Oil Market Report: 10 August 2012

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Highlights

  • Sluggish economic growth could restrict annual oil demand growth to 0.9 mb/d in 2012 and 0.8 mb/d in 2013, with demand averaging 89.6 mb/d and 90.5 mb/d respectively. Baseline revisions for the FSU, China and Middle East lower absolute demand by 0.3 mb/d for 2011/2012 and, combined with weaker economic growth assumptions, trim the 2013 demand total by 0.4 mb/d.
  • Global oil supply grew by 0.3 mb/d m-o-m to 90.7 mb/d in July, with non-OPEC generating 60% of the increase. Global oil output stood 2.6 mb/d above year-ago, with 80% of the increase from OPEC crude and NGLs. Summer maintenance reduced 2Q12 non-OPEC growth to 0.5 mb/d, but output should grow by 0.7 mb/d in 2013.
  • OPEC crude supply fell 70 kb/d to 31.39 mb/d in July versus June, on declines from Iran, Angola and Libya. Effective spare capacity is assessed at 2.57 mb/d, and July crude imports from Iran fell to 1.0 mb/d. The 'call on OPEC crude and stock change' is now 31 mb/d for 3Q12 and averages 30.1 mb/d for 4Q12-4Q13.
  • Oil prices advanced in July and early August, extending earlier gains. Urals, a substitute for Iranian crude in Europe, led the rally in spot markets as the EU embargo on Iranian oil took effect. Brent and WTI futures surged past $112/bbl and $93/bbl, respectively, in early August, from $89.61/bbl and $78.10/bbl in late June.
  • June OECD industry oil stocks fell counter-seasonally by 5.5 mb to 2683 mb, or 57.8 days of forward cover. A crude stock build failed to offset a draw in products. The deficit to the five-year average stock level widened to 19.2 mb. July preliminary data suggest a 10.0 mb build in OECD stocks.
  • Global refinery crude run estimates for 3Q12 have been lowered by 0.3 mb/d since last month, following a slowdown in apparent Chinese oil demand and refinery operations, and outages in the US and Japan. 3Q12 global throughputs now total 75.5 mb/d, 0.2 mb/d above a year earlier and 1.1 mb/d above the 2Q12 seasonal low.

Data reset

Baseline data changes are an occupational hazard for analysts, and frequently incur the wrath of a readership then forced to reset their working models. The OMR this month carries more than its fair share of data adjustments, most notably affecting oil demand estimates. Inconvenient though such adjustments may be, they are an inevitable result of our goal of incorporating the latest, most accurate information and, over time, to reflect the evolving membership of institutions like the OECD or OPEC. The August release of the OMR's companion Annual Statistical Supplement also allows such adjustments to be placed in historical context.

Baseline demand estimates now fully incorporate 2010 data for non-OECD countries (taken from 'Energy Statistics of Non-OECD Countries (2012 Edition)'). This results in a net downward adjustment to the 2010/2011 baseline of around 0.3 mb/d for the non-OECD total, concentrated in China (-0.2 mb/d), the Middle East (-0.2 mb/d) and FSU (-0.1 mb/d). Data for non-OECD 'other Asia' provide a partial offset, revised up by 0.2 mb/d. Generally, adjustments for China and the Middle East are carried through the demand outlook to 2013, although further weakening is incorporated for China, based on a lower economic growth assumption for 2012/2013. Meanwhile, the downward adjustment for the Middle East tapers off to -0.1 mb/d, amid assumed persistently high crude prices, and heavily subsidised domestic oil products prices, which together boost demand slightly compared to the weaker baseline.

Making sense of this month's market balance is further complicated by the OMR's reclassification of Chile, Estonia, Israel and Slovenia into the OECD category, and corresponding (but not identical) downward adjustments to supply, demand, stocks and refining data for the non-OECD grouping. All four countries joined the OECD during the course of 2010, but only now have comparatively regular, complete and consistent monthly and annual oil data become available. Table 1A on page 52, which every month makes a comparison between oil supply, demand and inventory estimates from the current and prior reports, has been re-worked to show a consistent comparison between data for the OECD and non-OECD groupings as they stand now. Notwithstanding the benefits of such a like-for-like comparison, the regional reclassification on its own effectively adds 0.7 mb/d (1.5%) to OECD total oil demand for 2010/2011, 13 mb (0.5%) to May OECD industry oil stocks and around 0.4 mb/d (1%) to OECD refinery crude runs based on January-June 2012 data.

Taken together with the removal of some increasingly tenuous adjustments previously applied for the OMR to OECD countries' submitted inventory data, and a modest downward adjustment to 2Q12 OPEC supply estimates, we arrive at a slightly different looking Table 1 compared to last month's version. All told, global oil demand for 2012 is 0.3 mb/d lower than in the July OMR and 2013 demand is 0.4 mb/d lower. Implied global stock build in 1H12 now looks to have averaged 1.85 mb/d, rather than the 1.7 mb/d estimated last month. And the 'call on OPEC crude and stock change' now dips to 31 mb/d for 3Q12 and an average of 30.1 mb/d during 4Q12-4Q13, markedly lower than we carried last month.

From a consuming country standpoint, this apparent easing in expected market fundamentals through 2013 might initially seem reassuring, particularly if it leads to some further relief from, by historical standards, very high crude prices. That of course overlooks the fact that a weaker demand outlook is partly the result of a worrying slow-down in global economic activity. And while the outlook for oil supplies is both relatively unchanged from last month, and indicative of sustained growth potential, there are worrying signs here too. In particular, the geopolitical dimension is likely to continue to provide something of a floor for prices. The issue of Iran will likely continue to weigh heavy on the market through 2H12. Moreover, there is a risk that recent progress in restoring output from Libya, Iraq and Nigeria could be jeopardised if recent political and civil tensions worsen. So as the incumbent OMR Editor bows out, there remains plenty of food for thought for his successor.  

Demand

Summary

  • A relatively subdued global oil demand forecast persists for both 2012 and 2013, resulting from the weak economic backdrop. Sub-one mb/d demand growth is envisaged in both years - to 89.6 mb/d in 2012 and 90.5 mb/d in 2013. The associated macroeconomic framework assumes global growth of 3.3% in 2012, and 3.6% in 2013 (the key change from last month being the 0.2 percentage point reduction for 2013).
  • Despite 2Q12 baseline demand data marginally exceeding last month's estimate, the key Chinese and US figures for June were revised down. The total 2Q12 global demand estimate is 0.03 mb/d higher than assumed in early-July, but recent (i.e. June) estimates of demand from the world's two dominant consumers - China (-570 kb/d) and the US (-105 kb/d) - have been curtailed. On average therefore, forecast 4Q12-4Q13 demand averages around 415 kb/d lower than last month on a like-for-like basis.
  • Definitional changes have seen the movement of Chile, Israel, Slovenia and Estonia into the OECD category, from the non-OECD. Together, these countries account for around 0.7 mb/d of oil demand. Accordingly this has altered the OECD regional groupings: North America with the addition of Chile is now classified as Americas; and the OECD Pacific, plus Israel, is now listed as Asia & Oceania. Large non-OECD baseline revisions have also removed around 0.3 mb/d from the historical series.


Global Overview

Oil consumption is forecast to post sub-1 mb/d gains in both 2012 and 2013, due to a combination of persistently high prices and a weak economic backdrop. Global oil demand growth of around 0.9 mb/d (1.0%) is assumed for 2012, averaging 89.6 mb/d, the growth forecast roughly on a par with those carried in the OMR all year. Demand growth will likely fall in 2013, to 0.8 mb/d (averaging 90.5 mb/d), as the stronger macroeconomic outlook is offset by, among other reasons, the resumption of nuclear capacity in Japan reducing prospective oil needs from the power sector.

Large non-OECD baseline revisions (see Non-OECD Baseline Data Revisions) reduce the aggregate global oil demand outlook for 2012, by 0.25 mb/d, coinciding as they do with net-negative revisions to new OECD nations (see New OECD Regions, Countries and Oil Demand Data: Changes in Demand). Surprisingly strong 2Q12 OECD demand (+0.2 mb/d y-o-y) bucks the overall downside trend, with a modest 0.03 mb/d global baseline addition now made. The US led the 2Q12 change, with 130 kb/d more oil demand than assumed in the OMR dated 12 July. Significant revisions were also seen for Japan (+65 kb/d), Germany (+45 kb/d) and South Korea (+40 kb/d), as consumers there took advantage of June's dip in prices to potentially replenish stocks.

Marginally weaker economic drivers leave the 2013 demand growth outlook 0.15 mb/d lower than previously assumed. Global economic growth of around 3.3% is anticipated in 2012, rising to 3.6% in 2013 - down marginally from last month's report (3.8%) as the economic backdrop has worsened. China endures the majority of the reduction, with GDP growth of 8.0% now assumed for 2012 (previously 8.2%), rising to 8.1% in 2013 (8.5% before). The economic outlook for the US has also been curbed for 2013, with growth of 2.0% now assumed (2.3% last month), as conditions in the US have deteriorated. The IEA is carrying marginally lower global GDP projections than seen in IMF's July World Economic Outlook Update - 3.3% for 2012 (3.5% IMF) and 3.6% in 2013 (3.9% IMF). The key difference in 2012 being the IMF's more positive outlook for Japan (2.4% versus 2.0% for the IEA). Given the power constraints currently facing Japan, we have assumed slightly weaker growth. In 2013 the discrepancies with the IMF centre on the US (2.3% IMF versus 2.0%) and China (8.5% IMF versus 8.1%), as recent weakness in both economies in our view reduce the potential for strong recovery as soon as 2013.



Lower June demand data for the US (105 kb/d less than assumed last month, despite the 2Q12 upward revision) and China (-570 kb/d), which jointly account for nearly one-third of total global demand, further suppress the demand forecast. Gas/diesel oil demand revisions leading the June adjustment, with Chinese June apparent demand 360 kb/d below its month earlier reading and the US 105 kb/d lower, as industrial activity slowed.



Strong distillate demand remains a feature of the outlook through 2013, despite recent weakness, as the construction and manufacturing sectors gradually become more robust. Global gas/diesel oil demand is set to rise by 260 kb/d in 2012, to 26.3 mb/d, and by 345 kb/d in 2013 to 26.6 mb/d. Having fallen by 25 kb/d amid weak economic growth in 2012, jet/kerosene demand is forecast to rise by 60 kb/d in 2013, to 6.5 mb/d. A still-strong petrochemical industry, largely an emerging market phenomenon, but also a North American one, is likely to support LPG (up 165 kb/d in 2012 and 185 kb/d 2013).

New OECD Regions, Countries and Oil Demand Data: Changes in Demand

Demand data for Chile, Estonia, Israel and Slovenia are incorporated within the new OECD regional classifications this month - Americas, Europe and Asia & Oceania. These countries now submit data to the IEA via monthly and annual oil questionnaires. Moreover, differences between the predominantly JODI-derived data series for these countries previously included in non-OECD totals, and the new monthly/annual data now included within the OECD, result in a net change for global oil demand due to these classification changes of around -50 kb/d for 2010 and -30 kb/d for 2011.

The new OECD Americas region is the amalgamation of the old North America and Chile. The effect on OECD demand of including new oil demand data for Chile is an average addition of 290 kb/d of oil products for 2000-2010 and an average of 330 kb/d added to 2012 and 2013. The OECD Europe region now includes Estonia and Slovenia, which previously were included in FSU and other non-OECD Europe, respectively. The impact for the period 2000-2013 is an average addition of 80 kb/d to OECD demand. OECD Asia & Oceania is essentially the OECD Pacific countries plus Israel. The average historical (2000-2010) impact of adding Israel is almost 250 kb/d, while for 2012 and 2013 the average effect is 270 kb/d.

The new data result in a marginal upward revision to Estonia, Israel and Slovenia oil demand between 2010 and 2013. On the other hand, Chile suffered a more significant downward revision to total oil products, from 2010, backed predominantly by downward revisions to 'other' products demand.



OECD

Aggregate OECD demand in June was largely flat y-o-y, although this masks disparate regional trends. Strong growth in Asia & Oceania, caused by post-tsunami additions to Japan and the robust expansion that continues to be seen in Korea, balance-out modest declines elsewhere. Gas/diesel oil proved to be the strongest product, as a result of strong industrial demand in many nations, notably Korea, Australia and Germany.



Americas

Subdued demand conditions persist for the newly created OECD Americas - US, Canada, Mexico and Chile - suppressed by a combination of stuttering economic growth, relatively high oil prices and continued efficiency gains. US demand, for example, showed signs of recuperating in May - with a year-on-year (y-o-y) gain of 345 kb/d (or 1.9%) to 18.8 mb/d posted - before gains were reversed again in June, demand being down 345 kb/d y-o-y (1.8%) to 19.0 mb/d.



US oil consumption averaged 18.7 mb/d in 2Q12, down by a very modest 0.6% y-o-y, after confirmed reports of a 3.9% decline in 1Q12. Absolute demand growth should return in the second half of 2012 (+0.5% y-o-y), as macroeconomic activity is thought likely to consolidate whilst prices remain below their earlier peaks. Rising second half demand should support an annual average decline rate of 0.9% in 2012, taking total US oil product demand down to an average of 18.7 mb/d. Potential support for gasoline could arise if, as many are speculating, the recent drought-related spike in US crop prices causes a waiver of Renewable Fuels Standard (RFS) commitments. Under such a scenario - not our prevailing base case - less ethanol would be required in the gasoline blend, in turn requiring more refinery-sourced gasoline. All other things equal however, US demand should remain relatively flat in 2013 at 18.7 mb/d, as the entrenched long-term structural decline cancels out any support provided by lower oil prices and continued 2.0% economic growth.



Europe

The oil demand outlook remains relatively bleak in Europe, reflecting the ailing state of the economic backdrop there. Gasoline remains one of the worst performing product categories, down 3.3% in June to 2.1 mb/d, as consumer sentiment has eroded, a consequence of record unemployment rates. The sharp deterioration in manufacturing-sector confidence post-February (see Eurozone Manufacturing PMI chart), has also led to falls in industrially important diesel (-0.8% to 4.5 mb/d) and fuel oil (-4.2% to 1.2 mb/d). Total European oil demand fell by 1.6% in June, to 14.3 mb/d, with Italy (-8.7% to 1.4 mb/d), Poland (-6.4% to 0.5 mb/d) and Spain (-4.9% to 1.3 mb/d) posting particularly low metrics. Demand in Germany (+7.7% to 2.4 mb/d) and France (+2.7% to 1.8 mb/d) remained more robust.



Starting with the greatest decline, Italian demand continues to fall heavily as the dire state of the economy undermines consumption of oil products, with no product except heating oil going unscathed. Fuel oil (-22.5%) led overall June demand south, as the previous year's need to replace lost Libyan natural gas waned, similarly suppressing 'other' products (-11.3%). Having fallen by 8.4% in May and 8.7% in June, total Italian oil product demand should contract by 8.5% for 2012 as a whole, to 1.3 mb/d. The assumed decline rate is then forecast to ease somewhat in 2013, to -2.9%, as the predicted economic decline also eases.

In June, according to preliminary data, oil product deliveries in Germany increased by 7.7% y-o-y, after declining 4.1% in May. Fuel oil rose by a sharp 50% and gasoil/diesel by almost 22%, while naphtha demand collapsed by 21% and jet/kerosene dropped by 4.3%. The sharp rise in heavy oils contrast with the deterioration of the economy, signalled by a three-year-low manufacturing PMI reading (July dropped to 43). The export sector, the traditional source of growth, may fail to boost German demand, as appetite for its exports languished in the 2Q12 due to anaemic demand in the EU, China and the US. Our 2012 and 2013 forecast for total oil product demand remain at 2011's 2.4 mb/d level.



Asia & Oceania

The extended Asia & Oceania region -the previous OECD Pacific region plus Israel - saw a robust 5.8% y-o-y growth rate for demand in June, to 7.9 mb/d. Post-tsunami Japan continues to provide a large amount of the upside momentum, with fuel oil and 'other' products rising particularly sharply stimulated as replacement fuels in a power sector shorn of nuclear capacity. Large gains were also seen in the, for now, more resilient South Korean (+9.1% to 2.3 mb/d) and Australian (+1.4% to 1.1 mb/d) economies.



In Japan, oil demand rose by 5.5% or 220 kb/d y-o-y in June, after rising by an average of 10.7% in the previous five months. May oil demand was revised upwards by 145 kb/d on the back of stronger residual fuel oil (75 kb/d higher than reported in the July OMR) and 'other' product demand (+55 kb/d). In June, residual fuel oil (up 37.4%), 'other' products (up 24%) which includes direct crude burning, and LPG (8.3%) led the monthly growth. Jet/kerosene (-7.3%), naphtha (-3.1%) and motor gasoline (-2.7%) all posted sizeable declines, reflecting the still-ailing state of consumer confidence.

The Japanese power sector continues to confront significant summer power generation constraints. Currently, only two nuclear reactors in Ohi are operating, adding 1 TWh in July and 1.75 TWh of capacity in August. Reactivation of further idle capacity depends on a new nuclear watchdog being appointed in September, responsible for authorizing nuclear plant start-ups. Our scenarios for incremental oil demand for 2012 were revised upward by 10 kb/d, taking the 'some nuclear' case to 360 kb/d and 'minimum nuclear' to 390 kb/d. Incremental oil demand in 2013, from 2010 'normal' levels, are expected at 160 kb/d for 'some nuclear' and 340 kb/d for 'minimum nuclear'. As such, the IEA has revised up Japanese total oil demand by an average of 20 kb/d for 2012 and 2013. Demand in 2012 is expected to grow by 200 kb/d (+4.5%) to 4.7 mb/d, while 2013 demand should decrease 140 kb/d (-3%) to average near 4.5 mb/d.



Korean demand data posted a surprisingly robust 9.1% y-o-y growth trend in June, a gain of roughly 190 kb/d to 2.3 mb/d. This strong demand growth has resulted in government efforts to curtail consumption (see 13 June 2012 OMR), as most of Korea's oil needs to be imported. With demand curbs adopted, Korean demand will likely flatten in 2013, falling by 0.2% to 2.3 mb/d, after an envisaged 2.3% gain in 2012. Relatively strong naphtha consumption, up 7.5%, is projected to lead the 2012 momentum, following June's 19.7% gain, as robust industrial output in Korea (+0.7% in June) continues to support the Korean petrochemical sector.



Non-OECD

June was a mixed month for the non-OECD, with strong gains in total oil consumption still seen in many nations but clear signs of economically induced weakness emerging elsewhere. Industrially important gas/diesel oil demand eased, rising by a relatively muted 1.4% in June to 13.5 mb/d, a growth rate exceeded by every other major non-OECD product category. A surprising drop in dominant non-OECD consumer, China (down 2.3% to 3.1 mb/d), led the way, with reports of lower trucking usage in June. The non-OECD transportation fuel market in general, however, remains relatively robust, supporting gasoline demand growth of 5.8% (to 8.9 mb/d). High volatility appeared in jet/kerosene demand, down 3.1% in May but up 3.5% in June, albeit air-traffic numbers show signs of weakness.

After a couple of tough months at mid-2012, more robust demand growth is assumed to emerge towards the end of the year and into 2013. The base case scenario holds that the exceptionally trying macroeconomic backdrop of mid-year improves in the latter stages of 2012 and into 2013. Furthermore, using the futures strip as the basis for our pricing assumption, real oil prices would fall in 2013, with Brent down around 7% according to the prevailing futures strip, providing some support for demand. Total non-OECD demand growth of around 2.7% is foreseen for 2013, averaging 44.7 mb/d, on a par with the predicted increase for 2012.



Non-OECD Baseline Data Revisions

Significant historical data revisions accrue to the non-OECD demand estimates this month, reflecting the complete annual data series that have now been compiled by the IEA's Energy Data Centre. Whereas previously post-2009 non-OECD figures were based upon a combination of national source statistics, JODI data and econometric modelling, the revisions that have been included this month reflect the official annual statistics for 2010, plus revisions to prior years. The changes amount to a lower global demand estimate of roughly 0.1 mb/d for 2009 and 0.3 mb/d for 2010, with the lower baseline numbers accordingly filtering through to the demand projections. Although changes were seen across several regions, the largest adjustments are applied to Iraq, Iran and China. The Iraqi series for 2008, for example, is roughly 150 kb/d lower than previously reported (with demand now listed at 0.5 mb/d in 2008), with almost all of the revisions seen in gas/diesel oil and heavy fuel oil. Both road and industrial usage of diesel in Iraq are now thought to have fallen by 2.3% in 2008, markedly weaker than the previously assumed gains. Official statistics for Iran cut around 65 kb/d off the annual 2009 demand estimate, to 2.01 mb/d, and reduced the 2010 estimate by 220 kb/d, to 1.84 mb/d, with LPG underpinning the change. The Iranian LPG demand number is revised down in 2010 on account of large reported contractions in road (-72%), residential (-10.9%) and industrial (-11.9%) use. Finally, China has seen 155 kb/d removed from its 2010 demand estimate, to 8.8 mb/d, based on reductions to gas/diesel oil. The adjustments are distributed  across different sectors, specifically private power producers (-25.0%), oil and gas extraction (-19.3%), iron and steel (-11.4%), non-metallic manufacturing (e.g. cement, -8.5%), rail (-5.1%) and non-ferrous metals (-1.2%).



China

Weaker economic projections, plus lower base data, combine to suppress forecasts of Chinese oil demand. Not only has an average of 450 kb/d been removed from the latest May/June consumption estimates, but the underlying economic backdrop has now also weakened: growth of 8.0% in 2012 (previously 8.2%) and 8.1% in 2013 (8.5%). China is expected to consume roughly 9.5 mb/d of oil products in 2012, up 2.6% (or 240 kb/d) on the previous year. The Chinese growth estimate then modestly accelerates to 2.8% in 2013 (or 265 kb/d), taking average annual demand up to 9.7 mb/d.

The latest data reveals a sharp deceleration in momentum compared to the double-digit expansions seen at the beginning of 2011. Preliminary estimates of apparent demand - i.e. refinery output plus net product imports - for June, depict y-o-y growth close to zero, with total demand averaging 9.1 mb/d. The near disappearance of Chinese growth continues the trend that took hold towards the end of 2011, with the average expansion rate of the previous ten months through June now just 1.1%. Reports of heavy rain likely boosted hydro production, quelling the need for coal to be moved by trucks, while stagnating electricity output in general has been taken as a pointer of the recent economic slow-down.  Stronger industrial output towards the latter part of 2012 should support a re-acceleration in demand, with growth of 2.9% assumed for 3Q12 and 4.1% for 4Q12. Gasoline looks set to continue to underpin the Chinese upside, with respective gains of 8.3% and 6.9% assumed as robust car sales (+9% in June, to 1.58 million) continue.



Other Non-OECD

Indian demand rebounded strongly in June, up 7.2% y-o-y to 3.8 mb/d, a sharp acceleration from the relatively lacklustre trend seen in the previous six months (when growth averaged just below 3%). The additional consumption is largely diesel, up 13.9% in June to 1.5 mb/d, as both the power and agricultural sectors ramped up their requirements. Below par monsoon rains (22% below their seasonal norm in the week ending July 20th), resulted in an increased usage of diesel-fired generators to irrigate crops. Late-July's electricity blackouts are likely to provide further short-term support for diesel demand, as a major stop-gap power source in emergency generation. The updated June estimate is effectively 145 kb/d up on the prediction made a month earlier. Growth will likely slow in the second half of 2012, reflecting the increased global economic malaise, before rebounding in 2013 as underlying conditions look set to improve (with GDP growth of around 7% foreseen in 2013).



The Thai demand forecast has also been revised higher, with growth of 2.7% now envisaged for 2012 (previously assumed to be 2.0%), on the realisation the post-flood rebound will be larger than previously assumed. Additional consumption following May's 75 kb/d revision, 35 kb/d attributable to fuel oil, leaving a total y-o-y gain in May of 6.1% to 1.2 mb/d. Economic growth of around 5% underpins the relatively robust Thai oil demand forecast.



The compilation of coherent Iranian data has proved particularly difficult this month, as official JODI data alluded to strong y-o-y gains of 6.0% in April and 7.9% in May, exceeding IEA estimates. Particularly large increases for gasoline, with respective jumps of 10.8% and 16.8% reported, and gas/diesel oil, up 7.6% and 6.4%. Additional IEA analysis implies lower, but still positive, y-o-y gains for total Iranian oil product demand, of 2.0% in April and 2.7% in May, with transportation fuels taking the brunt of the correction. Despite such adjustments, the April/May statistics still show an upward growth adjustment from last month's predictions of y-o-y declines, supporting a diminished annual decline rate of 1.6% in 2012, whereas previously -2.3% was assumed. Furthering the complexities the baseline series has been significantly reduced (see Non-OECD Baseline Data Revisions), down 220 kb/d in 2010. Total Iranian consumption of 1.8 mb/d is envisaged for 2012, a level that is expected to be maintained in 2013.

Supply

Summary

  • Global oil supply grew by 0.3 mb/d month-on-month (m-o-m) to 90.7 mb/d in July, with non-OPEC liquids production accounting for 60% of the increase. Compared to a year ago, global oil production stood 2.6 mb/d higher, with 80% of the increase deriving from OPEC crude and NGLs.
  • OPEC crude supply for July is estimated at 31.39 mb/d, a drop of 70 kb/d from a downward-revised June total. Lower output from Iran, Angola and Libya counteracted increases from Iraq, UAE and Qatar. OPEC output now stands just above the underlying 'call on OPEC crude and stock change' for 3Q12. The call recedes to 30.4 mb/d for 4Q12 and to 30.1 mb/d in 2013. OPEC effective spare capacity nudged higher to 2.57 mb/d, but remains slim relative to current supply-side risks permeating the market.
  • Imports of Iranian oil by major consumers registered a sharp drop in July, to 1.00 mb/d from 1.74 mb/d in June. However, July data are preliminary, and there is scope for imports from Iran to recover modestly from September onwards, albeit we retain our existing assumption that around 1 mb/d of Iranian oil may struggle to find buyers in 2H12.  
  • Non-OPEC supply grew by 0.2 mb/d in July from the prior month and by 0.5 mb/d compared to July 2011. Planned summer maintenance curbed growth of non-OPEC supplies in 2Q12 to 0.5 mb/d in contrast to 0.7 mb/d in the first quarter.  Non-OPEC supplies are expected to grow by 0.4 mb/d in 2012 and 0.7 mb/d in 2013, unchanged from last month's assessment.


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

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

OPEC crude supply for July is estimated at 31.39 mb/d, around 70 kb/d lower than a downward-revised June total of 31.46 mb/d. Last month saw lower supplies from Iran, Angola and Libya, which countered increases from Iraq, UAE and Qatar. Output has therefore ebbed from an April/May highpoint of near 31.8 mb/d, and now stands just above this report's assessment of the underlying 'call on OPEC crude and stock change' for 3Q12 of 31.0 mb/d. Thereafter, the 'call' is seen receding to 30.4 mb/d in 4Q12, before averaging 30.1 mb/d during 2013, slightly lower than envisaged in last month's report. After accounting for OECD definitional changes introduced this month, the marginally weaker 'call' derives from what is now a more conservative oil demand outlook for the OECD and China.



Effective spare capacity held by OPEC producers is assessed at 2.57 mb/d, slightly higher than the June level of 2.35 mb/d, on account of a higher average 3Q12 installed capacity level, which now forms the basis for comparison with the most recent month's output. Angola, Libya, Nigeria, Iraq, Qatar and Ecuador are all seen adding modestly to installed capacity during this quarter, thus boosting very slightly the level of implied spare output capacity within the global oil market. That said, and amid ongoing geopolitical issues affecting supply from a number of major producers, current spare capacity can hardly be considered excessive. Civil and social unrest affecting supply from Nigeria, Iraq and Libya in recent weeks, plus the ongoing slide in output from Iran, are outweighing the market impact of moves by Gulf producers to by-pass the Straits of Hormuz, weakening demand growth and higher levels of consumer inventory.



Iranian crude supply in July fell to 2.9 mb/d from a downward-revised 3.0 mb/d in June. Supply has steadily drifted lower, from 3.6 mb/d in 4Q11 to 3.4 mb/d in 1Q12 and 3.1 mb/d in 2Q12. We have also made a reassessment of both the crude export and domestic crude refinery throughput data that comprise Iranian supply estimates for 2011/2012. On average, 2011 monthly crude supply for Iran has been revised up by nearly 45 kb/d (averaging 3.62 mb/d), while those for January to June 2012 have been revised down by 40 kb/d on average (and come in close to 3.25 mb/d for the six month period). Symbolically, Iranian crude output fell below that of regional rival Iraq in July for the first time since the late 1980s.

July also saw the first full month of the combined US sanctions and EU embargo affecting Iranian oil sales. Preliminary data for key consuming countries suggest July imports of Iranian oil near 1.00 mb/d, compared with 1.74 mb/d in June. It is worth noting however, that July data are highly provisional, and subject to revision as fuller customs and shipping data become available. That said, the EU countries and South Korea are believed not to have taken any Iranian oil in July. However, if June potentially represented a pre-embargo surge in imports, July and August may similarly understate the trend level of Iranian imports for the months to come. Japan, South Korea, Turkey and India will all likely see some hiatus in liftings in July and August due to a lack of insurance cover for vessels carrying Iranian crude. That said, Japan and India have now introduced state-backed insurance schemes for cargoes of Iranian oil, while Iran itself announced that it will provide insurance cover for vessels trading into China, South Korea or indeed for any vessel entering its waters.

Imports may languish well below 1.5 mb/d in July and August, but they could theoretically pick up again from September if importers are satisfied that government-backed or Iranian insurance is adequate. An observed decline of 14 mb in Iranian floating storage in July also suggests that some extra oil is en route to customers for August/September delivery. However, with persistent doubts over the validity of Iranian-backed insurance, and an ongoing review by US authorities of the exemptions to sanctions, could also keep overall imports around 1 mb/d below 2011 levels. Moreover, with US financial authorities in late-July/early-August identifying Chinese, Iraqi and UK banks allegedly in breach of sanctions, and the US congress agreeing a bill that further tightens measures against Iran, the country will likely continue to face major difficulties in placing its exports.

Libya saw output slip to 1.35 mb/d in July, from 1.38 mb/d in June and 1.42 mb/d in May. Market reports suggest that uncompetitive pricing terms impeded sales in June and July, with suggestions that this temporarily led NOC to shut-in 300 kb/d during June as storage filled up. Civil unrest in the Kufra region and power supply problems have also impeded supply in recent weeks. Some rebound in supply is possible for August however, after official selling prices were adjusted to be more competitive with comparable light-sweet grades. The restart of the Ras Lanuf refinery was again postponed from 15 July until at least early-September, with disrupted crude supplies from Agoco fields cited as one reason. Meanwhile, a new pipeline is to be built by early-2013, linking the eastern Nafoora field to the Amal field, allowing onward flows to the Ras Lunuf export terminal. 

Output remained constrained from OPEC's two west African producers in July. Angola experienced a second successive month of output decline, averaging 1.62 mb/d in July from 1.71 mb/d in June. Scheduled maintenance at the Girassol FPSO and downtime at the Palanca export terminal affected output in the first half of July. However, supplies are expected to rebound in August, and export schedules in excess of 1.8 mb/d, if realised, would amount to a 30-month high. Nigerian crude production is assessed stable at 2.16 mb/d in July, around 150 kb/d lower than levels seen in summer 2011. Shell in early-August lifted the force majeure on Bonny Light crude exports in force since May, after completing lengthy pipeline repairs, while Total announced that it planned to add 350 kb/d of new oil output capacity in the next three years at the deepwater Akpo and Usan fields. However, less promisingly, late-July and early-August saw renewed pirate attacks on vessels carrying oil workers in the Niger Delta region.

The estimate for June crude supply from Saudi Arabia has been revised down to 10.0 mb/d from a prior level of 10.15 mb/d. Data on export shipments and indications for refinery throughputs and direct crude burn in the power sector together suggest June output remaining close to May levels. July output too has been held flat at 10 mb/d. Price formulas also suggest the Kingdom may not have been looking to place more oil with customers in August, although some extra sales into Asia are possible for September, based on cheaper regional price differentials.

The approach of the 1 July embargo on Iranian imports saw a spate of reports on alternative oil transit routes in the event of any blockage of the straits of Hormuz. In addition to the start-up of Abu Dhabi's 1.5 mb/d line (see below), there were also suggestions that Saudi Arabia is preparing to switch up to 2 mb/d of east-west pipeline capacity, currently given over to natural gas shipments, to once again carry crude. Separate reports noted Iraqi requests to be allowed to use the 1.65 mb/d Iraq Pipeline in Saudi Arabia (IPSA) to reduce its reliance on the Straits. However, press reports suggest that Saudi Arabia plans to continue using that pipeline for natural gas shipments to Yanbu, as has been the case since 2001.



Crude supply from the UAE in July was up by an estimated 20 kb/d to 2.68 mb/d. Abu Dhabi began commissioning the 1.5 mb/d Habshan to Fujairah pipeline in early-July, a project designed to ship onshore Murban crude 370 km to the northeast, by-passing the straits of Hormuz. Around 8 mb of new crude storage has been built at Fujairah in conjunction with the pipeline, and the line is expected to be operating close to capacity levels by end-2012.

Iraqi crude production in July reached 3.02 mb/d, with a rise in crude exports from Basrah contributing all of the 0.1 mb/d m-o-m increment in supply. Southern exports of 2.22 mb/d were the highest since before the allied invasion in 2003, as a single point mooring (SPM) terminal which had closed for maintenance in June, re-entered service. However, northern shipments via Ceyhan in Turkey fell by 40 kb/d to 0.28 mb/d. The pipeline from Kirkuk to Ceyhan was attacked twice, both times within the Turkish border, first on 20 July and then again on 5 August.

Amid a worsening political situation in Syria and heightened activity by PKK insurgents in border areas, the Turkish army has stepped up its presence along the Iraqi border. Meanwhile, the Kurdistan Regional Government (KRG) in Iraq has reportedly started cross-border shipments of around four trucks of condensate per day into Turkey. Strained relations between the KRG and Baghdad have seen the former cut off 175 kb/d of export shipments via the Kirkuk-Ceyhan pipeline since April, claiming that Baghdad has failed to make payment for the crude. The KRG said it would resume exports via the pipeline in August at levels of 100 kb/d, but that these could again cease by end-month if Baghdad fails to recommence payments.

A 'tug-of-war' is also underway between Erbil and Baghdad as regards foreign upstream participation. July saw Total and Gazprom, following earlier forays by Exxon Mobil and Chevron, buying stakes in acreage in northern Iraq. Production sharing contracts offered by the KRG are seen by foreign operators as more attractive than the limited, 20-year service contracts offered by Baghdad. Having prohibited Chevron and Exxon from bidding for any further work at southern fields as punishment for signing deals with the KRG, Baghdad now says it may also cancel Total's share of the recently-started Halfaya field.

Non-OPEC Overview

Non-OPEC production grew by 0.6 mb/d in the first half of 2012, although crude output accounted for only around 20% of the growth, with the rest coming from natural gas plant liquids and gas condensates. Unplanned outages at China's Peng Lai field, Total's Elgin/Franklin complex, and geopolitical disruptions in the Middle East and Africa, among others, have reduced non-OPEC output by around 1 million b/d. Nexen will perform maintenance at the 200-kb/d Buzzard field in September, which will lower production from the Brent benchmark blend.  On the plus side, a restart of exports from the 120-kb/d Marib pipeline in Yemen, and a tentative agreement on pipeline transit between Sudan and South Sudan, could herald an easing in the level of non-OPEC outages.

Yet, in non-OPEC countries downside risks remain. Sabotage could return to Yemen, and a comprehensive agreement between Sudan and South Sudan could yet prove elusive. In Latin America, Brazilian production is underperforming and Colombia's Cano Limón pipeline was bombed last month. More certainty regarding North Sea loading schedules supports prior and current forecasts that production in the North Sea, and notably at fields that feed into the Brent-Forties-Oseberg-Ekofisk marker, will drop to record lows. US maintenance is also at its peak now, with Alaskan pipeline maintenance and Gulf of Mexico turnarounds keeping 3Q12 crude output at 6.2 mb/d. This is 60 kb/d less than 2Q12 but still a significant 600 kb/d higher than 3Q11.  Maintenance will reduce 3Q12 annual growth in non-OPEC supply to only 60 kb/d, but growth rates of around 400 kb/d should return in the fourth quarter.



On balance, revisions made over the last month have cancelled each other out, with an uptick to Middle East and African production offset by lower Latin American and global biofuels output in 2012.  The inclusion of Estonia and Chile in the OECD category increases 2012 OECD production by around 30 kb/d. First half upward revisions to non-OPEC supplies offset downward revisions in the second half. Non-OPEC supplies should grow by 430 kb/d in 2012 and by 720 kb/d in 2013, leaving 2013 supplies at around 53.9 mb/d. 

OECD

North America

US - July preliminary, Alaska actual, other states estimated:  US oil production likely remained at around 8.9 mb/d in July, with maintenance in Alaska and the Gulf of Mexico and lower ethanol output offsetting rising onshore production at light tight oil deposits. In Alaska, summer maintenance at the Trans-Alaska oil pipeline (TAPS) reduced output in July and August. Operators such as BP and Conoco Philips have therefore reduced output at their fields lowering Alaskan output to 430 kb/d in July, or 150 kb/d lower than 1H12 production.



Remarkably, in the chart above drilling activity in PADD 2 has not slowed due to the recent fall in prices. The Gulf of Mexico, which is already prone to hurricane-related outages during 3Q, will see output further reduced from maintenance occurring at BP's Atlantis field. The BP-operated Mad Dog field is also undergoing maintenance, but company reports indicate the field has been offline since last year. Offsetting these declines are increases in production from the Eagle Ford shale, with operators reporting they plan to drill in closer intervals.  Operators are also now able to take advantage of Enterprise Products Partners' new 24-inch crude oil pipeline linking the area with extensive Houston area refining markets. The pipeline has a design capacity of 350 kb/d, but will initially carry around 250 kb/d.

North Sea

North Sea production fell to around 2.4 mb/d in July based on preliminary data, or 260 kb/d below the prior month, with 3Q12 production also 8% lower than in 2011. The impact of the oil workers' strike in Norway was expected to cut around 110 kb/d of production in June and 120 kb/d in July.  Maintenance in 2Q12, strong field performance, and the effects of the strike were less severe than expected resulting in an upwards revision. The BP-operated Valhall field also doubled its production in May from April to over 30 kb/d. A new platform is expected during the next couple of months, which should raise production further.



Forties production is expected to fall from around 370 kb/d in August to around 200 kb/d in September due to the onset of planned maintenance at Nexen's Buzzard field. The field also suffered some technical issues in July, which caused deferred loadings. The maintenance in September could increase price uncertainty and volatility with the benchmark BFOE crude because of the disproportional influence that Buzzard's sulphur content has on the Forties blend. Oseberg production likely fell below 100 kb/d in July due to the impact of the strikes earlier in the month. All told, BFOE production is expected to touch a record low of around 630 kb/d in September (not including Troll). On average, the third quarter BFOE level is 17% lower year-on-year (y-o-y).

Severe Drought Clouds US Ethanol Outlook

The worst drought in 55 years is severely affecting the US' key corn growing regions. In its 10 July update, the US Department of Agriculture lowered average yield expectations for corn by 12% compared to its June forecast (from 166 bushels/acre to 146 bushels/acre, i.e. 9.2 tons/hectare), and the total projected corn harvest has been revised down to 316 million tons. While this still represents the third largest harvest on record, the continued absence of rain in combination with very low US corn stocks have driven up corn prices to record highs during the last weeks (around $8/bushel, or $315/ton).

Reduced Profit Margins Lead to Plant Shut-ins. High corn prices in combination with falling ethanol prices have led to negative crushing margins that caused a number of ethanol plants to reduce production or idle temporarily until after the US corn harvest. Ethanol output has thus plunged to around 800 kb/d, the lowest level in two years. Given the current situation, US ethanol production is expected to average around 850 kb/d in 2012, 60 kb/d lower than in 2011, and expect 1H13 production lower than in our previous forecast.

The RFS Waiver Drumbeat Gets Louder. The drought has also raised fodder prices, putting increasing economic pressure on meat and poultry producers. Since around 40% of the US corn harvest is processed in ethanol distilleries (note that one third of this is returned to the fodder market as high protein feed in the form of dried distillers grains), meat and poultry organisations have recently called on the Environmental Protection Agency (EPA) to waive the Renewable Fuels Standard (RFS) as they see ethanol demand induced by the RFS creating the type of economic harm required to justify a waiver.

Although more than 150 members of Congress are supporting the call according to news reports, there is currently no indication from EPA that it will waive the RFS mandate. US ethanol stocks are fairly high at 800 million gallons, providing the possibility to satisfy at least part of the 13.2 billion gallons of ethanol mandated under the RFS this year. In addition, according to the Renewable Fuels Association, around 2.5 billion ethanol credits, so-called Renewable Identification Numbers (RINs), have been banked in recent years as refiners blended more ethanol than required by the RFS. These RINs provide some flexibility for blenders to meet the 2012 RFS requirements despite the projected lower ethanol output, and could help reduce some of the pressure on corn prices.

Non-OECD

Latin America

Brazil - June actual:  Crude output in Brazil fell by 20 kb/d to 2.0 mb/d in June (80 kb/d less than in June 2011) on continued maintenance at fields in the Campos Basin. The Marlim Leste and Barracuda fields saw production reduced by around 40 kb/d in total. It is worth noting, however, that in the Santos basin the Lula field reached a record level of 100 kb/d in June, 30 kb/d higher than the rates of the prior six months. In 2Q12 on average, Brazilian crude production fell by 50 kb/d from the prior year, although an uptick in growth is expected during 2H12.

Output remains shut in at the 70-kb/d Chevron-operated Frade field. Although Brazil's regulator the ANP noted it had no objections to the firm restarting production, a federal court is requiring Chevron and Transocean to stop all transport and production operations in Brazil. Chevron plans to appeal against the ruling and says that it is still planning for a production restart. Despite these intentions, we have delayed full resumption of production from 4Q12 to 1Q13 on the assumption that the Court's ruling will undermine a timely restart.

Colombia - May actual:  The Revolutionary Armed Forces of Colombia, known as the FARC, bombed the 220 kb/d Cano Limon pipeline on 22 July. The pipeline traditionally carries about a third of its design capacity, mostly from Ecopetrol. The company noted in an earnings release that they would be reducing their output forecast due to the unavailability of transport systems affecting the Cano Limon fields and the fields in the Putumayo basin.  Production from the Cano Limon field alone totals around 40 kb/d. Despite the sabotage of the field, pipelines are usually repaired quickly. Similar events occurred in September and December 2011 and the field's output was cut in half. Based on company-level data for 2Q12 we have slightly reduced production expectations, by 20 kb/d in 2012 and maintain that production is now unlikely to exceed 1.0 mb/d until the second half of 2013.

Africa

Sudan and South Sudan Agree on Transit Fees But Challenges Remain

Sudan and South Sudan reached a tentative agreement on oil processing and pipeline transit on 3 August, one day after the expiry of a UN resolution that would have imposed economic sanctions on both states had they not found a solution. The news of the deal does not, however, dramatically change our view on production prospects for 2013.

A new deal?  Southern oil is expected to be exported via the north through the pipelines from Petrodar's Block 3/7 and from GNPOC's Block 1,2, and 4 fields, at $9.10/bbl and $11/bbl, respectively. Including a $3.028 billion transfer to the north, to be paid out over 3.5 years, the deal averages an effective pipeline tariff of $24/bbl. Sudan had previously asked for $36/bbl. The deal stipulates that new rates can be renegotiated after three and a half years, but may not be raised before then.

Contentious issues remain. Sudan stresses that the implementation of the transit agreement will not go into effect until the sides agree on border security and the status of the Abyei area. Talks have broken down several times in the past over the location of a demilitarised zone, which would represent the first step to ending hostilities. The sides are unlikely to continue the requisite negotiations on border security until after Ramadan, at the end of August. According to the African Union Peace and Security Council (AUPSC), the parties have until 22 September to resolve the remaining issues.

Restarting crude production will not be easy. Industry sources have been quoted as saying that restarting oil production could take six months or even longer, since the lines have been filled with water and because some wells were not closed properly. South Sudan was producing around 300 kb/d in January 2012 before the shut-in began, with  around 250 kb/d of production from Blocks 3 and 7. We expect a trickle of oil from these blocks could make its way out before the end of 2012, yet we do not expect to see production exceed 150 kb/d from these assets in 2013. The potential for pipeline sabotage remains, and there is a high probability of  mechanical issues associated with restarting production. The extent of damage at Blocks 1, 2, and 4 in GNPOC's operating area in Sudan and South Sudan is also unclear, but it is likely that the damage could have reduced the capacity of the Central Processing Facility. Therefore, when this particular production does restart, it is unlikely to return quickly to pre-conflict volumes of around 130 kb/d (in Sudan and South Sudan).

Looking forward, the sustainability of any deal will depend on managing conflict on both sides, yet both sides are compelled to agree in the near future as fiscal pressures mount. The base case assumption is that output from Sudan and South Sudan averages 130 kb/d in 2013, and 60 kb/d in 4Q12, compared with around 450 kb/d in 4Q11.

Former Soviet Union

FSU net exports fell by a further 220 kb/d to 8.9 mb/d in June, with 60 kb/d and 110 kb/d contractions in crude and products, respectively. Year-on-year, net exports remain 470 kb/d lower, driven by a 440 kb/d fall in products, with crude shipments remaining relatively stable (-20 kb/d y-o-y). Exports of crude amounted to 6.34 mb/d after a 260 kb/d contraction in shipments from Baltic ports offset a 220 kb/d hike in shipments from the Black Sea. In the Baltic, Primorsk and Ust Luga volumes decreased by 130 kb/d in total. Exports from the former were curbed by maintenance, while anecdotal reports suggest that Ust Luga did not export its scheduled 320 kb/d after northern markets were awash with Urals, as evidenced by the collapse of the premium of Urals NWE to Urals Med throughout June. As a consequence, 140 kb/d more Urals was shipped via Novorossiysk. This underlines the rising flexibility in the Transneft network, which permits Russian producers to ship  oil via the most profitable routes.

Despite the surprise fall in Ust Luga loadings, Druzhba pipeline volumes remain depressed, at 1.1 mb/d (-80 kb/d m-o-m) with deliveries to all destinations lower than in May, notably with Poland receiving 60 kb/d less. Tanker data suggest that from July onwards to compensate for lower Druzhba deliveries, Poland are importing more seaborne Urals, despite the extra cost vis a vis pipeline deliveries. The FSU exported 2.63 mb/d of products in June, after shipments of fuel oil, 'other products' and gasoil fell by 60 kb/d, 30 kb/d and 20 kb/d, respectively. Healthy Russian internal demand and an expected fall in July export duties which prompted exporters to hold back shipments, resulted in lower exports, despite an increase in refinery throughput after recent maintenance.



Middle East

Crude and condensate production from Oman increased by around 40 kb/d in May to 940 kb/d despite a dispute with contractors for around a week. The Harwheel miscible gas and other EOR projects are increasing production in the country. In Yemen, producers shipped their first batch of crude oil to the Aden refinery at a rate of around 30 kb/d, the first shipment via the Marib pipeline since late last year. Output may be slow to recover and could remain subject to sabotage for the remainder of the year. Either way, the resumption of exports is a positive sign, and we have raised production estimates for 2H12 by around 30 kb/d to near 200 kb/d, on par with last year's levels during the same period but around 50 kb/d less than the first half of this year.

OECD Stocks

Summary

  • OECD industry stocks fell counter-seasonally by 5.5 mb to 2 683 mb in June, representing a deficit of 19.2 mb to the five-year average. A build in product stocks, notably of 'other products', failed to offset a draw in crude oil stocks.
  • OECD forward demand cover fell by 0.2 days to stand at 57.8 days, 0.2 days below May's downwardly revised level. However, cover now exceeds year-ago levels (+0.1 days) for the first time since January 2011.
  • July preliminary data indicate a 10.0 mb OECD stock build, more muted than the 21.7 mb five-year average build. A sharp 13.9 mb decline in crude, as refinery throughput increased, outweighed a significant 28.6 mb build in products, concentrated in OECD Americas.
  • Chinese strategic stock building continues apace as the gap between reported refinery throughput and net imports and production data averaged 600 kb/d over 1H12 suggesting a combination of strategic petroleum reserve filling, and unreported crude use in either the refining or power generation sectors.


OECD Inventory Position at End-June and Revisions to Preliminary Data

OECD commercial oil inventories slipped further below the five-year average in June, drawing by 5.5 mb in contrast to the five-year average build of 1.7 mb. End-June total oil inventories stood at 2 683 mb, a deficit of 19.2 mb to the five-year average. However, despite this, OECD total commercial oil inventories posted a second consecutive quarterly stock build, increasing by 0.3 mb/d in the second quarter, only slightly lower than the 0.4 mb/d reported for the first quarter. When translated into days of forward demand, levels have also come down compared to previous months, and cover now stands at 57.8 days, 0.2 days below May's downwardly revised level. However, compared to year-ago levels, cover now stands 0.1 days higher, the first time year-ago levels have been exceeded since January 2011.

June's draw was driven by crude inventories, which declined by a seasonal 6.6 mb after a build in the OECD Americas (+8.8 mb) failed to offset decreases in Asia Oceania (-4.8 mb) and Europe (-9.6 mb). In contrast, products holdings rose by 2.5 mb, although this masked a significant decline in middle distillate stocks which plummeted by 14.0 mb, notably in OECD Europe where prolonged weak refinery runs following rationalisation is continuing to weigh heavily on stocks. Motor gasoline also fell by 2.7 mb, with a build in the Americas partially offsetting declines elsewhere. These falls were more-than-offset by a 14.23 mb surge in 'other products' stocks principally located in OECD Americas.

New OECD Countries Incorporated

As elsewhere in this report, data for new OECD member countries Chile, Estonia and Slovenia has been incorporated. Unlike the OECD supply and demand analysis, however, Israel is currently not included in the time series since stock levels are not reported by their administration. The effect of the re-classification of these countries into the OECD makes for net additions in May 2012 of 17.7 mb and 13.4 mb to OECD total and industry oil stock holdings, respectively. As with supply and demand data, the historical OECD stocks series has been revised to include Chile from January 1984 onwards and Estonia and Slovenia from January 1990 onwards.

All of Chile's 10.5 mb total oil inventories are held by industry, equating to 31.2 days of forward demand. Indeed, the government places an obligation on all producers and importers of liquid fuels to hold stocks equivalent to 25 days of average sales for the previous six months. Crude stocks account for 2.7 mb while total products account for 7.7 mb, of which middle distillates, gasoline, residual fuel oil and 'other products' account for 2.7 mb, 1.6 mb, 1.0 mb and 2.4 mb, respectively.

Unlike Chile, Estonia does not place a minimum stockholding obligation on industry. Instead, Estonia has a specialized stockholding agency, OSPA, which is responsible for fully meeting Estonia's emergency stockholding requirements as a member of the EU. In May, out of a total 1.3 mb of stocks, industry held 0.5 mb and the government 0.8 mb. Total oil stocks are sufficient to cover 43.1 days of forward demand. Given that Estonia does not have a refinery, only products are stored on national territory. Middle distillates account for 0.6 mb while residual fuel oil and motor gasoline account for 0.3 mb and 0.4 mb, respectively. It is also noteworthy that Estonia's stockpiling agency stores over 1 mb of emergency oil stocks overseas under bilateral agreements with Sweden, Finland, Denmark and Latvia.

Slovenia has a similar stock holding regime to that of Estonia. There is no minimum stockholding requirement on industry, and the country's stockholding agency, ZRSBR, is fully responsible for covering Slovenia's EU stockholding requirement. Currently, out of 4.9 mb (92.6 days of forward demand) of total oil stocks in the country, industry holds nearly 1.5 mb while approximately 3.4 mb is held by the agency for emergency purposes. Since Slovenia does not have a refinery, it holds only products stocks with middle distillates accounting for the lion's share with 3.4 mb, of which the government holds 2.6 mb. Motor gasoline holdings amount to 1.1 mb, of which industry hold the majority (0.8 mb). Very little residual fuel oil is stored with the remaining 0.4 mb held as 'other products'. Slovenia's stockholding agency also holds approximately 1 mb of emergency oil stocks abroad in Germany, Hungary and Italy.



Recent Changes to Industry Stocks' Methodology

Beginning with this issue, and aside from regional category changes, a number of other adjustments  have been made to the methodology used to compile the OECD industry stocks data. Long-standing downward adjustments applied in order to net out volumes of residual fuel oil held by  major consumers, such as power producers, in Austria, Italy and the Netherlands have been removed from the entire data series. Since these stocks were stored at specific sites such as power stations and were largely unavailable to the general market , they were traditionally excluded from OMR industry stocks. However, data for major consumer stocks that could be individually identified for these countries has been unavailable in recent years, requiring the IEA to make adjustments based on historical average levels. Given the generally declining share of fuel oil in the fuel mix, these adjustments had become prone to error in the absence of concrete data, and so are now excluded from the entire series. Given that these stocks were previously 'removed' from reported industry levels, this change in methodology has the net effect of increasing industry stocks by a combined 22 mb in May 2012. Industry stocks in Austria, Italy and the Netherlands have therefore been revised upwards by 3.0 mb, 17.4 mb and 1.6 mb, respectively.

Coincidentally, in this issue a 12 mb downward adjustment has also been incorporated for Canadian 'other products' inventories for the period January 2007 to April 2012. This follows submissions by Canada for recent months which depict fundamentally lower 'other products' stock levels, and the adjustment represents an attempt to avoid a break in series during the 2007-2012 period.

Due to the above changes, the overall net change to current OECD inventory levels is +11.5 mb for May 2012.

This month's revisions to April and May preliminary estimates have been made on a 'like for like' basis and therefore do not reflect the one-off impact this month resulting from the addition of the new OECD members to their respective regions. In short, stock data for the new members have been added in to both last month's preliminary estimates and to this month's revised estimates. However, data revisions for April and May do reflect changes ensuing from baseline adjustments (see Recent Changes to Industry Stocks' Methodology) which 'added' 22 mb to OECD Europe fuel oil stocks. On this basis, more complete data for OECD countries indicate that May inventories were 17.2 mb higher at 2 672 mb when compared to the data presented in last month's report but nonetheless May's level still lagged the five-year average by 11.9 mb.



Preliminary data for July indicate an OECD stock build of 10.0 mb, more muted than the five-year average 21.7 mb stock build. The increase in refinery throughputs after seasonal turnarounds which outpaced rising crude supplies led to a 13.9 mb drop in crude inventories, with draws of -9.3 mb, -2.4 mb and -2.2 mb reported in the Americas, Europe and Asia Oceania, respectively. These were outweighed by a 28.6 mb build in products, concentrated in OECD Americas (+21.9 mb) after a refinery output rose.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

OECD Americas industry inventories (now including Chile) built by a seasonal 8.8 mb in June after a 12.9 mb build in products offset a seasonal 2.2 mb contraction in crude. 'Other products' stocks drove the build as they increased by 12.6 mb, nearly double the five-year average 6.5 mb build. On an absolute basis 'other products' stocks now stand at 194.8 mb, 21.6 mb above five-year average levels. Although this remains a seasonal phenomenon, stocks now sit above the five-year range having risen by 30 mb over the past year. This trend results from increasing domestic natural gas and light tight oil production which has increased propane supply and caused a significant stock build compared to a year ago. High stocks have thus led to a 40% fall in Propane prices compared to a year ago. Despite this rise, total OECD Americas products still lag the five-year average by 8.2 mb, in contrast to crude which remains 37.3 mb in surplus. Middle distillates are driving this deficit to the five-year average, declining by a further 3.7 mb in June to 27.3 mb below the seasonal benchmark.



Preliminary weekly data from the US Energy Information Administration through 27 July indicate that US industry total oil stocks fell by 7.3 mb over the month to stand at 1 105 mb. Crude inventories dropped by 9.3 mb after imports retreated to their lowest level in over six months. Crude stocks at Cushing drew by 2.5 mb from record June levels, with inventories there now standing at 45.1 mb. In contrast to the fall in crude, total products built by 16.6 mb driven by a 6.3 mb increase in diesel stocks and a 5.4 mb rise in the 'other oils' category, while gasoline grew by 2.9 mb.



After much focus on the crude stock overhang at Cushing, Oklahoma, it is now apparent that crude stocks in PADD 3 (the US Gulf Coast) have also increased significantly, due to the reversal of the Seaway pipeline and in the run up to the start-up of the Motiva refinery at Port Arthur and an increase in Saudi Arabian imports. Although this refinery was recently forced to shut down and is expected to remain closed until 2013, the crude intended for the refinery remains in storage in the region, pushing non-PADD 2 stocks also above the five year average.

OECD Europe      

Commercial inventories in OECD Europe (now including Estonia and Slovenia) continue to lag the five-year average on an absolute basis. They declined by a seasonal 9.6 mb to stand at 919 mb in June, amid continuing weak refinery throughputs which necessitated products destocking to meet demand. Despite sluggish overall demand levels, industry stock cover now stands at a comfortable 63.8 days, a fall of 4.1 days compared to the turn of the year. Germany led the destocking, reporting a sharp draw of 5.1 mb in total oil, as refinery runs remained depressed. Additionally, significant draws were also reported in Italian (-1.9 mb) and Dutch (-2.2 mb) inventories. Regional crude oil stocks remained relatively stable, declining by a slight 1.2 mb.



Total products drew by a significant 9.4 mb, steeper than the five-year average decline of 5.6 mb. Middle distillate holdings plummeted by 8.9 mb, with a third of the fall reported in Germany, which posted a 3.0 mb draw. Due to low German refinery runs, all products except fuel oil posted falls, although the decrease in middle distillates was exacerbated as German households took advantage of lower gasoil prices to fill up their heating oil tanks. Recent data suggest that consumer tank fill reached 53% of capacity, 4% higher than May. Motor gasoline was the only other product category to report a large draw in Europe, falling by 2.4 mb, led by falls in Germany (-1.7 mb) and France (-1.5 mb).

Preliminary data released by Euroilstock signal a 3.0 mb stock build in EU-15 and Norway. Crude fell by 2.4 mb after European refinery intake rose by a reported 170 kb/d. However, this was offset by a 5.4 mb rise is products led by middle distillates (+4.1 mb) and motor gasoline (+2.1 mb) as refinery output rose. Additionally, data indicate that refined products held in independent storage in Northwest Europe built in July with all products except gasoil rising.

OECD Asia Oceania

Industry inventories in OECD Asia Oceania (data for now still excludes Israel) fell by 4.8 mb in June, driven by a counter-seasonal 3.3 mb draw in crude oil stocks spread across the whole region. Total products stocks continue to lag the five-year average, declining by a seasonal 1.0 mb, with minor falls reported across all products except for 'other products'. Notably, middle distillates declined by 1.4 mb, driven by a sharp 1.47 mb drop in Korean inventories after refinery throughputs remained constrained, offsetting an uptick in imports.



Preliminary weekly data from the Petroleum Association of Japan (PAJ) indicate that despite a 0.3 mb fall, total industry stocks remained 1.6 mb above the five-year average. Crude stocks fell by 2.2 mb/d, despite a steep rise in imports, likely resulting from of post-maintenance refinery throughput gains coupled with robust crude direct burn for power generation. In contrast, total products rose by 1.4 mb, after kerosene inventories built by 2.0 mb, offsetting a 1.3 mb fall in naphtha.

Recent Developments in Singapore and China Stocks

According to weekly data from International Enterprise, Singapore onshore inventories fell below the five-year average, as they decreased by 3.9 mb to stand at 39.0 mb at end-July. During early and mid-month light distillates and residual fuel oil fell sharply amid high demand from Australia and Vietnam. However, end-July was characterised by stock builds across all product categories, notably fuel oil, after demand elsewhere in Asia waned while imports rose.



Chinese crude oil inventories rose by an equivalent 10.5 mb in June, according to percentage stock change data from China Oil, Gas and Petrochemicals (China OGP). Crude built despite a sharp 700 kb/d fall in crude imports, to their lowest levels since end-2011 as refineries sharply curbed runs. Product inventories drew by a combined 11.7 mb led by gasoil, which fell by 7.3 mb, while gasoline and kerosene fell by 4.2 mb and 0.2 mb, respectively. This destocking resulted from low refinery output lagging demand.

The gap between reported refinery throughput and net imports and production data implies an average 600 kb/d build in overall Chinese crude stocks over 1H12. This is significantly larger than the reported OGP figure of 100 kb/d, and suggests a combination of strategic petroleum reserve filling, and unreported crude use in either the refining or power generation sectors.



Prices

Summary

  • Crude oil prices in July extended the price gains begun towards the end of June, thereby retracing part of their steep 2Q12 declines. Russian Urals in the Mediterranean, a common substitute for Iranian barrels, saw prices rise by nearly $10/bbl on the month, to $106/bbl. The rally continued in early August, with prices passing the $110/bbl mark. Crude markets in the Middle East and the Asia Pacific region were more subdued, thanks in part to heavier-than-expected exports of Iraqi Basrah Light, which reached their highest level since the 2003 conflict. Prices for Middle East sour benchmark Dubai in Singapore gained less than $5/bbl on the month. In futures markets, front-month CME WTI gained $5.53 on the month, averaging $87.93/bbl, while ICE Brent advanced by $6.80, to $102.72/bbl.
  • Activity in futures markets continues to ebb away from the CME WTI contract. The ratio of open interest in Brent futures on the London ICE to New York and London WTI oil positions gained nearly half a percentage point in July, to almost 64%, driven by a 2.6% decline in CME WTI open interest. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by nearly 1.5 percentage points, to 84%. Trade volumes followed a similar path, with year-to-date volume in the ICE Brent market now exceeding that in the CME WTI contracts.
  • Product prices and crack spreads were a mixed bag in July. Naphtha prices rallied across the board on firming petrochemical margins, while fuel oil prices weakened on soft demand. Lacklustre US gasoline demand undermined gasoline cracks in the Atlantic basin, but Singapore cracks rose on healthy Southeast Asian demand and regional refinery glitches. Firm diesel demand in Europe and Latin America, compounding the impact of refinery mishaps in Europe and Asia, supported global diesel margins.
  • July crude tanker rates sank to their lowest levels since 4Q10 on weak demand and ample supply, but product tanker markets fared better. Crude rates on the VLCC Middle East Gulf - Japan route have fallen steadily since their April highs and now stand at $8.50/mt, down by $1/mt versus June. Suezmax rates on the West Africa - US Gulf Coast route also fell by over $1/mt in July and stood at below $13/mt by early August.  Aframax rates on the Baltic - UK trade fell the most, down by as much as $1.20/mt to under $6/mt by early August. In contrast, product tanker rates on the Middle East Gulf - Japan trade surged by close to $3.50, to a high of nearly $20/mt in late July, the highest level since 4Q2008.


Market Overview

Oil markets appeared to adjust smoothly in July to tightening international sanctions on Iranian oil exports, but prices continued to trend upwards, extending gains posted towards the end of June, when markets seemed to reverse course following steep second-quarter declines.  Continued high Saudi output combined with a faster-than-expected recovery in Libyan production, fast-growing Iraqi exports and lacklustre oil demand growth have helped blunt the impact of declining Iranian exports in recent months, which are estimated to have dropped by a weighty 1.8 mb/d in July compared to year-ago levels. However, on closer inspection, the supply/demand picture was more nuanced and less comfortable than it appeared at first sight.  Geopolitical concerns remained at the fore, not just in Iran but also in Syria, where civil conflict intensified, Sudan and South Sudan, where actual oil pipeline movements between the two countries may prove more elusive than an agreement in principle reached in early August, and Libya, where civil unrest in the Kufra region disrupted oil production last month. Attacks on oil workers and facilities resumed in Nigeria, where pirates targeted oil workers being ferried through the Niger Delta, and Colombia, where the Cano Limon pipeline was bombed.  In Libya and Iraq, production gains have come with signs of potential problems ahead. There were new supply surprises elsewhere too, including the North Sea (where maintenance-related production cuts this fall now look set to exceed earlier market expectations), Brazil, and Angola. Moreover, despite weak global economic growth, oil demand is showing pockets of renewed demand strength: global naphtha demand is on the mend, recent weekly US demand estimates are showing new signs of life, and worldwide distillate markets look tight.

The impact of Iranian sanctions also appears to play out differently depending on the regions.   Perhaps not coincidentally, Urals in the Mediterranean market displayed the steepest advances in crude pricing in July.  Mediterranean refiners arguably have been bearing the brunt of Iranian oil sanctions: EU imports of Iranian oil ground to a total halt after an EU embargo took effect on 1 July. There is a relatively limited choice of immediately available substitutes. Iraqi Kirkuk exports into the Mediterranean market too have been curtailed by attacks on the pipeline from Kirkuk to the Turkish port of Ceyhan. Meanwhile, Urals, the default substitute for Iranian barrels in Europe, has seen its own flows out of Black Sea ports through Turkey curtailed, with more barrels earmarked for domestic refineries and for export through the new Baltic terminal at Ust Luga.

Asian refiners, which normally take in a larger share of Iranian exports than Europe, have seemingly suffered less from the erosion of Iranian barrels on the market.  They have been the primary beneficiaries of incremental Saudi and Iraqi supply. The scope and duration of their cuts in Iranian imports is also unclear. Remarkably, Dubai prices in Singapore trailed the rest of the benchmark crude complex last month, with gains of less than $5/bbl. WTI prices in the US have also reacted to fast-rising output from rising light tight oil supply and weak Midwest demand for crude following a string of refinery outages.

Contrasting regional supply situations translate into diverging futures curves on the main futures markets.  WTI futures at the CME remain in contango, whereas the Brent market, after briefly flipping into a shallow contango in June, when prices bottomed out, has since returned to backwardation.  Given the implications of the time structure of futures markets on the roll yield of commodity indices, it may not come totally as a surprise that the ratio of open interest in oil futures has been steadily tilting towards the ICE Brent market, at the expense of CME WTI futures. While open interest in CME WTI in absolute terms still exceeds that in ICE Brent, already trade volume in the latter market exceeds that in the former.

Product markets also have firmed up, with naphtha posting particularly strong gains on the back of robust petrochemical margins.  Fuel oil markets, in contrast, have weakened across the board, but low-sulphur distillate markets benefit from robust global demand and insufficient production.  Distillate markets have been the main beneficiaries of insufficient or unreliable electricity generation capacity in a broad range of developing and newly industrialised countries.  Whenever power goes out, as it does routinely in many of those countries, end-users have learned to rely on back-up generators running on diesel. Such generators reportedly came in handy earlier this month in India, when a poor monsoon and insufficient investment in capacity caused the largest power outage in history.

Looking forward, a key factor in oil market direction will be Iran's own response to the tightening sanctions noose and narrowing export opportunities. The country may soon run out of storage capacity in which to stash unsold crude cargoes.  This could lead it to a more accommodating foreign and nuclear policy, eventually paving the way for an easing of sanctions, or it could incentivise it to more aggressively discount barrels in Asia and elsewhere. But markets could also turn more bullish if Iran responded to export constraints with other measures, including, but not limited to, production shut-ins, with all the adverse long-term effects that this could have.



Futures Markets

Activity Levels

Market activity on oil futures exchanges continued to slip away from the New York CME and London ICE WTI contracts towards the ICE Brent futures contract, extending recent trends.  Data on open interest show the ratio of Brent futures on the London ICE to New York and London WTI oil positions gained close to half a percentage point to 63.9% between 3 July and 31 July 2012, driven by a 2.6% decline in CME WTI open interest. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by 1.44%, to 84%. Trade volumes followed a similar path. Although open interest in CME WTI contracts still exceeds that in ICE Brent contracts, volumes in the ICE Brent market have now overtaken those in the CME WTI market. Total trade volumes in CME WTI contracts fell by 6.1% in July 2012 y-o-y and by 17.9% for year-to-date, to 10.9 million contracts and 87 million contracts, respectively. In contrast, Brent monthly volume jumped to 13.1 million contracts last month from 8.9 million in July 2011. Year to-date Brent volume jumped by 20% to 88.9 million contracts, exceeding the volume in CME WTI contracts.

Changes in the structure of the forward curve for Brent and WTI futures may have had something to do with the shift.  The Brent curve has been in steep backwardation since December 2010.  A recent flip into contango proved short-lived. In contrast, the WTI curve has stayed in contango. The Brent market thus offers a more positive roll yield than WTI, and may have been providing commodity index traders with a stronger incentive to invest in Brent futures than in WTI. The high-profile failure of two Wall Street brokerages in less than a year, both of which involved the apparent disappearance of customer funds held in segregated accounts, could potentially have caused some erosion of trust in investor circles and served as a contributing factor, at the margin, to the recent trend in CME WTI futures open interest and trade volume.

Open interest declined in July in both ICE Brent and CME WTI oil contracts but increased in ICE WTI contracts. At the CME, combined open interest in WTI futures and options declined by 5.2% to 2.32 million, while open interest in futures-only contracts declined by 2.6% to 1.4 million, the lowest level since January 2012. Over the same period, open interest at the London ICE rose to 0.44 million for WTI futures-only contracts and by 1.4% in futures and options, to 0.54 million contracts. Meanwhile, open interest in ICE Brent futures contracts inched down by close to 1% to 1.17 million contracts, while ICE Brent futures and options contracts declined by 1.9% to 1.43 million contracts from 3 July to 31 July 2012.



Amid optimism among investors that the European Central Bank and Federal Reserve would announce a new set of stimulus measures to rejuvenate the economy and revive growth momentum, money managers raised their net long positions by 5.2% between 3 July and 31 July 2012 to 119 858 contracts after a four-month decline. Expectations of new stimulus measures have been on the rise ever since the ECB President Mario Draghi said on 26 July that the central bank was ready to do whatever it took to preserve the euro. Crude inventory draws in the US may have contributed to the increase in bullish bets. Yet money managers' net long positions remain at just over half (52%) their peak levels reached in the week ending 28 February 2012. Money managers in London ICE Brent contracts followed a similar pattern and boosted their bullish wagers, especially after the second week of July, reaching the highest level since 22 May 2012, at 78 672.





Producers accounted for 19.8% of the short positions and 16.4% of the long positions in CME WTI futures-only contracts at end-July, having trimmed their net futures short positions to 48 099 contracts from 48 877 contracts at the beginning of the month. Swap dealers, who accounted for 27.7% and 37% of the open interest on the long side and short side, respectively, increased their bets on falling prices by 53.1% to 130 275 net futures short positions. Producers' and swap dealers' trading activity in the London ICE Brent contracts followed a similar pattern as CME WTI contracts. Producers in London ICE Brent contracts increased their net short positions from 158 832 to 175 610 contracts. Similarly, swap dealers reduced their net long positions from 113 627 to 97 219 contracts.

NYMEX RBOB futures and combined open interest declined by more than 3% to 245 820 and 262 401, respectively, over the same period. Open interest in NYMEX heating oil futures contracts declined by 3.8% to 303 178 contracts while open interest in natural gas futures market was up by 1% to 1.13 million contracts.

Index investors' long exposure in commodities in June 2012 increased by $14.2 billion to $284 billion, after plummeting by $38.2 billion in May. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts rose by $1.7 billion in June. The number of long futures equivalent contracts increased by 25 000 to 554 000, equivalent to $47.7 billion in notional value.

Market Regulation

As reported in the July OMR, the US CFTC approved a final rule on 10 July on the further definition and interpretation of the terms "swaps" and "security-based swaps", as well as "security-based swap agreement". The Commission announced that it was planning to publish the finalised rule in the Federal Register on 13 August 2012. It is expected to become effective 60 days later.

Importantly, the publication of the final swap definitions rule and interpretation will trigger the compliance dates for several other Commission rules, including swap dealers' (SD) and major swap participants' (MSP) registration, SD and MSP swap data reporting and record-keeping, real time reporting of swap transaction and pricing data, internal and external business conduct standards, and position limits. Some of these rules will be effective as early as 12 October. The Commission might however delay the compliance date for some rules.

On 10 July, the US CFTC also approved the final rule on the end-user exemption from mandatory clearing. The final rule clarifies the conditions which must be met to benefit from the exemption. Under the final rule, if a swap is being used to hedge commercial risk, then non-financial entities and certain financial entities may choose whether or not to clear. Financial entities eligible for exemption include small financial institutions with $10 billion or less in assets, certain government entities such as foreign governments, foreign central banks and international financial institutions (e.g. IMF and World Bank), and affiliates of end-users. The rule also specifies reporting requirements when the exception is used. Specifically, end-users are expected to provide information on swaps subject to exception in an annual filing or on a case-by-case basis. The final rule will be effective 60 days after publication in the Federal Register but compliance is not required until the Commission make its decision on swaps required to be cleared. 

On 24 July, the US CFTC finalised a rule that sets a phased schedule for compliance with the mandatory clearing requirements for swaps. According to the final rules, once the Commission decides that the swaps have to be cleared, the phased schedule compliance requires that (a) transactions between SDs, MSPs  and active funds ("Category 1" entities) will become subject to mandatory clearing, starting 90 days after publication of a final clearing determination; (b) transactions between "Category 2" entities (commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking or financial activity, provided that such participants are not third-party subaccounts) and Category 1 entities or other Category 2 entities will become subject to mandatory clearing, starting 180 days after publication of a final clearing determination; and (c) all other swap transactions between Category 1 or Category 2 entities and end-users, who do not qualify for clearing exemptions, will be subject to mandatory clearing starting 270 days after publication of a final clearing determination. On the same day, the CFTC proposed the first determination for mandatory clearing by derivatives clearing organisations of six classes of credit default swaps and interest rate swaps.

While the regulators on both sides of the Atlantic are drafting new laws to regulate swaps markets, Intercontinental Exchange (ICE) announced that it plans to transition all existing over-the-counter (OTC) cleared energy swaps and option products, including crude and refined oil, natural gas, electric power, and natural gas liquids, to economically equivalent futures and option products in January 2013. ICE argued that new regulations in the US and Europe as well as Asia are likely to increase the cost and complexity for swaps market participants relative to futures market participants. ICE further argued that already tested futures market regulations give market participants more certainty in regulation than untested regulation in swaps markets.

Treatise on the Definition of Swap

Almost two years after the Dodd-Frank Act was enacted into law, on 10 July 2012 the US CFTC voted 4-1 to approve a 600-page final rule, jointly developed with the US Securities and Exchange Commission (SEC), to further define the statutory term "swap".  Not only does the definition provide greater clarity on which financial products can be expected to fall within regulatory oversight, and thus become subject to reporting, clearing, capital and margin requirements, but passage of the rule also sets the compliance dates for a string of other Commission rules governing the $650 trillion over-the-counter global swaps markets. Those include rules on swap dealers (SD) and major swap participants (MSP) registration, SD and MSP swap data reporting and recordkeeping, registration of swap data depositories, large trader reporting for registered SDs and MSPs, real time reporting of swap transactions and pricing data, internal and external business conduct standards and position limits.

The Commission had been criticised for finalising other rules without first defining the term 'swap'. Critics argued that defining a swap should have been the first rulemaking by the regulators rather than one of the last. Others countered however that it was arbitrary deadlines imposed on the regulators by the Dodd-Frank Act that led the US CFTC to delay the product definition rule. Furthermore, the Commission, along with the SEC, might have postponed the swap definition rule to ensure that market participants were ready for the new regulatory requirements that the final rule would trigger.

What is a "Swap"?

The final rule, consistent with the Dodd-Frank Act statute, defines a broad range of derivatives as swaps: interest rate swaps, currency swaps, commodity swaps, including energy, metals, and agricultural swaps, commodity options, currency options, cross-currency swaps, forward rate agreements, options to enter into swap (swaptions) and broad-based index swaps, such as index credit default swaps. The final rule also treats foreign exchange swaps and forwards as swaps except those exempted by the Department of Treasury.

What is not a "Swap"? 

The final rule clarifies that insurance products, loan participations, certain consumer and commercial transactions, such as consumer mortgage rate locks, consumer and commercial loans, and service contracts will not be considered swaps. In line with the Dodd-Frank Act, the final rule excludes non-financial forward contracts that are intended to be physically settled from the statutory swap definition. Clearly, the scope of this exclusion or exemptions will have the greatest impact on energy market participants.

Exclusions for Energy Companies

The US CFTC also issued a guidance clarifying the extent of forward contract exclusion and its relevance to the new swap definition. The Dodd-Frank Act specifically excludes "any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled" from its statutory swap definition. If the transaction is to be physically settled, even if settled at different agreed prices, then it will not be considered a swap. Book-out transactions in nonfinancial commodities would not be considered as swap as long as the underlying contracts meet the requirement specified in the Brent interpretation, which requires that the contracts  (a) create a binding obligation to make or take delivery without providing any right to offset, cancel, or settle on a payment-of-differences basis and (b) are

between market participants that regularly make or take delivery of the referenced commodity in their ordinary course of business. If the parties settle their delivery obligations through a subsequent, separately-negotiated agreement, these contracts still qualify for the forward exclusion from the swap definition.

Furthermore, the interpretation keeps forward contracts with price optionality, where parties can adjust forward contract prices during the course of the agreement, as forward rather than swap contracts. The final rule also excludes forward contracts with volumetric optionality, where parties have the option to adjust the volume specified in the underlying contract, from being classified as swaps provided that the underlying contracts satisfy the seven-part test. The CFTC has, however, requested public comment on the interpretation of forward contracts with volumetric optionality.

The final rule also excludes environmental commodities, such as carbon offset credits, emission allowance and renewable energy credits from the statutory definition of swap. The Commission guidance also excludes certain types of arrangements, such as fuel delivery agreements and physical exchange transactions, from being classified as swaps.

Spot Crude Oil Prices

Having reversed course in late June following steep second-quarter declines, crude oil prices extended their gains in July. European benchmark Urals prices, which had seen a particularly steep drop in June in the Mediterranean market, led the rebound, rising by an average $9.58/bbl, or more than 10%, to $102.83/bbl. That was more than half the decline of $16.25/bbl, or nearly 15%, seen in the previous month, and nearly twice the price increase of Middle East benchmark Dubai in July in absolute terms. Dubai prices edged up by less than $5/bbl on the month, to slightly over $99/bbl, compared with a loss of nearly $13/bbl in June.

There were several likely factors behind the renewed comparative strength in Urals pricing, which has kept the Russian grade at a relatively unusual premium of 10-70cents/bbl to North Sea Dated in the Mediterranean market through most of the month. Demand for the grade has been on the rise.  Urals has proved one of the most popular substitutes for Iranian crude in the European Union, where an embargo against Iranian crude imports became effective on 1 July.  Refiners in the Mediterranean basin are by far Europe's largest users of Iranian crude; it may therefore not come as a surprise that the rebound in Urals prices was noticeably steeper there than in Northwest Europe, the region's other major refining centre and trading hub.



Compounding the effect of the ban on Iranian imports, Iraqi Kirkuk, another medium-sour crude and good substitute for Iranian grades, has also been in relatively short supply in Europe, as attacks on the pipeline from Kirkuk to the Turkish port of Ceyhan caused  loading delays at the Ceyhan terminal. 

Even as demand increased in the face of lower Iranian and Iraqi supply, supply of Urals barrels was itself relatively constrained, especially in the Mediterranean, even as a lack of Iranian and Iraqi barrels spurred extra European demand.  Export tariffs of roughly $51/bbl, while down by roughly $7/bbl from June, helped keep Urals at home, supporting rising throughputs at domestic refineries. Rising exports from the recently opened Baltic terminal of Ust-Luga, which pipeline operator Transneft seeks to maximize to offset construction costs, have come at the expense of shipments from the Black Sea, the main source of Russian barrels into the Mediterranean.

Last, product markets may also have helped support Urals, thanks to the latter's relatively generous distillates yields, as reduced import availability from the United States, India and Russia itself have compounded the impact of structurally declining regional refinery runs to keep European distillate markets in short supply.



North Sea crudes have also enjoyed relatively strong support in European markets, particularly towards the end of the month. Following a wave of consolidation in European refining capacity, steep product stock draws helped spur an earlier, pre-July recovery in refining margins, causing crude demand from European refineries to rebound.  Expectations of a steep seasonal decline in North Sea autumn supply due to field maintenance also helped. News in early August that North Sea maintenance would cut crude loadings even more than had been earlier anticipated hints at continued price support.

Support for US benchmark WTI was more tepid.  July prices averaged just $5.55/bbl above June levels, representing less than half the decline incurred from May to June. Strong Midwest crude production growth continued to undermine the price of the landlocked grade. But unplanned refinery shutdowns in the Chicago region also helped depress demand. Having narrowed to about $10/bbl by mid-June, the WTI-North Sea Dated spread widened again in July, passing the $20/bbl mark in early August. Light, sweet crude prices on the US Gulf fared better, mirroring the rise in North Sea markets and increased Midwestern demand for products from Gulf Coast refineries. Continued, strong product import demand from Latin America also helped support Gulf Coast refining activity and demand for coastal grades with relatively rich gasoline and distillate yields. LLS's premium to WTI bottomed out at slightly above $10/bbl on 24 May, bouncing back in July to reach $19/bbl by 2 August. 

Middle Eastern grades in the Asia Pacific proved to be the market laggards, posting some of the weakest price gains among international crude benchmarks in July.  Dubai prices in Singapore rose by less than $5/bbl on average month-on-month. Increased availability of Iraqi Basrah Light in the Middle East Gulf likely helped blunt upward pressures on regional crude prices.  Basrah Light exports out of Iraq's southern ports rose to roughly 2.2 mb/d in July, their highest level since the 2003 conflict, after one of two single-point mooring platforms was returned to service following maintenance in June. 



Spot Product Prices

Urals crack spreads came under pressure in July in the Mediterranean, even as Dubai cracks widened in Singapore, largely as a reflection of the contrasted price patterns observed in world crude markets. With Urals prices rising twice as fast as those of Dubai, Urals crack spreads in the Mediterranean fell for all products bar naphtha. In contrast, Singapore cracks rose across the board, except for fuel oil. Naphtha prices firmed up in all regions as petrochemical margins improved, while fuel oil prices weakened, mostly on lower-than-expected demand. Gasoline cracks were a mixed bag. Weak gasoline demand in the US restricted outlets for excess European gasoline production, undermining Atlantic Basin gasoline cracks. In Singapore, however, gasoline margins rose on healthy Southeast Asian demand and tight supplies caused by refinery glitches. Firm diesel demand in Europe and Latin America, compounding the impact of refinery glitches in Europe and Asia, supported diesel margins.



Naphtha margins rose by $1.23-2.97/bbl in Europe and by $5.43/bbl in Asia, due to brisk demand on the back of improved petrochemical margins, and tight feedstock supply due to refinery outages. Both European and Asian petrochemical manufacturers saw margins increase and boosted utilisation as a result. Notably, petrochemical producers in South Korea ran their crackers close to full capacity in July. Also firm prices in the west gave traders little incentive to ship cargoes to Asia, further supporting Asia's naphtha crack spreads. Finally, a shutdown at JX Nippon Oil & Energy Corp.'s Mizushima-B refinery, one of Japan's top naphtha suppliers, and the restart of Taiwan's CPC, a large naphtha cracker, contributed to prevailing naphtha tightness.

However, towards the end of July, naphtha margins lost their upward momentum, notably in Europe, as firm demand proved to be short-lived and import demand from Asia withered after Japan's Maruzen Petrochemical shut a 768,000 tonnes per year (tpy) naphtha cracker in Chiba.

Gasoline markets in Europe and the US Gulf weakened on a m-o-m basis in July, with crack spreads narrowing in Northwest Europe by $1.66/bbl to Brent, and by $3.38/bbl to Urals in the Mediterranean. Super unleaded gasoline crack spreads in the US Gulf coast also fell by $3.43/bbl to LLS in July. By contrast, in Singapore, crack spreads rose by $3.99/bbl versus Dubai.  Atlantic basin weakness was driven by low demand, with US gasoline demand (four-week average, as of 3 August) down by 4.2% on a y-o-y basis, leading to an unexpected build in gasoline stocks. Moreover, weak import demand from West Africa due to the ongoing Nigerian subsidy probe weighed on gasoline prices, leaving few outlets to place excess European material.

In Singapore, gasoline margins rose on healthy Southeast Asian demand and tight supplies caused by refinery problems. Southeast Asian countries, including Indonesia, increased import volumes in preparation for Ramadan, the Muslim holy month of fasting that started at the end of July (demand for gasoline usually rises during this period as travel increases). Moreover, Taiwan Formosa's back-to-back shutdown of its two residue fluid catalytic crackers (RFCC), along with a fire at the Bangchak Petroleum refinery in Thailand, further tightened supplies.



Middle distillate crack spreads strengthened in all regions in July bar the Mediterranean. Diesel crack spreads rose by $0.46/bbl to Brent in Northwest Europe, by $0.62/bbl to LLS in the US Gulf and an even stronger $2.45/bbl to Dubai in Singapore, while differentials fell by $0.98/bbl for Urals in the Mediterranean.

Firm demand in the midst of continued structural declines in refinery runs in Europe and steady exports from the US Gulf led the price increase on both sides of the Atlantic. The UK's diesel import demand was strong, affected by the closure of the Coryton refinery in June. A glitch at a unit at Shell's Pernis refinery in Rotterdam further clipped supply. US Gulf crack spreads were buoyed by ongoing diesel exports to Europe and Latin America, while a sharp increase in the Urals price brought about negative diesel margins in Mediterranean.

In the meantime, gasoil crack spreads in Singapore outperformed those in other regions amid comparatively weak Dubai prices, continued strong import demand from Australia, and Shell's closure of a 110 000 b/d crude unit at its Pulau Bukom refinery in Singapore.  

Fuel oil markets weakened in July, with HSFO crack spreads widening in Europe by $3.73-5.46/bbl and a lesser $0.95/bbl in Singapore. Subdued demand for bunker fuel from ship-owners and Chinese independent refineries along with plentiful supply weighed on the fuel oil market.



LSWR cracked fuel price differentials in Singapore increased by $3.69/bbl while LSFO discounts to Brent widened by $2.03/bbl and by $3.48/bbl to Urals in the Mediterranean. Lower-than-anticipated Japanese summer power demand outweighed strong demand in Korea and the Middle East.  In the meantime, the switch of bunker-fuel sulphur content for the North American Emission Control Area to a maximum of 1%, from 1 August had little impact on crack spreads.



Freight



July crude tanker rates sank to their lowest levels since 4Q10 amid limited demand and stiff competition for cargoes among a bloated fleet. Rates on the benchmark VLCC Middle East Gulf - Japan route have collapsed steadily since their early-2Q12 highs and now stand at $8.50/mt, a fall of $1/mt from the previous month. The impact of the softening has been amplified by bunker prices rising in line with international crude prices, which for some operators has once again translated into negative earnings. Not surprisingly then, there are now signs that rates may have found their floor and stabilised.

In the Suezmax market, limited US demand for light, sweet West African grades amid surging domestic light, tight oil production has limited demand for transatlantic cargoes. Although, European refiners have taken plenty of the 'backed out' barrels, this has not been enough to mop up excess tonnage and stop rates on the West Africa - US Gulf Coast route from weakening by over $1/mt over July to stand at under $13/mt by early-August. Even the normally stable Northwest European Aframax markets have weakened, as demand has remained seasonally weak. The Baltic - UK trade fared the worst, declining by $1.20/mt to under $6/mt by early August with reports indicating that supplies coming out of Primorsk and Ust Luga remained low.

In contrast, product tanker markets fared rather better. Notably, the Middle East Gulf - Japan trade surged by close to $3.50 to a high of nearly $20/mt in the last week of July as Japanese demand for carriers picked up and eventually available vessels became scarce. The last time such levels were reached was in 4Q08. In the Atlantic Basin, the transatlantic UK - US Atlantic Coast trade finally found a floor at $13.90/mt. Towards the end of the month the rate picked up as fundamentals tightened but by early-August the rate was once again on the way down after tonnage weighed heavy.

The activities of Iran's NITC fleet remain an important issue for tanker markets, with only a minority of other vessels able to call at Iranian ports or accept Iranian cargoes. Reports emerged over the past few weeks that due to insurance issues, Turkey is no longer lifting Iranian volumes shipped via Ain Sukhna and therefore will only accept crude delivered on NITC vessels. Iran has also offered to ship oil to Korea and India using its own carriers and this will therefore tighten the availability of its tonnage. Data indicate that Iran has recently offloaded 14 mb of floating storage, much of which is destined for Asia. There now remain 28 mb of Iranian crude stored on 12 VLCCs and 4 Suezmaxes. With land-based storage assumed to be brimming, it remains to be seen whether Iran is able to find outlets for its oil, either direct to customers or placing it into floating storage. It is understood that Iran has 6 VLCCs under construction in Chinese shipyards due to be delivered in 2012-13. The first vessel was due to be handed over towards the end of 1Q12, but this has not yet arrived.  Nonetheless, absent further significant delays, Iran could soon have 12 mb of extra capacity to help deliver its oil.

Refining

Summary

  • Global refinery crude throughput estimates for 3Q12 have been lowered by 0.3 mb/d since last month's report, following signs of a slowdown in apparent Chinese oil product demand and refinery operations, and refinery outages in the US and Japan. Total crude runs are estimated at 75.5 mb/d for the quarter, 0.2 mb/d above a year earlier and 1.1 mb/d above the 2Q12 lull in throughputs.
  • 2Q12 world crude runs are largely unchanged since last month's report, at 74.4 mb/d, following offsetting changes to the OECD and non-OECD regions. While our OECD assessment has been lifted by 100 kb/d following upward adjustments to the Americas and Europe for May and Asia Oceania for June, lower than expected Chinese throughputs in June left global runs unchanged. 2Q12 throughputs posted annual gains of 0.7 mb/d.
  • OECD crude throughputs rose by 0.4 mb/d in June, to 37.1 mb/d, or 120 kb/d less than a year earlier. Monthly gains were recorded in the US and to a lesser extent Europe, while Asia Oceania throughputs fell seasonally. Preliminary data indicate OECD runs continued to increase in July, despite US runs stabilising after several months of strong growth. Final May submissions came in 250 kb/d higher than preliminary data, lifting 2Q12 estimates by 100 kb/d since last month's report.
  • Refining profitability generally deteriorated in July, with the exception of Asia, as crude oil price increases largely outpaced gains in product prices. Gasoline cracks fell in the Atlantic Basin as surplus products struggled to find markets. ULSD cracks remained firm and improved in Rotterdam and on the US Gulf Coast, while Mediterranean cracks fell back slightly. Most product cracks, except for fuel oil, improved in Singapore supported by a series of refinery outages.


Global Refinery Overview

Global refinery crude throughputs rose seasonally in June and July as refiners ramped up runs after completing maintenance and to meet peak summer transportation fuel demand. Global crude runs are forecast to rise further in August, to a seasonal peak of 76.1 mb/d, before falling back again in September with the onset of more turnarounds. The 3Q12 forecast has been lowered by 0.3 mb/d since last month's report, largely on a more pessimistic outlook for China and unscheduled refinery outages in the US and Japan, and are now seen averaging 75.5 mb/d. This is still 1.1 mb/d higher than 2Q12 global runs, estimates for which remain unchanged, at 74.4 mb/d.

2Q12 OECD runs were lifted by almost 100 kb/d, due to upward revisions for Europe and the Americas for May on receipt of official monthly data, and higher preliminary data for Asia Oceania for June. A 320 kb/d downward adjustment to Chinese crude intake in June provided an offset, however, leaving global runs unchanged.



Despite the recent weakness in Chinese refinery runs and the structural declines recorded in the OECD, global refinery activity has been posting relatively healthy growth so far this year. In 2Q12, annual growth averaged 740 kb/d globally, of which two-thirds came from non-OECD countries. Both India and Russia reported record high crude intake in June, driven in part by capacity expansions and refinery upgrades, supporting not only healthy domestic demand, but also allowing for high-quality fuel exports. Also US refiners have been able to maintain robust runs this year, these averaging some 0.3 mb/d more than in 1H11, and this despite refinery closures on the East Coast and lacklustre domestic demand. Product exports have been key to supporting US runs. In the January-May period of this year, US exports have surged almost 0.4 mb/d year-on-year, mostly targeting Latin America and Europe. Global growth is seen slowing to 0.2 mb/d in 3Q12, however, as structural decline is expected to resume in the OECD.

Refining profitability generally deteriorated in July, with the exception of Asia, as crude oil price increases largely outpaced gains in product prices. Gasoline cracks fell in the Atlantic Basin as surplus products struggled to find markets. ULSD cracks remained firm and improved slightly in Rotterdam and on the US Gulf Coast, while Mediterranean cracks fell back slightly. Most product cracks, except fuel oil, improved in Singapore, supported by a series of refinery outages. The OMR will resume refining margin reporting in September, after having reworked the models to incorporate new price data and updated yields.

OECD Refinery Throughput

OECD refinery throughputs for June rose almost 0.4 mb/d from a month earlier, largely in line with our previous forecast as slightly higher runs in Asia Oceania offset weaker-than-expected runs in Europe. The monthly increase stemmed almost entirely from the US, which saw crude intake 460 kb/d higher. Seasonal increases were also recorded in Europe, largely on account of higher French rates, though regional runs were 90 kb/d lower than expected, at 11.95 mb/d. Maintenance curbed Japanese utilisation rates further in June, taking regional runs to a seasonal low of 6.4 mb/d. Compared to a year earlier, only the Americas saw runs higher, despite the complete halt to refinery operations in the US Virgin Islands since last year with the closure of Hovensa's 500 kb/d St. Croix refinery over 2011 and 2012. European refinery runs stood 280 kb/d below year-earlier rates, with the closure of more than 0.8 mb/d of capacity since early 2011. OECD Asia Oceania's throughputs have largely recovered to year earlier levels, with robust South Korean throughputs supporting regional runs.



As highlighted elsewhere in this report, the OECD total now includes Chile, Israel, Estonia and Slovenia. The inclusion of Chile in the new OECD Americas aggregate adds 180 kb/d to OECD total throughputs in 2011, while the addition of Israel to the OECD Asia Oceania add another 240 kb/d. While Estonia and Slovenia have also been added to OECD Europe, neither country has any operating refineries. The inclusion of the above countries had little impact on the global throughput levels for 2011 and 2012 as the new monthly series were largely in line with our earlier assessments included in the non-OECD grouping. The 2010 total has been revised 27 kb/d lower on slightly lower Israeli throughputs. All comparisons with previous reports shown here involve the current regional compositions.



OECD Americas refinery crude intake rose 420 kb/d in June, to 18.7 mb/d, some 190 kb/d higher than a year earlier and 35 kb/d above our previous forecast. Higher US50 crude runs underpinned the increase, up another 460 kb/d, to 15.64 mb/d, and their highest since August 2007. Including other feedstocks, US refinery runs averaged 15.9 mb/d. All US regions lifted runs in June as maintenance wound down and peak summer driving demand materialised, though in absolute terms the largest rises came from the Gulf and West Coasts, which were both up 0.2 mb/d m-o-m. Preliminary data show Canadian runs 80 kb/d lower in June, due to maintenance at Imperial's Edmonton refinery and as a fire broke out at Co-op's 100 kb/d Regina refinery. The expansion of this latter plant by 30 kb/d is expected to be completed in 4Q12. Mexican and Chilean throughputs were largely unchanged from the previous month, though Mexican runs were 110 kb/d higher than a year earlier.



According to weekly data from the EIA, US50 refinery crude intake was mostly unchanged in July, averaging 15.7 mb/d overall. US Gulf Coast throughputs initially increased further in the month, before falling back quite sharply in the week ending 27 July. In the same week, Midwest refinery runs surged to 3.6 mb/d, just shy of their previous record high. Throughputs in PADD4, or the Rocky Mountain region, were also at record highs in July, above 600 kb/d. The drop in Gulf Coast rates could be partly accounted for by the shutdown of Valero's 135 kb/d Meraux refinery after a fire on 22 July, while the company's Port Arthur refinery was also undergoing maintenance. The Meraux plant is expected to be offline until the end of August.

Motiva finally announced in July that the 325 kb/d expansion of its Port Arthur refinery in Texas would not come on stream until next year, following extensive corrosion damage and subsequent shutdown of the new unit in early June. Despite the delay, US Gulf Coast refinery runs have hovered well above year-earlier levels so far this summer, supported in large part by substantive product exports to Latin America and Europe. US oil product exports averaged 3.1 mb/d in the January to May period, 370 kb/d higher than a year earlier. Of this, more than 70% came from the Gulf Coast.



While US East Coast runs averaged only 1.0 mb/d in July, more than 300 kb/d less than a year earlier, refinery runs are expected to rise as ConocoPhillips' 185 kb/d Trainer refinery resumes operation in 3Q12. The plant, which shut in September 2011 due to poor margins, is currently undergoing maintenance and upgrades, after Delta Airlines finalised the deal to purchase the plant on 22 June. The EIA recently released a report updating its supply requirements for the Northeast market. The previously reported supply gap of 420 kb/d of products, which would have resulted from the shutdown of the three Philadelphia refineries, is now estimated at only 50 kb/d, as only the Marcus Hook refinery shut down while the Trainer and Philadelphia plants found buyers. Moreover, gasoline imports have also largely disappeared, with only ULSD imports required, as a result of higher demand expected due to New York state's requirement that all distillate fuel used for heating purposes should be ULSD from 1 July 2012.



West Coast crude runs are expected to fall back from current levels in August due to a fire at Chevron's 245 kb/d Richmond refinery on 6 August. The fire, which started in the plant's only crude distillation unit, could force the plant to shut for several months. US West Coast refinery runs have just recently recovered from a prolonged outage at BP's Cherry Point refinery, also due to a fire.

OECD European crude throughputs rose modestly in June, to 11.95 mb/d on average. A monthly increase in France of some 210 kb/d, supported by both improving margins and the return to service of Petroplus' Petit Couronne refinery mid-month, took runs to their highest level this year at 1.24 mb/d. The rise in France was partly offset by smaller declines in Greece, Germany, Italy and Poland. While regional runs are expected to rise seasonally in July and August, UK runs are forecast to drop markedly in the second half of this year. The permanent shutdown of Petroplus's 220 kb/d Coryton refinery in June will lower available capacity in coming months, as will the shutdown of one crude unit at Exxon's Fawley plant later this year. Furthermore, Valero recently announced it is planning an eight-week turnaround at its Pembroke refinery, starting in October.



The regional total still stood some 280 kb/d below year earlier levels, due to a 0.8 mb/d reduction in refinery capacity since the beginning of 2011. This includes the latest shutdown of UK's 220 kb/d Coryton refinery in June, France's Reichstett and Berre l'Etang refinery in 2011 and early 2012, Germany's 260 kb/d Wilhelmshaven in 2011 and Tamoil's Cremona refinery in 2Q11. Capacity will be reduced further later this year, when Exxon shuts one crude unit at its Fawley refinery, and ERG closes the Rome refinery. France's Petit Couronne refinery could also close, once the tolling agreement with Shell runs out later this year, and if no buyer has been found.

Refinery throughputs in OECD Asia Oceania fell seasonally in June, to 6.4 mb/d, unchanged from the previous year. The 130 kb/d monthly decline, was nevertheless smaller than expected, lifting regional runs 100 kb/d from our previous report. Lower-than-normal seasonal maintenance in Japan, following the extensive shutdowns in the aftermath of the earthquake and tsunami in 2011, could be partly responsible. Robust runs in South Korea also contributed, the latter supported by strong internal demand. South Korea's oil demand rose 9.9% year-on-year in June according to Korea National Oil Corporation. Warmer weather underpinned oil use, while government efforts to rein in consumption have yet to take effect.



Weekly data from the Petroleum Association of Japan (PAJ) showed Japanese refinery runs rising in line with historical trends in July, as maintenance wound down further. By end-month, however, Japan looked set to lose 14% of its refining capacity due to unplanned shutdowns. Idemitsu Kosan shut its 220 kb/d Chiba refinery on 19 July due to a fire, but the plant restarted earlier than many had expected on 31 July. Also in July, JX Energy had to shut down its Mizushima-B plant due to the discovery of falsified maintenance records. The plant has a capacity of 205 kb/d of crude distillation as well as a 35 kb/d condensate splitter. We have excluded this capacity for the remainder of the forecast period. The shutdowns coincide with Cosmo's closure of its 220 kb/d Chiba refinery. The plant, which was already shut for maintenance over May and June, could be offline for several months after an asphalt leak into the sea was detected on 28 June. The refiner has to wait for results from investigations of the cause of the leak and approvals from local authorities before it can restart.

Non-OECD Refinery Throughput

Non-OECD refinery throughput estimates have been lowered by 110 kb/d for 2Q12 and 240 kb/d for 3Q12, largely as a result of weaker than expected Chinese refinery runs in June and July and increasing evidence of a slowdown in the country's oil demand growth. We nevertheless expect Chinese crude intake to increase in coming months, though at a slower pace than previously assumed. Strong refinery runs in India and Russia in June and July, in part supported by strong export demand, still underpin growth in non-OECD refinery runs. Total non-OECD crude throughputs are seen posting annual gains of 0.5 mb/d and 0.7 mb/d in 2Q12 and 3Q12, to 37.8 mb/d and 38.1 mb/d, respectively.



Chinese refinery intake fell unexpectedly in June, to only 8.8 mb/d, the lowest since October of last year, and 0.3 mb/d less than our previous forecast. While runs continued to be capped by maintenance shutdowns and weak margins, high inventories and faltering domestic demand further added downward pressure. In July, runs improved only marginally, to 8.9 mb/d, despite a sharp reduction in announced maintenance shutdowns. The latest decrease in retail prices on 11 June, the third so far this year, again cut into refinery profitability offsetting lower offline capacity. In the end, runs ultimately depend on domestic demand and if the demand slowdown proves more severe than forecast in this report or rebounds from current lows, Chinese crude runs are expected to follow accordingly. That said, Petrochina was expected to start the new 100 kb/d Hohot refinery in July or August, after completion in June, possibly providing some upside to current runs.

Other Asian refinery runs were revised slightly lower for May but higher for June, following the receipt of monthly data for a number of countries. May estimates were lowered 170 kb/d, mostly due to unaccounted-for maintenance in the Philippines. Shell's 110 kb/d Tabango refinery was assumed to be shut over April and May, but JODI data suggest the refinery was completely shut for all of May, with total runs averaging only 64 kb/d (from 194 kb/d in April). Also Indonesian runs were lower than expected.



Regional throughput estimates were lifted for June as Indian refiners hit another record high, estimated at 4.5 mb/d. The monthly throughputs were some 7% above year-earlier levels and 85 kb/d higher than our forecast. While Vietnam's sole refinery resumed operations on 7 July, after a complete shutdown starting in May, the plant had to shut again unexpectedly in early August. Traders were as a result offering prompt Bach Ho crude supplies while looking to buy both gasoil and gasoline to fill the supply shortfall. Elsewhere, Taiwan's Mailiao refinery was reportedly reaching full capacity in mid-July after having completed safety checks on one of the plant's 180 kb/d units. In Singapore, Shell closed a 110 kb/d distillation unit at its Pulau Bukom refinery for 30 days from July.

In the FSU, official Ministry data confirmed Russia's record high throughputs of 5.6 mb/d in June, taking regional runs to 6.8 mb/d. Russia's crude runs were up 550 kb/d from a month earlier and 140 kb/d above a year earlier. Furthermore, preliminary data for July were in line with previous estimates of 5.5 mb/d. High throughputs supported not only robust internal demand but also increasing product exports. According to Argus Media, Russia exported record volumes of EU specification diesel in July, due to lower tariffs and refinery upgrades allowing for higher low sulphur fuel production.



According to the Energy Ministry, companies are investing $30 billion to modernise 88 processing facilities over the 2012-2015 period. The upgrades include 40 gasoline and 30 diesel production units, as well as 18 catalytic crackers, reformers and hydrocrackers. According to the Ministry, ten new units are scheduled to start operations in 2012, with four already commissioned. These include gasoline hydrotreaters at Slavneft's Yaroslav and Gazprom Neft's Omsk plants, as well as diesel hydrotreaters at Surgutneftegas' Kirishi and Lukoil's Volgograd refineries.

Middle Eastern refinery crude run estimates are relatively unchanged for May and June, but have been lowered for the first quarter following a reassessment of Iranian crude runs. These are seen averaging 1.5 mb/d in the first quarter, but then rising to 1.6 mb/d in April, possibly due an 80 kb/d expansion of the Arak refinery, which we had expected in 2Q12. Yemen's Aden refinery reportedly resumed operations on 6 August, after a nine month closure due to lack of crude supplies. Flows through the Marib-Ras Issa pipeline had been halted since October last year, following a series of attacks. Despite nameplate capacity of 170 kb/d, the refinery is expected to process between 60 kb/d and 70 kb/d, in line with rates reached prior to the shutdown.



In Africa, Libya again delayed the restart of the 220 kb/d Ras Lanuf plant from July to August or September. We were assuming the plant to resume operation in October at the earliest and retain this forecast. Sonatrach shut Algeria's largest refinery, the 335 kb/d Skikda plant, in July for a 15 day closure. The plant will be partially shut for up to six months. Meanwhile, Morocco reportedly commissioned a new 48 kb/d crude unit at its Mohammedia refinery in late July (in line with our capacity forecast).