Oil Market Report: 12 July 2012

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  • Muted economic recovery in 2013 supports a 1.0 mb/d rise in oil demand to 90.9 mb/d. While stronger than the estimated 0.8 mb/d gain envisaged for 2012, growth remains well below the pre-credit crunch trend. Non-OECD demand overtakes that expected for the OECD in 2013, with 2Q13 the potential inflection point.
  • Rising volumes of North American and Brazilian supply should support non-OPEC growth near 0.7 mb/d in 2013, to average 53.9 mb/d. This is after unplanned outages in 2011 and 2012 reduced growth to just 0.2 and 0.4 mb/d, respectively. OPEC NGLs output averages 6.5 mb/d next year, after growth of 0.4 mb/d in 2012 and 0.3 mb/d in 2013.
  • Following relatively weak 2011 refinery capacity growth, 2012 sees net additions of over 1 mb/d of distillation, with a further 1.3 mb/d in 2013, exceeding demand growth and potentially capping refining margins. Upgrading and desulphurisation additions are a combined 2.6 mb/d and 2.8 mb/d this year and next, amid higher fuel quality standards.
  • OPEC June crude supply was close to recent highs at 31.8 mb/d, ahead of incoming US sanctions and an EU oil embargo on Iran. The 'call on OPEC crude and stock change' rises to 31.2 mb/d in 3Q12, easing to average 30.5 mb/d during 4Q12-4Q13. Installed 2013 OPEC crude capacity rises by only 250 kb/d to 35 mb/d, as assumed decline in Iran partly offsets gains elsewhere.
  • OECD industry oil stocks rose by 15.4 mb in May, to 2 672 mb, lagging a five-year average build of 25.1 mb. Forward demand cover fell by 0.8 days to 58.9 days from April, albeit still 1.4 days above the five-year average. Preliminary data indicate a 7.2 mb decline in June OECD industry inventories, in contrast with a five-year average 2.3 mb build.
  • Oil futures were volatile over June and early July, amid conflicting pressures on prices. Benchmark crudes mostly plummeted in June after worsening euro zone woes and with a backdrop of rising global inventory. Prices reversed course towards end-June and into early July, with benchmark WTI last trading around $85/bbl and Brent at $99/bbl.

From col to 'call'

The recent track of crude prices resembles the mountain cols endured by the peloton of this year's Tour de France. Steep descent from March's Iran-derived peak was followed by a late-June climb, on resurgent Middle East Gulf tensions, alongside the threat of a Norwegian Shelf shut-in. Supply-side risks will likely continue to provide a price floor through 2012. Even a late-June, $89/bbl Brent low represented scant relief for beleaguered importers, already facing budgetary and balance of payments problems. While the economic risks encompassed in our weaker GDP and demand profile this month also hint at something of a price ceiling, the latent potential of emerging market demand growth and ongoing risk of nasty supply surprises could keep prices stubbornly high in absolute terms. This arguably represent as much of a policy challenge as does the perceived bogeyman of price volatility.

Physical market fundamentals have clearly eased since the start of the year, with an implied global stock build in 2Q12 of 2.1 mb/d, following hard on the heels of the 1.3 mb/d seen in the first quarter. Those who cite scant rationale from fundamentals for the recent fall in prices might do well to take note. However, only 15% of the implied stock build seems to have occurred in the OECD, emphasising again the need for better data on non-OECD stock levels and floating storage. With an underlying 'call on OPEC crude and stock change' for 2H12 now estimated at near 31 mb/d, OPEC producers may follow through on their mid-June pledge to curb output from current elevated levels if customers request less oil. While strict adherence to the previous 30 mb/d quota risks a renewed and potentially damaging price surge, lower production may in any case derive from the tightening restrictions on Iran's exports.

Our first detailed look at 2013 suggests an underlying 'call' oscillating between 30-31 mb/d, with a low of 29.7 mb/d in 2Q13 and a high of 30.9 mb/d in 3Q13. Economic and oil demand growth recover after an anaemic 1Q12-3Q12, with demand growth settling near +1.0 mb/d y-o-y from 4Q12 onwards. As well as providing all of 2013's growth, non-OECD total demand overtakes that of the OECD from 2Q13 onwards, a phenomenon already observed in the refining sector, where non-OECD throughputs have surged ahead of OECD crude runs since 2010. The recent start-up of nuclear capacity in Japan potentially diminishes one of the remaining props for OECD demand seen in 2011/2012. Meanwhile, China may not be the +1.0 mb/d per year demand behemoth it was in 2010, but still generates 30-40% of expected annual growth. 

The recurrent supply-side problems that have been evident throughout 2011 and 2012 cause us to extend our mature oilfield contingency factor (effectively a downward adjustment) to 0.5 mb/d for 2013, acknowledging that the best laid plans of upstream companies can often go awry. Nonetheless, with non-OPEC supply potentially gaining 0.7 mb/d in 2013 (mostly from the Americas), and OPEC crude and NGL capacity rising by a further 0.5 mb/d combined, at this stage there looks to be enough supply flexibility to avoid prices enduring another category 1 climb…geopolitical surprises aside, that is. 



  • This month sees the roll-out of our detailed global demand forecast to 2013, and although an acceleration in growth is foreseen, the predicted pace of expansion remains relatively muted at 1.0 mb/d. Global oil product demand will average 90.9 mb/d for 2013, with non-OECD demand exceeding that for the OECD for the first time ever in 2Q13, a trend that is unlikely to be reversed. Non-OECD demand is forecast at 45.7 mb/d in 2013, 0.6 mb/d more than OECD demand.
  • Non-OECD Asia is forecast to lead the demand upside in 2013, gaining 2.9% to 21.5 mb/d, with strong momentum maintained by highly supportive demographic and economic developments. Large gains also envisaged in oil-rich-producing regions; with former Soviet Union and the Middle East offering respective growth forecasts of 2.4% (to 4.8 mb/d) and 2.5% (to 8.3 mb/d).
  • The exceptionally testing global economic backdrop, of the early summer months, has led to a reduction in underlying economic assumptions. GDP growth of 3.3% is now assumed for 2012 (down from the IMF's previous 3.5% projection), accelerating to 3.8% in 2013 (previously 4.1%).
  • The 2012 global demand outlook is modestly curtailed to 89.89 mb/d, 15 kb/d less than last month as the weaker economic backdrop marginally outweighs higher base data. Revised data submissions for 2Q12 resulted in an additional 245 kb/d of oil demand, to 88.8 mb/d, with Japan alone accounting for an extra 155 kb/d, to 4.2 mb/d, with replacement demand from the Japanese power sector the dominant contributor.

Global Overview

This month's report extends the outlook for global oil product demand to 2013, with growth of 1.0 mb/d (or 1.1%) forecast, taking total demand to an average of 90.9 mb/d. After two years of relatively flat growth - up by 0.7 mb/d in 2011 and an anticipated 0.8 mb/d in 2012 - the predicted 1.0 mb/d growth rate for 2013 is unmistakeably an acceleration, albeit a very modest one. Underpinning the predicted uptick in growth in 2013 is a combination of the strengthening economic backdrop and mildly lower oil prices, as incorporated in the prevailing rolling three-month average futures strip. Economic growth of around 3.8% is assumed for 2013, half a percentage point up on the downgraded 2012 growth rate of 3.3% (see Lower Economic Assumptions). The forward price curve, meanwhile, assumes an additional real price contraction of over 7% in 2013, marginally supporting demand.

Non-OECD oil demand is expected to rise above that for the OECD in 2013, with respective average consumption rates of 45.7 mb/d and 45.1 mb/d anticipated. We envisage the non-OECD's ascendancy to be confirmed in 2Q13, and to be sustained thereafter. Of the main product categories, gasoil led this reversal, as non-OECD gasoil demand overtook its OECD counterpart in 2Q09. OECD consumption of gasoline, naphtha and jet/kerosene demand however remain ahead of that in the non-OECD; OECD gasoline demand forecast at 13.8 mb/d in 2013 is 4.9 mb/d above non-OECD consumption, while the respective differences for naphtha and jet/kerosene are forecast at 550 mb/d and 810 mb/d. 

The outlook for oil demand in 2012 has been very slightly curtailed since last month, revised down by 15 kb/d to 89.89 mb/d. The reduction in the global growth estimate for 2012 has occurred despite higher base data, with the 2Q12 demand estimate now 245 kb/d higher than last month's report at 87.78 mb/d, and lower underlying economic projections (see Lower Economic Assumptions) proving decisive. Japan provided the majority of the base data revisions, with an additional 155 kb/d of consumption added to the 2Q12 estimate. Global oil demand growth in 2012 is thus forecast to remain relatively entrenched at around 0.8 mb/d or 0.9%. Non-OECD demand dominates from a growth perspective, up 1.2% or 1.2 mb/d, to 44.6 mb/d.

Lower Economic Assumptions

The exceptionally challenging macroeconomic backdrop endured these past two months has forced the IEA to curb the economic assumptions that underlie the demand model. Economic expectations have worsened from those contained in the IMF's April WEO which we previously deployed. Concerns are mounting on the sustainability of the euro zone, there has been a definite easing in China's economic impetus and the US outlook has weakened. This leads to a reduction of expected 2012 GDP growth from 3.5% to 3.3%.

With all else held equal, this weaker economic backdrop would curtail the 2012 demand projection. However, the negative demand-side impact has been diminished by a sharp upwards revision in base data for April (+275 kb/d) and May (+500 kb/d), both largely attributable to y-o-y changes in Japan. Global oil demand growth should thus remain buttressed at around 0.8 mb/d in 2012.

Economic growth will then likely strengthen in 2013, albeit not to the heady heights of 4.1% previously assumed by the IMF. Ongoing debt concerns across the developed world will likely see associated austerity measures curtailing government, business and consumer expenditure levels alike. A global economic growth rate of 3.8% is assumed for 2013, up by half a percentage point on the 2012 estimate but well down on the previous IMF assumption, which was conditional on a relatively strong economic recovery. (Note: the IMF plans to release updated forecasts in mid-July.) Driven by these revised economic projections, global oil demand growth of 1.0 mb/d or 1.1% is expected for 2013.


The preliminary data series for May depicts a strong improvement in OECD demand, with a near flattening in y-o-y growth apparently ending the previously heavily falling trend. May's 60 kb/d y-o-y decline is a sharp strengthening from the average 750 kb/d decline of the previous 14 months. Gasoline dominates the OECD change, as May's 45 kb/d correction was much shallower than the 14-month average of -340 kb/d. North America and, to a lesser degree, the OECD Pacific account for the most notable gasoline changes. Having endured a 14-month average decline of 210 kb/d, preliminary North American gasoline demand showed a 65 kb/d y-o-y gain in May.

A large portion of the recent relative improvement in the y-o-y data results from the artificially depressed levels of OECD demand in April/May 2011, a consequence of the Japanese tsunami. Whether the rebound evident in June 2011 demand is repeated this year remains questionable, given the weakening economy. All told, structural OECD demand decline is expected to become re-established for the rest of 2012, even if the pace of decline ebbs in 2013 with stronger economic growth.

North America

Tentative signs that the weakening North American oil demand trend is bottoming-out continued. Preliminary May data showed a 0.7% y-o-y contraction, after April's confirmed 0.8% drop, a relative improvement on the previous 12-month average of -2.1%. Reversing its previously lagging trend, gasoline led the recent North American improvement, with preliminary consumption growth of 0.6% estimated for May, to 10.4 mb/d, after April's 1.2% gain.

Preliminary estimates of US demand (excluding territories) in May depict a 0.7% y-o-y contraction, to 18.3 mb/d, whereas the 14-month average is -2.6%. Absolute gains in diesel (+1.5%) and LPG (+0.5%) led the way, as these products gained support from the burgeoning US light tight oil boom. Modest signs of life in the US housing market have emerged, which if they become entrenched could support a recuperation in domestic consumer sentiment and, in turn, the demand for oil.

Caution is maintained however concerning the short-term US demand outlook. Not only did consumption rise very sharply on a month-on-month basis in June 2011 (+5%), which could depress the y-o-y measure for June 2012, but also underlying economic sentiment has since deteriorated. From an oil consumption perspective, the all-important US manufacturing sector has fared particularly badly recently, a worrisome indicator for distillates in particular, as the Institute of Supply Management's Manufacturing index fell below the key 50-threshold for June. Such a sub-50 reading implies expectations of deteriorating manufacturing activity, the first time this has occurred since July 2009.

US consumption is forecast to remain in negative y-o-y territory through the very short term, before returning to a rising trend once again in the winter of 2012. Not only should the underlying economics marginally improve in the later stages of the year, but also an assumed resumption of more normal winter weather conditions are expected to support heating oil demand following the exceptionally mild climate of 2011/2012. For 2012 as a whole, US consumption of around 18.7 mb/d is anticipated, down 1.0% on the year. Demand is expected to level off at 18.7 mb/d in 2013, as the impact of continued US efficiency gains offsets the supportive influence from slightly stronger economic growth and lower (but nonetheless still elevated) prices.


The European demand outlook has similarly deteriorated since last month's report, as the ongoing economic malaise has been confirmed by weaker-than-expected recent oil data. Consumption in OECD Europe averaged 13.5 mb/d in April, 95 kb/d less than assumed in last month's report and a y-o-y decline of 0.5 mb/d or 3.4%. The preliminary series for May points towards a continuation of this 13.5 mb/d demand level, a further y-o-y drop of 0.5 mb/d.

Looking ahead, the weak economic backdrop is likely to continue, a sentiment encapsulated by the continued sub-50 euro zone Manufacturing Purchasing Managers' Index (PMI) for June. Demand faces a 3.4% drop to 13.6 mb/d in 3Q12, with the decline moderating in 4Q12 to 0.8%, partly a response to the sharp 5.1% decline seen in 4Q11. The predicted pace at which European demand falls eases back significantly in 2013, to -0.4%, taking demand in OECD Europe to 13.8 mb/d. This relative improvement is underpinned by a combination of a slightly stronger macroeconomic climate, lower prices and a flattening in efficiency gains amid suppressed investment in more efficient capital stock.

Germany consumed 2.3 mb/d of oil products in May, according to the preliminary data series, a y-o-y decline of 3.1%. Alongside downward-revised April data, consumption for the year as a whole is now forecast to average 2.4 mb/d, a decline of 0.9% on 2011 and a sharp deterioration on the previous projection of a 0.4% loss. Significantly lower gasoline estimates lead the reversal, with a projected decline of 0.9% now assumed for 2012, whereas previously a 0.5% gain was assumed; the revised series for April (-4.3% y-o-y, previously +0.7%) and May (-6.7%, previously -0.7%) forced a change in the German gasoline outlook. A modest 0.1% expansion is foreseen in 2013, supported by the slightly more robust macroeconomic environment.

The UK consumed roughly 1.6 mb/d of oil products in April, a modest 1.3% y-o-y decline and 55 kb/d higher than our earlier estimate. Jet fuel demand held up amid sterling exchange rates which are conducive to tourism. Despite retaining a degree of pessimism on the UK consumption trend for 2012, the projected decline rate has been scaled back to -2.8% (from -3.1% a month earlier), given the higher base data. Consumption should flatten in 2013 on the cautious assumption that the underlying macroeconomic environment picks up, with GDP growth of around 1.5% assumed.


The Japanese power sector continues to dominate the OECD Pacific demand story, as the sector short of nuclear capacity made strident efforts to garner alternative supplies, notably residual fuel oil and 'other' products, including crude for direct burn. Total OECD Pacific demand averaged 7.6 mb/d according to preliminary data for May, a rise of 8.4% on May 2011. Fuel oil (up 29.2%, to 0.8 mb/d) and 'other' products (+34.6%, to 0.6 mb/d) led the way, although big gains were seen elsewhere, as year-earlier consumption was depressed by the impact of the earthquake and tsunami.

Japanese demand in April and May has been revised up by 150 kb/d and 200 kb/d, respectively, on stronger demand for light and middle distillates due to the lagged reconstruction efforts. Oil demand in 2012 is now expected to grow by 4.1%, or 180 kb/d, to 4.6 mb/d, as power plant outages continue. Two nuclear plants, that provided 1 812 MW each, will restart in July, ameliorating power generation constraints. Summer oil demand for power remains a key uncertainty amid new thermal capacity additions and voluntary demand restraint.  Our outlook assumes either 'minimal nuclear' (i.e. 2 reactors) or 'some nuclear' (i.e. up to 6 reactors or 6 390 MW of generating capacity) coming back by end-2012. Incremental demand above 2010 levels reaches 380 kb/d in the 'minimal nuclear' and 350 kb/d in the 'some nuclear' case. The difference between the scenarios for 2H12 is estimated at 55 kb/d. Under our base case, 'some nuclear' model, Japanese oil product demand is expected to contract by 3% in 2013, or 150 kb/d, to 4.5 mb/d, as an assumed 15% to 20% of previous normal nuclear generation (23 TWh) returns to displace residual fuel and direct crude burning.

Exceptionally strong Korean demand in May, up 7.8% y-o-y to 2.2 mb/d, led to a 55 kb/d upgrade in our 2Q12 forecast compared to last month and a 10 kb/d increase in our projection for the year as a whole. South Korean consumption in 2012 is now forecast to average 2.3 mb/d, a gain of 1.1%. A modest decline of around 0.2% is then assumed for 2013, with the growth forecast curbed by government efforts to curtail oil demand (see 13 June 2012 OMR) and ongoing macroeconomic uncertainty. The big increase in Korean demand seen in May was reflected across most of the main oil products, although fuel oil (+22.8%) and naphtha (9.2%) posted particularly sharp y-o-y gains. Naphtha's May rise, alongside strong April data (+11.3%), confirmed March's (-1.3%) dip to be an anomaly caused by additional seasonal maintenance of petrochemical facilities. The still relatively strong industrial backdrop (+2.6% y-o-y) maintains support from the expanding South Korean petrochemical sector. 


Non-OECD demand remains the engine of global oil demand growth, with the latest preliminary estimates for May pointing towards a 2.5% y-o-y gain to 44.4 mb/d. Naphtha demand led the way, up 6.5% to 2.7 mb/d, as the Chinese petrochemical sector continues to expand rapidly on a y-o-y basis. Strong growth has also been seen in the key transportation markets, with gasoline demand up 2.8% (to 8.6 mb/d), jet/kerosene up 2.9% (to 2.7 mb/d) and gasoil up 3.0% (to 14.0 mb/d), although gasoil also received additional support from the still strong non-OECD industrial sector.

Non-OECD oil demand growth near-3% is forecast in 2012, to 44.6 mb/d. In comparison an OECD demand estimate of 45.3 mb/d is assumed. Further non-OECD growth of 2.5% is foreseen for 2013, taking total non-OECD demand to 45.7 mb/d, while the respective estimate for the OECD is 45.1 mb/d. As already noted, this marks the volumetric ascendancy of non-OECD demand over that for the OECD, a trend that is unlikely to ever be reversed. Transportation fuels are expected to continue to drive growth, albeit at a moderated level in the light of the challenging economic backdrop now faced by most non-OECD countries (in terms of weaker export potential) and some, albeit slow, progress in reducing subsidies.


The Chinese apparent demand outlook for 2012 has been revised marginally upwards, despite continued signs of weaker underlying economic conditions, as historical data have tended to be revised higher. Amended April statistics, for example, were 90 kb/d higher than the preliminary numbers, while estimates for May are 10 kb/d above last month. Nevertheless, demand growth has eased back sharply recently, from the average expansion of 12.7% seen in 2010, with y-o-y growth of 0.3% now assumed for April and 0.8% in May.

Near-5% growth is forecast to resume in the second half of 2012, leading to an average annual expansion in oil demand of 3.9%, amid cautious optimism that the Chinese authorities will provide sufficient stimulus measures to support such a growth rate. July's interest rate cut (the second successive monthly reduction); a large infrastructure spending programme; and massive injections of money into the financial markets tend to support this view. Economic growth of 8.2% is assumed for 2012, accelerating to 8.5% in 2013. Oil growth could then ease back to a more sustainable 3.7% in 2013, taking total Chinese demand to 10.1 mb/d, as many of the aforementioned government-led measures are forecast to recede.

Transportation and industrial fuels such as naphtha are forecast to provide the greatest upside momentum to Chinese demand in 2013. Gasoil/diesel leads the way, with projected 2013 demand up 3.5% to 3.5 mb/d, on strong growth in both transport and industry. Naphtha, meanwhile, should see demand growth of around 5.5% in 2013, to 1.0 mb/d, as the Chinese petrochemical industry makes further competitive inroads against international rivals outside of North America.

Other Non-OECD

The Indian outlook for 2012 has been raised and demand is foreseen accelerating still further in 2013, as government-induced plans to raise infrastructure spending will likely support stronger growth for commercial fuel usage. These gains come on the back of the surprisingly strong preliminary demand numbers for May, which showed a 5.4% y-o-y gain, or 110 kb/d more oil than we had assumed last month. Consumption of unsubsidised gasoline bucked the otherwise strongly rising demand trend, falling for the first time since November, down 4.6% y-o-y to 365 kb/d. India is forecast to consume an average of 3.6 mb/d in 2012, up 3.3% on the year earlier. Growth should then accelerate to 3.5% in 2013, to 3.7 mb/d, as moves to reduce subsidies remain impeded by inflationary concerns and political opposition.

Demand in the other Asia region, which includes India but not China, has been revised up marginally, by 5 kb/d in 2011 and by 50 kb/d in 2012, following updates to the base data for Indonesia. Total other Asian product demand in both 2012 and 2013 is forecast to grow by an average of 2.2%, or 240 kb/d, to 11.1 mb/d and 11.4 mb/d, respectively. In both years, gasoil/diesel, motor gasoline and LPG are expected to drive demand growth in the region. Transport fuels' growth remains strong, supported by the region's ongoing economic strength, lower international products' prices and persistent governmental subsidies schemes, most notably in India and Indonesia. Moves in Thailand to phase out 91 RON gasoline by 1 October have been confirmed, despite concerns that such a move would mean that nearly 1.1 million vehicles would be running on sub-optimum fuel. The temporary closure of two Formosa Petrochemical cracking units in Taiwan disrupted naphtha demand in June/July, although full consumption should resume once again later in July.

Latin American demand has been revised down by 40 kb/d in 2011 and by 70 kb/d in 2012, following historical data revisions for Venezuela. Total product demand in 2012 is seen growing by 2.4%, or 160 kb/d, to 6.7 mb/d, led by jet/kerosene, residual fuel and motor gasoline and by 2.1%, or 140 kb/d, to 6.9 mb/d in 2013 driven by LPG, jet/kerosene and gasoil/diesel. Brazil accounts for almost 40% of Latin American demand growth in 2012 and 2013, especially in gasoil/diesel and jet/kerosene, on the back of vehicle sales and air travel. Argentina is also experiencing a slowdown of vehicle sales, after record highs in 2011, on the back of its economic deceleration. Stronger demand for LPG and residual fuel oil would not be a complete surprise as Argentina struggles to secure LNG imports for power plants and industry.

Middle Eastern demand is expected to grow by 2.4% in 2012, or 190 kb/d, to 8.1 mb/d, with gasoil/diesel, motor gasoline and residual oil providing particularly strong gains. Oil product demand is seen growing by a further 2.5% in 2013, or 200 kb/d, to 8.3 mb/d, driven higher by LPG, gasoil/diesel and motor gasoline. Saudi Arabia accounts for almost 60% of demand growth in 2013 as the Kingdom continues to heavily subsidise transport fuels and provide cheap petrochemical feedstock. Direct crude oil burn during 3Q12 is expected to reach 770 kb/d on top of 310 kb/d of residual fuel oil demand, amid the seasonal peak in electricity demand for summer cooling. Iran, on the other hand, is seen contracting as slightly higher transport fuel prices dent demand and economic activity slows on account of the oil embargo and economic sanctions. Iranian demand is expected to contract by 4.1% in 2012, to 2.0 mb/d, and by a further 4.0% in 2013; any changes in the embargo/sanctions structure impacting on demand. UAE and Qatar are expected to accelerate petrochemical demand for light distillates in 2013, as expansions in ethane cracker capacity boost operations with access to cheap feedstock.

FSU demand has been trimmed in 2011 and 2012, following revisions to Ukraine and Kazakhstan. Total product demand in 2012 is now expected to grow by 3.5% or 160 kb/d to 4.7 mb/d led by 'other' products, transport fuels and LPG. Total product growth of 2.4% is forecast for 2013, reaching 4.8 mb/d, with big gains in 'other' products, LPG and gasoil/diesel. Russia accounts for more than 85% of demand growth, especially in 'other' products and gasoil/diesel. Industrial oil demand in this region will remain susceptible to any sharper-than-expected European economic slow-down.



  • Global oil supply fell by 0.5 mb/d month on month (m-o-m) to 90.4 mb/d in June, with non-OPEC liquids production accounting for 75% of the decline. Compared to a year ago, global oil production stood 2.0 mb/d higher, all of which stemmed from increasing output of OPEC crude and NGLs.
  • OPEC crude oil supplies fell by 0.1 mb/d in June to 31.8 mb/d. Angola and Iran posted the largest declines and offset near-record production of 10.15 mb/d from Saudi Arabia. Preliminary estimates for imports of Iranian oil are stand at 1.9 mb/d for June, around 0.5 mb/d below 4Q11 levels.
  • OPEC crude capacity growth is expected to slow to 245 kb/d in 2013, after robust expansion of 750 kb/d in 2012 derived from recovering Libyan capacity. Iraq, UAE, and Angola drive next year's growth, offsetting an assumed depletion of Iran's productive capacity if sanctions remain in force. OPEC NGLs average 6.5 mb/d next year, after growth of 0.4 mb/d in 2012 and 0.3 mb/d in 2013.
  • Non-OPEC supply fell by 0.4 mb/d in June from the prior month and by 0.1 mb/d compared to June 2011. Labour strikes, as well as Tropical Storm Debby and planned Gulf of Mexico maintenance, reduced non-OPEC supplies. Coupled with a reduced 2012 processing gains estimate, non-OPEC supplies are now forecast to grow by 0.4 mb/d in 2012, or 0.2 mb/d lower than last month's assessment.
  • Growth should accelerate to 0.7 mb/d in 2013, to average 53.9 mb/d, largely from Canadian oil sands, US light tight oil, and Brazil's Campos and Santos basins.

All world oil supply figures for June discussed in this report are IEA estimates. Estimates for OPEC countries, some US states, and Russia are supported by preliminary June supply data. The non-OPEC and OPEC supply overviews this month focuses on the roll out of our forecast to 2013, with discussion of key developments in production.

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. After heavy outages seen in 2011 and 2012, this adjustment now totals ?500 kb/d for non-OPEC as a whole, with most downward adjustments focused in the OECD.

OPEC Crude Oil Supply

After an eight-month ramp-up in output, OPEC crude oil supply eased in June, off by 140 kb/d to 31.77 mb/d. Angola and Iran posted the largest declines, offsetting near-record production from Saudi Arabia. Nonetheless, relatively higher output from some OPEC members continues to provide a cushion against reduced supplies from Iran in the wake of international sanctions. For reference, Saudi Arabia last produced at the 10 mb/d-plus level more than three decades ago in order to help compensate for sharply lower Iranian output after the revolution.

As expected, OPEC ministers agreed to maintain the collective production target of 30 mb/d at their 14 June meeting. The wording of the official communiqué suggested a compromise was reached among the various members, and rather than announcing a simple rollover, said "countries should adhere to the production ceiling of 30 mb/d." In reality, production has been running 1.6-2.0 mb/d above the target in recent months.

Most observers expect the producer group to keep output at recent higher levels for now. Calls for an emergency meeting by some price hawks such as Iran and Venezuela have been paid little heed by OPEC's other members, especially as Brent prices have rebounded to around the $100/bbl mark. The 'call on OPEC crude and stock change' for 3Q12 is raised by 0.3 mb/d, to 31.2 mb/d, due to continued non-OPEC supply outages. As a result, the call for the second half of 2012 is expected to increase by around 1.1 mb/d from 1H12, to an average 31 mb/d. The average 2012 call has been raised by 0.2 mb/d to 30.5 mb/d, with next year's call expected to average a similar level.

OPEC's effective spare capacity in June was 2.35 mb/d, down from 2.38 mb/d in May. OPEC's sustainable capacity is expected to average 35.4 mb/d by 4Q12, an increase of 550 kb/d from current levels. Looking out through 2013, production capacity rises by 245 kb/d year-on-year, with increases from Iraq, UAE, Libya and Angola only partially offset by sharply lower Iranian capacity (See 'OPEC Crude Production Capacity On Course to Rise in 2013').

Saudi Arabia ramped up production by 150 kb/d to 10.15 mb/d in June, with the higher volumes likely earmarked for domestic use at power and desalination plants for the peak summer demand period. However, tanker data suggest output may have eased again in July on reduced demand from Saudi Aramco's US Gulf Coast joint venture Motiva refinery following the unexpected shut down of the new 325 kb/d crude unit. It is still unclear when the idled refinery will be brought back online. Saudi Arabia has increased exports to the US sharply this year to meet new demand from Motiva. The sudden breakdown likely means Saudi Aramco either found other buyers to take the crude or it was placed in storage tanks at the refinery. In the event, exports to the US are expected to be lower in July. There were also reports in June that the Kingdom has been testing the re-opened 1.65 mb/d IPSA crude pipeline, which feeds Yanbu on the country's Red Sea coast, with a view to diversifying exports should Iranian threats to disrupt shipments transiting the Strait of Hormuz materialise.

Iranian output is estimated to be flirting near 22-year lows at 3.2 mb/d for June, off 100 kb/d from May levels. Industry sources reported that volumes plunged in June, but the fall is not supported by shipping data. Tanker reports show imports rebounded sharply in June, led by China, to 1.95 mb/d compared with an estimated 1.42 mb/d in May. The higher June import data shows an eleventh-hour surge in tanker arrivals to China, up by 300 kb/d from May to 810 kb/d, with the bulk of the cargos arriving in the last 10 days of the month. Iranian trade data for June are preliminary and subject to revision once final import and custom data are available. Press reports indicate that some Iranian vessels have turned off their communication beacons, which is making it more difficult than normal for analysts to track crude shipments. Equally challenging is assessing Iranian crude held in floating storage, but latest data suggest volumes were only slightly higher at end-June, at an estimated 42 mb (see Freight).

While imports of Iranian oil in June remained robust, there are numerous indications volumes could fall significantly in July now that the tougher US financial sanctions on 28 June and the EU oil import ban on 1 July came into full force. That said, the US government granted China a waiver from sanctions in late June, which now brings the total to 20 countries deemed to have significantly reduced imports from Iran. Essentially, the waivers enable countries to continue importing crude from Iran at the lower levels provided payment mechanisms and shipping insurance can be obtained. So far, Japan and India have set-up sovereign insurance programmes that will allow their companies to continue buying Iranian crude. The National Iranian Tanker Company (NITC) is offering to deliver crude supplies, but agreeing on terms with buyers has proved problematic. China reportedly planned to lift 500 kb/d in July from Iran but balked at the deal when NITC set exorbitant freight rates. The payment dispute has reportedly led to a jump in the number of NITC tankers storing crude on the water in July.

Iraqi supply was down 39 kb/d to 2.91 mb/d in June from a revised 2.94 mb/d for May. Crude oil exports fell just under 50 kb/d to 2.41 mb/d. Shipments from the northern Mediterranean port of Ceyhan accounted for 48 kb/d of the decline, at 318 kb/d. Exports from the Kurdish region, which normally flow into the Kirkuk stream, remain halted due to the long-running dispute over payment issues. Southern exports of Basrah crude were largely unchanged at 2.09 mb/d. Around 430 kb/d, or nearly 20% of exports, were shipped via the new SPMs off Basrah.

Kuwaiti production edged up by 20 kb/d to 2.76 mb/d while output from UAE posted a smaller increase of 10 kb/d to 2.66 mb/d. The UAE is readying a new export pipeline in early July, which will allow it to bypass the Strait of Hormuz. The 1.8 mb/d pipeline will enable the UAE to export 60% of its exports from the Fujairah shipping terminal. Initially, the pipeline is forecast to operate at around 1.4 mb/d, carrying oil from the onshore Habshan fields. Offshore fields could be linked in later.

Angolan production fell to the lowest level in a year due to planned and unplanned maintenance work. June output is assessed at 1.65 mb/d, off by 155 kb/d from May levels. Output from both the Girassol FPSO and the Palanca terminal were reduced due to maintenance work, while technical problems at Greater Plutonio curtailed output there. Production should partially recover in July once maintenance work is completed. ExxonMobil announced it started production from the Kizomba Satellites Phase 1 project, which involves the development of 18 wells with subsea tiebacks to existing infrastructure.

Libyan production in June was down by 10 kb/d to 1.41 mb/d, constrained due to loading delays and storage problems. Output fell further in early-July following the forced shut-in of around 300 kb/d due to protests at oil facilities ahead of the 7 July election. Protesters demanded greater autonomy for Libya's eastern region, which was long dominated from the former Ghaddafi regime in Tripoli. Oil exports from three of the country's key terminals, Es-Sider, Ras Lanuf and Brega with a combined export capacity of just under 700 kb/d were halted, but an end to protests on 8 July was accompanied by resumed operations.

OPEC Production Capacity On Course to Rise in 2013

OPEC's crude oil production capacity is expected to rise in 2013 by a net 245 kb/d, to 35.03 mb/d, with increases by Iraq, the UAE, Libya and Angola partially offset by sharply lower Iranian capacity. The 2013 increase lags more robust growth in capacity this year of around 750 kb/d, which largely reflects the recovery in Libyan output from low 2011 levels.

Growth in OPEC capacity has been revised down by a sharp 1.36 mb/d from the December 2011 report, with Iran accounting for just under 60% of the downward adjustment. Baseline revisions to Qatar and Algeria capacity levels stemming from new data accounted for a further 440 kb/d.

Indeed, amid more rigorous international sanctions enacted against Iran over the country's nuclear development programme this year, we assume production capacity will fall by around 570 kb/d to an average 2.67 mb/d in 2013. The outlook assumes there is no positive resolution reached in the current round of discussions and that sanctions continue through 2013. The stiffer banking regulations and shipping insurance constraints will continue to lead to reduced exports and ultimately force Iranian officials to mothball oilfields though it is impossible to predict the pace. Of OPEC's 12 members, four are expected to post significant capacity gains in 2013. Iraq, the UAE, Libya and Angola together are expected to add just under 1 mb/d net next year.

  • Iraq's production capacity is slated to increase by 440 kb/d to an average 3.38 mb/d in 2013. Annual levels mask a significant upward trend, with capacity rising from 2.99 mb/d in 1Q12 to 3.74 mb/d by 4Q13, or an increase of almost 750 kb/d over the eight quarters.
  • Expansion of capacity in the UAE continues apace, rising 220 kb/d to 3.04 mb/d on average in 2013.
  • Libya posts a strong recovery over the period, rising from 1.28 mb/d in 1Q12 to 1.62 mb/d by 4Q13.
  • Angolan capacity is set to rise by around 145 kb/d to an average 1.98 mb/d in 2013. The 150 kb/d PSVM project is the next big project scheduled to be brought online, in 3Q12.
  • Saudi Arabia has brought forward the 900-kb/d Manifa project, with the first phase of production expected onstream in 2H13. However, over the forecast period Saudi capacity is forecast to decline by a marginal 25 kb/d, to 11.86 mb/d, but is slated to rebound as Manifa ramps up in 2014.

The Non-OPEC Outlook in 2013

Non-OPEC supplies should increase by 700 kb/d in 2013 from 53.2 mb/d in 2012. Whereas growth in non-OPEC supplies in the 1990s and first half of the last decade was centred in the FSU, the majority of the growth this decade has been and will continue to be oriented towards the Americas. With quickly declining offshore Brazilian production, the major source of growth outside OPEC countries will be the US and Canada. Around 40% of non-OPEC supply growth comes from additions to crude supplies (including light tight oil), 25% comes from natural gas liquids, and 20% comes from non-conventional production like Canadian synthetic crude. Non-OPEC deepwater production, mostly centred in the Gulf of Mexico and Brazil, should grow by around 300 kb/d (20% of the total), and selected North American light tight oil plays grow by 430 kb/d. A major project list is displayed at the end of the section.

Much of the 2013 growth profile for non-OPEC supplies also depends on a resumption of flows from Sudan/South Sudan, Yemen, and Syria. These countries accounted for total production of around 1.0 mb/d. We assume only a slight improvement in output from these countries (mostly from Yemen, South Sudan, and Sudan), and will revise upwards if concrete information merits. Also, the potential for labour unrest in all countries during periods of high prices remains a threat to output in 2013. Finally, evidence from 2011/2012 points to ongoing problems with mature infrastructure, largely in the OECD countries. As a result, our base case assumes non-OPEC supplies are reduced by 0.5 mb/d in 2H12 and 2013 (compared with the 0.2 mb/d adjustment initially assumed for 2011-2012). The new reliability factor does not include other downward geopolitical adjustments made for South Sudan, Yemen, and Syria.

Revisions to Non-OPEC Supply Levels

Since last month, there have been three major changes to the historical and 2012 assessments for non-OPEC supply that reduce the 2012 annual growth rate by 0.2 mb/d to 0.4 mb/d in 2012. First, new annual data has been incorporated, which reduces baseline estimates for many non-OECD countries including Vietnam, Uzbekistan, and China.  Offsetting these, new annual data suggested upwards revisions for India, the Phillipines, Argentina, Egypt, and Gabon. Monthly government data from Australia now also includes the Pyrenees and Mutineer/Exeter fields that had not been included in monthly data submissions and in publicly available data, which results in a 20 kb/d upwards revision there from early 2010. Second, global processing gains have also been reassessed in this outlook for 2008-2013 based on the IEA's downstream model. These have reduced non-OPEC liquids supply by 60 kb/d in 2011 and a substantial 130 kb/d in 2012. Finally, labour strikes in Norway that will impact summer supplies contribute to a reduction in 2012's output by 140 kb/d to 1.9 mb/d, around 50 kb/d worse than last month's estimate.


North America

US - May preliminary, Alaska actual, other states estimated:  US oil production fell in June by around 110 kb/d to 8.7 mb/d, which is nonetheless around 720 kb/d higher than year-earlier levels. Production fell in June due to pipeline maintenance in Alaska, the impacts of Tropical Storm Debby, and maintenance at other Gulf of Mexico (GOM) facilities. This was offset in part by the start of BP's Galapagos group of fields in GOM, that feed into the Na Kika complex. Tropical Storm Debby reduced GOM output by around 40 kb/d in June, and for 3Q12 we assume that such events could impact GOM production by around 90 kb/d. Light tight oil supported 2Q12 production growth in the Continental US, with North Dakota's Bakken and Eagle Ford output posting 90% annual increases from 2Q11.

US - 2013:  In 2013, light tight oil (LTO) supply from selected plays should reach 1.6 mb/d, a growth of 0.4 mb/d from 2012, and leads to similar growth in total US crude and condensate output to 6.6 mb/d. Additional production volumes will be included in this supply category as we obtain well and field-level monthly data from other tight formations, especially the emerging Texas plays.  Production costs vary widely across light tight oil plays, and producers that sell oil at a discount to WTI due to transportation bottlenecks may, at the margin, reduce activity. There is therefore a possibility that the Bakken's enormous growth rate in 2012 will abate somewhat in 2013 because geography and bottlenecks will crimp producer netbacks. However, Rystad Energy asset analysis shows that around 85% of the cumulative production is economic as long as realized Bakken oil prices stay above $60/bbl. The current Bakken to WTI spread is $10-20/bbl depending of the location of the sales point and means of transport.  The North Dakota Bakken is expected to grow by 200 kb/d to average 560 kb/d in 2012, but should increase by around 130 kb/d in 2013. The headline story for LTO in 2013 is bound to come from Texas' Eagle Ford and from Permian basin plays like the Bone Springs, Austin Chalk, Spraberry, and Wolfcamp. These carbonate and sandstone plays, which also spread to New Mexico and to east Texas, should raise Texas' long-declining output to over 2 mb/d, a yearly average not seen since 1988. 

Canada:  Canadian oil production is expected to breach the 4 mb/d marker in late 2012, and new in situ and mining bitumen projects are forecast to raise Canada's oil output by 280 kb/d to 4.1 mb/d in 2013. Imperial's Kearl mining and Suncor's Firebag SAGD projects are expected to be the largest contributors to output growth in 2013. CNRL's Horizon mining project did not fare well in 2012, producing an average of 80 kb/d (around 30 kb/d less than capacity), and we do not expect that 2013 will be much better due an assumption of maintenance turnarounds. Canadian LTO, centred in Alberta's Cardium and Saskatchewan and Manitoba's Bakken/Three Forks play, is also expected to post a slight annual gain to 220 kb/d in 2013. Despite high levels of drilling, we assess that producers still have a lot to learn about the reservoirs and how best to produce from them. Producers have not found the overpressuring that has been predominant in the North Dakota Bakken, which has contributed to its astronomical growth.

North Sea

In 2011 and 2012, the North Sea suffered from a host of production setbacks. With hindsight, we now assume that these problems, which reduced Norway's and the UK's output by around 200 kb/d on average in 2011 and 2012 will persist to a degree in 2013. Consequently, we have now doubled the reliability factor for Norway and the UK to total -150 kb/d in 2013. 

UK offshore crude production in April remained at the prior month's levels at around 950 kb/d, but is expected to fall by over 200 kb/d by July due to the Elgin/Franklin leak and maintenance. Nexen is planning to take out the 200-kb/d Buzzard field for maintenance at the end of the summer meaning Forties supplies alone (including the Eastern Trough) should average only 280 kb/d in 3Q12, around 25% less y-o-y and the lowest level in at least 20 years. UK offshore crude production in 2H12 should average 780 kb/d, 14% lower than 2H11.  Looking back at 2011 and 2012, the Buzzard field's gas compressors kept production at reduced rates for months, a storm damaged the Gryphon field and associated infrastructure, and the Gannett field leaked. So far in 2012, the Elgin-Franklin field also sprung a leak and reduced output by 70 kb/d, and Buzzard's monthly performance remains around 30 kb/d below its design capacity. Lingering technical problems and unplanned maintenance at smaller fields contributed to unplanned maintenance levels of around 120 kb/d in 1H12, around 20 kb/d higher than the prior year. We expect the Huntington and Forties Alpha projects, as well as the return of the Elgin-Franklin and Shearwater fields, will mitigate a median decline rate of 23% elsewhere in 2013, keeping 2013's levels only 4% (30 kb/d) lower than 2012 at 840 kb/d.

In addition to the strike in Norway (see text box below), unplanned outages at Norway's Gullfaks, Snorre, and Ormen Lange are reducing output. Norway's Skarv field, new drilling at Ekofisk and Eldfisk, as well as Valhall and Norne should however sustain Norway's oil production at 1.8 mb/d in 2013, which is around 3% (60 kb/d) lower than 2012. An average decline rate of roughly 17% is assumed for mature fields.

In the Nick of Time:  Widespread Worker Strike Averted But Supplies Still Reduced

Norway's Labour Ministry intervened at the last minute in a dispute between oil and gas industry union workers and employers. Workers had already been striking since mid-June over demands from the trade unions for an early retirement scheme from the age of 62. In addition to prevailing action affecting 200 kb/d of liquids, the Norwegian Oil Industry Association (OLF) then announced a lockout for all 6 515 workers to take effect from Monday 9 July that would have halted all production in Norway's Continental Shelf (NCS) for the first time since 1986. Such an outage would have threatened Norway's reputation as a reliable supplier of gas to Europe and oil to world markets.  The Labour ministry also justified its intervention due to the economic consequences of a shutdown on Norway's economy, which accounts for 21% of GDP and almost half of Norway's exports.

The strike already shut in around 160 kb/d of crude and 40 kb/d of natural gas liquids as various union personnel were called out on strike at the Oseberg and Heidrun facilities. IEA estimates indicate the strikes likely curbed oil production by almost 150 kb/d in June and by 180 kb/d in July. Production flowing to the Oseberg Field Centre includes output from the Oseberg, Veslefrikk, Brage, Tune and Huldra fields. According to the NPD, around half of the condensate from the Troll field flows through this system and is delivered via Oseberg to the Sture terminal. The terminal, Oseberg Field Centre, and Heidrun facilities are not expected to be operating normally again until the end of this week. Loadings for July have already been deferred, and Norway's oil production is expected to fall by 410 kb/d to around 1.6 mb/d in July from May. That is the lowest level from the NCS since August of 1991, when the Sleipner platform sank and caused a seismic event registering 3.0 on the Richter scale. The reduction in Oseberg loadings at the Sture terminal will also temporarily bring BFOE production to record low levels of only 600 kb/d.

The last lockout in the offshore sector occurred in April 1986, shutting down production on the Norwegian continental shelf completely, and lasted for three weeks before the government intervened. Norway's output was also threatened last month by a Baker Hughes worker strike. The strikes affected drilling and maintenance, but not production, at twelve rigs. Government workers, including Norwegian petroleum sector boat pilots, also struck in late May and early June.

With the government in control of the negotiations, the National Wages Board will decide how much the unions will get and press reports indicate a forced arbitration will likely take place in a few weeks.


Latin America

Brazil—May actual:  Crude production tendered a small increase in May and remained at around 2.0 mb/d. Campos basin production fell by around 40 kb/d, and Santos basin production increased by 10 kb/d. Brazil's crude output is on track to increase  by around 1% y-o-y in 1H12 to 2.1 mb/d, with growth expected to rebound to 3% in 2H12 and suggesting overall 2012 growth of 1.8% to 2.1 mb/d. Half of Brazil's production derives from six fields, : Albacora, Albacora Leste, Marlim Leste, Marlim Sul, Marlim, and Roncador which, including maintenance, have seen output decline by an average 9% in the last year, taking into account planned maintenance.

Brazil - 2013: Petrobras recently revised its production targets for 2016 to 2.5 mb/d, from an earlier 3.1 mb/d for 2015. Analysts assess that Petrobras' new CEO seems to hold a more measured and realistic view on project timelines than her predecessor, which should make the company's targets more realistic. The company acknowledged that project slippage has occurred as Asian-built rigs have been delivered late. Yet despite an announced effort to reduce costs and get tough with suppliers, government-mandated local content restrictions will continue to challenge the company's execution strategy and its profitability. Supply gains will come from improved efficiency at existing Petrobras facilities in the Campos Basin, incremental output from the Lula field, and project additions at the Papa Terra, Parque das Baleias, and Sapinhoa fields. We expect fewer delays in the near term projects because much of the infrastructure needed this year and in 2013 is already in Brazil. Finally, the oil supply forecast for 2013 of 2.4 mb/d (a growth of 140 kb/d) assumes a late 2012 return for the 70-kb/d Chevron-operated Frade field.

Argentina - May actual:  Oil production in Argentina remained at around 680 kb/d in May, though it is expected to drop by an average of 50 kb/d in June and July. Two weeks of labour strikes at the Pan American Energy-operated Cerro Dragon field in the Chubut province shut in around 95 kb/d of crude oil. 


Production from non-OECD Asian countries Malaysia, Thailand, and Vietnam has surprised to the upside in the last six months. In Malaysia, production is expected to be around 80 kb/d higher in 2012 at 660 kb/d than assessed in December 2011. Petronas has been successful at improving its recovery rates, and the company is planning to work with IOCs including Shell and ExxonMobil on developing EOR at the Tapis, Guntong and Irong Barat fields. In 2013, the delayed startup of the Gumusut field should keep liquids production slightly above 2012's levels of 660 kb/d. Production is expected to fall by around 20 kb/d to 890 kb/d in India in 2013 as mature field decline is offset by the Aishwariya and Baghyam fields. Indonesian output declined at an annual rate of around 4% over the last decade, and despite Government forecasts to the contrary, output is expected to decline by around 7% to 870 kb/d in 2012. Overall decline in 2013 eases only slightly (-6% to average 810 kb/d) due to Chevron's Duri steamflooding. In Vietnam, oil production is expected to fall by around 10 kb/d to 320 kb/d, but will be supported by increasing output from existing fields. Production from a new Te Giac Trang platform began in early July and should increase production by around 10 kb/d. Also, we expect some additional crude and condensate output from the Su Tu Trang and Chim Sao fields in the second half of 2012 and in 2013.

Former Soviet Union

Russia—May actual:  Crude production remained at around 10.0 mb/d in May, roughly 1% higher than May 2011. Taking a step back, Russia's liquids production grew by around 1.4% in 1H12 at around 10.7 mb/d including output growth from gas processing plants and gas condensate (which combined total 0.7 mb/d). The forecast for 1.0% growth in 2012 has remained robust over the last six months as high prices and preferential tax breaks have encouraged producers to increase recovery rates from brownfield production. New fields have also contributed around 110 kb/d of new production in 2012, largely Rosneft's Vankor field and TNK-BP's Uvat group.  Notably in 1H12, Lukoil has stemmed the decline to almost 0% at its Western Siberian fields compared to an average decline of -4% for 2010 and 2011.

Russia - 2013:   We expect that producers have been able to benefit from the low hanging fruit in 2011 and 2012, but that they will be harder-pressed in 2013 to show comparable gains. The government is considering further changes to the tax regime via a profit-based rather than a revenue-based system and via additional fiscal support for low permeability and offshore oil. These new policies could dramatically affect Russia's outlook in the medium term, but they are unlikely to have a dramatic effect in 2013. Broadly speaking, producers are likely to revisit the brownfield growth profile of 2009 in 2013, lowering liquids output by around 0.4% (-50 kb/d) to 10.7 mb/d. The greenfield increments are small, and companies have not documented incremental additions to new production. Rosneft's Vankor field is expected to reach around 500 kb/d in 2013. Sakhalin Island production, as well as TNK-BP's legacy production is forecast to drop to pre-2011 levels, and in the case of Sakhalin 1, decline even further.

Azerbaijan - 2013:  After peaking at 885 kb/d, the ACG fields have begun to decline, and no additional production is expected to boost Azerbaijan's oil output levels until the West Chirag field comes online in 2014. Some of the decline in 2012 has been due to maintenance, so a slight rebound is expected in 2H12, but output is still expected to fall by around 2% in 2013 to average 720 kb/d. The BP-led multi-platform project accounts for around 80% of Azerbaijan's crude output of  890 kb/d.

Kazakhstan - 2013:   Despite the government and the North Caspian Operating Consortium's statements that production at the 45oAPI Kashagan field will begin in December 2012, observers admit that weather will likely delay the commercial start until the summer of 2013, after which the field will begin its climb to around 375 kb/d. Production from Phase 1 facilities will only reach 450 kb/d after Phase 2 development is complete. The consortium has not yet determined a mutually agreeable path forward for the second phase. Exports could flow via the CPC pipeline, the Atyrau-Samara pipeline in the Transneft system, or via Atasu-Alashankou to the east. Kazmunaigas and Shell will jointly manage production operations of all phases through the North Caspian Production Operations Company. Due to uncertainty about the initial volumes, we conservatively forecast that the field contributes only around 30 kb/d to Kazakhstan's output in 2013, and major additions would come in 2014. At the Karachaganak gas and gas condensate field the KPO consortium members reached a resolution with the government on their cost and labour dispute. The government received a 10% equity stake as of June 30, 2012, and plans to exercise greater cost control on Phase 3 development. Therefore, growth of around 30 kb/d in 2013 from Karachaganak, coupled with planned maintenance at Tengiz and steep decline rates at KMG's fields in the Mangistau region are likely to keep Kazakhstan's output at around 1.6 mb/d in 2013.

FSU net exports fell by 600 kb/d to 9.1 mb/d in May from April's lofty 9.7 mb/d, with the fall driven by a 500 kb/d contraction in crude shipments. Exports from southern outlets bore the brunt of this drop, with flows of BTC blend shipped via Ceyhan cut by 100 kb/d and combined flows from the Black Sea 300 kb/d lower than in April. An overhang of light, sweet crude in the Mediterranean contributed to this decline, with exporters reluctant to ship crude after prices for CPC and BTC blends weakened to their lowest level in nearly 18 months.

In the Baltic, the continued ramping up of Ust Luga, which shipped 375 kb/d in May (+130 kb/d m-o-m), partially offset maintenance at Primorsk (-120 kb/d) and the halting of shipments to Gdansk. Druzhba volumes have recovered to 1.15 mb/d although they remain below 4Q11-1Q12 highs. All destinations received increased flows compared to April with the exception of the Czech Republic, which reportedly received alternative seaborne supplies via the IKL pipeline. All in all, crude exports via the Transneft system stood at 4.4 mb/d, lower than April's record high, but 200 kb/d higher than a year ago largely due to the extra flexibility in the Baltic. Loading schedules for June indicate that FSU crude exports are likely to recover as supplies through the CPC and BTC pipelines rise whilst the ramp up of Ust Luga continues. Despite recent floods in Russia's southern Krasnodar region and the temporary closure of Novorossiysk, July exports from the port are expected to remain unaffected due to excess capacity.

FSU product exports amounted to 2.7 mb/d in May, 150 kb/d lower than April as buoyant domestic demand combined with a seasonal peak in refinery maintenance kept more light and middle distillates in the region. Compared to a year ago, product shipments were off 400 kb/d, largely due to last year's changes in the Russian fiscal system and refiners preferentially supplying the domestic market so as not to risk a repeat of last year's light product shortages.

Middle East

Crude and condensate production from Oman fell 10 kb/d to 900 kb/d in April, and a PDO dispute with contractors for around a week at the end of May was expected to have stunted otherwise-increasing EOR production. In 2013, Oman's production is expected to increase by around 30 kb/d on average to 940 kb/d on the assumption that PDO can successfully enhance recovery with its Harwheel EOR project. The latter project likely started in late April 2012 and will add around 40 kb/d by 2014. The project was delayed by around a year, due to the rising costs and infrastructure constraints that PDO and other Omani producers including Oxy face in bringing on tertiary recovery projects.

Despite news that the Marib pipeline in Yemen is expected to open again in July, we assume that output will remain threatened by Al-Qaeda and other saboteurs for the remainder of the year, reducing output by 60 kb/d from 2011 levels. The 270-mile line used to bring about 120 kb/d of oil from the Marib and Shabwa areas. We assess that some security improvements will be made, leading to a slight uptick in production of 20 kb/d to 190 kb/d in 2013. 

The other major unknown for 2013 is the political fate of Syria. While impossible to predict the outcome, a return to pre-September 2011 production rates of 350 kb/d is deemed highly unlikely. Repeated bombings of energy infrastructure in Homs and Deir-ez-Zor, the continued economic impact of the embargo, and the fact that major companies have pulled out of the country lessen the likelihood of a quick rebound in 2013.

OECD Stocks


  • OECD industry oil inventories rose by 15.4 mb in May, to 2 672 mb, a milder increase than the five-year average of 25.1 mb. The muted OECD build suggests implied global supply overhang has been absorbed more by non-OECD markets. OECD commercial oil stocks have risen since February 2012, in line with seasonal trends. Although days of forward demand cover fell by 0.8 days to 58.9 days from April, this remained 1.4 days above the five-year average and 0.3 days higher than a year earlier.
  • Preliminary data indicate a 7.2 mb decline in June OECD industry inventories, in contrast with a five-year average 2.3 mb build. Crude oil inventories fell by 13.0 mb as refiners ramped up crude processing. In the meantime, refined product stocks rose by 8.7 mb. 'Other products' led the increase, rising by 14.8 mb. However, middle distillate stocks fell by 10.3 mb as firm demand in Latin America and Europe persisted.

OECD Inventories at End-May and Revisions to Preliminary Data

OECD industry oil inventories rose by 15.4 mb in May, to 2 672 mb, a milder increase than the five-year average 25.1 mb. The muted OECD build suggests that implied global supply overhang has been absorbed more by non-OECD markets than OECD. OECD commercial oil stocks have now fallen below five-year average levels again in May, after spending two months in modest surplus, although overall stock levels continued the upward trend evident since February 2012. Compared with the end of 2011, OECD industry oil stocks stood 71 mb higher in May. In the meantime, in terms of forward demand cover, OECD commercial oil holdings remained 1.4 days above the five-year average, at 58.9 days. This equates to a 0.8 days decrease from the previous month and a 0.3 days rise on a year-on-year basis. Regionally, the absolute surplus of stocks versus the five-year average in North America rose slightly, while the apparent deficit in Europe widened significantly, and the Pacific shortfall narrowed substantially.

May crude stocks rose by 8.0 mb to 995 mb, in stark contrast with the five-year average month-on-month draw of 6.9 mb. Crude stocks have built since December 2011 and stand above five-year average levels for a second successive month. Just like last month, North America and Pacific crude stocks led the increase, up by 6.7 mb and 7.6 mb, respectively while European stocks declined by 6.4 mb.

Refined product inventories also rose by 8.3 mb, a lesser increase than the five-year average build of 25.0 mb, thus widening the deficit against the five-year average to 34.9 mb from 18.2 mb in April. A sharp increase in 'other products' holdings in North America led the product stock build, and were up by 19.3 mb. In contrast, all product categories in Europe barring 'other products' stocks showed declines, whereas in the Pacific only fuel oil stocks showed a slight decline.

OECD stocks were revised 12.9 mb higher for April and 10.4 mb for March, upon receipt of more complete monthly submissions from member countries. This implies a 19.8 mb build in April inventory levels, instead of preliminary estimates of a 17.3 mb increase. Upward adjustments in April were centred on European crude oil and 'other products' stocks, and North American refined product holdings. Alone among crude stocks, European levels were adjusted up by 8.1 mb, while European 'other products' stocks were revised up by 6.5 mb. All of the major North American product categories except for 'other products' showed upward revisions, with notably gasoline and middle distillate stocks amended by 3.3 mb and 4.9 mb, respectively. However, lower-than-initially-estimated crude oil holdings in North America and middle distillate stocks in Europe provided a partial offset to the generally upward revisions.

Preliminary data indicate a 7.2 mb decline in June OECD industry inventories, in contrast with a five-year average 2.3 mb build. Crude oil inventories fell by 13.0 mb as refiners ramped up crude processing. In the meantime, refined product stocks rose by 8.7 mb as every product stock category bar middle distillates increased. 'Other products' stocks continued an upward trend, rising by 14.8 mb, most of which stemmed from the US. Gasoline and fuel oil holdings also rose by 0.3 mb and 4.0 mb, respectively. However, middle distillate stocks fell by 10.3 mb on strong demand in Latin America and Europe.

Analysis of Recent OECD Industry Stock Changes

OECD North America

North American industry oil inventories rose by 21.4 mb to 1 353 mb in May, in line with a typical seasonal build of 18.0 mb. Crude oil holdings rose by 6.7 mb to 515 mb, a record high, most of which stemmed from the US. Despite higher refinery runs, continued strong domestic output and healthy imports boosted US crude holdings.

Product inventories increased by 14.7 mb as a surge in 'other products' stocks outweighed decreases in gasoline and middle distillate holdings. 'Other products' inventories rose sharply by 19.3 mb, as propane increased on refiner restocking. Gasoline inventories declined by 3.5 mb as the summer driving season in the US started at the end of May. Moreover, middle distillate inventories fell by a slight 1.3 mb, as the US continued to draw on stocks mainly to meet import demand from Latin America and Europe. Since the beginning of 2012, both absolute middle distillate stock levels and days of forward demand cover have pushed lower, reaching 17.6 mb (3.5 days) below historical norms in May.

US weekly data show oil inventories rose by 10.8 mb in June, driven by another surge in 'other products' stocks, up by 12.6 mb as propane's seasonal build continued. Gasoline and fuel oil holdings also increased by 1.4 mb and 4.0 mb, respectively. Gasoline stocks edged up as US refiners ramped up their production to meet anticipated demand for the summer driving season. However, middle distillate inventories fell by 4.3 mb on continued strong exports. Overall, product inventories in the US rose by 13.8 mb. In the meantime, crude oil inventories fell by 1.7 mb, putting an end to five consecutive months of growth. Lower crude imports drove stocks down as tropical storm Debby disrupted tanker offloading operations in the region, including at the Louisiana Offshore Oil Port (LOOP). Nonetheless, crude oil stocks in the US have increased by 53.0 mb from the end of 2011 through to May, hovering significantly above the five-year range. Crude stock levels at Cushing, Oklahoma edged down by 0.1 mb, but remain just shy of recent record highs.

OECD Europe

Industry oil inventories in Europe fell by 18.6 mb in May to 904 mb, in contrast with a five-year average 2.6 mb build. European oil stocks have remained stubbornly below the five-year range for thirteen consecutive months. Moreover, forward demand cover in Europe has tightened after nine months at above traditional seasonal levels. Crude oil inventories fell by 6.4 mb to 308 mb, in contrast with a five-year average 0.8 mb build Meanwhile, refined product inventories declined by 10.8 mb to 525 mb, marking the lowest level since November 2007. Lower refinery runs drove down every major product stock category bar 'other products'. Gasoline holdings decreased by 2.6 mb on strong exports to the US. Middle distillate stocks fell by 7.0 mb as gasoil imports from Russia declined and amid strong demand. Fuel oil holdings declined by 1.4 mb while 'other products' stocks edged up by 0.2 mb. In the meantime, German end-user heating oil stocks rose by one percentage point to 49% fill at end-May, as cost conscious German consumers took advantage of the recent lower prices to replenish their tanks.

June preliminary data from Euroilstock point to a 12.5 mb stock draw, in the EU-15 and Norway. Crude oil inventories showed the largest decrease, falling by 7.1 mb. Refined product holdings also declined by 5.4 mb, driven by a sharp loss in middle distillate stocks, down by 6.0 mb. A slight drop in gasoline holdings also contributed to the overall product stocks decrease in June. In the meantime fuel oil and 'other products' stocks edged up by 0.9 mb and 0.4 mb, respectively. Refined product stocks held in independent storage in Northwest Europe also fell in June. Gasoline led the decline, as not only was there firm demand from the US but also from Mexico and West Africa.

OECD Pacific

In May, OECD Pacific industry stocks built for a second consecutive month ,rising by a seasonal 12.6 mb to 415 mb. Having fallen to very low levels over 1Q12, by May inventories had rebounded to exceed the five-year average for the first time since April 2011 and now stand 37.6 mb above March's low point. The May rise was led by a 7.6 mb, counter-seasonal build in crude oil, as healthy regional imports outpaced muted refinery runs. Product stocks rose by 4.5 mb, led by a 3.8 mb build in middle distillates, with gasoline increasing by a moderate 0.16 mb. Only fuel oil inventories drew, falling by 0.1 mb.

According to weekly data from the Petroleum Association of Japan (PAJ), Japanese industry inventories maintained their surplus to the five-year average in June despite a 5.5 mb draw. This was driven by a 4.2 mb decline in crude stocks while product inventories contracted by 1.3 mb due to a 1.6 mb fall in unfinished products. In contrast, finished products rose by 0.3 mb as a steady 1.7 mb build in naphtha stocks, likely resulting from longer-than-expected cracker maintenance, offset falls in fuel oil and gasoil.

Recent Developments in Singapore and China Stocks

Data from China Oil, Gas and Petrochemicals (China OGP) indicate that Chinese commercial oil inventories fell by an equivalent 0.5 mb in May driven by a 3.0 mb draw in diesel stocks which tempered the effect of builds in gasoline (+1.1 mb) and kerosene (+1.0 mb). Crude oil stocks rose by 0.4 mb despite record crude oil imports, especially of Middle Eastern grades. This would suggest that recently-completed strategic storage capacity continues to be filled, albeit hard data on this remains elusive.

Singapore commercial product stocks continued to trend in line with the five-year average as they rose by 0.4 mb in the four weeks to 27 June to stand at 39.9 mb. Fuel oil holdings rose by 1.4 mb to offset 0.3 mb and 0.7 mb draws in light and middle distillates, respectively. Light distillates reportedly fell after imports of Indian gasoline declined amid strong local demand. Middle distillates stocks now sit towards the bottom of the five-year range after strong exports to India, Vietnam and Sri Lanka. 



  • Oil futures markets were exceptionally volatile over June and into early July, with an array of conflicting drivers exerting pressure on prices. Benchmark crudes plummeted during most of June before reversing course towards the end of the month and into early July. Brent crude posted the sharpest swings, but rebounded to around $100/bbl before a threatened shut-down of Norway's oil sector was averted. WTI priced within a $10/bbl range, and was last trading around $85/bbl.
  • Open interest in all major oil futures contracts declined in June, while open interest in options contracts increased. Net long futures positions of money managers in CME WTI and ICE Brent contracts continued to fall in response to the worsening outlook for global economic activity and Europe's debt crisis.
  • Light distillate crack spreads strengthened in the Atlantic Basin (barring naphtha) due mainly to unplanned refinery outages. In the meantime, fuel oil crack spreads in all regions improved, supported by strong power utility and bunker fuel demand. In contrast, naphtha cracks fell on weak petrochemical demand amid ample supplies from Europe, despite rebounding toward the end of June.
  • June held plenty of opportunities for charterers as crude tanker rates continued their downward spiral as the bloated fleet continues to weigh heavily. By early-July, rates stood close to their 3Q11 lows for many benchmark rates.

Market Overview

Oil futures markets were exceptionally volatile over June and into early July, with a wide array of conflicting drivers exerting pressure on prices. Benchmark crudes plummeted throughout most of June, touching 18-month lows before reversing course towards the end of the month and into early July. Brent crude posted the sharpest swings, with closing prices in a wide $11.50/bbl band before briefly rebounding to above the $100/bbl threshold. WTI traded in a narrower $10/bbl range and was last trading at the higher end of the scale near $85/bbl.

Oil markets trended lower through most of June in tandem with worsening euro zone woes and against the backdrop of rising global inventory. Swelling crude supplies in Europe propelled Brent prices to 18-month lows and triggered a brief reversal in the prevailing backwardated price structure. Brent futures contracts flipped back into contango for about 10 days in June under the weight of ample prompt supplies, after trading in backwardation for more than 15 months. Chronic unplanned outages in the

North Sea and Libya have supported prompt prices for more than a year. However, ample crude now on offer from Africa and the Middle East weighed on both European and Asian markets. Plentiful supplies from West Africa, Libya, Iraq and Saudi Arabia, continued to add pressure on the front end of the forward curve for Brent. The Brent M1-M12 backwardation narrowed to just $0.72/bbl in June compared with $4.54/bbl in May before rebounding again in the first week of July to an average $1.58/bbl.

Similarly, US futures prices fell below the $80/bbl threshold in the third week of June for the first time since October 2011 amid swelling stocks of crude. US crude inventories are at their highest level in 22 years.

The sharp downturn in oil prices over the month also saw a decoupling from key financial indicators such as the S&P 500. With rising supplies exerting exceptional downward pressure on crude futures prices, WTI and the S&P index moved in the same direction during just two of the first six months of 2012, exhibiting a much weaker degree of co-movement than evident for much of 2010 and 2011.

However, by end-June markets again focused on rising tensions between Iran and the international community, as the most severe sanctions to date were implemented. Iranian authorities renewed threats to shut the Strait of Hormuz and reports that the US military was building up its forces in the Gulf region added further fuel to the rally. Sanctions are expected to force a cutback in Iranian exports of around 1 mb/d from the summer onwards compared with 2011 levels, with the US having now exempted 20 of Iran's main customers from financial sanctions after they made significant cuts in their purchase of Iranian oil. However, immediately ahead of the 28 June US and 1 July EU deadlines, imports of Iranian crude appeared to have surged again, with tanker data suggesting China increased imports by 60% to 800 kb/d in June. A sharper downturn in Iranian sales is expected for July however. 

A potential lock-out of striking Norwegian oil workers by operators threatened to shut down 2 mb/d of offshore production from 9 July, and added further upward momentum. Prices for Brent edged higher when it appeared that the Norwegian government was not going to intervene and would effectively allow the country's first closure of its oil industry in more than 25 years. However, the government finally intervened to stop the action and Norwegian supplies are expected to recover in coming weeks.

Worries over any escalation in Iranian tensions, however, are likely to persist for some time and keep something of a floor under prices. Unplanned outages in the North Sea, coupled with a potentially active Atlantic hurricane season, may also lend support. Seasonally strengthening global oil demand is also on the horizon, now expected to rise by 1.6 mb/d between 2Q12 and 3Q12, to 90.4 mb/d and by a further 500 kb/d to 90.9 mb/d in 4Q12.

Futures Markets

Activity Levels

The ratio of Brent futures in London ICE to New York and London WTI oil positions declined by almost 2% to 63.5% between 29 May and 3 July 2012. The fall was triggered by a 3.6% decline in ICE Brent open interest over the same period. The decline in the ratio of Brent to WTI open interest is slightly larger when ICE WTI contracts are excluded, falling by 2.66% to 82.6%. Opposite trends are observed in volume comparison. Total volumes of trade in CME WTI contracts declined by 20.4% in June 2012 compared to June 2011 (from 15.8 million to 12.6 million contracts). Year-to-date volume also declined by 19.3% from 94.4 million to 76.2 million contracts. In comparison, Brent monthly volume increased from 13.5 million to 15.1 million contracts for June  2011 and 2012, respectively. Year-to-date volume in London ICE Brent futures contracts also increased by 16%, from 65.3 million to 75.8 million contracts, levelling with CME WTI contract.

Open interest in all major oil futures contracts declined in June while open interest in options contracts increased. Open interest in New York CME WTI futures and options contracts increased by 6.2% to 2.45 million. Meanwhile, open interest in futures-only contracts declined by 0.5% to a four-month low of 1.43 million from 1.44 million. Over the same period, open interest in London ICE WTI futures-only contracts dropped to 0.43 million while  open interest in futures and options rose by 3.5% to 0.53 million contracts. On the other hand, open interest in ICE Brent futures declined by 3.6% to 1.18 million contracts, while ICE Brent futures and options increased by 0.5% to reach 1.46 million contracts from 29 May to 3 July 2012.

Money managers cut their bets on rising WTI crude oil prices for a fourth consecutive month by 26 473 contracts between 29 May and 26 June 2012. They reached the lowest level since early September 2010 at 99 765 in response to the fall in WTI prices from $90.76/bbl to $79.36/bbl. The fall in price is triggered by a worsening outlook for global economic activity, rising global inventories and Europe's debt crisis. As of 26 June, net long futures position of money managers in CME WTI contracts was less than half the level observed at the end of February. Money managers increased their bullish bets on WTI prices in London by 1 677 to 1 275 contracts, and reduced their bets on rising Brent prices over the same period by 47% from 71 646 to 37 816 futures contracts, the lowest level since October 2011. However, money managers increased their bullish bets on rising prices in the week ending 3 July 2012 as a European Union ban on Iranian oil took effect and following cuts in policy rates by central banks in Europe and China to stimulate economic growth. As WTI prices recovered from $79.36/bbl to $87.66/bbl in the week ending 3 July, money managers increased their net long position in CME WTI contracts by 14 133 to 113 898. Similarly, money managers increased their net long position in ICE Brent contracts by 15 371 to 53 187 in the week ending 3 July 2012.

Producers, who accounted for 17.9% of the short and 14.5% of the long contracts in CME WTI futures-only contracts, increased their net futures short positions from 48 644  to 48 877 contracts between 29 May to 3 July. Swap dealers, who accounted for 30.4% and 36.4% of the open interest on the long side and short side, respectively, reduced their bets on falling prices by 36.9% to hold 85 084 net futures short positions over the same period. Producers' trading activity in the London WTI contracts followed a similar pattern as CME WTI contracts. Producers in London ICE WTI contracts reduced their net long positions from 39 541 to 4 723 contracts. Swap dealers, on the other hand, followed an opposite pattern with respect to their trading in CME WTI contracts and increased their net short positions from 38 179 to 46 809 contracts.

NYMEX RBOB futures and combined open interest declined by more than 9.4% to 253 521 and 276 409, respectively, over the same period. Open interest in NYMEX heating oil futures contracts declined by 2.6% to 315 102 contracts while open interest in natural gas futures market is down by more than 7.6% to 1.12 million contracts.

Index investors' long exposure in commodities in May 2012 declined by $38.2 billion to $269.9 billion in notional value. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts fell by $12.7 billion in May. The number of long futures equivalent contracts declined to the lowest level since December 2008 to 529 000, equivalent to $46.0 billion in notional value.

Market Regulation

On 10 May 2012, the CFTC issued a final order amending the effective date of the provisions in the swap regulatory regime established by the 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. Although this is the third substantial delay amid agency struggles to keep pace with rule-making deadlines mandated by the Dodd-Frank Act, the Commission already finalised 40 rules out of the 60 required by the Act. In this sense, the Commission is in better shape than any other regulatory agency to meet the deadline despite having a limited budget. The Commission voted to finalise a swap definition rule on 10 July 2012 that closely follows what is laid out in Dodd-Frank. This would trigger the effective date for many rules two months after the final swap definition is published, including swap dealers registration, swap reporting and position limits.

On 29 June 2012, the CFTC unanimously voted to propose interpretive guidance extending the Dodd-Frank Act to cross-border derivatives activities for public comments. As noted in the June OMR, 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 under Section 722. This 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, the commerce of the US. The proposed interpretive guidance attempts to clarify the applicability of the new swap regulations to different categories of US and non-US entities.

On 3 July 2012, the European Council adopted the European Parliament's agreed version of the European Markets Infrastructure Regulation (EMIR). This introduces significant changes to the over-the-counter derivatives markets by establishing common rules for Central Counterparty Clearing Houses (CCPs) and trade repositories (TRs), mandating central clearing for all standardised contracts, as well as bringing reporting requirements to all derivatives contracts. Once published in the Official Journal, the rules will enter into force 20 days after the publication. The new rules will apply from the end of 2012.

Volatility vs. Price

In recent years, the oil market has been characterised by rising, and at times, rapidly fluctuating price levels. In the last three months alone, Brent crude oil prices have fluctuated in a wide range from $125/bbl to $89/bbl. Higher volatility will certainly impact both consumers and producers. Oil exporting countries can be negatively affected by the impacts of high volatility in oil prices on fiscal revenues, investment and confidence in the economy. Higher volatility can have negative impacts on inflation and growth prospects in oil importing countries as well. As a response to observed higher prevailing volatility, for example, G20 leaders called for policy options to combat excessive price volatility in commodity markets in general, and in oil markets in particular. In order to reduce volatility in oil markets, the G20 experts group emphasised the importance of improving data transparency in both financial and physical markets as well as phasing out of inefficient fossil fuel subsidies. They also urged the use of country-specific monetary and fiscal responses to support inclusive growth in order to mitigate the impacts of excessive price volatility.

However, it is important to note that volatility itself is not the main problem. The main challenge is the elevated price levels combined with higher volatility. Oil prices, like those of many other commodities, are inherently volatile and volatility itself varies over time. Due to inelastic supply and demand curves, at least in the short run, any shock to demand and supply will lead to large changes in oil prices. For example, annualised average volatility in January 2009 peaked at 92%, followed by a rapid decline to relatively low levels. On the other hand, volatility reached its historical peak level (116% annually) in January 1991. Up until mid-March 2012, average annualised volatility in 2012 was relatively stable at around 23%. It is important to note that prices in this period increased from $110/bbl to $128/bbl. Volatility in Brent prices increased especially in June 2012, reaching more than 34% at a time when the price level declined by more than $15/bbl.

This pattern, volatility increasing as oil prices decline and volatility declining as oil prices increase, is consistent with the empirical evidence in the stock market. The increase in volatility when oil prices falls can be explained by the fact that falling oil prices often accompany deteriorating global activity and resulting uncertainties for global oil demand, such as the collapse in demand observed immediately after the demise of Lehman Brothers in September 2008.

Although policy makers and market participants generally point to peak oil prices in 2008, the average Brent oil price in 2008 was $96.94/bbl, only peaking at $144/bbl on 3 July 2008. Moreover, oil prices were above the $100 threshold level on only 128 days during 2008. Average Brent oil prices registered $61/bbl in post-September 2008 when the worst financial crisis since the Great Depression hit the global economy. In contrast, between mid-February 2011 and June 2012, oil prices have averaged above $100/bbl. The average Brent oil price registered $111.26/bbl and $113.17/bbl in 2011 and 2012, respectively. Given the fragile state of the global economic recovery, the impact of high oil prices on global growth, especially in oil importing countries, is potentially more severe now than in 2008. High oil prices already threaten to aggravate global economic slowdown by widening global imbalances, reducing household and business income, and boosting inflation.

This is not to say that volatility should have a second order of importance when considering market dynamics and oil prices. Prices and volatility cannot be separated from each other. However, persistently higher oil prices have been increasing the share of GDP spent on oil imports. This is especially the case in oil-importing developing countries because their economies are often more dependent on imported oil and more energy-intensive and because their energy use in a given sector is sometimes less efficient than the global average. Therefore, policies to deal with high oil prices should arguably be given priority over policies dealing with volatility. There are already many tools to combat oil price volatility, including not least at a micro level the use of commodity derivatives markets to hedge against price risk. Addressing elevated price levels may be a harder nut to crack however, unless price distortions in consumer markets on the one hand, and uncertainties in the upstream investment environment on the other are addressed, allowing markets to more readily self-adjust to international pricing signals.

Spot Crude Oil Prices

Spot crude oil markets were exceptionally volatile in June and early July, with prices for benchmark crudes plummeting by around $13-17/bbl on average in June. North Sea Dated fell by $15.45/bbl, to an average $94.80/bbl, but sharply rebounded above $100/bbl in early July on fears of a complete shutdown in the Norwegian North Sea in the wake of workers strike action.

Spot prices for WTI crude were down $12.33/bbl in June, to $82.35/bbl, pressured lower by continued high levels of crude inventories in the US, and especially the midcontinent. Stock levels at the Cushing, Oklahoma delivery point for the NYMEX contract rose by 4.5 mb to a new record high of 47.8 mb.

Dubai spot prices posted a month-on-month decline of just under $13/bbl, to an average $94.33/bbl. The price differential for Dubai minus North Sea Dated narrowed in June on stronger demand for sour grades, to -$0.48/bbl in June compared with -$2.93/bbl in May.

In Europe, markets were awash with crude throughout June, with plentiful supplies of African light crudes available throughout the month, including a number of Libyan cargoes on offer. However, demand for medium sour crudes remained more robust, and when new sanctions on Iran were implemented on 1 July, demand for Urals increased sharply. The discount for Urals to Brent in the Mediterranean narrowed to just -$0.10/bbl in the first week of July compared with an average -$1.55/bbl in June and -$0.75/bbl in May, and was even trading at a premium at the time of writing. .

In Asia, weak naphtha demand curbed demand for light crudes while stronger fuel oil cracks propped up premiums for heavier, sour crudes. Moreover, the surplus of African crudes added further downward pressure on regional grades such as Malaysian Tapis.

Spot Product Prices

Crack spreads trended upwards for most products except naphtha in June, as the fall in product prices lagged the decline in benchmark crude prices. Light distillate crack spreads in the Atlantic basin strengthened (again except naphtha) due to unplanned refinery outages while fuel oil crack spreads in all regions improved, supported by ongoing strength in Japanese power utility demand and strong bunker fuel demand in Singapore. In contrast, naphtha margins fell on weak petrochemical demand amid ample supply from Europe, despite rebounding toward the end of June.

Naphtha crack spreads edged lower month-on-month in June, despite rising sharply from the middle of the month, falling by $0.29-1.06/bbl in Europe, and an even sharper $4.53/bbl in Asia. Despite the weak spot demand from petrochemical makers who have been hit hard by the intractable European debt crisis, spot naphtha feedstock supplies were ample for the early part of the month. Also recent record term premiums sought by Saudi Aramco, and a few other Middle Eastern countries, discouraged buyers, therefore resulting in some unsold volumes. In addition, Asia's top naphtha buyer Formosa Petrochemical shut its entire 2.93 million tonnes per year (tpy) cracking complex in late June due to maintenance and an unplanned outage, further weakening already lacklustre regional naphtha demand. However, in the latter part of the month, European demand for gasoline improved and this likely absorbed some surplus naphtha, boosting prices.

Gasoline markets in Europe and the US Gulf strengthened in June, with crack spreads widening in Northwest Europe by $4.60/bbl to Brent, and by $5.44/bbl to Urals in the Mediterranean. Super Unleaded gasoline crack spreads in the US Gulf coast rose by $3.49/bbl to LLS in June. By contrast, in Singapore, crack spread differentials fell by $4.12/bbl versus Dubai.

Prices in the US Gulf surged on the outage of a new crude distillation unit for unplanned repairs at Motiva Enterprises' 600 kb/d refinery in Port Arthur for the early part of June. However, gasoline prices then fell back again sharply as refinery runs in the region rose markedly despite the shutdown, albeit values showed a month-on-month increase. European gasoline crack spreads advanced further in June, as exports to the US and low refinery runs partly affected by the closure of Petroplus' Coryton refinery in the UK, left the spot market tightly supplied.    

In Singapore, gasoline margins followed a downward spiral as demand from Asia's top two importers, Indonesia and Vietnam weakened. Indonesia has restarted its Balongan refinery that is its key gasoline-producing plant in the country, reducing gasoline imports. Meanwhile, Vietnamese demand has weakened seasonally with the approach of the third quarter rainy season, and as the country's only refinery was gearing up to resume operations after a near-two-month maintenance shutdown.

Middle distillate crack spreads strengthened in all regions in June bar Singapore. Diesel crack spreads to Brent in Northwest Europe rose by $3.87/bbl and by $3.50/bbl to Urals in the Mediterranean, and by a lesser $1.18/bbl in the US Gulf. Diesel margins widened not only due to refinery shutdowns in Europe and the US Gulf coast, but also by strong demand from West Africa. In addition, a reported buying spree by Saudi Aramco of power generation diesel fuel further supported the middle distillate market.

In the meantime, gasoil crack spreads in Singapore were virtually unchanged. Strong demand from Australia, India and Sri Lanka offset ample supplies from Northeast Asia, where refinery maintenance has just finished. A slight decline in middle distillate inventories to a six-month low in Singapore also contributed to the upward price pressure.

Fuel oil markets continued to strengthen in June, with HSFO crack spreads narrowing in Europe by $4.36-4.90/bbl and in Singapore by a lesser $0.72/bbl. Low outright prices spurred bunker fuel demand for the shipping sector in Singapore, while on-spec bunker fuel supplies were tight in the Mediterranean. Fuel oil stocks in the ARA region declined in June toward the five-year average.

LSWR cracked fuel price differentials in Singapore increased by $1.35/bbl, while LSFO discounts to Brent widened by $2.65, and by $2.70/bbl to Urals in the Mediterranean. Rising seasonal power demand for the summer provided general support for the LSFO market. Prices were supported by incremental utility demand from Japan, South Korea and Saudi Arabia.


June held plenty of opportunities for charterers as crude tanker rates continued their downward spiral as the bloated fleet continues to weigh heavily. By early-July, rates stood close to their 3Q11 lows on many benchmark rates. The only bright spark in the market being that bunker costs have decreased by approximately 15% since end-1Q12, thus supporting time charter equivalent (TCE) earnings above break-even levels.

The benchmark VLCC Middle East Gulf - Asia route softened steadily over the month to stand below $10/mt by early-July, a fall of $2.50/mt compared to a month earlier. In the Atlantic Basin, rates fared little better. Although rates on the benchmark Suezmax West Africa - US Gulf Coast trade arrested their end-May collapse, they weakened by over $1.50/mt during June to stand close to $14/mt by early-July. Northwest European Aframax markets retained some strength despite recent Norwegian production shut-ins, remaining static from June. However, with North Sea supply forecast to fall over the next few months, the demand for tankers in the North Sea is likely to fall, a development likely to depress rates.

A geographical split was once again evident in product tanker markets with Asian markets out-performing those in the Atlantic Basin. In the East, the Middle East - Japan trade outperformed other routes, gaining $2/mt during the month while the Singapore - Japan rate remained close to month-earlier levels despite a mid-month blip. Meanwhile, in the Atlantic Basin anaemic demand from the US for European gasoline in the run up to the US driving season continues to severely dent the UK - US Atlantic Coast trade, as rates collapsed to an unseasonably-weak $15/mt, their lowest levels in nearly two years.

Recent crude floating storage has continued to be driven by Iranian volumes due to ongoing sales restrictions caused by US and EU sanctions. Although persistently difficult to assess as the Iranian fleet routinely deactivates their tracking beacons (see Iranian Tankers Play Hide and Seek in OMR dated 11 May 2012), latest estimates from shipbrokers indicate that Iran is storing approximately 42 mb on 17 VLCCs and 8 Suezmaxes. Despite Iranian tankers frequently changing name and flag, it is thought that this equates to 60% of the NITC fleet being engaged in storage duties. With EU sanctions now prohibiting vessels insured by the London based Protection and Indemnity Club (approximately 95% of global tankers) from calling at Iranian ports, and only Japanese tankers succeeding in obtaining sovereign insurance, it remains to be seen whether Iran will be able to adequately supply remaining customers using their available vessels. Despite the mid-June movement of ICE Brent into contango, information suggests that little speculative floating storage is currently taking place, with most non-Iranian ships continuing to store crude on the water for logistical reasons only.



  • Global refinery crude throughput estimates for 2Q12 have been revised up by 155 kb/d since last month's report, following higher US refinery runs for April and June, stronger-than-expected throughputs in the Middle East in April and record-high June runs in Russia. 2Q12 runs are now assessed at 74.4 mb/d, up by 0.7 mb/d annually. The incorporation of annual data for a number of non-OECD countries for 2010 has, however, lowered the 2010 and 2011 totals by 160 kb/d and 200 kb/d, respectively.
  • Refinery crude demand is expected to rise sharply in 3Q12, to 75.8mb/d. The quarterly increase of some 1.4 mb/d from the 2Q seasonal low is in line with the recent historical trend, except for the outlier years of 2008 and 2009. Annual growth accelerates in line with an expected rebound in demand, and as product stocks in key consuming countries are replenished. Growth retains a non-OECD focus, though US refinery runs have also proven robust recently and will likely continue to do so.
  • OECD refinery crude intake rose by 260 kb/d in May to 36 mb/d, unchanged from our previous estimate. The monthly increase stemmed entirely from North America, as US runs rose seasonally by more than 0.5 mb/d. Other increases came from Italy and South Korea, though these were offset by lower runs in other countries. Overall, OECD runs stood 260 kb/d above a year earlier, with April runs lifted 210 kb/d from last month's report after final monthly data submissions.
  • Refinery profitability generally improved in June, as plummeting crude oil prices outweighed corrections in most product markets. A reworking of IEA refinery margin modelling will see the re-introduction of margin reporting in September, with a hiatus before then for the July and August OMRs.

Global Refinery Overview

Global refinery crude run estimates have been revised by 155 kb/d and -60 kb/d for 2Q12 and 3Q12, respectively, to 74.4 mb/d and 75.8 mb/d, following higher reported throughputs in the US, a stronger outlook for the Middle East and record-high runs in Russia in June. Providing an offset to the stronger outlook for these areas, the incorporation of annual data for a number of non-OECD countries for 2010 lowers the non-OECD baseline by 160 kb/d and 200 kb/d for 2010 and 2011, respectively, while outages in Other Asia lowers the 3Q12 estimates further.

While recent reports hint at cuts in utilisation rates in China from July, due to weak internal demand and high product inventories, we still expect annual growth to resume for Chinese throughputs, as scheduled maintenance is now mostly completed and since summer 2011 throughputs were themselves very weak. New capacity is also expected to ramp up over the remainder of the year, supporting runs, though the strength of Chinese demand and call on domestic refiners remain a key uncertainty in the outlook.

Over June, refinery profitability improved for most benchmarks in key refining hubs, as the slide in international crude oil prices largely outstripped any declines in product prices. The recent rebound in crude prices could yet again cut into downstream profitability; however, as product price increases again lagged those of crude. That said, US runs have been particularly strong in recent months, rising by 0.5 mb/d in both May and June, despite the shutdown of Motiva's new 325 kb/d crude unit at Port Arthur. Preliminary data also show that Russian crude throughputs rose by more than 0.5 mb/d to a new record high in June, of 5.6 mb/d. In contrast, structural decline continues to plague the European refining sector, with further closures announced, though April and May data did not prove as weak as earlier indications had suggested. We continue to expect a very sharp increase in 3Q12 crude demand, of 1.4 mb/d from the 2Q low-point, largely in line with recent historical trends (except for 2008 and 2009, which were outliers due to the recession). Annual growth, at 0.7 mb/d in 2Q12 and 0.5 mb/d in 3Q12, compared to only 70 kb/d over the previous four quarters, stems almost entirely from the non-OECD. 

IEA Refining Margin Calculations

Due to the change in price data provider earlier this year, the IEA has also decided to rework its refinery margin calculations. Revamped models will see the re-introduction of margin reporting in September, with a hiatus before then for the July and August OMRs. We apologise for any inconvenience this may cause.

OECD Refinery Throughput

OECD refinery crude throughputs rose by 260 kb/d in May, to 36 mb/d. The increase stemmed almost entirely from higher US refinery runs, which surged more than 0.5 mb/d, though Italian and South Korean rates were also higher month-on-month. Reduced rates in most other European countries, and seasonally falling Japanese runs, limited the upward trend. While May throughputs were in line with estimates in last month's report given offsets in Europe and the Pacific, April data were revised 210 kb/d higher on the receipt of final monthly submissions. European and North American runs were lifted, by 140 kb/d and 110 kb/d, respectively, while Pacific runs were slightly lower. In all, May OECD throughputs were 260 kb/d above a year earlier, with higher North American and Pacific runs offset by structurally lower European utilisation.

Preliminary weekly data for the US for June showed surprising strength in Gulf Coast utilisation rates, despite the shutdown of Motiva's new 325 kb/d crude unit early in the month. US runs rose by another 0.5 mb/d on average to 15.6 mb/d, 140 kb/d more than expected. Weekly data for Japan, on the other hand, were in line with expectations, down a further 160 kb/d from May, to what may prove the seasonal low-point in regional throughputs. In all, OECD runs are assessed averaging 36.1 mb/d in 2Q12, 180 kb/d less than in 1Q12, but 110 kb/d above the same period a year earlier.

Looking ahead, OECD runs are set to rise sharply in 3Q12, increasing by 1 mb/d from the maintenance-reduced 2Q12 shoulder season. Throughputs are expected to rise most sharply in the US, but European runs could also see significant gains as refiners ramp up runs to meet stronger summer demand and refill depleted product inventories. While Pacific refinery crude runs are expected to recover from the seasonal low-point in June of 6.1 mb/d to 6.6 mb/d in August, the overall quarterly change is rather small as runs fall again in September with another spate of turnarounds. In all, 3Q12 OECD runs are seen at 37.1 mb/d, 350 kb/d less than the same period a year earlier.

North American crude runs rose seasonally in May, up by 470 kb/d, to just shy of 18.0 mb/d. The rise was entirely accounted for by the US, while Mexican and Canadian crude runs were largely unchanged month-on-month. Within the US, the increase came from refineries on both the Gulf and West Coasts. US Gulf Coast runs surged 0.4 mb/d m-o-m according to weekly data, with the ramping up of Motiva's new 325 kb/d crude unit at Port Arthur contributing. A sharp drop off in maintenance work from April also helped push rates higher. On the West Coast, throughputs rose more than 200 kb/d from April's low, with the resumption of operations at BP's Ferndale refinery in Washington State and Alon's California refineries, including the Bakersfield, Paramount and Long Beach sites, which had been halted since last December because of poor economics.

US West Coast runs continued to surge in June, with the return to full operations of BP's 220 kb/d Cherry Point refinery in Washington at the end of May. The plant had been shut by a fire in mid-February. US Gulf Coast runs also maintained their upward momentum, despite the shutdown of Motiva's new Port Arthur crude unit. The unit, which started processing crude in April and was only officially commissioned at a 31 May ceremony, was damaged and shut in early June. While Motiva has not announced a new restart date yet, industry sources say the damage to the unit, apparently due to corrosion caused by a caustic chemical leak, is so severe that it could take up to a year to repair.

According to the most recent US crude import data, June imports from Saudi Arabia averaged 1.4 mb/d, largely on par with levels in the first four months of 2012, but more than 0.5 mb/d higher than the same period a year earlier, as shipments were scheduled ahead of the shutdown of the new unit. Arrivals of Saudi Arabian crude oil to the US Gulf Coast will likely fall back in coming weeks if the refinery outage indeed proves to be as long-lived as expected by some market observers.

Delta Airlines has reportedly closed the deal to buy ConocoPhillips' Trainer refinery in late June, becoming the first airline to own a refinery. The new owner started maintenance work at the 185 kb/d plant in early July, and plans to restart fuel production after the summer. The refinery has been shut since September 2011. Further relief to the US East Coast downstream industry came from a last minute deal announced on 2 July, with private equity firm the Carlyle Group agreeing to buy Sunoco's 330 kb/d Philadelphia refinery. The plant was scheduled to close by the end of July if no buyer had been found. Carlyle plans to improve the plant's economics by building rail infrastructure to source cheaper domestically produced crudes. The new rail facilities will allow the plant to replace 144 kb/d of more expensive imported crudes, mostly from West Africa, with cheaper Bakken Shale crude within six months of taking over the plant. The company also plans to upgrade the plant, adding a mild hydrocracker and a hydrogen facility as well as upgrading the catalytic cracker. Access to natural gas from the Marcellus shale, 100 miles away, will reduce the plant's energy cost, allowing it to compete with US Gulf Coast refiners already benefiting from cheap feedstocks and refinery fuel.

European refinery runs were slightly lower in May, down 80 kb/d, but from an upwardly revised April, and averaging 11.7 mb/d. Preliminary data from Euroilstock, by contrast, had suggested regional runs falling almost 0.4 mb/d in May. As we had not fully incorporated this preliminary data, due to recent discrepancies with official data, May revisions were limited to -90 kb/d. Revisions to April data stemmed mostly from the UK (+70 kb/d), Germany(+50 kb/d) and Belgium (+30 kb/d), for a total of 140 kb/d.

In May, Italian crude runs recovered, rising 160 kb/d from April's low. Eni restarted its 80 kb/d Venice refinery on 2 May, after a six-month shutdown due to poor margins. Eni's Italian refinery throughputs were 14.9% lower in 1Q12 compared to the same period in 2011, due also to unplanned outages and planned idling at the Sannazzaro and Taranto plants. In April, however, the company shut part of its Gela refinery on Sicily, also due to poor margins and regional oversupply of refined products. Also in Italy, API announced it will shut the 80 kb/d Falconara refinery for 2013 due to an overhaul of a power plant and poor economics.

In the UK, the 220 kb/d Coryton refinery, which shut in early June, will be permanently closed and converted to an oil import terminal following the sale to a JV including Shell, Dutch storage firm Vopak and UK fuel supplier Greenergy. UK distillation capacity will be further reduced in September this year, as Exxon Mobil decommissions a crude unit at its 330 kb/d Fawley refinery. The unit to be shut is believed to have a capacity of around 80 kb/d. In France, the 162 kb/d Petit Couronne plant resumed crude processing on 14 June. Idled in January following the bankruptcy of Petroplus, Petit Couronne will receive 100 kb/d of crude for up to six months through a tolling agreement with Shell, agreed by the previous French government.

OECD Pacific throughputs declined 130 kb/d in May, to 6.3 mb/d. A 290 kb/d seasonal decline in Japan was partly offset by higher South Korean operations, while Australian refinery runs remained weak due to continued outages. Both Japanese and South Korean runs stood higher than a year earlier. While Japan's runs are on a rebound after last year's shutdowns, South Korean runs continued to be supported by robust product exports. So far this year, total South Korean product exports have averaged 1.1 mb/d, 3.4% higher than a year earlier. In June, South Korea's third largest refiner, S-Oil, reported it had cut operating rates in June due to weaker margins. The company, which operates the 670 kb/d Onsan refinery, said it had been running the plant at full capacity in May.

Non-OECD Refinery Throughput

Non-OECD crude throughputs estimates for 2Q12 are largely unchanged since last month's report, as higher Middle Eastern runs for April were mostly offset by lower estimates for Asia in the same quarter and a downward adjustment to baseline data. Annual data for a number of non-OECD countries for 2010, to be released in the upcoming Energy Statistics of non-OECD Countries, have been incorporated since last month's report. 2010 estimates were lowered by 160 kb/d in total, mainly on weaker-than-expected Malaysian runs, but also smaller downward adjustments for countries including Yemen, Cuba, and the Ivory Coast, for which no reliable monthly data is available. Non-OECD 2011 estimates were revised 200 kb/d lower following the lower baseline. In all, non-OECD throughputs are assessed at 38.3 mb/d in 2Q12, rising to 38.7 mb/d in 3Q12, up 0.6 mb/d and 0.9 mb/d year-on-year, respectively.

While no new official data on China's refinery operations have been released since last month's report, anecdotal evidence points to a slowdown in runs compared to previously expected levels. News reports and company statements cite weak internal demand and high product inventories leading to run cuts at the country's key refining companies in July. Sinopec's trading arm, Unipec, even exported gasoil for the first time in more than a year in June. Data released by China's National Development and Reform Commission (NDRC) on 29 June showed gasoil inventories held by the country's two top refiners totalling 2.32 million mt, 14.7% above a year earlier. Nevertheless, runs are still assessed higher in June than in May, as some refinery maintenance was completed and as new capacity ramps up runs. Despite the downward adjustment to our Chinese forecast for June through September, by about 100 kb/d, runs are still expected to see further increases as announced maintenance winds down from relatively high levels seen in the April to June period.

Within the 'Other Asia' category, Indian refinery runs in May surpassed both planned and year-earlier levels, at an estimated 4.3 mb/d. Government data included for the first time oil processed at BPCL's Bina refinery, though we had already adjusted for these missing volumes since the plant started trial runs last summer. According to the official data, the plant processed 100 kb/d in May and 114 kb/d in April, compared with a nameplate capacity of 120 kb/d. India's annual increase of some 240 kb/d came not only from the Bina plant, but also from HPCL's Bathinda refinery, which commenced crude runs in February, and expanded capacity at Essar's Vadinar plant. Further increases are expected in India over coming months, as new capacity is fully utilised and the fire-hit Numaligarh refinery resumes operations.

Elsewhere in the region, a fire at Thailand's 120 kb/d Bangchak refinery in early July damaged an 80 kb/d crude unit. The entire refinery was expected to be shut for a week, with the damaged unit offline for at least 30 days. Vietnam's sole refinery, the 130 kb/d Dung Quat refinery, shut since 16 May for a scheduled turnaround, reportedly reached full capacity again on 9 July, two weeks behind the original restart date. On 20 June a power outage forced Formosa to shut two crude units at its Mailiao refinery in Taiwan. The plant, which has three CDUs with a combined capacity of 540 kb/d, had already shut one crude unit for maintenance when the power problem occurred.

In the FSU, refinery crude intake surged in June, with the return of Russian refineries from extensive maintenance over the two previous months. Preliminary data show Russian crude runs rising almost 0.6 mb/d to 5.6 mb/d in June, an all-time high. While the increase is in line with known shutdown information, it was higher than expected and led to an upward revision in our FSU estimates for June of 125 kb/d. The increase likely came as TNK-BP's Ryazan plant, Lukoil's Nizhny Novgorod refinery and Rosneft's Achinsk and Samara refineries returned from maintenance and may have been further supported by the launch of a new crude unit at Rosneft's Tuapse refinery. The latter was expected to increase capacity by 150 kb/d to 240 kb/d with the launch of the new unit in 2Q12.

June FSU runs were also expected to have received a boost from the return to operations of Lithuania's 190 kb/d Mazeikiu refinery which was shut in May. A fire at Kazakhstan's Atyrau refinery at the end of June, however, cut rates there, although the extent of the damage is not known. The country's Pavlodar refinery was also to shut for maintenance at the end of June, further reducing product supplies. Russian crude exports to the Ukraine remained at zero in June, after TNK-BP halted operations at its Lisichansk refinery in March due to poor economics. The country's only operating refinery, the Kremenchung refinery, is assumed to be running at reduced rates and on domestic crude.

Middle Eastern crude runs have been revised higher following stronger-than-expected operations for Saudi Arabia and Kuwait in April. The announced maintenance at the Ras Tanura refinery, which restarted units in early May, seems to have had a smaller impact on overall runs than expected. According to JODI data, Saudi runs rose to 1.7 mb/d in April, from 1.6 mb/d a month earlier. Runs are expected to rise further over summer months in line with seasonal trends. Also reported monthly Kuwaiti throughputs exceeded expectations in April, by 70 kb/d, further lifting the regional total. In all, 2Q12 Middle Eastern runs are now assessed 200 kb/d higher, at 6.1 mb/d.

In Africa, Libya's Ras Lanuf refinery remains shut, despite earlier announcements of a planned July start-up. With the recent protest and blockades of the Ras Lanuf port, we await more positive news before including the 220 kb/d plant in our estimates. Algeria's largest refinery, the 300 kb/d Skikda plant, was reported to have completely halted operations in early July for 15 days, followed by partial shutdowns that could be lasting for up to six months to carry out improvement work. Sonatrach is expected to increase capacity at the plant by 40 kb/d, as well as adding a catalytic reformer and hydrotreating capacity by the end of this year. In Latin America, a technical outage at Venezuela's largest refinery, the Amuay plant in late June is expected to reduce runs there and lies behind the slightly lower forecast for the region.

2012-2013 Refinery Capacity Overhang Suggests Bleak Margin Outlook for Some

After a year of relatively weak refinery addition growth in 2011, this year and next are expected to see significant additions to global crude distillation capacity. While net additions in 2011 came to less than 400 kb/d, just over 1 mb/d of new crude distillation capacity is expected to be added in 2012 followed by a further 1.3 mb/d in 2013. Upgrading and desulphurisation additions are even more extensive in the two-year period, adding a combined 2.6 mb/d and 2.8 mb/d, respectively, as refiners strive to meet increasingly higher fuel quality standards.

2012 additions are entirely accounted for by the non-OECD, which adds 1.7 mb/d of new capacity in total, offset by contracting OECD capacity. The declining OECD total, however, masks the 325 kb/d expansion of Motiva's Port Arthur, TX, refinery. The actual ramp-up of this new unit will, as discussed elsewhere, now be delayed to later in the year, or possibly even next year, following corrosion damage. The expansion, probably the most important in the OECD in the last decade, is offset by further refinery closures in the US and elsewhere in the OECD. Notably, Hovensa converted its 350 kb/d St Croix refinery to a terminal earlier this year, and Sunoco shut its Marcus Hook plant on the East Coast.

Outside of the US, restructuring of the refining industry also gained pace, particularly in Europe. After shutting 530 kb/d of distillation capacity in 2011, another 495 kb/d has closed or is scheduled to close in Europe this year. Total completed or committed European capacity rationalisation now amounts to almost 1.6 mb/d since the start of the economic downturn in 2008. Key shutdowns in Europe include Petroplus' Coryton refinery in the UK, a reduction to installed capacity at Exxon Mobil's Fawley refinery also in the UK, and the shutdown of France's Berre l'Etang and Italy's Rome plants. Unless a buyer comes forward in coming weeks, Petroplus' French Petit Couronne refinery will likely close in 2013 alongside Shell's Harburg plant in Germany. Shell will also close its Clyde refinery in Australia this year.

Of the 1.7 mb/d of capacity added in the non-OECD in 2012, the largest share continues to derive from Asia. Other Asia, led by India, adds more than 0.5 mb/d, while China adds some 0.4 mb/d. India's capacity was already boosted by the commissioning of the 180 kb/d Bathinda plant and the expansion of Essar's Vadinar refinery earlier this year. Further additions are expected as Pakistan completes its 130 kb/d Karachi expansion later this year. Key projects in China include Sinopec's 200 kb/d Maoming expansion, the 100 kb/d addition to Huhhot Petrochemical and a 90 kb/d expansion of Sinopec's Jinling plant. Russian capacity could be expanded by 260 kb/d in 2012, in large part due to Rosneft's 140 kb/d Tuapse expansion.

In 2013, expected net crude distillation capacity additions amount to 1.3 mb/d globally. As in 2012, the majority of new plants or expansions are centred in non-OECD Asia, which accounts for just about half of additions. China, however, only sees 200 kb/d added in the year, with CNPC's 200 kb/d Pengzhou and 100 kb/d Renqui expansions partly offset by expected shutdown of smaller independent plants. In 'Other Asia,' India alone is expected to add 400 kb/d of distillation capacity next year, as the 300 kb/d Paradip and 120 kb/d Cuddalore plants start up. Also significant, the start up of the Saudi Aramco/Total 400 kb/d Jubail refinery is now expected at the end of 2013, as is the first phase of the 230 kb/d Abreu e Lima refinery in Brazil. The second 115 kb/d unit there will likely be commissioned in 2014.

With total oil product demand growth, including biofuels and products sources outside refineries, averaging only 0.8 mb/d in 2012 and 1 mb/d in 2013, well below new capacity additions, renewed margin weakness is expected unless more project delays or refinery shutdowns are forthcoming or demand surprises to the upside in 2013.