Oil Market Report: 12 April 2011

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  • Spot crude oil prices jumped 10-15% in March, as outages from Libya and mounting unrest in the MENA region offset a seasonal drop in refinery runs. At writing, Brent futures stood near $126/bbl, with WTI at $112/bbl. Refining margins, notably for light, distillate-rich grades, remained weak as crude price gains outstripped those for products.
  • Global oil output fell 0.7 mb/d to 88.3 mb/d in March on reduced Libyan crude supply. Non-OPEC production rose 0.2 mb/d to 53.3 mb/d, even as unrest and strikes in Yemen, Oman, Gabon and Ivory Coast shuts in an average 0.1 mb/d of crude in March and April. Non-OPEC 2010 supply is left at 52.8 mb/d, while stronger Canadian production lifts the outlook by 0.1 mb/d to 53.7 mb/d for 2011.
  • OPEC crude supply fell by 890 kb/d in March to 29.2 mb/d, on a near-70% drop in Libyan output. Effective OPEC spare capacity stands at 3.91 mb/d, with Saudi Arabia accounting for 3.2 mb/d. The 'call on OPEC crude and stock change' is cut by 0.4 mb/d for 1Q11 to 29.8 mb/d. The average 'call' for 2011 is also 29.8 mb/d, unchanged from 2010 but 0.6 mb/d above March OPEC production.
  • Global product demand remains unchanged for 2010 and 2011, at 87.9 mb/d (+2.9 mb/d year-on-year) and 89.4 mb/d (+1.4 mb/d) respectively. Higher anticipated post-earthquake Japanese oil use for power generation and reconstruction offsets downward non-OECD adjustments. Preliminary January and February data suggest that high prices are already starting to dent demand growth.
  • OECD industry stocks fell by 50.8 mb to 2 676 mb, or 59.2 days, in February, driven by sharp product draws due to seasonal refinery turnarounds. March data point to an 8.1 mb draw in US and European inventories, while oil held in short-term floating storage rose.
  • Global crude run estimates are lowered by 270 kb/d for 2Q11, largely due to the Japanese earthquake. Offsetting factors, in Japan and elsewhere, could mitigate the impact of a continuing loss of about 600 kb/d of refining capacity into 2Q. In all, global runs are seen averaging 74.5 mb/d in 2Q11, down from 74.6 mb/d in 1Q11.

High price, heal thyself

Recent lower supply levels, if sustained, could leave OECD stocks looking much tighter by end-year. Amid heightened geopolitical risks, a smaller supply cushion leaves the market more exposed to supply or demand shocks. Preliminary data for March show OPEC supply falling to 29.2 mb/d, as producers came up short in filling the gap left by lost Libyan supplies. Nor does the usual 'lower output, higher spare capacity' equation apply, since Libyan output could take months to reinstate once conflict ends. Other OPEC producers have so far struggled to place extra barrels on the market at prevailing, inflated prices. Some attribute OPEC caution to the seasonal 2Q low in products demand, but that overlooks a crude demand trend which potentially sees throughputs rise from March lows and add 3 mb/d by July. Much is made of today's 'comfortable' OECD inventory. As noted elsewhere, comfort depends upon where you sit. Refiners in the landlocked US Midwest indeed have ample crude stocks, but those elsewhere in the OECD face a tighter situation (graph below). Had the Libyan crisis emerged at a time other than during peak European refinery maintenance, $125/bbl might already be a distant speck in the rear view mirror.

Hypothetically, if global supply were to chug along at March levels for the rest of 2011, OECD inventory could slip to near five-year lows by December. The 57 days of forward cover this implies is not excruciatingly tight by historical standards. However, allied to sub-4 mb/d OPEC spare capacity, it begins to resemble the thin flexibility margin that helped underpin runaway prices from the mid-2000s onward.

After a hiatus at the time of the Japanese earthquake and tsunami on 11 March, renewed price strength now also acknowledges this potential for further market tightening. Libyan outages themselves look likely to rumble on for months rather than weeks. Attacks on oil production facilities, isolated so far, nonetheless prompt memories of a scorched-earth policy seen in Kuwait 20 years ago. And non-OPEC countries in MENA and sub-Saharan Africa facing political unrest account for around 3 mb/d of production. Even if only a fraction of this is genuinely prone to disruption, it does highlight the degree of uncertainty unleashed by the so-called Arab awakening. In addition, if IEA estimates are correct, reconstruction in Japan could result in higher, not lower, regional demand in 2011.

In this new 'high-risk' environment, what can check the remorseless rise in prices? Producers could adopt a more relaxed view on spot sales and greater flexibility in pricing to coax refiners, stung by weaker margins, into snapping up more crude. Most analysts see a more formal OPEC policy response as unlikely, since revisiting individual production targets may be difficult now after the tensions stoked by the Libyan and Bahraini crises. That leaves a less palatable route to price moderation - namely economic slow-down and weaker demand growth. Our projections already incorporate an expected halving in 2011 from the heady 3 mb/d growth of 2010, albeit assuming continued robust GDP growth. There are real risks however that a sustained, $100/bbl-plus price environment will prove incompatible with the currently expected pace of economic recovery. Economic impacts from high prices are never instantaneous, and often take months to materialise, but preliminary data for early-2011 already show signs of oil demand slow-down. Unfortunately, the surest remedy for high prices may ultimately prove to be high prices themselves.



  • Forecast global oil product demand remains largely unchanged for both 2010 and 2011. A revision to OECD demand, in anticipation of higher Japanese oil use for power generation and reconstruction following the March earthquake/tsunami, has broadly offset downward adjustments to non-OECD demand. Global oil demand, which averaged 87.9 mb/d in 2010 (+3.4% or +2.9 mb/d year-on-year), is still seen rising to 89.4 mb/d in 2011 (+1.6% or +1.4 mb/d year-on-year). However, preliminary January and February data suggest that persistently high oil prices may have already started to dent demand growth.

  • Projected OECD oil demand, unchanged for 2010, has been revised up by 90 kb/d for 2011, largely on a reappraisal of Japanese demand for gasoil, residual fuel oil and low-sulphur crude. Total OECD demand, which stood at 46.1 mb/d in 2010 (+1.5% or +0.7 mb/d year-on-year), is forecast to remain at a similar level in 2011. Japan's year-on-year oil demand growth, now seen at 30 kb/d (versus a contraction of 120 kb/d previously), is thus expected to effectively offset a decline in Europe.
  • Forecast non-OECD oil demand, largely unchanged for 2010, has been reduced by 90 kb/d for 2011, following downward baseline revisions in the Middle East (Kuwait) and weaker-than-expected readings for both January and February in Latin America (Brazil) and the FSU (Russia). Total non-OECD demand, estimated at 41.8 mb/d in 2010 (+5.7% or +2.2 mb/d year-on-year), is seen rising to 43.2 mb/d in 2011 (+3.5% or +1.4 mb/d versus the previous year). The most recent readings from China, coupled with some anecdotal evidence, may suggest an incipient slowdown in oil demand growth in the largest non-OECD consuming country.

Global Overview

Global oil demand growth has shown signs of slowing in recent months in the face of sharply higher prices. That said, our forecast for 2011 is effectively unchanged from last month's report, with global demand expected to average 89.4 mb/d, up by 1.6% or 1.4 mb/d from 2010. Nonetheless, this is a significant easing from 2010 growth (+2.9 mb/d).

Indeed, global growth slowed from December (+4.8% year-on-year) to January (+4.0%) and February (+2.9%), in a manner reminiscent of 2008 when prices were last scaling to such heady levels. Interestingly, this most recent deceleration was greater in the non-OECD (+8.4%, +5.9% and +4.7%, respectively) than in the OECD (+1.8%, +2.4% and +1.4%). Admittedly, the lull in the non-OECD is mostly related to Asia and specifically to China - yet several Asian countries such as Thailand and Malaysia were already showing diminishing economic momentum. Our 2011 forecast has remained broadly stable because of an upward revision in OECD Pacific in anticipation of higher Japanese oil needs for power generation and reconstruction. This has offset downward adjustments elsewhere, most notably in the non-OECD.

If confirmed, these trends could signal that high oil prices may already have started to bite, even though the effect of oil price shocks typically tends only to be fully felt after several months of lag. However, it should not be surprising that some impact is already being felt, considering that oil prices (Brent) have risen by approximately 50% since last September, breaking out after a remarkable year of stability within a relatively narrow band, as we noted last month.

Under our current assumptions, with Brent averaging some $105/bbl in 2011 based on the futures strip, the oil burden - defined as the ratio of nominal oil expenditures to nominal GDP - is almost on track to reach 2008 levels in virtually all large consuming countries. This assumes, of course, that international prices prevail in all countries (clearly not the case among some major consumers where end-user prices are subsidised). However, the concept of a rising burden still applies, in as much as government finances face a strain in sustaining lower domestic prices amid rising oil import costs. The burden in 2011 will be the highest in China and India, hovering between 5.5% and 8.5% of GDP. However, on an index basis, the oil burden's rise will actually be much faster in Japan, quadrupling versus 1995 on the back of a decline in nominal GDP and greater oil needs following the earthquake/tsunami, while doubling or tripling for other large consumers. There is a clear potential, if prices remain above $100/bbl, of adverse economic impacts and slower oil demand growth becoming firmly entrenched in late 2011 and into 2012.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) increased by 1.4% year-on-year in February, with all regions bar Europe recording growth. Demand rose by 2.4% in OECD North America (which includes US Territories), largely on strong deliveries of distillates and residual fuel oil, and by 1.3% in OECD Pacific as continued power generation needs lent support to residual fuel oil deliveries and direct crude burn. By contrast, demand was flat in OECD Europe as gains in industrial and transportation fuels were offset by lower heating fuels deliveries.

Upward revisions to January preliminary data totalled 120 kb/d, mostly driven by stronger-than-expected deliveries of 'other products' and indicating that total OECD demand rose by 2.4% year-on-year during that month, slightly faster than earlier estimates (+2.1%). North America accounted for half of these adjustments on higher Canadian submissions (although we are still adjusting reported gasoline levels), with the rest roughly evenly split between Europe and the Pacific.

Estimated OECD total oil product demand remains broadly unchanged at 46.1 mb/d in 2010 (+1.5% or +670 kb/d year-on-year). The prognosis for 2011, by contrast, has been lifted slightly to 46.1 mb/d (flat versus the previous year, and 90 kb/d higher when compared to our last report), largely on a reappraisal of Japanese prospects, which temper the decline expected in Europe.

North America

Preliminary data show oil product demand in North America (including US territories) rising by 2.4% year-on-year in February, following a 2.9% increase in January. While conclusions remain premature, February readings suggest high prices may be starting to restrain demand growth in some product categories, particularly diesel. Moreover, our higher price assumption has dampened growth going forward. Nevertheless, economic conditions have continued to improve, for both industry and the labour market. These offsetting forces are thus likely to result in a modest pace of regional oil demand growth for the rest of this year.

January data were revised up by a modest 60 kb/d, with higher 'other products' (+230 kb/d) and diesel (+80 kb/d) offsetting sharply lower gasoline (-220 kb/d) and LPG (-100 kb/d). Unadjusted weekly to monthly revisions in the US were positive (+90 kb/d), reversing the sharply negative revision for December highlighted in last month's report. North American demand is now estimated at 23.9 mb/d in 2010 (+2.6% or +600 kb/d versus 2009, unchanged versus our last report). Demand in 2011 is seen rising to 23.9 mb/d (+0.1% or +30 kb/d year-on-year, 30 kb/d lower than our last report).

Adjusted preliminary weekly data for the United States (excluding territories) indicate that inland deliveries - a proxy of oil product demand - declined by 0.4% in March, following a 2.9% year-on-year rise in February. March data featured a fall in jet fuel/kerosene demand (-5.2%) and a more modest decrease in gasoline (-0.3%), while middle distillate growth (+2.9%) came in lower versus the previous six months.

Weaker transport readings suggest that retail prices may be reaching thresholds at which end-users start to adjust consumption patterns, notably during an economic recovery period. In March, monthly gasoline, diesel and jet fuel/kerosene prices rose on average by 9-11%, with four-week average demand growth falling throughout the month. However, expanding industrial activity and falling unemployment suggest that the recovery may continue to provide a floor to US oil demand in the short-term, even though we have trimmed our 2011 demand forecast by 50 kb/d on average from 2Q11 to 4Q11 on a higher price assumption.

In Mexico, oil demand fell by 1.3% year-on-year in February, just as it did in January. Decreases in Mexican oil demand continued to stem from a mixture of one-off, weather and cyclical factors. Though it has picked up in recent months, jet fuel/kerosene demand (-4.8% year-on-year) remained relatively depressed in the wake of the Mexicana Airlines bankruptcy. Residual fuel oil demand (-15.3%) was also low compared to drought-affected readings in early 2010. Meanwhile, strong industrial indicators and robust diesel demand growth (+9.2%) pointed to cyclical strength, while flat gasoline demand (-0.1%) provided some offsetting weakness. Nonetheless, Mexican motorists are shielded to a degree by price subsidies; under the current budget, the retail prices of regular and high-octane gasoline increase by ¢0.7 and ¢0.4/litre per month, respectively (as such, current domestic prices are slightly lower than in the US).


Preliminary inland data indicate that oil product demand in Europe was flat in February versus a year ago, with strong naphtha and on-road diesel offset by weaker deliveries of heating oil and residual fuel oil. Temperatures were indeed much warmer than last year, although HDDs were slightly higher than the ten-year average. However, the availability of cheaper alternative fuels, such as natural gas, is also at play. As this report has often noted, there is a clear, ongoing structural decline in heating oil use.

Revisions to preliminary January demand data were minimal overall (+20 kb/d), although fuel oil readings were sharply trimmed (but were offset by stronger light distillates and 'other products'). This suggests that power generation is also seeing a degree of interfuel substitution. Overall, our estimate for total oil product demand in OECD Europe remains largely unchanged at 14.4 mb/d in 2010 (-0.4% or -60 kb/d compared with the previous year and 10 kb/d higher than previously expected). It is worth noting, though, that Germany revised its reporting of biofuels and refinery backflows back to 2008, leading to some relatively minor changes across product categories. By contrast, the outlook for 2011, at 14.4 mb/d (-0.7% or -100 kb/d versus 2010), is revised down (-20 kb/d versus last month's report) to account for weaker-than-expected February readings and persistently high oil prices.

However, demand growth so far remains buoyant in the continent's largest economy. Oil product deliveries in Germany increased by 4.6% year-on-year in February, according to preliminary data. Demand for naphtha - typically a leading economic indicator - and on-road diesel were particularly strong, largely offsetting a decline in heating fuel deliveries and confirming the country's robust economic performance. In France, by contrast, total oil demand plunged by 3.7% on the back of weak LPG and residual fuel oil, as warmer weather tempered power needs.

Meanwhile, in the UK, the rise in end-user prices has become a political issue. In late March, the government unveiled a 'windfall tax' on oil and gas production, aimed at raising some $2 billion in order to cushion motorists against dearer fuel prices. Preliminary January data suggest indeed that high prices may have started to alter driving habits: the structural decline in gasoline demand appears to be accelerating, while diesel use, which rose sharply in 2010, has seemingly stagnated.


Preliminary data show that oil product demand in the Pacific increased by 1.3% year-on-year in February, as largely normal winter temperatures (with HDDs slightly below both the ten-year average and the previous year) tempered the use of heating fuels (notably propane and kerosene). Nonetheless, power generation needs continued to provide support to residual fuel oil deliveries and direct crude burn, most notably in Japan. As discussed below, both fuels are likely to remain resilient as a result of the March earthquake and tsunami that, among other serious impacts, shut down several nuclear power generation facilities.

Meanwhile, the revisions to preliminary January data were relatively small (+40 kb/d), mostly pertaining to Japan's diesel and 'other products' deliveries. Although total 2010 OECD Pacific oil demand remains unchanged from last month's report at 7.8 mb/d (+1.7% or +130 kb/d year-on-year), the forecast for 2011 has been lifted by a sizable 140 kb/d to 7.8 mb/d (+0.7% or +60 kb/d year-on-year) to account for the effects of the Japanese disaster.

In Korea, as in other OECD countries, higher oil prices have raised political issues. Reluctant to cut fuel taxes, as this would compromise its fiscal targets, and eager to keep inflation in check, the government adopted a highly vocal campaign to encourage the country's refiners - SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank, which together account for roughly 98% of Korea's retail market - to absorb the oil price rise. In early April, SK Innovation was the first refiner to react to government pressure, agreeing to lower gasoline and diesel prices by about 5% for the next three months - perhaps calculating that its international expansion, notably in China and Southeast Asia, will gradually make it less sensitive to tightening domestic margins. In addition, the government has announced the creation of an online oil product exchange by end-2011, which aims to provide a more transparent picture of the domestic supply and demand balance. Interestingly, despite the outcry, rising prices have so far failed to dent Korea's strong gasoline demand.

Adjusting our Demand Projection for Japan

A month after the devastating earthquake and tsunami that hit northeast Japan, there is a wide diversity of opinions as to the short- to medium-term consequences of this tragic event. A first uncertainty relates to the cost and economic impact of the damage itself. Most observers have reasoned by analogy with the 1995 Kobe earthquake (roughly $100 billion), putting the cost of the March 2011 disaster at $100-200 billion, or 2-4% of current GDP. The Japanese government, meanwhile, estimates that the cost could be as high as $300 billion. This range of estimates stems from the difficulty of evaluating the earthquake/tsunami's indirect effects, ranging from the impact on industrial supply chains to consumer confidence, and hence colours views regarding future levels of economic activity and oil demand.

An optimistic narrative argues that the most devastated region (northeastern Tohoku) is relatively sparsely populated and has few energy-intensive industries; most are located in the Tokyo region and southern Japan and are thus intact. In addition, industrial spare capacity, albeit old, is plentiful and widespread throughout the country. After the initial shock, which is likely to depress 2Q11 GDP, economic activity would rebound strongly in 2H11, boosted by reconstruction efforts covering housing, industrial areas and infrastructure. As such, GDP growth for the whole of 2011 would match, if not exceed, the latest IMF prognosis (+1.6% year-on-year in 2011, according to the January World Economic Outlook Update). Effectively, under these circumstances, which for the time being underpin this report's oil demand assumptions, the earthquake would have only altered the distribution of quarterly economic growth, but not the annual growth level itself.

A more pessimistic scenario would acknowledge that the affected region accounts for a small share (about 4%) of the country's GDP but note that supply chains extending across the entire country have been disrupted given the pre-eminence of just-in-time inventory and production techniques, hence potentially affecting directly up to 12% of GDP. Factoring in rolling power blackouts as well, some 40% of GDP could be affected in one way or another. Given extensive infrastructure damage (roads, ports, refinery/petrochemical and power generation/transmission facilities), system inflexibility and reduced business confidence on the back of the unfolding nuclear crisis at the Fukushima plant, proponents of this analysis contend that supply chains would not be easily restored. The country would thus experience a marked economic slowdown with 2011 GDP averaging barely +0.5% year-on-year (indeed some other analysts envisage GDP declining by anywhere between 1% and 4.5%, depending on the nuclear emergency outcome). Moreover, the country's economic woes would also spill over to other countries, since Japan is effectively an economic hub where many key regional - and global - supply chains originate or end, particularly for high-technology products. That said, 2012 should be more favourable, with GDP growth rebounding to perhaps +3%, as reconstruction efforts would be much more advanced by then.

Using the more optimistic of these scenarios, we have attempted to rework our estimate of 2011 Japanese oil demand. In fact, the outlook hinges less upon the economy, and more on likely petrochemical and power developments. Under the optimistic view, naphtha demand would recover in short order since most petrochemical plants were not affected, being largely located in the south. As soon as 2Q11, power generation requirements would support fuel oil and low-sulphur crude use, and reconstruction would boost gasoil demand. As with GDP, total oil product demand could end up increasing slightly in 2011, rather than falling as under our pre-crisis projection. Consequently, our forecast now envisages year-on-year growth of roughly 30 kb/d (versus a contraction of 120 kb/d in our last report, thus implying a net revision of +150 kb/d), but other observers put growth as high as 100-200 kb/d. The lower economic case, meanwhile, would imply largely static year-on-year oil demand given Japan's overall low income elasticity. For the main petroleum products, our revised projection implies gasoil, residual fuel oil, and 'other products' demand respectively 30 kb/d, 80 kb/d and 90 kb/d higher than envisaged before the crisis, while our LPG, naphtha and gasoline projections are trimmed by 10 kb/d on average versus the pre-crisis outlook.

Crucially, the pertinence of any oil demand assessment is highly dependent on a proper review of Japan's power generation capacity and needs. Our current analysis suggests that capacity and transmission constraints in the stricken northeast may cap demand for fuel oil and direct crude burn at roughly 200 kb/d and 100 kb/d, respectively, during peak months (July to October). From this perspective, the load curve is likely to be atypically flat - that is, regional power demand may be effectively disconnected from economic developments (unless, of course, predictions of a severe recession materialise). On an annual basis, this would translate into roughly 240 kb/d of total oil use for power generation, representing an increment of some 170 kb/d versus 'normal' - defined as the ten-year average and assuming that the north-east, which typically accounts for roughly 40% of the country's power generation, will not be able to meet more than 25% of total generation in 2011.

The roots for the capacity constraints are three-fold. Most obviously, they are related to the partial or total destruction brought about by the earthquake/tsunami, which shut down 9.7 GW of nuclear capacity and 10.8 GW of thermal capacity. Furthermore, most oil-fired power plants were built between the late 1950s and the late 1970s, and face technical limitations that could cap sustainable utilisation at around 75% of capacity. Finally, the economics of LNG and coal-fired plants are more favourable - these facilities are not only more efficient, typically running at a load factor of around 80%, but their feedstock is also cheaper. Nonetheless, electricity supply could improve quicker than expected: for example, over the next few weeks a British company will reportedly install numerous small-scale generators, powered by both diesel and gas, in the Tokyo area, with a combined capacity of 200 MW.


Preliminary demand data show that non-OECD oil demand growth slowed in February (+4.7% or +1.9 mb/d year-on-year), for the second month in a row. Total February demand is assessed at 43.2 mb/d; January estimates, meanwhile, have been revised down by 240 kb/d to 41.9 mb/d (+5.9% or +2.3 mb/d year-on-year).

Despite this, all product categories continued to post strong growth in February. In relative terms, gasoil (+7.2% year-on-year), 'other products' (+6.1%), jet fuel/kerosene (+4.2%) and LPG (+4.1%) showed the highest gains. Nonetheless, gasoil remains well ahead in terms of absolute growth (+880 kb/d, equivalent to roughly 46% of total growth), followed more distantly by 'other products' (+330 kb/d) and gasoline (+200 kb/d).

Similarly, Asia remained the main driver of non-OECD oil demand growth. Yearly growth in February, at 1.2 mb/d (+5.9%), represented 61% of the total. In what has become a familiar pattern, China was the single largest contributor, representing 77% of Asia's increase and 47% of non-OECD growth.

Despite downward baseline revisions to Kuwait (from 2009), non-OECD demand is now estimated at 41.8 mb/d in 2010 (+5.7% or +2.2 mb/d year-on-year and 10 kb/d higher than previously estimated). The forecast for 2011 is also adjusted down slightly, on weaker-than-expected readings for Brazil and Russia for both January and February, to 43.2 mb/d (+3.5% or +1.4 mb/d versus the previous year and -90 kb/d when compared to our last report).


For the second consecutive month, China's apparent oil demand growth slowed in February (+9.6% year-on-year, versus +13.0% in January and +15.9% in December). However, at +0.9 mb/d, growth remains buoyant by any standards, with all product categories bar jet fuel/kerosene posting sizable gains. In addition, data collected during the Lunar New Year festivities tend to be partial and contradictory. Nonetheless, this slowdown may, at the margin, reflect greater oil price sensitivity, particularly with regards to gasoline (but much less so for gasoil, since its main users, which include farms, fisheries, public transport operators and taxi drivers, are still subsidised).

Indeed, private Chinese motorists may be starting to feel the pinch from high fuel prices. Domestic 'guidance' prices have been raised three times since last December - most recently in early April, despite concerns that inflation (notably for food) remains uncomfortably high. Given that the latest adjustment (of roughly 5%) still lags international price movements, another hike is already expected by some observers. Yet anecdotal recent reports have suggested that car owners in large cities are increasingly using public transportation during the week, and that small and medium-sized delivery and bus companies are facing a profitability squeeze. Of course, this evidence is patchy and is yet to be fully reflected in economic and oil demand data. Nonetheless, if confirmed, it would show that international prices have risen to such a level as to affect the largest non-OECD consuming country and the pivotal economy as regards to global oil demand growth.

Other Non-OECD

Having shelved plans to deregulate end-user gasoil prices, the Indian government has now turned its attention to kerosene and LPG. As with gasoil, capping domestic prices for both fuels as international oil prices continue to rise has proven to be extremely costly, both for state-owned oil companies and for the government itself, which shares part of the burden of the so-called 'under-recoveries' (losses). It has also fostered widespread adulteration, as kerosene is mixed with gasoil to produce cheap motor fuel.

Price controls on kerosene - a fuel for 'BPL' ('below the poverty line') consumers - have been maintained despite the rise in LPG use, a cleaner fuel that has been actively promoted and subsidised as a better and safer alternative for household use, particularly in rural areas. Kerosene demand indeed peaked in early 1999 at some 260 kb/d, and has steadily decreased to around 190 kb/d over the past decade. LPG consumption, by contrast, has skyrocketed from less than 100 kb/d in the early 1990s to almost 500 kb/d in early 2011.

Against the backdrop of this rising financial burden, the government is mulling a scheme that would entail pricing kerosene and LPG at much higher levels while handing cash payments to eligible consumers. The proposal is currently being debated; a task force is expected to make recommendations by June. If favourable, a pilot project would be launched in the state of Maharashtra by March 2012. Still, a number of key issues will need to be addressed, notably the price at which both fuels should be sold (at or below market levels), how users eligible for support would be identified (means tests, biometrics, etc.), and the amount and administration of the direct handouts (maintaining or reducing the current subsidy, using banks, post-offices or other delivery means) and the respective attributions of central and state governments. It remains to be seen whether current political and inflationary conditions will permit the implementation of such an idea.

Flying High

Another oil product that has featured remarkable growth over the past decade in India is jet fuel. Demand has almost quadrupled to around 110 kb/d, reflecting the surge in domestic air travel as a result of buoyant economic growth. Indian airlines carried 52 million passengers in 2010, 20% more than in 2009. Air travel growth, moreover, is expected to rise by 10-15% per year over the medium-term.

In 2008-2009, however, the industry was severely hit by high oil prices, the global economic recession and the Mumbai terrorist attacks, as passenger traffic plummeted. Low-cost companies, which account for some 70% of total domestic travel, were hit particularly hard, with many forced to cut capacity sharply. Despite a notable recovery since then, given that Indian travellers are highly price sensitive, it remains to be seen whether domestic airlines are now better prepared to withstand the latest, unfolding oil price shock.

Brazil, normally a gasoline exporter, will import several cargoes in April. Given high ethanol prices and a weak sugar harvest, distributors have also exceptionally bought US ethanol. Demand for both gasoline and gasoil was robust in January (+4.9% and +5.3% year-on-year, respectively), although weaker than in 2H10, suggesting that overall demand growth may be slowing. Under a higher price assumption and evidence of increased fiscal and monetary tightening, we have revised down slightly our 2011 prognosis, with total oil demand (-30 kb/d) now seen at 2.8 mb/d (+2.8% year-on-year).



  • Global oil supply fell by 0.7 mb/d to 88.3 mb/d in March, as lower Libyan crude production cut into OPEC output. Year-on-year, global output was 1.5 mb/d higher, with increases of 650 kb/d each for non-OPEC and OPEC NGLs, while OPEC crude was up by 200 kb/d.
  • Non-OPEC oil production rose by 0.2 mb/d to 53.3 mb/d in March due to growing Chinese and Brazilian supply and on recovery at Azerbaijan's Chirag oil field. Political unrest and strikes in Yemen, Oman, Gabon and Ivory Coast shuts in an estimated 0.1 mb/d of crude output in March and April. Non-OPEC supply for 2010 is left unchanged at 52.8 mb/d, while stronger recent Canadian production and the early completion of a key oil sands project lift the forecast by 0.1 mb/d to 53.7 mb/d in 2011.
  • OPEC's March crude production fell a sharp 890 kb/d month-on-month, to 29.2 mb/d, due to the near 70% drop in Libyan output. The loss of Libyan production and the 25-30% jump in oil prices since the crisis began in mid-February has so far drawn a limited response from fellow OPEC members. However, overall supply from the producer group remained above year-ago levels — largely due to higher output from Saudi Arabia since the beginning of the year, as well as smaller increases from the UAE and Kuwait.
  • OPEC's effective spare capacity, which excludes Iraq, Nigeria, Venezuela and Libya, is estimated at 3.91 mb/d, with Saudi Arabia providing just over 80% at 3.2 mb/d, while other Gulf producers Kuwait, Qatar and the UAE combined hold a further 13%.
  • The 'call on OPEC crude and stock change' was reduced by 0.4 mb/d for 1Q11 to 29.8 mb/d on lower demand from Japan and higher non-OPEC supply. For 2011 overall, the 'call' is expected to average 29.8 mb/d, largely unchanged from 2010 but around 0.6 mb/d above March OPEC production.

All world oil supply figures for March discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Peru and Russia are supported by preliminary March 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 production fell by a sharp 890 kb/d month-on-month due to the near 70% drop in Libyan output. March OPEC supply averaged 29.20 mb/d compared with 30.09 mb/d in February. OPEC-11 output, which excludes Iraq, fell by 845 kb/d to 26.51 mb/d. Higher output from Kuwait, the UAE and Angola only partially offset reduced Libyan and Nigerian output.

The Libyan-led steep monthly decline brought volumes down to the lowest levels since May 2010 but overall OPEC supply was still at or above trend 2009/2010 levels—largely due to increased output from Saudi Arabia since the beginning of the year. Current OPEC production at 29.20 mb/d is only about 280 kb/d below 4Q10 levels of 29.48 mb/d.

The now near-total shut-in of Libyan production and 25-30% jump in oil prices has so far drawn a limited response from fellow OPEC members. The producer group continues to dismiss the need for holding an extraordinary meeting to discuss supply levels before the previously scheduled gathering in June, arguing the market has enough oil. In March, the loss of Libyan supplies was partially muted by the cataclysmic earthquake and tsunami that hit Japan early in the month, which temporarily led to reduced crude demand. A number of Middle East cargoes scheduled for delivery to Japan were subsequently made available to other buyers in Asia.

While small increases in output by some OPEC members, including Saudi Arabia, Kuwait and the UAE, allied to a seasonal low in refinery crude runs, helped avert a supply crisis in the short term, by second-half 2011 the demand for OPEC crude is likely to rise again substantially. OECD crude inventories, adjusted for unusually high stocks held in the landlocked US Midcontinent, are now hovering near the bottom of the 5-year range, and are below that comfort zone in the OECD Pacific. A seasonal lull in product demand in 2Q11 is expected to be followed by a 0.9 mb/d rise in the 'call' to 30.1 mb/d by 3Q11. Needless to say, much depends on how events unfold in Libya, but either unofficial output increases or higher output targets will likely be on the agenda ahead of the June meeting.

Disagreement over existing, but largely redundant, output targets potentially makes consensus on increased quotas difficult to achieve. So too does the divisive nature of the momentous unrest sweeping the Middle East and North Africa region. Participation by Qatar and the UAE in the coalition supporting the no-fly zone over Libya has rankled not only officials in Tripoli but other OPEC members, such as Algeria, Iran and Venezuela, who see the NATO-led support of rebels as interference in a sovereign state's affairs. Military support from Saudi Arabia, the UAE and Kuwait for Bahrain in its confrontations with its Shi'ite population last month has drawn sharp criticism from both Iran and Iraq. Add in the fact that OPEC has placed the blame for higher prices squarely on speculative money inflows, and a collective decision to formally raise output targets looks likely to be elusive in June. Most analysts argue that Saudi Arabia, Kuwait, the UAE, Nigeria and Angola--the members which collectively hold the lion's share of spare capacity--will step in and raise production unofficially instead.

Gaddafi Regime's Attack on Eastern Libya Oil Fields May Be Game Changer

Attacks by Colonel Gaddafi's forces on oil producing fields and infrastructure in the rebel-held eastern region in early April has raised the spectre that the country's oil production will be offline indefinitely while the civil war rages on. The emerging stalemate at both the diplomatic level and on the ground between government forces and the rebels also reinforced market expectations that the crisis will be protracted. The attacks came on the heels of the first crude cargo exported by the opposition from Tobruk, but exports have now been suspended until security can be improved.

Libya's output plummeted by an average 935 kb/d to only 450 kb/d in March, but production is now thought to be completely shut-in following three separate attacks by government forces on rebel-controlled oilfields in the eastern region of the country. Previously, only Libya's ports and storage tanks in the oil towns of Es Sider and Ras Lanuf had been damaged during the two-month long conflict. A spokesman for the Gaddafi regime refuted the claims, saying the damage had been inflicted by NATO forces. The opposition group meanwhile said the strikes targeted production in a bid to halt further exports from the eastern region.

The attacks targeted oil infrastructure at the country's largest field, Sarir, in the Sirte Basin, as well as oilfields in the Waha and Messla areas. The three fields were producing around 100 kb/d, down sharply from the 420 kb/d seen before hostilities erupted in late-February. The rebel-controlled Arabian Gulf Oil Co (Agoco) said there was no damage to the Sarir field but that output would remain shut-in until the area could be secured. The extent of the damage to the other fields is not yet known, but Messla fields were thought to have been affected most.

The attacks were likely in retaliation for the opposition's first export of crude to international markets. The rebel-led Transitional National Council appeared to have navigated around the three different sets of sanctions imposed by the UN, EU and the US. It was hoped that crude exports would provide a steady flow of funding for the rebels. The vessel Equator left Tobruk on 6 April carrying around 1.0 mb of Sarir/Messla crude and was believed to be destined for China, though it is still unclear who the buyer was. Qatar, a partner in the coalition with NATO, has offered to market crude exports from the opposition-controlled eastern area but it is not known if they were involved in this first shipment. However, Qatar reportedly has arranged for the sale of two more shipments, which are now put on hold.

The complete production shut-in has temporarily stalled hopes of further exports from rebel-held territories until security can be improved to encompass a much broader area. Damage to storage and other terminal infrastructure can usually be repaired in short order but restarting more complex and aging oil fields and related infrastructure could take many months, depending on the extent of the damage. Agoco, which early on in the conflict formally split off from the government-controlled parent company in Tripoli, said it planned to move forces to the desert region to protect the fields, but it is a vast area to cover with limited resources, and has sparked fears that the Gaddafi regime will employ a scorched-earth strategy similar to the one Saddam Hussein implemented on his retreat from Kuwait.

After ramping up output since the start of the year, supplies from Saudi Arabia in March are assessed unchanged from February at 8.9 mb/d. Saudi production averaged 8.88 mb/d in 1Q11, which is up on average by 310 kb/d from the 8.57 mb/d average in 4Q10. Initial reports in early March suggested that Saudi Aramco would ramp up and hold output at just over 9 mb/d for the month, but the earthquake and tsunami that have devastated northeastern Japan reduced overall demand for the country's crude. A number of cargoes en route to Japan were diverted elsewhere in the region. As a result, Saudi Aramco is thought to have throttled back production in mid-March.

The Kingdom early on in the crisis pledged to make more crude available to the market, but Saudi Aramco saw only tepid demand from refiners for extra barrels due to the quality mismatch with lost Libyan supplies, reduced Japanese needs as well as relatively steep prices set for April liftings. In March, Saudi Aramco largely raised April price formulas for Arab Light for Asia and European customers to some of the highest levels in over two years while marginally lowering prices for the US. Moreover, reduced refinery throughput rates during the seasonal turnaround period muted buying interest for the Kingdom's new crude blends, which were customised to mimic lost supplies of Libyan light, sweet grades. Early on about three cargoes were sold, including one each to BP and ENI, but by late March there was reportedly little incremental interest.

However, Saudi production could edge higher after the company reduced prices for its benchmark Arab Light sales for May to European and Asian customers. In a reversal of last month, prices to the US were increased. In addition, the exceptionally steep rise in prices for light, sweet African crudes has prompted a number of Asian refiners to pick up extra Saudi grades for May.

Fellow Gulf producers Kuwait and the UAE also ramped up output in March by a combined 110 kb/d in a bid to offset lost Libyan supplies. Kuwait increased production by around 70 kb/d to 2.42 mb/d according to tanker tracking data. The UAE formally suspended cuts to contract allocations, which led to a boost in output of 40 kb/d, to 2.52 mb/d.

Iraqi supply in March was down slightly, by 45 kb/d to 2.68 mb/d, despite increased output from the Kurdish region. Northern exports via Ceyhan on the Mediterranean were off by around 20 kb/d to 460 kb/d in March after an explosion and repair work on the Ceyhan pipeline reduced volumes. Production of crude from the Tawke field in the northern Kurdish region reached new heights in March at 65 kb/d and by early April was reportedly pumping 85 kb/d.

Exports of Basrah crude from the south were lower by around 25 kb/d, to 1.69 mb/d, in part due to weather-related loading delays. Production from the new joint-venture projects, which include, Rumaila, Zubair and now West Qurna, is reportedly straining the export infrastructure at the ports in Basrah. Indeed, SOMO has reportedly asked several existing producers to rein in output to make room for the new supplies. Export capacity is expected to be capped at 1.75 mb/d until the end of the year when the new single point moorings are slated to be in place.

Angola's crude production rose by 80 kb/d, to 1.68 mb/d in March. The country's output is expected to fall again in April, however, to below 1.5 mb/d, due to scheduled maintenance and repair work at the 200 kb/d Greater Plutonio complex. The BP-operated field is reportedly completely shutdown for extensive repair to its troublesome water injection system for the month of April. Output from the Total-operated Dalia field is also expected to be reduced this month while maintenance work takes place.

Nigeria's output in March was down 110 kb/d, to around 2.05 mb/d, as a result of scheduled maintenance work. Reduced output from the giant 225 kb/d deepwater Bonga field was partially offset by the return of production after maintenance work from Qua Iboe and several other fields. All told, production in April should rebound by a significant 300 kb/d.

Meanwhile, Nigeria's election cycle got off to a rocky start in early April after ballots failed to arrive at polling stations across the country. Voting was postponed by a week while officials worked to get the elections back on track. Against all odds, the first round for parliament on 9 April (elections take place over three consecutive Saturdays) was considered a success. The presidential elections will take place on 16 April followed by voting for state governors on 23 April. President Goodluck Jonathan is widely expected to win. Fears of a resumption of rebel attacks around polling time have eased after militant group MEND called off planned attacks on oil installations to allow for a "safe election". During the last elections in 2007 around 1.0 mb/d of supply was disrupted.

Venezuelan output was unchanged in March at 2.2 mb/d but supplies look set to fall in April following widespread power blackouts that interrupted the operations of the country's heavy crude oil upgraders. The power shortage also reportedly affected some oil field operations during the first week of April.

Non-OPEC Overview

Non-OPEC oil production rose by 0.2 mb/d to 53.3 mb/d in March, as output recovered from outages at Azerbaijan's Chirag field and on growing supply in China and Brazil. Field maintenance hit UK production, while political unrest and strikes shut in some output in Yemen, Oman, Gabon and Ivory Coast. Total non-OPEC supply was also revised up in March on higher-than-expected US, Canadian and UK output, more than offsetting downward-revised production in the FSU, China, the Middle East and for global biofuels.

Historical adjustments to Sudan and Norway bring some minor upward revisions to 2007-2009 output, while 2010 average production is left unchanged at 52.8 mb/d. The 2011 estimate is again hiked on the basis of strong recent Canadian production, but also on higher assumed UK output (though seasonal maintenance will curb combined UK/Norway oil supply by around 165 kb/d in 2Q11). These upward revisions offset downward adjustments to global biofuels, Africa, Middle East and FSU. Non-OPEC supply for 2011 is now seen 0.1 mb/d higher than last month, at 53.7 mb/d, thus implying slightly stronger annual growth of 0.9 mb/d compared to 0.8 mb/d in last month's report. This follows annual increments of 1.1 mb/d and 0.9 mb/d respectively in 2010 and 2009.

Unrest in Yemen and Ivory Coast (and oil workers' strikes in Oman and Gabon) curbs an estimated 0.1 mb/d in both March and April, and protests are ongoing and strengthening in many countries in the Middle East and North Africa (see MENA Unrest Spreads to Other Non-OPEC Producers). Compared to total production in affected countries of around 3 mb/d, current shut-in volumes are small. Nonetheless, fear of potentially deeper shut-ins has lent additional support to recent price rises.

Drivers of non-OPEC growth in 2011 remain Brazil (+185 kb/d), China (+180 kb/d), global biofuels and Colombia (each +120 kb/d), Ghana (+100 kb/d) and now, following successive upward revisions, Canada (+155 kb/d). Lesser sources of incremental output are Russia, Oman, India and Kazakhstan (each around +50 kb/d). These are partially offset by decline in Indonesia and Malaysia (each -55 kb/d), Yemen (-30 kb/d) and Equatorial Guinea and Sudan (each -20 kb/d). North Sea producers Norway and the UK, while both in decline, are expected to have a relatively good year, with a string of smaller additions serving to slow net decline to only -20 kb/d each.

MENA Unrest Spreads to Other Non-OPEC Producers

While the media spotlight remains mostly on Libya, where international intervention has prevented pro-Gaddafi forces from retaking the rebel-controlled east, and most oil production and exports remain halted, markets have also reacted to spreading unrest in the region. In Yemen, in particular, the political situation is tense, with broad support for anti-regime opposition. It is also so far the only non-OPEC country to suffer from a significant shut-in of oil production - around 40% of the country's 265 kb/d crude output is estimated to be currently offline. With the exception of Oman, most regional producers' oil output is far smaller than in neighbouring OPEC countries, but still adds up to over 3 mb/d in all countries hit by unrest. Thus the risk of additional shortfalls in crude oil supply serves to underpin current high oil price levels.

  • Yemen:  Protests against the long-serving regime of President Salih have spread and intensified. Numerous high-level tribal, military and political leaders have declared their support for the opposition and the violent suppression of demonstrations has left many dead. Under severe pressure, President Salih has declared he will stand down, but not immediately, causing tensions to simmer. A key crude oil pipeline from the Marib producing region to the Red Sea coast was sabotaged in mid-March, leading to the shut-in of 70 kb/d of crude output. Reports of foreign oil companies pulling out staff and some further shut-ins lead to an estimated total 100 kb/d offline during April, assumed partly recovering in May. The Total-operated Yemen LNG facility in the southeast is reportedly functioning normally, but no part of Yemen is free from potential unrest.
  • Bahrain:  Mid-March saw fighting erupt between security forces and protesters in Bahrain. Later the Kingdom requested help from its neighbours in the Gulf Cooperation Council (GCC) and some 1,000 - 2,000 security forces from Saudi Arabia and the UAE moved into Bahrain. Reports of shortfalls in domestic crude production and refinery output were later denied by state oil company BAPCO. We assume crude production - in any case only 30-40 kb/d (in addition to 150 kb/d of crude from the Abu Safah field shared with but pumped by Saudi Arabia) - is unaffected and protests have subsequently been more muted. The main worry regarding Bahrain is of its Sunni/Shi'ite tensions spreading to Saudi Arabia's close-by core producing region.

  • Syria:  With a slight delay to others in the region, Syria has also seen a slow spread of unrest and some violence, though the government has been fast to crack down. Crude oil output of 385 kb/d is so far unaffected.
  • Oman:  Oman has seen little political unrest, with oil wealth and opportunities spread more widely among the small population. But in mid-March, striking oil workers at the government-controlled Petroleum Development Oman (PDO) consortium, the country's largest producer, briefly shut-in some production. We assume a shortfall of -20 kb/d in March.
  • Tunisia and Egypt, the first two countries to see protests and, so far, to see a change in regime, appear relatively calm, focusing on transition. Respective oil production of 85 kb/d and 740 kb/d is unaffected.
  • Gabon:  In Gabon, a strike by the main oil workers' union shut down the country's entire oil production of around 245 kb/d in early April. However, as in previous strikes, the workers' main demands were quickly met and production resumed only days later. April supply is curbed by an estimated 40 kb/d.
  • Ivory Coast:  Heavy fighting erupted in March between supporters of Alassane Ouattara, the widely-recognised winner of recent elections, and those of his predecessor, Laurent Gbagbo, who is clinging on to power. With foreign companies pulling out some expatriates, we have assumed that average recent production of around 40 kb/d has been curtailed by around a quarter in April.
  • Sudan:  Following almost unanimous support in a January referendum, the southern half of Sudan is set to become an independent country in July. But there are reports of sporadic outbursts of fighting both in the south and in the Abyei region, which straddles the border. The country's oil production of 470 kb/d, most of which is located in the south, is so far reportedly unaffected.


North America

US - Alaska March actual, others estimated:  Preliminary data indicate that US oil supply was steady at 7.9 mb/d in March, 0.1 mb/d higher than expected. BP was forced to halt production at its Holstein spar in early March, after an inspection, which takes out an estimated 40 kb/d. In the Gulf of Mexico, business is returning to normal, now that the Bureau of Ocean Management (BOEM) has issued ten permits to drill new deepwater wells and activity is resuming (drilling never stopped completely, as it was not banned in shallow water, nor on already-producing fields). Nonetheless, company guidance on new developments indicates that new fields will be delayed, as implicit in our forecast. We maintain that, as a result, Gulf of Mexico oil production will be around 100 kb/d lower this year compared to previous forecasts.

Meteorologists are forecasting higher-than-average storm activity in the Caribbean this year, with three to five storms turning into major hurricanes. Then again, 2010 saw above-average storm activity overall, but most major storms eventually veered away from oil infrastructure in the US Gulf of Mexico, only causing precautionary shut-ins.

In a major speech on energy on 30 March, President Obama called for a reduction in US oil imports to one-third of their current 9-10 mb/d in the next ten years. This could apparently be achieved by boosting energy efficiency (including fuel use in transport), using more advanced biofuels, using more natural gas and also by producing more domestic crude oil. He hinted that incentives could be put in place to encourage more production in existing producing areas, large tracts of which are leased but not actually actively producing. Proposed Republican legislation calls for more offshore drilling and an opening up of new areas currently off-limits. Total US oil production averaged 7.8 mb/d in 2010 and is forecast to remain steady at this level in 2011.

Canada - Newfoundland February actual, others January actual:  As in past months, recent Canadian production data came in stronger than expected. Despite ongoing shut-ins at CNRL's Horizon oil sands facility, January-March monthly production averaged a steady 3.5 mb/d, following upward revisions to 1Q11 averaging 80 kb/d. This robust performance, coupled with news that Shell's recent expansion of its Athabasca Oil Sands Project would already reach capacity of 100 kb/d in 2Q11, sooner than expected, has resulted in a higher projection. Total Canadian oil production averaged 3.37 mb/d in 2010 and is now expected to rise to an upward-revised 3.52 mb/d in 2011, making it the third-largest source of growth in non-OPEC, behind Brazil and China.

Mexico - February actual:  Mexican oil production dipped by 50 kb/d in February, to 2.94 mb/d, but is expected to pick up again in March. More details are emerging on the three fields that state oil company Pemex is offering for foreign involvement. The three have a combined current oil production of only 12-13 kb/d, which Pemex hopes could be boosted by 40-60 kb/d in the next couple of years. After gaining experience with the so-called 'integrated E&P contracts', which will give financial incentives to foreign oil companies, but will not allow production sharing or reserves booking, Pemex hopes to be able to offer contracts with larger and more difficult fields, including perhaps the onshore Chicontepec and deepwater blocks.

Pemex remains optimistic that it can not only sustain current production levels, but even boost them in the near-term. Despite considerable success at slowing decline over the past year, we remain more pessimistic until we see evidence to the contrary. For instance, Pemex claims it may be able to boost the expected peak capacity of the large Ku-Maloob-Zaap (KMZ) cluster of fields from their current 850 kb/d to as much as 925 kb/d. We have raised our outlook slightly, hiking the 2011 outlook for total Mexican supply by 15 kb/d, but remain cautious before making a larger adjustment. 2010 Mexican oil production averaged 2.95 mb/d, and our projection holds steady at this level in 2011.

North Sea

Norway - January actual, February provisional:  Norway's total oil production in 1Q11 was revised down by an average 60 kb/d, to just under 2.2 mb/d, with problems reported at a string of fields. Historical data have been nudged up by around 10 kb/d on the more comprehensive inclusion of production at the Gimle, Gungne and Rev fields. Though structurally in decline, Norwegian oil production prospects received a boost with news of the huge Skrugard discovery in the Barents Sea. Currently, the only gas (and oil) field producing in the far north is the huge Snohvit project, while the Goliat project is under development. Hugely challenging, the area also received a confidence boost when Norway and Russia recently agreed on a delineation of their common border, after 40 years of talks. Norway's oil production averaged 2.16 mb/d in 2010 and is forecast to dip slightly, to 2.14 mb/d, in 2011.

UK - January actual:  After a substantial upward revision of 170 kb/d to 1Q11, UK production is now expected to average 1.45 mb/d in the quarter, up from a depressed 1.35 mb/d in 4Q10. Oil companies active in the North Sea have objected to an upstream tax hike included in the recently-published budget for the coming year. Statoil said it would review whether it still wanted to sanction two relatively large projects by North Sea standards, the Bressay and Mariner heavy oil fields, projected to have respective output capacities of around 50 kb/d and 80 kb/d. Neither was previously included in our forecast, with a final investment decision pending, and both projects, if realised, may now slip beyond 2015. Their cancellation would be a blow to UK oil production prospects.

However, most analysts (as well as the UK government) consider that the tax hike will still keep the average fiscal burden on operators below that in neighbouring Norwegian and Danish waters, particularly if taking into account upward-revised price outlooks. Tax breaks for marginal, remote and particularly challenging fields also remain in place. Thus the tax increase may not have a material effect on medium-term oil prospects. UK production averaged 1.37 mb/d in 2010 and is forecast to dip to 1.35 mb/d in 2011.

Former Soviet Union (FSU)

Russia - February actual, March provisional:  Russian oil production dipped marginally in March from February, averaging 10.52 mb/d, slightly lower than expected. February data were revised down by 30 kb/d on lower output from Gazprom and on Sakhalin. Lukoil's production disappointed again in March, coming in 15 kb/d lower than anticipated. With year-on-year decline for total company output running at a steady -5% in 1Q11, this weaker performance is carried through the rest of the year, contributing to a minor annual downward revision of -10 kb/d. Russia's total oil production averaged 10.45 mb/d in 2010 and is forecast to rise to 10.50 mb/d in 2011.

BP's proposed tie-up with Rosneft hit a further obstacle when a court confirmed a previous injunction, forcing further arbitration (for background, see BP-Rosneft Deal Opens Up Arctic and Thaws Relations with IOCs? in report dated 10 February 2011). The deal may still go ahead if an agreement can be reached, but Rosneft has indicated it would also consider other partners for its Arctic blocks that BP had hoped to be able to access. In an unusual sign of discord between President Medvedev and Prime Minister Putin, the former ordered a shake-up of board membership of large oil and gas companies, ejecting government officials that also are tasked with overseeing the sector. This could hit powerful Deputy Prime Minister Sechin, a leading figure in Russia's energy sector, and currently chairman of Rosneft's board. Oil Minister Shmatko may leave Transneft and First Deputy Prime Minister Zubkov may give up his seat on Gazprom's board. This has the potential for significant ramifications for Russia's hydrocarbons sector, but the outcome is as yet unclear.

FSU net oil exports fell for the second month running, declining by 120 kb/d to 9.5 mb/d in February. Deliveries of crude fell by a sharp 150 kb/d to 6.5 mb/d in response to a significant 200 kb/d drop in seaborne crude shipments from Black Sea ports. Reports indicate that volumes originally planned for Novorossiysk were diverted northward to the Polish port of Gdansk, where exports more than doubled to approximately 200 kb/d. This factor also helped to maintain Baltic shipments in the face of persistently icy weather and maintenance on the BPS pipeline, which reduced cargoes shipped from Primorsk by 70 kb/d. Flows through the BTC pipeline recovered slightly as production problems in Azerbaijan appear to have been resolved, while deliveries through the Druzhba pipeline outside the FSU also fell by 40 kb/d after the resumption of Russian exports to Belarus. Far East shipments rose by 60 kb/d on increased cargoes from Sakhalin while total ESPO (Chinese spur + Kozmino) volumes were maintained at approximately 600 kb/d.

Exports of total oil products to non-FSU destinations increased by a marginal 40 kb/d to 3.0 mb/d in February, their highest since August 2010 and level with a year ago. Shipments of gasoline and kerosene (included under 'other products') increased by a combined 30 kb/d and gasoil rose by 10 kb/d to offset a 10 kb/d fall in fuel oil. It is likely that the increase in light products at the expense of heavy products is a consequence of the 1 February implementation of the new product export duty price formula aiming to incentivise the production of light products over heavy products (see Russia: Re-drawing the Fiscal Map in report dated 12 November 2010). In February the heavy product duty's discount to crude was reduced from 61% to 53%, while that of light products was increased from 28% to 33%.

With the price of Urals having recently risen rapidly in tandem with benchmark crudes, Urals-linked Russian crude and products export duties have also climbed considerably. Frequently cited as a factor constraining exports, the crude duty has risen by 70% from $249/mt in July 2010 to $424/mt in April 2011. This rapid rise has alarmed producers, with calls intensifying for a change in the tax calculation methodology. Currently the duties are based on a one-month monitoring period with a two-week lag before the new duty comes into effect. It has been suggested that recently the system had not adequately incentivised producers to hike exports and that a movement to a shorter monitoring period would help alleviate risks associated with fluctuations in global oil markets. Since no methodological change is proposed in the short-term, this report views the rising tax burden as a significant factor likely to constrain FSU crude and product exports over the next few months.

Other Non-OPEC

China - February actual:  Chinese oil production fell by nearly 100 kb/d in February month-on-month, to 4.19 mb/d. This is around 45 kb/d lower than expected, with an unidentified shortfall in offshore output. Lower production was partly carried through into March, resulting in a -25 kb/d overall downward adjustment to 1Q11. However, expectations for the remainder of 2011 were hiked by an average 20 kb/d on robust year-on-year performance and evidence of slowing decline rates at key fields. Chinese oil production averaged 4.1 mb/d in 2010, expected to rise to 4.28 mb/d in 2011, the second-largest source of non-OPEC growth behind Brazil.

Indonesia - January actual:  Indonesian oil production is estimated at 935 kb/d in January, down marginally from December, and is seen falling further in February and March, when flooding and work at some Chevron-operated fields in Riau province respectively cut output. Average 1Q11 production is estimated at 915 kb/d. With sustained decline at maturing fields and a string of recent unexpected shutdowns, Indonesia's government is reportedly mulling cutting its production target for 2011 to around 950 kb/d from 970 kb/d. We are more pessimistic after recent performance has regularly undershot government targets. After average output of 975 kb/d in 2010, we project a decline to 920 kb/d in 2011.

Brazil - January actual:  In January, Brazil's total oil supply fell by 60 kb/d to 2.21 mb/d, while preliminary data for February suggest a further dip of 45 kb/d to 2.17 mb/d on field maintenance. Thereafter, production is expected to pick up again, from an estimated 1Q11 average of 2.2 mb/d to 2.4 mb/d in 4Q11 as output ramps up at new fields. Average 2011 production is estimated at 2.32 mb/d, up from 2.14 mb/d in 2010, the single largest non-OPEC increment.

Argentina - February actual:  Oil production in Argentina picked up to 710 kb/d in February, its highest since August 2010. Production was down in December on unrest in the Santa Cruz region. At the time of writing, news reports indicated a workers' strike in the same region was also hitting production, though it was unclear by how much or how long-lasting protests might be. As such, we have not yet factored any adjustment into our forecast. Argentina's total oil production averaged 700 kb/d in 2010 and is expected to rise marginally to 710 kb/d in 2011.

OECD Stocks


  • OECD industry stocks fell by 50.8 mb to 2 676 mb in February, reversing a strong 63.0 mb January build. The monthly decline was driven by sharp product draws due to seasonal refinery turnarounds.
  • OECD stock cover rose to 59.2 days of forward demand in February, up from 59.1 days in January, and stood 2.8 days above the five-year average. The increase was driven by distillates and fuel oil, partly offset by a lower gasoline cover as demand for this product is expected to increase seasonally.
  • Preliminary data for the US and Europe point to an 8.1 mb draw in March, as refinery maintenance cut product stocks. The Petroleum Association of Japan (PAJ) resumed publishing weekly data for the week ending 2 April, but we have not incorporated March stock changes. The PAJ has warned that the data are incomplete and lack continuity with the historical series.
  • Oil held in short-term floating storage rose to 68 mb in March, from 66 mb in February. Crude floating storage declined by 4 mb to 40 mb, while offshore products built by 6 mb to 27 mb, driven by increases in Europe and West Africa.

OECD Inventories at End-February and Revisions to Preliminary Data

Commercial oil inventories in OECD member countries fell by 50.8 mb, to 2 676 mb or 59.2 days, in February. Over the past five years, February inventories have tended to draw by a more modest 25.4 mb as crude builds have partially cushioned falling products. This year, refinery turnarounds in all three OECD regions substantially curtailed stocks in all product categories and reduced the total oil inventory surplus versus the five-year average to 22.9 mb in February, from 48.4 mb in January. However, the middle distillate surplus widened to 37.2 mb, from 32.5 mb in January. Distillates and fuel oil drove the increase in forward demand cover and offset lower gasoline cover.

Comfortable OECD Crude Stocks Cushion - Depends Where You Sit

OECD inventory levels are widely quoted by other market commentators as being 'comfortable', but to fully assess the adequacy of the stocks buffer, it has to be placed in context and needs to account for regional differences and how quickly stocks can be brought to the market. Despite the sharp monthly draw, OECD stocks stood 22.9 mb above the five-year average levels in February. As already mentioned in past reports, the surplus is almost entirely concentrated in US crude oil inventories and in North American and European middle distillates.

The North American crude oil surplus, with stocks 29.5 mb above the five-year average and tied up in the US Midcontinent (PADD 2) following a structural shift in import patterns, is pressuring WTI prices. Temporary measures like rail deliveries or a potential reversal of a pipeline from the US Gulf to Cushing may provide partial relief. However, a significant rebalancing may not come before 2013, when new pipeline capacity from Cushing to the Gulf Coast, if approved, comes online (see Stock Overhang Eases But Remains Concentrated in North America in OMR dated 10 February 2011).

European crude stocks dropped to five-year average levels in February, but crude runs cover hovered around the top of the range. Yet French crude holdings stand out significantly. February inventories were still well below their five-year range following October labour action at ports and storage terminals and had not yet been replenished. Scandinavian stocks fluctuated within the bottom part of the range, offset by healthier cover in Germany, Italy, the Netherlands and Poland. Stocks in remaining European countries oscillated within a narrow band around the five-year average. This may explain why refiners have so far been relatively relaxed in the face of lost Libyan supplies, although a prolonged outage and post-maintenance rise in runs could tighten stocks significantly in the coming months.

Pacific crude stocks widened the deficit to the five-year average to 21.8 mb in February, with Japanese crude holdings dipping below the range. However, regional forward cover rose to average levels, partly due to the structural decline in the refining sector and partly due to lower forecast crude runs in Japan following the earthquake and tsunami in March.

OECD middle distillate stocks stood at 37.2 mb above the five-year average in February, with forward cover 3.1 days higher than average. Diesel stocks account for a lion's share of the overhang in both US and Europe. The US cushion started to build with the onset of the recession, indicating a potentially slower industrial recovery than refiners anticipated. Meanwhile, European diesel inventories have increased in line with the reorientation of yields to meet increasing diesel demand.

February stocks fell sharply, albeit from higher January levels than reported last month. Upon receipt of more complete OECD data, total oil holdings were revised up by a sizeable 32.1 mb, and thus boosted the previously reported 32.0 mb stockbuild to 63.0 mb in January. Both crude and product holdings were revised higher, with European products bearing the brunt of the revisions. Meanwhile, significant revisions came in for German historical data for 2008-2010, with close to a 9% (2.1 mb) upward adjustment to distillate inventories in 2009.

Preliminary US and European data point to an 8.1 mb draw in March, led by refinery-maintenance-induced product declines. Gasoline and distillate stocks dropped by 16.0 mb and 9.5 mb, respectively, while a 13.5 mb build in crude stocks provided a partial offset. We have not incorporated Japanese stock changes into the preliminary OECD data, despite the Petroleum Association of Japan (PAJ) resumed publishing weekly estimates for the week ending 2 April, just four weeks after a strong earthquake and tsunami on 11 March seriously affected refining and infrastructure in northeastern Japan. PAJ has warned that the dataset is incomplete and there is no continuity in the series.

Oil in short-term floating storage rose slightly in March to 68 mb, from an upwardly revised February level of 66 mb. Revisions included an additional Iranian tanker in the Middle East Gulf, and another VLCC anchored off the Northwest European coast. Both vessels have now reportedly offloaded their cargoes. Product floating storage rose by 6 mb to 27 mb, driven by additions in the Mediterranean, Northwest Europe and West Africa. Product offloading in the US Gulf provided partial offset.

Analysis of Recent OECD Industry Stock Changes

OECD North America

Industry oil inventories in North America declined by 25.1 mb to 1 312 mb in February. Sharp product draws led the decrease, while crude builds provided partial offset. Mexican crude oil inventories rebounded back to above-average levels following a surprising counter-seasonal January drop. Exports in February were constrained, as bad weather closed major ports on both the Atlantic and Pacific coasts. Meanwhile, US oil stocks fell by a hefty 29.2 mb, as refinery turnarounds peaked in February.

March US industry inventories fell by a modest 5.1 mb, according to US weekly data. The draw was driven by less steep declines in product stocks compared with February, as refinery runs started to ramp up post-maintenance in March. Yet crude oil stocks built by 9.9 mb and stocks held in Cushing, Oklahoma, rose to 41.9 mb, another record level.

Meanwhile, product inventories dropped by 18.2 mb, driven by the second consecutive monthly gasoline draw. Middle distillates fell by 3.5 mb, while a small increase in 'other products' provided partial offset. Gasoline stocks declined by 14.9 mb despite elevated imports, as indicated by stronger freight rates on the route from Europe (see Freight). The ramp-up in crude runs following February turnarounds and an increase in distillate production at the expense of gasoline contributed to the decline. However, January trade data indicate that a portion of gasoline was exported to Mexico and elsewhere in Latin America and this trend likely continued in both February and March.

OECD Europe

Commercial oil inventories in Europe declined by 9.4 mb to 988 mb in February. The loss of Libyan crude oil supplies seems to account for only part of this fall. Among OECD members with the largest relative import dependence on Libyan crude, inventory data indicate sharp builds in Italy and Spain, but signal a decline in Austria, France and Portugal. Preliminary data indicated that crude oil stocks in Italy, the country sourcing almost 25% of its imported crude in 2010 from Libya, rose by 3.7 mb, yet more complete data received just before this report went to press suggest instead a potential decline. Crude oil holdings decreased in Poland as lower deliveries via the Druzhba pipeline at the start of refinery turnarounds constrained imports.

As a result of planned refinery maintenance, European product stocks declined by 6.8 mb in February, with the largest draws in fuel oil, gasoline and middle distillates. Fuel oil inventories fell further below the five-year range, as higher exports to Asia curtailed stocks by 3.0 mb. Gasoline stocks dropped by 2.0 mb and continued tracking the bottom of the five-year range. Middle distillates remained in  surplus with stocks declining 1.6 mb, slightly less than the seasonal norm. German end-user heating oil stocks stood at 50% of capacity in February, marginally lower from 52% in January.

Preliminary March data from Euroilstock point to a 2.9 mb draw in the EU-15 and Norway. Crude stocks rose by 3.7 mb, while products declined by 6.6 mb, led by distillates. Meanwhile, refined oil products held in independent storage in Northwest Europe rose in March, driven by gains in fuel oil holdings.

OECD Pacific

Industry oil Inventories in the Pacific fell by 16.3 mb, to 375 mb in February. Stronger-than-seasonal crude oil draws in Japan and Korea brought stocks lower by 9.3 mb, while product inventories fell by 6.0 mb, led by declines in 'other products' and middle distillates. Pacific crude oil holdings dropped well below five-year average levels in February, yet forward cover rose to average levels.

The Petroleum Association of Japan (PAJ) resumed publishing weekly data for the week ending 2 April, just four weeks after the earthquake and tsunami that hit northeastern Japan. Due to considerable reporting difficulties for many companies, PAJ has acknowledged both a three week gap in series and a lack of comparability between available March and April data. Yet, industry stocks are expected to decline after the Japanese authorities relaxed stockholding obligations on industry by an equivalent of 66 mb to relieve the product supply situation (see Untangling Emergency Stocks in Japan). In addition, the ministry has allowed a release of some 0.5 mb of LPG from the government stockpile in the affected region, to be replenished from industry stockpiles elsewhere.

Untangling Emergency Stocks in Japan

In an attempt to facilitate the distribution of oil products to the regions affected by the earthquake and tsunami, Japanese authorities relaxed the industry's total stock-holding obligation by 25 days (10.5 million kilolitres, 66 mb). The first reduction came within days of the disaster, the second (equivalent to 22 days) followed a week later. As a result, Japanese industry emergency stocks obligations were temporarily lowered from 70 to 45 days. However, the normal 70-days obligation mentioned in the press following the announcement was often confused with a 90 days of net imports requirement for IEA member countries. The basis for the different methodologies is explained below.

  • Each IEA member country, which is a net importer of oil, has an obligation to hold oil stocks equivalent to at least 90 days of net imports. A country meets this commitment by stocks held exclusively for emergency purposes (e.g. government-owned or agency-held emergency reserves and mandatory industry stocks) and stocks held for commercial use (industry stocks, including stocks held at refineries, at ports and on moored vessels). The calculation is based on average daily net imports of the previous calendar year for total oil, including crude oil, NGLs and refined products, but excluding naphtha for petrochemical use and international marine bunker fuels. At the same time, stock holdings are adjusted 10% lower to account for technically unavailable stocks (such as tank bottoms). On this basis, as of end-December 2010, Japan held stocks equivalent to 169 days of net imports, of which 75 days were held by industry.
  • Japan's emergency reserves comprise both public stocks (managed by JOGMEC) and mandatory industry stocks. Industry has a national obligation to maintain at least 70 days of stocks proportional to the volume of imports, production and sales for each company. The government bases the 'days' calculation on a 12-month rolling average of domestic consumption, including naphtha consumed in the petrochemical sector. In addition, no deduction is made to account for technically unavailable stocks. Following the earthquake and the tsunami, Japanese authorities first relaxed the stockholding obligation on industry by 3 days and later by a further 22 days, lowering the total mandatory stocks to be held by industry to 45 days.

Commentators have also reported on 'days of forward demand cover'. This is a measure that facilitates comparison of prevailing inventory levels with expected demand for the coming three months. Forward cover can obviously vary depending not only on stocks but also on seasonal demand patterns. Japan held industry stocks at 61.2 days of forward demand in February, while government stocks covered 77.6 days of forward demand.

More information about reporting methodologies and IEA emergency measures can be found on the following websites:

  • IEA Days of Net Imports: www.iea.org/netimports.asp
  • IEA emergency response measures are described in Oil Supply Security (2007), available at the IEA online bookshop: www.iea.org/w/bookshop/add.aspx?id=322
  • Japanese Stockpiling Program at the website of Japan Oil, Gas and Metals National Corporation: www.jogmec.go.jp/english/activities/stockpiling_oil/index.html
  • Japans' Oil Stockpiling Act (Act No. 96 of 1975) translated into English at www.japaneselawtranslation.go.jp/law/detail/?id=65&vm=04&re=02&new=1
  • Days of Forward Demand in Oil Market Report User's Guide and Glossary: omrpublic.iea.org/glossary_sec.asp?G_FLOW=Stocks

Recent Developments in China and Singapore Stocks

According to China Oil, Gas and Petrochemicals (China OGP), Chinese commercial oil inventories rose by an equivalent of 15.8 mb (data are reported in terms of percentage stock change), to approximately 361 mb in February. Strong refinery runs reduced crude oil stocks by 2% (4.1 mb). Meanwhile, product inventories rose by approximately 19.9 mb, driven by a 28% (19.1 mb) rise in gasoil. Gasoline and kerosene gained 1.2% each (0.7 mb and 0.2 mb, respectively).

Singapore onshore inventories grew by 0.4 mb in March, led by a sharp build in light distillates. Gasoline and other light distillates rose towards the end of the month on arrivals of cargoes from Asian countries. Offsetting draws came from fuel oil and middle distillates as imports dropped. Fuel oil arrivals from the West were deferred to the beginning of April, while a portion of middle distillates supplies will be lost for some time, as Japan, which exported around 100 kb/d of gasoil in 2010, bought supplies directly from Korea and China to make up for domestic refinery outages.



  • Oil prices shot up to 36-month highs in recent weeks, with benchmark Brent flirting near $126/bbl and US WTI trading around $112/bbl by early April. Refiners and traders have been confronted with the demand impact from Japan's cataclysmic earthquake and tsunami and the near total shut-in of Libya's 1.2 mb/d crude exports, while keeping an eye on the political unrest gripping other key Middle East and North African countries.
  • Spot crude oil prices jumped 10-15% in March amid mounting unrest in the Middle East and North Africa (MENA) region and despite a seasonal drop in global refinery runs. So far, while individual producers have offered limited extra volumes, aggregate OPEC production outside of Libya has yet to fill the gap left by the North African producer's absence. As expected, prices for lighter, distillate-rich crudes eclipsed gains for heavier crudes by a wide margin due to the loss of light, sweet Libyan barrels from the market in March.
  • Refining margins remained weak in March as gains in crude prices far outpaced gains in refined products. In the Mediterranean, simple refineries were struggling, with Urals hydroskimming margins showing losses in excess of $5/bbl since last autumn. In the US, Gulf Coast margins mostly improved, although cracking margins are showing losses at levels generally not seen since summer 2008. In Singapore margins diverged, with Dubai hydrocracking margins showing profits of $3.50/bbl in the last week in March while Tapis hydroskimming posted losses of nearly $9/bbl, an historical low.
  • Crude oil tanker rates fell on all benchmark trades in March, but divergent trends were reported. In the East, the swollen tanker fleet diluted any potentially bullish impacts from the Japanese earthquake on the tanker market.

Market Overview

Whiplashed oil markets saw oil prices shoot up to 36-month highs in recent weeks, with benchmark Brent flirting near $126/bbl and US WTI trading around $112/bbl by early April. Refiners and traders are gingerly navigating the demand impact from Japan's cataclysmic earthquake and tsunami and the near total shut-in of Libya's 1.2 mb/d crude exports in recent weeks, while keeping another eye on the political unrest gripping key Middle East and North African countries.

The rapid escalation in political risks in the key MENA region and strengthening fundamentals have emerged as solid pillars of current market strength, with oil analysts near-unanimous in revising upward their price forecasts for the rest of the year. In addition to substantial physical supply losses from Libya, oil traders are closely tracking spreading unrest in non-OPEC countries in the MENA region for potential production disruptions.  Yemen, where the political situation is increasingly tense, is so far the only non-OPEC country to suffer from a significant shut-in of oil production - around 40% of the country's 265 kb/d crude output is estimated to be currently offline. Most regional producers' oil output is far smaller than in neighbouring OPEC countries, but still adds up to over 3 mb/d in all countries hit by unrest (see MENA Unrest Spreads to Other Non-OPEC Producers).

Meanwhile, as expected, the loss of Libya's light, low-sulphur crude has led to a sharp widening of the sweet/sour price spreads in March and early April. In Asia, the price differential for light, sweet Malaysian Tapis versus Dubai in early April nearly doubled from February levels, to around $14.45/bbl on average compared with about $7.50/bbl in February. The steep premium has prompted some European and Asian refiners to start shunning the pricier lighter barrels due to exceptionally poor margins. Refiners are either extending turnaround periods or cutting run rates. In addition, some refiners are now able to replace the lighter grades and run a more varied, heavier crude slate as more complex units come back on line after maintenance turnaround. Most do not see a problem securing supplies for April/May but are still worried about the June period when more refiners come back on line.

Futures prices for benchmark Brent were up by about $10.65/bbl on average in March to around $114.65/bbl. WTI posted stronger gains of $13.25/bbl to just under $103/bbl. Prices have ebbed and flowed in recent weeks, depending in part on the latest battle reports between government forces and rebels along the Libyan coastline. Meanwhile, trading volumes surged, with open interest in NYMEX WTI futures contracts at record levels in mid-March.

However, the back end of the futures curve has failed to keep pace with the rapid run-up in prompt prices, which has led to a flattening of the forward curve. The WTI M1-M12 narrowed to just -$1.85/bbl in March compared with around -$9.75/bbl in February. By the week ended 8 April, the price difference had come in further, to -$0.75/bbl on average for the week ending 1 April.

Prices for Brent have already posted a near 30% jump so far this year, from a low of about $93.50/bbl in early January to a high of $126.65/bbl by 8 April. That said, the sharp rise in oil prices may already be sowing the seeds of future demand destruction according to preliminary first-quarter demand data (see Demand).

Financial factors and negative economic indicators are also currently weighing on markets. China's decision to raise interest rates by 25 basis points for the fourth time in just seven months has sparked market worries about demand growth in the world's largest economic engine. Meanwhile, financially troubled European countries are also proving worrisome, with Portugal the latest to require a major bailout.

Futures Markets

Open interest in WTI futures contracts reached yet another record high in mid-March before declining at end-month. Open interest decreased in March in both futures-only and futures and futures-equivalent options (thereafter combined) to 1.52 million and 2.88 million contracts, respectively. Producers decreased their net short position during the month of March; holding 27.9% of the short and 13.0% of the long contracts in WTI futures-only contracts. Swap dealers, who accounted for 30.2% and 35% of the open interest on the long side and short side, respectively, remained net short.

Although managed money traders' net long exposure decreased by 2.6% in March to 261 759 futures contracts, their bullish bets on crude oil remained close to an all-time high. The market share of managed money traders has risen from 29.8% to 30.8% on the long side and from 12.7% to 13.6% on the short side. Other non-commercials, who accounted for 19.2% of open interest on the long side and 19.6% on the short side, reversed their net long exposure to net short in March. Meanwhile, open interest increased slightly in the NYMEX RBOB futures and combined markets. In March, open interest in NYMEX heating oil increased by 2.1% to 306 903 contracts while open interest in natural gas markets declined by close to 11.1% to 873 477 contracts.

Index investors continued to increase their long exposure in commodities in February 2011 to a record high of $322.7 billion. They added another US$4 billion to the WTI Light Sweet Crude Oil contract in February 2011, which rose to an all time high of 673 000 futures equivalent contracts, or $66.2 billion in notional value.

Volatility: How to Measure It

Prices for oil, like those of many other commodities, are inherently volatile. In recent years, the oil market has been characterised by rising, and at times, rapidly fluctuating, price levels. In the last six months alone, crude oil prices have fluctuated in a wide range from $75/bbl to $125/bbl.

The concept of volatility may itself at times be confused simply with rising prices; however, volatility can equally result in prices that are significantly lower than historical average levels. Volatility is the term used in finance for the day-to-day, week-to-week, month-to-month or year-to-year variation in asset or commodity prices. It measures how much a price changes either about its constant long-term level, or about a long-term trend. That is to say, volatility measures variability, or dispersion about a central tendency. In this respect, it is important to note that volatility does not measure the direction of price changes; rather it measures dispersion of prices from the mean. It is also very common to refer to returns' volatility when we talk about volatility of a commodity price.

The apparent increased volatility of oil prices raises questions about the determinants of volatility in oil markets. Since oil is considered to have highly inelastic supply and demand curves at least in the short run, neither supply nor demand initially responds much to price changes. Therefore, any shock to supply or demand will lead to large changes in oil prices. The dissemination of new information related to fundamentals results in price adjustment as market participants evaluate the implications of this information. It is further argued that emergence of a new class of financial traders has transformed the oil market substantially to a more volatile market. However, most research shows that the increase in financial participations in the oil market can be explained by the rise in volatility, not the other way around.

Two other caveats are perhaps worth mentioning: Firstly, it can be observed that during the so-called 'golden age' of lower prices in the 1990s, volatility as measured by absolute mean returns was at times markedly higher than in recent years, even allowing for an almost unprecedented economic recession. Secondly, the drivers of market volatility can be very different when comparing the short term and medium to longer term.  For the latter, cyclical macroeconomic factors, more than supply/demand shocks, are a key driver.

There are various ways to measure volatility. However, we can split volatility models into two parts: historical volatility and implied volatility. Historical volatility models use time series of past market prices while implied volatility uses traded option prices. Therefore, we can say that historical volatility is backward looking while implied volatility is a forward looking measure of volatility.

Historical Volatility

Historical volatility looks at past behaviour of price movement and measures the variation in the price. One such measure is the standard deviation. Standard deviation (s) is computed from a set of historical data as

where R is the return calculated as the natural log of daily price changes in the price of the underlying asset and is the mean return during the lookback period. The choice of price and lookback period gives rise to different estimations of volatility. In general, close-to-close prices are used but some prefer to use open-to-close prices to calculate return. The lookback period also has important implications for volatility. The historical average method uses all historical data available. The moving average method, on the other hand, discards some older observations. The exponentially weighted moving average method uses only more recent observations.

However all techniques have shortcomings. The historical average methodology gives equal weight to all observations regardless of relevance today. Although the moving average estimation technique provides some information on the evolution of volatility, it suffers from assigning an equal weight to all observations in the estimation window and zero weight to older observations. It also raises the issue of window-length determination. On the one hand, if the window is too narrow, one runs the risk of ignoring important observations in the data by giving zero weight to these observations. On the other hand, if the window is too wide, old observations will be given weight even though they may not be relevant to the analysis. To overcome these problems, exponential smoothing techniques assign declining weights to older observations based on a smoothing parameter without any prior determination on the amount of past data to be used in the analysis. One drawback of this second approach is that the user must adopt an ad hoc approach to choose the smoothing parameter.

Apart from standard deviation-based volatility, researchers also use model-free daily squared return and absolute return as a proxy for daily volatility. Range-based volatility estimation, calculated using market daily high and low prices, is another methodology adopted to calculate volatility. Although it is very easy to calculate, it is also very sensitive to outliers.

The empirical observation that volatility is not constant over time and that it has memory has led to more sophisticated time series models, known as ARCH/GARCH models. These models capture volatility persistence, time-varying mean as well as the non-constant nature of volatility. ARCH/GARCH type models do not make use of unconditional variance; rather they estimate conditional variance. Since conditional variance at time t is known at time t-1 by construction, it provides one-step ahead forecast. However, the inability of latent volatility models like ARCH/GARCH to describe satisfactorily several stylised facts that are observed in financial markets has led to realised volatility models, where volatility is estimated using high frequency intra-daily data. Realised volatility is calculated using squared returns at short intervals (either time or tick). However, realised volatility measures constructed with high frequency data can be biased by market microstructure noise. Therefore, recent research has focused on minimising the microstructure noise inherent in these models.

Implied Volatility

As opposed to historical volatility measures, implied volatility does not depend on historical prices. Instead, it depends on a particular model of the relationship between price and volatility. A simple option-pricing model, such as Black-Scholes, will give a theoretical price for an option as a function of implicit parameters, such as the strike price, risk free interest rate, time to maturity, spot price, dividend and volatility. With the exception of volatility, all other parameters are either given or can be observed. However, we also observe option prices in the market place. The implied volatility of an option is the volatility for which the Black-Scholes (or any other particular model) price equals the market price. That is to say, there is a one-to-one correspondence between prices and implied volatility. Implied volatilities are used to gauge a market's expectation about future volatility. Therefore, implied volatilities are forward looking as opposed to historical volatilities.

Accurate measures of volatility are important for understanding the functioning of markets. Estimated volatilities vary based on methodology, time period chosen and time horizon (intra-daily, daily, weekly, monthly, or annual). The upcoming Medium-Term Oil and Gas Markets report in June will provide in-depth analysis of observed volatility in the oil market during the last decade.

Spot Crude Oil Prices

International spot crude oil markets in March jumped 10-15% over February levels amid mounting unrest in the MENA region and despite a seasonal drop in global refinery runs. In line with the loss of Libya's light, low-sulphur crude, prices for middle distillate-rich crudes far outpaced gains for heavier grades. The price spread for light, sweet Malaysian Tapis versus heavier, sour Dubai jumped to around $14.45/bbl on average in the first week of April compared with $11.79/bbl in March and about $7.50/bbl in February. The absence of Libyan crude from the market in March also lent considerable support to benchmark North Sea Brent, up by $10.84/bbl on the month, to $114.60/bbl.

By contrast, Middle East marker Dubai was up a more limited $8.47/bbl to 108.71/bbl as demand for heavier, sour crudes waned due to the worsening fuel oil crack spread in most major markets. There was also ample supply of Middle East grades on offer, given sharply lower refinery runs in March, which were down on a global basis by 1.7 mb/d below February levels.

Spot prices for benchmark WTI posted the largest monthly increase, up a steep $13.42/bbl to $102.99/bbl on average in March, in part due to relatively low crude oil stocks in the key US Gulf Coast refining centre and despite swelling stocks in the US midcontinent. Crude oil stocks at the Cushing, Oklahoma storage terminals rose to record levels in March and continue to inflate surplus stock estimates for the US, and indeed, the global inventory picture (see Comfortable OECD Crude Stocks Cushion - Depends Where You Sit). The WTI-Brent price spread eased to -$11.61/bbl on average in March compared to -$14.19/bbl in February was widening again, to -$13.80/bbl in early April.

The market for lighter, sweeter crudes remained robust in March as refiners replaced lost Libyan crude but, by early April, prices for some grades were deemed too high for European refiners, who are opting to extend maintenance work or throttle back run rates rather than pay a widening premium for crudes such as Azeri Light, Nigerian Qua Iboe and Algerian Saharan Blend.

A buying frenzy for Azeri Light in mid-March, one of the most sought after grades to replace Libya's light, low-sulphur crudes, saw its differential to Dated Brent balloon to a premium of $4.45/bbl in early April compared to the monthly average of around $3.70/bbl in March and $2.45/bbl in February.

US refiners coming out of turnaround are also pushing premiums for sought-after light grades ahead of the summer driving season. Algerian Saharan Blend is especially sought after by US refiners for peak gasoline production. US refinery maintenance peaked in February. Crude runs already rose by 450 kb/d in March over February lows to average 14.3 mb/d. US crude runs normally rise seasonally through July.

In Asia, moderately higher crude output from some OPEC producers, and reduced demand from Japanese refiners, are capping price rises for sour Middle Eastern crudes. The Dubai/Brent swap narrowed on expectations of weaker demand for Mideast grades amid refinery turnarounds in March. However, steep price premiums for African grades prompted some buyers, including Chinese refiners, to switch to cheaper, Dubai price-related, Mideast crudes. Chinese refiners also shied away from pricier Russian ESPO crude last month. Spot prices for regional light crudes, however, posted the strongest gains, with Malaysian Tapis up by a staggering $12.75/bbl, to an average $120.50/bbl in March.

Japanese refiners are lifting extra barrels of heavy-sweet crude for direct burn at power plants to offset the loss of nuclear generation. Crude burning plants typically use Minas, Duri and Vietnamese Bach Ho. But March barrels sold out quickly and April cargoes are hard to find, so Japanese refiners looked for other regional crudes such as Vietnamese Sutu. Japanese demand for low-sulphur fuel oil for electricity utilities has buoyed prices for Australian heavy sweet Pyrenees, Vincent and Van Gogh crudes. China and South Korea have also been buying heavy, sweet Australian crudes to produce low-sulphur fuel oil.

Spot Product Prices

Spot prices for middle distillates managed to keep pace with the rapid rise in crude oil markets during March, largely spurred on by sharply lower refinery output during the seasonal turnaround period, and in spite of healthy OECD stock levels. As a result, March refined product crack spreads for gasoil, diesel and kerosene strengthened in Europe and Singapore. The loss of Libya's distillate-rich light, sweet crude also helped buoy crack spreads in Europe and Asia. By contrast, fuel oil cracks were down in all major markets on ample supply, and despite the demand pull deriving from extra Asian demand.

In Northwest Europe, gasoil and diesel differentials to Brent rose by around $2/bbl, to $14.30/bbl and $17.32/bbl, respectively. In the Mediterranean, the rise in gasoil crack spreads to Russian Urals averaged $1.67/bbl to $16.78/bbl while diesel posted a much stronger increase of $2.38/bbl to $21.37/bbl. Europe looked to the US to source diesel supplies since imports from Asia were down due to stronger regional needs.

In Asia, reduced refinery throughput rates following the loss of Japanese refining capacity supported gasoil crack spreads, with differentials for Dubai crude up by around $4.50/bbl to a strong $21.71/bbl in March. Since January, gasoil cracks have gained more than $6/bbl on more robust demand and lower stock levels.

A jump in diesel demand is expected following the shutdown of nearly 20% of Japan's nuclear power capacity and continued shut down of three refineries in the wake of the devastating earthquake and tsunami. Asian markets are expected to be supported in the months ahead on Japanese reconstruction demand. Japan is normally an exporter of diesel/gasoil, with net exports averaging 200 kb/d in 2010.

In the US Gulf Coast, diesel cracks rose on both stronger demand from the domestic market as well as export demand into Europe and Latin America. In Latin America, strong demand from Chile, Peru and Colombia also supported cracks. Chile has increased diesel imports due to a severe drought, which has cut output of hydroelectric generation. Despite increased LNG imports, utilities are increasingly turning to diesel for power generation. Imports in March/April may be higher than the previous peak of 100 kb/d reached in 2008, when a drought combined with reduced imports of natural gas from Argentina. Chile normally produces 85 kb/d of 50 ppm diesel leaving import requirements of 75 kb/d.

Meanwhile, US refiners are preparing for peak summer demand, with the seasonal shift from production of winter grade to summer grade gasoline well underway. US gasoline cracks have been supported by increased demand from neighbouring Mexico, Brazil and Canada. In the Gulf Coast, unleaded gasoline differentials to Mars nearly doubled, to $9.40/bbl in March versus $5.10/bbl in February.

Refining Margins

Refining margins remained weak in March, although improved in Northwest Europe and the US Gulf. Urals cracking margins in Northwest Europe rose throughout the month, reaching a comfortable profit of above $4.50/bbl in the last week of March, in contrast to Urals hydroskimming margins, which, although improving month-on-month, were at a near three-year low. Also in the Mediterranean simple refineries were struggling; Urals hydroskimming margins have been showing losses in excess of $5/bbl since last autumn.

In the US, Gulf Coast margins mostly improved, although cracking margins are showing losses at levels

not seen since spring 2008. In Asia, Singapore margins diverged, with Dubai hydrocracking margins

showing profits of $3.50/bbl last week in March and Tapis hydroskimming showing a loss of nearly

$9/bbl, a historic low.

In Northwest Europe March margins moved higher on both strong middle distillates cracks and improving gasoline cracks, especially in the latter half of the month. Brent margins were also supported by a narrow low-sulphur fuel oil discount as supplies were tight due to both the ongoing maintenance season and run cuts due to poor margins. On the other hand, high-sulphur fuel oil discounts widened over the month, pressuring Ural margins. By early April though European margins all fell, as product cracks weakened due to stronger crude prices.

In the US, weaker gasoline cracks pressured Gulf Coast margins in the first half of the month as the demand for winter grade gasoline fell and refineries returned from maintenance. However, refining margins strengthened towards month-end as gasoline cracks improved with the shift to summer grade gasoline, less imports from Europe due to ongoing turnarounds as well as large stock draws as refiners exported winter-grade gasoline to Latin America. Middle distillates cracks were strong throughout March due to robust Latin American demand, also providing support to margins. However, by early April margins dropped again as crude prices increased rapidly with product prices following at a slower pace. On the West Coast, refining margins mostly fell month-on-month as an increasing fuel oil discount weighed.

In Singapore, refineries using Tapis as feedstock suffered further losses in March due to the high premiums for the light, sweet crude in spite of strong product prices for middle distillates. Dubai margins fared better, taking advantage of cheaper crude and hence stronger product cracks. Chinese margins mostly fell, pressured by a weak low-sulphur waxy residue crack.

End-User Product Prices in March

End-user prices for selected IEA countries continued their four-month upward rally during March. Gasoline prices rose on average by 10.5% month-on-month (m-o-m) and by 31% year-on-year (y-o-y). Diesel was up 8.8% m-o-m and 40.2% y-o-y. With respect to the remaining surveyed products, heating oil and low-sulphur fuel oil (LSFO) experienced price hikes of 9.8% and 11.8% m-o-m, respectively. On a yearly basis, heating oil rose by 40.2% and LSFO by 35.6%

Germany saw the strongest increase of gasoline prices up by 20% and the US the strongest diesel price hike of 10.3%. In Spain, gasoline and diesel prices saw the smallest increments among the survey countries, up by 6.6% and 7% respectively. The m-o-m change in gasoline and diesel prices, when measured in Euro, subtracts around 3.0% from the dollar-based price hike. Prices for heating oil remained high in all countries, but Canada reported a 15% hike m-o-m and almost 40% y-o-y. In Japan prices for gasoline and diesel rose by 12% and 10%, while heating oil only rose by 6.8%, below the IEA average.


Crude oil tanker rates fell on all benchmark trades in March, but divergent trends were reported across the routes. In the East, the swollen tanker fleet diluted any potentially bullish impacts from the Japanese earthquake on the tanker market. After initial fears firstly of profiteering and secondly of increased premiums concerning exposure to radioactivity, the benchmark VLCC Middle East Gulf - Japan route has remained soft. While the rate peaked at $16/mt in mid-March, rates soon retreated due to slack fundamentals. After breaching the $20/mt level in mid-March for the first time since May 2010, rates on the Suezmax West Africa - US Atlantic Coast trade plummeted in response to falling demand, so that by early-April rates were once again below $16/mt.

In the Aframax sector, initial fears that the severe curtailment of Libyan exports would cause cross-Mediterranean rates to crash proved largely unfounded. Although rates have retreated by 50% since their early-March peak of $11/mt, they have remained stable since mid-March, holding at slightly above pre-conflict levels. In Northwest Europe, after initially firming, rates on the North Sea - North West Europe trade declined but were prevented from falling further by knock-on effects from events in the Baltic. Rates for trades from the Baltic Sea port of Primorsk rocketed in March following persistent icy weather in the Gulf of Finland. Primorsk has only admitted ice-class tankers since late December 2010 and recently ice-breakers have been required to assist tankers calling at the port. Consequently, suitable tonnage has tightened as ice-related delays have lengthened voyages, with Baltic - UK rates climbing to five-year highs of $23/mt in late-March.

In contrast to crude tankers, all benchmark product tanker rates rose over the month. Buoyed by a high PADD 1 import requirement stemming from high refinery maintenance, and lucrative distillate backhauls, rates on the transatlantic gasoline trade between the UK and US Atlantic Coast had reached $29.50/mt by early-April, their highest level since September 2008. The US Atlantic Coast's thirst for imports was also underlined by rocketing rates on trades bringing products from the Caribbean into the region. By early-April rates approached $20/mt, again their highest level since September 2008. In the east, product tanker rates firmed but not to the startling degree noted in the west. Rates on the Middle East Gulf - Japan route crept up over the month to approximately $25/mt by month-end. Despite reduced naphtha imports in the wake of the Japanese earthquake, the Singapore - Japan trade initially softened but then recovered to stand $1/mt above early-month levels at close to $16/mt.

After a 5.9 mb build in products offset a 4.2 draw in crude, the short-term floating storage of crude and products increased marginally to 67.7 mb (+1.7 mb) at end-March. Crude fell to 40.3 mb from its upwardly revised, end-February level of 44.5 mb. Iranian storage located either in the Red Sea or Middle East Gulf fell by 2.1 mb to 30.1 mb, while a sole VLCC previously storing crude off Northwest Europe discharged. Product builds in West Africa (+3.2 mb), Northwest Europe (+2.2 mb) and the Mediterranean (+1.2 mb) offset the discharging (-0.7 mb) of all products held in the US Gulf. Considering these dynamics, by end-March the storage fleet had expanded for the third consecutive month to 55 vessels, its highest since end-September 2010, as seven new LR2 or smaller clean vessels entered the fleet offsetting two VLCCs which left the fleet in March.



  • Global crude run estimates have been revised down by close to 270 kb/d for 2Q11, in large part due to the earthquake and tsunami that hit Japan on 11 March. Offsetting factors, in Japan and elsewhere, are expected to mitigate the impact of the loss of about 600 kb/d of capacity into the second quarter. In all, global runs are now seen averaging 74.5 mb/d in 2Q11, down from 74.6 mb/d in 1Q11.
  • 1Q11 global crude throughputs are largely unchanged since last month's report, at 74.6 mb/d. Higher rates in February for a number of countries, including India, Singapore and Russia, offset lower Japanese throughputs from the second half of March. Annual growth in the quarter is seen above 2.0 mb/d, falling to 0.8 mb/d in 2Q11.
  • OECD refinery activity slowed in February, in line with higher maintenance shutdowns. Total OECD crude runs averaged 36.2 mb/d, some 650 kb/d lower than in January. The monthly decline was almost entirely accounted for by the US, which saw spring turnarounds peak. OECD runs are thought to have fallen further in March, despite a rebound in North American activity. The disaster which hit Japan mid-March severely curtailed runs there. European runs are also expected to have fallen in March on peak maintenance and weak margins.

Global Refinery Throughput

Global refinery throughput estimates for 1Q11 are largely unchanged since last month's report at 74.6 mb/d. Higher-than-expected runs in February for a number of countries were offset by slightly lower January submissions and downwardly revised March estimates. February readings for India, Russia, Singapore and a few European countries were all stronger than expected, lifting global runs to 75.0 mb/d. This still represents a steep decline from January of some 640 kb/d, mostly accounted for by maintenance shutdowns in the US. March estimates were severely curtailed as a result of the earthquake and tsunami that hit Japan on 11 March, taking out almost a third of the country's refining capacity.

While close to 600 kb/d of capacity remains shut in Japan, we have lowered our global crude run forecast by only 270 kb/d on average for 2Q11. Spare capacity at other refiners in Japan is expected to partially offset shutdowns. High gasoil cracks resulting from the tightening supply situation are expected to support runs in coming months, and complex refiners elsewhere in the region will likely increase runs where possible. Some refiners, notably in India, already announced they will postpone scheduled maintenance from April/May until later in the year. Scheduled and unscheduled outages in Asia and the Middle East are nevertheless putting a cap on runs, suggesting regional product tightness ahead.

The outlook for Europe seems less clear-cut. The disruption to Libyan crude supplies has pushed light sweet crude prices sharply higher, outpacing increases in refined products, and deteriorating margins for most European refiners. The impact of the production shortfall has been somewhat muted by heavy maintenance and seasonally low runs in the region. Turnarounds are thought to have peaked in March, however, although there is some evidence of companies prolonging shutdowns due to poor economics. It is still difficult to determine whether we will see margins and runs remain weak through the summer, a repeat of last year when runs rose by more than 1 mb/d from May to June as refiners ramped up simultaneously, or rather a more traditional ramp-up in activity from March-lows through August.

OECD Refinery Throughput

OECD refinery activity slowed in February, to average 36.2 mb/d, 650 kb/d lower than in January and just 380 kb/d above a year earlier. The monthly decline was almost entirely accounted for by the US, which saw spring turnarounds peak. OECD runs are thought to have fallen further in March, despite higher North American runs. Preliminary weekly data show US runs up 450 kb/d on average from February, as maintenance on the US Gulf Coast slowed.

Pacific refinery runs were severely curtailed by the earthquake and tsunami that hit Japan on 11 March, taking out almost a third of the country's refining capacity. While three of the six plants that were closed restarted relatively quickly, the remaining three could remain closed until at least this summer. Spare capacity elsewhere in Japan and the region is expected to partly make up the shortfall, though a further tightening of already strong distillate markets is likely. Complex refiners elsewhere in Asia are profiting from the disruptions, and some are increasing run rates or even delaying maintenance to later in the year. European runs are also expected to have fallen in March, not only due to heavy maintenance but also to weak margins.

1Q11 North American refinery crude run estimates are unchanged since last month's report, averaging 17.1 mb/d. After a seasonal dip of some 1.1 mb/d since December's high by February, regional runs rebounded in March to 17.2 mb/d. Spring maintenance peaked in February this year, at an estimated 2.0 mb/d for the region as a whole. Runs are expected to continue to increase over the next four months as maintenance winds down and refiners step up production to meet peak summer driving demand. Our forecast for 2Q11 is also largely unchanged, at 17.9 mb/d.

US refinery crude throughputs rose in March, to average 14.3 mb/d, 110 kb/d more than our previous estimate. Runs were 450 kb/d above February, with the sharpest gains seen on the Gulf Coast. Refiners there were already coming out of maintenance, and ramping up runs to replenish depleted product inventories. More than 1.0 mb/d of capacity was reportedly shut on the Gulf Coast alone in February. Notable turnaround programmes include Valero's Port Arthur refineries, Citgo's Corpus Christie and Lake Charles plants, BP's Texas City and Lyondell's Houston refinery. Shutdowns were expected to have receded to 0.7 mb/d in March, before refiners ramp up runs sharply in April ahead of the summer gasoline season. The latest weekly data confirm that this is already happening, and Gulf Coast crude oil inputs were 7.5 mb/d in the week ending 1 April, 920 kb/d higher than the low-point reached in mid-February.

Midwest refiners scaled back runs slightly in March, but sustained the highest operating rates around 87% for the month on average. Refiners in the region continue to enjoy healthy profit margins due to depressed prices for WTI and related grades. In early April, WTI was trading at more than $13.00/bbl discount to Brent, leaving healthy margins. Crack spreads have sharply improved for refiners able to process discounted crudes. The New York Harbor gasoline crack (WTI) for instance was $30.00/bbl in early April, compared to $15.00/bbl at the same time last year.

As a result of the crude overhang at Cushing, and resulting steep crude discounts, refiners with access to 'cheap' feedstocks are investing in new capacity. Tesoro is planning to expand capacity at its North Dakota Mandan refinery, from 58 kb/d to 68 kb/d within a year. Valero is planning to raise CDU capacity at its McKee refinery in North Texas by 25 kb/d to 195 kb/d over the next three years.

US East Coast runs remain depressed as maintenance and poor economics cut operating rates. East Coast refiners are generally not able to take advantage of discounted US crude prices, as they normally import crude delivered by tankers from Nigeria, Angola and the North Sea, priced off Brent. Interestingly, the US' largest refiner, Valero, which disposed of two refineries on the East Coast during 2010 (Delaware and Paulsboro), signed a deal recently to acquire Chevron's 210 kb/d Pembroke refinery in the UK. The move allows Valero to establish itself in the European downstream markets and to supply the US North East gasoline markets with products from across the Atlantic.

Also in the UK, Indian private refiner Essar finally signed the deal to take over Shell's 295 kb/d Stanlow refinery. The move will give the company access to European fuels markets, providing it an outlet for clean products exported from its Vadinar refinery on the Indian west coast.

OECD Europe's refinery runs were 90 kb/d higher than forecast for February, at 12.4 mb/d, while monthly data submissions confirmed January runs at 12.5 mb/d. Even though no data are available for March yet, maintenance schedules suggest that runs declined in that month, potentially by as much as 355 kb/d. Refining margins, both in Northwest Europe and in the Mediterranean, deteriorated further in February as crude price gains following the Libyan crisis surpassed those of refined products, thus providing little incentive for refiners to step up production. As lower runs started to squeeze product supplies through March, however, margins improved somewhat, but remain low on a historical basis. Utilisation rates upon the completion of turnarounds from May onwards will be telling in evaluating the likely health of the sector in months to come, but much will depend on regional demand.

The near-complete halt to Libyan crude exports is having the most severe impact on European refiners. OECD Europe imported about 1.1 mb/d of Libyan crude in 2010, 70% of the country's total production. Refiners are reportedly not so far having any significant difficulties sourcing replacement crudes, but have to do so at a steep premium, as competition is pushing prices for comparable light-sweet grades higher. The impact of the lost supplies has so far been muted by the fact that European spring turnarounds hit a seasonal peak in March, reducing regional crude demand. Less maintenance is expected from April onwards, as well as a shift in focus from the Mediterranean to Northwest Europe, likely further increasing competition for comparable feedstocks.

The Libyan crisis is affecting European refinery operations also more indirectly. Libyan-owned Tamoil shut its 70 kb/d Collombey refinery in Switzerland for early maintenance at the end of March, because of poor margins and uncertainty over international sanctions against Libyan companies. Both BP and Shell stopped dealing with the company due to the sanctions and concerns over payment. The closure of the company's Cremona refinery in Italy was also brought forward due to the civil war. The refinery, which has a nameplate capacity of around 90 kb/d, was scheduled to be converted to an oil terminal by the end of this year. In France, Petroplus announced in early April its 85 kb/d Reichstett refinery will process its last crude oil this month, before being permanently shut on 30 June 2011.

Greek refinery runs are expected to be lower in April as Hellenic Petroleum's three refineries, (Aspropyrgos, Elefsis and Thessaloniki) and progressively shut down due to a strike that is set last 10 days, until 13 April. The three refineries have a combined capacity of about 300 kb/d.

OECD Pacific refinery operations were severely curtailed in March as the earthquake and tsunami that hit Japan on 11 March took out a large portion of the country's refining capacity (see Excess Capacity Comes to the Rescue - but Stalls Rationalisation Plans, below). Surplus refining capacity elsewhere in Japan, and potentially lower maintenance than usual for this time of the year (Japan usually reduces runs significantly from March to June) will likely limit the impact of the refinery closures. We expect neighbouring South Korea to also increase runs where possible to cover regional product shortfalls. Indeed, South Korean refiners announced plans to increase the export of refined products to Japan in the immediate aftermath of the disaster, and even lift some crude oil originally destined for Japan to help absorb any crude surplus resulting from the closure of Japanese capacity. In all, we have revised our Pacific crude run estimates down by only 240 kb/d for 2Q11.

Excess Capacity Comes to the Rescue - but Stalls Rationalisation Plans

As noted in last month's report, six out of Japan's 27 refineries were shut in the immediate aftermath of the 11 March earthquake and tsunami. The six refineries represented nearly 1.4 mb/d of crude distillation capacity, or 31% of the country total. Within 10 days, however, three out of six plants had restarted, leaving around 600 kb/d of capacity shut. The refineries that remain closed are Cosmo's Chiba refinery and JX Nippon Energy's Kashima and Sendai plants.

While it is still too early to evaluate the full extent of the damage to these plants, we assume for now that all three will remain shut at least until July. The president of Cosmo Oil said 1 April that the company is unable to estimate when it will restart the 220 kb/d Chiba refinery, as it still has to complete investigations into the cause of the fire that broke out in the LPG storage tanks at the site. The fire was extinguished on 21 March. JX Energy, meanwhile, has announced that it plans to restart its 250 kb/d Kashima refinery in the summer of 2011 and its 145 kb/d Sendai refinery in the summer of 2012.

However, we do not expect crude runs to fall short by the full extent of lost capacity over the coming months, as others stand to make up part of the shortfall. We calculate that crude runs in March could have fallen to 3.1 mb/d on average, from 3.8 mb/d in February, as runs rebounded quickly from the near-2.5 mb/d low in the week following the disaster. Indeed, according to the latest weekly data from the

Petroleum Association of Japan (PAJ), which acknowledged the reporting difficulties and the preliminary nature of the numbers, Japanese crude runs were 3.38 mb/d in the week ending 2 April. Understandably, no data are available for the three prior weeks.

Because Japan has been suffering from structurally declining oil demand for some time, the country also has significant surplus refining capacity. Efforts have been made to shed some of this excess capacity in order to improve the competitiveness of the industry, and Japanese refiners had already announced plans to cut over 0.8 mb/d of the country's 4.8 mb/d capacity. Temporarily, however, industry restructuring is being reconsidered to help fill the current gap in product supplies.

JX Energy has reversed rationalisation plans to help alleviate product shortages. The company restarted a 50 kb/d CDU at its Mizushima refinery, originally part of the company's programme to shut 600 kb/d by the end of March 2014. Cosmo announced it has increased capacity at its Yokkaichi and Sakaide facilities by a combined 80 kb/d. Moreover, refiners across the country, not damaged by the earthquake, have reportedly raised run rates. Showa Shell has announced it remains committed to mothballing a 120 kb/d crude unit at its 185 kb/d Keihin refinery by September despite the supply disruptions.

Furthermore, Japanese runs were set to decline seasonally from March to June, due to maintenance, possibly leaving some additional capacity available to ramp up runs. In the last five years, Japanese runs fell by 0.7 mb/d from March to June on average. We assume that the seasonal maintenance downturn will be moderated this year, as refiners likely will defer turnarounds where possible. 

Non-OECD Refinery Throughput

Non-OECD refinery runs were higher than expected in February, on account of India, Singapore and Russia. At an average 38.8 mb/d, total non-OECD runs were flat from a month earlier. Runs likely dipped in March, however, due to higher maintenance estimates for a number of countries as well as unscheduled outages. In all, 1Q11 estimates are largely unchanged from last month's report, at 38.4 mb/d, a sizeable 1.7 mb/d above 1Q10.

2Q11 crude throughputs have been revised lower by 70 kb/d since last month's report, on lower estimates for Latin America and the Middle East. Should refiners postpone maintenance to take advantage of current supply shortfalls resulting from the disaster in Japan, non-OECD runs could be higher than we show here. This is especially true for Asian and Middle Eastern refiners. We have so far only factored this in where announcements of higher throughputs have been made.

No new Chinese data on refinery operations have been released since last month's report, when both January and February data were made available after the New Year's celebrations ended. February runs were reported at a record high of 9.2 mb/d, some 0.8 mb/d above a year earlier. Runs are expected to have come off recent highs in March as some maintenance got underway and profitability was worsening. China's largest export refinery, the 200 kb/d WEPEC refinery in Dalian, was completely shut in March while undertaking a 40-day turnaround.

China announced in early April an increase retail gasoline and diesel prices of roughly 5% to ensure refiners produce enough to meet demand. The price rise is the third so far this year and falls short of the $22/bbl-$32/bbl increase seen in international crude prices since the beginning of the year (WTI/Brent). PetroChina nevertheless announced it would raise operating rates at its plants to 98.5% utilisation in April, implying a 15.1% annual increase.

Indian crude runs fell by 100 kb/d in February, to 4.1 mb/d, though were still 80 kb/d higher than our previous forecast. Runs were mainly reduced by maintenance at Reliance's Jamnagar refinery. The shutdown of the plant's gasoline-making FCC unit severely cut product exports in the month, with these reportedly down to just over 0.8 mb/d, from 1.1 mb/d in January. Concerns about regional supply of gasoil and ensuing high premia resulting from the Japanese disruptions led both state-owned and private Indian refiners to consider deferring maintenance plans from the second quarter to later in the year. Notably, Essar, which had planned a full shutdown of its 300 kb/d Vadinar refinery for 45 days in May/June, postponed this to September/October. The company has announced the timing of the first-phase expansion of the refinery, to 360 kb/d, would not be affected. Ramp-up of the new units are still expected from the third quarter. BPCL's 120 kb/d Bina plant will start commercial operations in 2Q11, and we expect runs to ramp up starting in April. The 180 kb/d greenfield Bathinda refinery is also set to be commissioned during the second quarter. The company reportedly received the first cargo of Saudi crude on 31 March, to be shipped through the 1000 km pipeline from the Mundra port to refinery. We assume operations to start in July.

In Indonesia, a fire and subsequent earthquake damaged Pertamina's 350 kb/d Cilacap refinery in early April, shutting two crude distillation units with a combined capacity of 280 kb/d. The units were shut as a precautionary measure due to a fire at nearby fuel tanks. The fire was successfully put out on 6 April, 5 days after breaking out, but it could still take some time before a restart is possible. A fatal accident at ExxonMobil's Jurong refinery in Singapore forced the company to briefly interrupt maintenance work scheduled to last for nine weeks from 9 March onwards. We had previously not included this shutdown and have thus lowered our Singapore outlook for the March-May period.

Middle Eastern refinery runs are estimated to have fallen by 250 kb/d in February, to 5.9 mb/d on average. Refinery maintenance in Saudi Arabia, where the 235 kb/d Yanbu refinery was taken offline for 39 days, was partly responsible. Regional runs are seen remaining at reduced levels until June before picking up sharply, as several other large plants shut for work. Also in Saudi Arabia, the 400 kb/d PetroRabigh refinery, a joint venture between state-owned Saudi Aramco and Japan's Sumitomo Chemical, is reportedly to shut from late April to the end of May. A 150 kb/d CDU at the Kingdom's Jubail refinery was also believed shut for 45 days from February. The planned closure of the ageing 190 kb/d Shuaiba refinery in Kuwait for work from April is expected to further reduce regional production.

Bahrain's only refinery, the 260 kb/d Sitra plant, was running at reduced rates in March. According to the oil minister, however, the lower runs were due to the shutdown of a 70 kb/d CDU for maintenance (from 16 February), already factored into our forecast, and not to the uprising. All exports of refined products were halted, however, as port employees stayed away during the turmoil.

Little information is available on the current situation surrounding Libya's refining sector and product supplies. The country has five refineries, with a combined capacity of close to 380 kb/d, and recent data suggest operating rates close to capacity just prior to the uprising in the country. We assume that the country's largest refinery in Ras Lanuf (220 kb/d) remains shut, since staff were evacuated at the end of February. The 120 kb/d Assawiya refinery (in Zawiya, west of Tripoli) and the three smaller plants could still be operating, but potentially at reduced rates due to lower crude supplies. According to the head of state National Oil Corp. (NOC), the Zawiya refinery is being supplied by crude from the still-producing El Sharara and Wafa fields in the southwest. The refinery shutdowns could be long-lasting, seriously impeding oil product supplies. Although product imports have all but halted since the turmoil started, one 145 kb shipment of gasoline was reportedly imported into Zawiya in early April, helping to alleviate oil product shortages. That said, it is still very difficult to get confirmation on any reports out of the country.

OECD Yields

January OECD yields increased for naphtha, jet fuel/kerosene and fuel oil at the expense of gasoline and gasoil/diesel. OECD gross output fell 1.2 mb/d from December, of which nearly all was in OECD North America, due to the start-up of the turnaround season in the US.

OECD gasoline yields fell 0.62 percentage points (pp), dragged down by a decrease of 2.2 pp in OECD Pacific. However, gasoline yields increased in OECD North America and Europe, which partly offset the decrease as refiners in both these regions profited from stronger gasoline cracks.

OECD gasoil/diesel yields fell 0.47 pp, also mainly as a result of reduced gasoil/diesel yields in the OECD Pacific. In OECD North America gasoil/diesel yields fell for the first time since July 2010, but yields are still 2.4 pp above levels seen a year ago.

Jet fuel/kerosene yields increased in January, in line with seasonal patterns, but also due to the strong jet fuel/kerosene cracks seen in January. Naphtha yields increased in both OECD North America and Pacific, and remained unchanged from December in Europe, on strong naphtha margins at the beginning of the month.