Oil Market Report: 16 January 2008

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  • NYMEX light sweet crude futures breached $100/bbl in early January and remain near record highs, lifted by falling stocks, cold weather and tight fundamentals.  Tensions in Nigeria and the Middle East and fund positioning remain important supportive factors.
  • OECD total oil industry stocks fell by 38.1 mb in November (-123.8 mb year-on-year), extending the move below the five-year average and lowering forward cover to 51 days.  Preliminary December data for the US, Japan and EU-16 show another 30.7 mb draw.
  • World oil supply averaged 87.0 mb/d in December, up 870 kb/d from November on increases in OPEC-10, North America, the FSU, Brazil and China.  Global supply in 4Q was more than 1.0 mb/d higher than a year earlier, having averaged at or below levels of a year ago in the previous three quarters.
  • December OPEC crude supply rose by 825 kb/d to 32.0 mb/d, following the inclusion of 500 kb/d from Ecuador and the remaining 325 kb/d coming from restored UAE production and higher Iranian exports.  Nigerian supply was stable below 2.2 mb/d, despite threats of further rebel attacks.  Effective OPEC spare capacity fell to 2.2 mb/d, of which 80% was held by Saudi Arabia.
  • 2007 world oil demand is revised up by 150 kb/d to 85.8 mb/d on stronger-than-expected deliveries in Asia and the Middle East and cold OECD weather. Offsetting adjustments leave 2008 demand virtually unchanged at 87.8 mb/d.  Downside risks to US and global GDP have increased, but remain outside consensus and institutional forecasts.
  • December global refinery throughput of 74.9 mb/d is estimated to have fallen just short of last August's peak.  January throughputs are expected to remain high at 75.2 mb/d, up 1.3 mb/d on the year, before seasonal maintenance kicks in from February onwards.

Far from perfect

After brushing perilously close at the end of last year, front month NYMEX light sweet crude futures finally surpassed $100/bbl in intra-day trading.  The breach was largely a symbolic: from an economic or analytical perspective it makes little difference if prices move to $99.29 or $100, and in reality there are many different crudes, some which trade at a premium, some at a discount to the WTI benchmark on which this futures contract is based.  But it underscored the 10 fold increase in oil prices seen since 1999 - a dramatic move by anyone's standards, and in particular, a sharp jump in prices from a year earlier.

The most recent rise would appear the easiest to explain: OECD stocks have been falling since July 2007, reflecting a tightening physical market.  Total OECD oil inventories are now below five-year average levels and demand cover has, over the past five months, moved from the upper-end of the five-year range to the lower-end.  Fourth quarter demand has also been stronger-than-expected and supply-side concerns have played a role.  Rebel groups in Nigeria have been threatening attacks again, we have had a reported spat between the US Navy and Iranian Revolutionary Guards and producers have shown little public interest in lifting output targets further.  Further, there has also been the perennial New Year investor positioning - a market factor every year for the past 20 years.

These factors provide an explanation for the recent trend higher - even in the face of more bearish economic projections - but do they justify $100/bbl oil?  If we look to basic economic theory, then the clearing price is reached where marginal supply equals marginal demand.  We know the cost of producing oil is going up, with some analysts estimating current marginal costs as high as $50 to $75/bbl.

But when has oil ever traded at its marginal cost?  Over the medium term, the marginal costs should act as a floor, but with OPEC managing supply, there is the potential for prices to trade at a premium.  Other factors may similarly confer an upside on prices.  Tightness in refinery capacity, the underperformance of non-OPEC supply, low spare capacity, fears of peak oil and accelerating demand for transportation fuels could work in the same way.

Such strong fundamentals can generate lasting price trends, which can also create their own momentum.  Why should a producer hedge his production, if the price is always rising? Doing so incurs a heavy insurance premium. Technical traders who follow price patterns buy when prices fall back to their trend lines, and also when new highs are made.  Risk managers can also adopt derivatives strategies which look good on paper, but which may lead them to buy additional contracts if the price range is particularly wide (option buying may have accelerated the initial push above $90).

Fund flows may also have an impact: certainly, the weight of money argument has an intuitive feel.  But the answer may not be clear-cut.  While we do not have disaggregated data on index fund activity in the oil markets, there is some information available for other commodity markets.  For example, according to the CFTC, index funds currently account for a very large share of wheat futures open interest (around 40%) on the Chicago Board of Trade.  That seems remarkably high, yet despite wheat prices nearly tripling since 2006, the share of index funds relative to open interest has actually fallen.  Certainly, tight fundamentals seem to be playing a major role there, rather than speculation.

Ultimately, this is a complex and interactive web of fundamentals, which are both variable over time and difficult to untangle.  Many would like to see the oil price as a composite ladder of identifiable factors, i.e. Oil price = marginal cost + product tightness + cold weather + geopolitics + speculation.  But the market does not work that way.

Recent newspaper articles have been eerily similar to those seen in the summer of 2004 when crude oil prices doubled from a year earlier to $50/ bbl. It created the same level of consumer disquiet as we are seeing three years later at $100.  $50/bbl seemed outrageously high.  Speculation was blamed for up to half of the prevailing price.  Plenty of reasons for $50 oil were subsequently found, none of them 'irrational'. That price now seems relatively low, bearing in mind higher marginal costs.

Recently, we have seen quotes attributing $25-$50 of the current oil price to speculation, but where do those numbers come from?  If the numbers were derived from a formal price model that would be impressive, particularly as when we hit $100 we only had partial inventory data for half of the OECD and precious little for the rest of the world, and accurate supply and demand data dating back to October at best.  As for speculators, the only comprehensive data we have are those for futures market open interest.  Partial trader classifications are only available on US markets and there is only a three-yearly survey by the Bank of International Settlements on the total activity in Over-the-Counter (OTC) paper contracts for all the commodity markets.

In a perfect market, price embodies all the information we need, but without perfect information, we are a long way from what academics would term an efficient market.  Information will never be perfect, but more information, from both the physical side and the financial side, would improve our understanding.



  • Global oil product demand has been adjusted up by roughly 150 kb/d in 2007, as a result of baseline revisions in several non-OECD areas (Asia and the Middle East) and stronger-than-expected 4Q07 submissions for OECD North America and Europe.  In 2008, by contrast, global demand has remained largely unchanged.  World demand is now expected to average 85.8 mb/d in 2007 (+1.2% or +1.0 mb/d over 2006) and 87.8 mb/d in 2008 (+2.3% or +2.0 mb/d).  The 2008 forecast, however, may be further revised if forthcoming assessments from the IMF and the OECD point to a weaker-than-expected outlook for the US economy, which may be only partially offset by strong GDP growth in the Middle East and China
  • OECD oil product demand has been upped by 53 kb/d in 2007 following stronger-than-expected 4Q07 demand in North America and Europe.  By contrast, the 2008 demand forecast was lowered by 83 kb/d, following a reassessment of gasoil demand prospects in 1Q08, particularly in the US.  OECD demand, estimated at 49.2 mb/d in 2007 (-0.2% year-on-year), is expected to average 49.7 mb/d in 2008 (+1.1%).

  • Non-OECD oil product demand has been revised up by some 100 kb/d in both 2007 and 2008, following the baseline reappraisal of several countries, including Chinese Taipei, Indonesia, Malaysia and Iran, which largely offset a small downward adjustment in shortage-stricken China.  As such, non-OECD demand is now seen averaging 36.6 mb/d in 2007 (+3.2% on an annual basis) and 38.1 mb/d in 2008 (+4.0%).


In November, according to preliminary data, total OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 0.1% year-on-year.  The resilience of oil product demand in the Pacific (+0.4% on a yearly basis) and North America (+0.1%) failed to offset Europe's demand weakness (-0.6%).

Oil product demand in OECD North America (including US Territories) was supported by transportation fuel deliveries in both the US and Mexico and strong residual fuel demand in the US as a result of relatively cold temperatures.  In OECD Pacific, demand continued to be mostly driven by strong electricity consumption in Japan, which boosted residual fuel and direct crude use.  OECD Europe demand, meanwhile, continued to feature lower-than-average deliveries of heating oil and residual fuel oil in Germany.

Overall, OECD demand is estimated at 49.2 mb/d in 2007 (-0.2% year-on-year), about 50 kb/d higher than last month's report, and is forecast to average 49.7 mb/d in 2008 (+1.1%).  As highlighted in the chart (previous page), most of the oil demand growth in 2008 is expected to come from heating use on the basis of a return to normal weather patterns.  By contrast, transportation fuels, which drove most of the demand growth in the previous years, are likely to remain subdued as a result of weaker economic activity and higher oil prices.

North America

Preliminary data indicate that oil product demand in North America (including US Territories) rose by 0.1% year-on-year in November, underpinned by transportation fuels and residual fuel oil growth.  In particular, US gasoline demand has turned out to be stronger than expected despite high retail prices; together with sustained Mexican demand, the region's gasoline deliveries rose by 0.8% on a yearly basis.  Moreover, buoyant gas/diesel oil demand across the region and relatively cold temperatures in the US and Canada supported overall gasoil deliveries (+0.8%).  Demand in OECD North America has thus been revised up slightly compared with last month's report.  It is now expected to average 25.6 mb/d in 2007 (+1.0% on a yearly basis) and 25.7 mb/d in 2008 (+0.5%).

Inland deliveries in the continental United States - a proxy of oil product demand - fell by 0.3% year-on-year in November, according to adjusted preliminary data.  The weakness in demand growth was due to lower-than-expected deliveries of naphtha, heating oil and 'other products', which offset strong residual fuel oil demand (+10.9%), partly related to slightly colder-than-normal temperatures.  Indeed, the number of heating-degree days in November was 5% higher than the ten-year average (and 12% higher than in November 2006).  Nevertheless, many climatologists are now predicting another mild winter (January is expected to be warmer than normal).  Gasoline deliveries, meanwhile, rose by 0.5%, as well as jet fuel (6.2%) and transportation diesel (5.2%).  It should be noted, though, that the strength of diesel demand is also partly related to the change in sulphur specifications since mid-2006, whereby some of non-road, locomotive and marine gasoil is now counted as diesel.  The fact that transportation fuel demand has continued to be resilient in the US appears to cast doubts on dire predictions of significant demand destruction as a result of high oil prices, suggesting that US oil demand is much more price inelastic than commonly assumed.   Yet oil demand would arguably be affected by an economic slowdown.

Given data revisions in 4Q07 and a reassessment of gasoil demand in 1Q08 (taking into account the prediction of a mild January but assuming that the rest of the quarter will post normal temperatures), US50 total oil product demand is slightly revised when compared with last month's report.  In 2007, demand is now seen averaging 20.8 mb/d in 2007 (50 kb/d higher than in the last report and representing a growth rate of 0.5% over 2006).  In 2008, demand is expected to rise by 0.3% to 20.9 mb/d (70 kb/d lower than in the previous report).

According to November preliminary data, oil product demand in Mexico grew by 2.8% on a yearly basis.  All product categories bar LPG and naphtha posted positive growth rates.  In particular, transportation fuels continue to remain resilient: gasoline deliveries expanded by 5.3% year-on-year, jet fuel/kerosene by 7.7% and diesel by 4.4%, suggesting that the Mexican economy is holding its ground despite the uncertainties north of the border.

In fact, demand for gasoline - driven by rising car ownership amid a consumer credit boom - is so strong that imports have continued to rise almost exponentially (reaching 380 kb/d in November, roughly half of total demand), since the country's refining capacity has barely increased over the past decade.  Although several refineries have been upgraded with crackers in order to increase volumes of lighter products (such as gasoline), this has been insufficient to meet the growth in demand.  Given current high prices, the country's product import bill has also soared as a result.

New Directions for the US Economy?

Over the past several weeks, many observers assessing the short-term effects of the US subprime crisis and its effects on the country's economy have become patently more pessimistic. Admittedly, several closely watched indicators, such the leading indices surveying house prices (Case-Schiller and OFHEO) or the Institute of Supply Managers (ISM) index of manufacturing activity, have reported a marked deterioration. The Case-Schiller index, for example, contracted by 5.5% year-on-year in 3Q07. This bodes ill for consumer spending, which has been bolstered by rising house prices. Moreover, the stock exchange volatility and credit tightness have continued. Other signs, though, are less gloomy: the steep fall of the dollar has been contained and the nominal GDP growth rate for 3Q07 has been revised up (to 4.9%, from a previous estimate of 3.9%). However, inflationary pressures could be building up, since the US economy has been expanding above trend growth (estimated by the Federal Reserve at some 2.5% per year) for two quarters in a row. Such pressures, furthermore, could be compounded by the weakness of the dollar and by prevailing high food and energy prices.

Nevertheless, by cutting the federal funds rate by a quarter of percentage point in mid-December - for the third month in a row - the Federal Reserve has clearly signalled it thinks the risks to economic growth outweigh inflationary risks, and has even hinted that the loosening may continue. Yet, given the financial markets' jittery mood, it is unclear whether a loose monetary policy will rapidly stabilize credit lending or lead to a resumption of the dollar's fall and the unwelcome entrenching of inflationary expectations.

Under a pessimistic scenario, household spending would be hit by falling house prices, while corporate investment would also probably contract, further compounding the economic slow down. US economic growth would then be essentially driven by net exports (and would be arguably running below trend). Even though the US external balance vis-à-vis the rest of the world would improve - i.e., the country's large current account deficit would narrow - this would entail a major challenge to the world economy. Indeed, by absorbing most of the global surplus savings - as reflected in its current account deficit - the US has acted as the main engine of the global economy over the past two decades. Therefore, in order to maintain the global economic momentum, other countries - those with the largest current account surpluses, namely the European Union, Japan and China - would arguably be required to boost their own domestic demand.

Yet, by launching a significant fiscal stimulus package, the US government might still compensate for the private sector's weakness. By running a large budget deficit, the US would effectively remain the world's buyer of last resort. In sum, given that the possibility of a fiscal package is started to be seriously debated in Washington, anticipating a sharp slowdown during 2008 - or even a recession, as some banks have predicted - might be premature. As such, this report will wait from the forthcoming assessments from the IMF and the OECD before making any revisions to its US oil demand forecasts.


Official data submissions for October and preliminary November data for several countries suggest that year-on-year demand growth was somewhat stronger than previously expected.  France posted higher growth in October (+4.1%) and November (+9.6%).  Italian and German demand was also higher in October; however, in the case of Germany this was offset by lower-than-expected November and December preliminary data.  Overall, OECD Europe demand was revised up by 67 kb/d in 4Q07, and is now estimated at 15.4 mb/d in 2007 (-1.8% over 2006) and 15.6 mb/d in 2008 (+1.3%), on the back of an expected rebound in winter heating demand.

The weather, though, remains the main forecasting uncertainty.  Until the turn of the year, the winter had proved much colder than the previous year, with heating-degree days (HDDs) slightly above the ten-year average.  Heating oil purchases by end-consumers were nevertheless low - and much weaker than anticipated.  Stocks were abnormally high at the start of the heating season due to the unusually mild 2006/07 winter, and high prices arguably deterred consumers, who seemingly preferred to keep their tanks at low levels.  Moreover, this year began with abnormally warm temperatures; if this January proves to be as mild as last year (which seems unlikely at this point, according to recent prognoses), the forecast will have to be revised down in due course.

In Germany, the only European country which collects and publishes end-user heating oil stocks, tanks were filled at 59% of capacity by the end of November (8% lower than a year before).  Month-on-month, this represents a decline of 2%, equivalent to a 134 kb/d stock draw - much higher than last year (-67 kb/d) and than the five-year average (-80 kb/d).  Yet despite this higher draw and slightly below-normal temperatures, heating oil demand was again lower than anticipated, thus suggesting an end-user response to high prices, and possibly expectations of future lower prices.

German naphtha deliveries, meanwhile, were also much weaker than expected in November, leading to a total downward revision of 110 kb/d for the month.  October, by contrast, was revised up by 120 kb/d following the submission of official data (demand for both gasoil and residual fuel oil was higher than indicated by the preliminary delivery data).  Diesel demand, in particular, continues to post strong annual growth, rising by an astounding 15.8% in October and by an estimated 5.3% in November.  Preliminary data for December, though, suggest a somewhat weaker picture.  As such, we have lowered our 4Q07 estimate by 25 kb/d to 2.6 mb/d (-4.7% year-on-year).

In France, 4Q07 demand is set to be stronger than anticipated.  October figures were revised up by 60 kb/d following official submissions, while preliminary delivery data for November prompted an upward adjustment of 180 kb/d - total oil demand thus rose by 4.1% and 9.6% year-on-year, respectively.  The changes were largely due to higher residual fuel oil consumption, but also to higher gasoil and 'other products' demand.

Buoyant electricity helps explain the strength of residual fuel oil demand.  Indeed, power generation rose by 2.8% year-on-year in October, with thermal power production increasing by 37% (nevertheless, its share of total generation remains marginal).  In November, power generation (mostly from nuclear facilities) shrank by 1.6%, probably as a result of plant closures during the national strikes.  Thermal electricity production partly compensated for the decline, rising by 18.2% year-on-year.  Finally, gasoil demand (diesel and heating oil) also posted strong annual growth in October and November (6.4% and 8.8% respectively), arguably due to increased driving during the strikes as well as colder weather.

Italy's October demand also turned out to be stronger than indicated by preliminary data.  Total oil product demand was revised up by about 60 kb/d, mostly due to higher residual fuel oil demand.  October now show total annual growth of 3.5%.  For November, preliminary data point to a 3.2% contraction, in line with our forecast.  Italian electricity demand was 0.8% higher year-on-year, due to one additional working day and slightly colder weather.  Fuel-fired generation rose by 7.6% as cheap hydro power contracted by 4.4%.  In December, electricity demand hit an all-time high, according to power grid Terna. The year-on-year increase of 1.2% was prompted by colder weather, as well by an extra working day.  Hydro fell by 13.2%, and fossil fuel-fired generation rose 6.6%, although natural gas continues to displace residual fuel oil for power generation, leading to the gradual fall in residual fuel oil demand.

Poland has been revised up by 50 kb/d in October, due to higher diesel (+45 kb/d) and naphtha (+15 kb/d) consumption.  Polish diesel demand was quite high during 2007, pointing to a 14.7% annual increase for the year as a whole, as GDP (+6.6% in 2007) and domestic purchasing power increased with market liberalization.  Total product demand, however, rose by only 1.4% in 2007 (compared with 6.9% in 2006), given weaker heating oil (-15.1%) and residual fuel oil demand (-37.6%).

Demand in the UK fell by 1.8% year-on-year in October, due in large part to a larger-than-expected 14.8% decrease in motor gasoline consumption (officially explained as evidence of the ongoing dieselization, but nonetheless implausibly large).  This 50 kb/d downward adjustment to our gasoline demand forecast was partly offset by higher jet fuel/kerosene and 'other products' demand.  Demand in 2007 now looks to be contracting by 2.7%, due in most part to lower LPG/ethane and naphtha demand but also to structurally declining gasoline demand and slightly lower jet kerosene consumption.

Preliminary JODI data for November suggest that Spanish demand grew by 1.2% annually.  Gasoil demand (the split between diesel and heating oil is not yet available), in particular, grew by a strong 7.5%.  Final data for October led to a slight downward adjustment to our forecast (-26 kb/d), although growth is still seen at a robust 4.3%.  All products bar naphtha reported gains, notably diesel and heating oil, which grew by 9.4% and 8.2%, respectively.

Some uncertainty surrounds the ability of Turkey to source adequate natural gas supplies this winter, after a Russian energy official announced in early January that Russia would be unable to allocate additional supplies to replace lost volumes from Iran.  Although Russia normally provides gas to Turkey when Iranian supplies run short, cold weather in Russia has meant that domestic supplies are needed to meet local demand.  The shortage in Iranian supplies is due to an interruption of shipments from Turkmenistan, which may last 'a long time'.  Gazprom later stated it had increased flows to Turkey in December and January, replacing the lost volumes from Iran.  We may revise our forecast of Turkish oil demand forecast when it becomes clear whether Turkey's gas demand will indeed be covered by Russian supplies, whether Turkey will have to turn to the spot LNG market or whether it will be obliged to use oil for power generation, even though switching capacity is limited.


According to preliminary data, oil product demand in the Pacific rose by 0.4% year-on-year in November.  Strong direct crude burning in Japan offset losses in all product categories bar LPG.  Japan's demand - some two-thirds of the region's total - was again boosted by strong power demand, notably for heating - the number of heating-degree days in November was 1% higher than the ten-year average (and 20% higher than in the same month of the previous year).  The outlook for OECD Pacific oil demand remains largely unchanged compared with last month's report, and is expected to average 8.3 mb/d in 2007 (-1.0% on a yearly basis) and 8.5 mb/d in 2008 (+2.4%).

According to preliminary data, oil product demand in Japan rose by 0.3% year-on-year in November.  As in the past several months, oil demand growth has been largely supported by strong electricity demand amid continued nuclear outages.  As such, demand for fuel oil and 'other products' (including direct crude for power generation) rose by 10.2% and 31.2% on a yearly basis.  However, Japanese preliminary estimates of direct crude consumption are usually revised down: October's preliminary figure for 'other products' was cut by almost 70 kb/d, implying a year-on-year growth of +4.8%, instead of the previous estimate of +23.5%.

Meanwhile, demand for kerosene (used as a heating fuel) shrank by 4.6% year-on-year.  On the one hand, end-users reportedly built up stocks in October in anticipation of a wholesale price increase effective 1 November.  On the other hand, although temperatures were noticeably colder than in the same month in the previous year, the start of the winter has proved to be relatively mild in the Pacific.

In Korea, preliminary data indicate that total oil product demand was 0.6% lower year-on-year in November, possibly as a consequence of the previous month's extensive stock rebuilding.  Although naphtha deliveries, which account for the largest share of total Korean demand, rose by 4.6%, they failed to offset somewhat subdued transportation fuel deliveries (gasoline increased by a paltry 0.2% and diesel by 0.4%) and the weakness in fuel oil demand (-16.6%).  Relatively cold temperatures supported LPG (+9.3%) and other gasoil demand (+8.4%), but jet fuel/kerosene deliveries fell by 13.1% (as in Japan, kerosene is used as a heating fuel in Korea), probably reflecting stock draws.

In Australia, oil product demand rose by an estimated 2.8% year-on-year in November, according to preliminary data.  The country's demand continues to be sustained by strong transportation fuel deliveries (gasoline rose by 3.0%, diesel by 3.8% and jet fuel/kerosene by 1.7%), driven in turn by buoyant economic growth.  In that respect, it is interesting to note that the Australian Competition & Consumer Commission (ACCC) found in late December that the country's gasoline market is fundamentally competitive, following a six-month probe into allegations that the four major refiners (BP, Caltex, ExxonMobil and Shell, which together control some 98% of the market) had engaged in price fixing and collusion.  Nevertheless, the ACCC admits that Australia's well-defined gasoline price cycles are very difficult, if not impossible, to explain.



According to preliminary data, China's apparent demand (refinery output plus net oil product imports, adjusted for fuel oil and direct crude burning, smuggling and stock changes) increased by an estimated 3.1% year-on-year in November, with all product categories bar LPG and residual fuel oil posting gains.  Demand for gasoline, jet fuel/kerosene and gasoil remains buoyant (+8.4%, +39.1% and +6.1%, respectively).  More notably, the fact that China has been coping with gasoline and gas/diesel oil shortages over the past several months suggest that pent-up demand is significant.  As such, overall oil demand would probably be largely unaffected were capped end-user prices to rise.  However, this possibility has once again been officially discarded by the government, which is concerned about accelerating inflation; as such, it has sternly warned against hoarding oil products or selling them above 'guidance' prices.  Meanwhile, fuel oil demand remains depressed (-13.5%) since 'teapot' refineries - which act as the country's swing producers - continue to shun expensive residual (which is used as the main feedstock) in favour of subsidised crude provided by state-owned companies.

The continued strength of these fuels is indicative of the structural changes that are occurring in China - i.e., an exponential increase of energy use as rising incomes boost the demand for cars, trucks and aeroplanes, to name a few energy-intensive items.  In this respect, as this report has repeatedly argued, global oil demand will likely continue to expand, driven by non-OECD growth and almost irrespective of developments in OECD countries.  Although our Chinese forecast is slightly revised down in light of the continuing fuel oil weakness, oil demand growth remains strong: total demand is expected to average 7.5 mb/d in 2007 (+4.8% year-on-year) and 7.9 mb/d in 2008 (+5.9%).

Meanwhile, despite being under increasing government pressure to adequately supply the domestic market, the two largest state-owned companies (Sinopec and PetroChina) are seemingly struggling to produce more - their refinery runs in November were roughly the same as in October, according to preliminary data.  However, there are reports that the 'Big 2' are providing subsidised crude to teapots in order to entice them to boost production (teapots, though, are obliged to revert part or their production to the NOCs).  This seems to be supported by trade data: November's net crude imports, at 3.3 mb/d were 13% higher than in October (suggesting than either the NOCs are no longer drawing down stocks or that the build-up of strategic stocks is continuing).  In the same vein, net diesel imports rose by 57% month-on-month to 41 kb/d.  Despite these moves, though, there are reports of continued shortages in some regions.

Other Non-OECD

According to preliminary data, oil product sales in India - a proxy of demand - rose by an estimated 5.7% year-on-year in November.  As has been the case for most of the year, transportation fuels constitute the main source of oil demand growth, with gasoline, jet fuel/kerosene and gasoil sales rising by 16.2%, 4.4% and 10.2%, respectively (gasoil figures, though, also reflect ongoing agricultural work).  Meanwhile, the slow decline of naphtha demand, gradually displaced by natural gas, continues (-6.6%).  This trend, however, may be interrupted in the short term given the current tightness of Asia's LNG market, which has seen prices rise to as much as $17-18/mmbtu.  India's oil demand outlook is largely unchanged from last month's report.  Total demand is expected to rise by 5.5% in 2007 to roughly 2.8 mb/d, and by 3.9% in 2008 to 2.9 mb/d.

In early January, India's Tata Group grabbed the headlines by launching the Nano, the world's cheapest car to date.  Given its low price tag, the $2,500 vehicle is geared towards the country's aspiring - and rapidly growing - middle-class.  Aside from the environmental and congestion consequences that the massive adoption of cars will likely pose, this suggests that India's gasoline demand will continue to grow at a very rapid pace over the coming years.

Following minor changes to both supply and trade data, FSU apparent demand - defined as domestic crude production minus net exports of crude and oil products - remains essentially unchanged.  The region's total oil product demand is thus expected to average 3.9 mb/d in 2007 (-4.9% year-on-year) and 4.0 mb/d in 2008 (+2.9%).

As noted in last month's report, the release of Brazil's oil demand data has been somewhat erratic since early 2007.  Following last month's posting of data from March to August in the Joint Oil Data Initiative (JODI), the National Petroleum Agency (ANP) published the missing series for some specific products (gasoline, diesel and ethanol) over the March-June period.  The new figures allowed the correction of some anomalies implicit in JODI's data, notably what had been reported as falling demand for 'other products', which comprise mostly ethanol.  In fact, ethanol has actually turned out to register positive growth, in line with anecdotal evidence of abundant supply.  In the end, though, our demand assessment remains largely unchanged - total oil demand is estimated at 2.3 mb/d in 2007 and 2.4 mb/d in 2008 (implying a year-on-year growth rate of 3.3% for both years).  These figures, however, are bound to be adjusted again if the ANP resumes the timely and up-to-date release of demand data.

Meanwhile, the ANP mandated a 2% biodiesel blend for all diesel sold in Brazil - requiring some additional 700 million litres per year, according to local sources (current capacity stands at 1.8 billion litres per year).  The measure, which took effect on 1 January, is intended to boost the country's biofuels industry and reduce its dependence on imported supplies.  By 2013, the biodiesel mandated blend is set to rise to 5% - necessitating about 2.5 billion additional litres annually.  With regards to gasoline, since last July the mandated ethanol blend has stood at 25%.

Oil demand in Argentina continues to expand unabated, supported by strong economic growth, end-user subsidies to gasoline and gas/diesel oil, soaring power needs and natural gas shortages.  According to September data (the latest available at the time of writing), total demand surged by 12.1% year-on-year - the fifth consecutive month of double-digit growth.  Gasoline sales rose by 11.4%, and gasoil consumption expanded by 7.8%.  Meanwhile, residual fuel oil demand jumped by 70.3%, as the high temperatures registered over this summer have boosted demand for electricity for air-conditioning.  Natural gas shortages have also encouraged the use of fuel oil in industrial activities.

As previously noted in this report, the policy of capping prices has led to severe market distortions, most notably widespread shortages.  Adamantly opposed to a sharp increase in retail prices amid rising inflation, the government resorted to a number of administrative measures aimed at forcing private companies, which dominate the downstream sector, to supply the market - or face stern penalties.  The latest measure, decreed earlier this month, was to ban altogether gasoline and gasoil exports, ostensibly to oblige companies to bring down prices by 10-15%, to the levels that prevailed in late 2007.

However, by closing the last avenue to profitability open to refiners - which, by exporting at higher international prices, were able to partially offset their domestic losses - the supply picture could worsen.  According to some reports, the private players may decide to confront the government by simply refusing to hike supplies, especially during the forthcoming winter.  In addition, the move may entail severe consequences for neighbouring countries, such as Paraguay, which imports some 50% of its oil product requirements from Argentina.  Perhaps aware of these risks, the government is trying to reach an agreement to allow exports to continue in exchange of retail price cuts.  At the time of writing, the local units of Petrobras, Repsol-YPF and ExxonMobil had reportedly signed such an agreement with the Commerce Department - but the local unit of Royal Dutch Shell did not.



  • World oil supply averaged 87.0 mb/d in December, up 870 kb/d from November after monthly increases estimated for the OPEC-10, North America, the FSU, Brazil and China.  Fourth quarter global supply regained a year-on-year growth trend, up by over 1.0 mb/d on average versus 4Q06, after running at or below year-ago levels in the previous three quarters.
  • Non-OPEC December production was largely unchanged from November at 50.1 mb/d, with the shift of 500 kb/d of Ecuador output from December 2007 into the OPEC category offsetting an increase of 535 kb/d elsewhere.  Supply from Mexico, Brazil, China, Kazakhstan, Russia and the UK recovered from prior outages.  Non-OPEC 2007 growth is trimmed by 30 kb/d to 525 kb/d, and 2008's level by 60 kb/d to 1.02 mb/d on lower expectations for the OECD, FSU and China.
  • Historical data in the OMR, Annual Statistical Supplement and Monthly Oil Data Service include primary non-OPEC and OPEC totals reflecting prevailing membership for each point in time. Secondary non-OPEC and OPEC totals extend current aggregates back historically to facilitate yearly comparison.  Changing methodology and categorisation can distort trends in non-OPEC oil supply.  Like-for-like, forecast 2007 non-OPEC supply is within 160 kb/d of levels forecast one year ago, after sharp initial adjustments made in 2H06.
  • December OPEC crude supply rose 825 kb/d versus November to reach 32.0 mb/d, with 500 kb/d of the increase attributable to Ecuador's move into the OPEC category.  Comparing OPEC-13 supplies, growth was 335 kb/d, with UAE supply recovery after November maintenance augmented by an uptick in Iranian crude exports. Iraqi December supply fell to 2.3 mb/d from 2.4 mb/d in November.  Nigerian supply was stable below 2.2 mb/d despite threats of further attacks on Niger Delta facilities.  Effective OPEC spare capacity narrowed to 2.2 mb/d, with Saudi Arabia accounting for 80% of the total.
  • OPEC-12 supply (excluding Iraq) averaged 29.7 mb/d in December, approximately the level inferred by production targets announced in September and December. Angola and Ecuador, which were allocated targets for the first time last month, produced below their respective guidance of 1.9 mb/d and 520 kb/d in December.  An extraordinary OPEC meeting will take place in Vienna on 1 February 2008.
  • The call on OPEC crude and stock change is revised up by 0.7 mb/d for 4Q07, reflecting stronger OECD demand, weaker OECD and Chinese supply and December's reclassification of Ecuador into OPEC (170 kb/d for the quarter).  Ecuador's exit from the non-OPEC category also underpins a 0.6 mb/d upward revision to the average 2008 'call' to 31.8 mb/d, 300-600 kb/d above 2007 levels.

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


Headline December OPEC crude supply rose 825 kb/d versus November to reach 32.0 mb/d.  However, 500 kb/d of this increase came from Ecuador's December shift from the non-OPEC into the OPEC category.  Adjusting for OPEC's additional member, a comparison of OPEC-13 supplies shows growth in December of 335 kb/d.  Key increases derived from the UAE, where Abu Dhabi offshore crude output resumed after November maintenance, and to a lesser extent from an uptick in Iranian crude exports. In contrast, Iraqi December crude supply fell to 2.3 mb/d from 2.4 mb/d in November amid lower tanker liftings from Ceyhan.  Nigerian December supply was stable below 2.2 mb/d despite threats of further attacks on Niger Delta facilities.  Effective OPEC spare capacity narrowed to 2.2 mb/d, with Saudi Arabian production around 9 mb/d, implying that it holds some 80% of the spare capacity total.

With the announcement of production targets in early December for Angola and Ecuador, OPEC-12 in effect replaced the previous OPEC-10 grouping as the focus for OPEC production management.  Supply from the OPEC-12 (excluding Iraq) in December averaged 29.7 mb/d, in line with the aggregated total of recently-stated official targets. Angola and Ecuador produced below their allocations of 1.9 mb/d and 520 kb/d respectively.

Change in Classification for Ecuador

With effect from this month's OMR, Ecuador's oil production is reclassified within OPEC and excluded from the non-OPEC total for the period December 2007 onwards. Historical data for January 1993 to November 2007 inclusive allocate Ecuador production to non-OPEC. The Monthly Oil Data Service, the OMR and the OMR's Annual Statistical Supplement all show historical data with a primary OPEC total representing OPEC as it was comprised at the time in question, and similarly for non-OPEC. In summary:

  • Ecuador is included in OPEC totals through 1992, and again from December 2007 onwards, in line with its membership, but in non-OPEC for the intervening period;

  • Angolan supply is allocated to the non-OPEC total through December 2006, but included within the OPEC aggregate from January 2007 onwards;

  • Gabon is included in OPEC totals through 1994, but in non-OPEC thereafter.

To facilitate year-on-year comparisons, secondary aggregates showing current OPEC and non-OPEC compositions extended back into history are included in the databases.

Preliminary indications of OPEC exports for January suggest some additional physical supply this month.  An extraordinary OPEC meeting will take place in Vienna on 1 February 2008 to review market conditions and consider the existing production target.  February's Ministerial review will take place against a backdrop of growing concerns about the US economy on the one hand, but high prices and demonstrably tight OECD inventory on the other.

The estimate for November Iraqi crude supply has been revised up by 80 kb/d to 2.4 mb/d, comprising 1.96 mb/d of exports and 0.44 mb/d of local crude use.  Export assessments for November from both Ceyhan and the southern ports of Basrah and Khor al-Amaya have been revised higher from an earlier total of 1.88 mb/d.  However, in December, while southern exports proved less prone to weather-related disruption than in November, liftings from Ceyhan in Turkey fell, amounting to around 7 mb compared with a scheduled 12 mb.  With refinery and power plant use largely unchanged at 0.44 mb/d, the fall in total exports to 1.86 mb/d pushed total supply down to 2.3 mb/d.

A shortage of available ships and maintenance work at Ceyhan storage tanks underpinned the slippage in December northern exports compared with an originally planned 12 mb.  State marketer SOMO plans to sell 300-400 kb/d of Kirkuk crude via Ceyhan on a term basis from January onwards, although stop-start pipeline flows from northern Iraq since early January may again see actual exports slip below target.  Recent fires at the Baiji and Basrah refineries may also curb January domestic crude runs.

Nigeria: One Step Forward, One Step Back

December began promisingly for the Nigerian hydrocarbon sector, where 550 kb/d of Niger Delta production has been shut-in on a sustained basis since early 2006 due to attacks on Forcados, Escravos and EA field facilities. On 6 December a 12-month ceasefire was signed by the government and eight Niger Delta rebel groups. In early January Shell was reported to have re-opened eight out of 15 Forcados flow stations, boosting production into a 120-160 kb/d range with further recovery towards 380 kb/d capacity targeted in coming months. Nigeria LNG's Bonny Train 6 began operations on 23 December, adding 4 mt of LNG capacity and 15-20 kb/d of LPG and condensate supply. Potential restart of 240 kb/d of idled refining capacity at the Warri and Kaduna plants by end-January was announced after repairs to the Chanomi Creek crude pipeline. Refinery reactivation could curb product imports, which have underpinned the government's raising of domestic prices and resultant public and labour union protests.

However, positive developments must be balanced against renewed signs that Delta insurgents are embarking on a renewed campaign of attacks. The Movement for the Emancipation of the Niger Delta (MEND) denounced the 6 December ceasefire, saying it did nothing to address issues about control of natural resources in the region. Rebel groups have cited the government's dual-track approach of negotiations alongside further arrests and militarisation of the Delta as undermining its claims to address regional grievances. A decline in violence was evident between May and August 2007 following President Yar'Adua's election, but with little to show at that time by way of re-instated production.

After a Christmas holiday period lull in both oil sector activity and attacks on facilities, disruption now appears to have picked up again. Shipping, export facilities and the oil refinery at Port Harcourt have all been targeted in the past month. At the time of writing, Shell declared force majeure on Forcados exports after pipeline attacks on 11 January. Shipping firm Maersk has said that its vessels will avoid calling at Port Harcourt until security is improved. MEND and the Ijaw Youth Council say that further major attacks are now planned, aimed at paralysing the oil industry. With this in mind, industry sources have been more cautious than NNPC and government representatives in assessing the timing and extent of any crude and refinery restarts. The next year should see renewed gains in Nigerian upstream capacity with start-up of the Agbami and Akpo projects (450 kb/d of liquids capacity) located further offshore. But Ministerial claims that Nigeria can boost capacity by 1.0 mb/d short-term by re-instating shuttered facilities look more like positioning ahead of future OPEC quota discussions than industrial reality.

Border tensions remain high between the Turkish military and PKK insurgents based inside Iraq, but recent outages on the Kirkuk-Ceyhan pipeline are believed due to technical issues rather than sabotage by the PKK or other insurgent groups.  This report also counts some 10-12 kb/d of cross-border pipeline exports to Syria in the monthly export total.  Pending confirmation, we omit 5-10 kb/d of crude now reportedly being sent by truck from the Tawke field in northern Iraq to Iran by the Kurdish Regional Government.  Tawke output may ultimately rise to 50-90 kb/d subject to access to the Ceyhan pipeline.  Baghdad has also signed an agreement with an affiliate of Russia's Gazprom to study the reactivation of 300 kb/d of pipeline capacity from Kirkuk to Banias, Syria, which has been out of service since early 2003.

Angolan supply fell in December as production outages affected blocks 17 (home to the Girassol, Rosa and Dalia fields) and 18 (Greater Plutonia).  Monthly crude supply was estimated at 1.7 mb/d, off by 20 kb/d from November.  Slippage at the Kizomba C project also contributed to lower-than-expected December supply.  Start-up of Kizomba C's 100 kb/d Mondo field was pushed back from December to 9 January.  Mondo will be followed by a combined 100 kb/d from the Saxi and Batuque fields in completing the Kizomba C development later in 2008. Build-up at Kizomba C and at Greater Plutonia should take Angolan capacity close to 2.0 mb/d by end-2008, compared with an OPEC production allocation of 1.9 mb/d. Further capacity increases up to 2.2 mb/d are possible early in the next decade, notably with field operator Total recently giving final investment approval for the 200 kb/d Pazflor development.

Saudi Arabian December production is unchanged from November at 9.05 mb/d. The Kingdom, together with Angola, underpins OPEC capacity expansion in 2008.    Start-up of 500 kb/d of Arab Light crude from the Khursaniyah project was pushed back from end-2007 into 1Q08, apparently due to delays in completing crude processing facilities.  Khursaniyah will also generate up to 300 kb/d of natural gas liquids.  A further 350 kb/d of light/sweet crude capacity will come from upgrades to the Shaybah and Nuayyim fields before the end of 2008.  Under fairly conservative build-up and decline rate assumptions, our assumed Saudi crude capacity level reaches 11.3 mb/d by end-2008 from 10.8 mb/d currently (both levels being net of some 150 kb/d of Abu Safah production and 100 kb/d of field condensates).

Non-OPEC Overview

December saw non-OPEC production increase by an estimated 535 kb/d (net of the impact of a 0.5 mb/d shift of Ecuadorean production into the OPEC category), with Mexico, Brazil, China, Kazakhstan, Russia and the UK recovering from prior outages.  Total non-OPEC supply for 2007 now averages 50.1 mb/d (or 49.7 mb/d excluding Ecuador).  Stripping out Ecuador, 2007 growth has been trimmed by 30 kb/d to 525 kb/d, and 2008's growth is cut by 60 kb/d to 1.02 mb/d on lower OECD, FSU and China supply.

Key gains in 2007 supply came from global biofuels (+265 kb/d), Russia (+235 kb/d), Azerbaijan and Kazakhstan (collectively +230 kb/d), Canada (+130 kb/d), Sudan (+125 kb/d) and China (+80 kb/d).  These producers will also drive 2008 growth, augmented by Brazil (+300 kb/d) and Australia/New Zealand (+150 kb/d), although Canadian production growth slows.  Mexico, the North Sea and the US outside of the Gulf of Mexico see continued production losses in 2008.

Non-OPEC Performance in 2007: Avoid Comparing Apples and Oranges

January habitually brings a temptation to review the year just gone, albeit solid data for the previous year, barring individual country exceptions, only runs through 3Q at best. Bearing in mind this partial picture, it is nonetheless clear that 2007 non-OPEC supply has lagged initial expectations published in July 2006, continuing the suppressed growth trend evident in 2005 and 2006. July is the first month in which the OMR forecast for the following year is rolled out, although with only one full quarter of data for the prevailing year available, July projections for the following year are by their nature highly provisional. Given the more solid foundation underpinning January 2007's forecast, it is perhaps more illuminating to compare 2007 projections in this month's report with those from January 2007, rather than July 2006.

Headline non-OPEC supply for 2007 was estimated at 52.3 mb/d in January 2007. On paper, this month sees a non-OPEC projection for 2007 (it will remain a projection until late-2008 in the case of some OECD producers and until 2009 in the case of elements of non-OECD production) of 50.1 mb/d. Superficially, this looks like a reduction of over 2.0 mb/d, or some 4%, in 12 months. However, the devil is in the detail, and 2007 was notable for changes in classification and forecasting methodology which distort the picture:

Angola left the ranks of non-OPEC to join OPEC from January 2007, removing 1.7 mb/d of oil production from the non-OPEC total;

The OMR internalised a field reliability adjustment factor of 410 kb/d at mid-year to reflect unscheduled field outages (mainly at mature OECD production capacity), affecting data from 2Q 2007 onwards, and netting a further 0.3 mb/d off annual 2007 estimates;

The shift of 0.5 mb/d producer Ecuador from non-OPEC to OPEC effective December 2007 nets 42 kb/d off this month's full-year 2007 non-OPEC assessment.

Like-for-like non-OPEC supply for 2007 therefore stands at 52.1 mb/d, only 160 kb/d below last January's number. This is not to say that data for the final months of 2007 will be free from surprises, or that revisions to early 2007 data may not also reduce the total. Diminishing international company access, cost and fiscal inflation, chronic project start-up delays, prolonged outages at aging infrastructure, extended maintenance schedules and accelerating decline rates at older fields can all undermine any forecast in the months to come. But the tendency for non-OPEC estimates to trend remorselessly down, on a like-for-like basis, appears to have abated, at least for now. Whether this offset to the negative factors itemised above is due to better forecasting, a delayed supply-side price response, or both, remains to be seen.


North America

US - December Alaska actual, others estimated:  Crude production in 2007 averages 5.1 mb/d, slipping to 5.0 mb/d in 2008.  This month's forecast trims the assessments for 2007 and 2008 US crude output by 10 kb/d and 20 kb/d respectively, centred on Alaska and the US GOM.  Alaska's Revenue Department last month said it envisages 4% decline in production in fiscal 2009, implying steeper losses due to maintenance on mature production and transportation assets than previously assumed by this forecast.  Although GOM supply is also trimmed for the forecast, growth in output here amounts to 50 kb/d net in 2008 after 60 kb/d in 2007.  Commissioning of the long-delayed Atlantis project was completed in December, although production began in October. Output is seen hitting 70 kb/d by March and full capacity of 200 kb/d by end-2008.  US ethanol supply, after rising by 100 kb/d to 415 kb/d in 2007, averages 475 kb/d in 2008.  Monthly ethanol output data for 2007 have tended to come in stronger than initial forecasts, despite weak basic economics.

Canada - Newfoundland November actual, others October actual:  Downward revisions to 4Q07 Canadian oil supply carry over into 1Q08, largely based on weaker bitumen and synthetic crude supply from Alberta's oil sands.   A coker outage at Syncrude's heavy oil upgrader and a fire at Shell's Athabasca unit may have curbed December syncrude supply by up to 300 kb/d, with production remaining affected to a lesser extent in January.   Synthetic crude nonetheless gains 70 kb/d in 2008 to average 0.73 mb/d after flat performance in 2007.

Conventional oil output slips from 2.0 mb/d last year to 1.9 mb/d in 2008, with a levelling off in offshore East Coast supply after strong 2007 growth.  All told, Canadian liquids supply averages 3.3 mb/d in both 2007 and 2008 from 3.2 mb/d in 2006.  The Canadian forecast includes a field reliability adjustment which nets 100 kb/d off the calculated total.  Any easing in the unscheduled outages seen in the past two to three years holds the potential to boost forecast Canadian supply accordingly in 2008.

Mexico - November actual:  Mexican November crude production remained suppressed at 2.9 mb/d after production shut-ins due to storms in October.  We have not yet carried this reduction into December and 2008 however, on the assumption that the dip in October/November output was indeed weather-related and not evidence of further acceleration in decline at Cantarell and other offshore fields. 2008 Mexican crude supply is forecast at 3.0 mb/d, a drop of 100 kb/d from 2007, after a fall of 165 kb/d last year.

North Sea

Norway - November actual, December provisional:  Preliminary 4Q Norwegian crude production averaged 2.04 mb/d, alongside 545 kb/d of gas liquids, an upward revision of 60 kb/d for the quarter compared with last month's estimates.  However, this is offset by an equal and opposite revision for 1Q08 after unscheduled outages affecting condensate supply from the Kvitebjorn, Snohvit and Ormen Lange fields.  StatoilHydro announced lower targets for 2008 oil and gas production, in line both with these gas-related outages and with this report's already conservative forecast for total Norwegian supply.  As a result we have left the 2008 forecast largely unchanged at 1.84 mb/d of crude and 540 kb/d of gas liquids, collectively 180 kb/d below total 2007 liquids production.

UK - October actual:  Data through October 2007 show UK oil production rebounding from peak summer maintenance.  Total output reached 1.74 mb/d in October (including 1.5 mb/d of crude) from 1.33 mb/d in August.  However, loading schedules for the main crude streams suggest a November/December dip in supply to 1.5 mb/d, around 50 kb/d below last month's forecast for end-year production.  A 20 kb/d downward adjustment to UK supply is carried through 2008, taking total oil supply to 1.42 mb/d from 1.64 mb/d in 2007 (offshore crude comprising 1.41 mb/d in 2007 and 1.16 mb/d in 2008).  The reduction results in part from a later start-up at the Chestnut field at the end of 1Q08, and plateau production below the previously-assumed levels at 10 kb/d.  Recent new field start-ups include Duart, Saxon and Wood.  Our 2008 supply forecast, as with officially reported data, incorporates output from these fields within the totals for larger adjacent fields to which their infrastructure is tied.


Australia - October actual:  Despite rising by 50 kb/d from September's level of 500 kb/d, Australian oil production in October lagged expectations by 65 kb/d.  A spate of subsequent production outages reduces forecast 4Q07 production by 40 kb/d and 1Q08 by 80 kb/d compared with the previous forecast.  January supply was curbed by an estimated 35 kb/d, as the 2008 storm season got an early start with the arrival of cyclone Melanie.  Mechanical outages have also affected the Mutineer/Exeter and Woolybutt fields and condensate supplies at the Karratha gas plant.  Nonetheless, overall 2008 supply increases due to recent start-up at the Puffin and Stybarrow fields, likely to be followed later in 2008 by new output from Skua and Angel. Total oil production is assessed at 555 kb/d in 2007 (465 kb/d of crude) and 670 kb/d in 2008 (550 kb/d of crude).

Solid growth is also expected from New Zealand, where oil supply is slated to reach 45 kb/d in 2007 and potentially 80 kb/d in 2008 from the 25 kb/d seen during 2004-2006.   Offshore liquids growth from the Tui-Amokura-Pateke, Maari and Cheal fields accounts for this rise from New Zealand.

Former Soviet Union (FSU)

Russia - November actual, December provisional:  November/December crude production from Russia remained stable around the 9.6 mb/d level evident since mid-year, with assumed condensate/NGL supply adding a further 460 kb/d to give total oil output of 10.1 mb/d.  Both month-on-month and annual growth levels have slowed since mid-year.  We have trimmed the forecast of 2008 output by 15 kb/d from last month to a total of 10.23 mb/d.  This represents 1.5% annual growth compared with the 2.4% now estimated for 2007.

A combination of lower 2007 baseline supply and weaker company growth expectations for 2008 affect Surgutneftegaz, Rosneft and output from the PSA projects (at Sakhalin and Kharayaga).  Technical problems forced the early seasonal closure of the production season at Sakhalin 2, although the commencement of year-round production via the Piltun-Astokhskoye-B platform from the second half of 2008 could push peak output up in excess of 150 kb/d from 80 kb/d currently.  Strong December performance at the Sakhalin 1 project belies now-weaker expectations for 2008.  Government refusal to sanction further drilling at the Chayvo field, and ongoing disagreement over contract territory and reserves, will reportedly see output decline in 2008 to 200 kb/d from 230 kb/d in 2007.

Kazakhstan - November actual:  The forecast for 2008 Kazakhstan output is trimmed by 25 kb/d after the Tengizchevroil consortium deferred to end-1Q08 expansion at the Tengiz field.  This follows technical problems and extended testing of compressors used for sour gas reinjection at the field.  Overall, we have curbed the contribution from Tengiz in the early part of 2008, but boosted late-year supply from the field to over 400 kb/d, from current output near 300 kb/d.  Total Kazakhstan oil supply (crude and gas liquids) rises by 90 kb/d in 2008 to 1.44 mb/d, having gained 15 kb/d in 2007 to average 1.35 mb/d.

The Kazakh President reported in December that Russia has approved expansion of the CPC export pipeline now that Kazakhstan has joined the Bourgas-Alexandroupolis pipeline scheme, although there is no sign to date of Russian confirmation of this.  January saw reports that state producer Kazmunaigaz will double its stake in the troubled Kashagan project to 16.8% and that all consortium members have now agreed to the transfer of equity.  Compensation is to be paid to the Kazakh government for cost over-runs and delays so far. Italian Eni's sole operatorship of the project remains to be confirmed with some press reports suggesting that joint operatorship by Eni, Exxon Mobil, Shell and Total may be the preferred option. Target start-up date for the project is now late-2011, versus initial estimates of 2005.

The supply forecast for Azerbaijan in 2008 has been revised up by 20 kb/d to 1.09 mb/d, sustaining the 200 kb/d growth seen in 2006 and 2007.  Higher Shah Deniz condensate accounts for the change, with output currently around 30 kb/d and potentially reaching 45 kb/d in late 2008.

Net oil exports from the FSU totalled a preliminary 8.56 mb/d in November, down 190 kb/d from October.  Although 410 kb/d higher than last November, this was well below the 700 kb/d average annual increase in FSU exports seen throughout 2007.  Respective monthly decreases of 220 kb/d and 200 kb/d in November crude exports from Black Sea and Baltic port were driven by weather issues (including a storm-related closure of Novorossiysk) and maintenance on the BPS pipeline.  These were partially offset by an extra 150 kb/d flowing through the BTC pipeline in November.  While fuel oil exports rose by 130 kb/d in November, gasoil flows decreased by 110 kb/d.  Total FSU product exports in November, at 2.54 mb/d, were 50 kb/d higher than October and 140 kb/d higher than November 2006.

Russian export duties rose again from 1 December, but while exports likely remained flat from the Black Sea, Primorsk loadings were scheduled to rebound after pipeline maintenance, suggesting a modest net increase in December exports overall.  January however may see an offsetting drop of around 50 kb/d, as potentially higher Baltic flows due to the introduction of new, larger Baltimax tankers is overshadowed by disrupted exports from Gdansk, underpinned by a pipeline contractual dispute.

Other Non-OPEC

Brazil - October actual, November provisional:  Despite slow progress in expanding total production in 2007, Brazil is still expected to be the largest single contributor to non-OPEC growth in 2008.  Crude supply is forecast to increase by 0.3 mb/d to 2.08 mb/d, from 1.76 mb/d in 2007.  December saw start-up of the Roncador field's P-54 platform in the Campos Basin and reports by state Petrobras that record company-wide production of 2.0 mb/d had been attained.  Further gains in 2008 come from the Roncador, Polvo, Piranema, Golfino, Marlim Leste, Marlim Sul, Albacore Leste, Espadarte and Jubarte fields, offset in part by declining output from older deepwater fields. Brazilian ethanol output is projected to gain a further 50 kb/d this year to reach 360 kb/d.

Revisions to Non-OPEC Estimates

OECD stocks


    • OECD industry stocks fell by 38.1 mb in November, and are now 123.8 mb lower than last year.  This puts them below their nominal five-year average and at the bottom of their five-year range in terms of forward demand cover, at 51.1 days, reflecting tighter market fundamentals.  While crude stocks fell 17.9 mb, product levels were down by 20.9 mb, slipping below their five-year range, as refinery maintenance prevented throughputs from meeting seasonally strong demand.
    • Preliminary December data for the US, Japan and the EU-16 show a further stock draw of 30.7 mb, mostly in crude and driven by a 30.8 mb decrease in the US.  A small stock build in Europe offset a draw in Japan.  Added to October and November OECD data, this implies a fourth-quarter stock draw of 1.1 mb/d, which compares to a 10-year average 4Q decrease of around 0.7 mb/d.
    • End-October OECD stock data were revised down by 13.1 mb, with a total downward correction of 22.3 mb for products more than offsetting an upward correction in crude stocks of 7.0 mb.

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

Total OECD industry stocks fell by 38.1 mb in November, to 2,597 mb, or 123.8 mb lower than end-November 2006.  Slightly more than half of this was due to a product stock draw of 20.9 mb, lowering product inventories 80.1 mb year-on-year to 1,356 mb.  Total OECD industry product stocks have thus fallen below their five-year range, or to 44 mb below their five-year average, as maintenance-constrained refinery outputs lagged demand growth.  OECD crude stocks meanwhile fell by 17.9 mb to 930 mb, in line with their five-year average, but were 56.6 mb lower than end-November 2006. 

Regionally, the product stock draws were spread more or less evenly over all three constituent areas of the OECD, while in crude, drawdowns in the US and to a lesser extent Japan were contrasted by a small build in Europe. 

The overall stock drawdown was a continuation of a trend observed since end-July, which has seen total OECD inventories fall nearly 100 mb to below their five-year average.  In terms of forward demand, cover has fallen from 54.9 days at end-July to 51.1 days at end-November - or from the top of its five-year range to the bottom, reflecting the tighter market conditions this report has highlighted throughout most of the past year.

End-October OECD stocks were revised down by 13.1 mb, with a total downward correction of 22.3 mb for products more than offsetting a slight upward correction in crude stocks of 7.0 mb.  North America and Europe accounted for the product inventory revision, seeing downward corrections of 11.8 mb and 10.6 mb respectively (while the Pacific remained unchanged).  For crude, all three regions saw slight corrections in end-October inventory numbers.  

OECD Industry Stock Changes in November 2007

OECD North America

Total North American industry inventories fell by 19.3 mb in November, most of which was crude, which drew by 14.5 mb, equally split between the US and Mexico.  Total products meanwhile fell by 5.3 mb, as a drawdown of 6.0 mb in the US was only marginally offset by a small build of 0.7 mb in Mexico.

Preliminary US data for December show that crude stocks fell by a further 18.5 mb on lower imports, and gradually higher crude refinery throughputs.  The difference to the five-year average is wholly due to below-average crude stocks on the US Gulf Coast, the country's main refining and main crude import hub.  In December, stocks there fell by 8.6 mb to 153.8 mb on lower imports, and as refineries ramped up throughputs to their seasonal peak.  Meanwhile, despite a total PADD 2 (Midwest) draw in December, Cushing, Oklahoma, crude stocks rose by 1.7 mb in the same period, though overall remain at the bottom of their four-year range.

The total North American product stock draw of 5.3 mb was mainly due to lower distillate and 'other product' inventories, which fell by 4.3 mb and 7.7 mb respectively, while fuel oil stocks saw only a marginal draw.  These decreases were somewhat offset by an increase in total gasoline stocks of 7.4 mb.  Virtually all of the drawdown took place in the US.

Preliminary US data for December showed total product inventories decreasing by 12.3 mb.  Again, this was driven by lower heating oil stocks, which fell by 6.2 mb on seasonal demand.  Diesel stocks on the other hand increased by 1.7 mb, bringing the total middle distillate draw to 4.5 mb.  Unfinished and 'other product' stock levels fell by 5.8 mb and 3.5 mb respectively, while gasoline and fuel oil rose by 9.5 mb and 0.6 mb.  Early-January weekly data showed both gasoline and distillates at the bottom of their respective five-year ranges in terms of forward cover.

OECD Europe

European industry stocks declined by 4.8 mb in November, to 39.5 mb lower than end-November 2006.  A total monthly product draw of 8.0 mb was only partly offset by a crude build of 4.1 mb, while 'other oils' were 0.9 mb lower.  In terms of forward demand cover, European stocks are regionally the lowest relative to their historical range, having fallen to the bottom of their five-year range or to 59.0 days.

Europe was the only region to see crude inventories increase in November, rising in Norway by 7.0 mb and in the Netherlands (+1.5 mb).  Balancing these developments, crude stocks were drawn down in Italy (-3.7 mb), the UK (-0.7 mb) and France (-0.5 mb).  Preliminary December Euroilstock data for the EU-16 showed a small dip of 0.8 mb.

Total OECD Europe product stocks fell by 8.0 mb in November, 33.5 mb below the previous year.  The drawdown was due to an 8.5 mb dip in distillate stocks. Residual fuel oil stocks increased by a marginal 0.6 mb, while gasoline and 'other products' stayed flat.  On a country-by-country basis, distillate draws were seen in Germany (-5.3 mb), the UK (-2.3 mb) and the Netherlands (-1.9 mb).  This was partly offset by increases in France (+4.9 mb) and Italy (+1.5 mb).  Some of the French increase may have stemmed from authorities' temporary loan of around 2.1 mb of heating oil to the market in early November, when a series of refinery glitches caused short-term logistical problems.

Preliminary Euroilstock data for December showed a total product build of 5.6 mb, with middle distillates somewhat surprisingly increasing by 3.1 mb, despite the cold weather in many parts of Europe.  Gasoline and naphtha inventories also rose, by 1.9 mb and 0.9 mb respectively, while fuel oil saw a small dip of 0.3 mb.  Product stocks held independently in the Amsterdam-Rotterdam-Antwerp region also showed a build, with increases in all product categories.

OECD Pacific

Total industry stocks in the OECD Pacific fell by 14.0 mb in November, 39.5 mb lower than a year earlier.  This was spread evenly between crude and product drawdowns of 7.5 mb and 7.6 mb respectively, while 'other oils' rose by 1.1 mb.  The crude stock draw took place almost wholly in Korea, where levels dipped by 7.8 mb, to their lowest level since February, and 8.4 mb lower than end-November last year.  In contrast, Japanese crude stocks were virtually flat.

Preliminary Japanese data for November from the Petroleum Association of Japan (PAJ) show a crude stock draw of 3.3 mb, which implies inventories remain near the bottom of their five-year range.  Refinery runs accelerated in December to meet seasonal product demand, ending the year at the top of their range.

Pacific product inventories fell by 7.6 mb in November, or to 19.3 mb below end-November 2006.  The decrease was split between Japan and Korea and was centred on 'other products' (-4.9 mb), residual fuel oil (-2.1 mb) and middle distillate (-1.0 mb) stocks, while gasoline levels inched up slightly.  The fuel oil decline leaves total Pacific fuel oil stocks well below their five-year average, with increased power generation needs taking them down from their end-September peak.  Preliminary December data for Japan from PAJ showed a further 1.4 mb drawdown, stemming from falls in kerosene (-1.6 mb) and residual fuel oil (-1.0 mb), likely due to winter heating and utility demand.

Recent Developments in Singapore Stocks

Product stocks in Singapore, as reported by International Enterprise, increased by 1.3 mb in December.  This was caused by light distillates rising by 1.4 mb, while middle distillate and residue stocks were flat.  Notably, while light and middle distillates ended the year in line with their respective five-year averages, fuel oil stocks were at the top of their range and indeed increased further at the beginning of this year.  Partly, this may be due to a collapse in Chinese fuel oil imports after high prices made the running of residual fuel oil at independent, 'teapot' refineries uneconomical, contributing to recent product shortages.



  • NYMEX light sweet crude futures (WTI) crossed and retreated from the symbolic $100/bbl threshold in early January.  A continued slide in industry stocks, colder weather in December and increased tensions in Nigeria and the Middle East kept prices high.  Subsequent warmer weather and economic jitters however saw prices weaken again to the lower $90s by mid-January.
  • Refining margins weakened in all regions, as markets remained crude-driven amid seasonally high refinery throughputs.  US Gulf Coast cracking margins were particularly weak, discouraging runs and therefore crude imports into the region, and negative hydroskimming spreads in Europe and elsewhere prompted hints of economic run cuts.
  • Product crack spreads mostly weakened, despite cold weather in December and sustained gasoline demand in the US.  Japanese winter fuel kerosene stocks rebuilt to above-average levels in early January, removing a key supportive factor, while reduced high-sulphur fuel oil imports into China caused discounts to crude to widen.
  • Crude tanker rates have retreated from the multi-year highs seen in mid-December, following a drop in chartering activity in the Middle East and a broader easing of vessel fundamentals.  Shipping delays related to weather in the Baltic and Black Seas have so far been milder than usual, but fog in the Houston shipping channel has dented US imports and boosted Caribbean Aframax rates.


Oil prices continued to rise in December and, early in the New Year, WTI futures crossed the symbolic $100/bbl threshold for the first time ever.  Market fundamentals remained tight, with cold weather and falling stocks, while funds were reported to be re-entering commodities as part of the annual January allocation process.  Geopolitical jitters also contributed to the price increase, with bombs in Algeria, more violence in Nigeria and turmoil in Pakistan, even though none of these events actually led to lower oil supply.  Early January subsequently saw prices sliding downwards again, partly as a correction, partly as a result of warmer weather and of worries of an economic downturn in the US and, by extension, elsewhere.

The move to $100/bbl by WTI futures made headlines in the mainstream press around the world but is largely symbolic in the sense that some spot crude grades (and various refined products) had previously been traded at even higher prices.  Nevertheless, $100/bbl represents an astonishing doubling of prices since a mid-January 2007 low and a five-fold rise since early 2002.  From an economic perspective, yearly averages often matter more and here the jump is less significant.  Oil prices in 2007 averaged around $72/bbl compared with $66 in 2006 (spot WTI in Cushing) - a rise of only 9%.  Of equal symbolic significance is the fact that US gasoline retail prices are now above $3.00/gallon and above €1.30/litre in much of Europe.

The main factors that contributed to December's price rise include colder-than-expected weather in the US, Europe and Japan, drawing down previously-high heating fuel stocks.  The contrast to the unusually warm winter in 2006/07 is pronounced, even though temperatures this season are in line with ten-year averages.  OECD industry stocks continued their slide in November and December, based upon preliminary data, falling from near the top of their five-year range in July to the bottom of the range at the end of November in terms of forward cover.  These moves come despite higher OPEC output following its pledge to increase supplies to the market from 1 November and a slight narrowing of WTI and Brent futures' backwardation.

Much was made of an influx of index fund and other investor money into oil and commodity markets in general, amid both the uncertain global economic outlook and as part of the annual early-year reweighting of positions.  But while NYMEX WTI non-commercials show an increase in net-long positions around the end of the year, open interest only rose in early January, after falling in December.  This would appear to indicate a reaction to high oil prices rather than a cause.  Nevertheless, commodities overall are clearly strong, with highs seen in gold, platinum, wheat and indeed all other oil contracts on the NYMEX and ICE exchanges.

Oil prices' rapid retreat from $100/bbl shows, however, how volatile markets remain and, in early 2008, there would appear to be some downside potential.  The latest weekly unemployment figures and other economic data from the US show weakness, amid much talk of a possible recession, though oil demand so far appears little affected.  Refining margins have fallen further, as a late-year surge in refinery throughputs boosted product stocks in the US and Japan.  Perhaps the most crucial factor remains winter weather, which so far in January has been warmer than average, as opposed to the colder-than-average temperatures seen in the west in the fourth quarter.

Spot Crude Oil Prices

Markets were crude-driven in December and early January, as refineries geared up throughputs to meet winter demand.  By all accounts, light sweet crudes were in particularly strong demand and dirty freight rates surged in the first half of December, also on increased exports from the Middle East Gulf.  North Sea Brent was strong vis-à-vis other grades, maintaining its premium of around $5/bbl over Dubai and remaining steady versus other light, sweet crudes from Africa and Asia.  Urals differentials in the Mediterranean weakened versus Brent as Kirkuk and more Middle Eastern sour barrels entered the region. 

US spot benchmark WTI in contrast weakened slightly relative to similar grades such as LLS, as cracking margins on the US Gulf Coast slipped further into negative territory, and crude imports into the region fell.  Spot WTI even traded at a discount to Brent briefly in December and early January, amid a slight recovery in stock levels at Cushing, Oklahoma.  Heavier, sourer grades such as Mars, Maya and Kern River also narrowed discounts to WTI.

Exchange-traded Oman rose to a strong premium to spot Dubai, continuing the recent volatility in the contract.  The UAE's kerosene-rich Murban returned to a premium over Brent, while in Asia, both Tapis and Minas picked up versus the North Sea benchmark, the latter taking strength from strong direct-burn demand in Japan, as nuclear capacity remains constrained.

Refining Margins

Refining margins fell in all regions in December, despite healthy seasonal heating oil demand, as markets remained crude-driven and, with a few exceptions, crack spreads fell for all products.  At current rates, some economic run cuts may be in the offing for less complex refineries.  US Gulf Coast cracking margins are particularly depressed, sliding into negative territory.  This is especially true for cracking margins of foreign crude, as a result cutting imports into the region and contributing to the pronounced US stock draw.  West Coast margins remain healthier in comparison, though Oman cracking also turned negative on high crude prices.  Trendwise, margins fell sharply over the course of the month and in early January. 

Margins fell across the board in Europe, driven largely by weaker diesel cracks.  Northwest European spreads remain higher, a trend observed for recent months, and hydroskimming margins linger in negative territory.  In Singapore, only Dubai hydrocracking is positive, after Dubai hydroskimming margins fell sharply in December.  Weakness here is rather in jet fuel spreads, while naphtha and some fuel oil cracks improved.  

Spot Product Prices

Refined product crack spreads to crude were mostly weaker in December and early January.  Key refining centres saw an uptick in throughputs towards the end of the year, boosting product availability.  At the same time, crude prices were supported by crude stock draws and geopolitics.  Despite colder December weather in the northern hemisphere, and strong heating oil consumption, distillate cracks were weaker in the US, Europe and Asia.  In Japan, stocks of heating fuel kerosene built back to above-average levels at the end of the year as production was boosted.  Higher Chinese gasoil imports in December were somewhat offset by lower purchases from Indonesia and Vietnam.   Meanwhile, the jet fuel arbitrage from East Asia to the US West Coast closed after a sharp narrowing of differentials.  In Europe, the introduction of 0.1% sulphur heating oil from 1 January apparently passed smoothly, despite requiring blending of higher-sulphur Russian export barrels. 

Light distillates also were weak, with gasoline crack spreads remaining more or less unchanged.  Higher gasoline production in the US towards the end of the year resulted in a stock build in December, drawing lower volumes across the Atlantic.  Naphtha cracks meanwhile fell again in December and early January, sliding into negative territory in Northwest Europe.  In Asia, the unplanned shutdown of large naphtha crackers in Taiwan and Japan lowered demand, despite a concurrent dip in Indian exports. 

Fuel oil crack spreads were more mixed.  Low-sulphur margins were more or less flat last month, despite healthy demand from utilities, especially in Japan, on reduced nuclear capacity.  High-sulphur discounts to crude however widened further amid higher supply on raised runs around the world.  Independent European product stocks held in the Amsterdam-Rotterdam-Antwerp region are at the top of their five-year range while, in Singapore, they are above average.  Lower Chinese buying in particular contributed to the weakening.  The recent product shortage there caused a redirection of domestic crude to independent 'teapot' refineries, lowering their usual import requirements.  But steady flows of high-sulphur fuel oil from Europe to Asia in February are expected, also against a background of slightly lower dirty freight rates. 

End-User Product Prices in December

End-user product prices in most cases increased in December.  Gains were most pronounced for heating oil, which on average rose by 3.4% in US dollars, ex-tax, as temperatures turned cold.  In Japan, heating oil prices even rose by 10%.  Diesel retail prices were also strong, with an average gain of 3.2% in US dollars, ex-tax.  Diesel prices were particularly strong in the UK and Japan, but dipped slightly in Germany and the US.  Gasoline prices were more mixed, despite an overall increase.  France, Germany, Canada and the US saw lower prices, while increases were registered elsewhere.


Crude tanker rates have retreated from the multi-year highs seen in mid-December, following a drop in chartering activity in the Middle East.  As a result, early-January vessel fundamentals have eased considerably from the tightness seen in mid-December, when extra OPEC cargoes led a rush on VLCCs in the Middle East.  Although vessel demand spilled over into Suezmax and some Aframax sectors, rates in these sectors have also now corrected downwards with winter delays so far proving less severe than normal.  By early January, clean tanker rates had softened slightly from fourth-quarter peaks.

New Year demand for VLCCs in the Middle East has been considerably weaker than the early-December scramble for vessels to cover extra OPEC cargoes.  Tanker availability for late-January and February loading has consequently improved.  This has eased concerns over double-hulled vessel supply, which had intensified in mid-December following a spill from a single-hulled tanker in Korea.  The medium-term effect of this incident may yet be significant, if the Koreans decide to accelerate a phase-out of single hulled vessels.  For now, rates have dropped and the long-haul arrival horizon for VLCCs on prompt charter now falls after the usual peak of winter.  In the second week of January, VLCC rates ended around $21 and $41/tonne respectively on trades to Japan and the US Gulf.  This marks a significant retreat from the respective peaks of over $37 and $65/tonne in mid-December on the same benchmark routes.

Suezmax and Aframax rates also rose to multi-year highs by mid-December, linked to spillover vessel demand from the robust VLCC sector.  The lack of VLCC availability reportedly prompted the splitting of cargoes into smaller vessel sizes.  Shipping delays related to weather typically play a key role in dirty rates at this time of year.  Fog delays in the Houston shipping channel pushed already-rising Caribbean Aframax rates to $26/tonne in mid-December, compared with last winter's peak of $15/tonne, and put a much publicised dent in US PADD 3 crude imports.  However, weather delays in the Turkish Straits and Baltic have been much less severe than usual so far this winter.  North Sea to Northwest Europe Aframax rates peaked around $9/tonne in December, significantly lower than last winter's maximum of $14/tonne, and, at the time of writing, have fallen to $7/tonne.

By early January, Asian clean tanker rates had eased from late-2007 peaks.  Vessel availability in Eastern markets was boosted by the arrival of arbitrage cargoes from the West, while December temperatures were mild, easing heating fuel (kerosene) import needs.  However, China is still facing diesel shortages and looks set to follow record December imports with high incoming volumes in January.  This could lend support to rates despite reports of a prospective reduction in Indian naphtha export cargoes.  In the Atlantic, diesel flows to Europe look to have become more economic in recent weeks and rates for 33,000-tonne-cargo vessels have risen from around $15/tonne in mid-December to over $22/tonne in early January.



  • January global refinery crude throughput is forecast to average 75.2 mb/d, up 1.3 mb/d on the year and at its highest level since last August.  Growth is driven by higher throughput in the OECD, China and Russia.  First-quarter crude throughput is forecast to average 74.5 mb/d as planned maintenance subsequently reduces February and March refinery crude runs.
  • Fourth-quarter global crude throughput is unchanged from last month's report at 73.5 mb/d, following offsetting revisions to October and November of around 0.5 mb/d.  Lower OECD North America and Pacific throughput, and weaker throughput in Russia underpinned the October reduction.  Conversely, November estimates are revised higher due to record crude runs in China and Russia as well as higher crude runs in OECD Europe, India, Chinese Taipei and Iran.

  • October OECD gasoil/diesel yields achieved a new high, driven by higher North American output.  Pacific yields hit record levels for the time of year, driven by the start-up of new upgrading capacity in Korea, while European distillate yields declined, following problems at Neste's Porvoo hydrocracker.
  • Chinese state refiners have resorted to heavy diesel imports to combat supply shortages, following the collapse of independent 'teapot' refinery utilisation rates due to unfavourable economics. Heavy imports are expected to continue into the first quarter, and possibly longer, depending on the level of throughput at independent refineries.

Global Refinery Throughput

First-quarter global refinery crude throughput is projected to average 74.5 mb/d; 0.2 mb/d higher than our previous estimate, representing an increase of 1.2 mb/d from 1Q07.  65% of the growth comes from  non-OECD regions, led by China, Asia and the FSU.  Details on refinery activity in Singapore and the start of operations at refineries in Cuba and the UAE have led us to revise up forecasts for these countries.  Significantly higher diesel imports into China suggest that crude runs by Petrochina and Sinopec to meet strong domestic demand will not need to be as high as we had assumed.  Consequently we have trimmed our Chinese estimates for 1Q08.  OECD throughputs are assumed to decline from their December peak, as maintenance work starts sequentially in the US, Europe and Pacific.

Fourth-quarter global crude throughput is unchanged at 73.5 mb/d.  October's 0.6 mb/d downward revision is partly offset by upward revisions of 0.5 mb/d in November and 0.1 mb/d in December.  Lower throughput estimates for all OECD regions, Russia Japan, Brazil and India in October largely reflect, heavier-than-estimated maintenance work and delays to refinery restarts. In addition, crude throughput estimates have been reduced for Chile and Nigeria following a more detailed review of throughput data.

Nigeria should reportedly achieve the re-start of the Warri and Kaduna refineries in the first quarter of 2008.  These plants shut in February 2006, due to disruption of the crude supply pipelines.  While we remain cautious as to the eventual timing of these re-starts, we have included a gradual build-up over the course of 1Q08.  Furthermore, we have revised down our assumed crude runs at Nigeria's Port Harcourt refinery as we appear to have been around 50 kb/d too optimistic on the 4Q07 level of refinery activity.

November crude throughput estimates are revised up by 0.4 mb/d, driven by higher-than-forecast runs in OECD Europe (+0.3 mb/d), Singapore (+0.2 mb/d) and Iran (+0.1 mb/d), plus record throughputs in Russia (4.8 mb/d) and China (6.7 mb/d).

OECD fourth-quarter crude runs are estimated to average 38.7 mb/d - broadly unchanged from last month's forecast.  Data submissions indicate lower-than-anticipated runs in October in all three regions, but preliminary November data point to higher-than-estimated November crude throughput, mainly in Europe, although still below the five-year range.  Consequently, we have revised up Europe's December and January crude throughput estimates to reflect the higher activity levels.  However, the continued weak state of margins suggests economic run cuts could reduce crude runs in January.  North American forecast crude runs have been reduced, due to further delays to the return of BP Texas City's sour crude unit.  Elsewhere in the US there remains little reported planned maintenance compared with 1Q07 levels, raising the possibility that throughputs will be higher than currently forecast.  In contrast, some refiners point to increased maintenance levels as a result of the tightening sulphur specifications for gasoline and diesel, and the potential for increased seasonal volatility in refining margins as refiners move maintenance into the first quarter from the second quarter.

Weekly data for the US point to early January crude runs reaching 15.8 mb/d, their highest level since last August, driven by gains in the Midwest, Gulf and West Coasts.  Japanese weekly data indicate that refineries hit a seasonal peak of over 4.5 mb/d in mid-December (a slight downward revision from last month's report) and that kerosene production has returned to its seasonal average yield compared with jet fuel, i.e. in excess of 80% of overall jet/kerosene production.

November Middle East crude runs were in line with expectations.  However, Saudi Arabian crude throughput was 0.1 mb/d lower than forecast, suggesting that the planned turnaround at the Rabigh refinery was heavier than expected.  Offsetting this, Iranian and Iraqi crude runs exceeded our estimate.   The re-commissioning of Fujairah's 85 kb/d refinery in the UAE has prompted us to increase first-quarter Middle East throughput estimates by 20 kb/d as the plant gradually returns to processing after a four-year hiatus.  Planned maintenance work at refineries in Iran and the UAE offsets this, leaving crude runs for 1Q08 flat compared with last year.

Latin American crude throughput in December is revised down by 0.1 mb/d following reports of ongoing operational problems with PDVSA's 300 kb/d Cardon refinery and the two-week unplanned shutdown of its Curacao refinery.  First-quarter crude throughput forecast is revised up by 0.1 mb/d, following the earlier than expected completion of work at the PDVSA Amuay refinery and the inauguration of the 65 kb/d Cienfuegos refinery in Cuba, which we assume will average 20 kb/d in 1Q08.

Chinese Product Supply - Diesel Imports Soar

In response to the widely reported product shortages that appeared in the fourth quarter, Chinese state refiners raised crude throughputs to record levels in November. However, China's domestic pricing system caps most product prices below international levels and has led to a dramatic decline in processing operations at independent "teapot" refineries, many of whom purchase fuel oil at international prices as a feedstock. This is reflected in the decline in fuel oil imports. To offset the economic disparity caused by the price caps, Chinese state refiners have supplied some teapot refineries with crude, either at heavily discounted prices, or in return for guaranteed access to the resulting product output.

However, state oil companies have also responded by increasing net diesel imports. Gross diesel imports for the first three quarters of 2007 averaged approximately 12 kb/d while exports averaged around 15 kb/d, a balance of 3 kb/d net exports. October data indicates that imports leapt to 36 kb/d, while exports declined to 10 kb/d. Provisional data for November point to minimal exports and imports of 50 kb/d. December imports reportedly reached almost 200 kb/d with minimal exports, while January import levels are expected to be at least 130 kb/d. Given the full utilisation of state refining capacity, incremental distillate yields from higher crude runs could be as low as 20%, suggesting the import of diesel has increased product supply by the equivalent of 0.6 1.0 mb/d of additional crude runs. Without further incentives for teapot refiners to increase utilisation rates this level of imports is likely to continue through much of 2008, given the limited capacity additions expected in China in the first half of this year.

While the Chinese government remains keen on limiting fuel price increases due to concerns over domestic inflation, the state has suspended VAT on imports for 1Q08 and a halved import duty to 1%. Refiners will also need to prepare for the Chinese New Year in early February, which typically sees stronger demand. If sustained, this level of imports would put China on a par with countries such as France, Turkey and Australia in terms of distillate imports, while refiners providing the incremental supply in recent months include Korea and more recently Japan.

Chinese November crude throughputs reached a record 6.7 mb/d, as state oil companies struggled with diesel supply shortages.  Recent trade reports point to a significant increase in net diesel imports during the fourth quarter (see above Chinese Product Supply - Diesel Imports Soar).  Due to the higher diesel import volumes we have trimmed our 1Q08 forecast crude throughput by 0.1 mb/d, but still expect crude runs to average 6.7 mb/d in 1Q08, consistent with annual growth of 0.3 mb/d.

Russian crude throughput is revised down in October by 0.2 mb/d to 4.4 mb/d, following heavier-than-expected refinery maintenance at the Moscow, Saratov and Kuibyshev refineries during the month.  Crude throughputs rebounded to new record levels in November, continuing the trend in recent months for refiners to maximise the benefit of refining and exporting products versus simply exporting crude oil.  Further export duty increases, which increase the incentive to export products rather than crude, have been signalled from 1 February, suggesting refineries will continue to maximise throughputs.  Consequently, we have revised up our 1Q08 throughputs by 0.1 mb/d to 4.8 mb/d, representing annual growth of 0.2 mb/d.

Asian crude runs in 1Q08 are revised up by following a reassessment of Singapore crude throughputs. These have tracked above our forecast for three months running and consequently we have revised up our estimates for 2008 by 0.1 mb/d.  Elsewhere, the expansion of Bangchak Petroleum's refinery at the beginning of 2008 has resulted in a slight upward revision to Thailand's forecast throughput, during the first quarter.

OECD Refinery Yields

Middle distillate yields reached record levels in October thanks to a strong performance from North America and the Pacific.  In particular, Korean gasoil/diesel yields improved by four percentage points  from September to 29% and are five percentage points above last year's level following the start-up of LG Caltex's residue hydrocracker.

North American gasoil/diesel yields reached 26%, a new record high for the region, driven by the record US distillate yields.  This reflects the record level of hydrocracker throughput and the relative strength of distillate cracks over gasoline.  As highlighted in previous reports, problems with the Neste's Porvoo Hydrocracker cut Finnish diesel output and maintenance at Total's Gonfreville refinery reduced French diesel production.  Consequently, European gasoil/diesel yields declined during October.  These temporary issues have been resolved and gasoil/diesel yields in Europe, and the OECD as a whole, likely recovered over the balance of the fourth quarter.  OECD fuel oil yields remain below the five-year average, (despite the increase in European fuel oil yield, a corollary of the lower upgrading unit throughput), and likely trended lower over the balance of the fourth quarter and into 2008.

US Refining - Product Supply Is More Than Just Crude Throughput

Weekly crude throughput data for the US indicate that refineries processed 15.2 mb/d in 2007, slightly lower than the 2006 average. This report has previously highlighted the impact of tighter fuel specifications on refinery reliability; suggesting the tighter sulphur specifications are contributing to lower crude throughput by placing increased operational constraints on refineries. However, total US throughput data (including crude, NGLs and feedstocks) point to refineries running closer to historical highs. This raises the possibility that refiners are substituting other feedstocks for crude in an attempt to boost overall profitability by filling upgrading units with more economic feedstocks.

The US was the first major consumer to introduce ultra low sulphur or sulphur free specification for diesel. Gasoline specifications are still in the ultra low range, but have stopped short of the move to 10 parts per million (ppm) - for the moment at least. As such it leads the way in understanding the impact of sulphur free fuels on refinery reliability. The removal of sulphur from light products typically requires existing hydrotreating capacity to be run harder, requires more hydrogen and the units feeding the hydrotreaters to meet more demanding standards for feed quality.

Perhaps the most important difference between ultra low sulphur specifications and previous sulphur specifications is the impact that even small operational issues can have on output levels. Prior to the introduction of ultra low sulphur levels in diesel and gasoline, operational issues could be compensated for by subsequently tightening desulphurisation targets on processing units, e.g. producing diesel with significantly less sulphur to bring the composite blend into line with specification. Alternatively, re blending of off spec product would also allow refiners to meet specifications, if spare tank space was available.

However, with a 10 or 15 ppm limit on sulphur in fuels for end-use, refiners must produce diesel ex refinery at 5-8 ppm to allow for possible contamination through the primary and secondary distribution systems and meet multi shipper pipeline specifications. This level of sulphur prohibits re blending for all but the most marginal of off-spec products, while the existing constraints on hydrotreating capacity suggests reprocessing through a hydrotreater is also not likely to be an option.

Producing fuels to such demanding specifications, represents a significant challenge to refiners. Operating practices must ensure that previously acceptable levels of operational excellence are improved, and can require real time continuous monitoring of unit performance and product quality. Unsurprisingly, all of the above requires significant investment, not only in hardware but in processes and people. The alternative is to invest in spare hydrotreating capacity, not a cheap option in today's tight oil services market. In recent months several US refiners have highlighted these operational constraints facing refiners. Some have suggested that the tighter product specifications now in force in the US may limit refinery utilisation to below 90% in the future, compared with the recent historical average of 92-94%.

However, the crude, NGL and feedstock throughput data suggest that refineries have fared better than the crude throughput number indicates. Total feed rates are in the top of the five-year range rather than at the bottom, suggesting that while crude throughput levels have dipped, the actual supply of products has not been as adversely affected as might initially be presumed.