Oil Market Report: 10 September 2010

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  • Benchmark crude futures trended lower during August on concerns the global economic recovery will slow this year and into 2011. Persistently high global oil stocks and expectations for easing demand growth weighed on prices. Benchmark crudes averaged near $77/bbl in August, and also remain currently within a $75-78/bbl range.
  • Global oil demand is now projected at 86.6 mb/d in 2010 and 87.9 mb/d in 2011, suggesting increments of 1.9 mb/d and 1.3 mb/d respectively. 2010 readings are revised marginally higher based on stronger data from OECD countries. Significant downside risk persists from fears that the world economic recovery could stall.
  • Global oil supply fell 250 kb/d to 86.8 mb/d in August, as non-OPEC output dipped to 52.4 mb/d on seasonal maintenance in Canada, the UK and Russia. Non-OPEC projections for 2010 and 2011 are raised minimally, to 52.6 mb/d and 52.9 mb/d, respectively, although Atlantic storms could yet curb autumn Gulf of Mexico supplies.
  • OPEC crude oil supply was down 60 kb/d in August to 29.2 mb/d. The 'call on OPEC crude and stock change' for 3Q10 is raised to 29.3 mb/d and to 28.8 mb/d for 4Q10 due to a downward revision in OPEC NGLs. The 2011 'call' is 29.2 mb/d, representing an increase of 0.3 mb/d from 2010 levels.
  • July OECD industry stocks rose by 19.0 mb to 2 785 mb, or 61.4 days of forward demand cover, approaching the record level of August 1998. Preliminary data point to a fifth consecutive monthly build, of 8.7 mb, in August, while oil held in floating storage fell.
  • Global 3Q10 refinery crude throughputs are estimated at 74.7 mb/d, 0.6 mb/d above 2Q10 on a seasonal lull in maintenance. Runs could fall to 73.9 mb/d in 4Q10, in line with an expected slowdown in oil demand growth. Nonetheless, 4Q10 throughputs could exceed year-ago levels by 1.4 mb/d.

Markets becalmed... for now

The return from summer vacation can be problematic for analysts seeking inspiration as a tight editorial deadline approaches. Nor is the task made easier when some components of the market are 'treading water', unchanged for several months. Crude prices have generally been range bound in a $70-$85/bbl groove since last October, OPEC production has been anchored close to 29 mb/d since October, OPEC spare capacity has exceeded 5 mb/d since early-2009 and OECD industry stocks have been oscillating around 60 days for most of the last 18 months. Seeking enlightenment through a comparative look back at the September 2009 OMR does not help much either. We then wrote about crude prices in a $70-$75/bbl range, collapsing natural gas prices, tentative economic recovery and intense regulatory activity in commodities futures markets. It all sounds familiar, and does little to quell an impression of late-summer market torpor, albeit that could easily change.

Our oil demand expectations for 2010 have been stable at 86.1-86.6 mb/d for the last eleven months. Demand growth of 1.9 mb/d for 2010 has also been steady over several OMRs (OECD demand now looks less weak than previously expected, and non-OECD demand slightly less strong). Early-2010 saw a consensus closer to 1.0 mb/d for 2010 growth, though many have now shifted higher as six months of 'actual' data have come in. Of course, any impression of certainty about 2010 demand, let alone expectations for 2011, is illusory, as final consolidated data can lag by 12-36 months. Weekly data are superseded by monthly data, which in turn are honed when annual revisions arrive. Data timeliness and accuracy do not always coincide, with the possible exception of pricing. But the statistical rigour of data review and improvement after the event is a force for greater accuracy, even if it causes analysts to revisit their perceptions on the prevailing state of the market. It will be interesting to see whether recent revisions to Chinese energy data back to 2005 and beyond change our own and others' view of market dynamics.

Market bears now suggest that economic slow-down in 2H2010 will inevitably curb demand growth and, although we retain a relatively optimistic base case of 4.5% GDP growth for 2010, we too see annualised demand growth easing from around 2.3 mb/d in 1H10 to 1.5 mb/d in 2H10. We expect growth to moderate further to 1.3 mb/d in 2011, although as noted last month, a weaker-than-expected economic outcome (of, say, 2.8% growth for GDP), could knock as much as 1.2 mb/d off 2011 absolute demand.

So for the time being, nagging concerns over the robustness of economic recovery, a US gasoline season which ended with a whimper and questions on the durability of still-robust non-OECD demand growth are holding at bay perceived short-medium term supply risks (be they from hurricanes, a Macondo-inspired drilling moratorium or geopolitical and domestic volatility in Iran, Iraq or Nigeria). This market 'stalemate' has nonetheless generated a welcome respite from the intense volatility of 2007-2009. A healthy supply cushion for now means that isolated events have less power to drive prices either side of their current tramlines for long.  But the market is unlikely to remain this nonchalant for ever, and nor should we be complacent about the continued existence of such a comfort zone. True, economic risks that are skewed to the downside could place a ceiling over prices in the next 12-15 months. On the other hand, our base case suggests a market tightening again from mid-2011 onwards. In such an event, we are unlikely to have to trawl back issues of the OMR for editorial inspiration in another year's time.



  • Forecast global oil demand for 2010 is revised up by 50 kb/d on higher-than-anticipated data submissions for June and July, but left unchanged for 2011. The changes stem from OECD readings, with the non-OECD posting marginal downward adjustments. Global oil demand is now projected at 86.6 mb/d in 2010 (+2.2% or +1.9 mb/d year-on-year) and 87.9 mb/d in 2011 (+1.5% or +1.3 mb/d), with a continuing significant downside risk if the world economy were to stall.
  • Forecast OECD oil demand for 2010 and 2011 is adjusted up by 60 kb/d on average on stronger-than-anticipated data for North America and the Pacific. Total OECD demand is now estimated at 45.6 mb/d in 2010 (+0.3% or +150 kb/d year-on-year), but should resume structural decline in 2011, averaging 45.4 mb/d (-0.5% or -220 kb/d versus 2010).

  • Forecast non-OECD oil demand for both 2010 and 2011 is revised down by 30 kb/d on average on slightly lower readings in Asia and the Middle East. Growth is slowing broadly as anticipated, with total demand seen averaging 41.0 mb/d in 2010 (+4.4% or +1.7 mb/d year-on-year), and further rising to 42.5 mb/d in 2011 (+3.6% or +1.5 mb/d).

Global Overview

Forecast global oil demand for 2010 has been revised marginally (+50 kb/d), reflecting little change in fundamentals. Uncertainty regarding a 'double-dip' recession in the OECD persists, with faltering readings in its largest economy, the US - yet oil demand submissions have been higher-than-anticipated, particularly in North America and the Pacific. Meanwhile, although oil demand growth in the non-OECD is gently slowing down as had largely been assumed, notably in China, it has also been supported by one of Latin America's periodic bouts of gasoil and residual fuel oil consumption spikes, this time on strong agricultural and industrial output, cold winter temperatures and natural gas shortages.

However, despite this uncertainty, our 2010 forecast has been remarkably - and paradoxically - stable. Since 4Q09, it has evolved within a 500 kb/d range (86.1-86.6 mb/d), entailing yearly growth of roughly +1.7 mb/d on average. Since December, in particular, the range has narrowed to only 300 kb/d (86.3-86.6 mb/d), anchored by the reporting of actual demand data and IMF economic assumptions that have changed marginally. By contrast, other forecasts - which initially envisaged 2010 demand growth at less than 1 mb/d - have been revised up sharply in recent months. We currently project global oil demand at 86.6 mb/d in 2010 (+2.2% or +1.9 mb/d year-on-year) and 87.9 mb/d in 2011 (+1.5% or +1.3 mb/d). However, as much as this year's forecast is bound to evolve, next year's arguably presents an even greater downside risk if the world economy were to stall. As we noted last month, global 2011 demand could be 1.2 mb/d lower than shown here were GDP growth 30% weaker.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) increased by 1.6% year-on-year in July. Resilient demand in OECD North America (which includes US Territories) and OECD Pacific, mostly buttressed by naphtha, gasoline and distillate demand, offset flat readings in OECD Europe, where weak deliveries of LPG, gasoline, fuel oil and 'other products' countered growth in other categories.

Revisions to June data were substantial (+360 kb/d). They were driven largely by North America (+260 kb/d), as US jet fuel/kerosene and residual fuel oil deliveries turned out to be stronger than suggested by preliminary weekly figures, and the Pacific (+110 kb/d), with changes concentrated in Japan's distillates, fuel oil and 'other products'. European readings, on the other hand, were largely unchanged. Total OECD demand thus rose by +1.5% year-on-year in June, almost twice as much as implied by preliminary data. Overall, demand is adjusted up by 70 kb/d in 2010 to 45.6 mb/d (+0.3% or +150 kb/d year-on-year) and by 50 kb/d in 2011 to 45.4 mb/d (-0.5% or -220 kb/d year-on-year).

North America

Preliminary data show oil product demand in North America (including US territories) rising by 2.3% year-on-year in July, following a 3.2% increase in June. Growth in July was led by diesel, jet fuel/kerosene and residual fuel oil, while gasoline demand rose by a mild 0.7%. Though we continue to maintain a regional real GDP growth assumption of +3.0% for 2011, recent indicators suggest that consensus over the economic outlook remains tenuous. Moderating oil demand may point to economic deceleration in 2H10 - after four months of rising oil demand growth from January-May, readings slowed in June and July. We expect 2H10 regional oil demand to grow at only 1.0% year-on-year, versus 2.1% in 1H10.

Still, June preliminary data were revised up by 255 kb/d, mostly due to higher-than-expected jet fuel/kerosene and residual fuel oil readings in the US. The upward revision meant that regional jet fuel/kerosene demand grew by 5.4% year-on-year in May-June. This was the first annual rise in consumption during two consecutive months since November 2007, albeit from a very low base and with month-on-month strength benefitting from volcano-related disruptions in April. North American oil demand for 2010 is seen rising to 23.7 mb/d (+1.6% or +370 kb/d year-on-year and 15 kb/d higher versus our last report). Looking forward, 2011 oil demand should fall slightly to 23.6 mb/d (-0.2% or -40 kb/d and 20 kb/d higher than our last report) with stagnant gasoline consumption and declines in petrochemical feedstocks and heating/power generation fuels outweighing growth in middle distillates.

Adjusted preliminary weekly data for the United States (excluding territories) indicate that inland deliveries - a proxy of oil product demand - grew by 1.5% year-on-year in August, following a 2.3% year-on-year rise in July. August data featured year-on-year gains in middle distillates and gasoline, outweighing declines in residual fuel oil and heating oil.

Diesel demand grew at an estimated 10.6% in August, though high levels of diesel exports may continue to inflate weekly demand readings. While we assume a split of distillate between diesel and heating oil based on historical patterns, we continue to forgo our normal weekly-to-monthly pre-emptive adjustment for July and August because of the uncertain magnitude of supplies moving abroad. Still, given minimal revisions to June diesel demand (which grew by 10.1% year-on-year), improved manufacturing and trucking indicators and depressed prior-year readings, it is likely that revised August consumption will still show strong growth. Sustained growth has also emerged in jet fuel/kerosene, which grew by 3.1% year-on-year in August after rising 3.4% in July. However, August readings were characterised by sharply declining growth comparisons as the month progressed.

Gasoline demand growth has petered out as the summer driving season ends. August readings suggest consumption grew by only 0.4% year-on-year, versus 1.0% in July and 1.3% in June. The latest estimates stem from weekly data that, at the time of writing, only included up to 27 August, thus missing end-month deliveries potentially related to the Labor Day holiday weekend. The American Automobile Association projected that holiday driving would rise by 10.3% versus 2009. However, worries about the impact of Hurricane Earl (which proved far less destructive than feared) may have curtailed some travel plans on the East Coast, but also fostered additional stockpiling by retailers. According to MasterCard, domestic gasoline sales in the week from 28 August to 3 September were lower week-on-week, yet up 1.7% on a yearly basis. Thus, the precise end of the summer driving season remains ambiguous for now.

Mexican oil demand posted its first year-on-year contraction in July, declining 0.6%, after ten consecutive months of growth and strong June readings (+7.1%). July data were downwardly revised from previous growth of 2.8%, led by reductions to gasoline, diesel and 'other products'. While close linkages to a slowing US economy may play a role, a seasonal mismatch in consumption patterns and a previous-year spike in 'other products' demand better explain the weakness versus 2009. Summer oil consumption typically peaks in June, as it has this year, but in 2009 the peak occurred in July, likely due to the still nascent economic recovery. As such, Mexico's June-July average demand growth, at +3.2%, may provide a better barometer of underlying consumption than looking at each month individually.


July preliminary inland data show that oil product demand in Europe was broadly unchanged versus the same month of 2009 (+0.2%). Weak deliveries of LPG, gasoline, residual fuel oil and 'other products' continued to offset sustained demand for distillates and, particularly, for naphtha (+10.1%). The rebound in jet fuel/kerosene is also noteworthy after April's volcano disruptions, with demand now back to the five-year average.

Revisions to June preliminary demand data were minimal (-10 kb/d), as stronger-than-expected deliveries of naphtha and gasoil were offset by weaker-than-expected readings for most other product categories. Overall, total OECD Europe demand is nudged up by 10 kb/d to 14.3 mb/d in 2010 (-1.3% or -180 kb/d compared with the previous year), and should decrease to 14.2 mb/d in 2011 (-0.6% or -80 kb/d versus 2010, largely unchanged versus last month's report).

As in the previous month, Germany provided most of the oil demand momentum in July. German deliveries of naphtha and heating oil have been particularly strong, underpinned by the country's much stronger-than-expected economic performance in 2Q10 (+2.2% versus France's +0.6%). Similarly, the refilling of household heating oil tanks has continued to boost deliveries (at 56% of capacity, filling is slightly above its five-year average, but still below the 66% posted in July 2009).


Preliminary data indicate that oil product demand in the Pacific rose by 2.2% year-on-year in July, on the back of buoyant distillate readings. Korea (+4.3%) largely provided the growth impetus, with sustained demand for transportation fuels and naphtha. It was followed more distantly by Japan (+1.4%). Yet sluggish economic activity in Japan, fuel efficiency improvements and interfuel substitution in favour of natural gas and nuclear power are likely to keep a lid on regional oil demand growth. For example, the peak summer power demand season, which typically spans from July to September, has not entailed so far a surge in residual fuel oil use or direct crude burning.

June data revisions, at +110 kb/d, mostly pertained to distillates, residual fuel oil and 'other products'. The fall in OECD Pacific demand in June was thus less steep (-0.6% year-on-year) than suggested by preliminary figures (-2.2%). Total oil product demand in 2010 is revised up slightly (+40 kb/d) to 7.6 mb/d (-0.4% or -35 kb/d year-on-year) and 7.5 mb/d (-1.3% or -100 kb/d compared with the previous year and 25 kb/d more versus last month's report).



Preliminary data show that China's apparent oil demand (refinery output plus net oil product imports) rose by 3.3% year-on-year in July. As expected, demand appears to be slowing down when compared with previous months as the government tames economic activity. In addition, oil product destocking also played a role. Guaranteed refining margins (as long as international crude prices remain below $80/bbl) previously spurred inventory builds, notably regarding gasoil, based upon partial stock data from various sources. Finally, baseline effects also tend to distort the picture, as demand picked up sharply in 2H09 - suggesting, ceteris paribus, that underlying growth rates for 2H10 might be expected to tail off somewhat.

July oil demand growth was essentially driven by LPG (+9.1%), naphtha (+24.5%, despite concerns of dwindling plastics needs and ample polyethylene stocks), and by 'other products' (+10.2%). Looking ahead, the forecast remains largely unchanged, despite recent announcements that the government will shut down some 2,000 energy-inefficient factories across the country over the next few months. These closures are likely to affect mostly very small enterprises, notably in the cement, paper and iron industries, which may not be accounted for in official statistics. Moreover, such firms provide local jobs, a key consideration amid an economic slowdown, suggesting there could be some lag in attaining such a target. Thus, total Chinese oil demand is expected to average 9.1 mb/d in 2010 (+9.0% year-on-year) and 9.5 mb/d in 2011 (+4.3%), although the prognosis is likely to be revised in the months ahead.

Other Non-OECD

India's oil product sales - a proxy of demand - rose by 2.2% year-on-year in July, supported by strong readings for LPG, gasoline and gasoil (+7.4%, +14.9% and +5.7%, respectively). In particular, with car sales rising by 38% year-on-year in July after 30% growth in June, gasoline demand remains strong.

Of the three fuels, only the pace of gasoil growth slowed, since heavier monsoon rains and fewer power outages reduced gasoil demand from farming and industry.

According to JODI submissions, gasoline demand in Iraq has skyrocketed this year, averaging roughly 130 kb/d in 2Q10 (+35.5% year-on-year), equivalent to almost a fifth of the country's total oil demand. Although rising consumption reflects a gradual return to normality after nearly seven years of military occupation, other factors also help explain this surge. On the one hand, a heat wave has boosted electricity needs (both for air conditioning and refrigeration), with daily temperatures hovering around 50°C in August. Much of Iraq's electricity is still produced by private generators, mostly of which are reportedly run on gasoline, rather than gasoil. On the other hand, significant volumes of Iraqi gasoline are reportedly smuggled into Iran, which has found it increasingly hard to import gasoline given prevailing international sanctions.

Cold weather in Argentina during July and August, which prompted government rationing of natural gas deliveries for industry and power generation, has continued to boost oil demand. In July, residual fuel oil consumption spiked, increasing over 40% year-on-year, while gasoil demand (up 11.9% year-on-year) continued to post strong readings. Some manufacturing firms reportedly started importing gas-derived raw materials, owing to low operating rates for the petrochemical industry. Still, the downside effect on LPG/ethane demand has been marginal - the bulk of consumption goes to home usage (e.g. cooking/heating) and, by most accounts, residential users have remained well supplied.

At the same time, the government has begun enforcing a law to restrict gasoline and diesel price rises at the pump. Service stations have reportedly rolled prices back to 31 July levels and government inspectors have threatened fines and refinery closures if they believe ample supplies are not being provided to the market. Overall, we have revised up Argentina's oil demand estimates by 10 kb/d for 2010, with expected annual growth of 65 kb/d (+10.3%). In 2011, the demand increase is expected to be less robust, at 20 kb/d (+2.9%), with slower economic growth, but with potential upside should challenging winter weather and gas market conditions return.



  • Global oil supply fell by 250 kb/d month-on-month to 86.8 mb/d in August, largely on lower non-OPEC output. Year-on-year, global output is up by 2.0 mb/d, around half of which stems from higher non-OPEC, a quarter from OPEC NGLs and a fifth from OPEC crude production.
  • Non-OPEC supply dipped by 0.2 mb/d to 52.4 mb/d in August due to seasonal maintenance in Canada, the UK and Russia. Despite stronger recent US and Canadian production, and an absence of hurricane-related shut-ins in August, the forecasts for 2010 and 2011 were only raised minimally, to 52.6 mb/d and 52.9 mb/d respectively. US Gulf of Mexico weather remains unstable though, with numerous storms forming in the Atlantic.
  • BP and the US authorities reported that the Macondo well had been secured in September. With a debate over the causes and prospective regulatory improvements still underway, we maintain last month's assessment that 60 kb/d and 100 kb/d of US Gulf of Mexico oil production will be 'lost' in 2010 and 2011 respectively due to delays in drilling. So far, we see little impact in other countries with offshore production.
  • OPEC crude oil supply was marginally lower in August, down 60 kb/d to 29.2 mb/d. Production from the 11 members with output targets, which excludes Iraq, averaged 26.8 mb/d last month, unchanged from July levels. Lower output by the UAE and Nigeria was offset by higher production from Angola and Iran.
  • The 'call on OPEC crude and stock change' for 3Q10 is raised by 100 kb/d, to 29.3 mb/d and by 200 kb/d to 28.8 mb/d for 4Q10 due to a downward revision in OPEC NGLs. For 2011 the call is forecast at 29.2 mb/d, up 300 kb/d over 2010 levels. OPEC effective spare capacity in August stood at 5.56 mb/d.

All world oil supply data for August discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary August 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 August, down by 60 kb/d to 29.15 mb/d. Production from the 11 members with output targets, which excludes Iraq, averaged 26.83 mb/d last month, unchanged from July levels. Lower output by the UAE and Nigeria was offset by higher production from Angola and Iran.

Relative to targeted production cuts, compliance rates were unchanged at 53% last month. The July-August rates are slightly weaker than the 55-58% rates seen in 1H10. The group is now pumping 1.99 mb/d above the implied 24.845 mb/d collective target. OPEC's next ministerial meeting to review the market outlook and production levels will take place on 14 October in Vienna.

The 'call on OPEC crude and stock change' for 3Q10 is raised by 100 kb/d, to 29.3 mb/d and by 200 kb/d to 28.8 mb/d for 4Q10 due to a downward revision in OPEC NGLs and slightly higher demand. For 2011 the call is forecast at 29.2 mb/d, up 300 kb/d over 2010 levels. Effective spare capacity stands at 5.56 mb/d.

Iraqi production has been faltering since the beginning of the year due to increased militant activity and operational problems. Iraqi August supply was down by 60 kb/d, to 2.32 mb/d, largely on lower supplies of Kirkuk from the north. It also stood some 180 kb/d below year-ago levels, when output appeared to be hitting a steady 2.5 mb/d. Since then, operational and technical problems in the south have reduced output there and volumes seem unlikely to pick up anytime soon. Iraq is now expecting production in the southern region to rise by some 600 kb/d by the end of 2011 given new targets agreed with joint venture partners. However, the ongoing political stalemate following the March 2010 elections, coupled with logistical and bureaucratic problems, will likely cause delays in reaching that target level. Indeed, such considerations played into our MTOGM projection of a net increase of 'only' 1.0 mb/d in Iraqi production capacity by 2015.

August exports were estimated at 1.77 mb/d compared with 1.83 mb/d in July. Northern exports of Kirkuk crude fell to just 320 kb/d in August, compared with 375 kb/d in July. Pipelines carrying oil to the Ceyhan terminal on the Mediterranean were attacked three times in August. Repeated attacks and technical problems on infrastructure along the northern export corridor are behind the steady erosion in exports of Kirkuk crude since the beginning of the year. Exports in August are 30% lower than the 2010 high of 465 kb/d posted in January.

Southern exports of Basrah crudes were off slightly, by 5 kb/d to 1.44 mb/d in August. State marketer SOMO cut allocations of Basrah Light to Asian term buyers for September, reportedly due to production problems at the southern fields.

Saudi Arabia's production was assessed at 8.28 mb/d, unchanged from July levels. Production is around 200 kb/d above the country's target level but latest JODI data indicate the higher output is being allocated for domestic use as crude oil for direct burn to meet increased power demand during the peak summer months. The implied crude burn rate in June and July was just shy of 680 kb/d, about 17% higher than the second-quarter average of 583 kb/d and, perhaps more revealingly, more than double the rate of around 300 kb/d seen in summer 2008. Year-to-date through July, implied crude oil direct burn has averaged 470 kb/d, slightly higher than the 2009 average of 435 kb/d. If recent history is a guide, crude oil for direct burn likely increased further in August and will again also in September. In addition, this year Ramadan fell largely in August, which should translate into higher power demand for electricity and cooling. As a result, August demand for direct burn crude may prove to have been higher than even the peak 765 kb/d reached in August 2009.

Iranian crude oil output was up by an estimated 20 kb/d, to 3.7 mb/d in August. The volume of Iranian crude and condensate held in floating storage appears to have declined at end-August, with estimates showing a drawdown of 10-15 mb, to 30-35 mb. However, Iranian floating storage levels may increase again as new sanctions have the unintended consequence of squeezing crude buyers. Market reports have suggested that new sanctions imposed this summer on Iran by the UN, the US, European Union and, more recently, Japan and South Korea target the country's gasoline suppliers, bankers and other financial institutions but specifically exclude crude oil sales. Nonetheless, the tougher, wide-ranging sanctions on financial activities have indirectly made it more difficult for traders to secure letters of credit for their crude purchases.

In addition, shipping and insurance companies are increasingly unwilling to do business with Iran so as not to violate new US sanctions. On 16 August, the US Treasury Department issued new regulations affecting US and foreign financial institutions that restrict business activities with Iranian companies, including the country's central bank and powerful Revolutionary Guard. Lloyd's of London, as well as other insurers, have opted not to insure or reinsure petroleum shipments going into Iran in a move to comply with stricter sanctions. Meanwhile, international shipping associations have adopted clauses in their contracts allowing a ship owner to refuse a petroleum trade to Iran. Market reports emerged in August suggesting Iran was having problems finding buyers for its crude, even though exports are not directly affected by sanctions.

Aside from Iran, Angola was the only other member country to increase supplies in August. Angola crude output edged higher last month following the end of maintenance work. Production rose by 50 kb/d to 1.79 mb/d. Output at Total's Girassol operations was gradually being restored after a technical problem forced the company on 13 July to declare force majeure on exports.

Nigerian production averaged 2.14 mb/d in August, off a marginal 20 kb/d due to sabotage. Shell declared force majeure on 16 August following damage to a pipeline from the Cawthorne Channel field, which feeds into the Bonny Light system.

Nonetheless, Nigerian output remains well above year-ago levels as companies make inroads in repairing damaged infrastructure. Shell has steadily increased long shut-in production at its Forcados and EA fields this year. A three-month-old force majeure on Qua Iboe supplies ended early in the month. ExxonMobil declared force majeure on 12 May after discovering a leak at one of its crude oil pipelines connected to its Qua Iboe export terminal, but now plans are afoot to raise capacity from 260 kb/d in August to 400 kb/d in October. The Shell/Nigerian joint venture partnership reported it is close to launching a new $1.1 billion pipeline to the Bonny export terminal. The new 97-kilometre Nembe Creek Trunkline will have a capacity to transport 600 kb/d from 14 flow stations in the Niger Delta to the Bonny export terminal in Rivers State.

Despite the steady progress this year in restoring shut-in production, growing discontent among former rebels over the lack of progress with the government's amnesty programme threatens to ignite a new round of violence. The country is grappling with a myriad of critical issues, not least because the government decided in early September to move forward elections. Nigerian officials announced on 7 September that the country will hold its presidential election on 22 January. However, if past elections are a guide, many expect an increase in violence in the run-up to the January polls. Critically, President Goodluck Jonathan, who is from the volatile southern Niger Delta region, has indicated he intends to run for the presidency but has not yet made a formal announcement. Traditionally, the presidency rotates between the Muslim north and Christian south every two terms, so technically the next president should still be a northerner since former president Yar'Adua only served half of his first term before his death earlier this year. Observers also fear that if Jonathan ran but lost the election, the ceasefire agreement would unravel and oil infrastructure would once again be vulnerable to militant attacks.


OPEC NGL supplies were revised down for second-half 2010 and 2011 due to delayed project start-ups in the UAE. Total OPEC NGLs were lowered on average by 150 kb/d to 5.3 mb/d for 2H10 and down by an average 100 kb/d, to 5.8 mb/d for 2011.

NGL supply from the UAE is now forecast to increase by 200 kb/d year-on-year in 2011. The third phase of the onshore Habshan Gas Complex (OGD-3) started production about a month ago, but it has encountered technical glitches, which are being resolved. The second phase Asab gas development (AGD-2) project is in the commissioning phase, with production expected to start in the next one to two months compared with an earlier planned start date of April. Condensate production from the new plants at Habshan and Asab is estimated at 40 kb/d and 20 kb/d, respectively, by end year. Asab's total peak capacity of 80 kb/d and Habshan's at 180 kb/d are spilt evenly between NGLs and condensate.

Non-OPEC Overview

Non-OPEC supply dipped by 0.2 mb/d to 52.4 mb/d in August due to seasonal maintenance in Canada, the UK and at Russia's Sakhalin 1 project. Revisions to the outlook are minimal this month, with 2010 and 2011 production forecasts upped by 25 kb/d and 45 kb/d respectively, while previous years' levels were trimmed by an average 25 kb/d due to a lower Brazil fuel ethanol baseline. The marginally stronger forecasts for 2010 and 2011 were largely due to better-than-expected recent US and Canadian output, and an absence of hurricane-related shut-ins in the US Gulf of Mexico in August. In Norway, June seasonal maintenance - while heavy - was still slightly lower than expected. Total non-OPEC supply is now forecast to average 52.6 mb/d in 2010, rising to 52.9 mb/d in 2011, annual increments of 0.9 mb/d and 0.4 mb/d respectively.

Global biofuels supply is revised down by 10 kb/d for 2009 and by an average of 25 kb/d historically for the duration of the series on a re-appraisal of annual Brazilian ethanol production. Intra-year revisions were minimal, though an ongoing evaluation of production seasonality within the Brazilian series will likely yield future adjustments to historical data. Ethanol output for 2010 and 2011 has been trimmed as a result of the re-evaluation and somewhat diminished expectations for Brazilian growth. As a result global biofuels supply is expected to grow by 245 kb/d to 1.8 mb/d in 2010 and by 185 kb/d to 2.0 mb/d next year. Still, biofuels represent a significant contribution to total short-term non-OPEC supply growth, together with Canadian oil sands and crude oil from Brazil, Colombia, China and the FSU.

Supply growth for 2010/2011 as a whole is heavily weighted towards the first two quarters of 2010, when incremental output averaged 1.2 mb/d year-on-year. Subsequent quarters see that figure dip to 0.4 mb/d on average. Partly this is related to anticipated lower US Gulf of Mexico supply, where we maintain our forecast 60 kb/d and 100 kb/d curbs to production in 2010 and 2011 respectively due to drilling delays following the Macondo disaster. In addition, production estimates for the latter half of the year contain a downward adjustment for hurricane shut-ins. Following actual 25 kb/d and 105 kb/d shortfalls in June and July this year due to precautionary storm shut-ins, we currently carry a downward adjustment of 500 kb/d for September - historically the most heavily affected month of the season - which tails off thereafter.

Elsewhere, we see growth in Russia slowing, as incremental greenfield output is reduced - our current forecast sees Russian oil supply plateauing in 4Q10. Chinese output growth is also set to peter out in 1Q11 and production will decline thereafter, as a raft of new, mainly offshore, fields reaches peak capacity. Lastly, biofuels growth is also anticipated to slow. Any forecast is subject to revision when actual data becomes available, but it is worth emphasising again that were there no significant hurricane impact for the rest of the year, this would add 0.2 mb/d to global supply for both 3Q10 and 4Q10.


North America

US - August Alaska actual, others estimated:  US oil production in August is now assessed flat at 7.8 mb/d compared to July, after the month passed without any hurricane-related shut-ins and on stronger-than-anticipated preliminary data. Recent, higher, production levels for a handful of Other Lower-48 states, have been carried forward, notably for North Dakota, where liquids output from the Bakken Shale boosted total state oil production to over 300 kb/d in June, up from around 200 kb/d one year earlier. At the same time, NGL production in June was slightly weaker. Total US oil supply for both 2010 and 2011 is adjusted up by around 90 kb/d, and is now forecast to average 7.6 mb/d in 2010, dipping slightly to 7.5 mb/d in 2011.

A Quiet August in the US Gulf May Prove Fleeting

On 4 September, BP and the US authorities declared closure in the battle to secure the damaged Macondo well that had spewed an estimated 5 mb of oil into surrounding waters since the Deepwater Horizon drilling rig exploded in late April. The well is now capped and cemented, its blowout preventer has been replaced, and it is now merely an additional safety measure to intercept the original borehole via a nearby relief well - expected in coming weeks. A sigh of relief is in order, even though the damaged well has not leaked oil since mid-July, when BP succeeded in placing a containment cap on top of it, halting the flow (see Macondo: The Beginning of the End? in OMR dated 11 August 2010).

Meanwhile, investigations into the precise causes of the Macondo disaster rumble on. A final analysis of causes and remedies will only be possible when all results are released, now expected in late October (BP published its own version on 8 September). The findings will be crucial to determine how safety regulations may be tightened, and will therefore have a bearing on the pace of future offshore oil development in the US and elsewhere. We currently maintain our assumption, as highlighted in last month's report, that 60 kb/d and 100 kb/d will be 'lost' to 2010 and 2011 US crude oil production respectively, due to drilling delays largely caused by the deepwater drilling moratorium, expected to remain in place until end-November. Currently, while other countries with offshore production are generally taking a wait-and-see attitude ahead of the results of the Macondo enquiry, we are not for now assuming any wider impact on production.

Following Hurricane Alex and Tropical Storm Bonnie in June/July, a series of storms has crossed the Atlantic in August and early September, though most have so far either weakened before lashing the Gulf Coast and its oil infrastructure, or veered to the north and up the US East Coast. In early September, Hurricane Earl caused severe damage when making landfall on the US eastern seaboard, though had no effect on oil production and caused only small disruptions to refining. While August saw minimal precautionary shut-ins of oil or gas production (and no damage to date at all this year), we currently maintain a hurricane adjustment of 500 kb/d for September and around half that on average for the following three months respectively, based on the five-year average level of outages. Meteorologists forecast that more storms are to come, with September historically the month when operational shut-ins are heaviest. That said, if the rest of the year were to remain free of hurricane-related shut-ins, this would add 0.2 mb/d to global supply for both 3Q10 and 4Q10.

Despite physical (if not regulatory) closure at Macondo and a lack of August hurricane outages, a spotlight remains on the US Gulf of Mexico, home to 30% of the country's crude oil production. On 3 September, a fire broke out at a Mariner-operated platform working on the Vermilion 380 block in shallow water offshore Louisiana. However, investigations so far have showed that the fire was most likely in the living quarters, was not due to an explosion and that safety systems had forced the automatic shut-in of output of crude and gas (recent production volumes were apparently around 1.4 kb/d of crude and 9 200 Mcf/d of natural gas respectively in late August).

While a fuller investigation will show what happened, the US government has already made clear its view that the Vermilion incident was an 'industrial accident' that was in no way similar to the earlier Macondo disaster. But some critics of drilling made the comparison, potentially slowing what had earlier seemed growing momentum for an early lifting of the deepwater drilling moratorium ahead of 30 November.

Canada - Newfoundland July actual, others June actual:  Canadian oil supply is estimated to have fallen to 3.2 mb/d in July on seasonal maintenance at bitumen upgraders and hence lower synthetic crude output. June saw a hefty upward revision of 235 kb/d to preliminary data, largely on higher reported bitumen output. The latter is partly carried forward, leading to a 30 kb/d upward revision to forecast production in 2010. Oil supply in 2010 and 2011 is expected to average 3.3 mb/d. August production at a cluster of fields offshore Newfoundland was not affected by Hurricane Earl on its journey up the eastern seaboard of North America.

Mexico - July actual:  Mexican oil production rose marginally in July, to 2.95 mb/d, as output at its largest oilfield, Ku-Maloob-Zaap (KMZ), picked up again to 825 kb/d and production from the Cantarell field was steady at 480 kb/d. Nonetheless, total production has dipped nearly 50 kb/d since the beginning of the year and is expected to fall a further 70 kb/d by year's end. Total oil production in 2010 is forecast to average 2.9 mb/d, falling to 2.8 mb/d in 2011.

North Sea

Norway - June actual, July provisional:  In Norway, July oil supply rose to 2.2 mb/d, following heavy seasonal maintenance in June, which took out 325 kb/d of crude output. June data was revised up by 40 kb/d, while preliminary production numbers for July were 110 kb/d lower than forecast. Maintenance in June was most pronounced at the Ekofisk group of fields, but field-by-field data published by the Norwegian Petroleum Directorate (NPD) showed that production levels at the trouble-stricken Gullfaks C platform were not as badly-hit as thought, though other fields such as Tordis were affected too. Pressure problems had forced the evacuation of the Gullfaks C platform in late-May, but operations were reportedly back to normal by mid-July. Annual production estimates are left unchanged, with output in 2010 forecast to average 2.2 mb/d, and set to fall to 2.1 mb/d in 2011.

UK - June actual:  Contrary to expectations based on loading schedules for key crude grades, preliminary data showed UK production fell a sharp 250 kb/d to 1.2 mb/d in June, pointing to higher seasonal maintenance. Output is expected to rise to 1.4 mb/d in July, before dipping to 1.3 mb/d again in August, as some more maintenance is undertaken. July saw some problems at the Buzzard field at the end of the month, briefly reducing output to 80 kb/d. Meanwhile, the Maule field started up in July, with expected peak capacity of 12 kb/d to be attained by year-end. By early 2011, the Athena, Bardolino and Burghley fields will add another collective 45 kb/d. A maturing base will nonetheless cause a drop in forecast production from 1.4 mb/d in 2010 to 1.3 mb/d in 2011.


Australia - June actual:  Despite production picking up nearly 45 kb/d to 530 kb/d in June on growing output at the Pyrenees field, and higher NGL production, June and subsequent months were revised down on consistent underperformance vis-à-vis forecast. In sum, this led to a downward adjustment of 10 kb/d for 2010 and 15 kb/d for 2011, which now see oil production averaging 550 kb/d and 585 kb/d respectively.

Former Soviet Union (FSU)

Russia - July actual, August provisional:  In August, Russian oil production fell by 100 kb/d to 10.36 mb/d due to heavy maintenance at the Sakhalin 1 complex. July data was revised up by a marginal 20 kb/d, while August output came in 70 kb/d below forecast, largely on lower production from the Petroleum Sharing Agreements (PSAs), which include the Sakhalin projects and Kharyaga. Annual output forecasts are unchanged, with 2010 expected to average 10.45 mb/d, having grown a strong 240 kb/d over 2009, and rising a more modest 50 kb/d to 10.50 mb/d in 2011.

Kazakhstan - July preliminary:  Kazakhstan's oil production rose by nearly 50 kb/d to 1.65 mb/d in July, as maintenance at the large Tengiz field came to an end. Intent on plugging a forecast budget deficit, the government re-introduced a crude export duty in August, which currently amounts to around US$2.70/bbl. Companies involved in the two consortia that operate the large Tengiz and Karachaganak fields are disputing whether their agreements, signed in the low-price era of the 1990s, allow for the tax. Others argue that the government's imposition of the export duty, and its recent suggestion to double it from early 2011, may be largely a bargaining chip with the International Oil Companies (IOCs) active in the country. Many think it likely that the consortium operating Karachaganak may cede a 5-10% share to the government in return for a waiver of the tax. Recent years have seen the government insist on part-ownership of the consortium that is developing the super-giant Kashagan field in an attempt to gain more control over its own natural resources. Total Kazakhstani oil production is forecast to rise from 1.66 mb/d in 2010 to 1.70 mb/d in 2011.

FSU net oil exports hit a new record high in July, increasing by 550 kb/d (+5.9%) to 9.9 mb/d. A cut in the Russian crude export duty improved economics and producers hiked their shipments accordingly, with crude exports inching up to a new record level of 6.8 mb/d (+4.7%). Outflows from the Black Sea climbed by 25% on the month, and together with increased deliveries through the Druzhba pipeline, offset slight falls in shipments from the Baltic and Arctic/Far East. The rise in the Black Sea was led by Novorossiysk, where volumes reached 1 mb/d (+350 kb/d month-on-month), with shipments boosted by the exporting of volumes previously held in port storage. Additionally, the Ukrainian port of Pivdenne profited from maintenance elsewhere as volumes more than doubled on the month but remained depressed compared to pre-June levels. Shipments of products rose by 240 kb/d (+8.3%) to 3.1 mb/d following the end of seasonal refinery maintenance and a reduction in product export duties, which prompted exporters to ship the previous month's held-over cargoes. Fuel oil volumes increased by 120 kb/d while gasoil and 'other products' rose by 60 kb/d each.

It is estimated that crude shipments in August fell back close to their June level following the raising of the crude export tax from $249/tonne to $264/tonne (+6%). However, the fall was likely cushioned by increased crude volumes shipped from Primorsk, where planned maintenance on the Baltic Pipeline System supplying the port was interrupted by wildfires. FSU crude exports will likely not rebound in September, reflecting deteriorating economics as oil prices have fallen while crude export duties rose by a further 4% to $274/tonne. In the near-term, both crude and product exports will likely continue to oscillate based on changes in the oil price-linked tax regime. However, underlying year-on-year growth could be underpinned by eastward shipments through the ESPO. Reports imply that buyers are absorbing the export tax introduced on 1 July, as reflected in 4Q10 cargoes selling for record premia to Dubai crude. In addition, future Kozmino loading schedules show no sign of falling.

Other Non-OPEC

China - July actual:  Chinese oil production fell by 135 kb/d to just over 4.0 mb/d in July, largely on lower offshore output and resulting in a modest downward revision. Total 2010 oil supply is now expected to average 4.1 mb/d, still a sharp rise of 0.2 mb/d from 2009, while 2011 production is set to dip again to 4.0 mb/d. In the near-term, Chinese offshore oil production, which has been a major driver of growth, is expected to stagnate. But the government announced recently that it plans to spend $35-45 billion on offshore oil development in the next five years, with an aim to raise total output in this sector to 1 mb/d by 2015 (it averaged 600 kb/d in 2009 and 750 kb/d in July this year).

Indonesia - August actual:  Indonesia's total oil supply picked up slightly in August, to just below 1.0 mb/d. Upstream regulator BPMigas announced in late August that it had approved 15 new development plans for oil and gas projects, totalling 24 mb of crude and condensate as well as 982 Bcf of natural gas. These should help the country in its stated aim to average total oil production of 965 kb/d in 2010 and 970 kb/d in 2011, despite a mature base with many ageing fields. The new fields are to be developed by a range of international oil companies active in the country, as well as state oil firm Pertamina. At the same time, Pertamina itself announced that it had revised down by half its estimated investment spending for 2010 to around $2.9 billion due to delays at projects and a stronger domestic currency versus the US dollar. However, a large chunk of the curbed investment would have flowed to refinery projects, while other planned spending, such as for the much-delayed Cepu block, are expected to be carried over into 2011 and perhaps beyond.

Our current forecast is for Indonesian oil supply to stay steady at 990 kb/d in 2010 and to dip to 965 kb/d in 2011. The 2010 level is higher than the government target due to an estimated 30 kb/d of gas liquids not accounted for by government crude and condensate production statistics. In our estimation, 2011 production also declines more sharply than the government forecast.

Brazil - June actual:  Safety inspections forced a halt to operations on Petrobras's P-33 production platform offshore in the Campos Basin in mid-August. Strikes and protests by an oil workers' union highlighted concerns over safety issues on ageing platforms and unions have since called for suspension of work at other production facilities, including P-31 and P-35. The P-33 platform, which has a production capacity of 60-65 kb/d, was reportedly pumping well below that volume before its closure. The actual impact on production is therefore not yet clear. Meanwhile, the Urugua and Cachalote fields started production in June, with projected peak capacities of 35 kb/d and 100 kb/d respectively. Later in the year, Tupi, the first large-scale development in the pre-salt, is expected to commence ramp-up from its current 20 kb/d pilot volume to its 100 kb/d phase-1 capacity. Total Brazilian oil production (excluding fuel ethanol) is forecast to rise from 2.2 mb/d in 2010 to 2.4 mb/d in 2011. The latter will be Brazil's first year as a net exporter of oil, though significant volumes will only be available to the world market in subsequent years.

Colombia - July actual:  Colombian oil supply continued its steady climb as new fields ramped up output. July production came in at 790 kb/d, 130 kb/d higher than July 2009. A blast at the Transandino pipeline in mid-August forced state oil company Ecopetrol to re-route 15 kb/d through Ecuador temporarily.

Export pipelines remain a key constraint to rapidly-growing oil production in Colombia and Ecopetrol intends to invest in boosting capacity in coming years. The company recently announced a plan to invest $4.2 billion to construct a new 450 kb/d line from the eastern Llanos Orientales region to the Caribbean export terminal at Coveñas, which will also be expanded. Pipeline bombings have become far more rare in recent years, as rebel groups' power wanes.

OECD Stocks


  • OECD industry stocks rose by 19.0 mb to 2 785 mb in July, approaching the record level of August 1998. However, the increase was less than the five-year average build of 31.7 mb. Products grew by 21.3 mb, with gains concentrated in North American middle distillates and 'other products'. Crude oil stocks fell by 0.6 mb, as draws in Europe and North America outweighed a build in the Pacific.
  • Forward demand cover rose to 61.4 days in July, up from 61.0 days in June. North American 'other products' cover rose by 2.5 days, while European and North American fuel oil and Pacific motor gasoline cover provided a partial downward offset.
  • Preliminary August data indicate OECD industry oil stocks increased by 8.7 mb, the fifth consecutive monthly build. Crude oil levels fell by 9.4 mb from the previous month, but the drop was offset by a product gain of 18.2 mb. By comparison, the five-year average stock movement shows a build of 3.2 mb.
  • Short-term oil floating storage fell for the third consecutive month to 72 mb at end-August, from 90 mb in July. Crude oil fell sharply from 59 mb in July to 37 mb in August on large draws in the Middle East Gulf and US Gulf. A build in Northwest Europe brought product floating storage up to 35 mb.

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

OECD industry stocks rose by 19.0 mb to 2 785 mb in July, driven by steep increases in middle distillates and 'other products' in the US. However, the fourth consecutive monthly increase came up short of the average July build (+31.7 mb) over the past five years. Nonetheless, at 2 785 mb, OECD commercial stocks stood only 11.3 mb below record levels. In August 1998, inventories were assessed at 2 797 mb, the highest level on record since the start of official OECD Monthly Oil Statistics (MOS) reporting in 1984.

The July build stemmed from sharp, albeit seasonal, gains in North American middle distillates and 'other products' (11.4 mb and 13.4 mb, respectively). The builds increased regional forward demand cover of 'other products' by 2.5 days, while distillate cover rose by 1.2 days. Draws in gasoline and residual fuel oil provided some offset, reducing the overall OECD product stock-build to 21.3 mb. Meanwhile, crude and 'other oil' inventories edged slightly lower (0.6 mb and 1.7 mb, respectively) as draws in North America and Europe offset gains in the Pacific.

Although gasoline inventories fell by 1.3 mb in July, they drew less than the seasonal five-year average of 5.6 mb and forward demand cover rose above the five-year range. In North America, summer is traditionally a season when gasoline stocks fall, but this year stronger refinery output caused inventories to move counter-seasonally up by 3.9 mb in July and preliminary August data point to a further 2.3 mb gain in the US. By contrast, July gasoline inventories in the Pacific and Europe plummeted by 2.7 mb and 2.5 mb, respectively.

May inventory levels were adjusted lower (3.8 mb) as Canada revised crude oil and other product stocks, but a greater upward revision to June readings (6.3 mb) raised the baseline. June's revision implied a 9.2 mb stock build in the OECD, in contrast with a previously reported 0.8 mb draw. Both crude and product stocks came in higher, but the bulk of the baseline change stemmed from an upward revision to US 'other products', contrasting with more typical downward revisions for June based on the five-year average.

Preliminary August data point to a 8.7 mb stock build, the fifth in a row, bringing OECD inventories 2.6 mb below the record level of August 1998. Twelve years ago, inventories rose in part due to surging stocks in the US. This year, the build was also triggered by a gain in US inventories, which rose to the highest levels since the start of US weekly reporting. Offsetting decreases came from Japan and Europe, where inventories fell by 7.6 mb and 2.0 mb, respectively.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American commercial inventories rose by 22.8 mb to 1 401 mb in July, building by more than twice the five-year average increase of 9.3 mb. Higher refinery runs in the US pushed crude oil stocks lower by 2.1 mb, while 'other oils' shed a further 1.5 mb. Products built by 26.4 mb, driven by steep increases in middle distillates and 'other products' (11.4 mb and 13.4 mb respectively). A counter-seasonal build in gasoline inventories also contributed to the overall increase.

US oil inventories rose by 18.4 mb in August, according to EIA weekly data, reaching the highest level of inventories since the start of US weekly reporting in 1990. The build was driven by crude, middle distillates and gasoline (4.6 mb, 4.6 mb and 2.3 mb, respectively), and it strongly contrasted with a more normal crude- and gasoline-led average draw of 6.2 mb over the past five years. However, inventories held at the NYMEX WTI delivery hub in Cushing, Oklahoma, fell by 2.1 mb to 35.8 mb in August.

Market uncertainty arising from variable estimates for nameplate and operable storage capacity at Cushing might be about to diminish, however. The EIA, as part of its Energy and Financial Markets Initiative, has begun gathering storage capacity data for crude and products at PADD levels, including tank farms in the Oklahoma counties of Lincoln, Payne, and Creek, commonly accepted as representative of Cushing storage. The data will be collected on a semi-annual basis for March and September and the EIA plans to publish the storage capacity data with the November release of the Petroleum Supply Monthly (PSM) report.

OECD Europe

Industry inventories in OECD Europe fell by 5.8 mb to 977 mb in July. Crude and products inventories drew by 1.6 mb and 3.9 mb, respectively, contrasting with the five-year 10.0 mb average build. Crude oil stocks decreased in the UK and France, while builds in Norway and Germany partly cushioned the draw. On the product side, gasoline and residual fuel oil posted the largest decreases (-2.5 mb and -1.2 mb, respectively). Meanwhile, German end-user heating oil stocks rose to 56% of storage capacity in July.

Is Germany short of gasoline?

German commercial gasoline inventories declined by more than 50% from January to July 2010. Although stock levels in January built more sharply than usual due to a weather-related drop in gasoline demand, at 11.9 mb the stocks were only 0.8 mb above the five-year average January levels. The subsequent freefall to 5.3 mb in July is more difficult to explain.

Gasoline demand has long been in decline as a result of ongoing dieselisation, possibly accelerated by last year's government stimulus (a kind of cash for clunkers programme). Yet the impact of new cars on fuel efficiency and the number of gasoline-fuelled cars switched for diesel-fuelled ones remain unclear. Dieselisation and more fuel-efficient vehicles, combined with pressure from EU/German legislation requiring 8% biofuels use in 2015 (on an energy content basis), could explain decreasing demand and provide some of the rationale to reduce commercial stock holding.

Meanwhile, refinery output of gasoline declined in line with demand, while yields fell from 24.4% in 1H09 to 22.8% on average in 1H10. Absolute refinery output also fell sharply after a closure of the 260 kb/d hydroskimming refinery in Wilhelmshaven in October 2009 due to poor economics. Upgrading plans were recently cancelled and ConocoPhillips is considering either turning the plant into a storage terminal or selling it. In the latter case, an inventory sell-off prior to a sale of fixed assets could also have contributed to recent gasoline stock-draws.

Germany has traditionally been a net exporter of gasoline, albeit exports have declined. Declining domestic production has seen imports rising, notably from the Netherlands, with inventory draws also potentially having been used to help meet domestic demand.

In the bigger picture, commercial gasoline inventories form about 20% of total gasoline stocks in Germany. Sizeable government-controlled stocks were generally stable in 1H10, although trending at the bottom or below the five-year range, and increased marginally in June. As such, the steep commercial stock draw from January to July 2010 brought total gasoline holdings down by a less alarming, but nonetheless significant, 18%. That said, forward demand cover decreased by 14 days to 54.3 days for total stocks, below the five-year range. It will be interesting to see whether re-stocking of winter-grade material and a seasonal increase in throughputs (margins permitting) in coming months generate a more comfortable level of commercial gasoline cover, or whether German gasoline remains one of the few potential areas of European supply tightness through to end-2010.

Product inventories held in independent storage in Northwest Europe rose in August, driven by additions to the gasoil pool. In addition, product floating storage held off Northwest Europe expanded by 4 mb to 18 mb. There was no crude floating storage reported in the region. However, the latest Euroilstock data point to another monthly decrease in the EU-15 plus Norway oil inventories. Crude oil fell by 5.4 mb offsetting a 3.4 mb build in products led by middle distillates.

OECD Pacific

Pacific commercial inventories rose by 2.0 mb to 407 mb in July, as an increase in crude outweighed product draws, mainly concentrated in gasoline and fuel oil. By comparison, stocks built on average by 12.3 mb over the past five years. On the product side, gasoline and residual fuel oil drew by 2.7 mb and 1.0 mb, respectively, partly balanced by a 1.6 mb gain in 'other products'. Crude inventories rose by 3.1 mb, in line with seasonal norms, but they continue to trend below the five-year range.

Preliminary weekly data from the Petroleum Association of Japan (PAJ) indicate a 7.6 mb draw in August, contrasting the five-year average build of 8.5 mb. After a period of depressed crude runs, an uptick in Japanese throughput curtailed crude oil stocks by 8.6 mb, while products increased by 1.0 mb, driven by gains in kerosene and gasoil.

Recent Developments in China and Singapore Stocks

In China, crude oil inventories built by 2.9 mb in July, according to China Oil, Gas and Petrochemicals (China OGP). Crude imports fell 15% in July as an oil spill required a temporary 10-day closure of Dalian port. The nearby WEPEC and Dalian refineries were short of crude and trimmed runs. As a result, product inventories declined. Gasoil shed 4.8 mb, while gasoline and kerosene fell by a combined 3.5 mb.

Singapore onshore inventories declined by 1.0 mb to 46 mb in August, according to data from International Enterprise. Middle distillates edged 1.3 mb lower on stronger demand from Indonesia and Vietnam, while fuel oil decreased by 0.9 mb following lower imports and steady bunker demand. An offsetting build came from light distillates as weaker regional demand contributed to a 1.2 mb gain.



  • Benchmark crude oil futures trended lower during August amid mounting concerns the global economic recovery will slow markedly this year and into 2011. Continued high levels of global oil stocks and expectations that demand growth will ease in coming months also weighed on prices. A more active-than-normal hurricane season is one of the few props supporting markets and tempering downward price shifts. WTI and Brent futures both averaged close to $77/bbl for the month and by early September were trading in a relatively narrow $75-78/bbl range.
  • Hedge funds and other non-commercial investors in August also signalled a shift in their normally bullish outlook for future oil prices. Non-commercials cast a vote of no confidence for further price rises above $80/bbl by accumulating a record number of short positions.
  • With an unspectacular US summer driving season formally ended after the Labor Day holiday, gasoline has clearly emerged as the weak link in the US product chain. Gasoline crack spreads in Atlantic basin markets have plummeted more than 40% from May levels. While gasoil and other middle distillate cracks improved on the month, swelling inventories may yet undermine their strength.
  • Crude tanker rates remained exceptionally soft in August, under pressure from the flotilla of surplus vessels. Oversupply was most pronounced in East of Suez markets where it negated strong demand. Short-term floating storage of crude fell dramatically by end-August, with the Middle East accounting for 69% of the drawdown. Products storage, however, has seen a recent resurgence in volumes, notably of middle distillates. Floating storage of crude and products now amounts to 72.4 mb, its lowest level since March 2009.

Market Overview

The 'summer time blues' appeared to affect oil markets in August. A more pessimistic outlook for the pace of economic recovery for the rest of the year and into 2011 emerged last month, and appears to have sapped some momentum from the oil market. Prices mirrored weaker sentiment in broader financial markets, with the Dow Jones Industrial Average and S&P 500 posting their worst August since 2001. Equally, continued high levels of global oil stocks also weighed on prices. Benchmark futures trended lower in August but still traded in the middle of the $65-85/bbl range seen over the past year. 

Despite the downturn over the month, average prices in August were up over July levels. WTI prices gained around $0.30/bbl, to an average $76.67/bbl, while Brent futures rose a stronger $1.76/bbl to $77.12/bbl, with the latter's strength due in large part to lower supplies of North Sea crudes as a result of scheduled field maintenance work.

Over the course of August, however, prices steadily eroded on mounting concerns that the economic recovery was stagnating, especially in the US. After a brief run-up in prices in line with hurricane activity in early August, Brent and WTI futures ended the month down by 8% and 12%, respectively. WTI prices fell from around $81.35/bbl on the first of the month to just under $72/bbl at end August. Over the same period, Brent declined from about $80.82/bbl to $74.64/bbl.

In early September, prices briefly snapped back after better-than-expected US and China manufacturing surveys raised the prospect of stronger oil demand growth, with WTI futures posting their biggest one-day gain in nearly a month on 1 September. Benchmark futures prices were trading in a relatively narrow $75-78/bbl range at the time of writing.

A more active-than-normal hurricane season is one of the few props supporting markets and tempering downward price shifts.  Prices briefly moved above the $80/bbl threshold in early August as Hurricane Earl gathered steam, but eased again once the storm passed without inflicting any damage on oil infrastructure. So far this season, there have been three major storms potentially threatening Gulf of Mexico and US East Coast oil installations but none have had a material impact on operations. The 5-year average loss of supply due to hurricane activity between July and November is estimated at 225 kb/d. There has been no damage to oil infrastructure this year and the only significant loss of output due to precautionary shut-in occurred in July, averaging about 100 kb/d. However, meteorologists caution that September is typically the month with the stormiest weather, and we assume a five-year average loss of 500 kb/d. This is already factored into our non-OPEC outlook.

Oil prices have closely tracked macroeconomic expectations and financial market activity over the past year. However, during the past month oil prices diverged from rising equity markets at times, leading analysts to suggest near-term supply and demand fundamentals may be reasserting their influence as the primary driver of oil prices for now at the expense of macroeconomic data. The relatively high global inventory cover is singled out for putting the current cap on any sustained upward price moves above $80/bbl. OECD oil inventories are on track to reach their highest level since 1998.

In the US market, oil inventories are at 20-year highs. Exceptionally high crude stocks, including volumes held at Cushing storage depots, pressured prompt prices, with the contango between the front month WTI futures contracts and forward months steadily deepening, after narrowing in July. The WTI M1-M2 contango increased to around $1.43/bbl in early September, compared to an average of $0.59/bbl in August and just $0.43/bbl in July. The WTI M1-M12 price spreads widened to around $7.50/bbl in early September compared with $5.45/bbl in August and $4.55/bbl in July.

A less-than-stellar summer gasoline season also shone a spotlight on stubbornly high unemployment rates in the US and weaker consumer confidence. Underscoring the weak summer driving season gasoline crack spreads in August were around 40% below May levels. On the NYMEX, heating oil futures started trading at a premium to gasoline futures earlier than usual. While gasoil and other middle distillate crack spreads improved on the month, swelling inventories may yet undermine their strength. Distillate stocks reached 20-year highs in the US while in Europe floating storage levels of mostly gasoil and jet fuel continued to swell by end-August.

In the absence of significant hurricane activity, a growing number of analysts see the current oversupply, coupled with prospects for the global economic recovery to slow markedly this year and next, likely tempering sustained upward price moves. Meanwhile our own supply/demand balance sees little sign of sustained market tightening before well into 2011.

Futures Markets

Hedge funds and other non-commercial investors in August also signalled a shift in their erstwhile bullish outlook for prices. Non-commercials cast a vote of no confidence for further price rises above $80/bbl by taking on a record number of short positions. 

Trading activity in crude oil futures on the NYMEX picked up in August after July open interest fell to the lowest level since end-2009, in part due to seasonal slowdown in activity and part due to the narrow trading range. Open interest in NYMEX WTI rose slightly to 1 308 million contracts in August, up 5.6% from July. Money managers switched sides during the month as they unwound long positions at the beginning of August and increased short positions to record levels. Their net long holdings dropped by 87% during August. Other reportables, swap dealers and producers took the other side of the market by increasing their net long positions.

Open interest in NYMEX RBOB gasoline futures fell slightly, to 235 000 contracts. Money managers have practically erased their net long exposure by taking 26 000 new short positions from 6 600 short held at end-July. Money managers have also gone net short in heating oil and natural gas futures (short holdings up by 19 600 and 37 600, respectively).

International efforts to enact stricter trading regulations are moving apace and are likely to take on more prominence when France assumes the head of the G-20 next month. France, considered one of the more ardent proponents of stricter regulation, has sent detailed proposals to the European Commission calling for common action to regulate commodities markets. France's proposals include limiting positions in derivative markets and increasing transparency, notably on the identity of market participants and movements. The French recommendation also sets out guidelines for a more comprehensive European supervisory system for trading commodity derivatives.

Meanwhile, the US Commodity Futures Trading Commission (CFTC) formally withdrew its proposed rule on energy position limits in mid-August as it prepares to issue broader curbs on speculative activity across all commodities, including energy.

Spot Crude Oil Prices

Spot crude oil prices trended lower in August but managed to post month-on-month increases. WTI spot prices rose a modest $0.29/bbl to $76.62/bbl while Dated Brent gained a stronger $1.51/bbl, to $77.15/bbl. Dubai spot prices rebounded smartly from July, up by $1.60/bbl to $74.09/bbl as demand picked up for Middle East crudes. Exceptionally high levels of crude stocks going into a period of significant refinery run cuts during the September-November maintenance season is adding downward pressure on spot markets.

Price trends for Atlantic basin markers WTI and Brent diverged markedly over the past month. The growing glut of stocks in the US added further downward pressure on prompt prices while maintenance work in the North Sea boosted Brent's premium. As a result, WTI was once again trading at a discount to Brent in August, averaging $0.53/bbl for the month versus a premium of $0.68/bbl in July and $0.44/bbl in June. By the end of the first week of September, the spread had widened to a discount of $3.65/bbl.

Brent's relative strength also distorted pricing relationships with other crudes pegged to the benchmark at end-July and early-August, especially West African grades, but the differentials gradually recovered over the month.

By contrast, Urals differentials to Brent strengthened smartly over the month due to a scheduled drop in Russian exports in September. In the Mediterranean, Urals discounts to Dated Brent narrowed from around $3.20/bbl in the first week of August versus $0.16/bbl by the last week. But the high prices for Urals eroded refining margins, prompting buyers to seek alternative grades until prices come down.

In Asia, the Brent/Dubai spread also narrowed over the month on stronger demand for Middle Eastern crudes ahead of the peak winter demand season. Dubai's discount to Dated Brent steepened from $3.15/bbl on average in July to around $5.25/bbl in the first week of August before gradually narrowing to just under $2/bbl at end-month.

The relative strength of Dubai and stronger demand for Mideast crudes given the upcoming seasonal shift in focus to distillate-rich grades is behind a number of Middle East producers jacking up official selling prices for October. Saudi Aramco raised prices for all crude exports, with European customers seeing the highest increases. Increments range from a low of $0.45/bbl for Arab Heavy in Northwest Europe to a high of $1.65/bbl for Arab Medium in the Mediterranean. The price hikes are in line with levels seen for competing grades such as Urals. By contrast, US and Asian customers saw smaller increases of $0.05/bbl to $0.15/bbl. Prices for Arab Super Light in Asia were the exception, up a steeper $0.75/bbl on the back of strong naphtha crack spreads.

Spot Product Prices

Even before the official end to what proved to be a disappointing summer gasoline season in the northern hemisphere, market activity shifted to heating fuels and diesel markets. On the NYMEX, heating oil shifted to trading at a premium to gasoline earlier than usual this year. In Asia, gas oil and jet kerosene markets posted the strongest month-on-month increases.

Overall in August spot prices for refined products were higher, bar gasoline in the US and Mediterranean markets. With the unspectacular US summer driving season formally ended after the Labor Day holiday, gasoline has clearly emerged as the weak link in the US product supply chain. Gasoline crack spreads in Atlantic basin markets have plummeted more than 40% from May levels.  In New York, crack spreads narrowed to a few cents above $9/bbl in August compared with just under $12/bbl in July, around $13.50/bbl in June and over $16/bbl in May.

In Europe, weak demand for export cargoes from the US undermined gasoline markets, with cracks now down 50% from the peak 2010 levels reached in March. Differentials to Brent in Northwest Europe fell by about $1.10/bbl to $7.24/bbl in August and are now about half of the average $14/bbl seen in March. In the Mediterranean, Urals cracks were off by $2.08/bbl to $6.33/bbl, about half of March levels of $13.56/bbl.

In Asia, gasoline crack spreads were also weaker with differentials to Dubai in Singapore off $1.50/bbl in August to $8.43/bbl and in Japan down a smaller $1.20/bbl to $10.34/bbl. By contrast, naphtha markets in Asia and Europe rebounded in August on stronger petrochemical demand and a shortage of prompt supplies, with spot prices up month-on-month by $4-5/bbl. The higher spot prices led to a steady improvement in cracks spreads in August but they still remained in negative territory, though differentials to Dubai crude in Singapore briefly turned positive mid-month. In Asia, higher petrochemical buying by China strengthened naphtha crack spreads. Increased spot purchase by Taiwan's Formosa Plastics for its ethylene cracker following the refinery fire also supported naphtha markets. Differentials to Dubai crude in Singapore narrowed to -$0.78/bbl in August compared with -$3.92/bbl in July.

In Europe, naphtha markets were supported by increased purchases from petrochemical buyers due to a shortage of prompt supplies amid refinery cutbacks as well as relatively higher LPG prices. Naphtha differentials to Brent narrowed to -$3.91/bbl in August versus -$6.36/bbl in July.

Markets are now squarely focused on middle distillates. Gas oil and other middle distillate crack spreads improved over the month but high inventories may yet undermine their strength. Distillate stocks reached 20-year highs in the US while in Europe floating storage levels of mostly gas oil and jet fuel continued to swell by end-August. In the Mediterranean, differentials for diesel rose by $1.85/bbl to $13.53/bbl while gas oil gained a smaller $0.78/bbl to $11.19/bbl. In the US heating oil cracks to WTI increased to $8.22/bbl last month compared with $6.81/bbl in July.

Refining Margins

The picture for refining margins was mixed in August. Average monthly margins in North West Europe (NWE) and Singapore improved, US West Coast margins fell, while Mediterranean, US Gulf Coast and Chinese margins saw diverging trends. Despite some increases from early-August lows, margins in general remain poor by historical standards and underpin a fairly cautious outlook for refinery crude runs in coming months. North West European margins inched higher in August from early month lows, as product cracks, especially for distillates, improved on tighter supplies. In the Mediterranean, margins were mixed. Urals cracking and hydroskimming margins improved on average in August on better middle distillate, naphtha and fuel oil cracks, but as Urals strengthened relative to Brent during the months, margins also deteriorated. Es Sider margins moved slightly lower.

US margins were also mixed in August. US Gulf Coast margins fell on average in the month, except for Mars, though generally rose in the second half of August. Sharply lower throughputs reduced supplies, pushing gasoline cracks and margins higher in the second half of the month, with approaching Atlantic storms likely also playing a psychologically supportive role. On the West Coast, margins all fell in August in line with sliding gasoline prices. The end of the driving season and high product inventories saw regional gasoline prices plummet; Los Angeles RBOB spot prices fell from $96.45/bbl at the end of July to $84.80/bbl at the end of August.

Singapore margins increased over the month, with Dubai hydrocracking remaining positive and Tapis improved from the very low levels seen at the beginning of August.

End-User Product Prices in August

End-user prices in US dollars, ex-tax, continued July's increases, rising in August by a slight 0.5% across the IEA region. Price rises were led by low-sulphur fuel oil which increased by, on average, 1.5% with notable increases in Italy (+1.9%) and France (+1.7%). On the same basis, gasoline weakened by an average 0.3% with only the US (+0.3%) and Canada (+0.1%) reporting price increases. The average IEA diesel price inched up by 0.7% with only France (-0.5%) and Germany (-0.2%) experiencing price contractions.

The effect of the weakening US dollar, which increases the purchasing power of non-US users, is evident when prices in national currencies are examined. Gasoline pump prices fell across all surveyed countries by between 0.2% (Canada) and 1.5% (Japan), except in the US where they increased by 0.3%. Forecourt gasoline prices averaged $2.73/gallon in the US, ¥134/litre in Japan and £1.16/litre in the UK. In continental Europe, prices ranged from €1.17/litre in Spain to €1.39/litre in Germany. Forecourt diesel price trends were geographically distinct, prices decreasing slightly in Japan and Europe while rising significantly in North America. End-user diesel prices averaged $2.95/gallon in the US, ¥114/litre in Japan and £1.19/litre in the UK whilst in the Eurozone they ranged from €1.08/litre in Spain to €1.21 in Italy.


Dirty tanker rates remained exceptionally soft in August, reflecting the pressure of abundant tonnage on the market. As with July, oversupply was most pronounced in East of Suez markets where it negated high demand. VLCC rates on the benchmark Middle East Gulf - Japan route stayed close to break-even levels. Rates began and ended the month at approximately $9/mt, although some mid-month respite was felt as rates briefly rallied close to $12/mt as charterers fixed date-specific cargoes for delivery by month-end. The Suezmax market fared even worse, with rates falling below break-even levels following low demand for cargoes of Brent-pegged, West African grades which traded at a premium to benchmark US and Asian crudes. Rates on the benchmark West Africa - US Atlantic Coast route plummeted to below $10/mt by early September, their lowest level in a year.

As in July, the clean tanker market performed slightly better, albeit with geographical variations. East of Suez markets fared particularly well with strong demand for vessels to ship products to and from Asian markets helping to keep the market firm. Rates on the benchmark Aframax Middle East Gulf - Japan and Handymax Singapore - Japan routes gained $1/mt over the month to stand at $28/mt and $14/mt, respectively. Atlantic Basin markets fared poorly with scant transatlantic gasoline trade keeping demand low and tonnage high, and even the deployment of extra vessels for floating storage in North West Europe could not lift rates from their malaise. By month-end, the benchmark trades between the UK and US Atlantic Coast and Caribbean and US Atlantic Coast stood $5/mt and $3/mt respectively below a month earlier.

Short-term floating storage of crude fell dramatically by 22.0 mb to stand at 37.0 mb by end-August, despite a widening contango.  The Middle East accounted for 69% (15.2 mb) of the crude draw, as Iran managed to offload some of its unsold cargoes. The remainder of the fall was accounted for by the US Gulf (-4.8 mb) and Asia Pacific (-2.1 mb). Crude now accounts for 51% of floating storage, a sharp contrast to end-May when it accounted for 73%. This broadly reflects changing storage economics, which eroded throughout June and July in line with the flattening of the forward price curve. Products storage however, has seen a recent resurgence with clean volumes, notably middle distillates, rising to 35.3 mb (+4.2 mb) by end-August with rises in North West Europe (+4.1 mb) and the Mediterranean (+0.3 mb). Floating storage of crude and products now amount to 72.4 mb, its lowest level since February 2009.

The pressure on dirty freight rates is emphasised by the recent changing dynamics of the storage fleet. EA Gibson shipbrokers report that by end-August the fleet contained its lowest level of VLCCs (18) since December 2008, following a fall of 11 VLCCs on the month. In contrast, six more vessels of Aframax size or smaller were being used for storage compared to a month earlier.



  • Global refinery crude throughputs for 2Q10 have been revised up by 115 kb/d to average 74.1 mb/d since last month's report, following higher-than-expected runs in the US, Brazil, Thailand and Saudi Arabia for June. Global crude runs are expected to increase by 600 kb/d in 3Q10, due to a seasonal lull in maintenance in Europe and the Pacific and higher runs in the FSU, the Middle East and Latin America. Annual growth remains dominated by China (+550 kb/d) and the US (+300 kb/d), partially offset by continued outages in Latin America (-340 kb/d).
  • 4Q10 global refinery crude runs are expected to fall back from the high levels seen in 2Q10/3Q10, in line with an expected slowdown in oil product demand growth in the second half of this year, to average 73.9 mb/d. This is 780 kb/d lower than 3Q10 runs, but still an impressive 1.4 mb/d above a year earlier. All regions are expected to record year-on-year growth, bar Latin America, where continued outages restrict runs.
  • OECD crude runs averaged 37.5 mb/d in July, 120 kb/d higher than both June and our previous estimate. Higher-than-expected throughputs in Europe more than offset downwardly revised North American and Pacific runs. Total OECD crude runs have been left unchanged at 37.0 mb/d for 3Q10 but are seen falling to 35.5 mb/d in 4Q10 on increased maintenance and continued sluggish demand in the OECD.
  • June OECD refinery yields increased for most products bar gasoline. Gasoil/diesel rose 0.56 percentage points (pp), naphtha 0.06 pp, jet fuel 0.04 pp, fuel oil 0.05 pp and other products 0.02 pp while gasoline yields fell 0.36 pp compared to May data. OECD refinery gross output continued its upward trend, increasing over 1 mb/d and narrowing the 5-year average deficit to just shy of 500 kb/d.

Global Refinery Throughput

2Q10 global refinery crude throughputs have been revised up by 115 kb/d from last month's report, to average 74.1 mb/d. The bulk of the change came from the OECD, where monthly submitted June data for the US were 230 kb/d higher than the weekly data had indicated, only partly offset by lower Pacific runs. Non-OECD 2Q10 crude runs are globally unchanged since last month's report, although this masks offsetting revisions for individual countries. Higher-than-expected crude runs in Brazil, South Africa, Thailand and Saudi Arabia in June were offset by slightly lower throughputs in April and May for a number of countries. Global annual growth in 2Q10 now stands at 1.84 mb/d, of which 57% is accounted for by China, 41% by North America and 20% by Other Asia. Lower runs in Latin America and to a lesser extent the Middle East and Europe provide a partial offset to this growth.

In 3Q10, global refinery activity is likely to show a continued increase, adding another 600 kb/d to the total, in line with seasonal patterns. Scheduled maintenance normally hits a low point in 3Q before again restraining runs in 4Q. For 2010, refinery shutdowns are estimated to fall from just over 5.6 mb/d in 2Q, to 3.8 mb/d in 3Q10. Although information on scheduled outages for the fourth quarter is still incomplete (as seen in the graph below), we expect actual outages to increase at the tail end of the year in line with historical norms.

As such, 4Q10 global refinery crude runs are seen falling back to 73.9 mb/d, though still maintaining an impressive year-on-year recovery. Runs average 1.4 mb/d above 4Q09's depressed levels, with growth stemming from all regions, bar Latin America, where runs still lag year-ago levels due to outages and shut capacity. An expected slowdown in global demand growth in the second half of the year will likely again put pressure on refiners to show restraint and reduce run rates beyond planned maintenance in order to support refining margins. In this forecast, we continue to exclude a restart of PDVSA's Curaçao refinery until progress is made in resolving the technical problems, which caused the refinery to shut in March 2010. We are also excluding a restart of Valero's Aruba refinery, as the company is only planning to make a decision on whether to resume operations once turnarounds are completed (late-October), depending on the market situation and the state of the refinery. If either of these refineries were to be brought back on line, US Gulf Coast profitability could be further undermined, forcing additional reductions.

OECD Refinery Throughput

OECD crude throughputs averaged 37.5 mb/d in July, 120 kb/d above June runs and our previous estimate (and 1.1 mb/d above July 2009). OECD Pacific runs added 350 kb/d from a month earlier, as seasonally rising throughputs in Japan were partly offset by lower runs in South Korea. Pacific maintenance fell sharply, from 1.1 mb/d in June to 0.7 mb/d in July. Offline capacity fell further in August, to a seasonal low point of 0.4 mb/d. Indeed, weekly data for Japan show runs there increasing by another 290 kb/d, to average 3.59 mb/d.

The increased activity in the Pacific was offset by a contraction in European runs from June's more robust levels. European crude throughputs hit an 18-month high in June, supported by improved margins and turnaround completions, but are thought to have fallen back since as profitability deteriorated sharply over July and into early August (before recovering by end-month). French refinery runs bucked the trend and posted a 115 kb/d increase in July, in line with lower maintenance. North American runs were steady in July from a month earlier, but an impressive 755 kb/d above the same month a year ago. Preliminary data for August point to a sharp decline in refinery runs in the US, particularly on the US Gulf Coast in the second half of the month. Although increased maintenance accounted for a share of the decline, deteriorating economics also played its part.

In all, 3Q10 OECD runs are unchanged from last month's report, at 37.0 mb/d, as upwardly revised European estimates are offset by lower throughputs in the Pacific and North America. Annual growth, although lower than 2Q10's 800 kb/d increase, remains robust at 615 kb/d as all regions rose. With OECD demand growth fading further in the second half of this year, lower refinery runs are expected in 4Q10. Refiners will have to show restraint to keep a prop under margins and we currently see runs averaging 35.5 mb/d. Although sharply lower than 3Q estimates, total runs nonetheless retain annual growth of about 200 kb/d versus very weak 2009 levels.

North American crude throughputs averaged 18.4 mb/d in July, unchanged from June and 90 kb/d lower than our previous forecast. Both US and Canadian runs came in below weekly data indications, offset in part by slightly higher Mexican throughputs. 3Q10 crude throughputs are now estimated at 17.9 mb/d, 65 kb/d lower than in last month's report. Runs are expected to drop further in 4Q10, to 17.1 mb/d as demand slumps with the end of the driving season and due to record high product stocks. We expect refiners to cut runs to prevent a collapse in margins.

The fatal explosion of a gasoil hydrotreater at Mexico's 275 kb/d Cadereyta refinery on 7 September, could support US runs, or help reduce high US product stocks, if damage is extensive and forces sustained run cuts. Mexico's refining capacity lags domestic oil product demand, forcing the country to import around 40% of its gasoline needs. Mexico imported 432 kb/d of oil products from the US in June (of which 57 kb/d was ultra low sulphur diesel and 56 kb/d low sulphur diesel) making it the top importer of US refined products.

US refinery runs in August were 220 kb/d lower than our previous estimate, averaging 15.0 mb/d. The monthly drop of 455 kb/d is in part due to higher shutdowns (+160 kb/d) but also lower margins and voluntary run cuts. Regionally, refinery runs fell most on the Gulf Coast, and these were 280 kb/d lower, though West Coast runs also fell by 100 kb/d. Refinery margins on the Gulf Coast fell sharply in August, with cracking margins firmly in the red, before recovering by end-month. PADD 2 runs were unchanged from July, despite the shutdown of Enbridge's 6B line, as refiners instead took advantage to draw down record high PADD2 crude stocks. By 27 August, regional crude inventories had fallen by almost 4 mb from the high of 97.7 mb reached four weeks earlier.

European crude runs averaged 12.8 mb/d in July, 340 kb/d higher than our previous estimate and down 250 kb/d from June's high. Runs fell in most countries, on the back of falling margins, partially offset by higher French throughput levels. Refinery runs in France rose by 115 kb/d from a month earlier as maintenance at Petroplus' 85 kb/d Reichstett refinery was completed. The strike forcing Total's refineries to run at reduced rates in early September, is not expected to severely curtail throughputs. After hitting a low point of -$1.09/bbl in early August, NWE Brent cracking margins rebounded sharply throughout the month to average $2.23/bbl in the week ending 3 September. Mediterranean margins were more stable in August, with Urals slightly higher and Es Sider slightly lower on average. Saras, who operates the highly complex 300 kb/d Sardinia refinery, announced it would make economic run cuts in 3Q10 due to poor margins.

OECD Pacific crude runs for July have been revised lower by 135 kb/d due to lower South Korean throughputs to average 6.3 mb/d. Runs likely rose sharply in August, as regional maintenance hit its seasonal low and on the back of improved cracking margins. Scheduled outages appear to have fallen from 680 kb/d in July to 370 kb/d in August (and 1.1 mb/d in June). According to trade sources, S-Oil raised run rates at its 580 kb/d Onsan refinery to almost 100% utilisation in August from 91-92% in July. GS Caltex, Hyundai Oilbank and SK Energy also reported increased utilisation rates from the July dip on improved economics. Japanese runs in August were slightly higher than expected, however, rising by another 290 kb/d, to average 3.59 mb/d. 3Q10 Pacific crude runs are now seen at 6.4 mb/d and are expected to remain at these levels in 4Q10.

Non-OECD Refinery Throughput

Non-OECD crude runs for 2Q10 have been left unchanged since last month's report, at 37.3 mb/d. Higher June readings for Other Asia, Latin America and Africa are offset by slightly lower-than-expected throughputs for a number of countries in April and May. For July, higher-than-expected runs in Brazil, Singapore and Thailand more than offset lower Chinese readings, leaving 3Q10 average runs also mostly unchanged at 37.7 mb/d. Non-OECD runs are expected to continue to increase, by 700 kb/d in 4Q10, to average 38.4 mb/d (+1.2 mb/d y-o-y). Annual growth is dominated by China (61% of total non-OECD growth), as new refinery capacity is expected to be brought online. An earlier peak in scheduled maintenance in Russia, in September rather than October this year, results in strong year-on-year increases in FSU throughputs. Lastly, Other Asia, led by India, continues to see growth in 4Q10, with the commissioning of some new capacity.

According to official data from the National Bureau of Statistics (NBS), Chinese refinery runs averaged 8.3 mb/d in July, 7% above year ago but 0.2% lower than June. The annual increase of 'only' 540 kb/d is the lowest since April 2009. China's crude oil imports also fell for the first time in 16 months in July, from a record high of 5.4 mb/d in June to 4.5 mb/d. Industry surveys suggest runs at the country's largest refiners will remain close to July levels in August. PetroChina's 200 kb/d Qinzhou refinery reportedly started operations in August and is expected to process 150 kb/d of crude in September. The refinery is reportedly also building crude inventories for its start-up. In 4Q10, Huaxing Petrochemical, an independent refiner in Shandong province, plans to start up a newly built 120 kb/d CDU. In all, 4Q10 Chinese crude runs are expected to average 8.8 mb/d, 420 kb/d higher than 3Q10 and 750 kb/d higher than 4Q09.

In Other Asia, Indian crude runs trended sideways in July, in line with expectations. Although runs were 13.7% higher than a year earlier, this is largely due to a low baseline. Reliance shut half its 660 kb/d Jamnagar 1 refinery for maintenance in July 2009, resulting in an inflated 2010 annual growth rate. The Mumbai port closure, following from a collision of two tankers on 7 August, did not impact refinery activity in the region on a sustained basis. According to local refineries, crude inventories were sufficient to prevent crude supply shortages and reduced runs.

In Taiwan, Formosa's Mailao refinery, which was shut after a fire on 25 July, is still running at reduced rates. One of the three 180 kb/d crude distillation units (CDU) was damaged in the fire and is not expected to restart until late this month at the earliest. The refinery's other two CDUs will be run at 50% for up to two weeks in September as the company is reconfiguring operations. Pakistan's Parco refinery (100 kb/d), which has been shut since 7 August due to flooding, is expected to resume operations in mid-September.  The refinery itself was reportedly not impaired in the floods, but was shut due to damage to nearby oil depots and road infrastructure.

Russian throughputs averaged 5.1 mb/d in July, in line with our forecast, but 130 kb/d higher than a month earlier as several refineries, including the 240 kb/d Moscow refinery, returned from maintenance. Runs likely fell in August and will again in September as maintenance activity picks up. Traditionally the height of autumn maintenance in Russia occurs in October, but this year's schedule seems to have been shifted earlier to peak in September. The extensive wildfires that raged across the country in July and August are not thought to have had a significant impact on refinery runs, although some small refineries reportedly shut operations as part of wider security measures. According to government officials, authorities transported the oil away from the areas at risk to prevent explosions.

In Latin America, Brazilian crude runs for June and July were stronger than expected, at 1.87 mb/d and 1.85 mb/d respectively. Maintenance scheduled for Petrobras' 170 kb/d RBOC refinery was delayed from June to September, and it seems that maintenance at company's 195 kb/d REPAR refinery (complete shutdown) only started in August instead of July as previously assumed.

Valero has delayed the (potential) restart of its Aruba refinery as current maintenance is now only expected to be completed by mid to late-October, as opposed to an earlier assumption of early September. The company cites difficulties in getting contractors to complete certain projects as the cause of the delay. According to a Valero spokesman, the company will evaluate market conditions and the state of the refinery once the turnarounds are complete before deciding on what units to restart and when. Due to the uncertainty, we exclude the Aruba refinery from our throughput levels until a company decision has been made. We equally continue to exclude operations at PDVSA's Curaçao refinery in the Netherlands Antilles despite reports that some small units restarted at the end of August. The main catalytic cracker has not yet been restarted, and can only be restarted once a boiler being repaired at the nearby utility plant resumes operation. Power supply problems and the boiler outage forced the refinery to halt operations in March of this year. In Trinidad, floods forced Petrotrin to close its 175 kb/d Pointe-à-Pierre refinery for about 3 weeks in August.

Middle Eastern crude runs averaged 6.0 mb/d in June, 100 kb/d higher than in May on the back of higher Saudi and Kuwaiti throughputs following maintenance completion. In the UAE, ADNOC is expected to shut two gasoline units at its 415 kb/d Ruwais refinery for maintenance in October. As a result, the company has issued a tender to import 150 kt of gasoline (or about 50 kb/d for delivery between 14 October through mid-November), according to trade sources. Saudi Arabia is also reportedly seeking to buy gasoline from September through the end of the year as well as diesel to fuel power plants in August and September.

OECD Refinery Yields

June OECD refinery yields increased for most products; gasoil/diesel rose 0.56 percentage points (pp), naphtha 0.06 pp, jet fuel 0.04 pp, fuel oil 0.05 pp and other products 0.02 pp. However, the gasoline yield fell 0.36 pp compared to May data. OECD refinery gross output continued its upward trend, increasing by over 1 mb/d in June, to stand just 500 kb/d below the 5-year average.

OECD gasoline yields dipped by 0.8 pp from 2009 levels in June, but remain in the upper half of the range for the last five years. The dip in yields was particularly large in the Pacific region, where they fell almost 1pp compared to last month and now stand at the same level as last year. North American gasoline yields fell a further 0.12 pp in June, and in Europe yields remained low, now 0.77 pp below the 5-year average. The fall in gasoline yields reflects high stock levels and depressed gasoline demand.

Gasoil/diesel yields continued to increase in June to a level 1 pp above the 5-year average. European and Pacific yields increased 0.73 pp and 1.02 pp respectively, while they remained above seasonal norms but unchanged versus May in North America. The OECD refinery gross output of gasoil/diesel made a jump upwards in June as well, increasing by 630 kb/d compared to last month. Europe accounted for 470 kb/d of the increase as refineries returned from maintenance and strong gasoil cracks also potentially contributed.

OECD fuel oil yields remained low in June albeit increasing 0.05 pp versus May. The yields decreased further in both Europe and North America, but for the Pacific region yields increased 1.15 pp compared to May to a level in line with last year as bunker demand increased in June with the recovery in shipping.