Oil Market Report: 12 April 2012

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Highlights

  • Crude futures regained early-2011 highs in March, underpinned by concern over current and potential supply disruptions. However, amid rising actual 1Q12 OPEC production, and a sizeable implied build in global stocks, prices have subsequently eased. Brent futures were last trading near $120/bbl, with WTI at $102/bbl.
  • Global oil demand is expected to rise to 89.9 mb/d in 2012, a gain of 0.8 mb/d (0.9%) on 2011, largely unchanged from last month. Consumption reaches a 2Q12 low of 88.6 mb/d, as weak seasonal products demand combines with high prices and a stuttering economic recovery. Demand then strengthens through end-2012 as economic growth accelerates.
  • Non-OPEC supply fell by 0.5 mb/d in March to 52.7 mb/d. Decline was widespread, but notable in the UK and at synthetic crude plants in Canada. Unplanned outages reached 1.1 mb/d in 1Q12, restraining non-OPEC output to 53.2 mb/d, albeit 0.5 mb/d higher than 1Q11. Non-OPEC growth recovers through 2012 to average 0.7 mb/d, taking total output to 53.4 mb/d.
  • March OPEC supply held near three-and-a-half year highs, up by 135 kb/d to 31.43 mb/d. A list of countries pledging import cuts in coming months suggests Iranian supplies could fall by 0.8-1.0 mb/d versus 2011 levels by mid-summer. The 'call on OPEC crude and stock change' for 2012 remains at 30.1 mb/d, but is raised for 2Q12 and 3Q12 to 29.5 mb/d and 30.7 mb/d respectively.
  • Global refinery crude runs for 1Q12 have been revised down by 90 kb/d, to 74.8 mb/d. Seasonal maintenance, notably in OECD Pacific, trims global throughputs by 410 kb/d in 2Q12, to 74.4 mb/d. Seasonally higher US runs, and new non-OECD capacity, provide an offset, leaving 2Q12 runs 0.5 mb/d above year-ago, compared to a y-o-y gain of 120 kb/d in 1Q12.
  • OECD industry total oil inventories fell by 12.4 mb in February, to 2 630 mb, compared with a historical average 38.8 mb draw. The stock deficit vs. the five-year average narrowed to 13.9 mb, from 40.4 mb in January. Forward demand cover rose 1.2 days to 59.6 days. March preliminary data show a 22.6 mb increase in OECD industry inventories.

Has the time turned?

Acknowledging that data remain preliminary, first quarter 2012 fundamentals nonetheless show a clear shift from the seemingly relentless tightening evident over the prior ten quarters (3Q09 to 4Q11). An increase of 1.2 mb/d in OPEC crude and gas liquids supply versus 4Q11, alongside sluggish oil demand, imply a potential global build in stocks of over 1 mb/d, despite patchy non-OPEC supply performance.

So the cycle of repeatedly tightening fundamentals evident since 2009 has been broken for now. March and April habitually represent a seasonal low point in global crude demand, so it is perhaps not surprising that extra supply has been channelled into producer or strategic storage. That said, with prevailing backwardation in the Brent market, it is clear that stockpiling so far has been driven more by concerns on supplies for the upcoming summer, after sanctions on Iran fully take effect, than by favourable storage economics. While some of this extra oil is now well positioned to meet rising summer demand from May onwards, its impact on prompt prices has been blunted by ongoing geopolitical uncertainties. Refiners have made the point that they will happily replace Iranian volumes with alternative supplies, so long as they can do so economically. As the world's key marginal supplier, Saudi Arabia has not traditionally been keen to heavily discount its prices, although it likely recognises that a degree of price flexibility is usually required when trying to replace base load supplies for new customers.   

Latest information suggests that offtake of Iranian crude by traditional buyers could drop by 0.8-1.0 mb/d this summer. Key OPEC producers have already shown that they can step into the breach to replace lost volumes, with total output now testing 31.5 mb/d. With demand-side risks looking evenly balanced, market direction over the rest of 2012 will hinge largely on the prospects for supply. We retain a fairly cautious view on the recovery in non-OPEC production from recent outages, but nonetheless see growth accelerating in the second half of 2012. This too could have more of a calming effect on prices as the year progresses. Arguably, with Iranian exports already 200-300 kb/d below the 2011 average, a pessimistic case might see overall OPEC supply fall by 600 kb/d from recent highs if no further offsetting increases from other producers materialise. Extrapolating this conservative supply scenario forward through end-2012, and against a backdrop of normal seasonality in demand, this paints a picture of fairly balanced OECD industry stocks, albeit at the cost of a sub-3 mb/d margin of OPEC spare capacity. We cannot discount the possibility that prices will remain high so long as geopolitical uncertainties remain. Further surprises almost inevitably lurk around the corner for both demand and supply. But for now at least, the earlier tide of remorseless market tightening looks to have turned.

Demand

Summary

  • Global oil demand is forecast at 89.9 mb/d for 2012, a rise of 0.8 mb/d (0.9%) versus 2011. The outlook remains largely unchanged from last month, as the negative influence of a higher price assumption counteracts stronger baseline demand.
  • Preliminary estimates for February imply global oil demand hit a seasonal peak of 91.1 mb/d in that month, 0.6 mb/d higher than last month's estimate for February. Notably higher indications for demand were reported in Japan, Russia, India and South Korea.
  • The underlying crude price assumption has been raised. Based on the prevailing futures strip, Brent crude now averages $115/bbl for 2012, nearly $10 more than assumed for 2012 in 4Q11.


Global Overview

Total global consumption of oil products is forecast to average 89.9 mb/d in 2012, a rise of 0.8 mb/d (0.9%) on 2011. The projected gain is the same as in last month's report, as changes in two explanatory variables have cancelled each other out. Firstly, given the recent gains seen in oil prices, the demand projections now incorporate a higher underlying price assumption, acting to constrain consumption. Secondly, more robust than expected preliminary February data equate to a higher base, or starting point, for the 2012 consumption estimate, thereby supporting demand.



Early estimates of global oil demand in February, at 91.1 mb/d, are nearly 0.6 mb/d higher than assumed in last month's OMR. Japan accounted for more than half of the global revision, as adverse weather conditions increased the pressure on a power sector already struggling with post-tsunami nuclear closures (see Japanese Power Sector Demand: One Year After Fukushima). Other large upwards amendments - 0.1 mb/d - in Russia, South Korea and India, have arisen because of the cold weather and/or robust industrial demand.

The OMR does not forecast oil prices, but instead utilises a three-month rolling average for the futures curve in its projections for demand. Re-calculated in March, this methodology results in a Brent Blend price averaging around $115/bbl in 2012, a near $10 premium on late-2011's expectation. Ceteris paribus, a higher price for oil would equate to lower demand.

Although the estimate of global oil demand growth for 2012, at 0.8 mb/d, is exactly in-line with the increase in 2011, the quarterly patterns for the two years are very different. Last year started with year-on-year (y-o-y) growth of 2.3 mb/d (or 2.6%) in 1Q11 before falling into negative territory by 4Q11, down by 30 kb/d, as rising prices and the weakening economic backdrop undermined consumers' appetite for oil. Modest demand growth is anticipated to have returned in 1Q12, with y-o-y growth of 0.3 mb/d (or 0.4%), in spite of high prices and subdued economic conditions and largely due to significantly higher Japanese demand. Growth is then forecast to accelerate, albeit very moderately, through 2012 as the global economic backdrop slowly improves.

The regional breakdown of demand is little changed, with Asia continuing to dominate, accounting for 0.7 mb/d of the global 0.8 mb/d expansion predicted in 2012. The only significant change from last month is the stronger growth now foreseen in oil-rich nations such as the Middle East (+205 kb/d, as opposed to +155 kb/d last month) and the former Soviet Union (+125 kb/d, previously +115 kb/d). More price sensitive regions, such as North America (-230 kb/d), correspondingly have had demand estimates revised lower.



It is important to note that the global demand forecast, of 89.9 mb/d in 2012 and a rise of 0.8 mb/d on 2011, is only the base case projection and is heavily dependent upon two key explanatory variables - the underlying price assumption (the futures curve) and assumptions for economic growth that result in a global expansion of 3.3%. A weaker economic backdrop and/or higher prices, with all else being held equal, would equate to a lower demand projection.

OECD

The OECD region continues to lag the global picture in general, with a predicted y-o-y decline in oil demand of 0.7% in February, to 46.6 mb/d versus an expansion of 0.8% for the world. Even this clouds a clear dichotomy that exists within the OECD, with western hemisphere OECD demand falling heavily but the OECD Pacific region posting very strong gains, up 7.4% to 9.3 mb/d. As already suggested, a lot of this additional demand is due to substitution in the Japanese power sector, with total Japanese oil demand up by 10.6% y-o-y in February to 5.6 mb/d. Resurgent Korea also played a role, with demand up by 2.6% to 2.4 mb/d, buttressed by recuperating industrial activity.



Transport fuel demand in the OECD remains weak, with gasoline demand down by 2.4% in February to 13.5 mb/d and consumption of diesel 2.0% lower at 9.2 mb/d. The Western hemisphere-Pacific separation also exists for transport fuels, with growth seen in the Pacific versus significant declines in the west, but the sheer scale of western consumption leaves a declining global trend. Other product demand, as it includes crude for direct burn, rose by 3.5% in 2012 to 13.2 mb/d, with Japan providing the greatest upside momentum, up 13.0% to 2.1 mb/d.



Looking further afield, the weak economic underpinnings and relatively high prices are forecast to restrain total OECD demand to 45.1 mb/d in 2012, a decline of 1.1% on 2011. GDP growth in the OECD is estimated at 1.1% in 2012, down from 2011's 1.6% expansion. The y-o-y demand contraction, evident throughout, is nonetheless forecast to lessen as 2012 unfolds; -1.7% in 1Q12, -1.4% in 2Q12, -0.8% in 3Q12 and -0.5% in 4Q12. The relative demand declines ease each quarter as the economy is assumed to recover in the later stages of 2012, with OECD GDP growth rising to 1.9% in 2013.

North America

Demand for oil products continues to fall sharply in North America, with the latest preliminary estimates pointing towards a 2.2% (0.5 mb/d) y-o-y contraction in February to 23.1 mb/d. Decline came in less steep than the average 3.7% contraction seen in both December and January. Gasoline demand remains on a sharply falling trend, down 2.6% in February to 9.9 mb/d, its twelfth consecutive month in negative territory. Falling gasoil demand however has triggered concerns about the medium-term health of North American demand. Having risen through most of 2010 and 2011, the three months through to February saw gasoil demand decline by 8.0% in December, 3.4% in January and 4.5% in February. Warmer winter weather and low natural gas prices accounted for much of the decline, via reduced heating oil use (down 10.3% in February to 0.9 mb/d), although other sectors such as road, industry and agricultural also showed signs of weakening, as escalating prices suppressed consumption.



Revised January data for the US shows a dramatic 0.9 mb/d y-o-y decline (-4.4%) in total US consumption to 18.4 mb/d, in line with the -4.7% rate implied in the EIA's Weekly Petroleum Status Report.

Having led the pace of the total decline in 2011, US gasoline demand is shadowing total oil demand, down 2.7% in January to 8.2 mb/d. The majority of the decline derives from reductions in miles travelled (as opposed to a more efficient vehicle fleet) as the Federal Highway Administration reported that US miles travelled fell by 2% in the 12 months through to January. Amid more direct price feed-through, near-$4/gallon gasoline is constraining demand as well as having become a major political issue ahead of this year's Presidential election.



Preliminary estimates for February point towards a moderation in the projected y-o-y decline, to -2.2%, taking US oil demand (excluding territories) to 18.5 mb/d. Despite slowing decline, consumption is still 425 kb/d less than a year earlier. Residual fuel oil demand led the downside as consumers looked to capture the relative price advantages available by switching to natural gas.

Warm winter weather has added to the recent US demand weakness, with gasoil demand (which includes heating oil) down by around 4.0% y-o-y in January to 3.8 mb/d and 5.2% in February to 3.7 mb/d.



A decline of around 0.2 mb/d (-1.1%) to 18.7 mb/d is foreseen in US demand in 2012. Demand in the key gasoline sector is expected to fall by 0.1 mb/d to 8.6 mb/d, on a combination of further efficiency gains and reduction in US miles travelled. The University of Michigan, for example, recently published a report citing that the average fuel economy of new vehicle sales in the US is 14% higher than four years earlier.

Europe

Y-o-y decline in European oil demand slowed to 3% in February, compared to 6.2% in December, on exceptionally cold temperatures. Heating oil demand posted a rare y-o-y gain in February, up 1.3%, and only the second such monthly gain in fourteen months. Transportation fuels maintained their heavy recent pace of decline however, with gasoline demand down 4.6% in February to 2.0 mb/d and road diesel down 2.2% to 4.2 mb/d.



Having fallen by 5.2% in 4Q11, to 14.1 mb/d, the relative pace at which European demand contracts is forecast to abate sharply, averaging 3.5% in 1Q12, 3.4% in 2Q12 and 2.1% in 3Q12, easing further to a contraction of 0.2% in 4Q12, supported by the assumed recuperation in the economy. European GDP growth of around 1.1% is foreseen in 2013, after a decline of 0.2% in 2012, with an assumption that economic growth resumes from 2Q12.

French demand growth resumed in February, as the preliminary data series depicted a 0.6% y-o-y gain to 2.0 mb/d - its highest level since December 2010. Heating oil led the French recovery, having fallen heavily through the three previous months, with a 7.3% y-o-y gain on unusually cold temperatures. Domestic transportation fuel demand continues to struggle, however, as cash-strapped consumers resist higher prices, with gasoline demand down 10.5% and road diesel down 3.7%. All told, French oil consumption is now seen declining by 2.0% in 2012, to 1.8 mb/d.



Given the paucity of recent German data (no data yet exists for February), the demand outlook for 2012 has been downgraded on a higher underlying price assumption. A decline rate of -0.8% to 2.4 mb/d is now assumed, compared with 0.4% decline last month. A more dramatic reduction would have been applied had it not been for the upturn posted in domestic business sentiment, as the Ifo Institute's rating rose for a fifth consecutive month in March to 109.8. The Munich-based research institute's index is based on around 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and retailing, and is normalised to 100 in 2005.



The UK saw a sharp contraction in consumption in January, with preliminary data depicting a 10% y-o-y drop to 1.4 mb/d. Not only is this the lowest level of UK demand since the mid-1960s, but it is also the weakest y-o-y trend since December 2009. Demand stalled as the economy moved close to a technical recession (i.e. two consecutive quarters of negative GDP growth) - the OECD claims this has already occurred, while the consensus of opinion elsewhere is that a UK recession has only just been avoided. Warmer January weather also contributed, as did sharply higher retail prices for both gasoline and diesel. Diesel, for example, saw demand fall by 6.0% to 410 kb/d, a significant slowdown after five consecutive months of growth. For the year as a whole, an annual oil demand contraction of around 2.5% is expected, to 1.6 mb/d. Threatened strike action by tanker drivers in 2Q12 could further affect motor fuel demand.

Italian demand saw a fairly modest seasonal February peak. Prior to 2008, Italian oil demand enjoyed a five-year average m-o-m expansion of around 10%, but in February 2012 the gain was a more-muted 5.1%. Compared to the year earlier, the story is even bleaker with Italian demand down 14.5% to 1.3 mb/d. A combination of austerity public budget cuts and record retail prices, which curbed transportation fuel demand (gasoline down 23.0% y-o-y in February and diesel -17.9%), is suppressing demand, with an average forecast decline of 5% for the year as a whole, to 1.4 mb/d.

Pacific

Demand in the OECD Pacific region looks stronger than that in the Atlantic Basin, with preliminary estimates for February demand at 9.3 mb/d amounting to a 7.4% (0.6 mb/d) y-o-y gain. February saw the third successive month of absolute growth and the fastest rate of expansion since June 2003. Extremely cold weather is the key determinant for higher demand, an impact magnified in Japan where the post-tsunami nuclear closures meant that swing power sector demand came from LNG, residual fuel oil and crude oil for direct burning (see Japanese Power Sector Demand: One Year After Fukushima).



Japanese demand continues to rise strongly, as nuclear closures stimulate additional demand for oil products. Since the tsunami hit last March, Japanese oil demand has transformed from steep decline to strong growth. Having risen by over 5% y-o-y in January to 5.2 mb/d, all the indicators are for an even faster expansion in February (10.6% growth), as extremely cold temperatures triggered additional demand for residual fuel oil, crude for direct burn and kerosene. Naphtha demand bucked the generally rising trend, with consumption falling as alternative ethylene cracking feedstocks looked better value.



Early indicators of South Korean oil demand in February point towards 2.4 mb/d of consumption, a 2.6% y-o-y gain as cold February weather stimulated, in particular, LPG consumption (+13.9%). Demand for naphtha (+7.0%) and diesel (+3.4%) also rose sharply as manufacturing activity improved in February for the first time since July 2011. HSBC's South Korean Manufacturing PMI rose to 50.7 in February, up from 49.2 in January. Nonetheless, a modest gain, of less than 1%, is foreseen in 2012 demand, as persistent price pressures and efficiency gains reduce South Korea's dependence upon imported oil.

Japanese Power Sector Demand: One Year After Fukushima

Incremental Japanese oil demand for power generation in 2011 due to Fukushima was around 145 kb/d, or around half earlier estimates, as a result of the higher than expected ratio of LNG to oil and significant power demand constraints. The outlook for 2012 depends on the reactivation of idled nuclear capacity, with incremental power sector oil demand of 250-300 kb/d versus normal nuclear generation.

In 2011, Japan generated 937 TWh of electricity, a decline of 4.7% y-o-y. The drop is a consequence of the Fukushima Daiichi nuclear meltdown, which triggered the closure of all nuclear plants and demands for more safety assurances at the nuclear complexes. Thanks to reconstruction measures and rationing of supplies to industry and households, the power sector faced mitigated demand in 2011. According to the Federation of Electric Power Companies (FEPC) of Japan, the power mix saw nuclear generation drop from a five-year average of 28% to 17%, while thermal plants powered by fossil fuels rose from a five-year average of 50% to 60%. The thermal generation fuel mix in 2011 was split: LNG (43%), coal (43%), crude oil (7%) and residual fuel oil (RFO, 7%). As a generalisation, the first two are used as inputs for base load electricity generation, while oil products are burned for peak electricity demand. As flagged in this report, although coal generation capacity remained largely unchanged, bar some 3% decrease imputable to plants damaged after March's tsunami, growth in fossil fuel demand for power generation was split LNG (56%), direct crude burning (27%) and RFO (20%).



In conjunction with the IEA's Gas, Coal and Power (GCP) Division, we have analysed two scenarios of nuclear outages going forward, acknowledging that a range of possibilities exists.  Our base case scenario is that some nuclear plants will be allowed to re-enter service as soon as governmental approval from national and local authorities is obtained. We expect some nuclear reactors to come back in August, with the most likely ones to receive authorisation Kansai-EPCO Ohi (reactors 3 and 4) and Shikoku-EPCO Ikata (reactor 3). These plants passed the computer stress test in March, and the Kansai-EPCO reactors were authorised by the National Safety Commission soon afterwards. In addition, these reactors are located in the southern region of Japan, where electricity demand is highest, due to a dense network of industry and households. Meanwhile, the national government is juggling its priorities: economic growth, electricity generation and popular demands for greater safety. After the tsunami, economic output fell by 0.9% in 2011 while power generation fell by an even larger 4.7%. For 2012, as reconstruction of the affected areas remains pending, the no-nuclear scenario would imply further electricity rationing and end-user prices exceeding 2011's records, calling into question the assumed 1.7% growth in national GDP and risking a price stand off between users and power utilities. Nevertheless, a no-nuclear scenario cannot be ruled out, as public opinion channelled through local governments currently remains sceptical concerning the nuclear industry, despite the apparent economic imperatives supporting nuclear capacity re-starts.

Taking into consideration capacity constraints and last year's final data, oil now looks to have generated 35% of incremental fossil-generated electricity rather than our previously assumed 60%. For 2012, we expect gas constraints to put an effective cap on LNG usage forcing the oil and LNG split to move slightly to 40/60 as more oil is pulled into the system. The 2012 split remains sensitive to change and it will depend on how the Japanese government manage electricity demand and how the nuclear generation comeback is spread in time.

On one hand, the ability of LNG to cover any shortfalls is limited by capacity constraints, with capacity usage prior to the disaster close to 80%. Japan also only has an annual import (regasification) capacity of 250 bcm, while the North East area, severely affected by the tsunami and the Fukushima Daiichi disaster, can only take minimal amounts of LNG at Sendai City (0.4 bcm) in the West coast and at Niigita (12.2 bcm) in the East coast. On the other hand, the region's oil power plants are operated by TOHOKU-EPCO (1 300 MW) and TEPCO (12 000 MW), which prior to the disaster were used marginally for peak demand. Therefore, North East Japan heavily relies on LNG and oil products to make up the loss of nuclear plants in Fukushima.



Under normal conditions, nuclear power generation averages 22 TWh per month or 264 TWh per year, and oil and LNG incremental demand is zero. 2011 saw shut downs in most nuclear plants, effectively bringing nuclear generation to an average of 13 TWh per month or 156 TWh for the year. Our previous base-case projection for incremental oil demand in 2011 and 2012 was 280 kb/d and 320 kb/d respectively versus normal conditions. After incorporating historical data and looking into the patterns of actual oil and LNG use, we revised down our figure of incremental demand for oil in 2011 by 135 kb/d to 145 kb/d and LNG by 1 bcm to 11 bcm y-o-y. For 2012, we revised down our expectations of incremental oil demand to 250 kb/d and LNG to 19 bcm y-o-y versus a normal nuclear power generation. This forecast considers the uncertainty surrounding the impending return of the nuclear capacity, as public opinion is far from convinced nuclear should return, hence the alternative no-nuclear scenario.  For 2012, we factor in that oil and LNG would substitute 200 TWh of generation if some nuclear comes back and 235 TWh if no nuclear comes back. The incremental demand from the no-nuclear forecast has been trimmed to 300 kb/d of oil products and 23 bcm year-on-year of LNG in 2012. Total annual electricity generation for 2012 is assumed to drop under this no-nuclear scenario, by 3.4% to 905 TWh, as stringent energy conservation measures are required.

An outcome for 2012 of decreasing power generation and increasing economic growth seems unsustainable. The Japanese government will certainly push forward in the next months its efforts to bring back two or three nuclear reactors ahead of the peak summer demand season, although stringent safety measures will be a prerequisite.



Non-OECD

Preliminary estimates of non-OECD oil consumption came in at 44.5 mb/d for February, a gain of 2.4% (or 1.1 mb/d) on the corresponding month of 2011. Rapidly expanding car ownership levels lead the way, as gasoline consumption is estimated to have grown by 5.7% to 8.7 mb/d and gasoil by 3.0% to 13.8 mb/d. The others category is also assumed to have posted strong February growth, of 3.6% to 5.8 mb/d, as extensive road building programmes require additional bitumen while crude oil for direct burn rises in many countries.



A combination of slower economic growth - with the non-OECD forecast to post GDP growth of 5.7% in 2012, down from 6.2% in 2011 - and further price gains has nonetheless slowed the pace at which non-OECD oil demand is growing. Not only is February's estimated 2.4% y-o-y growth rate, the fifth slowest growth rate in nearly three years but it is also down by more than a third of the five-year average y-o-y non-OECD global demand gain of 3.8%.





Non-OECD demand growth is forecast to slowly accelerate through to the end of the year, as the economic outlook brightens moving into 2013 (+6.1% GDP). In 1Q12 oil demand growth is assumed to be 2.5%, accelerating up to 3.1% by 4Q12. For the year as a whole, non-OECD oil product demand is forecast at 44.7 mb/d, a gain of 2.9% - the weakest expansion since 2009. The strongest expansions are generally reserved for the road transportation markets, as gasoil demand rises by 3.6% to 14.0 mb/d and  gasoline gained 3.2% to 8.6 mb/d; indeed even the others category (up 4.0% to 6.0 mb/d) includes a heavy transportation relationship as it includes bitumen.

China

Early indicators of Chinese apparent demand, i.e. net product imports plus refinery output, in February point towards consumption at around 10.0 mb/d. Despite the passing of this double-digit landmark, growth fell to around 1% on the corresponding month a year earlier. Leading the Chinese slowdown were the naphtha (-3%) and diesel (+1%) categories, as previously thriving Chinese industrial activity eased.



Traditionally strong 2Q demand (with diesel demand supported by the spring ploughing season) should be restrained in 2Q12, as retail gasoline and diesel prices were hiked by 6-7% on 20 March. This takes the average diesel price to $1.22 per litre and 90-octane gasoline to $1.17 per litre higher than recent US levels. Higher retail prices, on top of sluggish manufacturing indicators (HSBC's flash PMI fell to a five-month low of 48.1 in March - whereby any reading below 50 implies contraction), tend to back-up the OMR's cautious outlook for Chinese 2012 oil demand. Demand growth of 3.8% is foreseen in 2012, to a total of 9.9 mb/d, compared with some third party estimates as strong as 5.5%. Despite the projected slowdown, the domestic transportation fuel market - i.e. gasoline and diesel - is forecast to maintain growth at around 4%, as car ownership levels continue to rise briskly. New car sales rose by 26.5% y-o-y in February, according to China Association of Automobile Manufacturers, to 1.21 million cars. That said, patterns of vehicle use remain less intensive than in western markets, while vehicles tend to be smaller and more fuel efficient than their western counterparts. 



Other Non-OECD

The preliminary data series for Saudi Arabia points towards a 3% y-o-y gain in January oil demand to 2.6 mb/d. Persistent high oil prices support consumption across most sectors of the economy, in particular domestically subsidised transportation fuel demand with gasoline up 7.5% and diesel 5.9% higher. Saudi consumption is forecast to rise by 3.8% in 2012 to 2.9 mb/d, a notable deceleration on the prior year's 6.1% expansion, as additional gas-fired power generation capacity comes on-stream. Supporting Saudi demand in 2012 however will be the big predicted infrastructure spend, as outlined in Saudi Arabia's ninth development plan, which will be particularly supportive of diesel with a near 4% gain foreseen in 2012. Through to 2014, 117 new hospitals, 750 primary health care centres, 400 emergency centres, 25 new colleges of technology, 28 higher technical institutes and 50 industrial training institutes will be built. In addition a doubling of Saudi Arabia's desalination plants (from 1.05 billion to 2.07 billion cubic metres) is intended.



Indian demand rose by 4.9% y-o-y in February, according to preliminary estimates, to 3.8 mb/d although an additional note of caution needs to be applied to these numbers following the recent spate of downwards revisions. December growth was revised to 2.2% from an initial estimate of 3.5%, with January reduced to +2.1% from a preliminary figure of +2.7%. Having risen by 4.1% in 2011 to 3.5 mb/d, demand growth is forecast to decelerate to around 3% in 2012, taking consumption to 3.6 mb/d. Talk of lowering diesel subsidies in the fiscal year 2012/2013 adds a downside risk to our diesel demand outlook.

Latest estimates for Russia point towards an accelerating demand trend, as growth reached 7.9% y-o-y in February to 3.5 mb/d, after gains of 3.0% in December and 3.2% in January. February's growth rate is magnified, however, by the previous February low when demand declined on a y-o-y basis for the first time in sixteen months on account of depressed driving activity. Tracking forward, we envisage a moderating expansion, to around 3% for the year as a whole. The big unknown concerning Russian demand is the level of export duties on gasoline and naphtha. In May 2011, the administration introduced export duties at 90% of the crude oil duty, but since then media reports have suggested an imminent reduction in this duty. Lower export duties would potentially restrict volumes available to meet domestic Russian demand, forcing them to import potentially higher priced products.

Supply

Summary

  • Global oil supply fell by 0.4 mb/d to 90.3 mb/d in March, with higher OPEC NGL and crude production only partially offsetting a 0.5 mb/d decline from non-OPEC countries. Compared to a year ago, global oil production stood 2.8 mb/d higher, all of which stemmed from increasing output of OPEC crude and NGLs.
  • Non-OPEC supply fell by 0.5 mb/d to 52.7 mb/d in March from the prior month. Supplies declined in all regions but most notably in the UK North Sea and at synthetic crude plants in Canada. Non-OPEC supplies are expected to grow by 0.7 mb/d in 2012 to 53.4 mb/d, 50 kb/d lower than last month. The revision would have been greater had it not been offset by a 110 kb/d upward revision to US crude and NGL supplies.  
  • March OPEC supply held near three and a half-year highs, rising by 135 kb/d, to 31.43 mb/d. Higher output from Iraq, Libya and the UAE more than offset reduced Iranian and Angolan supplies. Saudi production was unchanged at a lofty 10 mb/d. The 'call on OPEC crude and stock change' for 2012 is unchanged at 30.1 mb/d, but has been raised for 2Q12 and 3Q12, by 0.1 mb/d and 0.2 mb/d respectively, to an average 30.1 mb/d due to further downward revisions in non-OPEC supplies.
  • Recently enacted EU and US sanctions on Iran's oil and banking sectors are already affecting shipping and trade flows, while at the same time undermining Iran's crude production outlook. March production is estimated down by a further 50 kb/d to 3.3 mb/d, or about 250 kb/d below end-2011 levels. However, the long roster of countries planning to implement import cuts in coming months suggests Iranian output could fall to 2.6-2.8 mb/d by the 1 July deadline when sanctions go into full force unless markets for displaced crude can be found.


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

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

OPEC Crude Oil Supply

OPEC supply hovered at three and a half-year highs again in March, rising by 135 kb/d, to 31.43 mb/d. Increased output by Iraq, Libya, Kuwait and the UAE more than offset declines in Iran, Angola and Nigeria. OPEC is now producing 1.4 mb/d above its collective target of 30 mb/d but the higher output largely offsets exceptionally reduced non-OPEC supplies. Non-OPEC supply outages are estimated at 1.2 mb/d for 2Q12 due to a combination of political turmoil in Sudan, Syria and Yemen and technical issues in the North Sea, Canada and Australia disrupting output (see Non-OPEC Supply).

The 'call on OPEC crude and stock change' for 2012 is unchanged at 30.1 mb/d but has been raised for 2Q12 and 3Q12, by 0.1 mb/d and 0.2 mb/d respectively, also to an average 30.1 mb/d for the six-month period, due to further downward revisions in non-OPEC supplies.



OPEC's 'effective' spare capacity declined to an estimated 2.54 mb/d from 2.75 mb/d in February. The lower spare capacity estimate partly reflects the removal of Iranian spare production capacity from the calculation on the assumption that sanctions will now progressively cap the country's ability to raise output amid diminishing export markets. A baseline downward adjustment to Algerian supplies of an average 70 kb/d for 2010-2012 also contributed to the revision.

The group's sustainable capacity for 2Q12 is now estimated at 34.91 mb/d. For 3Q12, capacity is forecast to increase by 360 kb/d, to 35.27 mb/d, largely due to increased supplies from Iraq as well as smaller incremental volumes from Angola, Nigeria, Libya, the UAE and Kuwait.

Saudi production was unchanged at a lofty 10 mb/d in March. Output is expected to trend higher over the next few months judging by customer nominations and tanker loading forecasts. In addition, an armada of tankers has recently been moving to the US Gulf Coast to supply Saudi Aramco's joint venture Motiva refinery, which has doubled its capacity to 600 k/d.

Saudi Oil Minister Ali al-Naimi reported in March that stocks inside the Kingdom are now at full capacity and Saudi Aramco's storage facilities in Rotterdam, Okinawa and Sidi Kerir are at their peak level of 10 mb. With storage now full, the Kingdom is well placed to meet incremental global refiner demand from May onwards after April's seasonal low in throughputs. Saudi Arabia also reduced official selling prices for benchmark Arab Light for May liftings for Europe and Asia while raising them slightly to the US. European customers saw the sharpest reductions, down by $2.60/bbl while prices for Asian buyers were off by $0.35/bbl. The price cuts partly reflected currently well-supplied markets amid reduced OECD demand from refiners during the seasonally weaker March to May period.

The rise in crude and associated gas supply, coupled with increased gas production from the non-associated Karan gas field, is expected to reduce domestic demand for direct crude burn at power and water plants this year. The April-September peak demand period for direct burn averaged 660 k/d in 2011 but is forecast to decline by about 100 kb/d over the same period this year. Saudi Arabia's oil minister said around 500 million cubic feet a day more gas, or around 90 kb/d of oil equivalent, would be made available for three or four months this summer.

Iraqi crude oil production in March rose by 220 kb/d to 2.835 mb/d, the highest level since May 2001. Crude oil exports rose by 240 kb/d to 2.32 mb/d. The jump in exports follows the start-up, albeit intermittently, of the new Single Point Mooring (SPM) facility in the Middle East Gulf. Officials are reporting volumes should trend higher in April, but traders report a shortage of operational storage tanks may cap exports near term.

Northern exports of Kirkuk crude from Ceyhan on the Mediterranean in March rose to 400 kb/d, up by 25 kb/d. However, around 50 kb/d of crude exports from the Kurdish region, which feed into the Kirkuk stream, were halted in early April due to ongoing payment disputes between Baghdad and the Kurdish Regional Government (KRG). Kurdish authorities suspended exports because the federal government in Baghdad had not made a payment to operating companies in the region for crude exports in ten months. Oil ministry officials countered that the Kurdish authorities owe for revenue collected in past years that has not been shared with Baghdad and that it had failed to meet its obligation of supplying 175 kb/d as per the 2012 budget. Estimates for exports from the region are closer to 50 kb/d on average this year. Baghdad also said production from the region was being illegally smuggled to neighbouring countries, especially Iran. Tensions between Baghdad and the KRG have escalated following the withdrawal of US troops at end-2011.

Moreover, April exports may be further reduced by the bombing of one of the twin northern pipelines running to Ceyhan on 5 April, which destroyed a section of the line in Turkish territory. The bombing was unrelated to the ongoing dispute between Baghdad and Kurdish authorities, with the Kurdish separatist group PKK claiming responsibility for the pipeline attack.

UAE production in March increased by 60 kb/d to 2.65 mb/d, the highest level since June 2008. Output from Kuwait rose by 20 kb/d to 2.72 mb/d.



Libyan production rose on average by 35 kb/d to 1.32 mb/d in March. Production levels have essentially reached a plateau for now, with much needed maintenance and repair work planned over the next several months. A key constraint holding capacity below pre-war levels is the allocation of a budget for the National Oil Company (NOC) and its regional arm in Benghazi, the Arabian Gulf Oil Company (AGOCO). The transitional government has so far not set a timeline for approval of a national budget, hindering the award of contracts for supplies and services.

Angolan production was down by 80 kb/d to 1.68 mb/d, the lowest level in eight months, despite the start-up of the Pazflor field. The reduced output partly reflects lower production from the troubled Greater Plutonio offshore complex, according to reports. However, output looks on track to recover in April and May judging by export schedules, with production from the Total-operated 220 kb/d Pazflor deep-water complex adding around 190 kb/d.

Nigerian supplies in March were down by 50 kb/d, to 2.05 mb/d. Volumes look set to increase in April and May however, on the steady ramp-up in output from the 180 kb/d Usan field. First cargoes of medium sweet Usan crude were lifted in April. In March, state-owned Nigerian National Petroleum Corporation (NNPC) also launched its tender process for annual crude oil term contracts. In what has been viewed as a positive step in battling charges of corruption, this year Nigeria has sharply tightened the contract terms to quell criticism of the tendering process. The number of small, unknown indigenous companies awarded contracts in the past has led to allegations of cronyism. For 2012, companies are required to have at least 10 years experience in trading and substantial capital resources on their books. Nigeria sells around 1.5 mb/d via term deals with traders, with the new contracts taking effect in June.

Crude supply from Algeria in March was unchanged from February's downwardly revised 1.14 mb/d. A review of official data is behind a baseline revision of crude production, and the adjustment averaged 70 kb/d for 2010-2011. The country's oil sector has only partially recovered from the massive corruption scandal that rocked the state oil company, Sonatrach, in January 2010, which has led to, among other problems, protracted delays in awarding contracts for enhanced oil recovery and expansion projects.

Iranian Crude Supplies Tumble Under The Weight of Sanctions

Recently enacted EU and US sanctions on Iran's oil and banking sectors are affecting shipping and trade flows as well as undermining Iran's crude production outlook. March production was down a further 50 kb/d to 3.3 mb/d, or about 250 kb/d below pre-sanction, end-2011 levels, but the long list of countries planning to implement import cuts in coming months suggests Iranian output could plummet to 2.6-2.8 mb/d by mid-summer, unless alternative buyers can be found. The 27 EU countries agreed to an embargo on Iranian crude oil imports on 23 January and the phasing out of existing contracts by 1 July.

Iran's traditional crude buyers are struggling to arrange payment mechanisms, secure ships to lift the oil and insurance companies to underwrite the trade. The EU tightened the stranglehold on 17 March by banning key Iranian banks from using one of the most important financial institutions for transferring and receiving funds, the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The latest ban effectively severs all trade between EU and Iranian entities. The US is also crafting an amendment that would halt SWIFT transactions with Iran.

The US sanctions essentially mean any company/countries trading with Iran will be cut-off from the US financial system unless they can show they have taken steps to substantially reduce their reliance on Iranian oil. In mid-March the US granted waivers to Japan and 10 EU countries (Belgium, the UK, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland and Spain) which the State Department deemed to have cut back on purchases. As a result, banks in the 11 countries have been granted a six-month waiver from being cut off from the US financial system. Absent from the list were Iran's two largest buyers, China and India, as well as other major buyers Turkey, South Korea and South Africa. Since the list was published in mid-March a number of countries have announced plans to reduce purchases or halt liftings altogether, including Turkey and South Africa. The US will next review compliance with sanctions at the end of June.

  • Japan was singled out for being the most aggressive in reducing imports from Iran. Japanese refiners are aiming to reduce Iranian crude imports further in April as they opt not to renew annual contracts.
  • Turkey announced 30 March that it would comply with the US request to curb its 30% dependence on Iranian oil imports. The country has already increased purchases of Libyan crude, which it said would replace Iranian barrels. Turkish refiner Tupras confirmed in early April that the company plans to reduce imports by 20%.
  • South Africa's Engen, which is majority owned by Malaysia's Petronas, reportedly stopped imports in March. Petrochemical producer Sasol has also said it halted Iranian imports of around 10 kb/d, which were easily replaced by other suppliers given the small volumes.
  • South Korea, which bought an average 230 kb/d in 2011, has been actively working with US officials to reach an agreement, with official data suggesting January/February Iranian imports some 15% below equivalent 2011 levels.
  • Greece's largest refiner, Hellenic Petroleum, announced in early April that it was no longer buying Iranian crude because of payment problems. Instead the refiner plans to buy Iraqi and Saudi crudes.
  • Sri Lanka, which was singled out by the US as one of the 12 countries that could face sanctions if it failed to reduce Iranian imports, has signed a term contract with Oman to replace some of the Iranian supplies.
  • Securing insurance for tankers willing to lift Iranian crude has become ever more challenging. In a move that took the market by surprise, the China P&I Club, which provides coverage to more than 1 000 vessels, announced it will cease underwriting tankers operating from Iran. Protection and Indemnity (P&I) clubs are owned by their ship-owner customers and set-up to provide insurance coverage against costly personal injury or environmental clean-up claims. Around a dozen of the Group of International P&I Clubs provide liability cover for 95% of the world's tanker fleet. Japanese P&I clubs have already said they would adhere to new regulations set out by the US and EU. That said, the EU, Japan and South Korea are still asking for exemptions.

Non-OPEC Overview

Non-OPEC oil production is estimated to have fallen by 0.5 mb/d to 52.7 mb/d in March, for the same reasons that it fell in February: weather-related and mechanical problems at fields in the North Sea, Canada, and Australia; continued unrest and additional sanctions in Syria; pipeline sabotage and labour strikes in Colombia and Yemen; and the transit dispute between Sudan and South Sudan. Field problems in Brazil added to the monthly decline in non-OPEC supplies, and tensions worsened markedly in the Sudans. Revisions to our data series for the US, UK, Canada and Egypt in 2011 from newly available data largely offset one another and lead to a 10 kb/d downward revision for 2011 non-OPEC supplies.

Despite prevailing widespread pessimism about non-OPEC supply growth in 2012, preliminary data for 1Q12 showed annual growth of around 510 kb/d. With historical data now available for most large producers through February, it is apparent that production growth in the Americas, especially from light tight oil basins in the US, is indeed supporting an otherwise bleak non-OPEC supply picture. Supplies should grow by around 690 kb/d to 53.4 mb/d in 2012, 50 kb/d lower than last month's estimate.

Unplanned outages are expected to mount in the second quarter of this year, and North Sea outages have already exerted influence on global benchmark oil prices. The chart below shows that unplanned outages are expected to reach 1.3 mb/d in the second quarter, much higher than any quarterly reading in 2011 and 200 kb/d higher than 1Q12. The outages are assumed to abate slightly in the third and fourth quarter of 2012, but they do not disappear altogether and constrain non-OPEC supply growth to below 900 kb/d in 2H12. Outages in Syria, Yemen, Sudan, and a hurricane allowance in the US comprise the majority of the 1.1 mb/d in unplanned outages that are forecast for 3Q12.



OECD

North America

US - February preliminary, Alaska actual, other states estimated:  Oil production in the US increased by around 11% in 1Q12 on an annual basis to 6.4 mb/d, on par with levels from the mid-1990s. In the same quarter, light tight oil plays in Texas increased the state's production by over 28% compared to 1Q11 to 1.6 mb/d. This month, the US Energy Information Administration (EIA) published historical revisions to its crude oil production series, resulting in an upwards revision in onshore production and a downward revision to the Gulf of Mexico. On the whole, US oil production was revised down by 27 kb/d for 2011. The 2012 forecast was revised down slightly due to a fire at the Prudhoe Bay field in March, which reduced production by around 20 kb/d to 290 kb/d from February levels. However, rapidly increasing production of light tight oil in North Dakota, New Mexico, Oklahoma, and Texas has caused a +110 kb/d revision to our outlook for US oil supply. An earlier-than-expected field start up at Anadarko's Caesar/Tonga in the Gulf of Mexico mitigates other adjustments to field development timelines. Furthermore, NGL production is showing record performance levels of around 2.4 mb/d in recent months as petrochemical producers expand their ethane cracking capacity and utilization rates to take advantage of the natural gas-oil price ratio. Based on current price levels, making ethylene from naptha rather than from ethane, is more than twice as costly. NGL takeaway capacity is near or at peak utilisation rates until more pipelines are brought online in 2013.



Canada—January actual: Canadian oil output fell from its record high 3.8 mb/d in December 2011 to 3.7 mb/d in January, and unplanned outages will reduce output by almost 400 kb/d in upcoming months. Production is stabilising from Alberta Light and Medium output as well as from Saskatchewan, but this is not nearly enough to offset falling syncrude output. In mid-March, Suncor announced unplanned maintenance for fractionator performance issues which would reduce output by 220 kb/d to 140 kb/d for 3-5 weeks. At the Horizon facility, operator Canadian Natural Resources announced in mid-March that it would restart its facilities after a month-long unplanned shut-in at its fractionator. A baseline revision to NGL and crude output, now matching Statistics Canada's estimates, has also been carried through the forecast. From 2003-2007 Shell's Scotford output is included in the Syncrude category even though Statistics Canada treated this output as 'Alberta Bitumen' at that time. The historical revisions result in a roughly 20 kb/d downward revision to total oil output from 1994 to present. This has little effect on the forecast, which has been revised downwards slightly by 10 kb/d to 3.7 mb/d, but is nonetheless 200 kb/d higher than 2011.

North Sea

Adverse weather and maintenance outages continue to plague North Sea production in 1Q12. Production is expected to fall by 300 kb/d in 2Q12 on an annual basis to average 2.7 mb/d as seasonal maintenance begins and in light of other unplanned outages that are explained in further detail below. Since last month, North Sea production in 2012 has been revised down by around 80 kb/d to 2.8 mb/d, due to the natural gas leak at the Elgin/Franklin field, new project slippage, and field underperformance.

UK—February preliminary, January actual: The UK government revised 2011 crude production data slightly, with upwards revisions to 1Q11 offsetting downwards revisions to 4Q11. 1Q12 offshore crude production is revised downwards by 30 kb/d to average 1.0 mb/d, which is around 40 kb/d lower than the prior quarter and 17% lower y-o-y. The inclusion of December field level data has indicated even more fields are experiencing performance issues of one kind or another, and we have in several cases carried through lower expectations for 2012 to take this into account. The Elgin/Franklin outage discussed in further detail below, comprises around 40% of the reduction in 2012's output since our last projection. In addition a project slippage at the Huntington field and lower expectations from the Erskine, Tweedsmuir, Schiehallion, Lochranza, and Callanish fields, reduce production further. In sum, UK oil output should average around 970 kb/d in 2012, around 13% below 2011.

Norway—February preliminary, January actual:  Crude oil production averaged 2.1 mb/d in 1Q12, posting a 20 kb/d gain from 4Q11 but a fall of 80 kb/d compared to the prior year. In late March, BP shut in production at its Valhall and Hod fields (a total capacity of around 35 kb/d) due to unplanned maintenance at a compressor unit. No date for a restart was announced, although trading sources expected the field to be out for at least half of April. We have assumed that the field returns to around 20 kb/d in May. Seven cargoes of Ekofisk blend crude have been delayed due to the field's shutdown. A new platform at the field is expected in June, which should raise output further to 40 kb/d, but this compressor problem could delay the installation. Power supply unreliability also curbed liquids output to 10 kb/d in April at the 30 kb/d Ormen Lange gas field. On the positive side, BG brought on the Gaupe field in April, which we expect to ramp to around 10 kb/d by the end of the year from two production wells.



Elgin/Franklin Gas Leak: The Tip of the Decommissioning Iceberg

In late March, Total shut in the Elgin/Franklin gas and gas condensate field due to a gas leak. Shell also shut in its nearby Shearwater field, which in sum has reduced UK Forties output in 2Q12 by around 60 kb/d to 420 kb/d. Several cargoes from the Forties programme were delayed, further reducing supplies and liquidity from the beleaguered Forties blend, and the loading programme delays led to an increase in Brent futures prices. The outage is likely to constrain Brent, Forties, Ekofisk, and Oseberg (BFOE) supplies, the four major streams that comprise the Brent benchmark, to below 1 million b/d in the second and third quarter of 2012. The incident highlights the impact that even small outages can have on Brent. In the medium term, the outage is likely to impact Total's Elgin/Franklin complex development plans, and outages are likely to continue in upcoming years when operators decommission infrastructure at mature fields.

Outage impacts Brent benchmark prices. Most importantly, the outage impacted Brent futures prices because of the quality differences in the composition of the Brent benchmark. Since 1990, the Brent benchmark definition has been progressively widened through the addition of new grades of various qualities. The start up of the under-performing Buzzard field in 2007 and its incorporation within the Forties blend increased blend viscosity and sulphur content, making it the least valuable of the BFOE benchmark. Since any of the four varieties can be delivered in fulfilment of a BFOE contract, Forties can frequently set the price for BFOE. Thus, the sensitivity of BFOE pricing becomes even more acute when unplanned maintenance occurs at fields in the Forties stream.

Total provides hazy outlook for field's return. The Elgin/Franklin complex, which produced more than 100 kb/d in the early 2000s, is one of the UK's highest temperature and highest pressure fields, with a well- documented history of operational difficulties. Total had been managing pressure fluctuations at the G4 well since it was plugged in January 2011, and the pressure had stayed within a safe operational range. Workers indicated rising pressure on 25 February, and heavy mud was pumped in to kill the well when the blowout occurred. A gas and condensate leak was identified at the platform level. Total indicated during a recent conference call that the platform was shut down under normal procedures, four days before planned maintenance, meaning that damage to other infrastructure or the reservoir is likely to remain limited. To stop the gas leak, it has begun the process of acquiring infrastructure to drill two relief wells, which would be used in case a quicker top-kill procedure is not effective. The relief wells could take three to six months. The outage is likely to also impact on the West Franklin field expansion, which had been slated to add around 20 kb/d through three new wells and should increase condensate production in late 2013.

The tip of the iceberg? The problem that Total encountered as it decommissioned an old well at the field is likely to portend difficulties at other mature fields for the medium term. Over the next decade, the UK Continental Shelf (UKCS) can expect to see a number of fields and installations cease production and commence decommissioning. Long term, over the next 30 years, almost 500 platforms, 8,000 wells, 4 million tons of steel and several hundred subsea wells, manifolds and pipelines will need to be decommissioned in the North Sea area, according to a recent report by Douglas-Westwood and Deloitte's Petroleum Services Group. The report estimated that the industry faces more than $100 billion in decommissioning costs in the timeframe. In light of producer concerns that the UK's recent tax changes had not adequately addressed the financial burden that producers face, the UK government has broadened the number of fields eligible for tax relief and has promised a contract system in order to create more certainty on cost levels.

As Total loses around $1.5 million per day as the Elgin/Franklin complex remains offline, other companies are sure to look towards Total's experience as an indicator of problems that might occur when routine maintenance becomes problematic for an entire field complex. As decommissioning accelerates in the medium term, analysts should not discount the price impacts that can occur when things go awry.

Other OECD

Australia—January actual: Oil production in Australia fell to 410 kb/d in January, its lowest level since January 2006, and slightly lower than year-ago and prior-month levels.  Cyclones reduced Australia's output by around 40 kb/d in 1Q12 after at least three storms lowered output from the Vincent, Stybarrow, Cossack, Hermes and Wanaea fields. Woodside has restarted most of the fields that were shut in except for the 30 kb/d Vincent field. The slow restart to production following the cyclones and field-level analysis for 4Q11 based on recently released data have reduced our estimate by 60 kb/d in 2012. Adjustments are centred in the Carnarvon and Gippsland basins. These revisions temper Australia's contribution to overall non-OPEC supply to 500 kb/d, or a growth of only 70 kb/d versus 2011.

Non-OECD

Former Soviet Union

Russia—March actual: Data for March show liquids production unchanged from January and February at levels of 10.6 mb/d, a rise of 1.0% compared to 1Q11 levels. A 10 kb/d monthly decline in condensate output was offset by upticks at Verkhnechonskoye in Eastern Siberia and an increase at Gazrpromneft. We have tempered our outlook by one percentage point to 1.1% growth as a result of yet another delay to Gazprom's offshore, Arctic Prirazlomnoye field. The oft-delayed field is now expected to come online in 2013, although we remain sceptical of Gazprom's timelines. The inability of TNK-BP and Lukoil to maintain brownfield production remains the downside risk to the outlook for continued 1+% growth in 2012. The data shows the companies have been successful in 1Q12, with TNK-BP stemming the annual decline rate at Samotlor to -7% (on par with 2011 levels) and with Lukoil's Western Siberian output declining by -0.6% compared to -4% in 2011.

Middle East

Production from Oman fell by 20 kb/d in January to 880 kb/d, but is expected to grow in coming months with additional output from several EOR projects. Overall output is tweaked slightly higher in 2012 due to an earlier-than-expected ramp up of EOR projects, but our forecast still assumes that Oman will fall short of the government's 1 mb/d target for the foreseeable future as water shortages hinder the amount of steam that can be used for steam-flooding. Oman is forecast to increase crude and condensate production by 20 kb/d to 910 kb/d in 2012.

Yemen's output fell victim to further sabotage and labour unrest in 1Q12 and April as labour strikes in Block 14 reduced export capacity. First, in February Total was forced to reduce production by 70 kb/d for four days at its Block 10 assets during a Petro Masila labour strike. The government created this new company in November to take over the role of Nexen, whose license was not renewed. Next, an Al-Qaida affiliate took credit for the bombing of the 130-mile and 135-kb/d capacity Shabwa-Bir Ali pipeline compromising around 5 kb/d of KNOC's exports. In a worsening sign of the chaos in Yemen, Al-Qaida has started to retaliate for drone attacks on its members by attacking oil and LNG pipelines and terminals in the country. Canada's Calvalley had been trucking around 10 kb/d of its crude from Block 9's Hiswah and Ras Nowmah fields to Block 51, where it is loaded into the Masila-Ash-Shahir pipeline. The company's output also fell victim to a blockade at its central processing facility during 1Q12. Finally, the continued rebel targeting of the 270-mile Marib oil pipeline has shut in production in Block 18, and Oxy is threatening a pullout if the government cannot guarantee security. Exports have increased from 110 kb/d in January to 170 kb/d in February but have proceeded only from the Ash Shahir terminal. The output forecast for 2012 is lowered by 10 kb/d to 170 kb/d to take into account these additional disruptions.

Africa

Sudan and South Sudan called off peace talks after military tensions escalated in the Sudanese Heglig oil producing area. GNPOC produced around 120 kb/d in 2011 from Blocks 1 and 2 on both sides of the border. We have only slightly lowered our outlook since last month, and still expect that oil production in South Sudan will remain below 100 kb/d in 2H12, averaging 250 kb/d lower than 2H11. There is downside risk to this outlook if output from Petrodar's Block 3/7 and White Nile's Block 5A cannot be restarted and exported via truck on existing and newly constructed roads. Also, if the Heglig field sustained damage and cannot be restarted, this would dent Sudan's output too.

Based on new data for Egypt for Fiscal Year 2010/2011, we have revised upwards our baseline estimates for supply in 2011 by around 20 kb/d to 710 kb/d. The higher baseline results in a revision of around +30 kb/d for 2012. Despite announcements that several small fields have come online, we do not expect any change in production levels in 2012 compared to 2011. Production should remain steady in 2012 at 710 kb/d.

Latin America

Brazil - February actual: Brazilian crude and condensate production fell slightly by 30 kb/d to 2.2 mb/d in February. The FPSO that was producing 20 kb/d from the BM-S-9 concession at the Carioca Nordeste deposit was shut in at the end of January for around 60 days. Chevron also recently identified a leak next to its Frade field at the neighbouring Petrobras-operated, 260-kb/d Roncador field. No shut ins were announced, but as a conservative measure, we have reduced output by 20 kb/d to 230 kb/d in 2Q12. If the entire field must be shut in, the impact could be much larger. A more likely scenario is that only some of the 29 wells or one of the three FPSOs would be shut in at the massive field. The 25-kb/d Tiro-Sidon field was declared commercial under the name Baúna this month and should increase output to 30 kb/d this year. Brazilian crude and condensate production in 2012 is increased by 20 kb/d to 2.3 mb/d on field level analysis (see box below), increasing output growth to 160 kb/d.

Brazil Field and Basin Level Reporting to Improve Field-level Database and Forecast

Brazil is a primary contributor to non-OPEC supply growth in the medium term, but in recent months field level problems have dented output growth necessitating field level analysis. In the past, the IEA reported three sub-levels of production by state in the Monthly Oil Data Service. Beginning this month and with data starting in January 2000, the first year that data is available from Brazil's ANP, we are now reporting data for major basins and for some of Brazil's largest fields including Roncador, Marlim Sul, Lula, and Marlim. The switch will improve forecast granularity and will add more accurate detail for users of the field level database. While not all of the ANP's field level data will be published, since much of it is available free on the ANP's website, the IEA will collect well-level production data as the basis for the forecast and history. In preparation for the Medium-Term Oil Market Outlook, the data collection will help refine our mid-term projections.

OECD Stocks

Summary

  • OECD industry total oil inventories fell by 12.4 mb in February, to 2 630 mb, compared with a five-year average decline of 38.8 mb. With this weaker-than-average draw, the deficit of inventories versus the five-year average narrowed to 13.9 mb, from 40.4 mb in January. Days of forward demand cover rose by 1.2 days to 59.6 days, 2.5 days above the five-year average.
  • Preliminary data indicate a 22.6 mb increase in March OECD industry inventories, in contrast with a five-year average 10.0 mb draw. Crude oil and product stocks rose by 16.7 mb and 4.9 mb, respectively. 'Other products', fuel oil and middle distillate holdings rose by 6.1 mb, 3.8 mb and 1.6 mb, respectively while gasoline stocks fell by 6.6 mb.


OECD Inventories at End-February and Revisions to Preliminary Data

OECD industry total oil inventories fell by 12.4 mb to 2 630 mb in February, compared with a five-year average 38.8 mb draw. Inventory levels have stood below the five-year average for nine successive months. However, with the stock draw shallower than the historical average, the deficit of inventories versus the five-year average narrowed to 13.9 mb from 40.4 mb in January. Moreover, in terms of forward demand cover, OECD commercial oil holdings remained 2.5 days above the five-year average, at 59.6 days, a 1.2 day increase from the previous month and a 0.4 day rise on a year-on-year basis. Regionally, the absolute surplus of stocks versus the five-year average in North America rose substantially, while deficits in Europe and the Pacific narrowed slightly.



Crude stocks rose seasonally by 17.0 mb to 936 mb in February, nonetheless marking an eighth straight month of below average readings. Crude holdings in North America, Europe and the Pacific increased by 5.2 mb, 7.5 mb and 4.3 mb, respectively. Firm global supply and rising OPEC exports, amid muted refining activity, built OECD crude oil stocks.

In the meantime, product inventories fell by 32.7 mb, in line with a five-year average 38.5 mb draw, reducing the deficit against the five-year average to 7.3 mb, from 13.1 mb in January. Most of the product stock draw centred on middle distillates, falling by 19.9 mb. Strong global diesel demand drove middle distillate stocks down in every region. North America showed the largest decline of 8.0 mb, while the Pacific and Europe saw 6.7 mb and 5.2 mb reductions, respectively.  



OECD stocks were revised 28.6 mb higher for January, upon receipt of more complete monthly submissions from member countries. This implies a 39.2 mb build in January inventory levels, compared with preliminary estimates of a 13.6 mb increase. Upward adjustments were centred on European middle distillates, Pacific crude oil and North American 'other products' stocks, which were revised up by 19.1 mb, 6.2 mb and 6.1 mb, respectively. Lower-than-initially estimated European crude oil holdings provided a partial offset.



Preliminary data indicate a 22.6 mb increase in March OECD industry inventories, in contrast with a five-year average 10.0 mb draw. Crude oil, refined product and 'other oils' stocks rose by 16.7 mb, 4.9 mb and 1.0 mb, respectively. 'Other products', fuel oil and middle distillate holdings rose by 6.1 mb, 3.8 mb and 1.6 mb, respectively while gasoline stocks fell by 6.6 mb.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil inventories fell by 3.5 mb to 1 330 mb in February, a milder decline than the five-year average drop of 19.7 mb, thus widening the surplus versus the five-year average to 62.8 mb, from 46.6 mb in January. Commercial oil stocks in North America have stood above the five-year range for a second consecutive month. Crude oil and 'other oils' stocks, including feedstocks, led the increase, up by 5.2 mb and 5.3 mb, respectively. Most of crude oil stock build stemmed from the US, where higher onshore production and rising imports from the Canadian oil sands have inflated midcontinent holdings.

Meanwhile, product inventories fell by 14.0 mb on the back of declines across every product category. Middle distillate stocks led the decline, falling by 8.0 mb. Record high US distillate exports in the midst of firm domestic demand drove US middle distillate stocks down by 7.4 mb. Gasoline holdings decreased by 3.2 mb overall, as a sharp fall in gasoline imports lowered US gasoline stocks by 1.8 mb in spite of continued weak demand. 'Other products' and fuel oil holdings fell by 2.6 mb and 0.2 mb, respectively.



US weekly data show oil inventories rose by 15.6 mb in March, compared with a five-year average 3.8 mb build. Strong imports and rising domestic production in the midst of lower refinery runs drove crude oil stocks up by 16.8 mb. Most of the stock build centred on the Gulf Coast or PADD 3, due to a rapid increase in crude imports. In the meantime, crude stock levels at Cushing, Oklahoma increased by 4.5 mb to 40.3 mb with a continued influx from North Dakota and Canada as well as from the purging of Seaway pipeline in anticipation of the line's reversal. Crude holdings at Cushing have increased by 12.0 mb since mid-January 2012, marking their highest level since May 2011. Although Cushing inventories are now approaching record high levels again, storage capacity is much higher than a year ago after significant recent expansions.



US product inventories fell by 2.0 mb in March as declines in both gasoline and middle distillate holdings outweighed increases in 'other products' and fuel oil stocks. Gasoline inventories declined by 7.7 mb as demand rose month-on-month, albeit remaining weak on an annual basis. Middle distillate also decreased by 4.7 mb on the combination of lower production, firm domestic demand and strong exports. Among middle distillate stocks, diesel and kerosene holdings declined by 3.9 mb and 0.8 mb, respectively while heating oil stocks were virtually unchanged due to relatively warmer weather. In the meantime, 'other products' and fuel oil inventories rose by 9.0 mb and 1.3 mb, respectively.

OECD Europe

Industry oil inventories in Europe fell by 4.0 mb in February to 914 mb, a shallower decline than the five-year average draw of 10.8 mb, thus narrowing the deficit versus the five-year average to 58.1 mb from 64.9 mb in January. Nonetheless, European oil stocks have stood below the five-year range for ten of the last eleven months. However, in terms of days of forward demand cover, total oil holdings in Europe have been above the five-year average for seven successive months, a more comfortable position than suggested by absolute stock levels.

Crude oil inventories rose by 7.5 mb to 298 mb compared with a five-year average 0.2 mb build, due to lower refinery runs. However, they are still at the third lowest level since December 2002 (after falling lower in December and January), and have stayed under the five-year range for a twelfth straight month. Even when measured against days of forward demand cover, crude stocks have been below the five-year average for a fifth consecutive month.

In the meantime, European refined product inventories fell by 10.5 mb to 550 mb on lower refinery runs, in line with a five-year average 10.0 mb draw. Product holdings have fallen by approximately 40 mb since the beginning of 2011. However, product stocks look much more comfortable when measured against forward demand, way above the five-year average at 40.5 days of forward cover, and approaching the higher end of the five-year range. Middle distillates led the decrease, falling by 5.2 mb on strong demand for diesel and heating oil. Gasoline, fuel oil and 'other products' holdings also rose by 3.8 mb, 1.0 mb and 0.6 mb, respectively. Meanwhile, German end-user heating oil stocks fell by 2 percentage points to 52% fill at end-February.



March preliminary data from Euroilstock point to a 7.6 mb stock build, in contrast with a five-year average 7.2 mb fall in the EU-15 and Norway. Both crude oil and product inventories rose by 1.1 mb and 6.5 mb respectively. Middle distillate holdings led the product increase, rising by 6.4 mb. Fuel oil inventories also increased by 1.8 mb while gasoline and 'other products' stocks edged down by 0.8 mb and 0.9 mb, respectively. Refined product stocks held in independent storage in Northwest Europe rose, led by increases in both gasoline and gasoil stocks as traders stored summer quality grades in anticipation of the seasonal switch.

OECD Pacific

February commercial oil inventories in the Pacific declined by 4.8 mb to 386 mb in line with the five-year average decrease of 8.3 mb. Although the deficit of inventories versus the five-year average narrowed to 18.7 mb from 22.1 mb in January, oil stocks stayed below the five-year range for a second consecutive month. Crude holdings increased counter-seasonally by 4.3 mb to 159 mb, finally regaining the lower end of the five-year range after four months running outside the range. In the meantime, product stocks declined by 8.2 mb in line with the five-year average decrease of 6.0 mb and remained below the five-year range. Middle distillate holdings fell most sharply, by 6.7 mb. Gasoline, fuel oil and 'other products' holdings rose by 0.4 mb, 0.1 mb and 0.9 mb, respectively.



Japanese industry inventories edged down by 0.5 mb in March, according to weekly data from the Petroleum Association of Japan (PAJ). Crude oil stocks fell by 1.6 mb, likely on lower crude imports. Product holdings rose by 0.8 mb, as increases in gasoline, middle distillate and fuel oil holdings outweighed a fall in naphtha stocks. Naphtha stocks declined by 2.0 mb, marking their lowest level since February 2010. In the meantime, gasoline, middle distillate and fuel oil holdings rose by 1.8 mb, 0.2 mb and 0.8 mb, respectively.



Recent Developments in Singapore and China Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories rose in February by an equivalent of 6.5 mb (data are reported in terms of percentage stock change). Commercial crude oil holdings were down by 3.8% (8.0 mb), although as noted elsewhere, lower refinery crude runs and higher imports suggest there may have been a build in strategic stocks. Commercial product inventories rose by 10.0% (14.5 mb), with every major product category showing an increase. Although slightly lower than January, February crude oil throughput was still strong enough to boost the levels of refined product stocks in general. Gasoline, diesel and kerosene inventories rose by 7.2% (3.8 mb), 12.3% (10.2 mb) and 3.8% (0.5 mb), respectively. Gasoil stocks showed another sharp increase as companies built up inventories with the spring ploughing season drawing near.




Singapore onshore inventories fell by 1.8 mb to 42.8 mb in March, driven by decreases in both light and middle distillate stocks. Light and middle distillate holdings declined by 1.3 mb and 1.6 mb, respectively as heavy refinery maintenance in South Korea and the Middle East limited the supply of light and middle distillates amid firm regional demand. In the meantime, fuel oil stocks rose for a third consecutive month, by 1.1 mb to their highest in almost two years, as fuel oil imports from the West and the Middle East surged and high prices suppressed demand. Fuel oil holdings have gained 7.5 mb since their two-and-a-half-year low in the middle of January.



Prices

Summary

  • Crude oil futures reclaimed 2011 highs in March, underpinned by market concerns over current and potential supply disruptions. North Sea outages continue to mount while the impact on Iranian crude oil export flows from recently enacted EU and US sanctions has become far-reaching, with key banking facilities already choked off. However, amid signs of rising 1Q12 supplies and hopes for talks between Iran and the international community, prices have subsequently eased. Futures prices for Brent were last trading around $120/bbl and WTI at $102/bbl.
  • Money managers cut their bullish bets on rising crude prices in the week ending 3 April 2012 as a response to rising crude stocks in the US, the Fed's decision to hold off on additional monetary policy easing, as well as discussions between the US, UK and France on a possible release of strategic oil reserves.
  • Product crack spreads trended upwards for most products in March as the refining maintenance season limited supply. For middle distillates and fuel oils elevated price levels in early February limited the month-on-month increase. In Asia, the upside was further constrained by comfortable stock levels in Singapore in early March.
  • Following strong demand for Middle Eastern and West African grades, benchmark VLCC and Suezmax crude tanker rates surged to their highest levels since mid-2010, while gains in the product tanker sector were muted.


Market Overview

Crude oil futures were up by around $4.00-5.50/bbl in March, underpinned by market concerns over current and potential supply disruptions. The impact on Iranian crude oil export flows from recently enacted EU and US sanctions set to take effect 1 July has already become far-reaching, with key banking facilities and insurance for the shipping market already choked off or severely constrained (see OPEC Supply, 'Iranian Crude Supplies Tumble Under The Weight of Sanctions'). UK North Sea production is expected to average below the 1 mb/d mark in 2Q12 and 3Q12, following the latest shut-in of the Elgin/Franklin complex, this time due to a gas leak.

Markets were also supported in March by robust demand growth in non-OECD Asia and the Middle East, including increased crude burn at utilities in Japan and Saudi Arabia. Brent crude rose $5.48/bbl in March to $124.54/bbl, the highest monthly average since July 2008. By early April Brent prices were trading lower at around $120/bbl on cautious optimism that the stalled talks with Iran over its nuclear programme would resume. Iran is now slated to hold talks with G-6 members on 14 April but already there is little optimism the next round will be a success. Officials are also casting about for the location for another round of talks. US WTI futures were up by just under $4/bbl in March to an average $106.21/bbl and were last trading at about $102/bbl.

Higher prices triggered by supply outages in the North Sea,  political turmoil in Syria, Sudan and Yemen and residual fears over replacements for Iranian supplies were countered by resurgent worries over the fragile euro zone economies. However, the loftier oil price levels have already been built into our demand estimates, with global oil demand for 2012 unchanged at 89.9 mb/d. 2Q12 demand is forecast to fall to a seasonally weak 88.6 mb/d, before sharply rebounding to an average 90.8 mb/d for second-half of the year.

That said, however, there is a growing consensus among analysts that high crude prices have already undermined fragile economic recovery, and with it oil demand growth prospects. Most recent manufacturing data for China and Europe were weaker than expected, prompting fears that the slowdown will further restrain oil demand growth. A mid-March press conference by Saudi Arabian officials aimed at calming high prices was followed by unfounded press reports of imminent strategic stock releases. Neither appeared to have an immediate impact, but may be playing in to weaker prices now, especially amid evidence of sharply higher 1Q12 supplies overall.



While relatively robust Asian and European markets are supporting Dubai and Brent-related crudes, US WTI prices are relatively depressed under the weight of swelling supplies at both the US Gulf Coast and Cushing. US crude imports have posted sharp increases in recent weeks, with Saudi crude making its way to US Gulf Coast refineries and Canadian and US onshore crude into the US Midcontinent. This fuelled WTI's relative weakness to Brent; the price spread between the two benchmark grades widened to more than -$20/bbl in early April, compared with -$18.34/bbl in March, -$16.80/bbl in February and -$11.13/bbl in January.



Underscoring the tight market for prompt Brent, the M1-M12 backwardation increased to around $7.15/bbl in March compared with just under $6/bbl in February and $3.65/bbl in January. Relatively weaker prompt WTI prices saw the WTI M1-M12 contract move deeper into contango in early April, to around -$2.10/bbl in the week of 2-6 April, compared with -$1.15/bbl in March, -$1.85/bbl in February and -$0.18/bbl in January.



Futures Markets

Activity Levels

The ratio of Brent futures in London ICE to New York and London WTI oil positions is up about 4%, to a peak of 59.1% in March, triggered by a relatively large increase in Brent open interest compared to NYMEX WTI open interest. Meanwhile, ICE WTI open interest increased for two months in a row after declining for six straight months since October. The increase in the ratio of Brent to WTI open interest is sharper when ICE WTI contracts are excluded. The ratio of ICE Brent to CME WTI open interest increased by more than 5.5% to reach a peak of 74.6%.

Open interest in all major oil derivatives contracts increased in March. Open interest in New York CME WTI futures and options contracts increased by 1.4% from 28 February 2012 to 3 April 2012 to 2.53 million contracts. Meanwhile, open interest in futures-only contracts increased by 3.4% during the same period from 1.52 million to a seven-month high of 1.57 million. Over the same period, open interest in London ICE WTI contracts increased to 0.41 million and 0.48 million contracts in futures-only and combined contracts, respectively. Meanwhile, open interest in ICE Brent contracts also tested fresh records in March, with 1.17 and 1.37 million contracts in March in futures-only and combined contracts, respectively.

Money managers followed opposite trading patterns in WTI and Brent futures contracts. They cut their bets on rising WTI crude oil prices by 48 891 contracts in March, to reach the lowest level since early February, at 179 501 as a response to rising crude stocks at Cushing, as well as to the expectation that the Federal Reserve will refrain from more monetary stimulus unless the US economic expansion falters. In contrast, money managers increased their bets on rising Brent prices by 45% from 122 288 to 138 365 futures contracts from 28 February to 27 March; the highest level since ICE Futures Europe started publishing information on trading of Brent futures last July. Here, traders responded to ongoing uncertainty over global oil supply fuelled by tension between Iran and the western powers. However, they also cut their bullish bets on Brent prices in the week ending 3 April by 13 289 to 125 076 futures contracts as a response to cautious optimism over the resumption of stalled nuclear talks between Iran and the six nations, expected to take place in Istanbul on 14 April. The decline in bullish bets on Brent was also triggered by some reports of discussions between the US, UK and France on a possible release of strategic oil reserves.



Producers reduced their net futures short positions from 84 706 to 70 974 contracts over the same period; they held 21.15% of the short and 16.63% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 23.88% and 34.99% of the open interest on the long side and short side, respectively, reduced their net short position by 15.7% to hold 174 408 net short in March. Both producers and swap dealers' trading activity in the London WTI contracts followed similar patterns to CME WTI contracts. Producers in the London ICE WTI contracts increased their net long positions from 11 521 to 25 040 contracts over the same period. Swap dealers, on the other hand, reduced their net short positions from 33 574 to 24 407 contracts.

NYMEX RBOB futures and combined open interest increased by more than 1.7% over the same period. Open interest in NYMEX heating oil futures contracts declined by almost 5.4% to 285 433 contracts while open interest in natural gas markets stayed flat at 1.23 million contracts.

Index investors' long exposure in commodities in February 2012 increased by $24.6 billion to reach a six-month high of $310 billion in notional value. They added $5.9 billion to WTI Light Sweet Crude Oil, both on and off futures contracts in February. The number of long futures equivalent contracts increased to 553 000 from the lowest level since December 2008 of 538 000 observed in January, equivalent to $59.1 billion in notional value.



Market Regulation

On 20 March 2012, the CFTC approved the final rule on business conduct standards addressing reporting and recordkeeping requirements and daily trading records requirements for swap dealers (SDs) and major swap participants (MSPs). The rule requires SDs and MSP to designate a chief compliance officer, clarify (specify) duties imposed upon the chief compliance officer  as well as those imposed upon SDs and MSPs registered with the Commission with regard to risk management procedures; and monitoring of trading to prevent violations of applicable position limits. However, the CFTC delayed again the vote on the final rule defining the swap dealer and major swap participants, which will eventually determine which entities face mandatory capital and margin requirements as well as position limits.

On 22 March 2012, the US CFTC Division of Market Oversight issued an advisory note on special call authorities relating to claimed exemptions from speculative position limits, which would become effective sixty days after the term 'swap' is defined by the Commission. The advisory note reminded market participants that the Commission may use its special call authorities to request market participants, who claim hedge exemptions, to provide information related, but not limited, to the following: positions owned or controlled by that person; trading done pursuant to the claimed exemption; any swaps, futures, options, or cash market positions which support the claim of exemption; relevant business relationships supporting a claim of exemption; their related cash, futures, and swap positions and transactions; and in certain instances, a list of pass-through swap counterparties for pass-through swap exemptions. However, the Commission is yet to issue its final rule on the definition of 'swap'. The earliest estimate for the final rule is in April, which implies that the position limit would not be effective until June, or possibly later if the federal court were to decide to provide a temporary injunction to stop implementation of the position limit.

On 29 March 2012, the European Parliament approved the European Markets Infrastructure Regulation (EMIR), which introduces significant changes to the over-the-counter derivatives markets by establishing common rules for Central Counterparty Clearing Houses (CCPs) and trade repositories (TRs), mandating central clearing for all standardised contracts, as well as bringing reporting requirements to all derivatives contracts. The final draft of EMIR is still pending approval from the European Council. Once adopted by the Council, it will be published in the Official Journal, and the rules will enter into force 20 days after the publication. The new rules are expected to be effective by the end of 2012.

The European Parliament's Economic and Monetary Affairs Committee proposed amendments for Markets in Financial Instruments Directive (MiFID) and Market Abuse Directive (MAD). The amendments call for a new tougher regime on high frequency trading.  The amendments included a minimum holding period of 500 milliseconds, higher fees on the cancellation of high volumes as well as a ban on direct electronic access. The proposed amendments also call for more restrictive curbs on speculative positions in commodity derivatives. The proposed amendments call for differentiation between limits on hedge and speculative positions as well as position management arrangements, in addition to ex ante position limits set by trading venues.

Do Exchange Rates Matter?

Oil prices have experienced large fluctuations in recent years.  The spike in crude oil prices in mid-2008 to more than $140/bbl, followed by a steep correction in late 2008/early 2009 and subsequent sharp rebound over the last two years have jolted the world economy and pinched consumers at the fuel pump. US dollar weakness in recent years is frequently cited as one reason for high oil prices. It is very common to see the financial press suggesting that a weak dollar has pushed oil prices

higher. However, this explanation is challenged by the empirical observations that (a) a change in oil price tends to lead to a change in the exchange rate as predicted by economic theory and (b) the oil price has risen regardless of what currency unit one uses to measure the price of oil.

Empirically, there is clearly an inverse correlation between oil prices and exchange rates - that is, other things being equal, oil prices rise if the dollar falls. An assessment of the one-year rolling average correlation between the daily change in the oil price and the daily change in the nominal effective exchange rate shows that this relationship has been relatively strong in recent years, although the negative correlation has been declining in recent months. As we suggested in our Medium-Term Oil and Gas Markets 2011 report, however, the direction of causality tends to run from oil prices to exchange rate, especially when we use lower frequency observations. This is consistent with the traditional terms of trade argument on the relationship between exchange rates and oil prices. Terms of trade effects suggest that when the price of an import rises, if the demand for that import is very inelastic, (i.e. quantities demanded hardly fall at all when prices rise, as is the case for oil) the trade balance deteriorates, which would decrease the value of the local currency.

The price of oil in different currencies provides further support to the notion that weakness in the US Dollar cannot be the main reason behind the high oil prices. The relationship between the change in oil price and change in the exchange rate is considered to be country-specific. For oil-exporting countries, when oil prices go up, ceteris paribus, we expect the country's exchange rate to appreciate. On the other hand, for oil importing countries, the reverse should hold.

For example, as expected, our analysis shows that the correlation between annual change in the oil price and annual change in the Canadian exchange rate is very strong. The price of Brent crude oil measured in US Dollars increased by more than 11% in the first quarter of 2012, from $111/bbl to $123/bbl. During the same period, the Canadian Dollar appreciated by 1% relative to the US Dollar. In the meantime, the price of oil measured in Canadian Dollars, as expected, increased only by 10%. Since the rate of currency appreciation is much smaller than the rate of oil price increase, we observed an increase in the oil price in Canadian Dollars as well.



The price of oil measured in different national currencies has followed very similar directional movement with oil prices measured in US Dollars, although some of these currencies appreciated against the US Dollar. The main reason for this, as suggested by Martin Feldstein, is that "the currency in which oil is priced would have no significant or sustained effect on the price of oil when translated into dollars, euros, yen, or any other currency." The equilibrium price in the oil market is determined by global supply and demand; it is irrelevant which currency oil is priced in. The decline of the US Dollar has little to offer as an explanation to the increase in oil prices. On the other hand, the high and rising price of oil does, contribute to the decline of the dollar through the terms of trade effect.

Spot Crude Oil Prices

Spot crude oil markets strengthened in March by 3.3-5.5%, with ongoing supply woes stemming from the Iranian crisis, further non-OPEC outages and relatively low OECD crude inventories in Asia and Europe trumping an expected drop in refinery demand during the seasonally weak second-quarter and evidence of rising 1Q12 supplies overall. European and Asian crude markets posted the strongest gains in March, though prices were trending lower over the month and into early April as concern over the impact of sanctions on Iran receded while resurgent worries over the sustainability of the global economic recovery added modest downward pressure on physical markets.

Benchmark spot crude prices increases in March ranged from a low of around $3.90/bbl (to an average $106.21/bbl) for WTI, to as much as $6.41/bbl (to $122.53/bbl) for Dubai. North Sea Brent posted an increase of $5.75/bbl to $125.28/bbl.



The steady decline in Iranian exports on the back of recent EU and US sanctions is partly behind the stronger-than-expected physical markets ahead of the seasonally weak refiner demand period of the second quarter. With sanctions hitting the banking and shipping sectors particularly hard, however, refiners were actively lining up alternative supplies in the spot market during March, though the biggest impact on trade is expected in April and May, judging by reports from Iran's traditional buyers (see OPEC Supply, 'Iranian Crude Supplies Tumble Under The Weight of Sanctions').

In the US, however, spot crude prices were fundamentally weaker due to a combination of reduced refinery throughputs and crude oil stocks hovering at the top of the five-year range. In early March reports of an armada of Saudi crude shipments heading to the US Gulf Coast initially took the market by surprise but approximately 500 kb/d of increased supplies are earmarked for the Saudi Aramco/Shell Motiva refinery, which has just completed the doubling of capacity, to 600 kb/d.



In Europe, North Sea outages continued to underpin Brent crudes in March but prices eased in early April on ample supply in Europe, in part due to increased exports of Russian crude to the region. However, the shut in of Total's Elgin/Franklin gas and gas condensate field for several months due to a gas leak will likely keep a floor under North Sea grades. Total UK Forties output in 2Q12 is forecast to fall by around 60 kb/d to 390 kb/d, further reducing liquidity from the beleaguered Forties blend. UK North Sea production is now expected to average below 1 mb/d in the second and third quarter of 2012 (see Non-OPEC Supply, 'The Tip of the Decommissioning Iceberg: Total's Elgin/Franklin Gas Leak').



Despite a steady increase in supplies of OPEC Middle East crudes weighing on the market in March, spot prices for Dubai strengthened month-on-month, up 5.5%. As a result, Dubai's discount to Brent narrowed, to -$2.75/bbl on average in March compared with -$3.42/bbl in February. The ample supplies of Middle East grades on offer was also due to sharply lower regional refinery runs in March, which were estimated off by 300 kb/d from February levels at 5.6 mb/d. Reflecting the relative weakness of spot prices in Asia, Saudi Aramco lowered its official selling prices for May liftings. Benchmark Arab Light was lowered by $0.35/bbl. Prices for medium and heavy crudes were reduced by a modest $0.10/bbl while at the other end of the spectrum, Arab Super Light was cut by $2.45/bbl.

Demand for direct burn crude at power plants in Japan continues to support prices for heavy, sweet crudes such as Duri (see Demand, 'Japanese Power Sector Demand: One Year After Fukushima').

Spot Product Prices

Crack spreads trended upwards for most products in March as the refinery maintenance season limited supply. For middle distillates and fuel oils elevated price levels in early February limited the month-on-month increase. In Asia, the upside was further constrained by comfortable stock levels in Singapore in early March. Gasoline crack spreads showed diverging trends in March, continuing to improve in the Atlantic basin, whereas in Asia they fell slightly. Atlantic basin markets were tight, especially in Europe, and markets turned more bullish with the shift to summer grade gasoline and the upcoming summer driving season. Comfortable stock levels in Asia pressured markets here, but the impending refining maintenance season pushed spreads higher towards the end of the month.

In Northwest Europe, gasoline crack spreads to Brent increased by $4.04/bbl month-on-month, and by a stronger $5.87/bbl to Urals in the Mediterranean, reflecting a tight market. An open arbitrage to the US East Coast, as well as demand from West Africa and the Middle East pulled volumes out of the region, and independent stock levels in ARA stayed in the lower end of the five-year range in March. Higher prices closed the arbitrage to the US East Coast at month-end.



US markets were supported by hopes of both a stronger summer driving season this year and more optimistic prospects for the US economy. Crack spreads increased as lower refinery runs on both sides of the Atlantic tightened supplies, and as demand from Latin America was relatively strong. The closed arbitrage from Europe at month-end gave further upward impetus to prices.

In Asia, gasoline crack spreads trended sideways in March, and fell by a minor $0.68/bbl vs Dubai in Singapore. Comfortable stock levels were offset by strong regional demand, although upward support to crack spreads came from increased refining maintenance towards the end of the month.

Naphtha markets weakened slightly in March with crack spreads falling by around $1.30/bbl to Brent in Europe and by about $1.45/bbl to Dubai in Asia. A stronger gasoline market in Asia was supportive for the crack spread, but the upside was limited by high flat prices and a partly closed arbitrage from Europe.



Middle distillates crack spreads mostly fell month-on-month from the strong levels seen in early February. However, after a dip early in March, cracks trended upwards again later in the month, with European diesel cracks to Urals over $20/bbl in the Mediterranean region around mid-month. Support came from ongoing refining maintenance, both regionally and in Russia, but an open arbitrage from the US kept markets well supplied and stocks rose throughout March to above the five-year range.

In the US, middle distillate markets continued to be pressured by the drawing to a close of a poor heating oil season, and high prices also limited demand. However, a strong export market to South America provided some support, together with ongoing refining maintenance. Meanwhile in Asia, crack spreads to Dubai were stable at around $14/bbl during March. Although the arbitrage to the west was only partially open, stocks drew to below the five-year average due to ongoing refining maintenance and strong regional demand.

For heavy fuel oils, discounts narrowed throughout March and broke the downward trend seen from mid-January. Nevertheless, only LSFO crack spreads to Urals in the Mediterranean improved month-on-month, as elevated early-February levels prevented monthly gains in crack spreads elsewhere. In Europe, markets tightened as refining maintenance both in Europe and Russia limited supplies, and the arbitrage to Asia reopened again after being partially closed in the second half of February.



Demand for straight run fuel oil increased also with increasing crude prices, and this resulted in independent stock drawing after a large build at the beginning of the month. In Asia, stocks in Singapore continued to increase, but strong power sector demand from Japan and prospects of lower inflows in April due to seasonal maintenance were supportive for fuel oil markets.



OMR Physical Price Analysis Now Based Upon Argus Media Ltd Assessments

As of April 2012, the OMR has begun monitoring spot crude, oil products and freight rate data provided by Argus Media Ltd. The table below sets out the price quotations now used in comparison with those formerly received from Platts.



End-User Product Prices in March

End-user prices for selected IEA countries continued to increase in March after showing steady growth in January and February. Gasoline prices rose on average by 5.9% month-on-month (m-o-m) and by 7.3% year-on-year (y-o-y). Diesel was up 3.1% m-o-m and 4.9% y-o-y. The remaining surveyed products, heating oil and low-sulphur fuel oil (LSFO) experienced price hikes of 1.4% and 3.3% m-o-m, respectively. On a yearly basis, heating oil rose by 3.9% and LSFO by 16.3%.

US motorists saw the strongest month-on-month increase of gasoline and diesel prices, up by 8.6% and 5.0%, respectively. UK heating oil prices rose by the highest proportion (2.7%), while in Italy LSFO increased by 3.8%. On a year-on-year basis, UK gasoline and diesel prices rose by 8.8% and 9.1%, respectively. Italians saw heating oil rise by 5.3%, while Spanish buyers saw a 17% increase for LSFO. During the past 12 months, average European gasoline and diesel prices fell steadily between June and December, but the declining trend flipped since January. This brought average European gasoline and diesel prices to a 7% and 4% increment from March 2011 levels.

Freight

Tracking strong demand for Middle Eastern and West African grades, benchmark VLCC and Suezmax crude tanker rates reached their highest levels since mid-2010. In the Middle East Gulf amid reports of increased Asian and US demand for regional crudes, the benchmark Middle East Gulf - Asia Pacific route for double-hulled VLCCs experienced a sustained recovery throughout March. Rates increased from $13/mt in early March to approximately $17.50/mt one month later, their highest level since mid-2010.



Note: Due to the switch from Platts to Argus pricing from this OMR onwards, freight rates presented here are not directly comparable with those published previously.

Tonnage, already stretched from healthy Asian demand, was further tightened by Saudi Aramco's shipping arm Vela significantly increasing its spot chartering as it sought to move crude to the US Gulf in preparation for the start-up of the expanded Port Arthur refinery, a joint venture between Aramco and Shell. On the benchmark Suezmax West Africa - US Gulf Coast route a boom and bust trend played out, after increased demand during the first half of the month pushed rates to $23.50/mt, a level which proved unsustainable as demand waned, tonnage built up and rates consequently retreated back to $17/mt, the same level as a month earlier.

In the considerably less volatile North Sea market, rates for the cross-UK Aframax trade held at approximately $6/mt. However, rates in the Baltic received some support as the Ust Luga crude terminal on Russia's Baltic Sea coast finally came on stream at the end of March following months of delays. Consequently, Aframax rates in the Baltic rose to $11/mt, their highest levels this year, as the increased demand tightened ice-class tonnage. With the port scheduled to load a further nine cargoes in April and crude volumes shipped via Baltic ports set to increase modestly over the second quarter, this development could buttress Northern European rates over the coming months.

In the product tanker sector, the transatlantic UK - US Atlantic Coast route fared the worst out of all the benchmark routes, where, as a result of fading demand and the steady build-up of tonnage, rates were pressured downwards throughout March, plummeting from over $26/mt in early month to below $22/mt one month later. The picture was more positive in the East where balanced fundamentals helped to sustain the 75Kt Middle East Gulf and 30 Kt Singapore trades into Japan at month-previous levels of approximately $23/mt and $16/mt, respectively.

Due to markets being in backwardation global floating storage remains at low levels with Iran accounting for the majority of crude volumes. Recent reports suggest that at end-March Iranian volumes remained close to those of a month previous with 8.8 mb stored on four NITC VLCCs.

Refining

Summary

  • Global refinery crude throughput estimates for 1Q12 have been revised slightly lower since last month's report, as higher February and March estimates only partly offset lower final January data for several OECD and non-OECD countries. Global runs are now assessed at 74.8 mb/d, 120 kb/d higher than a year earlier and 50 kb/d above 4Q11, which was revised up by 150 kb/d on the receipt of more complete data.
  • Seasonal maintenance is expected to curb global crude runs by 410 kb/d in 2Q12, to 74.4 mb/d, but they remain 0.5 mb/d above a year earlier. OECD Pacific throughputs see the sharpest seasonal decline, as the turnaround schedules in both North America and Europe peak earlier in the year. In the non-OECD, the commissioning of new capacity offsets scheduled outages ahead of summer.
  • OECD refinery crude throughputs rose by 155 kb/d in February, to 36.7 mb/d, 80 kb/d above previous expectations. The increase stemmed almost entirely from North America, while European runs fell seasonally and Pacific throughputs were largely unchanged. Year-on-year gains of almost 1 mb/d in the US offset contracting European and Pacific runs and lifted total OECD throughputs to 0.5 mb/d above February 2011 levels.
  • Refinery margins were mixed in March, with the European Urals and Gulf Coast coking configurations improving and all other rates declining month-on-month. The relatively negative overall picture masks a significant improvement in the second half of March, however. Following the more permanent reduction in distillation capacity in the Atlantic Basin in previous months, relatively heavy maintenance conspired to tighten gasoline markets. European and US Gulf Coast margins surged by more than $4/bbl on average in the last three weeks of March, and Singapore by $1.38/bbl.


Global Refinery Overview

Global refinery crude throughput estimates for 1Q12 have been lowered by 90 kb/d since last month's report, to average 74.8 mb/d. Weaker January data for a number of countries were offset by stronger preliminary February and March readings. Final monthly submissions for the US and Japan for January came in 170 kb/d and 120 kb/d lower than preliminary weekly data had suggested, respectively. Non-OECD January data were also revised down on lower-than-expected runs in Taiwan, Algeria and Saudi Arabia. A revision to Ukrainian historical data also contributed. Strong Japanese and Russian preliminary data for March, as well as a higher forecast for Iran, however, provide a partial offset to the quarter as a whole. Iran could have completed the 80 kb/d expansion of its Arak refinery earlier than the expected 2Q12, as seen in higher reported January and February throughputs.

With the arrival of more complete data for the tail end of 2011, our 4Q11 assessment has been lifted by 150 kb/d since last month's report. The bulk of the revision came from the Middle East, with the submission of Kuwaiti data and revised Saudi runs for November. As a result, 4Q11 runs were 85 kb/d higher than a year earlier at 74.7 mb/d. The historical series for the Ukraine was revised lower by 15 kb/d for 2010 and 40 kb/d for 2011 according to annual official data.



Seasonal maintenance is expected to curb global crude runs by 410 kb/d in 2Q12, to 74.4 mb/d. Global growth returns to more than 0.5 mb/d, however, compared to less than 100 kb/d on average over the last four quarters . OECD Pacific throughputs see the sharpest seasonal decline, as the turnaround schedule in both North America and Europe peaks earlier in the year. In the non-OECD, the commissioning of new capacity offset scheduled outages ahead of summer. India commissioned 360 kb/d of new capacity at the end of March, and China is still ramping up new units commissioned at the start of the year. All told, the seasonal dip in throughputs for 2012 looks less pronounced than last year, albeit the summer ramp-up is also assumed to be less steep.



Refinery margins were mixed in Europe and on the US Gulf Coast in March versus February, with the USGC coking, as well as Urals and Brent cracking in Europe improving and all others falling on a monthly basis. Pacific Basin margins remained weak overall. Nonetheless, margins surged in the second half of March, for all benchmarks surveyed except the US West Coast, on stronger gasoline cracks. Following the more permanent reduction of distillation capacity in the Atlantic Basin in previous months, relatively heavy spring maintenance conspired to lift European and US Gulf Coast margins by more than $4/bbl on average and Singapore margins by $1.35/bbl in the last three weeks of the month, while West Coast margins fell from more elevated levels in February.



OECD Refinery Throughput

OECD refinery crude throughputs rose by 155 kb/d in February, to 36.7 mb/d, 85 kb/d above previous expectations. The monthly increase stemmed almost entirely from North America, while European runs fell seasonally and Pacific throughputs were largely unchanged.



As noted in last month's report, US runs rose counter-seasonally in February, to stand 940 kb/d above year-earlier levels. The stronger year-on-year US runs offset contracting European and Pacific runs and lifted total OECD throughputs 0.5 mb/d above February 2011. In contrast, final monthly data submissions for January for both the US and Japan were weaker than indicated by preliminary weekly data. As a result, January OECD estimates have been lowered by 260 kb/d, to 36.5 mb/d, some 640 kb/d below the same month a year earlier.



North American crude runs rose by 255 kb/d in February, largely on higher US runs. Compared to an exceptionally weak February 2011, regional runs gained 830 kb/d year-on-year on strong US50 and Mexican throughputs. The closure of Hovensa's 350 kb/d St. Croix refinery in the US Virgin Islands in mid-February provided a partial offset, as did maintenance-reduced Canadian throughputs. St. Croix, once one of the world's largest refineries with 500 kb/d of crude distillation capacity, will be turned into a storage terminal after accumulating losses of $1.3 billion over the past three years. The company had already reduced capacity by 150 kb/d in 2011, due to poor market conditions.



Regional runs are estimated to have fallen in March, as refinery maintenance intensified, ahead of the seasonal ramp up in runs towards the peak summer demand season. Indeed, weekly data from the EIA show that US50 crude throughputs came down from February's peak of 14.9 mb/d in March. On a monthly basis, US50 crude runs were 175 kb/d lower. The sharpest declines came on the West Coast, where runs fell 150 kb/d month-on-month, and in the Midwest where runs declined 100 kb/d. While US Gulf Coast runs inched up 50 kb/d, East Coast and Rockies runs were mostly unchanged.



The declines on the West Coast came as BP shut its 260 kb/d Carson City refinery for 45 days for maintenance. The company's Cherry Point refinery also remained shut for repairs and maintenance after a fire in February. The plant is likely to remain closed in April. Alon announced on 8 March that it would restart its Californian refining complex, in which plants in Bakersfield, Paramount and Long Beach, California are operated as one integrated model, at the beginning of 2Q12. The plants, which have a combined capacity of 94 kb/d, were shut down in December due to weak margins and to make some adjustments to improve the crude slate flexibility.

Refinery runs on the Gulf Coast rose sharply in the second half of March, after maintenance cut runs earlier in the month. Maintenance included a crude unit shutdown at ExxonMobil's 560 kb/d Baytown Texas refinery, Citgo's 165 kb/d Corpus Christi, Texas and 425 kb/d Lake Charles, Louisiana plants. An unexpected shutdown of a crude unit at the 348 kb/d Exxon Beaumont refinery in Texas in February further reduced runs. In the last three weeks of March, however, runs rebounded by almost 700 kb/d to 7.8 mb/d. Throughputs will likely rise further over coming weeks, as the expanded Motiva Port Arthur refinery ramps up production. Shipments of Saudi Arabian crude to the US Gulf Coast have surged in recent weeks, in preparation for the start-up of the new units, which raise distillation capacity from 275 kb/d to 600 kb/d.



ConocoPhillips extended the deadline for submitting bids for the 187 kb/d Trainer refinery in Philadelphia to the end of May due to recent interest from potential buyers. The original deadline was 31 March. In an interesting turn of events, it was reported in early April that Delta Airlines is considering putting in a bid for the plant in an attempt to reduce its fuel bill, which amounted to more than $11 billion last year, or 36% of operating costs, and an increase of $2.8 billion from 2010. Sunoco also announced in late March that it is on track to shut the 335 kb/d Philadelphia refinery by July if no buyers are found. The company continues talks with interested parties.

European refinery runs fell by 130 kb/d in February, with lower runs in Germany, France and Italy. Indeed, both French and Italian throughputs stood near record-lows, at 1.09 mb/d and 1.5 mb/d, respectively. In France, the shutdown of Petit Couronne in January following the bankruptcy of Petroplus, further lowered capacity after LyondellBasel shut Berre l'Etang in early January. Total's La Mede refinery was reportedly also undertaking maintenance work in the first quarter. German throughputs fell due to the idling of Ingolstadt in February. The plant had already been running at reduced rates since early January due to difficulties securing crude supplies.



Exxon Mobil undertook maintenance of its Rotterdam refinery in January and February, and Shell's Pernis plant started work in early March. Media reports of a fire at BP's Rotterdam refinery on 30 March were quickly denied by the Rotterdam fire department. Other maintenance shutdowns include Cepsa's Huelva refinery in April/May, Eni/KPC's Milazzo refinery in May/June and the Collombey refinery in Switzerland in March.

Refinery crude intake at OECD Pacific plants was unchanged in February, averaging 6.9 mb/d. Slightly higher Japanese refinery runs were mostly offset by small declines in South Korea and New Zealand. Regional runs continued to lag year-earlier levels, with 220 kb/d of distillation capacity still shut in Japan following last year's disastrous earthquake and tsunami. Cosmo was restarted one of two crude units at its Chiba refinery at the end of March, bringing the last shuttered refinery back online.



Regional runs were forecast to fall sharply from March onwards, though weekly data from the Petroleum Association of Japan (PAJ) show Japanese runs holding their own in March, leading to a 170 kb/d upward revision. An unplanned shutdown at Nippon's Muroran plant and a power outage at the Marifu refinery only reduced Japanese runs marginally. Maintenance in Japan is expected to pick up from April, however, towards a seasonal peak of around 800 kb/d in June, reducing throughputs accordingly. South Korean throughputs are estimated lower for March, as SK Energy shut a 240 kb/d crude unit at the Ulsan refinery on 20 March and GS Caltex completed maintenance on a 155 kb/d crude unit at its 750 kb/d Yeochon plant. Nevertheless, South Korean refinery runs are expected to remain robust, maintaining the year-on-year growth recorded since 2Q10.

Non-OECD Refinery Throughput

Non-OECD crude run estimates for 1Q12 have been revised down by 90 kb/d since last month's report, to 38.5 mb/d, following the announcement that Valero will shut its Aruba refinery for the second time since the economic downturn on poor margins and lower-than-expected Algerian runs in January. The restart of Libya's 220 kb/d Ras Lanuf refinery now also looks less likely by late-April than previously assumed. A start-up in late-May looks more realistic, though this could again be delayed if production at key fields and power supplies are not fully restored. Annual throughput growth is expected to pick up in 2Q12, to 0.5 mb/d (from 0.2 mb/d in 1Q12), largely stemming from India, China and Russia. India commissioned 360 kb/d of crude distillation capacity in late-March, which should support runs in coming months.



While no new data has been made available since last month's report on Chinese refinery operations, official data confirm our previous estimates of 9.34 mb/d and 9.28 mb/d for January and February, respectively. February crude imports again recorded a record-high, amid evidence of strategic stock building. Runs are expected to have dropped in March, as refinery maintenance picks up, potentially taking as much as 700 kb/d off line for the three months through May. Newly commissioned refinery capacity will likely provide a partial offset to maintenance shutdowns however.

China's National Development and Reform Committee (NDRC) announced it would raise retail gasoline and diesel prices by $95/mt with effect from 20 March, only six weeks after the last price increase. The latest adjustments raise the retail price of gasoline to $1.1 per litre for gasoline and $1.22 per litre of diesel. The increase in retail prices will slightly improve refining margins. Capped retail prices for gasoline and diesel turned Chinese refining margins negative in 2011. Sinopec's refining losses more than doubled last year, to -$3.47/bbl, while PetroChina saw margins average -$9.46/bbl. Chinese refinery margins will likely remain under pressure as new capacity is brought on line. After net additions of 230 kb/d in 2011, we see another 450 kb/d of additional capacity added in 2012.

Indian refinery throughputs are estimated to have averaged 4.2 mb/d in February, 2.8% higher than a year earlier and close to record highs. A shutdown of a 290 kb/d crude unit at Reliance's Jamnagar 2 refinery from 10 February, was offset by higher runs elsewhere. IOC's Koyali refinery, HPCL's Mumbai plant, Reliance's domestic refinery and Essar's Vadinar plant all saw monthly increases in February and it is assumed that the new Bathinda refinery also started processing small amounts of crude in February.

According to a statement from a company representative on 29 March, HPCL's 180 kb/d project was fully commissioned in March, with all units operational at the end of the month. The plant reportedly started trial runs last August. With the seven-year, 100% tax holiday on profits from crude production or refining, expiring at the end of the 2011/2012 fiscal year, a slew of refinery projects were commissioned in March. Essar completed the expansion of its Vadinar refinery, which augmented the plant's capacity by 80 kb/d to 360 kb/d, and added a delayed coker and hydrotreating capacity. The upgrade allows the plant to process a heavier feedstock slate, becoming India's second largest refinery and one of the world's most complex plants, with a Nelson complexity index of 11.8. The plant's capacity will be expanded by an additional 40 kb/d by September - through debottlenecking/optimisation. Mangalore refinery also completed the 80 kb/d expansion of its plant in Southern India before the expiry of the tax holiday. Offsetting the ramping up of new capacity from March/April, HPCL's Visakhapatnam, IOC's Panipat and NRPL's Mangalore refineries will all undertake maintenance shutdowns in coming months.



Elsewhere in the region, Singapore refinery runs were largely unchanged in February at 1.25 mb/d. A disruption to a unit at Shell's Pulau Bukom refinery on 26 March, which activated the fire alarm and flare system, is not expected to have had material impact on operations as it was resolved quickly. Taiwan's refinery runs rose less than expected in January, to only 740 kb/d. Safety shutdowns following a series of fires at Shell's Pulau Bukom refinery last year might have been more extensive than previously assumed.



Russian crude throughputs averaged 5.18 mb/d in March, down from 5.37 mb/d in February, and in line with our forecast. Lukoil's Nizhny Novogrod, TNK-BPs Ryazan, Alliance's Khaborovsk, Slavneft's Yaroslav and Rosneft's Syrzan and Novokyibyshev plants are among the refineries expected to undertake maintenance over March-April. Gazprom Neft's 243 kb/d Moscow plant may have to reduce runs in coming months due to poor conditions on the Yaroslavl-Moscow trunk of the Transneft pipeline, which delivers about 50% of the plant's crude supplies. According to Transneft, the company is not allowed to perform maintenance on the line, which runs through a Moscow park where such interventions are forbidden. Transneft has suggested that supplies have to be halted before May, and as alternative supply routes are running close to capacity, the plant might be forced to cut runs.

Middle Eastern crude run estimates have been revised higher for 4Q11 with the submission of higher-than-expected Kuwaiti data and an upward revision to Saudi November throughputs. In contrast, January and February Saudi runs were lower than expected; below 1.6 mb/d, and 420 kb/d less than November's high. Saudi Aramco shut its 130 kb/d Riyadh refinery for most of January and early February. The 550 kb/d Ras Tanura refinery partly shut for work in the second half of March, for an expected duration of 45 days. The plant's 325 kb/d crude units, as well as the condensate splitter, hydrocracker and reformer, are reportedly included in the turnaround. As a result, Aramco was looking to import spot gasoline and gasoil for March and April. Iran's most recent refinery runs data, if confirmed, suggest the country may have commissioned the 80 kb/d expansion of its Arak refinery ahead of a previously expected 2Q12 completion. JODI data show Iran's crude runs at 1.64 mb/d and 1.66 mb/d in January and February, respectively, compared to 1.55 kb/d on average in 2011.



In Latin America, Valero's 235 kb/d Aruba plant halted operations by the end of March due to poor margins. The refinery previously restarted in early 2011 after a 17-month economic shutdown. The company will maintain the plant in a state that allows for restart should economic conditions improve. The company had already halted one 140 kb/d crude unit in December 2011.



In Africa, Nigeria's NNPC restarted the Kaduna refinery in mid-February. The plant had been shut since December due to sabotage on crude pipelines. Nigeria's three refineries are running well below their 440 kb/d nameplate capacity, most recently at less than 30% utilisation. Furthermore, we have assumed the start-up of Libya's Ras Lanuf refinery will be delayed from an earlier date of mid-April. Officials have stated the plant will resume operations as key oilfields, Sarir and Mesla return to full capacity, and our assumption now is that the plant restarts from late-May. Algeria's refinery runs were reported at 429 kb/d in January, some 80 kb/d less than expected. The country's smallest refinery, the 12 kb/d Adrar plant, was shut for most of January, reportedly due to a dispute over profitability, while the Arzew plant was partially shut for maintenance. The Skikda refinery is scheduled to partially shut for maintenance in early May.