Oil Market Report: 11 December 2009

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Highlights

  • Forecast global oil demand is virtually unchanged for 2009 at 84.9 mb/d but is revised up by 130 kb/d to 86.3 mb/d in 2010.  Yearly growth (-1.4 mb/d and +1.5 mb/d, respectively) remains driven by non-OECD countries, but OECD prospects have slightly improved.
  • OECD industry stocks fell by 36 mb in October to 2,735 mb, 2.5% above 2008's level.  Middle distillates accounted for over 40% of the draw, yet global products in floating storage continued to rise in October and November.  End-October forward demand cover fell to 59.4 days, 2.5 days higher than a year ago.
  • Global oil supply rose by 200 kb/d in November.  OPEC crude production increased by 135 kb/d to 29.1 mb/d, its highest level in a year.  Largely as a result of lower non-OPEC supply prospects for 2010, next year's call on OPEC is raised by 0.5 mb/d to 29.0 mb/d, compared with 28.7 mb/d in 2009.
  • Forecast 2009 non-OPEC supply is raised by 125 kb/d to 51.3 mb/d as Russian gas liquids output is revised up.  In addition, the end of the quietest US hurricane season since 1997 has contributed to lift this year's outlook.  By contrast, 2010 supply is revised down by 265 kb/d to 51.6 mb/d, with North American supply now lower.
  • Projected global 4Q09 refinery crude throughput is revised down by 0.6 mb/d to 72.3 mb/d, due to weaker US preliminary data and higher maintenance in Asia and the Middle East.  Global 1Q10 crude throughput is seen rising by 1.0 mb/d year-on-year to 72.7 mb/d, but OECD crude runs are expected to fall given weak refining margins.
  • Crude oil futures prices traded in a higher $75-80/bbl range in November before weakening in early December on fears that the recovery in the global economy could be shallower and slower than expected, especially in the key US market.  Prices were trading at eight-week lows of around a $70-74/bbl range at the time of writing.
  • A medium-term market update sees upward revisions for demand (largely non-OECD Asia) outstripping those for supply (Russia, OPEC NGLs and Nigerian and Iraqi capacity).  Yet higher OPEC capacity ensures similar market outlooks - tightening under the higher GDP case, but remaining comfortable under lower GDP growth or faster efficiency gains.

Reviewing the medium-term horizon

The December OMR contains not only the customary review and projections through 2010, but also a preliminary update of June's MTOMR outlook to 2014.  Our short-term balance looks marginally tighter for 2010 than last month, with lower non-OPEC supply giving an underlying 'call on OPEC crude and stock change' which now rises in 2010 to 29 mb/d.  The medium-term outlook also sees a stronger 'call' compared with the June MTOMR, alongside slightly tighter spare capacity in the higher GDP case.  We summarise key features of the medium-term update below, and individual OMR sections discuss MTOMR revision specifics.  An interim update will be a regular feature of the MTOMR cycle, published within the OMR.  June 2010 will see the next full medium-term report.  The exercise here focuses on baseline data changes, updated GDP/price assumptions and revised upstream/downstream project schedules.  An MTOMR data appendix will be available for subscribers later in December and, as ever, we welcome your comments.

Oil Demand

Adjustments to the outlook result in average 2009-2014 demand around 1.9 mb/d higher than in June's report.  A higher 2009 baseline, partly from the impact of economic and fiscal stimulus programmes (notably for the non-OECD), and stronger assumed 2009/2010 GDP growth underpin this upgrade.  Our higher GDP case hinges on the IMF's October 2009 outlook, which sees more front-end loaded recovery than last time, but with the global economy again regaining trend growth around 4.5% later in the forecast.  Assumed crude prices follow the futures strip as at early December 2009, equating to $80/bbl (nominal) by mid-decade, compared with the $70/bbl assumed last time.  The higher GDP case generates annual average demand growth of 1.2 mb/d (+1.4%) from 2009 onwards, taking world demand close to 91 mb/d by 2014.  All of the growth comes from the non-OECD, which overtakes the OECD to account for 51% of world demand by 2014.  Of course, much dust still has to settle in the aftermath of the 2008 economic meltdown, but our working assumption remains that a degree of structural demand destruction has occurred, notably in the OECD, which may constrain overall levels of demand growth in future.  After the economic hiatus of 2009 and 2010, ongoing declines in oil intensity (tighter fuel economy standards, industry restructuring and gas-for-oil substitution) are assumed.



As in June, we also run a simplified lower GDP scenario, with economic growth levelling off at around 3% annually during 2011-2014.  Price and efficiency assumptions are the same as in the higher case.  This would generate sub-0.5 mb/d annual oil demand growth (+0.5% per annum) post-2009 and take global demand to just 87 mb/d in 2014 (broadly returning to 2007 global demand levels).  As was the case in June, the resulting 4 mb/d variance for mid-decade demand makes a huge difference for medium-term oil market balances.  Although annual contraction in OECD oil demand in this case is double that in the higher GDP case, volumetrically 75% of the demand difference comes from the non-OECD, where income elasticity is higher.

Oil Supply

World oil supply growth now shows signs of an uptick around mid-decade, compared with the weaker trend developed in June.  Although, based on currently active investment projects, non-OPEC potential still looks weak after 2011, higher expected OPEC crude and NGL capacity underpin this stronger outlook for supply as a whole.  That said, expanding the supply base remains difficult amid stretching lead times and a shift to higher cost oil.  However, the supply profile comes in an average 1.1 mb/d higher for the 2008-2014 period, weighted to the back end of the forecast period.  Amid higher prices and re-emerging oil demand growth, some previously deferred projects are moving forward once again.

Key to the non-OPEC profile is a nearly 1 mb/d upgrade for 2009 production, centred on higher Russian output, more robust Caspian supply and the absence of significant autumn US GOM hurricane outages.  Together these account for about 75% of the 2009 upgrade, which is largely fed through to 2014.  Non-OPEC supply now increases by 0.7 mb/d for the 2008-2014 period, compared with an earlier expected decline of 0.4 mb/d.  No across-the-board changes are made to future decline rates, since there is little evidence that lower spending in 2009 versus 2008 has so far exacerbated these compared with our original expectation.  We have therefore not reproduced June's low supply sensitivity for non-OPEC.

The main change is for Russia, with 2009 crude output now 270 kb/d higher than expected in June.  New fields, like Rosneft's Vankor in East Siberia, have ramped up quicker than expected, and mature West Siberian output has borne up better than we had anticipated.  Late-2008 rouble devaluation, a modest easing of fiscal terms in early 2009 and stronger crude prices since then have all helped sustain spending and activity levels.  Nonetheless, after renewed growth in 2009 and 2010, we expect Russian crude production to drift lower in 2011-2014.  But a detailed review of global gas liquids prospects (to be presented in full in 2010) suggests growth from Russian NGL through mid-decade could offset the crude decline, as gas flaring is curbed and liquids capture increases.  The key 2008-2014 sources of non-OPEC supply growth remain Canadian oil sands, biofuels, the US GOM, Russian NGL, Azerbaijan, Kazakhstan and Colombia.  Conversely, Mexican and North Sea output fall by some 2 mb/d combined.

OPEC crude capacity is now seen growing by 2.8 mb/d over 2008-2014, to 36.9 mb/d compared with the 1.7 mb/d expansion envisaged last June.  Improvements in the geopolitical situation (Nigeria), development contract uptake (Iraq) and the completion of cost renegotiation (Saudi Arabia) mean that several projects now have firmer timelines.  Angola, Iraq and Nigeria see projected 2014 capacity revised higher by around 350 kb/d each, although Libyan capacity is revised down slightly.

The mainstay of growth remains Saudi Arabia, where capacity increases by a largely unchanged 1.2 mb/d to 12 mb/d (much of this during 2009/2010). The earlier idled Manifa project is now back on track, albeit for later completion.  Iraq sees capacity grow by 0.6 mb/d to 3.1 mb/d as more development contracts have been signed with foreign companies.  New projects also underline Angolan growth from 1.9 mb/d to 2.5 mb/d.  Nigerian capacity growth is more modest, reaching 2.85 mb/d in 2014 from 2.65 mb/d in 2009.  However, this is a stronger profile than before, amid an admittedly still-fragile peace deal between government and Niger Delta rebels.

The OPEC gas liquids supply trend is slightly stronger, with production seen rising by 2.8 mb/d to 7.3 mb/d in 2014.  About 80% of this increase comes from the Middle East Gulf producers, with Qatar, Iran and Saudi Arabia prominent, while Nigeria and Algeria also show strong growth.  Projections for Algeria, UAE, Angola and Nigeria have been revised up since June, while lower associated gas supply accounts for a slightly weaker Saudi Arabian profile.  Nonetheless, ongoing LNG plant progress and an imperative to develop natural gas for domestic use continue to underpin strong gas liquids growth for OPEC overall.

Biofuels

Within the non-OPEC supply forecast, biofuels prospects in 2008-2014 are also revised up marginally (by an average 35 kb/d, or some 2%) compared with the June MTOMR.  Production in 2009 is now 1.6 mb/d, with 2014 supply potentially hitting 2.2 mb/d.  Brazil and the USA continue to account for the bulk of expected growth, which, though marginal in overall volume terms, nonetheless accounts for around 15% of expected incremental road transport fuel growth on an energy equivalent basis.

US ethanol production has proven robust since 2Q09 as plant utilisation has increased on better production margins.  Total US ethanol production rises from 690 kb/d this year to 835 kb/d in 2014, despite ongoing industry consolidation and uncertainty surrounding adoption of an E15 blend.  We also remain cautious over the US' ability to meet a Renewable Fuel Standard for cellulosic ethanol of 115 kb/d in 2014.

Although still the key source of biofuels growth, Brazilian 2009 ethanol production is revised down after poor harvest conditions, high sugar prices and constrained capacity expansion.  That said, supply still grows from 475 kb/d in 2009 to 730 kb/d in 2014.  Biodiesel prospects from Latin America are revised up however, and supply is seen increasing by 50% between 2009 and 2014, to attain 75 kb/d.  Although policy uncertainty in OECD Europe persists, capacity expansions suggest regional biofuels output could rise from 200 kb/d this year to 265 kb/d in 2014.

Refining

Expected global refinery capacity growth is revised up by 1.1 mb/d to 8.7 mb/d for the period 2008-2014.  Growth is dominated by China (2.9 mb/d), other Asia (2.1 mb/d) and the Middle East (1.5 mb/d).  Elsewhere, initial signs of capacity rationalisation in the US and Latin America cut growth in these regions.  The closure of Valero's Delaware and Sunoco's Eagle Point refineries markedly reduce expected North American regional growth to just 0.6 mb/d.  European growth is unchanged since the last June's report, although several key projects are now expected to complete sooner, including GALP's Sines and Repsol's Cartagena refinery expansions.



More generally, our earlier concerns over project delays, due to limited access to capital markets or retendering to capture lower costs, seem to have been overdone.  Projects such as Saudi Arabia's 400 kb/d Jubail refinery and the UAE's 420 kb/d Ruwais expansion awarded engineering, procurement, and construction contacts some nine to 15 months ahead of our previous expectations.  Consequently, we have now included these projects within the 2014 timeframe.  The Chinese government's stimulus programme is seen boosting Chinese capacity expansions over the medium term, notably in the country's southeast.  Similarly, in India, progress to date on several refinery projects aiming to take advantage of tax breaks, which expire in 2012, has been better than expected, so we have brought forward expected completion dates, even if early utilisation rates may be open to question.  A more complete review of regional operating rates and oil products balances will be contained in MTOMR 2010.

Oil Market Balances

The expected call on OPEC crude and stock change in the higher GDP scenario now stands an average 1 mb/d higher than in June, primarily due to a stronger demand baseline carried through the forecast. This has also curbed average effective OPEC spare capacity for most of the period until 2014, even though OPEC capacity itself has also been revised higher (not to mention the persistent OECD stock overhang evident in 2009).  The basic shape of the market balance under the higher GDP case nonetheless remains similar to June, with physical fundamentals tightening from 2011 onwards, pushing effective OPEC spare capacity back down towards 3.5 mb/d in 2013 and 2014.



That said, and acknowledging that the pace of supply growth will remain constrained for the foreseeable future, the path of economic recovery remains the key to determining where oil markets are heading over the next five years.  The lower GDP case may not currently be a consensus view but it has many adherents, who see the pressures of accumulating budgetary deficits and for now rising rates of unemployment as inevitably constraining economic recovery.  Our simplified scenario, merely slicing a third off the higher GDP case, likely fails to represent the distinct shape of any such constrained recovery, but does demonstrate the primacy of economic growth in driving oil demand.



Put simply, despite persistently sluggish supply-side growth, annual demand growth of markedly below 1 mb/d can likely be accommodated, without eating into the current margin of spare capacity.  OPEC producers might be alarmed at the prospect of spare capacity above 6 mb/d sustained through mid-decade.  However, we would argue that in the face of manifold geopolitical risks, a margin of supply flexibility of between 7-8% is hardly excessive and is unlikely on its own to lead to any form of price collapse.  Of course, this 'shock absorber' for the market could also be realised in the event of the stronger economic growth case, if that was accompanied by accelerated efficiency improvements.  So, over the longer term, security of supply and environmental goals (like those itemised in the WEO's 450 scenario) can be met, even under an assumption of higher GDP growth, by accelerating efforts to reduce oil intensity beyond the 3% annual gains assumed here. A dual-track approach of unblocking supply-side bottlenecks and encouraging more efficient oil use may therefore be the most effective policy path for avoiding price volatility in future.



Demand

Summary

  • Forecast global oil demand remains virtually unchanged in 2009 and is revised up by 130 kb/d in 2010.  Global oil demand is expected to average 84.9 mb/d in 2009 (-1.6% or -1.4 mb/d year-on-year) and 86.3 mb/d in 2010 (+1.7% or +1.5 mb/d versus the previous year).  Growth continues to be driven by non-OECD countries, notably in Asia and the Middle East.  Nonetheless, OECD prospects have improved to some extent, particularly in the Pacific.
  • The OECD oil demand projection remains broadly unchanged in 2009, but is slightly adjusted up by 70 kb/d in 2010 on the back of an improved outlook for the Pacific, especially in Korea.  Oil demand is set to fall by 4.3% year-on-year (-2.0 mb/d) to 45.5 mb/d in 2009 and remain flat in 2010, as a year-on-year contraction in 1Q10 is expected to be offset by a return to modest growth in the following quarters.  Yet a key risk to the forecast pertains to the US outlook.  Demand remains stubbornly sluggish, with a continued contraction in distillate deliveries and very modest growth in gasoline demand despite a very weak 2008 baseline.  Moreover, the unpredictable nature of weekly-to-monthly revisions, given the weight of US demand, have resulted in large regional and global adjustments in recent months.  These have retrospectively revealed markedly different oil market conditions than suggested by preliminary weekly data, thus highlighting the difficulty of reconciling data timeliness and accuracy.


  • Forecast non-OECD oil demand has been increased up by roughly 20 kb/d and 60 kb/d for 2009 and 2010, respectively.  This results from higher-than-expected preliminary data for China and India, whose economies continue to benefit from government stimuli.  Non-OECD demand is expected to reach 39.3 mb/d in 2009 (+1.8% or +0.7 mb/d year-on-year) and 40.8 mb/d in 2010 (+3.7% or +1.4 mb/d versus the previous year).  Nonetheless, the forecast faces considerable uncertainty regarding data quality.  The most glaring is the seeming mismatch between China's subdued gasoline demand and surging car sales.  It remains unclear whether Chinese drivers are highly circumspect with regards to car usage, whether the vehicle fleet has suddenly become extremely efficient or whether gasoline demand is simply being under-reported.
  • Medium-term oil product demand is now expected to be some 1.9 mb/d higher over 2009-2014 when compared with the June 2009 MTOMR.  Global oil product demand is forecast to rise by 1.4% or 1.2 mb/d per year on average between 2009 and 2014, from 84.9 mb/d to 90.9 mb/d, with non-OECD demand accounting for more than half of global demand by mid-decade.  The changes to the prognoses are related to baseline revisions, essentially in China and non-OECD Asia; much stronger-than-expected oil demand growth in 2009 as a result of massive fiscal and monetary stimulus programmes; and stronger IMF GDP assumptions for 2009 and 2010, offset to a degree by a higher price assumption.
Medium-Term Demand Update

We have updated our medium-term forecast released in June.  As noted in the market overview, oil demand is now expected to be some 1.9 mb/d higher over 2009-2014 when compared with June's MTOMR.  Global oil product demand is seen growing by 1.4% or 1.2 mb/d per year on average between 2009 and 2014, from 84.9 mb/d to 90.9 mb/d, with non-OECD demand accounting for more than half of global demand for the first time ever by mid-decade.  In order to provide a range for potential demand evolution, we maintain our alternative, 'low GDP' scenario, whereby global GDP growth would remain subdued, expanding by only 3% post-2011 or about a third less than under the higher case.  Under this scenario, oil demand would grow by only 0.5% or 430 kb/d per year on average to 87 mb/d by 2014, a difference of 3.8 mb/d versus the higher case.

The changes to the prognoses are primarily related to baseline revisions, notably in non-OECD countries, much stronger-than-expected oil demand growth in 2009 as a result of massive fiscal and monetary stimuli implemented by governments across the world, and higher IMF GDP assumptions for 2009 and 2010.  (In its October update, the IMF front-loaded growth at the beginning of the forecast period while trimming slightly the prognoses for later years.)  In addition, we lifted our medium-term price assumption to roughly $76/bbl in real terms by 2014, compared with $60/bbl in June, based on the prevailing futures strip as of early December.  Non-OECD countries - mostly China and the rest of Asia - account for roughly three-quarters of the forecast revision, highlighting the growing resilience of that part of the world relative to the OECD.  It also demonstrates that data remain patchy in several key emerging countries, an issue poised to become more pressing in future, given that the centre of gravity of the oil market will shift to emerging countries.



It is worth noting that the growth in oil demand observed in 2009 and expected in 2010 will be somewhat 'anomalous', driven by extremely loose macroeconomic policies in big emerging economies, most notably China.  As such, the fall in oil intensity over 2009-2010 will be relatively limited, but by 2011 it should resume and even accelerate relative to its historical pattern, assuming economic growth is sustained after the withdrawal of macroeconomic stimuli.  Between 1998 and 2008, global oil intensity declined by -2.2% per year on average.  We assume that the fall will slow to only -0.9% per year on average over 2009-2010, and then accelerate to -3.0% per year on average over 2011-2014.

OECD

According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 4.1% year-on-year in October.  In OECD Europe, oil product demand plummeted by 7.1% year-on-year, with all product categories posting losses.  In OECD North America (which includes US Territories), demand fell by 3.7% as the rebound in LPG, gasoline, jet fuel/kerosene and residual fuel oil demand failed to offset continued gasoil decline.  By contrast, demand in OECD Pacific grew (+1.0%) for the first time in 16 months, boosted by strong deliveries of naphtha, gasoline and middle distillates.



The relatively large revisions to September preliminary data (+790 kb/d) were almost entirely due to North America, as deliveries for LPG, gasoline, gasoil and 'other products' proved to be much stronger than suggested by preliminary data.  As such, September demand contracted by 1.7% year-on-year, almost half than previously reported (-3.5%).  However, given other revisions, OECD oil demand is virtually unchanged for this year (-10 kb/d when compared with last month's report), but is revised slightly higher for next year (+70 kb/d).  Demand is thus expected to contract by 4.3% in 2009 to 45.5 mb/d and remain flat in 2010.







North America

Preliminary data show that oil product demand in North America (including US Territories) fell by 3.7% year-on-year in October.  With the exception of September 2009, which posted growth relative to a low 2008 baseline, demand in the region has uninterruptedly contracted on a yearly basis since the summer of 2007.  The fall in October was largely due to the United States (-4.4% year-on-year), followed by Canada (-1.6%).  By contrast, Mexico posted modest growth for the second month in a row (+0.8%).



Revisions to September preliminary data were sizeable (+670 kb/d), almost entirely due to the US, with upward adjustments in LPG, naphtha, gasoline, gasoil and 'other products' offsetting lower readings for jet fuel/kerosene and residual fuel oil.  Total demand in North America actually rose by 2.8% year-on-year in September, rather than declining by 0.2%.  However, on an annual basis, forecast North American oil product demand is little changed.  It should average 23.3 mb/d in 2009 (-3.7% or -890 kb/d versus 2008 and -40 kb/d versus our last report), while demand in 2010 should rise to 23.4 mb/d (+0.7% or +170 kb/d year-on-year and some 30 kb/d higher than previously thought).



Adjusted preliminary weekly data in the continental United States indicate that inland deliveries - a proxy of oil product demand - contracted by 3.7% year-on-year in November, following a 4.5% fall in October.  The September spike (+3.1% on revised data) appears to have been short-lived and owing mostly to a weak, hurricane-stricken 2008 baseline.  However, the preliminary estimates for October and November could still be sharply revised (see Another Source of Uncertainty).



Meanwhile, diesel demand - which is strongly correlated with economic activity - continues to be stubbornly weak, falling by 7.9% year-on-year in September.  Adjusted weekly figures suggest that demand may have contracted by as much as 17.9% in October and by 8.3% in November, despite the beginning of the Christmas shopping season after Thanksgiving.  Jet fuel demand, which is also considered a leading economic indicator, is hardly faring better.  It fell by 5.7% in September, and rose by only +0.8% and +2.7% in October and November, respectively - a very modest improvement considering the extremely weak 2008 baseline.

Gasoline demand registered a bounce in September (+4.8%), commensurate with a 2.6% yearly increase in average daily vehicle-miles travelled for the fourth month in a row.  Yet this appears to have been a temporary summer holiday phenomenon as travellers reportedly choose to drive rather than fly.  Indeed, adjusted weekly data indicate that gasoline deliveries rose by only 0.4% and 0.7% in October and November, respectively.  In sum, the outlook for US oil demand is largely unchanged, with oil product demand expected to average 18.7 mb/d in 2009 (-4.0% year-on-year) and 18.9 mb/d in 2010 (+0.7%).

Another Source of Uncertainty

Over recent months, it has become increasingly difficult to gauge US monthly demand trends from preliminary weekly data.  In terms of direction, the revisions from EIA weekly to monthly data have been generally downwards, reflecting the fact that weekly figures are an initial sample that tends to overestimate actual demand.  However, the revisions for October 2008 and April-July 2009 were positive.  While the October 2008 revision was probably due to the effects of last year's hurricanes, those of the 2009 summer were quite unusual - actually revealing that there was a driving season this year, contrary to what the weekly data had suggested.  Perhaps the change in direction was related to strong ethanol production, but if so, it is unclear why there was again a reversal in August and September.

Regarding their magnitude, the revisions increased gradually - and markedly - over the past year.  This could result from the economic recession; indeed, exports may have been counted as demand in the weekly data, being later removed from the more precise monthly estimates.  However, if this is the case, it is unclear why the revisions for November 2008 and January, March, April and July 2009 were relatively minor, and why they increased sharply again in August and September.  Finally, the products concerned have also varied noticeably.  The revisions are usually concentrated in 'other oils' (comprising LPG, naphtha and 'other products' as defined in this report), gasoline and gasoil.  However, in recent months the changes to jet fuel or fuel oil have also been relatively sizeable.



Given this irregular pattern of revisions, any pre-emptive weekly-to-monthly adjustment on our part is prone to miss the mark.  Indeed, based on a three-month average of previous changes, the revision for October should be around -350 kb/d.  However, using a six-month average would result in a -70 kb/d adjustment, while a nine-month average would imply -170 kb/d and a twelve-month average -150 kb/d.  For the past two months, our own pre-emptive adjustment has been based on a twelve-month average, in order to smooth out the unexpected changes observed recently.  Yet we underestimated demand for September by almost +580 kb/d.  In sum, difficulties in anticipating US monthly data have become a major source of oil demand uncertainty.  Given the weight of US demand, these weekly-to-monthly revisions have resulted in large regional and global swings, retrospectively revealing markedly different market profiles than thought when preliminary weekly data were first released.  While US weekly data are immensely helpful in providing an initial snapshot, it nonetheless highlights the vexing issue of data timeliness versus accuracy, with a convergence unfortunately very difficult to achieve.

Oil product demand in Mexico has risen for the past two months, after a year of continuous monthly falls (only briefly interrupted in March) triggered by the combined effects of the recession and the A/H1N1 flu alert.  Demand increased by 1.4% year-on-year in September and by 0.8% in October, but this improvement was essentially due to a surge in residual fuel oil demand for power generation over the summer, rather than to a sustained recovery from the global economic slump.  Indeed, the country has faced one of its worst droughts since the 1930s (which has resulted in less electricity production from hydro sources).  On the economic front, Mexico is actually likely to be among the hardest hit countries, owing to its dependence on the US market.



State-owned Pemex announced plans to invest $12.1 billion over the next decade to repair its 47,000-km pipeline network and build new lines.  This will probably help reduce the number of pipeline leaks from a 25-year old network that has suffered from inadequate maintenance.  However, it is unclear whether the theft of crude and refined products from Pemex's pipelines - which may be somewhat inflating overall demand - will be curbed.  The company admits this is a serious issue, implying a loss of at least $700 million per year through some 400 illegal pipeline connections (other observers reckon that Mexico's fuel black market could total as much as $2 billion per year).  More recently, the smuggling even acquired an international dimension, as executives of two oil companies based in Houston admitted to having bought stolen condensate in order to resell it in the US, and there are reports that several other companies are being investigated.

Europe

Oil product demand in Europe plunged by 7.1% year-on-year in October, according to preliminary inland data, with all product categories posting losses.  Admittedly, the fall was largely driven by weak deliveries of heating oil (-17.7%) and residual fuel oil (-14.4%), following trends that emerged a few months ago.  Lower heating oil demand in 2H09 has naturally followed the strong pace of consumer stockbuilds during 1H09, while cheaper natural gas remains also a viable alternative to residual fuel oil in industry.



Revisions to September preliminary demand data (-70 kb/d) were mostly concentrated on distillates and residual fuel oil.  OECD Europe oil demand thus fell more on a yearly basis during that month than previously anticipated (-7.2% instead of -6.8%).  Forecast oil product demand remains broadly unchanged at 14.6 mb/d in 2009 (-4.8% or -740 kb/d versus 2008), barely increasing in 2010 (+0.3%or +40 kb/d year-on-year).



Preliminary data indicate that German oil product demand plummeted in October (-14.7% year-on-year), marking the third consecutive month of double-digit falls.  This is mostly due to weak demand for heating oil (-40.1%) and residual fuel oil (-31.7%).  Consumer heating oil stocks remained at 68% of capacity by end-October, the highest level in the past two years, unchanged from September but much higher than in the same month of the previous year (62%).  In the meantime, cheaper natural gas continued to compete favourably against fuel oil.  A similar picture prevailed in France, although the contraction was less pronounced.  Oil product deliveries fell in October (-7.4% year-on-year), dragged down by lower deliveries of heating oil (-10.5%) and residual fuel oil (-13.1%).





It is worth noting that Polish oil product demand has rebounded strongly since May, growing at 3.6% on a yearly basis in October, according to preliminary figures.  Poland is the only large European country that managed to avoid a recession altogether.  As such, oil demand has been fairly resilient - although, admittedly, total demand is about a third to a half of that of European countries of equivalent land size and population.  Growth has been supported mostly by transportation needs, which have offset the structural decline of heating oil and residual fuel oil.  Diesel, which accounts for roughly 40% of total demand, has expanded at double-digit rates for the past four months, reflecting the ongoing 'dieselisation' of the vehicle fleet, notably among corporate users.

Pacific

Oil product demand in the Pacific grew (+1.0%) for the first time in 16 months, boosted by strong deliveries of naphtha, gasoline and middle distillates, according to preliminary data.  In terms of countries, though, growth was entirely due to Korea, as Japan continued to report a contraction.



September revisions were relatively large (+190 kb/d), owing to higher-than-expected demand for heating oil, residual and 'other products'.  Forecast OECD Pacific demand has thus been slightly revised up to 7.7 mb/d in 2009 (-5.1% or -410 kb/d on a yearly basis and +60 kb/d versus our last report) and 7.5 mb/d in 2010 (down by 2.4% or 190 kb/d when compared with the previous year and +40 kb/d versus previous estimates).



According to preliminary data, Japanese oil demand contracted by 2.7% year-on-year in October, dragged down by weak deliveries of LPG (-10.9%), residual (-28.1%) and 'other products' (-27.5%).  Nonetheless, diesel, naphtha and jet fuel/kerosene demand recorded strong readings (+3.1%, +6.9% and +21.5%, respectively).  The resilience of naphtha and diesel demand reflect rebounding industrial and transportation activity fuelled by rising exports to Asia, particularly to China (petrochemicals, cars, electronics and steel).  The rise in jet fuel/kerosene deliveries, meanwhile, is largely in line with seasonal patterns, as kerosene is mostly used for heating, although it could be argued that Japanese consumers may have decided to fill their tanks somewhat earlier in anticipation of seasonally higher prices.

Korea has also benefited from strong Chinese imports, perhaps even more than Japan.  Its economy grew faster in 3Q09 than initially estimated (+0.9% year-on-year instead of 0.6%, equivalent to +3.2% quarter-on-quarter).  Total oil product deliveries rose by 8.5% year-on-year in October, underpinned by strong demand for naphtha (+9.0%), which accounts for 40% of total Korean demand, and jet fuel/kerosene ahead of the heating season.  More interestingly, perhaps, gasoline deliveries surged counter-seasonally (+20.7%), but it should be noted that gasoline demand has been particular strong since 2Q09, possibly indicating more resilient disposable income per capita.





Non-OECD

China

Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) surged by 13.4% year-on-year in October, with all product categories bar residual fuel oil posting gains.  This was the second consecutive month of double-digit growth, underpinned by buoyant demand for naphtha (+31.7%), jet fuel/kerosene (+26.5%) and 'other products' (+40.3%).  Arguably, oil demand continues to be boosted by the government's stimulus programme, but as this report has repeatedly noted, some of this rise may be also related to stockpiling in anticipation of domestic price increases.





Given these higher-than-expected figures, we have revised up once again our demand forecast by roughly 80 kb/d on average for both this year and next.  Total oil demand is now expected to average 8.4 mb/d in 2009 (+6.6% or +520 kb/d) and 8.7 mb/d in 2010 (+3.6% or +300 kb/d).  However, these prognoses may be revised again next month.  The severe snowstorms and the accompanying cold snap that hit northern and north-western China in early November reportedly disrupted coal, oil products and natural gas deliveries, and forced the closure of highways and roads.  This may translate into weaker-than-expected demand for that month.  Still, it is worth noting that Chinese demand growth is on track this year to match the last surge (in 2006:  +550 kb/d) - and the highest growth of any country during a recession year.

Who's (Not) Driving?

Chinese apparent demand data feature some odd trends.  The most glaring is the seeming mismatch between subdued gasoline demand and surging car sales, which we have highlighted over the past few months.  We have argued that this inconsistency is probably largely related to incomplete data (notably the lack of inventory figures and possibly missing or understated estimates from independent retailers), but other observers have proposed alternative explanations.

Some contend that the reason behind subdued gasoline demand is simply due to a dramatic efficiency improvement, as small cars have accounted for over two-thirds of total sales given higher sales taxes on bigger engines and rising retail gasoline prices.  A variant of this argument is that, since tax incentives on small cars are due to expire by year-end, consumers are rushing to buy new cars or replace existing, less efficient ones even if they do not really intend to use them for the time being.  Along the same lines, other analysts suggest that local governments and state-owned companies have been ordered to purchase cars in order to support local manufacturers, but that these vehicles are sitting idle in car parks.

Some behavioural explanations have also been advanced.  One posits that Chinese motorists drive intrinsically less than elsewhere.  Cars would serve primarily to enhance the social status of their owners, who typically would use them only during the weekend, preferring public transportation during the working week, notably in large urban areas (in Beijing, for example, all private vehicles are not allowed to circulate one day per week based on their number plates' last digit).  Another explanation is that some sales reflect second-car purchases by wealthy households, and these vehicles would also tend to be driven only on an occasional basis.

However, as compelling as these explanations may be, they remain largely anecdotal, while some appear to be contradictory.  As much as efficiency may have improved, the sheer volume of car sales should arguably point towards much higher gasoline demand than currently inferred from official statistics.  Moreover, sales of big, gas-guzzling imported cars have also increased strongly (albeit at a slightly lower pace than domestic ones), thus somewhat downplaying the alleged price sensitivity of Chinese consumers.  In addition, the central government has frozen expenditures of new cars and has strongly encouraged local governments to follow suit, thus casting doubts on its supposed willingness to support the local industry at all costs.  Finally, the behavioural explanations are virtually impossible to assess, although they may become retrospectively clearer in a few years.  Yet the mystery remains unsolved:  are the Chinese highly circumspect about driving, has the vehicle fleet become extremely efficient or is gasoline demand under-reported?

Other Non-OECD

India's oil product sales - a proxy of demand - surged by 8.4% year-on-year in October, according to preliminary data.  This strong performance, reflecting the country's remarkable economic resilience, was mostly due to buoyant growth across all product categories bar naphtha, particularly LPG (+10.8%), gasoline (+18.6%), gasoil (+12.4%) and 'other products' (+16.4%).  By contrast, naphtha demand was reported to have declined by 23.3% given greater natural gas availability to utilities, fertiliser producers and steel plants.  However, as we have often noted in this report, naphtha preliminary figures are usually revised up (+70 kb/d in September, showing that demand actually expanded by +2.3% rather than declining by 20.8% as previously assessed).  Therefore, the much-anticipated structural decline in naphtha demand is so far proving elusive.

The rise in gasoline demand is noteworthy.  October car sales increased at their fastest pace in over two years (+34% year-on-year), helped by cheap credit.  In addition, the Diwali holidays, which traditionally boost domestic travel, fell in mid-October.  Meanwhile, the strength of gasoil demand was largely driven by farmers in key grain producing states, where the fuel is used to run water pumps and power generators.



The government has taken some tentative steps to address the issue of fuel subsidies, which have again become a pressing concern as international oil prices hover around $75/bbl.  Short of moving to abolish them, the Ministry of Petroleum & Natural Gas has reportedly launched a pilot project in three cities (Pune in Maharashtra, Hyderabad in Andhra Pradesh and Bangalore in Karnataka) to allocate kerosene and domestic LPG - two fuels used by the majority of the population - via smart cards, targeting the population quintiles that truly need subsidised fuel.  If the project proves successful, smart cards will be introduced throughout the country.  In addition, the government may implement dual pricing for transportation fuels, but such a decision is not expected before year-end.



In early December, Russia's Federal Anti-Monopoly Service (FAS) announced a deal with the country's oil companies aimed at working out a price formula to set 'fair' domestic oil product prices.  This comes after almost a year of investigations - and heavy fines - against Russia's majors, both private and state-owned, for alleged manipulation of retail prices.  (The vertically-integrated majors reportedly control sales in 57 out of the country's 89 regions, despite owning less than half of total retail outlets.)  According to the agreement, a specific domestic refinery (yet to be determined) will be chosen as a benchmark for a new price formula, which will eventually also incorporate international prices (possibly oil product prices in Rotterdam, although some companies argue in favour of pegging domestic prices to several, rather than just one, international benchmarks).



This solution appears to discard an earlier proposal to oblige oil companies to trade at least 15% of their domestically-oriented output through Russia's three commodity exchanges (which currently handle less than 2% of the country's total oil product sales).  Moreover, it is unclear whether another FAS proposal to achieve 'fair' prices - by forcing companies to dispose of their retail operations - will be implemented.  Interestingly, Russian motorists seem unconcerned by these price issues, judging by the fact that gasoline has remained buoyant.  By contrast, overall oil demand plummeted as the country entered into a severe recession last year.



Supply

Summary

  • Global oil supply rose by 200 kb/d in November, two-thirds of which came from OPEC.  Year-on-year, global supply is down marginally, with lower OPEC output mostly offset by higher non-OPEC production.  Largely as a result of lower non-OPEC supply prospects for 2010, next year's call on OPEC is raised by 0.5 mb/d to 29 mb/d, compared with 28.7 mb/d in 2009.
  • OPEC production rose 135 kb/d in November, to 29.1 mb/d, led by a sharp rebound in Nigerian output amid improved security following the government's October ceasefire agreement with rebel forces.  OPEC-12 production is now at the highest level in a year and up by 1 mb/d from the group's February low of 28.1 mb/d.  OPEC ministers are scheduled to meet in Angola on 22 December to discuss output targets.
  • Forecast non-OPEC supply in 2009 is nudged up to 51.3 mb/d (+125 kb/d versus last month's report), as the quietest US hurricane season since 1997 came to a close.  In addition, a review of global NGL capacity brings an upward adjustment to Russian and other gas liquids output in 2009.  In contrast, for 2010, lower North American NGL and US GOM crude prospects more than offset higher Russian NGL, with total supply now revised down by 265 kb/d to 51.6 mb/d.
  • Updated medium-term global supply capacity projections show an upward adjustment of 1.1 mb/d on average in 2008-2014, weighted to the latter half of the forecast period.  OPEC's crude capacity growth was revised up largely on a stronger outlook for Nigeria and Iraq, now forecast to rise by 2.8 mb/d, to 36.9 mb/d.  OPEC NGLs were also slightly higher, with capacity now forecast to increase by 2.8 mb/d, to 7.3 mb/d.  Non-OPEC supply prospects have improved, now forecast to grow by 0.7 mb/d compared with a previous decline of 0.4 mb/d in 2008-2014 period.


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

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

OPEC Crude Oil Supply

OPEC production inched higher in November, up by 135 kb/d to 29.1 mb/d, led by a sharp rebound in Nigerian output amid improved security following the government's October ceasefire agreement with rebel forces.  OPEC-12 production is now at the highest level in a year and up by 1.0 mb/d from the group's February low of 28.1 mb/d.

Crude oil production by OPEC-11 rose by 90 kb/d to 26.6 mb/d in November with the group now producing about 1.8 mb/d above its 24.845 mb/d output target.  Relative to targeted output cuts, OPEC's compliance rate slipped to just 58% in November compared with 60% in October.

Iran and Angola continue to top the list of overproducers, collectively accounting for 40% of above target output.  Iran's production increased by 40 kb/d to 3.7 mb/d, with the country's target compliance slipping to just 20% in November.  Angolan production was 25% above its implied target of 1.5 mb/d.  OPEC's newest member continues to argue its output target allocation in place since September 2008 is too low.  Angola's less-than-stellar compliance level may prove awkward at OPEC's 22 December meeting taking place in the country's capital.



Despite weakening compliance with output targets, pre-meeting statements by OPEC ministers suggest the group is comfortable with current levels of both oil production and crude prices.  With oil prices hovering around $75/bbl in November and early December, a consensus appears to favour rolling over current output targets.  OPEC may be calculating that a recovery in oil demand in 2010 will quickly reduce the relatively high levels of global crude and refined product stocks.  Indeed, OPEC may be banking on stronger winter demand for its crude judging by higher customer contract allocations for December and tanker tracking reports which show higher exports this month. 

Saudi Arabia's production was estimated at 8.28 mb/d in November, unchanged from the upward revised October level.  The higher levels are in line with previously announced increased contract allocations for some customers in Asia for December.  Above-target output also continues to be used for domestic use at power plants. The substitution of lighter quality crude instead of fuel oil partly reflects the Kingdom's new environmental regulations calling for cleaning burning feedstock.

Nigeria's output rose to the highest level in 15 months and accounted for around 60% of the group's increase in November.  Production rose 80 kb/d, to just under 2 mb/d in November, as companies stepped up the pace of repair work to damaged oil infrastructure with the ceasefire agreement holding.  Nigeria's oil minister estimated that the country could bring back onstream some 500 kb/d of shut-in production by the end of 2010 (see Medium-Term OPEC Capacity).

Medium-Term OPEC Capacity Update:  Nigeria and Iraq Key to Stronger Increases

The unexpected success of the Nigerian government's ceasefire accord with key rebel groups, Iraq's tangible progress in awarding technical service agreements to IOCs and new development plans in Angola are behind our upward revision to the outlook for OPEC production capacity published in the June MTOMR.  OPEC crude production capacity over the 2008-14 period is now forecast to rise by 2.8 mb/d, to 36.9 mb/d.  This represents a revision of +1.1 mb/d compared with last June's outlook for capacity growth of 1.69 mb/d.

OPEC's condensate and natural gas liquids (NGL) capacity has also been raised, by a smaller 175 kb/d, with growth now forecast at 2.79 mb/d, to 7.3 mb/d.

Nigeria's Reversal of Fortune

Nigeria's eleventh hour victory in securing a ceasefire agreement with militant groups holds the promise of a significantly improved operating environment for IOCs after years of debilitating attacks on the country's oil production infrastructure.  Nigeria's oil minister estimated that the country could bring back on stream some 500 kb/d of shut-in production next year.  Those projections are in line with our previous estimate of 500-600 kb/d of available capacity that could be restored in the short term.  For the 2008-14 forecast period, Nigeria's production capacity has been revised higher by 386 kb/d from the June report, with output levels now expected to increase by 370 kb/d versus a previous decline of 20 kb/d.  Nigeria's production capacity is forecast to reach 2.9 mb/d by 2014.  In the near term, restoration of shut-in production will be augmented by a ramp up in the Agbami field next year.

Before the ceasefire, Nigerian production fell to the lowest level in more than two decades in August but output is on track to breach the 2 mb/d mark in December as companies fast track repair work on damaged infrastructure.  The medium-term outlook critically hinges on the government's success in rehabilitating the former militants and improving the living conditions in the Niger Delta region.  A similar amnesty offer based on a cash-for-arms program under then President Obasanjo in 2004 collapsed because the government failed to deliver on promises or follow through with a sustainable development plan.  As a result, militants groups reorganised under new leaders and rearmed, ushering in a new wave of violence and disruption.

This time, however, the government has significantly increased spending in the region, earmarking roughly $1.3 bn for post-amnesty development projects, including building roads, schools and hospitals as well as proposing to allocate 10% of revenues from its oil joint ventures to residents in the Niger Delta.



The administration has also enlisted support from companies operating in the country. In tandem with government officials, Shell launched training programmes in November for former militants.  The European Union and South Korea, among others, have also offered financial assistance to provide training and build infrastructure for the impoverished oil-producing region.

While the prospect for securing peace with rebel groups looks more promising than at any time in the past, Nigeria's controversial 'Petroleum Industry Bill (PIB)' may yet derail production capacity expansion plans.  Nigerian lawmakers are pushing forward with plans to pass legislation a decade in the making aimed at restructuring the state oil company to put it on a profit-making footing capable of meeting funding commitments with its joint venture partners.  At the same time, the proposed legislation would allow the government to renegotiate old contracts, including offshore oil production contracts from the 1993 bid round, and impose higher royalties and taxes.  Negotiations are ongoing and we assume for our forecast that a positive outcome for the government and companies will prevail, allowing stalled capacity expansion plans to move forward.

Navigating Iraqi Minefields

Iraqi production capacity is forecast to rise by just over 600 kb/d, to 3.1 mb/d by 2014.  That is an upward revision of 390 kb/d from our June forecast in light of the progress made on contract awards and the pressing imperative to increase revenues.  However, the many political and security risks that continue to challenge the government and industry remain, leaving our outlook extremely vulnerable to future revision.  Iraq's three-track strategy to boost oil production in the short term has met with mixed success.  The enhanced drilling programmes by the Southern Oil Company (SOC) and the Northern Oil Company (NOC) have so far failed to increase production as planned. The joint venture between the Iraq Drilling Company and Mesopotamia Petroleum Company (UK) collapsed for lack of funding, underscoring the difficulties the national companies have had in ramping up production on their own.

The first bidding round for Technical Service Contracts (TSCs) for fields currently in production ended in only one contract being signed for the much coveted Rumaila field. On paper, the contract calls for production to rise from the current 1.0 mb/d to 2.85 mb/d.  Negotiated Engineering, Procurement and Construction (EPC) contracts with IOCs are also near being concluded for Nasseriya, Zubair and West Qurna. The deals in the pipeline are aimed at increasing capacity to 7.0 mb/d.

The second international licensing round, which focuses on undeveloped fields under TSCs, is scheduled for 11-12 December, and includes the Majnoon and West Qurna Phase-2.  The second bid round is expected to increase production by a further 3 mb/d, with the ministry forecasting production capacity to reach 10 mb/d by 2018-20.  However, the production targets are arguably very ambitious and are near impossible to reach in the announced time frame given political, logistical and technical hurdles.  Clarity on the contract awards may emerge following the country's elections now planned for early March. However, a significant increase in violence and bombings leading up to the elections are already causing security problems for the second bid round, highlighting the overwhelming security issues for companies.

Equally important, logistical constraints on the country's export capacity in the medium term are a formidable issue that urgently needs to be addressed if the country is to move forward with its expansion plans.  Experts estimate that current capacity constraints will limit exports to under 3.0 mb/d until major infrastructure work can be completed in the southern region, with 2013-14 the earliest expansion work would be completed.  Our updated forecast sees annual production capacity holding flat at around 2.5 mb/d in the near term and then rising to 2.7 mb/d in 2013 and to 3.1 mb/d in 2014.

Crude oil production in Iraq also increased last month despite further attacks on the northern export pipeline and weather-related delays disrupting southern shipments.  Production rose 45 kb/d, to 2.5 mb/d last month, with exports pegged at 1.96 mb/d. Exports of Basrah crude were up 65 kb/d, to 1.56 mb/d even as shipments from the south were hampered by loading delays during the last week of the month due to bad weather.  Exports of Kirkuk crude from the north were unchanged from October's levels at around 375 kb/d.  Iraqi production estimates include 550 kb/d of crude used for refinery operations and at power plants as well as an estimated 20 kb/d of output in the Kurdish region of the country.



Venezuela's November output declined by 20 kb/d, to 2.2 mb/d, reflecting technical problems at two of the country's extra-heavy oil upgrading plants, Petrocedeno (165 kb/d) and Petroanzoategui (135 kb/d).  As a result, upgraded Orinoco oil averaged 460 kb/d in November, down 20 kb/d from October levels.

Non-OPEC Overview



Revisions to short-term non-OPEC supply this month stemmed mainly from baseline changes to natural gas liquids (NGL), while recent reported data contained few surprises.  Tropical Storm Ida brought the US hurricane season to an end, only briefly shuttering Gulf of Mexico production, though by less than we had already deducted on the basis of five-year average outages, thus nudging up the US baseline.  In the process of updating our medium-term outlook, project start-up dates have been reviewed, while in addition, we undertook a wide-ranging reappraisal of NGL production figures (see Medium-Term Non-OPEC Supply Update:  Higher Baseline, More Optimistic Outlook).  The net result for total non-OPEC supply is an upward revision of 125 kb/d to 2009, now forecast to average 51.3 mb/d, and a downward revision of 265 kb/d to 2010, now seen growing to 51.6 mb/d.

Medium-Term Non-OPEC Supply Update:  Higher Baseline, More Optimistic Outlook

A series of monthly upward revisions, a more optimistic view on project start-up dates and a wide-reaching reappraisal of natural gas liquids (NGL) have led to substantial upward revisions to our medium-term non-OPEC supply figures.  Total output is now expected to grow 0.7 mb/d from 2008 to 2014, reaching 51.4 mb/d, compared with a decline of 0.4 mb/d forecast in June's MTOMR.

The single largest contribution to the higher forecast comes from Russia's unexpectedly robust crude production in 2009.  Compared with earlier in the year, when this report and most others were still anticipating a decline in 2009 Russian crude output, monthly production figures have disproved this, as new fields ramped up earlier and faster than expected, encouraged by a recovery in oil prices and some well-timed fiscal incentives.  Our outlook now expects Russian crude output to rise for a second year running in 2010, but then to drop, as decline at mature fields outweighs new start-ups.

The outlook for supply overall has improved, with a higher price assumption (around $75/bbl on average for 2010-2014, in real terms) and a widespread perception that the worst of the global economic crisis is over.  It appears that upstream investments have not been cut as sharply as feared earlier in the year, though costs, too, may not have fallen as much as anticipated and overall, it is fair to say that many upstream projects are back on the drawing board again.  This is certainly true for Canadian oil sands, which (as in June's MTOMR) are forecast to show the strongest growth over the forecast period.  But earlier-than-assumed starting dates at projects have also boosted the outlook for Brazil, Colombia, Kazakhstan, Oman and others.  In the US, the absence of any significant hurricane shut-ins this season has raised baseline production in the near term.  Partly offsetting these adjustments, downward revisions were made in Mexico, Indonesia, Brazilian fuel ethanol and Ivory Coast.



NGL projections have been recalibrated to reflect the latest IEA gas production forecast, which has led to numerous adjustments, both for baseline and outlook profiles.  The resulting aggregate downward revision is quite small for current output levels though greater towards the tail-end of the forecast, while changes to individual countries are significant.  Notably, Russia's NGL baseline is upped by 50 kb/d and both gas plant liquids and condensate output are expected to grow much more strongly than previously forecast, collectively rising by 50% from current levels.  The main factor supporting Russian NGL production growth is higher utilisation of associated gas as a result of curbs to flaring and ongoing investments in the midstream sector, as well as a higher liquids ratio of non-associated Russian gas as it is produced from deeper reservoirs.  Conversely, forecast NGL production in the US and Canada is curbed sharply, with output now expected to decline a combined 100 kb/d over the forecast period, on the basis of a less optimistic North American gas production forecast.  Other noteworthy upward revisions include Argentina, India, Kazakhstan, Malaysia, Norway, Peru, Thailand and Uzbekistan, while downward adjustments affect Australia, Indonesia, Oman and Tunisia.  (A detailed review of global gas liquids prospects (to be presented in full in 2010).)

OECD

North America

US - November Alaska actual, others estimated:  September and October US production were revised up by around 140 kb/d on average, as was November, though by a lower 50 kb/d.  Officially, the hurricane season came to an end on 30 November, the quietest since 1997 in terms of number of named storms, largely due to the presence of El Niño.  Tropical Storm Ida, the only storm this year to cause oil production shut-ins, ultimately only knocked out 50 kb/d of Gulf of Mexico output for November, as despite forcing the precautionary closure of 43% of regional production, operations were resumed only days later.  This report had previously assumed an average November shut-in volume of 180 kb/d and a lingering 50 kb/d in December.  The hurricane season's passing prompted the elimination of these adjustments and henceforth, recalculated five-year average outages of 210 kb/d and 240 kb/d respectively for the third and fourth quarters.



Forecast NGL output was reduced by a sharp 140 kb/d for 2010 and similar volumes thereafter on the basis of a reassessed gas forecast.  Some changes were made to crude project start-up dates, especially in the Gulf of Mexico, resulting in downward revisions there of -20 kb/d and -165 kb/d for 2009 and 2010 respectively.  Nonetheless, the Gulf of Mexico is still forecast to contribute 410 kb/d of incremental output this year.  Even slightly offset by lower crude production elsewhere, US total net crude growth of 355 kb/d in 2009 should be the highest year-on-year increase since 1978.  Added to growth in NGLs and biofuels, US total oil production increases by 525 kb/d to just over 8 mb/d in 2009.  2010 total US oil production is now forecast at a lower 7.9 mb/d.

Canada - Newfoundland - October actual, others September actual:  September production was revised down nearly 50 kb/d on lower-than-expected output across the board.  Lower NGL production likely stems from curbed natural gas output, while the Terra Nova oil field offshore Newfoundland has been at a reduced output level since August.  As part of our NGL reappraisal, Canadian forecast production is adjusted down by around 90 kb/d for 2010-2014.  Total Canadian liquids production is forecast to rise from 3.1 mb/d in 2009 to 3.2 mb/d in 2010.

Mexico - October actual:  October oil production in Mexico was higher than expected and flat month-on-month, as production at key oil fields Cantarell and Ku-Maloob-Zaap (KMZ) was unchanged.  The last couple of months have seen previously-steep decline at Cantarell slow, though we still envisage a further drop in coming months and years.  Looking ahead, the recent government decision to slash investment at the Chicontepec field leads us to project a slower ramp-up towards the tail-end of our medium-term forecast period.  In the shorter term, oil output for both 2009 and 2010 are revised up minimally, now forecast to average 3 mb/d and 2.8 mb/d respectively.

Better Biofuels Prospects in the Medium Term

The global biofuels production outlook has improved since our June 2009 MTOMR forecast.  For 2008-2014, biofuels production has been revised up on average by 35 kb/d annually, with the largest adjustments in the 2009-2011 timeframe.  We now see 2009 global biofuels production at 1.6 mb/d, up 105 kb/d from 2008 and 40 kb/d higher than in the MTOMR.  Over the medium term, we see global output increasing to 2.2 mb/d, with annual growth from 2008-2014 averaging 120 kb/d, similar to what we foresaw in June.

The headline revisions mask more significant underlying changes.  US ethanol production in 2Q09 and 3Q09 came in higher than expectations, buoyed by more favourable production margins.  Many producers remain vulnerable to ongoing industry consolidation and capacity surpluses remain, but utilisation has improved since 1H09 and some formerly shut plants have returned to duty.  We expect US ethanol output at 690 kb/d in 2009, growing to 835 kb/d in 2014.  Still, uncertainty surrounds the introduction of E15.  While the US Environmental Protection Agency (EPA) has positively signalled the ability of vehicles built after 2001 to handle a 15% ethanol blend (versus a current 10% limit), EPA recently delayed its ruling until next summer.  We continue to doubt that the US will be able to meet its Renewable Fuel Standard for cellulosic ethanol, which envisages 7 kb/d of usage in 2010 and 115 kb/d by 2014.



In Latin America, ethanol and biodiesel production fortunes have diverged.  We revised down Brazilian ethanol output from 2008-2014 on average by 60 kb/d as high sugar prices, challenging harvest conditions and reduced capacity expansion undermined production levels.  In 2009 we see output at 475 kb/d, unchanged from 2008.  Despite the lower baseline, however, medium-term growth still appears strong to meet expanding domestic consumption and an ever-expanding flex-fuel vehicle fleet; 2014 output is expected near 730 kb/d.  Biodiesel output, by contrast, has been revised up in both Brazil and Argentina, boosted by rising domestic consumption in the former and increased transatlantic export opportunities for the latter.  Latin American biodiesel production is seen at 50 kb/d in 2009, rising to over 75 kb/d in 2014.

In OECD Europe, favourable wheat prices improved margins for ethanol producers, prompting higher 2009 production than previously anticipated.  The baseline revision has prompted higher output on average by 10 kb/d from 2008-2014.  Despite the imposition of tariffs on biodiesel coming from the US, European biodiesel production from 2008-2014 is virtually unchanged with imports from Argentina and SE Asia having filled the gap in the near term.  Some sizeable biofuel capacity additions are on the horizon for 2010-2012, which should boost European total biofuels production from 200 kb/d in 2009 to 265 kb/d in 2014.  Still, market access uncertainties remain for both foreign and domestic producers.  The European Commission is due in 2010 to propose sustainability criteria legislation that accounts for the impacts of indirect land-use change on biofuels greenhouse gas savings versus fossil fuels.

North Sea

Norway - September  actual, October provisional:  Norwegian October output was revised down by 50 kb/d, despite including first reported output from new fields 33/9-6 Delta, Tyrihans, Yttergryta and Volund, the last of which was previously included in the Alvheim figures, to which it is tied back.  Notably Tyrihans shows a much more rapid ramp-up than previously assumed.  Elsewhere, the Snohvit LNG plant, shut down for maintenance since mid-August, eventually resumed operations in mid-November, after some start-up problems earlier in the month.  Norway's NGL forecast was raised by around 50 kb/d in 2010-2014.  Total oil production in 2009 and 2010 is now forecast at 2.3 mb/d and 2.1 mb/d respectively.



UK - September actual:  September oil production in the UK was revised down by 60 kb/d on lower-than-expected crude output, which was then carried through the forecast.  Disaggregated August field-by-field data confirmed the extent and details of this summer's heavier-than-usual field maintenance, which saw total UK liquids output dip to below 1.1 mb/d, its lowest since 1978.  August data also showed the first reported production at the Affleck, Ettrick and Shelley fields, which will collectively add around 40 kb/d of crude.  Total UK oil production is forecast to average 1.5 mb/d in 2009 and to decline to 1.3 mb/d in 2010.

Former Soviet Union (FSU)

Russia - October actual, November provisional:  Revisions to preliminary October production data for Russia showed crude output 25 kb/d higher than expected, most of which stemmed from higher production from smaller producers.  Preliminary November oil production data showed output flat compared with October, with an increase from Rosneft's new Vankor field offsetting small declines from other companies.



The Russian government has confirmed that a group of 19 oil fields in Eastern Siberia will benefit from an exemption to crude export duties from 1 December 2009.  However, there still remains some uncertainty as to how long the exemption will last.  It is generally held that a minimum of five years is necessary to break even on capital-intensive greenfield projects in what is still an undeveloped province.  The start-up of production at the new Talakanskoye, Verkhnechonskoye and the huge Vankor fields in the past year is one of the main reasons Russian production has picked up - and expectations of tax breaks were central to this development.  However, considerable uncertainty stems from the fact that the export duty waiver will still have to be renewed each month.  Total 2009 oil production in Russia is revised up 60 kb/d to 10.2 mb/d, while 2010 output is nudged up by 140 kb/d to 10.4 mb/d.



Other FSU:  Kazakhstan's NGL baseline is revised up by 45 kb/d for 2009.  In addition, October crude production data were around 100 kb/d higher than anticipated, with the large Tengiz field picking up to over 500 kb/d again, only the second time it has breached that level, following some capacity expansion work this summer.  The Karachaganak field meanwhile also came in slightly higher than expected, following maintenance in September.  Total 2009 production is forecast to average 1.6 mb/d and is set to remain broadly flat in 2010.  In Azerbaijan and Uzbekistan, NGL baselines were revised downward and upwards by around 5 kb/d and 10 kb/d respectively - both historically and in the forecast.



FSU net exports fell by 2.2% to 9.0 mb/d in October on a 7.9% drop in products exports caused mainly by a decrease in fuel oil shipments.  Crude oil exports remained almost unchanged at 6.6 mb/d in October as a drop in the Black Sea and Arctic shipments balanced higher loadings from the Baltic and the BTC.  The Ukrainian port of Pivdenne has accommodated oil usually shipped by pipeline to Novorossiysk and Odessa.  These ports saw deliveries cut due to maintenance and line reversal, respectively.

Russian loading schedules for November and December do not show any exports from Odessa, nor any deliveries of Russian crude oil to China via the Atasu-Alashankou line, after all three sections of the Kazakhstan-China oil pipeline were connected.  The Kozmino terminal on Russia's Pacific Coast appeared as a new export outlet in December's loading schedule.  The end-point of the ESPO pipeline is scheduled to load its first 100,000 mt tanker with Rosneft crude oil delivered to the port by rail.

According to preliminary data, Russian crude oil exports dropped in November on lower Baltic and Arctic shipments, as well as lower BTC volumes.  December shipments are expected to rise month-on-month, supported by higher volumes scheduled for export from Baltic ports and via the BTC, despite a 17% increase in Russian crude oil export duties from 1 December to $271.1/mt ($37.0/bbl).  Export duties for light and heavy oil products are set at $194.9/mt and $105.0/mt, respectively.

Other Non-OPEC

China - October actual:  Chinese oil production in October was revised down by 135 kb/d to 3.8 mb/d on lower-than-expected production offshore and, to a lesser degree, elsewhere.  In mid-November, strong winds shut-in offshore production in Bohai Bay, but it is unclear by how much and for how long (this report adjusted by -25 kb/d).  Total Chinese oil production in 2009 and 2010 was revised down slightly and is now forecast to average 3.8 mb/d and 4 mb/d respectively.



Various Latin America:  In Brazil, total oil production in October was revised up by 30 kb/d, as higher-than-expected crude and NGL output offset slightly lower fuel ethanol supply.  A review of project start-up dates indicated some slippage in 2010-2012, and therefore downward revisions, though these projects then simply lead to upward adjustments in 2013 and 2014.  Total 2009 oil production is set to rise from 2.5 mb/d in 2009 to 2.7 mb/d in 2010.  In Peru, the NGL review has prompted the reallocation of some crude production into the NGL category, related to the Camisea gas project.  Forecast production in 2009 and 2010 is kept steady at 150 kb/d.  In Colombia, steady gains at the Rubiales heavy crude field and anticipated future projects, incentivised by a welcoming upstream investment environment, have prompted small revisions to the near term (around +15 kb/d for 2009/10) and a greater upward adjustment for the medium-term forecast (around +170 kb/d on average for 2011-2014).  Total 2009 oil production is expected to average 670 kb/d and rise to 740 kb/d in 2010.

Various Africa and Middle East:  For Egypt, the NGL review resulted in an upward revision by around 25 kb/d of historical estimates and a slightly higher forecast profile.  Crude production figures were left unchanged this month.  Total Egyptian oil production is forecast to decline from 660 kb/d in 2009 to 620 kb/d in 2010.  In Tunisia, the NGL and crude forecasts were trimmed by a collective 12 kb/d in 2009 and marginally curbed for 2010-2014.  In Oman, the NGL baseline was also nudged down somewhat.  In the medium-term outlook however, Oman's crude profile has been raised substantially as several Enhanced Oil Recovery (EOR) projects boost production.  Total 2009 oil production is forecast to average 800 kb/d, rising to 860 kb/d in 2010.

OECD stocks

Summary

  • OECD industry stocks fell counter-seasonally by 36.0 mb in October to 2,735 mb.  The five-year average stock change for October is a 3.9 mb build.  Over 40% of the draw came in middle distillates as holdings in all three regions declined.  Crude stocks fell 0.9 mb, led by a 6.8 mb draw in Europe, countered by a 4.9 mb build in Pacific inventories.  North American 'other products' and gasoline stock draws also drove the overall change.
  • OECD stocks in days of forward demand fell to 59.4 days as of end-October, down from 60.2 days at end-September.  Days cover fell most in residual fuel oil and middle distillates, with declines evident in all three regions.  Nonetheless, distillate days cover remains well above the five-year range in North America and Europe and just above the five-year average in the Pacific.
  • Preliminary data indicate total OECD industry oil inventories edged up by 0.4 mb in November, with crude rising 6.6 mb and products falling 6.2 mb.  The five-year average stock change in November is a draw of 4.0 mb.  Middle distillate stocks drew 3.1 mb with US jet fuel/kerosene falling 3.0 mb.
  • Short-term crude floating storage levels declined to 55 mb as of end-November, from 61 mb at end-October.  Market reports continue to vary, with one estimate putting short-term storage below 35 mb.  However, recent widening contango in the crude futures curve may signal increasing December storage volumes.  Short-term products floating storage continued to rise, increasing to 98 mb at end-November from 83 mb at end-October, with most of the build occurring off Europe.


OECD Stock Position at End-October and Revisions to Preliminary Data



OECD commercial inventories dropped by 36.0 mb in October to 2,735 mb.  The downward move was the largest OECD monthly stock draw since February 2008 and marked only the second time OECD inventories have decreased over the past twelve months.  By comparison, the five-year average stock movement for October is a 3.9 mb build.  Significantly, over 40% of the overall draw came in middle distillates as all three regions posted declines.  The OECD distillate surplus to the five-year average - concentrated in Europe and North America - narrowed to 66 mb.  Yet, with products floating storage rising 14 mb in Europe and preliminary data pointing to only a 3.1 mb onshore middle distillate stock draw during November, it is too soon infer any sustained draining of surpluses in that product category.  Moreover, days of distillate forward demand cover, though only near five-year average levels in the Pacific, remain well above the five-year range in North America and Europe.



OECD crude stocks continued to come more into balance with historical norms.  Despite only drawing by 0.9 mb in October, downward revisions to September holdings in North America and Europe narrowed the OECD crude surplus versus the five-year average to 15 mb, the smallest since August 2008.  Preliminary November data point to a fall in short-term floating storage, but a rise in onshore stocks.  Moreover, a recent widening of the contango in NYMEX light, sweet crude combined with dismal refinery runs in the US have made onshore and offshore crude storage more attractive.  Year-end tax considerations in the US may prompt some destocking before January, but without a sustained boost in refinery demand, crude inventories look to remain healthy in the near term.



Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks fell 19.6 mb in October, entirely focused on oil products and driven by a 4.9 mb fall in US distillates and a 4.6 mb fall in US gasoline.  US 'other products' - a volatile category that includes naphtha, liquefied petroleum gases, petroleum coke, white spirits, lubricants, bitumen and others - fell 10.4 mb.  A 2.4 mb draw in Mexican products was led by distillate and residual fuel oil.  Crude changed little overall, with a 1.8 mb gain in Mexico partially offset by a 0.9 mb fall in the US.  North American government crude holdings remained unchanged.

November preliminary data point to a 0.6 mb draw in total US commercial stocks.  Crude stocks increased by 2.1 mb and inventories at Cushing, Oklahoma - the delivery point for the NYMEX light, sweet crude contract - swelled by 6.2 mb, including a 2.5 mb increase in the most recent week.  Deepening contango in WTI has both resulted from and contributed to the Cushing builds.  Strategic Petroleum Reserve (SPR) holdings rose by 1.0 mb in November and are expected to increase a further 0.5 mb in December.



US product stocks fell by 2.7 mb in November, driven by a decrease in propane of 7.3 mb and in jet fuel/kerosene of 3.0 mb.  The latter category came back into the five-year range for the first time since June.  Distillate stocks drew by 1.0 mb.  Yet diesel accounted for the entire draw.  Heating oil stocks continued to trend above the five-year average, particularly along the US East Coast and Northeast, where most home oil-fired heating is concentrated.



OECD Europe

European inventories fell by 15.8 mb in October, mostly due to a 6.8 mb decrease in crude and a 5.8 mb draw in middle distillate inventories.  European crude stocks fell to the bottom of the five-year range on an absolute basis, but remained at the top of the five-year range on a days cover basis. 

The draw in middle distillates was slightly larger than the five-year average draw of 5.1 mb, and came as October products floating storage - mostly middle distillates - off Northwest Europe and the Mediterranean decreased by almost 3 mb (albeit, levels rose again in November).  German consumer heating oil stock levels remained unchanged at 68% at end-October, but dropped to 65% at end-November.  Still, the October OECD Europe middle distillate stock surplus to the five-year average remained high, at 34.9 mb, relative to its 2009 peak of 43.3 mb in May.



November preliminary data show gasoil stocks held in NW Europe independent storage remained relatively constant through the month and well above the five-year range.  Naphtha, jet-kerosene, residual fuel oil and gasoline all posted increases on the month with the latter three categories all trending above the five-year range.  Products floating storage off Northwest Europe and in the Mediterranean increased by over 14 mb, accounting for most of the global change in November.  EU-16 preliminary data from Euroilstock also showed middle distillate stocks increasing, by 0.2 mb in November.  Fuel oil and naphtha posted gains of 0.8 mb and 0.4 mb, respectively, while gasoline fell 0.8 mb.  Crude stocks showed larger movement, however, increasing 8.0 mb.



OECD Pacific



Pacific industry stocks fell by 0.5 mb in October, as a 4.9 mb crude build was offset by a 3.4 mb decrease in middle distillates and a fall in 'other oils'.  The Pacific middle distillate deficit to the five-year average fell to 10 mb.  Japanese crude stocks gained 5.5 mb, while Korean crude holdings decreased 0.6 mb.  On an absolute basis, Japanese crude inventories have trended below the five-year range while Korean holdings are at five-year highs.  Yet, on a days of forward cover basis, crude inventories for both countries remained above the five-year average, near the top of the five-year range.

Weekly data from the Petroleum Association of Japan (PAJ) point to a commercial stock draw of 7.7 mb in November, with crude falling 3.6 mb and products falling 4.1 mb.  Naphtha stocks decreased 2.2 mb while kerosene stocks increased 1.0 mb.  Kerosene stocks continued to trend below the five-year range as refinery throughputs have languished.  Still, inventory levels have thus far not drawn steeply in comparison to previous winters.  As such, stocks have slightly narrowed their deficit to the five-year average in recent weeks.



Recent Developments in Singapore Stocks

Singapore product stocks increased by 3.8 mb in November.  Fuel oil stocks rose by 4.0 mb to new five-year highs as increasing supplies from Europe outweighed strong regional demand.  Light distillate stocks edged up on the month and remained above the five-year range.  Despite a slight fall in middle distillates, low export opportunities and high levels of regional floating storage kept stocks in the category also above the five-year range.





Prices

Summary

  • Crude oil futures prices traded in a higher $75-80/bbl range in November, with WTI averaging $78.15/bbl and Brent $77.58/bbl for the month.  By early December, however, prices weakened on market fears that the recovery in the global economy will be shallower and slower than expected, especially in the key US market.  Prices were trading at eight-week lows of around a $70-74/bbl range at the time of writing.
  • The oil price correlation with macro financial market activity that has marked most of 2009 has arguably started to weaken as supply and demand fundamentals appear to reassert more control over price direction.  Global oil demand growth, led largely by China, appears to be putting a floor under price expectations for the medium and long term.  The NYMEX WTI crude oil futures forward curve reached the $100/bbl mark for the 2016 contract.  However, despite significant idled refining capacity, a persistent high level of distillate stocks continues to temper near-term price moves to the upside.
  • Spot product prices were higher across the board in November, with naphtha in Asia posting the sharpest increases.  Gas oil markets posted more modest gains on relatively weak demand and high stock levels.  Refining margins were universally weaker in November as product price gains trailed higher crude oil prices.  Losses on the US Gulf Coast generally outpaced other regions.
  • Freight rates firmed in November and posted further gains in early December.  Crude tanker rates in particular improved amid increased volatility caused by both adverse weather conditions and the impact of holidays on chartering activity.


Market Overview

Crude oil futures prices in November traded in a higher $75-80/bbl range, with WTI averaging $78.15/bbl and Brent $77.58/bbl for the month.  By early December, however, prices reversed course amid fears that the global economic recovery, especially in the US and Europe, will be shallower and slower than expected.  Prices were hovering at eight-week lows at the time of writing, with WTI last trading at around $70.50/bbl and Brent at $72/bbl.

North Sea Brent prices have far outpaced the rise in West Texas Intermediate, given the latter's steepening discount for prompt barrels amid high stock levels and reduced refiner buying.  Over the course of the month, WTI crude went from trading at a premium to Brent of around $1.65/bbl to a discount of more than $2.50/bbl by the first week of December. Deteriorating refining margins in the key US Gulf Coast region over the last month have forced refiners to sharply curtail refinery operations, with runs cut to some of the lowest levels in the past decade.  By contrast, margins in Europe have been relatively stronger, propping up Brent prices relative to WTI.



The WTI 1M-2M contango, with the prompt price under pressure from swelling stocks at the pivotal Cushing, Oklahoma storage hub and forward prices strengthening on expectations for stronger demand next year, steadily widened over the past month.  The contango rose from an average 44 cents/bbl in October, to 75 cents/bbl in November and to around $2/bbl in early December.  The widening contango not only highlights the current weakness in US markets but also relative strength in other markets.

Indeed, a growing East-West oil market divide between the US (and to a certain extent Europe) and Asia is becoming more pronounced—mirroring the global economic recovery outlook.  Current market strength is centred on Asia, and especially China and India, where much of next year's demand growth will likely take place.

Stimulus packages in China have had the intended consequence of boosting oil product markets, especially demand for petrochemical feedstocks like naphtha.  Latest  demand projections show Chinese apparent demand posted double-digit growth rates for the second month in a row in October, with all products bar residual fuel oil posting gains.  By contrast, demand in the US remains anaemic; with sharply lower refinery throughput rates pressuring spot crude prices.

Ample OECD and floating crude and refined products stocks are likely to cap upward price moves in the near term while stronger forecast global oil demand growth for 2010, led largely by China, appears to be putting a floor under price levels for the medium term.  The NYMEX WTI crude oil futures curve for 2016 contracts reached the $100/bbl mark in November, reflecting market expectations of higher long-term prices.

Futures



The oil price correlation with macroeconomic factors and financial market activity that has marked most of 2009 may be weakening as supply and demand fundamentals reasserted more control over price direction.  Oil prices have largely moved in lock step with financial and equity markets this year as traders focus on macroeconomic developments for any signs of a potential recovery in oil demand while the weaker dollar has prompted some investors to hedge their exposure with oil futures.  Over the past month, the link between oil prices and equity markets and the dollar index appears to have frayed.



Open interest in NYMEX WTI futures increased by 18,700 contracts in November.  Swap dealers increased their net long exposure by 35,100 lots while money managers decrease their net long exposure by 31,200 contracts.  Meanwhile, producers increased their net short positions by 15,100 contracts.  However, discerning a clear linkage between open interest and prices remains problematic.

Spot Crude Oil Prices

Spot crude oil prices rose across all major regions in November, with benchmark grades up on average by $2-5/bbl month-on-month.  Asia posted the strongest gains on continued strong Chinese buying.  By contrast, the US spot crude market was markedly weaker due to significantly lower refinery run rates, rising stocks at Cushing and by reduced year-end crude purchases as companies try to minimise their tax liability.

China continued to be the major prop under spot crude markets in November with refiners holding throughput rates at record levels.  Chinese refiners continue to augment contract supplies with spot purchases of African crudes, which have been relatively cheap given increased volumes of Nigerian and Angolan supplies in the market.  Chinese, South Korean and other Asian refiners have stepped up their buying of naphtha-rich crudes such as Algeria's Saharan Blend and Nigeria's Agbami given robust crack spreads and strong demand.  Asian light grades also firmed on stronger naphtha cracks.



In Europe, growing volumes of unsold gasoil-rich Russian Urals for December pressured spot prices in NW Europe and the Mediterranean.  Russian exports for December are slated to rise despite a 17% increase in crude oil export duties (see Non-OPEC Supply, FSU Exports).

Spot Product Prices

Spot product prices were higher across the board in November, with naphtha posting the sharpest increases while gasoil posted more modest gains.  However, crack spreads were generally weaker in November, with the exception of naphtha and fuel oil in New York, as the rise in spot crude oil markets eclipsed product prices.

Heading into the peak winter demand period, distillate markets remained under pressure from swelling stockpiles of heating oil and diesel.  Record levels of distillate are being held offshore Europe and the US Gulf Coast.  Distillates stored at sea are estimated at 98 mb at end-November and set to rise further in December and January based on tanker bookings.

In Europe, the steep gas oil contango on London's ICE futures exchange is fuelling the stockbuilding offshore Europe.  Since October, the gas oil contango has held steady at between $8-10/mt compared with $6-8/mt in the August-September period.



Asian naphtha prices and cracks rose to their highest level in more than a year on 1 December in the face of stronger demand for January supplies.  The economics for most naphtha cracking complexes improved markedly, with plants working full-out producing olefins to meet stronger demand from China, South Korea and Japan.

One of Asia's top petrochemicals importers, South Korea, helped put a floor under naphtha prices in November with term deals for 1H10 fetching a premia of around $5/mt to Japanese spot quotes compared with a discount of $12/mt for the full year 2009 term contracts.  Naphtha crack spreads in Singapore averaged -$1.51/bbl in November compared with -$3.95/bbl in October.

In Europe, naphtha crack spreads turned positive in late November on increased export flows to Asia.  Rotterdam naphtha cracks averaged -$2.11/bbl for November versus -$3.63/bbl the previous month.  Mediterranean naphtha cracks averaged -$1.83/bbl in November compared with -$3.57/bbl in October.



Refining Margins

Refining margins were universally weaker in November as product price gains trailed higher crude oil prices.  Losses on the US Gulf Coast generally outpaced other regions.  Upgrading margins stabilised in the US but remained negative, close to September lows.  Deteriorating refining margins in the key US over the last month have forced refiners to cut runs to just below 80%, a level not seen in a decade if hurricane-related low utilisation rates are excluded.



With the exception of Urals cracking in NW Europe and Kern processing on the West Coast, margins were in negative territory.  European upgrading margins revisited the lows seen in September and the first -quarter of 2009.  The deterioration in light and middle distillate cracks (with the exception of naphtha) and stronger fuel oil cracks underpin these moves.



End-User Product Prices in November

In November, retail prices on average rose by 6.1%, in US dollars, ex-tax, and were 17.7% above levels of a year ago.  Heating oil and low-sulphur fuel oil prices rose by 5.4% and 7.8%, respectively, across all surveyed IEA member countries.

Transport fuel prices on average increased by 5.7% month-on-month.  US consumers paid $2.65/gallon ($0.70/litre) and in the UK prices averaged £1.09/litre ($1.80/litre).  In mainland Europe, the average gasoline price at petrol station was between €1.07/litre ($1.60/litre) in Spain and €1.32/litre ($1.96/litre) in Germany.  In contrast, gasoline prices in Japan decreased by 1.6% and consumers on average paid ¥126.9/litre ($1.42/litre).

Freight

Overall freight rates firmed in November and posted further gains in early December.  Crude tanker rates especially improved, amid much volatility caused by both adverse weather conditions and the impact of holidays on the chartering activity, with rates typically rising ahead of the holidays and then falling.



On the crude tanker side, rates for VLCC Mideast Gulf- Japan started the month on a weakening trend, but were soon hiked by a chartering rush ahead of the Eid and Thanksgiving holidays, reaching above $11/tonne, before falling again from 26th November.  Early December saw tighter tonnage availability and a run-up in chartering activity before Christmas.  Suezmax West Africa-US Atlantic Coast rates posted their highest levels since January/February at above $17/mt.  Aframax North Sea-NWE rates also hit peak levels for 2009 at close to $8/mt on 23 November, supported by weather-related delays in the Turkish straits and the Caribbean, which caused charterers to seek replacement tankers, and also due to higher North Sea and Baltic crude supply.  After a small dip at month end, rates were rising in early December.

On the product tanker side, Aframax (75kt) Mideast Gulf - Japan rates rose steadily to above $28/mt at month end, supported by high interest for moving naphtha to the Far East.  These routes also received support from a build-up in products stored at large product tankers.  Other product tanker benchmark rates were all remarkably flat throughout the month at levels below the five-year range, but recovered in early December.  Generally limited interest for moving gasoline into the US undermined product tanker rates in the Atlantic basin in November.

Short-term floating storage of crude fell to an estimated 54 mb, while floating storage of products continued an upward trend, increasing to 98 mb as of end-November. The centre of gravity for both crude and product storage at sea is still North West Europe and Mediterranean, while the build-up seen in October in Asia has subsided.  Reportedly, 149 tankers were employed for storage, with a large growth in large product tanker participation during November.  Floating storage now reportedly employs around 7-8% of both the VLCC and the large product tanker fleet.

Refining

Summary

  • Market conditions for the refining industry appear bleaker than last month, particularly for OECD countries.  November refining margins fell across the board, while upgrading margins stabilised but remained negative in the US and total product stocks in the OECD reached their highest level in several years in September.  Crude runs in non-OECD countries have shown an upward trend since January 2009, with China reaching records levels, pressuring crude runs elsewhere in the region.  However, signs that global demand may be trending higher once again after many months of decline, provides a glimmer of light on the horizon.
  • Global 4Q09 crude throughput is expected to average 72.3 mb/d, 0.6 mb/d lower than forecast in last month's report.  Underpinning the lower estimate are weaker October preliminary data, weaker November weekly data for the US and higher maintenance activity in Other Asia and the Middle East.
  • Global 1Q10 crude throughput is forecast to average 72.7 mb/d, which represents a quarterly and yearly increase of 0.5 mb/d and 1.0 mb/d, respectively.  1Q10 OECD crude runs are expected to remain flat quarter-on-quarter at 35.2 mb/d, nonetheless representing a reduction of 1.4 mb/d year-on-year, as weak refining margins continue to weigh on crude runs.


  • September refinery yields increased for naphtha, gasoline and gasoil/diesel at the expense of jet fuel/kerosene and fuel oil.  Total OECD gasoline yield increased in spite of weaker crack spreads and lower yields in Europe and the Pacific.  However, gasoline gross output fell, as crude runs in OECD countries remain constrained.  Gasoil/diesel yields continued around five-year average levels, despite high middle distillates stocks.  Naphtha yields increased, supported by a spike in crack spreads on the US Gulf Coast.
  • Medium-term projections for crude distillation capacity growth have increased by 1.1 mb/d to 8.7 mb/d.  Despite the weak margin outlook, better than expected progress at several world-class export refineries in the Middle East and additional Chinese domestic projects result in upward revisions to our projections.  Conversely, the announced capacity closures in the US and a slew of other project cancellations drive much of the downward revisions to our projections.

Global Refinery Overview

Market conditions for the refining industry appear bleaker than last month, particularly for OECD countries.  November refining margins fell across the board as product price gains were outpaced by higher crude oil prices.  Upgrading margins stabilised but remained negative in the US and total product stocks in the OECD reached their highest level in several years in September in spite of OECD refiners reducing crude runs by 1.7 mb/d on average in the first three quarters of 2009 compared with the same period in 2008.  Furthermore, crude runs in non-OECD countries have increased since January, with China reaching records levels supported by guaranteed domestic margins and tax incentives on exports.  This has resulted in lower product imports and higher product exports, pressuring crude runs elsewhere in the region.



However, a glimmer of light on the horizon has appeared in the form of product demand.  The year-on-year change in product demand in the twelve largest oil consumers, which account for around 70% of global product demand, depicts an upward trend since January, and regained growth in September for the first time in a year.  Unless the economic recovery turns out to be w-shaped, the low-point for global demand could prove to be that of May 2009.  That said, the refining industry still faces a long period of consolidation and restructuring.

Medium-Term Refinery Capacity Growth Projections Bounce

As highlighted in last month's report, the refining industry appears to be starting to address the structural issues that are currently undermining its profitability.  That structural changes have started to occur provides some reason to be optimistic for the medium-term outlook for the industry.  However, that does not mean there will be much relief from weak profitability in the short term, in the face of still growing middle distillate stocks, rising NGL volumes and tight fuel oil markets.

Nevertheless, a review of industry developments since the publication of the MTOMR in June suggests that projected global refinery capacity growth is likely to total 8.7 mb/d for the period 2008-2014.  This represents an upward revision of 1.1 mb/d.  Growth remains dominated by China at 2.9 mb/d, Other Asia at 2.1 mb/d and the Middle East at 1.5 mb/d.  Upward revisions are also dominated by these regions, following better than expected progress at several world-scale export and domestic refining projects.  Upward revisions to projected growth amount to 0.8 mb/d in the Middle East, 0.5 mb/d in China and 0.4 mb/d in Other Asia.  The latter revision is largely driven by higher expectations for Indian capacity growth



In contrast, the start of capacity rationalisation in North and Latin America partially offset these increases when compared with June's projection.  North American growth is halved to just 0.6 mb/d, for 2008-2014, as a result of several project cancellations and, more importantly, the closure of Valero's Delaware and Sunoco's Eagle Point refineries.  The closure of these two plants reduces regional distillation capacity by more than 0.3 mb/d.  North American growth rests mainly on the large-scale expansions of Marathon's Garyville refinery (180 kb/d), Motiva's 325 kb/d Port Arthur expansion and Pemex's 150 kb/d Minatitlan expansion.  A continuation of the current weak margin conditions may yet result in further project cancellations.  Refineries continue to strive to balance limited cash flow with ongoing non-discretionary capex for environmental and product quality improvements against the desire to expand and upgrade their operations.  European growth is unchanged since last June's report, although several key projects are now expected to be completed sooner than previously projected, including GALP's Sines expansion (2011) and Repsol's Cartagena refinery expansion (2012).

More generally, our concerns over project delays due to a lack of access to capital markets, or delays resulting from the retendering of contracts to lower costs seem to have been overdone.  Projects such as Saudi Arabia's 400 kb/d Jubail refinery and the UAE's 420 kb/d Ruwais refinery expansion awarded engineering, procurement, and construction contacts some 9-15 months ahead of our previous expectations.  Evidently, project sponsors took advantage of slack contracting markets to lock-in favourable cost reductions more quickly than we had anticipated. Consequently, we now expect these projects to be completed within the 2014 timeframe.

The Chinese government's stimulus programme is seen boosting Chinese capacity expansions over the medium term by an additional 0.5 mb/d.  Higher growth is concentrated among projects in the south-east of the country.  Progress to date at several Indian refinery construction projects has been better than expected, as they strive to meet the Indian government's 2012 deadline for a seven year tax-break on new-build refineries.  Consequently, we have brought forward projected completion dates for a number of projects.  However, not all Indian projects are currently expected to be meet the 2012 deadline, and it remains to be seen whether they will start processing crude while downstream units are still under construction, in order to qualify for the tax incentive, or whether the completion deadline itself will be pushed back to accommodate the laggards.

Global Refinery Throughput

3Q09 global refinery throughput averaged 73.2 mb/d, 70 kb/d higher than in last month's report.  Data for September were 0.3 mb/d lower than the preliminary figures, but this was compensated by revisions to August data, which were raised 0.5 mb/d.  Overall, 3Q09 refinery runs were 0.7 mb/d below 3Q08 levels.

More interestingly, 3Q09 throughput was 1.4 mb/d higher than the previous quarter, while global product demand increased only by 1.2 mb/d, signalling stronger than required crude runs.  Considering NGL and other feedstock, the 3Q over-hang of product comes into sharper focus.  Refinery runs in non-OECD countries have shown an upward trend since January 2009, outperforming those of OECD, which, in spite of higher runs from June to August, are likely to show continued decline thereafter, potentially reaching a low of 34.9 mb/d in November 2009.

4Q09 global refinery throughput is forecast to reach 72.3 mb/d, which represents a contraction of 0.6 mb/d compared with last month's report.  Underpinning the lower estimate are weaker October preliminary data (-0.5 mb/d), weaker November weekly data for the US and higher maintenance activity in Other Asia and the Middle East.



We have rolled over our forecast to cover 1Q10 and assumed weak refining margins will continue to weigh on crude runs, particularly for OECD countries.  1Q10 global crude runs are estimated at 72.7 mb/d on average, which represents a quarterly and yearly increase of 0.5 mb/d and 1.0 mb/d, respectively.  1Q10 OECD crude runs are expected to remain the same quarter-on-quarter to 35.2 mb/d, but remain 1.4 mb/d below 1Q09.  In North America, seasonal maintenance work, mainly in the US, will reduce crude runs to an average of 16.6 mb/d, representing a quarterly decrease of 0.3 mb/d and a 0.6 mb/d decrease year-on-year.  The non-OECD sees crude runs at 37.5 mb/d, which represents a 0.5 mb/d increase on a quarterly basis and an increase of 2.4 mb/d year-on-year, driven by growth from China and India of 1.5 mb/d and 0.4 mb/d respectively.

OECD Refinery Throughput

OECD crude throughput estimates for 4Q09 have been revised down by 0.1 mb/d to 35.2 mb/d as weaker November data offset higher than expected preliminary data for October.  This new estimate for 4Q09 represents a quarter-on-quarter decrease of 1.1 mb/d and a 2.2 mb/d contraction year-on-year.

OECD October utilisation rates decreased two percentage points month-on-month to 78%, representing a 4.7 percentage point decrease year-on-year.  European utilisation rates shrunk the most on an annual basis, losing more than eight percentage points, while utilisation rates in the Pacific and North America show a decrease of around four and two percentage points, respectively.

North American October crude throughput turned out 0.1 mb/d higher than expected at 17.0 mb/d.  Higher runs in Canada and Mexico offset lower-than-expected runs in the US.  However, this level represents a decrease of 0.4 mb/d year-on-year and a fall of 0.4 mb/d on a monthly basis, the latter mainly due to higher maintenance.



November US weekly data fell 0.6 mb/d short of expectations to an estimate of 13.9 mb/d.  Utilisation rates fell just below 80%, a level not seen in at least 10 years if we exclude hurricane-related low points.  We expect US utilisation rates to remain below 80% in December and through 1Q10 and have modified our forecast accordingly.  The Atlantic hurricane season ended as the least active in a decade, with only two tropical storms - Claudette and Ida - making landfall in the US.  Tropical Storm Ida hit land in Alabama on November 10 with no impact on refineries.  The light season stemmed in part from El Niño's development last summer.





European crude runs matched our expectations at 12.0 mb/d in October, 0.3 mb/d lower month-on-month and 1.4 mb/d lower year-on-year.  4Q09 runs are forecast at 12.0 mb/d, which represents a drop of 0.4 mb/d quarter-on-quarter and a drop of 1.2 mb/d year-on-year.  We keep last month's forecast unchanged.  Utilisation rates remain particularly weak in France and Italy.

OECD Pacific October crude runs were in line with expectations at 6.1 mb/d.  Lower Korean runs were offset by slightly higher runs elsewhere in this region.  However, we have reversed last month's downward adjustment for 4Q09 (-0.2 mb/d) as November Japanese weekly data point to crude runs 0.3 mb/d higher than expected.  However, increased runs in China and other non-OECD countries in Asia will weigh on OECD Pacific utilisation rates.  As such, 4Q09 crude runs are now expected to average 6.3 mb/d, on par with 3Q09 levels, but 0.4 mb/d below 4Q08.

Non-OECD Refinery Throughput

Non-OECD crude throughput estimates for 4Q09 have been revised down by 0.5 mb/d to 37.0 mb/d as October refinery runs were 0.7 mb/d below our projections, mainly the result of lower-than-expected crude runs in Russia and China and higher maintenance activity in Latin America.  Nonetheless, this new estimate for 4Q09 represents a quarter-on-quarter and year-on-year increase of 0.2 mb/d and 1.8 mb/d, respectively.  On a quarterly basis, 3Q09 was also the first time non-OECD crude throughput came in higher than that in OECD countries.

Chinese October crude runs were 7.8 mb/d, 0.2 mb/d below September's record level and 0.2 mb/d below our estimate.  The October throughput level represents a year-on-year increase of 12%.  China's Fujian facility, the country's first integrated refining and petrochemical complex with foreign participation, was reportedly completed and at full operation as of 11 November.  Reportedly, more than $4.5 billion was invested in the complex, with refining capacity tripled to 240 kb/d.  The complex also features a 250 megawatt cogeneration facility which should result in lower operating costs and reduced greenhouse gas emissions.  The complex had been in ramp-up mode for several months, with October crude runs reported at 219 kb/d.  Additionally, refining capacity at Petrochina's Golmud plant in north-western Qinghai province is reported to have been increased to 30 kb/d as a catalytic cracker unit started operations at the end of November.

As a result of higher throughput rates, China's fuel exports are reported up 38% in the first 10 months of the year, while imports are 6.6% lower, pressuring crude runs elsewhere in the region.  China's vehicle sales continue to soar, up 73% in October year-on-year, in spite of the government's decision to increase pump prices for gasoline and diesel, by about 7%, as well as jet fuel prices during the second week of November.  This assures domestic profits to refiners, and on the export side, the Chinese government offers tax incentives, thus Chinese refiners have every incentive to maximise crude runs.  However, we think that incremental exports may temper any further tax incentives, eventually weighing on crude runs.  We are keeping last month's 8.0 mb/d throughput projection for 4Q09, albeit upward potential exists.



Russian crude runs averaged 4.4 mb/d in October, 0.5 mb/d below our projection.  Logistical problems in the delivery of crude to far east refiners as well as maintenance at Lukoil's refineries, deferred from September, are behind the lower throughput.  Preliminary data for November show crude runs at 4.7 mb/d, 0.2 mb/d lower than expected.  Accordingly, we have lowered by 0.2 mb/d our FSU 4Q09 forecast to 6.1 mb/d.

October Indian throughputs were in line with last month's estimates, which include an estimation of crude processed at Reliance's Jamnagar expansion of around 0.5 mb/d.  Similarly, elsewhere in Other Asia, October crude runs were in accord with projections.  However, we have revised down our 4Q09 Other Asia forecast by 0.1 mb/d to 8.5 mb/d as additional maintenance activity has been scheduled.

OECD Refinery Yields

September refinery yields increased for naphtha, gasoline and gasoil/diesel at the expense of jet fuel/kerosene and fuel oil, while yields for other products remained unchanged.  OECD gasoline yields as a whole increased despite weaker crack spreads and lower yields in Europe and the Pacific.  However, gasoline gross output fell, as crude runs in OECD countries remained constrained.  Gasoline is the only product for which gross output remains above the five-year average.  Gasoline gross output is well above that of last year as there were not hurricane related disruptions in the US Gulf Coast this year.



Gasoil/diesel yields continued around their five-year average level, with gross output below the five-year average as middle distillates stocks levels continue above five-year-range levels.  Gasoil/diesel gross output remains particularly weak in Europe, 0.4 mb/d below last year's level.  In North America, gross output remained unchanged at 5.1 mb/d during a month when output usually falls 0.4 mb/d according to the five-year average.



Naphtha yields increased, supported by a crack spread spike in the US Gulf Coast.  Both yields and gross output are recovering towards the five-year range.  Net imports in the Pacific have strengthened through the year as demand from the petrochemical sector increases and gross output remains constrained at the bottom of the five-year range.