Oil Market Report: 14 May 2009

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  • Oil prices strengthened to six-month highs, with benchmark crudes reaching $58-60/bbl by early May.  Oil futures have moved higher in tandem with stronger global financial markets.  Yet, new bullish macroeconomic sentiment has not yet produced signs of oil demand recovery and oil market fundamentals remain weak.
  • Forecast 2009 global oil demand is revised down 0.2 mb/d on weaker-than-expected preliminary data and non-OECD country baseline changes.  Global oil demand is projected at 83.2 mb/d, 2.6 mb/d (3.0%) below 2008.  Continued oil demand weakness is premised on strong economic recovery later this year remaining elusive.
  • Global oil supply averaged 83.6 mb/d in April, up 230 kb/d versus. March on higher OPEC output.  Total 2009 non-OPEC supply is revised up 50 kb/d, after stable North Sea production and higher-than-expected Russian production in recent months.  Total non-OPEC supply falls from 50.6 mb/d in 2008 to 50.3 mb/d in 2009, offset by a similar rise in OPEC NGL production.
  • OPEC crude production in April broke a seven-month downtrend, with output up 270 kb/d, to 28.2 mb/d.  OPEC-11 output rose 230 kb/d, to 25.8 mb/d, 950 kb/d over OPEC's 24.845 mb/d target, reducing compliance to 78% versus March's 83%.  OPEC ministers meet again on 28 May in Vienna.
  • OECD industry stocks rose by 15.4 mb in March to 2,745 mb, 6.7% above a year ago.  Lower Pacific crude and distillates only partially offset higher North American and European crude stocks.  Rising inventories and weaker forward demand pushed end-March stock cover to 62.4 days, 8.0 days above a year ago.
  • Global crude runs remain depressed compared with the five-year historical range.  Despite higher China and North America estimates, global runs should trend lower than previous forecasts due to weaker demand.  We see 2Q09 crude throughputs at 71.1 mb/d, 3.1 mb/d lower than 2Q08 and 0.2 mb/d below last month's estimate.

Known unknowns

Global oil demand for 2009 is now estimated at 83.2 mb/d, 2.6 mb/d lower than in 2008, and the sharpest single year's fall since 1981.  While this looks a dramatic year-on-year change, preliminary data for early 2009 suggest little upside for now in our demand assessment, even if broader market sentiment has become more optimistic.  A downward revision of 0.1 mb/d for the 2008 baseline this month follows the incorporation of further JODI monthly data and annual data for non-OECD countries.  The composite global GDP estimate constructed last month came in close to the latest IMF numbers, so our GDP assumption remains close to the previous estimate at 1.4% contraction for 2009.  Preliminary data also show 2Q09 demand below expectations, notably in China, the US and Russia.  Despite tapering this downgrade through 2H09 (most analysts expected early 2009 data to look bad), we have nonetheless trimmed 2009 demand by 0.2 mb/d.  Is there a danger of going too far, especially as markets have latched onto something positive in the past month in moving prices above $55/bbl? Could demand be stronger than we envisage?

Unfortunately, dissection of the 1Q09 global balance offers little scope for an imminent demand upgrade.  Superficially, the global supply/demand picture saw better balance in 1Q09, after three consecutive quarters when supply ran ahead of demand.  However, there was also a counter-seasonal OECD stockbuild and a net shift of 0.5 mb/d of oil into transit and floating storage.  So the 'balance' highlighted graphically above is misleading.  With preliminary supply and demand both around 83.8-84.0 mb/d for the quarter, and a combined 1.2 mb/d build in OECD stocks and oil afloat, there is an offsetting 'miscellaneous' element in our balance which stands at an unprecedented -0.9 mb/d for 1Q09.  It pays to take note of this frequently overlooked item for guidance on supply, demand or stock levels.  A negative 'miscellaneous to balance' suggests non-OECD stockdraw, understated supply, overstated demand or a combination of all three.  Widespread stockdraw amid market contango seems unlikely.  OPEC supply could have been higher than estimated, but that would imply output compliance below the 80% market consensus.  The miscellaneous item will likely diminish as final 1Q09 data emerge, allocated between supply, demand and inventories.  But the scale of this negative item suggests early 2009 demand could be weaker, not stronger, than shown here.

Our projections point to a 'call on OPEC crude and stock change' oscillating around 28 mb/d in the second half of 2009.  OPEC ministers meet again in Vienna on 28 May to review market developments and production policy.  Our data suggest OPEC members have enacted nearly 80% of the production curbs announced since last autumn.  Performance versus targets has varied, and market reports abound suggesting disquiet among core OPEC members over the degree of compliance by Iran and Angola in particular.  Nonetheless, 80% compliance and total cutbacks of 3.2 mb/d since last September represent an impressive degree of cohesion compared with historical experience.  Recent market chatter however suggests that fraying compliance, and the fact that prices are now 50% higher than February lows, could argue against a further official cut in target on 28 May.  We remain both unwilling and unable to forecast what OPEC will decide.  However, under a simplified scenario (ignoring substantial current floating storage volumes, for example) in which OPEC attains and then sustains output at its current target, stocks could still move slowly lower by the end of the year in absolute terms, even if the potential distortion of declining demand could keep forward cover stubbornly high.



  • Forecast global oil demand for 2009 has been revised down slightly following weaker-than-expected preliminary data in various regions and minor baseline changes to non-OECD demand.  Global oil demand is projected at 83.2 mb/d (-3.0% or -2.6 mb/d when compared with 2008).  The demand estimate for last year, meanwhile, is down by 0.1 mb/d at 85.8 mb/d (-0.3% or -0.2 mb/d versus 2007).  This report incorporates the latest GDP assumptions from the IMF's World Economic Outlook, published in late April.  The projections are broadly in line with what we had anticipated and factored in last month, with global economic growth foreseen to contract by almost 1.4% in 2009.
  • Forecast oil demand in the OECD has been adjusted down marginally for 2009 to 45.1 mb/d (-5.1% or -2.4 mb/d on a yearly basis).  An upward revision of some 160 kb/d in 1Q09 has been largely offset by a downward adjustment in 2Q09, resulting from very weak preliminary data for the US in April and to a lesser extent in Europe, which has been partially carried forward.  By contrast, the oil demand estimate for 2008 remains virtually unchanged at 47.5 mb/d (-3.4% or -1.7 mb/d versus 2007).

  • Forecast non-OECD oil demand has been revised down slightly for both 2008 and 2009 as annual data for 2007 for around 70 countries spread across all regions was incorporated.  Preliminary data in several large countries such as China and Russia continue to exhibit sustained weakness.  Oil demand is foreseen to average 38.1 mb/d this year (-0.4% or roughly -140 kb/d versus the previous year), which would be the first contraction since 1994.  The estimate for 2008, meanwhile, now stands at 38.3 mb/d (+3.8% or +1.4 mb/d versus 2007).
  • The 2009 oil demand forecast is consistent with recent patterns of economic activity, on the assumption that the global economy will markedly recover in 2010 at the earliest.  However, a string of 'green shoots' in a few countries has led to expectations that strong global economic growth will actually resume late this year, if not before.  If so, this oil demand forecast could indeed prove to be too pessimistic.  Yet it remains to be seen whether the recent outbursts of economy activity simply reflect the rebuilding of depleted inventories across several industries.  As far as oil demand is concerned, the weakness of the latest available data suggest that such a quick recovery remains so far elusive.

Global Overview

Last month's sharp downward revision to our 2009 global oil demand forecast was dubbed by some observers as 'methodologically inconsistent' and therefore excessive.  Yet the, admittedly imperfect, correlation between oil demand and GDP growth, as highlighted in the graph overleaf, suggests that the prognosis is actually in line with the unprecedented economic recession that has extended throughout the world.

The correlation's more obvious outliers correspond to the early 1980s, when advanced economies - then largely driving oil demand growth - were much more dependent on oil.  Since then, however, the oil market has changed vastly, becoming more price inelastic and more sensitive to economic activity, as can be seen in the graph.  On the one hand, demand in the OECD became more geared towards transportation fuels, while efficiency improvements reduced oil intensity in most sectors.  On the other hand, demand in several large non-OECD countries picked up as income per capita gradually reached the threshold where energy demand takes off.

The comparison between the oil demand picture that prevailed in 2007 (rather than in 2008, which was an atypical year because a sharp price surge coincided with the start of a deep economic downturn) with what is expected in 2009 highlights the damage brought about by the current global recession.  Seven of the 10 largest oil-consuming countries posted positive demand growth in 2007, notably emerging countries (excepting Russia, where a relatively mild winter weighed on fuel oil demand).  In the OECD, only Japan, Germany and the US featured flat or negative growth - the first facing a pronounced structural oil demand decline and the latter two largely as a result of a very mild winter, with depressed heating oil and fuel oil use.

By contrast, in 2009 eight of these 10 countries are likely to register a marked fall in oil demand as their economies slow down or contract.  This could be particularly dramatic in OECD countries, despite an unusually cold winter in most of the Northern Hemisphere.  In China, which has witnessed a sharp deceleration in manufacturing as export markets dry up, oil demand will fall slightly or at best remain flat, although economic growth will firmly remain in positive territory.  Only in India and Saudi Arabia is demand poised to grow; the former has so far managed to weather the worst effects of the economic storm, while in the latter oil demand is supported by very low end-user prices, sustained electricity needs and an expanding petrochemical sector.

This prognosis could obviously change if the global economy were to rebound strongly towards the end of the year.  A closer examination of our outlook and those of other forecasters shows that the main differences are concentrated in the second half of the year, particularly in 4Q09.  Whereas we predict an annual contraction in oil demand of 1.9% in that quarter, based on the assessment by both the IMF and the OECD that economic recovery will be likely deferred to early 2010, other forecasters see a much lower fall or even a rebound.  This school of thought assumes that the global economy will feature a pronounced 'V-shaped' bounce much earlier than we have assumed, and cites as evidence a recent string of so-called 'green shoots' in several key countries - a slight rebound in industrial production in Japan, Germany and China and, in the US, stronger-than-expected consumer demand despite dismal 1Q09 GDP figures, a rebound in house sales and a slower pace of jobs destruction, to name just a few.

These 'green shoots', which are certainly welcome, may be interpreted as proof that the global recession has bottomed out, with significant fiscal and monetary loosening in key economies working their way up.  However, these recent bursts of economy activity could also simply reflect the rebuilding of depleted inventories across several industries, making it arguably premature to predict an imminent and strong economic rebound - not least because the elimination of spare capacity, the deleveraging of the private sector in several highly indebted countries and the rebalancing of global demand are still at an early stage.  As such, the recovery could conceivably be more 'L-shaped' (i.e., shallow), as the IMF and others posit.  The debate will undoubtedly continue - yet, as far as oil is concerned, the latest available data indicate that the 'demand green shoots', if any, continue to be buried under the thick ice of the current economic winter.


Preliminary data show that OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 4.5% year-on-year in March, with all three regions recording losses for the eleventh month in a row.  In OECD North America (which includes US Territories), oil product demand fell by 5.9% year-on-year, with all product categories again posting losses.  In OECD Europe, strong counter-seasonal heating oil deliveries failed to offset declines in other product categories, with total demand shrinking by 0.3%.  In OECD Pacific, demand contracted by an astonishing 7.6%, despite a marked rebound in gasoline deliveries.

Overall revisions to February's preliminary figures were positive, with the three regions submitting much higher-than-anticipated demand, notably for naphtha, gasoline, jet/kerosene and heating oil.  February's OECD demand estimates were thus adjusted down by 100 kb/d, indicating that demand fell by 5.8% during that month, rather than by 5.4% as previously estimated.  Moreover, preliminary data for April were noticeably weaker than anticipated, entailing a 350 kb/d downward revision for 2Q09 demand, partially carried forward in 3Q09 and 4Q09.  Overall, 2009 OECD demand is now expected to contract by 5.1% on a yearly basis (-2.4 mb/d) to 45.1 mb/d (80 kb/d below last month's assessment).

North America

According to preliminary data, oil product demand in North America (including US Territories) decreased by 5.9% year-on-year in March, the fifteenth monthly contraction in a row.  Oil demand in the United States, which has contracted uninterruptedly over the past year and a half, was particularly pronounced (-6.8% year-on-year in March), while Canada's (-2.3%) and Mexico's (-1.5%) fared only marginally better.  Meanwhile, two-thirds of February's revisions to preliminary data (-150 kb/d) were attributable to the US, and the rest to Canada.  Demand in OECD North America was thus weaker than anticipated in that month, falling by 5.1% year-on-year, instead of 4.5%.  Regional total demand is now expected to reach 23.2 mb/d in 2009 (-4.6% or -1.1 mb/d versus 2008 and about 90 kb/d lower than previously anticipated), given 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 plummeted by 10.4% year-on-year in April, with all product categories posting losses, reflecting the burden of the economic recession - GDP contracted by 6.1% year-on-year in 1Q09, almost as much as in 4Q08 (-6.3%).  It is worth noting that colder temperatures (the number of heating-degree days in April was much higher than both the 10-year average and the same month of the previous year) should have arguably provided a modicum of support to heating and electricity needs, yet demand for heating oil and fuel oil receded markedly.  More telling, perhaps, is the fact that gasoline demand fell by 2.0% (the highest rate of decline since December 2008), thus casting a shadow on its allegedly strong recovery, which many observers were confidently predicting last month.

Our pre-emptive adjustment to preliminary weekly data continues to perform relatively well.  Compared with the EIA's weekly-to-monthly revisions (-810 kb/d for February), we adjusted our demand figures by only -110 kb/d for that month.  The data now show that February's year-on-year annual decline reached 5.4%, slightly more than previously estimated (-4.9%).  Based on February's revisions and preliminary March and April data, oil demand in 2009 is expected to contract by 5.1% or 1.0 mb/d to 18.5 mb/d, about 110 kb/d lower when compared with last month's report.

It is important to note that this forecast assumes a resumption of the driving season - which petered out last year as very high gasoline prices coincided with the dawn of the financial crisis.  In other words, being the first OECD country to fall into recession, the US could emerge out of it more rapidly than its peers, probably by the end of the year.  However, as argued earlier, GDP growth is likely to be modest for several quarters, as the economy's imbalances will take some time to be resolved.  In that context, some doubts have arisen as to whether the financial system's woes are being decisively addressed, notably after questions were raised regarding the stringency of the recent round of so-called 'stress' tests, which were aimed at determining the optimal equity that banking institutions should have.

A Relentless Efficiency Drive?

Following the recent flurry of policy initiatives by the federal government with regards to fuel efficiency (such as the tightening of CAFE standards in late March and the insistence over the past few weeks that the ailing GM and Chrysler prioritise the production of smaller vehicles to benefit from government aid), the state of California adopted in late April a rule to regulate emissions from oil products - as opposed to those from vehicles themselves.  California's new standard - a first worldwide - mandates refineries and suppliers to reduce the 'carbon intensity' of transportation fuels sold in the state by 10% by 2020, a rate poised to increase afterwards.  The targets may be met either directly - by reducing the carbon content of produced fuels - or indirectly - by buying and reselling cleaner fuels or purchasing offsetting carbon credits.  The ultimate goal is to replace 20% of the state's fossil fuels with cleaner energy sources, such as electricity, hydrogen, natural gas and biofuels.

More strikingly, perhaps, the chairman of Ford Motor Company - the only US car manufacturer that has not sought the government's financial assistance - has publicly called for a massive increase in gasoline taxes (so that retail prices increase by as much as 70% over current levels) in order to usher in a new generation of fuel-efficient vehicles, arguing that the recent fall in domestic retail prices may entice consumers to turn once again to gas-guzzling SUVs and light trucks.  Such a statement - presented as an alternative to the carbon cap-and-trade system that has been proposed by the Obama administration - marks an unprecedented break with the rest of the industry and with the long-held view that raising gasoline taxes in the US is politically impossible.

Taken together, all these moves suggest that the goal of enhancing the fuel efficiency of the US vehicle fleet is indeed gaining momentum.  In the medium- to long-term, this will arguably have profound effects upon transportation fuels demand.  The growth in gasoline demand (including biofuels), in particular, is unlikely to emulate the recent past.  Demand will probably be marginal or flat in the years ahead (and negative if biofuels are excluded from the pool) - and if so, pose considerable challenges to refiners.

Dealing With Pandemics

The outbreak of the A/H1N1 flu virus in Mexico in late April has raised concerns about an impending pandemic, with the World Health Organisation on high alert, the Mexican government partially shutting down public and private sector activities in early May, and some countries such as China quarantining inbound flights from Mexico.  Even though the global death toll remains relatively minor (compared with regular, seasonal influenza), there are worries that economic activity and global oil demand may be significantly affected if punitive travel bans concerning Mexico or even North America at large were to be adopted.  However, aside from the fact that, in a globalised economy, travel bans after the event are often counterproductive, estimating the likely impact of this flu on air travel and ultimately on jet fuel demand is difficult.

Previous episodes of sharply falling jet fuel demand are not strictly comparable, and hence provide at best only a rough yardstick.  Atlantic Basin jet fuel demand in 4Q01 fell by 13.0% year-on-year (around 410 kb/d) to 2.8 mb/d, after the September 2001 terrorist attacks, and demand did not fully recover until 4Q02.  The SARS epidemic in 2003, which may prove to have been more severe than the current outbreak, saw jet fuel demand in China plummet by 18.9% (40kb/d) in 2Q03, but then rebound by 10.6% in 3Q03, while overall demand in OECD Pacific fell by 8.2% year-on-year in 2H03 (180 kb/d) but rebounded in early 2004.  As far as Mexico is concerned, jet fuel demand has been falling significantly since mid-2008 as a result of the unfolding economic recession.  It is therefore open to question whether the flu impact will be little more than a ripple in an already weakened environment.  As such, our Mexican demand forecast does not account for flu effects; we may alter it once better data become available.


According to preliminary inland data, oil product demand in Europe shrank by a relatively modest 0.3% year-on-year in March.  Somewhat colder temperatures continued to support heating oil (+24.8% year-on-year), as the number of heating-degree days in February was higher than the 10-year average but similar to the same month of the previous year.  Sluggish performance among Europe's largest economies weighed once again on the demand for LPG (-8.5%), naphtha (-14.0%) and jet/kerosene (-6.8%), although diesel recorded a modest bounce (+0.5%).

February's data, meanwhile, were adjusted down by 60 kb/d, given lower-than-expected figures for diesel and residual fuel oil.  Oil demand in OECD Europe is seen averaging 14.6 mb/d in 2009, -4.1% or -620 kb/d compared with the previous year and 20 kb/d lower than previously anticipated.

According to preliminary estimates, inland deliveries in Germany surged by 9.8% year-on-year in March.  As in previous months, the rise was primarily driven by heating oil demand (about 26% of the country's oil demand), which increased outstandingly and counter-seasonally by 81.9% year-on-year on the back of cold weather.  Heating oil consumer stocks, at 61% of capacity by end-March, were sharply above the levels recorded in the same month of the previous year (46%) and higher than in February (58%).  This highlights the significant influence that weather conditions can have upon German - and European - oil demand.  Indeed, German heating oil demand in 1Q09 was 48.1% higher than in 1Q08, when mild temperatures and rising prices contributed to cap deliveries.  It also conceals the fact that demand for other product categories continues to fall, largely as a consequence of the recession.  In that respect, the decline in demand for industrial fuels such as LPG and naphtha (-10.2% and -14.8% year-on-year, respectively) shows little sign of abating.  Only diesel demand (+6.1%) appears to be rebounding, but it remains to be seen whether this figure is an outlier related to the Easter holidays (which occurred in March this year) or the beginning of an ascending trend (the strong growth in diesel demand reported last month actually turned out to be a contraction following data revisions).

The demand picture in France tends to mirror developments in Germany, with deliveries rising by +2.7% year-on-year in March as a result of strong demand for heating oil (+21.0%) and residual fuel oil (+30.3%), which more than offset losses in other product categories such as naphtha (-20%).  As in Germany, this year's much colder weather and lower prices led to a surge of French heating oil demand in 1Q09 of 15.5% year-on-year.  Unlike Germany, though, France is becoming more dependent upon fuel oil for peak electricity generation (power is increasingly being used for heating), despite its sizeable nuclear industry and numerous gas-fired power plants.  The rise in electricity consumption was closely matched by fuel oil demand, which increased by 21.2% year-on-year in 1Q09.

Since early April, French motorists are in principle able to fill their tanks with E10 gasoline, a blend of unleaded 95-octane gasoline and 10% ethanol.  Well ahead of EU directives (which mandate the introduction of such a fuel in all member countries by 2015), France hopes to reduce CO2 emissions by 1 million tonnes in 2010.  However, given that only some 10% of the country's service stations are currently equipped to sell the new fuel, that the price difference between E10 and conventional gasoline is minimal (about 2 cents) and that only vehicles produced from 2000 (approximately 60% of the total fleet) can safely take the new fuel, the domestic downstream industry remains sceptical as to whether the new fuel's penetration will be achieved as quickly as intended.  The industry argues that in order to meet the government's biofuels goal (7% of total gasoline demand), E10 would need to account for 80% of total gasoline sales in 2009 and for 100% in 2010 - a tall order indeed.  Yet retailers will face stiff penalties if the goal is not fulfilled.289


According to preliminary data, oil product demand in the Pacific dropped for the ninth month in a row in March (-7.6% year-on-year) - less than the collapse of the previous month but nonetheless significant.  Once again, demand was being dragged down by Japan, whose export-oriented economy continues to be pounded by the global recession.  Korean demand also contracted markedly, offsetting its brief February rebound.  Even the relatively cold weather failed to provide support to the region's demand; heating-degree days were sharply lower in March compared with the 10-year average, although temperatures were slightly higher than the same month of the previous year.

Nonetheless, February's preliminary data were revised up (+100 kb/d), as Japanese figures were somewhat stronger than previously expected.  Still, demand is set to contract sharply in 2009 to 7.3 mb/d (-8.6% or -690 kb/d versus the previous year and +30 kb/d higher than last month's report).

In Japan, the pace of the recession-driven oil demand contraction appears to have receded somewhat.  According to preliminary data, deliveries plummeted by 'only' 11.0% year-on-year in March, almost half as much as in February (-20.6%) but slightly higher than in January (-10.5%).  Once again, demand for industrial fuels such as LPG (-10.1%), naphtha (-14.4% year-on-year) or gasoil (-6.7%) fell sharply.  Similarly, lower electricity needs weighed on demand for residual fuel oil (-23.0%) and direct-burning crude (included in 'other products', down by 64.9%).  By contrast, demand for jet/kerosene (which is mostly used for heating) rose by 5.8% (compared with -21.2% in February) given March's colder weather.

Following the release of last month's report, some critics argued that our forecast misconstrued the effects of February's warm weather upon Japanese oil demand, alleging that we wrongly carried forward that month's weak readings for some product categories, presumably those used for electricity generation (residual fuel oil and direct-burning crude).  However, our prognosis is based on normal weather conditions (defined as the 10-year average of prevailing temperatures).  As such, our March revision to residual fuel oil demand was negligible (+9 kb/d).  By contrast, the adjustment to 'other products' demand was actually downwards (-122 kb/d), which suggests that the unusually warm temperatures recorded in February were less significant than those observers contend.  In other words, the country's economic recession is seemingly accounting for the bulk of the fall in electricity consumption.

In addition, as we have widely flagged in previous reports, our forecast attempts to integrate the potential effects of greater power generation from nuclear sources, which will likely impinge upon oil-fired electricity production.  In early May, Tokyo Electric Power Co.  (TEPCO) finally won approval to restart one of the seven reactors of its giant 8.2-GW Kashiwazaki-Kariwa nuclear plant - the world's biggest - which had been shut down nearly two years ago following an earthquake.  The restarting trials of the 1.4-GW unit are imminent, according to several reports, and commercial operations could resume in less than two months, assuming that the No. 7 generator passes a final government inspection.  Moreover, a second 1.4-GW reactor (No. 6) could also be brought back on line by the end of this year (or perhaps even this summer, according to some reports).  The operation of both reactors at full capacity could reduce TEPCO's oil demand by as much as 70 kb/d, even though LNG is likely to be more severely affected.



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) fell by 0.3% year-on-year in March.  This estimate appears to confirm the country's economic slowdown; in fact, 1Q09 demand was down by 3.5% year-on-year, with two key industrial products, naphtha and gasoil, contracting by 6.3% and 12.5%, respectively.  Meanwhile, the pace of growth of gasoline demand, which rose by 14.7% in 2008, slowed down sharply to 2.5% in 1Q09.

Moreover, higher refinery output (+14.3% month-on-month in March) and falling gasoline and gasoil stocks held by PetroChina and Sinopec (-21.6% and -15.8% month-on-month, respectively) appear to have essentially fed exports rather than respond to significantly higher domestic demand, although some stock volumes from the state-owned firms were reportedly purchased by independent retailers.  The country remains a net exporter of both gasoline and gasoil, and the 29% month-on-month surge in net crude imports has mostly gone to higher refinery runs (+2.8% month-on-month) and crude stocks (+2.7% month-on-month).  Given this subdued picture, forecast oil demand remains virtually unchanged at 7.8 mb/d or -0.9% versus 2008.  It should be noted that this estimate incorporates a +25 kb/d revision to the 2007 baseline data, and assumes that GDP will expand by only 6.5% as predicted by the IMF, despite a relatively strong economic performance in 1Q09, according to official statistics.  Indeed, much uncertainty continues to surround China's GDP measurement.

Another Chinese Riddle:  How Reliable Are GDP Figures?

In mid-April, the Chinese government reported that real GDP increased by 6.1% year-on-year in 1Q09.  This figure was immediately taken up by the market as a tangible proof that the country is about to emerge from its downturn, and prompted numerous forecasters to upgrade their 2009 outlook of the Chinese economy.  The current consensus view is that the government's fiscal boost, its plans to develop a social security net for rural households and the Central Bank's much looser monetary policy are not only having earlier-than-anticipated effects but also virtually guarantee that the Chinese economy may expand by as much as 8% this year and be back at double-digit growth figures in 2010.

Oddly enough, 1Q09 reported GDP growth does not tally with oil demand data (nor with electricity demand, which was also inordinately weak).   Oil demand contracted by 3.5% year-on-year, as noted earlier.  Admittedly, pinpointing China's oil demand with accuracy is an exercise fraught with difficulties, given the lack of data and the underlying assumptions analysts must make regarding stocks and refinery output from independent producers.  Still, one would have expected stronger, positive oil demand growth commensurate with the reported economic resilience, unless income elasticities had drastically changed.

Another possibility is simply that real GDP data are not accurate, and therefore should not be taken at face value.  This is the view advocated by Lombard Street Research (LSR), a respected London-based economic consultancy.  It argues that 6.1% real GDP growth in 1Q09 is inconsistent with a decline in trade volumes of about 20% over the same period, as it would have required domestic demand to expand by some 9% in real terms.   Using official 1Q09 nominal annual growth rates for GDP and consumption, and consumer and fixed investment price indices as deflators for consumer spending and investment, respectively, LSR reckons that domestic demand expanded at most by 2% year-on-year in real terms.  If so, China's terms of trade should have deteriorated sharply in order to achieve the decline in the GDP deflator implied by official data - yet the country recorded a significant improvement in its terms of trade.  LSR concludes that 1Q09 real GDP growth was actually probably slightly negative or nil at best - a very large difference vis-à-vis official statistics - and adds that 4Q08 real growth was also likely negative or flat, if examining nominal data.  If so, the last two quarters would effectively signal, from a Chinese perspective, a recession of a rare magnitude.

This analysis, which ultimately suggests that the country's falling exports have significantly weakened domestic demand and hence GDP growth, is of course one set of opinions among many.  However, its conclusions regarding China's real 1Q09 GDP growth seem more consistent with oil demand estimates, and would imply that overall 2009 GDP growth could indeed match our current assumptions, despite the boost that fiscal and monetary policies will arguably provide in the quarters ahead.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - increased by 3.8% year-on-year in March, boosted by strong gasoline (+12.8%) and gasoil (+8.8%) sales, which together account for almost 45% of total oil demand.  It would appear that the country has so far succeeded in shrugging off the damaging effects of the global recession, even though economic activity has slowed.  Given such remarkable resilience (gasoline demand, for example, surged by 13.1% year-on-year in 1Q09), we have slightly revised up our Indian forecast for 2009.  Oil demand is now poised to grow to 3.2 mb/d (+2.8% year-on-year or +90 kb/d, some 30 kb/d higher than previously anticipated).  Although this is roughly half the pace of the previous two years, India is set to post the highest oil demand growth rate among the world's 10 largest consumers.

As margins in India's subsidised fuel market turned positive in late 2008 following the sharp fall in international oil prices, domestic retailing again became an attractive option for private refiners.  In 4Q08, Essar Oil reopened most of its 1,250 retail stations, which were closed in 2007 as the relentless rise in oil prices, coupled with domestic end-user price caps, rendered retail operations unprofitable.  It may now be followed by Reliance Industries Limited (RIL), which is reportedly considering whether to reopen the 1,432 retail stations it shut down in 2008, either in partnership with private or state-owned companies or on its own.  This reversal also reflects the fact that key export markets in the US and Europe - RIL's main product outlets - have sharply shrunk on the back of the global economic slump.  In anticipation of this move, the company applied for a change in the status of one of its two refineries at Jamnagar (the 660 kb/d J-1 plant).  The refinery will no longer be an 'Export Oriented Unit' (EOU) but rather a 'normal' refinery able to sell its products in the domestic market (and as such will now be obliged to pay import duty and other levies on crude, which are waived in the case of EOUs).

Oil product demand in Russia reached new lows in March, when it contracted by 8.5% year-on-year, thus bringing the 1Q09 annual fall to 6.8%.  The country has been severely hit by the global recession and the fall in commodity prices, and demand for industrial feedstocks has plummeted.  LPG demand, for example, plunged by 20.2% year-on-year in 1Q09, while naphtha consumption shrank by 8.6%.  Considering that the Russian economy is set to contract by 6.0% in 2009, total oil demand is foreseen to fall by 5.3% to 2.8 mb/d, some 30 kb/d less than previously expected.

The recession has also seemingly altered seasonal demand patterns.  Both gasoline and gasoil demand normally begin to rise steadily in March, the former as the driving season unfolds and the latter with the start of the agricultural season.  This year, however, demand for both products is sharply down - gasoline fell by 2.7% year-on-year in March and gasoil by 5.0%.  The flip side is that the market tightening observed in previous years - as the surge in demand coincides with the spring refinery maintenance season - will probably be averted.



  • Global oil supply averaged 83.6 mb/d in April, an increase of 230 kb/d versus March, as higher OPEC supply more than offset a dip in non-OPEC output.  World oil production in April is down 2.8 mb/d compared with year ago levels, largely due to a cutback in OPEC supplies.
  • OPEC crude oil production in April broke its seven-month downtrend, with output up 270 kb/d, to 28.2 mb/d.  Production by the eleven members with output targets rose 230 kb/d, to 25.8 mb/d, some 950 kb/d over OPEC's 24.845 mb/d target level.  Higher output in April reduced OPEC's compliance rate to 78% compared with 83% in March.  Iran accounted for about 40% of the overproduction last month, with smaller contributions from Angola, Qatar, Algeria, Ecuador and Venezuela.
  • April's weaker compliance rate risks fuelling further discontent with the overproducers among member countries more closely adhering to their production targets and reducing their interest in responding to calls to lower their own output further.  OPEC ministers next meet on 28 May to review the market outlook as well as the group's compliance with existing output targets.
  • Total non-OPEC supply for 2009 is revised up by 50 kb/d, on the basis of relatively stable North Sea production and higher-than-expected preliminary April production data for Russia.  These were to some extent offset by lower Chinese, Indonesian and Thai output figures and a broader historical downward adjustment for some African countries on the basis of new annual and monthly data.  Total non-OPEC supply is forecast to fall from 50.6 mb/d in 2008 to 50.3 mb/d in 2009.  However, OPEC NGL supply is projected to increase 300 kb/d this year to 5.0 mb/d.

  • 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 oil production in April broke its seven-month downtrend as compliance with output targets continued fraying at the edges.  Total OPEC output rose 270 kb/d, to 28.2 mb/d, with Iran accounting for about 40% of the higher volumes last month.  An increase in Iraqi production of about 40 kb/d also contributed to the group's overall total.

Production by the eleven members with output targets, which excludes Iraq, rose 230 kb/d, to 25.8 mb/d.  This is approximately 950 kb/d over OPEC's 24.845 mb/d target level.  Higher output in April reduced OPEC's compliance rate to 78% compared with baseline production levels published by the OPEC Secretariat last September.  In March, OPEC's compliance with target levels averaged 83%.  In addition to higher supply last month by Iran, smaller output increases were posted by Angola, Qatar, Algeria, Ecuador and Venezuela.

OPEC ministers will meet in Vienna on 28 May to review the market outlook and current compliance with targets levels that went into effect 1 January.  April's weaker compliance is likely to fuel further discontent with the overproducers among member countries more closely adhering to their production targets.  The deliberations could be made even more difficult by Angola, which has reportedly sent a letter to the OPEC Secretariat seeking a special exemption from the group's current output targets.

Angola is petitioning to have its current output target suspended on the grounds that the country is still suffering from the impact of its 30-year civil war and that reducing production to a lower target will exacerbate an already intense financial crisis.  Angolan officials see similarities between their situation and that of war-torn Iraq, which is currently exempt from targets, as well as Kuwait who was exempt from targets following the 1990 invasion by Iraq.

Angola produced 1.69 mb/d in April, 173 kb/d over its 1.52 mb/d target.  The country joined the producer group on 1 January 2007 at a time when demand for OPEC crude was strong and capacity tight.  It has struggled with accepting a formal quota almost from the beginning and even managed to negotiate an initial quota (1.9 mb/d) which was higher than its then existing 1.7 mb/d output capacity to accommodate increases in production capacity levels previous scheduled to come online.  Angola's sustainable output capacity now stands at 2.1 mb/d, or about 580 kb/d above its current target level.  Angola already appears to be ramping up output further even before the country's delegation meets with OPEC officials at the end of the month.  The country's preliminary export schedules show shipments are forecast to surge to 1.82 mb/d in June.

Uneven compliance by a few members and Angola's plea for an exemption threaten to chip away at OPEC's otherwise strong resolve to rein in oversupply.  Overall, the group has reduced production by 3.25  mb/d in comparison with the 4.2 mb/d in collective cuts agreed since last September.  The thorny issue of compliance and Angola's special request might limit the group's ability to implement any further reductions in official production targets at the Vienna meeting.

For Saudi Arabia, which now accounts for almost 45% of the combined cutback in production, the continued lack of compliance by some members may be particularly hard to bear as the Kingdom ramps up production capacity towards its planned 12.5 mb/d goal.  Saudi Aramco is on course for start-up of the 1.2 mb/d Khurais development, the 100 kb/d Nuayyim field and the 250 kb/d Shaybah expansion from end-June onwards.  As a result, Saudi Arabia's discontent with overproducers may grow in tandem with its swelling idle capacity.

Fellow Gulf producers Kuwait and the UAE have largely followed Saudi Arabia's lead in reining in output to target levels in recent months.  Kuwaiti production is assessed unchanged in April at 2.25 mb/d, or just about 30 kb/d over its assigned output level of 2.22 mb/d.

UAE production is also unchanged over the month at 2.25 mb/d, around 20 kb/d over target levels.  However, production may fall below the Emirates' production target level in June based on latest allocations.  Adnoc announced a further cutback in term allocations to 18% below contract volumes for June from 15% for Murban, Umm Shaif and Lower Zakum and 10% for Upper Zakum in May.

By contrast, crude oil production in Qatar increased to 780 kb/d in April compared with 740 kb/d in March.  Brisk demand for Qatari grades was likely behind the decision to raise output last month.  However, the April increase appears to be an exception based on latest, more stringent term allocations.

Iraq, currently the only member country exempt from quotas, posted a 40 kb/d increase in April, to 2.42 mb/d.  March output was assessed higher by 100 kb/d, to 2.37 mb/d based on latest data for domestic use at the country's refineries and for direct burn at power plants.  Iraqi exports of crude oil in April were estimated up by 40 kb/d, at 1.86 mb/d last month, with slightly higher shipments of Basrah crude from the southern ports offsetting marginally lower volumes of Kirkuk crude from the north.

After years of politically charged debate about control over production from the Kurdish region, Baghdad and the Kurdistan Regional Government have reportedly reached an agreement that will allow oil exports from the Kurdish-controlled Tawke and Taq-Taq fields to flow through the Kirkuk-Ceyhan oil pipeline.  Together the fields could be exporting an additional 200 kb/d to 250 kb/d from Iraq by the end of the year or in early 2010.

Nigerian April output was down 20 kb/d, to 1.76 mb/d, as Shell has maintained its force majeure for Bonny Light and Forcados exports for April.  The clause was extended through May though the manifold damaged in an attack has been repaired and volumes of Bonny Light are being gradually restored.

Slightly higher April production correspondingly reduced OPEC's effective spare production capacity, to 5.28 mb/d versus 5.51 mb/d in March.

Non-OPEC Overview

Total non-OPEC supply for 2009 is revised up by 50 kb/d on higher-than-forecast North Sea output in February and an (assumed temporary) bounce-back of Russian production in April.  These were partly offset by lower Chinese, Indonesian and Thai volumes and a downward revision for Africa following a reappraisal of historical annual data.  Currently, total non-OPEC supply is forecast to dip from 50.6 mb/d in 2008 to 50.3 mb/d in 2009, as steady decline from mature assets in the OECD and elsewhere outweighs new field start-ups and growth in biofuels and oil sands.

A preliminary look at early 2009 production data in key mature areas shows this to be holding up.  This does not invalidate the accelerated decline rate scenario presented in last month's report (Spending Cuts May Worsen Decline), but persuades us to retain it outside the base forecast for now.  February data for the UK and Norway suggest a combined 450 kb/d upward revision for the month, while Russian production in April was reported 200 kb/d higher than anticipated.

The Russian data in particular led several observers to foresee a recovery and renewed robust growth in Russian oil production, compared with this report's current forecast of gradual decline (-1.4% in 2009/08 for total oil production).  However, these are only preliminary data, which are often subject to revision and a closer look shows that the higher-than-expected production comes largely from Lukoil, TNK-BP and Rosneft, which all have large new fields ramping up.  Lower crude export duties may have contributed to the surge, as well as the rouble's depreciation, which works to exporters' advantage.  Lastly, higher production was also reported for Bashneft, which has recently changed ownership, leading some to speculate on the potential impact of new management structures or technologies deployed.  However, this report maintains, until sustained evidence to the contrary materialises, that field maturity, lower capex and an unfavourable fiscal and investment environment will keep Russian crude output on its recent trajectory of decline.

Higher-than-foreseen North Sea production in February in contrast was rather more due to an absence of technical outages.  This report includes a field reliability adjustment factor to account for technical accidents and equipment outages for mature assets, as outlined at the beginning of this section.  For Norway and the UK, these account for around 160 kb/d each for forecast months, which, when removed on receipt of actual data, makes up for over two-thirds of the upward revision.  This is a different picture than unforeseen strength in otherwise-declining fields, let alone strong ramp-ups of new assets.


North America

US - April Alaska actual, others estimated:  US oil production has nearly recovered to pre-hurricane levels, though February production data brought a downward revision to the month of around -140 kb/d.  However, Alaskan production in April, while not revised much compared with our forecast, fell by 80 kb/d due to the onset of maintenance and several outages.  Prudhoe Bay production alone fell by 60 kb/d in April, to 300 kb/d.  Cook Inlet production remains shut-in for the foreseeable future due to ongoing activity at Volcano Redoubt.  Output at Niakuk was also halted for two days in late April, marginally cutting levels.  Announcements of summer maintenance programmes have prompted a 60 kb/d downward revision for June.

In the Gulf of Mexico (GoM), Chevron's offshore Tahiti field started production in early May, slightly earlier than expected, though still delayed from initial plans to commence output last year.  The deepest producing field in the Gulf of Mexico to date, Tahiti should achieve output capacity of 125 kb/d in the course of 2010.  Elsewhere, BP started up production at its Dorado and King South projects, both tie-backs to the Marlin platform, which will eventually collectively contribute capacity of 40-50 kb/d.  Meanwhile, the US Department of Interior's Minerals Management Service (MMS) in early May released a study forecasting that GoM offshore oil production could reach 1.6-1.9 mb/d in the next 10 years, albeit revised down by 300 kb/d from last year's report.  We estimate that total US crude production will rise from 2008's 4.95 mb/d to 5.10 mb/d in 2009, partly reflecting lesser hurricane-related disruption in 2009.

Canada - Newfoundland March actual, others February actual:  Reported data brought a small net downward revision to the 2009 production forecast.  Bitumen output was consistently lower than anticipated during December-February, which was carried forward for the rest of 2009.  Revised December data brought, as suspected, a hefty 100 kb/d upward revision to ethane and a 40 kb/d upward revision to propane output, both counted in NGL production.  The April NGL number has also been adjusted downward by 13 kb/d of which 5 kb/d are due to problems at ExxonMobil's Sable gas liquids project in Northeast Canada.  Sable is also expected to undergo 20 days of maintenance in August, assumed to cut output by around 15 kb/d.  Year-on-year, despite growing production from oil sands (which are nonetheless taking a hit in terms of deferred investment due to the global recession), declining mature conventional crude output is set to reduce total Canadian oil production from 3.24 mb/d in 2008 to 3.20 mb/d in 2009.

North Sea

Norway - February  actual, March provisional:  February data for Norway resulted in a hefty 320 kb/d upward revision for total production.  Partly, as outlined above, this was due to the removal of the field reliability factor (-160 kb/d), which is included in our forecast until actual data are received.  Another 110 kb/d result from higher-than-expected condensate production, which rose around 80 kb/d over January.  Output was higher at the Kristin and Kvitebjorn fields, the latter recovering after six months of shut-ins.

Elsewhere, even though this report had previously included some assumed production at the Alvheim and Vilje fields, both part of the Sleipner-Frigg system, the Norwegian Petroleum Directorate (NPD) has only recently started reporting production data, which came in slightly higher than anticipated.  In the same Sleipner-Frigg stream, the Rev field, tied back to the Varg complex, also started in January.  Reports of a planned shutdown of Snoehvit prompted a slight downward revision for gas liquids in April and May (-5 kb/d each), while recently announced April maintenance at Statfjord B was already factored into our generic maintenance forecast for Statfjord-Gullfaks.  The Valhall field was shut for most of April due to technical issues.  Lastly, shortly before going to press, it was reported that a 40 kb/d pipeline feeding into the Ekofisk stream had been shut-in due to a leak, though until further details become available this has not been factored into the forecast.  Total Norwegian oil production is anticipated to decline from 2.46 mb/d in 2008 to 2.25 mb/d in 2009.

UK - January actual:  UK production data for February also brought a 120 kb/d upward revision to the forecast, though this was largely due to the elimination of the field reliability factor.  In the UK North Sea, the West Don satellite started production and is set to reach capacity of 25 kb/d later in the year.  Southwest Don, another satellite, should be added from June, with another 10 kb/d.  Four weeks of maintenance at Buzzard were announced for 3Q09, prompting a widening of 25 kb/d to the previously forecast -110 kb/d dip on overall Forties maintenance assumed for August.  Total UK oil supply is forecast to drop from 1.56 mb/d in 2008 to 1.41 mb/d in 2009.

Other OECD Europe:  Greater visibility in biofuels data allows us to segregate this from reported 'non-conventional' oil monthly data for the Czech Republic, Poland, Portugal and Slovakia.  Our estimates for France and the Netherlands have also been upgraded to more fully account for monthly biofuels data.


Australia - February actual:  Australian reported data for February showed a total downward revision of 13 kb/d.  This stemmed largely from a clearer picture of production in the Carnarvon Basin, which suffered outages due to cyclones that proved slightly heavier than expected.  Total NGL production was also revised 25 kb/d lower in February, which was carried forward on consistently lower-than-expected output.  Looking ahead, start-up of the new Van Gogh field is now assumed delayed until November, following the fire on its FPSO vessel in dry-dock in Singapore.  Previously, the 60 kb/d field was assumed to start production in August.  The Vincent field was also affected by a fire in mid-April and is currently expected to restart production at end-June, trimming April output by 15 kb/d and May and June by 40 kb/d each.  Maintenance work on the Mutineer-Exeter field was announced for 2Q09.

Former Soviet Union (FSU)

Russia - March actual, April provisional:  While revisions to previous months were negligible, Russian production data for April came in 200 kb/d higher than anticipated by this report.  At 9.62 mb/d, Russian crude output was thus around 50 kb/d higher for the second consecutive month leading some to diagnose a recovery in output volumes and renewed growth.  But companies' individual performance is strikingly diverse.  Higher-than-expected output came largely from Lukoil, TNK-BP and Rosneft, all three of which have recently brought onstream large new fields or where production is ramping-up.  Production at Bashneft also was reported higher than forecast, which some put down to its new owner, Sistema, implementing changes leading to a boost in output.  Lower crude export duties compared with last year, when the system of calculation was changed, and rouble depreciation may have also helped to hike output.

This report, however, maintains its position that Russian crude production is more than likely to continue its declining trend later this year.  Mature assets, high levels of debt, as well as a still-unfavourable investment environment, are expected to constrain opportunities for growth.  Gas liquids production is also expected to fall further, as Gazprom is forced to shut-in natural gas production on significantly lower domestic and international demand.  Total Russian output is forecast to dip from 10 mb/d in 2008 to 9.86 mb/d this year.

Azerbaijan - January actual, February preliminary; Kazakhstan - March actual:  Both January actual and February preliminary data showed slightly higher-than-expected crude output in Azerbaijan.  Indications are that production at the troubled ACG complex in the Caspian is recovering slightly more rapidly, but February data are aggregated, so this trend has not been carried through the forecast for 2009, until more detail become available.  March crude production in Kazakhstan was 30 kb/d higher than anticipated, as we had overestimated the impact of maintenance on the Tengiz field.  In Uzbekistan, reported January data prompted a trimming of crude but a slight upward revision to NGL production.

In March, FSU net exports decreased by 2.7% to 9.28 mb/d on both lower crude oil and product volumes.  Crude oil exports stood at 6.60 mb/d in March, down by 2.2% month-on-month as Druzhba flows to Germany and Slovakia fell by 4.5% and 17.0%, respectively, while deliveries to Poland were below average again following a dispute on trading terms.  Moreover, shipments from the Black Sea port of Novorossiysk were interrupted due to an accident on the pipeline carrying crude oil to the port, while flows also remained limited in April by planned pipeline maintenance.  A decrease in March crude oil exports is partly attributable to a 14% rise in the Russian crude oil export duty to $15.7/bbl.  In April, the duty slightly decreased to $15.0/bbl and preliminary export data showed a modest rise back to February levels supported by an increase in Baltic shipments.  However, Russian companies may again have an incentive to send more crude to domestic refiners in May as the crude oil export duty surged by 25% to $18.8/bbl, based on the rise in Urals prices during the monitoring period from 15 March to 14 April.

Product exports fell 4.1% month-on-month in March, led by lower gasoline and gasoil exports from Russia as the refinery maintenance season started.  The drop was partially offset by a 13% increase in fuel oil exports following a withdrawal of export bans in Belarus and Ukraine imposed during the January gas row.  However, this fuel oil export surge did not last long, as preliminary April data show lower exports across all product categories.

Elsewhere, shareholders detailed further the Caspian Pipeline Consortium (CPC) pipeline expansion process.  The pipeline will be expanded in three stages, covering construction and modernisation of pumping stations, construction of three storage tanks and a new 130 km pipeline near Atyrau.  The expansion work should last from 2010 to 2013.  Meanwhile, according to Transneft, the first 600 kb/d stage of the East Siberia-Pacific Ocean (ESPO) pipeline is near completion.  The company has reportedly only a few kilometres left to weld and work on the offshoot from Skovorodino to the Chinese border has already started. 

Other Non-OPEC

China - March actual:  March production data for China were revised down by 90 kb/d, spread across a multitude of fields.  However, a disconcertingly low data point for offshore production (implying a dip of 350 kb/d) is excluded from our estimate until confirmation is received.  Similarly, there were no news reports of intensive offshore maintenance or any incidents.  Currently, total Chinese oil production is forecast to rise from 3.79 mb/d in 2008 to 3.84 mb/d in 2009.

Various Asia-Pacific:  Overall revisions to 'Other Asia' (excluding China) production due to newly reported data were relatively minor.  In Indonesia, the recently started Cepu field was reduced to a trickle in mid-March due to issues with export infrastructure.  In India, Reliance slowed output at its offshore MA-1 field in the Krishna Godavari basin in order to link up new facilities aiming at boosting production.  In Malaysia, the PM-3 CAA increment (part of the 'Northern Fields'), which is shared with Vietnam, started up and will eventually reach its 20 kb/d capacity.  And in the Philippines, the offshore Galoc field halted production, as an approaching typhoon forced the decoupling of its FPSO for safety reasons.  Meanwhile, preliminary annual data for 2006 and 2007 prompted some historical revisions to baseline in Vietnam.  Total Other Asia production is forecast to remain flat at around 3.67 mb/d in 2009.

Brazil - March actual:  Reported March production data for Brazil were revised up slightly.  Initial volumes from the much-trumpeted pre-salt deepwater Tupi find are expected for early May, albeit as a pilot project.  They should hit around 30 kb/d in early 2010 and gradually ramp-up to around 100 kb/d thereafter (subsequent volumes are expected to be much higher later in the decade).   Nonetheless, Tupi's start-up has symbolic value, as it and other pre-salt finds have proven to be the largest new discoveries in years, making the basin as a whole probably the most promising new non-OPEC frontier area for the foreseeable future.

Various other Latin America:  For Colombia, a combination of higher January/February reported production and revised 2006 annual data prompted a small upward revision to the baseline and around a 20 kb/d hike to output forecast for 2009.  February production in Argentina was broadly in line with forecast, slowly recovering from an unexplained dip in December and January.  On the basis of expected growth in Colombia and Brazil (fuel ethanol and crude), total Latin American oil production is expected to rise from 4.12 mb/d in 2008 to 4.37 mb/d in 2009, the strongest growth of any non-OPEC region.

Various Africa:  A reappraisal of oil production in Egypt prompted an historical upward revision for 2006 and 2007 but a downward revision of around 15 kb/d in 2008 and around 40 kb/d for 2009.  Similar work on Equatorial Guinea and Sudan, reviewing preliminary annual data for 2006 and other sources, brought about downward revisions of around 40 kb/d and 20 kb/d for 2009 respectively.  In sum total African production for 2009 has been revised down by 90 kb/d, but is expected to remain steady versus 2008 at around 2.53 mb/d in 2009.

OECD stocks


  • OECD industry stocks rose by 15.4 mb in March to 2,745 mb, as falling Pacific crude inventories only partially offset increases in North America and Europe crude stocks.  Overall product stocks rose slightly, with increases in gasoline and other products outweighing falling distillate stocks.
  • In 1Q09, OECD industry stocks rose counter-seasonally by 500 kb/d as crude stocks increased 540 kb/d.  Product stocks increased marginally during a time of year when they typically draw heavily.
  • OECD stocks in days of forward demand reached 62.4 days at end-March as inventories rose and three-month forward demand fell.  Only gasoline stocks in days cover show readings within the five-year range with OECD readings in the top half.  All other categories are above the five-year range.
  • Preliminary April data indicate total OECD industry oil inventories rose by 23.2 mb, led by gains in US crude stocks.  US total stocks increased 33.0 mb as crude rose 14.8 mb.  Japanese stocks fell 1.2 mb.  Euroilstock data show EU-16 inventories fell 8.6 mb, with both crude and products drawing.
  • Short-term floating storage continued to expand, as crude levels increased from 85 mb at end-March to just over 100 mb at end-April.  Combined with the reported presence of around 25 mb of product (mostly middle distillates) waterborne inventories, total short-term floating storage (most of which is offshore OECD regions) potentially adds two to three days to OECD total forward demand cover.

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

Total OECD inventories rose by 15.4 mb in March to close at 2,745 mb.  A downward revision of end-February inventories by 13.2 mb puts the end-March stock level only slightly higher than the unrevised end-February level from last month's report.  Stocks stood 173 mb (6.7%) higher year-on-year and 196 mb (7.7%) higher than the five-year average.  North American and European crude built seasonally while Pacific crude drew counter-seasonally.  North American gasoline, Pacific gasoline and European distillates all built slightly under abnormally low refinery runs and during a month of typical draws.

1Q09 OECD industry stocks rose counter-seasonally by 500 kb/d, in comparison to five and 10-year average draws of 260 kb/d and 320 kb/d, respectively.  Crude dominated the stock change, rising 540 kb/d, but this was only 120 kb/d higher than the five-year average change.  A small increase in product stocks stood sharply out of line with five and 10-year average draws of 670 kb/d and 730 kb/d, respectively.  Within products, European distillates gained the most, rising 150 kb/d versus a five-year average draw of 50 kb/d.  OECD distillates rose 50 kb/d versus a five-year average draw of 500 kb/d and Pacific distillates drew only 90 kb/d versus a five-year average draw of 160 kb/d.

February OECD inventories were revised down 13.2 mb, and January levels were revised 11.8 mb lower.  Of note, Canadian crude were revised down 8.0 mb in February and 4.8 mb in January.  February data showed Japanese and Australian crude levels 7.2 mb and 2.1 mb lower, respectively.  European distillates were 4.2 mb higher for February with Belgium and the Netherlands up 2.3 mb and 2.7 mb, respectively.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks rose 16.5 mb in March, led by US crude, which rose 9.8 mb to 377 mb.  In addition, filling of the US Strategic Petroleum Reserve (SPR) increased government crude holdings by 7.2 mb.  US total product stocks rose slightly, but with disparate movement among categories.  Gasoline stocks rose on the month by 2.6 mb, yet distillate inventories decreased by 4.6 mb.  Mexican inventories displayed little movement as crude stocks remained unchanged and products increased by 0.2 mb.

April US weekly data point to even larger builds across the crude and products complex.  Crude industry stocks rose by 14.8 mb while government SPR holdings increased by 6.1 mb.  Product stocks jumped 18.2 mb with a 3.9 mb build in distillate.  However, over half the products build stemmed from the volatile 'Other Oils' category.

Of the estimated 100 mb global, short-term, crude floating storage, over 40% lies in the US Gulf of Mexico.  Moreover, given a recent strengthening in WTI cash prices versus Dated Brent, spot cargoes parked offshore West Africa may ultimately end up in the Gulf.  SPR filling will fall to 2.9 mb in May and 1.0 mb in June.  Though US refinery throughputs should increase in May versus April and PADD 3 imports have recently retracted, burgeoning onshore and offshore crude storage levels continue to suggest weaker fundamentals than indicated by recent upward price moves in WTI.

A drawdown in US gasoline stocks, stronger gasoline margins and increased refinery demand for crude concurrent with the US summer driving season would seemingly offer a route to thinning the crude stock overhang.  However, buoyant US product stocks and overall weak refinery margins continue to staunch this possibility in the near term.  While US gasoline demand should seasonally increase this summer, the upside to refinery runs remains limited and the crude stock impact may be weak.  In the absence of a destructive hurricane, imports from Asia and Europe and a strong gasoline stocks position at the driving season start may limit gasoline's ability to materially tighten a sloppy crude market.

OECD Europe

European inventories increased by 7.2 mb in March, almost wholly due to a 7.3 mb increase in crude inventories.  Most of the increase in crude stocks came from France and the Netherlands, where inventories rose by 3.7 mb and 2.2 mb, respectively.  Product inventories changed little on the month, increasing 0.7 mb, as a 1.9 mb rise in distillate stocks was offset by a gasoline and other products stock decrease.  The largest distillate stock gain was registered in France where levels edged up 1.2 mb.  Though primary German middle distillate stocks did not change in March, consumer heating oil fill levels rose counter-seasonally by 3% and by an additional 1% in April, providing an abnormally high cushion as heating oil demand goes into a seasonal trough.

Indeed, European product stocks remain robust as a distillate surplus continues to build.  Continued steep contango in the ICE Gasoil futures curve has pushed some storage tanks to near capacity in Northwest Europe, where independent storage levels for gasoil and kerosene remained well above five-year highs, and has created a one- to two-week backlog of vessels waiting to discharge diesel cargoes in Rotterdam.  Gasoil and jet/kerosene floating storage off Europe continues to grow as product freight rates languish.  Early May estimates range from 10-15 mb of gasoil floating storage versus 2-4 mb of jet/kerosene.  Gasoline stocks offer the only indication of tightness as absolute levels remain below the five-year range and days cover have trended just above the five-year average.  Still, despite a seasonal rise in Europe gasoline demand expected this summer, pull from US and Middle East export markets will likely be a key determining factor for the stocks trajectory in the next few months.

Preliminary data from Euroilstock indicate EU-16 inventories fell 8.6 mb in April, with crude and products falling by 4.1 mb and 4.5 mb, respectively.  All product categories posted draws except for naphtha, which rose by 0.4 mb.  European gasoline stocks decreased 2.3 mb while middle distillates fell 0.8 mb.

OECD Pacific

Pacific industry stocks showed the only March regional fall, decreasing by 8.3 mb.  Crude inventory falls of 3.8 mb and 2.7 mb in Japan and Korea, respectively, drove the change.  Regional crude levels remained well above the five-year range in forward cover, but only just above the five-year average in absolute levels.  Japan and Korea distillate stocks declined 3.3 mb and 1.8 mb, respectively.  Regional stocks remain above five-year highs in days cover and at five-year average absolute levels.  Of the three regions, only the OECD Pacific rests above the five-year range in gasoline forward stock cover.

Weekly data from the Petroleum Association of Japan (PAJ) point to an April commercial stock decline of 1.2 mb, with crude rising 0.9 mb and products declining 2.1 mb.  Within the products category naphtha stocks showed the largest movement, falling by 1.3 mb, while gasoline stocks rose slightly to just above five-year highs.  Kerosene stocks changed little and remain near the five-year average.

Recent Developments in Singapore and China Stocks

Singapore product stocks posted a small decline on the month, falling by 1.6 mb.  Middle distillate and fuel oil stocks both fell slightly, though inventories of the latter rose sharply in the last week of April, and thus minimised losses on the month.  Light distillate inventories rose slightly on the month.

China crude stocks reported by OGP rose 7.3 mb in March as crude net imports jumped over 800 kb/d.  Preliminary reporting suggests April imports rose 90 kb/d higher.  Product destocking continued as CNPC and Sinopec reported gasoline and gasoil inventories falling 6.9 mb and 8.5 mb, respectively.  Rising product exports, particularly gasoil, helped drive the change.  This marked the third consecutive month of draws, but inventories remained 50% above 2008 levels.  With respect to longer-term storage issues, China reportedly intends to establish a strategic product reserve of up to 10 million tonnes by 2011.



  • Oil markets continue to defy gravity, with benchmark crudes trading at six-month highs by early May.  After hitting a low of around $34/bbl in mid-February, futures prices for WTI and North Sea Brent traded in a solidly higher range of $48-$54/bbl in April and reached lofty $58-$60/bbl levels by early May.
  • Oil futures continue to move higher in tandem with relatively stronger global financial and equity markets.  The link between a decelerating economic downturn and a recovery in oil demand appears increasingly more distant given current overwhelmingly weak market fundamentals.
  • OECD oil stocks continued to build in April while oil in floating storage rose to more than 100 mb.  OPEC crude oil production reversed its six-month down trend, with supplies edging slightly higher in April, with ministers scheduled to review the market again on 28 May in Vienna.  However, several OPEC producers appear to be reining in output again this month based on customer allocations and preliminary tanker movements.
  • The peak summer gasoline driving season remains one key pillar of market support on the horizon.  Expectations of a stronger summer driving season in the coming months are already fueling higher spot prices and improved cracking margins in the US, Europe and Asia.  Despite the early optimism, latest data show US oil demand in April at the lowest level in a decade.
  • Refining margins in most major markets improved in April as increases in product prices outpaced the rise in crude oil prices.  However, margins were still negative in the key Asia-Pacific region and, by early May, margins deteriorated in all regions as product prices weakened and optimism about the economy strengthened crude oil prices.

Market Overview

Oil markets continue to scale new heights in April, with benchmark crudes trading at six-month highs by early May.  After hitting a low of around $34/bbl in February, futures prices for WTI and North Sea Brent traded in a solidly higher range of $48-54/bbl in April and reached a lofty $58-$60/bbl levels by early May.

Oil futures moved higher in tandem with stronger global financial and equity markets, which for the time being appear to amplify any good global economic developments while muting the negative.  Positive statements by politicians, government regulators charged with overseeing stimulus packages, and central bankers, appears to be achieivng the desired effect on global financial markets.  While proponents of economic 'green shoots' have plenty of detractors, optimism that the economic downturn is at least bottoming out appear to be gaining traction in the market.

The myopic focus on daily developments in financial markets for oil price direction and signs of a demand recovery, however, is causing concern in some quarters that traders may be just whistling past the graveyard.  The link between a decelerating economic downturn and a recovery in oil demand appears to remain tenuous, given current overwhelmingly weak supply and demand fundamentals.

Latest estimates show global oil demand declining 2.6 mb/d in 2009 with a marked recovery not expected until 2010.  Crude oil inventories in the key US market are currently flirting near 20-year highs while OECD industry stocks àre now estimated at an unprecendented 62.4 days forward cover.

OPEC crude oil production reversed a six-month down trend, with supplies edging slightly higher in April.  Total OPEC output rose 270 kb/d, to 28.21 mb/d as target compliance declined to 78% in April compared with 83% the previous month.  However, some OPEC producers appear to be reining in output further this month based on customer allocations and preliminary tanker movements.

The rise in prices over the past two months has proved to be a double-edged sword for OPEC.  The lure of higher prices may have encouraged some members to ignore their targets in a bid to maximize revenues at the expense of more compliant members.  Indeed, relatively strong spot crude prices, especially for heavier sour grades, may be providing a windfall for overproducers.  Iran accounted for about half the April increase, while Nigeria, Angola and Venezuela continued to exceed their output targets.  OPEC ministers next meet on 28 May to review the market and compliance with current targets.

The peak summer gasoline driving season remains one key pillar of market support on the horizon.  Expectations of a stronger summer driving season over last year's weak showing have already fuelled a jump in spot prices and improved cracking margins in the US, Europe and Asia.  Despite the early optimism, latest preliminary data for April show US gasoline demand at very weak levels.

The market is also hoping a recovery in gasoline demand will go some way towards reducing the massive crude oil inventory overhang in the US market.  Crude stocks in the US are at near 20-year highs.  In addition, about 50% of the 100 mb in floating storage is projected to be destined for the US Gulf Coast.

As expected, the high levels of stocks continue to put pressure on prompt prices.  The front month contango for WTI widened to a little over $2/bbl in April versus $1.44/bbl in March, as ample inventories added downward pressure on prices.  By contrast, the contango in the Brent market narrowed slightly to $1.04/bbl in April versus $1.30/bbl the previous month.  By early May, WTI was trading at a premium over Brent again but rising stock levels threaten to reverse WTI's recent gains.

Spot Crude Oil Prices

OPEC's output cutback of heavier sour crudes and stepped-up buying as refiners came out of turnaround boosted spot crude oil prices nearly across the board in April.  Spot prices for Middle East and Mediterranean crudes posted the sharpest increases last month, as reduced OPEC term contract supplies forced buyers onto the spot market.

Saudi Arabia appears set to tighten supplies further based on latest increases in term contract prices for Asia-Pacific customers.  In response, Asian buyers have been buying up spot barrels of similar crudes from Oman, Iran and Qatar.  Increased demand for heavier grades pushed spot prices up for Iran Heavy by an average $3.45/bbl in April, to just over $49/bbl.  Spot prices for lighter Mideast crudes, such as Abu Dhabi's Murban crude, rose by a relatively steep $5.40/bbl on the month, to $52.54/bbl, despite weaker demand for gas oil-rich crudes.  Abu Dhabi looks set to reduce crude sales next month based on Adnoc's decision to cut term allocations to 18% below contract volumes for June from 15% for Murban, Umm Shaif and Lower Zakum and 10% for Upper Zakum in May.

In Asia, reduced refinery throughput rates for maintenance over the April-May period have tempered spot purchases but China continues to cast about for relatively cheap African cargoes, with spot purchases of Angola and Nigeria crude reportedly on the rise.

Refining Margins

Refinery margins in most key global markets improved nearly across the board in April as increases in product prices outpaced the rise in crude oil prices.  On average, margins (on a full-cost basis) improved by $1.51/bbl.  Profits on Maya coking in the USGC were the exception, with margins off $1.40/bbl, to 94 cents/bbl in April.

Despite the month-on-month improvement, margins in Asia-Pacific as well as hydroskimming economics in Europe and the Mediterranean remained in negative territory.  The lowest margins on average were in NW Europe where they averaged $0.25/bbl, while the USWC reached the highest margins at $5.48/bbl on average.

However, by end-April and early May, margins deteriorated in all regions as product prices weakened and optimism about the economy strengthened crude oil prices.  Only two benchmarks, Brent cracking in the US Gulf Coast and Oman cracking in the US West Coast, improved at this time as higher gasoline and fuel oil crack spreads offset weaker middle distillates to crude price differentials.

In the USGC, upgrading margins in April declined 31% mainly because of weaker diesel prices and stronger residual fuel oil prices, favouring cracking to coking configurations.  In Asia, hydroskimming refinery economics strengthened relative to cracking as gasoline and middle distillates prices deteriorated and residual fuel oil prices increased.  In NW Europe, cracking margins strengthened 3% relative to hydroskimming as gasoline price increases outweighed increases in residual fuel.

Spot Product Prices

Spot prices rose across the product barrel in all the major regions in April in tandem with stronger crude oil markets.  The forthcoming peak summer driving season in the US is currently also supporting higher gasoline spot prices and crack spreads in Europe and Asia.  At the other end of the barrel, the substantial cutback in OPEC heavy crude oil production has also translated into tighter supplies of fuel oil, with prices in Europe, Singapore and the US up on average by 15% to 20% in April.  Relatively stronger European spot prices for ultra-low-sulphur diesel, combined with cheaper freight rates, also encouraged US and Asian refiners to send their surplus barrels to the region.

The economic optimism that continues to prop up crude oil markets and expectations for a stronger US gasoline demand season, especially relative to last year's weak preformance, are behind the current robust market.  US gasoline stocks are slightly above levels of a year ago but still within the five-year range.  Our latest forecast shows US gasoline demand rising in the coming months based on the assumption that the US will have a normal driving season but preliminary data for April show a worrying 2.0% decline in demand.

Expectations for a stronger gasoline season are behind the rise in crack spreads and increased trans-Atlantic trade from European refiners.  Spot gasoline prices in Asia, near seven-month highs in line with stronger futures markets, are also supported by increased arbitrage opportunities to the even stronger US West Coast.

In Europe, demand for products remains weak and is reflected in extended run cuts and refinery maintenance schedules.  However, spot gasoline prices have firmed due to increased buying interest from the US and, recently, West Africa.  Nigeria, a major importer of gasoline given chronic operational problems at the country's four refineries, has increased purchases of gasoline on global markets in recent weeks due to scheduled refinery down time and following the suspension of import subsidies to local private companies.  The Warri refinery, which operates at anywhere from 20% to 70% of its 120 kb/d name-plate capacity, was down for three weeks while repairs were made to its fluid catalytic cracking unit, but operations reportedly resumed 5 May.  The 110 kb/d Kaduna refinery is closed for maintenance and expected back in operation sometime in May or June.

Spot gas oil/diesel prices in both Rotterdan and the Meditteranean increased throughout April and early May despite weaker demand and higher run rates as refiners came out of turnaround.  The sharper decline in US heating oil prices on Nymex and a robust ICE gas oil contract encouraged transatlantic trade.  European traders took advantage of the arbitrage and imported ultra-low-sulphur diesel from the US despite the already hefty stockpiles of the fuel in the region, at both onshore tanks and in floating storage.

Spot product prices in the Asia/Pacific region strengthened in response to tighter regional supplies stemming from the sharp cutback in refinery output levels in April and increased exports of surplus product over the past few months.  Despite the month-on-month jump in spot product prices, refining margins remain negative for the region.  Asian product markets are also under pressure from the start-up of several new refineries.  Start-up of the new 160 kb/d crude distillation unit at the Fujian Refining and Petrochemical (FRPC) complex in Quanzhou, China is slated for late May.

End-User Product Prices in April

Retail product prices rose in April across all product categories bar Japanese diesel and heating oil.  The product prices on average increased by 10.6%, in US dollars, ex-tax, in surveyed IEA member countries.  Gasoline prices rose on average by 11.2% with the biggest month-on-month gains seen in Germany, Spain and France.  Consumers in the US on average paid $2.05/gallon ($0.541/litre) for gasoline, in Japan ¥113.9/litre ($1.152/litre) and in Europe, prices ranged from a low of €0.948/litre ($1.252/litre) in Spain to a high of €1.225/litre ($1.617/litre) in Germany.  Low-sulphur fuel oil prices increased by 11.0%, diesel prices by 9.7% and heating oil end-user prices by 10.5% month-on-month, in US dollars, ex-tax.  Retail prices were 44.9% below a levels of a year ago.


April dirty freight rates remained weak, with over 100 mb of short-term crude in floating storage providing the only significant support.  Only West Africa to US Atlantic Coast Suezmax rates seemed to display any signs of life, edging up slightly from the beginning to the end of the month as floating storage tightened spot tonnage availability and strong Chinese demand for Angolan crudes continued.  End-April rates on the route stood at just over $11/tonne.  Middle East Gulf to Japan VLCC rates continued to fall, declining from around $7.50/tonne to just over $6.00/tonne at the end of April.

VLCC earnings remained above breakeven operating costs for most ship owners and routes.  However, the absence of significant additional Middle East export volumes continues to weigh down on rates despite the presence of a large amount of crude in floating storage.  Additional falls in earnings may force tanker owners to lay up vessels, which may act as a balancing force for rates.

Though clean rates flat-lined through most of the month, they did display some increases towards the end of April.  The Europe to US transatlantic route displayed the most strength as rates rose from $10/tonne at the beginning of April to over $15/tonne at month-end as gasoline trade increased.  An increasing amount of middle distillates tied up in floating storage in the North Sea also provided some support to rates.  Despite the uptick in rates, product tanker earnings have, in some cases, fallen to the point where owners can barely cover operating costs.  Laying up of ships may prove to be the best near-term option for some ship owners if earnings remain below break even.

Still, new tanker builds inject yet another bearish element into an already unbalanced freight market.  Long building lead times combined with a surfeit of orders placed in the 2006-2008 timeframe have resulted in continued increases in freight tonnage coming to market, even in an environment of difficult credit conditions and low freight rates and with a small number of order cancellations.  In 1Q09, the VLCC and Suezmax fleets grew by 3% and 2.5%, respectively, in vessel count.  The Aframax/Long Range Two fleet increased by 4.5% and the Long Range One and Medium Range fleet grew by 2.5%.



  • Global crude runs remain depressed compared with the five-year historical range.  Despite increased Chinese and North American estimates, 2Q09 global crude runs are actually lower than our previous forecasts, due to the weaker demand environment.  Therefore, the necessary consequence of these changes is lower crude runs elsewhere, notably in Other Asia and OECD Pacific and Europe.
  • The 2Q09 crude throughput forecast of 71.1 mb/d, is 3.1 mb/d lower than 2Q08 and 0.2 mb/d below last month's report.  This reduction masks higher forecast Chinese crude runs following reports that CNOOC's 240 kb/d Huizhou refinery will run at 70% utilisation, well ahead of our estimates.  Furthermore, Indian official data appear not to include crude processed at the Jamnagar refinery expansion, which is currently commissioning and we have raised our Indian forecasts accordingly.

  • OECD crude runs are assessed at 36.2 mb/d in 2Q09, an annual decline of 2.0 mb/d, while non-OECD crude throughput is now expected to shrink by 1.1 mb/d year-on-year to 34.9 mb/d.  This month sees a switch in emphasis, with higher North American runs at the expense of lower European runs.  Stronger gasoline and weaker middle distillate cracks, plus the lack of the seasonal stockdraw for middle distillate in 1Q09, provide the rationale for this move.
  • February 2009 OECD refinery yields increased only for naphtha and 'other products', which nevertheless remained below their five-year ranges.  Yields for all other products decreased, in line with seasonal patterns.  Only gasoil/diesel yields remained above the five-year range while gasoline yields dropped, largely the result of a 6.5% decline in Europe, but nonetheless stayed above the five-year average.  Jet fuel and fuel oil yields continued to lag the respective five-year ranges.

Global Overview

Global forecast crude runs are again lower this month.  However, perhaps the more important change to our estimates lies in the different regional outlooks now incorporated.  Current forecasts assume that weaker distillate and stronger gasoline cracks are likely to drive a divergence in crude throughput levels between Europe and North America.  Similarly, higher middle distillate stocks, compared with more normal gasoline inventories, could also support such a move.  This would appear to favour US refineries, although how sustainable such a move is remains questionable.  Furthermore, despite higher Indian and Chinese forecasts, we expect weaker runs elsewhere in Asia as increased exports from both these countries weigh on regional refining margins.

Overall, the weaker non-OECD numbers reflect our assumption that global crude runs will remain depressed in coming months compared with seasonal norms.  However, it remains feasible that current high crude stock levels could result in refinery throughput exceeding our estimates in the short run.  Yet, as highlighted last month, this would require heavy discounting of prompt crude supplies to tempt refiners to process additional barrels.  This could lead to higher product stocks and ultimately weaker margins, barring a recovery in demand.

Chinese forecasts are again raised following reports that CNOOC's newly commissioned 240 kb/d Huizhou refinery is running at 70% utilisation during May, well ahead of our previous expectations.  Furthermore, reports of the 160 kb/d expansion of Sinopec/Saudi Aramco/ExxonMobil joint venture Fujian refinery being commissioned also feed into higher June and July estimates.  However, as flagged last month, higher crude runs will result in higher Chinese exports, with additional pressure on regional benchmark refinery margins and, we assume, lower runs elsewhere in Asia as a consequence.

Recent trade data for February would tend to indicate that the rise in North American diesel exports to Europe is pressuring European crude runs, just as sustained European gasoline exports to the US impinged on crude runs there in recent quarters.  The likely consequence of such moves is weaker European activity levels as small-scale, unsophisticated European refineries cut crude runs in the coming months.

Global Refinery Throughput

Estimated 2Q09 global crude throughput of 71.1 mb/d is 0.2 mb/d lower than last month's report, following the weaker demand estimates contained in this month's report.  Reported 1Q09 runs are broadly unchanged this month, despite weaker-than-expected data for OECD Europe in March and downward revisions to provisional February data.  Offsetting these lower runs are higher than expected March data for Chinese, Russian and Brazilian throughputs.

Forecast global crude throughput of 71.1 mb/d for 2Q09 implies a year-on-year contraction in crude runs of 3.1 mb/d, with around two-thirds of this decline anticipated in the OECD regions.  The lower overall total masks a shift to higher North American and Chinese crude runs and lower OECD Europe and Pacific crude throughputs.  Within Asia, lower runs elsewhere within the region offset higher forecast runs in India, following the incorporation of crude runs for the 580 kb/d Jamnagar expansion.  July global estimates increase by 0.2 mb/d to 72.4 mb/d on higher North American runs.  The extension of the forecast period to August sees runs rise further to 72.6 mb/d, which represent a year-on-year drop of 2.6 mb/d.

OECD Refinery Throughput

Forecast 2Q09 OECD runs are marginally weaker this month, following this report's lower demand estimates.  Within this minor downgrade (around 20 kb/d) we have made larger intra-regional adjustments to our forecasts.  We have reweighted regional runs in favour of US refiners and away from European refiners.  Contributory factors to this change include the recent strength in gasoline cracks and continued weakness in middle distillate cracks, plus the rising surplus in middle distillate inventories and relative tightness in gasoline inventories.

Provisional March data indicate that OECD crude throughput averaged 36.2 mb/d, some 0.4 mb/d less than last month's estimate, and 0.8 mb/d lower month-on-month.  This represents the lowest March level since 1995, the start of the current monthly data series, as significantly weaker than expected European throughputs were responsible for the majority of the decline.  Furthermore, February data were also revised down, with Europe once again the main contributor.  Partially offsetting these reductions North American runs were 0.2 mb/d stronger than previously estimated.  Runs were some 1.5 mb/d below March 2008's level with declines in the Pacific and Europe accounting for much for the total.  North American runs were just 0.1 mb/d down against the same period last year, reflecting the weak level of activity for the region during early 2008.

Weekly data indicate that US crude runs in April were stronger than forecast in last month's report, continuing the run of better than expected activity levels.  Nevertheless, declining intra-regional movements of gasoline, notably from PADD 3 to PADD 1, continue to suggest that US refineries will struggle to move aggregate crude runs much above 15.0 mb/d on a sustained basis, without an appreciable decline in gasoline import volumes.  This remains possible if European crude runs prove to be weaker than now anticipated; this once again highlights the competitive pressure that East Coast refineries face, given the region is a focal point for arbitrage opportunities in the Atlantic Basin gasoline market.

OECD North America crude throughput was broadly flat in March, compared with February and the year-on-year contraction narrowed to just 0.1 mb/d, its lowest level since June 2008.  The subsequent pick up in crude runs over the course of 2Q09 is expected to be more modest than last year, although, as noted elsewhere, weaker runs in key exporting regions may lead to higher than forecast crude runs if US gasoline imports can continue to be contained.  2Q09 forecasts increase by 0.3 mb/d this month, reflecting the more positive outlook for gasoline cracks, relative to middle distillates and our expectation of lower European crude throughputs over the quarter.

OECD Europe March crude throughput fell heavily, to just 12.3 mb/d, the lowest March level since the current monthly time series began in January 1995 and the second lowest level for any month thereafter.  Official data from Italy and the UK account for much of the 0.3 mb/d downward revision to February provisional estimates.  March provisional estimates reveal once again very weak French throughput levels.  The prospects for continued weakness have increased, with several French refineries likely to see reduced utilisation in the coming months due to a combination of economic run cuts and maintenance.  Weaker Spanish crude runs in March are explained by the maintenance at several refineries and the closure of Repsol's 110 kb/d Cartagena hydroskimming refinery in April on economic grounds is likely to keep the country's runs depressed during the early part of 2Q09.

More generally, we have taken a more cautious approach on the outlook for European crude runs with rising distillate inventories and weaker middle distillate cracks.  This, we expect, is likely to prove more of a burden to European than US refineries.  Recent trade data point to rising imports of diesel from North America displacing European diesel production, suggesting lower European runs in coming months.

OECD Pacific March crude runs were broadly in line with our estimates and continue to show a heavy decline against levels of a year ago.  At just 6.8 mb/d, March throughputs are nearly 7% below the bottom-end of the five-year range and 8% below the five-year average.  Much of the regional decline is accounted for by low Japanese throughputs as refineries that previously sought to export surplus product to other regional importers face a squeeze from new capacity additions, not only in China, but also Vietnam.  2Q09 Pacific estimates are reduced to reflect a stronger Chinese forecast and the ongoing fallout that weaker regional margins are likely to have on small-scale refiners in Japan.

Non-OECD Refinery Throughput

Forecast 2Q09 non-OECD crude throughput is revised downward this month by 0.2 mb/d to 34.9 mb/d, despite higher Chinese crude throughput estimates.  Much of the reduction is due to the weaker demand forecasts now contained in this report, and implications for refinery margins and prospective activity levels.  Furthermore, higher than anticipated maintenance in Russia in April, and Indonesia in April and May, also contribute to the lower estimate.  Notwithstanding these adjustments, weak demand and the poor margin environment are responsible for most of the reduction to regional throughput estimates.  Typically, these revisions are less than 50 kb/d, but Other Asia is a notable exception, despite higher Indian forecasts.

Chinese March crude throughput exceeded expectations by 0.2 mb/d, the second consecutive month where forecasts have proved too pessimistic.  Consequently, forecast 2Q09 crude throughput of 6.9 mb/d, is 0.1 mb/d higher than last month, a quarter-on-quarter increase of 0.3 mb/d, but broadly unchanged compared with 2Q08.  The higher forecast crude runs should result in higher gasoline and gasoil exports over the course of 2Q09, and in combination with rising exports from India, add further pressure to regional product cracks.  July's forecast increases by a more substantial 0.3 mb/d, as reports indicate that the 160 kb/d distillation capacity at the Sinopec/Saudi Aramco/ExxonMobil Fujian refinery is currently undergoing commissioning.  This follows on from the start-up of CNOOC's 240 kb/d Huizhou refinery in March, which is now reported to be preparing to supply product during May.

The weaker demand forecast is expected to lower runs in Other Asia, with smaller, export-oriented refineries in Taiwan, Thailand and possibly the Philippines baring the brunt of the reductions.  For now, Singapore may buck this regional trend, with crude runs forecast to stay above 0.9 mb/d due to the comparatively large scale of refineries (on average around 430 kb/d) and high degree of integration with petrochemical units present.  There undoubtedly remains a possibility that further weakness in Asian gasoil cracks or petrochemical margins may prompt further run cuts at some of the refineries in Singapore.

Indian data for March were in line with forecast for the second month running, at 3.3 mb/d, but it appears increasingly evident that aggregate Indian data do not include processing volumes from the new train at Reliance's Jamnagar refinery.  We have therefore raised out 1Q09 estimate marginally and increased Indian estimates by around 0.2 mb/d for 2Q09, as the first 290 kb/d crude unit is brought up to full utilisation.

OECD Refinery Yields

In February, OECD yields generally followed seasonal patterns, with only yields for naphtha and 'other products' increasing.  However products remained well below their historical yield levels.

OECD naphtha yields increased from 4.4% to 5.0%, supported by positive crack spreads which had strengthened since last November.  All OECD regions recorded higher yields, with the Pacific showing the highest increment from 10.9% to 12.3%.  However, year-on-year, OECD naphtha gross output contracted by 9% and net imports decreased by 13%, signaling a lack of demand.  It is notable that the OECD as a whole is a net importer of naphtha and that most of the imports go to the Pacific (79% in 2008).  A table comparing year-on-year gross production and net exports is shown at the end of this section.

In spite of a wider price differential of gasoline to crude oil, OECD gasoline yields fell back into the upper part of the historical range.  In Europe, yields decreased strikingly by 6.5% on a monthly basis, while in the Pacific and North America they remained stable, above the historical range in the first region and slightly above the five-year average in the second.  Year-on-year, North America increased its net imports by 18.4% and its gross output by 1.5%, albeit this trend does not yet seem to be backed up by resurgent demand.

OECD jet/kerosene yields decreased seasonally, reaching levels below the five-year range.  Crack spreads did not provide support as they continued drifting down in February.  Yields in North America remained particularly weak at 7.9%, which represents a decrease of 9.9% versus the five-year average of 8.8%.  In Europe, yields behaved in line with historical trends, while in the Pacific they moved to the top of the range.  This pattern is consistent with historical changes in demand.  Year-on-year, apparent demand (gross output plus imports less exports) in North America contracted by 5% while it increased 5% in Europe (which contrasts with a decrease of 3.1% in inland deliveries for Europe, presumably due to stock changes) and 12% in the Pacific.

Gasoil/diesel yields decreased seasonally but remained above the five-year range; crack spreads continued deteriorating in February.  All three regions recorded falls, with North America and Europe decreasing slightly while the Pacific slumped down to last year's levels.  On a yearly basis, OECD production increased by 1.7% in February, although total OECD gasoil/diesel domestic demand increased 5.6%, meaning that OECD countries are increasing their supply from non-OECD countries.  Last year OECD countries as a whole showed a net import position only twice, in January and November.  This year, both January and February revealed a net import position for OECD countries.  In February, European countries increased their net imports by 150%, while North America and the Pacific strengthened their net export position by 28% and 59%, respectively.

OECD fuel oil yields continued trending below their five-year-range, something which started in May 2006.  All OECD regions are now below their five-year range.  OECD countries as a whole are net exporters and even though production decreased 8.1% in January and 4.1% in February on a yearly basis, the net export position in these two months strengthened on average by 18.0%, albeit from a low base.