Oil Market Report: 18 January 2013

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  • Crude oil prices edged higher as 2012 drew to a close, gathering strength from seasonally stronger winter demand and geopolitical concerns. By mid-January, prices were trading above December levels, with Brent at $110.75/bbl and WTI around $95.15/bbl.
  • The world is forecast to consume 90.8 mb/d of oil in 2013, 240 kb/d more than in last month's report and 930 kb/d (1.0%) up on 2012. A raised 4Q12 demand estimate and heightened expectations for China are the main contributors to the hike.
  • Global supplies fell by 170 kb/d in December, to 91.2 mb/d. Non-OPEC production rebounded by 90 kb/d from the prior month, to 54.2 mb/d and is expected to increase by 590 kb/d in 1Q13 y-o-y. For 2013, non-OPEC production is projected to rise by 980 kb/d to 54.3 mb/d, the highest growth rate since 2010.
  • OPEC crude supply in December fell to its lowest level in a year at 30.65 mb/d on lower output from Saudi Arabia and Iraq. Average OPEC crude output reached an historic high in 2012 in the wake of continued global demand growth. The 'call on OPEC crude and stock change' for 2013 was raised by 100 kb/d, to 30 mb/d.
  • OECD industry inventories drew by 18.7 mb in November, led by a further drop of 11 mb in middle distillate stocks, extending earlier declines. On a forward demand basis, total products cover fell by 0.5 days to 30 days in November. December preliminary data point to a further 18.4 mb decline in OECD industry inventories.
  • Global refinery runs rose 1.5 mb/d y-o-y to around 75.9 mb/d in 4Q12, with growth in refining activity concentrated in China, India and Russia. Favourable refining margins, a gradual reduction in offline capacity and a cold snap in Asia and the FSU supported refinery throughputs in the last months of 2012.

Crouching tiger, hidden dragon

This first Report since the year-end holidays paints a sobering, 'morning after' view of the oil market. In one fell swoop, the estimate of the 'Call on OPEC' for 4Q12 has been nudged up by 400 kb/d. All of a sudden, the market looks tighter than we thought. On the demand front, a marked departure in Chinese apparent demand from the preceding low-growth trend brings to mind Napoleonic metaphors about awakening dragons. On the supply front, a down tick in Saudi production from the 30-year highs that had characterised it through so much of last year gave headline writers a field day, sparking much hand wringing about Saudi budget needs and price appetite. OECD inventories are getting tighter - a clean break from the protracted and often counter-seasonal builds that had been a hallmark of 2012.

It may be too early, however, to declare the start of a new market cycle or a return to the bull market of yesteryear. Both Chinese demand and Saudi supply are too complex for hasty interpretations. In hindsight, the latest twists in Chinese and Saudi data may partly reflect fleeting factors. The dip in Saudi supply, for one, seems less driven by price considerations than by the weather. Analysts often lose sight of the fact that Saudi Arabia has become its own single largest customer. A dip in air conditioning demand - as well as reduced demand from refineries undergoing seasonal maintenance - likely goes a long way towards explaining reduced output. Nothing for the global market to worry about.

Chinese data are another story. The prospects for the Chinese economy, ultimately the main driver of the country's demand, are as clear as the Beijing sky. Chinese economic indicators have been mixed, but recent bullish readings have signalled the potential for a rebound. There is no lack of alternative explanations for the latest demand data, though. First, tax changes might have offered market participants - including the so-called 'teapot' refineries -- an incentive to boost refinery runs before they came into effect. Apparent 4Q12 demand might thus include 'borrowed' 1Q13 demand. Second, record-high refinery runs - supported also by the start-up of a swath of new state-owned capacity - likely caused large product builds, weakening the validity of apparent demand estimates. As the country's refining capacity leaps ahead of demand growth, apparent demand will become an increasingly blunt and misleading proxy for consumption. Brutal swings in apparent demand in both directions may become a fact of life, masking unreported inventory builds and draws.

The bull market of 2003-2008 was all about demand growth and perceived supply constraints. The bear market that followed was all about financial meltdown. Today's market, as the latest data underscore, has a lot to do with political risk writ large, and not just in Syria, Iran, Iraq, Libya or Venezuela. Changes in tax and trade policies, in China as in Russia, can, at the stroke of a pen, shakeup crude and products markets and redraw the oil trade map. Producer country policies on power generation and price subsidies loom as large in oil supply as E&P investment or EOR technology. As producer demand grows, so will those policies' impact. Nor are OECD economies free from political risk. The abrupt shifts in oil markets in the last year expose instances where resources and regulations - such as export and shipping legislation - have become misaligned. Bringing tomorrow's oil supply to market may hinge on resolving those 'above-ground' issues as much as on geology, investment, technology or anything else.



  • Estimates of global oil demand for 2012 have been revised upwards to 89.8 mb/d on stronger-than-expected 4Q12 data. Demand growth for 2012 is now estimated at 975 kb/d (or 1.1%), 175 kb/d more than assumed in December's OMR. Fourth-quarter demand surprised on the upside, with the greatest upwards revisions seen in China (+200 kb/d), the US (+155 kb/d) and Brazil (+155 kb/d). The demand forecast for 2013 has been revised upwards by 240 kb/d, to 90.8 mb/d, underpinned by higher Chinese demand expectations; yet continuing concerns about the macroeconomic environment keep growth relatively restrained at 930 kb/d.

  • Chinese manufacturing sentiment continued to improve in 4Q12, supporting an apparent uptick in oil demand growth in the world's second largest consumer. Chinese implied demand reached an estimated 10.1 mb/d in 4Q12, an increase of 700 kb/d on the year. Coming on the heels of relatively slow growth through most of 2012, the 4Q12 acceleration surprised with its velocity. This heady pace of growth is unlikely to be sustained in 2013, as one-off factors helped support 4Q12 demand, but the forecast for the year as a whole has still been revised higher by 135 kb/d, to 10 mb/d. Chinese demand growth for 2013 is now projected at 390 kb/d (or 4.0%).
  • Early indicators of 4Q12 US demand point to higher-than-expected average consumption of 18.8 mb/d, 155 kb/d more than the projection carried last month, but still down by 100 kb/d (or 0.5%) on the year. The 4Q12 decline is the shallowest contraction in US demand in nearly two years.

Global Overview

The latest global demand estimate for 4Q12 comes out at 91.2 mb/d, equivalent to year-on-year growth of 1.7 mb/d (or 1.7%). This is 710 kb/d more than forecast in last month's Report. The most notable 4Q12 upwards revisions centred on China (200 kb/d higher), the US (+155 kb/d), Brazil (+155 kb/d), Russia (+55 kb/d), Korea (+40 kb/d), Belgium (+40 kb/d) and Saudi Arabia (+30 kb/d). Underpinning these adjustments were higher-than-expected October estimates, with the biggest revisions being the US (235 kb/d higher), Brazil (+225 kb/d), China (+155 kb/d) and Saudi Arabia (+95 kb/d). Those revisions more than offset downwards adjustments to demand for the UK (50 kb/d lower), India (-45 kb/d), Germany (-40 kb/d), Canada (-30 kb/d) and Russia (-15 kb/d). Preliminary November data also impacted the 4Q12 demand estimate, with big additions being seen in data for China, the US, Brazil, Korea, Russia and France, offsetting downward adjustments for India, Italy, Spain and Poland.

For 2012 as a whole, global demand is estimated at 89.8 mb/d, 975 kb/d (or 1.1%) more than in 2011, with strong Asian demand (+1.0 mb/d) leading the increase. Non-OECD Asian demand expanded by an estimated 675 kb/d, or 3.3%, while Japanese fuel switching away from nuclear power generation supported OECD demand growth. Projections for 2013 demand growth remain relatively subdued at 930 kb/d (to 90.8 mb/d). Upwards revisions to Chinese demand forecasts fail to offset continued concerns about the broader macroeconomic environment and reduced support from Japanese fuel switching.

Top-10 Consumers

Opposite seasonal factors in two of the world's top consumers saw Brazil and Saudi Arabia switch positions in our top-10-rankings for October, as reduced air conditioning demand in Saudi Arabia countered the impact of a counter-seasonal gain in Brazil. Both nations traditionally see falling month-on-month demand trends in October, but only Saudi Arabia fell in October 2012. Germany and Canada also traded places, as Canadian demand fell seasonally month-on-month in October, but German demand rose counter-seasonally. Mexico also made a late run for tenth spot in the October rankings, replacing South Korea as expected. The change occurred as additional replacement demand arose on account of the closure of Pemex's Reynosa gas processing facility. Korea will likely soon regain its 10th spot in the rankings, as strong seasonal domestic demand is likely to return in November.

Collectively the world's ten largest oil consumers used 53.3 mb/d of oil products in October, which roughly accounts for two-thirds of total global demand.


Preliminary estimates of 4Q12 US50 demand surprised on the upside, with average consumption now predicted at 18.84 mb/d, 155 kb/d higher than projected in December's OMR. Although the updated 4Q12 demand estimate is still 100 kb/d (or 0.5%) below 4Q11 figures, the annual decline rate was the shallowest in nearly two years. Domestic transportation fuels led the revival, jet fuel demand rose by an estimated 1.4% (to 1.42 mb/d) and gasoline by 0.2% (to 8.65 mb/d).

Diminished pessimism has emerged in recent months: with the political status-quo maintained without too much fuss; higher than anticipated 4Q12 demand; and, most importantly, the initial stages of the circumnavigation of the US 'fiscal cliff'. True, further flash points lie in wait concerning the US debt ceiling, but January's much anticipated hurdle passed without too much pain for world economies, providing support for the IMF's long held belief that economic growth will remain above 2% in 2013. Indeed, such predictions of relative macroeconomic buoyancy allow us to maintain our belief that US demand will essentially remain flat on the year.


Strong Chinese apparent demand growth in October of 740 kb/d y-o-y, to 9.7 mb/d, cements China's place as the world's second largest oil consumer. Preliminary estimates for November imply further gains of around 830 kb/d, to 10.4 mb/d - an all-time high. A surge in refinery runs on the back of new refining capacity underpinned the increase in apparent demand (i.e. refinery output plus net product imports). A January adjustment in excise duties, which brought blending components under the excise net, may have artificially inflated November and December apparent demand, however. End-2012 demand may thus in effect represent in part "borrowed demand" from early 2013. In addition, surging throughputs likely caused steep product stock builds at the end of 2012, which may be drawn down later on, alongside unreported builds of strategic stocks.

Chinese Demand Forecast Upgraded

China alone accounted for nearly two-thirds of total oil product demand growth between 2007 and 2011, but Chinese demand growth all but disappeared from September 2011-through-August 2012. Chinese apparent demand picked up momentum in September, however, as apparent growth rebounded to 915 kb/d (or 10.3%), up from an average 110 kb/d (or 1.2%) in the previous 12 months. Demand growth remained robust in October and November. These gains are the leading factor behind the upwards revisions to global 4Q12 demand estimates in this month's Report.

Initial pessimism regarding the short-term Chinese data led us to keep a lid on demand forecasts, but recent data suggest that the tide may have begun to turn. Manufacturing sentiment became "expansionary" (i.e. above 50) in November, albeit only marginally, after a long spell contracting when the index came in below 50, and has maintained this bias, rising into December. The Chinese trade figures, although mixed of late, provide additional support for the 'stronger Chinese demand' story. Total Chinese exports rose by 14.1% y-o-y in December, to $199.23 billion, outpacing imports which rose by a more modest 6%. This is in contrast to November, when exports rose by just 2.9% y-o-y. Other supportive influences include stronger electricity use (with double-digit percentage point gains returning in December, against a 2012 average of 5.5%) and increased rail usage, with 11% y-o-y more passengers carried in December.

Restraining the upside - hence the still below consensus 4% 2013 projection - are concerns about the sustainability of the Chinese upturn: as heightened debt levels, an enlarged shadow banking system, and worrisome property markets loom.

Infrastructural spending provided large chunks of the late-2012 momentum. While this is not something that can continue ad-infinitum, additional infrastructural expenditure is the key reason we are revising up the 2013 Chinese growth forecast, by 135 kb/d, to 10 mb/d - a projected annual expansion of 390 kb/d or 4%. China watchers, such as CICC, BNP Paribas and HSBC, appear confident that the new Chinese political leadership will rely on infrastructural projects as a form of economic stimulus, at least through its first full year in office. On the flip-side, the resumption of rising inflation in December, to a six-month high of 2.5% over the prior year, may limit the scope for government support.

Underpinning stronger growth predictions will be China's plentiful demand for cheap plastics, which will support robust naphtha demand, while predictions of 7% growth in new-vehicle sales (up from 4.3% in 2012) will underpin gasoline demand - though not at the pace seen at the end of 2012, when one-off factors provided support. Continued growth in air passenger traffic (which rose by 9.2% in 2012) will accordingly support demand for jet fuel.

Chinese demand estimates for 2012 have been revised upwards by around 50 kb/d since last month's Report, to 9.6 mb/d, on the strength of the preliminary 4Q12 data. Estimates for 4Q12 have been raised by 200 kb/d, to 10.1 mb/d, a y-o-y gain of 7.4%, in line with signs of stronger manufacturing sentiment. HSBC's Chinese Manufacturing Purchasing Managers' Index (PMI) rose to 51.5 in December, its second consecutive month above the key 50-threshold. Readings above 50 indicate that more survey respondents anticipate expanding conditions than contracting.


Japanese demand growth eased in October to 0.6% bringing consumption to an average of around 4.42 mb/d. Last month's OMR had assumed slightly more subdued growth of 0.2%. The weaker growth seen in October is a dramatic climb-down from the 7.3% average expansion seen in the previous twelve months, when fuel switching out of nuclear power generation lifted demand for fuel oil and 'other products' by 39.4% and 43.1%, respectively. Although the pace at which this replacement demand unwinds is forecast to be slow, no new replacement-demand is anticipated since 2011, hence the step change in year-on-year growth. Preliminary estimates of November demand, based on inland-deliveries, hint at a further deceleration to 0.1% y-o-y growth, to 4.61 mb/d. This is 30 kb/d more than projected last month, as a cold spell supported stronger-than-expected kerosene demand.


India consumed a revised 3.6 mb/d of oil products in October, 45 kb/d less than assumed in last month's report but still 165 kb/d higher than the year earlier. Gasoil led the growth momentum, contributing roughly half of the total growth, followed by LPG (+25 kb/d), gasoline (+20 kb/d) and naphtha (+20 kb/d). Growth came to a near-complete standstill in November, according to preliminary statistics, with significant y-o-y contractions seen in fuel oil, LPG and jet/kerosene. Gasoil demand growth eased to a 19-month low, as better weather patterns required less diesel-powered irrigation, while the spill-over from September's subsidy reduction (equivalent to a 14% rise in the price of diesel) continued. Demand averaged roughly 3.7 mb/d in November and is expected to average 3.6 mb/d for the year as a whole, 130 kb/d more than in 2011.


Revised estimates of Russian demand depict it averaging 3.4 mb/d in October, 15 kb/d less than we assumed a month ago and down 0.4% on the corresponding month a year earlier, its first y-o-y decline since July 2010. Between August and October, Russian demand growth averaged just 0.4% year-on-year, well down on the previous 12-month trend (7.2%). The slowdown is largely attributable to above trend growth in 2011 and, hence, is likely to have ended in November, when growth is forecast to resume at around 3.4%, as demand averages 3.6 mb/d. Russian consumption for the year as a whole is projected at 3.4 mb/d, 3.6% up on 2011. Growth is forecast to accelerate in 2013, to 4.5%, as momentum in Russia gains on the expanded income base.


Brazil leapfrogged Saudi Arabia into sixth place in the top-10 rankings of oil consumers for October, as demand rose counter-seasonally by 160 kb/d month-on-month, against a five-year average contraction of 5 kb/d. Stronger gasoil and gasoline demand underpinned the October turn-around, rising by 75 kb/d and 60 kb/d m-o-m, respectively, versus flat five-year averages. Gasoil demand rising as additional diesel-fired power generation was required to compensate for dwindling drought-hit hydropower supplies. The lower ethanol-mix of the gasoline blend by default boosted gasoline demand. Brazil consumed 3.2 mb/d of oil products in October, a gain of 9.3% on the year earlier (a two-year high) and 225 kb/d more than the estimate carried last month. A similar aggregate number is foreseen in November, amounting to 160 kb/d more demand than forecast earlier. Gasoline and gasoil account for the bulk of the upside in both months, as the previously ailing economy showed clear signs of recovery towards the end of the year. Manufacturing sentiment, as tracked by HSBC rose into 'expansionary' territory, October-through-December, having endured 'contracting' conditions previously.

Saudi Arabia

Strong 'other product' demand growth underpinned Saudi Arabian consumption of 3.1 mb/d in October, a 305 kb/d (or 10.8%) increase on the year. That revised October estimate was 95 kb/d higher than forecast in last month's report. Demand for 'other products', notably crude oil in the power sector, expanded by 215 kb/d on the year earlier, to 730 kb/d. Large gains were also seen in demand for gasoline (+55 kb/d, to 490 kb/d) and gasoil (+40 kb/d, to 695 kb/d). Stronger-than-anticipated October demand growth led us to revise higher our 4Q12 forecast by 35 kb/d over last month's Report, to 3.0 mb/d, lifting the overall 2012 forecast by a more modest 10 kb/d to 3.0 mb/d - a gain of 165 kb/d on the year earlier. A deceleration to 125 kb/d is foreseen in 2013, as economic growth eases. Saudi Arabia maintained its traditionally sharply falling October trend, with consumption down by 8% on the month earlier, in contrast to the 10.8% y-o-y gain.


Having endured a topsy-turvy year through most of 2012, the German demand trend has strengthened somewhat in recent months, breaking back into y-o-y growth territory in October and November. October's 0.1% gain saw consumption average out at around 2.5 mb/d. Rebounding naphtha and gasoil demand underpinned the trend, rising by 13.8% and 1.0% in October and 31.6% and 1.2% in November, respectively. For the year as a whole demand is projected at 2.35 mb/d, equating to a decline rate of 2.1% y-o-y, with a further reduction of 1% forecast in 2013, to 2.33 mb/d, as economic conditions remain under pressure.


Canadian oil demand grew by 90 kb/d or 4% to 2.3 mb/d in October, extending earlier gains, albeit at a more moderate pace. The Canadian economy continues, at least for now, to shrug off the recessionary trend that has bedevilled many other OECD countries. Momentum has moderated, however, compared to September's 115 kb/d expansion or the recent peak of 180 kb/d achieved in May, as manufacturing sentiment has slipped.


Mexico achieved tenth position in the Top-10 Consumers ranking in October on account of an explosion at Pemex's Reynosa gas processing plant. The disruption temporarily took 900 million cubic feet per day of natural gas off the Mexican market, equivalent to around 300 kb/d of oil products. Of course, not all of the shortfall was accounted for by oil products, but a very substantial fillip was seen. This replacement demand fell away in November, and we will likely see Mexico fall below the Top-10 ranking in next months report, as average consumption declined exactly in line with last month's report to 2.18 mb/d (from 2.28 mb/d in October). Gasoline demand of 785 kb/d accounts for roughly one third of total demand.


OECD demand showed signs of life in November as the y-o-y contraction slowed to a relatively modest 0.5%, to 46.5 mb/d, with more robust demand generally at the lighter end of the barrel (as well as in 'other products', which include crude oil used for power generation in Japan). OECD demand contracted by more than 1% in the previous 12-months. November's more subdued contraction came about on reports of colder weather conditions in many countries (notably Japan, Korea, the US and Canada) and early indications that some economies might be bottoming-out. In addition, demand in the year-ago reference period had been exceptionally low. A clear regional split is apparent, with demand expanding in Asia Oceania, staying flat in the Americas and contracting in Europe, much as has been the case since mid-2012.


Robust demand growth in both Canada and Mexico took the November average for the OECD Americas to near-flat y-o-y, according to preliminary data. The transport sector led the gains as gasoline demand edged up 0.8% y-o-y (to 10.3 mb/d) and jet/kerosene demand rose 1.6% to 1.7 mb/d. Modestly improved employment statistics supported the transportation figures, with unemployment in both Canada (7.2%) and the US (7.9%) near four-year lows in November.


OECD European demand averaged roughly 13.8 mb/d in November, according to preliminary statistics, 2.4% less than the year earlier. This is a dramatic deceleration from the previous 12-month average y-o-y decline of 4.2%, partly explained by exceptionally low demand a year earlier. November 2011 was almost the worst part of the European demand decline, triggered by very real concerns that the European single currency could collapse. Talk of upside should not, however, distract from the overwhelming trend which remains clearly a declining one. We project that European demand will fall by a further 1.7% in 2013, to 13.6 mb/d.

Asia Oceania

Asia Oceania continues to lead OECD demand growth. Preliminary statistics suggest that demand rose by 2.3% in November y-o-y, to 8.6 mb/d. All of the main product categories bar gasoline saw gains. An East Asian cold snap supported demand, compounding the impact of closed nuclear capacity in Japan and in contrast to unseasonably low demand in November 2011.


Preliminary estimates of total non-OECD demand averaged 45.2 mb/d in November, 3.9% up on the year earlier, a noted deceleration on October's pace of growth. Demand growth slowed markedly in India, Saudi Arabia and Brazil, in contrast to October when all three accelerated. Light products led November's upside, with naphtha and gasoline rising particularly steeply, predominantly in China. Growth of around 3.3% is expected for 2012 as a whole, to an average of around 43.7 mb/d. This is forecast to expand to around 45 mb/d in 2013, with total non-OECD demand forecast to briefly outpace OECD demand in 2Q13 before reversing on strong seasonal 2H13 OECD demand.

Taiwanese consumption saw an unseasonably large 60 kb/d hike in October, compared to a five-year average decline of 20 kb/d for that month. Strong naphtha demand accounted for the majority of the momentum, rising by 30 kb/d in October compared to five-year average decline rate of 10 kb/d.



  • Global supplies fell by 170 kb/d in December to 91.2 mb/d, with OPEC crude down by 265 kb/d.  Compared to 2011, December production stood 1.6 mb/d higher, with non-OPEC supply growth accounting for 60% of the increase.  For all of 2012, global supplies grew by 2.5 mb/d, the highest rate of growth since 2004, with OPEC crude accounting for 60% of the increase.
  • Non-OPEC production rebounded by 90 kb/d in December from the prior month to 54.2 mb/d with higher output from North America offsetting lower global biofuels output. Production is expected to increase by 590 kb/d in 1Q13 compared to 1Q12, roughly 160 kb/d higher than last month's assessment. For 2013, non-OPEC production is projected to rise by 980 kb/d to 54.3 mb/d, the highest growth rate since 2010 and 150 kb/d higher than the previous forecast.
  • OPEC crude oil production in December fell to its lowest level in a year, with reduced output from Saudi Arabia and Iraq partially offset by a recovery in Nigerian supplies. December production fell by 265 kb/d to 30.65 mb/d. On an annual basis, OPEC collectively increased crude output in 2012 to the highest level ever in the wake of continued global demand growth. OPEC NGLs also posted historic highs in 2012, up 425 kb/d to 6.2 mb/d.
  • The 'call on OPEC crude and stock change' for 2013 was raised by 100 kb/d this month, to 30 mb/d, following a 710 kb/d upward revision in demand for 4Q12, largely driven by China. The 4Q call was raised by 400 kb/d to 30.8 mb/d for the final three months of the year. OPEC's 'effective' spare capacity rose to 3.26 mb/d, in line with reduced OPEC supplies last month. The supply cushion is now at its highest level since October 2011.

All world oil supply figures for December 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 production in December fell to its lowest level in a year, with reduced output from Saudi Arabia and Iraq partially offset by a recovery in Nigerian supplies. December production fell by 265 kb/d to 30.65 mb/d. On an annual basis, however, OPEC collectively increased output in 2012 to the highest level ever in the wake of continued global demand growth and despite exceptional increases in North American supplies. OPEC NGLs also posted historic highs in 2012, up 425 kb/d to 6.2 mb/d. The group's revenues are estimated to have reached peak levels last year, at more than $1 trillion, in line with higher production and record Brent prices.

OPEC ministers, as expected, unanimously opted to rollover their 30 mb/d production target at the 12 December 2012 meeting in Vienna. Unable to agree a new Secretary General, however, the producer group extended the tenure of Abdalla Salem El-Badri for one year, effective 1 January 2013. The next meeting will take place in Vienna on 31 May 2013.

The 'call on OPEC crude and stock change' for 2012 and 2013 was raised by 100 kb/d this month, to 30.3 mb/d and 30 mb/d, respectively. A sharp upward revision in demand for 4Q12, largely driven by China, is behind a 400 kb/d increase on the 'call' to 30.8 mb/d for in the final three months of the year. OPEC's 'effective' spare capacity in December was estimated at 3.26 mb/d versus 2.49 mb/d in November, in line with reduced OPEC supplies last month. The increase represents the group's highest level of spare capacity since October 2011.

Preliminary data show OPEC output in 2012 averaged 31.36 mb/d, an increase of 1.48 mb/d, with the sharp rebound in Libyan supplies in the aftermath of the 2011 civil war accounting for two-thirds of the year-on-year increase. Libyan output recovered by 930 kb/d to an average 1.39 mb/d. That compares with 1.55 mb/d on average in 2009 and 2010.

OPEC's crude production stayed above the 31 mb/d mark for the first 10 months of the year before edging down in the final two months. OPEC Gulf producers Saudi Arabia, Kuwait, Iraq and the UAE combined increased production by 1.2 mb/d. Saudi supplies rose by around 530 kb/d to an average 9.86 mb/d. Iraqi production was up by 280 kb/d, to 2.95 mb/d, the highest annual average since the country's 1990 invasion of Kuwait but well below initial government projections for the year. By contrast, Iranian production tumbled 650 kb/d for the year, to 3 mb/d. All other OPEC members posted only marginal year-on-year changes (see table below).

After increasing production for most of last year, Saudi Arabia reduced supplies by just under 300 kb/d in December, to 9.36 mb/d. That is down 600 kb/d from October's lofty 9.95 mb/d, when crude exports surged to China. However, the downturn in production reflects a myriad of fundamental developments, not least of which is the country's sharply lower seasonal domestic demand. Saudi Arabia's domestic demand declined on a seasonal basis by around 400 kb/d from the third to the fourth quarter, when use of crude for burning at electricity and water desalination plants falls sharply. Crude burned at utility plants typically peaks in the May-September period before starting on a seasonal downturn. Latest data from JODI show Saudi crude burned over the May-September period averaged 700 kb/d before tumbling to 400 kb/d in October. Lower output in recent months also reflects a seasonal cutback in demand by refiners for the country's crude. Reduced output in December may also reflect lower-than-expected shipments to the US, where Aramco was planning to restart a new 325 kb/d crude unit at its joint-venture Motiva refinery in Port Arthur, Texas. Further technical problems have now delayed the planned start-up, however (see 'Refining').

Speculation that recent lower Saudi production levels equates to a desire for higher prices appears misplaced. Market speculation was rife that Saudi Arabia reduced supplies in a bid to set a new price target of $110/bbl. In response, the oil ministry categorically denied the rumours and confirmed seasonal, fundamental issues were at play. Saudi Oil Minister Ali Naimi reaffirmed last fall that the Kingdom "would like to see it [prices] lower, towards $100/bbl" versus Brent at $111-112/bbl. Saudi officials reported supplies to the market in December of 9.15 mb/d, about 200 kb/d below our monthly estimates based on tanker data and industry sources.

Iraqi crude oil production also posted a significant drop in December. A long-simmering political standoff between Baghdad and Erbil was behind reduced exports from the northern region while weather-related delays affected southern supplies, forcing operators to curtail production due to the lack of storage facilities at the ports. Output fell by 235 kb/d in December, to a six-month low of 2.97 mb/d. Full-year production rose to the highest level in more than three decades at 2.95 mb/d, an increase of 280 kb/d but well short of expectations.

Crude exports in December fell 235 kb/d, to 2.39 mb/d. Rough weather at the southern terminals disrupted Basrah shipments, with exports off 134 kb/d, to 2.06 mb/d. Full-year exports from the Basrah terminals rose by around 350 kb/d, to an average 2.06 mb/d, but well below expectations. The start-up of the two new 900 kb/d Single Point Moorings (SPMs) in the spring had led officials to forecast a much larger increase in southern exports for 2012 but as yet unresolved technical and infrastructure problems have undermined the operation of the SPMs.

Northern exports of Kirkuk crude via the Turkish Mediterranean port of Ceyhan tumbled as well, down 100 kb/d to 315 kb/d. An additional 10 kb/d of Kirkuk crude was trucked to Jordan. Oil flows from the Kurdish region, which are exported as part of the Kirkuk crude stream, fell to an estimated 50 kb/d in December compared with 150 kb/d in November as the quarrel escalated between the central government in Baghdad and the Kurdish Regional Government (KRG) in the North over payment and volume issues escalated.

The protracted dispute deteriorated further in early January when the KRG started selling crude via truck to Turkey. Initially a few thousand barrels per day were trucked, but operator Genel Energy says it plans to move as much as 20 kb/d by the end of January. In response, the central government in Baghdad threatened legal action against companies producing or buying the crude. The deterioration in relations between the two governments is likely to constrain northern exports further near term.

Iranian oil output in December was pegged at 2.70 mb/d, unchanged from the previous month. The sanctions-hit country saw 2012 production decline to an average 3 mb/d, the lowest level since 1990. Preliminary data show imports of Iranian crude in December declined by 250 kb/d, to 1.2 mb/d from an upwardly revised 1.45 mb/d in November. Japan and India reduced December imports by a combined 100 kb/d, to 160 kb/d and 150 kb/d, respectively. By contrast, South Korea and China both increased imports last month, to 250 kb/d and 450 kb/d, respectively. The US granted a second set of 180 day waivers to eight countries in December, including China. In early January, China reportedly signed a new term contract with Iran for 2013.

Kuwaiti production rose by 40 kb/d to 2.78 mb/d in December, bringing the full-year 2012 output to record levels. Average production in 2012 rose by 210 kb/d to 2.74 mb/d. Last year's increase follows a rise of 300 kb/d in 2011 stemming from debottlenecking at the Mina al-Ahmadi oil terminal, which enabled increased production from the giant Burgan oil field.

Production from the UAE edged up 30 kb/d to 2.68 mb/d while Qatari production was up a smaller 10 kb/d at 740 kb/d. The UAE's plans to increase production capacity from the current 2.8 mb/d to 3 mb/d have been delayed from 4Q12 to 1Q13 now.

Nigerian production rebounded in December following the end of the rainy season and severe flooding which sharply curbed output. Force majeures on Bonny, Forcados and Qua Iboe exports crudes were lifted in December. ENI also lifted its force majeure on Brass River crude 15 January, which had been in place since early November. A resurgence in sabotage and ensuing damage to infrastructure from illegal bunkering last year was behind the annual decline in Nigerian output, off 80 kb/d to an average 2.1 mb/d in 2012.

Crude oil output in Angola edged lower in December due to continued technical problems at some fields, down 25 kb/d to 1.73 mb/d. The decline was partially offset by the 6 December start-up of the BP-operated 150 kb/d PSVM fields. One field is reportedly in operation, averaging between 60-90 kb/d with the remaining fields expected to be connected to the platform in coming months.

Algerian crude oil production was unchanged at 1.18 mb/d for December and for full-year down a marginal 15 kb/d to 1.17 mb/d. The 16 January kidnapping and murder of foreign oil workers at the In Amenas gas field has cast a dark cloud over the outlook for the country's energy sector. Production at the field was shut-in, including an estimated 50 kb/d of condensate. The In Amenas gas project is a joint venture partnering Statoil, the operator, BP and state-run Sonatrach. Japan's JGC engineering firm is also on site. The Islamist militants said the attack was in retaliation for French involvement in Mali, where the government and French troops have launched an offensive against rebels that have taken over the northern region of the country.

Libyan production was off 50 kb/d, to 1.4 mb/d in December, due to striking workers. Exports have been curtailed by the strike action which forced the shut-in of production. The country's oil infrastructure has been targeted by protesters unhappy with the country's new government, elected last summer. Militia attacks also continue, with the latest targeting the Italian consul in Benghazi. Despite the precarious security situation, Libyan crude oil production recovered to an average 1.39 mb/d in 2012.

Venezuelan production in December rose by 35 kb/d to 2.5 mb/d. Oil production ebbed and flowed throughout the year in tandem with chronic operational problems at the country's four heavy crude oil upgraders, but overall full-year output was unchanged at an average 2.5 mb/d. President Hugo Chavez's worsening health condition has injected another level of instability into the outlook for the country's oil sector. Following his re-election to a new six-year term on 7 October 2012, Chavez's deteriorating health has caused a constitutional crisis. The president, still recuperating from surgery, could not be sworn in for another term on 10 January, but announced he would run the country from his hospital bed in Cuba. The country's constitution stipulates that new elections must be held within 30 days, but the current government has ruled Chavez is still in charge. The opposition is challenging this decision, which could potentially lead to an escalation in protests and civil unrest.


Non-OPEC supplies continue to show strong growth rates in 2012, and 2013 is expected to fare even better. Intense supply growth in North America is trumping systematic geopolitical and technical-related problems that continue to reduce supplies elsewhere, a trend that we see continuing through 2013. Based on the most recent estimates, non-OPEC supplies grew to 54.1 mb/d in 4Q12, around 870 kb/d higher than the prior year. Production was 1.2 mb/d higher in 4Q12 in North America but was offset by European output that was almost 500 kb/d lower than in 2011. The lingering impact of the dispute between Sudan and South Sudan dragged down non-OPEC supplies by a further 350 kb/d in 4Q12. North Sea production volumes rebounded by 135 kb/d in 4Q12 to 2.9 mb/d, but are still 14% below prior year levels.

Taking stock of 2012, non-OPEC production rose by 560 kb/d to a yearly average of 53.3 mb/d, around 400 kb/d less than predicted at end-2011. Although US production exceeded expectations by a wide margin, that was more than offset by reduced production from other regions, which fell short of forecast levels. Higher-than-expected growth from the US mitigated the lacklustre performance of the Middle East, Africa, and the North Sea. For 2013, non-OPEC output is forecast to increase by 1 mb/d to 54.3 mb/d, and we expect a reduction in unplanned outages this year. Some outages already have subsided. For example, in China, the Peng Lai field has returned to service and in the UK the Buzzard field is producing at capacity. Of course, 2013 will bring with it its share of unplanned and unpredictable outages elsewhere - the Brent pipeline system shut down in January is a case in point - but at this stage it is difficult to envision more acute outages in places like Syria, Yemen, and Colombia, and South Sudan. We also factor in a downward adjustment of roughly -500 kb/d to account for such unforeseen outages.

Upwards revisions outpaced downward revisions to non-OPEC supply this month and led to a 50 kb/d increase to the 2012 average supply growth estimate and a 150 kb/d upward adjustment for 2013. Higher-than-expected growth in the US in 2012 and 2013 was offset by lower-than-forecast Brazilian ethanol and Indian crude output in 4Q12 and an 80 kb/d reduction in Brazilian crude output in 2013.



US - December preliminary, Alaska actual, other states estimated: US crude oil production grew by almost 900 kb/d y-o-y in December to 6.9 mb/d. Based on this preliminary estimate, 2012 output grew by a total of 780 kb/d to 6.4 mb/d. In addition to revisions to October estimates from EIA's Petroleum Supply Monthly, 1Q-3Q12 historical production data were also adjusted upwards slightly by around 30 kb/d based on EIA's revisions. For the week ending 4 January, EIA data showed that production reached over 7 mb/d, a level not seen for 20 years. In 2013, US crude output is forecast to grow by around 600 kb/d y-o-y to around 7.1 mb/d, 170 kb/d higher than previously estimated. Despite the headlines reporting lower rig counts in some tight plays in the US, producers are gaining knowledge about their assets, resulting in efficiency gains and enabling them to drill more wells with fewer rigs. The Bakken (North Dakota) saw its first month-on-month decline of 10 kb/d to 670 kb/d in November 2012.  Nonetheless, production there is expected to grow by 140 kb/d in 2013 to 740 kb/d, compared to growth of 240 kb/d in 2012. In the Eagle Ford, in-fill drilling success, improved drilling efficiency, and new NGL processing capability are projected to result in higher-than-expected output in 2H13. Eagle Ford crude production is expected to grow by over 320 kb/d in 2013, to around 900 kb/d, compared to annual growth of 350 kb/d in 2012.

Canada - October preliminary: Canadian oil production continued its upward trajectory in October, rising 170 kb/d to 3.8 mb/d from September. Rising output from oil sands projects in 4Q12 was partly offset by the effect of continuing maintenance at offshore projects in Eastern Canada, but at 3.9 mb/d, production remained 200 kb/d higher than 4Q11 levels. Last month, Syncrude Canada Ltd trimmed its production forecast for December due to the impact of cold weather on equipment but company data revealed little impact. Next year, the crude oil outlook has been reduced by 20 kb/d due to delays at some upcoming oil sands projects, and most importantly a new delay at the largest project to come online this year, Imperial's 110-kb/d Kearl bitumen project. Imperial recently announced that the project would be delayed for several weeks (the original start date was December 2012). We now expect first oil in late January. In contrast to other surface mining projects with dedicated upgraders, the operator will market the diluted bitumen to the mid-continent where it will compete with other heavy oil streams.  Alternatively, the bitumen will be refined at Imperial and ExxonMobil's facilities in Ontario or in PADD II. Despite these adjustments to the 2013 outlook, output is still expected to increase by 330 kb/d to average 4.1 mb/d in 2013.

Mexico - December preliminary: Mexican production rebounded over the last two months to almost 3.0 mb/d in December from levels of around 2.9 mb/d in October. Mexican production has remained remarkably stable over the course of 2012, declining by only 20 kb/d to average 2.9 mb/d for the year. Ku-Maloob-Zaap (KMZ) production increased in each quarter this year to average 850 kb/d in 4Q12, and Cantarell's decline on an annual basis was maintained at -9%, in contrast to annual declines of over 30% in both 2008 and 2009. The latest monthly statistics also indicate that the Tsimin and Kuil fields (onshore in the south) have added about 25 kb/d since August to the country's output, which we have carried through the 2013 forecast. Because of these new field additions we have raised 2013 output by 40 kb/d to 2.8 mb/d, a 90 kb/d annual decline from 2012.

Up Against the Export Wall: Hurdles to US LTO Production Growth

Anybody with even a remote understanding of North American crude oil markets has become aware of the logistical hurdles facing future production growth, but the exact nature of those hurdles is less commonly understood. It is widely known that US light, tight oil (LTO) and Canadian oil sands -- which taken together account for the bulk of forecast North American production growth for 2013 and beyond - lack transport access to some growing markets which has kept their prices artificially depressed. A continued 'disconnect' between high-growth LTO and oil sands streams and international benchmarks could theoretically put further supply growth at risk, if the new barrels traded at a discount so deep as to make their production uneconomical. It is as if new production was running against a fast-approaching wall - a logistical wall or price wall - not unlike the so-called 'blending wall' facing ethanol output - in that case, the US gasoline market's limited ability to absorb incremental ethanol supply under current gasoline blending rules.

New pipeline and rail links are set to link rapidly increasing LTO and oil sands production with refining markets that had been geographically or economically out of reach beforehand. A first swath of new transport capacity opened up in mid-January with the start-up of a 300-kb/d expansion of the Seaway pipeline running from Cushing to the US Gulf, and there is more to follow over the course of 2013. Already, WTI prices have started to firm versus Brent. But the debottlenecking of transport capacity within North America and especially within the US may not in and of itself spell the end of LTO's market troubles. That is because of the North American refining market's ultimately limited appetite for incremental light, sweet oil supply. While new pipeline links, supplemented with increasingly efficient railroad links, will give producers short-term relief from depressed prices, at the end of the day US LTO production growth will need new export outlets. Under current legislation, however, US crude exports enjoy at best limited growth potential. In contrast with internal US pipeline capacity, which looks set to realign with production trends, export restrictions are becoming increasingly misaligned with the new marketplace reality. Given the twin constraints of finite refining capacity and legal limits on crude oil exports, pressure will be mounting to revisit the current regulatory regime and allow crude oil exports on a larger, less regulated scale.

Transport Constraints and Processing Capacity Raise Incentives to Export. Intra-US transport constraints and occasional shortages of processing capacity due to refiner turnarounds have put downward pressure on LTO prices. In some cases the resulting cut in producer netbacks has threatened the marginal barrel of crude production. Not only have transportation bottlenecks caused WTI at Cushing to trade at a widening discount to UK benchmark Brent, but price differentials for Canadian heavy crude, WTI at Midland, Texas and Bakken LTO prices at Clearbrook, Minnesota have chronically widened even further, often veering far below WTI Cushing prices.

New pipeline and rail capacity is set to open up in 2013 that will deepen the market reach of Midwestern supply and let incremental barrels move more freely to Gulf Coast refining hubs as well as to east and west coast refineries. First and foremost is the Seaway pipeline, which was reversed in 2012 with a capacity of 150 kb/d and just expanded to 400 kb/d in January.  The line is expected to reach full capacity of 800 kb/d by  1Q14.  All in all, more than 20 medium-sized or major pipelines are expected to come on stream this year.  Most of those will run from the Midwest to Texas. Several will run from West Texas south to coastal refineries in South Texas, and new capacity will also link Texas to Louisiana refineries. WTI discounts to Brent already have started narrowing on news of the Seaway pipeline expansion, while coastal grades have weakened.  However, new pipeline capacity, while a step in the right direction, will not bring LTO marketing problems to an end, as Gulf Coast capacity to absorb new light, sweet supply, even with blending, will not be limitless.

As shipping capacity to the Gulf Coast increases, however, light, tight oil barrels will compete for relatively limited refining capacity. Much of the Gulf Coast refining capacity is geared to process heavy, sour grades, which normally trade at a discount to light, sweet oil.  Sophisticated, deep-conversion Gulf Coast plants are designed to extract maximum yields of high-value light products from that discounted feedstock, and have limited appetite for premium lighter grades. In the mid-continent, Bakken producers are likely to find better netbacks by selling their crude oil to eastern Canada and the US East Coast, rather than compete for takeaway capacity to Cushing and the US Gulf Coast, which will already be filled to the brim with Eagle Ford and Permian crudes. These incentives are likely to be amplified any time takeaway capacity becomes constrained or if processing capacity in the mid-continent and US Gulf Coast is less than planned.

Existing Statute Limits Exports. While the need for export capacity is clear, US producers are hopelessly constrained in their capacity to export domestic crude.  In the past, export regulations facilitated the export of Alaskan crude oil to Canada and abroad.  Crude exports are governed by the Export Administration Act (EAA) of 1979, which allows the US President to prohibit or curtail the export of commodities, namely crude oil, determined to be in "short supply." The most comprehensive summary of the existing statute is found in the Export Administration Regulations (EAR), Section 7.[1] This statute is the result of a series of Congressional Acts, Executive Orders, and subsequent amendments. Under current regulations, exports of crude oil produced in the US require a license from the Bureau of Industry and Security (BIS), a branch of the US Department of Commerce. BIS will generally review and approve the application to export crude oil[2] as long as it is consistent with the national interest and purposes of the Energy Policy and Conservation Act of 1975. Criteria and stipulations are set forth in the Code of Federal Regulations (C.F.R.) Title 5, Part 754.2 and are also discussed in the EAR.  Such licenses are routinely granted for crude oil that falls within several categories, including:[3]

  • Exports from Alaska's Cook Inlet (unless via a federal right-of-way)
  • Exports to Canada for consumption or use therein, with the exception of Alaskan crude sent via the Trans-Alaskan Pipeline (where the policy is to approve applications for an average of no more than 50 kb/d for consumption or use in Canada)
  • Exports of Alaskan North Slope oil, unless there has been a national interest determination to the contrary
  • Exports of California heavy crude oil, up to 25 kb/d
  • Exports in connection with refining or exchange of oil in strategic reserves
  • Exports that are consistent with findings made by the President under an applicable statute
  • Alaskan North Slope crude does not require a license.  Domestically produced crude oil, transported via federal rights of way (granted under the Mineral Leasing Act of 1920[4]) requires a license but may be exported under certain conditions.  The exports must be licensed under the EAR; must not reduce the total quantity or quality of petroleum refined within, stored within, or legally committed to be transported to and sold within the US; must be in the national interest; and be in agreement with the EAA.  BIS must also determine if the export or exchange would otherwise lower refiner acquisition costs within 3 months time.[5]   Unless the export of crude is explicitly described in the regulations cited above, a person or entity may undertake transactions subject to the EAR without a license or other authorization. For example, crude and lease condensate produced on state lands and moved to port by means other than inter-state pipelines, would not be restricted. 

If BIS grants a crude export license, it is valid for one year from date of issue and for a specific dollar value, as opposed to a specific quantity of crude oil.[6] 

US Crude Exports to Canada on the Rise. Despite the relatively cumbersome nature of US crude export regulations, exports to Canada have been on the rise. Both Canada, and Mexico for that matter, benefit from free trade agreements with the US.  Crude exports to Canada averaged 50 kb/d in 2011 and 60 kb/d between January-and October 2012. Around 85% of these exports have come from PADD II, the location of North Dakota's prolific Williston Basin and Bakken play. Exports totalled around 70 kb/d in October 2012 based on the latest EIA data.  Exports of light, sweet Bakken crude flow via Enbridge Inc's Lakehead pipeline to the Sarnia, Ontario refining and petrochemical hub. The 300-kb/d Irving oil refiner at Saint John, New Brunswick, is taking railcars of Bakken crude to replace more-expensive seaborne supplies. Valero also recently noted that its 265 kb/d St. Romuald refinery in Quebec could run 90% light crude, and has reportedly received an export license from BIS to facilitate the export of Eagle Ford crude at a cost of around $1.50-2.00/bbl. On balance, the extent to which new crude and condensate volumes flow to Canada will depend first on oil sands' operators demand for diluent, which will clearly rise in the coming years, and on the competitiveness of these crudes at the refinery gate, net of transport costs, with their existing, largely Brent-priced import slate.

Plant Condensate and LPG Exports Provide an Outlet.  The export restrictions described above specifically include "lease condensate" in the definition of crude oil.  Lease condensate cannot be exported because it has not been processed. Pentanes Plus, on the other hand, which include natural gasoline or plant processed condensate, on the other hand, are not constrained by an export restriction. These hydrocarbons are mostly being sent to Canada to be used as a diluent for oil sands marketing and transport. Pentanes Plus exports have surged in the last two years, from 20-40 kb/d from 2008-2011 to over 100 kb/d over the past year.

These exports are occurring because of fast-rising production growth in Canadian oil sands, where shippers use pentanes plus to move heavy bitumen via pipelines.  Looking forward, there might be particular pressures to remove lease condensate from export restrictions, so as to let producers tap the fast growing Canadian market, where lease condensate could be processed in Canada.  In the absence of such exceptions, ethane and propane, derived from condensate, could be targeted for exports. US exports of LPG, mostly propane, have more than tripled since 2008 to 206 kb/d in October. So far Mexico and other Central and Latin American countries have been the main market, though US propane is also shipped to the Netherlands and elsewhere. In the future, however, ethane and propane could find growing markets in Asian and European petrochemical plants. The MTOMR, published in October 2012, projected that Asian ethylene demand will rise by almost 20% by 2017. Africa is also a growing market for LPG, used as a cooking fuel to replace traditional biomass, among other purposes.

Are Refiners Constrained in How Much They Can Process? Exports of refined products are not restricted in any way under US law, though recently there have been legislative efforts to extend crude export restrictions to products. In the last few years, the refining industry has in effect become a conduit for crude oil exports, allowing rising US crude production to be exported in product form. In just a few years, the US has transformed itself from the world's top product importer to its second largest product exporter, surpassed only by Russia. US product exports have averaged 3.1 mb/d from January to October 2012, compared with 2.9 in 2011 and just 1 mb/d in 2005. On a net basis, the numbers are even more impressive, showing that the US exported 900 kb/d of oil products so far this year, compared with net imports of 2.5 mb/d of refined products in 2005. The US refining industry has become a highly competitive export industry, benefitting from the twin strength of 'advantaged' crude - LTO and other feedstock trading at a deep discount to international benchmarks -- and some of the lowest natural gas prices on the planet. US refiners use natural gas as a refiner fuel and to produce hydrogen used in refinery processing. Refining utilization rates have streely risen recently. US refinery utilization rates were estimated at 89% in December, a level normally seen in the summer months.

Effective as it may have been as a way to leverage US crude production growth in international markets, the US refining industry has limited capacity to absorb incremental production of light, sweet oil.  The imminent restart of Motiva's new 325 kb/d crude unit at its Port Arthur refinery in Texas could lift US throughput, but the refinery is geared to heavy grades. Beyond the Motiva expansion, the US is set to add very little crude distillation capacity before 2018, limiting longer term growth in product exports. The Motiva expansion will also partly offset the closure of Sunoco's Marcus Hook refinery and a partial shutdown of Flint Hill's North Pole refinery in Alaska in 2012. Another 200 kb/d of distillation capacity is being added before 2018, through several smaller expansion and upgrading projects.  In all, US refining capacity is expanding by a net 285 kb/d

from 2012 to 2017.  With utilisation rates already trending near record highs, there seems to be little room for further gains in utilisation.  Also in Canada there is little spare capacity to process additional crude volumes. Current throughput rates are averaging around 1.7 mb/d, compared to nameplate capacity of some 1.9 mb/d. 

Objections to and opportunities for exports. Policymakers will have to balance growing producer incentives to export crude with existing law that governs US resources in "short supply" as set forth in the Export Administration Act. Producers may find a dwindling market for their crude in Gulf Coast refiners, who invested heavily in conversion capacity over the last 20 years, and whose appetite to undergo reconfiguration will be determined by their profitability. Running increasing amounts of blended LTO and heavier crudes would mean lower yields of middle distillates and reduced operating rates of some

sophisticated units that are designed to convert low-quality crude into high value products.[7] Much will inevitably depend on each refiner's configuration, feedstock prices (especially the relative prices of mid-continent crudes, coastal crudes like LLS, and Brent), and refined product demand outside the US. US refiners are already supplying around a quarter of Mexico's product demand (around 1.2 mb/d) and half of Brazil's imports (450 kb/d), and these volumes are poised to grow.  From an economic perspective, changing patterns of comparative advantage in crude production would suggest a shift in trade patterns, with winners and losers depending on the sector.

Opportunities for swaps could arise if certain providers of heavy crude into the US would be willing to exchange their heavy crude in kind for LTO supplies that they could supply elsewhere on the world market. BIS would have to determine that such a swap would result in "equal or better quality of crude oil" for the US. Light crude exchanged in kind for light product might also be conceivable as long as the quantity and quality of products is not less than the quantity and quality of commodities that would be derived from refining that same crude oil at home.[8]

Outlook.  Despite a slew of recent announcements that will facilitate the movement of more crude from the Bakken to the East and West coasts of the US, current export restrictions limit large-scale exports and are influencing North American crude benchmark prices. Yet US policymakers, concerned about energy security or possible domestic crude price impacts, have expressed their reluctance to relaxing export restrictions. Thus, large legislative changes seem unlikely in the short term, and we are likely to see instead work-arounds such as crude/product swaps and/or an expansion of condensate exports.  We may also see continued intra-US infrastructure built to allow LTO from the Eagle Ford, Bakken, and Permian plays to move to areas where light, sweet crude remains a staple of the refining feedstock slate, predominantly the East Coast. Brent-priced crudes are likely to continue to compete for East and West coast refining slates. And despite rising LTO supplies, US imports from foreign suppliers with refining and marketing assets in the US, like Saudi Arabia, Mexico and Venezuela, will likely to want to keep their market share. But this relationship opens opportunities for in kind swaps within current regulations and could increase pressure on BIS to facilitate such transactions on a large scale. 

There is more to this story than BIS's role. Shipping reform, including a potential overhaul of the Jones Act[9], the expansion of existing Gulf Coast-to-East coast pipelines, and a change in the refining slates are just a few ways in which rising LTO volumes could avoid or delay crashing into the export wall. This analysis is a work in progress, and we will continue to leverage our existing upstream, midstream, and downstream analytical capacity to understand how these developments in North America impact global oil markets. What seems already clear, though, is that policy and regulatory reform may loom as large in future North American production as geological resources and technology. Like everywhere else, production risk in North America is both below ground and above ground.

North Sea

North Sea production volumes rebounded sharply by 135 kb/d in 4Q12 to 2.9 mb/d, but are still 14% below prior year levels. Brent-Forties-Oseberg-Ekofisk (BFOE), whose output constitutes the stream underlying the North Sea Dated price, also rebounded sharply in the fourth quarter to average 730 kb/d after dipping to 700 kb/d in 3Q12. In 1Q13, output from BFOE is expected to average 810 kb/d, around 100 kb/d lower than the prior year. Loadings indicate that output is exceeding expectations, with cargoes from January being advanced to February.

UK — November preliminary: Production rebounded to 910 kb/d in November after falling to a record low of 620 kb/d in September 2012. For 2012 as a whole UK liquids output fell by almost 15% but a smaller decline of 10% is envisaged in 2013. As noted previously, a gas leak at the Taqa-operated North Cormorant platform led to the shutting in of the Tern and Eider platforms at the end of November. The December OMR reduced its forecast of output from these three fields by around 20 kb/d. On January 14, Taqa announced that an oil leak at an integrated facility, Cormorant Alpha, led to the closure of the 100 kb/d Brent pipeline system. The Brent system produced around 80 kb/d in October. Other fields shut in according to Taqa include Thistle, North Alwyn, and Murchison.  Taqa has indicated that they expect flows on the Brent pipeline system to resume shortly, though Cormorant Alpha and integrated fields are likely to remain shut in. We have assumed that output will remain lower through the beginning of February.

Production is forecast to fall by around 10% (100 kb/d) in 2013, taking into account planned maintenance and other continued outages. The Buzzard field is expected to undergo a week-long turnaround in the first week of March. Also, the Schiehallion field is expected to be shut for around three years beginning in 2013. This maintenance had not been explicitly included in prior forecasts and is the reason for a 30 kb/d downwards revision. In addition, the Elgin and Franklin fields remain offline until at least 2Q13. Looking ahead, the biggest field addition in 2013 will be the Huntington field, which is expected to start in 2Q13 and reach 20 kb/d in the second half of 2013.

Norway — December preliminary: Oil output continued to rebound in December to 1.9 mb/d from record lows of 1.5 mb/d reached in September. Supplies remained lower due to planned maintenance and technical problems at Morvin, Njord, Tordis, Visund, and Asgard. BP's Skarv field finally came online in January several months later than planned, but in line with prior expectations. We assume the field will reach levels of around 70 kb/d by 4Q13. Output from the Troll field exceeded expectations in October, reaching 140 kb/d. The Valhall and Ula fields remained offline at the end of 2012, an outage that also affected other small fields in the area. Valhall is scheduled to resume in early January, and Ula is already operating after a leak forced a shutdown.


Australia: Australian liquids production is estimated at 480 kb/d in 4Q12, around 60 kb/d higher on an annual basis and 40 kb/d higher than production during the prior quarter. Elevated production from the Pyrenees and Stybarrow fields, especially in October supported the increase. We estimate that Pyrenees production has reached close to the capacity of the FPSO, or around 90 kb/d. With production to be impacted by both the start of the cyclone season and a five-month-long maintenance at the 40-kb/d Vincent field, Australian oil production is expected to fall by around 150 kb/d, to 350 kb/d in 1Q13. Already in January, Cyclone Narelle caused BHP Billiton to shut in production at the Stybarrow and Pyrenees fields. Woodside and Apache also noted that FPSOs connected to Cossack, Enfield, and Van Gogh were disconnected for several days.

Recent government statistics from Australia's Bureau of Resources and Energy Economics (BREE)  show a 100 kb/d increase in crude and condensate output from July to October 2012 (the most recent month for which data are available), while production statistics from industry groups Australian Petroleum Production and Exploration Association (APPEA) and EnergyQuest show no such increase. In the past, the IEA has relied on BREE statistics, which it continues to use through 2Q12, and cross-checks them with industry data from APPEA and EnerQuest for statistical accuracy. For 3Q12, however, government and industry statistics diverged by more than 100 kb/d. For purposes of the balance in the Oil Market Report, we estimate that production averaged somewhere in between industry and government figures. In the upcoming months, we hope that APPEA, EnergyQuest, and BREE will be able to resolve the statistical discrepancy.


Former Soviet Union

Russia - November preliminary: In 2012Russian oil production averaged 130 kb/d (or 1.2%) higher than 2011, in line with end-2011 expectations. December's production fell by 60 kb/d from the prior month to 10.8 mb/d. We continue to forecast a slight decline (-70 kb/d) in production in 2013 to 10.7 mb/d. EOR at legacy assets or brownfields as well as rising natural gas condensate volumes are projected to contribute to production increases by some companies in 2013, as long as prices remain at current levels. The Vankor field is expected to reach roughly 470 kb/d by end-2013, which would be around 60 kb/d higher than current levels. Output expectations are raised slightly due to higher output at the TNK-BP's Uvat group of fields, which are planned to increase from 140 kb/d to 200 kb/d in the medium term. The company recently indicated it would bring on two new fields at the new Tyamkinsky hub of the group in 2013 at Yuzhno-Petjegovskoe and Radonezhskoe, helping to raise Uvat's output to 150 kb/d by 2015. Existing production comes from the Eastern Hub of Uvat.

FSU net exports increased 0.5 mb/d to 9.4 mb/d in November after refiners returned from maintenance and raised product shipments by a lofty 550 kb/d. Fuel oil and gasoil volumes were hiked by 300 kb/d and 200 kb/d, respectively. Meanwhile, 'other products' rose by 50 kb/d, likely after healthy domestic gasoline demand tempered exports. Conversely, the end of refinery maintenance also lifted Russian refinery throughputs, thus reducing Transneft crude shipments by 220 kb/d. However, total FSU crude exports only fell by 30 kb/d on the month after offsetting rises elsewhere, notably through the CPC pipeline (+150 kb/d m-o-m) and from Sakhalin Island (+40 kb/d m-o-m).

Kozmino exports rose to a new record of 400 kb/d (+90 kb/d m-o-m), boosted by the commissioning of the ESPO-2 pipeline to transport previousl- railed volumes to the port. Loading schedules indicate that volumes are set to remain at this level into 1Q2013. Looking into 2013 and beyond, it is anticipated that until a number of frontier Eastern Siberian fields are connected to the Transneft network, Western Siberian oil is likely to be diverted away from other outlets in order to fill the expanded ESPO line. Indeed, in November only 700 kb/d of crude was delivered to Black Sea outlets via the Transneft network, reportedly the lowest in 10 years and a significant 130 kb/d below a month earlier.

Elsewhere, a 130 kb/d fall at the new Ust Luga port lowered Baltic shipments by 170 kb/d. Druzhba deliveries inched down by 30 kb/d to 970 kb/d, a noteworthy 270 kb/d below a year earlier. Despite this and as anticipated in last month's report, Druzhba deliveries to the Czech Republic rebounded to a more normal 85 kb/d in November after refiners there were unable to secure cheaper supplies elsewhere.

Middle East

In Yemen, news reports indicated that the 110-kb/d Marib pipeline was sabotaged on 10 January after operating at a reported rate of 70 kb/d for about 10 days. Repairs reportedly only took two days. We have not changed our view on Yemen and assume no major improvement of the overall output situation in 2013, compared to 2012, with output staying at around 180 kb/d (including NGLs).  That said, the government reportedly reached an agreement with the tribal chiefs to stop such attacks in return for a cessation in air strikes, but there are doubts that the truce can hold.


Sudan and South Sudan: A presidential summit between the two leaders with the African Union during the first week of January led to a joint summit statement reaffirming some of the states' prior promises including the institution of a buffer zone between their disputed border. Negotiations continued two weeks later on the development of a "matrix" that will include a time frame for the implementation of all agreements. Successful implementation of the matrix is being linked to the resumption of oil exports. As this matrix is likely to take time to agree and then time to implement, we take a more pessimistic view than last month on the actual timing of the restart, and now assume that wellhead production could begin in April. On the positive side, Sudan's production volumes have been revised up slightly for 2012 and 2013 based on the reported start of the CNPC subsidiary operated 10-kb/d Hadida field (in Block 6) and the al-Najma field (in Block 17), which is expected to come online in January. Assuming an April production restart in South Sudan, output from Sudan and South Sudan is expected to average 200 kb/d in 2013, in contrast to only 110 kb/d in 2012.

Latin America

Brazil - November preliminary, October actual: Brazilian crude output has bounced back to 2.04 mb/d in November, on par with levels seen in 2Q12, after maintenance reduced output to 1.92 mb/d in September. The addition of the FPSO Cidade de Anchieta (with nameplate capacity of 100 kb/d) at the Baleia Azul field and first oil at Sapinhoá are also projected to lift output in 4Q12 and in 2013. Despite new field additions, we have revised downward our estimates for Brazilian crude production in 2013 for three reasons. First, announcements of planned maintenance at Roncador's P-53 platform in February and at the P-40 plaform at Marlim Sul in April will likely reduce output at the fields in 1H13. Second, we expect that Petrobras' efficiency program (called PROEF), while likely to sustain legacy output in the medium term, will cause short-term downtime while this work is underway. Finally, we anticipate a delay to the restart of production from the Frade field until at least August, and first oil from the Papa Terra field is now not expected until 1Q14. These developments are expected to reduce output levels in 2013 by 80 kb/d to 2.2 mb/d, which is still 120 kb/d higher than 2012 levels.


China - November preliminary: Oil output inched up by 20 kb/d to 4.3 mb/d in November from upwardly revised October figures. With Peng Lai 19-3 and other Bohai Bay reportedly back online, output in 4Q12 is seen 250 kb/d higher, on an annual basis, at 4.3 mb/d. Some reduction is expected in the first months of 2013 with ice disrupting output and logistics at four offshore fields. The icy conditions are expected to continue until early February according to Chinese meteorological sources. In the medium term, output at Peng Lai 19-3 and 25-6 is expected to increase further with the Chinese government's recent approval in January of operator CNOOC's second phase. According to media sources, the second phase for the Peng Lai fields consists of five well-head platforms, central processing facilities and an FPSO.

India - November preliminary: After an unexplained lull in reporting in October, the latest Indian production statistics showed no dramatic divergence from 2Q12 levels of around 890 kb/d in October and November 2012. While production jumped briefly in September, new well underperformance at Mumbai High offshore and higher water cuts at other facilities led to lower-than-expected production from ONGC in November. We remain optimistic that production will stay at 900 mb/d in 2013. Upside potential exists in Cairn's Rajasthan project that will offset declines elsewhere in India. The government just approved the second part of the project's field development plan that will increase total ouput to around 300 kb/d in the medium term. In the short term, the company forecast a 70 kb/d increase in output over the course of 2013 after a 40 kb/d increment (at the Bhagyam field) came online in 2012. This would bring the project's production rate to average 240 kb/d in 2013. However, as a result of the long delay for approval of the second phase, we conservatively expect these levels to not be seen until after 2013.

OECD Stocks


  • OECD commercial oil inventories drew by 18.7 mb to 2 693 mb in November led by a further drop of 11 mb in middle distillate stocks, extending earlier declines. Winter stocks of heating fuels look tight, especially in the OECD Americas region.
  • On a forward demand basis, total products cover fell by 0.5 days to 30 days in November. Final data show product stocks down 26.7 mb in October, almost 10 mb more than estimated in last month's Report.
  • Preliminary data point to a further 18.4 mb decline in OECD commercial oil inventories in December, driven by crude oil.

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

OECD commercial oil inventories fell by 18.8 mb to 2 693 mb in November, more than three times the average draw of the last five years for that month. Their surplus to the five-year average shrank to 4 mb, compared to October's downwardly revised excess of 17 mb.

As in previous months, inventory patterns varied greatly by region. Stocks in OECD Americas and OECD Asia Oceania remained above their five-year average, with surpluses of 51.9 mb and 8.5 mb, respectively. In contrast, the deficit in OECD Europe inventories widened by 6 mb, to 56.4 mb. On a product-by-product basis, crude oil inventories stood 36.4 mb above their five-year average, with the bulk of the overhang in OECD Americas. On the other hand, total products stocks showed a deficit of 38.1 mb to their five-year average that spanned all product categories bar 'other products'. Middle distillates led the drop with a 10.9 mb draw that widened their deficit to the five-year average by a steep 15 mb to 57 mb, well below last year. 'Other products' inventories declined by 7.5 mb. The deficit in total product inventories spanned all OECD regions.

On a forward demand basis, OECD total product inventories covered 30 days at end-November, down 0.5 days on the month. Final data show stocks drew by 26.7 mb in October, 9.9 mb more than estimated in last month's Report. Inventories were revised downwards by 12.5 mb for OECD Europe and by 6 mb for OECD Americas, but raised by 8.7 mb for OECD Asia Oceania. On a product-by-product basis, downwards adjustments of 13.9 mb for total products - led by a 7.2 mb downward revision in 'other oils' - more than offset an 11.3 mb upward adjustment in crude oil.

Preliminary data point to a further 18.4 mb decline in OECD commercial oil inventories in December. If confirmed, that draw would be weaker than the five-year average decline of 39.7 mb for that month, bringing the stock overhang to 25 mb versus seasonal levels. Crude oil drew by 24.6 mb, more than offsetting a 6.6 mb build in total products. Motor gasoline inventories led product gains with a steep 17.7 mb build, the bulk of which was centred in OECD Americas. In contrast, 'other products' drew by 16.2 mb following high US propane demand as prices remain at record seasonal lows. Middle distillates inventories built by a steeper-than-seasonal 8.1 mb, reversing three consecutive months of declines, as a 12.1 mb build in OECD Americas more than offset a 4 mb decline in Asia Oceania. Stocks in OECD Europe remained stable.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Industry oil inventories in OECD Americas fell by 8.3 mb in November, in line with seasonal trends. All categories except motor gasoline posted declines. Crude fell by a seasonal 4.4 mb as refineries in the US and Mexico ramped up runs while total products dropped by 2.3 mb, driven lower by falls in 'other products' (-6.9 mb) and middle distillates (-5.5 mb). The former dropped as consumers in the US, where propane is an important component of the heating fuel mix in the Midwest and South, reacted to record low seasonal prices that were roughly 40 cents per gallon equivalent below last year. The latter brought the regional draw in middle distillates to 13.1 mb since end-September in the wake of minimal summer restocking. On a forward demand basis, total products cover remained level with end-October at 28.6 days. However, middle distillates cover, which has been on a broad downward trajectory since end-2009, fell by 1 day to 27.5 days, its lowest level since April 2008.

Preliminary weekly data from the US EIA indicate a shallow 3.2 mb build in industry inventories in December. Crude oil stocks drew by a steep 11.1 mb after refinery runs surged by 360 kb/d over November, while imports fell steadily over the month. In contrast, product stocks built by 12.5 mb despite a 100 kb/d uptick in exports. Motor gasoline drove the increase, rising by a steep 17.8 mb amid persistently low demand that has once again slipped below last year's level. Middle distillates posted a robust build of 12.1 mb, reversing three consecutive monthly contractions. 'Other products' stocks dropped by a further 14.9 mb as healthy propane demand continued to the end of the year.

Crude holdings at Cushing, Oklahoma rose by over 4 mb in December to reach a new record level of 49.8 mb in the last week of the month. This surge has continued into early-January with latest weekly data suggesting that inventories recently exceeded 50 mb. Current builds at the hub have coincided with reduced demand for crude in the mid continent as a number of refineries there have been undergoing maintenance. However, the 'glut' of crude in the region is likely to dissipate over the coming months as maintenance at some of these refineries ends and as the early-January start up of the expanded Seaway pipeline begins to pump as much as 400 kb/d of crude to the Gulf Coast.

OECD Europe

OECD European commercial oil stocks built by 3.1 mb in November, significantly less than the 8.9 mb five-year average gain for the month. Crude oil stocks led the build with a 5.5 mb increase as rebounding North Sea crude production and healthy crude imports outpaced a 250 kb/d hike in refinery runs. Crude inventories stood at 311 mb in November, 4.2 mb above a year ago. Total product stocks inched lower by 0.4 mb as a 1.2 mb build in fuel oil failed to offset decreases elsewhere. Total product inventories appear tight on an absolute basis, standing at the bottom of the five-year range. However, due to weak demand, they look more comfortable when measured on a forward cover basis, sitting approximately 1 day above the seasonal average and only slightly lower than 12 months ago. Similarly, middle distillates inventories fell for a third consecutive month in November to a deficit of 20 mb versus the five-year average and 13 mb versus last year, but weak demand leaves them covering 35.1 days, only slightly lower than both the previous year and the seasonal average. In Germany, latest data suggest that the impact of high prices has tempered the refilling of consumer heating oil stocks, at end-November they remained level with end-October at 59 % of capacity, short of the seasonal average and below last year's peak of 61%.

Preliminary data from Euroilstock point to a steep counter-seasonal draw in EU-15 and Norway commercial inventories in December. Crude led the fall with a 11.1 mb decline as refinery runs continued to rise. Meanwhile, product stocks drew by a further 1.5 mb with all product categories contracting except middle distillates, which remained level with October. Data pertaining to refined products held in independent storage in Northwest Europe suggest that stocks rebounded in December with gasoline, fuel oil and gasoil posting gains while naphtha and jet kerosene fell.

OECD Asia Oceania

Industry inventories in OECD Asia Oceania fell by a sharp 13.5 mb in November, halving the region's surplus to the five-year average to 8.5 mb, from 17.3 mb in October. All oil categories contracted, notably middle distillates (-4.9 mb), crude oil (-3.1 mb) and motor gasoline (-2.3 mb). End-November regional product stocks covered 19.5 days of forward demand, a steep drop of 1.8 days compared to a month earlier after exports from the region reportedly remained buoyant.

The monthly decline was centred in Japan where stocks contracted by 10.7 mb, far steeper than the 0.6 mb five-year average fall. Crude dropped by a counter-seasonal 3.7 mb despite weak refinery runs which remained lower than at the end of summer, as crude imports fell by 250 kb/d. Japanese product inventories plummeted by 6.9 mb, with the draw spanning all categories. After seven consecutive monthly builds, middle distillates (gasoil and kerosene) stocks contracted by a steep 3.7 mb as cold weather increased kerosene demand by an approximate 200 kb/d m-o-m, outpacing refinery output. Korean stocks dropped by 2.8 mb, broadly in line with seasonal trends. Stocks for all categories except 'other products' inched lower.

Latest data from the Petroleum Association of Japan suggest that Japanese industry stocks contracted by a further 9 mb in December, half the five-year average draw of 18.2 mb for the month. A 4 mb decline in middle distillates led the decline on the back of continued cold weather. As in November, heating demand for kerosene outpaced refinery output. Crude oil dropped by 2.4 mb after refinery runs increased by 250 kb/d.

Recent Developments in Singapore and China Stocks

Chinese commercial oil inventories rose in November by an equivalent 3.1 mb (data are reported in terms of percentage stock change), to approximately 351 mb, according to China, Oil, Gas and Petrochemicals (China OGP). Crude stocks fell by 1% (2.2 mb) after refinery throughputs reportedly soared by 750 kb/d, outpacing imports. On the flip side, high refinery throughput lifted product inventories: gasoline stocks increased by 7% (3.8 mb) while kerosene and gasoil holdings rose by 3% (0.4 mb) and 2% (1.1 mb), respectively. All indications suggest that the stockpiling of crude for the government's strategic petroleum reserve abated in 4Q12. The implied crude stock change, calculated as the difference between reported refinery throughputs and crude oil supply (calculated as the sum net crude imports and domestic production), showed a deficit for the second consecutive month in November.

Data from International Enterprise indicate that commercial product stocks in Singapore fell by 2.6 mb in December but remained level with the five-year average and above last year's level. A 3.5 mb drop in residual fuel oil led the draw amid high exports to other countries in the region. Cold winter temperatures boosted power generation demand in parts of Asia while import demand from Chinese independent refiners rebounded. Light distillates (gasoline, reformate and naphtha) and middle distillates (gasoil and kerosene) inventories built by 0.6 mb and 0.4 mb, respectively.



  • Crude oil markets edged higher throughout December, with prices gathering strength from seasonally stronger winter demand while fears the US would go over the fiscal cliff tempered upward moves. Prices strengthened again after an 11th-hour agreement was reached to halt an across-the-board increase in taxes and spending cuts. By mid-January, prices were trading above December levels, with Brent at $110.75/bbl and WTI around $95.15/bbl.
  • Structural changes in energy trading markets look set to accelerate in 2013 as long-delayed rules governing global swaps markets come into effect. The new rules are intended to bring transparency to swap markets and reduce risks but regulatory uncertainties and inconsistencies within and across jurisdictions might in fact lead to less transparent and more risky global financial markets.
  • Spot product prices were relatively weaker than crude markets in December, with crack spreads in the US and Europe declining on rising supplies as refineries returned from maintenance. An exceptionally cold winter in Asia is helping to support gasoil, kerosene and fuel oil in the region.
  • Freight rates for Suezmax and Aframax tankers in the western hemisphere soared in December as brisk demand ahead of the year-end holiday tightened tonnage. However, momentum was not sustained and rates fell back after the Christmas holiday and into early January. In comparison, VLCCs for the main Mideast-Asia route weakened or remained static through December.

Market Overview

Crude oil markets edged higher throughout December, with prices gathering strength from seasonally stronger winter demand and a myriad of geopolitical issues while fears that the US government would be unable to avert the 'fiscal cliff' curbed upward price momentum. Pessimism over the outlook for the global economy and oil demand growth prospects as the year drew to a close also tempered upward moves. Diverging price trends for benchmark crudes continued in December. WTI prices rose by $1.50/bbl to average $88.25/bbl while Brent fell about $0.35/bbl month-on-month, to $109.20/bbl. By mid-January, prices were trading above December levels, with Brent at $110.75/bbl and WTI at around $95.15/bbl.

At the start of the New Year, crude oil prices rose to near three-month highs as part of a broader market rally after the US Congress reached a contentious deal to avert an across-the-board increase in taxes and spending cuts, which economists and investors feared would have derailed economic growth and thrown the country into a recession. The rally appeared overdone, however, with oil prices partially retracing their gains as new fears emerged that politicians would be unable to agree on the federal government's debt ceiling come a new February deadline. Nonetheless, the 11th-hour tax and spending agreement has reduced worries of a US recession, providing a floor under oil prices and financial markets.

Oil demand growth and the global economic recovery, however weak they may have been compared to earlier expectations, helped support oil prices last year, compounding the impact of supply disruptions and geopolitical risk. Brent futures averaged $111.68/bbl in 2012, a record level though just $0.75/bbl above year-ago levels, supported by persistent supply disruptions in the North Sea and elsewhere. The annual increase paled in comparison to the more than $30/bbl 2011 gain. By contrast, annual WTI futures were down by just under $1/bbl to $94.15/bbl in the wake of record growth in US domestic crude supply. The feast and famine of the two grades saw the price spread between Brent and WTI widen to $17.53/bbl in 2012 compared with $15.80/bbl a year earlier. In 2010 it was just $0.73/bbl.

Growing inventories in the US market pressured prices and served to amplify the disconnect between WTI and international markets. As a result, Brent cemented its role as the world's major benchmark crude, with futures contracts for Brent on the Intercontinental Exchange exceeding for the year as a whole WTI futures contracts traded on the NYMEX.

Diverging forward price structures also were a key feature of Brent and WTI futures contracts in 2012. Persistent disruptions in North Sea supply anchored prompt month strength in Brent futures, with the M1-M12 contract in backwardation throughout the year, except for a brief flirtation with contango in July. The Brent M1-M12 spread averaged about $5/bbl for full year 2012 versus $2.80/bbl in 2011. That compares with $5.95/bbl in December and $5.44/bbl in November.

Rising domestic inventories at the key Cushing, Oklahoma storage hub and pipeline constraints kept prompt month prices for WTI relatively depressed. Nonetheless, the WTI M1-M12 contract spread averaged -$1.84/bbl in 2012, a narrowing of around $0.80/bbl from -$2.65/bbl in 2011. Expectations that pipeline bottlenecks will ease following completion of the expansion of the Seaway pipeline running from the Midcontinent to the US Gulf this month prompted a narrowing of the WTI M1-M12 contract, to just $0.68/bbl on average in the first two weeks of January compared with an average of $2.70/bbl in December and $3.54/bbl in November.

Futures Markets

Activity Levels

Market activity measured by open interest on oil futures exchanges in December depicted a mixed trend. At the CME, combined open interest in WTI futures and options declined by 2.6%, to 2.17 million, while open interest in futures-only contracts dropped by more than 4.6%, to 1.48 million between 4 December 2012 and 8 January 2013. Over the same period, open interest at the London ICE fell by 1.4% to 0.49 million for WTI futures-only contracts and increased by 1.8% in futures and options, to 0.62 million contracts.

Meanwhile, open interest in ICE Brent futures contracts increased by 2.9% to 1.32 million while, ICE Brent futures and options contracts rose by 2.3% to 1.54 million. As a result, the ratio of Brent futures open interest on the London ICE to New York and London WTI oil positions increased by 4.4 percentage points to 66.9% over the referenced period. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by 6.5 percentage points to 89.2%, hitting a historical record.

Similar trends were observed in trading volumes. Overall trading activity in oil derivatives declined in December at the CME but increased in the ICE markets. Total trade volumes in CME WTI contracts fell 14.7% in December 2012 y-o-y and by 19.7% year-to-date, to 8.5 million contracts and 140.5 million contracts, respectively. In contrast, Brent monthly volume increased by 10.6% to 8.7 million contracts last month from 7.9 million in December 2011. Year to-date Brent volumes rose by 12% to 147.4 million, exceeding the volume change in CME WTI contracts by almost 7 million contracts. The continued decline in CME WTI contracts open interest and volume is partly related to regulatory uncertainties as well as erosion of customers' trust in the current design of customer segregated accounts in the wake of MF Global and PFG scandals.

Money managers increased their long positions in ICE and CME oil contracts in December, continuing their bullish wagers that started in late November. They increased their bullish bets on CME WTI contracts by 43.6% to 161 164 contracts as WTI prices rose from $88.50/bbl to $93.15/bbl, the highest settlement price since mid-September. The rise in price was triggered by expectations of growth in emerging markets and especially China, better-than-expected job growth in the US as well as the passage of an 11th hour deal by the US Congress that averted the so-called 'fiscal cliff'.

Money managers in London ICE Brent contracts followed a similar pattern and increased their bullish wagers by 34.1% to 147 701, the highest level since ICE started publishing its weekly commitments of traders report in June 2011. Producers accounted for 17.5% of the short positions and 16.5% of the long positions in CME WTI futures-only contracts in early-January, decreasing their net short positions by 52.7% to 14 652 contracts. Swap dealers, who accounted for 22.4% and 36.2% of the open interest on the long side and short side, respectively, increased their bets on falling prices by 22.9% to 203 734 contracts, continuing the trend seen in November. Producers' trading activity in the London ICE Brent contracts followed an opposite pattern to CME WTI contracts while swap dealers followed a similar pattern as CME WTI contracts. Producers in London ICE Brent contracts increased their net short positions from 112 431 to 169 866 contracts. In contrast, swap dealers increased their net long positions by 41% from 35 363 to 49 845 contracts.

Index investors' long exposure in commodities increased by $7.9 billion in November to $296.5 billion, after edging down $6.1 billion in October. The notional value of long exposures in both on- and off-WTI Light Sweet Crude Oil futures contracts also increased by $1.4 billion in November. The number of long futures equivalent contracts declined by 1000 to 537 000, equivalent to $48.3 billion in notional value.

Market Regulation

Most of the rules issued under the Dodd-Frank Act governing the swaps markets by the US CFTC and other regulatory agencies will go into effect in 2013. Some rules, such as the real-time reporting of swap transactions and registration of swap dealers already took effect on 31 December 2012. The CFTC announced that by New Year's Eve 65 entities had already submitted applications, became provisionally registered as swap dealers, and submitted real-time trading data to swap data depositories, fulfilling one of the main purposes of the Dodd-Frank Act.

In the meantime, during the month of December and early January 2013, the CFTC issued over 30 no-actions letters and other documents, related but not limited to extraterritoriality, business conduct and documentation requirements, and reporting of certain complex swaps. These no-action letters were intended to ease the transition to the new regulations. No-actions letters postponed the implementation of some of the new rules until no sooner than 10 April 2013 and as late as 1 September 2013.

Among the most important documents released by the CFTC is the one related to the cross-border application of the US swap rules. Those rules were heavily criticised by European and Asian regulators and other market participants for the unintended consequences of their cross-border application, including potential market disruption or fragmentation resulting in increased systemic risks and reduced market liquidity. Also of concern is the issue of non-US persons facing overlapping compliance requirements in the US and in their home country, where regulations can be mutually conflicting. The CFTC released its Final Cross Border Exemptive Order on 21 December 2012 and pushed back the compliance date for firm-level requirements of non-US swap dealers and major swap participants until 12 July 2013. Additionally, the Order also exempted foreign-owned US banks from including the swap activity of their parent company when determining registration requirements.

On 2 January 2013, the CFTC published an interim final rule extending the compliance date for business conduct and documentation requirements for swap dealers and major swap participants to 1 May 2013 for certain regulations, and to 1 July 2013 for others. Furthermore, the CFTC delayed the reporting of certain swap transactions to 30 April 2013 and onwards.

The CFTC was not the only regulatory agency that delayed the compliance date of some of the new rules enacted under Dodd-Frank Act. On 3 January 2012, the Office of the Comptroller of the Currency (OCC) released a guidance that effectively extended the compliance with the Swaps Pushout Rule, which prohibits banks from using federal assistance they receive to support certain swap activities, for up to two years for insured federal depository institutions that are (or may become) swap dealers. In order to use this extension, institutions have to submit their request for extension by 31 January 2013. The guidance, however, does not address the treatment of US branches or agencies of non-US registered swap dealers; therefore, they might not be eligible for the extension.

On 11 January 2013, the International Organisation of Securities Commissions (IOSCO) issued a consultation paper on financial benchmarks. The consultation paper solicited stakeholder' views on the following issues: (i) the appropriate level of regulatory oversight of the process of benchmarking; (ii) standards that should apply to methodologies for benchmark calculation; (iii) credible governance structures to address potential conflicts of interest in the benchmark setting process within the reporting financial institutions as well as in the oversight bodies; (iv) the appropriate level of transparency and openness in the benchmarking process; and finally (v) issues that market participants might confront when seeking to make the transition to new or different benchmarks. IOSCO requested responses by 11 February 2013.

Based on stakeholders' responses, IOSCO will formulate a framework of robust, globally consistent policy guidance and principles for financial benchmarks and related activities.  Recognising differences among benchmark setting practices in different asset classes, IOSCO principles will cover a wide range of benchmarks used in interbank borrowing markets, overnight lending and repo markets, swap markets, equity markets, credit markets, commodities markets, energy markets, and currency markets. The Consultation report heavily draws on IOSCO Principles for Oil Price Reporting Agencies (See OMR 12 December 2012, 'Extending Principles for Price Reporting Agencies to All Assessments'). Besides the principles mentioned for the oil reporting agencies, the Consultation Report called for an oversight committee to contribute to the technical aspects of the benchmark and governance arrangements as well as to review the appropriateness of the benchmark definition and methodology. However, the independence of such a committee cannot be guaranteed given the vested interests of its suggested members. The latter include market participants and other stakeholders who use these same benchmarks. If they try to use their power as a member of the oversight committee for their own benefit, not only the independence of oversight committee but also the independence of the price assessment process could become questionable.

The Changing Structure of Energy Trading Markets

Energy trading markets have been undergoing radical transformation lately. These transformations are set to accelerate in 2013 because of much anticipated implementation of new rules that will govern global swaps markets. These include measures such as position limits, mandatory clearing and margin requirements, capital requirements, pre- and post-trade transparency through position reporting requirements to trade repositories, as well as trading standardised swaps on designated contract organisations or swap execution facilities where multiple traders can place bids and offers, and real time reporting of cleared and uncleared swaps to the centralised swap data repositories. These changing dynamics present new challenges not only for financial speculators, who buy or sell any asset in the anticipation of a price change, but also for traditional energy companies that use previously unregulated financial derivative instruments to hedge or mitigate commercial risk.

The new rules are intended to bring transparency to the swaps markets and lower their risks. A closer look at the new rules suggests that lingering difficulties remain and that the process of regulatory swaps market

reform may still be undergoing teething pains. Regulatory uncertainties and inconsistencies within and across jurisdictions might in fact lead to less transparent and more risky global financial markets.

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

A closer look at the new rules also suggests some interesting implications. In seeking to prohibit excessive speculation and its possible effect on price volatility in futures markets, regulators introduced hard position limits on speculative activity. The main objective of the proponents of those hard position limits was to reduce market-share concentration in commodity markets, supposedly by ensuring that markets are made up of a broad group of participants with a diversity of views, thereby preventing distortion in market prices. The limit on the concentration of market share is also deemed necessary to reduce systemic risk. However, hard position limits have the potential of severely constraining trading activity, which would lead to increased, rather than reduced, volatility. Liquidity in futures markets, and especially in swaps markets, may be impaired. Producers and end users would have a smaller pool of counterparties to hedge their price risk with, which in turn increases the bid/ask spread, thereby creating more volatility. The position limit rule can also potentially constrain the size of trading entities. This will effectively lead to market dependence on small speculators, as institutional investors would be forced out of the market once they reach their respective position limit. This would lower liquidity and increase trading costs. Higher costs could, in turn, force some entities to establish smaller positions than their hedging needs.

A recent ruling by the District Court in the US against the so-called position limit rule will potentially force regulators to revisit some of their final rules. The court found that the US Commodity Futures Trading Commission (CFTC) overreached by imposing position limits without showing they were 'necessary to diminish, eliminate or prevent' excessive speculation. However, the CFTC announced that they will move forward with an appeal of the federal district court's decision vacating the position limits rule. Nevertheless, the court still did not rule on whether the agency must conduct a full cost-benefit analysis, which we expect market participants might use to further challenge the final rule.

In contrast to the position limit rule, the mandatory margin requirements rule may well lead to an increase in the concentration of market share of large speculators while raising price volatility and having no effect on price levels. A study released by the International Swaps and Derivatives Association (ISDA) 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 increases in margin cost will likely affect the end-users' ability to hedge price risks, especially during stressed market conditions when they need it most.

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

Higher capital requirements for swap dealers and major swap participants might as well increase the concentration ratio leaving only large speculators (investment banks) as viable liquidity providers in the commodity derivatives markets, which regulators try to limit in order to reduce systemic risk. Furthermore, the proposed Volcker rule prohibits proprietary trading while allowing transactions related to underwriting, market-making, risks mitigating hedging, trading in certain US government obligations, and trading on behalf of customers. As a response, most banking entities already closed their proprietary trading desks. Some argue that they are merely moving these activities to their market-making activities or that proprietary desks have morphed into independent hedge funds. A recent interview with one market participant suggests that registration requirements for hedge funds as commodity pools would likely force some of them to liquidate their positions.

As mentioned in the November 2012 OMR, in order to reduce their clients' exposure to compliance costs associated with the new rules imposed on swap transactions and to avoid dealing with the increased complexity facing swaps market participants (compared to futures market participants for example), the Intercontinental Exchange (ICE) has already converted all existing over-the-counter (OTC) cleared energy swaps and option products, including crude and refined oil, natural gas, electric power, and natural gas liquids, into economically-equivalent futures and option products on 15 October 2012, which corresponded to the compliance date for several new swaps rules. ICE further argued that already tested futures market regulations give market participants more certainty than the untested regulation in swaps markets. Furthermore, futures markets also offer clients the ability to margin their trades in one account rather than two separate accounts, one for futures and the other for swaps. Similarly, CME have listed all actively traded contracts on CME Clearport for execution on the CME Globex central limit order book as cross trades on the trading floor and as block trades. CME argued that since 15 October, customers have consistently traded approximately 80% as futures, compared to approximately 15% beforehand. If these futures-like products are successful, then the success of the swap execution facilities, where only standardised swaps will be traded, will be limited.

It is still too early to estimate the full impact of the new regulations on liquidity in the derivatives market and the cost associated with these rules. The implementation of some of the rules just started, and some of the rules, including rules on swap execution facilities, capital and margin rules, and the Volcker rule, still need to be finalised. However, we have already seen some real consequences for the swaps market, including the futurisation of swaps markets.

Spot Crude Oil Prices

Crude oil prices traded in a fairly narrow range for much of December, with a surplus of light, sweet crudes in US and European markets and waning demand for fuel-oil rich heavier grades weighing on Dubai crude. Atlantic basin benchmarks posted modest month-on-month increases while Dubai declined. Spot prices for WTI saw the largest increase, up $1.58/bbl to an average $88.18/bbl. A recovery in North Sea supplies in December weighed on spot prices for Dated Brent, up by a smaller $0.24/bbl to $109.40/bbl. Spot Dubai declined by just under $1/bbl, to$106.23/bbl on weaker refiner demand for Mideast crudes ahead of planned turnarounds and amid high crude stocks in Asia.

The ongoing structural shift in Atlantic basin markets became more pronounced this month following the start-up of additional pipeline capacity moving surplus crude from the landlocked Cushing, Oklahoma storage terminals to the US Gulf Coast refining centre. The Seaway pipeline expansion added a further 250 b/d to the line's capacity, however, this increment is just a trickle when compared with the total 1.2 mb/d planned pipeline capacity expected to come online this year. In addition, a further 600 kb/d of new rail capacity is expected to be brought online in 2013. Spot prices for WTI are forecast to gradually rise from depressed levels as the glut of crudes moves out of the Midcontinent. But with total US crude inventories well above the five-year average and stocks at Cushing hitting a new historic high of over 50 mb in early January, the price recovery promises to be a slow process.

The start-up of the Seaway pipeline has also supported the narrowing of the Brent-WTI price spread. WTI's discount to North Sea Dated Brent narrowed to around -$19/bbl in the first two weeks of January compared with $21.22/bbl in December and $22.56/bbl in November. Higher production of light, tight oil from the US Midcontinent and rising flows of Canadian crude also continue to back out other foreign grades, especially supplies of higher quality African crudes. As a result, light, sweet crudes that would typically move to the US headed instead to Europe. While crude stocks in Europe are running below the five-year average, exceptionally weak refining margins have limited imports into the region. An increase in Nigerian crudes on offer following a rebound in production as the rainy season ended depressed differentials to North Sea Dated crude prices.

In Europe, The price differential between Urals and Brent in the Mediterranean remained at weaker levels in December. Urals was trading at a $0.47/bbl discount to Brent on average in December compared with $0.50/bbl in November. Increased exports of Russian cargoes via Ust Luga are also pressuring the Urals-Dated Brent differential.

In Asia, reduced demand for fuel-oil rich crudes, ample stocks and upcoming refinery maintenance plans pressured prices for Mideast grades, with premiums above official prices for spot barrels disappearing and some grades trading at a discount. Rising volumes of Russian ESPO crude into Asia also pressured competing grades. Even the loss of heavier Syrian, Sudanese and Yemeni crudes failed to support markets. Both China and South Korea increased imports of Iranian crude in November and December. Underscoring the weakness, the spot Dubai-Brent differential deepened to -$3.18/bbl on average in December, falling to over -$5/bbl at end-year. That compares with just under -$2/bbl in November.

Spot Product Prices

Spot product prices were relatively weaker than crude markets in December, with crack spreads in the US and Europe declining. By contrast, an exceptionally cold winter in Northern Asia is helping to support gasoil, kerosene and fuel oil. The onset of colder weather in Atlantic basin markets in January, however, led to a strengthening in gasoil and low-sulphur fuel oil crack spreads. Gasoline markets in December were only marginally stronger in the US and Singapore and weakened in Europe. Gasoline cracks are expected to firm ahead of second-quarter seasonal refinery turnarounds.

Gasoil crack spreads in both Europe and the US were weaker in December due too relatively mild winter weather. Gasoil cracks for Dated Brent in Northwest Europe were down about $1.80/bbl, to $14.70/bbl, and by $1.55/bbl to $14.25/bbl for Urals in the Mediterranean. In the US, gasoline crack spreads in New York fell by $2.25/bbl but were still a robust $37/bbl.

So far this winter, crack spreads for heating fuels have posted the strongest gains in Asia due to exceptionally colder weather. Strong Japanese demand for kerosene boosted the differential to Dubai crude in Singapore by $0.50/bbl, to $18.55/bbl. Gasoil cracks are up a smaller $0.20/bbl to $18.75/bbl.

Depressed fuel oil markets were even weaker in December in Atlantic Basin markets, with higher inventories and weaker demand for bunker fuel adding further downward pressure. Crack spreads for Dated Brent in Northwest Europe were down by about -$2.10/bbl for both low- and high-sulphur fuel oil, to -$15.49/bbl and -$21.13/bbl respectively. In Asia, stronger utility demand for high-sulphur fuel saw crack spreads improve by $0.30/bbl in both Singapore and South Korea, to -$9.95/bbl and -$8/bbl, respectively.


Freight rates for Suezmax and Aframax tankers in the western hemisphere soared during December after brisk pre-holiday demand rapidly tightened tonnage. However, as has occurred so often over the past two years, momentum was not sustained and rates fell away post-holiday and into early January. The exception to this was the VLCC market where the firming reported in November was not prolonged into December with the benchmark Middle East Gulf - Asia route trending sideways at close to $12/mt throughout the month and into 2013. Rates for VLCCs on the Middle East Gulf - US Gulf weakened early month and then held steady at approximately $12/mt following reports of a delayed start-up at Saudi Aramco's Motiva joint venture refinery on the Gulf Coast, which tempered sailings from Saudi Arabia to the US.

The West Africa - US Atlantic Coast Suezmax rate surged to a peak of $18.80 on 19 December as charters struggled to fix cargoes before Christmas but following the holiday rates plunged back so that by early January they stood at $15.40/mt. In Northern Europe the pre-holiday rush combined with inclement cold weather in the Baltic to tighten Aframax markets. Predictably, those operating on routes out of Ust Luga or Primorsk rallied to a peak of $10/mt in mid-month but by early January had retreated to $8/mt. As a knock-on effect of events in the Baltic, the cross-UK Aframax market also received a boost as the notoriously stable rate rose to $6.60/mt by mid month, however, by early-January it had slipped to under $6/mt as fundamentals once again softened.

Clean tanker markets fared poorly compared to their crude brethren with no significant sustained firming reported on benchmark trades over the month. Following lower demand, the Middle East Gulf - Japan trade experienced the most significant drop as it plummeted from its lofty level of over $35/mt in early December to below $27/mt one month later, the Singapore - Japan trade was affected less as intra-Asian trade reportedly remained healthy and soaked up tonnage. The most significant upward rate movement took place on the UK - US Atlantic Coast trade in early January as an already depleted tonnage pool, following healthy West African and Mediterranean demand, dwindled after an upsurge in transatlantic enquiries. Consequently, rates soared to exceed $31/mt by early-January, a level not seen since December 2011.



  • Global refinery runs are estimated at around 75.9 mb/d for 4Q12, up 1.5 mb/d year-on-year, led by steep growth in Asia and the US.
  • China and Russia lifted non-OECD refinery crude runs for November to 39 mb/d, up 1 mb/d y-o-y. Chinese refinery runs surged past the 10 mb/d mark in November for the first time as new capacity came online and refiners boosted their activity in anticipation of the New Year holiday and changes in product taxes.
  • OECD refinery throughput rose by 550 kb/d in November on the month, to average 36.9 mb/d. Increases stemmed from OECD Americas and Europe while OECD Asia was stable. Strong refining activity in the US Gulf Coast offset lower crude runs on the East Coast, while recovery in Mexican activity pushed runs in the OECD Americas to 18.2 mb/d. In Europe, crude runs increased by 2% m-o-m, to 12.1 mb/d as refiners returned from maintenance. The 4Q12 OECD estimate has been adjusted upwards by 240 kb/d to 37.1 mb/d on the back of the strong increase in US runs.
  • Refining margins fell sharply in December in Europe and the US Gulf Coast. Weak demand, in part due to a mild winter and the progressive return from maintenance of European and Russian refineries, helped drive down European cracking margins by $2 - $3/bbl while margins for simple refineries fell into the red. In the US, December cracking and coking refining margins ended negative on weak gasoline cracks.
  • December Singapore refining margins remained stable, as high distillate demand in Asia lifted diesel prices on the back of colder-than-normal weather across the region and signs of a rebound in the Chinese economy.

Global Refinery Overview

Favourable refining margins, a gradual reduction in offline capacity and a cold snap in Asia and the FSU supported November crude runs, which are now estimated at 76 mb/d, a 730 kb/d increase y-o-y. Major growth in refining activity was concentrated in China, India and Russia. China refinery runs surprised in November with total crude runs breaking the 10 mb/d wall for the first time as new capacity came online and refiners boosted their activity ahead of the New Year holiday. Expectations of new taxes on refined products may have helped lift refinery runs. After record-high runs in October, India remained at 4.5 mb/d in November, a 300 kb/d increase y-o-y. In Russia, crude throughputs also reached a new record high of 5.6 mb/d in November, thanks to higher oil production, strong domestic demand and tax changes that are encouraging refining.

Preliminary data for December show steep increases in crude runs continued in all regions. In North America, refining activity remained strong as plant utilisation rates reached unusually high levels for that time of the year. In China, strong activity from independent refiners supplemented the earlier start-up of new state-owned capacity and seemed to ensure that total crude runs would remain above 10 mb/d. Elsewhere in Asia, colder-than-normal temperatures supported Japanese crude runs. European crude throughput is estimated to have extended earlier gains, albeit at a more subdued pace, as refiners faced declining margins.

On those premises, 4Q12 estimates for global refinery runs have been revised upwards by 580 kb/d for 4Q12, to 75.9 mb/d. For 1Q13, OECD crude runs are estimated at 36.9 mb/d, down 190 kb/d from the previous quarter on economically-driven reductions in activity in Europe and on scheduled maintenance in the US. Non-OECD 1Q13 crude runs are estimated at 38.9 mb/d, unchanged from last month's Report. Most of the y-o-y increase in non-OECD runs will come from the Middle East and mainly Saudi Arabia with the start-up of new units at the Jubail refinery.

Northwest European refining margins fell by about $3/bbl on the month in December. Weak demand, in part due to a mild winter, compounded the impact of the unwinding of maintenance at European and Russian plants to drive down complex refining margins to $2.5 - $2.7/bbl, while simple margins slipped into negative territory. A cold snap at the beginning of 2013 and low heating oil stocks provided cracking margins with some support. By mid-January, cracking margins had rebounded to about $2/bbl.

Mediterranean refining margins ended slightly higher on increased diesel demand as both Egypt and Algeria were reportedly seeking spot cargoes. After a slight decline in the first week of January, margins were returning to their December average amid rising prices for most products including fuel oil and weaker crude prices.

In the USGC, December cracking and coking refining margins (with the exception of Maya/Mars coking margins) ended negative and $2-$3/bbl lower compared with November. Ample supply from domestic refineries and an inflow of gasoline from Northwest Europe pushed both gasoline and diesel cracks further down. Margins recovered in the first week of 2013 on the back of increased exports to South America, however.

In the US Mid-Continent, WTI margins fell by $8/bbl in December. Mid-Continent refining margins might decrease from last year's very high levels following the startup in mid-January of the 250 kb/d expansion of the reversed Seaway pipeline. By further alleviating the oil transportation bottleneck at Cushing, the expansion may cause the WTI discount to coastal crude grades to narrow and thus put a dent into the advantage of the Cushing barrel crack spread.

By contrast, December Singapore complex refining margins remained stable, inching higher by 30-40 cents a barrel to $4.6/bbl on Dubai crude. Refiners benefitted from recovering Asian fuel oil cracks and strong diesel margins of over $20/bbl, supported by high distillate demand in Asia as China economy showed signs of rebound in the run up to the New Year holiday.

Fuel oil cracks improved slightly in December on the back of a cold snap across the region that lifted demand from utility companies, higher sales in the bunker market (albeit still lower than year earlier levels) and higher demand from independent Chinese refiners. A new Chinese tax scheme will increase feedstock cost for independent refiners in 2013 (see OMR 12 December 2012) and may have led so-called 'teapot' refineries to increase their operable utilisation rates before it took effect.

OECD Refinery Throughputs

OECD refinery crude runs rose by 550 kb/d in November, to average 36.9 mb/d. Increases stemmed from OECD Americas and Europe while OECD Asia Oceania was stable. Strong refining activity in the US Gulf Coast has offset lower crude runs on the East Coast following Hurricane Sandy and increased total US crude throughput by 170 kb/d (m-o-m), while a recovery in Mexican refining activity helped push up OECD America runs by 330 kb/d to 18.2 mb/d. In Europe, crude runs in November increased by 2% m-o-m to 12.1 mb/d, as refiners progressively returned from maintenance.

Preliminary data for December show steep increases in refinery throughputs in all regions. In North America, refining activity remained strong as refiners increased plant utilisation rates to unseasonably high levels. In OECD Asia, colder-than-normal temperatures in December and January lifted Japanese crude runs by 440 kbd/d, while in Europe, crude runs appeared to have continued to ramp up, albeit at a much slower rate.

Based on these elements, the 4Q12 forecast has been increased by 240 kb/d from our last report to 37.1 mb/d. For 1Q13, crude runs are unchanged at 36.9 mb/d.

OECD North American crude runs averaged 18.2 mb/d in November, unchanged from last year despite the closure of Hess's Hovensa refinery in early 2012. For 4Q12, crude runs are estimated at 18.2 mb/d, an increase of 1% y-o-y as refiners maintained very high utilisation rates to meet steady export demand from Central and South America. Refining activity is expected to slow down in 1Q13, however, as refiners enter a maintenance cycle.

Preliminary weekly data show US runs higher in December (+360 kb/d m-o-m) at 15.4 mb/d corresponding to a 90% utilisation rate of operable capacity. All PADDs show increases in crude runs, thanks to high light, tight oil production and exports to Central and South America. Part of the increase also reflects East Coast refiners coming back on line after disruptions caused by Hurricane Sandy.

The Seaway pipeline running from Cushing, Oklahoma to the Gulf Coast completed a 400 kb/d capacity expansion in January. This will help alleviate the glut of oil in the Cushing storage hub while increasing availability of attractive domestic and Canadian crude oil to US Gulf Coast refineries.

Overall, 2012 crude runs for the US are estimated at 15 mb/d, up 1.4% y-o-y. January refinery runs are forecast lower at 15.1 mb/d as many refiners have now entered maintenance.

The new 325 kb/d crude unit at Motiva's Port Arthur was shut down for the third time in early January after a new leak developed at an associated unit. Since early December, Motiva Enterprises has been trying to return the unit to production after more than six months of repairs following a chemical leak.

BP has pushed back again the start-up date of a revamped crude unit at its Whiting refinery. The restart is now scheduled for mid-April 2013, which could further delay the completion of its largest and most complex refining project. The modernisation project, completion of which is still planned for the second half of 2013, aims to increase the share of heavy crude, mainly from Canada, in the plant's feedstock slate. Delays at Whiting are particularly bearish for Canadian crude oil prices, which are now trading at a discount of more than $40/bbl to WTI.

Tesoro has announced this month that it will close its 94 kb/d refinery in Hawaii and convert it to an import, storage and distribution terminal.

In Mexico, refining activity in November was recovering from last month's technical issues in its Minatiltán and Madero refineries. Crude runs increased 120 kb/d m-o-m, to 1.2 mb/d, but should drop in 1Q13 as maintenance is planned at Salamanca and Cadereyta refineries.

European refinery crude runs in December increased for the second consecutive month by 150 kb/d, on a monthly basis, reaching 12.3 mb/d. Netherlands crude throughput posted the largest increase (280 kb/d) with the end of turnaround maintenance at Total's Vlissingen, BP's Rotterdam, Shell's Pernis and KPC's Europort refineries.

Crude runs averaged 12.1 mb/d in 2012, almost unchanged from last year. Weak demand, in part due to a mild winter and the progressive return from maintenance of European and Russian refineries, has driven down European refining margins by $3/bbl in NWE and $2/bbl in the Mediterranean. In response to poor refining economics in Europe, regional refiners have resorted to counter-seasonal run cuts. France's Lavera, the Netherlands' Pernis, Perm's refineries in Sweden and ExxonMobil's Fawley in the UK were all reported in the press as operating at reduced rates. Unless the refining margin recovers, it is anticipated that more refineries will cut operations. Our estimate for 1Q13 crude runs is 11.7 mb/d, down by 190 kb/d on a yearly basis.

In France, the Gonfreville refinery has now returned from a long period of maintenance. The refinery was shut down before the end of July to complete a major upgrade on the hydrocracker to boost its diesel production by 3.8 million barrels per year while reducing gasoline production by 7.5 million barrels. Meanwhile, units at Petroplus's Petit Courrone refinery (160 kb/d) started shutting down in mid-December, as the processing agreement with Shell expired and was not renewed.

In OECD Asia Oceania, weekly data from the Petroleum Association of Japan, show Japanese crude intake increasing in December by 440 kb/d at 3.5 mb/d, compared to November, in line with our last estimate. Refiners have been increasing their activity, as temperatures have held mostly colder-than-normal this month and temperatures for January were forecast below the 30-year average. As offline capacity remains high, with Cosmo delaying the restart of operations at its 220 kb/d Chiba refinery, most refiners resorted to importing kerosene amid growing fears that they would not be able to meet strong domestic demand. Average crude throughput for 2012 is estimated at 3.2 mb/d, close to the record low of 2011.

In South Korea, crude refining runs in November remained high at 2.6 mb/d, driven by strong exports. Oil products emerged in 2012 as the country's highest export earner. The election of President Pak Geun-Hye, who is due to take office by end-February, may affect refiners' export revenue, as she promised during her campaign to tackle inflation by letting the Won appreciate which will directly impact refiners since they export more than half of their production. She also pledged to promote greater competition in the energy sector and to increase the role of the antitrust watchdog. The country's four refiners, KS Innovation, GS Caltex, S-Oil and Hyundai Oilbank, which control more than 97% of the market, are regularly fined by the antitrust watchdog for price colluding and anti-competitive practices.

In January, the Nuclear Safety & Security Commission, which ordered the shutdowns in late November of two nuclear reactors, authorised them to come back online. Crude runs for 4Q12 remained unchanged at 2.6 mb/d. With maintenance planned at all four refineries by March, however, crude throughput is estimated to progressively decline in 1Q13 by 3% to 2.5 mb/d.

Non-OECD Refinery Throughputs

Non-OECD refinery crude runs have been revised upwards by 350 kb/d for 4Q12 to 38.8 mb/d on higher-than-expected runs in China and 'Other Asia' and slightly lower-than-expected runs in Africa, Latin America and the Middle East. Many unplanned refinery outages and extended maintenance plans have been weighing on crude runs for the last two months in those regions. Refineries in Asia, however, have been running at record highs, boosting our 4Q12 estimate for the Non-OECD region by 1.3 mb/d y-o-y amid rebounding demand and following the start-up of new refining capacity. Non-OECD runs are now estimated at 38.9 mb/d for 1Q13.

China processed record amounts of crude oil in November, reaching a new high of 10.2 mb/d as refineries returned from autumn maintenance and new capacity - both grassroot plants and expansions at existing facilities - came online. The 750 kb/d monthly increase boosts the 4Q12 average by 820 kb/d to 9.9 mb/d, a 9% increase y-o-y. The November surge in crude throughput pushed refiners to draw crude from storage and boosted crude oil imports, mainly from Saudi Arabia. A large part of this increase is attributed to the independent sector (the so-called 'teapot' refineries), which have been increasing their run rates in December to 50%, compared with an estimated 44% in November.

Company plans for January indicate runs should stay at elevated levels ahead of the 'Spring Festival' in February 2013 marking the Chinese New Year, particularly as turnaround maintenance plans are not scheduled before March and April.

However, uncertainty remains regarding the reaction of the independent refiners to a new tax on their feedstocks, which takes effect in 2013 and may force some of them to shut production for economic reasons while some independents like ChemChina could be granted a licence to import directly crude oil, others may find a modicum of flexibility from an expected rise in domestic offshore crude supply (Shengli crude).

'Other Asia' throughput estimates for 4Q12 and 1Q13 were revised upwards by around 175 kb/d to 9.6 mb/d, on higher runs mainly in Indonesia, Pakistan, Thailand and Taiwan.

Indian refinery runs increased marginally to 4.5 mb/d in November, reaching a new historical record. December crude runs are estimated to have decreased slightly, as Reliance Industries shut at the end of December a crude distillation unit after a fire at its Jamnagar refinery. Overall, we estimate total Indian 2012 runs at 4.3 mb/d, a 6% annual increase. Refinery runs for 1Q13 should retreat from their current highs as maintenance is scheduled at the Jamnagar and Mumbai refineries, removing more than 400 kb/d of capacity.

Pakistan's crude runs held higher in December and should ramp up progressively in 2013 with the commissioning of the Byco refinery (120 kb/d), the largest refinery in the country. This new plant will boost Pakistan's refining capacity by more than 45%, to 411 kb/d. The new refinery is a relocation of Chevron's Gulf Refinery at Milford Haven, UK, which closed in 1997 before being purchased by Petroplus in 1998 and subsequently sold to Byco Oil Pakistan in 2006. It took almost two years to move the refinery to Pakistan and another three years to reassemble it and re-calibrate it to fit the Pakistani environment. The Byco refinery will be the first one in the country to have an isomerization unit for the production of high-quality gasoline.

In Thailand, refinery activity remains high with crude runs reported at 1 mb/d in November, an 8% monthly increase. Nearly half of this increase is attributed to the progressive return to normal operation at the Bangchak Petroleum refinery. Since last summer, the refinery has been running at half capacity after a fire damaged a crude distillation unit. The bulk of the increase comes from IRPC refinery, which returns from October maintenance. Our crude runs estimate for 2012 is 980 kb/d, a 4% increase on a yearly basis and 1Q13 crude throughput should reach 1.0 mb/d with the return to full capacity of the Bangchak refinery.

Meanwhile in Taiwan, refinery runs recovered after CPC started up a new 80 kb/d residue fluid catalytic cracker (RFCC) at its Talin plant (300 kb/d) in early November. About one third of the refinery has been shut since September waiting for the start-up of the new units. Although 4Q12 refinery throughput is in line with 2011 on an annual basis, the estimate for 1Q13 surges to 990 kb/d, a 16% increase y-o-y.

Total FSU crude runs in November are estimated at 6.9 mb/d, an increase of 470 kb/d y-o-y on higher Russian crude runs. Crude oil processing at Russian refineries remained close to November's record high at 5.6 mb/d. On a yearly basis, refinery runs increased in November by 9%. A favourable price environment boosted the profitability of refining operations, a reduction in offline capacity and adverse weather conditions supported domestic demand and contributed to the increase in crude runs. In early January, operators were considering importing more gasoline from Europe in exchange for heavy oil products to avoid any domestic shortfall. Russia introduced at the beginning of 2013 Euro-3 specifications and delays in upgrading some refineries may explain on-spec fuel shortages.

Kazakhstan boosted crude runs in November, to 300 kb/d, as the Shymkent refinery returned from maintenance. On a yearly basis, processing in the country is up by 16%. The country has embarked on an ambitious plan to modernise its three refineries (Atyrau, Pavlodar and Shymkent) and build a fourth refinery at Bulaeva in northern Kazakhstan. Work is already underway at Atyrau refinery, where a deep conversion complex is being implemented with a view to increasing Euro 5 products production. At the same time, a front-end engineering (FEED) contract was awarded for the Pavlodar and Shymkent refineries and completion announced for 2015 and 2016 respectively. It is anticipated that all these modernisation projects will increase the country's refinery throughput to 390 kb/d.

Overall, FSU 4Q12 crude runs should increase by 200 kb/d (y-o-y) to reach 6.7 mb/d, but activity should slow down in the first month of 2013, as refinery maintenance operations are scheduled in Kazakhstan and Russia.

In Latin America, refining activity remains high in Brazil, with November refinery runs close to 2.0 mb/d.

Refinery activity is boosted by gasoline consumption, which soared in 2012 with rising car sales, helped by a sales tax break and pump prices well below international levels. Although the majority of cars in Brazil run on a mixture of gasoline and ethanol, high ethanol prices and gasoline price controls have pushed up the consumption of gasoline. Considering the financial difficulties facing Petrobras, which is losing money importing fuels at high international prices to sell at lower prices in the domestic market, the Brazilian government could increase domestic fuel prices in 2013. According to a local newspaper, government could announce an increase in gasoline and diesel prices as soon as next week. Gasoline prices would increase by 7% while diesel prices would go up by 4-5%. Refineries activity was also boosted by increased fuel oil demand for the power sector which rose by 45% y-o-y as Brazil's northeast suffers its worst drought in decades, threatening hydropower electricity supplies.

Refining throughputs in Venezuela continue to be highly impacted by outages at the Amuay refinery (645 kb/d) after a fire and an explosion in late August cut refinery production by half. To date, the Amuay refinery is still not operating at its full capacity, requiring the country to import products, a situation that is likely to prevail in 1Q13. Our forecast for 2012 set Venezuela refinery crude runs at 900 kb/d, a major setback of 9% y-o-y mainly on account of problems and operational failures in all the country's refineries.

In Trinidad and Tobago, Petrotin is struggling to complete the revamping and gasoline optimisation project at the Point-a-Pierre refinery (168 kb/d). In addition to technical issues, the company faces labour problems as employees walked off their jobs in September. Since then, the refinery has been running at historically low levels with November crude runs in steep decline at 39 kb/d, down 71% on a yearly basis.

We estimate Latin America refinery throughput for 1Q13 to remain low at 4.5 mb/d on continued problems in Venezuela and maintenance plans announced in Columbia's two main refineries (Barrancabermeja and Unibon) and in Ecuador, where PetroEcuador has announced that it will cut throughputs at its 110 kb/d Esmeraldas refinery.

Middle East refinery throughputs for November were revised down by 220 kb/d to 5.7 mb/d. According to latest JODI data, Saudi Arabian refinery runs were 1.7 mb/d in October, a 7% drop on a y-o-y basis. By the end of December, the Petro Rabigh refinery (400 kb/d) was forced to shut its entire operations for around 20 days due to a cut in power and steam, which caused some small fires. Although the first of the two 200 kb/d distillation units at the Jubail refinery is expected to be running by early 2013, heavy maintenance at the Yanbu refinery will keep refinery utilisation rates at moderate levels. Our forecast for 4Q12 and 1Q13 is 1.7 mb/d as refinery throughputs should not increase before the end of the next quarter.

Kuwait refineries are still operating at very high rates with a throughput of 926 kb/d in October  a 29.0% growth on a yearly basis according to JODI data. The country has ambitious plans for the future as it is still going ahead with the Al-Zour refinery project, the Middle East's largest oil refinery (615 kbp/d) and a 'Clean Fuels Project' (CFP) at its Mina Abdullah and Mina Al-Ahmadi refineries to increase conversion and products quality. KNPC declared this month in the press that the government will probably announce the winner of the management and consultancy (PMC) contract for the Al-Zour project next month while the PMC contract for the CFP project was already awarded before the end of December.

Overall, total refinery runs in the Middle East region for December are revised down by 110 kb/d at 5.7 mb/d, on reduced runs in Saudi Arabia. Our forecast for 2012 remains unchanged at 5.7 mb/d. Refinery runs in 1Q13 should show a net increase of 6% on a yearly basis at 5.8 mb/d as new projects come on line.

African refinery throughputs, for November, are largely unchanged from our last report at 2.0 mb/d. In Algeria, Sonatrach is still in the process of upgrading two crude distillation units at Skikda, the country's largest refinery (300 kbd). The refinery has been under heavy maintenance since July 2012 and was originally scheduled to restart in September 2012 but units were shut again following a fire and an explosion. To offset the shutdown of its largest refinery, the country will continue to import gasoline to cover its domestic needs.

In Libya, the Ras Lanuf refinery is reported to be operating at reduced capacity but a port strike at the oil terminal could affect operations of the refinery in coming months.

In Ghana, the Tema Oil Refinery (45 kb/d) was shut down by the end of November due to a mechanical failure and a lack of crude oil for processing, while in Nigeria, the Port Harcourt and Kaduna refineries were on maintenance.

The Societe Ivoirienne de Raffinage (SIR), Ivory Coast has announced that it has suspended its exports of gasoline, gasoil and jet fuel to neighbouring countries following delays in receiving Nigerian crude. Delays at oil export terminals in Nigeria have considerably increased over the last months following the severe flooding and a surge in pipeline bombings.

Accordingly, we now estimate, total refinery runs in the region for December at 1.8 mb/d, on reduced runs in Algeria, Libya and Nigeria. African crude runs for 4Q12 are revised down by 100 kb/d from last month at 2.0 mb/d. 1Q13 forecast has also been slightly revised down to 2.0 mb/d as we assume the Skikda refinery to be operational by mid-February, with gradual ramp-up towards full rates by March 2013.