Oil Market Report: 12 November 2009

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  • Crude oil prices rose to their highest level in more than a year in October with WTI and Brent futures up an average of $6/bbl, to $75.82/bbl and $73.93/bbl, respectively.  Growing expectations for economic recovery boosted markets, with WTI reaching over $81/bbl before settling in a $75-80/bbl range by early November.
  • Global oil supply in October rose by 635 kb/d to 85.6 mb/d.  OPEC production attained its highest level since January 2009, up by 110 kb/d to 29.0 mb/d.  The 'call on OPEC crude and stock change' for 2010 is revised up 100 kb/d to 28.5 mb/d, on higher demand and a 300 kb/d downward revision to OPEC NGLs.  The 2009 call averages 28.7 mb/d.
  • Non-OPEC supply is revised up 130 kb/d for 2009 and 350 kb/d for 2010 on stronger US GOM, Norway and Russia estimates.  Output is forecast at 51.1 mb/d in 2009 and 51.9 mb/d in 2010.  Production rose 380 kb/d in October to 51.4 mb/d as North Sea maintenance ended.  Tropical Storm Ida shut-in 560 kb/d (43%) of US GOM output in early November, though reports indicate no lasting damage.
  • Global oil demand is revised up 210 kb/d for 2009 and 140 kb/d for 2010, on stronger preliminary data in OECD North America and buoyant demand in non-OECD Asia/Middle East.  Global demand is on track for year-on-year growth in 4Q09 for the first time since 2Q08 and is now seen averaging 84.8 mb/d in 2009 (-1.5 mb/d year-on-year) and 86.2 mb/d in 2010 (+1.3 mb/d versus 2009).
  • OECD industry stocks rose by 1.6 mb in September to 2,774 mb, 4.3% above last year's level.  Gasoline and distillates built in North America while crude and distillates drew in the Pacific and Europe, respectively.  End-September forward demand cover fell to 60.0 days from 60.9 days, but remained 3.8 days higher than a year ago.
  • Global refinery crude throughput in 4Q09 is reduced by 0.3 mb/d to 72.8 mb/d as higher crude oil prices, falling OECD demand and high middle distillate inventories continued to undermine margins.  Higher China and Other Asia estimates, following stronger 3Q09 data, only partly offset downward revisions from lower reported OECD runs.

Not so disconnected?

Concerns persist over an apparent disconnect between prevailing market fundamentals and $75-$80/bbl crude prices.  True, OPEC nominal spare capacity is around 6.5 mb/d, and OECD inventory demand cover only just dropped back to 60 days at the end of September.  But equally, the extent to which global oil supply in 2009 has matched the downward path of oil demand is striking.  Quarterly demand began rising again in 3Q09 after six successive quarters of decline, but only after having lost 3.5 mb/d from late-2007 highs in the face of a game-changing economic recession.

Non-OPEC supply and OPEC NGL have risen marginally since mid-2008, but OPEC production curbs at their height took around 3 mb/d off the market (although leakage has been evident since 1Q09).  So, the crude market 'surplus' (as distinct from middle distillates) was largely a hangover from last year's economic collapse, since when upstream supply has broadly matched demand.  Meanwhile, concerns persist about the adequacy of upstream spending and capacity ahead of potential demand rebound, while project costs have remained stubbornly high.  So the sub-$40/bbl prices seen at the turn of the year were, purely from a crude perspective, likely to prove short-lived.  Add in a heady brew of loose monetary policy, surging equities and a weaker dollar, plus a belated arrival of the season's first Atlantic hurricane to threaten oil infrastructure, and today's crude prices may not be as disconnected as first appears.  Of course, if upward price momentum persists, this risks endangering economic recovery.  But equally, if economic prognoses are too optimistic, or the winter stays mild, market sentiment could easily weaken once again.

Pricing dynamics and the interplay between fundamental and financial flows do remain difficult to explain though.  Newly disaggregated CFTC data on futures market activity by swap dealers fails to demonstrate a primary price-driving role for this segment of the market.  The regulatory spotlight in the US and Europe is now shifting to the larger and more opaque over-the-counter (OTC) derivatives sector.

The interpretation of physical market fundamentals also remains clouded by issues of timeliness and availability of data.  This affects all countries - OECD and non-OECD alike.  However, since non-OECD countries will account for all of future demand growth (OECD demand likely peaked in 2005), the availability of regular data from these economies will come into ever-sharper focus.  This makes the recent discontinuation of public reporting of Chinese inventory data unfortunate.

The past month has also seen discussion of further apparent disconnects in the pricing arena, which may ultimately prove less puzzling than they first appear.  Saudi Arabia next year will shift the pricing basis for its North American crude sales from WTI to the Argus Sour Crude Index.  This is logical in terms of crude quality and since WTI prices can swing widely due to fluctuating imports from Canada and logistical constraints around the Cushing delivery point for the WTI contract.  The debate on abandoning the dollar for a substantial portion of crude oil sales also continued, although major producers and consumers were keen to play this down.  With more than 60% of global currency reserves held in dollars, not least by the Mideast Gulf producers and by China, the financial implications of dropping the dollar would be dire for these players in the short to medium term.  Finally, much has been made of the disconnect between spot and contract natural gas prices.  But a multitude of suppliers competing within a market where demand has collapsed was always likely to see lower spot gas prices in order to clear the market.  One upshot may be that highly competitive spot natural gas will put a further brake on OECD heating oil sales for the coming winter.  The market has flipped from the 2007/early-2008 situation, when distillates provided a strong prop for crude prices, to one in which they could now exert downward pressure.  Despite recent signs of readjustment in the sector, OECD refiners may therefore face high middle distillate stocks and an imperative to curb runs for a while longer.



  • Forecast global oil demand is revised up by 210 kb/d for 2009 and by 140 kb/d for 2010, following stronger-than-expected preliminary data in OECD North America and buoyant demand in non-OECD Asia and the Middle East.  Global oil demand is now averaging 84.8 mb/d in 2009 (-1.7% or -1.5 mb/d year-on-year) and 86.2 mb/d in 2010 (+1.6% or +1.3 mb/d versus 2009).  The pace of demand contraction is easing in the OECD, while demand in non-OECD countries is exceeding expectations.  This would suggest that global demand is well on track for resumed year-on-year growth in 4Q09, for the first time since 2Q08.
  • Forecast OECD oil demand has been increased by 80 kb/d for 2009 and 10 kb/d for 2010.  Upward revisions in North America and the Pacific offset downward adjustments in Europe.  Oil demand is thus expected to contract by 4.3% year-on-year (-2.1 mb/d) to 45.5 mb/d in 2009 and remain largely flat in 2010 (-0.1%).  However, the demand picture remains uncertain, notably in the US.  Weekly-to-monthly data revisions become more difficult to anticipate, and diesel demand - strongly correlated to economic activity - continues to languish.  It would thus seem that the 'real' US economy, as opposed to the financial one, is struggling to recover, despite the end of the recession.

  • Forecast non-OECD oil demand has been adjusted up by around 130 kb/d for both 2009 and 2010, following a reassessment of the demand outlook in Asia (China) and the Middle East (Saudi Arabia).  Growth in both countries continues to be largely driven by 'other products' in China, reflecting stimulus-induced infrastructure spending, and direct crude burning in Saudi Arabia for power generation.  Demand is now expected to average 39.3 mb/d in 2009 (+1.6% or +0.6 mb/d year-on-year) and 40.7 mb/d in 2010 (+3.6% or +1.4 mb/d versus 2009).

Global Overview

This month's report has revised up forecast oil demand for both 2009 and 2010, on the back of surging demand in China and Saudi Arabia, as well as somewhat higher-than-anticipated data for the US.  Thus, global oil demand is expected to average 84.8 mb/d in 2009 (-1.7% or -1.5 mb/d year-on-year and +210 kb/d higher when compared with our last report).  Next year, oil demand is expected to rise to 86.2 mb/d (+1.6% or +1.3 mb/d versus 2009 and +140 kb/d higher than previously expected).  Several developments are worth noting:

  • According to preliminary data, year-on-year demand growth among the world's twelve largest consumers - US, Europe 5 (France, Germany, Italy, Spain & UK), China, Japan, India, Russia, Brazil, Saudi Arabia, Canada, Korea, Mexico and Iran - was marginally positive in September (+0.03%), for the first time since July 2008.  As these countries collectively account for over 70% of global demand, this could be interpreted as proof that the global economy is on the mend (although total global demand fell in September by -0.4% year-on-year.)  However, this modest rebound among the largest consumers must be judged versus a very low base, as demand plummeted in September 2008.  Signs of renewed growth thus remain tentative.

  • Growth continues to be largely driven by 'other products' in China, reflecting stimulus-induced infrastructure spending, and direct crude burning in Saudi Arabia for power generation - rather than by more conventional industrial production, which is a better gauge of sustained economic activity.  Indeed, global gasoil demand - which powers the railways and trucks that underpin global industrial activity and trade - remains subdued and should decline by 3.1% year-on-year in 2009, with the OECD featuring a particularly severe contraction (-5.7%), in sharp contrast to non-OECD countries (-0.3%).  Therefore, a leading indicator of a sustained economic rebound will arguably be gasoil demand, despite the likelihood that the gasoil-to-GDP ratio will decline gradually (gasoil use will fall for power generation purposes in some large non-OECD countries, notably in Asia and the Middle East, while it should continue to be displaced by natural gas for heating purposes in the OECD, particularly given gas' current price advantage).

  • Nonetheless, the pace of demand contraction is easing in the OECD, while demand in non-OECD countries is exceeding expectations.  This would suggest that global demand is well on track to feature year-on-year growth in 4Q09, for the first time since 2Q08.  (Note:  in last month's report we incorrectly stated that we had revised our nominal price assumption for 2009 to roughly $71/bbl, but we actually meant 4Q09.  The average for 2009 is likely to be around $60/bbl.)
  • Looking ahead, however, the recent price spike, if further extended, risks derailing the recovery.  Not only that, but oil demand itself would rebound much more slowly were the price rally sustained into 2010.  The prospects for lower demand growth in 2010, primarily under a lower GDP scenario but also if prices were to rise further and for longer, were highlighted in last month's report and estimated to represent a downside sensitivity of some 0.7 mb/d.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 3.5% year-on-year in September, with all three regions recording losses for the seventeenth month in a row.  In OECD Europe, oil product demand tumbled by 6.8% year-on-year, with all product categories bar diesel posting losses.  In OECD Pacific, demand dropped by 6.1% despite a rebound in LPG, naphtha and jet fuel/kerosene demand.  By contrast, the demand contraction in OECD North America (which includes US Territories) was marginal (-0.2%), as strong LPG, gasoline and residual fuel deliveries counterbalanced the continued decline in middle distillates.

Revisions to August preliminary data amounted to +270 kb/d, notably from stronger-than-anticipated diesel demand in North America.  Yet August demand contracted by 3.8% year-on-year, only slightly less than previously reported (-4.4%).  Nonetheless, OECD oil demand is slightly revised up for this year (+80 kb/d) and next (+10 kb/d) when compared with last month's report.  Demand is thus expected to contract by 4.3% in 2009 to 45.5 mb/d and remain virtually unchanged in 2010 (-0.1%).

North America

Preliminary data show that oil product demand in North America (including US Territories) fell by 0.2% year-on-year in September, the 21st monthly contraction in a row.  Although the decline in Canada appears to have been significant (-2.5%), it was marginal in the US (-0.1%).  By contrast, Mexico posted modest growth (+1.4%).

Revisions to August preliminary data were substantial (+480 kb/d), almost entirely due to the US, with large upward adjustments in both gasoline and diesel offsetting much lower readings for 'other products'.  As such, total demand in North America actually contracted by 2.1% in August, roughly half the pace previously reported (-4.1%).  North American oil product demand is now seen averaging 23.3 mb/d in 2009 (-3.5% or -850 kb/d versus 2008 and +140 kb/d versus our last report), while demand in 2010 is seen rising to 23.4 mb/d (+0.4% or +100 kb/d year-on-year and some 40 kb/d higher than previously forecast).

Preliminary weekly data in the continental United States indicate that inland deliveries - a proxy of oil product demand - contracted by 0.8% year-on-year in October.  At first glance, this figure might suggest an imminent takeoff of oil demand.  However, the picture remains blurred, not least since 2008 demand already represents a weak baseline.

On the one hand, the EIA weekly-to-monthly revisions have again changed in terms of direction (down again in August, after four months of either upward or negligible revisions), magnitude (sharply down, almost -600 kb/d) and products affected (revisions were essentially concentrated in 'other products' rather than in distillate or gasoline demand, as in recent months).  As a result, our own pre-emptive weekly-to-monthly adjustments turned out to be too pessimistic, thus leading to an upward revision of +510 kb/d to our August preliminary estimate.  Since last month our pre-emptive, weekly-to-monthly adjustments have been based on a twelve-month average of previous changes, instead of a 6-month average, in order to smooth out the unexpected changes observed in recent months.  However, despite this move, as with August data, our September and October demand estimates could ultimately prove too low.  We will await the re-emergence of a more discernible trend before making further changes to the pre-emptive adjustment methodology.

On the other hand, aside from the increasing difficulty in gauging monthly demand trends from preliminary weekly data, one product category continues to consistently languish:  diesel.  Indeed, demand for this product - which, as noted earlier, is strongly correlated to economic activity - has continued to decline sharply on a yearly basis:  -8.9% in August, despite upward revisions, and as much as -11% in both September and October if weekly data are any guide.

It would thus seem that the 'real' economy, as opposed to the financial one, is struggling to recover, despite the technical ending of the recession (US GDP rose by 3.5% on an annualised basis in 3Q09, slightly above expectations).  Indeed, the rebound was mostly driven by one-off factors such as federal car purchasing incentives ('cash-for-clunkers'), a temporary tax credit for homebuyers and the gradual rebuild of depleted inventories across several industries.  Since private consumption accounts for almost three-quarters of GDP, this could suggest that economic growth going forward may be subdued, as consumers retreat again after their recent spending binge.  It is worth noting that car sales dropped by 35% year-on-year in September (the 'cash-for-clunkers' programme expired early that month).  Moreover, the personal savings rate fell by 1.6 percentage points to 3.3% of disposable income in 3Q09, a trend unlikely to continue given persistently high household debt and restricted access to credit.  Should the government withdraw its stimulus spending measures - in principle, in mid-2010 - economic activity could hence choke again, unless new measures were to be implemented, and cast further gloom on an already depressed job market (unemployment rose to a 26-year high of 10.2% in October).  This possibility in part underpinned the lower GDP and demand sensitivity contained in last month's OMR.

Overall, the outlook for US oil demand remains largely unchanged.  Oil product demand is now seen averaging 18.8 mb/d in 2009 (-3.7% year-on-year) and 18.9 mb/d in 2010 (+0.4%), some 130 kb/d and 40 kb/d higher in both years, respectively, compared to our previous forecast.


Oil product demand in Europe plummeted by 6.7% year-on-year in September, according to preliminary inland data.  All product categories bar diesel posted losses, notably naphtha, heating oil and residual fuel oil.  As in recent months, the persistent weakness in naphtha demand (-20.2%) continues to confound expectations of a sustained economic rebound, as the use of this fuel tends to track industrial production closely.  The fall in heating oil demand was expected, resulting from lower deliveries in both Germany and France, given the strong pace of consumer stockbuilds during 1H09.  Cheaper natural gas, meanwhile, continues to weigh on residual fuel oil use.

Revisions to August preliminary data were large (-220 kb/d), affecting mostly naphtha, gasoline, distillates and residual fuel oil demand.  As such, OECD Europe oil demand contracted at a steeper year-on-year pace during that month (-8.2% instead of -6.7%, as previously expected).  Consequently, total oil product demand is now expected to average 14.6 mb/d in 2009 (-4.8% or -740 kb/d versus 2008 and 60 kb/d lower than previously expected) and to barely rise in 2010 (+0.1%, some 50 kb/d lower when compared to last month's report).

Preliminary data indicate that German oil product demand, although rising from August, sank in September by 9.7% year-on-year, largely on the back of weak heating oil (-39.8%) and residual fuel oil deliveries (-17.4%).  Consumer heating oil stocks reached 68% of capacity by end-September, the highest level since October 2006, compared with 66% in August and 60% in September 2008, which suggests that deliveries are likely to remain weak for the rest of this year.  Meanwhile, cheaper natural gas supplies continued to displace fuel oil.  On a positive note, by contrast, naphtha demand was sharply revised up for August (+55 kb/d) and recorded higher-than-expected growth in September (+1.5% year-on-year), for the first time in a year.  Although naphtha demand should post relatively strong readings in the next few months given the extremely weak 4Q08 baseline, these improved figures suggest that German industrial production is faring somewhat better than previously thought.

In France, oil product deliveries continued to contract in September (-6.5% year-on-year), with lower deliveries of heating oil (-18.3%) and residual fuel oil (-25.5%), as in Germany.  By contrast, however, naphtha demand was much weaker than previously expected, having been revised down by 80 kb/d in August and recording another marked contraction in September (-9.7%).  As such, it would appear that French industry is still struggling.  Meanwhile, it is interesting to note that on-road diesel demand has been sustained since the early summer, while jet fuel/kerosene demand has sharply fallen.  This provides further evidence that during the last holiday seasons most French opted to drive to near-by locations rather than undertaking more expensive trips involving air travel.


Oil product demand in the Pacific fell for the fifteenth month in a row in September (-6.1% year-on-year), according to preliminary data.  All product categories bar LPG, naphtha and jet fuel/kerosene recorded losses, thus bringing to an end the modest improvement observed in August, when overall oil demand fell marginally (-0.1%) as Korean gains almost offset continued Japanese losses.

August data turned out to be 20 kb/d higher than expected, with upward adjustments in 'other products' deliveries barely offsetting large downward changes in middle distillate demand.  Forecast OECD Pacific demand is thus virtually unchanged, expected to average 7.6 mb/d in 2009 (-5.9% or -470 kb/d on a yearly basis and unchanged versus our last report) and 7.4 mb/d in 2010 (down by 2.2% or 170 kb/d when compared to the previous year and +20 kb/d higher than previously estimated).

According to preliminary data, Japanese oil demand contracted by 7.9% year-on-year in September, with all product categories bar LPG, naphtha and jet fuel/kerosene posting strong declines.  Naphtha demand, in particular, surged by 16.1%, which would tend to confirm a noticeable improvement in economic conditions.  Indeed, ethylene production recovered in September, mainly underpinned by rising exports to China.

By contrast, residual fuel and direct crude demand, included in 'other products', continued to post sharp losses (-46.7% and -38.1%, respectively), reflecting the continued weakness in electricity consumption, notably among large industrial users; less air conditioning at households and business given lower-than-normal temperatures in September; and possibly some substitution by cheaper natural gas.  The decline of these fuels is bound to accelerate as nuclear's share in power generation rises - Tokyo's utility TEPCO is set to restart the Kashiwazaki-Kariwa No.7 reactor for commercial purposes by end-2009.  The 1.4 GW unit, which had been damaged by an earthquake, had been conditionally restarted in May to undertake several tests, but was shut down in late September in order to replace fuel rods.

The new Japanese government is reportedly mulling whether to impose mandatory targets in order to reduce greenhouse gas emissions by 25% by 2020.  It may also institute a carbon tax and provide incentives to encourage motorists to switch to energy-efficient hybrid cars.  These moves, if implemented, would partially offset the planned abolition of the so-called 'provisional' gasoline and diesel taxes (which have been in place almost uninterruptedly since the early 1950s in order to finance road maintenance) in the 2010-2011 fiscal year (April-March).  Moreover, the government may still set a 'mileage tax' to pay for road maintenance, following the example of several European countries (such as Switzerland and Germany).  The net effect of all these measures would arguably be a faster decline in gasoline demand.



Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) surged by 15.1% year-on-year in September, with all product categories posting gains.  Demand growth, however, continues effectively to be largely driven by 'other products', which includes mostly bitumen, lubricants and coke (+38.5%).  Naphtha demand also recorded a sharp jump (+35.2%), as petrochemical production recovers.  Both product categories are arguably directly related to the effects of the government's stimulus measures - 3Q09 GDP rose by 8.9% on an annual basis, according to official statistics.  Meanwhile, gasoline demand remains vigorous (+6.8%), as car sales remain buoyant (+90% year-on-year in August, +78% in September and +76% in October), helped by generous government incentives, such as halved sales taxes on vehicles with engines under 1.6 litres.  (Luxury car sales, though, have also increased strongly, by about 45% on average, indicating rising incomes in the main urban areas).

However, as this report has previously noted, Chinese end-user demand trends are obscured by a lack of detailed inventory data.  Moreover, such data are becoming scarcer, as one of the two public sources for domestic oil stocks (Xinhua's China Oil, Gas and Petrochemicals newsletter) announced in its latest edition that it has ceased publishing crude, gasoline and gasoil inventories.  Given the recent rise in international oil prices, the apparent strength in gasoline and gasoil demand could be related to stockpiling in anticipation of domestic product price increases, as has been the case in several of the past few months.  (In fact, the actual year-on-year demand growth for both products is probably lower, assuming significant destocking after the 2008 Olympics.)

Looking ahead, two issues will arguably steer Chinese oil demand trends:  1) whether and to what extent the macroeconomic stimulus measures are maintained, and 2) whether and to what extent international oil price changes are passed on to the consumer.  Regarding the first issue, many voices inside and outside China are warning about emerging asset bubbles, rising inflationary pressures, industrial overcapacity and potential trade dumping issues.  Some official economists have also downplayed the 'rebalancing' of the economy (from exports to domestic consumption).  Moreover, the incentives for car purchases are due to expire by year-end, and it is unclear whether the small car market will be able to withstand this and sustain strong gasoline demand growth after that.

With respect to the pricing issue, on 10 November the National Development and Reform Commission increased the 'guidance' (wholesale) prices, for the eighth time this year (gasoline rose by 7.3%, gasoil by 8.2% and jet fuel by 6.6%).  However, since 5 November, the day when the price revision window opened, there were contradictory reports regarding its implementation (9 or 10 November or not at all) and its extent (5% or 7%).  The price adjustment may have been delayed to account for the week-long National Day holidays in early October, but it may also indicate that the government feels uncomfortable with current high international oil prices.  It must again balance the profitability of state-owned refiners against the effects (inflationary and political) of higher domestic prices if changes are fully passed on the end-user.  However, the price scheme has a provision to limit the impact on consumers if prices rise further:  refining margins will shrink gradually if international oil prices exceed $80/bbl and drop to zero if oil prices reach $130/bbl; above that level, the government may freeze domestic prices and exercise full discretion regarding ways to compensate refiners.

Therefore, China's oil demand outlook remains highly uncertain.  We have revised up our 2009 forecast by roughly 40 kb/d in order to account for the continued strength in 'other products' demand, but have left our 2010 prognosis largely unchanged.  Total oil demand is thus expected to increase by 5.7% or 450 kb/d to 8.3 mb/d in 2009, and by 3.5% or 290 kb/d to 8.6 mb/d in 2010.

Other Non-OECD

India's oil product sales - a proxy of demand - rose marginally by 0.7% year-on-year in September, according to preliminary data.  This relatively subdued growth was mostly due to a sharp fall in the demand for naphtha (-20.8%) and residual fuel oil (-5.0%) given reported greater natural gas availability to utilities, fertiliser producers and steel plants, as well as single-digit increases in gasoil sales (+4.7%).  In September, the government increased the allocation of gas from Reliance Industries' Krishna Godvari (KG) D-6 field, off India's East Coast, to 50 million cubic metres per day, from 40 mcm/d before.  However, naphtha figures tend to be revised up, sometimes sharply (+75 kb/d in August).  As such, the precise extent of naphtha's structural decline is still unclear.  Meanwhile, gasoil demand eased as drought conditions abated (demand had surged over the previous months to fuel power generators and irrigation pumps).  Gasoline demand continues to boom (+15.2% year-on-year), as car and two-wheeler sales, supported by holiday promotions and low interest rates, surged by 21% year-on-year in September.

By contrast, jet fuel/kerosene sales (-2.1% in September) have been depressed since mid-2008.  The reason is to be found in the distorting impact of high state sales taxes, which average roughly 21% across the country - only two states, Andhra Pradesh and Rajasthan, have recently lowered their sales taxes to 4%, in order to encourage the establishment of local aviation services.  Paradoxically, even though pent-up demand for air travel is considerable, most Indian airlines are posting heavy losses by virtue of buying jet fuel from local refiners at import parity prices and then paying state sales taxes on top.  Domestic end-user jet fuel prices are thus effectively the most expensive in the world.  Air carriers have therefore requested that jet fuel be declared an 'essential commodity', eligible for a maximum tax of 4%.  However, for this to occur - or for the rest of the states to lower their tax burden substantially - the federal government would probably need to foot the bill for lost state revenues.

Oil demand in Saudi Arabia jumped by an astonishing 16.4% year-on-year in August, driven by an unprecedented surge in direct crude burning (accounting for about two-thirds of 'other products', which were up by 94.1%).  Direct crude, used in power plants, refineries and other facilities related to upstream production, has displaced fuel oil for the past several months (fuel oil demand has fallen by 22% year-on-year on average in every month from March).  Moreover, given the constrained call on OPEC crude in 2010, this pattern of strong direct crude burning and falling fuel oil use is likely to continue.  As such, we have revised up our forecast of Saudi oil demand for both this year and next.  Total demand is now expected to rise by 8.9% year-on-year to 2.6 mb/d in 2009, and by 4.9% to 2.8 mb/d in 2010 (+50 kb/d and +100 kb/d, respectively, compared with our previous assessment).

Oil product demand in Iran has been subdued for most of this year, contracting by roughly 7% year-on-year on average in every month from January.  The slowing economy and political turmoil have arguably played a large role.  In addition, fuel smuggling out of the country also distorts demand patterns.  The Deputy Economy Minister was quoted saying that some 250 kb/d of gasoline, diesel and kerosene are smuggled out to neighbouring countries, where retail prices are much higher.  The trade is so entrenched that smugglers have reportedly even built 'export' pipelines at some border points.  Yet Iran currently imports some 40% of its domestic gasoline requirements at great cost - in early October, the government asked the Iranian parliament (Majlis) for an extra $3.8-billion emergency funding to pay for gasoline imports, despite having implemented a rationing scheme since mid-2007.

The Iranian government faces a mounting import bill - perhaps as much as $10 billion in 2009 - and the threat of further US sanctions aimed at curbing gasoline exports to Iran given the nuclear standoff (although whether such sanctions would be effective is debatable, given the availability of gasoline supplies in the region).  As such, the need to raise domestic prices in order to effectively manage demand and curb smuggling has become compelling.  Indeed, a new energy bill passed in early October aims at gradually raising gasoline (and natural gas) prices to close to international levels.  By 2013, retail prices should be at least 90% of the import cost.  The first incremental increase will be implemented in principle next March (the start of the Iranian fiscal year).

The issue of fuel smuggling is not restricted to Iran.  In Kuwait, state-owned Kuwait Petroleum Corporation has reportedly launched an internal investigation on a large-scale smuggling operation.  Over the past two years, some 15-20 Kuwaiti gate operators allegedly helped ship $2.5 million worth of diesel to Iraq in large tanker trucks driving through the Abdali border crossing.  The diesel, which apparently came from KPC's Shuaiba refinery and several service stations in the area, was sold in Iraq at 20 times Kuwait's domestic price, according to local observers.  Smuggling may explain the somewhat erratic pattern of Kuwaiti gasoil demand, which surged in 2H08 and then again in recent months (+38.6% year-on-year in July, the last month for which data are available).



  • Global oil supply in October rose by 635 kb/d to 85.6 mb/d, with both non-OPEC and OPEC supplies rising month-on-month.  Global production is still down 850 kb/d from levels of a year ago, with a steep fall in OPEC supplies partially offset by higher non-OPEC output.
  • Non-OPEC supply rose 380 kb/d in October, to 51.4 mb/d as North Sea maintenance ended.  The absence of any hurricanes in the US Gulf of Mexico until November also contributed to higher-than-expected output.  A more optimistic outlook in the US GOM, Mexico, Norway, Russia and 'Other Biofuels' contributed to upward revisions of 130 kb/d and 350 kb/d for 2009 and 2010 respectively.  Non-OPEC output in 2009 is now forecast to average 51.1 mb/d, rising to 51.9 mb/d in 2010.
  • Tropical Storm Ida made landfall near Mobile in Alabama just before going to press.  The storm had previously slowed from hurricane status and early reports indicate little to no damage.  However, as a precautionary measure, 560 kb/d or around 43% of Gulf of Mexico crude output was shut-in by 10 November, according to the US Minerals Management Service (MMS), in addition to 1.957 bcf/d or 28% of regional natural gas production.
  • OPEC crude production rose by 110 kb/d to 29.0 mb/d in October, the highest level since January 2009.  Crude production by the 11 members with output targets rose by 150 kb/d to 26.5 mb/d.  OPEC-11 is now producing about 1.6 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 61% compared with 64% in September.
  • The call on 'OPEC crude and stock change' for 4Q09 is revised up 200 kb/d, to 28.6 mb/d on higher forecast demand and lower OPEC NGLs.  A slower-than-forecast ramp up in new NGL output in Saudi Arabia is largely behind this month's revision to OPEC NGLs, which were lowered 200 kb/d to 5.0 mb/d for 2009 and by 300 kb/d, to 5.8 mb/d for 2010.

All world oil supply figures for October discussed in this report are IEA estimates.  Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary October 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 crude production rose by 110 kb/d to 29.0 mb/d in October, its highest level since January 2009.  Production by the 12 member countries has steadily edged higher over the year from a low of 28.1 mb/d in February.

Crude oil production by the 11 members with output targets, which excludes Iraq, rose by 150 kb/d, to 26.5 mb/d in October.  Higher production month-on-month was led by Nigeria followed by Angola, Kuwait, Algeria, Qatar and Saudi Arabia.  OPEC-11 is now producing about 1.6 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 61% compared with 64% in September.  OPEC's effective spare capacity is estimated at 5.4 mb/d.

OPEC output could edge higher in the last two months of the year as Nigeria presses ahead with restoring damaged oil infrastructure following the unexpected success so far of the country's amnesty programme for militant groups.

Several OPEC countries, especially in the Gulf, are easing up on volume cuts for some buyers, especially in Asia.  While OPEC price hawks talk of the need to reduce output further due to the persistently high level of stocks in the market, there seems to be a quasi-consensus among others that an increase in output targets may be in the offing at the next meeting if prices move significantly above current levels.  Saudi Arabia has unofficially branded $70-75/bbl as an ideal target price for the producer group—but markets have moved above this level in late October and early November.  OPEC members, especially in the Middle East Gulf, are worried that higher oil prices could threaten the global economic recovery and further strain relationships with consuming nations ahead of climate change talks in Copenhagen.  OPEC's next scheduled meeting will take place in Angola on 22 December.

Saudi Arabia's October output was assessed largely unchanged at 8.2 mb/d following an upward revision to the September estimate.  September Saudi output was increased from 8.15 mb/d to 8.19 mb/d following the country's data submission to JODI.  Above-target output of some 150 kb/d continues to be burned at domestic power plants despite the end of the peak summer demand cooling season when extra crude burn at power and water desalination plants is needed to meet stronger overall demand.  Aramco's decision to substitute Arab Light for crude burn instead of fuel oil looks set to continue given new environmental regulations calling for cleaning burner feedstock (see Is It Always The Darkest in the Hour Just Before Dawn in the Refining section.).

While Saudi Arabia's above-target output hitherto appears to have been earmarked for domestic use, reports that several customers in Asia will receive full contract volumes for the first time in a year may signal a further easing of output curbs.  The higher volumes on offer are for light grades, no doubt reflecting the start-up of new production.  The bulk of Saudi export cuts since last September appear to be medium and heavy crudes.  Saudi Arabia accounted for almost 50% of OPEC's total cuts in October.

Kuwait and the UAE also increased output in October but compliance with their output targets is still above 90%.  Kuwaiti production rose 40 kb/d, to 2.3 mb/d while the UAE increased output by about half that amount also, to 2.3 mb/d.

Iran's oil production in October was down by 50 kb/d, to around 3.7 mb/d.  Tensions between the global community and Iran over the latter's nuclear enrichment facilities continue but so far the impact on the market has been muted.  The US Congress is moving forward with plans to tighten sanctions on Iran, but the new legislation targets companies that sell refined products to Iran-a net importer of roughly 120 kb/d of gasoline.  However, sanctions on Iran by the international community via the UN are likely to be blocked by China and Russia.

Iraqi output fell by about 40 kb/d in October, to 2.5 mb/d, largely due to lower output in the northern region.  Total exports in October were down by 90 kb/d to just under 1.9 mb/d in October.  Domestic crude use at refineries and for power use is estimated at 600 kb/d compared with 550 kb/d last month.

Exports via the southern Basrah terminals were up by a small 30 kb/d in October, at about 1.5 mb/d.  By contrast, exports of Kirkuk crude fell by around 110 kb/d to 375 kb/d—the lowest since last November.  Exports from the northern fields were disrupted for a week following insurgency attacks on the pipeline running from Kirkuk to the Turkish Ceyhan port on the Mediterranean.

Northern exports via the Kirkuk-Ceyhan pipeline were averaging around 500 kb/d before the start-up of new production from the Tawke and Taq Taq fields in June.  The two fields were producing a combined 100 kb/d this past summer but the operators have opted to shut-in production until payment issues over the export volumes are resolved.  Iraqi state marketer SOMO handles collection of all oil revenues but refuses to make payments to the companies for this new northern production on the grounds that the contracts signed with the Kurdish Regional Government (KRG) are illegal.  The stand-off between the companies and Baghdad is not expected to be resolved until after the country's elections in January and until a new petroleum law is adopted, which is unlikely until mid-2010 at the earliest.

SOMO is apparently still spiking fuel oil into crude exports to maintain higher levels of exports but the quality has improved following the withdrawal of lower quality Tawke and Taq Taq crude from the Kirkuk blend.  The 27°API Tawke stream had earlier lowered the quality of the normally lighter 34.5-35° API Kirkuk export grade.

Angolan output was up by 40 kb/d, to 1.9 mb/d in October as output from the start-up of the new Tombua Landana and Mafumeira Norte fields continued to slowly ramp up.  Both fields are not expected to reach their peak capacity until sometime in 2011, to 100 kb/d and 35 kb/d respectively.

In October, Nigerian production rose to its highest level this year following new peace agreements between rebel groups and the government.  Output rose 50 kb/d, to 1.9 mb/d in October.  As a result, Nigeria's compliance with the country's targeted cuts slipped to just 25% in October from around 40% in September.

After dropping to the lowest levels in more than two decades this summer, Nigerian production may steadily increase following the success of the government's amnesty programme for militants.  The ceasefire has already enabled IOCs to pick up the pace on repair work to damaged oil infrastructure.

Operating companies have been unable to assess the damage to operations in recent years given persistent attacks in the sprawling Niger Delta region.  Plans are being developed now by companies to do a survey of the infrastructure but any significant increase in production is not expected to start until next year.  The country's largest operator, Royal Dutch Shell, has said it has restored around 100 kb/d of shut-in production in recent months and has plans on the drawing board to start work repairing the rebel-damaged Trans-Escravos, Trans-Ramos and Trans-Forcados pipelines.  Shell said around 800 kb/d remains offline.


OPEC NGLs were revised down by 200 kb/d, to 5.0 mb/d for 2009 and by 300 kb/d, to 5.8 mb/d for 2010.  A slower-than-forecast ramp up in new NGL output in Saudi Arabia is largely behind this month's revision to OPEC NGLs.

Partial start-up of Saudi Aramco's long-delayed gas processing plant at Khursaniyah is expected sometime this month but initial volumes are expected to be modest.  The gas plant project has been delayed for more than year after the Khursaniyah oil field started production.  The facility will have the capacity to produce 560 million cf/d of gas and 280 kb/d of NGLs and ethane.  Pre-commissioning of Train 1 is expected this month but Trains 2 and 3 are not slated for start-up until the end of 1Q10.

Non-OPEC Overview

Total non-OPEC supply rose by 380 kb/d in October, to 51.4 mb/d, as seasonal North Sea maintenance, which had been heavier than usual this year, came to an end.  The absence of any hurricane-related shut-in volumes in the US Gulf of Mexico until November also contributed to higher-than-forecast production, though at the time of writing, Tropical Storm Ida had caused precautionary crude production shut-ins of around 560 kb/d.

More generally, higher-than-anticipated September production in Norway, Mexico, Russian NGLs, Kazakhstan, Brazil and 'Other Biofuels' led to upward revisions to forecast.  Total 2009 production is now forecast to average 51.1 mb/d and is set to rise to 51.9 mb/d in 2010, following respective upward revisions of 130 kb/d and 350 kb/d.

Minimal Impact of Tropical Storm Ida on US Gulf of Mexico Upstream Operations

Just before going to press, Tropical Storm Ida made landfall near Mobile in Alabama.  The storm had previously slowed from hurricane status and early reports indicated nothing like as devastating an impact as Hurricanes Gustav & Ike in the late summer of 2008.  Ultimately, Ida veered to the east, thereby avoiding much of the offshore oil production areas.

Nonetheless, the US Minerals Management Service (MMS) reported that as a precautionary measure around 560 kb/d of oil production capacity had been shut in on 10 November, representing around 43% of total US GOM output.  In addition, 1.957 bcf/d of natural gas production was shut in, around 28% of regional capacity.

A comprehensive assessment of the storm's impact is expected now the storm has passed.  But it is worth stressing two points.  Firstly, that global spare upstream capacity is high, as are stock levels.  Secondly, initial reports indicate no damage and some companies are already in the process of restarting production.  A rough calculation shows that even assuming the currently shut-in volumes are only fully back online within a week, that would only amount to around 80 kb/d being shaved off monthly US production.  This is less than the 180 kb/d we had previously estimated as likely to be shut-in, simply based on the five-year average.

Much of this incremental volume is set to come onstream towards the end of 2010, such as phased expansions at Azerbaijan's ACG complex and incremental volumes of Canadian conventional crude, Kazakhstan and offshore Brazil, where the Tupi and Parque das Conchas fields, among others, will be ramping up production.  However, over 50% of this 1 mb/d increase in total non-OPEC supply from 3Q10 to 4Q10 is due to output returning from seasonal maintenance - typically heaviest in the third quarter in many parts of the world, such as the North Sea, but also assumed for Canadian crude and Kazakhstan.  In the latter, due to the Tengiz field's size and complexity, maintenance can shut-in production anywhere between 20-30% for a period in the third quarter.  This year's seasonal dip was actually partly masked due to some incremental capacity coming online around the same time.

Biofuels Update

Global biofuels production was revised down slightly for 2009 and 2010, by 5 kb/d and 10 kb/d, to 1.6 mb/d and 1.7 mb/d, respectively.  (Note, these production figures are volumetric, whereas in the recently published IEA World Energy Outlook, biofuels volumes are reported on an energy equivalent basis to fossil fuels).  However, minimal changes to the headline number mask more significant underlying revisions to the US, Europe and Brazil.  US ethanol producers continued to benefit from favourable corn and natural gas prices, which have translated into steadily improving margins.  August production data from the EIA put US ethanol production at 727 kb/d, largely unchanged from July.  This output level suggests capacity utilisation rates around 93%, much improved from the 80-85% utilisation rates seen during most of 1H09.  We have revised up our 2H09 production expectations by 10 kb/d and our overall 2009 production to 685 kb/d, in line with the US government's mandated usage volume while keeping 2010 relatively unchanged at 770 kb/d.

European ethanol production, which falls under the 'Other Biofuels' category (i.e.  all biofuels excepting US and Brazilian ethanol, which are included in those countries' totals) in our balance, has also benefitted from stronger margins.  Favourable wheat feedstock prices have lifted monthly output and have prompted an upward revision of 10 kb/d to 2H09 production and 15 kb/d to 2010 production.  By contrast, short-term Brazilian ethanol production expectations continue to recede.  Production is revised down by 25 kb/d for 2009 to 480 kb/d as rains have hampered the harvest in the Centre-South region and high sugar prices have encouraged sugar production at the expense of ethanol.  Rising domestic ethanol prices may also start curtailing ethanol demand as the price discount to gasoline is eroded in some areas.  Slower domestic consumption, tight sugar markets and reduced expectations for new mills have also lowered 2010 production by 45 kb/d, to 510 kb/d.


North America

US - October Alaska actual, others estimated:  Total US oil production in October rose marginally to 8.1 mb/d as output in the US Gulf of Mexico (GOM) grew and Alaskan production returned from summer maintenance.  In the latter, production at Cook Inlet rose to more normal output levels, following several months of shut-ins due to volcano activity in the plant's vicinity.  In the US GOM, once again the absence of any hurricane-affected shut-ins in October led to an upward revision.  Typically, the hurricane season ends on 30 November, although in early November, Tropical Storm Ida prompted some production shut-ins (see Minimal Impact of Tropical Storm Ida on US Gulf of Mexico Upstream Operations).  Lastly, some revised historical data for natural gas liquids (NGL) prompted a small lift in the baseline.  Total US oil production is revised up by 60 kb/d in 2009 and is now expected to average 8.0 mb/d.  2010 was revised up by 50 kb/d to 8.2 mb/d, with anticipated strong growth in the US GOM.

Going to California:  Shrinking PADD 5 Output Redirects Crude Flows

This summer saw crude volumes through the Trans-Alaska Pipeline System (TAPS) fall to a record low below 600 kb/d, leading to worries about its economic and technical sustainability.  The pipeline, which takes output from the giant Prudhoe Bay oil field on Alaska's North Slope to the Valdez export terminal in the south of the state, used to pump as much as 2 mb/d at its peak 20 years ago.  Besides economics, the fear is that even lower volumes could lead to more frequent and damaging outages - a major issue for oil companies lacking alternative export routes.

Alaskan authorities are mulling technical solutions - fewer  pumping stations is one suggestion.  But another answer would lie in increasing Alaskan output.  September data put North Slope crude production at 650 kb/d and falling - output was over 1 mb/d in 1999 and at around 2 mb/d ten years earlier.

But long-standing hopes to produce more crude in northern Alaska depend on changes to legislation.  Three large areas in Alaska lie unexplored and undeveloped - the National Petroleum Reserve in Alaska (NPR-A), reserved for the US Navy's use since 1923, the Arctic National Wildlife Refuge (ANWR) and federal waters offshore the north coast.  All have been surveyed to some extent, generating estimates of billions of barrels of recoverable crude.  Another boost for the pipeline could be natural gas liquids (NGL) from new gas fields being developed - e.g.  Exxon's Point Thompson, though this will likely only start producing in 2014, and overall NGL volumes are unlikely to compensate for declining crude output.

The previous federal administration chose to loosen restrictions on the development of Alaskan Arctic waters, as well as the Outer Continental Shelf (OCS) - both long out of bounds for oil producers due to environmental concerns.  In principle the Obama administration favours opening up these areas - the US Department of the Interior estimates that around 85 billion barrels of oil and 12 trillion cubic metres of gas are yet to be discovered there - but the debate on this issue is highly polarised.  For instance, a US court recently cancelled, on environmental grounds, some licences for blocks offshore Alaska which had been awarded under the Bush administration.

Lower Alaskan crude output has implications beyond state boundaries.  Californian refiners, which have long relied on Alaskan crude to top up declining local output, are having to search further afield.  Crude from Latin American producers used to flow north to the Golden State.  But competition from East Asia, notably China, is drawing some of this output across the Pacific.  One change in oil flows to result from this is the reversal of the Panama Canal pipeline.  Originally built to accommodate Alaskan crude heading to the US Gulf of Mexico refining cluster, it was recently converted to bring Atlantic Basin or even more remote crude to the Pacific, including California.  First shipments of Colombian crude were pumped in August.

A likely option in the face of declining Alaskan production will be to hike crude imports from Canada.  This northern neighbour has overtaken competitors Saudi Arabia and Mexico in recent years to become the US's largest source of crude oil, benefiting on proximity and energy security grounds as production has increased.  US Midwestern refineries have long taken heavy sour Canadian crude, and pipelines to bring the crude all the way to the US Gulf are under construction.  From 2010, Enbridge's Alberta Clipper pipeline, which will run 1,600 km from Hardisty, Alberta to Superior, Wisconsin, will add 450 kb/d of Canadian crude, later to be expanded to 800 kb/d.  With some other changes to the US pipeline network, these barrels will eventually be able to flow south to the US Gulf Coast.  Freight and refining economics permitting, some of these may even make it to California.

Canada - Newfoundland - September actual, others August actual:  August oil production in Canada was unchanged at 3.1 mb/d, but was adjusted down for September (-70 kb/d) on lower-than-expected output at the Terra Nova and White Rose fields offshore Newfoundland.  Synthetic crude producer Suncor reported a fire at one of its upgraders in mid-October, cutting an assumed 50 kb/d of average monthly output.  Total Canadian output is forecast to average 3.1 mb/d in 2009, growing to 3.2 mb/d in 2010.

Mexico - September actual:  In September, oil production in Mexico rose by 50 kb/d to 3.0 mb/d, as decline at the large Cantarell field slowed, at least temporarily, averaging 575 kb/d, and output at the Ku-Maloob-Zaap (KMZ) complex jumped by 50 kb/d to a new record high of 825 kb/d.  Production was also higher than forecast due to the absence of any hurricane impact.  Storms did close some export terminals on the Gulf of Mexico coast in late October and early November, a common occurrence, but no shut-in production volumes were reported.

In early October, the recently-formed National Hydrocarbons Commission recommended a full review of development plans at the large onshore Chicontepec field, leading to speculation that production might be halted.  Pemex statements have since affirmed that operations will continue, but it does appear likely that a full review of costs, service contracts and overall strategy at Chicontepec will take place.  Criticism focuses on the fact that, despite large investments, production at Chicontepec still only hovers around 30 kb/d, despite Pemex staking its hopes on Chicontepec's growth offsetting the sharp decline in Cantarell's output.  This report cautiously assumes only a marginal increase in Chicontepec output in 2010.  Meanwhile, better September performance elsewhere has led to an upward revision of 15 kb/d and 30 kb/d for 2009 and 2010 respectively.  However, production is nonetheless forecast to decline from 3.0 mb/d this year to 2.8 mb/d in 2010, weighed down by Cantarell's decline.

North Sea

Norway - August actual, September provisional:  Total Norwegian oil supply dipped in August and September month-on-month, but was expected to rise again in October, as maintenance ends.  Production was however more robust than forecast in August and September, leading to an overall upward revision of 35 kb/d and 50 kb/d for 2009 and 2010 respectively.  Average output is expected at 2.3 mb/d in 2009 and 2.1 mb/d in 2010.

Oil field maintenance took place at the Vigdis, Snorre and Snoehvit fields amongst others, the last of which came back onstream in October just to be halted again briefly due to technical problems.  On the other hand, there was a boost in output at the Varg field in August (and now confirmed for July too), as the Rev tie-back ramps up production.  Meanwhile, problems at the Valhall group of fields continue.  With a combined output of around 50 kb/d as recently as the beginning of the year, July and August saw production come to a nearly total halt.

Looking ahead, the Norwegian government announced that total capital expenditure in the oil industry, including exploration, will be just under $24 billion in 2009, up 7% from 2008, though much of the higher investment is expected to be offset by higher costs.  On average, forecast costs at ten monitored projects have risen by 23% over projections made in 2005-07.  Regarding the capex spent on exploration, much is focused on exploration in mature production areas, where development of even relatively small projects can be profitable by tying them back to existing infrastructure.  Meanwhile, the government hopes to publish a white paper on its petroleum policy next year, including plans for the environmentally sensitive Lofoten and Vesteralen archipelagos, where a drilling moratorium until 2013 was recently announced.


Australia - August actual:  Australian production was steady in August at 555 kb/d, though this and previous months were revised down marginally.  An oil spill at the Montara development had been underway since mid-August.  On 1 November, an attempt to halt the leak caused a fire on a platform and on a drilling rig.  This is expected to have set back the start-up of the 40 kb/d Montara complex by around one year until 3Q10.  Offsetting this, the start-up of production at the Pyrenees field was brought forward to 1Q10 from later next year, with the Van Gogh field now also expected to see first production volumes in 2010.  Total Australian oil production is forecast to average 550 kb/d in 2009 and to rise sharply to 660 kb/d as the above-mentioned fields start up.

Former Soviet Union (FSU)

Russia - September actual, October provisional:  September crude production was adjusted up by 40 kb/d on higher output at the Sakhalin projects.  However, in October, crude oil production in Russia fell for the first time since May, to 9.8 mb/d.  Partly disaggregated data continue to support the case that the main reason for recent growth was a group of new fields including the vast Vankor project, where output rose by 20 kb/d each month in September and October and is currently producing at around 170 kb/d.  On the NGL front, assumed Gazprom condensate production in October was also 25 kb/d higher than previously forecast.  In addition, an ongoing reappraisal of NGL output from the processing of associated gas, which is not included in the Russian Energy Ministry's reported crude oil and condensate production figures, has led to an upward revision of the total NGL baseline figure by 40 kb/d for 2010.  Total Russian oil production is forecast to average 10.1 mb/d in 2009, only marginally higher than in last month's report, while forecast 2010 output is raised by 60 kb/d to 10.3 mb/d.

September FSU net exports rose 1.2 mb/d year-on-year, as Varandey and Sakhalin shipments boosted Arctic and Far East exports, while more Caspian crude left Black Sea ports compared with last year when shipments dropped sharply due to problems at Azerbaijan's ACG field complex.  Month-on-month, FSU net oil exports reached 9.2 mb/d, up 0.5% from August.  Product flows contracted by 2.2% as some Russian refineries carried out maintenance of secondary units.  A rise in fuel oil volumes partially offset the drop of gasoil and other product deliveries.  In Ukraine, bad weather caused a power cut that halted flows via the southern leg of the Druzhba, but only for one day.  A 60 kb/d drop in loadings from the Baltic port of Primorsk reflected maintenance carried out on the Ukhta-Yaroslavl pipeline.  BTC volumes fell to 790 kb/d on maintenance at the ACG complex in Azerbaijan.

Crude oil export volumes from Odessa were curtailed in September and ceased completely in October.  The port is currently used for imports of crude oil loaded in Tuapse and Ceyhan to feed the Kremenchug refinery in central Ukraine (see Squeezing Central Europe? in report dated 9 October 2009).  But preliminary data show that exports from neighbouring Pivdenne port rocketed to almost 250 kb/d in October.  The Brody-Odessa line supplying the port with crude oil reached its maximum capacity, also carrying Kazakh crude redirected from Novorossiysk due to maintenance at the pipeline servicing the latter.  October also saw Kazakh volumes replace Russian crude exported to China via the Atasu-Alashankou line, after all three sections of the Kazakhstan-China oil pipeline were connected.

Russian loading schedules for November revealed shipments are set to fall from all ports except Novorossiysk.  The crude oil export duty is set at $231.2/mt ($31.5/bbl) from 1 November, down 3.9% from October's $240.7/mt ($32.8/bbl).  Light and heavy oil products carry an export tax of $168.1/mt and $90.5/mt, respectively.

Other Non-OPEC

China - September actual:  September oil production in China was around 120 kb/d lower than forecast, at 3.8 mb/d, and dipped slightly from August.  Notably, offshore production was around 40 kb/d lower than anticipated, while output at China's largest field, Daqing, came in around 20 kb/d below forecast.  On the other hand, Xinjiang production was reported 30 kb/d higher than expected.  In early October, the typhoon-hit Huizhou field came back onstream, while in early November, the 11 kb/d Luda 27-2 platform started production in Bohai Bay.

Meanwhile, state oil company CNPC started building a port on Myanmar's east coast, from which a crude oil pipeline will ultimately run to southwestern China, thereby bypassing the congested (and pirate-ridden) Malacca Straits between Malaysia and Indonesia.  This is another step in China's ongoing efforts to diversify its crude imports, adding to the Kazakhstan-China crude pipeline and the soon-to-be-completed Eastern Siberia-Pacific Ocean (ESPO) pipeline from Russia.  Total Chinese domestic oil production is forecast to average 3.8 mb/d in 2009 and to steadily rise to 4.1 mb/d in 2010.

Other Asia:  In India, August production was around 13 kb/d higher than forecast, at just under 790 kb/d, on stronger condensate output.  This has largely been carried through the forecast.  In Indonesia, despite government pressure on operator ExxonMobil to hike output, production at the troubled Cepu field was apparently still only around 16 kb/d in early November.  Export limitations appear to be the bottleneck, rather than production per se, and it seems likely that state oil company Pertamina will offer to take additional volumes.  In Malaysia, September production was around 13 kb/d higher than our forecast.  In the Philippines, the offshore Galoc field once again experienced difficulties, this time due to a faulty hose.  Output was shut-in in early November for a week.  In Vietnam, news reports indicated production at the Su Tu Vang field was halted in early November due to a water breakthrough, cutting around 30 kb/d for an undetermined period of time.  Total Other Asian oil production is forecast at 3.6 mb/d in 2009, rising to 3.7 mb/d in 2010.  Around 75 kb/d of that growth is due to the new Mangala field complex in Rajasthan in India.

Brazil - August actual:  Brazilian crude production in August was reported around 65 kb/d higher than forecast and once again rose to a new record at over 1.9 mb/d.  Part of this was offset by lower fuel ethanol production (see Biofuels Update), with a lower ethanol outlook also for 2010.  On the crude side, the Urugua/Tambau field start-up has been brought forward to 2Q10, ultimately to add 35 kb/d.  On the other hand, the projected ramp-up of output at the Tupi pilot field has been slipped to 3Q10.  Currently, production is constrained at 20 kb/d, but should start to rise towards 100 kb/d late next year.  Total Brazilian liquids production is now forecast to average 2.5 mb/d in 2009 and to rise to 2.7 mb/d in 2010.

Oman - August actual:  In Oman, there are indications that enhanced oil recovery (EOR) projects are beginning to have an impact on oil production in mature fields.  As a result, 2009 and 2010 output forecasts have been revised up 10 kb/d and 20 kb/d respectively, now to reach 800 kb/d this year and rise to 840 kb/d in 2010.

Non-OPEC Africa:  In Sudan, the oil minister admitted that 2009 oil production had disappointed so far.  Despite an ambitious plan to increase production to 600 kb/d, actual output has not even averaged 500 kb/d.  According to the minister, delays by contractors and large volumes of water in the key Nile and Dar Blend crude streams are ongoing problems affecting production.  On this basis, 2009 production is revised down 10 kb/d, to average 470 kb/d, while 2010 production is now assumed flat year-on-year, a downward adjustment of 30 kb/d.  In Tunisia, the offshore Hasdrubal gas field started production in November, and is expected to add around 15 kb/d of condensate when it reaches peak capacity early next year.  This led to an upward adjustment in total output, now set to reach 120 kb/d in 2009 and 140 kb/d in 2010.

OECD stocks


  • OECD industry stocks rose by 1.6 mb in September, to 2,774 mb.  The rise was in line with the five-year average build of 2.0 mb.  Gasoline stocks increased more than normal, particularly in North America.  Middle distillate stocks remained largely unchanged, as a European draw offset a North American build.  Crude stocks declined almost 10 mb, driven by a fall in Pacific holdings.
  • In 3Q09, total OECD industry stocks increased by 150 kb/d, less than the 10-year average build of 280 kb/d and the five-year average build of 450 kb/d.  Crude stocks drew faster than normal, falling 370 kb/d versus the 10-year average draw of 290 kb/d and the five-year average draw of 270 kb/d.
  • OECD stocks in days of forward demand fell to 60.0 days as of end-September, down from 60.9 days at end-August.  Days cover fell sharpest in the Pacific, particularly in the crude category.  Both Pacific crude and products trended along the top of the five-year range while days cover in North America and Europe for both categories remained above the five-year range.
  • Preliminary data indicate OECD industry stocks fell counter-seasonally by 28.9 mb in October, driven by a 28.8 mb products decline.  Roughly 40% of the products draw came in middle distillates, driven by the US and Europe.  Crude stocks drew 0.1 mb, as US and Japanese draws offset a European build.
  • Short-term crude floating storage levels at end-October hovered near 60 mb, relatively unchanged from an upwardly revised end-September number.  Short-term products floating storage continued to rise, to over 80 mb at end-October from 75 mb at end-September, with most of the build occurring in the Asia-Pacific.  Some market estimates put products floating storage almost as high as 100 mb.

OECD Stock Position at End-September and Revised Preliminary Data

The OECD industry stock position did not significantly change in September and at month-end stood at 2,774 mb.  Total oil inventories increased 1.6 mb, in line with the five-year average build of 2.0 mb.  The OECD total oil surplus to the five-year average remained essentially flat versus August at 120 mb.  Yet, an upward revision to August OECD stocks indicates that the five-year surplus for that month stood 23.2 mb higher than indicated in last month's report.  Almost one-third of the August upward revision came in middle distillates.  With September middle distillate stocks essentially unchanged versus the previous month, the OECD surplus to the five-year average in that category grew to 76 mb. 

The OECD crude surplus narrowed, to 39 mb, on the back of a larger than average September crude draw.  Yet, almost all of this surplus remains in North America, where crude stocks were little changed.  By contrast, Pacific crude stocks have run a consistent deficit to the five-year average and have come down to the five-year range in days of forward cover despite expectations of weak refinery runs ahead. 

Indeed, tightening days cover in the Pacific helped OECD total oil demand cover fall to 60 days for the first time since early 2009.  Of course, this lower days-cover stems from expectations of higher three-month forward demand rather than drawing inventories.  While part of this demand strength arises from an anticipated improvement in 4Q09 economic conditions, it also relies upon seasonal winter weather patterns.  A large October OECD stockdraw of 28.9 mb (around 40% from middle distillates), based on preliminary data, suggests OECD forward cover could fall below 60 days over the next month.  Still, with continued builds in products floating storage, a warmer-than-normal winter in the OECD or weaker-than-expected economic growth, OECD days of forward could equally remain inflated in the months ahead.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks rose 11.6 mb in September, led by gains in US gasoline and middle distillates of 7.7 mb and 7.2 mb, respectively.  US commercial crude stocks declined slightly by 2.5 mb while US government crude holdings increased by 1.0 mb.  Mexican crude inventories increased by 1.1 mb, driving most of the Mexico's 1.2 mb total oil build.  The North American crude surplus to the five-year average remained high, at 42.5 mb, though this is down from 57.4 mb in July.

Preliminary data through 30 October point to an 18.9 mb drop in US stocks in October, when stocks more typically remain static.  US crude stocks drew 1.8 mb as lower imports balanced lower refinery runs.  Historically low imports may persist in forthcoming weekly reporting with the temporary closure of the Louisiana Offshore Oil Port (LOOP) due to Tropical Storm Ida.  The Strategic Petroleum Reserve (SPR) levels remained unchanged in October while, 1 mb of filling is expected for November and 0.5 mb is expected for December.  Crude stocks at Cushing, Oklahoma remained relatively unchanged at 25.5 mb.

US product stocks fell by 17.1 mb in October driven by decreases in gasoline stocks (-5.3 mb), distillate stocks (-4.2 mb) and 'other oils' (-5.1 mb).  In distillate, about three-quarters of the draw came from diesel, marking the first monthly draw of that category since March of this year.  Still, more of the surplus in distillate continued to lie on the diesel side as heating oil stocks for the US as a whole trended only along the five-year average.  Yet, on the US East Coast, heating oil inventories remained healthier in the top half of the five-year range, despite drawing slightly in October.

OECD Europe

European inventories fell by 7.6 mb in September, as middle distillates decreased 9.0 mb.  The middle distillate draw was larger than the five-year average draw of 5.6 mb, but effectively was weaker than the headline number suggested.  September products floating storage - mostly middle distillates - off Northwest Europe and the Mediterranean increased by over 8 mb, implying a more static overall stock change when including offshore stocks.  Moreover, German consumer heating oil stocks continued to increase, moving from 66% capacity fill to 68% at month-end, suggesting that some of the draw in primary stocks merely went to buoy consumer inventories.  The OECD Europe middle distillate stock surplus to the five-year average remained high at 37.4 mb, relative to its 2009 peak of 43.3 mb in May.

European crude stocks remained above the five-year average but within the five-year range.  Gasoline and residual fuel oil remained relatively steady on the month but both categories are trending at the bottom of the five-year range.

October preliminary data point to further product draws, particularly in middle distillates.  Gasoil stocks held in NW Europe independent storage fell by over 2 mb, though they remained well above the five-year range.  Jet fuel/kerosene and naphtha posted draws on the month and the latter category fell to five-year lows.  Products floating storage off Northwest Europe and in the Mediterranean fell by about 3 mb.  Moreover, EU-16 preliminary stock data from Euroilstock showed middle distillate stocks decreasing 6.8 mb in October.  Other EU-16 categories showed smaller changes with gasoline decreasing 1.5 mb and crude stocks building 2.3 mb.

OECD Pacific

Pacific industry stocks fell by 2.4 mb in September, driven by a 7.1 mb decline in crude.  Japanese crude inventories fell by 12.3 mb to below the five-year range and to 20 mb under the five-year average.  Japanese crude stocks have drawn almost 24 mb since June despite historically low crude runs.  Korean crude stocks, by contrast, have risen almost 10 mb since June and ended September at the top of the five-year range.  On a days cover basis, the Korean crude stocks are also at the top of the five-year range, while the Japanese inventories are only at five-year average levels.

Product inventories rose 2.3 mb on gains in gasoline and distillate of 1.0 mb and 1.7 mb, respectively.  Residual fuel oil stocks fell by 0.4 mb.  On a days cover basis, gasoline, distillates and fuel oil trended at the top or above the five-year range, while the 'other products' category remained near the bottom of the five-year range.

Weekly data from the Petroleum Association of Japan (PAJ) point to a commercial stockdraw of 4.2 mb in October, with crude falling by 0.7 mb and products decreasing by 3.5 mb.  Crude stocks continued to trend under the five-year range as correspondingly low refinery utilisation has dampened the need to hold higher inventories.  Kerosene stocks drew counter-seasonally by 1.3 mb, when they usually rise by 2.0 mb, and fell further below the five-year range.  However, with jet fuel/kerosene demand expected to fall by 11.1% y-o-y from October-March and heating usage in structural decline, lower stock levels may not signal a tightening of regional kerosene markets.  In other product categories, residual fuel oil drew by 2.3 mb while gasoil, jet fuel and gasoline all built slightly or remained unchanged.

Recent Developments in Singapore and China Stocks

Singapore product stocks declined slightly in October by 0.2 mb.  A rise in fuel oil stocks of 1.33 mb only partially offset a fall in middle distillates of 1.0 mb and a decrease in light distillates of 0.6 mb.  All inventory categories remained at historical highs near or above the five-year range.  However, middle distillate stocks have drawn down to near 2008 levels for the first time this year.

China Oil Gas and Petrochemicals (OGP) announced a cessation of monthly reporting of crude, gasoline and gasoil inventories.  As such, for the time being, we will not include these figures in the OMR.  We will reinstate coverage if and when the data are made available again in the future.



  • Crude oil prices rose to their highest levels in more than a year in October, with WTI and Brent futures up by an average of around $6/bbl for the month, to $75.82/bbl and $73.93/bbl, respectively.  Growing expectations for fledgling economic recovery continued to exert upward pressure on markets.  WTI briefly traded at over $81/bbl before settling in a $75-80/bbl range by early November.
  • US West Texas Intermediate's (WTI) reign as a global oil price benchmark looks increasingly precarious after Saudi Aramco announced in late October that is was replacing the volatile marker  as the basis for pricing its sales to the US with a US Gulf Coast sour crude index that is more akin to its own crude quality, starting in January 2010.
  • Higher refined product prices were supported by fledgling oil demand growth in key markets in October but ample distillate stocks both onshore and held in floating storage may temper further increases.  Refined products held in floating storage rose to over 80 mb at end-October from 75 mb at end-September, with most of the build occurring in the Asia-Pacific.  Other market estimates put products floating storage as high as 100 mb.  Even a colder-than-normal winter demand season may only make a dent in the massive inventory overhang.
  • Refining margins were generally lower in October, with cracking margins in Europe and the US Gulf Coast the exception thanks to relatively stronger spot gasoline prices.  Hydroskimming margins deteriorated further in October, especially in Asia, and remained heavily negative.

Market Overview

Crude oil prices rose to their highest levels in more than a year in October, breaching the $65-75/bbl trading range seen over the past three months and settling in a $75-80/bbl range late in the month and into early November.  Financial markets continued to exert upward pressure and growing expectations for a significant resurgence in oil demand next year lifted prices, at times, to over $80/bbl. 

Futures prices for benchmark crudes WTI and Brent rose on average by around $6/bbl in October, to $75.82/bbl and $73.93/bbl, respectively.  Prices took a hit again in early November after the US Labor Department reported that the unemployment rate rose to a 26-year high, fuelling fears of a protracted economic recovery.  However, the downturn proved fleeting with prices quickly rebounding on the late season arrival of Tropical Storm Ida in the Gulf of Mexico.  Prices jumped more than $2/bbl on 9 November as operators shut-in oil and gas fields in the path of the storm.  The US Gulf Coast is home to roughly 25% of US oil production, 15% of natural gas output and 40% of the country's refining capacity.  But prices ebbed marginally lower as Ida gradually weakened.  Most recently futures prices were up by $3-4/bbl over October levels, with WTI last trading around $79 and Brent at $78/bbl.

Bullish economic data underpinned the rise in oil prices through much of October.  GDP data showing that the US economy grew at an annualised rate of 3.5% in the third quarter pushed WTI over $80/bbl and sparked a rise in equity markets to their best one-day percentage gain in three months in October.  At first glance, the data were hailed as marking the end of recession in the US.  On closer examination it appears much of the recovery was driven by one-off measures such as the 'cash-for-clunkers' car purchasing programme, and a temporary homebuyer tax credit, among other stimulus measures.  As a result, 'real' growth may be more moderate than initially perceived.

That said, the nascent recovery in oil demand in some pivotal markets appears to be underpinning stronger oil prices.  Preliminary US oil demand data suggest a substantial 1.7 mb/d month-on-month increase in October.  China's economic engine is also gathering steam judging by latest apparent demand estimates.  This month's OMR sees China's year-on-year oil demand up by 15% in September, or more than double the previous estimate.

Global oil demand is now forecast to rise by 1.3 mb/d, to 86.2 mb/d in 2010.  However, the much-anticipated resurgence in oil demand is being tempered by a historically large overhang of refined products stocks held in floating storage, estimated at 80 mb at end October.  Even a colder-than-normal winter demand season may only make a dent in the massive inventory overhang.

The steady rise in both OPEC and non-OPEC production is also weighing on markets.  Non-OPEC output was revised up in October while OPEC output rose for the sixth month running.  OPEC production could continue its upward trend as some Gulf countries have indicated they are easing contractual cuts for November and December.  In addition, the success of the Nigerian government's amnesty programme for rebel groups holds the potential that the country's oil production will rise in coming months.

The steep jump in monthly oil prices of 93% for WTI and 68% for Brent since February's low has likely encouraged slippage from output targets and some countries may even quietly add more supplies to the market in a bid to calm down prices.  A small contingent of OPEC members is reportedly worried that oil prices above $80/bbl could threaten the global economic recovery and trigger another round of demand destruction.

Futures Markets

Prompt month oil prices closely tracked the exceptional gains in global equity markets in October.  The Dow Jones hit a 13-month high on 9 November.  The G-20 decision's to continue stimulus measures and the US Federal Reserve's announcement that it would hold interest rates at current rock-bottom levels helped push the US dollar to a 15-month low against a basket of major currencies.  As a result, market reports suggest investors continue to shift funds into commodity markets as a hedge against inflation.

To what extent investment funds influence prices, however, is still no clearer after the US Commodities Futures Trading Commission (CFTC) published the much-anticipated three-year historical data series for the disaggregated version of its Commitments of Traders report on 20 October (for more details see CFTC Unveils New Disaggregated Report in report dated 9 October 2009).

While the time series sheds some light on the breakout of players, it falls short of expectations by some that the new reporting format may prove a correlation, or even causality, between the positions of money managers or swap dealers and price movements.  For example, when prices were at $140/bbl, swap dealers held 39,000 net long contracts and money managers were net long of 61,000 lots.  When prices hovered at below $40/bbl levels, the swap dealers held 160,000 net long positions and money managers were exposed to 31,000 net longs.

The historical time series does offer some interesting details.  The new disaggregated data show that producers usually hold net short positions, while swap dealers have net long exposure in NYMEX WTI futures.  Money managers are generally net long with the exception of a brief period from 21 October 2008 to beginning of December 2008.  During this time money managers held net short positions and the price of WTI plunged from $69/bbl to $45/bbl.  Interestingly, in the past few weeks the money managers more than doubled their net long positions.  A similar situation occurred during July 2007 when money managers almost doubled their net long positions while crude price rose $7/bbl.  In summary, it appears that financial flows can occasionally, and in the short term, augment price volatility but a persistent price-driving role remains difficult to establish.

Spot Crude Oil Markets

Spot crude prices rose across all major regions in October, with prices for benchmark grades up on average by $5-6/bbl.  But reduced refinery runs and weak margins in the US and Europe saw spot prices edge lower later in the month.

In Asia, Chinese crude buying remained brisk as refiners ramped up throughput rates to record levels.  Reduced volumes of medium and heavy sour grades from OPEC served to prop up Dubai prices.  Prices for heavier Dubai crude versus Brent moved to a premium of 40 cents/bbl in October compared with 25 cents/bbl in September and a discount of around $1.50/bbl in August.

WTI - For Which The Bell Tolls?

The reign of US West Texas Intermediate (WTI) as the pre-eminent crude price benchmark looks increasingly precarious after Saudi Aramco announced in late October that is was replacing the volatile light sweet crude oil as the basis for pricing its sales to the US.  Instead, Saudi Aramco will use a sour crude index that is more representative of its own crude grades starting in January 2010.

Saudi Aramco said its decision to use the recently launched Argus Sour Crude Index (ASCI), (based on Mars, Poseidon and Southern Green Canyon crudes from the US Gulf Coast) was due to wild volatility and regional distortions in WTI prices.  Saudi Arabia's exports to the United States are mostly medium-sour crudes.   Aramco previously used WTI prices published by Platts as its price market, which are closely linked with the NYMEX light sweet futures contracts.

The change in contract pricing comes at a time when Saudi sales to the US have dropped to the lowest level in more than 20 years.  US imports of Saudi crude fell to 745 kb/d in August compared with a year to date average of around 1 mb/d, and 1.5 mb/d in 2008, though part of the drop reflects reduced demand by refiners in the wake of the economic crisis.  Saudi Arabia's switch away from WTI is expected to trigger a similar shift by other sellers of medium, sour crudes.  Roughly 5.0 mb/d of US imports are pegged to WTI prices.

Arguably US WTI has been the most important price benchmark for several decades but its fall from grace was long in the making.  WTI largely gained its stature after the New York Mercantile Exchange (NYMEX) started using it in 1983 as the basis for its light, sweet crude contract.  Inherent logistical flaws given the contracts delivery point at the landlocked Cushing, Oklahoma frequently led to a disconnect from international markets (see WTI Benchmark:  Past Imperfect, Future Tense, in report dated 11 February 2009.

For all its flaws, WTI still has an important role to play since spot prices will continue to be linked to the NYMEX WTI contract   Indeed, both the NYMEX and IPE are planning to launch an Argus Sour Crude Index futures contract following Saudi Aramco's decision to link its formula prices to the index.  Derivative products are expected to emerge linking the ASCI to the WTI contract in order to provide hedging opportunities for buyers and sellers.

Spot Product Prices

Spot product prices rose in all major regions in October but diverging market trends resulted in uneven increases.  Economic run cuts and scheduled refinery maintenance work continue to provide offsets for an otherwise well supplied markets.

Gasoil/heating crack spreads in October improved by about $1.50-2/bbl in Europe and the US but weakened by around 50 cents/bbl in Singapore.  Even the weather may not cooperate.  Weather forecasters are predicting a moderate winter season on both sides of the Atlantic, which will likely weigh further on gas oil prices.  Warmer than normal weather in Japan is also likely to reduce demand for kerosene.  In addition, Japanese consumers continue to switch to electric powered heaters and away from kerosene-fired units.

In Europe, imports of gasoil cargoes and jet fuel are moving into the region at a steady clip despite weak demand and swelling stockpiles.  The brisk trade largely reflects the strengthening contango in the ICE gasoil futures contract.  The wider contango, where front month contracts are cheaper than later months, is still returning a decent profit.  The front-month November gasoil contract traded at a $10/mt discount to the December contract and at a $20/mt discount to the January contract.  Most of the additional imports are expected to end up in storage.

Fuel oil crack spreads were down on the month but staged a rebound as the month wore on in Europe and the US.  By contrast, Singapore fuel cracks deteriorated further on lacklustre demand from utilities, for industrial use and marine bunkers.   Low-sulphur fuel oil cracks to Dubai were down by $4.76/bbl on the month, to a negative $9.45/bbl, while high-sulphur differentials were off a smaller $2.74/bbl to minus $4.89/bbl.  In Japan, higher utilisation rates at nuclear power plants have also curtailed fuel oil purchases.

Refining Margins

Refining margins were generally lower in October with cracking margins in Europe and the US Gulf Coast the exception thanks to relatively stronger spot gasoline prices.  Hydroskimming margins deteriorated further in October, especially in Asia, and remained heavily negative.

In the US, Gulf Coast margins improved for most cracking and coking configurations due to stronger gasoline and gasoil/diesel differentials but still remained in negative territory.  Cracking margins for Bonny Light were -$1.65/bbl in October compared to -$2.68/bbl the previous month while Brent margins were pegged at -$2.05/bbl compared with -$2.64/bbl over the same period.  Normally stronger West Coast margins also declined for both coking and cracking configurations.

In Europe, only cracking margins improved over the month on stronger gasoil/diesel differentials to crude.  Cracking margins for both Brent and Urals in Northwest Europe were up by a modest 25 cents/bbl, to 91 cents/bbl and 81 cents/bbl, respectively.

Refining margins in Singapore and China fell month-on-month by around $2-$3/bbl.  In Singapore, Dubai hydroskimming and hydrocracking margins were -$4.31/bbl and -$3.55/bbl, respectively.

End-User Product Prices in October

End-user prices rose on average by 0.6% month-on-month in October but were 27.1% below levels of a year ago, in US dollars, ex-tax.  Diesel, heating oil and low-sulphur fuel oil prices on average rose by 0.9%, 2.2% and 1.1%, respectively.  However, gasoline prices ran against the trend last month and decreased by 2.0% in almost all surveyed countries except Japan where petrol prices were unchanged in domestic currency.  Consumers in Japan on average paid ¥128.9/litre ($1.43/litre), in the US $2.55/gallon ($0.67/litre) and in the UK £1.05/litre ($1.71/litre).  In Europe, the average price at petrol stations was between €1.05/litre ($1.55/litre) in Spain and €1.29/litre ($1.91/litre) in Germany for gasoline.


Freight rates remained under pressure from an oversupply of ships and lacklustre demand.  At the outbreak of the economic recession one year ago the demand for seaborne oil transport contracted in percentage terms at more than twice the rate of global oil demand in a year when the tanker fleet grew by 5%.  While oil demand is expected to rise by 0.4 mb/d in 4Q09 compared to the previous quarter, high tanker fleet additions combined with a further potential drawdown in crude floating storage could keep freight rates under extreme pressure.  Dirty freight rates were volatile in October, but performed better than clean tanker rates.

Mideast Gulf - Japan VLCC rates were stable at $8-9/mt the first three weeks of October, then rising to almost $10/mt over the last ten days of the month.  After an end September uptick to $13/mt, Suezmax West Africa - US Atlantic Coast rates fell down to $11/mt in the second week of October, before rising steadily again to $15/mt.  However, by early November gains for both tanker categories had begun to falter.  The Chinese holidays explain lower chartering activity in the first eight days of October, as well as the rise that followed.  A temporary rise in bunker prices during the third week of October sent prices further up, as owners refused to assume higher losses.  Aframax North Sea-North West Europe rates moved slightly higher to a level of around $5/mt, almost touching $6/mt during a mid-month recovery. 

Crude oil stored at sea remained at around 60 mb at end October, while floating storage of products continued its upward surge, estimated at above 80 mb at the end of the month.  Interestingly, much of the increase in product storage appears to have come from products from Asian refinery centres stored in two brand-new VLCCs and one Suezmax tanker, located near their source refineries.

Clean rates were weaker, as Aframax Mideast Gulf - Japan rates sank throughout the month, reversing last month's rally, and ending at $21/mt from end-September levels of $31.5/mt.  Fewer large product carriers were engaged in floating storage at the end of October as compared to the end of September, as vessels of this category rushed to take advantage of the temporary spike in rates.  All benchmark rates were below or at the lower rim of the five-year range.

The tonnage growth for product carriers has outpaced that of crude carriers this year, as the VLCC fleet got some relief from three months of accelerated single-hull phase-out and some conversion activity, as well as a temporarily lower new-build delivery rate due to negotiated delays.  Further, the trend of more long-haul transportation of crude oil, notably from West Africa to Asia, has been supportive of rates for crude carriers.  However, the weight of expected tanker deliveries continues to cast a shadow over the outlook for the tanker rates.



  • Projected 4Q09 global crude throughput is reduced by 0.3 mb/d to 72.8 mb/d.  The refining industry continues to be squeezed by higher crude oil prices, falling OECD demand and high inventories of middle distillates, all of which weigh on refining margins.  Downward revisions in OECD regions, following reported lower crude runs in the US, Europe and Japan, were partially offset by higher estimates in China and Other Asia, following stronger 3Q09 data.
  • Preliminary data indicate that 3Q09 global crude runs averaged 73.1 mb/d.  August data turned out higher by 0.3 mb/d, mainly the result of stronger runs in Brazil and in Other Asia.  Preliminary data for September was 0.9 mb/d stronger than expected, with runs in the OECD up by 0.3 mb/d, and up by 0.6 mb/d in the non-OECD.

  • August OECD refinery yields increased for gasoline, gasoil and fuel oil.  Gasoline yields stayed above the five-year range, with gross output at 15.0 mb/d and 600 kb/d higher than last year's level.  Gasoil/diesel yields moved back above the five-year average level, with gross output at 12.5 mb/d, 960 kb/d below last year.  Despite a wider discount to crude, fuel oil yields increased for the second consecutive month as coking throughputs remained under pressure.

Global Refinery Overview

The refining industry continues to be squeezed by higher crude oil prices, falling OECD demand and high inventories of middle distillates, all of which continues to weigh on refining margins.  The profitability of upgrading capacity has been particularly hard hit by OPEC cuts, which have narrowed heavy-sour crude discounts to light-sweet grades.  Furthermore, record crude runs in China and the ramp-up of new production capacity in India add further pressure on margins at uncompetitive refineries in OECD countries.

This month's report sees further downward revisions to planned crude runs in 4Q09.  Both independent and majors' 3Q09 refining results have been badly hit, ranging from striking decreases in net profits, to net losses of hundred of million dollars, forcing some to idle refineries, streamline operations, shut down non-profitable plants and consider selling non-core assets.  On the other hand, the current situation may turn out to be a good strategic opportunity for growth-orientated Asian companies to expand their presence in target regions through the acquisition of assets;  effectively betting on strong demand growth, once economic recovery filters through the refining industry.  As such, the refining industry is going through a painful, though necessary, process of adjusting to the changes in the competitive landscape (see Is It Always Darkest in the Hour Just Before Dawn?).

Global Refinery Throughput

Despite the weak macro economic environment, 3Q09 global refinery throughput estimates are revised up by 0.4 mb/d to 73.1 mb/d.  August data turned out higher by 0.3 mb/d, mainly the result of higher runs in Brazil and in Other Asia.  Preliminary data for September was 0.9 mb/d stronger than expected, with runs in the OECD revised up by 0.3 mb/d and by 0.6 mb/d in the non-OECD.  The quarterly year-on-year comparison now shows a decline of 0.8 mb/d, significantly better than the 2.3 mb/d differential shown in 2Q09, although the comparison is distorted by last year's disruptions caused by hurricane activity in the US Gulf Coast.

Conversely, we have decreased our 4Q09 projection by 0.3 mb/d, to 72.8 mb/d, following a significant reduction of 0.8 mb/d in OECD runs and an upward revision of 0.5 mb/d for non-OECD.  The increase in non-OECD results from higher Other Asia projections (+0.4 mb/d), as reported crude runs continue to exceed previous estimates, and upwardly revised demand forecasts.  The reduction in OECD runs is the result of protracted poor margins, persistent high middle distillate inventories, competition from higher runs in non-OECD and announcements by some majors in the US, Europe and Japan of further crude run cuts in 4Q09.

January 2010 throughput of 73.9 mb/d remains the seasonal peak, but this estimate is reduced by 0.2 mb/d.  This minor change to the overall total masks a reduction of 0.7 mb/d in OECD crude runs, as refiners in the US and the Pacific are forced to further reduce crude runs in order to cope with higher output in Other Asia and China, which have been raised by 0.5 mb/d and 0.1 mb/d, respectively.  February crude throughput is initially estimated at 73.3 mb/d, in line with the normal seasonal pattern.

OECD Refinery Throughput

OECD crude throughput estimates for 3Q09 have been revised up by 0.1 mb/d to 36.3 mb/d as August data turned out marginally lower and September preliminary data were 0.3 mb/d ahead of projections, mainly the result of higher-than-expected runs in the UK, Belgium and Greece.  This new estimate for 3Q09 represents a quarter-on-quarter increase of 0.4 mb/d, but a 1.2 mb/d decrease year-on-year.

Preliminary data for September indicate that OECD crude throughput averaged 36.3 mb/d, an increase of 0.7 mb/d compared to last year's hurricane-depressed baseline.  However, on a monthly basis, September crude runs were marginally lower, with higher North America and Europe crude runs partially compensating a fall in the Pacific, where the start of seasonal maintenance in Japan lowered activity levels.

North American September crude throughput is 1.9 mb/d higher year-on-year, mainly as a consequence of last year's disruptions caused by Hurricanes Gustav and Ike, which significantly dented crude runs in the region.  This year saw no material impact from hurricanes during September, and indeed for the summer as a whole.

In the US, some refiners have announced further run cuts for 4Q09 on low profitability.  Valero, the largest independent US refiner with a combined capacity of almost 3 mb/d, announced the reduction of crude runs to 73% in 4Q09 from a 3Q09 level near to 80%, driven by maintenance and economic run cuts.  ConocoPhillips, with a reported global refining capacity close to 2.7 mb/d, announced plans to reduce 4Q09 refinery utilisation rates to the upper 70% range from 3Q09 runs close to 90%.  In addition, Sunoco has recently announced the indefinite shut down of its 145 kb/d Eagle Point refinery in New Jersey a process that, by 5 November, appeared to be complete.

Weekly US refinery utilisation rates have now returned to levels below the five-year range, a pattern only interrupted this year by the absence of hurricane-related disruptions.  At the time of writing Tropical Storm Ida was approaching the Eastern US Gulf Coast, suggesting that some disruption to Chevron's 300 kb/d Pascagoula refinery may be possible, but more widespread disruption looks unlikely at this time.  Nevertheless, North American 4Q09 projections have been reduced further this month by 0.4 mb/d to an average of 17.1 mb/d.

European crude runs were 0.2 mb/d higher than expected in September, remaining constant compared to August, but 1.0 mb/d lower year-on-year.  Utilisation rates remained particularly weak in France and Italy.  The disruption to the SPSE pipeline, in Southern France prompted Petroplus to bring forward planned maintenance at its 85 kb/d Reichstett refinery in France from 2Q10 and it is now expected to be operational in December.  Petroplus' 68 kb/d Cressier refinery in Switzerland, also closed after the pipeline accident, has already restarted operations.  Elsewhere, we have assumed that the shutdown of Total's Dunkirk refinery in France now continues into 1Q10, due to continued poor economics. 

In Italy, the 84 kb/d ENI refinery in Livorno restarted operations at the end of September, after unions had blocked loading operations of cargoes in protest against possible job cuts.  ENI's crude runs in Italy are reported 25% lower in the first nine months of 2009, versus a year ago, due to prolonged refinery downtime prompted by weak market conditions.

OECD Pacific September crude runs were 0.1 mb/d above expectations, with all countries in this region posting higher runs.  However, we have adjusted downward our 4Q09 projection by 0.2 mb/d, as products demand continues to post annual declines, and increased runs in non-OECD countries, particularly China, are projected to further depress OECD Pacific utilisation rates, particularly in Japan.  4Q09 crude runs are now expected to average 6.1 mb/d, reaching 6.3 mb/d by December, on par with September levels, but 0.7 mb/d below December 2008.

Non-OECD Refinery Throughput

Non-OECD crude throughput estimates for 3Q09 have been revised up by 0.3 mb/d to 36.8 mb/d as August data were stronger than expected and September preliminary data were 0.6 mb/d ahead of projections.  This new estimate for 3Q09 represents a quarter-on-quarter increase of 1 mb/d and a 0.4 mb/d increase year-on-year.  Should preliminary data be reasonably accurate, 3Q09 would represent the first time crude throughput in non-OECD countries is higher than that in OECD countries, on a quarterly basis.

Chinese crude runs reached a new record level of 8.0 mb/d in September, 0.1 mb/d ahead of our estimate, supported by the government-guaranteed positive margins on domestic sales for state companies.  This new record level represents a monthly increase of 4% and a 16% increase year-on-year.  However, our calculations show crack spreads in the region weakened in October, as crude oil gains outpaced product price increases, which, as argued in last month's report, may temper Chinese crude runs if incremental products are exported at world oil market prices rather than sold domestically.  Furthermore, the seasonal dip in Chinese demand in 4Q09, currently estimated at 0.5 mb/d, may also weigh on crude runs, despite the healthy domestic margin environment.

Indian throughputs were slightly ahead of our estimates in September.  According to our calculations based on industry reports, official Indian data continue to understate the true level of crude runs by around 0.5 mb/d, representing crude processed at Reliance's Jamnagar expansion.  Elsewhere in Other Asia, reported crude runs continued ahead of expectations, with Indonesia, Malaysia, Chinese Taipei and Thailand once again performing better than expected.  Accordingly, we have revised up our 4Q09 Other Asia forecast by 0.4 mb/d to 8.6 mb/d.

The grim situation of the global refining industry is providing Reliance, Essar and other Asian refining companies with the opportunity to expand their presence in the US and Europe.  Reliance is reportedly looking to acquire assets worth several billion US dollars.  News reports indicate that companies including Valero, Sunoco and Flying J have been approached about potential US acquisitions.  In Europe, Royal Dutch Shell refineries are reported to be under consideration. 

Russian crude runs averaged 4.7 mb/d in September, just below five-year highs, as scheduled refinery maintenance took place.  Data provided by the Russian Ministry of Energy show September exports of gasoline, gas oil and fuel oil decreased month-on-month, by 32.3%, 8.4% and 8.2%, while October gasoline exports increased by 17.5% and decreased by 5.5% and 2.2% for gas oil and fuel oil, respectively.

As noted last month, the decision by Lukoil to stop operations at its Odessa refinery in Ukraine on October 2 followed Ukrtransnafta's reversal of the last leg of the Samara to Odessa pipeline, in order to ensure the supply of oil to the Kremenchug refinery in Ukraine.  Early November saw reports that the Russian pipeline operator Transneft had started to supply oil along the Brody-Odessa pipeline to the Odessa refinery as of November 5, allowing this refinery to refine oil at previous operating rates.

OECD Refinery Yields

August refinery yields mainly followed production economics as depicted by crack spreads.  Jet fuel/kerosene yields fell counter-seasonally as crack spreads mostly weakened across regions.  Yields for gasoline, gas oil/diesel and naphtha were higher, in line with a strengthening of their crack spreads.  The exception was fuel oil, whose yields increased in spite of wider discounts to crude.

Gasoline is the only product for which yields remained above the five-year range, although, in absolute terms, gasoline gross output only matched five-year average levels at 15.0 mb/d, nonetheless it was around 600 kb/d above last year's level.

Gasoil/diesel yields continued around their five-year average level, with gross output increasing to 12.5 mb/d, 960 kb/d below last year's level and 540 kb/d less than the five-year average.  Yields and gross output for other products remained suppressed below their five-year average.

Fuel oil yields increased for the second consecutive month in spite of wider discounts to crude.  Yields increased in Europe and particularly in North America, where yields and gross output reached five-year averages.  The increase may be related to the rationalisation of upgrading capacity, as coking throughputs have been strongly hit by the economic slump (see Is It Always Darkest in the Hour Just Before Dawn?).

Refining - Is It Always Darkest in the Hour Just Before Dawn?

The outlook for the global refining industry has seldom seemed gloomier, as refineries continue to struggle against economic headwinds.  While the cliché has it that it is always darkest in the hour just before dawn, in reality it is darkest in the middle of the night.  However, although the outlook for refineries is bleak, and in the OECD particularly bleak, some necessary changes appear to be happening, which could herald, if not a new dawn, then at least the passing of the darkest hour.

Historically, hydroskimming margins have averaged less than zero, suggesting that refinery profitability relies less on the simple process of fractional distillation of crude and is more closely tied to upgrading margins.  However, the removal of significant volumes of heavy sour crude from the market have crushed the light-sweet/heavy sour spreads, reducing upgrading economics.

Furthermore, tight fuel oil markets, at least by historical standards, have further hampered refineries' second source of additional profits, namely the reprocessing of relatively cheap residue into distillate and gasoline through upgrading capacity.  The bottom of the last profitability cycle in 2002 saw refineries shutting crude units and simply feeding vacuum towers with residue in order to most profitably (or perhaps least unprofitably) supply products to the market.  Recent data from OECD countries suggest that current markets have not allowed this opportunity for refineries to raise profitability.  Hence, the two potential sources of refining industry profitability over the past two decades have been temporarily removed.

US data uniquely provides insights into refiners' utilisation of upgrading units.  Recent months' data show that catalytic cracking unit throughputs moved above the 2008 level.  Given their bias towards gasoline production, this perhaps points to the re-emergence of gasoline as the binding constraint on US refining activity.  While encouraging, the continued weak premium for high quality gasoline components, such as alkylate, and strong gasoline imports, continue to limit gasoline's ability to restore refinery margins.  By contrast, weak hydrocracking and, more importantly, coking unit throughputs, demonstrate a response to weak distillate markets and the narrowing of heavy sour crude discounts, suggesting refineries are adapting.

Other changes revolve around the dramatic redrawing of global crude trade flows.  US imports of Saudi Arabian crude have collapsed from around 1.5 mb/d, to just over 700 kb/d.  Similarly, US imports of Mexican crude have plunged to around 1.0 mb/d in August, from a five year average level of 1.6 mb/d.  Offsetting these declines has been the rising volumes of Canadian crude imports and increasing variety of crudes, e.g., Russian Urals, which requires refineries to adapt to these new crudes.

Furthermore, narrower fuel oil cracks have resulted in several changes to fuel oil markets.  Firstly, OECD fuel oil yields have ticked up, as noted elsewhere in this report, suggesting refineries are responding to shifting product cracks.  Secondly, above average FSU and Saudi fuel oil exports may help restore typical fuel oil discounts, although the rise in condensate volumes may hamper such a move.  Lastly, the start of permanent, or at least semi-permanent, refinery closures will begin to establish a 'new normal' in the refining industry.  Namely, that capacity rationalisation will accelerate in the coming quarters as uncompetitive capacity is marginalised and shut down.

These factors in aggregate suggest that the industry is grappling with the outlook of persistently weak profitability.  It also highlights that some of the changes necessary to avoid the untenable imbalances highlighted in the June 2009 Edition of the Medium-Term Oil Market Report are indeed beginning to happen.  While the initial stages of the industry evolution to these changes are encouraging, more still needs to be done.