Oil Market Report: 13 June 2012

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Highlights

  • The springtime slump in oil markets accelerated in May in the wake of the deepening euro zone crisis, mounting concern over a slowdown in Chinese growth and rising global oil supplies. Futures prices were off 20% from peak 2012 levels, with Brent last trading at around $97.50/bbl and WTI at $83.50/bbl.
  • A muted economic backdrop underpins forecast demand growth of 0.82 mb/d in 2012, resulting in average demand of 89.9 mb/d. A lower GDP sensitivity this month illustrates downside demand risks, but upside potential exists too, amid uncertainty over summer power sector oil demand and non-OECD stockpiling.
  • Global oil supply rose by 0.2 mb/d to 91.1 mb/d in May. Non-OPEC liquids increased by 0.2 mb/d to 53.1 mb/d and by 1.0 mb/d versus year ago. In 2012 rising North American supply more than offsets record-low North Sea output, as well as outages in the Sudans, Syria, and Yemen, taking non-OPEC supply growth to 0.7 mb/d.
  • OPEC crude supply edged lower in May, off 20 kb/d, to 31.87 mb/d, with reduced output from Saudi Arabia and Iraq offset by higher production in Angola, Nigeria, and Libya. The 'call on OPEC crude and stock change' in 2H12 is around 1 mb/d higher than the 1H12 level, at 30.9 mb/d. OPEC 2012 NGL supply rises 0.4 mb/d to 6.2 mb/d.
  • OECD industry oil inventories rose by 17.3 mb in April, to 2 643 mb. OECD commercial oil stocks have now narrowed the apparent deficit to the five-year average in absolute terms, while remaining 1.9 days above the five-year average. May preliminary data indicate a 20.1 mb increase in OECD industry inventories.
  • World refinery crude demand is set to surge seasonally by 2.8 mb/d between April's low and August, as maintenance winds down. New and returning capacity in Asia and Europe also contribute, while ramp up at Motiva's expanded US plant could be delayed. Global crude runs rise from 74.3 mb/d in 2Q12 to 75.9 mb/d in 3Q12.

Spring Replenishment

Market fundamentals have eased since early-2012. OPEC crude output for May is estimated at 31.9 mb/d, around 1.4 mb/d higher than in December 2011, and 2.8 mb/d above May 2011 levels. 1Q12 saw an implied global stock build of over 1 mb/d and supply is on track to exceed underlying global products demand by over 2 mb/d in 2Q12. With prices now $25/bbl below March highs, some of the relentlessly bullish market sentiment evident in the last 18 months has dissipated. Economic concerns have risen in prominence again, with euro zone and China uncertainties to the fore.

Some may be tempted to see the market as over-supplied, and there have been calls by a number of producers for 'over-production' to be reined-in. Memories are indeed short: crude prices remain very high in historical terms, and are acting as a drag on household and government budgets in OECD and emerging markets alike. High prices eventually stunt demand growth, directly if consumers pay full price for their oil, or indirectly via weaker activity levels and GDP growth if consumers are shielded from full price pass-through. Higher OPEC production sits against a backdrop of tight end-2011 inventories, stubbornly high prices and persistent uncertainty over non-OPEC and Iranian supply for this summer.



OECD stock replenishment this spring is both a normal, and welcome, seasonal trend, particularly given ongoing geopolitical uncertainties and low levels of OPEC spare capacity. Major non-OECD consumers too seem to have been accumulating crude in the early part of the year as a precautionary measure ahead of the full imposition of economic sanctions on Iran from late-June/early-July. A look at Chinese crude oil output, refinery throughput and trade data suggests substantial 'incremental' crude demand so far this year, in excess of the apparent oil products demand we show in our market balances. Not all of that has necessarily been fed into new strategic storage, but as noted previously, were China to fill new storage capacity steadily over the course of 2012, that could add 150-200 kb/d to underlying demand.

OPEC production may indeed trend slightly lower in the third and fourth quarters if the EU embargo and US sanctions crimp Iranian oil sales further. Preliminary April and May data on imports of Iranian crude are nearly 1 mb/d below late-2011 levels, and close to the market impact we have assumed since sanctions were first tightened. In months ahead, Iran may need to shut-in production volumes if export markets remain similarly constrained and storage fills up. Nobody knows exactly how oil supplies will develop this summer, although a mutually acceptable agreement at upcoming Iran/P5+1 talks would be everyone's preferred outcome. Nonetheless, G8 Ministers in May again reiterated that the possibility of renewed supply tightness in coming months means that an IEA collective action cannot be ruled out.

Looking ahead, if the euro zone or Chinese economy slows more quickly than envisaged here, weaker customer demand would naturally see producers scale back output. A simple extrapolation of current OPEC output through end-2012 could indeed result in OECD stock-overhang. But equally, starting from our base case assumptions, and adjusting for potentially lower Iranian output on the one hand, and for some further Chinese crude buying on the other, leaves an outlook (above) that is hardly overflowing with oil. The market can clearly now be characterised as 'better supplied', but 'over-supplied' looks something of a stretch, given the myriad uncertainties that lie ahead for the summer.

Demand

Summary

  • The global oil demand estimate for 2012 is scaled back by 0.1 mb/d to 89.9 mb/d. Baseline revisions for 2009-2011, however, leave growth unchanged at 0.8 mb/d. Reports of a darkening global economic backdrop simply re-inforce our already-cautious view on 2012 demand. Subdued global economic growth of 3.5%, well down on the near-5% expansion seen before the global credit crunch, continue to cap expected 2012 growth.
  • Preliminary April OECD data nonetheless depict a relative improvement in the year-on-year (y-o-y) decline rate, to -0.7% (to 43.9 mb/d), from the average fall of -1.9% seen in the previous four-quarters. Resurgent OECD Pacific demand led the way, up 4.8% (to 7.5 mb/d), supported by power sector demand in Japan. North American consumption fell by 1.2%, shallower than the average 2.2% drop seen in the previous four-quarters, while financially-challenged Europe maintained its near-3% decline rate.
  • Slowing activity levels saw non-OECD demand growth fall back sharply in April, according to preliminary estimates, halving to 2.1% (43.9 mb/d) from 4.5% in March. A dramatic reversal in China's oil demand, down 0.6% after a rise of 3.1% in March, accounted for most of the deterioration, although early indications suggest a pick-up again in May. For the year as a whole, however, non-OECD demand is forecast to average 44.7 mb/d, up by 2.8% on the year.
  • A low-GDP sensitivity analysis, with 2012 GDP growth of 2.3% rather than 3.5%, would generate weaker 2012 demand growth of 0.34 mb/d. This scenario illustrates some of the downside risks were euro zone or Chinese economic growth to slow markedly in coming months.


Global Overview

Confidence concerning the sustainability of the global economic recovery has ebbed this past month which, all else held equal, should accordingly dampen oil demand. However, despite downward data adjustments to the non-OECD baseline for 2010 and 2011, an offset derives from the recent weakening in oil prices.  Employing an already cautious view on 1H12 economic growth, our projection for global oil demand growth of 0.8 mb/d in 2012 takes total consumption up to an average of 89.9 mb/d. We have also updated our occasional low-GDP sensitivity this month (see Economic Risks Again Skewed to the Downside). Under such a low-case scenario global economic growth for 2012 is assumed to be one-third lower, at 2.3% as opposed to 3.5% in the base case. Under this projection, a more sedate expansion in demand of 0.34 mb/d would result for 2012, to average 89.4 mb/d.

The low GDP case, by definition, remains for now a lower probability case than our base projection. That said, consumers' perceptions of a changing economic backdrop can greatly influence the key factors that impact upon economic growth itself, i.e. fears for the future can become self-reinforcing as businesses curtail investments and consumers withhold spending. Only recently, during 12 May through 6 June, the search engine Google recorded an unprecedented rise in searches for the term 'recession', up 6000% on the previous 26 day period; hits on the phrase 'double dip' were up by 325%. Such a crude methodology is not meant to offer conclusive proof of change in the economic landscape but rather to draw the reader's eye to an escalation in fears, potentially self-fulfilling. Such concerns have become more pronounced as the very sustainability of the European Economic and Monetary Union (EMU) has increasingly come under threat, while the pace of economic momentum in both China and the US appears to have stalled. Rising public angst does not mean we have to lower our forecast, but rather justifies the inclusion of an additional low-case scenario.



Numerous historical revisions, centred on annual data for the non-OECD, have also been made. For example, global oil demand for 2009 is now assessed at 85.5 mb/d, 55 kb/d less than carried in last month's report. Dominating the downside revisions were the economies of the former Soviet Union and the Middle East, both of which saw 2009 data reduced by more than 100 kb/d. For 2011, revisions curb global demand to 89.1 mb/d, which is 90 kb/d less than estimated previously.



OECD

Early estimates of OECD preliminary data for April depict a reduction in the y-o-y decline rate, with a 0.7% drop resulting as consumption averaged 43.9 mb/d for the month. The pace of contraction therefore slowed markedly compared with the -1.9% average seen during 2Q11 to 1Q12. OECD Pacific demand growth surged to 4.8%, while the rate of North American decline slowed from 2.2% to 1.2%. Amid heightened economic concerns, European oil demand remained on a near-3% downward trend.



Economic Risks Again Skewed to the Downside

Arguably, demand side risks in our projections so far in 2012 have been fairly well balanced. But amid renewed downside pressures, with mounting European debt concerns and the very sustainability of the EMU at the forefront of peoples' fears, another look at our lower GDP sensitivity may be in order. Additional worries have also arisen concerning momentum in both the Chinese and the US economies, the key growth engines for oil demand. China has taken on the mantle of the biggest single source of oil demand growth, while the US maintains its position as the largest global consumer. Concerns over the health of these economies are not new but are now arguably more intense. This is not to undermine the robustness of our existing base case for demand. However, global economic growth of 3.5% is still significantly down on the pre-credit crunch heights of near-5%. The possibility, although still slim, of much lower growth has undeniably risen this past month. To illustrate the scale of the issue, we again include a low-case projection, which assumes global economic growth one third lower in 2012, i.e. at 2.3%. Such an assumption entails a significant economic contraction in OECD Europe, as economic output falls by 0.2% as opposed to the 0.2% gain assumed in the base case. It also posits non-OECD growth of a weaker 3.9%, compared to 5.7% in the base case.



If the global economy were to expand by only 2.3% in 2012, total world oil demand would come in at 89.4 mb/d. Growth for the year would thus amount to 0.34 mb/d, nearly 0.5 mb/d less than assumed within our base case analysis. The developing or non-OECD region is forecast to take the brunt of the downside revision seen in the low-case scenario, with non-OECD growth of 0.84 mb/d in 2012 as opposed to 1.22 mb/d in the base-case analysis. Emerging markets would be expected to endure the majority of any lost demand, as a consequence of the higher income elasticity of these non-OECD oil consumers. The greater significance of oil-intensive industry in non-OECD economies, in comparison to the OECD average, plus the less mature state of their transport markets, fuels this dichotomy. Furthermore, non-OECD nations tend to have less developed public transportation systems, less money to invest in new/cleaner technologies and reduced flexibility to change fuels in the short term. OECD demand would decline by a more rapid 0.5 mb/d in 2012, under the terms of the low-case scenario, as opposed to a predicted OECD decline of 0.4 mb/d in the base case.



The exceptional demand low of April 2011 - a consequence in part of the devastating Japanese tsunami - led the y-o-y adjustment. The preliminary data for Japan in April 2012 implies a 6.1% y-o-y gain (or 245 kb/d), to 4.3 mb/d, as low nuclear availability stimulated replacement demand for both residual fuel oil (up 120 kb/d) and crude oil for direct burn (up 175 kb/d) by power stations. Indeed, Japan accounted for over 40% of the total global expansion in oil demand estimated for April.

North America

Demand for oil products in North America continues to decline, with revised March data showing a sizeable 1.0 mb/d y-o-y fall to 23.0 mb/d, and preliminary data for April depicting a further 0.3 mb/d drop to 22.8 mb/d. The North American decline rate abated somewhat in April, despite high product prices and the entrenched structural demand decline. All told, 2012 sees a 0.2 mb/d decline to 23.3 mb/d, with residual fuel oil (-9.4%) leading the contraction, as fuel switching to cheaper natural gas continues.



Revised US demand data for March averaged 18.2 mb/d, a y-o-y decline of 5.6%, with consumption lower across all of the main product categories. The sharpest contractions were seen in residual fuel oil, and naphtha, with reductions in excess of 20%. Relatively speaking, motor gasoline fell by a lesser degree, with demand down 1.3% to 8.6 mb/d, as the pace of the decline showed signs of bottoming-out following the falls of the past four years. Despite the optimism that had crept into the US economic news feed during late-2011/early-2012, cracks have started to appear, undermining the short-term demand prognosis. For example, the US economy expanded by an annualised 1.9% in 1Q12 (i.e. 0.5% in simple quarter-on-quarter terms), below the previously reported 2.2% (0.6%) level. Furthermore, the employment statistics have deteriorated (with unemployment posting its first rise in nine months, to 8.2% in May) while the closely watched Philadelphia Fed Manufacturing index slipped to -5.8 in May, significantly down on the consensus expectation of +10. The Institute of Supply Management's Manufacturing Index, although still above the key 50 threshold that signals expanding confidence, slipped to 53.5 in May from 54.8 in April.



The relative improvement in US gasoline demand growth deserves additional analysis, having previously fallen by an average of 3.5% y-o-y in the final three-quarters of 2011. March's 1.3% drop is therefore mild in comparison. With the number of miles travelled already significantly reduced, there is little more that US drivers can do in the short-term to reduced demand. The sheer scale of the US vehicle fleet means that more fuel-efficient car purchases take a long time to filter through into sizeable chunks of the total vehicle fleet.

Early estimates of April demand reinforce a moderation in the y-o-y pace at which US demand declines; with a drop of 1.6% now estimated, taking total US consumption to 18.4 mb/d. Supported by April's manufacturing strength, gasoil demand led April's upside, with a 3.2% y-o-y gain to 3.8 mb/d. Some of gasoil/diesel's strength may have derived at the expense of heavy fuel oil ahead of the ECA's bunker fuel specification switch on 1 August 2012, but also gaining support as secondary/tertiary tank refills were pushed into April.

For the year as a whole, a US demand contraction of around 165 kb/d (-0.9%) to 18.7 mb/d is forecast, as the predicted decline rate falls throughout the year, supported by further price appeasement and a continuation of the gentle pace of economic recovery. Bucking the otherwise falling US demand trend in 2012 is likely to be the LPG & ethane category, gaining support as higher NGL supplies from shale deposits make US petrochemical production more cost competitive.



In Mexico, oil demand grew by an average of 0.8% in March and April, after falling by 2.6% in February. Preliminary data for April depict strong gains in residual fuel oil (11.7%), 'other products' (6.2%), gasoil/diesel (3.4%) and jet/kerosene (2.7%), while motor gasoline contracted by 3.3%. Solid residual fuel oil demand growth in the power sector accelerated beyond our previous expectations, as natural gas consumption fell unseasonably in thermoelectric plants. Demand is projected to remain solid during 2Q12, as a result of a severe drought undermining hydroelectric power generation. Gasoline demand, on the other hand, is forecast to remain flat during 2012, as consumers react to local fuel price rises outpacing inflation, yet remaining below international levels. Total oil product demand in 2012 is assumed to fall marginally to 2.1 mb/d, although heavily dependent upon the continued growth of the US economy.



Europe

The economic woes of Europe continue to dampen oil demand, with a clear dichotomy in performance between northern Europe and the ailing economies on the Mediterranean. Overall demand in OECD Europe fell by 0.4 mb/d, according to preliminary April data, to 13.6 mb/d. European transportation fuels remained weak, with gasoline demand down by 125 kb/d y-o-y, to 2.1 mb/d, and diesel 175 kb/d lower, to 4.2 mb/d, as cash-strapped consumers struggled with near-record retail prices and weak consumer confidence.

A continuation of the economic gloom that has plagued Europe recently is assumed to continue through 3Q12, before recovering in 4Q12 (assuming the European economy does not deteriorate further) when the heavy y-o-y declines are forecast to abate. This leaves a fairly pessimistic demand outlook for the year as a whole, with OECD European demand forecast to shed 345 kb/d to an average of around 13.9 mb/d. Back at its peak in 2006, OECD Europe consumed 15.7 mb/d, suggesting a loss of 1.7 mb/d in six years or an average of 290 kb/d each year.



German consumption reversed its recently falling trend, according to the preliminary data series for April, which showed a y-o-y gain of 120 kb/d to 2.4 mb/d, as the cold weather supported strong growth in heating oil demand. France similarly bucked the overall declining European demand trend in April. French consumption rose by 2.2% y-o-y to 1.8 mb/d, according to the preliminary data. Unusually cold weather conditions supported particularly strong demand for heating oil, up 13.0% to 220 kb/d. Transport fuels, however, performed poorly, falling on account of near-record retail prices. Gasoline demand fell by 11.8% in April to 175 kb/d, while diesel demand slipped 0.3% to 710 kb/d.



The UK consumed 1.6 mb/d of oil products in March, a y-o-y decline of 1.3%, with particularly sharp deteriorations in the residual fuel oil (-8.8%), jet/kerosene (-8.5%) and heating oil (-6.0%) categories. Transportation fuels bucked the overall falling UK consumption trend, as panic buying, ahead of a heavily anticipated distribution strike (that never happened) provided temporary relief to gasoline (+0.9%) and diesel (+1.8%). Total UK consumption for the year as a whole is expected at around 1.6 mb/d, a drop of 3.1% on 2011.

Oil demand in Italy fell even more sharply, down a staggering 14.9% in April to 1.2 mb/d, as the dire economic backdrop quelled consumption. Residual fuel oil demand notably collapsed in a reversal of 2011's surge in use to replace Libyan natural gas. The similarly harsh economic situations in Spain and Greece saw y-o-y drops in demand of 7.8% and 16.5%, respectively.

Pacific

The strong OECD Pacific demand growth seen since the end of 2011 continued, according to the preliminary data feeds for April, up by 4.8% to 7.5 mb/d. Although power sector demand from Japan has led the upside, significant gains were also seen in OECD Pacific ground transportation fuels, with gasoline demand up 3.0% and diesel up 3.8%. Korea led the momentum here, up 5.7% and 15.3% respectively, largely on account of unseasonably low demand in the previous year. The Korean government is making stringent efforts to restrain demand growth (see next page).



In Japan, oil demand rose by 6.1% year-on-year in April, to 4.3 mb/d, following a sizeable 13% March increment triggered by cold weather, last year's tsunami-impacted demand and low electricity generation in the nuclear power plants. Japanese oil demand in 2012 is revised upwards by 70 kb/d over last month's estimate, as vigorous economic output drove electricity demand above 2011 levels. Confirming this trend, residual fuel oil climbed by 60% y-o-y in April, while 'other products', including direct crude burning, grew by 70% on the back of strong demand in thermoelectric plants. The power sector consumed 500 kb/d of oil products in April, a year-on-year increment of 300 kb/d, and demand is expected to accelerate to 600-700 kb/d in the summer. Currently, we assume that two nuclear reactors, located in the south and operated by Kansai Electric Company, will come back online in mid-July/early-August, but uncertainty remains, as the central government is required to approve the restart and stand by its decision. Our base case projection now assumes nine nuclear units restarted by December, compared with 16 previously. The summer will test our working assumptions, as well as Japanese efforts to manage electricity demand. Oil demand could be revised higher if significant delays to nuclear restarts materialise. Japanese total oil product demand in 2012 is seen at 4.6 mb/d, showing annual growth of 110 kb/d or 2.5%.



Having seen a sharp 4.4% y-o-y increase in demand in April, to 2.1 mb/d, South Korea announced on 23 May a range of policies that it hopes will limit consumption of oil products. Through a package of regulations and tax incentives, which will support the usage of hybrid/small cars and public transportation, the government hopes to save 26 million barrels of oil by 2015. The government intends to cut oil use, as a share of total energy consumption, to 33% in 2015 from its forecast of 37.5% for 2012. Of particular concern is its claims that the transport sector accounts for 32.7% of all oil used, a level that rose by 0.84% annually through the last 10 years, in contrast to the declines seen in Japan (-1.61%), Germany (-1.16%) and the US (-1.22%). Whereas Korean-produced cars currently average 15.5 km/litre, the intention is to raise this to 17 km/litre by 2015. Incentives will also be set up to encourage Korea's biggest oil consumer - industry - to economise, improve fuel efficiency and share energy-saving knowledge with other firms. Efforts to monitor air conditioning levels are also planned, with building temperatures tracked to prevent excessive usage, while incentives are created to limit peak hour usage. We envisage demand expanding by a relatively modest 0.8% in 2012, to 2.2 mb/d, with naphtha demand growing by 3.7% to 1.0 mb/d.

Non-OECD

The preliminary data for April depict a sharp deceleration in emerging market demand growth, to 2.1% from 4.5% in March, with transportation fuels showing the most dramatic slowdowns. Jet/kerosene, for example, saw y-o-y demand contract by 0.4% in April, after rising by 8.4% in March, with China accounting for the majority of the reversal, down 6.4%, after a gain of 44.1% in March. The Chinese month-to-month turnaround in growth is attributable to unseasonably low demand in both March 2011 and April 2012. The Chinese statistics were further compounded as the International Air Transport Association reported growth in domestic revenue passenger kilometres (RPKs) falling to 6.3% y-o-y in April, versus December's high of 12.3%.







After stuttering somewhat in 2Q12, up 2.4%, non-OECD demand growth is forecast to accelerate once again in the second half of the year, supported by what is still expected to be a strengthening economic backdrop for 3Q12 and 4Q12. For the year as a whole, non-OECD demand growth is projected at 2.8%, taking consumption to 44.7 mb/d. Transportation fuels are forecast to lead the upside - gasoline demand up by 4.2% to 8.7 mb/d and gas/diesel oil 3.2% higher at 14.1 mb/d - supported by the rapidly expanding non-OECD driver pool. Regionally, the strongest non-OECD demand growth in relative terms is envisaged in Africa, with demand growth of 3.9% foreseen (to 3.5 mb/d). Demand from the former Soviet Union should also rise strongly, up 3.5% to 4.7 mb/d, as Russia in particular has demonstrated a voracious appetite for transportation fuels in recent months.



China

Demand growth in the world's fastest growing market - China - has clearly slowed. Preliminary estimates of apparent Chinese demand, i.e. net product imports plus refinery output, depicted 9.5 mb/d of oil products being consumed in April, a drop of 55 kb/d (or 0.6%) on the corresponding month a year earlier. After stimulus-inflated oil demand growth averaging 1.0 mb/d during 4Q09-4Q10, momentum has since eased back considerably. In the last eight-months through April, y-o-y Chinese demand growth slipped to 125 kb/d, or roughly an eighth of earlier peak levels.



Consumption has eased back as Chinese economic momentum has subsided sharply. A quick glance at the Purchasing Managers' Index (PMI), compiled by HSBC/Markit (sic) clearly shows that the psychologically significant 50 threshold - which signifies the breakeven level between expectations of a contraction and an expansion - was broken in November and has since oscillated below the threshold. Industrially significant products, such as gasoil/diesel and LPG, have suffered particularly, as the manufacturing base has lost some of its appetite for these products.



Chinese demand growth is expected to resume in the second half of 2012, supported by a fresh acceleration in industrial output and the widely held belief that the Chinese government will enact measures to shore up the economy. Early-June has already seen a surprise interest rate cut and a lowering of reserve requirements at banks, thus easing monetary policy with further such moves anticipated. An infrastructure spending programme, albeit not on the scale of the 2008 stimulus, is also underway. (Such moves could also highlight the very real fears that the Chinese economy is set to slow markedly, see Economic Risks Again Skewed to the Downside).  After expanding, by a predicted 1.8% y-o-y in 2Q12, to 9.6 mb/d, oil demand impetus is forecast to gather pace into the second half of the year, rising by 4.6% in 3Q12 (to 9.6 mb/d) and 4.7% in 4Q12 (to 10.0 mb/d). This leaves a growth assumption of 3.6%, or 0.3 mb/d, for the year as a whole, to an annual average of 9.7 mb/d. Transportation fuels garnered additional support in mid-June, as China's National Development and Reform Commission (NDRC) announced price reductions of 530 yuan ($83) per metric tonne for gasoline and 510 yuan ($80) for diesel. The reductions, despite being the most dramatic in the current pricing system's three and a half year history, pale in significance next to the decline in crude prices.  

For the longer-term, official plans to cap total energy consumption are reportedly nearing completion, with the NDRC having already granted approval. Exact details have yet to emerge on the potential demand figures through to 2015, although an annual growth rate of around 5% can be assumed for total energy demand and a sub-5% expansion for oil. 



Other Non-OECD

LPG demand in Thailand looks likely to receive additional temporary support in 2012, as the government on 14 May announced that it was suspending plans to raise LPG prices. Local prices will now remain unchanged at a capped Baht 21.13 ($0.67) per kg in the three months through to 15 August. The move is a reversal of the government's September 2011 directive to remove subsidies, with the previous plan being that LPG prices rise by Satang 75/kg each month. Subsidised LPG demand has risen strongly in recent years, up by 10.2% in 2011 to 280 kb/d. A decline to a more modest growth rate of around 2% had been forecast for 2012, although the predicted pace of this slowdown has now been scaled back to 5%. Total oil demand growth of 1.8% is assumed for 2012, taking average consumption of oil products in Thailand to 1.1 mb/d for the year as a whole. Efforts to increase the use of ethanol in the gasoline mix should keep refinery-sourced gasoline demand growth under relative control in the longer term. The Department of Energy Development and Efficiency stated its intention on 30 May, citing preliminary plans for a more advantageous pricing structure (ethanol-blended-gasoline is already subsidized by the Oil Fund) and increased availability (currently 900 retail stations sell E20, a blend of gasoline that contains 20% ethanol, and that 25% of Thai cars can use).



Our Indian demand forecast has been curtailed somewhat to reflect the big reduction in the preliminary data series for April. With consumption edging just 0.7% higher on a y-o-y basis in April, to 3.6 mb/d, demand growth of 3.2% is foreseen for the year as a whole, also to 3.6 mb/d (last month's assumed growth rate was 3.4%). The chief downside demand laggards in April were the heavy fuel oil (-25.8%), naphtha (-9.5%) and jet/kerosene (-13.3%) categories. Despite the recent deceleration in demand, numerous calls have been made for an increase in Indian retail fuel prices, as the sharp decline in the domestic currency versus the US dollar put unsustainable pressures on government-run oil companies. The Indian Oil Minister, S. Jaipal Reddy put the annual cost at Rupees 80 billion ($1.5 billon) from each one rupee of devaluation against the dollar. The Junior Oil Minister, R.P.N. Singh claimed India imports 83% of its oil needs, which equates to just under 3 mb/d according to our forecasts - a burden of nearly $300 million dollars every day. Politically, reducing subsidies is tricky, as although they are uneconomic, they retain popular support. Any reduction in subsidies will likely sit beyond our short-term forecasting horizon, thus leaving our 2012 demand projections unaffected.

In Brazil, product demand expanded by 5.0% year-on-year in March, following a 2.1% increase in February. Product growth was led by gasoil/diesel (9.7%), jet/kerosene (8.2%) and motor gasoline (5.1%), while residual fuel dropped by 2.4%. Support for gasoil demand in March came from the start of the sugarcane, corn and soy harvest seasons. Jet fuel/kerosene demand is supported by strong growth in domestic aviation. Industry indicators from March showed that 'available seat kilometres' grew by 7.0% annually. However, the sector is slowing down as 'revenue passenger kilometres' grew only 1.3%. Motor gasoline demand accelerated as a result of lower prices of hydrous ethanol and strong seasonal demand. Refined gasoline continues to be competitive and the fuel of choice, but biofuel demand should pick up when ethanol stocks are replenished by the 2012/2013 sugarcane harvest. Brazil's total oil product demand is forecast at 2.8 mb/d in 2012, up 2.1% on the year earlier.



Other Latin American 2012 demand growth projections remain positive  for most countries, bar Argentina which is struggling with stuttering economic activity. The Chilean prognosis remains unchanged for 2012, forecast to rise by 1.2% to 375 kb/d. Total oil product demand for Peru also maintained last month's projected 4.0% growth to 230 kb/d. Finally, our 2012 prognosis for Colombia is 290 kb/d, growing by 2.1%. Forecasting trends for Colombia remains a challenge, since the government has not published data beyond September 2011.



Supply

Summary

  • Global oil supply increased by 0.2 mb/d to 91.1 mb/d in May, with non-OPEC liquids production accounting for all of the increase. Compared to a year ago, global oil production stood 4.2 mb/d higher, 70% of which stemmed from increasing output of OPEC crude.
  • Non-OPEC supply increased by 0.2 mb/d to 53.1 mb/d in May from the prior month and by 1.0 mb/d compared to May 2011. In the last month, a seasonal rise in biofuels, rebounding Canadian syncrude, and US light tight oil production growth largely offset declining supply in the UK North Sea and continued outages in the Sudans, Syria, and Yemen. The outlook assumes that substantial production stoppages affecting these countries persist for much of 2012, keeping annual non-OPEC growth at 660 kb/d.
  • OPEC crude supply edged lower in May, down marginally by 20 kb/d, to 31.87 mb/d, with increased output from Angola, Nigeria, and Libya offsetting reduced supplies from Saudi Arabia and Iraq. Crude oil production levels, however, are still flirting with four-year highs. OPEC NGLs are forecast to increase by 400 kb/d, to an average 6.2 mb/d in 2012, a downward revision of 100 kb/d from last month. Reductions centre in Iran and Algeria while growth stems primarily from Qatar and the UAE.
  • OPEC ministers are scheduled to meet on 14 June in Vienna to review the market outlook. However, with prices for benchmark Brent still near $100/bbl the producer group is expected to maintain the status quo. The 'call on OPEC crude and stock change' is largely unchanged from last month, with 2012 pegged at an average 30.3 mb/d, although the call in 2H12 is around 1 mb/d higher than the 1H12 level, at 30.9 mb/d.


All world oil supply figures for May discussed in this report are IEA estimates. Estimates for OPEC countries, some US states, and Russia are supported by preliminary May 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 edged lower in May, down by 20 kb/d, to 31.87 mb/d, and ending a seven-month run of increases. Higher output from Angola, Nigeria, and Libya was offset by reduced supplies from Saudi Arabia and Iraq. Crude oil production levels, however, are still flirting with four-year highs. OPEC's 'effective' spare capacity in May is estimated at 2.38 mb/d.

OPEC ministers are scheduled to meet on 14 June in Vienna to review the market outlook. OPEC supply is now nearly 2 mb/d over the group's notional 30 mb/d output target agreed at its mid-December 2011 meeting. However, with prices for benchmark Brent still near $100/bbl, the producer group is expected to maintain the status quo. Indeed, the OPEC Secretariat has scheduled a relatively short meeting of one hour following the organisation's two-day OPEC International Seminar, which starts on 13 June.

The 'call on OPEC crude and stock change' is largely unchanged from last month, with the 2012 average pegged at 30.3 mb/d. However, the call is expected to increase from 29.8 mb/d in the January-June period to 30.9 mb/d in the second half of the year.



The full implementation of the most severe sanctions to date on Iran's oil and banking sectors is just weeks away, but so far it appears the National Iranian Oil Co (NIOC) has been able to maintain production in May at around 3.3 mb/d. Iran reportedly is offering longer credit terms to some customers, which effectively give buyers a price discount on its crude purchases. Implementation of full sanctions is assumed to ultimately lead to a cut of some 1 mb/d in Iranian supplies in 2H12 as storage tanks both onshore and offshore reach maximum capacity unless the country finds alternative outlets. Iranian output is down around 200 kb/d from around 3.5 mb/d at end-2011. Import and customs data for January-March indicate supplies fell by around 400 kb/d, with roughly half going into onshore storage facilities and floating vessels. Preliminary import data for April and May indicate supplies are now running much lower, at around 1.5 mb/d.

However, this data needs to be treated with caution until more comprehensive import and customs statistics become available in coming weeks, and some third-party sources cite April/May exports at higher levels of 1.8-1.9 mb/d. The problem is compounded by the fact that Iranian vessels are routinely switching off their tracking devices, rendering timely measurement of exports problematic. Iranian oil supplies held at sea rose by just over 10 mb by end-May to around 40-42 mb, shipping analysts say. Approximately 17 VLCCs and 7 Suezmax vessels are reportedly engaged in floating storage operations. A further 20-25 mb is estimated to be held at onshore facilities.

Meanwhile, the US has now exempted 17 countries from sanctions effective 28 June after demonstrating that they have significantly reduced imports of Iranian crudes. China is the notable exception. The waiver is for 180 days and intended to allow countries more time to reduce imports from Iran further.

Going forward, it appears that the country's main European buyers have halved imports to around 300 kb/d in May and reports suggest volumes are expected to be halted altogether by the 1 July EU embargo deadline, with a plentiful supply of alternative crudes available to the region's refiners. Indeed, European buyers have already increased imports of Iraqi Basrah to replace Iranian barrels, from an average 100 kb/d in the first four months of the year compared with 450 kb/d in May. Less clear are the volumes of Iranian crude heading to non-OECD countries. Tanker data suggest Iranian exports to China and India rose in May by 70 kb/d to over 730 kb/d but, once again, data are preliminary. However, despite various proposals to ease sanctions on insurance coverage so far, strict rules are in place ahead of the deadline. EU companies are barred from insuring vessels carrying oil supplies from Iran as of 1 July. Asian buyers are also reporting that they are unable to find alternative insurance, although the Japanese government is promoting a bill that would compensate buyers of Iranian crude for the loss of insurance cover. Protection and Indemnity (P&I) clubs, which provide liability cover to over 95% of the world's tanker fleet, said they are adhering to new EU and US sanctions (see OMR 12 April 2012, 'Iranian Crude Supplies Tumble Under Weight of Sanctions').

After hitting a three-decade high of 10.1 mb/d in April, production from Saudi Arabia is estimated to have declined in May by 100 kb/d, to 10 mb/d. Saudi Arabia could maintain output at the recent higher levels during the summer months to meet any increased demand from Asian and European buyers when sanctions on Iran come into full-force. In addition, higher production is needed to meet increased domestic demand for crude burn, as usage peaks at power and desalination plants during the April-September period. Last year crude burn rose by an average 660 kb/d during the peak season but this year's demand for crude burn is expected to be slightly lower, at around 550 kb/d, due to increased use of gas.



Iraqi crude oil production in May declined by 25 kb/d, to 2.89 mb/d from a downwardly revised 2.92 mb/d for April. Oil exports were down 56 kb/d to 2.45 mb/d, with weather-related delays hitting shipments from the southern terminal while pipeline outages impacted northern volumes. Basrah exports declined by 29 kb/d to 2.09 mb/d. Exports of Kirkuk crude were down 27 kb/d to 366 kb/d, including 8 kb/d trucked to Jordan. There were no exports from the Kurdish region, which normally feed into the Kirkuk crude stream, due to the protracted payment disputes between Baghdad and the Kurdistan Regional Government (KRG).

Angolan crude oil production in May rose to the highest level in two years thanks to a ramp-up in production from the 220 kb/d Pazflor field and limited start-up from the Kizomba D Satellite fields. Output rose by 55 kb/d to 1.81 b/d last month. In May, almost every field/installation produced without technical losses. Pazflor output accounted for six cargoes of 950,000 each, or 185 kb/d. New production from the Kizomba D satellite fields, which started on May 18, averaged around 25 kb/d by end month. Nameplate capacity at the Kizomba D satellite fields is 140 kb/d. Start-up of the 150 kb/d PSVM fields is on track for 3Q12. However, planned maintenance at the Total-operated 250 kb/d deep-water Girassol complex is expected to curb production in June.



Libyan production increased by 20 kb/d in May, to 1.42 mb/d.  Continued repair and maintenance work at the Sarir and Mesla fields is curbing output there. Meanwhile, Nigerian output rose to the highest level in nine months due to the steady ramp-up in production at the 180 kb/d deep-water Usan field. Nigerian output rose by 30 kb/d in May, to 2.18 mb/d.



OPEC NGLs

OPEC NGLs output is forecast to average 6.2 mb/d in 2012, a downward revision of 100 kb/d from last month. Reductions largely centred on Iran and Algeria. In Iran, sanctions are continuing to delay gas project developments and constrain planned growth, with condensate and NGLs capacity now forecast to average 530 kb/d in 2012 compared with 545 kb/d in 2011. In Algeria, start-up of the 130 kb/d El Merk project has been delayed until 1Q13 compared with a previously anticipated 4Q12 launch.

Nonetheless, total OPEC NGLs are now on course to increase by 435 kb/d this year, to 6.2 mb/d. Qatar and the UAE will account for about one-third of the rise, in line with new projects brought onstream. In Qatar, the single largest increase is coming from the 100 kb/d Pearl II GTL project, with smaller increments from the continued ramp-up of Qatargas Train 6 & 7 and Rasgas 3. In the UAE, the ramp up in supplies from the Offshore Associated Gas (OAG) project, launched in second-half 2011, is forecast to reach 60 kb/d in 2012.

The return of Libyan supplies will also contribute to year-on-year growth of around 60 kb/d, to an average 90 kb/d for 2012. Algeria, Angola and Nigeria will add around 35 kb/d each, to 655 kb/d, 125 kb/d and 450 kb/d, respectively.

Non-OPEC Overview

After a strong 740 kb/d rise in 1Q12, preliminary estimates show the pace of growth in non-OPEC supplies accelerating to over 1 mb/d in April and May to 53.1 mb/d. Growth is centred in North America, where rising production of light tight oil should propel non-OPEC output to all-time record levels of almost 54 mb/d in 4Q12. The fast-paced growth is forecast to abate somewhat in 3Q12 during seasonal North Sea maintenance and assumed storm-related shut ins. Seasonal maintenance, forecasted at -260 kb/d in 3Q12, should reduce North Sea output to 2.9 mb/d, which is around 9% lower than 3Q11. Non-OPEC supplies should therefore grow by 660 kb/d year-on-year for 2012, to average 53.4 mb/d.

Continued sabotage of energy facilities in Yemen and Syria, no end in sight to the transit dispute between Sudan and South Sudan, and unplanned mechanical outages and labour unrest in the North Sea and Latin America, respectively, are mitigating rapid North American supply growth to the tune of around -1.3 mb/d in 2Q12. With the exception of Total's successful plugging of the leaking gas well in the UK, there has been no improvement in the outages from last month's estimate. We assume that the situation in Syria is likely to get worse before it gets better. Moreover, just when Yemeni authorities began making progress on repairing the Marib pipeline, which has cut exports and production by around 120 kb/d, saboteurs blew it up. Although more than four months without the flow of oil production and transit revenues in South Sudan and Sudan should motivate continuing negotiations, it will also exacerbate domestic tensions in each country and raise the risk of cross-border conflict near oil-producing regions.

Overall, we now hold a slightly rosier view of non-OPEC supplies in 2012, that are around 90 kb/d higher than last month's estimate. North American liquids production growth is also more than counteracting other new downward adjustments in the Middle East, Africa, and the North Sea. Baseline upwards adjustments to OECD Europe biofuels and Russian NGLs also add to the positive news. With the advantage of new annual data, we have revised biofuels output up by 100 kb/d in 2011 to 1.9 mb/d and by 70 kb/d for 2010. Revisions centre mainly in Spain, Germany, France, and Italy. As a result, global biofuels should grow by around 40 kb/d in 2012 to 2.0 mb/d, which is around 40 kb/d higher than last month's estimate.



OECD

North America

Canada—February actual: Canadian oil output slid 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 rebounded more quickly to around 800 kb/d in April after Suncor completed its unplanned maintenance. Although CNRL's output is expected to regain 100 kb/d this summer, Canadian Oil Sand's Mildred Lake coker maintenance is underway and has reduced output by around 130 kb/d to 200 kb/d in May and June. Alberta's production outlook has been raised due in part to historical data revisions that have been carried through the forecast, and also due to higher-than-expected tight oil production. In sum, Canada's production is increased by 70 kb/d in 2012 and should average around 3.8 mb/d.



US - April preliminary, Alaska actual, other states estimated: Production from light tight oil formations and the Gulf of Mexico (GOM) supported US crude production levels of around 6.3 mb/d in April. May weekly data indicate production will remain at around that level and will be supported by supplies of almost 0.6 mb/d from North Dakota's Bakken and 1.8 mb/d from Texas. Despite the precipitous decline in WTI prices over the last month, most light tight oil plays remain profitable, although further Bakken price declines below $80/bl could begin to have an impact on marginal plays that rely heavily on rail-based transit. Both Continental Resources and Oxy recently reported that cost inflation may require an adjustment to growth targets in the Bakken. US Liquids and crude production should grow by 10% (830 kb/d) and 12% (670 kb/d) year-on-year in 2Q12, respectively. NGL supplies did not decline as expected in March and April despite heavy maintenance, as producers put some of the production in storage instead of reducing output. Planned maintenance at GOM facilities, as well as a seasonal assumption of -100 kb/d in hurricane impacts, should offset the fast-paced growth from light tight oil during 3Q12. Lower-48 crude production and higher NGL supplies are the main sources of the +0.3 mb/d revision to 2Q12 production, and the higher baseline production level has been carried through the forecast for 2012. In sum, US liquids production is expected to grow by 8.6% (700 kb/d) to 8.8 mb/d in 2012.

North Sea

North Sea crude and condensate production is expected to fall by 290 kb/d to 3.1 mb/d in 2Q12 and by 210 kb/d in 3Q12 to 2.9 mb/d from the prior quarter. If forecasts of planned maintenance come to fruition, the North Sea would register its two worst quarterly output performances in over two decades this summer. Broadly speaking, economic factors may cause operators to defer or fast-track maintenance to months outside of the normal June-August period. Unplanned outages in the North Sea are curbing output by 270 kb/d on average in 2Q12. Although these unplanned outages are expected to subside somewhat to 220 kb/d in 3Q12, we planned maintenance levels will curb output by 260 kb/d in 3Q12 and reduce North Sea supplies by half a million b/d. Output of crude streams linked to Dated Brent prices are estimated to have fallen below 1 mb/d in May to 980 kb/d, and preliminary June and July loading schedules do not show any marked improvement. With the onset of seasonal maintenance, we conservatively assume that volumes from the BFOE streams will not exceed 1.0 mb/d again until October.

UK—March preliminary, February actual:  UK offshore crude production fell by 40 kb/d in March to 930 kb/d and is expected to average only 790 kb/d in 2Q12 or around 20% lower than the prior year. Total was able to successfully plug the leak at the Elgin/Franklin complex, which shut in around 65 kb/d of oil production from the Elgin, Franklin, and Shearwater fields in late March. However, we do not expect a gradual return to normal production rates until the fourth quarter.  Although the latest monthly statistics available for February show the Buzzard field's production rate had reached over 200 kb/d, near its normal rate of 210 kb/d, isolated problems with the field's compressor in April and May cause us to conservatively estimate that the field does not rise above production rates of 170 kb/d through the rest of 2012. In sum, UK oil production is expected to fall by around 14% in 2012 to average just 960 kb/d, compared to a decline of almost 18% last year. The outlook for 2012 has not been materially altered for 2012, but it assumes slightly higher output for the Beryl and Forties fields after Apache indicated additional wells are being drilled.

Norway—April preliminary, March actual: Norway's liquids production fell only slightly by 10 kb/d to stay around 2.0 mb/d in April, and crude production rose by 20 kb/d to average 1.6 mb/d. Lingering unplanned outages and maintenance at the Snorre, Gullfaks, and Grane fields has masked the addition of new oil fields Oselvar, Gaupe, and Marulk in April. Gaupe should reach around 10 kb/d by the end of 2012, Oselvar is a tie-back to the Ula platform and should bring production at Ula to 25 kb/d. With final data for March, crude production in 1Q12 fell 8% to 1.7 mb/d.  Due to problems with the risers at the Snorre field that continually keep production from the field below normal, we have reduced the 2012 Norway liquids estimate by around 20 kb/d to 1.95 mb/d in 2012, which is around 4% lower than 2011. Looking forward, Norway's output could be impacted by a Baker Hughes worker strike. News reports indicate that workers are striking at twelve rigs, which is affecting drilling and maintenance but not production. Crude production from the fields at risk totals 180 kb/d. This most recent strike comes after a widespread government worker strike in late May and early June that included boat pilots.

Non-OECD

Latin America

Brazil—April actual: Heavy Campos basin maintenance and a shut-in at the Frade field kept Brazilian crude production at 2.0 mb/d in April. Production from the Marlim, Marlim Leste, and Marlim Sul fields has fallen by over 70 kb/d to 590 kb/d since February, though output is expected to have rebounded in May and June. In April, Roncador's production rose by over 20 kb/d to 260 kb/d. Rising output from the Waimea, Marlim Sul, Peregrino, and Lula fields will offset declines elsewhere and will raise 2012 output by 70 kb/d to 2.2 mb/d.  The 2012/13 harvest season has begun, and recent production estimates from the Agriculture Ministry (MAPA) for March and April suggested a slightly tempered estimate for ethanol production in upcoming months, and we have lowered the estimate for the year by around 40 kb/d to 370 kb/d, the same average level as last year.



Former Soviet Union

Russia—May preliminary: Russian crude production in May stayed on par with April's level at around 10.0 mb/d, turning in a 0.8% increase year on year. TNK-BP's Uvat expansion has continued, with production reaching 130 kb/d, and the company is maintaining Samotlor's decline rate at around -7% during 2012, which is around two percentage points worse than during 2010. The Samotlor oil field accounts for a quarter of TNK-BP's overall production of 1.5 mb/d and currently produces around 350 kb/d. With the uncertainty regarding the shareholder makeup of TNK-BP, observers will want to watch for any worsening performance at TNK-BP's legacy assets. In the meantime, the outlook for Russian crude and NGLs production remains largely the same as last month's estimate. A baseline increase in gas plant liquids production for 2010 and 2011 has been carried through the forecast, and we have reduced Vankor's output levels slightly for the remainder of 2012 based on recent data. Sakhalin-1 is now only averaging 150 kb/d, compared to around 170 kb/d in 1H11 and will not increase output markedly until the Arktun-Dagi field comes online in 2014. In sum, Russian liquids production this year should grow by 1.0% (110 kb/d) to 10.7 mb/d.



Kazakhstan—April actual: Liquids production fell by 40 kb/d to 1.6 mb/d in April, after averaging 1.7 mb/d in 1Q12, with the onset of maintenance on field process lines at the Chevron-operated Tengiz field. Heavier maintenance in 3Q12 at the gas reinjection facilities is expected to almost halve the 500-kb/d facility's output. News reports continue to indicate that the North Caspian Operating Consortium (NCOC) plans to bring online the Kashagan field in December 2012, although levels of production associated with commercial exports are not expected until the summer of 2013. The field is expected to ramp up from 75 kb/d to around 350 kb/d in the first phase. The NCOC agreed on a long-term contract with the government whereby foreign members of NCOC will cover Kazmunaigaz's share of project costs (totalling almost $1 billion) and that NCOC is now able to sell up to 83% of Kashagan gas on the domestic market at the expense of gas reinjection.

FSU net exports surged to 9.68 mb/d in April (+600 kb/d m-o-m), their highest level in a year after refineries underwent maintenance and producers made more crude available for export. The beleaguered tanker industry benefitted from a 650 kb/d hike in seaborne crude exports with Baltic cargoes increasing by a significant 430 kb/d on the month. Following its end-March start up, the Baltic port of Ust Luga ramped up to average 240 kb/d in April. Russian producers maximised seaborne exports by shipping 120 kb/d more crude by Primorsk and 120 kb/d via the Polish port of Gdansk. The Gdansk shipments are notable because it was the first time the port had been used since November 2011, even in light of Russia's aim to reduce dependence on transit countries. Looking forward, Ust Luga is scheduled to ship 400 kb/d in May. Producers are expected to divert volumes from Primorsk while port maintenance is underway.

Elsewhere, Black Sea shipments rose by 230 kb/d following an increase in Kazakhstani volumes. In the East, the ESPO pipeline is now operating above its nameplate capacity with 310 kb/d and 320 kb/d shipped to Kozmino and through the Chinese spur, respectively. FSU product exports rose by 100 kb/d to 2.89 mb/d, driven by a 120 kb/d increase in fuel oil exports. The exports grew in tandem with the opening of the River Volga navigation season that aids the movement of product from inland refineries to ports. This offset a 70 kb/d decrease in gasoil, which fell after refiners reportedly maintained domestic deliveries of 10-ppm diesel at the expense of exports.



Druzhba Flows Lower as Seaborne Urals Heads to the Mediterranean

The start-up of the Ust Luga terminal appears to have initially taken crude away from the Druzhba pipeline, where flows decreased by 140 kb/d m-o-m in April after exporters found seaborne routes more profitable. April data indicate reduced deliveries to Poland (-60 kb/d m-o-m), the Czech Republic (-30 kb/d), Slovakia (-30 kb/d), Germany (-20 kb/d) and Hungary (-10 kb/d). Recent reports indicate that Russian companies were not supplying the Czech Republic with full, requested volumes in May. This decision by producers appears motivated by price, after the differential of Urals shipped through the Druzhba against seaborne NWE Urals collapsed by $3/bbl in April. Extra demand from Mediterranean refiners looking to replace Iranian supplies, combined with continued low freight costs, drew in supplies from the Baltic. Therefore, in this case the extra flexibility in the Transneft system which Ust Luga affords appears to have been utilised to fulfil incremental demand and allow producers to orient their exports towards the most profitable outlets. Given the continuing Iranian sanctions, this trend could continue for the foreseeable future.

Africa

Negotiations between the governments of Sudan and South Sudan ended at the beginning of June with little progress, but discussions will continue on 21 June. Meanwhile, production of over 300 kb/d in South Sudan remains shut in, and there is no evidence that any volumes from the South are being exported by truck. The sides remain at odds over their border and over the amount of transit fees that South Sudan should pay to Sudan. Sudan threatened new hostilities as South Sudan continues to dispute the 2009 Permanent Court of Arbitration ruling that said that Heglig and other oil producing areas are not part of the disputed Abyei area. As the dispute between the countries enters its sixth month, with concomitant implications for both countries' economies, South Sudan recently announced it would raise taxes and customs duties. However, austerity measures and efforts to triple non-oil revenue pale in comparison to oil revenue flows. A World Bank analysis published by the Sudan Tribune on its website in May estimated how long it would take for the country's reserves to be depleted. Assuming the government reduces expenditures by a quarter, reserves could last until August; and if they are reduced by around 40% (which is unlikely), reserves could last until October. The analysis warned that the sharp decline in dollar-based oil revenues would rapidly increase inflation and depreciate the exchange rate.

Middle East

Crude and condensate production from Oman rose by over 50 kb/d to 910 kb/d in March, yet a PDO dispute with contractors for around a week at the end of May was expected to have stunted otherwise increasing EOR production. 2Q12 crude and condensate production is expected to remain at 900 kb/d. Production in Yemen continues to suffer from sabotage. News reports indicated that tribesmen had bombed the Marib pipeline again, just as repairs were finally being completed. The 270-mile line used to bring about 120 kb/d of oil from the Marib and Shabwa areas. The 270-kb/d Shabwa-Bir Ali pipeline, which carries Block 4 crude to the Bir Ali terminal, is still down after attacks in April. 2H12 production is expected to average only around 140 kb/d, around 70 kb/d lower than the same period in 2011 and around 110 kb/d lower than 1H11. Exports averaged only 100 kb/d in March and April.

OECD Stocks

Summary

  • OECD industry oil inventories rose by 17.3 mb in April, to 2 643 mb, in line with the five-year average month-on-month increase of 19.4 mb. OECD commercial oil stocks have now narrowed the apparent deficit to the five-year average in absolute terms, while remaining 1.9 days above the five-year average, at 59.4 days of forward demand cover.
  • Preliminary data indicate a 20.1 mb increase in May OECD industry inventories, in line with a five-year average 25.1 mb build. Crude oil stocks rose by 21.5 mb while product holdings fell by 1.9 mb. 'Other products' stocks increased sharply by 18.9 mb but were offset by gasoline, middle distillate and fuel oil holdings, which declined by 6.9 mb, 9.8 mb and 4.1 mb, respectively


OECD Inventories at End-April and Revisions to Preliminary Data

OECD industry total oil inventories rose by 17.3 mb in April, to 2 643 mb, in line with the five-year average increase of 19.4 mb. Although OECD commercial oil stocks have now recovered close to the five-year average in absolute terms, they nonetheless have tracked below this metric for eleven successive months. However, in terms of forward demand cover, OECD commercial oil holdings remained 1.9 days above the five-year average, at 59.4 days. This equates to a 0.1 day decrease from the previous month and a 0.2 day rise on a year-on-year basis. Regionally, the absolute surplus of stocks versus the five-year average in North America diminished, while the deficit in Europe widened slightly, and the Pacific shortfall narrowed significantly.



Crude stocks soared by 21.6 mb to 983 mb, compared to the five-year average month-on-month build of 13.9 mb. After nine consecutive months below the historical trend, crude stocks rose slightly above the five-year average in April. North America and Pacific stocks led the increase, up by 13.9 mb and 11.6 mb, respectively while European stocks declined by 4.0 mb. Lower refinery runs resulting from maintenance amid ongoing surplus supply from the Middle East drove crude oil inventories up sharply.

In the meantime, product inventories fell more sharply by 9.6 mb, thus widening the deficit against the five-year average to 24.8 mb from 16.3 mb in March. Most of the product stock draw centred on North America, with gasoline and middle distillate stocks falling by 13.7 mb and 13.1 mb, respectively. Meanwhile, product stocks in both Europe and the Pacific rose by 0.5 mb and 6.3 mb, respectively.



OECD stocks were revised 22.6 mb lower for March, upon receipt of more complete monthly submissions from member countries. This implies a 2.5 mb stockdraw in March inventory levels, instead of preliminary estimates of a 13.5 mb increase. Downward adjustments were centred on North American oil inventories and OECD Pacific crude stocks. All of the major categories except for 'other oils' in North America showed a downward revision, with notably crude oil, gasoline and 'other products' stocks amended down by 4.7 mb, 4.0 mb and 4.2 mb, respectively. OECD Pacific crude inventories were adjusted down by 8.6 mb, all of which stemmed from Japan. However, higher-than-initially-estimated crude oil holdings in Europe, and 'other oils' stocks in North America, provided a partial offset to the downward revisions.



Preliminary data indicate a 20.1 mb increase in May OECD industry inventories, in line with a five-year average 25.1 mb build. Crude oil and 'other products' stocks led the increase, rising by 21.5 mb and 18.9 mb, respectively while product holdings excluding 'other products' stocks fell by a total of 20.8 mb. Gasoline, middle distillate and fuel oil holdings fell by 6.9 mb, 9.8 mb and 4.1 mb, respectively. As a result, total product inventories edged down by 1.9 mb.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil inventories fell by 3.8 mb to 1 325 mb in April, in contrast with a typical seasonal build of 15.3 mb, in the process narrowing the surplus versus the five-year average to 38.2 mb, from 57.2 mb in March. Crude oil holdings rose by 13.9 mb, most of which stemmed from the US. Continued weak refinery runs in the midst of strong domestic output and healthy imports drove US crude inventories higher, notably at Cushing.

Meanwhile, product inventories plummeted by 16.5 mb as declines in gasoline and middle distillate stocks outweighed an increase in 'other products' holdings. Gasoline inventories decreased by 13.7 mb as refiners switched over from winter to summer grades and US gasoline demand rose month-on-month, despite still remaining weak on an annual basis. Continued strong US middle distillate exports and higher domestic demand led middle distillate holdings down by 13.1 mb, well toward the lower end of the five-year range. Meanwhile, 'other products' stocks rose by 12.7 mb, providing a partial offset.



US weekly data show oil inventories rose by 17.3 mb in May, in line with a five-year average 19.1 mb build. Crude oil inventories increased by 7.7 mb as higher crude imports and domestic production outweighed a seasonal increase in refinery runs. Over the past 11 weeks, crude inventories have increased by more than 38 mb. Crude stock levels at Cushing, Oklahoma rose by 4.5 mb to a new record high of 47.8 mb. Cushing inventories increased even after the 17 May reversal of the Seaway pipeline, which has the capacity to ship 150 kb/d from Cushing to Houston, started on. In the meantime, the US EIA's semi-annual survey put working storage capacity at Cushing at 61.9 mb in March, up by 6.9 mb from the end of September 2011.

Moreover, refined product inventories also rose by 9.7 mb, led by a 19.5 mb surge in 'other products' stocks. In contrast, gasoline, middle distillate and fuel oil holdings declined by a total of 9.8 mb, partly offsetting the increase in 'other products' stocks. Gasoline stocks decreased by 5.4 mb on higher demand. Gasoline stockpiles have fallen by 29 mb from this year's February peak of 232 mb. Despite weak demand, strong exports drove middle distillate stocks down by 2.8 mb. Fuel oil holdings also fell by 1.5 mb.



OECD Europe

Industry oil inventories in Europe fell by 2.8 mb in April to 918 mb, in line with the five-year average draw of 1.4 mb. European oil stocks have remained stubbornly below their seasonal norms for thirteen 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 nine successive months.

Crude oil inventories fell by 4.0 mb to 306 mb, in contrast with a five-year average 3.6 mb build. In the meantime, refined product inventories edged up by 0.5 mb to 539 mb, thus reducing the deficit versus the five-year average to 15.5 mb from 20.1 mb in March. Gasoline holdings rose by 3.3 mb, while middle distillate, fuel oil and 'other products' stocks fell by 0.2 mb, 2.4 mb and 0.2, respectively, offsetting most of the gain in gasoline inventories. German end-user heating oil stocks fell by one percentage point to 48% fill at end-April.



May preliminary data from Euroilstock point to an 11.3 mb stock draw, in contrast with a five-year average 2.6 mb build in the EU-15 and Norway. Refined product inventories led the drop, decreasing by 14.3 mb as every major product category showed declines. Gasoline, middle distillate and fuel oil fell by 1.8 mb, 9.4 mb and 3.2 mb, respectively. 'Other products' and 'other oils' stock estimates remained unchanged from last month. In the meantime, crude oil inventories rose by 3.1 mb. Refined product stocks held in independent storage in Northwest Europe also fell in May. Gasoil led the decline, as regional demand for diesel rose and a backwardated price structure discouraged refiners from storing the product.

OECD Pacific

Commercial oil inventories in the OECD Pacific surged by 23.8 mb to 401 mb in April, compared with a five-year average increase of 5.5 mb. Therefore Pacific inventories now stand closer to historical norms in both absolute and forward cover terms, after nearly a year of relative tightness. Lower refinery runs and increased crude arrivals from the Middle East drove crude inventories up by 11.6 mb. Korean crude stocks rose by 9.1 mb while crude holdings in Japan increased by 2.7 mb. 'Other oils' stocks also added to the increase, rising by 5.9 mb. Moreover, product stocks also rose by 6.3 mb, compared with a five-year average 1.3 mb increase, creeping back within the five-year range. Middle distillate, fuel oil and 'other products' holdings rose by 2.5 mb, 0.4 mb and 4.1 mb, respectively while gasoline stocks edged down by 0.7 mb.



Weekly data from the PAJ suggest a further increase of 14.1 mb in Japanese industry oil inventories in May. Crude oil stocksreportedly rose by 10.7 mb, as refiners cut runs with refinery maintenance in full swing and stored more crude for direct crude burn ahead of summer. Despite this, with demand for petroleum products remaining lukewarm, refined product holdings also rose by 2.7 mb. Gasoline, middle distillate and fuel oil stocks increased by 0.3 mb, 2.4 mb and 0.6 mb, respectively while 'other products' holdings fell by 0.6 mb.

Recent Developments in Singapore and China Stocks

According to China Oil, Gas and Petrochemicals (OGP), Chinese commercial oil inventories rose in April by an equivalent of 8.6 mb (data are reported in terms of percentage stock change). Commercial crude oil holdings increased by 4.4% (9.1 mb) while product inventories fell by 0.6% (0.5 mb) on lower refinery runs. Gasoil and Kerosene stocks declined by 3.1% (2.8 mb) and 6.0% (0.7 mb), while gasoline inventories increased by 5.3% (0.3 mb).

In the meantime, the most recent simplified balance between Chinese domestic crude production, net imports and refinery runs shows a difference of around 600 kb/d (equivalent to more than 90 mb) for the first five months of this year. Although this may, in part, reflect direct crude burn or unaccounted for refiner demand, some of this is likely also to represent crude oil flows into strategic storage.



Singapore onshore inventories fell by 0.6 mb to 38.0 mb in May. Light distillate holdings led the decline, down by 1.5 mb on higher demand from Indonesia and Vietnam. Middle distillate holdings edged down by 0.1 mb, as strong demand from Australia and Vietnam more than offset an increase in imports from South Korea. In the meantime, fuel oil holdings rebounded by 1.0 mb after a big decline in April, due mostly to easing imports from the West while bunker demand improved.



Prices

Summary

  • The springtime slump in oil markets accelerated in May in the wake of the deepening euro zone crisis, mounting concern over a slowdown in Chinese growth and rising global oil supplies. Futures prices in May plummeted to the lowest level in six months, with Brent falling below the $100/bbl threshold for the first time in 15 months on 1 June. At writing, Brent crude was trading at around $97.50/bbl and WTI at $83.50/bbl.
  • The precarious macroeconomic outlook heightened risk aversion in global commodity markets and triggered a massive liquidation by investors in oil futures. Net-long futures positions of money managers in CME WTI contracts fell to the lowest level since early September 2010.
  • Refined product crack spreads were mixed in May. Fuel oil showed exceptional strength in Asia, in part due to continued Japanese demand, while gasoline on the US Gulf Coast strengthened due to a downward correction in LLS. By contrast, European crack spreads were mostly weaker. Light distillates, and naphtha in particular, saw the largest declines on weak petrochemical demand.
  • Tanker oversupply once again weighed heavily on freight rates in May for many benchmark routes. Despite continued high demand for Middle Eastern crudes and brisk spot market chartering activity, rates on the benchmark VLCC Middle East Gulf - Japan route steadily eroded over the month after a plethora of vessels returned to the tonnage pool.


Market Overview

The springtime downturn in oil markets accelerated in May and into early June in the wake of the deepening euro zone crisis, mounting concern over a slowdown in Chinese growth and rising global oil supplies. Futures prices in May plummeted to the lowest level in around six months, with Brent posting a $10.20/bbl decline while WTI was off by around $8.65/bbl, to $110.29/bbl and $94.72/bbl, respectively. Prices were down by a further $10/bbl in the first week of June, with Brent on 1 June falling below $100/bbl for the first time in 15 months. Prices briefly rebounded following EU ministers' agreement to provide a massive €100 billion bank bailout for beleaguered Spain on 10 June, but then quickly resumed their downward trend, with Brent last trading at $97.50/bbl and WTI at $83.50/bbl.

Resurgent worries over the euro zone crisis also saw oil prices more closely track the broader financial and equity markets in recent months. The precarious macroeconomic outlook, especially acute sovereign debt issues in Spain and Greece, heightened risk aversion in global financial and commodity markets and triggered a massive liquidation by investors in oil futures. Net long positions held by money managers in CME WTI contracts fell to the lowest level since early September 2010.

While managing the financial crisis in Spain and Greece is currently the central focus of the policymakers, the more downbeat market sentiment was reinforced after the ECB and the US Federal Reserve opted not to inject any further monetary stimulus for the global economy. A string of dismal manufacturing data from economic pillars Germany and China also added downward pressure on markets, albeit the Chinese government appears determined to ensure economic activity remains robust.



Price bias to the upside stemming from worries over the impact of sanctions targeting Iran's oil exports and financial sector has subsided with just weeks to go before full implementation of EU and US sanctions. Market concerns have eased against the backdrop of the steady rise in global crude supplies in recent months and falling crude prices. A growing consensus has emerged that the market is better positioned to cope with the envisaged loss of Iranian crude supplies from 1 July, in large part due to rising production from both OPEC and non-OPEC producers. Nonetheless, G8 leaders reiterated that the potential for any further tightening in supplies means that collective action by IEA member states remains an option that cannot be ruled out.

OPEC production is flirting near 4-year highs. Iran's European customers were particularly worried about the impact of sanctions but it appears, to a large extent, that Iranian crude supplies have been replaced by both Iraq and Saudi Arabia. While OPEC supplies are 1.86 mb/d above the collective 30 mb/d target agreed in December 2011, independent industry analysts do not expect ministers to announce a cut at the 14 June conference in Vienna. Non-OPEC output remains plagued by unplanned outages in the North Sea, Syria, Yemen, the Sudans and elsewhere. Indeed, unplanned non-OPEC outages are forecast to average 1.26 mb/d in 2Q12 and 1.18 mb/d in 3Q12. Nonetheless, non-OPEC supplies are on track to increase by 800 kb/d from 2Q12 to 4Q12, in part due to a steady ramp up in light, tight oil production in the US. The rise in US domestic oil output and stocks has forced a number of foreign suppliers, especially producers of higher-quality light crude such as Nigeria and Algeria, to seek markets instead in Europe and Asia.

Indeed, rising output of US domestic crude, increased flows from Canada and record stock levels at Cushing, Oklahoma saw the WTI M1-M12 contango (prompt minus forward) widen to -$2.25/bbl in early June compared with -$1.09/bbl in May and -$1.47/bbl in April. Increased crude supplies in Europe, especially from Libya, Iraq and Saudi Arabia, are also adding downward pressure on the front end of the forward curve for Brent. As a result, the Brent M1-M12 backwardation has narrowed sharply, to around $2.50/bbl in early June compared with $4.54/bbl in May, just under $6/bbl in April and $7.15/bbl in March.

Despite the multitude of economic, financial and fundamental factors adding downward pressure, the 20-25% plunge in prices from peak February levels may reflect the bottom, analysts say. Supply side fundamentals certainly look more comfortable, but likely stronger 2H12 refiner and final product demand, allied to remaining uncertainties about supplies from Iran could provide something of a price floor. The end of the seasonally weak second-quarter refining period is expected to lead to an increase in throughput rates of 1.6 mb/d, to 75.9 mb/d, in 3Q12. Similarly, global oil demand is now expected to rise by 2 mb/d between 2Q12 and 3Q12, to 90.5 mb/d.

Further uncertainties abound, with market players closely following several scheduled geopolitical and economic happenings in coming weeks, including elections in Greece, Libya and Egypt, the Iran/P5+1 talks scheduled for Moscow and G20 summit in Mexico, both taking place on 17-18 June, and the formal onset of US sanctions and the EU embargo after 28 June and 1 July, respectively.



Futures Markets

Activity Levels

The ratio of Brent futures in London ICE to New York and London WTI oil positions tested a fresh peak at 65.4% on 5 June. The surge was triggered by more than 9.1% and 3.1% declines in NYMEX WTI and ICE WTI open interest, respectively, from 1 May to 5 June 2012. The increase in the ratio of Brent to WTI open interest is sharper when ICE WTI contracts are excluded, rising by 7.91% to 85.3% over the same period. Similar trends are observed in volume comparisons. Total volumes of trade in CME WTI contracts declined by 18% in May 2012 compared to May 2011 (from 15.1 million to 12.4 million contracts). Year-to-date volume also declined by 19.1% in 2012. In comparison, Brent monthly volume increased from 11.1 million to 13.5 million contracts for May 2011 and 2012, respectively. Year-to-date volume in Brent futures in London ICE contracts also increased by 16%, from 52.3 million to 60.7 million contracts. These developments in open interest and volume suggest that in the very near future open interest in Brent will easily exceed open interest in CME WTI contracts.

Open interest in all oil major derivatives contracts declined between 1 May and 29 May. Open interest in New York CME WTI futures and options contracts declined by 9.1% to 2.3 million. Meanwhile, open interest in futures-only contracts declined by 10.1% to a four-month low of 1.44 million from 1.6 million. Over the same period, open interest in London ICE WTI contracts dropped to 0.44 million and 0.51 million contracts in futures-only and combined contracts, respectively. On the other hand, open interest in ICE Brent futures contracts declined by less than 1% to 1.23 million contracts. However, open interest in Brent and WTI contracts recovered some of their decline in the week to 5 June. Open interest in WTI futures and options increased by 5.9% to 2.44 million contracts while recovery in futures-only contracts was limited at 1.1%, to 1.46 million contracts. ICE WTI open interest increased to 0.44 million and 0.54 million contracts over the same period in futures-only and combined contracts, respectively. ICE Brent futures activity also rose by 1.2% to reach 1.24 million contracts between 29 May and 5 June 2012.



Money managers cut their bets on rising WTI crude oil prices for a third consecutive month, shedding 66 191 contracts to reach 119 910, the lowest level since early September 2010. This is against the backdrop of increasing risk that the euro zone debt crisis could turn into a full-blown currency crisis, and a worsening outlook for global economic activity amid lower than expected Chinese growth and weak US job growth. Net long futures position of money managers in CME WTI contracts is now only half the level observed at the end of February. Money managers also cut their bullish bets on WTI prices in London, from 12 183 to 4 987 contracts. It is noteworthy that they were net-short in the week ending 15 May and 29 May. Similarly, money managers reduced their bets on rising Brent prices by more than 50% from 115 227 to 57 303 futures contracts, the lowest level since November 2011.

Producers also reduced their net futures short positions from 74 134 to 40 865 contracts between 1 May and 5 June, the lowest level since 2006 when disaggregated data was made available to the public. They held 16.7% of the short and 13.9% of the long contracts in CME WTI futures-only contracts. Swap dealers, who accounted for 28.7% and 36.5% of the open interest on the long side and short side, respectively, reduced their bets on falling prices by 36.4% to hold 112 797 net futures short positions over the same period. Producers' trading activity in the London WTI contracts followed an opposite pattern to CME WTI contracts. Producers in London ICE WTI contracts reduced their net long positions from 48 726 to 21 071 contracts. Swap dealers, on the other hand, followed a similar pattern with respect to their trading in CME WTI contracts and reduced their net short positions from 57 226 to 39 019 contracts.

NYMEX RBOB futures and combined open interest declined by more than 2.4% to 292 481 and 314 513, respectively, over the same period. Open interest in NYMEX heating oil futures contracts increased by almost 3.9% to 316 412 contracts, while open interest in natural gas futures market was down by 4% to 1.21 million contracts.

Index investors' long exposure in commodities in April 2012 increased by $5.3 billion to $308.1 billion in notional value. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts increased by $1.2 billion in April. The number of long futures equivalent contracts increased to 560 000, equivalent to $58.7 billion in notional value.



Market Regulation

On 10 May 2012, the Commodity Futures Trading Commission (CFTC) approved a final rule on the core principles and other requirements of designated contract markets (DCMs), which will be one of the venues along with swap execution facilities (SEFs) where cleared swaps must be transacted. The final rule incorporates 23 core principles, which require DCMs to have proper tools to prevent manipulation and other distortions; to adopt position limits for each contract that trades on the DCM; to make available to the public daily information on settlement prices, volume, open interest, daily opening and closing ranges for actively traded contracts on the DCM; to keep records of all activities related to their business as contract markets; to establish and enforce rules regarding customer dispute resolution procedures; and to establish and maintain a risk oversight programme and emergency and disaster recovery procedure. However, the CFTC delayed the vote on a controversial rule on Core Principle 9, otherwise known as the '85 percent rule'. Under the proposal, any contract in which less than 85 percent of a contract's trading occurring on an exchange's centralised market must be delisted, should be reclassified as a swap and traded on the SEF. The purpose of this rule is to bring trading to centralised markets to boost price discovery. However, industry participants argue that this rule would reduce market liquidity and increase risk as well as prevent financial innovation in centralised markets. The CFTC will reconsider this rule after it finalises the rules related to SEFs, which are expected in July 2012.

The CFTC also again proposed an order amending the effective date for the provisions in the swap regulatory regime established by Dodd-Frank Act that would have gone into effect on 16 July 2011. The order extends the effective date for swap regulation until 31 December 2012, or until the Commission's rules and regulations go into effect, whichever is sooner. This is the third substantial delay amid agency struggles to keep pace with rule-making deadlines mandated by the Dodd-Frank Act. Critics note that the Agency has not finalised the definition of a swap, which is now expected to be considered later in June. Without the definition of a swap, some final rules, such as swap reporting and position limits, could be further delayed.

On 18 May 2012, the CFTC approved a proposed rule that amends the CFTC's aggregation provision for limits on speculative positions as a response to a petition from the Working Group of Commercial Energy Firms (WGCEF). The proposed rules define three tiers for purposes of aggregation. First, if the ownership interest is less than 10 percent, the entity is not required to aggregate positions with those of the owned entity. Second, the proposed amendment requires any person with an ownership or equity interest in an entity of between 10 percent and 50 percent to aggregate with those of the owned entity's positions unless independence of trading can be demonstrated; i.e. trading must be conducted in separate locations, different traders must be doing the trading, information about individual trades or trading strategies may not be shared between entities, and risk management systems must not allow the sharing of trades or trading strategies. Third, the proposed rule still calls for the aggregation requirement if one entity owns greater than 50 percent of another entity.

The CFTC also approved a final rule on swap data record keeping and reporting requirements for historical swaps on 18 May 2012. The final rule separates historical swaps into two categories: transition swaps (swaps entered into between the law's enactment date and the applicable compliance date for swap data record-keeping and reporting) and pre-enactment swaps (swaps executed prior to the passage of the Dodd-Frank Act). For transition swaps that were in existence on or after 25 April 2011, counterparties are required to keep records of specified, minimum primary economic terms for a swap of the asset class in question. Swap dealers (SDs) and major swap participants (MSPs) must keep the required records in electronic form (unless they were originally created and are exclusively maintained in paper form), while non-SD/MSP counterparties are permitted to keep them in either electronic or paper form. In addition, the counterparty to a transition swap must keep a confirmation, master agreement or credit support agreement concerning the historical swap in its possession on or after April 25, 2011. For pre-enactment swaps that expired prior to 25 April 2011, the reporting party must report such information relating to the terms of the transaction as was in the reporting counterparty's possession at 25 April 2011. Counterparties are required to keep the records they have, in any form elected by the counterparty. The required records must be retained throughout the existence of a historical swap and for five years following its final termination or expiration. The rule also calls for historical swaps data to be made available to regulators through swap data depositories (SDRs).

Bank Losses Sharpen Focus on Proprietary Trading

On 10 May 2012, JP Morgan, the largest US bank by assets, announced that poorly designed and executed hedging strategies had caused more than $2 billion in derivatives trading losses from transactions in London. Given the prominence of the company in derivatives trading (estimated to account for over 10% in notional value of OTC derivatives trading in late-2011), this raises important questions about regulatory oversight, the pace and extent of financial reform and ultimately (even though energy markets were not directly involved) the functioning of energy derivatives markets.

The Trades in Question

According to news reports, JP Morgan trades can be classified as directional bets, although some might argue that it is a complex hedging strategy to cover overall portfolio risk. In the simplest terms, the company initially purchased credit default swaps (CDS) on high yield bonds to hedge their loan book. Money could have been made if the economy deteriorated. In the event, as the US economy showed some improvement, this strategy did not perform well in terms of making money although it is the appropriate strategy in terms of risk management. In the second stage, JP Morgan sold substantial amounts of under-priced swaps on a basket of investment-grade corporate bonds, a traded index of credit default swaps, on the expectation that the economy would further improve.

It is especially this portion of the trades that are being questioned, and whether this constituted a hedge or a proprietary trade. Some have argued that this was a hedge against future obligations for which the firm is naturally short. Others argued that this is actually proprietary trading, which would have been prohibited under the Volcker rule. The company's large position eventually created a material gap between the index price and the sum of the prices on the underlying CDS in such a way that buying protection on the index was cheaper than buying protection via individual company CDS. Instead of unwinding their position in the index, JP Morgan further took the opposite position to hedge their exposures in the index by buying CDS on the investment-grade bonds of individual companies, which led to further losses for the company. We expect that debates surrounding these trades will have important implications for at least three contentious issues; namely the Volcker rule, the Lincoln swaps push-out rule, and the cross-border application of the Dodd-Frank Act.

Implications for the Volcker Rule

As explained in the February OMR, the proposed Volcker rule prohibits proprietary trading while allowing transactions related to underwriting, market-making, risk mitigating hedging, trading in certain US government obligations, and trading on behalf of customers. For example, the proposed rule allows for banking entities' risk-mitigating activities for their portfolio. The statute defines proprietary trading as engaging in the purchase or sale of certain financial assets as a principal for the trading account of a covered banking entity. The rule further provides guidance on what banking entities must do to prove that they are not undertaking proprietary trading but engaging in permitted activities, such as hedging, market-making or trading on behalf of customers. Finally, the proposed rule provides detailed limitations on the permitted activities. For instance, if their permitted activity would endanger the safety or soundness of the banking entity or the financial stability of the United States, then it is considered proprietary trading and it is prohibited.

The determination of what constitutes proprietary trading and what constitutes legitimate trading activity, such as hedging or market-making, remains under debate, although the final rule will now likely narrow hedging exemptions. Some suggest that portfolio hedging should not be considered as a legitimate hedging activity, and therefore should not be permitted. Also, regulators might interpret market-making activity more narrowly than the proposed rules. While recent events might boost popular support for more restrictive rules, they do not remove the need for thorough cost-benefit analysis on measures which might reduce liquidity in the market, adversely affecting price discovery and the transfer of risk functions of derivatives markets.

Implications for the Lincoln Swaps Push-Out Rule

The Lincoln rule specifically requires federally insured banking entities to move their risky trades, such as swap trading in uncleared credit-default swaps and energy and metal swaps, among others, from a banking unit into separately capitalised affiliates, while allowing exemptions for certain traditional bank derivatives activities, such as hedging and trades in interest-rate swaps. The rule is expected to be in effect starting on 16 July 2013. Banks lobbied against this rule and the US House Committee on Financial Services amended the Lincoln rule on 11 May to allow a wider range of swaps to stay in-house. However, due to the  recent JP Morgan losses, the US House Committee on Agriculture granted an extension for further consideration, ending not later than 16 July 2012. It will be interesting to see whether and how recent events trigger a major regulatory rethink in the US Congress.

Implications for Cross-Border Application of the Dodd-Frank Act

The extent to which the Dodd-Frank Act will govern cross-border activities is an important issue in light of the global nature of the swap market. The Dodd-Frank Act gives broad authority to the CFTC over the global swaps markets by Section 722. Section 722 provides that the CFTC's jurisdiction shall not apply to activities outside of the US unless they have a direct and significant connection with activities in, or effect on, commerce of the US.

The CFTC is yet to vote on interpretive guidance extending the Dodd-Frank Act to some overseas swap trading, but the Commission is likely to release its guidance on 21 June 2012. The US banking sector has argued that broader oversight of cross-border derivatives activities will diminish their competitiveness in global swaps markets with their foreign-based competitors. Others suggest that JP Morgan's losses are a reminder of how trades overseas by subsidiaries and branches of US firms can quickly affect domestic banking units.

Implications for Energy Derivatives Markets

Although JP Morgan losses were not related to energy derivatives trading, the implications of any resultant new interpretation of the Volcker, Lincoln and cross-border application of the Dodd-Frank Acts will certainly affect energy markets, where banking institutions have been the biggest liquidity providers through their hedging, market-making and speculative activities. Commercial traders have raised their concerns on the impact of the Volcker rule and other rules on market liquidity and their unintended consequences of higher trading costs. They were already lobbying for more exemptions from commercial banks' trading bans ahead

of the events surrounding JP Morgan, but might struggle now to win their case, not least if a narrower interpretation of hedging and market-making activities gains momentum. Cross-border application of the Dodd-Frank Act might complicate the international harmonisation of regulation if the CFTC's guidance goes beyond its own jurisdiction. Genuinely increasing transparency and reducing systemic risks in the global swaps market will need such harmonised rules, and moreover rules that have been subject to proper cost-benefit analysis.

Spot Crude Oil Prices

Spot crude oil prices plummeted by around $18-25/bbl over May and into early June in tandem with crude futures. Burgeoning global oil supplies weighed heavily on markets while worsening economic woes heightened fears of demand destruction. Spot prices for benchmark crudes plummeted $8-10/bbl on average in May, with North Sea Dated averaging $110.25/bbl and WTI $94.68/bbl. Spot prices for Dubai posted the sharpest monthly decline, down by nearly $10/bbl to an average $107.32/bbl on rising supplies of OPEC Middle East crudes. The price differential for Dubai minus North Sea Dated averaged $2.93/bbl in May versus $2.29/bbl in April.



A surplus of light, sweet crude was especially pronounced in the US and Europe, which in turn led to a narrowing in the sweet-sour crude price spread. Rising US production of light, tight oil from the Midcontinent and rising flows of Canadian crude backed out foreign supplies of higher quality crude that are typically in strong demand during the summer driving season. US imports of Nigerian crude likely fell by 500 kb/d in May. As a result, a surplus of Nigerian, Algerian and other gasoline-rich crudes weighed on European crude markets.



US markets are awash with crude supplies, with stocks nationwide at their highest level since June 1990. In addition to increased domestic output and supplies from Canada, seasonally lower refinery throughput rates have reduced demand. Refinery runs are expected to rise sharply in the third quarter, even though the ramp up of the Saudi Aramco-Shell Motiva refinery, which recently completed its 325 kb/d expansion to 600 kb/d, is now uncertain. An unscheduled outage in early June forced a shutdown of the new crude unit. While the duration of the outage is uncertain, some sources say it could be months before the plant can operate at full capacity. US imports of Saudi crude were up around 400 kb/d in recent months, with all of the extra supply reportedly earmarked for its Motiva joint venture, now the largest refinery in the US. A surplus of light crudes, coupled with field maintenance work in the Gulf of Mexico affecting heavier grades, have led to a sharp narrowing of the price spread for grades such as Light Louisiana Sweet (LLS) against heavier, sour Mars. The spread between the two grades narrowed sharply by early June, to around $1.75/bbl compared with around $3/bbl in May and about $6.65/bbl in April.

Crude oil inventories at the pivotal Cushing storage facilities rose to record levels of 47.8 mb following the addition of new tanks and despite the start-up of the Seaway pipeline 17 May. The much-anticipated reversal of the Seaway pipeline southbound is likely to have only minimal impact on high stock levels at Cushing, given initial capacity of 150 kb/d. Pipeline capacity is expected to be increased to 400 kb/d by early 2013. In the meantime, rising Canadian flows and pipeline bottlenecks have led to crude in the land-locked Midcontinent and Canada selling at heavy discounts to US Gulf Coast grades.

The reversal of Seaway has moreover had only a marginal impact on the WTI-Brent price spread, given the glut of crude at Cushing. WTI's discount to North Sea dated narrowed in May, to -$15.57/bbl compared with -$16.28/bbl in April. By early June the spread had come in further, to around -$14.70/bbl.



In Europe, fears that the loss of Iranian crude would wreak havoc for refiners have so far proved exaggerated amid weak regional runs. Backed out of the US, a wave of African crudes is on offer in Europe. Latest tanker data also show imports into the region from Iraq have surged. Imports of Iraqi Basrah crude jumped to an estimated 450 kb/d in May, compared with an average 100 kb/d in the first four months of the year. Partially offsetting the surplus, North Sea crudes have been selling into Korea at a brisk pace, following the end-2011 trade agreement between the European Union and Korea, which essentially waives a 3% import tax that Korean refiners previously paid. Low VLCC rates have also helped make the eastward flows economic, with multiple North Sea cargoes arriving in April and May.

The May Brent-Urals price spread in the Mediterranean narrowed on stronger demand for medium sour crudes, in part due to increased demand for the Russian grade as a replacement for Iranian barrels. The discount for Urals to Brent in the Mediterranean averaged -$0.75/bbl in May compared with -$2.11/bbl in April before widening again in early June, to around $1.90/bbl on increased supplies into the region.

In Asia, demand for heavy sweet crudes from Japanese utilities remained strong, but prices for prized grades eased on extra supplies from Vietnam due to the scheduled turnaround at the Dung Quat refinery. Both Malaysian Minas and Indonesian Tapis were also down sharply, off by around $23/bbl by early June from April levels, to $102.60/bbl and $102/bbl, respectively.

Exceptionally weak naphtha demand also limited buying interest in light crudes, while stronger fuel oil cracks have increased the premium for heavier, sour crudes. Mirroring the narrowing sweet-sour price spread in the region, Saudi Aramco lowered the differentials for price formulas for Arab Extra Light and Super Light grades by $0.25-0.30/bbl for July, but raised them for Arab Heavy by $0.75/bbl. Arab Light and Arab Medium price formulas were increased by $0.20/bbl and $0.40/bbl respectively. Asian buyers account for more than 5 mb/d of Saudi crude exports.



Spot Product Prices

Spot product prices fell across the board in May, in tandem with the dive in crude prices. Light distillates, and naphtha in particular, saw the largest declines on weak petrochemical demand. In contrast, gasoline crack spreads in the US Gulf strengthened due to a downward correction in benchmark crude LLS, while fuel oil crack spreads mostly improved month-on-month, supported by ongoing strength in Japanese utility demand.



Naphtha markets continued to struggle in May, and crack spreads fell by $7.76-9.12/bbl month-on-month in Europe, and a lesser $6/bbl in Asia, leaving naphtha at a $9-13/bbl discount to crude in May, not far from the low levels last seen in November 2011. Poor demand from the petrochemical sector continued to pressure prices, as several Asian crackers were running at reduced capacity or were shut down due to planned maintenance. The unplanned shutdown of one of the large naphtha crackers at Formosa, Taiwan around mid-month also contributed. Further adding to the downward pressure were lower prices for propane, a competing feedstock. On top of that, supplies increased with refineries coming back from maintenance.

Gasoline markets in Europe and Singapore weakened in May, with crack spreads narrowing in Northwest Europe by $5.22/bbl to Brent, and by $6.59/bbl to Urals in the Mediterranean. In Singapore, crack spread differentials fell by $3.49/bbl versus Dubai on average. By contrast, Super Unleaded gasoline crack spreads in the US Gulf strengthened by $4.46/bbl to LLS in May.

Prices in the US Gulf were supported by expectations of stronger demand with the start-up of the summer driving season at month-end as well as somewhat lower prices at the pump. Continuous gasoline stock draws throughout the month were also supportive for the prices. Furthermore, LLS came under pressure with the reversal of the Seaway pipeline mid-May and more light, sweet Eagle Ford volumes available at the Gulf Coast, and this also contributed to the stronger crack spreads.



European gasoline crack spreads, although weakening month-on-month from high April levels, trended up during the course of May with support coming from an open arbitrage to the US in the second half of the month, as well as robust West African demand. The news of the closure of Petroplus' Coryton refinery in the UK also helped pushed crack spreads higher at the end of the month. In Singapore, strong demand continued to be supportive for gasoline markets. The shut-down of the Dung Quat refinery in Vietnam tightened supplies and light distillate stocks in Singapore drew throughout May to the bottom of the five-year range.

Middle distillate crack spreads eased slightly in all regions in May bar the US Gulf Coast where the weakness in LLS resulted in improved price differentials. Diesel crack spreads to Brent in Northwest Europe fell by $0.87/bbl, and by $1.95/bbl to Urals in the Mediterranean. The euro zone crisis and high flat prices have muted European demand, but lower export volumes of diesel arriving from Russia provided support, and stocks in the ARA region declined in May towards the five-year average.

In the US Gulf, ULSD crack spreads rose by $3.18/bbl versus LLS. Prices were supported by stronger demand from southern Latin America as winter is approaching, and an open arbitrage to Europe. US distillate stocks were drawing in May, leaving stocks at month-end in the lower end of the five-year range. Meanwhile, Singapore gasoil cracks weakened by $0.13/bbl as a partly closed arbitrage to Europe weighed on prices.

Fuel oil markets remained strong in May, and in Singapore LSWR cracked fuel price differentials improved by $1.47/bbl versus Dubai. Meanwhile, LSFO discounts to Brent widened by $0.62/bbl in Northwest Europe and by $2.73/bbl to Urals in the Mediterranean. Although widening, average monthly discounts of $4.57/bbl and $2.25/bbl respectively are still robust. With the last nuclear unit taken off line early May, strong Japanese utility demand, together with maintenance at nuclear plants in South Korea, provided support for the LSFO market. In Europe, markets softened in part due to increased supply and a partly closed arbitrage.



HSFO discounts narrowed by $1.21/bbl in Northwest Europe and widened a minor $0.35/bbl in the Mediterranean. In Singapore, HSFO discounts narrowed by $1.07/bbl month-on-month. Tightness in on-spec bunker fuel supplies was one of the factors supporting prices both in Europe and Singapore in May.



Freight

Despite continued strong demand for Middle Eastern crudes and brisk spot market chartering activity, tanker oversupply once again weighed heavily on freight rates in May for many benchmark routes. Rates on the benchmark VLCC Middle East Gulf - Japan route steadily eroded over the month after a plethora of vessels returned to the tonnage pool, off approximately $16/mt in early May to under $12.50/mt by early June. Indeed, the continued depressed state of VLCC markets has helped the economics of long-haul trades. Recently, a combination of a free trade agreement between the European Union and Korea and low VLCC rates has helped to send North Sea crudes eastwards with multiple cargoes arriving in April and May.

The Suezmax West Africa - US Gulf Coast route was characterised by extreme volatility over the month. In mid-May a convergence of urgent cargoes for prompt delivery took the market by surprise and rapidly tightened tonnage, with rates spiking at over $23/mt, before plummeting back rapidly to below $16/mt by month end as demand waned and supply built. Meanwhile, despite reportedly high fixings in the Baltic, fundamentals in northern European markets remained well balanced and rates remained stable.



Product tanker markets fared little better than those for crude. Rates on the UK - US Atlantic Coast clean trade weakened by approximately $3/mt over the month. Indeed, even with the recent shuttering of a large portion of US Atlantic Coast refining capacity, a combination of depressed US gasoline demand and increased pipeline-supplied product coming from the Gulf Coast has changed the complexion of these markets. However, if supply delivered by the Colonial pipeline is insufficient during the summer driving season, volumes of transatlantic trade could once again increase. Oversupply was especially evident in East of Suez markets, which generally weakened over the month. The 75 Kt Middle East Gulf - Japan trade fell from approximately $26/mt to $23/mt over the month while, after initially holding its own, the Singapore - Japan trade declined to under $16.50/mt by early-June.

Refining

Summary

  • 2Q12 global refinery crude throughput estimates are largely unchanged since last month's report, averaging 74.3 mb/d, or 390 kb/d above a year earlier. Growth derives largely from non-OECD Asian countries, while Latin American and OECD runs are constrained by recent capacity rationalisation. 1Q12 crude run estimates have been lifted by 190 kb/d since last month's report, on higher than expected Asian and, to a lesser extent, Middle Eastern utilisation rates.
  • World refinery crude demand is set to surge seasonally by almost 2.8 mb/d between April's low and August, as plants in all key refining centres complete maintenance. New capacity in China and India, as well as the restart of some Petroplus plants in Europe, will also contribute to higher runs. The ramp-up of Motiva's expanded US plant is now uncertain after an unscheduled outage in early June. On a quarterly basis, 3Q12 runs are 1.6 mb/d higher than 2Q12, at 75.9 mb/d, or +345 kb/d year-on-year.
  • OECD crude throughputs declined a further 135 kb/d in April, to average 35.5 mb/d, largely unchanged from both April 2011 and last month's forecast. Lower runs in the Pacific led the decline, as Japanese refiners began seasonal maintenance and outages reduced runs in Australia and New Zealand. Sharp increases in US runs in May were partly offset by further cuts in Japan, though overall OECD runs are set to rise towards a seasonal peak of 37.4 mb/d in August.
  • Refinery margins saw diverging trends in May, with US West Coast margins improving and the majority of rates in other refining centres falling, despite the sharp decline in crude oil prices. A significant narrowing of gasoline and naphtha cracks pushed margins lower. US Gulf Coast LLS margins were an exception, due to a sharper downward correction in LLS prices compared to other crudes. Dubai hydroskimming margins in Singapore, although still negative, also improved slightly on improving fuel oil cracks.


Global Refinery Overview

Global refinery crude demand is estimated to have fallen to a seasonal low of 73.5 mb/d in April, with runs increasing from May as most refiners completed spring maintenance work. Continued work in Russia and China, and an escalation in planned outages in the Pacific, still saw crude demand relatively subdued in May. From June onwards, global refinery throughputs are expected to rise sharply, however, to a seasonal peak of 76.3 mb/d in August. On a quarterly basis, runs rise from 74.3 mb/d in 2Q12 to 75.9 mb/d in 3Q12. With the arrival of March data for a number of non-OECD countries, 1Q12 estimates have been raised by 190 kb/d, to 75.0 mb/d, largely on higher-than-expected Asian operations. Annual throughputs growth is expected to average 365 kb/d in 2Q12-3Q12, as demand for oil products also recovers from the very low levels seen over the previous four quarters.

Monthly data for March were higher than expected, in particular for several Asian countries, leading to a significant upwards revision to March and 1Q12 estimates. Middle Eastern crude runs were also higher than expected. Preliminary data for April, on the other hand, were mostly in line with last month's forecast, as slightly lower European and Russian runs mostly offset the higher Asian baseline. April throughputs are seen as the seasonal low in global refinery runs, with maintenance in several regions, notably the Atlantic Basin. Only the OECD Pacific is expected to increase shutdowns from April to June, providing a partial offset to increasing throughputs elsewhere.



Despite generally worsening refining economics, global crude runs are assessed 585 kb/d higher in May compared to April, at 74.1 mb/d. Most of this increase came from the US, which saw runs rising almost 0.6 mb/d month-on-month. In addition to the completion of regular maintenance work, the start up of Motiva's 375 kb/d Port Arthur expansion and the return of BP's Cherry Point refinery after a prolonged outage provided support. Runs are expected to have risen also in the Middle East, Other Asia and China as major turnarounds drew to a close.



The continued ramp up of runs at new capacity in Asia, and the resumption of operations at four of Petroplus' five European refineries over coming months, could again put further downward pressure on margins and force economic run cuts if oil product demand growth disappoints. The ramp-up of Motiva's expanded Gulf Coast refinery is now in question, following an unscheduled outage in early June. While the timing of the restart is unclear, some sources indicate the new crude unit could be offline for two to five months. Global crude runs still stand to rise seasonally to 76.3 mb/d in August, an almost 2.8 mb/d increase from April's low, based on available capacity, seasonal patterns and expected demand growth.

Refinery margins saw diverging trends in May, with US West Coast margins improving and the majority of rates in other refining centres falling, despite the sharp fall in crude oil prices. A significant narrowing of gasoline and naphtha cracks pushed margins lower. US Gulf Coast LLS margins were an exception, due to a sharper downward correction in LLS prices compared to other crudes. Dubai hydroskimming margins in Singapore also improved slightly on improving fuel oil cracks, though remained negative.



OECD Refinery Throughput

OECD crude throughputs declined by a further 135 kb/d in April, to average 35.5 mb/d. Both North American and European refinery runs were mostly unchanged from the prior month, while Japanese utilisation rates fell with the onset of the maintenance season. Refinery outages in New Zealand and Australia further reduced Pacific runs, to 6.5 mb/d. Overall OECD rates were also largely unchanged from the previous year and last month's forecast, with slightly downwardly revised European rates (-110 kb/d) partly offset by higher North American data (+55 kb/d).



Official monthly March submissions were largely in line with preliminary estimates for the OECD as a whole, though masking some regional divergences. While North America was revised up by 100 kb/d on higher US and Canadian data, the Pacific was revised down by 105 kb/d. In all, OECD crude intake averaged 35.7 mb/d in March, down 1.2 mb/d from February and 0.2 mb/d below year-earlier levels.



Preliminary weekly data for May show US refinery crude intake surging 585 kb/d month-on-month, to average 15.1 mb/d. The seasonal increase was only slightly lower than our forecast and ran some 350 kb/d above year-earlier levels. Offsetting the increase in the US, Japanese runs fell by 455 kb/d in May, shown in preliminary weekly data from the Petroleum Association of Japan (PAJ). The decline corresponded with an increase in maintenance activity and was in line with expectations. Preliminary data for Euroilstocks, released 11 June, indicate that European refinery utilisation rates remained weak in May, pressured by poor margins, contracting demand and limited export opportunities. In all, OECD crude intake is expected to rise from a low of 35.5 mb/d in April to a seasonal peak of 37.4 mb/d in August, with seasonal increases in the US and Europe accounting for the increase and the Pacific recovering after maintenance lows in the May-July period.

North American crude run estimates have been lifted by 100 kb/d and 55 kb/d for March and April respectively, with the submission of final and preliminary monthly data. Both months' throughputs were below year-earlier levels, with maintenance and unscheduled outages cutting runs over and above cuts stemming from recent refinery closures on the East Coast and on the US Virgin Islands.

US refinery throughputs were expected to rise sharply from May onwards as maintenance wound down, and indeed weekly data show US runs up 585 kb/d month-on-month. The increase stemmed from the Gulf Coast (+430 kb/d) and the West Coast (+235 kb/d). Other regions were slightly lower or unchanged versus April. US East Coast runs fell even further (-30 kb/d) to a recent low of 825 kb/d in the week ending 18 May. A fire at Sunoco's 330 kb/d Philadelphia refinery on 9 May reduced runs temporarily, though operations were fully restored by end-month.



Gulf Coast runs rose seasonally in May, as maintenance was completed and refiners boosted operations to replenish product inventories ahead of the summer driving season. Both gasoline and diesel stocks are at the bottom of their historical range. The completion of Motiva's 325 kb/d Port Arthur expansion saw runs surge late-month. A mechanical issue forced an unscheduled shutdown of the new crude unit in early June, however, and may curb output from the expanded plant in the short term and possibly for several months. While little information on the issues and potential restart was available at the time of writing, some sources said the new units could be off for two to five months. West Coast crude intake was lifted by the restart of BP's 225 kb/d Cherry Point refinery from 7 May, with full production reached at end-May. The refinery had been shut since 17 February due to a fire at the plant's central crude distillation unit.



European refinery intake was 110 kb/d lower than expected in April, with French and Italian runs particularly weak. Total European runs averaged 11.7 mb/d, only marginally higher than March's 11.6 mb/d, and just 50 kb/d above year-earlier levels. Submitted monthly data for March were overall in line with our previous estimates. April crude runs remained low on still-substantial refinery maintenance and outages. In Finland, an unscheduled outage at Neste's Porvoo plant took runs 60 kb/d lower than a month earlier, although this was already factored into the forecast and brought forward planned maintenance from the second half of the year. The shutdown of Petroplus' Antwerp, Petit Couronne, Ingolstadt and Cressier plants also played into the lower runs.

New owner Gunvor reportedly estarted the 108 kb/d Antwerp refinery in mid-May after a five-month shutdown. The company picked up another one of the Petroplus plants, the German Ingolstadt unit, in early June, and is planning to restart it as soon as possible. The deal is expected to close by October, and we assume the plant to resume operations in early 4Q12. In France, the Petit Couronne plant is set to resume operations at reduced rates on 14 June. French throughputs will likely remain below year earlier levels, however, due to the shutdown of Berre l'Etang in January 2012 and Reichstett in May 2011. Switzerland's Cressier plant is expected to restart in July/August after Vitol agreed to purchase the plant last month. The UK's Coryton plant, however, has not managed to find a buyer, and as crude supplies ran out on 6 June, the plant also had to halt operations. The administrator, while continuing to look for a buyer, is now proceeding towards a full closure, which could take up to three months.



Pacific crude runs were revised down by 105 kb/d for March, following lower data for Japan and Australia. March throughputs are now assessed at 6.6 mb/d, some 185 kb/d above year-earlier levels. March 2011 refinery operations were stunted by the devastating earthquake and tsunami hitting Japan. Preliminary data for April show overall Pacific crude intake only marginally lower at 6.5 mb/d. Slightly weaker Japanese runs due to the start of maintenance, and outages in New Zealand and Australia led the 140 kb/d monthly decline. The Marsden Point, New Zealand refinery underwent maintenance in April and May and Shell's Australian Geelong refinery had to take a unit offline for repairs in April after an emergency. Preliminary weekly data from the PAJ for May were in line with expectations, down 455 kb/d from a month earlier. Maintenance is expected to curb regional runs further in June, to a seasonal low of 6.1 mb/d, before rebounding from July onwards.

Shell announced on 7 June that it will bring forward the planned closure of its 80 kb/d Clyde refinery in Australia from mid-2013 to September of this year, due to poor industry margins and intense competition from complex refineries in Asia, according to a company statement. The plant will be turned into a fuel terminal.



Non-OECD Refinery Throughput

Non-OECD refinery throughputs were stronger than expected in the first quarter, and have been revised up by 190 kb/d since last month's report. Crude runs in March were particularly strong in Asia, reaching an estimated record-high of 9.5 mb/d. Middle Eastern runs also fell less than expected, with Kuwaiti runs rebounding from maintenance over January and February. Year-on-year increases of some 875 kb/d in March, stemmed largely from Asia - with Singapore, China, India, Taiwan and Thailand all providing significant growth. Saudi Arabia and Russia also reported annual increases in crude intake of around 150 kb/d each. For the current quarter, non-OECD crude runs are assessed 0.4 mb/d lower compared to 1Q12, before rebounding sharply in 3Q12, reaching a peak of 39.1 mb/d in July.



Chinese refinery runs were relatively unchanged in April, down 45 kb/d from March, at just over 9 mb/d, and only slightly lower than forecast. In May, throughputs rose to only 9.1 mb/d (0.2 mb/d less than previously expected), as refinery maintenance remained high, at around 700 kb/d (unchanged from April). While lower recent international crude prices have improved economics for domestic refiners, companies have said that they were still operating at a loss. China lowered retail prices of motor fuel by 5% on 8 June. The cut is the second in a month.

Other Asian refinery runs reached a record-high of 9.5 mb/d in March, some 600 kb/d above a year earlier. Growth came from Singapore, India, Taiwan and Thailand, and was well above expectations. Indian crude runs for April fell 110 kb/d m-o-m, to an estimate of 4.2 mb/d, adjusting for data for the Reliance, Bina and Bathinda refineries not yet included in official government statistics. The number was in line with our previous forecast and up by some 160 kb/d on a year earlier. The fire-damaged Numaligarh refinery restarted at end-May after a fire broke out in mid-April at the 60 kb/d plant.



Elsewhere, Vietnam's Dung Quat refinery shut for four weeks from 15 May for turnarounds. The shutdown freed up more Bach Ho crude for spot sales. The refinery was forced to shut down in mid-May after problems with a gasoline unit, and the outage could be extended to end-June. Taiwan's refinery crude intake in March was 180 kb/d higher than expected, at 940 kb/d. Earlier news reports of a crude unit being taken offline for safety checks may have been inaccurate. In the Philippines, Shell's 110 kb/d Tabangao refinery in Batangas underwent maintenance in late-April and early-May.

Preliminary May data for Russia from CDU-TEK show crude processing flat from April's depressed levels of 5.0 mb/d. Earlier maintenance schedules had indicated less maintenance in May than April, though more recent information show almost 0.8 mb/d of capacity still offline last month. As a result, we have revised lower Russian throughputs for May by 310 kb/d compared to last month's report. Final April data were in line with earlier estimates. As maintenance winds down, runs are set to rise sharply in June. Much of the increase will come from TNK-BP's 340 kb/d Ryazan and Lukoil's Nizhny Novgorod plants, as well as from Rosneft's Samara and Achinsk refineries. A fire at Surgutneftegaz's 350 kb/d Kirishi refinery on 13 May shut the plant's new hydrotreater and could delay the start up of 10 ppm diesel output.



FSU throughputs were further depressed in May by the shutdown of Lithuania's only refinery, the Mazeikiai refinery. The plant, which has a design capacity of around 300 kb/d but recent throughputs of around 160 kb/d, shut for a five-week maintenance programme ending on 3 June. PKN Orlen announced it had abandoned plans to sell their Lithuanian subsidiary Orlen Lietuva, and instead will upgrade the refinery to further improve its energy efficiency and economics. Kazakhstan's Pavlodar refinery will shut down for maintenance on 25 June. Transneft reduced crude supplies to the plant in May, from a usual 500 kt to only 275 kt. As a result, the plant processed only 410 kt in May and plans to run 350 kt in June.

Elsewhere, Libya's 220 kb/d Ras Lanuf refinery has still not resumed operations and the timing of the restart is still uncertain. Apparently, disagreement between NOC and refinery operator, Lerco, over crude supplies is holding up the restart. We are now excluding operations here for the outlook until further information becomes available. In the Middle East, crude runs are set to rise from May onwards with higher throughputs in Saudi Arabia after Ras Tanura completed maintenance in early May. Maintenance work in Kuwait will provide a partial offset, however, as the Mina Al Ahmadi refinery shuts for work in May and June. The maintenance does not include the crude unit, but is expected to result in slightly lower runs. Latin American crude runs fell below year-earlier levels in March, with the closure of Valero's 235 kb/d Aruba refinery from end-March. The plant, which only restarted in early 2011 after a 17-month shutdown was already operating at reduced rates due to poor margins. Hovensa's 350 kb/d St. Croix refinery in the US Virgin Islands was shut in mid-February but is accounted for in the North American regional total.