSA), which could support the participation of Greek government bonds to ECB’s QE program. This development could gradually lead to the return of Hellenic Republic to global capital markets, regain of trust to the Greek economy and accelerate lifting of capital controls. The Geek domestic fuel market demand ended up at 7 million tons in 2016, according to preliminary official data, decreasing by 2% compared to 2015, mainly due to a 14% drop in heating oil demand. The demand for motor fuels was largely stable, with diesel increasing by 5%, offsetting gasoline’s decrease of 2%.

⁵Sources: ELSTAT, Data from the Ministry of Production, Restructuring, Environment and Energy, World Bank, IMF, Bank of Greece “Monetary Policy” Interim Report, December 2016