Oil Market Report: 10 June 2010

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Highlights

  • Crude oil prices tumbled $18/bbl in the first three weeks of May amid deepening concerns over Eurozone debt issues, before partially recovering by end-month. By early June, benchmark crudes were trading in a lower range of around $72-73/bbl.
  • Global oil demand is revised up by 60 kb/d to 86.4 mb/d in 2010 on stronger-than-expected preliminary OECD data, albeit downside risks remain. With 2009 readings largely unchanged, yearly global demand growth in 2010 is now seen at +1.7 mb/d (+2.0%), deriving almost entirely from the non-OECD.
  • Total oil supply fell by an estimated 575 kb/d to 86.3 mb/d in May, with lower non-OPEC output due to seasonal maintenance. However, 2010 non-OPEC output is revised up by 0.1 mb/d to 52.3 mb/d amid slower expected North Sea decline. This year's growth of 0.8 mb/d from non-OPEC comes on top of 0.8 mb/d from OPEC NGLs.
  • OPEC crude oil supply was down slightly versus April, with higher Iraqi production offset by supply outages in Nigeria and Angola. In all, May crude oil output fell by 30 kb/d, to 29.02 mb/d, leaving spare capacity around 5.4 mb/d. The underlying 2010 'call on OPEC crude and stock change' remains 28.7 mb/d, peaking at 29.1 mb/d in 3Q10.
  • April OECD industry stocks rose by 47.9 mb to 2 726 mb as both crude and refinery supply came in stronger. Forward demand cover is assessed at 60.5 days, up by more than a day from downward revised end-March readings. Preliminary May data indicate OECD inventories and floating storage rose by 19.0 mb and 6.5 mb, respectively.
  • Forecast global 2Q10 refinery crude throughput is raised to 73.5 mb/d, representing an annual increase of 1.5 mb/d. In 3Q10, crude runs are forecast to rise further to 74.4 mb/d as seasonal maintenance activity falls back significantly.

Game changers

Unforeseen events and market trends repeatedly arise to recalibrate the way we look at the oil market.  Conventional wisdom (assuming that market drivers will be the same in future as in the past) repeatedly gets overturned.  The problem lies in distinguishing real 'game-changers' from isolated, albeit momentous, events which may subsequently prove to have more limited impact. 

Today, short/medium term market trends appear to hinge on two main 'game changers' - the threat to global economic recovery from OECD sovereign debt issues, and the sustainability of Chinese oil demand growth. Our imminent medium-term outlook will again run two GDP scenarios which, although not specific to sovereign debt issues, acknowledge uncertainties over the path of future growth. Two very different oil market balances arise, depending on assumed GDP growth and offsetting differences in the impetus to improve oil use efficiency. But a common thread is the strength of non-OECD demand and the predominance of China. Price subsidies partly underpin non-OECD demand strength, something also touched upon in those projections and to be more fully presented in the 2010 World Energy Outlook. Markets are inter-related, so any slow-down in the OECD could curb export-driven Chinese oil demand growth in future. Nonetheless, China is currently seen generating 40% of 2010 incremental demand (now +1.7 mb/d) and nearly 45% of 2010-2015 growth. The implications of China's attempts to secure oil supplies via overseas investment are highlighted this month, and will be further examined in IEA research this autumn.



April's sinking of the Deepwater Horizon drilling rig and the ongoing oil spill might also prove to be a supply-side game changer. It is unquestionably a human tragedy and a major blow to the ecosystem and local economy in the US Gulf. Whether it ultimately turns out to be a defining moment for broader US energy policy and for offshore oil and gas development worldwide remains to be seen. True, analysts and journalists have rushed to provide estimates of how much deepwater supply is at risk, even before exact causes and proposed remedies are clear (our own tentative view is up to 300 kb/d by 2015). Emotion is understandably running high, and the way deepwater hydrocarbon developments are approved, operated and regulated will of course be thoroughly examined and potentially amended. 

Procedures are already under review in the US, but also in the UK, Norway, Brazil, Canada and China. However, mandated changes to US operations may not automatically be transferable to other countries, nor necessarily imply a swansong for offshore expansion.  The UK, for example, implemented over 100 new maintenance and safety procedures after 1988's Piper Alpha disaster and separated the regulatory functions of field licensing and operational safety, an example the US is now belatedly following. Many other authorities outside the US amended procedures in light of Piper Alpha too. And despite major operational changes in the UK sector after Piper Alpha, the considered response nonetheless allowed scores of new offshore fields to be developed in the subsequent decade, generating over 300 kb/d of incremental offshore supply. The longer-lasting impact of Deepwater Horizon on US oil supplies may depend on whether operational negligence on the part of companies or regulators, or rather shortcomings in current operating procedures and regulatory structures, were the key cause. The former might suggest a less profound impact on future oil supply than the latter.

Demand

Summary

  • Global oil demand is revised up by 60 kb/d to 86.4 mb/d in 2010, but remains largely unchanged at 84.8 mb/d in 2009. This adjustment results largely from stronger-than-expected preliminary data in the OECD, while non-OECD demand looks slightly weaker. Global oil demand is now expected to expand by +2.0% or +1.7 mb/d year-on-year, following a sharp contraction in 2009 (-1.5% or -1.3 mb/d versus 2008).
  • OECD oil product demand is revised up by 80 kb/d to 45.5 mb/d in 2010 (+0.2% or +70 kb/d year-on-year). By contrast, the 2009 estimate is untouched at 45.5 mb/d (-4.5% or -2.2 mb/d versus 2008). This revision stems from stronger preliminary readings, notably in North America, where distillate demand appears to have surged in May as the economic recovery gained traction. However, the high weekly data could underestimate exports and may subsequently be revised down. Meanwhile, downward adjustments in Europe, partly related to April's air travel disruptions but also to prevailing economic woes, exceeded higher readings in the Pacific.


  • Non-OECD oil demand is nudged down by 30 kb/d to 40.9 mb/d in 2010 (+4.1% or +1.6 mb/d year-on-year), but remains broadly intact at 39.3 mb/d in 2009 (+2.2% or +0.9 mb/d versus 2008). These changes are related to cross-regional adjustments, with weaker demand in Africa and the Middle East offsetting higher readings in Asia and Latin America. Downward revisions are partly due to data quality issues, with submissions to the Joint Oil Data Initiative (JODI) database becoming more erratic for some countries such as Malaysia, South Africa and Chile. Meanwhile, Iran continues to post weak demand figures.

OECD

OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) rose by 1.1% year-on-year in April, according to preliminary data. Growth continues to be driven primarily by OECD North America (which includes US Territories) and OECD Pacific (+3.6% and +2.3%, respectively). Virtually all products bar residual fuel oil posted gains. By contrast, demand in OECD Europe remained very weak (-3.5%), partly as a result of the volcano-related flight disruptions that hit jet fuel/kerosene demand. Yet all product categories bar diesel either stagnated or receded, suggesting that other factors - such as the tepid economic recovery - are also at work.

March revisions, concentrated in North America and Europe, were sizeable (+400 kb/d). In North America, adjustments (+180 kb/d) were mostly ascribed to the 'other products' category; in Europe (+160 kb/d), they pertained essentially to distillates. As such, March demand rose almost three times as fast as previously estimated (+1.3% year-on-year versus +0.4%).



Even though estimated 2009 OECD oil demand remains untouched at 45.5 mb/d (-4.5% or -2.1 mb/d year-on-year), the 2010 prognosis is raised by 80 kb/d (+0.2% or +70 kb/d versus 2009). This revision stems from stronger preliminary readings, notably in North America, where distillate demand appears to have surged in May as the economic recovery gained traction. However, the high weekly data could underestimate exports and may eventually be revised down. Meanwhile, downward adjustments in Europe, partly related to April's air travel disruptions but also to prevailing economic woes, exceeded improved readings in the Pacific. Interestingly, if North America's strong preliminary estimates are confirmed, total OECD oil demand could briefly buck the decline observed in the previous four years.







North America

Preliminary data show oil product demand in North America (including US territories) rising by 3.6% year-on-year in April, following a 2.7% increase in March. While petrochemical feedstock demand growth persisted, transportation readings continued to improve. Regional diesel demand grew by an estimated 4.5% year-on-year in April, while motor gasoline increased by 2.5%. Jet fuel/kerosene declined slightly in April, by 0.2% year-on-year, but this reading came in stronger than the average 3.7% annual decline witnessed from last September through February. Regional trade has rebounded sharply and industrial output continues to improve. Strong economic indicators seem consistent with higher oil demand in May, yet uncertainty surrounding US weekly readings, particularly in middle distillate, suggests actual growth may not be as high as our current 6.3% year-on-year estimate.



March preliminary data were revised up by 180 kb/d, stemming mostly from higher readings in jet fuel/kerosene, heating oil and the 'other products' category in the US. Gasoline in Canada was also revised up over 1Q10, with January-March higher by 75 kb/d on average. As such, North American demand increased by 2.7% in March, versus 1.9% in last month's report. North American oil demand for 2009 remained unchanged at 23.3 mb/d (-3.7% or -0.9 mb/d versus 2008). In 2010, demand is seen rising to 23.6 mb/d (+1.5% or +340 kb/d year-on-year and +160 kb/d versus our last report), with increases in petrochemical feedstocks and transportation fuels 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 6.7% year-on-year in May, following a 3.3% rise in April. May data showed annual growth across all product categories, except motor gasoline, with total product demand increasing by 1.2 mb/d versus the previous year. Almost 90% of the growth stemmed from three product categories - middle distillates, jet/kerosene and 'other products' - which increased strongly on both a yearly and monthly basis. By contrast, gasoline, including data up to the Friday of Memorial Day weekend (the start of the summer driving season), posted a year-on-year decline of 20 kb/d. But annual comparisons are relative to an abnormally low baseline; excluding hurricane-affected September 2008, May 2009 marked the low point in US total product demand during the recession.



Demand gains in May seemingly offer further indication of a US economic recovery led by increased industrial output and restocking amid a lagging consumer sector. Strong distillate demand growth has indeed coincided with rising trucking, rail and shipping activity and may also reflect some economic catch-up as firms restock. Gasoline demand has remained relatively weak, stymied by high unemployment (9.7% in May) and a more elevated retail price environment in the first half of the month. Nevertheless, the May distillate spike may stem from factors beyond consumption. Weekly apparent demand data reflect deliveries to the domestic market as well as exports. Our own methodology attempts to anticipate revisions from weekly to monthly data based on historical averages. For May, however, we have left distillate demand unadjusted rather than applying the upward adjustment suggested by our model, which would increase an already sharp rise in consumption. While it is near impossible to accurately predict revisions to weekly data, market reports of stronger diesel exports in May suggest that the eventual change to the unadjusted reading may be a downward one.

Mexican oil demand increased strongly, rising 6.3% year-on-year in April as manufacturing activity has continued to improve. Most of the demand strength stemmed from diesel and residual fuel oil while motor gasoline growth was relatively weaker and jet/kerosene posted a decline.

Meanwhile, estimated April growth for Canada was boosted to 3.8% from 0.6% on upward revisions to baseline demand from January-March. Diesel, residual fuel oil and petrochemical feedstocks were the fastest growing categories while jet/kerosene registered a second consecutive month of positive growth.

Europe

According to preliminary inland data, oil product demand in Europe contracted by 3.5% year-on-year in April, largely on plummeting jet fuel/kerosene deliveries following the eruption of the Icelandic volcano. Demand for heating oil and residual was also subdued, despite relatively cold temperatures (with HDDs higher versus both the ten-year average and April 2009), being displaced by relatively abundant and cheap natural gas supplies. This offset relatively strong diesel deliveries in most countries.



As widely anticipated, total European demand in 1Q10 turned out to be inordinately weak (-4.8% year-on-year), following two quarters that featured falls of 6.9% each on a yearly basis. This is all the more striking when considering last year's depressed baseline (1Q09 itself had shrunk by 2.6%), and despite hefty revisions to March preliminary demand data (+160 kb/d). These revisions were mostly due to stronger than expected distillates, notably diesel, and naphtha, thus tempering that month's anticipated weakness (-1.4% year-on-year versus -2.6%).



Putting aside the volcano-induced air travel disruption (jet fuel/kerosene plunged by 12.1% in April, according to preliminary data), the overall oil demand picture is mixed. The improving and continued strength in diesel demand - the mainstay of industrial activity, freight, construction and farming - would suggest that the region's economic recovery is ongoing, but stagnant naphtha deliveries point to slowing activity. As such, even though estimated oil product demand remains largely unchanged at 14.5 mb/d in 2009 (-5.5% or -850 kb/d versus 2008), we now expect it to decline in 2010 slightly more than previously thought to 14.2 mb/d (-1.7% or -250 kb/d compared with the previous year and 130 kb/d less than previously forecast). Should the economic outlook worsen, this forecast may be further revised down.

Whether Europe sees consolidated economic recovery, and assuages worries about the Eurozone's long-term viability, will arguably depend on the largest economies - most notably Germany and France, which account for half of the area's GDP - being able to boost domestic demand in order to support weaker members. However, an increasing number of European governments appear more focused on balancing their budgets in order to engender greater financial stability, hoping that external demand will provide the necessary impetus. Admittedly, the euro's depreciation may provide some support to exports, but it is unlikely to restore competitiveness among southern countries. Fiscal retrenchment underway could lead to a more subdued economic recovery, stagnation or even another recession, and thus weigh on the few bright spots of oil demand (naphtha and distillates). And if economic prospects worsen, the effects are also likely to be felt outside the region - more notably in China, as Europe has become its main trading partner.



Pacific

Preliminary data show that oil product demand in the Pacific rose by 2.3% year-on-year in April, with all product categories bar naphtha and residual fuel oil posting gains. Demand was largely supported by jet fuel/kerosene and distillates, which surged by 23.0% and 4.0%, respectively. The rise in kerosene deliveries, which is used for heating in both Japan and Korea, was due to unseasonably cold temperatures (HDDs were higher than both the ten-year average and the same month in the previous year). The increase in distillate demand, driven by diesel, was within seasonal trends but contrasted with a weak baseline. Meanwhile, the petrochemical recovery remains resilient, with LPG demand increasing by 2.0% year-on-year. And even though naphtha deliveries contracted by 2.7% on a yearly basis, they still rose month-on-month by 0.8%. This suggests that the much-dreaded slowdown of the Chinese economy, the region's main market for petrochemical goods, has yet to materialise. Finally, the decline in residual fuel oil deliveries (-12.1%) continued as cheaper natural gas and rising utilisation rates in nuclear power plants satisfied most electricity needs.



March data revisions were relatively small (+70 kb/d), mostly centred on middle distillates (jet fuel/kerosene and gasoil) and residual fuel oil. As such, OECD Pacific oil demand increased slightly more than anticipated in that month (+2.2% vs. +1.4% year-on-year). Although estimated oil product demand for 2009 remains unchanged at 7.7 mb/d (-4.8% or -390 kb/d versus 2008), the outlook for 2010 is raised slightly to 7.7 mb/d (-0.2% or -20 kb/d compared with the previous year and 50 kb/d more than previously forecast).





Non-OECD

China

Preliminary data indicate that China's apparent demand (refinery output plus net oil product imports) surged by 12.7% year-on-year in April, similar to the pace of growth recorded in March (+12.0%). Strong demand for naphtha (+41.5%), jet fuel/kerosene (+30.1%), gasoil (+16.1%) and 'other products' (22.5%) continued to offset somewhat weaker demand for gasoline (-2.7%) and what appears to be structurally declining residual fuel oil use (-3.7%). The boost in naphtha demand is particularly noteworthy, as it highlights China's aggressive petrochemical capacity expansion. In 2H09, the country added three naphtha crackers totalling almost 2.3 million tonnes per year (mt/y); in 2010, three more - each with a capacity of 1 mt/y - are due to come on line.



On 1 June, China's National Development and Reform Commission (NDRC) implemented a cut to 'guideline' prices for gasoline and gasoil of roughly 3% on average, barely a month and a half after increasing both by 5%.  Although the cut is broadly in line with the recent evolution of international oil prices, it highlights that the NDRC is, unsurprisingly, much more reactive to falling, rather than mounting, prices - indeed, April's belated rise had been expected since the beginning of the year. Moreover, despite reports of potential changes to the country's oil product price mechanism, no official announcements have yet emerged.



Other Non-OECD

India's oil product sales - a proxy of demand - rose by 2.9% year-on-year in April, with strong gasoil, gasoline and LPG readings offsetting the structural decline of naphtha and residual fuel oil, displaced by natural gas. Gasoil sales surged by 13.5%, largely on higher agricultural demand as high temperatures led to early harvesting, and increased use of gasoil-generated electricity. Gasoline consumption jumped by 9.8%, with vehicle sales rising at their fastest yearly pace in a decade, (+39.5% in April). Meanwhile, natural gas supplies should continue to rise, although some observers wonder whether the Supreme Court's decision to grant the government the final say on natural gas prices might deter investment.



Towards Subsidy Reform in India?

Even though previous attempts have stalled - most recently on 7 June - some observers still expect the Indian government, through its Empowered Group of Ministers, to modify the country's controlled prices for gasoline, diesel, kerosene and LPG over the next few weeks. Ostensibly designed to protect the poor, the price regime is in fact highly distorting. Indeed, state-owned oil companies bear huge losses as domestic prices are much lower than international prices, while private players become increasingly oriented towards exporting products rather than supplying the domestic market. Central and local governments, meanwhile, impose taxes on crude and petroleum products that are often significantly higher than subsidies, and well-off motorists are encouraged to switch to diesel-powered cars as this fuel is less expensive than gasoline. Finally, the adulteration of transportation fuels (mostly gasoil) with cheap kerosene is extensive, as well as environmentally harmful.

Momentum for reform indeed appears to be gathering. Three government-appointed committees over the past few years have all generated virtually the same conclusion: fuel prices should follow market forces rather than government guidelines. The last committee, which submitted its report in February 2010, was boldest, plainly stating that gasoline and diesel prices should be fully deregulated. Moreover, state-owned oil companies, which import approximately three-quarters of their crude requirements, are facing an unsustainable financial situation. The so-called 'under-recoveries' (losses) for the 2010-11 fiscal year are expected to exceed some $23 billion - and if past years serve as a guide, only slightly more than half are likely to be absorbed by the government through the issuance of the so-called 'oil bonds'.

Finally, the largest private players - Reliance Industries, Essar Oil and Shell India - have petitioned the sector's regulatory agency, the Petroleum and Natural Gas Regulatory Board (PNGRB), against the three state-owned companies - Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL). The plaintiffs argue that subsidies amount to 'predatory pricing' and have asked the PNGRB to levy a penalty on state-owned companies. They also seek government compensation for eventual losses in order to be effectively able to compete in the domestic retail market. State-owned companies, in turn, contend that fuel pricing is a government policy prerogative upon which they have no control.



In the end, the potential outcomes for the country's fuel price reforms are essentially three. A prolonged status quo, whereby the government would continue to control prices for gasoline, diesel, kerosene and LPG, would arguably imply ever-rising fiscal deficits, and would impose a rising financial burden to state-owned companies, which would bear at least a third, if not more, of the total losses. A partial liberalisation could target gasoline, the so-called 'rich man's fuel', coupled with a gradual reform of diesel prices in order to tame inflationary expectations and revamping subsidies on kerosene and LPG to better shield the poor. As much as this would help both the public purse and state-owned companies' finances, it could also foster even more diesel adulteration if kerosene prices were left untouched. Finally, a full liberalisation would probably entail a sharp rise of fuel prices and inflation, as well as hit the poor in absence of targeted subsidies. The first option is arguably unsustainable, but full liberalisation is unlikely, given its political repercussions. Therefore, reform - if any - may turn out to be partial. But whether it would successfully address the distortions currently plaguing India's domestic oil product market would remain to be seen.

Russian gasoline demand surged by +17.6% year-on-year in April, following an increase of +5.0% in the previous month. This was largely due to the vehicle scrappage scheme introduced by the government in early March. As a result, sales of passenger cars and light utility vehicles rose by 20% year-on-year in April to roughly 163,000 units - the first yearly increase since October 2008. Assuming that the scheme is maintained and that the economic recovery continues, gasoline demand should rise by 3.1% to 750 kb/d in 2010. However, the country's vehicle market, poised to become the largest in Europe, still remains depressed overall. In 2009, sales plummeted by almost half to some 1.5 million units as the global recession, which hit Russia particularly hard, unfolded. So far this year, January-April sales were still down by 13% when compared to the same period in 2009, with gasoline demand essentially flat in 1Q10.

Having plummeted by 6.4% year-on-year in 2009, Iran's oil product demand is expected to rise by only 0.6% in 2010, in sharp contrast to the strong growth posted in recent years. The main culprit appears to be gasoil demand, which fell sharply in 1Q10 (-9.8%), thus offsetting continuous growth in gasoline use (+6.2%). Given that gasoil is a good proxy of overall economic activity, these poor readings could indicate that the country's recovery is much less buoyant than currently expected (GDP should expand by +3.0% this year, according to the IMF's latest projections). International sanctions, Iran's increasing difficulties in selling crude given its uncompetitive pricing policy, domestic political uncertainty and a degree of economic mismanagement appear to be weighing on economic growth.



Meanwhile, the strength of gasoline demand not only casts doubts on the government's repeated statements that the rationing scheme put in place since 2007 is an unqualified success, but also forces the country to maintain high and costly imports (around 30-40% of total gasoline demand). Indeed, despite rationing, Iran imported an average 130 kb/d of gasoline in 2009. The country is also reportedly building gasoline stocks in anticipation of another round of international sanctions over its nuclear programme and amid dwindling gasoline suppliers (believed to be now restricted to a handful of Chinese companies). Moreover, the government claims - implausibly, given the lack of adequate refining investment - that the country will become self-sufficient in gasoline over the next three years.

In addition, a plan to gradually remove subsidies to energy (liquid fuels, natural gas and electricity) and other goods and services (water and food), which was approved by the Majlis (Parliament) last January, is due to be implemented from the second half of the current Iranian year (which starts in September). Subsidies are to be replaced with targeted cash handouts, ostensibly to reduce waste and raise efficiency. Regarding oil products, end-user prices would increase over five years to the equivalent of 90% of FOB prices in the Middle East - entailing at least a five-fold increase based on current international prices, which would arguably help curb demand growth. Nowadays, Iranian motorists are entitled to purchase 60 litres of subsidised gasoline per month at 1,000 rials/litre ($0.10/litre) for regular unleaded and 1,500 rials/litre for premium gasoline; above that volume, gasoline can be purchased at 'market' prices (about $0.40/litre).  Many observers, however, argue that removing subsidies will be operationally and politically difficult to achieve.



Highly subsidised energy prices have also become a contentious issue of late in Saudi Arabia. In April, the CEO of Saudi Aramco warned that Saudi Arabia's crude export capacity would fall by over 40% during the next two decades if the kingdom's energy demand growth were left unchecked. In early June, a senior official in charge of the kingdom's Electricity and Co-Generation Regulatory Authority publicly stated that about 11% of the country's crude output is currently burned to meet surging domestic power consumption and that his agency was preparing a plan to rein in subsidies and curb waste, only shielding lower-income sectors.

The widely quoted direct-crude figure of 880 kb/d looks high, unless it refers to peak summer demand. JODI estimates put direct-crude burning at no more than 440 kb/d on a yearly average (2009) or about 76% of 'other products' demand. Alternatively, the higher estimate may also have included natural gas, which accounts for roughly 50% of the kingdom's total power generation. Yet, aside from the figures, the fact that subsidies are being publicly discussed suggests a realisation that runaway fuel and power demand is bound to pose serious financial, logistical, environmental and even strategic challenges over the medium term.



In Brazil, gasoil and jet/kerosene demand continued to surge, increasing by 11.0% and 14.7% year-on-year, respectively in April. Brazilian economic indicators have been strong recently, with 1Q10 GDP rising at an annualised 9%. Still, concerns have surfaced among market analysts that the economy may be overheating, with inflation rises exceeding the government's target and the labour market tightening. The Brazilian central bank has started a monetary tightening cycle, which is likely to continue in the months ahead. Nonetheless, our forecast retains strong oil demand growth for 2010, with consumption rising 125 kb/d (4.8%) versus 2009.



Supply

Summary

  • Global oil supply fell by an estimated 575 kb/d to 86.3 mb/d in May, largely on lower non-OPEC output due to seasonal maintenance. Year-on-year, global production was up by 2.2 mb/d, with non-OPEC oil, OPEC crude and OPEC NGLs respectively higher by 1.1 mb/d, 0.4 mb/d and 0.7 mb/d.
  • 2009 non-OPEC supply is seen unchanged at 51.5 mb/d, while 2010 output is revised 65 kb/d higher to 52.3 mb/d, implying annual growth of 0.8 mb/d. The upward adjustment stems largely from stronger OECD Europe production on more robust performance in the North Sea, while higher NGL production in the US is partly offset by lower NGL output in Canada.
  • BP has not yet managed to fully halt the leak at its Macondo well in the US Gulf of Mexico, which has been spilling crude oil at a rate of 12-19 kb/d since late April. At the time of writing, BP had however succeeded in finding a method to siphon off as much as 15 kb/d and was hoping to raise this volume further while it drills relief wells that should eventually allow the well to be plugged by August. A six-month moratorium on most deepwater drilling put in place by the US administration in late May, could, if extended, shave as much as 100-300 kb/d off forecast US GoM crude output by 2015.
  • OPEC crude oil supply was down slightly in May, with higher production in Iraq partially offset by supply outages in Nigeria and Angola. May crude oil output fell by a modest 30 kb/d, to 29.02 mb/d versus 29.05 mb/d in April. Excluding Iraq, production by the 11 OPEC members with output targets fell by 160 kb/d to 26.61 mb/d. OPEC-11 production is running about 1.77 mb/d above the group's 24.845 mb/d collective quota. The 2010 'call on OPEC crude and stock change' remains at 28.7 mb/d, flat versus 2009, albeit revised slightly lower in 2H 2010.


All world oil supply data for May discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary May 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 supply was marginally lower in May, with increased output in Iraq partially offset by outages in Nigeria and Angola. May crude oil output fell by a modest 30 kb/d, to 29.02 mb/d versus 29.05 mb/d in April. Excluding Iraq, production by the 11 OPEC members with output targets fell by 160 kb/d to 26.61 mb/d, with compliance holding around 58% in May. OPEC-11 production is running about 1.77 mb/d above the group's 24.845 mb/d collective quota.

However, OPEC output looks set to increase over the next two months based on announced customer allocations for June and July. Saudi Arabia, UAE and Qatar have all offered more crude to buyers in Asia. In addition, OPEC's Gulf producers typically ramp up wellhead production, if not market supply, during the summer to meet increased power needs.

The 'call on OPEC crude and stock change' for 3Q10 is pegged close to current output at 29.1 mb/d and for 2010 at 28.7 mb/d. OPEC's limited room for manoeuvre is highlighted by high OECD stock levels and a renewed rise in floating storage, with unsold Iranian crude accounting for around half of the oil stored at sea.



Iranian production was assessed at 3.72 mb/d in May, down 30 kb/d from April levels. The modest output decline was more than eclipsed by the swelling armada of unsold Iranian crude held in floating storage. Estimates for Iranian oil held on ships vary, with current volumes of crude and condensate ranging from 48-50 mb by end-May compared with between 30-38 mb at end-April. Unattractive price formulas relative to competing grades and limited demand for the country's high-metal content heavy sour Soroush and Nowruz crudes have combined to reduce buying interest and forced state-run NIOC to place unsold barrels on tankers.

Meanwhile, an explosion and fire triggered by a natural gas leak on 29 May at the Naftshahr field near the border with Iraq shut in 10 kb/d. Officials estimate it could take up to six months to control and plug the damaged wells.

Iraq's production rebounded last month, with exports from both the north and south slightly higher. Production rose about 125 kb/d, to 2.41 mb/d in May. Total crude exports averaged 1.89 mb/d, an increase of 125 kb/d over April levels. Exports from Basrah rose around 60 kb/d, to 1.48 mb/d while northern shipments increased by 68 kb/d, to 410 kb/d. Operational problems in the south at the end of May, however, prompted SOMO to cut crude allocations to Asian buyers for June.

Crude oil production in Saudi Arabia held at a steady 8.25 mb/d for the third month in a row in May. Output is 200 kb/d above the country's target level but it appears much of the extra production is earmarked for domestic use as crude oil direct burn at power and desalination plants. There are conflicting

reports on the volume of crude burned for domestic needs, with Saudi officials reporting a range as high as 877 kb/d and a low of 274 kb/d. What is clear is that the country's use of crude for power generation will continue to grow in line with stronger domestic demand. Based on data submitted by Saudi Arabia to JODI, we calculate a crude burn rate of around 435 kb/d on average in 2009, with a low of 141 kb/d in January and a high of 764 kb/d in August. In 2010 we assume direct burn would be around 150 kb/d higher on average at 685 kb/d.

Crude production in both Kuwait and the UAE edged up by 20 kb/d each, to 2.30 mb/d and 2.31 mb/d, respectively. The UAE are on track to post further increases this summer. ADNOC eased allocated cuts to Asia in July, to the smallest amount since it started trimming exports in October 2008. Light sour Murban will be reduced by just 3% and Lower Zakum and Umm Shaif by 5% versus contract volumes. June allocations were cut by 10-20%. Allocations for heavy sour Upper Zakum will be reduced by 10% in July compared with a sharper 15% cut in June.

Angolan crude production in May was down by 70 kb/d at 1.79 mb/d on scheduled and unplanned outages. A fire at a compressor at the NEMBA South Platform on Cabinda Block 0 on 11 May (costing around 35 kb/d) could see the facility closed for several months while new equipment is procured and repairs to all electrical system affected by the fire are completed. Maintenance at the Palanca fields started in mid-May affecting about 50-60 kb/d and the work is expected to continue for a month. Meanwhile, Greater Plutonio is also operating below capacity at 170 kb/d due to problems with the water injection system. As a result, Angolan production and exports could decline by a further 30-40 kb/d in June.

Algerian output in May was unchanged at 1.24 mb/d. However, a new era for the country's oil sector was ushered in at end-May following the replacement of long-serving oil minister Chekib Khelil in a cabinet reshuffle. Algeria's oil industry has largely been paralysed by the corruption scandal that engulfed top executives at state-run Sonatrach since the beginning of the year and the removal of Khelil, though not implicated in the scandal, was not unexpected. Khelil's replacement, Youssef Yousfi, held the energy minister portfolio from 1997-1999 and was also a director general at Sonatrach in the mid-1980s. A chemical engineer and an economist by training, he was briefly Minister of Foreign Affairs in 1999 and then ambassador successively to Canada, the United Nations, and Tunisia.

Algeria's production capacity has stagnated at around 1.4 mb/d since 2006 and is on course to decline this year and next, largely due to unattractive contract terms for foreign companies. Yousfi therefore inherits a national oil industry in decline, beset by chronic bureaucracy and infighting for political control over setting the country's energy strategy.

Nigerian production suffered a relapse this month following unplanned outages by companies due to infrastructure damaged by militants in the Niger Delta. Production was down on average by 100 kb/d to 1.9 mb/d in May. Output of Qua Iboe has been cut by an estimated 150 kb/d due to a pipeline leak, with operator ExxonMobil declaring force majeure on liftings on 12 May. Approximately 285 kb/d of the 440 kb/d scheduled to be exported in June has been delayed until July.

Royal Dutch Shell declared force majeure on Bonny Light crude exports for about two weeks in May due to pipeline leaks and a fire on the key Trans-Niger pipeline that feeds into the Bonny export terminal. Production of an estimated 60 kb/d of Brass River crude, shut in on 25 April, resumed on 13 May. Shell's 100 kb/d EA field, shut in mid-April, remains closed for maintenance and repair work.

Progress on the ceasefire agreement with rebels has been slow, not unexpected given the recent appointment of a new president and cabinet last month. Kick starting the ceasefire negotiations remains near the top of the government's agenda while the proposed Petroleum Industry Bill (PIB) appears delayed indefinitely. In early June the new political leadership apparently decided to halt efforts to push through the legislation as it stands while lawmakers review government and foreign oil company comments. It is unclear now if the review process of the PIB will be completed before the country's presidential elections scheduled for April next year, leaving the operating environment for IOCs highly uncertain.

Based on our forthcoming medium-term review, OPEC's sustainable production capacity was adjusted lower by 70 kb/d to 35.08 mb/d, reflecting minor changes ranging from -10 kb/d to +10 kb/d for six OPEC members.



Non-OPEC Overview

In May, non-OPEC supply fell by 540 kb/d to 52.1 mb/d, as seasonal maintenance in the North Sea and elsewhere slowed output, albeit year-on-year, production was up by 1.1 mb/d. While average 2009 non-OPEC supply is seen unchanged at 51.5 mb/d, 2010 output is now estimated 65 kb/d higher than previously, at 52.3 mb/d, implying annual growth of 0.8 mb/d. The upward adjustment stems largely from stronger OECD Europe production on robust performance in the North Sea, while higher NGL production in the US is partly offset by lower NGL output in Canada. In terms of contributors to anticipated 2010 growth, trends remain unchanged. Major increments will stem from global biofuels, Russia, Brazil, the US, China, Colombia, India and the Caspian. These will be partly offset by decline in Norway, Mexico and the UK.

Chinese NOCs Active Abroad

Throughout the past decade, the three major Chinese national oil companies (NOCs) - CNPC, Sinopec and CNOOC, along with other Chinese players - have ramped up their upstream investment activities overseas. From January 2009 to April 2010 alone, they spent around $29 billion worldwide to acquire oil and gas assets. In addition, CNPC and Sinopec were involved in 11 loan-for-oil deals with eight countries worth a total of $77 billion. Furthermore, the NOCs have entered contracts committing them to invest at least $18 billion in future exploration and development, mostly in Iraq and Iran.

The Chinese NOCs have emerged as a significant force in global M&A activity in 2009. The total amount spent on M&A deals by Chinese companies last year was $18.2 billion, accounting for 13% of total global acquisitions in 2009, and 61% of all acquisitions by NOCs. In the first four months of 2010, the three NOCs spent a collective $10.9 billion, with Sinopec purchasing a 9% share in Canadian oil sands producer Syncrude, CNPC/PetroChina joining with Shell to acquire Australian coal bed methane producer Arrow Energy, and CNOOC buying 50% of Argentinean oil company Bridas.

According to IEA data, successful acquisitions allowed China's NOCs to expand their overseas equity shares from 1.1 mb/d of crude oil production in 2009 to 1.5 mb/d in 1Q2010. Chinese oil companies are now operating in the upstream sector of 31 countries and have equity production in 20, although their equity shares are overwhelmingly concentrated in only four: Kazakhstan, Sudan, Venezuela and Angola. Notwithstanding currently limited volumes, concerns exist that this activity by China's NOCs is effectively 'removing' oil from the market. But the fungible nature of markets and the apparently market-oriented thinking behind NOC decisions suggest this is not the case.  

Equity shares are but one route for upstream expansion. Chinese NOCs have also successfully bid for service contracts, sometimes in collaboration with IOCs and other NOCs, as in the case of CNPC's joint bid with BP for a 20-year service contract in Iraq to develop the Rumaila oil field and with Total and Petronas to develop the Halfaya field. Chinese NOCs have also negotiated long-term loan-for-oil and gas purchase deals with resource-rich countries with the support of the Chinese government and Chinese banks. For example, China Development Bank provided loans to Russian state oil companies in exchange for CNPC receiving 300 kb/d of crude over 20 years and the construction of a spur connecting the East Siberia-Pacific Ocean Pipeline (ESPO) to China's oil hub in Daqing. Other loan for resources deals have involved Kazakhstan, Brazil, Venezuela, Turkmenistan, Angola, Ecuador and Bolivia.

China's urgent need for energy supply to sustain economic growth and raise the wellbeing of its people has become a global market issue. At the same time, China's domestic oil production base faces the challenge of large mature assets, and with demand set to continue rising rapidly, China will remain reliant on the international oil market to meet incremental oil needs.

Most of that oil will continue to come from a small number of countries. In 2009, the top ten crude oil suppliers to China were Saudi Arabia, Angola, Iran, Russia, Sudan, Oman, Iraq, Kuwait, Libya and Kazakhstan. As many other net oil importers, China relies most heavily on suppliers in the Middle East: 47% of total imports in 2009. That high degree of reliance is unlikely to change, even though China has been diversifying supply sources to Africa, Central Asia, Russia and Latin America - and NOCs have sought to expand their upstream activities in those regions.

* In October, the IEA will publish a paper to provide a more in-depth analysis of Chinese NOCs' upstream investments overseas.

Market attention has been focused on the crude oil spill in the Gulf of Mexico, which BP and partners have still not been able to fully staunch and is now the largest ever in US waters, exceeding the 1989 Exxon Valdez incident in Alaska. Output from currently-producing fields remains virtually unaffected and little impact may accrue in the short term; therefore our 2010 US forecast has not been adjusted. In the medium term though, the deepwater drilling moratorium for new developments put in place by President Obama, were it extended for 1-2 years, would likely cause delays in bringing onstream new production and could potentially curb output by around 100-300 kb/d by 2015 (see Potential Implications of US Gulf Oil Spill).



Other countries with a substantial share of offshore oil production, including Brazil, Canada, China, Norway and the UK, have indicated they will review policies and safety requirements in their own offshore industries. The UK for instance will double the frequency of inspections of offshore installations, while Norway has indicated it will apply lessons learned from the US GoM spill in the event that it opens up further Arctic acreage for drilling. Canada has already implemented tighter drilling regulations for deepwater areas.



OECD

North America

US - May Alaska actual, others estimated: US total oil supply dipped to 8.3 mb/d in May, as scheduled maintenance on the huge Thunder Horse platform curbed output by as much as half of nameplate capacity of 250 kb/d. A brief halt to crude flows through the Trans-Alaskan Pipeline System (TAPS), which connects northern fields with the Valdez export terminal on the Pacific Coast, forced the shut-in of crude oil production at the end of May. Around 5 kb of crude were spilled after a storage tank overflowed on 25 May, though the oil was contained. While exports were not affected, Alaskan May production was curbed by 75 kb/d to 580 kb/d, but was returned to normal by late May. Crude oil production in the US Gulf of Mexico has so far not been affected by the Macondo oil spill, though could be in the longer term (see Potential Implications of US Gulf Oil Spill). The 2010 outlook for US oil production was lifted by 60 kb/d after NGL and fuel ethanol output in March were again stronger than expected. Total US oil production is forecast to rise from 8.1 mb/d in 2009 to 8.2 mb/d in 2010.



Besides the Macondo oil spill, another focus of attention concerns the US Gulf of Mexico hurricane season, which started on 1 June. Both US authorities and private meteorological forecasting groups envisage the most active season since 2005, when Hurricanes Katrina and Rita devastated New Orleans and the Gulf Coast, shutting in 1.1 mb/d of crude oil production at their peak and leading to an IEA-coordinated emergency stock release. The US National Oceanic and Atmospheric Administration (NOAA) is currently forecasting that 8-14 hurricanes will hit the US Gulf Coast this year, the highest number since 2005, of which 3-7 could be major hurricanes. While one effect of the storms could be to disperse the Macondo oil spill, it could also wash ashore crude and disrupt efforts to halt the spill. In contrast, 2009 was the quietest year since 1997, in part due to the absence of the El Niño weather phenomenon. OMR projections of 3Q and 4Q US GoM production customarily include a five-year average hurricane adjustment.

Canada - Newfoundland April actual, others March actual: Total Canadian oil production was unchanged at 3.2 mb/d in May. Lower reported NGL output in March prompted a downward revision to this component for 2010, but was partly offset by a higher crude forecast. Total Canadian supply is now seen rising marginally to 3.2 mb/d in 2010. Canadian authorities have announced tightened drilling regulations for deepwater areas, which will affect (though not halt) a new well being drilled in Newfoundland. The new measures have however not affected the North Amethyst project, a tie-back to the White Rose field, which started production in early June and is set to add 35 kb/d of crude capacity.

Potential Implications of US Gulf Oil Spill

The sinking of the Deepwater Horizon offshore drilling rig on 22 April has resulted in the largest oil spill in US history. An estimated 12-19 kb/d of crude oil has been leaking into surrounding waters, amounting to some 550-900 kb by 9 June (compared to the 250 kb spilled in the Exxon Valdez incident in 1989). None of BP's attempts so far to completely halt the leak have been successful, including re-activating the failed blowout preventer, mounting a dome or 'top hat' on top of the leak, or an attempt to clog the well using drilling mud ('top kill') and solid waste ('junk shot'). At writing, BP was siphoning off more than half of the flow through a Lower Marine Riser Package (LMRP) placed on top of the leaking well (around 15 kb/d, on 9 June, with BP hopeful it can eventually catch up to 90% of the leakage). BP is also drilling two relief wells nearby, to tap the Macondo well beneath the seafloor and cut the flow of oil and gas permanently. However, these wells will likely take until at least August to complete and potentially longer if hurricane disruption occurs.

On 27 May, President Obama extended an earlier moratorium on new deepwater drilling to six months. All wells currently in operation will be allowed to continue production, while drilling in depths less than 500 feet will be unaffected. Exploratory drilling planned for summer 2010 offshore Alaska was postponed. A lease sale for the Gulf of Mexico planned for August was cancelled, as was a lease sale offshore Virginia planned for 2011/2012. President Obama has established a bipartisan National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. This body will provide recommendations on how to prevent - and mitigate the impact of - any future spills that result from offshore drilling. The Commission will report within six months. The Minerals Management Service (MMS) is to be broken into three distinct bodies, separating the functions of energy leasing, revenue collection, and safety enforcement.

Regional crude and natural gas production of around 1.7 mb/d and 2.7 tcf/y, respectively, is continuing as normal and no short-term impact upon regional production is expected. Similarly, oil shipment and refining operations are unaffected. US Gulf of Mexico crude oil and gas production make up around 30% and 11% respectively of total US domestic output.

June however marks the start of the hurricane season, with 2010 expected to be particularly active. While it is not normally until August/September that storms impact upon offshore operations, early storms this year could affect attempts to deal with the leak and the spread of the oil slick (though they could also help to disperse the oil). Longer-term, the moratorium on drilling new deepwater wells could delay new oil and gas development projects. Existing production might ultimately be affected, as oil fields need regular workover to maintain production, albeit this activity is for now unrestricted.

Meanwhile, the impact on the regional economy and environment is highly significant. Despite the scale of the clean-up effort, crude oil has now reached the coastline near Pensacola in Florida's western panhandle, having previously hit Louisiana, Mississippi and Alabama. Large swathes of the local economy have been badly hit, including fishing, shrimping and tourism, the latter of major significance for Florida. Some 35 national wildlife refuges are at risk and several hundred dead birds have been collected. Criticism has targeted BP, the US government and the broader oil industry. The government may try to harness changing public sentiment behind legislation aimed at weaning the US away from oil use, and mitigating climate change. However, moves that adversely affect local oil industry employment carry their own political difficulties.

At present there is no certainty over specific regulatory and permitting changes that may be implemented in the aftermath of Deepwater Horizon and so no certainty over the ultimate impact on regional production. Purely for illustration, assuming 1-2 years of delay for all planned new deepwater oilfield projects implies 2015 production from the US Gulf of Mexico of 100-300 kb/d less than in our working case production forecast. Regulatory procedures and operating conditions differ from country to country, so extrapolating any potential delays in the Gulf to other deepwater regions has limited analytical value. Nonetheless, Canada, the UK, Norway, Brazil and China are all examining existing procedures in light of the disaster. A further 550 kb/d of expected 2009-2015 production growth from deepwater Brazil, Angola and Nigeria could be at risk, albeit there are no current indications that permitting in these countries is likely to be affected.

North Sea

Norway - March actual, April provisional: Norwegian oil production fell by 0.2 mb/d to 2.1 mb/d in May as seasonal maintenance kicks in. Following a build-up in well pressure, the Gullfaks C platform was partly evacuated and production shut in around 20 May. Operator Statoil reports that around 60-70 boe/d of crude and natural gas output at the Gullfaks C, as well as the smaller Tordis and Gimle fields is currently shut in. Well pressure has apparently been brought under control and the well has been safely plugged, with production to resume soon. Our forecast assumes 3-4 weeks of lower output. Problems were also reported at the Kollsnes and Kaarstoe gas processing plants, though these apparently only resulted in very brief production curbs. Despite the shut-ins, April and May output was revised up on robust production elsewhere, resulting in a 45 kb/d upward adjustment to 2010 production. Total oil production is forecast to decline from 2.4 mb/d in 2009 to 2.2 mb/d in 2010.



UK - March actual: March UK production came in higher than expected, while subsequent months' output was hiked on the basis of loading schedules. Seasonal maintenance also saw UK oil production shut in, dipping to 1.4 mb/d in May. Lower output, notably at the UK's largest field, Buzzard, was in part offset by a return to production at the troubled Schiehallion field, which had been offline since May last year and started output again in February, with ensuing ramp-up in March-May. Total 2010 oil supply is adjusted up by 45 kb/d but is still forecast to drop from 1.5 mb/d in 2009 to 1.4 mb/d in 2010.

Former Soviet Union (FSU)

Russia - April actual, May provisional: April and May Russian oil production are revised down slightly, averaging around 10.4 mb/d, and while Russian production is still high in historical terms, it has dipped slightly since its record level reached in March this year. The debate on changes to the fiscal regime - notably the possible extension of current exemptions to the crude export duty - continues. However, it appears likely that Lukoil will succeed in obtaining such an exemption for its recently-inaugurated Yuri Korchagin facility, the first field to be brought online in the Russian sector of the Caspian. Total Russian production is forecast to rise from 10.2 mb/d in 2009 to 10.4 mb/d in 2010.

Kazakhstan - April actual: Kazakhstan's oil production in April was little revised, dipping slightly to 1.6 mb/d, with maintenance at the large Tengiz field not proving to have as much of an impact as anticipated. Output at Tengiz was reduced to 515 kb/d due to work on the newly-installed sour gas unit. Production at Karachaganak and other fields was more or less unchanged in April versus March. Total oil production is forecast to rise by 60 kb/d to 1.6 mb/d in 2010.



FSU net oil exports rose by 160 kb/d to 9.7 mb/d in April from March, as product flows increased. Total crude exports were steady at 6.6 mb/d in April, with higher Black Sea volumes compensating for lower Baltic flows. Total product exports rose by 150 kb/d to 3.1 mb/d in April, with fuel oil shipments up by 170 kb/d on the month. Slightly lower gasoil exports were offset by higher flows of other products. May crude loadings are estimated to have been higher, with larger volumes sent through Primorsk, Kozmino and the BTC pipeline, but are set to dip again in June, with exports of Russian crude through Ukrainian ports to dry up entirely on unfavourable economics. The Russian crude export duty will rise to $292.10/mt in June, up from $284.06/mt in May. Revisions to 2008/2009 data centre on products, lifting the total exports baseline by 0.1-0.2 mb/d, largely on higher gasoil and fuel oil.



Chevron announced that construction would start work later this year on the long-awaited expansion of the Caspian Pipeline Consortium (CPC) line. The pipeline's current capacity of 540 kb/d, which carries crude from the west of Kazakhstan for onbound shipment from the Black Sea, has long been seen as insufficient, in light of ambitious production capacity expansion plans in Kazakhstan. The December 2009 MTOMR Update forecast growth from 1.6 mb/d in 2009 to 1.8 mb/d by 2014 and higher thereafter, as production from the super-giant Kashagan field increases in the latter half of the decade. The CPC pipeline will be expanded to capacity of 1.34 mb/d and is set to be completed by 2015.

Meanwhile, Iranian officials said that crude oil swaps through its northern port of Neka had dried up from the beginning of June. In 2009, around 80 kb/d of Caspian crude, largely from Kazakhstan, was shipped to Neka on the Caspian Sea and processed at northern Iranian refineries (though 1Q2010 data already indicate a decline to around 65 kb/d). Similar volumes of southern Iranian crude were then exported into the Middle East Gulf. The halt is apparently due to a substantial hike in Iranian transit fees.

Other Non-OPEC

China - April actual: In April, China's oil production dipped to just below 4.0 mb/d on lower output from its ageing Daqing field. Offshore supply, key to projected growth, was around 60 kb/d lower than expected in April which, with some offsets elsewhere, was carried through the forecast, resulting in a 25 kb/d downward adjustment to the 2010 forecast. Drilling at the large offshore Jidong Nanpu field has thrown a question mark over the size of its reserves. The field, which started output in August 2009, was expected to reach 200 kb/d by 2012 and perhaps more at a later stage. Our forecast remains unchanged for now, assuming production reaching 50 kb/d by the end of 2010 and 200 kb/d by mid-2012. Total Chinese oil production is forecast to rise from 3.8 mb/d in 2009 to 3.9 mb/d in 2010.

OECD Stocks

Summary

  • OECD industry stocks rose by a sharp 47.9 mb to 2 726 mb in April, more than twice the 17.8 mb five-year average build, as both crude production and refinery runs were stronger. Crude and products increased by similar amounts, but the majority of higher volumes came from crude additions in Europe and Pacific, and a product build in North America.
  • OECD stocks in days of forward demand cover stood at 60.5 days at end-April, up by more than one day as downward revisions to OECD stocks prompted a lower assessment of end-March stock cover to 59.5 days.
  • Preliminary data indicate total OECD industry oil inventories rose by 19.0 mb in May, less than the five-year average stock-build of 39.5 mb, driven by increases in product inventories across all regions.
  • Short-term crude floating storage levels increased to 93 mb in May from 81 mb in April on further additions in the Middle East Gulf and despite offloading in the US Gulf. Draws in the Mediterranean pushed global short-term product floating storage levels lower again, from 40 mb at end-April to 34 mb at end-May.


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

Total OECD industry oil stocks soared by 47.9 mb to 2 726 mb in April. The increase, more than double April's five-year average build of 17.8 mb, was evenly split between crude and products. Counter-seasonal movements in Europe and Pacific drove crude oil stocks up by 21.2 mb, while builds in North American 'other products', distillates and fuel oil contributed to a 23.9 mb surge in product inventories.



Pacific crude oil stocks increased by 9.0 mb on builds in Japan and Korea. In Europe, crude oil inventories rose by 12.3 mb on depressed crude runs, mostly in Italy, the Netherlands and the UK. These movements are in strong contrast to five-year average draws of 4.0 mb and 1.7 mb in Pacific and Europe, respectively. North American middle distillates grew by 10.6 mb, fuel oil inventories were up by a counter-seasonal 4.9 mb, while US propane inventories added a further 8.9 mb. This all coupled with weaker April demand contributed to a 30.0 mb product build in OECD North America.



In terms of days of forward demand cover, stocks rose to 60.5 days at the end of April, up by more than one day from end-March readings. March holdings themselves were assessed 31.4 mb lower than in last month's report, implying a 26.3 mb stock draw, in contrast with a previously reported 7.3 mb build. Crude oil stocks were revised down by 20.6 mb, mostly due to lower reported levels in Germany, Italy, the Netherlands and Japan. Product revisions were widely spread across all regions, with the majority occurring in middle distillates and gasoline.



The lower-than-usual OECD industry stock change in May, evident in preliminary data, partially reversed stronger-than-usual April stockbuild. Inventories reportedly rose by 19.0 mb in May, less than the average 39.5 mb increase seen in the past five years. Product stocks moved in line with seasonal norms, adding 23.9 mb, while crude oil stocks diverged from their normal trend and drew by 5.0 mb. Most of the product build occurred in Japanese kerosene and unfinished products, but increases in European middle distillates and US propane and other oil inventories also contributed.

Floating storage rose by 6.5 mb in May on a 16 mb build in the Middle East Gulf, largely reflecting higher volumes stored by Iran. Offsetting draws came from products held in the Mediterranean and crude stored near the US Gulf Coast. Overall, product floating storage declined to 34 mb at the end of May, from 40 mb held a month ago. Crude floating storage increased by 12.0 mb to 93 mb last month.

Analysis of Recent OECD Industry Stock Changes

OECD North America

Industry stocks in North America built by 30.2 mb in April, led by a 30.0 mb increase in product stocks, mainly middle distillates and 'other products' in the US. By comparison, during the past five years inventories on average rose by 17.9 mb in April. This year, middle distillates built by 10.6 mb while 'other products' and naphtha increased by a combined 12.3 mb. Counter-seasonal gains in fuel oil and gasoline added a further 4.9 mb and 2.2 mb, respectively. Crude oil stocks contracted by 0.1 mb, as a 5.1 mb draw in Mexico outweighed a 5.0 mb build in the US.



Weekly EIA data point to a further 7.7 mb stock build in May, although this movement is less than half of the average 19.3 mb increase. Crude oil inventories rose by 2.4 mb, including a 1.5 mb increase in the stocks held in Cushing, Oklahoma, to record levels of 37.9 mb (around 73% of storage capacity). The majority of the increase on the product side came from 5.1 mb and 6.3 mb increases in propane and other oil stocks, respectively. Much of the fuel oil stockbuild on the East and Gulf coasts seen in April came to an end in May and inventories levelled off around 46 mb. Transport fuels offset the decline, as gasoline stocks fell by 5.6 mb, but almost half of the draw occurred during the last week of May prior to the Memorial Day holiday and may thus reflect wholesaler restocking.



OECD Europe

European oil stocks rose by 8.6 mb in April, faster than the five-year average build of 1.1 mb. Crude inventories grew by 12.3 mb, and the increase was mostly led by Italy, the Netherlands and the UK. Offsetting decline came from the combined 5.1 mb gasoline stock-draws in Finland, France, Italy and the Netherlands. Gasoline stock levels stood close to the bottom of the five-year range in volumetric terms, but are slightly above the five-year average in days of forward demand cover.



Meanwhile, distillate inventories started to build following the onset of warmer temperatures in some European countries, although end-user heating oil stocks in Germany decreased further to 49% of capacity at the end of April, from 50% at the end of March.



According to Euroilstock preliminary data, stocks in the EU-15 plus Norway dropped by 4.0 mb on a counter-seasonal 9.2 mb draw in crude oil. A product stockbuild of 5.2 mb, mostly in middle distillates, tempered the fall. By contrast, product inventories held in independent storage in northwest Europe declined in May, as draws in gasoline, fuel oil and naphtha outweighed builds in gasoil and jet kerosene.

OECD Pacific

Oil inventories in the OECD Pacific rose by 9.2 mb in April, led by a 6.9 mb increase in Japanese crude oil stocks. Product stocks (down by 1.8 mb) provided some offset, led by a counter-seasonal 2.6 mb fall in middle distillates and a 0.7 mb draw in 'other products'. Meanwhile, gasoline inventories in Japan built by 1.5 mb, to 14.6 mb.



Weekly data from the Petroleum Association of Japan (PAJ) showed industry inventories increasing by 15.2 mb in May, driven by a build in product stocks. The majority of the surge was due to high kerosene and unfinished products, which swelled by 2.7 mb and 4.7 mb, respectively. Gasoline inventories rose further by 0.8 mb and reached record levels during the third week of May, compared with historical data back to 2003. Naphtha built by 2.5 mb and gasoil on average gained 1.2 mb last month, while crude inventories increased by 1.8 mb.



Recent Developments in China and Singapore Stocks

Chinese commercial crude oil stocks fell by 5.9 mb to 203.1 mb at end-April, according to China Oil, Gas and Petrochemicals (China OGP). The draw came as Chinese refineries increased runs to take advantage of better margins, following a drop in crude oil prices and despite an increase in crude oil imports. Products stocks fell due to a seasonal draw in gasoil inventories, which were off by 7.5 mb to 71.5 mb. Jet kerosene stocks edged 0.5 mb lower, while high exports limited the gasoline stockbuild to 0.4 mb.



In Singapore, lower product imports from China drove a fall in May stock holdings. The Chinese government reportedly restricted exports of transport fuels on fears of tight summer supply and higher gasoline demand, following the start of the EXPO exhibition in Shanghai. Singapore refined product inventories plummeted by 6.7 mb in May, after four consecutive monthly stockbuilds. Middle distillates fell by 2.5 mb and stood below year-ago levels at the end of May. Fuel oil stocks fell by 3.5 mb largely due to steady bunker demand in Singapore, while light distillate stocks dipped by 0.7 mb.



Prices

Summary

  • The escalating Eurozone debt crisis in May triggered a meltdown in both financial and oil markets and set in motion a sea change in market sentiment. Oil prices tumbled $18/bbl in the first three weeks of May before posting a modest recovery by end-month. At the height of the freefall in prices, open interest in the NYMEX WTI contract reached the highest level in the past two years as money managers slashed their long positions.
  • Benchmark crude futures prices in May were down on average by $9-10/bbl from the previous month, with WTI averaging just over $74/bbl and Brent at a higher $77/bbl. By early June, benchmark crudes were trading lower again at around $72-73/bbl.
  • This year middle distillate growth is driving stronger products markets, in contrast to a more normal seasonal focus on gasoline. Diesel crack spreads in the US are running at their highest level in 16 months. Refining margins increased across all regions in May.
  • Freight rates ebbed and flowed with crude in May, with the benchmark VLCC Middle East Gulf - Japan and Suezmax West Africa - US Atlantic Coast routes crashing in early May and recovering by end-month. Rates rapidly rocketed back to their previous levels on stronger demand for Brent-pegged African grades, which were being sold at a discount to WTI.


Market Overview

The deepening Eurozone crisis in May proved a fulcrum for shifting market sentiment. Oil markets posted one of the most turbulent months in the past year, with prices tumbling $18/bbl in the first three weeks of May. WTI futures prices hit a 19-month high of $86.19/bbl on 3 May then plummeted to $68.01/bbl by 20 May as concerns mounted over Europe's burgeoning debt woes. At the height of the freefall in prices, open interest in the NYMEX WTI contract reached the highest level in the past two years as money managers slashed their long positions and rebalanced their books.

By end month, however, WTI futures had posted a modest recovery with prices in May on average down by $9-10/bbl from April levels. May WTI averaged just over $74/bbl and Brent a higher $77/bbl.  By early June, benchmark crudes were trading in a lower range of around $72-73/bbl.

Since the onset of the global economic crisis oil markets have closely tracked the broader financial and equity markets looking for signs of a recovery in oil demand, especially focusing on macroeconomic data in the key US and Chinese markets. For most of the past 12 months market sentiment had a bias to the upside, at times bordering on irrational exuberance, as expectations for a strong recovery propelled financial and commodity markets higher.  Now, however, traders cite fears of a Eurozone-inspired double-dip recession as the main reason for the shift towards a more downbeat market sentiment.  The unfolding fiscal crisis in the Eurozone, especially in southern countries, was the main driver of oil price volatility last month and remains squarely on the radar screen of traders and analysts as they closely follow European governments' strategies for managing their debt while at the same time avoiding choking off the prospects for economic recovery.



Last year a combination of OPEC production curbs, rebounding financial markets and expectations of tightening markets down the road drove prices higher against a backdrop of relatively comfortable prompt market fundamentals. Markets appeared blindsided by the Greece-inspired Eurozone crisis with many now regarding the near 20% plunge in May prices an overdue correction. Other factors seen tempering higher price moves include stubbornly high global oil stocks, with inventories holding at the higher end of the five-year range, and a relatively comfortable level of OPEC spare capacity. Floating storage is also edging higher, with Iran accounting for more than half the volumes held at sea at almost 50 mb, which includes both crude and condensate.

OPEC production has hovered around 29 mb/d so far this year, with target compliance at around 58%. Meanwhile, non-OPEC production continues to outpace expectations, and is on track to increase by 800 kb/d this year.  The Gulf of Mexico disaster so far has had limited impact on operations in the area, even though the prospect of longer term tightening in offshore regulation and shorter term hurricane season concerns may have underpinned a stronger back end of the futures curve in early June. 

It is still too early  to suggest a permanent shift in market sentiment will prevail, especially given the improving outlook for demand. By early June downward pressure on prices was tempered by more robust demand fundamentals. Global oil demand is now expected to rise by 1.7 mb/d to 86.4 mb/d in 2010 as a whole and to 86.8 mb/d on average in the second half of the year, with  growth now taking root in the US and moving apace in China.

While the market typically looks to a seasonal increase in gasoline demand in the US to buoy markets, this year middle distillate growth predominates. Diesel crack spreads in the US are running at their highest level in 16 months. By contrast, gasoline demand in May was slightly lower than year-ago levels, with relatively higher retail prices prompting consumers to curtail driving. European gas oil markets also remain robust with ICE gas oil cracks flirting near $14/bbl in early June.



Futures Markets

With prompt prices under duress through much of May, the WTI contango between the prompt month and forward markets (M1-M78) widened at one point to $20/bbl before narrowing to around $16/bbl by end of the month. The WTI M1-M12 spread also widened further in May, to $8.57/bbl from $5.58/bbl in April and $2.86/bbl in March.



As oil price plummeted by more than $20/bbl in the first three weeks of the month, traders scrambled to close out and rebalance their positions. As a result, NYMEX WTI open interest reached its highest levels in two years in the second week of May but on average fell 5.7%, to 1.367 million contracts last month.

Money managers slashed their long positions in favour of short holdings, ending net long with 66 000 lots by end-May, compared to 155 000 at end-April. By contrast, swap dealers increased net longs by 97 000 contracts, to 180 000 holdings. On the net short side, producers and other reportables kept contract volumes steady throughout the month. However, open interest in NYMEX RBOB gasoline futures fell by 22.1% to less than 250 000 contracts.

Meanwhile, the Tokyo Commodity Exchange (TOCOM) resumed trading in gasoil futures in May but traded only 217 contracts. This was in strong contrast to almost 275 000 contracts of gasoline futures and 120 000 kerosene futures contracts. TOCOM earlier suspended the gasoil futures contract due to low trading volumes at the beginning of 2006.

Spot Crude Oil Prices

Spot crude oil prices also proved volatile in May, with Atlantic basin benchmark crudes ending the month down on average by around $8-11/bbl while Dubai posted a smaller $6.81/bbl decline. WTI's discount to Brent widened in May, to -$1.54/bbl compared with -$0.45/bbl in April. However, by end month the crudes were trading at near parity.



WTI spot prices declined under the weight of record levels of crude stocks in the US, especially at Cushing, Oklahoma storage facilities. Cushing stocks rose by 1.5 mb to record levels of 37.9 mb at end-May. The swelling stockpiles continue to depress prompt prices, with the contango between M1-M2 widening to -$3/bbl in May versus -$1.20/bbl in April. As a result, the more normal price differentials for domestic and foreign crudes priced off the marker have been distorted. The price spread between WTI and Light Louisiana Sweet (LLS) crude surged to around $8/bbl during May versus a more typical premium of $2-3/bbl.

In Europe, the Urals-Brent discount narrowed on lower exports of the Russian crude for May and stronger demand for medium sour feedstocks. The Urals-Brent spread in the Mediterranean averaged -$1.48/bbl in May compared with -$2.27/bbl in April. Indeed, demand for Russia's medium sour crude came from as far afield as India in May as Reliance sought to replace Iranian barrels lost when it cancelled its contract with NIOC.

In Asia, China's buying remained brisk as it cranked up run rates to the second highest level ever. In addition to its normal purchases of African crude from Angola, state-owned trader Unipec has stepped in to buy spot cargoes of Libyan Es Sider.

Meanwhile, Saudi Arabia lowered its July price formulas for Asian buyers, increased them for European customers and changed only marginally in the US. Other Mideast producers typically follow Saudi Arabia's lead in setting prices. Saudi Aramco's lower price formula for Asian customers in July also coincides with the country's decision to increase crude allocations for the month. Saudi Aramco's discount for Asian buyers is broadly seen as a move to maintain market share in the region, especially with new competition for Russian ESPO crude.



Spot Product Prices

Spot prices for refined products declined in all major regions in May but crack spreads largely improved due to the relatively sharper downturn in crude markets. Gasoline crack spreads were mostly firmer in the US but largely unchanged in Europe and weaker in Singapore on ample supplies. In the US the onset of the peak summer driving season boosted spreads but preliminary data so far indicate demand in May was flat compared with year-ago levels. Higher retail gasoline prices at the pump this year and continued high unemployment may temper demand growth.



Diesel cracks went from strength to strength in May in the US and Europe while differentials in Singapore remained relatively flat month-on-month. In the US, stronger demand for diesel, evidenced by increased trucking and rail activity, boosted crack spreads to their highest level in 16 months. Diesel cracks for WTI at the US Gulf Coast were up by $3.15/bbl in May, to $12.15/bbl, and in NY Harbor by a stronger $3.50/bbl to just shy of $14/bbl.

In Europe, reduced imports from the US due to surging demand there, and lower supplies from Russia due to planned refinery maintenance, helped firm diesel cracks spreads. In Rotterdam, ULSD cracks to Brent in May averaged around $13.50/bbl, an increase of about $1.60/bbl over April levels while ULSD differentials to Urals in the Mediterranean rose by $1.15/bbl to $14.80/bbl.

In Asia, diesel cracks were largely unchanged on average over April levels but they gradually improved over the month on increased demand from China as the spring agricultural season got underway.





Refining Margins

On a monthly basis, May refining margins increased across regions. The one exception was the Mars coking margin, which was pressured by weaker light product prices.  Benchmark crude prices fell between $6.50/bbl and $10.00/bbl on average, offset only partially by lower product prices. Gasoline crack spreads mainly decreased while they increased on average for other products, particularly for fuel oil and naphtha in the USGC.

After weakening during the first week of May, upgrading margins then remained mostly unchanged. However, on a monthly basis, upgrading margins deteriorated by $0.94/bbl in Europe, $0.61/bbl in Singapore and $0.17/bbl in the USGC.



End-User Product Prices in May

In contrast to recent increases, collectively prices fell in May by an average 2.8% across the IEA region, in US Dollars, ex-tax. However, the picture was mixed with European countries and Canada reporting sharp declines whilst the US reported modest increases and Japan was exceptional in reporting sharp gains. On a US Dollar, ex tax basis, Germany reported notable month-on-month declines in gasoline and diesel of 8.0% and 6.5%, respectively. In contrast, the US reported that gasoline prices rose by a modest 0.6% and diesel by 1.3%. Japanese gasoline and diesel prices surged by 9.9% and 9.5%, respectively. A similar picture was evident for heating and low-sulphur fuel oils where major declines were reported in European countries compared to North America and Japan.

When examining end-user prices in national currencies, the effect of the strengthening US Dollar was evident since the price decreases previously outlined are dampened. On this basis, within the Eurozone, only Germany reported price falls of 1.0% for gasoline and 0.2% for diesel. Gasoline pump prices were $2.84/gallon in the US, ¥139/litre in Japan and £1.21/litre in the UK. Continental European prices ranged from €1.18/litre in Spain to €1.42/litre in Germany. Compared to May 2009, gasoline prices in national currency were on average 17.2% higher across the surveyed IEA countries with only Canada reporting non double digit price growth (6.7%) and the US posting the highest growth of 26.4%.

Freight

Following the sharp decline in crude oil prices in early month, freight rates on the benchmark VLCC Middle East Gulf - Japan and Suezmax West Africa - US Atlantic Coast routes crashed in early May. By the end of the month, rates on the former route had fallen as low as $12.50/metric tonne. The latter trade, meanwhile, was characterised by extreme volatility and after the early month price crash, rates rapidly surged higher on increased demand for Brent-pegged African grades, which were being sold at a discount to WTI. However, as WTI recovered its ground, demand waned, sending Suezmax rates quickly back down. Rates on the Aframax North Sea - North West Europe route fared better and avoided the early month crash, as Brent became more attractive for European refiners. However, rates did fall somewhat at month-end.

Preliminary data indicate that short-term global floating storage rose sharply to 127.4 mb at end-May. Crude oil storage increased by 12 mb to 93 mb, with a further 16 mb added in the Middle East Gulf, largely due to a continuing build up of Iranian grades. Data suggest that 48 vessels were deployed worldwide for crude storage at end May, up seven on the previous month. 44 VLCCs are now storing crude oil, compared with 39 at end April, maintaining the trend of more oil stored on larger vessels.

Refining

Summary

  • 1Q10 global refinery crude throughputs averaged 72.7 mb/d, 0.9 mb/d above year-ago. Second-quarter throughputs look likely to average 73.5 mb/d, an annual increase of 1.5 mb/d, as seasonal maintenance ends, particularly in the US, where refiners are increasing runs significantly. 2Q10 OECD crude runs are forecast at 36.4 mb/d, 430 kb/d above a year ago, led by North America (+620 kb/d) and the Pacific (+200 kb/d), while European levels are seen contracting by 390 kb/d. 2Q10 non-OECD crude runs are expected to increase by 1.1 mb/d on an annual basis to 37.1 mb/d, with China accounting for 88% of the increase.
  • Looking ahead, 3Q10 global crude throughput rises towards 74.4 mb/d, buoyed not only by sharp non-OECD increases but also by a North America-inspired rise in the OECD. Globally, maintenance activity is set to drop significantly, supporting the 0.9 mb/d quarterly rise in runs, although weaker demand could further pressure refining margins, and undermine the prospects for stronger throughputs.
  • March OECD refinery yields increased for gasoline, gasoil/diesel and for the 'other product' category. Year-on-year, total gross product output was 280 kb/d (0.7%) below year ago levels at 42.5 mb/d. Gasoil/diesel and fuel oil gross output shrank by 4.4% (-570 kb/d) and by 1.4% (-50 kb/d), respectively, naphtha and gasoline rose marginally, and jet fuel/kerosene and other products output increased by 1.9% and 3.1%. Month-on-month, total OECD gross product output increased by 790 kb/d (1.9%).


Global Refinery Throughput

1Q10 global refinery crude throughputs averaged 72.7 mb/d, 0.9 mb/d above year-ago levels and 120 kb/d lower than our previous assessment. March data for the OECD came in 90 kb/d higher than our preliminary figures, while data for the non-OECD were 160 kb/d lower. Non-OECD data has been revised down also for January and February, resulting in a 1Q10 downward revision of 160 kb/d.

Our estimate for 2Q10 global refinery throughputs points to an annual increase of 1.5 mb/d, averaging 73.5 mb/d. The increase is supported by the end of seasonal maintenance, particularly in the US, where refiners are increasing throughputs significantly. 2Q10 OECD crude runs are expected to increase over year ago levels by 430 kb/d to 36.4 mb/d, after recording year-on-year reductions ever since 2Q07, when runs were at 38.4 mb/d. The increase is led by OECD North America (+620 kb/d), followed by the Pacific (+200 kb/d), while European levels are trailing behind with an anticipated contraction of 390 kb/d. 2Q10 non-OECD crude runs are expected to increase by 1.1 mb/d on an annual basis to 37.1 mb/d, with China  accounting for 88% of the increase. On a quarterly basis, global throughputs are projected to increase by 915 kb/d, even if actual runs may be constrained by a more muted 330 kb/d seasonal increase in demand.

We have now rolled over our projections to include September. As a result, 3Q10 global crude throughput is seen at an average of 74.4 mb/d, a 1.0 mb/d increase year-on-year. OECD crude runs are expected to rise by 85 kb/d to 36.4 mb/d, with North America increasing by 170 kb/d, the Pacific contracting marginally and Europe still posting a decrease of 67 kb/d. Non-OECD crude runs are forecast to increase by 925 kb/d to 38.0 mb/d, with China accounting for 80% of the increase. On a quarterly basis, throughput levels could potentially increase by 0.9 mb/d, with maintenance activity dropping significantly, by more than 55% on average, in both OECD and non-OECD countries. 3Q10 demand is forecast to grow by 330 kb/d, thus pressuring refining margins.



OECD Refinery Throughput

March OECD refinery crude throughput is now estimated at 35.9 mb/d, 90 kb/d higher than last month's preliminary data. The upward revision derived from European data, as a 185 kb/d upward adjustment for North America was countered by a similar cut to preliminary Pacific estimates. 1Q10 OECD crude runs are now estimated at 35.8 mb/d, 800 kb/d lower year-on-year. All three regions posted a decline, with Europe seeing 55% of the fall, the Pacific 24% and North America 21%.

April OECD refinery crude throughputs averaged 36.3 mb/d based on preliminary data, a 380 kb/d increase month-on-month and 180 kb/d above April 2009 levels. Monthly increases came from North America and the Pacific, offsetting weaker European runs, a trend also reflected when comparing 2010 versus 2009 data. In fact, European April runs were fully 750 kb/d below last year's levels, amid weak demand born of both tepid economic recovery and the adverse impact of volcanic activity on airline travel.



OECD North American runs averaged 17.8 mb/d in April, a 555 kb/d increase month-on-month and 685 kb/d above year-ago levels. Throughputs in the US increased by 590 kb/d over March levels as refinery maintenance dropped sharply and refiners boosted throughputs ahead of the driving season. Higher gasoline pump prices and incentives to boost exports have encouraged refiners to increase gasoline yields, although the impact of higher pump prices on the current season's demand remains to be seen.



May OECD North America crude runs are projected to increase by 160 kb/d month-on-month to 18 mb/d. Both Canadian and Mexican runs are expected to contract, by 30 kb/d and 20 kb/d, respectively. US weekly data for May point to a 210 kb/d increase in US throughput as refineries return to operations after maintenance and refining margins improve. 3Q10 North American runs are forecast at 17.7 mb/d. As in last year's report, we have incorporated a seasonal downward adjustment for September, equivalent to the five-year average monthly decline from August. This year, the adjustment scales to 980 kb/d for the region, driven largely by outages caused by hurricane activity.



According to preliminary data, April European throughputs were 11.9 mb/d, a 750 kb/d annual drop of which around 380 kb/d is due to heavier maintenance activity in the region. This is only 45 kb/d higher than the November 2009 level, which is the lowest reading since year 2000. May throughputs are thought to have shifted marginally higher at 12.0 mb/d, as 1.3 mb/d of processing capacity was expected to remain off-line.

Bunker Fuel - Tightening the Standard

In October 2008, the International Maritime Organization (IMO) adopted new standards to control harmful emissions from ship engines. The IMO is the United Nations agency concerned with maritime safety and security and the prevention of marine pollution. The standards are found in Annex VI to the International Convention on the Prevention of Pollution from Ships (MARPOL). As part of the incoming MARPOL regulations, effective 1 July 2010, the sulphur content of seaborne vessel fuel will be reduced to a maximum of 1.0%, from 1.5%, in Sulphur Emission Control Areas (SECAs). Currently there are two SECAs, one in the Baltic Sea and the other in the North Sea. On 27 March, the United States and Canada jointly submitted a proposal to the IMO to designate most areas of the coastal waters covered by their Exclusive Economic Zones as an Emissions Control Area (ECA) for SOx, nitrogen oxides (NOx), and particulate matter emissions. The proposed North American ECA extends 200 nautical miles (370 kilometres) from the coast, and includes waters adjacent to the Pacific coast, the Atlantic/ Gulf coast and the main Hawaiian Islands.

The incoming standard has implications most immediately for European refiners. Bunker fuel producers might have to switch their prevailing feedstock slate away from grades such as Urals, towards sweeter grades. It may also require higher imports of low sulphur fuel oil into the region. In the longer term, tighter bunker fuel specifications raise the issue of whether the industry adopts on-board sulphur scrubbing, or shifts towards greater use of diesel bunkers.   





OECD Pacific throughputs averaged 6.6 mb/d in April, 120 kb/d higher than expected in last month's report. Despite peak maintenance activity in May, weekly data from the Petroleum Association of Japan (PAJ) points to a 6.1 mb/d throughput level, 430 kb/d lower month-on-month but 250 kb/d higher than expected. As mentioned in last month's report, throughput reductions may be less pronounced than announced shutdowns, as other refiners compensate for part of the shut capacity with increased runs. As our May forecast turned out to be too conservative and  lower than previously expected maintenance activity for June is now reported, we have raised our June projection by 260 kb/d. The July projection forecast is also raised by 150 kb/d, albeit regional throughputs as a whole remain weak compared to the five-year average.



Non-OECD Refinery Throughput

1Q10 non-OECD throughputs averaged 36.9 mb/d, 1.7 mb/d higher than a year earlier, but 160 kb/d lower than last month's estimate. Downward revisions to Middle East and Latin America data account for most of the difference, which in part is explained by higher maintenance activity in both regions. 2Q10 throughput levels were also revised down by 210 kb/d to 37.1 mb/d, with around 40% of the revision being accounted by higher maintenance activity. Lower prospects for the Middle East, Latin America and Other Asia contribute to the new estimate. 3Q10 non-OECD crude runs are forecast at 38.0 mb/d, a 930 kb/d increase year-on-year, with China accounting for 80% of the increase. The 3Q10 crude runs are expected to be 840 kb/d higher than the prior quarter as maintenance activity is significantly reduced.



Chinese crude runs hit a new record in April at 8.37 mb/d, 30 kb/d above the previous record reached in February, and 1.2 mb/d higher than last year's level. The Chinese government raised both gasoline and diesel retail prices by around 4% and ex-refinery jet fuel by 10% on 14 April. Further capacity gains could influence throughput in months to come with, for example, PetroChina's new 200 kb/d Qinzhou refinery expected to start commercial runs in August.



Indian refinery runs were 3.7 mb/d in April, 460 kb/d above last year's level and 140 kb/d lower than expected. Government data show oil product demand rose by 3.8% in April on an annual basis, with local fuel demand rising for the first time in four months. Newswires report Indian companies buying low-sulphur gasoil as the government's mandate requires companies to offer 50-ppm sulphur gasoil to major cities from 1 April, and 350-ppm sulphur gasoil to the rest of the country by 1 October.

Russian throughputs averaged 4.8 mb/d in April, 230 kb/d above last month's expectation, and 350 kb/d above last year's level. The May forecast is revised down as slightly higher maintenance activity is scheduled. Bunker fuel oil exports to Europe may wane as this region adopts the new MARPOL standard to reduce harmful emissions from ships from 1 July.

OECD Refinery Yields

March OECD refinery yields increased for gasoline, gasoil/diesel and 'other products' category. Year-on-year, total product gross output was 280 kb/d (-0.7%) below year ago levels at 42.5 mb/d. North American output rose by 1.0%, while in Europe and the Pacific readings were 2.1% and 2.6% below their respective year ago levels, which define the lower-end of the five-year range. Regarding products, gasoil/diesel and fuel oil shrank by 4.4% (-570 kb/d) and by 1.4% (-50 kb/d), respectively, while naphtha and gasoline rose marginally, and jet fuel/kerosene and 'other products' output increased by 1.9% and 3.1%, respectively. Month-on-month, total product gross output increased by 790 kb/d (1.9%).



OECD naphtha yields fell to 5.2% after increasing almost every month since June last year, when they were at 4.3%. European yields fell by 0.7 percentage points (pp) from the top of the five-year average to the lower end, while yields in the Pacific fell by 0.4 pp, and they remained unchanged in North America.

Gross output fell by 140 kb/d to 2.2 mb/d.



Gasoline yields hovered around 34.9%., with regional yields following seasonal patterns. Yields in North America stayed unchanged at 47.7%, increased in the Pacific and fell in Europe. Both, North American and Pacific yields were above the five-year average, while European yields were at the lower end of their range. Gross output increased by a hefty 420 kb/d to 14.6 mb/d at the top of the five-year range, mostly driven by a 430 kb/d North American rise.



Despite total OECD gasoil/diesel yields increasing by only 0.24 pp, gross output rose by 320 kb/d. European yields increased 0.40 pp for a 170 kb/d increase in gross output, with crude throughput rising by 320 kb/d. North American yields actually fell by 0.20 pp, but output rose by 170 kb/d as throughput in this region increased by 360 kb/d. Finally, yields in the Pacific gained 1.39 pp, but output fell 22 kb/d as crude runs in this region contracted by 550 kb/d.