Oil Market Report: 18 January 2012

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  • Oil markets began the New Year confronting a host of supply issues, not least a pending EU ban on Iranian oil imports and retaliatory threats from Tehran to close the Strait of Hormuz, through which flows roughly one-third of world oil exports. Oil prices jumped $4-5/bbl on the reports, but eased on mounting euro zone debt issues. Brent was last trading near $112/bbl and WTI at $100.50/bbl.
  • Clear signs of economic weakness tipped global oil demand into a declining year-on-year trend at the end of 2011, down 0.3 mb/d in 4Q11, its first such drop since the tail-end of the credit crunch. The significantly lower starting point has accordingly trimmed global oil demand growth to 1.1 mb/d for 2012 (from 1.3 mb/d previously).
  • Non-OPEC supply fell by 140 kb/d to 53.2mb/d in December, as rising North Sea output only partially offset a seasonal decline in biofuels and lacklustre supply from the FSU. Middle East unrest and other unplanned outages limited annual growth in 2011 to only 45 kb/d. A rebound to 340 kb/d growth is expected for 1Q12, and 1.0 mb/d for 2012 overall, as non-OPEC output averages 53.7 mb/d.
  • December OPEC crude output rose by 240 kb/d to 30.89 mb/d, the highest in more than three years, on a rapid recovery in supplies from Libya, and lesser increases from Saudi Arabia and the UAE.  OPEC in December raised its output target to 30 mb/d for 2012, close to OMR projections for the 'call on OPEC crude and stock change'.
  • OECD industry oil inventories rose by 4.1 mb to 2 647 mb, or 57.5 days of forward cover, in November, led by North American and European gasoline. Stock levels nonetheless remained below the five-year average for a fifth consecutive month. December preliminary data show a seasonal 23.6 mb draw in OECD industry stocks.
  • Global refinery crude runs are revised down by 250 kb/d and 170 kb/d for 4Q11 and 1Q12, to 74.8 mb/d and 74.9 mb/d, respectively. Weak economic growth and mild weather led to global demand contraction in 4Q11. A weakening economic outlook and recent refinery shutdowns in Europe curb early-2012 activity levels.

Between a rock and a hard place

OPEC Ministers came away from a mid-December meeting having agreed to a new production target, close to both recent output levels and expected 2012 demand for their crude of around 30 mb/d. Indeed, both our own and OPEC's oil market reports converge on a likely 'call' for 2012 near such levels, even if our analysis suggests the 'call' was rather higher in 2011 (hence the continued tightening in OECD inventory evident last year). Consensus on the market outlook may be a force for greater stability, so long as it does not generate a false sense of security. And prices for major crude benchmarks have shown remarkable stability (WTI aside) since springtime last year, oscillating within a $100-$120/bbl range.

However, two inherently destabilising factors are interacting to give an impression of price stability that is more apparent than real. These factors are influencing futures market perceptions as much as they are driving sentiment in physical markets. The first is a rising likelihood of sharp economic slow-down, if not outright recession, in 2012. Although media coverage has subsided from the levels of early-December, euro-zone indebtedness has not gone away, as downgrades to the credit ratings of a number of major economies testify. Private sector credit is also in short supply, as the travails of refiner Petroplus show. Slowing oil demand growth has outpaced downgrades to economic forecasts for 2012. We persist with a 'business as usual' base case for GDP and oil demand, but have scaled back expectations for 2012 oil demand growth to nearer 1 mb/d. We also acknowledge that upcoming revisions to the GDP forecasts of the IMF and other institutions might result in much weaker growth still, even if not to the zero growth implied by our lower GDP variant. As usual, identifying a single smoking gun, for prices or oil demand, remains difficult. Mild 4Q11 weather on the one hand, and incremental Japanese oil demand for power generation on the other, blur the picture. That said, economic concerns and slowing demand growth have so far placed a ceiling over prices since their peak back in spring 2011.

The second factor, which is counteracting bearish pressures, is the physical market tightening evident since mid-2009, and notably since mid-2010. In contrast to 2010, tightening in 2011 derived from supply-side shortfalls. Last year saw non-OPEC supply hit by 600-700 kb/d of unscheduled disruptions between 2Q11 and 4Q11. The Libyan crisis has to date cut supplies to the market by nearly 425 mb, and only 75% of this has been made up by higher other OPEC supplies and the IEA Libya Collective Action. Now, the focus for geopolitical risks has shifted to Nigeria, Iraq and most pressingly, Iran. At least a portion of Iran's 2.5 mb/d of crude exports will likely be denied to OECD refiners during second-half 2012, although more apocalyptic scenarios for sustained disruption to Strait of Hormuz transits look less likely. 

A sustained spell of oil price stability is often seen as a good thing. But if it derives from the 'rock' of potential economic slump on the one hand, and the 'hard place' of possible geopolitical turmoil on the other, that is scarcely a source of comfort.  



  • The outlook for global oil demand in 2012 is for a more conservative 1.1 mb/d of additional consumption (1.3 mb/d previously), as heavy baseline data revisions feed through. The key contributor is the reduction of 0.3 mb/d made to the 4Q11 demand estimate which, along with additional seasonal curtailments and early indicators of January demand, prompted a further cut of 0.5 mb/d for 1Q12. Growth will nonetheless accelerate from 2011's 0.7 mb/d trajectory.
  • The two-speed market will endure, with non-OECD economies providing relatively strong growth that more than absorbs the absolute declines foreseen in the OECD. Developing economies saw consumption rise by 1.3 mb/d in 2011 (or 3%), to 43.4 mb/d, and are seen accelerating very modestly to an increase of 1.4 mb/d (3.2%) in 2012. The comparable metrics for the OECD are declines of 0.6 mb/d (or -1.2%) in 2011, to 45.6 mb/d, and 0.3 mb/d (-0.7%) in 2012. Non-OECD Asia dominates the growth trajectory throughout, providing gains of 0.7 mb/d in 2011 and 0.8 mb/d in 2012.

  • An economic sensitivity analysis, with global GDP growth one-third lower than in our base case (2.6% in 2012 as opposed to 3.9%), would effectively leave 2012 global oil consumption unchanged at 2011 levels. This alternative scenario is based upon the very real possibility that Europe's current financial and economic woes - with many nations already bogged down in the early stages of recession - remain unsolved, spilling over into significantly lower growth elsewhere.
  • A three-pronged attack - of mild winter weather, European economic malaise and elevated oil prices - combined to curtail 0.3 mb/d from the global 4Q11 demand estimate, to 89.5 mb/d, pushing demand back towards a clearly declining year-on-year trend for the first time since the global credit crunch. The US felt the brunt of the downward adjustment, as early signs of a slightly more optimistic economic picture there failed to filter through into oil demand.

Global Overview

An exceptionally precarious economic backdrop in the fourth quarter of 2011 saw oil consumption globally return to a declining trend. Global oil demand fell by 0.3 mb/d (or -0.3%) year-on-year, to 89.5 mb/d, as much of Europe struggled with the early stages of recession. Elevated oil prices, partly a consequence of the standoff with Iran, further dampened prospects, as did mild northern hemisphere weather. Oil demand will likely confront this growth-impeding combination of a weakening economy and high crude prices through the early stages of 2012. It remains to be seen how this combination works going forward, and the extent to which high prices beget weaker economic and oil demand growth, leading eventually to a looser market.

The lower fourth-quarter demand number not only cemented an anaemic annual growth rate for the year as a whole - now 0.7 mb/d for 2011 - but it also undermined prospects for 2012, as world demand is now starting from a lower base. Global oil product demand growth of 1.1 mb/d is now foreseen in 2012, 0.2 mb/d less than the expansion assumed previously. The underlying model generates global oil demand averaging 90.0 mb/d in 2012, 0.2 mb/d less than assumed last month. Leading 2012 demand growth is a strong non-OECD increase of 1.4 mb/d, which more than offsets the predicted OECD decline of 0.3 mb/d.

Despite maintaining the annual growth rate assumed in last month's report (+0.7 mb/d), global oil demand in 2011 nonetheless suffered from a 0.3 mb/d fourth quarter reduction, to 89.5 mb/d. The reduction failed to dent 2011 growth due to a combination of rounding through the year and upside revisions to the third quarter data. The US faced the brunt of this fourth quarter curtailment, as early indications for November US demand remained weak despite the notable upturn in the recent economic newsfeed from the US.

Having led the global upside since 2010, gasoil will once again dominate in 2012, with a projected annual expansion of 1.9%. Specifically, diesel demand will benefit from the relative strength foreseen in the industrial complex, garnering additional support from the continued dieselisation of the global vehicle fleet. The persistent volatility of global energy supplies has also tended to support diesel demand, thanks largely to the presence of diesel-power back-up generating capacity. The non-OECD region will maintain its dominant underpinning of the gasoil market in 2012, with growth of 3.5% foreseen, compared to only 0.2% in the OECD. The last five years have seen an average annual expansion of 4.7% for gasoil in the non-OECD and -0.9% for the OECD, with consumption in emerging markets overtaking that for the OECD in mid-2009.

The forecast outlined thus far is dependent upon the most recent complete IMF global data series published in September, which is understandably showing signs of age. The economic backdrop has since deteriorated, certainly in Europe, with likely feed-through effects elsewhere. Next month's OMR will benefit from the IMF's updated data series, but until then the downside risks are emphasised through a low-case scenario, which arguably overstates the likelihood of full-blown global recession in 2012. That said, under this low-case scenario, the underlying economic growth of 2.6% in 2012 is one-third lower, potentially eliminating global oil demand growth altogether for 2012.


Strongly falling demand in the OECD caused the global fourth quarter demand decline, with demand down by 1.1 mb/d year-on-year (or 2.3%). Not only has the OECD seen a falling demand trend since the second quarter of 2011, but also it is now enduring its weakest relative performance since 2009. Within the OECD, North America and Europe are likely to be the worst performing sub-regions, with respective year-on-year 4Q11 contractions of 0.7 mb/d and 0.6 mb/d envisaged. Fourth quarter demand in the Pacific region, however, was up 2.6%, as the post-tsunami surge in oil product demand in Japan, used as a replacement for closed nuclear reactors, continued.

Underlying the dire 4Q11 OECD demand estimates are early indicators for November, derived from inland deliveries (oil products supplied by refineries, pipelines and terminals), which fell by 1.7 mb/d (or 3.7%) on the corresponding month in 2010. Roughly, 60% of this decline is attributable to North America, down 1.1 mb/d on the same period a year earlier, with the rest of the decline from Europe. A continuation of comparatively weak OECD economic growth going forward, notably for Europe, sustains OECD 2012 demand contraction, with a decline of 0.3 mb/d foreseen. OECD European demand will fall by 0.2 mb/d (-1.4%) in 2012, North American consumption is forecast to slip by a more modest 0.1 mb/d (-0.5%) while the Pacific region essentially flat-lines.

A seasonal northern hemisphere fourth quarter demand fillip was missing in 2011, as both North America and Europe saw noticeably warmer-than-average temperatures. Heating degree days (HDDs) in December, in the US and Europe, were respectively 9% and 12% lower than the 10-year average. Assuming a return to more normal 4Q12 temperatures, this should accordingly provide some support for otherwise weak OECD demand in our forecast.

North America

The fourth quarter demand estimate for North America was the dominant contributor to the global revision, accounting for almost all of the total 4Q11 reduction compared to last month's report. Stark preliminary US oil demand figures for November defied the recent spate of more positive economic news. North American consumption of oil products therefore looks likely to have fallen by 3.1%, on a year-on-year basis, in 4Q11, with the residual fuel oil, LPG and motor gasoline markets notable laggards, posting respective year-on-year declines of 8.0%, 4.0% and 3.4%. The decline is most pronounced in the US (excluding territories), as 4Q11 consumption shed 3.8% on its corresponding value in 2010. Particularly stark declines were seen in the heating oil (-18.9%), residual fuel oil (-10.9%) and LPG (-5.6%) markets, all suffering on the unseasonably mild early winter temperatures.

US November demand fell despite the wave of surprisingly resilient US economic news (notably the rising employment trend and the ISM's upbeat industrial sentiment indicator). The US heating oil market bore the brunt of November's downgrade, with demand off by 36.1%, as substitution by gas for home heating (see 'The Winter That Cries Wolf for Heating Oil', OMR dated 10 November 2011) was augmented by the impact of significantly warmer-than-normal temperatures. Nor does the combination of weakening demand amid stronger economic indicators suggest much oil demand upside for 2012.

Mexican oil demand stagnated in November, down by 0.2% on the corresponding month a year earlier, continuing a declining trend started in September. The flat behaviour during the month masked divergent growth rates across product categories. The fuels that weakened versus a year ago were naphtha (-26 kb/d) and residual fuel oil (-46 kb/d). On the other hand, gasoil/diesels, jet/kerosene and other products grew by a combined 67 kb/d. Industrial activity during 2H11 gave support to oil demand, although gasoline consumption showed less dynamism due to monthly end-user price hikes. Anecdotal evidence regarding low water levels at hydroelectric dams implies higher fuel oil demand in 4Q11. Total product demand fell by an estimated 0.6% in 2011, to 2.06 mb/d, before declining by 0.3% in 2012 to 2.05 mb/d.


Against a backdrop of weakening economic performance, regional oil demand looks particularly sluggish in Europe. According to preliminary data for November, European consumption fell by 4.6% on a year-on-year basis, with similarly sized declines right across the continent. None of the major European product categories bucked this trend, with the worst performances seen for naphtha (-17.1%), heating oil (-8.6%) and residual fuel oil (-6.9%).

European consumption of oil products fell by 3.8%, on a year-on-year basis in 4Q11, led by naphtha, heating oil and residual fuel oil. An ailing European petrochemical market, a warmer-than-normal winter and continued fuel substitution, respectively, influenced these declines. Only the diesel market offered a semblance of growth for 4Q11, up 0.1%, although this is well down on its recent trend (+2.4% in 1Q11) as the economic backdrop deteriorates.

Little room for optimism is apparent in 2012, with European demand forecast to fall by 0.2 mb/d (or 1.4%). Despite the gloomy economic backdrop, the forecast demand contraction is less severe than 2011's 1.9% correction as Europe is coming from such a low base that a slackening pace of decline seems inevitable, particularly as a degree of economic recovery is expected in the second half of the year. The relative demand decline will also ease if, as seems likely, the 4Q12 winter turns out to be colder than 4Q11.

Preliminary data for France show oil consumption fell by 6.0% on a year-on-year basis in November, with residual fuel oil (-24.0%), LPG (-22.8%) and heating oil (-22.7%) performing particularly poorly. In contrast, the industrially significant naphtha (+2.5%) and diesel (+2.3%) markets posted absolute gains in November, along with jet/kerosene (+1.2%). The French manufacturing PMI rose to a four-month high of 48.7 in November (although still below the key 50-level, signalling contraction).  

German consumption of oil products fell by 4.6% in November, according to preliminary estimates, with naphtha (-32.2%), residual fuel oil (-6.8%) and heating oil (-4.3%) key downside contributors. The modest gains in the major German transportation fuel markets, with motor gasoline consumption up 4.1%, jet/kerosene 1.3% higher and diesel gaining 1.0%, suggest slightly more robust potential for German oil demand running through 2012 than is the case for some other European markets.

UK demand fell by 3.2%, on a year-on-year basis in November 2011, with jet/kerosene (-11.3%), naphtha (-6.3%) and heating oil (-6.1%) faring particularly badly. These were only partly offset by absolute gains in residual fuel oil (+7.1%), diesel (+2.7%) and LPG (+0.2%). Economic indicators remain mixed, with the CIPS Business Activity Index rising to a five-month high of 54.0 in December (whereby a reading above 50 signals an improvement in sentiment). Plenty of less favourable economic stories continue to flow regarding the UK economy, however, as industrial output fell by 3.1% on a year-on-year basis in November. The National Institute of Economic and Social Research forecast UK GDP barely up at all (+0.1%) for 4Q11 versus 3Q11, and a dramatic slowdown from the third quarter's 0.6% gain.


Preliminary demand data for the OECD Pacific region show a sharp deceleration in November, to a year-on-year growth rate of 0.1%, well down on October's 4.6% expansion. Japanese consumption growth fell to 2.7% in November from the heady heights of 8.6% seen in October. The Japanese market nonetheless is still seeing additional power sector demand for fossil fuels in the face of nuclear generating capacity closures (see August's OMR for a more detailed explanation) although big declines for other products drove the overall slowdown in demand growth. Diesel (-4.8%) and gasoline (-2.7%) saw sharp reversals, having posted absolute gains in October, as weakening economic sentiment curbed driving and augmented the impact of expiry of a ceiling on highway tolls earlier this year. The Markit/Japan Materials Management Association Manufacturing PMI fell to a seven-month low of 49.1 in November. This has since reversed, rising to 50.2 in December, potentially lending some support to end-year demand.

Reports of warmer-than-normal temperatures further undermined the November demand series, notably trimming jet/kerosene demand (down 17.1% versus an, albeit inflated, November 2010 level).


Bucking the global downside trend, the non-OECD region provided a welcome fillip, with the preliminary series for November posting a 3.1% year-on-year gain. Not only was this more than a percentage point higher than October's 2.0% growth rate, but it was also significantly higher than the growth assumed in last month's report (2.2%). The still relatively robust economic backdrop for the non-OECD countries supports this stronger growth trend, and for 2012 we assume non-OECD GDP growth averages 6.2%, after 6.4% growth in 2011.

Total non-OECD demand averaged 44.1 mb/d in November, according to preliminary data, nearly 0.4 mb/d higher than assumed in last month's report. The largest upgrades were seen in China (+210 kb/d), Russia (+180 kb/d) and India (+60 kb/d), as these economies for now seem to be shrugging off concerns about another global economic slowdown, amid relative cost advantages compared to the developed economies.

Transportation fuels continue to drive demand momentum, with jet/kerosene particularly strong, showing growth of 8.3% on a year-on-year basis in November. The preliminary data series imply strong expansions in gas/diesel oil (+4.1%), motor gasoline (+3.8%) and LPG/ethane (+3.7%). Only residual fuel oil (-0.4%) saw a year-on-year decline.

The non-OECD countries will continue to dominate growth looking forward, with 1.4 mb/d of additional demand expected for 2012 (+3.2%). This is 130 kb/d less than assumed in last month's report, following a modest downward adjustment for growth prospects in China.


Apparent Chinese demand for oil products (calculated as refinery output plus net product imports) rose by a relatively modest 1.7% in November, although this still amounts to its sharpest growth rate since August. Strongest year-on-year growth derived from jet/kerosene (+38.7%), motor gasoline (+5.7%) and LPG (+5.5%). The industrially significant residual fuel oil (-10.4%), naphtha (-1.6%) and diesel (-0.7%) lagged behind, and may reflect November's dip in manufacturing sentiment, with the official PMI of purchasing managers' activity falling to a 32-month low of 49.

Despite concerns of a slowing Chinese economy, November's demand level is still 0.2 mb/d more than forecast in last month's report, and the subdued 1.7% year-on-year growth rate needs to be considered in the context of strong 4Q10 Chinese demand amid restrictions on power sector and industrial coal-burn.

Chinese demand is expected to have bottomed out in 4Q11, remaining flat versus 4Q10, before embarking on a gentle acceleration through 2012. Consumption is expected to expand by 4.3% in the year as a whole - nearly one whole percentage point down on our month earlier forecast. This reflects a lower 1Q12 baseline, and an easing of economic growth from 9.5% to 9.0% this year. Growth nonetheless amounts to 0.4 mb/d of extra Chinese consumption in 2012, nearly 40% of the total global expansion in demand. Any moves by China to expand strategic crude stocks during 2012 would come over and above this product-derived measure of growth for the year.

Other Non-OECD

According to preliminary November estimates, Indian demand growth accelerated to 5.8%, its fastest year-on-year clip since the end of 2010. Strong gains were seen in the industrially important gas/diesel (+10.4%) and naphtha (+7.9%) categories. HSBC's Manufacturing PMI for November, at 51.0, remained above its 50 expansionary threshold, and alongside a 32nd successive monthly gain in new manufacturing business orders during November, further underpinned expectations for demand growth looking forward.

Gasoline demand posted a 6.2% year-on-year gain in November, as consumer sentiment rebounded in India's dominant service sector. The HSBC Markit Business Activity Index rose sharply in November, to 53.2, having fallen into contracting territory in October (49.1), despite inflationary pressures. Despite this strong late-year performance, demand growth is expected to fall back in 2012 as a whole to nearer 3%, dominated by gas/diesel oil and LPG.

Brazilian product demand grew by 1.2% year-on-year in October, boosted by jet/kerosene (10.2%), gasoil/diesel (2.8%) and other products (1.7%). In contrast, residual fuel and motor gasoline posted respective decreases of 6.4% and 0.3%. During 2011, jet/kerosene demand has been buoyant, supported by strong domestic airline activity. Passenger transport grew year-on-year by 8.8% and 16.6%, respectively in October and November. Industrial activity is showing less dynamism since June, when the Manufacturing PMI dropped below the 50 points benchmark. Economic activity during 4Q11 gave a mixed set of signals, supporting a cautious outlook for 2012. Brazilian demand totals 2.79 mb/d for 2011, up 2% on 2010, before rising by 2.3% in 2012 to 2.86 mb/d.

Nigerian oil demand rose by 5% on a year-on-year basis in October, on the back of the relatively steady economic growth trend seen this past year. Absolute gains were seen in most of the main categories bar motor gasoline which dropped by 14%, or 30 kb/d. Total product demand is seen averaging 280 kb/d in 2011 (down 3.8% on a year-on-year basis or -10 kb/d) and remaining flat during 2012.

Goodluck Removing Subsidies

While the 2011 Nigerian demand forecast is based on nine months of reported data, an additional factor that could lower the 2012 forecast is the government's new policy of eradicating the subsidy on the preferred transport fuel, premium motor spirit (PMS). In December 2010, the average price for PMS (or gasoline), diesel and kerosene was $0.41/litre, $0.69/litre and $0.56/litre, respectively, thanks to heavy fossil fuel subsidies. During 2Q11, the government cut diesel and kerosene subsidies, allowing diesel and kerosene prices to increase to $1.01/litre and $1.0/litre, respectively. Manufacturers that rely on small gasoil power generators felt the brunt of this change, with most households only noticing the change through kerosene used for cooking.

At the beginning of January, the government removed gasoline subsidies, effectively raising gasoline prices to $0.90/litre. This bold decision hit a predictable roadblock mid-January, as workers opposed to the inevitable price hikes went on a nationwide strike and brought the country to a virtual standstill. The Nigerian government instigated the new-year subsidy removal programme as it revealed that the subsidy cost the economy $8bn in 2011, more than double the estimate for 2010.

In a country where two-thirds of the population live on less than $1.25 a day it is blatantly unaffordable to support a subsidy that costs nearly $50 per person last year. Fuel subsidies are not only enormously wasteful but they also greatly distort the efficient distribution of resources, whilst often fuelling corruption. However, gasoline prices more than doubled on the subsidy removal, causing great political unrest. This suggests that, in hindsight, a more gradual process might have been advisable. Nor do the measures seem to have been accompanied by much in the way of public consultation or targeted assistance for the poorest members of society.

The nationwide strike ended on 16 January, as the government agreed to partially back track on its subsidy removal programme. A gasoline price of $0.60/litre has now been set, still 50% higher than pre-removal levels but one-third down on the initial price hike. Plans remain to reduce the subsidy further, although the government may have learned to adopt a more co-operative approach next time.

Nigeria is on the watch list for 2012, with oil product demand likely to fall, at least in 1Q12. Persistent industrial disputes, of the kind seen in January, could further reduce forecasts, not just for oil demand but also for economic growth in general.



  • Global oil supply rose by 100 kb/d to 90.0 mb/d in December, with rebounding output from Libya and Saudi Arabia partially offset by declines in non-OPEC countries. Compared to December 2010, global oil production stood 1.8 mb/d higher, 80% of which stemmed from increasing output of OPEC crude and NGLs.
  • Non-OPEC supply fell by 140 kb/d to 53.2mb/d in December, as rising production in the North Sea only partially offsetting a steep seasonal decline in biofuels production and lacklustre output from the Former Soviet Union. On a quarterly basis, unrest in the Middle East and other unplanned outages meant 4Q11 output grew by 610 kb/d from the prior quarter (but only 25 kb/d compared to last year) and should grow further by 340 kb/d in 1Q12 to 53.5 mb/d.  
  • OPEC crude oil supply rose by 240 kb/d, to an average of 30.89 mb/d in December. The rapid recovery in supplies from Libya, and to a lesser extent increases from Saudi Arabia and the UAE, combined to push year-end output to the highest level in more than three years.
  • A looming escalation in economic sanctions imposed on Iran by the US and proposed by the EU has sparked market concerns in Europe and Asia over potential crude availability, as well as raising alarm over the possibility of military action in the Gulf.
  • OPEC ministers agreed a higher collective production target of 30 mb/d for 2012 at their 14 December meeting in Vienna. It is the first new output agreement in three years and the first to include Iraq in the group's target system in more than two decades. OPEC's new target is broadly in line with our own estimates for the underlying 'call on OPEC crude and stock change' of 30 mb/d for 2012.

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

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

OPEC Crude Oil Supply

OPEC crude oil supply averaged 30.89 mb/d in December, up by 240 kb/d over November levels. Increased supplies from Libya, and to a lesser extent Saudi Arabia and the UAE, combined to push year-end output to the highest level in more than three years. The higher output levels are behind a decline in OPEC's 'effective' spare capacity, to 2.85 mb/d from 3.18 mb/d in November. Saudi Arabia accounts for 75% of effective spare capacity at 2.15 mb/d.

Preliminary tanker data suggest OPEC supply is on course to rise further in January. Iran is under siege from new US sanctions on the country's central bank, which are expected to come into effect over the next several months, and the proposed EU embargo on all purchases of Iranian oil (see 'International Sanctions Tighten Chokehold On Iran'). As a result, customers have been aggressively seeking alternative supplies from other OPEC members, especially Saudi Arabia. UK-based Oil Movements forecasts that sailings from the Middle East may rise 300 kb/d above December levels.

OPEC ministers agreed a higher collective production target of 30 mb/d for 2012 at their 14 December meeting in Vienna. It is the first new output agreement in three years and the first to include Iraq in the group's target system in more than two decades. In stark contrast to last June's divisive gathering that ended without a communiqué, the mid-December meeting produced a consensus agreement, albeit somewhat vague and short on detail. No individual country quotas were allocated as part of the agreement; instead the 30 mb/d was reportedly arrived at based on the OPEC Secretariat's anticipated "call" on its crude for 2012. The communiqué left ample room for interpretation and suggested there would be scope for voluntary downward production adjustments as necessary and subject to prevailing economic and oil demand uncertainty. OPEC set its next ministerial meeting for 14 June in Vienna.

OPEC's new 30 mb/d target is in line with our own estimates for the underlying 'call on OPEC crude and stock change' for 2012. Downward revisions in global oil demand in this month's report see the 2012 'call' reduced by an average 200 kb/d, to 30 mb/d. 1Q12 see the largest revision to the 'call', lowered by 400 kb/d to 29.8 mb/d.

The group's 30 mb/d target also mirrors average 2011 output levels. OPEC 2011 production averaged 29.97 mb/d, which is 500 kb/d up on 2010 levels. War-torn Libya saw production decline an average 1.09 mb/d to 460 kb/d in 2011. Saudi Arabia posted the largest increase at 950 kb/d to 9.34 mb/d, followed by Iraq, rising by 310 kb/d to 2.67 mb/d. Fellow Gulf producers also posted substantial increases in 2011, with Kuwait up by 210 kb/d to 2.5 mb/d and the UAE up by 190 kb/d to 2.5 mb/d. Nigeria also saw a rise in production, up by 100 kb/d to 2.18 mb/d. While the ceasefire agreement enabled the country's IOCs to carry out repairs and restart long shut-in production, a fresh wave of militant activity in the later part of 2011 reduced volumes.

By contrast, year-on-year, Iranian production fell by 130 kb/d to an average 3.58 mb/d last year, its lowest levels since 2002. Angola also posted a decline, down by 90 kb/d to 1.64 mb/d on average in 2011, due almost entirely to chronic technical problems at the BP-operated Greater Plutonio complex.

December Saudi Arabian crude oil output was pegged at 9.85 mb/d, up 100 kb/d from November levels. Latest tanker data suggest production may be closer to the 10 mb/d mark in January, with an increase in shipments expected, especially westbound cargoes.

Iraqi supply averaged 2.69 mb/d in December, up 10 kb/d from the previous month. November levels were revised down by 40 kb/d, to 2.68 mb/d from 2.72 mb/d, on reduced domestic use. Crude exports averaged 2.15 mb/d last month, up 10 kb/d month-on-month. Exports of Basrah crude from the southern terminals rose by 25 kb/d to 1.74 mb/d. Exports of Kirkuk crude from the Turkish port of Ceyhan on the Mediterranean were off by around 15 kb/d, to 410 kb/d.

For 2011, Iraqi crude exports averaged 2.17 mb/d, an increase of 275 kb/d over 2010 levels, with shipments from the southern ports accounting for almost 85% of the increase. Basrah exports averaged 1.71 mb/d, up around 230 kb/d, while Northern volumes of Kirkuk rose by 50 kb/d to 450 kb/d.

Iraqi crude export growth in 2012 is likely to be constrained by a number of issues, including delays with infrastructure projects. The Oil Ministry has forecast crude exports to reach 2.6 mb/d in 2012 but analysts project volumes to fall short of that target. The planned expansion of southern export facilities on the Gulf is behind schedule, and now the first of the three new single-point moorings (SPMs) is not expected to be operational by end March, compared with the original 1 January start date. Though nameplate capacity for each SBM is 900 kb/d, industry experts say operational capacity may only be 500 kb/d. The full plan calls for the installation of three 48-inch land pipelines between the production hubs of Zubair and Rumaila to the Fao onshore terminal, the construction of storage tanks to raise capacity by around 16 mb and new pumping, power and metering facilities. So far, only one pipeline is under construction, with completion also slated for the end of first quarter 2012. Three tanks at Fao have been completed, but work on the critical gas supply pipeline has not begun, and contracts for the main electrical generators have been only just awarded. Temporary generators and booster pumps may be installed, which would enable an increase in flow rates to offshore terminals by an estimated 250 kb/d by mid 2012.

Iranian supplies declined by 100 kb/d to 3.45 mb/d in December, with increasing volumes going into floating storage. EA Gibson shipbrokers report Iranian storage increased by 4.3 mb to 32.3 mb at end-December.

After rising for six straight months, Kuwaiti output declined by 50 kb/d to 2.62 mb/d in December. UAE production, by contrast, rose by 60 kb/d to 2.58 mb/d last month.

Libya posted the single largest monthly increase, up 250 kb/d to 800 kb/d on average in December. Total's 40 kb/d Mabruk oil field was the latest to restart production. Officials reported production breached the 1 mb/d mark in December but output reportedly has been throttled back so engineers can conduct tests on wells and pipelines, where numerous leaks have been reported.

Angolan output in December was around 1.75 mb/d, about 60 kb/d more than November. The new Total-operated Pazflor field has now ramped up to capacity of around 160 kb/d.

Nigeria's supply fell 40 kb/d to 2.06 mb/d in December. Shell was forced to shut down the massive 200 kb/d offshore Bonga facility after a leak during a tanker loading operation on 20 December. Production was restarted on 5 January. Shell's offshore 115 kb/d EA oil field was also undergoing maintenance work through much of December, with production restarted on 27 December. In early January, Shell declared force majeure on its benchmark Bonny Light crude exports following a leak caused by theft incidents on the Nembe Creek trunk line in the Niger Delta.

A nationwide strike against the ending of fuel subsidies that more than doubled gasoline prices threatened to shutdown the country's oil production and exports this month but the labour action was averted following an eleventh hour agreement (see Demand, 'Goodluck Removing Subsidies').

Venezuelan output was down 30 kb/d to 2.5 mb/d in December, largely due to maintenance at the Petroanzoategui heavy crude upgrader. Total Orinoco output was estimated at 450 kb/d in December.


OPEC NGLs are on course to average 6.2 mb/d in 1Q12, up 200 kb/d from 4Q11. Qatar is slated to provide around 40% of the increase, with incremental supplies expected from LNG Trains 6 & 7 and Pearl NGLs. Kuwait, the UAE, Algeria, Nigeria and Angola will see smaller increases. For full-year 2011 OPEC NGLs rose by 400 kb/d to an average 5.8 mb/d. The UAE accounted for 250 kb/d of the increase with the ramp-up in output from the Habshan condensate and NGL complex providing the bulk of the increase. OPEC NGLs are forecast in 2012 to increase by a further 600 kb/d to 6.4 mb/d.

International Sanctions Tighten Chokehold On Iran

A looming sharp escalation in economic sanctions imposed on Iran by the US and EU has sparked concerns in Europe and Asia over potential crude availability, as well as raising alarms over the possibility of military action in the Middle East Gulf. A new law was signed by President Obama on 31 December 2011 imposing sanctions on financial institutions that deal with Iran's central bank after a certain time, the main clearinghouse through which Iran deals with trading partners around the world. Meanwhile the EU is moving at a brisk pace to finalise a ban on oil imports from Iran by member states. Though neither measure is likely to take meaningful physical effect until mid-year, they have already set in motion a flurry of diplomatic activity, with leaders from Japan, China, South Korea, among others, visiting top Middle East producers in recent weeks to secure assurances that supply will be forthcoming to replace Iranian barrels.

The new US sanctions will force foreign banks and other institutions to terminate financial transactions with Iran in order to avoid being precluded from dealings on the US financial markets. The measures target both private and government-controlled banks, including central banks. The law, however, enables a great deal of latitude for the US Administration on how to implement it and, crucially, allows waivers for countries that demonstrate they are taking measures to significantly reduce their imports of Iranian crude. The US President may also grant waivers deemed to be in the US national security interest or otherwise necessary for energy market stability. The timeframe for implementing the law via-à-vis the petroleum sector is:

  • After 60 days (end February), and every 60 days thereafter, the US Energy Information Administration (EIA) has to submit a report on the availability and price of oil from suppliers other than Iran.
  • After 90 days (end March), after 180 days thereafter, the US President has to make a finding (based on the EIA report) whether there is sufficient oil supply from countries excluding Iran in order to permit other countries to significantly reduce their purchases from Iran.
  • After 180 days (end June): if the US President established that there is sufficient oil available outside Iran, the sanctions shall be applied to financial institutions; the sanctions shall not apply to financial institutions of countries that have significantly reduced their oil purchase from Iran.
  • At any time the President may waive the sanctions altogether for up to 120 days, if that is considered to be in the national security interest of the US.
  • In addition, the President has to undertake diplomatic initiatives with other countries to:
  • o    Limit Iran's imports of non-luxury consumer goods and exclude purchases destined for military/nuclear purposes and ;

    o    Encourage other producer countries to produce more oil.

In Brussels, the EU has agreed in principle to impose an oil import ban on Iranian oil but details such as timing and implementation are still being discussed. A decision could be taken at the next EU Foreign Ministers' meeting on 23 January. If the ministers agree on the new regulation (which would be directly applicable, with no transposition into national law needed), it would take about two weeks to formalise. One critical issue for the market is the date for implementation of the import ban, with current proposals ranging anywhere from three months to a year. However, a target of six months is gaining traction, since it would dovetail with the US law. This would tend to suggest a measure that would have a material impact on physical supplies from Iran from mid-summer onwards, similar in timing to the US measures. Italy has asked for, and is considered likely to receive, a full exemption for the oil that ENI receives as payment of their share in upstream production in Iran (some 10 kb/d). Greece, Italy and Spain may receive an exemption for a limited amount of time after the implementation, to be able to find alternative supplies.

Iran meanwhile has upped its brinkmanship with the west as well as with its fellow OPEC members and regional neighbours. In recent weeks it has conducted major naval exercises close to the Strait of Hormuz, and claimed to have successfully tested anti-ship missiles and a new mid-range missile, comparable to the cruise missiles of Western forces. Iran claimed also to have practiced for an effective closure of the Strait of Hormuz, although the waterway was not actually blocked at any moment. Secondly, Iran announced it would close the Strait of Hormuz, if confronted with an embargo on its oil exports. This would not only physically prevent significant additional exports by Saudi Arabia and other Gulf producers, but could potentially hinder the majority of oil exports from the Gulf, albeit for a short period. The Strait of Hormuz in recent months has seen the transit of some 17 mb/d of crude oil and refined product. Most military analysts believe any closure would be short term, especially as the US and UK said they would never allow the Strait to be closed given its vital importance to global energy markets. In the event of temporary or partial closure of the Strait, Saudi Arabia has the capacity to ship a further 2.5 mb/d via the East-West pipeline to the Red Sea.

The long-awaited 1.5 mb/d Abu Dhabi pipeline, which offers a further bypass route of the Strait of Hormuz, will be operational by June. The pipeline will move crude to the port of Fujairah, on the UAE's eastern coast, facing the Gulf of Oman.

By mid-January, Iran was warning its fellow OPEC members, threatening serious consequences if other producers stepped in to replace banned Iranian crude supplies. Iranian OPEC Governor Mohammad Ali Khatibi said 16 January that there would be serious consequences for regional producers, alluding to blockage of the Straits. Much to the anger of Iran, high-level diplomatic efforts are under way to secure alternative supplies, with the leaders from Iran's biggest customers - China, Japan and South Korea - visiting Saudi Arabia and other Middle East producers to receive assurances that alternative supplies will be available.

IEA import data for January-October 2011 and preliminary estimates for other destinations suggest Iranian crude exports averaging 2.5 mb/d (including over 200 kb/d of condensates). Around one-third of these were destined for IEA European destinations, with Italy, Turkey, Spain and Greece accounting for about 80% of these sales into Europe. Both Turkey and Greece have so far met around 30% of their oil demand with Iranian imports. These data imply EU imports of around 600 kb/d.

Japan and South Korea imported a collective 550 kb/d of Iranian crude, with deliveries into China and India estimated at 550 kb/d and 310 kb/d respectively (including at least 90 kb/d of condensate into China). South Africa purchased around 80 kb/d. All told, eastbound exports accounted for 65% of total Iranian exports.

Japan has not yet committed to the US Administration to reduce imports of Iranian crude, with the country's foreign minister visiting Saudi Arabia and the UAE to gain assurances that substitute crude for Iranian barrels will be available. China has not implemented any sanctions, with Iran its second largest supplier after Saudi Arabia. Chinese Premier Wen Jiabao, though openly opposed to sanctions on Iran, recently travelled to Saudi Arabia, the UAE and Qatar in a bid to secure assurances over crude supplies. Separately, China, whose 2011 purchases from Iran were up by around 20% from 2010, this month cut in half its Iranian term contract volumes over a pricing dispute.

For European refiners the new EU sanctions will force them into the difficult task of finding alternative comparable crudes, especially for Iran's heavy crudes. Iran's two main export grades, produced from onshore fields, are Iranian Heavy (29.5° API and 1.99% sulphur) and Iranian Light (33.4°API and 1.36% sulphur). Historically, Iranian Heavy has accounted for around one half of Iranian exports, and Iranian Light for a further one third. In 2011, IEA European importers' purchases have comprised around 30% Iranian Light and 70% Iranian Heavy or sourer (higher sulphur) grades. For 2011 sales so far into the IEA Pacific, less than 10% comprised Iranian Light, the remainder comprising Iranian Heavy and sourer grades. Both the main export grades are shipped from the terminal of Kharg Island, towards the northern end of the Middle East Gulf. Kharg accounts for around 85% of total Iranian exports, with shipments of Iran Light and Iran Heavy and offshore Foroozan. Other offshore crudes such as Sirri, Lavan and Soroosh are exported from Sirri and Lavan Islands and from floating facilities, respectively. Crude is also made available into the Mediterranean 'free on board' from Sidi Kerir in Egypt, the northern end of the Sumed pipeline.

Non-OPEC Overview

Non-OPEC oil production is estimated to have fallen by 0.1 mb/d to 53.2 mb/d in December, largely due to seasonally lower biofuels output and reduced production in Latin America and the Former Soviet Union. Preliminary data show North Sea volumes increased by 140 kb/d from November levels. Non-OPEC supply in 4Q11 is estimated to have risen by 0.6 mb/d from the third quarter, but grew by only 25 kb/d year-on-year. 

The major source of a 110 kb/d downward revision to our estimate for 4Q11 non-OPEC supply is centred in China and is offset by 50 kb/d upwards revisions based on new historical data in Malaysia and the US light tight oil production totalled 740 kb/d in 4Q11, and exponential growth rates continue to exceed initial expectations, especially in Texas and in North Dakota. All told, non-OPEC supply grew on an annual basis by only 50 kb/d in 2011, the third-lowest performance in the last decade.

Overall, we have not altered our outlook for non-OPEC oil production in 2012, when production is expected to rebound by around 1.0 mb/d to average 53.7 mb/d. Since last month, more pessimistic expectations for the return to production of the Peng-Lai 19-3 field in China (-110 kb/d), continued violence in Yemen (-10 kb/d), and weather-related shut-ins and project delays in Australia (-20 kb/d) reduced non-OPEC supply growth. These downward revisions are equally offset by earlier than expected field start-ups in the Gulf of Mexico and higher production estimates for light tight oil in Texas.


North America

US - December, Alaska actual, other states estimated: Gulf of Mexico and Alaskan production, as well as light tight oil output from Texas, and North Dakota, led to an increase in total US liquids output of around 60 kb/d to 8.3 mb/d in November. North Dakota's crude and condensate production reached almost 510 kb/d in December according to preliminary state estimates, only 50 kb/d shy of Alaskan production in 2011. After a light hurricane season, Gulf of Mexico production should stay at 2011 levels with additions from the Petrobras-led Cascade and Chinook development in 1Q12 (+40 kb/d on average for 2012), Anadarko's Caesar and Tonga (+20 kb/d), and LLOG's Mandy and Who Dat (+30 kb/d) offsetting declining production elsewhere. We have increased our expectations for Texas oil production by 25 kb/d to 1.5 mb/d in 2012 in this outlook to reflect a higher production baseline from the second half of 2011. NGL output in 4Q11 also exceeded our expectations by 20 kb/d. We estimate that the US will produce 8.2 mb/d in 2012, which is around 170 kb/d higher than preliminary 2011 output estimates and around 30 kb/d higher than last month's forecast.

Canada - October actual: Rising output from the oil sands brought Canadian oil production to 3.5 mb/d in October, a slight increase from the prior month. Planned maintenance kept the Terra Nova field producing 10 kb/d lower than 1H11 average levels at 30 kb/d, while maintenance and a fire at the Syncrude project kept production around 60 kb/d lower than average at 250 kb/d in 4Q11. As discussed last month, the operator has warned that it may bring the unit down for a turnaround if full production rates cannot be achieved. The Canadian outlook for 2012 has been increased by 20 kb/d from last month to take into account additional output from CNRL's Primrose project. In sum, total liquids output should grow by around 180 kb/d to average 3.6 mb/d.

North Sea

Production from the North Sea returned to around 3.2 mb/d in 4Q11, 240 kb/d lower than last year's levels. We estimate that on a monthly basis, North Sea production rebounded by 140 kb/d in December to 3.3 mb/d, mainly due to rising production from the UK's Buzzard field. Pending further unplanned outages, it should remain at these levels through 1Q12. Overall, rebounding production from unplanned outages should keep North Sea production in 2012 close to the 2011 levels of 3.1 mb/d.

UK—September actual, October preliminary: UK offshore crude production increased from a record low of 0.7 mb/d in August to around 1.0 mb/d in October with the completion of summer maintenance and other unplanned outages. With the benefit of field level detail for the majority of the maintenance season, it is worth observing that oil production fell by 225 kb/d in 3Q11 from 2Q11 and around 80 kb/d less than during the 2010 maintenance season. Offshore loaded production fell by 35 kb/d during this period, Brent and Ninian systems' output fell by 10 kb/d each, Teal area production fell by 25 kb/d, and Forties production fell by almost 50 kb/d. Notably, production problems at the Buzzard field did not cause any of the 3Q11 decline in the Forties area, but we have tempered our expectations for output from the field in 4Q11, which should average around 160 kb/d, or 40 kb/d less than capacity. Other revisions for 2012 this month stem from one-year delays at the Alder and Athena field. Also, the 25-30 kb/d Gryphon FPSO, which came loose from its moorings in February 2011 after a storm, will not be returning to production until 3Q12, or one quarter later than planned, according to Maersk Oil. The FPSO aggregates production from the Tullich, Maclure, and Gryphon fields. Downwards revisions are offset by slightly higher 4Q11 baseline production in the Forties and Ninian systems, leaving 2012 production estimates of 1.2 mb/d (+40 kb/d from 2011), unchanged from last month.

Norway—October actual, November preliminary: Norwegian production also increased by 100 kb/d in October to 2.0 mb/d and is expected to average 2.1 mb/d in 4Q11. The Grane field remained at around 100 kb/d in October, in line with expectations, and around 50 kb/d below normal levels due to post-maintenance problems. Preliminary data from the Norwegian Petroleum Directorate suggest crude, condensate and NGL output increased by around 30 kb/d in November, meaning that 4Q11 production is on track to average around 2.1 mb/d.


Australia—September actual, October preliminary: Australian oil production increased by around 10 kb/d in October to 430 kb/d. We expect that production in January will fall by around 60 kb/d from December's estimate to 490 kb/d on the impact of Cyclone Heidi that reduced production at the Waenea/Cossack, Stybarrow, and Vincent fields as well as at the Mutineer/Exeter FPSO. 2012 production estimates have been reduced by 20 kb/d on this weather-related impact, and due to continued delays at the PTTEP-led Skua and Montara project, that was expected to add 35 kb/d in 2012. We estimate that the project has been delayed six times since October 2008. However, other field additions should raise total Australian oil output by 130 kb/d y-o-y to 570 kb/d in 2012.


Latin America

Brazil - November actual: Brazilian crude and condensate production reached a new record of 2.2 mb/d in November 2011, despite leaks at the Frade field and the Marlim Sul P-40 platform. Even though news articles reported that output had been reduced by 75% at the P-40 platform from a gas reinjection line, November output from the field remained near average levels of 260 kb/d, although we now forecast that December's output will be around 100 kb/d lower than the prior month. Notably, in January the pre-salt Guara field in the Santos basin was declared commercial after a five-month extended well test and will officially begin the production phase under the name Sapinhoa. Based on field level data, production in the Santos basin has reached around 120 kb/d in November, with the addition of oil from the Carioca Nordeste extended well test and a new well at the Lula field. OGX's Waimea project received a green light for production to begin in late January, yet we remain cautious about the ultimate production rates for 2012. We expect further increases from the Santos basin to sustain Brazilian crude and condensate production at levels of 2.2 mb/d in 2012, an increase of 140 kb/d over 2011 levels.

Argentina—November actual: Argentina produced around 580 kb/d of crude oil in November, slightly higher than the 3Q11 average. Earlier, strikes had dented output by 70-100 kb/d in March-June and by 90 kb/d in December 2010. At that time an oil worker strike and teacher protests in the Santa Cruz province kept production from attaining normal levels. Recently, news reports surfaced that strikes were again reducing output at Pan America Energy's 90 kb/d Cerro Dragon oil and natural gas field in the Chubut province. Workers blocked access to the field due to dissatisfaction with their salaries and because they are seeking compensation pay for days lost during a previous strike. Output from the field represents 80% of the company's output, and shares are held 60/40 by BP and Bridas respectively. We have reduced our outlook for 2012 by 20 kb/d (and -60 kb/d in 1Q12) based on the likely continuation of these labour issues in the neighbouring Santa Cruz and Chubut provinces. These contingencies will restrain production close to 2011 levels of 660 kb/d in 2012.


China—November actual: Chinese production is estimated to have fallen to 4.1 mb/d in 4Q11, around 160 kb/d lower than the same quarter in 2010 and at the same rate as 3Q11. November's production increased to 4.0 mb/d. Offshore production averaged over 100 kb/d lower than year-ago levels in October and November, well below our expectations from last month, and onshore production also fell. For example, output stayed at 380 kb/d in October and November or 30 kb/d below August levels at the Changqing complex, and 20 kb/d below August at the Jilin field. The unexpected onshore decline and the more widespread-than-anticipated offshore production decline from leaks at other platforms resulted in a 160 kb/d downward revision to 4Q11 production. Also, we now do not expect production from the 150 kb/d offshore Peng-Lai field to return until late in 2012 amid government caution over re-start. The revised outlook also takes into account the Yangkuang group's new 20 kb/d CTL plant in the Shaanxi province. The first phase of the CTL project will produce 76% diesel, 20% naptha, and 3% LPG. The Peng Lai and CTL adjustments mean that total Chinese oil production should still grow by 1.7% to 4.2 mb/d in 2012, but the growth rate is around 110 kb/d less than last month's estimate.

Other Non-OECD Asia: Production in India fell below 880 kb/d in October, a level not seen since August 2010, due to poor output performance from the Bombay High offshore platform. But, production from the field rebounded in November, bringing Indian oil production back above 900 kb/d. Production in Thailand fell victim to the widespread flooding in October, especially at the Sirikit oil field near the Sirikit hydroelectric dam, where production decreased to 15 kb/d from 25 kb/d. Malaysian oil production increased to 660 kb/d in November due to continued workover drilling at the Kikeh project, where operator Murphy Oil has brought three new wells online. The operator expects gross output to reach 100 kb/d from 3Q11 levels of around 60 kb/d. Recent 4Q11 data have exceeded expectations by around 20 kb/d, which we have carried through the outlook for 2012. We currently expect overall production to decline in Malaysia by 20 kb/d to 630 kb/d in 2012, but further upward revisions based on Kikeh's performance may be required in upcoming months.

Middle East

Unrest in the Middle East continued to reduce non-OPEC supply in December 2011 and in January 2012. In Yemen, an explosion at a Hunt Oil subsidiary's well reportedly shut in around 10 kb/d. The field is located in the Jannah Block, where the company produced around 42 kb/d in 2010 according to the Yemeni government. A number of attacks have occurred in Yemen in the last several months, reducing output to around 150 kb/d in 4Q11. News reports indicated this month that OMV's pipeline from Block S2 have also been attacked 13 times since October. The 400 kb/d pipeline from the Block 18 Marib fields to the Ras Isa port is still offline, meaning Yemen's Aden refinery has been shut in due to lack of feedstock. We expect violence will continue to impact production in Yemen, keeping output in 2012 at around 150 kb/d.

Syria is also suffering from attacks on its energy infrastructure that have led to power and petroleum product shortages. Violence between government military forces and the opposition has escalated in the last month and shows no signs of abating. To add fuel to the fire, reports indicate petroleum product prices have doubled, and cooking gas prices have tripled. The head of the Arab League, which sent a mission to Syria in January, recently indicated he feared a civil war was in the making, which could also have wider implications for neighbouring countries. Numerous foreign companies have suspended operations, and skilled personnel are bound to be departing the country. Economic sanctions and these factors mean that production should average only 270 kb/d in 2012, down from 330 kb/d in 2011.

Former Soviet Union

Russia—December actual: Data for December show production fell slightly from 10.0 to 9.9 mb/d, with notable 10 kb/d monthly declines from TNK-BP's Samotlor oil field and from LUKoil and ConocoPhillips' Yuzhnoye Khylchuyu field. With the benefit of a full year of Ministry of Energy data, it is useful to take stock of major Russian companies' performance over the last year in the table below. In 2011, oil output hit a new post-Soviet record and increased in the second half of the year. All companies except for LUKoil exceeded their initial guidance on brownfield and greenfield production. Overall crude and condensate output rose by 1.2% in 2011 led by Surgutneftegaz, other private companies, and Rosneft, offset by a 5.3% decline from LUKoil. In 2012, crude and condensate output in Russia will receive strong support from associated natural gas liquids production from Gazprom and Novatek. Gazprom's liquids output reached over 300 kb/d in 2011, or an increase of 8% y-o-y, and we expect this growth to continue in 2012 with added condensates from the Zapolyarnoye gas field and the start of production from the offshore Prirazlomnoye field. Increasing production in East Siberia from Surgutneftegaz's Talakan group of fields and at Rosneft's Vankor oil field will offset mature field declines at these companies, raising Russian oil production by 1.4% to 10.7 mb/d in 2012.

Kazakhstan Government Reacts Swiftly to Recent Labour Unrest

In both the summer and December 2011, oil workers' strikes at national oil company Kazmunaigas (KMG) facilities halted operations at the Uzen field in Zhanaozen near the Caspian Sea. In December 2011, over 15 people were killed in clashes between police and protesters. With proven oil reserves of 30 billion barrels, Kazakhstan has attracted over $100 billion in foreign investment since the discovery of the giant Tengiz oil deposit in the 1980s and the Kashagan field in the 1990s. Although the potential for a serious disruption from Kazakhstan is relatively small, unrest near the Caspian producing areas might set a precedent for future strike movements. Kazakhstan's leadership will likely continue to contain the unrest at the cost of economic expediency. The unrest compromises KMG's role in the three major consortia because it must now employ the fired workers, not to mention the additional threat the unrest poses to KMG's legacy production output. In addition to threatening domestic investment, strikes and labour issues will complicate and continue to slow the pace of billions of dollars of existing and planned foreign investments that should make Kazakhstan a key potential source of non-OPEC supply. 

Violence at Zhanaozen exposes Kazakhstani labour tensions. This summer, an eight-month-long strike began when workers demanded higher wages and a stronger union. KMG's exports plummeted by 37% in 3Q11 due to the strike, but output was normalised after August. Despite normalisation, nearly 2 000 workers were fired, planting the seeds for further unrest. The workers continued to occupy Zhanaozen's main square, and violence erupted during Independence Day commemorations. Local/foreign wage discrepancy and labour union restrictions contributed to the Mangistau unrest and other instances of violence over the last several years. But, the government and especially foreign operators have moved quickly to contain these problems to prevent them from spiralling out of control. To insure against further problems, President Nursultan Nazarbayev had the head of KMG replaced with a veteran deputy energy minister and Mangistau native Lyazzat Kiinov, and he put the old KMG head in Kiinov's old position. President Nazarbayev also removed Timur Kulibayev, his son-in-law and a very influential energy player, from his position at the head of Samruk-Kazyna, the sovereign wealth fund and government holding company. Now that the unemployed KMG workers will be given temporary jobs in newly created KMG subsidiaries, it is less likely that the unrest will continue there. President Nazarbayev also reinstated the region's right to vote in parliamentary elections after a state of emergency had been imposed. Although difficult to verify, foreign operators may also have increased the amount they are spending on local workers and on local sustainability projects.

Despite the immediate threat to output from KMG's Mangistau fields, KMG also holds shares in all major additions to Kazakhstani oil production. KMG's waxy and salty Uzen field, situated in the Mangistau region close to the Caspian Sea, once produced more than 300 kb/d in the mid-1970s, but declined to around 110 kb/d in 1H10. Around 50% of KMG's Mangistau region oil flows via the Atryrau-Samara pipeline to Russia, 30% goes via the Tengiz-Novorossiysk line to the Black Sea, and the remainder is used domestically. With the agreement last month for KMG to take a 10 percent share in the 280 kb/d Karachaganak gas and gas condensate field, KMG represents the Kazakh state's stake in the country's major fields. However, KMG's workers will play a key role in new production additions in Kazakhstan, and local content restrictions will make project execution and negotiations more complicated for foreign investors.

Complex geology and rising capital costs have hindered Kazakhstan's near-term contribution to non-OPEC supply. Kazakhstan produced around 1.6 mb/d in 2011, and is forecast to reach 1.8 mb/d by 2016 and 4 mb/d by 2035. With government approval, around 200 kb/d of new production will be added to TengizChevroil's current 520 kb/d output but not until after 2016. With the inclusion of KMG as a 10% shareholder and the settlement of other disputes, Karachaganak (KPO B.V.) shareholders will begin to reconsider the sanctioning of additional phases of the gas and gas condensate project that would add around 80 kb/d to production. Also, ConocoPhilips and UAE-based Mubadala have begun exploratory drilling in the highly prospective offshore Nursultan block. Last but not least, Phase 1 of the oft-delayed Kashagan project should come online by the end of 2013, adding as much as 370 kb/d to the country's output.  

In sum, although labour unrest could flare up in upcoming months, it is unlikely to spread to the Atryau region where foreign operators have ensured local workers are satisfied. President Nazarbayev will inevitably ensure that further unrest is contained so that it does not damage the country's investment standing or further rattle oil markets. This comes at a cost to KMG and to foreign companies operating in Kazakhstan. The creation of new KMG subsidiaries inevitably raises the cost of production and could hinder KMG's ability to fulfil its shareholder obligations.  

FSU net oil exports increased by 150 kb/d to 9.1 mb/d in November, the first time since June that net exports have exceeded 9 mb/d. The rise was propelled by increasing Transneft crude shipments which rose strongly by 260 kb/d on the month and offset falling volumes of BTC blend and non-Transneft cargoes shipped via the Arctic port of Varandey. Black Sea cargoes rose by 200 kb/d, and Primorsk exports rebounded by 200 kb/d to 1.5 mb/d upon the conclusion of maintenance on the Baltic Pipeline System. In the East, deliveries of ESPO blend shipped through Kozmino remained below 300 kb/d at 270 kb/d for a second consecutive month, which was their lowest level since February 2010. It is likely that newly restarted Russian crude exports via the Kazakhstan-China pipeline were diverted from ESPO exports. Exports of products from FSU countries fell for the seventh consecutive month, contracting by 30 kb/d to 2.5 mb/d. Total exports are now 180 kb/d below a year ago, with 'Other Products' (-120 kb/d y-o-y) (including gasoline and naphtha) leading the yearly fall due to the introduction of the 90% light product export duty.

The start-up of the much heralded BPS-2 pipeline and its outlet of Ust Luga on the Gulf of Finland has been delayed to 1Q12 from November 2011. The first crude cargo was initially held over until December, but reports suggest that the terminal will now not commence operations until later than planned due to subsidence at a number of tanker berths. However, even the 1Q12 assessment looks to be optimistic due to the reported complexity of the required repairs and the onset of ice. Related to increasing Baltic and Arctic exports, reports indicate that Russia has begun to modernise its ice-breaker fleet with state controlled shipyards engaged to build a number of new ice-breakers to operate in the Gulf of Finland and along the Northern Sea Route, where Russia hopes to establish a major trade route. Additionally, the Russian government plans to construct ten emergency centres by 2016 with the capability to deal with any accidents occurring along Russia's arctic coast.

OECD Stocks


  • OECD industry oil holdings rose by 4.1 mb in November, to 2 647 mb, in contrast with a five-year average 14.9 mb draw. Even though the deficit of inventories versus the five-year average narrowed to 30.3 mb, from 49.2 mb in October, stock levels nonetheless remained below the five-year average for a fifth consecutive month.
  • Preliminary data indicate a seasonal 23.6 mb draw in December OECD industry inventories, compared with the five-year average drop of 37.4 mb. Crude oil stocks led the decline by falling 16.1 mb, most of which stemmed from Europe. Product holdings fell by 2.7 mb, driven by sharp drops in 'other products' in the US and kerosene stocks in Japan.
  • Short-term oil floating storage fell by 5.2 mb, from 39.7 mb in November to 34.5 mb in December. Despite an increase in Iranian crude oil floating storage in the Middle East, reductions in Asia Pacific and the US Gulf due to a persistently backwardated pricing structure outweighed the increase

OECD Inventories at End-November and Revisions to Preliminary Data

OECD industry oil holdings rose by 4.1 mb in November, to 2 647 mb, in contrast with a five-year average 14.9 mb draw. Even though the deficit of inventories versus the five-year average narrowed to 30.3 mb, from 49.2 mb in October, stock levels nonetheless remained below the five-year average for a fifth consecutive month. North America was the only region with stocks above the five-year average, both for crude and products. OECD forward demand cover fell to 57.5 days from 58.0 days in October, but continued to stand 1.5 days above the five-year average of 56.0 days.

Crude stocks declined seasonally by 3.6 mb to 929 mb, with the deficit of inventories versus the five-year average widening to 28.9 mb, marking a fifth straight month of below average readings. While crude holdings in OECD Pacific and North America fell by 5.9 mb and 3.5 mb, respectively, Europe saw a 5.8 mb build, following the return of a significant amount of Libyan crude production. In the meantime, product inventories rose by 9.6 mb in November, narrowing their deficit against the five-year average to 4.9 mb, from 20.3 mb in October. Gasoline stocks led the increase by gaining 11.6 mb on higher production in the midst of low seasonal demand. Middle distillates rose in all three regions thanks to warmer-than-normal weather. 'Other products', by contrast, decreased significantly by 8.9 mb, mostly in North America.

OECD stocks were revised 12.7 mb higher in October, upon receipt of more complete monthly submissions from member countries. This implies a 21.0 mb draw in October inventory levels, a lesser decline than the preliminary drop of 36.3 mb. Upward adjustments were centred on North American crude oil and middle distillate stocks, which were revised higher by 9.0 mb and 7.0 mb, respectively.

Preliminary data indicate a seasonal 23.6 mb draw in December OECD industry inventories, compared with a five-year average 37.4 mb drop. Crude oil stocks led the decline, falling by 16.1 mb, most of which stemmed from Europe. Product holdings fell by 2.7 mb, driven by sharp draws in 'other products' in the US and for kerosene stocks in Japan, while builds in gasoline and middle distillate holdings in the US provided a partial offset.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil inventories fell seasonally by 3.7 mb to 1 330 mb in November, nonetheless a milder fall than the five-year average 16.3 mb. Crude oil holdings declined by 3.5 mb, mostly on lower imports into the US for end-year tax reasons. 'Other oils' stocks including feedstocks also decreased significantly by 4.8 mb, mostly affected by rising refinery throughput. Meanwhile, product inventories rose by 4.7 mb in contrast with a five-year average 4.0 mb draw. Gasoline and fuel oil stocks took the lead, rising by 8.0 mb and 2.5 mb, respectively. Motor gasoline holdings gained on higher production and imports in the midst of low seasonal demand. 'Other products' was the only category that showed a draw, declining sharply by 6.1 mb, due to the increased use of naphtha for gasoline blending.

US weekly data point to a 5.6 mb decline in US industry stocks in December. Crude holdings fell by 4.8 mb, affected by the last-in-first-out tax system. In the meantime, crude levels at Cushing, Oklahoma showed a further drop of 1.9 mb to 29.2 mb in December, marking the lowest monthly level since November 2009. The storage utilisation rate at Cushing has been on a downward trend since April, when it was over 80%, reaching an estimated 50%, amid rising PADD 2 refinery runs, onward crude shipments from Cushing and significant storage capacity expansion (see 'Storage Expansion at Cushing').

US product inventories rose by 2.6 mb in December, driven by gains in gasoline and middle distillate stocks, which rose by 7.0 mb and 3.4 mb, respectively on higher production. Meanwhile, 'other products' and fuel oil inventories fell by 5.5 mb and 2.3 mb, respectively, offsetting much of the gasoline and distillates gains.

Storage Expansion at Cushing

Crude storage capacity at Cushing, Oklahoma - the delivery point for the NYMEX light sweet crude oil (WTI) futures - has been increasing dramatically over the last year and seems likely to continue this trend in the near future.

While precise capacity levels at Cushing remain difficult to gauge, the build-up of crude in storage there, and resultant sharp relative weakening in WTI prices (to discounts exceeding $25/bbl versus Brent at times) has seen capacity expansion accelerate. Storage capacity at Cushing is estimated to have expanded by approximately 5 mb or less annually during 2005-2010. However, according to most sources, including the EIA, there was an 11-14 mb storage build in 2011. Moreover, at least another 7-8 mb of capacity will likely be added in 2012.

There are a couple of reasons behind this rush. Thanks to technologies such as hydraulic fracturing, output of light, tight oil from locations such as North Dakota and Texas has surged, while output from the Alberta oil sands also continues to ramp up. For pipeline companies confronting the resultant influx of crude to Cushing, amid bottlenecks in the ability to ship crude onward to refining centres on the US Gulf and East coasts, storage build has become more of a necessity than an option. Moreover, with a proliferation of crude qualities now coming in to Cushing storage, the need for segregation has further boosted the pace of capacity expansion. Storage capacity expansion may continue at an accelerated pace until such time as pipeline capacity to evacuate crude to coastal refining centres catches up.

The other impetus has derived from price. In recent years (specifically from 2006 to October 2011), the contango in WTI futures prices has incentivised holding barrels in storage now to sell at a higher price in the future. With storage utilisation at Cushing occasionally breaching 80%, there has been every incentive for companies to expand tankage. Even though WTI flipped into backwardation again in late October 2011, and the utilisation rate fell back to around 50% at the end of 2011, price volatility continues to provide an incentive for Cushing storage expansion. If market players perceive there to be 'buy low, sell high' opportunities in future, further Cushing storage expansion is likely.

OECD Europe

Industry oil inventories in Europe rose seasonally by 15.3 mb to 917 mb in November, more than double the 7.0 mb five-year average build. Although they rebounded from eight-year lows in October, and thus returned to the five-year range, the deficit versus five-year average stock levels remained at 34.2 mb. Crude stocks increased by 5.8 mb, but were still at their lowest since February 2003, marking a ninth straight month under the five-year range. A more rapid-than-expected return of Libya's crude output, and recovering North Sea supplies helped to loosen some of the prevailing tightness in the regional crude oil market. Moreover, European refined product holdings also rose by 8.1 mb on healthier refinery runs. Gasoline and middle distillates led the increase, rising by 4.4 mb and 1.9 mb, respectively. Meanwhile, German end-user heating oil stocks rose to 59% fill at end-November.

Preliminary data from Euroilstock point to a 13.7 mb draw in crude oil and product inventories combined in the EU-15 and Norway in December, in contrast with a five-year average 11.2 mb build. Crude stocks fell by 13.3 mb likely on weak demand (due to continuing high crude prices), and several refinery shut-downs from January. Products holdings edged up by 0.4 mb, as gains in gasoline and middle distillates outweighed declines in fuel oil and 'other products' stocks. Refined product stocks held in independent storage in Northwest Europe edged down due to mild winter weather and a backwardated price structure.

OECD Pacific

Commercial oil inventories in the OECD Pacific fell by 7.5 mb to 400 mb in November and stayed under the five-year range for a second consecutive month, widening the deficit versus the five-year average to 23.5 mb, from 21.5 mb in October. Crude stocks declined by 5.9 mb to 150 mb in contrast with a five-year average build of 1.1 mb, marking the lowest level on recent record. Moreover, crude holdings in Japan fell by 2.6 mb to 101 mb, again the lowest level in recorded history. Product stocks fell by 3.2 mb, staying barely within the five-year range. All products' inventories except middle distillates fell. 'Other products', gasoline and fuel oil holdings declined by 3.2 mb, 0.8 mb and 0.1 mb, respectively, while middle distillate stocks rose by 0.9 mb.

Weekly data from Petroleum Association of Japan (PAJ) suggest a seasonal draw of 4.4 mb in Japanese industry oil inventories in December. Product stocks fell by 5.0 mb, driven by a drop in kerosene holdings. Colder-than-normal weather drove kerosene stocks down by 4.5 mb, putting an end to a steadily rising trend that continued after the major earthquake and tsunami in March. Gasoline and fuel oil holdings also contributed to the decrease, falling by 0.9 mb and 1.2 mb, respectively, while middle distillate (excluding kerosene) and 'other products' stocks increased by 1.0 mb and 0.6 mb, each. In the meantime, crude oil inventories rose by 2.0 mb, likely on higher crude oil imports.

Recent Developments in Singapore and China Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories rose in November by an equivalent of 1.5 mb (data are reported in terms of percentage stock change). Although imports reached a new intra-year high in November, crude oil stocks fell by 1.3% (2.9 mb) as a result of a sharp increase in refinery throughput and a moderate fall in domestic crude production. Thanks to higher refinery throughput, aggregate product holdings climbed by 3.6% (4.4 mb), rising for the first time in six months. Gasoline, diesel and kerosene inventories increased by 4.9% (2.5 mb), 2.3% (1.3 mb) and 5.2% (0.5 mb), respectively.

Singapore onshore inventories fell by 2.6 mb in December, led by draws in light distillate and fuel oil holdings. Light distillate stocks declined by 1.8 mb due to limited imports from North Asian countries. Fuel oil inventories decreased by 1.0 mb, plunging to an 11-month low as inflows from Europe were thin and regional bunker demand stayed strong. In the meantime, middle distillate holdings edged higher by 0.2 mb overall. However, this masked fluctuating trends through the month. In early December, distillate stocks plummeted to a 43-month low on limited output from Shell's 550 000 b/d refinery in Singapore, lower imports from Japan and South Korea and higher exports to China. However, distillate holdings rebounded to gain month-on-month in December, as arbitrage for jet fuel and diesel deliveries to Europe significantly narrowed in late December.



  • Oil markets began the New Year confronted with a host of supply issues, not least a looming EU ban on Iranian oil imports and retaliatory threats from Tehran to close the pivotal Strait of Hormuz, through which flows roughly one-third of world oil exports. Oil prices initially jumped $4-5/bbl on the reports, but eased again, under stress from mounting euro zone debt issues. Brent was last trading at $112/bbl and WTI at $100.50/bbl.
  • Regulatory bodies on both sides of the Atlantic will be busy in 2012 finalising rules for moving swaps onto electronic trading platforms with a view to pre-trade transparency by ensuring prices are posted to a wide variety of market participants, not just among dealers. Some market players, however, argued that such a move actually reduces, rather than increases, transparency.
  • Spot crude oil markets were, understandably, propelled higher in December and early January by the convergence of geopolitical events threatening global oil supplies in Iran, Nigeria and Syria. Month-on-month, however, spot prices were mixed, with ample supplies in Europe weighing on Dated Brent, while WTI strengthened on stronger demand and reduced stocks at Cushing.
  • Middle distillate cracks spreads fell in December as above-normal winter temperatures in the Northern Hemisphere pressured prices. Gasoline crack spreads improved slightly, and naphtha markets recovered from the lows seen in November. Fuel oil crack spreads also continued to improve.
  • Tanker rates for all benchmark crude voyages strengthened over December and into early-January, finishing 2011 on an upward note and reversing their dire 3Q11 performance. Despite a slow start, rates on the Middle East Gulf - Japan VLCC route firmed from mid-December onwards, buoyed by high Asian demand and charters hurrying to fix cargoes before the holidays.

Market Overview

The new year saw oil markets again rattled by a series of long-standing geopolitical issues. The international community moved to further tighten its economic sanctions stranglehold on Iran over nuclear ambitions, but this time specifically targeted oil exports, which has raised alarm bells over the possibility of military action in the Gulf. Meanwhile, civil strife in Nigeria over the removal of fuel subsidies, threatened to shut-in the country's oil production. The euro zone crisis deepened further after Standard & Poors knocked down the credit rating of half a dozen European countries, including triple-A-rated France and Austria.

When markets re-opened on 3 January, oil futures spiked $4-5/bbl above end-2011 prices. Brent futures fell on average in December, by $2.77/bbl to $107.72/bbl. After reaching a two-month high of $113.70/bbl in early January, prices again eased under the weight of euro zone debt issues. For 2011, average annual futures prices for Brent were at record levels, up $30.57/bbl to $110.91/bbl. WTI futures prices rose by $1.41/bbl to $98.58/bbl in December. WTI closed the year up $15.50/bbl to an average $95.11/bbl in 2011. After peaking at $103.22/bbl in early January, prices retraced their gains and were last trading around $100.50/bbl.

Supply issues may once again drive oil price direction this year, as they did in 2011. The loss of Libyan crude oil production dominated last year, triggering a $22-24/bbl rise in prices above pre-crisis levels and shorting the market of light, sweet crude. Iranian supply prospects are now front and centre, including the ever-present, if unlikely, threat of closure of the Strait of Hormuz. European refiners have shifted their concern from a loss of light-sweet Libyan barrels to the availability of heavier Iranian crude for their refining systems. However, while some market dislocation is inevitable, the gradual phase-in of any EU import ban and the considerable latitude in implementation built in to the US sanctions will serve to minimise unwanted market disruptions.

The fragile economic outlook is already tempering fears of physical supply disruptions. Indeed, global oil demand for 1Q12 has been revised down by a sharp 0.5 mb/d, to 89.5 mb/d and full-year demand is lowered by 0.2 mb/d to 90 mb/d.

Brent futures prices remained firmly backwardated in January, whereby prompt prices are stronger than further out. However, increased North Sea supplies were likely behind the Brent M1-M12 backwardation narrowing in December, to $3.70/bbl compared with $4.90/bbl in November. In early January, the differential deepened again to an average $4.15/bbl in the first two weeks of the month.

The WTI M1-M12 contract posted a similar easing, averaging just $0.55/bbl by mid-January compared with a monthly average of $1.13/bbl in December and $1.43/bbl in November.

Futures Markets

Activity Levels

Despite a decline in trading volume and relatively stable prices on the New York CME WTI contract, open interest, the number of contracts that have not been closed or delivered, posted three consecutive weeks of increases, reaching a two-month peak, triggered by supply concerns. The ratio of Brent on London ICE to New York and London-based WTI combined futures contracts open interest climbed to 54%, an increase of almost 15% since July 2011.

Open interest in New York CME WTI futures and options contracts increased by 2.27% from 6 December 2011 to 10 January 2012, reaching 2.35 million contracts after plunging by 13.9% in November. Meanwhile, open interest in futures-only contracts increased by more than 4.22% during the same period, from 1.33 million to 1.39 million. Over the same period, open interest in London ICE WTI contracts dropped to 0.37 million and 0.43 million contracts in futures-only and combined contracts, respectively. Open interest in ICE Brent contracts increased to 0.95 million and 1.06 million contracts in futures-only and combined contracts, respectively.

Money managers reduced their bets on rising WTI crude oil prices in New York for the first two weeks of December, shrinking the number of net futures long holdings to 151 304 contracts from a high of 174 381 contracts in the week ending 20 December as a response to renewed concerns over the health of the Euro-area economy. However, concerns over possible European sanctions on Iranian oil imports subsequently induced a reversal in this position. Overall, in December, net futures long positions of managed money traders declined only by 238 from 174 323 to 174 085 contracts in New York and increasing from 12 127 to 15 775 contracts in London. Over the same period, money managers in London followed a similar pattern as New York—declining in the first two weeks and increasing thereafter. Overall, traders increased their Brent futures net long position in December by 5.89% from 85 516 to 90 551 contracts, due to concerns over Iranian and Syrian oil supply.

Producers also reduced their net futures short positions from 118 152 to 98 646 contracts in December; they held 20.46% of the short and 13.35% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 28.3% and 35.3% of the open interest on the long side and short side, respectively, increased their net short position by 47.3% to hold 96 749 net short in December. Producers' trading activity in the London WTI contracts also followed a similar pattern as CME WTI contracts. Producers increased their net long positions in London ICE WTI contracts from 1 126 to 22 894 contracts over the same period. Swap dealers also increased their net short positions to 42 237 in the week ending 10 January 2012, from an earlier 22 413 contracts.

Index investors' long exposure in commodities in November 2011 declined by $0.7 billion. However, they added $9.9 billion to WTI Light Sweet Crude Oil, both on and off futures contracts. The number of futures equivalent contracts increased to an all-time high of 695 000 contracts since the CFTC started publishing its index investment data in December of 2007, equivalent to $69.4 billion in notional value.

Market Regulation

On 20 December 2011, the CFTC unanimously approved the final rule on real-time reporting of swap trades. The final rule calls for swaps subject to a clearing requirement to be made public within 30 minutes of execution of the transaction in the first year and narrowed to 15 minutes after the first year. End users will be required to report within 48 hours in the first year, 36 hours in the second year and finally 24 hours after the second year. The rule on block trades has been removed from final rulemaking and it is expected that the rule on appropriate block size will be redrafted in 2012. The final rule was welcomed by market participants who raised concern over the potential for shorter time delays for real time reporting to reduce market liquidity.

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

In a contentious 3-2 vote on 11 January 2012, CFTC Commissioners proposed limits on banks' proprietary trading and hedge fund investments in line with the restrictions proposed by the Federal Deposit Insurance Corporation, the Federal Reserve, the Securities Exchange Commission (SEC) and the Comptroller of the Currency in October, 2011. The proposed rule prohibits proprietary trading activities of banks and limits their investments in private-equity and hedge funds in order to reduce risk in the banking system.

As noted in the previous OMR, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFAM) filed a lawsuit in the federal appeal court challenging the CFTC's position limits rule. The CFTC, on 4 January 2012, asked the federal court to dismiss the challenge, claiming it does not have jurisdiction to consider the lawsuit. The CFTC argued that the district court, rather than federal court, must first hear the challenge to the rule. In response, ISDA and SIFAM asked the appeal court, on 12 January 2012, to delay the rule while the court considers their legal challenge against the position limit rule in order to prevent irreversible harms. Meanwhile the European Parliament and Council of Ministers, on 19 December 2011, failed to reach an agreement on a final text for the European Markets Infrastructure Regulation, further delaying regulation of swap markets in Europe.

Swap Execution Facilities

Regulatory bodies on both sides of the Atlantic will be busy in 2012 finalising rules on one of the most important requirements for bringing pre- and post-trade transparency to the over-the-counter derivatives markets by ensuring prices are posted to a wide variety of market participants, not just among dealers. Initially set by the G-20 leaders at their Pittsburgh Summit in September 2009 and later adopted in reform packages in the US and Europe, transparency would be achieved through the requirements that "all standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest."

For this purpose, the Dodd-Frank Act in the US introduced a new trading venue called a swap execution facility (SEF), where only standardised swaps will be traded. The Dodd-Frank Act defines an SEF as "a facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce." SEFs are similar to multilateral trading facilities (MTFs) in European markets. In addition to MTFs, the European Commission also introduced a new trading venue category ("organised trading facility - OTF") to cover hybrid platforms run by firms which currently do not fall under the current MiFID categories for organised trading.

Although the general details of these facilities and how they are going to function have already been proposed, final rules will emerge later in 2012. However, there are certain differences between regulators in the interpretation of swap execution facilities. For example, as opposed to the strict CFTC proposal that swap execution facilities be either order-book or request-for-quotes (RFQs) from a minimum of five possible seller facilities, the SEC has proposed a looser definition of these platforms, which do not require order-books and would allow buyers to request a quote from a single seller.

Furthermore, the SEC proposal allows for voice broking, rather than stipulating electronic trading as the CFTC has. However, the US House Committee on Financial Services approved legislation (H.R. 2586) in late November 2011 which would prevent the CFTC from imposing a requirement that swap-buyers seek quotes from at least five participants before executing a trade. On 23 December 2011, the US House Committee Agriculture granted an extension for further consideration by 1 February 2012. We expect the CFTC final rule to be similar to one that SEC has already proposed, including keeping voice broking.

On 5 December 2011, the CFTC proposed further rules establishing a process for designated contract markets (DCMs) and SEFs to make swaps "available to trade" without a defining swap. The proposal calls for DCMs and SEFs to submit to the CFTC a determination that a swap is available to trade. To make a swap available for trading under the proposed rules, DCMs and SEFs must consider:

  • The readiness and availability of buyers and sellers of the swap.
  • The frequency and size of transactions in the swap on that DCM or SEF, or of bilateral transactions in the swap.
  • The trading volume for the swap on that DCM or SEF, or of bilateral transactions in the swap.
  • The bid/ask spread for the swap.
  • The usual number of resting firm or indicative bids and offers that the DCM or SEF receives in the particular swap being considered.
  • Whether the DCM's or SEF's trading facility or platform will support trading in the swap.
  • Any other relevant factors.

A determination of which swaps would be made available to trade might be a challenging task both for regulators and trading facilities. As mentioned in previous OMRs, the OTC market is different from the futures markets. Instruments (swaps) in the OTC markets can trade infrequently, often in significant sizes, between dealers and end-users or speculators. If activity in the futures markets is any evidence, a relatively small number of highly liquid instruments has been effectively traded on the exchange. The failure rate especially in less liquid instruments has been very high. However, a lighter SEC proposal might be the proper way to bring transparency, while ensuring continued liquidity in the swap markets.

Some market participants raised concern over excessive fragmentation of markets with the introduction of different trading venues. For example, the purpose of introduction of OTFs, which can be considered a subcategory of MTFs, in the European Union is not well understood, except as creating further market fragmentation. Opacity in terms of unknown counterparties attracted by a shift towards electronic trading, as well as excessive fragmentation of markets, is actually a source of less, and not more, transparency in the market.

Market participants also argue that OTC markets are for professionals; not for retail investors. The role of brokers is primary in providing transparency. A move to a platform-based trading systems with a view to pre-trade transparency, actually removes transparency for the professionals that are involved.

A final criticism of moving swaps onto platforms is related to the supporting claim that electronic trading is associated with higher volumes and volatility of trading. Critics argue that markets could be subject to the kind of volatility evident in the futures markets immediately after the introduction of electronic trading to the NYMEX and ICE exchanges. It is true that the volume of trading increased after moving from open outcry to electronic trading. However, there is no empirical evidence supporting the claim of increased volatility due to electronic trading.

Spot Crude Oil Prices

Spot crude oil markets were, understandably, propelled higher in December and early January by the convergence of geopolitical events threatening oil supplies from Iran, Nigeria and Syria. Spot crude prices month-on-month, however, were mixed. December spot prices for Dated Brent declined by $2.85/bbl, to an average $107.83/bbl. Dubai crude was also down on the month, off around $2.55/bbl to an average $106.43/bbl. But the monthly declines masked the steady upward trend for both grades over the past six weeks.

By contrast, WTI rose by around $1.40/bbl in December, to average $98.60/bbl. WTI's relative strength partly reflected the recent drawdown in stocks at Cushing, where inventories are at their lowest level since autumn 2009 (see Stocks, 'Cushing Storage Expansion'). The WTI/Brent price spread continued to narrow in December, to -$9.25/bbl compared with -$13.50/bbl in November and -$23/bbl in October.

While announcement of a potential EU embargo on Iranian crude initially triggered a spike, prices fell off when details emerged that the time-line could be six months or more. In addition, the steady rise in Libyan exports, increased supplies of North Sea grades and continued euro zone fiscal issues weighed on markets. European crude markets were further pressured after credit problems at the region's largest independent refiner, Petroplus, forced the company to cut production as it teetered on the brink of bankruptcy (see Refining, 'PetroPlus - Latest Victim of European Downstream Malaise').

Meanwhile stronger fuel oil markets in Europe at end-December and into January saw Brent-Urals price differentials narrow. Increased demand for Urals is also coming from European and Chinese buyers, who see the crude as a suitable alternative to Iranian barrels. China, which cut its Iranian imports in half while it renegotiates its 2012 term contracts, reportedly bought Urals as a replacement.

Although European spot crude markets look fairly well-supplied now, refiners are already aggressively searching for alternatives to Iranian grades. Depending on refinery complexity, individual refiners in these countries may have a specific need for relatively heavy, sour crude such as Iranian Heavy or asphalt-rich Doroud and Foroozan crudes. Some Mediterranean refiners are believed to have already approached Saudi Arabia to ascertain whether they would be willing to boost supplies to replace imports of Iranian Heavy crude in particular. Italian refiners, who produce bitumen, are likely to have the hardest time replacing the heavier Iranian crudes. Russian Urals, Iraqi Basrah and Kirkuk, Venezuelan and Mexican Maya may all be suitable substitutes.

Brent crude's premium to Middle East marker Dubai, an indicator for the premium of light sweet grades over heavy sour supplies, narrowed to just $1.40/bbl in December compared to $1.65/bbl in November and $5.50/bbl in October. The narrowing of Brent's premium to Dubai has prompted traders to send more crude from the Atlantic Basin to Asia.

Spot prices for Middle East sour crudes were lower in December, in part due to milder than normal winter weather. However, heavy sweet crudes, such as Indonesia Minas and Angola Dalia were in demand due to increased direct burn at Japanese power plants.

Spot Product Prices

After showing unusual strength in November, middle distillate cracks spreads fell in December as above-normal winter temperatures in the Northern Hemisphere pressured prices. Gasoline crack spreads improved slightly, and naphtha markets recovered from the lows seen in November. Fuel oil crack spreads continued to improve. Moving into January, markets were lifted by the news of Petroplus' closure of three European refineries, removing about 340 kb/d of refining capacity from the market.

After a very strong November, middle distillate cracks spreads fell month-on-month in December in all major regions as mild winter weather in the Northern Hemisphere pressured prices. In Europe, diesel crack spreads fell by $3.39 - 5.22/bbl, although markets are still tight. Middle distillate stock levels far below average continued to support robust average diesel crack spreads, which were $16.58/bbl and $18.63/bbl for the month in NW Europe and the Mediterranean, respectively. Although the backwardation (M1-M2) narrowed from $0.99/bbl in October and $0.93/bbl in November to $0.50/bbl in December, it is still undermining storage economics.

The main reason behind the drop in crack spreads was the mild weather in December. Supplies were increased further both as cargoes booked in the autumn from Asia arrived, and as export volumes from Russia increased. Russian export volumes are still lower than normal due to the new domestic regulations which ban domestic use of diesel containing above 500 ppm sulphur. However, the news of Petroplus closing three refineries in Europe, together with a slight draw in ARA gasoil stocks, lifted crack spreads in January.

The US market was also affected by the mild weather, and heating oil crack spreads to WTI fell $8.69/bbl in New York Harbor and a lesser $4/bbl versus Mars in the US Gulf. Temperatures in the traditional US North East heating oil market were above normal, with PADD I heating degree days around 16% below the 10 year average in December. Weaker European prices limited arbitrage opportunities, although total middle distillate exports in December of 1 mb/d remained very high. Nevertheless, US middle distillate stocks built in December as strong prices in previous months have seen refiners maximise output.

The Asian markets were tighter than in the Atlantic basin, both due to stronger demand and heavy regional maintenance, and crack spreads fell a lesser $1.84/bbl on average in December. Fear of a Chinese diesel demand surge continued to be supportive, together with middle distillate stocks in Singapore being well below average.

Fuel oil markets continued to improve in December. LSFO discounts narrowed by $1.46-2.11/bbl in Europe and Asia month-on-month, whereas HSFO discounts widened slightly by $0.55-1.20/bbl. The widening was more a result of stronger crude prices than weakening of fuel oil fundamentals and HSFO discounts narrowed considerably in the second half of the month. HSFO markets continue to be supported by tightness in the bunker fuel market, as new shipping regulations lowered the global maximum sulphur content from 4.5% to 3.5%, taking effect from 1 January 2012, and refiners are still adjusting their production to the new regulation. LSFO markets were tight in Asia, partly due to strong Japanese demand. In Europe, the market was supported by utility demand particularly from the Mediterranean region.

Gasoline markets strengthened slightly in December, with most cracks spreads being back in positive territory on average for the month with the exception of US Gulf product cracks to LLS, which were still negative. Gasoline market fundamentals are still weak, with stock levels above average as refiners increase supplies after maintenance, whereas demand especially in the US is muted due to high prices at the pump. The closure of Sunoco's Marcus Hook refinery in December however provided some support to prices throughout December, together with slightly more bullish sentiment based on better US economic data.

The European gasoline market also improved, opening the arbitrage to the US East Coast and reducing some of Europe's supply surplus. Markets were further supported by increased exports to Saudi Arabia, which has refinery maintenance in 1Q12, and North Africa. The announcement of the closure of three of Petroplus' refineries in Europe gave further support to prices at the end of the month, although news of the removal of fuel subsidies in Nigeria added some uncertainty in the market.

Asian gasoline markets strengthened, with gasoline crack spreads to Dubai increasing by $3.57/bbl over the month, to an average of $7.43/bbl in December, around $5/bbl more than Brent cracks in Europe. The Asian market faces strong demand, and supplies have been limited by regional maintenance. At the same time, Chinese gasoline exports were lowered by Chinese stockpiling before the Lunar Year Holiday at the end of January.

Naphtha markets turned up sharply in December from the lows seen in November, but prices retained a near -$11/bbl discount to crude in Europe and an $8/bbl discount in Singapore. The main reasons for the higher prices were increased buying from South Korea and Taiwan, where petrochemical producers needed to refill their stocks. Naphtha market fundamentals remain constrained, however, by poor petrochemical margins and weak demand for plastics.


Tanker rates on all benchmark crude voyages strengthened over December and into early-January, finishing 2011 on an upward note and reversing their dire 3Q11 performance. Despite a slow start, rates on the Middle East Gulf - Japan VLCC route firmed from mid-December onwards, buoyed by high Asian demand and a rush to fix cargoes before the holidays. By the end of the month, Middle East fixings had again reached a record level but plentiful tonnage availability muted rate rises. In the Suezmax market the picture was rosier, and rates on the West Africa - US Atlantic coast trade surged to approximately $17/mt in early-January, as healthy demand combined with tight tonnage following delays in Bosphorus transits. In Northwest Europe storm delays propelled the North Sea - UK coast Aframax route to a mid-month peak of $9.50/mt, its highest level since 1Q11.

Clean product tanker markets exhibited a distinct geographical split, with Atlantic basin trades outperforming those in Asian markets. In response to extremely tight fundamentals in the Atlantic Basin, the transatlantic UK - US Atlantic Coast route experienced a mid-month surge, breaching $32/mt by late-December. Over the same period the Caribbean - US Atlantic coast voyage also benefitted from the US East Coast's thirst for imports, peaking at over $21/mt. However, as fundamentals eased, these traditionally volatile rates began to weaken in the second week of January. In contrast, thin trading in the East was unable to sustain recent gains on the 30 Kt Singapore - Japan route, while the rise on the Middle East Gulf - Japan route was capped by plentiful tonnage.

Floating Storage Falls Away….

Recent market conditions have seen the appeal of putting oil into short-term floating storage diminish. Although the redistribution of crude and products is still taking place using long-term-moored tankers in regions including offshore Malaysia and the Baltic, short-term volumes have declined with crude falling from a peak of 93.0 mb in May 2010 to 34.5 mb as of end-December 2011. Similarly, no products have been stored at sea since September 2011, a far cry from the 97.7 mb peak in November 2009. The only current significant short-term floating storage are unsold Iranian crude cargoes  (currently 32.3 mb), stored for logistical, rather than economic, reasons. As the role of floating storage in the dynamics of oil and shipping markets has diminished, shipbrokers have tended to cease publishing these data and therefore we will no longer routinely track these volumes until an uptick in floating storage leads to renewed reporting once again.



  • Global refinery crude throughputs have been revised down by a sharp 250 kb/d for 4Q11 since last month's report, as weak economic growth and warm winter weather led global demand to contract for the first time since 3Q09. Revisions stem from both OECD and non-OECD countries, with preliminary data pointing to weaker-than-expected runs in Europe, Thailand and Argentina, among others. At 74.8 mb/d, global crude runs stood only 130 kb/d higher than the same quarter of 2010.
  • 1Q12 global crude run estimates have similarly been lowered since last month's report, in large part due to the weakening economic outlook and recent refinery shutdowns in Europe. Global throughputs are now expected to average 74.9 mb/d, 170 kb/d less than in our previous report.
  • Refinery crude runs rose in all OECD regions in November, adding more than 1 mb/d in total, to 36.5 mb/d. A winding down of autumn maintenance was behind the increase. Refinery profitability remained weak in all regions, and only North America maintained throughput rates above year-earlier levels. Preliminary data for key countries indicate stable throughputs for December, and in particular, weaker-than-expected European runs.
  • Refinery margins diverged in December, yet remained mostly in negative territory. Some improvements came in European margins late-month and early January, as product prices were buoyed by news that independent refiner Petroplus would close three of its five European plants. US West Coast margins saw sharp gains, of as much as $15.30/bbl from end-November, and bounced back into positive territory, as Californian crude discounts to WTI widened significantly.
  • Independent refiner Petroplus became the latest victim of the European downstream crisis, as it was forced to shut three of its five European plants in early January when creditors pulled the plug on its revolving credit lines. The company shut its Belgian, Swiss and French plants, but has so far been able to keep its UK and German plants running. The 340 kb/d of shut capacity comes in addition to LyondellBasel's 105 kb/d Berre l'Etang plant, which was mothballed in early January, and Repsol's 220 kb/d Bilbao plant, which halted crude and gasoline units in January due to weak margins.

Global Refinery Overview

Global refinery markets took a turn for the worse in December, and full-cost refining margins remained negative for almost all configurations surveyed. The most recent available data indicate that 4Q11 global crude runs averaged as much as 250 kb/d less than previously forecast and that global demand actually contracted in the quarter, for the first time since 3Q09. Part of the demand weakness follows from exceptionally strong demand a year earlier, particularly in China, and a much warmer-than-normal winter so far this year in the northern hemisphere. Economic weakness and high oil prices continue to weigh on oil product demand in developed nations, however, putting further pressure on refiners. 4Q11 runs are now estimated to have averaged 74.8 mb/d, practically flat from a year earlier. Some growth continued to come from China, the FSU, Latin America and other non-OECD countries, though 'Other Asian' runs were curtailed by maintenance and unscheduled outages and African runs limited by continued shutdowns in Libya.

Refinery margins saw a slight improvement at the end of the December and early January, even turning positive for cracking plants in NW Europe and the Mediterranean on the news that Petroplus was shutting three of its five European refineries due to a credit squeeze (see 'Petroplus - Latest Victim of European Downstream Malaise'). That did not prevent another refinery, Repsol's Bilbao plant in Spain, from shutting crude and gasoline producing units for at least two months starting in January on weak demand and margins. Repsol described the situation as "unprecedented in the history of the company". January also saw the mothballing of LyondellBasel's Berre l'Etang refinery in France, though the company is still looking for a buyer to avoid a permanent closure.

Across the Atlantic, on the US East Coast, Sunoco is equally looking to offload its Pennsylvania and Marcus Hook refineries. The latter has already halted operations and both will reportedly shut permanently if no buyer comes forward by June 2012. ConocoPhillips' Trainer refinery is also idle and scheduled to shut permanently if no buyer is found.

A slightly more positive outlook is seen outside of the OECD. Recent runs in China, India, Russia, Saudi Arabia and Brazil have been touching record-highs, on still relatively robust domestic demand. 1Q12 also sees the commissioning of new capacity in Asia, in particular in China, where PetroChina's recently completed Yinchuan refinery in Ningxia Province and Sinopec's Beihai plant, which started up in late-December are expected to ramp up runs. The return to normal rates of Shell's Singapore refinery from January will also add to product supplies. As a result, non-OECD crude runs are expected to grow annually by 555 kb/d in 1Q12. Given the recent weakening outlook for the European economy and demand prospects, the 1Q12 global crude run forecast has nevertheless been cut by close to 170 kb/d, to average 74.9 mb/d, leaving global runs only 310 kb/d above year-earlier levels.

OECD Refinery Throughput

OECD refinery crude runs rose by more than 1 mb/d in November, to average 36.5 mb/d. Increases stemmed from all regions and were only 45 kb/d shy of our previous forecast. Final October official data and preliminary weekly and monthly data for December, however, were lower than earlier assumptions, and throughput levels for these two months have been revised down by 275 kb/d and 290 kb/d, respectively. While the October adjustment was split across regions, December weakness stemmed almost entirely from OECD Europe. Preliminary Euroilstock data for 16 European countries show aggregate runs down slightly from November's levels, as opposed to an anticipated pick-up in runs towards the end of the year, as maintenance wound down and peak winter demand set in. In all, 4Q11 OECD runs have been cut by 205 kb/d since last month's report.

1Q12 expected throughputs have similarly been lowered by some 330 kb/d, on the back of a sharply reduced European outlook. The shutdown of Petroplus' three European refineries and the reduced runs at two others due to credit problems (see 'Petroplus - Latest Victim of European Downstream Malaise'), and a lower demand outlook than previously, add to an already weak market. Our US estimates have been lifted slightly, however, providing a partial offset.

OECD North American crude runs averaged 17.7 mb/d in November, 400 kb/d above both this October's and November 2010 levels. Increases came mostly from the US, where runs rose in all regions, except for the East Coast, despite poor margins and a narrowing of the WTI-Brent discount. Lower maintenance activity was mostly responsible for the increase.

Preliminary weekly data show US runs slightly lower in December (-90 kb/d), but mostly in line with previous estimates. Runs fell sharply on the East Coast (-150 kb/d) to only 60% utilisation. Sunoco announced on 1 December that it would immediately shut its 178 kb/d Marcus Hook refinery, ahead of an earlier July 2012 deadline due to deteriorating market conditions. The Marcus Hook plant, as well as ConocoPhillips' 185 kb/d Trainer refinery which was idled in September, only run expensive Brent-linked crudes and have seen profits slump. Also on the East Coast, PBF Energy announced it plans to invest $1 billion over the next three years to build a hydrocracker and hydrogen plant at its 190 kb/d Delaware refinery. The project will allow the plant to process heavy crude oil while increasing production of distillates, in particular producing large volumes of ULSD, and thus improve its competitiveness.

US West Coast runs rebounded in December, gaining 120 kb/d on average, after several months of exceptionally weak activity. Regional refining margins saw significant improvements in the month, gaining more than $15/bbl for Kern cracking from end-November to regain positive territory on a monthly basis for the first time since August. Independent refiner and marketer Tesoro, which operates five refineries on the West Coast with combined capacity of 540 kb/d, announced in January it expects to report a fourth quarter net loss of between $0.55 and $0.80 per share due to the "extremely weak margin environment in California and the collapse of the WTI to Brent crude oil spread". The company cited unusually high prices for California crude oil relative to light sweet crude oil as having a negative impact. Heavy Californian crude oil traded at a $1/bbl discount relative to Brent in the quarter compared with a discount of $7/bbl in the fourth quarter of 2010 and $12/bbl in 3Q11. In the last week of 2011, California market conditions improved and the discount of heavy Californian crude widened to nearly $5/bbl, lifting refinery margins in turn. Margins were also boosted by loftier gasoline prices, as both Tesoro and Valero were planning work to their respective plants in Wilmington, California.

The US Gulf Coast also saw runs falling in December (-130 kb/d) on persistently weak economics. Margins improved somewhat towards the end of the month however, and even turned positive for LLS cracking and Mars coking configurations. Gulf Coast runs, and subsequently US runs, nevertheless lagged 2010 for the first time since July, by some 340 kb/d and 270 kb/d respectively.

Midwest runs, on the other hand, continued to enjoy high throughputs and healthy profits despite a narrowing WTI-Brent discount. ConocoPhillips completed the start-up of its expanded Wood River Refinery in Illinois in December. The $3.8 billion expansion added 50 kb/d of crude distillation capacity and a coking unit, boosting the plant's ability to process Canadian heavy crude.

The biggest changes to the outlook this month come from OECD Europe. While European crude runs for November were largely in line with forecast, both final October data and preliminary December data came in lower (-80 kb/d and -300 kb/d respectively). Total regional throughputs were up by 240 kb/d in November, with gains in Spain (+100 kb/d), Sweden (+75 kb/d) France (+65 kb/d), UK (+65 kb/d) partly offset by lower runs in Germany and Belgium. Indeed, Belgian runs fell to 460 kb/d, their lowest since November 2006, as Total's Antwerp refinery was partly closed for maintenance.

Albeit preliminary, Euroilstock data for December show 'EU15 + Norway' crude runs down 40 kb/d from November, leading to further downward revisions for OECD Europe. European crude runs are now seen averaging only 12.1 mb/d in December, 300 kb/d less than previously expected. Weak demand, in part due to a mild winter, was contributing to the counter-seasonal decline in runs at the end of the year. The 1Q12 forecast has equally been lowered by some 370 kb/d as the outlook for the region's economies and oil product demand has deteriorated.

Further refinery closures also add to the weaker activity outlook. While the mothballing of LyondellBasel's refinery in France was already included in our forecast from early January, the announcement that Repsol's Bilbao refinery will shut one crude unit for at least two months and a gasoline producing unit (FCC) for January due to poor economics and the recent shutdowns of Petroplus' three European plants, further drag down forecasted rates. Repsol described the measure as "unprecedented in the history of the company, due to the drastic decline in margins in the last three months and the fall in demand that has been occurring throughout the year 2011". The most recent closures had a positive impact on margins, however, and could thus entice other refiners to increase runs to offset lost volumes.

Petroplus - Latest Victim of European Downstream Malaise

Independent Swiss refining group Petroplus became the latest and the single largest victim of the European downstream industry's ongoing economic woes. The company was forced to suspend operations at three of its five remaining plants in January, due to limited credit availability. If the shutdowns are made permanent, it would take total European capacity rationalisation since the 2008 economic downturn to 1.35 mb/d, to 15.0 mb/d by end-2012 (net reductions are lower due to some expansions notably in Poland, Spain and Greece). Global shutdowns would amount to 2.9 mb/d, not counting plants scheduled to shut if not sold or temporarily idled due to poor economics. While such a scenario would be disastrous for the company, independent refining, Petroplus' employees and the local economies, it could provide a welcome respite to those refineries still operating in this increasingly difficult environment.

On 30 December 2011, Petroplus Holdings announced that it would commence temporary shutdowns of its Petit Couronne, Antwerp and Cressier refineries, given "limited credit availability and the economic climate in Europe". The restart of the plants will depend on economic conditions and credit availability. The statement came shortly after a group of lenders, including BNP Paribas, Natixis, Credit Suisse, Société Générale, Morgan Stanley and Deutsche Bank, pulled the plug on the uncommitted $1.05 billion portion of Petroplus' $2.01 billion revolving credit facility (RCF). The RCF was critical to the company's ability to buy crude oil.

Petroplus is the largest independent refiner and marketer of refined oil products in Europe. Since the economic downturn, the company already converted its Teesside plant in the UK in 2Q09 and its French Reichstett plant in 2Q11 to oil terminals. The recent shutdowns of the company's French, Belgian and Swiss refineries bring the company's shutdowns since 2009 to 515 kb/d, leaving only 330 kb/d of capacity at two sites. Petroplus announced on 11 January that it had reached a temporary agreement with lenders under the revolving credit facility to allow it to maintain operations at the two remaining plants. The company also announced it was in negotiations with a third party for the supply of crude and feedstock for those two refineries.

In the short-run the temporary closures, while only reducing throughputs by some 240 kb/d (the rate at which the three plants ran over the first nine months of 2011), provided a welcome boost to a persistently weak margin environment in Europe and the Atlantic Basin. Following the news, European benchmark margins gained on average $3.30/bbl. If the plants are shut permanently, it would help to reduce the capacity overhang in the Atlantic Basin and could provide longer-lasting support to margins. Some argue that the closures lower regional crude demand and reduce product availability, in turn increasing the region's import requirements for diesel. Given currently low operating rates at European refiners, it seems there is still enough spare distillation capacity in the region to make up the difference. Several plants continue to run at reduced rates, or are shut altogether due to weak margins.

It remains to be seen if the shutdown provides enough support to entice European refiners to increase runs and keep regional product supplies stable. A looming embargo on Iranian crude and potentially reduced gasoline demand from Nigeria (one of the few outlets for surplus European gasoline) given the recent dismantling of subsidies could still provide further challenges ahead.

OECD Pacific crude runs averaged 6.6 mb/d in November, up 350 kb/d from October but 165 kb/d below the same month a year earlier. Preliminary data from the Petroleum Association of Japan show Japanese runs increasing seasonally in December on the completion of autumn maintenance. The increase was nevertheless slightly less than anticipated (by 40 kb/d). The outlook for 1Q12 is largely unchanged, seeing regional runs increasing to 6.7 mb/d, before spring maintenance cuts runs in 2Q12. Both Idemitsu and JX Nippon have announced plans to process less crude year-on-year over the January-March period due to structurally declining demand and capacity still off-line since the March 2011 earthquake.

Non-OECD Refinery Throughput

Non-OECD refinery crude runs have been revised down by 50 kb/d for the fourth quarter of 2011, with lower runs seen in a number of regions. In particular, lower-than-expected October readings for Thailand, where operations were disrupted by floods and refinery maintenance, were offset by higher runs in Russia, India and Singapore in November (carried forward to December). Russian crude throughputs in December were in line with expectations, hovering around the 5.2 mb/d mark, though recent historical data has been revised higher to adjust for the recently commissioned Taneko refinery, not included in Ministry data. 1Q12 estimates have been raised, largely as the higher Russian figures feed through the forecast. The announcement of further security check shutdowns at Mailiao in Taiwan in February, lower estimates for Yemen and China provide a partial offset. Non-OECD runs are now estimated at 38.7 mb/d and 39.0 mb/d for 4Q11 and 1Q12, respectively.

As highlighted in last month's report, Chinese crude runs reached a record high of 9.2 mb/d in November. The near-0.5 mb/d monthly increase followed stronger runs from both Sinopec and PetroChina to refill depleted inventories and avoid domestic shortages amid seasonally higher demand. Another record-high was reached in December, when total runs reach 9.24 mb/d. Company plans for January indicate runs stayed at elevated levels ahead of the New Year holidays, starting on 23 January, and the spring ploughing season. Some maintenance is scheduled for February and March, however, leading expected throughputs to dip slightly in these months.

Both PetroChina and Sinopec have announced plans to increase runs in 2012 compared to 2011, by 6.0% and 3.8% respectively. PetroChina is reportedly planning to process 3.04 mb/d of crude in 2012, while Sinopec plans to process 4.53 mb/d on average. PetroChina will add a 100 kb/d crude unit at its Hohhot Petrochemical plant and complete a 200 kb/d refinery in Pengzhou by the end of the year or early 2013. Further increases are expected to come from the recently completed 100 kb/d addition at PetroChina's Yinchuan refinery in Ningxia Province. Higher runs at Dalian, which was hit by a fire in July of last year, will also add to volumes. Sinopec's growth is expected to come from the 100 kb/d Beihai refinery that became operational in early January. Other Sinopec projects expected to become operational later in 2012 include Shijiazhuang (+60 kb/d), Anqing (70 kb/d) and Jinling (90 kb/d).

'Other Asian' throughput estimates are largely unchanged for 4Q11 and 1Q12, at 8.9 mb/d and 9.2 mb/d, respectively. Indian refinery crude runs surged 400 kb/d in November after several months of reduced runs due to maintenance. Total runs, adjusting official statistics higher to account for Jamnagar's 580 kb/d export refinery and the recently commissioned 120 kb/d Bina refinery currently not included, are estimated to have averaged 4.2 mb/d in the month, more than 10% higher than a year earlier when Reliance underwent maintenance. The monthly increase stemmed from the return of Essar's Vadinar refinery from maintenance. Runs there rose by 250 kb/d, to 309 kb/d. Higher runs were also recorded from Indian Oil Corporation's Mathura plant, up from 72 kb/d in October to 183 kb/d in November and MRPL's Mangalore plant, up 60 kb/d to 257 kb/d in November. Reliance will shut a 290 kb/d crude unit at its 580 kb/d Jamnagar export refinery from mid-February for three weeks of maintenance. This will be the first scheduled turnaround at the plant since it was commissioned in 2008.

Shell's Singapore refinery is thought to have regained full production by end-2011. Runs are believed to have recovered to 1.2 mb/d in November, up from 1.08 mb/d in October. The 550 kb/d refinery, which completely shut in late September following a fire, was progressively restarted over October and November, to pre-shutdown rates assessed around 400 kb/d, or 70% utilisation.

Thailand refinery runs came in weaker than expected in October, averaging only 860 kb/d, compared to 970 kb/d a year earlier and 910 kb/d in September. The lower runs are likely due to the devastating floods that have plagued the country since July, and in a possibly related move, several plants underwent maintenance in October. Star Petroleum Refining Co, a joint venture of Chevron and Thailand's top energy company, PTT, partially shut its 145 kb/d refinery in Rayong from mid-September for a month, while Esso shut its 160 kb/d refinery in Sriracha for two months from 16 September. IRPC Pcl meanwhile was planning major maintenance at its 215 kb/d plant for 40 days from mid-November.

Russian crude runs bounced back above 5.2 mb/d in November, after several months of maintenance-reduced throughputs. At 5.24 mb/d, throughputs were 120 kb/d higher than the previous year, in large part due to the start-up of Tatneft's Taneko refinery earlier this year. In fact, this refinery is not included in Ministry data, so we have adjusted for this for recent months. The monthly increase of 90 kb/d followed a return of Rosneft's Syrzan, Angarsk and Salavat plants from maintenance, while the Moscow refinery cut runs by 90 kb/d amid maintenance. Preliminary data show December runs steady, and mostly in line with our previous forecast.

The restart of Libya's largest refinery, the 220 kb/d Ras Lanuf plant, has been delayed by at least a month, from an earlier expected start-up date of end-2011. We now assume the Ras Lanuf plant to be operational by mid-February, with gradual ramp-up towards full rates by mid-March, though this could easily slip further. The country's other refineries have reportedly restored 160 kb/d of capacity.

In Latin America, Brazil's refinery runs held steady at around 1.96 mb/d in November, as crude output hit a record high. Petrobras is expected to add 400 kb/d of capacity through two grassroots projects in 2014. Prior to this, product imports are expected to increase to meet robust demand growth. Uruguay's sole refinery closed for maintenance from early September through December. The 50 kb/d Ancap plant started work to bring two desulphurisation units into operation by March or April 2012, allowing the production of low sulphur gasoline. Meanwhile, Hovensa completed maintenance work at its 350 kb/d St Croix refinery in the US Virgin Islands in early December. According to a company spokesman, the refinery continued to run at "the necessary rates to meet customer commitments" during the work.

According to JODI data, Saudi Arabian refinery runs hit 2 mb/d in October, the highest on record. Compared to domestic distillation capacity of 2.1 mb/d, this represents a monthly increase of 240 kb/d and a utilisation rate of 96%. Also in the Kingdom, Aramco is reportedly to shut some units at its Riyadh refinery in January for maintenance and some units at its Ras Tanura refinery in March and possibly into April. The 550 kb/d Ras Tanura plant includes a condensate splitter, which will also reportedly shut down in the period.

In Kuwait, KNPC is planning to partially shut its Mina Al-Ahmadi refinery in January for maintenance work. CDU capacity of around 250 kb/d will reportedly be offline for anywhere between 20-35 days. Israel's Haifa refinery was partially shut over Nov-Dec, hitting Mediterranean diesel supplies. Yemen's Aden refinery remained shut as of early January, due to lack of crude supplies following sabotage to key pipelines. We assume the plant to be offline until 2Q12 or until the security situation improves. Iraqi runs fell to only 436 kb/d in October, from 610 kb/d the month before, though no reports of outages or maintenance has been found.

The OECD Refinery Yields Table is available in the Tables Section on the OMR Website, as Table 16.