Oil Market Report: 14 December 2007

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Highlights

  • Crude futures tested $100/bbl in late November, but dipped on signs of higher supplies from OPEC/non-OPEC producers and improved product supply as refineries return from maintenance.  A sharp jump in freight rates and a narrower backwardation underscored this shift.  However, $90/bbl oil and significant price volatility still reflect underlying concerns over supply and economic growth.
  • Global oil product demand growth is revised lower by 60 kb/d in 2007 to average 85.7 mb/d (+1.1% over 2006).  Following a reappraisal of ethane prospects in the Middle East, 2008 demand is revised up by 115 kb/d to 87.8 mb/d (+2.5%), with growth driven by the non-OECD, as well as by an assumption of normal weather in the OECD.
  • World oil supply rose 55 kb/d in November to 86.5 mb/d as output recovery in Mexico, China and Brazil offset lower OPEC supply.  Non-OPEC supply is revised up by an average 50 kb/d to 50.2 mb/d in 2007 and 51.25 mb/d in 2008, on higher estimates for refinery processing gain.  These offset downgrades of 95-140 kb/d for non-OPEC oil production.
  • November OPEC crude supply averaged 31.1 mb/d, 180 kb/d lower than October.  Offshore maintenance in Abu Dhabi removed an estimated 0.4 mb/d, offsetting increases from other producers.  Early indications show rising supply in December, despite an unchanged OPEC output target.  The call on OPEC crude and stock change is revised down by 100-200 kb/d for 2007 but 100 kb/d higher for 2008.
  • OECD industry stocks fell by 22.4 mb in October, lowering demand cover to 52.6 days, just below the five-year average.  A sharp decline in European products led the draw, with a similar picture emerging in November.
  • Global refinery crude runs are forecast to average 74.9 mb/d in December, as throughput reaches its seasonal peak.  Throughputs are expected to remain at these levels in January, but average 74.3 mb/d in 1Q08, 1 mb/d above a year earlier.

In the balance

In contrast to market expectations, OPEC maintained existing production targets at its December meeting.  While winter weather always means considerable uncertainty in demand, OPEC's decision needs to be evaluated in the context of what is really happening in the market.  OPEC 10 output had already started to rise by September, well ahead of the 1 November 2007 agreed output increase.  Output rose 400 kb/d in September, reaching target levels of 27.3 mb/d in October, before UAE field maintenance prompted a dip to 27.1 mb/d in November.  But, the additional oil from OPEC 10 has almost been doubled by increases from outside the targeted-10, with Iraqi output rising by 330 kb/d between August and November and Angolan by a more modest 70 kb/d.

While few would have predicted such an improvement in Iraqi security and output since September, the additional oil has been as welcome for the international market as it has been for Iraqi finances.  But though the increase has been dramatic, the market continues to recognise the propensity for ongoing security issues and output volatility.  On the other hand, Angolan output could continue to rise, despite its new OPEC target.  Angola's allocation of 1.9 mb/d is still 85 kb/d above its estimated November output level, but could constrain supplies next year when output capacity could exceed the target.  Scheduled maintenance also reduced UAE output by 395 kb/d in November, making room for production within the OPEC 10 to increase.  While it is constructive that major producers are responding to high prices by raising output, it is clearly premature to project that these supplies will remain in place for the rest of the winter.  Moreover, field outages and delays continue to act as a brake on actual production performance.

The development of the IEA's Refinery and Product Supply Model has also afforded a better understanding of refinery processing gain, identifying adjustments ranging from 50 kb/d for the early part of the decade, rising to 150 kb/d for 2006-2008.  The net result lifts global processing gain, and therefore total supply, from 1.9 mb/d in 2007 to 2.1 mb/d.  The shift is not a new source of supply, rather, it is an accounting change from the miscellaneous-to-balance and represents a reduction in the sources of discrepancies that occur when comparing crude oil supply and product demand.

High prices are beginning to squeeze demand in OECD Europe and North America.  German and other European consumers are either holding off from filling home heating oil tanks or doing it piecemeal, while US demand growth remains weak.  But if prices moderate, demand could rebound.  Typically, from this point on, German (and other European) heating oil consumers start to run down their tanks, but with stocks already at the lower end of the five-year range consumer demand could be higher than normal.  Lower prices or a cold snap could also prompt a flurry of buying.  In contrast, where subsidies protect consumers in non-OECD regions, robust growth continues.  But here too, it is possible that high prices may have depleted domestic stocks, or low refinery returns have discouraged refinery throughput, offering the potential for a rebound in demand

OECD total oil stocks have been trending lower since July, leaving forward cover fractionally below five-year average levels.  That is typically the flip point between backwardation and contango for crude oil futures and represents a market-defined barometer of tightness.  Of course, declining stocks are normal in the winter, but at present levels the market is likely to respond quickly if the currently higher OPEC supplies discussed above drop off, or non-OPEC supply and world demand veer off their projected path.

Overall, winter prospects have clearly improved.  Reflecting this change, the forward price spreads for WTI, Brent and Dubai have narrowed considerably since the end of November.  That suggests that the market is more comfortable with the pending supply and demand balance.  But $90/bbl oil makes clear that the market is still on edge and is unlikely to relax until the peak weather risks have subsided and a clear trend in OPEC supplies is apparent.

Demand

Summary

  • Global oil product demand growth has been adjusted down by almost 60 kb/d in 2007, mostly as a result of revisions in the OECD (3Q07 and 4Q07), Asia (3Q07), and the FSU and Latin America (4Q07).  In 2008, global demand is revised up by roughly 100 kb/d following a reappraisal of ethane prospects in the Middle East.  World demand is now forecast at 85.7 mb/d in 2007 (+1.1% over 2006) and 87.8 mb/d in 2008 (+2.5%), with growth largely driven by non-OECD countries, as well as by expectations of normal weather in the OECD.


  • OECD oil product demand has been lowered marginally in both 2007 and 2008 (-51 kb/d and -8 kb/d, respectively).  Stronger-than-expected 3Q07 demand in North America, driven by resilient transportation fuels deliveries, offset 4Q07 downward revisions in heating fuels demand as a result of October's mild weather.  In the Pacific, the 3Q07 rebound (September), supported by strong oil-fired electricity demand, was revised down slightly, but the region's outlook remains strong in 4Q07, given persistent power needs in October.  European demand was adjusted down because of continued weakness in heating oil and residual fuel oil demand.  Overall, OECD demand is expected to decline to 49.2 mb/d in 2007 (-0.3% year-on-year), but should rebound to 49.8 mb/d in 2008 (+1.3%).
  • Non-OECD oil product demand remains virtually unchanged in 2007, but has been adjusted upwards in 2008 by roughly 115 kb/d on average.  Downward revisions in Asia (3Q07) and the FSU (4Q07) were compensated by upward adjustments in Latin America (1H07).  The changes in 2008 were primarily driven by a reassessment of petrochemical demand for LPG/ethane in the Middle East, notably in Saudi Arabia.  Overall, non-OECD demand is seen averaging 36.5 mb/d in 2007 (+3.1% on an annual basis) and 38.0 mb/d in 2008 (+4.0%).
  • Sustained high prices are starting to curb demand, but so far only at the margin.  In real terms, prices have not yet reached the peaks seen in the early 1980s, while oil use per unit of GDP has significantly diminished across the world over the past two decades, implying greater resilience to higher prices, despite significant differences regarding oil efficiency between OECD and non-OECD countries.  Moreover, most of the largest and fastest-growing emerging countries cap end-user prices, thus insulating consumers and fuelling strong oil demand growth.  Only in the OECD, where end-user prices are more sensitive to crude price shifts and oil demand has plateaued, is oil product demand growth gradually slowing, as evidenced by weak US gasoline data or sluggish European heating oil figures.


OECD

In October, according to preliminary data, total OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 0.3% year-on-year.  The continued strength in oil product demand in the Pacific (+4.8% on a yearly basis) proved insufficient to offset demand weakness in both Europe (-1.4%) and North America (-1.1%).  OECD demand is now forecast to average 49.2 mb/d in 2007 (-0.3%) and 49.8 mb/d in 2008 (+1.3%), marginally revised compared with last month's report.



Oil product demand in OECD North America (including US Territories) fell in October, mostly due to depressed heating fuel deliveries in the US as a result of relatively mild temperatures.  Transportation fuels were a notable exception, as strong gasoline demand in Mexico (and to a lesser extent, Canada) managed to offset a contraction in the US, arguably related to high retail prices.  OECD Pacific demand continued to be mostly driven by Japan, where strong electricity demand forced utilities to turn to thermal sources to compensate for idled nuclear plants.  Power demand,

though, was also buoyant in Korea, where oil-fired generation has seen a rebound following the closure of the country's oldest nuclear power plant.  In addition, cold weather in Korea, coupled with stock rebuilds, boosted demand for heating fuels, such as LPG and jet fuel/kerosene.  Finally, demand in OECD Europe continued to be dragged down by lower-than-average deliveries of heating oil and residual, notably in Italy and Germany.



North America

Preliminary data show that oil product demand in North America (including US Territories) shrank by 1.1% year-on-year in October.  With the exception of modest gains in transportation fuels, deliveries for other product categories posted negative growth during the month.  In particular, strong gasoline demand in Mexico (and to a lesser extent in Canada) barely offset the small contraction in the US.  Overall, the region's gasoline deliveries rose by a modest 0.1% on a yearly basis.  Moreover, relatively mild temperatures in the US and Canada led to a sharp year-on-year fall in heating oil deliveries (-29.0%).  Demand in OECD North America remains largely unchanged compared with last month's report, at 25.5 mb/d in 2007 (+0.8% on a yearly basis) and 25.7 mb/d in 2008 (+0.9%).



Inland deliveries in the continental United States - a proxy of oil product demand - fell by 2.7% year-on-year in October, according to adjusted preliminary data.  This was the fifth consecutive month of falling demand, and the trend is likely to continue in November (-0.3%), according to weekly data.  October's weakness was due to lower-than-expected deliveries of naphtha, gasoline, jet/fuel kerosene, distillates (heating oil and other gasoil) and 'other products'.

The weakness in gasoline demand is arguably related to both worsening economic conditions and the effects of high oil prices.  For the first time in two years, gasoline deliveries contracted in both October and November (respectively -0.7% and -0.1% year-on-year).  Nevertheless, it is arguably too early to establish a definitive conclusion regarding the short-term outlook of US gasoline demand (cf. text box below).  As for the other product categories, their weakness is related to relatively benign temperatures (the number of heating-degree days in October was 71% lower than the 10-year average) and possibly to the slowdown of construction activity following the housing market woes.  As such, US50 total oil product demand is seen reaching 20.8 mb/d in 2007 (+0.3% over 2006), and 20.9 mb/d in 2008 (+0.9% versus 2007), virtually unchanged from last month's report.

Preliminary data for October suggest that, after two months of stalling growth, oil product demand in Mexico jumped by 8.8% on a yearly basis.  All product categories posted positive growth rates, particularly transportation fuels.  Gasoline deliveries expanded by 9.8% year-on-year, together with jet fuel/kerosene (+9.9%) and diesel (+8.0%).  The rebound suggests that economic activity continues to be resilient, despite the uncertainties prevailing in the US, Mexico's main market.  From this perspective, the demand weakness observed in August and September could be related to one-off factors, notably the pipeline attacks that disrupted the flows of key products, natural gas and crude (in late July and early September), coupled with the holiday season.

Following the publication of a presidential decree, Mexico's LPG market is poised to become more competitive, transparent and safe.  Under the new regulations, large consumers will be able to buy LPG directly from state-owned Pemex, instead of purchasing it through private intermediaries.  In addition, bottled gas cylinders - used for cooking and heating by some three-quarters of Mexican households - will be available for sale in more places, under tighter security rules and higher quality control.  Nevertheless, even though LPG end-user prices are subsidised, the market has been gradually shrinking over the past few years as natural gas distribution networks are built in major cities.





Assessing US Gasoline Demand Trends (continued)

As noted, November's EIA weekly data - which serve as the starting point of our adjusted preliminary assessment - indicate that US gasoline demand contracted for the second month in a row on a yearly basis (-0.1%). This figure, however, is intriguing, for two reasons. First, the fall was much smaller than the one recorded in October (-0.7%). Although the Thanks Giving holiday may have supported demand, higher retail prices and growing economic uncertainties would arguably have favoured an even larger contraction.

Second, EIA data is sharply different to that collected by MasterCard through its SpendingPulse survey, whose estimates of gasoline demand are actually much higher. This could indicate that the EIA may be missing some demand - its weekly data, a preliminary sample from oil companies, reportedly represent some 90% of demand. But it could similarly be argued that the SpendingPulse survey, by tracking only credit card payments, is missing cash transactions, which represent the activity of the marginal consumer. In addition, the definitions of what constitutes 'demand' are different (EIA's deliveries versus MasterCard's sales). As such, refinery maintenance work may explain why the EIA survey shows lower deliveries. In the end, the absolute level of demand is perhaps less important than its direction, but then again, the trend is unclear: while SpendingPulse figures indicate that gasoline demand started to rebound in late November, EIA data suggest that demand began to decline again in mid-November.



This divergence brings back to the fore the question of how responsive is US gasoline demand to prices. Recent academic research appears to confirm that gasoline demand has indeed become more price inelastic, as a result of several social changes that have taken place over the past decades: the suburban sprawl; the relatively limited availability of public transportation outside of big cities; the emergence of dual working parents; and the rise of extracurricular events for children. After all, as shown in the chart, US retail gasoline prices are about two-thirds lower than those prevailing in most advanced economies. Moreover, 2Q07 data from the US Bureau of Economic Analysis (BEA) points out that the weight of motor fuel expenses relatively to average household incomes, albeit rising, is still below its early 1980s peak, at about 3.4% in 2007, versus 4.5% in 1981 (this share, however, is now probably closer to 4%, given the price spike in 2H07).

This doesn't mean that US motorists are impervious to retail price increases, but that their response is slow and largely dependent upon expectations of future prices - i.e., whether the rise is permanent or temporary. Unfortunately, the data are so far inconclusive. BEA quarterly figures do not disaggregate among income quintiles - arguably, the lower brackets of the population are feeling the brunt of the recent price increase and may thus be forced to change their driving habits, as opposed to higher income brackets. Similarly, demand data by state shows some weakness, but not a clear trend. This has not prevented some observers from contending that in some large regional markets, such as California, the weakness is related to mounting hybrid cars sales as a result of both higher prices and a heightened mindfulness about global warming. But nation-wide sales of hybrid cars remain negligible, at barely more than 12,000 units so far this year; more notably, October car sales data suggest that purchases of SUVs have rebounded to levels comparable to those observed in 2006.

In sum, it is perhaps premature to conclude that US gasoline demand is inevitably poised to contract significantly in the months ahead. Most likely, its pace of growth will continue to slow down slightly, as motorists drive shorter distances or less frequently, or use the second, smaller car for short travel. More permanent behavioural changes will take longer and perhaps require much higher retail prices. In the longer-term, the adoption of measures to improve the country's vehicle fleet efficiency are more likely to bring about a lasting effect upon gasoline demand.

In that respect, the House of Representatives just passed a new energy law, which mandates a 40% improvement of Corporate Average Fuel Economy (CAFÉ) standards by 2020 - the new bill, though, must still be approved by both the Senate and President Bush, who has threatened to veto it in its current form. But even if federal legislation stalls, several key states are intent on improving efficiency and curbing emissions. In mid-November, following a lawsuit brought by eleven states and several environmental organizations, the 9th US Circuit Court of Appeals ordered the National Highway Traffic Safety Administration (NHTSA) to establish new fuel economy standards for light trucks, to close a loophole allowing SUVs and other light trucks to feature lower fuel efficiency standards than cars, and to set fuel economy standards for large pickup trucks that have so far been exempt from existing rules. It is unclear at this point whether the lawsuit will succeed, but it signals a marker of intent on fuel efficiency.

Europe

Total European oil product demand was down 1.4% year-on-year in October, unchanged from last month's report.  Preliminary data for Germany, the UK and the Czech Republic came in slightly weaker than expected, but were offset by higher demand in Spain and France.  Europe's weakness continued to be centred in heating oil and residual (-11.0% and -7.1%, respectively).  However, heating oil demand is declining less rapidly than in previous months.  In September, meanwhile, demand was revised down by 130 kb/d, given lower-than-expected figures for Spain, the UK and Italy, only partly offset by higher demand in Turkey, France and Norway.  As such, 3Q07 demand averaged 15.4 mb/d, 1.3% lower than in the same period in 2006.



Demand is seen rebounding seasonally in 4Q07 to 15.7 mb/d (+0.1% versus 4Q06).  So far this autumn, Europe has been significantly colder than last year, with HDDs slightly above the 10-year average.  Overall, total demand is expected to average 15.3 mb/d in 2007 (-1.9% year-on-year) and 15.5 mb/d in 2008 (+1.4%).  The forecast for both years is about 40 kb/d lower than last month's report, and represents a greater adjusted average contraction of demand growth over both years (-0.2%).

German demand remained feeble in October, with preliminary data indicating a 7.5% year-on-year decline.  Heating oil demand was 37.4% below levels of a year ago.  Last year, however, stockpiling was significant:  end-user stocks rose by 195 kb/d in October 2006, due both to warm weather and an impending tax increase.  This year, by contrast, household stocks rose by only 65 kb/d in the same month, but the filling rate was still above the five-year average of 40 kb/d.  By end-October, stocks stood at 61% of capacity (compared with 68% last year and 60% by end-September).  As the winter sets in with household tanks at the lower end of the five-year range, end-user consumption and primary deliveries will likely become more closely linked.  At only 134 kb/d, fuel oil deliveries in October were 20.8% down compared to last year - their lowest level since September 1999.



Preliminary French data for October indicate that demand grew by a higher-than-expected 1.2% year-on-year, in contrast to September, when it declined by 3.3%.  Transportation fuels were particularly strong, with diesel deliveries soaring by 7.2% and gasoline demand gaining 0.2% (after falling for 28 consecutive months).  Heating oil deliveries were also strong, catching up with 2006 levels for the first time this year.  September data, though weak on an annual basis, came in 88 kb/d higher, as naphtha, gasoil and other products proved stronger than anticipated.  As for 4Q07, it remains to be seen to what extent the strikes that hit the country's public transportation and energy sectors over October and November affected transportation fuel and power generation demand.  Anecdotally, the use of private cars rose, but the net effect is still unclear as many workers carpooled, cycled or decided to stay at home during the strikes.



September's Italian preliminary demand estimate was lowered by 87 kb/d following the submission of official data, with more than two-thirds of this revision centred in residual fuel oil, which declined by 18.0% on an annual basis due to lower oil-fired electricity generation.  In October, electricity demand was 1.2% higher year-on-year (and +1.3% than in September), due to an additional working day in the month and lower temperatures, which boosted heating needs.  In addition, hydro power generation declined by 19.1% year-on-year.  Surprisingly, preliminary data pointed to lower fuel oil consumption in October, possibly leading to upward revisions with the submission of official statistics.  Gasoil demand, meanwhile, was very strong in October as diesel deliveries rose by 5.8%.

Spanish demand in September came in some 100 kb/d lower than suggested by preliminary data, mostly due to weak heating oil demand.  October data, however, was revised up by 80 kb/d based on JODI figures, which show a 5.9% annual growth.  Gasoil, in particular, was 9.0% higher, but all products bar gasoline posted positive growth.  UK demand was weaker than expected in September, leading to a downward adjustment of 84 kb/d.  Jet fuel/kerosene and motor gasoline demand was particularly subdued; both products were revised down by about 50 kb/d.  LPG/ethane demand was also lower due to offshore field maintenance, but October data indicate a rebound within the seasonal range.  Meanwhile, gasoline demand in the Netherlands has been revised down for 2007 following a correction to official data.  Growth for 2007 now averages 0.4%, instead of 9.0% as previously reported.



Finally, Turkish monthly data have been adjusted back to January 2007, but the change was partly offset by our preliminary adjustment last month following revisions to 2006 data.  However, the 2007 revisions were not uniform:  1Q07 was down by 57 kb/d, but 3Q07 was up by 39 kb/d.  Moreover, September's demand is much stronger than expected (+33.0% year-on-year), with gasoil consumption roughly 73% higher than in August.  As this spike remains unexplained (the split between diesel and heating oil is not available), it has not been yet carried through the 2008 forecast.



Pacific

Preliminary data show that oil product demand in the Pacific rose by 4.8% year-on-year in October.  Deliveries for all product categories bar naphtha registered gains.  As in September, demand growth was driven by Japan.  The country's demand - some two-thirds of the region's total - was again boosted by power demand and relatively warm temperatures (the number of heating-degree days in October, which signals the start of the heating season, was 11% lower than the 10-year average).  Naphtha's weakness, meanwhile, was due to depressed demand in Korea.  As such, the outlook for OECD Pacific oil demand is virtually unchanged compared with last month's report, expected to average 8.3 mb/d in 2007 (-0.8% on a yearly basis) and 8.5 mb/d in 2008 (+2.4%).



According to preliminary data, oil product demand in Japan rose by 4.1% year-on-year in October.  As in the previous month, oil demand growth was largely due to strong electricity demand, amid nuclear outages and lower operating rates at hydro generators.  Most utilities have continued to rely to a large extent on thermal power, a situation expected to last at least until mid-2008, when most of the idled nuclear plants should come back online following extensive security checks.  Demand for fuel oil and direct crude (included in 'other products') thus rose in October by 22.3% and 23.5%, respectively, compared with the same month in the previous year.  Demand for both fuels was for the most part driven by Tokyo Electric Power Company (Tepco), the country's largest utility, whose usage of fuel oil and direct crude soared by 290.2% and 145.2%, respectively.  It should be noted, though, that September's direct crude figure was revised down; as such, 'other products' demand in Japan stood at roughly 500 kb/d (+42.3%), instead of the previous estimate of 600 kb/d (+68.0%).



In Korea, preliminary data indicate that total oil product demand surged by 7.2% year-on-year in October, as all products bar naphtha registered gains.  Demand for transportation fuels was particularly strong, with gasoline soaring by 6.0% and diesel by 9.9%.  As a result of colder temperatures than those recorded in the previous year and extensive stock rebuilding, deliveries of heating fuels also rose (LPG soared by 34.0%, followed by jet fuel/kerosene with +12.8% and other gasoil with +12.2%).  Fuel oil deliveries increased by 4.6%, prompted by strong electricity demand.  Coupled with the closure of the country's oldest nuclear plant, the share of fuel oil in power generation (about 6%) is poised to rise slightly, although LNG - currently cheaper than residual in Asian markets - continues to make inroads.  Finally, naphtha deliveries - the largest component of total Korean demand - plunged by 7.6% as petrochemical producers sought alternative feedstocks (naphtha has become particularly expensive in the region due to buoyant demand).



As noted in last month's report, the rise in international oil prices has become a politically sensitive issue, especially in the context of the approaching Korean presidential elections.  Following the review of low-income living standards mandated by the President, the government has announced that it will reduce excise taxes by 30% for several heating and cooking fuels (LPG, kerosene and LNG) during the forthcoming winter, at a cost of some 1.4 trillion won in taxes (about $1.5 billion).

Non-OECD

China

According to preliminary data, China's apparent demand (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 4.4% year-on-year in October.  All product categories bar LPG and residual fuel oil registered gains.  Demand for gasoline and jet fuel/kerosene was particularly strong (+5.7% and +7.7%, respectively) on the back of the week-long National Day holidays.  Meanwhile, the continued fall in fuel oil demand, as noted in previous reports, is related to its high price, which deters 'teapot' refineries from using fuel oil as a feedstock - thus limiting product supplies and contributing to widespread shortages and rationing of gas/diesel oil over the past two months.



The latest refining and trade figures help illustrate the magnitude of the squeeze.  Seeking to trim refining losses as a result of domestic retail price caps, the country's largest (mostly state-owned) refineries undertook extended off-season maintenance (September's runs were 2% lower than those of August) and increased gross oil product exports (522 kb/d in September, the highest since August 2005).  As for the teapots, many simply suspended or sharply reduced their own production.  The ensuing shortages prompted the government to order Sinopec and PetroChina to increase diesel supplies to the domestic market.  The NOCs obligingly boosted both refinery runs by about 3% in October (month-on-month) and net imports by five times as much as in September, to roughly 26 kb/d (during most of this year China had been a net diesel exporter).  However, both net crude oil and net fuel oil imports continued to fall - the former to 2.9 mb/d, -13% versus September, the latter to 217 kb/d, the lowest level since June 2002 - suggesting that a) the NOCs chose to draw down rather than purchase expensive foreign crude; and b) that many teapot refineries remained idle or operated at very low capacity.



Arguably, November's 9% price increase per se will only marginally improve the supply picture.  In order to tackle the problem, and short of further price increases (which have been officially ruled out, although in recent weeks Prime Minister Wen Jiabao hinted that domestic prices may rise again), state-owned oil companies have several options in order to adequately supply the domestic market:  1) delaying maintenance work at refineries, 2) increasing runs (distillate yields are already at a maximum), 3) raising net diesel imports, 4) selling domestically produced crude to teapot refineries at preferential prices, or potentially 5) tapping crude from China's strategic reserves.  But, in exchange, the NOCs may, as in previous years, receive direct payments from the government to compensate their losses.  Sinopec, the larger of the two state-owned refiners, received Rmb 9 billion in 2005 and Rmb 5 billion in 2006 ($1.2 billion and $677 million, respectively).  Another possibility is that the government lowers or even abolishes oil product import duties, as recently suggested by the National Development and Reform Commission (NDRC) - however, other Chinese government officials have rejected this proposal.

Although there have been reports that some service stations are blatantly exceeding capped diesel prices by as much as 40% in some inland and coastal provinces (Sichuan, Guizhou, Hebei, Ningxia, Shanxi and Hunan) in the face of strong truckers' demand, we believe that pent-up demand will not be entirely met over the rest of this year.  (The government has barred officials from purchasing SUVs for government use, but this will unlikely reduce transportation fuels demand significantly).  As such, we have slightly revised down our Chinese forecast in both 3Q07 and 4Q07.  Total demand is now seen averaging 7.5 mb/d in 2007 (+5.2% year-on-year).  Assuming that supply issues are addressed, demand growth should accelerate in 2008 to +5.7% (8.0 mb/d).

Other Non-OECD

Oil product sales in India - a proxy of demand - soared by 10.2% on a yearly basis in October, according to preliminary data.  Growth remained strong across all product categories, with the exception of 'other products' (-3.5%, although preliminary figures for this category, as previously noted, are generally revised upwards).  Demand for transportation fuels continues to race ahead, with gasoline, jet fuel/kerosene and gasoil sales rising by 11.8%, 6.4% and 17.3%, respectively.  The strong figures for gasoline and diesel are related to strong sales of passenger vehicles (almost 17% higher than in the same month of the previous year), coupled with October's festival season.  The gasoil figure, meanwhile, is also likely reflective of the resumption of agricultural activities after a prolific summer monsoon (June-September).  Given these strong data, our forecast of India's oil demand is slightly revised up, with total consumption seen rising by 5.1% in 2007 to roughly 2.8 mb/d.  In 2008, oil demand growth is expected to slow down slightly to +3.0% in 2008 on the back of naphtha's weakness, displaced by natural gas.



Most observers tend to focus on India's passenger vehicle market, which is indeed expanding at breakneck speed.  Less advertised but equally significant is the growth in airline passenger traffic.  The numbers are startling:  so far this year, domestic airlines have carried some 35 million passengers (+35% versus the same period in 2006).  Similarly, the domestic fleet is expected to reach 370 aircraft by year-end, nearly doubling since early 2005.  More significantly, passenger traffic only represents about 3% of India's total population, currently estimated at some 1.1 billion people.  Doubling or tripling that proportion will require significant investment in airport facilities and new aircraft.  By the same token, jet fuel demand in India - roughly 97 kb/d today - will likely continue growing at a double-digit pace in the foreseeable future (in both 2005 and 2006, demand rose by almost 20% on average).



FSU apparent demand - defined as domestic crude production minus net exports of crude and oil products - has been revised down by about 30 kb/d in both 2007 and 2008.  The changes were related to 4Q07adjustments of both supply (downward) and trade (upward), which have been carried out into next year.  Overall, FSU total oil product demand is seen averaging 3.9 mb/d in 2007 (-5.0% year-on-year) and 4.1 mb/d in 2008 (+3.5%).

Russian service stations, particularly in the country's central regions, are reportedly facing oil product shortages as a result of refinery maintenance work (notably at the Moscow refinery), with some retailers being forced to close down or work only intermittently.  In addition, the lack of supplies has led to a spike in wholesale prices.

According to preliminary data, Brazilian oil demand rose by 1.2% year-on-year in August.  Gasoline deliveries remained particularly buoyant, rising by +5.6% on a yearly basis.  Intriguingly, 'other products' (which include ethanol) posted a decline of 30.4%.  It is unclear whether this fall is due to lower ethanol demand as a result of price arbitrage between that fuel and gasoline - which would contradict anecdotal evidence of sustained and even cheaper ethanol supply - or whether it is related to data issues.



Indeed, over the past few months Brazil's demand data-reporting has been somewhat erratic - the National Petroleum Agency (ANP) suspended the publication of delivery figures in early 2007 for reportedly technical reasons, on a 'temporary' basis (but publication has not resumed; the last ANP data point is February).  However, demand data consistent with historical figures resurfaced in JODI, but the latest data point is August.  Based on JODI's figures, we have revised up Brazil's demand estimates by about 15 kb/d in both 2007 and 2008.  Total oil demand is now seen growing by 3.7% to 2.3 mb/d in 2007, and by 2.6% to 2.4 mb/d in 2008, assuming that natural gas will displace some fuel oil demand in power generation.



According to preliminary data, oil demand in Saudi Arabia increased by 8.6% year-on-year in September.  All product categories posted strong growth, notably transportation fuels - gasoline:  +6.7%; jet fuel/kerosene:  +4.8%; gasoil:  +2.8% - and fuel oil (+12.2%), which is used in power generation.  These rates of growth are testimony of the Kingdom's buoyant economic expansion, retail price caps and mounting electricity needs.  As such, total oil product demand should average 2.2 mb/d in 2007 (+6.2%) and 2.4 mb/d in 2008 (+9.0%).  The strong 2008 forecast, which includes an upward revision of 100 kb/d, is related to a reassessment of ethylene cracking capacity; as the country develops its petrochemical industry, demand for LPG/ethane is poised to grow very rapidly.

In Iran, the government is set to increase quotas for the gasoline rationing system introduced last June given growing signs of scarcity - and popular resentment.  The scheme currently allows every car owner to purchase 100 litres of subsidised gasoline per month over a period of six months (over the summer, though, a one-off monthly allocation was added to the quota, ostensibly to facilitate holiday travel).  However, anecdotal evidence suggests that large swathes of the population are now running out of gasoline - well before the end of the six-month period.

September data from JODI suggest that gasoline demand has indeed fallen (by about 13% in 3Q07, compared with the same period in the previous year) to about 412 kb/d following the implementation of rationing.  These figures seem consistent with import data, which has also markedly declined.  Yet the government announced early this month that on 22 December it will raise the monthly quota by 20% to 120 litres, with the declared goal of curbing the large black market that has - predictably, as argued in this report - emerged.  The quota period, meanwhile, will be kept at six months.  It is unclear, however, whether the rationing scheme will be abolished at the end of the second quota period (i.e., from next January to June) or whether it will be further extended (in late November, President Mahmoud Ahmadinejad suggested that rationing would end in March 2009).



Although extending the quota will bring some relief, the additional volumes will unlikely meet pent-up demand.  Moreover, with black market prices reportedly two to three times higher than official levels, taxi drivers have no incentive to stop selling their quota rather instead of actually working.  This is becoming a serious issue in a country where urban transportation needs are essentially fulfilled by taxis given the severe lack of public transportation.

The move may be motivated by political considerations - the forthcoming March 2008 parliamentary elections.  As long as the government continues to postpone a key measure that was to be announced shortly after the implementation of the rationing scheme - setting the price at which above-quota gasoline would be sold - many private motorists will arguably continue to run out of gasoline before the end of the allocation period and public pressure to extend the quotas will re-emerge.  Similarly, promoting the use of compressed natural gas (CNG) in state-owned vehicles, as the government has also suggested, is unlikely to make a significant difference in the short term.

Supply

Summary

  • World oil supply averaged 86.5 mb/d in November, up 55 kb/d from October (which saw a rise of nearly 1.5 mb/d versus September).  November OPEC supply fell versus October, but an assumed supply rebound after October outages in Mexico, China and Brazil underpinned month-on-month growth among non-OPEC producers. Yearly comparison saw global supply in October and November move 1.0 mb/d higher than in 2006, after having averaged at or below 2006 levels for much of 2007.
  • Non-OPEC production in 2007 is now estimated at 50.2 mb/d, with 51.25 mb/d expected for 2008, respectively 60 kb/d and 45 kb/d above last month's estimates.  Global processing gain net of China and the FSU has been revised up by 155 kb/d for 2007 and 180 kb/d for 2008, reaching a total level of 2.1 mb/d next year.  Oil production estimates are revised down by 95 kb/d and 135 kb/d, with North America, Russia, China, Brazil and the Middle East affected.
  • November OPEC crude supply averaged 31.1 mb/d, some 180 kb/d lower than October.  Offshore field maintenance in Abu Dhabi removed an estimated 0.4 mb/d of monthly supply, offsetting widespread, but limited, increases from other producers. Saudi Arabian supply reached 9.0 mb/d, its highest since last October, while Iraqi supply in October/November of 2.3 mb/d was its highest since spring 2004.  Effective OPEC spare capacity remained largely unchanged at 2.5 mb/d.
  • OPEC-10 November production averaged 27.1 mb/d, versus a 27.25 mb/d target set in early September.  There are early indications of further OPEC supply gains in December.  An extraordinary meeting of OPEC ministers in Abu Dhabi on 5 December left production targets unchanged, but another extraordinary meeting will take place in Vienna on 1 February 2008.  New member Ecuador was allocated target output of 520 kb/d, with a first time allocation also agreed for Angola, at 1.9 mb/d.


  • The call on OPEC crude and stock change is revised down by 100-200 kb/d for the second half of 2007 on weaker seasonal demand and refinery processing gain revisions.  The call now centres on 31.7 mb/d for 4Q07.  The 2008 call rises by 500-700 kb/d versus 2007, with steeper growth driven by now-higher estimates for Middle Eastern LPG and ethane demand.  First-half 2008 requirements look notably stronger than last month's estimates, but remain highly weather-dependent.

Ecuador's reaccession to OPEC will be reflected in data in the report dated 16 January 2008.

All world oil supply figures for November discussed in this report are IEA estimates.  Estimates for OPEC countries, Alaska, Kazakhstan and Russia are supported by preliminary November 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.  Specific 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.  In addition, from July 2007, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast.  This totals ?410 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC

November OPEC crude supply averaged 31.1 mb/d, some 180 kb/d lower than October.  Offshore field maintenance in Abu Dhabi removed an estimated 0.4 mb/d of monthly supply, offsetting modest increases from Saudi Arabia, Qatar, Kuwait, Libya, Iraq, Venezuela and Angola.  Saudi Arabian supply reached 9.0 mb/d, its highest since last October, while Iraqi supply in October and November of 2.3 mb/d was also its highest since spring 2004.



Effective OPEC spare capacity remained largely unchanged at 2.5 mb/d, with only minor changes to assumed sustainable capacity (Indonesia is trimmed from 880 kb/d to 870 kb/d and Libya increased from 1760 kb/d to 1780 kb/d).  Expected net capacity additions over the next year will augment OPEC installed capacity by some 1.3 mb/d, with Saudi Arabia and Angola collectively generating over two thirds of the increase.  Depending on variations in effective, as opposed to notional, installed capacity, and market requirements for OPEC crude, there is the prospect of a modestly wider margin of spare capacity in 2008.

OPEC-10 November supply averaged 27.1 mb/d, marginally below the 27.25 mb/d target set in early September in Vienna.  An extraordinary meeting of OPEC ministers in Abu Dhabi on 5 December left these targets for the OPEC-10 unchanged.  However, there are early indications of further rises in physical OPEC supply in December, not least with returning production from the UAE, and the prospect for sustained or higher volumes in the next two to three months from Iraq and Angola.  A further extraordinary OPEC meeting in Vienna on 1 February will allow ministers to reassess market conditions.



OPEC Sets Production Allocations for New Members

Having announced the widely anticipated reinstatement of Ecuador's full membership at the OPEC Heads of State summit in Riyadh in November, ministers allocated the South American producer an output target of 520 kb/d, rather higher than recent crude production levels around 500 kb/d. The organisation's second newest member Angola (which joined in January 2007) was given an allocation of 1.9 mb/d, which was below market expectations of a 2 mb/d-plus quota. There was some ambiguity over exactly when the new limits take effect, with OPEC sources variously reporting January and December. This report will incorporate Ecuador production within OPEC totals as of the January 2008 OMR (effectively including Ecuador within OPEC total production for December 2007 output onwards).



Recent trends in Ecuador's upstream investment environment mean it may struggle to fully match its allocation immediately. However, our estimates suggest that Angola could attain capacity in excess of 1.9 mb/d as early as 1Q08. Our Angolan numbers exclude gas liquids production of around 0.1 mb/d from the Sanha/Bomboco fields, which logically would be excluded from OPEC quota considerations. While it is not unprecedented for individual OPEC members to produce above or below quota for certain periods, the apparent mismatch between Angolan allocation and potential output raises a number of questions. Not least of these is the ability of foreign investors to fully recoup investments from production at newly-started fields. This could have a knock-on effect on future investment and ultimately on Angolan capacity levels (the MTOMR in July envisaged a further 0.5 mb/d of new field investments due for development by 2012, in addition to those itemised above).

Supply from Iraq in November was largely unchanged from October at 2.3 mb/d.  After oscillating in a 1.7-2.0 mb/d-range since 2003, this year has seen a steady improvement in net supply.  Iraq's output has increased from 1.9 mb/d in 1Q07 to 2.3 mb/d so far in 4Q, underpinned by the reinstatement of more regular northbound pipeline crude shipments from fields around Kirkuk to Ceyhan in Turkey.  Seaborne tanker and pipeline exports from Ceyhan reached 270 kb/d in October and 460 kb/d in November.  The latter figure included an estimated 60 kb/d of term pipeline crude supply taken by Turkish refiner Tupras, under a contract which runs through January.  State marketer SOMO also announced that it had extended Kirkuk term contracts to 300 kb/d for the January to March period with 11 major buyers.  However, despite encouraging news on Kirkuk exports, the northbound export pipeline suffered another 10 day outage in November after attacks, and tenders announced so far suggest that Ceyhan exports may dip below 400 kb/d for December.

Rising November Kirkuk exports were countered by weather delays which cut southern exports via Basrah and Khor al-Amaya by some 150 kb/d, to 1.4 mb/d, giving total monthly exports of just under 1.9 mb/d.  Domestic refineries and power plants were estimated to have run around 440 kb/d of crude, giving a total November net supply level of 2315 kb/d.

The Oil Minister announced that Iraq aims to raise production capacity to 3 mb/d by the end of 2008, largely via improved recovery at existing fields.  However, the country's fledgling hydrocarbon law has still to be approved by parliament.

The largest single shift in November OPEC supply occurred in the UAE, where offshore field maintenance in Abu Dhabi curbed monthly output by a net 395 kb/d to 2.15 mb/d.  Work affected the Umm Shaif, Upper Zakum and part of the Lower Zakum fields, with Umm Shaif having resumed production in late November and Lower Zakum scheduled to recommence full output from 6 December.  Term export volumes for Asian buyers for December and January have correspondingly risen, augmented by the fact that the Ruwais refinery will be partially offline those months.

Saudi Arabian supply is estimated at 9.0 mb/d for November, marginally higher than an upward-revised 8.95 mb/d in October.  For now, it appears that the bulk of the Kingdom's efforts in boosting supply came during September and October, allowing November term exports to regain full contract volume for the first time in a year.  December and January allocations have remained close to November levels, suggesting a levelling off in supply.

Saudi Arabia's crude oil and NGL capacity is scheduled to be boosted in December by start-up of facilities at the Khursaniyah field.  Ultimate production will amount to 500 kb/d of Arab Light crude and 300 kb/d of gas liquids. This report assumes gradual build up in capacity at the new facilities, reaching capacity production in 3Q08.  Depending on crude demand, state company Aramco may use the higher value Arab Light output to displace Arab Heavy or Arab Medium volumes.  Saudi Arabia's crude capacity is seen reaching 11.4 mb/d by 4Q08 from an estimated 10.8 mb/d currently.

The Saudi Press Agency reported in late November that 208 suspected militants had been arrested by security forces, one group of the militants having been planning an attack on an oil facility in the Eastern Province.  An abortive attack on the 7 mb/d Abqaiq oil processing facility in February 2006 led to a series of subsequent arrests and tightened security at major oil installations.

Nigerian production remains constrained by outages at fields within and offshore the Niger Delta, with over 500 kb/d of production still shuttered on a long-term basis.  Total November Nigerian supply is estimated at 2.16 mb/d, unchanged from downwardly revised October levels.  Plans to reinstate 110 kb/d of production at the offshore EA facility received a setback in late October after MEND rebels attacked a supply vessel.  Output of Forcados crude was further reduced by some 50 kb/d in mid-November when a pipeline feeding the export terminal was blown up.  An attack was also made on the Qua Iboe export terminal, although production was not affected.

Initial optimism over a 12 month ceasefire announced on 6 December between the government and MEND militia groups in Bayelsa state has receded after MEND leadership denounced the deal and said attacks on facilities would continue until greater local control over natural resources is established. The fragmented nature of rebel groups active in the region makes assessment of prospects for greater stability difficult. Meanwhile, Nigerian production may be further affected if the government follows through on plans to shut-in oilfield operations if gas flaring persists after 31 December 2007.  Several producing companies had been lobbying for an extension of permitted flaring from 2008 to 2010.

Non-OPEC Overview

Downward adjustments to non-OPEC oil production averaging 95 kb/d for 2007 and 140 kb/d for 2008 are counterbalanced by the adoption of a revised global refinery processing gain methodology.  This latter factor adds 155 kb/d to the previous 2007 supply forecast and 180 kb/d for 2008. This is however not 'new' supply, rather a statistical shift from our miscellaneous to balance item. Global annual biofuels supply estimates have also been smoothed within the forecast, to avoid the distortion of an exaggerated 1Q increase each year.  This does not change the annual totals, but phases-in biofuel growth across the year - a more realistic trend given the growth seen, for example, in the USA in recent years.  All told therefore, non-OPEC supply comes in at 50.2 mb/d for 2007 and 51.3 mb/d for 2008, up by 60 kb/d and 45 kb/d respectively from last month's estimates.



For the oil production forecast, 2007 totals are trimmed by 95 kb/d, focussed on the late part of the year in Canada, Mexico, Russia, China, Brazil and the Middle East region.  Unscheduled stoppages and extended maintenance continue to dog existing production levels, even though this report has for some months included a 410 kb/d contingency factor within the non-OPEC forecast.  Revisions for 2008 amounting to 140 kb/d are front-end loaded and adversely affect the totals for the USA and, again, Russia, China, Brazil and the Middle East. We have re-examined decline rates for the US Gulf of Mexico (GOM), trimmed estimates for Lukoil, Surgutneftegaz and Sakhalin 1 in Russia, and incorporated lower recent months' production data for offshore areas of China and Brazil.  The Middle Eastern adjustments are centred on a now weaker profile for Yemen, only partly offset by a stronger showing from Bahrain, Oman and Syria.

OECD

North America

US - November Alaska actual, others estimated:  GOM crude supply, plus ethanol and NGL, are the sole sources of US supply growth for 2007 and 2008.  September NGL supply regained 1.8 mb/d for the first time since Hurricanes Katrina and Rita in 2005.  And US ethanol production has consistently over-shot forecast levels in recent months, despite questionable economics. Collectively, these elements drive a 105 kb/d increase in total US oil supply in 2007 to 7.44 mb/d (5.1 mb/d being crude oil).  However, the prospect of decline from Alaska and onshore lower 48 states, plus outages at mature facilities, sees 2008 supply potentially slipping to 7.39 mb/d.  This is despite the start-up of significant new fields in the GOM (notably the recently started Atlantis and Genghis Khan, plus Thunder Horse and Neptune next year).



November actually saw US supply exceed expectation by 120 kb/d, though this was wholly due to the absence of hurricane-related disruptions in the Gulf of Mexico.  A hurricane adjustment of 185 kb/d previously employed for November 2007 and 2008, based on the rolling five year average, has accordingly been trimmed to 165 kb/d for November 2008. However, November production from the Mars and Ursa fields was depressed by maintenance.  Meanwhile, Alaska saw crude production largely unchanged in November at around 720 kb/d, although this was an improvement on disrupted November 2006 levels.

Enbridge Pipeline Outage

An explosion and fire on line 3 of Enbridge's 1.9 mb/d capacity Lakehead pipeline system on 28 November caused two deaths as workers attempted to repair an earlier leak. The explosion occurred south of the Clearbrook terminal in Minnesota, on the line which runs between Edmonton, Alberta and Superior, Wisconsin. Lakehead is the main route for Canadian crude imports feeding US refineries in Minnesota, Illinois, Ohio, Michigan and Wisconsin. Recent import levels of Canadian crude into US PADD 2 have been around 1.1 mb/d.

The company briefly closed line 3 (450 kb/d capacity), together with lines 1, 2 and 4, sending crude prices sharply higher. However, lines 1, 2 and 4 returned to service by the afternoon of 29 November, while line 3 was reactivated early on 3 December. Neither upstream production nor downstream operations were materially affected, rendering the incident's price impact very short-lived.

Canada - Newfoundland October actual, others September actual:  Operational problems continue to plague production from the three heavy oil mining/upgrading projects in Alberta.  A November fire at Shell's Scotford upgrader has caused the halt of bitumen production at the associated Muskeg River mine.  Early December saw a coker fire adversely affect production at the Syncrude Canada plant.  These, plus an earlier fire-related disruption at Suncor, will likely keep total Canadian upgraded mine output in a 650 kb/d-700 kb/d-range for much of the September 2007 to January 2008 period, compared with capacity production in excess of 800 kb/d.  4Q07 Canadian total oil supply is trimmed by 65 kb/d versus last month's projection to account for these outages.  Forecast 2008 production remains largely unchanged compared with last month's forecast at 3.34 mb/d (1.92 mb/d of conventional crude), flat on 2007 levels.

Canada's National Energy Board (NEB) released revised scenarios for national oil supply in November.  Under a $50/bbl WTI reference scenario, Canadian oil output increases to 4.05 mb/d by 2015, including 2.8 mb/d from the oil sands.  This is a 200 kb/d downward revision compared with last year's projections, largely reflecting cost increases.  Our own MTOMR in July envisaged Canadian production reaching around 3.85 mb/d in 2012, including 2.3 mb/d from Alberta's oil sands.  Both sets of projections were made before Alberta announced increases in royalty rates from 2009.  Analysts see the latter potentially having an adverse impact upon conventional oil and natural gas production more than the oil sands, although moves that impede gas supply growth could ultimately also affect oil sands production.



Mexico - October actual:  This report's projection of October Mexican production understated the impact of storm outages on crude and NGL supply, with the result that October supply has been revised down by 90 kb/d.  Looking ahead, we maintain a view of a general decline in Mexican production.  Indeed, several months of weaker than expected NGL supply result in a downward adjustment of 25 kb/d running through 2008.  However, recent months have seen crude output from the Ku-Maloob-Zaap and offshore south eastern areas exceeding our expectation.  Crude supply is revised up by 15 kb/d on average for 2008.  Average output for crude now stands at 3.11 mb/d in 2007 and 3.01 mb/d in 2008, with NGL at 0.4 mb/d and 0.41 mb/d for the two years respectively.

North Sea

Norway - September actual, October provisional:  Forecast Norwegian crude output is revised up by 20 kb/d for 2007 and by some 50 kb/d for 2008, after a combination of stronger-than-expected October data and indications of a sharper than expected rebound in output after November storms.  Crude output is now seen averaging 2.06 mb/d and 1.85 mb/d in 2007 and 2008 respectively.  However, expected NGL and condensate supply is trimmed by 25-30 kb/d for 1Q08 onwards, after reports of problems at the newly 8started Ormen Lange gasfield and with facilities at the Visund and Kvitebjorn gas/condensate fields.

StatoilHydro on 13 December incurred a 25 kb oil leak at the Statfjord field.  Bad weather impeded clean-up efforts, but neither landfall of the resultant oil slick, nor impeded production, were expected to result.

UK - September actual:  This report retains a conservative forecast for UK oil production, averaging 1.63 mb/d in 2007, with decline accelerating to give output of 1.44 mb/d in 2008.  This is towards the lower end of the range cited in equivalent government forecasts.  Storm damage briefly disrupted November supply from one of the UK's newest developments, the Buzzard field, and forced the deferral of one December cargo.  A turbine fire at the Thistle field in late November also trimmed supply there by 5 kb/d.



More evidence emerged in November of the mature nature of the UK production base.  Tax changes proposed by the government on 6 December are designed to minimise the costs of facility decommissioning and to extend production at mature oil fields.  Meanwhile the UK Health and Safety Executive (HSE) released a report suggesting that 50% of offshore facilities are in poor condition arising from insufficient priority allocated to ongoing maintenance.  The tendency for mature production facilities throughout the OECD countries to suffer unscheduled stoppages underpinned our adoption in July 2007 of the field reliability factor which, for the UK, nets 125 kb/d off the base case production forecast.

Former Soviet Union (FSU)

Russia - October actual, November provisional:  Forecast Russian production for 2008 is revised down by 65 kb/d, in line with weaker than expected output in November.  Crude production now averages 9.61 mb/d in 2007 and 9.77 mb/d next year (with corresponding NGL and condensate supply of 465 kb/d and 475 kb/d).  Russia's second largest producer, Lukoil, cut its 2007 production expectations due to delays in developing the Yuzhno-Khylchuyuskoye field in Timan Pechora, although this has minimal impact on the OMR forecast, as we previously assumed 2008 start-up.  Of greater impact were reports that partners in the Sakhalin 1 project will curb 2008 production for as yet unspecified reasons.  Although expected output levels were not specified, we have scaled back 2008 output from 240 kb/d to 210 kb/d.



Kazakhstan - November actual:  Total November production of 1.37 mb/d (crude oil 1.1 mb/d) came in close to expectation, and 2007 output of 1.35 mb/d is now likely to be largely unchanged from the 2006 total. We expect renewed growth in 2008, with `liquids output reaching 1.46 mb/d on the basis of growth in supply from the Tengiz field.

Negotiations continue on the Kashagan project, mainstay of longer-term Kazakhstan growth prospects.  Government proposals to boost state company Kazmunaigaz's equity in the project from 8.3% to 18.5% have reportedly met with agreement from most foreign partners, but not from ExxonMobil.  A new deadline of 20 December has been set for concluding negotiations on equity stakes and operatorship of the 1.5 mb/d project.  In response to delays at Kashagan, the Kazakh government announced that forecast national 2015 oil production had been scaled back by around 300 kb/d to 2.9 mb/d.



October FSU net oil exports, at 8.69 mb/d, increased by 160 kb/d compared with September.  Monthly crude exports rose by 190 kb/d, with BTC and CPC flows rebounding by 140 kb/d and 95 kb/d respectively as Caspian production maintenance wound down.  Crude exports through Black Sea ports rose by 120 kb/d in October, despite seasonal transit delays through the Turkish Straits.  Baltic ports handled 20 kb/d more crude in October, despite late-month maintenance on the BPS pipeline.  Offsetting the monthly rise of 270 kb/d in seaborne FSU crude exports, Russian crude flows through the Druzhba pipeline fell by 60 kb/d versus September, likely in part due to higher crude export duties (averaging $250/t from 1 October).

After a large drop in September, October product exports fell again, this time by 40 kb/d in total.  Although EU sulphur limits could have a negative impact on FSU flows of diesel to Europe, it was fuel oil exports which fell most significantly in October, by 90 kb/d.

Loading schedules suggest that November FSU exports via the Transneft network may have decreased by 100 kb/d, despite a potential recovery in Druzhba transits ahead of December's scheduled export tax hike.  Weather-related delays in the Black Sea likely contributed, partly offset by increased Caspian exports.  December exports may level off, with higher Primorsk volumes countering lower Azeri exports.

Longer-term Russian crude export expansion centres on the East Siberia to Pacific Ocean (ESPO) pipeline and phase 2 of the Baltic Pipeline System.  Transneft reported in November that progress on the initial 600 kb/d phase of ESPO, originally due online in late 2008, was falling behind schedule.  Contractor delays, shortages of skilled personnel and difficult terrain have been blamed for the delays, which may push commissioning of the pipeline back to 2009.  Meanwhile, a late 2008/early 2009 schedule for completion of the proposed 1  mb/d BPS-2 pipeline may also slip, given delays in the feasibility study, and making crude allocations.  ESPO reportedly outranks BPS-2 in pipeline monopoly Transneft's priorities.

Middle Eastern Non-OPEC Production Eclipsed by OPEC Neighbours

Middle East Gulf OPEC producers will add 1.0 mb/d of crude capacity and a further 1.0 mb/d of gas liquids during 2007 and 2008. But their regional counterparts outside OPEC face dwindling reserves and little prospect of significant long-term growth. Unfavourable geology and in the case of Yemen, a deteriorating investment environment, puts non-OPEC Middle East oil output on a declining track. After a post-1995 decade plateau at 2.0 mb/d, collective output from Bahrain, Oman, Syria and Yemen now stands at 1.6 mb/d, and could slip towards 1.5 mb/d in 2008. July's MTOMR saw a levelling off in supply at best for 2010-2012, based on enhanced oil recovery in Oman and small-scale developments in Yemen.

Oil Ministry plans envisage Oman's production reaching 790 kb/d in 2008 from 740 kb/d in 2007, and potentially 1.0 mb/d by 2010. The OMR employs a lower base for 2007 of 710 kb/d based on January-September data, and less aggressive expansion at Occidental's Mukhaizna field, giving lower production estimates of 690 kb/d for 2008. The last MTOMR envisaged 760 kb/d for 2012. Moves are afoot to stem decline at Petroleum Development Oman's Harweel and Qarn Alam fields with ongoing gas and steam injection. While the 1.0 mb/d target for 2010 looks ambitious, these developments, plus more condensate output, may see modest upgrades to forecasts of Omani supply in the next MTOMR.



Bahrain has employed intensive drilling and gas injection to stem 14% natural decline at the 35 kb/d Awali oil field and envisages using thermal recovery to exploit as-yet untapped heavy zones at the field. It also receives 150 kb/d of offshore output from the Abu Safah field shared with Saudi Arabia. Although plans to double Awali field output have been discussed, the MTOMR took a more cautious view, with total Bahrain liquids output falling to 165 kb/d by 2012.

Syrian production looks to be in steady decline, although this month's OMR incorporates shallower rates than previously assumed. This follows reports on year-to-date production, seen to be averaging around 360 kb/d of crude and 35 kb/d of NGL. The July MTOMR saw Syrian output slipping to 300 kb/d by 2012.

In contrast to modest upgrades for this month's estimates for Oman, Bahrain and Syria, Yemeni production is scaled back by 50 kb/d for the second half of 2007 and by 65 kb/d for 2008. Total oil production averages 335 kb/d and 315 kb/d for the two years respectively. JODI data through August came in below expectations and subsequent investigation reveals new output from Block 9 and the Nabrajah and An Nagyah fields lagging this report's forecast. Bids for the country's fourth upstream tender are due by April 2008, aimed at stabilising national production at 0.3 mb/d, but the deepwater nature of acreage offered, and slow progress ratifying production sharing contracts signed last December under the third round, may limit participation. Growing infrastructure attacks by Al-Qaeda also discourage investment.

Other Non-OPEC

Brazil - September actual:  Having risen towards 1.8 mb/d in 4Q06, Brazilian crude production has struggled to retain such levels for much of 2007.  Planned and unplanned stoppages at existing facilities, allied to delays in new project start-ups, have eaten into supply, with September production coming in 50 kb/d below our forecast, at 1.73 mb/d and preliminary October data also lagging at some 1.75 mb/d.  However, renewed growth is expected to materialise after the November start-up of the P-52 facility on the Roncador field and a new floating production, storage and offloading (FPSO) vessel at the Golfinho field.  Together with Roncador's newly started P-54 installation, these facilities could contribute a combined 400 kb/d of new supply in 2008.  In all, Brazilian crude output is forecast to average 2.1 mb/d in the second half of 2008, although clearly further slippage from this ambitious growth programme remains a possibility if 2007 delays are repeated.



OECD stocks

Summary

  • OECD industry stocks fell by 22.4 mb in October, sliding close to their five-year average and, at 52.6 days, just below average forward demand cover.  A large stockdraw in Europe, totalling 23.3 mb and led by products, alongside slightly lower North American stocks were partially offset by a Pacific stock build.  Notably, French middle distillate stocks fell by 6.1 mb, as heavy and delayed Northwest European refinery maintenance tightened the regional market.  US crude stocks fell by 9.1 mb, continuing their downward slide, while crude inventories in Japan rose by 7.2 mb in October, recovering from an upwardly revised September.
  • Preliminary November data for the US and Japan and much of Europe show a further draw of around 24 mb, as both crude and products fell further in the US and middle distillate stocks fell further in Europe.
  • End-September OECD stocks were revised higher by 22.8 mb on upward corrections to products in Europe and crude stocks in Japan.  In North America, an upward revision of 5.1 mb in 'other oils' was offset by downward adjustments to both crude and product stocks.


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

Total OECD industry stocks fell by 22.4 mb in October, to 2,648 mb, or 97.2 mb lower year-on-year.  Most of this was due to a 21.1 mb draw in product stocks caused by seasonal refinery maintenance in Europe and the Pacific.  Total product inventories decreased to 1,399 mb or 60.2 mb lower than at the end of October last year.  Total crude stocks rose by 1.9 mb to 940 mb, but remain 45.0 mb lower year-on-year.  Regionally, the draw was concentrated in Europe, where total stocks fell by 23.3 mb, while Pacific and North American stock changes more or less balanced each other.





Overall, total OECD industry stocks have continued their contra-seasonal downward slide.  In terms of forward demand, end-October cover fell further to 52.6 days, slightly below its five-year average, and providing some fundamental explanation to the recent record prices.



End-September OECD stocks were revised up by 22.8 mb on upward corrections in Europe and the Pacific.  In the former, total product inventories were adjusted higher by 12.3 mb and crude stocks by 4.3 mb.  The Netherlands, Germany and Italy saw upward revisions of 3.3 mb, 2.0 mb and 1.7 mb respectively.  In the Pacific, Japanese crude stocks for September were reported 6.1 mb higher than in last month's tables, while in North America, an upward correction of 5.1 mb in 'other oils' was offset by downward shifts in both crude and product stocks.  Together, September and August changes now mean that the third quarter only saw a counter-seasonal stock draw of 50 kb/d.

OECD Industry Stock Changes in October 2007

OECD North America

Total North American industry stocks fell by 2.2 mb in October and are 45.0 mb lower than end-October 2006.  While crude stocks drew by 6.0 mb and 'other oils' by 1.4 mb, total products rose by 5.2 mb.  The general trend reflected a period of below average crude imports into the US, a gradual return of refineries from maintenance, while US demand growth saw the first signs of weakening.  In the US, crude stocks fell by 9.1 mb, only partly offset by an increase of 3.1 mb in Mexico.

Preliminary weekly US stock data for November show a further crude stock draw of 6.9 mb, as refinery runs increased and imports remained below average.  At the very end of November, the Enfield pipeline from Canada into the US Midwest suffered a brief outage due to a fire, but the greater effect in terms of dampening crude imports into the US was likely high crude prices, which incentivised refiners to draw down stocks.  Year-end tax considerations may also have played a role.  US crude stocks have now fallen nearly 50 mb since a late-June peak of 354.0 mb.  Crude stocks in Cushing, meanwhile, have risen 2.0 mb in November, likely contributing to the WTI futures contract's weakness relative to Gulf Coast sweet LLS and ICE Brent and also narrowing its backwardation, in place since late July.

North American product inventories rose by 5.2 mb in October, but remain 25.4 mb lower on the year.  Gains were seen in all three product categories, as year-on-year demand growth slowed slightly.  Product stock builds were more or less evenly shared between the US and Mexico, albeit the former saw growth predominantly in gasoline, and the latter in middle distillates.



Preliminary November US data showed total product stocks down by 5.2 mb, as a dip in distillates (essentially heating oil) and 'other oils' outweighed increases in gasoline.  While the first cold weather has hit the US Northeast and Midwest, regional heating oil stocks are in line with their five-year average.  Total distillate stocks are only just marginally below their five-year average in terms of forward cover.  Meanwhile, gasoline stocks, after trending below average for the past nine months, have recovered somewhat and at 21.7 days ended November within a day of their five-year average demand cover.

OECD Europe

European industry stocks drew by 23.3 mb in October, trending below their five-year average for the first time since August 2005.  They also remain 25.3 mb lower than the end of October 2006.  While the greater drop was in product stocks, crude inventories also fell by 5.0 mb, continuing the September trend, and are now 15 mb below their five-year average.  Large draws were seen in Germany (-4.4 mb), France (-3.9 mb) and the Netherlands (-3.0 mb), while Italy and the UK saw builds of 3.7 mb and 1.5 mb respectively.  Euroilstock data for November, published on Tuesday 11 December, showed a further 13.82 mb draw in Euro-16 stocks, dominated by an 11.77 mb fall in middle distillate stocks probably linked to lower refinery throughputs.



Similarly, total product stocks in Europe fell by 17.4 mb in October to below their five-year average.  The fall was largely in middle distillates, which drew by 12.6 mb, though residual fuel oil and gasoline also decreased by 3.4 mb and 1.2 mb respectively.  Half of the distillate draw occurred in France, where stocks fell by 6.1 mb after heavy refinery maintenance in October.  Coinciding with maintenance at several other large European refineries, a fire at the UK's Coryton plant in early November, Northwest European ultra-low-sulphur diesel prices spiked on the temporary shortage.  This prompted French authorities to temporarily loan 285,000 tonnes (~2.13 mb) of heating oil to the market.

Elsewhere, the Netherlands and Germany also saw distillate stocks fall in October, by 1.9 mb and 1.5 mb respectively, rising marginally in the UK and remaining flat in Italy.  Total European middle distillate stocks have now fallen to their five-year average, or to the bottom of their five-year range in terms of forward demand cover. 

Product stocks held independently in the Amsterdam-Rotterdam-Antwerp region have also registered sharp falls in gasoil and jet/kerosene inventories, while gasoline and fuel oil stocks remain above average.

OECD Pacific

Total industry stocks in the Pacific - the only region to see a net gain in October - rose by 3.1 mb.  A crude build of 12.9 mb more than offset draws in products and 'other oils' of 8.9 mb and 0.9 mb respectively.  Crude and product stock builds and draws respectively were more or less evenly split between Japan and Korea.  In the former, crude stocks rose by 7.2 mb in October, on top of a large upward revision to the low September crude stock level reported last month.  However, they remain 7.0 mb lower than end-October last year.  Meanwhile, crude stocks in Korea increased by 5.8 mb in October and are slightly higher year-on-year.

Preliminary data from the Petroleum Association of Japan (PAJ) show a further uptick of 1.5 mb for crude stocks in November, despite a strong rise in crude runs as refineries returned from maintenance.

Pacific product stocks meanwhile fell by 8.9 mb in October, 22.2 mb lower on the year and slightly below their five-year range.  Middle distillates and fuel oil fell by 4.7 mb and 3.8 mb respectively, while gasoline inventories rose by 0.6 mb.  Again, the trends were similar in Japan and Korea, though crucially, Japan saw the bulk of the drop in distillate stocks.  November PAJ data showed a slight build in product stocks of 330 kb, as refineries ramped up production, reaching their highest throughput levels since March 2003.  But kerosene stocks (for heating) dipped by 440 kb and ended the month around 5.0 mb below their five-year average, even as inventories of jet fuel increased.

Recent Developments in Singapore Stocks

Product stocks in Singapore, as reported by International Enterprise, fell by 850 kb in November.  Light and middle distillates saw builds of 770 kb and 440 kb respectively, and both remain slightly below their five-year averages.  Naphtha stocks are likely lower on rising seasonal petrochemical demand, while trade data show a steady flow of distillate to Europe.  Fuel oil inventories, meanwhile, rose by 400 kb to a six-month high and the top of their five-year range.  China has been importing lower volumes, as refining margins especially for small 'teapot' refiners remained low, while an influx of barrels has come from Europe, Russia and Latin America.













Prices

Summary

  • Crude futures almost reached $100/bbl in late November, but subsequently dipped on signs of higher supplies from Iraq and a return of UAE fields from scheduled maintenance.  At the time of writing, a cut in the Fed funds rate by the US Federal Reserve, alongside moves to shore up financial liquidity, have supported oil futures at around $93/bbld.  There was little reaction to the 5 December decision by OPEC to leave targets unchanged.  Net non-commercial positions on NYMEX light crude futures continue to decline, characterised by falling net long positions and rising short positions.  The dollar continued to weaken in November on average, but has remained relatively static since early December.
  • Refining margins were mixed, showing gains in Europe and Asia on strong distillate cracks.  US margins weakened or saw only small increases, dragged down by weaker gasoline spreads as refineries returned from seasonal maintenance and long-term outages, bolstering domestic gasoline stocks.  Gulf Coast cracking margins turned negative in late November which combined with WTI's slide vis-à-vis other Atlantic Basin light sweets to deter transatlantic arbitrage.
  • The refined product market was driven by winter heating fuel demand, raising gasoil, diesel and jet/kerosene crack spreads in all regions.  This was particularly true in Europe, where refinery throughputs were below average in November due to protracted maintenance.  Tight distillates markets were also exacerbated by the UK switch to lower-sulphur diesel standards.  In Asia, strong Chinese gasoil imports to ease domestic tightness and below-average Japanese kerosene stocks kept the market tight.  Naphtha cracks rose in all regions on growing petrochemical demand, while gasoline spreads were comparatively flat.


  • VLCC freight rates from the Middle East Gulf tripled between mid-November and early December, rising to two-year highs.  Higher OPEC December cargoes drove up demand for VLCCs in the Middle East Gulf, leaving vessel availability extremely thin.  Asian clean tanker rates rose seasonally, supported by a tight regional product market.

Overview

Crude futures rose further in November on strong fundamentals, with WTI hitting a new nominal record of $99.29/bbl on November 21st.  Winter heating demand, falling stocks, crude outages and refinery problems contributed to higher prices.  Subsequently, crude futures fell to around $90/bbl in early December as market tightness eased.  The widespread assumption (until late November) that OPEC would raise production when it met in early December may have contributed to lower prices, but the weakening of the spot premium (backwardation) suggests that physical supplies improved.  Underscoring the fundamental forces behind price movements, the market showed little reaction to OPEC's decision to leave production unchanged.  However, at the time of writing, WTI front-month futures were being supported at around $93/bbl by a cut in the Fed funds rate by the US Federal Reserve, alongside co-ordinated moves with four foreign central banks to shore up global financial liquidity.  Geopolitical issues were mixed, with a US intelligence report saying that Iran had abandoned its nuclear weapons programme earlier this decade offset by still-strong political pressure, and in Nigeria, the rebel group MEND have sent mixed signals over future military activity.



November field maintenance in the UAE offset increases in output from within the OPEC 10 and from Iraq and Angola.  Output was also restrained by problems in non-OPEC producing countries.  However, fields resumed production at the end of the month, and early indications, together with sharp increases in long haul freight rates out of the Middle East Gulf suggest more widespread increments.

Futures prices painted a similar picture, with a sharp narrowing of the backwardation in crude futures in late November.  The M1-2 spread had been consistently around $1/bbl since early September, but slipped to a matter of cents in late November and early December.  Particular pressure stems from four consecutive increases in crude stocks at Cushing, WTI's delivery point in Oklahoma.

A US National Intelligence estimate published in early December appeared to take some of the heat out of tensions over Iran, as it was interpreted by many to make a potential conflict more unlikely.  Nonetheless, doubts remain, as Iran has not complied with UN Security Council demands to halt uranium enrichment.  In Nigeria, a local ceasefire with some Delta militants was heralded as a breakthrough, but is unlikely to mean an imminent resumption of crude from shut-in production.  Group leaders continue to express their discontent with regional investment pledges.  Despite the latest central bank moves to bolster global liquidity, downside risks to the global economy and hence oil demand remain, as the fallout from the subprime and financial crisis is still uncertain.  In the shorter term, winter weather remains key.

Spot Crude Oil Prices

Spot crude prices mirrored futures, gaining on average in November, but trending lower towards the end of the month and early December.  In the Atlantic Basin, east-west arbitrage options decreased, as WTI weakened relative to other light sweets, likely due to four consecutive weeks of Cushing crude stock gains.  Moreover, US refining margins mostly weakened further, with Gulf Coast cracking margins moving into negative territory in the latter part of November and early December.  Demand for regional sour crudes also increased as complex refinery capacity in the Gulf of Mexico returned from seasonal maintenance.  At the time of writing, WTI had staged a significant recovery against other sweet crudes.

Stronger regional refining margins and less attractive transatlantic arbitrage activity led refiners in Asia to draw in more West African sweets.  China's refiners were ramping up production to counter widespread product shortages, while the petrochemical market picked up.  However, the Brent/Dubai spread remained relatively high throughout the last month, on average around $6/bbl.  Regional sweet benchmark Tapis also weakened compared with Atlantic Basin light sweets.





In Europe, Dated Brent was supported by minor North Sea outages, but further pressure was put on the Urals discounts to Brent from higher volumes of Iraqi Kirkuk entering the Mediterranean market.  But Urals remained attractive compared with North American and Middle Eastern sour benchmarks Mars and Dubai, and so was less likely to flow outside the region.

Refining Margins

Full-cost refining margins in Europe and Asia rose on average in November and were mixed in the US.  In Europe, margins were driven by strong gains in distillate cracks, particularly ultra-low-sulphur diesel.  Cracks in Northwest Europe, which had surged in late October on market tightness, have dipped slightly, but remain high.  Jet cracks also increased, as did gasoline, while fuel oil spreads weakened.  In Asia, tighter jet/kerosene and low-sulphur fuel oil cracks played a larger role, though gasoline, diesel and naphtha were also up.

In the US in contrast, refining margins mostly weakened or made only small gains.  US Gulf Coast margins on average picked up slightly in November, but trended sharply downwards throughout the month and into early December.  Brent and Bonny Light cracking spreads both moved into negative territory in recent weeks, weighed down by weaker gasoline crack spreads, unlike the other regions.  Heating oil cracks were also down on the US Gulf Coast, as was fuel oil.  Only jet cracks were reasonably strong.



Spot Product Prices

Refined product markets were dominated by distillates, as winter heating demand kicked in.  Diesel and heating oil cracks were particularly strong in Europe, as refinery throughputs remained below average after protracted maintenance.  This report has revised down projected total European refinery runs in November by -0.4 mb/d from last month on problems and delayed start-ups.  Last month's report had also highlighted diesel price spikes in Northwest Europe ahead of the new UK limits on sulphur levels in diesel, while EU heating oil specifications will change from 1 January.  Against a background of strong regional demand, European distillate stocks fell to the bottom of their five-year range in October, with preliminary data showing further draws in November.  As a consequence, Europe has been drawing in distillate cargoes from Russia, the US and Asia.  Fuel oil discounts to crude also narrowed, while gasoline crack spreads remained flat.



In Asia, Chinese diesel shortages and low Japanese jet/kerosene stocks kept distillate cracks high, while naphtha cracks edged up on strong petrochemical demand and lower Indian exports in December.  Volumes from the latter were expected to be around 520,000 tonnes in December, down from 900,000 tonnes in November.  Gasoline remained flat versus benchmark crudes and fuel oil cracks were mixed.  High-sulphur fuel oil discounts to Dubai widened on an influx of barrels from around the world (independent product stocks held in Singapore rose to a six-month high in early December) and demand from China was lower-than-normal.  Smaller 'teapot' refineries in China, which typically take straight-run fuel oil as a feedstock, were affected by weak margins.  At the same time, low-sulphur waxy residue (LSWR) narrowed its discount to crude on strong regional utility demand.



US product price differentials to regional crudes were, meanwhile, more muted.  Gasoline crack spreads declined as refineries increased throughputs and stocks increased.  Jet fuel and heating oil cracks saw strong gains on rising demand, as the cold snaps and snow reached the US Northeast in November.  Diesel cracks also gained, though less so.

End-User Product Prices in November

Retail prices increased strongly across-the-board in November, in many cases reaching record nominal highs.  Diesel and gasoline prices on average rose 12% and 10% respectively in US dollars, ex-tax, while due to the dollar's weakness, gains in national currencies were slightly lower.  Heating oil prices rose by around 13% on average in US dollars, ex-tax, driven by gains in Europe.  But the strongest gains were seen in low-sulphur fuel oil, which on average gained 14% in Europe and Japan.  Compared with November last year, retail prices on average increased by around 45% in US dollars and by around 30% in national currencies, both ex-tax.

Freight

VLCC freight rates from the Middle East Gulf tripled between mid-November and early December, rising to two-year highs.  Higher OPEC December cargoes drove up demand for VLCCs leaving the Middle East Gulf on long-haul trades.  Alongside higher Chinese purchases of West African cargoes, this has left available tonnage extremely thin.  Suezmax rates were also supported by a spill over of vessel demand from the VLCC sector.  Aframax trades were disrupted by bad weather in several areas.  Asian clean tanker rates were supported by a tight regional product market.

By the first week of December, VLCC rates from the Middle East Gulf to Japan had risen to $28.84/tonne from a mid-November level of just below $10/tonne, around the average 2007 freight rate for this route.  This surge took rates to levels not seen since early 2006.  Corresponding rates from the Middle East Gulf to the US Gulf jumped from around $14/tonne to almost $40/tonne over the same period, and are now at three-year highs.  The key factor behind these increases was an apparent increase in OPEC cargoes for December loading.  A post-maintenance rebound of UAE output in December looks to have built upon earlier export increases from other OPEC countries, while Saudi Aramco reduced prices of its crude to US and Japanese customers for December.  Tanker movement reports suggest at least a 400 kb/d increase in Middle East sailings through the first three weeks of December, compared with November, 300 kb/d of which will head to Western markets.  The higher vessel demand associated with these increased sailings, much of it for long-haul voyages, has left vessel availability in the Middle East Gulf extremely thin.  An oil spill from a single-hulled VLCC involved in a collision with a barge off South Korea added further upward pressure to VLCC rates in early December, by boosting demand for double-hulled vessels.



The recovery in the VLCC sector also boosted Suezmax rates for vessel loading not only from the Middle East Gulf but also West Africa.  One-million barrel rates from West Africa to US Atlantic rose from under $10/tonne in mid-November to almost $19/tonne at the end of the month, before dropping by a dollar in the first week of December.  Chinese purchases of West African crude in December were at record highs, of 920 kb/d, following a push to replenish Chinese crude stocks.  Conversely, US demand for West African cargoes was lower in December and may remain limited in January with physical WTI recently falling below Brent.  Higher Ceyhan liftings also supported Suezmax demand in November.  Aframax rates rose less dramatically, with intra-North West European rates gaining around $2/tonne in the second half of November to finish at $7.40/tonne in early December.  Vessels of this size faced particular disruption in November from bad weather in the North Sea and around the US Gulf Coast.  Reduced transit hours in the Turkish Straits dented Mediterranean Aframax supply, as vessels waited up to 12 days to pass through.

Clean freight rates ticked up in line with seasonal trends in November.  Shipping rates for Middle East Gulf clean cargoes of 75,000 tonnes heading for Japan were over $26/tonne in early December, up almost $10/tonne from mid-November.  Winter product demand, including higher petrochemical throughputs, low product stocks in Japan and diesel shortages in China and Indonesia underpinned the need for incremental product imports into and within Asia.  Elsewhere, European diesel tightness maintained the demand for backhauling diesel imports from the US, and reportedly opened up East-to-West arbitrage opportunities.  Clean, 33,000-tonne rates between UK Continent and the US Atlantic Coast have held firm around $20/tonne since the second week of November, two dollars higher than the November 2006 average.

Refining

Summary

  • Global refinery crude runs are forecast to average 74.9 mb/d in December, as throughput reaches its seasonal winter peak.  Crude runs are expected to remain at these levels in January.  Crude Throughput in 1Q08 is forecast to average 74.3 mb/d, a year-on-year increase of 1.0 mb/d.


  • December OECD throughput is estimated to average 39.7 mb/d, with downward revisions to North America and Europe partially offset by higher runs in the Pacific, where Japanese crude throughput reached 4.6 mb/d earlier this month, the highest level since March 2003.  OECD crude throughput in 1Q08 is forecast to average 39.0 mb/d, 0.4mb/d higher than in 1Q07, following the return to service of several US refineries from long-term outages.
  • September gasoil/diesel yields remain at record levels for the time of year, largely driven by increases in European countries.  Fuel oil yields strengthened in Canada, following reports of operational problems with upgrading units.  A similar pattern is evident in the OECD Pacific, particularly in New Zealand.  Kerosene yields in the Pacific remain low compared with seasonal norms, given Japanese refiners' continued preference to produce (and export) jet fuel.
  • European product market outlook for 2008 is forecast to evolve in line with the long-term trends for the respective products.  Gasoline and fuel oil exports should grow in 2008 while import requirements for middle distillates should increase as heating oil demand rebounds and diesel demand growth continues.

Global Refinery Throughput

Global refinery crude throughput is projected to average 74.9 mb/d in December; 0.1 mb/d lower than our previous estimate, but up by 1.8 mb/d from maintenance-afflicted November.  It is seen holding at this higher level through to the end of January.  Lower December throughput estimates for Europe and the US are partially offset by increased runs in the Pacific.  First quarter 2008 throughputs are seen averaging 74.3 mb/d, 1.0 mb/d higher year-on-year, on the assumption of normal weather conditions.

OECD October crude throughput averaged 38.0 mb/d, in line with our forecast.  Crude runs were consistent with expectations in North America and 0.1 mb/d higher than expected in Europe. This was partly offset by the OECD Pacific, where crude throughput was 0.2 mb/d lower than forecast.  October crude runs mark the seasonal low-point in refinery throughput as maintenance work reached its peak in the OECD.  Crude runs in North America were broadly flat against levels of a year ago, while Pacific crude throughputs were above levels of a year ago.  European crude throughput remains weak compared with the five-year range, down 0.2 mb/d year-on-year. This suggests that European refineries may have undertaken higher than normal maintenance, linked to the introduction of tighter heating oil quality specifications in 2008.



Third-quarter crude runs were higher-than-estimated in Malaysia, Egypt and Venezuela leading us to revise up average crude throughput for 3Q07 by 0.4 mb/d to 74.6 mb/d.  These higher crude runs have been carried forward in our forecasts as it appears that we were too cautious on these countries.  October crude throughputs are also revised higher from last month's report, by 0.4 mb/d, following higher-than-expected crude runs in Saudi Arabia and Iran in addition to the adjustments to the countries mentioned above.



OECD fourth-quarter crude runs are estimated to average 38.7 mb/d - 0.2 mb/d versus last month's forecast.  Slower than anticipated restarts following maintenance at several refineries in Europe (notably BP's Nerefco, OMV's Burghausen and Total's Gonfreville refineries) have reduced November's estimated crude runs by 0.4 mb/d.  Industry reports indicate an apparent rise in unplanned outages at Japanese refineries, particularly with regard to upgrading equipment.  However, weekly data would suggest we have overestimated the impact of these problems on crude runs, resulting in a small upward revision.  Offsetting this, October OECD submissions provided upward revisions to European and North American crude throughput, partly offset by a small downward revision to Japanese throughputs.





Weekly data reveal that Japanese refineries recovered quickly from the November operational problems.  By early December, crude runs had reached 4.6 mb/d, the highest level since March 2003.  Nevertheless, despite high crude throughputs, kerosene and gasoline stocks remain below seasonal norms.  Weekly US data indicate that crude runs reached 15.5 mb/d, in late November, their highest level since mid-September, and they are forecast to average around 15.5 mb/d for the whole of December.  The recovery in crude runs in the US Midwest has been most pronounced in recent weeks, following the completion of planned works at BP's Toledo refinery and other plants, including Flint Hill Resources' Pine Bend refinery.



Fourth quarter Middle East crude runs have been revised up following stronger-than-expected throughput in October data for Iran and Saudi Arabia.  The planned shutdown at Saudi Aramco's 400 kb/d Rabigh refinery may have occurred later than our assumed mid-October start date, resulting in a higher level of average throughput for the month.  Alternatively, other refineries within the Kingdom may have compensated for the shutdown by processing extra crude.  Ahead of data confirming November's throughput level, we have left Saudi crude forecasts unchanged but recognise that a later start date could have an impact upon December runs.  Iranian throughputs were similarly higher; continuing the pattern of upward adjustments in recent months.  Consequently, we have revised up November and December crude runs for the region.

Latin American crude throughput in September is revised up by 0.3 mb/d following higher-than-expected crude runs in Argentina and Venezuela, the latter despite several reports of unplanned outages and planned long-term maintenance work on coking facilities at the Amuay refinery.  Consequently, we have carried part of this upward revision forward in our forecasts through to the end of the first quarter of next year, when the work is expected to be completed, as crude runs appear to have been relatively unaffected by the work on the upgrading units.

Chinese October crude throughputs were 6.5 mb/d, 0.1 mb/d weaker-than-forecast.  November crude throughput is expected to have increased to 6.7 mb/d, with a further increase in December to 6.8 mb/d.  These increases by Chinese refiners are in response to government pressure to resolve diesel and gasoline supply shortages.  Other measures to help ease the tight product supply situation include the curtailment of gasoline and diesel exports, high levels of diesel and gasoline imports and the offer of cheap, additional crude supplies to some independent refiners.  Ultimately, erratic supplies are likely to remain a pattern of Chinese domestic supply until domestic prices both upstream and downstream more closely follow international prices.

First quarter 2008 global throughputs are seen provisionally around 74.3 mb/d.  This represents an increase of 1.0 mb/d against 1Q07 and assumes higher throughput to meet normal seasonal demand, albeit with much of the growth in regions that either have strong demand growth or returning refinery capacity - namely North America and China.  In the US, the return to service of BP's Texas City and Whiting refineries from long-term outages and our assumption that Chevron will recommission a 160 kb/d crude unit at its Pascagoula refinery underpin the growth.  In China, capacity additions and pressure from the Chinese government on Sinopec and PetroChina to ensure adequate supplies of products, most notably diesel, results in strong crude throughput growth.  Globally, the adjustments for offline capacity are based largely on estimated seasonal average maintenance levels, due to the currently limited published information on actual planned maintenance.  The first quarter of next year is forecast to see a gradual decline in runs from January's level of 74.9 mb/d, to 74.0 mb/d in March,  as the start of spring maintenance, initially in the US and the Middle East reduces runs.  Later in the quarter we expect work to start in Europe and Asia.

OECD Refinery Yields

Middle distillate yields reached record seasonal levels in September, and reached levels that are close to all-time highs.  Higher gasoil/diesel yields in Europe and North America underpin the increase, partly at the expense of jet/kerosene.  European gasoil/diesel yields reached 37.3%, a level only surpassed by last November's 37.4%.  Increased gasoil/diesel yields were seen in the majority of European countries.  However, October's gasoil/diesel yield is likely to be lower due to the maintenance and unplanned downtime highlighted in last month's report. Fuel oil yields increased in North America, largely due to higher Canadian fuel oil yields, as a result of problems with upgrading equipment, given the corresponding reduction in gasoline and gasoil/diesel yields.



As highlighted last month, Japanese and Korean refiners continue to produce increased amounts of jet fuel, at the expense of kerosene.  The higher jet fuel production is being exported while domestic stocks of kerosene remain low compared with the historical range.



Revising Processing Gain Methodology - Utilising the Global Product Supply Model

Following the development of the refining and product supply model for the Medium-Term Oil Market Report (MTOMR) we have developed a new, more detailed, method for calculating refinery processing gain, (reflecting the volumetric increase achieved when the heavier fractions of crude oil are processed through upgrading capacity). Consequently, global processing gain has risen steadily over time as refineries have added more upgrading units, in order to raise the percentage of light products produced. But the trend is not linear: growth in processing gains tends to slow down when spare refinery capacity is tight and marginal (and simple) hydroskimming refineries are increasingly used.

The new methodology will serve as the basis for the forecasts in both the Oil Market Report and the MTOMR. The largest changes are in 1986, 1987 and 1992 where we have cut estimated processing gain by an average 260 kb/d. Conversely, for the period 1995 2005 the net change to processing gains averages zero. However, from 2006 onward the increases become more significant; a reflection of increasing levels of upgrading capacity.

The detailed modelling brings together the yields of individual upgrading units, together with an assessment of crude quality and trade, providing a regional and global assessment of the net processing gains. As a broad guideline, the following unit specific assumptions for volumetric gains have been used:

  • a 18.1% gain on delayed coking using vacuum residue as feed,
  • a 20.7% gain on hydrocracking vacuum gasoil in diesel-max mode,
  • a 14.9% gain on fluid catalytic cracking of vacuum gasoil in gasoline max mode.

These assumptions will of course be subject to change, alongside shifts in technology, investment and utilisation.



European Product Market - 2008 Outlook

As part of a series of more in depth looks at regional forecasts from our medium-term global product supply model, this month we consider prospects for Europe in 2008.

The 2008 European product market outlook is driven heating oil demand, (which we assume returns to its seasonal norms), and diesel, where demand growth is expected to continue apace. Consequently the refining industry, despite investment in hydrocracking and hydrotreating capacity, will struggle to match the pace of distillate demand growth, but be forced to increase exports of gasoline and fuel oil as demand for these fuels continues to weaken.

European gasoline exports are expected to grow by 80kb/d in 2008, largely as a result of continued weak demand as the dieselisation of Europe's car fleet continues. Weaker European gasoline demand and stronger diesel demand growth have forced refineries to operate in a distillate maximisation mode, relegating gasoline to a subsidiary role. Gasoline refinery yields have declined from an average 21.8% in 1995 to 19.9% in 2007, even though OECD Europe crude import quality has not changed over the same period. We noted in last month's report that North American net imports of gasoline were expected to decrease by 112kb/d in 2008. Consequently, European refiners will need to find alternative customers for their increasing export volumes at a time when two major importers, Iran and Nigeria, are both likely to import less in 2008 compared with 2007. Gasoline output is expected to remain under pressure, as refiners seek to maximize diesel output, but squeezing gasoline yields further could prove difficult given refinery hydrogen balances, which rely on naphtha reforming for a substantial part of the supply.

Kerosene yields are expected to remain under pressure due to strong growth in diesel demand. European refiners are assumed to meet marginal ultra low sulphur diesel demand where possible and rely increasingly on imports of jet fuel from other regions to balance their supply commitments. Kerosene output remains relatively unchanged in 2008, while demand is forecast to grow by 1.6%, leaving the overall balance 20 kb/d tighter. This suggests that jet fuel cracks will be supported by the need to import product into the region and as a source of alternate value to ULSD production.

Continued strong diesel demand growth and winter heating oil demand, plus the limited addition of hydrocracking capacity in 2008 are forecast to require an incremental 210 kb/d of distillate imports in 2008. In addition, refiners must prepare for the introduction of 10 ppm sulphur diesel in 2009, raising the possibility of heavy maintenance next autumn to upgrade hydrotreating capacity to meet the tighter specifications. The addition of distillate hydro treating capacity in 2007 reflects the need to meet tighter sulphur requirements for heating oil that will come into force at the beginning of 2008 - particularly the need to continue to desulphurise Russian gasoil supplies (the source of marginal heating oil in Europe).

As a result, higher hydroskimming margins will be needed to incentivise incremental crude runs in the region, offsetting the strong growth and tightening supply trend in middle distillates that would otherwise be seen.

Fuel oil exports are forecast to increase by 70 kb/d in 2008, as European demand continues to weaken in the face of rising natural gas substitution. However, demand may be stronger than forecast if next year's weather patterns are colder than normal in winter or warmer in summer, but in this regard, we note that natural gas stocks are reportedly high throughout Europe.

Prospects for Emission Trading in OECD Regions

Several regions and countries are developing or proposing greenhouse gas emissions trading schemes (ETS). While some have designed their schemes and defined rules (the European Union, North Eastern US States, Japan, Norway), others are still in the process of elaborating their system's design (Australia, Canada, New Zealand).

The European Union ETS, the largest scheme in operation, is currently evolving on two fronts. First, the European Commission has approved all EU countries' National Allocation Plans (NAPs) running from 2008 to 2012, in line with the first trading period of the Kyoto Protocol. The total cap for these countries represents a 6.5% reduction from 2005 emissions. The second front relates to the scheme's next phase, post-2012. In parallel, the Commission has proposed to include the aviation sector in the ETS by 2011.

Following its ratification of the Kyoto Protocol on 3 December, Australia is likely to establish a GHG trading scheme that would operate starting 2010. While details have yet to be worked out, the similarities between the options proposed by the former prime minister's Task Group on Emissions Trading and the States and Territories' National Emissions Trading Taskforce (NETT) suggest that the scheme would apply to the energy, transport and industrial sectors as well as fugitive emissions (e.g. greenhouse gases that escape during the process of fuel production, storage or transport, such as methane given off during oil and gas drilling and refining).

In Canada's Regulatory Framework for Air Emissions, the government has proposed emission objectives on an intensity basis (emissions per unit of output) in the following sectors: electricity, oil and gas, forest products, smelting, refining, iron and steel, cement, lime, and chemicals production sectors. To comply, emitters could rely on five options: internal reductions; a domestic offsets system; contributions to a technology fund; a pool of early action credits; and Certified Emission Reductions from the Kyoto Protocol's Clean Development Mechanism, to meet 10% of their compliance obligation.

On 4 December 2007, the New Zealand Parliament introduced legislation to establish an emissions trading scheme following the government's September 2007 detailed framework proposal. The proposed cap-and-trade system should cover all six major GHG emissions and will be introduced in stages, applying to all sectors of the economy by 2013. It will be fully open to the Kyoto Protocol's trading mechanisms.

Of Particular Relevance to the Oil and Gas Sector

Several of these schemes intend to cover the oil industry. Some schemes would put emission caps on the carbon content of liquid fuels produced or imported in the country (Australia and New Zealand); others could impose caps on the refining sector's direct emissions (EU and Canada), and on other energy end-users, including aviation in the EU.

Upstream' Allocation

An upstream coverage seeks to assign the obligation on emissions to firms that produce or import fossil fuels in an economy; they are made liable for the CO2 content of fuels they sell into the country, and must surrender emission allowances matching such volume. Fossil fuel producers and importers would then take measure to comply, buying allowances to cover emissions above their initial allocation, and curbing demand for fuels, including through pricing. None of the proposals for upstream coverage would allocate allowances for free to the liquid fuel sector; liable entities would either purchased allowances at auctions, or acquire them from the domestic or international carbon markets. The purpose of an upstream allocation is to send a carbon price signal to all fossil fuel consumers, through a single policy instrument.

The New Zealand ETS is to cover all liquid fossil fuels (primarily used for transport) as of January 1, 2009, except international aviation and marine. Obligations would lie with large fuel suppliers, and no free allocation will be provided. In the Australian domestic ETS, permit liability could also be placed on fuel suppliers with a series of short-term annual caps.

Under the EU ETS at present, refinery installations are allocated allowances for their direct emissions (i.e., not for the carbon content of processed fuels). The carbon constraint may increase variable costs whenever extra emission allowances are needed to cover emissions over and above the initial allocation.

In Australia, fugitive emissions such as methane emitted during oil and gas drilling as well as during the refining could be covered. In such a case, emitters would be capped and liable for those emissions.

Caps on Direct Emissions in the Oil and Gas Sector

In the Canadian proposed scheme, existing facilities that are covered (i.e. including refinery installations) may be required to reduce their GHG emissions intensity by 6% each year from 2007 to 2010. This yields an initial emissions intensity reduction of 18% from 2006 levels in 2010, the year the proposed greenhouse gas regulations would be implemented. Every year thereafter, a 2% continuous improvement in emissions intensity will be required. By 2015, therefore, a reduction in the GHG emissions intensity of 26% from 2006 would be mandated.

Caps on Direct Emissions of Aviation

The European Commission proposes to include the aviation sector in the EU ETS as of 2011, a proposal backed by the Council and Parliament, though they have yet to approve the proposal presented by the Commission on 20 December 2006. Members of Parliament voted, on 13 November, in favour of slightly toughening up the Commission's proposal, requesting that all airlines flying to and from EU territory should join the scheme in 2011; airlines would be required to reduce emissions by 10% compared to average 2004-2006 levels; 25% of the emission allowances would be auctioned; the cost of all CO2 allowances bought by airlines would be multiplied by two unless the Commission develops legislation to address additional climate impacts caused by nitrogen oxide (NOx) emissions from aircraft; an 'efficiency clause' states that the aviation sector can only buy allowances from other sectors if it first improves its fuel efficiency; and military flights and planes weighing less than 20,000 kg, such as business jets, would be excluded.

Based on IEA/OECD Annex 1 Experts Group paper Emissions Trading: Trends and Prospect. For more details, please contact Julia Reinaud: Julia.REINAUD@iea.org or Cedric Philibert: Cedric.Philibert@iea.org.