Oil Market Report: 15 January 2010

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Highlights

  • Crude oil prices surged to 15-month highs in early January on very cold winter weather in much of the northern hemisphere and escalating geopolitical tensions in key oil producing countries. At their peak, prices had jumped by around $10-12/bbl from December lows. Prices have since eased, last trading in a $78-80/bbl range.
  • Global supply rose 270 kb/d in December to 86.2 mb/d, on both higher OPEC and non-OPEC output. A reappraisal of Azerbaijan's crude production outlook leads to a -150 kb/d revision for 2010 non-OPEC supply, to 51.5 mb/d. Non-OPEC output this year will grow 0.2 mb/d from a modestly-revised 51.3 mb/d in 2009, driven by biofuels and rising crude supply in Brazil, the FSU, Australia, Colombia and India.
  • OPEC-12 crude output rose 75 kb/d to 29.1 mb/d in December, resulting in effective spare capacity of 5.4 mb/d. OPEC ministers left output targets unchanged at their 22 December meeting, but called for better compliance. The 'call on OPEC crude and stock change' stands at 28.7 mb/d for 1Q10 and 29.1 mb/d for 2010. OPEC NGLs are forecast to increase sharply by 885 kb/d to 5.7 mb/d in 2010.
  • Forecast global oil demand remains virtually unchanged at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.3 mb/d in 2010 (+1.7% or +1.4 mb/d versus the previous year). Growth is driven by non-OECD countries, most notably in Asia. Oil demand recovery in the OECD will likely remain sluggish, despite the recent cold weather.
  • OECD industry stocks rose 12.6 mb in November to 2 747 mb, 2.0% above 2008's level. Yet preliminary data point to product draws, onshore and offshore, due to colder winter temperatures in December and early January. End-November days of forward demand cover fell to 59.1 days, 1.9 days higher than a year ago.
  • Global 1Q10 refinery crude throughput is forecast at a slightly lower 72.7 mb/d, while global 4Q09 crude throughput is assessed at an unchanged 72.3 mb/d. With OECD stocks still high and global demand recovery as yet anaemic, the refining industry outlook for 1Q10 is not promising, suggesting further weakness in throughputs.

Dichotomous trends

The start of a new decade provides a welcome opportunity to stand back from the short-term maelstrom of see-sawing prices and reflect. This report already tries to do that on a monthly basis, even if, arguably, oil markets are becoming more difficult to interpret and predict as each year goes by. One recurring theme in recent months however is a certain polarisation - between regional growth prospects, between the roles of various market players and between the relative influence of different market drivers.

Firstly, there are several paths market fundamentals could follow in 2010. Demand growth predictions range from +0.8 mb/d to +2.0 mb/d. This report stands somewhere in between, envisaging 1.4 mb/d of growth if economic recovery remains on track (albeit downside risks persist). Growth from OPEC gas liquids and, to a lesser extent, non-OPEC supply should account for most of this increase, leaving OPEC production as a key unknown. The Organisation's decision to hold targets unchanged in December was logical in terms of market stability and economic recovery. But what producers will collectively do henceforward remains uncertain. Assuming major changes in output are unlikely before the Organisation's next meeting in March, were OPEC nonetheless to regain existing target output levels by mid-year and hold steady thereafter, this could result in a sharp tightening in OECD stocks, as shown on the right. Of course uncertainties persist regarding whether such OPEC-wide discipline is feasible, or whether key producers are willing to continually shoulder most of the burden by themselves.  Moreover, OPEC actions will likely be influenced by a desire not to risk driving prices sharply higher and undermining economic recovery.

Key figures in the Organisation have also recognised that overly focusing on OECD markets is itself rather myopic.  Demand growth in 2010 derives entirely from outside the OECD (+0.4 mb/d combined from the FSU and Latin America and +0.9 mb/d from east of Suez markets). This report and the recent MTOMR update identify the growth in Asian refining and the weak outlook for OECD utilisation rates.  In addition we note the related attempts by producers (notably Saudi Arabia and Russia) to divert supplies to lucrative eastern growth markets and away from North America and Europe (an East versus West shift). It remains a key task for the IEA and JODI partners to encourage improved data coverage for these more opaque markets.

The polarised debate on fundamental versus financial drivers of commodity prices continues to rage, though a number of recent studies continue to struggle to discern a direct causal link between speculative trades on the oil futures markets and prices, in anything other than the very short term.  That said, visibility of OTC derivatives trades remains obscure at best.  Regulators on both sides of the Atlantic continue to mull position limits for energy futures exchanges and the migration of derivatives trades towards mandatory clearing.  However, international regulator consensus on the best way to improve transparency, reduce the risk of market manipulation but sustain liquidity remains some way off.  We will report further on proposed regulatory developments in coming issues of the OMR and we are pleased to be holding an expert workshop on oil price formation in Tokyo on 25 February 2010 in collaboration with IEEJ (Japan's Institute for Energy Economics) and METI.

Finally, this month's report may provide food for thought in the optimists-versus-pessimists debate about supply prospects, even if a growing body of opinion sees peak demand potentially preceding peak supply if a combination of sub-trend economic growth, high prices and efficiency gains continues.  The IEA believes physical oil resources are plentiful.  But there are valid concerns about the ability of the industry to expand the supply base quickly enough (not least because of above-ground opportunity constraints) if unfettered annual demand growth of 1 mb/d-plus re-emerges post-recession. For that reason, indications that upstream spending is likely to rebound in 2010, and with it an uptick in exploration, are very welcome.

Demand

Summary

  • Forecast global oil demand remains virtually unchanged for both 2009 and 2010, as weaker preliminary data for the OECD offset more buoyant readings in non-OECD countries. Global oil demand is expected to average 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.3 mb/d in 2010 (+1.7% or +1.4 mb/d versus the previous year). Growth continues to be driven by non-OECD countries, most notably in Asia. Oil demand recovery in the OECD is likely to remain sluggish, despite a bout of recent cold weather.
  • The OECD oil demand projection is adjusted down by 50 kb/d on average in both 2009 and 2010 given weaker-than-expected preliminary data for Europe and North America. The fall in oil demand in 2009 is estimated at 4.4% year-on-year (-2.1 mb/d), with demand averaging 45.5 mb/d and remaining flat in 2010. However, the forecast faces downside risks for this year, with the largest OECD economies (the US, Japan and Germany) featuring a sluggish recovery and persistently weak oil demand.


  • Forecast non-OECD oil demand has been revised up by roughly 70 kb/d for both 2009 and 2010, largely due to higher-than-expected Chinese data. Assuming that the impact of China's government stimulus programme continues to be felt during most of this year, non-OECD demand is expected to reach 40.9 mb/d (+3.7% or +1.4 mb/d on a yearly basis), after growing by 2.0% (+0.8 mb/d) in 2009.
  • The cold wave that hit the northern hemisphere in the past few weeks has led many observers to predict a surge in oil demand, driven by heating and power generation needs, and an erosion of OECD distillate stocks. However, such reasoning overlooks the fact that the already relatively small share of oil for heating and power generation is shrinking in the OECD, as oil is gradually replaced by other energy sources, most notably natural gas. Moreover, it remains to be seen whether this winter overall will be much colder on average than last year's, which was particularly cold. As such, it would be premature to boost our 1Q10 forecast, which assumes similar weather conditions to those that prevailed last year.

OECD

According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 2.7% year-on-year in November. In OECD Europe, oil product demand shrank by 3.8% year-on-year, despite gains in naphtha and middle distillates. In OECD North America (which includes US Territories), demand declined by 2.5% as the rebound in gasoline and jet fuel/kerosene deliveries failed to offset declines in other product categories. In OECD Pacific, demand resumed a declining trend (-1.4%) after modest growth in the previous month.



Revisions to October preliminary data were relatively small (-80 kb/d), mostly concentrated in North America. As such, October demand contracted by 4.2% year-on-year, roughly unchanged from the previous estimate (-4.1%). On a yearly basis, OECD oil demand is revised down marginally (-40 kb/d in 2009 and -60 kb/d for 2010) when compared with last month's report. Demand is thus expected to contract by 4.4% in 2009 to 45.5 mb/d and remain flat in 2010.



These revisions, notably for 2010, may appear somewhat surprising in the light of the cold wave that has hit the northern hemisphere in the past few weeks. Many observers have been quick in predicting a surge in oil demand driven by heating and power generation needs, which would also erode distillate stocks. However, such reasoning overlooks the fact that, in the OECD, the relatively small contribution of oil to heating and power generation is still shrinking, gradually being replaced by natural gas, renewables and, in some cases, by rising nuclear power generation as idle plants come back on line.

Oil-based heating and power generation only remains significant for a handful of OECD countries - for example, heating oil in the US, Germany and France; kerosene in the Pacific; residual fuel oil in Italy; and direct crude in Japan. Furthermore, oil's contribution in these countries can fluctuate in the short term due to a multitude of other factors (for example, levels of German consumer heating oil stocks, hydro and nuclear capacity availability in Europe and the Pacific, the reliable delivery of natural gas supplies from Russia, or the relative price of natural gas versus other fuels). Finally, it remains to be seen whether this winter will be much colder on average than last year's, when heating-degree days in the OECD were higher than normal, notably between September and January. Therefore, we retain an assumption of similar weather conditions to those that prevailed last year, believing it premature to boost our 1Q10 forecast because of the recent cold spell.







North America

Preliminary data show that oil product demand in North America (including US Territories) contracted by 2.5% year-on-year in November. Demand in the region has fallen uninterruptedly on a yearly basis since the summer of 2007 (excepting September 2009). The current weakness is entirely due to the United States (-3.6% year-on-year), as both Mexico and Canada are now posting growth (+5.8% and +0.1%, respectively).

The revisions to October preliminary data were minor (-60 kb/d), almost entirely related to the US. Thus, total demand in North America actually plummeted by 4.0% year-on-year in that month, slightly more than previously estimated (-3.7%). On an annual basis, North American oil product demand is estimated at 23.3 mb/d in 2009 (-3.8% or -0.9 mb/d versus 2008 and -20 kb/d versus our last report), while demand in 2010 should rise slightly to 23.4 mb/d (+0.6% or +0.1 mb/d year-on-year and some 50 kb/d lower than previously thought) on the basis of modest recovery in transportation fuel use.





Adjusted preliminary weekly data in the continental United States indicate that inland deliveries - a proxy of oil product demand - contracted by 1.4% year-on-year in December, following a fall of 3.7% in November and of 4.5% in October. The December figure suggests an easing of the rate of contraction. Yet the fact that demand continues to fall relative to a very weak baseline hardly supports the contention of a demand rebound. Moreover, cold temperatures in December failed to provide the demand boost that many observers had been hoping for, with heating oil deliveries about a third lower than in the same month of the previous year (the number of heating degree days in December 2009 was indeed lower than in December 2008, albeit slightly higher than the ten-year average).

More generally, the US economy remains fragile. The preliminary 3Q09 GDP growth estimate was sharply revised down in early December (from +3.5% year-on-year to only +2.2%), amid continued credit and consumer spending weakness, as well as ongoing job losses. Other indicators more closely related to oil demand, such as freight, continue to show year-on-year declines despite monthly improvements, painting the picture of an anaemic economic recovery. Our US oil product demand outlook remains largely unchanged, with demand expected to average 18.7 mb/d in 2009 (-4.0% year-on-year or -780 kb/d) and 18.8 mb/d in 2010 (+0.5% or +100 kb/d), with growth centred on gasoline, diesel and jet fuel/kerosene.



Europe

Oil product demand in Europe fell by 3.8% year-on-year in November, according to preliminary inland data, with all product categories bar naphtha, jet fuel/kerosene and diesel posting losses. As in the last few months, the fall was driven by weak deliveries of heating oil (-19.4%) and residual fuel oil (-15.3%), either because of earlier restocking (heating oil during 1H09), cheaper energy alternatives (natural gas) or warmer temperatures. Indeed, despite colder temperatures in much of Europe during December, overall heating-degree days remained below the ten-year average last month.





The marginal revisions to October preliminary demand data (-20 kb/d) were mostly due to weaker-than-expected distillate deliveries. Thus, OECD Europe oil demand actually shrank during that month as much as anticipated (-7.1% year-on-year). Forecast oil product demand remains broadly unchanged at 14.6 mb/d in 2009 (-5.0% or -0.8 mb/d versus 2008), barely increasing in 2010 (+0.3%), as gains in naphtha, diesel and 'other products' are offset by declines in other categories, notably gasoline, heating oil and residual fuel oil.

Preliminary data suggest that German oil product demand contracted by as much as 10.9% year-on-year in November - the fourth consecutive month of double-digit decline - on the back of weak heating oil deliveries (-52.1%) and residual fuel oil (-29.0%). However, consumer heating oil stocks fell to 65% of capacity by end-November, at the upper bound of the five-year range. In France, total oil product deliveries (-4.2% year-on-year in November) also reflected lower deliveries of both heating oil (-18.5%) and residual fuel oil (-29.9%).



The French government's plans to introduce a carbon tax on 1 January 2010, which would have entailed an average €0.05/litre rise to gasoline and diesel retail prices, were thrown into disarray in late December. The country's Constitutional Council rejected the legislation because of its many exemptions (for example, some 1,000 of the biggest industrial emitters had been exempted, being already covered by the European Union's Emission Trading System, thus reportedly violating the principle of equality). Although the government has vowed to redraft the legislation to implement the carbon tax later in the year, it is unclear whether there will be sufficient political momentum. Indeed, not only will there be regional elections in March, rendering progress before then unlikely, but also the exemptions included in the original law were themselves the result of a political compromise to win support for the initiative.

Pacific

Oil product demand in the Pacific fell again in November (-1.4% year-on-year), resuming a decline that had begun in June 2008 and was only briefly interrupted last October. According to preliminary data, even though naphtha demand posted a strong recovery (+14.2%), all other product categories posted losses, despite somewhat colder temperatures. Interestingly, the region continues to be dragged down by Japan; by contrast, oil demand in Australia, Korea and New Zealand appears to have resumed growth.

October revisions were negligible (+3 kb/d). Forecast OECD Pacific demand thus remains virtually unchanged at 7.7 mb/d in 2009 (-5.1% or -0.4 mb/d on a yearly basis) and 7.5 mb/d in 2010 (down by 2.4% or 0.2 mb/d when compared to the previous year). Despite an assumption of average winter temperatures for 2010, continued inroads by gas and rising nuclear power use will constrain oil use.





According to preliminary data, Japanese oil demand plummeted by 6.7% year-on-year in November, with all product categories bar naphtha posting losses. Although the resilience of naphtha deliveries (+14.6%) reflects rising industrial and petrochemical exports, particularly to Asia, the economy remains very weak. As in the US, preliminary 3Q09 GDP figures were sharply revised down. Similarly, diesel demand, which has been reported as growing strongly in October, was actually adjusted down to reflect a sharp contraction (-9.7%), which continued in November, albeit at a lower pace (-3.6%). Moreover, nuclear generation has been steadily rising, weighing on November's demand for residual fuel oil (-35.2%) and 'other products' (-16.5%), which include direct crude burning.



In mid-December, the Japanese government announced it will maintain the provisional tax on gasoline in fiscal 2010-2011 (April-March), rather than replacing it by an environmental tax. The ¥25.1/litre 'provisional' tax (introduced in 1974 to fund road construction) was set to expire next March.  The decision to reverse an earlier election campaign pledge is probably related to the government's weak fiscal position, with revenues declining amid the economic slowdown. Nonetheless, the government has indicated it may suspend the provisional tax if oil prices were to soar, without clarifying at what price.

Non-OECD

China

Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) rose by an astonishing 16.4% year-on-year in November, with all product categories bar gasoline and residual fuel oil posting gains. This was the third consecutive month of double-digit growth, underpinned by buoyant demand for naphtha (+71.9%), jet fuel/kerosene (+70.8%) and 'other products' (+36.6%).



It appears that the severe snowstorms and cold snap that hit China in early November, severely disrupting energy supplies and transportation infrastructure, notably in northern and north-western areas, did not translate into weaker-than-expected demand. As in recent months, oil demand is supported both by government spending and by product hoarding ahead of likely domestic price increases. In the case of naphtha, though, demand has been also driven by the expansion of ethylene and BTX capacity (olefins and aromatics) and by the conversion of old ethylene crackers from gasoil and other feedstocks to naphtha.

This pattern of ever rising demand - excepting, oddly, gasoline amid booming vehicle sales, a mismatch we highlighted last month - has led to yet another forecast revision of roughly 80 kb/d on average for both 2009 and 2010, assuming that the stimulus programme will continue this year. Total oil demand is now expected to average 8.5 mb/d in 2009 (+7.2% or +570 kb/d) and 8.8 mb/d in 2010 (+4.3% or +360 kb/d), with upward revisions concentrated in the 'other products' category. That said, and despite claims by some analysts that Chinese motorists have now become hyper-sensitive to rising prices, gasoline and gasoil account for around two-thirds of our projected demand growth.



However, there are concerns that the current refining boom - a combination of higher runs and new capacity, such as the 240-kb/d Fujian refining complex (a joint venture by Sinopec, ExxonMobil, Saudi Aramco and the local government), which tripled the capacity of the previous facility, or Sinopec's new 200-kb/d Tianjin refinery - may not last. Indeed, state-owned Sinopec itself expects oil product demand to keep on lagging behind refinery capacity additions, as new refineries come on-stream while independent players expand their own output, which may eventually oblige companies to find new export outlets.

Nonetheless, the government is determined to rationalise the 'teapot' sector by forcing small refineries to consolidate and close the least efficient units. In mid-December it hiked the import tax on 'No. 5-7' fuel oil as defined by Chinese customs - the feedstock of choice of teapot refineries - from 1% to 3% from 1 January, a year after raising fuel oil consumption taxes. Similarly, the government increased the import tax on jet fuel/kerosene from 1% to 6%, in order to discourage imports amid growing domestic supply and reportedly high inventories. Judging by the pattern of weakening fuel oil demand, these efforts are gradually paying off, despite resistance from local governments, which rely on teapots as a key source of revenue. Over the past year or so, many teapots have actually been purchased by the state-owned majors, which use imported crude, exempted from any import tariff.

Other Non-OECD

The rise in India's oil product sales - a proxy of demand - slowed to 3.2% year-on-year in November after double-digit growth in the previous month, according to preliminary data. Demand continues to be supported by buoyant gasoline demand (+11.1%), with car sales rising by 61% year-on-year in November (although relative to a lower base). Gasoil consumption, which accounts for about 37% of the country's total oil demand, rose by 5.6% - a more moderate pace versus October's 12.0% jump. Although jet fuel/kerosene sales went up by only 2.2% on year, air travel has picked up after a weak start in 2009. By contrast, naphtha demand declined by 28.3% given greater domestic natural gas availability from Reliance Industries Limited's giant offshore D6 block in eastern India (the project, which currently produces some 1.4 bcf/day, is expected to peak at 2.8 bcf/d by early 2010). However, preliminary naphtha data were yet again revised up (+100 kb/d in October), showing demand growth of 13.6% instead of a 23.3% decline.



The recent rise in international oil prices above $80/bbl is once again putting pressure on the government to reform fuel subsidies. According to some reports, India's Ministry of Petroleum & Natural Gas is intent on liberalising gasoline retail prices and raising gradually diesel prices. The ministry is equally keen to adjust LPG and kerosene prices, which have been frozen for a decade to shield the poor (who use these fuels for cooking and lighting), although subsidies for both products would be maintained. The ministry is also eager to absorb the subsidy burden currently borne by upstream companies, which are forced to sell crude oil at a discount to help refiners supply oil products below market rates. The final decision, though, is to be taken by the Prime Minister, presumably over the next few weeks.



The question of subsidies is also potentially related to product quality. It is now becoming increasingly apparent that India's three major state-owned refiners and fuel retailers will be unable to meet stricter fuel specifications scheduled to be implemented across the country from 1 April (Euro IV in the main metropolitan areas and Euro-III in most other cities). The companies, which are likely to request a deadline extension, have argued that higher gasoline and diesel prices are required to fund the refining upgrade expenditure.

Argentina began blending 3% of ethanol into gasoline from January 1 in an effort to diversify energy supplies and reduce carbon emissions. The rollout began in northern areas, where sugarcane is produced, and will be gradually extended to the rest of the country. The government hopes to raise this level to 5%, setting a mandatory target by September or October 2010. Eventually, the share of ethanol could be as high as 25%, although it is unclear when that goal would be achieved.



By contrast, in Brazil the government has decided to reduce the minimum ethanol blending requirement from 25% to 20% during 90 days from 1 February, allegedly to avoid further rises in domestic ethanol prices - sugar prices rose markedly this year as torrential rains resulted in a smaller-than-expected harvest. However, some observers contend that the measure intends to restrict potential imports of US ethanol, which is normally more expensive, and contain ethanol pump prices during an election year.

Supply

Summary

  • Global supply has risen steadily to 86.2 mb/d in recent months, with December production up by a further 270 kb/d. However, for full-year 2009, preliminary estimates peg global supply down by a steep 1.6 mb/d, to 84.9 mb/d, in the wake of sharply lower demand. A decline in OPEC supplies of 2.5 mb/d last year was partially offset by a rise in non-OPEC of 630 kb/d and OPEC NGLs of 310 kb/d.
  • Non-OPEC supply in 2009 is revised modestly higher to 51.3 mb/d on robust 4Q09 Norwegian production. A reappraisal of Azerbaijan's crude production outlook leads to a 150 kb/d downward revision for projected 2010 non-OPEC supply, while lower Canadian and Malaysian prospects were largely offset by a stronger outlook for Norway and Brazil. In total, expected non-OPEC 2010 supply now averages 51.5 mb/d, up 0.2 mb/d versus 2009. Key sources of growth in 2010 are global biofuels, Brazil, the FSU, Australia, Colombia and India. OPEC NGLs are also forecast to increase by 885 kb/d, to 5.7 mb/d in 2010.
  • OPEC crude production edged higher at year-end, with December output up by 75 kb/d to 29.1 mb/d. Output by OPEC-11, which excludes Iraq, rose by 95 kb/d to 26.6 mb/d last month, with the group now producing about 1.8 mb/d above its 24.845 mb/d target. OPEC ministers left production targets unchanged at their 22 December meeting in Luanda, but the group's leadership called on members to improve adherence to current output targets. OPEC's effective spare capacity is estimated at 5.4 mb/d.
  • The 'call on OPEC crude and stock change' is estimated at 28.7 mb/d for 1Q10 and for full-year 2010 is estimated at 29.1 mb/d, up 400 kb/d from 2009 levels.


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

Crude oil production by OPEC edged higher at year-end, with December output up by 75 kb/d to 29.1 mb/d. Nonetheless, this was still almost 1.0 mb/d below December 2008 levels. Output by OPEC-11, which excludes Iraq, rose by 95 kb/d to 26.6 mb/d last month, 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 December compared with 60% in the previous month. OPEC's effective spare capacity is estimated at 5.4 mb/d.

As expected, OPEC ministers left production targets unchanged for the fourth time in 2009 at their 22 December meeting in Luanda, but the group's leadership called on members to improve adherence to current output targets. OPEC Secretary General el Badri said better quota compliance, of between 75% and 80%, was needed.



Significantly, Saudi Oil Minister Ali Naimi said during the gathering that current oil price levels were likely to last into 2010, describing a range of $70-80/barrel as 'a perfect price for the world.' The market interpreted the minister's comments as setting a floor of $70/bbl and a ceiling of $80/bbl. OPEC is scheduled to meet again to review production levels in Vienna on 17 March 2010.

While OPEC's crude production crept steadily higher through the year, preliminary total 2009 estimates of 28.7 mb/d show the group's output was still down a substantial 2.5 mb/d from 2008 levels. Indeed, OPEC production last year was at its lowest average level since 2003.

Saudi Arabia bore the brunt of the cutbacks, accounting for 39% of the decline at 987 kb/d, to an average 8.2 mb/d last year. Kuwait accounted for 13% of the lower output levels, down 326 kb/d to 2.3 mb/d, while the UAE followed at 12%, with output down 315 kb/d to 2.3 mb/d.

With the exception of Iraq posting a modest year-on-year increase, all other members accounted for a much smaller share of the decline, ranging from 1% for Ecuador to 7% for Iran, Libya and Venezuela.

Saudi Arabia's production in December rose by 30 kb/d, to 8.25 mb/d. Saudi Aramco reportedly increased exports going to Asia but some of the higher shipments were due to extra crude availability following the closure of the 325 kb/d crude distillation unit at the Ras Tanura refinery from mid-December to late January for maintenance work. Early indications are that Saudi supplies may be down a bit in February, with some smaller Asian buyers told to expect lower volumes next month.

European customers were also notified in late December that they will no longer receive any volumes of Arab Heavy and Arab Medium crude in 2010. Saudi Arabia has been increasingly diverting both grades to meet growing domestic power generation demand and higher sales into Asian markets. Saudi exports to Europe of Arab Heavy crude were down to just 25 kb/d in the first nine months of 2009 compared with 90 kb/d in 2008, 110 kb/d in 2007 and 180 kb/d in 2006. Arab Medium crude exports slipped to just 20 kb/d over the same period from 50 kb/d in both 2008 and 2007 and 140 kb/d in 2006 (see Table 6:  IEA Member Country Destinations of Selected Crude Streams for more detailed data on Saudi crude imports by IEA member countries).

Iran's oil production was up slightly in December, rising by 20 kb/d to 3.72 mb/d. The country's compliance with its agreed targeted cut was just 16% compared with 20% in November. On average in 2009, Iranian production was down 165 kb/d.

Oil production in Qatar is rising as new tranches of production from the al-Shaheen fields are brought online. December output was up 30 kb/d to 800 kb/d, which reduced the country's compliance with output targets to just 49% from 74% in November. Qatar's production capacity is on course to reach 1 mb/d in coming months as additional production increments start up.

Crude production in the UAE also increased in December, up by 10 kb/d to 2.28 mb/d, but compliance with its targeted cut is still a high 98%. State-owned ADNOC eased its contract cuts for Asian buyers for January but has since tightened them again for February liftings.

Nigerian production rose to 2 mb/d in December, an increase of 25 kb/d from the previous month and the highest level since mid-2008. Nigeria's new Oyo offshore oilfield started pumping in December at an initial rate of 25 kb/d. Nigerian-based Allied Energy and Italian ENI said output is expected to reach a peak of 40 kb/d. The Oyo field is in the Niger Delta deep water offshore, about 75 km off the Nigerian coast.

The country's output has been steadily rising in recent months following the ceasefire agreement between the government and rebel groups, but a deepening political crisis in the country threatens to derail the hard-won accord. President Umaru Yar'Adua's long absence from the country while he receives medical treatment in Saudi Arabia, and his decision not to appoint a replacement while on sick leave, has angered politicians and the public as well as delayed peace talks, with restive rebels announcing that they have ended the ceasefire agreement for now. The president's decision not to transfer powers to Vice President Goodluck Jonathan has triggered protest rallies and lawsuits, which argue the constitution has been violated. Indeed, after months of relative calm, militants renewed attacks on pipelines in December and early January. Rebel groups are suspicious that the government will not honour its amnesty offer. Militants hit a Chevron pipeline in the Niger Delta on 6 January, forcing Chevron to shut-in an additional 20 kb/d so far.

In addition to the tense issue over the fate of the country's presidential powers, Nigeria's production this month and in February appears beset by operational problems. Few details have been forthcoming, but Forcados exports are reportedly down sharply due to operational problems. In addition, production problems at the 60 kb/d Okono field have forced delays in its export schedule.

Iraqi output fell by around 20 kb/d in December, to 2.43 mb/d from a revised 2.45 mb/d for November. Total exports are estimated at 1.98 mb/d for December compared with 1.90 mb/d the previous month. Crude run at domestic refineries and power plants fell to 515 kb/d last month from 550 kb/d in November.

Crude oil exports from the southern Basrah terminals rose by 35 kb/d to 1.53 mb/d despite weather-related disruptions. Exports of Kirkuk crude rose by around 50 kb/d, to 443 kb/d in December. Production in northern Iraq was disrupted for four days in December following an attack on the pipeline that carries Kirkuk crude to the Turkish port of Ceyhan for exports. Iraqi state oil marketer SOMO continues to spike fuel oil into crude in a bid to maintain higher export levels. Roughly 100 kb/d of fuel oil was spiked into Kirkuk and Basrah exports in December. OMR Iraqi production estimates are based on export volumes plus crude run for domestic use at refineries and power plants, less reinjected oil and spiked fuel oil.

Iraqi production has been trending lower since September, with preliminary 2009 output pegged at 2.45 mb/d, up just 65 kb/d year-on-year. Production from the Tawke and Taq Taq fields in the northern Kurdish region largely remains shut-in, with only about 20 kb/d of the fields' combined 100 kb/d capacity operating to feed refinery needs. Little progress has been made between Baghdad and the Kurdish Regional Government (KRG) over payment issues and negotiations are not likely to move forward until after the country's election on 7 March 2010. During last month's OPEC meeting, Iraqi oil minister al-Shahristani said 'We don't expect Iraq's production to increase significantly next year. Any increase will not be seen before 2011 and by that time we hope the market will have recovered.' This report and the MTOMR update have tended to take a cautious view on expansion of Iraqi capacity, envisaging as a working case that levels of around 3.1 mb/d are attained by 2014.



Non-OPEC Overview

Non-OPEC supply in December increased by 0.2 mb/d to 52 mb/d on higher US and Other Asia production. Meanwhile, near-complete annual data for most major non-OPEC producers meant that 2009 is adjusted up by +45 kb/d on higher-than-expected 4Q09 Norwegian production. 2009 non-OPEC supply is now forecast to average 51.3 mb/d. This compares with our original projection of 50.6 mb/d, first published in our July 2008 report. Besides regular revisions to submitted data, the higher outcome stems largely from Russia's surge in production, as well as a storm-free 2009 in the US Gulf of Mexico after a disrupted 2008. Indeed, largely for the same reasons, December 2009 non-OPEC supply is up a full 1.2 mb/d year-on-year, also benefiting from increments in China and Latin America.

Lower Upstream Costs Offset Reduced Investment in 2009; Spending to Rise in 2010

Data recently published by consultancy IHS/CERA show that, following a decline in the previous two quarters, upstream capital costs fell further in 2Q09 and 3Q09, albeit at a slightly slower pace. Costs associated with the construction of new oil and gas production facilities have fallen 12% since their peak in 3Q08. Other cost data made available by the US Bureau of Labor Statistics (BLS) show that since peaking in November 2008, US upstream drilling and support activities (essentially wages) have fallen by 19% and 12% respectively. Machinery and equipment costs however, have stayed flat. In aggregate, these indicators dipped by 12% year-on-year in November 2009. These findings are broadly consistent with anecdotal reports throughout 2009 of companies making the most of the fall in oil demand to put planning on hold and bolster their case for contract renegotiation on large upstream (and downstream) projects.



Furthermore, evidence of lower upstream development costs is significant when set against measures of how much upstream investment fell in 2009 - a recent spending review by Barclays Capital (The Original E&P Spending Survey, December 2009) sees expenditure down by 15% last year. As the OMR has previously argued, the effect of lower upstream spending last year was thus offset at least in part by lower costs, indicating that the potential impact on future supplies of the price slump and weaker demand could be less significant than originally thought. Prior to late 2008, upstream costs had been on an upward trajectory for much of the decade.

Looking ahead, Barclays Capital's study finds that upstream spending is expected to rise again by 11% globally in 2010, increasing from $395 bn to $439 bn, based on an average expected crude price of $70/bbl and a survey of 387 companies. A key finding is that while National Oil Companies (NOCs) plan to hike their upstream investments by 15% in 2010, International Oil Companies (IOCs) will only spend 1% more - a reflection in part of opportunity constraints borne of limited access to major new sources of reserves.

Other new data show a further pick-up in rig counts, a measure of upstream exploration and development activity. Data from Baker Hughes show that the number of both global and US drilling rigs (for both oil and gas) edged back up towards the five-year range in late 2009, after a strong dip early in the year. It appears that in 2010, upstream activity is on the rebound, even if time lags mean that 2010 non-OPEC supply growth is currently forecast lower than the growth seen in 2009.





Projected non-OPEC supply for 2010 is revised down by -150 kb/d to 51.5 mb/d, after a reappraisal of Azerbaijan's production outlook. Following a gas leak and associated problems at the Azeri-Chirag-Guneshli (ACG) complex in September 2008, production has recovered, but now seems unlikely to reach previous capacity levels at the affected installations as we had assumed (though increments from new fields have lifted overall ACG production levels higher). Canadian and Malaysian prospects were adjusted downward too, partly offset by a better 2010 outlook for Norway and Brazil.



Key components of growth in 2010 are forecast to be the FSU (in total +330 kb/d, of which Russia +150 kb/d, Azerbaijan +120 kb/d and Kazakhstan +50 kb/d), global biofuels (+210 kb/d), Brazilian crude (+160 kb/d), but also Australia, Colombia and India, with increments of around +75 kb/d each. In contrast, US oil production, which contributed to 2009 growth, is forecast to drop in 2010 (-130 kb/d), while ongoing decline in Norway and the UK is more pronounced than in 2009 (-250 kb/d and -200 kb/d respectively in 2010). Canada, while expected to be a major source of growth in the medium term, largely due to rising crude oil volumes extracted from oil sands, will see its oil supply stay flat in 2010 at 3.1 mb/d, following a dip in 2009, when performance was hit by lower oil prices and project postponements. The usual risks to our forecast apply, including unexpected weather-related, technical or politically-motivated outages.



OECD

North America

US - December Alaska actual, others estimated:  October and November production estimates for the US were left largely unchanged, while December output was revised up 200 kb/d to 8.4 mb/d as the year came to a close without any significant production outages (our outlook assumes -125 kb/d of production downtime due to outages at mature production facilities, an adjustment that is removed once preliminary monthly production data are available). In Alaska, there was a small leak at the large Prudhoe Bay field in late December, but this had no noticeable effect on monthly output. In the Other Lower-48, North Dakotan production once again came in higher than expected, as output from the Bakken Oil Shale continues to rise. As a result, and on reports of further sustained investment, we have adjusted our 2010 forecast for North Dakota by +20 kb/d. On the NGL front, the seasonality of output in 2010 was adjusted, without any net change to the overall forecast. Total US oil supply is now expected to dip slightly from 8.1 mb/d in 2009 to 7.9 mb/d in 2010, as incremental production from the Gulf of Mexico slows, following a bumper, hurricane-free year in 2009.



Canada - Newfoundland November actual, others October actual:  The estimate of Canadian total oil production for October was left unchanged, with lower NGL production offset by higher-than-expected conventional and synthetic crude output. For November and December, total Canadian output was revised down by -60 kb/d and -120 kb/d respectively, largely on estimated lower syncrude output from Suncor. The company reported a fire at one of its upgraders in October, cutting output, and then another fire in December, with ongoing repairs expected to last until end-January 2010, thus also curbing expected 1Q10 output by around 30 kb/d. Lower Albertan supply - most of all light and medium conventional crude, but also reduced heavy crude and bitumen - also trimmed the November and December Canadian production total to around 3 mb/d.

To some extent, these factors are carried through 2010, thus curbing the 2010 oil production forecast by -50 kb/d to 3.1 mb/d. This implies total oil supply will remain flat on an unchanged 2009, as higher synthetic crude output is offset by a decline in conventional crude and NGL production. Just when going to press, pipeline operator Enbridge announced the shut-down of one if its trunk lines from Canada to the US following a leak. The line runs from Cromer, Manitoba to Superior, Wisconsin. Enbridge said that volumes were being rerouted and would not affect overall exports.



Mexico - November actual:  In Mexico, while November levels were unrevised, December oil output was adjusted up by +20 kb/d to 2.9 mb/d on anticipated better offshore crude performance. Suffering from a sharp decline at mature fields, in particular the giant Cantarell field, Mexico announced that total upstream capital expenditure would remain unchanged at $15.2 bn for 2010. The government and state oil company Pemex are still confident the decline of past years can be halted. However, following disappointing performance at the complex onshore Chicontepec field, the investment budget there has been cut by 60%. In 2009 around 1 000 wells were drilled at Chicontepec, while production remained essentially steady around 30 kb/d. Total Mexican oil supply is now forecast to decline from 3.0 mb/d in 2009 to 2.8 mb/d in 2010.

North Sea

Norway - October actual, November and December provisional:  In Norway, September and 4Q09 production estimates were revised up 100 kb/d and 200 kb/d respectively, resulting from mostly uninterrupted production and on the basis of preliminary production data and reported loading schedules for key North Sea crude grades. While these adjustments only affect production prospects through end-2009, a reassessment of the Snorre and, to a lesser extent, the Ekofisk and Varg fields, led to an upward-revised forecast for 2010. Total Norwegian oil production is expected to average 2.4 mb/d in 2009 (+50 kb/d vs. last month's report), dipping to 2.1 mb/d in 2010 (a +70 kb/d revision).

Just ahead of publication, the Ormen Lange gas field and the Kaarstoe gas processing facility were briefly shut down due to weather-related problems (cutting gas exports to the UK, among other things). Both were reportedly in the process of being restarted, but it was unclear what the impact would be on liquids production for Ormen Lange, which produced around 30 kb/d of gas condensate in January-October 2009, or the Kaarstoe facility, which processes most of Norway's NGL and condensate.



UK - October actual:  The UK production estimate for 2009 is left largely unchanged at 1.5 mb/d in aggregate, with higher crude offsetting downward-revised NGL production. September field-by-field data showed that two of the UK's largest fields, Buzzard and Schiehallion, were still operating at reduced levels, following seasonal maintenance and a collision involving a tanker respectively. The Buzzard field was reported to be back at normal production levels around 200 kb/d at the end of October, despite suffering a glitch with a gas pipeline towards the end of the month. Schiehallion, which was fully offline from June through September due to seasonal maintenance, saw its Floating Production, Storage and Offloading (FPSO) vessel collide with a shuttle tanker in early October and has remained shut-in since. Latest reports indicate a start-up in January 2010. This report assumes partial volumes in January and a gradual ramp-up to recent observed capacity of 40 kb/d from February.

Schiehallion's problems and January loading schedules have prompted a downward revision of 75 kb/d to 1Q10 UK output. While 2009 total oil volumes are left unchanged at 1.5 mb/d, 2010 is revised down by -30 kb/d to average 1.3 mb/d. Attempting to slow the past ten years' steady decline in UK output, in early December the government announced an expansion of its scheme offering incentives to develop marginal North Sea fields, especially in the prospective West of Shetlands area. Industry voices claim more incentives are needed if UK production decline is to be attenuated.

Denmark - October actual:  In Denmark, the Siri field remains shut-in. It has been offline since early September 2009 after the discovery of cracks in parts of the structure connected to its underwater storage tanks. Rough seas have reportedly delayed a restart, which is now expected to take place in mid-January 2010. Following its return online, the Nini field will be tied back to the Siri platform, total output of which is now reassessed slightly higher. As a result, Danish crude production is expected to remain flat at 260 kb/d in 2010, unchanged from 2009.

Pacific

New Zealand - October actual:  Lower-than-expected reported October production, coupled with a later-than-anticipated start-up of the Kupe gas field (from which ultimate liquids production of 10 kb/d is expected), led to a downward revision of -15 kb/d for 4Q09. 2009 oil production is now expected to average 60 kb/d. In part lower output was carried through the forecast, curbing expected 2010 output slightly to 80 kb/d.

Former Soviet Union (FSU)

Russia - November actual, December provisional:  November 2009 crude production in Russia was left unchanged overall, with lower output from Rosneft and the three production sharing agreements ('PSAs', including the two Sakhalin projects and the Total-operated Kharyaga field) offset by higher output at smaller, private companies (Novatek, Russneft and others). Preliminary December data prompted a downward adjustment of -90 kb/d on lower-than-forecast output at the PSAs, as well as Rosneft, TNK-BP, Lukoil and others, although total output came in only marginally lower than November's 10.4 mb/d. In part this downward adjustment was carried forward into 2010. Thus total Russian oil production is expected to rise from an unrevised 10.2 mb/d in 2009 to 10.4 mb/d in 2010. Russia's dispute over exports with Ukraine and Belarus is examined below (see Russia - Belarus Dispute on Oil Tax and Transit).

Russia - Belarus Dispute on Oil Tax and Transit

Crude oil futures strengthened towards $83/bbl in early January, against the backdrop of a renewed dispute between Russia and Belarus over export duties and transit fees for up to 1.5 mb/d of Russian oil moving west via Belarus. An earlier disagreement in 2007 caused a halt to the westbound flow of crude oil via the Druzhba pipeline for three days, affecting supplies to Poland, Germany, the Slovak Republic, Hungary and the Czech Republic. That dispute centred upon export duties for Russian oil processed in Belarus and exported to third countries and the transit fee for Russian crude oil crossing Belarus en route for Europe. It was settled in 2007 with an agreement for three years, which gave Belarus a reduction of about two-thirds on the export duty normally imposed on Russian oil exports. The tariff for the transit of Russian oil through Belarus was kept quite low at between $0.89 and $2.90/mt, depending on the export route.

That three-year agreement ended on 31 December 2009. Russia then indicated it wanted to amend Belarus's favourable tax treatment, proposing to impose the full export tax (currently $267/mt) on all crude oil processed in refineries in Belarus and exported as product to third countries, but at the same time leaving oil destined for domestic consumption in Belarus exempt from export tax. Belarus imports some 420 kb/d of crude, of which 120 kb/d is consumed domestically and 300 kb/d is exported as product.

As no new agreement was reached on 31 December 2009, Russia stated that it would apply the full export tax to all deliveries to Belarus, including those destined for domestic consumption. In response, Belarus threatened to raise the transit tariff for Russian crude oil shipments to Europe from $3.90 to $45/mt. Although supplies to the two refineries in Belarus were briefly halted on 2 and 3 January, so far the dispute has had no impact on volumes for third parties, and indeed both sides have confirmed that flows to Europe through Belarus would continue undisrupted. At the time of writing no agreement had been reached, but talks were continuing.

The Druzhba pipeline through Belarus carries a substantial amount of crude oil destined for IEA member countries. We estimate that in 2009 some 1.5 mb/d entered Belarus, of which 420 kb/d stayed in the country for consumption and processing. In Belarus the Druzhba crude line splits into two legs, at Mozyr.



As for contingencies, the five IEA member countries mentioned above hold emergency stocks of well above 90 days. There are alternative supply routes as well - for Poland through the port of Gdansk; for Germany through the ports of Rostock and Gdansk; for Hungary and the Slovak Republic through the port of Omisalj in Croatia (Adria pipeline); and for the Czech Republic by increased imports through the port of Trieste in Italy (TAL and IKL pipelines). Each of the alternatives would require logistical adjustment, but seem feasible as some were tested during the 2007 disruption and others have been prepared since then. And despite the recent cold snap, OECD European refinery utilisation also remains relatively low at around 75%, cushioning the impact of any temporary curb in shipments via Belarus were that to occur. In the longer term, Russia is reportedly accelerating work on expanding the Baltic Pipeline System to reduce its reliance on transit states such as Belarus for sales into Europe.

The stakes for Belarus in this dispute are high. It receives an implicit subsidy of some $2.5 billion per year from Russia and oil product exports make up about 37% of total exports. Over recent years, Russia has consistently implemented a policy of phasing out subsidies on hydrocarbon supplies for countries of the former Soviet Union, and Belarus seems to be one of the last countries still greatly benefiting from these implicit subsidies. So, although there is no imminent threat of tighter European crude supplies, given what is at stake for Belarus, a resolution may take some time to achieve.



Azerbaijan - September actual:  While reported September data prompted an upward adjustment of +50 kb/d for that month (taking total Azeri production to 1.1 mb/d), a reassessment of the production outlook at the BP-operated Azeri-Chirag-Guneshli (ACG) complex has led to a significant downward revision of -140 kb/d to total forecast Azeri production in 2010, to 1.2 mb/d.

Following a gas leak in September 2008, the Central and West Azeri platforms were partly and fully shut-down respectively, causing a major dip in Azeri oil production to only 700 kb/d in October 2008. While the West Azeri platform was back at capacity relatively soon afterwards, volumes at the Central Azeri platform only gradually recovered during 2009. Added to the ramp-up of new volumes at the Guneshli Deep platform, total ACG volumes were therefore back at pre-incident volumes in 2Q09, although this masked the persistent undershoot compared to pre-incident volumes at Central Azeri.

Since then, our forecast has assumed further ACG growth due to the gradual recovery to pre-September 2008 volumes at the Central Azeri platform, as well as some further ramp-up at Guneshli Deep. However, persistently weaker actual output levels have led to a reappraisal and it now seems unlikely that original, pre-September 2008 Central Azeri nameplate capacity (of as much as 300 kb/d) will be regained in the foreseeable future. Our forecast now envisages total ACG production rising by 100 kb/d in 2010 to 960 kb/d, generating the bulk of 2010 Azeri growth. 2009 total Azeri oil production now averages 1.1 mb/d, rising to 1.2 mb/d in 2010.



FSU oil exports rose to 9.1 mb/d in November, boosted by an 8.7% increase in oil product shipments. Gasoil exports rose by 5.0% while gasoline deliveries almost doubled. Fuel oil volumes recovered to previous levels on higher shipments from Tallinn and the restart of operations at the Odessa refinery following a shortage of crude oil in October. Crude oil exports dropped by 1.9% in November as maintenance on the pipeline leading to Primorsk cut shipments from the Baltic. Preliminary December data show crude oil exports from the FSU increased slightly after volumes from Primorsk returned to previous levels, which, coupled with increases in Arctic and Far East exports, more than offset a drop in CPC volumes.



Last month saw also the launch of exports from Russia's new terminal in Kozmino, the end-point of the East Siberia-Pacific Ocean (ESPO) pipeline, which ultimately aims to provide direct access to growing markets in Asia and to diversify Russian crude oil exports. Indeed, even in the short term, Russian loading schedules for 1Q10 show a rerouting of crude oil from Baltic and Black Sea ports to the east, while overall volumes to be shipped via the Druzhba pipeline to Europe remain close to last year's levels.

Winter crude oil exports are usually affected by cold, stormy weather in the Black Sea and icy conditions in the Baltic requiring tankers loading in Primorsk to fulfil ice-class requirements. A further winter feature that has come to haunt European countries in recent years is the potential for disrupted westbound oil and gas shipments via transit states Belarus and Ukraine. This year, Russia and Ukraine quickly reached an agreement including an increase in transit tariffs via Ukraine, export volumes from Yuzhny, the resumption of shipments to Ukrainian refineries Galichina and Neftekhimik Prikarpatia, and a switch from pricing in dollars to euros. Tariffs under the new agreement are set at €6.60/mt for deliveries via the Druzhba and at €6.50/mt for exports to Yuzhny. However, an ongoing pricing dispute between Russia and Belarus concerns export taxes on the re-sale of oil products processed in Belarusian refineries from Russian crude oil obtained at preferential conditions. (see Russia - Belarus Dispute on Oil Tax and Transit).

Other Non-OPEC

In Brunei, for which we rely upon data reported to the Joint Oil Data Initiative (JODI), there was a small baseline revision of -5 kb/d from 2007, which has been carried forward in our forecast. Estimated 2009 and 2010 oil production is expected to average a steady 140 kb/d. November reported data for Malaysia prompted a downward adjustment of -35 kb/d, which was partly carried through the forecast. 2009 output is estimated at a slightly lower 740 kb/d, falling in 2010 to a downward-revised average of 700 kb/d.

For Brazil, November crude production was revised up +45 kb/d on more robust-than-expected offshore production. While this leaves 2009 average total oil supply unchanged at 2.5 mb/d, the 2010 forecast is nudged up slightly and is now expected to grow to 2.7 mb/d. Output from pre-salt fields in offshore deepwater will start to ramp-up significantly from this year, with production at the Tupi pilot growing from current levels around 20 kb/d to first-phase commercial production around 100 kb/d by the end of 2010 (generating 2010/2009 annual growth of +40 kb/d). However, despite the government's aim to rapidly put in place its proposed legislative framework for the development of these vast reserves, Brazil's Congress only managed to pass one of four pre-salt bills before its December recess, thus missing its end-of-year deadline. As highlighted in a previous report (see Brazil's Lula Outlines Suggested Pre-Salt Development Regime in report dated 10 September 2009), the outcome of this proposed framework is crucial in determining the pace at which these reserves will be developed.

OECD Stocks

Summary

  • OECD industry stocks rose counter-seasonally by 12.6 mb to 2 747 mb in November. The five-year average stock change for November is a 4.1 mb draw. A large build in European crude stocks and an increase in North American gasoline stocks accounted for much of the rise. Decreases in North American middle distillates and 'other products' provided some offset.
  • OECD stocks in days of forward demand fell to 59.1 days as of end-November, down from 59.4 days at end-October on rising three-month forward demand. Days cover fell sharpest in residual fuel oil and middle distillates. However, readings in both categories remained near or above the top of the five-year range for all three regions.
  • Preliminary data indicate total OECD industry oil inventories fell by 35.8 mb in December, driven by a 28.2 mb fall in US products. Drawing middle distillates, driven in part by colder winter temperatures in key northern hemisphere markets, accounted for about 25% of the total OECD change. The five-year average stock change for the OECD in December is a draw of 41.9 mb.
  • Short-term crude floating storage levels declined to 51 mb as of end-December, from 55 mb at end-November. Short-term products floating storage registered its first monthly fall, albeit a modest one, since August, decreasing to near 95 mb at end-December from 98 mb at end-November. Early 2010 cold weather in the OECD may induce continued product floating storage draws through January, though levels are likely to remain historically high.


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

Reversing their sharp fall in October, OECD commercial inventories increased counter-seasonally by 12.6 mb in November to 2 747 mb. The five-year average stock change for November is a 4.1 mb draw. As such, the OECD stock surplus to the five-year average widened from 77 mb in October to 93 mb at end-November. Middle distillates in North America and Europe accounted for two-thirds of this surplus while North American crude remained the other large surplus category.



Preliminary December inventory data and OECD-wide cold weather in January suggest that surpluses, particularly in products, may be narrowing. From mid-November through 8 January, US heating oil stocks have drawn almost 10 mb, narrowing the US distillate surplus to the five-year average to 25.5 mb. Japanese kerosene stocks have sunk to new five-year lows. Products floating storage remained high as of end-December, yet, in January, volumes off Europe began discharging and others headed to the US on favourable arbitrage economics.



OECD stocks in days of forward cover continued to decrease, hitting 59.1 days at end-November. The surplus to the five-year average remained high at 5.7 days, but this figure was down from a peak of 8.9 days in March. With three-month forward demand expected to remain strong in December and January, preliminary indications of falling stocks suggest days cover should also continue to fall.



Strong winter heating usage amid low refinery runs has dented weather-related fuels such as heating oil, kerosene and propane.  Still, the overall market impact may not be as stark as headlines suggest. In Europe, ample consumer stocks and floating storage may well buffer industry level inventories from a sharp drawdown. Indeed, preliminary December data from Euroilstock showed EU-16 middle distillate stocks rising and, as of the first week of January, Northwest Europe gasoil stocks in independent storage stood 5% above levels of a year ago. Moreover, product inventories tied to economic activity have proved more resilient. US diesel and gasoline stocks hit new five-year highs in December and early January.

Crude stocks should now be entering a seasonal building phase in the OECD, aided by low refinery demand. Despite the cold weather tightening WTI time spreads, high inventories at Cushing, Oklahoma, may yet induce widening contango and increased storage incentives. OECD total oil stocks, particularly middle distillates, typically draw in the winter from January through March and harsh weather conditions may exacerbate this downward momentum. Yet, without an economically linked demand response, seasonal draws may reverse once the thaw begins, leaving a still healthy overhang in days of forward demand cover.

Analysis of Recent Industry Stock Changes

OECD North America

North American industry stocks fell 3.9 mb in November, driven by a 5.6 mb fall in the US 'other products' category and a 3.7 mb draw in US middle distillates. A 6.0 mb increase in US gasoline stocks and a 1.1 mb increase in US crude stocks provided some offset. A decrease in Mexican stocks of 2.4 mb contributed to the overall draw as Mexican crude inventories fell 2.1 mb.

December preliminary data point to a 39.4 mb draw in US commercial inventories, versus a five-year average draw of 18.4 mb. Despite stagnant refinery runs, crude stocks decreased by 11.1 mb with year-end tax concerns providing incentive to shed inventories. The Strategic Petroleum Reserve increased by 0.5 mb in December, while the US government filling programme ended with levels at 726.6 mb.



Stocks at Cushing, Oklahoma - the delivery point for the NYMEX light, sweet crude contract - swelled by 3.6 mb in December. As of 8 January, Cushing stocks stood at 34.5 mb, after hitting a record 35.7 mb the previous week. Despite this high level, WTI's contango has consistently narrowed with the onset of cold weather. While high storage levels could mark a return to wider crude contango, it is worth noting that Cushing nameplate storage capacity looks higher than a year ago. A recent Reuters survey of storage operators estimated total capacity at 51.5 mb at end-November versus 46.3 mb in February 2009.  Still, most market assessments put operable capacity at only around 80% of this figure, or around 41 mb.



US product stocks fell by 28.2 mb in December. Much of this stemmed from weather-sensitive fuels, as propane and heating oil decreased 12.3 mb and 7.7 mb, respectively. The 'other oils' and 'unfinished oils' categories fell as refinery runs remained low. Economy-linked transport fuels proved more resilient, though weather also constrained demand and helped sustain inventories. Gasoline stocks increased 3.6 mb, diesel stocks rose 0.4 mb and jet/kerosene inventories edged down by 0.4 mb.

OECD Europe

European inventories rose 23.7 mb in November, mostly due to a 19.5 mb increase in crude. Gains in crude stocks stemmed from an assortment of countries, but Norway (+6.4 mb) and Germany (+3.7 mb) posted the largest increases. European product stocks increased by 4.1 mb, led by a 2.1 mb rise in gasoline and a 1.4 mb gain in residual fuel oil. Both gasoline and residual fuel oil remained at the bottom of the five-year range on an absolute basis, but above the five-year range on a demand cover basis.



European industry middle distillate inventories rose slightly in November, by 0.7 mb, and accompanied by a 14 mb surge in November products floating storage - mostly middle distillate - off Northwest Europe and the Mediterranean. German consumer heating oil stock levels fell to 65% at end-November. Still, the OECD Europe middle distillate stock surplus to the five-year average increased to 38.6 mb. 



December preliminary data showed gasoil stocks held in Northwest Europe independent storage remaining relatively unchanged while gasoline and fuel oil posted gains. EU-16 preliminary data from Euroilstock showed all product categories rising in December led by middle distillates (+2.0 mb) and gasoline (+1.5 mb), while crude stocks fell by 2.6 mb. Though products floating storage decreased globally in December, volumes off Europe held steady. January reporting indicates some cargoes coming ashore as gasoil markets have tightened. Others headed across the Atlantic to the US to take advantage of arbitrage opportunities, though this window appeared to have closed as of mid-January. An early January increase in Northwest Europe independent gasoil storage to levels 5% above a year ago suggests floating storage replenishing land-based tanks. Yet, with still-flush onshore storage and disruptive weather around European ports, any drawdown may prove gradual.

OECD Pacific and Singapore

Pacific industry stocks fell by 7.1 mb in November, as crude and residual fuel oil each decreased by 2.0 mb. The downward movement in crude came primarily from Japan while the residual fuel oil change stemmed mainly from Korea. Crude stocks in Korea remained at five-year highs, while Japanese crude stocks trended below the five-year range.



Weekly data from the Petroleum Association of Japan (PAJ) point to a commercial stock build of 1.7 mb in December, with crude up 6.6 mb and products down 4.9 mb. Kerosene stocks fell 3.2 mb and trended at five-year lows. Gasoline and gasoil drew 0.8 mb and 0.4 mb, respectively. The former is at the bottom of the five-year range while the latter is at five-year average levels. Japanese refinery runs continued at five-year lows and unfinished product stocks, as of early January, stood 13% below levels of a year ago.



Singapore product stocks decreased by 3.7 mb in December. Residual fuel oil fell 3.8 mb on strong regional demand. As of early January, fuel oil stocks had lost further ground but still stood at five-year highs. Moreover, trade sources indicated the presence of at least 12 tankers storing fuel oil and crude off the coast of Malaysia in late December. Movements in Singapore light and middle distillates offset each other in December with the former falling by 0.6 mb and the latter rising by 0.7 mb.





Prices

Summary

  • Oil prices surged to 15-month highs in early January following a mid-December onset of exceptionally cold winter weather in much of the Northern Hemisphere and escalating geopolitical tensions in key oil producing countries. At their peak in early January, prices had jumped by around $10-12/bbl from December lows as temperatures plummeted. Prices have since eased, last trading in a $78-80/bbl range on 14 January.
  • The weather-related surge in prices that ushered in the new year may prove fleeting given the still considerable armada of middle distillate supplies in floating storage. Preliminary data show the season's first chill shaved a bit off the massive supply overhang but even protracted cold weather this winter may only make a dent in high inventories. With temperatures forecast to rise in the near term, the market may well look beyond the latest cold snap and turn its attention back to macroeconomic developments for signs of economically-driven oil demand growth.
  • Refining margins rose in all major regions in December as the weather-related rally in spot product markets outpaced the rise in crude prices. Margins showed a steady improvement on a weekly basis from the beginning of December until early January, but nonetheless remain weak on an underlying basis.
  • Tanker markets were buoyed by weather-related demand increases, with year-end rates for several benchmark routes at the highest levels in more than a year. The outlook for 2010 remains weak, however, with fleet additions expected to outpace demand growth.


Market Overview

Oil prices surged to 15-month highs early in the new year following the mid-December onset of exceptionally cold winter weather in much of the Northern Hemisphere, coupled with escalating geopolitical tensions in key oil producing countries.

This contrasted with a downward drift in early December under the weight of surplus crude and products, continued low refinery runs in Europe and the US, as well as increasingly bearish market sentiment about the near-term prospects for a recovery in the global economy. Indeed, average December futures prices for WTI and Brent were down 4.7% and 3.2%, respectively, from November levels.

However, frigid temperatures across much of Europe, the US, Asia and even parts of the Middle East gave a belated winter boost to oil prices by mid-month. After settling at a monthly low of $69.51/bbl on 14 December, the front month NYMEX light crude oil contract moved higher at a breakneck clip throughout the rest of the month and into January, gaining $13.61/bbl, to $83.18, by 6 January. North Sea Brent futures and spot Dubai prices lagged WTI's robust increases, up by a smaller $7-8/bbl on average over the same period. Prices have since eased, last trading in a $78-80/bbl range on 14 January.



Prices garnered further strength when a number of divisive geopolitical issues raised the spectre of potential supply disruptions in Iran, Nigeria and Russia. Tensions in Yemen and Angola may also have played into this sentiment. Prices jumped on 18 December after reports emerged that Iranian forces crossed over into Iraq and seized an idle oil field in the Maysan border region between the two countries. Both governments played down the incident a few days later.

Iran remains on traders' radar screens as tensions over the country's nuclear ambitions escalate in the new year. Iran issued in December a one-month deadline to the US, UK, Russia, China, France and Germany to respond to its counter-offer to a nuclear fuel-swap deal drafted by the IAEA. The announcement that Iran's Islamic Revolutionary Guards Corps (IRGC) plan to hold a major military exercise in the Strait of Hormuz also fuelled market speculation that a potential supply disruption might be looming. Meanwhile, the US took one step toward tightening sanctions on Iran when the US House of Representatives passed a resolution that would penalise foreign companies that sell gasoline or other refined products to Iran. However, a Senate vote is still required for it to become legislation, and the Obama Administration has indicated they prefer more time for negotiations.

In Nigeria, the government's fragile peace accord was shaken by militant attacks on pipelines in December and early January—the first since the ceasefire agreement was reached with the government last October. President Yar Adua's long absence from the country while he is receiving medical treatment in Saudi Arabia and his decision not to hand over power to his Vice President Goodluck Jonathan have raised suspicions among rebel groups that the government will not honour the ceasefire agreement. Jonathan is a native of the Niger Delta and has played an important role in negotiating peace efforts in the volatile oil-producing region.

By early January, prompt month futures prices briefly traded above $83/bbl on market concerns that Russia's dispute with Belarus over export fees could impede up to 1.5 mb/d of crude oil supplies that flow through the Druzhba pipeline for use within or transit across Belarus. Russia so far has maintained crude flows to Europe via the Druzhba but briefly cut oil supplies to two Belarus refineries on 2 January for three days, which helped push WTI futures prices on 5 January to the highest close since 9 October, 2008. The dispute centres on the size of the export duty that Belarus should pay to Russia for crude oil supplies, which are then refined and exported to the West (See Non-OPEC Supply, Russia - Belarus Dispute on Oil Tax and Transit).

Oil markets are sensitive to problems related to Russian energy supplies following last year's cut-off of gas exports during the country's dispute over payments with Ukraine. Negotiations between Moscow and Minsk are ongoing, but Russian energy ministry officials have said the country would not halt crude exports to Europe via Belarus regardless of the outcome of the negotiations between the two countries.

Market concern over potential supply disruptions have been somewhat tempered by ample crude supplies. Global oil production, moreover, continued its upward trend in December. OPEC output edged up by 75 kb/d, to 29.1 mb/d last month. As expected, OPEC ministers left production targets unchanged and will meet again on 17 March to review the market. Significantly, Saudi Oil Minister Ali Naimi said current oil price levels were likely to last into 2010, and the market interpreted his further comments as effectively suggesting a floor of $70/bbl and a ceiling of $80/bbl.



Indeed, the weather-related surge in prices that ushered in the new year appears exaggerated given the still considerable armada of heating oil supplies in floating storage. Preliminary data show the season's first chill shaved a bit off the massive supply overhang but even protracted cold weather this winter may only make a dent in surplus inventories. OECD stock levels of middle distillate are still well above the five-year average while crude inventories are hovering at the top of the range. Equally, refining runs are primed to be ramped up if needed. With temperatures forecast to ease in the near term, the market may well look beyond the latest cold snap and turn its attention back to macroeconomic developments and financial markets for signs of economic-driven oil demand growth. That said, non-OECD indicators look strong, with Chinese December crude imports averaging a high 4.1 mb/d. As has been mentioned in other quarters, those seeking to fathom the impetus to prices from fundamental factors need to cast their net wider than a focus on solely OECD indicators.

Futures

The late-year cold blast may partly explain a jump in the volume of futures market activity in December. Non-commercials classified under the old aggregated Commitment of Traders (COT) report increased their net long positions of heating oil contracts to a record high of 50,377 contracts as of 5 January, according to CFTC data. Under the new Disaggregated Commitment of Traders (DCOT) report, that total is broken out as 'Money Managers' at 38,879 and 'Others' at 11,498 contracts.

Open interest in NYMEX WTI futures increased by 21,600 contracts in December. Swap dealers decreased their net long exposure by 8,700 lots while money managers' net long exposure rose by 30,300 contracts. Meanwhile, producers extended their net short positions by 21,600 contracts.



Higher volumes may also reflect a seasonal new year rebalancing of commodity investments by index fund managers. Some see the latest rally in prices in the short term having potentially been aided and abetted by the sudden influx of money managers increasing their net long positions. On the flip side, data show producers increasing their net short positions as they sell into the rising market.

Spot Crude Oil Prices

Spot crude prices strengthened on the back of colder weather from mid-December, rising anywhere from $5-10/bbl on average from the beginning of December to early January. The arrival of winter weather, however, came too late to reverse losses earlier in the month, with spot crude prices down on average by 2-4% from November levels.

Albeit amid weak OECD throughputs overall, refiners are snapping up distillate rich crudes to meet stronger demand for heating oil. In the US, buyers sought out African crudes to augment their slate. WTI rebounded from a discount of $1.42/bbl to Brent in the first week of December to a premium of $2.63/bbl by early January, which sharply improved the economics of African grades priced off the relatively weaker UK benchmark crude.



However, WTI may be poised for a sharp correction in January as frigid weather subsides. The WTI contango deepened in early December in response to swelling stock levels at the Cushing, Oklahoma storage hub. The US benchmark then broke with trend mid-month and surged higher as temperatures plunged despite Cushing stocks building throughout December to 34.5 mb as of 8 January.  WTI may well maintain its current premium following a cutback in Canadian crude shipments to the region due to the shutdown of Suncor's syncrude upgrader. New storage capacity added to Cushing over 2009 raised the previous 38 mb operational capacity to an estimated 41 mb. This likely raises the threshold for supply pressures on WTI.

Russia's New Bridge to Asian Markets May Displace Competing Crude Suppliers

Russia opened a new gateway to China and wider Asian markets with the official launch of the first stage of the East Siberia-Pacific Ocean (ESPO) pipeline in December. The 600 kb/d ESPO will move crude from the East Siberian fields near Taishet to Skovorodino near the Chinese border. From there some 300 kb/d will transit by rail to the new Kozmino terminal on Russia's Pacific coast. A spur line running from Skovorodino to Daqing, China will carry a further 300 kb/d when it is completed at end-2010.

ESPO's exact crude quality is still unknown but the sheer volume involved and close proximity to Asian outlets will likely displace some similar quality Middle East crudes. The properties of the ESPO blended crude have not been tested yet, though reportedly it will have an API of around 34° and sulphur content of 0.6%. But the mix is currently deemed an unstable grade as crude oil from various fields are added to the blend.

As China fills up its expanded refinery slate with new term contracts from Middle East suppliers for 2010, ESPO crude will likely augment the ever-increasing number of sources of spot crude from the Middle East, Africa and Latin America. Unlike these other longer haul producers, one major selling point is its short five-day sailing time from its Kozmino delivery point to markets in China, South Korea and Japan, among others.

First cargoes were reportedly sold at a premium to Brent or Dubai, contrary to usual practice when new, untested grades are sold at a discount to benchmark crudes. To attract new customers in Asian markets Russia's authorities have set a preferential tariff for ESPO crude exports. The tariff is set at $7.28/bbl including pipeline, rail and tanker loading fees, which is well below the estimated actual cost of transport at around $17/bbl. The subsidised ESPO exports to the East will most probably be covered by a 15.9% hike in transport fees on Western shipments, which last year averaged $6.90/bbl.

In Europe, refiners are modestly increasing crude runs on improved refining margins and after a number of offshore European gasoil cargoes moved to the US. As a result, refiners are looking to replenish supplies of gasoil-rich grades. Spot prices for Russian Urals strengthened, with the differential to Brent narrowing from a discount of -23 cents mid-month to just - 9 cents by early January

China's stepped-up buying of spot crude to meet new refinery demand helped support cash prices throughout much of the year but a wave of new term contracts may reduce spot trade early in 2010. By year-end, China had agreed higher contract volumes with a number of term suppliers, including Saudi Arabia, Iraq, Kuwait and Libya.

The switch to more term contracts for 2010 in part reflects completion of the country's massive refinery expansion plans last year. China brought online the last of the four major new refinery units in December, with the start-up of Sinopec's new and revamped facilities at its Tianjin refinery in the north of the country. The refinery is slated run on about 80% sour crude sourced from Saudi Arabia, Kuwait, Iran and Iraq. Sinopec also inaugurated a new crude oil pipeline linking its two major Tianjin refineries to a major northern port terminal to enable a steady flow of crude imports inland. The pipeline is the final link in a massive pipeline network, which has been a decade in the making and will enable Sinopec, which imports 70% of its crude supplies, to improve logistical costs for its 4 mb/d refining operations.



Spot Product Prices

Distillate prices surged as winter snow storms blanketed large swathes of the Northern Hemisphere from mid-December and into early January. With weather forecasts calling for milder temperatures in the near term, distillate prices were once again under pressure from the stubbornly high levels of heating oil stocks both onshore and offshore. Spot product prices and crack spreads eased further as data emerged showing that freezing weather in much of the US failed to translate into a meaningful rise in heating oil demand and decline in stocks.

Spot prices for heating/gasoil cargoes in New York rose by around $14/bbl, from a low of $78.50/bbl on 10 December, to just under $92/bbl on 5 January. Heating oil cracks in the US were up $3/bbl to $8.32/bbl in December, and averaged around $9.45/bbl the first week of January. The reversal of fortune in heating oil markets in the US pulled a number of cargoes from Europe, including Russian gasoil. Despite the recent gains, crack spreads are still well below levels of a year ago of around $18/bbl.



Products in floating storage—mostly middle distillate—were estimated at 95 mb at end-December. A number of cargoes floating offshore Europe were reportedly sold into the US market in early January but the brief arbitrage closed as demand waned on both sides of the Atlantic and the contango narrowed.

In Europe, the steep gasoil contango on London's ICE futures exchange, which fuelled record stock building offshore Europe in recent months, narrowed to just $6 by early January compared with $8-10/mt seen since last October.



While distillate and fuel oil fortunes are now closely tied to volatile weather patterns, the uptrend in naphtha markets is anchored more solidly with stronger non-OECD economic activity, especially in Asia.

Spot naphtha cracks turned positive in both Asia and Europe in December. Naphtha cracks in Singapore averaged $2.86/bbl last month compared with a loss of $1.51/bbl in November. In Northwest Europe naphtha prices continued to be supported by increased exports to Asia, with cracks averaging $1.03/bbl in December compared with a loss of $2.11/bbl in November.



Refining Margins

Refining margins rose in all major regions in December as the weather-related rally in spot product markets outpaced the rise in crude prices, but remain weak in overall terms. Margins showed steady improvement on a weekly basis from the beginning of December until early January.

In the US Gulf Coast, cracking margins for both Brent and Nigerian Bonny crudes posted strong week-on-week increases. Brent cracking margins narrowed from -$4.18/bbl to -$0.74/bbl by the first week of January. Bonny improved from -$4.28/bbl to -$0.53/bbl over the same period. Margins for Mars crude turned from negative to positive over the month, moving from a loss of $2.01/bbl to a profit of $0.92/bbl at coking units and from -$1.29/bbl to +$0.78/bbl at cracking operations. In Europe, gasoil-rich Urals posted relatively stronger increases, at both cracking and hydroskimming units. Urals cracking margins steadily improved over December, up $1/bbl by the start of the year, to $1.41/bbl in Northwest Europe and $0.89/bbl in the Mediterranean.



End-User Product Prices in December

In December, retail prices remained almost unchanged from the previous month, in US dollars, ex-tax, and were on average 35.3% above levels of a year ago in the surveyed IEA member countries. The onset of exceptionally cold winter weather across the Northern Hemisphere in mid-December, however, likely jolted retail prices for heating oil/gasoil higher in the second-half of the month. Heating oil prices across all regions were up on average by 0.8% in December from November and by a much sharper 15.5% from levels of a year ago. The monthly price change varied country-by-country, with Japan and Canada posting the largest increases, at 2.7% and 1.5% in December, respectively. By contrast, retail gasoil prices were down in Germany and Spain, by -1.1% and -0.1%, respectively.

End-user prices for other products such as gasoline, diesel and low-sulphur fuel oil were largely unchanged or lower in December. Low-sulphur fuel oil prices decreased on average by 0.3% while diesel prices were down by 0.6% month-on-month.

Retail gasoline prices posted the largest decline, down by 1.3% on average for the month. Consumers in the US paid $2.61/gallon ($0.69/litre), ¥126.9/litre ($1.44/litre) in Japan and £1.08/litre ($1.79/litre) in the UK. In continental Europe, the average price at petrol stations was between €1.07/litre ($1.60/litre) in Spain to €1.30/litre ($1.95/litre) in Germany.

Freight

Freight rates in December rose on cold weather and stronger demand, combined with continued high levels of floating storage. After a weak 2Q09 and 3Q09, several benchmark routes saw year-end rates at the highest levels observed since October 2008. While some rates softened somewhat in early January, some major rates turned higher. The outlook for 2010 remains weak with fleet additions expected to outpace demand growth (see Seaborne Oil Transportation - Demand and Supply Outlook 2010).



On the crude side, VLCC Mideast Gulf - Japan rates rose to a level around $13/mt over the first three weeks of December on increased eastbound sailings out of the Mideast Gulf, as Chinese crude imports increased, and rates were volatile in January. Suezmax West Africa - US Atlantic Coast rates fell from an end-November peak of $17/mt towards $14/mt at mid-month, stabilising there before climbing to a peak of $25/mt in early January. The number of Suezmax tankers employed in floating storage increased over December, supporting rates. Reportedly, eastbound exports from West Africa fell, as westbound sailings strengthened, while more eastward sailings took place out of the Mideast Gulf. Aframax North Sea-North West Europe rates initially continued their upward surge on delays in the Turkish straits, and reached almost $9/mt ahead of Christmas. However, as weather-related delays diminished, the rates fell, further depressed by lower North Sea volumes. All quoted benchmark crude routes posted rates during December and January at heights not observed since late 2008.

Seaborne Oil Transportation - Demand and Supply Outlook 2010

The global recession reportedly led to a decrease of 5% in seaborne oil volumes, compared to an overall oil demand reduction of 1.5% in 2009. The recession-related cut in oil transportation came mainly as reduced westbound exports out of the Mideast Gulf, while eastbound exports out of both Mideast Gulf and West Africa increased due to Asian refinery capacity expansions. Adjusted for increased floating storage, tanker demand reportedly fell by 2-3% in 2009, compared to a global oil tanker fleet growth of 7%, due to deliveries of some 30-35 million deadweight tonnes (m dwt) of new-builds. The oil tanker fleet additions are set to stay high at 5% annually over the next three years, as orderbooks still hold about 125 m dwt to be delivered over 2010-2012. The ability of the industry to negotiate more cancellations of newbuilds will be critical to shipping sector fortunes, although few were obtained during 2009.

An estimated 6.8 m dwt worth of oil tankers were demolished in 2009, including around 9-10 VLCCs and 3-6 Suezmaxes, as compared to 2.8 m dwt and fewer larger vessels in 2008. The upward surge in the rate of scrapping did not occur until August 2009, in the second consecutive quarter of exceptionally low rates, dampened by low metal prices. Single hull tankers have fallen from an estimated 18% to 13% of the operating fleet over the year, corresponding to a reduction of 18 m dwt from end-2008 to end-2009, revealing that lay-ups weigh more than scrapping for this category.

Lower OECD imports of both crude and products depressed freight rates in 2009, while more long-haul sailings, especially from West Africa to China and India, lent some offsetting support. Of the overall expected consumption growth in 2010 of 1.4 mb/d, OMR forecasts an increase of 0.5 mb/d in the Pacific basin, 0.6 mb/d in the predominantly producing areas of FSU, Africa and the Middle East, and 0.4 mb/d in the Americas and Europe. Oil import requirements will widen in Atlantic OECD regions, mostly driven by production decline of 0.2 mb/d in North America and 0.5 mb/d in Europe. However, rising net Latin American availabilities will provide a partial offset in the Atlantic basin. Russia is expected to decrease its share of oil exported to the Atlantic basin, in spite of production growth outpacing demand growth by 0.1 mb/d, as more Russian crude will be directed eastwards due to the opening of the East Siberia-Pacific Ocean (ESPO) pipeline. Lower exports from Baltic and Black Sea ports as a consequence of Russian ESPO exports could put pressure on Aframax rates in the North Sea/Baltic/Mediterranean area. In 2010 more West African oil could target closer destinations like Europe or elsewhere in the Atlantic basin, as opposed to Asian destinations, possibly putting pressure on Suezmax rates that benefitted from more long-haul trades to China and India during 2009. Reportedly, West African exports to Asia fell over the fourth quarter, and volumes were replaced by more Middle East crude going eastwards.

In summary, tonnage supply in 2010 is expected to outpace demand growth and put freight rates under further pressure. Freight rates will depend on the levels of floating storage, the ability of the industry to cancel new-build orders and the scrapping, conversion or lay-up of substandard vessels.

Note:  Fleet change estimates in this article are based on analyses from E.A. Gibson, SSY and Platou.

On the product side, Aframax (75 kt) Mideast Gulf - Japan rates rose towards $30/mt at mid-month, from $28/mt at end-November, before falling slightly towards $26/mt in early January. Rates for 25 kt UK coast - US Atlantic routes rose from $14/mt in end November, peaked at $19/mt at mid-month, before flattening out below $18/mt towards the end of the year. Rates then shot up to levels of $25/mt, the highest since October 2008, as gasoil in floating storage off North West Europe headed to North America on increased demand amid cold weather. Rates for Handymax (30 kt) South East Asia - Japan rose over the first three weeks of December to a peak of $18/mt, on increased Asian naphtha demand, before falling to $14/mt in early January. Fewer LR1 and LR2 product carriers were employed in floating storage as of end December. Rates for Handymax Caribbean- US Atlantic coast rose ahead of Christmas to a plateau above $12/mt, still below the five-year range.

Short-term floating storage of crude as of end December fell to an estimated 51 mb, while products at sea fell slightly to near 95 mb from previous month levels of 55 mb and 98  mb, respectively. The centres of gravity for products stored at sea are still North West Europe and the Mediterranean, while Asian floating storage has come down somewhat. Crude stored on tankers is concentrated off North West Europe and the US Gulf of Mexico. Some 141 tankers were engaged in this practice at the end of December, with a large growth in Suezmax tankers observed this month.

Refining

Summary

  • Constrained OECD utilisation rates reflect the higher exposure of these refiners to market economics, the excess of global refining capacity, low OECD demand growth prospects and a weak margin environment. OECD refiners announced further capacity rationalisations and continued their efforts to sell less economically favoured assets. On the other hand, crude throughput in non-OECD countries looks stronger and non-OECD based players are moving ahead with strategic projects, taking storage positions in target markets and evaluating refinery acquisitions. With OECD stocks still high and the global demand trend still looking anaemic, the refining industry outlook for 1Q10 is not promising, suggesting that further weakness in throughputs might be expected.
  • Global 1Q10 crude throughput is forecast at 72.7 mb/d, 65 kb/d lower than in last month's report.  However, this number masks a reduction of 0.2 mb/d in our OECD projection and a 0.1 mb/d increase for the non-OECD. Underpinning this shift is higher refinery maintenance activity in OECD countries and higher-than-expected crude runs recently in non-OECD countries. The 1Q10 estimate is 0.9 mb/d higher year-on-year, but remains 1.3 mb/d below the equivalent 1Q08 throughput level.
  • Global 4Q09 crude throughput stands at 72.3 mb/d, unchanged from last month's estimate. Slightly higher-than-expected runs in the non-OECD (attaining a high of 37.5 mb/d in November) compensate for a marginal decrease in the OECD. October throughputs turned out to be 0.5 mb/d lower than last month's preliminary assessment. However, November preliminary submissions at 72.7 mb/d, 0.7 mb/d higher than projected, outweighed the fall in October.


  • October OECD refinery yields for gasoline and fuel oil increased at the expense of jet fuel/kerosene and other products, while yields for naphtha and gasoil remained unchanged. OECD gasoline yields were supported by higher crack spreads in the US Gulf Coast, but gross output fell, as crude runs in OECD countries remained constrained. Gasoil/diesel yields continued trending at five-year average levels, with gross output plummeting 1.1 mb/d year-on-year. Fuel oil yields rebounded in spite of wider discounts to crude, particularly in North America, as coking throughputs in the US are subdued.

Global Refinery Overview

Even though refining margins improved across the board during December, they remained mostly negative. OECD November throughput increased slightly after having contracted by 1 mb/d in October, with OECD refinery utilisation rates averaging 78%, a level considered economically unsustainable, forcing refiners to announce new capacity rationalisations and continue their efforts to sell some of the less economically favoured assets.



On the other hand, crude throughput in non-OECD countries reached new highs in November at 37.5 mb/d, representing a monthly increase of 1.3 mb/d. Non-OECD operators are moving ahead with their strategic projects, taking storage positions in target markets and evaluating refinery acquisitions. Amid bearish OECD stock and global demand indicators, the 1Q10 refining outlook is not promising, since refinery throughputs are still outpacing product demand.

Global Refinery Throughput

1Q10 global refinery throughput is seen at 72.7 mb/d, 65 kb/d lower than in last month's report.  However, this number masks a reduction of 0.2 mb/d in our OECD projection and a 0.1 mb/d increase in the non-OECD prognosis. Underpinning this shift are higher refinery maintenance activity in OECD countries and higher-than-expected crude runs in non-OECD countries. The 1Q10 estimate is 0.9 mb/d higher year-on-year, but represents a decrease of 1.32 mb/d compared to equivalent 1Q08 throughput levels.



We are keeping last month's 4Q09 global refinery throughput estimate of 72.3 mb/d unchanged. Slightly higher-than-expected crude runs in the non-OECD compensate for a marginal decrease in the OECD. October throughputs turned out to be 0.5 mb/d lower than last month's preliminary assessment. However, November preliminary submissions, at 72.7 mb/d, were 0.7 mb/d higher than projected, and outweighed the fall in October.

It is interesting to compare the expected increase in throughput with that of demand. 1Q10 throughput is expected to be 380 kb/d higher than in 4Q09 based on capacity availability and the latest information on throughput plans, while demand is expected to increase by only 300 kb/d over the same period. The difference may look marginal, but it suggests that operators are still struggling to constrain output as has been the case for much of 2008/2009. The problem is made worse since this calculation does not consider NGL and other feedstock. Taking as a reference point 1Q08 global demand and throughput, and calculating the cumulative increase, we can see how refinery crude runs have consistently outpaced demand levels, even if a degree of convergence looks to be materialising based on 4Q/1Q indicators.

OECD Refinery Throughput

OECD crude throughput estimates for 4Q09 have been maintained at 35.2 mb/d, as stronger than expected November preliminary data offset lower October and December data. October turned out to be 0.2 mb/d weaker than last month's preliminary data, and December estimates based on weekly data were also 0.2 mb/d lower than expected. This estimate for 4Q09 represents a quarter-on-quarter decrease of 1.2 mb/d and a 2.3 mb/d contraction year-on-year.



Low utilisation rates highlight the higher exposure of OECD refiners to market economics, the excess of global refining capacity and lower demand growth prospects. The average OECD October utilisation rate was 77.5%, representing the lowest point in our data going back to January 1995. November preliminary data point to a utilisation rate of 77.9%, representing a 5.1 percentage point decrease year-on-year. European utilisation rates continue to show the steepest falls on an annual basis, with an eight-percentage point fall, equivalent to a 1.26 mb/d fall in throughput. Utilisation rates in France, Italy and Spain were particularly low. November utilisation rates in the Pacific decreased five-percentage points, equivalent to a fall of 0.4 mb/d, while utilisation rates in North America fell 2.9% equivalent to 0.6 mb/d, even though Mexican crude runs rose 0.2 mb/d, boosting the country's utilisation rate by more than 11 percentage points to 86%.

4Q09 OECD North America crude throughput is maintained at 16.9 mb/d, lower by 0.7 mb/d on a quarterly basis and by 0.6 mb/d on a yearly one. Preliminary November crude throughput data turned out to be 0.2 mb/d higher-than-expected, at 16.9 mb/d. All three countries posted higher runs, with Mexico accounting for around 60% of the increase. October data were 0.1 mb/d lower than last month's preliminary data, and December US preliminary data point to runs of 13.8 mb/d, 0.2 mb/d below our projection. Expected regional throughputs through April 2010 are constrained by weak margins and seasonal maintenance, holding runs at or below 16.7 mb/d for the outlook period.

Regarding capacity cuts, Shell recently announced plans to close its 130 kb/d Montreal refinery in Canada after no buyers were found. The plant will be converted into a terminal for gasoline, diesel and aviation fuels.



4Q09 OECD European crude runs matched our expectations, at 12.0 mb/d, 0.4 mb/d lower quarter-on-quarter and 1.2 mb/d lower year-on-year. November preliminary crude throughput data turned out to be 0.1 mb/d higher-than-expected at 12.0 mb/d. Runs in Spain and France were 0.2 mb/d and 0.1 mb/d lower than expected, respectively, while crude runs in Turkey were 0.3 mb/d above our projection. Given the prevailing weakness in European operating conditions and the onset of spring maintenance, regional throughputs may struggle to breach 12.2 mb/d through April.



According to news, due to depressed refining economics, the French oil major Total might idle permanently its 140 kb/d Flanders refinery in Dunkirk, Northern France, where operations have been suspended since September; the site could be transformed into a storage facility. A resultant strike by workers at five of Total's six French refineries from 12 January had, at writing, not caused significant supply problems. Talks continue between Shell and Essar Oil for the Indian firm to buy the UK Stanlow refinery and the Heide and Hamburg-Harburg facilities in Germany, with a combined capacity of 446 kb/d. Shell has plans to cut 600 kb/d of refining capacity in the next two years.

4Q09 OECD Pacific crude runs were in line with expectations, at 6.3 mb/d, the same level as in 3Q09 and 0.5 mb/d lower year-on-year. December Japanese weekly data point to crude runs 0.1 mb/d higher-than-expected, with strong exports of gasoline and middle distillates supporting the higher runs. However, based on the bleak prospects for domestic demand, Japanese refiners Cosmo Oil and Showa Shell announced they would extend crude run cuts through 1Q10. Cosmo Oil's utilisation rate is expected to be reduced by 4.6% year-on-year, while Showa Shell is planning a 9% reduction. These cuts come after Nippon Oil and Japan Energy's targeted cuts of 400 kb/d of capacity by the end of March 2011, following their merger under the umbrella of holding company JX Holdings.

Non-OECD Refinery Throughput

Non-OECD crude throughput estimates for 4Q09 have been revised up by 0.1 mb/d to 37.1 mb/d. October data were 0.3 mb/d lower than last's month preliminary data. However, November preliminary data were 0.4 mb/d higher than projected and crude runs in Other Asia were likely higher for December also. This new estimate for 4Q09 represents a 0.2 mb/d increase quarter-on-quarter and a 1.8 mb/d increase year-on-year, with the annual increment mainly the result of increases of 1.3 mb/d in China and 0.6 mb/d in other Asia.

Chinese November crude runs were 8.1 mb/d, around 0.3 mb/d higher than October's level and 0.1 mb/d above our estimate. The November new record high throughput level represents a year-on-year increase of 22% (1.5 mb/d). We are keeping last month's December projection at 8.0 mb/d as some maintenance activity is scheduled. Looking forward, should oil prices stay above $80/bbl, financial incentives to maximise runs might dip. However, our projection for 1Q10 Chinese refinery runs stays at 8.0 mb/d.

Meanwhile, PetroChina has expanded its reach in the Caribbean residual fuel market by the lease of 5 mb of crude oil storage capacity from the NuStar's Statia terminals, on the Dutch Caribbean island of St. Eustatius. The storage capacity was previously held by Saudi Aramco, which is instead taking storage capacity in Japan, as Saudi exports to China are becoming prominent and their exports to the US are declining. PetroChina is also in talks with Valero, the largest independent US refiner, to acquire its 235 kb/d Aruba refinery, which was officially idled on poor margins in July last year. This will tie with the expansion of the Panama Canal projected to be completed in mid 2014 at a cost of $5.25 billion, which will allow the transit of Suezmax ships with a capacity up to 1 mb of crude, then facilitating trade from West Africa and the US West Coast.



Russian crude runs averaged 4.9 mb/d in November, 0.2 mb/d above our projection, and only 30 kb/d shy of the record level reached in August 2009. 4Q09 FSU crude throughput is forecast at 6.2 mb/d, around 0.1 mb/d higher than estimated last month. The dispute between Russia and Belarus over crude export duties threatens crude shipments to Belarus' 323 kb/d Mozyr and 170 kb/d Novopolotsk refineries. According to news reports, the amount supplied to both refineries is already well below their throughput capacity. Supply to European destinations is however reported as normal (see Non-OPEC, Russia - Belarus Dispute on Oil Tax and Transit).

November Indian throughputs turned out to be 0.2 mb/d higher than projected at 3.8 mb/d. Elsewhere in Other Asia, November crude runs were in accord with projections. We have increased our estimate for December Indian crude runs by 0.1 mb/d to 3.6 mb/d. 4Q09 Other Asia throughput is now estimated at 8.6 mb/d, 0.1 mb/d above last month's forecast.

OECD Refinery Yields

October refinery yields increased for gasoline and fuel oil at the expense of jet fuel/kerosene and other products, while yields for naphtha and gasoil remained unchanged. The rise in OECD gasoline yields was supported by higher crack spreads in the US Gulf Coast. Gasoline yields are particularly strong in the Pacific, well above the five-year range. However, OECD gasoline gross output fell to levels at the bottom of the five-year range, as crude runs in OECD countries remained constrained. Gasoline lost its erstwhile status as the only product with gross output above the five-year average and output now is below last year's level as a result of weak demand in North America and despite the almost total absence of autumn hurricane-related disruptions in the US Gulf Coast in 2009.



Gasoil/diesel yields continued to trend along their five-year average level. However, gross output plummeted 1.1 mb/d year-on-year and is now below the five-year range as the middle distillates stock over-hang continues. Gasoil/diesel gross output remains particularly weak in Europe, well below the five-year range and 0.5 mb/d below last year's level. In North America, gross output fell below the five-year average and was 0.4 mb/d lower on a yearly basis.



Fuel oil yields rebounded despite of wider discounts to crude. Both yields and gross output increased in all three OECD regions, particularly in North America where yields were above the five-year range. The yield increase is partly a reflection of low coking throughputs in the US, which reached 1.8 mb/d in October.