Oil Market Report: 10 November 2011

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  • The Euro zone debt crisis influenced market sentiment in October and early November although ultimately fundamentals reasserted themselves. Futures prices for benchmark crudes diverged in October, with WTI on a solid upward trend while Brent eased. At writing, Brent traded around $114/bbl, with WTI at $96/bbl.
  • Forecast global oil demand is revised down by 70 kb/d for 2011 and by 20 kb/d for 2012, with lower-than-expected 3Q11 readings in the US, China and Japan. Gasoil continues to provide the greatest impetus for demand growth. Global oil demand is expected to rise to 89.2 mb/d in 2011 (+0.9 mb/d y-o-y) and reach 90.5 mb/d (+1.3 mb/d) in 2012.
  • Global oil supply rose by 1.0 mb/d to 89.3 mb/d in October from September, driven by recovering non-OPEC output. A yearly comparison shows similar growth, with OPEC supplies well above year-ago levels. Non-OPEC supply growth averages 0.1 mb/d in 2011 but rebounds to 1.1 mb/d in 2012, with strong gains from the Americas.
  • OPEC supply rose by 95 kb/d to 30.01 mb/d in October, with higher output from Libya, Saudi Arabia and Angola, partially offset by lower output from other members. The 'call on OPEC crude and stock change' for 2011 is largely unchanged at 30.5 mb/d, while higher non-OPEC supply leads to a 0.2 mb/d downward adjustment for 2012 to 30.4 mb/d.
  • Global refinery crude throughputs fell sharply in September, as planned and unplanned shutdowns amplified the normal seasonal downturn. Following significant refinery outages and apparent delays in starting up new capacity in Asia, 3Q11 global runs have been lowered by 30 kb/d, to 75.5 mb/d, while 4Q11 runs are revised down 260 kb/d, to 75.1 mb/d.
  • OECD industry oil stocks declined by 11.8 mb to 2 684 mb in September, led lower by crude, plus lesser declines in middle distillates and fuel oil. Inventories stood below the five-year average for a third consecutive month, a first since 2004. September forward demand cover dropped to 57.9 days, from 58.6 days in August. October preliminary data point to a 34.3 mb draw in OECD industry stocks.

Distillates, derivatives & downside risk

October was a better month for beleaguered OECD refiners, largely due to stronger diesel cracks. As noted before, clean middle distillate markets will remain a driver of crude and product prices in future too. In the mature OECD markets, jet fuel and diesel represent the only durable source of demand growth, albeit driven in Europe by preferential diesel taxes. This month's report also suggests that rising light tight oil supply and logistical bottlenecks around Cushing are, at the margin, boosting road and rail shipments and thus US diesel demand. Impending changes in bunker quality will generate a new market for middle distillates at fuel oil's expense. In the emerging economies, rising personal mobility and growing freight traffic are largely fuelled by diesel. And, as seen last winter, when non-oil fired power generation bottlenecks emerge in China and elsewhere, industrial and domestic consumers turn to diesel generators to fill the gap. Short-term demand surges of several hundred thousand b/d can result.

When products, and clean middle distillates in particular, are in tight supply, crude prices can be driven sharply higher. Part of the 2007/early-2008 crude price surge resulted from tightness in clean diesel supplies. With over 50% of future demand growth deriving from middle distillates, refinery supply of these products may be as important as OPEC quotas or upstream investment in setting market dynamics.

Middle distillates may be pervasive in the market right now, but middle ground among policy makers in Washington rather less so. Upcoming decisions affecting new pipeline capacity to the Gulf Coast are likely to be contentious, while October also saw a split vote among CFTC Commissioners narrowly favour the adoption of further position limits for commodity derivatives. It remains difficult to tread the fine line between ensuring market diversity, preventing manipulation and minimising systemic risk on the one hand, while sustaining economic hedging opportunities, preserving market liquidity and preventing unintended outcomes for price volatility on the other. The debate on market regulation will continue, and a joint IEA-IEF-OPEC Vienna workshop on 29 November will again examine some of the issues.    

To end on market fundamentals, this month's report sees an underlying 'call on OPEC crude and stock change' averaging 30.4 mb/d for the rest of 2011 and 2012, just above recent OPEC output. Considering this and tightening OECD stocks, a fundamentals underpinning for stubbornly high prices is clear. And although demand estimates are shrouded in economic uncertainty for 2012, so perennial supply risks also need acknowledging. The combination of Libya and extensive non-OPEC supply outages may make 2011 an outlier. Resurgent, +1 mb/d non-OPEC supply and over 400 kb/d of extra OPEC NGLs should cover demand growth in 2012. But don't forget that the US Gulf largely avoided hurricane outages in 2011, that the Arab winter could well prove as turbulent as the Arab spring and, not least, that the Iranian nuclear issue is again rising among market concerns. Single-point projections are invaluable, but only with the caveats that are provided by recognising the more extreme supply and demand side risks.



  • Forecast global oil demand is revised down by 70 kb/d for 2011 and by 20 kb/d for 2012, with lower-than-expected 3Q11 readings in the US, China and Japan. Stronger-than-expected demand in Korea, India and Brazil provide some offsetting support, with overall demand growth largely supported by gasoil. Global oil demand is expected to rise to 89.2 mb/d in 2011 (+1.0% or +0.9 mb/d y-o-y) and reach 90.5 mb/d (+1.5% or +1.3 mb/d) in 2012.

  • Projected OECD demand for 2011 is now 45.8 mb/d (-0.8% or -380 kb/d) for 2011 and 45.5 mb/d (-0.5% or -220 kb/d) for 2012. Demand has been revised down by 60 kb/d this year and by 20 kb/d next year, led by downward adjustments to the US and Japan. Nonetheless, European demand was broadly unchanged and oil-fired power generation in Japan is expected to rise in coming months.
  • Estimated non-OECD oil demand for 2011 and 2012 is now seen at 43.4 mb/d (+3.0% or +1.3 mb/d) and 44.9 mb/d (+3.5% or +1.5 mb/d), respectively. Recent Chinese data have come in lower than expected, but higher readings from India and Latin America offered a partial offset. Overall revisions were marginal, with 2011 adjusted down by 10 kb/d and 2012 left unchanged.
  • 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

Amid continued economic uncertainty and sustained high oil prices, we have revised down global oil demand versus last month's report. Our base case global economic growth assumptions remain steady at 3.8% for 2011 and 3.9% for 2012, but 3Q11 demand readings have come in weaker than expected. Indeed, we estimate global demand in September, albeit based on preliminary data, as flat compared to the same month in 2010. This follows growth of 1.4% in August. If this result holds, it would signal the weakest monthly demand growth since October 2009. Nevertheless, the forecast revisions are moderate overall; we have cut 2011 by 70 kb/d and lowered 2012 by only 20 kb/d, with an upward baseline revision to 2010 of 20 kb/d, primarily due to Syria, providing some offset.

The short-term oil demand picture remains cautious but stable. Recent weaker-than-expected data for China, the US and Japan, led to combined downward revisions in September of 670 kb/d. Russian gasoil demand has eased from its recent soaring heights, and baseline revisions have reduced Kuwait's consumption. Although JODI data have yet to show dents in Thailand's consumption, recent widespread flooding may signal future downward adjustments there. As such, global growth should remain tepid over the next few months, with average annual increases of 0.5% expected in 4Q11. Nevertheless, this annual comparison needs to be seen in context. For one, demand in 4Q10 grew exceptionally, by +3.4% (3.0 mb/d), a strong comparison baseline. Real power sector requirements in Japan suggest increased oil-burning there in the coming months and potential needs for diesel generators in China also lend upside risks, though gasoil there is not expected to grow at the pace of 4Q10's expansion. Moreover, the global consumption picture still appears broadly supportive, with annual European demand expectations unchanged and Korea, India and Brazil growing stronger than expected. Robust gasoil continues to underpin product demand in many countries. Leading indicators point to economic caution, but gasoil strength may signify lingering industrial strength in some markets, particularly the US.

As we habitually note, the demand picture could sour significantly should economic prospects falter. Our sensitivity analysis provides an indicative view with GDP growth one-third lower than the base case. Under such conditions, global oil demand would be reduced versus our base case by 0.2 mb/d 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 would feel this impact most intensely.


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) fell by 2.2% year-on-year in September, with all three regions posting declines. All products fell year-on-year except for diesel (+2.0%) and residual fuel oil (+1.6%), amid strength from North America and the Pacific, respectively.

Revisions to August preliminary data, at -190 kb/d, stemmed largely from the US (-260 kb/d) and Japan (-150 kb/d), which outweighed upward adjustments to Turkey (+130 kb/d) and Germany (+60 kb/d). In the US, downward revisions were concentrated in residual fuel, 'other products' and gasoline. Downward adjustments to 'other products' (which includes direct crude burn) led the revision in Japan. Yet, as noted last month, given volatility in deliveries and the strength of preliminary September data, there is little evidence to suggest a retrenchment in Japanese oil-fired power generation. Meanwhile, gasoil in Turkey and naphtha in Korea have continued to surprise to the upside.

Overall, OECD demand declined by only 0.2% year-on-year in August versus -2.3% in July. September preliminary data, however, suggest a weaker picture, with consumption declining by 2.2% year-on-year. Japan, in particular, appears to be contributing to the weaker-than-expected September data. While oil burning in power generation remains strong, downward adjustments to all other product categories may indicate some slowing in the recovery effect after March's earthquake and tsunami. We have continued to revise down the annual OECD demand picture, but only moderately, with downward adjustments of 60 kb/d in 2011 and 20 kb/d in 2012. Our outlook sees OECD demand declining by 0.8% (-380 kb/d) to 45.8 mb/d in 2011 and falling by 0.5% (-220 kb/d) in 2012.

North America

Preliminary data show oil product demand in North America (including US territories) falling by 2.6% year-on-year in September, following a 1.5% decrease in August. Declines were led by gasoline (-3.5%), heating oil (-15.3%) and naphtha (-17.0%). Diesel (+5.4%) continued to post strong readings, amid still-positive industrial indicators. US GDP grew at an annualised 2.5% in 3Q11, suggesting a degree of economic stability amid recent pessimistic headlines. Our assumptions for US and North American GDP growth in 2012 remain at 1.8% and 2.0%, respectively. Still, preliminary October readings for the US have come in lower than expected. Going into November, an early blizzard in the US Northeast may help temporarily boost heating oil demand, but travel disruptions may further depress gasoline.

Revisions to August data averaged -200 kb/d and were driven by the US (-260 kb/d). Residual fuel oil (-130 kb/d), other products (-130 kb/d) and gasoline (-50 kb/d) were all lower, while gasoil (+50 kb/d) provided some offset. Weekly-to-monthly gasoil revisions in the US continue to be difficult to anticipate, with adjustments alternating between positive and negative over the past four months; by contrast, gasoline adjustments to weekly data have been consistently negative.

Adjusted preliminary weekly data for the United States (excluding territories) up to the 28th of October, which would exclude the unseasonably early winter storm, indicate that inland deliveries - a proxy of oil product demand- declined by 1.7% year-on-year in October, following a 3.0% fall in September. October data featured a sharp year-on-year decline in residual fuel (-36.5%) amid mild autumn temperatures. Gasoline demand declined by an estimated 4.9%, suggesting that passenger travel has continued to deteriorate even with retail prices around $3.40/gallon at month-end, some 15% below price highs reached in May, but 25% above prior-year levels.

Meanwhile, gasoil demand appears to have strengthened in October, growing at an estimated 13.6%. Such a strong rate should be viewed cautiously; it may indeed stem from both methodological and economic factors. Our growth assessment, which adjusts weekly data for prior weekly-to-monthly revisions, may be producing an inflated result compared to a seasonally low October 2010. Moreover, diesel indicators, while still strong, suggest that year-on-year growth may be somewhat less robust. US intermodal rail traffic from the Association of American Railroads rose 3.6% year-on-year in October and the latest truck tonnage index from the American Trucking Association in September showed growth of 5.8% year-on-year.

Mexico's oil demand grew by 0.5% in September with positive readings coming from jet fuel/kerosene (+14.3%) and gasoil (+9.8%) partly offset by weak readings of residual fuel and naphtha. Mexico's air travel activity has recovered from last year's lows as other carriers have stepped-in to cover routes once flown by bankrupt Mexicana. Gasoil demand strength has continued to benefit from strong industrial activity, though leading indicators suggest that manufacturing may moderate over the next six months.


Preliminary estimates of European demand in September point to a 2.2% year-on-year decline, with naphtha (-4.6%), motor gasoline (-4.5%) and heating oil (-4.2%) performing poorly. September's gasoline contraction implies a combination of fuel switching and simple economising, as new car registrations continued to rise, according to the European Automobile Manufacturers' Association, up 0.6% in September after August's 7.7% gain. Considering the declining nature of the European demand picture, jet/kerosene's steadiness (flat compared to 2010) has been another positive, with the International Air Transport Association reporting a 9.2% gain in European airline traffic flows this September. Moreover, revisions to August preliminary data were positive, at 160 kb/d, largely due to stronger-than-anticipated diesel and heating oil; a downward baseline revision to Norwegian LPG provided a partial offset. Our forecast remains largely unchanged, with demand averaging 14.4 mb/d in 2011 and 14.3 mb/d in 2012.

Still, the two-tier nature of the European oil demand picture remains - with the more northerly European nations seeing stronger demand than their more heavily indebted Mediterranean brethren -albeit the gap appears to be narrowing, with the general economic gloom spreading north. Germany and France saw sub-50 purchasing managers' indices in October, at 49.1 and 49.0 respectively. Having enjoyed strong growth in August, above 3.5%, preliminary estimates for French oil demand in September point towards a return to its long-run declining trend, down 1.7% on the corresponding period last year. The gasoline market in France was particularly sluggish, down 5.9%. Early estimates for September imply year-on-year declines across the continent, with neither Germany (-3.9%), Spain (-3.3%), nor Italy (-3.4%) escaping the malaise. Still, German heating oil demand continued to rise on a seasonal basis.

August data for the UK showed a decline of 1.5% year-on-year, led by gasoline (-4.7%) with potentially weaker readings ahead. The UK purchasing managers' index for October fell to 47.4 from September's 50.8 reading. Not only is the reading a 28-month low for this index but its decline below the key 50 threshold effectively signals a contraction. Nevertheless, European demand supports persist. September preliminary data indicate Poland grew by 0.5%, following 6.9% growth in August. Turkey's demand also continues to surprise to the upside, led by gasoil, though its growth rate (+20.8% in August versus the prior year) may be unsustainably high.

The Winter That Cries Wolf for Heating Oil

While autumn prevails in the calendar, a late October blizzard in the US Northeast serves as a reminder of the approaching winter heating season in the OECD. Oil market players often greet cold winter weather surges with excitement, in anticipation of upward revisions to heating oil consumption above forecasted seasonal rises. In exceptional cases where impairment to the power sector prompts a widespread rollout of diesel generators, the uptick to oil demand could be significant. However, as elaborated previously (see Watching the Mercury, OMR dated 10 December 2010), the real upside of many cold shocks on anticipated demand often falls short of headlines over the course of a winter, given uncertainties over the duration of colder-than-normal weather and structurally declining OECD oil use for heating and power generation.

A simple, top-down examination of OECD heating oil demand during winters (October-March) over the last decade suggests that original forecast estimates have been prone to sharp swings, with changing economic conditions and distillate categorisation likely playing a larger role than the weather. It appears for the five coldest winters during that period, final heating oil demand has come in roughly between -100 kb/d to +300 kb/d versus our original forecast. During these winters, heating-degree days (HDDs) averaged 5-to-15% higher than the prevailing 10-year average. During last year's winter (2010-2011) heating oil demand was revised up by 160 kb/d versus the original forecast with HDDs 6% above normal. Still with the economy recovering from recession at that time, the demand upside attributable solely to weather was probably less.

Indeed, given structural inter-fuel substitution, the weather impact on OECD oil use continues to slowly recede over time. Ongoing changes in the US are illustrative of this trend. Demand for heating oil has fallen as less homes use oil as their chief source of heat, while those still doing so have become more efficient consumers. The US Energy Information Administration's (EIA) Residential Energy Consumption Survey indicates that in 2009 only 6.3% of US homes were dependent upon heating oil to heat their homes, down from 6.6% in 2005 and 7.6% in 2001. Most of these households are located in the US Northeast, where heating oil accounts for about 27% of space heating. Since 2003, the number of heating oil households in the

US Northeast has fallen by 20%, with over half of the decline due to increased natural gas penetration, a trend that is likely to continue as natural gas maintains an advantageous price gap over oil products.

Still, gauging the demand impact of substitution is difficult given ongoing challenges in characterising gasoil consumption by use. Evolving fuel quality specifications and changing consumption patterns have blurred the distinction between 'Transport Diesel' (defined as on-road diesel) and 'Heating and Other Gasoil' (heating oil for industrial/commercial uses, marine diesel, rail diesel and other uses, irrespective of sulphur content) in monthly data submitted to the IEA. In the US, dramatic changes in heating oil demand in recent years may stem as much from data classification issues as from economics, weather and inter-fuel substitution. With several states in the US Northeast planning to reduce sulphur in heating oil to that of low-sulphur diesel in the next few years, the picture may become even more muddled going forward.

Data classification issues notwithstanding, we would caution that any impending cold snap during the coming winter may have less impact on OECD heating oil demand over the course of a winter than many commentators think. This contrasts with developments in emerging markets, particularly China, where a combination of weather, government policy and non-oil generation shortages can induce huge short-term swings in gasoil demand of several hundred thousand barrels per day in magnitude.


Preliminary data indicate that Pacific oil product demand declined by 1.4% year-on-year in September, led by LPG, jet fuel/kerosene and gasoline. Revisions to August preliminary data, at -140 kb/d, stemmed mostly from lower 'other products' in Japan. Still, the outlook for crude and fuel oil burning in Japan has improved, while petrochemical activity in Korea has acted as a near-term support. In contrast, weaker readings across other product categories suggest that the recovery effect after Japan's earthquake and tsunami in March may be waning. We have revised down 2011 demand by 30 kb/d to 7.9 mb/d (+0.7% or 50 kb/d y-o-y) while leaving 2012 unchanged at the same level (+0.3% or 20 kb/d y-o-y).

In Japan, oil demand declined by 4.5% year-on-year in September, with all categories, bar 'other products', which include crude direct burn, and residual fuel oil, posting declines. Jet fuel/kerosene (-16.5%) and gasoil (-11.4%) posted the steepest falls. Due to higher assessed needs for power generation, the outlook for 'other products' and residual fuel oil has been raised by a modest 10 kb/d for 2012. Our base case profile for nuclear power generation continues to see a recovery starting in spring 2012, though at a slightly slower pace versus the previous assessment. Oil burning needs in 2012 are forecast to add 290 kb/d to 'normal' levels (around 200 kb/d). To be sure, the nuclear policy debate in Japan continues. In the less likely event that no nuclear power returns in 2012, incremental oil burn needs versus normal would stand at 460 kb/d next year.

In Korea, demand rose by 2.9% in September. Despite indications of generally weak petrochemical activity in Asia, naphtha demand continued to hold up, growing by 7.3% year-on-year. Still, expectations are for moderating growth rates through 2012, with naphtha demand growth forecast to fall below 3% in the fourth quarter of 2011 and demand remaining relatively steady in 2012. Korean diesel demand (+10.4%) posted strong gains while gasoline grew moderately (+1.0%) in September, in contrast to the declining motor fuel picture in many other OECD countries.


Preliminary demand data indicate that non-OECD oil demand grew by 2.4% year-on-year (+1.0 mb/d) in September, down from 3.1% growth in August. Chinese apparent demand growth was markedly slower, though questions persist over the true weakness of underlying consumption. Russian demand, particularly in gasoil, also slowed from its torrid pace during the previous four months. Still, the overall demand picture remained supportive, with India's growth rate notably picking up.

Total September demand is estimated at 43.6 mb/d, while August levels have been revised up by 210 kb/d to 43.7 mb/d (+1.3 mb/d year-on-year). Still, part of August's upward revision included a boost to Thailand, as reported via JODI data. With recent flooding dampening industrial output there, the demand risk looking forward lies increasingly to the downside. The latest JODI update also included sizeable revisions to Kuwaiti demand, resulting in the downward adjustment of our estimate there by 160 kb/d in June and by 110 kb/d in July (these revisions were smaller than the changes to the JODI numbers themselves, given our previous adjustments for data points we believed to be too high).


China's monthly apparent demand (calculated as refinery output plus net product imports) rose by only 1.9% year-on-year in September as higher refinery runs were weighed down by lower net imports compared to a year ago. Apparent demand in August was revised down marginally, by 20 kb/d, putting growth for that month at 5.6%. September demand was led by year-on-year increases in gasoline (+6.4%), jet/kerosene (+16.0%) and gasoil (+4.6%). Residual fuel oil (-24.8%) posted a sharp fall, while LPG continued to decline (-1.5%). The monthly demand pattern fits with our view of moderating growth rates over the next 18 months as the economy slows and particularly heading into 4Q11, which is not expected to feature the almost 300 kb/d quarter-on-quarter gasoil increase that characterised 4Q10.

However, questions remain over the viability of Chinese consumption indicators. While our apparent demand calculation implicitly includes stock changes, recent month product draws may be exacerbating apparent demand weakness and could signal stockpiling ahead. September's calculated inventory change (see OECD Stocks section) suggests gasoil stocks may have drawn 8.9 mb, with Sinopec indicating a need to replenish its holdings. Moreover, indicators again point to shortfalls in winter power generation, which may incentivise higher-than-expected diesel use. Nevertheless, the economy has slowed on the back of monetary tightening, with GDP growing at 9.1% in 3Q11. Notably, the official purchasing managers' index fell in October to a level only just in expansionary territory. Overall, our forecast for 2012 is revised down modestly, by 20 kb/d, though growth at 5.3% (+500 kb/d) remains robust.

Other Non-OECD

In India, oil demand rose by 6.7% year-on-year in September, faster than August's 3.4% growth. Gasoil (+9.8%), LPG (+10.2%) and naphtha (+18.5%) posted the largest gains, though residual fuel oil (-20.2%) and jet fuel/kerosene (-2.5%) declined. Gasoline, which is priced higher than diesel and whose price rose in September, still increased by 6.2% y-o-y while gasoil demand benefitted from coal-fired power shortfalls. Despite September's strong growth, the Indian economy continues to show signs of slowing, with both industrial output and auto sales moderating. Nevertheless, with a now higher 2011 baseline, our forecast is revised up by 20 kb/d for 2012, with growth marginally higher at 3.7%.

Demand growth in Russia eased from its previous lofty heights, rising 2.8% in September versus the prior year. This deceleration comes after four-months of average 10%+ growth. Slowing gasoil explains much of the retrenchment, with demand declining slightly (-0.3%) in September, and baseline demand revised down slightly over the previous four months. Gasoline (+0.7%) also registered a notably slower growth rate. Persistent strength in LPG (+4.5%) and 'other products' (+12.2%) continued to lend support to the consumption picture.

In Brazil, product demand rose 3.2% year-on-year in August, led by jet fuel/kerosene (+8.6%), gasoil (+7.3%) and LPG (+4.7%). Residual fuel oil (-15.9%) continued to decline, displaced in the power sector by increased gas and hydro supplies. Brazil's industrial indicators have continued to soften; as such, gasoil growth rates are expected to moderate through the end of the year. Gasoline demand growth, at 3.4%, improved versus the 2.6% decline registered in July. As elaborated in last month's issue, a reduction in anhydrous alcohol blending from 1 October may have a neutral effect on overall motor gasoline demand, while increasing petroleum based products requirements. Still, auto sales have been declining year-on-year since July (by comparison, sales grew by 7% in 2010), suggesting potentially more moderate gasoline growth rates ahead.



  • Global oil supply rose by 1.1 mb/d to 89.3 mb/d in October from September, driven higher by rebounding non-OPEC output. Compared to a year ago, global oil production stood 1.2 mb/d higher, 70% of which stemmed in roughly equal shares from higher OPEC crude and NGLs production and 30% from increased non-OPEC oil output.
  • Non-OPEC supply rose by 0.9 mb/d to 53.3 mb/d in October, largely due to the completion of maintenance in the North Sea, as well as increased production in Brazil and North America. Unplanned outages in China and the Middle East only modestly dented overall output. Compared to last year, 4Q11 production should grow by around 300 kb/d to 53.4 mb/d. Annual non-OPEC supply growth now averages only 0.1 mb/d for 2011 but recovers to 1.1 mb/d for 2012.
  • OPEC supply rose by 95 kb/d to 30.01 mb/d in October, with higher output by Libya, Saudi Arabia and Angola partially offset by lower output from all other members. Libya continued to ramp-up crude production from 75 kb/d in September, to a monthly average of 350 kb/d in October and by early November it was hovering around the 500 kb/d mark. OPEC NGLs supply averages 5.9 mb/d in 2011 and 6.3 mb/d for 2012, representing annual growth of 0.5 mb/d and 0.4 mb/d respectively.
  • The 'call on OPEC crude and stock change' for 2011 is largely unchanged at 30.5 mb/d while a further increase in non-OPEC supplies results in a 0.2 mb/d downward adjustment in the 2012 call to 30.4 mb/d. Meanwhile, estimated OPEC spare capacity for October stood at 3.58 mb/d versus 3.31 mb/d in September. OPEC spare capacity reached a 2011 low of 3.21 mb/d in June compared with 4.74 mb/d prior to the Libyan crisis in January.

All world oil supply figures for October discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, and Russia are supported by preliminary October 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 supply rose by 95 kb/d to 30.01 mb/d in October, with higher output from Libya, and to a lesser extent Saudi Arabia and Angola, which offset declines in output from all other members. Libya continued to ramp-up crude production in October, to a monthly average of 350 kb/d and by early November reached the 500 kb/d mark (see 'Libyan Production Outpaces Forecast').

While October OPEC production was still running below pre-Libyan crisis levels by 450 kb/d, latest export schedules and tanker data indicate November supplies may increase by 300-400 kb/d, in line with the seasonal upturn in winter demand.

OPEC's ministerial meeting in Vienna on 14 December is expected to be a low-key gathering, against a backdrop of high prices. After last June's rancorous meeting, which led Saudi Arabia and other Gulf producers to break ranks and ramp up production to offset lost Libyan supplies, already there is a growing chorus of statements by OPEC representatives that the market is well balanced heading into the peak winter demand season. In addition, relatively strong oil prices have seen OPEC's basket of crudes average above $107/bbl in the first ten months of the year.

However, habitual price hawks Iran and Venezuela argue that the group's current 24.845 mb/d target, in effect since January 2009, should be actively re-instated. Underscoring the group's obsolete output targets, October production by OPEC-11 of 27.32 mb/d is now estimated 2.47 mb/d above official levels. Iran currently holds the group's rotating presidency but will pass this task on to Iraq in January. The thorny issue of individual production targets is again likely to be side-stepped (potentially until Iraqi capacity nudges above 3.5 mb/d in late-2012/early-2013). With high prices plus economic headwinds possibly counteracting rising Libyan supplies in OPEC thinking, many analysts see the December meeting leaving official production levels well alone.

Our 'call on OPEC crude and stock change' for 2011 is largely unchanged at 30.5 mb/d while a further increase in non-OPEC supplies results in a lower call for 2012, revised down 0.2 mb/d to 30.4 mb/d.

An escalation in civil unrest and/or political instability among several member countries, including Libya, Iran, Iraq and Nigeria, has served to focus the market's attention once again on OPEC's spare production capacity. Estimated effective spare capacity for October reached 3.58 mb/d versus 3.31 mb/d in September. OPEC spare capacity reached a 2011 low of 3.21 mb/d in June compared with 4.74 mb/d prior to the Libyan crisis in January.

Saudi Arabia increased October supplies by 50 kb/d, to 9.45 mb/d. The September output estimate was lowered by a steep 200 kb/d on the back of more complete tanker data, to 9.4 mb/d. That said, preliminary indications are that production may rebound in November in response to higher customer requests following Aramco's decision to lower prices for December liftings (see Prices section). Several Asian buyers reportedly plan to request additional volumes above their normal allocations in December.

Kuwaiti production has been on a solid upward trend in response to the Libyan crisis, with output in October averaging 2.65 mb/d, unchanged from an upwardly revised September estimate. That represents an increase of 240 kb/d since April, largely due to higher output from the northern region of the country.

Supplies from Iran were down marginally last month, to 3.53 mb/d from 3.54 mb/d in September, but it appears an increasing volume of crude is moving into floating storage. Shipbrokers EA Gibson reported Iranian crude held in floating storage rose to 34.3 mb at end-October compared with 21.4 mb at end-September and 19.3 mb at end-August. These volumes are not included in monthly supply estimates until vessels set sail for export markets.

Libyan Production Outpaces Forecast

Restoration of Libyan production is on a far faster track than initially anticipated. In the midst of the pandemonium that ultimately led to the formal end to civil unrest in the country on 23 October, Libyan officials have made a herculean effort to restore upstream operations. Crude oil supplies rose from an average 75 kb/d in September to around 350 kb/d in October. By early November, that figure was an even higher 500 kb/d.

Libya's impressive reactivation of its production operations, amid less-than-feared damage to infrastructure, has led to another upgrade in our projection for the near term. Production capacity looks on course to average 500 kb/d in 4Q11, with year-end levels closer to 700 kb/d.

For 2012, the scope and pace of the recovery to date has led to a revision on a quarter-by-quarter basis since our last assessment in June. The 4Q12 estimate has been raised slightly, to 1.17 mb/d compared with the previous estimate of 1.08 mb/d, but a more rapid build-up in the first three quarters of the year is now envisaged. 1Q12 capacity is forecast to reach an average 800 kb/d compared with the 500 kb/d envisaged in June; 2Q12 is now estimated at 930 kb/d versus 685 kb/d previously and; 3Q12 nearer 1.07 mb/d compared with 925 kb/d.

The initial surge in production has come from a handful of fields. Going forward, the timing and pace of the production increases will hinge on the state of supporting infrastructure such as pipelines, refineries and export terminals. Production from some fields like Sarir and Mesla has been capped by export constraints. Other fields in the Sirte basin, such as Waha, 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. Production flows from the Amal field, which serves as a gathering centre for smaller fields in the eastern Sirte basin, could also be curbed due to extensive damage at the Ras Lanuf export terminal, including key infrastructure such as storage tanks and control rooms.

The bulk of the restoration of production has been carried by local petroleum industry staff, with much of the foreign workforce still outside the country. Participation by IOCs may be needed now to undertake more costly and specialised repairs. The board of Libya's National Oil Co (NOC) held meetings with all the IOCs' representatives at end-October to discuss the status of field operations, export infrastructure and security, with the goal of restoring remaining shut-in output as soon as possible.

In the immediate aftermath of the capture of Sirte and subsequent death of Colonel Gaddafi, there were heightened fears of retribution killings and attacks on oil infrastructure. So far, the worst expectations have not come to pass. Indeed, exports have progressed more smoothly than anticipated. Much of the September output was earmarked to refill storage tanks and supply refineries, which kept a lid on exports, October saw shipments edge higher, to an estimated 180 kb/d. Though supplying domestic refineries remains a priority, November exports volumes are expected to be in the 200-250 kb/d range. Libya's NOC has also started publishing production, export and status reports on its web site to improve transparency.

The surge in export revenue has provided the National Transitional Council (NTC) much-needed breathing room while it takes on the historic task of forming a new government.

Iraqi supplies were marginally lower in October, down by around 15 kb/d to 2.69 mb/d. Crude oil exports were also down 15 kb/d, to 2.09 mb/d, with reduced shipments from southern ports stemming from pipeline attacks and weather-related lifting delays only partially offset by a rebound in northern shipments. Crude exports from the Basrah and Khor al-Amaya shipping terminals averaged 1.63 mb/d, off 138 kb/d from a revised 1.77 mb/d for September.

Exports of Kirkuk crude to the Turkish Mediterranean port of Ceyhan recovered in October, up around 125 kb/d to 460 kb/d, largely due to increased output from the Kurdish region of the country. September exports of Kirkuk were revised down by 95 kb/d to 335 kb/d, the lowest level since August 2010, partly reflecting maintenance work at the Ceyhan port and partly reduced output from the Kurdish region of the country due to payment disputes between Baghdad and local authorities.

Angolan output continued its upward trend in October, up 20 kb/d to 1.72 mb/d. The chronic production problems that have plagued output at the Greater Plutonio field have largely been overcome now, while at the same time production continues to ramp-up from the Total-operated 220 kb/d Pazflor field, which was inaugurated in late August. Pazflor crude oil production averaged an estimated 100 kb/d in October. Angolan output hit a 2011 low of 1.49 mb/d in June during the worst of Greater Plutonio field problems. Plutonio has a nameplate capacity of 200 kb/d but recent production has averaged 170 kb/d.

Nigerian production was off by 160 kb/d to 2.02 mb/d due to the loss of Bonny and Forcados supplies following sabotage to infrastructure in September and October. By early November, however, the force majeure on Forcados crude exports was lifted a month earlier than expected following completion of repairs to the Trans-Forcados Pipeline. As a result, exports for November and December are expected to increase by around 200 kb/d, barring further pipeline vandalism and theft.

Venezuelan supplies ebbed in October, down by 20 kb/d to 2.49 mb/d. September supplies were revised down by 55 kb/d, to 2.51 mb/d, reflecting latest data showing China reduced imports by 60 kb/d that month. October output was hit by lower supply from two of the country's heavy oil upgraders. Operations at the Petropiar heavy oil upgrading unit were reduced following two separate small explosions and fires. Maintenance work at the 130 kb/d Petroanzoategul heavy oil upgrader also led to lower October output.

Non-OPEC Overview

Non-OPEC oil production is estimated to have risen by 0.9 mb/d to 53.3 mb/d in October, largely due to rising supply from North America and Brazil and the completion of maintenance in the North Sea. Unplanned outages in Yemen and Syria partially reduced overall output. Compared to last year, non-OPEC supply in 3Q11 fell very slightly (-50 kb/d), with North American and Latin American production growth offset by multiple outages and maintenance elsewhere. In the UK, production again reached record low levels in August, when offshore crude oil production totalled only 770 kb/d (over 20% below August 2010). We expect fewer outages during the fourth quarter in the North Sea, with non-OPEC production increasing by 0.9 mb/d compared to 3Q11. With the exception of a couple of new fields coming online this month in Africa and Latin America, the real source of non-OPEC growth is coming from North American shale oil production and Canadian Oil Sands. See (Eagle Ford and Bakken Bonanza to Transform US Oil Production Outlook). 

The major source of the downward revision to our estimate for 2011 non-OPEC supply is centred in a data-related revision to Norway's production, described in more detail in 'Revisions to Norwegian Petroleum Directorate Data Allow for Better Forecasting.' This baseline revision, combined with other outages lowers our assessment of 2011 non-OPEC supply growth by 30 kb/d to only 140 kb/d, or 0.3% compared to 2010.

In 2012, a 70 kb/d upwards revision to the US oil production outlook is the largest component of the change to the non-OPEC supply estimate. Non-OPEC supply is expected to grow by 1.1 mb/d to 53.8 mb/d in 2012, as shown in the chart above, and is driven primarily by increasing production in North America, OECD Pacific, Latin America, and biofuels. A major downside risk to the outlook includes unplanned outages, which reached around 650 kb/d in 3Q11. While by definition we cannot predict 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.


North America

US - September, Alaska actual, other states estimated: The impact of tropical storm Lee reduced US crude oil output in September by around 170 kb/d to 5.5 mb/d, bringing September's crude output 250 kb/d lower than August's levels. US total liquids supply increased by almost 300 kb/d in the third quarter compared to the prior year to 8.0 mb/d, stemming largely from growth in US light tight oil production and natural gas liquids. Even in light of 3Q11 hurricane-related shut-ins in the Gulf of Mexico and declining conventional production elsewhere, US oil supply has not reached these levels since 2002. Crude and total oil supply is seen remaining stable for the balance of the year. Major revisions for this month centre in the shale plays, especially in North Dakota's Bakken and Texas' Eagle Ford shale where oil production is exceeding expectations. Increased oil output from shale oil deposits that raises total US crude oil production by 1% in 2012 will be mitigated by declining production elsewhere, especially in Alaska and the Gulf of Mexico.

Eagle Ford and Bakken Bonanza to Transform US Oil Production Outlook

The Medium-Term Oil and Gas Markets report (MTOGM) highlighted how the application of horizontal drilling and hydraulic fracturing techniques, which have been used to access natural gas, could also be used to access liquids from the same tight oil formations. The combination of these techniques with lessons learned producing shale gas has greatly boosted oil recovery rates. MTOGM presented data showing a sky-rocketing US oil rig count, and that light "tight" oil from these newly tapped resources would be the single largest driver of incremental oil production in the medium- (and even long-) term. In fact, the number of oil drilling rigs in the United States jumped by 34 this week to 1 112, the highest on record and 50% higher than last year. Zooming in on certain plays shows that we were correct to emphasise light tight oil as a key driver of the supply outlook, but the data point to an even quicker and higher magnitude uptick in NGL and crude oil production than previously forecast. Consequently, we have revised our outlook for 2012 light tight oil production by around 120 kb/d to 810 kb/d.

In North Dakota, where the Bakken and Three Forks acreage accounts for almost 90% of production, monthly output has risen by 6% on average in the last three months. Fourth quarter 2011 output is forecast to grow by over 60% annually. The chart below shows the number of rigs drilling for oil in North Dakota jumping again to around 170 this past month as well as a sharp uptick in development well approvals. These leading indicators are also evident in the Monterey (California), Niobrara (Rockies), and Eagle Ford (Texas) tight oil formations.

Tight oil production is not cheap, with some estimates placing per barrel production costs at around $40-$55, and it requires extensive infrastructure to collect small volumes from dispersed wells. Transporting the oil to the Gulf Coast adds additional costs, but producers can get Louisiana Light Sweet equivalent prices for their oil. As long as oil-to-gas price ratios remain at high levels, producers will maximize the liquids output of their resources.

An additional possible constraint could be takeaway capacity, especially from areas of the Williston Basin in North Dakota and eastern Montana. Even though current production exceeds existing pipeline and rail capacity from the area, analysts do not expect a real constraint until at least the end of 2013 (see chart below). The  chart below shows a representation of one company's analysis of these trends as well as their

forecast for the basin. Recent data show a large uptick in trucking and rail from the region (trucking reached 20 kb/d according to BENTEK Energy), which puts a strain on road infrastructure and has increased diesel demand.

Takeaway capacity and economics are less of a constraint in the Eagle Ford shale, where producers benefit from close proximity to the Gulf Coast refining centre, high gas liquids content, and high initial oil production rates. Production in the area tripled over the course of 2010. Since then, it has more than doubled in 2011 to over 300 kb/d. With rising production, trucking and rail takeaway capacity have also ramped up, and 1 mb/d of new transmission and 465 kb/d of processing capacity are planned to handle new crude and associated gas production.

We have tempered the upwards revision to the US light tight oil production outlook because of the high reported decline rates and the high capital costs in shale oil formations.  Drilling and completion costs sometimes reach $10 million/well largely due to the need for longer horizontal laterals and constrained quantities of oilfield services in the Bakken. Another limiting factor will be the extent of drilling that can occur without reducing the pressure in the formation. Analysts maintain that if the Bakken can support multiple wells, then future exploration and development would shift to new prospective areas such as Three Forks and would result in even higher output.  In fact, this month Continental Resources, one of the Bakken's largest resource holders, announced positive flow rates in a deeper part of the Three Forks formation that might indicate other production zones that could be tapped commercially.  

Despite the positive outlook in the Bakken and Eagle Ford shales, there remains much debate about whether hydraulic fracturing poses a threat to the environment. We will continue to re-assess our estimates as new data on the economics of these plays becomes available, and we will provide a revised forecast to our 2011-2016 estimates next month.

Canada - August actual: Rising output from the oil sands drove a 150 kb/d monthly increase in Canada's liquids production in August. In upcoming months planned maintenance at Terra Nova's FPSO, declining production at Hibernia (both offshore Newfoundland/Labrador), and maintenance at Canadian Oil Sands' Syncrude project should mitigate production gains from growing oil sands projects like Suncor's Firebag and Devon's Jackfish project. Changes to the outlook for 4Q11 and 2012 stem mainly from the slightly faster-than-expected return of the Horizon facility after the major fire in January caused a complete shutdown, and the subsequent deferral of 2012 maintenance into 2013.

Mexico - September actual, October preliminary: Tropical Storm Nate reduced Mexican crude oil output in September by around 60 kb/d to 2.5 mb/d, and preliminary figures for October show production rebounding almost to August levels. Overall, Mexican liquids production fell by around 50 kb/d to 2.9 mb/d in 3Q11 compared to the prior quarter and decreased by 30 kb/d y-o-y. Declining production at Cantarell and at KMZ were the primary sources of overall decline. Looking forward, production in Mexico is expected to continue to decline at 3% annually despite Pemex's efforts to maintain production at KMZ and Cantarell and ramping production at the Chicontepec fields.

North Sea

Norway - August actual, September provisional: Total liquids production fell by 100 kb/d to 1.9 mb/d in September, as maintenance continued at the Troll, Snorre, and Grane fields. With the return of these fields to full production by November, 4Q11 production should rise about 130 kb/d over 3Q11 levels. We adjusted our outlook downwards last month after news reports indicated problems with the 130 kb/d Grane field after it completed planned maintenance. Statoil was able to bring the field back to its normal levels more quickly than expected. With the revisions to the data series taken into account, we now expect 4Q11 output to grow by 6.7% to 2.1 mb/d compared to 7.3% last month. In 2012 liquids output should fall by 1.4% to 2.0 mb/d in contrast to the 0.6% growth envisaged last month.

Revisions to IEA's Norway Field Level Data Allow for Better Forecasting

We have undertaken a systematic review of our field level data and are now matching the Norwegian Petroleum Directorate's (NPD) field level crude, condensate, and NGL data back to the beginning of our monthly data series in 1994. A step-change in condensate reporting convention by NPD back in 2006 previously caused our own and NPD estimates to diverge, as we retained higher condensate numbers to match with historical data.

The largest volume divergence began in October 2006, when NPD reclassified Kristin, Mikkel, and Åsgard condensate as crude oil. The reclassification occurred because the operator no longer separately markets its output as condensate but instead blends the condensate into the crude stream and markets it as Åsgard Blend 47.1? API crude oil. At the time, it was prudent to keep these streams as condensate in our database to avoid a break in the series for crude and condensate. Other fields, including Troll and several small fields also underwent similar re-classifications since 1994.

Three factors have caused us to change the OMR's accounting of Norway's liquids output. First, we believe that comparisons between 2006 and 2007 that might have been impacted by a break in series are less important today than the advantage gained from more closely matching the NPD convention. Second, matching the NPD convention more accurately reflects the way that Norway's petroleum production satisfies world oil demand given heightened interest in NGL and condensate output. The revision improves near-term forecasts by providing a better link to loading schedules and by more accurately tracking field-level trends for crude, NGLs and condensate. Finally, this revision addresses a wider effort in our monthly oil database to better account for differences in liquids qualities and to delineate between crude, NGL, and condensate production where data is accurate and available.

Other changes to our field level database include removing satellite fields Valhall, Gullfaks, and Heimdal Ost, which the NPD includes in already existing aggregates. Removing these fields also means they do not appear in the 2012 forecast, which is the main reason for the revision to the outlook this month. In order to better model NGL output from Norway, we have also added field level NGL output detail for nine fields that account for 90% of Norway's NGL output.

UK - July actual, August preliminary: Following a record low production level in July, preliminary estimates indicate maintenance reduced offshore crude oil production by almost 150 kb/d to even lower levels in August at 770 kb/d. In addition to the Buzzard field outage, maintenance in the Teal Area and at the Schiehallion field was also heavy. Production is expected to rebound in the fourth quarter by 300 kb/d over 3Q11 levels, largely unchanged from the estimate last month. Downward revisions to the 2012 outlook take into account start-up delays at the Causeway, Andrew, Solan, and Athena fields, previously expected to come online in late this year, but now delayed for a year or more. Higher-than-expected output after the completion of routine maintenance at some fields in the Forties system offsets most of these downwards revisions. In sum, 2012 output should remain at around 2011 levels, supported in large part by Buzzard's return to normal production.



China - September actual: China's oil production fell by around 70 kb/d in September to 4.0 mb/d, its lowest level in over a year. The Peng Lai field outage curbed China's output by over 120 kb/d in September and likely even more in October. Declining production at Jilin, Changqing, and other mature CNOOC fields also drew down China's output. News reports indicate the Peng Lai leaks were plugged in late October/early November, but ConocoPhillips has not indicated a possible restart date. In October, there were also reports that CNOOC found and quickly fixed another spill at its 20 kb/d Jinzhou 9-3 field, making this the third spill at a CNOOC facility this year. Sources indicate that an anchor of a ship ruptured a pipeline in the oil field and caused the leak. We remain sceptical about reports indicating production has increased at other facilities while these problems are occurring.

A more likely driver of production trends in the medium term is the new resource tax on oil and gas that will go into effect on 1 November. This particular tax change, ceteris paribus, will mean that production is taxed at 5-10% of the value of the commodity, rather than the volume of commodity. The reform redistributes some production tax revenues from the federal government to local governments and means a total tax take of around $4/bbl, seven times higher than current levels. Analysts estimate that a 5% value-based tax would reduce Sinopec's earnings by 8%. However, the government is also considering increasing the windfall tax threshold from $40/bbl, which would benefit producers' earnings by around 15-20% if the threshold were raised to $60/bbl. Also, the government is already providing tax breaks for production at offshore fields, in western China (mostly for enhanced oil recovery), and for heavy oil production. These fields might receive a value tax rate below the 5% window. We have not substantially altered our short-term outlook as a direct result of tax changes however.

Other Asia - August estimated: In other Asian countries, aggregate production increased in 3Q11 by 10 kb/d over the prior quarter to 3.5 mb/d, and fell by over 200 kb/d year on year. Vietnam, Thailand, India, Indonesia, and Malaysia all posted annual declines in this quarter largely due to mature field decline. In Vietnam the 25 kb/d Chim Sao and 40 kb/d Te Giac Trang fields have started in the last two months and should raise the country's production by 25 kb/d to 330 kb/d in 4Q11. In Indonesia, ExxonMobil reported it had almost finished awarding the EPC contracts for the 160 kb/d Cepu project, which is expected to begin ramping up during 2013-2015.

Middle East

In Syria, sanctions have begun to have an impact on oil output. UK-based 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. With the exception of Gulfsands and Croatia's INA, oil companies are not revealing if their crude oil output has been curtailed. Recently, Syria's Oil Minister was quoted as saying that production had been reduced by around 110 kb/d to 250-270 kb/d. We assess that this estimate is likely conservative, given that shipping data does not indicate any exports from the country in September or October, and given reported challenges in exporting oil products. Additionally, anti-Assad regime supporters could target oil and product deliveries to the domestic market, thus curbing output and domestic product transit.

Despite a reported heavy marketing effort targeting India, Malaysia, and Indonesia, we expect it to take several more months before Syria can return to previous export levels. Before Syria can finalise new contracts, Sytrol will be challenged to obtain financing and tanker insurance. Therefore, we have further reduced our output forecast for Syria by 80 kb/d in 4Q11, which would mean an 80 kb/d y-o-y decline in 4Q11. We expect Syrian oil production to decline by a further annual 20 kb/d in 2012 to 320 kb/d, which is around 20 kb/d lower than last month's estimate.

Former Soviet Union (FSU)

Russia - October actual: Russian oil output hit another post-Soviet high of 10.7 mb/d in October, up slightly from last month's levels and 90 kb/d higher than last year. Growth from Rosneft's Eastern Siberian fields is primarily responsible for Russia's oil output growth, followed by increased production from Gazprom (NGLs), Gazpromneft, and TNK-BP. Lukoil's production has fallen by 5.3% year-on-year, due in part to a precipitous 60% decline at the Yuzhno-Khyluchuskoye field and other mature field decline. It is also worth noting that Gazpromneft's output is increasing with very little greenfield investment, and that TNK-BP's Verkhnechonskoye output has more than doubled to around 120 kb/d in October. Despite these highlights, we still expect Russia's output to grow by a modest 0.9% next year to 10.7 mb/d, nevertheless a 50 kb/d increase from last month's outlook. The upwards revision takes into account Gazpromneft's impressive performance over the last several months.

Russia's output could exceed our expectations in 2012 with the introduction of the 60-66 tax regime. The overall effect of the regime change on oil companies' cashflow and their willingness to invest in stemming oilfield decline remains a subject of much debate. As of 1 October, the 65% to 60% tax change reduces crude export duties using a formula as follows: [$4/bbl + 60% * (Urals price - $25/bbl)]. However, oil companies likely paid a duty of $53/bbl in October, the same level as in September, given the increase in Urals prices. And although the regime shifts the tax burden from the upstream to the downstream, companies also face a 6.5% higher mineral extraction tax from January 2012, higher Transneft export tariffs, 5-7% higher excise taxes, and possible price controls if the price at the pump increases by more than 10% in any 30-day period. All of these factors could reduce the incentive of producers to invest in brownfield production.

FSU net oil exports increased by 150 kb/d to 9.0 mb/d in September as crude shipments climbed by 220 kb/d, offsetting a 70 kb/d decrease in product deliveries. Net oil exports remain close to year-ago levels, although crude volumes have grown by 150 kb/d to 6.5 mb/d and have offset a 150 kb/d fall in products. The month-on-month rise in crude shipments was driven by a sharp 250 kb/d hike in Transneft deliveries after seasonal Russian refinery maintenance reduced domestic crude requirements. The largest beneficiary of this was Russia's flagship Baltic port of Primorsk where shipments increased by 140 kb/d. Indeed, reports suggest that scheduled maintenance on the Baltic Pipeline System (BPS) feeding the port was postponed at the behest of producers. In the Black Sea, Novorossiysk exports crept up to 950 kb/d (+30 kb/d m-o-m), their highest level since March after an uptick in Kazakhstani and Azerbaijani deliveries to the terminal. Flows through the Druzhba pipeline increased by 80 kb/d following a rebound in deliveries to Poland after its Plock refinery came out of maintenance. Outside Russia, volumes through the BTC and CPC pipelines remained flat at 700 kb/d and 650 kb/d, respectively.

Reports suggest that the BPS-2 pipeline is now being filled, with exports scheduled to begin in December from the Baltic port of Ust Luga. However, Transneft has indicated that the BPS-2 will run at 200 kb/d throughout its first year of operation, significantly below its 600 kb/d capacity.

Product exports fell by a further 70 kb/d to 2.58 mb/d in September, their lowest level since end-2009. Gasoil shipments drove the decline, contracting by 80 kb/d largely due to buoyant Russian distillate demand. In contrast, fuel oil flows rose by 50 kb/d, after Russian refineries ran less vacuum gasoil as a feedstock during heavy maintenance. The 150 kb/d year-on-year fall in product exports was led by 'other products', here including naphtha and gasoline, due to the recent introduction of the 90% light product duty.


Oil production in non-OPEC African countries increased by 20 kb/d to 2.5 mb/d in 3Q11, stemming largely from small increases in Sudan and Ghana. In 2012, new oil production should come from Equatorial Guinea, where an FPSO arrived one month early at the 55 kb/d Aseng field and should begin production this year.

Latin America

Brazil - August actual: Brazil's production averaged 2.2 mb/d in 3Q11, which is up 20 kb/d from last year's levels. Maintenance at offshore fields led to the lowest level of Rio de Janeiro offshore production since November 2008, at 1.52 mb/d in August. Start-up at the Marlim Sul field and new wells at fields in the Campos basin mitigated ongoing field maintenance in September. In 4Q11, we expect production to rebound to 2.3 mb/d, and output should grow by 6.5% in 2012. Brazil's Senate recently approved a plan to distribute oil royalties more widely among states, which is an incremental step towards relaunching the development of Brazil's offshore reserves. Potential law suits from oil-producing states that would lose revenue and several legislative hurdles could still pose obstacles to the plan.

OECD Stocks


  • OECD industry oil stocks declined by 11.8 mb to 2 684 mb in September. Inventory levels stood below the five-year average for a third consecutive month, for the first time since 2004. Declines in crude oil holdings dominated in September, but middle distillates and fuel oil also fell, while gasoline and 'other products' stocks rose.
  • OECD forward demand cover dropped to 57.9 days in September, from 58.6 days in August, yet OECD stock cover still remains 1.5 days above the five-year average. A decline in fuel oil holdings and a moderate uptick in demand expected over the next three months brought fuel oil cover lower by 2.5 days to a still-strong 43.5 days.
  • Preliminary data suggest a sharp 34.3 mb draw in October OECD industry stocks, with product stocks plummeting 22.2 mb after steep declines in US distillates. A strong stockdraw in Europe contributed to a counter-seasonal 13.8 mb reduction in crude holdings.
  • Short-term oil floating storage rose by 2.6 mb, from 43.4 mb in September to 46.0 mb in October. Increases in Iranian crude oil floating storage boosted offshore crude oil inventory levels by almost 13 mb, but tight fundamentals and a backwardated market structure completely drained around 10 mb of product floating storage held off West Africa, the Mediterranean and Asia-Pacific.

OECD Inventories at End-September and Revisions to Preliminary Data

OECD industry oil inventories fell by 11.8 mb in September, to 2 684 mb or 57.9 days of forward demand cover. The monthly decline was sharper than the five-year average 8.0 mb draw. Inventory levels stood below the five-year average for a third consecutive month, the first time this has occurred since 2004. Weaker-than-seasonal builds during July and August, as well as a stronger September draw, widened the deficit versus five-year average levels to 22.5 mb.

In September, an 11.4 mb decline in crude holdings dominated, while products remained largely unchanged from the previous month. Middle distillates and fuel oil fell by 4.7 mb and 5.7 mb, respectively. Upward support came from stronger gains in gasoline and 'other products' (7.0 mb and 3.8 mb, respectively).

Middle distillate inventories contracted by 4.7 mb to 565 mb in September and forward demand cover dropped to 33.0 days. The stock overhang observed during the past two years has dissipated and distillates stood for the second consecutive month at a deficit versus the five-year average in both absolute and cover terms. Ahead of the winter heating season in the northern hemisphere, only North America retains a sizeable distillate buffer, but weekly data from the US suggest a further sharp decline in middle distillate holdings in October.

Fuel oil inventories declined by 5.7 mb to 128 mb in September. US and European inventories fell counter-seasonally and the deficit versus the five-year average widened to 16.8 mb. Structural decline in OECD fuel oil demand has led to consistent reduction in inventories. Nonetheless, the contraction in industry stocks has lagged declining demand, so that forward demand cover had actually risen in recent years. But counter-seasonal draws since April brought demand cover down from 7.2 days above the five-year average to 1.1 days.

OECD stocks were revised 3.7 mb higher in August, upon receipt of more complete monthly submissions from the member countries. This implies a 0.9 mb build in August inventory levels, contrasting with a previously reported 3.4 mb draw. Upward adjustments were centred on 'other oils', fuel oil and gasoline and outweighed a 6.0 mb downward revision to distillate holdings in North America.

Preliminary data suggest OECD industry stocks plummeted by 34.3 mb in October, more than double the five-year average 14.4 mb. Product inventories fell by 22.2 mb, with the majority of the decline stemming from distillates in the US (largely diesel). A sharp draw in Europe contributed to a counter-seasonal 13.8 mb reduction in crude holdings. Meanwhile, short-term oil floating storage rose by 2.6 mb to 46.0 mb in October.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil stocks declined by 14.1 mb to 1 346 mb in September, in strong contrast with a five-year average build of 10.4 mb. Crude oil inventories plummeted by 15.3 mb, driven by draws in the US. A final crude cargo from the US Strategic Petroleum Reserve (SPR) deriving from the IEA's Libya Collective Action was delivered at the beginning of September, but a combination of healthy crude runs and low imports drained US crude stocks by 17.2 mb and reduced the stock overhang to 3.0 mb. Yet, 4.4 mb of crude brought ashore from floating storage near the US Gulf cushioned the September draw. North American refined product inventories rose by 1.5 mb, as gains in gasoline and distillates outweighed a counter-seasonal decline in fuel oil.

US EIA weekly data up to 28 October point to a seasonal 9.8 mb draw in US commercial stocks in October. US refineries entered maintenance season and, consequently, crude and 'other oils' rose by 7.7 mb, while refined products fell by 17.5 mb. Middle distillates contracted by a sharp 15.7 mb, as inventories of diesel plummeted on strong industry demand and exports, while heating oil and jet kerosene stocks declined modestly. As such, distillate inventories fell below the five-year average. October fuel oil holdings gained 2.7 mb and regained their five-year range after a sharp drop the previous month.

After declines totalling nearly 10 mb during the past six months, crude levels at Cushing, Oklahoma rose by 2.0 mb to 32.1 mb in October. However, persistent WTI backwardation may lead to further Cushing stockdraws. The October build coincided with an estimated 10 mb increase in working storage capacity at Cushing following the completion of new storage tanks. The US EIA's semi-annual survey put working storage capacity at 48 mb in March and September capacity levels will be published in November.

OECD Europe

Industry oil inventories in Europe fell by 10.7 mb to 916 mb in September, the lowest level since November 2007. However, a milder-than-seasonal monthly draw narrowed the deficit versus the five-year average to 33.2 mb. Crude holdings declined by 2.6 mb and remained at their lowest since 2003. The restart of Libyan exports may provide relief to a European crude market that looks constrained in absolute terms, although forward cover for refinery runs remained near average levels at 25.3 days in September. European product holdings dropped by 7.6 mb. Gasoline declined modestly, but distillates fell by 5.6 mb and fuel oil stocks contracted by 2.6 mb.

Preliminary data from Euroilstock suggest a further 16.2 mb stockdraw in EU-15 and Norway in October. Crude inventories led the decline by falling 12.3 mb, in contrast with a five-year average build of 3.4 mb. Product holdings dropped by 3.8 mb driven by a 3.0 mb decrease in middle distillates. Refined product stocks held in independent storage in northwest Europe fell on strong draws in gasoil. This might signal that winter restocking of consumer reserves is underway and latest reports indicate German end-user heating oil stocks rose to 59% at end-September, up steadily from July's 53% and August's 56% reading.

OECD Pacific

Commercial oil inventories in the OECD Pacific rose by 13.1 mb to 421 mb in September. Crude stocks increased by 6.5 mb, in contrast to a five-year average 3.4 mb decline. Lower refinery throughputs boosted crude stocks in Japan by 2.4 mb, while higher imports led a 3.9 mb gain in crude holdings in Korea. OECD Pacific crude oil stocks came back within the five-year range in September, after having been well below the range for the past three months.

Product stocks gained 6.5 mb in September, with the majority of the increase stemming from a 4.0 mb surge in Japanese gasoline inventories reported by the Ministry of Economy, Trade and Industry (METI). However, this gain is not visible in the weekly data from the Petroleum Association of Japan (PAJ) and thus it remains to be seen whether the data point will be revised later.

Weekly data from the PAJ suggest a counter-seasonal decline of 8.3 mb in Japanese industry oil inventories in October. Crude oil stocks fell by 4.6 mb, likely on lower imports. Product stocks dropped 0.9 mb, led by a 1.3 mb decrease in gasoil. Jet/kerosene stocks gained 0.9 mb, but jet fuel inventories remained below the five-year range amid kerosene restocking ahead of winter heating season. Meanwhile, PAJ revised weekly inventory data for several product categories from July to October. Product stocks were adjusted on average 2.7% lower at end-September, with the largest revisions in gasoline (-5.8%) and distillates (-3.5%).

Recent Developments in China and Singapore Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories fell by the equivalent of 2.9 mb in September (data are reported in terms of percentage stock change). Crude oil holdings rose by 3.0% (6.6 mb) on reduced refinery runs because of scheduled maintenance and refiners' reluctance to boost production amid dismal margins. Product stocks dropped for the fourth consecutive month, led by a sharp decline in diesel (12.7% or 8.9 mb). In addition, both gasoline and kerosene stocks fell by 0.3% (0.2 mb) and 3.8% (0.5 mb), respectively.

Singapore onshore inventories fell by 2.2 mb in October, driven by a draw in middle distillate holdings. Middle distillate stocks declined by 3.0 mb following a recent outage at Shell's refinery, which is still operating at reduced rates, and higher regional demand for gasoil. Moreover, fuel oil inventories edged down by 0.6 mb, while light distillate stocks rose by 1.5 mb, as seasonal peak demand has ended.



  • The Euro zone debt crisis hung over the market for most of October and early November but, ultimately, supply and demand fundamentals appeared to be the main drivers of price direction. Futures prices for benchmark crudes were on divergent paths in October, with WTI on a solid upward trend while Brent traded in a lower range. At writing, Brent was trading around $114/bbl and WTI at $96/bbl.
  • In a contentious 3-2 vote on 18 October, CFTC Commissioners voted in favour of establishing federal speculative positions limits on 28 commodities, including NYMEX natural gas, crude oil, gasoline and heating oil. Part of the Dodd-Frank financial legislation passed by the US Congress, position limits are aimed at curbing excessive speculation in commodity derivatives markets. However, critics point to the risks of lower market liquidity, higher hedging costs and increased market volatility.
  • Refining margins generally improved in all regions in October, largely supported by a strong increase in middle distillate crack spreads. Moving into November, margins continued to seesaw in line with volatile crude markets, declining towards the end of the first week as product prices failed to keep track with a renewed increase in crude prices.
  • Crude tanker freight rates posted a recovery during October, with benchmark rates firming for the first time since early summer. The picture for product tanker markets was mixed.

Market Overview

The Euro zone sovereign debt crisis hung over the market like the sword of Damocles for most of October and early November but, ultimately, supply and demand fundamentals appeared to be the main drivers of price direction. Futures prices for benchmark crudes were on divergent paths in October, with WTI on a solid upward trend in line with stronger regional fundamentals. By contrast, Brent crude traded in a lower range, pressured in part by the Euro zone crisis as well as from rising Libyan output and a recovery in North Sea supplies.

In October, WTI rose by around $0.80/bbl to an average $86.43/bbl while Brent was down by over $1/bbl at $108.79/bbl. By early November, benchmark crudes had strengthened relative to October average levels. WTI was last trading at $96/bbl, or about $10/bbl plus above October levels. Brent rebounded by a smaller $5.20/bbl over the same period, last trading around $114/bbl.

The ever-present threat of a far-reaching financial collapse from the worsening economic quagmire in Greece and Italy generated a raft of daily headlines that injected a high level of trading volatility in October and early November. Expectations that the G20 ministers meeting in Cannes would agree viable rescue packages proved overly optimistic. While G20 leaders managed to placate markets, the very public disagreements over strategy among member countries laid bare some starkly divergent views. Greece's Prime Minister George Papandreou threw a spanner in the works before the gathering by announcing that the country would hold a referendum on the proposed bail-out plan, seen as likely to have been rejected by the populace. Following a sharp downturn in markets, and under pressure from G20 leaders, the prime minister back-tracked but the ill-advised referendum proposal cost him his job.

With the crisis in Greece averted for now, market attention has shifted to Italy where a weak financial reform package has triggered a dangerous rise in 10-year government bonds. Oil markets are inextricably linked to the deterioration in the European debt situation given the impact on financial markets, the heightened risk of global recession, and the corresponding potential loss of oil demand. Amid all the economic uncertainty, for now, however, prices are finding something of a floor ahead of the winter demand season, amid a tighter inventory situation and from ongoing political turmoil affecting Libya, Iran, Iraq, Syria and Yemen.

Upward price momentum in recent days has centred on the tense situation over Iran's nuclear programme, triggering a $2-3/bbl rise in oil prices in early November. The much-publicised release of a new IAEA report on Iran's nuclear programme, following on the heels of earlier accusations of Iranian involvement in an attempt on the life of a Saudi diplomat in Washington, set-off a series of verbal exchanges between Tehran and the West as well as triggering alarm bells within the Middle East region. While at writing heightened tensions are still generating bullish market pressure, many analysts believe the situation will be contained.

Libyan oil production recovered at a faster-than-expected pace in October despite the escalation in violence as the end-game neared after eight months of civil war. However, the effect of higher production on absolute prices has been marginal to date, with the larger impact being felt on sweet and sour price spreads. The formal end to hostilities was announced on 23 October following the capture of the last stronghold of Sirte and subsequent death of Colonel Gaddafi. Against this daunting backdrop, officials were able to ramp up output from an average 75 kb/d in September to 350 kb/d in October. By early November, output was above 500 kb/d (see OPEC Supply, 'Libyan Production Outpaces Forecast').

The return of Libyan crude to the market has been partially countered by continued supply disruptions in Nigeria and reduced output over the past two months from Saudi Arabia. For most of October a tighter supply situation prevailed in Europe and Asia, leading to strong premiums for physical crude prices. Even the restoration of North Sea supplies following an unplanned shut-in of output from the key Buzzard field over the past six months has failed to knock Brent off its loftier perch. While ICE Brent futures were marginally lower on average in October, prices in early November were still trading above levels seen over the past three months.

Underscoring current strong fundamentals, forward prices for regional benchmarks Brent, WTI and Dubai are all in backwardation, so-called because prompt prices are higher than outer months. While Brent has been in backwardation for much of this year, significantly, WTI ended its long contango streak in late October, flipping into backwardation for the first time since late 2008. The shift in price structure reflects a growing consensus of tighter prompt market fundamentals. The WTI M1-M2 futures contracts was averaging around $0.13/bbl in early November compared with an average -$0.13/bbl in October and -$0.20/bbl in September. The WTI M1-M12 contract showed an even deeper backwardation, averaging around $1.30/bbl in early November compared with - $0.88/bbl in October and -$2.55/bbl in September.

As a result of relatively softer Brent prices and stronger WTI, the spread between the two grades saw an unprecedented narrowing starting on 25 October. WTI's discount to Brent narrowed by around $2/bbl on average for the month, to -$22.36/bbl, in October. But the modest monthly change masks the steady erosion over the month, which at one point reached -$15/bbl. By early November, the WTI-Brent discount was running about $16-18/bbl.

Futures Markets

Activity Levels

Open interest in WTI contracts in New York plunged in October to a one-year low as traders limited their exposures in risky assets. Open interest in futures-only contracts decreased in October from 1.43 million to 1.35 million. Meanwhile, open interest in futures and options contracts decreased by 8.5% to 2.56 million contracts. During the same period, open interest in London ICE WTI contracts increased in futures-only contracts to 0.44 million and decreased in combined contracts to 0.50 million.

Money managers increased their bets on rising crude oil prices for four straight weeks, sending the number of net futures long holdings to their highest since June in the week ending 25 October as a response to better than expected economic growth in the US and optimism over EU agreement on a debt deal. However, money managers' net long position declined in the week ending 1 November due to concerns over the future of a European debt deal after the Greek Prime Minister George Papandreou announced a referendum on the country's bailout package. Overall, in October, net futures long positions of managed money traders increased from 126 093 to 179 845 contracts in New York. Similarly, money managers increased their Brent futures net long positions by 106.7% from 24 776 to 51 212 contracts.

Producers increased their net futures short positions in October; they held 22.3% of the short and 13.1% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 33.8% and 36.9% of the open interest on the long side and short side, respectively, switched to hold 42 192 net short positions by reducing their gross long position to a seven-month low of 454 231 contracts in the week ending 1 November 2011.

However, producers' trading activity in London WTI contracts showed an opposite pattern from CME WTI contracts. Producers decreased their net short positions in London ICE WTI contracts by 70% from 28 313 to 8 446 contracts over the same period. Swap dealers, on the other hand, switched to hold a net short position (8 412) in the week ending 1 November 2011.

MF Global, one of the most active brokers by volume at CME's metals and energy exchanges in New York, filed for bankruptcy protection on 31 October 2011 after a series of credit rating downgrades due to its $6.3 billion proprietary trade on euro zone sovereign debt. The CFTC revealed that MF Global's commodity customer funds have a $633 million shortfall, or about 11.6 percent, out of a segregated fund requirement of about $5.4 billion. Following the bankruptcy protection, MF Global customer accounts were also frozen due to inability to transfer customer accounts to other brokerage firms. On the day bankruptcy was announced, the volume in CME WTI contracts more than halved. However, the impact of this trade disruption on prices was very limited. Although trading volume in later days rebounded somewhat, the volume was at 518 394 contracts on 4 November 2011, less than half of its October high of 1.088 million contracts.

NYMEX RBOB futures and combined open interest declined by more than 1.45% in October. Open interest in NYMEX heating oil decreased by 9.9% to 296 818 contracts while open interest in natural gas markets increased by 2.3% to 960 199 contracts.

Index investors reduced their long exposure in commodities in September 2011 by more than $50 billion. They withdrew $7.2 billion from Light Sweet Crude Oil, both on and off-exchange traded derivatives contracts, in September to a nine-month low of 646 000 contracts, equivalent to $51.6 billion in notional value.

Market Regulation

In a contentious 3-2 vote on 18 October, CFTC Commissioners voted in favour of establishing federal speculative positions limits on 28 commodities, including NYMEX natural gas, crude oil, gasoline and heating oil, along with a number of metals and grains contracts. Position limits form part of the Dodd-Frank financial legislation passed by the US Congress and are aimed at curbing excessive speculation in commodity derivatives markets. However, critics point to the risks of lower market liquidity, higher hedging costs and increased market volatility (see 'Rescuing Commodities from Speculators?').

At the same meeting, the CFTC also passed a final rule on the operation of derivatives clearing organisations (DCOs). The final rule brings together five previous proposals into a single rule-making with a few revisions. The rule covers requirements for risk and information management, requirements for financial resources as well as requirements for processing, clearing and transfer of customer positions; in addition to general regulations on DCOs.

The CFTC also proposed another extension to the effective date for the provisions in the swap regulatory regime that would have gone into effect on 16 July 2011 as established by the Dodd-Frank Act. The proposed amendment extends CFTC's temporary relief order, initially issued on 14 July 2011, until 16 July 2012 from 31 December 2011.

As noted in a previous OMR, the European Commission released its extensive revision to Markets in Financial Instruments Directive (MiFID) on 20 October 2011. The new proposal increases the role of the European Securities and Market Authority (ESMA). In order to prevent regulatory arbitrage and distortion from competition, MiFID increased the ESMA's role in the implementation of the new legal proposals. According to MiFID, all trading of derivatives which are eligible for clearing and which are sufficiently liquid, as assessed and determined by ESMA, will move to either regulated markets, Multilateral Trading Facilities (MTFs) or Organised Trading Facilities (OTFs). MiFID is also seeking to introduce a position reporting obligation by category of trader, similar to the Large Trader Reporting System in the US. Furthermore, MiFID will seek to curb speculative trading in commodity derivatives by giving harmonised and comprehensive powers to financial regulators to monitor and intervene at any stage in the trading activity, including hard position limits, if there are concerns in terms of market integrity or orderly functioning of markets. Trading venues will also be required to adopt appropriate limits on traders' position to maintain market integrity and efficiency.

Rescuing Commodities from Speculators?

In a contentious 3-2 vote on 18 October, the US CFTC Commissioners approved final rules on federal speculative positions limits on commodity futures, options and swaps positions of speculators for 28 commodities. These include NYMEX natural gas, crude oil, gasoline and heating oil, along with a number of metals and grains contracts.

In seeking to prohibit excessive speculation and its possible effect on price volatility in futures markets, the Commission adopted a two-stage approach for hard position limits as preventive medicine for excessive speculation.  The main features of the final rulemaking include:

  • Spot month limits, effective sixty days after the term "swap" is defined by the Commission, which is expected in December 2011. In the first stage, the Commission will take over the existing spot-month limits set by exchanges. In the second stage, the Commission will make its own determination on the spot-month limit based on the 25% of estimated deliverable supply. The spot-month limit will be adjusted biennially for agricultural contracts and annually for energy and metal contracts. That is to say, the earliest adjustment to energy contracts spot month limits based on estimated deliverable supply can be made in the first quarter of 2013.
  • Non-spot-month and all-months-combined position limits for legacy agricultural contracts will go into effect sixty days after the Commission defines the term "swap". For non-legacy agricultural, energy and metal contracts, the position limits will be effective after the Commission receives one year of open interest on swaps data. Thereafter, non-spot month and all months combined position limits will be adjusted every two years based on the previous two years' open interest. The rules call for limits on non-spot month and all-months-combined positions up to 10% of the sum of futures, cleared and uncleared swaps open interest for the first 25 000 contracts owned by a trader and 2.5% thereafter.
  • The cash-settled natural gas contract will be subject to spot month and non-spot month position limits set at five-times the limit that applies to the physical delivery natural gas contract. 
  • Bona fide hedging positions will not count towards the limits. Exemptions for bona fide hedging transactions have been broadened to include certain anticipated merchandising transactions, royalties, and service contracts in the final rulemaking. Hedge exemptions need to be approved by the Commission, rather than the exchanges. Also, if a swap dealer's counter-party is a hedger, or a swap dealer completes a trade on behalf of a bona fide hedger, then the swap dealer might use bona fide exemption for this specific trade and it will not be counted towards position limits.
  • The final rule requires quarterly position visibility reporting requirements for traders exceeding a non-spot month position visibility level in energy and metal contracts.

Proponents argue that hard position limits on speculative activity ensure the effective functioning of the market by minimising price disruption that could be caused by excessive speculation. They further argue that a hard position limit is necessary to reduce concentration of market share in commodity markets. This will ensure that markets would be made up of a broad group of market participants with a diversity of views, thereby preventing distortion in market prices. The limit on the concentration of market share is also deemed necessary to cut systemic risk. Finally, they argue that rule-based hard position limits are preferable to position accountability levels, in that they provide much more certainty as well as preventing arbitrary intervention in the market.

Opponents have made the point that nine agricultural contracts subject to position limits were not spared record price increases and have noted that substantive comments received by the CFTC were overlooked during rule-making. They further expressed concerns over the inadequacy of cost benefit analysis, restrictive interpretation of bona fide hedging, lack of clarity on how the Commission reached its proposed position limit formula, the possibility of reduced trading activity which would lead to increased, rather than reduced, volatility, and the possibility of international or physical/cash settled regulatory arbitrage.

Moreover, the rule was passed by the seemingly reluctant vote of Commissioner Dunn, who expressed concerns that position limits are "at best, a cure for a disease that does not exist or a placebo for one that does. At worst, position limits may harm the very markets they are intended to protect." His decision to vote in favour as the decision is required by the law was challenged by the two dissenting Commissioners. They argue that the Commission overreached its mandate since the Act clearly states that the Commission should adopt position limits only if it finds that they are "necessary to diminish, eliminate or prevent" the burden on interstate commerce caused by excessive speculation. They further argued that the Commission still did not have qualitative or quantitative criteria for what is meant by excessive speculation.

The debate over the position limit rule may continue further. Market participants might challenge the final rule based on whether the Commission overreached its mandate by pre-emptively setting a position limit on commodity derivatives contracts, on the almost non-existing cost-benefit analysis in the final rulemaking as well as insufficient consideration of some of the comments letters which the Commission was obliged to take into account.

Spot Crude Oil Prices

Spot crude prices were down on average in all major markets in October, with the increasingly regionally-focused WTI the exception. The weaker monthly average, however, masks the strong rebound in spot prices throughout the month. The steady increase in spot prices since the exceptionally weak early-October levels has been underpinned by stepped-up buying ahead of the winter demand period as well as low crude stocks levels in all major consuming regions.

Dated Brent prices were down by around $3.70/bbl to about $109.45/bbl in October. Prices fell off the cliff in early October on mounting concerns over the Euro zone debt issues but quickly recovered on strong refiner demand. Middle East marker Dubai was down a smaller $2.35/bbl, to an average $103.95/bbl in October, though by end-month prices had rebounded to a higher band of $106-107/bbl. By contrast, WTI rose to a four-month high in October, up by an average $0.90/bbl, to $86.45/bbl and by early November was trading $10/bbl-plus higher at around $96/bbl.

WTI posted a near 18% gain month-on-month in October. As a result of WTI's relative strength, the price spread with Brent plummeted at end-October. WTI's discount to Dated Brent narrowed by around $4.60/bbl in October, to just under $23/bbl on average for the month, and flirted with lows around $15/bbl at end-October.

Trading the price differential between WTI and Brent has been a major play for physical traders, money managers and investment funds for the past year as the Brent premium over WTI steadily increased due to the latter's price weakness on rising inflows of Canadian crude and transportation bottlenecks at the landlocked Cushing, Oklahoma terminal. In addition, sharply reduced supplies of North Sea crudes between April and September, to record 30-year lows, have exceptionally elevated the premium for Brent but prices have eased now as supplies slowly return to more normal levels. A number of players were reportedly caught on the wrong side of the trade when WTI posted its sharp rebound. Many market participants feel that 2011 highs and lows for the spread may now have passed, and that it could settle into a high-teens to low-twenties range in the near-term.

Storage levels were brimming over at times during the past year, but more recently, crude oil stocks held in Cushing tanks have steadily declined since April, from 41.9 mb to 30.1 mb at end-September. End-October levels at 32.1 mb were slightly higher on the month but still near the bottom of the recent range. Profitable rail and trucking economics to move crude to the US Gulf coast refining region have provided an unexpected relief valve for oversupply that was weighing on prices. While domestic demand has been lacklustre, there has been exceptionally strong export demand for refined products from neighbouring South America.

Increased exports of light, sweet Libyan crude has added downward pressure on sweet-sour spreads in Asia and the Mediterranean. The premium for light, sweet Malaysian Tapis over Dubai has narrowed over the past two months, to around $9.50/bbl in early November compared with about $11.50/bbl in October and $13.40/bbl in September. Meanwhile, the Brent-Dubai price differential, an indicator of the premium for light, sweet crudes over heavier grades, narrowed in October, to around $5.50/bbl from $6.80/bbl in September. By early November the spread was around $4/bbl.

After raising price premiums for Arab Light, Extra Light and Super Light , to record levels for November to Asian customers, Saudi Aramco lowered them again for December liftings. The price cuts for the region are reportedly in line with the seasonal downturn in demand for naphtha and other light-end products.

Spot Product Prices

October saw middle distillate crack spreads strengthening, and European diesel crack spreads increased to a robust $19.80/bbl to Brent in an unusually tight market. Stock levels are around or below the five-year average in all major markets as increasing demand and below-average refinery runs in both Europe and Asia have resulted in counter-seasonal stock draws. Light distillates markets on the other hand were weak in October, with crack spreads falling further from last month. Asian naphtha crack spreads fell almost $5/bbl to Dubai month-on-month, and gasoline crack spreads were only $4/bbl to Brent and at a discount to LLS in the US Gulf at month-end. Fuel oil discounts narrowed in October and both high- and low-sulphur fuel oil were trading at premium to Dubai at month-end.

Gasoline crack spreads showed diverging trends in October. In Europe, crack spreads fell slightly partly due to stronger crude prices and a narrow arbitrage to the US East Coast, but demand from West Africa and Middle East was strong, and supplies were especially tight in the Mediterranean. At the US East Coast, gasoline crack spreads also fell, driven by a negative sentiment as demand readings continue to be poor as well as the end-October shift to lower-priced winter grade gasoline. A strengthening of WTI also contributed to the weaker crack spreads. At the Gulf Coast, crack spreads improved slightly, but this was mainly related to benchmark crude prices LLS and Mars falling more than gasoline. In Asia, crack spreads fell throughout October with the gradual restart of the Bukom refinery in Singapore. The tight market conditions of the first half of October saw gasoline crack spreads improve month-on-month from September.

Naphtha markets continued to perform poorly in October, with Asian prices at a $7.80/bbl discount to Dubai in October. Low demand from the petrochemical sector (Korean strength aside), and the competitiveness of propane feedstock contributed in pressuring naphtha markets together with the weakness in gasoline markets.

Middle distillate crack spreads improved in October in all regions. In Europe crack spreads were supported by higher demand and stock draws, partly due to still low exports from Russia. US markets were supported by both increasing domestic demand as well as strong export demand to Latin America and Europe. Asian markets were tight due to lower regional production and high export demand.

Fuel oil discounts remained narrow in October. Asian markets were tight on strong demand especially from Japan and low stock levels, which also supported European markets.

Refining Margins

Refining margins largely improved in October but volatility throughout the month was high. Margins were generally supported by a strong increase in middle distillate crack spreads, with the exception of high-priced Maya crude, which led to depressed coking margins for the grade in the US Gulf. Moving into November, margins continued to seesaw in line with volatile crude markets, declining towards the end of the first week as product prices failed to keep track with increasing crude prices.

European refining margins showed a slight improvement in October, especially for simple refineries although absolute levels continue to be very weak. The strength seen for middle distillates and narrowing discounts for fuel oil supported the margins.

On the US Gulf Coast, margins continue to be weak, although both Mars coking and LLS cracking margins moved into positive territory again after showing calculated losses last month. The strength in the middle distillates segment gave support, but LLS margins weakened in the second half of the month as LLS was relatively stronger. After showing strength over the summer, Maya coking margins fell by $3/bbl month-on-month in October on strong Maya prices.

Tightness in Asian product markets due to ongoing capacity outages at the Bukom refinery in Singapore gave support to Singapore Dubai margins. Tapis margins also improved in October as its value eased alongside that for light-sweet grades generally. Meanwhile, Chinese margins improved in October mainly due to stronger middle distillate crack spreads and narrowing fuel oil crack spreads.

End-User Product Prices in October

Average IEA end-user prices in US dollars (ex-tax) fell by a lean 0.94% in October. On this basis, prices retreated across all surveyed products, bar diesel, which reported a marginal 0.2% increase. Gasoline decreased by a significant 2.9% driven by weak prices in the US (-5.1%), Canada (-3.9%) and Spain (-3.8%). Diesel dropped in Japan and the US by 2.9% and 1.2%, respectively; but showed a sizeable increase in Germany (+3.5%). Heating oil showed mixed movements across surveyed countries but on average decreased by a minor 0.3%. LSFO dropped by a more sizeable 0.8% driven by a fall of 1.4% in France.

On a year-on-year basis, fuel prices continue to recede on the back of weaker demand and ambivalent consumer confidence. On a country-by-country basis, average end-user prices range between 23% and 33% higher than a year ago. UK prices posted the heftiest annual increase driven by heating oil and diesel. On a fuel-by-fuel basis, gasoline and diesel are 25% and 27% higher than year-ago levels, respectively.


Crude tanker freight rates experienced a recovery of sorts during October, with all benchmark rates firming for the first time since early summer. The upward momentum resulted from severe delays in the Bosphorus Straits where the implementation of new regulations on hazardous cargoes contrived to increase journey times by up to 10 days. In the West African market, the delays combined with high demand to tighten Suezmax tonnage, forcing the benchmark West Africa - US Atlantic Coast rate to a peak of $18.50/mt on 17 October.

In the Middle East, steady demand provided some respite for owners as rates on the benchmark Middle East Gulf - Japan voyage recovered to $12.50/mt by end-October. Even the North Sea Aframax market got a piggyback from the delays affecting their Mediterranean counterparts as tightening tonnage pushed the North Sea - Northwest Europe rate over $7.70/mt by end-month. However, the firming on all trades proved fleeting as once again vessels repositioned themselves to take advantage of firming markets thereby forcing rates downwards. This was most pronounced in the West African Suezmax market, which plummeted from mid-month as demand waned and tonnage lists lengthened after tankers based East of Suez 'offered up' for forward Nigerian and Angolan cargoes.

In product tanker markets, the picture was mixed. The volatility of the UK - US Atlantic Coast trade was once again underlined as a bust, boom and then bust again scenario played out. After a lacklustre early-month, fundamentals firmed in mid-October with the rate resurging to over $24/mt, but by the time of writing, the rate had receded sharply on the back of a lengthy tonnage list. In the east, the Middle East Gulf - Japan route, which had remained healthy all summer, fell below $24/mt by early-November after declining demand and a plethora of available vessels softened fundamentals.

Oil in short-term floating storage increased by 2.6 mb at end-October. However, this masked the fact that crude climbed sharply by 12.8 mb to 46 mb whilst all product floating storage (10.2 mb) came ashore. The rise in crude inventories was driven by a 12.9 mb build in Iranian storage either in the Middle East Gulf or being shuttled unsold to the SUMED pipeline at Ain Sukhna. Additionally, storage in the US Gulf rose by 2.1 mb to 6.5 mb whilst Asia Pacific storage drew by 1.2 mb. The surprise fall in products was led by West Africa which drew by 6.6 mb with inventories in Asia Pacific and the Mediterranean declining by 3.1 mb and 0.5 mb, respectively. Consistent with the offloading of products, the storage fleet is now composed of 20 VLCCs and 2 Suezmaxes after 11 smaller vessels were released.



  • Global refinery crude throughputs fell sharply in September, as planned and unplanned shutdowns amplified the normal seasonal downturn. Asian refinery runs were lower than expected following unscheduled and prolonged outages in Taiwan and Singapore, and extensive maintenance and delays in the commissioning of new capacity in India. Russian runs also fell more than expected despite recent tax changes, and earlier talk of postponed turnarounds, while higher OECD rates provided a partial offset. In all, 3Q11 global crude runs have been lowered by 30 kb/d, to 75.5 mb/d.
  • 4Q11 refinery crude run estimates have been lowered by 260 kb/d since last month's report, to average 75.1 mb/d, following significant refinery outages and apparent delays in starting up new capacity in Asia. While mega-refineries in both Singapore and Taiwan have restarted after extended unplanned shutdowns, reduced runs are likely to persist through to the end of the year. New capacity in India is now only expected to be fully operational in 2Q12.
  • OECD crude runs fell by 0.9 mb/d in September to 36.8 mb/d, on the back of lower runs in all regions. European and North American runs were both down 390 kb/d from a month earlier, while the Pacific contracted by less than 100 kb/d. The seasonal decline was nevertheless smaller than expected, resulting in an upward revision to 3Q11 OECD estimates of 100 kb/d in total, to 37.2 mb/d. 4Q11 estimates are unchanged since last month's report, averaging 36.4 mb/d, on par with 4Q10.
  • OECD refinery yields were relatively unchanged in August, showing only a small decrease in yields for naphtha and 'other products' and a minor increase in fuel oil and distillate yields compared to the previous month. Unchanged OECD gasoline yields masked a further decline in Europe and higher Pacific yields. OECD gross output increased further in August by 485 kb/d from July, to 44.7 mb/d.

Global Refinery Throughput

Global refinery crude runs have been revised down by 30 kb/d for 3Q11 as weaker-than expected non-OECD runs more than offset higher runs in all OECD regions. September throughputs were particularly hard-hit in 'Other Asia' (260 kb/d lower than expected) following a series of planned and unscheduled outages and delays to the commissioning of new capacity in India. The shutdown of Essar's Vadinar refinery for 45 days led to a 200 kb/d monthly decline in Indian runs, while apparent delays continued to impede the ramping up of operations at the recently commissioned Bina (120 kb/d) and Bathinda (180 kb/d) refineries. These plants and the expanded Vadinar refinery are now only expected to be fully operational sometime in 2Q12. Significant refinery outages in Taiwan and Singapore also restricted regional product supplies. Elsewhere, Russian refinery runs fell more sharply than forecast in September, despite talk of postponing maintenance as a result of new export tax changes taking effect on 1 October (See Supply Section). Russian crude processing fell by almost 400 kb/d from August, 100 kb/d above forecast. Higher-than-expected runs in all OECD regions in September provided a partial offset however. While total OECD runs fell 0.9 mb/d in September, the drop was 290 kb/d lower in than last month's report, spread across the three regions.

4Q11 global estimates have been revised lower by 260 kb/d from last month's report, in large part due to the changes outlined above. While capacity in both Taiwan and Singapore had been restored by end-October, reduced runs are likely to persist through to the end of the year. Shell announced it plans to fully restore production at the 500 kb/d Pulau Bukom refinery in Singapore during November and December. In Taiwan safety checks and staged shutdowns will persist at the 540 kb/d Mailiao refinery until August 2012, with the first such shutdown scheduled for December. We now see 4Q11 runs averaging 75.1 mb/d, down 420 kb/d from the previous quarter, but 450 kb/d higher year-on-year.

OECD Refinery Throughput

OECD crude runs fell by close to 900 kb/d in September, as all regions recorded declines. Both European and North American runs were down by 390 kb/d from a month earlier, while the Pacific contracted by less than 100 kb/d. Only North America sustained runs above a year earlier (+370 kb/d), with total OECD runs trailing some 240 kb/d below last year's average. However, the seasonal decline was somewhat weaker than expected, leading to a 290 kb/d upward revision in total. In particular, South Korean runs rebounded from August's dip, back to 2.5 mb/d, supported by robust domestic demand and strong exports. Total OECD 3Q11 runs are now pegged at 37.2 mb/d, 315 kb/d below 3Q10. OECD runs are expected to hit their seasonal low in October, as scheduled shutdowns peak, before rebounding towards year-end. 4Q11 OECD estimates are unchanged since last month's report, averaging 36.4 mb/d.

Refinery crude throughputs in North America fell by 390 kb/d in September following lower runs in both the US and Mexico. However, driven by relatively healthy operations in the US, regional throughputs stood some 370 kb/d above the same month last year. The absence of any hurricane shutdowns on the Gulf Coast and persistently high product exports supported runs. US product exports hit yet another record high, above 3.0 mb/d, in August, the latest month for which consolidated data are available. Net product exports totalled 915 kb/d, up from 490 kb/d in July and 440 kb/d last year, led by record-high shipments of distillates. Distillate exports averaged 895 kb/d while finished gasoline exports were at a record 535 kb/d. Imports of gasoline blending components, at 590 kb/d, provided some offset.

Mexico remains the largest importer of refined products, and gasoline in particular, from the US. Total product exports to Mexico averaged close to 0.5 mb/d in August. Imports of petroleum products probably remained elevated in September and October, as Mexican refinery operations were curtailed by planned and unplanned outages at Salamanca, Cadereyta, Minatitlan and Ciudad Madero during September and October, exacerbating structural product supply shortages.

US runs fell seasonally in October, by 570 kb/d, but were slightly stronger than expected, prompting a 140 kb/d upward adjustment for 4Q11 regional runs. Refinery margins generally improved on the Gulf Coast, and the region was spared any storm shut-ins. US refinery runs were more than 700 kb/d higher than a year earlier, with annual gains recorded for PADDs 1, 2 and 3 (unadjusted weekly data show 590 kb/d annual increase). On the West Coast runs fell sharply at end-October due to maintenance at BP's Carson refinery in California, Tesoro's Wilmington plant and Chevron's Richmond refinery amongst others.

OECD European runs fell by 390 kb/d in September, in line with expectations. The monthly decline stemmed from a number of countries as the peak summer demand season came to an end and refiners started autumn turnarounds. Notable declines came from the Czech Republic, Sweden, Germany and Italy due to maintenance and reduced runs due to poor economics (notably Eni's Venice refinery). In Spain, Repsol announced mid October that the upgrades and expansions at the Cartagena refinery would be operational by mid-October and at Bilbao by 15 November. Cartagena's capacity has been doubled to around 220 kb/d, from 110 kb/d previously, and new coking, hydro-cracking and desulphurisation units have been added. At the Bilbao refinery, a 40 kb/d coking unit has been added.

OECD Pacific crude runs averaged 6.5 mb/d in September, 90 kb/d lower than in August, but almost 200 kb/d higher than our previous forecast. The largest revision came to South Korean throughputs, which rebounded from August's dip, to 2.5 mb/d, and provided some offset to seasonally declining Japanese throughputs. Japanese crude runs fell more than expected in October, to only 2.9 mb/d, 260 kb/d less than both September and October 2010. Runs rebounded by the last week of October, however, as refiners were increasing utilisation rates to replenish inventories and to meet winter heating demand. Both gasoil and kerosene stocks were well below their 5-year average levels ahead of the peak heating season.

Non-OECD Refinery Throughput

Non-OECD refinery crude runs have been revised down by 135 kb/d for 3Q11 following shortfalls in a number of countries, due to both planned and unplanned shutdowns. Indian runs in particular were weaker than expected in September, averaging 3.8 mb/d, following heavy maintenance at several plants, including Essar's Vadinar refinery and delays in ramping up runs at HPCL's Bathinda and BPCL's Bina plants. Talk of delaying scheduled maintenance in Russia, due to recent export tax changes, does not seem to have materialised and Russian runs fell by close to 400 kb/d in September, some 100 kb/d more than forecast. Russian runs were also likely constrained due to turnarounds in October, before rebounding in November. September operations were also lowered by slightly weaker-than-expected runs in Brazil and South Africa, the latter experiencing some fuel shortages as four out of the country's six refineries were shut. In all, total non-OECD runs are now estimated at 38.3 mb/d for 3Q11, 380 kb/d above 3Q10.

The delays and shutdowns mentioned above in large part extend into the remainder of the year. 4Q11 estimates have as a result been lowered by a more significant 275 kb/d, to 38.7 mb/d. New Indian capacity is now only expected to be fully operational by 2Q12, cutting into previously forecasted growth. While mega-refineries in both Singapore and Taiwan have restarted after being shut following fires, reduced runs are likely to persist through to the end of the year. The latest information regarding Shell's 500 kb/d Singapore refinery is that all crude units have restarted, but full rates will likely only be regained by end-year. Also in Taiwan, Formosa's 540 kb/d Mailiao refinery will likely run at reduced rates through August 2012, as the plant undertakes safety checks and stages shutdowns. One such shutdown has been announced for December. Despite the outages and delays, non-OECD runs are expected to increase by 0.4 mb/d in 4Q11 on both a quarterly and an annual basis.

Chinese refinery crude throughputs averaged 8.8 mb/d in September, some 120 kb/d higher than in August and 290 kb/d above a year earlier, but in line with our previous forecast. Runs are expected to rise from October, as maintenance is completed at most plants and refiners restock depleted inventories. Sinopec announced it was planning to run its refineries at close to full capacity in November to "ensure adequate supplies of product to meet domestic demand". PetroChina's refineries have reportedly been running at full capacity since October, (+5.7% y-o-y), CNPC said on 28 October. Turnarounds at CNOOC's 240 kb/d Huizhou refinery for 40 days from October will provide some offset. A decrease in ex-refinery prices of gasoline and diesel, effective from 9 October, lowered domestic refining margins, however, and could discourage increases in runs and product imports, leading to continued stock draws or shortages.

Indian refinery crude runs fell to 3.8 mb/d in September, down 200 kb/d from August and 200 kb/d less that expected. The drop in runs follows maintenance shutdowns of Essar's Vadinar refinery from mid-September as capacity was boosted to 375 kb/d. The plant resumed operations on 24 October, although operations at the 75 kb/d expanded unit will not begin until end-1Q12. Indian state company IOC reportedly reduced runs at its Mathura plant due to weaker demand for industrial fuels during the monsoon and at its Koyali plant due to high naphtha inventories. Total runs were nevertheless 4.4% higher than a year earlier. It is uncertain whether the new 180 kb/d Bathinda refinery is currently operating. The latest news, around 1 November is that HPCL plans to commission the plant by 31 March 2012, though the crude and vacuum distillation units have already been commissioned and crude processing trials started in August.

Elsewhere in the region, refinery throughputs in Singapore and Taiwan were hampered by shutdowns following fires. Taiwan's refinery runs dropped to 40% utilisation in August, or 504 kb/d, but in line with our estimates. Formosa was forced to shut the 540 kb/d Mailiao refinery at the end of July following a fire. The plant's three CDUs had all restarted by mid-September, but runs will likely be reduced until the end of August 2012 as the company undertakes safety checks and staged shutdowns. The first such shutdown has been announced for December, when a 180 kb/d CDU will be taken offline for 40 days.

In Singapore, Shell restarted the final crude unit at its refinery at the end of October, one month after the entire 500 kb/d plant had to be shut following a fire. The company said the plant would be running at 52% utilisation following the restart, or 259 kb/d, before returning to normal operation by December.

Russian refinery runs fell by almost 400 kb/d in September, due to extensive maintenance outages. The fall was almost 100 kb/d more than expected in last month's report. Talks of postponing scheduled shutdowns until after the 1 October introduction of the 60-66 export tax changes seem to have had a limited impact on actual runs. It was argued that since product export duties would rise after the duty change while crude export duties would decrease as a result, refiners would maximise product output and exports ahead of the change, and crude exports thereafter. In reality, changes to maintenance schedules are not so easy to implement, as a lot of planning and staff are involved. That said, October maintenance is expected to increase further, and runs are likely to rebound in November following the completion of most maintenance. Providing a partial offset, Kazakhstani refinery runs averaged 324 kb/d in September, the second highest since our monthly time series started in January 2004, ahead of planned maintenance. Kazakhstani runs are forecast to dip in October and November as the Shymkent refinery close for a 30-day turnaround from 20 October.

In Latin America, Brazil's refinery runs came in at 1.8 mb/d for September, 40 kb/d lower than expected. Argentinean throughputs fell by 50 kb/d in August, to 470 kb/d. Hovensa is planning maintenance work on its 350 kb/d refinery in the US Virgin Islands in the fourth quarter (here accounted for in Latin America). The company permanently reduced crude capacity by 150 kb/d in 1Q11 due to poor economics. In Trinidad and Tobago, state-run oil company Petrotrin shut its 160 kb/d Pointe-a-Pierre refinery in October due to industrial action over salaries.

In Africa, according to statements from the National Oil Company, initial Libyan crude production is being supplied to domestic refineries as a priority over exports. Currently, both the smaller Sarir (10 kb/d) and Tobruk (20 kb/d) refineries are reportedly operating while the larger Zawiya (120 kb/d) is running at reduced rates. The 220 kb/d Ras Lanuf plant is expected to resume runs in late November or early December, before ramping up runs over the coming months. We assume that refinery production could be restored to pre-war levels by February. Four out of South Africa's six refineries were shut for planned and unplanned repairs during September and October causing LPG and bitumen shortages. Capacity is expected to be back on line by the end of November, as repair work is completed. In Chad, CNPC restarted it's newly commissioned refinery after 40 days' shutdown from 25 September as the government raised the price of locally produced and refined fuel products. In October, CNPC's new 20 kb/d refinery in Niger reportedly started operations as the Agedam oil pipeline came on stream.

OECD Refinery Yields

OECD refinery yields did not change much in August. There was a small decrease in yields for naphtha and 'other products', and a minor increase in fuel oil and distillates yields compared to last month. OECD gasoline yields as a whole were unchanged versus July at 34.6 %, although this masks a further decrease in OECD European yields by 0.4 percentage points (pp) and an increase in Pacific yields by 0.7 pp. OECD gasoil/diesel yields increased 0.1 pp, to 30.8 %, as a rise by 0.6 pp in European yields was offset by lower yields in North America and the Pacific. OECD gross output increased further in August to 44.7 mb/d, a rise of 485 kb/d from July, with output for the month higher than last year in both North America and Europe.

Refineries in OECD Europe increased the production of gasoil/diesel at the expense of gasoline in August due to continued low gasoline demand and increasing product crack spreads for middle distillates. In OECD North America, yields were practically unchanged versus last month. There was a slight increase in fuel oil yields, leaving them in line with last year's level of 4.7 %. Fuel oil yields have been trending around 0.5 pp below last year's level earlier this year. In OECD Pacific, gasoline yields increased 0.7 pp on stronger gasoline crack spreads as Asian markets were tight due to refinery maintenance and unplanned shutdowns. Both gasoil/diesel and fuel oil yields decreased as crack spreads for both product categories narrowed in August.