Oil Market Report: 12 June 2007

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Highlights

  • Global oil product demand is revised up to 84.5 mb/d for 2006 and 86.1 mb/d for 2007 (revisions of +250 kb/d and +420 kb/d, respectively).  This results from baseline adjustments for non-OECD countries and also has the effect of reducing the miscellaneous-to-balance.  World demand is now estimated to rise by 2.0% or 1.7 mb/d in 2007.
  • May world supply fell by 565 kb/d to 84.9 mb/d.  Seasonal OECD stoppages compounded weaker OPEC crude supply, notably in Nigeria, where outages are near 800 kb/d.  Non-OPEC 2007 output is trimmed by 110 kb/d to 50.2 mb/d, with growth of 0.9 mb/d this year.
  • Nigerian outages cut OPEC crude supply by 425 kb/d to 30.1 mb/d.  While effective spare capacity stands at 2.8 mb/d, refining constraints imply much lower marketable spare capacity.  Stronger demand raises 2007's 'call on OPEC crude and stock change' by 0.5 mb/d, with the seasonal rise in the call outstripping OPEC capacity additions by 4Q07.
  • Dated Brent rose above $70/bbl in late May as markets tightened on stronger demand, lower supply, ongoing downstream tightness and early summer storms.  Economic concerns, weaker commodities and the passing of Cyclone Gonu saw prices dip as the report went to press.
  • Global refinery crude throughput rose by 0.6 mb/d to 72.4 mb/d in April.  Higher refinery throughput in the OECD and China offset lower runs in the FSU and India.  Global crude runs could rebound to an August peak of 75.2 mb/d on higher OECD throughput.
  • Total OECD industry inventories rose by 9.9 mb in April, with a crude build offsetting a dip in product stocks.  While forward cover stayed flat at 54 days, total OECD gasoline inventories are now well below their five-year average range.

Pausing for breath

Rising stocks during the seasonally weak second quarter can be deceptive.  Total OECD stocks built by 9.9 mb in April and preliminary data show a 28 mb build in May.  While the US gasoline market remains tight, stocks have begun to rebuild, and high crude stocks in parts of the US require heavy discounts to clear the spot market.  These discounts are creating large forward premia that make it attractive for traders to put crude into floating storage in the Gulf of Mexico.  So why the huffing and puffing about the need for more crude?

Regional discrepancies aside, it has been clear since 2004 that a large portion of higher prices is related to a mismatch between the pattern of demand growth, refinery output and spare capacity.  For the latter of these issues, we should probably be more precise - marketable spare capacity.  Spare crude capacity is of little use if it cannot be processed economically in order to meet rigid product specifications by the existing refinery infrastructure.  Also, in the short-term capacity is only 'spare' if it is available to the market.  Therefore, while it is clear that much of the recent rise in crude prices has been caused by US gasoline tightness, there is a portion which is related to tighter OPEC supply.

Hopes for a moderation in crude prices in the short term therefore lie both with OPEC and the US gasoline market.  The Refining section of this report assesses that there is the potential for a modest inventory rebuild if the US and European refining industry can remain relatively trouble-free over the next few months, but we remain concerned that the system is stretched.  Further, there may be some competition for stocks from the Pacific, where gasoline stock cover is as low as it is in the US.

With the exception of gasoline, cumulative OECD crude and product stocks are not particularly tight.  The expected modest surplus in the weak April/May demand period adds to the inventory cushion.  But it is important to look at the underlying trend.  Stocks fell by 0.9 mb/d in 4Q06 and by 1 mb/d in 1Q07, but the magnitude of the draws could have been doubled if we had not had such a mild winter.  This trend could re-emerge.

But the stock situation can change rapidly, and here is where our concern lies.  This month's report includes a series of adjustments for non-OECD demand as annual surveys for the IEA's 2005 'Green Book' are processed.  For our balances, these are predominantly accounting changes in Africa and 'Other Asia' apportioning barrels from the miscellaneous-to-balance to our demand baseline.  However, they also lift the call on OPEC plus stock change in 2007.

Projecting OPEC output forward at 30.3 mb/d suggests the recent mild surplus should turn into a deficit in June, and then to a 3Q stock draw of around 1-1.5 mb/d.  This would push forward stock cover down towards the low levels seen when prices accelerated higher in 2004.  That is, by itself, a concern.  But these low stocks would also come ahead of the fourth quarter, when OPEC spare capacity (assuming it raises output in line with the call) is poised to trend lower.

There are, of course, uncertainties, which could shift the market.  Nigeria, geopolitics, economic growth and the weather (hurricanes, plus heating and cooling needs) could swing the balances in either direction.  But, even with these caveats, it seems difficult to escape the conclusion that the oil market will be tight in the second half of the year.  Refinery constraints are attracting investment, but shortages of skilled labour, capacity and equipment, are slowing progress.  In the meantime, we have an oil system which needs every inch of flexibility to deliver the products we need.  Constraining that flexibility by restricting supply or reducing stocks, risks provoking a price increase that would be detrimental to both producers and consumers alike.

Demand

Summary

  • Global oil product demand has been revised up to 84.5 mb/d in 2006 and 86.1 mb/d in 2007 (+250 kb/d and +420 kb/d, respectively).  These changes result from large baseline adjustments in 2005 and growth reappraisal in 2006 for various big non-OECD countries in light of new data.  Overall, world demand is now estimated to have grown by 0.9% or 0.8 mb/d in 2006, and is expected to rise by 2.0% in 2007 or 1.7 mb/d.



  • The OECD oil product demand forecast remains unchanged in both 2006 and 2007, at 49.2 mb/d and 49.6 mb/d, respectively.  In April, demand rebounded on seasonal factors on the back of higher motor fuel deliveries (gasoline and diesel).  Gasoline demand was primarily supported by North America, while diesel deliveries were sustained in both North America and Europe.
  • Non-OECD oil product demand has been adjusted upwards by some 250 kb/d in 2006 and 400 kb/d in 2007.  Historical and forecast data were reassessed following the submission of final 2005 data and revisions to previous years.  The changes were particularly significant among several key consuming countries, including Nigeria, Indonesia, Singapore, Venezuela and Former Yugoslavia, among others, where demand turned out to be much stronger than previously anticipated.  Non-OECD oil product consumption is now estimated at 35.2 mb/d in 2006, an increase of 3.5% or +1.2 mb/d over 2005, and is forecast to reach 36.6 mb/d in 2007 (+3.7% or +1.3 mb/d).
  • China's apparent demand has been adjusted slightly downwards, and is now expected to increase by 6.1% in 2007, to roughly 7.6 mb/d following revisions to March estimates.  April demand rose by an estimated 4.8% year-on-year, driven by petrochemical demand (ethylene production), the start of the agricultural planting season and accelerating infrastructure construction.  India's oil product sales, meanwhile, are forecast to reach 2.8 mb/d in 2007, +4.3% over 2006, on the back of strong transportation fuel demand.
  • The closure of small thermal plants, iron foundries and steel mills deemed too polluting is unlikely to boost Chinese oil demand, particularly for diesel and fuel oil, since coal-based power generation capacity is being added at record speed.  The Middle East is also facing the challenge of meeting rapidly expanding power demand, which is being fuelled by strong economic growth.  Shortages of natural gas are forcing governments to consider alternatives such as coal, fuel oil, nuclear and even imported gas, but increased direct crude and fuel oil burning provide a short-term solution.


OECD

According to preliminary data, total OECD demand rose by 1.1% in April versus the same month in 2006.  This small increase was mostly attributable to strong demand in North America, where inland deliveries increased by 2.1%, twice as fast as in Europe (+1.0%).  Deliveries in the Pacific contracted by 1.4%, due to weakness across most product categories.





This rebound in demand is associated with higher deliveries of motor fuels (gasoline and diesel).  Gasoline demand rose by 1.1% year-on-year in April, primarily supported by North America, while diesel deliveries jumped by 6.4%, sustained in both North America and Europe.  Overall, offsetting minor revisions leave our OECD demand forecast for 2007 largely unchanged at 49.6 mb/d (+0.7% over 2006), assuming normal temperatures throughout the rest of this year.





North America

According to adjusted preliminary data for April, inland deliveries in the continental United States - a proxy of demand - rose by 1.9% versus April 2006.  Both gasoline and diesel demand growth were particularly strong (+1.6% and +11.0%, respectively), indicating resilient economic conditions despite anecdotal but contradictory evidence of a gradual economic slowdown and rising retail prices.  Although heating oil data show deliveries were down by 11.9% on an annual basis, this conflicts with colder-than-normal temperatures.  In OECD North America, the number of 'heating-degree days' or HDDs in April was 18% higher than the ten-year average and 5% higher in the US, a trend that continued in May.  Part of the explanation for this is the change in the sulphur specifications for off-road diesel, which were previously lumped in the heating oil category but now apportioned as diesel.  Meanwhile, fuel oil deliveries increased by 5.3% year-on-year to help meet higher power demand, boosted by relatively high natural gas prices ($8.52/mmbtu in April versus $8.43/mmbtu for residual).

Gasoline deliveries continue to be strong despite rising retail prices.  Nevertheless, the last available data (March) on the number of miles driven ('vehicle-miles travelled' or VMT) suggest that VMT remained essentially flat during 1Q07.  These data, however, are liable to revisions, so it remains premature to draw conclusions from them rather than from recorded gasoline demand.





According to preliminary April data, Canada's inland deliveries rose by 3.5% versus April 2006, largely supported by gasoline (+1.5% year-on-year).  Interestingly, February's outage of Imperial Oil's 118 kb/d refinery in Nanticoke, Ontario, which led to gasoline, diesel and heating oil rationing in the province and obliged the company to close some 20% of its 400 Esso retail stations, appeared to have a marginal impact in the country's overall oil product demand.  The refinery resumed full operations in late March, and data show only a blip in February, suggesting that the contingency was well handled.

Preliminary April data reveal that inland deliveries in Mexico increased by 2.1% versus the same month in 2006.  For the second month in a row, demand was supported by strong transportation fuel consumption.  Gasoline rose by 5.4% year-on-year, jet fuel/kerosene jumped by 15.6% in the wake of the Easter holidays and diesel climbed by 2.6%.  Residual fuel oil consumption, meanwhile, is still below the five-year average, mostly because of natural gas substitution.

Gas, and particularly LNG, is making inroads in electricity generation, mostly because of tighter environmental restrictions and greater efficiency (with combined-cycle technology).  Shell's Gulf of Mexico, 750 mmcfd Altamira terminal, began operations in October 2006, bringing natural gas from Nigeria to feed several power stations belonging to state-owned monopoly CFE as well as to five independent power producers (IPP).  Sempra's Baja California terminal, still under construction, will also supply both the CFE and IPPs, although some of the gas (and the electricity) are to be exported to the US (California and Arizona).  Other projects, still under planning, would also basically supply utilities and industrial activities (Manzanillo and Lázaro Cárdenas in the Pacific Ocean, and Puerto Libertad and Topolobampo in the Sea of Cortés).



Europe

Preliminary figures indicate that total oil product demand in Europe rose by 1.0% in April on a yearly basis, sustained by strong diesel and jet/kerosene use (+5.7% and +5.6%, respectively).  Temperatures were unusually warm on average during the month (HDDs were some 27% lower than the 10-year average) and electricity demand remained subdued.  Similar conditions prevailed in May.

In Germany, oil product demand plummeted by 8.7% year-on-year in April, according to preliminary delivery data.  As anticipated, once again the main culprit was heating oil, which contracted by 43.4% on an annual basis.  German household stocks remained filled at approximately 53% of capacity by the end of the month, barely unchanged versus March (one percentage point less) and well above the five-year average.  The Easter holidays also influenced demand, with jet/kerosene rising by 8.9%.



In France and Italy, similar patterns were observed in April, with continued weak heating and fuel oil deliveries, given the end of the mild winter.  Heating oil deliveries shrank by 24.8% and 10.3%, respectively, compared with April 2006, while residual fuel oil demand plummeted by 32.3% and 25.0%, respectively.  Nevertheless, fuel oil demand in Italy could rebound ahead in the summer if the dry season is particularly severe and dents hydropower supplies.





Pacific

According to preliminary data, oil product demand in the Pacific shrank by 1.4% in April on a yearly basis.  Despite a cold snap that hit Japan and Korea in late March and most of April (HDDs were some 38% higher-than-normal in April), demand for heating fuels (kerosene in Japan and Korea, and gasoil elsewhere) and fuel oil remained weak.  Jet/kerosene deliveries fell by 10.6% compared with the same month in 2006, while those of other gasoil contracted by 9.4%.  Residual fuel oil deliveries, meanwhile, plummeted by 10.5%.

In Japan, oil product demand contracted in April (-7.1% on an annual basis) for the sixth month in a row.  As in previous months, the mild weather has been largely responsible for this weakness, compounded by Japan's structural demand weakness in transportation fuels.  Inland deliveries of jet/kerosene, which is mostly used for heating, contracted by 14.2% in March.  Lower electricity demand, in turn, curbed residual fuel oil (-16.6%), other low-sulphur gasoil (-16.5%) and direct crude for power generation (included in 'other products', which contracted by 12.5%).

In Korea, total oil product deliveries rose strongly in April (+10.5% on an annual basis), essentially buoyed by naphtha (+28.9%), gasoline (+2.8%) and diesel (+1.0%).  As in neighbouring Japan, jet/kerosene demand was weak (-7.6% year-on-year) given mild temperatures.





Non-OECD

China

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) increased by approximately 4.8% year-on-year in April, on the back of strong naphtha, gasoil and residual fuel oil deliveries (+5.2%, +4.7% and +20.3%, respectively).  Demand was buoyed by continued petrochemical demand, agricultural and fishing activities, and construction.  Nevertheless, minor revisions to March estimates have resulted in a slight downward adjustment to our short-term forecast.  Total Chinese oil product demand is now expected to increase by 6.1% in 2007, to roughly 7.6 mb/d.



Some observers worry that China's ongoing double-digit growth in several industries using ethylene as a raw material (automobiles, textiles, chemicals, building materials and electronic industries) may lead to a shortage of naphtha.  Indeed, the country's annual ethylene production capacity - which requires naphtha as an essential feedstock - is expected to double to 18.3 million tonnes in 2010, from 9.7 million tonnes in 2006.  Domestic demand is forecast to reach 25.5 million tonnes by then: the government's efforts to improve automotive fuel quality standards will also further boost naphtha demand (which is also used to produce lighter gasoline).

But this ambitious target will necessitate securing cheap and stable supplies of naphtha - at a time of high international crude oil prices and expensive domestic production of the feedstock, given that most Chinese crude grades are relatively heavy.  However, the country will most probably import ethylene from neighbouring Japan and Korea.  It may also presumably try to purchase ethylene from Middle Eastern countries, such as Saudi Arabia, Iran and Qatar, where it would be cheaper given the abundance of feedstock (gas).  However, petrochemical developments in the Middle East are likely to significantly curtail export surpluses.



Challenges to China's Power Industry

The effects of China's relentless economic growth on global greenhouse emissions are gaining increased attention. Although China is adamantly opposed to specific targets that may curb economic development, it is acutely aware of the need to increase overall energy efficiency. One area of attention pertains to power consumption, particularly by industry. China's steel, non-ferrous, chemical, oil processing, coking and construction material industries accounted for approximately 64% of the country's total industrial power consumption in 1Q07.

Over the Eleventh Five-Year Plan (2007-2012), the government intends to shut down old production facilities - small thermal plants with total power generation capacity of 50 GW, of which 10 GW in 2007 - as well as backward iron foundries (with total production capacity of 100 million tonnes) and steel mills (with a total capacity of 55 million tons). Closure targets for foundries and mills stand at 30 million and 35 million, respectively, in 2007. In the same vein, the government intends to halt the construction of new coal-fired power plants below 300 MW. In January, the National Development and Reform Commission (NDRC) reportedly ordered the suspension of coal-fired power plants with a capacity of less than 50 MW, those with a capacity of less than 100 MW that have been running over 20 years, and plants with a capacity of 200 MW that have operated for a longer period. According to local reports, the country shut 101 small thermal power generators in the first four months of the year, accounting for 3.4 GW.

According to preliminary data, oil product sales in India - a proxy of demand - grew by 5.4% year-on-year in April.  All product categories bar 'other' recorded strong gains.  Transportation fuel sales were particularly buoyant, with gasoline deliveries rising by 10.8%, diesel sales by 8.2% and jet/kerosene by 6.7%.  Given the observed demand strength, we have raised our 2007 growth forecast for India; demand is expected to reach 2.8 mb/d in 2007, +4.3% over 2006.These closures are unlikely to adversely impact Chinese oil demand, particularly of diesel and fuel oil, since coal-based power generation capacity is being added at record speed - some 93 GW of generation capacity were added in 2006, with a further 90 GW expected to be installed during 2007, of which more than 90% is coal-based. China plans to have 840 GW of aggregate installed capacity by 2010, compared with 622 GW by end-2006.

Nevertheless, regional imbalances are expected to remain, with the Beijing-Tianjin-Tangshan region in northern China expected to face power shortages this summer, northeastern areas roughly balanced and central and west China posting an electricity surplus. In 1Q07, twelve provinces were reportedly forced to implement measures limiting local consumption (but the shortfalls were also related to limited hydropower output in some areas). But these imbalances are unlikely to prompt a repeat of the diesel spike of 2004, when power shortages were extensive. Moreover, the government will probably continue to turn a blind eye to the legality of some new capacity additions (which are often built without prior local authorisation).

Other Non-OECD

According to preliminary data, oil product sales in India - a proxy of demand - grew by 5.4% year-on-year in April. All product categories bar 'other' recorded strong gains. Transportation fuel sales were particularly buoyant, with gasoline deliveries rising by 10.8%, diesel sales by 8.2% and jet/kerosene by 6.7%. Given the observed demand strength, we have raised our 2007 growth forecast for India; demand is expected to reach 2.8 mb/d in 2007, +4.3% over 2006.These closures are unlikely to adversely impact Chinese oil demand, particularly of diesel and fuel oil, since coal-based power generation capacity is being added at record speed - some 93 GW of generation capacity were added in 2006, with a further 90 GW expected to be installed during 2007, of which more than 90% is coal-based. China plans to have 840 GW of aggregate installed capacity by 2010, compared with 622 GW by end-2006.

Forecasting Indian demand has been complicated by the recent rebound of naphtha, which until then had been facing a structural decline in favour of natural gas - which had, in turn, boosted naphtha exports.  The lack of gas, due to natural disruptions and pricing issues, prompted petrochemical and fertiliser companies as well as utilities to switch back to naphtha.  For example, a new generating unit commissioned by Ratnagiri Gas and Power (previously Dabhol Power) will use only naphtha.  Similarly, some observers argue that the government's plan with regards to adding power generation capacity is insufficient, and if so this could herald a spike in oil demand, particularly diesel, of which some 20% serves to power small generators in the countryside.  However, the main bone of contention - the price of gas, seen as too low - is apparently subsiding.  Both LNG operators such as Shell or domestic producers such as ONGC have recently reported sales at international prices (around $6.0/mmbtu).  This realignment of domestic prices, if sustained, could bring about the development of India's natural gas market, held back by suppliers with little incentive to develop local resources given subsidy constraints.



FSU apparent demand - defined as domestic crude production minus net exports of crude and oil products - has been marginally revised upwards by 16 kb/d in 1Q07 and downwards by 19 kb/d in 2Q07.  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 (0.1% lower than in 2006).  The region's net exports are expected to continue to peak at close to 9.0 mb/d during 2Q07.  This would be the second quarter in a row of post-Soviet highs.  It should also be noted that Russian duties fell from 1 April, further boosting net exports.  Duties, however, are poised to increase again on 1 June.

As for most other countries in the Middle East, Saudi Arabia's oil product demand growth is racing ahead.  Total consumption is expected to reach 2.2 mb/d in 2007, +4.5% over 2006.  Unsurprisingly, given the Kingdom's low retail prices and ongoing economic boom, transportation fuels are driving demand, rising by over 10% on a yearly basis.  Gasoline and gasoil, which together account for roughly 41% of total consumption, rose by 10.3% and 11.3%, respectively, in 1Q07.



In Iran, the plan to introduce gasoline rationing was postponed at the last minute, but on 22 May the government went ahead with a 25% increase on retail prices (on regular gasoline, +27% for premium), which are still very low by international standards (at some 12 cents per litre)  Rationing is now expected in June at the earliest, assuming that the numerous logistical problems that have plagued smart cards are addressed - acute distribution delays, lack of adequate equipment and software in some 22% of the country's service stations, uncertainty regarding central gathering capabilities of daily rationing data and poor information and user training.

Meeting Power Demand in the Middle East

The Middle East, whose economies are flourishing on the back of an energy boom, is facing a worrying paradox: how to meet rapidly expanding power demand, itself fuelled by economic growth. Indeed, shortages of natural gas - hitherto the fuel of choice for electricity generation - have become a regular feature, forcing governments to consider alternatives such as coal, fuel oil, nuclear and even imported gas. For example, Abu Dhabi is expected to divert gas from its oil field injection programme this summer, in order to run power stations and desalination plants. A large eight-turbine, gas-fired power station that serves the UAE will be obliged to run two of its trains on gasoil (requiring some fifty tanker trucks per day). But gasoil itself is scarce: in Qatar, trucks must reportedly wait up to six hours to refuel. In Kuwait, meanwhile, the authorities have warned that there will be extensive power cuts this summer.

Since local gas is not a short-term option, because of lengthy development phases - except in the UAE, which will eventually be supplied with Qatari gas from the Dolphin project and with Iranian gas from the Crescent project (although both have been delayed) and in Qatar itself - coal is likely to be the most favoured alternative. Both Saudi Arabia and Oman are considering building coal-fired power plants - the former along the coast and the latter in its southern Raysut industrial complex. But LNG could also be encouraged, with Kuwait reportedly mulling the construction of a terminal with Shell and BG. Finally, other countries are envisaging power imports, with Bahrain willing to purchase electricity from Saudi Arabia.

Supply

Summary

  • World oil supply in May is estimated down by 565 kb/d versus April at 84.9 mb/d.  Seasonal outages in the OECD compounded weaker OPEC crude supply, notably in Nigeria and Iraq.  Non-OPEC supply could fall further, by up to 485 kb/d, in June as northern hemisphere summer maintenance kicks in.
  • Non-OPEC production for 2007 is trimmed by 110 kb/d to 50.2 mb/d, with annual growth of 0.9 mb/d this year after 0.4 mb/d in 2006.  The 1.0 mb/d growth seen in the last three quarters eases to 0.7-0.9 mb/d for the rest of 2007 due to maintenance, seasonal shut-ins, project slippage and mature field decline,  but is nonetheless an improvement on late 2004 to early 2006 performance.  OECD and Africa drive 2007's downward revision, exceeding upward supply adjustments for Mexico, Sudan, Thailand and biofuels.
  • Russian supply growth through 2012 should prove slower than in the early 2000s, albeit remaining a key driver for non-OPEC supply.  Output could rise from 9.9 mb/d now to 10.6 mb/d by 2010, dipping modestly to 10.5 mb/d by 2012, based on analysis for the forthcoming MTOMR.  Renewed growth after 2012 is possible.  New pipeline capacity planned to accommodate growing Russian and Caspian supply comes with uncertainties over economics, timing, dedicated crude supply and geopolitical factors.
  • Total OPEC crude supply slipped by 425 kb/d to 30.1 mb/d in May, as Nigeria and Iraq saw April's gains reversed.  Preliminary data suggest Iran, Kuwait and Angola also produced less in May.  Although effective producible spare capacity stands around 2.8 mb/d, allowing for refining capacity constraints and current prices, the true volume of current, readily useable spare capacity is probably much less. Moreover, expected net capacity additions by end-year are only some 0.7 mb/d.
  • Nigerian crude outages peaked close to 1.0 mb/d around mid-May, and remain close to 800 kb/d in early June.  From a market perspective this exacerbates tightness in gasoline-rich crudes, with North Sea maintenance now also getting into full swing.  Although Niger Delta insurgents have temporarily ceased hostilities, their demands for jailed leaders to be released for now look unlikely to be met and the security situation remains precarious.


  • The 'call on OPEC crude and stock change' is revised up by 0.2 mb/d for 2005/2006, with up to 0.5 mb/d added for 2007 (a lower historical miscellaneous to balance limits the adjustment for 2007 to 0.3 mb/d).  The call rises by 2.5 mb/d between 2Q and 4Q07, markedly above an expected increase in OPEC capacity, regardless of the fate of currently shuttered Nigerian volumes.  This would appear to be the key impending market dynamic, rather than a, likely temporary, crude stock overhang.

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

OPEC crude supply in May fell by 425 kb/d from April to average 30.1 mb/d.  However, rather than representing proactive cuts from the cartel during the seasonal low in global demand, the reductions were largely involuntary, centred as they were on Nigeria (-245 kb/d) and Iraq (-100 kb/d).  Nonetheless, OPEC-10 production stands at 26.5 mb/d, some 1.2 mb/d below last September's reference point for production curbs and 1.7 mb/d below last July's high point for production of 28.2 mb/d.

Notional spare capacity stands at 4.0 mb/d, while our measure of effective spare capacity (excluding Indonesia, Iraq, Nigeria and Venezuela) stands at 2.85 mb/d.  Although these volumes are physically producible, even this lower figure likely overstates what OPEC could actually shift onto the market given current prices and shortages in refinery upgrading capacity.  Heavy, sour Saudi Arabian and Kuwaiti crude accounts for 88% of the effective spare capacity figure.  In the absence of substantial discounts, these volumes might struggle to find buyers while sizeable amounts of refinery upgrading capacity remain offline for scheduled and unscheduled maintenance.  Readily marketable spare crude capacity may therefore be much lower, and a more accurate reflection of current market tightness.

Low spare capacity puts in context recent claims from OPEC that, rather than accelerating investment in new capacity, members might actually stall expansion plans in the longer term if consuming countries continue to pursue energy diversification policies such as the promotion of biofuels.  While the OPEC Secretary General's comments in early June were aimed more at long-term trends than the current market, we already see there being a potential crude capacity crunch in the more immediate future, albeit one not wholly of OPEC's making (as noted above, available refinery upgrading capacity is another key factor).

While biofuels production continues to grow strongly (+30% expected in 2007), global supply was nonetheless expected to remain below 2 mb/d by 2011 in the last MTOMR.  The evolving 2007 global oil balance presents a more immediate challenge.  The stark conclusion from our supply/demand balance is that the call on OPEC crude and stock change rises by 2.5 mb/d from its 2Q low to the 4Q07 high point.  In contrast, without substantial recovery in Nigerian production capability by the end of the year, OPEC net crude capacity gains amount to only some 700 kb/d.  Returning refining capacity may generate some extra supply flexibility, but OPEC spare capacity may have already hit a high-water mark for this year.



Iraq's crude supply in May is estimated off by 100 kb/d from an upward-revised April level of 2.1 mb/d.  April's adjustment follows data showing increased local crude use, to a recent high of around 0.5 mb/d.  Lower supply in May derived directly from weaker export liftings, assessed at 1.5 mb/d for the month, with domestic consumption assumed unchanged at April levels.  Exports currently move via the southern ports of Basrah and Khor al-Amaya, with only some 10 kb/d moving cross-border by pipeline into Syria.

Although crude storage at Ceyhan in Turkey reached nearly 3 mb during May, northbound pipeline flows are still believed erratic and no cargoes are thought to have loaded from Ceyhan since January. Turkish military manoeuvres on Iraq's northern border, despite having little direct impact on oil sector operations for now, only add to the potential uncertainty concerning expansion of production and exports from the northern, Kurdish area.  That said, Norway's DNO plans imminently to bring onstream the 50 kb/d Tawke field, although transport limitations will limit early flows to 15 kb/d.  Progress on longer-term expansion from Iraqi Kurdistan, such as Addax's 100 kb/d Taq Taq field (possible 2009 start-up), awaits adoption of Iraq's delayed hydrocarbon law, plus improved security on the northern pipeline network.

Aside from Nigeria and Iraq, changes elsewhere in May OPEC supply were more modest.  Iran's April estimate was revised up by 70 kb/d to 3.97 mb/d on evidence of higher exports, with domestic crude runs also likely increasing after earlier maintenance at the Abadan refinery.  Conversely, preliminary estimates suggest weaker exports in May.  Scheduled work on the Soroush/Nowruz fields during 2Q also lends support to a lower supply number for May, at 3.9 mb/d.  Kuwaiti May supply also fell by some 50 kb/d, while maintenance work ahead of the new Dalia field's start-up offshore Angola potentially curbed crude supply there to 1.55 mb/d. Heavier Saudi Arabian refinery turnarounds in May were potentially offset by marginally higher export liftings, leaving supply unchanged at 8.6 mb/d.

Nigeria: Getting Worse Before it Gets Any Better

Suggestions in April that significant volumes of Nigerian Forcados production were about to restart proved premature. Latest estimates suggest that May Nigerian crude production fell to its lowest levels since early-2003. Month-on-month production fell by 245 kb/d versus April, with production shut-ins reaching a high of nearly 1.0 mb/d. For May as a whole we estimate average idled capacity was over 800 kb/d, a level that still pertained in the first week of June.



Longer-term shut-ins from 2006 and earlier, comprising Forcados, Escravos, EA and Bonny volumes, continued to average over 550 kb/d. However, a spate of attacks on offshore vessels, onshore pipelines and pumping stations throughout May shuttered incremental volumes at the following fields:

  • Abiteye (Escravos) 55 kb/d now restored;
  • Bomu manifold (Bonny) attacked twice in May, 170 kb/d now restored;
  • Funiwa (Pennington), 15 kb/d now restored;
  • Akri and Oshi (Brass River) 80 kb/d now being restored;
  • Nembe pipeline leak (Bonny) 77 kb/d still offline;
  • Okono (offshore) 65 kb/d still offline;
  • Tebida (Brass River) 40 kb/d still offline;

Aside from physical production stoppages, the issue of security for oil industry personnel remains precarious. A number of western service companies have withdrawn from the Niger Delta and on 11 May Chevron announced it would remove non-essential offshore workers due to the worsening security situation for one month to concentrate on sustaining production elsewhere. The announcement by major rebel group MEND (the Movement for the Emancipation of the Niger Delta) that it would cease hostilities for a month to allow incoming President Umaru Yar'Adua to formulate a plan for peace and development in the Delta was initially seen as a positive sign. However, suggestions that the President might be about to sanction the release of an ethnic Ijaw leader jailed under previous President Obasanjo appear to have been premature. Nigeria's Supreme Court on 8 June refused bail and the UK promptly advised its nationals to leave Bayelsa, Delta and Rivers states, for security reasons.

Compounding the threat to oil supplies from Nigeria, workers' unions are mulling a strike later in June to protest against domestic oil products price rises and the sale of government stakes in the Port Harcourt and Kaduna refineries. Only the Port Harcourt refinery is currently operating, with overall crude runs representing less than 25% of the country's 450 kb/d capacity.

Non-OPEC Overview

Non-OPEC supply for 2007 is trimmed by 110 kb/d to 50.2 mb/d, with growth of 0.9 mb/d this year after 0.4 mb/d in 2006.  Steady 1.0 mb/d growth seen in each of the last three quarters now eases into a 0.7-0.9 mb/d range for the rest of 2007 under the impact of maintenance, seasonal shut-ins, project slippage and mature field decline.  This is nonetheless an improvement on the scant growth evident from late 2004 through mid-2006.  Notably, North Sea maintenance could remove some 0.5 mb/d of light/sweet crude from the market over the summer, adding to current outages of 700 kb/d-plus of similar Nigerian crude.  However, the expected rise in 4Q non-OPEC supplies is now some 0.8 mb/d compared with mid-year lows.



Non-OPEC projections are made on an assumption of 'business as usual' operating conditions, with no downward allowance made for unexpected events, such as prolonged project delays or unscheduled field stoppages.  We prefer to take account of a propensity for 'things to go wrong' (amounting historically to some 300-400 kb/d) in the Table 1 balance when assessing the adjusted call on OPEC.

The narrowing base for 2007's growth from non-OPEC is worth noting.  The FSU, global biofuels and non-OPEC Africa generate nearly 95% of a now-expected 0.9 mb/d increment in 2007, helping offset continued decline from the North Sea and non-OPEC Middle East.  Moreover, despite recent strength from the three 'growth regions', none is immune from political, technical and economic risks.  Australasia, Latin America and China generate more limited growth, although the former two regions could see resurgent growth in the medium term.  Meanwhile, aggressive hurricane outage assumptions and ongoing decline from Mexico's Cantarell field counteract strong Canadian growth (which by itself accounts for 20% of the net non-OPEC total), leaving North American supplies largely unchanged in 2007 at 14.3 mb/d.

OECD

North America

US - May Alaska actual, others estimated:  Total US supply in 2007 is now seen flat at 2006's level of 7.4 mb/d, including 5.1 mb/d of crude, 1.7 mb/d of NGL and 0.6 mb/d of other liquid fuel supplies, including ethanol.  Ethanol growth and an assumed supply recovery from Alaska offset crude supply reductions elsewhere.  As previously noted, we are including in these projections an aggressive GOM hurricane outage assumption for 2007, at 160 kb/d for 3Q and 215 kb/d for 4Q based on the five-year average.  As was the case in the minimally disrupted 2006, early-year meteorological forecasts for 2007 envisage strong hurricane activity for the season that commenced 1 June.  However, operators and regulators suggest that the industry is better placed than in 2005 to maintain power supplies, re-route crude and product supplies and have better reporting systems in place.

Alaskan May production came in below expectation due to an outage at the problem-plagued Prudhoe Bay field.  Production was cut by 100 kb/d between 21-25 May at Gathering Centre 2 due to a water pipeline leak.  Meanwhile, BP and Pioneer Natural Resources announced progress during May on the new offshore Liberty and Oooguruk developments, which could produce 20 kb/d each by the end of the decade.  US plans to augment declining longer-term production were signalled in late April when authorities announced the 2007-2012 outer continental shelf (OCS) drilling plan. There is speculation that long-standing moratoria on drilling in areas offshore Alaska, GOM and the East Coast could be relaxed.



Canada - Newfoundland April actual, others March actual:  Scheduled outages affecting synthetic crude units in Alberta and the offshore Terra Nova and White Rose fields are likely to result in a lull in Canadian supply growth.  Total oil supply is unlikely to regain March's 3.4 mb/d until August.  Thereafter however, supply could reach close to 3.6 mb/d by December, with growth this year focussed on the Terra Nova and White Rose fields, plus Albertan oil sands mining and in-situ projects.  Total Canadian supply is seen rising by 170 kb/d in 2007, similar to 2006 growth.  A slowdown in expansion is then possible until late decade, given delays at several new oilsands projects, and in the absence of significant new offshore developments.



Mexico - April actual:  A second successive monthly upward revision to Mexican 2007 supply does little to change the expected profile for the year.  Total oil supply is expected to decline by 175 kb/d to 3.5 mb/d.  Pemex announced in May that it plans to sustain crude supply close to 3.1 mb/d by 2012 (versus 3.25 mb/d in 2006) with $33 billion investment per year.  However, the company is lobbying to reduce the 54% share of revenue paid to the government in taxes in 2006 in order to meet its targets.  Reflecting financial uncertainty and apparently accelerating decline at the Cantarell field, forthcoming projections in the MTOMR take a more pessimistic view.

North Sea

UK & Norway - March actual:  Production from the UK's Buzzard field hit 175 kb/d during May, close to this report's earlier expectations.  Buzzard is responsible for a temporary levelling off in UK oil supply in 2007, at 1.72 mb/d.  Declines of around 200 kb/d each year were evident during 2003-2006.  Norwegian supply falls by 145 kb/d in 2007 to 2.6 mb/d, with loading schedules for June reinforcing earlier estimates of heavy seasonal maintenance, notably for the Ekofisk system.  Total OECD Europe oil supply (primarily from the North Sea) is seen falling back from prevailing levels close to 5.2 mb/d to 4.8 mb/d in June, rebounding in July, but receding again to 4.9 mb/d in August and September.  Production is expected to average 5.2 mb/d again in the fourth quarter.  However, incomplete advance maintenance data, notably for the UK sector, renders the summer forecast prone to subsequent revision as the actual path of scheduled and unscheduled stoppages becomes clearer.



Former Soviet Union (FSU)

Russia - April actual, May provisional:  Annual growth in Russian oil output slowed below 2% in April and May, while total output dipped to 9.85 mb/d from around 9.93 mb/d in March.  Notably, output from the erstwhile fast-growing Sakhalin 1 project dipped to 225 kb/d, but should still attain capacity levels close to 250 kb/d by mid-year.  Despite the most recent easing in growth, Russian production should average 9.95 mb/d (including gas condensate) in 2007, growing by 2.6% for the year.  Despite major ongoing barriers to foreign company upstream investment in Russia, we nonetheless see the potential for supply growth to continue in a 2-2.5% per annum range through to the end of the decade based on firmly committed field development, broader company growth targets and evolving pipeline capacity.



Russian Supply Growth and Export Pipeline Developments

Russian oil production could level off during 2010-2012, potentally stalling growth until mid-decade. Taking the top 20 main development projects scheduled for production through 2012, along with assumed 3% pa net decline for baseload production (in reality, some baseload assets are increasing output, some are at plateau, the remainder in varying degrees of decline), production reaches around 10.6 mb/d by 2010, from an actual 9.9 mb/d in 1Q 2007. Overall, output then dips to 10.5 mb/d by 2012. Assumed decline is a key variable in a forecast such as this, although the relatively low net level of 3% is balanced by a highly selective list of new field developments. But an uncertain Russian investment climate and tight drilling/service capacity justify caution on new project start-up.

Significant increments in 2007/2008 come from Sakhalin 1 (now building towards peak 250 kb/d), year-round production from late-2008 from Sakhalin 2, Rosneft's Vankor project, plus initial volumes from Lukoil in Timan Pechora and the North Caspian. During 2009-2011, more significant volumes begin to emerge from Rosneft, Surgutneftegaz, TNK-BP and Russneft in East Siberia. In all, we assume that East Siberian supply is capped at 600 kb/d through 2012, enough to fill phase 1 of the East Siberia-Pacific Ocean (ESPO) pipeline. Growing volumes also become available towards the end of the forecast period from TNK-BP's Uvat field in West Siberia, and from Gasprom/Rosneft's Priramloznoye in the Barents Sea.


Without publicly available field-specific data, it is not possible to perform an in-depth, field by field analysis for Russia. Our approach therefore combines a simplified key field overview such as the above, with an examination of company growth plans, government and industry forecasts and an assessment of likely pipeline capacity availability. The range of industry forecasts shows 2010 production lying in a 10.0 11.1 mb/d range, with traditionally conservative government forecasts showing a 2010 level of 10.2 mb/d. Although higher than this, our forecast is well below levels implied by the published growth targets for producers like Rosneft, Lukoil and TNK-BP.

Drawing longer-term conclusions from a five-year forecast is hazardous. Operators of multi-phase projects (such as Sakhalin) envisage modest decline from early production phases by 2010-2012, but a sharp build in supply again by the middle of the next decade. Extrapolating a decline in Russian production longer term would therefore be premature before examining post-2012 prospects in detail.

Longer-term crude and condensate supply growth will need new export routes, not least given pipeline monopoly Transneft's moves to diversify export markets while reducing reliance on transit states. The following major projects (including the non-Transneft operated CPC and BTC pipelines) incorporate a high level of uncertainty in terms of economics, timing, dedicated crude supply and geopolitical factors. However they illustrate the progress being made to avoid future transport bottlenecks:

  • East Siberia Pacific Ocean (ESPO)
    Under construction. Phase 1 (600 kb/d) completion scheduled late 2008, with apparently committed crude supply. China to take initial 300 kb/d, leaving balance to be railed to Pacific. Phase 2 expansion to 1.6 mb/d depends on highly uncertain levels of East Siberian reserves.
  • Baltic Pipeline System (BPS)-2
    Transneft now planning the 1 mb/d, $2.5 billion line. On approval, estimated 15 month construction time. Could limit future Druzhba transit shipments to C.Europe via Belarus. Questions over crude supply, Russian willingness to effectively cede C.European markets to Caspian oil and whether real rationale is to obtain increased European prices.
  • Turkish Straits By-Pass<
    Seen essential to clear Black Sea/Turkish Straits bottlenecks and pre-requisite for CPC expansion. 1.5 mb/d Samsun-Ceyhan link now moving ahead. Russian-sponsored 1.0 mb/d Bourgas to Alexandroupolis line has clearer crude supply commitments. Unlikely that all four projects scheduled for 2011/2012 will proceed.
  • Baku-Tbilisi-Ceyhan (BTC)
    Principal exit route for Azeri crude to Mediterranean. April confirmation that capacity now raised from 750 kb/d to 1 mb/d. Currently running 600 kb/d of crude. Slow progress on CPC expansion could attract Kazakh Tengiz (early-08) and Kashagan oil (post-2010) to BTC. But slow progress to date on necessary Trans-Caspian shipment facilities.
  • Caspian Pipeline Consortium (CPC)
    Key exit route for Kazakh crude via Novorossiysk on Russian Black Sea. Proposed doubling of capacity to 1.4 mb/d is stalled. Transneft now controls Russia's 24% stake, seeking accelerated loan repayment and 40% tariff increase. Speculation that eventual Russian go-ahead for expansion may be used to lure Kazakh oil back from using BTC.

Sakhalin Energy announced recently that year-round production from the Sakhalin 2 project will be deferred until 2008 because of technical issues.  This report was already assuming a slower time horizon after the marked delays forced on the project before Gazprom's takeover of a major equity stake.  Hence our outlook for next year is likely to remain unchanged.  Rosneft has also indicated a degree of optimism about medium-term supply growth prospects, now that it has taken control of some 1.6 mb/d of former Yukos assets.  It now sees previous supply targets of 2 mb/d by 2010 and 3 mb/d by 2015 as attainable earlier and is expected to reveal new production targets imminently.  Meanwhile, with doubts over TNK-BP's continued stake in the Kovytka gas field growing, the company appears to be focussing on progressively expanding the Uvat oilfield in West Siberia by a potential 200 kb/d during the next decade.



Preliminary trade data show FSU monthly crude exports rising by 180 kb/d in April, while product exports fell by 80 kb/d.  Total April net export volumes of 9.0 mb/d were close to record highs and 110 kb/d above March totals, which had been revised down by 40 kb/d.  Increases were clearly linked to lower Russian export duties which came into effect on 1 April.

April crude exports were boosted by a 250 kb/d monthly increase in volumes transiting the Transneft pipeline network.  Exports leaving Baltic ports were 180 kb/d higher month-on-month as pipeline maintenance finished and, as a result, Primorsk loadings hit an all-time peak of around 1.5 mb/d.  More modest rises were seen in exports through Druzhba and via Arctic ports.  FSU refinery maintenance led product exports down by 80 kb/d in April.  Gasoil exports decreased most notably, falling 140 kb/d, alongside smaller drops for fuel oil but an increase in exports of other products.  Lower exports suggested by May loading schedules could be offset by higher BTC volumes leaving a flat export profile in May.  However, a rise in Russian duties could dent exports by up to 200 kb/d in June.

Other Non-OPEC

Brazil - April actual:  Crude production slipped by 30 kb/d in April to 1.74 mb/d, on a combination of scheduled maintenance work and an unplanned stoppage at the Golfinho facility.  The latter field has struggled since start-up to get beyond 20-30 kb/d due to reservoir pressure problems.  Original plans to attain 200 kb/d by the end of 2007 may therefore slip.  Notwithstanding, a series of new facility start-ups and rising supply from fields entering service in the past year should see Brazil add some 125 kb/d to production in 2007, with crude output averaging 1.85 mb/d.  Ethanol supply is also seen rising by 20 kb/d to reach 310 kb/d.  Growth in 2008 from both crude and ethanol could be stronger still.

Sudan - February actual:  Current production stands close to 480 kb/d from seven blocks in the south and centre of the country operated largely by Chinese, Malaysian, Indian and Sudanese interests.  Rising volumes of acidic Dar Blend crude from Blocks 3 and 7, and from the Thar Jath field in Block 5A stand to push production to 520 kb/d by end-2007 and 580 kb/d for the second half of 2008.  Crude is exported north to the Gulf of Aden and from two 500 kb/d terminals at Bashayer on the Red Sea coast.  However, ongoing conflict in the Darfur region is retarding development, which otherwise could allow Sudan to reach 1.0 mb/d between 2010 and 2012.  There have been calls for the UN to take charge of Sudan's oil revenue in an escrow account until the government in Khartoum ceases hostilities.



Revisions to Non-OPEC Estimates

Non-OPEC supply for 2007 is adjusted down by 110 kb/d to 50.2 mb/d.  Estimates for 2005 and 2006 are also trimmed, by 20 kb/d and 10 kb/d respectively.  For 2007, the OECD and non-OPEC Africa account for most of the downward revision, outstripping upward adjustments from Mexico, Sudan, Thailand and biofuels.  Downside adjustments focus on 2Q and 3Q07, partly due to heavier maintenance outages.

The largest revision accrues to Equatorial Guinea, where production from ExxonMobil's Zafiro field is now running lower than previously forecast.  This cuts the 2007 forecast by nearly 50 kb/d.  Other non-OECD adjustments for 2007, each of which lies in a 15-25 kb/d range, come from:

  • Brazil (negative, field outages);
  • Brunei (negative, weaker 1Q performance);
  • Qatar GTL (negative, technical problems);
  • Oman (negative, weaker than expected 2006 and 1Q07 output);
  • Congo (negative, N'kossa field fire);
  • Thailand (positive, stronger than expected February/March production);
  • Sudan (positive on adoption of field-specific central bank data).

Biofuels projections are also revisited ahead of the forthcoming Medium-Term Oil Market Report (MTOMR). Supply outside of US and Brazilian ethanol is revised up 30 kb/d for 2006 (to 208 kb/d) and 15 kb/d for 2007 (to 360 kb/d).

Aggregate US monthly supply for March came in 65 kb/d above expectation, driven by NGL and ethanol supply.  The ethanol adjustment is carried through 2007.  But preliminary April/May indications suggest lower GOM and other lower-48 states' crude supply, leading to a 20 kb/d downward revision for 2007.  Mexican 2007 supply is revised up by 25 kb/d to 3.51 mb/d after 55 kb/d upside for April.  Lower Alberta conventional crude output in 1Q underpins a 10 kb/d downward revision to 2007 Canadian supply.



The 2007 production forecast for the UK and Norway is revised down by 15-20 kb/d each.  This follows weaker-than-expected North Sea supply in March, and indications now of a sharper dip in loading schedules for June from Norway.  March data for Australia also point to a more pronounced impact of cyclones on production.  Although the effect is short-lived, overall 2007 supply is revised down 15 kb/d.

OECD stocks

Summary

  • Total OECD industry inventories rose by 9.9 mb in April, with a crude build of 10.9 mb offsetting a -3.6 mb dip in product stocks.  Regional trends diverged, as crude increases in Europe and North America were offset in the Pacific, and an increase in European product stocks was only partly balanced by drawdowns in North America and the Pacific.  Total OECD gasoline inventories have now fallen well below their five-year average range, reflecting the globally tight market.


  • End-March data were revised down by 3.8 mb, with a 22.6 mb upward revision to North America more-than-offset by revisions in Europe and the Pacific.  Across the OECD, large downward revisions in crude (-3.2 mb) and products (-3.3 mb) were only partly offset by an upward change in 'other oils' (+2.7 mb).  Again, regional differences were pronounced.  North America saw crude revised up by 9.4 mb, which was balanced by a downward revision in the Pacific of 14.8 mb, mostly in Japan.  On the other hand, an upward revision of 11.5 mb of products in North America was outweighed by a sharp downward revision of 16.0 mb in Europe.
  • OECD forward cover from total oil stocks remained flat at 54 days at the end of April, unchanged from both March and a year ago, despite the gasoline tightness.  Preliminary May data for the US, Japan and Europe indicate an increase in OECD stocks (although European gasoline fell) but this may be balanced by growing consumption at the start of summer.

OECD Industry Stock Changes in April 2007

OECD North America

Total industry inventories in North America rose by 7.9 mb in April, as increases in crude (+9.3 mb), 'other oils' (+2.9 mb) and 'other' products (+5.3 mb) offset a 10.1 mb fall in gasoline stocks.  Higher-than average crude imports and continued refinery outages contributed to a 5.9 mb April crude stock build in the US, although this still left levels 9.9 mb lower year-on-year.  Mexico added a further 3.4 mb to the North America crude total.



Preliminary US inventory data for May show a further industry crude build of 4.3 mb, as more problems dogged refineries and kept throughputs lower-than-average.  Crude stocks at Cushing, Oklahoma, meanwhile fell by 1.1 mb, but remained high at 26.2 mb at the end of May, continuing to depress the price of NYMEX WTI relative to other crudes.

In other news, the US Department of Energy has now awarded contracts to exchange 9.2 mb of royalty-in-kind crude for 8.7 mb of higher-quality crude.  This will be injected into the Strategic Petroleum Reserve at a rate of 50 kb/d from August.



North American product stocks fell in April, as a 10.1 mb drop in gasoline stocks was only partially offset by gains in 'other' products and residual fuel oil.  The gasoline stock draw was wholly due to a draw in the US, where refinery utilisation has underperformed previous years', and imports have only partially been able to compensate.  Indeed, a steady and unusually steep decline in US gasoline inventories since January, coupled with similar trends in the Pacific (and to a lesser extent Europe), has now pulled total OECD gasoline stocks 30 mb below their five-year seasonal average.



The gasoline situation improved slightly in May, as refiners gradually returned from maintenance, but the market remains tight overall.  The most recent weekly data showed US refinery utilisation still around 5% below the five-year average, but even so, the weak spring demand period enabled total US product stocks to increase by 17.5 mb.  Of this total, gasoline inventories increased by 7.8 mb on the month, but with the forward demand cover calculation now encompassing the driving season cover remains in line with the April average at 21 days.

In contrast, US distillate stocks are in the higher half of their five-year range, but within this grouping, a change in diesel specifications has altered the composition of the stocks.  There is considerable overlap between high-sulphur (usually off-road) diesel and heating oil in many countries, leading to statistical difficulties in separating the two categories.  However, the phase-out of off-road diesel in the US since early June has seen an accounting switch, with a boost to diesel and a corresponding decline in heating oil stocks.

OECD Europe

Total inventories in Europe rose by 18.6 mb in April, on increases in crude (+13.9 mb) and total products (+5.6 mb).  Crude stocks are above average, as refiners only gradually returned from maintenance.  European product stocks are 15.5 mb higher than one year ago and remain the highest relative to their five-year average of all three regions.  However, this masks the fact that in April, gasoline stocks fell by 4.2 mb, contributing to globally low inventories, as shippers looked to export barrels to the structurally short US.  The decline in gasoline stocks stemmed mainly from France and Germany, where levels each fell by 1.7 mb.  However, in Europe it must be recognised that the structural decline in gasoline demand means that stock cover should decline every year.  Offsetting the gasoline draw, middle distillate stocks increased by 10.0 mb.

Preliminary Euroilstock data for May show a total industry stock build of 4.4 mb in the EU-16 as a rise in products of 5.3 mb offset a slight downturn in crude inventories of -0.9 mb.  Notably, gasoline stocks fell by a further 2.3 mb, as did naphtha (-0.9 mb), but were outweighed by increases in middle distillate (+5.3 mb) and fuel oil (+3.3 mb).

OECD Pacific

In the Pacific region, total industry stocks for April fell by 16.7 mb, as crude and total products drew by 12.3 mb and 5.0 mb respectively.  The lower crude levels reflect lower imports from OPEC countries, due to output cuts and seasonal throughput considerations.  As such total OECD Pacific crude stocks have now fallen to the bottom of their five-year average range - in sharp contrast to the situation in North America.  There were only modest shifts in product stocks, with 'other' products falling by 2.8 mb, middle distillates by 1.4 mb and gasoline by 0.9 mb in April.  But while the gasoline stock fall was small, it took total Pacific gasoline stocks below the lower-end of their five-year average range, accentuating a globally tight picture.



Preliminary weekly data for May from the Petroleum Association of Japan (PAJ) showed a slight uptick in total industry inventories (+2.2 mb), driven by a crude build of 2.9 mb.  Total (unfinished and finished) products fell slightly, with naphtha and gasoline shedding 1.5 mb and 0.5 mb respectively.  Jet fuel stayed flat, but increases were seen in kerosene (+2.0 mb), gasoil/diesel (+0.9 mb) and residual fuel oil (+0.5 mb).  Latest weekly data showed an uptick in refinery runs, perhaps indicating the end of maintenance and a gradual increase in product stocks ahead of the summer. 



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

Total OECD industry stocks were at 2,606 mb at the end of April, 9.9 mb higher than in March, but down 12.9 mb year-on-year.  Crude inventories totalled 967 mb, a rise of 10.9 mb on the month, but 13.9 mb lower than end-April 2006.  Total products stood at 1,354 mb, down slightly by 3.6 mb from last month, and 4.7 mb higher year-on-year.  'Other oils' meanwhile rose by 2.7 mb since March.  Forward demand cover fell slightly, but due to rounding stayed at 54 days, unchanged from end-March and end-April last year.  Taking a total downward revision of 3.8 mb into account, the first-quarter draw came in at a slightly higher 970 kb/d, compared with the 930 kb/d calculated in last month's report.



Recent Developments in ARA Independent Storage

Total product stocks held in independent storage in the Amsterdam-Rotterdam-Antwerp (ARA) area fell by 1.4 mb in May, but remain at the top of their five-year average range.  Gasoil stocks drew by 1.3 mb, making up most of the drop, but fuel oil and naphtha also fell by 0.2 mb and 0.1 mb respectively.  The draw downs were partially offset by a small increase of 0.2 mb in gasoline stocks.  For the next few months the level of US gasoline imports from Europe will be important in determining the path of gasoline prices.  In this regard it is worth noting that ARA gasoline stocks, while lower than the peak seen earlier this year, are around 2.2 mb above historic lows for this time of year.  This would suggest that there is the potential for European exports to be maintained in the coming months.

Recent Developments in Singapore Stocks

Total product stocks held in Singapore rose by 0.5 mb in May, according to International Enterprise, and also remain above their five-year average range.  Middle distillates fell by 0.9 mb to their lowest level since early January, on regional refinery turnarounds.  Light distillate inventories also fell by the same amount, but were at the top of their five-year average range, as naphtha buyers reportedly held back temporarily.  Fuel oil stocks meanwhile rose by 2.3 mb in May, though they dipped again in the latter half of the month after a steep rise previously.



Prices

Summary

  • Dated Brent rose above $70/bbl in late May as markets tightened further on stronger demand, lower supply, continued downstream tightness and early summer storms.  While refining worries prevail, there are signs the market's focus is shifting, with rising interest rates, higher US gasoline stocks and the passing of Cyclone Gonu leading to a dip in crude prices as this report went to press.  The fall in oil prices mirrored similar declines in other commodities, reflecting broader economic concerns.
  • Crude oil may be taking over as the market driver from gasoline in early June, as refineries increase purchases and throughputs ahead of the summer.  Brent and WTI prices and forward spreads continue to diverge, reflecting both regional supply and demand differences and the structural imbalances at the WTI delivery point of Cushing, Oklahoma.
  • Refining margins rose in May, when gasoline's strength still outpaced gains in crude prices.  Cracking margins broadly remain strong worldwide, but our calculations show European hydroskimming margins turning negative in late May.
  • Refined product markets were driven by gasoline, though crack spreads have retreated since mid-May.  Naphtha has mostly weakened versus crude, although it remains strong in Asia on healthy petrochemical demand.  Low-sulphur fuel oil has picked up in areas with strong summer cooling demand.
  • Crude freight rates gradually eased from near the top of five-year ranges in early May to finish the month below seasonal averages.  Floating storage in the US Gulf and increased long-haul trading prevented a dramatic slide in dirty rates, despite Nigerian outages and muted OPEC exports.  Asian refinery maintenance and US gasoline tightness maintained upward pressure on clean tanker rates.


Overview

Tighter markets pushed prices above $70/bbl in May and early June, with crude benchmarks rising to their highest levels since last summer on stronger demand, lower supply, continued downstream tightness and the first summer storms.  If geopolitical worries over Iran, Lebanon and elsewhere have perhaps receded, real outages briefly closed as much as 1 mb/d of high-quality Nigerian crude, adding to what is still the most acute problem - gasoline tightness.  However, as this report went to press, benchmark crude prices had dipped again on worries about interest rates, the passing of Cyclone Gonu and a general decline in commodities.

Refinery issues in the US continue to keep utilisation low now the driving season has officially started - the latest weekly data indicated as much as five percentage points below the five-year average for this time of year.  As a result, despite a 7.8 mb increase in stocks in May and relatively high imports, gasoline forward cover remains at an unusually low 21 days and US retail prices have in real terms been as high as in the 1979/80 crisis.



While it may still be possible for US refineries to substantially increase gasoline output, high fuel imports will be needed, as well as enough (of the right kind of) crude.  Ongoing kidnappings and attacks in Nigeria reduced output by up to 1 mb/d in mid-May, and currently some 800 kb/d are shut-in.  Further, the US crude stock position is not reflective of the global picture.  While US crude stocks are at the top end of their five-year range, crude stocks in the OECD Pacific fell by 12.3 mb in April, to the bottom of their five-year average range.  And markets reacted sharply to Cyclone Gonu which, unusually, threatened to significantly affect oil operations in the Middle East Gulf, and heralded the start to summer storm season.  These developments - coming as they did at the same time as a rise in US gasoline stocks - appear to indicate a shift towards a crude-driven market.

Looking ahead, this report's data show that the need for more OPEC crude is likely to be even greater over the third quarter as the market tightens and prices remain high.  While weekly data from Japan and the US remain in line with our projections for a modest surplus in April and May, we continue to foresee a tightening in the summer.  Moreover, geopolitical issues remain, including the Iranian nuclear issue, fighting in Lebanon and Gaza and disrupted oil supplies in Nigeria.  Rumours (unsubstantiated) that Turkish troops had staged a limited incursion into northern Iraq provided further temporary support to oil prices in early June.

The decline in prices as this report went to press represents a response to a perceived easing of some of these geopolitical and weather issues and broader economic concerns.  However, we note that the tightness in the refining sector has played a large role in supporting prices over the past weeks, and an easing of gasoline tightness could help to depress prices in the short term.  The extent to which this price impact will be offset by a tightening of crude oil supplies is, however, difficult to quantify.

Spot Crude Oil Prices

With refinery maintenance in the Atlantic Basin nearing its seasonal end, the market's focus may switch to crude.  Nigerian outages have again pinpointed the potential tightness of light sweet crude ahead of a summer when the global refining system already looks strained.  Relative gross product worth comparisons show that refiners will strive to run high-gasoline-yield crudes where they can.  Besides the Nigerian shut-ins, which currently amount to 800 kb/d, June will see strong North Sea maintenance taking approximately a further 400 kb/d off the market.

Physical Brent remains at a premium to most other similar grades such as Azeri Light, Saharan Blend and many West African crudes, due to better refining economics and lower June availability because of field maintenance.  In the US, LLS's pronounced premium to WTI once again highlights the specific regional reasons for WTI's weakness, namely high local stocks at Cushing, Oklahoma, due to lower refinery throughputs and growing Canadian imports.  In general, high crude stocks as well as a wide contango in near-month WTI futures have encouraged the booking of floating tanker storage off the US Gulf Coast, though this may also be connected to pricing issues.



WTI's discount to Dubai in parts of May once again led to shipments of Western Hemisphere crude to Asia.  In addition to the more common flows of crude from Ecuador, Brazil and Argentina, China reportedly bought Canadian heavy sour Cold Lake, which, among other Canadian crudes, sometimes struggles to find an outlet to the US - at least until new pipelines are built.  A wide Brent/Dubai spread is also encouraging Asian buyers to buy more Middle Eastern crudes over West African ones.  In contrast, US buyers, after buying record-high volumes of Nigerian crude in March, have more recently drawn in far more Algerian crude, doubling their 2007 purchases so far compared with the same period last year.



Refining Margins

Refining margins rose across-the-board on average in May (month-on-month), as gasoline price gains led the market and outpaced crude.  The greatest gains were on the US Gulf Coast, where gasoline saw the strongest increases, but also strength in fuel oil and diesel.  Compared with the West Coast, where refinery throughputs have increased sharply from their previous malaise, Gulf Coast runs are still below average as a result of planned and unplanned refinery outages.  West Coast margins however remain by far the highest in our survey, despite an easing of regional tightness.

A clear indication of refinery tightness in May was the fact that European hydroskimming margins turned positive for the first sustained period since the post-hurricane late summer of 2005.  However, by late May/early June this trend had reversed as gasoline cracks weakened from around mid-May.  Briefly, even Dubai and Tapis hydroskimming margins turned positive in early May, as the peak in Asian refinery maintenance coincided with the globally tight gasoline market.

Spot Product Prices

Gasoline led product prices higher in the first half of May, gaining sharply in all regions on sustained demand and tight supply.  However, its influence on the market may be waning, as cracks tailed off from mid-May and into early June.  This was partly due to strengthening crude, which gained on the return of refineries from maintenance in the US and Europe and geopolitical worries, but is also a reflection of a slightly less-tight gasoline market and a small increase in stocks (in May).  Northwest Europe gasoline cracks in particular have narrowed quite considerably from early May highs, as in addition to refineries returning, lower volumes have reportedly been sent across the Atlantic.





In the light distillate segment, naphtha crack spreads have also seen strong declines since mid-May peaks.  This is less true for Asia, where petrochemical demand remains strong as new crackers start up, and lead exporter India is reportedly set to provide a lower 600,000 tonnes to the market in May (compared with April's 790,000 tonnes).  But in Europe, naphtha cracks have narrowed quite dramatically, as stocks increase again (in ARA) and opportunities to export to both east and west appear to have declined.

Middle distillates were more or less unchanged in May and early June, both in terms of crack spreads and absolute prices.  Compared with gasoline, there is less tightness evident in the market; indeed in the ARA region, gasoil stocks have risen slightly above their five-year average range.  Several new hydrocracking units have come online in Europe, somewhat reducing import needs for the region as a whole.  In the US, total diesel stocks are high and rising, though in part, this simply reflects the switch of off-road (high-sulphur) diesel out of the 'heating oil' and into the 'diesel' pool (for more on this, see the Stocks and Refining sections).  Jet cracks remain higher than diesel, and particularly strong in New York Harbor, due to refiners squeezing yields in favour of elements of the gasoline pool.

Fuel oil developments were divergent, with low-sulphur residue cracks improving.  Low-sulphur waxy residue (LSWR) in Singapore gained from restocking ahead of the summer cooling season in Asia.  High-sulphur fuel oil was flat vis-à-vis crude, while stocks in Singapore remained high.  Slightly lower arbitrage volumes from Europe for June and July could yet change this.  In the US, interest in low-sulphur fuel oil (LSFO) was reportedly also strong, again for utility use, given strong natural gas prices.

End-User Product Prices in May

OECD end-user product prices continued to increase in May.  The ex-tax price of gasoline in US dollars rose by 9% on average in the countries reviewed, with US prices up 11.4%.  In terms of full retail prices (with tax included), this means a 39% increase for drivers in the US since February.  The ex-tax retail price of diesel in US dollars increased by 2.6% on average for all countries except the US, where it fell by 1.8%.  Heating oil prices in US dollars on average rose by 1.8%, while LSFO ex-tax prices increased by 6.5% in OECD Europe and Japan.



Freight

Crude freight rates gradually eased from near the top of five-year ranges in early May to finish the month below seasonal averages.  Floating storage charters in the US Gulf and some increased long-haul trading restrained crude tanker supply.  This prevented a dramatic slide in dirty rates, despite Nigerian outages and muted OPEC exports continuing to undermine vessel demand.  Refinery maintenance in Asia supported product trade and demand for clean tankers.  Low stocks and refinery outages maintained the need for gasoline imports into the US in May.

Trade data reveal that Nigeria was the third-largest provider of crude to the US in March, above Saudi Arabia for the first time.  However, extensive outages have now reduced Nigerian export cargoes.  OPEC cuts remain in place and Vela spot charters for June are reportedly near three-year lows.  Furthermore, refinery maintenance, now focussed on Asia, usually undermines vessel demand in May.  Despite these factors, VLCC freight rates had fallen only slightly below five-year averages by the end of May.  Middle East Gulf rates to Japan and the US Gulf in early May were well above average, reaching around $13/tonne and $22/tonne respectively.  One month later, rates for both routes had only dropped by around $2/tonne.  They remain higher, on a $/tonne basis, than almost all rates seen between mid-October and February.

One factor supporting rates has been the reductions to vessel supply caused by the increased use of VLCCs as floating storage in the US Gulf.  The prevailing wide contango in WTI has made it economic to charter VLCCs specifically for floating storage.  Some VLCCs arriving in the US Gulf with valuable African crude have also invoked a clause to store offshore before discharging.

Vessel supply has been further reduced by incremental long-haul chartering.  Asian purchases of West African crude reportedly hit 14-month highs for June on increased buying from China and evidence of the first cargoes for Indonesia in more than a year.  Clearly Nigerian exports may be disrupted, but Angolan loading schedules suggest exports there will increase.  Furthermore, Indian refiners have been increasingly looking to Mediterranean crude markets and there has even been a recent Chinese purchase of Canadian crude.



Elsewhere in the dirty sector, Nigerian outages caused westbound Atlantic Suezmax rates to weaken by $2-3/tonne in May.  Cross-Mediterranean Aframax rates showed their volatility again by falling from six-month highs of $21/tonne in early May to 18-month lows of $7/tonne in early June.  Aframax demand in June has been dented by a rise in Russian export duties and North Sea maintenance.

Clean product tanker rates rose in May.  Asian clean rates were supported by increased trade of products during refinery maintenance.  Rising Asian petrochemical capacity continues to boost demand for naphtha imports from Saudi Arabia and India.  In the Atlantic basin, discharging delays caused an unusually large vessel backlog at Lagos port in late May, temporarily reducing vessel supply.  Transatlantic clean rates were further boosted by the continued need for gasoline imports in the US, where stocks remain historically low. UK continent to US Atlantic Coast rates for 33,000-tonne clean cargoes rose by $4/tonne from the start of May to reach $28/tonne in early June.

Refining

Summary

  • Global refinery crude throughput is estimated to have averaged 72.4 mb/d in April, with higher OECD crude runs offset by lower throughput in the FSU.  Global crude runs are expected to increase to 75.2 mb/d in August, driven by higher crude throughput in the OECD, Russia and India.


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  • OECD refinery crude throughput increased in April to 38.2 mb/d as higher European and North American runs offset the maintenance-related decline in the Pacific.  OECD crude throughput in May is estimated to have averaged 38.0 mb/d as Pacific maintenance reaches a peak and European crude runs remain subdued.
  • OECD fuel oil production remained under pressure according to refinery yield data for March.  This was most pronounced in the Pacific, with production some 2% lower.  March naphtha yields were weaker in all regions, but remain at the top of the five-year range in the Pacific.
  • US gasoline inventories should increase in coming weeks, but may remain tight over the summer months.  Higher refinery throughputs, increased throughputs of catalytic cracking units and strong imports will all be needed to reduce the recent gasoline market tightness.

Global Refinery Throughput

Global crude runs were an estimated 72.4 mb/d in April, rising to 73.0 mb/d in May.  Second-quarter crude runs are forecast to average 73.1 mb/d and should increase in July, reaching a peak in August at 75.2 mb/d.  Upward revisions to Chinese and Asian forecasts underpin the higher forecast.  Chinese crude runs are expected to remain strong over the balance of the second quarter and July.  During this period they are likely to set new record throughput levels, following the completion of late-spring maintenance, the start-up of additional capacity at Sinopec's Yanshan refinery near Beijing, and in response to continued strong demand growth.

March crude throughput is revised down to 71.8 mb/d, on lower OECD Europe and Asian estimates.  Upward revisions to planned maintenance activity partly account for this downward revision in crude throughput, as it does for the lower April and May estimates.  However, some of the lower-than-expected crude throughput remains unexplained by reported maintenance activity and unplanned outages.  The commercially sensitive nature of maintenance work implies that there will always be a portion that is unreported and we are unlikely to capture all the work taking place.  Crude runs in Asia were weaker than forecast as lower throughputs in Taiwan and Indonesia more than offset the strength in Indian crude runs.  Indian runs are forecast to increase by a further 50-70 kb/d in August when Essar completes the start-up of the remaining upgrading units at its recently commissioned Vadinar refinery.

Russian April crude throughput declined to 4.4 mb/d, down 0.1 mb/d on the month and some 0.3 mb/d below the record level of February, following maintenance work at several refineries, according to preliminary data.  Consequently, Russian crude throughput recorded the first year-on-year decline in three years.  The lull in throughputs contributed to lower FSU product exports.



OECD Refinery Throughput

OECD Second- and Third-Quarter Forecast

OECD crude runs are forecast to average 38.2 mb/d over the second quarter.  Lower forecast European crude runs are partly offset by upward revisions to estimates for North America.  Weekly data for May point to higher utilisation in the US, as refiners on the East and West Coasts increased throughputs outpacing lower throughputs in Midwest, which remaining subdued due to continued operational difficulties at BP's Whiting refinery and reports of planned work at Flint hill Resources' Pine Bend refinery.  Problems late in the month at several Gulf Coast refineries lowered utilisation rates in the region.



Higher quarter-on-quarter crude throughput in the third quarter is forecast to reach a seasonal peak of 40.3 mb/d in August.  Gains in all three regions drive the higher throughputs.  Pacific crude runs will recover by some 0.7 mb/d in July, following the completion of maintenance work at Korean refineries.  Atlantic Basin runs are forecast to increase by a similar amount in July as refineries in North America and Europe seek to supply peak driving season demand.  September crude runs are forecast to fall by 1.4 mb/d as autumn maintenance starts in all three regions.

Despite reports of operational problems with catalytic cracking units from several US refineries, US crude runs reached their highest level in mid-May since September last year.  However, the respite was short-lived, as renewed problems emerged at the end of the month and the start of planned work on a 200 kb/d crude unit at Chevron's El Segundo refinery in California in early June.



Consequently, we continue to forecast lower North American throughput in June compared with May.  However, July and August are still expected to see crude runs average 18.8 mb/d, roughly 0.5 mb/d above June levels and the highest level since last August.  Monthly data on upgrading unit throughputs from the US EIA point to a rebound in March from the low levels seen in February.

Pacific region crude runs should increase over the balance of the second quarter, from their May low point, as Japan exits its maintenance season.  Weekly data from Japan suggest that refineries have passed the low point of crude throughput in late May.  However, planned work is expected to increase in Korea which typically starts its turnaround season later than Japan.  Korean refinery maintenance will be somewhat constrained by the strong demand for gasoil/diesel ahead of a 1 July tax increase, which also raises distillate yields during the second quarter.  Overall the region is forecast to achieve significantly higher runs in the third quarter, around 0.5 mb/d above the second quarter, as maintenance work is completed and driving season demand reaches a peak.



US Gasoline Stocks - Tightness to Persist?

Tightness in the US gasoline market has been a major contributor to recent oil price strength. Robust demand growth, rapidly falling stock levels and reports of refinery problems have focused attention on the prospects for gasoline stocks during the US summer driving season.

Recent gasoline production levels have been constrained by the erratic level of crude intake and the reported problems with upgrading units, particularly fluid catalytic cracking units (FCCs). The delay in reporting FCC utilisation rates (it is reported monthly and not weekly) suggests that one must consider other aspects of the gasoline market to determine its tightness. Gasoline imports have reached record levels for the time of year, while gasoline component imports have matched the ethanol induced peaks of the second quarter of 2006 and are well above the previous five-year range.



Higher imports depend upon the availability of surplus gasoline elsewhere. European gasoline demand is expected to be 1.8% lower than 2006 over the next three months, raising the prospect of higher exports. However, our forecast for European crude runs is also 1.3% below levels of a year ago. Consequently, only limited additional exports may be possible unless stock levels in Europe are drawn down further. Tightness in gasoline markets can be gauged by the strength in gasoline cracks and also by the premium that high octane, low volatility blending components, such as alkylate, command over gasoline. The volatility constraint imposed by ethanol blending can boost this premium during the summer months and make analysis difficult. However, alkylate production can be affected by FCC problems, as alkylation units typically derive their feedstock from FCCs and hence the premium can provide a good indication of FCC utilisation rates. The premium's decline, from the recent high levels, despite the introduction of less volatile summer specification gasoline, suggests that FCCs may have increased throughputs.



Gasoline market tightness is forecast (based on our outlook for US crude throughput) to ease in the coming weeks, barring a further deterioration in refinery reliability. However, subsequently gasoline supplies look set to remain tight by historical standards, assuming that US imports of gasoline and gasoline blending components are in line with last year's average levels. Consequently gasoline inventories are likely to remain at best flat from end-May levels and may well dip through to July, given our cautious forecast for US crude runs. Higher gasoline (and gasoline component) imports could improve the outlook, but a question mark remains as to where these would be sourced from.

Second-quarter European crude runs are forecast to average 13.3 mb/d, down 0.3 mb/d from last month's forecast and some 0.2 mb/d below last year's level.  Higher estimates of offline capacity and a lower March baseline contribute to the reduced forecast.  However, June crude runs could exceed our estimate of 13.6 mb/d given the relatively sparse nature of reported maintenance work during the month.  July and August are expected to see crude runs average almost 14.0 mb/d before a heavy September maintenance programme reduces crude throughput.

April Data

OECD refinery runs averaged 38.2 mb/d in April, an increase of 0.2 mb/d from March's downwardly revised (-0.3 mb/d) level.  Gains in Europe and North America outweighed the 0.5 mb/d decline in the Pacific where maintenance reduced crude throughput.  US crude runs recorded the largest increase, up 0.4 mb/d, while Japanese runs showed the biggest decline of 0.3 mb/d.



OECD Europe crude runs were 0.6 mb/d weaker than expected, a combination of the lower March baseline, with downward revisions of 0.3 mb/d, centred on the Netherlands, Turkey and Belgium.  Lower than expected throughputs in France, possibly a result of more prolonged impact from the strike at Fos in late March, as well as Turkey, Belgium and Sweden where planned maintenance may have been underreported.



OECD Refinery Yields

OECD fuel oil production remained weak in March according to the most recent refinery yield data.  Fuel oil accounted for 11.1% of output, 1.2 percentage points below the five-year average.  The Pacific continued to lead other regions, in cutting fuel oil yields with production some 2 percentage points lower than last year, to the lowest level since 1995.  In March, naphtha yields eased back in the Pacific and in Europe, with a corresponding increase in gasoline in both regions.  Naphtha yields remain at the top of the five-year range in the Pacific and could rise further in next month's data, based on the strengthening naphtha crack in Asian markets during April and early May, underpinned by rising demand from petrochemical plants for feedstock.



North American jet fuel/kerosene yields remain weak compared with 2006 and to five-year averages, as refiners struggle to cope with strong demand growth for diesel and robust gasoline demand.  The impact of the tighter off-road gasoil sulphur limit of 500 ppm, which became effective on 1 June in the US, remains to be seen.  It could add further pressure to jet yields as refiners seek to maximise production of gasoil, and seek to minimise jet fuel, with marginal demand met by increasing imports of the more fungible product. However this outcome is by no means certain.