Oil Market Report: 11 February 2010

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Highlights

  • Benchmark crude oil prices fell to six-week lows by early February, after warmer weather in the Northern Hemisphere, negative macroeconomic news and sudden strength in the dollar set in motion a $12/bbl slide. Prices regained some of their losses in recent days, with WTI last trading at $73.80/bbl and Brent at $72/bbl.
  • Forecast global oil demand is revised up 170 kb/d for 2010 as more robust IMF GDP projections are partly offset by a higher price assumption and persistently weak OECD oil demand. Global oil demand is estimated at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.5 mb/d in 2010 (+1.8% or +1.6 mb/d versus 2009), with growth entirely in non-OECD countries.
  • Global oil supply fell 45 kb/d to 85.8 mb/d in January, with higher total OPEC output (mostly NGLs) offset by lower non-OPEC production. Average 2009 non-OPEC production is revised 70 kb/d higher at 51.4 mb/d while 2010 supply is revised up by 120 kb/d to 51.6 mb/d on slightly improved US and North Sea crude prospects.
  • OPEC crude output was up 105 kb/d at 29.1 mb/d in January.  OPEC NGL production is forecast to rise 0.8 mb/d to 5.5 mb/d in 2010, with just over half of the increase related to ramp-up from 2009 project start-ups.  The call on OPEC crude and stock change for 2010 is revised up 300 kb/d to 29.4 mb/d.
  • OECD industry stocks fell 67.8 mb in December to 2 678 mb, around 0.8% below 2008's level, on lower crude and middle distillate inventories. End-December forward demand cover fell to 58.1 days, now only 0.1 day higher than a year ago. Preliminary data point to a January OECD stockbuild of 11.4 mb, but with lower floating storage.
  • Global 4Q09 and 1Q10 refinery crude throughput forecasts remain unchanged at 72.3 mb/d and 72.6 mb/d respectively, though in the latter's case, higher Canadian, Mexican and OECD Pacific runs offset lower non-OECD throughputs. Despite some signs of improvement for the refining industry, the sector's short-term outlook remains fundamentally bearish.

'Oil-less' recovery?

The term 'oil-less' recovery has been much mentioned in recent months.  At first glance, it looks out of line with this month's report, in which projected 2010 oil demand growth is nudged up to 1.6 mb/d after a significant upgrade to global GDP prospects in the recent IMF economic outlook. While this looks consistent with historical elasticity trends, we also reflect persistent downside economic risks, via a lower growth scenario nearer 1.2 mb/d. In our base projection however, global GDP growth now stands at +3.8% for 2010 versus an earlier estimate of +3.1%. The stronger economic growth is partly offset by a higher crude price assumption of $75/bbl for 2010, based on the prevailing futures strip.  Since we first released detailed 2010 projections back in July, the outlook for OECD economic growth has improved from around zero to +2.1%.  But over the same period, expected OECD demand has barely changed, averaging 45.5 mb/d this month versus an estimate of 45.2 mb/d then. Even the recent record US and European winter snows look unlikely to revive OECD demand - which remains flat at best in 2010  - an 'oil-less' recovery indeed. Meanwhile, forecast 2010 non-OECD demand has risen from 40 mb/d last July to 41 mb/d now (partly on a higher 2009 base). Anticipated GDP growth here has gone from 4.1% to 6.1%. Global oil demand now takes its cue primarily from rising emerging country incomes.

This should come as little surprise:  A diminishing number of OECD countries use oil for heating, power or industrial processes, and competition from cheap spot natural gas will likely further cap discretionary use this year.  Oil use in OECD power generation has already fallen by 40% since 2000. We mentioned in the 2009 MTOMR how structural changes in the automobile, aviation and power generation sectors suggest the use of cleaner, more efficient technologies. Environmental imperatives mean that gas, renewables and nuclear power will increasingly be preferred, even if binding climate change targets are stalled for now. Transportation oil use may still grow in the OECD, but here too vehicle efficiency standards and the penetration of biofuels, hybrid and electric vehicles will limit requirements for refinery-sourced gasoline and diesel.   So demand growth in the OECD may well have peaked, with all the negative consequences for OECD refining this implies.  In contrast, the thirst for oil among emerging economies looks unlikely to diminish anytime soon, absent weaker than expected economic recovery.

Crude prices have eased in February after a December/January cold snap, under the influence of high inventories borne of persistent market contango.  The influence of the dollar trade, which showed a persuasive correlation with crude prices for much of 2009, ebbed in December and January, but may have come back with a bang in early February, this time acting as a drag on prices as the dollar strengthened due to weaker European financial markets. This factor seems to have trumped renewed geopolitical risks (in Nigeria and Iran) and rising NYMEX open interest to push prices back below $75/bbl.

Questions continue to swirl over the impact that financial sector reform will have on commodity markets.  In the US, Congress is examining legislation that would extend CFTC oversight to the OTC derivatives markets, albeit with significant exemptions for hedging-related trades. The CFTC proposed energy commodity position limits in January, but arguably at a level high enough to prevent migration off exchange or to markets such as the UK, where position limits are off the agenda for now.  In contrast, proposals from the Obama administration aimed at curbing banks' proprietary trading were seen by some as more likely to affect market liquidity, although others cite a likelihood that banks will simply revert to pre-2000 practice, circumventing restrictions by spinning off their trading affiliates into separate companies.  Meanwhile, among policy makers the idea of consensus prices may be gaining ground against that of a managed price band, perceived now by many as being unworkable if not downright undesirable. We look forward to examining these issues among others in a price formation forum in late February in Tokyo, co-hosted by the IEA and Japan's IEEJ and METI.

Demand

Summary

  • Forecast global oil demand has been revised up by 50 kb/d for 2009 and by 170 kb/d for 2010. More robust economic projections by the International Monetary Fund, notably for 2010 (annual global GDP growth of +3.8%), are partly counterbalanced by a higher price assumption and persistently weak preliminary OECD oil demand data. Global oil demand is now estimated at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year and +50 kb/d higher compared with our last report). In 2010, demand is expected to rise to 86.5 mb/d (+1.8% or +1.6 mb/d versus 2009 and +170 kb/d higher than previously expected). Growth comes entirely from non-OECD countries, where oil's income elasticity is more pronounced. However, should global economic growth in 2010 fail to live up to expectations, oil demand could be around 400 kb/d lower.
  • Forecast OECD oil demand remains largely unchanged for both 2009 and 2010, despite improved economic prospects. Although naphtha demand has shown a remarkable recovery, preliminary data for most product categories and countries remain persistently weak. Oil demand is now seen falling by 4.4% year-on-year (-2.1 mb/d) to 45.5 mb/d in 2009 and stagnating at that level in 2010. The outlook for this year is predicated on the basis of ongoing structural trends, with the continuous decline in heavier products offsetting modest growth in lighter products. Overall, this supports contentions of an 'oil-less' recovery, thus reinforcing the argument that demand has probably peaked in the OECD.


  • Forecast non-OECD oil demand has been adjusted up for both 2009 and 2010, on the back of higher economic forecasts and yet again higher-than-expected demand readings from China and other Asian countries. Demand in 2009 is now expected to average 39.4 mb/d (+2.0% or +0.8 mb/d year-on-year and +40 kb/d higher when compared with our previous assessment). In 2010, demand is expected to increase to 41.0 mb/d (+4.0% or +1.6 mb/d versus 2009 and +170 kb/d higher than previously anticipated), assuming that stimuli programmes will only be gradually withdrawn, notably in China, where the imperative to sustain economic expansion may arguably take precedence over inflationary concerns.

Global Overview

This report integrates the latest IMF GDP forecasts, which were released in late January. Although the updated growth projections are marginally higher for 2009 - the global economic contraction is now expected at -1.0%, rather than -1.2% - they were revised sharply up for 2010 relative to the last World Economic Outlook (October 2009). The Fund now expects global economic activity to rise by 3.8% year-on-year, up by 0.8 percentage points or almost a quarter versus the October assessment. Interestingly, the revisions were almost equally split between OECD (+0.7 percentage points) and non-OECD countries (+0.9 percentage points). Nonetheless, emerging and developing countries remain the key driving force of the global recovery, expanding collectively by +6.1%, roughly three times as fast as the OECD (+2.1%). In general terms, economic growth will be strong in most non-OECD areas, but Asia - and particularly China - will clearly lead the pack.

In addition to incorporating these higher GDP forecasts within our models, we have also adjusted our nominal price assumptions to roughly $58/bbl in 2009 (based on actual data) and $75/bbl in 2010 (based on the most recent futures curves) - some $1/bbl and $4/bbl higher than previously assumed. The higher price, combined with persistently weak preliminary oil demand data for OECD economies, partly counterbalances these GDP changes.

Global oil demand is now estimated at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year and +50 kb/d higher compared with our last report). In 2010, oil demand is expected to rise to 86.5 mb/d (+1.8% or +1.6 mb/d versus 2009 and +170 kb/d higher than previously expected), similar to the absolute level recorded in 2007. This year's growth will come entirely from non-OECD countries (+4.0%), where oil demand is highly sensitive to economic activity. By contrast, oil demand in the OECD is poised to stagnate, despite improved economic prospects. This is largely due to structural reasons:  the continuous decline in the demand for heavier products, particularly heating oil and residual fuel oil, is increasingly offsetting modest growth in lighter product categories. In addition, the one area that drove OECD oil demand growth in recent years - North America - has virtually stalled as a result of the sharp economic recession, cheaper energy alternatives (natural gas and coal) and behavioural changes (notably the smaller size and greater efficiency of new vehicles sold).



Relative to GDP growth, these oil demand projections, particularly for 2010, seem well within historical trends - as opposed to outliers that resulted from specific circumstances (the oil shocks and accelerated OECD efficiency improvements in the 1980s or the Chinese 'gasoil shock' in 2004). This implies a global elasticity of roughly 0.5. Admittedly, this implied GDP elasticity is not strictly speaking an income elasticity as it does not strip out the dramatic price rise since the mid-2000s (which was significant for the OECD, but less so in countries with administered prices). Nonetheless, the outlook captures the price effect through the continuous decline in oil intensity, which illustrates expected efficiency gains.

More interestingly, perhaps, is the expected relative evolution of oil demand in OECD and non-OECD countries. The former featured a markedly declining implied GDP elasticity during the 2000s, dramatically amplified during the recession (as oil demand fell much faster than economic activity over 2008-2009) but expected to return to roughly zero in 2010. By contrast, non-OECD countries presented a more stable GDP elasticity, rising during the recession on the back of stimulus programmes and falling to almost pre-crisis levels in 2010 (about 0.65). The share of non-OECD oil demand relative to global demand has thus risen from 38% in 2000 to 46% in 2009. Yet this in itself highlights the risks to the outlook. On the one hand, OECD demand could decline even faster in 2010, but this would imply a deeper structural change than currently anticipated - i.e., far greater demand destruction than demand suppression, although this will be impossible to prove until the economic recovery takes hold. As much as we have advanced the hypothesis of significant demand destruction in the OECD, these structural changes will take time to become fully apparent. On the other hand, expectations of rapid non-OECD demand growth rest on the assumption that stimulus programmes will only be gradually withdrawn. In China, in particular, continued economic expansion may arguably take precedence over inflationary pressures.



Known Unknowns

Although the global economy is clearly rebounding from the late 2008 and early 2009 recession, serious threats remain. Such risks could derail the recovery and have been extensively flagged by numerous observers:

  • Mounting and potentially unsustainable public debt in most advanced economies, evidenced by the turmoil that has engulfed Greece in recent weeks and that may extend to other European economies, with unpredictable effects upon the euro's credibility;
  • A degrading fiscal position, which may force OECD governments to tighten fiscal and monetary policy amid rising unemployment, weak domestic demand as a result of the recession (potentially exacerbated by ballooning fiscal deficits that may prompt consumers to save) and continued private-sector deleveraging;
  • Persistent global imbalances, resulting from exchange-rate distortions, as long as capital controls in China keep the yuan pegged to the dollar (thus effectively subsidising exports and imposing a tariff on imports);
  • Rising protectionism, if countries with large current account surpluses (such as China or Germany) fail to boost domestic demand (particularly consumption, rather than investment) and reduce their dependence upon export-led growth, while other large countries, such as Brazil or Japan, attempt to limit their own currency appreciation to maintain competitiveness;
  • Concerns that the Chinese economy, which has brought in substantial imports of commodities and industrial goods (particularly from other Asian countries), is overheating, obliging the government to suddenly withdraw its massive stimuli and hence engineer a sharp slowdown; and;
  • The risk that moves to tighten the regulation of financial activities, particularly in the US, might lead to unintended consequences, such as a fall of liquidity in key markets and increased commodity price volatility.

Given such uncertainty, this report includes once again a sensitivity analysis, with a 'higher' GDP scenario, based on the IMF January update, and a 'lower' one, based on the latest consensus forecasts (January's survey from Consensus Economics). It must be emphasised that this approach is merely illustrative. It does not imply a probability of occurrence and ignores the iterations between economic activity and the oil price (held unchanged in both scenarios). Its purpose is simply to identify the potential range of global 2010 oil demand.

As noted, under the higher GDP case (+3.8% in 2010), demand would reach 86.5 mb/d, +1.8% versus 2009. By contrast, under the lower case (+3.0%), demand could be some 390 kb/d lower, at 86.1 mb/d, still below 2008 levels. This would imply growth of +1.4%, with the more GDP-sensitive non-OECD countries bearing the brunt of the difference (-275 kb/d, compared with -115 kb/d for the OECD). The asymmetry of this sensitivity analysis versus our GDP-derived adjustment is simply due to the incorporation of demand baseline and price assumption adjustments within this month's outlook.

OECD

Preliminary data indicate that OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) fell by 1.6% year-on-year in December. In OECD Europe, oil product demand shrank by 3.9% year-on-year, despite strong naphtha growth and modest diesel gains. In OECD Pacific, demand contracted by 1.1%, as growth in LPG and naphtha failed to offset losses in all other product categories. In OECD North America (which includes US Territories), demand declined by only 0.3%, as the rebound in light products (LPG, naphtha, gasoline and jet fuel/kerosene) nearly countered the decline in heating oil and residual fuel oil deliveries.

Revisions to November preliminary data were marginal (+40 kb/d), with positive changes in North America and the Pacific exceeding negative adjustments in Europe. As such, November demand contracted by a largely unchanged 2.6% year-on-year. On a yearly basis, OECD oil demand is broadly untouched when compared with last month's report. Demand is still expected to contract by 4.4% in 2009 to 45.5 mb/d and remain flat in 2010.







These small revisions to the OECD outlook may seem counterintuitive, given higher GDP assumptions, notably for 2010, and the prevalence of very cold temperatures. As noted, several ongoing trends have rendered OECD oil demand less sensitive to economic growth and, increasingly, to extreme winter conditions, as discussed below. Moreover, demand in the largest OECD consumer - the United States - remains stubbornly weak, as suggested by preliminary weekly data for January, despite signs of rebounding economic activity. This recovery risks being 'oil-less' as far as the OECD is concerned, potentially supporting the argument that OECD demand has peaked.



A Heated Debate:  Will The Cold Spell Boost Winter Demand?

OECD oil demand has traditionally followed a clear seasonal pattern, with demand peaking in the first quarter as winter sets in, thus boosting demand for heating and electricity. Yet the cold wave that hit the northern hemisphere in December and January has not produced any noticeable surge in oil demand, judging by preliminary data, which admittedly could still be revised. The reason is largely structural. As this report has often noted, the share of oil for heating and power generation in the OECD has been shrinking uninterruptedly over the past decade. Other energy sources, notably natural gas, renewables and nuclear power, are becoming the fuels of choice for both purposes, displacing both distillate and residual fuel oil. The dynamics of heating oil (HO) demand are particularly noteworthy.

Nowadays, only a handful of OECD countries rely on oil for heating. In North America, HO is essentially burned in the US East Coast (about 640 kb/d on average in 1Q09) and southeastern Canada (360 kb/d). In Europe, the largest heating oil market is Germany (680 kb/d), closely followed by France (450 kb/d), and more distantly by Spain (270 kb/d) and several other countries consuming around 140 kb/d on average (Belgium, Greece, Italy, Switzerland and the United Kingdom). In the Pacific, HO demand in Japan (440 kb/d) and Korea (120 kb/d) is dwarfed by kerosene use, which is the region's winter fuel of choice. Overall, 1Q09 HO use (4.2 mb/d) accounted for about 9% of total OECD oil demand, compared with almost 14% in the early 1990s. Over the past 15 years, OECD first-quarter HO demand has declined by about a third (or approximately 2 mb/d).

Europe, which accounted for roughly two-thirds of total OECD HO demand in 2009, features the highest HO demand correlation with heating degree days (HDDs), at 74% over the past ten years. This affords several interesting observations:  although 1Q06 was the coldest quarter over the past ten years, HO demand actually peaked in 1Q01; in 1Q09, the second-coldest quarter during the same period, HO demand was approximately 300 kb/d lower than in 1Q01, and only 400 kb/d higher than in the warmest quarter (1Q07). In terms of quarter-on-quarter growth, 1Q09 HO demand rose by about half as much as in 1Q06 (+130 kb/d versus +220 kb/d).



In sum, there are clearly structural forces at play behind the decline in OECD HO demand. As such, even if 1Q10 proves to be as cold as 1Q09, the HO surge - and the concomitant fall in distillate stocks - predicted by many observers is unlikely to materialise. Indeed, OECD HO demand will probably be lower than last year. This report takes into account the 10-year average of HDDs when projecting HO demand, but it also attempts to incorporate the observed declining trend, taking into account a number of factors (such as natural gas penetration, the relative prices of alternative fuels, etc.). On that basis, we currently expect total OECD HO demand to average 3.7 mb/d in 1Q10, some 500 kb/d or 13% lower than in 1Q09.

North America

Preliminary data show that oil product demand in North America (including US territories) contracted by -0.3% year-on-year in December. Excluding September 2009, the -0.3% year-on-year comparison was the most muted fall since December 2007, suggesting that steep oil demand declines for the region as a whole have begun to abate. This seems true for Canada and Mexico, which posted growth of 3.1% (estimated) and 4.6% (preliminary), respectively, in December. Canada has thus likely witnessed two consecutive months of annual demand increases, while Mexico has been in positive territory for the past four months. The US, by contrast, has continued to lag. The 50 states saw a yearly contraction of 1.2% in December, despite relatively cold weather (HDDs in that month were slightly higher than the 10-year average, but lower than in 2008).

Revisions to November preliminary data, at +300 kb/d, stemmed from a +60 kb/d upward change to Canada and a 235 kb/d upward revision to the US. As such, North American demand fell by 1.2% year-on-year in November versus the 2.5% previously estimated. The change was driven primarily by a large upward revision in US LPG/ethane demand, which was only partially offset by falls in gasoline and jet/kerosene in both the US and Canada. North American oil demand is thus estimated at 23.3 mb/d in 2009 (-3.7% or -0.9 mb/d versus 2008 and +25 kb/d versus our last report). In 2010, demand should rise to 23.4 mb/d (+0.5% or +110 kb/d versus 2009 and unchanged versus our last report) with GDP-driven increases in naphtha and transport fuels outweighing structural declines in heating oil and residual fuel oil.





Adjusted preliminary weekly data in the continental United States indicate that inland deliveries - a proxy of oil product demand - contracted by 1.9% year-on-year in January, following a fall of 1.2% in December and 2.4% in November. The January figure reversed a recent trend of diminishing demand declines and seemingly belies more optimistic economic data. After growth of 0.2% in December, diesel in January reverted to a negative trend, shrinking 1.9% versus January 2009. Weather and continued interfuel substitution also played a role. Though colder than December, January 2010 was warmer than January 2009; as such, heating oil and residual fuel oil year-on-year comparisons were sharply negative.



Recent economic readings have been more positive, but point at best to muted oil demand recovery in the near term. US real GDP growth in 4Q09 was preliminarily estimated at 5.7% on an annual basis, while December industrial production reached its highest level of 2009. Nevertheless, 4Q09 oil demand fell by 2.8%, or 530 kb/d, versus 4Q08, with diesel down by 7.9%, as other indicators - such as freight volumes - also continued to show year-on-year declines. Our 2009 US oil product demand outlook was revised up marginally by 20 kb/d to 18.7 mb/d (-3.9% year-on-year or -760 kb/d). Meanwhile, the more optimistic prognosis of 2.8% GDP growth for 2010 (versus 1.5% previously) may yield only subdued oil demand growth, led by diesel and jet/kerosene. Indeed, our higher price assumption, combined with increased interfuel substitution and much weaker-than-expected preliminary data for January, largely dampens the stronger GDP outlook. Our 2010 forecast has thus been slightly revised down (-35 kb/d), with demand expected to average 18.8 mb/d (+0.2% or +40 kb/d).

Europe

Oil product demand in Europe contracted by 3.9% year-on-year in December, according to preliminary inland data, with all product categories bar naphtha and diesel posting losses. As in the last few months, the fall was driven by weak deliveries of heating oil (-13.3%) and residual fuel oil (-17.4%), resulting from earlier heating oil restocking, cheaper natural gas and warmer temperatures relative to the same month in the previous year (HDDs were slightly higher than the 10-year average but markedly lower than in December 2008).

Nonetheless, the sharp rebound in naphtha deliveries in 4Q09 (+13.8% year-on-year) could signal a buoyant economic recovery, if petrochemicals - and hence naphtha demand - remains a reliable leading indicator. The surge, however, must be assessed vis-à-vis the collapse of the previous year:  European demand in December 2008 had plummeted by 23.1% versus December 2007 - and despite the sharp increase, demand is still below 2007 levels. Moreover, the surge occurred essentially in Germany (+26.5% in 4Q09), which accounts for almost half of Europe's total naphtha demand, and is thought to have been largely export-driven, something borne out by still-muted expectations for European GDP growth from the IMF. Indeed, Germany's 4Q09 GDP appears to have stagnated, according to preliminary estimates, with domestic demand remaining anaemic if not declining.



Meanwhile, the revisions to November preliminary demand data were hefty (-370 kb/d), mostly because of weaker-than-expected distillate and residual fuel oil deliveries. Admittedly, more than half of the total revisions were concentrated in heating oil, but other product categories bar naphtha and jet fuel/kerosene were also trimmed. OECD Europe oil demand actually plummeted by 6.2% during that month, much more than previously anticipated (-3.8% year-on-year). Overall, as in other OECD areas, the rebound in oil demand is likely to be modest despite slightly higher economic prognoses. Forecast oil product demand is slightly adjusted down by 20 kb/d on average to 14.5 mb/d in 2009 (-5.2% or -790 kb/d versus 2008) and to 14.6 mb/d in 2010 (+0.4% or +65 kb/d versus 2009).



Preliminary data indicate that German oil product demand fell by 1.6% year-on-year in December, with weak deliveries of heating oil (-37.4%) and residual fuel oil (-10.8%) offsetting the spectacular surge in naphtha demand (+57.9%). Interestingly, consumer heating oil stocks fell to 61% of capacity by end-December, roughly at the levels recorded in early 2009 prior to the dramatic stockbuild that began in March. However, this may not signal another heating oil stocking binge in 1H10, since part of the reason why German consumers opted to replenish their tanks early last year rather than in the third quarter, as they traditionally do, is that oil prices had plummeted as a result of the global recession.





In France, total oil product deliveries contracted by 2.9% year-on-year in December, despite more seasonal heating oil deliveries. Heating oil demand was well above the five-year average, although below last year's level (-2.2%). In fact, all product categories bar diesel and 'other products' continued to post negative readings. Meanwhile, Italian oil product demand plummeted by 9.9% in December, mostly as a result of very weak residual fuel oil deliveries (-50.6%). This provides further evidence of interfuel substitution in favour of natural gas, as residue used to be the fuel of choice whenever hydropower supplies were affected by lack of rain (as during most of 4Q09). However, this trend could be partially reversed as low contract natural gas prices eventually catch up with higher oil prices.

Pacific

Oil product demand in the Pacific fell in December (-1.1% year-on-year), according to preliminary data. The sharp rebound in naphtha deliveries (+15.5%) and strong growth in LPG demand (+2.6%) failed to offset losses in all other product categories. Jet fuel/kerosene, in particular, declined by 4.1%, despite colder temperatures, notably relative to the previous year (kerosene is used for heating in both Japan and Korea). Regional demand continues to be pressured down by poor readings in Japan and despite solid growth in Korea.

November revisions were positive (+100 kb/d), on the back of stronger-than-expected Japanese deliveries of gasoil and residual fuel oil. OECD Pacific oil demand contracted by only 0.1% during that month, much less than previously anticipated (-1.4% year-on-year). Yet the outlook has been marginally revised up. Indeed, the recent IMF update lifted GDP projections for all countries bar Japan, for which the prognosis was actually trimmed slightly. This reflects ongoing worries about the health of the Japanese economy, the largest in the region. Given the weight of Japan and its continued, structural decline in oil demand, OECD Pacific total oil demand is estimated at 7.7 mb/d in 2009 (-5.0% or -400 kb/d on a yearly basis and +10 kb/d versus our last report) and at 7.5 mb/d in 2010 (-2.3% or 180 kb/d versus 2009 and +20 kb/d compared with our previous assessment).





According to preliminary data, Japanese oil demand fell by 3.1% year-on-year in December, with all product categories bar naphtha posting losses. Here too, the strong recovery of naphtha deliveries (+21.3%) was likely export-driven, rather than related to buoyant domestic demand. Admittedly, the weakness in overall demand is also due to interfuel substitution in favour of natural gas and rising nuclear power generation (December's nuclear utilisation rate, at 74%, was the highest since August 2006). This continues to curb demand for residual fuel oil (-26.9%) and 'other products' (-17.8%), which include direct crude burning.



The Japanese government has provided further guidelines on how the ¥25/litre ($0.28/litre) 'provisional' gasoline tax might be suspended. The tax, introduced in 1974 to fund road construction, was originally due to expire next March, but it will be maintained at least during the next fiscal year (April-March). According to the government's tax commission, the tax would be suspended if the national average retail price for regular unleaded gasoline exceeded ¥160/litre ($1.80/litre) for three consecutive months, and would be reimposed if the average price fell below ¥130/litre ($1.46/litre) for another three consecutive months. The measure must still be approved by parliament, and it remains unclear whether the tax would be wholly or partly suspended, and perhaps more importantly, who would bear the burden - i.e., the government or refiners holding tax-inclusive stocks.  However, some observers suggest that the measure is largely symbolic, as the suspension trigger would require crude oil prices to exceed $100/bbl - an eventuality not presently suggested by prevailing futures strips.

Non-OECD

China

Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) posted the fourth consecutive month of double-digit growth, surging by 17.5% year-on-year in December. All product categories bar gasoline and residual fuel oil posted gains, most notably naphtha (+67.9%), gasoil (+25.4%) and 'other products' (+35.7%). The growth of those three products is commensurate with rising industrial activity and, more generally, buoyant economic growth on the back of government-directed stimuli. GDP expanded by 10.7% year-on-year in 4Q09, according to official statistics, putting yearly growth at +8.7%, well above the government's avowed target of 8%.

The fall in gasoline demand, meanwhile, is probably related to data issues and stocking, as discussed in previous months. A similar point could be made regarding Sinopec's recently announced 2009 sales, which at first glance were puzzlingly low. Indeed, the state-owned company, which is the country's largest refiner and retailer, only reported figures for three products (gasoline, gasoil and jet fuel/kerosene) and provided no data on stocks.

The IMF now expects Chinese economic growth to reach +10% in 2010, a full percentage point higher versus its October assessment. This, coupled with higher than expected 4Q09 data (November's figure was revised up by 190 kb/d), suggests that oil demand, at 8.5 mb/d in 2009, rose by as much as +7.7% year-on-year (+610 kb/d), about 35 kb/d more than previously anticipated and equivalent to an astonishing 75% of total non-OECD oil demand growth. Meanwhile, the higher GDP assumption has resulted in a +75 kb/d adjustment to the 2010 prognosis, with demand projected to average 8.9 mb/d in 2010 (+4.7% or +400 kb/d versus 2009), equivalent to a lesser 25% of non-OECD growth.



This outlook assumes that the Chinese government will continue to favour growth as long as inflation remains moderate. From that perspective, recent moves to curb lending and pre-emptively tame inflationary pressures could be interpreted as an attempt to merely rein in credit excesses, rather than signalling a fundamental change regarding the direction of macroeconomic policy. If this assessment proves to be correct, our oil demand forecast could well be revised up over the course of the year. The outlook for 'other products', in particular, could well surprise on the upside if investment in infrastructure projects within China continues apace. Similarly, naphtha demand could be stronger if all the planned ethylene capacity additions (+25% in 2010, according to some estimates) come on stream. On the downside, though, economic growth could be less buoyant if China's exchange-rate policies prompt a protectionist backlash among its main trading partners.



Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - rose by 2.7% year-on-year in December, a slower pace when compared with most of 2009. As in previous months, demand for gasoline continued to race ahead (+19.4%), with car sales rising by 40.3% year-on-year in December, supported by easier credit and relative to a lower base. It was closely followed by gasoil (+13.5%) and 'other products' (+16.4%), both sustained by rising irrigation and power generation needs in agricultural states (although the harvest season has ended, northern areas have faced a severe winter) and by robust manufacturing activity. By contrast, naphtha sales were reportedly down by 47.4% - albeit upward revisions to preliminary data, a feature throughout 2009, were again evident in November (+80 kb/d, showing a decline of 3.1% instead of -28.3%). Nonetheless, the structural decline of naphtha in favour of natural gas seems well underway (naphtha demand fell by about 3% year-on-year in 2009).





Time To Tackle Subsidies?

In early February, a government panel set up last September submitted its findings regarding the question of how to establish a viable and sustainable system of pricing of petroleum products in India. The expert group - the third of its kind after earlier committees set in 2006 and 2008 - came up with a similar recommendation as its predecessors:  the government should fully liberalise gasoline and gasoil prices (ex-refinery and retail prices) and reduce the highly distorting subsidy on cooking fuels (LPG and kerosene).

In terms of specific measures, the panel advocates sharply raising end-user LPG and kerosene prices, by 35% and 67%, respectively (albeit both fuels would still be sold at prices well below international benchmarks). The subsidy would be partly financed by a special oil tax levied on state-owned exploration companies if international oil prices exceeded $60/bbl. In addition, a further excise duty would be levied on diesel cars in order to discourage the ongoing dieselisation of the fleet, which has been prompted by the current price differential in favour of diesel. Arguing that diesel has a social function, the panel deemed it preferable to raise taxes on private diesel cars rather than equalising the taxes applied to both fuels.

It remains to be seen whether the government will follow these recommendations, as recent efforts to align domestic and international prices have met with mixed success. Some reports suggest that the government may opt for a dual strategy, namely liberalise gasoline prices but only gradually raise diesel prices in order to contain inflation. This would help diminish the subsidy-related losses incurred by the three state-owned oil companies (IOC, BPCL and HPCL). Last January, the Finance Ministry compensated them with Rs 120 billion ($2.6 billion) for losses incurred over April-December 2009 (roughly half of what the companies had requested). For the whole fiscal year, losses are expected to reach some Rs 450 billion. Private players (Reliance, Essar and Shell) - although technically not obliged to supply the domestic market, as opposed to state-owned companies - have also repeatedly argued that they too deserve some type of compensation for selling oil products at a loss.

In Brazil, a disappointing sugar harvest and ethanol production over the past six months continued to influence the transportation fuel mix. Hydrous ethanol prices have risen to levels above 70% of gasoline - the level at which they lose competitiveness versus fossil fuels - in the majority of Brazilian states. High costs for anhydrous ethanol, which is blended directly into the gasoline pool, have prompted the government to reduce mandated blending volumes from 25% to 20% for 90 days starting 1 February. The government has reduced taxes on gasoline by $0.12/litre in a further effort to control fuel price inflation. Nevertheless, Brazil's foreign trade commission decided to delay until June a potential tariff cut on imported ethanol from 20% to zero, which may have resulted in the rare importation of US supplies and eased price pressures for domestic consumers. By contrast, Brazilian biodiesel, whose output rose through much of 2009, continued to expand on the demand side with the introduction of a nationwide 5% blend in the diesel pool on 1 January.



In Argentina, meanwhile, the government announced the introduction of a 5% biodiesel blend. Originally envisaged to begin on 1 January, the B5 mandate was delayed up due to disagreement with refiners over the incursion of blending costs. The pricing dispute was resolved with the government agreeing to pass those costs on to prices at the pump.

Supply

Summary

  • Global oil supply fell by 45 kb/d to just above 85.8 mb/d in January, with a 415 kb/d gain in total OPEC output (mostly NGLs) offset by a 460 kb/d dip in non-OPEC production.  Year-on-year, global output was 1.3 mb/d higher, with increases shared between non-OPEC and OPEC NGL production, while OPEC crude output was unchanged.
  • Non-OPEC supply dipped by 460 kb/d in January 2010 to 51.6 mb/d on a seasonal drop in OECD crude and NGL output and problems at some Chinese fields due to extreme weather.  Average 2009 production is now estimated 70 kb/d higher at 51.4 mb/d as robust end-2009 US and North Sea production and some NGL/non-conventional baseline changes more than offset disrupted Chinese oil output. 2010 supply is revised up by 120 kb/d to 51.6 mb/d on improved US and North Sea crude prospects.
  • Crude oil supply from OPEC averaged 29.1 mb/d in January, up by 105 kb/d compared with the previous month. Output by OPEC-11, which excludes Iraq, was up by 135 kb/d to 26.6 mb/d in January, with the group producing about 1.8 mb/d above its 24.845 mb/d output target. The call on OPEC crude and stock change for 2010 has been revised up by 300 kb/d, to 29.4 mb/d due to higher demand projections.
  • OPEC condensate and natural gas liquids (NGL) production is forecast to post strong gains in 2010, of 800 kb/d to 5.5 mb/d, but just over half of the increase is related to ramp-up in 2009 project start-ups.  Total OPEC condensates and NGLs averaged 4.7 mb/d in 2009, up by 250 kb/d over 2008 levels but 305 kb/d lower than forecast in December 2009.


  • 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.

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

OPEC Crude Oil Supply

Crude oil supply from OPEC averaged 29.1 mb/d in January, up by 105 kb/d compared with the previous month. December output was revised down by 80 kb/d, largely due to lower than previously estimated output from Saudi Arabia.

Output by OPEC-11, which excludes Iraq, was up by 135 kb/d to 26.6 mb/d in January, with the group 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 January compared with 61% the previous month.



OPEC production has hovered in a fairly narrow range of between 28.8 mb/d and 29.1 mb/d over the past six months, with lower Iraqi output offset by a steady uptick in Nigerian volumes. However, the worsening political crisis in Nigeria given ailing president Yar'Adua's prolonged absence from the country has crippled the government's functioning and led to rebel groups formally calling off the six-month ceasefire effective 30 January, arguing the government has failed to deliver on its end of the arms-for-amnesty agreement. On 31 January, a day after the Movement for the Emancipation of the Niger Delta (MEND) suspended the cease fire, Shell reported three key oil flow stations and pipelines handling Forcados crude were sabotaged, forcing the company to shutter 150 kb/d of production. Earlier, rebels kidnapped four Shell contract workers on 12 January. Chevron's operations were also attacked in early January, forcing the shut-in of some 20 kb/d.

Nigeria's January production was down by 10 kb/d, to around 2 mb/d. Nigerian crude output could average below 1.9 mb/d in February if these shut-ins persist,

However, after weeks of contentious debate among the country's leaders, Nigerian Vice President Goodluck Jonathan was officially granted presidential powers on 9 February, which many hope will put an end to the crisis. MEND has yet to announce whether it will honour the ceasefire agreement following the appointment of Jonathan as acting President. Moreover, the government still has many challenges to contend with in the near term, including election reform ahead of the 2011 elections and the controversial new 'Oil Industry Bill'.  In addition, the political upheaval is delaying contract renewals with foreign operators and formal approval for development of new projects, with deep-water production plans at risk of delays given the high costs and long lead times involved. Shell, the country's oldest and largest producer partner as well as the principal target of militant attacks, announced in mid-January it was downsizing its operations in Nigeria.

Crude oil production in Angola edged higher in January, up by 40 kb/d to 1.89 mb/d. Preliminary loading schedules indicate output is on course to rise a further 50 kb/d in February.



Saudi Arabia's production in January was pegged at 8.2 mb/d, slightly higher than a revised 8.1 mb/d for December. The downward revision in December's output is in line with reduced domestic refinery crude runs due to scheduled maintenance work. Despite lower output, crude exports were up in December and tanker data suggest shipments continued at these higher levels in January. Saudi Aramco shut in the 325 kb/d crude distillation unit at the Ras Tanura refinery from mid-December to late January for maintenance work.

UAE production was also up in January, by 10 kb/d to 2.29 mb/d. Volumes are expected to edge a bit lower in February, however. State-owned ADNOC tightened contract allocations for Asian buyers in February for lighter crudes while increasing heavier Upper Zakum. Murban volumes were cut by 13% versus 10% in January while Lower Zakum and Umm Shaif supplies were reduced by 15% compared with 10%. By contrast, Upper Zakum supply cuts were eased somewhat in February, 10% versus 20% the previous month. For March ADNOC reversed February cuts for the lighter crudes, to just 10% below allocations while heavier Upper Zakum cuts were increased to 15%.

Iraqi output was slightly lower by around 30 kb/d in January, at 2.45 mb/d, due to weather related-disruptions at the southern Basrah ports. Total exports are estimated at 1.93 mb/d for January versus 1.98 b/d in December. Crude oil exports from the Basrah terminals were down 85 kb/d, to 1.45 mb/d. Exports of Kirkuk crude rose by around 30 kb/d, to 475 kb/d in January.

Plans have been put forward by the regional government to allow exports from the Kurdish region, which were halted in October, to resume. Production from the Tawke and Taq Taq fields has been reduced to a combined 20 kb/d compared with an earlier 100 kb/d due to a dispute between Baghdad and the Kurdish Regional Government (KRG) over the legitimacy of the latter's contract awards to foreign operators, profit sharing proposals and payment issues for past exports. Negotiations on the broader issues have been sidelined until after the 7 March elections, but in a bid to show some progress to the 30 some companies that have signed contracts, the KRG have proposed that the companies could resume exports but only be paid for the cost of producing the crude, not the sale price collected by SOMO. The KRG officials argue this is a step forward in the protracted negotiations and Baghdad is reportedly reviewing the proposal.

OPEC NGLs

OPEC condensate and natural gas liquids (NGL) production is forecast to post strong gains of 800 kb/d, to 5.46 mb/d, in 2010 but nearly a quarter of the increase is due to delays in project start-ups last year. Total OPEC condensates and NGLs averaged 4.65 mb/d in 2009, up by 250 kb/d over 2008 levels but 210 kb/d lower than forecast in December 2009. We have undertaken an extensive review of NGL prospects worldwide in recent months.

Saudi Arabia's condensate and NGL production is estimated at 1.39 mb/d in 2009 and rising to 1.56 mb/d in 2010, down about 40 kb/d from the January forecast. Saudi Aramco announced in mid-January that the gas processing plant at the 500 kb/d Khursaniyah oilfield was finally being commissioned, with the first unit brought online at end-January and the second unit slated for start-up in late March or April. The plant is expected to produce 290 kb/d of condensate and NGLs. Saudi Arabia earlier reported that start-up of the Khursaniyah gas processing facility would commence in 3Q09 but technical issues delayed start-up. Originally planned to start in late 2007, the project has been beset by construction, engineering and staffing delays. Crude production from Khursaniyah started in September 2008 even though the gas plant was not finished.

Given the project's history, a slow ramp-up has been factored into our forecast for 2010. Saudi condensates and NGLs are now forecast to rise from an average 1.38 mb/d 4Q09 to 1.61 mb/d by 4Q10. Start-up of the 310 kb/d Hawiyah NGL complex in 3Q09 is expected to add about 70 kb/d to supply in 2010.



Iran's condensate and NGL production is estimated at 520 kb/d for 2009, up 80 kb/d from the previous year but 75 kb/d below the December 2009 MTOMR estimate. The lower estimate is largely due to delays at the South Pars 8, 9 and 10 phases. The onshore gas processing facilities of South Pars phases 9 and 10 started operation in early 2009 but the facilities are currently running gas supplied from South Pars phases 6 and 7.

Construction of the offshore facilities for phases 9 and 10 is well behind schedule due to problems procuring wellhead equipment as a result of US sanctions. Previously, phase 9 was slated to be completed in February 2009 and phase 10 offshore activities were to be completed by October 2009. Currently, of the 24 wells that are scheduled to be drilled, only 12 have been completed. Against this backdrop, we assume roughly 50% of this capacity will start-up in the latter half of 2010 and that the full 152 kb/d of condensate and NGLs capacity of phases 6-8 will not be operational until the end of 2011. Total Iranian NGL production capacity is now forecast to increase from 520 kb/d in 2009 to 585 kb/d in 2010.

In Algeria, lower than expected associated condensate output from the country's largest gas field, Hassi R'Mel, is largely behind downward baseline revisions which average 80 kb/d between 2003 and 2008. Expansion of the Hassi R'Mel - Arzew NGL pipeline last year enabled output at the field to increase in 2009. Total Algerian NGL output is estimated at 625 kb/d in 2009, rising to 665 kb/d in 2010.

Nigeria will also post an increase of 115 kb/d this year, to around 385 kb/d, as the Akpo condensate field slowly ramps up output after start-up in 1Q09, produces at its full 175 kb/d capacity in 2010.

Qatar and the UAE will also post significant increases in 2010 as new projects ramp up. Qatar's condensate and NGLs are slated to rise by 290 kb/d, to 1.0 mb/d. Ras Gas 3 and 4 started production in 4Q09 and will slowly ramp up to capacity by early 2011, with output of condensate of 100 kb/d and NGLs of 45 kb/d. Qatargas 3 is forecast to commence production of mostly condensate in 3Q10 and reach capacity of 70 kb/d sometime in 2012. The al Khaleej 2 project was brought online also in 3Q09 and will steadily build up to 40 kb/d of condensate and 32 kb/d of NGL this year.

The UAE is on course to increase output by 125 kb/d, to 645 kb/d, in 2010 following the start-up of the OGD Habshan in 3Q10, with peak capacity of 120 kb/d each of condensate and NGLs expected to be reached in 2011.

Non-OPEC Overview

Total 2009 non-OPEC liquids supply (including biofuels) is adjusted up by 70 kb/d to 51.4 mb/d on marginally better-than-expected late-year US, North Sea and Russian output, as well as some baseline revisions to NGL supply and South African non-conventional oil production. These upward adjustments more than offset lower Chinese crude output in November and December as well as a downward adjustment to Chinese coal-to-liquids (CTL) supply.



The 2010 non-OPEC supply forecast was revised up by a total of 120 kb/d to 51.6 mb/d, largely on improved prospects for US Other Lower-48 and GOM crude, as well as NGL and 'other hydrocarbons', including fuel ethanol. The outlook for Norway, Mexico and the UK also improved slightly. Meanwhile, the Russia forecast was revised down on stalled development at the Sakhalin-1 complex, while the above-mentioned problems in China and the CTL downward revision also feed into 2010.

2010 growth is now seen at 235 kb/d, up from the 185 kb/d forecast in last month's OMR, with a strong increase in the non-OECD of 780 kb/d more than offsetting a decline of 540 kb/d in the OECD (lower refinery processing gains balance a further increase in 'other biofuels'). Within the OECD, Norway and the UK see a combined drop of around 400 kb/d, as a string of new small field start-ups fails to offset a decline in mature assets. Mexico, the US and Canada will also see output drop by a combined 200 kb/d, in the US's case after a bumper, hurricane-free year that saw 560 kb/d growth. In sharp contrast to the decline elsewhere in the OECD, Australia and New Zealand will deliver a 70 kb/d increase in OECD Pacific output in 2010, as new fields come online.



In the non-OECD, forecast 2010 growth centres on the FSU, Brazil, China and India, with the largest country increments to come from Brazil (+220 kb/d, including fuel ethanol), China (+170 kb/d) and Azerbaijan (+120 kb/d).  Russia is expected to contribute a further 100 kb/d as a group of new fields ramps up to peak capacity, while Colombia, India and Kazakhstan will each deliver around 70 kb/d.  The only region to show a net decline is Africa, where the much-heralded start-up of initial volumes from the huge Jubilee project in Ghana and small increments in Mauritania, Gabon and Chad will be offset by decline at some mature producers such as Egypt, Equatorial Guinea, Cameroon and Ivory Coast, leading to an overall net drop for the region of 40 kb/d.



OECD

North America

US - January Alaska actual, others estimated:  While September and October US oil production was unrevised, November output was adjusted up by 190 kb/d to 8.4 mb/d on a combination of higher Other Lower-48, NGL and fuel ethanol production. November production also picked up month-on-month by 125 kb/d and is expected to grow again in December, before plunging again in January, based largely upon assumed lower NGL output, which in turn is premised on forecast lower gas production. Crude output is also forecast to fall, based upon preliminary weekly data.

Total US supply in 2009 averaged 8.1 mb/d and is set to dip slightly to 8.0 mb/d in 2010. Net growth is assumed in onshore Texas and some key Lower-48 states including Oklahoma, Utah and New Mexico, which have seen rising output throughout 2009 and forecasts of a resurgence in drilling, while Gulf of Mexico crude production is set to increase by a further 100 kb/d in 2010, despite an assumed hurricane adjustment in 2H10 of -115 kb/d. But these increments will be offset by further decline in Alaska, California and NGLs.



Canada - Newfoundland - December actual, others October/November actual:  Canadian oil production was only partly revised for 4Q09, given proposed changes to the breakdown of production data reported by Statistics Canada. The planned new split will likely move some bitumen production into the synthetic crude category. However, until StatCan makes available an historical series of its new breakdown, we will not yet incorporate these changes.



Separately, preliminary end-2009 data for the various synthetic crude mining/upgrading companies prompted a small upward revision to November and December output. A reported outage at the Syncrude complex in January 2010 was not quantified, but we have assumed output was down by 50 kb/d. December data for the Hibernia, Terra Nova and White Rose fields offshore Newfoundland were reported 50 kb/d lower than forecast, which was partly carried through into the 2010 forecast, when they collectively average nearly 300 kb/d. Further work on reappraising NGLs prompted a 25 kb/d hike in the 2010 forecast to a level of 640 kb/d. In sum, Canadian total oil supply in 2009 was left unchanged at 3.1 mb/d, and is forecast to remain flat at 3.1 mb/d in 2010, as growth in synthetics, Newfoundland crude and NGLs offsets lower bitumen and onshore conventional output.

Mexico - December actual:  Mexican crude and NGL production in December, at just under 3.0 mb/d, were 25 kb/d and 15 kb/d higher than expected respectively, and were 50 kb/d higher than in November. After several months of slowing decline, workhorse field Cantarell's output fell by 35 kb/d to 530 kb/d in December, down 280 kb/d or a steep 35% year-on-year. Partly offsetting this, production at the Ku-Maloob-Zaap (KMZ) field rose 35 kb/d in December, to 835 kb/d, which is around 55 kb/d or 7% up on December 2008. KMZ production is thus at a new record high and is forecast to rise slightly higher, to an average 840 kb/d in 2010, though this and other new fields' output is not expected to offset forecast further decline at Cantarell. Total Mexican oil supply is expected to fall from 3.0 mb/d in 2009 to a marginally upward-revised 2.9 mb/d in 2010.

North Sea

Norway - November actual, December provisional:  Norwegian oil production data for November prompted a +25 kb/d upward revision to 2.5 mb/d, as crude output picked up slightly. Meanwhile, preliminary data for December brought a similar-sized downward adjustment. In January, shut-ins related to extremely cold temperatures affected the Ormen Lange complex, as well as the Kaarstoe gas processing plant, but in the end, affected gas liquids volumes appear to have been relatively small, after problems were resolved within days. Despite a downward adjustment to the total NGL figure, the forecast sees an overall upward revision for oil as a whole of 35 kb/d for 2010 on better prospects for crude production, based upon recent performance and loading schedules for 1Q10. 2009 total oil supply is now seen at 2.4 mb/d, falling to 2.2 mb/d in 2010.



UK - November actual:  Total UK oil production levels in November (reported) and December (estimated) were each revised up by around 110 kb/d to 1.5 mb/d, as the year ended with fewer outages and lower seasonal maintenance than usual. The UK's largest field, for instance, Buzzard, is expected to have been back near full capacity of around 220 kb/d in November, following three months' maintenance. Despite a fire shutting in the Erskine platform in late January, better-than-expected end-2009 and preliminary loading schedules for early 2010 prompted a +25 kb/d upward adjustment for total UK supply in 2010, now forecast to average 1.3 mb/d, down from 1.5 mb/d in 2009 and weighted towards seasonal first-quarter peak output and heavy maintenance in 3Q10.

The UK authorities have just launched the country's largest-ever upstream licensing round, with over 2,800 licenses available to potential bidders. Keen to slow a steady decline in output, which has seen UK oil production fall from its high of 2.9 mb/d in 1999 and has led to the country becoming a net importer of oil since 2006, the UK government is also offering significant tax breaks for fields developed West of Shetlands, considered the area with the most undeveloped potential.

Denmark - December actual:  November and December oil production data for Denmark were only marginally revised, with production running at a steady 245 kb/d. The Siri field restarted output at the end of January 2010, as anticipated, and should see output rise to around 20 kb/d, with the addition of oil from the nearby Nini complex.  Total Danish oil supply is now seen to average 260 kb/d in 2009 and stay flat around the same level in 2010.

Pacific

Australia - November actual:  Australian oil production in November was revised down 20 kb/d to 545 kb/d, with both crude and NGL output coming in marginally lower than expected. In mid-January, a well at the 35 kb/d Montara project in the Timor Sea, which had suffered an oil spill in August, followed by a fire in November, was finally capped. The affected drilling rig will have to be completely overhauled or replaced, and initial production volumes are expected to be delayed until at least 2H11, as compared with a previously-planned start-up date a year earlier. However, February 2010 should see the start-up of the Pyrenees and Van Gogh fields, with peak capacity of 90 kb/d and 60 kb/d respectively, although the ramp-up at Pyrenees is now expected to be slower than thought, resulting in a 30 kb/d downward revision to the 2010 forecast. Total Australian oil production is now estimated to have averaged 560 kb/d in 2009 and is set to rise to 610 kb/d in 2010, largely based on the new start-ups of predominantly heavy sweet crude.

Former Soviet Union (FSU)

Russia - December actual, January provisional:  Russian oil supply in December 2009 was revised up by 35 kb/d to 10.4 mb/d, as output at the three production sharing agreements (PSAs) Sakhalin 1, Sakhalin 2 and Kharyaga was reported higher than in preliminary data. In addition, and following on from changes described in the report published on 11 December 2009, our reappraisal of NGL production has led us to recategorise liquids production by independent Novatek as condensate, rather than, as previously, crude. Crude and condensate production by company is not disaggregated in official production figures, so this report will in future count combined Gazprom and Novatek liquids production as a proxy for condensate output (just under 400 kb/d in December 2009). In addition, we estimate that another 230 kb/d of NGL was produced from gas processing plants in December. This recategorisation, which we have extended historically and in our forecast, leads to a further small upward volumetric revision, due to condensate's higher barrels per tonne conversion factor. Total Russian oil production is now seen to have averaged 10.2 mb/d in 2009, having grown 200 kb/d from 2008.



The 2010 forecast is nudged down by 40 kb/d, but still rises to 10.3 mb/d, with lower forecast production now expected from Gazprom, Surgutneftegaz and the Sakhalin 1 PSA. The latter is now forecast to produce 170 kb/d in 2010 according to our own estimate, unchanged from 2009, as natural decline is only just offset by the anticipated start-up of the Odoptu field in 3Q10. Disagreement between the Sakhalin regional government and the consortium developing Sakhalin 1 looks set to delay development and drilling activity, causing the downward revision. All told, rising 2010 supply derives largely from further gains at new fields, including Rosneft's Vankor, Lukoil's Yuzhno Khylchuyuskoye and Yuri Korchagin (the latter to start-up in early 2010), TNK-BP's Uvat expansion and growth at Sakhalin 2.

Further Uncertainty Over Eastern Siberian Tax Breaks

In late January, Russia's Finance Ministry caused a further twist to the saga surrounding preferential tax treatment of Eastern Siberian exports, when it made headlines calling for the abolition of favourable duties, fearing substantial fiscal shortfalls. Most analysts consider that the prospect of those tax breaks was one of the reasons East Siberian oil fields got a boost last year, contributing to a further year of growth in Russian oil production, when there had previously been a widespread perception that output would decline in 2009 for a second year running.

The Finance Ministry's argument was apparently based upon persistently high international oil prices and seemingly favourable transport tariffs through the new Eastern Siberia-Pacific Ocean (ESPO) pipeline, as well as related rail routes. But the Energy Ministry countered with statements that the tax breaks (currently applicable to 22 select fields) would stay in place. Seemingly conflicting statements are not uncommon from the Russian ministries involved in what is the country's largest single source of income, but uncertainty over the export duty regime is seen by most oil producers as detrimental to planning.

Deputy Prime Minister Sechin later weighed in, again confirming that the tax breaks would stay, though hinting that one idea might be to limit them to crude volumes flowing through the ESPO. His voice carries much weight, given that he is in overall charge of Russian oil policy and is also chairman of state-owned giant Rosneft (which is developing Eastern Siberia's currently largest oil field Vankor, itself one of the single biggest factors behind Russia's surge in oil production in 2009 and a beneficiary of the tax breaks).

But the uncertainty surrounding fiscal policy will likely remain a problem for companies seeking to develop upstream assets in frontier areas such as Eastern Siberia, but also the Caspian, the Barents Sea and others that have so far remained largely undeveloped. Despite assurances that the export duty holiday will stay, the duty itself (and its exemption) are recalculated and imposed on a monthly basis by executive decree, as opposed to being enshrined in law. Sustaining oil production at present levels will require substantial new field development, something that is only likely with greater fiscal stability.

FSU net exports rose further in December, to 9.2 mb/d, as crude oil shipments from the Baltic bounced back to seasonal levels following the end of maintenance on the pipeline leading to Primorsk. Volumes from the Black Sea and via the BTC and Druzhba pipelines remained almost unchanged, while the first shipments from the freshly inaugurated Kozmino terminal on the Pacific Coast balanced a dip in exports from Varandey in the Arctic. Product export volumes rose slightly to 2.6 mb/d in December as a drop in fuel oil shipments was offset by increases in gasoil and other product exports.

Exports of the new Eastern Siberia-Pacific Ocean (ESPO) blend from Kozmino commenced, with nine cargoes loading in January, and February loading schedules indicating a further ten tankers set to leave the Pacific coast terminal. Reportedly, several of these ESPO blend crude cargoes are currently stored on vessels as floating storage because of the crude's untested quality. With shipments scheduled at around 250 kb/d for the meantime, the port will become the third largest Russian oil-exporting outlet. Last year, Novorossiysk in the Black Sea handled around 900 kb/d and Primorsk in the Baltic loaded around 1.5 mb/d. However, new schedules show that volumes delivered to main ports on the Baltic and the Black Sea decreased, confirming the theory of an eastward shift from traditional export routes. Yet lower prospective export volumes to Europe during the first two months of 2010 may also be attributed to reduced volumes due to low temperatures, frozen seas in the Baltic, a trade dispute between Russia and Belarus and February maintenance at the pipeline leading to Primorsk, although the latter will have been partially offset by additional shipments from Gdansk.



European countries breathed a sigh of relief as fears of reduced deliveries via the Druzhba pipeline did not materialise. An agreement between Russia and Belarus signed at the end of January after long negotiations reportedly promises 6.3 million mt/y (125 kb/d) of duty-free crude oil for Belarusian domestic consumption. The remaining 15 million mt/y (300 kb/d) for re-export as oil products will be liable for the standard full export duty rate and in return Russian companies agreed to pay 11% higher transit tariffs. The agreement will be reviewed in September 2010, but may be a source of further dispute before then when a new Customs Union between Russia and Belarus comes into force in July 2010.

Other Non-OPEC

China - December actual:  Late-year production data brought sharp downward revisions of 140 kb/d and 180 kb/d for December and November respectively, dragging down average 2009 production by 30 kb/d to just under 3.8 mb/d. Some major fields/regions reported lower output in December, including Xinjiang, Dagang and Jilin. Early January saw reports of frozen seas in Bohai Bay hampering production and operations in the area, while there were also power shortages across the country (in part related to the extreme cold), which in some cases apparently also affected oil production. However, it is unclear whether these factors, or rather maintenance or other unplanned outages, were behind the lower output at the above-mentioned fields. Meanwhile, December data showed higher-than-forecast output in the Changqing, Henan and Yanchang producing areas, partly offsetting lower output elsewhere.

As regards 2010, the above-mentioned problems are anticipated to have affected output in January, which has led to a downward revision of the forecast. In addition, a reappraisal of Chinese CTL production has led to a sharp downward adjustment as, despite the Shenhua/Erdos facility in Inner Mongolia starting up production in late 2008, output has apparently remained at pilot levels. Until evidence of higher output emerges, and ambitious plans for CTL notwithstanding, this report has trimmed the non-conventional forecast by around 5 kb/d for 2009 and a full 50 kb/d for 2010 to 6 kb/d and 8 kb/d respectively. Total Chinese oil supply is now seen to average 3.8 mb/d in 2009 and to rise to 4.0 mb/d in 2010, with significant increments from offshore Bohai Bay, Changqing, Tarim Basin and Yanchang.



Other Asia-Pacific:  Brunei surprised with yet another revision to data reported to the Joint Oil Data Initiative (JODI), which we rely on as our main source for this country. The result is an overall revision of +10 kb/d to average 2009 production, now estimated at 150 kb/d, and an upward adjustment of +25 kb/d to 4Q09 output, which has been carried through the 2010 forecast, now set to average 160 kb/d. In India, company reports of lower-than-expected December/January production at the new Mangala field in Rajasthan prompted us to scale back the assumed pace of ramp-up. Total Indian oil output is estimated at 800 kb/d in 2009, rising to 860 kb/d in 2010, as production at Mangala and its satellites Bhagyam and Aishwariya increases. In Thailand, delays at the Map Ta Phut NGL project have prompted a 15 kb/d downward revision to the 2010 forecast. Total Thai oil production is now anticipated to remain flat at around 350 kb/d in 2010.

Various Middle East:  The inclusion of newly-available historical JODI data for Yemen led to small historical revisions, though we have left the forecast unchanged. 2009 total oil production is expected to have averaged 300 kb/d, and is forecast to decline to 270 kb/d in 2010. Recent unrest and military operations have not affected oil production. For Syria, government forecasts have prompted a small upward revision of 10 kb/d in 2009, production thus averaging 375 kb/d, and by +25 kb/d in 2010, with output forecast to decline marginally to 360 kb/d.  

Various Africa:  For South Africa, a reappraisal of CTL and gas-to-liquids (GTL) production has led to a baseline upward revision of 20-25 kb/d for past years. This is carried through the forecast. Total oil production for the two years is now seen steady at around 200 kb/d. In Chad, a $1 bn boost in investment by ExxonMobil has raised the 2010 forecast by 20 kb/d, now set to rise to 130 kb/d from 2009's estimated 120 kb/d.

OECD Stocks

Summary

  • OECD industry stocks fell by 67.8 mb in December, to 2 678 mb, compared with a five-year average draw of 41.9 mb. Falling crude stocks in North America and Europe as well as declining middle distillates across all three regions drove the change. The 'other products' categories in North America and the Pacific also drew steeply.
  • OECD industry stocks drew by 1.1 mb/d in 4Q09, led by middle distillates and 'other products'' in North America and the Pacific. The movement was steeper than both the five-year and 10-year average fourth quarter stock change of -0.5 mb/d and -0.7 mb/d, respectively.
  • OECD stocks in days of forward demand fell to 58.1 days at end-December, down from 59.2 days at end-November on falling stocks. Days cover declined most in residual fuel oil and middle distillates.
  • Preliminary data indicate total OECD industry oil inventories rose by 11.4 mb in January. US stocks fell 3.3 mb, Japanese inventories increased 1.8 mb and EU-16 holdings, according to Euroilstock, rose 12.9 mb. The five-year average stock change for the OECD in January is a build of 33.8 mb.
  • End-January short-term crude floating storage stood at 59 mb, unchanged from an upwardly revised December level. Yet, discharges in early February reduced that level by about 8 mb. Short-term products floating storage decreased to 86 mb at end-January from 96 mb at end-December. Early-February discharges reduced product levels a further 11 mb. However, market estimates for both crude and product levels varied significantly, with some sources indicating steeper January declines.


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

OECD commercial inventories fell sharply in December, by 67.8 mb or 2.2 mb/d, to 2 678 mb as cold weather prompted a distillate draw across all three regions and North American crude stocks decreased. In 4Q09, OECD inventories drew by 1.1 mb/d, steeper than five-year and 10-year average stock draws of 0.5 mb/d and 0.7 mb/d, respectively. Middle distillates and 'other products' fell more sharply than historical norms, gasoline increased by less than normal and crude posted a larger than normal build.



As such, OECD commercial stocks, as of end-December, had narrowed their surplus to the five-year average by almost 50%, to 67 mb from 124 mb in September. Middle distillates accounted for over one-third of this narrowing, as the OECD surplus in that category moved from 75 mb at end-September to 54 mb at end-December. Still, some regional surpluses remained stable during the quarter. The North American crude surplus decreased by only 5 mb, to 34 mb and the European middle distillate surplus actually grew by 2 mb to 37 mb, as floating storage and ample stocks at the consumer level provided a buffer against industry stock changes.



January preliminary data show industry stocks building 11.4 mb, less than the five-year average build for of 33.8 mb. Gains were concentrated in crude, gasoline and middle distillates, while losses were driven by a large draw in US propane. The stock change suggests that the overall OECD surplus to the five-year average should continue to narrow, with crude and distillate increasing by less than the five-year average build. Moreover, crude and products floating storage decreased by 10 mb on the month, with larger draws seen in early February.



With three-month forward demand rising from December to January, days of forward cover may continue to decrease from their level of 58.1 days at end-December. Still, any further tightening may require more of a demand recovery as well as continued floating storage draws in the months ahead. With OECD demand expected to remain essentially unchanged for 2010 as a whole and rising only slightly from 4Q09 to 1Q10, crude stocks typically showing a seasonal build and the coldest portion of the winter likely over, a repeat of the steep 4Q09 draws in 1Q10 looks unlikely.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks drew by 42.2 mb in December, driven by a 20.9 mb fall in US 'other products', a 10.4 mb decrease in US crude oil and an 8.1 mb fall in US middle distillates. A 3.1 mb Mexican stock decrease stemmed from draws in crude and gasoline of 2.3 mb and 1.4 mb, respectively.

January preliminary data point to a 3.3 mb draw in total US commercial stocks through January 29. By comparison, the five-year average stock change is a 10.4 mb build. Crude stocks increased by 1.8 mb, but stood only 11.9 mb above the five-year average versus 21.2 mb at the start of the month. Stocks at Cushing, Oklahoma - the delivery point for the NYMEX light, sweet crude contract - fell by 3.5 mb as disruptions to Canadian supplies reduced imports into the US Midcontinent. As of 29 January, Cushing stocks stood at 32.0 mb, 2.3 mb below levels of a year ago.



US product stocks fell by 5.2 mb in January driven by a decrease in propane of 16.0 mb and a distillate draw of 2.5 mb. The distillate draw was evenly split between diesel and heating oil and likely stemmed more from low refinery output rather than demand strength. US East Coast heating oil stocks held a position 3.1 mb above the five-year average at the end of the month. US diesel stocks stood 28.9 mb above the five-year average at month-end. US gasoline stocks increased 9.0 mb on the month and continued to trend above the five-year range despite a late month, counter-seasonal draw.



OECD Europe

European inventories fell 9.3 mb in December as crude decreased 5.6 mb and middle distillates drew by 2.3 mb. All other product categories also registered draws, albeit slight. The largest distillate change came in France (-2.6 mb) while stocks in Germany, the Netherlands and the UK all posted distillate increases. European crude stocks stood 5.0 mb above the five-year average at end-December while gasoline and residual fuel oil stood at deficits of 8.0 mb and 3.1 mb, respectively.



Middle distillate inventories decreased their surplus to the five-year average to 37.3 mb at end-December from 45.3 mb at end-November. Yet, the end-December differential still stood higher than end-September, suggesting that winter weather alone has not been sufficient to draw down industry stocks. Surpluses have narrowed at the consumer level, however, with German heating oil readings falling from 65% fill at end-November to 61% at end-December. German consumer heating oil fill levels stood just 2.3 percentage points above the five-year average at end-December versus 7.3 percentage points at the end of September.



January preliminary data showed gasoil stocks held in Northwest Europe independent storage rising slightly during the month as discharges of floating storage counterbalanced demand-related draws. Products floating storage off Europe - primarily middle distillates - decreased by 5.6 mb with draws occurring from both the Mediterranean and Northwest Europe. Floating storage draws continued in early February. Other product categories in Northwest Europe independent storage, such as gasoline and jet/kerosene, saw small monthly gains while naphtha and residual fuel oil both declined. EU-16 preliminary data from Euroilstock showed gains in gasoline and middle distillates of 6.3 mb and 7.3 mb, respectively. Crude stocks increased by 1.3 mb while fuel oil and naphtha both posted declines.

OECD Pacific and Singapore

Pacific industry stocks fell by 16.3 mb in December, as middle distillates decreased by 8.1 mb. Gasoline stocks edged down by 2.3 mb to five-year average levels as both Korea and Japan posted draws. Pacific crude inventories rose by 2.8 mb. Korean crude stocks 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 stockbuild of 1.8 mb in January, with crude increasing 1.3 mb and products rising 0.6 mb. Kerosene stocks decreased 1.8 mb and continued to trend at five-year lows. Nevertheless, kerosene levels as of end-January stood higher than in 2009 while jet/kerosene demand estimates for the month continued to trail readings of a year ago.  Gasoline stocks increased 1.6 mb to above the five-year average.



Singapore product stocks increased by 0.7 mb in January, led by a 0.6 mb rise in middle distillates. Although fuel oil inventories drew 0.2 mb on the month, early February readings put them back up to their highest levels since mid-December. Light distillates increased slightly on the month. After rising steeply in early January, light distillate stocks steadily decreased through the month with reports of stronger regional demand, particularly in India and Indonesia.





Prices

Summary

  • Benchmark crude oil prices cascaded through January, hitting six-week lows by early February. After trading at 15-month highs early in the New Year, warmer temperatures in the Northern Hemisphere by mid-January and a series of negative macroeconomic developments set in motion a $12/bbl slide in prices by early February. Prices retraced some of the losses in recent days, with WTI last trading at $73.80/bbl and Brent at $72/bbl at the time of writing.
  • The strong link between oil prices and expectations that the economic recovery would gather steam in 2010 kept oil markets on a solid upward course for most of 2009. However, despite higher global GDP projections for 2010, there are fresh concerns over financial stability, notably in the eurozone, and as government policy makers consider plans to wind down stimulus measures. The sudden strength in the US dollar, which hit eight-month highs against the euro in early February due to weaker European financial markets, also appeared to add downward momentum to crude prices.
  • Spot crude oil prices eroded steadily over January.  Refiners continued to curtail crude purchases in line with sharply lower global refinery throughput rates as well as reduced demand ahead of heavier than usual forthcoming spring refinery maintenance.  Refined product prices, however, have lagged the drop in crude markets, with margins in most major markets posting across-the-board increases month-on-month in January.
  • In January, freight rates moved higher as weather-related delays curbed vessel availability and sailings out of major crude export regions increased. By mid-month rates eased on weaker demand and as decreasing floating storage added available tonnage.


Market Overview

Benchmark crude oil prices cascaded lower throughout January, hitting six-week lows by early February. WTI futures prices swung a sharp $12/bbl over the month, from closing at a high of $83.18/bbl on 6 January to a low of $71.19/bbl on 5 February. The cold winter weather-inspired run-up in prices proved fleeting as warmer temperatures in the Northern Hemisphere set in motion the slide. However, the steady stream of negative macroeconomic developments and the ripple effect on global financial markets played into this downward momentum. At the time of writing WTI was trading at around $73.80/bbl and North Sea Brent at $72/bbl.

Oil prices by and large traded steadily higher throughout 2009, albeit in a relatively narrow $70-$80/bbl range over the past six months, amid expectations of the global economic recovery gathering steam in 2010. However, despite now-stronger consensus views on the pace of economic recovery, concerns persist over the financial instability in the eurozone, which may again temper market expectations about the pace of economic growth.

The aftershocks of sovereign debt issues in Europe were still reverberating through equity markets as government policy makers considered plans to wind down stimulus measures that have been the pillar of economic recovery. In mid-January, oil markets moved lower as concern mounted that China is planning to alter stimulus measures to prevent overheating in the economy. Reports that the US Federal Reserve is now crafting plans to rein-in stimulus spending and contemplating tightening credit markets by raising historically low interest rates once signposts emerge that the US economy is on a steady path to recovery added further pressures to market sentiment. The current uncertainty in financial markets has also halted the upward march in equity markets, with the S&P 500 posting a sudden downturn.

Worries over proposed government regulations for investment banks also cast a cloud of uncertainty over financial markets. The Obama Administration announced in mid-January that it plans to tighten regulations on the nation's largest banks, with oil prices apparently sliding $3/bbl in response to the news. The proposals are aimed at limiting financial activities at banks that have received federal funds over the last year and a half, including trading for their own account, owning hedge funds or private equity funds. Analysts contend that the proposed regulations on US banks may have a greater impact on oil trading than the proposed position limits in the long-awaited report by the Commodity Futures Trading Commission released mid-month.

With financial markets under siege for much of the month, oil prices found little support from supply and demand fundamentals. OPEC producers continued to pump at 12-month highs of 29.1 mb/d in January and preliminary tanker data suggest the group's output is trending higher in February.

Forecast global oil demand was ratcheted up by 170 kb/d, to 86.5 mb/d for 2010 but market focus is on the seasonal second quarter low point. Oil demand is forecast to decline by 300 kb/d between 1Q10 and 2Q10, which could sustain still relatively high stockpiles of refined products. US middle distillates inventories, which include both heating oil and diesel, contracted in January but arguably the steep cut in runs may have had an even more significant impact than the cold weather drawdown. Distillates stocks in the OECD, however, remain at or above the five-year average and floating stockpiles are still considerable.

Spot crude prices remain pressured by the sharp cutback in global refinery throughput rates and curtailed refiner buyer ahead of heavier than usual forthcoming spring refinery maintenance.  Refined product prices, however, have lagged the drop in crude markets in January, with margins posting across the board increases month-on-month in January, and strengthening further in early February.

Futures Markets

One underlying sign that prices may be supported at current levels is steady narrowing of the price spread between front month futures prices and forward prices. The WTI M1-M2 narrowed by 95 cents/bbl, to just 45 cents/bbl in January versus an average $1.40/bbl in December. More striking, the WTI M1-M12 closed in by $2.30/bbl, from a high of $9.89/bbl in December to just under $5/bbl in early February.

The influence of the dollar trade, which showed a persuasive correlation with crude oil prices for much of 2009, ebbed in December and early January, but may have come back with a bang in early February, this time acting as a drag on prices as the dollar strengthened due to weaker European financial markets. The US dollar hit an eight-month high against the euro on 5 February as investors sought a safe haven from the eurozone crisis.  However, efforts by European governments to stabilise financial instability in Greece lent support to the euro, with the corresponding weakening in the dollar adding upward momentum to crude prices once more.



Meanwhile, daily trading volume in crude oil contracts on the New York Mercantile Exchange (NYMEX) hit a record on 5 February in the wake of long liquidations as the dollar rose sharply and amid mounting concerns over the shape of the economic recovery. Volumes hit 1,121,751 contracts, surpassing the previous record posted on 6 June 2008 of 1,092,509 contracts.  Rising open interest however has not coincided with any discernable corresponding shift in prices.

Latest data released by the Commodities Futures Trading Commission (CFTC) showed open interest in Light Sweet Crude Oil rose by 129,300 contracts by 2 February and currently stands at 1,360,700 contracts. Swap dealers further increased net long holdings on the expense of money managers who unwound their net-long positions accumulated throughout most of January.

Meanwhile, US officials took several steps in their efforts to expand government regulation of exchanges, the over-the-counter (OTC) markets and the banking industry. The CFTC unveiled on 14 January its long-awaited proposals for setting limits on energy futures positions. The new position limits, if adopted, will affect the WTI, heating oil, RBOB gasoline and natural gas futures contracts. Similar limits are already in force for agricultural commodities.  The aggregate limits are set by the number of outstanding contracts. Companies could hold 10% of the first 25,000 contracts of open interest for all trading months combined and then 2.5% of open interest beyond this threshold. The new rules would allow exemptions to companies using the futures contracts to hedge their commercial risks and a 'limited risk management' exemption, where limits are capped at two times the normal limits, is granted to swap dealers offsetting their positions underwritten at the OTC markets.

Initially, the much-anticipated proposal was viewed as benign since the limits were believed high enough not to divert trades  either onto OTC markets or to outside the US. The CFTC said they believed only 10 companies trading in the crude market (out of around 320) would be affected and that these will be able to ask for exemptions. However, critical comments emerged later indicating that limits could have greater impact on smaller heating oil and gasoline markets. The CFTC estimated that caps would have been imposed on 16 traders in each market in the past two years (out of around 170 and 200, respectively). Some banking sources also criticised the 'limited risk management' exemptions for swap dealers, which they believe in effect limits speculative activity and by implication hedging.

Some believe that the introduction of position limits might shift trades to the OTC market, where the CFTC currently has no legislative oversight or outside the US to countries with less strict legislation. However, the US House of Representatives has already come up with a proposal to extend CFTC oversight to include the OTC markets. There is a 90-day period for soliciting comments before any final proposal would be submitted.

Meanwhile, the UK Financial Services Authority (FSA) has said it does not plan to impose position limits as it considers them outside its current remit, though it is considering greater standardisation of OTC contracts and registration of relevant OTC derivative trades in a trade repository.

Spot Crude Oil Prices

Spot crude prices posted modest month-on-month increases in January but the gains proved fleeting given exceptionally low refinery throughput rates in the US and Europe. January Dated Brent prices rose $1.90/bbl month-on-month, to an average $76.19/bbl, and were trading at just under $73/bbl by early February. Dubai crude posted an even smaller increase of just $1.27/bbl, to $76.69/bbl in January and by early February prices were trading just above $73/bbl.

By contrast, spot prices for WTI at Cushing gained a steeper $4/bbl on the month, in part due to a disruption in Canadian oil flows to the key Midcontinent storage hub. Reduced production at Suncor's upgrader has cut exports to the US by about 150 kb/d since December. Indeed, Cushing stocks fell to 32 mb and are now flirting near the five-year historic range. The WTI contango narrowed in January, to just 41 cents/bbl compared with an average $1.43/bbl in December, wiping out the economics of building stocks onshore and offshore.



In Europe and Asia, exceptionally robust crack spreads for gasoline and naphtha increased demand for light crudes, with spot price premium but ample supplies of North Sea and African grades were more than enough to meet buyers needs, especially as European refiners prepare to slash runs even further in March as spring maintenance plans kick in. Floating storage economics weakened as prompt prices narrowed relative to forward months, though crude oil stored at sea was pegged at 59 mb at end-January, unchanged from December levels.



Chinese and other Asian refiners have also stepped up their buying of naphtha-rich crudes such as Algeria's Saharan Blend given stronger crack spreads. Chinese refiners continue to augment contract supplies with spot purchases of African and Middle East crudes to meet record high refinery throughput rates. The start-up of Russia's ESPO crude pipeline is also making inroads into Asia, with Japan and South Korea the latest buyers.

Spot Product Prices

Refined product prices lagged the drop in crude markets and as a result, crack spreads posted across-the-board increases in January. While distillate and fuel oil crack spreads came off the boil as cold weather abated, differentials for gasoline and naphtha, especially in Asia and Europe, proved especially resilient in the wake of the downturn.

In Europe, gasoline cracks rose by $2/bbl over the month, from $6.30/bbl to $8.27/bbl in January. Continued arbitrage opportunities to Asia, West Africa and the Middle East offset weak local demand, with cracks holding onto gains as Nigeria and Iran continue to increase imports from the region.



In Singapore, gasoline crack spreads for Dubai ballooned to $11.31/bbl in January compared with $6.43/bbl in December. In Japan reduced runs rates helped support gasoline cracks, which were up by $4.50/bbl to $10.12/bbl in January.

In the US Gulf Coast, gasoline differentials to Light Louisiana crude more than doubled in January, to $4.50/bbl while gasoline crack spreads for Mars gained more than $2/bbl to $8.31/bbl in January.



Strong Asian demand for petrochemical feedstock buoyed crack spreads for naphtha. In Singapore, naphtha cracks rose to just under $4/bbl in January compared with $2.86/bbl in December and -$1.51/bbl in November. In Northwest Europe, naphtha cracks more than doubled on the month, in part due to increased exports to Asia, reaching $2.80/bbl in January compared with $1.03/bbl in December and a loss of $2.11/bbl in November.



Refining Margins

Refining margins were mixed in January, with Europe far outpacing other regions. Strong export demand for gasoline and naphtha from Asia, Africa and the Middle East helped support upgrading margins in both the Mediterranean and Northwest Europe (NWE). Brent margins in NWE surged to an average $2.03/bbl in January compared with 12 cents/bbl in December. By early February margins were even higher, averaging $2.50/bbl.

In the Mediterranean, cracking margins for Es Sider jumped from -53 cents/bbl in December to $1.80/bbl on average in the first week of February.

Losses on the US Gulf Coast generally outpaced other regions. Upgrading margins for Nigerian Bonny Light worsened from 71 cents/bbl the first week of January to -$1/bbl for the week ended 5 February.



End-User Product Prices in January

Retail product prices in US dollars, ex-tax, increased by 3.0% in January 2010 for surveyed IEA member countries. Prices rose steeply in Canada, the US and France, while end-user prices in Japan dropped by 1.6% month-on-month. Gasoline prices rose by 3.8% on average, while automotive diesel prices increased by 3.5%. Cold weather in the North American continent, the UK and Europe pushed heating oil prices up by 4.0%. The monthly price change varied across countries (from +6.0% and +5.3% in France and the UK, respectively, to +3.8% in Spain). Heating oil prices were 26.3% above levels of a year ago. By contrast, January gasoline prices rose by 67.1% year-on-year. Consumers in January 2010 paid $2.72/gallon ($0.72/litre) in the US, ¥126.0/litre ($1.38/litre) in Japan and £1.09/litre ($1.76/litre) in the UK. In Europe, the average gasoline price at petrol stations ranged between €1.10/litre ($1.57/litre) in Spain and €1.35/litre ($1.93/litre) in Germany.

Freight

January saw some impressive spikes in freight rates, especially for large crude tankers, as weather related delays curbed vessel availability and sailings out of major crude export regions increased. Towards the end of the month, rates generally fell, as demand was lower and decreasing floating storage added available tonnage.



VLCC Mideast Gulf - Japan crude freight rates rose sharply over the first three weeks of the month to highs of $20/mt, driven by increased sailings out of the Mideast Gulf, both eastwards and westwards, coupled with fleet tightness due to weather related delays and Chinese port congestion, conditions which had softened by the end of the month. Freight assessments for this route from 1 February will reflect double hull instead of single hull vessel rates. Suezmax West Africa - US Atlantic Coast rates skyrocketed to $27/mt in mid-January, influenced by VLCC tightness and high crude exports from West Africa to the USA. However, lower volumes in February, and an influx of available tonnage made the spike short. Aframax North Sea rates fell in early January on low demand, but briefly spiked at $9/mt later in the month on ice-class vessel requirements in the Baltic Sea.

On the product side, Aframax (75 kt) Mideast Gulf - Japan rates fell from late-December highs of $29/mt, but recovered partially to a level of $27-28/mt towards the end of January. Refinery shut-ins in Indonesia and Saudi Arabia, a busy naphtha trade and Iranian gasoline hoarding ahead of US sanctions increased demand, while the supply side balanced with an estimated 10 vessels of this category freed up from floating storage during January. Rates for 25kt UK Continent - US Atlantic Coast spiked in early January to $26/mt, the highest level since October 2008, as cold weather gave a brief impetus to US gasoil demand. However, the spike proved short and rates fell throughout the remainder of January, with some support provided by increased gasoline sailings to Western Africa. Handymax Caribbean- US Atlantic coast rates poised on the higher plateau around $12/mt established in December, supported by delays from fog and rough seas and a US Gulf oil spill. Rates for Handymax (30 kt) South East Asia - Japan fell throughout the month from $17/mt to $12/mt in early February, at five-year lows.

Short-term floating storage of products fell by 10 mb to 86 mb over January, mainly in North West Europe and the Mediterranean region, with a large reduction in Suezmax and large product tankers. Crude floating storage was flat in January, but a fall in floating storage of both crude and products was observed in early February. Some single-hull VLCCs were deployed from floating storage, but will reportedly not re-enter the trade. A faster speed of demolition has been observed lately, with 2010 being the last official year of the single-hull phase-out mandated by the International Maritime Organisation (IMO).

Refining

Summary

  • Despite some signs of improvement for the refining industry, its short-term outlook remains fundamentally bearish. Refining margins in the main regions improved across the board for a second month in a row, OECD total product stocks appear now to be on a clear downward trend and the year-on-year change in oil demand stayed positive for main consumers. However, new distillation capacity additions continued while demand plunged in 2008 and 2009, thus resulting in a surplus of capacity and a sharp fall in utilisation rates. Global surplus capacity by 4Q10 could reach 3.9% of installed capacity in baseline 1Q08, assuming 84% normal utilisation. A similar level is expected to linger throughout 2011, suggesting further capacity rationalisation will be needed to bring operating rates back to more normal levels and restore profitability to the industry.
  • The global 1Q10 crude throughput forecast is largely unchanged at 72.6 mb/d, 27 kb/d lower than in last month's report. However, the OECD estimate is seen 0.3 mb/d higher at 35.4 mb/d, while the non-OECD estimate is seen 0.3 mb/d lower at 37.3 mb/d. Higher-than-expected crude runs in Canada, Mexico and OECD Pacific underpin this shift. However, higher maintenance activity more than outweighs a higher projection for Chinese crude runs for the non-OECD regions. The global 1Q10 estimate is 1.0 mb/d higher year-on-year, but is still 1.35 mb/d below 1Q08 throughput levels.
  • Global 4Q09 crude throughput stands at 72.3 mb/d, unchanged from last month's estimate. A marginal decrease in non-OECD throughput levels is compensated by a slightly higher-than-expected reading for the OECD. Lower October and November throughputs offset a 0.3 mb/d higher-than-expected December preliminary level of 73.2 mb/d.


  • November OECD refinery yields increased for naphtha, jet fuel/kerosene and gasoil/diesel at the expense of fuel oil and other products, while yields for gasoline remained unchanged. OECD naphtha yields rose for the fifth consecutive month to 4.7%, consolidating their position in the five-year range. Gasoline yields remained flat at 35.0%, considerably above the five-year range, with refiners in North America continuing to maximise their gasoline yields in order to compensate lower throughputs. Gasoil/diesel yields increased to 29.5%, in line with the five-year average pattern, with European yields trending towards the top of the five-year range, which only partially compensated low throughput levels. OECD fuel oil yields reversed October's rise with a fall of 0.5 percentage points, trending well below the five-year range, reflecting in part still-suppressed heavy/sour crude availability.

Global Refinery Overview



It seems that the short-term refining outlook is improving. Refining margins in the main regions rose across the board for a second month in a row. OECD total product stocks for now appear to be on a clear downward trend, helped by cold weather at the beginning of the year, and the year-on-year change in oil demand stayed positive.

However, the outlook for 2010-2011 remains bearish. Despite the latest GDP growth projections reverting close to pre-crisis levels, the refining industry is far from regaining lost ground, as fundamentals show. In fact, the industry is going through a restructuring and consolidation process, which will take several months before any return to business-as-usual.

During 2008 and 2009, our data show that refiners increased crude distillation capacity by 2.1 mb/d, while oil demand plunged by 1.6 mb/d in the same time period, thus resulting in a surplus of capacity and sharp falls in utilisation rates. Taking 1Q08 as a reference point, it is interesting to compare the cumulative growth of both demand and crude distillation capacity. According to our projections, crude distillation capacity will rise by 3.2 mb/d by 4Q10, whereas demand will fall short 0.2 mb/d from an early-2008 level of 87.4 mb/d. This could create an excess of crude distillation capacity of 3.4 mb/d, equivalent to 3.9% of existing global capacity in 1Q08, when global refinery utilisation rates were slightly above the four-year average of 84%. Looking further ahead through 4Q11, this situation remains essentially the same as crude distillation capacity grows at least as fast as demand. As highlighted in previous reports, new refineries in non-OECD countries will be better positioned to meet local demand growth, making further capacity closures more likely in OECD countries.

Global Refinery Throughput

1Q10 global refinery throughput is expected to average 72.6 mb/d, unchanged from last month's report. However, the OECD projection is seen higher by 0.3 mb/d at 35.4 mb/d, while the non-OECD is projected at 37.3 mb/d, 0.3 mb/d below last month's report. Underpinning this shift are improving refining margins and higher-than-expected runs in Canada, Mexico, Japan, Korea and Australia. In the non-OECD regions, higher maintenance activity more than outweighs a higher projection for Chinese crude runs. The global 1Q10 estimate is 1.0 mb/d higher year-on-year, but represents a decrease of 1.35 mb/d compared with 1Q08 throughput levels.

As in last month's report, we are keeping our 4Q09 global refinery throughput estimate of 72.3 mb/d unchanged. This time, higher-than-expected crude runs in Australia and Korea compensated for marginal decreases in the Middle East, FSU and non-OECD Europe. Lower October and November throughputs offset December preliminary data, which were 0.3 mb/d higher than expected, at 73.2 mb/d.

OECD Refinery Throughput

OECD crude throughput estimates for 4Q09 are revised up by 52 kb/d to 35.3 mb/d, representing a decrease of 1.1 mb/d on a quarterly basis and a contraction of 2.2 mb/d on a yearly basis. Lower October and November readings partially offset December preliminary data, which were 0.3 mb/d higher than projected and 0.6 mb/d higher than the November data, but 2.0 mb/d lower than in December 2008. On a quarterly basis, only the Pacific posted higher runs, supported by an increase in export activity and cold weather at the end of the year.



November OECD refinery utilisation rates averaged 77.6%, 0.2 percentage points (pp) above the October reading of 77.4%, which is the lowest point in our data going back to 1995. December preliminary data point to a utilisation rate of 78.9%, 1.4 pp above the November level, but 4.6 pp lower on a yearly basis. Refiners in the Pacific increased utilisation rates by 3.5 pp to 81.1%, with gasoline exports reaching a six-year high in November at 181 kb/d.  European utilisation rates increased by 2 pp month-on-month in December to 77.2%, with France and Italy reporting the lowest levels, around 70%, followed by Germany, UK and Spain at around 79% and the Netherlands at 85.4%. In North America, utilisation rates stayed at 79.4%, with Mexican and Canadian levels around 85% and the US slightly above 78%.

4Q09 OECD North America crude throughput remained at 16.9 mb/d, representing a fall of 0.7 mb/d and 0.6 mb/d on a quarterly and annual basis, respectively. Preliminary December crude throughput data turned out to be higher than expected (0.1 mb/d at 16.9 mb/d), with Mexico accounting for most of the increase.  Mexican utilisation rates reached 86%, representing an increase above 3 pp on a yearly basis, reflecting higher exports. Weekly US data for January point to utilisation rates some 4.7 pp below last year's level of 83.8%, as demand remains constrained.



4Q09 OECD European crude runs matched our forecast, at 12.0 mb/d, 0.4 mb/d lower quarter-on-quarter and 1.2 mb/d lower year-on-year. December preliminary data turned out to be 0.1 mb/d higher than expected at 12.2 mb/d, outweighing a lower reading for November. The 1Q10 estimate of 12.1 mb/d could see some upside potential in March, as latest third-party estimates point to lower maintenance activity, although for now we estimate that weak margins will keep throughput levels constrained overall. In France, Total's potential closure of its 140 kb/d Flanders refinery in Dunkirk is facing the resistance of unions, which have given the company an ultimatum to reopen the refinery by 15 February, threatening otherwise to take control of the site and call new strikes at other Total refining centres in France. Total has put off until June a decision on whether to close the refinery, which could cost over 600 jobs, and has offered to create a technical support centre and a refining training centre at the site, which stopped operations in September last year due to low refining margins.



4Q09 OECD Pacific crude runs are revised up by 0.1 mb/d at 6.4 mb/d, only 12 kb/d higher on a quarterly basis and 0.4 mb/d lower year-on-year. December preliminary data were 0.1 mb/d higher than expected with exports of gasoline, naphtha and other products supporting the higher level. Given that regional crude runs have been outperforming our projections and weekly Japanese runs outperformed last month's projection, we have increased the 1Q10 forecast by 0.2 mb/d.

Non-OECD Refinery Throughput

Non-OECD crude throughput estimates for 4Q09 have been revised down by 0.1 mb/d to 37.0 mb/d. Updates to October and November data from the Joint Oil Data Initiative (JODI) were 0.1 mb/d lower than reported in last's month report, while December data were in line with our projections. The new 4Q09 estimate represents a 0.3 mb/d increase quarter-on-quarter and a 1.7 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 December crude runs reached a new record high of 8.15 mb/d, 30 kb/d higher than November's level and 0.2 mb/d above our estimate. Crude prices stayed below $80/bbl, incentivising refiners to maximise runs.  The December throughput level represents a year-on-year increase of 27%, equivalent to 1.7 mb/d. We are increasing the 1Q10 projection by 0.1 mb/d to 8.2 mb/d given that demand is growing more strongly than expected.  According to news reports, Sinopec's newly expanded Tianjin refinery is likely to become a regular exporter of gasoline, diesel and kerosene in 2010.  The refinery expansion includes a new 200 kb/d crude unit, which will bring total crude distillation capacity to 250 kb/d once an existing 50 kb/d crude unit is deactivated.



Russian crude runs averaged 4.8 mb/d in December, 0.1 mb/d below our projection. 4Q09 FSU crude throughput is forecast at 6.1 mb/d, around 0.1 mb/d higher than estimated last month. We have lowered the 1Q10 FSU estimate based on expansion work at Lukoil's Odessa refinery, which is scheduled to take until mid-March, and an estimation of lower crude runs in Belarus' 323 kb/d Mozyr and 170 kb/d Novopolotsk refineries as a result of the crude export duty dispute between Russia and Belarus.  The dispute was resolved in the last week of January. Russia agreed to supply around 125 kb/d of duty-free oil to Belarus, on the basis of the country's domestic consumption, but Belarus must pay full exports duties on additional Russian crude it receives, which risks lowering throughput levels.

December Indian throughputs at 3.7 mb/d were 0.1 mb/d higher than projected but 0.1 mb/d lower month-on-month. The 4Q09 Other Asia throughput estimate remains unchanged at 8.6 mb/d, as well as our 1Q10 projection at 8.8 mb/d. Indian refiners are confronted with the implementation of fuel Euro IV standards in 13 major cities and Euro-III standards for the rest of the country from April. Refiners are struggling to meet the deadline and are pushing to delay the launch of the new standards, facing the possibility of having to import around 100 kb/d of fuel from April and perhaps until October.

OECD Refinery Yields

November refinery yields increased for naphtha, jet fuel/kerosene and gasoil at the expense of fuel oil and other products, while yields for gasoline remained unchanged. OECD naphtha yields rose for the fifth consecutive month, reaching 4.7%, consolidating their position in the five-year range. The increase was driven by an unseasonal rise in North America, which offset decreases in OECD Europe and the Pacific. The increase in North America was on the back of stronger exports.



OECD gasoline yields remained flat at 35.0%, well above the five-year range and 1.5 pp higher than the previous year. In OECD North America, refiners continued to maximise their gasoline yields. This was evidenced by year-on-year growth of 2 pp to 48.0%, well above the five-year range, whilst refinery gross output remained aligned to the five-year average at 10.1 mb/d. In the OECD Pacific, despite a sharp monthly fall of 1.2 pp to 22.5%, yields have trended well above last year's levels. In OECD Europe, yields increased to 22.1%, but remained subdued at the low end of the five-year average.



Gasoil/Diesel yields increased by 0.2 pp to 29.5%, in line with the five-year average pattern. This trend was driven by seasonal gains in North America and Europe, which offset a decrease in the Pacific. European yields held towards the top of the five-year range at 37.8%, which only partially compensated low throughput levels, as gross output remained below the five-year range. In contrast, yields in North America and the Pacific held towards the bottom of the five-year range at 24.5% and 27.5%, respectively.

OECD fuel oil yields were weaker in November, reversing October's rise with a fall of 0.5 pp, with consequently yields trending well below the five-year range, and below the previous year.  Month-on-month losses were reported across all OECD regions with particular weakness in Europe, where yields fell by 0.7 pp to 10.3%, reflecting perhaps diminishing heavy sour crude sales into the Atlantic Basin. In the Pacific region, yields declined by 0.4 pp to 10.6%.  Only in North America, where upgrading throughputs remain subdued, fuel oil yields hold within the five-year range at 5.4%, above last year's value of 5.1%.