Oil Market Report: 11 May 2007

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  • Nigerian crude capacity shut-ins rose to 815 kb/d in early May, adding to pressures caused by a gasoline market already tightened by an unusually high level of unplanned refinery outages.  Unsurprisingly, gasoline remains the primary driver behind oil prices, with cracks and US retail prices reaching levels not seen since the post-Hurricane Katrina spike in September 2005.
  • Seasonal refinery maintenance and a spate of unplanned outages is expected to depress global throughputs.  This implies, with demand increasing in June, that there will be a further tightening of product stocks.  Refinery runs, and therefore crude demand, should rise sharply in July (2.5 mb/d over March) as refiners seek to meet peak summer demand.
  • Preliminary OECD stock data continue to point to a 930 kb/d draw in first-quarter total oil stocks, following on from a draw of similar magnitude in the previous quarter.  Forward demand cover provided by total oil inventories remains around the five-year average, but gasoline stocks are low in all regions.
  • April world oil output rose by 55 kb/d to 85.5 mb/d, with OPEC supply levelling off near 30.3 mb/d.  Non-OPEC growth in 2007 is trimmed to 1.0 mb/d, plus 0.2 mb/d of OPEC NGLs, which leaves the 2.3 mb/d rise in the 'call on OPEC' by 4Q running well ahead of expected OPEC capacity additions.  This implies lower spare capacity later in the year.
  • Global oil product demand is revised down marginally to 84.2 mb/d in 2006 and 85.7 mb/d in 2007 following adjustments to baseline historical data.  Changes are centred in the Middle East, but Chinese demand has also been revised down, despite strong 1Q growth.

Half-full or half-empty?

Preliminary first quarter data in this report do little to answer the debate on oil market tightness.  Some argue that stocks are adequate, the market is balanced and there is little cause for concern.  Others (like us) argue that it is tightening.

Nominally, stocks appear comfortable:  OECD crude oil and product stocks are in the upper portion of the five-year range but there is little doubt that a 930 kb/d stock draw in the first quarter - hot on the heels of a 890 kb/d draw in 4Q06 - is dramatic.  This leads on to an academic debate as to whether the build in stocks over the past few years represents increased demand cover for low spare capacity and additional supply risks, or whether it is a phenomenon financed by fund money.  However, we will leave this for another time.

Forward inventory cover has also flattened and looks to be less concerning than a month ago, following small upward revisions to stocks and downward revisions to demand.  However, that should not be too surprising considering the incredibly mild winter, which moderated the impact of significant OPEC cutbacks.  No analyst, however, will dispute the low level of gasoline stocks in all OECD regions.  In particular, US gasoline stock cover is at a 16-year low for this time of year - pushing pump prices to near record levels.

Yet, the recent trend in stocks and current stock levels are less of a concern than the outlook for the next two quarters.  The preliminary 8.2 mb build in key OECD country stocks in April represents a surplus of less than 300 kb/d, around a third of the level expected.  As with final February stock data, revisions are likely, but these could equally apply to supply or demand as to stocks.  More importantly, there is the need for a significant increase in supplies to match the forecast 1.6 mb/d jump in June oil product demand, which looks unlikely to happen.

From a refining perspective, things look slightly different.  Seasonally, refinery throughputs tend to hit a low between March and May and then rise through to August.  Therefore, while increased crude availability in the first quarter may have influenced prices, it would have done little to rectify the current tightness in gasoline supplies, given a high level of outages, particularly in gasoline-producing catalytic cracking units.

By June, global refinery throughputs should have risen by (a maintenance-constrained) 660 kb/d from May, and although there may be some upside to this figure (see Refinery section), the growth in runs is expected to lag the 1.6 mb/d jump in global product demand.  That certainly implies a tightening of product stocks, but also in total oil stocks if crude supplies remain at current levels.  Unplanned outages permitting, there should be plenty of available capacity to meet forecast product demand increases in July and August, but to achieve this without causing a steep decline in crude stocks, requires an increase in OPEC output before the summer.

Further, there are some disquieting signs for supplies of high gasoline-yielding light sweet crudes from Nigeria.  A spate of bombings and kidnappings in early May has shut a further 220 kb/d on top of the 600 kb/d of capacity that was offline on average during April.  Further, reports of an imminent restart of 350 kb/d of Forcados production seem premature in the current environment.

While oil analysts will continue to debate the adequacy of current stocks, some things are very clear:

  • The observed OECD stock draw of around 900 kb/d over the past six months is unusually high;
  • Gasoline stocks are tight and may tighten further in June unless refinery capacity rises more sharply than current forecasts suggest;
  • Crude stocks will tighten if OPEC production stays at current levels through to the end of the third quarter -  as some officials have suggested;
  • Recent developments in Nigeria highlight ongoing supply risks.

While the optimist can point to the glass being half-full, this report anticipates a thirsty market in the months ahead.



  • Global oil product demand has been revised down marginally to 84.2 mb/d in 2006 and 85.7 mb/d in 2007 (approximately -100 kb/d in both years).  Changes in 2006 are related to baseline adjustments in various, mostly non-OECD, countries, particularly in the Middle East.  Overall, world demand is estimated to have grown by 0.8% or 0.7 mb/d in 2006, and is expected to rise by 1.8% in 2007 or 1.5 mb/d.

  • OECD oil product demand remains essentially unchanged in 2006 at 49.2 mb/d, but is revised up slightly in 2007 by about 100 kb/d to 49.6 mb/d given upward revisions to Germany's 2006 baseline, which are carried forward in the forecast.  Across all regions, March temperatures continued to be much milder than the ten-year average, but the trends appears to have diverged in April, with the Pacific getting cooler and Europe much warmer.
  • Non-OECD oil product demand has been adjusted downwards slightly by some 100 kb/d in both 2006 and 2007.  Historical and forecast data were reassessed following the submission of preliminary 2005 data and revisions to previous years, which were particularly marked in the Middle East, but do not resolve all of the outstanding data issues in the region.  Chinese 1Q07 demand was also adjusted down by some 250 kb/d following data revisions, but was slightly offset by higher Indian growth.  Non-OECD oil product consumption is now estimated at 35.0 mb/d in 2006, an increase of 3.2% or +1.1 mb/d, and is forecast to rise to 36.2 mb/d in 2007 (+3.3% or +1.2 mb/d).
  • April's International Monetary Fund worldwide economic forecasts - which together with OECD data form the foundation of our econometric demand model - are incorporated in this report.  The IMF's World Economic Outlook assessment implies a continuation of robust global oil product demand, with only marginal changes compared with the September 2006 edition, with stronger non-OECD growth compensating for weaker OECD gains
  • China's apparent demand has been revised down slightly to 7.6 mb/d for 2007 (6.4% growth) following revisions to February and March estimates.  March demand rose by an estimated 4.7% year-on-year, driven by petrochemical demand (especially for ethylene production), the start of the agricultural season and the build-up of infrastructure construction.
  • The planned introduction of a fuel rationing system in Iran has the potential to curb demand, increase fuel efficiency and move the country closer towards free market pricing.  However, there remain considerable political and social hurdles to be overcome.
The World Economy: The Party Is Not Over Yet

The general tone of the IMF's April 2007 World Economic Outlook is optimistic, painting a portrait of a world economy that should be able to withstand some turbulence. Of course, as the Fund quickly points out, there are downside risks that could derail these forecasts, notably the "disorderly" unwinding of global imbalances, financial market volatility, a more pronounced slowdown in the US, renewed inflationary pressures, and last but not least, a sustained hike in oil prices.

Still, the IMF sees US growth slowing moderately; its GDP forecast for 2007 is now put at 2.2% (compared with 2.9% in the September 2006 edition of the World Economic Outlook). The country's 1Q07 GDP grew at a relatively weak 1.3% pace, but this is a preliminary estimate, and may be revised upwards as March data is compiled. Moreover, inflationary pressures seem to be building up.

Nevertheless, there is no clear evidence that the US housing market woes are spilling over to the rest of the economy - notably via the banking system, which according to most measures remains strong. As such, economic activity should hold its ground over the coming quarters, supported by private consumption and, to a greater extent, by exports, buoyed by a weakening dollar.

Meanwhile, the Eurozone looks stronger than anticipated, with the German economy consolidating the growth trend observed since last year. In Asia, Japan's prospects continue to look relatively healthy, despite concerns about the yen's depreciation and capital outflows, prompted by low interest rates.

More interestingly, China's expansion is not seen abating over the next few years, suggesting that the Fund's economists think that the economy will be able to withstand the risks of overheating and associated undesirable consequences, such as mounting inflation. Indeed, Chinese GDP growth in 1Q07 reached 11.1% on an annual basis, much higher than the "harmonious" rate targeted by government officials (around 8%).

Although the US slowdown could conceivably curb Chinese net exports (which contribute to almost half of GDP growth, the rest being mostly driven by investment), it must be pointed out that the US accounts for only a quarter of Chinese exports. The rest are bought by other countries, particularly the European Union and Japan, which as noted above feature a relatively positive economic outlook.

What do these forecasts imply for oil demand? The erratic weather aside, which depressed demand in OECD in the last two quarters, the IMF economic assumptions suggest that oil consumption will remain strong, particularly in non-OECD countries - notably China and the Middle East, where economic activity remains buoyant. In the US, meanwhile, oil product deliveries remain robust, although rising gasoline prices ahead of the summer could lead to lower leisure or marginal driving, as observed last year.


According to preliminary data, total OECD demand fell in March by 1.7% versus the same month in 2006.  The decrease was mostly related to continuing mild temperatures across all regions.  Inland deliveries fell by 6.1% in Europe and by 2.8% in the Pacific, and rose by only 1.5% in North America.

Demand weakness was centred on both lower deliveries of heating fuels (heating and fuel oil in North America and Europe, and jet/kerosene in the Pacific) and residual fuel oil, due to the temperate weather.  Overall, jet/kerosene contracted by 0.3% on a yearly basis, other gasoil by 17.4% and residual fuel oil by 11.8%.  Only naphtha and gasoline registered gains (+4.7% and +1.2%, respectively), the former buoyed by petrochemical demand and firm gasoline blending in North America and the Pacific, and the latter lifted by sustained North American consumption, which countered Europe's structural decline.  Moreover, given Germany's upward baseline revisions to 2006 data, we have slightly raised our OECD demand forecast for 2007 to 49.6 mb/d (+0.7% over 2006, assuming normal temperatures throughout the rest of this year).

North America

According to adjusted preliminary data, March's inland deliveries in the continental United States - a proxy of demand - rose by 1.5% versus March 2006.  Diesel demand growth was particularly strong (+14.6%), indicating enduring economic activity.  Meanwhile, both heating and residual fuel oil deliveries were down on an annual basis (by 17.9% and 0.9%, respectively), as temperatures became warmer (in OECD North America, the number of 'heating-degree days' or HDDs in March was 13% lower than the ten-year average, and 15% lower in the US).

More interestingly, gasoline deliveries posted a healthy 2.4% gain, despite concerns that rising retail prices would curb demand.  Temporary price hikes, however, have a relatively marginal effect in the US, where income elasticity plays a greater role as prices are relatively low compared with other OECD countries.  During last year's summer price spike, consumers reacted mostly by cutting leisure or marginal driving, as suggested by the number of miles driven (the so-called 'vehicle-miles travelled' or VMT), which recorded virtually no growth instead of the seasonal +2-3% increase.  Since the latest VMT figure available corresponds to January 2007, it is too early to properly assess the impact of the current price spike.  Nevertheless, in the longer term, sustained high prices could arguably dent demand in a more significant way.

Preliminary March data indicate that inland deliveries in Mexico increased by 1.3% versus the same month in 2006, pulled up by strong transportation fuel demand.  Gasoline rose by 6.4% year-on-year, while jet fuel/kerosene jumped by 10.9% and diesel climbed by 3.3%.  Sustained growth in transportation fuels is a testimony to both strong economic growth and a growing vehicle fleet.  Admittedly, growth may taper off somewhat as the US economy slows down, but that will probably affect highway diesel (truck freighting to and from the US-Mexico border) more than gasoline use.

Still, this fast pace of growth appears to preoccupy Mexico's Congress, amid growing gasoline import expenditures and concerns that the country will become a net crude oil importer given the decline of its major oil producing field, Cantarell.  As such, in late April ruling-party legislators and their allies passed a law in the Lower Chamber aiming at promoting the production and use of ethanol from both corn and sugar.  However, the law - already passed by the Senate and only needing President Calderón's signature to be promulgated - is notably vague in terms of targets, and was stridently opposed by the opposition, which claims it will endanger food supplies and foster another 'Tortilla crisis' as corn prices rise.

Despite the bill, it is unlikely that ethanol will make inroads in Mexico in the short- to medium-term, given the lack of infrastructure.  Since ethanol is highly corrosive, new storage facilities and pipelines would need to be built - a tall order for Pemex, the state-owned monopoly, already struggling with growing debt and a high tax burden.  At most, according to some observers, the country could hope to introduce ETBE (a mix of ethanol and isobutene used as an oxygenate additive in gasoline), but the magnitude of the required investment is a potential deterrent.


Preliminary figures indicate that total oil product demand in Europe shrank by 6.1% in March on a yearly basis, mostly as a result of the continuing weakness in heating and residual oil use (-21.9% and -19.8%, respectively).  Temperatures were mild on average (HDDs were some 8% lower than the 10-year average) and electricity demand was consequently weak.  Only jet fuel and diesel recorded modest gains (+1.8% and 2.3%, respectively).

In Germany, in a pattern that is becoming all too familiar given the unusually warm 2006-2007 winter, March preliminary data highlight the ongoing contraction of heating oil deliveries (-41.3% on an annual basis).  German household stocks remain quite ample by historical standards, with tanks filled at approximately 54% of capacity by month-end, three percentage points less than in February and well above the five-year average.  Since temperatures were also benign in April, heating oil deliveries in April have probably been quite weak.

By contrast, transportation fuel deliveries remained strong in March (gasoline rose by 2.2%, jet/kerosene by 6.0% and diesel by 3.9%), further strengthening the case of a blossoming German economy (whose outlook, as noted earlier, was revised upwards by the IMF).

Unsurprisingly, heating and fuel oil deliveries in France and Italy mirrored Germany's pattern, given the prevailing warm weather.  Heating oil deliveries shrank by 24.2% and 23.3%, respectively, compared with March 2006, while residual fuel oil demand plummeted by 54.4% and 59.3%, respectively.  Moreover, some reports suggest that water reservoirs have been replenished and that hydropower will be plentiful in the months ahead.  If this is confirmed, it could herald a continued weakness in fuel oil consumption for power generation, especially in Italy and Spain, although it should be noted that in other countries, such as Austria, low water levels remain a concern.

Finally, in France and Italy gasoline demand continues to be structurally weak given the gradual 'dieselisation' of their vehicle fleets.  Deliveries shrank by 3.0% in France and by 9.2% in Italy (in the latter this trend is compounded by seasonal factors).


According to preliminary data, oil product demand in the Pacific declined by 2.8% in March on an annual basis, due to continuing weak demand for heating fuels (kerosene in Japan and Korea, and other gasoil elsewhere) and fuel oil as a result of mild temperatures across the region (HDDs were some 3% lower than normal in March).  Overall, jet/kerosene deliveries fell by 4.2% compared with the same month in 2006, while those of other gasoil fell by 14.0%.  Residual fuel oil deliveries, meanwhile, shrank by 8.9%.  In April, however, this pattern probably reversed, given a cold snap that began affecting the region (notably Japan and Korea) in late March.

In Japan, oil product demand contracted in March (-6.1% on an annual basis) for the fifth month in a row.  The mild weather has played a large part in this decline; inland deliveries of jet/kerosene, which is mostly used for heating, contracted by 5.4% in March.  This, in turn, depressed electricity demand and reduced the usage of residual fuel oil (-21.3%), other low-sulphur gasoil (-14.0%) and direct crude for power generation (included in 'other products', which contracted by 20.1%).  In addition, utilities burned more natural gas, thus further weighing down on oil-based fuels.

Regarding transportation fuels, Japan's structural demand weakness continues.  Gasoline and diesel deliveries fell by 2.5% and 3.0%, respectively.  Nevertheless, the seasonal rebound in gasoline demand (typically during the holidays in late April and early May and in the summer weeks from late July to August) could be stronger this year when compared with 2006, as a result of warmer temperatures.  Indeed, the country's official weather agency recently forecast that most parts of Japan are bound to experience normal or higher-than-normal temperatures from May to July.

In Korea, total oil product deliveries rose in March by 3.8% on an annual basis, essentially supported by naphtha (+5.6%), gasoline (+4.4%) and diesel (+1.1%).  By contrast, as in Japan, jet/kerosene demand was weak (-2.1% year-on-year) given the temperate weather.



Apparent demand in China (defined as refinery output plus net oil product imports, adjusted for fuel oil and direct crude burning, smuggling and stock changes) rose by an estimated 4.7% year-on-year in March, on the back of strong naphtha and gasoil deliveries (+11.1% and +8.1%, respectively), buoyed by petrochemical demand (especially for ethylene production), the start of the agricultural season and the build-up of infrastructure construction.  Coupled with revisions to February estimates, we have adjusted slightly downwards our overall 2007 forecast; we expect total Chinese oil product demand to rise by 6.4% to roughly 7.6 mb/d.

It should be noted that February's aggregated figures and preliminary March data were weaker than anticipated, bringing down quarterly demand by some 250 kb/d, compared with previous estimates.  However, although demand grew by a respectable 5.7% year-on-year in 1Q07, this rate contrasts with the quarter's high GDP growth (11.1%), suggesting unreported stock draws, rather than a shift in income elasticity, unlikely in a country with such high energy intensity as China.

Is demand understated or GDP growth overstated?  Our adjustment attempts as much as possible to account for some of the statistical unknowns, under a consistent methodology with data gathered from independent sources.  Nevertheless, the bulk of our apparent demand calculation is essentially based on official refinery and trade figures.  Moreover, we do not arbitrarily change our methodology in order to reflect what we think should be the 'real' Chinese demand in a given month.

As such, the main question mark pertains to the completeness and reliability of official Chinese data.  There are no stock data, which exaggerates shifts in apparent demand.  Trade figures are also implausibly precise - they are rarely revised as would be expected and sometimes conflict with other sources.  For example, in February the General Administration of Customs reported no exports of crude, but independent sources claim to have tracked at least three outbound cargos; moreover, there are reports that crude imports are tagged as fuel oil.  Meanwhile, refinery data, as we have often noted, systematically excludes 'teapot' refineries, which tend to use fuel oil as feedstock and have arguably become the 'swing' suppliers of lower-quality products in times of high farming and fishing activity.  And if teapots are burning crude rather than fuel oil, then product demand is understated.  Finally, further uncertainties revolve around estimates for smuggling or military consumption.  Thus, without an improvement in official statistics, the volatility and uncertainty regarding Chinese oil product demand will persist.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - jumped by 7.8% year-on-year in March.  All product categories bar residual fuel oil and 'other' recorded strong gains.  Naphtha sales were particularly buoyant (+22.1%), as well as transportation fuels (gasoline deliveries rose by 15.8% and diesel sales by 11.5%).  In light of these developments, we have marginally raised our 2007 growth forecast, to 3.8%.

Although the vigorous increase in naphtha could be explained by reported power shortages in industry, as well as by limited availability of natural gas, the figure must be taken with caution, as it has tended in the past to be subsequently revised down sharply.  By contrast, the buoyant growth in transportation fuels is arguably related to the effects of February's retail price cut and to the expanding vehicle fleet (which rose by about 13% in 2006).

FSU apparent demand - defined as domestic crude production minus net exports of crude and oil products - has been revised upwards by 129 kb/d in 1Q07 and downwards by 163 kb/d in 2Q07.  As in previous months, these changes are related to the volatility of monthly FSU trade data, since supply adjustments have been relatively minor.  Overall, the region's apparent demand in 2007 is virtually unchanged from last month's report, and is expected to average 4.0 mb/d (0.2% lower than in 2006).

The picture that emerges, though, is that FSU net exports have indeed reached peaks not seen since Soviet times.  In February, net exports averaged 9.1 mb/d (some 120 kb/d less than anticipated but almost 700 kb/d higher than in January) and are estimated to have remained in the vicinity of 9.0 mb/d in both March and April.

The surge is due to several factors: 1) relatively subdued domestic demand because of milder-than-normal temperatures; 2) higher oil product exports (about 2.7 mb/d in March), notably of fuel oil (1.1 mb/d); 3) higher crude exports via several pipelines (Druzhba, BTC and CPC); 4) reductions in domestic refinery runs; and 5) lower export duties since 1 April.  It should be noted, however, that duties are bound to increase from 1 June, and this is likely to curb net exports.

Gasoline Rationing in Iran: A Durable Solution?

In our last commentary on Iran's gasoline market (Oil Market Report dated 11 October 2006), we speculated about how the country would tackle its galloping gasoline demand, which had led to a significant surge in imports (some 40% of total demand, given the lack of domestic refining capacity) and which was being prompted by possibly the cheapest retail prices in the world (as in many oil producing countries, cheap fuel is almost considered an entitlement). The issue was quite sensitive, we then argued, because the government had to balance financial imperatives (the growing burden of subsidies and imports) and political considerations (triggering social unrest by rationing demand and/or raising prices, which would also likely stoke inflation), not to mention the issue of tackling waste (spills at service stations and the poor fuel economy of most of the Iranian vehicle fleet).

The government, though, prevaricated for a few months, releasing instead extra funds in January 2007 (about $2.5 billion) to finance gasoline imports until March (the end of the Iranian fiscal year). In late March, however, both the Majlis (parliament) and the Council of Guardians finally approved a long-debated scheme to ration supply and raise prices, which will reportedly be implemented from mid-May. Under the scheme, private car owners will be allocated 90 litres per month (300 litres for taxis), priced at Rials 1,000 per litre (approximately 12 cents) instead of Rials 800 per litre (that is, a 25% price increase). Supply above the quota will be priced at Rials 5,000 per litre (five times more than subsidized prices and roughly equal to gasoline's import cost). In addition, the National Iranian Oil Refining and Distribution Company (NIORDC) intends to launch a five-year refinery upgrade and expansion plan, aimed at raising throughput to 2.9 mb/d from the current 1.6 mb/d.

The big question, however, is whether these measures will succeed in effectively curbing gasoline demand without provoking a political backlash. The quota has been tacitly designed to reduce import demand and is therefore well below daily consumption. Iran's vehicle fleet currently counts some 15 million units, and demand is estimated at about 78 million litres per day (roughly 490 kb/d in 2006) - that is, on average, about 5.2 litres per day per vehicle or three-quarters higher than the 3 litres per day quota. On average, therefore, the quota will last around 17-18 days. Heavy users who are unable to find transportation alternatives will be highly penalized, but there will be some drivers who will manage to curb their own consumption and feed what will likely become a highly profitable black market with their own quota surpluses.

The scheme includes "smart cards" at service stations to reduce both smuggling to neighbouring countries (currently around 10% of gasoline imports per year) and fraud, but the technology is untested and may be liable to malfunctioning. According to some reports, the company in charge of such cards has gone bankrupt. In reality, the government would not have a real incentive to tackle the black market: if marginal users could curb consumption and resell their quotas, heavier users would gradually become accustomed to paying higher prices and overall demand would fall. By contrast, eliminating cheating incentives would be costly, if not impossible: the government would need to increase prices sharply - an even more unpalatable move than rationing.

The new rationing plan should be seen as a clever move towards gradually adopting market prices, encouraging greater fuel efficiency and curbing demand. However, the change will entail considerable social and political hurdles, which will need to be overcome if it is to be a success.



  • World oil supply gained 55 kb/d in April to average 85.5 mb/d as higher OPEC and other non-OECD production countered sharply lower Russian, North American and North Sea supply.  Latest data leave global 1Q07 supply largely unchanged at 85.3 mb/d, as higher OECD and OPEC crude production are compensated for by a weaker OPEC NGL baseline, and lower non-OECD supply.
  • Non-OPEC supply growth for 2007 is forecast at 1.0 mb/d, after 0.4 mb/d in 2006 (both excluding Angola).  Annual growth of 950 kb/d evident since mid-2006 could now ease towards 770 kb/d in 3Q amid maintenance and seasonal outages.  Resurgent growth in 4Q07 centres on North America, the North Sea, FSU and Latin America.  Additionally, OPEC gas liquids growth eased to 0.1 mb/d in 2006, but should recover to 0.2 mb/d in 2007.  OPEC 2007 NGL supply of 4.8 mb/d rises to 7.1 mb/d by 2012.
  • Adjustments to non-OPEC supply add 30 kb/d for 2006, as refinery blendstock data for South Korea and Portugal are included.  But the 2007 total is revised down by 70 kb/d to 50.4 mb/d with lower expectations now for the US, Norway, Brazil, Malaysia and Russia.  Nonetheless, the 2007 OECD forecast is sustained by counteracting upward revisions for Canada, Mexico and the UK.
  • Total OPEC crude supply stabilised at 30.3 mb/d in April after stronger performances from Iraq and Nigeria.  Lower supply from Iran and Venezuela was also offset by higher output from Saudi Arabia, UAE, Qatar and Angola.  Worsening ethnic unrest in Nigeria since late April elections however leaves some 815 kb/d of early May capacity shut in.  Effective OPEC spare capacity stood at 2.8 mb/d in April, while sustainable capacity levels are expected to rise from 34.1 mb/d to 34.8 mb/d by 4Q.

  • The 'call on OPEC crude and stock change' is revised up by 0.1 mb/d for 2007 (0.2 mb/d for the adjusted call), now averaging 30.5-31.7 mb/d for the year.  Weaker 1Q demand combines with a now-lower forecast for non-OPEC supply, most noticeably in 3Q, when the call is revised up by 0.3-0.4 mb/d.  The call rises by 2.3 mb/d between 2Q and 4Q, implying a tightening margin of OPEC spare capacity in the absence of markedly weaker-than-expected demand or a sizeable draw in stocks.

All world oil supply figures for April discussed in this report are IEA estimates.  Estimates for OPEC countries, Alaska and Russia are supported by preliminary April supply data.

Note:  Random events present downside risk to the non-OPEC production forecast contained in this Report.  These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses.  Allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America.  These aside, no contingency allowance for random events is subtracted from the supply forecast.  While upside variations can occur, experience in recent years indicates that the random events listed above may cause supply losses of between 300 kb/d and 400 kb/d for non-OPEC supply each year.


OPEC April crude supply, including Angola, matched upwardly-revised March levels of 30.3 mb/d as lower supply from Iran and Venezuela countered increases from Saudi Arabia and Nigeria.  March estimates were raised by 220 kb/d, largely on revised export estimates from Iran.  Iraqi and Kuwaiti supply for March is also revised up, while indications of falling Orinoco crude supply trim 25 kb/d from the March Venezuela estimate.  April production in Nigeria recovered after reinstatement of earlier-shuttered Bonny crude volumes, although disruptions in early May, if sustained, are likely to result in renewed monthly decline.  UAE, Angola, Qatar, Iraq and Algeria also nudged supply higher in April.  With OPEC sustainable capacity estimates unchanged, implied spare capacity in April came to 3.7 mb/d on a nominal basis and 2.8 mb/d on an effective basis, excluding Indonesia, Iraq, Nigeria and Venezuela.

The Asian Ministerial Energy Roundtable in Riyadh saw renewed emphasis by producers on demand security. Uncertainty over future demand is cited as impeding upstream investment.  We noted last month that incremental crude capacity from OPEC could amount to a relatively modest 700 kb/d for the remainder of 2007.  Moreover, the increase in the expected call on OPEC crude plus stock change looks likely to amount to 2.3 mb/d between the expected 2Q low and the 4Q high point.  OPEC spare capacity has steadily increased since 2004/2005 lows, but on this basis seems unlikely to widen further in 2007.  Claims by OPEC sources in April that there was no need to increase production appear wide of the mark, unless they signal a preference for informal increases rather than overt changes in production targets.

Iranian crude supply for March has been revised up by 215 kb/d to 4.03 mb/d as exports now appear to have been markedly higher than initially thought, at 2.64 mb/d.  The higher exports support earlier reports of sales from floating storage, although our tanker tracking data do not support the higher March export levels reported by some analysts.  Moreover, March crude runs likely remained constrained by reported maintenance at the Abadan refinery.  Preliminary indications are that lower crude exports offset higher domestic crude runs in April, and supply averaged close to 3.9 mb/d.

March supply from Iraq, based on crude exports plus domestic use, is revised up to 2.0 mb/d on higher exports.  April supply is estimated marginally higher at 2.02 mb/d.  Although exports declined from 1.59 mb/d to 1.55 mb/d, this was likely offset by a similar rise in domestic crude use, averaging some 465 kb/d in April.  Again, exports remain concentrated on the southern ports of Basrah and Khor al-Amaya, augmented by around 10 kb/d of cross-border pipeline deliveries into Syria.  The northbound pipeline to Ceyhan remains offline due to repeated attacks by insurgents.

The fate of future upstream investment in Iraq remains in the balance as law makers attempt to reach agreement on a draft hydrocarbon law.  Disagreements between the oil ministry and Kurdish regional authorities on oilfield categorisation and the relative allocation of control between the Iraq National Oil Company (INOC) and the regions point towards a 31 May deadline for the law's adoption being missed.

Production of crude oil from Nigeria staged a modest, 100 kb/d recovery in April to average 2.25 mb/d.  This followed the reinstatement in late March of 187 kb/d of Bonny Light output after an earlier Nembe Creek pipeline spill.  Ahead of late April elections, state NNPC announced that Shell would resume exports from the Forcados terminal in June, with sales of four 950 kb cargoes.  This was interpreted in some quarters as signalling the imminent restart of 360 kb/d of Forcados production which has been shut-in since early 2006.  However, it now appears that sales will be made entirely from storage, and that although Shell has been working to reinstate Forcados facilities, no production restart has yet been scheduled.  Security concerns remain, while it is also reported that extensive theft of pipework could further delay restart.  Nor has any restart at the shuttered EA FPSO (110 kb/d) been scheduled.

The more bullish prognoses emerging in April have subsequently given way to a more down-beat outlook in early May.  A spate of kidnappings after the elections and attacks on production and export facilities has extended production outages to nearly 820 kb/d as at early May.  Estimates of the volumes of crude production which are currently offline can be summarised as follows:

To date, offshore production has been less prone to disruption than onshore pipeline, pumping station and export facilities.  However, with the EA, Okono and Funiwa FPSO facilities all now shut, rebel group attacks may be taking on more of an offshore slant.  Rising deep water production has helped to sustain Nigerian capacity levels in the face of four years of disruptions in the Niger Delta and is much less easy to attack for Delta-based insurgent groups.  However, the apparently increasing capability of rebel groups to target offshore facilities may mean no Nigerian capacity is entirely free from the risk of attack.

Pace of OPEC NGL Growth to Match Crude Oil

Looking at OPEC crude additions for 2006-2012 tells only half story for potential capacity growth. Gas liquids (ethane, propane, butane and pentanes from gas processing plants plus field gas condensates) are expected to match crude's increase, rising by +2.6 mb/d (+7.8% pa) and taking potential OPEC NGL supply to 7.1 mb/d by 2012. The rate of increase matches growth evident during 2001-2006, as attempts to boost natural gas utilisation and to reduce flaring continue. Moreover, rising OPEC condensate supplies defer an eventual global shift to heavier and sourer global crude.

The gas liquids supply forecast focuses on specific gas processing plant and condensate capacity projects, on a country-by-country basis. The results are tested against aggregate natural gas supply projections, as contained in WEO 2006. In this instance, our forecast suggests the liquids-to-gas output ratio for the Middle East Gulf (MEG) region will remain around a current 10 kb/d per bcm. Although this looks conservative, a degree of caution over future NGL availability is in order. Firstly, the current tight market for raw materials, labour, services and fabrication capacity renders some gas and NGL supply projects as risk-prone as those for crude oil. Gas re-injection requirements for oil production may rise. Baseline NGL supply data is notoriously opaque, with ambiguities over the inclusion of ethane and condensate. Regulatory delays in consuming countries are undermining earlier strong expectations for future demand growth and exports. Finally, analysts partly rely on capacity rather than production in forecasting future increments, with data on decline rates at existing gas fields as scarce as those for oil. However, offsetting factors should sustain OPEC NGL growth in the next five to six years:

  • The impetus to minimise gas flaring is growing.
  • Much Middle Eastern gas is stranded gas, with a clear incentive to strip out liquids to maximise early revenue flows. Wet gas streams are preferentially developed ahead of dry gas for this reason.
  • OPEC gas development is targeting local, just as much as export, markets, diminishing the potential impact of international demand uncertainty.
  • Qatar, Iran and others are tending towards modular gas supply and export infrastructure, which should be less prone to time and cost over-runs than stand-alone projects.
  • Although much of the NGL increase from associated gas will be dependent on related crude capacity, a significant and growing amount will also come from non-associated gas, being less prone to delays if crude capacity plans are deferred.

Over 50% of the expected increase in gas liquids supply by 2012 will come from Saudi Arabia and Qatar. A further combined 30% comes from Iran and Nigeria, even though our projections for these two countries have been revised down since the July 2006 Medium Term Oil Market Report (MTOMR). These four producers hold 35% of global natural gas reserves and account for 80% of gas liquids growth. The rate of growth from other heavyweight OPEC NGL producers such as Algeria and UAE looks more modest in comparison, although these two combined will produce around 1.5 mb/d of NGL by 2012, similar to current volumes. Replicating our approach to crude capacity, the uncertain investment environment in Iraq and Venezuela is reflected by a flat forecast NGL profile, though both could see much higher production over time. The forecast will be examined in greater project- and country-specific detail in the forthcoming MTOMR.

April Saudi Arabian supply is estimated to have risen by 55 kb/d from March, at 8.6 mb/d.  Higher domestic refinery throughputs countered lower eastbound crude sales.  However, heavier refinery maintenance is scheduled for Ras Tanura in May, potentially opening the way for higher exports.

As noted last month, Saudi Aramco replaced production in 2006, maintaining crude and condensate reserves just under 260 billion bbls.  The release of Aramco annual data for 2006 leads to a 30 kb/d downward adjustment to this report's crude supply estimate, focused on 2Q06.  Our estimate of 2006 Saudi NGL supply is revised down by 55 kb/d to 1.44 mb/d, with 2007 gas liquids cut by 50 kb/d to 1.47 mb/d.

Aramco announced earlier in April that the Manifa project is on schedule for 2011 completion, with targeted output of 900 kb/d of Arab Heavy crude, 90 Mcfd of gas and 65 kb/d of condensate.  Manifa was already included in this report's medium-term capacity estimate in the April OMR.  A later announcement by Oil Minister al-Naimi suggested that longer-term demand restraint measures in consuming countries could cap Saudi Arabia's capacity at the 2009 target level of 12.5 mb/d.  Implicitly this suggests a scaling back of capacity growth plans, as Manifa was originally a component of later-phase expansion beyond 12.5 mb/d.  This report assumes crude capacity reaches 12.5 mb/d by 2012.

State PDVSA officially took over operational control of Venezuela's four Orinoco crude upgrader projects on 1 May.  Terms for future participation by, and financial compensation for, international operating companies remain unclear.  However, with Venezuela's tax authorities now seeking payment of alleged tax arrears for 2002 from ExxonMobil for the Cerro Negro upgrader, it appears that Venezuela is attempting to offset its liabilities.  PDVSA has already said that it will only recognise the book value of the upgrader projects, not future worth.  At peak operating levels, the upgraders process 630 kb/d of extra heavy Orinoco crude, but a combination of OPEC supply curbs and uncertainty over the future operating regime have reportedly cut April output closer to 450 kb/d.  Estimates for Venezuelan crude supply (including heavy Orinoco supply) are trimmed to 2.39 mb/d for March and 2.35 mb/d for April.  Venezuelan gas liquids supply contributes an additional 220 kb/d.

Hormuz Crude Bypass Routes*

International political tensions over Iran's nuclear programme have arguably eased in the last two months, but the UAE has become the first regional state to put in place contingency plans to shield its oil exports from the threat of any future escalation across the Gulf.

In the last month, the Abu Dhabi-owned International Petroleum Investment Company (IPIC) has awarded Germany's ILF the project management contract for construction of the 360 km pipeline from the Habshan oil fields to the port of Fujairah on the Gulf of Oman, where a large downstream and bunkering development is envisaged. The pipeline will have capacity of up to 1.5 mb/d of crude a day - just over half of UAE's production capacity, reducing dependence on transit through the Straits of Hormuz.

The decision to finance this project and the wider Fujairah complex shows the impact on regional thinking of Iranian President Ahmedinejad's references last year to the 'oil weapon'. While some interpreted this as a threat to cut off Iranian supplies, others saw it as a threat to all Gulf oil supplies shipped via the Hormuz Straits. Some 17% of world oil supplies transits this 280 km route, which measures barely 50 km at its narrowest.

The rationale for further large-scale Hormuz bypasses is limited for now - not least because of financing. While Iranian tensions have seen plans dusted off for a 5 mb/d Trans-Gulf pipeline starting in Iraq and running south to the coast of Oman, the trans-national nature of the link and its vulnerability to political and insurgent tensions render it more problematic than the domestic UAE route.

One of the largest potential financiers, Saudi Arabia, already has its own Hormuz bypass route in the form of the Abqaiq-Yanbu line, with potential to take some 4.8 mb/d of Saudi crude - over half of current Saudi production - through the Red Sea. With only 2.4 mb/d of this capacity currently in use, this would be the first recourse for Saudi oil in the event of shipping problems.

Iraq too has the potential to route oil through the Kirkuk-Ceyhan pipelines to the Mediterranean. But with only a maximum 300 kb/d of an installed 1 mb/d plus of capacity useable since the US-led invasion of 2003, this remains a vulnerable alternative. Further limited capacity exists through Syria, with 10 kb/d of trade in April. That leaves Kuwait and Qatar most vulnerable to tensions around Hormuz. But with Kuwait struggling to advance core projects at home, and Qatar likely to focus more on the security of its 31 million tonnes per year LNG exports than 700 kb/d of crude, prospects for co-operation remain limited, unless Iran's deployment of the 'oil weapon' comes closer to reality.

* Contributed by Catherine Hunter, Office of Global Energy Dialogue, International Energy Agency

Non-OPEC Overview

Non-OPEC supply growth for 2007 is adjusted down this month to 1.0 mb/d, albeit partly due to a higher 2006 baseline.  On a like-for-like basis (excluding Angola) this nonetheless represents a marked recovery from 2006's 0.4 mb/d growth and the decline of 0.1 mb/d seen in 2005.  The FSU generates nearly half of 2007's growth, with more modest 100-150 kb/d contributions coming from Asia, Africa and Latin America.  Equally importantly however, the sluggish performance evident from OECD supply in 2005 and 2006 is expected to level off.  New production from the UK, Canada and Australia, alongside an assumption that 'normal' operating conditions prevail (less unscheduled field shut-downs), underpin this forecast.  By implication, we see the tendency for OECD supply to under-perform initial forecasts in the past few years being due to unforeseen outages and delays as much as to underlying decline rates.  OECD projections now look more robust, and indeed changes for 2007 have largely been confined to January's downward adjustment to account for latest Norwegian and Mexican government forecasts.

Moreover, much of the expected 2007 non-OPEC rebound is already evident, with quarterly growth averaging 950 kb/d since mid-2006.  Northern hemisphere field maintenance and seasonal production stoppages may now hold non-OPEC supply flat at 50.1 mb/d, until a surge to 50.8 mb/d in 4Q.  The late-year increase derives from seasonal OECD recovery, plus new production from Canada, the Caspian, Brazil and Sudan.  Of course, in the current environment of higher costs and delays, slippage from this profile is always possible.  Nonetheless, new production increments envisaged for 4Q are now sufficiently advanced to be less prone to delay than projects at an earlier stage of development.  Our customary downside risk proviso for unforeseen events remains, but is now explicitly included in the forecast adjusted 'call on OPEC' in Table 1, rather than hidden in regional adjustments to the base forecast.


North America

US - April Alaska actual, others estimated:  Total US oil supply in 1Q07 of 7.4 mb/d (5.2 mb/d of crude) remains well below first-half 2005 levels of 7.8 mb/d, prior to the arrival of Hurricanes Katrina and Rita.  Supply of NGL and crude from the GOM and Alaska each stands around 0.1 mb/d below levels from two years ago.  Recovery from Alaska in April was stalled by a power outage at a 90 kb/d gathering centre at the Prudhoe Bay field, and by mild temperatures which tend to impede reinjection.  Prudhoe facilities were operating normally again by early May, but Alaskan production rebound could be short-lived, as pipeline replacement is scheduled for the Alpine field this summer.

Total US supply growth in 2006 amounted to around 50 kb/d, with ethanol, NGL, and GOM growth offsetting decline elsewhere.  This report foresees a similar trend in 2007, with crude supply averaging 5.1 mb/d and total oil production 7.42 mb/d.  There is some upside potential for the GOM forecast, as for now we retain an aggressive hurricane outage assumption for 2007, at 160 kb/d for 3Q and 215 kb/d for 4Q based on the five year average.  The US Minerals Management Service sees GOM production potential attaining 2.1 mb/d within 10 years, a trend similar to the 1.8 mb/d by 2011 envisaged in the last MTOMR.

Canada - Newfoundland March actual, others February actual:  Stronger-than-expected February/March supply from Alberta and offshore Newfoundland boosts the 2007 Canadian production forecast by 65 kb/d.  Alberta bitumen and non-mined syncrude, plus higher offshore east coast output from Terra Nova and White Rose, account for the bulk of 2007's near-200 kb/d growth.  This takes crude supply to 2.0 mb/d and total oil (including NGL and mined syncrude) to 3.4 mb/d.  Offshore east coast production, recently around 350 kb/d, faces maintenance in 2Q and 3Q, but could rebound towards 440 kb/d by year-end.  Husky Energy in April announced regulatory approval to increase average annual production capacity for White Rose to 140 kb/d from 100 kb/d.  The net impact on production may be less, since actual production in 1Q07 averaged 124 kb/d, while the OMR already assumed 135 kb/d from late 2007.

Mexico - March actual:  Mexican oil supply is expected to fall by some 200 kb/d in 2007, more than double the rate seen in 2005 and 2006.  This is despite higher-than-expected March output, when crude averaged 3.18 mb/d and NGL some 415 kb/d.  March's recovery also led to rising crude exports, which touched 1.78 mb/d, their highest since last November.  Exports of heavy/sour Maya crude to the Americas have recovered earlier low levels.  Recent data confirm that the December/January dip in Mexican supply was exaggerated by production outages.  However crude decline from the Cantarell field, which accounts for over 50% of Mexican supply, is accelerating.  Latest estimates put 2007 Cantarell decline at 15%, which easily eclipses increases from other deep water supply at Ku-Maloob-Zaap.  Pemex cited in early May an over-onerous tax burden as preventing the doubling in investment needed to arrest production decline.

North Sea

Norway - February actual, March provisional:  Unscheduled outages and project overrun have cut forecast Norwegian liquids supply for 2007 by 75 kb/d.  Total output now averages 2.65 mb/d in 2007, from 2.78 mb/d in 2006 and 2.97 mb/d in 2005.  Condensate and gas liquids account for 0.5 mb/d of the total.  State operator Statoil announced in late April it would miss its 2007 production target, partly due to an extended outage at the Kvitebjorn gas and condensate field.  This report previously factored in reduced supply at Kvitebjorn through mid-year due to a drilling programme.  However, the field will now be shut completely from May until 4Q to address reservoir pressure problems.  Kvitebjorn produced some 50 kb/d of condensate in 2006.  Also affecting 2007 supply are installation delays at Marathon's Alvheim FPSO, deferring start-up until 3Q.  Alvheim peak liquids supply is also trimmed from 80 kb/d to 50 kb/d.

UK - February actual:  UK offshore production enjoys a temporary hiatus from decline in 2007, as Nexen's Buzzard field in the Forties system builds to peak.  First quarter 2007 offshore output averaged 1.75 mb/d, its highest level in a year.  Average offshore supply in 2007 is estimated at 1.72 mb/d, after the 1.63 mb/d seen in 2006 and 1.81 mb/d in 2005.  Buzzard was reportedly producing above 150 kb/d in early May and should attain near-200 kb/d capacity by mid-year.  Data from BP, the Forties pipeline operator, suggest that Buzzard inclusion has cut Forties gravity by 3.7°API to 40.9°API, while raising sulphur from 0.2% to 0.45%.  Earlier concerns that hydrogen sulphide (H2S) content would impede early Buzzard production have been unfounded, but may affect later production when sourer wells are tapped.685

Former Soviet Union (FSU)

Russia - March actual, April provisional:  April saw lower-than-expected output from Lukoil, Surgutneftegaz, Rosneft and a number of smaller producers.  Together with now-weaker guidance on 2007 production prospects from Lukoil and Surgutneftegaz, this results in a 30 kb/d downward revision to this report's Russian forecast, which now comes in at 9.94 mb/d of crude and condensate.  That equates to 2.6% growth versus 2006, continuing the slowdown seen in the past two years.  The Ministry for Economic Development revised down its own expectations for crude production and exports through 2010.  However, actual 1Q production already seems to be close to the Ministry's 2007 average, and with incremental volumes expected later in 2007, we retain a slightly stronger growth profile than the Ministry.

Preliminary March trade data reveal FSU net exports of 8.93 mb/d, 160 kb/d lower than February.  February's net export total was revised down by 120 kb/d with finalised rail export data, but still marked a post-Soviet high of 9.1 mb/d.

Monthly crude exports via Transneft were down by 180 kb/d in March, to 4.12 mb/d, with 90 kb/d less heading to central Europe.  March maintenance on the pipeline to Primorsk cut Baltic seaborne crude exports by 70 kb/d, while Black Sea exports were off by 30 kb/d.  However, extra Caspian crude provided a 30 kb/d offset, as BTC transits continue to rise.  Products exports hit a record 2.7 mb/d in March, 40 kb/d up from February.  Fuel oil exports of 1.13 mb/d were especially strong, 180 kb/d higher than March 2006.  April exports likely nudged above March levels, as new reductions to Russian export duty came into effect on 1 April.  With pipeline maintenance ending, and cuts in domestic refinery runs exceeding a drop in output, crude exports to rise.  A scheduled June export duty rise could push May exports higher still.

Next month's report will review Russian pipeline developments as a prelude to a new medium-term production forecast for the MTOMR.  However, Transneft in late April announced that one third of the 600 kb/d pipeline being built from Eastern Siberia to Skovorodino on the Chinese border has been constructed.  Completion is expected by end-2008, with 50% of deliveries travelling by spur line to China and the remainder likely to be railed to the Pacific coast.  Completion of a second phase of the pipeline, taking total capacity to 1.6 mb/d, will be dependent upon exploration successes in Eastern Siberia.

Kazakhstan - March actual:  Kazakh oil production is seen levelling off in 2007 at 1.34 mb/d, despite modestly higher output from the Tengiz and Karachaganak fields.  The country's Energy Ministry, on the strength of 1Q performance, revised expected 2007 production up by 3%, suggesting growth of around 40 kb/d.  Maintenance work assumed for July-September potentially accounts for our flatter 2007 profile.

Export and processing capacity remain a potential constraint on future Kazakh growth.  Russian pipeline monopoly Transneft took over Russia's 24% stake in the 700 kb/d CPC pipeline, which moves much of Kazakhstan's oil output to western markets.  Russia has long blocked a doubling of CPC capacity, arguing for higher pipeline tariffs and progress on a Turkish Straits bypass to ease shipping bottlenecks.  Operators of Kazakhstan's much-delayed Kashagan project are now seeking alternative export routes before the field comes online at the turn of the decade.  Expansion at the Karachaganak oil and gas field is also partly dependent on negotiations with Russia.  Karachaganak oil exports use the CPC pipeline but gas liquids also depend on northbound gas shipments to Russia's Orenburg processing facility.  Initial plans to expand Orenburg have stalled, with Kazakhstan now considering a processing facility of its own.

Other Non-OPEC

China - March actual:  China has enjoyed an unbroken, if modest, run of production growth this decade, averaging 70 kb/d per year.  The trend is expected to continue in 2007, with output reaching 3.75 mb/d, a level that was already attained in 1Q.  Rising western onshore production and developments offshore counter easterly onshore decline.  CNPC on 3 May announced a major discovery in the northerly Bohai Bay, with proven reserves estimated at three billion barrels and early production potential of 200 kb/d.

Revisions to Non-OPEC Estimates

Non-OPEC supply is revised up by 30 kb/d for 2006 but down by 70 kb/d for 2007.  This cuts expected non-OPEC growth in 2007 to 1.0 mb/d from last month's 1.1 mb/d.  Higher 1Q data for Canada and Mexico add a combined 90 kb/d to 2007 supply, in part offset by a 30 kb/d reduction for the USA.  Lower Norwegian supplies due to delays and outages outstrip a higher UK baseline, leaving European 2007 supply revised down by 35 kb/d.  The inclusion of previously omitted refinery blendstock and additives data for Korea adds some 10-15 kb/d to historical and forecast OECD Pacific supply.

Revised historical data for Nigerian Oso condensate and 2006 Aramco production data reduce 2006 OPEC NGL supply by a combined 60 kb/d.  These, plus delays in the build up in Qatar's gas liquids supply, reduce the 2007 OPEC NGL total by 70 kb/d.  Aside from China and Russia (already discussed, above) other key downward adjustments for 2007 come from Brazil and Malaysia.  In both cases weaker baseline production data through March underpin the revision.

OECD stocks


  • Total OECD stocks fell another 17.1 mb in March as a 35.9 mb product draw was only partly offset by a 16.3 mb increase in crude.  Atlantic Basin downstream maintenance, a string of refinery glitches in the US and sustained demand growth have kept gasoline stocks at the bottom of their five-year average range.  With the summer driving season due to begin at the end of May, this has been one of the main pillars of support for prices.  OECD Pacific inventories in contrast rose on strong crude builds ahead of refinery maintenance.

  • End-February OECD inventory data were revised up by 20.5 mb, on higher crude numbers in Italy, Germany and Japan, while US crude figures came in lower.  Nevertheless, preliminary first-quarter calculations still show a 930 kb/d stock draw, the largest first-quarter downturn since 1996, as flagged in our last two Oil Market Reports.  Additional revisions to demand have flattened the decline in days of forward cover, which remained at 54 days at the end of March, unchanged from the end of February and levels of a year ago.
  • Preliminary April inventory data from the US, Japan and Europe showed an uptick in total stocks of 8.2 mb, as a 10.2 mb crude build outweighed a small product draw of 2.4 mb.  Latest US weekly data for the first week of May showed the first gasoline stock build in three months, and while inventories there are at their lowest in at least 16 years in terms of forward demand cover, the uptick could yet prove to be the turning point, after which stocks build until their seasonal peak in June.

OECD Industry Stock Changes in March 2007

OECD North America

Total stocks in North America fell by 6.6 mb in March, as a strong decline in products was only partly balanced by increases in crude and 'other oils'.  Crude stocks increased by 6.5 mb, as a build of 8.0 mb in the US outweighed a small 1.4 mb downturn in Mexico.  Crude imports into the US have risen steadily since February as refineries prepare for their return from seasonal maintenance, and were on average around 0.4 mb/d higher than the five-year average.  In addition, a series of unplanned outages has kept utilisation at the bottom of its five-year average range.  Despite the build in March, US crude stocks were still 16.3 mb down year-on-year.

Preliminary US inventory data for April show a crude build of 5.2 mb, as refinery throughputs followed their seasonal recovery.  However, there remains concern that reduced OPEC output will tighten crude supplies ahead of peak runs in the high-demand summer season.  In other news, the US Department of Energy rejected a second round of bids tendered to fill the Strategic Petroleum Reserve (SPR), again arguing that prices were too high.  However, a small trickle of royalty-in-kind crude from oil produced on federal land has been put into the SPR in April, amounting to 772 kb, or around 26 kb/d.  Meanwhile, although stocks at Cushing, Oklahoma, the delivery point for the NYMEX light sweet crude contract, dipped in mid-April they more recently returned to only slightly below their early April record-high of 28.0 mb.  This remains the main reason for WTI's relative weakness to other benchmark crudes.

North American product stocks fell by a total of 17.3 mb in March, and are now 15.9 mb lower year-on-year.  Virtually all of this stemmed from a decline in the US of 16.8 mb, while total products in Mexico dipped only by 0.5 mb.  The main concern in the US is gasoline stocks, which fell by 13.3 mb in March, leaving total North American gasoline inventories below their five-year average range.

In April, preliminary data for the US show a further gasoline stock draw of 11.2 mb, additionally raising worries that cover might be tight in the summer.  Heating oil stocks also fell by 5.3 mb on colder weather, though with increases in diesel (+5.2 mb) and fuel oil (+1.3 mb), as well as 'other oil' and unfinished products, the overall product stock draw only amounted by 2.4 mb.  The disparity in heating oil and diesel stocks is worth noting, as while the former has fallen to the bottom of its five-year average range due to the cold temperatures in April, diesel stocks are well above their average range.

OECD Europe

Total inventories in Europe fell by 17.6 mb in March on a decline in both crude and product stocks.  Crude fell sharply in France (-7.0 mb), partly as a result of the dock workers' strike at southern import hub Fos, which delayed unloading.  On the other hand, crude stocks were up in Italy by 3.0 mb, even though no reported maintenance was taking place, possibly due to some crude being diverted from southern France.

European product stocks fell by 9.2 mb in March because of a strong drawdown in middle distillate stocks.  Seasonal refinery maintenance and some forced run cuts due to the Fos strike reduced product supply, even while Europe was experiencing an unusually warm spring (March saw 8% fewer heating degree days in Europe compared with the 10-year average).  Nevertheless, European middle distillate stocks remain significantly higher than their five-year average.

Preliminary EU-16 data from Euroilstock show total inventories rising by 9.5 mb in April due to a 9.8 mb increase in crude.  While total refined products were down slightly, gasoline stocks fell by 2.7 mb and fuel oil by 1.4 mb.  These changes were balanced by a total middle distillate build of 3.8 mb.

OECD Pacific

In the Pacific, in contrast, total inventories rose by 7.0 mb in March.  Crude stocks increased by 17.3 mb on strong gains in both Korea (+9.7 mb) and Japan (+7.6 mb), outweighing a product drawdown of 9.4 mb, largely in middle distillates.  The crude increase came despite approaching seasonal refinery maintenance, which in Asia-Pacific ramps up from March towards a June peak.  At the end of March, Pacific crude inventories stood above their five-year average range.

Preliminary April data from the Petroleum Association of Japan (PAJ) indicate a reversal of March developments, as a 4.6 mb crude draw far outweighed a marginal product increase of 0.6 mb.  Despite unusually cold weather in April, heating fuel kerosene stocks only fell by 0.7 mb.  Jet fuel also declined by 0.8 mb, balancing increases in gasoil/diesel (+0.8 mb), residue (+0.8 mb), naphtha (+0.2 mb) and gasoline (+0.1 mb).

OECD Inventory Position at End-March and Revisions to Preliminary Data

Total OECD industry stocks stood at 2,600 mb at the end of March, down by 17.1 mb from an upwardly-revised end-February figure and roughly unchanged (3.5 mb higher) year-on-year.  Crude inventories came in at 959 mb, 16.3 mb higher than the previous month, but 19.1 mb lower on the year.  Total products were 1,361 mb, 35.9 mb lower than end-February, but 27.6 mb higher than end-March 2006.  'Other oils' meanwhile were down by 2.1 mb from February and 8.3 mb higher on the year.  Forward demand cover remained at 54 days, unchanged from end-February and the previous year.  Based on this preliminary data for March, the total OECD first-quarter stock draw was 930 kb/d, the highest since 1996, and only slightly lower than our estimate published in last month's report.

Revisions to February data amounted to +20.5 mb, mostly in crude, though a small increase in product stocks was also noted.  The crude increase was mainly centred on Europe (+20.3 mb), where large revisions were noted for Italy (+10.0 mb) and Germany (+5.1 mb), the former in part stemming from stocks held under bilateral agreement but not captured by preliminary data.  Japanese crude stocks were also revised up by 8.4 mb, while US crude was adjusted down by 5.9 mb.  In addition, European product inventories were also revised up by 6.3 mb, after adjustments to middle distillate (+4.9 mb), gasoline

(+4.4 mb) and fuel oil (-3.6 mb) inventories.

Recent Developments in ARA Independent Storage

Total oil product inventories held in independent storage in the Amsterdam-Rotterdam-Antwerp (ARA) area fell by 0.6 mb in April, but at 27.1 mb, remain above their five-year average.  The most noticeable development was a 1.3 mb drawdown in gasoline, including a particularly sharp dip of 1.7 mb in the week ended 26 April.  While Europe itself is structurally long in gasoline, the tight market in the US has attracted fixings across the Atlantic whenever the economics are right -although from mid-April, Rotterdam prices have occasionally been at premia to New York Harbor.  But flows from Europe to other destinations have also been reported, notably West Africa, Mexico and some Mediterranean countries.  Jet-kerosene stocks also fell by 0.2 mb.  Meanwhile, increases were seen in gasoil (+0.5 mb), naphtha (+0.3 mb) and fuel oil (+0.1 mb).

Recent Developments in Singapore Stocks

Total product stocks held in Singapore rose by 1.6 mb in April, according to International Enterprise, and remain around the top of their respective five-year ranges in all three categories.  Light distillates rose by 0.9 mb as higher naphtha exports flowed in from India and petrochemical crackers in the region geared up for seasonal maintenance.  Fuel oil inventories also increased by 0.8 mb, while middle distillates dropped by a more marginal 0.1 mb.



  • Prices traded sideways around $65/bbl in April and early May, supported by a tight Atlantic Basin gasoline market and ongoing geopolitical worries.  Continued refinery glitches in the US kept gasoline stocks low ahead of the summer driving season, while further Nigerian supply outages and constrained OPEC supply raised concerns that crude supplies would be tight when refineries need to run at peak summer levels.
  • Crude prices rose, supported by gasoline's gains and correspondingly healthy refining margins.  WTI's unusual discount to Brent has narrowed but persists, while Asian sour benchmark Dubai nearly reached parity with Brent in early May, making eastward shipments of Brent-priced crude attractive.
  • Refining margins rose on strong product price gains, and remain high in most markets.  Most notably, European and Singapore Dubai hydroskimming margins turned positive in early May, indicating the need for less sophisticated plants to hike runs in a tight product market.  This is a further indication of a product, rather than crude-led, market.
  • Product prices rose across the barrel, led by gasoline in the US and Europe and naphtha in Asia.  Jet and fuel oil cracks also increased, the latter on colder-than-average weather in Asia in particular in April.  Only diesel prices were relatively lacklustre amid high stocks in the US.

  • Volatile VLCC rates recovered in early May from deep mid-April troughs, as Middle East Gulf exports to the West increased modestly.  High US gasoline prices failed to support clean tanker rates as tightness in Europe restricted incremental transatlantic shipments.


Markets remain product-driven, as gasoline crack spreads reached their highest levels since Hurricanes Katrina and Rita hit the US Gulf Coast in the summer of 2005.  Particularly in the US, longer-lasting Atlantic Basin refinery maintenance and increasingly frequent unplanned outages, as well as healthy demand growth and only-average gasoline imports have dragged down industry stocks and boosted prices.  With average retail prices in the US near record-highs at just over $3/gallon several weeks ahead of the start to the summer driving season (on Memorial Day in late May), concerns over supplies are being raised.

Unusually moreover, the European gasoline market, which is structurally long, is also showing its highest gasoline cracks since the hurricanes, even on occasion pushing up prices to a premium over the US, and thus discouraging the all-important flow of incremental European barrels over the Atlantic to complement US production.  US gasoline inventories have seen a steep decline in the past three months to well below their five-year average range for this time of year.  However, early-May weekly data, which showed the first build since late January, could herald a gradual build up, and change the market's perspective.  European markets relaxed after a strike by Belgian refinery workers was avoided in early May, which had threatened to affect operations in the crucial Antwerp area.

But underlying worries about product availability in the summer are concerns that geopolitics could threaten crude supplies, most recently in Nigeria.  A further 215 kb/d is now offline, in addition to the estimated 600 kb/d already shut-in during April.  Meanwhile, the planned restart of Shell's Forcados stream, while initially seen by the market as a sign of an imminent return to normal production levels, now looks to be at best a slow process.

When Saudi Arabia announced in late April that it had arrested 172 suspected terrorists and foiled various plots to attack civilian and oil installations, the market (as opposed to some security observers) appeared reassured that the security situation in the world's largest producer was under control.  Nevertheless, with OPEC apparently unconvinced of the need to review crude production before its scheduled September meeting, steady output at current levels would lead to the group undershooting our calculated range for the call on its crude, and thus tightening stocks further.

In the short term however, while refinery maintenance is at its peak, an easing has been noted in the front end of Brent spreads and WTI's exceptionally wide contango has narrowed.  NYMEX RBOB in contrast has been in backwardation since early March due to the gasoline market's tightness.  In other futures news, the Dubai Mercantile Exchange (DME) has postponed the launch of its Oman contract to 1 June, apparently pending the resolution of outstanding regulatory issues.  Rival ICE meanwhile reportedly plans to launch its own Middle Eastern sour crude contract from late May, based on Dubai price assessments.  The NYMEX has also announced a new US Gulf Coast gasoline, and Gulf Coast and New York Harbor ultra-low-sulphur diesel (ULSD) contracts, to start trading from 13 May.  Meanwhile, from 8 June Platts will include Ekofisk in its basket of crudes that underlie the North Sea Dated BFO benchmark.  This report will take a closer look at these developments in future issues.

Spot Crude Oil Prices

Crude markets remain underpinned by gasoline's strength at a time of near-peak global refinery shutdowns due to seasonal maintenance and a string of unplanned outages.  WTI's unusual discount to Brent is still in place (see Report dated 12 April 2007), even though it has narrowed considerably along the forward curve.  Crude oil inventories in Cushing, Oklahoma, have dipped slightly from their early-April all-time high, following the restart of Valero's McKee refinery, while front-end Brent tightness has also eased somewhat.  Nevertheless, markets have increasingly focused on Brent (paper and physical) as the dominant global benchmark.  Meanwhile, Asian marker Dubai, buoyed by fuel oil's strength and constrained OPEC output, has sharply narrowed its discount to Dated Brent.

Dubai's and also light sweet Tapis's relative strength versus Brent should encourage the flow of Atlantic Basin crudes to Asia, despite June's peak in refinery maintenance there.  West African sweets are at record high premia as a consequence, though given the problems surrounding Nigeria, rival Mediterranean crudes have also seen strong interest.  Despite increasing volumes flowing through the Baku-Tbilisi-Ceyhan (BTC) pipeline into the Mediterranean, Azeri Light has swung from an $8/bbl discount to Bonny Light in late March to a $1/bbl premium recently.  Tapis in turn is still taking strength from recent cyclone-induced outages in Australia.

Russian crude exports meanwhile have been at record highs after a dip in export tariffs from 1 April and ahead of a new rise from 1 June.  Urals has benefited from a sharp rise in hydroskimming margins in Europe and its discount to Dated Brent has narrowed by around $1/bbl since early April.  Dubai's strength however has seen it shift from a $2/bbl discount to a $3/bbl premium versus Urals over the past month.

WTI's return to more normal levels has seen its position versus other US crudes normalise.  LLS's premium to WTI has narrowed to around $5/bbl and Gulf Coast sour crude Mars is hovering around a $3.50/bbl discount.  On the West Coast however, a short-lived outage to Alaskan Prudhoe Bay production curbed ANS supply, just as refineries were ramping up throughputs after maintenance and a spate of problems.  As a consequence, ANS has risen to a rarely-seen premium to WTI in recent weeks.  In other US-related news, the Department of Energy rejected a second round of bids to fill the Strategic Petroleum Reserve (SPR) as being too expensive.  This postponed the purchase of crude until after the summer driving season, thus taking an expected 133 kb/d of implied crude demand from the market in June.  The SPR has however been filled with around 26 kb/d of royalty-in-kind crude during April.

Refining Margins

Refining margins rose in the US Gulf Coast and Europe on soaring gasoline prices and generally remain very high in the Atlantic Basin.  Product prices all rose on average in April, though less so on the US West Coast, slightly trimming what were already the highest margins in the world.  Most interesting this month was the rise in European hydroskimming margins.  Long depressed, early May saw them swing into positive territory for the first time since August 2006, and to their highest level since October 2005, after Hurricanes Katrina and Rita.  This was largely due to gasoline's unusually strong performance in April, with Premium Unleaded rising $10/bbl in April over March, but also in response to price gains for naphtha, jet and fuel oil.  The rise in hydroskimming margins would appear to indicate less complex plants need to boost runs in order to cover demand in a constrained product market.

In the US, refining margin gains were strongest on the US Gulf Coast on healthy gasoline demand and an average dip in refining runs of over 120 kb/d in April over March due to maintenance and outages.  Gasoline, jet and even fuel oil cracks increased, while only gasoil/diesel spreads remained flat, despite some additional late-season heating oil demand.  West Coast margins mostly declined slightly in April, partly due to ANS's strength, but nevertheless remain high.  In Asia, margins were mixed, partly due to crude's relative strength, but also due to a relatively weaker light distillate market, as naphtha cracks fell from record heights.  In early May, Dubai hydroskimming margins also moved into positive territory for the first time since early February.

Spot Product Prices

Gasoline's strength is leading product markets (and oil prices in general) higher - particularly in the US.  The lowest level of forward gasoline stock cover since Hurricanes Katrina and Rita, and the lowest ever level ahead of the summer driving season in at least 16 years - at 21 days - is causing some concern.  Refinery utilisation is still only at weak levels of a year ago, as are gasoline imports, and inventories have declined steadily for three months in a row (showing their first build in latest weekly US data just ahead of publication).  A series of refinery problems has dogged the US industry, arguably also because of tighter specifications, which amplify the effect of any outages.

US gasoline retail prices are already at their highest levels since the late summer of 2005, at over $3/gallon.  Partly in response, European gasoline prices have risen too, recently attaining a premium over US prices, hampering the usual transatlantic arbitrage.  And in Asia, naphtha cracks remain near the record-high levels seen in early April, driven by undimmed petrochemical demand.  The gasoline arbitrage from East Asia to the US West Coast remains open, with volumes reportedly sent from Taiwan and South Korea.  Venezuela is also set to restart gasoline exports to the US, after a seven-month hiatus, following refinery problems.

Middle distillate prices were more muted, with diesel staying more or less flat in both absolute and crack spread terms.  The exceptions were spreads for jet, which rose quite strongly, and heating oil in the US, the latter due to a colder-than-average April.  Fuel oil meanwhile narrowed its discount to crude.  It remains particularly strong in Asia, where the influx from Europe has been lower than usual in April, and demand in Japan rose on higher utility use due to low temperatures.  Higher refinery shutdowns in the Asia-Pacific region in June are likely to increase this tightness.

End-User Product Prices in April

End user product prices in April showed strong increases in OECD North America and Europe, both in national currency and US dollar terms.  Ex-tax gasoline prices in US dollars rose by 10.5% in Europe on average, 7.6% in Canada and 14.5% in the US.  With the exception of Japan, diesel retail prices in US dollars rose 7.0% on average across the OECD, matched by a 5.6% increase in heating oil prices.  Japanese retail prices were flat in April, excepting a 0.7% decline in heating oil prices.  More significant was the increase in low-sulphur fuel oil retail prices, which increased by 10.3% on average across Europe.  (A detailed breakdown of prices by OECD Member countries is available in Table 14 in the Tables section of www.oilmarketreport.org.)


Volatile VLCC rates recovered from near first-quarter lows in mid-April to reach above-average values in early May.  Interest in May-loading vessels was boosted by a mild upturn in Middle East Gulf exports to the West, where refinery maintenance has now peaked.  High US gasoline prices failed to support clean tanker rates as gasoline tightness in Europe restricted incremental transatlantic arbitrage opportunities.

From multi-month highs of almost $15/tonne at the end of March, VLCC rates from the Middle East Gulf to Japan dropped by 40% in three weeks to $8/tonne.  Falling by a similar proportion, VLCC rates to the US Gulf bottomed out near $13/tonne in mid-April, almost a two-year low.  However, by early May, rates had recovered to above-average levels of $13/tonne and $19/tonne for Eastern and Western routes respectively.  VLCC rates for trades from West Africa to the US followed similar trends.  Such rate volatility in March and April is in notable contrast to the gradual downtrend seen between September and February, which was prompted by decreasing OPEC exports.

An upswing in long-haul tanker rates is usual during the second quarter as refinery maintenance finishes in the West and peaks in the East, boosting demand for crude transportation.  This year, however, heavy maintenance and unplanned outages at Western refineries have pushed margins extremely high and increased the potential for a more dramatic rebound in post-maintenance crude imports.  Limited OPEC exports have exacerbated this potential by preventing crude stocks from building at usual seasonal rates.  Ultimately, though, even if more OPEC cargoes are made available, greater spare vessel capacity provided by an expanding fleet of VLCCs may dilute any dramatic upside to rates.  There are now 18 more VLCCs in operation compared with 12 months ago.  This has boosted the active VLCC fleet by around 4% in vessel terms, over the year.

Eastbound West African VLCC rates ended April at under $17/tonne, well below seasonal averages and $5/tonne down on the month.  Loading volumes for April and May were reportedly lower than March, but Angola has announced record-high volumes scheduled for June.  Suezmax rates in the Mediterranean and Atlantic fell from end-March highs as the vessel backlog caused by strikes at Fos cleared.  In the second quarter, rates for these trades should gain support from increased Western crude needs (especially for sweeter grades from FSU, North and West Africa and the North Sea) and the continual rise of FSU exports.  Caribbean to US Gulf Aframax rates rose from $9/tonne to $12/tonne in April, as PADD 3 refiners replenished crude stocks in anticipation of higher May throughputs.

High product prices in Eastern and Western markets did not translate into higher clean product tanker rates in April.  Record naphtha prices in Asia reflected regional tightness but clean rates only rose in early May when extra volumes from India became available, although there have also been some shipments from Europe.  High US gasoline prices did not draw above-average flows of gasoline across the Atlantic because supply was tight in Europe too, leaving transatlantic clean rates fairly flat in April.  However, increased flows of feedstocks may provide support in the next few weeks.  Some gasoline moved across the Pacific from Asia to the US West Coast, reducing Asian vessel supply.



  • Global refinery crude throughput is estimated to have averaged 72.3 mb/d in March, a decline of 1.3mb/d from February, as crude runs declined in most non-OECD regions, particularly in Asia and the FSU.
  • OECD refinery crude throughput was also slightly weaker in March at an estimated 38.3 mb/d.  Runs declined in Europe and the Pacific, largely due to maintenance, more than offsetting the rebound in North America.  Current tightness in contractor and oil-service sectors could be contributing to refinery unreliability in the US.

  • Global refinery throughput is expected to increase by 2.5mb/d from March through to July, largely driven by the OECD regions, but with significant contributions from the Middle East and Latin America.
  • OECD refinery yields suggest that gasoline production is under pressure from increasing demand for naphtha from petrochemical plants in Asia, resulting in higher naphtha yields in the Pacific and, more recently, Europe.  First-quarter OECD Pacific runs cuts may have resulted in dramatically lower fuel oil yields.
  • The possible change of marine fuel oil bunkers to distillate could have significant implications for the refining industry, oil markets and carbon dioxide emissions.

Global Refinery Throughput

This month, we introduce a more comprehensive survey and forecast of global refinery crude runs.  Combining our forecasts for the OECD with estimates for non-OECD crude runs and our offline capacity forecasts, we have derived a forecast for global crude runs.  This expanded survey of crude throughputs is based on the JODI database together with estimates from industry sources and annual data where necessary.  Our forecast, currently through to Q3 2007, also uses a combination of offline capacity data and planned expansions.  Where necessary gaps are filled using historical seasonal trends.

Global crude runs fell by an estimated 1.3 mb/d in March to 72.3 mb/d, pulled down by planned maintenance in Asia, the Middle East and FSU, but rebounded by 1.0 mb/d in April on higher OECD throughput.  This rebound is likely to be brief, with global crude throughput seen reaching a second-quarter low of 72.4 mb/d in May before rising seasonally to 74.8 mb/d by July.

FSU April crude runs are estimated to have declined as work continues at the Kirishi, Yanos and Novokubishev refineries in Russia.  The start of turnarounds at the TNK-BP Ryazan facility and a fire at Lukoil's Volgograd plants have also contributed to lower activity, but runs should increase to 5.9 mb/d by the middle of the third quarter as plants return to full operations.

Middle East crude runs should increase from May's forecast level of 5.7 mb/d, to around 6.2 mb/d by July, following the completion of planned work at Saudi Aramco's Ras Tanura refinery in June.  Chinese crude throughputs increase through to June as maintenance at the WEPEC and Zenhai refineries is completed, but should dip in August when work starts at Sinopec's Gaoqiao refinery starts.

OECD Refinery Throughput

OECD Second- and Third-Quarter Forecast

Forecast OECD crude runs average 38.3 mb/d over the second quarter, as increased estimates for maintenance in the OECD Pacific dampen an easing maintenance workload in the US.  Runs are expected to increase from May onwards, reaching 40.1 mb/d by August, as refineries return from work in Europe and latterly the Pacific, but the rate of recovery will to a large extent depend on whether the recent high level of unplanned outages becomes entrenched.

In the US, a spate of problems has hampered the expected recovery in crude throughputs from the seasonal first-quarter trough in runs.  Noticeable additions to the casualty list include BP's Whiting and ExxonMobil's Beaumont refineries where operational problems have cut May crude runs by a total of 350 kb/d from previously expected levels.  BP has cited problems in sourcing replacement equipment, such as compressors, in today's tight oil services sector - a contributory factor to our estimate that a full restart for the Whiting refinery will not be seen until the third quarter.  Despite these and other unplanned outages, April refinery throughputs were around 0.3 mb/d higher than a year earlier.  Utilisation rates are broadly in line with last year, but remain at the bottom, or below, the five-year range.  However, outages in May have the potential to drag runs lower year-on-year by the same amount.

These disruptions to US operations are more serious for the gasoline market than the headline crude unit outages would suggest, as they appear to have affected a large number of catalytic cracking units.  Confirmation of this trend will not be available for several months, but we note that February's low level of crude runs was matched by low feed rates into refinery upgrading units.  In particular, feed rates into hydrocrackers reached the lowest level since February 2000 and coking and catalytic cracking capacity was similarly constrained.

Refinery Reliability - Cyclical Downturn or Long-Term Trend?

Recent reports of increased unreliability of refineries, particularly in the US, may be partly a function of the industry cycle: Higher margins boost cashflow, and investment spending increases, raising demand for contractors and service companies. Refiners are now stepping up capital expenditure on upgrading equipment having previously spent substantial amounts on environmental and product quality improvements.

Consequently, service companies have struggled to keep pace with demand. Most report increased order books, order backlogs and increased competition for skilled workers, leading, as some refinery operators have pointed out, to a deterioration in the quality of personnel available. Some refiners have suggested that this is contributing to delays and cost increases both for planned capacity additions and maintenance. Valero recently estimated that Gulf Coast skilled labour productivity was 35% lower than in 2004, but that its cost had risen by 60%.

Furthermore, the tighter fuel specifications and the increasing complexity of refineries in OECD member countries and elsewhere results in a greater interdependence between units, and across refining complexes. Two consequences of this development are that refineries require longer turnarounds and maintenance periods to complete work on the more complex units. This in itself exacerbates the problem, adding to the demand for skilled personnel during what is often a massively complex project that can involve thousands of temporary workers being on-site for a temporary period.

Tightness in the contractor market and shortages of skilled personnel, can result in unplanned outages taking longer to fix. And with an increased potential for refinery-wide impacts (as a result of the tighter product specifications reducing refiners ability to blend away product that is slightly off-spec), the net result is higher product prices.

Crude runs in Europe should increase over the balance of the second quarter from March's seasonal low of 13.3 mb/d.  April runs should be around 13.8 mb/d and decline again in May, before strengthening into June and the third quarter.  Work is expected in Northern Europe at PKN's Plock, Total's Vlissingen and PCK Schwedt's refineries in May.  In Southern Europe, BP's Castellon and Sarras's Sarroch refineries are also expected to close for planned work.  Little maintenance activity is reportedly planned in June, July and August, but a heavy turnaround programme is forecast for September (and indeed into the fourth quarter) and is set to cut runs by 600 kb/d from the August level.

Pacific maintenance of just over 1 mb/d during the second quarter is slightly higher than last year and is dominated by Japanese refineries.  The peak in Japan's offline capacity comes in May at just under 1 mb/d, equivalent to 20% of capacity, before declining to around 0.7 mb/d in June.  Lower levels of planned work in Korea follow sequentially, peaking in June at around 0.3 mb/d, before dropping slightly in July.

March Data

OECD refinery runs fell by 0.1 mb/d in March, to an average of 38.3 mb/d, as declines in Europe and the Pacific outweighed a slight rebound in North American activity.  March crude runs were 0.2 mb/d higher than a year ago, largely driven by higher runs in Germany and the US, but the performance is much less positive than this would suggest considering that the US in 2006 still had around 0.8 mb/d of capacity offline the from the 2005 hurricane season.

OECD Europe crude runs fell by a smaller-than-forecast 0.3 mb/d to 13.3 mb/d during March.  Most of the decline occurred in France, partly due to the Fos port strike, and Germany, due to planned maintenance.  UK crude runs recovered from February's level of 1.4 mb/d, but remained weaker than anticipated suggesting that maintenance work at Shell's Stanlow refinery overran its planned restart date, or that other, unreported, work started elsewhere.

North American crude runs gained on stronger US refinery activity, particularly in the US Gulf Coast and despite weak crude runs on the East and West Coasts.  Pacific crude runs edged down in March as Japan's spring maintenance programme started, with work at Cosmo's Chiba refinery.  In addition, lingering run cuts following this winter's warm weather and high kerosene stocks, reduced runs by 175 kb/d.  March crude runs were 260 kb/d below 2006 levels and since the beginning of the year have averaged some 200 kb/d below last year.

OECD Refinery Yields

Refinery yield data for February highlight some interesting changes that are occurring in OECD refineries.  Firstly, as mentioned last month, OECD naphtha yields are rising, in response to strong demand growth from Asian petrochemical producers.  Pacific naphtha yields are some 11.4%, well above the five-year range, driven by strong increases in both Japan and Korea.  European naphtha yields have also increased: after setting new five-year lows for much of 2006, they are now towards the top of their five-year range.  Consequently, European gasoline yields have fallen to 19.2% - their lowest level since 2001.  The subsequent (i.e. post February) strengthening of naphtha prices would indicate that these trends may continue, possibly constraining gasoline exports to the US from Europe.

OECD Pacific Refiners - Reducing Their Use of Marginal Hydroskimming Capacity?

Japanese and Korean refinery yields have shown a remarkable drop in fuel oil production over the latter part of 2006 and into the early part of 2007. While Korean refiners appear to have lightened their crude marginally, anecdotal evidence suggests no material change to Japanese crude selection in terms of API and sulphur and there are no reports of large upgrading projects over this period.

Given the stability in crude diet and refinery configuration there is a possibility that the run cuts which Japanese and Korean refineries enforced over the latter part of 2006 reduced the use of marginal hydroskimming capacity. This capacity, at existing complex refineries, arises where there is crude distillation capacity in excess of the levels needed to supply upgrading units at the site. The resulting product yields are effectively hydroskimming in nature and can, at times provide the incremental supplies of fuel oil, naphtha and kerosene.

The weak demand for kerosene was a result of warm weather for much of the winter, while weak fuel oil demand resulted from high utilisation of nuclear generating capacity. This weak demand pattern appears to have resulted in refiners cutting runs to rebalance their production pattern. Japanese and Korean fuel oil yields averaged 13.9% and 23.6% respectively during the fourth quarter of 2006, a decline of 1.1% and 0.4% respectively from prior year levels. The first two months of 2007 have seen an even larger 2.4% decline in fuel oil yields for both countries from the same period in 2006.

This suggests that refiners may utilise marginal hydroskimming (or topping) capacity as an effective way to meet product supply commitments. Consequently, restricting crude runs so that only upgrading units are fully supplied may appear to be the most attractive option, leading to materially lower fuel oil yields.

Fuel Oil Demand - Change on the Horizon?

The International Maritime Organisation's (IMO) Marine Environment Protection Committee is considering a range of options to improve the environmental footprint of the global shipping industry. Bunker fuel use by the industry is seen by some as a major source of carbon dioxide (CO2), particulate matter and sulphur emissions. However, the shipping industry arguably achieves a very high environmental standard when assessed in terms of CO2 that is emitted per tonne mile of goods moved, relative to other industries such as haulage, or the airline industry. Furthermore, shipping is invaluable in facilitating trade, which is the kernel of economic growth. In seeking to further reduce the shipping industry's environmental impact the IMO is to consider the possible use of distillate fuel in place of fuel oil in marine bunkers. This proposal, if approved, would have a global remit and could be implemented as early as 2012.

Supporters of the proposal see three key benefits in a forced migration to distillate fuels. Firstly, it would reduce CO2 emissions, secondly particulate matter emissions and Sulphur are lower and thirdly, it would remove, or at least minimise, any competitive disadvantage from the adoption of higher quality fuels. This last point is crucial for the shipping industry. Despite recent improvements in fleet utilisation and profitability, due to robust growth in global trade, no ship operator is likely to adopt distillate fuels if it results in lower profitability, in both absolute terms and indeed vis-à-vis their competitors.

Marine bunker demand is estimated to have been 3.6 mb/d in 2004, accounting for roughly 30% of global fuel oil demand. Crucially, it is perhaps the only area of fuel oil demand that is growing, with some estimates suggesting growth of around 5-7%, as global trade expands. Some forecasters expect this growth to continue in the medium term, possibly reaching 5.5 mb/d by early next decade.

From a refining industry perspective, the loss of such a large part of the demand for fuel oil and, perhaps more importantly, additional distillate demand has massive implications, in terms of investment requirements, crude selection and environmental constraints. The obvious (but overly simplistic) route to boost distillate yields and reduce fuel oil production is for hydroskimming refineries to invest in upgrading capacity, by adding hydrocrackers and cokers. However, to remove such a significant quantity of fuel oil may require an investment programme on a scale that would equal or exceed that required to meet the clean fuels programmes that have been implemented in recent years, at a time when manufacturers of such refining hardware are already reporting full order books and lead times of three years.

Using recent investment announcements as a guide, the required incremental investment by the refining industry could be in the order of $100-150 bn, depending on availability of hydrogen supplies and the level of post treatment of sulphur levels in distillates. Even this figure probably understates the size of the challenge that the refining industry would face. One further problem with such an investment proposition is that it would not necessarily generate sufficient distillate for the marine industry given the product yield these units deliver, raising the possibility of further substantial investment being required to avoid an even tighter distillate market.

From a CO2 emissions perspective the proposal would actually increase the overall level of emissions, although those attributable to the shipping industry would decline. Previous case studies used by the IEA suggest that converting sufficient hydroskimming capacity into complex refining capacity to meet existing demand for marine bunkers, (3.6 mb/d), would at a minimum create an incremental 53 million tonnes (mt) of CO2 per annum. However, the switch to gasoil as a marine bunker fuel could reduce CO2 emission by as little as 27 mt.

The IMO is considering a range of possible alternatives which include the introduction of post-treatment of flue gas for particulate matter and sulphur removal, either through installation of onboard scrubbers, or particulate traps. Furthermore an initial reduction in NOX emissions of 3-5% may be possible through more widespread use of currently available additives in the fuel oil to improve fuel economy. The IMO's proposal sets out to take into consideration the overall cost of any possible solution. However, while a move to reduce the environmental impact is to be applauded, the cost to the shipping industry, its customers and the oil market in general, may be higher than anticipated. In addition to a significant net increase in CO2 emissions from a global shift, it may also require an additional 2 mb/d of crude runs which would be the equivalent of finding 'another Kuwait'. Quite possibly the impact on global warming may be the opposite of what is intended and the impact on oil prices could be dramatic.