Oil Market Report: 10 April 2009

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  • Benchmark crude prices exceeded $50/bbl for the first time in four months as more bullish sentiment entered financial markets in late March/early April.  Prices recently have tracked expectations for the global economy, seeking signs of demand recovery.  However, pervasively weak market fundamentals could limit further gains for now.
  • Forecast 2009 global oil demand is revised down by 1.0 mb/d after a reassessment of GDP assumptions and much lower-than-expected 1Q09 demand data.  Global  demand is now forecast at 83.4 mb/d, 2.4 mb/d below 2008.  The pace of contraction is close to early 1980s levels, with a growing consensus that economic and oil demand recovery will be deferred to 2010.
  • Global oil supply fell by 400 kb/d in March, to 83.4 mb/d.  Non-OPEC supply fell by 170 kb/d, with a 220 kb/d dip in the OECD partly offset by higher non-OECD output.  2009 non-OPEC output is revised down by 320 kb/d, largely due to lower biofuels output, and weaker 1Q09 crude production in Asia.  Non-OPEC output now falls from 50.6 mb/d in 2008 to 50.3 mb/d in 2009.
  • OPEC crude supply in March averaged 27.8 mb/d, down 235 kb/d versus February.  OPEC-11 output stands 720 kb/d above a 24.9 mb/d target that was retained at OPEC's 15 March meeting.  Supplies stand at five-year lows, amid exceptionally weak demand, with Ministers meeting again on 28 May.  Effective spare capacity is around 5.5 mb/d.  The call on OPEC crude and stock change is 28.2 mb/d for 2009, 2.6 mb/d below 2008 levels.
  • OECD industry stocks rose by 7.5 mb in February to 2,743 mb, 7.2% above a year ago.  Lower North American products only partially offset a rise in Pacific crude stocks.  An upward revision to January inventories, plus increasing February stocks and weaker forward demand, pushed end-February stock cover to 61.6 days, 7.9 days above a year ago.
  • Lower global crude runs are expected to persist through 2Q09 and into 3Q09.  Demand revisions, weak middle distillate cracks and reports of bulging product inventories in several markets, suggest a further painful period of weak margins as refiners adjust operating rates to the 2.8% decline in demand now expected for this year.

Searching for the low water mark

Record-high prices, followed by economic downturn, helped to severely curb last year's demand total.  By last month, a progressive 3.3 percentage point downgrade in expected GDP growth had also driven a cumulative 3.3 mb/d cut in our 2009 demand forecast.  Still-lower global GDP expectations this month (growth is reduced from +0.5% to -1.4%) further depress the 2009 forecast.  An additional 1.0 mb/d is cut from projected demand, leaving the 2009 total at 83.4 mb/d, its lowest since 2004.  Demand now falls by 2.4 mb/d in 2009, double last month's figure, albeit an upward-revised 2008 non-OECD baseline exaggerates the trend.

Nor are the 2009 adjustments solely conjecture.  Early indications for 1Q09 suggest much lower demand in both the OECD and non-OECD than we had expected.  Compared with a total 2009 demand adjustment of -1.0 mb/d, 1Q demand is revised lower by 0.7 mb/d, with middle distillates suffering, despite spells of colder northern hemisphere weather.  Lower prices may have aided an apparent rebound in February US weekly gasoline demand data, but this could prove a false dawn if traditional downward revisions in monthly data again materialise.  Elsewhere, industrial activity indicators remain universally weak, leaving analysts struggling to identify an economic low water mark.

Since it remains impossible to judge the likely time horizon for a turn in the economic tide, demand prognoses remain equally hazy.  But oil market symptoms of the economic malaise abound.  In the short term, producers are scrambling to curb prompt supply to staunch a build-up in inventories, with OECD forward cover now at a giddy 61.6 days for February, the highest since 1993 (even if absolute stock levels arguably now provide a more balanced view of the state of the market).  OPEC output has been cut below 28 mb/d, its lowest level since just after the 2003 war in Iraq.  Floating storage levels have risen again, while tentative indicators of key Chinese inventories suggest these remain well above levels of a year ago.  We have also slashed forecast refinery crude throughputs for the period into July.  Extended maintenance and run cuts amid weak margins could keep global runs 3 mb/d or so below (admittedly high) 2008 levels in months to come.  OECD activity flat-lines at best, despite the assumed re-emergence of a US gasoline season this year.

There has been much comment in recent months about the industry storing up problems for the future by curbing investment.  Relentless downward revisions to demand muffle some of the cries about an imminent 'supply crunch', but long project lead times will only be stretched further by today's market weakness.  OPEC's recent Vienna Seminar, the IFP Paris Oil Summit and other industry gatherings have been striking for the unanimity of view between producers, consumers and other market players.  All envisage oil supply levels in the next five years seriously constrained by today's lower prices and lower investment.  While talk of setting a 'fair' price level has sensibly receded, it is likely that, in future, prices will again rise as demand growth returns, markets tighten and higher cost resources need to be tapped.  What's more, evidence continues to surface that supply-side impacts from the recession lag those for demand.  Upstream spending levels for 2009 now look to be slipping by nearer 20% than 10%.  Non-OPEC project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at 1 mb/d or more (something we capture in our forecasts).  Finally, this month we also make a preliminary attempt to illustrate how cuts in spending at selected existing fields could reduce short-term non-OPEC supplies by at least a further 360 kb/d (not yet rolled into the main forecast).  The tide may still be going out for both the economy and the oil market, but it will inevitably turn again at some point.



  • Forecast global oil demand has been revised down for 2009 following another reassessment of global economic assumptions, after a flurry of downward adjustments by both public and private forecasters, and much lower than expected 1Q09 data (-0.7 mb/d versus last report's estimate).  Global GDP is now expected to contract by 1.4% in 2009, entailing a -1.0 mb/d revision to global oil demand, which is projected at 83.4 mb/d (-2.8% or -2.4 mb/d when compared with the previous year).  The demand estimate for 2008, by contrast, has been revised up by +160 kb/d to 85.8 mb/d (-0.3% or -0.3 mb/d versus 2007) following an upward adjustment to the non-OECD baseline.  The pace of oil demand contraction is approaching rates last seen in the early 1980s, but a repeat of the four-year consecutive fall seems unlikely at this point, although an emerging consensus sees economic, and hence oil demand, recovery likely deferred to 2010.
  • Forecast oil demand in the OECD has been adjusted down for 2009 on the basis of much lower economic assumptions.  OECD countries are set to face an unusually severe recession, with overall GDP contracting by 3.9%.  Consequently, oil demand is now forecast at 45.2 mb/d (-4.9% or -2.4 mb/d on a yearly basis), some 760 kb/d lower than previously estimated.  By contrast, this month's estimate for 2008 oil demand remains virtually unchanged at 47.5 mb/d (-3.4% or -1.7 mb/d versus 2007).

  • Forecast non-OECD oil demand has similarly been revised down for 2009, since economic growth in emerging economies is now expected to halve to +1.9%.  Oil demand is foreseen to average 38.3 mb/d in 2009 (-0.1% or roughly flat versus the previous year and almost 230 kb/d lower than previously expected).  Although small, this will be the first contraction in non-OECD demand since 1994.  Meanwhile, the oil demand estimate for 2008 has been lifted by 170 kb/d, largely due to an upward revision to historical data.
  • The adjustment in the non-OECD baseline owes largely to a significant improvement in the JODI database with regards to monthly demand data.  Monthly data from for 14 additional countries, deemed reliable after having been closely monitored over the past two years, have now been included.  As such, this report now tracks almost 90% of global oil demand on a monthly basis.

Global Overview

Over the past few days, global stock and commodity markets have been frantically looking for evidence of an imminent economic recovery, with indices and prices rising somewhat from their dismal lows of early 2009.  The G20 meeting further boosted sentiment, as world leaders jointly pledged to support growth.  However, aside from the substantial increase of the IMF's balance sheet, which should arguably help it address looming balance-of-payment crises more effectively, most other G20 commitments were a restatement of existing fiscal and monetary measures.  Meanwhile, rising unemployment, falling industrial production, shrinking trade and, more generally, the imbalances in global aggregate demand remain - so much so that major public and private forecasters recently embarked on yet another round of sharp downward revisions to GDP prognoses.  Industrial production in key economies, for example, continues to plunge (China's growth uptick in February was distorted by the Lunar New Year holiday).

Consequently, for the fourth time since last October, we have slashed the economic assumptions that underpin our oil demand forecasts.  However, given the very broad range of views with regards to the short- and medium-term outlook, we have attempted to chart a middle course by using specialised sources per region (i.e., OECD for advanced economies, Asian Development Bank for Asian countries, etc.) and generalist sources for others (for example, the World Bank for Russia).  Admittedly, such a diversity of sources is not ideal, but is an attempt to capture the most reliable and recent estimates.  Indeed, the IMF is due to release a comprehensive update of its World Economic Outlook by late April and we may then try to restore a modicum of homogeneity to our GDP assumptions.

We now assume that global GDP will actually contract by 1.4%, rather than expanding modestly as we had been expecting in the February and March reports.  OECD countries should face an unusually severe recession (-3.9%), while non-OECD countries are expected to slow down significantly (+1.9%), with several sub-regions even facing falling output.  Naturally, these changes, coupled with much weaker-than-expected 1Q09 data, entail a large downward revision to our 2009 global demand forecast (almost 1.0 mb/d compared with our previous report, of which 0.8 mb/d in the OECD and 0.2 mb/d in non-OECD countries).  World demand is now expected to average 83.4 mb/d, down by 2.8% or 2.4 mb/d versus 2008, when demand totalled 85.8 mb/d (about 160 kb/d higher than previously estimated, largely on the back of an upward revision of 170 kb/d to the non-OECD baseline).

This forecast implicitly discards a recovery in both global economic growth and oil demand from 2H09, as we had earlier assumed.  Oil demand in 3Q09 should rise versus 2Q09 in line with the US driving season, contrary to 2008, when it petered out on the back of high prices and the impending economic slowdown.  However, oil demand in 4Q09 should be little changed versus 3Q09 - instead of the rebound normally seen in the fourth quarter.  Consumption in the OECD should remain subdued, as weak economic activity counteracts the normal seasoning rise, while demand in non-OECD countries should decline as their economies slow.  As such, oil demand is set to shrink at a pace last seen in the early 1980s - but a repeat of the four-year consecutive fall seems, at this point, unlikely.  Indeed, most economists now see a sustained recovery materialising in 2010 at best, although we may witness occasional outbursts of growth over the next quarters as companies across different industries and countries rebuild depleted inventories - as long, however, as demand sustains such a restocking.


Preliminary data show that OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 5.4% year-on-year in February, with all three regions recording losses for the tenth month in a row.  In OECD North America (which includes US Territories), oil product demand fell by 4.5% year-on-year, with all product categories posting losses.  In OECD Europe, despite strong heating oil deliveries, total demand shrank by 2.3%.  In OECD Pacific, demand plunged by an astonishing 13.0% as the economic recession deepened.

Overall revisions to January's preliminary figures were positive, as both North America and Europe reported slightly higher-than-anticipated demand for both gasoline and heating oil (demand in the Pacific, by contrast, was largely unchanged).  January's OECD demand estimates were thus adjusted up by 210 kb/d, indicating that demand fell by 5.0% during that month, rather than by 5.5% as previously estimated.  However, the 1Q09 demand estimate has been cut by 370 kb/d given very weak preliminary data for February (and March, in the case of the US).  Overall, following the inclusion of preliminary data and the reappraisal of the economic outlook in advanced economies, OECD demand is now expected to contract by 4.9% on a yearly basis In 2009 (-2.4 mb/d) to 45.2 mb/d (760 kb/d below our previous assessment).

North America

According to preliminary data, oil product demand in North America (including US Territories) fell by 4.5% year-on-year in February, the fourteenth monthly contraction in a row.  Oil demand in the United States (-4.8% year-on-year in February) has contracted uninterruptedly since August 2007, Canada's (-0.4%) since August 2008 and Mexico's (-6.6%) since October 2008.

Revisions to January preliminary data (+210 kb/d) were driven by the US and Canada (Mexico was unchanged).  Demand in OECD North America was thus slightly stronger than anticipated in that month, falling by 4.4% year-on-year, instead of 5.2%.  Overall, demand is expected to reach 23.3 mb/d in 2009 (-4.2% or -1.0 mb/d versus 2008 and about 240 kb/d lower than previously anticipated), largely as a result of more pessimistic economic assumptions and the continued weakness of preliminary weekly data on US oil demand.

Adjusted preliminary inland deliveries - a proxy of oil product demand - in the continental United States declined by 7.0% year-on-year in March, with most product categories posting large contractions.  The country's shattered economy weighed again on oil demand (GDP is expected to have contracted by at least 6% year-on-year in 1Q09).  Furthermore, continued mild weather softened power and heating needs (the number of heating-degree days in March was barely higher than the 10-year average and much lower than in the same month of the previous year).  Not coincidentally, East Coast city-gate gas prices have reached new lows ($4.2/mmbtu), and about $3.6/mmbtu for utilities on the Gulf Coast.

Our revisions to preliminary US weekly data (+120 kb/d) in January were again relatively marginal; so far, our pre-emptive adjustment has worked relatively well, compared with the EIA's weekly-to-monthly revisions (-450 kb for the month).  The adjusted data show that January's year-on-year annual decline reached 4.9% - slightly less than previously estimated (-5.5%) but scarcely heralding a recovery.  In fact, based on January's revisions and preliminary February and March data, in addition to a lower GDP assumption (-4.0%), oil demand in 2009 is expected to contract by 4.5% or 880 kb/d to 18.6 mb/d, about 200 kb/d lower when compared with our previous report.

The fall in jet fuel/kerosene demand, down by 11.1% year-on-year in 1Q09, has been particularly striking.  According to the latest available data from the US Bureau of Transportation Statistics, both the number of passengers and cargo tonnage began to shrink in early 2008, largely offsetting airlines' efficiency efforts (notably filling planes at greater capacity).  Interestingly, the so-called 'passenger-miles' indicator has not yet reached the lows seen after September 2001; by contrast, the fall in freight (measured by 'freight tonne-miles') has been steeper.  Anecdotal evidence suggests that these indicators have probably worsened during 1Q09, given the deepening recession.

The US government appears determined to enhance the fuel efficiency of the country's vehicle fleet.  Firstly, in late March the Department of Transportation announced the corporate average fuel economy target to be applied to 2011 model cars and light trucks.  The new standard (27.3 miles per gallon, equivalent to roughly 12 km/litre) is expected to raise the average fuel efficiency of new vehicles by some 2 mpg from 2010.  The move is consistent with the Energy Independence and Security Act of 2007, which mandated a goal of 35 mpg by 2020 but allowed the government to set a standard for each year up to a maximum deemed feasible.  Secondly, the President rejected the restructuring plans submitted by GM and Chrysler - a condition for a $22 billion bailout (in addition of the $17 billion that the ailing automakers have already received).  The companies must quickly devise new plans that prioritise smaller, fuel-efficient vehicles - or risk bankruptcy.  Finally, several members of Congress are working on a bill that would promote the replacement of old, less fuel-efficient cars in favour of cleaner vehicles via consumer tax credits.  This would mirror similar legislation in Europe, which has succeeded in boosting car sales since February in Germany, and to a lesser extent, France.


According to preliminary inland data, oil product demand in Europe shrank by 2.3% year-on-year in February.  The cold weather boosted both heating oil (+11.7% year-on-year) and residual fuel oil demand (+7.8%); although February was less chilly than January, the number of heating-degree days was higher than both the 10-year average and the same month of the previous year.  However, that was not enough to offset losses elsewhere, notably in naphtha (-15.1%), jet fuel/kerosene (-7.0%) and diesel (-5.1%), which reflect worsening economic conditions among Europe's largest economies.

Regarding revisions, January data inched up by 50 kb/d, mostly for gasoline, jet fuel/kerosene and residual fuel oil.  Owing to the adjustment to our economic assumptions, oil demand in OECD Europe is now expected to average 14.6 mb/d in 2009, -4.0% or -610 kb/d compared with the previous year and 130 kb/d lower than previously anticipated.

At first glance, demand in Germany would appear to be holding its ground.  According to preliminary estimates, inland deliveries increased by 3.5% year-on-year in February.  The rise, however, was essentially driven by cold temperatures, which boosted heating oil demand (a quarter of the country's oil demand) by 41.1% year-on-year and residual fuel oil by 9.4%.  Heating oil consumer stocks, at 58% of capacity by end-February, were well above the previous year (49% in February 2009) and slightly lower than in the previous month (60%).  By contrast, the continuous plunge of export-oriented industries, as foreign demand for German manufacturing goods dries up, continued to decimate LPG and naphtha demand (-15.7% and -22.0% year-on-year, respectively).

Interestingly, German gasoline demand was flat versus levels of a year ago and diesel demand rose by +4.2% - impressive under prevailing economic conditions.  This could be related to lower fuel prices and to a government programme that was introduced in early 2009 - consumers who scrap cars at least nine years old benefit from a €2,500 credit when purchasing a new or nearly new vehicle.  Car sales (mostly of small vehicles) duly jumped by 21% year-on-year in February and 20% in March.  Road fuels sales may thus exhibit an otherwise unexpected resilience over the next months if German car owners opt to drive more (despite having purchased more efficient vehicles).

In France, the demand picture was similar to that of Germany.  Deliveries rose by +4.6% year-on-year in February on the back of strong demand for heating oil (+15.5%) and residual fuel oil (+50.6%) amid cold temperatures, thus largely offsetting losses elsewhere.  Interestingly, even though France has also introduced a fiscal scrapping incentive (a €1,000 credit for trading a car ten years old or greater, for one emitting less than 160 g/km of CO2), both gasoline and diesel demand continued to decline in February (-9.3% and -3.0%, respectively), while car sales actually fell by 13% and rebounded only modestly in March (8%).  This could be due to the fact that the French credit is 60% lower than the German one.  The domestic industry argues that, in addition, consumer behaviour is changing - a poll carried out in January found that only 18% of French motorists would drive more if pump prices fell substantially.  Although the fact that retail prices are currently hovering at around €1/litre would lend credence to this hypothesis, the evolution of demand in the next few months may allow to draw firmer conclusions.451


According to preliminary data, oil product demand in the Pacific sank for the eighth month in a row in February (-13.0% year-on-year).  This astonishing collapse was due to Japan (-22.7%), where demand has contracted uninterruptedly since mid-2008 as its export-oriented economy is increasingly battered by the global recession.  The revival of Korean demand (+5.7%) was thus largely insufficient to offset Japan's decline.  February's contraction was further compounded by relatively mild weather, which depressed demand for heating.  Heating-degree days were sharply lower than both the 10-year average and the same month of the previous year (though, notably, temperatures fell sharply in March).

Upward revisions to January preliminary data, mostly from Japan and New Zealand, were negligible overall (+7.0 kb/d).  Looking ahead, however, the sharp worsening of Japan's economic assumptions has had a profound impact on forecast 2009 demand, which has been revised down by 380 kb/d to 7.3 mb/d (-8.9% or -720 kb/d versus the previous year).

In Japan, oil demand continues to reach new record lows with every passing month.  As noted, deliveries plummeted by 22.7% year-on-year in February, according to preliminary data.  More worrisome, the pace of decline seems to have accelerated sharply (in fact, it doubled compared with January), suggesting that the effects of the country's unprecedented recession have by now largely overtaken structural decline trends.  Japan's export-oriented industry has virtually come to a standstill, surpassing even the slowdown seen in Germany.  It has dragged down with it domestic demand for industrial fuels, such as naphtha (-19% year-on-year) or gasoil (-18.6%), as well as electricity consumption, thus weighing on demand for residual fuel oil (-27.4%) and crude for direct burning (included in 'other products', down by 65.9%).

Admittedly, the fall in power consumption was also related to unusually warm temperatures, which also contributed to curb jet fuel/kerosene demand by 23.3% (kerosene is mostly used for heating in Japan and Korea).  Nevertheless, even discounting the weather effect, it remains to be seen whether the quite optimistic forecasts of Japanese utilities with regards to oil use for power generation over the current fiscal year (which ends in March 2010) will materialise.  The industry expects to move away from the more expensive natural gas (LNG) to oil, and as such boost consumption by 10.5% year-on-year, despite the fall in electricity demand (and potentially higher nuclear utilisation rates).

By contrast, Korean demand surprisingly rebounded in February (+5.7%), according to preliminary data.  This rise was driven essentially by a spike in naphtha (+14.7%), which accounts for roughly 40% of total demand.  Residual fuel oil also rose (+6.5%) as utilities moved away from expensive LNG, as well as middle distillates (+5.1%).  The increase in naphtha demand, attributed by KNOC officials to 'bullish' prices of petrochemical products, is somewhat puzzling.  Although naphtha cracks rebounded somewhat from previous lows, they still have a long way to go to justify higher petrochemical runs.  The answer to this riddle is perhaps strategic - Korean petrochemical operators may be seeking to consolidate a competitive advantage now that their main Asian rivals (China, Taipei and Japan) are in the doldrums.  However, this advantage could well be rapidly eroded by cheaper producers in the Middle East, albeit the latter are arguably facing limited feedstock availability at present.



According to preliminary data, China's apparent demand (refinery output plus net oil product imports, adjusted for fuel oil, direct crude burning and stock changes) rose by a paltry 0.3% year-on-year in February.  Meanwhile, demand in January contracted by 10.4%, twice as much as previously expected.  However, the year-on-year comparison is somewhat misleading, since it tends to be distorted by the Lunar New Year holiday, which can fall in either month depending on the year.  In fact, over the past few years the government has opted to withhold key data for January, bundling them into the February statistics.  As such, the annual comparison of the two-month period is more revealing:  demand fell by 6.9%, thus providing fresh evidence of the country's discernible economic slowdown amid the shuttering of export-oriented manufacturing plants.

Data on gasoline and gasoil stocks held by PetroChina and Sinopec, as well as trade figures, appear to confirm the trend.  Although gasoline stocks slightly diminished in both January and February, gasoil stocks continued to rise slightly, suggesting that industrial activity remains subdued.  By the same token, net imports of both products began to fall in mid-2008 as stocks built - in fact, China has now become a net exporter of both gasoline and gasoil.

Overall, given these weak demand data and a slight downward adjustment to China's 2009 GDP growth assumption, oil demand is now expected to decrease by 0.8% to 7.8 mb/d (110 kb/d less than previously anticipated).  However, this forecast has some upside risks.  On the one hand, the spring ploughing season, which began in March, will have an impact on gasoil demand, but that effect is impossible to ascertain as this depends on weather conditions and other factors.  For example, an ongoing drought since late January in some areas has reportedly boosted gasoil demand, as pumps are needed to tap groundwater.  On the other hand, the fiscal stimulus might boost demand earlier than expected - although most large projects are earmarked for 4Q09-1Q10, while some analysts argue that private consumption is falling markedly.  A revival of the construction industry, for example, could see a surge in gasoil use.  In addition, it is unclear to what extent factories and mills across the country resumed operations in March after the holiday season.

Meanwhile, in late March the government raised the official ceiling on domestic retail prices of gasoline and diesel by 4.6% and 3.2%, respectively.  This was the second adjustment after January's price cut, suggesting that the government is serious about applying its new pricing mechanism, whereby domestic product prices follow international price movements.  The increase may prompt wholesalers and resellers to replenish their stocks, which in turn could help reduce excess inventories held by refiners.  However, the price hike could also dampen demand further.

Subsidies:  Difficult Fiscal Choices Ahead?

The fall in oil prices and production cuts are obliging some OPEC producers to reconsider whether to reform their administered domestic price regimes.  In early March, Nigeria's government declared its intent to deregulate its downstream sector, removing end-user price subsidies and selling the four state-owned refineries.  Although liberalising prices would entail sharp increases for consumers, the government would save some $4.4 billion per year and reduce its widening fiscal deficit - in addition to stimulating a likely inflow of private investment into the industry, which has been neglected for decades.  However, the announcement was predictably met by considerable opposition from political parties and labour unions, which control lucrative distribution networks and import contracts.  The government is currently negotiating with the country's two oil workers' unions (Pengassan and Nupeng), which have threatened a general strike, but has vowed to carry out its deregulation project.

On the other side of the Atlantic, the Venezuelan government hinted in mid-March that the domestic gasoline price (currently around $0.04/litre) might eventually be adjusted for the first time since 1996, on the grounds of 'social justice' - that is, making drivers of luxury vehicles pay more.  However, this issue is sensitive, probably more than in Nigeria, given the precedent of deadly riots in 1989 following a price rise.  Moreover, the current administration has trumpeted the low gasoline price as a key source of political legitimacy - even though a litre of mineral water in Venezuela is currently about 52 times more expensive than a litre of gasoline.  State-owned PDVSA is estimated to spend as much as $8 billion per year in subsidies, while the low price has fostered smuggling to neighbouring countries, notably Brazil.  In the end, however, the government opted to keep the retail price unchanged, which has encouraged runaway demand growth.  Instead, it cut its 2009 budget by almost 7%, on the assumption that oil prices will average $40/bbl and that domestic oil production will reach 3.2 mb/d.  However, since independent sources - including this report - put Venezuelan oil production at only 2.1 mb/d, the reform of the subsidy regime could well resurface in the next few months.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - rose by 1.2% year-on-year in February, led by gasoline (+14.6%), naphtha (+10.3%) and gasoil (+4.4%), which together account over half of total demand (by contrast, LPG, jet fuel/kerosene and residual fuel oil registered losses).  Thus far, the country continues to show an extraordinary resilience to the global slowdown, especially when compared with its Asian neighbours.  Nevertheless, the economy is slowing, and oil demand is expected to grow by only 1.7% on an annual basis to 3.1 mb/d in 2009 - about a third of the pace recorded in the previous two years.  However, the government is looking at ways of supporting faltering industrial activity.  A possibility being explored is to abolish the import duty on naphtha, set by the 2008-09 budget at 5%.  The Department of Petrochemicals argues that the duty has eroded the competitiveness of Indian polymer producers, and that reducing it to zero would go a long way in stimulating demand.

Meanwhile, the outlook for gasoline demand looks promising, as consumer appetite for new cars appears to remain strong.  The launch in late March of Tata Motors' Nano, a low-cost, no-frills car, should contribute to making transportation relatively affordable for large swathes of prospective Indian drivers.  Indeed, the most basic version of the Nano (about $2,000 apiece) is sold at about half the price of what used to be the cheapest Indian car (the Maruti 800).  Nevertheless, some observers question whether Tata will be able to sustain such a low price given the car's relatively high manufacturing costs.

Data Transparency:  Gradually Improving

The quest for more and better oil data has been a constant preoccupation for market participants.  This has become increasingly more relevant given the marked increase in the share of non-OECD countries relative to global oil demand.  The Joint Oil Data Initiative (JODI) - originally launched in mid-2000 by several organisations, including the IEA - has greatly contributed to fill the gap.  Indeed, the JODI database has gradually become an indispensable reference.  Over the past two years, in particular, the coverage, timeliness and quality of available data have greatly improved.  More countries are now participating, while the number of statisticians trained by the International Energy Forum Secretariat (which manages the database) is steadily rising.

As from this month, given these tangible improvements, this report includes monthly data for 14 additional countries (Algeria, Libya, Nigeria, Hong Kong, Philippines, Estonia, Chile, Colombia, Peru, Kuwait, Qatar, Yemen, Bulgaria and Romania).  Data for these countries were deemed reliable after having been monitored over the past two years, comparing both absolute levels and growth trends with other sources, notably government data and the IEA's annual Energy Statistics of Non-OECD Countries.  As such, this report now tracks almost 90% of global demand on a monthly basis (from 30 OECD and 29 non-OECD countries).

Nonetheless, important gaps remain.  A handful of large oil consumers still do not provide any demand data at all (such as Singapore) or detailed figures (Indonesia, for example, only releases total demand data).  Still others publish data that are clearly inconsistent with economic trends (gasoline demand in Venezuela, for example, allegedly declined in both 2007 and 2008, despite strong economic growth and generous subsidies).  However, if the recent trends are any guidance, improved oil-data transparency is becoming a less-elusive goal.



  • Global oil supply fell by 400 kb/d in March , to 83.4 mb/d, with the decline split equally among OPEC and non-OPEC producers.  However, global oil supply is down a sharp 3.4 mb/d compared with levels of a year ago in response to the downturn in oil demand.
  • Non-OPEC supply declined by 170 kb/d in March, with a 220 kb/d dip in the OECD partly offset by slightly higher non-OECD output.  While 2008 production is assumed more or less unchanged since last month's forecast, 2009 output has been revised down by 320 kb/d, implying a year-on-year decline from 50.6 mb/d in 2008 to 50.3 mb/d in 2009.  Around 220 kb/d of the revision is due to downward-adjusted biofuels production.  Regarding crude production, lower-than-forecast Chinese, Indian, Vietnamese and Australian 1Q09 production data dragged down the forecast.
  • OPEC crude supply in March averaged 27.8 mb/d, down 235 kb/d from the previous month.  Cuts were centred among Libya, Iran and Kuwait.  OPEC supplies are now hovering at their lowest level in more than five years as member countries curtail production in response to exceptionally weak global oil demand.  Effective spare capacity now stands at 5.5 mb/d.
  • The call on OPEC crude and stock change now stands at 28.2 mb/d for 2009, down 0.7 kb/d from last month and 2.6 mb/d below 2008 levels.  Revisions centre primarily on substantial downward revisions to OECD demand data for 2009.

  • Note:  Random events present downside risk to the non-OPEC production forecast contained in this report.  These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses.  Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America.  In addition, from July 2007, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast.  This totals ?410 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC Crude

OPEC crude supply in March averaged 27.84 mb/d, down 235 kb/d from the previous month.  Libya, Iran and Kuwait contributed 160 kb/d to the March reduction.  OPEC supplies are now hovering at their lowest level in five years as member countries curtail production in response to exceptionally weak global oil demand.  OPEC has reduced official output targets three times since its September 2008 meeting, equal to a total planned reduction of 4.2 mb/d.

Production from the 11 members with output targets, which excludes Iraq, was assessed at 25.57 mb/d in March.  That is down 245 kb/d month-on-month, but about 720 kb/d above the group's 24.85 mb/d target.  OPEC's compliance rate with the latest target that went into effect in January rose to 83% in March.  This compares with 77% in February.  Effective spare capacity stands at 5.5 mb/d.

OPEC has managed to remove an unprecedented 3.36 mb/d from the market since last September, IEA data show.  OPEC ministers opted to rollover the existing 24.85 mb/d production target at their 15 March meeting in Vienna, with concern that another reduction in production levels might further undermine the fragile global economy topping the agenda.

Disparity in compliance with production targets was reportedly a contentious issue at the meeting and continued overproduction by some members may cause friction when OPEC ministers gather again on 28 May to review market conditions.  Iran, Angola, Venezuela and Nigeria are currently producing a collective 668 kb/d over their target levels.  The extent to which countries are observing targets is still a major issue, especially for countries who have substantially reduced supplies in line with targets.

Saudi Arabia held output steady in March at 7.95 mb/d, about 100 kb/d below its target level.  OPEC's largest producer accounts for about 45% of the total cut in OPEC supplies since last September at 1.5 mb/d.  Aramco told customers that it was holding steady its 10% cut below contractual volumes for April.  Saudi Arabia's production capacity has been increased by 150 kb/d, to 11 mb/d in line with higher production volumes from the 500 kb/d Khursaniyah project.  After a delayed start-up last August at an initial rate of 150 kb/d, Aramco is in the final stages of bringing the last 150 kb/d on stream this month.

Production from Iran was lower by 50 kb/d, at 3.65 mb/d in March, compared with an upwardly revised 3.7 mb/d the previous month.  Iranian output is now running 315 kb/d above the country's 3.34 mb/d target.  Iran has now reduced output levels by around 250 kb/d, equal to a 44% compliance rate.  Iranian customers were told they would continue to receive full contract volumes in April, the same as March.

Crude oil production in Kuwait fell by 50 kb/d, to 2.25 mb/d in March.  Kuwaiti output is largely in line with the country's output target.  The state oil company used the weaker market climate to do unscheduled field maintenance work.

UAE output was nearly unchanged on the month at 2.25 mb/d.  Compliance is now pegged at near 95% due to further cutbacks in customer nominations.  Adnoc's term allocations for Murban, Umm Shaif and Lower Zakum were unchanged in May at 15% below contract volumes while cuts in supplies of medium heavy Upper Zakum were eased, with volumes down by a smaller 10% compared with April's stronger 17% cut.

Oil production in Qatar was slightly lower in March, down 10 kb/d to 740 kb/d last month.  After implementing a 15% cut in supplies to its Asian customers in March, Qatar removed lifting restrictions for April.  However, the state oil company notified Asian customers that supplies of its medium sour Qatar Marine crude would be reduced 4% in May

Iraqi oil supplies were up slightly on the month, with production assessed at 2.27 mb/d.  Total exports last month averaged 1.82 mb/d compared with 1.8 mb/d in February.  Exports from both the northern pipeline to Turkey's Ceyhan terminal and the southern Basrah route were disrupted last month due to weather-related delays.  Exports from Basrah averaged 1.39 mb/d in March compared with 1.35 mb/d the previous month.  Crude run at refineries and for power use averaged about 455 kb/d in March.

Crude oil production Nigeria  fell 20 kb/d in March, to 1.78 mb/d.  The lower output is due to yet another attack by militants on a pipeline, this time affecting Chevron's Escravos.  The attack forced the shut-in of around 11.5 kb/d on 16 March.  Despite the small decline in output last month, there is no shortage of Nigerian crude in the market.  Traders have been taking advantage of the contango in the market and storing a large quantity of crude on floating tankers over the past three months.  In March a number traders sold their cargoes into the market

Angolan crude oil production was unchanged in March at 1.65 mb/d.  Angola, whose minister is the current OPEC president, is producing 133 kb/d above its target, equating to 45% of the required cut.  Angola may be reluctant to impose further output restrictions on operating companies, especially since it has already lowered output by around 175 kb/d since last September.

Non-OPEC Overview

While 2008 production has been kept more or less flat, downward revisions to 2009 non-OPEC supply amount to around 320 kb/d, implying a year-on-year decline from 50.6 mb/d in 2008 to 50.3 mb/d in 2009.  Of the 320 kb/d revision, 220 kb/d stem from an in-depth reappraisal of biofuels output.  Biofuels have so far been hit probably harder by the economic downturn and lower oil prices than non-OPEC crude oil output and the economics of non-subsidised production look questionable in many areas (see Biofuels Production Growth to Slow in 2009).  This sizeable revision to the biofuels forecast for 2009 masks the fact that US fuel ethanol production was revised down by around 115 kb/d, but offset by a similar upgrade for Brazilian ethanol.  In other words, net of offsetting US and Brazilian changes, the downward revision was in other areas - largely in OECD Europe, but also in China and other Asian countries.

Spending Cuts May Worsen Decline

The global economic/financial crisis, weaker demand for oil and lower oil prices have dented the prospects for non-OPEC supply.  Our forecasts already capture project deferrals and cancellations, which for 2009 and 2010 are estimated to account for a gross 1 mb/d (although some of this will enter production later on).

Analysts' spending surveys now envisage upstream spending to be down significantly in 2009, by around 15-20%.  Most agree that while many majors and large NOCs will keep spending stable on the whole, independents and smaller oil companies will slash it most.  Also of significance is the consensus that spending will be hit hardest in North America, the UK, Norway and Russia.  But the precise effect is not yet evident in monthly reported production data.  Project slippage, which we do monitor, is only part of the likely impact.  Another feature is likely to be lower production from mature oilfields where drilling or pressure maintenance activity is curtailed.

In order to model what the potential impact could be, we have developed the following scenario.  According to calculations published in the July 2008 Medium-Term Oil Market Report (MTOMR), the average (1999-07) observed decline rate in mature non-OPEC fields was 7.7%.  The IEA's November 2008 World Energy Outlook (WEO), on the other hand, estimated that the natural decline rate (i.e.  without offsetting investment) in post-peak non-OPEC fields is around 11%.  For illustration in this scenario we have modelled the effect of 2009's lower spending, nudging up decline rates by around 20% to average 9.4%.

We have applied this steeper decline rate scenario proportionally to all declining fields in selected mature basins, where we assume the impact of lower spending will be felt first and hardest.  This includes the US onshore (including Alaska), Canada (including bitumen, though here we apply a lower growth rate, rather than 'decline' per se), the UK, Norway and Mexico (albeit spending is slated to rise).  Together, these maturing fields total up to almost 10 mb/d.  We already hold a quite pessimistic outlook on Russian production, so for the purpose of this scenario have not applied the steeper decline rate there.  Other countries may be prone to a similar effect from lower spending, which means the total impact could be higher.  Potentially offsetting that, however, is the fact that not all of the mature fields in the countries we have looked at will necessarily be adversely affected to the same degree.

The net effect of this hike in decline rates would be to reduce production by 360 kb/d in total by end-2010, of which 110 kb/d occurs in 2009 and 250 kb/d in 2010, with the effect being compounded thereafter.  The impact is felt least strongly in Canada, as current oil sands output is forecast to remain relatively constant and relatively flat production is assumed at the large East Coast offshore fields.  On the other hand, in Mexico, where we track a relatively small number of sizeable fields, that are anyway mostly in steep decline, the effect is greater, with a combined 2009/10 potential downward revision of 135 kb/d.

Until more early-2009 production data become available, this lower output scenario is not incorporated as the baseline output forecast.  The topic will be revisited in greater depth in this summer's MTOMR, which will both fine-tune the analysis and extend it beyond 2010.  But the implication is clear - further downward adjustments to the non-OPEC forecast could arise in light of weaker spending levels.

Regarding crude production, lower-than-forecast Chinese, Indian, Vietnamese and Australian 1Q09 production data dragged down the non-OPEC forecast for the quarter and the year.  This was only partly offset by higher Latin American and European output, both of which were, however, related to biofuels revisions.  Meanwhile, Russian production picked up again slightly in March, bringing up the yearly number slightly, while reported and preliminary Azeri data for January and February respectively appeared to confirm our recent assumption that the country's production will remain largely flat year-on-year.

In sum, 2008 total non-OPEC production remains more or less unchanged at 50.6 mb/d, but is set to fall to 50.3 mb/d in 2009.  Moreover, anticipated lower capital expenditure this year might well lead to substantial further downward revisions, as we review in a scenario, though not yet in our base case forecast (see Spending Cuts May Worsen Decline).


North America

US - Alaska March actual, others estimated:  March oil production in the US was largely unchanged compared with forecast, but fell by around 100 kb/d from February.  Higher-than-forecast Alaskan and Texan production was largely offset by lower crude output elsewhere and sharply lower fuel ethanol.  In Alaska, it appears that we had overestimated typical winter outages.  At the time of writing in early April, activity at the Mount Redoubt volcano near Anchorage had forced preventive shut-ins at the Cook Inlet field southwest of Anchorage, after suspended tanker loading operations at a terminal caused storage to fill up.  Most likely, only small volumes will be shut-in, but the duration of problems is not yet clear.

In the US Lower-48, reported November data brought sizeable upward revisions to the forecast.  On the other hand, this was broadly offset by downward revisions to Gulf of Mexico production in the same period.  Once again, we have attributed this to an underestimation of hurricane-related shut-ins, but also to a slower-than-anticipated ramp-up of production from the large Thunder Horse platform.  Other developments include the start-up of BHP Billiton's Shenzi project in late March, with peak capacity of 100 kb/d.  The Clipper field's start-up on the other hand was delayed, from April to an assumed October of this year.  Overall, US crude output is expected to grow to 5.1 mb/d in 2009, from last year's 4.95 mb/d.

Biofuels Production Growth to Slow in 2009

After several years of rapid increases, world biofuels production growth should dramatically slow in 2009.  Lower oil prices, credit constraints, increasingly divergent government support and downward revisions to transport fuel demand have all conspired to undermine production economics and the industry's viability.  Stronger growth should resume in the medium term, with the potential for oil markets to retighten and rising government mandates among the largest producing countries.  Our 2009 MTOMR will feature a more detailed production forecast through to 2014.

In the meantime, we have revised down expected 2009 production growth by 220 kb/d, which leaves global biofuels growth at 95 kb/d (6.6%) year-on-year versus estimated growth of 345 kb/d (31.5%) for 2008.  Much of this revision comes from the OECD, as US and European production economics have soured, and the media has reported idled plants and bankruptcies.  While those features apply also to non-OECD countries to an extent, higher-than-expected 2008 production from Brazil and expectations of continued growth there should leave Latin America production prospects relatively stable.

In the US, 15-20% of about 800 kb/d total ethanol capacity has been shut-in or idled, and remaining capacity is likely operating below potential.  Ethanol crush spreads have continued to fall and the industry's profitability has weakened.  Stronger-than-expected 2008 growth and a 100 kb/d increase in 2009's blending mandate to 685 kb/d (10.5 bn gal or 39.7 bn litres) should support a production floor.

Yet, the US may just meet or undershoot the 2009 Renewable Fuel Standard (RFS) rather than exceed it- with imports or renewable credits carried from 2008 making up the difference.  2008 production averaged 600 kb/d and January ethanol data from the EIA shows production at 630 kb/d, but this is down almost 40 kb/d from November.  Blending economics have since improved though, with rising gasoline prices and falling Brazilian supply prices.  While gasoline blended with ethanol dropped to near 55% of the conventional pool in January, the latest weekly readings put it at 70%, on par with September 2008 levels.  The degree to which a US summer driving season emerges remains a key variable for blending economics going forward.

In Europe, biodiesel production should stagnate, despite a recent decision by the European Union to impose duties on imported biodiesel from the US for an initial six-month period.  Weak government support and overcapacity in the region's largest producer, Germany, should reduce its production this year.  Exemptions on excise taxes for biodiesel were reduced in January, yet 2009 quotas remain uncertain as a mandatory 5.25% biofuels blending target in fossil fuels awaits approval.  Other countries, such as France, Italy, Spain and the UK, have increasing targets for 2009 and should see production continue to grow, albeit weakly.  The introduction of import duties on US biodiesel would also likely aid European output.  In 2008, about 25 kb/d arrived from the US.  Yet, imports from lower-cost producers in Latin America and Asia will more likely replace those volumes rather than domestic production.

Expectations for biofuels growth from Latin America continue, with regional production forecast to increase in 2009 by almost 60 kb/d versus 85 kb/d in 2008.  Most of this growth comes from Brazilian ethanol, which averaged about 460 kb/d last year.  Yet, the industry there faces increased economic hurdles that have curtailed its expansion.  Sugarcane industry association Unica announced in March that only 15-20 of an initially expected 35 new mills may come online in 2009.  Additionally, the group noted an increasing amount of the cane crop this year might go to sugar rather than ethanol production as producers look to capture higher margins.

Canada - January actual:  Canadian production in January was in line with forecasts, albeit Newfoundland offshore field data was not available at the time of writing.  Syncrude and bitumen production were assessed lower than forecast, but offset by slightly higher Saskatchewan crude output and national NGL production.  Suncor mining and upgrading operations were reported lower than forecast, perhaps still suffering from a fire in late November last year.  Albertan bitumen production fell by around 50 kb/d from December to 650 kb/d, though no problems were reported.  Our current 2009 forecast sees total Canadian production dipping slightly, from last year's 3.23 mb/d to 3.21 mb/d, as growing oil sands production fails to offset weaker crude output.

North Sea

Norway - January  actual; UK December actual, January provisional:  Latest actual data showed only small revisions to Norwegian and UK production data.  In the UK, the January forecast was revised up by nearly 100 kb/d in order to match preliminary data, with other, smaller revisions, lifting the total 2009 forecast by 40 kb/d.  In Norway, revisions to the Haltenbanken stream and others dragged down the 2009 forecast by around 25 kb/d.  Total Norwegian oil supply is now forecast to fall from 2.46 mb/d in 2008 to 2.19 mb/d in 2009.


Australia - January actual:  Australian oil production in January was revised down by 70 kb/d on lower NGL and Carnarvon Basin crude production.  In the latter, slower ramp-up at the Woodside-operated Angel field is assumed to be a cause, as well as slightly slower recovery following Cyclone Billy, which hit in December and caused brief regional shut-ins.  Looking ahead, 3Q09 will see both a three-month partial shut-in at the Woollybutt FPSO, for a workover and the start-up of the Van Gogh field, initially at an assumed 5 kb/d and rising to 20 kb/d from the beginning of 2010.

Former Soviet Union (FSU)

Russia - February actual, March provisional:  Russian oil production for both February and March was revised up by 70 kb/d and 150 kb/d respectively.  In February, production data for Novatek and Sakhalin 2 were higher than expected.  The latter's output in particular is picking up gradually after the start to year-round production from last December.  More recently, additional volumes from the Piltun Astokhskoye platform have been added to the complex, boosting output.  In March, higher-than-expected output was likely due to faster-than-anticipated ramp-up at Lukoil's new Uzhno-Khylchuyuskoye field and TNK-BP's expansion of the Uvat complex.  Looking ahead, this report now assumes that Rosneft's large Vankor field in Eastern Siberia will start producing small initial volumes in mid-2009.  In early April, the Russian government approved spending plans for the ExxonMobil-led Sakhalin 1 project for 2009 after repeated delays, which should unfreeze later development stages.

Overall, March production figures indicate an increase from February and a return to November volumes of just over 10 mb/d.  But our forecast nonetheless anticipates a gradual decline for the rest of the year.  Year-on-year, we forecast a fall from 10 mb/d total oil production in 2008 to 9.75 mb/d in 2009, or a dip of -2.5%.

Other FSU:  Azerbaijan January actual, February preliminary; Kazakhstan February actual:  January reported and February preliminary data for Azerbaijan confirm our assumption that shut-ins at the Azeri-Chirag-Guneshli (ACG) complex in the Caspian Sea are continuing and that therefore, despite a gradual ramp-up on prospective recovery towards the end of the year, total 2009 production, at just over 900 kb/d, will remain flat over 2008.  Gas leaks in September 2008 had forced large shut-ins of parts of the offshore complex and full recovery is apparently taking longer than expected.  In Kazakhstan, February data confirmed our forecast that around 25 kb/d were shut-in at the Tengiz field during that month due to a brief shutdown of the CPC pipeline.  However, slight revisions to the ramp-up timing of the Karachaganak expansion due from mid-year have lifted our yearly total Kazakhstan figure by 23 kb/d.  In Turkmenistan and Uzbekistan, reappraised 2008 production data prompted a combined downward revision for 2009 of 20 kb/d.  In sum, total FSU oil production is forecast to fall from 12.75 mb/d in 2008 to 12.55 mb/d in 2009, almost wholly due to expected lower Russian output.

FSU net oil exports in February on average rose by 3.1% to 9.55 mb/d, supported by a rise in crude oil flows on all routes except Druzhba pipeline deliveries.  Baltic shipments increased by 5.4% after a dip in volumes in January due to pipeline maintenance.  Black Sea exports posted an increase despite a closure of the CPC pipeline for two days at the end of February following an oil leak.  BTC volumes also rose sharply in February, but they are still below the 1 mb/d capacity of the pipeline.  Ongoing commercial disputes between Russian producing companies and intermediary trading companies stood behind a decrease in Druzhba flows.  Pipeline deliveries to Poland dropped by 7% due to a dispute between Tatneft and KD Petrotrade, an intermediary trading company in Poland.  Flows to Germany were 3.5% below January levels; however TNK-BP continued to export higher volumes using Lukoil's allocations.

Product exports from FSU countries rose slightly to 2.83 mb/d in February as an increase in shipments of other products offset lower exports of fuel oil and gasoil.  Fuel oil volumes continued their decrease as the restrictions on exports imposed by governments of Belarus and Ukraine remained in place.  However, Ukraine reportedly lifted its ban on fuel oil sales abroad from 18 February so fuel oil exports in March are expected to rise.  Russian product exports may be affected in March and April by planned maintenance at several Russian refineries.

According to preliminary data and loading schedules, crude oil exports in March should remain around February levels, although crude oil shipments from Black Sea ports were affected by stormy weather and a five-day closure of a pipeline leading to Novorossiysk after a leak and a fire at the beginning of March.  Nonetheless, BTC flows reportedly increased further in March as well as flows through the Druzhba pipeline.  Russian loading schedules for April are set to be higher than in March, though shipments through Novorossiysk should be affected by planned maintenance of the pipeline leading to the port.  The rise in Russian loading schedules coincides with a fall in Russian crude export duties, which were set to $110.0/mt ($15/bbl) in April from $115.3/mt ($15.7/bbl) in March.  Product export duties fell from $90/mt in March to $86.4/mt in April for light products and from $48.5/mt to $46.5/mt, respectively, for heavy products.

Russian pipeline operator Transneft announced that the first stage of the 600 kb/d East Siberia-Pacific Ocean (ESPO) pipeline will be completed in several weeks.  This link will connect Taishet in East Siberia with Skovorodino in Russia's Far East, from where a leg will connect to Chinese oil infrastructure just across the border.  Crude oil is expected to start flowing through the pipeline towards the end of 2009 and will be transported onwards to Russia's Pacific Coast by rail until the second stage is completed in late 2010.

Other Non-OPEC

Brazil - February actual:  On a net basis, reported February data for Brazil only added 20 kb/d, but this hides substantial revisions to fuel ethanol and crude production.  Ethanol production was revised up by just over 100 kb/d to 470 kb/d for 2008 and carried forward into 2009 as a higher baseline.  But this was largely offset by an average monthly crude downward revision of 125 kb/d for December through March.  Partly, this is due to revisions to reported data, but our January forecast had overestimated output on the basis of overoptimistic preliminary data.  End-February saw the start-up of Petrobras's Jabuti field in the deepwater Campos Basin.  Initial estimated volumes of 10 kb/d in March are expected to quickly ramp-up to 60 kb/d by end-year and to reach capacity of 100 kb/d in 2010.  Start-up of the Pinauna field has been brought forward to September in our forecast.  Meanwhile, a strike by Petrobras workers in March caused only the most minor of outages, according to Petrobras.  Brazilian total oil production is due to rise from 2.37 mb/d in 2008 to 2.54 mb/d in 2009.

China - January and February actual:  January and February China data (publication of which was delayed by the Lunar New Year holiday) were 200 kb/d and 150 kb/d lower than estimated, with a string of basins showing lower-than-estimated output.  Production in Xinjiang, Tarim, Jilin and Turpan-Hami came in lower than expected, while the 'offshore' category confirmed what appears to be an unreported outage or maintenance from December.  According to reported data, the 'offshore' production category showed a dip of 130 kb/d in December and is only gradually picking up.  February data was similarly lower, though indicated recovery in the 'offshore'.  As regards new fields, the Bozhong 28-2S platform started offshore production in March and is forecast to reach capacity of nearly 25 kb/d later in the year.  The Penglai-2 increment with a new FPSO is also assumed to be raising output and is set to rise from an assumed current 45 kb/d (February) to 75 kb/d by the end of the year (and to 150 kb/d by end-2010).  Total Chinese oil production is pegged to rise from 3.8 mb/d in 2008 to 3.9 mb/d in 2009.

Other Asia:  January data for India, also published with a delay, prompted a downward revision of 50 kb/d, with lower output spread over most fields and reasons unclear.  On the border of Malaysia and Vietnam, the shared PM-3 CAA increment started up, which will eventually add 45 kboe/d of oil and gas, expected by 2010.  Meanwhile, January data for Thailand was around 15 kb/d higher than expected.  In sum, total Other Asia oil production will rise slightly from 3.66 mb/d in 2008 to 3.68 mb/d in 2009.

OECD stocks


  • OECD industry stocks rose by 7.5 mb in February, to 2,743 mb, as a fall in North American gasoline and other product inventories only partially offset a rise in Pacific crude stocks.  European stocks changed little as rising distillates offset draws in crude and gasoline.  Falling gasoline stocks in the Pacific only partially offset jumps in crude and distillate inventories in that region.
  • OECD stocks in days of forward demand reached 61.6 days, their highest level since August 1993.  An upward revision to January baseline stocks, combined with increasing February stocks and downward demand revisions, boosted the reading.  All three regions now stand above five-year highs.
  • Preliminary March data indicate total OECD industry oil inventories rose by 15.2 mb, led by gains in US crude stocks.  US inventories rose 16.6 mb as crude and products increased by 9.8 mb and 6.8 mb, respectively.  Japanese stocks fell 7.2 mb, as crude declined by 3.6 mb and products fell 3.6 mb.  According to Euroilstock, EU-16 inventories increased 5.7 mb, led by crude, which rose 3.0 mb.
  • Short-term crude floating storage continues to provide an inventory buffer, as late March levels increased to 70-75 mb.  Low freight rates and a recent increase in the crude forward curve contango supported the higher levels, even though earlier storage may have fallen as much as 50% from February through mid-March as forward curve time spreads tightened.

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

Total OECD inventories rose by 7.5 mb in February, closing the month at 2,743 mb.  Stocks stood 185 mb (7.2%) higher year-on-year and were 175 mb (6.8%) higher than the five-year average.  North America and Europe saw seasonal stockdraws, though both had counter-seasonal distillate builds.  Pacific stocks jumped 16.8 mb with larger than normal crude builds and a counter-seasonal products build.

An upward revision to January total OECD inventories of 24.0 mb boosted baseline stock levels.  Higher official data for North America and Pacific pushed OECD crude stocks higher by 18.5 mb.  The largest gain stemmed from Japan, where data showed January crude inventories 8.0 mb higher.  The US and Canada experienced upward crude revisions of 5.7 mb and 2.5 mb, respectively.  Total European stocks witnessed an upward revision of 12.8 mb for January as data showed higher regional distillate, gasoline and residual fuel oil storage levels.

These revisions, combined with rising February inventory levels and lower forward demand estimates, pushed OECD total oil forward demand cover to 61.6 days at the end of February.  Days of demand cover for end-January increased to 60.2 days.  The February reading stands 8.7 days above the five-year average and 7.9 days above last year.  Days of forward cover for almost all major categories within the OECD regions stood at or above the five-year range.  Gasoline stocks remained the exception.  For North America and the OECD as a whole, gasoline days of forward cover trended below the five-year average, while in Europe and the Pacific they remained only within the top half of the five-year range.

OECD Industry Stock Changes in February 2009

OECD North America

North American industry stocks fell 8.0 mb in February as US gasoline and Mexican products draws outweighed gains in US crude and distillate.  A 4.8 mb draw kept US gasoline stocks trending below their five-year average.  Though US crude inventories kept building above the five-year range, February builds were less than January, as levels increased only 3.4 mb.  Falling crude imports, according to February weekly data, and narrowing WTI time spreads in the second half of February likely tempered the builds.

March weekly US data point to larger month-on-month crude builds as imports rebounded to near five-year average levels and refinery utilisation has stagnated.  March crude imports into the US averaged 250 kb/d more than February, but the US Gulf Coast showed a gain of over 450 kb/d.  Some of this increase may stem from discharges of floating storage, which likely occurred with a narrowing in WTI's contango from mid-February through mid-March.  Still, a significant amount of floating storage remains in the Gulf, representing up to half of the global total.  In contrast to the US total, March data showed Cushing, Oklahoma inventories continuing to draw.  As of early April, they stood at 30.0 mb.

According to weekly data, US product stocks also rose in March, increasing by 6.8 mb.  Gasoline and distillate both showed small stock builds.  Within distillate, heating oil built by 1.0 mb at a time of year of typical draws and diesel drew 2.1 mb, but the latter's still healthy stock position continued to reflect underlying demand weakness.  Heating oil stocks in the US East Coast and Northeast - the primary regions for domestic heating oil use - appear to have emerged from the winter season above the five-year average and at levels far more robust than the same period last year.

OECD Europe

European inventories changed little in February, declining by only 1.3 mb.  Most categories, including crude (-1.8 mb) and gasoline (-1.1 mb) registered small draws.  European total products, however, posted a net gain on the month of 1.4 mb.  Distillate stocks drove this change as they rose 3.0 mb, led by Germany, which saw its stock levels rise by 2.3 mb.  German heating oil demand fell by almost 15 kb/d (2.1%) in February versus the previous month and demand indications point to further falls in March.  While primary stocks increased, German consumers drew down their stocks by two percentage points.  Yet, consumer stock levels, at 58% of capacity, remained well above the five-year average.

Preliminary data from Euroilstock indicate EU-16 inventories rose 5.7 mb in March as crude and products gained 3.0 mb and 2.8 mb, respectively.  All product categories rose except gasoline, which declined by 0.4 mb.  Northwest European product stocks held in independent storage generally declined in March.  All major categories posted declines or remained unchanged, led by distillate and gasoline.  Levels in the former remained well above the five-year range while gasoline stocks trended below the five-year average.  Yet, an early-April rebound in both categories moved stocks back to near early March levels.

OECD Pacific

Pacific industry stocks jumped by 16.8 mb in February, buoyed by crude builds.  Japanese crude inventories increased by 4.4 mb, and Korean crude rose 9.4 mb.  High imports ahead of increased March crude import tariffs and falling February refinery runs likely drove the Korean stock change.  Although February imports declined 11% relative to January, they stood 14% above levels of a year ago.  Pacific product stocks posted a small gain of 2.3 mb with gasoline rising 1.8 mb and distillate falling 1.3 mb.  Yet, distillate stocks increased in days of forward cover, as readings moved to the top of the five-year range.

March weekly data from the Petroleum Association of Japan (PAJ) indicate a fall in total industry stocks of 7.2 mb for the month with onshore crude declining by 3.6 mb and products slipping by 3.6 mb.  Most categories either fell or changed little and product stocks overall suffered, as refinery utilisation fell steadily through the month.  Kerosene inventories fell by 3.0 mb, but trended along the five-year average.  Gasoline remained the exception as it rose 1.2 mb to the top of its five-year range. 

Recent Developments in Singapore and China Stocks

Singapore stocks built by 2.5 mb in March as an increase in middle distillates of 0.6 mb offset a decrease in light distillate stocks of 0.5 mb.  Residual fuel oil inventories built by 2.5 mb as regional demand for bunkers and fuel oil used in power generation remained weak.  The last two weeks in March, however, saw some retracement in fuel oil stocks, as they declined from a 2009 high of 21.9 mb

Last month's report featured an update on China's inventories (see China's Inventory Picture -More Colour But Still Hazy, page 33 of report dated 13 March 2009) based on new crude stock data from China Oil, Gas & Petrochemicals (OGP).  So long as this data remains available, we will feature it as another indicator of overall inventories, but with the caveats we noted last month related to completeness and accuracy.  The latest OGP data show China February crude stocks fell by 4.4 mb to 268 mb as net imports fell and refinery intake increased.  Gasoline and gasoil inventories held by Sinopec and CNPC both fell slightly.  Gasoline stocks declined by 0.9 mb to 31.9 mb and gasoil stocks nudged down by 0.1 mb to 53.7 mb.  In the past two months, product category declines have totalled 0.8 mb and 1.0 mb, respectively, although stocks remain well above last year's levels.



  • Benchmark crude oil prices exceeded $50/bbl for the first time in four months as a markedly more bullish sentiment swept through global financial markets in late March and early April.  Oil prices have been consistently tracking financial markets as traders intensify their focus on the global economy in search of signs of a potential recovery in oil demand.  However, pervasive weak supply and demand fundamentals cast a long shadow and could limit any further gains for now.
  • Oil markets were also supported by lower OPEC production levels and the group's decision to rollover existing output targets.  However, OPEC cuts have yet to dent stubbornly high oil stocks and the full impact of the reduced volumes may take some time to translate into a significant stockdraw.
  • Refined product markets trailed the upswing in crude prices and refinery margins were universally weaker in March across the three main refining centres surveyed.  Much of the weakness stemmed from a compression of middle distillate cracks in all regions, continuing the trend of recent months.
  • March dirty freight rates continued to languish at five-year lows as OPEC production cuts and a decrease in oil trade continued to outweigh demand for floating storage.  Clean tanker rates for major routes steadily declined through the month on oversupply and weak demand.


Benchmark crude oil prices crossed the $50/bbl threshold for the first time in four months as a markedly more bullish sentiment swept through global financial markets in late March and early April, notably following the G20 summit in London.  Futures prices hit a high of $54.34 for WTI and $53.50 for Brent but eased back again in early April.

A further cut in OPEC supplies in March also supported firmer prices.  OPEC output for the 11 members bound by targets fell by 235 kb/d, to 25.6 mb/d.  The producer group's decision to rollover existing targets levels at its 15 March meeting in Vienna meeting rather than open up the contentious debate about further target cuts helped to stabilise markets.

Pervasive weak oil supply and demand fundamentals cast a long shadow but oil prices in early April were last trading in a higher $48-53/bbl range.  Oil prices have largely moved in lock-step with financial and equity markets in recent months as traders focus on global economic developments for any sign of a potential recovery in oil demand.  The latest price rally over the $50/bbl mark was triggered by a convergence of bullish stimulus plans announced by governments and international financial institutions.  In the span of a few weeks, China unveiled plans to substantially increase lending in a bid to support credit markets and economic activity, the US Federal Reserve put forward proposals to buy up toxic government debt and mortgage bonds, the G20 announced a $1.1 trillion spending package,  the European Central Bank unexpectedly cut rates (albeit less than expected) and Japan announced it would inject a further $100 bn into its economy.  Expectations heightened that the ailing global economy would soon turn the corner and led to a more than $10/bbl surge in prices from the beginning of March.

However, with few solid indicators that the stimulus packages are showing visible results so far and scant data showing oil fundmentals are improving, prospects for a sustained rally in oil prices in the near term remains elusive.  Indeed,  this report's revised projections show 2009 demand down by 2.4 mb/d, to 83.4 mb/d, compared with the 1.2 mb/d decline forecast last month, largely due to the weaker economic prognosis and much lower-than-expected 1Q09 data.

The bullish market sentiment in recent weeks appears to have temporarily masked persistent underlying weak price signals in both crude and refined product markets.  OPEC production cuts have yet to dent stubbornly high oil stock levels, now estimated at a 16-year high of 61.6 days of forward cover.  Arguably, the less dramatic metric of absolute stock levels in mb may be a more accurate gauge of the market in present circumstances.  Lower OPEC output to date has basically matched the decline in global oil demand, with the full impact of reduced production volumes not expected to translate into a significant stock drawdown for some time to come.  However, until then, prices are likely to ebb and flow, with global economic and financial markets developments being two driving forces among many influencing oil price direction.

The recent headline-driven price rally in WTI futures markets helped briefly restore the traditional price relationship between WTI and Brent futures in March.  The WTI contango narrowed to an average of $1.44/bbl in March compared with $3.90/bbl in February.  Since mid-December, WTI had traded at a discount to Brent instead of the more normal premium due to persistent depressed prompt prices for the US benchmark.  Traders capitalised on the price weakness for prompt WTI relative to forward markets by storing barrels at tank farms around Cushing, Oklahoma, the physical delivery point for the NYMEX light sweet crude contract, and then selling it at a later date at higher forward prices.

Moreover, the relatively steeper contango formation for WTI compared with Brent opened arbitrage opportunities for North Sea crude and other grades to move to the US market, which ultimately created a mini-armada of floating storage offshore the Gulf Coast.  The heady combination of high stocks levels both onshore at Cushing and on tankers created a vicious cycle of chronic weak prompt prices for WTI.  The market's exploitation of this price anomaly undermined WTI's credibility and raised doubts about its future as a global benchmark.

The $8.80/bbl surge in futures prices for WTI in March far outpaced the $3.54/bbl rise in benchmark Brent over the month and in the process triggered, albeit tenuous, a reversal of fortune for the beleaguered US benchmark.  Firmer gasoline demand and fallings stocks at Cushing lent some support to higher WTI levels but the exaggerated increase relative to other crudes largely reflects an upswing in financial markets and WTI's tendency to follow headlines higher or lower.  By contrast, the substantial surplus of crudes in storage and on offer in the market, such as Nigergian grades, kept a lid on upward price movements for the more grounded North Sea marker.  As a result, WTI regained its pole position over Brent, posting an average 64 cents/bbl premium in March compared with a discount of $4.62/bbl the previous month and $3.78/bbl in January.  However, with the contango widening again to over $2/bbl in early April, WTI is once again trading at a discount to Brent.

Spot Crude Oil Prices

Spot crude oil markets edged steadily higher in March, with month-on-month increases ranging from a low $1.56/bbl for Nigerian Forcados to a stronger increase of $5.35 for Iranian Heavy crude.  The substantial cutback in heavy and medium sour crudes by OPEC members helped narrow differentials between light and heavy grades.  In a departure from the recent norm, much-coveted gasoline-rich Nigerian crudes were exceptionally weak, with ample supplies on offer from storage and an unusually high level of cargoes unsold from the April sales program.  Nigeria raised prices ahead of the driving season but the relatively steep increases,  given weak demand and plentiful supplies, prompted buyers to seek alternative grades.  Surplus Nigerian barrels also depressed prices for similar grades such as Algerian crudes.

The  heavier-than-usual refinery maintenace season, coupled with economic run cuts, sharply curtailed crude demand.  In the US, record crude inventory levels at 16-year highs and floating storage tempered gains early in the month.  Relatively cheaper prices for African crudes prompted China to pick-up a number of cargoes for storage.  Angolan grades were particularly sought after.

In response to weaker demand Saudi Aramco cut the May price for its flagship Arab Light to all regions for the first time in five months.  US buyers saw the biggest drop, with the differentials for Arab Light cut by $4.15/bbl, to WTI minus $2.25.  In Europe, Arab Light was down $1.60/bbl, to Brent minus $4.05.  Prices for the Far East were down only 10 cents/bbl, to the Oman/Dubai plus 80 cents/bbl.  Prices for Arab Heavy were also lowered in line with weaker fuel oil cracks.  Other Mideast producers, such as Kuwait and Iran, followed the Saudis lead, possibly signalling general expectations of weaker markets in the weeks ahead.

Spot Product Prices

Refined product markets lagged the uptick in crude oil prices but both US and European spot prices moved higher over the month on anticipation that gasoline demand would pick up ahead of the driving season in spring and summer.  Gasoline crack spreads to benchmark crudes edged up to around $10/bbl from under $5/bbl at the beginning of the month.  US gasoline trade was boosted by the switch from winter grade production to more expensive summer-grade gasoline.  European refiners were a key beneficiary of stronger US gasoline trade, with at least 15 cargoes moving trans-Atlantic.

By contrast, Asian gasoline markets were under pressure from weak demand, high stocks and an influx of supplies from Chinese refiners.  Contrary to run cutbacks almost everywhere else, Chinese refiners have not significantly curtailed their operations as yet since they are guaranteed a profit under the new pricing system that went into affect at end-2008 and revised again in late March.  As a result, Chinese exports of gasoline continue to rise and risk saturating neighbouring markets.  The start-up of Reliance's Jamnagar refinery expansion is also expected to boost gasoline exports to the region in the months ahead.

Distillate started off the month as the weak link in the product chain but quickly moved higher in Europe and the US in response to the cutback in refinery output rates.  A sharp slowdown in economic activity, especially in northeast of China, pressured crack spreads in some markets to their lowest levels in five years.  The onset of the peak spring agricultural period in China has also failed to boost demand.

However, surplus gas oil and diesel supplies from Asia and the US are finding a home in Europe as run cuts there have increased demand for some products.  European distillate markets were also supported by German consumers restocking heating oil supplies after the winter season.

The sharp downturn in economic activity and reduce power use at utilities continues to undermine fuel oil markets.  Crack spreads for both high-sulphur and low-sulphur fuel against benchmark crudes in all regions were running between minus $5/bbl to minus $10/bbl.

Refining Margins

Refinery margins were universally weaker in March across the three main refining centres surveyed.  Much of the weakness stemmed from a compression of middle distillate cracks in all regions, continuing the trend of recent months.  Bulging inventories and the build-up of floating storage of jet fuel and gasoil in Northwest Europe depressed prompt cracks.  Gasoline cracks were stronger on the US Gulf Coast, stable in Europe and significantly weaker in Singapore and on the US West Coast.

Late March saw a partial recovery in refining margins as renewed crude price weakness outpaced the decline in product prices.  However, at the time of writing, products were surrendering gains relative to marker crude grades as anaemic demand again undermines pricing power in the product markets.

Kern margins on the US West Coast posted the heaviest declines on the month, for both coking and cracking configurations.  The primary driver of this move was the collapse in Kern's extremely heavy discount versus ANS and WTI, from a low of -$20/bbl in mid-February to a small premium by the end of March.  By early April, the discount had stabilised at around -$5/bbl versus ANS, in line with its 12-month average discount in percentage terms.

Hydroskimming margins generally underperformed cracking margins as weaker cracks spreads for naphtha and fuel oil (which are assumed to have higher yields in hydroskimming refineries) weakened in Europe and Asia.  Consequently, upgrading margins generally improved during the course of March, with the exception of the US West Coast, where cracking refinery configuration's higher exposure to fuel oil narrowed the upgrading spread when running Kern River crude.

End-User Product Prices in March

In March, retail product prices in surveyed IEA member countries on average decreased by 5.2%, in US dollars, ex-tax.  Gasoline prices in the US, Canada and Italy continued to increase month-on-month, but the higher levels were offset by much steeper declines in petrol prices in other European countries.  In March, consumers in the US on average paid $1.96/gallon ($0.512/litre) for gasoline, in Japan ¥112/litre ($1.138/litre) and in Europe prices ranged from a low of €0.907/litre ($1.143/litre) in Spain to a high of €1.165/litre ($1.468/litre) in Germany.  Low-sulphur fuel oil prices decreased by 1.9%, diesel prices by 8.3% and heating oil end-user prices by 9.8% month-on-month, in US dollars, ex-tax.  Retail prices were 48.5% below levels of a year ago.


March dirty freight rates continued to languish at five-year lows as OPEC production cuts and a decrease in oil trade continued to outweigh healthy demand for floating storage.  Note, our freight rates now reflect daily pricing as opposed to weekly rates, as featured in previous reports.

Middle East Gulf to Japan VLCC rates continued to edge downwards during March.  Chartering costs fell to around $7.50/tonne by month-end from near $11/tonne in late February.  North Sea Aframax rates displayed a similar pattern, finishing March below $5/tonne.  However, West Africa to US Atlantic Coast Suezmax rates showed greater life, as rates rose from almost $14/tonne in late February to almost $20/tonne in early March.  Attractive pricing early in the month made West African grades, particularly Angolan, well sought after.  Yet the boost was short-lived as rates on the Africa-USGC route fell to almost $11/tonne by end-March, weighed down by reduced demand for gasoline-rich Nigerian crude supplies.

Clean tanker rates also continued to languish as major routes steadily declined throughout the month.  Europe to US Atlantic Coast rates saw brief support around $16-17/tonne in the beginning of March with open trans-Atlantic gasoline arbitrage.  However, rates dropped to almost $10/tonne by end-month as increases in US gasoline stocks and stronger refinery production closed the window.

Middle East Gulf to Japan clean rates also saw support evaporate in late February to early March.  After beginning the month over $21/tonne, rates fell to just above $13/tonne by end-March.   Oversupply and weak demand continue to undermine most East-West product trade.  Naphtha, however, remains an exception.  High run rates at Japanese and South Korean petrochemical plants in April are providing support to naphtha trade and an outlet for European volumes, in particular, at a time when OECD Pacific refineries are undergoing increased maintenance.



  • Weakness in global crude runs should continue throughout 2Q09 and into 3Q09.  Downward revisions to demand, weakness in middle distillate cracks and reports of bulging product inventories in several markets suggest a further painful period of weak margins as refiners adjust operating rates to the 2.8% decline in demand now expected this year.
  • The 2Q09 crude throughput forecast of 71.2 mb/d, is reduced by 1.1 mb/d from last month's report, despite an upward revision to Chinese runs, the following start-up of CNOOC's 240 kb/d Huizhou refinery in March.  Throughputs for the quarter reflect an annual decline of 2.9 mb/d, of which 2.0 mb/d in OECD regions.  Lower OECD imports will also be necessary to balance the lower demand forecasts.  This could translate into non-OECD export refiners bearing a greater share of the lower crude runs.

  • 1Q09 global runs are unchanged versus last month's report.  However, much stronger-than-expected European and Chinese runs in February mask much weaker-than-expected January data for China and the Middle East and lower estimates for March for Iran, Russia and Other Asia.  A continuation of OECD crude runs ahead of forecast would suggest that OECD refiners are coping better with the economic crisis and consequently non-OECD export refiners will face a more severe downturn in crude runs in the months to come.
  • OECD refinery yields have evolved significantly in the last year.  These changes have been accompanied by shifts in trading patterns, as refiners seek to adjust production to declining domestic demand.  Notably, gasoline and gasoil/diesel yields remain above their respective five-year ranges, while fuel oil and naphtha yields continue to lag beneath their respective five-year ranges.

Global Overview

The backdrop of weaker demand forecasts, notably in the OECD, again reduces our forecast for global crude throughput in the coming months.  Despite the leaden skies under which much of the world sits economically these days, February data has proved surprisingly strong, suggesting either demand is not as weak as reported, or that the resulting build in product inventories will be the precursor of additional margin weakness in the months to come.

Intuitively, this month's forecasts appear extremely weak vis-à-vis recent historical ranges.  At this present juncture, uncertainties abound and there undoubtedly remains a risk that refinery activity levels could exceed these forecast levels if the decline in demand were to be offset by lower NGL production, particularly where it is integrated into the petrochemical supply chain.  However, such low-cost production appears unlikely to shoulder the burden of reduced activity, given its competitive advantage and the requirement for gas production, the primary driver of NGL supply, to be maintained.  Lastly, we assume that refineries provide the incremental, or swing, source of supply for petrochemical feedstock.

Weakness in crude throughput is not limited solely to OECD regions.  Asia Pacific (including OECD Pacific, China and Other Asia) saw crude runs an annual decline of 1 mb/d in 1Q09.  Asia Pacific crude runs are forecast to post a year-on-year decline of 0.9 mb/d in 2Q09, despite our higher forecast for Chinese runs over the quarter.  Nevertheless, OECD crude runs are forecast to bear the lion's share of the annual decline in 2Q09 crude runs, down by 2.0 mb/d, and remain similarly depressed in July.

Our more aggressive forecast for Chinese crude runs over the course of 2Q09 is based on February's significantly higher rates, and the assumption that CNOOC's newly commissioned 240 kb/d Huizhou refinery will ramp up production progressively over the coming quarters.  In addition, the more attractive pricing environment for state refiners, following government price reform in late 2008, may also support activity levels.  However, higher runs will necessitate higher exports if demand does not start to recover in short order, pushing China towards more of a merchant refiner role and adding further pressure to product cracks and benchmark refining margins, as other refiners will need to scale back runs to contain product inventories.

Furthermore, the continued weakness in middle distillate cracks could undermine activity levels in Asia, but also potentially Europe, while the more gasoline-biased US refining industry may benefit from the rebound in gasoline cracks.  Nevertheless, US margins are anticipated to remain under pressure from excess Atlantic Basin gasoline supply potential.  To the extent that Iran's recent weakness in refinery throughput may continue into the future, an increasing amount of gasoline will need to be imported.  This potentially offers an additional source of demand to European supply, albeit against increasingly stiff competition from Asia.

Global Refinery Throughput

Estimated 1Q09 global crude throughput of 71.4 mb/d is broadly unchanged from last month's report.  Weaker official January data for the OECD, Iran and China all contribute to the 0.45 mb/d reduction in runs to 71.0 mb/d for the month.

The March throughput estimate is also cut by 0.3 mb/d, despite the substantial reduction in non-OECD runs, being partially offset by higher OECD European and Chinese estimates.  Offsetting both these reductions is the substantially stronger February data, particularly for the OECD and China.

Global crude throughput is forecast at 71.2 mb/d for 2Q09, some 1.1 mb/d lower than last month's report, reflecting the now-lower demand estimates.  Throughputs for the quarter result in an annual decline of 2.9 mb/d, of which 2.0 mb/d is in OECD regions.  Were OECD crude runs to be significantly ahead of our current forecast, it may suggest that OECD refiners are coping better with the downturn in demand than we have assumed.  However, this would imply that non-OECD crude throughput estimates for 2Q09 are still likely too high and that export refineries in the non-OECD will need to shoulder a higher proportion of future run cuts.  There appear only two likely scenarios for this to occur.  Either refiners voluntarily cut runs to support margins or, perhaps more likely, substantially weaker margins drive crude runs lower.  Lower OECD product imports would contribute to drive margins lower.  Currently, non-OECD runs are 35.1 mb/d, some 0.2 mb/d down on last month's report.

OECD Refinery Throughput

Provisional February data indicate that OECD crude throughput averaged 37.3 mb/d, some 0.5 mb/d above last month's estimate.  Regionally, European throughputs were 0.3 mb/d stronger than estimated, while North American runs were 0.2 mb/d stronger.  Despite this rebound in crude throughput, runs are 0.6 mb/d lower year-on-year, with the US, Portugal and Japan accounting for much of the decline.  The smaller year-on-year contraction in crude runs is somewhat flattered by the weak February 2008 baseline.

OECD crude runs reached their weakest February level since 1995, when they averaged just 36.5 mb/d.  However, it should be pointed out that the current OECD utilisation rate of 82.6% is substantially lower than 89.3% reported then, due to lower installed capacity at the time.  Weakness was most pronounced in the US, with 80% utilisation.

OECD 1Q09 throughput now averages 36.9 mb/d, some 0.3 mb/d higher than in last month's report.  The higher February European data and March estimate underpin much of the revision.  However, crude runs remain 1.3 mb/d below 1Q08 levels, driven by the exceptionally weak January level, when crude runs were 2.2 mb/d lower year-on-year.

The March estimate of 36.6 mb/d, suggests crude runs will fall month-on-month in all three regions, by a total of 0.7 mb/d.  2Q09 throughput is estimated at 36.2 mb/d, an annual decline of exactly 2.0 mb/d, with North American refineries accounting for nearly 60% of the decline and European and the Pacific a further 20% each.  Current OECD forecast for March and 2Q09 throughputs suggest activity levels will be the lowest since 1995.

OECD North America crude throughput eased back in February, with Canadian crude runs falling the most.  This trend continued into March according to weekly data, and we expect April to see an extension of this trend.  May crude runs should pick up, notably in the US, where, despite the slowdown in demand, the seasonal strengthening in gasoline demand should elicit higher runs.  2Q09 forecasts have been cut by 0.2 mb/d this month, reflecting the lower demand estimates and the factors mentioned above which are likely to limit refinery activity levels.

OECD Pacific February crude runs were 0.1 mb/d ahead of forecast, with only Korea reporting slightly weaker-than-expected crude runs.  Recent reports indicate that Korean refineries are likely to reduce runs over 2Q09, due to deteriorating economics and despite strong February data.  Japanese crude runs weakened over the course of March and are forecast to weaken further in the months ahead as maintenance reaches a June peak.  Thereafter, runs would start to recover.  However, the lower demand forecasts now incorporated into our estimates suggest any rebound will be minimal before 4Q09.

OECD Europe crude throughput rebounded in February as stronger-than-forecast UK and Turkish refinery runs lifted the regional total.  Nonetheless, crude runs were 0.1 mb/d down year-on-year.  French and Italian activity recovered after the low levels seen in January, but elsewhere crude runs were broadly flat.  March and April runs are expected to remain weak, as maintenance and economic run cuts weigh on throughput levels.  Thereafter a recovery back towards just above 13 mb/d is now expected.  Higher run rates than these are certainly possible, but we suspect that lower runs elsewhere are necessary for this to become a reality.

Non-OECD Refinery Throughput

Forecast 2Q09 non-OECD crude throughput is revised downward this month by 0.2 mb/d, despite Chinese throughput estimates being 0.3 mb/d higher and year-on-year growth is now pegged at -0.9 mb/d.  Similarly, 1Q09 estimates are reduced by 0.3 mb/d following weaker estimates for Ukraine, Iran, Taiwan and the Philippines.

Forecast Chinese 2Q09 crude throughput is 0.3 mb/d higher than last month, at 6.7 mb/d, following the start up of CNOOC's 240 kb/d Huizhou refinery in March, and stronger-than-expected February crude runs.  Sinopec's announcement of a 9% increase in planned crude throughput for 2009, in combination with the scrapping of VAT on exports, could result in Chinese state refiners shifting their focus more towards merchant refining rather than purely meeting domestic demand requirements.  In combination with the recently reported drive to raise gasoline yields, Recent trade data suggest that Chinese refiners are raising gasoline exports and potentially diesel exports as a way to reduce high stock levels.

Other Asia forecasts are again lower, as merchant refiners in Taiwan, Thailand, and Singapore are assumed to trim runs on the back of demand weakness and poor margins.  Regional 2Q09 crude runs are now forecast to decline by 0.4 mb/d year-on-year.  Indian data for February was in line with forecast at almost 3.4 mb/d, although the contribution from Reliance's refineries was weaker than forecast at just 660 kb/d.  This implies that either the newly opened 580 kb/d Jamnagar expansion is still running at minimal levels, that the existing plant underwent maintenance, or possibly that the newly opened capacity is not yet within the reporting structures for Indian data collection.

Heavier maintenance and lower demand are now expected to weigh on Russian crude throughput, with March and April seeing particularly heavy turnaround activity.  Thereafter, the weaker state of domestic demand will likely weigh slightly on crude throughput, although higher exports are the likely corollary to weaker Russian domestic demand.  Consequently, the FSU 2Q09 forecasts has been reduced by 0.2 mb/d from last month's report.  Middle East forecasts have been trimmed due to lower Iranian throughputs in recent months.  Despite rising gasoline imports the country's refineries appear to be struggling to keep runs much above 1.5 mb/d, and well below our previous Iranian forecast of 1.7 mb/d.  We have therefore cut our forecast to around 1.5 mb/d, depending on planned maintenance levels.

OECD Refinery Yields

Refinery yields have evolved significantly in the last year.  This evolution has been accompanied by shifts in trading patterns.  This month, in addition to considering purely refinery yield changes, we also illustrate some of the year-on-year shifts in output and trading that have accompanied the yield changes.  It should be noted that our trade figures include intra-regional trade; thus, for example, an increase in exports from a particular region does not necessarily imply an increase in imports in some other region; rather, it may be due to a higher level of trade among countries in the same region.

OECD gasoline yields, although still well above the five-year range decreased slightly to 34.0%, having reached 34.2% last December, which was their highest level since 2003.  Yields in North America and the Pacific decreased seasonally in spite of an improvement in crack spreads.  In Europe, yields increased counter-seasonally supported by stronger crack spreads, a 16% increase in net exports, and a need to replenish regional stocks that fell below the five-year range.

Naphtha yields, after having reached a level of 4.1% in December 2008 (their lowest since 1995), rebounded to 4.4% in January.  Crack spreads supported the month-on-month increase, although on a year-on-year basis, yields remain well below the 2008 level.  In absolute terms, production, domestic demand as well as net imports decreased by 25% in the OECD, confirming the striking contraction of demand.  In contrast, naphtha imports in North America increased by 56%, turning this region to a net importer.

In spite of lower crack spreads, January jet fuel/kerosene yields increased to 9.2% from 8.8%, in accordance with seasonal patterns.  However, yields remain at the lower end of their five-year range and in combination with the year-on-year decline in crude runs, total OECD production was 3.9% below January 2008.  Yields increased most significantly in the Pacific from 16.3% to 17.2%, to above the five-year average, in part driven by an increase in net exports of 32%.  In Europe, net imports increased by 31%, while in North America net imports decreased by 37%.

After reaching a record high level of 31.3% in December 2008, OECD gasoil/diesel yields decreased seasonally in January to 30.4%, remaining however above the five-year range.  All three regions showed seasonal decreases underpinned by decreasing crack spreads.  Year-on-year, OECD countries decreased their net import position by 47% from a low base whereas production decreased only 2%.  Trade, on the other hand, has expanded year-on-year, with North American gasoil/diesel net exports being twice as high as in January 2008 and the Pacific net exports increasing 38%, whereas in Europe net imports increased 20%. 

Even though January fuel oil yields increased to 9.3% from December's level of 8.7%, they remain below the five-year range.  All OECD regions increased yields seasonally, with the Pacific rising 1.2 percentage points to 12.7%.  Total OECD fuel oil production decreased by 8% year-on-year in January, the Pacific declined by 17.5% and the European region by 8.9%, whereas in North America fuel oil production rose by 4.5%.  OECD fuel oil net exports increased by 123%, as North America became a net exporter compared with its more usual net importer status.  The Pacific became a net importer, but the overall scale of the change in trade was low compared with other OECD regions.