Oil Market Report: 13 October 2010

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Highlights

  • Benchmark crude futures were range-bound in September but by early October had breached the $80/bbl mark. Stronger demand, a rebound in financial markets, a weaker dollar and a major strike at French ports converged to propel prices higher. Benchmark Brent was last trading around $83/bbl and WTI at $81.50/bbl.
  • Global oil demand for 2010 and 2011 is revised up by 0.3 mb/d on average to 86.9 mb/d and 88.2 mb/d, respectively, on new data showing much stronger-than-expected 3Q10 readings, notably in the OECD, and updated GDP and price assumptions. Yearly growth is now +2.1 mb/d in 2010 and +1.2 mb/d in 2011. If GDP growth were a third lower, demand growth would only reach 0.4 mb/d in 2011.
  • Global oil supply fell by 150 kb/d to 86.9 mb/d in September on lower non-OPEC output, but was up by 1.5 mb/d year-on-year, shared equally between non-OPEC, OPEC crude and NGLs. Estimated 2011 non-OPEC supply is raised by 150 kb/d to 53.1 mb/d on stronger US, Canadian and Chinese output, growing from 52.6 mb/d in 2010.
  • OPEC crude oil supply rose by 40 kb/d, to 29.29 mb/d in September. The 'call on OPEC crude and stock change' is raised to 29.8 mb/d in 3Q10 and 29.0 mb/d in 4Q10, after a large upward demand revision. The 2011 'call' averages 29.3 mb/d, up by 0.1 mb/d from 2010.
  • August OECD industry stocks rose by 15.8 mb to 2 790 mb, or 61.1 days, reaching their highest level since August 1998. Preliminary data point to a sharp 31.7 mb draw in September, while oil in floating storage increased slightly.
  • Global refinery crude throughputs are revised up by 0.7 mb/d for 3Q10, to 75.3 mb/d, or 1.8 mb/d above 3Q09. Stronger runs in North America and Europe, shadowing revisions to oil product demand, as well as record-high runs in Brazil and Russia contributed. 4Q10 runs are to fall seasonally to 73.8 mb/d, in line with the expected slowdown in oil demand growth.

I don't want to spoil the party*

Prices in early October broke through the psychological $80/bbl barrier, with many foreseeing more strength to come. Choruses of "$100/bbl-by-next-year" are being heard once more. Our own view, however, is that markets could remain comfortably supplied until well into 2011. That said, the potential for Quantitative Easing II in the US, and signs that China will engineer a soft landing for the economy have encouraged a belief in resilient demand growth. 2Q10 and 3Q10 OECD demand showed significant yearly growth for the first time since 2005. And although the US Gulf emerged unscathed from this season's hurricanes, supply concerns - Macondo-related deepwater drilling restrictions and unrest in Nigeria among them - abound, highlighting the difficulty in rapidly expanding supply to the market. Were sustained 2.0 mb/d-plus annual demand growth to become a new reality, global supply would struggle to keep up, tightening OPEC spare capacity and drawing inventory. This could combine with renewed economic/financial exuberance and a weaker dollar to drive oil and commodities sharply higher. Such a scenario is possible, but does not look to us the most likely short-term outcome.

This month's report incorporates the latest IMF World Economic Outlook assumptions for 2010/2011. Globally these raise 2010 GDP growth to an impressive 4.7%, while curbing 2011 growth to a still-robust 4.2%. Our own oil demand estimates for 3Q10 are raised by a weighty 0.8 mb/d, with revisions concentrated in the OECD. Amid apparently resurgent OECD demand, global growth has averaged nearly 2.5 mb/d so far in 2010.  But the devil, as always, is in the detail. OECD growth in 2Q10 and 3Q10 was relative to recessionary lows in the same quarters of 2009. Economic rebound always tends to encourage temporarily resurgent demand. However, OECD consumption remains well below early-2008 levels. Moreover, 3Q10 strength contained quirks which suggest it may not persist: exceptional weather in OECD Asia boosted oil-fired power generation; European heating oil re-stocking is unlikely to carry through coming quarters; apparent 3Q10 North American strength is based on revision-prone preliminary data. So 3Q10 look like an imperfect guide for future OECD demand, hence our tempering of upside revisions for 4Q10 and 2011.

Seasonal considerations aside, there are also plenty of cautionary signs on the economic side.  The IMF's own GDP estimates largely curbed expectations for the OECD, while raising those for the non-OECD.  And consensus surveys among private forecasters for 2011 economic growth suggest numbers closer to 3% than 4%. When we replicate a similar low GDP sensitivity in our model, we come up with 2011 demand nearer 87 mb/d than our base case of near 88 mb/d. OPEC spare capacity, comfortable for 2011 in our base case, looks all the more so under the lower demand variant.

Structurally too, there is a recognition that demand growth needs to be moderated amid the 'new reality' of $70-$80/bbl oil.  The US has announced plans to move vehicle fuel economy targets through 50 mpg and beyond by 2025. Electric vehicles are proving a hit at the Paris motor show. And while steps towards domestic price deregulation may falter, the fact that subsidy reform is being implemented or at least discussed, for markets such as India, Iran and Saudi Arabia could eventually dampen robust non-OECD demand growth in future. At the risk of appearing a 'party-pooper' for market bulls, our prognoses still suggest to us that benign market fundamentals could persist well into 2011.

*J.Lennon, 1964

Demand

Summary

  • Projected global oil demand for both 2010 and 2011 is revised up by 0.3 mb/d on average. The changes largely result from new data for July (final) and August (preliminary) showing much stronger-than-expected 3Q10 readings (up by 0.9 mb/d versus our previous report), most notably in the OECD. New GDP prognoses by the IMF, together with an updated oil price assumption based on the futures curve at the time of writing, have also been incorporated. Global oil demand is now expected to average 86.9 mb/d in 2010 (+2.5% or +2.1 mb/d year-on-year) and 88.2 mb/d in 2011 (+1.4% or +1.2 mb/d). However, a sensitivity analysis suggests that, if global GDP growth were instead to hover around +3% in 2011 (a third less than our base case), global oil demand would be over two-thirds lower, reaching only 87.1 mb/d next year as emerging countries would bear the brunt of weaker economic activity in terms of much lower oil use.
  • OECD oil demand for 2010 and 2011 is adjusted up by 170 kb/d and 100 kb/d, respectively, despite slightly lower GDP assumptions. Extremely warm weather conditions in the Pacific, sustained heating oil stock builds in Europe ahead of winter and much stronger distillate and 'other products' demand in North America may imply that the underlying OECD demand trend is actually more resilient than previously thought, but there are reasons to be cautious. The much higher 3Q10 readings are largely based on the Pacific's exceptional, weather-related surge in burning fuels use and on preliminary US weekly data at odds with persistently weak economic indicators. OECD demand is now forecast at 45.8 mb/d in 2010 (+0.7% or +320 kb/d year-on-year) and is expected to resume its gentle structural decline in 2011 (-0.6% or -290 kb/d versus the previous year).


  • Forecast non-OECD oil demand for both 2010 and 2011 is nudged up by 160 kb/d on average, on stronger-than-anticipated preliminary readings in Asia, the FSU and Latin America, as well as slightly higher GDP assumptions. With total oil demand now expected to average 41.2 mb/d in 2010, non-OECD year-on-year growth, at +1.8 mb/d or +4.7%, is fast approaching the historical record, reached in 2004 (+2.2 mb/d or +6.9%). In 2011, though, the pace of growth should moderate to +1.5 mb/d or +3.7%, with total demand reaching 42.7 mb/d.

Global Overview

This report incorporates the latest set of IMF GDP prognoses, which were released on 6 October. Overall, the Fund's new forecasts are marginally revised, both versus its April World Economic Outlook and its July Update. On the one hand, 2010 global economic growth is now seen at +4.7% year-on-year, up by 0.1 percentage points versus the Fund's July interim evaluation and by roughly 0.6 percentage points versus its April assessment, given stronger-than-expected activity in the first semester. On the other hand, 2011 growth is now projected at +4.2%, down by 0.1 percentage points versus the previous forecasts.

More interestingly, the upward revisions are mostly concentrated in non-OECD countries, while the downward adjustments pertain largely to the OECD. Emerging economies have clearly become key players: collectively, their GDP is seen rising by +6.9% on average over 2010 and 2011, with Asia in particular featuring strong growth, largely driven by China. Meanwhile, mature economies are struggling; as much as the recovery in the OECD is expected to be tangible (+2.4% on average over both years), it is unclear whether it will be sustainable, notably in the United States, as it has been largely driven by government spending, restocking and, to a lesser extent, net exports. The outlook thus faces great uncertainties. As the Fund acknowledges, "the global recovery remains fragile, because strong policies to foster internal rebalancing of demand from public to private sources and external rebalancing from deficit to surplus economies are not yet in place."

Indeed, there seems to be little international consensus on whether or not to engage in rapid fiscal consolidation amid skyrocketing public debt. The Fund itself argues that simultaneous fiscal retrenchment in all OECD countries would be ruinous for both economic growth and the already high unemployment rate. Yet the alternatives are not obvious, as was shown by the financial turmoil that engulfed Europe a few months ago. Meanwhile, the vexing issue of currency manipulation is becoming increasingly pressing, with China in particular resisting calls to let the yuan rise freely on the grounds of preserving domestic social stability - raising the spectre of a round of competitive devaluations and unwelcome global protectionism.

Leaving aside these risks, these economic prognoses show how much the world has changed in the past few years. Indeed, while GDP in the OECD will barely surpass its 2008 aggregate levels by 2011, non-OECD income will be almost 20% greater - with emerging countries as a group having altogether escaped the Great Recession of 2009. Similarly, whereas OECD oil demand is poised to stagnate almost 5% below 2008 levels both this year and next - highlighting the region's economic woes and the extent of ongoing, structurally driven demand destruction - non-OECD demand will have increased by over 10% by 2011, commensurate with the economic strength of key emerging countries.



As a result of these new GDP prognoses, together with a nominal oil price assumption of roughly $75.60/bbl in 2010 and $79.70/bbl in 2011 based on the futures curve at the time of writing, and new data for July (final) and August (preliminary) showing much stronger-than-expected 3Q10 readings, global oil demand is now seen averaging 86.9 mb/d in 2010, 320 kb/d higher when compared with our last report. This implies growth of +2.5% or +2.1 mb/d year-on-year, 260 kb/d higher than previously assessed. In 2011, demand is expected to rise to 88.2 mb/d (+1.4% or +1.2 mb/d versus 2010 and 270 kb/d higher than previously expected), broadly in line with historical trends relative to GDP growth, interfuel substitution and oil intensity.



Given the persistent - and considerable - uncertainty regarding the world's short-term economic outlook, this report presents, as previously, a sensitivity analysis based on different paces of economic growth. Our 'base' GDP profile mirrors the current IMF assessment, while the 'lower' one is constructed by shaving a third of global growth for the reminder of 2010 and in 2011, in order to pin down the potential range within which global oil demand may evolve. Thus, GDP growth under the lower case would be around 3% in 2011, broadly in line with the latest Consensus Forecasts (September 2010). The usual disclaimer applies: this analysis is merely illustrative, does not imply a probability of occurrence and ignores the iterations between economic activity and the oil price, which is held constant.



On this basis, 2010 global oil demand would range from 86.7 mb/d under the lower GDP case to 86.9 mb/d under the base case (a 0.2 mb/d divergence), while 2011 demand would range between 87.1 mb/d and 88.2 mb/d, respectively (a 1.1 mb/d difference). Thus, under the lower GDP case, oil demand growth, at +360 kb/d, would be over two-thirds lower than under the base case. The reason for this sharp fall relates to emerging countries, which bear the brunt of weaker economic activity in terms of much lower oil use. Indeed, under the low case, the pace of year-on-year decline in the OECD increases slightly (from -0.6% to -1.0%), but growth almost halves in the non-OECD (from +1.5 mb/d to +0.8 mb/d), highlighting its much higher income elasticity.

OECD

According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) jumped by 3.0% year-on-year in August. Exceptionally warm weather conditions in OECD Pacific boosted residual fuel oil use and direct crude burning. Meanwhile, in OECD Europe, the continued refill of household stocks supported sustained heating oil deliveries ahead of the winter. Finally, in OECD North America (which includes US Territories), demand readings for distillate and 'other products' were much stronger than previously anticipated.



Revisions to July data were hefty (+470 kb/d) and largely concentrated in North America (+320 kb/d), with US readings exceeding preliminary weekly estimates for all product categories bar residual fuel oil. In Europe (+90 kb/d), German heating oil stocking surprised on the upside, while Japanese distillate and residual fuel oil consumption turned out to be higher than expected in the Pacific (+60 kb/d). Total OECD demand thus surged by +2.7% year-on-year in July, almost twice as much as previously estimated.



Looking ahead, the July adjustments and the unusually strong August figures have resulted in an overall +600 kb/d revision for 3Q10. This change, though, is only partly carried through to 4Q10 and 2011. As much as current data may well imply that the underlying demand trend in the OECD is more resilient than previously thought, there are reasons to be cautious, even if the global economic recovery avoids a relapse. First, the Pacific's weather-related surge in burning fuels use was arguably exceptional; second, North American readings are based on the notoriously fickle weekly US data, which seem at odds with stubbornly weak economic indicators, and may thus well be significantly revised in the months ahead; finally, European heating oil deliveries may moderate if German inventories stabilise at around the five-year average. As such, OECD demand is now expected to average 45.8 mb/d in 2010 (+0.7% or +320 kb/d year-on-year and 170 kb/d higher than previously anticipated). However, as much as demand appears to have 'overshot' in 2010, we still believe that it will resume its gentle, structural decline in 2011 (-0.6% or -290 kb/d versus the previous year and 100 kb/d higher when compared with our last report).

North America

Preliminary data show oil product demand in North America (including US territories) rising by 2.6% year-on-year in August, following a 3.7% increase in July. August witnessed growth in all categories bar residual fuel oil. Despite a downgrade of regional economic growth prospects (real GDP growth was revised down by 0.6 pp on average for both 2010 and 2011) and economic indicators pointing towards continued weakness, the prognosis for oil demand in 2H10 has improved. Stronger-than-anticipated July submissions and upbeat August/September preliminary data have boosted our estimate for 3Q10 by +300 kb/d, though demand remains well below pre-recession levels (-1.6 mb/d versus 3Q07). Still, given short-term economic uncertainty, demand in 4Q10 is only 60 kb/d higher than in our previous report.



The 3Q10 change is anchored by a +320 kb/d revision to July preliminary data, mostly due to higher-than-expected demand readings for petrochemical feedstock, heating oil, residual fuel oil and 'other products'. Stronger-than expected US preliminary data in August (+160k b/d) and September (+420 kb/d) is more difficult to assess in terms of viability, as discussed below. With the incorporation of baseline data plus the latest IMF GDP prognoses, North American demand is now estimated at 23.8 mb/d in 2010 (+2.1% or +480 kb/d versus 2009 and 110 kb/d higher than our last report). Demand in 2011 is seen falling slightly to 23.7 mb/d (-0.2% or -60 kb/d year-on-year and 80 kb/d higher than our last report).

Adjusted preliminary weekly data for the United States (excluding territories) indicate that inland deliveries - a proxy of oil product demand - grew by 2.2% in September, following a 2.4% year-on-year rise in August. September data featured broad-based year-on-year gains (middle distillates, jet/kerosene and residual fuel oil all posted healthy growth), seemingly belying indicators pointing to slower economic growth. Still, our outlook remains cautious given uncertainty over recent US demand readings.

Firstly, weekly-to-monthly revisions have remained mixed in terms of direction and magnitude, confounding efforts to pre-empt such changes. The past twelve months have witnessed seven positive adjustments to total product demand versus five negative adjustments, including a large 720 kb/d downward revision to May data. Distillates are particularly problematic; after a May downward revision of 360 kb/d, adjustments for June and July were small (+20 kb/d on average) despite the presumption of high exports amplifying demand readings. Jet fuel/kerosene and residual fuel oil revisions have also been volatile of late. Our methodology currently incorporates a twelve-month average of previous revisions; however, a three-month average is used for middle distillates given strong apparent gasoil growth rates in August and September.



Moreover, September can be a volatile shoulder period for preliminary data, with a seasonal demand fall-off normally occurring throughout the month. This year, weekly readings varied by 1.3 mb/d from peak to trough, possibly due to refiners accelerating deliveries of summer-grade products in order to make room for storing winter-grade fuels. With gasoline and diesel stocks both trending at five-year highs during the summer, it is possible that deliveries from inventories may have been stronger than usual, boosting September demand.

In the longer run, the prospects for US gasoline demand have weakened. The US Environmental Protection Agency and the Department of Transportation announced that they are developing auto fuel economy standards for model years 2017-2025. Current rules foresee fuel economy for new passenger cars and light trucks averaging 35.5 mpg by 2016; the new standards could raise new auto fuel economy to between 47 mpg and 62 mpg by 2025. Rule proposals are scheduled for September 2011, with a final rule in July 2012. Canada has indicated it will work in parallel to tighten fuel economy standards for beyond 2016. In early October, it announced final regulations for auto greenhouse gas emission standards from 2012-2016, which effectively mirror those of the US.

Mexican oil demand growth has slowed recently, with August levels up only by 1.0% year-on-year, after declining 0.6% in July. In 1H10, Mexican oil demand grew by 5.8% on average. Part of the slowdown stems from the strength of 2H09 demand, which increased considerably versus 1H09 as the recovery took hold. It also reflects the lack this year of a residual fuel oil spike, which rose in August/September 2009 on drought-induced power generation problems. Diesel and jet fuel/kerosene also posted strong growth in August (+5.3% and +10.7%, respectively). Nevertheless, given the economy's ties to the US and slowing momentum in the manufacturing sector, the outlook for diesel is more moderate through the end of 2011.

Oil demand could face a further check if Mexico's proposed 2011 budget entails a reduction of fuel subsidies. Maintaining gasoline and diesel prices below international market values will cost the government an estimated 64 billion pesos (~$5 billion) in 2010, twice as much as originally budgeted. Moreover, the Finance Ministry acknowledges that subsidies are highly regressive, with the richest segment (10% of the population) capturing one-third of the benefit and the poorest (30% of the population) only getting 4%. The new budget seeks to maintain monthly price rises at the pump, which began in December 2009 as part of an effort to slowly halve petrol subsidies. The action is critical from a fiscal standpoint, given recent oil price rises and Mexico's increasing reliance on gasoline imports, which account for about 40% of demand. Subsidies for LPG are also due to be phased out, though over a longer period, while sizeable support remains in place for electricity consumers.



Europe

August preliminary inland data suggest that oil product demand in Europe surged by +2.7% year-on-year, largely on the back of strong deliveries of heating oil (+24.3%), diesel (+3.8%) and jet fuel/kerosene (+2.7%). The strength of heating oil demand stems from the sustained refilling of German and French household tanks ahead of next winter. German deliveries, in particular, skyrocketed by 114.9%, raising consumer stocks to 60% of capacity, above both July (+56%) and the five-year average (but still below the 66% recorded in August 2009). Meanwhile, jet fuel/kerosene demand proved to be highly resilient over the summer, indicating stronger holiday-related air travel. Finally, the vigour of diesel demand may signal somewhat improving economic conditions, notably in Germany and France, even though current economic indicators remain inconclusive.



Revisions to July preliminary demand data were sizable (+90 kb/d), also due to stronger-than-expected deliveries of distillates and naphtha that offset weaker-than-expected readings in other product categories. Looking ahead, assuming that German heating oil deliveries revert to their five-year average, total OECD Europe demand should average 14.3 mb/d in 2010 (-1.1% or -160 kb/d compared with the previous year, revised 20 kb/d higher). The decline is expected to continue in 2011, with demand reaching 14.2 mb/d (-0.7% or -100 kb/d versus 2010, largely unchanged versus last month's report).



Pacific

Preliminary data indicate that oil product demand in the Pacific jumped by 4.9% year-on-year in August, as unusually warm weather conditions and the ensuing surge in power demand for air conditioning boosted residual fuel oil use and direct crude burning (included in 'other products'), most notably in Japan, where overall demand surged by 4.7%. Korea also registered strong demand readings (+6.6%), given the continued resilience of its petrochemical industry (naphtha, which accounts for roughly 40% of total demand, rose by +5.6%). However, if the weather effect were excluded, OECD Pacific demand would probably have stagnated or even declined. Aside from the burning fuels surge in, virtually all other product categories in Japan - which altogether represents almost 60% of regional oil demand - posted losses, notably distillates. This highlights the challenges facing Japan's economy: externally, it is battling the yen's appreciation, which poses a risk to exports, the country's main growth engine; internally, it faces falling domestic demand and deflation.



July data revisions, at +60 kb/d, were relatively minor, and were mostly concentrated in distillates, thus pointing to +3.0% year-on-year growth during that month, slightly higher than suggested by preliminary figures (+2.2%). However, August's weather-related surge in burning fuels resulted in a +0.2 mb/d revision in 3Q10 - only partly carried through to 4Q10 and 2011. Indeed, the heat wave was arguably exceptional (Japan had the hottest summer since weather records started in 1898, according to the country's Meteorological Agency) and as such should be treated as an outlier. Overall, OECD Pacific demand is revised by +50 kb/d and +20 kb/d in 2010 and 2011, respectively. At 7.7 mb/d this year, this implies growth of +0.2% or +20 kb/d versus 2009. Next year, though, demand should resume its structural decline and average 7.5 mb/d (-1.7% or -130 kb/d).



Non-OECD

China

China's preliminary data indicate that apparent oil demand surged by 8.5% year-on-year in August, over twice as fast as in July (+3.5%), with all product categories showing buoyant growth. July's sharp drop in both industrial activity and oil demand growth had led some observers to conclude that the widely expected 2H10 Chinese economic slowdown was already in motion. However, even though total oil demand fell by almost 1% month-on-month, the strength of August's numbers - particularly against a resurgent 2H09 baseline - suggests that the Chinese government is intent on engineering a soft, rather than a hard, landing.



As such, the country's oil demand could well continue to surprise on the upside, even though our outlook assumes that monthly year-on-year oil demand growth will be much more subdued for the reminder of this year (at around +4%) when compared with the previous eight months (almost +13%), as the government gradually winds down stimulus measures. Overall, Chinese oil demand is expected to average 9.1 mb/d in 2010 (+9.3% year-on-year) and 9.5 mb/d in 2011 (+4.2%), virtually unchanged from last month's report.

China's National Development and Reform Commission (NDRC) is reportedly on the verge of adjusting the cycle of the country's oil product price mechanism. The system, introduced in early 2009 with the goal of aligning domestic and international prices, has tended to encourage hoarding as the market can easily gauge the range and direction of forthcoming price moves. Indeed, under the current policy, the NDRC considers adjusting domestic benchmarks if the price of a basket of international crudes fluctuates by more than 4% over 22 consecutive working days. Under the new proposals, which have been under discussion over the past six months, this period would allegedly be halved to only ten days, in order to both reduce the lag between international and domestic prices and curb speculative stockpiling. It is unclear, however, when the shorter cycle will be implemented and whether other changes, notably narrowing the 4% fluctuation range, reforming subsidies for farming and public transportation or changing the composition of the reference crude basket, will also be carried out.



Other Non-OECD

Preliminary data show that India's oil product sales - a proxy of demand - barely rose in August (+0.2% year-on-year), as the sustained strength of LPG, gasoline and middle distillates was almost offset by weak naphtha, residual fuel oil and 'other products' readings. As monthly car sales have risen by almost a third on a yearly basis for most of the year (+33% in August), gasoline demand growth remains quite strong (+11.4%). Gasoil growth, at 'only' +2.9%, is not only related to more abundant monsoon rains (and hence less irrigation needs) and fewer power outages, but also to a relatively high baseline - in the summer of 2009, major farming states were hit by the worst drought in almost four decades.





According to JODI data, Iran's gasoline demand fell counter seasonally in July (-15.1% year-on-year). This dip appears to be related to toughened international sanctions prompted by the country's nuclear programme. Indeed, gasoline imports allegedly plummeted by a third from June to July, to 85 kb/d, and according to various sources, fell further in August and September - perhaps to as low as 25 kb/d. In addition, Teheran has reportedly been forced to pay a hefty premium over spot prices. Over the last decade, Iran has heavily depended upon gasoline imports, as the combination of buoyant demographic and economic factors with extremely low end-user prices fostered runaway demand growth amid constrained refining capacity. Imports thus rose from some 20% of gasoline demand in the early 2000s to as much as 40% of demand over 2004-2007. The rationing scheme put in place in mid-2007, weakening economic conditions and social and political turmoil have since helped curb imports somewhat, but they still remained relatively high, at roughly 30% of demand during the first seven months of 2010.



Who Needs Gasoline Imports, Anyway?

Officially, Iran has successfully phased out gasoline imports by boosting production at petrochemical plants - so much so, according to several government officials, that the country will not only cease importing gasoline altogether until early next year but will also export a few cargoes for the first time ever. It is indeed technically possible to increase gasoline production, for example by cracking ethylene to produce pyrolysis gasoline with high aromatics content (reportedly the solution of choice at the Bandar Imam, Buali Sina, and Borzuyeh petrochemical plants), or by diverting naphtha entirely from petrochemical uses and into a gasoline reformer. Nevertheless, some observers suspect that the government is merely posturing, as gasoline import requirements are simply too large relative to capacity at petrochemical units. Most likely, the shortfall has also partly been met by drawing down gasoline stocks, which are reportedly dwindling fast.

Even assuming that self-sufficiency has been fully achieved, increasing gasoline output at the expense of other petrochemicals is arguably unsustainable. Financially, Iran is losing out twice, first by producing less valuable gasoline and then by selling it domestically at a huge loss given existing price caps. Meanwhile, a shortage of several key petrochemical products has emerged, thus merely shifting around - rather than solving - the problem of insufficient oil product supplies. More ominously, Iran is unlikely to be able to carry out the necessary refining investments that would address this issue in the medium-term, given the constraints imposed by international sanctions. Finally, there are concerns regarding the product's octane number, which could be as low as 75 RON in some cases, compared with much higher international standards (93-97 RON). If so, the damage to vehicle engines using such low-quality gasoline is likely to be consequential.

In the meantime, the Iranian government remains reluctant to liberalise the gasoline market. It has postponed the broad implementation of subsidy-removal legislation, voted in January and due to begin in late September. The law would remove subsidies to energy (liquid fuels, natural gas and electricity) and other goods and services (water and food) over the next five years, with subsidies replaced by targeted cash handouts for the neediest Iranians. However, only electricity prices have so far been raised (by as much as ten-fold for some households). Aside from serious institutional challenges - such as accurately identifying the recipients of the cash handouts - there is reportedly strong disagreement within the political elite on whether to move forward, what to do with the potential savings and how to deal with unintended consequences, such as a probable surge in inflation and the ensuing social protests. Still, the official line is that the removal of oil product subsidies has merely been delayed by one month.

Supply

Summary

  • Global oil supply declined by 150 kb/d to 86.9 mb/d in September on lower non-OPEC output. Year-on-year, global oil production was 1.5 mb/d higher, shared equally between non-OPEC, OPEC crude and NGLs.
  • Non-OPEC oil supply fell by 0.2 mb/d to 52.4 mb/d in September on seasonal maintenance plans in Azerbaijan and a dip in Brazilian fuel ethanol production. Production was higher than expected in the US, due to the absence of storm-related shut-ins.
  • Estimated non-OPEC supply in 2010 is left unchanged at 52.6 mb/d, while the 2011 forecast is raised by 150 kb/d to 53.1 mb/d on stronger US, Canadian and Chinese output. Annual growth is raised to 0.5 mb/d in 2011, following 0.9 mb/d in 2010. A reappraisal of Brazilian fuel ethanol production data changes historical seasonality, but leaves absolute annual output levels unchanged.
  • OPEC crude oil supply in September rose by a marginal 40 kb/d, to 29.29 mb/d, with higher output from Iraq offsetting lower Angola production as well as smaller declines by some other members. Excluding Iraq, OPEC-11 collectively saw production fall by 150 kb/d, to 26.77 mb/d. OPEC NGL production estimates were left unchanged, at 5.2 mb/d in 2010 and 5.8 mb/d in 2011.
  • OPEC officials have indicated that their 14 October meeting in Vienna will be a low-key affair, most likely given rangebound prices. Current prices for benchmark crudes are over $80/bbl and well above the comfort zone for most members.
  • The 'call on OPEC crude and stock change' is adjusted upwards, most markedly reaching 29.8 mb/d in 3Q10, after a large upward demand revision. The 'call' for 4Q10 recedes to 29.0 mb/d, and then averages 29.3 mb/d in 2011.


All world oil supply data for September discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Peru and Russia are supported by preliminary September 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 in September rose by a marginal 40 kb/d, to 29.29 mb/d, with higher output from Iraq offsetting lower supplies from Angola and some other members. Excluding Iraq, OPEC-11 collectively saw production fall by 150 kb/d, to 26.77 mb/d. As a result, compliance rates relative to targeted production cuts improved to 54% last month compared with 50% in August. The group is now pumping 1.93 mb/d above the implied 24.845 mb/d target level.



Heading into OPEC's 14 October meeting, several ministers said publicly that compliance with existing targets will feature on the group's agenda when they gather in Vienna. However, in recent days other OPEC officials have indicated that the meeting will be a low-key affair with little debate over compliance issues given relatively high prices and the upcoming seasonally-stronger winter demand period. Since OPEC last met on 17 March, benchmark crude prices have remained range bound. OPEC's price basket averaged around $75.20/bbl in 2Q10 and 3Q10, little changed from the $75.40/bbl posted in 1Q10. Current prices for benchmark WTI and Brent crudes of over $80/bbl are well above the comfort zone for most members, including Saudi Arabia, which has said it favours prices around $75/bbl.

Compliance with OPEC's implicit targets, which have been in place since January 2009 after the group agreed to curb supply by 4.2 mb/d in light of sharply lower oil demand and prices, has eased significantly this year. Collectively, compliance with targets has hovered around 50-55% in recent months. However, on an individual basis target compliance varies widely. Currently, Nigeria is at the bottom of the range with zero compliance while the UAE posts the highest level at 90%.

Indeed, Nigeria, Angola and Iran have posted the poorest compliance rates since the new targets were adopted. Angola and Nigeria have forcefully argued that their individual allocations rest on an artificially low baseline when production was at exceptionally low levels, due to operational problems in the former and militant activity in the latter. Iran, for its part, has largely ignored its assigned target for almost two years, with compliance ranging around 20% in 2010. In September, Iran produced 344 kb/d above its implied target of 3.34 mb/d. While the latest round of international sanctions has clouded the country's production outlook, existing capacity is still some 620 kb/d above the country's 3.34 mb/d target.

Iraq's production in September rebounded from August, up by 190 kb/d to 2.52 mb/d. Indeed, last month's supply is at the highest level since before the coalition's invasion in March 2003. However, without official data, implied Iraqi supply is estimated by calculating exports, which include sales from storage, plus domestic use at refineries and power plants, less fuel spiked into crude. September's output appears to be inflated by delayed shipments from the previous month as a result of sabotage to export infrastructure in the northern region of the country in August. Iraqi state marketer SOMO has said that it will also trim export levels to some Asian customers in October.

Iraqi crude exports in September are estimated at 2.02 mb/d compared with 1.77 mb/d in August—the highest level since February. Exports of Kirkuk crude in the north rebounded to just over 500 kb/d in September after hitting a 2010 low of 320 kb/d in August. Planned exports for August were delayed until September, which largely explains the exceptionally high supply estimate for the month. Exports of Basrah crude from the southern ports were up by 60 kb/d, to 1.51 mb/d in September.

Meanwhile, Iraq's announcement in early October of a 25% upward revision in its proven reserves, to 143 bn bbls, sparked speculation that the country was seeking a proportionately much higher production allocation for the future. Iraq has not officially had an output target for two decades following its 1990 invasion of Kuwait and most observers believe it is years away from being brought back into the quota fold. There is no doubt about Iraq's potential to significantly increase its reserve base, not least because its production potential has been hampered by decades of war and sanctions. However, some reports suggest the latest reserves assessment falls short of standard industry practices and that more work is needed to produce meaningful data. Indeed, the latest announcement may also be linked with efforts by the country's leadership to show tangible progress in developing this key sector, especially since politicians are still struggling to form a new government seven months after the March elections.

Saudi Arabia's production is assessed at 8.38 mb/d for September, unchanged from August levels, which were revised up by 100 kb/d. The higher production is largely attributed to increased domestic use of crude oil for direct burn to meet stronger power demand during the peak summer months. Indeed, the implied crude burn rate in August reached a record 915 kb/d, compared with just under 680 kb/d on average in July and June, according to JODI data. The higher crude burn in August is partly due to the Ramadan holiday occurring earlier than usual this year, which led to increased domestic demand for electricity and cooling.



Iranian crude oil output in September fell by 20 kb/d to 3.68 mb/d. Iranian crude in floating storage is estimated at approximately 33 mb at end-September, though off the 2010 peak of around 50 mb in June, volumes are still substantial. Although not subject to the latest round of sanctions, a number of refiners and traders have been forced to cut purchases of Iranian crude due to stiffer banking and insurance regulations. However, several European companies, unhindered by such constraints, reportedly stepped up purchases of Iranian crude in recent months, albeit buying the cargoes at steep discounts to official prices. From Jan-June 2010, OECD imports of Iranian crude amounted to 1.19 mb/d, or 60% of total Iranian crude exports, with four countries - Japan, South Korea, Italy and Spain - accounting for over 70% of the OECD total.  There are some reports that China has increased purchases of Iranian crude in recent months but volumes are down from year-ago levels, most likely due to state NIOC's uncompetitive pricing formulas. China's imports of Iranian crude in the first 8 months of 2010 averaged 390 kb/d, 130 kb/d below 2009 levels of 520 kb/d for the same period. Indeed, Iran's problems selling its crude and its high volumes held in floating storage stem in large part to its over-the-market pricing for poorer quality grades, with new sanctions having had a smaller impact.

Nigerian production was up slightly, by 10 kb/d to 2.15 mb/d. Higher production levels in recent months reflect continued progress in repairing long-damaged infrastructure. A steady recovery in Bonny Light production is partly behind continued gains in Nigerian production and volumes are expected to increase further following the completion of a new $1.1 billion pipeline. The 600 kb/d Nembe Creek Trunkline will carry crude from 14 flow stations in the Niger Delta to the Bonny export terminal in Rivers State. Joint venture partner Shell says half the line has been commissioned. The new line will replace an existing pipeline and is part of the company's ongoing asset integrity programme that has replaced more than 1,000 kilometres of major pipelines and flow lines in the last five years. Approximately 320 km of pipeline was replaced last year. Bonny exports in November are expected to top 300 kb/d, up from 130 kb/d earlier this year.



Resurgence in violence in recent weeks has so far not affected oil infrastructure but security issues, the fragile ceasefire accord and political machinations ahead of the January 2011 presidential elections may have a larger impact on oil supplies in coming months. Security in the oil-producing Niger Delta was stepped up in early October after deadly attacks in the capital as celebrations took place to mark 50 years of the country's independence. The Movement for the Emancipation of the Niger Delta (MEND) claimed responsibility for the attacks. Frustrated by the government's slow pace in meeting promises to provide cash payments, education and jobs for putting down their arms as part of the amnesty programme reached a year ago, rebel groups have threatened to rearm and resume attacks on the country's oil infrastructure.

The controversial new energy legislation is also fuelling flames of discontent among the country's oil workers. Nigeria's oil minister once again announced that the Petroleum Industry Bill (PIB) would imminently be passed by Congress. Now, however, oil workers in the two main unions, Pengassan and Nupeng, claim that too many concessions have been made to international oil companies (IOCs) and have threatened industrial action. Despite the union claims, it appears that the government and the IOCs (which account for over 90% of current production) remain wide apart on the issue.

In addition to widespread discontent among former rebels and union oil workers, analysts fear the upcoming presidential elections may foment further political unrest as parties jockey for power. However, the formal announcement by President Goodluck Jonathan that he will run for election in January may help quell unrest in his native Delta region.

Angolan production drifted lower in September, down by 90 kb/d to 1.68 mb/d. Maintenance work at the Dalia FPSO in mid-September reduced output for the month to an estimated 140 kb/d compared to a more normal 250 kb/d. Lower supplies in September also stemmed from reduced operations at the Greater Plutonio FPSO due to repair work on the water injection system, which commenced on 22 September for three weeks. Scheduled maintenance work on Block 15 also reduced supplies.

Ecuador posted a small output decline of 10 kb/d, to 450 kb/d in September. OPEC's smallest producer was besieged by internal problems last month, which could lead to further declines in supply. Firstly, Petroecuador suspended a staggering 10% of its workforce amid corruption allegations. In addition, OPEC's Secretary General reportedly suggested that the country's plans to suspend development of the Ishpingo-Tambococha-Tiputini (ITT) oil field might undermine its status as a net oil exporter, rendering its membership in OPEC moot. Ecuador rejoined OPEC three years ago after a 13-year hiatus. ITT, which is located at the eastern edge of the Yasuni National Park in the Amazon rain forest, is Ecuador's largest undeveloped oil field, and accounts for 20% of the country's total reserves. Ecuador is trying to negotiate a financial package that would compensate the country for keeping the 1 billion barrel heavy crude field undeveloped in order to preserve the rain forest as well mitigate climate change.

Non-OPEC Overview

Non-OPEC oil supply fell by 0.2 mb/d to 52.4 mb/d in September on seasonal maintenance in Azerbaijan and on a dip in Brazilian fuel ethanol production. Production was higher than expected in the US as, despite a string of storms in the Atlantic, none affected US oil production, nor even entered the Gulf of Mexico. Mexican oil production was however briefly affected by storms, while small volumes of Canadian oil were backed up by the shutdown of a major crude export pipeline into the US. Early October saw unplanned shut-ins in Indonesia and Norway.



Estimated non-OPEC supply in 2010 was left unchanged at 52.6 mb/d, as stronger US and Canadian production offset lower output in the North Sea and smaller downward adjustments to the FSU and Africa. A reappraisal of Brazilian fuel ethanol production changes historical seasonality, though not absolute annual numbers (see Recognising the Seasonality of Brazilian Ethanol Production). Stronger recent production in the US and Canada is carried through the forecast, which, combined with a higher prognosis for Chinese output, boosts our 2011 non-OPEC supply estimate by 150 kb/d to 53.1 mb/d. Annual growth is thus raised to 0.5 mb/d in 2011, following 0.9 mb/d growth in 2010.

International Reactions to the Macondo Oil Spill

After the Macondo oil well was sealed for good in September, oil companies keen to return to deepwater drilling in the Gulf of Mexico recently got a flavour of what they may have to comply with in order to do so. On 1 October, US authorities released some new safety regulations for deepwater drilling, including tighter standards on blowout preventers, well design and cementing, as well as requirements that companies have the safety of their operations certified by third-party inspectors. Compliant companies could then in theory recommence deepwater drilling. Meanwhile, the Department of Interior is considering whether to lift the current moratorium on deepwater drilling ahead of its planned expiry at end-November.

While this report maintains an assumption that delays to drilling will curb US output by 60 kb/d in 2010 and by 100 kb/d in 2011, we currently do not foresee any significant impact on production elsewhere. A round-up of national and international responses to the disaster follows:

  • In the UK, a parliamentary committee will release a report on lessons learned from the Macondo incident at the end of October. Regulators consider the UK's safety regulations to be tougher than in the US, after they were significantly tightened following the 1988 Piper Alpha disaster. Authorities have already sanctioned new drilling at the deepwater Lagavulin prospect West of Shetland.
  • Norway significantly tightened safety requirements following the Alexander L. Kielland disaster in 1980. Deepwater drilling continues for the moment, though some acreage has been withdrawn from an upcoming auction. Authorities acknowledge that public support for opening up new northern areas to exploitation has likely fallen, notably around the Lofoten islands and in the Barents Sea, where Norway recently resolved a longstanding boundary dispute with Russia.
  • Australia is investigating its own disastrous blowout, at the Montara oil field in 2009, and will publish a report by the end of this year. It is currently not discussing a drilling ban, but does have plans to set up a national offshore petroleum regulator.
  • In Canada, the Senate released a report stating that no drilling ban was necessary, as safety regulations are considered adequate.
  • Brazil, the country with the most potential for growth in deepwater oil production of all non-OPEC countries, is considering new regulations, but continues to allow deepwater drilling. Brazil tightened requirements after an incident with the P-36 rig in 2001. It recently closed the P-33 platform over safety concerns.
  • Mexico has postponed a plan for an exploratory deepwater well close to its maritime border with the US in the Gulf of Mexico.
  • Russia is mulling a plan to require companies active offshore to present contingency plans in the case of an accident, and was instrumental in setting up the Global Marine Environment Protection Initiative (GMEP) under the auspices of the G-20. This body aims to highlight industrial best practices in offshore resource exploitation, and provide a centralised forum for discussing regulatory developments.
  • European Union Energy Commissioner Oettinger has repeatedly called for an EU-wide moratorium on offshore drilling, but a recent, non-binding resolution passed by the European Parliament fell short of a ban, though favours tightening regulations (the EU Commission is working on a comprehensive report).
  • Many of the countries above (Australia, Brazil, Canada, the Netherlands, New Zealand, Norway, the UK and the US) are grouped in a body called the International Regulators' Forum, which met in early September. The group hopes to take the lead on possible reforms of safety regulatory regimes in its member countries. To this end it is meeting again in Vancouver in October.
  • ExxonMobil, Chevron, ConocoPhillips and Royal Dutch Shell (recently joined by BP) have formed the Marine Well Containment Co (MWCC), an oil spill response group with the stated aim of having the capacity to handle a 100 kb/d spill in 10 000 feet water depth. The group, led by Exxon, is seeking to increase membership further and hopes to have its response capability in place by early 2011.


OECD

North America

US - September Alaska actual, others estimated:  US oil supply rose by 140 kb/d to 7.9 mb/d in September as Alaskan output picked up again following seasonal maintenance. Our September estimate is also revised up sharply in the absence of any storm-related shut-ins. Despite eight named storms crossing the Atlantic in September, most veered north and avoided the Gulf of Mexico. Our use of a hurricane adjustment on the basis of five-year average shut-in volumes had resulted in a particularly pronounced assumed shortfall of -500 kb/d for September, skewed by outages of -1.1 mb/d due to Hurricanes Katrina/Rita and -1.2 mb/d due to Gustav/Ike in September 2005 and 2008 respectively. A recalculated five-year average including a now shut-in-free September 2010 results in a lower September average for the 2011 forecast.



A reappraisal of US NGL prospects has prompted us to up our 2011 forecast by 30 kb/d to 1.98 mb/d. Higher recent monthly NGL production, and the potential for natural gas production to remain resilient in the face of lower prices combine to prompt this assessment. While drilling continues to rise, low natural gas prices vis-à-vis oil prices are prompting companies to develop liquids-rich formations first.

US onshore oil production is also adjusted higher, as again, drilling rig counts continue to rise and monthly production has been coming in higher in areas such as Texas and North Dakota, the latter aided by rising production from the Bakken shale formation. Estimated 'other oxygenates' are also adjusted higher on stronger recent performance. In sum, forecast US oil supply in 2010 is revised up by 95 kb/d to 7.65 mb/d, while output in 2011 is now seen 125 kb/d higher than previously, also at 7.65 mb/d.



Canada - Newfoundland August actual, others July actual:  July oil production in Canada is revised up by 200 kb/d to 3.4 mb/d, half of which stems from higher synthetic crude output. Hurricane Igor, which blew up the East Coast of North America in late September, briefly forced the precautionary evacuation of facilities offshore Newfoundland, but apparently caused no shut-in of oil production. The closure of a section of Enbridge's 6A crude pipeline from northern Wisconsin to Indiana in mid-September reportedly forced the shut-in of small amounts of crude output in Saskatchewan. The debate over TransCanada's proposed Keystone XL pipeline, which would extend existing infrastructure and open up a new route for crude to flow from Cushing, Oklahoma, to the US Gulf Coast, continues. While reserve and operating risks for Canadian oil sands are less than for other frontier forms of production, recent pipeline spills have added to ongoing concerns over CO2 emissions. 962

Shell announced the start-up of its 100 kb/d Jackpine Mine oil sands facility in mid-September, which will boost output at its Athabasca complex to around 250 kb/d. However, significant volumes will only become available when the company's related Scotford upgrader completes its own expansion, due in the course of 2011. Total Canadian oil supply is adjusted up by 30 kb/d and 15 kb/d for 2010 and 2011 respectively, with both years steady at 3.3 mb/d.



Mexico - August actual:  Oil production in Mexico was little-changed in August, at just over 2.9 mb/d, as output at major fields Cantarell and Ku-Maloob-Zaap (KMZ) remained steady. Hurricane Karl ripped through the Campeche Sound in late September, forcing the evacuation of offshore platforms and the shut-in of small production volumes. No damage was reported, and our customary -50 kb/d September storm adjustment is likely to amply cover any impact. Annual forecasts are left unchanged, with oil production estimated to decline from 2.9 mb/d in 2010 to 2.8 mb/d in 2011.

North Sea

Norway - July actual, August provisional:  While July production levels were left more or less unchanged at 2.15 mb/d, preliminary August production was reported 100 kb/d lower than expected, at 2.03 mb/d, due to some remaining seasonal maintenance. Field-by-field production levels for July show that the troubled Gullfaks C platform was nearly back to normal, after restarting output mid-month following problems in mid-May. But output at the related Tordis field, which was also affected by the same incident, was still at zero in July. In early October, problems at the Oseberg South platform were announced, apparently already ongoing since 20 September. Problems with gas re-injection had forced the shut-in of 25 kb/d, assumed to restart in coming days.

The Norwegian Petroleum Directorate (NPD) is putting pressure on oil companies to boost recovery rates, as the government predicted a decline in oil production in 2011 as part of its budget projections. A task force had previously published a report giving 44 recommendations such as cutting operating costs, encouraging new technology and adjustments to the regulatory regime, which could boost recoverable oil from 46% to 60% at key fields, thus yielding some 16 billion barrels of oil and allowing Norway to slow decline. Earlier this year, ConocoPhillips and Statoil had already announced large-scale investment in the ageing Ekofisk, Eldfisk and Troll fields, some of Norway's largest. NPD forecasts indicate a decline from current levels of around 2 mb/d to 1.5 mb/d in 2015, which (excluding NGLs from gas processing) is slightly more optimistic than our recent medium-term forecast, which sees a fall to 1.4 mb/d in 2015. 2010 oil production (including all NGLs) is little revised and forecast to average 2.2 mb/d, declining to 2.1 mb/d in 2011.



UK - July actual:  July oil production in the UK is revised down by a sharp 225 kb/d to 1.16 mb/d, as seasonal maintenance was more protracted than expected. Output is anticipated to stay around the same level in August, before rising again to over 1.3 m b/d in September. Field-by-field data for June indicate a new problem at Schiehallion, which had only just restarted output in February this year, after eight months of downtime. Planned work at the Buzzard field is being brought forward from early 2011 to 4Q10, taking around 60 kb/d offline for an unknown duration. 2010 total oil production is revised down by 55 kb/d to 1.37 mb/d, and this is expected to decline to 1.32 mb/d in 2011, as some new start-ups help to offset steady decline at mature fields.

Denmark - August actual:  In August, Danish crude oil production fell by a steep 50 kb/d to 190 kb/d on assumed maintenance, since no unplanned outages were reported. Unlike Norway and the UK, Denmark does not typically see a significant reduction in output due to seasonal maintenance. 2010 production is expected to average 245 kb/d, declining to 225 kb/d in 2011.

Former Soviet Union (FSU)

Russia - August actual, September provisional:  September oil production in Russia once again hit a record post-Soviet high, at 10.47 mb/d. This represents an increase of around 100 kb/d from August, when seasonal maintenance substantially curbed output at the Sakhalin 1 project, though total Russian output is only marginally higher than in July. September saw the start-up of production from the Odoptu field, adding 35 kb/d of capacity to Sakhalin 1. According to company reports, this should offset decline at the Chaivo field and keep the project's output steady at around 150 kb/d until mid-decade, when the Arkutun-Dagi field will boost volumes. Total Russian oil supply forecasts are left unchanged, with output expected to rise from 10.4 mb/d in 2010 to 10.5 mb/d in 2011.

Russia has hinted that it may consider allowing foreign companies access to its continental shelf's oil and gas resources, although details remain elusive. Currently, oil fields containing over 500 mb and/or offshore areas are considered 'strategic', with access limited to state-owned oil companies. However, this rule was put in place before the financial crisis hit, when Russian companies had more cash to spend on developing challenging upstream projects. The Russian government is keen to start developing offshore areas, especially in the Arctic and Barents Sea, which so far remain largely undeveloped.



FSU net oil exports fell by 250 kb/d to 9.68 mb/d in August from their July record high. However, despite this fall, they remained 230 kb/d above a year ago. The fall was led by Russia where the crude export tax increased by 6% to $264/tonne. Following the duty hike, Transneft volumes fell by 160 kb/d. Flows through the Druzhba pipeline decreased by 110 kb/d to 1.1 mb/d and shipments from the Russian Black Sea port of Novorossiysk dropped by 140 kb/d. With Russian production and refinery throughputs hovering close to record levels, the crude export duty is currently dictating the month-on-month changes in export volumes. Throughout 2010, the Urals-linked crude export duty has remained between $254-$292/tonne. Over this period, a cut in the monthly duty has always coincided with an increase in crude exports. This suggests that on a short-term basis exporters are willing to defer shipments in anticipation of future tariff reductions, while boosting shipments ahead of tariff increases.



Rising Caspian exports partly offset the fall from Russia, as CPC flows and shipments of Kazakhstani crudes exported through Pivdenne rose. The latter was made possible after the governments of Kazakhstan and Ukraine reached an accord ending their pricing dispute.

Product exports fell by a marginal 40 kb/d as rising fuel oil (+40 kb/d) offset decreases in gasoil (-30 kb/d) and 'other products' (-50 kb/d). It is suggested that higher export taxes prompted exporters to withhold some shipments in anticipation of lower duties in September. Initial port loading data imply that in September, FSU crude exports are set to fall slightly in line with the rising Russian crude export duty, while rising product duties and increasing refinery maintenance could depress product exports. Looking further ahead, Russia has signalled its intention to use the so called 'northern route' along its Arctic coast as a viable alternative to transporting cargoes to Asia via southern routes, if the summer navigation season lengthens due to reduced ice. A test condensate cargo was shipped by an ice-class Aframax between Murmansk and the Chinese port of Ningbo in mid-August. In taking 22 days, it was considerably shorter than using the alternative route. Although such trades are likely to be heavily weather-constrained, it nevertheless emphasises Russia's intent to further develop Asian markets.

Other Non-OPEC

Indonesia - August actual:  Following a gas leak at a pipeline, oil production at the Minas and Duri fields in Indonesia was curtailed by a reported 150 kb/d in late September. As the incident happened at the very end of September, it shaves only an estimated 5 kb/d off monthly output. At the time of writing, production was reportedly returning to normal, but we have estimated that 50 kb/d was lost in October. Total 2010 oil production is forecast to average 985 kb/d, declining marginally to 970 kb/d in 2011.

China - July actual:  Based on recent performance, China has recently slowed decline at some of its older fields, including Daqing and Shengli, while output at newer offshore fields is outpacing expectations. This has led us to hike 2011 forecast production by 45 kb/d. Thus production is anticipated to remain steady from 2010, at 4.1 mb/d.



Brazil - August actual:  August oil production in Brazil was marginally higher than expected, at 2.17 mb/d, while our current outlook sees total Brazilian oil supply rising from 2.15 mb/d in 2010 to 2.37 mb/d in 2011. In a complicated deal, which included the world's largest-ever share offering, the Brazilian government boosted its stake in Petrobras, by selling it 5 billion barrels of crude in the pre-salt formations in the Santos Basin. The government now hopes to hold the first bidding round for new offshore acreage, including several pre-salt fields, early next year, provided it can complete its planned investment regime for the development of the pre-salt reserves.

The share sale and the creation of a new body to oversee development are two of four planned steps. The two remaining ones would make Petrobras the operator of all pre-salt fields and lead to the creation of a social fund for oil revenues (see Brazil's Lula Outlines Suggested Pre-Salt Development Plan in OMR dated 10 September 2009). Rapid growth in pre-salt output is expected to contribute nearly half of Brazil's projected oil production growth to just under 3 mb/d by mid-decade.

Recognising the Seasonality of Brazilian Ethanol Production

The OMR has traditionally reported Brazilian fuel ethanol production in annual increments, with levels held flat within the year. While this method has the advantage of simplicity and provides a reasonable mirror of consumption patterns, it ignores the seasonality inherent in distillery output. The IEA has increased its outreach efforts with Brazilian counterparts, including a recent technical meeting held with market analysts at Petrobras in Rio de Janeiro, in an effort to deepen analytical cooperation and data sharing with respect to the Brazilian market in general. As Brazilian ethanol output has increased, recognising production variability becomes more important for oil market balances. As such, we have revised Brazilian ethanol output for the duration of the series and have adjusted our forecast to reflect this pattern.

The updated series incorporates monthly data issued by the Ministerio da Agricultura, Pecuária e Abastecimento (MAPA) available through August 2010. These data are adjusted to account for differences with annual production as reported in IEA's Energy Statistics of Non-OECD Countries. Where monthly MAPA data are not available, as in early years, annual production is adjusted using average historical seasonality. Intra-year Brazilian ethanol output, composed of anhydrous and hydrous production (anhydrous is pure ethanol and sold blended with gasoline; hydrous contains a small quantity of water and is sold as a stand-alone fuel), thus reflects patterns of the sugar harvest. In the Centre-South, the largest ethanol producing region, sugar and ethanol production tend to be highest during the May-November period. In the North-Northeast, which accounts for less than 10% of total production, output tends to be strongest from September-February. As such, the variability in total Brazilian distillery output can be considerable, with 3Q versus 1Q production differing by around 400-700 kb/d in recent years.



Of course, such an approach carries uncertainties. MAPA data follow the harvest season (April-March) rather than the calendar year and reflect cumulative monthly positions rather than monthly production. While our series tries to adjust for these complexities, it is possible that delayed production reporting and reprocessed volumes may distort the picture in any given month. Moreover, as suggested by the more level pattern of Brazilian ethanol consumption, distillery output can sharply differ from the amount of product supplied to the market. Inventory data, first published by MAPA in 2009, may help reconcile the mismatch over time, but, as yet, remain outside our balances. Finally, monthly data carry increased forecasting risk, particularly with plant capacity data often expressed in annual production potential and given the influence of underlying agricultural conditions and weather.

Nevertheless, such drawbacks point to the need for continued improvements in data collection and market analysis, rather than the maintenance of an over-simplified level intra-year production series. Upgrades within Brazil's own ethanol supply chain, such as industry consolidation and pipeline builds, may help improve the data picture over time. Moreover, Brazilian ethanol output, and biofuels as a whole, continue to constitute strong sources of non-OPEC supply growth that warrant increased analytical scrutiny. For 2010 and 2011, we see annual Brazilian ethanol production growing on average by 50 kb/d, to 475 kb/d and 520 kb/d, respectively.

OECD Stocks

Summary

  • OECD industry oil inventories rose by 15.8 mb to 2 790 mb in August, reaching their second-highest stock level since the start of the official OECD Monthly Oil Statistics reporting in 1984. Products surged by 26.2 mb, while crude oil inventories declined by 10.8 mb.
  • Forward demand cover rose to 61.1 days in August from a lowered July estimate of 60.5 days. The increase was largely driven by a build in North American 'other product' stocks and falling European gasoline demand projections.
  • Preliminary data indicate OECD industry oil stocks drew sharply by 31.7 mb in September, led by a combined 17.5 mb decline in crude oil levels in Europe and Pacific. Products decreased by 14.2 mb on middle distillate draws across all regions, but a fall in US gasoline stocks also contributed. By comparison, the five-year average movement is a stock-build of 3.8 mb.
  • Short-term oil floating storage increased to 76 mb at end-September, from 72 mb in August. Crude floating storage stood at 42 mb on builds in the Middle East Gulf and Asia-Pacific, but was partly offset by a product draw in Northwest Europe bringing overall product floating storage down to 34 mb.


OECD Inventories at End-August and Revisions to Preliminary Data

OECD industry oil stocks rose by 15.8 mb to 2 790 mb in August. A surge in North American 'other products' accounted for approximately 75% of the increase, but middle distillate builds in the Pacific and North America also contributed. Overall, products built by 26.2 mb, in line with seasonal trends. Higher refinery throughput in Japan reduced crude oil inventories in the Pacific and thus provided a partial offset. Nonetheless, a total 10.8 mb crude drop came up short of the five-year average draw of 22.2 mb.



Middle distillate inventories rose by 9.4 mb to 598 mb in August. The increase was less than half the five-year average gain at this time of the year and much of the shortfall came from Europe. There, a 1.0 mb distillate stock-build was the smallest August gain over the past five years, well below the historical increase of 8.9 mb on average. However, German consumers refilled their stocks of heating oil to 60% of capacity in August. European distillate stock levels stood 17 mb above their five-year average levels; the forward demand cover was estimated at 37.9 days in August.



OECD inventory levels were revised down by 5.5 mb for June and by 11.5 mb for July. The largest downward adjustments occurred in the 'other products' and crude oil categories, but were partially balanced by a higher assessment of gasoline holdings in North America and Europe. Moreover, German gasoline stock levels were also revised up from a previously reported 5.3 mb to 7.7 mb in July.



The August stock build, combined with downward revisions to the baseline, brought OECD inventories approximately 7 mb below the all time highs of August 1998. Preliminary September data point to a sharp 31.7 mb draw, suggesting the record level will remain unsurpassed this time. A further drop in crude oil holdings in Japan and in Europe pushed these stocks down by 17.5 mb. Middle distillate draws across all regions, combined with a drop in US motor gasoline stocks, brought overall product levels lower by 14.2 mb.

Analysis of Recent OECD Industry Stock Changes

OECD North America

Commercial oil inventories held in North America increased by 16.3 mb to 1 415 mb in August. The build was largely driven by an unusually high 11.8 mb addition to 'other products', but middle distillates and gasoline also provided some support. In the past five years, 'other product' inventories have risen during the seven months from March to September, with the extent of the build peaking in May and declining afterwards. This year's August stock-build therefore appears much stronger than the seasonal norm.



Meanwhile, gasoline stocks grew counter-seasonally, widening the surplus to the five-year average levels from 14.7 mb in July to 25.8 mb in August. Middle distillates increased by 3.9 mb, in line with seasonal trends, and North American distillates stood 30 mb above the five-year average levels. Crude oil inventories rose by 0.9 mb as a build in the US outweighed a draw in Mexico.



According to weekly data from the Energy Information Administration (EIA), US industry oil stocks fell by 4.6 mb in September, contrasting with the five-year 5.7 mb average build. Crude oil stocks remained almost unchanged from the previous month, as increases elsewhere offset draws on the US East Coast due to lower deliveries on pipeline problems, planned maintenance and weather-related delays. As a result, gasoline inventories on the East Coast also fell sharply. The country's total gasoline stocks declined by 4.9 mb in September, while middle distillates drew by 2.3 mb.

OECD Europe

Commercial oil inventories in Europe rose by 3.3 mb to 970 mb in August. Crude inventories increased slightly as builds in France, Italy, Norway and Spain offset draws in the Netherlands and the UK. Meanwhile, product stocks grew by 1.0 mb, almost entirely driven by middle distillates. This contrasted strongly with the five-year average crude draw of 11.5 mb and a product build of 13.6 mb.



Middle distillates rose by 1.0 mb as pre-winter restocking in France, Germany and the UK outweighed a draw in the Netherlands. German consumer heating oil stocks rose to 60% of the capacity in August, from 56% in July. Meanwhile, the puzzlingly low gasoline inventory level for July in Germany, which we highlighted last month, was revised up by 2.4 mb to 7.7 mb, with a further increase to 8.1 mb reported for August, bringing them closer to seasonal norms.



According to Euroilstock, oil inventories in the EU-15 plus Norway fell by a sharp 21.5 mb in September. Crude oil stocks dropped by 12.9 mb and products, led by draws in middle distillates, declined by 8.6 mb. Meanwhile, product inventories held in independent storage in Northwest Europe fell slightly in September. An increase in fuel oil inventories partly offset an outflow of gasoil as the backwardation structure of ICE gasoil futures made storage less profitable. Product floating storage offshore Northwest Europe, estimated to consist mostly of middle distillates, declined by 1.5 mb, while the volume stored on vessels in the Mediterranean remained unchanged from the previous month. However, oil floating storage in the Mediterranean reportedly rose at the beginning of October due to a strike at France's largest oil port Fos-Lavera (see French Refinery Operations Halted by Strikes in Refining).

OECD Pacific

Industry oil inventories in the OECD Pacific fell by 3.8 mb to 405 mb in August, driven by a sharp draw in crude stocks. This contrasted with the five-year average monthly build of 6.4 mb. Crude oil inventories declined by 12.5 mb due to higher refinery throughput in Japan. Middle distillates increased by 4.6 mb, albeit less than the seasonal five-year average build, and thus widened the deficit to 13 mb below five-year average levels. 'Other products' followed the historical trend closely and added a further 3.1 mb in August. Overall, product inventories rose by 8.2 mb.



Preliminary weekly data from Petroleum Association of Japan (PAJ) point to a further 4.8 mb draw in September crude oil inventories. Crude stocks fell sharply throughout the month, but edged up at the end of September, closer to the five-year range. Product inventories fell by 0.9 mb, driven by draws in gasoil, gasoline and jet fuel. Gasoil stocks fell by 1.3 mb, while gasoline declined by 0.8 mb. An offsetting build came from kerosene, which rose by 2.3 mb.



However, kerosene restocking in the past two years might indicate a structural shift in demand. Kerosene is used for heating in Japan, and stocks typically follow a seasonal, weather-related pattern, building from May to October by 17 mb on average, with the largest increases in the summer months. Yet in 2009, the restocking levelled off already in August (with inventories rising by 9 mb over the May-October period). This left stocks at around 20 mb for the rest of the year (approximately 6 mb below the five-year average). The prolonged cold temperatures in the first half of 2010 delayed seasonal refill, but warm weather in the summer months and in September allowed kerosene stocks to build to 16.3 mb, up by 8 mb from end-April. Nonetheless, kerosene inventories still stand around 10 mb below the five-year average level.

Recent Developments in China and Singapore Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese crude oil inventories rose by 3.4% (around 7.3 mb) in August, on higher imports and lower refinery runs. Crude imports rose again in August, following a July dip related to a port closure. Meanwhile, product inventories declined for the second consecutive month, with a sharp drop in diesel stocks (7.3% or 4.5 mb). Gasoline stocks fell by 2.7% (1.4 mb) and kerosene by 6% (0.8 mb).

Starting in January 2010, China OGP began publishing a revised series of absolute stock levels for crude, gasoline, gasoil and kerosene after having discontinued the previous series during 2009. While the discontinuity unfortunately prevents meaningful historical comparisons, the new data initially appeared to be more comprehensive. Regrettably, the latest August data release involves another hiatus, in that percentage changes, rather than absolute levels, are now reported. Data inconsistencies such as these for China, as for all major consuming or producing countries, represent a significant set-back for transparency and for attempts to improve visibility and stability within the market.



In Singapore, product inventories increased by 0.8 mb in September, led largely by fuel oil inflows. Partial offset came from stronger gasoil shipments to Europe, drawing the inventories down by 1.1 mb. Bunker fuel stocks rose by 1.8 mb due to arbitrage arrivals from the West. Reportedly, several cargoes originally slated to arrive in September were delayed, partly as a result of delays to tanker loadings in Europe.



Prices

Summary

  • Benchmark crude futures prices were range-bound in September but had breached the $80/bbl mark by early October. WTI prices posted a monthly decline of just over $1.00/bbl to an average $75.55/bbl in September. By contrast, Brent futures rose by $1.30/bbl to an average $78.42/bbl.  Stronger demand, a rebound in financial markets, a weaker dollar and a major strike at a French port converged to propel prices higher. Brent was last trading around $83.00/bbl and WTI at $81.50/bbl.
  • While financial markets and macroeconomic developments continue to underpin oil prices, an apparent surge in 3Q10 demand to 87.6 mb/d goes some way towards explaining recent price strength. Stronger demand for gasoil and diesel helped support higher spot prices in September.
  • The seasonal shift to gasoil in Atlantic basin markets accelerated throughout September and early October. Expectations for stronger heating oil demand this winter is propping up crack spreads. On the NYMEX, heating oil cracks in September jumped by more than $3.50/bbl on average, to $13.12/bbl and by early October had reached $14.75/bbl. Some support for refining margins in Europe and the US was forthcoming as a result, although absolute levels remain weak.
  • Crude tanker rates on all benchmark routes hovered near break-even levels during September and may have now bottomed out due to the unwillingness of tanker owners to run their vessels below break-even levels. As with the previous two months, vessel oversupply is weighing heavy on rates, underscored by the most recent oil-in-transit data.


Market Overview

Benchmark crude oil prices were trading on either side of $76-78/bbl in September, but by early October had crossed the $80/bbl threshold. WTI prices posted a monthly decline of just over $1/bbl, to an average $75.55/bbl in September. By contrast, Brent futures rose by $1.30/bbl to an average $78.42/bbl.

A combination of stronger than expected demand, a rebound in financial markets, a weaker dollar and a major strike at a French port propelled prices higher in recent weeks. Benchmark Brent was last trading around $83/bbl and WTI at $81.50/bbl.

The ICE US Dollar Index, which tracks the US benchmark against a trade-weighted basket of currencies, also staged a modest recovery in late September, but plummeted to new lows by early October.  Market expectations that the US Federal Reserve will need to inject a fresh round of money into the economy before end-year also weighed on the dollar. A weak US dollar translates into cheaper oil for buyers using other currencies. The US dollar also was trading at 15-year lows versus the yen and continued to weaken against the euro in September, making commodities an attractive alternative investment.



While financial markets and macroeconomic developments continue to underpin oil prices, an apparent surge in 3Q10 global demand to 87.6 mb/d may go some way towards explaining the recent price strength. However, demand is forecast to ease again in 4Q10, to 87.2 mb/d, despite the potential for higher refinery throughput after an October dip to meet increased winter demand.

Market consensus is that OPEC's 14 October meeting will be a low-key affair with little debate over compliance issues given range bound prices. Moreover, current prices for benchmark WTI and Brent crudes of over $80/bbl are well above the comfort zone for most OPEC members.

The seasonal shift to gasoil supplies accelerated throughout September and early October, supporting stronger refined product markets.  Expectations for robust heating oil demand this winter are propping up crack spreads on futures exchanges. NYMEX heating oil cracks in September jumped by more than $3.50/bbl on average from August levels, to $13.12/bbl. By early October, heating oil cracks breached $14.75/bbl. ICE gasoil cracks posted smaller gains, with September averaging just under $11.75/bbl, around $0.35/bbl over August levels. However, by the first week of October, gasoil cracks were trading more than $1.50/bbl above September levels.



Futures Markets

Open interest in WTI futures contracts rose in tandem with the increase in futures prices in recent weeks. Open interest rose by 4.3% to 1 407 900 contracts in September. Producers decreased their net short positions, while money managers increased their net long holdings as they switched sides last month and unwound the short holdings accumulated in August. Swap dealers balanced the market by closing more longs and taking on more short exposure and thus decreased their net long holdings by more than 75% in September.

Meanwhile, RBOB open interest increased by 7.7%. Money managers sharply raised their long holdings and unwound shorts, becoming net long in RBOB gasoline again in September. Open interest in heating oil rose but that for natural gas fell in September.



Following the G20 agreement last year to standardise over-the-counter (OTC) derivative trading and move it onto trading platforms when appropriate, the European Union unveiled in September its proposal to control OTC derivative trading and restrict short-selling. OTC derivative contracts will be standardised, centrally cleared and the trades will be reported to trade repositories. The new rules require approval from all member countries and the European Parliament, and will align EU laws with recently approved financial regulation in the US.

Meanwhile, under the mandate from the Dodd-Frank Act, the US Commodity Futures Trading Commission identified 30 areas where rules will be necessary and released three new proposals so far focused on the swaps market. The proposals are open to public comment for 30 days. The rules define governance, ownership caps and control of clearinghouses, exchanges and swap execution facilities, clarify financial resources for clearing house and finally, detail the reporting of unexpired swaps agreed before the Dodd-Frank Wall Street Reform and Consumer Protection Act became law.

Spot Crude Oil Prices

Spot markets for benchmark crudes were mixed in September, with average monthly WTI prices down by $1.44/bbl to $75.17/bbl while Brent rose by $0.65/bbl to an average $77.80/bbl. Dubai bettered Brent's gains in September, rising by just over $1.00/bbl, to an average $75.12/bbl. By early October, prices were up by $4.00-6.00/bbl over September levels, average prices for the first week of the month for WTI averaging a lofty $82.36/bbl, Brent higher still at $84.02/bbl and Dubai pegged at $80.56/bbl.

WTI's discount to Brent widened to a steep $2.62/bbl in September compared with -$0.53/bbl in August and a premium of $0.68/bbl in July and $0.44/bbl in June. However, a drawdown in stocks held at Cushing storage terminals in the midcontinent helped to narrow the differential by early October, averaging -$1.66/bbl for the week ended 8 October.

That said, the return to operation of Enbridge's 670 kb/d pipeline is expected to increase flows of Canadian crude to the US midcontinent market and pressure prompt prices further in coming months. Indeed, the futures curve shows Brent's premium to WTI continuing as far out as next March.



Notably, Urals differentials to Brent narrowed further last month, largely due to a scheduled drop in Russian exports in September. In the Mediterranean, Urals discounts to Dated Brent narrowed to 0.41/bbl in September compared with $1.69/bbl in August and $1.84/bbl in July. However, the monthly average masked a steep widening of the differential in September and into early October on expectations of higher exports and as buyers shied away from relatively pricier Russian crude. Strike action in France also reduced demand for Urals, while upgrading unit maintenance may also underpin stronger demand for the lighter North Sea grade. Urals was briefly, and unusually, trading at a premium to dated Brent in the first week of the month before steadily widening again, from an average of +$0.12/bbl for the week starting 6 September to -$0.71/bbl mid-month and then to a steeper $1.37/bbl discount by early October.

Prices for middle-distillate rich crudes steadily strengthened ahead of the peak winter season. Prices for Middle East crudes also gained after hitting a trough in August stemming from increased supplies to the market and reduced demand following major disruptions (explosions and fires) to port and refinery operations in China and Taiwan. Abu Dhabi's Murban crude jumped from an average $76.12/bbl in early September to just over $82.50/bbl by the first week of October.



Increased demand for light sour crudes helped propel prices higher for Russia's ESPO crude. ESPO Blend relative to Dubai and Brent charted new highs in early October, trading at a premium to Dubai of almost $1.40/bbl by 7 October compared to an average $0.64/bbl in September and $0.19/bbl in August.



Spot Product Prices

A seasonal shift to stronger demand for middle distillates ahead of the northern hemisphere winter saw crack spreads for gasoil and diesel in the US and Europe widen month-on month while surplus supplies in Asia added downward pressure on gasoil. Fuel oil —bar New York Harbor—weakened in line with a seasonal downturn in utility demand.  In Europe, prices may gain some residual strength on the back of major strike action in France (see French Refinery Operations Halted by Strikes in Refining).

In the US, heating oil cracks increased by $4.50/bbl, to an average $12.73/bbl, on higher demand and reduced trade flows. A number of Gulf Coast cargoes of both heating oil and gasoline destined for the East Coast were reportedly diverted to the midcontinent due to pipeline problems forcing refiners to curtail production there. Increased US gasoil and diesel exports to Latin America also continue to support prices.

In Europe, restocking by consumers at the same time refiners were curtailing throughput rates helped increase spot prices by 2.6-3.6% in September. As a result, gasoil differentials for Brent in Rotterdam rose by $1.80/bbl in September, to $11/bbl. In the Mediterranean, differentials to Urals were up on average by a smaller $0.35/bbl, to $11.54/bbl, in part due the recent strength of the crude in the region. Diesel cracks also posted strong gains in Rotterdam, up $1.56/bbl to $13.46/bbl on average last month while they were unchanged in the Mediterranean.

By contrast, crack spreads in Asia were down across the board in September. Scheduled refinery maintenance work in the Middle East in November, however, may help tighten markets in the near term.

Premium unleaded gasoline differentials to Dubai were off $1.00/bbl, to $7.43/bbl last month but fuel oil posted the largest decline.  LSWR differentials to Dubai lost more than $4.50/bbl last month as the end of seasonally strong demand for power unwound.  In Asian markets HSFO 180 CST cracks lost about $2/bbl on average month-on-month, reaching -$5.29/bbl in Singapore, -$5.74/bbl in South Korea and -$4.84/bbl in Japan.



Refining Margins

Refinery margins remained weak in September, although some improvements were seen in Northwest Europe and the US.  Brent margins in Northwest Europe improved, whereas Urals margins fell back after the slight recovery seen in August. Mediterranean margins all weakened. In the US, Gulf Coast and West Coast margins differed over the month. In Asia, margins fell in both Singapore and China in September.



In Northwest Europe, Brent margins moved higher in the first half of the month on stronger gasoline and middle distillate prices. Gasoline prices rose on tighter supply due to refinery maintenance and increased demand both from West Africa and Saudi Arabia. Middle distillate prices were supported by pre-stocking ahead of winter and were lifted by maintenance-related supply tightness. However, although improving over the month on average, Brent margins fell again in the second half of September as product prices did not keep up with the increasing crude price. Urals margins fell on average due to the unusual strength in Urals feedstock itself.

On the US Gulf Coast, Bonny and LLS cracking margins improved together with Maya coking margins, whereas Brent cracking and Mars coking margins weakened on average in September. Generally, the weak gasoline price weighed on the margins as high stock levels and the end of the driving season prevented prices from increasing. In the second half of the month, the stronger crude price further curbed margins. West Coast margins fell further from August except for Kern cracking margins, which were supported by higher fuel oil prices. On the East Coast, gasoline product cracks (NYH Unl 93) rose significantly throughout September, pushing refinery margins in the PADD 1 area higher. Prices were supported by Enbridge's pipeline problems, and lower regional throughputs in general (due to shutdowns and maintenance) which all reduced gasoline supplies to the region.

Singapore margins all fell in September and are back in negative territory. Plentiful product supplies, limited export opportunities, which weakened middle distillate prices, and stronger crude prices towards the end of the month all contributed to lower margins. Also, Chinese margins fell further in September, pressured by weak fuel oil prices.



End-User Product Prices in September

End-user prices in US dollars, ex-tax, remained relatively stable in September, increasing by a modest 0.4%. However, the picture was mixed across surveyed fuels and countries. On a US dollar, ex-tax basis, across the IEA region, gasoline and low sulphur fuel oil weakened while diesel and heating oil prices rose. However, when examining average ex-tax prices in national currencies the impact of the weaker dollar was conspicuous, since prices fell in all surveyed countries except Canada. On this basis, Japan experienced the most significant average price fall of 2.8%, but this was skewed by an exceptional 7.8% fall in low sulphur fuel oil. In Europe, the most significant average price fall was reported in the UK, where prices fell by 2.2% following notable falls in gasoline (-2.9%) and diesel (-2.5%).

Gasoline pump prices fell across all surveyed countries except Canada, which remained stable. Regular motor gasoline averaged $2.71/gallon in the US, ¥133/litre in Japan and £1.15/litre in the UK. Across the Eurozone, prices ranged from €1.17/litre in Spain to €1.38/litre in Germany. The picture was slightly different for automotive diesel with price climbs in the Eurozone and Canada and price falls elsewhere. Forecourt prices averaged $2.95/gallon in the US, ¥113/litre in Japan and £1.17/litre in the UK while in the Eurozone prices ranged from €1.09/litre in Spain to €1.22/litre in Italy.

Freight

Dirty tanker rates on all benchmark routes hovered near break-even levels during September. Rates may have now 'bottomed out' due to the unwillingness of tanker owners to run their vessels at far-below break-even levels. As with the previous two months, vessel oversupply is weighing heavy, underscored by the most recent oil-in-transit data. Consultancy Oil Movements estimate that in early October 45.7 mb of crude was in transit globally which is approximately 2 mb higher than one year ago, but almost 3.3 mb lower than the seasonal high reported in mid-July. It is therefore highly likely that the mid-July crash of the dirty tanker market resulted from the drop in oil in transit combined with the release of vessels from floating storage.



The problem of oversupply and resulting idle tankers was emphasised by a recent report suggesting that during negotiations for a recent long-term crude supply deal between Kuwait and India, KPC stipulated that its vessels are to be used for the shipments. Following the Fos-Lavera port strike in France, it is anticipated that there will be some localised supply tightness, and recent broker reports indicate sharp increases in the Mediterranean Aframax market. Indeed, our data indicate that rates in these markets spiked by more than $2/mt (+57%) between 4 and 6 October and are likely to continue climbing if the strike is prolonged. At the time of writing, 56 oil tankers were reported to be blocked either outside or inside the port.

In September, clean tanker rates fared almost as badly as their dirty counterparts, although the geographical split reported last month reversed, as Atlantic basin routes outperformed those East of Suez. The 25K UK - US Atlantic Coast route peaked at $17/mt late month after a number of westwards gasoline cargoes were fixed. Additionally, rates on the 30K Caribbean - US Atlantic Coast trade firmed by $1/mt to stand at over $11/mt by month-end. In comparison, the 75K Arabian Gulf - Japan and 30K  Singapore - Japan routes fell, with the former plummeting by $7/mt over the month. Some short-term support to markets could come from the movement of gasoil from Asia and the US to Europe, where the market has recently moved into backwardation in part resulting from high demand caused by German heating oil stock replenishment.

Short-term floating storage of crude and products increased by 3.6 mb to stand at 76.0 mb by end-September. Crude increased by 4.9 mb with estimated Iranian storage increasing by 1.3 mb to approximately 33 mb. Elsewhere, crude stored in the Asia Pacific region increased by 4.3 mb and US Gulf volumes fell by 0.8 mb. Products decreased by 1.5 mb, with the draw concentrated in North West Europe (-1.5 mb), likely resulting from gasoil moving ashore for economic reasons. At month-end the storage fleet was stable at 57 vessels with VLCCs increasing by two to number 20.

Refining

Summary

  • Global refinery crude throughputs have been revised up by 0.7 mb/d for 3Q10, to 75.3 mb/d, or some 1.8 mb/d above 3Q09, following stronger-than-expected runs in both the OECD and non-OECD. North America and Europe each account for about a quarter of the total adjustment, shadowing recent revisions to oil product demand. In the non-OECD, both Brazil and Russia reported another set of record-high runs, further contributing to the revision.
  • Forecast 4Q10 global crude runs are seen falling sharply, to 73.8 mb/d, on the back of an expected slowdown in global demand growth. Despite the drop of almost 1.6 mb/d from the previous quarter, runs retain annual growth of close to 1.4 mb/d. Annual increases are centred in the non-OECD, in particular in China and the FSU, though the OECD is also expected to post modest 4Q10 growth.
  • OECD crude runs averaged 37.6 mb/d in August, some 170 kb/d below a month earlier, though an impressive 960 kb/d above last year's depressed levels. Masked by the relatively stable overall picture, runs moved in opposite directions in the US and Japan, in line with seasonal trends. As US refinery runs fell back from summer highs, Pacific runs increased sharply as peak maintenance wound down. Preliminary weekly data for the US, Canada and Japan indicate a further weakening in utilisation rates in September, though not as much as we had anticipated.
  • July OECD refinery yields increased for gasoline, jet fuel and other kerosene and fell for all other products. OECD gross output continued its upward trend, although flattened compared to the increase seen for June. Output for July edged close to the 5-year average.


Global Refinery Throughputs

Global crude throughputs have been revised up by 0.7 mb/d for 3Q10, following stronger runs in both the OECD and several non-OECD countries. In the OECD, both North American and European runs were higher than expected, and reflect recent revisions to oil demand. The absence of any hurricanes affecting plants in the US in September lifted North American runs, while European runs were also stronger than expected in both July and August, mostly due to higher French throughputs. According to preliminary August data, France reported its first annual growth in refinery runs since February 2009, though recent industrial action have reduced runs in September and October. In the non-OECD, both Brazil and Russia recorded another set of record throughputs in July and August, respectively, while Saudi Arabia reported its highest run rates in two years in August. Some strength was equally seen in African runs in June/July, underpinned by Algeria and South Africa.

At 75.3 mb/d, 3Q10 global throughputs are assessed 1.8 mb/d above year-earlier levels. Annual increases are now equally split between the OECD and the non-OECD, as opposed to recent growth strongly skewed towards the non-OECD. OECD strength has to be seen as only a partial recovery however, and runs remain well below levels seen in 2007 and early 2008. In the non-OECD, China still accounts for the bulk of growth, though the FSU, Africa and the Middle East all contribute.



4Q10 global throughputs have been adjusted slightly lower (-120 kb/d) since last month's report, to average 73.8 mb/d. The downward adjustments mostly come from China, following a reassessment of capacity expansion projects and likely ramp-up rates, and smaller adjustments to runs in the Middle East, despite offsetting increases in the OECD. The steep fall in utilisation rates from 3Q10 is in part due to higher expected maintenance at the tail-end of the year but also due to an expected slowdown in oil product demand growth. 4Q10 world demand growth is estimated at around 1.4 mb/d, down from an average of 2.4 mb/d in the three previous quarters.



OECD Refinery Throughput

OECD crude throughputs averaged 37.6 mb/d in August, some 170 kb/d lower than July's high point. Both July and August were revised up by nearly 270 kb/d, following higher throughputs in North America in July and Europe in August. Masked by the relatively stable overall throughput level, large offsetting moves were seen in North America and in the Pacific. While North American runs came down some 640 kb/d from summer highs, Pacific refiners all increased runs as maintenance wound down. Despite the monthly decline, August runs remained an impressive 960 kb/d above last year's depressed levels.



Preliminary data for September came in higher-than-expected for both the US and Japan, leading to yet another upward revision. The absence of any hurricane shutdowns underpinned the US adjustment, as we previously included a five-year average outage adjustment, as for upstream supply. Stronger-than-expected oil product demand likely also supported runs. As a result, 3Q10 OECD runs are now assessed at 37.3 mb/d, close to 1 mb/d higher than the same period last year and 360 kb/d above our previous estimate.



4Q10 OECD crude throughputs have similarly been adjusted slightly higher since last month's report, to average 35.6 mb/d. Nevertheless, quarterly runs are assessed some 1.7 mb/d lower than 3Q10. Indeed, US runs already fell sharply towards the end of September, as did Japanese runs. In both the Pacific and North America autumn maintenance is currently lowering throughput levels. A significant expected slowdown in OECD demand growth in the last quarter will also likely put downward pressure on margins and operating rates. Lastly, the closure of capacity in North America, in both Canada and the US northeast, will lower runs for the remainder of the year. In Europe, strike action in France and poor margins are expected to bring runs down from earlier highs.

North American crude throughputs fell by 640 kb/d in August, to average 17.9 mb/d, 310 kb/d above a year-ago and 80 kb/d lower than our previous estimate. The monthly decline was concentrated in the US as maintenance activity resumed after the summer lull, and deteriorating margins likely prompted refiners to lower operating rates. Preliminary weekly data for the US and Canada, supported by an increase in recorded shutdowns, saw runs falling further in September. As mentioned above, despite a number of named storms, none of the hurricanes made landfall near the main refining centres, minimising the need for closures or precautionary shutdowns. As a result, September US run rates have been revised up by some 415 kb/d, as we had previously included a hurricane adjustment in the forecast.



US crude runs fell by 230 kb/d in September, with declines in PADD 1, 2 and 3. The fall was concentrated in the second half of the month, when total US crude runs fell by close to 900 kb/d. Gulf Coast runs fell the most and were down by almost 500 kb/d in the last two weeks of September. Refining margins in the region continued to deteriorate until late August, before improving somewhat through September, yet all cracking margins remained negative in September. The closure of the upper Houston Ship Channel after an accident on 3 October is not expected to have significantly reduced refinery runs in the area, as refiners hold operational stocks to deal with short-term disruptions such as this. The channel, which connects the Gulf of Mexico to the Port of Houston, and is used to deliver oil to refineries in the Houston-Texas City-Baytown area, reopened for two-way traffic on 6 October.



Refinery runs on the East Coast (PADD 1) fell by 95 kb/d in September. A slew of maintenance and another refinery closure pulled runs lower yet again, reducing regional product supplies and supporting product cracks. ConocoPhillips' 238 kb/d Bayway refinery on New York Harbor went down for 45 days maintenance at the end of September. Western Refining announced on 13 September that it had completed the closure of its 70 kb/d Yorktown refinery, originally announced on 5 August, because of poor profitability. The company will continue to run the products terminal and storage facility to supply the region with finished products. Refining capacity in PADD 1 is now assessed at 1.2 mb/d, a reduction of 400 kb/d since the closure of Eagle Point, Delaware and Yorktown. Also on the East Coast, United Refining's 70 kb/d Warren refinery in Pennsylvania was reportedly running at reduced rates due to the shutdown of Enbridge's Line 6B pipeline, which ruptured on 26 July, and remained closed for more than 2 months.

Though runs have come down from August highs, the shutdown of Enbridge's 6A and 6B pipelines seem to have had a limited impact on refining operations in the Midwest (PADD 2). Record high regional crude oil stocks enabled refiners to sustain rates. PADD 2 crude stocks have come down by more than 6 mb since the pipeline ruptured. The slide in runs in September will likely continue in October due to increased maintenance and lower demand and profitability.



Outside of the US, Canadian crude runs averaged 1.84 mb/d in July and just under 1.8 mb/d in August. Preliminary weekly data show runs falling further in September, in part due to the phased shutdown of Shell's Montreal refinery from mid-month. The 130 kb/d plant will be completely shut by the end of October, one month ahead of schedule, and will be operated as a terminal thereafter. In Mexico, the explosion at PEMEX's 275 kb/d Cadereyta refinery on 7 September is thought to have had minimal impact on refinery operations as, according to a company spokesperson, damage was not serious and could be repaired quickly.

In OECD Europe, August marked a third consecutive month of relatively strong refinery throughputs, averaging 12.9 mb/d. Year-on-year growth of 470 kb/d came from a number of countries, including the Netherlands (+155 kb/d), Spain (+105 kb/d), Turkey (+55 kb/d) and Greece (+45 kb/d). According to preliminary JODI data, France also posted its first annual increase in runs in 18 months, leading to an upward revision of some 200 kb/d. Although the impact of the current blockade of the port of Fos-Lavera in southern France (see French Refinery Operations Halted by Strikes) is still unclear, we have lowered our estimate for French output over October. French refinery throughputs were also affected in September, when Total was forced to operate its five French refineries, with a combined capacity of 930 kb/d, at minimum rates due to nationwide strikes in protest over government plans to overhaul pensions. In all, OECD European runs are estimated at 12.8 mb/d in 3Q10, and falling to 12.1 mb/d in 4Q10, upwardly revised by 165 kb/d and 75 kb/d respectively.



French Refinery Operations Halted by Strikes

At the time of writing, a strike at the Fos-Lavera oil terminal had entered its third week, crippling local refinery operations. The strike, which began on 27 September, is preventing oil shipments in or out of the port and tightening the supply of oil products in the region. Industrial action revolves around changes in the port's ownership and proposed nationwide pension reforms. On 12 October, eight out of France's 12 refineries joined French trade unions in a separate, national, strike in protest against pension reforms.

The port closure has cut crude supplies to the four regional refineries and the pipeline (SPSE) which feeds two refineries in north-eastern France and one refinery in Switzerland. All are reported to have been running at reduced rates since the start of the strike. Two facilities have already been required to begin shutdown procedures. Total's La Mede refinery started shutting down on 10 October due to a lack of crude supplies, as did Ineos' Lavera refinery a day later. Other refineries have signalled they will have to start shutting down in coming days should the situation not be resolved. The Karlsruhe refinery, in south-eastern Germany, also usually sources crude supplies via the SPSE, but unlike the other affected units, has the possibility of using an alternative supply line.



There is no shortage of oil product supplies so far, as commercial inventories are being used to replace missing refinery production. However, by some estimates the strike could continue during the next two weeks and lead to product shortages. The strike is pushing European product cracks and refining margins higher however, drawing in products from abroad and likely encouraging other refiners to increase run rates. Press reports have indicated that a large number of diesel cargoes are heading to Europe from the United States, but if the Fos-Lavera port remains blocked logistics of delivering the products to end-users in the region could be significantly hampered.

The Fos-Lavera port region has four refineries and is the starting point of the SPSE pipeline. While total crude distillation capacity of all refineries supplied from near the port is some 1.2 mb/d, refineries have not been operating anywhere near maximum levels in recent years, and pre-strike utilisation rates are estimated at closer to three quarters of this amount.

The SPSE has a capacity of 700 kb/d of crude, feeding two refineries in France, and one each in Germany and Switzerland. Only about two-thirds of the pipeline capacity has been utilised in recent years. The German Karlsruhe refinery can also receive supply from the port of Trieste, Italy (via the TAL line).

Based on the IEA's method of calculating stockholding obligations, France had total oil stocks equating to 95 days of net imports at the end of July. Roughly 60 days are held as public stocks (some 95 million barrels); the remaining portion of strategic stocks (some 30 days) is covered by stocks held by industry for emergency use. Public stocks at the Manosque storage facility close to the Fos-Lavera hub include both crude and products. Crude stocks in this facility, nearly 20 million barrels, can be pumped at a rate of 300 kb/d to feed the refineries in the Fos region and can also enter the SPSE pipeline to supply the refineries further in land.

While France has not drawn down emergency stocks in response to this situation, stocks held for emergency purposes have been utilised in a technique referred to as "re-localisation". In a geographical exchange, reserves in the needed area are swapped with commercial stocks held elsewhere in France, such that the total emergency reserves do not change.

The potential loss of around 800 kb/d of refinery capacity due to the port strikes, if sustained, and the added shutdowns elsewhere in the country due to the separate action from 12 October, have at first glance the potential to push European commercial products stocks sharply below September's 38.5 days. However, ex-France European refinery utilisation stands at only 82%, meaning supplies could be increased elsewhere within the region to deal with a disruption. The problem, rather, is a logistical one involving the movement of crude and products within France.

Crude runs in the OECD Pacific were in line with expectations for August, averaging 6.8 mb/d. The 550 kb/d increase from a month earlier largely stemmed from Japan, though South Korean runs were also higher. The increase in runs coincides with the end of the maintenance season, and Japanese runs could have been further supported by relatively strong domestic demand over the summer. Unseasonably high temperatures led to two consecutive months of year-on-year growth in oil product sales in July and August (although in part due to direct crude burn and not refined products).



Weekly data from the Petroleum Association of Japan show Japanese crude runs falling by about 200 kb/d in September as maintenance activity picks up again. Furthermore, several Japanese refiners, including Showa Shell, have indicated they will reduce operating rates in the fourth quarter due to weak domestic demand. Simultaneously, the company plans to increase product exports in line with announcements made by Idemitsu Kosan (which said they would double product exports in 4Q10 compared to a year earlier). In all, total Pacific crude runs are largely unchanged from previous reports, at 6.5 mb/d in 3Q10 and 6.4 mb/d in 4Q10.

Non-OECD Refinery Throughput

Non-OECD throughputs have been revised up by 330 kb/d for 3Q10, to 38.0 mb/d, due to higher assessed runs in Latin America, the FSU, the Middle East and Africa. Both Brazil and Russia reported another set of record high runs of 1.9 mb/d and 5.2 mb/d respectively for July and August. In Saudi Arabia runs reached their highest in two years in August. African throughputs also showed some strength over the summer months, mainly driven by higher Algerian and South African runs. Though 4Q10 non-OECD runs are now seen slightly lower than the previous forecast, growth is expected to pick up from 3Q10's level of 850 kb/d, to just over 1.0 mb/d.



Chinese crude runs fell by 130 kb/d in August, to average 8.21 mb/d (100 kb/d less than expected). Total crude runs were nevertheless 540 kb/d higher than a year earlier, or +7.1% y-o-y. Run rates are thought to have increased in September as PetroChina's 200 kb/d Guangxi refinery started operations. Several refineries, including Sinopec's Yangzi Petrochemical, and PetroChina's Jingxi and Daqing plants, will also exit turnarounds during September 

In Other Asia, Indian refinery runs fell by 100 kb/d in August, to 3.79 mb/d (assuming stable throughputs of 600 kb/d at Reliance's Jamnagar). At -0.6% y-o-y, this is the first annual decline since November 2008. According to trade sources, Reliance shut half its 660 kb/d refinery for about a month at the end of September for maintenance, though confirmation remains elusive. Pakistan successfully restarted its 100 kb/d Pak-Arab refinery on 14 September, a day ahead of schedule, after it was forced to close on 7 August due to the heavy floods. In Taiwan, state-run CPC Corp. announced in early September that it had started the decommissioning of several processing units at its 220 kb/d Kaohsiung refinery. The company had pledged it would permanently shut the refinery by 2015, in exchange of permission to build an ethylene plant on the site. Formosa is also facing more delays in the restart of units at its 540 kb/d Mailao refinery, which was damaged in a fire in early July. The 700 kt/y naphtha cracker restart has been delayed by two weeks, from end-September, due to investigations and design modifications following a series of fires at the plant. The third and last 180 kb/d crude distillation unit is scheduled to restart during October.



Russian crude runs reached yet another record high in August at 5.2 mb/d, with throughput 260 kb/d above year-earlier levels and 210 kb/d higher than our expectations. It looks like the wildfires that raged across the country over the summer did not affect refinery operations. Russian runs are likely supported by strong domestic demand, as well as favourable export duties on products relative to crude oil. Additionally, several refiners are upgrading their plants to produce European specification fuels and some are increasing crude distillation capacity at the same time. The Novoshakhinsk and Atinpinsky refineries are currently commissioning new capacity. Runs are forecast to have fallen in September, as several refineries started autumn maintenance.

Elsewhere in the region, Kazakhstani crude runs also rebounded sharply in August, by 80 kb/d to just over 300 kb/d, as the 160 kb/d Pavlodar refinery came back on line after a complete maintenance shutdown in July. In the Ukraine, some sources reported that Lukoil will permanently shut its 80 kb/d Odessa refinery in the Ukraine due to poor economic performance, though the company said it is still considering options. Reportedly, runs will already be cut in October by 36% to 115 kt (27 kb/d). Average runs at the refinery were 41 kb/d in 2009.

Latin American crude runs have been revised up by 150 kb/d for 3Q10, mostly due to higher Brazilian estimates. July data from ANP (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis) were some 80 kb/d higher than our previous forecast while our maintenance assessments have been slightly lowered for August and September. At 1.93 mb/d, July marked yet another record high throughput month to fuel the robust domestic demand growth of +6% y-o-y in 2010. Valero has once again delayed the decision whether to restart its Aruba refinery, this time until January 2011 at the earliest.



According to JODI data, African crude runs were remarkably robust in June and July, at around 2.5 mb/d. The sharp increase from May, when total regional crude runs were estimated at 2.25 mb/d is largely underpinned by higher runs in Algeria and South Africa, and some improvement in Nigerian throughputs. South African runs averaged 480 kb/d in July, 150 kb/d higher than the previous 12-month average. Due to a major power cut, Engen Petroleum had to shut its 125 kb/d refinery for about a week in October. Furthermore, South African historical data have been revised lower by 50-60 kb/d back to 2004 due to an update of conversion factors for that country.

OECD Refinery Yields

July OECD refinery yields increased for gasoline, jet fuel and other kerosene and fell for all other products. OECD gross output continued its upward trend, although flattened compared with the increase seen for June. Output for July edged close to the five-year average.

OECD gasoline yields increased by 0.44 percentage points (pp) compared to June, and stand just 0.05 pp below last year's level. The largest increase was in North America, where gasoline yields went up by 0.6 pp, in line with seasonally rising demand. The gross refinery output of gasoline in North America was very high in July as well, due to utilisation rates above 90% at US refineries. Refinery gross output of gasoline increased by 340 kb/d from June, and was 580 kb/d higher than last year. In the OECD Pacific, gasoline yields increased by 0.36 pp as demand was high amid exports to non-OECD countries in the region. European yields increased only marginally (0.14 pp), reflecting weak demand and already high stock levels.



The OECD gasoil yield dipped by 0.53 pp in July, the largest contributor being Europe, where gasoil yields decreased by 0.64 pp. As a result of run cuts, European gross output of gasoil also fell. The decrease has to be seen in relation to an oversupplied market and weaker middle distillates prices. However, in the Pacific region the gasoil/diesel yields increased by 0.29 pp.



OECD fuel oil yields decreased by 0.16 pp in July. The regional fuel oil yields were all in line with last year's levels, and European and Pacific fuel oil yields decreased by 0.41 pp and 0.28 pp respectively. North American fuel oil yields were generally flat from the previous month with an increase of 0.04 pp. The OECD refinery gross output of fuel oil was however above last year's levels, lifted by an increase in the North American refinery gross output as runs were very high in July.