Oil Market Report: 12 May 2011

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  • After gaining $7-8/bbl in April, prices for benchmark Brent and WTI plummeted more than $16/bbl over the course of the week ended 6 May, to $109.13 and $97.18/bbl, respectively, during a broad commodity rout. Prices have since partially recovered their losses, with Brent trading at $115/bbl and WTI at $101/bbl at press time.
  • Forecast global oil product demand growth for 2011 is trimmed on persistent high prices and weaker IMF GDP projections for advanced economies. Global demand, which averaged 87.9 mb/d in 2010 (+3.3% or +2.8 mb/d year-on-year), is projected to reach 89.2 mb/d in 2011 (+1.5% or 1.3 mb/d versus the previous year).
  • Global oil supply dipped by 50 kb/d to 87.5 mb/d in April, with combined OPEC crude and NGL supply lower by 0.26 mb/d, while non-OPEC production rose by 0.2 mb/d. Baseline data changes to non-OPEC raised average 2010 supply by 0.1 mb/d to 52.9 mb/d, while 2011 estimates are adjusted down 0.1 mb/d to 53.7 mb/d, implying annual growth of +0.8 mb/d.
  • OPEC supply continued its downward trend in April, with Libyan supply shuttered in the wake of the worsening civil war. April OPEC output was pegged at 28.75 mb/d, off by 235 kb/d from March and 1.3 mb/d below January levels. The 'call on OPEC crude and stock change' rises by 800 kb/d from an average of 29.3 mb/d in 2Q11 to 30.1 mb/d in 3Q11.
  • OECD industry stocks declined by 9.2 mb, to 2 643 mb or 58.8 days cover in March, as seasonal refinery maintenance substantially reduced product stocks. Preliminary April data indicate a 29.9 mb increase in commercial OECD inventories, while oil held in short-term floating storage fell.
  • Global refinery crude runs estimates have been revised down by 740 kb/d for 2Q11, mainly due to significantly lower April OECD runs in North America and Europe. Global throughputs are seen averaging 73.8 mb/d in 2Q11, down from 74.2 mb/d in 1Q11, but stand to increase by more than 3.5 mb/d by August from April's low point.

Stepping up to the plate

Crude prices surged again in April (undermining already weak refining margins), but saw an abrupt correction on 5 May as benchmark grades lost around 9% in a single day, and by 6 May both Brent and WTI were off by over $16/bbl from end-April highs. A faltering economic recovery, stronger dollar and speculative commodity sell-off were variously cited as underpinning the correction. True, renewed concerns about the economic impact of high prices and shaky economic statistics from the US, China and Germany may have contributed to a degree of profit taking, but as the dust settles, prices have again begun to creep higher. Fundamentals don't look very different today than they did on 4 May. The market bull run may have legs for a while longer.

Yet our own estimates for global oil demand show a marked slow-down, with preliminary March data suggesting near zero annual growth for the first time since summer 2009. While March estimates are probably distorted by exceptional events in Japan and the timing of Easter holidays, nonetheless $4/gallon (€0.73/litre) gasoline is likely to yield an anaemic US driving season. This is the main change to our demand forecast - a weaker 2011 profile in North America. Meanwhile, governments in Russia, Brazil and China face difficulties fully passing on recent price rises to consumers, helping to sustain robust demand growth in the non-OECD countries. Potential power supply problems in China might augment that trend.

After all is said and done, demand growth still averages 1.3 mb/d for 2011, after an estimated 2.8 mb/d in 2010. The base case rests on GDP growth easing from +4.8% in 2010 to +4.3% in 2011, with the pace of slow-down being greatest for the OECD. Our crude price assumption is near $110/bbl, which the IMF and others see as not so high as to choke off economic recovery….just yet. $100-plus prices have only been with us since February/March, and it takes time for economic impacts to become entrenched. For those who feel nervous about such a sanguine attitude, were GDP growth nearer 2.9% in 2011 instead of 4.3%, global oil demand might come in around 0.5 mb/d less. As we noted last month, persistently high prices at this stage of the economic cycle may ultimately sow the seeds of their own destruction. Until then, the market confronts fundamentals that still look likely to tighten in 2H11.

OPEC Ministers will meet in four weeks' time in Vienna. Most analysts see a change in prevailing production allocations unlikely. To date, OPEC crude production remains around 1.3 mb/d below where it was before the Libyan crisis broke. Political and military stalemate there lead us to assume Libyan supply will remain absent from the market for the rest of 2011. Production from Yemen too is now significantly curtailed by political unrest. Our projections suppress the pace of recovery in potential OECD refinery throughputs to reflect recent weak margins and stubbornly low recent run rates. But new downstream capacity in the non-OECD is likely to ensure a 3Q11 pick-up. Global crude runs habitually rise by around 1.6 mb/d between 2Q and 3Q, with this year increases potentially amounting to a stronger 2.3 mb/d. Less than half of that can be met via higher non-OPEC supply. Some OPEC members might be happy with the OECD inventory profile that unchanged production on their part would bring about (see above). But it's unlikely to result in the market stability both producers and consumers profess to seek.



  • Forecast global oil product demand growth for 2011 is trimmed to 1.3 mb/d on persistent high prices and weaker IMF projections for advanced economies. Global oil demand, which averaged 87.9 mb/d in 2010 (+3.3% or +2.8 mb/d year-on-year and 40 kb/d below our last report), is expected to reach 89.2 mb/d in 2011 (+1.5% and 190 kb/d less when compared to earlier projections).

  • Projected OECD oil demand growth for 2011 is revised down by 210 kb/d to -230 kb/d. Total OECD demand, largely unchanged at 46.1 mb/d in 2010 (+1.2% or +0.6 mb/d year-on-year), is now projected to decline to 45.9 mb/d in 2011 (-0.5% versus the previous year). This is largely due to slightly weaker prospects for North America, where high oil prices may have finally begun to dent oil demand.
  • Forecast non-OECD oil demand growth for 2011 remains largely unchanged. However, absolute non-OECD demand levels have been revised down by 60 kb/d on average over 2009-2010, following the submission of 2009 data by a number of countries, but hiked slightly for 2011 (+20 kb/d) on stronger-than-expected readings in Asia, Latin America and the Middle East. Total demand is now estimated at 39.5 mb/d, 41.8 mb/d and 43.3 mb/d in 2009, 2010 and 2011, respectively, with yearly growth now assessed at +1.7% (+640 kb/d), +5.7% (+2.3 mb/d) and +3.6% (+1.5 mb/d).

Global Overview

This report includes the most recent IMF economic forecasts (World Economic Outlook, April 2011). Overall, the outlook is largely unchanged from the Fund's January update, reflecting growing confidence that the recovery has become self-sustaining, albeit unequal - with emerging countries growing almost three times as fast as advanced economies. Still, OECD prospects have been revised down slightly to account for Japan's earthquake and for high commodity prices, identified as a key source of risk, together with stubborn global current account imbalances and asset bubbles in large emerging economies. It should also be noted that the downward revision to Africa's expected GDP growth stem from the consequences of political and social unrest in several large countries, notably Egypt and Libya.

This month's issue also includes baseline revisions across all non-OECD regions, as most countries have submitted their official estimates for 2009 oil demand and, in some cases, revised previous years as well. Overall, total non-OECD demand has been trimmed by 70 kb/d in 2009, with this adjustment largely carried forward through to 2010 and 2011.

This relatively small adjustment, though, hides regional differences. The largest revisions tend to occur in countries where data reporting and quality issues have often been raised - a recurrent concern that will become more acute given the increasingly central role that the non-OECD will play in terms of global oil demand growth in the years ahead. Indeed, estimated demand in the Middle East was raised by 280 kb/d on higher-than-expected data for Iran, Kuwait, Oman and Syria, but curbed by 530 kb/d in Asia on weaker estimates for China, India and Taiwan.

In terms of global oil demand growth, the revisions have been minimal for 2009 and 2010 (+50 kb/d and -40 kb/d, respectively). This report tracks 60 countries on a monthly basis, representing 88% of total demand; the rest - mostly small non-OECD countries - are estimated based on our econometric model. By contrast, 2011 growth has been curbed by 190 kb/d (on top of baseline adjustments) to 1.3 mb/d, entirely due to a now-weaker outlook for the OECD.

The most recent data - albeit preliminary - provide further evidence of an emerging pattern that we highlighted last month. Persistent high prices - which have risen by approximately 50% since last September, notwithstanding the recent correction - may have finally begun to dent oil demand, particularly in the world's most price-sensitive areas. Indeed, total OECD demand contracted by 2.8% year-on-year in March, for the first time since February 2010 - a significant fall, only matched in 2008 (a year of skyrocketing prices) and 2009 (stricken by recession). Meanwhile, total non-OECD demand growth has slowed in consecutive months from December (+8.0%) to March (+4.0%). Overall, global oil demand grew by only 0.4% (or +330 kb/d) in March - about a tenth of 2010 total growth, now estimated at +2.8 mb/d.

A combined impact from slowing economic recovery and high oil prices on OECD oil demand was largely to be expected, despite uncertainty about the timing. However, a greater question mark pertains to the resilience of non-OECD demand, despite being largely shielded by price subsidies and controls. Energy-driven inflationary pressures are gradually becoming politically unbearable in many countries. Several have moved to tighten fiscal and monetary policy - following the lead of many large OECD economies with the exception of the US - or to impede oil product exports in a last-ditch attempt to keep domestic markets sufficiently supplied at prices below international levels, as in China and Russia. It is not inconceivable, therefore, that non-OECD economic growth may slow down as a result, and that global oil demand growth in 2011 - already expected to be less than 50% of that posted in 2010 - may turn out to be even weaker than estimated here.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 2.8% year-on-year in March, with all regions bar the Pacific declining. Demand plummeted by 4.1% in OECD Europe, with weaker deliveries of heating oil, diesel, gasoline and 'other products'. In OECD North America (which includes US Territories), demand fell by 2.9%, largely on depressed gasoline deliveries. In OECD Pacific, higher direct crude burn following Japan's nuclear emergency marginally offset losses in most other product categories.

Downward revisions to February preliminary data were significant (-370 kb/d) and mostly driven by LPG, naphtha and distillates. This shaved total OECD demand growth to only 0.6% year-on-year during that month, compared with the more buoyant preliminary estimates (+1.4%). Moreover, the revisions for North America - related to most product categories in the US - were particularly steep, only marginally offset by upward adjustments in Europe and the Pacific.

Total OECD oil product demand remains broadly unchanged at 46.1 mb/d in 2010, although growth has been slightly cut (+1.2% or +560 kb/d year-on-year) following upward adjustments to Turkish demand in 2009 (+120 kb/d) as a result of a reappraisal of product imports. The prognosis for 2011, by contrast, has been trimmed by 210 kb/d to 45.9 mb/d (-0.5% or -230 kb/d versus the previous year), largely on slightly weaker prospects for North America.

North America

Preliminary data show oil product demand in North America (including US territories) falling by 2.9% year-on-year in March, following a 0.4% increase in February. Several factors - a large downward revision to US demand in February, weak March preliminary data, a higher oil price assumption and reduced expectations for economic growth - have led us to cut expectations for regional demand growth in 2011. While weather effects may have weighed upon February consumption, persistently high oil prices - despite of the correction that occurred in early May- will likely induce moderate year-on-year declines through the remainder of the year. Total North American oil demand in 2011 is now seen falling to 23.7 mb/d (-0.8% or -190 kb/d year-on-year and 220 kb/d lower than our last report).

February revisions resulted in demand 470 kb/d lower than previously projected, led by reductions in other gasoil (-130 kb/d), LPG (-115 kb/d) and gasoline (-70 kb/d). Unadjusted weekly-to-monthly revisions in the US were particularly large (-760 kb/d); downward changes to unadjusted preliminary gasoline demand have been the most pronounced of late, averaging -275 kb/d over the past three months.

Adjusted preliminary weekly data for the United States (excluding territories) indicate that inland deliveries - a proxy of oil product demand - declined by 1.8% year-on-year in April, following a 3.6% fall in March. Gasoline declined by an estimated 3.1%, leading the overall fall. Still, diesel and jet fuel/kerosene consumption posted gains of 3.8% and 3.3%, respectively. Diesel demand has appeared less responsive to recent oil price hikes, with manufacturing and freight indicators continuing to point to year-on-year growth. Notably, road freight tonnage grew by 6.1% year-on-year in March, while intermodal rail traffic rose by 9.0% in April, suggesting a still-strong expansion in industrial activity.

Looming Lacklustre Gasoline Demand?

The relentless rise in US gasoline prices since March, to almost $4/gallon in early May (up by roughly 40% year-on-year), has re-launched the seasonal debate on whether the upcoming summer driving season will be forceful or anaemic. As much as 2010 gasoline usage surprised on the upside (see 'No Reverse Gear Yet: US Gasoline Demand Plods Ahead' in OMR dated 10 December 2010), we believe gasoline demand will indeed disappoint this year - rising seasonally but nonetheless declining on a yearly basis if retail prices remain at current levels.

The precise demand impact of high prices remains hotly contested given the time lags associated with transport and demand indicators. Some, such as vehicle-miles travelled (VMT) and monthly consumption data, come with a 2-3 month lag. Others, notably preliminary figures for product supplied, offer fresher observations (currently through end-April). However, such data are volatile and often unreliable for any given week. Moreover, actual 2010 gasoline demand will not be finalised until July, when EIA annual revisions are due to be published.

Bullish observers argue that the downside to gasoline demand will be limited, noting that VMTs grew by a respectable 0.9% year-on-year in February despite already high retail prices. If anything, both VMTs and gasoline demand would have been higher if weather conditions had been normal. Furthermore, the continued economic recovery, rising employment levels and still-weak new vehicle sales (which entail slower efficiency gains) are also likely to support gasoline demand. Finally, consumer tolerance for high prices has presumably risen since the last price shock in 2008 - the threshold for demand suppression, according to this view, may have shifted above $4/gallon in nominal terms.

Nonetheless, recent weekly demand data, when examined on a monthly average basis and taking into account the pattern of revisions versus consolidated monthly figures, point to emerging demand weakness. Indeed, weekly-to-monthly revisions over the past 12 months indicate that gasoline demand has been persistently overstated by preliminary data, which tend to count exports as domestic deliveries. Adjusting for past revisions, we estimate that US gasoline demand fell by 2.0% year-on-year on average in both March and April. At $3.70/gallon in April (expressed in real 2008 dollars), retail prices are now well in the $3-4/gallon threshold that typically triggers a fall in VMTs.

Admittedly, higher prices have not been accompanied by a severe economic recession, as in 2008, when the summer driving season virtually evaporated. Nevertheless, some reduction in discretionary driving relative to 2010 is likely to occur, particularly given the still fragile nature of the economic recovery. For example, anecdotal evidence points to increased internet shopping, partly shifting demand from gasoline to freight-related diesel, which is more price inelastic. Altogether, we expect US50 gasoline demand to average 8.9 mb/d in 2011, down by 1.5% (-140 kb/d) year-on-year - with demand from April to September declining by 2.0% versus the same period in the previous year. Diesel demand for 2011, meanwhile, is projected at 3.4 mb/d (+2.2% or +70 kb/d versus 2010).

In Mexico, oil demand fell for the fourth consecutive month in March (-2.6% year-on-year). Jet fuel/kerosene demand remained weak (-3.4%), though it appears to be overcoming the bankruptcy of air carrier Mexicana. Moreover, residual fuel oil posted its first year-on-year gain (+2.7%) since June 2010. Still, although consumers are partly shielded from high gasoline prices, demand has weakened (-2.0%), while diesel growth (+4.0%) has moderated from its high January/February rates (+9.4% on average).


Preliminary inland data indicate that oil product demand growth in Europe plummeted by 4.1% year-on-year in March, on the back of weak deliveries of heating oil, compounded by falling demand for diesel, gasoline and 'other products'. The large contraction in heating oil demand was probably due to a combination of factors - warmer temperatures than last year (although HDDs were slightly higher than the ten-year average), cheaper alternative sources for heating purposes (such as natural gas) and delays in consumer tank refilling owing to prevailing high prices. The decline in transportation fuels is likely reflective of high retail prices - now well above the peaks reached in 2008 - although growth may have been distorted by the Easter holiday, celebrated this year at end-April, rather than in March.

Revisions to preliminary February demand data were negligible (+10 kb/d), with stronger-than expected readings for 'other products', heating oil and residual fuel oil offsetting weaker deliveries of naphtha, jet fuel/kerosene and diesel. Total oil product demand in OECD Europe remains largely unchanged at 14.4 mb/d in 2010, but the annual change (-1.3% or -180 kb/d compared with the previous year) has been curbed further given upward adjustments to 2009 Turkish demand, as noted earlier (most product categories were lifted to account for revised import data). The outlook for OECD Europe demand in 2011 also remains broadly unchanged at 14.3 mb/d (-0.8% or -120 kb/d versus 2010 and 20 kb/d lower versus last month's report).

In March, according to preliminary data, oil product deliveries in Germany posted their largest year-on-year decline (-6.4%) since April 2010. Demand fell across all product categories bar residual fuel oil and 'other products', and most notably with regards to heating fuel. As in previous episodes of sustained high prices, German consumers are probably delaying the refill of their household tanks. Meanwhile, the counter-seasonal March uptick in fuel oil demand is intriguing - it may partly reflect some interfuel substitution following the political decision to shut down several nuclear power plants following the tragic events in Japan, but this hypothesis remains to be confirmed.

Total oil demand also fell in other major European markets in March, mostly on weaker heating oil and residual fuel oil deliveries, notably in France (-4.5% year-on-year) and Italy (-7.4%). The contraction of heating oil demand in the latter country (-22.8%) was particularly marked; as with residual fuel oil use, which has more than halved over the past decade, this product is seemingly being structurally displaced by cheaper natural gas. Elsewhere, the demand weakness is possibly related to high retail prices. Diesel demand in the UK - the largest product category, accounting for almost a third of total demand, has gone from stagnation (January) to outright contraction (-2.4% in February), after two years of almost uninterrupted growth.


Preliminary data indicate that oil product demand in the Pacific rose by only 0.1% year-on-year in March. Warmer temperatures (with HDDs well below the previous year, albeit above the ten-year average) tempered the use of LPG and kerosene, but Japan's devastating earthquake and tsunami also played a significant role. Even though direct crude burn rose sharply to offset the partial loss of nuclear power generation, the disruption of economic activity curbed diesel demand sharply. Meanwhile, the revisions to preliminary February data (+80 kb/d) were mostly concentrated in gasoline (New Zealand), jet fuel/kerosene (Japan) and distillates (Australia). Total oil demand in OECD Pacific remains unchanged at 7.8 mb/d in 2010 (+1.7% or +130 kb/d year-on-year), but is raised slightly to 7.9 mb/d (+1.1% or +90 kb/d year-on-year and +30 kb/d versus last month's report).

The assessment of the economic consequences of Japan's disaster is still a work in progress - which continues to elicit a wide range of views. In April, the IMF cut slightly its 2011 forecast versus its January update, but curbed 2Q11 and lifted 4Q11 sharply, implicitly deferring the bulk of the recovery/reconstruction towards the end of the year. This new profile differs somewhat from the assumption we had posited in last month's report, where we foresaw a higher 3Q11 on the back of more immediate reconstruction efforts. The OECD, meanwhile, also sees a stronger rebound in 3Q11 - but a sharp contraction in 2Q11, resulting in annual GDP growth well below the IMF prognosis (+0.8% vs. +1.4%). Reconstruction will very much depend upon government plans, themselves subject to a degree of uncertainty. In addition, the ultimate extent of the irradiated area around the Fukushima nuclear plant, which will presumably remain off limits for reconstruction, remains unclear.

Regarding oil demand, several reports have recently suggested that more non-nuclear power generation capacity may be available during the forthcoming summer than originally thought. Although power outages were less severe than expected in April, at this point we are not tempted to revise our summer forecast, as it is unclear whether such extra capacity, if indeed fully available, may actually run on natural gas, rather than oil. Presumably, fewer blackouts would imply stronger, industry-driven economic growth overall - but, as noted, opinions differ, not to mention that further nuclear capacity (the 3.6 GW Hamaoka plant) has just been shut down on security concerns. In addition, it remains uncertain to what extent air flight - and hence jet fuel demand - will be affected (the country is the world's third-largest air travel market). Our 2011 demand outlook for Japan thus remains unchanged for now, showing growth of some 60 kb/d versus 2010, although this projection is likely to evolve in the coming months.


Preliminary demand data indicate that non-OECD oil demand growth slowed down in March (+4.0% or +1.6 mb/d year-on-year), for the third month in a row. Total March demand is estimated at 42.4 mb/d, while February levels have been revised down by 90 kb/d to 43.1 mb/d (+4.5% or +1.6 mb/d year-on-year), on both baseline changes and revisions to preliminary readings.

Nonetheless, growth in all product categories remained buoyant in March, with LPG (+5.0% year-on-year), gasoil (+4.9%) and naphtha (+4.7%) recording the largest relative gains. Yet gasoil continued to lead in absolute terms (+620 kb/d, equivalent to roughly 38% of total non-OECD growth), growing by twice as much as gasoline, its closer competitor (+280 kb/d). Similarly, Asia remained the main regional driver of non-OECD oil demand growth (+6.4% year-on-year or +1.2 mb/d, equivalent to 74% of the total), with growth actually accelerating slightly. Once again, China (+890 kb/d) was the single largest contributor to total non-OECD demand, representing 74% of Asia's increase and 55% of non-OECD growth - slightly less than in previous months, but still larger than in any other region.

As noted earlier, non-OECD demand has been revised down by 60 kb/d on average over 2009-2010, following the submission of 2009 data by a number of countries. However, it has been raised slightly for 2011 (+20 kb/d) on stronger-than-expected readings in Asia, Latin America and the Middle East. Total demand is now estimated at 39.5 mb/d, 41.8 mb/d and 43.3 mb/d in 2009, 2010 and 2011, respectively. This has entailed some minor revisions to yearly growth, now respectively assessed at +1.7% (+640 kb/d), +5.7% (+2.3 mb/d) and +3.6% (+1.5 mb/d).


China's apparent oil demand growth accelerated slightly in March (+10.4% year-on-year), reversing the slowdown observed in the previous two months. All product categories posted gains, bringing total demand to 9.5 mb/d. This figure incorporates a baseline revision for 2009 (-300 kb/d), following the submission of official data, largely concentrated in 'other products' (-190 kb/d) and naphtha (-110 kb/d). Yet the fact that revisions were restricted to 2009 again raises data quality questions and highlights the difficulties of assessing demand based on preliminary estimates. Seemingly inconsistent income elasticity trends and uncertainties over independent refineries' reporting in official data are two key issues.

Indeed, as much as the sharp swings in the country's implied income elasticity over the past few years are partly related to the periodic surges of gasoil use on the back of power-generation needs (notably in 2004 and 2010), the 2009 elasticity may have arguably been higher, given the government's massive macroeconomic stimulus, which involved extensive construction work. For the time being, we have kept our growth prognosis for 2011 largely unchanged (+600 kb/d, with demand rising to 9.7 mb/d), assuming an income elasticity of 0.7. However, electricity shortages due to limited coal supplies - which have again emerged in eastern and southern China, well before the peak summer season - could potentially add as much as 300 kb/d to 'normal' gasoil demand.


China's oil product price policy currently faces a paradox. On the one hand, wholesale or 'guidance' prices are too low to guarantee positive refining margins; on the other, retail prices have increased to an extent that is reportedly fostering localised social discontent.

Indeed, despite three government-mandated price hikes since last December, domestic refining margins have become negative in recent months, judging by the 1Q11 financial results from state-owned Sinopec and PetroChina. The former posted losses of roughly $89 million on an average throughput of 4.3 mb/d, while the latter (which operates less complex refineries) lost $945 million on an average throughput of 2.8 mb/d - implying refining margins of -$0.23/bbl and -$3.75/bbl, respectively. Small 'teapot' refineries, which have traditionally helped to fill the supply gap, are also facing poor economics, with many reportedly shut down or running at some 30% of capacity, notably in Shandong province.

The recent price correction, albeit welcome, is unlikely to help refiners much, since domestic price adjustments have lagged international levels. Moreover, state-owned refiners cannot seek better downstream returns by exporting most of their output, as the government appears determined to avoid domestic oil product shortages and to combat hoarding, both of which have been recurrent over the past years. In fact, both companies have been instructed to hike runs and maximise gasoil output, as demand picks up seasonally in spring - and the more so since teapot refiners are not producing enough off-spec product to supply farmers and fishermen.

In terms of policy remedies, increasing domestic prices sufficiently to guarantee reasonable refining margins - or alternatively, fully deregulating the market - is probably not an option at this point, given stubborn inflation (which hovered above 5% in both March and April). Subsidising refiners directly or cutting the fuel consumption tax, as refiners have demanded, are other options - but neither has so far been implemented.

Meanwhile, in late April Shanghai was the theatre of an unprecedented three-day strike by truck drivers. The protests in several areas of the city's large port - marred by police clashes, according to international media sources - were reportedly triggered by high gasoil prices, which compounded the effects of already mounting operating expenses. The unrest ended when the local government ordered container shipping centres to eliminate or reduce a number of fees and tolls. In a related move, the Shanghai authorities have also announced they are considering financial assistance for taxi drivers, who have not protested so far.

Other Non-OECD

As this report has often argued, attempts to cap domestic oil product prices well below international levels typically result in domestic shortages as local refiners boost exports or curb production instead. This dilemma has now come to haunt Russia, where the government has once again required local companies to lower retail prices or face the threat of another price-fixing investigation as inflationary pressures rise - even though the domestic market is nominally unregulated. Although domestic refiners have largely obliged by lowering prices, following the launch of the last such probe in February, scheduled plant maintenance and the proposed removal of low-quality oil products from the market have led to severe shortages - notably of gasoline - since late April. Shortages have gradually spread from remote areas in Siberia to major cities such as Saint Petersburg and even Moscow.

Facing parliamentary and presidential elections in late 2011 and 2012, the government has responded by sharply increasing gasoline export duties from 1 May and delaying the sales ban for Euro-2 gasoline. It remains to be seen, however, whether the move will succeed in keeping both the domestic market well supplied and retail prices in check. Indeed, some refineries may well choose to reduce gasoline production and maximise fuel oil output, since export duties for this product are still relatively low.

Admittedly, the government could also hike fuel oil export duties, but that would remove virtually all incentives to boost refinery throughputs and lead to more shortages across several product categories. It would also further deter upgrading investments and make it difficult, if not impossible, to introduce cleaner products, as most refiners were already struggling to switch to Euro-3 standards. Alternatively, should shortages nonetheless prevail, the government could re-instate formal price controls and subsidise local refiners to ensure adequate supplies - but this option would arguably entail an exorbitant financial cost and has probably not been contemplated.

Gasoline fundamentals continued to tighten in Brazil amid strong demand and high ethanol prices. Even though gasoline demand (including ethanol) surged by 11.0% year-on-year in February, the share of ethanol (by volume) dropped to 49% of the total gasoline pool. Ethanol prices surged on weak sugar harvests and a seasonal lull in production; as a result, hydrous ethanol lost its competitive advantage versus gasoline in many regions over recent months. However, with a new ethanol production season beginning to swing into full gear, the country's gasoline imbalance may improve.

Yet lingering structural issues persist. Brazil's pricing policy has limited the pass-through of higher crude prices to gasoline consumers. With demand unchecked and refineries already running at high rates, Petrobras will be likely obliged to import some 30-35 kb/d of gasoline and additional cargoes of ethanol in May. The government has sought to mitigate the impact of rising ethanol prices by authorising a reduction of anhydrous ethanol content in gasoline to as low as 18% (from 25%) should high prices persist. However, it has yet to embrace a more forceful liberalisation of gasoline prices, which may ultimately prove more effective in balancing domestic gasoline demand and supply.



  • Global oil supply dipped by 50 kb/d to 87.5 mb/d in April, as sharply curtailed Libyan output reduced OPEC crude and NGL supply by 0.26 mb/d, only partly offset by a 0.2 mb/d rise in non-OPEC oil production. Year-on-year, global oil production was 0.3 mb/d higher, with a 0.6 mb/d increase from OPEC NGL and 0.1 mb/d from non-OPEC offset by a 0.4 mb/d reduction in OPEC crude.
  • Non-OPEC total oil supply rose by 0.2 mb/d in April, to 53.0 mb/d, on higher production in the North Sea, the FSU, China and Brazil. Shut-ins for technical and political reasons in Argentina, Canada, China, Norway, Sudan and Yemen only partly offset these increases. Baseline changes to NGL production and preliminary 2009 annual data for non-OECD countries raise 2010 estimates by 0.1 mb/d to 52.9 mb/d. The 2011 projection is adjusted down by 0.1 mb/d to 53.7 mb/d on revised Canadian prospects, implying lower annual growth of +0.8 mb/d compared to +0.9 mb/d in last month's report.
  • OPEC crude oil supply continued its downward spiral in April as Libyan output slowed to a trickle in the wake of the worsening civil war. April OPEC output was pegged at 28.75 mb/d, off by 235 kb/d from a downward-revised 28.99 mb/d for March. Despite expectations that fellow OPEC producers would increase output to replace lost Libyan supplies, the group's production remained an estimated 1.3 mb/d below the pre-crisis level of around 30.04 mb/d posted in January.
  • The 'call on OPEC crude and stock change' rises by 800 kb/d from an average of 29.3 mb/d in 2Q11 to 30.1 mb/d in 3Q11. For full-year 2011, the call has been revised down by 100 kb/d to 29.7 mb/d due to lower expected demand. OPEC's effective spare capacity is estimated at 4.14 mb/d in April. Libyan crude output is now assumed to remain constrained at around 200 kb/d through the end of the year, and, as a result, OPEC's installed capacity by end-2011 is forecast at 33.83 mb/d, down 740 kb/d from 1Q11 estimates of 34.57 mb/d.

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

Note:  Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from May 2011, a revised national (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 -200 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC Crude Oil Supply

OPEC crude oil production continued its downward spiral in April as Libyan output slowed to a trickle in the wake of the worsening civil war. April OPEC supply was pegged at 28.75 mb/d, off by 235 kb/d from a revised 28.99 mb/d the prior month. March supply was revised down by 210 kb/d, largely reflecting lower Iranian output for the month. OPEC-11 supply, which excludes Iraq, fell by 215 kb/d to 26.16 mb/d in April. Significantly higher production from Nigeria, coupled with smaller increases from several other countries, failed to offset reduced output from Libya, Angola, Saudi Arabia and Iraq.

Despite expectations that OPEC would increase output to replace lost Libyan supplies, the group's production is now running 1.3 mb/d below the pre-Libya crisis level of 30.1 mb/d posted in January. Libyan supplies in April averaged 200 kb/d compared to a more normal 1.5-1.6 mb/d and the opposition group said production in the eastern region had fallen to around 70-80 kb/d by early May. Nonetheless, judging by recent public statements, there appears a near-unanimous consensus among OPEC members that supplies to the market are adequate.

While the loss of Libyan supplies in March and April was partially mitigated by the spring seasonal drop in refinery throughputs, forecast product demand for the second half of the year suggests a much tighter market balance. Global oil demand is forecast to jump by a steep 2.0 mb/d between 2Q11 and 4Q11, from 88.2 mb/d to 90.2 mb/d. In addition, we envisage global refinery crude throughputs could potentially rise by more than 3.5 mb/d, from April lows to August.

Indeed, the 'call on OPEC crude and stock change' is expected to rise from a 2Q11 average of 29.3 mb/d to 30.1 mb/d in 3Q11. Given expectations of a protracted civil war in Libya, and likely increases in demand of this order, the market will be seeking incremental supplies through the summer. While a formal agreement to increase output targets at OPEC Ministers' 8 June meeting currently looks unlikely, an informal pact to ramp up production, most likely by OPEC's Gulf members as well as Nigeria, may emerge.

OPEC effective spare capacity is estimated at 4.14 mb/d in April. Libyan crude output is now forecast to remain constrained at around 200 kb/d through the end of the year, and, as a result, OPEC's available capacity by end 2011 is estimated at 33.83 mb/d, down 740 kb/d from 1Q11 estimates of 34.57 mb/d.

Saudi Arabia's output was down marginally in April, to 8.8 mb/d compared with estimates of 8.9 mb/d in March and February. The market was taken aback in mid-April when Saudi Oil Minister Naimi reported that the country had slashed March output by a sharp 800 kb/d to 8.29 mb/d, well below industry estimates of 8.8-9.1 mb/d for the month. The reported 8.29 mb/d also conflicts with official data for March of 8.66 mb/d submitted by the Kingdom to the Joint Organisations Data Initiative (JODI). The 370 kb/d discrepancy between the two sets of Saudi data could be explained by several factors. It appears that the lower of the two estimates reflect only sales to the market in March, and not actual wellhead production. Shipping data also suggest that a relatively high level of output was either placed in storage in Europe and at Sidi Kerir or was held offshore as floating storage. The JODI figures also likely exclude the country's shared production with Kuwait of Partitioned Neutral Zone output. The wide discrepancy in production estimates underscores the need for harmonised definitions of monthly production and more transparent data reporting.

Saudi Arabia continues to offer extra barrels to the market to make up the Libyan shortfall but refiners argue that June crude prices are too expensive. Saudi Aramco raised June prices for Arab Light to near-record levels and close to the highest since June 2007. Weaker refining margins and reduced refinery throughputs in 2Q11 have also combined to limit buying interest in Saudi Arabia's new Libyan look-alike crude blends. Apparently three extra cargoes were sold in April and early May in addition to the three cargoes in March.

Output from the UAE edged lower in April by 10 kb/d to 2.51 mb/d and volumes may be reduced further in May following the unexpected shut down of the Upper Zakum field at end April. As much as 50% of the field's 550 kb/d capacity will be shut-in for the next several months. The field's operators, a joint venture with state-owned Abu Dhabi National Oil Co.(ADNOC), ExxonMobil and Japan Oil Development Co., were forced to cut output after a depleted field used for storage of water and other contaminants breached the maximum capacity levels. The spillover also caused leakage and build-up of residue in the pipeline from the field to the storage area. The company plans to drill a new well to be used as storage and implement repairs to a key export pipeline, which could take two months or more to complete. It is unclear if ADNOC will increase output at the large Murban field and the smaller Lower Zakum to compensate.

Qatar's output edged lower in April, down by 15 kb/d to 805 kb/d, due to maintenance work at the offshore al-Shaheen fields. A late-April fire at a platform, which was already shut down for scheduled maintenance, affected 60 kb/d of production for around 10 days.

Iraqi supply in April was off by just under 20 kb/d to 2.6 mb/d. Total exports fell 18 kb/d to 2.14 mb/d last month, with higher northern exports offset by lower southern shipments. Exports of Basrah Light crude were down by 31 kb/d to 1.66 mb/d. Plans to have new single-point moorings operational to handle increased southern field joint-venture production have now been delayed until the first quarter of 2012.

Exports of Kirkuk crude from the northern port of Ceyhan on the Mediterranean were up around 15 kb/d, to 475 kb/d, thanks in part to rising production from the Kurdish region. An additional 10 kb/d of Kirkuk was trucked from Iraq to Jordan. Production of Tawke and Taq Taq crudes from the northern Kurdish region hit a peak 135 kb/d in April.

Nigerian crude output rebounded following the completion of maintenance work at the deepwater Bonga field in April—up by 210 kb/d to 2.22 mb/d. Nigeria's crude oil production has steadily recovered to a 2.1-2.2 mb/d range over the past 10 months and output is expected to rise further in May and June, judging by export schedules.

Moreover, the country's operating environment is expected to improve further in coming months following the largely orderly conclusion to Nigeria's elections in April. As expected, incumbent president Goodluck Jonathan was elected to serve for the next four years. With the time-consuming election cycle now at an end, a number of challenging and controversial problems affecting the oil sector will need to be addressed. Newly-elected government officials have the difficult task of finalising the controversial 'Petroleum Industry Bill' if the country is to see higher upstream investment. In addition, the government will have to move quickly to implement promises made as part of its ceasefire agreement with Niger Delta rebels or risk a renewed wave of violence.

Angolan April output fell 90 kb/d to 1.58 mb/d as a result of scheduled maintenance work at the Total-operated Dalia field. Maintenance and repair work at the troublesome Greater Plutonio complex scheduled for the month of April was postponed until mid-May due to technical issues. The BP-operated field, which has been running at just 50% of capacity this year, needs repair work on its faulty water injection system. The loss of Plutonio production and temporary cut in Dalia output has pushed Angolan output down to its lowest level in more than four years. After averaging 1.77 mb/d in 2010, Angolan production has tumbled to 1.64 mb/d in early-2011 and looks set to edge lower in coming months.

Libyan oil supply plummeted in April to an estimated 200 kb/d. The opposition group sold one cargo in April but exports had to be suspended following attacks on oil infrastructure by government forces. Early-May production in the eastern region fell to 70-80 kb/d, according to a spokesman for the opposition group. Output from the eastern fields is reportedly going into storage tanks, with the next exports at least a month away while security measures are implemented to protect the workers and the fields. Colonel Gaddafi's forces attacked several oil installations in the eastern region in late March, which included Sarir and Messla, but damage was reportedly minimal. In early May an opposition spokesman said repairs were being made to oil infrastructure damaged in recent weeks, but refused to identify the specific areas hit for security reasons.

Amid apparent political and military stalemate, it increasingly looks as if Libyan crude output could remain constrained at around 200 kb/d through the end of the year.

Non-OPEC Overview

Non-OPEC oil supply rose by 0.2 mb/d to 53.0 mb/d in April, on higher estimated North Sea, FSU, Chinese and Brazilian output, even while production dipped in Argentina, Canada, Sudan and Yemen due to technical and other outages. This followed a -250 kb/d downward revision to 1Q11 output on sharply lower preliminary UK output and weaker-than-expected US NGL production.

Estimates of non-OPEC supply for 2007-2010 are revised up by an average +75 kb/d (and around +40 kb/d for 2000-2006) on the inclusion of new annual data for 2000-2009 for many non-OECD countries and a full reappraisal of NGL production and outlook for all non-OPEC countries. As a result, 2010 non-OPEC production is now estimated to have averaged 52.9 mb/d.

Meanwhile, estimated 2011 non-OPEC supply is adjusted down by 0.1 mb/d, to 53.7 mb/d, as lower North American, FSU and African supplies are only partly offset by the carry-through of a higher Thai baseline and a more robust outlook for Norway. Annual growth in 2011 is therefore slightly reduced to +750 kb/d compared to an increment of +870 kb/d in last month's report.

As highlighted in recent reports, the spectre of further shortfalls in oil production due to ongoing unrest in the wider Middle East and North Africa (MENA) region is still haunting oil markets. Despite the situation in Syria and Yemen deteriorating, and problems in Bahrain still simmering, the only sizeable production curbs are to Yemeni production, where around 100 kb/d has been offline following sabotage on a key crude pipeline in mid-March. In addition, at the time of writing, an oil workers' strike had shut-in a further 70 kb/d, though this is not yet captured in our outlook.

Elsewhere, production has recovered in Gabon, but has been hit in Sudan, due to north-south fighting. In Argentina, an oil workers' strike cut an estimated 50 kb/d and 100 kb/d off crude production in March and April respectively, while early May saw protesting teachers block roads, cutting oil output by an estimated 25 kb/d. Norway's oil production was hit by a series of gas leaks and other problems at a string of fields, while in China, late April saw the shut-in of 40 kb/d due to the malfunction of a floating production, storage and offloading vessel (FPSO).

Perennial supply outages aside, 2011 growth in non-OPEC supply is focused in 2H11 and remains centred on Brazil (+200 kb/d), where April saw the start-up of the Peregrino field, as well as China (+175 kb/d), Colombia (+130 kb/d), Ghana (+95 kb/d), global biofuels (+90 kb/d), Canada (+80 kb/d) and Russia (+70 kb/d). These increments are partly offset by decline in Mexico, Indonesia, Malaysia and Yemen (each around -50 kb/d). In contrast with previous years' sharp annual decline, and despite current problems at a string of fields, North Sea producers Norway and the UK are expected to see production remain steady in 2011 compared to 2010.


North America

US - April Alaska actual, others estimated:  US total oil production stayed flat at 7.8 mb/d in February from January, following a 140 kb/d downward revision to February NGL output. Higher Texan production was offset by lower 'other' supply. Based on preliminary weekly data, March and April likely saw average US production at a slightly higher 7.9 mb/d. May is expected to see a dip to 7.8 mb/d again, with news reports of some North Dakotan output shut-in due to late snow storms and power failures.

North Dakota is a source of light tight oil (sometimes called 'shale oil', as distinct from 'oil shale') from the Bakken formation, a key source of growth in US oil production. Sustained high oil prices and the application of techniques used to produce natural gas from unconventional formations - notably horizontal drilling and hydraulic fracturing - are proving equally successful in boosting liquids output. As a result, North Dakotan oil production (light tight oil is reported as conventional crude in both EIA and IEA analysis) has tripled to 300 kb/d during 2006-2010 and is currently forecast to average 385 kb/d in 2011. A detailed look at supply growth in the Bakken and similar formations, will be included in the forthcoming MTOGM 2011, published in mid-June.

Canada - Newfoundland March actual, others February actual:  Total Canadian oil production averaged 3.6 mb/d in February, up slightly from January. Preliminary data indicate a dip again to 3.5 mb/d in March. CNRL, the operator of the Horizon oil sands production facility, has indicated that repairs to the fire-stricken plant will take longer than expected. Latest plans see half of the facility's 110 kb/d capacity return in mid-June and the rest in the middle of 3Q11. Meanwhile, Syncrude indicated it plans 45 days of scheduled maintenance at one of its upgraders in 3Q11. While estimated oil supply for 2010 was unchanged at 3.37 mb/d, average 2011 production is adjusted down by 75 kb/d to 3.45 mb/d on lower synthetic crude supply as well as a downward-adjusted NGL outlook on a lower gas supply forecast.

Non-OPEC Oil Production Seen as More Reliable

Recent OMRs have seen successive upward revisions to estimated non-OPEC supply growth in the near-term. When initially forecast in July 2010, incremental production in 2011 was put at 0.4 mb/d, while the current forecast implies growth of 0.8 mb/d. A similar pattern can be seen for the evolving 2010/2009 and 2009/2008 growth outlooks respectively (see graph). Projections always evolve, as consolidated data becomes available with a time lag. But there may also be a cyclical factor at work.

Four years ago, following a period of apparent under-performance by non-OPEC supply, this report adopted a country-specific field reliability adjustment, in order to take into account a pattern of frequent unscheduled outages due to technical problems at mature fields (see Methodology Change Accounts for Bulk of Non-OPEC Forecast Adjustment This Month in report of 13 July 2007). This adjustment aimed to account for the fact that not only does a maturing field's geology impact upon output levels, but so too does ageing equipment and spending to maintain such facilities.

Volumetric adjustments were calculated on the basis of a five-year historical average, largely in OECD countries, and in sum amounted to -410 kb/d for non-OPEC as a whole. The adjustment was not designed to cover regular field maintenance, extreme weather or project slippage, all of which are already taken into account in our methodology. At the same time, positive adjustments were added for a limited number of countries where output had regularly exceeded expectations. The negative net adjustment reflected a degree of ongoing underinvestment in mature upstream infrastructure and chronically tight drilling and service sectors at the time.

Today, the picture appears to have changed, prompting a reappraisal of the adjustment. A recalculation of unscheduled technical outages for 2007-2010 suggests a lower net adjustment of -200 kb/d on average. For the forthcoming Medium-Term Oil & Gas Markets Report 2011, a similar proportional adjustment will also be applied for the 2012-2016 period.

Better-than-expected performance in mature OECD producing areas such as the US and North Sea can also be seen to reflect sustained higher investment in the upstream sector in recent years, in response to rising oil prices and less tight markets for rigs and equipment. Upstream spending was at double-digit growth in 2010, with a similar trend expected for 2011, while upstream cost inflation has at least temporarily flattened off. Arguably, these investments are now bearing fruit, not only in terms of new projects sanctioned, and in less pronounced project slippage, but also in terms of fewer outages affecting mature infrastructure.

North Sea

Norway - February actual, March provisional:  In February, Norwegian total oil supply held steady at an upward-revised 2.2 mb/d, but fell to 2.1 mb/d in March, based on preliminary data. April saw problems reported at the Oseberg East, Ormen Lange, Njord and Visund fields, though outages at the first two were only brief. Gas leaks at Njord and Visund reportedly shut down production for most of April. Despite the outages in April, possibly leading into early May, 2Q11 supply is nudged up marginally, while 2011 production estimates are hiked by 35 kb/d, in part stemming from a revised field reliability adjustment (see Non-OPEC Oil Production Seen as More Reliable). 2011 is thus forecast to see the first (marginal) rise in Norwegian oil production in a decade, increasing from 2.17 mb/d in 2010 to 2.18 mb/d in 2011. Looking further ahead, the Oil Ministry awarded 24 offshore licences in the Barents Sea, a so far virtually undeveloped northern area, which also saw the recent discovery of the largest field found in a decade, Skrugard.

UK - February actual:  February UK oil production has been revised down by a sharp 315 kb/d, which is partly carried through into March. Output is thus seen to have fallen from 1.4 mb/d in January to 1.2 mb/d in February. January field-specific data confirmed the return of the Schiehallion field, long plagued by problems, but March-May production may remain constrained at an average 1.3 mb/d as problems continue at Gryphon and as maintenance scheduled for March/April at the UK's largest field, Buzzard, may have dragged into May. The overall annual forecast is unchanged though, with UK production estimated to slide from 1.37 mb/d in 2010 to 1.35 mb/d in 2011.

Former Soviet Union (FSU)

Russia - March actual, April provisional:  According to preliminary data, Russian total oil production rose by 50 kb/d in April, to 10.56 mb/d, the highest monthly output level since October 2010, its post-Soviet record high. Russia's total oil supply averaged 10.45 mb/d in 2010 and is expected to rise to 10.52 mb/d in 2011.

From 1 May, after much deliberation by officials, export duty tax breaks for key Eastern Siberian fields Vankor, Verkhnechonsk and Talakan will expire. The latter two fields were originally intended to retain tax free status until January 2012 and January 2013 respectively. The Ministry of Finance has long argued that higher oil prices allow operators to make a decent return on these relatively new fields - and there is no indication by oil companies that production at existing fields will in any way be constrained. Nonetheless, oil companies planning to develop new fields in the region have warned that they will now take a closer look at project profitability. Rosneft in particular, is still arguing that it needs the promise of tax relief before giving the final go-ahead for its large Yurubcheno-Tokhomskoye field ('Y-T'), which was pencilled in to start up in 2015. The seemingly arbitrary nature of application and removal of tax breaks at short notice continues to cause much uncertainty for upstream investors.

An arbitration court in London has ruled that BP may go ahead with its proposed share swap with Rosneft, provided the UK major allows its Russian joint venture TNK-BP to join a related deal to access Arctic acreage held by Rosneft. BP had already indicated its willingness to do so, but it is far from certain that Rosneft will concur. Rosneft has declared that its clear preference is to partner with BP in exploring and developing the blocks in question offshore Russia's northern coast, as BP has significant offshore experience, in contrast to TNK-BP, which has only worked onshore Russia.

Azerbaijan - February actual; March preliminary:  Azerbaijan's total oil production remained constrained at just over 1.0 mb/d in February and March, following a sharp 80 kb/d downward revision for March, based on preliminary data. Problems apparently continue to dog the Azeri-Chirag-Guneshli (ACG) complex, responsible for nearly 85% of Azerbaijani crude supply. On the basis of company guidance, the lower output is partially carried through to trim the 2011 forecast by 25 kb/d. Azerbaijan's total oil production is thus estimated to stay flat at around 1.04 mb/d in 2010-2011.

Other Non-OPEC

China - March actual:  Total oil production in China stayed flat at 4.2 mb/d in March from February, as offshore output remains constrained. March production was revised down by 85 kb/d. 2Q2011 output estimates are also revised down by 45 kb/d on average after reports of problems at a floating production, storage and offloading vessel (FPSO) in Bohai Bay. Thereafter, production is expected to pick up, resulting in growth from 2010's average 4.1 mb/d to 4.28 mb/d in 2011.

Brazil - March actual:  Brazil's total oil production rose marginally to 2.17 mb/d in March from February. In April, the Statoil-operated Peregrino oil field started production, with a peak capacity of 100 kb/d. Its ramp-up, as well as increased production from a swathe of other fields, is estimated to hike Brazil's supply from 2.14 mb/d in 2010 to 2.34 mb/d in 2011. Meanwhile, the government announced a 1H11 auction of oil blocks in northern Brazil. Setting a date for the much anticipated offshore pre-salt auction has been delayed due to disagreement over revenue sharing between producing states and the federal government.

Argentina - March actual:  Striking oil workers cut April production by an estimated 100 kb/d, to 610 kb/d, after March estimates were also curbed to 660 kb/d. The workers' strike reportedly ended in late April, but in early May, news reports indicated that teachers' protests had halted a smaller volume (estimated at 25 kb/d) of crude output in the same Santa Cruz region, putting average monthly output at 685 kb/d. Thereafter oil production is expected to recover. In 2010, total oil supply averaged just under 700 kb/d, and is expected to hold steady in 2011.

Colombia - March actual; April preliminary:  Colombia's oil production continues to rise, topping 900 kb/d in April for the first time. At the time of writing, it was uncertain whether oil workers would follow up on threats to halt production at the 40 kb/d Caño Limon field. The country's oil production is expected to keep on growing, jumping from an average 790 kb/d in 2010 to 920 kb/d in 2011 as output ramp-up continues at fields such as Rubiales, Castilla and others.

Yemen:  Amid ongoing unrest and violence in Yemen, a deal brokered by the regional Gulf Cooperation Council (GCC), in mid-April, was set to lead to the departure of incumbent President Saleh and a peaceful transition to a new regime. However, after initially indicating that he would accept this deal, the president has subsequently wavered, and political violence continues. At least 100 kb/d of the country's 270 kb/d oil production remained shut-in in April, and is expected to stay curtailed for some time (we cautiously assume recovery from July). At the time of writing, striking workers were reported to have shut-in a further 70 kb/d of crude production. The situation remains volatile.

Syria:  The political situation in Syria has deteriorated in April and early May, with reports of a flare-up in violence. Nonetheless, according to company statements, no oil production has so far been affected. The country produced 385 kb/d in 2010, currently expected to dip slightly to an average 370 kb/d in 2011.

Sudan:  In Sudan too, the situation remains tense amid a stand-off between the northern and southern halves of the country. A January referendum resulted in overwhelming support for the south's secession, which is due to take effect in July. However, disputes over oil fields near the border continue to dog the transition. In mid-April, reports indicated that around 85 kb/d of southern oil production was shuttered. Sudan's total oil production averaged 470 kb/d in 2010 and - assuming no further outages - is expected to dip to 445 kb/d in 2011.

OECD Stocks


  • OECD industry stocks declined by 9.2 mb to 2 643 mb in March, following a sharp 65 mb draw in February. Seasonal refinery maintenance substantially reduced product stocks, while a strong crude build provided a partial offset. Yet, the overall monthly drop appeared more limited than the five-year average 15.4 mb stockdraw.
  • OECD forward demand cover tracked year-ago levels and fell to 58.8 days in March, from 59.2 days in February, and stood 2.7 days above the five-year average. Lower gasoline cover drove the decline, as demand for this product is expected to increase seasonally.
  • OECD preliminary data point to a 29.9 mb increase in commercial inventories in April, driven by gains in crude and 'other oils'. Builds in all product categories but gasoline lifted refined oil product stocks by 6.3 mb. The monthly increase is broadly in line with a 20.0 mb five-year average build.
  • Oil held in short-term floating storage fell to 62 mb in April, from 68 mb in March. A further build in the Middle East Gulf boosted crude floating storage by 4 mb to 44 mb. Offshore oil products declined by 9 mb to 18 mb, driven by offloading in Northwest Europe and West Africa.

OECD Inventories at End-March and Revisions to Preliminary Data

OECD commercial oil inventories fell by 9.2 mb, to 2 643 mb or 58.8 days cover in March, as seasonal refinery turnarounds substantially reduced refined product holdings. Product stocks continued to track the five-year average levels, as sharp draws in gasoline and middle distillates curtailed holdings by 34.3 mb. Meanwhile, crude oil stocks gained 27.0 mb in March, twice the seasonal 12.5 mb average increase seen over the past five years. The lion's share of this monthly crude build came from the Pacific and, as a result, crude's overhang versus the five-year average doubled. Consequently, total oil inventory stood 23.0 mb above five-year average levels in March, compared to 16.8 mb in February.

Both gasoline and distillates stocks declined seasonally in March. Middle distillate stocks fell by 15.2 mb, but remained nonetheless 30.1 mb above the five-year average. Gasoline holdings shed 19.6 mb in March, the largest decline in the past four years, and, combined with an expected seasonal increase in demand, reduced gasoline stock cover by 1.7 days to 26.1 days. Despite preliminary April data pointing to a further strong 11.1 mb decline in gasoline, stock levels have closely tracked the five-year trend since the start of 2011.

The March stock-draw followed a substantial 64.5 mb decline in OECD inventories in February, exacerbated by sharp downward revisions since last month's preliminary estimates. Upon receipt of more complete OECD data, total oil holdings were revised 23.5 mb lower in February, with significant adjustments to distillate and crude inventories. In addition, crude oil baseline levels were adjusted lower due to historical revisions to Canadian crude oil stocks, spanning from January 2000 to December 2010. Revisions to crude oil stocks for a provincial jurisdiction resulted in significant overall downward revisions, but the impact was partially mitigated for recent months by higher estimates of Canadian pipeline fill included in industry stocks. In addition, we expect further revisions to the 'other products' category in coming months.

Preliminary OECD data suggest stock levels followed their seasonal trend in April and rose by 29.9 mb. The build was driven by crude and 'other oils' gaining 14.1 mb and 9.4 mb, respectively. Products rose by 6.3 mb as gains in distillates, fuel oil and 'other products' outweighed a draw in gasoline. Meanwhile, global oil short-term floating storage declined to 62 mb in April.

Analysis of Recent OECD Industry Stock Changes

OECD North America

Commercial oil stocks in North America fell by 7.7 mb, to 1 288 mb in March, directionally in line with the five-year 3.6 mb average draw. Crude oil inventories rose by 6.5 mb, as sharp gains in the US outweighed a draw in Mexico. Maintenance curbed refinery runs in the US and product stocks consequently declined by 17.4 mb. Gasoline inventories fell by 14.7 mb, the largest monthly decline over the past five years. Middle distillates drew by 3.4 mb while 'other products' provided partial offset, rising by 1.3 mb.

US weekly data point to a modest 1.3 mb decline in US industry stocks in April, as product draws outweighed crude builds. Crude stocks rose by 8.9 mb, yet inventories held at Cushing, Oklahoma, decreased by 1.4 mb from a record high 41.9 mb in March. Meanwhile, a further sharp monthly gasoline draw, combined with counter-seasonally falling diesel stocks, curtailed product inventories by 12.3 mb. Gasoline and distillates declined by 12.1 mb and 9.5 mb, respectively, counteracted in part by a 7.7 mb gain in 'other products'.

OECD Europe

European industry oil inventories declined by 5.8 mb, to 959 mb in March, as regional refinery turnarounds curbed product stocks. Crude inventories built by 4.4 mb, primarily in France, Italy, the Netherlands and the UK. Sharp distillate draws in Germany, the Netherlands and the UK reduced product holdings by 9.7 mb. German end-user heating oil stocks stood at 50% of capacity in February. End-March data have been delayed, however, we estimate that relatively high heating oil prices discouraged consumer buying. Meanwhile, European gasoline stocks dropped by 2.7 mb, but a modest gain in fuel oil provided a partial cushion.

Preliminary April data from Euroilstock point to a 5.1 mb stockbuild in the EU-15 and Norway, with the sharpest gain in middle distillates. Crude inventories edged 0.7 mb higher, while products increased by 4.4 mb, driven by distillate builds in Germany, France and the UK. Gasoil holdings in independent storage in Northwest Europe also rose, as some barrels were taken ashore from floating storage. Backwardation in ICE gasoil futures prompted offloading from vessels into cheaper onshore storage and oil products held off Northwest Europe declined by 8 mb. However, sharp draws in gasoline, jet fuel and fuel oil inventories offset gasoil gains and reduced overall refined oil product stocks in independent storage in Northwest Europe in April.

OECD Pacific

Commercial oil inventories in the OECD Pacific rose by 4.2 mb to 396 mb in March. Regional product stocks fell by 7.3 mb, but the draw was outweighed by the largest monthly crude oil stock build since 2003. Crude oil stocks soared by 16.1 mb, boosted by sharp gains in Japanese and Korean holdings. In Japan, lower crude runs following the earthquake and subsequent tsunami in March contributed to a 5.9 mb increase in the country's crude stocks. However, total oil inventories dropped by 4.0 mb, as distillate, gasoline and 'other product' draws dominated a 5.8 mb product decline and 'other oils' shed a further 4.1 mb.

The Petroleum Association of Japan (PAJ) resumed publishing weekly data for the week ending 2 April, just four weeks after the disaster in March, although PAJ acknowledged both a three week gap in series and a lack of comparability between available March and April data due to considerable reporting difficulties for many companies. Therefore, we adjusted April opening stock levels by applying the March stock change calculated from monthly data published by the country's Ministry of Economy, Trade and Industry (METI) to February averages derived from PAJ data. These constructed time series signal a strong 26.0 mb gain in Japanese oil inventories in April, driven by both crude and product builds. Crude stocks were seen 4.5 mb higher, 'other oils' added a further 7.3 mb and all product categories gained a combined 14.2 mb in April. Nevertheless, these series are prone to revision should more complete data become available.

Recent Developments in China and Singapore Stocks

Chinese commercial oil inventories fell by an equivalent of 8.4 mb (data are reported in terms of percentage stock change), to approximately 353 mb in March, according to China Oil, Gas and Petrochemicals (China OGP). Lower refinery runs boosted crude oil stocks by 2% (4.0 mb) and partly offset a sharp gasoil-led draw in product holdings. Gasoil stocks plummeted by 12% (10.5 mb) after three months of strong builds, while kerosene inventories dropped by 8.5% (1.1 mb) and gasoline fell by 1.4% (0.8 mb).

Refined oil product inventories in Singapore grew by 0.3 mb in April, as strong gains in fuel oil outweighed declines in light and middle distillates. Higher arbitrage arrivals lifted fuel oil stocks to the highest levels since September 2010, while lower exports from Japan and China curtailed light and middle distillate holdings. Middle distillate inventories fell to the lowest levels since July 2008, but rebounded by the end of the month as Japan resumed exports, albeit at reduced levels, and more cargoes arrived from other regional exporting countries.



  • As part of a broader commodity rout, oil futures prices for benchmark WTI and Brent on 5 May posted their single biggest one-day loss since their respective contracts started trading. Over the course of the week ended 6 May, futures prices for Brent tumbled by $15.99/bbl to $109.13/bbl while WTI plummeted by $16.34/bbl to $97.18/bbl. Prices have ebbed and flowed since, but partially recovered their losses, with Brent last trading at around $115/bbl and WTI at $101/bbl.
  • Before tumbling in tandem with futures markets, spot crude oil prices posted their seventh monthly increase in April. Supported by the loss of Libyan crudes from the market, North Sea Brent saw the largest monthly increase. While the shut in of light, sweet Libyan crudes supported strong premiums for middle distillate and gasoline-rich crudes early in the month, by mid-April refiners, especially in Asia and Europe, were shunning expensive lighter crudes given very poor margins.
  • European and Asian refiners posted another month of deteriorating margins in April while the US saw modest improvements. In Northwest Europe, Brent margins were negative for the month on average, while in the Mediterranean Urals hydroskimming margins fell to new record-lows. In Asia, Singapore margins declined across the board in April, with refineries processing more expensive, lighter crudes as feedstock showing the largest losses. In the US, the situation improved in April although refining margins remained weak compared to historical levels.
  • Despite healthy demand, the oversupply of VLCCs East of Suez again weighed heavy on the tanker market in April. Rates for product tankers fared somewhat better as they held onto their recent gains.

Market Overview

As part of a wider commodities sell-off, oil markets plunged into uncharted waters when futures prices for benchmark WTI and Brent on 5 May posted their single biggest one-day loss since their respective contracts started trading. Over the course of the week ended 6 May futures prices for Brent tumbled by $15.99/bbl to $109.13/bbl, while WTI plummeted by $16.34/bbl to $97.18/bbl. Prices have partially recovered their losses, with Brent last trading at around $115/bbl and WTI at $101/bbl.

Before May's sharp reversal, April prices had posted their seventh monthly increase, with benchmark crudes rising by 6.4-6.8%. North Sea Brent was up $8.42/bbl to an average $123.09/bbl in April while WTI prices, still under pressure from swelling stocks at Cushing, Oklahoma storage tanks, was up by a smaller $7.06/bbl, to $110.04/bbl.

Analysts are still debating the myriad of factors that drove prices over the precipice, but most agree the collapse in oil prices was part of the broader meltdown in commodity markets. There does not appear to be a single key catalyst, but instead an array of developments appear to have played a role in the collapse. Factors frequently cited include:

  • Growing fears that the relentless rise in oil prices, i.e., retail prices for gasoline and other oil products, will curb demand in the key US market and undermine the economic recovery, especially in OECD countries;
  • A wave of disappointing economic data releases, including high levels of unemployment in the US, weaker manufacturing data in Germany and interest rates increases;
  • The impact of QE2 in the US coming to an end in June;
  • A temporarily stronger dollar;
  • Slowing Chinese and Indian demand, partly due to inflationary pressures;
  • Speculative traders liquidating positions; of which, notably algorithmic trading or 'black box' played a role;
  • Steep increases in the costs of margins on crude and silver;
  • A perception by some of reduced geopolitical risk following the death of al-Qaeda leader Osama bin Laden.

The list of negative factors pressuring markets lower in early-May suggests seeds of doubt may be beginning to be sown by the potential downside risk to economic growth and ultimately oil demand due to prices remaining stubbornly high (the recent correction notwithstanding). However, for now the prevailing market consensus remains one of tightening supply and demand fundamentals, including the continued loss of Libyan supplies, potentially adding upward pressure to prices in second-half 2011.

OPEC's apparently relaxed attitude towards increasing production to offset lost Libyan supplies may also lead to sharply tighter markets later this summer once refiners are back in full swing, following extensive turnaround schedules. OPEC production at 28.75 mb/d in April is some 1.3 mb/d below pre-Libyan crisis levels. Ministers will meet on 8 June in Vienna to review the market, but public statements leading up to the gathering suggests the group sees little need to increase supplies at current prices.

Unusually, almost all OPEC members, both traditional price hawks and the doves, are arguing there are ample supplies in the market. Saudi Arabia has offered additional supplies of its new Libyan-quality crude in the spot market but there are currently few takers, in part due to the unknown risks associated with processing new crude blends. Another reason buying interest is tepid, refiners argue, is that Saudi Aramco is setting premiums too high for its lighter crudes. June prices were raised to near record levels, according to refiners.

Near term, the shut-in of Libyan crudes led to a further widening of the sweet/sour price spreads but by early-April refiners, especially in Europe and Asia, were shunning the high-priced light crudes in favour of cheaper heavier and sourer barrels.

The Brent/Dubai spread, an indicator for the premium of light sweet grades over heavy sour supplies, widened in April with Dubai's discount to Brent at -$7.48/bbl compared with -$5.89/bbl in March and down more than 50% from February's -$3.52/bbl. The deeper Dubai discount has also encouraged refiners to buy more Dubai-linked crudes in April.

Extensive refinery maintenance turnarounds this spring have curbed demand for crude in recent months but oil demand is expected to increase sharply between 2Q11 and 3Q11, by as much as 1.7 mb/d. Indeed, refinery throughput rates are forecast to increase by 2.3 mb/d in the same period.

Futures Markets

Open interest in WTI futures contracts reached yet another record-high in April, increasing in both futures-only and futures and futures-equivalent options (thereafter combined) to 1.62 million and 3.04 million contracts, respectively. Producers decreased their net short position during the month of April; they held 27.02% of the short and 14.6% of the long contracts in WTI futures-only contracts. Swap dealers, who accounted for 29.33% and 34.4% of the open interest on the long side and short side, respectively, remained net short.

Managed money traders' net long exposure decreased by 3.32% in April to 258 668 futures contracts. The market share of managed money traders has declined from 31.13% to 30.96% on the long side and risen from 14.05% to 15.04% on the short side.  Other non-commercials, who accounted for 18.9% of open interest on the long side and 19.8% on the short side, remained net long. Meanwhile, open interest increased in the NYMEX RBOB futures and combined markets by 5.09% and 4.37%, respectively. In April, open interest in NYMEX heating oil increased by 2.7% to 314 173 contracts, while open interest in natural gas markets increased by close to 10.7% to over one million contracts.

Index investors continued to increase their long exposure in commodities in March to a record high of $336 billion. They added another $7.9 billion to the WTI Light Sweet Crude Oil market, which rose to an all time high of 694 000 futures equivalent contracts, or $74.1 billion in notional value.

Spot Crude Oil Prices

Spot crude oil prices continued their upward trajectory for the seventh monthly increase in a row in April, with benchmark crudes posting gains ranging from 6.5% to almost 8% on average for the month, before plummeting in early May. Supported in part by the loss of Libyan crudes from the market, North Sea Brent posted the largest monthly increase, up on average by $8.89/bbl to $123.49/bbl. Mideast marker Dubai rose by $7.30/bbl to $116.00/bbl while US WTI spot prices were up by just under $7/bbl to $109.89/bbl.

The loss of light, sweet Libyan crudes supported strong premiums for middle distillate and gasoline-rich crudes in March. By April though, refiners, especially in Asia and Europe, were shunning the high-priced lighter crudes, given exceptionally poor margins. Refiners opted to either maintain lower throughput rates after completing maintenance work, especially at simple refineries, or switch to more competitive-priced heavier, sourer crudes where possible.

Leaving aside the 5 May price plunge, already-strong Brent crude prices gained further support with the cutback in Forties supplies for the month. Production problems at the key Buzzard field and several other installations have unexpectedly reduced supply of North Sea Forties crude for May and June. Buzzard is the largest field in the UK with production of around 200 kb/d. North Sea Forties is a key crude used for setting the Dated Brent price.

In Asia, the premium for light, sweet Malaysian Tapis over Dubai weakened over the month of April, from $14.56/bbl on average in the first week to $13.90/bbl on average in the last week. By early May, it had narrowed further, to $13.69/bbl.  Asian refiners, especially in China, also shied away from some African grades linked to pricier Brent and switched to heavier, but cheaper, Dubai-linked Middle East crudes. In April, average spot Dubai's discount to Brent weakened a further $1.59/bbl, to -$7.48/bbl. However, the weaker monthly average masked the steady erosion in differentials over April. Stronger buyer interest in Middle East grades led to a narrowing in Dubai's discount to Dated Brent by around $2.65/bbl as the month progressed, from -$8.55/bbl in the first week of April to -$7.09/bbl by the last week. By early May the discount had narrowed to -$5.89/bbl.

The unexpected, and some refiners argue unwarranted, increase in June prices by Saudi Arabia, the UAE and Qatar (given poor refining margins) may curtail buying interest in Middle East grades and prompt further economic run cuts.

Unlike other markets, US spot crude markets were supported by improving refining margins, especially for gasoline, ahead of the peak summer driving season. Relatively weaker outright spot prices for WTI prompted increased buying of lighter grades linked to the beleaguered benchmark. The price spread between WTI and Dated Brent widened in April, to $13.59/bbl compared with $11.61/bbl on average in March. Nonetheless, US refiners are bidding up prices for gasoline-rich crudes from Nigeria and Algeria ahead of the summer driving season.

Spot Product Prices

Spot product prices increased smartly in April, especially for light ends such as gasoline and naphtha, as reduced refiner output led to a tightening of supplies. However, the rise in spot crude prices outpaced gains in refined products, and, as a result, cracks spreads were largely weaker month-on-month, with the exception of gasoline in all major markets and naphtha in Europe.  Crack spreads saw a recovery in early May as refined product prices lagged the unprecedented plunge in spot crude prices. The loss of Libya's distillate-rich light, sweet crude also helped buoy crack spreads in Europe and Asia.

The cutback in refinery runs to seasonal lows in the March/April period has had the largest impact on gasoline markets. At the US Gulf Coast, unleaded gasoline differentials to Mars jumped to a steep $16.34/bbl, compared to $9.40/bbl in March and just $5.10/bbl in February. A steady drawdown in gasoline stocks is also supporting crack spreads. US gasoline stocks were down again in April after posting the sharpest decline in five years in March. However, early indicators suggest this year's gasoline season may disappoint. Gasoline demand declined by 3.1% y-o-y in April and the relentless rise in prices at the pump may further curtail consumer demand in the months ahead (see 'Looming Lacklustre Gasoline Demand?').

In Europe, gasoline cracks were largely supported by a sharp downturn in refinery runs as well as export demand from the US and Middle East. Gasoline cracks rose by just over $3/bbl in April, averaging $10.09/bbl in the Mediterranean and $8.78/bbl in Rotterdam.

Middle distillate crack spreads were weaker in April in Europe and posted only marginal increases in Singapore. In Northwest Europe, gasoil differentials to Brent declined by $2.09/bbl to $12.21/bbl while diesel was off by $3.38/bbl to $13.94/bbl. In the Mediterranean, gasoil crack spreads to Urals eased by $1.66/bbl to $15.12/bbl, while diesel fell by $1.96/bbl to $19.41/bbl.

In Asia, refinery turnarounds coupled with reduced Japanese runs helped lift gasoil cracks in April, with differentials for Dubai crude in Singapore up by $0.30/bbl, to $22.00/bbl, while they declined by around $0.20/bbl in Japan, though still remaining at a strong $25.48/bbl.

Fuel oil markets were a weak link in all major markets in April, with limited demand and ample stocks pressuring crack spreads. In Europe cracks for high-sulphur fuel oil were around -$20/bbl.

Refining Margins

Refining margins fell to new lows in Europe in April, as both middle distillates and fuel oil cracks remained weak. Margins improved towards month-end as reduced runs and an open arbitrage to the US East Coast lifted gasoline cracks, and in early May the sharp drop in crude prices lifted margins further. Margins fared better in the US amid steep gasoline stock draws and some unplanned shut downs which pushed gasoline cracks higher. In Asia, margins fell as fuel oil discounts widened in April.

European refineries faced another month with deteriorating margins in April. In Northwest Europe cracking margins fell and Brent margins were negative for the month on average, a situation not seen since November 2009. Urals cracking margins remained in the black, although also fell month-on-month. The main reason for the falling margins was weaker middle distillates and fuel oil cracks, but refineries using Urals also had the advantage of relatively cheaper feedstock. Profits improved towards month-end however, lifted by a higher gasoline crack as a result of turnarounds and run cuts in the Mediterranean and increased arbitrage possibilities to the US East Coast.

In the Mediterranean, Urals hydroskimming margins fell further to new record-lows with an average loss of -$8.80/bbl in April. They were pressured by weak fuel oil cracks in particular, due to a closed arbitrage to Singapore.

In the US the situation improved in April, although refining margins remained weak. Both LLS and Mars cracking margins moved into positive territory in April, supported by stronger gasoline cracks, especially in the second half of the month, due to falling inventories and unplanned refinery shut-downs. Mars coking margins had a calculated profit of $4.40/bbl in April, an increase of $2.50/bbl since March. They were supported by the steep increase in the gasoline crack in the last week in April, as a power outage in Texas shut down around 5% of US refining capacity, raising fears of gasoline shortages.

US West Coast margins showed diverging trends in April, with cracking margins falling slightly over the month, and Kern coking margins showing a small improvement. Cracking margins fell as fuel oil discounts increased over the month, while the coking margin was supported in part by a slightly stronger diesel crack.

In Asia, Singapore margins all fell in April and, as last month, refineries using Tapis crude as feedstock showed the largest losses. Simple refineries using Tapis showed a calculated loss of $10.70/bbl on average in April. Margins were pressured by both weak middle distillates cracks and increasing discounts for fuel oil. Refining margins also fell in China. Refineries, both simple and complex, using Daqing crude as feedstock posted the largest losses over the month, where losses worsened by around $2.50/bbl versus March.

End-User Product Prices in April

End-user prices for selected IEA countries continued their upward rally during April, for the fifth successive month. Gasoline prices rose on average by 7.9% month-on-month (m-o-m) and by 35.13% year-on-year (y-o-y). Diesel was up 4.7% m-o-m and 40.1% y-o-y. With respect to the remaining surveyed products, heating oil and low-sulphur fuel oil (LSFO) experienced price hikes of 3.7% and 8.4% m-o-m, respectively. On a yearly basis, heating oil rose by 40.1% and LSFO by 41%.

Germany saw the strongest increase in gasoline prices, for the second month in a row (12% m-o-m) and the UK the strongest diesel price hike (6.2% m-o-m). In Italy, gasoline prices saw the smallest increments among the surveyed countries (+4.5%), while Canada saw the smallest diesel price increments (+3.75%). The m-o-m change in gasoline and diesel prices, when stated in local currencies, was smaller than when measured in US dollars. In part, this difference is explained by the recent weakening of the US dollar. Japanese end-user prices for April, missing from the above analysis, will be available later in the year.


Despite healthy demand, the oversupply of VLCCs East of Suez weighed again on the tanker market in April. Rates on the benchmark VLCC Middle East Gulf - Japan crude trade softened during the month, so that by early-May they stood below $11/mt, at close to break-even levels. Although these lows are above their mid-2010 slump, ship owners are increasingly pressured by spiralling bunker fuel costs. Indeed, recent data indicate that marine gasoil bunker prices in the Middle East Gulf have risen by approximately 28% so far this year. Rates on the Suezmax West Africa - US Atlantic Coast route plummeted in early April following a drop in demand and slack tonnage. However, rates recovered somewhat over the second half of the month, to once again exceed the $15/mt level in early-May. In North-West Europe, rates held firm at close to $7/mt, although rates for voyages calling at Baltic ports softened considerably as Primorsk reduced its ice-class requirement, thus increasing the pool of suitable tonnage.

Rates for product tankers fared somewhat better than their crude counterparts as they held onto their recent gains. The UK - US Atlantic Coast trade has once again gone from strength to strength over the past month. Driven by high gasoline demand, transatlantic rates broke the $30/mt level in early-May for the first time since September 2008. However, it is noteworthy that time charter equivalent (TCE) earnings on transatlantic routes remain anchored at close to January 2009 levels, again attributable to high bunker fuel costs. Rates for East of Suez voyages have also experienced a recent resurgence driven by buoyant demand and tightening tonnage. The benchmark Middle East Gulf - Japan trade increased by over $5/mt in April to stand at approximately to $30/mt by early-May. Similarly, the Singapore - Japan route also firmed to reach approximately $17/mt by early-May.

Short-term floating storage of crude and products fell by 5.5 mb to 62.2 mb at end-April. This decline was led by a sharp 9.1 mb draw in products, more than offsetting a 3.6 mb build in crude oil. The fall in products was driven by 7.9 mb of products, likely middle distillates, coming ashore in North-West Europe following the ICE gasoil futures contract moving into backwardation. Elsewhere, products held off West Africa declined by 1.3 mb. At end-April global volumes of products in floating storage stood at 18.3 mb.

The increase in crude was again driven by Iran, where volumes increased to 34.4 mb (+ 4.3 mb m-o-m). US Gulf volumes grew by 1.2 mb, while storage in the Asia Pacific region drew by 1.9 mb. Overall, global crude floating storage amounted to 43.9 mb at end-April. The total storage fleet has now oscillated between 40 and 60 vessels since August 2010, a far cry from its maximum level of over 140 units at end-2009 and again illustrating that floating storage is no-longer underpinning freight rates.

How Transparent Are Crude Oil Derivatives Markets?

Increased volatility, higher crude oil prices and the arrival of new financial participants in the crude oil market during the last decade have raised the question of whether financial players have an impact on commodity prices and price volatility. Unfortunately, limited publicly available data in both physical and financial markets makes it very hard to provide a definitive answer. Understanding the linkages between physical and financial markets on price formation requires more complete information on both than is currently available. Traders in derivatives markets rely on signals from current and expected physical fundamentals , but these signals can be distorted by imperfect or delayed information flows Therefore, it is crucial to have more timely and reliable information from physical markets in order to address the observed volatility as well as to determine the influence of different market participants on prices.

CFTC data and classifications

Data limitations are not restricted to physical oil markets. Energy derivatives markets are also partially opaque. The best available data comes from the US Commodity Futures Trading Commission's (CFTC) Commitments of Traders Report, which break down each Tuesday's positions held in the aggregate by "large traders" (those whose positions are above a certain threshold). Those data are published every Friday as part of the CFTC's Commitments of Traders (COT) or Disaggregated Commitments of Traders (DCOT) reports. Both publications separate reportable large traders into "Commercials" and "Non-commercials".

DCOT reports further disaggregate commercials and non-commercials into two groups: producers and swap dealers for commercials, and managed money traders and other reportables for non-commercials. A trader's positions in a given commodity are classified as commercial if the trader uses futures and option contracts in that particular commodity for hedging, as defined in CFTC regulations. To ensure accurate and consistent classifications, the CFTC may reclassify a trader based on additional information about the trader's use of the markets. "Non-commercials" comprise many types of mostly financial traders, such as hedge funds, mutual funds, floor brokers, etc.

Still, the CFTC's reports are not perfect. For example, non-commercial traders are typically viewed as speculators. On this basis, some observers argue that commercial swap dealers, who use futures markets to hedge over-the-counter positions with financial traders, should also be considered as speculators, since they lack direct exposure to the underlying commodity. In fact, swap dealers commonly take positions for commodity index funds that view commodities as a distinct asset class, raising concerns that these funds could convey herding behaviour from unsophisticated traders into futures markets. Insofar as the client base of swap dealers also includes traditional hedgers, however, the issue is not clear.

Differentiating hedgers and speculators

Furthermore, the distinction between hedging and speculation in futures markets is less clear than it may appear. Traditionally, traders with physical commodity exposure have been called hedgers, while those without a physical position to offset have been called speculators. In practice, however, commercial traders may "take a view" on the price of a commodity or may not hedge in the futures market despite having an exposure to the commodity, positions that could be considered speculative.

Traditional speculators can be differentiated based upon the time horizons during which they operate. Scalpers, or market makers, operate at the shortest time horizon - sometimes trading within a single second. These traders "make markets" by standing ready to buy or sell at a moment's notice. The goal of a market maker is to buy contracts at a slightly lower price than the current market price and sell them at a slightly higher price, perhaps at only a fraction of a cent, to profit on each contract. Skilled market makers can make a profit by trading hundreds or even thousands of contracts a day. Market makers provide immediacy to the market. Without a market maker, a market participant would have to wait until the arrival of a counterparty with an opposite trading interest.

Other types of speculators take longer-term positions based on their view of where prices may be headed. "Day traders" establish positions based on their views of where prices might be moving within minutes or hours, while "trend followers" take positions based on price expectations over a period of days, weeks or months. These speculators can also provide liquidity to hedgers in futures markets. Through their efforts to gather information on underlying commodities, the activity of these traders serves to bring information to the markets and aid in price discovery.

While hedging and speculating are often considered opposing activities and are generally identified with commercial and non-commercial traders, respectively, in practice both groups can contribute to price discovery in futures markets. Futures prices reflect the opinions of all traders in the market. Moreover, the actions of those who can, but choose not to enter the futures market can also contribute to price discovery. For example, a commercial trader holding physical inventory, but choosing not to hedge using futures markets (by taking a short position) not only withholds downward pressure on the futures price, but may also signal that prices are expected to rise in the future.

COT and DCOT identify trader categories based on self-reported lines of business collected and audited by the CFTC. The public reports do not provide any indication of the intraday activities of many traders. Specifically, because the CFTC's reports are based on end-of-day positions, scalpers' and day-traders' activities are not discussed in these reports. Furthermore, the CFTC's public reports fail to differentiate between traditional and non-traditional hedgers in the commercial category, due to active non-traditional commodity speculative activity by some commercial traders in the same commodity market. In order to increase transparency, the CFTC should consider re-classifying some of the commercial traders based on their trading patterns (as well as their hedging exemptions or their cash positions). Furthermore, it may be advisable to discuss the cash positions held by commercial traders to understand the size of their true hedging needs. In order to increase transparency in futures exchanges, more frequent (daily) release of the end of day positions held in the aggregate by different trader groups, as well as more refined information by contract maturity (rather than the current aggregation of all maturity contracts), are needed.

Outside influences on futures markets

Activities that occur in other markets and other instruments can also affect futures markets. There are three potential activities that might impact futures trading on US exchanges: (i) the trading of OTC derivatives contracts; (ii) the trading on exempt commercial markets (ECMs); and (iii) the trading on foreign boards of trade. Futures markets traditionally comprise only one venue for hedging price risk. In the context of risk management, market participants may be involved concurrently in over-the-counter (OTC) transactions, trades on ECMs and transactions in foreign markets. Crude oil traders, for example, can hedge cash market positions using a combination of futures, swaps, bilateral forward contracts, cleared broker and ECM transactions.

Since transactions on the OTC market primarily deal with privately-negotiated contracts, the OTC derivatives market is essentially opaque, with information typically available only to the negotiating parties. Some argue that this lack of public information prevents an appropriate assessment of overall risks by market participants and precludes them from taking the necessary measures against default risks. In order to increase transparency in OTC markets, recent regulatory proposals in the United States and Europe require mandatory reporting of almost all OTC transactions to trade repositories or regulators. More transparency in OTC derivatives is to be welcomed, even if some participants argue that hiding volumes in OTC markets is very difficult since traders know their counterparties.

US regulations adopted in 2008 require significant price discovery contracts traded on ECMs to be subject to certain regulatory requirements, including position-reporting requirements to CFTC. The 2010 Dodd-Frank Act goes further, eliminating the category of ECM from the US Commodity Exchange Act (CEA). Therefore, they have to be registered as either as a swap execution facility or a designated contract market, which will lead to full dissemination of positions established in any contract by traders in these markets. As a result, the so-called Enron loophole in derivatives markets is finally eradicated.

Foreign boards of trade should also be encouraged to start providing detailed information on large trader positions in order to increase market transparency. This is crucial, since some similar contracts are traded in more than one exchange in different countries. For example, the WTI Light Sweet Oil contract is not only traded on NYMEX but also on ICE Europe. ICE Europe started to provide detailed large trader information to CFTC in recent years; however, market participants do not have any data on positions in some key contracts (such as Brent crude on ICE Europe, where most of the trade takes place).

Transparency in both the physical and financial markets is essential to better understand possible linkages between both markets. The 2008 financial crisis has spurred efforts to address limited data availability in commodity derivatives markets. Nevertheless, more international coordination is needed to make headway in increasing the availability of timely and reliable data in physical markets too.



  • Global refinery throughputs averaged 74.2 mb/d in 1Q11, 385 kb/d below our previous estimate. Lower runs in OECD Europe accounted for much of the revision, as well as slightly weaker throughputs for a number of non-OECD regions, notably Latin America and the Middle East.
  • Global throughputs for 2Q11 are revised down by 740 kb/d to 73.8 mb/d on average, due to significantly weaker OECD runs. The largest revisions are in Europe, where preliminary April data suggest only a minor month-on-month growth from March. We have also lowered our North American forecast, as US crude runs in April fell counter-seasonally, and Japan due to higher-than-expected scheduled maintenance.
  • Crude runs stand to rise by over 3.5 mb/d from April lows over the course of the summer as refiners ramp up activity to meet seasonally higher oil product demand and new capacity is brought on stream in Asia. This sharp increase incorporates an assumption that weak margins continue to constrain OECD utilisation rates.
  • OECD crude runs for March averaged 35.3 mb/d, 580 kb/d lower than February and 640 kb/d below a year earlier. Increased runs in North America, as refineries started to come back from maintenance, were offset by lower runs in both Europe and the Pacific. In Europe planned maintenance peaked in March, whereas a total of 620 kb/d of Japanese refining capacity was still shut-in by end-March due to the earthquake and tsunami.

Global Refinery Throughput

Global refinery crude throughputs averaged 74.2 mb/d in 1Q11, 385 kb/d below our previous estimate, and 1.7 mb/d above a year ago. Lower runs in OECD Europe accounted for much of the revision, as well as slightly weaker throughput rates for a number of non-OECD regions, notably Latin America and the Middle East. March throughputs in OECD Europe were much weaker than expected, even when taking into account a peak in maintenance. This suggests that refiners have been constraining throughputs after maintenance to avoid potential losses, given that margins have been very poor this spring, especially for simple plants.

Global throughputs for 2Q11 are estimated to average 73.8 mb/d, a downward revision of 740 kb/d from our previous projection, with the bulk of the revision stemming from the OECD. The largest change was in Europe, where preliminary April data from Euroilstock suggest throughput rates around 500 kb/d below our previous forecast. However, we still expect runs to increase from May onwards as summer demand ticks up. There were also large changes in North America, as US crude runs in April fell counter-seasonally, and taking into account Canadian maintenance in May. However, as the April drop in US runs was partly related to operational problems, we expect runs there to increase sharply in May and June in line with rising demand towards the summer. OECD Pacific crude throughputs have also been revised down, even allowing for regional offsets to Japan's refinery outages as we now assume more capacity off-line due to maintenance. In the non-OECD, the overall adjustment was minor, but run rates in Africa are nonetheless adjusted down based on the situation in Libya, offset by slightly higher than expected runs in the FSU.

Notwithstanding the difficulties of projecting crude runs more than a couple of months ahead, global throughputs could potentially rise further in July and August, reaching levels in excess of 76 mb/d. The winding down of seasonal maintenance in the OECD Pacific and new capacity brought on stream in Other Asia, notably India, contribute to this. We have, however, reflected concerns about sustained margin weakness for the more economically sensitive regions in the OECD via suppressed throughput levels. Nonetheless, even allowing for this, crude demand potentially stands to gain over 3.5 mb/d from April lows to a summer highpoint in August.

OECD Refinery Throughput

OECD crude runs for March averaged 35.3 mb/d, 580 kb/d lower than February and 640 kb/d below a year earlier. Increased runs in North America, as refineries started to come back from maintenance, were offset by lower runs in both Europe and the Pacific. In Europe, planned maintenance likely peaked in March, whereas a total of 620 kb/d of Japanese refining capacity was still shut-in by end-March due to the earthquake and tsunami.

Total estimated OECD crude runs for April averaged 34.6 mb/d, a further reduction of 700 kb/d from March, as preliminary data suggest falling runs in North America and the Pacific. In all, 2Q11 estimates are now 400 kb/d below 1Q11 in spite of our assumption that runs are forecast to increase in both North America and Europe from May onwards, compensating for lower runs in the Pacific where maintenance normally peaks in 2Q.

North American March crude runs increased by 600 kb/d month-on-month, in line with preliminary data. Almost all of the increase was concentrated in the US, with runs in Mexico and Canada largely flat compared with February. Weekly data for April show that US crude runs averaged 14.1 mb/d, a decline of 200 kb/d from March, and 690 kb/d below our previous estimate. Runs fell in all regions except the Midwest (PADD 2), and the largest reduction was on the East Coast (PADD 1), where runs declined by 120 kb/d on average. PADD 1 throughputs fell due to operational problems with the FCC unit at Sunoco's 330 kb/d refinery in Philadelphia in the second week of April and because of a shutdown since end-March at Sunoco's 175 kb/d Marcus Hook refinery in Pennsylvania following a power outage.

A power outage in Texas City on 25 April forced Valero (225 kb/d), Marathon (72 kb/d) and BP (450 kb/d) to shut down their refineries in the area, taking out 5% of total US refinery capacity. Valero and Marathon both restarted their plants within the same week, whereas BP waited until early May. North American crude runs are expected to increase in May in line with seasonal trends, and are assumed to remain stable at around 18 mb/d throughout the summer.

OECD European throughputs fell by 580 kb/d to 11.6 mb/d from February to March compared to our previous 355 kb/d projected reduction. Monthly data submissions further revised February runs down by 220 kb/d to 12.2 mb/d, with the largest revision in Italy (-130 kb/d). Runs fell in all countries in March with the exception of Portugal as Galp's 220 kb/d Sines refinery ramped up production after maintenance in January and February. Germany and the Netherlands posted the largest declines in runs due to planned maintenance, taking 220 kb/d and 125 kb/d offline, respectively.

In Germany, OMV announced earlier in April an ongoing conversion of its 72 kb/d Burghausen refinery to run alternative crudes due to the lack of Libyan crude deliveries. A six-week maintenance shutdown of the 200 kb/d Schwechat refinery in Austria was also announced, starting in early May. Although this plant also normally processes Libyan grades, it is not certain that is the reason behind the closure.

Preliminary April data from Euroilstock showed that runs for the EU15+ Norway only increased 80 kb/d from March, which gives an estimated month-on-month increase of only 20 kb/d in April for Europe as a whole taking scheduled maintenance in Switzerland into account. As demand increases towards the summer and product inventories are depleted, refining margins should improve somewhat, and we expect runs to increase throughout May. However, taking into account the current weak margins and difficulties sourcing light sweet barrels of the right price to replace lost Libyan supplies, we assume that runs will only increase slowly through summer, and remain muted over the coming quarters.

OECD Pacific runs averaged 6.5 mb/d in March, falling 590 kb/d from February, and coming in 176 kb/d above our previous estimate. Not surprisingly, the drop was concentrated in Japan as the earthquake and tsunami resulted in over 600 kb/d of Japanese refining capacity being shut down for a prolonged period. South Korean runs in March remained at February levels, suggesting that the country may have postponed spring maintenance in order to help compensate for supplies lost by the Japanese outages.

Weekly data from the Petroleum Association of Japan (PAJ) show that Japanese runs averaged 2.9 mb/d in April, down 290 kb/d from March and 120 kb/d below our previous estimate. We expect runs to fall further in May and June as seasonal maintenance increases, but rebound from July onwards. Concerning the capacity shuttered as a result of the earthquake, JX Nippon Oil announced at end-April that it will restart the Kashima refinery in June, bringing 250 kb/d back on stream. The 145 kb/d Sendai and the 220 kb/d Chiba refineries are expected to remain offline at least until summer 2012. Separately, Showa Shell confirmed it will close the 120 kb/d CDU unit at the Keihin refinery later this year. In Australia, Shell announced in mid-April a proposal to turn its 75 kb/d Clyde refinery in Sydney into a fuel import terminal as it is unable to compete against large-scale refineries in the Asia- Pacific region.

Non-OECD Refinery Throughput

Non-OECD refinery throughputs in March averaged 37.6 mb/d, only slightly lower than expected. Runs fell 900 kb/d compared with February, mainly due to spring turnarounds in the Middle East and the FSU as well as reduced runs in Libya. For 1Q11, refinery throughputs have been revised down by 130 kb/d to 38.3 mb/d on average, with the largest revision seen in Latin America due to an unplanned shutdown of Valero's refinery at Aruba. In all, non-OECD annual growth is estimated at 1.6 mb/d in 1Q11, of which half stems from China, where 760 kb/d of new capacity has come on line. We expect a comparatively shallow rebound in 2Q11 non-OECD runs, although throughputs are forecast to increase in June as refineries within the FSU region and the Middle East return from maintenance and new capacity comes on line in India.

Chinese data for March show that runs averaged 8.9 mb/d, 36 kb/d below our previous forecast and around 200 kb/d lower than the record-high February. Less maintenance outages in April likely saw Chinese runs increase, with both Petrochina and Sinopec having stated that they boosted runs in April. The announced increase in retail prices in early April probably encouraged private refineries to increase runs as well.

In Other Asia, Indian throughputs were 4.2 mb/d in March, in line with our previous forecast. For April we have adjusted down our projection as the scheduled start-up of the 120 kb/d Bina refinery was delayed, and we now assume a ramp-up in production from mid-May onwards. This leaves runs in April in line with March levels. Rates are expected to increase from June onwards as refineries come back on stream after maintenance and the new 180 kb/d Bathinda refinery starts up in August. Refinery runs in Singapore were almost 100 kb/d lower than forecast for March, as the reduction in operations due to the accident at ExxonMobil's Jurong refinery was more extensive than anticipated. We still assume the refinery to be back in operation in May.

Middle Eastern refinery runs for March are estimated to have averaged 5.7 mb/d, down 170 kb/d from February and only 10 kb/d below our previous forecast. The main reason for the decline in March was refinery turnarounds in Saudi Arabia, where crude runs fell by 150 kb/d. Run rates are expected to have dropped further in April, as several plants in Saudi Arabia and Kuwait shut down for maintenance and will remain closed throughout May.

In Libya, March runs were 88 kb/d on average, slightly higher than anticipated, likely due to some throughputs at the Zawia refinery in the southwestern part of the country. Our working assumption for Libyan refinery operations, given the impact of the civil war on both upstream and downstream sectors, restricts throughputs to only 90 kb/d throughout the summer compared with the usual 370 kb/d.

Latin American runs averaged 5.3 mb/d in March, up 130 kb/d from February and a massive 600 kb/d above a year earlier. Extensive shut-downs during spring last year, including PDVSA's 320 kb/d Isla refinery at Curacao and Valero's Aruba refinery, reduced runs to only 4.7 mb/d in March 2010. February throughput rates were revised down by 116 kb/d, most notably for Aruba due to the closure of the 235 kb/d Valero plant in February. The plant restarted production in January after being closed since summer 2009, but was forced to shut down again for much of February due to damage to oil product lines. However, the refinery started up again in early March.

Russian throughputs were 5.0 mb/d in March, 100 kb/d lower than February and 35 kb/d higher than our previous estimate. Maintenance at several Russian refineries started in March and is expected to increase in April, further reducing runs. In Lithuania, a two-week turnaround at PKN Orlen's 200 kb/d Mazeikiu Nafta refinery started at the end of March, reducing rates compared to our previous projection. For the FSU region as a whole, we expect runs to pick up from the yearly lows in March/April to around 6.5 mb/d in July as both Russian refineries and the 360 kb/d Mozyr refinery in Belarus come back on stream.

OECD Refinery Yields

February OECD yields increased for gasoline and 'other products', but declined for all other product categories. The largest changes were for gasoline and gasoil/diesel. North American gasoline yields increased by 1.03 percentage points (pp) but this was partly offset by a 0.35 pp decrease in Europe. Also in the Pacific, yields were slightly up. Compared to January, gasoil/diesel yields were down both in North America and Europe but largely unchanged in the Pacific. Refinery gross output fell by close to 500 kb/d from January due to heavy maintenance in North America and hence lower runs.

In North America, gasoline yields increased by 1.03 pp in February to a high of 48.4%, after having been decreasing towards the five-year average in 4Q10. The increase came at the expense of both gasoil/diesel and fuel oil. Gasoil/diesel yields increased steadily from spring last year until December but started to reverse last month and yields are now back at the five-year average. The decrease in fuel oil yields followed seasonal patterns, also falling below the five-year range.

In Europe, both gasoline and gasoil/diesel yields fell in February. Gasoline yields averaged 21.6% last year, but fell in February to only 20.9%, a record-low. Gasoil/diesel yields on the other hand declined from a record-high 40.5% last month to 39.7% in February, but are still 0.5 pp higher than last year's average. In the Pacific, the largest movement was in naphtha yields, which fell 0.43 pp while refiners increased production of gasoline and 'other products' in line with seasonal trends.