Oil Market Report: 12 December 2012

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Highlights

  • Oil futures extended earlier declines in November, as persistent concerns about the economy and the looming US fiscal cliff appeared to eclipse those about political risks in Israel, Gaza, Syria and Iran. Benchmark crudes inched further down in early December, with WTI last trading at $85.90/bbl and Brent at $107.85/bbl.
  • Global oil demand is projected at around 90.5 mb/d in 4Q12, 435 kb/d more than forecast last month, following stronger-than-expected October preliminary demand data and signs of improving Chinese sentiment. Relatively sluggish demand growth is forecast through 2013, as global economic expansion remains tepid.
  • Non-OPEC production bounced back by 0.7 mb/d in November on the month, to 54 mb/d, after fields in the North Sea and Brazil returned from maintenance. US output also rose steeply and will contribute to an aggregate non-OPEC increase of 0.9 mb/d to 54.2 mb/d in 2013, the highest growth rate since 2010.
  • OPEC crude oil supply inched up by 75 kb/d to 31.22 mb/d in November, led by higher output from Saudi Arabia, Angola, Algeria and Libya. Nigerian output remained constrained by severe flooding and sabotage. Iranian production edged lower under the weight of shipping constraints and stepped-up sanctions.
  • OECD commercial oil inventories drew by a seasonal 16.2 mb to stand at 2 722 mb in October, bringing to a halt seven consecutive months of stock building. Forward cover remains at 59.1 days, unchanged from a downwardly-revised September level. Preliminary data indicate a further draw in November.
  • Global refinery runs have been revised lower by 140 kb/d for 4Q12 to average 75.3 mb/d. Growth is nevertheless expected at 950 kb/d year-on-year, driven by non-OECD Asia. Refinery margins extended earlier declines in November, led by decreases in gasoline and fuel oil cracks.

A market in transition

On the surface, the oil market appears calm. With so much in the world seemingly on the brink, crude price trends look as close to a flat EKG as they have in months. Prices have been easing, but gently, within a relatively narrow band, in stark contrast with the wild roller coaster ride of earlier this year. On closer examination, market fundamentals tell another story.

Recent data have helped to show two key areas of almost violent structural change in sharp relief. The first has to do with an apparent acceleration in the eastward shift of global oil demand growth. Latest data show European oil demand underwent the steepest contraction y-o-y in 3Q12 since the 2008-2009 financial crisis, even as Asian oil demand remained remarkably robust.



While there clearly are similarities between Europe's situation now and then, the differences are even more striking. The last time European oil demand nosedived as it did this summer, international oil prices had been in freefall. Not only are crude prices holding up, but European consumer prices hovered near record highs this summer, buoyed in part by a weakening currency. This was likely part of the reason for the dip in demand.

Three years ago, Europe was broadly in sync with Asia and the rest of the world. Today, there is a clear contrast not only in oil demand trends, but also in economic growth between Europe and Asia. North America falls somewhere in the middle. Everywhere, uncertainty prevails. China is sending out mixed economic signals. Meanwhile, whether the recent plunge in European oil demand is part of a trend or just a one-off is unclear. Early data show demand bouncing back in October, but may be revised.

While Asia and Europe are going their opposite ways, the refining industry - and that is the second trend highlighted in recent data - is coming together. Product specifications are converging. Long-haul product trade is on the rise. End-user markets are globalising. No longer is refining a local industry. Exports are what's driving throughputs in Europe and the US in the face of local demand contraction. Until recently the largest product importer, the US has become the world's second largest exporter after Russia, which recently hit record-high runs. India, another product exporter, is also on the rise.

Crude and product markets are moving at different speeds. While the former seems quiet, refining margins have been more volatile. High in Europe this summer amid weak regional demand, they plunged just when demand seemed to rebound. It is tempting to draw a link between those swings and rising long-haul product trade. As refiners extend their reach, adjustment to market changes may be abrupt.

Further muddling the picture, crude exporters, faced with surging demand, are expanding downstream. Saudi Aramco is leading the way with the start-up of new capacity both at home and abroad. Among the many reasons why OPEC producers might find market management an even more elusive goal than in the past, the least may not be these deep, complex and challenging shifts in market structure.

Demand

Summary

  • Global oil demand is projected to grow to around 90.5 mb/d in 4Q12 - roughly 435 kb/d more than estimated in last month's report - after having risen to an average 90 mb/d in 3Q12. Leading the upward revision for 4Q12 were higher-than-expected October product deliveries in Mexico (+150 kb/d, 4Q12), signs of stronger implied demand in China (+115 kb/d) and surprisingly robust data for Germany (+105 kb/d). The revised 4Q12 estimate brings the assessment of year-on-year global demand growth for 2012 to around 850 kb/d or 0.9%, a 70 kb/d increase from last month's forecast. Fourth-quarter upward adjustments were partly offset by a 140 kb/d downward revision to 3Q12 estimates, led by cuts in the US (-115 kb/d), Turkey (-95 kb/d) and Germany (-55 kb/d).
  • OECD European oil demand plummeted by 895 kb/d y-o-y in 3Q12, to 13.8 mb/d. This was the steepest contraction in OECD European demand since the onset of the 2008-2009 financial crisis, and apparently resulted from the combination of near-record product prices and a weak economy. Contraction in European demand is expected to slow through our forecast, however, as underlying macroeconomic conditions improve, albeit slowly. Exceptionally weak European demand in 3Q12 was partly offset by comparatively robust demand growth in Asia, including both OECD and non-OECD economies.
  • Global demand growth is expected to stay relatively sluggish through 2013, based on the continued assumption of tepid global economic expansion - notwithstanding signs that Chinese sentiment has turned mildly positive - and despite stronger-than-expected preliminary demand data for October. Global oil demand growth for 2013 is now forecast at 865 kb/d, taking consumption up to an average of 90.5 mb/d (110 kb/d more than projected last month). We continue to assume global economic growth of 3.3% for 2012 and 3.6% for 2013, in line with International Monetary Fund forecasts.
  • Five of the world's top-10 oil consumers are now non-OECD countries. Improved data quality from many non-OECD countries make it possible to look at monthly demand rankings and patterns in the world's top oil consumers regardless of OECD affiliation. While the US continued to lead the group as of September by a wide margin, with demand of 18.2 mb/d, the so-called BRIC countries and Saudi Arabia together took five of the next six spots. China is ranked second with demand of 9.8 mb/d, followed by Japan (4.4 mb/d). India, Russia and Saudi Arabia came next, with demand of around 3.4 mb/d each, followed by Brazil (3 mb/d). The top-10 consumers as a whole account for roughly 60% of total global demand in September, thus exceeding OECD's 50% share.


Global Overview

Although 2012 is already drawing to a close, it will take several more months for OECD oil data for the year to come through, and longer still for most non-OECD economies. Based on currently available information, however, global oil demand for 2012 is now projected at around 89.7 mb/d, 0.8 mb/d (or 0.9%) more than in 2011, a growth forecast roughly on a par with the projections we have carried since the beginning of the year. Nevertheless this relatively steady headline figure conceals a multitude of mutually offsetting revisions for specific regions and quarters. This month alone is seeing 140 kb/d of oil product demand stripped from the 3Q12 estimate and 435 kb/d added to the 4Q12 forecast. The latest revisions reflect various unpredictable factors, including one-off incidents such as a fire at a Mexican natural-gas facility, broad statistical revisions in Turkey and weather disruptions in the US.

Leading the adjustments to 4Q12 demand forecasts were large upward revisions to preliminary October inland delivery statistics for Mexico (275 kb/d), France (140 kb/d), India (125 kb/d) and China (110 kb/d). October also had its share of downward revisions, however, particularly in the US and Korea, whose demand estimates were trimmed by 65 kb/d and 35 kb/d, respectively, from last month's assessments.



Revisions to September data resulted in an aggregate downward adjustment to the 3Q12 global demand estimate of 140 kb/d, to 90.0 mb/d. The US led the September cuts with a 350 kb/d reduction since last month's report, followed by Turkey (-110 kb/d), Brazil (-100 kb/d), Israel (-60 kb/d) and the Netherlands (-45 kb/d). In Turkey, the cut is part of a larger downward reassessment of historical data (see OECD Europe). Notable upward adjustments for September include China, Canada, Iraq and Egypt, up by 135 kb/d, 110 kb/d, 40 kb/d and 30 kb/d, respectively.



A modest acceleration in growth is foreseen in 2013, to 0.9 mb/d (or 1.0%), as global oil product demand averages 90.5 mb/d for the year as a whole. This reflects the assumption of slightly improved macroeconomic conditions, consistent with the IMF forecast of an acceleration in GDP growth to 3.6% in 2013 from 3.3% in 2012 - with emerging markets continuing to dominate growth. Asia, especially non-OECD Asia, leads the upside, followed by the resource rich economies of the Middle East, the FSU and Latin America. The middle-of-the-barrel will continue to dominate demand growth through the forecast, with distillates projected to account for nearly 60% of total global oil demand growth in 2013, light products accounting for the majority of the remainder.

Top-10 Consumers

As the balance of global oil demand growth shifts away from the world's mature economies to faster-growing emerging and newly-industrialised economies, the traditional division of the oil-consuming world between OECD and non-OECD economies is becoming an increasingly blunt analytical instrument.  For a long time, while monthly oil data were provided for all OECD economies, non-OECD demand trends could only be assessed on a quarterly basis, if not an annual one. Today, however, many non-OECD economies, including some of the largest and fastest-growing ones, report oil data monthly - albeit with varying degrees of detail, timeliness and regularity. Persistent data-quality issues notwithstanding, it is becoming possible to assess oil demand patterns in the world's leading oil economies with far more granularity and timeliness than provided in the traditional quarterly and annual global forecasts.

The IEA is inaugurating in this report a monthly look at demand patterns across the world's top 10 oil consumers, regardless of OECD affiliation or geographical location. We start with the ranking of the top 10 leaders for September, the most recent month for which comprehensive data are available. Not surprisingly, the US, long the world's largest consumer, holds the top spot by a wide margin. China comes in second, followed by Japan, India and Russia. The so-called BRIC countries - Brazil, Russia, India and China - and Saudi Arabia together occupy five of the top-seven slots. While those top rankings are unlikely to change from month to month, at the bottom end of the group more variation may be expected as many countries come close to each other in demand levels. Thus Mexico, though it failed to make the top 10 cut for September, may leapfrog Korea in October thanks to a spike that month in oil demand for power generation. It could fall back again in November if that spike proves short-lived.



US

US demand averaged 18.2 mb/d in September, roughly double estimates for second-placed China. Whereas Chinese demand has been expanding, US demand has been on a structural decline since late 2005. Year-on-year contraction for September reached 3.8%, the steepest annual decline since March this year, and 350 kb/d below our month-earlier projection of a 1.9% decline. Demand for residual fuel oil led the decline (-39.7% to 285 kb/d), followed by demand for 'other products' (-10.4% to 1.8 mb/d) and naphtha (-10.0% to 210 kb/d). Absolute declines were seen across all key product categories except LPG, demand for which surged by 8.4%, to 2.2 mb/d, buoyed by the resurgent US petrochemical industry. Fuel switching from naphtha to LPG for ethylene manufacturing likely explained the contrasting trends in demand for those two products.



Recently, US demand has come under additional pressure as Hurricane Sandy impeded late-October/early-November deliveries, compounding the effect of a weak economy and uncertainty about the looming "fiscal cliff". Preliminary estimates for October imply average consumption of 18.5 mb/d, down by 1.9% y-o-y and 65 kb/d less than our month earlier forecast. In relative terms, consumer fuels, such as gasoline, fared worse, reflecting persistently high unemployment and weak consumer sentiment. Industrial fuels, such as distillates, held up better, as manufacturing indicators such as the Institute for Supply Management's Purchasing Managers' Index (PMI) have shown some improvement. The PMI remained in growth mode in October for the second month in a row, reversing the previous contraction, though at 51.7 the uptrend remains limited.



China

Markets have grown somewhat more optimistic about the Chinese economy as confidence indicators recently turned expansionary after a long period in the doldrums. Reversing months of contraction indicated by a reading below 50, HSBC's seasonally-adjusted Chinese Manufacturing PMI broke into expansionary-territory in November. Monthly readings had improved steadily since August. This trend seems consistent with signs of a return to more robust Chinese oil demand growth in the last two months, following uncharacteristically sluggish expansion earlier this year. Chinese apparent oil demand surged by +10.3% in September and 6.5% in October (both y-o-y), raising our 4Q12 Chinese demand forecast to 9.9 mb/d, 115 kb/d higher than projected in last month's report. The upward revision brings the projection of 4Q12 annual demand growth to 500 kb/d, or 5.3%. Higher apparent demand came along with a step change in refining activity. Chinese refineries ran at 9.4 mb/d in October, near the record high posted in September. Demand forecasts for both November and December have been adjusted upwards - with more than 100 kb/d added to both projections - to more than 10 mb/d.



A 3% reduction in Chinese retail gasoline and diesel prices as of mid-November contributes to this slightly more bullish demand outlook. On the flip side, however, lower retail prices might cut refining margins and thus refinery runs, resulting in lower apparent demand readings. Chinese demand is estimated at 9.5 mb/d for 2012 as a whole, up by 300 kb/d (3.3%) on 2011. Similar growth is foreseen in 2013, with demand forecast to average 9.8 mb/d, as economic growth is expected to remain below its recent lofty heights.



Japan

Japanese oil demand rose 3.9% y-o-y to 4.4 mb/d in September, led by residual fuel oil (+21.1% to 575 kb/d) and 'other products' (+13.4% to 600 kb/d). B--oth of these fuels continue to post exponential growth on the back of additional replacement demand from the power sector, shorn of nuclear capacity since the Great East Japan Earthquake and tsunami of March 2011. Even the previously ailing gasoline market returned to growth territory in September, up 1.2% y-o-y to 995 kb/d, having endured an average decline rate of 1.3% through the preceding three months.



Russia

Having expanded by an average of over 4% in the previous nine months, Russian demand growth came to a halt in October as sharp declines in transportation fuels offset advances for heavier products. All told, Russia consumed 3.4 mb/d of oil products in October (and September), reporting in line with expectations and unchanged from the corresponding month in 2011. Assuming a modest uptick in momentum towards the end of the year, demand should average 3.4 mb/d in 2012, up by 105 kb/d (or 3.2%) on 2011.

India

Preliminary estimates of Indian demand average 3.7 mb/d in October, 6.4% more than the year earlier and a return to the robust growth trend seen prior to September. Roughly 3.4 mb/d was consumed in September, up 2.3% y-o-y, whereas the trend for the preceding four-month period was 6.2%. Gasoil led October's acceleration, with demand up 6.7% to 1.4 mb/d. The preliminary October series came out 125 kb/d above last month's projection, as we had expected that September's subsidy-reduction (equivalent to a 14% increase in diesel prices) would dampen demand. The resilient domestic economy - demonstrated by HSBC's seasonally adjusted manufacturing PMI well above 50 - has, however, continued to support vigorous oil consumption growth. Stronger October demand has led us to revise our forecast up for the year as a whole, by 20 kb/d, to 3.7 mb/d (4.2% higher than 2011).



Saudi Arabia

Saudi Arabia, which broke into the top-10 group in 2007, has been experiencing strong demand growth, spurred by demographic expansion, the economic stimulus provided by high oil export revenues and deeply subsidised energy prices. Seasonal cycles are pronounced as demand rises steeply during the summer months, when power generation demand for air conditioning peaks. Not surprisingly, the strong recent demand trend abated somewhat in September, as consumption eased to 3.4 mb/d from a high of 3.5 mb/d in August. In terms of y-o-y growth too, demand eased somewhat, albeit from exceptionally high levels. Annual demand growth reached into the double digits in August, at 11.6%, as the early onset of Ramadan this year likely hiked consumption compared to September, when growth slowed to a still robust 5.7%. The early commissioning of the 1.8 billion cubic feet per day Karan gas field this year had been intended to stem growth of oil consumption in the power sector; however incremental gas-fired generation goes only so far in curbing consumption as electricity demand keeps rising.



Brazil

The latest statistics for Brazil depict a flattening in the y-o-y demand trend, with a 0.1% gain evident in September to 3.0 mb/d, having risen by an average of 3.8% in the preceding eight months. The September estimate is 100 kb/d below the projection carried last month, with lower gasoil accounting for the majority of the correction (-75 kb/d). Prospects dimmed as HSBC's Manufacturing PMI came in at 49.8 in September, indicating contraction. The index has since rebounded to 50.2 in October, providing modest support for the forecast next month, +1.6%. Growth of around 3% is assumed for the year as a whole, to an average of around 3.0 mb/d in 2012.

Canada

Official statistics for oil demand came out at 2.5 mb/d in September, 110 kb/d ahead of our month earlier projection. The surprisingly robust Canadian data saw the y-o-y growth rate accelerate to 7.3%, well over the preceding year-to-date average, of 1.2%, and against RBC's Manufacturing PMI which fell to a seven-month low of 52.4 in September. LPG and naphtha provided the majority of the demand support, accounting for 69.7% of total demand growth, thanks in part to strong petrochemical activity and continued development of the highly energy-intensive Canadian oil sands. Consumption growth is forecast to moderate in the coming months, however, as manufacturing sentiment deteriorates, (PMI fell to 50.4 in November).

Germany

Heightened volatility has surrounded German demand in recent months, with downwardly revised September data indicating an 8.3% y-o-y decline (to 2.3 mb/d) followed by a 1.6% gain in October, based on preliminary data (to 2.5 mb/d). Official monthly oil statistics for September were a steep 170 kb/d weaker than preliminary data had suggested. Demand for heating oil, residual fuel oil and gasoline was particularly weak in September, with declines of 20.2% (to 355 kb/d), 15.5% (to 110 kb/d) and 11.0% (to 420 kb/d), respectively. Naphtha led October's upside, up 18.6% to 380 kb/d, as the petrochemical sector (benefiting from two additional working days in October 2012 compared to 2011) remains supportive despite choppy export markets.



Korea

Signs of slower South Korean demand have emerged as forecast, with y-o-y demand contracting by 15 kb/d (or 0.7%) in October, following the average expansion of nearly 4% seen in the preceding six months. Government efforts to curb consumption seem to be having an impact (see 13 June 2012 OMR). Diesel demand fell by 0.8% on a y-o-y basis in October (to 290 kb/d), having contracted by an average 2.6% y-o-y in the four-months through October, compared to growth of 5.8% in the previous six-months. Compounding the effect of a slowing economy (GDP growth fell to 0.2% in 3Q12, down from 0.9% as recently as 1Q12), the government last May announced stringent measures to cut oil demand (including limits on car use and incentives to promote natural gas and biofuels). October's drop comes on the back of September's modest 1.1% gain, to 2.3 mb/d.

OECD

The sharp recent OECD demand contraction slowed to 0.6% y-o-y in October (-3.5% in September), taking total OECD demand to 46 mb/d, according to preliminary data. Strongly divergent patterns remain apparent, with steep declines in Europe contrasting with more modest drops in the Americas and growth in Asia Oceania. At both ends of the spectrum, however, the trends have become less pronounced. Overall, heavier products provided OECD demand the most support, as incremental power generation demand in both Mexico and Japan helped lift total OECD fuel oil demand by 1.8% y-o-y, to 2.9 mb/d. Colder weather and two additional working days compared to last year also supported October demand.



Americas

Preliminary data for October show consumption essentially unchanged on a y-o-y basis, averaging 23.8 mb/d. Broken down by country, however, the picture is more contrasted, with declines in the US and gains elsewhere. In terms of products, residual fuel oil (up 12.6%) led the way, supported by an upsurge in Mexican use.

An explosion at Pemex's Reynosa gas processing plant in September accounts for the bulk of the growth - through substitution - in Mexican oil demand. Mexican demand averaged 2 mb/d in September, leaving it just below the top-10 consumers, but surged to 2.3 mb/d in October, a gain of 10% y-o-y. This was the fastest annual gain in nearly eight years, and 275 kb/d above forecast. The Reynosa explosion essentially took 900 million cubic feet per day of natural gas off the Mexican market, or roughly 200 kb/d of oil products on an energy-equivalent basis. Natural gas is, however, a more efficient generator of electricity in Mexico. Utilising a ratio of efficiency of 1.5 between gas-powered electricity plants and oil, the lost gas is equivalent to around 300 kb/d of additional oil products.



Fuel oil is the main alternative feedstock to natural gas in the Mexican electricity sector. The latest official statistics depict 350 kb/d of fuel oil being consumed in October, equivalent to growth of 63.1% y-o-y or 185 kb/d over last month's estimate. The 'other' oil products category also exhibited strong demand growth in October (up 15.8% to 185 kb/d), while gasoil consumption grew by 8.45% to 495 kb/d and jet/kerosene by 4.9%, to 55 kb/d. The closure of the Reynosa facility was not alone in supporting oil product demand. Economic sentiment is also strengthening, as shown by HSBC's Manufacturing PMI rising to 55.5 in October (54.4 in September). Due to the short-lived nature of the fuel switching demand to replace lost natural gas supply (the Reynosa facility is back in operation), the Mexican forecast has been little changed, with only 40 kb/d added to the 2012 estimate, to 2.2 mb/d.

Europe

Consumption in OECD Europe of around 13.8 mb/d was seen in 3Q12, 205 kb/d less than last month's report on account of the large number of September revisions. The main September curtailments included Germany, Turkey, the Netherlands and the UK, respectively below month earlier forecasts by 170 kb/d, 110 kb/d, 45 kb/d and 35 kb/d. The UK reduction was largely driven by lower LPG demand, which contracted as ExxonMobil's Fife petrochemical plant closed for maintenance. Preliminary estimates for 4Q12 saw a surprisingly large upside revision of 120 kb/d (over last month's OMR), to 13.9 mb/d. The most notable October additions include Germany (+150 kb/d) and France (+140 kb/d). Big curtailments in the forecast for Turkey (-70 kb/d) and the Netherlands (-30 kb/d) dampened the upside momentum somewhat.

One of the main historical changes to the European picture this year comes from Turkey, where an average of 55 kb/d has been stripped from the 2012 series (i.e. January-through-August, compared to last month's report). Lower gasoil numbers accounted for almost all of this post-hoc revision, attributable to double-counting of international marine fuels. The official August estimate was reduced by 125 kb/d (110 kb/d gasoil), explaining why our previous September projection was 110 kb/d higher than the revised data, at 755 kb/d.

Preliminary October data, available for only a few European countries, surprised to the upside, although the additional two working days over the previous October were accountable. France, for example, came out 140 kb/d ahead of prior expectations, at 1.8 mb/d. Stronger than expected gasoil demand accounted for the majority of the revision, at 1.1 mb/d, 120 kb/d more than predicted and 6.3% higher than the year earlier (the previous three-month trend being -2.3%). The demand spike could reflect a stronger-than expected response to a three-month 6-euro-cent/litre tax cut implemented last summer as a form of temporary price control. Gasoline, a less important transport fuel in France, remained in negative y-o-y growth territory, down 3.6% to 165 kb/d. The German data, as alluded to in the Top-10 Consumers section, was also revised higher, for October, by 150 kb/d over last month's estimate, to 2.5 mb/d.

European Demand Hit the Buffers in 3Q12

Oil demand in OECD Europe plummeted by 895 kb/d (-6.0% y-o-y) in 3Q12 to 13.8 mb/d, the steepest quarterly average drop in nearly three years, or since the onset of the 2008-2009 financial crisis. This steep decline in demand came as near-record retail product prices coincided with recessionary economic conditions.

Remarkably, the previous north-south European split, which had seen demand growth in northern Europe outperform that in the south, abated somewhat as European oil product demand in general hit the rocks. The sharpest 3Q12 declines were seen in Portugal (-12.8%), closely followed by Poland (-10.6%), Italy (-8.9%), Ireland (down 8.8%), Greece (-8.6%), Spain (-7.8%) and Germany (-7.2%). Only the Czech Republic, Denmark and Norway bucked the trend, rising by 2.7%, 1.0% and 0.9%, respectively.

As in 2009, when such a strong plunge was last seen, macroeconomic issues were likely a major factor behind the contraction. The near three-year record drop in oil demand coincided with the euro area's return to outright technical recession in 3Q12, as GDP fell by 0.1% quarter-on-quarter for a second consecutive quarter, following contraction of -0.2% in 2Q12. The economies of the Netherlands (-1.1% q-o-q), Portugal (-0.8%), Cyprus (-0.5%), Spain (-0.3%) and Italy (-0.2%) suffered the sharpest 3Q12 declines, with only Finland (+0.3%), France (+0.2%) and Germany (+0.2%) enjoying modest advances.

With retail prices at, or near, all-time highs across much of Europe, cash-strapped consumers were further incentivised to reduce consumption. Price pressures have been particularly pronounced in Europe, as the weakening euro made euro-denominated retail product prices, which are largely driven by dollar-denominated crude prices, all the more expensive. Diesel prices in Italy, for example, in 3Q12 were 17% up on the year earlier, at a time of contracting economic momentum (-2.4% y-o-y, -0.2% q-o-q). Not surprisingly, Italian diesel consumption declined by 10.8% in 3Q12 to 455 kb/d. In contrast, the downside sentiment was less severe in France, where diesel prices rose by a more benign 5.6% thanks in part to a government tax cut of 6 euro-cent per litre in September, while the economy essentially flat-lined. Reported French kilometres travelled dipped 1.1% y-o-y in 3Q12, according to government statistics, closely matching the 0.8% contraction in diesel demand, to 695 kb/d.

Demand for industrially important products, such as gasoil (-5%), fuel oil (-14%) and LPG (-6%), particularly suffered in 3Q12, as manufacturing indicators have implied contracting sentiment. Markit's Manufacturing PMI for the euro zone fell to 46.1 in September, a 14th successive month below the key 50-threshold that signals contraction (16th by November). Unemployment above 10% also kept transportation fuel demand under wraps, with gasoline down 7% and both diesel and jet/kerosene 3% lower. 

Looking forward, European demand is forecast to decline further over the next year but at a lessened pace than in 3Q12. Significant downside risks remain, however, due to the heightened economic uncertainties that prevail.

Asia Oceania

The strongest OECD growth, indeed the only consistent gains, have been reserved for Asia Oceania recently, as the region has seen y-o-y demand rise since 2Q11. This growth reflects the lasting impact of the Great East Japan Earthquake and tsunami, which closed substantial swathes of nuclear capacity and in turn required big quantities of replacement demand from fuel oil and crude oil (tracked in our 'other' products category). Having peaked in 2Q12, at 0.6 mb/d (or 8.2%), growth has since decelerated to 0.3 mb/d (3.2%) in 3Q12, as post-tsunami replacement demand has now fed through an entire year hence diminishing y-o-y gains.

Other non-OECD

Emerging markets continue to dominate growth, a trend that has become deep-rooted having commenced around the turn of the millennium. The five largest non-OECD countries are discussed in detail in the new Top-10 Consumers section. The total non-OECD slowdown, that began early in 2011 and has run through to the present day, has even shown signs of abating recently, largely driven by recuperating conditions in China and India. Having risen by an average of 5.4% y-o-y in the six quarters through 1Q11, non-OECD demand growth eased back considerably, 2Q11-2Q12, to an average of 2.6%. Recent evidence led us to revise up our 3Q12 non-OECD demand estimate by 75 kb/d, as September data releases in several key countries exceeded earlier projections. The largest September additions were China, Iraq and Egypt, with reported numbers respectively higher than last month's report by 135 kb/d, 40 kb/d and 30 kb/d. Growth is now seen rebounding in 3Q12, to 3.4% (or 1.5 mb/d), taking total non-OECD demand up to an average of 44.0 mb/d.



The Egyptian numbers have been revised to reflect stronger than anticipated September data. Egypt consumed 730 kb/d of oil products in September, 30 kb/d more than we predicted last month, taking the y-o-y growth up to a ten-month high of 11.5%. We had anticipated a gain of 7.1%, more closely in-line with recent history. Of the main product categories, gasoline and residual fuel oil led September's momentum, rising by 8.4% (to 155 kb/d) and 22.3% (to 130 kb/d) respectively. The 3Q12 rally has led us to revise up our 2012 forecast, to 710 kb/d (previously 700 kb/d), equivalent to y-o-y growth of 2.0%.



Other notable non-OECD data revisions include Malaysia, where the official data only runs through August but has seen substantial additions over last month's projections. Roughly 60 kb/d was added to the estimate of Malaysian 2Q12 demand, to 720 kb/d, while 40 kb/d was added to 3Q12 demand, to 695 kb/d. These higher demand estimates respectively result in robust y-o-y expansions of 26.1% and 10.8%, as opposed to 15.3% and 4.1% as previously foreseen. Consumption for the year as a whole is set to average around 720 kb/d in 2012, equating to growth of around 11%, 25 kb/d more than assumed in November's OMR.



Supply

Summary

  • Global oil supply rose by 730 kb/d between October and November to 91.6 mb/d, with non-OPEC output increases, especially from the Americas and the North Sea, once again overshadowing marginal contribution from OPEC. Compared to a year ago, global oil production stood 1.9 mb/d higher, with 70% of the increase coming from OPEC crude and NGLs.
  • Non-OPEC production rebounded strongly by 650 kb/d in November from the prior month to 54.0 mb/d after seasonal maintenance in the North Sea and Brazil reduced output to 52.9 mb/d in September. Production is expected to increase by 600 kb/d in 4Q12 compared to 4Q11, roughly 30 kb/d higher than last month's assessment. For 2013, non-OPEC production is projected to rise by 890 kb/d to 54.2 mb/d, the highest growth rate since 2010 and 70 kb/d higher than the previous forecast.
  • OPEC crude oil supply in November rose a marginal 75 kb/d to 31.22 mb/d in November, led higher by increased output from Saudi Arabia, Angola, Algeria and Libya. Nigerian output remained constrained by severe flooding and sabotage. Iranian supplies edged lower under the weight of shipping constraints and stepped-up sanctions.
  • The 'call on OPEC crude and stock change' for 2012 and 2013 is left unchanged this month, at 30.2 mb/d and 29.9 mb/d, respectively. The call for 4Q12 has been revised up by 400 kb/d, to 30.4 mb/d, reflecting upward revisions to global demand growth. This was partly offset by downwards retrospective revisions for earlier quarters. OPEC's 'effective' spare capacity in November is estimated at 2.49 mb/d versus 2.51 mb/d in October.


All world oil supply figures for November discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary November 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 rose by a marginal 75 kb/d to 31.22 mb/d in November, led by increased output from Saudi Arabia, Angola, Algeria and Libya. Nigerian production continued to be constrained by severe flooding and sabotage through most of the month but volumes are expected to trend higher with the end of the rainy season. By contrast, the November downturn in Iranian output is expected to continue in December due to shipping constraints and stepped-up sanctions, preliminary crude export data indicate.

The 'call on OPEC crude and stock change' for 2012 and 2013 is left unchanged this month, at 30.2 mb/d and 29.9 mb/d, respectively. The call for 4Q12 has been revised up by 400 kb/d, to 30.4 mb/d, reflecting upward revisions to global demand growth. OPEC's 'effective' spare capacity in November is estimated at 2.49 mb/d versus 2.51 mb/d in October.



OPEC ministers meet in Vienna to review the market outlook on 12 December, OMR's release date, and were widely expected to roll over the current 30 mb/d target given relatively robust prices and balanced markets. Leading up to the gathering, the majority of ministers have signalled the status quo will be maintained despite production this year averaging 1.5 mb/d above the current target. Indeed, Brent futures prices are on track to surpass 2011 record levels this year, buoyed by heightened political risks in key producing countries, both in OPEC and Non-OPEC countries. 

Saudi Arabia's output edged higher in November, by 100 kb/d to 9.9 mb/d. A surge in crude exports during October, especially to China, is not likely to be repeated in coming months. Saudi Aramco is expecting increased demand for crude supplies at its domestic and international refinery operations with the start-up of significant new capacity. Overseas, Aramco is currently preparing to ramp up its new 325 kb/d crude unit at its Motiva refinery in Port Arthur, Texas. This joint venture with Shell failed to start earlier this year. At home, the commissioning of the 400 kb/d Jubail refinery is underway, with approximately half of nameplate capacity expected online by end-year.

Iraqi crude oil production inched marginally higher by 10 kb/d in November, to 3.21 mb/d, with increased supplies from the south offsetting lower volumes from the northern region. Crude exports were off by a marginal 5 kb/d, to 2.62 mb/d. Basrah exports rose by just over 20 kb/d to 2.19 mb/d. Basrah crude exports would have been higher but weather-related delays continued to disrupt loadings in November and forced state SOMO to put volumes into storage tanks. Exports of Kirkuk crude through the northern Turkish port of Ceyhan on the Mediterranean fell by 26 kb/d to 416 kb/d. A further 10 kb/d of Kirkuk was trucked to Jordan. Shipments from the Kurdish region, which feeds into the Kirkuk crude stream, fell to 120 kb/d from 145 kb/d. Crude oil exports from the Kurdish

region have ebbed and flowed in recent months in tandem with payment disputes between the central government in Baghdad and the Kurdistan Regional Government in Ebril. Baghdad has stalled payments to the KRG after exports from the Kurdistan region fell well short of the promised 200 kb/d, which officials say is due to pipeline and cash flow issues. The current agreement between Baghdad and Erbil calls for 250 kb/d of northern crude to be shipped via Ceyhan in 2013 but analysts caution volumes may be lower given the history of disputes between the two sides.

By contrast, other Gulf producers Kuwait and the UAE posted small declines in November. Kuwait output was down by 40 kb/d to 2.78 mb/d while the UAE fell by a smaller 20 kb/d to 2.65 mb/d. Qatari production was unchanged at 730 kb/d.



Nigerian production continued to be hampered by severe flooding in November, with output down 100 kb/d to 1.88 mb/d, the lowest level in more than three years. For most of November the country's main crude oil streams—Bonny Light, Qua Iboe, Brass River and Forcados—were disrupted. However, by the end of the month and early December force majeure was lifted on Bonny and Forcados. Preliminary loading data shows volumes are expected to recover fully by January.

Crude oil production in Angola recovered in November, up by 70 kb/d to 1.8 mb/d, despite technical issues and maintenance work at several small fields for part of the month. Output during the first week of the month was down to just 1.5 mb/d due to technical problems on Block 18, which forced the shut-in of production from Greater Plutonio field, but volumes recovered by the second week. Sonangol expects first oil from the BP-operated 150 kb/d PSVM operation to start at around 35 kb/d in mid-December, with the first cargo of the new heavy, sour Saturno crude expected to be lifted in January compared with end-year previously. Meanwhile, Libyan production rose by 30 kb/d to 1.45 mb/d in November from an upwardly revised 1.42 mb/d in October while Algerian output rebounded to 1.18 mb/d, up 60 kb/d over October levels.



Sanctions Further Reduce Iranian Crude Production

Iranian production edged lower in November, down 20 kb/d to 2.70 mb/d and preliminary shipping data indicate volumes may fall further in December. Iranian crude exports are expected to turn lower next month and into the New Year—reaching a level closer to 1 mb/d—as EU and Asian countries reduce further their crude imports from Iran in order to secure continued access to the US financial system. Indeed, even Iranian government officials have confirmed the impact of sanctions on the country's oil sector, announcing in early December that next year's budget, starting 1 March, would be based on exports of around 1 mb/d.

The US granted waivers for another 180 days on 7 December to eight countries - China, India, Malaysia, South Africa, South Korea, Sri Lanka, Turkey and Taiwan.  China has cut imports from Iran by over 20% in the first 11 months of the year. Japan, along with 10 EU countries, were given a further exemption in September. US officials have made clear that a country seeking a further 180-day exemption from financial sanctions must show continued reductions in its purchases of Iranian crude oil.

The US passed additional financial sanctions on Iran, which take effect in February 2013. The new sanctions prohibit Iran from repatriating earnings from export trade, forcing the country to use any money owed on goods within the importing country, and thus severely reducing cash flows to Tehran's accounts. The new law also prohibits the flow of gold from Turkey to Iran for payments. Meanwhile, the economic impact of sanctions already in place continues to mount, with the country's exports now 50% below year ago levels. The riyal continues to decline against the US dollar and other international currencies. In addition to the EU embargo on oil and natural gas, the ban on EU-linked insurance coverage for any ship carrying Iranian oil has had a significant impact on Asian buyers and has served to severely curb imports.

Sanctions-related shipping problems continue to curb exports. Imports of Iranian crude, based on arrival data, were estimated close to 1.3 mb/d in November compared with 1.24 mb/d in October and 1.07 mb/d in September. Reduced  crude oil buying from China and India has been offset by increased crude oil purchases from Malaysia, Taiwan and the UAE. Iranian crude exports are poised to fall back in December, however, judging by the higher level of idle ships owned by National Iranian Tanker Company (NITC). EU sanctions bar around 95% of the global tanker fleet from lifting oil from Iranian ports.

Non-OPEC Overview

Non-OPEC production rose by 660 kb/d in November from October and by 600 kb/d year-on-year (y-o-y) to 54.0 mb/d. In November, output is almost 1.0 mb/d higher in North America on an annual basis. On a quarterly basis, non-OPEC supplies stand at around 53.8 mb/d in 4Q12, 0.6 mb/d higher than 4Q11 and a sharp 0.8 mb/d higher than the previous maintenance-affected quarter. Upwards revisions to US supply more than offset downwards revisions in the North Sea due to field start-up slippage, lifting the non-OPEC outlook for 4Q12 and 2013 by 30 kb/d and 70 kb/d, respectively.



Outages in non-OPEC countries fell back somewhat in the second half of this year to around 1 mb/d from their highs of 1.2 mb/d in 2Q12. Yet South Sudanese crude remains shut in, sabotage on the Marib pipeline in Yemen only briefly abated in late summer, and Syrian production remains offline due to sabotage and sanctions. Of the 1.0 mb/d offline in 4Q12, unplanned outages in the North Sea exceeded 200 kb/d in 4Q12 due to the unexpected delayed restart of the Buzzard field, the continued stoppage at Total's Elgin/Franklin field, and other outages.

Looking ahead to 2013, the assumed steady resumption of oil flows from South Sudan, new oil output from Brazil, and rising light tight oil supplies should raise output by 890 kb/d to 54.2 mb/d. If confirmed, this would be the fourth largest annual growth for non-OPEC supplies in the last decade, based on the current composition of OPEC. In fact, growth could exceed expectations in the US if prices remain high and if producers of light tight oil are able to find economic transport options for their incremental barrels of supply. If the US Energy Information Administration's (EIA) 25-kb/d upwards revision for Texas in 2012 is any indication, output levels may exceed expectations for measurement and reporting reasons in addition to economic reasons. On the other hand, production outside of US, especially in the North Sea has had the potential to disappoint, which is why we continue to include a -0.5 mb/d contingency factor for such events.

OECD

Americas

US - November preliminary, Alaska and North Dakota actual, other states estimated: US crude oil production grew by around 780 kb/d y-o-y in November to 6.8 mb/d, as Texas production exceeded 2 mb/d again, back to August levels but previously not seen since June 1988. NGL supplies also rose to over 2.4 mb/d in September, a record level, but are expected to have fallen back towards 2.3 mb/d in 4Q12 on weak LPG prices. Based on the latest data from the US Energy Information Administration, Oklahoma production rose exceptionally quickly in September, up by 20 kb/d on the month to 250 kb/d, yet another record level. EIA baseline revisions to Texas and a faster-than-forecast production growth rate for Oklahoma are the prime reasons for the increase in the 2013 forecast. Liquids production is expected to grow from 9.0 mb/d to 9.6 mb/d in 2013, around 80 kb/d higher than last month's estimate.



Canada - September preliminary: Canadian oil production reached around 3.6 mb/d in September, based on preliminary government data, and is expected to breach 4.0 mb/d by the end of the year after offshore  production at the Hibernia, Terra Nova, and White Rose fields returns. Output stood at 260 kb/d in April 2012 before maintenance began but fell to 60 kb/d in August, and has only partially returned to levels of around 200 kb/d in November. Production should return to normal levels in January 2013 with the return of the 60-kb/d Terra Nova FPSO in December. Synthetic crude oil production fell back to 910 kb/d in September after Long Lake began a planned turnaround, and Millenium's output fell back from near record highs by 80 kb/d to 250 kb/d. Syncrude Canada Ltd reduced forecast production slightly in December due to the impact of cold weather on equipment. Suncor reported that its Firebag facility was producing around 130 kb/d at the end of November, which should help increase 4Q12 Canadian bitumen output by 170 kb/d annually. Next year, the outlook remains largely unchanged. Canadian oil output is now expected to grow by a still-robust 350 kb/d in 2013 to 4.1 mb/d, roughly 10 kb/d lower than last month's estimate.

North Sea

North Sea liquids production rose to 2.7 mb/d in October from record lows in September of 2.3 mb/d. In the UK, output continued to increase in November with the return of the Buzzard field, which remained offline over three weeks longer than operator Nexen expected. A gas leak at the North Cormorant field shut in around 20 kb/d of production since the 4-kb/d field is also connected to the Tern and Eider fields. Overall output increased in Norway as seasonal maintenance concluded and the Visund South satellite field started. Troll C had been producing around 120 kb/d before it was closed unexpectedly for several days after Statoil found corrosion in the gas treatment facility. The Troll C facility is also used for production from the Fram field, which normally produces around 40 kb/d.

Seen with the benefit of field level information for 3Q12, planned maintenance was more concentrated and slightly more severe in 2H12 than in 2H11. Unplanned outages in the North Sea in 2H12 averaged around 200 kb/d, similar to last year, but they were centred more in the UK. In the UK, the outlook for 2013 has been adjusted downward by 20 kb/d due to field startup delays at the Gryphon, Jasmine, and Huntington fields. Maersk's Gryphon FPSO had been expected to return to the Gryphon and Tullich fields in 4Q12, but weather aggravated labour-sourcing problems and has delayed start up to 1Q13. ConocoPhilips' Jasmine field is now expected to come online in 2H12. The outlook for Norway is also reduced by 10 kb/d in 2013 from baseline revisions to 2012. In sum, declines of 6% in the UK, 5% in Norway, and 8% in Denmark reduce 2013 North Sea output 180 kb/d to 2.9 mb/d in 2013.



Non-OECD

Former Soviet Union

Russia - November preliminary: Russian oil production rose by another 60 kb/d to a new post-Soviet record of 10.9 mb/d in November thanks to rising production from private companies, Gazprom, and PSAs. Gazpromneft continues to show strong growth on an annual basis of around 5% in 2H12 due to expansion of its assets in the Orenburg region. All other major companies either decreased output on a monthly basis or maintained it nearly unchanged. Lukoil's declining output is notable as in November it returned to July levels of under 1.7 mb/d, a decline of 1.1% annually. At TNK-BP, mature assets at Orenburg and Samotlor (which account for a combined 700 kb/d) showed accelerated declines in November compared to better performance in 3Q12, and greenfield production growth failed to sustain the company's overall output level at 1.3 mb/d.

Azerbaijan: Production from Azerbaijan fell by 40 kb/d on an annual basis to 900 kb/d in 3Q12, based on the latest data available. Production from the Azeri Chirag Guneshli (ACG) field totaled around 660 kb/d, slightly higher than expected in previous reports. Current (4Q12) output at ACG should have improved to an estimated 720 kb/d, accounting for around 75% of the country's output. President Ilham Aliyev has recently threatened "severe measures" for  BP's performance at the 900-kb/d capacity ACG field. As the majority shareholder and operator, BP has pledged to keep output at around 660-680 kb/d through 2020 in response. Estimates published in the October MTOMR suggested that output at ACG might continue to decline to around 570 kb/d in 2014 until the 120-kb/d West Chirag field comes online to raise output back to BP's target rate.

FSU net exports plummeted by 500 kb/d to 8.9 mb/d in October, after a seasonal but steep drop in product shipments of 410 kb/d, their steepest fall in eleven months. Crude volumes fell by 110 kb/d with declines spanning all regions except the Black Sea. Cargoes sent via Baltic ports fell by 70 kb/d as a 60 kb/d hike at Ust Luga to 520 kb/d failed to offset a 120 kb/d drop at Primorsk. In the east, Kozmino flows remained close to 300 kb/d but outflows are expected to ramp up steadily over the coming months following the November commissioning of the ESPO-2. Shippers are scheduled to lift 18 cargoes in January, only three of which will be railed to the port. Additionally, Transneft recently stated that it expects to ship 440 kb/d of crude via Kozmino in 2013, less than the 600 kb/d design capacity, mainly due to delays in linking eastern Siberian fields to the ESPO network. Despite record production, November exports are likely to remain lower than October as domestic crude throughputs rise sharply as refineries come back from maintenance.

As noted in last month's report, flows through the Druzhba pipeline have remained constrained over recent months as exporters maximise shipments via more profitable outlets. This has led to supply disruption for refiners in the Czech Republic. To solve this, the Czech government recently acquired a 5% stake in the TAL pipeline to secure alternative supplies delivered via the Adriatic coast. The country's refiners have also reportedly secured increased supplies via the Druzhba for the remainder of the year, although this is likely a function of Druzhba deliveries trading at a premium to seaborne Urals in November.

The fall in product exports was driven by lower fuel oil shipments which dropped by 290 kb/d m-o-m in response to an oversupplied market and sluggish demand in Asia. Meanwhile, gasoil and 'other products', here including light distillates, fell after maintenance reduced regional refinery runs by 180 kb/d, and producers preferred to supply the domestic market.



Middle East

In Syria, opposition forces have over-run several oilfields in the Deir-ez-Zor area according to press reports. Production is estimated at only around 160 kb/d, less than half of the more than 380 kb/d that Syria produced in 2011 before sanctions were enacted on its oil exports.

In Yemen, news reports indicated that the Marib pipeline had been damaged for the third time this year after a nine-month closure ended in July. Three new attacks in November damaged the line in two places and  has compromised more than 100 kb/d of production from OMV (Block S2), Hunt (Block 5), and Safer (Block 18). According to press reports, Safer sent a letter to the Ministry of Oil and Minerals criticizing the government for not dealing with the saboteurs, noting that the country is losing 100 kb/d or $310 million each month. The pipeline also supplies the 150-kb/d Aden refinery, and officials worry that a fuel shortage is looming. We assume no major improvement of the overall output situation in 2013, compared to 2012, with output staying at around 190 kb/d (including NGLs).

Africa

Sudan and South Sudan:  Sudan and South Sudan have yet to agree to a border security zone, a precondition to the export agreement that the states ratified on 27 September. The Sudanese government is insisting that it is South Sudan's responsibility to disarm the Sudanese People's Liberation Movement- North (SPLM-N) rebel group, which is engaged in an insurgency against the government of Sudan. South Sudan dismisses this as an impossible request. Despite this issue, we maintain that the desire by both sides to see revenue will compel some oil exports to start by early 2013. Oil companies have been requested to start production, and South Sudan said on 2 December that negotiations have gone well and that exports could resume in two to three weeks. Therefore, we continue to assume a January restart of South Sudanese production, unchanged from last month's estimate of 130 kb/d of production from Sudan and South Sudan in 1Q13. Without a resolution of the security zone and the status of the Abyei area, potential for further conflict and delays to the resumption of exports remains.

Uganda:  Tullow is developing two projects in the Lake Albert basin: an Early Commercialization Project to tap gas from the Nzizi field and oil from the Mputa and Waraga fields as well as a large-scale Basin Wide Development plan. The company said in July that it would be possible to produce oil at low rates by trucking before completion of its Basin Wide Development plan, which had been set to begin in 2014. Tullow recently indicated, however, that it was still waiting on government approvals for these smaller scale shipments and said that this could take place sometime "within the next 24 months".  We had initially expected no more than 5 kb/d in 2013, centred in the second half of 2013, but we now do not expect this output until 2015 or late 2014 at best.

Latin America

Brazil - October preliminary, September actual: Brazilian crude output is expected to decline in 2012 for the first time since 2004, but is forecast to rebound next year. In October, Brazilian crude output bounced back to 2.01 mb/d, on par with levels seen in 2Q12, after maintenance reduced output to 1.98 mb/d in 3Q12. The addition of the FPSO Cidade de Anchieta (nameplate 100 kb/d capacity) at the Parque das Baleias group of fields should also add to output in 4Q12 and in 2013. Production is expected to continue to rebound in November and December, but this is not expected to be sufficient to keep Brazilian crude production from declining by 35 kb/d for the entire year. Production in the Campos basin is expected to have declined by 3% to 1.7 mb/d in 2012, in contrast to gains for the last seven years. The connection of the Baúna field's FPSO late this year, the start of production from Sapinhoá in 1Q13, and Roncador's P-55 platform should raise Brazilian crude production by 190 kb/d to 2.26 mb/d in 2013 on the assumption that the Frade field will not restart until 2H13.

Chevron is said to be making plans to restart production from the Frade field after a court dismissed an injunction that barred the oil company and contractor Transocean Ltd from operating in the country. The regulator, ANP, could not move forward with restart plans until the injunction had been overturned.  The pace and timing of the restart remains unclear, though there could be upside risk if production at the 70-kb/d field is restarted sooner in 2013.

Asia

Malaysia—August preliminary:  State statistics indicate that liquids production in Malaysia totalled 660 kb/d in August on par with last year's levels. This level is expected to increase to over 700 kb/d in 1Q13 after news that production at the Gumusut-Kakap field started on 18 November. Production from the deepwater field is tied back to the existing Kikeh FPSO, and has reportedly raised production by 30 kb/d to 100 kb/d according to trade press. The blended stream is expected to yield more middle distillates and less lighter products such as LPG and naphtha. After the initial phase, the field is expected to increase from 30 kb/d to 120 kb/d by 2015.

China - October preliminary: Oil output fell back by 190 kb/d unexpectedly to 4.1 mb/d in October due to lower offshore production. Though unconfirmed, we suppose that there are continued problems with the restart of the 150-kb/d Peng Lai field. ConocoPhillips had reported that the field was producing at around 90 kb/d at the end of September in its quarterly update. The unexpected monthly decline will dent 4Q12 output by 80 kb/d to 4.2 mb/d, which is around 180 kb/d higher than the year prior.

OECD Stocks

Summary

  • OECD commercial total oil inventories drew by a seasonal 16.2 mb to stand at 2 722 mb in October, bringing to a halt seven consecutive months of stock building. The 'other products' category led the draw with a steep 13.1 mb decline, twice the seasonal average. Middle distillates drew by a further 10.2 mb. Inventories fell across all regions, notably in OECD Europe which declined by an exceptionally steep 13.0 mb.
  • On a forward demand basis, total inventories stood at 59.1 days at end-October, unchanged from downwardly revised end-September levels. Stripping out crude oil, refined product inventories covered 30.8 days of forward demand, a fall of 0.2 days compared to the previous month.
  • Recent data from the US EIA indicate that crude inventories at Cushing have soared over recent weeks to stand close to record levels. However, due to recent capacity expansions at the hub these still remain 18.7 mb below working capacity.
  • Preliminary data for November point to a further, sharp 19.1 mb fall in OECD commercial total oil stocks split across all regions with middle distillates drawing by a strong counter-seasonal 14.9 mb.


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

OECD total commercial oil inventories fell by a seasonal 16.2 mb to 2 722 mb in October, bringing to a halt seven consecutive months of stock building. All regions reported draws, with those in the Americas and Asia Oceania being shallower than the seasonal average. In contrast, in OECD Europe the declines were exceptionally steep.

Since the aggregate OECD stock draw for October was in line with the seasonal average, surplus to the five-year average level remained at a comfortable 26 mb, but this concealed strong regional differences. While in OECD Americas and Asia Oceania, the surplus widened to 56 mb and 9 mb, respectively, in OECD Europe the deficit deepened to 39 mb. On a forward demand basis, total inventories stood at 59.1 days at end-October, flat from downwardly revised end-September levels. Total products inventories covered 30.8 days of forward demand, a fall of 0.2 days compared to the previous month.

Product inventories drove the draw in total oil stocks, with the 'other products' category showing a steep 13.1 mb decline, twice the seasonal average. That decrease was centred in the OECD Americas region, where relatively lower prices spurred US consumers to refill propane tanks ahead of winter. Middle distillates drew by a further 10.2 mb, in-line with the seasonal average, with draws in OECD Europe and Americas of 6.3 mb each, more than offsetting a small counter-seasonal build in Asia Oceania. Middle distillate markets remain tight following lacklustre summer builds, leaving OECD holdings below both last year's levels and the five-year average in absolute terms and when measured in days of forward demand.

Preliminary estimates of OECD inventories for September were revised downwards. While stocks still show a counter-seasonal increase for that month, the build is now estimated at 2 mb, far shallower than the initial assessment of a 15.2 mb build in last month's report after the September downward revision combined with a 5.4 mb upward adjustment for August. Revised September data came in 7.8 mb lower than early estimates. Downward adjustments were concentrated in crude, including a 6.3 mb reduction for OECD Europe. Product holdings in Europe were also revised downwards, by another 6.4 mb. In contrast, inventories in OECD Americas were adjusted higher by 9.1 mb, led by revisions of +3.2 mb to middle distillates and +3.0 mb to gasoline.



Preliminary data for November point to a further, sharp 19.1 mb fall in OECD commercial total oil inventories split across all regions. OECD Americas and OECD Asia Oceania drew by 6.2 and 7.3 mb, respectively, broadly in line with seasonal trends. In contrast OECD European holdings dropped by a further 5.6 mb, in contrast to the 9.3 mb average build. Data also suggest that middle distillates drew by a sharp counter-seasonal 14.9 mb over the month.



Analysis of Recent OECD Industry Stock Changes

OECD Americas

Commercial oil inventories in OECD Americas drew by a seasonal but relatively slight 2.9 mb in October, led by a steep 13.1 mb fall in 'other products'. In recent months, 'other products' stocks had been running approximately 25 mb above five-year average levels, led by growing propane holdings in the US. As noted in previous reports, the oversupply of propane from burgeoning NGL production in the US has pressured prices downwards. Consumers appear to have taken advantage of these low prices to refill their tanks ahead of winter. Middle distillates stocks drew by a seasonal 6.3 mb, again likely due to the seasonal refilling of consumer heating oil tanks. Despite having built by 1.6 mb over the summer, commercial middle distillate stocks still faced a 27.3 mb deficit to the five-year average at late October, heading into the peak heating season. In contrast, gasoline inventories built by a seasonal but steep 6.5 mb to stand level with year-earlier levels in both absolute terms and days of forward demand. In total, regional product stocks fell by 10.6 mb in October, slightly below the five-year average draw of 12.7 mb for that month. Total product inventories for the region covered a still comfortable 28.7 days of forward demand, just 0.2 days less than at end-September.



In contrast with products, crude oil stocks continued their upwards trajectory, growing by a seasonal 8.7 mb in October. Inventories at the WTI futures delivery point of Cushing, Oklahoma stood at 43 mb at end-October with US EIA weekly data indicating that by late-November levels had increased to 45.6 mb, 2.1 mb below the record levels reported in June. Inventories rose as refinery maintenance cut throughputs at several mid-continent refineries and producers scrambled to move crude to the Gulf Coast. Yet despite these builds, WTI prices have held up more than during similar episodes in 2010 and 2011. This appears to be due to the expansion of storage capacity at the hub over the past couple of years. Inventories currently remain 18.7 mb below the most recent EIA assessment of working capacity undertaken at end-September 2012.



Latest weekly data from the US EIA point to a further 2.7 mb fall in industry oil inventories in November. Data indicate that Hurricane Sandy, which hit the Eastern seaboard in late-October, did not have a lasting impact on product and crude inventories, as stock draws on the East Coast (PADD 1) were offset by builds in the Gulf (PADD 3). Those stemmed from disruptions in pipeline traffic between the two markets, which kept Gulf Coast refiners from moving products to PADD 1. By mid-November, even the regional impact in PADD 1 had dissipated, as local middle distillates and gasoline stocks rebounded to near pre-hurricane levels.

OECD Europe

Industry total oil inventories in OECD Europe plummeted by 13.0 mb in October with draws reported across all categories bar gasoline and fuel oil, which posted modest gains. Despite a sharp decrease in refinery runs, crude oil inventories declined by 5.4 mb, likely on lower imports. Total products contracted by 7.5 mb, led by a seasonal 6.3 mb decrease in middle distillates. Despite those draws and due to an exceptionally weak demand prognosis going into 1Q13, on a forward demand basis total products now cover 41.0 days, a rise of 0.7 days from September.



French inventories led the regional decline, drawing by 3.3 mb with falls reported across all product categories, notably middle distillates (-2.2 mb). In contrast, German holdings rose by a combined 2.4 mb, with all categories gaining bar middle distillates, which posted a minor contraction. Gasoline posted yet another unseasonably strong build of 0.8 mb (see German Gasoline Struggles to Find a Home). Persistently high prices appear to have hampered the replenishment of German consumer heating oil stocks. Although restocking started earlier than normal this year, tank fill has only increased by 1% of capacity per month since July to stand at 59% by end-October, 2 percentage points below 2011.

German Gasoline Struggles to Find a Home

Following recent high European refinery runs, some refiners appear to be having trouble finding outlets for their increased production. Over the summer, high crack spreads and comfortable margins encouraged refiners to ramp up middle-distillate production. Crude throughputs soared in France, Germany and Spain. As a result, gasoline production also increased.

Recent inventory data suggest that German refiners have found it difficult to find outlets for their excess gasoline. German gasoline inventories have built by 2.3 mb since end-June to stand 1.5 mb above their five-year average by end-October. Demand projections, on the other hand, point to extended dips in consumption. Given those diverging trends in supply and demand, stocks at end-October covered a full three days more forward demand than a year earlier,  and were well above seasonal norms - even though the backwardated structure of product markets discouraged stock building.

In contrast, French gasoline holdings have avoided large builds over recent months and at latest count stood level with the five-year average in both absolute terms and forward demand cover. In Spain, which posted the steepest gains in middle distillates production, gasoline inventories remained comfortably within the seasonal range.

The main reason for this disparity appears to be the difficulty that landlocked German refiners face accessing foreign markets when domestic markets do not soak up extra supply. Germany now only has three operating coastal refineries. Its remaining landlocked refineries have only limited access to international markets. In contrast, most French and Spanish refineries are located on the coast and are thus connected with international product markets.

Over the June-to-September period, Spanish gasoline exports rose by approximately 60 kb/d, while German shipments inched up by less than 10 kb/d. French gasoline shipments actually fell, but high runs there coincided with robust domestic demand after the French government decreased taxes on transportation fuels. German gasoline exports have remained relatively range bound at between 110 kb/d and 120 kb/d in 2012, suggesting that German refiners have been exporting as much as possible given constraints in export capacity. Meanwhile French and Spanish exports have fluctuated by as much as 80 kb/d.

Faced with declining domestic demand and increased refining capacity and diesel yields, Spain appears to be repositioning itself as a product exporter. Trade data suggest that its outflows of middle distillates have risen by 110 kb/d between January and September while gasoline exports also grew by 60 kb/d over the same period.

Preliminary data from Euroilstock suggest a 5.6 mb decline in November inventories, in sharp contrast to the 9.3 mb five-year average build. Stocks were driven lower by a sharp counter-seasonal 4.9 mb decrease in middle distillates, contrary to a 3.9 mb five-year average build. Elsewhere, gasoline fell by 1.8 mb and crude built by a slight 0.3 mb. If these data were to be confirmed by subsequent submissions, the region's deficit to the five-year average would widen to 53.8 mb. Meanwhile, refined products held in independent storage in Northwest Europe fell sharply, led downwards by draws in fuel oil and gasoil with only naphtha rising during the month.

OECD Asia Oceania

Industry oil stocks in OECD Asia Oceania inched down by 0.2 mb in October with a decrease in crude balanced against rises in total products and the NGLs and refinery feedstocks category. Total products were led 3.8 mb higher by a counter seasonal 2.3 mb increase in middle distillates, 'other products' also posted an additional 2.3 mb gain on the month. Only fuel oil drew by a shallower-than-seasonal 0.9 mb. Crude stocks fell by 5.8 mb, in sharp contrast to the five-year average 0.6 mb build. South Korea drove this contraction as crude inventories there fell by 4.1 mb after rising throughputs outpaced crude arrivals. Elsewhere, Japanese stocks rose by a counter-seasonal 3.8 mb after gains in products offset a draw in crude. Notable builds were reported in 'other products' (+2.4 mb) and middle distillates (+1.5 mb).



Latest weekly data from the Petroleum Association of Japan suggest a 7.3 mb fall in November inventories with all products drawing except naphtha. Total finished products declined by a combined 5.8 mb with kerosene and residual fuel oil dropping by 2.6 mb and 1.6 mb, respectively, while gasoil fell by a slight 0.2 mb. Crude holdings inched down by 0.2 mb, although levels fluctuated wildly over November with levels reaching their lowest in 14 months in mid-month but recovering lost ground by end-month.

Recent Developments in Singapore and China Stocks

According to China Oil, Gas and Petrochemicals, Chinese commercial oil inventories drew by 6.5 mb in October. Crude stocks fell by 3.5% (8.0 mb) after crude throughputs, although falling month-on-month, remained at the second highest level this year, outpacing gains in crude production and arrivals. Product holdings were driven upwards after a 5.7 % (3.0 mb) increase in gasoline, reportedly after domestic demand 'faltered', offset a 2.5 % (-1.5 mb) draw in diesel. Meanwhile, kerosene remained relatively stable, posting a minor 0.7 % (+0.1 mb) rise.

The gap between crude oil demand (as measured by reported refinery throughputs) and supply (production plus net imports) widened to +170 kb/d in October, raising the possibility that further SPR building is taking place. If this was the case, it would indicate that a further tranche of Phase-2 capacity has been completed ahead of schedule, previous information suggested that this capacity was due to be completed in 2013.



Refined product inventories in Singapore rose by 2.9 mb during November, led by a 2.1 mb build in residual fuel oil, extending earlier gains, after low Asian bunker demand hit exports. These stocks have been on an upward trajectory since mid-summer and now stand near the top of their five-year range. Anecdotal evidence suggests that inventory levels are nearing capacity. Furthermore, Asian fuel oil markets are currently in a steepening contango, which is encouraging stock building. That is forcing market participants to turn to floating storage as a cheap alternative to land-based storage. Meanwhile, Singapore light distillate and middle distillate inventories edged up by 0.3 mb and 0.6 mb, respectively.



Prices

Summary

  • Oil futures edged further down in November, extending earlier declines, as persistent concerns about the economy appeared to eclipse heightened political risks in Israel, Gaza, Syria and Iran. Futures prices also remained under pressure from the divisive debate underway in the US over the looming 'fiscal cliff'. Prices for benchmark crudes continued to inch lower in early December, with WTI last trading at $85.90/bbl and Brent at $107.85/bbl.
  • Money managers increased their long positions in ICE and CME oil contracts in late November for the first time since August despite downward price pressures after having reduced their bullish bets on CME WTI contracts earlier in the month on worries about a stalemate in US talks on the 'fiscal cliff'. Money managers reversed the decline, and more, in the second half of the month increasing their net long positions by 41.7% on more upbeat economic news from the US and China.
  • Spot crude oil markets continued their downtrend for the fifth straight month in November, with relatively steep crude oil inventory builds in the US and Asia Pacific region adding downward pressure. Weaker crack spreads have also pushed crude markets lower.
  • Refined product prices declined across the board in all major markets in November, with gasoline cracks especially hard hit, while Asian markets proved more robust than the US and Europe. Middle distillates also weakened despite the onset of the northern hemisphere winter season, when heating oil demand normally peaks.
  • Freight costs on the benchmark VLCC Middle East Gulf - Asia route finally moved upwards in late November as fundamentals tightened on the back of healthy regional demand from exporters. Rates peaked at over $14/mt on 21 November, their highest level since end-May, but by early-December were retreating rapidly as demand waned.


Market Overview

Oil futures continued on a downward trend in November, with monthly prices trading at five-month lows. Heightened concerns about geopolitical risks involving Israel, Gaza, Syria and Iran were eclipsed by downgrades to European GDP rates for 2013 and weaker demand prospects. Futures prices also remained under pressure from the divisive debate underway in the US over the looming fiscal cliff.

Futures prices escalated at the onset of hostilities between Israel and Gaza but the start of ceasefire talks between the two adversaries ratcheted down tensions. In November, WTI futures fell by $2.84/bbl on the month to $86.73/bbl while Brent was down just under $2/bbl to $109.53/bbl. Prices for both crudes edged lower in early December, with WTI last trading at $85.90/bbl and Brent at $107.85/bbl.

Global oil demand has been revised higher by some 435 kb/d since last month's report, to 90.5 mb/d for 4Q12 but the growth in Asia and the Americas masks exceptionally weak European demand. OECD European oil demand posted its steepest contraction since the 2008-09 financial crisis, in 3Q12 off by just under 900 kb/d over year ago levels.

Underscoring weakness, gasoil oil futures fell almost $4.50/bbl in November. Low middle distillates stocks in Europe and the US, however, may yet buoy prices as the peak heating oil season gets underway.

The Israel-Gaza hostilities provided prices with temporary support, but upward pressure on prices eased once talk of a ceasefire emerged. Iranian crude exports are likely to fall back to the 1 mb/d mark going forward amid new US sanctions on financial transactions (see OPEC Supply, 'Iranian Crude Production Slips Further').

The backwardation in Brent futures narrowed slightly in November on a recovery in North Sea outages, with the premium to forward prices for M1-M12 contracts averaging around $5.45/bbl in November compared with $6.30/bbl in October and $5.85/bbl in September. The growing supplies of US crudes and near-record levels of stocks at Cushing, Oklahoma helped propel WTI M1-M12 contracts deeper into contango, to around -$3.55/bbl in November, compared with -$2.45/bbl in October and -$0.95/bbl in September.



Futures Markets

Activity Levels

Market activity on oil futures exchanges in November saw open positions in the Brent contract increase while those in WTI decline. At the CME, combined open interest in WTI futures and options sank by 12.6%, to 2.23 million, while open interest in futures-only contracts declined by almost 3.0%, to 1.55 million between 30 October and 4 December, 2012. Over the same period, open interest at the London ICE fell by 4% to 0.5 million for WTI futures-only contracts and declined by 8.4% in futures and options, to 0.61 million

contracts. Meanwhile, open interest in ICE Brent futures contracts increased by 4.0% to 1.28 million contracts while ICE Brent futures and options contracts declined by 2.9% to 1.5 million contracts. As a result, the ratio of Brent futures open interest on the London ICE to New York and London WTI oil positions increased by 4.3 percentage points to 62.5% over the referenced period. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by 5.6 percentage point to 82.7%.



Overall trading activity in oil derivatives declined in November on both the CME and ICE markets, with CME contracts leading the contraction. Total trade volumes in CME WTI contracts fell 18.7% in November 2012 y-o-y and by 20.1% year-to-date, to 11.1 million contracts and 132 million contracts, respectively. Brent monthly volume also declined by 5.5% to 11.8 million contracts last month from 12.5 million in November 2011. However, year to-date Brent volume increased by 12% to 138.7 million.



Money managers increased their long positions in ICE and CME oil contracts in late November for the first time since August. Even though they reduced their bullish bets on CME WTI contracts in the first two weeks of the month due to worries about a stalemate in the US fiscal cliff talks, this was more than offset in the second half of the month. Since mid-November, they increased their net long position by 41.7% as a response to positive economic news from the US and China. Money managers in London ICE Brent contracts followed a similar pattern and increased their bullish wagers by 27.3% to 110 167.

For the first time ever, money manager net long positions on CME and ICE reached equal levels in November, and money managers net long positions in ICE Brent even exceeded their positions in WTI during the two weeks ended 20 November and 27 November.

Producers accounted for 19.3% of the short positions and 17.7% of the long positions in CME WTI futures-only contracts at end-November, increasing their net short positions by 78.7% to 30 948 contracts. Swap dealers, who accounted for 23.1% and 33.8% of the open interest on the long side and short side, respectively, increased their bets on falling prices by 5.2% to 165 745 contracts, reversing the trend seen in September and October. Producers' and swap dealers' trading activity in the London ICE Brent contracts followed a similar pattern as CME WTI contracts. Producers in London ICE Brent contracts increased their net short positions from 89 806 to 112 431 contracts. Similarly, swap dealers reduced their net long positions from 42 744 to 35 363 contracts.





NYMEX RBOB futures and combined open interest declined to 273 735 and 280 755 contracts, respectively, over the same period. Open interest in NYMEX heating oil futures contracts was down by 1.3% to 292 708 contracts while open interest in natural gas futures market declined by 2.7% to 1.15 million contracts.

Index investors' long exposure in commodities in October 2012 declined by $6.1 billion to $288.6 billion, after edging up by $7 billion in September. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts declined by $2.1 billion in October. The number of long futures equivalent contracts increased by 9 000 to 538 000, equivalent to $46.9 billion in notional value.

Market Regulation

Liquidity in the over-the-counter (OTC) energy markets declined sharply following the implementation of several Dodd-Frank requirements on 12 October 2012 and the resulting decision by ICE to convert energy swaps to futures, as well as CME's initiatives to allow more OTC swaps to be done as block trades in futures markets. The decline in liquidity was especially pronounced in Asian markets. As of 12 October, Dodd-Frank legislation requires that derivatives traders with $8 billion or more in swap transactions in any 12-month period register as swap dealers within 60 days of the end of the month in which they hit that threshold. Once they are registered as swap dealers, traders also face additional requirements in terms of swap data reporting and record-keeping, real-time reporting of swap transaction and pricing data, and internal and external business conduct standards. In order to reduce their clients' exposure to compliance costs associated with the new rules, exchanges introduced swap-like futures contracts. As a result, swap markets contracted, especially in Asia, where interdealer brokers, without being registered as futures brokers, have used traditional voice-brokered business models to serve their clients' swaps transactions. Firstly, the Dodd-Frank requirement forced these dealers to reduce their trades with US entities, since the $8 billion rule applies only to transactions with a US person. Secondly, many of these dealers saw their market contract as their clients started using the alternative instruments offered by the exchanges. To calm disruption to its over-the-counter (OTC) energy derivatives, Singaporean authorities extended the deadline for interdealer brokers to register as futures brokers from mid-November to end-December.

On 27 November 2012, the International Swaps and Derivatives Association (ISDA) released a quantitative impact analysis of initial margin requirements for non-centrally cleared OTC derivatives under current regulatory proposals. The analysis suggests that the initial margin requirement will be between $1.7 trillion and $10.2 trillion depending on the specific models used. The analysis further finds that the required margin requirement is at least three times higher during stressed market periods, leading to increased systemic risk due to greatly increased demand for new funds at the worst possible time for market participants. The increase in margin cost will likely affect the end-users' ability to hedge price risks, especially during stressed market conditions when they need it most.

On 4 December 2012, to address the growing concerns over the impact of cross border application of different regulatory reforms across countries on global swaps markets, leaders of entities responsible for the regulation of the over-the-counter (OTC) derivatives markets in Australia, Brazil, the European Union, Honk Kong, Japan, Canada, Singapore, Switzerland and the United States issued a joint statement on operating principles and areas of exploration in the regulation of the cross border OTC derivatives markets. The regulators agreed to consult with each other prior to making any final determination regarding which derivatives products will be subject to a mandatory clearing requirement. The regulators further recognised the different speed of regulatory reforms across jurisdictions with respect to clearing, reporting, trading and capital requirements; therefore, they pledged to consider appropriate transitional implementation periods for entities in jurisdictions that are implementing comparable regulations, supervision and comprehensive oversight. The authorities will meet again in January 2013 to exchange information about the planned timing of implementation dates for the new rules and transition periods markets will be given.

On 22 November 2012, the Wall Street Journal broke the news that the Shanghai Futures Exchanges planned to launch dual-currency oil futures contracts. Although there is no specific date for the launch or details of the contract, it is expected that some foreign investors will be allowed for the first time to trade oil futures contracts in China. The contracts will be priced in US dollars but both dollars and Yuan will be used by foreign investors and domestic investors, respectively, for clearing and settlement.

Extending Principles for Price Reporting Agencies to All Assessments

Allegations of price manipulation in UK wholesale natural gas prices by some major power companies and financial institutions could not have come at a worse time for price reporting agencies (PRAs). Less than a month after IOSCO's publication of principles for oil price reporting agencies, a price reporter at energy-industry data provider ICIS went public with the charge that natural gas prices are regularly manipulated by physical and financial traders, and that prices assessed by price reporting agencies do not accurately reflect the underlying physical market. Furthermore, he argued that poorly trained price assessors often developed close relationships with traders, which led them to routinely engage in Libor-style price fixing exercises. Immediately following these allegations, UK Financial Services Authority (FSA) and energy regulator Ofgem launched investigations into the claims.

Market participants have long claimed that selective reporting by traders and inconsistent methodologies used by price reporting agencies can distort reported prices. These concerns were the basis of a report published by IOSCO in early October, to which the IEA, OPEC and the IEF, responding to a request from the G20, provided input.* The report suggested that " the ability to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data that are submitted to PRAs" and "the need for assessors to use judgement under some methodologies creates an opportunity for the submitter of data to deliberately bias a PRA's assessment in order to benefit the submitter's derivatives positions."

In order to enhance the reliability of oil price assessments that are referenced in derivatives contracts subject to regulation by its members, IOSCO set forth a set of principles for the PRAs to follow. IOSCO proposed, in collaboration with the IEA, IEF and OPEC, to review the implementation of the PRA principles after 18 months. If implementation is ineffective, there may be further recommendations.

The IOSCO PRA principles are intended to establish a framework of best business practices for PRAs and include:

  • requirements for transparent methodologies adopted by PRAs as well as consultation with industry stakeholders for any proposed material changes in methodologies;
  • giving priority to concluded transactions in making assessments;
  • employing sufficient measures to ensure the integrity of submitted information; 
  • encouraging submitters to submit all of their market data;
  • publishing criteria according to which transaction data may be excluded from a price assessment;
  • specifying criteria that define who may submit market data to PRAs;
  • implementing internal controls to identify communications between submitters and price assessors, and to ensure the integrity and reliability of assessments;
  • retention of all information and judgments made in reaching a price assessment for at least five years;
  •  functional and operational separation of a PRA's assessment business from any other business that may present a conflict of interest;
  • adoption of formal complaint-handling policies;
  • and finally, annual independent external auditing of a PRA's adherence to its stated methodology criteria and with the requirements of the principles.

PRAs initially argued that they are basically news agencies and they are simply using their freedom of expression rights, therefore they cannot be subject to such rules. IOSCO overcame this objection by restricting these principles to be applied only in price assessments that are referenced in oil derivatives contracts. Practically, they recommended that "market authorities consider whether to prohibit trading in any oil derivatives contract that references a PRA-assessed price unless that assessment follows the PRA principles." It is a rather indirect way to force PRAs to adopt such rules. Instead of losing their customer basis, PRAs are expected to adopt these proposed principles.

While a step forward, these principles still do not fully address the problem of selective price reporting. Since traders are not required to submit trade data to PRAs, there is a risk that voluntary reporting could result in selective reporting and seriously compromise the integrity of price assessment. Therefore, it is important, in our view, to allow PRAs to use more information than concluded transactions in making their price assessments. Exclusive reliance on concluded transactions might lead to inaccurate price assessment if submitted prices are false or manipulated. Thanks to the use of other market information, PRAs can check the accuracy of submissions or assess whether submitted prices truly reflect the market place. Demanding traders who chose to voluntarily submit data to provide all of their market data in order to prevent selective reporting is not the answer. Given the voluntary nature of trade reporting, asking traders to submit all of their trade data amounts to an "all or nothing" policy which runs the risk of effectively discouraging price reporting and drastically limiting the pool of information available to PRAs, thereby adversely affecting the reliability of their reports. As long as the submission of data is voluntary, there is a strong risk that such "all or nothing" policy could end up fatally disrupting the flow of information from submitters to PRAs.

Another weakness in these principles has to do with complaint-handling. While they do call for a formal complaint-handling policy, the principles stop short from requiring the disclosure of complaints to market participants. The principles require PRAs to advise plaintiffs and any other relevant parties of the outcome of the investigation in the event of a formal complaint. Disputes regarding a daily pricing determination will be communicated to the market only when a complaint results in a change in price. However, if the aim of these principles is to increase transparency in price assessment, it may be argued that they should have called for an immediate announcement of all accepted formal complaints to market participants, similar to error trade announcements in exchanges. Furthermore, the principles called for recourse to an independent third party review of complaints if the plaintiff is dissatisfied with the way a complaint has been handled by the relevant PRA. However, the principles require that the independent third party be appointed by the PRA itself. Giving the right to appoint the third party to the PRA to review its own decision clearly creates a conflict of interest and undermines the independence of the external review. To ensure an independent review process, the appointment of the third-party reviewer should be jointly handled by the PRA and industry stakeholders.

It is important to note that PRAs deliver more than just news. Their assessed prices are used not only in settlement of oil derivatives contracts but also in other derivatives contracts, including but not limited to natural gas and refined products. These assessed prices are also referenced in many long-term physical market contracts. The recent allegations of price-fixing in UK wholesale gas prices show the importance of reliable price assessments.  Therefore, the principles developed for oil price assessments that are referenced in derivatives contracts should be universally adopted by PRAs for any price assessment activities.

*The report, "Principles for Oil Price Reporting Agencies", was published on the IOSCO website on 5 October 2012 and can be accessed at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

Spot Crude Oil Prices

Spot crude oil markets continued their downtrend for the fifth straight month in November, with upward pressure on prices from escalating geopolitical conflicts in the Middle East offset by worries over a weaker demand prospects and relatively steep crude oil stocks in the US and Asia Pacific region. In addition, little progress in discussions between Congressional leaders and the White House to resolve the fiscal cliff continued to unnerve markets. Weaker crack spreads have also added downward pressure on crude markets.



Spot prices for benchmark crudes fell by -$1.60 to just under -$3/bbl in November. WTI spot prices posted the largest decline, off $2.92/bbl to a monthly average of $86.60/bbl, the lowest level in five months and $20/bbl below the 2012 high reached in March. US prices may come under pressure again in December as producers reduce storage levels ahead of year-end inventory tax charges. North Sea Dated prices declined by $2.44/bbl to average $109.16/bbl in November. A surplus of competing crudes from Africa is helping to undermine North Sea markets. Spot prices for Dubai crude posted the smallest decline, off about $1.60/bbl to an average $107.18/bbl in November on stronger demand for Middle Eastern crudes.

North American crude price structures were severely distorted in November, with price differentials for WTI at both Cushing and Midland trading at atypical levels. The WTI-Brent spread increased by about $0.50/bbl to $22.56/bbl, with stocks at Cushing, Oklahoma well above the 5-year average (see Stocks). The WTI-Brent spread, however, may narrow in the New Year with the planned expansion of the Seaway pipeline from 150 kb/d to 400 kb/d in 1Q13.



However, oil price differentials between WTI at Cushing and Midland surged in November due to pipeline bottlenecks and maintenance work at a key refinery that processes crude from the Permian basin. However, at the core is surging Texas oil production, which has soared to a 24-year high of 2 mb/d, overwhelming pipeline infrastructure and creating a glut of WTI in the Midland producing hub. The discount of crude at Midland, Texas, has sharply increased relative to WTI at Cushing, reaching an exceptional spread of $14.81/bbl on 4 December compared with $8.12/bbl on average in November, $2.91/bbl in October and a more typical $1.40/bbl in September. Prices could remain at elevated levels until new pipeline projects under development come online early in the New Year, though the differential could ease once the Phillips 66-Cenovus Energy 150 kb/d Borger, Texas refinery comes back into operation. In addition, completion of the reversal of the 220-kb/d Longhorn Pipeline, which currently flows from Houston to El Paso, is expected in early 2013



Urals price differential to Brent weakened in November due to reduced demand for the medium sour crude on lower fuel oil demand. However, Urals discounts in the Mediterranean were less pronounced due to stronger regional demand, especially from Spain, due to a shortage of similar grades. Indeed, Saudi Aramco reduced price differentials to Europe for January liftings on weaker fuel oil demand. The Brent-Urals differential traded at an average -$0.50/bbl, compared to a monthly average of -$0.92/bbl in October and -$1.15/bbl in September. The Brent-Urals spread is expected to come under more pressure following increased Russian exports from Ust Luga, which is steadily rising to its 600 kb/d capacity.



In Asia, regional benchmark Dubai strengthened month-on-month due to increased demand for winter fuels. Dubai's discount to Brent narrowed to $1.98/bbl compared with -$2.80/bbl in October and around $1.85/bbl in September. Seasonal demand for sour crudes helped close the price differential. Underscoring more robust prompt demand for Dubai, the M1-M2 spread widened to $1.25/bbl on average in November compared with just under $0.50/bbl in October.

Asian demand for lighter crudes also remained relatively robust. For the fourth month running, Saudi Aramco raised its prices for Arab Light and Arab Medium, by $0.35/bbl for January liftings. Meanwhile, Dubai crude differentials to North Sea Dated narrowed to -$1.98/bbl in November, from -$2.81/bbl a month earlier. Stronger naphtha and gasoil cracks are likely behind the increase. Meanwhile, Japanese demand for heavy sweet Asian crudes strengthened at end November/early January on stronger demand from utilities, especially in Indonesia.



Spot Product Prices

Refined product prices declined across the board in all major markets in November, with gasoline cracks especially hard hit while Asian markets proved more robust than the US and Europe. Middle distillates also weakened ahead of the seasonally stronger winter demand period, after posting more robust crack spreads in October. By contrast, naphtha markets posted the smallest declines. Fuel oil crack spreads also weakened further in November on oversupply and lacklustre bunker demand.



Middle distillate markets weakened in tandem with the start-up of refineries from turnarounds and despite relatively low levels of stocks in the US and Europe. That said, crack spreads for gasoil are still relatively robust, with November levels averaging $16.50/bbl in Rotterdam and $18.50/bbl in Singapore. ULSD in the US averaged $17/bbl in November. Concern over demand growth in the face of continuing economic crisis is curbing the outlook for the New Year.



Gasoline crack spreads for LLS on the US Gulf Coast posted a staggering loss in November following the end of refinery turnarounds and return to normal refinery operations on the East Coast following Hurricane Sandy. LLS crack spreads for premium unleaded plummeted to an average $4.17/bbl in November compared with $18.02/bbl in October and $30.39/bbl in September.

European gasoil cracks in Rotterdam fell by around $4.75/bbl, to an average $16.50/bbl in November compared with $21.25/bbl in October, largely due to restart of refineries following maintenance work. Meanwhile, Fuel oil markets continued their downturn, with oversupply in Asia and reduced demand from utilities depressing crack spreads.



Freight

Freight costs on the benchmark VLCC Middle East Gulf - Asia route finally moved upwards in late November as fundamentals tightened on the back of healthy regional demand from exporters. Rates peaked at over $14/mt on November 21, their highest level since end-May, but by early-December were retreating rapidly as demand waned. Meanwhile, other crude tanker markets remained depressed during November. Notably the benchmark Suezmax West Africa - US Atlantic Coast route remained anchored at approximately $13/mt throughout November with vessels reportedly ballasting to the Middle East Gulf to take advantage of better prospects. In Europe, northern Aframax markets remained static at close to $5.50/mt over the month with no weather-related delays to tighten tonnage lists.



Despite the resurgence in rates for VLCCs, oversupply in the crude tanker fleet remains a millstone. Indeed, last month Maersk became the first owner to attempt to tackle the problem when it announced it was laying up two of its VLCCs and encouraged other owners to 'behave responsibly' and follow suit. As yet, no other owners have followed, although with VLCC rates currently receding all hope is not lost.

Clean tanker markets are going from strength to strength in the East with the 75Kt Middle East Gulf trade soaring to a peak of over $35/mt at the time of writing. EA Gibson shipbrokers recently reported that a catalyst for this has been the recent conversion of a portion of the clean fleet to carry dirty fuels such as residual fuel oil and waxy residues, which, when combined with robust clean product demand, has rapidly tightened tonnage. In the Atlantic basin, the effects of Hurricane Sandy had largely dissipated by mid-month with rates for vessels supplying Atlantic Coast markets receding quickly as the Linden pipeline reopened. Although, at the time of writing rates on the benchmark UK - US Atlantic coast trade were beginning to take off as healthy demand quickly ate into tonnage lists.

This month has seen renewed interest in the floating storage of refined products. Over November, Asian fuel oil markets moved into steep contango in tandem with waning Asian bunker demand and reports that the market was awash with product. In turn, land-based inventories in Singapore built for five consecutive weeks and traders began to look to floating storage. BP chartered a VLCC to store 2 mb off Singapore and ship tracking data suggest that Brightoil is also storing product in the region. However, unless the contango persists into 2013 or other products move out of backwardation, the likelihood of speculative floating storage absorbing a significant amount of the fat in the fleet remains a distant prospect. Meanwhile, crude is still being stored on the water for operational rather than speculative reasons, Iran is leading the way with a reported 13 mb in storage in either the Middle East Gulf or off Malaysia.

Refining

Summary

  • Refinery margins fell in all regions except the US Midwest in November, led by decreases in gasoline and fuel oil prices. Margins on the US Gulf Coast are close to their weakest this year, with low-to-negative cracking margins and dull coking margins. European margins also fell, but healthy distillate cracks supported cracking returns above $5/bbl.
  • Global refinery runs are projected to average around 75.3 mb/d in 4Q12, up 950 kb/d year-on-year, but 140 kb/d less than estimated in last month's Report. Estimates of 4Q refinery maintenance have been revised upwards on reports of more extensive turnarounds in Europe and Asia than previously assumed. Nevertheless, non-OECD Asia remained by far the main driver of year-on-year growth in refining activity this quarter.
  • OECD crude runs fell abruptly in October, led by a 555 kb/d plunge in European throughputs month-on-month. Aggregate OECD runs averaged 36.1 mb/d, a steep 730 kb/d below September levels but in line with year-ago levels. Runs are expected to retrace most of their October declines in November, rising to a forecast 36.7 mb/d after the completion of maintenance and as refiners rebuild inventories. Fourth-quarter OECD throughputs are projected at 36.9 mb/d.
  • Non-OECD throughputs for 4Q12 are now estimated at 38.5 mb/d, 970 kb/d above year-earlier levels, with growth concentrated in non-OECD Asia. After months of relatively subdued growth, Chinese refiners switched gears and moved into more vigorous expansion in September and October as margins improved and depleted product inventories had to be rebuilt. Several Chinese economic indicators also showed stronger readings than in previous months. Additional growth also came from India and Russia, which reported runs at all-time highs in October and November, respectively.


Global Refinery Overview

Estimates of global refinery runs have been revised down by 140 kb/d for 4Q12, due in large part to an abrupt decline in European throughputs in October and more extended maintenance than expected in November. Fourth-quarter global runs are now projected at 75.3 mb/d, a still remarkable 950 kb/d increase year-on-year. Growth is concentrated in non-OECD Asia, with both India and China expected to expand as new capacity is commissioned, though Russia also surprised to the upside in November, refining a record 5.6 mb/d. India recorded record high runs again in October, of 4.5 mb/d, an impressive 680 kb/d above year earlier levels. Chinese refinery runs also returned to strong growth in September and October, rising by more than 600 kb/d year-on-year, after posting average growth of only 170 kb/d over the previous 12 months. Improved refinery economics and the need to rebuild depleted product inventories supported runs, even as several economic indicators also took a turn for the better.

After posting robust growth of more than 200 kb/d on average in 3Q12, European refinery runs are expected to return to contraction in 4Q12, on weak underlying demand and falling margins. Extended maintenance shutdowns already caused European throughputs to weaken considerably in October. US refiners completed maintenance by November and raised throughputs on growing export needs from Latin America and the Atlantic Basin.



On average, 2012 global refinery throughputs are projected to average 75 mb/d, 0.8% higher than 2011.

The growing trend observed at the end of 2012 should continue into the first months of 2013. Global crude throughput for 1Q13 is projected at 75.8 kb/d, a 480 kb/d ramp-up from 4Q12. Most of the increase is expected in China and Latin America, assuming that Venezuelan refinery outages get resolved. Declining refining margins in all regions may force low-conversion refiners to reduce runs, however.

Refinery margins fell in all regions in November except in the US Midwest, which still benefits from lower regional crude prices due to logistical bottlenecks. In Europe, refining margins fell below $10/bbl in the second week of October and continued to slide through November as gasoline and fuel oil prices decreased. Support came from the middle of the barrel, however, as extensive maintenance drew down distillate inventories, supporting prices (please see Stocks: 'German Gasoline Struggles to Find a Home'). On average, refining margins in Europe lost $3-4/bbl compared to the previous month to $5.5/bbl for cracking configurations and negative margins for simple refineries.



On the US Gulf Coast, refining margins fell by $4-6/bbl in November to near their weakest levels this year, with low to negative cracking margins and dull coking margins ranging from $2-4/bbl. With the end of the driving season, the completion of refinery maintenance and the recovery of the East Coast after Hurricane Sandy, the main supporting factors that had lifted Gulf Coast prices have disappeared. The persistence of high operating rates and efforts by refiners to limit stock builds due to year-end tax considerations weigh on gasoline cracks, as refiners are running down crude oil stocks while exporting increasing volumes of products. The start-up of a new, 325-kb/d crude distillation unit at Motiva's Port Arthur refinery raises further concerns about product surpluses as winter heating demand has yet to bite into inventories significantly.



In Singapore, refining margins posted a near $3/bbl decline in November, in large part due to weakening fuel oil cracks. A shift in Chinese policy to impose a new tax on feedstock and let independent refiners import crude oil is creating concern over the emergence of a more persistent fuel oil overhang. So far, only one company, ChemChina, reportedly received a crude import license for 2013, allowing it to import about 200kb/d. Whereas China's major oil companies report detailed data on their refinery operations, there are no systematic statistics on China's independent refining sector. Yet that segment of China's refining industry is far from marginal. Independent refining capacity is estimated at around 2-2.5 mb/d, or roughly 20% of total Chinese capacity. Regulatory changes affecting their operations are therefore a cause of significant uncertainty, as the scope of China's future crude import increase and of its corresponding cut in fuel oil imports is unclear. The impact is widely expected to be more pronounced in the fuel oil market than in the crude market. Any erosion in Chinese fuel oil demand will put further pressure on fuel oil cracks, especially at a time when demand from the bunker market and utilities is muted.

OECD Refinery Throughputs

OECD crude throughputs fell by 730 kb/d from September to October, with the majority of the decline stemming from extensive maintenance at Northwest European refiners. After three months of higher than year-earlier throughputs, European refinery runs resumed their trend of structural decline in October. In the OECD Americas, US runs remained robust as healthy export demand on the US Gulf Coast by far offset limited shutdowns on the East Coast due to Hurricane Sandy. OECD Asia Oceania refinery throughputs fell for the third consecutive month to 6.6 mb/d as increased refinery runs in South Korea only partly offset seasonally weak Japanese activity. Overall, OECD October preliminary data were 285 kb/d below our previous forecast, while September and August were in line with preliminary estimates overall.



Preliminary data for November show a reverse trend with steep increases in refinery throughputs expected in all regions. In all, OECD runs are foreseen to rise to 36.7 mb/d, some 565 kb/d more than in October, but still 445 kb/d less than the previous year. Runs are set to rise as maintenance is completed and in response to higher seasonal demand and low products inventories. 4Q12 OECD throughputs are estimated at 36.9 mb/d, 90 kb/d below our last report.



Refinery crude intake in the OECD Americas in September was 17.8 mb/d as US crude runs have been revised upwards by 170 kb/d. In October, crude intake in the region fell by 85 kb/d to 17.8 mb/d. Hurricane Sandy caused major fuel shortages on the US East Coast in late October and November but only limited disruptions to the refining sector as only two plants were damaged with combined capacity of 300 kb/d (Hess's Port Reading and Philipps'66 Bayway).

In November, OECD Americas crude throughputs should increase by 355 kb/d to 18.1 mb/d as the hurricane impacted refineries on the US East Coast resumed operations in the aftermath of Hurricane Sandy. Refineries in the Gulf Coast were also running at unseasonably strong rates. Crude throughputs on the US Gulf Coast started increasing in mid-October to mitigate impacts of Hurricane Sandy while exporting significant amounts of petroleum products to Venezuela, as the country is struggling to resume production at its massive 645 kb/d Amuay refinery, which was hit by a deadly explosion and fire at the end of August.

Since the end of October, refineries in the Gulf Coast have been running above 90 percent of installed capacity reaching 95 percent by the end of November. US crude throughputs will most likely continue to increase in the coming months as refiners are back on line (Monroe's Trainer, Philipps66's Wood River) and the new 325 kb/d crude unit at Motiva's Port Arthur is progressively coming on stream. It is expected that the giant 615 kb/d refinery will be in full production by early 2013.



In Mexico, refining activity in October was reduced as the sector suffered from major technical issues in its Minatiltán and Madero refineries. The Salina Cruz refinery was also badly touched by a massive earthquake on the Oaxaca-to-Guatemala Coast.

European refinery crude runs fell by more than 555 kb/d in October, to 11.8 mb/d, due to extensive maintenance shutdowns. Shell's Pernis, BP's Rotterdam, Ineos' Grangemouth, Essar's Stanlow, Valero's Pembroke, Saras' Sarroch, Total's Gonfreville and Gunvor's Antwerp refineries were all reported shut down. This heavy maintenance activity combined with low oil products stocks helped maintaining refining margins in Northwest Europe above the historical trends. Spanish refiners well anticipated the economic context by delaying their refining maintenance and increased their crude runs by 75 kb/d. Refinery crude intake for September was revised downwards by 135 kb/d to 12.4 mb/d on revised data submitted by Belgium and Turkey. October crude throughputs were also lower than our previous forecast. As the autumn maintenance season concludes, crude runs are expected to ramp up progressively, reaching 12.0 mb/d in November and 12.4 mb/d in December. 4Q12 European crude throughputs are expected to average 12.1 mb/d, unchanged year-on-year.



In France, the commercial court in Rouen has granted a three-month extension until 5 February for companies to present bids for Petroplus' Petit Couronne refinery. The court held hearings on 4 December to deliberate on the possibility for the refinery to continue operating after 16 December, when the processing agreement with Shell expires. Shell has announced it is not interested in prolonging the tolling agreement. Companies which have expressed an interest in purchasing the plant include: Dubai-based Netoil, Iranian group Tadbir Energy Development Group, Iraqi Jabs Gulf Energy Ltd. and Swiss consortiums Activa Pro and Terrae International. A possible offer from Oilinvest - owned by the Libyan Investment Authority (LIA) - was envisaged at some point, but later denied by the LIA.

In OECD Asia Oceania, weekly data from the Petroleum Association of Japan, show Japanese crude intake at 3.0 mb/d in November, a small increase (35 kb/d) compared to the previous month's low point. With the start of the heating season in Japan, and the return of refineries from maintenance, crude runs are expected to increase in December to 3.5 mb/d, still a dour 90 kb/d increase y-o-y. JX Nippon Oil & Energy restarted with delays its Negishi refinery and partially resumed operations at the Mizushima B refinery in November, which has been closed for four months after the discovery of false inspection records. A full restart is however not expected before the end of the year.

Australian refinery runs were unchanged from a month earlier at 605 kb/d in October. The sector is continuing its restructuration as announced. The Government has stated in its recent Energy White Paper, that closure of the Clyde and Kurnell refineries will not pose any risk to market security.

In South Korea, crude refining runs in October remained unchanged at 2.6 mb/d. Refining utilisation remains high and is likely to stay at this level until the end of the year, as no significant maintenance has been announced. On average, 2012 crude run in South Korea is estimated at 2.6 mb/d, a 2.3% growth compared with last year. Increasing runs in South Korea push our forecast for the region to 6.7 mb/d for 4Q12, 110 kb/d above our previous estimate.



The Next Chapter in Petroleum Products Specifications

Fuels specifications and standards are first and foremost driven by environmental concerns.  While there is a long history of emission standards, the current wave of adjustments in specifications can be traced back to the European Union's initiative to cut emissions and improve air quality in 1992.  Since then, many countries have followed suit, leading to a concerted campaign by the United Nations Environment Programme to reduce global transport emissions, eliminate lead from gasoline and improve global fuel quality through a significant reduction in sulphur, nitrogen and particulate matter pollutants. The EU completed its last major step in lowering fuel sulphur and improving air quality (Euro V) in 2009. Other countries around the world have since strived to align their standards to the Euro V benchmarks.

Beside air quality, countries may factor in other considerations when setting new fuel standards, not least the promotion of international trade. Indeed, global convergence in environmental standards for refined products will facilitate product imports and exports. Initially, however, adjustments in fuel standards may also in some cases cause temporary trade imbalances and market tightness, as market participants struggle to adapt to the changes. Below is a non-exhaustive list of recent decisions on new fuel quality specifications entering into force in 2013 which could have major impacts on products trade.

Russia: According to the latest plan, Russia will phase out Euro II gasoline and diesel by 2013 and move to Euro III, which allows for a maximum sulphur content of 150 ppm for gasoline and 350 ppm for diesel. Russia's first attempt to introduce more stringent nationwide fuel quality requirements in line with European ones dates back to 2006. At that time, the road map of the Russian federal government was to implement Euro II specifications in 2008, Euro III in 2009, Euro IV in 2010 and Euro V in 2013. Delays in the refineries' modernisation and the age of the Russian vehicle fleet have twice forced postponements in the plan.  The new fiscal policy introduced in October 2011 should give oil companies more incentives to upgrade their refineries. Although several refiners have recently completed modernisation programmes and now produce Class 5 quality fuels, Russia as a whole is not expected to complete the full switch to Euro V standards until 2020.

Changes in fuel specifications in Russia have a major effect on product trade. Russia may reduce its exports in order to avoid domestic shortages (as already seen in 2011). The recent spat between Belarus and Russia over the delivery of oil products is a direct consequence of the ban on the sale of low-grade gasoline.

Europe: In November 2012, the Council of the European Union adopted a new directive regulating the sulphur content of marine fuels, in line with International Maritime Organization (IMO) regulations. The IMO adopted in 2010 regulations stipulating that maximum sulphur content allowed in ship fuel will be reduced globally as of 1 January 2012 from 4.5% to 3.5%, and as of 1 January 2020 to 0.5%, subject to a review to be completed by 2018. The Directive also set the general sulphur limit for fuel to 3.5% in all EU waters except in emissions control areas (ECAS), currently including the Baltic Sea, the North Sea and the English Channel, where it is was reduced from 1.5% to 1.0% from 1 July 2010 (and to 0.1% in 2015). However, the EU directive goes further than the IMO regulations on some points, specifically mandating the switch from 3.5% to 0.5% by 2020, independently of the IMO decision on global sulphur limits expected after the 2018 review.

In October 2012, the European Commission issued a Proposal for a Directive designed to amend the EU legislation on biofuels including the Directive 2009/28/EC on the promotion of the use of energy from renewable sources (Renewable Energy Directive or "RED") and the Directive 98/70/EC relating to the quality of petrol and diesel fuels (Fuel Quality Directive or "FQD"). The Proposal, expected by 2013, is currently at the Parliament's preparatory phase of the legislative procedure. The oil industry considers that these regulations would lead to additional reporting and administrative costs.

Recognising the difficulties faced by the EU oil refining sector and the need to maintain its comptetitiveness, the Commission has decided to set up by 2013 a permanent forum tasked with looking at key issues facing the European refining industry. One of the objectives of this forum is to undertake a `fitness check' of the EU legislation and identify excessive administrative burdens, regulatory overlaps, gaps and inconsistencies, while also assessing the cumulative impact of legislation on the sector. The Commission stated that new legal provisions should only be adopted if they don't run counter to keeping refineries in Europe.

China: Currently, China specifications require 150 ppm sulphur gasoline and 350 ppm sulphur diesel except in Beijing where 10 ppm sulphur fuels are required and other big cities where 50 ppm sulphur fuels are mandatory. According to the 12th five-year environmental protection plan (2011-2015), it is expected that by the end of 2013, gasoline with 50 ppm sulphur will be adopted nationwide (except in Beijing and other big cities) and 50 ppm sulphur on-road diesel by mid 2014.

Brazil: The country has embarked on a major plan to modernise its refineries to produce low sulphur diesel. Brazil has mandated ULSD in urban areas in 2013 for the commercial fleet (diesel-based passenger cars are not allowed). Currently three diesel qualities (50 ppm, 500 ppm and 1800 ppm sulphur) are distributed. By 2013, 1800 ppm sulphur diesel should be phased out and 10 ppm diesel be introduced nationwide to replace 50 ppm.

As fuel specifications tend to be stricter, regional trade imbalances will appear and markets will tighten as production of very low sulphur fuels have important impacts on refiners' strategies ranging from crude selection, to modernisation and upgrading or even closure for simple refineries.

Clearly, the implications of country level specifications and global regulation (like the bunker fuel regulation) on petroleum products trade calls for improved statistics on consumption by fuel quality.

Non-OECD Refinery Throughputs

Non-OECD refinery throughputs for 3Q12 have been revised downards by 95 kb/d to 38.1 mb/d on additional refinery shutdowns not accounted for previously and lower than expected Saudi Arabian crude runs. 4Q12 throughputs are now estimated at 38.5 mb/d, 970 kb/d above a year earlier, with growth stemming mostly from China and India. Chinese crude runs returned to growth in September and October after several months of weak demand, on improved profitability and low product inventories. New price reforms and regulations for 2013 may however reduce the incentives for Chinese refiners to increase utilisation rates further, although new refining capacity will call for more oil. India's refining sector expansion has been remarkable this year with crude throughput reaching an all-time high in October at 4.5 mb/d.

Chinese crude runs for October averaged 9.40 mb/d, slightly weaker than September's record levels (9.43 mb/d), but still a notable 7.3% annual increase. Refining activity was boosted by an apparent recovery in domestic oil demand growth over the last months, improved refinery profitability on higher fuel prices and new refining units as about 500 mb/d of new capacity are expected to come on line between 4Q12 and 1Q13. However, the decision in mid-November to cut domestic gasoline and diesel prices by 3% will squeeze refining margins and probably push down operating rates for some small independent refiners (the teapot refineries). Platts reported that independent refiners in the Shandong province were already running their plants at 42% in October compared to 46% in September.



In a move to rationalise its refining sector, the China's State Administration of Taxation has issued new tax regulations to take effect from 1 January 2013. These new measures include levying consumption tax on certain petroleum products that were previously exempt such as MTBE, aromatics and naphtha when used for gasoline production. These measures will drastically impact the profitability of the small teapot refineries, which have little or no secondary processing capacities. Typically, those refineries were importing fuel oil and feedstock without paying taxes to produce mostly gasoil and gasoline for sale in the domestic market. The gasoline produced was then blended with MTBE or aromatics in order to meet the national fuel standards. The new tax imposed will make blended gasoline production cost on a par with, or even higher than, the cost of standard gasoline produced by the state refiners, therefore denting further their weak margins.

It seems that China's independent refining industry is undergoing strong reforms. With an estimated processing capacity between 2.0 and 2.5 mb/d, many of them have a capacity less than or around 40 kb/d. These small plants will be closed by 2013 as per Chinese government decision, but the remaining ones could be finally granted a licence to directly import crude oil like ChemChina, which could be the first independent refiner to receive a quota to import 200 kb/d. The likely outcome of these regulations in 2013 is still unclear. However, if the license to import crude oil is extended to all independent refiners in China, fuel oil market dynamics in the region could be severely reshaped. Yet, fuel oil cracks in Asia have deteriorated substantially over the last months on weak bunker demand in Singapore, softer Japanese demand and supply increases as refiners raise runs in response to strong middle distillate margins.

In 'Other Asia', Indian refinery runs averaged an estimated 4.5 mb/d in October, up an impressive 680 kb/d year-on-year, reaching a new historical record. Half of this increase is on the account of Essar Oil, which has now completed the capacity expansion of its Vadinar refinery from 280 kb/d to 400 kb/d. Consequently, Indian product exports surged nearly 20% last month, reaching a new record of 1.45 mb/d.

Overall, regional crude throughputs are set to fall by about 300 kb/d in November to 9.1 mb/d, on account of maintenance work in Indonesia and Taiwan. Indonesia had a heavy turnaround schedule in November as three of its major refineries (Cilipac, Balikpapan and Balongan) underwent maintenance. Lower Indonesian runs provided some support to products crack spreads in Singapore. It was reported that 380 kb/d of gasoline was to be imported.

India's Private Refiners Push Product Trade to New Record

As 2012 is drawing to a close, India stands out as one of the top contributors to growth in the refining sector this year. The latest readings for Indian refinery throughputs show the country processed 4.5 mb/d of crude oil in October, 680 kb/d higher than a year earlier. Year-to-date, Indian crude runs are up 260 kb/d compared with 2011, accounting for almost half of global crude throughput growth in the same period.



So far in 2012, India's refining capacity has been boosted by 400 kb/d, through the completion of HPCL's 180 kb/d Bathinda refinery, a 120 kb/d expansion of Essar's Vadinar refinery and some smaller expansions at state refiners. Another 400 kb/d of capacity could be added in 2013 if Indian Oil Corporation's (IOC) 300 kb/d Paradip and Nagarjuna's 120 kb/d Cuddalore refineries are completed on schedule by end-year.

Further investments planned for the medium term are getting increasingly hard to justify, as India's state refiners have to supply the domestic market at subsidised prices. IOC posted a loss of Rs 224.5 bn ($4.12 bn) in 2Q12 -- the largest quarterly loss ever of an Indian company -- due in large part to the fuel subsidies. India normally compensates state refiners for about 60% of under-recoveries, but the state may fund a smaller portion this year as the under-recoveries could reach an exorbitant levels, of up to Rs 2 trillion for the 2012-2013 fiscal year according to some sources. (Fore more information on India, Please see: 'Understanding Energy Challenges in India - Policy, Players and Issue's, available on the IEA website).

The private sector, which now holds 1.64 mb/d of refining capacity at Reliance's Jamnagar and Essar's Vadinar plants, is faring better, since unlike the state sector it is free to export products and collect international fuel prices. Indian exports of refined petroleum products reached another record high in October, at more than 1.5 mb/d according to the country's Petroleum Planning & Analysis Cell. Of this, 39% was diesel, 25% gasoline, 15% naphtha and 8% jet fuel.



In terms of destinations, OECD Europe has been importing just over 100 kb/d on average so far this year (Jan-Sept), but shipping data suggest that this increased sharply in October and November. Latin America has also increased its imports from India, and at last count took in about 120 kb/d of Indian product exports. The bulk of the Indian exports stay in the region, however, feeding both OECD and non-OECD Asian countries, but also, to an increasing degree, Middle Eastern customers.

Russia's refinery throughputs in November rose 8.3 percent from a year earlier to a record 5.6 mb/d. By January 2013, Russia is to ban the sale of low grade gasoline (Euro II) and move to Euro III which allows maximum sulphur content of 150 ppm for gasoline and 350 ppm for diesel (See 'Tightening International Fuel Quality Standards impact Product Markets and Trade'). Although it is likely that the government will extend the deadline, Russia could import products from Belarus to avoid any shortages.



Kazakhstan's refinery crude intake declined 24.5% in October to 215 kb/d as the Shymkent Refinery shut down for a planned overhaul. Total FSU crude runs for 1Q13 is estimated at 6.7 mb/d, slightly higher than a year earlier (6.6 mb/d).

In Latin America, Brazil continued to post robust refinery runs in October, at 2.0 mb/d. As the country is struggling to rein in costly petroleum products imports and meet higher fuel demand, refineries should continue to operate at high utilisation rates. In a move to raise finance for its development plan, Petrobras has announced this month that it was planning to sell all its refineries outside of Brazil, including the Houston Texas refinery. Concomitantly, it was reported that PDVSA did not submit the required guarantees to acquire a stake (40%) in the new refinery Abreu e Lima (230 kbd/), which is scheduled to be commissioned in two phases over 2014 and 2015.

Refining throughputs in Venezuela continues to be highly impacted by outages at Amuay refinery. Surprisingly, official crude run for September submitted to JODI shows a monthly increase of almost 100 kb/d, to 900 kb/d, inconsistent with outages in Amuay and others refineries (El Palito) and a surge in products imports from the USA, as reported by the EIA. News reports on Amuay refinery mention that additional units have been shut down (flexicoker) while the plant continues to operate at around half capacity. Consequently, our 4Q12 refining throughputs forecast has been adjusted downwards at 720 kb/d considering that Amuay will not return to full operation before 1Q13.



Middle East refinery throughputs for September were revised down by 170 kb/d to 5.8 mb/d as monthly Saudi Arabian JODI data show a surprisingly sharp decline in throughputs following strong runs in August. Regional crude runs are likely to remain steady above 5.8 mb/d until the end of the year. In early 2013, Saudi throughputs could increase as Saudi Aramco and Total start's trial runs at their 400 kb/d Jubail refinery Start-up of the new refinery will be partially offset by a major maintenance shutdown for modernisation at Yanbu refinery by the end of 1Q13, however. In a constant effort to reduce its dependence on imported fuels, Iran has announced that it has increased the capacity at its Bandar Abbas refinery by 25 kb/d to 345 kb/d.



African crude runs for 3Q12 are unchanged from the last report at 2.0 mb/d and forecast for 4Q12 is 2.1 mb/d. Tema Oil Refinery, Ghana's sole refinery (45 kb/d) were shut at the end of November due to technical problems and crude shortage. Over the last four years, the refinery, which processes mainly Nigerian crude oil, operated at very low rates accumulating massive debt. The expected restart of the refinery is uncertain as its creditor, the Ghana Commercial Bank cut off support. In Nigeria, the NNPC Kaduna Refinery and Petrochemical Company (110 kb/d) has recently shut down for routine maintenance lowering total country crude oil processing for December down to 75 kb/d. Libya's Zawiya refinery was shut down for a second time this month after soldiers protested outside the plant. African crude runs for 2012 are estimated at 2.1 mb/d, a reduction of 115 kb/d from the previous year, mainly due to planned and unplanned refinery outages in Libya, Algeria and Egypt.