Oil Market Report: 12 October 2011

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Highlights

  • Oil futures tracked latest economic developments amid the worsening European debt crisis, which triggered downward price moves throughout September. Prices partially recovered on renewed optimism that European leaders would address euro-zone financing issues, with WTI last trading at $84.50/bbl and Brent near $108/bbl.
  • Global oil demand is revised down by 50 kb/d for 2011 and by 210 kb/d for 2012 with lower-than-expected 3Q11 readings in the non-OECD and a downward adjustment to global GDP growth assumptions. Global GDP growth is now seen at 3.8% in 2011 and 3.9% in 2012 with significant downside risks. Demand estimates stand at 89.2 mb/d in 2011 (+1.0 mb/d y-o-y) and 90.5 mb/d in 2012 (+1.3 mb/d).
  • Global oil supply fell by 0.3 mb/d to 88.7 mb/d in September from August, due to non-OPEC outages. Non-OPEC supply projections are trimmed by 0.3 mb/d for 4Q11 and by 0.2 mb/d for 2012, with annual growth averaging 0.2 mb/d, to 52.8 mb/d, and 0.9 mb/d to 53.6 mb/d for 2011 and 2012 respectively. OPEC NGL output averages 5.9 mb/d in 2011 and 6.3 mb/d in 2012.
  • OPEC crude oil supply nudged down to 30.15 mb/d in September, with lower Saudi Arabian and Nigerian output partly offset by resumed Libyan supply. Output there reached 350 kb/d in early October and capacity is assumed at 600 kb/d by end-year. The 4Q11 'call on OPEC crude and stock change' is adjusted up by 0.3 mb/d to 30.8 mb/d on lower non-OPEC supply, with the 2012 'call' unchanged at 30.5 mb/d.
  • OECD industry oil stocks fell counter-seasonally in August by 3.4 mb to 2 692 mb, or 58.4 days of forward cover. Preliminary September data suggest a further 12.7 mb decline in OECD industry stocks and a drop in short-term floating storage. OECD stocks since July fell below the five-year average for the first time since June 2008.
  • Global crude runs estimates for 3Q11 and 4Q11 are revised down by 50 kb/d and 75 kb/d respectively versus last month. Lower-than-expected Asian throughputs are partly offset by continued robust US runs. Global throughputs now average 75.5 mb/d in 3Q11 and 75.3 mb/d in 4Q11. Meanwhile, OECD refinery rationalisation continues.

Getting the balance right

This month, our supply/demand balance for 2012 remains largely unchanged, with markets being swayed by both economic news from the euro-zone and reports of recovering Libyan oil supply. Both factors remain highly uncertain, but will shape market dynamics over the next 18 months. Meanwhile, participants in the Joint Organisations Data Initiative (JODI) met this week in Beijing to celebrate JODI's tenth anniversary. Enhanced collaboration between APEC, Eurostat, IEA, IEF, OLADE, OPEC and the UN, and the consolidation of monthly oil data submissions are indeed good reason to celebrate. JODI is being extended to gas, and may one day cover investments or even reserves. A better understanding of physical markets requires improved data. Huge progress has already been made in the last 10 years, but some reflection by governments, statisticians and oil analysts on the quality of existing JODI and national oil data is in order, acknowledging what it might cost to make material improvements.

We should not focus on shortcomings in oil market data without acknowledging that they are much more complete than data for many other sectors. The OMR's Table 1 (page 59) summarises our best estimates of prevailing and likely future market fundamentals. We explicitly acknowledge the gaps in our historical knowledge with the 'miscellaneous to balance' (MtB) item - the difference between observed demand and supply, having taken account of recorded inventory and shipment changes. Others try to massage this component away by forcing unaccounted barrels into supply or demand, or inferring non-OECD stock change. The OMR uses MtB as a check on data integrity. Historically it averages less than 1% of global demand, but doggedly hunting down this elusive, near-1 mb/d of data 'error' remains important, as oil prices hinge on developments at the margin. Recent negative bias in MtB implies that data/estimates may overstate demand, understate supply, that non-OECD inventory is being drawn or a combination of all three. (It also argues against oil prices being driven higher by non-fundamental factors, as above-equilibrium prices would tend to cause stock build.)  



The OMR and the Monthly Oil Data Service (MODS) showcase IEA member country official oil statistics, and are augmented by non-member country data, market intelligence and analysts' judgement for current month (M) and last month's (M-1) data. All these data points are the foundation for projections of market fundamentals looking six to 18 months ahead. Good historical data don't guarantee good forecasts, but nor can consistent, credible projections be generated without a solid baseline. Government data that look inconsistent or unaccountably diverge from normal seasonal trends are sometimes discarded. 'Official data' are not always synonymous with 'good data'. And useful though existing weekly data are, (USA, Japan, Canada), a trade off exists between timeliness and reliability. Before policy makers demand to know more about what is driving markets, they must consider whether current resources and structures for gathering and processing oil market data are sufficient. Calls for more weekly or M-1 data are fine, but only if adequately resourced to generate meaningful statistics.

In recent months OMR analysts have pursued data inconsistencies or omissions for Australia, Canada, Japan, Korea, Kuwait, the Netherlands, Russia, Saudi Arabia, Taiwan and Thailand, among others, occasionally resulting in the re-submission of improved data. Routinely, OMR analysts also try to fill in major gaps in coverage for crucial emerging markets like India (refinery operations data) and China (inventory data, inferred demand, a large unofficial refining sector). The simple truth is that even ongoing gains in data coverage, timeliness and reliability will still leave analysts scouring for missing pieces of the puzzle, applying judgement to create a market balance that 'stacks up'. That's all part of the job, although better, more detailed data on Chinese stocks or OPEC capacity would certainly help. 

Demand

Summary

  • Forecast global oil demand is revised down by 50 kb/d for 2011 and by 210 kb/d for 2012, with lower-than-expected 3Q11 readings in the non-OECD and a downward adjustment to global GDP growth assumptions. Stronger-than-expected OECD monthly submissions, primarily in Europe and the Pacific provide some offsetting support. Global oil demand is expected to rise to 89.2 mb/d in 2011 (+1.1% or +1.0 mb/d y-o-y) and reach 90.5 mb/d (+1.4% or +1.3 mb/d) in 2012.


  • Projected OECD demand for 2011 is now 45.8 mb/d (-0.7% or -320 kb/d) for 2011 and 45.6 mb/d (-0.6% or -260 kb/d) for 2012. We have cut GDP growth assumptions for 2012 across all three regions. Nevertheless, stronger-than-expected 2011 data outweigh the GDP adjustments, with demand revised up by 40 kb/d this year and by 20 kb/d next year. Some of the demand boost stems from temporary factors such as seasonal heating oil tank filling, while oil-fired power generation in Japan provides more lasting upside potential.
  • Estimated non-OECD oil demand for 2011 and 2012 is revised down by 90 kb/d and 230 kb/d to 43.4 mb/d (+3.1% or +1.3 mb/d) and 44.9 mb/d (+3.5% or +1.5 mb/d), respectively. GDP growth assumptions have been downgraded across all regions, though they remain relatively unchanged for China. Lower than expected July/August oil readings in the Middle East, Asia and Latin America combined with the GDP adjustment drive the demand revisions.
  • An economic sensitivity analysis, with GDP growth one-third lower than in our base case, would cut 0.2 mb/d from expected 2011 oil demand and 1.2 mb/d from the 2012 projection, effectively curbing global annual demand growth to 0.7 mb/d and 0.3 mb/d, respectively.

Global Overview

This report incorporates updated GDP assumptions from the IMF's World Economic Outlook, released in September. Global real GDP growth is now seen at 3.8% for 2011 and at 3.9% for 2012, versus prior 3.9% and 4.2% assumptions. Both the OECD and the non-OECD absorb the downgrade for 2012, with prospects trimmed in most major economic areas - the US, Europe, Brazil, India, Russia and the Middle East. Our growth assumptions for China, however, remain largely unchanged. Moreover, we maintain our 2012 oil price assumption, based on the futures strip, with nominal Brent at $108/bbl. Nevertheless, these downward economic adjustments are partly offset by higher-than-expected August preliminary demand readings. Altogether, we have revised down 2011 and 2012 oil demand by 50 kb/d and 210 kb/d, respectively. Demand growth for those years is now seen at 1.0 mb/d (+1.1%) and 1.3 mb/d (+1.4%).

Global oil demand has grown at a moderate, but stable pace, in recent months, suggesting neither resurgent economic activity nor a downward consumption spiral. With the incorporation of lower-than-expected OECD readings for July, global demand growth for that month was only 0.6% year-on-year, down from 1.1% previously. By contrast, August preliminary readings boosted global demand growth to 1.4%. To be sure, the picture remains cautious - August data yielded downward revisions to key markets such as the US, China, India and Saudi Arabia and the stronger global rate may partly reflect temporarily faster seasonal heating oil tank filling in Europe. Nevertheless, oil demand in the OECD has come in broadly stronger than anticipated, with Japan's oil-fired generation needs continuing to provide support for the near future.

This picture could deteriorate, however, with a downward lurch in economic prospects. The IMF's forecast assumes that global growth is being "delayed" rather than "derailed" with the effects from the Japanese earthquake and tsunami in March and high commodity prices likely to moderate over time. Moreover, the Fund does not assume that recent financial market volatility will spill over into the real economy in a lasting way, preferring to assume that the actions of policymakers will help keep turmoil in check. Given that economic prospects remain fragile, particularly with the eurozone's ongoing sovereign debt crisis, we continue to run a sensitivity analysis showing an indicative view of oil demand should GDP growth come in about one-third lower than our base case. Under such conditions, global oil demand would be reduced by 0.2 mb/d versus our base case for 2011 and by 1.2 mb/d for 2012, with annual growth at 0.7 mb/d and 0.3 mb/d, respectively. As previously, we assume that the more income elastic developing economies will feel this impact most intensely.





OECD

According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) rose by 0.2% year-on-year in August, with growth in the OECD Pacific and OECD Europe outweighing OECD North America declines. Diesel, European heating oil and 'other products', which include direct crude burn, drove the gains, outweighing falls in gasoline and heating oil outside Europe.



Revisions to July preliminary data, at -380 kb/d, stemmed largely from the US (-380 kb/d) and Japan (-110 kb/d), which outweighed upward adjustments to Mexico (+120 kb/d), Europe (+60 kb/d) and Korea (+40 kb/d). In the US, downward revisions were concentrated in diesel, heating oil and residual fuel. Japan saw 'other products' adjusted lower - yet, given volatility in deliveries and the strength of preliminary August data, there is little evidence to suggest a retrenchment in oil-fired power generation there. Meanwhile, in Europe, upward revisions concentrated in heating oil suggest a faster pattern of seasonal consumer tank filling. Still, overall OECD demand declined by 2.2% year-on-year in July, down from -1.1% in June.

Economic prospects for 2012 have been trimmed across all regions, though more moderately than in last month's issue, which attempted to pre-empt some of the IMF adjustments. Yet, our oil demand outlook remains little changed, with 2011 revised up by 40 kb/d and 2012 higher by 20 kb/d. This positive adjustment stems from sharply stronger-than-anticipated August preliminary readings (+600 kb/d), which when fed through the forecast, more than offset the effects from the GDP changes. Some of this August strength may stem from a temporary acceleration in heating oil deliveries ahead of winter. Still with stronger-than-expected readings from other product categories, it is possible that OECD demand has found some support, for now, as economies continue to grow. Our outlook sees demand declining by 0.7% (-320 kb/d) to 45.8 mb/d in 2011 and falling by 0.6% (-260 kb/d) in 2012, with GDP growth assumptions of 1.7% and 1.9%, respectively.



North America

Preliminary data show oil product demand in North America (including US territories) falling by 0.7% year-on-year in August, following a 2.7% decline in July. Gasoline (-2.5%) led the fall, but diesel and jet fuel/kerosene posted gains of 7.1% and 2.8%, respectively, continuing a trend of relative middle distillate demand durability. The IMF's outlook for North America has reduced GDP growth prospects to 1.8% for 2011 and 2.0% for 2012, but this represents a revision of only 0.1% and 0.2%, respectively, to our assumptions. Our forecast is revised down by 30 kb/d in 2011 and by 20 kb/d in 2012 with oil demand now seen at 23.5 mb/d (-0.9% or -220 kb/d) and 23.4 mb/d (-0.6% or -130 kb/d), respectively.



Revisions to July data averaged -340 kb/d and were driven by the US (-380 kb/d). Residual fuel oil (-160 kb/d) and diesel (-120 kb/d) accounted for the largest downward adjustments. Still, the latter posted solid growth of 3.3% year-on-year. Weekly-to-monthly gasoil revisions in the US continue to be difficult to anticipate, particularly given surging diesel and heating oil exports, which, combined, reached a record of 890 kb/d in July.

Adjusted preliminary weekly data for the United States (excluding territories) indicate that inland deliveries - a proxy of oil product demand - declined by 2.7% year-on-year in September, following a 0.9% fall in August. It appears that 3Q2011 gasoline demand fell by 3.5%, or 320 kb/d, year-on-year and averaged only 8.9 mb/d, making it the weakest third quarter since 2001. By contrast, diesel demand grew by an estimated 5.7%, or 190 kb/d, and averaged 3.5 mb/d, its highest level since 4Q2007. These readings correspond to weakness in vehicle miles travelled, albeit on a lagged basis, versus still growing road and rail freight. This divergent trend continues through our 2012 forecast, though with smaller declines in gasoline and more moderate diesel growth on weaker economic prospects. US GDP growth is assumed at 1.5% this year and 1.8% in 2012. Overall, US demand is expected to decline 1.1% (-210 kb/d) to 19.0 mb/d in 2011 and fall 0.5% (-90 kb/d) to 18.9 mb/d in 2012, with downward revisions of 40 kb/d and 20 kb/d, respectively.



In Mexico, oil demand rose by 4.6% in August, led by strong diesel (+13.3%) and residual fuel oil readings (+20.3%). Economic growth has slowed, though our latest assumptions put GDP growth at a still respectable 3.8% and 3.6% for 2011 and 2012, respectively. With stronger-than-anticipated August data, the outlook is revised up by 20 kb/d in 2011 and demand is expected to decline 0.8% (-20 kb/d). The forecast for 2012 is adjusted up by 10 kb/d, with demand expected to fall 0.4% (-10 kb/d).

Europe

Preliminary inland data indicate that oil product demand in Europe increased by 0.3% year-on-year in August, led by gains in LPG (+4.3%), diesel (+2.9%) and heating oil (+1.9%). These more than offset declines in gasoline (-2.5%) and naphtha (-2.0%). The pick-up in European demand growth followed two months where declines averaged -2.6% year-on-year. Some of the strength may simply be due to accelerated seasonal filling of heating oil tanks at the consumer level, though it may also indicate a somewhat more supportive demand picture, particularly in France, Germany and Poland, as economies continue to expand.



Revisions to July preliminary data were positive, at +60 kb/d, with higher readings for most products outweighing downward adjustments to gasoline (-50 kb/d) and jet fuel/kerosene (-20 kb/d). GDP growth expectations for Europe have been trimmed to 1.9% for 2011 and 1.4% for 2012, versus 2.0% and 1.7% previously. Nevertheless, based on higher baseline readings, the forecast has been revised up by 50 kb/d and 20 kb/d for 2011 and 2012, respectively. We now see European demand declining by 190 kb/d (-1.3%) to 14.4 mb/d in 2011 and falling 130 kb/d (-0.9%) to 14.3 mb/d in 2012.



In August, according to preliminary data, oil product deliveries in France rose by 3.8% year-on-year with all categories except residual fuel oil posting gains. Growth was strongest in diesel (+4.3%) and heating oil (+18.2%), where it appears that consumer tank filling has accelerated ahead of winter. Such strength was also evident in Germany, where demand rose 1.2%, reversing average declines of 8.1% during the previous two months. Diesel increased by 5.2% and though heating oil deliveries fell by 0.2% year-on-year, demand was sharply higher on a monthly basis. Poland was another source of support, with total product demand up 5.9% year-on-year. Gains there were broad based, with diesel (+8.2%) and LPG (+7.5%) growing strongly. By contrast, the picture has slowed in Turkey. Following year-on-year growth of 6.2% in 1H2011, demand rose by only 1.4% in July. Still, data submissions indicate that diesel deliveries soared to new highs, with growth of over 20% year-on-year.

Pacific

Preliminary data indicate that oil product demand in the Pacific grew by 2.7% year-on-year in August, led by 'other products', residual fuel oil and naphtha. The economic outlook has been revised up for 2011, with a stronger Japanese recovery, but revised down for 2012. GDP growth expectations are now 0.8% in 2011 and 2.9% in 2012. Revisions to July preliminary data, at -100 kb/d stemmed mostly from lower 'other products' demand in Japan. Still, oil demand continues to be buoyed by oil-fired power generation in Japan and, to a lesser degree, by petrochemical activity in Korea. These factors may diminish from 2H2012, though our forecast is revised up marginally by 10 kb/d for both 2011 and 2012. We now see regional demand increasing 80 kb/d (+1.0%) to 7.9 mb/d in 2011, and holding steady for 2012 (+0.0%).



In Japan, oil demand rose by 4.0% year-on-year in August, with 'other products' (+27.3%), which include crude direct burn, residual fuel oil (+22.3%) and naphtha (+4.4%) posting the strongest gains. Diesel (-3.6%) and gasoline (-2.1%), by contrast, weakened versus year-ago levels. Oil burning for power generation continues to underpin demand growth. Despite volatility in reported deliveries - 'other products' plus fuel oil demand increased by 60 kb/d from June to July but surged by 280 kb/d from July to August - main utilities have reported a smooth and steadily rising oil consumption pattern. Recent temperatures have not approached the high levels seen in late-summer 2010, but the nuclear power outlook remains unclear. At the time of writing, only 10 nuclear reactors, of 54, remained online in Japan with plant restarts contingent upon the still-evolving policy debate. Our outlook has changed little from last month, with total oil demand growing 1.5% (+70 kb/d) to 4.5 mb/d in 2011 and holding steady for 2012 (+0.0%). This forecast pre-supposes gradual recovery in nuclear generation, and therefore receding crude burn requirements, over the course of 2012.



Meanwhile, in Korea, demand rose by only 0.2% in August. Most products declined, except for naphtha (9.3%) and diesel (+3.5%), with the former benefitting from increased petrochemical activity. In September, power outages hit residential areas across the country with surging temperatures in the face of seasonal plant maintenance. The government is seeking to avoid further blackouts this winter by having utilities secure additional coal supplies. For now, the upside to oil demand looks limited (in August, residual fuel oil declined 11.6% year-on-year), with economic concerns predominating. Our outlook sees demand falling by 20 kb/d (-1.0%) in 2011 and by 10 kb/d (-0.4%) in 2012.

Non-OECD

Preliminary demand data indicate that non-OECD oil demand grew by 2.7% year-on-year (+1.2 mb/d) in August, down from 3.6% growth in July. Much of the slow-down stemmed from relatively weaker demand growth in China and Saudi Arabia. Total August demand is estimated at 43.5 mb/d, while July levels have been revised down by 50 kb/d to 43.8 mb/d (+1.5 mb/d year-on-year).





Gasoil, LPG and gasoline led product growth in August. With weaker growth in direct crude oil burning in Saudi Arabia, 'other products' demand growth was flat year-on-year and sharply lower than in July. At the regional level, growth in the FSU remained robust due to surging Russian demand while Asian growth moderated and the Middle East witnessed a rare monthly decline in year-on-year demand growth.



China

China's monthly apparent demand (calculated as refinery output plus net product imports) rose by 5.8% year-on-year in August as slower refinery runs outweighed higher product imports. Apparent demand in July was revised up by 50 kb/d, putting growth for that month at 6.6%. August demand was led by year-on-year increases in gasoil (+6.5%), residual fuel oil (+10.6%), jet fuel/kerosene (+9.5%) and gasoline (+5.2%). The monthly demand pattern fits with our view of moderating growth rates over the next 18 months as the economy slows. However, with GDP growth and demand growth expected to average 9.0% and 5.0% (+480 kb/d), respectively, in 2012, the outlook still looks robust.



In addition to moderating economic activity, part of the demand growth slowdown relates to easing auto sales in China. August data show car sales up 7.5% year-on-year, amid overall vehicle sales up just 3.3%. While these rates are stronger than previous month readings and long-term prospects for vehicle growth remain robust, they are still far lower than the 30+% growth in 2010. The expiry of government tax incentives, reduced availability of vehicle registrations in cities and higher gasoline prices have all contributed to the slowing. The National Development and Reform Commission (NDRC) cut prices for gasoline and diesel by 3-4% on 9 October, but this was the first adjustment since April 2011. The responsiveness of domestic prices may increase as the NDRC has announced plans to shorten its adjustment mechanism for retail product prices from 22 days to 10 days, which would make them more sensitive to international crude prices. Nevertheless, anecdotal evidence gleaned on a recent visit to Beijing suggests that persistently high gasoline prices may indeed be curbing taxi driving, with drivers complaining about tenuous profitability and cutting hours accordingly.



Other Non-OECD

In India, oil demand rose by 2.7% in August, slightly slower than the 2.9% increase in July. Growth was stable in gasoil (+6.3%) and gasoline (+4.3%) while LPG growth rose to +9.5%. Residual fuel oil, jet fuel/kerosene and naphtha all registered declines. Indian economic prospects are seen somewhat higher for 2011 and lower for 2012, with growth now expected at 7.8% and 7.5%, respectively. Passenger car sales growth continued to slow from its rapid expansion in the first half of the year. August auto sales fell for the second month in a row, decreasing 10% year-on-year. Rising gasoline prices, which are formally deregulated, may be a contributing factor to the slowdown. Oil Marketing Companies (OMCs) raised prices by $0.11/litre in May and instituted a further $0.07/litre price rise in September.







Demand in Russia has shown little sign of slowing, growing by 10.4% year-on-year in August. Gasoil and residual fuel oil demand continued to soar, growing by 20.9% and 30.5% year-on-year, respectively, even as we have cut economic growth prospects on average by 0.4% for 2011 and 2012, to 4.3% and 4.1%, respectively. This year's demand growth has exceeded expectations based on income and may stem from a degree of end-user stock building. By contrast, the 2012 forecast is more in line with longer-term income-demand relationships.



In Saudi Arabia, demand fell by -3.5% in August. Sharply lower 'other products' (-15.6%), which includes crude direct burn for power generation, and residual fuel oil (-5.8%) accounted for the decline, though gasoline demand growth (+1.2%) also moderated. The decline may partly stem from reduced activity during Ramadan, which was centred on August this year rather than a more usual straddling of different months. Nevertheless, 'other products' demand and crude burn still rose on a monthly basis from July, though with a more smoothed pattern compared with previous summer spikes. Economic assumptions for Saudi Arabia remain steady, but we have revised our demand outlook there down by 50 kb/d for both 2011 and 2012. The outlook has also been cut for Syria by an average 40 kb/d this year and next, based on the IMF's assessment of negative GDP growth for 2011.







In Brazil product demand fell by 0.8% year-on-year in July, weighed down by residual fuel oil (-15.6%), gasoline (-3.3%) and LPG (-0.9%). By contrast, middle distillates posted strong growth, with jet fuel/kerosene and gasoil rising by 10.1% and 2.1%, respectively. Economic prospects have been trimmed, with real GDP growth seen at 3.8% for 2011 and 3.6% for 2012. Nevertheless, demand is expected to grow at a still solid pace, +1.8% (+50 kb/d) and +2.4% (+70 kb/d), for the two years.

From 1 October, Brazil cut the mandated anhydrous ethanol content in gasoline by 5% to a level of 20%. On the one hand, with overall ethanol (whose prices are high and set by the market) tightness likely to ease versus gasoline (whose prices are relatively fixed), the move may help revive total gasoline consumption, growth rates for which have fallen steadily. That said, efficiency gains will derive from the higher energy content of a gasoline pool containing less ethanol. Petroleum based gasoline requirements may rise by only 30 kb/d to substitute for the reduced anhydrous ethanol, but this will put pressure on an already strained refining system and necessitate increased imports.



Argentina's oil demand rose by 4.1% year-on-year in August, on the back of still robust economic growth. LPG and gasoline led the increases, growing by a sizeable 29.6% and 15.1%, respectively. Total product demand is expected to average 730 kb/d in 2011 (+3.5% year-on-year or +20 kb/d) and 750 kb/d in 2012 (+3.2% or 20 kb/d), with GDP growth at 8.0% and 4.6%, respectively. While the 2011 demand forecast is guided by eight months of reported data, the 2012 outlook is based upon longer-term income-demand relationships.

Supply

Summary

  • Global oil supply fell by 0.3 mb/d to 88.7 mb/d in September from August, driven lower by reduced non-OPEC output. Compared to a year ago, global oil production increased by 1.0 mb/d, 40% of which stemmed from higher OPEC NGLs production and another 60% from increased OPEC crude output.
  • Non-OPEC supply fell by 0.3 mb/d to 52.6 mb/d in September, largely due to weather and/or maintenance related shut-ins in North America, the North Sea, and Latin America, as well as unplanned outages in the Middle East. Non-OPEC supply is expected to increase during the fourth quarter by 0.7 mb/d compared to the third quarter after maintenance is completed in the North Sea. Annual non-OPEC supply growth now averages 0.2 mb/d for 2011 and 0.9 mb/d for 2012.
  • OPEC crude oil supply was down by a slight 20 kb/d to 30.15 mb/d in September, with lower output by Saudi Arabia and Nigeria partly offset by the resumption of Libyan production. Despite ongoing armed conflict in Gaddafi strongholds, crude production was rapidly restored to 350 kb/d by early October following the liberation of Tripoli in early September. Success in restoring supplies to date has led us to revise upward our outlook for the country's capacity, with year-end output now pegged closer to 600 kb/d, although formidable challenges remain.
  • Calls by some in OPEC for fellow members to sharply scale back production now that Libyan production has restarted may be premature. The average 'call on OPEC crude and stock change' for 4Q11 has been adjusted 0.3 mb/d higher, to 30.8 mb/d, in response to lower forecast non-OPEC supplies. The 'call' for 2012 is largely unchanged at 30.5 mb/d, marginally lower than the 30.6 mb/d average for 2011. Effective OPEC spare capacity is estimated at 3.31 mb/d.


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

Note:  Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from July 2007, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast. This totals -200 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC Crude Oil Supply

OPEC crude oil supply was down by a marginal 20 kb/d to 30.15 mb/d in September, with lower output by Saudi Arabia and Nigeria partially offset by the resumption of Libyan production. Despite ongoing armed conflict in Colonel Gaddafi's strongholds, the country's oil industry has been able to quickly ramp up production, to a level around 350 kb/d in early-October, following the fall of Tripoli in early September (see 'Libya Flexes it Production Muscle').

Libya's return to the global market may have already set in motion a rebalancing of production flows for several OPEC member countries which stepped in to fill the breach after hostilities broke out last February, forcing the shut-in of some 1.6 mb/d of production. Fellow OPEC members, led by Saudi Arabia, have collectively increased supplies by more than 1.1 mb/d from the 2011 low seen in April in a effort to replace lost Libyan crude. Both Kuwait and the UAE raised output in September to the highest levels in around three years to help compensate for Libya's shutdown. However, Saudi Arabia, which increased output by around 1 mb/d in recent months, appears now to be scaling back supplies.



Calls by other OPEC members, including Iran, Iraq and Venezuela, for Saudi Arabia to rein-in supplies now that Libyan output has restarted may be premature. The group's output is still running 300 kb/d below pre-Libyan crisis levels of 30.5 mb/d from January 2011. Moreover, despite increased output by several OPEC members and the IEA's Libyan Collection Action, demand has continued to run ahead of supply by an average 0.6 mb/d so far in 2011. Crude oil stocks in OECD Europe and Pacific are holding well below the five-year average.

Indeed, the 'call on OPEC crude and stock change' for 4Q11 has been adjusted higher in response to lower forecast non-OPEC supplies. After a downward adjusted 2011 peak of 31.2 mb/d in 3Q, the 4Q11 call has been raised by 300 kb/d, to 30.8 mb/d, due to a downward revision in expected supplies from the North Sea, Brazil, Yemen and Syria. The 2011 'call' is largely unchanged at 30.6 mb/d, but remains unchanged for 2012 at 30.5 mb/d.

Attacks on key crude pipelines in September and early October, which temporarily forced the shut-in of 600-700 kb/d in Iraq and Nigeria, are also a stark reminder of how vulnerable oil production facilities are in countries facing ongoing civil unrest, such as that confronted now by Libya.

OPEC will next meet in Vienna on 14 December to review the market outlook for 2012. When the group last met in June, the gathering failed to agree a Saudi plan to raise output to replace lost Libyan crude. OPEC's September supply was 2.57 mb/d above the now largely irrelevant official 24.845 mb/d target, which has been in place since January 2009. Recent statements by several OPEC ministers suggest that discussions at the December meeting may revolve around calls for some Gulf producers to curtail output to make room for Libyan supplies. Reaching accord on such a proposition will largely depend on benchmark crude prices, the state of Libyan reconstruction, the macro economic situation, current

outlook for oil demand and prevailing Saudi output levels.

Saudi Arabia curtailed output by an estimated 200 kb/d to 9.6 mb/d in September, according to export data and industry reports. The cutback is largely in line with lower domestic needs following the end of the peak summer demand period. Latest data from JODI indicate direct crude burn in August came in seasonally lower than expected. The more modest increase in crude burn was most likely due to Ramadan celebrations, which led to reduced industrial and consumer electricity use in August.

Saudi Oil Minister Ali Naimi suggested on 8 October that September production was down to as low as 9.39 mb/d. Although it is not clear whether this referred to production or actual supply to the market, or indeed whether this was a monthly low-point, it nonetheless supports views that output is now on a downward trend. Moreover, Saudi Arabia sent the clearest signal yet that it intends to protect revenues despite declining output with its decision to raise prices to record levels for its Arab Light for Asian buyers for November. The steep price hike took many market players by surprise, especially following the unplanned shutdown of Shell's massive 500 kb/d Singapore refinery and ensuing cutback in crude needs. Aramco's price rise is likely pegged to recent stronger refining margins and on expectations of robust demand for winter fuels.

Meanwhile, Saudi Arabia formally announced it is unlikely now to implement plans to raise its oil output capacity to 15 mb/d, arguing increased production and expansion projects elsewhere, such as in Iraq and Brazil, will be adequate. "There is no reason for Saudi Aramco to pursue 15 mb/d," Saudi Aramco chief executive Khalid Al Falih was reported as saying 8 October. Early on in the Libyan crisis, and likely aimed at quelling market fears of a critical production shortage, Saudi Arabia reaffirmed that it could increase capacity to 15 mb/d.

Kuwait raised output to its highest level in three years at 2.55 mb/d, up 20 kb/d from August levels. Production, however, is still some 250 kb/d below levels reported by officials. Kuwait reported to JODI an unusually sharp increase in crude production for August although tanker data show no significant change over the past few months through September. Some analysts have questioned such a rise, although recent JODI demand data also suggested higher domestic use. Others have cited claims to higher production as being designed to appease domestic political criticism of the state oil company.

Elsewhere in the Gulf, the UAE increased output by 20 kb/d to 2.55 mb/d, the highest level since September 2008, while Iranian supplies inched up 30 kb/d to 3.54 mb/d. Latest shipping data show the increased Iranian production was likely moved to floating storage. Gibson Shipbrokers reported Iranian floating storage rose by around 2 mb to 21.4 mb by end-September.

Iraqi output in September reached its highest level in almost 10 years. However, production edged lower in early October following attacks on pipelines in the south of the country. Production of around 650 kb/d at the southern part of the workhorse Rumaila oilfield was initially shut-in on 7 October following two bomb attacks. Total production from the BP-China National Petroleum Corp. joint venture had been running at around 1.24 mb/d. The field's southern output was gradually restored three days later. An estimated 540 kb/d produced from the northern part of the Rumaila field was not affected by the disruption. An earlier explosion at a degassing station during maintenance work also forced operator BP to temporarily shut-in output at Rumaila on 21 September.

Iraqi production in September rose by 60 kb/d to 2.74 mb/d, the highest level since November 2001 thanks to increased output from the new joint venture projects. Oil exports also reached new highs in September, up by 50 kb/d to 2.24 mb/d. Shipments from the Basrah and Khor al-Amaya terminals averaged 1.8 mb/d, up by about 70 kb/d from August. Exports of Kirkuk crude in the north were down by around 20 kb/d to 430 kb/d. Pipeline leaks related to ageing infrastructure led to a halt in crude exports through the Kirkuk-Ceyhan network on 28 September for several days. Reduced output from the Kurdish region also contributed to the monthly decline. Norwegian operator DNO said it reduced output at the Tawke field in early September while it conducted technical tests related to reservoir management. Total crude exports from the northern Kurdish region, which flow through the pipeline to the Turkish Mediterranean port of Ceyhan, dropped to 50-60 kb/d in early September from around 160 kb/d in August, before rising to 100 kb/d by the end of the month.



Nigerian supplies in September were down 100 kb/d, to 2.18 mb/d, following a series of pipeline outages on the Bonny and Forcados network due to sabotage and oil theft. Reports suggest there have been almost a dozen vandalism incidents in August and September on pipelines in eastern operations of the Niger Delta. In early October, Shell declared force majeure on its Forcados export programme for October, November and December 2011 following the production shutdown stemming from sabotage on the Trans Forcados Pipeline. Forcados output was already cut by as much as 50% in the third week of September due to pipeline leaks. Operator Shell has not confirmed the exact amount of crude affected but loading schedules indicate exports were to average 220 kb/d prior to the attacks.  At the same time, Shell lifted its force majeure on Nigerian Bonny Light crude exports, which had been in effect since 23 August following several pipeline attacks.

The attacks risk reversing a fairly steady increase in production since the government's amnesty agreement with militant groups was implemented two-years ago.

Indeed, July production levels reached a five-year high of 2.32 mb/d. However, the latest escalation in oil thefts, or 'bunkering' as it is known in Nigeria, may ultimately result in more pipeline shut-downs going forward. After coming in for harsh criticism for its environmental record from a United Nations'(UN) report on oil spills released in August, Shell, the country's biggest foreign producer, is likely to take a much more aggressive approach in dealing with vandalism and bunkering. The UN report said decades of oil pollution in the Ogoniland area of the Niger Delta, located in Rivers state, will require the world's largest ever clean-up. Shell and other IOCs contend that a large majority of oil spills are caused by sabotage or oil theft. Soon after the reports' release, Shell shut in 25 kb/d from its Imo River field in the Niger Delta on 28 August, saying it has "shut in production from Imo River Field due to a recent upsurge of illegal bunkering and refining activities which have impacted the environment."

Angolan crude oil production in September rose to the highest level in sixteen months, up 55 kb/d to 1.75 mb/d, in part due to the end of field maintenance work and start-up of production at the Total-operated deepwater Pazflor field. Output is expected to rise in coming months as Pazflor ramps up towards its 220 kb/d capacity.

Libya Flexes its Production Muscle

Libya's national oil company and joint venture partners have moved quickly to restore output since the fall of Tripoli in early September. After being idled for more than six months, production from four fields brought online so far reached an estimated 350 kb/d in early October. In September, Libyan output averaged 75 kb/d. Despite the ramp-up in production, crude exports so far have been minimal as officials divert the early barrels to replenishing tanks at refineries given the critical need to meet domestic demand. To date, four cargoes carrying a total 2.5 mb have been sold since production started up in early September.

Despite still formidable challenges, success in restoring supplies to date has led us to revise upward our outlook for the country's production capacity through the end of the year. Production now looks on track to reach an average 400 kb/d in 4Q 2011, with year-end output closer to 600 kb/d. That compares with our earlier forecast of 350-400 kb/d by end-2011. Indeed, there may be more upside revisions once companies are able to conduct a more thorough assessment on the ground and determine if damage is less than initially feared. So far, however, there are still many conflicting reports about the state of the fields and infrastructure which need to be clarified. One manager at the 300 kb/d Elephant field said production start-up would be delayed due to severe damage while operator ENI reported no damage.

So far, production is made up of relatively easy barrels from fields unaffected by the fighting but thereafter restoring production may be more difficult as companies implement repairs to war-damaged fields, terminals and other key infrastructure. The National Oil Corporation (NOC) estimated that full pre-war output is achievable at end-2012.

The bulk of current production is coming from the eastern region of the country, and includes Sarir at an estimated 180-200 kb/d, Mesla at 60 kb/d and Bu Attifel at 70 kb/d. The offshore Al-Jurf field is also ramping up to its 40 kb/d target. Planned start-up of more fields from the western region in coming weeks, including the 200 kb/d Sharara field, should double current output, NOC officials said.

Internal power struggles within the nascent National Transitional Council (NTC) as well as at the national oil company, oil ministry and even at the field level may yet threaten output targets. Workers at the Waha oil complex, which produced 400 kb/d before the outbreak of unrest, are threatening to strike unless managers who are reportedly loyal to Colonel Gaddafi are fired and put on trial. Workers unearthed documents showing the management used the Waha oil facility as a base for Gaddafi's military operations. NATO targeted the complex because it was used to support pro-Gaddafi militia and, as a result, there is extensive damage to fields, including Waha and Gialo, which could take four to six months to repair.

While the bulk of the production in the eastern region of the country was spared some of the worst damage, output from the Sarir and Mesla fields, which were the first to come online and combined were producing 280 kb/d by early October, is likely to be capped at current levels until equipment is replaced and repairs made. Operator AGOCO said it could take a year to fix its power turbines near Mesla. Production elsewhere in the Sirte basin could also be hemmed in since exports flow through to the heavily damaged Es Sider terminal, which officials also say could take a year to repair.

Non-OPEC Overview

Non-OPEC oil supply is estimated to have fallen by 0.3 mb/d to 52.6 mb/d in September, largely due to weather and maintenance related shut-ins in North America, maintenance in the North Sea, unplanned outages in the Middle East, and outages and maintenance in Latin America. We expect fewer outages by the fourth quarter, with production increasing by 700 kb/d compared to 3Q11. However, compared to last year, non-OPEC supply in 4Q11 is estimated to grow by only 0.3 mb/d, halving our long-standing expectations from last month. Annual growth in 4Q11 stems mainly from gains in Latin America and Russia that are tempered by declines in Malaysia, China and Indonesia.

Continued mature field decline, slower than expected ramp-up of new production, and unplanned outages have caused us to reduce expectations for growth in 4Q11 (-300 kb/d) and the entire year (-30 kb/d). Noteworthy downward revisions in 4Q11 are focused in the North Sea (-95 kb/d), Brazil (-90 kb/d), US Gulf of Mexico (-80 kb/d), and the Middle East (-40 kb/d), which are offset by an upwards revision to US NGLs. In 2012, the revisions focus on the same areas and lead to an overall reduction in non-OPEC supply growth for next year by 180 kb/d to around 0.9 mb/d.



Although non-OPEC supply should grow by 0.9 kb/d to 53.6 mb/d in 2012, it is worth highlighting the major downside risks to our outlook.  In addition to planned maintenance in the North Sea, this past year has had its share of unplanned outages, reaching 650 kb/d in 3Q11, and many analysts question whether 2012 will be any different. We still maintain that the rebound from unprecedented levels of unscheduled outages and growing production in Latin America, the Caspian, Russia, Australia, and the US will bolster non-OPEC supply growth in 2012.  While we cannot forecast unscheduled outages in 2012, we customarily assume a 0.2 mb/d annual downward adjustment in our outlook, largely for potential equipment failures at mature assets in the OECD.  Looking forward, the forecast is most susceptible to further revisions from weather and other unplanned outages, persistent project slippage, and mature field declines.  However, set against that, the ability of high prices to stimulate activity remains, even if prices have receded in recent weeks.



OECD

North America

US - August, Alaska actual, other states estimated: US oil supply dipped by 57 kb/d to an estimated 8.0 mb/d in August as production declined in the Gulf of Mexico and in the Lower 48. Lower production was offset by a return to pre-maintenance levels at Alaska's Prudhoe Bay field. The impact of tropical storms accounted for some of the decline in August, though conventional PADD 2 production should remain lacklustre. We expect further declines in US production in September and 4Q2011 on weather-related shut-ins, as well as mature field decline. For example, the tropical storms in September caused a liquid build up in the Destin gas pipeline and led to BP curtailing production for around two weeks at some of its facilities including the Marlin and Pompano fields and the Na Kika complex. We have also reduced our outlook by 80 kb/d for production from the Gulf of Mexico in 2012 from an analysis of recent field level production that shows reduced performance from a number of individual fields.

In North Dakota, production for May, June, and July averaged 390 kb/d, 80 kb/d higher than the same period in 2010. State data indicated that the number of producing wells rose to more than 5 500, which was mitigated by other flooding related shut-ins and rail disruptions in June and July. Severe storms at the start of the year also caused a reduction in output.

An upwards revision to our outlook for US NGL production offsets declining US crude production in these areas. Recent NGL production data have exceeded our expectations, and thus we have revised upwards our assessment of NGL output for 2H11 and for 2012 by 100 and 140 kb/d respectively. There has been a marked acceleration of shale and tight gas resource development in the US in the last two years, especially those with high liquids content, and we believe these developments will continue to support rising NGL production in upcoming months. This revision is predicated on announcements of new fractionation capacity in areas with large amounts of unconventional gas production and on an assumption that  natural gas processing margins will continue to support NGL production (versus natural gas sales).



Canada -July actual:  Ramp up continued at the Suncor oil sands project in July, raising Canadian total oil production to 3.4 mb/d in July. Further gains in August and September are likely to follow production restart at the 75 kb/d CNRL Horizon mine/upgrader in mid-August. The project should regain 110 kb/d by October. July estimates for conventional crude production in Alberta also reached a record-low level of 290 kb/d, but are expected to rebound to pre-summer levels of 320 kb/d by September. Recent data show that the Hibernia field's production has rebounded by 50 kb/d from seasonal maintenance in the summer, although news of reduced loadings for later this year could be due to other maintenance or performance issues at the field. In September, Syncrude Canada conducted unplanned maintenance on the vacuum distillation unit of its 350 kb/d upgrader, and recent statistics show that output was 90 kb/d lower than August levels.

Mexico - August actual:  Mexican crude oil production in August increased by 20 kb/d compared to prior month levels, but fell by around 30 kb/d compared to the previous quarter. Monthly production increased due to record high output from the KMZ field of almost 850 kb/d, but likely fell back to around 800 kb/d after Tropical Storm Nate reduced output in September. We expect production from the field to decline only slightly in our outlook. We have adjusted NGL output in Mexico slightly to take into account seasonal fluctuations in output over the last five years.

North Sea

Norway - July actual, August provisional:  Total liquids production increased by 150 kb/d in July as fields returned from planned maintenance, but output likely declined by 170 kb/d in August on reduced output from the Statfjord area, shut ins at the Valhall field, and reduced NGL output. Maintenance is offset by a restart to production from the 25 kb/d Visund field, which had been shut in since April due to a gas leak. Looking forward over the next few quarters, we expect Norwegian production to continue to decline year on year by 25 kb/d in the fourth quarter and by 40 kb/d in 2012.

The outlook for 2012 production has been adjusted lower for three main reasons. First, news reports indicate a three to four month delayed start up to the 80 kb/d Skarv-Idun gas and condensate field, which operator BP had expected on stream in August. Second, recent production statistics show that some fields' production levels are lower than normal despite a return from maintenance. Finally, news reports indicate that the 130 kb/d Grane field has had problems with its injection compressor as it completed planned maintenance. Downward revisions now leave Norwegian oil production averaging 2.12 mb/d in 2H11 and 2.07 mb/d next year.



UK - July actual: Following widespread maintenance, July UK offshore crude oil production declined by around 100 kb/d to its lowest monthly level for at least 30 years. With the 200 kb/d Buzzard field still at reduced levels through August, crude oil output was likely even lower in August at around 900 kb/d. In upcoming months, Buzzard's return, albeit at a slow pace, as well as the completion of maintenance turnarounds will raise UK output by around 300 kb/d in the fourth quarter over 3Q11. Lower-than- expected production from the Schiehallion field and others in Forties leads to a more pessimistic view for these fields in 2012. More aggressive field decline rates remain a downside risk to the UK outlook. The production base, net of production increases, is projected to decline by 20% in 2011. Incorporating steeper decline, but a more normal profile for Buzzard in 2012 leaves UK production largely unchanged at 2011's level near 1.2 mb/d.

Asia

Australia - July actual:  Crude oil supply in Australia fell by 10 kb/d in July to 0.3 mb/d, its lowest levels since early 2006. At that time, cyclones hampered output, but production has been lower this time primarily because of a prolonged delay at Woodside's 70 kb/d Waimea and Cossack field as the Cossack FPSO is swapped out for the Okha FPSO. Production restarted at the end of September, and we expect it to reach 30 kb/d by December. The prolonged outage has further reduced our assessment of 2H11 production by 30 kb/d, and we have likewise lowered 2012 expectations at the field, causing a 20 kb/d downward adjustment for total Australian production. Despite these downward revisions, we still expect total liquids output to increase by 130 kb/d to 580 kb/d in 2012 on the addition of the Van Gogh and recently-started Kitan fields and higher NGL output.

Non-OECD

Asia

China - August actual:  China's oil production remained flat at July levels of 4.1 mb/d in August as shut ins at the Peng Lai platform offset growing output from the Changqing and Jilin fields. Overall, offshore production came in around 100 kb/d below last month's expectation due to the Peng Lai stoppage. At this stage, Chinese production is still expected to grow by 120 kb/d in 2012 to 4.3 mb/d, unless the Peng Lai stoppage extends beyond the 1Q12 assumed here. ConocoPhillips reported that depressurisation of the reservoir at Peng Lai is occurring to limit the possibility of further leaks, and the company reported they are working on a new field development plan without giving further details.

India - August actual:  India's output remained at 880 kb/d in August and should post annual growth of around 40 kb/d in 2011. We have slightly tempered our expectation for growth in 2012 because of a possible delay to Cairn's plans to produce an additional 40 kb/d from the Bhagyam field in the Rajasthan block. The government has not yet approved field development, and this also puts the 10 kb/d that we expected from the Aishwariya field in jeopardy.  Approval is being delayed because of the company's dispute with partner ONGC over royalty payments. Therefore, India's overall output should continue to grow in 2012 to 920 kb/d with some new field additions in Rajasthan, but tempered by these above-ground factors and mature field decline at onshore fields.

Malaysia - August actual:  Malaysia's output continued its three month upward trajectory to 670 kb/d in August with some rebounding production from the Kikeh field, which has been adversely affected for the last several months due to a well leak and sand in the oil. Output at the 115 kb/d field had been roughly halved since May 2011 as the operator waited for rig workovers to be completed. Operator Murphy Oil reported in August that the first workover well at Kikeh was successful, but this was offset by a mechanical problem at another 10 kb/d well on the field.  We estimate that Kikeh is currently producing around 60 kb/d with three production wells remaining shut in (in addition to the mechanical problem at a fourth well described above). With new details available about the timing of further phases and a slower expected ramp up, we have lowered 4Q11 and 2012 output by 30 kb/d and 10 kb/d respectively.



Indonesia - July actual:  Output in Indonesia increased by 2.5% to 920 kb/d in July, but output for 3Q11 is expected to be around 7% lower than 3Q10 due to mature field decline. We have very slightly lowered our monthly production estimate for September when a fire temporarily shut in around 15 kb/d of oil at CNOOC's southeast Sumatra block, where crude output is estimated at 48 kb/d.  Mature field decline in 2012 will be mitigated by around 40 kb/d of new crude and condensate output, and new volumes from the ExxonMobil-operated Cepu project. ExxonMobil expects to increase supply from around 25 kb/d to 165 kb/d by 2014. In addition to the $750 million EPC contract that ExxonMobil awarded in August, four additional EPC contracts for the onshore and offshore pipeline, the FPSO, and other related infrastructure need to be awarded for the project to achieve its target output.

Middle East

In Syria, the impact of sanctions is now beginning to be felt on oil output. Gulfsands said production from its Khurbet East and Yousefieh fields had been lowered from 24 kb/d to 6 kb/d from the beginning of October due to lack of domestic crude storage capacity. Given that this crude and Syrian Heavy generally lie in a mid-20s API gravity, other producers may also be having similar problems marketing their crude oil production to other buyers. As a result, we have reduced our 4Q11 forecast by 20 kb/d. 2012 output is similarly revised lower, now declining by 30 kb/d to 330 kb/d, albeit the absence of field-specific data makes projections more difficult.



In Yemen, pipeline sabotage continues to reduce output, causing us to lower expectations for 4Q11 by almost 20 kb/d. The Marib pipeline was sabotaged by militias for the fifth time since July during the first week of October.  The 120 kb/d capacity pipeline moves oil from the Marib and Shabwa oil fields to the Ras Isa terminal on the Red Sea, and the government maintains that crude oil continues to flow despite the sabotage. Before the most recent bombing, traders were reported saying that the pipeline flows to Ras Isa had been reduced by around 35 kb/d. Like Syria, the lack of recent monthly or even quarterly production data also complicates an accurate assessment of supply trends. As a cautionary measure, we have also reduced output by 10 kb/d in 2012, pending a stabilisation of the political situation in the country, the primary cause of the pipeline sabotage and worker strikes. Although President Saleh has returned to the country and has promised to stand down, the uncertain political landscape will continue to undermine the country's stability. Further downward revisions to the 4Q2011 and 2012 outlook are likely if the violence continues.  

Former Soviet Union (FSU)

Russia - September actual: Russia's total oil output hit another post-Soviet high of 10.6 mb/d in September, driven by expanding output at TNK-BP greenfields and rising production from Bashneft. Lukoil's production in September remained largely on par with last month's levels, but 3Q11 production is 100 kb/d lower than 2010 levels, mainly on declining production at legacy fields and poor performance at the Yuzhno Khylchuyuskoye field.  We expect production from some companies to increase further in upcoming months with the application of the new "60-66" export duty calculation. On balance Russian liquids production should maintain levels of around 10.6 mb/d. See last month's 'Russia: Upstream and Export Impacts of the 60-66 Tax Regime' in OMR dated 13 September 2011 for a more comprehensive discussion. The 60-66 regime reduces the marginal crude export duty rate from 65% to 60%, which enhances the profitability of upstream projects. The crude export duty fell by 7.4% in October from the prior month to around $56/bbl.



Kazakhstan - August actual:  Oil output rebounded by over 100 kb/d in August to 1.6 mb/d on recovering output from the 550 kb/d Tengiz field. The return from maintenance was quicker than expected and raised the baseline production level in 2011. In addition, we have accelerated the decline rate at other mature fields in Kazakhstan due to several months of lacklustre performance. Alongside a recent oil workers' strike, these two factors result in a 10 kb/d lower 2012 annual growth rate than last month's assessment. We expect production in 2012 to stay on par with 2011 at 1.6 mb/d.



FSU net oil exports remained flat in August at 8.8 mb/d as a 200 kb/d increase in crude exports offset a 210 kb/d decrease in product exports. Net exports now stand over 800 kb/d lower than year-ago levels driven by a 500 kb/d decrease in crude largely due to the year-on-year growth in refinery runs required to satisfy healthy domestic demand. Crude volumes rose to 6.3 mb/d on the month largely driven by a rise in Caspian shipments, despite the continued low utilisation of the BTC pipeline. In the Black Sea, Odessa saw exports rise by 140 kb/d, largely after TengizChevroil railed extra Tengiz crude oil to the terminal. Additionally, CPC volumes returned to normal 700 kb/d levels, rising by 40 kb/d on the month. Transneft volumes dropped by 70 kb/d to 4.0 mb/d, 100 kb/d lower than a year ago. Baltic shipments fell a further 20 kb/d following continuing maintenance at Primorsk and on its supply pipeline. Druzhba flows were also cut by 30 kb/d with lower deliveries to Hungary and the Czech and Slovak Republics. Looking forward, loading schedules indicate Transneft volumes are likely to rebound, but FSU exports could be capped by lower flows through the CPC and BTC pipelines.

Following an uptick in refinery maintenance and buoyant domestic demand, product exports plunged by a further 200 kb/d from July's already low level to 2.6 mb/d in August. Fuel oil was again the driver for this decline with Baltic deliveries, notably sent via Tallinn, falling sharply, on reports suggesting that Russian refineries ran this product as a feedstock. The 90% emergency export tax on light products appears to be having its desired affect of incentivising domestic supply at the expense of exports, as shipments of naphtha (included here under 'other products') fell by a considerable 70 kb/d.

Eastern Europe Looks Past the Druzhba

The imminent start up of the Baltic Pipeline System-2 (BPS-2) and the expected late-2012 commencement of the Eastern Siberian Oil Pipeline-2 pipeline extension from Skovorodino to the Pacific coast have once again focused attention on the dynamics of Russia's crude export destinations. Indeed, Eastern European governments have long been exploring routes to facilitate the diversification of their crude imports away from their heavy reliance on Russian Urals via the Druzhba pipeline. These states have two concerns; firstly, that their supplies could be compromised in the event of a short-term dispute between Russia and a transit state, and secondly that Russia will eventually look to re-orient its exports towards northern and eastern outlets leading to reduced Druzhba flows. Indeed, over the past months Poland, Slovakia, and Hungary have re-stated their intent to diversify crude imports away from Russia and several plans for infrastructure upgrades have re-emerged.

Poland recently declared its intention to import Azeri crude via Ukraine and Belarus with shipments planned to start either late-2011 or early-2012. Initially, the oil will follow the route already used to supply Belarus with Azeri crude where it will enter the Odessa-Brody pipeline followed by an already-reversed segment of the Southern Druzhba to Mozyr. Crude could enter the Northern Druzhba towards Poland or even be refined at Mozyr. In the long-term, a pipeline is planned between Brody and Poland's inland refinery at Plock bypassing Belarus. Such infrastructure would permit Poland to receive alternative supplies while also permitting Azerbaijan to supply other countries connected to the Druzhba network. However, with an environmental impact assessment on the Brody-Plock leg not scheduled until 2H12 but with funding available under the EU Infrastructure and Environment program, this remains a long-term project.

Hungary and Slovakia are currently exploring the idea of using the Adria pipeline running between the Croatian port of Omisalj and Hungary with a spur running from Hungary to Bratislava. However, in order for this to be a viable alternative for all countries involved, both the Adria pipeline and its Slovakian spur require significant investment to increase capacity towards a level capable of replacing volumes supplied by the Druzhba.

Additionally, Slovakia is exploring options for importing crude via the Czech Republic which already imports a significant portion of their crude from outside Russia via the Transalpine (TAL) and Ingolstat Kralupy Litvinov (IKL) pipelines. This plan would involve the reversal of the Druzhba link and thus would need to be mutually beneficial for both countries. Another obstacle would be the required capacity upgrade of the IKL pipeline, as at present its 200 kb/d capacity is only sufficient to supply Czech refineries.

Despite these proposed projects it should be noted that even with the arrival of the ESPO stage 1 in 2010, and the producers' choice to send some Western Siberian oil on this route, there has been no major reduction in Druzhba flows yet. This report has previously (see FSU Exporters Branching Out in 2009 Medium-Term Oil Market Report) identified the impact of Russian infrastructure developments as being more detrimental to flows coming out of the Black Sea rather than the Druzhba.  Nonetheless, the impetus to diversify sources of supply remains clear.

Latin America

Brazil - July actual:  Maintenance at offshore fields led to the lowest level of Rio de Janeiro offshore production since November 2008, at 1.52 mb/d in July, and preliminary August data indicate that production fell even further. Start-up at the Marlim Sul field may mitigate field maintenance, but not until September. The Brazilian crude oil production estimate for 2012 is lowered due to field level analysis showing production from fields in decline. In particular, production from Jabuti and Marlim Leste, Parque das Conchas, Cachalote, and Roncador fields are expected to decline at a quicker rate than originally forecast, which leads to a revision of 90 kb/d for 4Q11 and 2012. This month we have revised the ethanol output forecast further by -20 kb/d in 4Q2011 and by around -10 kb/d in 2012 because of the lacklustre sugar cane harvest.

Colombia -  July actual, August provisional:  Colombian output fell by 50 kb/d in July to 900 kb/d on the impact of protests at the Rubiales field, jointly owned by Petrominerales and Ecopetrol.  News reports indicate that protests continued to hamper output growth in August and September. Petrominerales' output also suffered from continued blockages at its Corcel and Guiatiquia fields in September, reducing output by around 15 kb/d in July. Their recent financial update indicates that 95% of this production has returned, but the threat of continued protests persists.  A recent agreement between the company and its workers could prevent further disruptions except not all the unions support it, and it could also increase Petrominerales' operating costs.  Consequently, we have reduced 2H11 output by 30 kb/d, although our expectation that Colombia will reach an average of 1.0 mb/d in 2012 remains unchanged.

OECD Stocks

Summary

  • OECD industry stocks fell by 3.4 mb to 2 692 mb in August, contrasting with a 14.0 mb five-year average seasonal build. Crude stocks dropped by 10.8 mb, as higher refinery throughputs in the Pacific ran down regional crude holdings. Elsewhere, seasonal draws were tempered by low refinery runs in Europe and deliveries from the US Strategic Petroleum Reserve (SPR) in North America. Distillate and 'other products' restocking in North America and the Pacific pushed OECD product stocks 9.4 mb higher.
  • OECD forward demand cover however rose marginally to 58.4 days in August, from 58.2 days in July, and in so doing remained 1.3 days above the five-year average. However, the absolute deficit of OECD oil inventories versus the five-year average widened to 22.5 mb in August and industry stocks stood more than 100 mb below inflated August 2010 levels.
  • Preliminary data point to a 12.7 mb decline in OECD industry holdings in September, as both crude and products declined seasonally. Strong refinery runs weighed on crude stocks in the US, while European crude and product holdings also contracted. However, gains in US products and in Japanese oil inventories provided a partial cushion.
  • Short-term oil floating storage declined to 43.4 mb in September, from 48.3 mb in August. Offshore crude oil holdings fell to 33.2 mb, as volumes held in the US Gulf and Northwest Europe were brought ashore. Meanwhile, refined products held in floating storage dropped to 10.2 mb, following the discharge of a vessel near West Africa.

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

OECD industry oil inventories fell by 3.4 mb to 2 692 mb, or 58.4 days of forward demand cover, in August. Crude oil stocks dropped by 10.8 mb, with the majority of the draw coming from the Pacific where higher refinery runs led to reduced inventories. North American and European crude stocks decreased by a modest 0.9 mb each, tempered by low refinery runs in Europe and final deliveries from the US SPR balancing needs for higher refinery inputs in North America. August data show European oil stocks have fallen by more than 70 mb since January, and now stand 44.4 mb below the five-year average.



Meanwhile, product inventories rose by 9.4 mb in August, led by gains in middle distillates and 'other products', albeit weaker-than-seasonal. Motor gasoline stocks declined by 7.8 mb. Distillates rose by 7.2 mb, driven by restocking in North America and in the Pacific, but the monthly build was lower than 'normal' as distillates in Europe fell counter-seasonally by 0.6 mb. This was due to stronger European distillate demand likely driven by filling of heating oil tanks by consumers.

From Peak to Trough in a Year, But Is This the Low-Point for Stocks Already?

August 2010 OECD industry oil inventories reached their second-highest level since the start of official OECD Monthly Oil Statistics reporting in 1984. Following several revisions over the past year, the data now show that, at 2 796 mb, OECD stocks in August 2010 stood only a modest 0.8 mb short of all time record highs from August 1998. A lot has changed in one year. A never-ending chain of supply and refining outages caused by various weather, labour, technical or political problems, has contributed to the steady erosion of OECD inventory levels and industry stocks have fallen by more than 100 mb. The stock overhang of 119 mb a year ago turned into a deficit versus the five-year average of 22.5 mb in August. It is worth noting that the five-year average is a rolling benchmark.



The North American overhang decreased from 117 mb to 45.6 mb. Product stocks contracted due to stronger exports, but crude stocks remained elevated due to higher volumes imported from Canada, infrastructure bottlenecks and export restrictions. A European surplus of 31 mb reverted to a 44.4 mb deficit, while the Pacific shortfall narrowed from 29 mb to 23.7 mb in one year. Pacific stocks were already declining structurally before March's disastrous earthquake and tsunami in Japan. Recovery efforts and nuclear outages in Japan temporarily reversed this trend and encouraged higher levels of stockholding. Meanwhile, European stocks were particularly hard-hit during the past year by a number of supply-side elements which have driven crude stocks lower. Labour strikes in France in October 2010, the loss of Libyan supplies, North Sea production outages, force majeure on Nigerian crude exports as well as the gradual redirection of Russian crude flows towards Asia all contributed. Furthermore, low refining profitability has depressed European refinery output and curbed regional product holdings.



The release of oil via the IEA Libya Collective Action occurred in recognition of tightening industry stocks and a desire to avoid further sharp stock draws which risked a damaging spike in 3Q11 prices. The fact that markets have continued to tighten since raises the question as to whether weakening economic growth and oil demand or continued supply-side outages will predominate through end-2011 and into 2012.

OECD industry oil holdings were revised up by 7.8 mb upon the receipt of more complete July data. The revision implies a 17.8 mb build in July versus a previously reported 10.8 mb increase in the last report. Gasoline, distillates and 'other oils' came in higher, while downward adjustments were centred in crude, fuel oil and 'other products'.



IEA Libya Collective Action: Accounting for Government Oil Inventories in August

Government barrels released as part of the IEA Libya Collective Action mitigated the drop in industry oil inventories, especially in the US. After a release of 30.6 mb of light sweet oil from the US SPR (of which 8.3 mb was delivered in July and 22.3 mb in August), North American industry crude stocks fell by a modest 0.9 mb in August, despite an active hurricane season, elevated refinery throughputs and low imports. Yet, weekly data point to a sharp 17.4 mb draw in US commercial crude inventories in September, also driven in part by lower production due to weather-related shut-ins in the US Gulf.



In Europe, preliminary data indicate draws of only 1.1 mb and 0.7 mb in July and August government stocks, respectively, whereas Belgium, Germany and the Netherlands released 3.9 mb of government oil. Part of this apparent discrepancy relates to stock releases being masked by other public stock movements, unrelated to the sale of IEA volumes. In the case of Germany, government stocks traditionally show more frequent turnover than any other IEA member country. Over the past five years, public stocks have tended to rise by an average 0.3 mb in July and fall by 0.5 mb in August and such 'background' changes in public stock holdings help explain why German data show only a 2.0 mb decline over July and August compared to an actual 2.6 mb release.

In the case of the Netherlands, a pledge to sell 1.2 mb of oil from public stocks far exceeds the reported release of only 0.4 mb from government stocks in July. After investigation, it now appears that a portion of oil owned by the Dutch stockholding agency was misreported in the industry category. Hopefully these volumes can be correctly re-allocated in subsequent data submissions.

In Korea, following a release of 3.5 mb of government stocks in July in the form of a loan, companies surprisingly returned 1.8 mb, of which 85% was crude, in August. This may reflect the fact that since the Japanese earthquake in March Korean refiners have been holding extra crude in order to help replace lost distillate exports from Japan. Arguably, this left them in a position to rapidly return loaned crude barrels.

Preliminary September data indicate a 12.7 mb decline in OECD industry inventories, sharper than the 8.0 mb five-year average draw. Strong refinery runs weighed upon crude stocks in the US, which fell by 17.4 mb. European crude stocks contracted by 4.3 mb, while increases in Japan provided a partial offset. Draws in distillates and fuel oil offset gains in gasoline, thus bringing product holdings down by 2.5 mb. Meanwhile, oil floating storage dropped 4.9 mb to 43.4 mb in September, from 48.3 mb in August.

Analysis of Recent OECD Industry Stock Changes

OECD North America

Industry oil inventories in North America rose seasonally by 2.5 mb to 1 363 mb in August. Despite higher regional refinery throughputs, industry crude stocks edged lower by a modest 0.9 mb, supported by a delivery of 22.3 mb of light sweet crude from the US SPR as part of the wider IEA Libya Collective Action. By contrast, over the past five years, North American crude oil stocks have decreased by 3.9 mb on average in August. Meanwhile, holdings of refined products gained 7.1 mb driven by sharper increase in 'other products' and a 4.7 mb addition to distillates. A counter-seasonal 3.8 mb draw in 'other oils', comprising NGLs and feedstocks, and a 6.3 mb decline in gasoline provided a partial offset.



Weekly EIA data point to a sharp 14.0 mb decline in US commercial inventories in September, contrasting with a more seasonal 6.5 mb average monthly build over the past five years. Refiners trimmed strong throughputs slightly from the previous month; nevertheless crude stocks plummeted by 17.4 mb. Crude imports were low in September especially into the East Coast, likely affected in part by the passage of Hurricane Irene at end-August, while Tropical Storm Lee shut down production in the US Gulf at the beginning of September. A release of 4.4 mb of crude from short-term floating storage held in the US Gulf did not provide as big an offset as the delivery of SPR barrels in July and August. Meanwhile, inventories at Cushing fell to 30.1 mb at end-September, 11.8 mb below their peak in April.



US refined product inventories increased seasonally by 3.8 mb in September. Gasoline holdings rose by 4.9 mb, again widening the surplus to the five-year average. Motor fuel holdings were oscillating between five-year average and prior year elevated levels as a weak driving season reduced gasoline demand and refiners diverted supply to export outlets including Latin America and West Africa. Meanwhile, distillates gained 2.8 mb, driven by gains in jet fuel/kerosene holdings, and fuel oil stocks declined counter-seasonally by 4.2 mb, likely on higher exports to the Asia-Pacific.



OECD Europe

Industry oil inventories in Europe declined by 1.6 mb to 921 mb in August, as crude and products declined by 0.9 mb and 0.5 mb, respectively. The region's oil stocks plummeted to their lowest level since November 2007, a draw in part allowed by lower stockholding obligations related to the IEA Libya Collective Action by providing a greater flexibility to the operators. This is in contrast with a seasonal 4.1 mb five-year average gain, as strong refinery runs normally deplete crude stocks and allow product tanks to be refilled ahead of winter. This year, a number of supply-side factors (see From Peak to Trough in a Year, But Is This the Low-Point for Stocks Already?) have brought crude stocks 25 mb lower since January, to the lowest levels since February 2003. Yet, crude stocks remain near comfortable five-year average levels when measured in terms of forward crude runs cover (crude stocks versus forecast crude runs over the next three months) on the back of what will likely remain depressed refinery throughputs.



By the same token, below-average refinery throughputs have contributed to a 46.8 mb reduction in product stocks since January, with distillate draws accounting for two-thirds of the decline. Middle distillate stocks, which usually build by 8.9 mb on average, fell by 0.6 mb in August, although heating oil restocking by German consumers also likely contributed to the primary stock fall. German end-user heating oil stocks stood at 56% of capacity at end-August, lower than the seasonal average 60% fill. Moreover, gasoline holdings, drawing by a 1.6 mb in August, shrank to the lowest levels on record. As such, European product stocks fell to 19.1 mb below the five-year average in August.



Preliminary Euroilstock data signal a seasonal 10.7 mb decline in EU-15 and Norway in September, in line with the 16.1 mb five-year average draw. Crude inventories contracted by 4.3 mb, while a sharp drop in middle distillates drove products 6.4 mb lower. Refined oil products held in independent storage in Northwest Europe declined, led by further draws in gasoline holdings.

OECD Pacific

Commercial oil inventories in the OECD Pacific fell by 4.3 mb to 408 mb in August. Crude stocks declined by 9.0 mb, as higher refinery runs reduced crude holdings in Japan by 6.9 mb, while lower imports and a precipitous return of 1.5 mb of earlier-loaned government stocks contributed to a 2.3 mb decrease in crude stocks in Korea (see IEA Libya Collective Action: Accounting for Government Oil Inventories in August). Meanwhile, product stocks and 'other oils' rose by 2.8 mb and 1.9 mb, respectively. Distillates gained 3.1 mb, driven by kerosene restocking in Japan. However, fuel oil stocks dropped counter-seasonally, due to elevated Korean exports to satisfy demand in Japan, Singapore and Hong Kong.



Weekly data from the Petroleum Association of Japan (PAJ) suggest an 11.9 mb increase in Japanese industry oil inventories in September. Crude oil stocks gained 9.9 mb on lower refinery runs while 'other oils' rose by 2.0 mb. In the meantime, product holdings remained virtually unchanged as modest draws in gasoline, distillates and fuel oil balanced 'other products' gains.



Recent Developments in China and Singapore Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories rose in August by an equivalent of 2.8 mb (data are reported in terms of percentage stock change). Crude oil holdings rose by 2.0% (4.3 mb) due to higher imports and lower refinery runs. Product stocks declined for the third consecutive month, led by draws in diesel (1.7% or 1.2 mb) and gasoline (1.2% or 0.6 mb), while kerosene stocks rose by 2.6% (0.3 mb) providing a partial offset.




Singapore onshore inventories fell by 1.4 mb in September, driven by a draw in fuel oil inventories. Fuel oil stocks fell by 2.9 mb on lower imports. Meanwhile, light and middle distillates stocks rose by 1.0 mb and 0.5 mb, respectively, led by stronger imports from other Asian countries. However, distillate stocks fell towards the end of September following Shell's major Singapore refinery outage.



Prices

Summary

  • Oil futures prices moved in tandem with the latest economic developments in September amid the worsening European debt crisis and pervasive fears of further deterioration in recession-hit countries. By the first week of October benchmark crudes had fallen $8.50-11.50/bbl from loftier early September levels. At writing prices had recovered from their lows, with WTI last trading around $84.50/bbl and Brent at $108/bbl.
  • While global economic concerns have been a key influence, supply and demand fundamentals are nonetheless having a more immediate impact on spot crude markets. In September, markets were supported by more robust demand in Europe and Asia, especially for Middle East grades, as scheduled refinery turnarounds complete over the next four to six weeks. The return of Libyan crude to the market has been partially countered by continued supply disruptions in the North Sea and Nigeria while OECD inventories have tightened further.
  • With few exceptions, refined product markets saw crack spreads weaken on average in all major regions in September. Gasoline crack spreads in the Atlantic basin eased as a disappointing summer driving season came to a close and refineries returned from maintenance. However, towards month-end and into early October product crack spreads improved on tightening product markets following a fire at a key Singapore refinery.
  • Freight rates for the benchmark VLCC Middle East Gulf - Japan route receded further in September following a drop in the number of cargoes leaving the Gulf as well as the retreat in bunkering costs, which had previously helped to buttress rates.


Market Overview

Oil futures prices were tethered to the latest economic developments in September amid the worsening European debt crisis. The eurozone quagmire has kept futures markets on tenterhooks and triggered downward price moves throughout September amid expectations of weakening oil demand. However, overall price moves in September were muted on a month-on-month basis, with WTI off by just $0.73/bbl to $85.61/bbl while Brent was flat at $109.91/bbl.

By the first week of October, benchmark crudes had fallen $8.50-11.50/bbl from loftier early September levels. WTI touched its lowest level in a year, flirting with $75/bbl while Brent hit an 8-month trough, falling below the $100/bbl threshold for the first time since the start of the Libyan crisis. At writing, prices have partially recovered from their 4 October lows on renewed optimism that European leaders were taking concrete measures to stem the economic malaise, with WTI last trading around $84.50/bbl and Brent $108/bbl.



Financial markets are closely dissecting the contentious debate among European officials and policymakers at international organisations as they struggle to rescue economies on the brink, especially Greece. In turn, this has buttressed oil's correlation to equity markets. Oil futures markets are grasping at any positive comments from European leaders as they search for sustainable solutions to sovereign debt issues, craft a plan for recapitalising banks and tackle the difficult task of increasing economic coordination in the euro zone before the 3-4 November G20 summit in Cannes. A more upbeat rhetoric (not to mention some encouraging economic data) has emerged in recent days, which has added some upward momentum to oil futures prices.

The WTI M1-M12 contracts narrowed in September, to around -$2.50/bbl compared with -$4.20/bbl in August. Meanwhile the Brent M1-M12 backwardation deepened to around $4.60/bbl in September compared with $1.55/bbl in August — signalling a tighter prompt market despite the return of Libyan crude supplies and steady downward revisions in global demand expectations for 2012. A growing chorus of analysts and traders argue that demand next year will be over 1 mb/d higher than in 2011, which should more than accommodate the return of Libyan crude.



On the supply side, the faster-than-expected ramp up in Libyan crude production during September and early October initially weighed on market sentiment and gave rise to speculation on whether or not OPEC members, which stepped into the breach to offset lost Libyan supplies, will now implement a corresponding cutback. Early indications are that Saudi Arabia, which increased crude production by around 800 kb/d to 1 mb/d since last spring in a bid to replace lost Libyan supplies, is already in the process of throttling back output.

OPEC cutbacks to make way for rising Libyan supplies may be premature. Libyan officials have moved quickly to restore output since the fall of Tripoli in early September, but so far there have been limited crude exports, with a large portion of the output being used to replenish storage tanks at refineries (see Supply Section, 'Libya Flexes its Production Muscle'). Despite just a trickle of Libyan supply heading to global markets, expectations of higher volumes in coming weeks and months are having a more pronounced impact on the price spreads between light, sweet crudes and heavier sour grades in the Mediterranean.



Futures Markets

Activity Levels

Open interest in WTI contracts in New York and London ICE exchanges showed considerable fluctuations in September. After reaching its highest level since mid-June in the second week of August, open interest in New York plunged by about 200 000 in futures-only contracts from its August peak of 1.56 million contracts to 1.37 million in the week ending 20 September 2011. This was the lowest open interest in futures-only WTI contracts in New York since 30 November 2010 (1.34 million contracts open then), with WTI then at $84/bbl. Although open interest increased in the week ending 4 October 2011, it registered a decline of more than 90 000 contracts, from 1.52 million to 1.43 million, from 6 September to 4 October 2011. Meanwhile, open interest in futures and options contracts increased by 0.5% to 2.8 million contracts. During the same period, open interest in London ICE WTI contracts declined in futures-only contracts to 0.44 million and increased in combined contracts to 0.52 million.



Money managers trimmed their bets on rising crude oil prices for three straight weeks in September, sending the number of net futures long holdings to their lowest in a year in the week ending 4 October as a response to resurgent fears about the health of global economy and outlook for oil demand. In September, net futures long positions of managed money traders decreased from 154 127 to 126 093 contracts in New York. Similarly, money managers cut their Brent futures net long position by 64.3% from 69 527 to 24 776 contracts, the lowest level since the ICE started publishing data in June 2011.

Producers reduced their net futures short positions to a three-year low of 127 561 contracts in the week ending 4 October by reducing their gross short positions by more than 16% in September in response to the decline in WTI prices from $86.02/bbl to $75.67/bbl; they held 24.35% of the short and 15.44% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 33% and 32.1% of the open interest on the long side and short side, respectively, increased their net long position by 92.4% from 6 848 to 13 176 contracts from 6 September to 4 October 2011.

However, producers' trading activity in the London WTI contract showed an opposite pattern from CME WTI contracts. Producers increased their net short positions in London ICE WTI contracts by 170% from 10 495 to 28 313 contracts over the same period. Swap dealers, on the other hand, switched to hold a net long position in the week ending 4 October. Though a relatively small number of contracts (2 489), it was the first time since 15 March 2011 that swap dealers bet in favour of rising WTI crude oil prices.

NYMEX RBOB futures and combined open interest increased by more than 2.5% in September. Open interest in NYMEX heating oil increased by 5.3% to 329 440 contracts while open interest in natural gas markets declined by 4.0% to 938 710 contracts.

Index investors reduced their long exposure in commodities in August 2011. They withdrew $6.3 billion from WTI Light Sweet Crude Oil, both on and off futures contracts, in August  to an eight-month low of 657 000 contracts, equivalent to $58.8 billion in notional value.



Market Regulation

Before missing the congressionally mandated deadline for implementing rules that will govern OTC derivatives markets, the Commodity Futures Trading Commission (CFTC) issued an order on 14 July to clarify the effective date of the provisions in the swap regulatory regime that would have gone into effect on 16 July 2011 established by Dodd-Frank Act. The CFTC argued that "The order provides temporary relief from certain provisions that will become effective as of 16 July 2011, until the CFTC completes the rulemakings specified in the order. The CFTC's action will avoid disruption in the markets, and will provide for the orderly implementation of the new comprehensive swap regulatory regime mandated by Congress. This order is temporary, and expires upon the effective date of final rules or 31 December 2011." However, the CFTC later indicated that they may need to extend certain exemptions beyond the December deadline as it became clear that they cannot complete final rules before then.

To date, the CFTC has issued 15 final rules ranging from large trader reporting, anti-manipulation rules, definition and regulation of agricultural swaps, process for review of swaps for mandatory clearing, process for rule submissions by registered entities, whistleblower incentives and protection, and consumer protection to the registration of swap data repositories. Most of the rules become effective within two months after the publication of the final rules. However, the CFTC issued a letter on 16 September granting temporary relief from daily large trader reporting requirements, which were to take effect on 20 September. The decree provides voluntary relief from reporting requirements to derivatives clearing organisations and clearing members until 21 November for cleared swaps and 20 January 2012 for uncleared swaps.

The CFTC has yet to provide its final rule on the most contentious issues, such as the definition of swap dealers and major swap participants, clearinghouses, swap execution facilities as well as position limit rules. The CFTC, after delaying consideration in September, cancelled the 4 October meeting to discuss position-limit rules. At the time of writing, the position-limit rule was being scheduled for consideration at the 18 October meeting.

The delay in finalizing the rule on position-limits might suggest that the CFTC lacks the three votes for approval, or that the CFTC is taking more time to properly analyse the costs and benefits of the so-called position-limit rule.

In the meantime, unless there is no last-minute change, the European Commission is expected to release its amendment to Markets in Financial Instruments Directive (MiFID) in mid-October. It is expected that the final draft would align European regulation with the proposed regulatory regime in the US.

Commodities: No Longer an Asset Class in their Own Right?

Investors, seeking to diversify their portfolio and hedge against rising inflation, have increased their exposure to commodities by directly purchasing commodities, by taking outright positions in commodity futures, or by acquiring stakes in exchange-traded commodity funds (ETFs) and in commodity index funds. This pattern has accelerated in recent years. According to index investment data collected by Barclays Capital for US and non-US assets under management, commodity index investment has increased from $55 billion in late 2004 to $431 billion in July 2011.

The initial surge in investment in commodities is due to the observed negative correlation between commodity returns and the other asset returns as well as positive correlation between inflation and commodity returns.

Although the positive correlation between inflation and commodity returns (0.55 for the last twenty years and 0.73 for the last three years in monthly inflation and commodity returns proxied by returns on S&P Goldman Sachs commodity total return index) is still present, the recent positive correlation between commodities and the other asset classes raise the question of whether commodities can still be considered as an asset class in their own right, and particularly a route to portfolio diversification.

A commonly used approach is to consider an investment as a separate asset class when:

  • Its expected returns are higher than risk-free returns;
  • Its returns perform differently from other asset classes in any given market environment; and
  • Its returns may not be replicated with a linear combination of other asset classes.
  • Up until Lehman Brothers' demise in September 2008, commodities met all three criteria. However, since then, commodities have not displayed the last two characteristics of an asset class. Of course, there are episodes in history when commodities moved in sync with other assets, especially equities. Nevertheless, compared to other episodes in the last two decades, the last three years have seen different dynamics in their degree and duration.

    Between September 1991 and September 2008, weekly returns on commodities proxied by Goldman Sachs commodity index were very close to equity returns and exceeded bond returns and risk-free Treasury-bill returns. They displayed negative correlation with stocks (-0.008) and bonds (-0.008) (as shown in the upper triangle of the correlation table). However, since September 2008, commodity returns registered negative returns as well as statistically significant positive correlation with equities (0.689) and bonds (0.022) (as shown in the lower triangle of correlation table) returns.



    Furthermore, if we regress the weekly GSCI return on weekly stock returns for the two sub-periods considered above, then these regression analyses suggest that the variation in commodity returns is independent of either stock or bond returns between September 1991 and September 2008 - but not afterwards. Specifically, the regression results after Lehman's demise suggest that more than 47% of the variation in commodity returns can be explained by variation in stock returns. The statistically significant coefficient on stock returns suggests that a 1% increase in stocks returns leads to 0.85% increase in commodity returns. Additionally, when we regress weekly GSCI energy returns on stock returns, we find a statistically higher coefficient on stock returns, revealing that a 1% increase in stocks returns leads to a 1% increase  in energy-commodity returns.  These findings suggest that post-Lehman commodity returns might be replicated by returns on stocks. In this sense, one may conclude that commodities in the last three years do not appear to fulfil the three criteria  to be considered as a separate asset class in their own right.

    As we argued earlier, the recent episode of high correlation between different assets may not be unique, and it is unclear whether the change observed between asset classes' movement, or more specifically commodity prices, are permanent. Several recent academic studies suggest that the financialisation of commodity markets has increased the co-movements between equities and commodities. If these studies' findings are any guide, we may well expect that co-movements between commodities and equities are here to stay as long as investors' appetite for commodities stay strong.

Spot Crude Oil Prices

Immediate global economic concerns and emerging expectations of weaker supply and demand fundamentals are having an immediate impact on spot crude markets. In September, prices trended lower but still found some support from more robust demand in Europe and Asia, especially for Middle East grades, as scheduled refinery turnarounds complete over the next four to six weeks.

In addition, the upcoming peak winter demand period underpins record premiums for distillate rich crudes such as Russian ESPO and the UAE's benchmark Murban crude. Initial expectations that a fire at Shell's 500 kb/d Singapore refinery would undermine crude markets proved fleeting, especially after Saudi Arabia raised November prices for Arab Light to record levels for Asian customers. Iran, Kuwait and Iraq followed the Saudis lead and also raised prices for Asian customers for November. As usual however, interpreting formula price changes as either an attempt to ration demand on the one hand, or merely an acknowledgement that supplies will be lowered on the other, is difficult to call.



Spot crude oil prices for benchmark Brent and other European, African and Middle East crudes on average rose by around $1.25/bbl to over $3/bbl in September while isolated WTI posted a modest decline for the month. However, prices tumbled in line with the overall market-wide rout, with spot prices down by $8-12/bbl between early September and the first week of October.

WTI declined on average by $0.75/bbl, to $85.55/bbl, in September but by early October had plummeted to one-year lows above $75/bbl. Prices have since recovered from their 4 October lows, with WTI last trading around $85.65/bbl. WTI's discount to Dated Brent widened by around $3.50/bbl in September, to $27.57/bbl, largely on continued price strength for the North Sea grade.

Dated Brent prices posted a monthly increase of $2.75/bbl, to around $113/bbl, in September, supported by continued North Sea supply disruptions. North Sea outages are estimated at a steep 500 kb/d in 3Q11 and are seen only easing in 4Q11, to 170 kb/d. Underscoring the relative strength of the North Sea market, Brent M1-M2 backwardation has widened to around $2.20/bbl in September from just $0.45/bbl in August.



Although the persistent delays to the North Sea loading programmes have contributed to stronger European markets, the lack of Libyan supplies also continued to be a major support. Libyan officials have moved quickly to restore output since the fall of Tripoli in early September, but so far there have been limited crude exports, with a large portion of the output being used to replenish storage tanks at refineries (see 'Libya Flexes its Production Muscle').

That said, the prospect of increased supplies of Libyan crude have already pressured sweet-sour spreads in the Mediterranean. The premium of Azeri Light, which has been a main replacement crude for shut-in Libyan supplies, over Dated Brent narrowed to $2.40/bbl in September compared with around $4/bbl in August. The Saharan - Dated Brent spread, with the former typically trading at a premium, was about flat at an average $0.01/bbl in September compared with a $1.12/bbl premium in August.

In Asia, Dubai's discount to Dated Brent widened to an average $6.82/bbl in September compared with $5.35/bbl in August, largely due to the latter's relative market strength on supply disruptions. The premium for light, sweet Malaysian Tapis over Dubai widened in September to around $13.40/bbl, up almost $2/bbl above August levels. Asian demand for regional grades has increased as refiners shun some African barrels linked to pricier Brent crude.



Spot Product Prices

Refined product markets registered a downturn in crack spreads on average in September in all major regions, but overall differentials remained fairly robust, especially for middle distillates. The end of the summer driving season, coupled with higher throughput rates as refineries returned from maintenance, saw gasoline crack spreads ease in the Atlantic basin. Middle distillate crack spreads were marginally weaker before the start of the winter heating season. Fuel oil discounts widened due to increasing crude prices early in the month, although strong bunker fuel demand in Singapore provided support. Generally, product crack spreads improved in the second half of the month with weaker crude prices and the fire at the 500 kb/d Pulau Bukom refinery in Singapore providing support at month-end and in early October.





US gasoline crack spreads posted the largest decline on the US Gulf Coast, down a steep $9.20/bbl for Mars in September from the high levels seen in August. Prices edged lower in response to continuous low-demand readings at the end of a weak summer driving season and with renewed fears of recession. In addition, the shift to winter grade gasoline in New York Harbour, and increasing stock levels as refineries on the US East Coast came back on stream after Hurricane Irene, added downward pressure on markets.



The depressed US market also undermined European gasoline prices as arbitrage opportunities to the US dissipated. European gasoline markets, however, were supported by stronger demand from West Africa and below-normal stock levels. Weaker market fundamentals coupled with higher crude prices were behind the decline in gasoline crack spreads, off by around $3.80/bbl for Dated Brent in Northwest Europe and by $3.90/bbl for Urals in the Mediterranean. In Asia, gasoline crack spreads increased month-on-month.

Asian markets have been tighter in general over the last few months due to regional refining maintenance, but markets softened mid-month as plants came back on stream. However, the closure of the 500 kb/d Pulau Bukom refinery in Singapore after a fire triggered a jump in prices at end-September.

Middle distillate crack spreads fell month-on-month in all regions as demand was still somewhat muted at the start of the winter heating season. However, there were several factors propping up the market throughout September. Lower supplies from Russia supported European markets, whereas US markets were still taking advantage of strong demand from Latin America. Fuel oil crack spreads widened month-on-month in all regions in September but the decline masks a steady improvement throughout the month. Although the peak summer demand season for fuel oil at power plants is over, Asian markets were supported by high bunker fuel demand and lower exports from Iran. In Europe, support came from arbitrage volumes going to Asia and diminished fuel oil exports from Russia.

Refining Margins

Refining margins decreased month-on-month in September, falling steeply from higher August readings towards mid-month as product crack spreads narrowed, in particular for gasoline. However, margins improved again towards month-end as product crack spreads increased. This was due to both weaker crude prices and tightening product markets with the fire at the major Pulau Bukom refinery in Singapore. US refining margins decreased the most on average, with margins on the Gulf Coast and Kern margins on the West Coast falling month-on-month by $4.60-$6.75/bbl and $9-$13.80/bbl, respectively.



US Gulf Coast refining margins were driven lower by narrower gasoline crack spreads compared to the high levels seen in August, with the end of the summer driving season and increasing stock levels as refineries increased production. Only Maya coking margins managed to stay in positive territory on average for September due to Maya crude's favourable pricing. Further pressure came from narrower middle distillates crack spreads, as markets were quiet before the winter heating season. However, margins improved towards month-end with both LLS cracking and Mars coking margins back in positive territory as product markets tightened and crude prices weakened. US West Coast margins suffered from weak gasoline cracks as well, but in addition, a widening fuel oil crack adversely affected margins.

European refining margins were depressed by weakening gasoline crack spreads in September, but also a widening fuel oil discount contributed, pressuring margins at simple refineries in particular. Towards month-end, crack spreads improved both due to weaker crude prices and the fire at the Pulau Bukom refinery. In addition, Urals weakened relative to Brent giving extra support to Urals margins.

In Asia, Singapore refining margins fell even though product cracks improved towards month-end due to the fire at the Singapore refinery. Tapis margins showed an average calculated loss in September of $10.60/bbl at a simple refinery, a level corresponding to the lows from April and May this year. Weak fuel oil product cracks at the beginning of the month depressed margins as did relatively stronger Tapis crude. In China, Daqing margins improved slightly month-on-month on the increased crack spreads for light and middle distillates towards month-end.



Review and Updates of US Refining Margin Model

This month, Purvin&Gertz has made several changes to the refining margin model affecting the US margin calculations. The updated version takes into account the benzene reduction programme for gasoline, which affects the yields at US refineries. For updated details on yields, please visit the user's guide at our web site www.oilmarketreport.org. Furthermore, the Bonny light refining margin calculations have been discontinued as the Bonny crude assay has changed radically and political disruptions in Nigeria are affecting the production of a number of streams. We are considering replacing the Bonny calculation with another viable offshore sweet crude in the near future.

USGC Refining Margin Model Changes:

In February 2007, the EPA finalised rule-making activities intended to reduce emissions of hazardous air pollutants from motor vehicles. The regulations require more stringent control of hydrocarbon exhaust emissions at low temperatures, reduced evaporative emissions from portable fuel containers, and lower benzene content in gasoline.

The gasoline benzene controls require that refiners and importers meet an annual average maximum benzene content of 0.62% (volume) on all gasoline (both conventional and reformulated). California gasoline is excluded from the programme. A nationwide credit banking and trading system has been established, but no supplier will be allowed to exceed a maximum physical average of 1.3%. The technologies generally used to reduce benzene include pre-fractionation of reformer feed to eliminate benzene precursors, isomerisation of light naphthas to saturate benzene, extraction of benzene from reformate, and saturation of benzene in streams such as FCC naphtha.

The new benzene restriction came into effect on 1 January 2011. At that time, the toxic emissions control programmes applying to both RFG and conventional gasoline were replaced by the new benzene controls. The Purvin & Gertz USGC Margin Models have been updated to include the resultant yield vector changes for the new restrictions beginning, retroactively, with the January 2011 calculations.

West Coast Refining Margin Model Changes:

The yields for the US West Coast refinery yield set have been updated to provide better harmonisation with the US Gulf Coast refinery yield set. Specifically, the use of distillate hydrocracking capacity in the coking refinery yield set has been removed and both the West Coast cracking and coking yield sets now share the same basic process technologies as their US Gulf Coast counterparts.

Both the cracking and coking configurations feature full hydrotreatment of FCC unit feed. Incremental gasoline sulphur control is achieved through FCC gasoline treatment, while incremental benzene control is accomplished through C5/C6 isomerisation. A specialised high pressure hydrotreater is used to treat FCC light cycle oil and coker diesel to improve the refinery cetane balance in light of the more stringent requirements that are associated with CARB diesel.

The updated West Coast refinery yields were developed through the use of Aspentech PIMS and the Aspentech Blend Model Library (ABML). ABML provides sophisticated blending correlations and allows for rigorous modelling of CARB gasoline specifications for each period.  In addition, other model improvements in the areas of variable and fixed cost estimation were also applied. These updates are being applied retroactively, re-indexing the historical West Coast margins.1

1Subscribers will be able to access updated historical refining margins on the OMR website shortly.

End-User Product Prices in September

Average IEA end-user prices in US dollars (ex-tax) fell by a slim 2.25% in September. On this basis, price drops were reported across all surveyed products and countries, bar Germany, which reported a marginal increase in gasoline (0.40%). Prices decreased the most in Spain, with notable falls in LSFO (-5.40%) and heating oil (-3.80%). In Italy, France and Germany prices fell on average by 2.60%, 1.80% and 1.40%, respectively. Outside of the Eurozone, UK prices were down by 2.70%, driven by declines in gasoline and diesel. In Japan, where reconstruction efforts continued during the third quarter, prices dropped by 2.90% led by gasoline and diesel. Meanwhile, in North America, where the summer driving season finished in September, prices decreased in Canada and the US by 1.20% and 0.70%, respectively.

Year-on-year price hikes for surveyed countries range between 30% and 40%, with the US and the UK showing the largest increases. Across products, the yearly increments rank higher for LSFO (37%) and gasoline (35%), followed closely by heating oil and diesel by an average of 34%.

Freight

The benchmark VLCC Middle East Gulf - Japan rate receded further in September following reports of a fall in cargoes leaving the Gulf coupled with a retreat in bunkering costs, which had previously helped to buttress rates. With the Eastern VLCC market awash with vessels, even Typhoon Roke, which briefly closed a number of Japanese ports, provided no respite. By early-October the trade was at a 2011-low of $9.30/mt, pushing time charter equivalent earnings firmly into negative territory at a reported -$3000/day before taking into account slow steaming.



However, despite this grim situation there is still no appetite for vessel demolition amongst owners. In the Suezmax market the situation was slightly better with the benchmark West Africa - US Gulf Coast trade experiencing a mid-month climb on the back of a shortage of available tonnage for October delivery. At writing, the rate stood at over $15/mt, its highest level since mid-May.

Clean product tanker rates were mixed over the month. The transatlantic UK - US Atlantic Coast trade has been volatile for much of 2011 and again surged to a late month high of over $24/mt on the back of tight fundamentals. This was once more short-lived since vessels quickly repositioned themselves thereby forcing rates down to below $20/mt by early-October as fundamentals softened. Rates in the East have remained relatively stable and buoyant over the past few months as Japanese imports of products, notably gasoline, have increased in the wake of post-earthquake refinery shutdowns.

Oil in short-term floating storage fell by 4.9 mb to stand at 43.4 mb at end-September. Crude fell by 4.4 mb to 33.2 mb as draws in the US Gulf (-4.4 mb) and Northwest Europe (-2.1 mb) offset a surprise 2.1 mb build in Iranian storage. Products fell by 0.5 mb to 10.2 mb resulting from a draw off West Africa where volumes now amount to 6.6 mb. This region still holds the largest share of global product floating storage. Following the discharge of two VLCCs and one LR1, the fleet now numbers 29 vessels with 15 of these being VLCCs, a new historical low.

Refining

Summary

  • Global crude runs estimates for 3Q11 and 4Q11 have been revised down by 50 kb/d and 75 kb/d respectively since last month's report. Stronger US runs only partly offset lower-than-expected throughputs in Asia. Global throughputs now average 75.5 mb/d in 3Q11 and 75.3 mb/d in 4Q11.
  • OECD crude throughputs rose 460 kb/d in August, to 37.62 mb/d, or 150 kb/d less than a year earlier. While runs rose in all regions, the largest gains came from the Pacific, in line with seasonal trends. OECD estimates have been lifted by 75 kb/d and 60 kb/d, to 37.1 mb/d and 36.3 mb/d, for 3Q11 and 4Q11 respectively, as stronger-than-expected US data were only partly offset by lower Pacific readings.
  • July OECD gasoline yields fell in all regions but were offset by higher naphtha, jet fuel/kerosene and other products, while gasoil/diesel and residual fuel oil yields were unchanged overall from June. OECD gross output increased 760 kb/d from June, but was still almost 600 kb/d below a year earlier, mainly on lower OECD European output.
  • Refinery consolidation continues in the OECD, with operators in all regions concluding or announcing extended shutdowns or refinery sales in September. The recent plant rationalisations involve ConocoPhillips and Sunoco in the US, Eni and LyondellBasel in Europe and Showa Shell in Japan, with total capacity amounting to nearly 1 mb/d.


Global Refinery Throughput

Global refinery crude runs are seen averaging 75.5 mb/d in 3Q11, declining marginally to 75.3 mb/d in 4Q11. While the global figures are within 0.1 mb/d of those in last month's report, offsetting changes in the OECD and the non-OECD are masked by the total. OECD estimates have been raised by 75 kb/d and 60 kb/d for 3Q11 and 4Q11 respectively, largely on higher US runs. The latest readings from the OECD Pacific offset part of the recent strength in the US, however. In the non-OECD, China recorded its second weakest refinery runs this year in August. Maintenance plans and scheduled operating rates at key refineries show relatively weak throughputs also over September and October, before new capacity is commissioned, potentially raising runs at the tail-end of this year. Asian refinery runs were further curtailed by another large-scale refinery outage in late September. The fire and subsequent shut-down of Shell's 500 kb/d Pulau Bukom refinery in Singapore could significantly tighten regional product markets if a full restart is not imminent. While the refinery announced a partial restart on 10 October, to around 100 kb/d, market sources say it will take time for the plant to return to full operating rates.

In the OECD, refinery consolidation continued apace, with refineries accounting for close to 1 mb/d of primary distillation capacity completing or announcing extended shutdowns or refinery sales in September. Refinery margins deteriorated further last month, and were on average negative for 18 out of the 26 configurations surveyed. In the US, ConocoPhillips announced at end-September it had idled its Trainer refinery on the East Coast and would permanently shut it if no buyer is found within six months. The announcement comes only weeks after Sunoco said it would also sell or shut its two East Coast plants. In Europe, Eni idled its Venice refinery on poor margins, while LyondellBasel announced the French Berre l'Etang refinery will close permanently. Finally, in Japan, Showa Shell completed the shutdown of the Oghimachi factory, in line with previously announced plans. 



OECD Refinery Throughputs

OECD crude intake rose by 460 kb/d in August, to 37.6 mb/d on average, following gains in all regions. Japan recorded the strongest increase, in line with seasonal patterns. While total throughputs remained below year-earlier levels for the sixth consecutive month, the deficit narrowed to only 150 kb/d in the latest readings (compared to an average of -0.8 mb/d over the previous five months). The August data were 90 kb/d less than our previous forecast, with lower-than-expected Pacific runs offset by higher readings for North America. European runs were mostly in line with expectations. The submission of final monthly July data led to an upward revision of 125 kb/d for the month, following stronger US data.



As a result, 3Q11 OECD throughputs have been revised higher by 75 kb/d. We have furthermore lifted the outlook for the US for the remainder of the year, leading to an upward revision of 60 kb/d for the OECD as a whole for 4Q11. The start of seasonal maintenance in all regions, as well as a recent sharp deterioration of US refining margins, both on the Gulf Coast and West Coast, are nonetheless set to see OECD runs decline by 750 kb/d in 4Q11, compared to the previous quarter. 



Since last month's report, North American crude run estimates have been lifted by 220 kb/d for 3Q11 and 110 kb/d for 4Q11 based on stronger July monthly and September weekly data. Final monthly US data for July again came in some 175 kb/d above weekly estimates. After five consecutive months of weekly-to-monthly data upgrades, we have introduced an adjustment factor to the weeklies in this month's report. The adjustment factor is the six-month rolling average difference between the weekly and monthly data. For August and September this amounts to +135 kb/d and +170 kb/d respectively.



Regional crude runs rose 70 kb/d in August, to 18.5 mb/d, or 330 kb/d above a year earlier. Preliminary weekly data show US crude runs tapering off in September, falling some 300 kb/d from a month earlier, mostly due to lower Gulf Coast runs. September runs were nevertheless stronger than expected and seasonal patterns, in part supported by healthy refining economics and the lack of any hurricane related shutdowns on the Gulf Coast. By end-September however, refining margins plummeted both on the Gulf and West Coasts following a sharp deterioration in gasoline cracks (see Refinery Margins in Prices Section), and this, combined with an uptick in maintenance shutdowns will further reduce runs over the balance of the year, albeit runs are forecast to remain above year-earlier levels.



North American refinery turnarounds for this autumn are expected to be slightly lighter than normal. We estimate around 1.2 mb/d of capacity to be offline in October, falling to 0.9 mb/d in November and slightly less than 0.5 mb/d in December. This compares to five-year averages of 1.4 mb/d, 1.0 mb/d and 0.5 mb/d respectively.

Record Product Exports Drive High US Runs

US refinery runs continue to be supported by strong oil product exports. In July, the latest month for which detailed monthly trade data is available, total oil exports averaged 2.9 mb/d, a new record and 400 kb/d higher than in July 2010. Of this finished oil products accounted for 85%, with gasoline blending components and other liquids the bulk of the remainder. Distillate fuels are exported to Europe and Latin America, while gasoline is mostly shipped to Mexico and other Latin American countries. In July, middle distillate exports were 890 kb/d, of which ULSD accounted for 645 kb/d. Finished gasoline exports were 335 kb/d in July, of which 190 kb/d went to Mexico. At the same time, US crude imports are dwindling. July crude oil imports were only 9.3 mb/d compared to 9.9 mb/d in July 2010. Higher domestic production and a reduction in crude oil inventories, rather than lower refinery runs, were behind the lower crude imports.



ConocoPhillips announced on 30 September that it had ceased crude processing at its 185 kb/d Trainer refinery in Pennsylvania due to poor margins. The announcement follows a statement from Sunoco only a few weeks earlier (see Another Refiner Bows Out - Sunoco Announces Refinery Exit in OMR dated 13 September 2011), that it is looking to exit the refining business and sell or close its two East Coast refineries. As in the case of Sunoco, ConocoPhillips is looking to sell the plant, or will shut it if no buyer is found within six months. The company cited large investment requirements to meet state regulations regarding sulphur content in heating oil and federal Tier 3 sulphur gasoline standards as one reason for the decision to exit this market. With now nearly 700 kb/d of refining capacity for sale or to be shut down on the East Coast by mid-2012, crude and product trade flows could change significantly in the next year. More light sweet crude from Nigeria and the North Sea would be available for other markets (about 300 kb/d of each), while product import requirements could increase dramatically, potentially reversing the trend of rising exports noted above.

European crude run estimates are largely unchanged from last month's report, at 12.4 mb/d for 3Q11 and 12.2 mb/d for 4Q11. Regional runs rose 165 kb/d in August, to 12.6 mb/d, 325 kb/d below a year earlier. Refinery stoppages continue to be heavier than last year, in part due to economic shutdowns. While the loss of Libyan supplies since February prompted several refiners to undertake turnarounds earlier than planned, several plants are currently reducing runs or shutting altogether due to poor margins. We include the recent closure of Eni's Porto Maghera, Venice refinery in this month's report. Eni announced it had shut the 70 kb/d Venice refinery from November due to a worsening in refining margins. The refinery processed mainly Libyan crudes and could restart as more supplies become available. The Head of Planning at Eni's downstream division said that company has cut crude distillation runs across its Italian refining network in recent weeks due to poor economics.

In terms of scheduled maintenance, the main contributors are the Netherlands, with both Shell's Pernis and BP's Rotterdam undertaking work in October. In Germany, Gelsenkirchen is out for most of the month and in Greece, Petrolas Elefsis is also undertaking work. Also notable is the 49-day partial shutdown of Statoil's 120 kb/d Kalundborg refinery in Denmark from late September.



Also in Europe, refinery consolidation moved a step further this last month, as LyondellBasell announced plans to permanently close its 105 kb/d Berre l'Etang refinery in France in September. The plant was put up for sale in May, but no buyers were found. While employees at the affected plant went on strike in protest at the announcement, workers at France's other refineries voted against joining the protest. This is in contrast to last year, when all of France's 11 refineries, with a combined capacity of some 1.8 mb/d, were shut following the closure of Total's Dunkirk refinery, and emergency stocks had to be tapped to meet domestic demand. After intense negotiations between the company's management and the unions, guaranteeing no lay-offs until 31 March 2012, the Berre l'Etang refinery restarted on 10 October. The restart is temporary, however, as the plant will be mothballed for a period of up to two years as of 31 December 2011, allowing more time to attract potential buyers or margins to improve.

OMV announced on 21 September that it would reduce its downstream business from around 50% of its asset base currently, to 25% within 10 years. The company said in its medium- and longer-term strategy it will increase its upstream presence and sell off refining and marketing assets worth up to €1 bn by 2014. OMV already stopped crude processing at its Romanian Archepim plant in 2011. The company still operates the Petrobrazi refinery in Romania, as well as the Schwechat refinery in Austria, Burghausen in Germany and holds a 45% stake in Bayernoil, which operates another two German plants. OMV will still invest in modernising the 90 kb/d Petrobrazi refinery (owned through its majority stake in Petrom).

OECD Pacific crude runs were weaker than expected in August, mainly on lower-than-expected South Korean refinery runs. Still, South Korean throughputs were sufficiently buoyant to support product exports some 11.1% higher than a year earlier, according to data from the energy ministry. After reaching a seasonal peak of 3.4 mb/d in August, Japanese crude runs fell seasonally in September as refineries started autumn turnarounds. Throughputs were also hampered by Typhoon Roke, which delayed crude tanker shipments. As a result, Japanese runs were revised down by 120 kb/d for the month, to about 150 kb/d below a year earlier. Also in Japan, Showa Shell permanently shut its 120 kb/d Ohgimachi refinery in Kawasaki in September, in line with previously announced plans.



Non-OECD Refinery Throughputs

Non-OECD refinery throughputs have been revised lower for both 3Q11 and 4Q11 following weaker-than-expected runs in China in August and disruptions to refinery operations in Other Asia, primarily due to the fire and closure of Shell's 500 kb/d Pulau Bukom refinery in Singapore. Total non-OECD runs are assessed at 38.4 mb/d and 39.0 mb/d for 3Q11 and 4Q11, up 520 kb/d and 675 kb/d y-o-y, respectively.



China's refinery runs fell to the second lowest reading so far this year in August, at 8.66 mb/d, or 5.9% higher than a year earlier. While maintenance is expected to continue to constrain runs over September and October, the restart of PetroChina's Dalian refinery in early September, as well as the start up of new capacity, will likely lead to higher runs at the end of this year. By late October, CNPC will start operating a new 100 kb/d crude distillation unit (CDU) at its Ningxia refinery. The unit was originally slated for start-up by the end of this year. Sinopec started test runs at its new 100 kb/d Beihai refinery at the end of September, following the recent commissioning of a new 160 kb/d unit at the Changling refinery in central China.

Other Asian refinery throughputs continue to be constrained by maintenance and unscheduled outages. Most notably, the fire and subsequent closure of Shell's 500 kb/d Pulau Bukom refinery in Singapore on 28 September severely curtailed regional product availability. Force majeure was already declared on middle distillate exports and Shell cancelled the lifting of 4 mb of October Arab Light crude. On 10 October, the company restarted a crude distillation unit (210 kb/d), at a 50% utilisation rate. Sources said a temporary delivery system had been built to divert the oil products away from the area damaged by the fire and into storage tanks in other locations on the site. The partial restart also allows the chemical complex to run at reduced rates. While the extent of the damages sustained during the fire are not yet clear, we assume that a full start up is unlikely for at least another month. Other estimates vary, with some sources saying it could take up to 6 months before the plant can resume normal operations.

The Shell outage follows on the heels of another large shut-down, at Taiwan's 540 kb/d Mailiao refinery. Formosa reportedly restarted the last of its three 180 kb/d crude units in mid-September, though the reactivation of RFCC and MTBE units has apparently been delayed. The plant was forced shut in July following a fire. Regional product markets were further tightened due to the closure of Vietnam's sole refinery from mid-July to end-August, leading to a 71% surge in Vietnamese product imports in August.

Indian refinery runs inched lower in August, to an estimated 4.02 mb/d (accounting for both Reliance's export refinery at Jamnagar and the recently commissioned Bina plant, which are currently excluded from official statistics). Total throughputs were nevertheless 5.3% above a year earlier. Runs are expected to drop further in September as several plants, including Essar's Vadinar refinery, shut for maintenance. Over coming months, Indian refinery runs will likely be supported by the ramping up of the Bina refinery to full capacity, the commissioning of the 180 kb/d Bathinda plant, as well as expanded throughput capacity at Essar's Vadinar refinery.



FSU refinery runs were slightly lower in August as Russian refineries processed 5.26 mb/d, down 61 kb/d from a month earlier. Gasoline production continued to increase however, at the expense of lower fuel oil and gasoil output. Russia's newest refinery, the 140 kb/d Tatneft plant in Nizhnekamsk, reportedly started commercial production finally in September. The plant was scheduled to receive 90 kb/d of crude feedstock in September.

In Africa, Libyan refineries Tobruk (20 kb/d) and Sarir (10 kb/d) reportedly resumed operations in the third week of September, followed by the 120 kb/d Zawiya refinery in October. Ras Lanuf (220 kb/d) remains shut. Meanwhile, Ghana's sole refinery shut for almost a month in September due to crude supply outages following problems securing letters of credits for feedstock. Chad's recently commissioned 20 kb/d refinery also halted operations on 25 September for 40 days. CNPC argues that the product price agreed with the Chadian government is too low, resulting in heavy losses. Apparently, the agreement was to supply local markets at a price of 200 CFA ($0.41) per litre of refined products.

OECD Refinery Yields

OECD refinery yields in July increased for naphtha, jet fuel/kerosene and other products, and fell for gasoline. Gasoil/diesel and residual fuel oil yields were unchanged from June. The largest change occurred for gasoline yields, which fell 0.8 percentage points (pp) amid lower relative output in all regions. Naphtha yields increased 0.4 pp with the largest increase seen in Europe, where July yields were 1 pp above the five-year average. OECD gasoil/diesel yields were unchanged from June, as an increase in OECD North America was offset by lower yields in both Europe and the Pacific. OECD gross output increased 760 kb/d from June's level, but is still almost 600 kb/d lower than last year's July output, mainly on lower OECD European output.



In OECD North America, gasoil/diesel yields increased at the expense of gasoline. A weak summer driving season in the US and stronger product crack spreads for middle distillates, supported by demand from Latin America likely explain the shift. Although gasoline yields fell 0.7 pp in July and are 1 pp below last year's level, they are still 0.8 pp above the five-year average. Gasoil/diesel yields on the other hand were 1.6 pp above last year's level and 1.8 pp above the five-year average.

Gasoline and gasoil/diesel yields fell in OECD Europe by 0.7 and 0.5 pp respectively, and gasoline yields were in July 2 pp below the five-year average, reflecting poor gasoline cracks. The largest change was however in residual fuel oil yields, which fell 3.7 pp in July, likely due to wide fuel oil discounts. Naphtha yields increased 0.9 pp on expected higher gasoline blending demand.



In OECD Pacific, increased petrochemical demand pushed up naphtha yields. Jet fuel/kerosene yields increased on seasonally stronger demand at the expense of gasoil/diesel yields, which fell 1.5 pp from June as earlier expectations of higher diesel demand from China dissipated.