Oil Market Report: 10 October 2008

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  • Oil prices declined in September and early October, as demand growth weakened further, offsetting the impact of hurricane-related outages and lower OPEC output.  US crude futures fell from around $100/bbl in early September to below $90 in early October.  However, prices remain very volatile, with unprecedented daily swings.
  • Oil demand forecasts for 2008 and 2009 were trimmed by 240 kb/d and 440 kb/d, respectively, given weaker OECD deliveries and the IMF's downward revisions to 2009 global GDP assumptions.  World oil demand is expected to average 86.5 mb/d in 2008 (+0.5% or +0.4 mb/d vs. 2007) and 87.2 mb/d in 2009 (+0.8% or +0.7 mb/d).
  • Global oil supply declined by 1.1 mb/d in September to 85.6 mb/d.  Hurricane outages in the Gulf of Mexico and renewed stoppages in Azerbaijan and among OPEC producers offset higher supply from Russia and the North Sea.  Non-OPEC net output growth is largely wiped out for 2008, now averaging 150 kb/d, plus an extra 310 kb/d from OPEC gas liquids.  Combined 2009 growth is +1.45 mb/d.
  • September OPEC crude supply fell 0.3 mb/d to 32.3 mb/d, largely due to unplanned outages.  The 9 September OPEC meeting, which reinforced output targets, will be followed by an extraordinary meeting on 18 November to discuss the impact of the global financial crisis on the oil market.  Effective OPEC spare capacity stands at 2.1 mb/d.
  • OECD stocks fell by 5.1 mb in August to 2,645 mb, including notable draws in European crude and US motor gasoline.  Hurricanes drove further dramatic draws in US products and could have reduced OECD total stock cover from 54.9 days at end-August to 53.6 days by end-September, according to preliminary data.
  • Global refinery crude throughput should average 74.9 mb/d in 4Q08, 0.8 mb/d lower than forecast in last month's report, on weaker demand, higher maintenance, hurricane-related disruptions and economic run cuts.

When storms collide

Around 0.5 mb/d has been cut from our global demand estimate for 2H08 and 0.4 mb/d from 2009.  Weak baseline summer demand in the main OECD consuming countries in the face of higher prices is now being perpetuated by weakening economic prospects and, most recently, by a spiralling liquidity crisis, which risks tipping OECD economies into outright recession.  The latest IMF World Economic Outlook, upon which this report's demand forecast is based, has knocked nearly a percentage point off expected global GDP growth for 2009, with the global figure now below 3% and OECD economies seen as barely able to muster 0.5% growth.

Non-OECD economies fare rather better, with GDP growth of 6.1% expected next year, albeit this is a 0.8% downward revision from the April Outlook.  Our oil demand estimates in the face of these adjustments show sustained decline from the OECD, but a degree of resilience for developing economies.  Although non-OECD slow-down is also likely, it is by no means certain that growth will be choked off altogether.  We have yet to see unambiguous evidence of a sharp slow-down from China, while Middle Eastern demand growth remains robust.  Moreover, moderating global oil and commodity prices may yet provide sufficient inflationary relief to dissuade governments from a politically difficult policy of further removing price subsidies, thereby supporting demand.  That said of course, no one can foresee the ferocity or duration of the current economic tempest, nor whether full-blown recession will be avoided.

But we should avoid focusing only on the demand-side implications of the current financial storm.  Credit shortages are rapidly becoming yet another in a long line of impediments to industry investment.  In the upstream, this will intensify the impact already accruing from access restrictions, tightening fiscal barriers and manufacturing/service capacity constraints.  In short, expanding production capacity, even in line with moderating demand growth, becomes more difficult, quite apart from ever-present 'below ground' risks.  Tightening credit and equity markets will slow the pace of investment, with smaller, independent producers and, potentially, several Russian operators seen as particularly at risk.  Some analysts envisage a sizeable proportion of current global drilling rig orders will be cancelled.  Ordinarily, financially strapped independents might raise capital through share offerings, but with hedge funds shedding E&P stocks in recent months this may be less easy.  In such an environment, a renewed phase of industry consolidation is likely.

Most large IOCs and state producers should weather the financial storm.  However, investment is already being affected at a number of highly leveraged companies in locations such as Russia and the Caspian.  Russia's major producers have approached the government for loans to replace foreign borrowings. Ambitious expansion plans for national oil champions like Brazil's Petrobras, which will need upwards of $500 billion to finance its offshore subsalt development programme, may be further delayed as share prices tumble and amid restrictions on the availability of state development bank funding.  A cash liquidity crisis also affects storage, refining and trading activity.  Oil market liquidity itself is already suffering, so underlying price volatility could persist, or even increase, in the months to come, something that further complicates investment planning for the future.

The impact of this autumn's physical storms in the Gulf of Mexico, and other supply disruptions, have been somewhat eclipsed by the parallel economic and financial maelstrom.  This month we highlight the upstream and downstream impacts of recent outages affecting the US Gulf Coast and Azerbaijan.  It is a sobering reminder of the perils of forecasting that these two events, during the months of August-October 2008 alone, will have cut some 120 mb, or 1.3 mb/d, from forecast non-OPEC production.  What is more, neither the Atlantic hurricane season nor the global financial storm have blown themselves out yet.



  • Forecast global oil demand has been lowered in both 2008 and 2009, given much weaker-than-expected July and August deliveries in the OECD and a marked downward revision to global GDP prognoses by the IMF.  At +2.9% in 2009, global GDP growth is almost one percentage point lower than previous estimates.  World oil demand is thus now expected to average 86.5 mb/d in 2008 (+0.5% or +0.4 mb/d versus 2007 and 240 kb/d lower than previously estimated) and 87.2 mb/d in 2009 (+0.8% or +0.7 mb/d compared with the previous year and 440 kb/d lower on average compared with our last report).
  • Oil demand in the OECD is expected to average 48.1 mb/d in 2008 (-2.2% or -1.1 mb/d versus 2007) and 47.5 mb/d in 2009 (-1.3% or -0.6 mb/d on a yearly basis), roughly 360 kb/d lower on average for both years than previously estimated.  Revisions to both North America and Pacific data were significant.  Rapidly weakening economic conditions, financial turmoil and high prices should have a marked impact upon OECD demand, most notably in the United States.

  • Non-OECD oil demand is forecast at 38.4 mb/d in 2008 (+4.2% or +1.5 mb/d and 80 kb/d higher than previously estimated) and 39.7 mb/d in 2009 (+3.4% or +1.3 mb/d compared with the previous year and 40 kb/d than in our last report).  The minor upward revision is related to stronger-than-expected demand in almost all regions.  Overall, non-OECD demand growth should continue offsetting the severe OECD demand contraction.
  • The largest OECD economies will likely face a severe economic slowdown or even a recession, according to the IMF's latest prognoses.  The US mortgage market, in particular, is likely to remain in the doldrums for some time as consumers shed excessive debt.  Falling purchases from US consumers will thus weigh down on oil demand.  The question is whether emerging markets will be affected.  Oil demand growth areas (notably the Middle East and emerging Asia) have yet to show a significant slowdown.  Although eventually China's economic growth may decelerate given the contraction of its main export markets (the US and Europe), this adjustment is expected to be relatively limited, according to IMF assumptions.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 3.5% year-on-year in August - a month were demand normally peaks - with all the three regions posting losses.  In OECD Pacific, demand plummeted by 4.4%, dragged down by Japan, where gasoline demand fell sharply while lower electricity needs and higher nuclear utilisation rates curbed direct oil use for power generation.  In OECD North America (which includes US Territories), oil product demand contracted by 3.7% as a result of weak gasoline demand, even though easing retail gasoline prices prompted a mild month-on-month rebound in consumption.  In OECD Europe, demand also remained subdued on the back of weak transportation fuel deliveries, shrinking by 2.6%.

July revisions to preliminary data, meanwhile, were once again significant.  Finalised figures indicate that OECD demand contracted by 3.0% year-on-year during that month - almost twice as much as previously estimated and implying a downward adjustment of 700 mb/d.  Coupled with hurricane effects, this translates into a 0.8 mb/d downward adjustment for 3Q08.  These revisions came from OECD North America (mostly from the US) and OECD Pacific (essentially Japan, and to a lesser extent, Korea).  Changes within OECD Europe largely offset each other.  Consequently, OECD demand is now forecast at 48.1 mb/d in 2008 (-2.2% or -1.1 mb/d versus 2007).  In 2009, demand is seen contracting by 1.3% on a yearly basis (roughly -0.6 mb/d) to 47.5 mb/d.  For both years, these estimates are roughly 360 kb/d lower on average when compared with our last report.

North America

Oil product demand in North America (including US Territories) shrank by 3.7% year-on-year in August, according to preliminary data, for the eighth month in a row.  Although there was a month-on-month rebound, US-centred demand weakness continued to drag down regional demand.  Canadian demand has also declined during most of this year, and even steady Mexican growth has slowed down.  Revisions to July preliminary data were once again relatively large (almost -0.5 mb/d):  demand in OECD North America actually plummeted by 4.7% year-on-year during that month, rather than 2.9% as previously estimated.  Regional oil demand is now expected to average 24.6 mb/d in 2008 (-3.8% or -960 kb/d on a yearly basis) and 24.2 mb/d in 2009 (-1.4% or -350 kb/d).  Compared with our last report, these estimates are about 200 kb/d lower.

Adjusted preliminary data in the continental United States for September confirm what had been largely expected:  a sharp fall in oil demand, weakened by both the economic slowdown amid a financial crisis and the damaging effects of Hurricanes Gustav and Ike, whose impact turned out to be of the same order of magnitude as Katrina and Rita in 2005.  Inland deliveries - a proxy of oil product demand - contracted by 7.0% year-on-year, with all product categories bar naphtha registering significant contractions.  Economic woes, which began to surface in early 2007, account perhaps for two-thirds of this fall, with the rest related to Ike's supply disruptions, notably in LPG deliveries.

Gasoline demand, in particular, appears to have shrunk by as much as 5.5%.  Car companies, which were cautiously celebrating August's gasoline demand recovery in general and the vehicle sales rebound in particular - largely supported by price reductions and other incentives - were confronted in September by plummeting sales of both light trucks (-31% year-on-year) and passenger cars (-22%), since the financial turmoil has drastically curbed access to consumer credit.  As such, in order to stay afloat, American automakers are either rushing to launch electric vehicles as soon as 2010 (General Motors and Chrysler), refitting European models to US standards (Ford), curbing leases (Chrysler), or even lobbying Congress for loans (all).

Moreover, Hurricane Ike prompted a spike in retail gasoline prices and localised shortages in southeastern states such as Georgia, which saw gasoline shortages, panic filling, closed stations, and long queues at those stations still open, notably in cities like Atlanta.  Vehicle-miles travelled, meanwhile, registered a fall for the eighth month in a row (-2.0% year-on-year in July).

Our estimates of July oil demand figures, meanwhile, were revised down from preliminary weekly estimates by 400 kb/d (compared with the EIA's 700 kb/d), with the bulk of the adjustment again related to gasoil deliveries.  The continued mismatch between weekly and monthly data likely reflects a previous underestimation of diesel exports, which have risen as domestic demand falls and are not captured in weekly data, rather than the more traditional overestimation of refinery production.

Regarding the outlook, the economy looks on the verge of a deep slowdown amid renewed financial turmoil.  The IMF's latest World Economic Outlook predicts virtually no economic growth in US in 2009.  Our current outlook foresees US oil demand contracting by as much as 4.6% year-on-year in 2008 to 19.7 mb/d.  In 2009, assuming that the financial turmoil eases, the fall is expected to be somewhat less pronounced but nonetheless significant (-1.7% to 19.4 mb/d).  The Ike effects are not carried through to 2009, so the downward revisions, when compared with our previous report, amount to roughly 200 kb/d in 2008 and 150 kb/d in 2009.

According to preliminary data, oil product demand growth in Mexico slowed down significantly (+0.7% year-on-year) in August.  Transportation fuel demand was relatively weak, with gasoline and diesel growing by 1.6% and 6.0%, respectively, and jet fuel shrinking by 9.4%.  The relative resilience of diesel demand (which had been expanding at 7.0% on average over the previous twelve months) may suggest that the overall economy in general and the export sector in particular are holding up despite the US woes.  By contrast, the subdued picture for gasoline and jet fuel - which had both grown at over 6.0% on average in recent months - may indicate that consumer spending is faltering, and possibly that credit conditions for vehicle purchases are tightening.

Paradoxically, slowing gasoline demand may come as good news for both the government and state-owned Pemex.  Indeed, given the runaway demand growth observed in the past few years, Mexico's gasoline imports have risen to almost 40% of total demand.  This, on the one hand, has put under severe strain the country's distribution system, obliging Pemex to build new pipelines and storage facilities and, on the other hand, has sharply increased both the import bill and end-user subsidies, since retail prices are about 30% lower than in the US.  Pemex reckons that imports will further rise in 2009 to some 390 kb/d - roughly 50% of total demand.  Moreover, the country's product import dependency is unlikely to recede in the short term, as proposals to abolish Pemex's refining monopoly and encourage new refining capacity additions are stuck in Congress.


Oil product demand in Europe contracted by 2.6% year-on-year in August, according to preliminary inland delivery data, with significant losses in gasoline (-8.0%) and diesel (-3.7%).  Revisions to July annual submissions, on the other hand, were relatively small (-60 kb/d), with losses in France and the UK largely offset by stronger-than-anticipated Italian demand.  Looking forward, demand in OECD Europe is foreseen averaging 15.2 mb/d in 2008 and 15.1 mb/d in 2009, implying a year-on-year decline of 0.6% and 0.9%, respectively, about 120 kb/d lower on average for both years when compared with our previous forecast.  The weak 2009 GDP growth prognoses for several key European countries underpin the revisions for next year.

Inland deliveries in Germany rose by a modest 0.4% year-on-year in August, according to preliminary estimates.  As in the previous month, the rebound in heating oil deliveries (+25.6%) supported the overall rise, given the weakness of gasoline and diesel.  Heating oil consumer stocks averaged 53% of capacity by end-July, sharply higher than a month earlier (48%) but below the readings of August 2007 (58%), suggesting that demand will remain subdued this year when compared with 2007.  In France, by contrast, total oil demand plummeted by 5.1% year-on-year in August, despite continued strong deliveries of heating oil (+11.9%).

Meanwhile, transportation fuel demand continues to shrink, notably in the largest European countries.  Gasoline demand - which is structurally declining across most of Europe - is falling much quicker than in the recent past (when it declined by 3.0% to 5.0% year-on-year, depending on the country):  in August it contracted by 16.9% year-on-year in France, 7.2% in Germany, 11.2% in Italy and 8.7% in Spain, and in July by 7.6% in the United Kingdom (the last month for which official data is available).  More significantly still, diesel deliveries also contracted markedly in August on an annual basis:  -10.6% in France, -3.8% in both Germany and Spain, and -5.7% in Italy; in the UK they fell by 10.3% in July.  Admittedly, this plunge is largely related to the fact that oil prices reached record highs during the summer amid a noticeable economic slowdown across much of the continent.

As in the US, vehicle sales in Europe's main markets have shrunk over the past several months.  Drivers have been deterred by high oil prices, which have compounded other existing driving issues, such as mounting traffic jams, parking shortages, driving restrictions in urban areas, radar-enforced speed limits and growing environmental concerns.  (Moreover, the European Parliament seems in no political mood to raise emission limits above 120 grams of CO2 per km, which will be voted next November, despite frantic lobbying by car manufacturers in favour of such an increase).  In France, for example, the use of public transportation has risen by about 6% year-on-year in 1H08 in all modes (buses, suburban trains, subways and high-speed trains).  Nevertheless, the car industry may find an ally in the beleaguered financial sector:  the Spanish bank Banesto is offering free cars in exchange for opening over the long term, interest-free deposits.457

A Turn for the Worse?

The financial turmoil that engulfed US and global markets in early September was unprecedented.  It saw the nationalisation of several large mortgage and insurance institutions (Fannie Mae, Freddie Mac and AIG in the US, and Fortis and Dexia in Europe), the forced sales of large investment and commercial banks (Merrill Lynch and Wachovia in the US and HBOS in the UK, following in the steps of Bear Sterns last March,) and the bankruptcy of other banks (such as Lehman Brothers and Washington Mutual in the US), and culminated in plans to engineer the largest bailout in US history.  Financial market volatility has been extreme, driven by outbursts of panic in several stock exchanges around the globe.

According to some observers, the global financial system, which was first hit by a lack of liquidity as the subprime bubble burst, could well enter a phase of insolvency and push the US and the global economy into a severe depression.  By dumping assets at fire-sale prices in order to obtain badly needed cash, financial institutions are bound to weaken themselves more and thus cut credit, which would further undermine economic conditions and trigger another round of asset - and dollar - depreciation.  From that perspective, the US $700 billion bailout could be crucial to restore confidence and recapitalise financial institutions.  The details of the package, approved by the US Congress despite strong political resistance, are unclear:  whether it will involve purchasing 'toxic' mortgage-backed securities, purchasing equity in troubled banks, increasing deposit protection, augmenting capital requirements, or a combination of all of these remains to be decided.

In the end, the largest OECD economies will likely face a sharp slowdown, as the IMF prognoses suggest.  The US mortgage market is likely to remain in the doldrums for some time as consumers shed excessive debt.  This will certainly weigh down on oil demand, as evidenced by its dramatic contraction seen so far in the US.  The question is whether emerging markets will be affected.  In this respect, the evidence is patchy.  Some markets have indeed been hit hard:  Russia, for example, has opted to shut down its exchange several times already as losses mounted up, but turmoil there is also arguably related to recent geopolitical events.  Other markets, by contrast, have held up surprisingly well amid the global uncertainty (Mexico and Brazil, for example).

More crucially, oil demand growth areas (notably the Middle East and emerging Asia) have yet to show a significant slowdown.  Some argue that China's economic growth will decelerate markedly, on the grounds that its main export markets (the US and Europe) are contracting.  Although this may eventually occur, it remains to be seen whether such an adjustment will be significant.  Although annualised industrial production growth slowed to 12.8% in August versus 14.7% in July, this is hardly a crash and is more indicative of the shut-in of several polluting industries around Beijing's metropolitan area during the Olympics.  Moreover, preliminary manufacturing production figures show a month-on-month rebound in September.  The slowdown case, in addition, underestimates recent Chinese policy reactions.  Indeed, a de facto monetary easing (by reducing interest rates for the first time in six years and bringing the yuan's appreciation to a halt) is now well underway in order to sustain domestic growth given the gradual slowdown in the export sector, and the government could well engineer a fiscal boost if necessary.  Therefore, even if global economic growth slows down - but short, of course, of global recession - China's oil demand growth can arguably remain in positive territory in the foreseeable future.


According to preliminary data, oil product demand in the Pacific plummeted by 4.4% year-on-year in August, brought down by weak Japanese demand.  On the one hand, given lower electricity demand and higher nuclear generation rates, Japanese residual fuel oil deliveries fell (-5.6%) for the first time in a year.  More dramatically, gasoline demand in Japan shrank given record-high oil prices.  Strong use of crude for direct burning in power generation in Japan, and Australian diesel support, were not high enough to offset these losses.

Meanwhile, downward revisions to July preliminary data stood at 180 kb/d:  demand in OECD Pacific fell by 2.3% year-on-year during that month, instead of growing by 0.1% under previous estimates.  As a result, oil demand in the Pacific is expected to average 8.3 mb/d in 2008 (-0.4% or -30 kb/d on a yearly basis) and 8.2 mb/d in 2009 (-1.4% or -120 kb/d) - down in both years by about 70 kb/d when compared with our last report, given the worsening outlook for the Japanese economy.

The July revisions were mostly related to Japan, particularly with regards to the 'other products' category, possibly because naphtha backflows continue to be underreported.  As such, the fall in July's Japanese demand - which represents two-thirds of regional demand - was actually steeper (-3.4% year-on-year) than previously anticipated (-0.9%).

August preliminary data show an even larger contraction (-6.9%); as in the rest of the OECD, high oil prices during the summer have depressed Japanese transportation fuel demand:  deliveries of gasoline (22% of total demand) and diesel (11% of demand) plummeted by 14.0% and 14.2%, respectively.  In addition, milder temperatures in late August in the Tokyo region and higher nuclear power generation rates helped both curb power demand for air conditioning and reduce the use of fuel oil for electricity generation by local utility TEPCO.  Indeed, residual deliveries contracted by 5.6% in August, in sharp contrast to the double-digit rates of growth observed during the previous year.



Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports, adjusted for fuel oil, direct crude burning and stock changes) grew by an estimated 6.8% year-on-year in August.  As in recent months, the rise was due to buoyant domestic and international deliveries of transportation fuels (gasoline, gasoil and jet fuel/kerosene rose by 15.0%, 18.0% and 13.5%, respectively) in the midst of the Olympic Games.  By contrast, the weakness in residual fuel oil demand - the feedstock of choice for 'teapot' refineries - persisted for the thirteenth month in a row, with deliveries contracting by 37.8% year-on-year as a result of continuing poor margins.

August's annual growth is a third lower than last month, and illustrates the expected fall in crude and product imports.  Nevertheless, August imports were respectable:  net crude imports stood at 3.6 mb/d and net product imports at 650 kb/d - both slightly above their 2008 average.  As for September, post-Olympics imports are reportedly likely to decrease, as well as refinery runs.  It is often argued that stocks are ample and that new refining capacity is coming online.  But some industry observers claim that the main reason behind lower prospective imports is a purported decision by the Chinese government to stop subsidising imports.  However, the decline in international prices could lend some support to imports:  it is estimated that the breakeven oil price required by the Chinese state-owned majors (PetroChina and Sinopec) is about $90/bbl - unless, of course, the government decided to lower domestic energy retail prices to stimulate the overall economy, as has been rumoured recently.

There are concerns for the economy's export outlook.  As noted, China's economic growth may slow down, since its main export markets (the US and Europe) are contracting.  However, whether such an adjustment will be significant remains to be seen.  At this point, this report's forecast is based on the latest - and slightly lower - GDP assumption by the IMF for 2009 (9.2% versus 9.8% previously).  As such, our prognosis for this year remains largely unchanged when compared with our last report, at 8.0 mb/d for 2008 (+6.0% versus 2007), and 8.4 mb/d in 2009 (+5.2%).  This forecast, however, may be revised as the post-Olympics and post-financial turmoil picture becomes clearer.

Other Non-OECD

According to Indian preliminary data, oil product sales - a proxy of demand - rose by a modest 3.1% year-on-year in August.  This slower pace of growth was largely related to heavy rains and floods in some states (Bihar, eastern Uttar Pradesh and Punjab), which affected both industrial and construction activity, as well as oil demand.  Nevertheless, demand for naphtha (+5.8), gasoline (+7.2%) and particularly diesel (+9.7%) continued to roar ahead, since this fuel is highly subsidised.  Many private firms are increasingly seeking to overcome widespread power shortages with diesel-run generators, while power companies are using cheaper diesel instead of fuel oil.  Our forecast is little changed compared with our last report, with Indian demand expected to average 3.1 mb/d in 2008 (+4.8% on a yearly basis) and 3.2 mb/d in 2009 (+4.1%).

Regarding a rumoured gasoil retail price cut, the Petroleum & Natural Gas Minister has stated that this will not happen until crude oil prices reach $67/bbl.  In the meantime, though, subsidies continue to distort demand in favour of gasoil, with some state-owned companies becoming more vocal (IOC, for example, has petitioned the government to allow it to charge industrial and commercial customers market prices for gasoil) in order to reduce their losses ($17.15 billion in the fiscal year to March 2008 from selling gasoline, diesel, kerosene and LPG at subsidised prices).  In addition, international credit rating agencies are beginning to express concerns on the subsidy burden.  Recently Fitch argued that the Indian government's policy of insulating domestic consumers from high global crude prices has damaged the finances of the country's three state-owned oil companies - Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPC) and Hindustan Petroleum Corporation (HPC) - thus impairing their investment capabilities.  The expanding fuel subsidy has also further affected the government's fiscal position.

In the meantime, given the surge in domestic demand, state-owned companies will likely be obliged to import gasoil.  In response, IOC has reportedly asked the government to direct privately owned Reliance Industries Limited (RIL) to sell domestically some output from its 660 kb/d Jamnagar refinery.  However, given Jamnagar's status as an export-oriented unit, product sales into the domestic market would be subject to double taxation - an issue that Reliance has asked to be addressed for sales to proceed.

According to preliminary data, oil demand in Iran soared by 12.7% year-on-year in July, on the back of sustained transportation fuel (+15.8%) and residual fuel demand (+59.2%).  The sharp rise in gasoline use (+16.3%) is particularly noteworthy:  at 570 kb/d, demand has surpassed its 2007 pre-rationing levels (of roughly 500 kb/d on average).  As such, the rationing system only brought a temporary respite, and if this trend persists, imports will have to rise again - inventories are reportedly depleted - amid renewed international tensions over Iran's nuclear programme.  It could also be argued that rationing was bound to fail, given the sheer inefficiency of the fleet (according to some estimates, two-thirds of the country's 5.5 million vehicles are more than 25 years old), the lack of alternatives to driving, notably between large cities, and the government's prevarication on the price issue (subsidies are still too high and discourage conservation).

Oil demand in Thailand plummeted by 6.3% year-on-year in July, for the second month in a row.  The sharp fall in demand is related to high oil prices for transportation fuels:  gasoline, gasoil and jet fuel kerosene demand contracted by 9.4%, 10.8% and 6.4%, respectively.  By contrast, LPG demand has risen markedly since the beginning of the year:  facing very high prices for conventional motor fuels, some 600,000 drivers have converted their vehicles to run on subsidised LPG (Thailand has now about 1.2 million LPG-fuelled vehicles).  In fact, in April the country imported its first LPG cargo in almost a decade.  In response, the government looked at implementing a two-tier LPG pricing strategy (distinguishing between households and the transportation sector).  However, the plan (originally scheduled for launch in July 2008) has seemingly been shelved.



  • Global oil supply declined by over 1.0 mb/d in September, as in August, to reach 85.6 mb/d.  Hurricane outages in the Gulf of Mexico (GOM), and renewed stoppages in Azerbaijan and among OPEC producers, offset higher supply from Russia and from the North Sea.  Year-to-year growth in world oil supply dipped to 435 kb/d in September from 2 mb/d-plus during June-August.
  • Non-OPEC production is adjusted down by 100 kb/d for 3Q08, by a sizeable 500 kb/d for 4Q08 and by 245 kb/d for 2009.  Renewed September production stoppages in Azerbaijan drive the 3Q08 change.  These extend to October and, alongside a longer tail for GOM outages after Hurricanes Gustav and Ike, account for the downward revision for 4Q08.  New field delays and slower ramp-up to plateau for projects in Latin America, the FSU and Asia, pull back 2009 non-OPEC supply to 50.4 mb/d.
  • The scale of outages in the USA due to hurricanes, and the combined impact on Azeri supplies of pipeline outages, conflict in Georgia and idled production facilities has had a major impact on 2Q08 and 3Q08 non-OPEC supply.  Combined losses of 120 mb for the August to October period equate to a cut in forecast non-OPEC supply of 1.3 mb/d, or 325 kb/d on an annualised basis.
  • Net growth in non-OPEC output is largely wiped out for 2008, now averaging only 150 kb/d, plus an extra 310 kb/d from OPEC gas liquids.  Corresponding figures for 2009 are +655 kb/d and +800 kb/d respectively, with the non-OPEC component weighted towards 1Q09.  This derives from a bunching of new project start-ups in the latter part of 2008 and early 2009.  Azerbaijan, Brazil, the US, Canada, biofuels, China and Australia underpin 2009 non-OPEC growth, while the North Sea, Mexico and Russia see significant decline. OPEC NGL growth centres on Saudi Arabia, Qatar, the UAE, Nigeria and Iran.
  • September OPEC crude supply fell 0.3 mb/d from August to 32.3 mb/d.  OPEC's 9 September Ministerial meeting pledged to trim supply to target levels, but September's cut was driven more by unplanned supply outages, notably affecting Angola, Iraq and Nigeria.  An OPEC meeting is scheduled for 17 December in Algeria, but unconfirmed reports suggest Ministers may convene earlier, on 18 November in Vienna.  OPEC effective spare capacity stands at 2.1 mb/d.  Installed capacity may rise by 360 kb/d by end-year to 35.8 mb/d, with increases from Saudi Arabia, Nigeria and Angola.
  • The 'call on OPEC crude and stock change' is cut sharply for 3Q08, and by an average of 0.2 mb/d for 2009, as weaker demand outstrips the impact of lower estimates for non-OPEC supply. However, a sharp downward revision to 4Q08 FSU and North American supply nudges this quarter's call up marginally to 31.7 mb/d. The underlying level of the 'call' weakens in 2009 to average around 31 mb/d, albeit strengthening over the course of the year from low early 2009 levels.

  • 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.


September OPEC crude supply was 0.3 mb/d below August levels at 32.3 mb/d. However, as was the case in August, involuntary cuts due to production outages seemed to play as great a role as strategic decisions to reduce supply.  Angolan, Iraqi and Nigerian supplies were all affected in this way during September.  Nor have we yet seen firm evidence that Saudi Arabian crude supply has shifted markedly in September, with our preliminary estimate suggesting output remained close to 9.5 mb/d, albeit heavier crude volumes may now be scaled back to make way for higher volumes of Arab Light from the newly started Khursaniyah project.

While wary of trying to predict the outcome of OPEC gatherings in advance, in our last report we did identify a move to reinforce quota discipline as one of the more likely outcomes of OPEC's 9 September Vienna meeting, particularly in the face of weakening prices. In the event, this was the track followed as the meeting pledged to rein-in production to target levels agreed back in September 2007, excluding Indonesia whose membership of the Organisation is to be suspended from 2009 at its own request.  Taking the suggested quota levels from last year, and adjusting for prevailing Iraqi and Indonesian production volumes suggests that OPEC may be targeting total production levels close to 32 mb/d.  A further OPEC meeting is scheduled for 17 December in Oran, Algeria, although there have also been unconfirmed reports in early October that Ministers are consulting on the possibility of a further meeting on 18 November in Vienna to discuss the impact of the global financial crisis on the oil market.

OPEC effective spare capacity among producers readily able to boost supply is estimated at 2.1 mb/d.  Installed capacity could rise by 360 kb/d by end-year to 35.8 mb/d, with significant increases expected to come from Saudi Arabia (with the build-up in volumes from the Khursaniyah project), Nigeria (the recently started Agbami project and assumed further recovery from Forcados) and Angola (Saxi-Batuque and Rosa).

Iraqi crude supply in September (exports plus domestic crude use) fell for the third month running, down by 140 kb/d to 2.2 mb/d because of lower exports from both Ceyhan and the southern Gulf ports around Basrah.  Weather-related loading delays underpinned the reduction in the south (off by around 150 kb/d at 1.3 mb/d), while shipments from Ceyhan were also affected by a five to six day pipeline outage early in September to repair bomb damage. This was the first major stoppage of this kind since increased security on the pipeline was put in place in summer 2007.  Total domestic crude use in September is estimated at 590 kb/d compared with 565 kb/d in August, as expansion projects at several smaller refining facilities have led to higher crude throughputs.

A 2006 agreement whereby Iraq supplies Jordan with crude was renewed in June.  This was supposed to involve initial volumes of 10 kb/d, rising later to 30 kb/d, although to date shipments have been at minimal levels as deliveries are made by truck.  Iraq's only other pipeline exports comprise some 10 kb/d of crude which moves cross-border to Syria.

We have scaled back Iraqi capacity assumptions for the next 18 months (effectively holding flat at 2.5 mb/d) after the virtual collapse of six Technical Support Agreements (TSAs) designed to add 500 kb/d to Iraqi crude capacity via existing fields over the next one to two years.  Instead, focus will be on formal bidding rounds aiming at expanding capacity for the longer term. The government has said it will include four undeveloped fields in the second bidding round, aiming to add some 1.75 mb/d to capacity.  The four fields are all in southern Iraq - Halfaya, Majnoon, Bin Umar and West Qurna 2 - and the bidding round is tentatively scheduled for December.

Preliminary estimates of Iranian exports suggest a drop of perhaps 100 kb/d from high August levels.  The other component of our supply estimate - domestic refinery crude runs - may also have come in marginally lower, bearing in mind that extra swap volumes of Azeri crude were taken in at the Iranian Caspian port of Neka in September.  We net off Neka volumes from our estimate of Iranian crude runs when calculating our supply 'proxy' for production.  On this basis, we think Iranian supply may have been down by 130 kb/d at 3.97 mb/d in September.

Angolan production is estimated to have fallen by 0.1 mb/d to 1.75 mb/d due to the continued outage at the 200 kb/d Greater Plutonia field, which shut down in mid-August after a gas plant problem.  A definitive re-start date for Greater Plutonia was not known in early-October.  However, this was likely to have been partly offset during September by rising supplies from the Saxi-Batuque section of the Kizomba C project, which also started in mid-August.

Libyan and Venezuelan production are both assessed up in September by 50-60 kb/d as a result of the end of scheduled maintenance.  In Libya, supplies of Waha crude increased after pipeline maintenance ended.  However, Libyan production remains below 1.8 mb/d capacity levels due to continued outages affecting facilities at the al-Jurf field and the Ras Lunuf terminal.  In Venezuela, we have scaled back July and August estimates to account for maintenance at the Hamaca and Sincor heavy oil upgrader units.  The return of these facilities after maintenance looks to have pushed September supply to just short of 2.4 mb/d.  While there are ambitious plans for future output expansion in the Orinoco region, at the same time industry reports suggest that state PDVSA is struggling to maintain western region production around Lake Maracaibo.  Amid falling crude prices and the global financial squeeze, some reports suggest thousands of wells are affected by lack of maintenance and water encroachment.

Non-OPEC Overview

Downward adjustments to the non-OPEC forecast continue this month, with 4Q08 and year 2009 projections cut by 500 kb/d and 245 kb/d respectively.  While there may be a temptation to see this as a curbing of earlier overenthusiasm in an investment-constrained environment, the reality is more to do with force majeure, alongside initial signs that the global credit crisis is starting to have an impact upon upstream spending. The aftermath of Hurricanes Gustav and Ike is now characterised by longer-lasting supply outages as over 40% of US GOM crude production remains offline amid shuttered pipeline links.  And Azeri production, earlier assumed to recover quickly from the after-effects of the August BTC pipeline blast and the brief war in Georgia, now faces at least another month of sharply reduced supply due to continued pipeline outages and technical problems at offshore production facilities. These two events together cut 120 mb from 2008 non-OPEC supply, or over 300 kb/d on an annualised basis.

Since our forecast automatically employs a rolling five-year average hurricane outage assumption for the offshore US GOM, the incorporation of September's heavy outages (an estimated offshore production loss of 1.1 mb/d for the month on average) also feeds through to knock 70 kb/d off projected 3Q09 GOM supply.  October 2008 outages also look likely to come in above earlier expectation, but no downward adjustment is made for October 2009 until the current month's impacts are confirmed. Until then, our October 2009 hurricane adjustment remains at the 2003-2007 average of 265 kb/d.

Delays in new field starts, and slower ramp-up to plateau for projects in Mexico, Brazil, Russia, Azerbaijan, Kazakhstan, China, Malaysia and Vietnam scale back expectations for 2009 non-OPEC output to 50.4 mb/d, from 50.7 mb/d last month.  Our methodology does not involve arbitrarily slipping all upstream project starts (even though delays of up to 12 months are not uncommon at present).  Instead, we prefer to assess projects on a case-by-case basis, with subscribers able to track individual projects in our field-by-field MODS database.  But forecasting under 'normalised' conditions, when the upstream investment environment faces a multitude of barriers and bottlenecks, will always leave projections prone to downside risk.  The sustained outages due to weather and force majeure seen in the past two months highlight that trend, as indeed could the global credit squeeze now gripping financial markets (see When Storms Collide).  Upward adjustments to the 2009 projections are limited this month, and confined to India, Oman and Syria.

As a result, earlier expectations of healthy net growth in non-OPEC output for 2008 have been largely wiped out, with growth now averaging only 150 kb/d, plus an extra 310 kb/d from OPEC gas liquids.  Corresponding figures for 2009 are +650 kb/d and +800 kb/d respectively, with the non-OPEC component weighted towards 1Q09, tapering off as we progress through 2009.  As a result, the implied call on OPEC crude and stock change looks weak early next year, but rebounds towards 4Q09.  This imbalanced supply profile derives from a bunching of new non-OPEC project start-ups in the latter part of 2008 and early 2009.  Azerbaijan, Brazil, the US, Canada, China, Australia and biofuels underpin 2009 non-OPEC growth, while the North Sea, Mexico and Russia see significant decline. OPEC NGL growth centres on Saudi Arabia, Qatar, the UAE, Nigeria and Iran.


North America

US - September Alaska actual, others estimated:  Total forecast US oil production is actually revised up by 30 kb/d for 2008, despite a now-longer recovery 'tail' after Hurricanes Gustav and Ike (see Re-evaluating Upstream Losses from Gustav and Ike).  Preliminary weekly August and September data suggest output fared better than expected.  Forecast output averages 7.6 mb/d in 2008 and a largely unchanged 7.9 mb/d in 2009, with ethanol generating the bulk of this year's growth and sharing the increase with GOM crude supplies next year.  Alaskan crude production falls in both years, although September showed a rebound in supplies to 700 kb/d after earlier maintenance had affected the Trans Alaska Pipeline system and the Alpine field in August.

Canada - Newfoundland August actual, others July actual:  Lower indicated 3Q08 Albertan mined syncrude and offshore east coast production trim the total production estimate for the quarter by 20 kb/d.  However, on a trend basis the Canadian forecast remains largely unchanged, with total oil output stable at 3.3 mb/d in 2008, then rising by 150 kb/d to 3.45 mb/d in 2009 on the strength of higher Alberta oil sands production.  In-situ bitumen generates some of this growth, as does the expected start-up at the CNRL Horizon mining project.  The operators have reported cost overruns at the latter project and a deferral of earlier-planned 3Q08 start-up, although our forecast has, for some time, assumed a more conservative end-2008 start-up.

Re-evaluating Upstream Losses from Gustav and Ike

As of 7 October, 582 kb/d of Outer Continental Shelf (OCS) crude production and 2.9 bcfd of gas remained shut-in after the passing of Hurricanes Gustav and Ike, representing 45% and 39% respectively of pre-storm production levels.  In addition, we estimate that perhaps 150-200 kb/d of regional shallow water and onshore crude and NGL production may also be offline.

As was the case after Hurricanes Katrina and Rita in 2005, the continued unavailability of offshore pipelines remains a key impediment to restoring production, more so than damaged production facilities per se.  The Minerals Management Service (MMS) reports that 54 of the GOM's total 3,800 production facilities have been destroyed, although these account for only 13 kb/d of oil and 90 mcfd of gas production.  Some 35 platforms have suffered damage requiring three to six months to repair and another 60 platforms will require one to three months recovery, although output rates have not been itemised. MMS also identifies one major crude pipeline system and eight gas transmission systems with confirmed damage, while other pipelines are being inspected and tested. MMS has said that it will consider on a case-by-case basis all requests to reroute supplies by barge or alternative pipelines or to flare gas to enable crude to be routed via undamaged pipelines.

Last month our working assumption was that the bulk of production shuttered by Gustav and Ike could be restored by the end of the first week of October.  This was based in part on reports after Gustav that damage to facilities appeared slight. It is apparent now however that recovery will take longer, even though actual outages in September came in below our preliminary estimate (see graph).  All told, we now assume oil outages averaging 1.4 mb/d in September and 0.6 mb/d in October, reverting to the seasonal five-year average for GOM hurricane stoppages of 266 kb/d by end-October, 165 kb/d in November and 110 kb/d in December.  Cumulative total oil losses therefore amount to 45 mb by end-September and potentially 65 mb by end-October.  The 2009 GOM production forecast has been adjusted to include apparent September 2008 outages, but retains a 2003-2007 average level for October-December 2009 (266 kb/d, 165 kb/d and 110 kb/d respectively). Of course, all of these assumptions are subject to change as the path of supply recovery becomes clearer in coming weeks.

Mexico - August actual:  Crude production of 2.76 mb/d in August was 75 kb/d lower than expected. Output from the Cantarell complex dipped below 1 mb/d, reportedly for the first time in 13 years.  Production is likely to have fallen further in September, in part as Pemex curbed output due to weaker US Gulf refiner demand after the hurricanes, and also due to production and port facility closures due to bad weather closer to home during the month.

The latest government budget has crude output for 2009 at 2.75 mb/d, whereas our own forecast is rather lower at 2.6 mb/d (off from 2.8 mb/d in 2008).  Our 2009 forecast has been trimmed by 60 kb/d to incorporate a slower build in supplies from the Ku-Maloob-Zaap complex, and also to reflect higher average autumn hurricane outages next year.

North Sea

Norway - August provisional; UK - July actual:  Norwegian maintenance levels in the summer appear to have been less heavy than anticipated, while loading schedules for the main production systems for September and October also point to slightly higher output than we had been assuming up to now.  Around 75 kb/d is added to the 3Q08 estimate and 25 kb/d to 4Q08, resulting in a 2008 production average of 2.4 mb/d (including 1.9 mb/d of crude).  Higher condensate supplies in 2008 cushion the impact of declining crude, but production falls by 235 kb/d in 2009, to 2.2 mb/d, as the impact of condensate supply recedes.

Forecast UK production is left largely unchanged compared with last month at 1.55 mb/d in 2008 and 1.39 mb/d in 2009. September saw the start up of Venture Production's 30 kb/d capacity Chestnut field and Maersk Oil's Dumbarton field extension, which will boost capacity by some 15 kb/d to 40 kb/d.  Several new field developments however are insufficient to offset older field decline.


Australia and others - July actual:  The Australian forecast is left largely unchanged, with 2008 production at 585 kb/d (+40 kb/d v 2007), growing to 665 kb/d in 2009. New light/sweet crude and condensate supplies from the country's offshore North West Shelf area underpin growth.  As part of this, the Angel gas/condensate field, which should plateau at 50 kb/d of condensate, started up on 3 October.  This follows the August start of heavy, sweet crude output of some 50 kb/d from the Vincent field.  Supplies in 2009 will be further augmented by 35 kb/d of new production from the Skua field in the Bonaparte Basin further north.

New Zealand too is expected to see a temporary surge in oil output during 2007-2009, with output on track to average 75 kb/d in 2008 and potentially over 100 kb/d in 2009. This is despite the announcement in late August of a two-month delay to expected start-up at the 35 kb/d Maari field, which will be operated by OMV of Austria.

Former Soviet Union (FSU)

Russia - August actual, September provisional:  Our forecast for Russian oil production is trimmed by around 20 kb/d for the 3Q08 to 4Q09 period as both August and September data came in below expectations.  There have been some suggestions that production from new projects (such as Lukoil's Yuzhno-Khylchuya) has been delayed to capture a lower mineral extraction tax coming into force in January.  More generally, the fiscal regime is seen to have deterred much-needed investment in sustaining capacity at older fields, while questions have also been raised by recent turbulence in Russian equity and financial markets.  Share values have fallen particularly sharply in Russia, and the country's key producers such as Gazprom and Rosneft are heavily dependent on debt to finance operations. Anecdotal reports suggest upstream investment is being scaled back further, although it is too early to identify which companies and key fields will feel the impact first.  Despite the advent of lower export taxes from October, and a modestly lower tax burden overall from 2009, we envisage Russian output falling by 60 kb/d this year to 10.0 mb/d and by a further 150 kb/d in 2009 to 9.9 mb/d.

Kazakhstan - August actual:  The forecast for oil production from Kazakhstan is cut by 25 kb/d for the second half of 2008 and by 80 kb/d for 2009.  Annual averages now come in at 1.42 mb/d for 2008 and 1.47 mb/d for 2009.  We have curbed our own expectations for Kazakh supply in line with the now-lower expectations from the government, which envisages growth of only around 50 kb/d for 2009.  This is despite Tengizchevroil's announcement that production capacity at the Tengiz field has been raised by 45% to 540 kb/d after completion of sour gas injection and crude processing units at the field.  However, question marks remain over export routes for higher Tengiz supply, particularly given longstanding delays in finalising expansion of the CPC pipeline.  Nor do scheduled CPC exports for October tend to support such an immediate increase in Tengiz supplies of this magnitude, although marginal extra volumes may be railed to Odessa, or shipped via BTC.

Further reinforcing the potential slow-down in Kazakh growth have been claims from the government that the global credit crisis will likely impede oil and gas sector investment, and that a new mineral extraction tax to be levied from 2009 will apply to 60% of the country's output.

A 480 kb/d monthly reduction to BTC pipeline transits (see above) was the main component of the 810 kb/d drop in total net FSU oil exports seen in August, to 7.8 mb/d.  The fire-related closure of the BTC pipeline lasted three weeks and left August flows averaging 360 kb/d, compared with 840 kb/d in July.  A 25% hike in Russian export duties from 1 August also contributed to lower volumes leaving the FSU, including a 130 kb/d ebb in Primorsk loadings.  Total flows via the Transneft pipeline network (heading for sea terminals or direct to refineries) were down by 210 kb/d on average in August.  FSU product exports were also down by 250 kb/d, including a significant drop of 180 kb/d in gasoil shipments.

With BTC exports back online in the last week of August, exports along this route had been expected to recover in September.  However, a gas leak on the line in September and further technical problems at the offshore Azeri platforms in the Caspian have constrained both actual September, and likely October, exports considerably.  Conversely, Russian exports should increase in October, following the announcement of a 25% cut in export duties from the start of that month, the first cut for 18 months.

Azeri Crude Supplies Disrupted Again

As reported in last month's report, a fire on the Turkish section of the Baku-Tbilisi-Ceyhan (BTC) pipeline on 6 August severely curtailed last month's shipments of Azeri Light crude to world markets, a development compounded from mid-month by the outbreak of hostilities in Georgia.  Attempts to reroute Azeri crude supply were hampered by military activity which curbed rail shipments of crude to Georgia's Black Sea port of Batumi (some 50 kb/d, plus products shipments via Poti and Kulevi) and prevented use of the 150 kb/d Baku-Supsa line.  Indeed, reports in early October suggest that although the Supsa line is operable, it is not yet operating again.  Increased crude shipments were made on the Baku-Novorossiysk pipeline, although only perhaps 40-50 kb/d, while up to 35 kb/d of swap crude went to Neka in northern Iran.  In all, BTC flows are estimated to have averaged 360 kb/d in August compared with 840 kb/d in July, and an August schedule before the outages of 910 kb/d.

Repairs on the BTC pipeline allowed resumed tanker loadings from Ceyhan on 25-26 August, and exports were reported back at pre-outage levels on 3 September.  They later reached 940 kb/d, before a technical problem disrupted flows on BTC again on 12 September.  Separately, a gas leak on 17 September affecting the Central and West Azeri fields in the Caspian saw crude supplies to BTC again severely curtailed. BP on 3 October announced that it will not be able to restore offshore production until the end of October, restricting production to 300 kb/d, before a phased increase back to 900 kb/d.  As a result, the company plans to introduce limited volumes of Tengiz crude from neighbouring Kazakhstan into the now-reinstated BTC line from the second half of October, with arrival at Ceyhan by mid-November.

The impact of these incidents in and around Azerbaijan on our non-OPEC supply forecasts has been highly significant.  The forecast for Azeri production for 3Q08 has been cut from 1.1 mb/d to 0.8 mb/d since report dated 10 July 2008 as a result (-280 kb/d on average), with the 4Q08 projection curbed from 1.2 mb/d to 0.9 mb/d (-335 kb/d).  Put another way, these stoppages have cut 2008 crude supply by over 55 mb, similar in magnitude to the losses incurred as a result of Hurricanes Gustav and Ike in the US.

OECD stocks


  • OECD stocks fell by 5.1 mb in August to 2,645 mb, as large draws in European crude and US motor gasoline were only partially offset by builds in Pacific distillates and North American 'Other Products'.
  • US motor gasoline stocks fell by 17.6 mb in August, a much sharper drop than normally seen on a temporary firming of demand.  Correspondingly, US distillates drew counterseasonally, by 2.4 mb.  As a result, stock cover in both products was below the five-year range as hurricanes Gustav and Ike approached.  Weekly data showed that hurricane-related disruptions drove further product draws of around 26 mb in September.  Gasoline stocks temporarily fell to their lowest level for decades before a late-month rebound while distillate stocks were left very tight ahead of the winter.
  • A large 14 mb August draw in European crude inventories reversed the build seen in July and reduced levels to seasonal averages once again.  Lower Caspian exports and field maintenance in the North Sea reduced crude availability in the region in August, with French and UK crude stocks dropping by 3.7 mb and 2.2 mb respectively.
  • Strong August builds in OECD North American 'other products' (of 10.1 mb) and Pacific distillates (of 9.4 mb on weaker demand) offset some of the decreases elsewhere.  OECD Pacific product stocks are now back near the five-year seasonal average cover after three months below.  Preliminary Japanese data reflect further product builds in September.
  • OECD stock cover in terms of forward demand fell by 0.7 days in August, to 54.9 days.  Despite the monthly drop, this is a high level of forward demand cover, significantly inflated by the effect of a lower OECD demand prognosis.  Preliminary data incorporating the effects of the US hurricanes in September plus Japanese and Euroilstock data imply a sharp drop of 25.1 mb in OECD stocks, which would erode cover to 53.6 days.

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

By end-August, total commercial OECD oil stocks were at 2,645 mb or 54.9 days cover.  This was above the end-August absolute average for the period 2003-07 (of 2,634 mb) as well as the corresponding average for days of forward demand cover (53.4 days).

Naturally, another downward revision to our OECD demand prognosis in this month's report amplified stock cover (derived by dividing stocks by average daily demand for the next three months).  In fact, cover reached as high as 55.6 days in July.  Even after a notable monthly drop of 0.7 days in August, aggregate cover for the OECD is still above the five-year range.

However, this is not uniformly the case for all products across all regions.  Ample stock cover for fuel oil, a structurally long product in a global context, distorts the picture by exaggerating aggregate product cover.  In addition, a preliminary Canadian crude stock number for July may be subject to downward revisions later and could be currently inflating North American crude cover artificially.  Conversely, motor gasoline in North America and distillates in general remain tight in terms of forward demand cover.

Furthermore, stockdraws as a direct result of US hurricanes appear to have driven US product cover dramatically lower and total OECD stock cover could have decreased by 1.3 days by the end of September.  Euroilstock data also suggests that alongside some refinery maintenance, the hurricanes may have downwardly influenced European product inventory, provisionally off by 9.6 mb in September, with arbitrage cargoes moving across the Atlantic.  That distillate cracks remain above $15/bbl in both markets is a sign that distillates could be the major concern as winter approaches, although supposed lower Chinese buying of distillates after the Olympics may have an easing effect in a global context.

Revisions to OECD closing stocks for July amounted to 4.4 mb.  The largest upward corrections were to North American crude (+9.2 mb, led by the provisional reporting of a surprising Canadian build) and European distillates (+5.0 mb).  These countered major downward adjustments to European crude of 5.1 mb, as new data showed draws in the Czech Republic (on lower Russian deliveries) and Greece (-2.4 mb) while the UK revised down inventory by 5.0 mb.  Pacific closing crude stocks for July were also downgraded, by 6.1 mb, after a revision of -7.4 mb for Japan.

OECD Industry Stock Changes in August 2008

OECD North America

Before Hurricanes Gustav and Ike struck the US Gulf, a large product draw had eroded OECD North American stocks by 4.5 mb in August to 1,257 mb, but they remained just above the five-year average.

In the US, the August gasoline stockdraw of 17.6 mb was 10 mb larger than seasonal norms while distillates defied seasonality to fall by 2.4 mb to the bottom of the five-year absolute range.  These draws were a result of a monthly dip in refinery throughputs combined with a late-summer firming in demand (possibly related to an easing in prices at the pump).  They left stocks tight in the run-up to September hurricanes (see 'Low End-August Stocks Add to Concern over Hurricane Impact on US Inventory').  By contrast, US stocks of 'other products' saw a healthy increase of 9.7 mb, much of which was prompted by a seasonal build in propane stocks.  Furthermore, an August bounce of 1.9 mb in distillate inventories boosted Mexican product stocks.

Unusually, crude stocks in North America improved in August, as a shallow Mexican draw of 1.9 mb was more than outpaced by the continued recovery in US crude inventories from a deep second quarter draw.  One bumper mid-month week of almost 11 mb/d of crude imports into the US contributed to the August build of 4.5 mb.  However, the reporting of an 8.2 mb July build in Canada took stocks to a level suspiciously close to those recorded before last month's round of substantial downward revisions.  This suggests that there remains an issue with Canadian stock reporting and that regional crude stocks levels may soon face more downward corrections.

Low End-August Stocks Add to Concern over Hurricane Impact on US Inventory

Whether as a result of precautionary closures or actual storm damage, the disruption caused to the US oil supply chain by the passing of this year's malevolent hurricanes, Gustav and Ike, was massive.  This was no surprise with Ike's epicentre passing over Houston, the focus of onshore oil infrastructure in the US Gulf.  Weekly EIA data suggest that September product stockdraws were substantial and left inventory at multi-decade lows.  However, significant August decreases in US product stocks meant that inventory was already tight before the disruption.

Following a monthly dip in refinery throughputs and a firming in gasoline demand, OECD data showed a hefty 17.6 mb August draw in US motor gasoline stocks, to 190.7 mb or 21.3 days of forward demand cover.  This was their lowest end-August absolute level for four years and below the comparative pre-Katrina 2005 level of 193.7 mb.  From this low position, weekly EIA data suggests that hurricane disruption massively reduced refinery activity, prompting a further drop in gasoline stocks to below 179 mb by the third week of September.  This was their lowest value since August 1967 (excepting pre-1990 intra-month levels) and would have represented multi-decade low forward demand cover of around 19.5 days.

With the focus of infrastructural closures near Houston, in Ike's direct path, PADD 3 (US Gulf) gasoline stocks fell to under 55 mb by mid-September, also lower than the post-Katrina minimum.  Furthermore, disruption to inland pipeline flows was much worse than in 2005 as many lines begin in the Houston area, such as the Colonial pipeline that takes products from the Gulf to the US East coast.  PADD 1 gasoline stocks had dropped below 44 mb in the week ending 26 September, significantly lower than the 2005 trough of 49 mb.  However, by the end of September, a rebound had already been observed in US gasoline stocks as they finished at almost 187 mb.

US distillate stocks bucked the seasonal August build of around 7.0 mb, instead decreasing by 2.4 mb to 173 mb - the bottom of their five-year seasonal range, with demand recovering and exports at all-time highs.  Hurricane disruption prompted a further drop to below 160 mb, including a steep draw in jet fuel stocks, with distillate inventory still in decline through the end of September.  US crude stocks had risen counter-seasonally in August and the hurricane-related drop in refinery throughputs offset the effect of output losses to a large extent, leaving  monthly draws in commercial crude inventory limited to just 3 mb by the end of September.

With gasoline stocks already showing a late-September rise in line with recovering refinery activity, some increased gasoline imports and the driving season now behind us, it could well be that the comparative dearth of US distillate stocks turns out to be at least of equal concern to markets as the headline-grabbing gasoline draws.

OECD Europe

A large August crude draw of 14.0 mb in OECD Europe eroded July gains, while a pre-autumn build in product inventories of 5.4 mb was conspicuously mild.  Combined with a 0.9 mb draw in gas liquids, total OECD European stocks saw a counterseasonal August draw of 9.5 mb, to 957 mb.

Regional crude inventories had risen by 9.2 mb in July, a build adjusted down by 5.1 mb in the latest data submissions (including July data from Greece and the Czech Republic which reflected crude draws, the latter due to lower Russian deliveries).  The subsequent 14 mb decrease in August was influenced by disruptions to Azeri crude exports via the BTC pipeline and lower North Sea production.  UK end-July closing stocks were revised down by 5.0 mb, to 33.9 mb, on slower July production, before falling by 2.2 mb in August in conjunction with the usual August output drop associated with field maintenance (which normally prompts a monthly crude draw of around 3 mb).  The latest data also show a draw of 3.7 mb in August French crude stocks, possibly allied to a slight firming of refinery runs but also lower imports (notably of Caspian and North Sea grades).  Lower crude cargo availability may have also been instrumental in a 1.5 mb August draw in Italian crude inventory.

OECD European product stocks saw a very mild August build of just 5.4 mb, compared with the 15 mb increase usually seen in advance of September and October refinery maintenance.  A counterseasonal dip in refinery activity meant that distillates built slowly, by 6.3 mb, while fuel oil and 'other products' drew counterseasonally.  Fuel oil markets have tightened on a global basis over the summer, related to increased demand in the Middle East, which curbed exports.  Regional motor gasoline inventory increased by 1.4 mb, boosting cover ahead of seasonal norms, which left them in a good position before US hurricane disruption flung arbitrages wide open to send material across the Atlantic in September.  These flows were reflected in a 2.7 mb drift in European gasoline inventory in September as recorded by Euroilstock and a concurrent decline of almost 3 mb in ARA independent stocks of gasoline.  Euroilstock data also indicates further impending product tightness with a steep 7.5 mb distillate drop in September.

OECD Pacific

A sizeable 16.1 mb increase in product inventory on the back of weak demand pushed OECD Pacific oil stocks into a significant counterseasonal build of 8.9 mb in August.  Forward demand cover fell in line with seasonality, to 51.4 days, however.

Regional distillate stocks rose by 9.4 mb, including a colossal 10.9 mb increment in Japan, where distillate demand was apparently down 17% year-on-year.  While August seasonally sees the largest monthly builds in Japanese distillate stocks, this was the biggest monthly build (in any Japanese product) in over 20 years.  However, weekly PAJ data suggest that a cut in refinery runs contributed to a subsequent hasty and substantial erosion of gasoil stocks in September.  Korean distillate stocks fell seasonally, by 1.5 mb, but this took them below the five-year range for the first time since January 2006.  Healthy regional builds in motor gasoline, residual fuel oil and 'other products' stocks also contributed to higher product inventory by end-August.

Pacific crude stocks decreased by 7.3 mb in August, in line with seasonal trends as crude runs hit their summer peak and Japanese imports dipped by 200 kb/d (notably lower from UAE, Saudi Arabia and Qatar).  They remain well adrift of the five-year range, not helped by a downward revision of 7.4 mb to closing Japanese crude stock levels in July.

Recent Developments in Singapore Stocks

If independent stocks are a good barometer of regional product tightness at the margin, Singapore's implied that Asian light distillates and fuel oil markets tightened in September.  Stocks of those products respectively drew by 2.1 mb and 2.7 mb.  Fuel oil shortages have been caused by lower Middle Eastern exports and evidenced by narrowing negative fuel oil cracks.  Meanwhile global gasoline markets tightened considerably following hurricanes in the US Gulf.  By contrast, middle distillate stocks grew 1.3 mb, perhaps eased by lower Chinese imports since the Olympics, as has been widely reported.



  • Oil prices declined in September and early October, as demand growth weakened further, offsetting the impact of hurricane-related outages and lower OPEC output.  US crude futures fell from around $100/bbl in early September to below $90 at the time of writing.
  • However, prices remain very volatile, with unprecedented large daily swings.  On 22 September, first-month WTI futures rose around $25/bbl and prices closed about $15/bbl higher.  However, this was linked to the October contract expiry and short covering rather than more fundamental factors, and the spike was not reflected in other delivery months, nor in other crude and product futures.
  • Product prices fell, but strengthened relative to crude, with gasoline on the US Gulf Coast briefly spiking in mid-September after Hurricane Ike's landfall.  To some extent this boosted cracks in other regions, with Northwest Europe reportedly sending a flurry of gasoline cargoes in response.  Distillate premia remain high around $25/bbl and fuel oil discounts to crude are negligible.  As a result, refining margins rose across the board.
  • Clean charter rates in the Atlantic were boosted by the potential for increased trade of gasoline from Europe to the hurricane-disrupted US (notably the Gulf Coast), and remained high in September before fading in early October.  Dirty tanker rates firmed as charterers began to cover long-haul transportation needs for the post-maintenance period, when refinery runs are ramped up.


Despite a knockout blow to US Gulf crude and refinery production capacity delivered by Hurricanes Gustav and Ike, as well as lower OPEC production and tighter stocks, concerns over demand weakness due to high oil prices and the ongoing financial and now fully-blown economic crisis prevailed.  As a result, crude futures prices ultimately fell from around $100/bbl at the release of the last report to currently below $90/bbl.

Prices were characterised by a hitherto unseen degree of volatility, reflecting strong uncertainty.  Several days saw price swings in the range of $5-10/bbl, though even these moves were dwarfed by the dramatic spike of 22 September, when first-month NYMEX WTI briefly rose $25/bbl to close around $15/bbl higher than the previous day.  Amid claims of market manipulation, this was at least partly due to the contract's expiry that day and a scramble to buy oil by those caught out holding a short position.  Some have even argued it was Midwestern refiners who, needing oil, found themselves compelled to use the contract's expiry to buy crude delivered in Cushing, Oklahoma. In October  Other futures prices, including subsequent delivery months for WTI, ICE Brent and NYMEX product prices, did not see nearly such strong moves, implying that factors specific to the NYMEX Light Sweet Crude Oil contract determined its moves.

Arguably, it is the current financial meltdown in the banking sector, concurrent losses on Wall Street and other stock exchanges, and concerns about a fully-blown economic recession that are causing havoc in oil markets with perceptions of impending weakness for now trumping supply outages in driving prices.  Regarding the latter, the most notable impact was that of Hurricanes Gustav and Ike, which forced the shut-in of around 1.4 mb/d of crude production capacity and 2.7 mb/d of refinery capacity respectively on average in the US Gulf in September.  The full extent of damage is not yet known, but currently some 800 kb/d of crude output and 700 kb/d of refining capacity remain shut in.  Ultimately, the IEA's assessment was that market flexibility would be sufficient to cope with the outages without a release of emergency stocks, notwithstanding SPR loans to refiners short of crude.

Nonetheless, the impact on inventories was pronounced, with US gasoline stocks now down well below their respective five-year range and with localised shortages causing brief gasoline price spikes on the US Gulf Coast.  Furthermore, crude outages in Azerbaijan and elsewhere compounded lower output from OPEC, though the latter appeared to result more from accident than design, despite the group's 9 September pledge to adhere to quotas (and by inference, to reduce output).

All this has been overwhelmed, however, by concerns for the health of the global economy.  Emanating from the credit crunch, a fully-blown credit and liquidity crisis has toppled several major banks and caused OECD and other governments to intervene with bail-out packages.  US efforts to shore up its economy had an especially marked impact on oil price volatility, at least until a $700 billion package was agreed by Congress and signed into law by President Bush on 3 October, with prices see-sawing in the previous days.  It remains to be seen what the impact of the bail-out measures is and whether it proves successful in stemming the economic downward slide.

Ultimately, two worries are behind the current economic crisis.  Firstly, while OECD countries are already slowing or even contracting, it remains to be seen whether there is any knock-on effect on other emerging economies, which have largely underpinned global oil demand growth in the past few years - notably China.  Secondly, a lack of credit or tighter restrictions on credit is curbing liquidity in oil markets, making trading and price discovery more difficult - hence the more volatile price swings.  Several investment banks, which have now been taken over and were previously active in commodity markets, may have been forced to liquidate positions, as reflected in a further slide in WTI futures open interest as reported by the CFTC.  And others may simply have limited their oil exposure, given current uncertainty.

CFTC Report on Commodity Swap Dealers and Index Traders

On 11 September 2008, the US Commodity Futures Trading Commission (CFTC) released its findings on the possible impact of commodity swap dealers and index traders on commodity prices (Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, available at www.cftc.gov).  The CFTC was able to examine data not normally publicly available through its weekly Commitment of Trader (CoT) reports after issuing a 'special call' for data.  This comes against the background of intense discussion about the reasons for recent, volatile oil price movements and specifically an ongoing debate on whether these can be attributed to market fundamentals or so-called speculation.

For this report, the CFTC looked at the period between 31 December 2007 and 30 June 2008, aiming to establish the precise amount of money invested by commodity index tracking funds.  It has been argued that an increased volume of money invested in such funds has in itself contributed to high oil and other commodity prices.  The CFTC's finding is that the total value of index money invested in WTI futures rose from $39 billion at the end of 2007 to $51 billion by end-June 2008 - and this in a period in which the first-month futures contract rose from $96/bbl to $140/bbl (daily closing prices).

However, while the total value of investment rose in this period, the CFTC finds no reason to conclude this is in any way a driver of the rise in prices.  Crucially, it states that:

  • The value of index fund money held in WTI futures rose due to higher oil prices in this period, rather than by virtue of increased investment;
  • In fact, the total number of contract 'futures equivalents' held decreased from 408,000 to 363,000 - in other words index funds reduced their position in WTI futures, even as their value increased due to higher oil prices;
  • A close look at individual transactions and price moves shows that significant fund investment or disinvestment decisions are generally made in response to oil price moves, rather than vice versa - i.e. there is no reason to assume any causality from investment to prices;
  • In several other commodities, periods of increased money flows into commodity indices were concurrent with a fall in price.

Overall, the CFTC thus implicitly concludes that market fundamentals rather than 'speculation' drive oil prices, at least for the period examined.  This reinforces its conclusion from a previous report (Interim Report on Crude Oil, 22 July 2008), in which the Commission also looked at fundamental market drivers.

However, the CFTC also found that there were several occasions on which - had all trading activity been on-exchange (i.e. rather than in the over-the-counter or OTC market), players would have exceeded speculative position limits.  It concludes that more and better data will be needed to make any final conclusions on whether speculation or manipulation is present in the market.  Consequently the CFTC makes the following specific recommendations:

1.     Swap dealers should be removed from the CoT's current 'commercial' categorisation and allocated their own classification for reporting purposes;

2.     A new supplemental report on OTC swap dealer activity should be developed and published by the CFTC;

3.     A new CFTC Office of Data Collection ought to be dedicated to collecting, analysing and publishing CoT data;

4.     Large traders should disclose more detailed data to more accurately assess the type of trading activity;

5.     Certain specific hedge exemptions should be reviewed;

6.     To undertake this oversight, CFTC will require more staff and resources;

7.     Clearing of OTC transactions should be centralised;

8.     The independence of swap dealer commodity research should be reviewed.

The CFTC has also called for its oversight to be extended to foreign-based futures contracts, such as the ICE WTI contract based in London.  To this end, the CFTC will co-chair an international task force to study oversight of commodity markets with the UK's Financial Services Authority (FSA).

Spot Crude Oil Prices

Spot crude markets were not as volatile as futures markets in September and early October but nonetheless reflected the impact of Hurricanes Gustav and Ike, with prices spiking in their aftermath.  This was most pronounced in the US, where WTI Cushing rose from just over $90/bbl in mid-September to $114 on 22 September, the day the futures contract expired.  Spot WTI also rose to premia to many other similar crudes on the outages, for example trading more than $5/bbl over Dated Brent.  But gasoline-rich LLS also gained versus WTI in the scramble for cargoes, briefly hitting a premium of $6/bbl.  Meanwhile, Alaskan ANS dropped to a discount of around $4/bbl to WTI, as some cargoes destined for the Gulf Coast were redirected to the West Coast if delivery was not possible.

North Sea crudes fared quite well relative to other light sweets, taking strength from the outages in the US Gulf and Azerbaijan, but also ongoing problems in Nigeria.  Urals saw its discount to Dated Brent widen again on expectations of higher volumes available in October, after export duties were cut.  Loading schedules imply around 125 kb/d more crude in October with an increase in the Black Sea (but a dip in the Baltic).  But Urals did appear to benefit from US Gulf outages (and still-strong fuel oil), rising to a premium to Mars.  It also strengthened vis-à-vis Oman.

Asian crude buyers may have benefited from strong volatility in the Brent-Dubai spread, which narrowed in early September and again later in the month.  But regional marker grade Tapis weakened versus Nigerian and Mediterranean light sweets.  Nonetheless, India reportedly bought a record 550 kb/d of West African crude for October delivery.  Freight rates were somewhat lower, Indian diesel demand is strong, and reportedly, some lighter grades are being fed into the new Jamnagar refinery ahead of start-up.  China on the other hand, reportedly bought only around 600 kb/d of West African crude for October, compared with average volumes above 800 kb/d so far this year.

Refining Margins

Refining margins increased across the board in September as nearly all product crack spreads increased.  On the US Gulf coast, margins briefly shot up to $45-70/bbl mid-month as gasoline spiked and US refinery utilisation fell to its lowest in years.  Margins have since fallen again, but remain in a healthy $5-10/bbl band.  On the US West Coast, margins improved sharply and, in early October, were on average higher than in the US Gulf.

European refining margins improved strongly, with hydroskimming spreads moving into positive territory for the first time since May last year (for the monthly average).  Gasoil 0.1% and ULSD 10 ppm diesel premia in Northwest Europe were especially strong, benefiting simple Brent margins in particular.  Mediterranean refining margins were slightly weaker, where diesel cracks were lower.  In Singapore, margins were the weakest of the three regions, despite rising around $5/bbl month-on-month.  The Asian distillate market in particular is distinctly weaker, as demand growth slows, new refining capacity comes online and China has temporarily abandoned imports.  Nonetheless,  Dubai hydroskimming moved into positive territory in mid-September.  Relatively high Tapis prices kept its refining margins negative, both for hydroskimming and cracking.

Spot Product Prices

Outright product prices on average fell in September and early October, though in crack spread terms mostly made gains.  Unsurprisingly, US Gulf Coast (and to a lesser extent, New York Harbor) gasoline crack spreads shot up post-Ike, with Premium Unleaded in the former briefly hitting nearly $100/bbl in mid-September.  But despite news of regional product shortages and queues at filling stations in the US Southeast, and a large swathe of US refining capacity offline, crack spreads rapidly retreated.  Northwest European gasoline margins benefited too, with a host of cargoes reportedly fixed transatlantic to fill the gap (though the precise extent of this is still unknown and is not yet clearly reflected in either trade volumes or clean freight rates).  Certainly, independent gasoline product stocks held in the Amsterdam-Rotterdam-Antwerp (ARA) region fell sharply from mid-September.

To some extent, gasoline markets were calmed by the fact that US demand - especially for gasoline - is falling in response to high prices and the general economic downturn, and by the potential for OECD refiners outside the US Gulf to boost runs.  European and Asian markets' ability to export product to the US contributed, especially with China returning to gasoline net-exporter status in September.  In addition, the seasonal switch to winter-specification grade helps, as it is easier to produce.  Meanwhile, naphtha cracks plummeted even further and remain negative in all markets amid a downturn in demand from the petrochemical sector.  The latter is suffering a global slump but also finding new potential feedstock in increased NGL output.

Distillate crack spreads were flat in September and early October (excepting jet in the US), but remain high, especially relative to gasoline.  Markets tightened again after the relaxation seen in the summer, when higher refining throughputs and distillate yields combined with receding demand from previous pockets of fuel substitution.  US refinery outages have stemmed exports to Europe, though to some extent this has been compensated for by fixings from Asia and the Middle East.  European consumers appear to have re-entered the heating oil market, perhaps also stocking up while retail prices are slightly lower.  In Asia, however, distillate demand is slightly weaker, with independent distillate stocks in Singapore rising around 50% above their five-year average at end-September.  China is apparently again skipping distillate imports in October, while Indonesia and Vietnam have announced lower regular purchases.

Fuel oil discounts to benchmark crudes remained steady and very narrow.  Markets remain tight after lower-than-average exports from the Middle East, where domestic consumption for power generation is high.  This is constraining the flow of fuel oil to the Far East, as seen in declining Singapore residual stocks.  Natural gas outages in the US may also have hiked interest in fuel oil as an alternative feedstock.

End-User Product Prices in September

September end-user product prices decreased in all surveyed IEA member countries, in US dollars, ex-tax, except gasoline prices in Canada (which rose by 1.4%).  On average, gasoline prices dropped by 4.5% with the strongest decreases in the UK (-7.1%) and Japan (-6.4%).  Price spikes following Hurricanes Gustav and Ike slowed the decline of the average gasoline price in the US which decreased by 1.5% to $3.72/gallon ($0.98/litre) in September.  Meanwhile consumers in Japan paid ¥174/litre ($1.63/litre), in the UK £1.12/litre ($2.01/litre), and in Europe from €1.17/litre in Spain ($1.68/litre) to €1.45/litre in Germany ($2.08/litre).  Diesel prices on average dropped by 6.9%, heating oil prices by 6.2% and fuel oil prices by 10.1%.  Compared with September 2007, end-user product prices were 41% above levels of a year ago.


Clean charter rates in the Atlantic remained high in September, boosted by the potential for increased trade of gasoline from Europe to the hurricane-disrupted US.  At the same time, dirty tanker rates firmed as charterers began to cover long-haul transportation needs for the post-maintenance November/December period when refinery runs are ramped up.

Dirty tanker rates firmed slightly in September.  VLCC spot charter rates on benchmark routes from the Middle East Gulf to Japan increased from $18/tonne in late August to $27/tonne one month later.  Support stemmed from renewed westbound chartering by Vela, while some October-loadings for long-haul voyages now correspond to arrivals in November, beyond autumn maintenance and a time when refiners are likely to be ramping up runs for the winter.  There have been widespread reports of high volumes of West African crude purchases by Indian refiners, some for processing at the new Jamnagar unit.  Despite lower Chinese purchases for October, this left Asian aggregate interest in West Africa exports at high levels, boosting long-haul vessel demand and broadly supporting the dirty sector.

Chartering rates for Suezmax vessels trading between West Africa and the US Atlantic Coast were fairly steady around the$25/tonne mark, as the supportive effect of delays at some Nigerian terminals was offset by limited US short-haul interest with falling gasoline cracks and refinery maintenance still underway.  Ongoing problems in the Caspian could restrict Mediterranean dirty vessel demand in October, while refinery maintenance continues to weigh on short-haul Aframax rates in North Europe (around $10/tonne for much of September).  The post-hurricane recovery of US Gulf port infrastructure also added downward pressure to Caribbean Aframax rates.

Similar to transatlantic (so-called MR2) clean tanker rates in September (see 'Incremental Transatlantic Gasoline Mainly Heading to the US Gulf Coast'), rates on other clean routes were fairly flat but at inflated levels in September.  Further increased competition for clean transportation is a distinct possibility with US diesel exports drying up, necessitating imports from elsewhere (possibly longer-haul, with anecdotes of incremental Korean diesel heading for Europe).  However, reports suggest that Atlantic clean rates weakened in the first week of October.

Incremental Transatlantic Gasoline Mainly Heading to the US Gulf Coast

After rumours of large volumes of gasoline heading to the US from Europe in September, prompted by hurricane disruptions in the US Gulf, there has been initial evidence that at least some of this extra trade did occur.  Gasoline imports into PADD 1 in September were around 100 kb/d higher than the August average of 810 kb/d.  PADD 3 gasoline imports averaged 260 kb/d, up around 140 kb/d on July and around 230 kb/d compared with June.  The majority of gasoline imports into both regions generally emanate from the other side of the Atlantic (Europe, Russia or the Mediterranean).  Although 35 kmt clean tanker rates from UK continent to US Atlantic coast were little changed in September at around $36/tonne, this is a seasonally high level and certainly as high as post-Katrina levels.  These heights were achieved following a rise of over $12/tonne in early August.  However, early October reports suggest that these rates may have faded as the flow of arbitrage cargoes dried up.



  • Global crude throughput is forecast to average 74.9 mb/d during 4Q08, 0.8 mb/d lower than forecast in last month's report.  Weaker demand, higher maintenance and hurricane-related disruptions and reports of economic run cuts, particularly in Asia, have all contributed to the reduction.  Year-on-year growth remains firmly rooted in the non-OECD regions, notably the FSU, China and the Middle East.
  • The 3Q08 global crude throughput estimate is revised down by 0.8 mb/d to 74.1 mb/d, largely on the back of a greater impact from Hurricane Ike on the US refining industry.  This follows weaker-than-estimated European and Chinese crude throughput in August and lower-than-forecast Japanese, European and US crude runs in September.  September crude throughput is particularly hard hit, due to Hurricane Ike, pushing US throughputs to their lowest monthly level in more than fifteen years.

  • US hurricane-related disruption caused 33 refineries to shut down or reduce crude runs during September.  There was significant damage to refineries around Houston and Port Arthur.  Weekly data show crude runs on the US Gulf Coast fell to 3.5 mb/d, their lowest level since September 2005, after Hurricane Rita, and for the US as a whole, the lowest weekly level since 1986.  Recovery has been slower than anticipated, with offline capacity in September averaging 2.7 mb/d and the potential for it to average 400 kb/d in October.
  • OECD refinery yields for diesel/gasoil were flat in July, while jet/kerosene increased, reflecting the strength in jet/kerosene cracks that emerged during the month.  Fuel oil yields fell to record lows for the OECD, driven by new upgrading capacity in Korea and increased use of discretionary run cuts to limit unprofitable hydroskimming crude throughput.

Global Refinery Throughput

Preliminary data for September indicate that global crude throughput averaged 71.8 mb/d, some 2.2 mb/d below last month's forecast of 74.0 mb/d.  Much of the decline was driven by the greater-than-anticipated impact of Hurricanes Gustav and Ike on the US refining industry, while Japanese refiners cited weak demand in August and September as forcing them to scale back planned crude throughput levels.  OECD September crude throughput is assessed at 35.5 mb/d, its lowest level since 1995.  Furthermore, reports of lower Chinese crude runs by Sinopec and a prolonged outage in the Ukraine contributed to a reduction in non-OECD crude throughput for September of around 0.3 mb/d. Nevertheless, annual global crude throughput growth of 0.7 mb/d in 4Q08 remains firmly rooted in the non-OECD regions.

At the time of writing, unconfirmed reports indicate that the liquidity problems that have beset financial markets in recent weeks are affecting refinery operations in several ways.  Firstly, refiners who rely on letters of credit to facilitate product exports are finding these increasingly difficult to obtain, and at ever-higher interest rates, reducing their ability to maximise the value of their production.  Secondly, counterparty risk is also limiting some trading companies' ability to deal with other companies, similarly resulting in reduced levels of trade.  Lastly, some IOCs have reportedly taken the option to process crude cargoes within their own system, despite the crude being sub-optimal, in terms of margin and yields, in order to minimise third-party credit exposures.  Were such practices to become widespread it could potentially lead to some refiners cutting runs for financial reasons, despite apparently healthy product margins and demand for products.

October global crude runs are forecast to recover from September's low level, despite increased maintenance work in some regions, as US refiners return to pre-hurricane utilisation rates.  Crude throughput is forecast to increase by 1.7 mb/d month-on-month, to an average of 73.5 mb/d, driven by the US recovery.  Nevertheless, this represents a downward revision to our forecast of 1.2 mb/d, as higher US hurricane-related outages and maintenance in Europe depress runs.  The balance of 4Q08 is also revised down on the back of lower FSU and Chinese crude runs, the latter in part due to the delayed start-up of CNOOC's Huizhou refinery, which we had previously included in our December forecast.

OECD 4Q08 crude throughput is forecast to average 38.4 mb/d as refiners recover from autumn maintenance and US hurricanes, rising from 37.1 mb/d during October to a seasonal peak of 39.2 mb/d by December.  A significant level of uncertainty is attached to this forecast, given the continued weak demand data being reported in OECD regions, raising the prospect of further run cuts, notably in Japan and Korea, but also possibly in Europe.

OECD 3Q08 crude throughput averaged 37.5 mb/d, 0.6 mb/d lower than estimated in last month's report, on the back of weaker-than-expected US, European and Japanese September crude runs.  The assumption of a bounce in September European crude throughput has been removed from our estimates, following preliminary data from Euroilstock, despite tighter Atlantic Basin middle distillate markets and the stronger margin environment in Europe.  Consequently, OECD average 3Q08 crude throughput is now estimated to have been 1.9 mb/d below the five-year average and 1.7 mb/d below 3Q07 average levels.

OECD North America crude throughput is forecast to increase strongly in October, as refineries recover from the September US hurricanes. Further increases in crude throughput are expected over the course of 4Q08 as refiners gear up for the peak winter heating oil demand season.  Some refiners have reported process upsets during the restart following the hurricanes but, with the exception of ExxonMobil's Beaumont refinery, the industry appears to have coped with the challenges faced during September.  Fourth-quarter maintenance is likely to allow refiners the opportunity to adjust operational settings on crude towers to adjust their production towards higher middle distillate yields, given the sustained premium that exists between diesel and gasoline prices in US markets, subject to their ability to desulphurise any increased middle distillate production.

US refinery crude throughput averaged 12.8 mb/d in September, according to provisional weekly data, and follows a seasonally weak August level of crude runs.  Crude runs fell to a level comparable to that seen during the September 2005 hurricane disruption of Gulf Coast refineries, although the timing of last month's hurricanes concentrates the impact within the month of September.  4Q08 refinery runs are forecast to continue the recovery already witnessed, given the low product stock levels, despite the recent deterioration in gasoline cracks on the US Gulf Coast, which may yet lead to renewed economic run cuts.

OECD Pacific crude runs increased slightly in August as Japanese refiners completed maintenance.  However, rising domestic product stocks during the month, reportedly on the back of weak demand, prompted some refiners to reduce planned rates for September.  Korean refiners were also reported to be cutting September crude runs, due to the weak margin environment, with utilisation of less complex capacity at SK Incheon and Hyundai Oilbank particularly affected.  The margin environment has also been under pressure from the weaker Korean currency, which has depreciated by 30% against the US dollar in the last three months, forcing refiner to raise domestic prices to compensate.

Weekly Japanese data point to continued weakness in early October, with utilisation rates falling below the five-year range for the time of year.  Forecast 4Q08 crude throughput is unchanged from last month's report, but the risks are clearly to the downside given the weak demand environment and impact of the liquidity crisis on companies' ability to trade with each other.

OECD Europe crude throughput in August dipped counterseasonally, with Italian crude throughput continuing to register large year-on-year declines.  Weakness in Mediterranean hydroskimming margins and regional demand appear to have constrained European runs during the month.  Improved activity levels during September now look less likely than assessed last month, despite the strengthening of margins and the call for transatlantic gasoline shipments.  The recent weakness in gasoline cracks, in early October, partly on a closed US arbitrage, raises the prospect of further weakness in European runs during the fourth quarter.  In addition, the heavy maintenance programme during October, as refiners complete upgrades to desulphurisation equipment ahead of next January's tighter European sulphur limits in diesel, will also depress crude throughput levels during 4Q08.

US Gulf Coast Refineries - After the Storm

Hurricanes Gustav and Ike are estimated to have reduced US product supply by around 84 mb during September, with a further 13 mb likely to be lost in October.  At the time of writing only ExxonMobil's 348 kb/d Beaumont refinery was yet to restart following the hurricane-related disruption. This significantly higher level of lost product supply, compared with our assessment in last month's report, reflects both the Houston landfall that Ike made, rather than our assumption of near Corpus Christi and the longer duration to some the refinery disruptions.

Disruption from Hurricane Ike centred on the Port Arthur, Houston and Lake Charles refining clusters, but chiefly on the former.  At its peak, we estimate 4.8 mb/d of crude throughput was lost, either because of capacity that was shut down or running at reduced rates.  Average offline crude processing for the month is assessed at 2.7 mb/d, with the prospect of a further 0.4 mb/d in October.  The recovery following Hurricane Gustav took longer than we had anticipated for the refineries around New Orleans, while Port Arthur refineries have generally taken much longer than forecast to restart following Hurricane Ike.

As expected, the availability of electricity supplies proved to be crucial for some refineries to complete a safe restart of operations, while the more seriously damaged plants reported lost jetties and serious flooding affecting some process units.  Several refineries were able to restart, but were subsequently shut down over process unit safety concerns, highlighting the complex nature of modern refineries.

Predictably, gasoline prices/cracks spiked on concerns of lack of physical supply.  However, these price movements proved short-lived and benchmark traded prices quickly moved back toward pre-hurricane levels.  The potential availability of significant gasoline volumes from Europe and Asia helped offset the reduced supply in the US.  Perhaps more importantly, weak gasoline demand seen over the summer period and increased use of ethanol have reduced the need for US Gulf Coast refiners to move product to the Atlantic Coast.  Monthly EIA data on gasoline movements from PADD 3 to PADDs 1 and 2 show declines of  12-13% during the second quarter, when compared with the five-year average and are at their lowest level since 1994 and 2000 respectively, highlighting the reduced call on Gulf Coast capacity.  The ability of the Atlantic Basin refining system to cope with this level of disruption may provide an insight into the increasing degree of excess gasoline capacity currently available.

Non-OECD crude throughput continues to post healthy year-on-year growth of around 1.1 mb/d in 3Q08 and 4Q08, in contrast to the weakness observed in the OECD regions.  Notable regional contributors to this increase include China, the Middle East and the FSU.  Indian crude runs remained around the 3.2 mb/d level in August according to Indian government data, but should increase over the course of the fourth quarter with the commissioning of Reliance's 580 kb/d Jamnagar expansion, which we include in our forecasts from October onwards at progressively higher rates.  Furthermore, commissioning a new refinery is not always a straightforward process; there is some risk that we have over-estimated the impact of Jamnagar's start-up within our forecast.  Increased Indian purchases of West African crude may indicate the processing of a lighter, sweeter crude slate initially, before all the upgrading and hydrotreating capacity is brought on stream.

Chinese August crude runs were 0.2 mb/d below expectations, averaging 6.9 mb/d, according to National Bureau of Statistics data.  Additional reports emerged during September that state oil companies PetroChina and Sinopec stopped product imports, while Sinopec is reported to be targeting lower crude runs over 4Q08 in an effort to trim product stock levels.  Consequently, we have lowered forecast 4Q08 crude throughput by 0.3 mb/d to reflect the weaker outlook, with runs expected to trough in October on the back of maintenance.  Furthermore, the start-up of CNOOC's Huizhou refinery has been postponed from December, due to delays in completing construction work and will now start in 2009, which also reduces our 4Q08 forecast.

FSU forecast 4Q08 crude throughputs are lowered following a review of Ukrainian crude throughput, given the problems facing Ukrtatnafta's Kremenchug refinery, where availability of crude supplies suggests lower runs than we had previously assumed, and the start of six weeks maintenance work at TNK-BP's Lysychansk refinery during September and October.  Conversely, Russian crude runs increased in August to a new post Soviet-era high of 4.9 mb/d, as falling crude prices reinforced the incentive to refine crude into products, for either domestic or export sales, due to the current tax regime.  Notwithstanding the extraordinary reduction in export tax announced for the start of October, there remains a significant incentive to sell product within Russia, rather than export it.

OECD Refinery Yields

OECD refinery gasoil/diesel yields stabilised at near-record levels in July at around 30.6%.  Month-on-month gains in Europe of 0.4 percentage points (+1.2%) and the Pacific of one percentage point (+3.4%), offset the decline of 0.7 percentage points (-2.5%), witnessed in North America.  This latter drop is likely the result of lower diesel cracks in the Atlantic Basin reducing the incentive for US refineries to continue to make every effort to increase diesel yields.  Conversely, the strengthening of jet/kerosene cracks during July appears to have resulted in yields for jet/kerosene to increase during July, in line seasonal trends, to above the five-year range for the time of year.