Oil Market Report: 11 June 2009

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Highlights

  • Crude futures were up $10 in May, averaging $60/bbl and reached $10/bbl higher by early June.  The bull-run appears largely driven by perceived global economic recovery, with prices also recently underpinned by rising refinery throughput.  OPEC's late-May decision to maintain current production targets added further support to markets.
  • Forecast global oil demand is adjusted up 120 kb/d for 2009 following stronger-than-expected 1Q09 OECD data.  Global oil demand is projected at 83.3 mb/d, -2.9% or -2.5 mb/d compared with 2008.  These revisions do not necessarily imply economic recovery, but may reflect a slowing in previously sharp decline.
  • 2009 non-OPEC supply is revised up 170 kb/d on stronger growth at new Russian fields, more robust North Sea production and higher crude output in Colombia.  Year-on-year, it is now expected to decline 100 kb/d to 50.5 mb/d.  Global May oil supply edged down 210 kb/d from April to 83.7 mb/d.  A non-OPEC decline of 370 kb/d, entirely in OECD countries, outstripped higher OPEC output.
  • OPEC crude oil production in May again increased, by 160 kb/d to 28.4 mb/d.  OPEC-11 output rose 110 kb/d, to 26.0 mb/d, about 1.1 mb/d over the group's 24.85 mb/d target.  OPEC opted to hold output targets steady at its 28 May meeting in Vienna.  The call on OPEC crude and stock change is cut 0.2 mb/d to 27.7 mb/d for 2009.
  • Forecast global 2Q09 crude runs are raised 0.2 mb/d to 71.3 mb/d, as a result of higher April preliminary data in OECD countries, reports of high crude runs in China and marginally stronger global demand.  But 3Q09 crude runs are forecast at 72.8 mb/d, representing an annual decline of 1.2 mb/d.
  • OECD industry stocks rose by 10.4 mb in April to 2,753 mb, 7.5% above a year ago.  Higher North American inventory outweighed lower stocks in both Europe and the Pacific.  Yet, end-April forward demand cover fell slightly to 62.0 days with rising seasonal demand, albeit still  7.5 days above a year ago.

Back to the futures

Both the OMR and MTOMR have long argued that market fundamentals remain the key driver of crude prices.  A 20%-plus rise in prices during May and into early June looks difficult to justify from fundamental factors alone, even though refinery throughputs are trending higher, while OPEC curbs remain in place and gasoline markets begin to tighten. But saying that fundamentals are the key driver is different from inferring they are the only driver. Prospects for equity markets and the global economy, backed up by exchange rate fluctuations, expectations about future oil market tightness and, by inference, a shift of money into or out of futures markets can all influence short-term prices, as we have noted before.  Indeed, it is tempting to conclude that the shift in NYMEX WTI non-commercial positions from a net 11,000 short in early May to 40,000 net long a month later is sufficient explanation for the surge in prices.  The problem is that the relationship falls apart over longer periods, and also that total open interest on the NYMEX has been range-bound this year at well below spring 2008 highs.  So if an 'it's only fundamentals' argument strains credibility, so too does the idea of a single 'speculative' smoking gun underpinning higher prices, although recent regulatory moves to improve financial market oversight are welcome.



Other analysts have argued that prevailing market contango and the use of commodities as a hedge against the spectre of resurgent inflation and a weakening dollar will perpetuate the incentive to build inventory, squeeze the prompt market and risk a difficult-to-break vicious circle of upwardly spiralling prices.  The ongoing stockbuild element of this thesis is supported by anecdotal reports that China was buying more crude for strategic storage during April and May. But a recently narrowing contango, and latest OECD stock changes give more mixed messages.  A 10 mb OECD stockbuild in April was below seasonal norms, and forward cover eased to (an admittedly still-high) 62 days.  Preliminary OECD end-May data also came in higher, partly offset by reports of a 30 mb fall in crude floating storage. OECD inventory and floating storage combined are abnormally high, but existing OPEC target output still holds the potential to tighten inventory (albeit only by late 2009 or early 2010), something OPEC Ministers tacitly acknowledged on 28 May in Vienna.  If that coincides with a further strengthening in prompt demand, the price curve could look rather different in a year's time.

While rapid price swings can prove destabilising, higher prompt prices, if symptomatic of a gradually recovering global economy, in themselves may be no bad thing.  If they coincide with cyclically weaker costs (which now seems the case), higher prices could also prompt a recovery in upstream investment. Notwithstanding a now-lower cost base, a recent IEA report prepared for the G8 Energy Ministers Meeting highlights the risks for longer-term supply growth if upstream spending curbs are sustained. But moves to try to identify and artificially maintain a new 'ideal' price look fraught with hazard.  Not only are marginal supply costs themselves a moving target, but there is a risk in selecting an arbitrary and inflexible consensus price level that this itself could undermine the global economic rebound everyone wishes to see. Free markets may be getting a bad press just now, but over time they are the most efficient way to rebalance supply and demand, however well-meaning the urge towards greater market management might be.

Demand

Summary

  • Forecast global oil demand has been adjusted up slightly for 2009 following stronger-than-expected early-year OECD demand.  Global oil demand is projected at 83.3 mb/d, -2.9% or -2.5 mb/d when compared with 2008, and 120 kb/d higher when compared with last month's report.  These revisions do not necessarily imply the beginnings of a global economic recovery, and may only signal the bottoming out of the recession.  The demand estimate for 2008, meanwhile, remains broadly unchanged at 85.8 mb/d (-0.3% or -0.2 mb/d versus 2007).
  • Forecast oil demand in the OECD has been adjusted up marginally for 2009 to 45.2 mb/d (-4.9% or -2.3 mb/d on a yearly basis and 120 kb/d higher than previously anticipated).  These revisions resulted mostly from higher-than-anticipated demand for petrochemical feedstocks.  However, the rebound of petrochemical activity, which reached historical lows in early 2009, is possibly due to restocking.  By contrast, demand for transportation fuels remains very weak, suggesting that other economic sectors (notably services) are still constrained.  As such, revisions have not been carried forward until more solid evidence emerges.  The oil demand estimate for 2008, by contrast, remains largely unchanged at 47.5 mb/d (-3.3% or -1.6 mb/d versus 2007).


  • Forecast non-OECD oil demand remains essentially unchanged for both 2008 and 2009.  Although 1Q09 revisions and preliminary data for April indicate that demand was slightly higher than expected in Africa and Asia, it also showed somewhat lower-than-expected growth in the Middle East.  The forecast for 2009 remains at 38.1 mb/d (-0.3% or -130 kb/d versus the previous year), while the estimate for 2008 is untouched at 38.3 mb/d (+3.8% or +1.4 mb/d versus 2007).
  • The recent flurry of fuel efficiency policies in the US will arguably contribute to tame gasoline demand, curb emissions and reduce the country's dependence upon foreign oil.  It is unclear, however, whether these policies will also succeed in helping domestic car manufacturers to compete successfully against foreign producers, unless retail gasoline prices remain low.  From an economic perspective, raising gasoline taxes would complement fuel standards, but this would be politically unpalatable in a recession.

OECD

Preliminary data show that OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 8.1% year-on-year in April, with all three regions recording losses for the twelfth month in a row.  In OECD Pacific, demand plunged by 9.9%, despite a marked rebound in naphtha deliveries.  In OECD North America (which includes US Territories), oil product demand fell by 8.4% year-on-year, with all product categories posting losses.  In OECD Europe, the support provided by strong heating oil deliveries largely dissipated and compounded the seasonal weakness of Easter holidays (which this year fell in April); as such, total demand shrank by 6.8%.



The upward revisions to March's preliminary data were relatively large, with higher-than-anticipated demand for LPG, naphtha, heating oil and 'other products', which offset weaker deliveries of gasoline, jet fuel/kerosene and diesel.  March's OECD demand estimates thus turned out to be 650 kb/d higher, indicating that demand fell by 3.2% during that month, rather than by 4.5%.  Preliminary data for April were also stronger than anticipated, mostly owing again to sustained LPG and naphtha demand on the back of a rebound in petrochemical activity, which had reached historical lows.

These adjustments do not necessarily reflect the beginning of a global economic recovery, signalling at best what could be the bottoming out of the recession, possibly related to industrial inventory rebuilds.  As noted, demand for transportation fuels remains subdued, which suggests that other economic sectors (notably services) are still constrained.  Indeed, oil demand in the OECD since July 2008 has largely followed a downward spiral.  As such, these revisions have not been carried forward until more solid evidence of sustained demand emerges.  Moreover, preliminary May data for the US (based on weekly figures) were actually slightly weaker than expected.  Overall, 2009 OECD demand has been adjusted up by 120 kb/d, entailing a contraction of 4.9% or -2.3 mb/d versus 2008, to 45.2 mb/d.







North America

According to preliminary data, oil product demand in North America (including US Territories) plummeted by 8.4% year-on-year in April, the sixteenth monthly contraction in a row.  The oil demand decline in both the United States and Mexico was particularly pronounced (-9.0% and -8.2% year-on-year, respectively), with Canada faring slightly better (-2.3%).



Three-quarters of March's upward revisions to preliminary data (+430 kb/d) were attributable to the US.  Regional demand fell less than expected during that month (-4.2% rather than -5.9%).  Regional demand for LPG, naphtha and 'other products' was much stronger than expected, possibly as industrial firms moved to rebuild depleted inventories, but demand for transportation fuels, notably gasoline, was much weaker than anticipated.  Total demand is now expected to reach 23.3 mb/d in 2009 (-4.3% or -1.0 mb/d versus 2008 and about 80 kb/d higher compared with last month's report).



Adjusted preliminary inland deliveries - a proxy of oil product demand - in the continental United States plunged by 8.1% year-on-year in May.  Despite predictions by some analysts that the economic recession is virtually over, all product categories bar heating oil posted sharp losses, scarcely indicative of an imminent recovery.  Heating oil demand was arguably supported by relatively cool temperatures (the number of heating-degree days in May was higher than the 10-year average, yet lower than in the same month of the previous year).  The poor readings for fuel oil consumption could suggest that electricity needs remain subdued and that natural gas continues to make inroads in power generation.

It is worth noting that demand for transportation fuels remains significantly subdued.  Jet fuel/kerosene demand languishes at 12.9% below last year's levels, while diesel demand is down by 15.8% year-on-year.  Gasoline demand is still contracting (-0.6% year-on-year), albeit less sharply than in previous months, most likely because of the Memorial Day weekend, traditionally seen as the kickoff for the driving season.  The trend indeed suggests that this year, contrary to 2008, will likely feature a driving season; therefore, gasoline demand should post positive growth from June onwards - for the first time since September 2007.  However, as much as we expect strong growth this summer - relative to very weak gasoline deliveries last year - the long-term increase in US gasoline demand is likely to slow down markedly when compared with recent years, as new legislation regarding efficiency and emissions is put into place (see US Fuel Efficiency Initiatives:  A Primer).



For the first time in more than a year, our pre-emptive adjustment to preliminary weekly data (+320 kb/d for March) slightly exceeded the EIA's weekly-to-monthly revisions (+190 kb/d).  The data now indicate that March's year-on-year annual decline was 5.3%, less than previously estimated (-7.0%).  Based on March's revisions and preliminary April and May data, US oil demand in 2009 is expected to contract by 4.8% or 950 kb/d to 18.6 mb/d, about 50 kb/d higher than expected in our previous report.

US Fuel Efficiency Initiatives:  A Primer

Until recently, the US had been less pro-active than other OECD countries concerning fuel efficiency improvements in the transportation sector.  Following the oil price shock of the 1970s, the US government introduced the Corporate Average Fuel Economy (CAFE) standards in order to reduce the fleet's fuel intensity, but this policy was relaxed in the early 1980s.  As such, fuel intensity in the US has largely stagnated since the early 1990s.  The efficiency gap has become quite large:  on average, the vehicle fleet in the US is currently about a third less efficient than in Europe and the Pacific.

In 2003, the US government revived the efficiency effort, seeking to reduce the fuel intensity of 'light-trucks' (SUVs, vans, and pickups, among others).  The National Highway Traffic Safety Administration (NHTSA) set new light-truck CAFE standards that aimed to improve efficiency by roughly 10% by 2007 - the largest increase since the mid-1980s.  Three years later, the NHTSA mandated a further 10% improvement by 2011.  However, models from 2008 to 2010 were exempted, thus remaining subject to the 2003 legislation.  More significantly, the passenger-car CAFE standards were left largely untouched, given that the NHTSA lacked the formal authority to reform them.  This changed in 2007 with the Energy Independence and Security Act, which mandated an average goal of 35.5 mpg (about 15 km/litre), to be reached gradually from 2011 to 2020 (thus more than doubling current average fuel efficiency).

The Obama administration has gone much further and quicker.  First, it moved last May the 35.5-mpg goal four years ahead to 2016.  Second, it has not only allowed states to set their own standards - an attribution that the previous administration had fiercely denied - but has also followed California's example in regulating CO2 emissions from vehicles, which must now fall by almost a third by 2015.  Third, it has cornered domestic car manufacturers - which opposed fuel efficiency improvements during most of the past two decades - by making contingent federal bailout funds upon their firm commitment to produce much more efficient vehicles.  Fourth, it has put in place a $7,500 subsidy for buyers of electric vehicles (EVs).  Finally, the administration is considering whether to introduce a carbon cap-and-trade system and fiscal rebates for the purchase of more efficient vehicles (other than electric ones), but the details of these initiatives remain to be unveiled.329

Taken together, these policies will arguably contribute to improve the fleet's overall efficiency and help meet three of the government's stated objectives, namely to tame gasoline demand, curb emissions and reduce the country's dependence upon foreign oil.  (US gasoline demand trends will be covered in detail in our forthcoming Medium-Term Oil Market Report.)  It is unclear, however, whether these policies will succeed in achieving a fourth goal  prompting domestic car manufacturers to produce more efficient vehicles and helping them compete successfully against foreign manufacturers.

The new targets will probably require introducing hybrid technologies, notably in the case of light trucks, and possibly even diesel engines (although that fuel has never been popular in the US).  Yet in the field of technological improvements, foreign manufacturers have a clear advantage - unless protectionist trade policies were to be put in place to prevent imports of more efficient vehicles, as happened in the early 1990s.  If gasoline prices were to remain low, however, domestic manufacturers would stand a better chance.  Indeed, despite setting more stringent, average fuel mileage standards, the new CAFE rules continue to favour light trucks over passenger cars.  The former must raise fuel efficiency to only 30 mpg, while the latter must achieve 39 mpg, from 23 mpg and 27.5 mpg today, respectively.  Thus, under a low-price environment, domestic manufacturers would arguably focus on selling more profitable SUVs - for which efficiency improvements would be less challenging given the lower standards - while building just a few small cars to fulfil the mandated average mileage.  This would entail a repeat of the trend observed in the late 1990s and early 2000s, when annual sales of light trucks eventually rose to over half of total vehicle sales, thus contributing to the stagnation of the fleet's overall efficiency - hardly a genuine improvement.

For these reasons some stakeholders - most notably the CEO of Sunoco, a large independent refiner, and the chairman of Ford, the only US car manufacturer that has not gone bankrupt or effectively been nationalised, as well as several environmental groups - have advocated a steep increase in gasoline taxes.  From an economic perspective, raising taxes, by targeting demand (as high retail prices would discourage motorists to switch away from light trucks and encourage producers to focus on building leaner vehicles), would complement the supply-side approach of the CAFE standards.  Retail gasoline prices would need to be high enough to prompt a turnover of the fleet, even if more efficient vehicles are more expensive (the government estimates they will cost about $1,300 more than conventional models); otherwise, drivers would be tempted to keep their older models on the road for longer.  It remains to be seen, however, whether hiking the federal gasoline tax significantly above its current level - $0.18/gallon - would be politically palatable in a recession.  The administration has seemingly concluded that, at this juncture, Congress would likely oppose such a move.

Europe

According to preliminary inland data, oil product demand in Europe plunged by 6.8% year-on-year in April.  Somewhat warmer temperatures (the number of heating-degree days in April was lower than both the 10-year average and the same month of the previous year) tamed heating oil deliveries, which fell by 1.5% year-on-year, in sharp contrast to previous months.  Moreover, as far as key products are concerned, there are no clear signs that would support the contention that the recession in Europe is bottoming out:  demand for LPG fell by 10.1%, naphtha by 15.7%, jet fuel/kerosene by 4.3%, residual fuel oil by 8.0% and diesel by 7.2% (in the case of the latter product, the decline was much larger than is traditionally the case at Easter).





Regarding revisions, March's data were adjusted up by 140 kb/d, given higher-than-expected figures for gasoline and diesel.  European demand thus expanded modestly that month (+0.4%), rather than contracting by 0.3%.  Oil demand in OECD Europe is now expected to average 14.6 mb/d in 2009, -4.1% or -620 kb/d compared with the previous year and 25 kb/d higher than previously anticipated.

According to preliminary estimates, inland deliveries in Germany fell by 3.1% year-on-year in April, as much lower growth in heating oil deliveries (+11.6% year-on-year versus an astonishing +88.1% in March) failed to offset losses elsewhere, notably in naphtha (-16.4%).  Heating oil demand is now following a more seasonal pattern, but consumer stocks, at 62% of capacity by end-April, were sharply above the levels recorded in the same month of the previous year (45%) and higher than in March (61%).  As such, heating oil deliveries will be presumably much lower than a year earlier over the next few months.  Naphtha demand is also in line with seasonal trends, but remains well below both last year's levels and the five-year average, thus casting doubt on Germany's industrial rebound.



In France, oil product deliveries plummeted by 7.0% year-on-year in April, according to preliminary data.  As in Germany, the support provided by heating oil has vanished, with demand contracting by 9.4%, thus compounding the still marked contractions in naphtha (-20%) and LPG (-19.4%), driven by the economic recession.  The effects of the recession can also be seen in Italy (total demand down by 10.7% in April) and Spain (-7.1%).  The fall in Italy was admittedly compounded by very weak fuel oil deliveries (-16.7%), arguably due to unusually high hydropower generation.  Meanwhile, the sharp contraction in Spanish diesel demand (-10.7%) is particularly noteworthy, highlighting the dire state of the country's economy - diesel demand has contracted year-on-year by about 8% on average every month since the autumn of 2008.



Pacific

According to preliminary data, oil product demand in the Pacific plunged for the tenth month in a row in April (-9.9% year-on-year) - more than in the previous month.  Although Korean demand grew strongly on a rebound of petrochemical activity, this was not enough to offset a sharp decline in Japan, whose export-oriented economy shows little signs of recovering.  Moreover, warmer weather further undermined the region's demand (heating-degree days were much lower in April when compared with both the 10-year average and the same month of the previous year).



March's preliminary data were revised up slightly (+70 kb/d), as Japanese figures were again somewhat stronger than previously anticipated.  Still, regional demand is expected to contract sharply in 2009 to 7.4 mb/d (-8.4% or -670 kb/d versus the previous year and about 15 kb/d higher than last month's report).



The surprising news regarding Japanese oil demand is not that it plummeted by 18.6% year-on-year in April - almost as much as in February (-20.6%), which had so far been the worst month on record - but that it did not contract even more.  All products registered sharp losses, bar one:  naphtha.  Indeed, according to preliminary data, naphtha demand rebounded strongly in April (+5.7%) - the first month of positive growth since September 2007.  Pending revisions, this is may be related to the restocking of petrochemical products, as the industry had virtually come to a standstill over the previous months, and possibly renewed exports to China.  As such, it is unlikely that the rebound will last, unless export-driven industrial activity picks up significantly - this 'green shoot' could well prove to be short-lived.  Moreover, Japan is now increasingly challenged by Korea, which is poised to become the region's main naphtha-based petrochemical producer:  naphtha demand in the latter is now almost 20% higher than in the former.



In Korea, demand growth in April (+5.7%) was essentially driven by strong naphtha deliveries (+12.2%).  Even though the country has undoubtedly suffered the effects of the global economic slowdown, its petrochemical industry continues to perform startlingly well.  Contrary to other OECD countries, which saw naphtha consumption collapse in 1Q09, Korean naphtha demand has posted positive growth rates since January.

Non-OECD

China

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) surged by 6.5% year-on-year in April, mostly on the back of strong deliveries of LPG (+26.6%), naphtha (+14.1%), 'other products' (+16.1%) and gasoline (+13.8%).  Overall, these data would point to a partial industrial revival, notably in petrochemical production - as in neighbouring Japan and Korea - and also reflect the jump in vehicle sales (+22% quarter-on-quarter in 1Q09).  In the case of gasoline, though, part of the surge in demand could be related to stockpiling ahead of an expected retail price rise in April (which probably continued in May, as the price increase was actually delayed until early June).  Indeed, month-on-month refinery output growth slowed down a bit in April (+3.0%).  Meanwhile, the fall in gasoline and gasoil stocks held by PetroChina and Sinopec (-12.0% and -13.7% month-on-month, respectively) was likely related to a sharp rise in net exports of both products (+162.9% and +94.6% month-on-month, respectively).  As such, actual domestic demand could well remain subdued; interestingly, diesel demand fell by 5.6% year-on-year in April.



This rebound suggests that government spending is finally bearing fruit.  Growth is indeed likely to pick up in the forthcoming months given the sharp increase in government spending and the rise in inventories.  However, the pace and sustainability of future economic growth will also depend on net exports and private domestic demand.  Should both remain subdued if global imbalances take longer to be addressed, China could well find itself facing excess capacity, inventory draws, a rise in non-performing loans and even deflation.  The central bank shares these concerns, cautioning that the recovery remains fragile and advocates boosting exports - which have fallen drastically because of the global recession.  Given these uncertainties, forecast oil demand for 2009 has been only marginally lifted to 7.9 mb/d or -0.4% versus 2008, some 40 kb/d higher than previously expected.



A Price Saga

China's fuel pricing mechanism, introduced in early 2009 and intended to follow market trends, recently faced some implementation delays.  In principle, the new scheme set ex-refinery prices as the sum of the weighted average of a specific crude basket (including Brent, Dubai and Cinta), transportation costs, refining costs, a 'reasonable' refining margin, and taxes (consumption tax and VAT).  Although the formula remains short on details regarding its specific components, local observers and industry players were expecting an increase of gasoline and gasoil prices of some 9% by late April or early May at the latest, given the recent evolution of international crude benchmarks.  Prices for both products were previously raised in late March by about 3% and 5%, respectively.  In early May, however, the National Development and Reform Commission (NDRC) unveiled instead a few new particulars on how prices would be adjusted in future.  Fuel prices would change if global crude prices were to fluctuate by more than 4% for 22 consecutive working days.  Refiners would enjoy 'normal' profits at crude oil prices below $80/bbl, but 'narrower' margins above that level.  Fuel prices would not rise further if crude oil prices were to exceed $130/bbl, and fiscal tools would ensure adequate supplies.

Yet refiners (including both state-owned PetroChina and Sinopec, as well as smaller independents) reportedly increased wholesale prices to the allowed ceiling following the NDRC announcement, presumably anticipating a retail price rise.  According to Platts calculations, the 22-day moving average of the crude basket had already risen by more than 4% by 1 May for four consecutive working days.  Suppliers, meanwhile, began stockpiling products.  In late May, the state-owned companies announced they would cap deliveries to fuel outlets in an attempt to curb hoarding - yet most outlets had arguably built up stocks already.  Sinopec then declared that prices would rise by end-May - that is, after 22 consecutive working days of fluctuation.  Although on 28 May the NDRC announced that domestic oil product prices would not be adjusted 'in the near future', on 1 June it increased gasoline and gasoil prices by roughly 6%.

The episode has highlighted persistent uncertainty over the precise workings of the new price mechanism.  It is still unclear, for example, what constitutes a 'normal' refining margin, or whether Cinta will be dropped from the crude basket, and if so, which crude would replace it.  Meanwhile, disclosing specific fluctuation ranges and timeframes has been seen by some observers as potentially encouraging stockpiling in anticipation of price changes, which could eventually cause shortages.  The government has been understandably eager to support an incipient economic recovery - during the peak of the agricultural planting season - by keeping fuel prices low, even though this effectively deferred the enforcement of the new mechanism and with it the enhanced predictability for market participants.  Higher prices, in particular, would arguably prompt Chinese motorists to purchase more efficient vehicles.  The recent price increase effectively gives precedence to market stability, although priorities may change if international crude prices keep on rising.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - rose by only 0.9% year-on-year in April.  This slower expansion, when compared with previous months, is due to a relatively high base in the previous year, notably for transportation fuels.  In April 2008, rumours of an imminent fuel price increase boosted total demand, which grew by 6.1% year-on-year on the back of very string gasoline and diesel sales (+14.0% and +12.9%, respectively).  This year, demand for both fuels increased by 'only' +8.5% and +4.9%, respectively, despite intense campaigning ahead of the general elections.  Moreover, naphtha demand fell (-1.9%) following several months of double-digit growth, suggesting that this product - used essentially to produce fertilisers - has become less competitive vis-à-vis natural gas (LNG).  Overall, despite a clear slowdown in industrial activity (+2.3% in March, the lowest pace in over a decade), India is probably the only big emerging country that has managed to largely 'decouple' from the worst effects of the global recession, largely due to its domestic-oriented growth model and lack of severe external imbalances.  Forecast oil demand for 2009 thus remains largely unchanged at 3.2 mb/d (+2.4% year-on-year or +75 kb/d, some 10 kb/d lower than previously anticipated).



The re-election in May of a Congress-party majority could herald significant changes to India's administered price regime.  The new government coalition will not be encumbered by its former Communist allies; as such, the government may now be finally able to push for deregulation.  The Ministry of Petroleum has reportedly prepared a draft cabinet note outlining the removal of price controls on gasoline, diesel, kerosene and LPG if international crude oil trades below $75/bbl.  As long as that threshold were not exceeded, fuel retailers would be free to set retail prices every three months, based on the quarterly average of crude prices.  Above $75/bbl, the losses incurred by retailers would be shared between the treasury and upstream oil companies.  The poor - the main users of kerosene and cooking gas - would receive direct subsidies for both products via smart cards or coupons.  Although the government is expected to take a decision by late July, some observers remain sceptical, noting that some influential Congress party members believe that price controls contributed to the electoral victory, that Congress' new main allies (Trinamool Congress and Dravida Munnetra Kazhagam) will likely oppose market-based prices, and that Congress' own reform record has been inconsistent.



Supply

Summary

  • Global oil supply edged lower in May to 83.7 mb/d, down by 220 kb/d from April levels.  A decline of 370 kb/d in non-OPEC supplies, mostly in OECD countries, outstripped higher OPEC crude production of 160 kb/d.  Global oil supplies are now down a steep 3.2 mb/d below levels of a year ago in the wake of sharply lower oil demand.
  • Non-OPEC supply is revised up by 170 kb/d for 2009 on higher-than-expected growth from new Russian fields, more robust, albeit declining, North Sea production and stronger crude output in Colombia.  Year-on-year, non-OPEC supply is now expected to decline by a lesser 100 kb/d, from 50.6 mb/d in 2008 to 50.5 mb/d in 2009.
  • OPEC crude oil production in May rose for the second month running, up 160 kb/d, to 28.4 mb/d.  Production by the 11 members with output targets, which excludes Iraq, rose 110 kb/d, to 26.0 mb/d, with output about 1.1 mb/d over the group's 24.85 mb/d goal.  Iran and Angola accounted for about 55% of above-target output.  As a result, OPEC's compliance rate with output targets slipped to 74% last month compared with 76% in April.  OPEC ministers opted to hold output targets steady at their 28 May meeting in Vienna and will next meet on 9 September to review the market outlook.
  • OPEC NGLs were revised up by 200 kb/d for 2009, largely due to a reappraisal of Iranian and Nigerian output levels.  OPEC NGLs are forecast to average 5.2 mb/d in 2009 compared with 4.7 mb/d in 2008.
  • The call on OPEC crude and stock change stands at 27.7 mb/d for 2009.  After a sharply reduced call of just 27.3 mb/d for the seasonally weak 2Q demand period, the call on OPEC crude and stocks rises to 27.9 mb/d in 3Q before slipping again to 27.4 mb/d by the 4Q of the year.


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 rose marginally again in May, with output target compliance weakening against a backdrop of sharply higher oil prices.  OPEC crude output rose to 28.4 mb/d, up a modest 160 kb/d over April levels.  Angola, Iraq, Saudi Arabia and Nigeria all posted month-on-month increases.

Production by the 11 members with output targets, which excludes Iraq, rose 110 kb/d, to 26.0 mb/d. That is about 1.1 mb/d over the group's 24.85 mb/d target level.  Iran and Angola accounted for about 55% of above-target output.  Higher production levels last month reduced OPEC's compliance rate to 74% compared with 76% in April.  The OPEC-11 have reduced output by a total 3.1 mb/d of the pledged 4.2 mb/d reduction in production agreed since September 2008.

OPEC opted to hold output targets steady at an unexpectedly their brief meeting in Vienna on 28 May.  Discussions reportedly focussed on continued overproduction by some members like Iran and Angola but a united front was presented in the end to sustain the group's hard-won reputation for strong compliance with targets.  Angola's bid to have its output target temporarily suspended and Venezuelan complaints about quota allocations were not addressed in the final communiqué.  OPEC's next meeting to review the market outlook is scheduled for 9 September.



The continued strength in crude oil prices also appears to have convinced OPEC members that a nascent recovery in the global economy is underway and with it, stronger demand for the group's crude supplies.  Previous gatherings were tempered by a pessimistic outlook for crude oil demand but, mirroring financial markets, Ministers apparently struck a more optimistic tone at the end-May meeting when talking about a global economic recovery.  Indeed, several stated that $70-75/bbl would be a 'fair price,' sending a strong signal to the market about future price expectations.  OPEC's upbeat assessment of a recovery in the global economy could also be aimed at quelling any critcism over the higher price ambitions that some fear could potentially derail a ecovery given the fragile market.

Saudi Arabia's crude oil production is estimated at 8.05 mb/d in May, up 50 kb/d from a revised 8.0 mb/d for April.  March output was revised up by a sharper 400 kb/d, to 8.35 mb/d, based on production data submitted to JODI.  The revised, higher JODI production levels for March and April run counter to statements by Saudi officials that the country was producing below target in recent months.

Assessing Saudi crude oil production has been increasingly complicated by the varying percentage cuts in customer crude allocations among the major regions as well as by conflicting statements about actual production levels from government officials and high-level executives.

Complicating the issue further is the rather surprising lack of data on start-up at new fields given Aramco's high-profile, massive capacity expansion programme underway.  Saudi Aramco is reportedly on target for start-up of the 1.2 mb/d Khurais development from end-June. The 100 kb/d Nuayyim field and the 250 kb/d Shaybah expansion have reportedly commenced.  Combined, the new production will raise Saudi Arabia's nameplate capacity to 12.5 mb/d.

That said, despite various statements by Aramco officials about the start-up at the AFK fields, first in the spring of 2008 that was then later changed to that September, it emerged more than six months later that output was running at less than half the planned capacity due to technical problems with a gas-processing unit.  The 500 kb/d project was most recently reported to be shut-in altogether due to lack of demand for the crude.

Details about the start-up of production totalling a staggering 1.55 mb/d this year have been equally vague.  Obviously, the lack of demand for extra crude has forced Saudi Aramco to revise its production strategy but whether the company brings the new streams on line in a staggered fashion or opts to start operations at the new fields and then shut-in production at older fields for maintenance work or more extensive rehabilitation is unclear.

These conflicting reports over new field start-ups currently make assessing Saudi supplies to the market increasingly difficult.  As a result, in addition to following tanker data, Saudi data provided to JODI appears to be the most reliable source of information for now.



Iranian supplies edged slightly lower in May to 3.72 mb/d, compared with 3.75 mb/d in April.  However, with a compliance rate of just 32%, Iranian output accounts for around 35% of the above-target output at 384 kb/d.  Iran's plans to offset declining production at the country's older fields moved a step forward with the formal launch of the enhanced oil recovery project at the onshore Aghajari oil field.  After years of delays, the gas reinjection project aims to increase output by 100 kb/d, to 300 kb/d, but that target may be overly ambitious given technical issues and the field's age.

The gas for reinjection is being piped from the offshore South Pars 6, 7 and 8, which were brought online in late 2008 and slated to gradually ramp up this year.  This project has also suffered delays, from a lack of equipment to challenging corrosive issues.

Iraqi production (measured as exports plus domestic use) rose by 55 kb/d, to 2.43 mb/d in May. Domestic crude used at refineries and for power use was estimated at 550 kb/d last month.  Higher supplies from the northern part of the country offset a decline in the main southern producing region.

Total crude oil exports were assessed at 1.88 mb/d last month compared with 1.82 mb/d in April.  Iraqi shipments of Basrah crude from the southern export terminals were down about 60 kb/d, to 1.35 mb/d in May.  Kirkuk exports via the northern Ceyhan terminal on the Mediterranean increased by 112 kb/d, to 512 kb/d in May.  A further 10 kb/d was exported to Syria.

These figures do not include new production that came on stream 1 June from Iraqi Kurdistan.  Baghdad has given the green light for production from the Tawke and Taq Taq fields to be blended in with Kirkuk crude for export via the Ceyhan pipeline.  Combined output for the two fields could potentially reach 100  kb/d in the second half of the year.  An agreement between Kurdistan and Baghdad was reached whereby state SOMO would market the crude.  However, a number of difficult issues that have yet to be resolved could derail export plans.  SOMO will reportedly deposit payments from the crude exports into a federal account but the contentious issue over revenue splitting remains.  Moreover, Oil Minister Shahristani is threatening to withhold payments altogether for the companies producing the crudes since he considers the contracts signed with the Kurdistan government to be illegal.

Crude oil production in Nigeria posted a 20 kb/d rise in May, to 1.8 mb/d, despite worsening violence in the conflict-torn Niger Delta region.  A major offensive launched in mid-May by the country's security forces were countered by equally forceful attacks by militant groups.  Chevron shut in 100 kb/d of Escravos crude production on 25 May for a week after bomb attacks disrupted five flow stations.  Militants also forced ENI to declare force majeure on 50 kb/d of Brass River exports for five days from 20 May.  Shell extended its force majeure for June exports of Forcados and Bonny crude following damage from attacks in March and April, respectively, but supplies slowly increased in May.  Increased output at offshore fields is estimated to have offset the loss of Brass River and Escravos output.

Angolan production increased by 60 kb/d to reach 1.74 mb/d in May and output looks set to move above 1.8 mb/d in June according to export schedules.  Angola has largely ignored its 1.52 mb/d OPEC output target, with compliance a mere 11% last month.  Angola's bid to have its output target suspended was taken off the table for discussion at the group's latest meeting as the group endeavoured to downplay any internal disputes while markets remain fragile.

Crude oil production in Venezuelan, including extra heavy Orinoco output, was pegged at 2.12 mb/d in May, unchanged from the previous month.  Venezuelan officials have recently launched a campaign to argue that production is markedly higher than assessments by secondary sources, including the OMR.  Officials have recently released some (unaudited) data on the country's crude oil exports to support their argument.

The new data on Venezuelan supply are welcome, even if much of it remains unverified and so far is of limited time coverage.  As with all new sources of information, the data need to be thoroughly checked against all other sources over a credible timeframe.  Should we decide, after a detailed investigation, that any changes to our own data series and assessment methodology are warranted, then this will be addressed in a future OMR; until such time, we retain our existing estimates.

Meanwhile, the Venezuelan government's latest moves to nationalise oil service companies operating in the country are expected to have a detrimental impact on output levels in the near term.  The disruption to ongoing field work coupled with an acute financial shortfall may limit the state oil company's resources to manage the takeover.

OPEC NGLs

OPEC NGLs were revised up by 200 kb/d for 2009, largely due to a reappraisal of Iranian and Nigerian output levels.  OPEC NGLs are forecast to average 5.2 mb/d in 2009 compared with 4.7 mb/d in 2008.  In 2009, South Pars 6-10 will account for around 250 kb/d of the total 500 kb/d increase in OPEC NGLs.  Condensate from Nigeria's new Akpo field provides a further 175 kb/d.

Condensate and LPG output at South Pars 6, 7 and 8 was expected to reach 152 kb/d in 2009, but technical problems with the pipeline will restrict volumes to a maximum capacity of about 130 kb/d for the next few years.  Condensate output from the fields is expected to gradually ramp up to 100 kb/d in first half 2009 with the remaining 30 kb/d brought online in the third quarter.  An additional 50 kb/d in NGLs from the fields is also forecast for 2009.

South Pars 9 was brought online earlier than expected this year, with condensate output of 40 kb/d.  A further 40 kb/d from Phase 10 is expected by the fourth quarter.  In addition to condensate, output from Phase 9-10 includes another 30 kb/d of NGL.

Non-OPEC Overview

Non-OPEC supply prospects are revised up modestly for 2009, now assessed around 170 kb/d higher than in last month's report on stronger-than-expected Russian production in April and May and more robust March North Sea production in the absence of reported outages.  We have also revised up 2009 Colombian production on the basis of higher reported output in recent months.  In sum, total non-OPEC supply is now expected to decline by a lesser 100 kb/d, from 50.6 mb/d in 2008 to 50.5 mb/d in 2009.



Despite relatively buoyant 1Q09 data however, 2Q09 indicators again point towards renewed year-on-year decline in non-OPEC production.  As such, concerns over lower 2009 spending and its impact on project timeliness and mature field decline persist.  That said, Russian data now imply less underlying weakness and has, coming on top of two consecutive similar upward revisions, narrowed our presumed year-on-year decline figure to only 80 kb/d for 2009.  However, growth once again appears to stem from increased output at a handful of new fields, as detailed in last month's report, which in itself does not undermine assumed steady (or even accelerated) decline at some mature assets.



As regards the main source of the upward revision, the North Sea, the adjustment here rather stems from a stable, disruption-free production profile, after we adjust our field reliability factor for Norway and the UK in recent months.  Elsewhere, despite a small upward revision, Mexican production keeps sliding, with a month-on-month dip in Cantarell's output of over 40 kb/d in April.  Canadian production was also revised down by around 40 kb/d for 2009.

OECD

North America



US - Alaska May actual, others estimated:  Alaskan oil production in May was revised up by 60 kb/d, as assumed Prudhoe Bay maintenance in May has been delayed to June.  March data for total US production brought crude and NGL upward revisions of around 50 kb/d each.  Meanwhile, the US Minerals Management Service (MMS) reported mid-May that contrary to expectations, around 5% or 70 kb/d of Gulf of Mexico crude output was still shut-in as a result of last year's Hurricanes Gustav and Ike.  The shut-ins, which result largely from unfinished pipeline repairs, are expected to last until at least late June.  This has prompted us to extend assumed outages into 2Q09.  Lastly, growth evident in weekly US data prompted a slight upward revision for April and May production.  Currently, total US crude output is forecast to rise 180 kb/d to 5.14 mb/d in 2009, largely based on new US GoM supply.

Canada - Newfoundland April actual, others March actual:  March and April 2009 total Canadian output were revised down by 30 kb/d and 60 kb/d respectively.  Reappraised NGL data saw downward revisions of around 40 kb/d in 1Q08, added to lower-than-expected syncrude (-60 kb/d) output in March.  In April, Newfoundland crude output was around 50 kb/d lower than expected.  Total Canadian oil production is expected to decline by 70 kb/d to 3.15 mb/d in 2009.

Meanwhile, Imperial made headlines when it gave the go-ahead to its long-delayed Kearl oil sands project.  As recent IEA research outlined, large and cost-intensive oil sands projects have borne the brunt of upstream delays as a result of the global recession, financial crisis and lower oil prices.  Therefore, Imperial's sanctioning of Phase 1 at Kearl, a 100 kb/d mining project due to start-up in 2012, partly redresses a hitherto negative balance for oil sands.  Elsewhere, Syncrude reported an explosion at its plant on 1 June, but apparently this had no impact on production.

North Sea

Norway - March actual, April provisional:  As in last month's report, the elimination of the field reliability factor for March production in Norway shows up as the largest 'revision', but is in fact the result of uninterrupted output.  Moreover, revised March data prompted upward adjustments to total condensate, NGL and crude production, with total revisions totalling just over 200 kb/d.  North Sea maintenance season is starting, and various adjustments were made to assumed timing and duration.  A condensate leak at the Kollsnes gas processing plant cut NGL supply, trimming May and June output by an assumed 25 kb/d and 15 kb/d respectively.  Lastly, first production for the new Alve field, grouped into the Haltenbanken area in our field-by-field data, was reported in May.  Total Norwegian oil production is expected to decline by 200 kb/d to 2.27 mb/d in 2009.



UK - February actual:  UK data for March were also revised up by 150 kb/d on outage-free production, while April and May saw small upward adjustments.  Two new fields started production.  The Ettrick field saw first data reported for February.  It should ultimately reach production capacity of 30 kb/d towards the end of the year.  The Jacky field started production in May, but is tied back to Beatrice and is not reported separately.  It should ultimately add around 10 kb/d.  Total UK oil production is forecast to fall by 125 kb/d to 1.44 mb/d in 2009.

Pacific

Australia - March actual:  March production data for Australia were little changed, with a total downward revision of 20 kb/d.  The start-up of the Van Gogh field was once again delayed, with repairs to its Floating Production, Storage and Offloading (FPSO) vessel to take longer than anticipated.  First oil is now expected early next year.  Total Australian oil production is forecast to remain flat at around 560 kb/d in 2009, compared with earlier expectations of growth.

Former Soviet Union (FSU)

Russia - April actual, May provisional:  As for the past two OMRs, monthly Russian crude production data were revised up on stronger-than-anticipated output from producers with large, new fields onstream.  March production was adjusted up by 20 kb/d on higher output by the PSAs and small companies, while preliminary April data prompted an upward revision of 130 kb/d.  This stemmed mostly from higher-than-expected production at TNK-BP (+45 kb/d), Rosneft (+35 kb/d), Lukoil and Gazpromneft (each +20 kb/d) and Surgutneftegaz (+15 kb/d).  The first three are in the process of ramping up output at new fields.  Indeed, it was reported that output at Lukoil's Uzhno-Khylchuyuskoye field has now reached its capacity of 150 kb/d.  TNK-BP is reportedly also boosting output at its older Kamennoye field in Western Siberia.  On the other hand, the surprising production hike at Bashneft in April, while confirmed by the newest data, was not repeated in May, with output dipping again to average levels around 235 kb/d.

Other FSU:  April oil production in Kazakhstan was revised up marginally, as the Tengiz field returned slightly more rapidly from a workover in March, when production was down.  Our current forecast indicates total oil production will increase by 60 kb/d to 1.47 mb/d in 2009.  No new (March) data were available for Azerbaijan at the time of writing, but recent statements by the Energy Minister and operator BP support our view that repairs at the ACG complex will be protracted, essentially only recovering by the end of the year, thus constraining 2009 year-on-year growth.  Total oil output is expected to rise by 55 kb/d to 960 kb/d in 2009, again below earlier expectations which envisaged 1.25 mb/d being attained this year.



April FSU net oil exports on average rose by 1.1% to 9.38 mb/d.  Crude oil exports stood at 6.64 mb/d, up by 0.6% as lower pipeline deliveries were more than offset by an increase in shipments from Baltic and Black Sea ports.  A drop in volumes pumped through the BTC and CPC pipelines of 2.8% and 2.6%, respectively, were the results of March maintenance at Kazakhstan's Tengiz field and redirection of exports by rail.  Druzhba flows were again below average on lower deliveries to Germany and Hungary - the latter due to refinery maintenance - but were partially offset by a 4.8% rise in exports to Poland.  May Druzhba volumes are expected to rise due to higher flows to Germany following the resolution of a pricing dispute.  Product exports reached April seasonal average levels as fuel oil exports resumed following the removal of an export ban in Belarus and Ukraine in February and with Russia supplying higher volumes during the refinery maintenance season.

According to preliminary May data, FSU oil exports increased despite a 25% hike in Russian oil export duties, as well as reduced loading schedules and a rebound in domestic demand.  Product exports reportedly increased, supported by higher Russian gasoline exports, while crude oil exports remained virtually flat month-on-month.  June loading schedules show an overall drop in crude oil exports as lower shipments are expected in the Black Sea port of Novorossiysk, reportedly due to pipeline maintenance.



Elsewhere, the third stage of the Kazakh-Chinese oil pipeline is near completion, with filling of the Kenkiyak-Kumkol section with crude scheduled to begin in September and to last four months.  CPC shareholders recently postponed the final pipeline expansion decision to 2010 following a delay in some 'technical procedures'.  The expansion of the line is now scheduled in three stages and the pipeline's capacity should reach 1.4 mb/d by mid-2014; however, the date could slip if the final investment decision is reached later than mid-2010.

Other Non-OPEC

China - April actual:  Revised March data confirmed our suspicion from last month's report that the reported figure for offshore production was too low.  However, April data brought a downward revision of 80 kb/d for the month, stemming from revisions across the board.  As mentioned in the 13 March 2009 OMR (China Investing in Supply Through the Down-Cycle), Chinese crude imports from Brazil are expected to rise after the two countries signed a loan-for-oil deal.  Beijing will give a $10 bn loan to Brazil's Petrobras, which is seeking funds to develop its capital-intensive and technologically challenging, but resource-rich deepwater sub-salt fields in coming years.  Petrobras in turn is set to increase crude exports sent to China to 150 kb/d in 2009 and to 200 kb/d for the subsequent nine years.  2008 Brazilian crude exports to China were around 60 kb/d.  Total Chinese oil production is forecast to rise by 55 kb/d to 3.85 mb/d in 2009.

Various Other Asia:  Adjustments to Other Asia lead to a downward revision of 20 kb/d for 2009 production.  In Indonesia, lower reported April and May production, as well as a reappraisal of new fields led to a downward revision of around 25 kb/d for 2009.  The largest new project, Cepu on Java, is still facing significant problems with export infrastructure, and is assumed to be effectively shut-in until mid-year.  In India, March production data were slightly higher than expected, split between crude and NGLs.  In Thailand, crude output in January, which had looked suspiciously high, was revised down 20 kb/d.  Lastly, in the Philippines, the troubled new Galoc field was reported back onstream in mid-May, after another interruption due to a typhoon.  Total oil production in Other Asia is expected to stay flat at 3.65 mb/d in 2009.



Various Latin America:  Receipt of new data for Colombia prompted an upward adjustment of 35 kb/d for 2009.  Fiscal incentives have supported a flurry of activity and we had already been forecasting steady output growth in the years to come.  Our current forecast now sees 2009 production growing by 60 kb/d to 650 kb/d.  In Peru, protests by indigenous inhabitants and then a flare-up in violence from mid-May forced the shut-in of some Amazonian production.  Initially, only very small volumes were affected, but a halt to shipments through an export pipeline run by Petroperu caused some idling of wells.  We have assumed a shortfall of around 20 kb/d for May and, depending on the situation, this could be extended into June or beyond.  Lastly, Brazil oil production data in April were around 20 kb/d lower than expected at 2.53 mb/d (including fuel ethanol).  Our forecast for total Latin American oil production shows growth of nearly 300 kb/d to 4.41 mb/d in 2009, largely on stronger output from Brazil, but with contributions from Colombia, Peru and Argentina.

OECD stocks

Summary

  • OECD industry stocks rose by 10.4 mb in April, to 2,753 mb, as a crude stock decline only partially offset a products increase.  Inventory movements differed starkly between regions as North American stocks rose 35.3 mb on higher crude, distillate and other product inventories while European stocks dropped 18.3 mb on lower crude and gasoline.  Pacific stocks drew 6.5 mb on lower crude.
  • OECD stocks in days of forward demand fell slightly to 62.0 days at end-April with rising seasonal forward demand outweighing higher inventories.  On a days cover basis, gasoline stocks are closest to normality with OECD and North American stocks in the top half of the five-year range and Europe stocks trending along the five-year average.  All other major categories are above the five-year range.
  • Preliminary May data indicate total OECD industry oil inventories rose by 30.5 mb, led by US product stocks.  US stocks rose 15.9 mb as products increased by 26.4 mb.  Japanese stocks rose 7.6 mb as products rose 7.3 mb.  Euroilstock data show EU-16 stocks rose 7.0 mb as crude increased 6.5 mb.
  • Short-term crude floating storage levels fell in May to 80-85 mb by month-end from 110-115 mb at end-April.  Narrowing contango in the crude futures curve made storage economics less favourable, precipitating the first sustained fall in short-term floating storage levels since they started building rapidly in 4Q08.  Yet, total short-term floating storage remains high and products floating storage - mostly middle distillates - grew to over 30 mb with persistent contango in ICE gasoil futures.  Most distillate floating storage is off Europe with smaller volumes off West Africa and Singapore.


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

Total OECD inventories rose by 10.4 mb in April, to 2,753 mb.  The change was less than the 19.9 mb five-year average build for April, and the year-on-year comparison for crude narrowed as April crude stocks stood 75.4 mb (8.0%) above levels of a year ago compared with 82.3 mb (8.7%) last month.  April product stocks, meanwhile, stood 105.7 mb (8.0%) above levels of a year ago versus 75.3 mb (5.6%) for March.



An 11.0 mb build in distillates and an 11.1 mb build in the 'other products' category contributed most strongly to the products build.  Yet, this category, which includes a wide range of products - naphtha, liquefied petroleum gases, petroleum coke, spirits, lubricants, bitumen, among others - is subject to a high degree of revisions, suggesting perhaps a more tenuous products build than at first glance.



Still, at 192.9 mb (7.5%) above levels of a year ago and at 62.0 days of forward cover (7.5 days above a year ago), total OECD inventories remain abnormally high.  On a days cover basis, only gasoline continues to show more normal - i.e. within the five-year range - readings than other major categories.  Total OECD and North America gasoline cover is trending in the top half of the five-year range while Europe cover remains only at the five-year average.



Total OECD inventories for March were revised down slightly by 2.8 mb since last month's report, as lower product inventories in Europe outweighed higher crude stocks there.  Total products were revised lower by 11.8 mb led by reductions in gasoline and distillate for both the Netherlands and Italy.  Crude oil was revised 7.9 mb higher in March, led by higher Netherlands, Italy and Germany data.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks rose by 35.3 mb in April, led by US crude inventories, which rose by 14.7 mb to 392 mb.  Filling of the US Strategic Petroleum Reserve (SPR) increased government crude holdings by 6.3 mb.  US product stocks jumped by 17.6 mb, but most of this occurred in the 'Other Products' category, which as described above, includes a wide array of oil products and is prone to large revisions.  US gasoline stocks fell by 4.8 mb, only partially offsetting a 6.2 mb rise in distillate stocks.  Mexican product stocks rose by 2.0 mb on higher gasoline and distillate inventories and Mexican crude stocks dipped by 0.5 mb.

May US preliminary data show a 15.9 mb build and the highest weekly industry stocks reading since August 1998.  The build was mostly due to products as crude industry stocks fell by 10.4 mb, marking the first US monthly crude stock decline since July 2008.  Over the past five years, crude stocks have on average declined from April to May by 2.4 mb and draws typically continue through the summer as refinery runs increase.  Yet, predicting a continued US crude stock decline remains problematic with over 30 mb of floating storage near the US Gulf of Mexico as of end-May.  A recent uptick in US Gulf Coast imports and other anecdotal evidence suggest increased discharge of floating volumes as storage economics have deteriorated.  However, given the large volumes to be absorbed, a sustained onshore movement of floating storage may stymie, in the near term, any seasonal crude inventory draw as runs pick up.  SPR filling may absorb some volumes but they will be small.  Government stockpiling should fall from 2.9 mb in May to 1.0 mb in June and then to zero until September.



In products, US inventories jumped by 26.4 mb with a 3.8 mb build in distillate and a 9.7 mb gasoline draw.  The underlying nature of the products build, though, makes the headline number tenuous.  The 'Other Oil' category, which includes a wide range of oils as defined by the US Energy Information Administration (EIA), accounted for 18.3 mb of the monthly build.  Principal product stocks (gasoline, distillate, jet/kerosene, residual fuel oil), by contrast, fell by 1.1 mb on the month.



OECD Europe

European inventories fell by 18.3 mb in April, mostly due to a 15.5 mb decrease in crude inventories.  Product inventories also fell, by 3.6 mb, as gasoline dipped 4.2 mb on the month.  Distillate stocks rose by 2.2 mb, increasing the region's healthy distillate buffer.  High levels of heating oil stocks held by German consumers continued to reinforce this buoyancy in distillate stocks as end-April readings showed a counter-seasonal rise in fill levels to 62.0% of consumer capacity.  Moreover, a glut of gasoil and kerosene (about three-quarters of global products floating storage) continues to be stored in vessels off Northwest Europe and in the Mediterranean.

Gasoline stocks, by contrast, stand well below the five-year average on an absolute basis but are trending along the five-year range on a days cover basis.  While an increase in refinery runs going into the summer combined with persistently weak demand may help bolster European gasoline stocks, a pick-up in gasoline trade (with most recent flows heading to West Africa) spurred by higher Atlantic Basin margins could keep inventory levels lean.



May preliminary data show product stocks held in NW Europe independent storage rising on the month, with gasoil and jet/kerosene continuing to push higher above the five-year range.  Early June readings showed a slight dip in gasoil stocks after six straight weeks of rises.  Gasoline stocks showed the opposite pattern, however, declining throughout the month by about 25% with an uptick in early June.  Preliminary data from Euroilstock indicate EU-16 inventories rose 7.0 mb, but mostly due to a 6.5 mb rise in crude stocks.  On the products side, gasoline and fuel oil gained 0.9 mb and 1.5 mb, respectively, though middle distillates registered a 1.1 mb decline.

OECD Pacific

Pacific industry stocks drew by 6.5 mb in April, led by crude, which declined by 3.4 mb.  Product stocks dropped by 2.7 mb, but most of this fall was due to a 6.3 mb decline in the other products category.  Distillates posted a 2.1 mb increase and gasoline edged up 0.5 mb.



Japanese weekly data from the Petroleum Association of Japan (PAJ) point to a commercial stockbuild of 7.6 mb for May with crude remaining relatively unchanged and products increasing 7.3 mb.  Though gasoline stocks ended the month 1.0 mb lower, they displayed a lot of volatility - as of mid-month they were down as much as 3 mb from early month readings, likely due to local 'Golden Week' holidays and reduced highway tariffs for motorists.  Gasoil stocks looked increasingly healthy as they increased 1.6 mb on the month and stand well above the five-year range.



Recent Developments in Singapore and China Stocks

Singapore product stocks posted a 0.7 mb decline on the month, led by a 2.0 mb fall in fuel oil stocks.  Middle distillates grew by 1.0 mb as arbitrage opportunities to Europe remained scant.  Light distillates rose by 0.4 mb as Indonesian gasoline buying slowed, prompting some Asian cargoes to head to the US.



China crude oil stocks reported by China OGP rose by 7.3 mb in April as net imports rose 220 kb/d and new build refineries - such as Huizhou - looked to augment crude stockpiles.  Anecdotal reports also pointed to strategic stock filling, though hard numbers remain elusive.

Evidence of product destocking continued as Sinopec and CNPC reported gasoline and gasoil inventories falling 3.0 mb and 6.2 mb, respectively.  This was the fourth consecutive month of draws.  At 61.0 mb, those inventories stood 34% above levels of a year ago.  Some destocking likely continued in May as wholesalers increased their purchases ahead of an anticipated retail product price rise and exports likely remained elevated.  Yet, a June 10 Reuters story suggested that product stocks held by the two firms may have risen by 2.1% in May, with an increase in gasoline stocks outweighing a fall in gasoil.





Prices

Summary

  • Oil prices have gone from strength to strength in recent months, with benchmark crudes trading at seven-month highs by early June.   Futures prices for benchmark crudes in May gained almost $10/bbl over the April levels, with WTI averaging $59.21/bbl and Brent at $58.29/bbl.  By early June, prices had gained a further $10/bbl.  Prices for both benchmark crudes were last trading around $70/bbl.
  • While the bull run in prices since mid-February was largely driven by market sentiment that a recovery in the global economic outlook was nearing,  the latest surge in crude oil markets was partly fuelled by signs of slightly stronger fundamental factors.  Increased demand for crude by refiners as they came out of spring turnarounds, the onset of the summer gasoline season and a substantial drawdown in floating oil stocks helped boost prices.  OPEC's decision in late May to maintain current production targets added further support to markets.
  • Increased financial flows from non-commercial investors looking to hedge against the weaker dollar and inflation, coupled with expectations for even stronger oil prices in the longer term, likely provided further upward price momentum.
  • Refined product markets largely followed crude oil markets higher, aided and abetted by stronger gasoline crack spreads in key regional markets.  Demand for middle distillates, however, remained weak and gas oil stocks continued to build offshore in Europe, the Middle East and other regions.  Fuel oil saw some unexpected strength from still significantly lower refining runs as well as reduced supplies from OPEC of heavier, sour crudes.  Refining margins were mixed in May, with hydroskimming operations largely in negative territory.


Market Overview

Crude oil prices on futures exchanges were trading at seven-month highs by early June, propelled by continued market optimism for a rebound in the economy, increased financial flows from investors and tentative signs of a pick-up in supply and demand fundamentals.  Crude futures prices in May gained almost $10/bbl over April levels, with WTI averaging $59.21/bbl and Brent at $58.29/bbl for the month.  By early June, prices had gained a further $10/bbl, with both benchmarks last trading around $70/bbl.

While the rise in oil prices since mid-February has largely just tracked the upward momentum in financial markets, the latest surge in crude oil markets was partly fuelled by a long-awaited emergence of improving fundamentals.  Crude prices were lifted by stronger demand as refiners, especially in the US, completed spring turnarounds and reportedly brisk buying by China ahead of a planned increase in June refining throughput rates, and potentially to augment its strategic stockpile, may have added further support.

OPEC's decision in late May to maintain current production targets lent additional support to markets. Equally important, a call by some ministers in Vienna for a 'fair price' of $70-$75/bbl was interpreted by some as a strong signal to market participants about future price expectations.  The group's delicate dance to avert a contentious debate about overproduction by some members, and discussion of realigning individual output targets by others, also served to reassure the market that the producer group was likely to maintain the cohesive front put forward since 4Q 08 when output cuts totaling some 4.2 mb/d were agreed.

That said, OPEC production edged higher again in May, up by 160 kb/d to 28.4 mb/d.  As a result, compliance with targets was down to 74% versus 76% the previous month.  However, the month-on-month leakage is small and, overall, OPEC's lower output levels are probably having a bigger impact on markets now as refiners come back into the market after lengthy turnaround schedules, especially in the US and China,  than when compliance was better but demand from refiners was at seasonal lows.



The contango for WTI narrowed over the month, averaging just 91 cents/bbl in May compared with $1.91/bbl in April.  The narrower contango, combined with stronger refiner demand, prompted a number of traders holding crude in floating storage to sell-off their stocks.  However, OECD industry stocks are still equivalent to a high 62 days forward cover.  Crude stored on tankers is estimated at 80-85 mb and floating storage of refined products, especially gas oil off Europe and gasoline in the Middle East, continues to build.  Refined product stocks held offshore were estimated at over 30 mb by the end of May.

Futures prices were also boosted by an injection of increased financial flows from investors looking to hedge against the weaker dollar and the spectre of resurgent inflation.  Non-commercial contract positions on the NYMEX moved from net short of 11,285 in early May to a net long of 40,122  by early June.

Increased net long positions also reflect renewed perceptions that oil markets would strengthen in the medium term.  The 12-month forward price curve on NYMEX has increased to $75.84/bbl on 5 June from $66.49/bbl on 8 May and $53.23/bbl on 6 March.

However, it is worth noting that open interest on NYMEX has remained largely rangebound though year to date, at levels well below 2008 highs.

Expectations for a normal gasoline summer demand season this year over last year's dismal showing, however, remain the major fundmental prop under both crude and refined product markets.  While cracking margins in major markets are robust, underlying demand data have yet to reflect the more buoyant outlook.  In the US, the rise in gasoline prices reflects traders' hopes but if the gasoline season fails to launch soon,  prices could spiral lower next month.



Prospects for a sustained rally in oil prices in the near term crucially hinge on market expectations for a stronger gasoline season translating into solid actual demand data as well as continued OPEC compliance with output targets.

Spot Crude Oil Prices

Crude oil prices firmed across all major regions in May, with prices for benchmark grades up on average by $7-$10/bbl over April levels.  Increased demand from refiners coming out of seasonal refinery maintenance turnaround, especially in the US and China, helped strengthen markets throughout the month.  By contrast, European refiners continued to run plants at lower levels, muting demand for spot barrels in the region.

Indeed, China has been a major prop under spot crude oil markets in recent months.  Chinese refiners are slated to increase refinery throughput rates in June to the highest level in a year.  Meanwhile, the government reportedly continued its buying binge to fill the country's strategic crude oil storage tanks.   China has been a major buyer of West African grades and also Urals crude on the spot market in recent months.  However, with the country's existing storage tanks are reportedly approaching capacity, spot prices may come under pressure.



Continued production restraint by OPEC also led to tighter price differentials between light sweet and heavier sour grades, distorting crude trading patterns.  In Asia, Saudi Arabia maintained cuts of 15% to 17% in contract allocations for July, while Abu Dhabi's state oil company, Adnoc, tightened sales volumes slightly for heavy, sour Upper Zakum contracts while leaving contract volumes for lighter Murban, Umm Shaif and Lower Zakum crude allocation cutbacks unchanged from June levels.

In response, prices for heavier Dubai crude moved above lighter North Sea Brent while cheaper freight rates led to higher imports of African crudes and increased buying of Urals crude. Spot prices for Iranian heavy rose $6.70/bbl to $55.76/bbl. Gas oil rich-crudes lag the upswing given poor demand for middle distillates.  Prices for Abu Dhabi's distillate-rich Murban rose by a lesser $5.26/bbl in May.



The US market showed a similar tightening of light/heavy crude price differentials.  Spot prices for medium sour crudes like Mars and heavier Alaskan North Slope were up by between 20% to 24% last month, while lighter crudes such as WTI and Lousiana Light Sweet (LLS) were up a smaller 12% to 15%.  Nonetheless, demand for gasoline rich crudes improved, with cargoes of lighter Nigerian and Algerian grades floating off the key US Gulf Coast refining center sold in recent weeks.



Notably, US imports of Saudi crude oil have fallen to their lowest level in 21 years at just under 950 kb/d in March.  Reduced sales of Saudi crudes to the US have led to increased spot purchases of alternative grades.  Stronger spot prices in the US relative to other markets, coupled with cheaper freight rates, have pulled a wider arrary of crudes into the region, including medium sour Russian Urals.

Spot Product Prices

Spot product prices tracked crude oil markets, with stronger gasoline crack spreads in key markets also supporting higher levels.  Demand for middle distillates, and therefore prices, remain weak in all regions however due to ample stocks both onshore and in floating stoarge offshore in Europe and the Middle East.  Fuel oil saw some unexpected strength from reduced refining runs as well as reduced supplies from OPEC of residual-rich heavier, sour crudes.

US spot gasoline prices jumped more than 25%, or by $16.33/bbl to an average $78.70/bbl in May, as the summer driving season got underway.  So far, however, demand data have been disappointing and, despite the sharp cutback in refinery throughput rates, gasoline stocks remain near five-year averages.  Despite lukewarm stock and demand levels, more bullish market sentiment saw gasoline crack spreads to benchmark crudes edge up to around $13/bbl in May from about $10/bbl in April.



European spot gasoline prices surged 20% in May thanks to strong export demand from Nigeria and the Middle East, and to a lesser extent the US.  Brisk transatlantic trade to the US, however, slowed markedly in early June as the jump in European spot gasoline prices narrowed the arbitrage.  Premium unleaded rose $13.17/bbl to $72.63/bbl in Rotterdam and was up by $11.45/bbl, to $70.18/bbl in the Mediterranean.

Asian gasoline markets have also been supported by stronger export demand, to African and the US West Coast markets.  Spot prices for unleaded gasoline on the US West Coast rose from an average $61.95/bbl in April to $84.85/bbl by early June.

Distillate markets are the weak link in all three major refining centers, though prices posted modest gains month on month in tandem with stronger crude markets.  Spot jet fuel prices are up around 7%-8% in May compared with more robust increases of over 20% for gasoline and low-sulphur fuel oil. The sharp downturn in economic activity has hit jet fuel demand particularly, with ample stocks adding further downward pressure.

Spot prices for gas oil/heating oil also lagged the increases in crude and gasoline markets.  In Europe, ample gas oil stocks both onshore and in floating storage offshore tempered price increases, with differentials to benchmark Brent in Northwest Europe narrowing over the month, to $4.82/bbl in May from $7.31/bbl in April.





Fuel oil prices strenthened in response to lower refinery throughput rates and reduced supplies from OPEC of heavier, sour feedstocks.  In Europe and Asia, fuel oil prices were boosted by relatively uncompetitive natural gas prices in May. Spot fuel oil prices rose about 20% in major markets but gains were tappering off by early June as natural gas prices realigned.

Refining Margins

Refinery margins experienced mixed fortunes in May against a backdrop of price increases for all crude oil benchmarks and refined products.  Margins increased for some benchmarks and decreased for others, depending on the relative price increases, product yields and refinery configuration.

Hydroskimming configurations suffered in relation to more complex units in Europe, but fared better in Asia.  Refining margins for simple configuration remained not only negative but worsened on a monthly basis.  Throughout the month refinery margins largely decreased, with NW Europe and Mediterranean margins posting the largest declines.

Cracking margins increased in the US Gulf Coast (USGC) as gasoline crack-spreads provided stronger support than those in Europe, where only the Brent margin improved.  Middle distillates proved to be a drag on margins as cracks deteriorated in all regions.

Upgrading margins in the USGC (coking versus cracking) initially fell back as higher middle distillate yields for coking configurations lagged the impact of stronger fuel oil prices on cracking margins.



In Europe, upgrading margins (cracking versus hydroskimming) improved as higher gasoline prices outweighed the more modest gains seen for residual fuel oil.

In Singapore, all benchmarks margins deteriorated.  Upgrading margins (hydrocracking versus hydroskimming) worsened,  as higher yields of light products for hydrocracking configurations failed to compensate for the price increases in high sulphur fuel oil.

End-User Product Prices in May

Retail product prices on average rose by 8.0% in May, in US dollars, ex-tax, in IEA member countries.  Biggest increases were seen for gasoline and low-sulphur fuel oil, when prices rose on average by 12.4% and 12.7%, respectively.  Both diesel and heating oil posted smaller gains in May, up by 4.1% and by 2.7%, respectively.  Consumers in the US on average paid $2.27/gallon ($0.599/litre) for gasoline, in Japan ¥117.0/litre ($1.212/litre) and in the UK £0.97/litre ($1.500/litre). Across Europe, prices ranged from a low of €0.977/litre ($1.335/litre) in Spain to a high of €1.263/litre ($1.725/litre) in Germany.  End-user product prices were 44.9% below May 2008 levels.

Freight

May dirty freight rates stayed relatively flat on the month as increased output from the Middle East was balanced by the discharge of about 30 mb of crude from floating storage over the course of the month.  The fall in crude floating storage was the first sustained downturn since short-term levels began ramping up in December.  Yet, as of early June, approximately 80-85 mb of short-term crude floating storage remained globally and some new-build VLCCs were being enlisted into floating product storage duties.

West Africa to US Atlantic Coast Suezmax rates showed the most signs of life as they rebounded briefly in mid-May, moving from $11/tonne at the beginning of the month to almost $14/tonne.  These rates remained higher than other routes on strong buying of West African crudes by Chinese and Indian refiners and higher US gasoline margins, which increased demand for gasoline-rich Nigerian crudes.  Still, a significant uptick in violence in the Niger Delta in the second half of the month took additional Nigerian production volumes offline, which decreased export availability and caused freight rates to retrace.

Although VLCC rates on the Middle East Gulf to Japan route remained steady at around $6/tonne, a 30% rise in bunker fuel prices during the month ate into spot daily earnings and pushed ship owners to the break-even point.  VLCC earnings also fell to the point where they were less than those for medium-range product tankers.



Clean rates increased somewhat throughout the month, supported by short-term products floating storage levels and increased Atlantic Basin gasoline trade.  Middle East Gulf to Japan Aframax rates rose from around $14/tonne at the end of April to over $16/tonne by end-May.  Northwest Europe to US Atlantic Coast medium-range (MR) rates rose from $17/tonne at the beginning of May to over $20/tonne at one point mid-month, before settling back at $18/tonne at month-end.

The resumption of gasoline imports by Nigeria propelled Atlantic basin rates higher.  Industry sources assert that Nigeria could import 230 kb/d of gasoline from mid-May through end-June following a month-long suspension of imports by domestic fuel marketers.  More generally, an increase of products floating storage - concentrated mostly off Europe but also off West Africa and Singapore - to upwards of 30 mb (with some reports indicating as much as 40 mb) acted as a bullish factor for product vessel demand, if not for products markets themselves.

Refining

Summary

  • Global crude runs remain depressed compared with the five-year historical range, but we have raised our forecast for 2Q09 by 0.2 mb/d to 71.3 mb/d.  This is a result of higher April preliminary data in OECD countries, reports of near-record-high crude runs in China and slightly higher outlooks for global demand.  However, this forecast remains 2.9 mb/d lower than for 2Q08, with 63% of the reduction in OECD countries.
  • The crude throughput forecast has been rolled out to September, with 3Q09 crude runs forecast at 72.8 mb/d, an annual decline of 1.2 mb/d, of which 70% is in OECD countries.  However, runs in 3Q09 are expected to be 1.5 mb/d higher than 2Q09.  This forecast incorporates a downward adjustment of 1.2 mb/d in North America for September in order to account for recent seasonal patterns, including lower runs due to hurricanes.


  • OECD crude runs are assessed at 36.4 mb/d in 2Q09, an annual decline of 1.8 mb/d.  Last's month shift to higher North American runs compared with European is retained, as distillate cracks continued to deteriorate and gasoline cracks strengthened in the US.  Furthermore, middle distillate stocks kept increasing in Europe while latest US weekly data recorded a fall of 9.3 mb in gasoline stock levels.  Despite stronger prospects for crude runs in China, non-OECD crude throughput is expected to remain at a subdued 34.9 mb/d, as reported last month, as lower crude runs are expected elsewhere in non-OECD countries.
  • March 2009 OECD gasoline refinery yields rebounded to 34.3%, the highest level since August 2003.  Year-on-year, North America saw a 5% increase in refinery gross output and a 21% increase in net imports, driven by the US.  OECD gasoil/diesel yields remain above historical levels.  European gasoil/diesel refinery gross output decreased 2% year-on-year but there was a 47% increase in net imports.  North America and the Pacific's net export position increased 90% and 21%, respectively.

Global Refinery Overview

Global forecast crude runs are raised this month, taking into consideration higher April preliminary data for OECD countries, reports of near-record-high crude runs in China, and slightly higher prospects for global demand.  We retain last month's shift in favour of US refinery throughputs over European ones as distillate cracks continued to deteriorate and gasoline cracks increased further, particularly in the US.  In Europe, higher April preliminary data for Spain, the UK and Belgium proved last month's estimate of 0.2 mb/d short of reality; while crude runs in North America increased by 0.3 mb/d.

Global 1Q09 runs are reviewed higher by 0.1 mb/d.  Runs in non-OECD countries were higher than expected (mainly in Indonesia, Thailand, Venezuela and Bolivia) while runs in OECD regions turned out lower, mainly in the US, Canada, Turkey and Japan.  1Q09 crude runs are now 2.6 mb/d lower than 1Q08, with 65% of the decline in OECD countries.

Estimated 2Q09 global crude throughput of 71.3 mb/d is 0.2 mb/d higher than in last month's report.  This is mainly the result of higher April preliminary OECD crude runs of 0.6 mb/d and a decrease of 0.2 mb/d in the non-OECD, implying a year-on-year contraction of 2.9 mb/d, with 63% of the decline in OECD countries.   In spite of higher Chinese runs, reports of lower runs elsewhere in non-OECD countries, mainly the FSU, keep the April comparison negative.



We have rolled over our forecast to include September.  A global crude throughput of 72.8 mb/d is expected for 3Q09, representing a year-on-year contraction of 1.2 mb/d, with 70% of the decline in OECD regions.  Crude runs in 3Q09 are expected to be 1.5 mb/d higher than 2Q09, with 75% of the increase in non-OECD countries.  This forecast incorporates a September downward adjustment of 1.2 mb/d in North America, equivalent to the monthly five-year-average decline in crude runs, in order to account for seasonal patterns, which includes lower runs due to hurricanes.  Runs in September 2008 recorded a monthly fall of 2.3 mb/d as hurricane activity forced refiners to shut down or reduce crude runs.

July crude runs of 73.1 mb/d are expected, representing an increase of 0.7 mb/d from last month's forecast, mainly in OECD regions, as only expectations of higher China crude runs have been incorporated for non-OECD countries.  Similarly, August crude runs are raised by 0.4 mb/d to 73.0 mb/d, with most of the increases in OECD North America and the Pacific.  September global crude throughput sees crude runs dropping by almost 0.7 mb/d, as we have incorporated the above mentioned seasonal downward adjustment.  September non-OECD crude runs are expected to show a monthly increase of 0.4 mb/d as a result of lower maintenance activity in Other Asia, Latin America and the Middle East.

OECD Refinery Throughput

March crude runs were revised down 0.2 mb/d, with North America accounting for 62% of the decrease, as data for the US and Canada turned out to be lower than preliminary estimates.  Data for Europe and the Pacific were also lower than estimated.

Provisional April data show OECD crude throughput rose to 36.4 mb/d, or 0.6 mb/d more than last month estimate and 0.4 mb/d higher month-on-month.  North America represented about 45% of the increase while OECD Europe accounted for 25%.  Furthermore, US gasoline cracks strengthened relative to European ones and draws in gasoline stocks and build-ups of distillate stocks in both regions also support the shift.





OECD 2Q09 crude throughput is forecast to average 36.4 mb/d, 0.2 mb/d above last month's report but 1.8 mb/d below 2Q08.  The quarterly increase in forecast runs is mainly driven by higher than expected preliminary data for all three OECD regions in April.  Higher runs for Canada, Spain, the UK, Belgium, Korea and Australia constitute most of the increase while crude runs in Turkey, France and Japan were lower than expected.

3Q09 OECD crude throughput is forecast at 36.8 mb/d, representing a quarterly increase of 0.4 mb/d but a year-on-year decrease of 0.8 mb/d.  Most of the year-on-year decrease is expected in the Pacific and European regions.

OECD North America April crude throughput increased by 0.4 mb/d on a monthly basis in accordance with seasonal patterns.  Most of the increase came from the US, where imminent driving season elicited higher runs.  US weekly data for May confirm the upward trend, which is expected to continue until August, along with less-visible maintenance activity.   For September, we have incorporated a seasonal downward adjustment of 1.2 mb/d for the region, equivalent to the five-year-average monthly decline from August, driven largely by outages caused by hurricane activity.



OECD Europe April crude throughput rebounded 0.4 mb/d to 12.7 mb/d compared with March.  Only the UK showed lower monthly throughputs.  Considering distillates stocks have kept rising and middle distillates crack spreads have narrowed, there is a risk of lower European crude runs for the coming months.



OECD Pacific crude throughput fell by 0.4 mb/d to 6.3 mb/d in April, 0.2 mb/d less of a drop than estimated last month, as preliminary crude runs for Korea and Australia were higher than expected.  However, Japanese crude runs turned out to be lower.  Strong maintenance activity in May and June, coupled with increased competition for export markets, should further depress crude runs in this region.

Non-OECD Refinery Throughput

Forecast 2Q09 non-OECD crude throughput of 34.9 mb/d is unchanged, higher-than-expected crude runs in China offset lower-than-expected crude runs elsewhere in non-OECD countries.

Chinese April crude throughput is reported at 7.2 mb/d, exceeding again our expectations for the third consecutive month, this time by 0.3 mb/d.  Higher domestic fuel demand, reduced net imports and lower inventories are seen as contributing factors.  Tax incentives, which allow for both imports of crude and exports of products free of the 17% value-added tax, seem to have incentivised exports in recent months.  Therefore, we have increased our 3Q09 forecast for China to 7.2 mb/d.  Chinese fuel exports will likely continue to pressure prices in the region.

Indian crude runs have been decreased slightly as additional maintenance activity is scheduled.  FSU crude runs meanwhile were 0.2 mb/d lower than expected in April as maintenance at some major Russian refineries, and reported weak domestic demand, depressed crude runs.  3Q09 non-OECD crude throughput is forecast at 36.1 mb/d, representing a quarterly increase of 1.2 mb/d but a year-on-year decrease of 0.4 mb/d.

OECD Refinery Yields

OECD March gasoline yields rebounded to 34.3%, the highest level since August 2003.  Stronger crack spreads, particularly for North America, supported this change.  North America and the Pacific led the monthly change with increases of 1.1 and 1.0 percentage points, respectively.  The yield in North America is the highest since December 2003, signalling again the strength of gasoline markets in this region relative to middle distillates.  North America in March saw a 5% increase in refinery gross output and a 21% increase in net imports.



OECD gasoil/diesel yields decreased slightly in accordance with seasonal patterns and weaker crack spreads.  North America yields fell by 1.4 percentage points, outweighing increases in Europe and the Pacific.  However, in absolute terms, production decreased in Europe and net exports increased in North America.  As far as data are available up to March 2009, Europe has favoured imports over production of gasoil/diesel.  Year-on-year, Europe's gasoil/diesel net import position increased 47% while refinery gross output decreased 2%.  Interestingly, North America and the Pacific's net export position increased 90% and 21% respectively.

OECD jet fuel/kerosene yields fell sharply by 0.6 percentage points to 8.4%; this fall represents twice the five-year average seasonal decrease.  All three OECD regions recorded decreases, with the Pacific falling 2.3 percentage points to 14.8%.  Falling crack spreads in all regions undermined yields.  OECD jet fuel/kerosene yields have been depressed below the five-year range since October 2008, requiring imports from non-OECD countries.  Year-on-year net imports of jet fuel/kerosene recorded an increase of 31% in the OECD as refinery gross output decreased 11%.  In particular, European gross output fell 18%, necessitating a 32% increase of net imports.

OECD Trading Patterns

Overall refinery gross output and product trade among OECD regions have changed significantly as a response to changes in product demand generated by the new economic environment and the aim of refiners to retain some degree of profitability in their businesses.



As a whole, the OECD is a net importer of products.  Year-on-year, total product net imports increased by 20% in March 2009, while refinery gross output shows a 3% decrease, implying a net contraction in OECD apparent domestic demand.  Each region has responded differently to the new demand patterns and economic environment.  In Europe, apparent domestic demand contracted with refiners decreasing refinery gross output by 7%; compensating for this, product net imports increased 92%.  In North America, apparent demand remained at the same level as in March last year and refinery gross output increased by 1%, however net imports declined by 9%.  Finally, the OECD Pacific region seems the most affected, with a 5% decrease in refinery gross output and a 13% decrease in net-imports, suggesting a sharp decline in apparent demand.