Oil Market Report: 9 October 2009

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  • Global oil demand has been revised up by 200 kb/d for 2009 and by 350 kb/d for 2010, given more optimistic IMF economic prognoses and stronger preliminary data from the Americas and Asia.  Global oil demand now averages 84.6 mb/d in 2009 and 86.1 mb/d in 2010, implying yearly growth of -1.7 mb/d and +1.4 mb/d, respectively.
  • Crude oil prices in September continued to trade in a $65-75/bbl range, although high distillate stocks ahead of winter and worries about the global economic recovery added a downward bias, with WTI and Brent trading at around $68-72/bbl in early October.  Market concerns over Iran's nuclear programme have been muted, partly because OPEC's spare production capacity currently exceeds 5.4 mb/d.
  • OECD industry stocks decreased by 3.9 mb in August to 2,750 mb, 2.8% above last year's level.  Crude draws in North America and the Pacific outweighed middle distillate increases in all three regions.  End-August forward demand cover decreased to 60.7 days, 3.7 days higher than a year ago.
  • Global oil supply rose by 310 kb/d in September to 84.9 mb/d, driven by non-OPEC growth.  Compared with September 2008, global supply was nearly flat, as a non-OPEC recovery of 1.6 mb/d relative to last year's hurricane-hit base was offset by OPEC curbs.  That said, OPEC supply has continued to rise from early 2009 lows.
  • Non-OPEC output projections are left largely unchanged, and production should continue to rise towards the end of 2009.  Output is expected to average 51.0 mb/d this year, rising to 51.6 mb/d next year.  Total annual growth stands at +380 kb/d in 2009 and +550 kb/d in 2010, augmented by OPEC NGL growth of 550 kb/d and 850 kb/d, respectively.
  • Global refinery crude throughput in 4Q09 is reduced by 0.2 mb/d to 73.2 mb/d, as further weakness in refining margins undermines the outlook.  Declines in OECD Europe and North America compound lower Latin American projections, only partially offset by higher Other Asian estimates resulting from stronger 3Q09 data.

The joys of summitry

After a lull in July and August, international organisations traditionally face a slew of meetings, summits and gatherings in the autumn.  The last month has seen an OPEC ministerial meeting in Vienna, the G20 gathering in Pittsburgh, IMF/World Bank annual meetings in Istanbul, and talks on Iran's nuclear programme in Geneva.  Aside from wisecracks about these events' collective carbon footprint, each could have major implications for oil and energy markets.  October also sees the IEA's own biennial Ministerial meeting in Paris, with a focus this year on global energy partnerships.

Heading into its annual meeting in Istanbul this week amid calls for an expanded role in world financial markets, the IMF released its new World Economic Outlook (WEO).  This trimmed the expected global economic contraction in 2009 to -1.2% (from -1.4% in its last complete outlook in April), based on stronger than expected performance in OECD and non-OECD Asia, including China.  The 2010 global GDP growth level, now +3.1%, stands 1.2 percentage points higher than in April, with expectations for North America and Asia upgraded.  Our own base case oil demand projection is raised accordingly, albeit by a muted 200-350 kb/d.  Offsets to higher GDP accrue from a higher price assumption (now around $75/bbl in 2010 based on the prevailing futures strip) and further evidence of fuel substitution and efficiency improvements.  Given continuing uncertainties about the path of economic recovery, we also illustrate a downside GDP sensitivity, which suggests global demand 0.1 mb/d and 0.6 mb/d lower than the base case for second-half 2009 and full year 2010, respectively.

OPEC's 9 September meeting saw a much-expected retention of existing production targets, with post-meeting statements distancing future output decisions from a sole focus on OECD forward stock cover.  Saudi Oil Minister al-Naimi was quoted saying that economic growth, not inventories, was now the real driver of prices.  We too have previously noted that forward stock cover can be a misleading metric when oil demand is declining.  While OPEC is presently producing well above output targets, the existing production agreement at least holds the potential to push absolute OECD inventory levels closer to seasonal norms again by second half 2010.  OPEC Ministers will meet again in December in Angola.

The G20 discussions in Pittsburgh were notable for two key reasons from an oil standpoint.  First, the pledge to remove fossil fuel price subsidies, while unencumbered by a firm timetable, could ultimately make non-OECD oil demand more responsive to price signals from the international market.  Second, price volatility was addressed, with the communiqué citing agreement to improve the regulation, functioning and transparency of financial and commodity markets.  On derivatives, the US administration's approach appeared to gain ground, with a recommendation that all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, and centrally cleared by the end of 2012 at the latest.  Similarly, all OTC derivatives contracts should be reported to trade repositories and non-centrally cleared contracts should be subject to higher capital requirements.  The OMR this month examines newly disaggregated weekly data from the US CFTC on futures market trades and the recent role of broader financial factors in oil price formation.

Finally, two key themes of the upcoming IEA Governing Board meeting at Ministerial level (with participation from China, India and Russia) will be comprehensive energy security and enhanced global energy dialogue.  The scope of these matters is of course much broader than the oil market.  Nonetheless, the OMR this month notes ongoing concerns surrounding Iran's nuclear programme, albeit the impact of any hypothetical supply disruption, were diplomatic efforts to fail, would currently be blunted by weak refiner crude demand and high OPEC spare capacity.  The crucial role of China in shaping future oil markets also permeates this report, amid upward-revised demand and inventory estimates, and evidence of growing reach in the international upstream arena.  Ongoing dialogue with key oil market actors outside the IEA fold remains an Agency preoccupation, and the presence of China and India at the Ministerial meeting will be followed by joint oil market seminars in Beijing and Delhi later in October.



  • Forecast global oil demand has been revised up by 200 kb/d for 2009 and by 350 kb/d for 2010, on the back of more optimistic economic assumptions by the International Monetary Fund and stronger-than-expected preliminary data in OECD North America, non-OECD Asia and Latin America.  Global oil demand is now expected to average 84.6 mb/d in 2009 (-1.9% or -1.7 mb/d year-on-year), with a slightly higher assessment of 4Q09 OECD demand.  In 2010, oil demand should rise to 86.1 mb/d (+1.7% or +1.4 mb/d versus 2009), largely reflecting buoyant economic activity in more oil intensive emerging countries.  Even though the pace of demand contraction is clearly easing, auguring a return to year-on-year growth by 4Q09, the outlook for 2010 is still fraught with uncertainty, as the IMF warns.  Were global economic growth next year to be around two-thirds of what is currently projected, oil demand itself could be some 0.6 mb/d lower, as discussed in our sensitivity analysis.
  • Forecast OECD oil demand has been increased by roughly 70 kb/d for both 2009 and 2010, given minor upward revisions to preliminary data and higher economic growth assumptions for 4Q09 and next year.  Oil demand is now seen falling by 4.5% year-on-year (-2.1 mb/d) to 45.4 mb/d in 2009 and remaining flat in 2010.  Most recent data show minor year-on-year contractions or even positive growth in several countries for some product categories, notably in North America and the Pacific, but these readings are relative to a very weak 2008 baseline and should arguably not be construed as a takeoff resulting from an allegedly buoyant economic recovery.  In Europe, the continuing fall in naphtha demand, a fuel mostly used in industrial applications, suggests that any such recovery remains fragile.

  • Forecast non-OECD oil demand has been adjusted up for both 2009 and 2010, following a reassessment of demand prospects in Asia (China, Chinese Taipei, India, Indonesia, Malaysia and Singapore) and Latin America (Brazil), as well as much higher economic forecasts.  Demand in 2009 is now expected to average 39.2 mb/d (+1.2% or +0.5 mb/d year-on-year and 120 kb/d higher versus our previous assessment).  The revision for 2010 is higher (+290 kb/d), with demand seen averaging 40.6 mb/d (+3.6% or +1.4 mb/d versus the previous year).

Global Overview

This report incorporates the latest IMF GDP forecasts, published on 1 October.  Arguing that the global economy is on the mend, the Fund's new prognoses are sharply up, both versus its April World Economic Outlook and its July Update.  While the 2009 global economic contraction is now expected to be less pronounced, notably in non-OECD countries, the 2010 global rebound has been revised to +3.1% year-on-year, up by 1.2 percentage points versus the Fund's April assessment and by roughly 0.6 percentage points compared with its July interim evaluation.  (The IMF interim report was not taken into account by this report at the time, as most other forecasters were then significantly less bullish.  Nowadays, by contrast, the consensus is closer to the Fund's projections.)  Emerging countries will be the driving force, expanding by +5.2%, but the recovery in the OECD will be far from negligible (+1.4%).  Asia and the Middle East, in particular, are seen featuring strong economic growth.

Largely as a result of these higher GDP assumptions, global oil demand is now seen averaging 84.6 mb/d in 2009 (-1.9% or -1.7 mb/d year-on-year and +200 kb/d higher compared with our last report), with a slightly higher assessment of 4Q09 OECD demand.  In 2010, oil demand is expected to rise to 86.1 mb/d (+1.7% or +1.4 mb/d versus 2009 and +350 kb/d higher than previously expected), reflecting more buoyant economic activity, notably in emerging countries, where oil demand is more responsive to economic growth than in the OECD.  It must be noted, however, that these revisions are not entirely attributable to different GDP figures.  Preliminary oil data for several non-OECD countries showed stronger-than-expected readings in both July and August, thus slightly lifting the baseline.  In addition, we have also adjusted up our oil price assumptions for both years (to roughly $71/bbl in 2009 and $76/bbl in 2010 in nominal terms), thus partly counterbalancing GDP changes.  Overall, nonetheless, both oil demand growth forecasts remain consistent with historical trends relative to GDP growth, taking into account interfuel substitution and declining oil intensity.

Yet despite revising up the outlook, prompt oil demand remains in the doldrums.  Global demand was still down by 1.6% year-on-year in July (versus -2.3% as previously estimated) and by 1.7% in August.  More significantly, demand among the world's twelve largest oil consumers (those using at least 1.5 mb/d), which collectively account for about 70% of the world total, is still contracting by roughly 2% on a yearly basis; the modest demand surge in June appears to have been short-lived.  Gasoil demand, in particular, remains very weak, trailing by about 4% below last year's levels on a quarterly basis.  Nonetheless, the pace of demand contraction is clearly easing, auguring a return to year-on-year growth by 4Q09.  But, as noted, the contraction in 2009 as a whole will be significant; meanwhile, despite the expected 2010 rebound, oil demand next year will still remain below 2008 levels.  From that perspective, at this juncture the absolute level of oil demand, rather than its relative change, is more instructive when outlining market fundamentals.

Bulls Versus Bears:  Oil Demand Sensitivity

The latest IMF forecasts, released on 1 October, suggest that the recession is largely over.  Although global economic growth will not immediately return to the pre-crisis rates of roughly 5% on average from 2004 to 2007, the Fund predicts it will still feature a quite respectable rebound (+3.1%) - and eventually reach +4.5% in the medium term (2014).  Yet, as the IMF is the first to acknowledge, this prognosis faces several vexing question marks regarding its sustainability.

The incipient recovery has largely been engineered by extensive government intervention, as would have been expected, but the Fund warns against complacency.  It notes that despite very loose fiscal and monetary policies, unemployment is on the rise and likely to remain high for some time.  Public debt in many countries has increased sharply, placing many governments in a predicament: they will eventually have to tighten macroeconomic policies in order to avoid damaging public balance sheets in the medium term.  Yet the deleveraging in the private sector will continue to weigh on consumption and credit availability, thus limiting the scope for policy changes in the short term.  Moreover, there are concerns with regards to the emergence of massive overcapacity across the globe in key industries, which could further sour the balance sheets of the banking sector in several large countries, exacerbate trade tensions and foster deflationary pressures.  Meanwhile, global imbalances, albeit diminishing, remain significant.  Another risk is related to the rise in commodity prices, notably of oil, which could yet easily derail the recovery.

In sum, as we have repeatedly noted in this report, there is considerable uncertainty as to the world's short-term economic outlook.  The ongoing, lively debate among different economic schools of thought - in shorthand, bulls versus bears - regarding the strength and shape of the economic rebound is far from settled.  By implication, any oil demand forecasting is open to equal uncertainty.  Facing this conundrum, we present a sensitivity analysis based on different GDP scenarios, akin to the one published in June's Medium-Term Oil Market Report (MTOMR):  a 'higher' GDP profile (based on the current IMF assessment) and a 'lower' one (shaving a third off global growth in 2H09 and in 2010, attempting to reflect more bearish economic forecasts).

This sensitivity analysis is merely illustrative, as it does not imply a probability of occurrence and ignores the iterations between economic activity and the oil price, which is held unchanged in both scenarios.  Yet it is useful to pinpoint the potential range within which oil demand may evolve, particularly next year.  Under the higher case (+3.1% GDP growth in 2010), demand is expected to reach 86.1 mb/d, as noted earlier.  By contrast, under the lower case (+2.1% GDP growth), demand would stand some 620 kb/d below the higher scenario's level, at 85.4 mb/d, and growth would be subdued (+1.0% versus +1.7% or +0.9 mb/d versus +1.4 mb/d).  In terms of regions, the effect of less buoyant economic activity upon oil demand would be felt more in emerging countries, which are much more oil intensive than mature OECD countries.  Indeed, under the lower GDP scenario, demand would be 190 kb/d less in the OECD, but 430 kb/d less in non-OECD countries.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 4.4% year-on-year in August, with all three regions recording losses for the sixteenth month in a row.  In OECD Europe, demand plummeted by 6.7% year-on-year, with all product categories bar diesel posting losses.  In OECD North America (which includes US Territories), oil demand sank by 4.1%, with all product categories bar LPG and 'other products' showing yearly decline.  In OECD Pacific, demand fell by 0.4% as depressed demand for LPG, residual fuel oil and 'other products' offset a marked rebound in gasoline and middle distillate demand.

Revisions to July preliminary data totalled +440 kb/d, with stronger-than-anticipated demand for all product categories bar residual fuel oil and 'other products'.  Overall, July demand contracted by 4.5% year-on-year, slightly less than previously assessed (-5.5%).  These revisions, coupled with higher GDP assumptions, have resulted in slightly adjusted estimates of OECD oil demand for this year and next (up by about 70 kb/d when compared with last month's report).  OECD demand is now expected to contract by 4.5% in 2009 to 45.4 mb/d and remain largely flat in 2010.

North America

Preliminary data show that oil product demand in North America (including US Territories) shrank by 4.1% year-on-year in August, the twentieth monthly contraction in a row.  The decline in the US was particularly marked (-4.9%), but more moderate in Mexico (-1.0%).

Meanwhile, July's revisions to preliminary data (+250 kb/d) were again almost solely due to the US, with all product categories bar 'other products' featuring higher readings.  For the second month in a row, US gasoline and distillate demand have been revised up.  Total demand in North America actually fell by 3.8% in July, a lower pace when compared with our last report (-4.9%).  However, this does not necessarily signal a demand rebound, but rather that our pre-emptive weekly-to-monthly adjustments, which were based on the six-month average of previous adjustments, were slightly overstated.  Taking into account the latest IMF GDP prognoses, North American demand is now estimated at 23.2 mb/d in 2009 (-4.1% or -1.0 mb/d versus 2008), while demand in 2010 is seen rising to 23.4 mb/d (+0.9% or +0.2 mb/d year-on-year).  Both forecasts are some 60 kb/d higher than their predecessors.

Preliminary weekly data in the continental United States indicate that inland deliveries - a proxy of oil product demand - contracted by 1.5% year-on-year in September.  This could be interpreted as an easing of the demand contraction and hence of economic recovery, but some caveats are in order.

First, the precise state of US oil demand is becoming increasingly difficult to ascertain.  In the past several years, weekly-to-monthly revisions have generally been downward, reflecting the fact that weekly data only capture a preliminary snapshot of demand.  However, in recent months weekly-to-monthly revisions have abruptly changed both in terms of direction (up, rather than down), magnitude and products affected (revisions to distillate or gasoline demand, for example, have been unusually large), possibly because of evolving trade patterns for several key products.  This has complicated our efforts to pre-empt these changes, hitherto based on the six-month average of previous adjustments (we have now moved to a twelve-month average).

These weekly-to-monthly revisions have also dramatically changed the demand picture for some products, notably gasoline.  Given the sharp upward adjustments to June and July data, it appears that this summer did indeed feature a driving season, at least in its earlier stages, contrary to preliminary weekly data showing depressed gasoline use, which had suggested that demand had fared worse than in an already weak 2008.  Despite these upward revisions, though, gasoline demand has nonetheless been trailing below the five-year average.  On the basis of weekly data, the driving season appears to have petered out at the end of the summer - yet gasoline demand in August and September may turn out to be eventually revised up as well.

Second, the current, relatively strong growth readings result from a very weak baseline.  The US Gulf Coast was battered by severe hurricanes over August and September 2008, which disrupted refinery operations and deliveries and further compounded the impact of the financial meltdown (as such, total oil demand contracted by almost 13% year-on-year in September 2008).  Therefore, a demand bounce in September this year was to be expected, given the calmer conditions (meteorological and economic), and should arguably not be construed as a takeoff on the back of an allegedly buoyant economic recovery.  Diesel demand - strongly correlated to economic activity - has continued to decline sharply on a yearly basis (-6.8% in July, despite upward revisions, and with weekly data suggesting a double-digit contraction in both August and September).  As such, the outlook for US demand has only marginally improved, with demand averaging 18.7 mb/d in 2009 (-4.3% year-on-year) and 18.8 mb/d in 2010 (+0.9%), some 40 kb/d higher in both years compared with our previous assessment.


According to preliminary inland data, oil product demand in Europe plummeted by 6.7% year-on-year in August.  All product categories bar diesel posted losses, but the fall was mostly driven by weaker-than-expected demand for naphtha, heating oil and residual fuel oil.  The persistent weakness in naphtha demand (-13.9%) continues to defy expectations of a rebound in industrial activity in the continent's largest economies, although it could be also partly explained by ethylene cracker maintenance as well as rising competition from low-cost areas such as the Middle East.  The fall in heating oil demand reflected once again lower deliveries in both Germany and France, as consumer stocks approach historical highs.  Residual fuel oil demand, meanwhile, continues to be displaced by cheaper natural gas in the power generation sector.

Paradoxically, July's revisions (+70 kb/d) were to a great extent due to stronger-than-expected naphtha demand.  Overall, European oil product demand fell slightly less than expected during that month (-5.2% instead of -5.6%).  Despite slightly stronger economic growth assumptions, the demand outlook remains largely unchanged.  Total demand is now seen at 14.7 mb/d in 2009 (-4.4% or -670 kb/d versus 2008 and 40 kb/d lower than previously expected).  Demand is expected to remain flat in 2010 (but down 20 kb/d when compared with our last report, given a minor reappraisal of 1Q10).

According to preliminary data, German demand plummeted in August (-14.0% year-on-year) as heating oil deliveries plunged counter-seasonally (-62.4%), naphtha contracted again (-18.6%) and cheaper natural gas supplies continued to displace residual fuel oil (-8.4%) for power generation.  Although gasoline and diesel rebounded strongly in August (+5.2% and +6.4% year-on-year, respectively), this surge may be explained by a very low baseline (deliveries of both products had plummeted in August 2008) and by incentives to buy new cars, rather than stronger economic conditions.  In fact, the abrupt fall in naphtha demand, a fuel mostly used in industrial applications, suggests that the much-trumpeted economic recovery remains fragile.

The drop in heating oil deliveries, meanwhile, confirms that after the surge in demand during 1H09 - arguably fostered by the sharp fall in oil prices - the replenishing of consumer stocks has been largely completed as expected.  Indeed, stocks reached 66% of capacity by end-August, unchanged versus July but much higher than the 55% recorded in the same month of the previous year.  The current fill rate is below the record attained in August 1986 (79% of capacity), but is higher than the five-year average, suggesting that deliveries are likely to remain weak for the rest of 2009.

In France, oil product deliveries also fell sharply in August (-9.0% year-on-year), mimicking German trends, with continued weakness in deliveries of naphtha (-17.6%), heating oil (-30.6%) and residual fuel oil (-43.6%) but rebounding diesel demand (+5.2%), albeit from a low base in the previous year.  As in Germany, the poor readings for industrial fuels place the extent of the economic recovery in context.

In mid-September, the French government launched a new carbon tax, to be levied at a rate of €17/tonne of CO2 from January 2010, assuming that the necessary legislation is approved by parliament over the next few months.  The country would thus become the first large economy to adopt such a tax (Denmark and Sweden have already imposed a carbon tax, while Germany adopted a 'green' tax 10 years ago).  The new duty will be applied to transportation fuels (gasoline and diesel), heating oil, natural gas and coal, with the aim of gradually reducing carbon emissions.  However, it remains to be seen whether the move will actually encourage energy conservation to any significant degree: retail gasoline and diesel prices, for example, are expected to increase by a marginal ¢4-5/litre - in Sweden, by contrast, the carbon tax is levied at €108/tonne of CO2, which translates into much higher pump prices.  Moreover, the tax is to be fiscally neutral, offset by 'green cheques' for poorer and rural households, while several industries (farming, fishing and trucking) will be granted exemptions.  A government agency in charge of monitoring energy use (Ademe) has estimated that the new tax will at best reduce transportation fuel demand by 1.3% per year if the cost of CO2 emissions is kept at the proposed price level.109

Of potentially greater impact is France's goal to encourage the adoption of electric vehicles (EVs).  In early October, the government announced it will invest €1.5 billion to install 4.4 million charging points across the country over the next decade, as well as subsidise both car manufacturers and consumers.  It aims at having two million EVS (either totally electric or hybrid/electric) on the roads by 2020 and 4.5 million by 2025, equivalent to about 12% of the French vehicle fleet (currently estimated at some 30 million units).  Although there are many questions on the technical viability and evolution of EVs, the trend in France - and in other large OECD countries - seems clear: to transcend the traditional internal combustion engine, a move that will likely have dramatic consequences in terms of oil demand in the medium to long term.


According to preliminary data, oil product demand in the Pacific fell for the fourteenth month in a row in August, albeit marginally (-0.4% year-on-year).  A newfound strength in gasoline, jet/kerosene and distillates almost offset the persistent decline in residual fuel oil demand and 'other products'.  This relative strength, compared with the record plunges observed in previous months, was almost entirely due to Korea, whose economy continues to show a remarkable rebound (Australia, whose demand is about half the size of Korea's, also featured marginally positive growth).  By contrast, Japanese demand recorded yet another contraction.

Yet the upward revisions to July preliminary data (+110 kb/d) came largely from Japan, and specifically from the 'other products' category.  Pacific oil demand thus contracted slightly less than previously expected (-5.5% versus -7.0%).  The demand outlook has also been revised up on the back of these data adjustments and stronger GDP assumptions.  OECD Pacific demand is now seen averaging 7.6 mb/d in 2009 (-5.9% or -480 kb/d on a yearly basis and +70 kb/d versus our last report) and 7.4 mb/d in 2010 (down by 2.4% or 190 kb/d when compared with the previous year and 10 kb/d from the last estimate).

According to preliminary data, Japanese oil demand contracted by 1.5% year-on-year in August.  This relatively limited decline - at least compared with double-digit rates for most of the past year - was largely due to a strong rebound in transportation fuels, with gasoline, jet fuel/kerosene and diesel rising by 16.7%, 39.5% and 12.1%, respectively.  Naphtha demand posted a marginal increase, which may indicate an improvement in economic conditions - even though both residual fuel and direct crude demand continued to post sharp losses, reflective of subdued electricity demand.

However, as in other OECD countries, the rise in transportation fuels is related to a very low base.  August normally marks a seasonal spike in gasoline demand, as many Japanese travel back to their hometowns to celebrate the Obon holidays.  Last year, however, driving was sharply curtailed by exceedingly high retail prices (about 30% above current levels), with gasoline demand falling by 13.7% in August 2008 (and diesel plunging by 14.5%).  Moreover, Japanese drivers have benefited this year from lower highway tolls, which were reduced in early 2009 as part of the government's fiscal stimulus package.  By contrast, the counter-seasonal surge in jet fuel/kerosene is more difficult to interpret, but it could suggest a bounce in air travel on the back of lower fares.

The rebound in Korean oil demand took a pause in August, up by only 1.0% year-on-year after two consecutive months of strong growth.  This was largely due to subdued deliveries of naphtha (-0.7%), possibly because of cracker maintenance.  Diesel demand also fell (-4.6%) relative to last year's high base (diesel had rebounded strongly in August 2008, following a sharp plunge in June and July).  As both products account for roughly 56% of total Korean oil demand (naphtha itself represents 43%), they exert great influence on overall demand trends, even if other product categories such as gasoline (+4.0%) or jet/kerosene (+20.0%) appear more robust, probably given lower oil prices.

Yet the government appears worried that another oil price spike could derail Korea's enviable economic recovery.  In late September, the government's Fair Trade Commission launched an investigation of some 200 service stations across the country, on the grounds of potential collusion to rig LPG, gasoline and diesel prices, citing the fact that domestic retail prices had remained high despite a softening in international oil prices.  Although the Korean market is dominated by only four companies (SK Energy, GS Caltex, S-Oil and Hyundai Oilbank, with a combined 98.5% share), the relative inelasticity of domestic retail prices could be partly related to tight regulations governing oil product imports.



Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) rose by 6.8% year-on-year in August to roughly 8.5 mb/d, with all product categories bar gasoline and gasoil posting strong gains.  This marks the fifth consecutive month of strong demand growth, which continues to be largely driven by 'other products'.  This category, which includes mostly bitumen, lubricants and coke, surged by 49.3% in August, standing some 580 kb/d above last year's levels, effectively accounting for this year's entire oil demand growth to date.

Meanwhile, the lack of detailed inventory data continues to test observers' powers of deduction.  As we have repeatedly noted in this report, these data are key to any assessment of underlying demand trends, particularly amid the recent surge of oil product stocks.  As discussed in this report's OECD Stocks section, the two official sources reporting partial stock data - China Oil, Gas and Petrochemicals (OGP) and the Joint Oil Data Initiative (JODI) - provide some guidance, but unfortunately do not match in terms of monthly changes.  Moreover, analysts are still working out how to interpret OGP's gasoline and gasoil stocks series from 2008 onwards, which were abruptly revised this month (although the monthly changes inferred from the previous data remained identical).

Using monthly stock changes from OGP and JODI data (starting in January 2008, given OGP's revisions) to adjust our estimates of apparent gasoline and gasoil demand produces contradictory trends, depending on which source is used.  If apparent demand is adjusted with OGP data, actual gasoline demand appears to have been much lower in 3Q08 and much higher in 1Q09.  However, last summer car sales were booming and Chinese motorists were insulated from international price fluctuations, while early this year China was flirting with recession amid falling car sales.  Using JODI data, actual gasoline demand looks consistently lower, yet perhaps this is plausible - the fall and rise of demand would match the slowdown and rebound in economic activity.  Interestingly, all three series show a rebound in July, consistent with reviving vehicle sales, but only the OGP-adjusted series shows year-on-year growth.  Although the two price increases in June may have somewhat moderated gasoline demand growth, the strong rebound in vehicle sales should indeed entail strong growth - unless Chinese motorists were to park their brand-new vehicles, which seems unlikely.

Regarding gasoil, apparent demand and OGP-adjusted demand match more closely, although the 3Q08 and 1Q09 discrepancies observed in the case of gasoline are also discernible.  More strikingly, perhaps, JODI-adjusted gasoil demand indicates a sharp surge in June and July - which would tally with the reported rebound in industrial activity.  However, the president of state-owned Sinopec has reportedly stated that gasoil demand in China continues to lag the country's economic recovery, as suggested by both our apparent demand and the OGP-adjusted series.

In sum, both the current demand picture and outlook for two key products remains blurred.  In the meantime, taking into account the astonishing strength of 'other products' demand and the recent adjustment to ex-refinery gasoline and gasoil prices (which were cut in late September by 2.8% and 3.1%, respectively, slightly less than implied by the NDRC's price mechanism), we have revised up our prognoses of Chinese oil demand by roughly 50 kb/d for both 2009 and 2010.  Total oil demand is now expected to increase by 5.1% or 410 kb/d to 8.3 mb/d in 2009, and by 4.1% or 340 kb/d to 8.6 mb/d in 2010.

Residual's Revival?

In early 2009, apparent Chinese residual fuel oil demand looked to be firmly set on a downward path.  After all, fuel oil use had plummeted by 18.1% to roughly 600 kb/d in 2008, and it remained largely below last year's level during the first five months of this year, aside from a brief spike in February.  Yet demand has rebounded since June on a year-on-year basis, reaching almost 490 kb/d in August( +12.2%).  Does this signal the revival of residual fuel oil?

Fuel oil's sharp decline in 2008 was related to several factors.  Demand had already begun to fall in 2007 as large power plants and industrial users gradually switched to alternative fuels, either to reduce costs (by using cheaper coal) or for environmental reasons (by burning cleaner LNG), using residual only for peak power demand.  This largely offset rising consumption by 'teapot' refineries - which use fuel oil to produce industrial grade gasoil, low-octane gasoline and heavy products such as bitumen - and by merchant shipping, buoyed by strong Chinese exports.  The January 2008 increase in the domestic fuel oil consumption tax, the sharp rise in oil prices in 1H08 and the outbreak of the global recession in 2H08 further accelerated fuel oil's decline.  The operations of many teapots, which rely on imported straight-run fuel oil such as Russian M100, became unprofitable, while international trade came to a virtual halt.  To cap it all, the government raised the consumption tax again in January 2009, this time eightfold, and tightened specifications for imported fuel oil in June (in order to prevent the extensive practice of importing fuel oil mixed with crude or labelling crude as fuel oil to evade import restrictions).

The recent recovery is probably related to the ongoing economic rebound.  This has pushed up demand for bunkers and other heavy products, hence providing incentives for teapots to boost runs.  This is remarkable, considering the government's plans to consolidate the country's refining sector in order to improve its overall global competitiveness.  Such a move would effectively entail closing down many of these refineries, which collectively account for as much as a fifth of the country's total refining capacity, according to some estimates.  Indeed, the latest hike in the consumption tax was intended to drive out of business those refineries with less than 20 kb/d of capacity, given the lack of alternative feedstocks.  Teapots are legally barred from importing crude, reserved to state-owned majors (PetroChina, Sinopec, CNOOC and ChemChina).

It is open to debate, however, whether the residual revival will last beyond 2009.  Although we foresee average fuel oil demand rising by 6.8% to 650 kb/d in 2009, the annual pace of growth could slow down to +2.5% in 2010, with demand averaging 660 kb/d.  Still, demand will remain well below the 880 kb/d peak reached in 2004.  Indeed, the outlook for residual will arguably be shaped by the refining consolidation and rationalisation drive.  Although data on the independent refining sector are patchy, it is likely that teapots located in southeast China, notably in Guangdong province, will bear the brunt of the adjustment.  Indeed, Guangdong teapots typically have simple refining units, are heavily dependent on residue and are barely supported by provincial authorities.  As such, they are more likely to be shut down.  By contrast, those based in the northeast, mostly in Shandong province, are likely to fare better, as they have access to crude (from local fields and partnerships with the majors), feature more sophisticated refining capacity and enjoy strong local government support (by virtue of being a key source of employment and fiscal revenue).

The smaller and more polluting teapots had long been tolerated and even encouraged because of their key role as swing product suppliers.  Indeed, teapots helped ease the shortages that emerged from late 2007 to the run-up to the Olympics in August 2008.  Today, by contrast, the timing for a consolidation drive is arguably optimal.  Even in the unlikely event that all teapots were to be shut down, implying the loss of some 1.6 mb/d, this would be offset by ample product stocks and large, planned and ongoing refining capacity additions by state-owned companies.  Moreover, the last pockets of resistance are vanishing.  A plan drafted earlier in the year to present a common front by creating a refining consortium encompassing most Shandong teapots - over half of estimated independent capacity - has seemingly stalled, mostly because state-owned majors have already acquired many of the largest and most sophisticated plants.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - rose by 6.4% year-on-year in August, driven by strong sales of gasoline (+18.0%), gasoil (+15.2%) and residual fuel oil (+7.1%).  The demand narrative was unchanged from the previous month: strong car sales continue to support gasoline demand, while the drought boosted gasoil and fuel oil consumption - as both fuels, particularly gasoil, are used for back-up electricity generation and irrigation.  Meanwhile, naphtha demand, long the preferred feedstock for utilities, fertiliser producers and steel plants, continued to trend down (-15.6%) on the back of greater natural gas availability.  However, it should be noted that July sales were revised up from preliminary estimates, suggesting that the year-on-year drop in that month was less than previously reported (-2.3% versus -19.4%).

In September, the Indian government appointed a panel to examine, over the next three months, how to reform the administered price regime governing domestic transportation fuels.  The petroleum ministry has already suggested two potential reforms: to reduce taxes on gasoline and gasoil, which currently account for about 45% and 25%, respectively, of pump prices in major cities, and to introduce a unified Goods and Services Tax (GST) on oil products, which would replace the different - and distorting - sales taxes currently levied by state governments.  However, judging by past experience, the likelihood that such recommendations are implemented is low given their political sensitivity, even if the new expert panel endorse them.  In recent years, two other committees had proposed several reforms, but these never came to fruition.



  • Global oil supply rose by 310 kb/d in September to 84.9 mb/d, driven by non-OPEC growth.  Compared with September 2008, global supply was nearly flat, as a non-OPEC recovery of 1.6 mb/d relative to last year's hurricane-hit base was offset by OPEC curbs.
  • September non-OPEC supply rose 200 kb/d from August in the absence of US hurricane outages.  It was up 1.6 mb/d compared with last year when Gustav and Ike forced the shut-in of around 1.2 mb/d in the US GoM.  Forecast revisions are again minimal this month at +8 kb/d for 2009 and +105 kb/d in 2010.  Non-OPEC production is expected to continue to rise towards the end of the year, as seasonal maintenance in key areas ends and as FSU output continues to pick up.  Total production for 2009 is forecast to average 51.0 mb/d, while 2010 output is seen at a revised 51.6 mb/d.  Total yearly growth will be +380 kb/d in 2009 and +550 kb/d in 2010, with OPEC NGLs adding 550 kb/d and 850 kb/d respectively.
  • OPEC production rose by 120 kb/d to 28.9 mb/d in September, with higher output from Nigeria, Angola and Venezuela accounting for the lion's share of the increase.  Crude oil production by the 11 members with output targets, which excludes Iraq, rose by 170 kb/d, to 26.4 mb/d.  As a result, the group's compliance rate slipped to around 62% compared with 66% in August.
  • OPEC opted to maintain existing output targets at the 9 September meeting in Vienna.  There was broad agreement among member countries that relatively stable oil prices hovering in the $65-$75/bbl range in recent months negated the need to tamper with output levels.  OPEC's effective spare capacity is estimated at 5.45 mb/d.
  • The call on 'OPEC crude and stock change' for 4Q09 is revised up 500 kb/d, to 28.4 mb/d on higher forecast demand.  The call for 2010 is also now pegged at 28.4 mb/d, up 200 kb/d from last month's estimate.

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

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

OPEC Crude Oil Supply

OPEC production rose by 120 kb/d to 28.93 mb/d in September, with higher output from Nigeria, Angola and Venezuela accounting for the lion's share of the increase.  Crude oil production by the 11 members with output targets, which excludes Iraq, rose by 170 kb/d, to 26.42 mb/d.

OPEC-11 is now producing about 1.58 mb/d over the group's 24.845 mb/d output target.  Relative to targeted output cuts, the group's compliance rate slipped to around 62% compared with 66% in August.  OPEC's effective spare capacity is estimated at 5.45 mb/d versus 5.47 mb/d in August.

As widely anticipated, OPEC opted to maintain existing output targets at the 9 September meeting in Vienna.  There was broad agreement among member countries that relatively stable oil prices hovering in the $65-$75/bbl range in recent months negated the need to tamper with output levels.  OPEC is calculating that a recovery in oil demand will bring down stocks overhanging the market.  Unusually, there were no formal calls for better compliance with output targets in the group's formal communiqué this time despite the steady climb in production over the past five months.  Output is up by around 800 kb/d from May levels of 28.12 mb/d.

While the market outlook for the group's production and compliance with output targets are usually the focus of discussions at OPEC's ministerial meetings, broader concerns about the global economy and the need for stable oil prices have taken on an added importance ahead of the Copenhagen climate change summit in December.  OPEC opened its conference acknowledging the summit could have far-reaching economic repercussions on oil producing countries and wants to ensure that their interests are represented in the post-Kyoto agreement.  Some OPEC members are mindful that higher oil prices could threaten the global economic recovery and further strain relationships with consuming nations at this critical juncture in the climate change talks.  OPEC's next scheduled meeting follows the Copenhagen summit and will take place in Luanda, Angola on 22 December.

Saudi Arabia's production declined by 50 kb/d in September, to an estimated 8.2 mb/d.  Above-target output continues to be used at domestic power plants.  While the peak cooling season is winding down, extra crude burn at power and water desalination plants may persist to meet stronger overall demand.  The substitution of lighter quality crude at the expense of fuel may become a permanent feature in the market in line with new environmental regulations calling for cleaning burner feedstock.

Qatar also saw production decline in September, by 10 kb/d to 760 kb/d, due to lower output of heavy sour Shaheen crude.  Production at Shaheen was reduced by around 20 kb/d at end-September due to extensive field work underway to expand the field's capacity to 525 kb/d in 1Q10.

Iraqi output fell by about 50 kb/d in September, to 2.51 mb/d.  Total exports were estimated at 1.96 mb/d, with shipments of Basrah were down about 50 kb/d at 1.5 mb/d, while Kirkuk loadings were unchanged at 490 kb/d.  An additional 10 kb/d was exported to Jordan.  Domestic crude use is estimated at 550 kb/d, with 470 kb/d for refinery output and around 80 kb/d for power generation.

Stable Iraqi oil exports in September mask a relatively tumultuous month for crude oil sales.  Iraqi exports have risen to post-2003 highs of around 2 mb/d in recent months, but reports now suggest that part of the recent uptick in volumes is due to spiking fuel oil into the crude mix rather than a reflection of higher production levels.  Iraq has spiked fuel oil into crude in the past but some reports say the latest moves are intended to boost export volumes to fend off criticism that the country's production is on a downward trend.

Iraqi state marketer SOMO has not formally explained the shift in policy to add fuel oil in with its crude exports but has acknowledged a change in quality by offering discounts to compensate for the grade changes.  The injection of fuel oil into the country's primary Basrah Light has boosted volumes by 50 to 100 kb/d, while at the same time lowering the quality of the crude.  The normal API gravity for Basrah is 31-32°, but in recent months it has been averaging a heavier 29-30° API due to the addition of fuel oil.  State SOMO is discounting the price by 4 cents/bbl for every degree drop below 34°API.

Iraq's Kirkuk crude has also become heavier following the start-up of new production from the Tawke field in the northern region last June and additional injection of fuel oil.  The 27° API Tawke crude is blended into the lighter 34.5-35° API Kirkuk export stream, with similar discounts to Basrah applied to compensate for the quality differential.  The suspension of Tawke production on 21 September may not necessarily result in a marked improvement in the quality of Kirkuk, since fuel oil reportedly has also been injected into the crude stream.  Production of around 60 kb/d from the Tawke field was halted after the Kurdish Regional Government (KRG) demanded that Norwegian operator DNO clear the government of any improprieties related to a dispute between DNO and Norway's stock exchange over the controversy surrounding the stockholdings of the company.  The KRG and DNO resolved their differences in early October but output is expected to resume at a smaller 6-8 kb/d.  DNO now plans to sell the Tawke oil locally since the payment mechanism has yet to be agreed with Baghdad.  DNO says it will not sell its crude through SOMO until the contentious payment issues are resolved.  SOMO collects the money for exports from the region via the Kirkuk pipeline to the Ceyhan port on the Mediterranean but Baghdad has refused to distribute revenues to the KRG since it does not recognize production contracts the regional government signed with oil companies.

Nigerian production increased by 130 kb/d, to 1.87 mb/d in September and, as a result, compliance with the country's OPEC target slipped to just 34% from 75% in August.  Repair work to idled oil infrastructure affecting Bonny, Forcados and Escravos production is moving apace in large part due to the ceasefire agreement in place between the government and militant groups.  Operator Shell continues to make headway restoring Forcados crude production, but work at Bonny facilities is moving more slowly.  Chevron has said it had restored about 100 kb/d of Escravos exports in September after militant attacks forced the shut-in last May.  Meanwhile, operator Total continued to ramp up output at the Amenam field last month, following the shut-in of around 50 kb/d in late July.  Production from the Chevron-operated offshore Agbami field also continued to ramp up, reaching its 250 kb/d target plateau four months ahead of schedule.

However, production at the 115 kb/d offshore EA field, which was restarted in July after being shut down since January 2006 due to militant activity, was shut-in again in early September. The Shell-operated Sea Eagle floating production, storage and offloading (FSPO) vessel at EA was shut-in due to problems with the FPSO's emergency shutdown valve.  Repairs were still ongoing at end-September.

After dropping to the lowest levels in more than two decades this summer, Nigerian production is poised to rebound further following an eleventh hour agreement between the government and key militant leaders.  The government's amnesty programme has proved more successful than initially anticipated.  A number of key rebel leaders from the main militant group, the Movement for the Emancipation of the Niger Delta (MEND), surrendered their weapons by the 4 October deadline.  While this potentially bodes well for the near-term outlook for Nigeria production, what is still unclear is the government's plan to deal with the remaining militants who number in the thousands.  Moreover, a reorganized MEND announced it will resume attacks on the country's oil industry on 15 October, the date when the current ceasefire agreement ends.  A similar government amnesty programme offering cash in exchange for weapons under then President Obasanjo in 2004 ultimately failed, because rebel groups simply reorganized under new leaders and rearmed.

Angolan output was up by 70 kb/d, to 1.86 mb/d, due to completion of repairs at several facilities last month and start-up of new production at the Mafumeira Norte and Tombua Landana fields.

Venezuelan production rose by 30 kb/d, to 2.24 mb/d in September, with target cut compliance slipping to 33% versus 44% in the previous month.  Output from the country's heavy oil upgraders edged higher after production cuts at its joint venture Orinoco Belt upgrading operations were suspended in August.  In September, PDVSA also suspended earlier cuts at other projects, including Petrolera Indovenezolana, its joint venture with India's ONGC, and at Petrolera Sinovensa, its project with  China National Petroleum Corp.  Mid-September scheduled maintenance work at the 190 kb/d PDVSA-Chevron Petropiar upgrader was delayed until 5 October.  To offset the loss of output from Petropiar during the planned 40-day plant maintenance period, the company plans to spike the extra-heavy crude feedstock with lighter grades in order to maintain production at around 100 kb/d during the outage.

Diplomatic Tensions over Iran's Nuclear Program

There were escalating tensions between the global community and Iran over the latter's revelations that it had a second nuclear enrichment facility. Fears of a potential disruption in Iranian supplies to the market were tempered somewhat given still sluggish demand and a relatively high level of OPEC surplus production capacity. OPEC's effective spare capacity is estimated at 5.45 mb/d, and excluding Iran amounts to 5.23 mb/d. Iranian oil production in September averaged 3.78 mb/d, down by 20 kb/d from August levels.  Iranian crude exports fluctuate around 2 mb/d.

Initial tense negotiations have given way to more collaborative efforts to address the issue, but lingering fears may provide something of a floor to prices.  Iran rejects allegations that it is seeking to build nuclear weapons, arguing it plans to use the facility for domestic power use.  The United Nations' nuclear watchdog, the IAEA, is taking the lead in investigating the hitherto unknown uranium enrichment facility, with inspections planned for 25 October.  However, Washington is moving forward with legislation that will tighten sanctions in a bid to halt gasoline sales to Iran, a net importer of roughly 120 kb/d.  Proposed legislation has been crafted in order to punish international oil companies that export gasoline to Iran.  Some of Iran's traditional gasoline trading partners severed their ties several months ago but new suppliers have readily emerged, notably China.  Some analysts contend sanctions would be ineffective given the growing glut of surplus products available via third parties to Iran.

Non-OPEC Overview

September non-OPEC supply rose by 200 kb/d to 50.6 mb/d from August, with the absence of any hurricane impact in the US Gulf of Mexico prompting an upward revision to the forecast.  In addition, many fields are returning from seasonal maintenance.  Year-on-year, non-OPEC supply was up by 1.6 mb/d in September, compared with last year when Hurricanes Gustav and Ike forced the shut-in of around 1.2 mb/d in the US GOM.

Overall revisions to the forecast are again minimal this month, at +8 kb/d for 2009 and +105 kb/d in 2010.  Rising Russian production was in line with our expectations, while Kazakhstan's oil output was markedly lower than expected in August, but is still seen stronger next year.  The single largest revision was the elimination of the hurricane outage adjustment, resulting in a 400 kb/d upward correction for the US GOM in September, which was, however, partly offset by weaker-than-expected performance in Canada.  Global biofuels were also nudged upwards in our forecast, after output in the US and elsewhere exceeded expectations as production economics improved.

Non-OPEC production is expected to continue to rise towards the end of the year, as seasonal maintenance in key areas ends and as FSU output continues to pick up.  Next year's increments come from the FSU (+400 kb/d), Brazil (+250 kb/d, of which 200 kb/d is crude and 50 kb/d fuel ethanol), and the US GOM (+200 kb/d).  Another 100 kb/d will stem from Canadian mined syncrude, which has seen rekindled interest since earlier in the year.  Generally speaking, there is still no evidence of any short-term impact of the curtailed upstream development spending reported earlier this year - in fact, non-OPEC supply currently appears as robust as in the 2006/07 period.  Total production for 2009 is now forecast at 51.0 mb/d, unchanged from last month's report, while 2010 output is seen at an upward-revised 51.6 mb/d.  Total annual growth will be +380 kb/d in 2009 and +550 kb/d in 2010.

Putting Recent Large Oil Finds in Context

The recent discovery of several large new non-OPEC oilfields has been greeted by some as effectively banishing 'peak oil' for the foreseeable future.  These finds represent the culmination of several years of greater efforts and higher investment in exploration.  The fact that most of these fields are in technically difficult environments proves how far international oil companies are prepared to go to find new oil outside of traditional low-cost areas, as mature provinces decline and access restrictions remain in place.  As such, these finds are to be welcomed as timely additions to non-OPEC reserves, and as potential offsets to declining production elsewhere.

Independent Anadarko made headlines in mid-September with the announcement of its Venus discovery in relatively unexplored waters offshore Sierra Leone.  The apparent geological similarities between Venus and the huge Jubilee field being developed in Ghana led the company to suggest that this find indicated the existence of a new 1,100 km-long oil basin stretching between the two countries and including waters off Liberia and Cote d'Ivoire.  The Jubilee field, which is due to start production in 2H2010, is among the largest non-OPEC fields in Africa found to date.  In East Africa, Tullow also reported the discovery of the Ngassa-2 field in the Albert Basin in Uganda, which is significant as it may finally give critical mass to the relatively isolated reserves there, making their development much more likely.

Elsewhere, BP recently announced what may be the largest discovery to date in the Gulf of Mexico, Tiber, while new discoveries within Brazil's much-feted pre-salt deepwater offshore basin have come along recently with such regularity as to almost go unremarked!  Nonetheless, the pre-salt, spanning Brazil's Santos and Campos Basins, is arguably the most attractive new non-OPEC frontier since the development of the Caspian (see Brazil's Lula Outlines Suggested Pre-Salt Development Regime in report dated 10 September 2009).

But these discoveries must be seen in context.  Over 3.5 mb/d of new crude production capacity need to be added to global supply every year in order to offset decline from mature assets.  Part of this increment can come from OPEC members, which are not discussed here, but have in some cases added significant capacity (e.g. Saudi Arabia).  Another chunk can be gained through increased recovery rates due to increased drilling and/or enhanced oil recovery (EOR).  But a recent report by IHS Herold/Harrison Lovegrove found that 2008 global oil and gas reserve replacement came to only 88% - the lowest since 2004.  This came despite a surge in upstream spending of around 20% to nearly $500 billion (though some reserves figures were revised down following the fall in prices in late 2008 and early 2009).  While the resource base likely remains plentiful, this illustrates how hard the upstream sector is having to work to sustain productive capacity - as welcome as the recent discoveries are.


North America

US - Alaska September actual, others estimated:  US oil production is estimated to have risen by 170 kb/d in September to 8.1 mb/d in the absence of any hurricanes affecting GOM output.  Rather than attempt to forecast meteorological developments, we include a downward adjustment based on five-year average outages.  September is typically the peak outage month, resulting in a 600 kb/d adjustment, the remainder of which we have now removed.  We have also reduced the October adjustment.  Some forecasters have opined that, given this year's El Niño, it is unlikely that there will be any more storms this year.

In Alaska, September production rose by 100 kb/d, as Prudhoe Bay and other fields ended several months of maintenance.  Meanwhile, Alaskan NGL numbers were revised down by 45 kb/d in August and adjusted in past months, after the receipt of historical data.  August also saw maintenance at the Prudhoe Bay Central Gas Facility, in line with field workovers.  Elsewhere, increased activity in the Bakken Shale is resulting not only in a slug of US natural gas, but also gradually increased shale oil output in North Dakota.  The formation also covers part of northeastern Montana, but higher oil production is not yet showing up in that state's data.  Total North Dakotan production is estimated at around 200 kb/d this year, having doubled from 2005.  Lastly, fuel ethanol output was around 60 kb/d higher in July than we had anticipated.  In sum, forecast US production is nudged up by around 60 kb/d for 2009, to 7.96 mb/d and by a similar amount in 2010, to 8.16 mb/d.

Canada - July actual:  Canadian oil production in July was 25 kb/d lower than our forecast, which has partly been carried through the outlook.  But July production was still up 160 kb/d on June, with synthetic crude and production from offshore Newfoundland returning from heavy maintenance.  In September and early October, oil sands operations run by Shell and Suncor were briefly interrupted on three occasions by environmental protesters, but none of the incidents resulted in anything but the briefest outage.  For 2009 and 2010, total Canadian supply is revised down by around 20 kb/d and 10 kb/d respectively, to 3.13 mb/d and 3.16 mb/d.

Mexico - August actual:  Mexican production in August was in line with last month's forecast, at 2.92 mb/d, down slightly from July.  In early September, President Calderon installed a new chief executive at Pemex, tasked with shoring up steadily declining oil production.  The company is apparently considering restructuring, and the new head has reportedly already questioned the strategy of largely depending on the Chicontepec field for future growth.  Chicontepec undoubtedly has significant hydrocarbon reserves, but spread over a large onshore area in small pockets.  Despite substantial investments, current production is only around 30 kb/d, despite ambitious plans to ramp up to several hundred thousand barrels per day by the middle of the next decade.  A possible shift in strategy could involve more emphasis on deepwater offshore potential, an area so far relatively underexplored - though as things stand, many doubt that Pemex has the expertise and budget to do this on its own.  In the meantime, Mexico's oil production remains on a steady downhill course, forecast to slide to 2.94 mb/d in 2009 and further to 2.76 mb/d in 2010.

North Sea

Norway - July  actual, August provisional:  Norwegian production in July was around 60 kb/d higher than our forecast, at just under 2.40 mb/d, as maintenance was less heavy than anticipated.  Production was around 240 kb/d higher than June, as fields returned from maintenance work.  Problems following a gas leak were ongoing at the Valhall complex, with production down since April.  In September, Marathon started output at Volund, a tie-back to the Alvheim field.  Peak capacity will be 20 kb/d, which is expected to offset decline at Alvheim, thus keeping production steady at around 90 kb/d.  A leak cut output briefly at the Statfjord C platform at the end of September, but this was reportedly rapidly repaired.  Total Norwegian production is forecast to reach 2.29 mb/d in 2009, then dipping by around 260 kb/d to 2.04 mb/d in 2010 due to its mature base.

UK - July actual:  July oil production in the UK was reported around 45 kb/d lower than our forecast, of which around half was NGLs.  At 1.47 mb/d, production was down due to maintenance and is expected to fall further in August for the same reason, after which it should gradually pick up again towards the end of the year.  June saw the start-up of the Don Southwest field, while in August, Affleck commenced production.  The two fields are expected to have peak capacity of 10 kb/d and 8 kb/d respectively.  Total UK output is forecast to average 1.48 mb/d in 2009 and then to decline to 1.33 mb/d in 2010.


Australia - July actual:  Australian oil production was slightly lower than our forecast in July, at 570 kb/d.  Output is due to rise towards the end of the year, as the Van Gogh field starts up, with peak capacity of 20 kb/d.  In our forecast, the Pyrenees field start-up is brought forward to 2Q10 from 3Q10, after construction of its FPSO was completed in a Chinese shipyard.  Pyrenees will add 90 kb/d of heavy crude to the Carnarvon Basin.  On this basis, the total 2010 supply forecast is raised slightly, to 640 kb/d, versus 570 kb/d in 2009.

Former Soviet Union (FSU)

Russia - August actual, September provisional:  Russian oil production in August was unrevised and rose by a further 38 kb/d in September, in line with our forecast.  Recent months' output is the highest since October 2007, with notable increases from Rosneft, which is ramping up its giant Vankor field (where September production was at around 150 kb/d, according to preliminary data), but also Gazprom and the Sakhalin projects.  Vankor is expected to hit 220 kb/d at the end of the year and Russian oil output is now expected to average 10.14 mb/d in 2009, rising to 10.2 mb/d in 2010.

As outlined in recent reports, new fields are part of this return to growth, but also an improving fiscal regime.  Some tax breaks are in place, yet the picture is far from certain as to how incentives for the newer province of Eastern Siberia will eventually be set.  Intriguingly, in September Prime Minister Putin said foreign companies would be conditionally welcome to invest in Russia's energy sector.  Firstly, this would involve taking Russian companies' interests outside of Russia into account - a hint at Russian oil companies' difficulties at establishing footholds in downstream and retailing infrastructure in Europe and elsewhere.  Secondly, foreign companies would have to respect that some Russian hydrocarbon assets would remain off-limits due to their 'strategic' nature.  Neither of these points is new, but more specific offers concerning potential gas investment on the Yamal peninsula have already attracted some IOCs.

Azerbaijan - June actual:  A reappraisal of data sources for Azerbaijan's oil production leaves 2009 and 2010 total output levels unchanged at 1.07 mb/d and 1.34 mb/d respectively, but quarterly and monthly totals have changed.  One adjustment is the move of Shakh Deniz output into the NGL category, as it is effectively condensate from offshore natural gas production.  Total output has returned to last year's pre-ACG gas leak levels and is seen steadily increasing towards the end of the year.  2010 growth then stems from higher output at the ACG complex.

Kazakhstan - August actual:  August production in Kazakhstan of 1.51 mb/d was below July levels, as Tengiz output came in lower than we had anticipated.  July had seen growth at the field to 500 kb/d, indicating the first results from the next expansion phase, but August production was at a lower 430 kb/d, perhaps due to seasonal maintenance.  Karachaganak output was also lower than in our last forecast, possibly also heralding maintenance work, which we had previously assumed for September and October.  Total 2009 production is left unchanged at the forecast 1.51 mb/d, while the 2010 forecast is raised to 1.57 mb/d on otherwise-robust growth.

Squeezing Central Europe?

Major pipeline projects in the FSU region designed to geographically diversify export outlets may lead to stiff competition for regional crude supplies.  Russia's East Siberia-Pacific Ocean pipeline (ESPO) and the Baltic Pipeline System 2 (BPS-2) will effectively attract volumes now flowing through the Druzhba line and thus potentially curb current levels of pipeline deliveries to Central Europe.  The same is true of a pipeline spat in Ukraine.

The much-anticipated launch of the first stage of the 600 kb/d ESPO line is scheduled for 25 December, with the first test shipment planned to sail from the oil terminal at Kozmino Bay on the Pacific Coast, the future end-point of the ESPO, on 18 November.  During the first phase of the project crude will be shipped through the pipeline from Taishet to Skovorodino, with half of the volume continuing by rail to Kozmino and the other half to China via a new pipeline spur.

Rail and pipeline charges are yet to be decided, but two separate tariffs are expected in the future for crude from Western Siberia and from Eastern Siberia.  New fields in Eastern Siberia will likely become the primary source of supply for the pipeline.  However, relatively lower tariffs for West Siberian crudes, which normally flow west, may encourage producers to ship more barrels eastwards.

Meanwhile, the Russian government is considering speeding up construction work on the BPS-2.  The line connecting Unecha, a junction on the Druzhba pipeline, and the Russian Baltic port of Ust Luga, could commence operations six months earlier than the scheduled 3Q12 start and will inevitably divert some volumes otherwise destined to Europe via the Druzhba route.

Developments in Ukraine could also curb Druzhba volumes.  Until recently, Russian and Kazakh crude flowed from Samara to Odessa for exports via the Black Sea.  But a shortage of crude deliveries to the Kremenchug refinery in central Ukraine, which is on this trunk line, has now led to the reversal of the Odessa-Kremenchug spur.  As a result, crude supplies to Lukoil's Odessa refinery have been cut off.

Lukoil in turn is now exploring other options for crude feedstock for its refinery.  One alternative would be to bring in crude via the underused Brody-Odessa link.  This too would potentially limit Druzhba volumes headed for Central Europe.  But the Ukrainian authorities are actually considering resurrecting long-held plans to reverse the Odessa-Brody pipeline flow, which would boost volumes of Caspian crude to Central Europe, partly compensating for the lower Druzhba flow because of ESPO and BPS-2.

A month-on-month drop in product exports of 330 kb/d combined with another month of crude oil pipeline maintenance work were behind a fall in total FSU net exports in August, to 9.17 mb/d.  Baltic exports rose 7.4% after the completion of July work on the Russian pipeline network, but lower Black Sea and BTC volumes offset the increase.  Maintenance work on the Baku-Supsa pipeline halted oil flows for ten days and on the BTC line for two days.  The story continued in September, as preliminary data show that Ukhta-Yaroslavl pipeline maintenance cut back deliveries to Primorsk by 6.6% and that BTC volumes dropped to 770 kb/d on maintenance at the ACG complex.

In September, a scarcity of tankers caused a sharp fall in shipments across the Caspian Sea from Kazakhstan to Neka in Iran.  Odessa exports also dropped drastically following the escalation of a conflict over the ownership of the Ukrainian Kremenchug refinery.  Uncertainty about this dispute delayed the publication of the Russian export loading schedule for 4Q09.  It shows zero exports from Odessa in October and loadings at Yuzhny at their highest ever, suggesting also a redirection of extra volumes from Novorossiysk as the pipeline leading to the port is reportedly scheduled for maintenance in October.  Lastly, the new Kozmino terminal, the future end-point of the ESPO on the Pacific coast, received its first 24 kb/d export allocation in the 4Q09 loading schedule (see Squeezing Central Europe?).

Other Non-OPEC

Brazil - July actual:  July crude and NGL production in Brazil was slightly weaker than anticipated, the former stemming from lower offshore production, which has been carried forward.  At the Tupi pilot, production was reportedly resumed in mid-September, after some technical hitches were overcome.  The first pre-salt crude to be produced, Tupi started up in May, but suffered problems in July, keeping output at a minimal level.  If everything goes to plan, production should reach 15 kb/d by the end of the year and rise to around 50 kb/d by mid-2010, after which it should gradually ramp up to 100 kb/d in its initial phase.

On the proposed pre-salt legislation, as outlined last month (see Brazil's Lula Outlines Suggested Pre-Salt Development Regime in report dated 10 September 2009), parliamentary deliberations continue.  The initial idea to fast-track legislation has already been scrapped, after long lists of proposed changes were received from interested parties.  On the other hand, members of the Brazilian government went on a September road-show, advertising the suggested legislative regime and investment opportunities and garnering much interest.  Energy Minister Edison Lobao already hinted at a first bidding round in mid-2010, though this would depend on the legislation being passed by then, which is far from certain.  The forecast for total Brazilian supply is revised down by 25 kb/d to 2.51 mb/d in 2009 and down by 45 kb/d to 2.75 mb/d in 2010, still implying strong 2010 growth of nearly 250 kb/d.

Other Non-OPEC Latin America:  In Colombia, Rubiales production continues to rise after the start-up of a new spur connecting to the country's pipeline infrastructure.  Revisions were minimal and production is forecast to increase steadily on steady investment and improved security.  The Rubiales expansion, for instance, was long stalled due to its remote location in the Llanos basin and concerns about pipeline security.  Total 2009 oil supply is forecast to average 660 kb/d, rising to 690 kb/d in 2010.  In Argentina, August supply was revised down by 35 kb/d, partly due to a prolongation of an oil workers' strike in Santa Cruz province.  Total oil production is expected to rise from 740 kb/d in 2009 to 750 kb/d in 2010.

China - August actual:  August oil production in China undershot this report's expectations by around 85 kb/d, though the overall profile remains virtually unchanged.  Offshore production is gradually returning from mid-year seasonal maintenance and output rose by 20 kb/d in Xinjiang, to nearly 250 kb/d.  Changqing output is also steadily increasing, currently around 320 kb/d.  From mid-September, Typhoon Koppu shut-in oil production at the offshore Huizhou field, thus shaving off approximately 20 kb/d in September and an assumed 45 kb/d in October until the FPSO can be reconnected.  Total Chinese oil production is forecast to average 3.84 mb/d in 2009, rising to 4.03 mb/d in 2010 as steady growth in the new offshore fields and from Xinjiang and Changqing offsets decline elsewhere.

Indonesia - September actual:  Indonesia is still experiencing problems at its new Cepu field, as previously reported.  The Indonesian market regulator threatened to withdraw the operatorship from ExxonMobil, while the company itself has sent signals that output will soon increase.  We are assuming a delayed but slow ramp-up towards the end of the year and steady growth thereafter, with production averaging 30 kb/d in 2010.  In early October, the Oyong field started up, which should ultimately generate 10 kb/d of condensate.  The devastating earthquakes in Sumatra in late September appear not to have affected oil and gas production.  Total Indonesian oil supply is forecast to rise from 1.01 mb/d in 2009 to 1.03 mb/d in 2010.

OECD stocks


  • OECD industry stocks decreased by 3.9 mb in August, to 2,750 mb.  OECD crude and products diverged seasonally as the former fell by 16.1 mb and the latter rose by 19.0 mb.  The 'other oils' category fell by 6.7 mb.  Crude fell in all three regions, though most heavily in North America and the Pacific.  Middle distillates drove the products build, with all OECD regions posting gains.
  • OECD stocks in days of forward demand stood at 60.7 days as of end-August, down from a revised end-July reading of 61.4.  Despite falling across all three regions, crude days cover remained above the five-year range.  Products days cover increased on the month, led by European gasoline and North American residual fuel oil.
  • Preliminary data indicate total OECD industry oil inventories rose by 10.5 mb in September, as an increase in product stocks outweighed a fall in crude stocks.  Products rose 19.9 mb, led by US distillate and gasoline.  Crude stocks decreased 9.3 mb, led by a fall in Japan.  The stock change did not include EU-16 data from Euroilstock, which were unavailable as this month's OMR went to press.
  • Short-term crude floating storage levels declined to 45 mb at end-September, from 50-55 mb in August.  Narrower contango in the crude futures curve and a draw from onshore stocks diminished the economic attractiveness of the practice.  Yet, products floating storage, particularly middle distillates, remained more viable as levels increased to over 75 mb from 60-65 mb at end-August.

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

OECD industry stocks decreased by 3.9 mb in August, to 2,750 mb.  The change was slightly below seasonal norms; the five-year average stock change for the month is a 1.7 mb build.  Crude and product movements diverged seasonally, with the former falling by 16.1 mb and the latter rising by 19.0 mb.  The OECD stock surplus to the five-year average continued to fall.  At end-August, the surplus stood at 97.6 mb, down from 147.4 mb in June.  Yet, September's preliminary 10.5 mb stock build looks higher than seasonal norms.  Moreover, though short-term crude floating storage continued falling in September, a rise in products floating storage caused the combined crude and products total to increase by about 5 mb.  With refinery utilisation in a seasonal trough, the large OECD stock surplus may stagnate through November unless demand surges or a bout of cold weather boosts distillate consumption.

On the crude side, the end-August surplus to the five-year average remained high at 50.4 mb, mostly due to North America, which saw its surplus to the five-year average stay flat on the month at around 55 mb.  Continued discharge of short-term crude floating storage has likely kept onshore surpluses intact while downward revisions to crude stock levels in Japan (-8.1 mb) provided some offset.  Even with a preliminary September stockdraw of 9.3 mb, OECD crude stocks look unlikely to draw down over the next few months.  Around 45 mb of short-term floating storage remains off the US, Europe and West Africa and OECD refinery throughput is expected to remain low.  Moreover, the absence of a severe hurricane this year has kept non-OPEC production seasonally healthier in comparison to previous years.

In products, OECD gasoline stocks appear to have emerged from the summer driving season in relatively normal shape, with end-August absolute levels slightly below the five-year average and days of forward cover above the five-year average.  Large distillate surpluses to the five-year average persisted in North America (30.1 mb) and Europe (35.3 mb), with end-August levels more than ample to cover demand needs heading into the colder season.  In the Pacific, where absolute distillate levels trended below the five-year average, end-August days cover nonetheless remained well above the five-year range.  In residual fuel oil, stock levels have trended below the five-year average in all three regions, aided by an 11.2 mb downward revision to European inventories in July and a tightening Asia-Pacific market.  Yet, on a days cover basis, all three regions remained near the top of the five-year range.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American commercial inventories fell by 19.2 mb in August, led by decreases in US crude and gasoline.  US crude stocks drew by 9.8 mb as refinery throughput increased and imports sagged.  Mexican crude stocks increased by 1.5 mb.  North American crude stocks continued to show the largest regional surplus relative to the five-year average.  In products, US gasoline decreased seasonally by 6.5 mb while middle distillates posted a 2.1 mb seasonal rise.  Mexican product stocks rose by 1.6 mb, led by distillates.

September preliminary weekly data point to a 9.1 mb build in US commercial stocks, with an increase in products outweighing a 3.2 mb decrease in crude.  Crude stocks drew seasonally in September, though as of early October inventories remained above the five-year range.  With weak product margins and low refinery utilisation expected through the remainder of autumn, crude inventories may continue to build seasonally.  Crude stocks at Cushing, Oklahoma - the delivery point for NYMEX light, sweet crude - drove much of the change at the national level as they fell by 5.7 mb on the month to 2009 lows.  The change reflected narrowing contango in the WTI curve, which made storage returns less attractive, and a volatile pattern of imports into the US Mid-Continent and Gulf Coast during the month.

US product stocks increased by 12.3 mb in September, led by gains in gasoline and distillate of 7.6 mb and 7.1 mb, respectively.  Gasoline stocks remained near the top of the five-year range as a weak summer driving season came to its end.  Both diesel and heating oil stocks increased within the distillate category.  The former continued to push to new five-year highs while heating oil stocks along the US East Coast - the primary region for oil-based heating - trended in the top half of the five-year range.

OECD Europe

European inventories rose by 10.7 mb in August, led by an increase in middle distillates.  European crude stocks remained relatively unchanged on the month and continued to track the five-year average.  Product inventories rose 11.7 mb as middle distillates increased 7.1 mb and gasoline and fuel oil both posted 2.1 mb gains.  The European distillate surplus to the five-year average narrowed slightly, but remained high at 35.3 mb.  A July downward revision to residual fuel oil stocks, combined with falling August levels, left that category trending at the bottom of the five-year range at end-August.

German consumer heating oil stocks showed signs of levelling off in August, with an end-month reading at 66% capacity fill, unchanged from July.  Still inventory levels remain ample with end-August levels already above the five-year average for the beginning of the heating season in October.  Gasoil stocks held in NW Europe independent storage continued to indicate a strong middle distillate buffer in September.  Levels remained at five-year highs, but stocks there decreased slightly on the month.  Meanwhile, products floating storage - mostly middle distillates - off NW Europe and the Mediterranean grew to about 50 mb as of end-September versus around 40 mb the previous month.

September preliminary data for other product categories in NW Europe independent storage showed gasoline, naphtha, jet/kerosene and fuel oil posting inventory gains.  Fuel oil and jet-kerosene posted the largest increases as the former topped the five-year range for the first time since April.  Gasoline and naphtha stocks finished the month at the top of their respective five-year ranges.  September EU-16 preliminary stock data from Euroilstock were not yet available as this month's OMR went to press.

OECD Pacific

Pacific industry stocks rose by 4.7 mb in August as an increase in product stocks outweighed a fall in crude inventories.  Stock levels in crude fell further below the five-year average as August inventories drew 7.6 mb, driven largely by a 6.2 mb decrease in Japan.  On a days of forward cover basis, however, Pacific crude stocks stood above the five-year range.  Product inventories rose by 12.8 mb led by increases in middle distillates and the 'other products' category.  Middle distillates rose by 3.3 mb on the month in Japan and by 1.3 mb in Korea.  Pacific residual fuel oil stocks increased by 2.2 mb.  On an absolute basis they remained under the five-year range, yet on a days cover basis they continue to trend at the top of the range.

Weekly data from the Petroleum Association of Japan (PAJ) point to a small commercial stock build of 1.4 mb in September, with a crude fall of 6.2 mb partially offsetting a products rise of 7.6 mb.  Crude inventories fell even as refinery utilisation decreased on the month.  Though they continued to trend below the five-year range on an absolute basis, crude stocks appear healthier on a days cover basis with refinery throughput expected to remain below the five-year average in the months ahead.  Among products, kerosene and residual fuel oil showed the largest increases, gaining 1.6 mb and 1.7 mb, respectively.  Yet, after trending along the five-year average during much of the year, kerosene stocks are entering October below the five-year range.  Gasoline, gasoil and naphtha remained in line with or slightly above their historical averages.

Recent Developments in Singapore and China Stocks

Singapore product stocks decreased by 2.8 mb in September as fuel oil stocks partly pared the previous month's gains.  Fuel oil inventories decreased by 3.8 mb in September with strong regional demand and tighter Russian supplies.  Still, stockdraws may prove limited as a recent increase in high-sulphur fuel oil prices relative to those in NW Europe has begun attracting more cargoes from the West.  Light and middle distillate stocks both edged up, by 0.6 mb and 0.5 mb, respectively, to end-month levels near their 2009 highs as regional demand remained weak.

China crude oil stocks reported by China Oil, Gas and Petrochemicals (OGP) rose by 2.2 mb in August to near 286 mb on higher domestic output, lower runs and continued elevated import levels.  The end-month stock level was the highest reported since the beginning of the series in January 2008.  OGP again noted that the inventory figure included 'both commercial and state strategic reserves'.

More Pieces, But Chinese Inventories Remain Puzzling

Additional data from China are always welcome.  Yet, the October 1 issue of China OGP included upward product stock revisions that have generated many questions.  OGP reported gasoline and gasoil stocks higher on average by 71% and 60%, respectively, from January 2008 to July 2009 versus corresponding data from previous issues.  Starting in January 2008, gasoline and gasoil stocks were revised up by 18.4 mb and 21.4 mb, respectively, with the baseline changes carried through the remainder of the data set.  Month-on-month stock changes following January 2008 remained unchanged from the previous figures up until July 2009.  Moreover, the series in the October 1 issue did not include data points before January 2008, leaving open the question as to when exactly the inventory change occurred.

OGP provided no explanation for the change in its monthly report, but a Dow Jones Newswire story indicated that OGP attributed the change to CNPC data.  The long holiday from October 1-8, which included the 60th anniversary of the founding of the People's Republic of China and the traditional Mid-Autumn festival, closed offices in China, including those of OGP.  Consequently, further insights were not available as this month's OMR went to press.

Improved data should ultimately contribute to a more comprehensive understanding of the Chinese stock-holding position.  Still, the lack of clarity surrounding this disclosure creates near-term uncertainty not only on inventories but also on demand, as discussed in this report's Demand section.  Since monthly stock changes for both gasoline and gasoil remained largely intact from the old series, it remains unclear whether OGP's data are actual reported monthly inventories or estimates based on monthly changes.  Questions also persist over stocks held by other entities, as suggested by sometimes-stark differences between the OGP monthly stock changes, based on only CNPC and Sinopec, with those reported by China to the Joint Oil Data Initiative (JODI).

As indicated in media reporting, China's Phase 2 Strategic Petroleum Reserve construction, about 170 mb of storage, continues.  Tank completion and filling schedules remain ambiguous, however.  The deputy head of China's National Energy Administration was recently quoted in Reuters as saying that Phase 2 construction may take two years to finish and that filling would be based upon market conditions.  Yet, the head of the National Energy Administration indicated in another Reuters story that construction completion may occur within three to four years.  A third phase of 170 mb is scheduled for completion by 2020.

End-August inventory data showed gasoline and gasoil declining on the month by 2.4 mb and 3.0 mb, respectively, as refinery output fell and gasoline and diesel exports rose.  Curiously, OGP data showed a large upward historical revision to absolute gasoline and gasoil stock levels held by CNPC and Sinopec (see More Pieces, But Chinese Inventories Remain Puzzling).



  • Benchmark crude oil prices waxed and waned throughout September but continued to trade in the relatively narrow $65-$75/bbl range seen over the past three months.  Growing concerns over mounting distillate stocks and worries about the pace and depth of a global economic recovery added a downward bias, with prices ending lower by $1.65-$4.90/bbl for the month.
  • Oil prices tracked the upward swings in financial markets over the month but were frequently knocked off their perch by negative economic developments, including worsening unemployment data, and continued lacklustre industrial and transportation.
  • Refining margins in September remained dismal, but directionally trends were mixed as both crude and product prices decreased across the board.  Gasoline and gasoil/diesel cracks mostly fell as the driving season in the US ended and high levels of middle distillates stocks continued to build in the Atlantic basin.  Hydroskimming margins improved, but remained heavily negative, and upgrading margins deteriorated across the board.
  • The tanker market continues to be pressured by an oversupply of vessels against the backdrop of weak demand.  The year-on-year drop in seaborne crude shipments of 1.5 mb/d has hit mainly westbound trade out of the Middle East and Western Africa.  While oil demand is expected to rise by 0.6 mb/d in 4Q09 compared with the previous quarter, high tanker fleet additions combined with a further potential drawdown in crude floating storage will keep freight rates under extreme pressure.


Benchmark crude oil prices in September continued to trade in the relatively narrow $65-75/bbl range seen over the past three months.  Oil prices were pushed lower during the month by worrisome economic data and persistently weak oil market fundamentals, not least continued lacklustre industrial and transportation demand for diesel and other middle distillates.

Varying market dynamics in the Atlantic basin saw average futures prices for WTI decline in September by $1.65/bbl, while North Sea Brent was down a steeper $4.90/bbl, to around $69.50/bbl and $68.15/bbl respectively.  The relative strength for WTI reflected a drawdown to the lowest levels this year in crude oil stocks held at the key Cushing, Oklahoma storage depots, while volumes of some North Sea crudes increased following completion of oil field maintenance work.

Heightened tensions over the nuclear standoff with Iran tempered the downturn by the end of September, but by early October apparently cooperative dialogue between Iran and the International Atomic Energy Agency (IAEA) calmed market fears of a potential supply disruption, or worse.  Concern about a show-down with Iran over its nuclear programme was also muted, in part because OPEC currently holds more than 5.4 mb/d in spare production capacity.  WTI and Brent were trading in a $68-72/bbl range at the time of writing.

While market perception turned a bit gloomier on worries over swelling stockpiles of distillates, OPEC's own economists were resolutely upbeat about the global economy and prospects of increased demand for the group's crude at their 9 September meeting in Vienna.  OPEC ministers largely agreed that there was little need for further target cuts given stable prices of around $65-$75/bbl.  Concern about the relatively high level of global inventories was cast aside at the meeting, with expectations that the economy will pick up in 4Q09, helping soak up both crude and product stocks.  Perhaps underscoring the group's optimism, latest data for September show OPEC production up by just 120 kb/d, to 28.9 mb/d, about 1.6 mb/d shy of the 4.2 mb/d cuts in place since last September.

Reports that several key Nigerian rebel leaders in the Delta oil-producing region had agreed to a government ceasefire triggered selling as it raised the prospect of increased crude oil flows into an already saturated market.  Yet it is far from certain that the latest calm will last.  Militants who rejected the government's amnesty programme said on 7 October that they would start attacking the country's oil infrastructure when the ceasefire ends on 15 October.

Futures Markets

Futures prices continued to track global financial and equity market expectations, which directionally exerted pressure to the upside.  As the recovery from the global economic crisis unfolds, oil traders have increasingly looked to financial markets for signs of 'green shoots' in the broader economy, which ultimately will trickle down to a recovery in oil demand.  Oil prices and broader financial markets have had a fairly strong correlation for the past year.  Of late, the link has become more tenuous as weak supply and demand fundamentals appear to be exerting more pressure to the downside.

CFTC Unveils New Disaggregated Report

The US Commodity Futures Trading Commission (CFTC) released a new disaggregated version of the Commitments of Traders (DCOT) report in September, as part of its effort to increase market transparency.  The new format is designed to better reveal the role of investment banks and index traders, among others, in commodities markets.

However, the time series currently available is as yet too small to draw meaningful conclusions.  The CFTC plans to publish three years' of historical data under the new format later this month, which should enable more detailed analysis.  For the time being, the report will be published alongside the original Commitments of Traders (COT) report.

In the disaggregated version, the two original categories (commercial and non-commercial) are each broken down further according to the traders' predominant business activity, making four new categories:

  • Producer/Merchant/Processor/User - Commercial producers or other users of a physical energy commodity.
  • Swap Dealers - Entities, e.g. investment banks, which manage or hedge the risk associated with their swap transactions.
  • Money Manager - Commodity traders who trade futures on behalf of clients, like hedge funds or index funds.
  • Other Reportables - Small volume traders or others who do not fall within the three categories outlined.

The new report is expected to provide greater depth on activities of swap dealers, which were previously included in the commercial category.  However, one current flaw with the report is that it does not fully capture information about the swap dealer's counterparties.  These may be speculative traders, such as index fund managers or traditional commercial users that hedge risks arising from dealings in the physical commodity market.  What the new report does show is that most of the swap dealers hold their positions in an offsetting number of long and short contracts, otherwise known as spreading.

The disaggregated commercial and non-commercial categories still contain the same number of contracts as before.  The COT report for the week of 29 September shows commercial players hold net short positions of 50,069 NYMEX WTI futures contracts.  According to the DCOT, the Swap Dealers hold 145,520 net long contracts and are offset by Producers/Merchants having net short exposure of 195,589 contracts.  Similarly, net long non-commercial players hold 42,142 contracts, comprising net long 60,002 contracts held by Money Managers and net short 17,860 contracts of Others.

Open interest rose by 53,610 contracts the week of 29 September compared with 22 September.  Commercial traders decreased their net short positions by 19,737 lots, with Swap Dealers' net long holdings rising by 17,356 contracts versus falling net short exposure of 2,381 contracts by Producers/Merchants.  On the non-commercial side, net long positions fell by 20,074 contracts, when Money Managers axed net long exposure by 38,029 lots and Others reduced their net short positions by 17,955 contracts.  The remaining increase of 337 net long contracts comes from Non-Reportables, shown in both COT and DCOT.

Among a multitude of other factors, the flow of money into futures markets partly reflects investor attempts to hedge against inflation and a weaker US dollar.  The inverse relation between the US dollar index and NYMEX WTI price has been strong of late even if the longer-term correlation is much less evident.  A London newspaper report in early October claiming Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the US dollar with a basket of currencies for most oil sales has been roundly denied by officials on both sides.  Indeed, a change from pricing oil in dollars has been muted before, recently by Venezuelan President Hugo Chavez.  However, while at various times the dollar can be an imperfect denominator, so too are other options explored in the past.

The contango for NYMEX WTI futures narrowed sharply in September, averaging 44 cents/bbl compared with $1.43/bbl in August.  The narrower contango prompted companies holding crude on tankers and at onshore storage tanks in Cushing, Oklahoma to sell off their stocks.  Meanwhile, WTI solidly regained its more typical premium over Brent in September.  The WTI premium over Brent average $1.32/bbl in September compared with a discount of $1.92/bbl in August.

Spot Crude Oil Prices

Spot crude oil prices were down on the month, in part following futures lower, but also on reduced buying by refiners.  Economic run cuts and worries over the economy curtailed buying interest.  Despite relatively lower runs in recent months, US, Asian and European refiners are still grappling with swelling stockpiles of refined products, especially middle distillates.  Spot crude barrels were also under pressure from the narrowing of the contango and the unwinding of crude storage plays in the US Mid-continent.  Cushing storage levels fell to the lowest level this year.

OPEC's cutback of heavy and medium sour crudes helped lift prices of competing grades in recent months, but demand for heavy crude oil is now easing due to reduced runs of coking units in the US.

Increased supplies of Nigerian and UK North Sea crude also weighed on Atlantic basin markets.  After months of reduced exports due to militant attacks on the country's infrastructure, a rebound in Nigerian production in September has left many unsold barrels on offer in the market.

In Europe, Iraqi crude quality problems have buyers seeking alternatives such as Russian Urals but customers are complaining retroactive official prices are too high.  The heavier Basrah quality, however, has not deterred Asian buyers since the higher yield of fuel oil is currently much in demand.  The normal API gravity for Basrah is 31-32°, but in recent months it has been averaging a heavier 29-30° API due to the addition of fuel oil.  State marketer SOMO is discounting the price by ¢4/bbl for every degree drop below 34° API.

Spot Product Prices

Refined product markets moved lower in tandem with weaker crude levels in September.  Spot prices were down across the board for all products in all major markets.  Only fuel oil showed any relative strength over the month, with continued cutbacks of heavier, sour Middle East crudes the main prop for the market.  The light end of the barrel posted the sharpest declines in September, with gasoline cracks shedding about $2-3/bbl in Europe and Singapore, and $4-6/bbl the US.  However, by early October European gasoline cracks rebounded above $5/bbl, after hitting six month lows of around $2/bbl in late September.

Middle distillate markets are being battered on all fronts.  Across the oil complex nowhere is the reversal of fortune more pronounced than in the diesel market.  Diesel led the market higher to record levels two years ago, and now it threatens to lead it lower this year.  After ranging from $15-$25/bbl in 1Q09, gasoil and diesel cracks to benchmark crudes have steadily eroded.  However, a semblance of stability emerged in September, with cracks stabilising in the $5-$10/bbl range although this may reflect tighter specifications ahead of winter.

The much-anticipated rebound in industrial and transport demand for diesel remains elusive while stocks are brimming over, with swelling offshore storage at unprecedented levels.  While Europe, Japan and the US implement economic run cuts to stem the build of gasoil/diesel supplies, new refining capacity in China, India and Vietnam continues to flood the market with unwanted supplies.

The emergence of China as a net exporter of diesel and gasoline this year, following the start-up of new refineries, and guaranteed refining profits in domestic markets, has been a game changer for the region.  Persistently high Chinese throughput rates continue to threaten profit margins at neighbouring refineries.  But on the flip side, China also holds the promise of reversing the region's fortunes when the country's economic engine gathers steam again.

Fuel oil cracks generally rebounded again in September as markets tightened on reduced processing of heavier sour crudes.  High sulphur cracks in Singapore strengthened on stronger demand for bunker fuel in Singapore and from the UAE's Jebel Ali port.  Increased demand from Pakistan also helped support regional prices.

Refining Margins

Refining margins in September were weak, but directionally trends were mixed, as both crude and product prices decreased across the board.  Gasoline and gasoil/diesel cracks mostly fell as the driving season in the US ended and high levels of middle distillate stocks continued to build in the Atlantic basin.  The fuel oil discount to crude narrowed as OPEC's production cuts of heavier crudes limited fuel oil availability.  Naphtha differentials to crude improved as demand from the petrochemical industry increased.  Therefore, hydroskimming margins improved, but remained heavily negative, and upgrading margins deteriorated across the board.

In Europe, margins for cracking configurations decreased mainly on weaker gasoline and gasoil/diesel differentials to crude.  The Brent cracking margin improved only marginally in spite of a month-on-month price fall of more than $5/bbl.  Similarly, lower Urals and Es Sider prices were insufficient to improve cracking margins.

In the US Gulf Coast, margins decreased for both cracking and coking configurations, again on weaker gasoline and gasoil/diesel differentials to crude.  Cracking margins were down nearly $1/bbl and coking margins off by around $1.80/bbl.

In Singapore, margins generally improved although they remained in negative territory.  The price differential between extra-light sweet Tapis and medium sour Dubai narrowed by nearly $3/bbl, highlighting the relative price strength of sour to sweet crudes, improving Tapis margins accordingly.  However, Dubai margins still outperformed Tapis by more than $1.50/bbl for hydroskimming and $1/bbl for hydrocracking configurations.

Upgrading margins deteriorated on a monthly basis as weak gasoline and gasoil/diesel crack spreads weigh more heavily on complex configurations, and stronger fuel oil crack spreads relatively favour simple configurations.  In the US Gulf Coast, the cracking to coking upgrading margin remained negative for the entire month; reports of upgrading capacity shutdowns suggest some refiners are taking the necessary actions to offset this.  In Singapore, the hydrocracking to hydroskimming differential briefly touched negative territory by the end of the month and in NW Europe, the cracking to hydroskimming upgrading margin touched a month-low level not seen since November of 2003.

Demand prospects for middle distillates in OECD countries remain bleak in the near term, especially given the high stock levels and mix of crude qualities in the market, which may force further rationalisation of upgrading units as well as continued economic run cuts well into 2010.

End-User Product Prices in September

End-user product prices in US dollars ex-tax fell on average by 0.5% month-on-month in September.  However, a closer look uncovers very different trends in the surveyed IEA member countries.  Prices in Japan continued rising by 6% month-on-month across all product categories, with gasoline prices up by 6.9%.  On the other side of the spectrum, prices in European countries, with Germany at the top, saw end-user product prices drop by 1.6% on average.  European consumers paid on average between €1.06/litre ($1.52/litre) in Spain and €1.31/litre ($1.87/litre) in Germany for gasoline.  In the US the average price at the pump was $2.55/gallon ($0.68/litre) and in Japan ¥128.9/litre ($1.39/litre).  Average retail product prices for all countries surveyed were 31.1% below levels of a year ago.


The tanker market continues to suffer from an oversupply of vessels and weak oil demand.  Entering October, a year-on-year reduction of seaborne crude exports of 1.5 mb/d has hit mainly westbound trade out of the Middle East and Western Africa.  While oil demand is expected to rise by 0.6 mb/d in 4Q09 compared with the previous quarter, high tanker fleet additions combined with a further potential crude floating storage draw-down will keep crude freight rates under extreme pressure, as reflected in continuously depressed October crude tanker fixtures.  Some relief came for long-haul product tankers this month, especially east of Suez, supported by higher distillate exports from Asia to Europe and a very high 75 mb of products, which is tying up short-term floating storage.

Dirty rates on the benchmark VLCC route Mideast Gulf - Japan initially fell from $7/mt at end-August to $6/mt, before rising steadily over the remainder of September, ending at $9/mt as some ship-owners decided to withdraw from the market.  Rates for Suezmax West Africa - US Atlantic Coast fell from end-August heights of $14/mt to $10/mt, touching $13/mt at the month-end, but were down at $11/mt in early October, still in the lower end of the five-year range.  Asian refiner purchasing of West African crude has supported freight rates on this route since July, but their appetite now seems to have diminished.  Some market observers forecast West African crude exports to Asia to drop in October compared with recent months, which may be bearish for rates.  Aframax North Sea - North West Europe rates have moved little and remain mired at around $4/mt, below operating cost.

Clean rates on the benchmark Aframax Mideast Gulf - Japan route rose throughout the month from $21/mt at end-August to $31.5/mt at end-September, the highest quotation so far this year and within the five-year range.  New refinery centres in Asia have been aggressively targeting sales of products in Western Europe and the USA, sending large product tankers on long-haul voyages transporting gasoline and gasoil.  While demand is still weak, a persistent contango signals hopes that a cold winter will diminish the product overhang.  Rates for Handymax South-East Asia - Japan rose slowly, but steadily from the end-August level of $10/mt up to just above $12/mt.  Rates for 25kt UK coast -US Atlantic Coast trades ended the month at $14/mt, somewhat above end-August levels but down from a mid-month peak of $15/mt, and well below break-even levels.  Rates for Handymax Caribbean - US Atlantic Coast have stayed stable at around $9/mt since July, below the five-year range.

Short-term floating storage of crude has fallen almost 70 mb since its peak in April.  Short-term floating storage of products has risen by 25 mb to 75 mb over the third quarter, mainly off Northwest Europe.  While the contango for crude is flattening, the contango for distillates still works in Northwest Europe.

In spite of tanker oversupply, relatively few oil tankers have been laid up.  Lay-up costs are higher than previously due to more on-board electronics.  Three VLCCs were reportedly sold for scrapping in August, and three at the beginning of September.  However, the pace of new-builds entering the market is higher, and buoyant order books are expected to keep the tanker market oversupplied for years to come.



  • Projected 4Q09 global crude throughput is reduced by 0.2 mb/d to 73.2 mb/d as further weakness in refining margins undermines the outlook for activity levels in the coming months.  Declines in OECD Europe and North America compound lower Latin American projections.  These reductions are only partially offset by higher Other Asian estimates, following stronger 3Q09 data.
  • Preliminary data indicate that 3Q09 global crude runs averaged 72.7 mb/d, some 0.6 mb/d higher than in last month's report, following stronger-than-expected crude runs in Other Asia, notably in Chinese Taipei, Indonesia and Thailand during June and July.  In addition, a further re-evaluation of Indian refinery runs, in light of Reliance's Jamnagar refinery expansion reportedly reaching full utilisation in September, raises August and September estimates.

  • August OECD preliminary data indicate crude runs averaged 36.4 mb/d, 0.3 mb/d ahead of last month's report, with stronger than expected runs in Korea raising OECD Pacific runs above our estimate.  This upward revision is carried through September and October for the region, although the period remains a seasonal low point in activity levels as planned maintenance levels peak.
  • In July, OECD refinery yields increased for naphtha, jet fuel/kerosene and fuel oil. Gasoline yields fell to 34.6%, as premia to crude continued to deteriorate across the board and summer demand in the US was lower than expected.  Gasoil/diesel yields continued their downward trend, reaching levels below the five-year average, with yields in North America and Europe decreasing counter-seasonally on very high stock levels.  OECD total product gross output contracted by 4.1% year-on-year in July (1.9 mb/d).  All three OECD regions posted lower production figures.  European output contracted by 5.4%, North America decreased by 2.4% while the Pacific fell by 6.9%.

Global Refinery Overview

Weak refining margins continue to weigh on global crude throughputs.  Evidence continues to emerge of refineries becoming increasingly more proactive in dealing with the poor cash flow generated from operations.  European refineries appear to have been particularly active in cutting runs, although this may be due greater visibility to the market, rather than an inherent predisposition to act.  Nevertheless, the proximity to significant floating products storage leads us to once again trim European forecasts.  Until floating stocks have been worked off by tighter market conditions and an accompanying rise in margins throughput seems likely to remain subdued.

The recent strengthening of gasoil/diesel cracks appears to reflect a shift towards tighter winter quality specification material and possibly a spate of hydrotreater turnarounds rather than any meaningful and sustainable improvement in market fundamentals.  Consequently, we continue to see refiners struggling to raise global crude runs, with the following notable exceptions:

  • Firstly, Chinese refiners continue to report strong annual increases of nearly 1 mb/d in crude throughputs, despite seasonal maintenance trimming crude runs slightly during August.
  • Secondly, the ongoing ramp-up in Reliance's 580 kb/d expansion of the Jamnagar refinery in India, continues to be under-reported within official statistics, and suggests that annual growth of around 0.5 mb/d will continue for the balance of the year.
  • Lastly, Russian crude runs remain at close to record levels, given the substantial tax incentives to maximise exports of products in preference to exports of crude.

Elsewhere, crude runs remain under pressure, although as noted last month the drop in Japanese kerosene stocks below the five-year range may, in time, prompt a response from refiners, were robust seasonal demand to materialise at some point.  Similarly, the reports of a recovery in petrochemical demand for naphtha might also provide some added incentives for higher runs, although competition from low-cost supplies from the Middle East is expected to remain intense over the medium term.

Global Refinery Throughput

3Q09 global refinery throughput estimates are revised up by 0.6 mb/d following the removal of the September hurricane adjustment from US estimates, stronger than expected OECD Pacific preliminary data and upward revisions to Indian data as Reliance's Jamnagar refinery expansion reaches full capacity.  Nevertheless, 3Q09 crude throughputs of 72.7 mb/d represent an annual decline of 1.2 mb/d, albeit September year-on-year comparisons are distorted by hurricane-related baseline disruption.

Conversely, 4Q09 projections have been lowered by 0.2 mb/d, to 73.2 mb/d and represent annual and quarterly growth of 0.4 mb/d.  Unsurprisingly, the main drivers of this revision are the continued weakness in refining margins and build-up in global middle distillates stocks, particularly those stocks held offshore.  The greater proportion in Europe and US of independent refineries, who arguably must defend their profitability more vigorously, suggests a greater response in these regions.

Crude throughput projections are extended this month through to January 2010.  Crude runs are forecast to average 74.0 mb/d, potentially the highest level since August 2008.  Seasonal strength in runs in OECD Pacific should underpin a month-on-month increase, while the assumed start of seasonal maintenance at US refineries in January undermines North American runs.

OECD Refinery Throughput

Preliminary data for August indicate that OECD crude throughput averaged 36.4 mb/d, a drop of 2.2 mb/d compared with last year, but flat on July's level.  However, compared with July, weaker European runs were offset by higher activity in the OECD Pacific.  Overall, OECD refining activity remains subdued by weak margins, high distillate stocks and tepid regional demand.

North American August crude throughput remained flat for the second month in a row, at 17.6 mb/d, with activity subdued by weak margins.  Industry reports suggest that an increasing number of refiners are proactively trying to support margins by idling of both crude distillation and upgrading capacity.

Weekly US data showed that activity levels showed some strength early in the September, but the continued poor profitability of cracking and, more importantly, coking activities for US refineries, have hampered overall throughput levels.  Furthermore, the start of planned maintenance looks to have depressed US crude runs in the latter half of September and is expected to do so again in October.  4Q09 projections have been reduced by 0.2 mb/d for both Europe and North America in light of prevailing economic factors and middle distillate stock levels, given the greater proportion of profit-driven operations in these regions.

Notably, the announced shutdown of Sunoco's Eagle Point refinery for an indefinite period highlights the depth of cuts necessary to cope with current market conditions.  The step also shows the potential benefit that independent refiners may obtain from fully closing one refinery within their portfolio, rather than running all plants at 80%, due to the nature of refinery economics.

European crude runs fell in August to 12.2 mb/d, equalling the 10-year low seen in March.  Further weakness in September and October is expected for economic and logistical reasons, and planned maintenance.  The economic closures highlighted last month, and ongoing partial disruption to crude supplies via the SPSE pipeline in southern France, suggest further weakness in French, Swiss and possibly German crude runs is probable.  Moves by Repsol in Spain to cut runs by 20% at its 120 kb/d La Coruña refinery and close the coking plant, plus 40% run cuts at its 220 kb/d Bilbao refinery, once again highlight the difficult choices facing refiners.  At the heart of this issue lies the tight fuel oil and heavy sour crude markets on the one hand and weak light and middle distillate cracks on the other.

OECD Pacific August crude runs were 0.2 mb/d above expectations thanks to stronger Korean runs.  We have reflected this better-than-expected performance in our September estimate.  Elsewhere, continued low utilisation of Japanese refining assets remains the dominant theme for the region.  Announcements by the major refining groups suggest October runs will remain almost 10% lower than previous years' levels, although as noted already the tighter kerosene stock levels now reported by PAJ may offer some incentive to raise runs if robust demand for kerosene re-emerges during the winter.  Korean refineries continue to perform well compared with other OECD Pacific countries, notably Japan.  4Q09 crude runs are expected to recover to 6.6 mb/d by December, some 0.4 mb/d above current levels, but still 0.4 mb/d below December 2008 levels.  Preliminary industry reports suggest that runs may rise further in January, but as previously highlighted any recovery is likely to need a demand for kerosene and also possibly naphtha to return to normal seasonal levels.

Non-OECD Refinery Throughput

Non-OECD runs were stronger than expected in July and August, based on preliminary data.  Chinese crude runs were again in line with expectations, but remain well above 2008 levels following the start-up of more than 0.5 mb/d of capacity since the beginning of the year and the positive margin environment that state refiners enjoy on domestic sales.  However, although profit margins are still guaranteed, lower domestic prices may weigh on crude runs in the coming months.  Crude runs will be boosted by the official start-up in late September of a 200 kb/d crude unit at Dushanzi to process imported Kazakh crude will boost runs.  Offsetting these positive factors is the poor profitability of exports, given weak crack spreads in Asian markets, which may ultimately temper crude runs.

Upside surprises to 3Q09 centred on Other Asia, with better-than-expected progress at the 580 kb/d Jamnagar refinery expansion in India underpinning much of the upward revision.  Industry reports indicate that this plant is now running near full capacity, and with Reliance crude imports at over 1.2 mb/d in August we estimate that official Indian data likely understates the true level of crude runs by around 0.5 mb/d.  Elsewhere in the Other Asia region, reported crude runs were broadly ahead of expectations, with Chinese Taipei and Thailand once again performing better than expected.  The resumption of crude processing at Vietnam's Dung Quat plant in October is in line with previous expectations.  In total, the combination of the stronger than anticipated performance of the Jamnagar refinery and higher demand estimates leads us to revise up our 4Q09 Other Asia forecast by 0.4 mb/d to 8.2 mb/d.

Russian crude runs averaged 4.9 mb/d in August, in line with expectations and close to five-year highs, as strong incentives to maximise crude runs to capture the tax benefits of exporting products over crude remain.  Elsewhere in the FSU, Ukrtransnafta, the operator of the pipeline running from Samara via Lisichansk and Kremenchug to Odessa decided to reverse the direction of crude oil flows in the last leg of the pipeline.  This will allow the supply of oil to the troubled Kremenchug refinery, which has been struggling to secure crude supplies for the past two years.  The reversal of the line to flow northeast to the Kremenchug refinery has allowed Ukrtransnafta to ship alternative crudes, including Azeri Light, from Odessa up the line to the refinery.

However, as a result of Ukraine's decision to reverse the pipeline flow, crude supplies to Lukoil's Odessa refinery have been cut off and Lukoil was forced to halt operations at the plant after it was unable to secure alternative economic crude oil volumes for October.  The company is now exploring other options for crude feedstock for its refinery.

4Q09 Latin American crude runs are lowered by 0.2 mb/d this month, following Valero's closure of the Aruba refinery for an indefinite period.  Citing economic pressures and the fact that the refinery produces mainly feedstocks for the broader Valero refining system the plant is likely to remain offline until the margin environment improves.

Ongoing reliability problems with Venezuela's refineries have not yet prompted us to cut our estimates of crude processed there, as issues appear to centre on upgrading units, notably the recently expanded catalytic cracker at PDVSA's El Palito refinery.  In the absence of reliable data, we assume that gasoline imports have increased to meet the shortfall in domestic supply, while VGO exports have also increased.  Perhaps, if there is a silver lining to this particular cloud, it may be that such a move is not as financially disadvantageous as would have been the case in previous years, given the tight fuel oil market and depressed state of the gasoline market.

OECD Refinery Yields

In July OECD refinery yields increased for naphtha, jet fuel/kerosene and fuel oil at the expense of gasoline and gasoil/diesel, while yields for 'other products' remained unchanged.  Only gasoline yields stayed above their five-year range.  Gasoil/diesel yields are now below the five-year average as growing stock levels in the Atlantic basin have weakened crack spreads.  Yields for other products also remained below their five-year ranges.

OECD gasoline yields fell to 34.6%, albeit remaining well above their five-year range, as its premium to crude continued deteriorating across the board and summer demand in the US came up lower than expected.  In North America and the Pacific, yields remained above their five-year range, while in Europe they reached the five-year average level.

Naphtha yields increased sharply from near five-year lows, supported by stronger crack spreads.  A fall in North America was more than offset by a counter-seasonal increase in Europe and a spike of more than 1.5 percentage points in the Pacific as demand from the petrochemical sector increased.  It is worth noting than in July, naphtha demand in the Pacific and Europe increased on both a monthly and yearly basis, and that in the Pacific gross output increased by 18.9% (130 kb/d) and net imports by 16.0% (125 kb/d) month-on-month.  The boost in naphtha demand is partly related to the manufacture of plastic components as demand for cars in China is burgeoning, and the "Cash for Clunkers" programmes in the US and Europe had already increased vehicle demand.

Gasoil/diesel yields continued their downward trend, falling below their five-year average, with crack spreads lower than those for jet fuel/kerosene across the regions.  Yields in North America and Europe decreased counter-seasonally on very high stock levels, while in the Pacific they fell in line with seasonal patterns.

Jet fuel/kerosene yields rebounded seasonally, with yields in Europe and North America increasing sharply.  In the Pacific, yields fell marginally and counter-seasonally. In Japan, jet fuel/kerosene demand remains particularly subdued, with a contraction of 17.8% on a yearly basis.  Fuel oil yields increased slightly, supported by stronger crack spreads across the board as demand for bunker fuel strengthened and the availability of sour crudes diminished.

OECD Refinery Gross Output and Trading Patterns

In July, OECD total product gross output contracted by 4.1% year-on-year (1.9 mb/d).  All three OECD regions continued to post lower output.  European output contracted the most with a 5.4% fall (836 kb/d), North American output decreased by 2.4% (530 kb/d), while in the Pacific output fell 6.9% (512 kb/d).  By contrast, July OECD output was up by 282 kb/d (0.7%) versus June, muted relative to the five-year average increase of 1.1%, with output in Europe and the Pacific increasing by 2.1% (305 kb/d) and 2.4% (164 kb/d), respectively.  In North America, meanwhile, output fell 0.8 % (187 kb/d).

Only total OECD gasoline gross output increased by 3.6% on a yearly basis (516 kb/d), with most of the rise corresponding to North America (510 kb/d), partially compensated by a decrease of 237 kb/d in net imports.  It is worth mentioning that our yield calculation includes the ethanol blended in gasoline, which in the case of the US has increased continuously in the last few years.  The EIA reported 673 kb/d being blended in July, which represents a year-on-year increase of 139 kb/d or 20.7%, arguably displacing US gasoline imports.

July OECD gasoil/diesel gross output decreased the most, both in absolute and percentage terms, 9.2% or 1.2 mb/d vs. July 2008.  In North America, both gasoil/diesel output and net exports fell by 595 kb/d and by 115 kb/d, respectively, while in Europe, gross output fell by 415 kb/d and net imports increased marginally.