Oil Market Report: 11 May 2012

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  • Crude markets reversed their upward course in April and by early May futures prices had fallen $10-12/bbl amid disappointing economic data for the US and Europe and an apparent easing of tensions between the international community and Iran. Brent crude was last trading near a three-month low of $113/bbl, with WTI at $97/bbl.
  • Global oil supply increased by 0.6 mb/d to 91.0 mb/d in April, 3.9 mb/d above last year. Higher Iraqi, Nigerian and Libyan supplies lifted OPEC production by 410 kb/d, to 31.85 mb/d. The 'call on OPEC crude and stock change' is raised by 0.2 mb/d to 30.9 mb/d for 3Q12 and by 0.4 mb/d to 30.7 mb/d for 4Q12, with the 2012 average now 30.3 mb/d.
  • Non-OPEC supply increased by 0.1 mb/d to 52.9 mb/d in April as a seasonal rise in biofuels output offset declining supplies in the UK and Canada. Despite persistent non-OECD outages in 2012, production growth in North America should average 0.6 mb/d for the remainder of the year, lifting non-OPEC supplies by 0.6 mb/d y-o-y to 53.3 mb/d.
  • Global oil consumption is set to rise by 0.8 mb/d (0.9%) in 2012, to 90.0 mb/d, with gains in the non-OECD more than offsetting declining OECD demand. After posting near-zero annual growth in 4Q11, global demand growth is forecast to gradually accelerate throughout 2012, culminating in an expansion of 1.2 mb/d by 4Q12.
  • OECD industry oil inventories increased by 13.5 mb in March, to 2 649 mb, lifting total stocks above the five-year average for the first time since May 2011. Moreover, forward demand cover rose by 0.5 day to 60.3 days, 3.0 days above the five-year average. Preliminary data indicate a modest 5.1 mb increase in industry stocks in April.
  • Global crude throughputs reached a seasonal low of 73.4 mb/d in April, coinciding with a peak in refinery maintenance. Crude runs are expected to rise sharply from May onwards, as refiners complete turnarounds and meet seasonally stronger demand. On a quarterly basis, global runs are expected to fall from 74.8 mb/d in 1Q12 to 74.3 mb/d in 2Q12, 150 kb/d and 440 kb/d respectively above 2011 levels.

A foggy horizon

Our global oil balance this month paints a marginally tighter picture than in the last OMR, with the underlying 'call on OPEC crude and stock change' averaging 30.8 mb/d in the second half of 2012. Slightly stronger global oil demand (albeit 2012 growth remains close to last month's +0.8 mb/d) coincides with a non-OPEC supply prognosis trimmed by an average 0.2 mb/d for the second half of the year. Nonetheless, with OPEC producing an estimated 31.8 mb/d in April, and OECD stocks having clawed their way back from earlier tight levels, some of the nervousness which drove prices to record highs in March has receded. But there is no room for complacency: the path of market fundamentals for the rest of the year remains highly uncertain and geopolitical risks will likely continue to keep prices high. As always, the IEA will monitor market conditions and stands ready to act if supply conditions warrant it.

Several factors examined in this month's OMR highlight the complexities faced by those trying to peer through the murk that shrouds any outlook for the second half of the year. The precise impact on physical supplies of sanctions imposed on Iran is of course near the top of that list. But, with Iran's domestic tanker fleet by some accounts becoming less easy to track, real-time analysis of cargo movements is more difficult. The monthly data on imports from Iran that we present in the OMR are based on official national reporting, but there is always a lag of a month or more before such information becomes available. Shipping data based on vessel arrivals, by provenance, are used to fill in the gaps for more recent months, but are themselves prone to major revisions. All we can say currently is that 1Q12 imports from Iran seem to be around 0.3 mb/d below 4Q11 levels, and that imports in April look to have fallen more sharply, with much of the drop apparently being funnelled into the 0.5-0.8 mb/d that Iran seems to have placed in floating storage. Whether Iranian vessels stay tied up in storage, or are pressed back into service amid restrictions on marine insurance for international fleets, remains to be seen.

The spate of unplanned stoppages currently afflicting non-OPEC supply is partly carried through our outlook, with around 1 mb/d of production that was originally in our forecast now assumed shuttered on average for the year. This month, as last month, we retain fairly cautious assumptions about production from the two Sudans, Syria and Yemen, as political turmoil there shows little sign of resolution. That said, technically-derived, un-planned stoppages affecting production in locations such as the North Sea and Canada are assumed to gradually recede and, all told, we see non-OPEC supply showing reasonable y-o-y growth of around 0.6 mb/d in 2012, with the Americas to the fore. More worrisome for the medium and longer term is the precedent set in Argentina, where the expropriation of Repsol assets by the government raises concerns about contract sanctity, which has been toyed with before in the region, with adverse results, not least on oil and gas supply. Without certainty that contracts will be respected, foreign investors are likely to shun aspiring resource plays in favour of more predictable domains.

Finally, demand estimation also carries its own ambiguities. A more optimistic recent set of GDP projections from the IMF carried some heavy caveats around the damaging impact of high oil prices and continuing risks in the euro zone. These were followed by a slew of disappointing industrial and employment indicators for the US and Europe. Nonetheless, driven by robust growth from China, other Asia and the oil producing regions, the consensus economic view is slightly brighter than a few months ago. While euro-zone risks and potential price spikes might drag oil demand lower than we project, similarly, upside potential exists depending on the fate of the Japanese nuclear moratorium, China's economic landing (hard or soft?), that country's strategic stockpiling policy and summer crude burn in exporting countries. Who'd be a forecaster?



  • Global oil demand is expected to expand by 0.8 mb/d (or 0.9%) in 2012 to 90.0 mb/d, following consumption of 89.2 mb/d of oil products in 2011. The non-OECD countries are forecast to account for all of the growth, with demand rising from 43.5 mb/d to 44.8 mb/d, whilst OECD demand falls from 45.6 mb/d to 45.2 mb/d.
  • The world's four biggest markets - China, the US, Europe and Japan - should dominate the demand story in 2012. Chinese growth is forecast to maintain its global dominance in 2012, at 0.4 mb/d (to 9.9 mb/d) or nearly 50% of the total expansion. Big declines are foreseen in Europe and the US, down by 0.3 mb/d (to 13.9 mb/d) and 0.2 mb/d (to 18.7 mb/d) respectively. Japan is expected to buck the falling OECD trend, up by 40 kb/d to 4.5 mb/d.
  • The annual demand outlook masks an important uptick in global demand throughout 2012. After next to no growth in 4Q11, the predicted trend will accelerate through the year to 1.3% by 4Q12.
  • Historical data revisions equate to a higher absolute 1Q12 demand number but lower 1Q12 growth. The preliminary series for 1Q12 is 50 kb/d higher than last month's report, at 89.5 mb/d, but the underlying year-on-year (y-o-y) growth trend is 0.3% as opposed to 0.4% previously.

Global Overview

Oil demand growth is expected to accelerate through 2012, having remained fairly modest in 1Q12, according to the latest preliminary figures. First quarter demand averaged 89.5 mb/d - a gain of 0.3 mb/d (or 0.3%) on the corresponding period last year. Global demand is forecast to average 90.0 mb/d in 2012, 80 kb/d higher than last month's estimate and a gain of 0.8 mb/d (0.9%) on the year earlier. The modest upside revision is attributable to marginally higher base demand numbers and GDP projections provided by the IMF (see 'IMF Cautiously More Optimistic on The Global Economy').

The predicted improvement in economic activity over the course of the year sees global oil demand attain y-o-y growth of 0.6 mb/d (0.7%) in 2Q12 (to 88.6 mb/d), accelerating through to 1.0 mb/d  in 3Q12 and 1.2 mb/d in 4Q12. The pace of demand growth in the non-OECD will exceed expectations for the OECD, where demand is predicted to continue to ease, not only amid weaker economic activity but also reflecting a structural oil demand decline which, barring 2010, has been in place since 2005.

Relatively high oil prices allied to the mild winter weather overall at the start of 2012, curtail the extent of 2012 demand growth. The Brent price that underpins this demand forecast is for an average of around $112/bbl in 2012, up from $108/bbl in 2011. The degree of negative price impact however appears to have diminished, as not only have prices softened recently but also as demand growth remains primarily driven by rapidly expanding non-OECD incomes, and as consumers outside of the US face much less in the way of direct feed-through from high international crude prices. The income effect has a much more pronounced impact upon demand than the price effect. That is not to say that high oil prices are not a disincentive to consumption in the medium and longer term. However, we would continue to see the impact of high prices globally stemming more indirectly via macro-economic impacts, as opposed to direct demand suppression via price, with again the potential exception here being the US. That being said of course, further downside risk to the demand projection, at the margin, could accrue were prices to spike again in light of any worsening geopolitical and related supply-side events.

Of the individual products within our base case, gasoil/diesel will provide the majority of the growth in 2012, with an additional 0.4 mb/d of consumption added (roughly half of the global increment), taking total demand to 26.5 mb/d.  Gasoil's strength, largely attributable to the economies of the non-OECD, is seen growing by 0.5 mb/d to 14.0 mb/d, supported by the still relatively strong industrial, construction and agricultural sectors. OECD demand for gasoil is projected to fall by around 70 kb/d in 2012 to 12.5 mb/d, with lower heating oil demand outweighing increases foreseen in OECD diesel demand.

Having fallen by around 80 kb/d in 2011, gasoline demand is forecast to expand by 180 kb/d in 2012, taking global gasoline consumption to 22.5 mb/d. The majority of the growth is a consequence of rapidly expanding non-OECD incomes, as non-OECD gasoline demand is predicted to rise by 290 kb/d to 8.7 mb/d. Demand continues to contract in the mature OECD markets. The greatest global contraction is forecast in heavy fuel oil, with a dip of 60 kb/d expected globally to 8.3 mb/d. Tougher environmental legislation in the OECD will result in this region leading the downside momentum, with a 100 kb/d OECD drop envisaged to 2.7 mb/d. This is despite incremental use in Japan for power generation.

IMF Cautiously More Optimistic on The Global Economy

The IMF has raised its global economic growth projections for 2012, and to a lesser degree 2013, in the World Economic Outlook (published April 2012), with growth of 3.5% now foreseen in 2012 rising to 4.1% in 2013. Back in January the IMF was predicting growth of 3.3% in 2012 and 4.0% in 2013. Leading the upside revisions are the notably stronger growth projections for the US, Germany, France, Canada and Japan.

The converse of the old adage 'when the US sneezes, the rest of the world catches a cold' now seems to apply, with the rest of world now benefiting from stronger US economic activity in the form of greater export opportunities and the general confidence garnered from rising equity markets. Previously, US economic growth of 1.8% was foreseen in 2012 whereas now the IMF believes an acceleration towards 2.1% is probable (from 1.7% in 2011), with a further increase towards 2.4% pencilled in for 2013. These estimates already lean towards the more conservative of predictions, with the US Federal Reserve having since forecast US growth of 2.4%-to-2.9% in 2012 and 2.7%-to-3.1% in 2013.

The IMF also cited the relative success of the policy response to the European debt crisis, as further supporting its higher economic projections. The euro zone is still forecast to dip into a mild recession in 2012, as the sovereign debt crisis chokes off economic activity, but the assumed decline rate is less than previously assumed (-0.3%, whereas in January -0.5% was assumed).

Heightened downside risks remain, with particular emphasis made by the IMF on its warning with regard to a large increase in oil prices and the risk of a further implosion in the economies of the euro zone. On this latter point, the IMF suggests a euro zone crash scenario whereby global and euro zone output decline, by 2% and 3.5% respectively over a two-year time frame. Considerable attention is also given to the IMF's doomsday scenario whereby the oil price rises by a further 50% (on the IMF's baseline projection), which they forecast removing 1.25% from global economic output. Of course, if either of these two scenarios were to happen then our own oil demand estimates (based largely on the recent IMF GDP estimates) would be greatly reduced. For example, feeding the latter scenario into our model would result in a global demand estimate on a par with our own lower GDP sensitivity, carried in January's OMR, effectively leaving 2012 global oil consumption unchanged at 2011 levels.

It is worth noting that in the IMF's base case scenario non-OECD growth was revised modestly lower, which given their higher associated income elasticity keeps a relative lid on the feed through from stronger global GDP growth through to oil demand.

Note: the four-tenth of a percentage point upside revision in the Japanese economic projection, to +2.0% for 2012, could place an additional burden on the Japanese power generation sector (see 'Japanese Power Sector Demand: One Year After Fukushima', OMR dated 12 April 2012).


According to preliminary data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) contracted by 2.1% y-o-y (or by 1.0 mb/d) in March, to 45.4 mb/d, with all regions bar the Pacific declining. Demand plummeted by over 4% in OECD Europe and nearly 3% in OECD North America (which includes US Territories), with losses seen across all of the major product sub-categories. In OECD Pacific (+4.2%), higher direct crude burn and residual fuel oil use, following the near complete closure of the Japanese nuclear industry (see 'Japanese Power Sector Demand: One Year After Fukushima', OMR dated 12 April 2012) offset big losses in jet/kerosene (-6.9%) and heating oil (-1.2%).

The 1Q12 OECD demand estimate is 45.5 mb/d, a drop of 1.7% on the corresponding period a year earlier (-0.8 mb/d). An absolute reduction of 15 kb/d has been seen since last month's report, as European consumption came in below expectations. For the year as a whole, OECD demand is forecast to contract by a more modest 1.0% (-0.5 mb/d) to 45.2 mb/d, on account of the projected lessening in the rate of decline through the year. A y-o-y demand decline of 1.4% is foreseen in 2Q12, -0.7% in 3Q12 and -0.3% in 4Q12. The largest OECD contractions in 2012 are envisaged in heavy fuel oil (-3.4%) and jet/kerosene (-1.6%), with only diesel demand forecast to offer anything near growth (+0.1%).

North America

Consumption of oil products continues to fall heavily, according to the latest preliminary data for 1Q12, with demand averaging 23.2 mb/d a drop of 630 kb/d (-2.7%) on the year earlier. Despite this continued downturn, hope has emerged that the declining trend is abating, led by early indicators that US demand flat-lined y-o-y in February.

Having endured ten consecutive months of heavily falling demand, US oil consumption is finally showing signs of bottoming-out. Total demand in the US (excluding territories) amounted to 18.7 mb/d in February, down by 1.2% on the corresponding month a year earlier and notably less than the recent near-5% declines seen in December and January. US consumers have shown remarkable resilience in the face of rising retail prices, with February gasoline demand up 5.2% on January levels despite the corresponding 6% hike in pump prices. This month-on-month (m-o-m) gain is gasoline's strongest performance within the last three and a half years, amounting to a y-o-y contraction of 0.5%, its slowest in nearly a year. Not only did vehicles miles travelled rise in February (up 1.8% y-o-y), but also 14.3% more vehicles were sold, at a seasonally adjusted 15.7 million units.

Revised February data cite gasoil demand averaging 4.0 mb/d in February, up by 2.3% y-o-y. We attribute this rise to expanding activity in America's strong manufacturing sector, traditionally a big consumer of distillates, illustrated by an above-50 reading from the Institute for Supply Management's Manufacturing Index. Further evidence for this trend comes from the 31.7% y-o-y gain in seasonally adjusted heavy vehicle sales in February.

Preliminary estimates for March pointed towards average US consumption of 18.6 mb/d, down by 3.5% on the year earlier, as gasoil demand slipped back into negative territory on account of 2011's late winter peak (March as opposed to February) and concerns that economic progress is still far from clear cut.  The US Labor Department, for example, reported that 115,000 new jobs were created in April, roughly half the level traditionally deemed to be required to support a strengthening economy. Demand is assumed to average 18.6 mb/d in 1Q12, a y-o-y decline of 3.1%, and a level it is forecast to maintain in 2Q12, down 1.2% y-o-y. The declines are then forecast to disappear in 3Q12, as demand remains roughly unchanged y-o-y, before rising 0.8% in 4Q12 taking total US50 consumption to 18.9 mb/d. The relative performance of US demand is forecast to rebound as economic growth strengthens through to 2013 (from 2.1% in 2012 to 2.4% in 2013).

In Mexico, oil demand grew marginally in March (up 0.8% y-o-y), following a 2.6% drop in February. Demand for gasoil/diesel (4.8%) and 'other products' (13.8%) showed firm growth, while residual fuel oil (-10.9%) lagged. Consumption found support on solid economic output from the industrial sector, but Mexico's export-driven growth entails downside risks as the US economy has yet to provide fully convincing signs of sustainable growth. Interestingly, residual fuel oil demand was subdued against cost-competitive natural gas and LNG in the power sector, because of new LNG import capacity and electricity generation at the western port of Manzanillo. During 1Q12, the government's monthly marginal price hikes on transport fuels have weighed down on gasoline demand, albeit against strong growth in passenger and commercial vehicle sales. Although its monthly price hike is marginal, it has successfully kept gasoline demand flat since the beginning of 2011. Diesel demand, on the other hand, trailed economic activity, but remains dependent on the health of North American trade. Our current forecast of Mexican total oil product demand remains flat at 2.1 mb/d.


Oil consumption in Europe is in a dire state, matching the region's general state of economic malaise, as March unemployment rose to 10.9% in the euro zone (10.2% for wider EU). The latest figures show Greece, Spain, Italy, Portugal, the Netherlands, Ireland, Slovenia and the UK in the midst of technical recession - i.e. enduring two or more consecutive quarters of negative economic growth.

Preliminary data depict total oil product demand at 13.7 mb/d in March, down by 640 kb/d (or -4.5%) on the year earlier. Naphtha demand performed particularly poorly, down 5.8% to 1.1 mb/d, as ailing gasoline consumption reduces blending requirements. The falling overall European demand trend reflects not just an unusually warm March but also the weak economic backdrop, near-record high retail prices and the heightened sense of EU political uncertainty amid government changes in France and Greece. This reinforces the predicted y-o-y drop of 540 kb/d (-3.8%) in 1Q12, taking the OECD European demand estimate to 13.7 mb/d.

Bleak confidence indicators, such as Markit's Purchasing Managers' Index (PMI) falling to a near-three-year low of 45.9 in April, imply further short-term demand weakness. Although European demand is forecast to fall in y-o-y terms throughout 2012, the pace of the declines should lessen as the worst of the economic slowdown is assumed to occur in the first half of the year.

France consumed 1.8 mb/d of oil products according to preliminary data for March, 3.9% less than a year earlier, with transportation fuels performing particularly poorly. Gasoline demand, although up seasonally, plummeted 9.1% to 160 kb/d, while road diesel edged 2.1% lower to 700 kb/d, as near-record retail prices and a weak economic backdrop undermined consumption. The newly elected President has promised to cap petrol prices for three months by adjusting the tax on the fuel, a policy that could impact upon demand. The exact details of the plan have yet to emerge. Heightened economic concerns caused even worse demand contractions in Italy and Spain, with respective y-o-y drops of 12.2% and 8.6% (both to 1.3 mb/d).

UK demand data remain weak, as total oil product demand came in at 1.6 mb/d in February, a drop of 5.3% (or 90 kb/d) on the corresponding metric last year. The UK officially entered 'double-dip' recession territory in 1Q12, as predicted by the OECD a couple of weeks earlier. Weak economic news coincided with near-record retail prices for fuels such as motor gasoline, which saw demand down by 3.2% y-o-y to 330 kb/d. The outlook remains bleak, with total UK demand forecast to decline by 3.2% in 2012 to 1.6 mb/d.

A more modest 1.6% y-o-y contraction was seen in Germany, as preliminary data put demand around 2.4 mb/d for oil products in March. Relatively robust industrial consumption supported demand for oil products, with diesel up 3.3% in March to 720 kb/d. Gasoline also performed relatively well, considering the sharp falls seen across most of Europe, down just 0.3% y-o-y to 450 kb/d.


OECD Pacific demand remains supported by the nuclear-related shutdowns in Japan, with preliminary consumption of 8.4 mb/d in March, 335 kb/d (4.2%) more than the corresponding month in 2011. Heavy fuel oil and other products, which include crude oil for direct burn, continue to dominate growth prospects, as they are the key replacement fuels in the power sector shorn of nuclear capacity. Here, respective y-o-y expansions of 16.2% and 25.9% are forecast. Temperatures in March were colder than the ten-year average but higher than in 2011.

In March, according to preliminary data, Japanese oil product deliveries posted their largest y-o-y increase (9.9%) in nine years (albeit distorted by very low demand in March 2011 on account of the tsunami). Demand grew across all product categories, bar naphtha and jet/kerosene, notably residual fuel oil and 'other products', which include direct crude burn, rose by 41.6% and 32.5% respectively, on the back of strong electricity generation.

Japanese economic activity drove total electricity generation in March to 81.9 TWh an increase of 1.3% year-over-year and in line with the five-year average. Total thermal generation during 1Q12 rose to a record high of 186 TWh or 73% of total generation. Strong electricity consumption certainly boosted oil product demand but economic activity in general also gave support to LPG (+24.7%), diesel (3.2%) and gasoline (2.8%). Our 2012 demand outlook for Japan thus remains unchanged for now at 4.5 mb/d, showing growth of some 40 kb/d or 0.9% versus 2011, although the nuclear closures bring an additional layer of uncertainty to the forecast (see 'Japanese Power Sector Demand: One Year After Fukushima', OMR dated 12 April 2012). We continue to assume a very gradual nuclear recovery towards end-2012, although a zero-nuclear case has only a marginal impact and would raise our oil demand projections by 80 kb/d for 2012 as a whole.

South Korean demand fell heavily in March, down by 6.2% y-o-y to 2.2 mb/d and a 170 kb/d reduction on our previous forecast. Lower demand numbers were seen right across the board, bar motor gasoline, with naphtha (with demand at 960 kb/d, 60 kb/d less than assumed in last month's report), jet/kerosene (-40 kb/d) and residual fuel oil (-25 kb/d) taking the brunt of the correction. Overall the greatest volumetric y-o-y declines were seen in jet/kerosene (-55 kb/d) and residual fuel oil (-50 kb/d). The former followed reports of warm weather; the latter in response to a dramatic fall in demand of bunker fuels as less freight cargoes travelled in March. Despite relatively strong survey data (HSBC's Manufacturing PMI rose to a one-year high of 52.0 in March), industrial oil demand fell heavily, with all the major industrial sectors, except construction, using less oil products than they did a year earlier. Modest demand growth is forecast to return in 3Q12 and 4Q12, supporting demand of around 2.2 mb/d in 2012 up 0.6% on the year despite the government announcing it plans to launch efforts to curb demand.


Consumption conditions remain strong in the non-OECD although demand growth remains significantly below the near-6% growth peak it demonstrated at the end of 2010. Preliminary March demand of 44.0 mb/d shows only a negligible slowdown, up by 3.4% on the year earlier. The relative resilience of the non-OECD demand trend may at first glance appear surprising, given oil prices are nearly a third higher against a weaker economic backdrop. However, demand in many markets is bolstered by the continued existence of end-user price subsidies, which cushion consumers from the impact of high international prices.

Transportation fuels continue to drive non-OECD demand, as rapidly expanding incomes not only make motorised transportation an increased possibility for many but subsidies also provide a level of price protection. Gasoline led the upside momentum, as consumption rose by an estimated 5.5% y-o-y in March to 8.4 mb/d. The potential for further strong gains remains, as total non-OECD gasoline demand is still less than in the world's largest consumer, the US.

For the year as a whole, non-OECD demand is estimated at 44.8 mb/d, a gain of 2.9% or 1.2 mb/d over 2011. A resilient economic backdrop, with GDP growth of 5.6% assumed for 2012 and, for now price -cushioned consumers, combine to support the growth prediction. Notably strong expansions are foreseen in transportation fuels, with gasoline demand forecast to rise by 3.5% to 8.7 mb/d and gas/diesel consumption expected to gain 3.6% to 14.0 mb/d.


The latest apparent demand figures for China, (net product imports plus refinery output), show a slight uptick in demand growth following the low figures witnessed at the turn of the year. Estimates for 1Q12 demand point towards total product consumption of 9.9 mb/d, 3.4% (or 330 kb/d) higher than a year earlier after a relatively flat 4Q11 (up 0.3% y-o-y). Chinese demand growth remains muted in comparison to the double-digit percentage point gains seen at the beginning of 2011, with the most obvious decelerations seen in the industrially important gasoil and naphtha markets. Having risen by as much as 11.1% y-o-y in 1Q11, gasoil demand growth fell back to 2.8% in 1Q12 (to 3.4 mb/d) as manufacturing activity slowed. HSBC's PMI has endured six consecutive months of sub-50 readings through April, implying contracting sentiment in the manufacturing sector, albeit at a lesser degree (as the index has risen to 49.3 in April, from 48.3 in March). Naphtha consumption growth similarly fell, from 10.2% in 1Q11 to 0.8% in 1Q12 (to 1.2 mb/d), as demand from the previously buoyant petrochemical sector waned.

Reflecting the relative Chinese slowdown, production of electricity rose by its lowest non-holiday amount for a year in March. Electrical output is traditionally a good indicator of underlying Chinese demand trends, given the paucity of otherwise reliable data. China used 344 TWh of thermally-generated electricity in March, a gain of 7.3% on the corresponding period in 2011. Total electricity output also rose by just over 7% y-o-y in March, to 410.9 TWh, according to the National Bureau of Statistics.

Growth in the Chinese economy has steadily eased since 4Q10. According to the preliminary series from the China National Bureau of Statistics economic growth came out at 8.1% in 1Q12, a couple of percentage points below the consensus estimate of the markets. We are forecasting Chinese oil demand growth of 4.1% in 2012, to 9.9 mb/d, on the assumption that the Chinese economy will expand by 8.2%. Our demand estimate leans towards the lower end of the spectrum (with estimates stretching as high as 8%), as we believe the authorities' ability to reflate the economy will be contained by persistent inflationary pressures (as the consumer price index rose 3.6% y-o-y in March). Despite this, demand growth is forecast to accelerate through the year, to 4.8% by 4Q12 (to 10.2 mb/d), as the underlying economics solidify.

Transportation fuels will continue to underpin Chinese demand growth, at least in the short term, as any pending electric car revolution remains a long way off. Consumers in Shanghai, for example, bought a mere 40 electric cars in 2011 (People's Daily, 16 April), versus a government target for Shanghai of 1 000. The recharging infrastructure, meanwhile, remains insufficient with only 93 charging stations opened in Shanghai in 2011, against an intended 700. Near-4% demand gains are foreseen in both gasoil and gasoline, as growth is forecast to remain muted consequential on the weak economic backdrop, the recent price gains and relatively slow car sales (up 4.5% y-o-y in March, to 1.4 million, according to the Chinese Association of Automobile Manufacturers).

Other Non-OECD

Gasoline fundamentals remained tight in Brazil amid firm demand, low supply of ethanol and high gasoline prices. Even though total gasoline consumption (including ethanol) grew by 2.5% y-o-y in February, the share of ethanol (by volume) remained at a low 38% of the total gasoline pool. The latter is on the back of low stocks of ethanol during the inter-harvest period and historically poor investment in the sector. Going forward, the long awaited 2012 sugarcane harvest in Brazil started with weather-related delays reducing output. However, the Sugarcane Industrial Union of Brazil (UNICA) said that laboratory tests on cane samples showed recoverable sugar content was 10-15% higher than last year. Also the industry union informed that around two thirds of the crushed cane was channelled to ethanol production due to price signals that favour the motor fuel over refining sugar. Effectively, the start of the season in late April brought a respite to ethanol consumers and helped tame the price of blended motor gasoline, highly demanded by flex-fuel vehicles. The economy is showing signs of slowing down, as sales of passenger vehicles and light commercials in Brazil came in flat during 1Q12 versus last year, while gasoline imports during the same period retraced slightly from the historically high level observed in December. In 2012, Brazilian total products demand is expected to be 2.8 mb/d, a year-over-year increase of 1.2%.

Preliminary estimates of Indian demand in March point towards a 5.1% y-o-y gain to 3.7 mb/d. Gasoil demand continues to show the strongest significant growth, as consumption rose by an estimated 10.3% y-o-y to 1.5 mb/d, supported by particularly strong growth from the automotive and power sectors. Subsidies on diesel consumption continue to distort demand trends in relation to fuel oil and gasoline, which are sold at market prices. Indian demand is forecast to rise by 3.4% in 2012, to 3.6 mb/d, as consumption expands supported by an economy forecast to grow by just under 7%.

Russian demand continues to surge thus far in 2012, with the second month of near-double-digit percentage growth y-o-y seen in March, taking total demand to 3.5 mb/d. The preliminary March estimate is 215 kb/d up on last month's forecast as strong growth in February proved to be more than a temporary aberration. Transportation fuels led the upside, with gasoline demand 12.4% higher at 750 kb/d and jet-kerosene up 9.9% at 250 kb/d. The Russian demand forecast has been significantly revised higher in recent months to reflect not just the recent flow of more bullish demand data, but also what now looks a stronger structural trend. Russian consumption is now forecast to average 3.6 mb/d in 2012, a 3.4% gain on 2011, whereas last year we were assuming a relatively flat 1% trajectory for 2012.



  • Global oil supply increased by 0.6 mb/d to 91.0 mb/d in April, with OPEC crude production accounting for more than 70% of the increase. Compared to a year ago, global oil production stood 3.9 mb/d higher, 90% of which stemmed from increasing output of OPEC crude and NGLs.
  • Non-OPEC supply increased by 0.1 mb/d to 52.9 mb/d in April from the prior month. A seasonal rise in biofuels output offset declining supply in the UK North Sea and at synthetic crude plants in Canada. Non-OPEC supplies are expected to grow by around 600 kb/d to 53.3 mb/d in 2012, 90 kb/d lower than last month's estimate due to downward revisions to Africa and Latin America. The outlook assumes that substantial production stoppages affecting the Sudans, Syria and Yemen persist for much of 2012.
  • OPEC crude supply in April rose by 410 kb/d, to 31.85 mb/d, with Iraq, Nigeria and Libya providing 85% of the increase. The 'call on OPEC crude and stock change' has been raised by 0.2 mb/d to 30.9 mb/d for 3Q12 and by 0.4 mb/d to 30.7 mb/d for 4Q12, taking the 2012 average to 30.3 mb/d. OPEC's April effective spare capacity declined to an estimated 2.38 mb/d from 2.54 mb/d in March. For 3Q12, OPEC sustainable crude capacity is expected to increase by 330 kb/d, to 35.3 mb/d.
  • OPEC has increased output for seven months running and volumes are now nearly 3 mb/d above April 2011 levels. Higher OPEC production has, in part, offset constrained non-OPEC supplies stemming largely from unplanned outages. OPEC's Gulf producers also appear to have ramped up output ahead of the anticipated disruption in Iranian crude flows in coming months as the EU's 1 July oil embargo nears.

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

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

OPEC Crude Oil Supply

OPEC crude supply in April rose by 410 kb/d, to 31.85 mb/d, with Iraq, Nigeria and Libya providing around 85% of the increase. Indeed, higher Iraqi exports accounted for half of the incremental supply. Angola, Kuwait and the UAE also posted smaller month-on-month increases.

OPEC producers have increased output for seven months running and volumes are now nearly 3 mb/d above April 2011 levels. Higher OPEC production has, in part, offset constrained non-OPEC supplies stemming largely from unplanned outages, now forecast to average a steep 1.3 mb/d in 2Q12 (see Non-OPEC Supply). OPEC's Gulf producers also appear to have ramped up output to meet increased customer demand in response to the potential disruption in Iranian crude flows in coming months as the EU's 1 July oil embargo nears. EU and US sanctions are expected to ultimately impact upon 800 kb/d to 1 mb/d of Iranian exports compared to 2011 levels.

The 'call on OPEC crude and stock change' has been raised by 0.2 mb/d to 30.9 mb/d for 3Q12 and by 0.4 mb/d to 30.7 mb/d for 4Q12. For 2012 as a whole, the 'call' is raised by 0.2 mb/d, to 30.3 mb/d.

OPEC's 'effective' spare capacity declined to an estimated 2.38 mb/d from 2.54 mb/d in March. A baseline downward adjustment to Qatar crude output and capacity levels by an average of 75 kb/d for 2011-2012 also contributed to the revision. For 3Q12, OPEC sustainable crude capacity is forecast to increase by 330 kb/d, to 35.3 mb/d, with Iraq and Angola bringing on stream new production accounting for half the incremental barrels and smaller contributions from Nigeria, Libya, Kuwait and the UAE. OPEC is now producing nearly 2 mb/d above its collective target of 30 mb/d agreed at its December 2011 meeting. The producer group will next meet 14 June in Vienna to discuss the market outlook and review output targets.

Iranian crude output was unchanged at 3.3 mb/d in April. While some of the country's main buyers, including Japan and South Korea, are gradually reducing Iranian crude imports, other countries such as Turkey and South Africa appear to have ramped up imports ahead of the 1 July sanctions deadline. Latest tanker data show a steep drop in Iranian imports by OECD Europe countries in April but data are highly preliminary. Traders say Iranian crude exports in April were estimated at as much as 1.8 mb/d, although this does not necessarily conflict with lower levels of imports which we show overleaf. Tracking Iranian exports has become increasingly difficult following reports that the National Iranian Tanker Company (NITC) ordered its vessels to shut-off their communication beacons (See Freight, 'Iranian Tankers Play Hide & Seek').

In addition, a wide range of estimates have emerged for Iranian crude held in floating storage. It appears that much of the unsold March production ended up in onshore and floating storage in April. Estimates of crude held in floating storage at end-April ranged from 20-35 mb compared with 8 mb in March. That is equivalent to a rise of between 450 kb/d-800 kb/d held offshore. A further 20-25 mb has reportedly been stored at onshore facilities in recent months.

Adding to the confusion, NITC is reported to be actively shuttling crude from Kharg Island to the Suez-Mediterranean (Sumed) facility at Ain Sukhna, Egypt so that customers, unable to get insurance for Iranian ports, pick up barrels CIF from the other end of the Sumed pipeline at Sidi Kerir in the Mediterranean. Indeed, securing insurance for tanker movements before the sanctions go into full force has proved one of the most challenging aspects of the sanctions. The UK is reportedly planning to request that the EU postpone by six months the ban on insurance coverage for tankers carrying Iranian oil, arguing that more time is needed for companies to find alternative coverage, which could lead to a sudden jump in costs as the July deadline nears. While the bulk of Iranian exports go to Asia, the impact of the measure is expected to have a large impact on London's marine insurance market.

Saudi crude oil supply in April was unchanged at an estimated 10 mb/d. Oil Minister Ali al-Naimi reported in early May that the Kingdom holds 80 mb in inventories. Approximately 10 mb is stored near consumer markets in Okinawa, North West Europe and Sidi Kerir, with the remaining inside the Kingdom. Crude supplies are on track to go above 10.1 mb/d in May, according to tanker loading data and volumes may rise further in June given the steep price discounts announced for mainstream Arab Light crude sold into Asia. Some of these liftings may be from storage.

Saudi Aramco slashed Arab Light prices for Asian buyers by $1.30/bbl for June. Customers expected Aramco to lower prices, given markets are relatively well supplied and the narrowing of Dubai crude's backwardation for prompt sales. Nonetheless, the cuts were steeper than anticipated and are likely to prompt some customers to increase liftings in June on improved margins.

Iraqi crude oil production in April rose by 195 kb/d to 3.03 mb/d, the highest level in several decades. Oil exports rose to 2.51 mb/d. Basrah shipments were up by around 200 kb/d to 2.12 mb/d, with increased exports from the new Single Point Mooring (SPM). A second SPM was inaugurated in April, but both SPMs are operating well-below capacity given constraints with pumping capacity on trunk lines from producing fields and lack of storage tanks. Near term, export capacity from the two SPMs combined is expected to be capped at 300 kb/d versus nameplate capacity of 1.8 mb/d until infrastructure problems can be resolved.

Exports of northern Kirkuk crude were 400 kb/d in April, up a marginal 5 kb/d from March. Exports from the Kurdish region, which feed into the Kirkuk crude stream, were halted in early April due to ongoing payment disputes between Baghdad and the Kurdish Regional Government (KRG). To date, little progress in resolving the complex issues has been reported.

Crude supply from Qatar was unchanged in April at 750 kb/d after March estimates were revised down from an earlier 810 kb/d. Qatari Oil Minister Mohammed al-Sada production at the Al-Shaheen field has been constrained to around 300 kb/d since 2009 due to reservoir complications, despite the major capacity expansion of the field to some 550 kb/d. As a result, Qatar's production and capacity have been lower than reported and revised down by around 75 kb/d for 2011-12 and 60 kb/d for 2009-2010.

Libyan production in April rose a further 50 kb/d to 1.4 mb/d from a revised 1.35 mb/d for March. Output is edging closer to its pre-civil war average of 1.6 mb/d in 2010 from just 460 kb/d in 2011. Production from the Sarir and Mesla fields remains below capacity while repair and maintenance work takes place, which may now not be completed for another month. Protesters, calling for more transparency on how the new government has spent oil revenues, led to Libya's largest oil company, Arabian Gulf Oil Co (AGOCO), to shut-in some of the company's 360 kb/d production for more than two weeks in late April/early May. Protesters effectively closed AGOCO's headquarters on 23 April, which forced the company to shut-in production of around 30 kb/d. Security forces retook the building on 9 May.

Nigerian crude output rose by 100 kb/d to 2.15 mb/d, largely due to the steady ramp up in production from the deepwater offshore 180 kb/d Usan field. However, Shell was forced to shut-in 60 kb/d of Bonny Light crude and declare force majeure on 4 May due to theft and illegal bunkering along the Nembe Creek trunk line. New production in Angola also boosted April output, up by 25 kb/d to 1.75 mb/d. Output from the 220 kb/d Pazflor deep-water complex is estimated to have reached around 200 kb/d. Angolan supplies are expected to decline again in June due to planned maintenance work at the massive 250 kb/d deep-water Girassol complex. Operator Total said output would be reduced in June in order to link new volumes from a satellite field, aimed at stemming decline rates. Total previously linked new wells, such as those from the nearby Jasmim field, to Girassol in order to maintain production levels.

Non-OPEC Overview

Non-OPEC supply fell by around 600 kb/d in March amid lower expected US NGL output and ongoing production disruptions affecting Australia, Colombia, Brazil, the North Sea, the Middle East, and Africa. Yet overall, supplies grew by 180 kb/d in March y-o-y and were also 600 kb/d higher on a quarterly basis in 1Q12 y-o-y. April output is expected to have improved marginally, and non-OPEC supplies should post another annual gain of 470 kb/d in 2Q12. Non-OPEC supplies should grow by around 600 kb/d to 53.3 mb/d in 2012, 90 kb/d lower than last month's estimate. In short, growth from the Americas offsets longstanding outages affecting Middle East and African production.  US crude production has risen above 6.0 mb/d in 1Q12 for the first time in over 13 years as companies employ horizontal drilling and hydraulic fracturing to liquids-rich shale and carbonate plays. Annual production growth in North America is expected to average 0.6 mb/d for the remainder of the year.

Unplanned outages should increase in the second quarter of this year to around 1.3 mb/d, much higher than any quarterly reading in 2011 and 200 kb/d worse 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 around 700 kb/d in 2H12. As discussed last month, outages in Syria, Yemen, Sudan, and a hurricane allowance in the US comprise the majority of the 1.0 mb/d in unplanned outages that are assumed for 3Q12.

The major source of the revision to non-OPEC supplies compared to last month is related to the escalation of the tensions between Sudan and South Sudan, with South Sudanese forces targeting the 40-60 kb/d Heglig field in Sudan. With no evidence of trucked volumes making their way south, estimates for oil production have also been cut in 2Q12 and 3Q12. Elsewhere in non-OECD countries, Brazilian output is faltering slightly and expectations have been reduced by 50 kb/d in 2012. Canadian output is reduced by 10 kb/d on balance in 2H12 to take into account turnarounds at offshore facilities.


North America

Canada—January actual: Canadian oil output fell from a record high of 3.8 mb/d in December 2011 to an estimated 3.6 mb/d in March due to unplanned maintenance at synthetic crude oil production facilities. Synthetic crude output fell to 670 kb/d in April but will likely rebound to 780 kb/d in May. Production is stabilising from Alberta Light and Medium output as well as from Saskatchewan, and we have increased expectations during 2H12 by 30 kb/d. This upward revision has been offset by taking into account planned maintenance at Husky's Sea Rose FPSO and Nexen's Terra Nova and White Rose FPSOs. The Sea Rose maintenance will last 125 days, and the Terra Nova and White Rose FPSO maintenance will last for slightly longer. All told, this maintenance is expected to reduce 3Q12 production at the Terra Nova, Hibernia, and White Rose fields to no more than 150 kb/d, which is around 130 kb/d less than last year. The maintenance will not dent the resilient growth in other Canadian production during 2H12, with total Canadian oil production increasing by 6% (210 kb/d) to 3.8 mb/d.

US - March preliminary, Alaska actual, other states estimated: Production from light tight oil formations and the Gulf of Mexico increased US crude production in March to 6.1 mb/d. Crude production grew by more than 11% (590 kb/d) year-on-year in 1Q12. With the exception of 3Q09, when the Gulf of Mexico rebounded strongly from Hurricanes Gustav and Ike the prior year, US crude production last quarter increased at the highest annual pace since at least 1994. The breakneck pace of growth is expected to moderate slightly in upcoming months due to turnarounds at Gulf of Mexico facilities in 2Q12 and the hurricane season. NGL supplies are expected to have declined due to fractionator maintenance in March and 2Q12 to around 2.2 mb/d, from record levels of 2.3 mb/d in 4Q11. Upward revisions to Texas and other Lower-48 oil production raised US liquids output to 8.7 mb/d in 2012, 0.6 mb/d higher than in 2011.

North Sea

North Sea crude and condensate production is expected to fall by 300 kb/d in 2Q12 year-on-year to average 2.7 mb/d due to seasonal and unplanned maintenance. Production is expected to fall further by 180 kb/d to 2.5 mb/d in 3Q12, potentially amplifying the relative strength in benchmark Brent prices versus other grades. Output of crude streams linked to Dated Brent prices are expected to fall by 130 kb/d (-12%) from 3Q11 to around 960 kb/d in 3Q12. Some upside to these 3Q12 estimates exists if producers decide to undergo seasonal maintenance earlier or later than planned.

UK—March preliminary, February actual: Forties output fell by 40 kb/d in March, contributing to a decline in UK offshore crude output of 60 kb/d to average 1.0 mb/d. Based on preliminary loading schedules, output is expect to fall by 160 kb/d in 2Q12 from the prior quarter and by 20% from the prior year. The Buzzard field went offline for several days in April, due to a bearing failure in one of the gas compressors, which results in three deferred cargoes for May. We assume that because of Buzzard's lingering operational issues and unconfirmed maintenance in 3Q12, as well as the Elgin/Franklin/Shearwater leak, Forties production will average only 340 kb/d during 2H12 (60 kb/d less than 2H11). In this area production is revised downwards from last month by 20 kb/d in 2H12 to take into account lower expectations from the Erskine and Callanish fields. Although Apache brought online the long-awaited Bacchus field in April, we have tempered our expectations slightly and believe the field's output level is unlikely to exceed 12 kb/d by the end of the year, before increasing to 18 kb/d during 2013. In sum, UK oil output should average around 950 kb/d in 2012, around 15% below 2011. Third quarter total production is expected to decline by 11% y-o-y.

Norway—March preliminary, February actual: Total liquids output averaged around 2.1 mb/d during the last six months, and sustained this level in large part from rising NGL production. We expect that production will fall to around 2.0 mb/d in May with the onset of some seasonal maintenance and from field problems at Ormen Lange.  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, but the fields returned to normal rates earlier than expected in mid-April. Since last month, we have increased the outlook for NGLs during 2H12 by around 20 kb/d due to higher than expected historical output. Gjøa's crude and

NGL output has exceeded expectations and has now increased to around 100 kb/d since the field came online in November 2010. Oselvar is now onstream, adding around 15 kb/d via a tieback to the Ula field. The positive revisions are partially offset by a field delay at BP's 85-kb/d Skarv, now expected online in 4Q12. In sum, Norway's liquids production is revised up by around 10 kb/d in 2012, posting a 3% decline from 2011 to 2.0 mb/d.


Latin America

Brazil - March actual: Brazilian crude and condensate production fell by over 100 kb/d in March to 2.1 mb/d. Production from the Marlim, Marlim Sul, Roncador and Frade fields in the Campos basin fell by almost 100 kb/d to 750 kb/d. The fields account for around 40% of Brazil's 2.1 mb/d output, and the monthly decline constrained Brazil's year-on-year growth to the prior year's level. We have slightly tempered our expectations from the Marlim and Marlim Sul fields to take the poor output performance into account. Brazilian crude production is expected to increase by 100 kb/d in 2012 to 2.3 mb/d. Updated Agriculture Ministry (MAPA) March and April biofuels production data was not available at the time of publishing so the biofuels forecast remains largely unchanged from last month.


South Sudanese forces (the SPLA) occupied and then retreated from the Heglig field in Sudan for about a week in April in an escalation of the conflict between the two countries. GNPOC operates the fields in Blocks 1, 2, and 4 in Sudan and South Sudan, and the company produced around 120 kb/d from them in 2011. Sudapet estimated the group of fields (in S. Sudan inclusive) produced only 60 kb/d in March 2012. We remain sceptical on the volumes currently flowing despite media reports that production from the Heglig field in Sudan has been restarted. Company and tanker tracking estimates will help indicate how much oil is actually being sold but these will be delayed. News reports indicated that the field sustained damage by both sides, meaning that a slow restart is likely. The military intensification is also a worrisome sign that increases the likelihood of continued conflict unless the two sides agree on the border and revenue sharing. Sudan and South Sudan's production is expected to average just 70 kb/d in 2Q and 3Q12, almost 400 kb/d less than before the countries separated.

Milking a Vaca Muerta: Argentina's YPF Expropriation Clouds Investment Climate

In the latest instance of resource nationalism in Latin America, on 16 April, Argentina's President Cristina Fernandez de Kirchner announced that the government was seizing control of Spanish firm Repsol's share of YPF S.A. The government now holds a 51% share in YPF (of which the oil producing Argentine provinces will hold 49%). Repsol's current 57.4% stake in the company will be reduced to 6.4%. YPF accounts for a third of the country's crude oil production of 560 kb/d. The government has declared that hydrocarbon self-sufficiency is in the public interest, and therefore other players in Argentina will be affected in the government's pursuit of that self-sufficiency. The government also created a Hydrocarbons Federal Council which will regulate the sector and make sure that the government's plans are being followed. The government takeover clouds the investment climate for international companies that might otherwise have been attracted to unconventional resources in the Vaca Muerta (meaning 'dead cow') and other plays. Absent foreign investor guarantees of contract sanctity, the move could deepen Argentina's product import needs in the short and medium term.

Motivating Factors. Fernandez has said that the expropriation was necessary due to a lack of investment and decreasing oil and gas production from YPF. Argentina was forced to import $9.4 billion in fuel last year as domestic crude and product production declined. Domestic liquids production has declined by an average of 3% per year over the last decade. Producers must pay a tax on exports, and refinery utilization rates suffered as refiners lost money on selling their products at subsidised prices. Argentina had been paying in kind for some of its fuel supplies from Venezuela with farm and manufactured products, and the country became a net oil importer in 2010. New trade restrictions that took effect on 1 February have exacerbated the problem this year, with key fuel supplier YPF saying the changes could mean it will face problems in importing products.  Short term financial gains may partially underpin the move as in previous instances. At the height of the global financial crisis, the government nationalised around $30 billion in private pension funds and renationalised airline Aerolineas Argentinas, which had been privatised in the 1990s.  The government believes that by reining in this private capital it will aid Argentina's rising fiscal deficit and deteriorating economic situation.

Vaca Muerta's resources. The Vaca Muerta formation spreads over an area of about 30 000 square kilometres (7.4 million acres), of which YPF holds a 40% interest. To apply the shale experience of the US to Argentina's geology, Repsol chose the formation in the Neuquén basin as the one with the most promise and spent around $300 million on mapping, exploration, and initial development. By January 2012, the company had drilled 28 new wells in the area. The formation contains around 21.2 billion barrels of oil equivalent of hydrocarbon prospective resources, as independently estimated by Ryder Scott. Contingent oil resources (those estimated to be potentially recoverable based on exploration to date) total around 1.1 billion barrels. For comparison Statoil and Lundin found 1.7-3.3 billion barrels of contingent oil resources at Avaldsnes and Aldous Major in the North Sea last year. The firm indicated that 77% of the area contains oil, with the rest containing dry and wet gas. At the time, Repsol indicated that about $28 billion for wells and 60 additional drilling equipment units would be needed to realise the resource's full potential, possibly raising Argentina's current output levels by 50%. A Repsol press release estimated that the play was around three times as thick but twice as high in pressure as the Eagle Ford unconventional play. Apache also owns 1.7 million acres in the Vaca Muerta. The company is producing around 0.9 bcm (89 mmcf/d) of natural gas and plans to drill several wells in 2012. But, Apache has said that the rig market is tight in the Neuquén, and large scale development requires significant additional infrastructure and human resources.  ExxonMobil also hopes to test a well it drilled in 2011 in the Vaca Muerta.

Resources to reserves.  The government's political interventions are unlikely to reduce the country's import needs, and it faces a steep challenge in achieving a short-term reduction in imports. The decision to expropriate Repsol's share, rather than taking control of the share through the open market, is bound to negatively influence foreign investors' decisions in Argentina. Looking forward, Argentina will need continued investment and an improved regulatory framework to turn resources into reserves. Vaca Muerta contains only 81 million barrels of 3P oil reserves, but much further exploration is needed to confirm the 7.2 billion barrels of resources assessed by Ryder Scott. YPF in particular will face higher borrowing costs from a downgraded Moody's rating. The government may claim production is showing short term gains; however, higher state influence is bound to direct capital to lower-return projects, companies will face higher borrowing costs, and a tight rig market is likely to make exploration and development in the Vaca Muerta costly for YPF and other players.

A cloudy outlook. In the near term we expect to see companies commit to new investments to secure their positions with the government. The government's move also adds an element of fear to producers and service sector players in Argentina that they could also suffer from increased scrutiny by the government over their commercial decisions. It has also raised the ire of the US, Mexico, and the EU and is sure to affect Argentina's trade relations. Finally, the lack of a clear path forward on how the government allocates the expropriated shares sets the stage for a possible conflict amongst provinces and with the central government.  Absent guarantees of stability from the government, producers are unlikely to risk significant investment to develop shale deposits in the Neuquén basin and to employ costly technologies to enhance existing production.

Middle East

Production from Oman fell by 30 kb/d in February to 870 kb/d, ahead of expected growth in coming months from enhanced oil recovery. Our forecast still assumes that Oman will fall short of the government's 1 mb/d target for the near 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.

Operators did not report any improvement to the export and security situation in Yemen in April and early May. Since 2010, output had been cut in half to 150 kb/d by 1Q12 as labour unrest and sabotage have prevented producers from exporting oil. Al Qaeda's branch in Yemen has exploited weakening government control The continued 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. Total's LNG facilities have been targeted twice in the last month, and some of its security-related officials were wounded. The output forecast for 2012 is lowered by 20 kb/d to 140 kb/d to take into account the worsening situation.

Former Soviet Union

Russia—April preliminary: Although Russian crude production fell by 20 kb/d in April from the prior month, production is still up by 1.1% compared to the prior year. Gazprom NGL production fell slightly in April, dragging down growth in crude output. Lukoil has successfully maintained production at its Western Siberian fields at around 880 kb/d while its Yuzhno Khylchuyu field has fallen below 40 kb/d after being at 60 kb/d in September 2011. TNK-BP's output increased by 10 kb/d from rising production at Verkhnechonskoye and the Uvat group of fields. The company mitigated the annual decline rate at the legacy Samotlor field to 6.2% in April, an improvement from the twelve-month average of 7.4%. 

FSU net exports rebounded by 160 kb/d to 9.11 mb/d in March but still remained 470 kb/d lower than a year ago. In contrast to recent trends, the month-on-month increase was led by rising product shipments while exports of crude oil fell by 40 kb/d to 6.4 mb/d. Kazakhstani deliveries fell as domestic refinery runs rose. Indeed, Kazakh producers opted to reduce shipments sent via the Transneft network by a combined 175 kb/d, with Novorossiysk (-190 kb/d m-o-m) bearing the brunt of these cuts, as more oil was railed to outlets such as the Ukrainian port of Odessa (+ 60 kb/d m-o-m). A reduction in Kazakh exports, largely resulting from work upgrading the CPC pipeline, is also a factor contributing to the 280 kb/d year-on-year contraction in Black Sea exports. Higher Primorsk shipments raised Baltic port exports by 70 kb/d in March. Meanwhile, the much-delayed Russian Baltic port of Ust Luga finally exported its first cargo at the end of March. Shipments from the port are now expected to be ramped up quickly from 90 kb/d in April to 400 kb/d in May.

Product shipments rose by 140 kb/d to 2.8 mb/d largely as a result of a 120 kb/d increase in fuel oil, most of which was delivered to Northern Europe and the US. However, this rise in total product liftings is anticipated to be short-lived as refinery maintenance is set to peak in April. Russian refiners are expected to ensure that domestic deliveries, especially of 10-ppm diesel, which they are struggling to produce in sufficient quantity, are maintained at the expense of exports so as to avoid a repeat of last year's light product shortages.

OECD Stocks


  • Total OECD industry oil inventories increased by 13.5 mb in March, to 2 649 mb, in contrast with a five-year average decline of 10.2 mb. OECD commercial oil stocks also rose above the five-year average for the first time since May 2011. This pushed the surplus versus historical average to 15.2 mb from an implied deficit of 8.4 mb in February. Moreover, forward demand cover rose by 0.5 day to 60.3 days, 3.0 days above the five-year average.
  • Preliminary data indicate a 5.1 mb increase in April OECD industry inventories, compared with a five-year average 19.4 mb build. Crude oil and 'other oils' stocks led the increase, rising by 10.0 mb and 5.1 mb, respectively, while product holdings fell by 10.0 mb as sharp decreases in gasoline and middle distillate inventories outweighed a rise in 'other products' stocks. Gasoline, middle distillate and fuel oil holdings fell by 11.5 mb, 11.6 mb and 2.3 mb, respectively, while 'other products' stocks increased by 15.4 mb.

OECD Inventories at End-March and Revisions to Preliminary Data

Total OECD industry oil inventories increased by 13.5 mb in March, to 2 649 mb, in contrast with a five-year average decline of 10.2 mb. As a result, OECD commercial oil stocks rose above the five-year average for the first time since May 2011. The implied surplus of inventories compared with the historical average is therefore 15.2 mb, versus a deficit of 8.4 mb in February. Moreover, in terms of forward demand cover, OECD commercial oil holdings remained 3.0 days above the five-year average, at 60.3 days. This equates to a 0.5 day increase from the previous month and a 1.3 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 the deficit in Europe narrowed significantly, and the Pacific shortfall also narrowed slightly.

Crude stocks rose by 23.4 mb to 972 mb in March, nearly double the five-year average build of 13.4 mb. After eight consecutive months below the historical trend, crude stocks rose above the five-year average. Most of the growth in stocks stemmed from North America, up by 18.7 mb. Europe and the Pacific also increased by 3.3 mb and 1.3 mb, respectively. Sustained high levels of OPEC crude supply in the midst of seasonally weak refining activity built OECD crude oil stocks in March.

In the meantime, product inventories fell by 10.8 mb, a milder decline than a five-year average 25.1 mb draw. Most of the product stock draw centred on gasoline and middle distillate stocks, falling seasonally by 9.0 mb and 8.5 mb, respectively. North America showed the largest product stock decline of 5.2 mb, while Europe and the Pacific saw 3.3 mb and 2.3 mb reductions, respectively.  

OECD stocks were revised 4.9 mb higher for February, upon receipt of more complete monthly submissions from member countries. This implies a 10.6 mb drop in February inventory levels, compared with preliminary estimates of a 12.4 mb decrease. Upward adjustments were centred on crude stocks, and were evident across all three regions. North American, European, and Pacific crude oil inventories were adjusted up by 2.8 mb, 6.0 mb and 3.4 mb, respectively. Moreover, fuel oil and 'other products' stocks also showed upward adjustments of 3.9 mb and 1.4 mb, respectively. However, lower-than-initially estimated middle distillates holdings provided a substantial offset to the upward revisions.

Preliminary data indicate a 5.1 mb increase in April OECD industry inventories, compared with a five-year average 19.4 mb build. Crude oil and 'other oils' stocks led the increase rising by 10.0 mb and 5.1 mb, respectively, while product holdings fell by 10.0 mb as sharp decreases in gasoline and middle distillate inventories outweighed a rise in 'other products' stocks. Gasoline, middle distillate and fuel oil holdings fell by 11.5 mb, 11.6 mb and 2.3 mb, respectively while 'other products' stocks increased by 15.4 mb.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil inventories rose by 14.2 mb to 1 342 mb in March, a heavier increase than the five-year average build of 3.8 mb, thus again, widening the surplus versus the five-year average to 70.2 mb, from 59.8 mb in February. Commercial oil stocks in North America have therefore exceeded five-year highs for a third month running. Crude oil holdings surged by 18.7 mb to 501 mb, with the lion's share of the increase stemming from the US. Not only lower refinery runs but also higher crude imports and domestic output inflated US crude inventories.

Meanwhile, product inventories fell by 5.2 mb to 682 mb as declines in gasoline and middle distillate stocks outweighed an increase in 'other products' holdings. Gasoline inventories decreased by 7.3 mb as refiners switched over from winter to summer grades and US gasoline demand rose month-on-month, albeit remaining weak on an annual basis. Middle distillate stocks fell by 7.5 mb, marking their lowest level since November 2008. Firm US middle distillate exports to Latin America and Europe in the midst of lower domestic production drove middle distillate holdings down significantly. In the meantime, 'other products' stocks rose by 9.6 mb, providing a partial offset.

US weekly data show oil inventories declined by 3.8 mb in April, in stark contrast with a five-year average 15.3 mb build. Sharp decreases in gasoline and middle distillate stocks led the decline. Gasoline inventories plunged by 12.9 mb as refiners cleared out winter grades while rebuilding summer grades and gasoline demand rose month-on-month, despite remaining lower than the five-year range. Middle distillate holdings also plummeted by 13.4 mb on higher demand amid strong exports and hit the lowest level since October 2008. Distillate stocks are quite tight on the US Gulf in particular, since refiners in the region drew stocks to sustain high exports. Gulf Coast stockpiles of the fuel fell by 5.2 mb to 34.1 mb, which marked the lowest level for distillates in the region since November 2008. In the meantime, 'other products' holdings rose by 12.0 mb, providing a partial offset and resulting in a total draw of 17.4 mb in refined product inventories as a whole.

Meanwhile, higher domestic production in the midst of weak refinery runs drove crude oil stocks up by 14.5 mb, marking their highest since August 1990. Crude oil inventories have increased by 30.6 mb since the middle of March. Crude stock levels at Cushing, Oklahoma increased by 3.8 mb to a record high 44.1 mb in the week ending May 4. Since the beginning of 2012, stockpiles at Cushing have increased by 15.0 mb. Cushing inventories may ease somewhat when work on the Seaway pipeline reversal is completed in the middle of May. Flows toward the US Gulf Coast could average 150 kb/d initially, rising to 400 kb/d by end-2012/early-2013.

OECD Europe

Industry oil inventories in Europe rose by 1.1 mb in March to 923 mb, in contrast with a five-year average draw of 7.4 mb. This led to a narrowing in the deficit versus the five-year average to 41.7 mb, from 50.2 mb in February. Nonetheless, European oil stocks have stood below their five-year range for twelve consecutive months. However, in terms of days of forward demand cover, total oil holdings in Europe look more comfortable, having stood above the five-year average for eight successive months.

Crude oil inventories increased by 3.3 mb to 307 mb, in line with a five-year average 1.7 mb build, due to lower refinery runs. Nonetheless, amid very weak refiner crude demand, absolute stocks have been held well below historical norms for over a year now, while forward cover has also looked tight for crude since late 2011.

Also in March, refined product inventories fell by 3.3 mb to 544 mb on weak refinery runs. This was a milder decline than the five-year average drop of 9.0 mb, thus reducing the deficit versus the five-year average to 14.4 mb from 20.2 mb in February. However, product stocks look much more comfortable when measured against forward demand, standing 1.5 days above the five-year average at 39.8 days. Gasoline, middle distillate and 'other products' holdings declined by 3.0 mb, 0.5 mb and 0.8 mb, respectively, while fuel oil stocks rose by 1.1 mb. Meanwhile, German end-user heating oil stocks fell by 3 percentage points to 49% fill at end-March.

April preliminary data from Euroilstock point to a 4.3 mb stock draw, exceeding a five-year average 1.4 mb fall in the EU-15 and Norway. Crude oil inventories led the decline, decreasing by 4.8 mb with the backwardation of Brent discouraging European refiners from storing oils. In the meantime, refined product holdings rose by 0.5 mb as increases in gasoline and 'other oils' stocks outweighed declines in middle distillate and fuel oil holdings. Gasoline and 'other products' inventories increased by 1.4 mb and 0.9 mb, respectively while middle distillate and fuel oil stocks fell by 0.8 mb and 1.0 mb, respectively. Refined product stocks held in independent storage in Northwest Europe also fell in April, led by declines in both gasoil and fuel oil stocks as regional demand for diesel rose and fuel oil exports to Asia, notably to Japan, increased.

OECD Pacific

Commercial oil inventories in the OECD Pacific fell by 1.9 mb to 384 mb in March, lagging behind a five-year average draw of 6.6 mb, and thus reducing the deficit of inventories versus the five-year average to 13.3 mb from 18.1 mb in February. Having fallen to very low levels at the turn of the year, Pacific total oil stocks crept back within the five-year range in March. Forward demand cover has also recovered sharply from the very low levels evident since April last year.

Crude holdings increased counter-seasonally by 1.3 mb to 163 mb, as a crude stock build in Japan outweighed a decrease in crude holdings in Korea. In the meantime, product stocks declined by 2.3 mb to 151 mb, compared with the five-year average decrease of 5.3 mb and remained below the five-year range for a third consecutive month. 'Other products' holdings led the decline, down by 2.8 mb. Middle distillate and fuel oil stocks also edged lower by 0.5 mb and 0.3 mb, respectively, while gasoline holdings rose by 1.3 mb.

Japanese industry inventories surged by 13.2 mb in April, according to weekly data from the Petroleum Association of Japan (PAJ). 'Other oils' stocks including feedstocks led the increase, rising by 6.1 mb, mostly affected by lower refinery throughput. Crude oil stocks rose by 0.3 mb due also to lower refinery runs. Despite weaker refinery runs, with demand for petroleum product likely remaining sluggish, product holdings rose by 6.8 mb, with every product category showing an increase. Gasoline, middle distillate, fuel oil and 'other products' holdings rose by 0.1 mb, 2.6 mb, 1.6 mb and 2.6 mb, respectively.

Recent Developments in Singapore and China Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories fell in March by an equivalent of 1.5 mb (data are reported in terms of percentage stock change). Commercial crude oil holdings were up by 2.0% (4.1 mb), although lower imports outweighed weaker refinery runs. Commercial product inventories fell by 3.6% (5.6 mb), with every major product category showing a decrease. Due to lower refinery runs, gasoline, diesel and kerosene inventories declined by 0.6% (0.3 mb), 4.9% (4.6 mb) and 5.1% (0.6 mb), respectively. However, the biggest draw was in diesel holdings as the beginning of spring planting season in northern China boosted agricultural demand for gasoil in March.

Taking The Gauge of A Possible SPR Build in China

Official data are inconclusive on the subject of whether 1Q12 saw significant strategic crude stockbuilding by China. State oil company CNPC completed nearly 40 mb of new storage capacity at Dushanzi and Lanzhou in the second half of 2011 under the second phase of China's strategic storage capacity programme. CNPC recently acknowledged the 11% increase seen in 1Q12 Chinese crude imports, and suggested that further increases could come later in 2012 as more SPR sites are completed.

Less clear however is whether or to what extent crude buying to fill SPR facilities began in 1Q12. On the one hand, an implied global stock build of 1.2 mb/d for 1Q12 from our own global supply/demand balance, evidence of sharply higher Chinese 1Q12 crude imports and the fact that only around half of the implied global build can be accounted for by OECD company stocks anecdotally supports extra Chinese purchasing. Moreover, a simplified balance between Chinese domestic crude production, net imports and refinery runs throws up a difference of around 275 kb/d, compared with equivalent levels of 185 kb/d and 90 kb/d for year 2011 and 4Q11 respectively. The surge in February crude imports in particular looks supportive of some stockpiling of crude, albeit this is not reflected in officially reported company data on month-on-month stock changes.

However, on the other hand, caution is required: firstly, prevailing backwardated price structure is unsupportive of stock-building in purely economic terms. In addition, part of the implied 'stock build' may instead be due to fluctuations in independent refiner activity or crude oil for direct burning in the power sector. These caveats aside, Chinese crude demand in coming months may run ahead of that implied by product demand if concerns over Middle East supplies lead to further SPR purchasing.

Singapore onshore inventories fell by 4.3 mb to 38.5 mb in April, driven by a decrease in fuel oil stocks. Fuel oil holdings declined by 3.6 mb, putting an end to three successive months of growth as fuel oil imports from the West reduced significantly. Recently, fuel oil stocks in Singapore have shown high volatility affected by dramatic changes in import volumes from the West. Middle distillate holdings edged down by 0.6 mb, as strong demand from India and Vietnam emerged. Light distillate inventories were virtually unchanged, as increases in supply from India and China were offset by firm demand from Vietnam and Indonesia.



  • Crude oil markets reversed their upward course in April and by early May futures prices had fallen by $10-14/bbl amid worsening economic data for the US and Europe, mounting pessimism in equity markets in the wake of elections in Europe and apparently reduced tensions between the international community and Iran over the latter's nuclear programme. Futures prices for Brent crude were last trading near a three-month low of $113/bbl, with WTI at $97/bbl.
  • In a latest attempt to address increased price volatility and prevent excessive speculation in oil markets, President Obama asked the US Congress to provide the CFTC with additional authority to raise margin requirements in oil futures markets. Opponents of the move argue that raising margin requirements may instead lead to an increase in price volatility and market share concentration while having no effect on price levels.
  • Crude oil spot markets turned lower on limited demand for prompt barrels while refinery turnarounds were in full swing in April, as well as higher crude availabilities from OPEC producers. Saudi Arabia's decision to sharply reduce June Arab Light prices for Asian customers took the market by surprise and could add further downward pressure on spot crudes in the region.
  • Refined product crack spreads improved in April as seasonal refining maintenance provided support. Gasoline crack spreads increased the most, supported by fear of tight supplies due to the recent refinery closures in the Caribbean, US East Coast and Europe. However, markets were volatile, with gasoline crack spreads peaking around mid-month, before falling steeply as demand worries again came into focus.
  • Rates weakened on all benchmark crude tanker routes during April, although by early May rates had either stabilised or begun to creep back up. Meanwhile the picture was slightly brighter in product tanker markets, with rates firming on all but one of the benchmark routes over April.

Market Overview

Crude oil prices tumbled in April and into early May amid worsening economic data for the US and Europe, mounting pessimism in equity markets in the wake of European elections, and increased crude oil supplies from OPEC. In addition, market worries over the impact of sanctions on Iranian exports lessened as tensions seemed to ease between Iran and the global community ahead of the next meeting between officials from Tehran and the UN P5+1 group on 23 May in Baghdad. Futures prices were last trading near three-month lows, with Brent at $113/bbl and WTI at $97/bbl.

As full implementation of EU and US sanctions on Iran draw nearer, refiners and traders are adopting a more sanguine view on the market impact, in large part due to increased supplies from OPEC and despite continued unexpected disruptions to non-OPEC supplies. OPEC increased supplies to the market in April by just over 400 kb/d, to 31.85 mb/d, which is the highest level since July 2008. Non-OPEC outages continue to short the market, however, with unplanned outages now assumed to average 1.3 mb/d in 2Q, and to remain near 1 mb/d for the remainder of the year.

Imports of Iranian crude appear to have fallen sharply in April but preliminary data is fraught with inconsistencies and the tanker trackers are finding the monitoring of Iranian vessels difficult. That said, it appears that refiners are actively lining up replacement barrels from Saudi Arabia, Iraq, Libya and Russia ahead of the 1 July deadline. In addition, companies which have received US exemptions from the full sanctions after reducing imports from Iran are focussed now on securing insurance for their permitted liftings. The UK has stepped into the debate over tanker insurance and is seeking a six-month exemption for the EU sanctions on the shipping industry so customers have more time to find alternatives. The marine insurance industry has a large base in London.

As concern over Iran has eased in recent weeks, market worries shifted to the less-than-stellar economic outlook. Elections in Greece have also cast a pall over financial markets and the euro zone economic recovery. In early May, stock markets posted their worst week of the year.

Market attention has also focussed on a steady rise in global inventories, especially in the US where crude oil stocks are at the highest level in two decades. OECD crude oil inventories also rose in both Asia and Europe in March. Japan, in particular, appears to be boosting crude inventories ahead of the full implementation of sanctions on Iran.

The steady increase in supply in 1Q12 is adding downward pressure on the front end of the forward curve for both Brent and WTI. Prompt futures prices for Brent have been supported by the chronic unplanned outages in the North Sea but increased supplies from Iraq and Libya into Europe have tempered the upward momentum. The Brent M1-M12 backwardation narrowed to around $4.90/bbl in early May compared with just under $6/bbl in April and $7.15/bbl in March.

Record levels of crude stocks at the NYMEX delivery point at Cushing, Oklahoma also added downward pressure on the front end of the WTI contract. The WTI M1-M12 contract moved deeper into contango in April at an average -$1.47/bbl compared with -$1.15/bbl in March.

Futures Markets

Activity Levels

After reaching a historical peak at 62.3% on 24 April 2012, the ratio of Brent futures in London ICE to New York and London WTI oil positions is down by more than 2% in the week ending 1 May. The surge was triggered by a 4.1% and 5.5% increase in NYMEX WTI and ICE WTI open interest, respectively, in the last week of April. Over the period from 3 April to 1 May, the ratio of Brent to WTI contracts increased by 1.1% to 60.2%. The increase in the ratio of Brent to WTI open interest is sharper when ICE WTI contracts are excluded, rising by 2.8% to 77.8% in April. This ratio also tested new peaks at 79.8% in the week ending 24 April.

Open interest in all oil major derivatives contracts increased in April. Open interest in New York CME WTI futures and options contracts increased by 0.18% to 2.54 million contracts. Meanwhile, open interest in futures-only contracts increased by 2.1% to a one-year high of 1.6 million from 1.57 million. Over the same period, open interest in London ICE WTI contracts increased to 0.46 million and 0.54 million contracts in futures-only and combined contracts, respectively, reaching its highest level since July 2011. Meanwhile, open interest in ICE Brent contracts also tested fresh records in April with 1.24 million and 1.45 million contracts in futures-only and combined contracts, respectively.

Money managers cut their bets on rising WTI crude oil prices by 14 979 contracts to reach to the lowest level since early February to 164 522 from 3 April 2012 to 24 April 2012 as a response to rising crude stocks at Cushing  as well as concern over the US recovery. However, they  boosted their net long futures positions by 21 579 to 186 101 in the week ending 1 May, as the price of WTI crude oil rallied to a one-month high of $106.16/bbl. Similarly, money managers reduced their bets on rising Brent prices by 18% from 125 076 to 102 391 futures contracts from 3 April to 24 April, the lowest level since February, as a response to easing geopolitical tensions surrounding Iran as well as the re-emergence of sovereign debt crisis worries in the eurozone economies. However, like money managers in WTI contracts, they increased their net long futures positions by 12 836 contracts in the week ending 1 May to a one-month high of 115 227 contracts.

Producers increased their net futures short positions from 70 974 to 74 134 contracts in April; they held 20.2% of the short and 15.6% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 23.5% and 34.6% of the open interest on the long side and short side, respectively, increased their bets on falling prices by 1.7% to hold 177 329 net futures short positions over the same period. Producers' trading activity in the London WTI contracts followed an opposite pattern with CME WTI contracts. Producers in the London ICE WTI contracts increased their net long positions from 25 040 to 48 726 contracts. Swap dealers, on the other hand, followed a similar pattern with respect to their trading in CME WTI contracts and increased their net short positions from 24 407 to 57 226 contracts.

NYMEX RBOB futures and combined open interest declined by more than 12% to 302 610 and 322 207, respectively, over the same period. Open interest in NYMEX heating oil futures contracts increased by almost 6.7% to 304 613 contracts while open interest in natural gas futures market is up by 1.9% to 1.26 million contracts.

Index investors' long exposure in commodities in March 2012 declined by $7.2 billion to $302.8 billion in notional value. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts declined by $1.6 billion in March, triggered by a decline in WTI prices from $107.70/bbl to $103.20/bbl from end-February to end-March. The number of long futures equivalent contracts increased to 557 000, equivalent to $57.5 billion in notional value.

Market Regulation

On 17 April 2012, the Obama Administration proposed new initiatives to strengthen oversight of energy markets. The President's plan calls on Congress to:

  • Increase funding to augment the number of surveillance and enforcement staff charged with oversight of the oil futures market;
  • Allow the Commodity Futures Trading Commission (CFTC) to upgrade the technology used to monitor the energy markets;
  • Increase the civil and criminal penalties for those convicted of manipulating the oil futures market;
  • Expand access to CFTC data so that analysts can better understand trading trends in the oil markets and;
  • Provide the CFTC with additional authority to raise margin requirements in oil futures markets to limit disruptions in the oil market.

Market participants welcomed the first four items in the list but raised concern over the proposal on margin increase (See 'Margin Requirements in Futures Markets').

On 18 April 2012, the US CFTC approved final rules on its long-awaited definition of 'swap dealers (SDs)' and 'major swap participants (MSPs)', which will be effective 60 days after publication in the Federal Register. These rules eventually determine which entities face mandatory capital and margin requirements as well as position limits. The final rule closely follows the Dodd- Frank Act in defining SDs. The Dodd-Frank Act defines SDs as persons who hold themselves out as a dealer in swaps or make a market in swaps or regularly enter into swaps with counterparties as an ordinary course of business for their own account; or engage in activity causing themselves to be commonly known in the trade as a dealer or market maker in swaps. Furthermore, an entity would be deemed an MSP if it held a "substantial position" in any of the major swap categories, excluding positions held for hedging and mitigating commercial risk. Highly leveraged financial entities, which are not already subject to federal banking regulators' capital requirements, are also considered as major swap participants if they hold substantial swap positions. In addition, a person whose outstanding swaps positions created "substantial counterparty exposure that could have serious adverse effects" on the U.S. financial system is considered a major swap participant.

The final rule also provides exemption from being considered as SDs for those who are entering into a swap for the purpose of mitigating or offsetting price risks of a physical position. Finally, in line with Dodd-Frank Act requirements, the final rule allows an exemption for a person who "engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers." In the proposed rule, a threshold of aggregate gross notional amount in a 12-month period was set at $100 million. The final rule increases this threshold and specifies that a swap dealer is an entity that engages in $8 billion or more of swap dealing activity annually in the interim period. Once the Commission receives two and a half years' worth of data from swap data repositories, the staff will conduct a study and, depending on the results, may end the interim period, or propose new rules to change the threshold. If the Commission does not take action to end the interim period, it will terminate automatically five years after data starts to be reported to swap data repositories and the threshold will be reduced to $3 billion. The final rule requires that SDs or MSPs to register with the Commission by the later of the effective date of the swap entity definition and swap product definition rules. However, the US CFTC has yet to deliver its final rule on the swap product definition, now expected in the second quarter of 2012.

Market participants welcomed the increased threshold since lower thresholds would have required many energy companies to be registered as swap dealers or major swap participants. However, some argue that the oversight exemption ceiling at $100 million as initially proposed would have exempted only 30% of derivatives traders; while a higher ceiling of $8 billion annually set by the final rule would exempt more than 85% of derivatives traders from heightened oversight, including additional capital and margin requirements under the Dodd-Frank Act. Critics stressed that major players might be able to avoid regulations based on de minimis quantity exemption. However, market participants argued that it will still cover the major broker-dealers and financial institutions given the estimated size of the crude oil swap market which averages $500 billion a day.

On 30 April 2012, three major price reporting agencies (Argus, ICIS and Platts) in physical commodities released a draft self-regulating code of conduct, which addresses some of issues raised by the International Organisation of Securities and Commissions' (IOSCO) consultation paper and subsequent comments received from industry stakeholders. PRAs argued that the Independent Price Reporting Organisation (IPRO) Code may also be regarded as a standard of best practice among PRAs. The Code "applies strictly to activities, policies and structures associated with the publication by the IPROs of price assessments in commodities markets and does not govern the specific design or substance of methodologies used by IPROs for determining their price assessments". The code specifically addresses issues such as governance, managing and mitigating conflict of interest, integrity and transparency of price reporting process, non-discriminatory participation and data collection processes, timely publication of price assessments, corrections and methodology modifications, monitoring and detecting of non-representative transaction data in connection with the price reporting process, responding to complaints as well as confidential information and record-keeping. PRAs have requested feedback on the Code from industry stakeholders, other potential IPRO Code signatories and any other interested parties by 1 July 2012. In the meantime, IOSCO, in collaboration with the IEA, IEF and OPEC, is expected to release its recommendations on PRAs later this summer.

Margin Requirements in Futures Markets

Despite scant evidence of a negative impact of speculation in the oil market, in seeking to prohibit excessive speculation and its possible effect on price volatility in futures markets, the US CFTC approved final rules on federal speculative positions limits on commodity futures, options and swaps positions of speculators for 28 commodities in October 2011. As we reported in previous OMRs, position limit rules are being challenged by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFAM) in court. They are challenging the final rule based on whether the Commission overreached its mandate by pre-emptively setting a position limit on derivatives contracts, amid almost non-existent cost-benefit analysis in the final rulemaking, as well as insufficient review of some of the comment letters, which they argue that the Commission was bound to take into account. The court still has to deliver its decision on the speculative position limit rule.

The main hypothesis of proponents of hard position limits is to reduce market share concentration in commodity markets. They argue that doing so ensure that markets are made up of a broad group of market participants with a diversity of views, thereby preventing distortion in market prices. The limit on the concentration of market share is also deemed necessary to reduce systemic risk.

In a latest attempt to reduce price volatility and prevent excessive speculation in oil markets, President Obama asked the US Congress to provide the CFTC with additional authority to raise margin requirements in oil futures markets. However, raising margin requirements in oil futures markets may well lead to an increase in price volatility and concentration of market share of large speculators while having no effect on price levels.

One of the key safeguards in the risk management systems of futures clearing organisations is the requirement that market participants post collateral, known as margin, to guarantee their performance on contract obligations. In contrast to the operation of credit margins in the stock market, a futures margin is not a partial payment for the position being undertaken. Instead, the futures margin is a performance bond that serves as collateral or as a "good faith" deposit given by the trader to the broker. Minimum levels for initial and maintenance margins are set by the exchange. However, futures commission merchants (FCM) have the right to demand higher margins from their customers. The US regulator (CFTC) also has the power to increase margins in emergencies but they have rarely used this option, given the fact that exchanges frequently change margin requirements as a response to a change in volatility and they notify market participants at least one-day in advance.

In a traditional futures market, contracts are margined under a risk-based margining system, which is called SPAN. Portfolio margining systems evaluate positions as a group and determine margin requirements based on the estimates of changes in the value of the portfolio that would occur under assumed changes in market conditions. Margin requirements are set to cover the largest portfolio loss generated by a simulation exercise that includes a range of potential market conditions.

Marked to market ensures that futures contracts always have zero value; hence the clearing house does not face any risk. Marked to market takes place through margin payments. At the inception of the contract, each party pays an initial margin (typically less than 10% of the value of the contract) to a margin account held by its broker. Initial margin may be paid in interest-bearing securities (T-bills) so there is no interest cost. If the futures price rises (falls), the longs have made a paper profit (loss) and the shorts a paper loss (profit). The broker pays losses from and receives any profits into the parties' margin accounts on the morning following trading. Loss-making parties are required to restore their margin accounts to the required level during the course of the same day by payment of variation margins in cash; margin in excess of the required level may be withdrawn by profit-making parties.

For example, the initial margin for one WTI futures contract is currently $6 885 and the maintenance margin requirement is $5 100 per contract for speculators, 6.5% and 4.8% of the value of the contract as of 1 May, respectively. Initial and maintenance margins for hedgers and clearing members, even for their speculative trading, is the same amount as the maintenance margin levels for speculative traders. However, clearing members' initial margin for their speculative positions will be increased to that of speculators' initial margin in early August. Whenever the margin account exceeds or falls below the maintenance margin, the customer receives a margin call from its broker (or broker receives a margin call from the exchange). If the margin account exceeds the maintenance margin, the investor is entitled to withdraw any balance in the margin account in excess of the initial margin and whenever it is below the maintenance level, the customer has to make a deposit to bring the margin account to its initial margin level. The extra funds deposited are known as a variation margin. Basically, if there is a price decline the investor who has a long position has to deposit extra funds, so called variation margin, to bring the margin account to the initial level. On the other hand, the seller of the contract account will be credited. That is to say, if a trader is on the right side of the market, there is nothing to worry about margin calls. However, if a trader is on the wrong side of the market, he/she gets a warning in terms of a margin call to reconsider his/her position.

The Effects of Margin on Market Activity, Composition of Traders, Volatility and Prices

Exchanges argue that changes in margin levels are related to volatility in the markets; if the market becomes more (less) volatile, they increase (reduce) the margin level. The purpose of a change in margins is not to control the composition of traders, volatility or prices but serve primarily as insurance to futures exchanges from default by traders - for example, by setting margin to cover 99% of possible price moves for a position in a trading day.

Some argue that setting higher margins should drive away less risk averse and less informed traders; and without them, markets will be more stable. Others argue that an increase in margin will result in thin markets due to an increase in the cost of using these markets, thereby increasing the volatility. Empirical research generally suggests that the effect of margin on market activity tends to be small as long as margin changes move in line with price volatility. Furthermore, extant research suggests that it is not obvious which types of traders leave the market when margin increases. These studies also find no clear impact of margins on the volatility or price behaviour in the futures markets. It is not surprising to see no relationship between margin levels and the price level, since the latter depends on physical supply and demand.

However, it is important to note that these results are obtained when analysing the impact of relatively small margin changes by exchanges. If we consider raising margin requirements to a very high level through regulations to combat speculation, then we might find that certain trader groups, especially the hedgers and cash-constrained small speculators, will be driven out of the market, increasing concentration share where few traders, especially large traders, participate in the price discovery, leading to more volatile, rather than more stable, oil markets.

Spot Crude Oil Prices

Crude oil markets turned lower on limited demand for prompt barrels while refinery turnarounds were in full swing in April as well as higher crude availabilities from OPEC. Spot prices for benchmark crudes in April and early May were down $10-14/bbl from March levels. Atlantic basin benchmarks diverged in April, with Dated Brent down a steeper $5.70/bbl while WTI posted a smaller loss of under $3/bbl. Both grades were off a further $7-8/bbl in early May in the wake of mounting pessimism over the economic outlook for the euro zone, and hence oil demand, following European elections. Disappointing US employment data also pressured prices. Dubai crude lost about $5.25/bbl, to an average $117.28/bbl for April, pressured lower by rising supplies of Middle East crudes.

WTI's discount to Brent narrowed in early May after reaching six month highs again at $21.50/bbl on 3 April. The spot WTI-Dated Brent price differential was averaging around $13.10/bbl in early May, compared with an average $16.28/bbl in April and $19.13/bbl in March. WTI relative weakness partly reflected the steady rise in crude oil inventories at the Cushing, Oklahoma storage depot in April. Moreover, by early May, US crude oil inventories were at their highest level in more than 20 years. In addition to the lofty stock levels, the completion of the reversal of the Seaway pipeline later this month should take some pressure off WTI prices going forward. The Seaway pipeline is slated to initially move around 150 kb/d from the landlocked Cushing region to the US Gulf Coast refining centre.

European spot crude prices in April moved lower in tandem with futures markets and reduced demand for prompt barrels due to seasonally low refinery runs and despite more disruptions in North Sea output. Refiners, however, continue to cast about for replacement barrels for Iranian crudes, with a focus on crudes from Saudi Arabia, Russia and Iraq. Indeed, increased exports of Iraqi crude are finding a home in Europe. Moreover, spot crude prices are expected to find extra support as European refiners come out of turnaround in May.

Urals crude was relatively weak next to North Sea crudes in early April, but strengthened as the month went on, partly due to stronger refiner interest as a replacement for Iranian crudes. The Urals-Brent discount in the Mediterranean narrowed sharply in early May, to just under -$1/bbl compared with an average -$2.11/bbl for April and -$2.04/bbl in March.

In Asia, plentiful Middle East grades weighed on markets in April and upcoming June maintenance turnarounds limited demand. Saudi Arabia's decision to sharply reduce official selling prices for Asian customers for benchmark Arab Light took the market by surprise and could add further downward pressure on regional spot crude markets.

Brent crude's premium to Dubai narrowed in April to $2.29/bbl and was trading just under $1/bbl in early May. The continued absence of heavier crude supplies from Syria, South Sudan, Sudan and Yemen is supporting prices of similar grades. Meanwhile, demand from Japanese refiners for heavy-sweet crudes for direct burn at power plants remains brisk.

Spot Product Prices

All spot product prices bar gasoline fell in April, following the downward trend for crude and equity markets in general. Nevertheless, product crack spreads improved in April as seasonal refinery maintenance provided support. Gasoline crack spreads increased the most, supported by fears of tight supplies due to the recent refinery closures in the Caribbean, US East Coast and Europe. However, markets were volatile, with gasoline crack spreads peaking around mid-month, before falling steeply as demand worries again came into focus.

Gasoline crack spreads strengthened across the board in April, with the strongest gains seen in the Atlantic basin. On the US Gulf Coast super unleaded gasoline cracks spreads to LLS increased by $9.33/bbl whereas crack spreads increased by $7.06/bbl to Brent in Northwest Europe and by $7.37/bbl to Urals in the Mediterranean in April. Prices were supported by fears of tighter supply in the US due to recent refinery closures and as the shift to summer grade gasoline also lifted flat prices higher.

In Europe, gasoline markets were tight as export demand was strong, with an open arbitrage to the US East Coast and demand from West Africa as well as the Middle East. However, crack spreads fell steeply in the second half of the month, and US Gulf Coast cracks fell to around $19/bbl in early May after a mid-April peak of $27.50/bbl. The main driver behind the drop was easing on the supply side, both as refineries came back from spring turnarounds and as large arbitrage volumes arrived at the US East Coast. Additional pressure came from demand worries as the price at the pump for the US on average increased to just under $4/gallon mid-April, before falling back again thereafter. European crack spreads were also pressured lower, with a closed arbitrage to the US East Coast being a contributing factor.

In Singapore, on the other hand, gasoline crack spreads were strong throughout April, and price differentials to Dubai were $17.80/bbl on average for the month, up $3.70 from March. Strong demand supported prices as well as reduced refinery activity with increasing maintenance.

Naphtha crack spreads followed much the same trends as for gasoline, and a slight improvement was seen month-on-month in both Europe and in Asia, with a peak around mid-month before falling steeply in the second half of the month. Prices edged lower partly because alternative feedstock for the petrochemical industry was relatively cheaper, and on a partly closed arbitrage to Asia that pressured European markets. In Singapore, on the other hand, the arrival of earlier-booked arbitrage volumes pressured cracks lower there.

Middle distillates crack spreads saw moderate increases in all regions in April. In Northwest Europe, diesel crack spreads increased by $2.99/bbl versus Brent to an average $17.79/bbl in April, and in the Med, spreads increased by $2.47/bbl versus Urals to an average $19.80/bbl for the month. Markets were supported by ongoing refining maintenance both regionally and in Russia, with lower volumes being exported. Comfortable stock levels however capped upside price potential.  On the US Gulf Coast, diesel crack spreads to LLS increased by $2.47/bbl. Continuously strong exports to both Europe and Latin America were supportive for prices, and draws in middle distillate stocks were also contributing to the upward price pressure. In Singapore, 0.05% gasoil differentials to Dubai increased by $2.23/bbl in April to an average $17.76/bbl. The ramp-up in refining maintenance tightened the market, and Singapore stock levels fell below the five-year average in the second half of the month.

Fuel oil markets strengthened in April, and LSFO crack spreads in the Mediterranean improved by $3.78/bbl over the month, and moved into positive territory to a monthly average of $0.48/bbl. Also HSFO markets strengthened with Singapore bunker fuel grade crack spreads improving $2.85/bbl in April. In Europe, supplies were tight due to less inflow from Russia and ongoing regional refining maintenance and independent stocks in the ARA region fell to below the five-year average during April. In Asia, strong demand from Japan continued to be supportive with prospects of increased fuel oil demand in coming months with the country's last nuclear reactor taken offline early May. Increased demand lifted bunker fuel grades.


Rates weakened on all benchmark crude tanker routes during April, although by early May rates had either stabilised or begun to creep back up, largely due to continued high demand for Middle Eastern crudes. The benchmark Middle East Gulf - Japan trade, which initially weakened to $13/mt, recovered to stand at above $15/mt at the time of writing. The Suezmax market remained depressed throughout April on over supply. The West Africa - US Gulf coast route, which initially softened to under $15/mt, posted a modest recovery in mid-May, to breach $15/mt. In the European Aframax markets, the end of ice restrictions in the Baltic weighed heavy with an abundance of newly suitable vessels exerting downward pressure on rates. Not surprisingly, the Baltic - UK trade bore the brunt of the losses as rates collapsed from $11.40/mt to $7.60/mt by early May.

In the product tanker market, the picture was slightly brighter. The only trade to experience a sharp fall was the Caribbean - US Atlantic Coast route, which steadily declined from $15.60/mt in early April to below $12/mt by the first week in May. It is highly likely that this fall is related to the closure of the St Croix and Aruba refineries. With no operational refineries and only storage terminals located in the region the volumes transported on the route will now be minimal and thus most vessels operating the route are expected to re-orientate towards other Atlantic basin markets. In the East, rates on the 75 Kt Middle East Gulf - Japan trade surged to a mid-month high of over $27/mt in response to buoyant Japanese demand.

Iranian Tankers Play Hide and Seek

Crude oil tankers controlled by the National Iranian Tanker Company (NITC) have reportedly been ordered to routinely deactivate their Automatic Identification System (AIS) transponders. These systems, although intended primarily to supplement radar and mitigating against marine collisions, are also used by numerous organisations to track vessel movements. Switching off the transponders, even only for a limited period of one or two days, can hamper the tracking of a vessel's movements.

NITC currently operates a fleet of 39 vessels composed of 25 VLCCs, 9 Suezmaxes and 5 Aframaxes. Due to ongoing sanctions and the connected problems of obtaining insurance for carriers calling at Iranian ports, NITC tankers have recently shipped the bulk of Iran's crude exports. The deactivating of the AIS transponders therefore permits these vessels to obscure destination ports and ship-to-ship transfers in mid-ocean where oil is transferred onto another carrier for forward delivery. Indeed at the time of writing, tracking data indicate that over a quarter of the NITC fleet have not activated their transponders since April. This issue is hindering assessing Iran's oil in transit on the water and also the amount of Iranian oil in floating storage, since it is unclear, without firm information of the draught of a vessel, whether it has unloaded its cargo in the time that its transponder has been deactivated. This is reflected in the varied recent estimates of Iranian floating storage. Although sources acknowledge that Iranian floating storage has risen over April, total volumes vary between 23 and 35 mb, with up to half of the Iranian fleet possibly engaged in storage.

As such, with NITC reportedly due to take delivery this month of the first of eight new VLCCs due to be completed in 2012, and given the ongoing difficulties for Iran to sell its crude, assessing Iranian trade flows is likely to remain challenging for the foreseeable future.



  • Global refinery crude throughputs reached a seasonal low in April, but are set to rise sharply from May onwards to meet higher demand for oil products through the summer. Coinciding with a peak in refinery maintenance, global crude runs are estimated at 73.4 mb/d in April, 2.5 mb/d less than February's high. Poor OECD refining economics in 1Q12 also contributed to lower throughputs. From an average 74.8 mb/d in 1Q12, runs are expected to fall to 74.3 mb/d in 2Q12, with throughputs up by 150 kb/d and 440 kb/d y-o-y, respectively.
  • OECD crude runs plummeted by 1.2 mb/d in March, as seasonal maintenance peaked in both Europe and North America. European runs regained previous record-lows seen last April, at 11.6 mb/d, down 575 kb/d from February. The shutdown of Hovensa's refinery in the US Virgin Islands helped reduce North American throughputs by 0.5 mb/d. Pacific runs recorded smaller month-on-month declines, due to a later maintenance season which normally peaks in June.
  • Refinery margins rose in all regions surveyed in April, bar the US West Coast, which fell from more elevated levels in March. US Gulf Coast margins saw the sharpest improvements, rising $4.25/bbl on average to around $4/bbl for cracking margins and more than $6.50/bbl for coking configurations. Northwest European margins rose by $2.70/bbl on average, while Singapore rates gained $2.30/bbl in the month, but remained in negative territory on a full cost basis. Reduced run rates due to maintenance, unscheduled outages and economic run cuts supported margins.
  • Refinery capacity rationalisation efforts were partly reversed in April, with the potential sale of four Atlantic Basin refineries previously taken out of the market due to poor margins. Delta Airlines agreed to buy ConocoPhillips' Trainer refinery in Pennsylvania, Vitol/AtlasInvest bought Petroplus' Cressier plant in Switzerland, Gunvor is about to restart the Antwerp refinery, also bought from Petroplus, and the Carlyle group is in talks to buy Sunoco's Philadelphia refinery after Energy Transfer Partners bought Sunoco's pipeline and retail network for $5.3 billion.

Global Refinery Overview

Global refinery runs for February were 170 kb/d higher than preliminary data had indicated, with European runs notably stronger. Also, Middle Eastern crude runs were higher than expected, but offset by downward adjustments to Latin America and non-OECD Europe. March data were slightly lower than expected in the OECD (-85 kb/d) partly offset by higher runs in the non-OECD (+60 kb/d). In all, 1Q12 global crude runs have been revised up by 20 kb/d, to average 74.8 mb/d.

2Q12 global throughputs have been lowered by 90 kb/d since last month's report to 74.3 mb/d. The adjustments follow from significantly weaker US runs in April, and continued delays to the restart of Libya's Ras Lanuf refinery and outages in India. Furthermore, an evaluation of non-OECD European data also lowers throughputs in Croatia and Romania through the forecast period. Higher Japanese data lift the OECD Pacific however, providing a partial offset to global runs.

The quarterly decline in runs from 1Q12 to 2Q12 is now assessed at 0.5 mb/d, less than last year's dip, but steeper than historical trends. Global throughputs generally rise most sharply in 3Q, by 1.2 mb/d on average for the last five years, before falling seasonally again in 4Q (-1.0 mb/d).

Refinery margins improved in all regions surveyed in April, except for the US West Coast, where they came down from more elevated levels in March. US Gulf Coast margins gained $4.25/bbl on average, and returned to profitable levels of $3.50-6.70/bbl. Northwest European margins rose $2.70/bbl on average, with cracking margins returning to respectable returns of $4.90-6.60/bbl. Urals hydroskimming margins improved but remained negative in April. Similarly, Singapore margins improved by more than $2/bbl but remained negative for all configurations surveyed on a full cost basis.

New Refinery Entrants Temporarily Stall Rationalisation Drive

The confirmation on 30 April that Delta Airlines will buy ConocoPhillips' 187 kb/d Trainer refinery for a bargain price of $150 million, in an attempt to reduce jet fuel cost, was met by mixed reactions. On the one hand, the plant's 400 employees and local officials were relieved to save jobs directly and indirectly linked to the plant, which has been idled since September 2011. More critical observers say that market fundamentals on the US East Coast have not improved, and economics will remain just as challenging for Delta - which is already struggling to survive amid challenging airline industry economics. Delta is planning to spend $100 million to reconfigure the plant to produce more jet fuel, and expects production to resume in 3Q12.

Also on the US East Coast, Sunoco announced in late April it will delay the planned shutdown of its 330 kb/d Philadelphia refinery by a month to end-July to allow it more time to conclude a deal with private equity firm Carlyle Group to take the majority stake in the plant. If an agreement is not reached between the two parties, the plant will be destined for the same fate as Sunoco's 175 kb/d Marcus Hook plant, already idled since December 2011 on deteriorating market conditions, and be permanently shut.

Separately, Energy Transfer Partners, a natural gas pipeline company, has agreed to buy Sunoco for $5.3 billion. The deal will allow ETP to enter the Marcellus and Utica shale plays, and become the controlling partner of Sunoco Logistics LP, which operates 2 500 miles of refined products pipelines, 5 400 miles of crude pipelines, and the storage of 42 mb of crude and refined products across the US. The deal also encompasses 4 900 retail stations and two refineries, though Sunoco will continue its plans for exiting the refining business, as well as its plans for the proposed refinery joint venture with the Carlyle Group.

In Europe, a new breed of owners is increasing its presence in the refining sphere. After the collapse of the region's largest independent refiner, Petroplus, administrators and local governments have been working to secure buyers for the five plants and a few deals were struck recently. Independent commodity trader Gunvor struck a deal to take over the 108 kb/d Antwerp refinery in March. The plant is currently in start-up mode and is expected to resume full production by mid-May. On 3 May Petroplus announced it had made a deal with Varo Holdings, a JV between oil trader Vitol and AtlasInvest for the sale of the 68 kb/d Cressier refinery. The plant could be restarted in 3Q12. France's Petit Couronne refinery is planning to restart runs through a tolling agreement with Shell, and reportedly is moving closer to finding a buyer.

While the refinery purchases surely make sense for the new owners, trying to become more vertically integrated or looking for a physical stake at key trading hubs, and the restarts are good for employment, they do nothing to address the fundamental overhang in capacity afflicting the OECD industry in general. 

OECD Refinery Throughput

OECD crude runs declined by 1.2 mb/d in March, to 35.7 mb/d, or 215 kb/d less than March 2011. Throughputs were lower in all regions as seasonal maintenance picked up, but most sharply in Europe, where crude runs fell by 575 kb/d, to 11.6 mb/d, equalling the record-low reached last April. North American throughputs also declined by 520 kb/d, though the shutdown of Hovensa's 350 kb/d refinery in the US Virgin Islands accounted for some of the fall. Runs in the US, Canada and Mexico all fell as maintenance intensified. Pacific refiners reported smaller declines, however, with only South Korean runs lower than in February. Japanese refiners traditionally cut runs later in the season, and reach a low point in June when turnarounds peak. March OECD crude runs were 85 kb/d lower than our previous forecast overall, with minor changes to all regions. Final February data on the other hand were higher than preliminary data, leading to an upward revision of 210 kb/d. Stronger German and Belgian rates drove European throughputs 150 kb/d higher.

Preliminary April data for key countries showed diverging trends in the Pacific and the US. While US runs rose less than expected, despite announced maintenance schedules winding down, Japanese crude throughputs were higher than expected. The traditional seasonal ramp-up in US refinery runs could have been hampered by exceptionally weak margins in February and March. A wide improvement in returns in April suggests the lower runs in April paid off, and refiners will likely come back strongly from early May onwards. Furthermore, Motiva's expanded Port Arthur refinery (+325 kb/d) is expected to lift Gulf Coast throughputs as the plant ramps up to full rates. OECD European refiners reached a seasonal peak in maintenance in March, and runs are expected to pick up already from April and further in May, once shuttered capacity comes back online. Petroplus' Antwerp and Cressier refineries are scheduled to resume operations over May and June/July, while the company's Petit Couronne plant in France could restart somewhat later, depending on the completion of current maintenance work.

North American crude throughput estimates are unchanged since last month's report for 1Q12, but have been lowered substantially for 2Q12 following weaker-than-expected April US runs. Regional runs fell 520 kb/d in March, in large part due to the closure of Hovensa's refinery in the US Virgin Islands, and maintenance shutdowns elsewhere. March totals were 45 kb/d lower than our previous forecast and 365 kb/d below a year earlier.

Regional refinery maintenance peaked in March with 1 500 kb/d in reported outages. In April shutdowns fell to 1 200 kb/d before most work is to be completed in May. Key shutdowns in March included Marathon's Garyville refinery in Louisiana, Citgo's Corpus Christi in Texas, BP's Cherry Point in Washington and Valero's Port Arthur plant in Texas. In April, planned shutdowns comprised amongst others Valero's Houston refinery and at Exxon's Beaumont refinery. Furthermore, an unplanned outage at BP's Texas City refinery slightly lowered runs.

Despite the lower announced maintenance figures for April, weekly EIA data show US crude runs mostly unchanged from March. Weak, and in some cases negative, margins, especially on the Gulf Coast through March, likely led to discretionary run cuts. US Gulf Coast refinery runs fell sharply in April, also due to poor margins in March. Cracking margins were negative on average in March (-$0.65/bbl) and LLS cracking returned only $0.52/bbl. Margins saw sharp improvement in April, however, rising by more than $4/bbl on average on the Gulf Coast. West Coast margins fell however, as refineries came back from scheduled and unscheduled outages.

On the West Coast, operations resumed at BP's Ferndale refinery, Valero's Norco refinery and Alon resumed operations at its Californian refineries. BP's 225 kb/d Cherry Point refinery, which has been shut since February due to a fire at the plant's crude distillation unit, restarted on 7 May. Also at Midwest refineries, utilisation rates recovered with the restart of Valero's 90 kb/d Ardmore refinery in Oklahoma.

Implications of European Refinery Rationalisation

Notwithstanding recent refinery sales, since the start of the economic downturn in 2008, 2.8 mb/d of OECD crude distillation capacity has been shut or is committed to shut, with further capacity at risk.

The European downstream industry restructuring currently underway follows more than two years of low profitability. European refinery margins have gone from bad to worse, with both cracking and simple hydro-skimming margins deteriorating to levels that have forced several plants to halt operations. Regional crude throughputs are trending at all-time lows, averaging just over 12.0 mb/d in 2011, some 1.7 mb/d less than five years earlier. So far, more than 1.0 mb/d of regional crude distillation capacity has been shed, through seven refinery shutdowns and two capacity reductions, with likely more to come. The three unsold Petroplus plants add another 490 kb/d, destined for permanent closure if no buyers are found.

While several factors contribute to the current dire situation of the European downstream, the structural decline in regional product demand is most relevant. Regional demand fell by 1.3 mb/d from 2006 to 2011, and is forecast to decline by another 0.7 mb/d by 2016. The 2.1 mb/d demand contraction by far outweighs completed or committed refinery shutdowns. Furthermore, demand is becoming progressively biased towards diesel. Europe's gasoil demand share is set to grow from 40% in 2006 to 42% in 2011 and 44% in 2016. At the same time, the gasoline share falls from 16% to 13%, which creates further problems for those European refiners geared towards gasoline production.

European product markets have traditionally been balanced by importing the required diesel, mostly from the FSU, and exporting surplus gasoline to the US. Since 2008, however, there has been another revolution related to North American crude and product balances. Increased regional crude supplies, from the US and Canada, have seen feedstock imports decline significantly. US net imports of crude are now less than 8.8 mb/d, over 1 mb/d lower than five years ago. More significantly for European refiners, US product exports are surging and gasoline imports are on a sharp decline. US refiners with access to cheaper, WTI-linked crudes and inexpensive natural gas used as refinery fuel or feedstocks, enjoy better margins than their counterparts on the other side of the Atlantic (and also refiners on the US East Coast, who do not benefit from the same advantage). Furthermore, US gasoline demand is in steep decline, with ethanol taking up an increasing share, further cutting demand for imports from Europe. Refinery capacity rationalisation on the US East Coast could provide increased export opportunities for European refiners however.

So where else can Europe send its surplus gasoline output? So far, European refiners have been finding markets in Africa, the Middle East and other non-OECD regions, but large scale expansions of non-OECD refinery capacity could further undermine this outlet. The non-OECD countries plan to add more than 9.0 mb/d of crude distillation capacity by 2016, far outpacing expected global demand growth of 6.7 mb/d. An increasing share of demand will furthermore be met by supplies bypassing the refinery system (crude direct burn, NGLs, GTLs, biofuels), and from refinery processing gains.

The fundamentals outlined here (in line with the December 2011 MTOMR Update) imply 5.9 mb/d of capacity would have to be shut or not built worldwide for global utilisation rates to be brought back to 83%, the average over 2006-2008, the last time we saw synchronous healthy refining margins. This suggests that, in addition to further refinery shutdowns, some project delays and cancellations post-2013 are now likely. Additional closure of European distillation capacity could be as much as 2.3 mb/d for utilisation rates to bump back up to 83%, or 2.6 mb/d if 85% was targeted. OECD Europe's crude oil imports from outside the region could fall by 760 kb/d (-8.8%) from 8.6 mb/d in 2010 to 7.8 mb/d by 2016.

Overall, main trade flows to Europe from Russia, the US, the Middle East and Asia currently account for over 1 mb/d of distillate imports. Assuming lower regional runs going forward, this could rise to more than 1.5 mb/d by 2016, as diesel demand is still expected to grow. Gasoline and fuel oil balances on the other hand will remain relatively unchanged, as lower output offsets declining regional demand. While fuel quality standards are evolving at different speeds across the world, much of the planned capacity upgrading and expansion looks set to meet Euro V standards. New supplies of high quality fuels are expected to outpace demand in the emerging markets, leaving high quality fuel available for export.

In the event of future distillate shortages in Europe, arbitrage economics should keep the European market well supplied, with future capacity additions likely to boost exportable surplus distillates by at least 1.3 mb/d (with Saudi Arabia, Russia and, in the longer term, Brazil likely to add additional supplies). Growing demand in Asia should restrict exports from that region unless premia for ultra low sulphur diesel (ULSD) keep the arbitrage open to European markets. Some Middle East and Asian volumes of distillate, such as gas-to-liquids (GTL) from Qatar and Malaysia, and hydrotreated vegetable oil biodiesel are likely to continue to flow to Europe due to their extremely low sulphur content. Such fuels are marketed as "green" relative to their conventional equivalents.

In addition to changing the balance of trade in favour of products rather than crude oil, the shutting of refinery capacity in Europe could also have a direct impact on commercial stock levels of crude oil and unfinished products, while their effect on commercial stocks of finished products is considered more limited. Commercial stocks of input fuels are assumed to decline by a share equal to the share of shut down refining capacity. Storage facilities of finished products at closed refinery sites that can be used as import terminals or distribution hubs will largely be maintained, due to a combination of high costs for complete site restoration and the existing trend of higher exports from refiners in non-OECD countries to Europe.

One likely repercussion of a shift in the balance between commercial stocks of crude oil/unfinished products and finished products, in favour of the latter is that holding strategic stocks under an industry obligation will likely become more expensive on a per barrel basis. A second outcome is that higher demand for oil product storage facilities - as already witnessed in some European countries - is likely to become an issue elsewhere as well.

Irrespective of whether a country fulfils its stockholding obligation by keeping public or industry stocks or a mix of both, refinery closures will likely lead to lower commercial inventories of crude oil and unfinished products. The impact on total stocks held by a country could hinge upon the kind of stockholding system in place and the number of refineries on its territory. First, the decrease in total stocks will conceivably be less pronounced for countries that cover the 90-day IEA obligation with public stocks only. Second, although there may be exceptions, the lower the number of refineries in a country, the more pronounced will be the impact of a refinery closure on overall stock levels.

OECD European runs plummeted by 570 kb/d in March, to 11.6 mb/d, 60 kb/d less than forecast in last month's report, reflecting the weak demand picture outlined earlier. February preliminary data were revised up by 150 kb/d however, on stronger German and Belgian readings. The March total was likely the season's low-point coinciding with the peak in scheduled outages, and was on par with the previous all time-low hit last April. Runs fell in practically all countries, though most sharply in Germany, Italy, Spain and France. The year-on-year deficit, of 140 kb/d in total, was most pronounced in France (-220 kb/d y-o-y), Italy (-150 kb/d), Switzerland (-60 kb/d) and Belgium (-55 kb/d)

Regional runs are expected to pick up from April onwards as maintenance winds down. After peaking in March at 1.3 mb/d, the 2Q12 outage forecast is now around 670 kb/d, with shutdowns falling sharply from 700-850 kb/d in April and May to 400 kb/d in June. The shutdown of the Italian Gela plant has been included from mid-April to the end of the year. Belgium's Antwerp refinery, which was bought by Gunvor, is currently in start-up mode and will likely restart production in mid-May. Petroplus' French refinery in Petit Couronne will resume production in coming months, after maintenance is completed. Shell will then supply up to 100 kb/d of crude for refining under a tolling agreement. Petroplus' Swiss refinery has also found a buyer in Varo Holdings (a joint venture between Vitol and AtlasInvest). The 68 kb/d refinery is expected to resume operations early in 3Q12, after the transaction is closed later in 2Q12. 

OECD Pacific crude runs declined 130 kb/d in March, to 6.7 mb/d on average. The regional total was some 295 kb/d higher than a year earlier, when Japan was hit by a devastating earthquake and tsunami. Runs are expected to start falling seasonally in April, and indeed, weekly data from the Petroleum Association of Japan through 5 May confirms maintenance work was picking up. The monthly decline was nevertheless much weaker than expected, leading to an upward revision of 320 kb/d to Japanese estimates. An incident at Shell's Geelong refinery in Australia in early April likely cut runs there, providing a partial offset. Shell reportedly delayed the loading of a Vietnamese cargo from May to June and was looking to sell at least one cargo bought in a tender prior to the accident.

Non-OECD Refinery Throughput

Non-OECD refinery crude run estimates have been left largely unchanged for 1Q12, averaging 38.5 mb/d. Higher Middle Eastern throughputs were offset by a downward baseline adjustment to non-OECD Europe. The 2Q12 forecast have been lowered by 90 kb/d on the other hand, due to the lower non-OECD European baseline and following further delays to the start up of Libya's largest refinery and unscheduled outages in India.

Chinese crude runs fell by 210 kb/d in March, to 9.1 mb/d, in line with expectations. Throughputs were 200 kb/d or 2.3% above a year earlier, but the lowest since October 2011 as refiners commenced seasonal maintenance. Throughputs were set to fall further in April as turnarounds intensified and amidst continued poor margins. Outages scheduled for April include a 200 kb/d crude unit at Sinopec's Zhenhai refinery, further work at PetroChina's Dalian plant, and a partial reduction at the joint venture WEPEC refinery.

Sinopec reportedly started crude deliveries to the new 160 kb/d unit at its Jinling refinery in the last week of March, boosting the plants capacity to 430 kb/d, the largest in China after the 460 kb/d Zhenhai refinery. Full operations are not immediate, however, as some secondary units are still to be completed. The unit was originally scheduled to start up at the end of 2011, but was delayed until June 2012 after a series of accidents in the Chinese refining sector.

In 'Other Asia', refinery runs were slightly higher than expected in March, with India, Singapore and Taiwan lifting the regional total by a combined 50 kb/d compared to the previous forecast. In all, regional runs are assessed at 9.2 mb/d, 215 kb/d lower than in February. Expected lower runs in Indonesia and Taiwan were partly offset by higher Indian runs.

India's refinery throughputs are estimated to have averaged 4.3 mb/d in March, adjusting official ministry data for Reliance's Jamnagar export plant and the recently commissioned Bina and Bathinda refineries. The monthly figure is assessed some 4.4% higher than a year earlier and 2.8% above the previous month. According to its latest financial report, Reliance Ind. Ltd (RIL) processed 16.2 million mt of crude in the first quarter, or an average of 1.3 mb/d, of which 720 kb/d were accounted for by the domestic orientated Jamnagar 1 site and the remaining 580 kb/d by the export oriented plant. Quarterly runs were 1 million mt less than in 4Q11 due to a planned shutdown in 1Q12.

In the same report, RIL reported that its refining margins averaged $7.60/bbl in 1Q12, compared to $6.80/bbl in 4Q12. For the 2011/2012 fiscal year as a whole, the company processed 67.6 million mt of crude and exported 39.6 million mt of products, an annual increase of 3%. In terms of value however, product exports rose 23% from the previous year to $36 billion in 2011/2012. In March, India's private refiners, which account for about a third of India's refining capacity, was boosted further as shipments from the recently expanded Essar Vadinar refinery doubled. Essar expanded the Vadinar refinery by 150 kb/d in March, to 360 kb/d. In all, shipments averaged 1.13 mb/d, 34% higher than in February.

Runs for both April and May have been revised lower, as state-run Mangalore Refinery and Petrochemicals Ltd had to shut its 300 kb/d refinery in the south of the country due to a water shortage. Local authorities reduced water supplies to the plant from end-March and on 11 April the water intake from the Nethravath River was completely halted, forcing a full shutdown. The company declared force majeure on crude feedstock supplies as well as refined product deliveries. By end April, however, the facility was partially restarted and force majeure lifted after water supplies to the plant resumed. Commissioning of the Phase 3 expansion (including a 60 kb/d crude distillation unit) completed in March 2012, however, will be delayed until water supplies can be further increased. A fire at the 60 kb/d Numaligarh refinery led the company to shut the plant in April for an expected duration of 20 days. Prior to the fire, the company was planning a maintenance shutdown in May.

Trafigura, the worlds' third largest crude trader, entered the Asian refining sector in April by taking a 24% share in India's third planned private refinery, the 120 kb/d Nagarjuna in southern India. The project, initially slated to start up in November 2011, will now likely be commissioned later this year with full commercial production starting in the first half of 2013.

In Taiwan, operations at CPC's 220 kb/d Kaohsiung refinery were unaffected by a fire and explosion at the complex on 6 April. Throughputs were still estimated lower in March, due to continued safety shutdowns at Formosa's 540 kb/d Mailiao plant.

After declining 200 kb/d in March, Russian crude runs fell another 160 kb/d in April, in line with our previous forecast. At 5 mb/d, Russian refinery throughputs are expected to have reached the seasonal low-point. Refinery maintenance is thought to have peaked in April, with more than 1 mb/d of capacity offline. In May, offline capacity falls to less than 0.6 mb/d and 0.2 mb/d in June.

In Lithuania, PKN Orlen closed its sole refinery, the 190 kb/d Mazeikiu plant at the end of April for a 35-day maintenance shutdown. Ukraine's, TNK-BP announced it was preparing to mothball its Lysychansk refinery (halted since March) as the Government would not limit gasoline imports from neighbouring countries benefitting a from cheaper Russian crude prices (through the Russian-Belarus-Kazakhstan customs union). Also in the Ukraine, Lukoil's 56 kb/d Odessa refinery has been shut in since October, due to poor margins. Kazakhstan's three refineries processed 284 kb/d of crude in March, up 11% from a year earlier but 5.2% lower than in February. 

Middle Eastern crude run estimates have been lifted by 55 kb/d for 1Q12 and 90 kb/d for 2Q12 since last month's report. Saudi Arabia's 550 kb/d Ras Tanura refinery, which has partly been shut since March is expected to come back online in early May. The plant's 350 kb/d crude unit was reportedly back already in mid-April, followed by the 200 kb/d condensate splitter by end-month and the hydrocracker in early May. Aramco imported 90 kb/d of gasoline in March and 110 kb/d in April, due to the shutdowns. Iraqi refinery runs fell to 593 kb/d in March, from 660 kb/d in February, as exports surged to their highest level since 1989 with the startup of new export capacity. In the UAE, maintenance at ADNOC's 140 kb/d crude unit at the Ruwais refinery from March 9 to April 12 likely lowered throughputs.

Elsewhere, Latin American throughput estimates for 1Q12 and 2Q12 are largely unchanged since last month's report, at 5.0 mb/d and 4.8 mb/d, respectively. Brazil's crude throughputs were 1.9 mb/d in March, 65 kb/d more than a month earlier and on par with the previous year. In Argentina, Spanish firm Repsol-YPF was ordered to boost refinery runs after Buenos Aires moved to expropriate a 51% stake in the firm (see Supply, 'Milking a Vaca Muerta: Argentina's YPF Expropriation Clouds Investment Climate'). The 189 kb/d La Plata refinery near the capital city was told to raise runs to 93% of capacity, from 85%. The plant will run 15 kb/d more heavy sweet Escalante crude to boost fuel oil supplies to domestic power stations. YPF is Argentina's largest fuel retailer and refiner, with just over 50% of the country's refining capacity across three refineries with a combined capacity of 320 kb/d. The latest monthly data available for Argentina puts crude throughputs at 527 kb/d in December 2011. In Chile, Enap was looking to restart a crude unit at its 110 kb/d Bio Bio refinery amid improving margins. One of the plant's two crude units had been offline since 4Q11 due to weak economics. The company's 95 kb/d Concon refinery were running at reduced rated for the same reason.

African refinery runs are set to dip sharply in May, due to scheduled and unscheduled outages. A fire at EGCP's Suez refinery in April was expected to reduce Egyptian supplies through early June. Scheduled maintenance at Algeria's Skikda refinery from May is expected to curb regional runs further, though the extent of the shutdowns are not known. Also in Algeria, problems with a gasoline producing unit at the Arzew refinery will result in below-capacity runs for several months, after a partial shutdown was completed only in mid-February. In Libya, an official at refinery operator Lerco told Reuters that the restart of the country's principal Ras Lanuf refinery is unlikely for at least another month after a meeting between board members and shareholders, expected in mid-May.