Oil Market Report: 12 March 2010

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  • Benchmark crude oil futures were down by $2/bbl month-on-month in February, but rebounded by almost $10/bbl from early-February lows. WTI and Brent were recently trading at $82/bbl and $80/bbl, respectively, on a perceived heightening of geopolitical tensions affecting some producing countries, but market sentiment was tempered by ample physical oil supplies.
  • Global oil demand has been revised up by 70 kb/d for both 2009 and 2010 on higher-than-expected non-OECD data, which largely offset persistently weak OECD readings. Demand is now estimated at 85.0 mb/d in 2009 (-1.4% or -1.2 mb/d year-on-year), and is expected to rise to 86.6 mb/d in 2010 (+1.8% or +1.6 mb/d versus 2009).
  • Global oil supply rose by 0.9 mb/d to 86.6 mb/d in February, with OPEC crude posting its first yearly growth since October 2008. Non-OPEC output for 2009 is revised by +0.1 mb/d to 51.5 mb/d, implying annual growth of 750 kb/d, the strongest since 2004. A higher Canadian baseline boosts 2010 supply by 0.2 mb/d to 51.8 mb/d. OPEC NGLs are set to rise by 0.8 mb/d to 5.5 mb/d in 2010.
  • OPEC crude production hit a 14-month high of 29.2 mb/d in February, with Iraq accounting for half of the 200 kb/d increase. Market expectations envisage OPEC ministers maintaining current production targets at their 17 March meeting if prices remain near $80/bbl. The call on OPEC crude and stock change is revised down to 29.6 mb/d on average in 2H10 due to higher non-OPEC expectations.
  • Global refinery throughputs are revised down by 140 kb/d to 72.5 mb/d for 1Q10, nonetheless 910 kb/d higher than a year earlier. Newly added refinery capacity pushes up expected Chinese and Other Asian runs by a combined 2.1 mb/d year-on-year in 1Q10, but OECD throughputs remain constrained.
  • OECD industry stocks increased by 34.4 mb to 2 703 mb in January, 0.1% below 2009's level, with higher crude, gasoline and distillates. End-January forward demand cover rose to 59.2 days, 0.1 days lower than in the previous year. Preliminary data point to a February OECD stockdraw of 28.6 mb and a continued decline in floating storage.

The price is right?

A recent workshop on oil market volatility held by the IEA and Japan's Institute of Energy Economics (IEEJ) in Tokyo heard that, amid major data gaps for physical fundamentals and financial market participation, prices are one of the few timely and accurate data points available.  There were calls for policy makers to avoid ultimately futile attempts to identify and engineer a "fair price", even if $60-80/bbl may currently represent a kind of temporary consensus. Data lags mean a definitive fundamentals picture takes months to emerge, only then clarifying erstwhile 'inexplicable' price moves, which at the time are often blamed on the shady hand of speculation. Commodity price volatility is inevitable, and will likely defy attempts to eradicate it. Price shifts, if passed on to market players, can help re-establish equilibrium.

A long-standing polarity in debate - "speculation" versus "fundamentals" - persists, although this oversimplifies a more nuanced argument. In fact, views form a spectrum, with avid "fundamentalists" agreeing that futures and derivatives can influence prices short term, and hard-core "speculationists" admitting that current supply/demand and future expectations underpin the pricing complex.  All agree that deeper, broader, more timely data are required on physical and paper markets if we are to better understand price formation. Extending financial market oversight to prevent manipulation is welcome if it continues to facilitate liquidity and the hedging of risk. Clearer internationally agreed policy on access, end-user prices and environmental and efficiency targets would prompt rational investment decisions by producers and consumers. Forecasters need to clearly acknowledge outlook uncertainties, and highlight alternative scenarios. The inevitability of ever-tightening markets may not be set in stone.

The theme of future expectations permeated discussions in Tokyo.  Recent weeks have seen changing expectations also begin to shift price structure. Market contango (forward prices above prompt) has narrowed.  Questions abound on whether tighter prompt markets or less alarmist views on the future underpin this shift.  The answer is likely a bit of both.  As we discuss in this month's report, tighter Canadian crude supply into the US midcontinent helps explain stronger prompt WTI prices. Floating storage is coming down, and there are fledgling signs of resurgent industrial activity, which could even put a floor under moribund OECD oil demand.  Petrochemical sector re-stocking may translate into higher diesel demand as goods move to domestic and export markets.

Ever-present geopolitical risks also moved centre-stage in recent weeks, helping lift the front end of the curve, amid concerns on Iran, Nigeria, Iraq and the Malacca Straits.  But perceptions may be subtly changing for the medium and longer term. Despite many investment barriers, a shift in expectations on supply may be emerging. If a more open investment policy in Iraq yields real capacity gains (a very big "if"), producers like Iran and Venezuela may have to relax investment terms if they are to retain clout within the ranks of OPEC. And while traditional non-OPEC supplies are maturing, new, more remote or "non-conventional" replacements have come to the fore. Time will tell if these can offset mature field decline.

Persistent contango has itself been cited as evidence of the distortions caused by speculative players in the market. In reality, contango is the mechanism that allows surplus oil to be absorbed when demand is weak. It allows firms that store oil for forward delivery to recoup the cost and risk of storage. Whether the market reverts to a more habitual state of backwardation remains to be seen.  But the "distortion" of contango and higher stocks has provided some price stability amid unusually frigid northern hemisphere weather this winter. Well functioning, liquid forward markets provide the framework for dealing with inevitable periodic imbalances in the short term.  Through the medium of price, they may also ultimately be better at sending optimal investment signals to producers and consumers than any managed price regime - 'the price is right' indeed.



  • Global oil demand has been revised up by 70 kb/d for both 2009 and 2010 on higher-than-expected non-OECD data, which largely offset persistently weak OECD readings. Oil demand is now estimated at 85.0 mb/d in 2009 (-1.4% or -1.2 mb/d year-on-year), and is expected to rise to 86.6 mb/d in 2010 (+1.8% or +1.6 mb/d versus 2009). The latest data confirm that global oil demand resumed growth on a yearly basis in 4Q09, after five consecutive quarters of decline. Growth has been led by LPG and naphtha on the back of restocking in the petrochemical sector. Assuming that the recovery picks up over the coming quarters, transportation fuels (particularly gasoline and diesel) are expected to take the baton as freight activity increases, while growth in petrochemical feedstock demand should ebb to a more normal pace. In terms of regions, this year's global oil demand growth will be driven entirely by non-OECD countries, with non-OECD Asia alone representing over half of total growth.
  • Estimated OECD oil demand remains largely unchanged for 2009, but the forecast for 2010 is adjusted down by 120 kb/d given very weak readings in January, most notably in Europe. Although the impact of winter weather upon OECD demand is diminishing as a result of ongoing structural changes, notably interfuel substitution in favour of natural gas, the severe winter weather that prevailed in most of the OECD during January helps explain the continued weakness in transportation fuels, as heavy snow disrupted road and air travel. By contrast, strong naphtha deliveries provide some further evidence of a nascent petrochemical-led economic recovery. Nonetheless, the continued decline of heating and residual fuel oils will more than offset growth in transportation fuels and other product categories. Thus, OECD oil demand, estimated at 45.5 mb/d in 2009 (-4.4% or -2.1 mb/d year-on-year), is set to decline by 0.3% in 2010, or -0.1 mb/d.

  • Projected non-OECD oil demand has been revised up for both 2009 and 2010 as demand readings from Asia, and to a lesser extent the FSU, continue to exceed expectations. Total oil demand is now estimated at 39.5 mb/d in 2009 (+2.2% or +0.8 mb/d year-on-year), 70 kb/d higher than in our previous assessment. It is expected to increase to 41.2 mb/d in 2010 (+4.3% or +1.7 mb/d versus 2009), 190 kb/d higher than previously anticipated. The revisions were almost entirely concentrated in China, where apparent demand surged by an astonishing 28.0% year-on-year in January according to preliminary estimates, although these figures, which assumed that refinery runs in January were unchanged versus December, may be partly distorted by product stocking. Moreover, Chinese officials have made it clear that the government will continue to foster strong economic growth as long as inflation remains moderate, thus raising the possibility of potential upside sensitivity for the country's oil demand outlook. China is currently expected to account for almost a third of global oil demand growth in 2010.

Global Overview

Latest data confirm our earlier view that, after five consecutive quarters of decline, global oil demand began growing again on a yearly basis in 4Q09. Assuming that the world's economic recovery is sustained (although many headwinds remain, as noted in last month's report), demand growth should be robust over the next four quarters. Global oil demand is expected to rise by 1.6 mb/d or +1.8% year-on-year in 2010, compared with a contraction of 1.2 mb/d (-1.4%) in 2009.

More interestingly, perhaps, is the composition of growth in terms of geographical areas. The OECD has not only borne the brunt of the demand slump, but will also see no net recovery at all - demand is currently expected to register another, albeit small, contraction in 2010 (-0.3%). The continued, structural decline of heating oil and residual fuel oil will more than offset moderate growth in transportation fuels and other product categories. Thus, as highlighted last month, global growth will come entirely from non-OECD countries (+4.3%), where all product categories are poised to post strong growth, notably transportation fuels and petrochemicals feedstocks. Asia alone will represent over half of global oil demand growth, with China accounting for almost two-thirds of that region's rise.

Equally salient is the evolution of growth among oil products. Indeed, 4Q09 demand (+0.7 mb/d year-on-year) rose essentially on the back of LPG (+0.7 mb/d) and naphtha (+0.6 mb/d), with other product categories either flat or declining. The strength of LPG and naphtha is largely due to restocking in the petrochemical supply chain fostered by the gradual economic recovery and rising industrial production in key countries. As the recovery picks up over the next quarters, transportation fuels (particularly gasoline and diesel, but less so jet fuel) are expected to play a more prominent role on the back of rising freight activity and support growth throughout 2010, while growth in petrochemical feedstock demand should ebb to a more normal pace.


Preliminary data indicate that OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 3.8% year-on-year in January. In OECD Europe, oil product demand shrank by an astonishing 8.0% year-on-year, dragged down by heating oil and residual fuel oil, which registered sharp losses despite cold temperatures. In OECD North America (which includes US Territories), demand declined by 2.3% as the rebound in light products (LPG, naphtha, gasoline and jet fuel/kerosene) observed in the previous month petered out. In OECD Pacific, demand fell by only 0.9%, as strong growth in naphtha tempered losses in all other product categories.

Revisions to December preliminary data were negligible (+4 kb/d), with positive changes in North America and the Pacific offsetting negative adjustments in Europe. December demand fell by 1.6% year-on-year, identical to last month's estimate. As such, on a yearly basis, estimated 2009 OECD oil demand is unchanged at 45.5 mb/d (-4.4% or -2.1 mb/d versus 2008). By contrast, the 2010 forecast is revised down by 120 kb/d, largely on the back of expectations of lower 1Q10 heating oil demand in Europe and continued North American weakness, notably in middle distillates. OECD demand is now seen contracting by 0.3% year-on-year in 2010 or -0.1 mb/d - the fifth consecutive yearly decline in a row.

North America

Preliminary data show oil product demand in North America (including US territories) falling by 2.3% year-on-year in January, reversing December's +1.2% growth. Economic and oil demand indicators remain mixed, with increasing signs of industrial activity weighed down by still falling oil consumption. The US featured the steepest oil demand decline, with January preliminary data showing a 3.1% year-on-year fall. Although January temperatures were milder than in the previous year (but much colder than the 10-year average), heavy snow disrupted transportation, underpinning the weaker demand picture. By contrast, Canada's estimated consumption was up 1.9% year-on-year and Mexico's preliminary demand increased by 0.7% versus the previous year. Yet, for both Canada and Mexico, growth was weaker than in December as transport fuel growth rates faltered. However, growth in some product categories, notably Canadian diesel and regional petrochemical feedstocks, has seemingly coincided with recent stronger economic indicators. Still, the degree to which growth will re-emerge in other areas of oil demand remains questionable.

Revisions to December preliminary data, at +340 kb/d, stemmed from an upward revision in the US (+285 kb/d) and Canada (+55 kb/d). As such, North American demand grew 1.2% versus December 2008, revised up from a 0.3% decline. The US change was driven largely by LPG/ethane (+420 kb/d) and heating oil (+340 kb/d), partially offset by jet/kerosene (-105 kb/d) and diesel (-55 kb/d). With a full year of data submissions, North American oil demand is estimated at 23.3 mb/d for 2009 (-3.6% or -0.9 mb/d versus 2008 and +25 kb/d compared with our last report). In 2010, demand is seen rising to 23.4 mb/d (+0.3% or +70 kb/d year-on-year and -10 kb/d versus our last report), with increases in petrochemical feedstocks and a modest transport fuel rise outweighing structural declines in heating oil and residual fuel oil.

Adjusted preliminary weekly data for the continental United States indicate that inland deliveries - a proxy of oil product demand - grew by 1.1% year-on-year in February, following a fall of 3.2% in January and a rise of 0.3% in December. Mixed trends continued to pepper the February data, however. LPG/ethane and heating oil grew by 21.5% and 12.2% year-on-year, respectively, led by an apparent rebound in petrochemical activity and colder weather than a year ago. Jet/kerosene and diesel, by contrast, posted year-on-year declines of 4.4% and 7.4%, respectively. Of course, with a split between diesel and heating oil unavailable in US preliminary data, estimating the breakdown of middle distillate demand remains problematic, particularly in winter months. Still, it appears that US transport fuels have all continued to lag. Gasoline demand, while little changed from the previous report, continued to trend negatively, down 0.4% year-on-year in February.

Recent US economic indicators have continued to improve. Real year-on-year 4Q09 GDP growth was revised up to 5.9% from 5.7%, while industrial production in January rose by 0.9% to its highest level since December 2008. Moreover, January loaded-container trade at the Long Beach and Los Angeles ports increased by 8.1% over the previous year on the back of outbound shipments to Asia, although imports (typically consumer goods) fell slightly. Similarly, data through November point to positive year-on-year growth in air transport, though freight has enjoyed much more of a resurgence than passenger travel. All the while, the US economy has continued to shed jobs.

All of this points to an economic recovery led so far by restocking and rebounding industrial activity, rather than by re-emerging consumer demand. Evidence of rebounding middle distillate demand tied to growth has so far been scant. One reason may stem from ongoing efficiency improvements. For example, even as revenue miles have climbed for US airlines, increasing load factors and restrictions on the number of luggage pieces on board, aimed at reducing overall weight, likely explain why jet fuel/kerosene demand is still shrinking. While demand for middle distillates should rise in 2H10, the persistent weakness in both jet fuel/kerosene and diesel suggests that growth for both fuels is likely to be flat for the entire year. Flailing diesel demand may also trace its roots to substitution from coal to gas in the power sector. While the latest US rail freight traffic shows continued year-on-year declines, this largely stems from lower shipments of coal. Industrially related freight traffic, by contrast, has recently showed strong year-on-year gains. As such, our total oil product demand forecast for 2010 has been revised down slightly by 15 kb/d to 18.8 mb/d, unchanged from 2009.


Oil product demand in Europe plunged by 8.0% year-on-year in January, according to preliminary inland delivery data, with all product categories bar naphtha posting losses. As in the last few months, the fall was mostly driven by weak deliveries of heating oil (-26.5%) and residual fuel oil (-17.2%), despite cold temperatures (HDDs were sharply higher than the 10-year average but only slightly above January 2009). In part this was due to earlier heating oil restocking prompted by lower prices in 1H09, notably in Germany, as well as stable natural gas supplies from Russia (disruptions in the past two years boosted heating oil and residual fuel oil in several European countries). Overall, though, this trend lends support to our hypothesis of a gradually diminishing impact of winter conditions upon OECD demand as a result of ongoing structural changes, particularly interfuel substitution in favour of currently cheaper natural gas.

Nonetheless, the severe winter conditions that prevailed in most of the continent probably help explain part of the continued but arguably disproportionate weakness in transportation fuels, as blizzards and snow storms disrupted road and air travel. By contrast, the only bright spot was to be found in naphtha deliveries, which surged by +24.5% year-on-year in January, thus providing further evidence of a petrochemical-led, manufacturing-based, and for now export-oriented economic recovery. In absolute terms, naphtha demand is just a shade below pre-recession levels. However, it may still be premature to signal a well-established trend because preliminary naphtha data may still be revised down (as in December).

The revisions to December preliminary demand data were substantial (-500 kb/d), mostly because of weaker-than-expected distillate and - paradoxically - naphtha deliveries, which together accounted for roughly four-fifths of the total revisions. OECD Europe oil demand actually plunged by 7.1% during that month, much more than previously anticipated (-3.9% year-on-year). As such, Europe's 2009 oil product demand is now estimated at 14.5 mb/d (-5.4% or -0.8 mb/d versus 2008 and 40 kb/d less than in our previous report). Given the weakness of January 2010 readings, which weigh on the 1Q10 outlook, oil demand this year is expected to decline by 0.3%, some 150 kb/d steeper than previously forecast.

Preliminary data indicate that German oil product demand fell by 5.6% year-on-year in January, with weak deliveries of heating oil (-35.3%), residual fuel oil (-8.9%) and diesel (-4.4%) offsetting a dramatic increase in naphtha demand (+51.1%). Yet consumer heating oil stocks fell to 56% of capacity by end-January, well below the level recorded in January 2009 (60%). However, this is unlikely to boost heating oil demand in the short term:  prevailing high oil prices suggest that demand may probably follow a more traditional seasonal pattern, with the bulk of restocking occurring in 3Q10. The naphtha demand surge, meanwhile, was likely related to the continued rebound of export-oriented industrial production; naphtha demand has now recovered to its early-2008 levels.

Similar heating oil and residual fuel oil demand patterns were observed elsewhere. In France and Spain, year-on-year heating oil deliveries contracted by 38.2% and 22.0%, respectively, in January, while year-on-year residual fuel oil deliveries fell by 50.4% and 47.8%, respectively, in France and Italy. Meanwhile, naphtha demand surged by +29.3% in Italy, yet fell by 11.1% in France.

Although interfuel substitution is probably at play, the large drop in French fuel oil demand, if confirmed, is particularly noteworthy. Indeed, as a result of the gradual development of space and water heating since the mid-1980s, the country has tended to face ever higher electricity demand peaks in wintertime, typically met by hydrocarbon-based power plants (mostly burning fuel oil but also natural gas) or by power imports from neighbouring countries, as nuclear generation capacity only covers the base load. From this perspective, the low fuel oil readings for January amid frigid temperatures may suggest either much higher-than-expected natural gas penetration and/or a dramatic surge in expensive power imports, even though state-owned utility EDF is a major fuel oil buyer with significant storage capacity.


Oil product demand in the Pacific fell in January (-0.9% year-on-year), according to preliminary data, as the continued rebound in naphtha (+16.1%) and "other products" (+6.9%) deliveries failed to offset losses in most other categories. Jet fuel/kerosene (used for heating in both Japan and Korea) and residual fuel oil declined by 7.9% and 16.7%, respectively, despite colder temperatures. This is in part related to the increasing use of electric heaters, which in turn are powered by rising electricity supplies from nuclear reactors. The regional aggregate, however, obscures the fact that Japan continues to feature falling oil demand, by contrast to strong Korean growth.

December revisions were positive (+160 kb/d), on the back of stronger-than-expected Japanese deliveries of residual fuel oil and "other products", higher-than-expected diesel demand in Australia and buoyant gasoline demand in New Zealand. OECD Pacific oil demand actually grew by 0.7% during that month, instead of contracting by 1.1% year-on-year as suggested by preliminary data. Consequently, 2009 oil product demand is now estimated at 7.7 mb/d in 2009 (-4.8% or -0.4 mb/d versus 2008 and 10 kb/d more than in our previous report), while oil demand this year is seen averaging 7.5 mb/d (-1.9% or -150 kb/d versus 2009, some 40 kb/d more than previously forecast).

Preliminary data indicate that oil demand in Japan fell in January (-2.5% year-on-year), for the 20th consecutive month, with all product categories bar naphtha posting losses. The weakness in gasoline demand (-3.5%) was attributable to snowy and cold weather, which impinged upon recreational driving. However, burning fuels also continued to decline - with demand for jet fuel/kerosene, residual fuel oil and "other products" down by 10.0%, 25.6% and 18.8%, respectively - because of interfuel substitution in favour of cheaper natural gas and rising nuclear power generation as idled plants are progressively restarted (January's nuclear utilisation rate, at 69.9%, was almost three percentage points higher than in the same month of the previous year). By contrast, naphtha deliveries continued to recover, rising by +40.5% largely on the back of strong Chinese demand for plastics. Nonetheless, although naphtha's growth must be assessed relative to last year's plunge, in volumetric terms demand has reached a new record high, exceeding the previous December 2003 peak.

In Korea, oil demand rose in January (+1.9% year-on-year), for the fourth consecutive month. This strength results from the strong recovery of the country's economy, largely on the back of rising exports to China, but must also be compared with a low baseline. The pace of oil demand growth, however, was much slower than in the previous three months, as frigid weather conditions disrupted transportation in most metropolitan areas, including Seoul. Yet cold temperatures failed to significantly boost demand for heating kerosene, with utilities favouring cheaper imports of natural gas (LNG) and even coal.



Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) surged by an astonishing +28.0% year-on-year in January, with all product categories bar residual fuel oil posting gains. The increase in the demand for naphtha (+54.3%), gasoil (+28.0%) and "other products" (+89.7%) was particularly noteworthy, although other categories also registered respectable growth rates (gasoline and jet fuel/kerosene expanded by 10.6% and 39.8%, respectively). It should be noted, though, that these estimates assume that refinery runs in January were unchanged versus December as official refinery indicators were not available in time to be included in this report, given delays resulting from the Chinese New Year holidays. However, last-minute reports indicate that refinery runs in January were slightly lower, yet February runs reached record highs.

Moreover, another customary caveat is in order:  these figures may well be distorted by product stocking, for which partial data ceased to be published a few months ago (although, as discussed in this report's stocks section, the Xinhua news agency recently published stock data for January, based on a new methodology). Indeed, although net exports of gasoline, gasoil and jet fuel/kerosene have risen sharply on a yearly basis over the past few months, refinery runs have increased much faster given the guaranteed refining margin provided by the country's current price mechanism. Even allowing for strong growth in real (as opposed to apparent) demand, domestic oil product stocks have probably swollen as well (partly on hoarding, as some players currently expect an imminent increase to "guideline" prices of at least 10%). Revealingly, state-owned Sinopec has reportedly offered a subsidy to its refineries since February, in order to increase oil products exports and curb relatively high inventories.

The new data have also entailed upward revisions to our 2009 estimate and 2010 outlook. Total oil product demand for 2009 is now estimated at 8.5 mb/d (+7.8% or +620 kb/d year-on-year and 10 kb/d more than in our last report). More significantly, the 2010 prognosis has been increased by 130 kb/d to 9.0 mb/d (+6.2% or +520 kb/d versus 2009), on the back of a large revision for 1Q10 (+510 kb/d) resulting mostly from the very strong January readings - which highlight continued upside sensitivity to the outlook. Recent government statements that economic growth will continue to be fostered lend credence to the view that a sharp slowdown from China is unlikely. As such, China is poised to account for almost a third of global oil demand growth in 2010.

A Forthcoming Price Reform?

A year after the implementation of China's oil product price mechanism, there is talk of further reform in order to address several distortions that have become evident over time. Prior to the introduction of the current scheme, shortages tended to emerge periodically, since domestic prices, capped well below international prices, discouraged supply to the domestic market and encouraged much more profitable exports. Since the adoption of the new mechanism in early 2009, Chinese refiners have enjoyed a guaranteed margin (unofficially estimated at 5%), which provides an incentive to boost runs and export product surpluses, if necessary through subsidies. This is causing unease among overseas refiners, which complain about dumping practices.

Moreover, the price mechanism has encouraged speculative stockpiling, as domestic prices are to be adjusted if the rolling average price of a basket of international crudes (including Brent, Dubai and Cinta) fluctuates by more than 4% for more than 22 consecutive working days. Although the government has some discretionary leeway (it also takes into consideration other social and economic factors), it has tended to mandate changes that have largely tracked the volatility of international oil prices, albeit with a lag. Last year, indeed, there were five hikes and three cuts on domestic gasoline and gasoil prices; another upward adjustment (that had been expected in early January but never occurred) is believed to be imminent.

The National Development and Reform Commission (NDRC) is reportedly seeking ways to fine tune the price mechanism to render it "more transparent and scientific" and prevent "speculative activities". Reports suggest that the trigger is likely to be modified over the course of 2010. The 22-day adjustment cycle may be shortened and the 4%-adjustment range may also be dropped. The main purpose would be to render price changes unpredictable and thus discourage arbitrage by rendering hoarding more costly. In addition, domestic prices would track international oil price changes more closely. The flip side of this is that domestic prices could become more volatile, thus running against one of the original aims of the price mechanism.

Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - fell by 2.0% year-on-year in January, the first contraction in 14 months. This unusual fall derived from weak naphtha sales (-34.3%), as this product is displaced by rising domestic supplies of natural gas (naphtha demand fell by 2.3% year-on-year in 4Q09); a lower pace of growth in the sales of gasoline (+8.2%, versus +18.2% in December) and gasoil (+6.3% versus +12.8%); and falling sales of residual fuel oil (-15.5%) and "other products" (-2.5%). Part of the reason for weaker demand may have been exceptional fog that affected parts of India, reducing transportation, disrupting road building and curbing irrigation power demand.

In late February, the Indian government raised retail prices for gasoline and gasoil by almost 8% on average. This resulted from two measures included in the 2010-11 budget:  a Rs 1.0/litre excise tax on both fuels, coupled with an import duty on crude oil, gasoline/diesel and other refined products (5%, 7.5% and 10%, respectively). Yet it is unlikely that the price rise will affect sales much, as pent-up demand for transportation fuels is high and arguably more responsive to income than price. Indeed, the last price revision (+10% for gasoline and +6.5% for gasoil in July 2009) was implemented amid less buoyant economic conditions and had no appreciable effect on demand. Nonetheless, February gasoline demand may show added strength due to hoarding in anticipation of the price rise.

India's Finance Minister has argued that the price adjustment attempts to enhance the country's fiscal consolidation and is unrelated to the Parikh report released in early February, which calls for the complete elimination of gasoline and gasoil subsidies. However, the opposition has loudly criticised higher prices on inflationary grounds and this, together with inevitable delays caused by cross-ministry consultation, clouds both the implementation and timing of the Parikh report's recommendations.

India is not the only country having second thoughts about fully liberalising fuel prices. In early March, the Malaysian government cancelled plans to curb subsidies from 1 May. The goal had been to reduce this year's subsidy bill by about 15% to some $5.3 billion and, in doing so, to diminish the country's fiscal deficit, which reached 7.4% of GDP in 2009. Officially, the scheme - based on rationing cards - was deemed too complicated, as consumers would have to register to be eligible while retail stations would have to verify a purchaser's identity through thumbprint scanning, potentially causing congestion. However, the decision - which followed a delay of previous plans to hike electricity prices and real estate taxes - was more likely related to impending regional elections. Indeed, the last attempt to liberalise fuel prices in 2007 led to riots and to the ruling party's poor electoral performance in the following year.

In Iran, by contrast, attempts to tackle fuel subsidies appear to be slowly moving forward. In mid-January, the Guardian Council gave its approval to a bill, passed by the Majlis (parliament) last November, aimed at gradually slashing subsidies on oil products, electricity, water, food and medicines over a five-year period. The legislation is to be implemented by late March at the latest (the beginning of the Iranian fiscal year). However, the government has seemingly realised that, under current circumstances, the new law could lead to a surge in inflation (from 25% currently), further social discontent amid an already difficult economic situation and the risk of renewed violent unrest, as it has periodically happened since last year's contested presidential elections. This may explain the government's last-minute attempt to withdraw the bill before it was submitted to the Guardian Council - before being overruled by parliament. The government then opted to announce that motorists would be granted an extra 20-litre allowance - above the heavily subsidised 80-litre monthly quota - for the New Year holiday, which begins in late March.

Yet the imperative to rationalise fuel demand is arguably becoming pressing, given mounting international efforts to curb gasoline imports, which account for roughly one-third of Iranian gasoline demand. The US Congress and Senate have both recently passed legislation to punish companies or individuals involved in shipping gasoline or other refined products to Iran, and a consolidated bill may shortly be signed by President Obama.

Iran is already finding it increasingly difficult to source gasoline imports (120 kb/d on average in 2009), as several of the country's regular suppliers - notably Glencore, IPG, Trafigura and Vitol - have reportedly ceased altogether or curbed significantly their oil trading operations with Iran in the past few months (BP and Shell, two other major gasoline suppliers, stopped shipments in 2008). In addition, Iran is reportedly struggling to obtain credit to finance imports, as many international banks are also reducing their business with state-owned National Iranian Oil Co. (NIOC). The jury is out, though, on whether further sanctions will effectively succeed in halting gasoline imports completely - since Iran has reportedly still access to alternative sources, either directly (Total, Petronas and Litasco) or indirectly (from Chinese and Indian sources) - and whether an embargo will engender a domestic backlash against the regime or instead promote nationalist support. Current expectations of 4.6% Iranian demand growth in 2010 are based on modest economic rebound, but the forecast could evolve to the downside if subsidies are removed or sanctions are hardened.

Tough Luck:  Oil Market Reform in Nigeria

In Nigeria, the political vacuum and ensuing stalemate related to the poor health of President Umaru Yar'Adua since last November are not only fostering uncertainty in the upstream sector but are also delaying pressing reforms to the domestic oil market as well. The country faces two key downstream problems:  on the one hand, none of its four state-owned refineries is currently operating, obliging it to import all of its fuel requirements; on the other, retail prices for gasoline, which accounts for 55% of total oil product demand, are among the lowest in the world (about $0.43/litre), thus entailing a subsidy burden estimated at some $3-4 billion per year. This situation has fostered the emergence of a handful of powerful oil importers, which effectively control the country's fuel supplies, backed by trade unions that consider cheap prices as an irrevocable entitlement.

In early 2009, the government announced plans to deregulate Nigeria's refining and marketing sectors as part of a yet to be approved new Petroleum Industry Bill (PIB). This triggered two standoffs (in April/May and October/November) between importers/trade unions and the government, which ended when the latter backed down. During the first episode, shortages briefly emerged as imports were deliberately curbed; in the second, rumours of an impending price hike led to panic purchases and further shortages. According to the latest data, the second disruption was particularly severe, with gasoline demand plummeting by almost a third. More recently, the Nigeria Labour Congress, the trade union umbrella organisation, threatened once again industrial action if the 'unacceptable' deregulation programme were to be pursued. Yet this is unlikely to happen:  in mid-February Acting President Goodluck Jonathan instructed the House of Representatives to put the PIB on hold in order to "better assess" its consequences.

An earthquake in Chile, tightening sulphur specifications, drought-related power shortages and a pickup in agricultural activity are driving increased gasoil demand in Latin America. The earthquake that hit Chile on 27 February prompted the temporary closure of refining capacity and the importation of an additional 20 kb/d of gasoil in March (total gasoil demand in Chile accounts for roughly 46% of total oil product demand, estimated at 350 kb/d in 2009). However, Argentina is doubling natural gas exports to its neighbour, which should help meet power generation needs and temper the rise in gasoil demand. Meanwhile, both Chile and Colombia introduced lower sulphur specifications for on-road diesel earlier this year, boosting regional low sulphur diesel demand. Finally, drought-related power shortages in Venezuela have reportedly prompted widespread diesel generator use, while a seasonal increase in agriculture activity has spurred higher gasoil demand in Brazil and Argentina.



  • Global oil production rose by nearly 900 kb/d in February to 86.6 mb/d. For the first time since October 2008, OPEC crude output is showing year-on-year growth—to the tune of 1.1 mb/d—which, combined with increments of 650 kb/d from non-OPEC and 550 kb/d of OPEC NGLs, comprises a healthy 2.3 mb/d gain in global output versus a year ago.
  • Crude oil production by OPEC hit a 14-month high of 29.2 mb/d in February, with Iraq accounting for just over half of the monthly increase of 195 kb/d. OPEC NGLs are forecast to rise substantially from 4.7 mb/d in 2009 to 5.5 mb/d in 2010.
  • OPEC ministers will gather on 17 March to review the market and current output targets. However, with prices hovering around $80/bbl, the producer group is widely expected to maintain current production levels. The call on OPEC crude and stock change, although revised down from last month due to higher non-OPEC expectations, nonetheless averages 29.6 mb/d in the second half of the year, after a seasonal dip closer to 29 mb/d in 2Q10.
  • Non-OPEC output rose by 0.7 mb/d to 52.2 mb/d in February on higher output in the US, Canada, China, Brazil, the UK and Kazakhstan.  Baseline revisions to historical Canadian data raise 2009 production by 110 kb/d to 51.5 mb/d. Non-OPEC growth of 750 kb/d in 2009 was the strongest annual increment since 2004. In 2010, the Canadian adjustment, as well as slightly brighter prospects for the North Sea, Egypt, Russia, Thailand and Colombia, offset downward revisions to the Caspian, China, Indonesia and Argentina. Production in 2010 is now forecast to rise by 330 kb/d to 51.8 mb/d.

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

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

OPEC Crude Oil Supply

Crude oil supply from OPEC hit a 14-month high in February, with Iraq accounting for just over half of the monthly increase. Production averaged 29.2 mb/d in February, up by 195 kb/d compared with the previous month. Higher output by Iraq (+115 kb/d), Angola (+60 kb/d), Iran (+40 kb/d), Qatar (20 kb/d) plus 10 kb/d increases by Ecuador, Libya and Venezuela were partially offset by lower output by Saudi Arabia (40 kb/d), Nigeria (20 kb/d) and UAE (10 kb/d).

Output by OPEC-11, which excludes Iraq, was up by 80 kb/d to 26.7 mb/d in February, with the group producing about 1.86 mb/d above its 24.845 mb/d output target. Relative to targeted output cuts, OPEC's compliance rate slipped to just 56% in February compared with 58% the previous month.

OPEC ministers will gather on 17 March in Vienna to review the market and current output targets. However, with prices hovering around $78-81/bbl, the producer group is widely expected to maintain current production targets, which have been in place since January 2009.

Iraqi output was up by around 115 kb/d in February, to 2.54 mb/d. Total exports are estimated at 2.08 mb/d for February versus 1.93 mb/d in January—the highest level in two decades. Iraq has targeted an export rate of 2.15 mb/d for 2010. The increase in exports partly reflects state-owned SOMO's stepped-up practice of spiking surplus fuel oil into the Basrah and Kirkuk crude streams. The country's simple refineries are heavily weighted to the lower end of the barrel, with the result being insufficient light products and a surplus of heavy fuel oil. In the past, when fuel oil stocks were full, refinery operations had to be curtailed, but the country's growing demand for lighter products has meant that plants work full-out when possible. Fuel oil not burned at power plants is then injected into crude export flows, with price adjustments made for the varying crude quality. Spiked fuel oil volumes appear to vary month-to-month, but estimates range from around 60 kb/d to 100 kb/d. OMR calculates Iraqi crude supply as exports plus domestic use at refineries and power plants. For the past six months an estimated 100 kb/d of fuel oil spiked into crude exports has been subtracted from total supply to avoid double counting.

Crude oil exports from the southern Basrah terminals were up by 160 kb/d to 1.61 mb/d in February, compared with 1.45 mb/d in January. Northern exports of Kirkuk crude were off by a small 5 kb/d to 470 kb/d in February, including 10 kb/d sent to Jordan. Domestic crude demand for refinery use was down in February following an attack on the pipeline carrying crude from Iraq's northern fields to the 110 kb/d Daura refinery in southern Baghdad on 9 February. Repairs were still being completed in early March.

Plans put forward by the regional government to allow exports (which halted in October) to resume from the Kurdish region have been shelved for the time being and will probably only reach a resolution after a new national government is in place following the 7 March elections. Production from the Tawke and Taq Taq fields has been reduced to a combined 20 kb/d from an earlier 100 kb/d last summer due to the ongoing battle between Baghdad and the Kurdish Regional Government (KRG) over legal and payment issues. As an intermediate step towards resuming exports, the KRG had proposed last month that shipments via the Ceyhan pipeline be restarted but that the companies would only be paid for the cost of producing the crude, not the sale price collected by SOMO for the exports. Oil companies have been cool to the idea and Baghdad has not formally responded to the proposal.

Nigerian crude output was down by 20 kb/d in February following renewed attacks on the oil infrastructure at end-January. Shell was forced to shut in 150 kb/d of Forcados output on 31 January following militant attacks on three key oil flow stations and pipelines. Shell reported that sections of the trans-Escravos and trans-Forcados pipelines were still shut down at end-February. However, increases in both offshore and onshore production helped offset the loss of production.

Political turmoil in Nigeria continues to threaten the country's oil production outlook despite the return to the country of the ailing President Umaru Yar'Adua after a three-month absence. Acting President Goodluck Jonathan remains in the top post for now, but internal political machinations over the country's leadership continue to undermine the government's plans to push forward controversial new oil industry legislation and implement measures related to ceasefire accords with militants.

Indeed, in addition to renewed attacks by the Niger Delta's main militant group, MEND, a splinter group of rebels operating under the umbrella of the Joint Revolutionary Council (JRC) has emerged, launching two separate attacks on oil infrastructure. On 2 March the JRC attacked Shell's non-producing Kokori flow station in the Delta state. Shell confirmed an explosion had damaged the facility. On 3 March JRC announced it had bombed Agip's Tura manifold, but the company has yet to confirm the incident.

Iran's oil production inched higher in February, to 3.74 mb/d versus 3.70 mb/d in January. Iran increased the number of tankers holding crude off Kharg Island to seven in February versus three in January. Refiners and traders have curtailed their buying of Iranian crude this year, partly due to relatively high official price formulas and partly due to a tightening of credit by banks unwilling to underwrite purchases ahead of possibly looming sanctions. The US, UK, Germany and France, among others, are moving forward with proposals for a fourth round of United Nations sanctions against Iran given its intransigence over its nuclear programme. Although China is adamantly resisting UN moves to tighten sanctions, Russia appears to be moving in favour of tougher sanctions while several key countries are prepared to move unilaterally, targeting the country's energy industry, and this appears to already be having an impact on the country's oil production outlook. IOCs from Italy and Russia announced they were abandoning investment plans in the country ahead of looming sanctions:

  • Italy's ENI reported that it will not move forward with plans to develop the third phase of the Darkhovin field development until Iran's relations with the West improve. ENI was expected to boost output there from 100 kb/d to 260 kb/d in the last phase of its $550 million contract with state-owned National Iranian Oil Co.
  • Russia's Gazprom said it would abandon plans to take a stake in the Azadegan field.

Iran has warned that it will cut off oil exports to the West if more sanctions are imposed but may not follow through on the threat given its hard currency needs and reliance upon oil revenues. In addition, IEA member countries hold public stocks sufficient to cover a 4 mb/d loss of production for approximately a year, while other OPEC members also have an estimated 6 mb/d in spare capacity available to offset any shortfall from Iran. Any disruption to oil flows via the Straits of Hormuz would represent a different order of disruption, albeit this remains an unlikely scenario for now.

Crude oil production in Qatar rose by 20 kb/d in February, to 820 kb/d. A ramp up in offshore Al-Shaheen production is behind the higher levels. Planned increases from the field are slated to push Qatari crude output capacity to 1 mb/d this year.

UAE production was off by a slight 10 kb/d, to 2.28 mb/d, in February. State-owned ADNOC tightened contract allocations for Asian buyers in February for lighter crudes while providing more heavier Upper Zakum barrels. Output is expected to move slightly higher again in March following a renewed easing of contract allocations by ADNOC.


Qatar NGL production is on course to reach an estimated 1.0 mb/d in 2010 following the ramp up of two new projects, Rasgas 3, Trains 6 and 7, and Al-Khaleej 2. The Rasgas production is expected to add 100 kb/d of condensate and 45 kb/d of other NGLs. The Al-Khaleej 2 project is on track to hit its 2010 plateau of 40 kb/d of ethane and 32 kb/d of LPG. In addition, Qatargas Phase 2, with two trains that came into operation in 2009, will ramp up output of condensate to 100 kb/d and other NGLs to 14 kb/d. All told, Qatar is the major contributor to expected 2010 OPEC NGL growth, which, including non-conventionals, rises from 4.65 mb/d in 2009 to 5.46 mb/d in 2010.

Non-OPEC Overview

In February, total non-OPEC oil production rose by 0.7 mb/d to 52.2 mb/d, as output picked up in the US, Canada, China, Brazil, the UK and Kazakhstan. Production is now also 0.7 mb/d higher than in February 2009.  And with most readily available data for 2009 now in, it is evident that total year-on-year growth in 2009 - at 750 kb/d - was the strongest since 2004. This is not far from the level of growth implied by our original 2009 forecast, which stood at 640 kb/d when first published in July 2008, albeit we subsequently scaled back expectations amid reports of lower 2009 upstream spending. That said, it is worth noting that 2009 growth in non-OPEC countries was heavily influenced by supply outages that occurred in 2H2008, which effectively exaggerate the 2009 growth level. For this report, 2009 output was adjusted upward by 110 kb/d to 51.5 mb/d, almost wholly due to a baseline change to Canadian production on the basis of a revised data series running back to January 2007.

The Canadian revision is largely carried forward into 2010, while the outlook for the North Sea, Egypt, Russia, Thailand and Colombia has been upgraded, offsetting downward revisions to Azerbaijan, Kazakhstan, China, Indonesia and Argentina. In sum this leads to an upward adjustment of 205 kb/d to the 2010 forecast. Total non-OPEC oil production is now expected to reach 51.8 mb/d in 2010, up by a slightly more robust 0.3 mb/d from the 2009 level of 51.5 mb/d. Thus, following 2009's growth of 0.7 mb/d, which is roughly in line with the 15-year annual average, anticipated growth in 2010 comes in at around half that level.

2010 growth in non-OPEC oil production will be driven by global biofuels (+200 kb/d), Brazilian crude and total liquids output in China and Russia (each around +150 kb/d), as well as the Caspian, India, Canadian mined synthetic crude, Australia and Oman (each around +60 kb/d). Noteworthy is also the fact that non-conventional oil growth in 2010 (biofuels and Canadian syncrude from mining) delivers nearly all the net growth we expect from non-OPEC overall. Total conventional crude only grows minimally and non-OPEC NGLs as well as processing gains actually dip slightly. The sharpest net decline in 2010 is expected to take place in Norway, the UK and Mexico.

Throughout mid-2010, non-OPEC oil production is expected to dip from 52 mb/d in 1Q10 to 51.8 mb/d in 2Q10 with the onset of (the first round of) seasonal maintenance, especially in the North Sea, but also in Canada, and then to dip further to 51.4 mb/d in 3Q10, when Caspian, Newfoundland and Albertan maintenance work takes fields offline. In 4Q10, we see production picking up to 52.1 mb/d again, as new field start-ups increase output, offsetting assumed hurricane outages in the US Gulf of Mexico of around -210 kb/d and -240 kb/d respectively for third and fourth quarters, based on the five-year average shut-in levels.


North America

US - February Alaska actual, others estimated:  US total oil production in December was revised down by 175 kb/d to 8.3 mb/d on lower reported non-conventional oil, which, besides fuel ethanol (production of which came in slightly higher than expected), is largely oxygenates and other refinery additives. Total crude production was also weaker than expected. January and February saw some more minor adjustments, with total liquids output expected to dip to 8.1 mb/d on average, as NGL production in particular falls due to anticipated lower gas output. Following bumper growth of +550 kb/d in 2009, as Gulf of Mexico output saw sizeable new field start-ups and avoided any hurricane shut-ins, total US oil production is expected to dip by 50 kb/d to 8 mb/d in 2010, as decline in Alaska, California and other Lower-48 states offsets more modest growth in the GOM. The latter should see new output from the Cascade/Chinook, Droshky and Perdido field complexes, as well as incremental volumes from fields started up in 2009.

Canada - Newfoundland January actual, others December actual:  Besides the impact of historical baseline revisions (see below), recently incorporated data for November and December contribute to an upward revision of 220 kb/d on average for those two months, with oil production reaching around 3.3 mb/d at the end of the year. January and February 2010 estimates were also adjusted higher as ongoing problems at one of Suncor's bitumen upgraders, which is expected to curb production by around 100 kb/d until at least early April, partly offset the historical baseline revision. Total Canadian oil production is forecast to dip slightly from just above 3.2 mb/d in 2009 to just below 3.2 mb/d in 2010.

Canadian Production Data Revisions Boost Outlook

As indicated in last month's report, revised historical monthly oil production data have now been provided by Statistics Canada (with adjustments made from January 2007). This has been incorporated into our supply database, resulting in a shift from bitumen to mined synthetic crude production, and an upward revision to NGL supply.

By extension, this also affects the production figures we report as Albertan light, medium and heavy crude, as they are derived from the total Albertan liquids production figure. For 2007 and 2008, these changes result in relatively minor upward revisions of around 10-30 kb/d to total Canadian liquids output. However, for 2009, the inclusion of the new data results a net upward revision of 110 kb/d, which we have partly carried through the forecast.

Moreover, for other, unrelated reasons, Statistics Canada has revised Canadian NGL production figures up by 20 kb/d, 40 kb/d and 55 kb/d respectively for 2007, 2008 and 2009. Upward adjustments to propane, butane and pentanes-plus more than offset a slight downward revision to ethane, while condensate production numbers were virtually unchanged. As the 2009 revisions were centred predominantly on 2Q09 (and to a lesser extent, on 1Q09 and 3Q09), this has not affected the NGL forecast.

In total therefore, Canadian production data are adjusted up 110 kb/d and 80 kb/d for 2009 and 2010 respectively, accounting for 100% and 40% of the revisions made to total non-OPEC supply this month. However, our view of Canadian oil production trends has not changed. In 2010, total Canadian liquids are expected to decline by 50 kb/d to 3.2 mb/d, as dips in total crude (including bitumen) and NGLs of 80 kb/d and 20 kb/d respectively more than offset higher mined synthetic crude production (+50 kb/d).

Thereafter, as we showed in data published in our December 2009 Medium-Term Oil Market Report Update, we continue to see Canada as one of the main centres of net growth in non-OPEC, with expected strong increases in combined bitumen and mined synthetic crude outweighing lower production of conventional crude and NGLs. An updated Canadian outlook will be published in the next full MTOMR due in late June 2010.

Note:  For readers who subscribe to the field-by-field production databases, it is worth noting that for 2007 and 2008, the historically-higher mined synthetic crude volumes have been allocated to the "Other Mining/Syncrude" category, rather than being added to specific named projects.

Mexico - January actual:  Mexican production picked up in January, rising by 20 kb/d to just under 3 mb/d. In recent statements, national oil company Pemex was upbeat about slowing decline at Akal, the key field in the Cantarell complex, and Cantarell's output did indeed stabilise in January, at 540 kb/d. However, it is still down 235 kb/d or 30% year-on-year. Pemex, which has long pinned its hopes on raising output at the onshore Chicontepec complex, now claims that production there will rise from its current 30 kb/d to 60 kb/d by the end of the year. We have cautiously raised our 2010 total Mexican oil production forecast by 35 kb/d on recent, stronger performance, but still see total Mexican oil output declining by 85 kb/d to 2.9 mb/d in 2010, a slower decline than 2009, when production fell by 200 kb/d.

Meanwhile, wrangling over key incentive contracts with upstream service companies continues. Given constitutional limits on foreign involvement in Mexico's oil industry, but a need to ramp up investment to stem rapidly declining oil production, the government in 2008 crafted a measure allowing increased service company involvement to help to boost production. Reportedly, service contracts are nearing completion in time for a planned licensing round in May for work on the Chicontepec field. But objections raised are forcing the Supreme Court to judge on whether the contracts are constitutional, which could delay matters further.

North Sea

Norway - December actual, January provisional:  While final December data saw only minor downward adjustment, preliminary January oil production data were revised higher by 110 kb/d to just below 2.4 mb/d. Previously-reported problems at the Kaarstoe gas processing plant have apparently continued, with small volumes still shut-in in February and early March. In late February, the Draugen field was shut-in due to ice, though it is not clear how long this will last. The field produced 60 kb/d on average in 2009. Loading schedules for March indicate a pick-up in output and generally better-than-expected recent performance at several fields prompts an upward adjustment of nearly 50 kb/d to the 2010 outlook. Nonetheless, from 2.4 mb/d in 2009, total Norwegian oil production is forecast to fall to 2.2 mb/d in 2010.

UK - December actual:  Overall, December data brought minimal revisions to estimated 2009 production for the UK, which averaged 1.5 mb/d. Field-by-field data for November showed operational problems at some fields, including the relatively new Affleck, which started up in August 2009 and where output has been languishing at minimal volumes. Ettrick has suffered much the same fate, while the Don West and Southwest fields have also underperformed. Schiehallion, which has been out of action since June last year, started output again in early February, while Buzzard, the UK North Sea's largest producer, reportedly also returned to full strength around 200 kb/d in March, after repairs cut output by around 55 kb/d in February. But as with Norway, preliminary loading schedules and a generally better outlook have prompted a modest upward revision of 35 kb/d for 2010. Total production is now anticipated to fall from 1.5 mb/d in 2009 to 1.3 mb/d in 2010.


Australia - December actual:  Australian oil production picked up in early 2010, rising to around 475 kb/d on average in January and February. Some production in the Cooper Basin was halted in February due to heavy rains, but was not quantified, while output at the long-suffering Woollybutt field finally returned in early March, after being offline since April last year for refurbishments on its FPSO. But these events were overshadowed by the start-up of both the Pyrenees and Van Gogh fields in February. Both start-ups had been delayed and Van Gogh peak capacity is now expected to be lower than originally planned at around 40 kb/d, but together the two fields should ultimately contribute around 130 kb/d to Australian production when they ramp up to capacity. Total Australian oil production is now forecast to rise from 550 kb/d in 2009 to 600 kb/d in 2010, its largest increase in 10 years.

Former Soviet Union (FSU)

Russia - January actual, February provisional:  While January Russian oil production was revised down by 55 kb/d, preliminary February data were around the same volume higher than expected, coming in at 10.4 mb/d and marginally higher than January. Ramp-up at new fields continues, though still amid calls for more certainty surrounding the duration of tax breaks for new fields in frontier areas (see Further Uncertainty Over Eastern Siberian Tax Breaks in report dated 11 February 2010). State-owned major Rosneft has threatened to curb growth at its Vankor field, which is already providing the bulk of oil for the new Eastern Siberia-Pacific Ocean (ESPO) pipeline and is set to increase output from its current 230 kb/d to 300 kb/d by early 2011 and to 500 kb/d by around 2015. Tax uncertainty notwithstanding, the forecast for 2010 has been raised by 45 kb/d on stronger-than-expected recent output from Bashneft, Lukoil and TNK-BP. From 10.2 mb/d in 2009, total Russian liquids production is forecast to rise to 10.4 mb/d in 2010.

Azerbaijan - November actual:  Finalised data for October and November, as well as preliminary numbers for December prompted downward adjustments to Azerbaijan's oil production, largely affecting output at the offshore Azeri-Chirag-Guneshli (ACG) complex. Total 2009 output is now seen at just under 1.1 mb/d, up by 150 kb/d from 2008.  Some preliminary data for January 2010, as well as company guidance, have also led us to adjust down the 2010 forecast by 70 kb/d, to just over 1.1 mb/d, implying year-on-year growth of only 70 kb/d. In early March, Azerbaijan's government gave the green light for the next phase of the ACG complex, the Chirag Oil Project, which should add a gross 185 kb/d of capacity, commencing production in 2013, and is expected to raise total ACG output capacity to around 1 mb/d.

Kazakhstan - January actual:  In Kazakhstan, lower-than-expected January data brought a small downward adjustment to total 2010 output, which is now forecast to rise 50 kb/d to over 1.6 mb/d. Meanwhile, uncertainty surrounds the future of the Karachaganak gas and condensate field consortium. The government is reviewing the details of the production sharing agreements (PSAs) signed in the 1990s, when oil prices were much lower. Potential renegotiation of these could lead to higher taxes as the government looks for ways to bolster revenue squeezed by the economic and financial crisis. Similar developments and project delays led to the 2008 restructuring of the consortium developing the super-giant Kashagan field, with KazMunaiGaz doubling its stake in the project to 16.8%.

FSU net exports decreased seasonally by 1.7% in January to 9.1 mb/d. Crude oil volumes fell by 2.3% as shipments from the Baltic and the Black Sea dipped below previous months' levels due to wintry weather. BTC flows dropped after a brief halt of production at the ACG platform and a termination of Tengiz crude deliveries via the pipeline following an increase in transport tariffs. Small Tengiz volumes, around 40 kb/d, were then diverted by rail to smaller Black Sea ports as these routes reportedly offered better economic value. The flows via the CPC, carrying the bulk of Tengiz production, rose month-on-month as did volumes exported from Kozmino, the newest Russian export outlet. Furthermore, loadings at the Polish port of Gdansk were above the original schedule following the redirection of crude oil flows previously destined to Belarusian refineries. Product exports remained virtually unchanged in January as a fall in fuel oil exports due to a winter-related boost in domestic demand was balanced by higher gasoil and gasoline shipments.

Weather conditions indicate that February exports might have remained constrained at January levels. Preliminary data show Kozmino shipments continued to rise and BTC exports were back up despite missing Tengiz volumes. However, maintenance at the Baltic Pipeline System (BPS) cut back barrels handled at Primorsk, while upkeep at Tengiz facilities scaled back CPC volumes. Russian loading schedules for March show an increase in exports led by Kozmino and Primorsk shipments. Moreover, Russian crude oil export duties decreased by 6.3% in March. However, Belarus-bound crude oil volumes might be redirected to southern ports as the Russian companies are concerned about the ability of the Belarusian refineries to pay higher export duties.

Other Non-OPEC

Various Asia-Pacific:  In China, unconfirmed reports suggest earlier problems with extreme cold temperatures affecting coastal and offshore Bohai Bay production appear to be over. While 2009 production is unchanged at 3.8 mb/d, weak early-year indications and a reappraisal of the 2010 outlook have prompted a slight lowering of the forecast to 3.9 mb/d. In Indonesia, lower-than-expected early 2010 production data and ongoing delays to further development of the Cepu complex, which is now only expected to reach its full 160 kb/d capacity by 2014, brought a downward revision to the forecast. Total 2010 output is now expected to stay flat over 2009 at just under 1 mb/d. In Thailand, a surge in production to 370 kb/d in December pushed up the 2010 forecast by 20 kb/d and output is now set to rise from 350 kb/d in 2009 to 370 kb/d in 2010.

Various Latin America:  Colombian oil production picked up significantly in 4Q09, rising by 55 kb/d from the end of September to 740 kb/d by end-December, largely from the Rubiales field, where output has now surpassed 100 kb/d.  Final 2009 data now show total Colombian output at 675 kb/d, with a further 100 kb/d of growth expected for 2010. In contrast, prospects in Argentina look less rosy and expectations for 2010 have been trimmed by 20 kb/d. Output is forecast to decrease from 725 kb/d in 2009 to 705 kb/d in 2010. Meanwhile, the arrival of a drilling rig off the Falkland Islands re-ignited a long-standing sovereignty debate with the UK. However, despite indications of a potentially significant resource base, no oil discovery has yet been made. In Brazil, preliminary January production data pointed at output being curtailed by around 60 kb/d due to platform maintenance. Total output of 2.5 mb/d in 2009 is forecast to rise to 2.7 mb/d in 2010 on increases from the Marlim Sul, Jabuti, Parque das Conchas, Marlim Leste, Frade and Tupi fields.

Egypt - December actual:  A reappraisal of Egyptian production data have prompted historical upward adjustments - 15 kb/d in 2008 and 25 kb/d in 2009. Moreover, the perspective also looks brighter than anticipated earlier, amid sustained investment and numerous small field start-ups. On this basis, we have increased the 2010 forecast by 35 kb/d in addition to the implied baseline adjustment. Production is now forecast to remain flat at around 680 kb/d in 2010 over 2009.

OECD Stocks


  • OECD industry stocks increased by 34.4 mb in January, to 2 703 mb, slightly higher than the five-year average build of 32.9 mb. Rising crude, gasoline and distillate stocks in all three regions, with the exception of North American distillate, drove the change. A fall in North American ''other products'' provided a partial offset.
  • OECD stocks in days of forward demand rose to 59.2 days at end-January, up from 58.3 days at end December, on rising stocks and falling three-month forward demand. Days cover increased the most in gasoline and middle distillates, particularly in the Pacific.
  • Preliminary data indicate total OECD industry oil inventories fell by 28.6 mb in February. US stocks drew 2.5 mb, Japanese inventories fell 13.8 mb and EU-16 holdings, according to Euroilstock, fell 12.3 mb. The five-year average stock change for the OECD in February is a draw of 25.5 mb.
  • Short-term crude floating storage levels declined to 52 mb as of end-February, from 59 mb at end January, as the crude contango narrowed. Products in short-term floating storage decreased to 74 mb from 86 mb at end January. Most of the products draw occurred in Europe and the Asia Pacific. 

OECD Stock Position at End January and Revisions to Preliminary Data

OECD commercial inventories rose in January, by 34.4 mb, to 2 703 mb, propelled by gains in gasoline, middle distillates and crude oil. Gasoline increased by 20.3 mb, in line with its five-year average build of 20.9 mb, while middle distillates rose by 12.3 mb at a time when they typically rise by 9.2 mb. Crude increased 9.6 mb versus a five-year average build of 12.3 mb. Falling North American "other products" provided the only significant offsetting stock movement to the downside.

The OECD total oil stock change came out only slightly higher the five-year average build of 32.9 mb, thus keeping the overall surplus to the five-year average relatively unchanged at 58 mb. This surplus is significantly less than that seen in November, when it stood over 90 mb, and is at its lowest level since October 2008. A downward revision to December stock levels contributed. OECD inventories were revised down by 9.9 mb versus last month's report, led by an 8.0 mb adjustment in Japanese crude stocks and 8.9 mb lower North American "other oils" stocks. These downward revisions more than offset smaller upward revisions to European gasoline and North American middle distillates.

Combined with falling three-month forward demand, rising stocks in January lifted days of forward cover to 59.2, up from 58.3 days at end December and reversing seven consecutive months of declines. Much of the gain came from distillate and gasoline, where stocks increased by 1.2 and 0.9 days, respectively. In both days cover and absolute terms, middle distillates are still relatively high as winter fizzles out and gasoline appears well buffered ahead of a period of seasonal draws.

The position of both OECD industry stocks and days cover relative to the five-year average may continue to hold in the near term. Preliminary February data point to a 28.6 mb OECD stock decline, in line with the five-year average draw of 25.5 mb. Additional stockdraws have transpired, yet they have been concentrated in reducing the floating storage overhang. In February, crude floating storage decreased by 7 mb while products fell by 11 mb as the contango narrowed in both crude and gasoil forward curves.

Seasonality and forward fundamentals will influence stocks in the months to come. Historically, OECD inventories build during the second quarter, aided by seasonally lower demand and increasing refinery output ahead of the summer driving season. While our own projections see global demand decreasing by over 0.4 mb/d from 1Q10 to 2Q10, global refinery throughputs should increase slightly. Higher runs in non-OECD Asia underpin much of this throughput strength, making the impact on OECD product stocks difficult to assess. This makes the recent reinstatement of publicly available Chinese inventory levels all the more welcome, even if they only offer a partial picture of oil stocks in that country.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks rose 1.7 mb in January, driven by a 9.4 mb rise in US gasoline. In Mexico, stocks rose by 3.9 mb, led by crude and gasoline. All stock categories rose in the US and Mexico except for US distillate, which decreased slightly, and US other products, which fell by 18.3 mb.

Preliminary data point to a 2.5 mb draw in total US commercial stocks in February. By comparison, the five-year average stock change is a 9.3 mb draw. Crude stocks increased by 12.2 mb, while stocks at Cushing, Oklahoma - the delivery point for the NYMEX light, sweet crude contract - fell by 1.5 mb. Recent production outages have curbed Canadian syncrude supplies into the Midcontinent, helping to draw stocks. As of 5 March, Cushing stocks stood at 30.6 mb.

US product stocks fell by 14.7 mb in February, driven by a decrease in propane of 7.1 mb and a fall in distillate of 5.5 mb. Most of the distillate draw came from diesel, which trended down towards the top of the five-year range. Heating oil stocks along the US East Coast - the primary region for oil-based home heating - remained relatively stable on an absolute level and increased relative to the five-year average. US gasoline stocks increased by 1.6 mb and continued to trend in the top half of the five-year range.

OECD Europe

European inventories rose by 23.1 mb in January, with increases across all product categories except for residual fuel oil. Middle distillates posted an 11.5 mb gain, while gasoline increased 7.0 mb. German consumer heating oil stocks decreased to 56% capacity at end January from 61% at end December while products held in floating storage off Europe fell by almost 6 mb, suggesting that drawing consumer stocks and floating storage have buffered industry stocks against significant seasonal drawdowns.

February preliminary data show that products held in north-west Europe independent storage fell on the month, led by gasoil and gasoline. A labour-related disruption to refinery operations in France helped cause stocks to draw. Gasoil stocks drifted down to 2009 levels, even as floating storage was discharged. Though gasoline stocks fell during the month, levels jumped in early March. Products floating storage off Europe decreased almost 3 mb in February, with weakening contango in the gasoil futures curve. Still, levels remained robust at 54 mb at month-end.

EU-16 preliminary data from Euroilstock pointed to further product draws in February. Gasoline and middle distillate stocks dipped by 2.8 mb and 2.6 mb, respectively, sparking an overall products draw of 5.3 mb. Fuel oil and naphtha stayed relatively unchanged. EU-16 crude stocks decreased by 7.0 mb, leading an overall commercial inventory draw of 12.3 mb.

OECD Pacific

Pacific industry stocks rose by 9.6 mb in January, with gains across all product categories. Korean crude stocks remained at five-year highs while Japanese crude stocks trended below the five-year range. Gasoline in both Japan and Korea increased on the month and Pacific gasoline stocks continued to trend above the five-year average.

February preliminary data from the Petroleum Association of Japan (PAJ) point to a commercial stockdraw of 13.8 mb in February, with crude falling 6.6 mb and products decreasing 7.2 mb. Kerosene stocks decreased 2.5 mb and continued to trend at five-year lows. Gasoline stocks decreased 0.3 mb but remained near the five-year average.

Recent Developments in Singapore and China Stocks

Singapore product stocks increased by 2.1 mb in February. Residual fuel oil increased by 2.9 mb to new five-year highs as regional supplies benefitted from shipments from the West. Middle distillates declined 0.9 mb with increased buying from Indian refiners. Early March indications point to some gasoil supplies moving from Asia to South America in the wake of Chile's earthquake. Light distillates edged up by 0.2 mb in February, with increased gasoline exports from China helping to buoy levels. Early March data showed more pronounced gains as gasoline buying from Indonesia began to wane.

In a welcome move, China Oil, Gas and Petrochemicals (OGP), a publication of Xinhua News Agency, resumed publishing Chinese oil inventory levels. China's commercial crude inventories at the end of January reportedly stood at 196 mb while gasoline, gasoil and kerosene were at 56 mb, 71 mb and 13 mb, respectively. Previously, OGP had published Chinese crude inventory levels, including both commercial and strategic stocks, and gasoline and gasoil stocks as reported by Sinopec and CNPC. Both data series ran through August 2009. From September-December, only estimates of stock changes were made available.

The new product stock data appear more comprehensive, in that they stem from a nationwide survey (as opposed to just Sinopec and CNPC) and expand coverage to include kerosene. Moreover, both crude and product levels in the new data series represent commercial rather than strategic storage. As such, comparisons with historical inventory series remain problematic. Nevertheless, we aim to monitor trends in these new data as they become available.



  • Benchmark crude oil prices were down by $2/bbl on average in February, but the month-on-month declines mask the sharp recovery in prices over the course of the month.  Futures prices for both WTI and Brent rebounded by almost $10/bbl from four-month lows posted on 5 February. WTI futures prices in February averaged $76.45/bbl, but by early March they were trading around $82/bbl. Brent futures averaged $74.79/bbl in February and have since rebounded to $80.50/bbl at writing.
  • Oil prices also moved higher on escalating political pressures in Nigeria, Iran and Iraq and heightened fears of oil supply disruptions, but market sentiment was tempered by ample physical oil supplies. Stocks both onshore and at sea have come down from peak levels but are still high. OPEC production inched up to 14-month highs in February.
  • Near-month crude oil prices were also supported by stronger crack spreads for naphtha, gasoline, gasoil and diesel in most major markets in February.  Spot prices for gasoline increased strongly by early March on expectations for a healthy recovery in demand during the peak summer months.  Refining margins were up in most markets during February as a result.
  • Refiners have scheduled a heavier than usual seasonal maintenance work programme over the next several months, which will reduce spot purchases of crude oil and could add some downward pressure. Even China is slated to curtail refinery runs in March, but at an estimated 8.1 mb/d are 1.2 mb/d above levels of a year ago. The lower run levels represent an attempt to sustain the firmer refining margins seen in February.
  • Freight rates continued to tumble in early February from their January peak on the back of weaker demand and increased vessel availability. However, with oil demand now recovering from the 2009 slump, rates for large crude carriers held up, rebounding somewhat towards the end of the month as eastwards chartering activity increased after the Chinese New Year holiday.

Market Overview

Benchmark crude oil prices were down about $2/bbl on average in February, but the month-on-month declines mask the sharp recovery in prices over the last three-weeks of the month. Futures prices for both WTI and Brent rebounded by almost $10/bbl from four-month lows posted on 5 February. WTI futures prices in February averaged $76.45/bbl, but by early March were trading around $82/bbl. Brent futures averaged just under $75/bbl in February and have since rebounded to $80.50/bbl at writing.

Oil markets in early February were hit by the financial meltdown in Greece, with widespread fears the crisis would spread to the rest of the Eurozone, conspiring to push prices to six-week lows.  Prices steadily retraced the losses as European leaders and financial institutions debated measures to grapple with sovereign debt issues, which helped renew confidence in global financial markets and usher in a fresh wave of economic optimism. Recent statements out of China that the government will maintain its economic stimulus measures were also seen as positive for oil demand. Over the past 12 days prompt futures prices for WTI traded in a fairly narrow $79-81/bbl range, while Brent has steadied between $77-$80/bbl over the same period.

Oil prices also moved higher on escalating political pressures in Nigeria, Iran and Iraq and heightened fears of oil supply disruptions.

  • In Nigeria, renewed violence and attacks on oil infrastructure resumed in February, threatening the country's oil exports yet again after more than six months of relative calm.
  • The global community appears to be moving closer to imposing tougher sanctions on Iran as the country continues to pursue its nuclear ambitions. Plans by the US, UK, Germany and France, among others, to tighten sanctions under the umbrella of the United Nations in response to Tehran's intransigence over its nuclear programme have been stymied by lack of support from China but this is not likely to deter countries from imposing their own tougher sanctions. While Iran has threatened to halt oil exports if further sanctions are implemented, the impact on the market would be muted by the current high levels of stocks. Moreover, IEA government stocks are sufficient to replace 4 mb/d of production for a year if needed. OPEC also has spare capacity equivalent to 6 mb/d. Nonetheless, the escalating war of words with Iran continues to unnerve markets.
  • By contrast, national elections in Iraq proceeded in relative calm on 7 March, which many now hope will improve the prospects for the strife-torn country, especially its plans to boost oil production. Though it will likely take months for the government to build a working coalition, the elections provided a welcome boost in confidence for the country's new joint venture partners.

While concerns that geopolitical issues could affect oil supply flows from key OPEC producers added upward pressure to futures prices, physical oil supplies continued to provide a counter weight. Stocks, both onshore and at sea, have come in from peak levels but are still high. Non-OPEC production is on course to rise by a further 300 kb/d in 2010, with Russian production setting new records in February. OPEC production also increased to a 14-month high of 29.2 mb/d in February. In addition, refiners have scheduled a heavier than usual seasonal maintenance work programme over the next several months, which will reduce spot purchases of crude oil.  Even China is slated to curtail refinery runs in March after four months of steadily higher throughput rates.

Despite expected 2010 demand growth of 1.6 mb/d, the anticipated call on OPEC crude and stocks looks unlikely to breach 29.5 mb/d on a sustained basis, so market fundamentals should continue to provide a brake on upward price aspirations. Offsetting that, equity and currency markets could continue to play a more bullish role.

Futures Markets

The narrowing of the contango between front-month crude prices and forward markets continued in February and into early March. The WTI M1-M12 spread narrowed from $5.38/bbl in January, to $4.36/bbl in February and to $3.25/bbl in the first week of March. Brent's forward spread showed similar trends, coming in from $6.16/bbl in January, to $5.11/bbl in February and to $3.92/bbl in early March.

More pronounced, the price of front-month NYMEX crude futures increased by 2.5% in February from the December average, aided by the belated onset of colder winter weather. At the same time, oil futures 12 months out fell by 1.7%. The divergent trends between prompt and 12-month futures prices in February were more muted in early March. The flattening of the forward curve to a certain extent reflects market views that the long-term oil price may well have moved ahead of the much anticipated recovery in the economy and associated oil demand. Rising demand in 2010, in effect, has already been built into the forward price.

Marginally tighter prompt fundamentals, notably for WTI, likely also played a role. While near-month oil traded at a $7.60/bbl discount to the 12-month contract in December, the discount is now about $3.25/bbl.

After a hiatus since early January, investment banks and other long-term investors increased their net long positions in mid-February as the overall outlook for the economy improved. On a monthly basis, open interest in NYMEX WTI futures fell by 4.9% in February to 1,297,400 contracts from early-February highs, when they reached their highest since June 2008. Swap dealers increased their net-long holdings by 75% from mid-January to mid-February, but afterwards loosened them by 30%.  In the same period, money managers decreased net long holdings from mid-January to mid-February by 50% but subsequently started to increase their bets on rising prices, with their net-long holdings rising by more than 60% as of 2 March.

The shift came after trading volumes in NYMEX WTI futures reached the highest level this year on 5 February 2010 amid concerns about Europe's fiscal problems and the dollar. The sell-off of crude oil positions by hedge funds started two days before, and oil experienced its biggest one-day fall since July 2009 of $3.84/bbl on 4 February 2010, falling by a further $1.95/bbl to $71.19/bbl on 5 February 2010. A week later, trading volumes recovered, although to lower levels, as Eurozone countries held intensive talks on a possible rescue for debt-laden Greece.

Spot Crude Oil Prices

Spot prices for benchmark crudes were also lower, but the declines ranged from about $1.85/bbl to as much as $3.25/bbl in February. WTI posted the smallest declines, while Urals in the Mediterranean saw steeper drops. Spot prices steadily recovered over the month in line with futures markets and on improved crack spreads, and were up by $3.50-4/bbl by early March.

In the US, spot prices for WTI at Cushing in the first week of March rebounded by over $3.85/bbl from average February levels, in part due to improved crack spreads. A steady decline in Cushing stocks in January and most of February and tighter NYMEX prompt month contango also lent support to spot prices.  The WTI M1-M2 differential narrowed to just -$0.36/bbl in February versus -$0.43/bbl in January and -$1.43/bbl in December, rendering the contango play uneconomic for now.

Lower shipments of Canadian light, sweet synthetic crude to the US midcontinent since December are partly behind the relatively stronger WTI spot prices. An oil sands upgrader operated by Suncor Energy near Fort McMurray, Alberta was shut following a fire on 9 February, just a week after another upgrader had been brought back online following shut-in in December. The outage of syncrude also depressed values of sour crudes as refiners sought alternative lighter crude feedstocks. The reduced flows of Canadian crude to the US are also reflected in lower Cushing crude oil stocks, with volumes falling within the historical range for the first time in a year in February. Cushing stocks spent all of 2009 above the historical range.

Meanwhile, Canadian supplies of heavier grades to the US Midwest will be curtailed in coming months while TransCanada embarks on filling its southbound Keystone pipeline. Roughly 9 mb of heavier oil in total will be removed from the market while the pipeline, which is running 6-8 weeks behind schedule, is filled. The pipeline is being built in stages, with the first phase, from Hardisty to Wood River and Patoka, Illinois, slated to be in service in mid-2010 with a throughput capacity of 435 kb/d.  Construction on the second phase of the expansion, Keystone XL, which will extend the pipeline to the US Gulf Coast, is expected to begin in early 2011.

In Europe, spot prices were down by $2.50-3.50/bbl in February, with sour crudes especially hard-hit due to weaker fuel oil crack spreads and ample supplies of sour crudes on offer, including Russian Urals, Iranian and Iraqi barrels. Spot prices for Urals crude recovered over the month but increased export volumes for March pushed differentials for the Russian grade in Northwest Europe to Brent down to their lowest level in 28 months by 8 March.

Dubai spot prices were down a sharper $3.21/bbl, reflecting the weight of increased supplies from Middle East producers. Spot crude price increases were tempered by ample supplies of OPEC crude on offer, including Nigerian and Angolan grades, and reduced refinery demand due to turnarounds. Increased supplies of Russian ESPO crude also displaced competing grades. Plentiful spot barrels of lighter crudes saw the Brent-Dubai spread collapse. Dubai's premium over Brent reversed course in February, declining from a premium of 50 cents a barrel in January to a discount of 15 cents/bbl on average in February.  By early March, Dubai's discount to Brent ballooned to $1.79/bbl.  Brent's loftier price levels had the unintended consequence of limiting long-haul purchases of light crude linked to the benchmark, including mainstay African grades.

Spot Product Prices

Spot prices for refined products were down on average in February, by anywhere from 1.7% to 6.7%, but steadily rebounded over the month and into early March. Gasoline crack spreads posted strong gains in Asia and Europe in February.  European gasoline crack spreads were buoyed by strong import demand from Africa and the Middle East.

In the US, gasoline cracks in February were weaker on the East Coast but improved markedly on the Gulf Coast. By early March, gasoline cracks surged above $10/bbl on the US Gulf Coast on growing expectations of a strong summer gasoline demand season. The switch from winter grade gasoline to more expensive summer spec production also tightened crack spreads in the Gulf Coast region.

Naphtha crack spreads flirted near 12-month highs in Asia and Europe, with stronger petrochemical demand from Japan, China and South Korea helping to lift values. In addition to stronger demand as feedstock for petrochemicals, European naphtha cracks were also supported by increased demand for blending in gasoline.

Middle distillate cracks also steadily improved over the month as winter weather returned in the Northern Hemisphere, with gasoil crack spreads higher in all major markets. In Europe, continued high levels of distillates in floating storage pressured values in early February but the narrowing of the gasoil contango encouraged sales from floating storage. Gasoil cracks in Singapore were also sharply higher in February as lower refinery throughput rates reduced supplies to the market. Singapore crack spreads for Dubai crude rose to $8.82/bbl last month versus $7.55/bbl in January.

By contrast, high-sulphur fuel oil differentials to benchmark crudes cascaded lower in all major markets on weaker demand. In Asia, an influx of HSFO supplies from the Middle East weighed on values while HSFO cracks in Europe were eroded by swelling stocks.

Refining Margins

February refining margins rose for all benchmark crudes, bar Tapis hydroskimming in Singapore and China, where margins were mixed. Lower crude oil prices more than offset weaker product prices last month. Crack spreads strengthened mainly for gasoline and gasoil/diesel, while naphtha cracks ballooned in the USGC. Consequently, by the end of the month, upgrading margins strengthened, reaching positive territory at $0.68/bbl in the USGC, $1.80/bbl in Singapore and $4.92/bbl in Europe.

Simple margins remained negative, with the exception of Brent in Northwest Europe (NWE), which stayed barely positive, helped by its higher gasoline yield compared to Urals. Cracking margins were mixed across the regions. NWE and Mediterranean margins were positive, while in the USGC margins for Bonny and Brent remained negative, along with Alaska North Slope and Oman in the US West Coast (USWC).

Refining margins have generally been recovering since November, outside of the USWC. European margins have gained between $2-3/bbl, based on stronger naphtha and gasoline. USGC improvements have been stronger still, based on naphtha and jet fuel, while gains have generally been greatest in Singapore, where fuel oil, gasoline and naphtha have underpinned better margins. Despite these four-month gains, February margins nonetheless continue to lag levels of a year ago, aside from the USGC.

End-User Product Prices in February

End-user product prices decreased in February by 4.5% on average from January levels, in US dollars, ex-tax.  Retail prices fell in all surveyed IEA member countries except Japan, where prices rose by 6.4% on average.  Transport fuel prices dropped steeply in Germany with gasoline and diesel prices falling by more than 10%.  In the US, gasoline prices fell by 3.1% while diesel prices posted steeper declines of 8.5% in February.  Overall, ex-tax prices in low-sulphur fuel oil and heating oil prices fell by 5.9% and 4.1%, respectively, while gasoline prices decreased by 3.3% and diesel fell by 4.8%, in US dollars, ex-tax. Gasoline consumers paid in the US $2.64/gallon ($0.70/litre), in Japan ¥128.9/litre ($1.44/litre) and in the UK £1.12/litre ($1.68/litre). In continental Europe, the average price at petrol stations ranged between €1.10/litre ($1.50/litre) in Spain to €1.32/litre ($1.79/litre) in Germany.  End-user product prices in February were 40% on average above levels of a year ago, with fuel oil prices up by more than 60% and diesel 25% above the previous year.


Freight rates continued to tumble in early February from their January peak on the back of weaker demand and increased vessel availability. However, with oil demand now recovering from the 2009 slump, rates for large crude carriers held up, rebounding somewhat towards the end of the month as eastwards chartering activity increased after the Chinese New Year holiday.

VLCC rates on the benchmark Middle East Gulf - Japan route plummeted to below $12/mt in early February following lower enquiries and swelling tonnage. As stated in last month's report, due to the phasing out of single-hull tankers, rates now reflect more expensive double-hulled VLCCs. This switch results in an associated one-off correction from $19/mt to $22/mt on 1 February, shown in the chart below. Suezmax rates on the West Africa - US Atlantic Coast route bottomed out at $13/mt in mid-month, compared with a January high of $27/mt. Together with VLCC rates, they recovered in the second half of the month, boosted by a post-Chinese New Year increase in eastwards charter activity. This was supported by recent reports suggesting, that for the first time Chinese refiners sourced the majority of their crude from West Africa. Rates settled at approximately $6/mt in the short-haul Aframax North Sea market on soft fundamentals as plentiful vessel supply partly resulted from continued ice-class requirements in the Baltic.

Clean charter rates softened on all benchmark routes at the beginning of February following poor demand and increased vessel availability. Rates on carriers trading between the Middle East and Japan fell sharply from $27/mt at the beginning of the month to a low of $23/mt on 19 February. Due to the oversupply of tonnage, Handymax rates on the benchmark Caribbean - US Atlantic coast and Singapore - Japan routes eroded to month-end lows of under $11/mt and $12/mt, respectively. Increased gasoline demand from West Africa helped offset the oversupply of ships and stabilise rates on the UK - US Atlantic coast route at $20-22/mt.

Short-term floating storage fell by 18 mb to 126 mb at the end of February, comprising draws of 7 mb for crude and 11 mb for products.  Data suggest 112 tankers were engaged in floating storage at end-February, down from 128 a month earlier, with seven Aframaxes and seven Suezmaxes released from floating storage. Reportedly, 8 mb of crude came ashore in North West Europe while the run down of products was centred in Asia Pacific, where floating stocks of products decreased by over half to 7 mb. Looking forward, the outlook for the freight market remains bearish as seasonally lower demand combines with a swelling fleet. Even taking into account the phasing out of single hulls and a delay factor of over 30% on new deliveries, vessel oversupply will likely persist weighing heavy on freight rates.



  • Refinery margins in February got a boost from higher product prices, as extreme cold weather across the Northern Hemisphere supported runs in January and February.  However, the backdrop for the industry, at least in the OECD, remains bearish, with overcapacity and weak demand likely to lead to further restructuring and consolidation ahead.
  • Global refinery throughputs are estimated at 72.5 mb/d in 1Q10, 910 kb/d higher than a year earlier, but 140 kb/d lower than in our previous report.  Newly added refinery capacity in China and Other Asia boost runs by a combined 2.1 mb/d year-on-year, effectively curbing throughputs in the OECD, which continues to see structural declines.
  • Global refinery throughputs are revised down by 140 kb/d to 72.5 mb/d for 1Q10, nonetheless 910 kb/d higher than a year earlier. Newly added refinery capacity pushes up expected Chinese and Other Asian runs by a combined 2.1 mb/d year-on-year in 1Q10, but OECD throughputs remain constrained.
  • OECD refinery runs were 35.7 mb/d in January, unchanged from December and 130 kb/d higher than our previous estimate.  Pacific throughputs were surprisingly robust, 250 kb/d higher than our forecast.  Preliminary February weekly data for the US, Canada and Japan were similarly much stronger than expected, on the back of improved economics.  A heavier maintenance schedule and more outages than expected in Europe, however, partly offset the increases seen elsewhere.

  • December OECD refinery yields increased for naphtha, gasoline, jet fuel/kerosene and fuel oil at the expense of gasoil/diesel and other products. Gasoline yields rose to 35.5%, with yields in North America at 48.8%; gasoline refinery gross output trended along its five-year average. Gasoil/diesel yields fell from five-year-average levels to 29%, with gross output falling 1.5 mb/d to 12.3 mb/d on a yearly basis, still reflecting brimming distillate stock levels. Naphtha yields rose to 4.8% supported by stronger crack spreads and robust demand in the Pacific, although constrained throughput kept naphtha gross output subdued at 2.0 mb/d.

Global Refinery Overview

Although refinery economics continued to improve in February, with margins improving across all regions, the outlook for the industry remains weak.  Short-term support to product prices came from exceptionally cold weather experienced across the Northern Hemisphere, but weak demand generally and over-capacity in the refining sector remain key concerns of the industry.  Integrated oil companies and independents alike try to minimise downstream losses by reducing runs, shedding capacity and cutting operating costs.  Chevron announced this week that, as a cost-cutting measure to boost profits, it would lay off another 2000 employees from its refining and marketing business this year, after already having shed as many jobs in 2009.  The company further announced that it would try to sell refining assets in Europe and its lubricants and marketing business in Latin America and the Caribbean.  Japanese refiners are looking for opportunities in the renewables sector after shedding surplus capacity.  More than 600 kb/d of Japanese refining capacity has already been scheduled to close before the end of next year and a further 200 kb/d by March 2015.

Elsewhere, refinery workers protested against the closures of sites, as seen in both France and the Netherlands Antilles recently, and discontent is mounting over integrated companies restructuring while posting hefty full-year profits.  Workers at Total's six French refineries walked out in protest over the uncertain future of the Dunkirk refinery, which has been closed since September on poor economics.  Total announced 8 March that the Dunkirk refinery would be closed permanently and dismantled by 2013.  Instead the company would create a training and technical support centre on the site to preserve jobs.  Total has made public plans to cut global refining capacity by 500 kb/d by 2011, in order to boost profitability, but subsequently stated it would not close any further sites in France in the next five years.

Despite this poor outlook, new complex and highly competitive capacity is being brought on-line in non-OECD countries.  Asia and the Middle East added 1.6 mb/d crude distillation (CDU) capacity by in 2009 and will add a further 630 kb/d this year to meet growing demand.  Runs have outpaced demand growth so far though, putting additional strain on OECD refiners who face increased competition in export markets.  Chinese refiners have run at record high throughputs in part due to guaranteed margins and have recorded net product exports for two months running.  A move by Chinese state-controlled refiner Sinopec to subsidise its refineries to export products in February will further encourage refiners to keep operating rates high (despite an increase in  crude prices which may lead to a scaling back of government-guaranteed margins).  The challenges for the industry are by no means over and further consolidation and restructuring lie ahead.

Global Refinery Throughput

1Q10 global refinery throughput is estimated at 72.5 mb/d, 140 kb/d lower than in our last report but 910 kb/d higher than in 1Q09.  Higher estimates for the OECD, and in particular for the OECD Pacific, are offset by a weaker outlook for the non-OECD since our last report.  The OECD Pacific has been revised higher for January and February by 250 kb/d and 240 kb/d respectively, as submitted data were much stronger than expected.  Other Asia has been lowered by 310 kb/d in 1Q10, following weaker than expected runs at the tail-end of 2009 for a number of countries in the region and a higher outage forecast early in 2010.  Refinery activity in Latin America has similarly been revised lower, following refinery shutdowns in Chile and the Netherlands Antilles in March.  Partly offsetting these downwards revision, estimates for the Middle East have been revised upwards for the quarter, as previously assumed maintenance is now expected later in the year.

Global refinery runs in 2Q10 are expected to average 72.6 mb/d, an increase of 50 kb/d from the previous quarter.  Runs are 920 kb/d higher than the depressed levels seen in 2Q09, with China and Other Asia up by a combined 1.4 mb/d year-on-year.  OECD runs is set to fall in the second quarter, as the Pacific enters peak turnaround season.  Japanese runs alone are expected to be curtailed by more than 1 mb/d in both May and June due to maintenance.  Runs in both North America and Europe are likely to improve somewhat as refiners there complete, predominantly first quarter, scheduled work, but nonetheless remain at low levels due to continued weak economics.

OECD Refinery Throughput

1Q10 OECD crude throughputs have been revised higher by 150 kb/d to average 35.5 mb/d.  Higher runs in the Pacific, and to a lesser extent North America, more than offset the weaker estimate for Europe.  Submitted January data show runs flat from December for the region, as higher runs in Europe and the Pacific were offset by lower activity in North America.  An improvement in refinery margins may have supported runs in Europe and the Pacific, while North American runs were tempered by heavy refinery maintenance and outages.  Preliminary weekly data for Japan and the US for February suggest higher runs than expected, and both OECD Pacific and North America have been revised higher by about 230 kb/d for February.  Larger than expected outages in Europe for the month however, partly offset the changes and result in an overall upward revision of 240 kb/d for February.  2Q10 runs are expected to dip by a further 240 kb/d for the OECD, as heavy maintenance in the Pacific depresses total throughputs.

OECD North American refinery throughputs have been revised up by 70 kb/d and 80 kb/d for 4Q09 and 1Q10 respectively.  Official December statistics were quite a bit higher than suggested by preliminary weekly data for both the US and for Canada.  US refinery runs were 155 kb/d higher, averaging 14.0 mb/d for the month while Canadian runs were 50 kb/d higher at 1.75 mb/d.  After a slew of maintenance and outages in January, US runs rebounded in February to average 13.9 mb/d for the month, and reached their highest weekly utilisation rate since September 2009 (at 81.9% of operable capacity in the week ending 26 February).  Runs improved on the East Coast (PADD 1 & 2) and on the West Coast (PADD 5).  Activity on the Gulf Coast remained depressed, however, as refineries there were in peak spring turnarounds.  Regional refinery activity is expected to increase further in 2Q10 as heavy 1Q10 turnarounds are completed.  At 17 mb/d, 2Q10 regional runs look likely to remain well below levels of a year ago on weak product demand and poor economics.

European crude runs inched higher in January, following an improvement in margins, but remain well below their 5-year range.  Crack spreads improved across the barrel in January with some support coming from exceptionally cold weather across the Northern Hemisphere.  NWE Brent cracking margins averaged $2.04/bbl in January, up from only $0.12/bbl in December.  Urals cracking margins were even higher, at $2.20/bbl in NWE and turning positive in the Med. for the first time since May 2009 (on a monthly basis).  Although margins improved further in February and early March, refinery activity is estimated lower as the region has entered its peak turnarounds (spring maintenance).  A total of 1.4 mb/d of distillation capacity is scheduled to have been offline in February and a further 1.2 mb/d in March, up from 880 kb/d in January.

European refinery news was dominated by the 8-day strike at Total's French refineries in February, which threatened to disrupt regional fuel supplies.  Workers at Total's six refineries walked out in protest on 17 February over the uncertain future of the 140 kb/d Dunkirk refinery, which has been idled since September on poor economics.  Workers at Total's five other refineries (Donges, La Mede, Grandpuits, Feyzin and Gonfreville) returned to work as Total pledged not to close or divest any further refineries in France in the next five years.  At the site of the Dunkirk refinery, which will be closed permanently and dismantled by 2013, a training and technical support centre will be created in order to preserve jobs.  Although some news reports of panic buying and gas stations running out of fuel emerged, supply disruptions were limited with less than 5% of fuel stations running out of one or more products.  Total had earlier said it would shed 500 kb/d of refinery capacity by 2011, and speculations are that in addition to permanently closing Dunkirk, Total could sell its UK Lindsey plant to meet its key target.

Preliminary data for January and February indicate that refinery activity in the OECD Pacific ran at higher levels than previously thought.  January crude runs have been revised up by 250 kb/d, following higher throughput data for South Korea (+114 kb/d) and Australia (+83 kb/d) in particular.  February was likewise revised higher by 240 kb/d following the publication of weekly Japanese data.  Runs there are now thought to have averaged 3.95 mb/d, representing a capacity utilisation rate of 82.4%.  This is a 1 percentage point increase in utilisation from January, albeit partly exaggerated due to some capacity closures from early February.

In light of the higher reported throughput levels and more information on refinery maintenance, we have also raised our Pacific forecast for March and April.  Some maintenance previously slated for April is now only expected in May and June, and as a result, the April outlook has been increased by about 400 kb/d.  The region is expected to hit peak maintenance in May, with an estimated 1.2 mb/d of capacity offline followed by 1.1 mb/d in June.  This includes the permanent closure of 100 kb/d of capacity by Cosmo Oil effective February 2010, including the Chiba (20 kb/d), Yokkaichi (50 kb/d) and Sakaide (30 kb/d) refineries.  Japanese refiners have announced another 720 kb/d of capacity cuts by 2015, led by Nippon Oil and Japan Energy.  The two companies are planning to cut their combined capacity of 1.8 mb/d by 30% before the end of 2015, with more than 500 kb/d scheduled to be shut before the end of next year.

Non-OECD Refinery Throughput

Non-OECD refinery runs have been revised lower by 290 kb/d for 1Q10, to average 37.0 mb/d, following disappointing run data for a number of countries for the tail end of 2009 and heavier than previously assumed outages early in the year.  1Q10 still sees a massive 2.1 mb/d increase from the previous year, as refiners in China and Other Asia utilise new capacity to gain market share at the expense of refiners in OECD countries.  4Q09 non-OECD refinery runs are now estimated to have averaged 36.8 mb/d, 240 kb/d lower than our previous estimate.  Runs were still 1.5 mb/d higher than 4Q08, as refiners in Other Asia and China increased runs sharply.  2Q10 throughputs are seen increasing by 290 kb/d as runs in Asia continue to rise and activity in Latin America rebounds from reduced 1Q10 levels.

January Chinese refinery runs have been held steady from December's record levels of 8.2 mb/d.  Official data from the National Bureau of Statistics (NBS) were delayed due to the New Year celebrations and not available in time to be included in this report.  Subsequently released data, however, revealed January refinery runs lower than our assumption (at 8.0 mb/d) while February runs reached record highs (8.3 mb/d), implying a net change of -20 kb/d to our 1Q10 estimate.  February's record high was in part supported by a decision by Chinese state-controlled refiner Sinopec to start subsidising its refineries to export products in February, as weak demand and increasing inventories pressure domestic markets.  Sinopec's move will encourage refiners to keep operating rates high, despite the fact that mounting crude prices in recent weeks have diminished Chinese refining margins.  Throughputs are expected to decline from these high levels in March, when several major refineries on the eastern and southern coasts plan maintenance to reduce the current product overhang.

Other Asian throughputs were revised lower for December following the submission of data for several countries through JODI.  Throughputs fell short of expectations in Malaysia, Indonesia, Taiwan and the Philippines (-350 kb/d combined), and the lower runs have largely been carried forward to 2010.  Reports of maintenance at India's MPRL's Mangalore and IOC's Chennai refineries in February and March have also been included in our forecast, reducing runs by a further 260 kb/d and 400 kb/d respectively.

Indian refinery runs averaged 3.8 mb/d in January, 100 kb/d higher than December and 550 kb/d higher than January 2009.  Reported refinery maintenance was low in January with only 30 kb/d reported (down from 266 kb/d in December).

FSU throughputs have been revised marginally lower for the first quarter. Runs are now expected to average 6.2 mb/d, 90 kb/d higher than the previous quarter and an increase of 300 kb/d from 1Q09.  Russian refinery runs were reported at 4.9 mb/d in January, 70 kb/d higher than a month earlier and 300 kb/d higher than in January 2009.  The largest monthly increase came from Lukoil's Norsi refinery, which operated at 339 kb/d for the month compared with 263 kb/d in Dec and 228 kb/d in November.

Throughputs in Kazakhstan averaged 278 kb/d in January, down 15.4% from December but still 37% higher than a year earlier. The Atyrau and Pavlodar refineries reduced their throughputs by 25 kb/d and 20 kb/d respectively. Kazakh refineries reportedly experienced interruptions to their crude supplies in early February, as Russian deliveries were halted amid uncertainties over export duties under the new customs union between Russia, Kazakhstan and Belarus.

Refineries in Belarus equally experienced difficulties with their Russian crude supplies in February.  A recent agreement between the two countries allows for only 125 kb/d of crude on a tax-free basis, (equal to domestic consumption) to be exchanged against zero export duty on Russian product exports.  The remaining crude shipped to Belarus, or two-thirds of oil Russian imports, is subject to a 100% export duty.  Uncertainty over payment capabilities of the Belarus refiners has led several suppliers to re-route crude for March delivery.  The 220 kb/d Mozyr refinery said it was forced to work below usual levels in February to leave some crude for March, when total deliveries should total only a third of the volumes originally scheduled.

Latin American crude runs have been revised lower by 180 kb/d for 1Q10, following an adjustment to our outages forecast for January and February and a larger revision (-340 kb/d) to March figures.  Although we have incorporated more detailed outages data for a number of countries, the main changes have been made to the Netherlands Antilles and Chile.  PDVSA's  320 kb/d Isla refinery in the Netherland Antilles (Curaçao) remains shut after a power outage on 1 March.  The refinery had been closed for a few days prior to the outage due to workers' concerns over the refinery's future.  Although the strike only lasted a few days, the refinery is likely to remain closed for several weeks after two of three air compressors failed at the restart.

Chile's refinery industry was hard hit when a massive earthquake devastated the country on 27 February and shut two of the country's three refineries.  Chilean state-run company Enap's largest refinery, Refinería Bío Bío (116 kb/d), suffered structural damage and could, according to some reports, be off-line for at least a month.  The company's second largest refinery, Refinería Aconcagua (104 kb/d), was expected to return to operation much sooner following the restoration of electrical power.  Enap has deferred crude purchases scheduled from Ecuador, and instead contracted cargoes of diesel.  Independent traders have also booked tankers to ship clean products from the US and Asia to prevent a potential shortfall in products while refinery operations are constrained.

Middle Eastern refinery throughputs have been revised higher by 140 kb/d for 1Q10 as previously assumed February maintenance has been rescheduled for later in the year.  Combined with work in Oman and Syria, maintenance at Saudi Arabia's 400 kb/d Yanbu refinery and the 190 kb/d Shuaiba refinery in Kuwait will cut an estimated 525 kb/d and 600 kb/d of operable capacity in March and April respectively.  Iraqi throughputs are estimated to have averaged 540 kb/d in February, 40 kb/d lower than January's estimate, but 100 kb/d higher than February of last year.  An attack on the pipeline carrying crude from Iraq's northern fields to the 110 kb/d Daura refinery in Baghdad on 9 February, reduced runs.

OECD Refinery Yields

December OECD refinery yields increased for naphtha, gasoline, jet fuel/kerosene and fuel oil at the expense of gasoil/diesel and other products yields. Yearly patterns show how refiners in OECD countries are adapting to a depressed demand environment, which constrained 2009 refinery throughputs to an estimated 36.1 mb/d on average, 1.8 mb/d lower than the 2008 level.

OECD gasoline yields continued trending upwards, reaching 35.5%, with yields in North America at 48.8%, their highest level in at least 10 years.  However, gross output is trending along the five-year average. Refiners in Europe are constraining gasoline yields, which reached 22.2%, 0.5 percentage points below the five-year average. This yield combined with lower refinery throughputs resulted in gross output of 3.1 mb/d, 291 kb/d lower year-on-year and 490 kb/d lower than the five-year average. In the Pacific, yields are hovering above the five-year levels, with gross output at last year's level, 35 kb/d above the five-year range.

Gasoil/diesel yields fell from five-year-average levels to 29%, 2.2 percentage points below last year's level. Yields decreased counter-seasonally in Europe and North America but rose, again counter-seasonally, in the Pacific. Gross output fell 1.5 mb/d to 12.3 mb/d on a yearly basis, still reflecting brimming distillate stock levels. Gross output remains particularly subdued in Europe and North America, at 5.2 mb/d and 5.0 mb/d, respectively, equivalent to a year-on-year fall of 0.7 mb/d in each region.

Naphtha yields continued their upward trend, supported by stronger crack spreads across all regions and strong demand for petrochemical feedstock in the Pacific. Yields increased from a low of 4.2% in June 2009 to 4.8% in December. This level represents an increase of 0.7 percentage points on a yearly basis, but is still 0.4 percentage points below the five-year average level. Gross output remains subdued at 2.0 mb/d, 200 kb/d higher than last year's level but 320 kb/d below the five-year average.