Oil Market Report: 12 May 2010

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Highlights

  • Crude prices fell by over $10/bbl in early-May, the biggest weekly decline in 18 months amid an evolving Eurozone debt crisis and sell-off in global equity markets. Subsequent moves by EU finance ministers to guarantee liquidity for vulnerable economies saw partial recovery, with WTI futures recently trading at $76/bbl and ICE Brent at $79.50/bbl.
  • Global oil demand is revised down by 190 kb/d on average for 2009 and 2010, equating to 84.8 mb/d (-1.2 mb/d year-on-year) and 86.4 mb/d (+1.6 mb/d) respectively. Revisions stem largely from changes to non-OECD historical baseline data, as slightly higher GDP prognoses from the IMF are counterbalanced by a higher price assumption.
  • OPEC crude output rose by 40 kb/d in April, to 29.03 mb/d, sustaining a trend of largely stable supply since mid-2009. The 'call on OPEC crude and stock change' for 2010 is cut by 0.4 mb/d to 28.7 mb/d on lower demand estimates and higher non-OPEC supply. The 'call' peaks in 3Q10 at 29.4 mb/d but recedes in 4Q10 on rising non-OPEC supplies.
  • Non-OPEC oil supply fell to 52.4 mb/d in April, on seasonal output curbs. The 2010 forecast is revised up 0.2 mb/d to 52.3 mb/d on higher expectations for the US, Canada and China. Growth in 2010 of 0.8 mb/d is the strongest since 2004 and matches that for OPEC NGLs. The Deepwater Horizon drilling accident in the US Gulf has led to a major crude spill. Regional production is unaffected but the incident may lead to tighter safety measures and delay further offshore leasing.
  • OECD industry stocks rose by 7.3 mb to 2 709 mb in March, with divergent trends in crude and products across all OECD regions. Stock cover in days of forward demand rose to 60.5 days by end-March but stood 1.1 days below March 2009 levels. Preliminary April data show a sharp 47.4 mb build in onshore stocks and higher floating storage.
  • The 2Q10 global refinery crude run estimate is raised to 73.3 mb/d, up 450 kb/d from 1Q10 and 370 kb/d higher than in last month's report. Sharply higher US crude runs in April, due to improved complex margins and a quick exit from seasonal turnarounds, combine with stronger expectations for Chinese throughputs.

Cool heads in a crisis

Both the global economy and the oil sector face testing times after a series of natural and man-made crises in recent months. Drawing similarities between coincident but disparate events risks sounding trite, but in each case policy responses will be crucial in determining the investment environment for the next decade. While most agree that a gradual shift towards a lower carbon economy is desirable, the reality is that oil will retain a pivotal role in satisfying the transportation and consumer aspirations of the world's population for decades to come. So decisions made today that affect the way oil is produced, traded, stored, transformed, shipped and consumed really matter for the sake of the global economy.

April witnessed see-sawing perceptions on the health of the global economy. The IMF's latest outlook provides an upbeat view, nudging GDP growth above 4% for 2010, with upgrades for both OECD and non-OECD. We have adopted similar levels in our oil demand model, but identify offsets via deployment of a higher oil price assumption, near $77/bbl for 2010. A downward revision of 0.2 mb/d for 2009 and 2010 oil demand largely reflects changes in non-OECD baseline data. As the IMF acknowledges, economic risks remain. Eurozone finance ministers are striving to ensure that potential contagion from Greece's debt crisis could be contained. However, serious concerns persist on government resolve to reduce public deficits quickly enough and to implement genuine reform, with some commentators seeing potential economic implications being at least as great as in autumn 2008. Downside economic risks remain a clear and present danger.

The 2008/2009 global financial and economic crisis saw governments rush to provide liquidity to enable financial systems to continue to function. Moves to prevent future systemic failure are entirely justified. Yet some policy makers now implicitly see commodity futures market liquidity itself as a problem, in moves to curb what is seen as speculative excess. Despite a lack of clear evidence that crude oil prices move in lock-step with either open interest or net non-commercial positions, wide-ranging curbs on market activity now look likely. Meanwhile physical players warn of the risks to investment if they have to divert a greater share of capital to meeting the higher costs of hedging. This is not to argue against oversight and regulation, merely to observe that moves aimed at avoiding market manipulation and price volatility, if hastily formulated, could re-enforce volatility if they hamper investment and price discovery.

Natural forces were also clearly evident in April. Firstly, an ash cloud after eruption at Iceland's Eyjafjallajökull volcano wiped out an estimated 1.2 mb/d of global jet fuel demand in eight days of partial European airspace closures. Depending on the duration of volcanic activity and prevailing weather systems, 2010 jet-kerosene demand may take further hits in the months ahead.

Secondly, the hazards for oil companies in recovering oil and gas from ever deeper, more remote and technically challenging locations was tragically illustrated by the explosion and subsequent oil leak from the Deepwater Horizon drilling rig in the Gulf of Mexico. Valid arguments about the oil industry's generally good safety record fade into the background when loss of life and environmental damage materialise on this scale. Equipment standards, safety procedures and crew training will likely be reviewed, depending on results from an ongoing investigation of the incident. The industry itself needs to ensure that safety standards are scrupulously applied.  However, a knee-jerk reaction by regulators, banning new offshore licensing altogether, as some are proposing, risks pushing companies to ever-more precarious locations in search of hydrocarbons. The law of unintended consequences may apply.

Demand

Summary

  • Global oil demand is revised down by 190 kb/d on average in 2009 and 2010. These revisions stem largely from baseline changes to non-OECD historical data, as slightly higher GDP prognoses from the IMF were largely counterbalanced by a higher price assumption. However, recent submissions for February and preliminary data estimates for March have also contributed to alter the outlook to some extent. Oil demand has been stronger than anticipated in some OECD areas (North America and the Pacific), but somewhat weaker in two non-OECD regions (Asia and the Middle East). Global oil demand is now estimated at 84.8 mb/d in 2009 (-1.4% or -1.2 mb/d year-on-year) and 86.4 mb/d in 2010 (+1.9% or +1.6 mb/d versus the previous year).
  • OECD oil product demand remains unchanged at 45.5 mb/d for 2009 (-4.4% or -2.1 mb/d year-on-year), while the 2010 forecast is revised up by 80 kb/d to 45.4 mb/d (-0.1% or -20 kb/d versus 2009). This revision follows slightly stronger preliminary readings in North America and the Pacific (notably the long-expected revival of gasoline and diesel demand in the US), as well as a rosier economic outlook, mostly in North America. European oil demand prospects, meanwhile, have been trimmed as a result of the grounding of airline flights in mid-April, following problems with an ash cloud from an Icelandic volcano, and persistent concerns on the region's economic outlook, dramatically highlighted by the Greek debt crisis.


  • Non-OECD oil demand has been revised down by 230 kb/d on average in 2009 and 2010. These changes are related primarily to historical data revisions, as well as finalised 2008 data, for most non-OECD countries. In aggregated terms, non-OECD demand was raised by some 60 kb/d on average over 2000-2004, but trimmed by about 160 kb/d on average for 2005-2008. Further revisions to the baseline are possible in future, as a handful of large oil consuming countries (most notably China and Russia) have yet to submit comprehensive 2008 demand assessments. In addition, non-OECD demand has turned out to be weaker than previously thought in Asia (given very feeble Malaysian readings, although this is possibly related to data-quality issues) and the Middle East (with reported Iranian figures seemingly reflecting the impact of a weaker economy and restrictions on international trade). Overall, total non-OECD oil demand, estimated at 39.3 mb/d in 2009 (+2.2% or +0.9 mb/d year-on-year), is projected to rise to 40.9 mb/d in 2010 (+4.2% or +1.6 mb/d versus 2009).

Global Overview

This report incorporates the latest IMF economic forecasts, which were published in the Fund's World Economic Outlook released in mid-April; a revised nominal price assumption; and non-OECD historical data revisions. Together with the most recent data submissions and preliminary estimates, these changes have entailed some adjustments to both our global oil demand baseline and short-term outlook.

Firstly, compared with the IMF interim January Update, the Fund's new GDP growth projections are marginally higher for both 2009 and 2010. Last year's recession appears to have been slightly less severe than anticipated (-0.8% rather than -1.0% year-on-year), while this year's rebound is expected to be slightly stronger (+4.1% instead of +3.8%). The revisions for 2009 were mostly concentrated in non-OECD countries - a testimony of the resilience of those economies. By contrast, the adjustments for 2010 were equally split between OECD and non-OECD countries (+0.3 percentage points each).

The overall picture is broadly unchanged: emerging and developing economies, led by Asia, are set to remain the key driving force of the global recovery, expanding collectively by +6.4%, almost three times as fast as the OECD (+2.3%). Nonetheless, as made clear by Greece's financial travails, the economic recovery is at risk of drowning in an ocean of public debt, at least in some OECD countries. Although attention is currently focusing on the unfolding Greek drama, other large economies - and not only in Europe - face the increasingly pressing challenge of achieving an orderly fiscal consolidation in the next few years without jeopardising long-term growth (but arguably at the price of subdued short- to medium-term growth). Elsewhere, China has taken further steps to rein in the real estate market amid inflationary concerns, even though previous moves to restrict bank lending have so far had limited impact (GDP surged by almost 12% year-on-year in 1Q10). The country is also seemingly reconsidering its stance regarding the potential appreciation of the renminbi, but it remains unclear whether this will occur, when and to what extent - and what would be its effect upon China's economy, the oil market and the global economy at large.

Secondly, we have also adjusted our nominal price assumption for 2010 to roughly $76.50/bbl, based on recent futures curves - some $1.20/bbl higher than previously assumed. Lastly, this report also includes historical data revisions, as well as finalised 2008 data, for most non-OECD countries. In aggregate terms, non-OECD demand was raised by some 60 kb/d on average in 2000-2004, but trimmed by about 160 kb/d on average in 2005-2008. Further revisions to the baseline are likely in future, as a handful of large oil consuming countries (most notably China and Russia) have yet to submit comprehensive 2008 demand assessments.

Overall, global oil demand is now estimated at 84.8 mb/d in 2009 (-1.4% or -1.2 mb/d year-on-year and 160 kb/d lower when compared with our last report). In 2010, oil demand is projected at 86.4 mb/d (+1.9% or +1.6 mb/d versus 2009 and 220 kb/d less than previously expected), similar to the level recorded in 2007 (itself revised down by 130 kb/d). Overall, these revisions stem largely from the baseline changes highlighted above, as the higher GDP prognoses are largely counterbalanced by the higher price assumption. However, recent submissions for February and preliminary data estimates for March and April have also contributed to alter slightly the outlook. Oil demand appears to be stronger than anticipated in some OECD areas (North America and the Pacific). By contrast, demand has been weaker than previously thought in two non-OECD regions: Asia (on the back of very feeble Malaysian readings, although this is possibly related to data-quality issues) and the Middle East (with reported Iranian figures suggesting that economic conditions may be worsening).



In general terms, this appraisal remains consistent with the recent oil market narrative and expected developments. This year's oil demand growth is still expected to come entirely from non-OECD countries (+4.2% or +1.6 mb/d), where consumption is highly sensitive to economic activity. By contrast, the economic improvement in the OECD is unlikely to prompt any demand growth at all. On the one hand, falling demand for heavier products will largely offset growth in lighter product categories. On the other, expected oil demand growth in North America - albeit modest, given cheaper energy alternatives, efficiency improvements and behavioural changes - will be counterbalanced by structurally declining demand in Europe and the Pacific. It should be noted that weather effects can also play a significant role: 2007 featured unusually mild temperatures - thus largely explaining the demand contraction in the OECD - while early-2010 saw a particularly severe winter - thus limiting the demand fall there. Finally, the outlook attempts to reflect efficiency gains in line with historical trends, with global oil intensity declining by 2.1% in 2010, as much as the yearly 1996-2009 average.



OECD

OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) rose by a modest 0.4% year-on-year in March, according to preliminary data. As in February, growth was driven by OECD North America (which includes US Territories) and OECD Pacific (+1.9% and +1.4%, respectively). Demand in these regions continued to be driven by strong deliveries of LPG and naphtha (mostly used by the petrochemical industry, which is considered a leading indicator for economic activity) and by stronger middle distillates requirements, notably of diesel. By contrast, demand in OECD Europe remained quite weak, shrinking by 2.6% year-on-year as growth in LPG, jet fuel/kerosene and naphtha failed to offset losses in other product categories.



Revisions to February preliminary data (-120 kb/d) were mostly concentrated in Europe and the Pacific (-45 kb/d each on average), followed more distantly by North America (-25 kb/d). In terms of products, the largest downward adjustments pertained to gasoline and residual fuel oil in North America, possibly reflecting the effects of a harsh winter on the former and of higher gas usage on the latter. February demand thus fell by 0.1% year-on-year, rather than expanding by +0.4%.





Although estimated 2009 OECD oil demand remains unchanged at 45.5 mb/d (-4.4% or -2.1 mb/d year-on-year), the 2010 forecast is revised up by 80 kb/d to 45.4 mb/d (-0.1% or -20 kb/d versus 2009). This is due to slightly stronger preliminary readings in North America (March and April) and the Pacific (March), which point to the long-expected revival of gasoline and diesel demand in the US, as well as to a rosier economic outlook, mostly in North America. European oil demand prospects, meanwhile, have been trimmed as a result of the grounding of airline flights in mid-April, following the giant ash cloud that resulted from the eruption of an Icelandic volcano, and persistent concerns about the region's economic outlook, dramatically highlighted by the ongoing Greek turmoil. Overall, total OECD oil demand should fall for the fifth consecutive year.

North America

Preliminary data show oil product demand in North America (including US territories) rising by 1.9% year-on-year in March, following a 1.5% increase in February. Annual demand growth in 1Q10 is estimated at just slightly above zero. However, this would mark the first quarter without a regional year-on-year decline since 2Q07, possibly pointing to a gradual, cyclical resumption of oil demand growth after an almost three-year hiatus, brought about first by rising prices and then by the economic recession. Oil demand growth over the past six months has been driven almost exclusively by increased consumption of petrochemical feedstocks - LPG and naphtha - that have outweighed declines in transportation fuels.

However, transport fuel demand appears to be gaining ground. Regional diesel demand grew by an estimated 2.5% year-on-year in March, while gasoline increased by 0.6%. In real terms, US surface trade with Canada and Mexico continued to rebound, increasing by 21.7% year-on-year in February. Such developments, if sustained, point to continued transportation fuel growth through the remainder of 2010. Nonetheless, regional gasoline and diesel demand in 3Q10 - the period when it typically peaks - is expected to remain over 0.5 mb/d below 3Q07, with still-high unemployment in the US, elevated fuel prices and structural efficiency improvements weighing on growth.



Revisions to February preliminary data were modest, at -25 kb/d, stemming mostly from lower US residual fuel oil (-190 kb/d) and gasoline (-130 kb/d), which outweighed an upward revision to US diesel demand of 250 kb/d. As such, North American demand increased by only 1.5% in February, versus 1.6% reported in last month's report. North American oil demand for 2009 remained essentially unchanged at 23.3 mb/d (-3.7% or -0.9 mb/d versus 2008 and -5 kb/d compared with last month's report). In 2010, demand is seen rising to 23.5 mb/d (+0.8% or +180 kb/d year-on-year and +65 kb/d versus our last report), with increases in petrochemical feedstocks and a transportation 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 2.7% year-on-year in April, following +1.8% in March and +0.8% in February. April data showed growth in all product categories bar heating oil and residual fuel oil. LPG/ethane and naphtha grew by 9.3% and 26.6% year-on-year, respectively, while motor gasoline increased by 2.0%. Middle distillate transportation fuels showed further recovery with jet fuel/kerosene increasing by 1.0% (despite the cancellation of Europe-bound flights during part of the month) and diesel jumping by 7.5%. Diesel's strength comes on the heels of growth of 2.1% in March and 1.0% in February, suggesting that fuel consumption has finally started to benefit from improved economic conditions in the US over the past half-year. Still, this strength reflects comparison to an abnormally low base and a carry-through of February's upward revision. US diesel demand in April remained 2.9% (or 100 kb/d) below April 2008 levels, although the difficulty in splitting diesel and heating oil from US weekly data makes preliminary estimates tenuous.



The US economy has continued to improve, though with still stubbornly high unemployment and a shaky housing market. GDP grew by an annualised 3.2% in 1Q10, the third consecutive quarter of expansion, as stronger consumer spending began to supplant slowing industrial inventory restocking. Ground level activity continues to offer more evidence of a rebound. Road freight tonnage, as reported by the American Trucking Association, surged by 7.5% year-on-year in March, the fourth consecutive month of gains. For 1Q10 as a whole, tonnage rose by 4.9% versus 1Q09. Loaded container trade at the Port of Los Angeles and Long Beach increased by 6.5% year-on-year in March and by 16.0% for 1Q10 overall. Moreover, light vehicle sales continued to improve in March, up from February on a seasonally adjusted basis and 21.2% higher than March 2009. All of these indicators seemingly underscore improved transport fuel demand readings, particularly in diesel.

Recent employment and housing data have also provided support. The US economy added 290,000 jobs in April and seasonally-adjusted housing starts improved in March, topping 625,000 units. However, April's unemployment rate actually increased to 9.9%, from 9.7% in March, and almost 25% of the new jobs stemmed from the forthcoming Census (and are therefore temporary). Moreover, housing starts, though 20% higher than March 2009, remained far below the over 2 million units seen during the height of the housing boom in 2005. While stronger than expected April preliminary data and an improving economy suggest rising gasoline and diesel demand through end-summer, weak employment-related commuting and elevated fuel prices suggest more downside than upside demand pressure.

Mexican oil demand continued to lead the region in terms of growth rates, increasing by 5.4% year-on-year in March. A revival in manufacturing led by surging auto production (+85.1% year-on-year in March), as well as expanding employment, have raised economic prospects and supported strong readings in diesel (+8.0%) and gasoline (+7.1%). Meanwhile, estimated March growth for Canada was slightly negative, at -0.5% year-on-year, with downward revisions to January and February gasoline demand translating into a weaker March reading (-4.5% year-on-year).

Europe

According to preliminary inland data, oil product demand in Europe declined by 2.6% year-on-year in March, as higher LPG, jet fuel/kerosene, diesel and 'other products' deliveries were negated by losses in other categories. The rise in diesel demand (+4.7%) was particularly noteworthy as it took place amid persistent cold temperatures - HDDs were sharply higher than the ten-year average, albeit somewhat lower than in March 2009. Meanwhile, stable natural gas and relatively high oil prices continued to weigh on deliveries of heating oil (-16.3%) and residual fuel oil (-7.5%). However, gas prices are set to rise, as they are usually indexed to oil prices (with a 6-9 month lag).



The revisions to February preliminary demand data were relatively minor (-45 kb/d), as downward adjustments to 'other products' and fuel oil overtook changes to LPG and distillates data. Overall, February oil demand was slightly weaker than previously anticipated (-3.7% year-on-year versus -3.4%). As noted in our last report, 1Q10 demand has indeed been inordinately weak (-5.3% year-on-year), especially compared to last year's depressed baseline. Although estimated oil product demand for 2009 is unchanged at 14.5 mb/d in 2009 (-5.4% or -835 kb/d versus 2008), it is expected to decline to 14.4 mb/d in 2010 (-1.0% or -140 kb/d year-on-year and 40 kb/d less than previously forecast).

The short-term outlook has been complicated by the eruption of an Icelandic volcano and, more importantly, by the financial turmoil affecting Greece and the Eurozone. Despite efforts to stave off Greece's sovereign debt default and eventual contagion to other southern European countries, the market has apparently bet that several years of painful adjustment in countries with highly degraded fiscal positions is untenable, and that a default is therefore a distinct possibility, with all the negative economic consequences that would entail. A sharp recession in Greece (410 kb/d in 2009) would have a relatively minor impact on overall European oil demand. However, the picture would arguably change if other large countries - such as Spain, Portugal or Italy, which collectively consume 3.3 mb/d or roughly a fifth of the total - were also to face difficulties in financing their public debt or engage in drastic fiscal consolidation. At the time of writing, the European Union had agreed to a massive €750-billion global emergency rescue package to stabilise the euro, bringing a modicum of calm to financial markets and suggesting that the worst-case scenario has so far been averted.



Preliminary data indicate that German oil product demand plummeted by as much as 12.5% year-on-year in March. Such weakness was concentrated in heating oil and residual fuel oil deliveries (-41.3% and -17.9%, respectively), and perhaps more surprisingly, in naphtha demand (-22.1%). Consumer heating oil stocks, at 50% of capacity by end-March, are trailing almost exactly their five-year average, suggesting that this product will follow a more traditional seasonality given high oil prices, as opposed to last year's unusual first-quarter surge. Only diesel demand brought some support to overall deliveries, rising by 3.9% year-on-year after two consecutive months of strong decline - and relative to last year's extremely weak baseline.



The weak March figure for naphtha demand may well be revised up, but it could yet be another sign that the German economy slowed down in 1Q10 after its buoyant rebound in 2H09. Month-on-month car sales have fallen continuously since mid-2009, and industrial production has remained virtually flat. Exports, while rising, are about a fifth below their pre-crisis levels in volumetric terms, boding ill for the sustainability of Germany's economic recovery, which depends on export-oriented manufacturing given subdued domestic consumption. As a large portion of German exports go to other Eurozone members, the country's recovery would be further imperilled if the current financial turmoil were to spread to several neighbouring economies. Even if the worst is averted - i.e., sovereign default by one or several countries and/or exit from the Eurozone - the efforts required to achieve fiscal consolidation in Greece and elsewhere and the ensuing recession would ultimately adversely affect Germany.

Germany's diesel demand rise also occurred in other large countries, notably in France (+3.8%), Italy (+4.9%) and Spain (+4.4%). Meanwhile, residual fuel oil demand continues to be displaced by natural gas, notably in industrial processes, not only in Germany but in most European countries as well. Both products, though, may have found some unexpected support in April as a result of the air space closure prompted by the Icelandic volcano. For almost a week, travellers and companies sought terrestrial and maritime alternatives (car, bus, railway and even ship, although a concurrent strike in France somewhat limited the train alternative) to flying from and to northern European countries.



Pacific

According to preliminary data, oil product demand in the Pacific increased by 1.4% year-on-year in March, with all product categories bar heating oil and residual fuel oil registering gains. As in previous months, demand for petrochemical feedstocks remains resilient with LPG and naphtha rising by +5.7% and +2.8%, respectively. The export-led industrial recovery thus continues to gather momentum, but the region's economy is vulnerable to downside risks if external demand were to falter. Much colder temperatures (compared to both the ten-year average and the same month in the previous year) brought support to jet fuel/kerosene deliveries, which rose by 5.7% (kerosene is used for heating in both Japan and Korea). Demand for transportation fuels also improved relative to last year's weak baseline, with gasoline and diesel growing by 1.3% and 0.4%, respectively. Meanwhile, the decline in residual fuel oil deliveries persisted (-15.7%) as electricity needs were met by cheaper natural gas and rising utilisation rates at nuclear power plants.

February data revisions were relatively small (-50 kb/d), mostly centred on distillates. As such, OECD Pacific oil demand rose slightly less than anticipated in that month (-1.8% vs. 2.4% year-on-year). Estimated oil product demand for 2009 is unchanged at 7.7 mb/d (-4.8% or -390 kb/d versus 2008), it is projected to decline to 7.6 mb/d in 2010 (-0.9% or -70 kb/d compared with the previous year and 50 kb/d more than previously forecast).



Preliminary data show that oil demand in Japan rose in March (+1.0% year-on-year), for the second consecutive month albeit relative to a very weak baseline. Demand continues to be largely boosted by export-driven petrochemicals (with LPG and naphtha rising by 6.4% and 14.7%, respectively), but gasoline (+1.2%) and 'other products' (+10.1%) also contributed. This rise in gasoline demand, in particular, derived from booming passenger car sales (+41% year-on-year, but from a low baseline) supported by government subsidies for fuel-efficient vehicles. By contrast, residual fuel oil continued to decline (-23.7%), displaced by cheaper natural gas and rising nuclear power generation. Japan's nuclear utilisation rate averaged 66% in March, six percentage points higher than levels of a year ago (yet down from 70% in the previous two months).



In late April, the Japanese government announced a revamping of the toll road discount introduced in March 2009, which caps tolls at ¥1,000 (roughly $11) for passenger cars, irrespective of the mileage, during weekends and most national holidays. The toll ceiling is to double to ¥2,000 from next June and will be valid for the entire week. The new cap will actually depend on the type of vehicle, ranging from ¥1,000 for the most fuel-efficient to as much as ¥10,000 for the most polluting; in addition, it will now apply to all cars, as opposed to only those equipped with an electronic toll collection system (ETC). Finally, about a fifth of rural roads will become free.

The government thus intends to reconcile its pledge to lower tolls substantially (without the caps, Japanese highways would cost two to six times more than in other OECD countries) with Japan's commitment to reduce CO2 emissions. Yet the new system is likely to boost gasoline demand marginally, since the ¥2,000 cap will be advantageous only when driving more than 70 km - but most highway users drive less than 50 km. Moreover, rising end-user prices (now at some ¥130/litre, up by about 20% year-on-year) and the potential introduction of an environmental tax to compensate for higher emissions could dampen driving. As such, gasoline use is unlikely to arrest its ongoing structural decline, with demand currently expected to fall by 0.9% to 980 kb/d in 2010.218



Clogged By Ash

The eruption of Iceland's volcano Eyjafjallajökull, with its subsequent release of a dense ash cloud since mid-April, has heavily disrupted aviation activities, mostly in Northern Europe. Flights were partially or totally cancelled in almost two dozen countries for over one week (15-22 April). The countries most affected during the one-week air space closure included four with key international airport hubs - France (Charles de Gaulle), Germany (Frankfurt), the Netherlands (Schiphol) and the UK (Heathrow) - as well as Austria, Belarus, Belgium, Croatia, the Czech Republic, Denmark, Estonia, Finland, Hungary, Ireland, Italy, Norway, Poland, Romania, Slovakia, Slovenia, Sweden, Switzerland and the Ukraine. Paradoxically, Iceland itself was largely unaffected due to favourable winds. Inbound flights from other countries were also indirectly affected, notably from North America, but flights from Asia, the Middle East, northern Africa and several large South America were also grounded.

Aside from the material costs to the aviation industry - put at $250 million per day by the International Air Transport Association (IATA) - global jet fuel/kerosene demand also took a hit. Quantifying this disruption with precision is necessarily fraught with difficulties, given the lack of comprehensive flight data. However, a rough approximation for April can be worked out, based on the following assumptions:

In the European countries listed above, 70% of all flights on average were grounded during eight days (the 15 April flying ban was lifted on 20 April, but normal operations were fully restored only a few days later);

  • Disruptions in North America concerned 20% of all flights originating there (since the Transatlantic route is probably the busiest in the world), and 10% elsewhere;
  • Global jet fuel/kerosene demand in April would have otherwise been similar to March levels (6.3 mb/d), since this year's European spring holidays occurred in April, tempering the traditional seasonal demand fall (about 150 kb/d).

On this basis, some 1.2 mb/d of global jet fuel/kerosene (roughly 330 kb/d on a monthly basis), equivalent to 20% of the total under normal conditions, were probably not used during April's eight-day air space closure. Overall, this 10 mb disruption was about 10% lower than the one that followed the New York terrorist attacks in September 2001 (roughly 11 mb from mid September until end-October), which was largely restricted to OECD countries.

However, the episode is not over yet, as Eyjafjallajökull has again occasionally disrupted flights in several European areas since early May (notably Ireland and Scotland, followed by the northern part of the Iberian Peninsula, southern France, northern Italy and parts of Germany, Austria and Croatia). Although the latest round may turn out to be much less severe than last month's, if disruptions persist in May global jet fuel/kerosene demand could be weaker than currently thought.

Non-OECD

China

Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) rose by 12.5% year-on-year in March. The pace of demand growth has thus somewhat moderated compared with the previous four months, when total year-on-year average gains exceeded 20%. Yet gains in naphtha (38.1%), gasoil (20.4%) and 'other products' (23.7%) were strong enough to largely offset losses in other categories, notably gasoline (-6.9%) and residual fuel oil (-5.4%). The rise in gasoil demand was related to the beginning of the agricultural ploughing season and the resumption of fishing and industrial activities, although it was probably exacerbated by an unusually long and cold winter, notably in northern provinces where agricultural planting was delayed by over two weeks. The surge in gasoil use was also reflected in reported nationwide stocks, which fell by 8% month-on-month.

By contrast, the reason for the decline in apparent gasoline demand is less obvious. Stocks fell (-2% month-on-month), but much less than demand (-7% month-on-month). An explanation is perhaps to be found in March's lower refinery runs and higher gasoline exports, suggesting that Chinese refiners were awaiting a price hike that would improve shrinking domestic margins ('guideline' domestic price had last been adjusted in November 2009, but international oil prices had increased steadily since then). From this perspective, exporting had become more profitable than supplying the domestic market.



The long-anticipated increase to 'guideline' prices for gasoline and gasoil finally took place in mid-April. In line with market expectations, China's National Development and Reform Commission (NDRC) announced a price hike of 5% on average for both products, as well as a 10% upward adjustment to jet fuel prices. In terms of oil use, the price increase is unlikely to have much impact, as demand is largely inelastic and mostly driven by economic growth. Meanwhile, market watchers continue to wait for an official announcement regarding a potential reform of the country's oil product price mechanism. Any such reforms, though, are not expected to alter significantly the government's policy of subsidising several consumers in key sectors - agriculture, fishing, forestry and public transportation.



Other Non-OECD

According to preliminary data, India's oil product sales - a proxy of demand - fell by 1.0% year-on-year in March, highlighting the opposing forces driving the country's demand. On the one hand, as noted in previous reports, naphtha and residual fuel oil demand have continuously fallen for the past several months (-30.0% and -19.0%, respectively, in March) on rapidly growing availability of natural gas, both from expanding East Coast production and higher LNG imports. Assuming that LNG prices remain moderate and that infrastructure development continues apace, some observers reckon that India's domestic natural gas consumption could well rise by at least 50% in the next five years (from about 5 bcf/d in 2009 to 8 bcf/d in 2015). However, preliminary estimates for naphtha and residual fuel oil consumption are prone to revisions - February's preliminary data, which had indicated a 0.2% contraction in total oil demand, the first in over a year, were revised up to +1.4%, as the decline in both fuels, albeit pronounced, turned out to be lower.



On the other hand, demand for cooking, transportation and farming fuels is rising strongly (LPG, gasoline and gasoil rose by 8.2%, 9.4% and 7.3%, respectively, in March). It is worth noting that with car sales increasing by 29% year-on-year in 2009, India has become the second fastest growing automobile market in the world after China (+42%) and ahead of Germany (+23%). Passenger car sales grew by almost 26% year-on-year in April (commercial vehicle and two-wheeler sales rose by 40% and 26%, respectively).



India's rapid gasoline demand growth is stretching refining and marketing capabilities to the limit. Recent reports suggest that April's switching to Euro IV-equivalent standards in 13 cities and the gradual adoption of Euro III standards in the rest of the country (from June to October) may result in domestic production shortfalls in the months ahead, which will have to be met with imports. Indeed, the recent demand trend has vastly exceeded the growth projections (made in mid-2009) upon which the switching had been planned. Oil companies also apparently underestimated the time required to upgrade refining units. Seeking to limit costly imports, the Supreme Court has postponed by five months the switching to Euro III standards, which is now due to take place in October.

In Brazil, gasoil and jet/kerosene demand continued to surge, increasing by 16.4% and 15.8% year-on-year, respectively, in March. Overall 1Q10 gasoil demand jumped by 12.3% (or about 90 kb/d) versus the same period in 2009. From January until its September peak, Brazilian gasoil demand typically increases by around 160 kb/d, buoyed by increased agricultural activity and cooler temperatures. A rapidly rebounding economy is amplifying this rise, with industrial production data from February showing a year-on-year jump of 18.4%.

Brazilian gasoline demand also grew strongly (+8.6%) in March. A 90-day reduction on ethanol blended into gasoline ended on 2 May, with the content of anhydrous ethanol returning to a nominal 25% from 20%. Stronger 2010-2011 ethanol production, on the back of increased capacity, more favourable weather and sugar prices, and a government loan scheme to help producers defray day-to-day costs, should help Brazil avoid the domestic supply shortfalls that plagued the 2009-2010 harvest.





Increased agricultural activity is also bringing an earlier seasonal boost to Argentina's gasoil consumption (+9.5% year-on-year in March), which normally peaks in April. This jump in gasoil demand also suggests an ongoing economic rebound. Nevertheless, inflation remains a serious economic concern - market consensus views on annual CPI increases are some 10 percentage points higher than official figures (+9.7 year-on-year in March). Oil refinery workers called for wage increases more in line with price increases, and briefly toyed with the idea of launching a national strike. The private sector, meanwhile, is curbing investment, which could tame the country's medium-term economic prospects.

Supply

Summary

  • Global oil supply was unchanged at 86.6 mb/d in April from March, as lower non-OPEC output was offset by a rise in OPEC NGLs and crude. However, year-on-year, total production was up by 2.6 mb/d, with growth of 1 mb/d, 0.7 mb/d and 0.9 mb/d, respectively, in the three components.
  • Non-OPEC supply dipped 175 kb/d to 52.4 mb/d in April from March, as seasonal factors curbed output in the North Sea and Canada. The 2010 forecast is revised up by 0.2 mb/d to 52.3 mb/d on expectations for stronger NGL output in the US, bitumen in Canada and conventional crude in China. With 2009 estimated production unchanged at 51.5 mb/d, annual 2010 growth of 0.8 mb/d is slightly higher than in 2009 and now matches 0.8 mb/d of growth expected for OPEC NGLs, representing non-OPEC's best performance since 2004.
  • An accident that sank the Deepwater Horizon drilling rig in the US Gulf of Mexico has led to a major oil spill. While regional crude production is currently unaffected, the incident could lead to tightened offshore safety measures and may impede moves to further open up US waters for hydrocarbon development.
  • OPEC crude oil production rose by a modest 40 kb/d in April, to 29.03 mb/d. Excluding Iraq, production by the 11 OPEC members with output targets increased by 70 kb/d to 26.79 mb/d. As a result, OPEC-11 compliance slipped to 55% in April, with production estimated at 1.95 mb/d above the group's 24.845 mb/d collective quota. Effective spare crude capacity remains near 5.4 mb/d.
  • The 'call on OPEC crude and stock change' for 2010 is reduced by 400 kb/d to an average 28.7 mb/d due to this month's downward demand revisions and higher forecast for non-OPEC supply. The 'call' peaks in 3Q10 at 29.4 mb/d but recedes in 4Q10 when other supplies rise sharply.


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

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

OPEC Crude Oil Supply

OPEC crude oil production has held relatively steady at around 29 mb/d since mid-2009, a trend that continued into April. Crude oil production rose by a modest 40 kb/d in April, to 29.03 mb/d. Excluding Iraq, production by the 11 OPEC members with output targets increased by 70 kb/d, to 26.79 mb/d. As a result, OPEC-11 compliance with output targets slipped to 55% in April, with production now estimated 1.95 mb/d above the group's 24.845 mb/d collective quota. Saudi Arabia, the UAE and Kuwait remain most compliant with targeted output cuts, while Angola and Nigeria continue to produce above their allotted output levels.



Despite the steepest weekly oil price decline in more than 18 months and sudden turmoil in global financial markets in early May, several OPEC ministers attending the OAPEC Conference in Doha, Qatar on 9 May dismissed the need for further action on production levels, attributing the latest oil price downturn to a correction in overheated markets. Despite the $11/bbl drop in prices by 6 May, benchmark crudes at $75-$80/bbl remain within the group's apparent comfort zone for prices. However, Kuwait's Oil Minister said a decline in oil prices to $65/bbl would 'ring a bell' and possibly lead to an extraordinary ministerial meeting.

OPEC is not scheduled to meet to review market fundamentals for another five months, in early October. Latest data show the 'call on OPEC crude and stock change' for 2010 at 28.7 mb/d, a downward revision of 0.4 mb/d from last month's report. A baseline revision to demand and higher projected non-OPEC output are behind the revision. The 'call on OPEC crude and stock change' is pegged at 29.4 mb/d in 3Q10 and 28.6 mb/d in 4Q10.

Saudi Arabia's crude oil production in April was unchanged at 8.25 mb/d, roughly 200 kb/d above its output target but still representing a strong 91% compliance rate. Moreover, much of the above-target production is reportedly being used internally for direct burn at power and desalination plants, with volumes dedicated for domestic use likely to increase further in coming months to meet peak summer demand. Kuwaiti and UAE output was only marginally higher in April, with both countries increasing output by 10 kb/d to 2.29 mb/d.

Iraqi output fell by 30 kb/d to 2.24 mb/d in April, with production in the northern region disrupted following a bomb attack on the Iraq-Turkey pipeline, which carries one-quarter of the country's exports. The attack occurred in the northern province of Nineveh, which is a stronghold of insurgent activity, including Al Qaeda. With Iraq's political future still uncertain after March elections, analysts fear acts of sabotage aimed at destabilising the country could increase in coming months. Total Iraqi crude oil exports were estimated at 1.76 mb/d last month. Shipments from the southern Basrah terminals rose by 40 kb/d to 1.42 mb/d, while northern exports of Kirkuk crude were off by 68 kb/d, to 342 kb/d in April.

Iran's Floating Armada

Iran ramped up production in April by 70 kb/d, to 3.75 mb/d, but the extra output appears destined to end up in storage at sea. Weaker demand for heavier crudes, unattractive price formulas and the threat of new sanctions have combined to reduce buying interest in the country's heavier, sour crudes. Estimates for the volume of unsold Iranian crude held in floating storage vary but generally ranged between 30-38 mb by early May, about double end-March levels.

In the past, Iran has had similar marketing problems for its heavier, high-metal content crude, especially during seasonal refinery turnaround periods. With India's Reliance having curbed liftings of high metal content Soroosh and Nowruz crudes earlier this year, a lack of alternative buyers has added to the armada of offshore storage. This year the problem of unsold barrels has been compounded by the more general trend of term-crude customers cutting or cancelling their contracts. Term customers have turned away from Iran in part due to weaker demand for heavier, sour crudes, as well as NIOC's uncompetitive pricing relative to similar quality crudes. Notably, Iran is the only major supplier to Chinese buyers to have its term contract volumes cut this year. Refiners in Japan, South Korea and India have also cut or cancelled contracts with Iran for 2010.

Volumes at sea may continue to build until refiner demand returns after turnarounds or NIOC improves its sales terms. The last time Iran was forced to store unsold barrels at sea was in early 2008, when it took five months to sell off the surplus barrels. New changes at the top of NIOC, with a close ally of Iran's president appointed to head the troubled state oil company, may actually intensify marketing woes in the near term. NIOC is unlikely to start a fire sale of its crude held offshore, if only to avoid depressing prices for its heavier crude further. Iran's production profile has become increasingly weighted towards heavy, sour barrels that make up a large portion of its export stream. NIOC's own refining slate tends to favour running lighter, higher quality crudes for processing at its older domestic refineries.

Although the threat of further sanctions against the country also intensified this month, it is difficult to draw a direct line to the growing stockpile of crude inventories, which remains largely a marketing issue. Looming sanctions, however, do help to explain the country's shrinking list of gasoline suppliers.

The deadline is drawing closer to find a solution in the stand off with Iran over its nuclear programme, with a draft proposal of long-anticipated and much-debated additional sanctions by the United Nations expected to be finalised by mid-June and then submitted to the Security Council for review. The US and European countries have reportedly made significant progress in bringing onboard Russia and China to support the sanctions.

In anticipation of either a UN-sponsored sanctions regime or unilateral measures by the US and Europe, a number of companies have publicly announced that they have stopped supplying gasoline to Iran. Securing credit terms and insurance risks are major issues for traders. The US administration has also proposed imposing sanctions on companies selling refined products, including shipping, financing and insurance firms involved in the trading chain. So far Shell, Vitol, Trafigura, Reliance, Lukoil and Glencore have halted gasoline sales to Iran. Chinese suppliers, including CNPC and Sinopec trading subsidiaries Chinaoil and Unipec respectively, have reportedly stepped in to fill the gap, but the withdrawal of its traditional suppliers is nonetheless creating further headaches for the state oil company at a time when it is grappling with a growing fleet of floating storage.

Despite the downward pressure on regional crude prices from surplus Iranian barrels, it is unlikely Iran will be able to stem the build in stockpiles by significantly curtailing physical crude production, which has been averaging between 3.65 mb/d and 3.8 mb/d over the past year. The country needs to produce at current high levels in order to maintain gas pressure at aging fields and meet domestic demand.

Nigerian crude output was slightly lower in April due to increased militant attacks. Production was down 10 kb/d, to 2 mb/d last month, with crude flows halted by militant activity partially offset by rising output as companies continue to make progress in restoring damaged infrastructure. Last month rebels attacked a pipeline on the ENI-operated Brass River facilities, which forced the shut-in of 60 kb/d out of total 150 kb/d output in late April. Operations resumed on 5 May following completion of repairs. On the same day that ENI lifted its force majeure on Brass River, Shell was forced to shut-in output in the eastern Niger Delta region following attacks and a fire on a pipeline feeding the Bonny terminal. In addition, roughly 100 kb/d of Shell's deeper offshore EA production has remained shut-in for repair work since February.



However, relative political calm prevailed over Nigeria after Goodluck Jonathan assumed full presidential powers following the announcement of the death of President Umaru Yar'Adua on 5 May. The new president has the broad support of the main rebel groups, which may lead to a lessening of militant activity in the near term and a rise in production and export levels. Export schedules show production could reach 2.1-2.2 mb/d in May and June, reflecting higher Forcados and Qua Iboe output following restoration of shut-in capacity.

OPEC NGLs

OPEC NGLs production rose by 125 kb/d to 5.2 mb/d in April as output ramped up from projects which started-up at end-2009 and in 1Q10. Saudi Arabia, Qatar, the UAE and Nigeria accounted for all of the growth. However, going forward, NGL production for 2H10 has been revised down by 100 kb/d due to delays in new Qatari production.

Qatar's newest liquefied natural gas (LNG) production facility, Rasgas 3, train 7, started operations in February but the facility was unexpectedly shut down in April. The project was expected to reach full production by the end of September but this is unlikely given current delays. RasGas Phase 3 (trains 6 & 7) are expected to add 100 kb/d of condensate and 45 kb/d of NGLs to capacity.

Non-OPEC Overview

Non-OPEC supply dipped to 52.4 mb/d in April from March as seasonal factors curbed output in key OECD producing regions such as the North Sea and Canada. 1Q10 output is revised up by 0.1 mb/d, also to 52.4 mb/d, largely on higher-than-expected US NGL production, which is carried through the forecast. Combined with an upward adjustment to Canadian bitumen supply and a slightly higher China crude production baseline, this results in an upward revision of +0.2 mb/d to the 2010 outlook, which now stands at 52.3 mb/d. With 2009 estimated production left unchanged at 51.5 mb/d, year-on-year growth now amounts to +0.8 mb/d, a slightly higher increment than in 2009 and the strongest non-OPEC showing since 2004.



Annual data for many smaller non-OECD producers have been incorporated into our model, resulting in marginally higher historical production levels. The 2010 forecast includes a rare revision to reported Chinese crude oil production data, which were adjusted up by 100 kb/d for January. Offsetting downward adjustments in 2010 include revisions to Turkmenistan, Malaysia, Pakistan, Thailand, Brazil, Congo Brazzaville and Tunisia.



From a 1Q10 production level of 52.4 mb/d, seasonal maintenance is expected to pull down non-OPEC production to 52.1 mb/d and 51.8 mb/d respectively in the second and third quarters, before a sharp rise again to 52.7 mb/d in 4Q10, as turnarounds end and some new production kicks in. Notably, new fields or field ramp-up should add around 100 kb/d each to Brazil, Russia, Azerbaijan and Kazakhstan in 4Q10. These countries, as well as the US, Canadian oil sands, China and India will contribute to net growth of 0.8 mb/d in 2010. Offsetting year-on-year decline will be most pronounced in the North Sea and Mexico, as well as in some non-OECD producers such as Malaysia.



The oil industry's focus has recently centred on the oil spill in the US Gulf of Mexico. While the leakage risks severe damage to the area's marine and littoral environment, fishing and tourism, so far the accident has not led to any significant oil and gas production shut-ins (the rig that sank was working on non-producing wells). At the time of writing, attempts were being made to cap the well, and it remains to be seen how the incident will affect longer-term prospects for offshore drilling (see Gulf of Mexico Oil Spill Could Boost Opposition to Offshore Drilling).

OECD

North America

US - April Alaska actual, others estimated: Total US oil production picked up in February to 8.5 mb/d, with gains in crude, NGLs and fuel ethanol. Most significantly, total NGL production was reported substantially higher than forecast, at just under 2.0 mb/d. On the basis of higher-than-estimated early-2010 production, but also on a substantial upward revision to the US EIA's gas production forecast, the NGL estimate for 2010 is adjusted up by 75 kb/d for 2010 as a whole. Fuel ethanol and refinery additives output was also higher, with the former registering record output of 835 kb/d.



Gulf of Mexico Oil Spill Could Boost Opposition to Offshore Drilling

The recent oil spill in the US Gulf of Mexico has the potential to curb crude oil production, shipping and imports, even if it has not yet done so. It also casts doubt over President Obama's recently proposed plan to open up large tracts of US coastal waters that were off-limits to drilling (see Proposals to Open Outer Continental Shelf Could Double US Crude Reserves in report dated 13 April 2010). Already, the incident has led to a temporary moratorium on new drilling permits and the suspension of hearings on offshore development in Virginia, until a preliminary investigation into the accident is presented at the end of May. Beyond that, debate over the causes of the accident and the prospect of stricter safety requirements could postpone the passage of the broader energy bill in which the offshore access provisions reside.

After a fire broke out on the Deepwater Horizon drilling rig on 20 April, two days later a huge explosion caused the rig to sink, with 11 crew presumed dead. The rig, which is owned by drilling company Transocean, was leased by BP and was exploring for oil at the Macondo prospect in depths of around 1.5 km, some 60 km offshore Louisiana. The cause of the accident is thought to be a well blowout. Various security systems designed to prevent oil leakage failed to work, with the result being a flow of crude oil through the broken well and other leaks currently estimated at 5 kb/d or more.



Currently, only small volumes of gas output have been shut in and some drilling rigs in the proximity evacuated for safety reasons. Short-term measures to contain the spill include the use of oil booms, chemical dispersants and controlled fires. BP and associates have already succeeded in capping one of the leaks, though this has not yet stemmed the flow. Efforts to lower a metal dome over the leak in order to collect and pump the oil to the surface are ongoing, after attempts to activate the failed blowout preventer were unsuccessful. If quick fixes fail, it will take two to three months to drill relief wells in the vicinity.

In addition to the loss of life and the environmental impact, the potential effect on oil operations in the Gulf of Mexico is threefold. Firstly, a wider spread of the oil slick could for safety reasons force a halt to activities on oil platforms, as well as hamper shipping, including ship-based crude imports to coastal refineries. Investigations into the cause of the accident have begun and the debate over the allocation of responsibility and adequacy of safety measures is already underway. More intrusive security checks, or potential retrofits of safety equipment, if required, could hamper production in the medium term, and raise costs accordingly, but might be necessary for companies to gain access to new acreage.

Secondly, for the longer term, environmental and local industry groups have raised concerns about the very desirability of offshore drilling and the merits of opening up new areas. This takes on greater urgency given the role of the GoM in generating most of the increase in US crude production in recent years and its likely predominant role in the future.

Finally, damage has accrued to the oil industry in general, and to the reputation of the companies concerned. The memories of past incidents such as Piper Alpha (UK, 1988) and Exxon Valdez (US, 1989) linger. Both resulted in a significant tightening of safety requirements for drillers, the latter also in the Oil Pollution Act that apportions liability and led to the introduction of double-hulled tankers. A 1969 spill in Santa Barbara directly led to the ban on further drilling in California, a position not even the recent bill proposal wanted to overturn. At the very least, the Deepwater Horizon accident highlights acutely the high risks involved as international companies are required to source hydrocarbon supplies in ever more challenging and remote locations.

US crude output expectations are also raised by 25 kb/d for 2010 on robust production from onshore unconventional basins such as the Bakken Shale in North Dakota. In the US Gulf of Mexico (GoM), the Telemark field started output in March, tied-back to Mirage and set to pump at 25 kb/d once its capacity is reached. The Gulf's largest field, Thunder Horse, started maintenance in the latter half of April, halving production for 60 days and thus curbing 2Q10 production by an estimated 70 kb/d. Expectations for 2010 GoM production overall are left unchanged, with projected net growth of 80 kb/d. Total US oil production is now expected to rise from 8.1 mb/d in 2009 to an upward-revised 8.2 mb/d in 2010, a fifth consecutive year of growth.

Canada - Newfoundland March actual, others February actual: Canadian oil production rose to 3.4 mb/d in February, largely on higher oil sands output. Bitumen production in February was reported 50 kb/d higher than expected, partly reflecting lower output of synthetic crude, as one of Suncor's upgraders was out of action for repairs (synthetic crude production was 65 kb/d lower than estimated). The plant suffered a fire last October and has subsequently run at below capacity for several months, though in April was back at normal levels, according to Suncor. The higher bitumen figure was nonetheless partly carried through the forecast on higher anticipated ramp-up at several new projects. In combination with higher forecast NGL production - also stronger in reported February data - total Canadian oil supply is forecast to rise from 3.2 mb/d to 3.3 mb/d in 2010, with combined bitumen and synthetic crude growth and higher NGLs offsetting slightly lower conventional crude production.



Canadian conventional crude production, while in decline in most areas, is set to get a boost in Newfoundland this year. Around mid-year, both the North Amethyst and Hibernia AA fields will come onstream, adding 35 kb/d and 25 kb/d respectively to the larger White Rose and Hibernia complexes.

With Canadian oil production set to grow in coming years, infrastructure to send more crude to the US is being expanded. The Keystone pipeline is currently being filled with crude and is set to start pumping 435 kb/d of Albertan crude from Hardisty, Alberta, to refineries in Illinois in the second half of 2010. Phase II will expand the line to Cushing, Oklahoma, the delivery point for WTI futures and a key crude oil hub. From late 2012, a further expansion will enable crude exports to flow all the way to the US Gulf, with an increased capacity of 1.1 mb/d.

North Sea

Norway - February actual, March provisional: At 2.4 mb/d in February, total Norwegian oil production was unchanged from January, but dropped to 2.3 mb/d in March as seasonal maintenance started. In late April, Norway and Russia agreed on the delineation of their northern boundary in the Barents Sea, which could assist the development of expected resources there. On the other hand, in a long-awaited report, the government cut its reserves estimate for waters around the Lofoten islands off Norway's northwestern coast from 2 to 1.3 billion barrels. Less oil in place could undermine development prospects amid an ongoing debate over the environmental impact, which itself could intensify following recent events in the US Gulf. Besides its current strategy of bringing onstream small tie-backs to existing infrastructure, Norway needs to develop new resources if it wants to stem the decline in its oil production. Overall, the Norwegian oil production outlook is little changed and is forecast to fall from 2.4 mb/d in 2009 to 2.2 mb/d in 2010.

UK - February actual: UK oil production also dipped slightly in February, to 1.45 mb/d, and is expected to slide further in March and 2Q10. Output at Buzzard, the UK North Sea's largest oil field, was cut by an estimated 50 kb/d due to equipment repairs. In early May, Buzzard started a turnaround estimated to last ten days, again curbing output, this time by an estimated 65 kb/d. In both the UK and Norway, commercial helicopter flights were temporarily grounded in mid-April after the eruption of Iceland's Eyjafjallajökull volcano, though platforms could be supplied by boat and the interruption caused no production shut-ins. The UK production forecast is broadly unchanged, with output expected to decline from 1.5 mb/d in 2009 to 1.4 mb/d in 2010.

Former Soviet Union (FSU)

Russia - March actual, April provisional: In line with our forecast, Russian oil production dipped marginally to 10.4 mb/d in April following several consecutive months of growth. Final data showed March output levels virtually unchanged. In April, production started at Lukoil's Yuri Korchagin field in the northern Caspian - a first for the Russian share of the inland sea. The field will have a production capacity of 50 kb/d. As elsewhere, Lukoil is lobbying to receive tax breaks for Yuri Korchagin, without which, it claims, it will be difficult to realise profits in a challenging and otherwise undeveloped province. Prime Minister Putin's presence at the field's launch was interpreted as a positive sign in that regard. TNK-BP announced that its new Verkhnechonsk field would ramp-up more slowly than initially expected. Despite this downward revision, overall Russian prospects for 2010 are unchanged, potentially growing by 0.2 mb/d from last year's 10.2 mb/d.



Kazakhstan - March actual: March oil production dipped by 30 kb/d to 1.64 mb/d and is expected to fall further in April to around 1.6 mb/d as maintenance at the Tengiz field's sour gas unit curbs production. Towards the end of the year, a steady production increase should bring the country's total output to around 1.7 mb/d. Average annual production of 1.58 mb/d in 2009 is forecast to rise to 1.64 mb/d in 2010.

Azerbaijan - January actual, February provisional: Preliminary February production data were 65 kb/d lower than expected, seeing total Azeri output at 1.03 mb/d. Downward-adjusted 1H10 output at the Azeri-Chirag-Guneshli (ACG) complex is offset by a slightly more robust forecast for the second half of the year, leaving average 2010 production more or less unchanged at 1.1 mb/d, up from 1.05 mb/d in 2009.

FSU net oil exports rose by 380 kb/d to 9.2 mb/d in March, or only marginally higher than one year ago. Gains were mostly in crude shipments, which were up by 290 kb/d at 6.6 mb/d, as loadings at Primorsk, on the Baltic, returned to normal following maintenance. Druzhba and 'Other Routes' were once again lower, reflecting the structural shift away from those outlets. Flows through the Baku-Tbilisi-Ceyhan (BTC) pipeline were up by 60 kb/d at 740 kb/d on expected higher Azeri production. Lastly, exports from the Arctic and Far East were 80 kb/d higher at 790 kb/d. Year-on-year growth of 310 kb/d is due to the start of crude exports from Russia's new terminal at Kozmino, the end-point of the half-completed Eastern Siberia-Pacific Ocean (ESPO) pipeline. In line with Asian practice, Russia has released loading schedules for crude from Kozmino out until early July. On this basis, June will see shipments of 260 kb/d, followed by higher volumes in July. Russia's crude export duty has been set at a higher $284/mt or $38.90/bbl for May, compared with $268.90/mt or $36.68/bbl in April.



March product exports were up by 90 kb/d at 2.6 mb/d, with higher fuel oil and gas oil shipments offsetting a decline in other products. The launch of Russia's new Ust-Luga product export terminal on the Baltic Sea has been postponed to the latter half of the year. As with the gradual shift in crude exports away from traditional routes such as the Druzhba pipeline towards the Far East and expanded Russian terminals such as Primorsk, the new 450 kb/d terminal - the largest in Russia - will serve to draw away shipments from other ports, notably in the non-Russian Baltic.

Other Non-OPEC

China - March actual: In March, Chinese oil production inched up to just below 4 mb/d and is expected to cross that threshold soon for the first time, with a steady increase from offshore output. Unusually, reported January data were revised up by 100 kb/d, centred wholly on the offshore sector. This revision, coupled with higher-than-expected March production (output at the ageing Daqing field held up well, while the offshore Huizhou field restarted production after a typhoon), was partly carried through the forecast, boosting forecast 2010 output by 60 kb/d. Total Chinese oil production is now expected to rise from 3.8 mb/d in 2009 to 4.0 mb/d in 2010, putting the country's growth roughly on a par with the expected respective increases in Russia, Brazil and US plus Canada.



India - February actual: Indian oil production continues to grow steadily, reaching 830 kb/d in February, as output from the Mangala complex in Rajasthan rises. Mangala started production in July 2009 and in combination with satellites Aishwariya and Bhagyama is now expected to reach an upward-revised 240 kb/d by late 2012. Largely due to Mangala, Indian oil production is forecast to rise from 800 kb/d in 2009 to 870 kb/d in 2010.

Brazil - March actual: In Brazil too, oil production is rising steadily, averaging 2.62 mb/d in March, with slightly lower-than-expected crude and NGL output partly offset by higher fuel ethanol production. With increasing crude production in key offshore areas - notably start-up at Cachalote, ramp-up at Frade, Marlim Leste P-53, Marlim Sul 2, Parque das Conchas and the launch of commercial-volume production at the large Tupi field all to come by the end of 2010 - Brazilian crude production will keep rising and is currently forecast to rise from average 2009 production of 2.5 mb/d to just under 2.7 mb/d in 2010.

However, the debate over the proposed plans for majority-state-owned Petrobras rumbles on, which could lead to delays in the development of the large pre-salt reserves (for background, see Brazil's Lula Outlines Suggested Pre-Salt Development Regime in report dated 10 September 2009). President Luiz Inácio Lula da Silva, when he launched the proposals, had hoped to have them sanctioned by Congress ahead of presidential elections due in October 2010. With attention shifting to the campaign, it looks increasingly unlikely that the set of four bills will be passed soon. Debate is still intense over capitalisation plans for Petrobras, which would see the government cede 5 billion barrels of to-be-developed reserves to the company, allowing it to raise capital, as well as the proposal to make Petrobras the mandatory operator of all new fields.

Various Africa: In Gabon, an oil workers' strike cut oil production by an estimated 50 kb/d to 200 kb/d in mid-April, but work soon resumed again thereafter. Average annual production is therefore only marginally affected and is expected to remain steady around 250 kb/d in 2010. In Sudan, elections confirmed the incumbent president, Omar al-Bashir, but results showed likely increased support for southern independence in a referendum scheduled for 2011. A division of the country could spark conflict over rights to the country's oil, much of which is located in the south and some of which straddles the proposed border. While Sudan's oil production has grown from virtually nothing in the late 1990s to 470 kb/d in 2009, sanctions and a lack of investment have seen production stagnate. Our forecast sees output remaining unchanged in 2010.

OECD Stocks

Summary

  • OECD industry stocks rose counter-seasonally by 7.3 mb to 2 709 mb in March, with opposite movements in crude and products across all three OECD regions. Crude oil inventories built by 32.6 mb, in contrast to a 28.5 mb drop in products, mostly in middle distillates and gasoline.
  • OECD stocks in days of forward demand rose to 60.5 days by end-March, compared to 59.9 days at end-February. Downward revisions to demand estimates drove the increase, alongside a significant gain in Pacific crude oil stocks.
  • Preliminary data indicated total OECD industry inventories rose by a sharp 47.4 mb in April, more than the five-year average build of 18.0 mb. More than a half came from an increase in products in the US, while by 24 April, Japanese inventories had edged up by 3.2 mb. Stocks in Europe added further 10.1 mb to the overall stock levels.
  • Short-term crude floating storage levels continued to rise to 81 mb in April, from 65 mb in March. Most of the increase resulted from additions of Iranian crude oil to floating storage in the Middle East Gulf. Draws in Mediterranean and Northwest European short-term product floating storage pushed the overall product levels further down from 52 mb at end-March to 40 mb at end-April.


OECD Inventory Position at End-March and Revisions to Preliminary Data

OECD commercial oil stocks built by 7.3 mb in March, in contrast to the five-year average draw of 12.5 mb. This divergence from seasonal pattern comes from a larger-than-usual crude build outpacing a weaker-than-normal product draw. On a days of forward demand cover basis, stock levels increased by 0.6 days to 60.5. Preliminary April data point to a 47.4 mb build led by product restocking in the US.



February OECD inventory levels were revised up by 17.3 mb, mostly due to an upward 17.7 mb adjustment to European crude readings, mainly in Germany, Italy and the UK. Combined with revisions to North American and Pacific crude stock levels (-6.4 mb and +6.3 mb, respectively), the actual February crude stock change in the OECD turned out to be less dramatic than previously estimated (a 6.4 mb build, against a 10.4 mb draw reported last month). Overall, oil inventories in February drew by 22.2 mb due to a seasonal 27.4 mb decrease in products.



Crude oil industry inventories increased by 32.6 mb in March, almost twice the normal 16.8 mb build. Most of the surge came from the Pacific, where abundant imports and low refinery runs propelled stocks up by 12.7 mb, in comparison to a typical 1.1 mb stockbuild. North American stocks soared by almost double their five-year average, while European crude holdings moved in line with seasonal norms. Preliminary reports indicate that OECD crude stocks built by 14.7 mb in April. This build was augmented by an additional 16 mb added to floating storage, most of which stems from an increase in Iranian crude at sea (see Iran's Floating Armada).

Oil products decreased by 28.5 mb in March, slightly less than the seasonal average decline of 33.4 mb. Distillates drew by 17.9 mb across all three regions, in line with seasonal trends. Still, in both absolute and days of forward cover terms, distillates trended above the five-year range, slightly increasing their surplus versus the historical average from 64.8 mb to 66.5 mb, or to 6.1 days in March. Gasoline stocks fell by 11.1 mb and remained in the upper half of the five-year range. Contrary to April historical trends, gasoline holdings rose in Japan and, more significantly, in the US ahead of the driving season, and contributed to a sharp 32.7 mb increase in OECD product stocks, along with distillates and fuel oil. However, preliminary Japanese data only run up to 24 April, as data for the last week of April were unexpectedly delayed.



Flight disruptions caused by a volcanic ash cloud spreading over Europe increased jet fuel stocks during April. Japanese preliminary data showed a 0.6 mb build, while US stocks rose by 2.4 mb. Inventories held in independent storage in the Northwest Europe declined, but according to various reports, at least three tankers anchored near the European coast stored jet/kerosene following the disruption. Jet fuel floating storage was expected to draw down after air traffic above Europe returned to normal, since the product degrades fairly quickly and it needs to be blended with gasoil/diesel when held in long-term storage.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry stocks rose by 3.8 mb in March. The regional crude stock-build of 13.3 mb and product draw of 10.8 mb were driven primarily by stock movements in the US, while Mexican oil stocks fell by 0.5 mb despite a 1.2 mb increase in gasoline stocks. Depressed US refinery runs in the middle of spring maintenance diverted 13.7 mb of crude into storage tanks. Middle distillates, mainly along the East Coast and in the Midwest, drew by 6.4 mb while gasoline dropped by 7.9 mb.



However, US crude runs rebounded by 0.7 mb/d in April, resulting in a 29.5 mb product build. The largest increases came from propane (+8.5 mb) and middle distillates, with diesel rising by 4.0 mb and heating oil contributing 2.9 mb. Middle distillates have increased their surplus to the five-year average; this time the rise stemmed from an end-winter related heating oil stock-build. Gasoline stocks posted surprising gains and extended the surplus to the five-year average to 17.6 mb from 10.5 mb in March.



April crude oil inventories rose by 4.7 mb, with stocks in the Midwest reaching historically high levels. Holdings at Cushing, Oklahoma, the delivery point of NYMEX WTI, posted 5.1 mb gains on the month and reached 36.2 mb, approximately two thirds of nameplate capacity. Cushing storage capacity gradually expanded throughout 2009 to 51.5 mb estimated by Reuters and further 2.3 mb of new capacity reportedly became operational this April. However, Genscape, a company using infra-red spectrum monitoring techniques to estimate Cushing levels, assessed total nameplate capacity including new storage tanks at 51.4 mb at end-April. Still, most market sources put Cushing operable capacity at only around 80% (around 41-42 mb).

OECD Europe

Contrary to a usual draw of around 2.5 mb, commercial oil inventories in Europe fell only slightly in March. Crude holdings rose by 6.6 mb, but were more than offset by an 8.8 mb draw in products. French crude built counter-seasonally by 2.4 mb, reversing a similar February draw when a labour strike at the country's oil ports disrupted tanker offloading. Germany and Italy also contributed to the overall build. Meanwhile, middle distillate decreases, mainly in Germany, the Netherlands and 'other Europe', drove the product stock-draw. German consumer heating oil stocks decreased further in March to 50% of capacity.



Preliminary Euroilstock data show stocks in EU-15 plus Norway rose by 10.1 mb in April, led by a 11.2 mb build in crude oil inventories. Products fell by 1.2 mb with draws in gasoline and fuel oil offsetting increases in middle distillates and naphtha. However, gasoline and gasoil stocks held in independent storage in Northwest Europe rose month-on-month. Despite a temporary curb in jet/kerosene demand due to the volcano disruption, holdings in Northwest Europe fell. Yet, reportedly, at least three additional tankers stored jet/kerosene in floating storage off Europe after the disruptions.

OECD Pacific

Pacific commercial stocks rose counter-seasonally by 4.0 mb in March, as crude oil imports increased despite slowing regional refinery runs. Crude oil stocks in Korea and Japan built by a combined 12.3 mb, while gasoline and distillates fell by 2.0 mb and 4.9 mb, respectively.



Preliminary weekly Japanese data up to 24 April provided by the Petroleum Association of Japan (PAJ) point to a 1.2 mb drawdown in crude oil stocks, despite depressed refinery runs as maintenance began in April. Meanwhile, gasoline inventories built counter-seasonally by 1.9 mb and jumped from the bottom to the top of the five-year range. Gasoil inventories built by 1.1 mb and jet fuel added a further 0.6 mb, possibly because of flight disruptions in Europe. Following a burst of colder weather in mid-April, kerosene fell more than the seasonal average to its lowest levels in at least the past seven years.



Recent Developments in Singapore and China Stocks

Product inventories held in Singapore rose for the fourth consecutive month to record levels in April. Fuel oil stocks soared to new highs by mid-month, as ample supplies overtook relatively stable regional demand. Afterwards, stock levels fell sharply, narrowing the surplus to the five-year average level from 10 mb at end-April to 7.5 mb at the beginning of May. In total, fuel oil inventories rose by 0.6 mb on the month and middle distillates added a further 0.9 mb. Light products fell from 12.3 mb in March to 11.5 mb, 25% above the five-year average. Overall, a rise in product stocks to 49.3 mb coincided with higher exports from China following higher refinery runs in recent months and from Korea as refineries returned from seasonal maintenance.



Oil product inventories in China dropped by 8.7 mb in March. An increase in gasoil exports pushed gasoil inventories 7.1 mb lower on the month. Similarly, gasoline and kerosene stocks fell, albeit by smaller amounts. The draw in product stocks outpaced a 2.5 mb addition to Chinese crude inventories. Oil imports rose further in March and crude stocks, as reported by China Oil, Gas and Petrochemicals, stood at 208.9 mb at end-month. While data series for 2010 are not directly comparable with 2008 and 2009, the March product draw and crude build came in close to the seasonal movements evident in the previous two years' data.



Prices

Summary

  • The fallout from the Eurozone debt crisis and ensuing sell-off in global stock markets hammered oil prices in early May. Oil markets posted their biggest weekly decline in nearly 18 months by 7 May, with prices for benchmark crudes plummeting by more than $10/bbl, after steady gains in April.
  • Oil prices moved in lock-step with the crash in equity markets, fuelled by fears that the Greek debt crisis could spread to other European nations. Benchmark prices partly recovered their losses after EU ministers voted to create a €750 billion fund for debt-stricken member countries. WTI futures prices were trading around $76/bbl and ICE Brent at $79.50/bbl at press time.
  • The catastrophic explosion at the Deepwater Horizon rig in the Gulf of Mexico has had a minimal impact on actual production in the region so far but there could be far-reaching implications. Operational safety and regulatory issues have raised the spectre of significantly higher development costs, a possible curbing of offshore leasing and slower growth in offshore production. Combined, these critical issues could lead to a strengthening of the long-term forward price curve.
  • Refining margins decreased across the main refining regions as product price increases only partially offset crude oil prices. Upgrading margins remained mostly flat as gasoline and jet fuel/kerosene's crack-spread divergent trends offset fuel oil's wider discounts.
  • Crude freight rates continued to recover in April from recent mid-February lows thanks to further deployment of carriers into floating storage whilst an oversupply of smaller vessels tempered gains for product charters.


Market Overview

A series of man-made and natural disasters acted as oil market backdrops in recent weeks. Jet fuel demand was curbed by around 1.2 mb/d for eight days in mid-April due to an ash cloud from an Icelandic volcano but the corresponding downward pressures on prices proved to be fleeting. This was followed by the catastrophic rig blow-out in the Gulf of Mexico on 22 April and the extraordinary meltdown in financial markets on 6 May.

Oil prices fell by around $4/bbl in the aftermath of the volcanic eruptions, when European officials took the unprecedented decision to ground flights as a safety measure, but prices recovered relatively quickly as airline traffic gradually returned to normal. Prices for Brent futures in April were hardest hit by the volcanic eruption but posted an equally strong recovery once the clouds had cleared. April Brent futures prices were up on average by a steep $5.82/bbl, to $85.75/bbl for the month. WTI futures prices rose by a smaller $3.29/bbl, to $84.58/bbl in April, with the month-on-month gains tempered by rising stocks of crude at the pivotal Cushing, Oklahoma storage depots.

By early May, however, the fallout from the Greece-inspired Eurozone crisis and ensuing sell-off in global stock markets triggered the biggest weekly price decline in nearly 18 months, with benchmark crudes plummeting more than $10/bbl. Oil prices moved in lock-step with the crash in equity markets, fuelled by fears that the Greek debt crisis could spread to other European nations. Benchmark prices recovered their losses after EU ministers voted to create a €750 billion fund for debt-stricken member countries. WTI futures prices were last trading around $76/bbl and ICE Brent at $79.50/bbl.



A number of market players, however, are taking the downturn in their stride, arguing that prices were due for a correction. Indeed, even several OPEC ministers attending the OAPEC Conference in Doha, Qatar viewed the latest oil price collapse as largely a correction of overheated markets and dismissed the need for further action on production levels. Despite the near 13% decline in prices by 7 May, benchmark crude prices remained in a $75-$80/bbl range that arguably represents something of a comfort zone for producers. However, Kuwait's Oil Minister said a decline in oil prices to $65/bbl would 'ring a bell' and possibly lead to an extraordinary ministerial meeting.

Against this backdrop, diverging trends emerged between the benchmark crudes. The WTI-Brent front month price spread widened in April, with WTI trading at $1.18/bbl discount to Brent on average for the month compared with a premium of +$1.36/bbl in March and +$1.66/bbl in February. By early May, the spread had deepened further, with WTI trading closer to a $3/bbl discount. Record high levels of crude oil stored at Cushing, Oklahoma and increased flows of Canadian crude into the Mid-continent region pressured prompt WTI prices. At the same time, Brent crude remained relatively firm due to a combination of crude oil stocks in Europe hovering at five-year lows and upcoming maintenance work at the key North Sea Buzzard field.



April's upward price trajectory was fuelled by relatively healthy demand growth in non-OECD countries, as well as in the US. Market expectations for a robust US summer gasoline season also supported prices, with the RBOB futures contract breaking the $100/bbl threshold and crack spreads rising above $15/bbl in early May. The relentless rise in crude oil markets in April continued to confound analysts, given increased supplies of both OPEC and non-OPEC crude, lower refiner demand during turnaround season and weak European demand. Volatile financial markets and a stronger dollar also capped the price gains.

As yet unclear is the market impact from the catastrophic explosion at the Deepwater Horizon drilling rig in the Gulf of Mexico. So far, the impact on production in the region has been minimal but once the oil spill is under control, there could be far-reaching implications for operational and regulatory issues during the upcoming months (see Non-OPEC Supply, 'Gulf of Mexico Oil Spill Could Boosts Opposition to Offshore Drilling'). However, crude oil inventories in the key US market remain at the top of the five-year average range, with stocks at the NYMEX contract delivery point at Cushing reaching record high levels of 36.2 mb.

An armada of tankers storing unsold Iranian crude is also weighing on Asia-Pacific markets. Iran had an estimated 30-38 mb in floating storage in early May. Refiners have curtailed term-contract purchases of Iran's relatively uncompetitively priced crude. Rising competition from Russian ESPO crude into the region has also hit Iranian sales. Less clear is the impact of threatened sanctions on the state oil company's difficulties in selling its crude (see OPEC Supply, 'Iran's Floating Armada').



Futures Markets

Despite solid indications of a recovery in oil demand growth, plentiful prompt barrels were weighing on front-end futures prices even before the collapse in financial markets in the first week of May. The contango between front-month WTI crude prices and forward markets continued to widen in April and into early May, especially for WTI. Market perceptions of near-term oversupply of oil pushed June crude oil to just over $3/bbl below the July-delivery contract. That represents the biggest M1-M2 discount in a year. Again, steadily rising crude stocks at Cushing are behind the widening contango.

The WTI M1-M2 contract at almost $3/bbl in the first week of May compares with $1.36/bbl on average in April and just 37 cents/bbl in March. The widening in the Brent M1-M2, however, was more muted due to relatively tight inventory levels. The Brent M1-M2 was running about $1/bbl in early May, compared with around 75 cents/bbl in April and 44 cents in March. Further out, after steadily narrowing since the start of the new year, the WTI M1-M36 spread widened markedly over the last five weeks, to $14.38/bbl by 7 May from $3.77/bbl on the 1st of April.



Spot Crude Oil Prices

Spot crude oil markets strengthened across all major regions in April, with prices for benchmark grades up on average by between $3-6/bbl month-on-month. Spot crude prices weakened mid-month after the volcanic ash incident hit demand, recovered by end-month but then spiralled lower in tandem with futures markets by early May. Spot prices for medium-heavy sour grades weakened relative to lighter crudes as higher OPEC production in recent months worked its way into the market and with rising volumes of the new Russian ESPO crude pressuring competing grades. Weaker fuel oil crack spreads are also adding downward pressure on medium heavy crudes.



In Europe, the Urals-Brent differential continued to widen on increased exports of the Russian crude and expected lower volumes of North Sea grades due to field maintenance. The Urals-Brent spread in the Mediterranean averaged -$2.27/bbl in April compared with -$1.85/bbl in March, -$0.80/bbl in February and just -$0.10/bbl in January.

In the US crude market, prices for medium sour grades like Mars and Poseidon strengthened relative to the depressed spot prices for light sweet WTI. Strong crack spreads for gasoline, gasoil, diesel and jet fuel are supporting most US domestic grades while WTI remains weak under the weight of surplus barrels. Should the oil spill in the Gulf of Mexico spread inland to shipping lanes, and disrupt imports into this key refining region, WTI prices could rebound.

CFTC Watching Trading Limits in Wake of Equity Market Sell-off

Open interest in crude oil contracts traded on the New York Mercantile Exchange flirted near record highs in the week ended 4 May. Total open interest jumped to 2,922,000 contracts. The latest reported increase in open interest does not include last week's most volatile trading day, 6 May. The wild price swing in equity and commodity markets has prompted the US Security & Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to investigate any unusual trading activity following the plunge in financial markets on 6 May in the wake of the European debt crisis. Regulators are reviewing activity to ensure no position limits were exceeded.



Latest data released by CFTC showed open interest in Light Sweet Crude Oil rose by 49,400 contracts over the week, to 1,445,300 by 4 May. Non-commercials, which includes Money Managers and Other Reportables were net long 109,870 NYMEX crude futures contracts, up just 606 contracts. The CFTC's disaggregated report showed Money Managers increased net long crude positions by 8,052, to 154,982 contracts. By contrast, producers and swap dealers shed 7,323 short positions during the week, ending net short 130,846 crude futures contracts.

In refined products, open interest in the RBOB contract hit record levels, with non-commercials buying 6,036 contracts, with their net long position at 80,529 contracts. Money Managers were the heaviest buyers, increasing their net long RBOB positions by 7,501 contracts, to 68,922 contracts.

Meanwhile, the CFTC closed out the period for comments on its proposals for setting limits on energy futures positions on 26 April. There were more than 7,500 comments submitted on the proposals and officials report the majority of the responses were from individuals urging regulators to cap the number of futures contracts a trader can hold. CFTC officials are reviewing the comments but there is no fixed time limit when or if the agency will follow through to formally propose new rules.

The new position limits, if adopted, will affect the WTI, heating oil, RBOB gasoline and natural gas futures contracts. The new rules would allow exemptions to companies using the futures contracts to hedge their commercial risks. Market participants are concerned that adopting the new position limits would raise the costs for companies engaged in hedging activities, make the market less efficient and prompt the largest traders to move their business overseas to unregulated over-the-counter markets at the expense of liquidity in the established futures markets.

Spot Product Prices

Spot prices for refined products rose across the board in April. However, the increases in spot crude prices largely outpaced the month-on-month gains in products, with only crack spreads for gasoil and diesel posting modest improvement. In the US, gasoline cracks against the relatively weaker WTI were also the exception.

Gasoline crack spreads weakened $1-2/bbl on average in April as refiners cranked up production after turnarounds. In the US, however, cracks rebounded again in early May on expectations of stronger demand going into the peak driving season as well as fears that the Gulf of Mexico oil spill could affect refining operations in the region. Relative to other products, spot prices for naphtha posted modest gains on the month, especially in Europe. As a result, crack spreads in Europe and Asia moved into negative territory in April on limited demand due to the ongoing olefin cracker turnaround season.



Jet fuel markets briefly dipped in mid-April as fears mounted that stocks would mushroom the longer aircraft were grounded due to the Icelandic volcano, but crack spreads strengthened again once the skies had cleared, rising to just over $13/bbl in Northwest Europe by end April compared with a mid-month low of $9.39/bbl.

Spot prices for gasoil/diesel posted the sharpest month-on-month increases, up on average by 6-8.5% in April. Crack spreads for both gasoil and diesel strengthened. In Northwest Europe, gas oil differentials to Brent increased on average to $9.64/bbl in April versus $9.03/bbl in March and $6.53/bbl in February. In the Mediterranean, gasoil cracks for Urals firmed to $11.71/bbl in April compared with $10.76/bbl in March. 

In Singapore, lower refinery throughput rates continued to support gasoil crack spreads, with differentials for Dubai crude averaging $11.18/bbl in April against $10.47/bbl in March.

Diesel cracks — a key barometer of economic activity — also posted solid increases in April thanks to improved demand, which was up by an estimated 4% year-on-year in OECD countries. In Rotterdam, ULSD cracks in April averaged $11.90/bbl, an increase of $1.38/bbl over March levels. In the Mediterranean, ULSD differentials to Urals rose by a similar $1.26/bbl to $13.66/bbl.



Refining Margins

In April, refining margins decreased across the main refining regions, bar the Maya coking margin in the USGC and Kern coking on the West Coast. Product price increases only partially offset crude oil prices, which rose more than $5/bbl for most of the benchmark grades.



Across the regions, only jet fuel/kerosene and gasoil/diesel premiums to crude increased, while the gasoline differential to crude narrowed and both fuel oil and naphtha discounts to crude widened - bar a marginal improvement for naphtha in the USGC.

Upgrading margins were mostly flat in April as gasoline and jet fuel/kerosene's divergent crack-spread trends offset fuel oil's wider discounts. During the first week of May, the upgrading differential waned as gasoline and middle distillates prices fell more steeply than those of fuel oil.

End-User Product Prices in April

End-user prices in April climbed on average by 4.3% from March levels, in US dollars, ex-tax. Japan apart (-0.3%), all surveyed countries reported average monthly increases in April of over 3%. A notable rise was reported in the UK where a surge in diesel (+10.3%) and gasoline (+9.8%) prices resulted in average growth of +8.8%. More modest transport fuel inflation was experienced in Continental Europe and North America, where prices strengthened by between 2.7-4.6% for gasoline and 3.1-5.9% for diesel. In contrast, Japan reported a 1.0% increase for gasoline and a 0.4% price contraction for diesel.

Pump prices rose across all surveyed countries in March. At the forecourt, gasoline was priced at $2.82/gallon ($0.75/litre) in the US, ¥133/litre in Japan and £1.20/litre in the UK. Continental European prices ranged from €1.18/litre in Spain to €1.43/litre in Germany. Led by the strengthening price of crude oil, gasoline pump prices were on average 22% above year ago levels. Following a similar trend to transport fuels, heating oil prices also grew by 27% compared to a year ago. Compared to March, heating oil prices grew proportionally less than transport fuels, prices in US Dollars, ex-tax increased on average by 3.6% with rises in Europe (+4.9%) and Canada (+2.4%) offsetting the -1.6% decrease in Japan.

Freight

Following tighter tonnage for larger carriers and an oversupply of smaller vessels, dirty and clean freight rates diverged in April. Dirty rates continued their recovery from recent mid-February lows as they firmed during April. VLCC rates on the benchmark Middle East Gulf - Japan route increased from $14/mt to over $18/mt by mid-month on the back of rising demand ahead of the Easter holidays and the further deployment of carriers into floating storage in the Middle East Gulf. Rates then slipped back to below $17/mt at month-end following lower enquiries. Suezmax rates on the West Africa - US Atlantic Coast route surged in the second half of the month from $14/mt to over $22/mt resulting from a shortage of both VLCC and Suezmax vessels in the Atlantic basin to transport Nigerian cargoes. Aframax rates on the short haul UK - North West Europe route peaked mid-month at $7/mt before falling back again to month-start levels of $5/mt by end-April.

Clean charter rates consolidated their positions following March's losses and were little changed for much of the month. A notable increase was reported on the Handymax South East Asia - Japan route where rates lifted from $11/mt to over 13/mt towards month end on higher enquiries and relatively tight tonnage. Rates on the benchmark Aframax Middle East Gulf - Japan and Handymax Caribbean - US Atlantic Coast routes, remained stable at around $20/mt and $11/mt, respectively.



Oversupply is expected to weigh heavily on rates for the foreseeable future. However, in the short term, support could come from three factors. Firstly, increasing Somali pirate activity, which has forced many operators to divert cargoes away from the East African coast and in some cases to reroute around the Cape of Good Hope, increasing shipping times to Europe by up to 12 days. Secondly, although as yet, the recent oil spill in the Gulf of Mexico has not had an impact on the tanker market, if the slick was to encroach on shipping routes it would likely impede shipping to and from the US Gulf Coast. Finally, the renewed rise in the use of large crude carriers for floating storage could limit their availability, especially on routes from the Middle East Gulf.

Data suggest that short-term floating storage stood at 120.9 mb at end-April, representing a monthly increase of 3.7 mb. Crude oil now accounts for 81 mb, an increase of 16 mb from end-March. The bulk of this increase was located in the Middle East Gulf where, by early May, Iran was estimated to be storing 30-38 mb on a reported 18 VLCCs and one Suezmax. The trend for more oil to be stored on larger carriers is highlighted by a net decrease in the number of vessels being deployed for storage from 100 to 92. The total number of VLCCs deployed for storage now stands at 44, a month-on-month increase of 4. Product floating storage fell by 12.3 mb across all regions, with decreases concentrated in Northwest Europe (-4.6 mb) and the Mediterranean (-3.3 mb). In the coming months, it is conceivable that crude floating storage could increase further if a widening price contango encourages arbitrage front month buying.

Refining

Summary

  • Global refinery crude throughputs were 72.9 mb/d in 1Q10, 330 kb/d above our previous assessment. The increase from last month's report stems in part from the inclusion of annual historical data for a number of non-OECD countries, as well as higher than previously assumed runs in Europe, North America and Singapore in February and March.
  • 2Q10 global crude runs are similarly revised higher by 370 kb/d, to average 73.3 mb/d. Sharply higher US runs in April, on the back of improved margins for complex refineries and a sharp exit from turnarounds, lift North American throughputs by 930 kb/d compared to 1Q10. Stronger expected Chinese runs for the quarter add to product supplies, while heavy Pacific maintenance and continued shutdowns in Latin America limit the global quarter-on-quarter increase.
  • OECD crude throughputs averaged 35.9 mb/d in March, essentially flat from February and 240 kb/d lower than March 2009. Runs rose in both the US and Europe, while Pacific throughputs fell in line with seasonal trends. Weekly data brought US, and with them total OECD, runs sharply higher in April, given more favourable refining economics. A downward correction in Atlantic basin margins is expected however, as more capacity comes out of maintenance in the coming months, unless refiners pre-emptively curb runs or global oil product demand exceeds expectations.
  • February OECD refinery yields increased only for naphtha and the 'other product' category. Total product gross output was 4.0% below levels of a year ago at 41.9 mb/d. European output contracted by 6.4%, while in North America and the Pacific output fell by 2.8% and 2.7%, respectively. Naphtha and other products output increased by 8.1% and 1.4%, whereas gasoil/diesel and fuel oil output shrank the most, by 9.7% and 8.6%. Gasoline and jet/fuel output declines were less pronounced, at 2.1% and 2.4% respectively.


Global Refinery Throughput

Global refinery crude throughputs averaged 72.9 mb/d in 1Q10, 330 kb/d higher than our previous assessment, and 1.1 mb/d above runs of a year ago. Since last month's report, we have started to incorporate consolidated annual data for a number of non-OECD countries up to 2008, to be published in the upcoming edition of the IEA's Energy Statistics of Non-OECD Countries. We will continue to update historical data in the months to come, as they become available and are evaluated. Updated data for February and March runs reflect the trend of generally stronger margins seen at that time. Gasoline cracks to benchmark crudes rose steadily over the first quarter, peaking in mid-March, on tighter supplies and expectations of stronger demand in the months ahead. The steep fuel oil discounts and widening light-heavy differentials propped up upgrading margins and supported runs at complex refineries.

US refiners increased runs sharply in April, as seasonal maintenance ended, to take advantage of more favourable economics. In April, refinery margins generally trended lower, but were supported by strong jet/kerosene and diesel cracks. Albeit lower than those of March, margins could still support relatively high US run rates into May. However, as more capacity comes out of maintenance (on both sides of the Atlantic) however, increased product supply will likely pressure margins lower again, unless refiners pre-emptively cut utilisation rates to keep a floor under prices or if demand is stronger than anticipated.

Chinese refinery runs are equally now seen higher for 2Q10, after newswire reports of increased runs at the country's largest refineries for April and May. Prolonged outages in Latin America, at PDVSA's Isla refinery and Chile's earthquake-hit Bio Bio refinery, are expected to keep regional run rates at exceptionally low levels until the start of 3Q10. In all, global 2Q10 refinery run rates are now estimated at 73.3 mb/d, an increase of 450 kb/d over 1Q10 and 1.3 mb/d higher than 2Q09. The global total is also 370 kb/d higher than our previous estimate.



OECD Refinery Throughput

OECD refinery crude throughputs averaged 35.9 mb/d in March, essentially flat from February and 240 kb/d lower than in March 2009. OECD North American runs rose by 170 kb/d month-on-month, following stronger runs in the US. OECD European rates also increased by some 230 kb/d in the month with higher runs in both France and Spain. The Pacific, on the other hand, saw sharply lower runs on both a monthly and an annual basis, as regional maintenance and permanently shut capacity reduced runs. Final data for February leave total OECD largely unchanged from preliminary estimates, as higher than initially estimated runs in Europe were offset by lower final Japanese data.

2Q10 OECD throughputs are expected to return to levels of a year ago, at 36 mb/d, as a significant improvement in the US from April onwards is offset by continued year-on-year deficits in Europe and the Pacific. Runs are slightly higher than in 1Q10 (+160 kb/d), as seasonal patterns and maintenance schedules diverge across regions. It must be noted that the 2Q10 OECD estimate has been significantly raised since last month's report, by 450 kb/d in total, in large part due to the sharp increase in US runs recorded in April, and following a reassessment of runs based on updated information on shutdowns and oil product demand.



OECD North American runs averaged 17.1 mb/d in March, an increase of 170 kb/d from a month earlier and on par with March 2009. US runs, in particular, rose, despite a heavy maintenance schedule. The commissioning of Marathon's expanded Garyville Louisiana refinery and a sharp ramp-up of rates in early March supported the increase. The Garyville refinery added 180 kb/d of crude distillation capacity and reportedly reached its full 436 kb/d capacity in early March after the completion of a planned turnaround to integrate the new units.



In April, US crude runs again rose sharply, supported by a steep decline in maintenance activity (reported outages falling by almost 1 mb/d from March levels) and significantly improved refining margins. Total US capacity utilisation (including non-crude inputs such as NGLs) reached its highest since July 2008, at 90% at the end of April, up from only 83% a month earlier. Regionally, runs rose in all PADDs bar the Midwest (PADD 2), further adding to stock builds at Cushing and elsewhere in the region. The Gulf Coast saw the strongest gains, as refineries there are generally more complex and benefitted from stronger upgrading margins, and recorded a month-on-month increase of 490 kb/d. The East Coast followed with an increase of 125 kb/d, while the West Coast and the Rocky Mountains added 115 kb/d and 50 kb/d month-on-month, respectively.

It is worth noting in addition to the 720 kb/d monthly increase in US crude runs in April, a further 165 kb/d increase was reported for blending components and non-crude refinery inputs (unfinished oil and gas plant liquids/NGLs). The non-crude inputs to crude distillation units reached their highest volume since the weekly EIA series started in 1990, adding to product supplies at the expense of crude throughputs.



European throughputs were stronger than expected for both February and March, but remain well below levels of a year ago. Relatively healthy cracking margins in both Northwest Europe and in the Mediterranean supported runs. Finnish refiner Neste Oil reported on 29 April 1Q10 profits of €64 million, an increase of 4.9% compared to 1Q09, due to a 'positive surprise' of rapidly improving refining margins early this year. April European runs likely dipped again, as the shutdown of Neste's Porvoo refinery in early-month added to an already heavy maintenance schedule. From May onwards, runs are expected to increase. ConocoPhillips restarted its 260 kb/d Wilhelmshaven refinery at the tail-end of April, after having been shut for six months due to poor economic conditions. The return of Wilhelmshaven and additional capacity coming back from maintenance, will likely pressure margins lower again however, potentially bringing about another round of discretionary run cuts at less profitable units.



OECD Pacific throughputs averaged 6.6 mb/d in March, 370 kb/d lower than the previous month and 170 kb/d below levels of a year ago. Weekly data from the Petroleum Association of Japan (PAJ) for the first three weeks of April suggest the seasonal decline in run rates flattened slightly, in line with reported and scheduled outages data for the region. The big increase in turnarounds, and corresponding fall in utilisation rates, is expected for May. As regional refiners still have ample spare capacity, we expect the decline in run rates to be less pronounced than planned shutdowns, as other refiners will most likely compensate for part of the shut capacity with increased runs.



Idemitsu Kosan joined the list of Japanese refiners to slash refining capacity at the end of April, announcing it will cut crude distillation capacity by 100 kb/d over the next three to four years. Idemitsu currently operates a nameplate capacity of 640 kb/d, spread across four refineries. It is unclear where, and in what form the capacity cuts will take place. Previously, Nippon Oil/Japan Energy, Cosmo Oil and Showa Shell have already announced capacity cuts of a combined 710 kb/d before 2014, now one year earlier than originally announced.

Non-OECD Refinery Throughput

Non-OECD throughputs averaged 37.1 mb/d in 1Q10, 1.9 mb/d higher than a year earlier, and 200 kb/d higher than last month's estimate. The upward revisions stem in large part from higher runs in Singapore, as maintenance thought to take place in February and March, only started in early May. A higher estimate of historical Belarusian runs, and a new assessment of current Russian crude deliveries to the country, further raised the baseline and forecast for the FSU region. The incorporation of revised monthly data for Brazil going back to January 2000 also entails a higher baseline. The inclusion of lower annual data for a number of non-OECD countries, for 2008 and prior years offset some of these changes.



The 2Q10 forecast has been lowered by 80 kb/d since last month's report, following a lower assessment for Latin America, partly offset by higher Chinese runs. PDVSA's 320 kb/d Curacao refinery, in the Netherlands Antilles, did not come back on line at the end of April, as previously assumed, and is now expected to remain shut also for most of May. Heavier maintenance schedules at Brazilian refineries further cut regional runs, these only averaging 5.1 mb/d in 2Q10, down 290 kb/d from a year earlier. Total non-OECD 2Q10 throughputs are nonetheless estimated at 37.3 mb/d, 290 kb/d up from 1Q10.

Chinese refinery runs were 8.14 mb/d in March, 200 kb/d lower than February's record high, and 55 kb/d lower than our previous estimate. Maintenance at China's largest refinery, CNPC's Zhenhai, reportedly cut runs there from 420 kb/d in February to 320 kb/d in March, while Sinopec's Guangzhou refinery in southern China's Guangdong province had to shut a 160 kb/d CDU for several weeks after a fire on 18 March. Lower runs were also seen at Sinopec's Qilu refinery, as a 70 kb/d crude distillation unit (CDU) was closed in March. The refinery reportedly started up a new 160 kb/d CDU at the same time (or in early April), two months ahead of schedule. The new unit allows the refinery to process more local heavy/sour, acidic crude from the onshore Shengli field, and frees up imported crudes for plants closer to import terminals. The refinery is mothballing another 40 kb/d CDU, due to a lack of upgrading units, resulting in only a net 50 kb/d increase of distillation capacity.



Further capacity increases are expected in the coming months. Dongming Petrochemical will commission a new 60 kb/d CDU in May, raising nameplate capacity to 120 kb/d. A further 120 kb/d increase is planned, potentially making it China's largest independent refiner. The commissioning of CNPC's 200 kb/d Qinzhou refinery (in Guanxi province) is not expected until 3Q10.

Despite the slightly lower than expected runs in March, we have adjusted China's 2Q10 runs higher since last month's report. According to newswire surveys of the largest refineries, runs rebounded in April and increased further in May to new highs. Independent refiners are also thought to have raised runs in April.

The 14 April announcement of an increase in prices of gasoline and gasoil will also have supported refinery margins, and a subsequent increase in runs at independent refiners. The National Development and Reform Commission (NDRC) announced on 13 April that it would raise retail prices of gasoline and diesel by RMB 320 ($46.87) per tonne from 14 April.

Elsewhere in Asia, refinery activity dipped sharply in March, for the most part on account of lower throughputs in India, Pakistan and Taiwan. Indian refiners recorded runs averaging 3.8 mb/d, 100 kb/d lower than a month earlier as almost all refineries saw runs dip slightly. Maintenance at HPCL's Vizag refinery and MRPL's Mangalore refinery further reduced runs. India's Finance Ministry agreed in early May to give Rs 140 billion ($3.14 billion) to Indian state refiners for the fiscal year ending March 2010, partially compensating them for selling four oil products in the domestic market at prices below international values. Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) will receive proportional shares of the total subsidy. This Rs 140 billion compensation is the additional payment for this fiscal year, adding to an earlier payment of Rs 120 billion, but fall short of the annual loss of Rs 460 billion for the three companies, estimated by the Ministry of Petroleum and Natural Gas, resulting from government capped prices.

Elsewhere in the region, maintenance at Formosa's 400 kb/d Mai Liao refinery and CPC's Kaohsiung refinery cut Taiwanese runs by an estimated 230 kb/d in March. Pakistan's Pak Arab Multan refinery cut runs by another 100 kb/d. Regional throughputs are expected to rebound in April, before again falling in May and June as a new round of maintenance hits. An estimated 0.5 mb/d is expected off line for these two months, with the closure of ExxonMobil's Jurong refinery in Singapore in May followed by Indonesia's Calicap refinery in June among the most notable contributors.



Latin American runs remained low in March and April, at an estimated 5.0 mb/d and 5.1 mb/d respectively. PDVSA's 320 kb/d Isla refinery has remained shut since 1 March due to a power outage that caused serious damage to the refinery's air compressors. We had previously assumed the refinery to come back at the end of April, but this is now only expected at the end of May. Venezuela's Cardon refinery had to shut after a fire at end April (but is again operational), while Amuay was partly closed for a scheduled 45 day maintenance programme. The Amuay refinery was already running at reduced rates in February and March due to unplanned outages, thus reducing product exports.

Our assumptions for the restart of Chile's 116 kb/d Bio Bio refinery, which has remained shut since the 28 February earthquake, remain largely unchanged despite some conflicting reports on its possible restart. ENAP's Chief Executive Rodrigo Azocar announced in early May that the refinery could restart in late May. Chilean mining minister Laurence Golborne had said at the end of April that the refinery would only resume operations in June and not reach capacity before the third quarter. We assume the refinery to start operation, albeit at reduced rates, at end May, but note the risk of further delays.

Brazilian historical refinery runs have been revised upward to include oil processed at the Guamare complex, previously excluded from data reported by the National Petroleum Agency (ANP). The Guamare complex is currently being extended and new units are being installed after which it will be renamed the Potigar Clara Camarao refinery (RPCC). The project will boost installed capacity by 30 kb/d and deploy a gasoline production unit. RPCC is one of five refining units designed by Petrobras to increase domestic refining capacity by 1.2 mb/d by 2015 in its 2009-2013 Strategic Plan. The company is currently in the process of updating its investment programme, and is widely expected to delay, reduce or shelve some of the refinery projects due to the worsening outlook for refining since its previous plan, from January 2009. The revisions entail 30 kb/d higher runs in 2009, and a 10 kb/d increase to prior years. February runs were also revised higher by about 50 kb/d, although the data show a monthly drop in runs of 180 kb/d in March. The decrease was more or less in line with expectations, as several large refineries, including Petrobras's largest refinery, the 360 kb/d REPLAN refinery, entered an extensive turnaround period.

Elsewhere in the region, members of Argentina's Federation of Oil, Gas and Biofuel Workers threatened to block several refineries and fuel depots at the end of April, demanding a 32% salary increase. The strike was called off however, as an agreement with energy companies was reached in last-minute negotiations. We have also revised runs at Valero's Aruba refinery since 2007. Based on company information, runs averaged only 196 kb/d in 2007 and 167 kb/d in 2008, down from 244 kb/d in 2006.

Russian throughputs averaged 4.9 mb/d in March, 70 kb/d lower than in February but 120 kb/d higher than our previous estimate. Runs are expected to dip in April, as significant capacity is taken offline due to maintenance, before rebounding in May and into summer.

Since last month's report, we have reassessed Belarusian refinery activity for historical and forecast periods. Including revised annual data for the 2004-2008 period, we have lifted the baseline by 50 kb/d. Further, incorporating Russian crude deliveries data to the ex-Soviet republic, we have reassessed current trends, raising 2010 estimates. Judging from Russian crude delivery schedules for 2Q10, it seems that the disruption to supplies and resulting drop in refinery runs earlier this year were short lived. Russian deliveries rebounded to 370 kb/d in February, up from only 166 kb/d a month earlier, as an agreement between the country and Russia, allowing it to import duty-free oil, was reached. 2Q10 Russian crude delivery schedules include volumes to the two Belarusian refineries of 4 500 mt, equating to daily volumes of 365 kb/d for the quarter. Furthermore, the first batch of Venezuelan crude arrived at the Mozyr refinery on 2 May. A total of 30 kb was delivered by rail to the refinery, after a deal had been made by the two countries for delivery of up to 80 kb/d of Venezuelan crude to Belarus refiners. As uncertainty over the profitability of such a trade remains, we have refrained from raising run rates to reflect a more permanent transatlantic trade yet.

Elsewhere in the region, the 56 kb/d Odessa refinery in the Ukraine restarted its operations in April after shutting 27 January for a 30-day maintenance programme. The company had delayed the restart due to a dispute with the government over value-added tax refund and possibly poor economics. March Kazakh refinery runs were unchanged from February, at 290 kb/d.

OECD Refinery Yields

February OECD refinery yields increased only for naphtha and for the 'other product' category. Total product gross output was 4.0% below levels of a year ago at 41.9 mb/d. European output contracted by 6.4%, while in North America and the Pacific output fell by 2.8% and 2.7%, respectively. Regarding products, naphtha and other products output increased by 8.1% and 1.4%, respectively, whereas gasoil/diesel and fuel oil output shrank the most, by 9.7% and 8.6%. Gasoline and jet/fuel output contracted as well, but these declines were less pronounced, at 2.1% and 2.4%, respectively.



OECD naphtha yields continued their upward trend and surpassed their five-year average level. Naphtha and 'other products' gross output hovers within the five-year range level, while output for the rest of the products remained below historical levels. Interestingly, OECD naphtha net imports are above their five-year range, mainly the result of higher petrochemical feedstock imports in the Pacific.



Gasoline yields fell slightly, in line with seasonal patterns. European refiners continued restraining yields, which fell below their five-year range in February. However, yields in North America and the Pacific rose and continued above their five-year range, supported by wider premia to crude prices. This translated to higher output month-on-month while in Europe February gross output was 325 kb/d below its 2009 level (-10.2%) and 522 kb/d (-15.5%) below the five-year average.



Gasoil/diesel yields fell slightly month-on-month and approached the bottom end of the five-year range. Yields fell strongly in Europe, from 38.5% to 37.4%, but still remained above the five-year average, while yields in North America were unchanged, below their five-year average. Both regions' output remained well below seasonal norms, with European output at 5.1 mb/d (-518 kb/d year-on-year) and North American output at 4.7 mb/d (-677 kb/d year-on-year).