Oil Market Report: 13 November 2012

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Highlights

  • Oil futures prices fell to four-month lows in late October and early November amid mounting pessimism over the global economic outlook. Prices fell further after the US presidential election on worries over the so-called US 'fiscal cliff' looming at end-year, with Brent last trading at $109.25/bbl and WTI at $86/bbl.
  • The forecast of 4Q12 global oil demand has been cut by 290 kb/d since last month's report, to 90.1 mb/d, reflecting persistent weakness in Europe and the impact of Hurricane Sandy in the US. The 2012 growth forecast has been reduced by 60 kb/d to 670 kb/d.
  • Non-OPEC production rebounded by 840 kb/d in October, to 53.4 mb/d, after seasonal maintenance and weather disrupted output in September. Non-OPEC supplies are expected to grow by 460 kb/d in 2012 and by 860 kb/d in 2013, to 54.1 mb/d.
  • OPEC crude oil supply dipped by 30 kb/d to 31.15 mb/d in October, a nine-month low, even as Iran halted a seven-month supply downtrend with a small rebound. The 'call on OPEC crude and stock change' for 4Q12 has been lowered by 500 kb/d, to 30 mb/d, due to a weaker demand outlook and a stronger forecast of non-OPEC supply.
  • September OECD total oil commercial inventories increased by a steep, counter-seasonal 15.2 mb in September, extending six months of builds, to 2 746 mb. Forward demand cover stood at 59.6 days, flat with an upwardly revised August estimate. Preliminary data indicate OECD oil stocks rose by 5.5 mb in October.
  • Global refinery throughputs averaged 75.9 mb/d in 3Q12, as recovering Chinese runs and strong OECD margins, notably in Europe, offset US hurricane outages. A seasonal dip is expected to leave 4Q12 runs at 75.5 mb/d. Annual growth is projected to rise to 1.1 mb/d in 4Q12 from 0.6 mb/d in 3Q12.

The new look and feel of oil supply risk

Judging from the record so far, 2012 may go down in oil history not just as one of exceptionally frequent supply disruptions, but also as one when no production shortfall seemed large enough to affect global oil markets in a truly big way. Such apparent resilience, due in part to the sorry state of the global economy, is somewhat misleading, however.

The havoc recently wreaked by Hurricane Sandy on US product distribution is just the latest in a string of glitches spanning the oil map and the whole length of the supply chain. Rarely have so many things gone wrong in the oil patch at the same time. Mishaps from Brazil to Yemen cut non-OPEC crude supply by a substantial 1.3 mb/d in 3Q12, even as expanded international sanctions wiped more than 1 mb/d of Iranian exports off the map, adding to hiccups elsewhere in OPEC. Following the devastating East Japan earthquake and tsunami last year, Sandy reminded us that disruptions in the downstream can be as painful for end-users as they are in the upstream. The storm cut off product supplies to much of the US's single largest market, the patch of East Coast running from Washington to southern Connecticut, adding to a long list of unplanned outages and shutdowns earlier at refineries in the US, Venezuela, Europe, Japan and the Caribbean.

At first blush, the oil market seems to have taken those disruptions in its stride. Not only did record supply losses fail to make a dent in OECD oil stocks, but the latter built counter-seasonally in 3Q. After falling from March to June, crude prices rebounded around July, only to fall again later. In the last six weeks alone, benchmark futures shed about $8/bbl. Traders recently cut their bullish bets on crude prices to lows unseen in years. Far from rising after Sandy, product prices slid even as bottlenecks forced parts of New Jersey and New York to ration gasoline for the first time since the 1970s.

The disruptions would have hit much harder if the economy had not been far weaker than expected. Estimates of 4Q12 oil demand have been cut by 850 kb/d since June on slower-than-expected economic expansion, including 300 kb/d in this report. The North American supply revolution, a surge in Saudi and Iraqi supplies to 30-year highs and record Russian output also helped blunt the impact of supply losses elsewhere. Together, supply and demand factors helped trim the 'call on OPEC' by 500 kb/d for 4Q12 in this month's report.

But conventional metrics don't fully capture the disruptive nature of supply shortfalls, especially if those occur near the retail level. That international product prices failed to rise after Sandy is no consolation to the millions of Americans stranded by power losses and oil distribution breakdowns.

Relatively benign price outcomes should not be cause for complacency. Growing reliance on international trade for product supply is spreading oil supply risk from the upstream to the downstream. Increased product market integration means consumers in all regions are increasingly exposed to local shortfalls in refining or product distribution, even as they remain exposed to traditional crude supply disruption risks. This will be even more so when supply/demand product balances start tightening again.

Meanwhile, natural disasters in the US and Japan have exposed domestic vulnerabilities that, unlike crude supply disruptions, are not typically considered a matter of international policy. But shifting global market conditions may call for a fresh approach to evaluating supply risks, and policymakers may benefit from experience sharing across borders in a bid to define best practices and help minimize the potential impact of future disruptions, both locally and globally.

Demand

Summary

  • Estimates of global demand for 4Q12 have been reduced by 0.3 mb/d from last month's report, to 90.1 mb/d, expanding on other downwards revisions earlier this year. The lower 4Q12 estimate reflects downward adjustments to the US demand estimate in the wake of Hurricane Sandy and a lower European 4Q12 starting point on account of big September curtailments.
  • Global demand is now forecast to grow by 670 kb/d in 2012 (60 kb/d less than assumed last month) and 830 kb/d in 2013, taking total consumption up to an average of 90.4 mb/d in 2013 (0.1 mb/d less than assumed last month). A weak economic backdrop - with the global economy forecast to rise by 3.3% in 2012 and 3.6% in 2013 - continues to restrain oil demand growth throughout the forecast.
  • Hurricane Sandy is expected to have trimmed US demand by 230 kb/d in October, reflecting widespread disruptions in US East Coast travel, and product deliveries during and after the storm.
  • Gasoil demand during the northern hemisphere's heating season is projected to be close to year-earlier levels, reflecting weather forecasts of a colder winter partly offsetting the impact of a weak economic outlook. Winter temperatures were exceptionally warm in the US last year, and a return to lower average temperatures would, with all else held equal, result in higher heating oil demand.
  • The geographical distribution of demand growth remains contrasted, with the expansion focused in non-OECD countries while OECD demand as a whole declines. A macroeconomic split underpins the difference. OECD demand is forecast to decline by 1.1% in 2012 and by a further 0.7% in 2013 (to 45.8 mb/d). In contrast, non-OECD demand is forecast to rise by 2.8% in 2012 and by 2.6% in 2013 (to 44.7 mb/d).
  • Estimates of global demand for 3Q12 are roughly unchanged from last month's report despite significant but equally offsetting revisions at the country level. Ascendant adjustments to the US and Turkey of 275 kb/d and 135 kb/d, respectively, account for most of the revisions on the upside for August, while Canada (-115 kb/d) and Germany (-100 kb/d) make up the most sizeable reductions. For September downward revisions are led by the US (down by 150 kb/d), Russia (-115 kb/d), India (110 kb/d), Italy (-105 kb/d), Spain (-100 kb/d), Mexico (-90 kb/d) and France (-85 kb/d), while notable additions were seen for China (+505 kb/d) and Japan (+105 kb/d).


Global Overview

Hurricane Sandy wreaked havoc in product distribution on the US East Coast in late October and into November, severely disrupting product deliveries. The storm made landfall in New Jersey at a time when East Coast product inventories were already at lower than normal levels. Purely on account of this storm, the PADD 1 demand forecast for October has been curtailed by 230 kb/d. Earlier forecasts of demand for August and September have been adjusted significantly in other regions too, reflecting in part new or preliminary data for those months. Most notably, estimates of Chinese apparent demand for September have been revised upwards by more than 500 kb/d. All in all, global demand is now projected to grow by 670 kb/d (or 0.8%) in 2012 (to 89.6 mb/d) and 830 kb/d (or 0.9%) in 2013 (to 90.4 mb/d). Growth in 2012 has been reduced by 60 kb/d on last month's report. Anaemic economic growth, still assumed to average 3.3% in 2012 and 3.6% in 2013, will continue to act as a break on global oil consumption.



Preliminary estimates of global 4Q12 demand are 0.3 mb/d lower than in last month's report, to 90.1 mb/d, due to a combination of lower US demand in the wake of Hurricane Sandy and downward revisions to the forecast of European demand, extrapolating from recent trends. The 3Q12 demand estimate is essentially unchanged on last month's report, also at 90.1 mb/d, as a large upward revision to Chinese apparent demand in September is offset by reductions elsewhere. The fundamental exogenous factors that drive our short-term oil demand model i.e. the macroeconomic backdrop and the underlying futures price have seen little change.

Notable upside revisions to August data were seen in the US, Saudi Arabia, Turkey and Brazil, with respective additions of 275 kb/d, 155 kb/d, 135 kb/d and 90 kb/d made since last month's report. Preliminary data releases for September show some notable increases compared to last month's forecast, with the largest additions being China (+505 kb/d) and Japan (+105 kb/d). These upward adjustments were offset by downward revisions elsewhere. Prominent reductions were applied to the Canadian, German, Qatari and Kuwaiti August estimates, down by 220 kb/d, 100 kb/d, 65 kb/d and 60 kb/d, respectively. Significant September curtailments include the US (-150 kb/d), Russia (-115 kb/d), India (-110 kb/d), Italy (-105 kb/d), Spain (-100kb/d), Mexico (-90 kb/d) and France (-85 kb/d).

Strong non-OECD demand growth is forecast to continue, in contrast to the absolute declines envisaged in the OECD. Non-OECD oil demand is estimated to have grown by 1.4 mb/d, or 3.2%, year-on-year (y-o-y) in 3Q12 (to 43.9 mb/d). If confirmed, this non-OECD expansion would mark the region's fastest growth since 1Q11. Non-OECD demand is projected to keep growing at more than 1 mb/d through the forecast. For 2012 as a whole, it is forecast to average out at 1.2 mb/d (or 2.8%), to 43.5 mb/d, and 1.1 mb/d (2.6%) for 2013, to 44.7 mb/d. The risks to the non-OECD demand forecast are skewed to the upside, with a more rapid economic recovery potentially driving additional demand for products.

Having briefly returned to positive growth territory in the 2Q12 (lifted by heightened nuclear-replacement demand in Japan), the OECD returned in 3Q12 to its now entrenched pattern of long-term structural decline, with demand contracting by 0.8 mb/d (or 1.6%) to 46.2 mb/d. OECD demand is forecast to fall by an average of 0.5 mb/d (or 1.1%) in 2012, to 46.1 mb/d, and 0.3 mb/d (or 0.7%) in 2013, to 45.8 mb/d. The risks to the OECD forecast are skewed to the downside, as the economic backdrop - an OECD recovery is currently assumed in 2013 - could quite conceivably deteriorate further. The so-called fiscal cliff looming in the US (which if not addressed by January will be equivalent to $600 billion worth of automatic tax rises and public expenditure cuts) and ongoing European debt concerns contribute to the downside risk that hangs over OECD demand projections.

Weak Economic Growth Leaves More Fuel for Heating

Shifts in demand patterns and changes in heating oil specifications are complicating the task of assessing the adequacy of heating oil inventories ahead of winter. OECD inventories of 'other gasoil', a proxy for heating oil, remain at historically low levels despite summer builds (see OECD Inventories, Winter fuel inventories remain tight as peak demand season approaches). In the past, these stocks would have been assessed against heating demand forecasts based on weather forecasts of winter temperatures and heating degree days (HDD). Expectations of lower winter temperatures this year than last would thus magnify concerns spurred by low inventory levels. As more stringent fuel quality standards are making heating oil and on- and off-road diesel increasingly similar, however, a relatively weak 4Q12 outlook for trucking demand may provide an offset, and heating oil inventories may not be as tight as might otherwise appear.

While notoriously difficult to predict, early indicators for this winter are pointing towards a return to generally colder weather patterns, with the US widely forecast to see sharply lower temperatures than the previous year, after an unusually warm winter in 2011. Lower temperatures are also forecast in most of Europe, with the notable exception of Germany. With all else being held equal, lower winter temperatures overall would equate to higher heating oil demand, or at least provide support to otherwise flailing gasoil consumption. Japan and South Korea are forecast to see warmer than year earlier conditions.

Leading the additional upside momentum this winter is the US outlook. The National Oceanic and Atmospheric Administration predicts that the US Northeast, Midwest and South will experience a 20%-to-27% colder winter this year (expressed in terms of HDD) than a year earlier. These temperatures, if confirmed, would provide a fillip to US demand estimates. The US was unusually warm last winter (between October 2011 and March 2012), substantially warmer than both the previous year and the 10-year average. Last winter saw 13.4% less HDD than the 10-year average and 18.0% less than the winter of 2010-2011. Heating oil demand in the US should accordingly post robust growth, although the full impact of additional cold-winter demand will be partly offset by continued fuel switching from oil to natural gas from residential and commercial space heating.

Similar, albeit somewhat weaker, support is envisaged in Canada and much of Europe (Germany excepted) this winter, as last year was unusually warm in these regions too. The UK, for example, had 3.6% less HDD last winter than the 10-year average, while Canada, Spain and France respectively had 12.0%, 3.9% and 8.0% less HDD. Simply assuming a return to normal winter weather patterns equates to lower temperatures in the countries, which all else being held equal means higher heating oil demand.



The opposite impact is expected in South Korea, Japan and Germany; as last winter was unusually cold in these countries. Comparing last winter to 10-year averages, South Korea had 4.5% more HDD, Japan 7.3% and Germany 9.5% more HDD. To complicate matters still further, kerosene remains the leading home heating fuel in OECD Asia Oceania.

Simply extrapolating future weather patterns across to 'other gasoil' demand statistics, as a proxy for heating oil consumption is problematic. In many markets, fuel switching continues out of heating oil and into natural gas for space heating, partly offsetting the effect of a potential return to colder winter temperatures.

Also, large quantities of heating oil are reported as diesel, reflecting in part tightening sulphur specifications for heating fuels, hence the analysis needs to focus on the amalgamated gasoil demand number. While predictions of a colder winter should all things being equal prove supportive of total gasoil demand, in reality stronger gasoil demand for space heating may be offset by weaker demand for road transportation. For example, the latest statistics on container traffic in Singapore, a global trade hub, show a 3.7% y-o-y decline in total trade in September and a 6.4% decline in exports. Container traffic has been shown to be a reliable proxy for road diesel demand, as trucking activity in major importing and exporting economies closely track the container volumes that go through import and export terminals. Low outbound container traffic through Singapore would thus be expected to imply correspondingly weak gasoil demand in both Asian manufacturing centres and major import markets in the US and Europe. As heating oil and road diesel markets increasingly converge into a single fuel market, a weak forecast of diesel demand would imply a slightly more comfortable heating fuel inventory cushion than meets the eye.



OECD

Falling absolute OECD oil demand remains very much the theme in the industrialised world. Exceptions exist but largely only on account of one-off factors, such as the additional fuel oil/crude oil that Japanese demand saw in the light of the 2011 tsunami. Early estimates of 3Q12 OECD demand point towards a 0.8 mb/d (or 1.6%) decline, to 46.2 mb/d, with the sharpest absolute declines seen in recessionary-hit Europe (down by 0.8 mb/d in the 3Q12 to 14.0 mb/d), followed by the Americas (down 0.3 mb/d to 23.9 mb/d). Asia Oceania bucked the overall declining OECD trend, rising by 0.3 mb/d (or 3.7%) in 3Q12 to 8.3 mb/d. To summarise, OECD demand conditions are continuing to deteriorate reflecting the general trend towards weak domestic demand, rising cost pressures and recently the additional downside influence of declining export sales almost everywhere. Even fast-growing non-OECD economies such as China have slowed recently, limiting the outlook for OECD exports and oil demand.



Americas

Estimates of US demand for October have been reduced by 230 kb/d on account of Hurricane Sandy (non-storm subtractions take the total change over last month's estimate to -245 kb/d). US demand is now estimated to have averaged 18.6 mb/d in October, a reduction of 290 kb/d (or 1.5%) y-o-y. In November, we estimate that US demand will average 18.7 mb/d, 405 kb/d (or 2.1%) less than a year earlier.



Preliminary estimates of US demand point towards a 1.9% contraction in September over the year earlier, with consumption in the US50 averaging 18.6 mb/d. Gasoil notably contracting, down nearly 4% to 3.9 mb/d, as the weakening industrial backdrop took away a key pillars of strength in the US numbers. Gasoil previously maintained a gently rising trend, up by an average of 0.5% in the 20-months to August 2012, despite the average 1.2% decline in total US consumption. Modest US growth is envisaged to return December-2012/January-2013, on account of predictions of colder climes (See Demand, 'Weak Economic Growth Leaves More Fuel for Heating'). An anticipated average decline rate of 1.6% is assumed for 2012 as a whole (or 310 kb/d), to 18.7mb/d, a level of consumption that should be maintained in 2013.

Europe

This month's forecast included notable revisions to projections of European data in August. These include Turkey (up 135 kb/d) and Germany (down 100 kb/d). Although complete September statistics have yet to be published, preliminary estimates reveal a high number of large downwards revisions, with France (down by 85 kb/d on the estimate assumed last month), Italy (-105 kb/d) and Spain (-100 kb/d) leading the way. Overall, the 3Q12 OECD European series is 150 kb/d lower than the estimate carried last month, as the already bleak outlook was with hindsight too optimistic, a sentiment that filters through the forecast. A European demand contraction of 0.5 mb/d (-3.7%) is envisaged for 2012, to 13.8 mb/d, and of -0.2 mb/d (-1.4%) in 2013, to 13.6 mb/d.



The outlook for German demand in 2012 has been curtailed, with a decline rate of 2.6% now assumed (previously -1.6%), to 2.3 mb/d, to reflect concerns about the domestic German economy, the sharp downside revision that was applied to August data and a reassessment of likely winter heating use. Revised August data implies a 355 kb/d (or 13.4%) drop over the year earlier, to 2.3 mb/d, 100 kb/d less than the level depicted by preliminary data reported last month. The forecast for 4Q12 German demand endures a 60 kb/d downside adjustment over last month's report, consequential on lower baseline data and reduced estimates of winter heating oil demand, as Germany was colder last year than its previous 10-year average.

The already-falling UK demand trend deteriorated sharply in August, down 8.7% y-o-y to 1.5 mb/d, with all of the main product categories down. The official UK data amounts to a reduction of 110 kb/d on the previous forecast, which had expected a more modest 2% decline. The worsening UK numbers are particularly worrying given reports that the economy exited recession in 3Q12. Even diesel demand, which had previously held up relatively well, reversed its rising trend in August, down 0.4% to 450 kb/d. Further declines, albeit progressively less severe than seen in August, are forecast through to the end of the year, leaving an annual decline rate of 5.2%. A stronger economic backdrop in 2013 projected to support a further moderation, to -1.3% in 2013.



The revised Turkish demand data for August was 135 kb/d higher than last month's estimate, at 905 kb/d a massive 14.1% y-o-y gain, as the traditional September uptick in demand appeared to have come a month early (i.e. in August, likely weakening momentum in September). Improved manufacturing sentiment and an earlier Ramadan (split between July and August in 2012, as opposed to being wholly in August in 2011) provided supportive influences. The Turkish Manufacturing Purchasing Managers' Index (PMI) rose to 50 in August, the break-even point between contraction and expansion, up from 49.4 in July (it has since risen to 52.2 in September). Turkish demand should remain above year earlier levels throughout the remainder of the year, albeit not at the heady heights seen in August, as the obvious early-Ramadan effect wears off and the global economic backdrop remains clouded in uncertainty.



Preliminary September data for France reveals a worsening of the y-o-y trend, down 9.5% to 1.7 mb/d, its sharpest decline since December 2011. Heavy contractions seen across the main product categories, such as gasoline which fell by 11.9%, to 0.2 mb/d, down on account of crumbling consumer confidence. An average decline rate of around 3.2% is assumed for 2012 as a whole, to 1.7 mb/d, with a further albeit more modest decline of 1.8% assumed in 2013.

Asia Oceania

Japanese demand surprised on the upside in September, according to preliminary data showing a 4.3%  increase over the year earlier, to 4.5 mb/d, supported by particularly strong gains in residual fuel oil and 'other products'. Growth in both of these product categories continues to thrive, as additional energy is needed to compensate for the post-tsunami nuclear disruptions (see MTOMR published October 2012). Expectations for a milder winter, in comparison to the year earlier, should narrow the pace of y-o-y growth in the 4Q12, with a decline of 2.4% envisaged to 4.7 mb/d, down dramatically on the average expansion of 7.3% seen in the previous four quarters. An absolute decline of around 170 kb/d (or -3.6%) is foreseen in 2013, to 4.5 mb/d, as the anticipated call on residual fuel oil and crude for direct burn eases as further tsunami-impacted nuclear/coal capacity slowly returns whilst additional gas capacity is also envisaged.



Non-OECD

Having risen by around 1.4 mb/d y-o-y (or 3.2%) in 3Q12, to 43.9 mb/d, non-OECD demand is forecast to continue leading global oil demand growth. Regional growth is projected to average 1.2 mb/d (2.8%) in 2012, to 43.5 mb/d, and 1.1 mb/d (2.6%) in 2013, to 44.7 mb/d.



Recently released data revise non-OECD demand estimates upwards by 0.2 mb/d for 3Q12, led by China (+120 kb/d), Saudi Arabia (+80 kb/d), Brazil (+50 kb/d) and Iraq (+40 kb/d). A massive 505 kb/d revision in the Chinese demand estimate for September led the way (see China). Significant August amendments were also made, such as the Taiwanese number coming out 60 kb/d higher than the initial estimate, as an unseasonable spike in naphtha demand (which usually dips in August) accounted for almost all of the revision. Although we envisage weaker Taiwanese naphtha demand in September, to counter the stronger August consumption trend, the overall 2012 estimate will exceed last month's prediction by 10 kb/d. A similar amount was added to the Iraqi estimate (plus 60 kb/d), with large additions made to the residual fuel oil (40 kb/d) and 'other products' (15 kb/d). Roughly 40 kb/d of additional consumption was added to the Nigerian estimate for August, with 25 kb/d added to jet/kerosene and 20 kb/d to gasoline. Saudi Arabia led the upside in August demand revisions, with 155 kb/d added to the Saudi forecast, leaving growth of 11.6% y-o-y whereas a month earlier we had been forecasting a more modest 6.7% expansion. Heavy fuel oil (+75 kb/d), gasoil (+60 kb/d) and gasoline (+40 kb/d) dominated the Saudi revision, as the early Ramadan provided a surprisingly large fillip to August consumption (a support reflected, to greater or lesser degrees, in all Muslim countries). Nearly 90 kb/d was added to the Brazilian August estimate, as demand growth returned to a four-month peak of 4.0% y-o-y.







Notable reductions have been made to the Qatari and Kuwaiti demand estimates, with assessments for August cut by 65 kb/d and 60 kb/d respectively since last month's report. Lower consumption figures for both 'other products' and fuel oil led the Kuwaiti revisions, with respective amendments of 70 kb/d and 25 kb/d, as the Kuwaiti power sector increasingly switches over to natural gas. The middle of the barrel saw notable reductions in Qatar, with 25 kb/d stripped from gasoil/diesel demand and 15 kb/d removed from the jet/kerosene estimate. Weak Qatari demand, down 22.8% y-o-y in August, arose as consumption of gasoil/diesel roughly halved on the year earlier. The full extent of the downgrade to the Qatari gasoil number has not been fully passed through the forecast, as gasoil demand is a notoriously volatile component of Qatari consumption (see chart) and we envisage at least a partial rebound towards the final stages of 2012. A number of preliminary estimates for non-OECD oil demand have also come out for September, showing notable baseline reductions since last month's report, with the Russian estimate 115 kb/d down and India curtailed by 110 kb/d.



China

Preliminary estimates of Chinese apparent demand in September are 505 kb/d higher than assumed in October's OMR, as y-o-y growth of 8.8% is now assumed (whereas a slower, but more on-trend, 3.1% expansion had previously been envisaged). Surging refinery crude intake, following another increase in domestic fuel process and depleted product inventories saw apparent consumption rise to a seven-month high, of 9.7 mb/d. Industrially-important gasoil/diesel returned to positive growth territory for the first time since March, despite signs that China's broader economy continues to show signs of slowing down. HSBC estimates that China's manufacturing PMI rose to 49.1 in October from 47.9 in September and 46.7 in August, still below the key 50 threshold separating growth from contraction. The official Chinese manufacturing PMI is already above 50, as it rose to 50.2 in October, but this indicator is widely agreed to be less representative of small-and medium-sized private businesses (instead more closely tracking state-owned enterprises) than that developed by HSBC.

Until consistently robust Chinese growth holds for a number of months, we will remain sceptical as to whether September's expansionary pace of Chinese apparent demand can be maintained moving forward. Stronger growth was always foreseen in the second half of the year, but not at the dizzy near double-digit heights seen in September. Challenging macroeconomic conditions, coupled with inflationary concerns (albeit easing), will likely see demand growth moderate through to the end of the year. Growth of around 260 kb/d (2.8%) is projected for 2012 as a whole, to 9.5 mb/d. This expansion is 70 kb/d faster than previously assumed, reflecting recent data and the assumption of a modest feed through the forecast. A similarly flat trajectory is assumed in 2013, with growth of around 270 kb/d (2.9%) to 9.8 mb/d, as growth continues to be restrained by the exceedingly testing macroeconomics.



India

Preliminary data show Indian September demand rising at its slowest pace since April, as a combination of recovering monsoon rains and higher prices curbed growth. India consumed an average of 3.4 mb/d of oil products in September, up 2.8% y-o-y, with decelerations seen across all of the main product categories. Gasoil/diesel gained the majority of the headlines, rising by 7.4% y-o-y to 1.2 mb/d, its slowest expansion since January 2012. The slowdown in diesel is attributable to subsidies being cut for the first time in 15 months - equivalent to a price hike of about 14% - while the resumption of more normal seasonal rains dampened agricultural demand.



The September Indian update amounts to a 110 kb/d reduction over last month's forecast, largely attributable to a lower outcome for 'other products' (-50 kb/d), naphtha (-25 kb/d) and gasoline (down by 10 kb/d). The easing Indian economic backdrop largely culpable, with the PMI's for both the manufacturing and service sectors trending down since the beginning of the year. The Society of Indian Automobile Manufacturers, for example, lowered its sales forecast for the current fiscal year, citing higher interest rates and the weaker economic backdrop. We have accordingly trimmed our own Indian oil demand forecast, now envisaged to rise by 3.6% (or 125 kb/d) in 2012, to 3.6 mb/d, compared with 4.5% projected last month. The outlook for 2013 remains unchanged in percentage growth terms, at 2.6%, although total Indian demand is now forecast to reach a lower absolute number of 3.7 mb/d (3.8 mb/d in October's OMR).

Other Non-OECD

Robust demand growth returned in Brazil, in August, as the escalation in consumption climbed to a four-month high of 4.0% y-o-y, to an average of 3.1 mb/d. Leading the upside were particularly strong gains in the land-transport fuels, with gasoil/diesel up by 6.9% (to 1.1 mb/d) and gasoline up by 5.6% (to 0.9 mb/d). Gasoline's August expansion was a four-month high, while gasoil rose at its fastest pace since March.



Strong demand conditions remain in much of non-OECD Asia, with Thailand for example seeing y-o-y growth averaging out at around 3.5% in the six-months through August. The particularly sharp gains seen in industrially important LPG (up 5.2% over the six-month period) and gasoil/diesel (6.5%) have driven Thai growth. Thailand has announced that it intends to raise the compulsory blending ratio of palm methyl ester (PME) in gasoil to 5%, effective at the beginning of November.

Supply

Summary

  • Global oil supply rose by 0.8 mb/d month on month to 90.9 mb/d in October, as rebounding supplies from the Americas and the North Sea offset a slight decline in OPEC crude supplies. Compared to a year ago, global oil production stood 2.0 mb/d higher, with 80% of the increase coming from OPEC crude and NGLs.
  • Non-OPEC production rebounded strongly by 840 kb/d in October to 53.4 mb/d after seasonal maintenance in the North Sea and Brazil as well as Hurricane Isaac in the US reduced output to 52.6 mb/d in September. Production is expected to increase by 560 kb/d in 4Q12 compared to 4Q11, roughly 190 kb/d higher than last month's assessment. For 2013, non-OPEC production is projected to rise by 860 kb/d to 54.1 mb/d, which is 150 kb/d higher than the previous forecast.
  • OPEC crude oil supply declined to the lowest level in nine months in October, down by 30 kb/d to 31.15 mb/d. Severe weather-related supply disruptions in Nigeria, which saw output tumble to two and a half year lows, was largely behind the monthly decline. By contrast, output from Iran inched higher, reversing a seven-month downtrend.
  • The 'call on OPEC crude and stock change' for 4Q12 has been lowered by a sharp 500 kb/d, to 30 mb/d, due to downward revisions to global demand growth and projected higher non-OPEC supply. OPEC's 'effective' spare capacity in October is estimated at 2.51 mb/d versus 2.56 mb/d in September.


All world oil supply figures for October discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary October 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 oil supply declined to the lowest level in nine months in October, down by 30 kb/d to 31.15 mb/d. Supply disruptions in Nigeria, which saw output tumble to two and a half year lows, was largely behind the monthly decline. By contrast, output from Iran increased marginally, partially reversing a seven-month downtrend.

The 'call on OPEC crude and stock change' for 4Q12 has been lowered by a sharp 500 kb/d, to 30 mb/d, due to downward revisions to global demand growth and projected higher non-OPEC supply. The 'call' on OPEC for 1Q13 is also reduced, by 100 kb/d to 29.8 mb/d.

OPEC's 'effective' spare capacity in October is estimated at 2.51 mb/d versus 2.56 mb/d in September. The group's current sustainable capacity of 35 mb/d is slated to rise by a net 320 kb/d, to 35.37 mb/d, in 1Q13. Increased capacity is expected from a steady ramp up in production from Iraq (+320 kb/d) as well as start-up of project expansions in the UAE (+220 kb/d). The next scheduled meeting of OPEC ministers to review the market outlook is on 12 December in Vienna. The group's current collective production target for all 12 members is 30 mb/d.



Iranian crude output marginally reversed its downward course in October, rising by an estimated 70 kb/d to 2.7 mb/d. Preliminary data for OECD and non-OECD imports from Iran show a 300 kb/d increase in October, to 1.3 mb/d, compared with an average 1 mb/d in September and August. China and South Korea appear to account for the lion's share of the increase in Iranian imports. After suspending imports in August and September due to insurance-related shipping issues, South Korea imported around 250 kb/d in October, according to preliminary data. Chinese imports were up about 175 kb/d to 565 kb/d. Singapore, though not a regular buyer of Iranian crude, imported around 65 kb/d in October. By contrast, Japanese imports fell by 50 kb/d to 130 kb/d.

Assessing Iranian supply flows is fraught with obstacles, not least because the National Iranian Tanker Company (NITC) ordered its vessels to shut-off their communication beacons when operating in some regions last spring. Gibson Shipbrokers estimate current volumes of Iranian crude oil held in floating storage declined to 13 mb at end-October, off by 1 mb from September levels. However, these levels are still well below the high end-April estimates of 20-35 mb. Iran's state tanker company is increasingly using its own vessels to deliver crude to buyers unable to obtain shipping insurance, reducing the number of available ships for storage.

The 27-member governments of the EU significantly broadened sanctions against Iran's energy and banking industries on 16 October, in a bid to bring Iran back to the negotiating table over its nuclear enrichment expansion plans. The new measures target major Iranian oil and gas companies and broaden restrictions on the country's central bank. The EU plans to freeze assets of both the National Iranian Oil Co (NIOC) and NITC. With the bulk of Iranian crude now heading to Asia, however, the main impact of the new EU measures will likely be on the country's financial sector. However, new EU sanctions, which include Iran's natural gas industry, have sharply reduced liquefied petroleum gas (LPG) exports, further depriving Iran of revenue. LPG, mainly propane and butane, is a by-product of oil rather than natural gas, but the lack of clarity over product specifications in the latest sanctions has prompted shipping and insurance firms to curb coverage.

Saudi Arabia's production was marginally higher last month, up by 50 kb/d, to 9.85 mb/d. However, tanker data suggests crude exports rose in October by as much as 200-300 kb/d. The end of the peak power generating season, when demand for direct burn crude typically jumps, may have freed up more barrels for export. Going forward, however, increased crude requirements for Saudi Aramco's joint-venture refineries, both at home and overseas, may see production levels sustained in the 9.8-10 mb/d range. Saudi Aramco's 400 kb/d Jubail refinery, held in joint venture with Total, is preparing to launch and may start its first 200 kb/d crude unit by end-year. A new, 325 kb/d crude unit at Saudi joint venture Motiva's Port Arthur, Texas refinery is also expected to resume operations in early 2013 following an aborted start earlier this year (see Refining section).



Iraqi crude oil production in October rose by 20 kb/d, to 3.16 mb/d, with higher supplies from the northern region accounting for all of the increase.  Crude exports rose by 30 kb/d, to 2.62 mb/d. Basrah exports averaged 2.17 mb/d, nearly unchanged from the previous month but well below scheduled volumes due to weather-related delays at the country's southern terminals. Exports of Kirkuk crude through the northern Turkish port of Ceyhan on the Mediterranean rose by 32 kb/d, to around 450 kb/d. The resumption of shipments from the Kurdish region, which feeds into the Kirkuk crude stream, was behind the rise. Shipments from fields in the Kurdish Regional Government's (KRG) jurisdiction were estimated to account for 150 kb/d of Kirkuk flows in October. Production from the region is expected to reach 200 kb/d by the end of the year.

Total Iraqi production is projected to rise by just over 300 kb/d in 1Q13, but state SOMO's efforts to lock in term contracts for next year are reportedly bogged down by quality issues and disagreements with potential buyers over prices. Iraq's term contract prices have been relatively expensive given ample global supplies and increased volumes of Iraqi crude available on the spot market, traders report. CNPC and BP, the joint venture partners in the Rumaila field, regularly sell their equity crude on the spot market. Official selling prices for Basrah Light crude have been running anywhere from $0.10-0.50/bbl above spot prices for the grade. One issue is that the new production from Rumaila, which is being blended with Basrah Light, is relatively heavy and degrades the quality of the blend. Traders note that blending issues associated with the inclusion of new Kurdish production into the Kirkuk export stream is also a problem.

Meanwhile, after nearly a year of uncertainty, Baghdad has confirmed that ExxonMobil is seeking bidders for its 60% stake in the massive 2.8 mb/d West Qurna-1 project. ExxonMobil rattled government officials in Baghdad in November 2011 after it signed contracts to develop six blocks with the KRG. Baghdad objected to the move by ExxonMobil, the first international major to ink a deal with the KRG, given its ongoing dispute with the KRG over primacy for oil policy and contract awards. Since 2010 Exxon, along with partner Shell, has increased production at West Qurna-1 to 400 kb/d from the 244 kb/d baseline. The JV receives $1.90/bbl on output above the baseline, an amount some companies believe is not profitable enough given the high risks. The KRG is offering companies more attractive production sharing contracts. Chevron, Total and Gazprom have also signed contracts with the KRG this past year. Deputy Prime Minister Hussein Shahristani has said he expects a new stakeholder to be approved by the end of this year.

Elsewhere in the Gulf, Kuwaiti production inched up 40 kb/d to 2.82 mb/d while UAE output dipped 20 kb/d to 2.67 mb/d. Qatar also saw lower output, down 20 kb/d to 730 kb/d.



Nigerian production has been beset by weather-related problems in recent months, with officials reporting the worst flooding in some 50 years forcing the shut-in of around 500 kb/d during October. Output tumbled by an estimated 110 kb/d to 1.95 mb/d in October, the lowest level in around two and half years. The country's rainy season, which runs from April until October, has been severe, with the key southern Niger Delta oil producing region especially hard-hit. By early November production levels were recovering, with export schedules showing increased volumes for December. In addition to the floods, Shell declared force majeure on Bonny Light and Forcados production due to vandalism. On 1 November Shell reported that 4Q12 output would be down about 20% after a series of sabotage and so-called 'bunkering' (i.e., pilfering) incidents during October damaged key pipelines, including the Bomu-Bonny, the Trans-Forcados and the Brass Creek trunklines. The company said it hoped to lift the force majeure by the end of November. Total also declared force majeure in mid-October on gas exports from the Bonny LNG plant. Crude flows to the country's two operating refineries were also disrupted. State-owned NNPC reported in October that there have been almost 775 breaks in its 5 100 km network of pipelines. Oil bunkering, or theft, costs the government an estimated $7 billion in lost revenue per year.



Angolan crude oil production in October rebounded by 40 kb/d, to 1.79 mb/d, following the completion of field maintenance work.  Start-up of the BP-operated 150 kb/d PSVM fields is set for a late November, with the first cargo of the new Saturno crude expected to be lifted by the end of the year. Saturno, made up of output from the deep-water Plutao, Saturno, Venus and Marte fields in Block 31, is a heavy, sour grade with a projected API gravity of 24.9 and a sulphur content of 0.78%.

Libyan production was pegged at 1.38 mb/d in October, off 60 kb/d month-on-month. Officials report production reached 1.6 mb/d in mid-October but tanker data suggests volumes on average for the month were closer to 1.4 mb/d. Output continues to be constrained by both civil unrest and operational issues. When workers at the country's Zawiya refinery halted operations in early November, production at the 200 kb/d El Sharara field was shut-in due to lack of storage. Pipeline and other equipment issues are also capping production at a number of fields.

Non-OPEC Overview

Non-OPEC production rebounded strongly by 840 kb/d in October, to 53.4 mb/d, after seasonal maintenance in Brazil and the North Sea (including a protracted outage at the Buzzard field), and weather disruptions in the US reduced output to 52.6 mb/d in September. Planned and unplanned outages reduced average non-OPEC supplies for 3Q12 to 53.0 mb/d, still around 260 kb/d higher than the same quarter the prior year.



Output is now projected to rebound by 810 kb/d from 3Q12 to 4Q12. In addition to higher Brazilian and US production and the expected consistent contribution of output from the Buzzard field, 4Q12 output will benefit from the end of an unplanned outage at the 150-kb/d Peng Lai field in China. Production forecasts for Russia and Sudan have also been revised upwards.  Year-on-year non-OPEC growth for 2012 is now forecast at 460 kb/d, slightly higher than previously estimated.

Likewise, supply projections for 2013 have been raised slightly due to rosier expectations in the Eagle Ford shale of the US and in South Sudan. Though less acute, there have also been downward adjustments in the North Sea and Brazil due to unplanned stoppages at the Ula and Frade fields, respectively, and a delayed restart to Total's Elgin and Franklin fields.  On balance, production is expected to rise by 860 kb/d to 54.1 mb/d in 2013, roughly 150 kb/d higher than last month's assessment.

Since December 2011, US production in 2012 has exceeded expectations by 0.8 mb/d, while production elsewhere has been 1.3 mb/d lower than forecast.  At this point, a higher contingency factor of -500 kb/d and expectations of growth of 600 kb/d from US oil are forecast to raise non-OPEC supplies to over 54 mb/d in 2013. In the US, maintenance, mature-field decline, weather disruptions and falling NGL prices are all factors that could curtail production.

OECD

Americas

US - October preliminary, Alaska and North Dakota actual, other states estimated:  US crude oil production rose by 260 kb/d from September's levels with the completion of maintenance at fields in the Gulf of Mexico (GOM) and on pipelines in Alaska.  Alaska's crude output fell to 400 kb/d in August, its lowest level in over two decades. Production is forecast to average 550 kb/d in 4Q12, around 40 kb/d lower than the prior year. Compounding the impact of maintenance at some BP-operated fields, Hurricane Isaac reduced GOM output to 1.05 mb/d in August, but production has gradually recovered and should reach an average of 1.4 mb/d by 4Q12, or 140 kb/d higher than a year ago. Production growth continues in tight oil plays in the US, with the fastest growth in the Eagle Ford and the Bakken plays. Production levels from the Eagle Ford, estimated at 600 kb/d in 3Q12, are quickly closing in on North Dakota's Bakken production levels of 630 kb/d in the same period. We expect that production levels from the Eagle Ford play could overtake Bakken's production levels by 1Q13. Rail routes are likely to handle the incremental volumes of Bakken crude, and the incremental $3-5/bbl cost (vs pipeline) will serve as a disincentive for producers to continue ramping up production. This will particularly apply to producers with assets both in the Bakken and in Texas plays that are closer to refining markets.



Baseline revisions to US crude and other liquids output, mostly in Colorado, from the EIA Petroleum Supply Annual result in a minor -10 kb/d downward revisions to US production estimates for 2011.  Looking forward, an upward revision for Texas' Eagle Ford was offset by the incorporation of a 50-day turnaround at BP's Thunderhorse field in 2Q13 which reduces production estimates for that field by 20 kb/d for the year.  In sum, US oil production is expected to increase by 680 kb/d in 4Q12, to 9.3 mb/d, and by 570 kb/d to average 9.5 mb/d in 2013.

Canada - August preliminary:   Canadian oil production reached around 3.7 mb/d in August based on preliminary government data and is expected to breach 4.0 mb/d by the end of the year. On the positive side, output from the third stage of Suncor's Firebag project continues apace, raising output at the complex to around 120 kb/d several months earlier than even the operator expected.  Firebag's output is forecast to increase to 180 kb/d when the fourth stage is brought online in the next couple of months. But on the downside, maintenance proved heavier than initially expected in 3Q12 in Canada's East Coast, lowering output to only 60 kb/d in August or 200 kb/d less than the prior year. The planned maintenance at the Terra Nova, Hibernia, and White Rose fields involved removing the FPSOs, and these facilities are expected to be back in operation by December, which is a longer downtime than originally forecast.

To maintain consistency and to improve forecasts, more disaggregated data from the Alberta Energy Resources Conservation Board (ERCB) are now being used in place of Statistics Canada and National Energy Board data for January-August 2012. As a result, Alberta oil output is revised downwards by 20 kb/d in 2012 and by 30 kb/d in 2013. Synthetic crude oil output at the Horizon and Scotford upgraders also came in around 60 kb/d lower than expected in 3Q12, keeping output on par with the prior quarter at 3.7 mb/d and  160 kb/d higher than last year. On balance, Canadian oil output is now expected to grow by a still robust 340 kb/d in 2013 to 4.1 mb/d, roughly 20 kb/d lower than last month's estimate. 

North Sea

North Sea liquids production fell precipitously in September to 2.4 mb/d on planned and unplanned maintenance in Denmark, the UK and Norway. Preliminary estimates indicate a recovery to 2.7 mb/d in October, and we expect production to return to levels of above 3 mb/d by year-end. The benchmark Brent Forties Oseberg Ekofisk (BFOE) blend reached record lows of around 600 kb/d in September, though crude output is expected to rebound to around 820 kb/d by December 2012. Major contributors to the reduced North Sea and BFOE output include eight weeks of maintenance at the UK's 200-kb/d Buzzard field, as well as planned maintenance at Norway's Troll field and Denmark's Syd Arne field. Norway's 10-kb/d Ula field was also taken offline due to a leak, and we do not expect a restart until 1Q13. Relief should come in the next couple months as fields undergoing maintenance return to service and new fields start.  The Buzzard field reached normal levels at the beginning of November, only to suffer a brief weekend stoppage. The FPSO for the UK's Huntington field is on its way to the field and looks set to add around 20 kb/d in 2013. Likewise, in Norway, the Valhall and Hod fields were offline in August in preparation for a new production platform that should add around 40 kb/d.

Though the UK's Elgin and Franklin fields were widely expected to return to production in December 2012, this expectation is likely to have been too optimistic. Eni, one of the partners in the field now expects production to return sometime in 1Q13, and we have also delayed the restart in our estimates. These revisions lower output from the North Sea in 4Q12 by around 40 kb/d to 2.9 mb/d on average or 13% below prior-year levels.

Asia

Australia - August preliminary:   Production in Australia rose to almost 600 kb/d in July and August, levels not seen for two years, amid higher production from fields in the Carnarvon basin and from NGLs. Mature field decline is still expected to keep production in check in 2013 at around 440 kb/d, but the recent production results are encouraging and could lead to an upwards revision if results continue to exceed expectations and cyclones do not dent production in 1Q13 as they have in the past couple of years. The thrice-delayed Montara field is projected to come online in 1Q13, adding around 30 kb/d.

Non-OECD

Middle East

Oman - August actual: Production reached a record level of almost 940 kb/d in August, around 50 kb/d higher than 1Q12 levels. The Mukhaizna steam-flood EOR project is currently producing 120 kb/d according to the trade press, and an additional 20-30 kb/d of output is expected. The increment from Mukhaizna is likely to be sufficient to offset mature field decline elsewhere for the remainder of 2012 and 2013. Output is expected to stay at 930 kb/d in 4Q12, and rise to 950 kb/d in 2013.

In Yemen, shipments from the 120-kb/d Marib pipeline restarted in August after an eight month closure. Shipments averaged only 60 kb/d in August and September and mostly served the refinery in Aden. The outlook for 4Q12, and 2013 remains broadly the same as new bombings of the Marib line were reported. Over the past month, Al-Qaeda linked militants targeted a natural gas pipeline associated with Total's Yemen's LNG plant and an oil pipeline that carries 8 kb/d of production from a KNOC-operated field.

Former Soviet Union

Russia - October preliminary:   Russian oil production rose by 70 kb/d to a new post-Soviet record of 10.8 mb/d in October thanks to rising production from the new Vankor field in Eastern Siberia, and to a lesser extent from an expansion at Gazpromneft's assets. In contrast, brownfield production fell by 120 kb/d (-1.3%) in October compared to the year prior and stands to continue to decline in the remaining months of 4Q12. The forecast for 2012 of a 1.1% increase in crude output is 10 kb/d higher than last month because of higher than estimated output from Vankor. The 2013 forecast remains unchanged overall, with a decline by 90 kb/d to 10.6 mb/d.

Relatedly, the planned Rosneft buyout of TNK-BP could impact ouptut in the short term. If the deal moves forward, Rosneft's share of Russia's crude output would increase from 26% to almost 40%. Rosneft's conference calls with investors indicated that synergies in East Siberia could reduce access costs to pipeline infrastructure. But as suggested in earlier reports when rumours of the deal first surfaced, TNK-BP's need to employ EOR technologies and increase greenfield production may be hindered if it cannot raise capital expenditures.

FSU net exports remained relatively stable at 9.5 mb/d in September after shipments had climbed by a significant 800 kb/d in August following surging product loadings. Despite a hike in Russian export duties, September crude shipments increased by a combined 200 kb/d as refinery maintenance limited domestic demand. Urals volumes shipped via Baltic ports rose by 200 kb/d after loadings at Primorsk and Ust Luga rose by 140 kb/d and 60 kb/d, respectively. Moreover, Ust Luga ramped up to 460 kb/d in September with plans in place for it to ship 600 kb/d in 2013. Elsewhere on the Transneft network, loadings from Novorossiysk plunged by 160 kb/d as more crude was directed towards the BPS-2 system. However, this decrease was offset by increased volumes (+70 kb/d) coming through the CPC system.

November export schedules indicate that 400 kb/d of crude is due to be loaded from Kozmino, the end point of the ESPO system. This suggests that the ESPO-2 line from Skovorodino to Kozmino, which will transport currently railed volumes, will be starting up ahead of schedule. This line will add approximately 300 kb/d to the system's capacity, meaning that, including the Chinese spur, it will be able to ship approximately 1 mb/d. These developments together with the recently launched BPS-2 line have added almost 1 mb/d of additional export capacity and allowed exporters to re-orientate volumes away from less profitable outlets, firstly the Druzhba pipeline and more recently Black Sea ports. Recent low Druzhba flows, combined with other supply issues have hit eastern European refiners hard (See Refining 'Pipeline Bottlenecks Create IEA Supply Disruptions').

Compared to last year, product exports were over 500 kb/d higher in September. Fuel oil loadings have risen by 300 kb/d which suggests that to a certain degree, the '60:66' tax reforms initiated 12 months ago have not had the immediate effect of incentivising the export of distillates at the expense of fuel oil. 'Other products' (including naphtha and gasoline) are also 50% above last year implying that Russia has managed to maintain refinery runs throughout the summer, thus avoiding the light product shortages experienced 12 months ago.



Africa

Sudan and South Sudan:  Both parliaments ratified the 27 September comprehensive agreement on 15 October, which will pave the way for a restart of South Sudanese crude oil exports via pipeline routes to the north. South Sudan will pay an average of $9.70/barrel to the north as a transit fee, and will also pay Sudan a transitional financial arrangement (TFA) payment of $3.03 billion to cover the period between July 2011 and December 2014.  At that point, the South Sudanese government is hopeful it could have other export alternatives.  The TFA is based on production levels of 150 kb/d from South Sudan.  These sums are not small, and the possibility of non-payment or disputes over the amount due could derail export flows. In addition, territorial disputes remain.

Production estimates have been revised upwards for 2012 in Sudan based on government statements of increased output and a 40 kb/d rebound in exports observed in 3Q12.  We assess that production is currently averaging around 90 kb/d. Restarting  South Sudan's output and exporting it will prove more challenging.  GNPOC's processing facility in Sudan, which processes Nile blend crude from Blocks 1, 2, and 4 was damaged.  South Sudanese government officials expect production from Petrodar's Blocks 3 and 7 to return to around 180 kb/d within three months, around 50 kb/d less than pre-shut volumes.  We have revised upwards our estimates for 2013 for Sudan and South Sudan by around 60 kb/d.  All told, production from both countries is now expected to reach 280 kb/d by 4Q13 from current rates of around 90 kb/d.

Latin America

Brazil - September preliminary, August actual:  Brazilian crude output slid to 1.92 mb/d in September, its lowest monthly level since July 2009. In the summer, maintenance took place at several of the largest fields in the Campos basin, but these fields did not rebound as forecast in August and September in part due to weather issues. Petrobras undertook a turnaround at the P-52 platform in the Roncador field in September, which produced around 130 kb/d in July-August.

On a year-on-year basis, 3Q12 Brazilian crude output stood 100 kb/d lower at 2.0 mb/d, but should rebound to 2.1 mb/d in 4Q12 as turnarounds are completed. Petrobras noted recently that it expects to reach output of 1.9 mb/d in October, a 100 kb/d increase month on month; and with the recent addition of the Baleia Azul field, the company will continue to increase output in the remainder of 2012. The lower-than-forecast output in 2H12 results in a 40 kb/d downward revision, which means that for the year as a whole, production stands to actually fall by 20 kb/d to average 2.1 mb/d for the year. Turning to 2013, Chevron recently announced it would try to reassign its drilling rig at the Frade field. Therefore, we estimate that any restart for the field is likely to be pushed back to end-2013, lowering the estimate for 2013 slightly. Still, production is expected to rebound by 190 kb/d to 2.3 mb/d in 2013.

Colombia - October preliminary: Production increased to 960 kb/d in October, a return to levels not seen since November 2011. Year-on-year growth has slowed to a halt during 2012, in stark contrast to 100+ kb/d levels seen during 2011, due to pipeline sabotage and labour-related stoppages. These issues have subsided for now, which explains most of the production rebound. Some small field additions are also behind the better performance, and additional wells at existing fields should raise Colombia's output by 50 kb/d to 990 kb/d in 2013.

Asia

China - September preliminary:  Oil output rose to 4.3 mb/d in September after the restart of the 150-kb/d Peng Lai field. Peng Lai production was reported to be at around 90 kb/d at end-September. ConocoPhillips confirmed the restart of the Peng Lai field, which had been shut in since a drilling-fluid leak in the summer of 2011, leading the government to order the company to shut in production from all platforms at the field in September 2011. Uncertainty concerning new environmental restrictions was expected to delay the restart, previously expected sometime in 2013. Looking ahead, Chinese production in 4Q12 is expected to rise by 260 kb/d from the prior year to over 4.2 mb/d. Chinese output has been revised upwards by 90 kb/d for 2H12 and by 30 kb/d for 2013.

Elsewhere in Asia, Thailand's oil output has remained at around 390 kb/d in the past few quarters and no growth is expected in 2013 overall.  Vietnam has also benefitted from increased output at the Te Giac Trang field from an additional platform which has raised output in 3Q12 to 350 kb/d, around 60 kb/d higher than the prior year.  In 2013, output is expected to decline by 30 kb/d to 320 kb/d.

OECD Stocks

Summary

  • OECD total oil commercial inventories posted a steep, counter-seasonal 15.2 mb build to stand at 2 746 mb by end-September. Revisions to preliminary data for August, which had initially shown a draw, now reveal that stocks built that month as well, making the September gain the seventh consecutive monthly increase in OECD oil inventories. The September increase also left OECD stocks significantly above five-year average levels for the first time in 2012.
  • OECD forward demand cover stood at 59.6 days at end-September, level with end-August, which, following a more pessimistic OECD demand prognosis, was revised 0.8 days higher.
  • Hurricane Sandy wreaked havoc in the distribution system for refined products on the US East Coast, but its overall impact on US inventories appears relatively limited. Disruptions in pipeline transportation from the US Gulf Coast (PADD 3) to the East Coast (PADD 1) resulted in mutually offsetting draws in PADD 1 and builds in PADD 3.
  • Chinese strategic stock building, after going strong in the first half of the year, appears to have ground to a halt in July.  The gap between implied Chinese demand for crude oil (reported refinery throughputs) and supply (production plus net imports) does not indicate any unreported stock build in August or September.


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

OECD total oil commercial inventories moved significantly above five-year average levels in September for the first time in 2012, building by 15.2 mb to stand at 2 746 mb by end-month. Revisions to data for August now show that stocks, far from drawing that month as had initially been reported, actually built, making the September gain the seventh in a row.  The September increase defied seasonal patterns of a five-year average stock draw of 21.2 mb. Stocks now cover 59.6 days of forward demand, level with end-August, which, following a more pessimistic OECD demand prognosis, was revised upwards by 0.8 days from last month's report. Crude oil led the increase in inventories, building by 14.0 mb, including builds of 9.9 mb and 9.2 mb in OECD Asia Oceania and OECD Americas, respectively. A significant portion of the steep Asian stock build reflected the transfer by Korea of inventories held in its bonded areas to national territory. In the Americas, a rebound in US inventories after hurricane disruptions in late August accounted for much of the build.

After trending close to the five-year average for most of the second and third quarters, OECD inventories jumped 34.9 mb above average in September, the first time levels have been significantly in positive territory since January 2011. As in previous months, however, the geographical distribution of inventories remains unbalanced, with steep inventory surpluses in Asia and the Americas relative to the five-year average contrasting with deficits in Europe. Inventories in the OECD Americas region now stand 43.1 mb above average while those in OECD Asia Oceania exceed the average by 13.4 mb. In contrast, stocks in OECD Europe are 21.6 mb below the five-year mean. On average, OECD stocks built by a significant 510 kb/d over the third quarter, the third consecutive quarterly rise following builds of 410 kb/d and 430 kb/d in 1Q12 and 2Q12, respectively.



More complete data for OECD countries indicate that August inventories were 12.7 mb higher at 2 730 mb than suggested by preliminary data presented in last month's report. Although this upward revision narrowed the deficit to the five-year average, total oil inventories still lagged the benchmark by 1.5 mb. Revisions were concentrated in OECD Americas and OECD Europe where crude holdings were adjusted higher by 7.5 mb and 6.3 mb, respectively. Total products were revised upwards by 1.8 mb with a 2.8 mb upward adjustment in OECD Europe offsetting a 1.0 mb downward revision in OECD Americas.



Preliminary data suggest that OECD inventories built for an eighth successive month in October posting a 5.5 mb increase. A strong counter-seasonal 10.5 mb build in OECD Europe offset smaller 2.7 mb and 2.4 mb declines in OECD Americas and OECD Asia Oceania, respectively. All product categories increased except 'other products' with motor gasoline and fuel oil rising by 6.5 mb and 4.9 mb, respectively. Elsewhere, OECD crude oil holdings posted a 5.1 mb build led by a 9.6 mb gain in the US.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Inventories in OECD Americas rebounded by 9.4 mb in September, a steeper gain than the average 1.5 mb build of the last five years. The United States led the increase as crude stocks there, which had drawn by 8.4 mb in August due to Hurricane Isaac, bounced back by 7.4 mb, as crude unloading and production operations resumed faster than expected in the US Gulf. The regional crude build outweighed a 5.5  mb fall in product inventories led by a 3.4 mb decrease in motor gasoline, their second consecutive monthly decline.  The seasonal turnover in stock ahead of the switch to winter gasoline grades likely accounted for much of the decline. Middle distillates inventories drew by 2.9 mb.



In contrast, a steep 5.7 mb build was reported for NGLs and other feedstocks in the US, undoubtedly a consequence of fast-rising tight liquids production. NGL stock builds are testing spare storage capacity at hubs such as Conway and Mt Belvieu and prices are coming under downward pressure. As discussed in the 2012 MTOMR (see 'Natural Gas Liquids: The Unsung Hero of Supply Forecasts), low natural gas and NGL prices could constrain US production over the short-term. Despite the current stock overhang, one way that producers have managed to dispose of excess natural gas liquids is by processing them into LPG which is then exported to such destinations as Central and South America or to Canada for use as diluents for oil sands processing and transport.



Preliminary US EIA weekly data up to 2 November point to a shallow 2.7 mb draw in industry inventories in October. Although Hurricane Sandy, which made landfall in the eastern seaboard in the last week of the month, wreaked havoc in the local distribution system for refined products, shuttering refineries, pipelines, terminals and port facilities, its overall impact on primary US oil inventories appears relatively limited. A modest draw of 460 kb in East Coast (PADD 1) crude stocks in the last week of October was offset by builds elsewhere,  so that total US crude holdings posted a modest gain. Similarly, US gasoline stocks rose by 2.9 mb in the last week of the month as a build in the Gulf Coast offset a draw in PADD 1. The full impact on US inventories will only be apparent in coming weeks and months, however, as more complete data are submitted.



OECD Europe

OECD European commercial oil inventories were drawn by 7.1 mb to stand at 944.0 mb by end-September. This fall was shallower than the five-year average 19.3 mb draw and consequently reduced the region's deficit to five-year average levels to 21.6 mb from 33.8 mb at end-August. Total oil stocks have now remained under the five-year average levels since early-2011, but the deficit has narrowed considerably from the recent nadir of 63.1 mb reported at end-May.

Crude led the September draw with a 5.1 mb decline as record refinery margins helped to stimulate refinery throughputs, notably in Germany, France and Spain. Notwithstanding the recent draw, crude holdings are now back within the seasonal range and 26.2 mb above their end-2011 lows. Inventories benefited from strong regional imports over the summer as incremental supplies from Saudi Arabia, Iraq and Nigeria offset North Sea shut-ins and the loss of Iranian barrels.



Despite high refinery runs, regional product stocks were drawn by a slight 0.5 mb. Refiners likely exported a significant portion of their output, as the backwardated price structure of European product markets did not favour stockholding. Since the draw was shallower than the seasonal average, product inventories moved back within the seasonal range. The September product decrease was concentrated in middle distillates (-2.6 mb) and 'other products' (-1.1 mb) which offset builds in motor gasoline (+2.1 mb) and fuel oil (+1.1 mb).

Preliminary data from Euroilstock indicate a strong, counter-seasonal 10.5 mb build in the EU-15 and Norway inventories in October. Both crude and product stocks rose with middle distillates posting an especially strong 6.0 mb gain. Fuel oil and motor gasoline rose by 2.2 mb and 1.4 mb, respectively. Elsewhere, crude inched up by 0.6 mb. Data pertaining to refined products held in independent storage in Northwest Europe indicate that stocks fell for the second consecutive month in October with all products except fuel oil drawing down over the month. 

OECD Asia Oceania

Industry inventories in OECD Asia Oceania (excluding Israel) rose by 12.9 mb in September, led by a counter-seasonal 9.9 mb build in crude. A 7.1 mb build in Korea accounted for most of the regional gains, reflecting the transfer of crude previously held in bonded areas and owned by another state to its national territory. Japanese crude stocks built by 2.8 mb as maintenance cut refinery throughputs by 180 kb/d.

Recent builds have moved product inventories back towards normal levels on an absolute basis. However, since regional demand is expected to strengthen by 300 kb/d between the third and fourth quarters in line with seasonal trends, days of forward demand have fallen compared to August but still remain on a par with last year. 'Other products' led the monthly product uptick, adding 5.3 mb. Meanwhile, Korean middle distillates inventories drew by a strong 3.6 mb, offsetting a 1.8 mb build in Japan.



Preliminary weekly data from PAJ suggest a counter-seasonal 2.4 mb decline in Japanese industry stocks in October. Crude oil led the contraction, shrinking by 5.1 mb on the month, as refinery throughputs outpaced imports which, were seasonally low according to preliminary tanker data. Middle distillates, including kerosene, built by 2.0 mb, the fourth consecutive monthly rise, ahead of the peak winter heating season. Japanese middle distillates have been replenished by approximately 11.8 mb (30 %) since their 1Q12 low and now stand above last year's level for the first time since March.

Recent Developments in Singapore and China Stocks

According to China Oil, Gas, and Petrochemicals (OGP), Chinese commercial oil inventories built by the equivalent of 2.6 mb in September (data are reported in terms of percentage stock change). Crude (excluding the government-controlled Strategic Petroleum Reserve) built by 0.6% (1.4 mb) after imports rose by over 500 kb/d. Products reversed August falls, building by a combined 1.2 mb with all categories posting increases, notably kerosene (+6.0% or 0.6 mb) and gasoline (+1% or 0.4 mb).

Evidence suggests that the filling of recently completed Chinese strategic storage capacity has ceased. Although other factors such as unreported crude use in the refinery or power generation sectors could be at play, data suggest that the gap between crude oil demand (as measured by reported refinery throughputs) and supply (production plus net imports)narrowed from 640 kb/d in 1Q12 to 510 kb/d in 2Q12 and and 100 kb/d in July. Data for August and September imply that filling has come to an end.



According to weekly data from International Enterprise, Singapore onshore oil inventories grew by 1.5 mb in October largely as a result of a 2.3 mb build in residual fuel oil after wide arbitrage to ship from the west. Ahead of the peak winter heating season, middle distillates rose by 160 kb barrels over the month to stand above last year and level with the five-year average by end-month. However, recent data indicate that by the second week of November these stocks had surged by a further 2 mb to an eight and a half month high.

Winter Fuel Inventories Remain Tight as Peak Demand Season Approaches

With winter fast approaching now is a pertinent time to take stock of how OECD inventories have replenished over the summer. OECD industry middle distillate inventories have replenished by 38 mb since this year's end-June low. However, On both an absolute and days of forward demand basis, these inventories remain significantly lower than last year by 5.3 mb and 0.9 days, respectively. With with a return to more normal colder temperatures forecast in North America and most European countries (see Demand 'Weak Economic Growth Leaves More Fuel for Heating') likely to provide an upside to OECD heating fuels demand there is concern that low inventories could provide upward price momentum in the event of a demand surge. In examining the status of specific heating fuels in different regions the picture is complicated somewhat by the use of different fuels for heating in different regions, the convergence of specifications for diesel and heating oil and the associated problems in obtaining accurate data pertaining to these products.



In OECD Americas, gasoil stocks continue to lag the five-year average, standing at 145 mb in October, 24 mb below 2011. Focusing on heating oil, the US has led this downward shift with end-October heating oil stocks standing approximately 9 mb (25%) lower than 12 months previously with inventories in PADD1, the world's largest heating oil market, remaining 11 mb (35 %) below 2011. However, as noted in previous reports the US heating oil demand has decreased steadily over the last decade as households have switched to cheaper natural gas and now stands 800 kb/d lower than in 2002. Following these underlying trends, the US Government cut the size of the Northeast Home Heating Oil Reserve by 50% to 1 mb when switching its stock to ultra-low sulphur distillate in 2011. With the loss of these stocks, compared to one-year ago, days of forward demand stand at 47 days, 31 days less than last year.

The picture in Asia Oceania is complicated somewhat by different fuels used for heating purposes. Korea and Japan favour kerosene while Australia and New Zealand use other gasoil. Considering this, it is most useful to examine middle distillate stocks while bearing in mind that other trends in diesel and jet kerosene can cloud the underlying picture. On this basis, total middle distillate inventories in the region stood at 70.9 mb at end-October, 3.9 mb below both last year and outside of the seasonal range. On a forward demand basis, stocks stand level slightly lower than a year earlier at approximately 25 days. Specifically, Japanese kerosene stocks stood at 20.4 mb at end-October, 1.3 mb below a year ago.



Total OECD European gasoil stocks stood at approximately 395 mb at end-October, including some 125 mb of government stocks while in all likelihood would be available in case of a demand surge but may take time to reach market. This level is 18 mb above 2011 and stands comfortably in surplus to the five-year average. On a forward demand basis, 66 days were covered at end-October, 4 days above twelve months ago. Nevertheless, it should be noted that going forward an exceptionally weak European demand prognosis is feeding through but if demand surprised to the upside following colder than expected weather, stock cover in these terms would be reduced. Additionally, German end-user heating oil stocks stood at 58% of capacity by end-September, one percent below 2011 levels. It is noteworthy that stock replenishment started earlier this year than last but its pace has tailed off since mid-summer and is continuing at a lacklustre pace not seen since 2009.



The evidence suggests that heating fuels stocks remain seasonally depleted with high prices and backwardated product markets not favouring strong commercial or consumer stock building over the summer months. Moreover, if this winter was to be unseasonably cold then markets could tighten considerably. However, both inventories and demand should be considered in terms of the fuel mix with low stocks in the, notably in the US, arising from the structural shirt towards cheaper natural gas.



Prices

Summary

  • Oil futures were trading at four-month lows by early November amid mounting pessimism over the economic outlook for China and the euro zone and post-election worries over the looming US fiscal cliff come the New Year. Underscoring the shift in market sentiment, money managers reduced their bullish bets on WTI contracts at the Chicago Mercantile Exchange (CME) to the lowest level in over two years. Prices for benchmark crudes were down $5-8/bbl in October and early November, with Brent last trading at $109.25/bbl and WTI at around $86/bbl.
  • Spot crude oil markets moved lower in October, with the downtrend continuing into November. Exceptionally high crude oil inventories in the US and Asia Pacific region, combined with constrained buying by European refiners, tempered price moves despite the onset of the peak heating oil demand period.
  • Middle distillate markets outshone other products in October ahead of the peak winter demand season in the Northern Hemisphere, continued demand for diesel and exceptionally low inventory levels in Europe and the US. Strong buying from Latin America is also supporting US distillate margins. In Asia, only Japan saw improved distillate cracks.
  • Contrasting fortunes in crude and product tanker markets have been evident over September and October as rates for crude carriers remained in the doldrums while those for product tankers firmed. Following a similar pattern to 2011, crude tanker markets have remained extremely weak over autumn with only bunker fuel price rises providing any upward momentum.


Market Overview

Oil futures prices were trading at four-month lows by late October and early November with mounting pessimism over the economic outlook for China and the euro zone and a weaker global oil demand picture pressuring markets. Futures prices fell further on post-election worries over the so-called US 'fiscal cliff' hanging over markets for the next few months.

Futures prices for WTI posted the largest decline in October, off about $5/bbl to $89.57/bbl while Brent saw a smaller monthly drop of just $1.50/bbl, to around $115.50/bbl. Prices fell a further $3/bbl the second week of November. Oil prices posted a sharp downturn, in line with financial markets, following the US presidential election. Market worries shifted to the US fiscal cliff with the slated expiration of a number of laws, which will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit at the start of the new year, and fears that Congressional gridlock may make it impossible to avert a crisis. Mounting concerns over an economic outlook increasingly perceived as precarious translated into heightened risk aversion in global financial and commodity markets and triggered massive liquidation by investors in oil futures. Net long positions held by money managers in CME WTI contracts fell to the lowest level since early September 2010.

By far, the prospect of weaker-than-expected demand in the near term is adding the greatest pressure on markets. Estimates of global oil demand for 4Q12 have been revised down by 300 kb/d from last month's report, to 90.1 mb/d, bringing incremental revisions for the quarter since July to 800 kb/d. Exceptionally low inventories of middle distillates in the US and Europe, however, may yet support prices once winter weather sets in.

Despite the loss of some 1-1.2 mb/d of Iranian crude supplies in the first ten months of the year, oil markets are well supplied. Concerns over the loss of Iranian crude and fears of increased tensions between Iran and the international community appear to have eased in recent weeks, though no new talks have yet been scheduled and the European Union imposed even more stringent sanctions on Tehran in mid-October (See OPEC Supply).



Non-OPEC supplies are growing apace but continued unplanned outages and disruptions have kept Brent futures in backwardation. Prompt prices for Brent remain at a steep premium to forward prices, though the M1-M12 backwardation narrowed slightly on expectations of a recovery in North Sea supplies by end-month, to around $5.15/bbl in early November compared with $6.30/bbl in October. Signalling expectations of continued ample supplies in the US, WTI prices saw the WTI M1-M12 contract move deeper into contango, to around -$3.60/bbl in early November, compared with -$2.40/bbl in October and -$0.95/bbl in September.



Futures Markets

Activity Levels

Reversing the trend seen in August and September, market activity on oil futures exchanges in October saw futures positions in the Brent contract rebound relative to those in WTI. Data on open interest show the ratio of Brent futures on the London ICE to New York and London WTI oil positions increased more than 2.8 percentage points to 59.1% between 2 October and 6 November, driven by more than a 6.5% rise in ICE Brent open interest. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by 3.9% to 78.2%.

Similar trends are observed in volume comparison. Total trade volumes in CME WTI contracts fell 21% in October 2012 y-o-y and by 20% year-to-date, to 11.7 million contracts and 121 million contracts, respectively. In contrast, Brent monthly volume increased by 5.8% to 13.2 million contracts last month from 12.5 million in October 2011. Year to-date Brent volume jumped by 14% to 127 million contracts, exceeding the volume in CME WTI contracts by almost 6 million contracts.

Open interest increased in all major oil contracts in October. At CME, combined open interest in WTI futures and options increased by 1.2%, to 2.56 million, while open interest in futures-only contracts increased by 3.7% to 1.61 million. Over the same period, open interest at the London ICE rose to 0.52 million for WTI futures-only contracts and increased by 7.2% in futures and options, to 0.66 million contracts. Meanwhile, open interest in ICE Brent futures contracts increased by 9.1% to 1.26 million contracts, while ICE Brent futures and options contracts rose by 5.4% to 1.58 million contracts from 2 October to 6 November 2012.



Money managers reduced their bullish bets on CME WTI contracts to the lowest level since September 2010 in response to the fall in WTI prices to a four-month low at the end of October. They cut their net long futures positions by 30% between 2 October and 6 November, to 98 840 contracts, the lowest level since the week ending 21 September 2010. The shift in money managers positions seen in September extended into October. Since their bullish bets on CME WTI contracts reached a recent peak in the week ending 18 September at 192 474, money managers liquidated their long positions in five weeks out of seven, reflecting concerns about rising inventories and weak demand and fears of political gridlock in the aftermath of the US presidential election. In the last two weeks of October alone, money managers cut their long positions by more than 30%, partly due to expectations of Hurricane Sandy's impact on refinery runs and crude inventories. Money managers in London ICE Brent contracts followed a similar pattern and reduced their bullish wagers by 23%, reaching the lowest level since July 2012, at 83 007.



Producers accounted for 19.3% of the short positions and 18.7% of the long positions in CME WTI futures-only contracts on 6 November, reducing their net short positions by 42.8% to 10 464 contracts, the lowest  net short position ever recorded since the disaggregated report was made available in 2006. Swap dealers, who accounted for 24% and 33.5% of the open interest on the long side and short side, respectively, reduced their bets on falling prices by 25.3% to 153 429 contracts, the lowest net futures short positions since  August 2012. Producers' and swap dealers' trading activity in the London ICE Brent contracts followed an opposite pattern from CME WTI contracts. Producers in London ICE Brent contracts reduced their net short positions from 104 778 to 100 560 contracts. Similarly, swap dealers increased their net long positions from 29 958 to 58 184 contracts.





NYMEX RBOB futures and combined open interest declined by more than 4.1% to 265 501 and 278 929, respectively, over the same period. Open interest in NYMEX heating oil futures contracts was down by 4.5% to 307 659 contracts while open interest in natural gas futures market increased by 2.4% to 1.18 million contracts.

Index investors' long exposure in commodities in September 2012 increased by $7 billion to $294.7 billion, after edging up by $6.7 billion in August. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts declined by $1.9 billion in September. The number of long futures equivalent contracts increased by 2 000 to 529 000, equivalent to $49.0 billion in notional value.

Market Regulation

After more than two years of rulemaking, the implementation of some of the swaps rules adopted by the US CFTC finally took effect in the US on 12 October 2012. This is the effective date of the swap definition rule, which triggered 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, and internal and external business conduct standards. However, just before the effective date, the US CFTC issued several interpretive letters and other guidance regarding rules issued under the Dodd-Frank Act. The US CFTC granted energy firms until the end of the year to convert swaps to futures contracts, thereby relieving them from costly new regulations faced by swap dealers who trade more than $8 billion of swaps in a 12-month period. Energy firms trading more than $25 million in swaps with public utilities were also given more time to comply with the swap-dealer registration requirement.

On 31 October 2012, The Financial Stability Board (FSB) published its fourth progress report on implementation of over-the-counter (OTC) derivatives market reforms. The FSB reported that although significant progress had been made in building the infrastructure mandated by the G20, such as central clearing house and swap depositories, regulatory differences among regions, including in the cross-border application of rules, will likely delay the full and timely implementation of the G20 requirements for OTC markets regulations. The objective of achieving global swaps rules is thus unlikely to be achieved by the end of 2012.

On 7 November 2012, the US, European and Asian regulators met in Washington, DC to discuss the implications of cross-border reach of the US swap rules, which was heavily criticised by European and Asian regulators and other market participants. The latter had raised their concerns about the unintended consequences of the cross-border application of swaps rules, including potential market disruption or fragmentation resulting in increased systemic risks and reduced market liquidity, as well as the issue of non-US persons facing overlapping compliance requirements in the US and in their home country, where regulations can be mutually conflicting.

A New Era in Swaps Markets?

US CFTC Chairman Gary Gensler declared last month that a new era for the swaps marketplace would start on 12 October 2012, the effective date of the new US swap definition rule. This marked the beginning of the process of swap dealer registration and swap data reporting. Mandatory clearing by swap dealers and major swap participants is expected to follow in February. The new rules are intended to bring transparency to the swaps markets and lower their risks. While the 12 October date may indeed be remembered as a milestone, a close look at the new rules suggests that lingering difficulties remain and that the process of regulatory swaps market reform may still be undergoing teething pains.

Those difficulties should not come as a surprise. There is an inherent tension between, on the one hand, the political clarity of the perceived need for, and urgency of, financial-market transparency and regulatory reform and, on the other hand, the very complexity of those market's financial instruments, and hence the great difficulty of regulatory adjustments. When G20 leaders set the broad reform agenda to be implemented by the end of 2012 to reduce systemic risk and increase transparency in the OTC derivatives  markets, they might not have fully appreciated the complex nature of the instruments they were dealing with. They might also have held exaggerated hopes that new rules could easily achieve consistency across nations and win consensual international support. Instead, regulators in different countries followed their own paths in designing the rules that were supposed to govern global swaps markets, without engaging into much-needed cooperation among themselves.

As indicated in the latest FSB progress report on OTC market reforms, it now appears that regulatory differences among regions, including in the cross-border application of rules, will likely delay the full and timely implementation of the G20 requirements for OTC markets regulations. The FSB urged regulators for more international coordination to provide clarity on how the rules will apply to transactions and entities for more consistent and effective oversight in OTC markets.

Although the US CFTC is still working on the final guidance on the cross-border application of Dodd-Frank swaps market reform, interpretive guidance issued in June was heavily criticised by European and Asian regulators as well as other market participants when they met in Washington, DC on 7 November 2012. They have raised their concerns about the unintended consequences of cross-border application of swaps rules, including potential market disruption or fragmentation resulting in increased systemic risks and reduced market liquidity.

Clearing requirements for standardised swaps through an intermediary company with sufficient capital, such as clearing houses or central counterparties (CCPs), a measure introduced to eliminate counterparty risk, have also become a target of criticism. Proponents of the requirement argue that central clearing has worked in the futures markets for over a century. Critics counter that the present regulatory reform and regulations may not remove the systemic risk from OTC derivatives but rather shift it from counterparties to central clearing parties. A recent IMF paper concluded that the current proposed central clearing system, far from reducing systemic risk, actually increases it.

Some observers argue that the CFTC has rushed to meet arbitrary deadlines without providing proper analysis of the costs and benefits of the new rules for swaps markets. The CFTC's last minute issuance of a series of no-action and interpretive letters and other guidance just before the 12 October deadline was interpreted as proof that the Commission had failed to develop clear and cost-effective rules, as noted by one of its Commissioners.

Market participants are already searching for ways to escape from costly and complex regulations of the swaps market. Aside from cross-border disputes, in the presence of regulatory arbitrage, there are concerns that market participants may increasingly seek out jurisdictions with less strict regulations, thereby shifting the risk rather than mitigating it, and eventually increasing the opaqueness of swaps markets rather than bringing more transparency to them.

Moving to less heavily regulated jurisdictions would be a form a physical or geographical migration of the swaps market. Another form of market migration entails converting swap positions into equivalent futures positions, resulting in what could be called the 'futurisation' of swaps. Neither the physical migration nor the futurisation of the swaps market would likely have been the market response intended by regulators.

In order to reduce their clients' exposure to compliance costs associated with the new rules imposed on swap transactions and to avoid dealing with the increased complexity facing swaps market participants (compared to futures market participants for example), the Intercontinental Exchange (ICE) has already converted 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, into economically-equivalent futures and option products on 15 October 2012, which corresponded to the compliance date for several new swaps rules. ICE further argued that already tested futures market regulations give market participants more certainty than the untested regulation in swaps markets. Similarly, Chicago Mercantile Exchange (CME) also announced the launch of a deliverable interest rate swap futures contract on 3 December 2012, which will convert or be delivered into an OTC swap that is cleared by the CME upon expiry.

Exchanges are introducing these swap-like futures contracts to avoid complexity, cost and the lack of regulatory certainty. Of course, the success of these new products is still to be tested. Sufficient market liquidity and trader confidence are essential to the survival of these new products. If successful, a new era may indeed beging for swaps markets, though not quite in the sense intended by regulators.

Spot Crude Oil Prices

Spot crude oil markets fell to four-month lows in October, with the downtrend continuing into November. Exceptionally high crude oil inventories in the US and Asia Pacific region, combined with reduced buying by European refiners as margins in the region started to decline from their recent highs, put downward pressure on prices despite the onset of the peak heating oil demand period. Spot prices for regional benchmark crudes were down in a relatively narrow range of -$0.65 to -$2.35/bbl in October, with US WTI the exception. WTI was down a steeper $5/bbl, to an average$89.52/bbl. By early November, spot crude prices tumbled a further $3-5/bbl amid post-election worries over the looming US fiscal cliff and mounting pessimism over the economic outlook for China and the euro zone. However, the onset of winter heating oil demand may yet revive prices for distillate-rich crudes.

Spot prices for North Sea Dated were off month-on-month by around $1.50/bbl to an average $116.60/bbl in October and by the second week of November were down a further $2.50/bbl to around $108/bbl. After months of supply delays, North Sea volumes are expected to recover by end month, which is adding downward pressure on prices. Dubai crude was off about $2.35/bbl to an average $108.79/bbl in October and down a further $3.50/bbl in November on ample supplies of Middle East crudes on offer and as demand for heavier grades receded.



WTI's discount to North Sea Brent widened again in October, to around $22.10/bbl on average compared with $18.45/bbl in September. WTI's relative weakness partly reflected the continued high crude oil inventories at the Cushing, Oklahoma storage depot. Total US crude oil inventories have been well above the five-year average since last April. Adding to supply, imports from Canada increased following the restart of the 590 kb/d Keystone pipeline while increased supplies of Bakken crude fell relative to WTI.



While Hurricane Sandy wreaked havoc on the US East Coast oil infrastructure, the storm also halted crude and product flows from the US Gulf Coast, adding further pressure on crude prices (see Refining, 'Sandy Causes Havoc to US East Coast Supply Network'). The end of the US gasoline season also muted East Coast refiner demand for West African grades.

European spot crude markets were under pressure from reduced demand for higher-priced prompt barrels. Smaller European refiners have been hard hit by steep financing costs, opting to keep working inventories at minimal levels.

However, Urals prices strengthened to near parity with Dated Brent in early November, in part due to reduced exports as domestic demand increased after Russian refiners returned from maintenance. A shift away from exports to the Mediterranean to the more lucrative ESPO pipeline to Asia as well as the BPS-2 to the Baltic region also propped up Urals prices in Europe. Urals was trading just below Brent by around -$0.05/bbl in early November compared to a monthly average of -$0.92/bbl in October and -$1.15/bbl in September. Russian seaborne cargoes exported via Ust Luga are ramping up to their 600 kb/d capacity, which will is likely to pressure the Urals-Dated Brent differential.



In Asia, ample supplies of Middle East grades weighed on markets in October as demand for fuel-oil rich crudes weakened. Moreover, increased imports of Iranian crude by both China and South Korea, at an estimated 500 kb/d, muted demand for alternative crudes. Spot Dubai's discount to Brent deepened to around -$2.80/bbl in October compared with around $1.85/bbl in September. The end of the bitumen season has partly eroded the seasonal premium for asphalt-rich crudes. The steeper Brent/Dubai spread, a barometer of demand for light sweet grades versus heavier sour supplies, may yet encourage refiners to buy more Dubai linked crudes in coming months versus higher priced African grades pegged to Brent.



Spot Product Prices

Middle distillate markets outshone other products in October ahead of the peak winter heating season in the Northern Hemisphere, continued demand for diesel and exceptionally low inventory levels in Europe and the US. Strong demand from Latin America is also supporting US distillate margins. In Asia, only Japan saw improved distillate cracks.

Gasoil crack spreads in Atlantic basin markets rose by $0.50-2.00/bbl on average in October from already robust levels but much of the increase came early in the month, with growing pessimistic sentiment about demand growth pressuring cracks in the second half of the month.

In the US, heating oil crack spreads in New York were a steep $42.40/bbl on average in October while ULSD at the US Gulf Coast was running above $22/bbl in October. However, exceptionally low heating stocks in the East Coast region is a major prop under crack spreads. Heating oil inventories in PADD1 were down 35% below the five-year average by early November. The relentless demand from Latin American for distillate supplies continues to provide significant support to US crack spreads, with exports to the region now topping 1 mb/d. In the US Gulf Coast heating oil crack spreads to Mars increased by around $1.85/bbl in October to $26/bbl.



European gasoil cracks in October averaged between $20-$21/bbl in both Rotterdam and the Mediterranean. The sudden shift of gasoil futures to contango in October may discourage stockbuilding ahead of winter, leaving markets excepting tight. ICE gasoil The onset of early winter weather in Germany at a time when refineries were in turnaround also supported gasoil prices. Diesel cracks were supported by strong demand from Germany, France and the UK. In Central Europe, crude pipeline bottlenecks reduced refinery output, in both Germany and the Czech Republic (see Refining, 'Pipeline Bottlenecks Create IEA Supply Disruptions').



Gasoline markets in the Atlantic basin markets, on the other hand, continued to weaken in October after the end of the driving season, with monthly crack spreads falling $9.50-$12.40/bbl in the US and Europe. By contrast, premium gasoline cracks in Singapore were slightly firmer, up by just under $0.78/bbl to $15.33/bbl for premium unleaded. Naphtha cracks in Singapore also firmed month on month, by around $0.35/bbl but were still in negative territory at an average -$3.77/bbl in October.

Fuel oil markets were weaker across all regions in October on higher inventories in both Europe and Asia. However, in Europe increased bunker demand supported crack spreads in early November. In Asia, with the exception of South Korea, reduced demand from utilities for high-sulphur fuel and increased offerings from Middle East refiners depressed crack spreads further.





Freight

Contrasting fortunes in crude and product tanker markets have been evident over September and October as rates for crude carriers remained in the doldrums while those for product tanker rates firmed. Following a similar pattern to 2011, crude tanker markets have remained extremely weak over the autumn with only bunker fuel price rises providing any upward momentum. On many routes, these rates have translated into negative earnings but as in 2011 there is still little appetite for either scrappage or the laying up of vessels due to carriers being required to maintain their approvals with exporters.



Middle Eastern oil in transit has fallen steadily from mid-summer onwards in tandem with the glut of available vessels rates on trades out of the region have been pressured. The benchmark Middle East Gulf - Asia route remained below $10/mt from early-August until late October, with these dour rates translating into negligible or even negative TCE's. A similar overhang of vessels in the Baltic also prevented healthy exports from Primorsk and Ust Luga from providing any upward momentum.

Product tanker markets have experienced a resurgence recently with healthy demand in Asia helping to boost rates. In the East, rates on the Middle East Gulf - Japan route have increased steadily over the past couple of weeks breaching $30/mt, a level not seen since April-2011, in the second week of November. Additionally, strong, recent intra-regional trade centred around flows in and out of Singapore has propelled the Singapore - Japan rate to above $21/mt in early November, a level not reached since end-2008. In the Atlantic Basin, rates on the benchmark UK - US Atlantic coast trade fell from their September highs as demand was not sustained although indications are that they are receiving a small boost in the wake of Hurricane Sandy, firming to over $19/mt at the time of writing.    

The effect of Hurricane Sandy, which hit the US Eastern Seaboard on 29 October, was immediately felt in clean product tanker markets. Since shuttering a significant portion of refining capacity, PADD 1 markets have become ever more reliant on product deliveries from Gulf Coast refiners via the Colonial pipeline. As of the first week of November, the pipeline was closed North of Linden along with a number of fuel distribution terminals and the 240 kb/d Bayway and 70 kb/d Port Reading refineries, which prompted the US Department of Homeland Security to issue a temporary Jones Act waiver. This permits foreign-flagged ships to perform US coastal trade and thus transport product north from the Gulf Coast region. Available vessels rapidly became scarce prompting rates on the USGC - Caribbean route to double to over $30/mt in four days.

Refining

Summary

  • Record-high Chinese refinery runs in September lifted average 3Q12 global throughput estimates to 75.9 mb/d. Chinese throughputs rebounded in September and October after seven months of subdued growth due to improved refinery profitability and low product inventories. Third-quarter runs were also supported by strong OECD margins, especially in Europe, while US refinery operations were curtailed by Hurricane outages in September. A seasonal dip is expected to leave 4Q12 runs at 75.5 mb/d, 1.1 mb/d above last year, compared with y-o-y growth of 0.6 mb/d in 3Q12.
  • OECD crude runs fell by 1.2 mb/d in September, to 36.8 mb/d, mostly on lower runs in the Americas. Hurricane shutdowns on the Gulf Coast and outages in California and the Midwest - both scheduled and unscheduled - curbed runs in the United States, as did seasonal maintenance in Japan and Europe. Surging refinery margins nevertheless provided partial support, in particular to European runs. OECD runs likely fell in October, as margins declined and seasonal maintenance increased.
  • US East Coast product supplies were severely disrupted in late October, as Hurricane Sandy wreaked havoc to regional distribution and logistical networks. The storm, which made landfall in New Jersey on 29 October, forced several refineries to shut or reduce rates, and led to widespread fuel shortages as pipeline flows, tanker traffic, terminal operations and retail stations were disrupted by flooding and power outages.
  • Refinery margins fell sharply in October as product prices retreated faster than benchmark crude prices. Despite a $3.50/bbl average decline, European cracking margins remained robust compared with recent historical trends, at around $9/bbl. Gulf Coast margins fell by a similar amount. Builds in product inventories in the face of continued demand weakness saw margins fall back from recent highs and by end-month simple margins had fallen back into the red after several months of healthier returns.


Global Refinery Overview

Global refinery runs have been revised up by 60 kb/d for 3Q12, due to record-high Chinese September throughputs as well as slightly stronger readings for the Middle East. Global refinery runs are now estimated at 75.9 mb/d for the quarter, 635 kb/d higher than the same period in 2011. Annual growth continues to be centred in non-OECD countries, in particular in Asia, but was also strong in Europe, where refinery runs increased by 300 kb/d in the quarter, their strongest annual increase since the rebound of 2010. Surging refinery margins, following recent capacity rationalisation and depleted inventories, enticed European refiners to increase discretionary throughputs.



For 4Q12, the estimate of global throughput is unchanged from last month's report, at 75.5 mb/d. Higher-than-expected US and Chinese runs in October offset lower forecasts for Latin America, where problems continue to plague Venezuelan refineries. Weaker African estimates, reflecting problems in Libya, maintenance in South Africa and lower reported data for Nigeria and Egypt in August also contributed. On average, y-o-y growth is expected to pick up momentum to 1.1 mb/d in 4Q12, almost entirely accounted for by non-OECD Asia. New capacity commissioned in India earlier this year and new units coming on line in China at the end of 2012 support the recovery. First-quarter 2013 throughputs could be further boosted as Saudi Arabia's 400 kb/d Jubail refinery starts trial runs and Motiva's 325 kb/d expansion on the US Gulf Coast and Chevron's Richmond refinery in California come back on line after extended outages.

Refinery margins were a mixed bag in September but generally moved lower in October. In Europe, margins rose by an average of $4.40/bbl in September, to around $12/bbl for cracking configurations, and to $3.15/bbl-$8.75/bbl for simple refineries. European margins in September were the highest recorded since 2008, and in some cases even higher. US Gulf Coast margins were mixed, while Midwest refineries recorded declines of up to $7.90/bbl. Despite the drops, Midwest refineries remained among the world's most profitable, thanks to discounted crude and natural gas supplies. Singapore also saw diverging trends in September, with Dubai margins falling and Tapis improving month-on-month.



In October, margins plummeted across the board, as declines in product prices exceeded those in spot crude prices. Margins in both Europe and the US Gulf Coast shed more than $3/bbl. In the US Midcontinent coking margins declined by a steep $6.25/bbl for WTI, but inched up marginally by $0.60/bbl for a 30% Western Canadian Select/70% Bakken blend. In Singapore, Dubai hydrocraking margins improved marginally, while other benchmarks declined. Yet despite this significant deterioration in netbacks, margins remained above recent historical trends. European margins averaged almost $9/bbl for cracking refineries, far above regional trends, compared to a range of $2.8/bbl - $8.60/bbl on the Gulf Coast. In comparison, US Midcontinent refiners profited a gross $27 for each barrel refined.



Chinese refiners also reported improved refining economics in September. The National Development and Reform Commission (NDRC) adjusted retail product prices for the seventh time this year. Retail gasoline prices were raised 6.1%, to 0.41 yuan/litre, while diesel prices were raised 6.5% to 0.46 yuan/litre. As a result, Sinopec's refining margin reportedly returned to positive levels for the first time since 4Q10. Sinopec's refining segment reported third quarter earnings of 3 billion yuan versus a loss of 9.3 billion yuan in 2Q12. PetroChina on the other hand reported continued operational losses in 3Q12, though its situation also improved from the same period last year and for 2Q12.

OECD Refinery Throughput

OECD crude throughputs fell by 1.2 mb/d in September versus August, with most of the decline in the Americas. US crude intake fell 0.6 mb/d m-o-m, to 14.7 mb/d, as Gulf Coast refineries affected by Hurricane Isaac in late August remained offline or at reduced rates for part of September. This also represented a 0.6 mb/d decline y-o-y.  Canadian and Mexican throughputs also fell, taking the regional total 940 kb/d below year-earlier levels. European crude runs fell by 300 kb/d m-o-m, in line with previous estimates, as the start of autumn maintenance was only partly offset by increased discretionary runs fuelled by surging margins. Refinery throughputs in Asia Oceania fell seasonally as maintenance picked up in Japan. Overall, the September preliminary data was 150 kb/d below our previous forecast, while July and August data were largely in line with preliminary estimates overall.



Preliminary indications suggest that runs continued to decline in October, but by somewhat less than the previous year and earlier expectations. US throughputs, in particular, recovered faster than expected in October from hurricane disruptions in August and September, and actually increased counter-seasonally month-on-month. In contrast, European runs appear to have fallen steeply, due to heavy maintenance and a sharp deterioration of margins throughout the month. Simple Urals margins plunged back into negative territory, which may have led some refiners to trim operating rates. Despite the reduction in refining activity, European October runs are expected to retain year-on-year growth of over 200 kb/d, averaging 12.1 mb/d. In OECD Asia Oceania, refinery throughputs also seem to have fallen steeply amid higher Japanese plant maintenance. In all, OECD runs are forecast to fall to 36.4 mb/d, some 410 kb/d less than in September, but 300 kb/d above the same month in 2011. 4Q12 OECD throughputs have been raised 120 kb/d since last month's report, to 37.0 mb/d, compared with 37.7 mb/d in 3Q12.



Refinery crude intake in the OECD Americas fell 740 kb/d in September, to 17.6 mb/d, almost 1 mb/d lower than a year earlier. US crude runs led the decline, both on a monthly and annual basis. The shutdown of Hovensa's 350 kb/d St. Croix refinery earlier this year was a contributing factor. While the US decline spanned all regions, the US Gulf Coast was hit hardest in late August and early September as Hurricane Isaac forced precautionary shutdowns of significant refining capacity in the storm's path. On a monthly basis, Gulf Coast runs fell 280 kb/d to 7.4 mb/d in September. Throughputs also fell in the Midcontinent (-160 kb/d) and on the West Coast (-95 kb/d) due to scheduled and unscheduled outages.

In October, both Gulf Coast and US runs recovered, lifting the average for the OECD Americas by an estimated 300 kb/d from September. Runs were again curbed at end-October, however, as Hurricane Sandy hit the Atlantic Coast on 29 October, forcing several East Coast refineries to shut down or reduce rates. Severe flooding and power outages caused widespread disruptions to product supplies to the region, though the damage on the refinery industry itself appears more limited. At the time of writing, only Phillips66's 238 kb/d Bayway and Hess' 70 kb/d Port Reading refineries in New Jersey remained shut, and was expected to resume runs within a few weeks. Prior to the storm shutdowns, US East coast refinery crude intake had reached 1.1 mb/d, the highest since November 2011, as Delta's 185 kb/d Trainer refinery (formerly owned by Sunoco) resumed operations after a year-long shutdown (See 'Sandy Wreaks Havoc on US East Coast Supply Network').



In the Midcontinent, the reconfiguration of BP's Whiting, Indiana refinery could cut runs by around 250 kb/d for up to six months, as the company shut the plant's largest crude unit. The upgrade will enable the plant to process more heavy Canadian oil, replacing mostly light sweet US crude processed currently. In October, Phillips 66 and Cenovus' 360-kb/d joint-venture Wood River refinery also started maintenance, further curbing crude demand in the Midwest. Chevron's 245-kb/d Richmond refinery in California remains offline, as does a new 315-kb/d crude unit at Motiva's expanded Port Arthur refinery on the Gulf Coast. Both are expected to resume operations in early 2013.

Sandy Wreaks Havoc on US East Coast Supply Network

US East Coast product supplies were severely disrupted in late October and November, as Hurricane Sandy wreaked havoc on regional distribution and logistical networks. The storm, which made landfall in New Jersey on 29 October, forced several refineries to shut or reduce rates and led to widespread fuel shortages as pipeline flows, tanker traffic, terminal operations and retail stations were disrupted due to flooding or power outages. Initially, the supply disruptions were offset by a slump in demand as flights were cancelled and traffic slowed, though a rebound is expected as secondary and tertiary storage tanks are refilled once deliveries normalise.

Sandy forced two refineries in the East Coast region known as PADD 1 - Hess' 70 kb/d Port Reading refinery and Phillip 66's 238 kb/d Bayway, Linden refinery, both in New Jersey - to shut. Both plants remain closed at the time of writing, with no firm restart date annouced. Expectations are that the plants will remain offline for several weeks, but 'jumper' pipelines have been put in place around the Bayway plant to allow pipeline access to critical terminals associated with the refinery and ensure eventual product deliveries to East Coast customers. Philadelphia Energy Solution's 335 kb/d Philadelphia refinery (formerly owned by Sunoco) was reportedly operating at reduced rates due to crude supply delays until 7 November, while PBF's Delaware and Paulsboro refineries and Monroe Energy's Trainer refinery resumed normal operations within days of the storm passing after having reduced runs as a precaution.

While the damage to refineries appeared relatively limited, East Coast product supplies were severly disrupted as key pipeline flows, import terminals and retail outlets lost power or sustained flood damage from the storm. The Colonial Pipeline, a key supplier of refined oil products from Gulf Coast refiners to the East Coast, shut down its mainline serving the Philadelphia, New Jersey and New York Harbour markets for several days but has since resumed operations. Also a Buckeye pipeline supplying the three New York area airports with jet fuel resumed normal operations within days of the storm's passing.

Aggravating the situation, most of the region's tanker traffic and oil product terminals were shut ahead of the storm and remained closed for days, curtailing imports. Federal energy officials reported that seven of 57 petroleum terminals affected by the storm remained shut on 12 November. Of those, five were located in New Jersey, one in Long Island and one in Brooklyn. Tanker traffic access to New York Harbour, a major point of entry for the nearly 1 mb/d of refined products imported into the US East Coast, reopened gradually, though not until 7 November was all vessel traffic allowed.

East Coast retail markets were severely disrupted due to widespread power failures at New York and New Jersey gasoline stations and supply delivery difficulties. On 9 November, as many as 28% of gas stations in the New York metropolitan area still did not have gasoline for sale, causing long lines of customers at working stations. Oil companies were scrambling to resupply working stations in their networks, but access to the region's terminals was restricted. To alleviate product shortages, the a i temporary Jones Act waiver was issued, permitting foreign-flagged ships to perform US coastal trade and thus transport product north from the Gulf Coast region.

In an attempt to ease the supply crunch, New York City, Nassau and Suffolk Counties followed New Jersey's example and started gasoline rationing on 9 November, for the first time since 1970. New Jersey had already put in place a rationing system a week earlier. Earlier, the US Environmental Protection Agency, in consultation with the US Department of Energy, had already issued emergency waivers of reformulated gasoline (RFG) and Ultra Low Sulphur Diesel (ULSD) fuel requirements for mobile non-road diesel engines for a number of states to improve fuel availability. Both waivers will remain in effect through 20 November.

Hurricane Sandy is expected to have a significant impact on East Coast oil product demand. Last October, the US East coast - PADD 1 - consumed 5.3 mb/d of oil products, compared to total US demand of 18.8 mb/d, according to data from the US Energy Information Administration. If the experience of Hurricane Irene in 2011 and other storms is any guide, product deliveries will show substantial drops for October and November. The scope of demand suppression may vary product by product, with jet fuel likely leading the losses following the shutdown of several major East Coast airport hubs for several days followed by continued disruptions in local air traffic. Gasoline deliveries will also be reduced due to power losses at service stations, reduced driving demand, pipeline disruptions, etc. However, a dip in demand in late October and early November may have been preceded by a spike in deliveries ahead of the storm as consumers anticipated the disruptions and stockpiled, and followed by a rebound in deliveries to rebuild secondary and tertiary inventories once logistical operations return to normal.

Pipeline Bottlenecks Create IEA Supply Disruptions

Not only the US East Coast experienced supply disruptions in October; some central European refiners were also forced to halt operations due to pipeline bottlenecks. In particular, the Czech Republic's Kralupy refinery (-64 kb/d) was forced to suspend runs in October due to lack of crude supplies, with neighbouring Litvinov (100 kb/d) rumoured to be close to following suit. Germany's Karlsruhe refinery (320 kb/d) equally had to shut down due to an interruption in pipeline flows, further raising concerns over infrastructure adequacy and supply security in the region.  

The supply disruptions in central Europe relates to two factors. Firstly, Russian Urals flows through the Druzhba pipeline have been severely curtailed recently, as oil is being diverted to more profitable export outlets. The latest data available show total Druzhba flows hovering around 1 mb/d over the last three months, down from 1.2 mb/d over the same period last year. Supplies to the Czech Republic fell from around 100 kb/d to less than 50 kb/d in the last five months.

The lower shipments through the Druzhba pipeline are partly related to alternative export capacity starting up within Russia. Most notably, the commissioning of the Ust-Luga terminal on the Baltic Sea in March of this year was diverting as much as 460 kb/d of FSU crude supplies away from regular outlets in September. The ESPO pipeline, which is in the process of raising its capacity with the commissioning of the phase 2 spur, together with the recently launched BPS-2 line have added almost 1 mb/d of additional export routes to the east, allowing exporters to re-orientate volumes to the most profitable outlets. As a result, not only Druzhba pipeline flows but also Black Sea exports have fallen sharply.

Most refiners in Central Europe have alternative feedstock supply routes available, however. The 850 kb/d Transalpine pipeline (TAL) running from Trieste in Italy to the Ingolstadt, Vohburg, Neustadt and Karlsruhe refineries in Germany, as well as Austria's Schwechat refinery is a favoured supply source. Some of the German plants normally also source crude from the 700 kb/d SPSE pipeline running from Fos-sur-Mer. Coinciding with the reduced flows on the Druzhba line, however, several German customers have favoured taking feedstock from the TAL pipeline rather than the SPSE, due to lower tariffs. As a result, the TAL line has had no spare capacity available to fulfil requests from Czech refineries or others for increased flows to offset lower Druzhba volumes.

As Russia continues to diversify its export options, the situation is not likely to improve for refiners in the short-term. Both suppliers and consumers will always choose the most economical option, unless long-term contracts or shareholder agreements are in place. Pricing differentials on Russian export routes as well as alternative supply routes will have to converge, or alternative infrastructure is developed. If not, Central European refiners could see the current situation repeat itself in coming months and years.

European refinery crude intake fell by 300 kb/d in September despite exceptionally strong refinery margins. European cracking margins averaged around $12/bbl in the month, up from $7.70/bbl in August and $2.50/bbl a year earlier. Regional runs averaged 12.5 mb/d, still an impressive 330 kb/d above the same month in 2011, and in line with our previous estimate. The decline was led by a 250 kb/d drop in French throughputs, as Total's Gonfreville refinery in Normandy shut for turnarounds. UK refinery runs fell by close to 100 kb/d, as maintenance at Ineos' Grangemouth and Essar's Stanlow refineries commenced, while smaller declines were recorded for Norway and Italy. In Italy, ERG had announced earlier this year that it would convert its Rome refinery, which it owns together with Total, into an oil product terminal by the end of 3Q12. Higher German, Belgian, Polish and Swedish runs provided a partial offset.



European refinery runs are expected to have fallen further in October, as maintenance activity hit its seasonal peak. Planned shutdowns included Gunvor's newly acquired Antwerp refinery for five weeks from end-September, Tamoil's 80 kb/d Swiss refinery and partial shutdowns of the Pernis and Vlissingen plants in the Netherlands. In the UK, Valero shut its 210 kb/d Pembroke refinery for eight weeks at end-September, while the Stanlow and Grangemouth plants remained shut. In addition, runs were halted for five days at GALP's Sines refinery in Portugal, while Czech's Kralupy and Germany's Karlsruhe refineries had to halt operations due to lack of crude (See 'Pipeline Bottlenecks Create IEA Supply Disruption'). Some maintenance work was delayed due to the strong margins, however, including Cepsa's Gibraltar refinery which will now shut units in March 2013 instead of November this year.

In France, the fate of Petroplus' Petit Couronne refinery remains uncertain. A 5 November deadline to submit bids for the plant was again extended. The 162 kb/d refinery has been operating since June under a processing deal with Shell, after it had closed in January when Petroplus filed for insolvency. Six letters of intent were received, but all parties asked for more time to prepare their bids. A local court will meet again on 13 November to set the new deadline for submitting bids. The deadline for takeover set by the French commercial court is expiring on December 16, the day after the current tolling agreement with Shell is set to expire. If Petit Couronne were forced to close, the reduction in French refining capacity since 2010 would reach 585 kb/d, following the idling of Total's Dunkirk refinery in 2010, Petroplus' Reichstett plant in 2011, Lyondell Basell's Berre l'Etang facility in 2012 and a capacity reduction at Total's Gonfreville refinery.

In OECD Asia Oceania, weekly data from the Petroleum Association of Japan, show that the country's crude intake fell to a seasonal low point of 2.9 mb/d in October, from 3.1 mb/d in September. Refinery maintenance cut runs at JX Energy's 270 kb/d Negishi refinery in September and October, while the company's Mizushima B plant remained shut since July and Cosmo had yet to restart its 220 kb/d Chiba refinery. The latter has been shut since May. The latest news reports indicate the plant will only resume operations in January, with both crude units online by April.

JX Energy's Muroran plant, was shut unexpectedly for four days in September. The company recently announced it will permanently shut the 180 kb/d refinery in 2014, to comply with government rules on upgrading ratios.



Meanwhile, Korean refiners continue to process high volumes, averaging 2.6 mb/d in September, or more than 100 kb/d higher than a year earlier. In all, Asia Oceania throughput estimates are largely unchanged from previous reports, averaging 6.7 mb/d in September, and a preliminary 6.4 mb/d in October. Regional runs are set to rise seasonally from November onwards, as scheduled maintenance is completed and refiners strive to meet winter heating demand for kerosene and replenish depleted inventories.

Non-OECD Refinery Throughput

Non-OECD refinery throughputs were slightly higher in 3Q12 than previously forecast, averaging 38.2 mb/d. Record-high Chinese throughputs in September, after subdued growth in the previous six months, was the main contributor to a 115 kb/d quarterly revision. The increase in Chinese runs was expected for the tail end of this year, as new capacity is starting, and product inventories have been depleted in recent months. It was likely the recovery in refining margins after two retail price increases that is behind the sudden jump in runs, however. In contrast, 4Q12 non-OECD throughputs have been revised slightly lower due mostly to prolonged outages in Venezuela. Some refinery shutdowns in Africa not counted previously also curb runs compared to earlier forecasts, though overall non-OECD runs are still set rise to 38.5 mb/d, 990 kb/d above a year earlier.



Chinese refinery crude runs surged to record levels in September, of 9.43 mb/d, some 500 kb/d higher than a month earlier and 620 kb/d above 2011-levels. Refinery runs rose despite increased maintenance, as margins improved and refiners had to replenish depleted product inventories. The NDRC raised retail fuel prices by 6% in September, the seventh adjustment in fuel prices and fourth increase so far this year. Retail gasoline prices were raised 6.1%, to 0.41 Yuan/litre, while diesel prices were raised 6.5% to 0.46 Yuan/litre. As a result, Sinopec's refining margin reportedly returned to positive levels for the first time since 4Q10. So-called 'teapot' refineries also increased runs in September due to the fuel price increases, while fuel oil imports surged to 520 kb/d, 56.6% above the previous year and 82.2% higher than August. These smaller plants typically import fuel oil and process it into gasoline and gasoil, as they do not have the license to import crude oil.

Refinery throughputs remained high in October, at 9.4 mb/d, or 640 kb/d above the year earlier, as some maintenance shutdowns were completed and economics remained favourable. In late October, Sinopec restarted the 100 kb/d crude units at its Guangzhou and Dongxing refineries, after it was forced to shut the two units earlier in the month following alleged pollution of the Pearl River. Also in October, PetroChina started a new 120-kb/d crude unit at its Daqing refinery, while scrapping an older 60-kb/d unit. Sinopec has reportedly completed the expansion of its Maoming refinery, by 200 kb/d, and will start operations in late November. Secondary units will only be completed by mid-2013, capping runs for the time being.

In 'Other Asia', Indian refinery runs averaged an estimated 4.2 mb/d in September, up 11.6% y-o-y, but slightly lower than in August. The newly commissioned Bina refinery saw its throughputs decline to only 25 kb/d, from 142 kb/d a month earlier due to power supply problems. IOC's Panipat refinery runs also declined by 70 kb/d, due to maintenance. We have slightly revised down our historical data for India going back to April 2012, following a report that HPCL's Bathinda refinery was only producing 30 kb/d of gasoil in September, suggesting that overall runs might have been closer to 100 kb/d, rather than 150 kb/d as assumed earlier. Runs are expected to reach full capacity by end-year. Refinery throughput data of the newly commissioned plant has yet to be included in Ministry Data. Private refiners Reliance and Essar exported a record 1.24 mb/d of oil products in September, up 51.3% on the same month a year earlier. Gasoil exports averaged 560 kb/d and jet fuel 69 kb/d, gasoline 390 kb/d according to Platts.

Elsewhere in the region, Sri Lanka was forced to shut its only refinery in October, the 50 kb/d Ceypetco plant, due to problems replacing Iranian crude supplies. The refinery is expected to resume operations as alternative supplies were secured. Indonesia was expected to import record amounts of gasoline in October, due to high demand and refinery maintenance at Pertamina's Balongan plant in October and a possible turnaround of Cilacap in November. The operator of Vietnam's sole refinery dismissed reports that Dung Quat had halted runs in October, due to a malfunction.



Russian crude runs averaged 5.1 mb/d in October, slightly lower than September and below the previous year for the first time since May. Throughputs had already been curbed sharply in September, from record levels of around 5.5 mb/d seen over the summer months. Runs are expected to rise in November as most maintenance is completed. Kazakhstan's refinery crude intake rose by 100 kb/d in August, to 310 kb/d, as the Pavlodar plant completed a scheduled overhaul. In non-OECD Europe, the Serbian oil company NIS restarted its Pancevo refinery in early November, after a two-year upgrade. The refinery added a hydrocracker and hydrotreating complex. Overall refining capacity remained unchanged at around 100 kb/d. Also Macedonia's sole refinery was set to resume operations after a 7-month hiatus in early November, according to owner Hellenic petroleum.

In Latin America, record-high Brazilian throughputs in August and September were masked by continued outages at Venezuela's largest refinery. The explosion at the 645 kb/d Amuay refinery at the end of August, killed 41 people and caused severe damage to several key units, including a 180 kb/d crude unit which remained offline in early November. Also the 310 kb/d Cardon refinery was running well below capacity according to some sources, further denting the country's product supplies and raising gasoline import requirements. The latest data show Venezuela importing 83 kb/d of refined products from the US in August, compared to an average of 32 kb/d in 2011. These are expected to have risen sharply in September and October due to the refinery outages. In contrast, Brazil's crude throughputs averaged 2 mb/d for a second month running, up 130 kb/d year-on-year.



Monthly data for the Middle East, reported to JODI, show Saudi Arabian runs surging almost 200 kb/d in August to 1.97 mb/d, the highest in nine months. The 400 kb/d Saudi Aramco Total JV refinery in Jubail has started preparations for production start-up and will likely start the first 200 kb/d crude unit before the end of the year. Oman's Mina Al Fahal refinery was shut for about three weeks in October due to a fire, but resumed operations in early November.