Oil Market Report: 13 February 2013

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Highlights

  • Crude oil futures prices breached nine-month highs in early February as improved economic signals from China and the US, robust financial market activity and colder temperatures in the Northern Hemisphere buoyed market sentiment. Brent futures last traded at $118.75/bbl and WTI at $97.35/bbl.
  • Despite signs of improvement in China and the US, weak macroeconomic conditions are forecast to keep global oil demand growth capped at around 840 kb/d in 2013, to 90.7 mb/d. The growth projection is 90 kb/d less than estimated last month, as the IMF trimmed their GDP forecast to 3.5%, from 3.6% previously.
  • Global supplies fell by 300 kb/d in January, to 90.8 mb/d. Non-OPEC production slipped by 190 kb/d from the prior month, to 54.2 mb/d but is expected to increase by 750 kb/d in 1Q13 y-o-y. For 2013, non-OPEC supply is projected to rise by 1 mb/d to 54.4 mb/d.
  • OPEC crude supply hit 12-month lows in January, off by 100 kb/d m-o-m to 30.34 mb/d despite slightly higher output in Saudi Arabia and Kuwait. OPEC NGL supply was cut by 100 kb/d for 1Q13, partly due to the effect of a terrorist attack in Algeria. The 'call on OPEC crude and stock change' for 1Q13 was cut by 100 kb/d, to 29.7 mb/d.
  • OECD commercial stocks edged down by 22 mb in December to 2 688 mb, less than the average draw for that month. Crude and 'other products' led the decline while gasoline and middle-distillate stocks increased. Total products now cover 30.4 days, 0.4 day higher than at end-November.
  • The estimate of global refinery crude runs has been cut to 75.1 mb/d for 1Q13 but remains up by 515 kb/d on 4Q12. Plant maintenance slashed US runs in January, but Asian runs hit new highs ahead of Chinese maintenance. Strong Atlantic Basin gasoline cracks, resilient gasoil cracks and narrowing fuel oil discounts lifted January margins.

Of oil prices and spare capacity

The current run-up in oil prices, which saw Brent pass $118/bbl in early February, defies the widely accepted assumption that oil prices and OPEC spare capacity are inversely correlated. That assumption had worked well during the 2008 rally, when oil prices soared to record highs and "wafer thin" capacity became the cliché du jour. Excluding capacity in Venezuela and Nigeria that was effectively off limits to the market, so-called "effective" spare capacity had dipped below 1.5 mb/d, much of it too heavy and sour to run through refineries economically. During the financial crisis that ensued, demand plummeted, allowing capacity to rebuild. By the time effective capacity bounced back to over 3 mb/d, Brent had dipped below $60/bbl. It then dropped even lower.




OPEC spare capacity has been building lately, thanks both to years of robust Saudi upstream investment and the effect of soaring production of light, tight oil and oil sands in North America, but one would never guess it by looking at a Brent price chart. Total OPEC capacity at latest count had grown back to around 4.5 mb/d and counting. But Brent prices have also been on the rise, amid improved economic signals in the US and China. A revival of investor appetite for stocks and commodities, and record open interest in ICE Brent futures, are also driving bullish sentiment.

What then accounts for the apparent disconnect between the oil benchmark and OPEC spare capacity? First, definitions of "available" spare capacity have expanded as fast as the American oil patch. Excluding hard-to-tap capacity in Iraq, Venezuela, Nigeria, Libya and Iran, capacity doesn't look quite as high. Now a new wave of political unrest in Africa is clouding the outlook in a growing number of producers. Following the recent attack on an Algerian gas facility, companies have begun to reassess their security arrangements in the region. For the first time last month, a firm long active in Nigeria reportedly pulled personnel from that country on security concerns. Second, some of the latest gains in OPEC capacity simply reflect production cuts. So recent gains in spare capacity may not be as comforting in reality as they otherwise would appear.

Brent prices can also be misleading. Other crude grades have been trading at a widening discount to the North Sea benchmark. The WTI discount to Brent is getting deeper again, following the troubled start-up of new pipeline capacity out of the US Midwest. But so is the discount of other grades such as Western Canadian Select to WTI itself. Even Oman and Dubai, key benchmarks in Asia, where demand for crude has been rising faster than anywhere else, have seen their discount to Brent widen since November.

There are many reasons for the unprecedented price disparity between various crude oil grades and, more broadly, for the apparent "disconnect" between benchmark prices and spare capacity. But it is clear that there is more to prices than just supply and demand balances. The market is undergoing dramatic changes in the regional distribution of both supply and demand growth, even as part of the oil exporting world is caught up in a social and political shift of potentially far-reaching consequences. It is hard, under the circumstances, to overstate the challenges involved in bringing supply to market, which often result in unprecedented price pressures. Improving the quality of oil statistics and forecasts amid this maelstrom of change is not the least of those challenges.

Demand

Summary

  • The projection of global oil demand for 2013 was adjusted marginally lower, to 90.7 mb/d, following downward revisions in the IMF forecast of economic activity. In its latest World Economic Outlook, the IMF trimmed its forecast of global GDP growth to 3.5% for 2013, from 3.6% previously. The lower economic assumption cut 85 kb/d out of our global demand estimate for 2013. The euro area and Latin America account for the bulk of the revisions (see 'Macroeconomic Assumptions for 2013 Downgraded').
  • Revised 4Q12 data took 210 kb/d off the global 4Q12 demand estimate, to 91.0 mb/d. Notable November changes included the Hurricane-hit US and Saudi Arabia, with 260 kb/d and 250 kb/d respectively subtracted. Preliminary estimates of December conflicted with the otherwise downward 4Q12 trend, with prominent additions for Japan (up by 265 kb/d) and China (+185 kb/d).
  • Global demand growth is forecast at 840 kb/d for 2013, 90 kb/d less than estimated in last month's Report. Mutually offsetting revisions have only marginally raised the assessment of demand for full year 2012 since last month's Report. Adjustments to the economic outlook for 2013 are thus the main factor behind the cut in the forecast of demand growth for the year, which is broadly in line with the reduction in the projection of 2013 absolute demand.


  • In this Report we are revising our methodology for estimating Chinese implied demand, in a bid to better account for changes in product inventories. The apparent demand calculation is now based on refinery output, plus net product imports, minus product inventory builds (or plus inventory draws) and adjustments. Utilising this methodology smoothes out abnormal swings in apparent demand. As a result, the estimate of 4Q12 demand has been slightly reduced, reflecting an estimated product build of 135 kb/d, estimates for 2Q12 and 3Q12 have been revised upwards due to de-stocking.

Global Overview

Predictions of a weaker global economic recovery in 2013 - 3.5% as opposed to the 3.6% expansion previously assumed - and marginal downward revisions to the estimate of 2012 demand together trimmed the forecast for global oil demand growth by 90 kb/d, to 840 kb/d (or 0.9%) in 2013. The weaker growth prediction results in a 2013 average consumption forecast of 90.7 mb/d, 85 kb/d less in absolute terms than last month. The 2012 estimate has also been very slightly increased (by 5 kb/d) to 89.8 mb/d. The main changes in the forecast since last month's Report include (a) slightly weaker global macroeconomic expectations; (b) adjustments to the estimate of Chinese apparent demand due to methodological changes; (c) a sharply reduced estimate of US demand for November; and (d) a weather-related drop in Saudi Arabian consumption since November.

The latest global demand estimate for 4Q12 comes out at 91 mb/d, equivalent to year-on-year growth of 1.5 mb/d (or 1.6%). This is 210 kb/d less than forecast in last month's Report. The most notable 4Q12 downwards revisions centred on the US (150 kb/d lower) and Saudi Arabia (-125 kb/d). Underpinning these adjustments were lower-than-expected November estimates, with the biggest revisions being the US (-260 kb/d), Saudi Arabia (-250 kb/d), China (-140 kb/d) and Egypt (-95 kb/d). Those revisions more than offset upward adjustments to demand for Thailand (+75 kb/d), Argentina (+70 kb/d), South Africa (+50 kb/d) and India (+50 kb/d). Preliminary December data partly offset November's reductions, with large upward revisions for Japan (+265 kb/d) and China (+185 kb/d), but smaller downward adjustments for Spain (-70 kb/d), Mexico (-55 kb/d) and Korea (-50 kb/d).

Macroeconomic Assumptions for 2013 Downgraded

There has been some degree of dissonance lately between, on the one hand, market perception of an improvement in recent economic indicators and oil demand prospects for 2013, and, on the other hand, reduced expectations of economic growth from major economic institutional forecasters such as the International Monetary Fund (IMF). In its most recent World Economic Outlook Update (January 2013), the IMF downgraded the pace of forecast global economic growth to 3.5% for 2013, from 3.6% in its previous report in October. The euro area and Latin America took the brunt of the IMF curtailments, with the growth forecast in each of these regions reduced by roughly three-tenths of a percentage point. This weaker economic outlook trims 85 kb/d from the global demand forecast for 2013, and, combined with small revisions to the 2012 demand estimate, cuts projected oil demand growth for the year by 90 kb/d, to 840 kb/d. Although the recent data flow from many oil consumers has shown signs of a potential improvement in economic conditions in recent months, as can be gleaned from the 930 kb/d upwards adjustment applied to the 4Q12 global demand estimate since November's OMR, some of those revisions were offset by recent downward adjustments for other past quarters.

In its latest World Economic Outlook, the IMF questions the permanency and sustainability of an improvement in economic performance that became apparent towards the second half of 2012. The global economy rose by 2.9% on a quarter-on-quarter basis in 3Q12, building on 2.5% growth in the previous quarter. But the IMF believes those signs of stronger recovery in 3Q12 to have been "largely due to temporary factors, including increased inventory accumulation (mainly in the US)". Indeed, US GDP swung back into a decline of 0.1% q-o-q in 4Q12 (reversing a 3.1% gain in 3Q12), while that of the UK fell by 0.3% (following growth of 0.9% in 3Q12) and the German economy contracted by 0.5% (after expanding by 0.2% in 3Q12). The overall 3Q12 expansion also hid the significant weakening in Europe, a factor that could end up depressing growth elsewhere through spill-over effects. Similarly, some signs of recovery in global oil demand growth in recent months may be attributable to one-off factors, rather than to a solid uptrend in underlying economic conditions. Thus, the extent to which one can extrapolate from a steep increase in Chinese apparent demand towards the end of 2012 is unclear. While higher Chinese refinery runs at that time may have responded to an actual increase in end-user demand, they may also have led to significant product inventory builds, potentially setting the stage for a slowdown or for an increase in product exports later on.

The reduction in the IMF economic outlook for Europe seems particularly ominous, not only because of the large three-tenth of a percentage point reduction applied to the 2013 growth estimate but also because of the sheer size of the region's economic footprint - taken in aggregate, OECD Europe is the world's largest economy on an absolute basis. Economic activity in the euro area is forecast to decline by 0.2% in 2013, a notable curtailment on the previously assumed 0.1% expansion. German and Italian downgrades led the decline, with respective changes of 0.6% (previously 0.9%) and -1.0% (versus -0.7%) forecast for 2013. The European weakness reflects "delays in the transmission of lower sovereign spreads … (and) still-high uncertainty about the ultimate resolution of the crisis despite recent progress." The outlook for non-euro

area members, such as the UK, has also been reduced, as the confidence across the continent continues to erode. Reduced European economic momentum in 2013 accordingly raised the predicted decline rate of European oil demand in 2013, to -260 kb/d (or -1.9%) from -235 kb/d in last month's Report.

Non-OECD economies, as a whole, are expected to continue to expand, with economic growth forecast to approach 6% in 2013, little changed from the previous outlook. These figures, however, hide many revisions at the country level, including downward adjustments to the forecasts for Brazil (3.5%, from 4.0%), Russia (3.7%, from 3.8%) and India (5.9%, versus 6.0%), while the projection of Chinese economic growth is unchanged at 8.2%. The US came out of the revised outlook relatively unscathed, with the 2013 estimate reduced by just one-tenth of a percentage point, to 2%. US50 oil consumption is predicted to remain flat in 2013, at 18.7 mb/d, a modest 5 kb/d reduction on the slightly lower GDP forecast.

In our forecast, we have slightly adjusted the effect of the revisions in the IMF economic outlook to account for relatively robust oil demand growth in several countries in 4Q12, including China, Brazil and Russia, and some recent signs of improving underlying economic conditions in those countries - a sentiment supported by major forward-looking indicators such as the Purchasing Managers' Indices (PMI).

Top-10 Consumers

After oil consumers endured a particularly testing year in 2012, with falls or very shallow growth seen, November data saw a conflicting trend emerge. Stronger growth becoming apparent for China, Brazil, Korea and Canada, while weaker demand trajectories were seen across the remainder of the Top-10 Consumers. Notable November contractions being seen in the US and Saudi Arabia, as both suffered from weather-related additional downturns.



US

Upward adjustments to the estimate of 4Q12 US demand made in last month's Report have been reversed, reflecting revised November data for the US50 that now show a 455 kb/d contraction over the year earlier (or 2.4% lower), to 18.6 mb/d. Last month's Report was based on an earlier assessment from the US Energy Information Administration's Short-Term Energy Outlook (STEO). The January STEO had estimated US demand for November at 18.9 mb/d (equivalent to a decline rate of 1.2%). In hindsight, that assessment overshot by 260 kb/d. The initial assessment made in the OMR in November - right after Hurricane Sandy - ended up being closer to the mark.

Particularly sharp November contractions were apparent in gasoil/diesel and residual fuel oil, demand for which fell by 205 kb/d (or -5%) and 130 kb/d (-31.2%), respectively, on the year earlier. The trend in oil demand echoed that in manufacturing sentiment in November, as reported by the Institute for Supply Management (ISM). Indeed, overall US economic activity contracted by 0.1% in 4Q12 (over 3Q12), its first dip since 2Q09 and a far cry from the consensus estimate of 1% growth.



Preliminary estimates of December US50 demand highlight a 140 kb/d (or 0.7%) contraction over the year earlier, with notable weaknesses apparent in residual fuel oil (125 kb/d less than the year earlier) and gasoline (-100 kb/d), outweighing the modest gains seen in jet/kerosene and gasoil. For 2012 as whole, US50 consumption is expected to average 18.7 mb/d, a drop of 300 kb/d (-1.6%) on the year. The relative performance should then improve in 2013, although still not growing, as consumption averages out at around 18.7 mb/d (unchanged on 2012), supported by a trend-rate expansion of around 2% for the US economy.

For January, the US Energy Department's Weekly Petroleum Status Report suggests that total products supplied increased by 1.2% on the year. Those weekly estimates, which remain subject to revision, show surprisingly large y-o-y gains in transport fuel deliveries including gasoline (+4.7%) and jet/kerosene (+2.3%), a trend that seems supported by reports of strengthening consumer sentiment (as shown in the Thomson Reuters/University of Michigan's consumer sentiment index rising to 73.8 in January, from 72.9 in December). That was partly offset by contractions in industrial fuels such as distillates (-3.6%) and residual fuel oil (-36.2%).

China

The forecast of Chinese demand growth in 2013 remains roughly on par with that made in last month's Report, when it was revised higher - to 4% from 3.2%. Both recent Chinese oil statistics and economic indicators remain supportive of this more bullish forecast. The overall Chinese apparent demand estimate for 2013 remains roughly unchanged from last month, at 10 mb/d. Consumption averaged 9.6 mb/d in 2012, up by 370 kb/d (or 4.0%), a modest 5 kb/d up on last month's Report. The quarterly breakdown of demand in 2012 has changed reflecting modifications to our assessment methodology (see 'Improving the IEA's Estimates of Chinese Oil Demand').







Chinese apparent oil demand scaled new heights in November and December, as growth tested double-digit percentage point territory, having struggled at an average of 2.9% earlier in the year. Although a number of factors - such as a change in excise duties and the commissioning of new refinery capacity - may have distorted the estimate, it probably did not hurt that several key macroeconomic variables showed clear signs of improvement. GDP growth, for example, rose in 4Q12, to 7.9%, having slowed to 7.4% in 3Q12. Total Chinese exports also improved, with y-o-y growth accelerating from November's relatively flat 2.9% expansion to a robust 25% gain in January. Forward looking indicators, such as HSBC's Manufacturing PMI - where any reading above 50 highlights a bias towards 'expanding' sentiment - underpinned the trend, with a third consecutive 'expansionary' month seen in January, at 51.9 and a fifth successive rise.

Improving the IEA's Estimates of Chinese Oil Demand

Few oil market issues are more critical yet more elusive than getting Chinese demand right. The challenge is not just accurately to forecast Chinese economic expansion - the main underpinning of demand growth. Even assessing current and past Chinese oil consumption is more art than science. That is because the Chinese authorities do not publish demand statistics. Rather, Chinese demand in oil statistics is inferred from other data. Whereas estimates of demand in OECD countries and many other economies stem from surveys and reports of actual product deliveries, in the case of China "demand" is really a balancing item - in effect a function of estimated product supply.

In the past, the IEA, like many others, calculated Chinese "apparent demand" - a proxy for consumption - as the sum of Chinese refinery output and net product imports. While that method had the advantage of straightforwardness, its obvious shortcoming was its failure to account for changes in product inventories. In the absence of reliable Chinese stock data, that was inevitable - and, as long as inventory swings could be thought to be relatively small, manageable. That is no longer the case now that China accounts for roughly 10% of the world's oil consumption and 40% of global growth (five-year average, excluding 2008 and 2009 when global demand declined) - and especially since a step change in Chinese refining capacity has dramatically increased the potential for product swings. Since 2006, China also does provide some data on oil product inventories, though these statistics are open to question.

As long as China was short refining capacity and had to rely in part on product imports to meet domestic demand, it had limited scope forting up capital in product inventories. That has now changed. In the last few months, Chinese companies have aggressively expanded their refining capacity, turning China into a budding product exporter - a trend that is likely to continue. Chinese refining capacity increased by 300 kb/d in 4Q12 and is forecast to expand by another 300 kb/d in 2013. Data for the last few months show that as Chinese refining capacity ran ahead of domestic demand growth, there was more room for product stock builds.

Indeed, Chinese statistics for 4Q12 reveal an unusual build in product stocks, including a 5 mb gasoline build in December and a 1 mb build in gasoil. The ramp up in Chinese apparent demand in late 2012 is thus partly misleading, inasmuch as it lumps together real consumption and a build up in stocks, which has the potential to come undone later on - thus causing an equally misleading downswing in apparent demand.

To better reflect Chinese demand in this environment of expanding Chinese refining capacity, the IEA has adjusted its methodology and now captures reported stock changes in its demand assessments. This new

method smoothes out abnormal swings in apparent demand: thus, a slowdown in apparent demand in the first 10 months of 2012 no longer seems as pronounced and as divorced from Chinese economic activity as it did according to the IEA's previous methodology. Likewise, the 4Q12 ramp-up in demand seems less startling when adjusted for inventory builds.

While the new methodology is an improvement on the old one under current circumstances, it is far from perfect, if only because of the uncertainty surrounding the various statistical inputs that go into the calculation. For example, it has become unclear whether the refinery output numbers that the National Bureau of Statistics (NBS) reports include only state-owned refineries or have begun to capture some of the independent refineries commonly referred to as "teapots", which are estimated to account for as much as one-third of Chinese nominal refinery capacity. Product imports reported by China, Oil, Gas and Petrochemicals (China OGP, published by China's Xinhua news agency), which apparently capture seaborne trade numbers, may miss the rising volume of over-land movements.

The method used for assessing stock changes is less than transparent. Product stocks (also reported in China OGP) only include inventories of gasoline, gasoil and jet/kerosene, missing any changes in LPG, naphtha or fuel oil. Uncertainty also surrounds what they are actually capturing. Until end-2009, it was understood that the reported OGP stock levels included oil held by the four national oil companies. Since then, OGP has only published a percentage stock change figure by product rather than absolute levels, after data CNPC and Sinopec became unavailable, and it further raises the question of whether current percentage stocks change data include only CNOOC and Sinochem or still include Sinopec and CNPC. However, there is a general consensus that the stock changes do not include stock changes at independent refiners.

When percentage stock change data are extrapolated using the last known absolute stock change number and then converted into days of forward demand, the data suggest a steady decline from mid-2008 onwards. Considering the large amount of refining capacity commissioned over this period and the need for minimum operating storage levels at these sites, such a steady decline seems unlikely.

Anecdotal efforts have been made to capture movements in other product stocks, but uncertainty is attached to these methods; until more quantifiable statistics are published, we are reluctant to include them within our numbers. For example, conflicting information, from market agents, of 'other product' (here referring to all products bar gasoline, gasoil and jet/kerosene) 2Q12 stock movements highlight the subjective nature of these reports. Improved data quality would accordingly raise the value of Chinese demand estimates, but for now the worth of this new methodology remains limited by the data that is passed through it.

Getting demand right is always a work in progress. Oil statistics, like science according to Werner Heisenberg, proceeds from error to error, not from truth to truth. China itself is making great strides in improving its data collection and reporting system. This adjustment in our methodology is far from being our final word on Chinese demand. We will continue to look for ways to improve and refine our assessments. For now, the impact of the adjusted methodology is to redistribute 2012 consumption data across the year, increasing 2Q12 and 3Q12 demand at the expense of 1Q12 and 4Q12, with next-to-no change seen in the overall Chinese demand assessment for 2012. But its main benefits may come in 2013 and beyond, as Chinese refining capacity continues to grow.

Strong January oil imports figures for China are supportive of our robust early-2013 prediction, with a 1Q13 gain of 6.1% y-o-y forecast, easing back as the year progresses. Net crude imports were up by nearly 8% y-o-y, to 5.9 mb/d; net product imports were 36% higher. Looking much further ahead, growth will likely ease as the government makes strenuous efforts to minimize oil imports following the release of its latest Five-Year Energy Plan, targeting a 61% import ceiling by 2015 (currently 59%).

Japan

Preliminary estimates for December depicted 5.4 mb/d of oil products being consumed, roughly unchanged on the year earlier but 265 kb/d more than our month earlier estimate. A cold spell meant large quantities of fuel oil/crude oil were still required in a power sector shorn of most of its nuclear capacity. The forecast for 2013 is for a decline of 175 kb/d (or -3.7%), to 4.6 mb/d, as economic momentum eases and the prior year's nuclear replacement demand falls out of the y-o-y equation.



In related, longer-term news, the new Japanese government is reportedly giving consent to the gradual return of those nuclear reactors currently closed. For economic reasons this was a move predicted in October's Medium-Term Oil Market Report, but one that was always likely to prove problematic for political reasons. Contrasting the previous strategy - no-nuclear future, by 2040 - the new administration has said that it will target the construction of new, safer nuclear reactors, as the government looks to limit the Japanese dependence on expensive imported fossil fuels.

India

The Indian demand forecast for 2013 has been curtailed on account of weaker assumed economic growth and the likelihood of higher diesel prices. Demand growth of 2.7% is now assumed (or 100 kb/d), to 3.75 mb/d, a weaker gain than in last month's Report (2.8%), the reduction largely caused by the lower assumed economic growth (5.9% versus previous 6.0%). The likelihood of higher gasoil/diesel prices in 2013 has further compounded the forecast, as the government has agreed to gradually reducing diesel subsidies. As on January 17, the subsidy reduction effectively meant that diesel prices charged to individuals rose by half a rupee per litre (roughly 1 US cent). Delhi, for example, now charges 47.65 rupees (88 US cents) a litre (prices varying from state-to-state due to local taxes). Bulk users, such as apartment-complexes (which use diesel in their back-up power generating systems), saw an even greater 11 rupee/litre (20 US cents per litre) price gain. Gasoline (+3.7%) is forecast to outpace gasoil/diesel (+2.6%) in 2013, as the relative price discrepancy eases.

Roughly 3.7 mb/d of oil products were consumed in 2012, 135 kb/d up on the year (or 3.9%). The 2012 estimate is 5 kb/d higher than that assumed last month, consequential on 30 kb/d being added to the 4Q12 number: 50 kb/d more in November and 35 kb/d in December. Growth appeared to bottom-out in November, at 50 kb/d (or 1.3%), before accelerating in December, to 100 kb/d (or 2.8%) over the year earlier. A cold spell in northern India triggered additional diesel-fired generator demand - gasoil/diesel demand rising by 60 kb/d in December (to 1.5 mb/d).



Russia

Preliminary estimates of Russia demand depict it rising by 6% in December, to 3.5 mb/d, with particularly strong gains in gasoil (+15.2%, to 695 kb/d) and jet/kerosene (+9.7%, to 270 kb/d) offsetting weak gasoline (+0.2%, to 845 kb/d) and LPG (-0.9%, to 375 kb/d). Having endured a mid-year slowdown, growing by an average of 1.1% June-through-October, a clear acceleration has since set in once again towards the end of the year.

Brazil

The recent Brazilian demand trend remains strong, rising by 6.8% to 3.2 mb/d, supported by big gains in road transportation markets. Gasoline consumption rose by 8.3% in November, to 900 kb/d, while gasoil/diesel was up 9.4%, to 1.1 mb/d. The overall trend is an upturn from the mid-2012 slowdown (average growth easing to 2.6%, June-through-September), underpinned by strengthening manufacturing sentiment (as the PMI rose into 'expansionary' territory, October-through-January, previously having 'contracted'). Government efforts to raise domestic prices - gasoline 6.6%/diesel 5.4% - should moderate demand growth, although the mandated increase in gasoline's ethanol-blend, (from 20% to 25%, in May), could increase demand as efficiencies wane from the lower energy content of a gasoline pool containing more ethanol.



Saudi Arabia

Consumption of oil products in Saudi Arabia fell sharply in November, down by 120 kb/d y-o-y (or 4.2%) to 2.8 mb/d, as the traditional winter demand-dip in 'other products' - notably crude oil for direct burn in the power sector - exceeded expectations. 'Other products' demand accounted for the majority of the contraction, down by 135 kb/d (or 21.5%) to 490kb/d. Other fuels used in power generation also saw seasonal declines, including residual fuel oil (-5 kb/d) and gasoil (used for power generation in the Northwest), demand for which fell by 85 kb/d month-on-month, but those drops were more closely captured in last month's Report. In total roughly 3 mb/d was consumed in 2012, equivalent to growth of around 135 kb/d on the year (or 4.7%), an expansion supported by the relatively robust economic backdrop. Further growth of around 120 kb/d is foreseen in 2013, to 3.1 mb/d, sustained by a budget that incorporates $219 billion in various public spending programmes.



Germany

Consumption rose for a third consecutive month in December, up 3.1% y-o-y to 2.3 mb/d, a three-month trend not previously seen since the end of 2010. Demand has essentially returned to its 5-year average, supported by notable accelerations in naphtha, jet/kerosene and gasoil/diesel, the later rising as temperatures dipped below the year earlier. Concerns remain for 2013, with early indicators pointing towards demand weakness - car sales down 9% y-o-y in January and the manufacturing PMI 'contracting' (49.8 in January) - with consumption forecast to decline by 1.2%% in 2013, to 2.3 mb/d.



Canada

Strong November demand growth, up 3% on the year earlier, saw Canadian consumption average out at 2.3 mb/d, a trend supported by the still moderately 'expansionary' manufacturing PMI (which at 50.4 in November exceeded the 50-expansionary-threshold). The 2012 demand estimate has, however, been revised down since last month's Report, by 20 kb/d to 2.3 mb/d, due to reductions that have been applied to the historical series (-145 kb/d September, -50 kb/d October). This leaves a slower predicted growth rate for 2012 as a whole, up by 0.9% (versus 1.7% previously), with strong gains in transportation markets - gasoline (+3.3%) and jet/kerosene (+6.4%) - offsetting big reductions in residual fuel (-13.9%). Total Canadian consumption is forecast to remain roughly unchanged in 2013, at 2.3 mb/d, as modest economic momentum cancels out further efficiency gains.



Korea

Oil deliveries fell back by 35 kb/d (-1.5%) on the year, in December, to an average of 2.4 mb/d, reversing steep growth in November, as the economic backdrop remained subdued. GDP edged up by just 0.4% in 4Q12 over 3Q12, as growth in private consumption barely offset weak exports. Having risen by around 40 kb/d in 2012 as a whole, to 2.3mb/d, little change is foreseen in 2013, as the government has announced that it intends to make a concerted effort to restrain energy imports.

OECD

Developed economies continue to see a declining demand trend, as preliminary data for December shows average OECD consumption of 46.5 mb/d, a drop of 1.4% on the year. Europe continues to account for most of the decline with a contraction of 3.3%, while demand in OECD Asia Oceania remains more resilient, edging down by only 0.3%.



Americas

Modest falls remain the dominant theme in the OECD Americas, as the declining trend that set-in towards the beginning of 2011 continued, albeit to a lessened pace. Preliminary December statistics depict a 0.7% contraction, over the year earlier, leaving a relatively flat -0.5% nine-month trend, April-through-December. This is a notable improvement on the previous 12-month trend, of -1.6%, which in a region as large as this can account for a lot of oil, 285 kb/d of oil to be precise.



Mexican demand returned to its previously entrenched falling-trend in December, having seen two-months of above-trend growth in October-November caused by a fire at a large gas-processing facility. Roughly 2.2 mb/d of oil products were consumed in December, 3.5% (or 80 kb/d) less than the corresponding period a year earlier. Average consumption of around 2.1 mb/d was seen in 2012, a modest gain of 0.7% on 2011

Europe

Europe's near-recessionary economic backdrop has coincided with a period of sharply falling oil demand. Roughly 13.3 mb/d of oil products were consumed in December, according to preliminary data, 3.3% less than the year earlier. This sharply falling trend became entrenched around 2Q11, with the 22-month average, March 2011-through-December 2012, exactly matching December's 3.3% decline. The prior 12-month trend was for a modest average gain of 0.8%, before the woes of the double-dip recession started to feed through.

Revisions to 4Q12 OECD European demand amounted to -85 kb/d, with notably lower numbers carried for France (-80 kb/d), Spain (-25 kb/d) and Greece (-15 kb/d). These reductions more than offset the modest additions that were applied to Turkey (plus 25 kb/d), the UK (+10 kb/d) and the Netherlands (+10 kb/d). Total OECD European demand is forecast to decline by around 260 kb/d (or -1.9%) in 2013, to 13.5 mb/d, as the economic landscape remains precarious, at best.



Asia Oceania

The rising demand trend, which transpired mid-2011, ended in December, as the preliminary data showed a 0.3% y-o-y decline. The reversal, predicted in recent issues of this Report, arose as rising nuclear-replacement demand in Japan was correctly foreseen to be temporary; hence, Japanese consumers led December's downward momentum.

Non-OECD

Emerging market growth accelerated in December, according to preliminary estimates, as non-OECD demand averaged 44.8 mb/d, a gain of 4.5% on the year earlier. The December growth estimate is seven-tenths of a percentage point up on November, which turned out to be a temporary relative lull caused by slower gasoil/diesel demand growth. Lighter products, such as naphtha and gasoline, led December's upside momentum, respectively rising by 9.7% and 5.7%, supported by robust petrochemical and transportation demand, respectively.



Argentinean demand, at 755 kb/d in 4Q12, exceeded earlier expectations, by 50 kb/d, as consumers shrugged-off a mid-year lull. Demand growth accelerated to 4.5% y-o-y in 4Q12, from an average of around 0.4% over the rest of the year, reflecting a pick-up in economic activity. A modest decline of 5 kb/d is forecast for 2013, as the third-largest economy in Latin America struggles with the region's highest inflation. South Africa saw a significantly revised historical data series, September-through-November, with large reductions over month earlier estimates applied in September (down by 45 kb/d) and October (-25 kb/d) counteracting increases for November (+50 kb/d). For 2012 as a whole, South African consumption should average out at 560 kb/d, 1.3% higher than 2011. Growth is forecast to accelerate in 2013, to 4.5% to 585 kb/d, as predictions of strengthening economic growth support a rising consumption trend.



The latest data on Thailand came out 75 kb/d ahead of the prediction carried in last month's Report, at 1.2 mb/d, equivalent to growth of 15.3% on the year earlier. Having expanded by around 5% in 2012, consumption growth is forecast to moderate to around 1.5% in 2013, as some of 2012's momentum was attributable to additional gasoil demand used in the post-flooding reconstruction. Severe flooding occurred in 2H11, triggering extra oil consumption in 2012 as oil-intensive rebuilding work was undertaken.

Supply

Summary

  • Global supplies fell in January m-o-m by 300 kb/d to 90.8 mb/d, with output from both OPEC and non-OPEC edging lower. Compared to 2012, January production stood only 40 kb/d higher, with non-OPEC and OPEC NGLs growth offsetting a sharp decline of 720 kb/d in OPEC crude.
  • Non-OPEC output contracted mildly in January m-o-m, edging down by 190 kb/d to 54.2 mb/d, but was 540 kb/d higher than year ago. North America grew strongly, but failed to offset fully a seasonal downturn in biofuels, production losses in Australia due to cyclones and maintenance, and unplanned outages in the North Sea. Annual output growth of 1 mb/d in 4Q12 had been the strongest in two years. For 2013, non-OPEC production is projected to rise by 1.0 mb/d to 54.4 mb/d, 80 kb/d above than last month's estimate due to higher output expectations from North America and Other Asia.
  • OPEC crude oil supply hovered near 12-month lows in January, off by 100 kb/d month-on-month to 30.34 mb/d. Marginally higher output by Saudi Arabia and Kuwait failed to offset reduced volumes from Nigeria, the UAE, Iran, Libya and Qatar. Following a terrorist attack on Algeria's In Amenas natural gas processing facility, oil companies in the region, including Libya, are reviewing their security arrangements. The assessment of OPEC NGL supply in 1Q13 was lowered by 100 kb/d to 6.3 mb/d, in part due to reduced supplies from Algeria. Saudi Arabia's supply was marginally higher m-o-m in January and looks set to hold at the lower levels in February.
  • The 'call on OPEC crude and stock change' for 1Q13 was reduced by 100 kb/d to 29.7 mb/d, reflecting adjustments in both demand and non-OPEC supply estimates. For full year 2013, the call was lowered by 100 kb/d, to an average 29.8 mb/d. OPEC's 'effective' spare capacity in January was pegged at 3.63 mb/d versus 3.26 mb/d the previous month.


All world oil supply figures for January discussed in this report are IEA estimates.  Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary January 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.  This totals ?500 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC Crude Oil Supply

OPEC crude oil supply continued its downward trend in January, off by 100 kb/d to 30.34 mb/d. Marginally higher output by Saudi Arabia and Kuwait failed to offset reduced volumes from Nigeria, the UAE, Iran, Libya and Qatar. While it did not directly target oil operations, an unprecedented terrorist attack on Algeria's In Amenas gas facility has led oil companies in the region to review their security arrangements (see 'Heightened Security Risks In OPEC's African Producers ').

Customer demand for crude supplies eased ahead of the spring refinery turnaround season, with runs forecast to fall by 1.6 mb/d between December and March. The 'call on OPEC crude and stock change' for 1Q13 was reduced by 100 kb/d month, to 29.7 mb/d. For full year 2013, the call was also lowered by 100 kb/d, to an average 29.8 mb/d. OPEC's 'effective' spare capacity in January was pegged at 3.63 mb/d versus 3.26 mb/d the previous month. The estimate of OPEC NGL production in 1Q13 was lowered by 100 kb/d to 6.3 mb/d, in part due to reduced supplies from Algeria.



Iranian crude oil production continued to edge lower in January and may fall further in coming months following implementation on 6 February of additional sanctions by the US. Iranian production is now hovering below three-decade lows at 2.65 mb/d, a decline of 50 kb/d from December levels. The new sanctions, which were part of legislation adopted last summer, effectively bar Iran from repatriating earnings from its oil exports, depriving Tehran of much needed hard currency. The new provision requires that customers buying Iranian crude pay funds into an escrow account at a bank in the purchasing country. This effectively limits Iran's use of the proceeds to buying goods in the countries where it exports its oil. Under the law, such bilateral trade is also restricted to approved goods such as food and medicine, excluding all categories of items which could be used for military purposes or support nuclear development. As with other sanctions, countries that violate the new requirements risk being banned from the US financial system, among other penalties. Iranian crude exports declined to an average 1.5 mb/d in 2012, down about 1 mb/d from 2011 levels. A back-of-the-envelope calculation shows Iran lost just over $40 billion in export revenues in 2012 or about $3.4 billion per month based on average Brent futures prices of $111.70/bbl.

For Iran, the latest expansion of sanctions is expected to further undermine government finances as its oil export earnings are now effectively locked in the buyers' countries. Indeed, Iran's export earnings from them, which include China, India, South Korea and Japan, far exceed the value of what it imports from its crude customers. South Korea, China, Japan, India and Turkey also owe substantial amounts for past crude purchases.

Preliminary data for imports of Iranian crude in January show volumes below 1 mb/d compared with an upwardly revised 1.56 mb/d in December. Import estimates are drawn from data submitted by OECD countries, customs data and news reports for non-OECD countries and tanker tracking data. More complete data for December show Chinese imports of Iranian crude jumped to the highest level since last June at around 595 kb/d. For January, though, preliminary data show Chinese imports of Iranian crude falling by more than half, to just over 200 kb/d. The exceptionally low January estimate remains subject to revision. South Korea also appears to have reduced its imports from Iran in January, to 130 kb/d from 185 kb/d in December.

Despite more stringent sanctions, Iran appears to have increased its export capacity in logistics terms with the addition of two new VLCCs in January. The National Iranian Tanker Company's (NITC) VLCC fleet is now estimated at 30 vessels with a capacity of 60 million barrels. The latest delivery of tankers is part of a $1.2 billion, 12 super tanker deal between NITC and two Chinese shipyards that was inked in 2009. Five of the 12 tankers have now been delivered. With exports expected to be further constrained by the latest sanctions, the additional VLCCs will also increase the country's floating storage capacity. 

Meanwhile, a new round of talks between Iran and Western powers over the former's nuclear programme is set for 26 February in Kazakhstan. Expectations, however, are low for a breakthrough in the more than decade-long dispute. Indeed, it is unlikely that progress will be made before Iran's June presidential elections.

Saudi Arabia's supply was marginally higher at 9.25 mb/d in January, up 100 kb/d from a downwardly revised 2012-low of 9.15 mb/d for December. Reduced domestic demand and lower customer nominations over the past few months are behind the recent decline to an average 9.2 mb/d for December-January. That's 700 kb/d below the average 9.91 mb/d posted in the January-November 2012 period. Preliminary tanker data indicate Saudi exports will increase in February. Going forward, preliminary tanker schedules indicate Saudi supplies will hover at the lower levels in February too before  rising in line with increased customer demand for the post-refinery turnaround period.



Iraqi crude oil output hovered at six-month lows, down marginally by 5 kb/d to 2.97 mb/d. The standoff over revenue sharing and the legality of contract awards by the Kurdish Regional Government (KRG) and Baghdad escalated once again last month. January exports fell a modest 5 kb/d to 2.38 mb/d, with sharply lower exports from the north offsetting higher southern shipments. Exports from the southern Basrah terminals rose by around 45 kb/d to 2.11 mb/d in January but volumes were still below planned levels due to weather-related delays. Exports of Kirkuk crude via the northern Turkish Mediterranean port of Ceyhan plummeted to the lowest level in five years, off 60 kb/d to 265 kb/d. An additional 10 kb/d of Kirkuk crude was trucked to Jordan while 10 kb/d of output from the KRG region was trucked to Turkey.

KRG oil flows to the Kirkuk crude export system were completely halted in January due to the stand-off with Baghdad. An agreement reached last September called for the Kurdish region to supply 250 kb/d in 2013 in exchange for Baghdad to release $850 million in overdue payments to the KRG, but so far only a fraction was paid by Baghdad in early December. Since then relations have deteriorated further, in no small part due to ExxonMobil's decision to sign a contract for acreage with the KRG and the company's apparent unwillingness to withdraw, despite heavy lobbying efforts by Baghdad in January and early February. The KRG's decision to allow exports of Kurdish crude via truck to Turkey also angered Baghdad, with both producing companies and buyers threatened with lawsuits by the central government. Given the many apparently intractable issues between the North-South, near term Iraqi exports from the Ceyhan terminal on the Mediterranean are expected to remain at current lower levels.

Other Gulf producers Kuwait and Qatar posted small production increases in January while UAE output declined. Kuwaiti output rose by 40 kb/d, reaching a new high of 2.82 mb/d in January. Production from Qatar rose 20 kb/d to 720 kb/d. Production from the UAE declined by 80 kb/d to 2.6 mb/d, due to a temporary reduction in onshore output stemming from work related to plans to raise crude oil production capacity from the current 2.8 mb/d to 3 mb/d. Plans to expand capacity by 200 kb/d were delayed from 4Q12 and are now expected to be completed by the end of 1Q13.



January Angolan crude production was largely unchanged month-on-month, off 5 kb/d to 1.77 mb/d. New output from the 150 kb/d PSVM fields was offset by continued technical problems at several fields. Technical issues halted production at the new FPSO PSVM platform for three days in January, with output there running below forecasts at around 80 kb/d. The 15 kb/d Kuito platform restarted on 21 January after a 17-day shutdown due to technical problems. A fire at the Central platform of LOMBO East forced production there and at the onshore Soyo field to be shut-in, a loss totalling about 25 kb/d in January.

Heightened Security Risks In OPEC's African Producers

A deadly terrorist attack on Algeria's In Amenas gas facility on 16 January has served to heighten security concerns for companies operating in Algeria, Libya and Nigeria. As new details emerged that the terrorists planned to blow up the entire gas complex and more threats were made against expatriate workers, companies went on high alert and evacuated at-risk personnel from both Algeria and Libya. While initial claims by the Islamist militants that the attack was in retaliation for French involvement in Mali, where the government and French troops have launched an offensive against rebels, the attack had been planned for several months. Indeed, terrorist activity and political violence in the region have been on the rise for the past year. So far only gas output from In Amenas has been affected but with companies already repatriating staff located in remote areas as well as undertaking comprehensive security reviews, some existing production or development projects in Algeria and Libya could be curtailed near term. 

In Algeria, gas production of 9 bcm/year remains shut-in, including an estimated 50 kb/d of condensate and 7 kb/d of LPG, while damage is assessed and repairs are made. The In Amenas gas project is a joint venture of Statoil, BP and state-run Sonatrach. Japan's JGC Engineering is also active on site. All three foreign operators have evacuated their staff. A restart date has not been announced yet, and, contrary to Algerian officials who expect an imminent resumption of operations, both BP and Statoil appear to be taking a very cautious stance after the tragedy, emphasising the safety of staff is paramount. Statoil President Helge Lund said on 7 February that "the recent terror attack implies uncertainties related to production from In Amenas." In other words, the facility could be shut-in for a protracted period of time. 

Reports that the terrorists entered Algeria from Libya also highlighted the ongoing risk from unstable neighbouring countries to Algeria's oil and gas fields near the unprotected borders. As a result, companies operating at Algeria's Saharan oil and gas fields have withdrawn staff. BP and Statoil have also evacuated staff from their In Saleh gas facility in the southwest of the country while Spain's Cepsa removed staff from its 150 kb/d Ourhoud operation.

Foreign nationals in Libya, which is reeling from political instability from armed militias, have received numerous threats since the In Amenas attack, prompting Britain, Germany, the Netherlands, the US and others to warn their nationals to leave the country. French Total has said it is beefing up security in Libya but has no plans to repatriate its staff.  At the same time, it has relocated staff in Algeria from the desert to Algiers and sent others home to France.

Libyan officials increased security forces patrolling the border areas with Algeria, adding reinforcements to oil fields in the southwest region, which include ENI's El Feel and Repsol's Sharara fields. The In Amenas facility is about 100 km from the Libyan border. Libyan crude production has been declining due to ongoing strike action by workers disappointed with the post-Gaddafi government. Crude oil production fell to a seven-month low in January of 1.38 mb/d.

In Nigeria, a resurgence in oil theft and so-called 'bunkering' (oil pilfering) along pipelines and increased sectarian violence continue to destabilise the country. In January, production was down 100 kb/d to 2 mb/d, in large part due to lingering technical problems following the shut-in of major crude streams in recent months. Force majeure on Qua Iboe exports crudes was lifted in December but ExxonMobil said in early February that cargoes would be delayed due to ongoing pipeline repairs. Nigeria has increased its security forces but militant and terrorist activity remains a major problem for operators. Total moved its staff from Nigeria's capital, Abuja following the kidnapping of a French national in December, which was the first time staff were repatriated from the country.

Non-OPEC Overview

With the advantage of finalised North Sea and other OECD member country data, 4Q12 supplies grew by 1.0 mb/d, the strongest annual growth rate since 4Q10.  Strong growth from North America will account for almost all of the gains in non-OPEC supply in 2013, raising it by over 1.0 mb/d to 54.4 mb/d. Other areas of expansion include Africa, Latin America, China, and biofuels with offsets provided by declines in Europe, the FSU, and non-OECD Asia.

Since last month's Report, the most positive news comes from the North Sea, where the Valhall and the Skarv fields in Norway started up. Colombia breached the 1.0 mb/d benchmark, but pipeline sabotage still dented output. Continued production growth from North America and Russia did not offset hurricane- and maintenance-related declines in Australia and mechanical-related unplanned outages in the North Sea. Geopolitical factors were behind the sabotage in Yemen, and the continued dispute between Sudan and South Sudan that has shut in 350 kb/d of South Sudanese output. These factors dragged down non-OPEC supply's month on month contribution to negative territory (-190 kb/d) for the first time since North Sea planned maintenance in September 2012.  January data remain preliminary, however.

Since the last report, new end-2012 monthly data has not resulted in any substantial revisions to the 2013 outlook. Some field level changes in the North Sea, continued lack of resolution to the dispute between Sudan and South Sudan, and higher-than-expected US and non-OECD Asian oil production growth are the major sources of revisions this month. These and other changes increase 2012 non-OPEC supplies by 10 kb/d in 2012 and 80 kb/d in 2013. We continue to expect a reduction in unplanned outages in 2013. 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 near-capacity.



OECD

Americas

US - January preliminary, Alaska actual, other states estimated: Preliminary estimates indicate that US crude oil production averaged over 7 mb/d in January, the highest monthly average since November 1992, and 910 kb/d higher than the prior year. In total, US oil output increased by almost 1 mb/d in 2012, to 9.1 mb/d, a slightly higher estimate than last month, based on an upwards revision to NGL supply. NGL output increased by almost 190 kb/d in 2012, to 2.4 mb/d, and is expected to further increase to 2.5 mb/d in 2013. Prices for ethane, which comprised 40% of US NGL production in 2012, have fallen by half to around 40 cents/gallon over the last year, as production levels are exceeding available processing capacity. The overwhelming majority of new capacity is not scheduled to come onstream until after 2016. In the mean time, insufficient ethane cracking capacity, delays in NGL export projects, and the resulting low ethane price are hitting upstream operator profits.  Noble, Anadarko and Chesapeake all reported starkly lower NGL realisations in their recent quarterly earnings releases. If it is not profitable for the producer to process or fractionate the natural gas liquid (NGL), producers "reject" the NGL by keeping it in gaseous form.  Additionally, lower drilling levels for natural gas will cause lower NGL volumes. Though NGL production growth is expected to be muted in 2013, crude production is expected to grow by 610 kb/d, raising total oil output by 720 kb/d to 9.8 mb/d this year.  

Canada - November preliminary: Canadian oil production continued its upward trajectory in November, rising 80 kb/d on the month to 3.9 mb/d. Overall liquids output is likely to exceed 4.0 mb/d in 1Q13 and average 4.1 mb/d for 2013. Part of the recent increases are due to the partial return to production of Eastern Canadian offshore output. We expect a slower return than previously estimated at the Terra Nova field in 2013, however, as Suncor indicated only one of three drill centres is operational. Hibernia and White Rose are expected to return to normal levels in 1Q13. Alberta light and medium production also continued to increase in 4Q12, to over 420 kb/d, its highest level since 1Q03, after declining by 4% per year from 1994 to 2006 Multistage fracturing techniques are increasing output in the Viking and Cardium tight oil plays in Alberta, as well as in Saskatchewan and Manitoba.

Mexico - January preliminary: Mexican oil production totalled 2.94 mb/d in January, around 40 kb/d higher than both the prior month and the prior year. In contrast with earlier declining trends, Mexican production has remained remarkably stable over the course of 2012, inching down by only 20 kb/d to average 2.9 mb/d for the year. Ku-Maloob-Zaap (KMZ) production increased in each quarter last year to average 850 kb/d in 4Q12. Cantarell's output declined by 9% annually, a departure from declines of over 30% in both 2008 and 2009. The new Tsimin field is now assumed to ramp up to around 100 kb/d in the medium term, which results in a slight (+30 kb/d) 2013 upwards revision. Production at the field in November 2012 totalled 11 kb/d. We project Mexico's production will fall by only 60 kb/d to 2.9 mb/d in 2013.

North Sea

North Sea production volumes rebounded sharply by 180 kb/d in 4Q12 to 3 mb/d, still 13% below prior year levels. After falling to a low of only 530 kb/d in September, production of Brent-Forties-Oseberg-Ekofisk (BFOE), the stream underlying the North Sea Dated price, inched its way back up to 750 kb/d in January. Output is expected to average slightly higher at 780 kb/d in 1Q13 with Buzzard operating again at normal rates, the completion of some unplanned outages and the start of new fields in the UK and Norway.

In the UK, the Elgin/Franklin oil fields remain offline after a gas leak several months ago and are not expected to return to service until at least 2Q12.  A gas leak in January also caused the Cormorant Alpha platform to be shut down. Although Taqa, the UAE-based operator of the platform reportedly stopped the gas leak on 28 January, a restart date for the platform has yet to be provided. The Cormorant outage also temporarily lowered output at Cormorant's neighbouring fields when Taqa reduced pipeline flows on the Brent system.   Planned maintenance at the St. Fergus associated gas terminal cut UK NGL output to around 50 kb/d in 3Q12 from 85 kb/d in 3Q11,   In the near future, besides a possible Elgin/Franklin restart, the two major events that are expected to impact output are planned maintenance at the Buzzard field in March and the start of the Huntington field in 1Q13.

In Norway, liquids output increased by 90 kb/d to 1.8 mb/d in 4Q12 from prior-quarter levels but is around 10% lower than the prior year. We expect 1Q13 production to remain at those levels as new field additions offset natural declines and other outages. An emergency replacement of the Troll A platform is underway and will reduce NGL output by 25 kb/d through May. New processing facilities at BP's Valhall field finally came online at the end of January, after several months of delays.  This is likely to increase oil output to around 40 kb/d in 2H13. The field produced 30 kb/d in 2011 but has been offline for most of 2012. Output is also increasing at the Skarv field, and the Skuld and Jette fields are expected to add to production during 1Q13.

Non-OECD

Former Soviet Union

Russia - January preliminary:  January liquids output increased by 130 kb/d to 10.9 mb/d y-o-y.  Most of the increase came from strong output growth from Gazprom and from Rosneft's East Siberian Vankor field. Vankor's output reached over 400 kb/d in 4Q12, having increased by 22% over the course of last year. Total Russian oil production is showing annual gains, but crude production has been falling for the last three months to around 10.0 mb/d in January, from 10.1 in November 2012. Rosneft recently indicated that it would not meet its peak production target of 500 kb/d by the end of the year, and that it would average around 430-440 kb/d. The company cited the impending integration of this asset with those of TNK-BP's eastern Siberian assets for the revision in the development plan. As a result, we have slightly reduced output expectations from the field for 2013. On the other hand, we have adjusted upwards our projection of gas condensate and plant liquids output from Gazprom. Though the company scaled back gas production by 6% in 2012, it is now targeting its more liquids-rich natural gas plays. NGL output is forecast to increase by 50 kb/d to 790 kb/d in 2013, around 30 kb/d higher than the prior estimate.

FSU net exports fell back by a significant 530 kb/d in December to 8.9 mb/d but are still 110 kb/d above year-ago levels. Product shipments plummeted by 310 kb/d and crude shipments fell by 210 kb/d. Over the past year, Transneft expanded its pipeline network as it connected Eastern Siberian fields. The two largest developments were the 2Q launch of the BPS-2 line and associated Ust Luga terminal on the Baltic and the 4Q commissioning of the expanded ESPO-2 line linking Skovorodino to Kozmino on the Pacific coast. Ust Luga was launched to reduce dependence on transit states. Consequently,  exports via Gdansk (previously reaching 170 kb/d) ground to a halt from April onwards with shipments from the Baltic rising to 1.67 mb/d in 2012 (+ 170 kb/d y-o-y). On an annual basis, exports of ESPO blend from Kozmino only rose by 25 kb/d to 330 kb/d in 2012, however, shipments are expected to rise to over 400 kb/d in the coming months.

Overall, Transneft exported 40 kb/d more during 2012 than in 2011. The expanded network has afforded Russian producers extra flexibility in choosing where to send their oil and as such they have gravitated away from less profitable routes. This has seen recent volumes shipped via the Druzhba pipeline fall to under 1 mb/d leaving many land-locked Eastern European states struggling to find alternative supplies. Similarly, Black Sea exports averaged 1.81 mb/d in 2012, 120 kb/d lower than the previous year as more Western Siberian oil flowed to other outlets, notably ESPO. This has also decreased the quality of Urals shipped via Novorossiysk leaving some exporters liable for penalty payments.



Despite product exports plummeting by 310 kb/d during December, recent months have seen high volumes of Russian 10 ppm-sulphur product meeting European ultra-low sulphur diesel (ULSD) standards, reportedly saturating Northwest European markets. This is not surprising since diesel demand in Russia is seasonally low in winter, Russian refiners have added over 200 kb/d of hydrotreating upgrades in 2012 to boost ULSD production (according to IEA data). The largest outlet for Russian refined 10 ppm diesel is the pipeline-fed port of Primorsk. Data indicate that over 180 kb/d of gasoil was exported from that terminal in December (+50 kb/d m-o-m). Recent reports also indicate that shipments may have climbed by a further 60 kb/d in January. With over 100 kb/d of Russian hydrotreating capacity slated to come on line in 2013, it is likely that ULSD will become a more important component of Russian exports, though exports may not necessarily remain at recent highs once domestic demand rebounds in the spring.

Middle East

Oman - November actual:  Oil production reached 950 kb/d in November, and preliminary reports indicate production remained about the same in December. At 940 kb/d for 4Q12, production is 50 kb/d higher than the prior year. Some further output gain is expected in 2013 (+30 kb/d), bringing production to 950 kb/d. The Occidental-led Mukhaizna heavy oil EOR project failed to meet its target production rate in 2012. Additional drilling required tripled the cost of the project. Volumes are estimated at 125 kb/d, and the target rate is now 140 kb/d (10 kb/d less than planned).

The 110-kb/d Marib pipeline in Yemen was bombed twice in January, leading to reduced oil flows for around five days. Our view on Yemen is unchanged and we assume no major improvement of the overall output situation in 2013, compared to 2012, with output staying at around 180 kb/d (including NGLs). The government reportedly reached an agreement with the tribal chiefs whereby the latter would stop attacking the Marib pipeline in return for a cessation in air strikes, but whether the truce can hold appears questionable. In early February, saboteurs simultaneously attacked the pipeline again in two separate spots.

Africa

Sudan and South Sudan: More than 350 kb/d of South Sudanese oil production remains offline due to a disagreement on oil export revenue sharing between Sudan and South Sudan.  The two presidents continued to negotiate the terms of a resumption in oil flows in January, along with other sticking points. Each side is accusing the other of delaying tactics. A statement released at the end of the January meetings indicated that the African Union mediators would give the two sides until 25 April to negotiate outstanding issues. Though discussions are making progress, three previous deadlines have come and gone without the African Union following through on its threat of sanctions. In the aftermath of the negotiations, South Sudan's Deputy Minister for Finance indicated that South Sudan is "considering" trucking some oil south to ports in either Kenya or Djibouti. It has been almost a year since that option  - which would involve an underwater oil pipeline along the Nile River from Blocks 1, 4 and 5A  to Djibouti or Kenya - was mentioned for the first time. Exports from those assets would represent only about a quarter of South Sudan's pre-independence capacity and would still leave output from Blocks 3 and 7 stranded. There are of course a host of challenges that make this option extremely challenging including financing, road development and truck procurement.

Latin America

Brazil - December preliminary: Brazilian crude output averaged 2.05 mb/d in 4Q12, up from 3Q12 but still 120 kb/d less than 4Q11 as fields in the Campos basin have yet to rebound fully from summer maintenance. As discussed in last month's Report, 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 projected to lift output in 2013. We have marginally revised downwards our estimates for 2013, by another 30 kb/d, based on a more aggressive planned maintenance schedule and project delays. Maintenance in the Campos basin is expected to peak in 2Q13, reducing output by 60 kb/d, but will also reduce output in 4Q13 by 30 kb/d. High winds caused two platforms to break free of their moorings and collide according to a Reuters report.  The collision of the P-58 (Parque das Baleias) and P-63 (Papa Terra) platforms result in a delay for output expectations from the Papa Terra field by several months, from 3Q12 to the end of the year.  The P-63 had just arrived at the Port of Rio Grande several days prior.



Colombia—January estimated: Government statistics indicated that Colombian output exceeded the country's goal of 1.0 mb/d in January, with output averaging 1.01 mb/d. Colombia's largest rebel group, the Revolutionary Armed Forces of Colombia (FARC), announced that on 21 January it had ended a two-month cease-fire with the government. The previous day, FARC bombed the country's 50-kb/d Trans-Andino line, and it is unclear whether the line is back in service. Rebels also reportedly destroyed four sections of a smaller line that takes crude to storage facilities and kidnapped two contract workers in the southern Putomayo provice. Sabotage is expected to continue throughout this year, keeping annual output growth in check at 60 kb/d and keeping Colombian oil output levels at 1.0 mb/d.

Asia

China—December preliminary:  Despite an almost year-long outage from August 2011 to August 2012 at the Peng Lai group of fields, Chinese production still grew by around 70 kb/d to 4.18 mb/d in 2012 largely from growth in offshore CNOOC output. Output at the onshore Changqing field, a low permeability field operated by CNPC, grew by 50 kb/d to 450 kb/d, while most other fields either stayed at 2011 levels or fell slightly. CNPC is working with western service companies at Changqing to optimize well completion and employ multistage fracturing. It is unclear to what extent these technologies are being applied elsewhere. Total Chinese output grew by almost 270 kb/d y-o-y in 4Q12 on rebounding offshore output at Peng Lai and from other fields.  In 2013, we expect growth of around 70 kb/d to 4.25 mb/d, largely because of new offshore fields. CNOOC recently noted it expects 10 new offshore oil and gas fields in 2013, but the company did not disclose field specifics.

Rising output in Malaysia has brought production to more than 680 kb/d in 4Q12, around 20 kb/d higher than the prior year. The Gumusut Kakap field came online in December and is expected to add around 10 kb/d to output this year, half of the projected increase in total Malaysian output, to 690 kb/d. Oil production in Vietnam is also up by 20 kb/d to 360 kb/d in 4Q12 based on the most recent government statistics.

OECD Stocks

Summary

  • Commercial oil inventories in OECD countries drew by a weaker-than-seasonal 22 mb to stand at 2 688 mb by end-December. Stocks were driven lower by falling crude and 'other products' while builds in motor gasoline and middle distillates provided some offset. On a forward demand basis, OECD industrial total product holdings now cover 30.4 days, a rise of 0.4 days compared to end-November.
  • The assessment of OECD stocks for November has been revised upwards by a steep 16.8 mb, based on final data for that month. As a result, the sharp November stock draw reported in last month's Report has been reduced to a shallower 4.2 mb, a downward adjustment of 14.5 mb from preliminary estimates.
  • After building over the first three quarters of 2012, OECD total oil industry inventories reversed course and drew by 550 kb/d over the fourth quarter, compared to an average 650 kb/d draw for that time of year in the last five years. For 2012 as a whole, they rose by 200 kb/d, their highest annual increment since 2008.
  • Preliminary data suggest that OECD commercial total oil inventories posted a shallower than typical rebound of 19.4 mb in January, compared to an average first-quarter build of 49.6 mb in the last five years.


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

Commercial oil inventories in OECD countries drew by 22 mb to stand at 2 688 mb by end-December. The draw was approximately half the five-year average reduction for the month, consequently the surplus of OECD stocks to the five-year average widened to 38.7 mb, its highest level since January 2011. Over recent months, crude oil holdings have accounted for the bulk of the overhang with much of this linked to soaring US liquids production. These extra supplies have necessitated the commissioning of new storage capacity, subsequently filled, to store crude in the US mid-continent. On a regional basis, stocks were driven lower in December by a seasonal 17 mb draw in Asia Oceania and a counter-seasonal 9.7 mb decrease in OECD Europe, partly offset by a 4.7 mb build in OECD Americas.

On a monthly basis, seasonally falling crude (-24 mb) and 'other products' (-16 mb) drove industry stocks lower. Stronger-than-seasonal builds in motor gasoline (+15 mb) and middle distillates (+10.1 mb) provided some offset. Despite the monthly build, however, middle distillates inventories remain a significant 50.3 mb below five-year average levels - a potential concern in the event of a cold spell. On a forward-demand basis, OECD industrial total product holdings now cover 30.4 days, a rise of 0.4 day compared to end-November. This Report is now referring to total products rather than total oil to assess forward demand cover, since product inventories are viewed as a more reliable and precise measurement of the market's capacity to meet consumer demand at any given time.



A now complete dataset for 4Q12, and thus for 2012 as a whole, indicates that after restocking over the first three quarters of 2012, OECD industry inventories drew by a significant 550 kb/d over the fourth quarter. The decline spanned the entire OECD region. OECD Asia Oceania led the way with a steep 320 kb/d draw, while OECD Europe and OECD Americas retreated by 140 kb/d and 90 kb/d, respectively. For 2012 as a whole, industry holdings rose by 200 kb/d, their highest annual build since 2008. On a region-by-region basis, the build was unevenly distributed. Inventories in OECD Americas soared by 180 kb/d, led by significant builds in crude (+110 kb/d), NGLs (+50 kb/d) and 'other products' (+ 50 kb/d of mostly propane) triggered by soaring US light tight oil and liquids production. Asia Oceania stocks built by a more muted +30 kb/d, while OECD Europe inventories fell marginally by 5 kb/d.

Final data confirm that OECD total oil inventories drew in November, although not quite as steeply as first thought. November data were revised upwards by 16.8 mb, cutting our assessment of the stock draw for that month to 4.2 mb versus the 18.7 mb (October data were also revised up by 2.2 mb) presented in last month's Report. An eye-catching upward adjustment of 15 mb in crude oil stocks drove the revisions. Region-by-region, crude stocks were revised upwards in OECD Europe and Americas by 9.7 mb and 8.7 mb, respectively. In contrast, OECD Asia Oceania crude stocks were restated 3.4 mb lower.



Preliminary data imply that OECD inventories rebounded by 19.4 mb in January, a shallower build than the five-year average increase of 49.6 mb. Rising stocks of crude oil (+10.2 mb), NGLs and feedstocks (+9.5 mb) and motor gasoline (+9.4 mb) led the build, while falling 'other products' stocks (-14.6 mb), notably in the US, provided some offset. Middle distillates continued to restock, growing by 5.5 mb on the month.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Industry oil inventories in OECD Americas rose by 4.7 mb in December, in sharp contrast to the 26.9 mb five-year average draw for that month, to stand at 1 373 mb by end-year. Stronger-than-seasonal builds in motor gasoline (+17 mb) and middle distillates (+13 mb) drove the gains, offsetting seasonal draws in crude oil and 'other products' of 11.9 mb and 14 mb, respectively. Total products covered 29 days at end-December, level with a month earlier. Despite the monthly rise in middle distillates, inventories still look very tight amid peak winter-heating demand season. Standing at 204 mb, they are 23 mb below their average seasonal level and 21 mb below end-2011. On a forward demand basis, the picture is improved somewhat, 30 days were covered at end-December, two days above November but still four days below end-2011.



The regional deficit in middle-distillates is centred in the US. Despite a change in New York State legislation requiring residents since July 2012 to use cleaner-burning ultra low-sulphur distillate for space heating, and the associated 2011 conversion of the Northeast Home Heating Oil Reserve, heating fuels are still captured by middle distillate (kerosene+diesel+other gasoil) statistics. Data indicate that the US middle distillate deficit is primarily located in two regions; PADD 1 inventories stood 17 mb in deficit to the five-year average level at end-December while PADD 3 sat 5 million below the average. These deficits have to be considered in the context of greater natural gas penetration in the heating fuel mix where even in PADD 1 more gas is being shipped eastwards from the Marcellus Basin. Regardless, on a forward demand basis, US middle distillates covered 32 days, 5 days less than one year previous.

In contrast, US gasoline has 'overshot' normal seasonal levels. At end-2012, total US gasoline inventories had risen to 12.5 mb above the five-year average and 8.8 mb above last year. One reason for the contrasting states of gasoline and middle distillate holdings is that while demand for middle distillates has generally held up over 2012, gasoline demand has been sluggish, and even soaring US gasoline exports have done little to diminish excess inventory. However, it should be noted the overhang is geographically unbalanced: while gasoline holdings elsewhere in the US remain very healthy, PADD 1 inventories have been tighter; lying below the five-year range at end-December and into January. This, coupled with news of operational problems and shutdowns at East Coast refineries, helped cause gasoline prices to rally in January, drawing supplies in from abroad.

Preliminary data suggest that US restocking has continued into January with a further 7.6 mb build in total oil reported in EIA weekly data. Crude oil drove the rise as holdings increased by a seasonal 11 mb, motor gasoline built by 4.1 mb while middle distillates posted a 1.4 mb build. These increases were mitigated by a further seasonal 14.5 mb decline in 'other products', following brisk propane buying and growing exports to Latin America.



Despite the mid-January start-up of the Seaway pipeline expansion designed to move additional crude volumes from Cushing to PADD 3 (i.e., the US Gulf Coast), inventories at Cushing increased by 1.4 mb over the month. The main factor behind this has been bottlenecking at the Jones Creek terminal, the end-point of the line. Brimming tanks there have reportedly restricted pipeline flows to just 300 kb/d, well below the line's 400 kb/d capacity. These problems are likely to persist for some time as a number of Gulf Coast refineries undergo maintenance, thus reducing regional demand for crude. Looking forward, such problems should be alleviated by the 2H13 completion of a line taking Seaway crude to Houston where it could be transferred to vessels for onward shipment on Jones Act tankers and barges to other US refiners.

OECD Europe



Commercial oil holdings in OECD Europe followed seasonal trends in December, drawing by 9.7 mb to stand at 916 mb by end-month. Crude oil inventories led the trend with a 7.8 mb draw over the month. Since regional refinery runs did not increase month-on-month, this drop in crude stocks likely reflected falling imports, as refiners ran down inventories which in November had risen to a 17-month high. Total product stocks built by a muted 1.6 mb in comparison to their five-year average 10 mb build as increases in middle distillates (+3.1 mb) and 'other products' (+1 mb) offset draws in motor gasoline (-1.4 mb) and fuel oil (-1.1 mb). In days of forward demand terms, total products now cover 40 days, little changed from November.

High prices appear to have discouraged German consumers from refilling their heating oil tanks. For the third consecutive month, tanks stood at 59% fill in December, well below the peak levels reached in previous years. Cold weather reached Germany in early January, therefore it is likely that these inventories have since been significantly drawn down.



Preliminary data from Euroilstock suggest that OECD European commercial oil inventories rebounded by 8.7 mb in January as a 9.4 mb build in total products offset a slight 0.7 mb fall in crude. Rising inventories of motor gasoline (+5.5 mb) and middle distillates (+3.8 mb) pressured stock upwards while fuel oil and 'other products' remained approximately level with end-December. Data pertaining to refined products held in independent storage in Northwest Europe suggest that stocks continued their rebound in January with gasoline, gasoil and jet-kerosene reportedly building while naphtha and fuel oil fell.

OECD Asia Oceania

Seasonal destocking continued apace in OECD Asia Oceania as commercial total oil inventories drew for the third consecutive month over December. The 17 mb month-on-month fall left levels at 400 mb, above both last year's level and the five-year average. All oil categories slipped except fuel oil which posted a modest 1.2 mb increase. Crude oil fell by 4.4 mb after regional refinery runs surged by 580 kb/d, likely outpacing imports. However, this surge in refinery runs did not translate into a rise in product stocks as healthy demand from other Asian economies meant that refiners exported more products. Therefore, total products shrank by a seasonal 8.6 mb to cover 18.5 days to forward demand, a fall of 0.6 days from November's downwardly revised estimate.



Product inventories were led lower by a 6.1 mb draw in middle distillates after cold weather hit the region increasing kerosene demand (the region's heating fuel of choice). Indeed, the onset of cold weather has eroded middle distillate stocks by a sharp 13 mb from the year-to-date peak posted in October so that by end-year they sat below five-year minimal seasonal levels on both an absolute and forward demand basis. Furthermore, days of forward cover stood at 19.4 days at end-December, their lowest level since January 2006.

Preliminary data from the Petroleum Association of Japan point to a 3.1 mb rise in total industry inventories in January led by a 3.1 mb build in total finished and unfinished products which grew after refiners turned their attention to supplying domestic, rather than export markets. Meanwhile, crude holdings remained relatively stable, slipping by a slight 0.1 mb.

Recent Developments in Singapore and China Stocks

According to data from China Oil, Gas and Petrochemicals (China OGP), Chinese commercial total oil inventories fell by an equivalent 2.4 mb (data are reported in terms of percentage stock change) in December. Following refinery throughputs exceeding 10 mb/d for the first time, crude oil stocks declined by 4% (8 mb), their largest monthly downward movement since February. As a result, gasoline and gasoil inventories reportedly grew by 9% (5 mb) and 2% (1.1 mb), respectively, while kerosene stocks declined by 4% (0.5 mb). The implied change in Chinese crude oil inventories, calculated as the difference between reported refinery crude runs and the sum of net crude imports and domestic production, showed a deficit for the third consecutive month, suggesting that no SPR filling took place.



Weekly data from International Enterprise indicate that land-based commercial product storage in Singapore reversed December's decline following a 3.6 mb build in January. Residual fuel oil (+1.6 mb), middle distillates (+ 1.2 mb) and light distillates (+0.8 mb) all posted builds. However, the build was not constant with end-month inventories looking much healthier after residual fuel oil posted its largest monthly build for six months (+ 3mb) in the week to 30 January following heavy imports and a reduction in exports to Korea and China.



Prices

Summary

  • Crude oil futures prices scaled nine-month highs in early February, propelled by a shift in market sentiment amid expectations for a better economic outlook for power houses China and the US and robust financial market activity as well as, to a lesser extent, seasonal winter demand. Futures prices for Brent were last trading at $118.75/bbl and WTI at $97.35/bbl.
  • Money managers increased their net long positions in ICE and CME oil contracts in January, continuing their bullish wagers that started in late November. The rise in net long positions of NYMEX money managers reached a staggering 155% compared to mid-November, triggered by several factors, including, but not limited to, improved economic data from the US and China, increased geopolitical risks in Middle East and Northern Africa, and the passage of an 11th hour deal by the US Congress that averted the fiscal cliff in early January.
  • Refined product crack spreads rose across the board in all major markets in January. After a relatively mild winter heating oil season in the Atlantic basin, spot prices for gasoil in Europe and the US East Coast ticked higher at end-January with the belated onset of cold weather. Meanwhile, gasoline crack spreads were supported by reduced refinery output, a temporary supply imbalance on the US East Coast in January, which drew product from elsewhere into that market, and the prospect of further scheduled outages in the second quarter in all major regions.
  • Rates for large crude carriers spiralled lower in January on falling demand and a swelling tanker pool. VLCCs on trades out of the Middle East Gulf were hardest hit after Saudi Arabia throttled back production over recent months.


Market Overview

Crude oil futures prices scaled nine-month highs in early February after posting a steady upward trend since mid-January. Futures prices for Brent were propelled by a shift in market sentiment amid expectations for a better economic outlook in power houses China and the US and robust financial market activity as well as, to a lesser extent, seasonal winter demand. The January and early February increase was also fuelled by heightened geopolitical risks, including the 16 January terrorist attack on Algeria's In Amenas gas facility, Israel air strikes into Syria and continued hostile rhetoric from Iran.

Futures prices for Brent were last trading at $118.75/bbl, up $6/bbl over January levels. By contrast, WTI prices gains were more modest given the weight of surplus crude supplies in the Midcontinent and were last trading at $97.35/bbl, around $2.50/bbl above January levels.

In January, Brent futures were up a modest $3.12/bbl, to an average $112.32/bbl. By comparison, WTI posted the sharpest monthly gains, up by $6.58/bbl to $94.83/bbl. WTI's relative strength in January reflected market expectations that prices would recover from exceptionally depressed levels following the start-up of new capacity on the Seaway pipeline running from the futures contract delivery point of Cushing, Oklahoma to the US Gulf Coast. In the event, storage bottlenecks on Seaway tempered WTI's upward price momentum shortly after start-up, with expectations now that it will take several months to work out the problems. As a result, the WTI price differential, which had narrowed to around $17.50/bbl in January from $20.95/bbl in December, widened to $23.18/bbl on 8 February.

The latest surge in crude futures, to levels not seen since May 2012, was mirrored by the broader financial market rally. Crude oil futures tracked the upward momentum in stock markets and the S&P 500 index. The S&P 500 closed above 1500 for the first time in five years on 25 January while on 1 February the Dow Jones Industrial Average rose just over 14,000, the highest since October 2007, supported by better-than-expected jobs and manufacturing data in the US. The market's rally also coincided with a flood of cash flowing into equity markets. By 30 January, data showed investors injected $12.7 billion into US-based stock mutual funds and exchange-traded funds—ending the strongest four-week period for stock funds since 1996.



Forward price spreads for Brent widened on prompt month strength, with the M1-M12 contract averaging about $8.15/bbl in the first week of February compared with around $7/bbl in January and just under $6/bbl in December. The WTI M1-12 forward curve narrowed over the month with the start-up of additional Seaway pipeline capacity. By mid-January, expectations that incremental pipeline capacity would start draining surplus inventories at Cushing propelled the curve into backwardation by mid-January for 14 days before slipping back into contango on reports of pipeline delays. The WTI M1-M12 contract spread narrowed from -$2.70/bbl in December to +$0.05/bbl on average in January before widening again to -$0.15/bbl in early February.



Futures Markets

Activity Levels

Market activity on oil exchanges saw futures positions in Brent contracts rebound relative to those in WTI. Open interest in all major oil contracts increased between 31 December 2012 and 5 February 2013; however, the increase was more prominent in the Brent contracts.  At the CME, combined open interest in WTI futures and options increased by 9.5%, to 2.36 million, while open interest in futures-only contracts rose by more than 8.2%, to 1.59 million. Over the same period, open interest at the London ICE soared by 11.4% to 0.52 million for WTI futures-only contracts and rallied by 16.7% in futures and options, to 0.68 million contracts. Meanwhile, open interest in ICE Brent futures contracts surged by 15.5% to 1.48 million contracts while ICE Brent futures and options contracts rose by an even steeper 18.6% to 1.78 million contracts. As a result, the ratio of Brent futures open interest on the London ICE to New York and London WTI oil positions increased by 4 percentage points to 70.2% over the referenced period. Stripping out ICE WTI contracts, the ratio of Brent to WTI open interest rose even faster, by 5.9 percentage point to 93.1%, after hitting a new record the week before at 94.2%.



Overall trading activity in oil derivatives declined in January at the CME but increased in the ICE markets. Total trade volumes in CME WTI contracts fell 4.2% in January 2013 y-o-y, to 12 million contracts. In contrast, Brent monthly volume increased by 18.6% to 13.3 million contracts last month, from 11.2 million in January 2012. The continued decline in CME WTI volume was partly related to growing investor appetite for Brent over WTI, due to continued deep contango in WTI futures prices and the dislocation between Brent and WTI prices. Regulatory uncertainties and erosion of customers' trust in the design of customer segregated accounts in the wake of the MF Global and PFG scandals were contributing factors.

NYMEX RBOB futures and combined open interest declined by more than 13.4% to 319 552 and 332 352 contracts, respectively, over the same period. Open interest in NYMEX heating oil futures contracts was up by 18.6% to 311 647 contracts while open interest in natural gas futures market increased by 3.1% to 1.2 million contracts. Over the same period, open interest in London ICE gasoil futures contracts increased by 11.6% to 572 033 contracts.

Index investors' long exposure in commodities fell by $9.3 billion in December 2012 to $287.2 billion, after edging up by $7.9 billion in November. The notional value of long exposures in both on- and off-exchange WTI Light Sweet Crude Oil futures contracts increased by $1.4 billion in December. The number of long futures equivalent contracts declined by 4 000 to 533 000, equivalent to $49.7 billion in notional value.



Money managers increased their net long positions in ICE and CME oil contracts in January, continuing their bullish wagers that started in late November. They increased their bets on CME WTI contracts by 47.9% to reach the highest level since mid-September 2012 to 201 833 contracts in response to the rise in WTI prices from $91.80/bbl to $96.64/bbl, the highest settlement price since mid-September.

The rise in net long positions of NYMEX money managers reached a staggering 155% compared to 13 November 2012, triggered by several factors, including, but not limited to, improved economic data from the US and China, increased geopolitical risks in Middle East and Northern Africa, the passage of an 11th hour deal by the US Congress that averted the fiscal cliff in early January and delay of the US debt ceiling at least through mid-May. As a result, the market share of managed money traders reached a one-year high of 33% of open interest on the long side at the end of January. They were also very active in the options market in January. With the expectation of higher oil prices, they increased their outright delta-adjusted gross long position by 20%. There was also some short covering by managed money traders as reflected by a decline of 50% of gross short contracts. Money managers in London ICE Brent contracts followed a similar pattern and increased their bullish wagers by 33.7% to 183 892, the highest level since ICE started publishing its weekly commitments of traders report in June 2011.

Producers accounted for 16.5% of the short positions and 16.6% of the long positions in CME WTI futures-only contracts in early-February, switching to a net long position for the first time ever since the CFTC started publishing its weekly disaggregated commitments of traders report in June 2006. Swap dealers, who accounted for 19.2% and 36.9% of the open interest on the long side and short side, respectively, increased their bets on falling prices by 54.5% to 281 857 contracts, continuing the trend seen in November and December. With producers switched to net long in the market, swap dealers became the only net short traders in ICE WTI futures; counterparty to all other types of traders on the net basis.  

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 147 346 to 237 452 contracts, an historical record since the first ICE commitments of traders report. In contrast, swap dealers increased their net long positions by 34.4% from 47 297 to 63 566 contracts.





Market Regulation

The CFTC held a roundtable on 31 January to highlight and discuss the so-called futurisation of swaps market. Banks, inter-dealer brokers, exchanges, trading platforms, corporate end-users as well as institutional investors were among the roundtable participants. The conference came at a time of intense debate surrounding recent conversions of swaps products into economically equivalent futures and options by exchanges in order to reduce their clients' exposure to compliance costs associated with the new rules imposed on swaps transactions, and to avoid dealing with the increased complexity facing swaps market participants. The discussion included general industry views and concerns regarding the conversion of swaps to futures, clearing and different margin requirements for swaps and futures, transaction-related matters including appropriate block trade size for swaps and futures; and the effect of the conversion of swaps to futures on end-users. Participants were generally supportive of the conversion from swaps to futures and argued that the current regulatory framework encouraged futures over swaps, pointing to the following factors: (1) futures market regulations give market  participants more certainty than the untested regulation in swaps markets; (2) one-day margin for futures, compared to five-day margin for cleared swaps; and  (3) lower block trade sizes set by exchanges for futures, compared to higher block sizes set by the CFTC for swaps.

On 7 February 2013, the European Parliament passed the European Market Infrastructure Regulation (EMIR), which obliges non-financial firms, including energy trading firms, to clear over-the-counter (OTC) derivatives transactions if their notional value exceeds €3 billion, to report OTC derivatives transactions to trade repositories as well as to apply risk mitigation techniques to OTC derivative contracts. This was a surprise approval by the European Parliament especially after the decision by the Economic and Monetary Affairs Committee (ECON) of the EU Parliament on 5 February 2013 to reject some of the Regulatory Technical Standards (RTS), including clearing thresholds, drafted by the European Securities and Markets Authority (ESMA) under EMIR. The European Parliament was able to pass the EMIR after the ECON accepted the resolution offered by the European Commission of a phase-in over an appropriate period of time of clearing obligations.

Spot Crude Oil Prices

Spot crude oil prices for benchmark Brent and WTI largely rose in tandem with futures markets in January but the gains varied greatly by crude grade and region. WTI spot prices posted the largest increase, rising by 7.4%. In contrast, spot prices for Dubai crude saw the smallest rise on the month at 1.6%, with cash differentials for Mideast sour crudes weakening markedly over the month. January spot prices for WTI rose by $6.55/bbl to $94.75/bbl, Brent crude by $3.56/bbl to $112.97/bbl and Dubai by $1.71/bbl to an average 107.94/bbl.



A long awaited increase in take-away pipeline capacity from Cushing, Oklahoma to the US Gulf Coast started up in January, with the Seaway pipeline expansion adding an incremental 250 b/d to the line's existing 150 kb/d. However, storage bottlenecks at the end-point of the Seaway pipeline at the Jones Creek terminal forced a cutback in volumes, with flows ebbing and up and down in the 200 kb/d to 300 kb/d range. The bottleneck is not expected to ease until refineries in the region come back from turnaround. As a result, the strengthening of WTI spot prices from depressed levels stalled by mid-January. Indeed, rather than draining off the surplus at Cushing as expected, stocks at the storage terminal rose to yet another record high by end-January, to over 50 mb. The surplus of crudes in the US Midwest and pipeline constraints for Canadian oil moving south has also depressed the price of Western Canadian Select and widened the spread with WTI to a steep -$40/bbl in January compared with a more normal $10/bbl to $20/bbl discount.

In Europe, spot crude markets were well supplied with Urals, North Sea crudes and West African grades. The price differential between Urals and Brent in the Mediterranean narrowed marginally in January, trading at -$0.33/bbl on average compared with -$0.47/bbl in December. Price differentials for West African crudes also slipped over the month, in large part due to a growing surplus of Nigerian and Angolan crude exports backed out of the US by rising domestic light, tight oil production and looking for a home in Europe. It did not help crude differentials that many European refineries are undergoing maintenance turnarounds.



Asian markets continued to be well supplied with heavier Middle East barrels, with inventories hovering near the top of the five-year range. Spot prices for Mideast grades weakened relative to benchmark Brent. In line with reduced demand during the peak refinery turnaround season, the spot Dubai-Brent differential fell by $1.85/bbl, to -$5.03/bbl in January compared with -$3.18/bbl in December. Mirroring the Dubai decline, Saudi Aramco's cut Arab Light March OSPs by a steeper than expected $1.50/bbl, from February's premium of $3.45/bbl above average Oman and Dubai prices to just plus $1.95/bbl.

Weak time-spreads for the front month Dubai spread also underscore the slowdown in demand for crude. Northern Asian refiners reduced purchases ahead of the heavy 2Q13 refinery turnaround season The Dubai M1-M2 narrowed sharply in January, reaching just a few pennies by end of the month. The Spread for the month narrowed by $0.60/bbl, to $0.72/bbl compared with $1.32/bbl in December. Prompt demand from Japanese and South Korean refiners has also dried up due to turnarounds and warmer weather.



Spot Product Prices

Refined product crack spreads rose across the board in all major markets in January, with naphtha in Europe the exception.  Cold weather in Asia continued to prop up gasoil, kerosene and fuel oil in January. After a relatively mild winter heating oil season, spot prices for gasoil in Europe and the US East Coast ticked higher at end-January with the belated onset of cold weather. Meanwhile, gasoline cracks were supported by reduced refinery output and further scheduled outages in the second quarter.



Gasoline markets showed unseasonal strength in January, in part due to earlier-than-expected refinery turnarounds. In the US, PADD 1 gasoline stocks fell below their five-year average due to a combination of lower refinery output and supply dislocations following Hurricane Sandy last November. The upcoming closure of Hess's Port Reading refinery at the end of February is also supporting crack spreads. Gasoline cracks also posted exceptional gains on the US Gulf Coast, albeit from depressed levels, due to earlier-than-expected refinery turnarounds. Despite the shutdown of Hess's Port Reading facility, however, capacity is actually higher on the East Coast year-on-year, as other plants that had been earmarked for closure have since been restarted (See Refining, 'The Straw that Broke the Camel's Back?'). Crack spreads for Mars crude increased by $4.56/bbl pushing differentials into positive territory. Stronger gasoline markets along the US East Coast also provided an arbitrage opportunity to import surplus supplies from Europe. Gasoline imports into the East Coast increased markedly in early February, to around 665 kb/d in the first week compared with around 500 kb/d on average in the December - January period.

In Asia, gasoline cracks were buttressed by restocking operations in the region, with differentials to Dubai crude rising by $2.15/bbl to an average $14.75/bbl. Expectations of tighter supplies in the coming months in line with planned refinery maintenance in the region and reduced throughput rates in the Middle East helped support both gasoline and gasoil.



Gasoil crack spreads in Europe and Singapore were firmer on increased demand and reduced refinery output. Gasoil cracks for Dated Brent in Northwest Europe rose by around $1.20/bbl to $15.89/bbl on average in January. Differentials for Urals in the Mediterranean rose by $1.50/bbl, to an average $15.75/bbl. In the US, gasoline crack spreads in New York fell by $2.25/bbl but were still a robust $37/bbl. In Asia, cold weather boosted demand for both gasoil and kerosene, with differentials to Dubai in South Korea rising by around $1.55/bbl, to $18.20/bbl and $16.65/bbl, respectively.



Fuel oil cracks improved slightly despite weak demand and differentials solidly remained in negative territory in the US, Europe and Singapore. In Europe, crack spreads for Dated Brent in Northwest Europe rose by $2.35/bbl to -$18.80/bbl for HSFO and by $3.30/bbl to -$12.20/bbl for LSFO. In Asia, HSFO 180 crack spreads to Dubai improved by $1.85/bbl in both Singapore and South Korea, to -$8.12/bbl and -$6.38/bbl, respectively.



Freight

Rates for large crude tankers nosedived during January as falling demand for tankers, following recent production falls, left the tanker pool bloated. VLCCs on trades out of the Middle East Gulf were hardest hit after main regional producers Saudi Arabia and Iraq throttled back production over recent months. Consequently, rates for carriers on the benchmark Middle East Gulf - Asia route dropped by over $3/mt during January to bottom out at $8.50/mt by end-month, a level not seen since July 2012.



Suezmaxes fared little better as the tanker pool remained swollen with multiple offers for scarce cargoes driving rates lower. The benchmark West Africa - US Gulf route, already suffering as the US imports less light West African crudes in the face of soaring domestic production, plunged by close to 4$/mt over the month. Rates for trades shipping Urals from Baltic ports were the exception as rates on the benchmark Baltic - UK trade soared to over $10/mt, after cold weather hit the region, vessels were consequently delayed due to ice and the tightening of ports' ice-class requirements, reducing the availability of suitable carriers.

Product tanker rates generally held up better than those for carrying crude. Vessels plying the benchmark UK - US Atlantic Coast route experienced a rollercoaster month. After initially plunging by $5/mt over the first three weeks of the month, rates soared by $6/mt over the final week of the month to stand at $32 by early-February after a wide arbitrage opportunity to move gasoline to the US opened. Meanwhile, Pacific Basin markets were weaker and generally trended sideways. The steady decline in rates on the benchmark Middle East Gulf - Singapore route was finally arrested in mid-January as rates bottomed out at close to $23.50/mt, $14/mt below their November high.

January saw a potentially important development in tanker markets with the news that the cash strapped Egyptian government, through the Suez Canal Authority, plans to raise transit tariffs by 5% for oil tankers using the canal from May 1st. However, this could be a risky move, which, in response to the tariff hike and with VLCC rates standing close to historic lows, could see shippers re-route cargoes onto larger vessels routed via the African Cape.

Additionally, the Suez Canal Authority also recently began permitting the passage of VLCCs through the canal in a southbound direction by part-unloading their cargoes onto smaller vessels. This move is likely in response to South Korea continually buying North Sea cargoes due to the free trade agreement with the EU. Even with the logistics of transferring cargoes, it should cut down transit times in comparison to passing via the African Cape. However, in a low-cost freight environment it remains to be seen whether shippers will take up this option.

Refining

Summary

  • Global refinery crude throughputs have been revised lower to 75.1 mb/d for 1Q13, following a steep reduction in US crude runs. After processing at a record high for that month in December, US refiners finally started maintenance operations at their plants, cutting January crude runs by 770 kb/d m-o-m. Despite this steep reduction, global runs are forecast to grow year-on-year by a still robust 515 kb/d in 1Q13 down from 75.9 mb/d in 4Q12.
  • OECD crude runs fell 90 kb/d y-o-y in 1Q13 to 36.6 mb/d on average. The start of seasonal maintenance in the US and Europe, and the closure of capacity in Europe brought runs lower in these regions, while Asia Oceania runs inched higher on stronger Japanese throughputs.
  • Final December data for several countries leaves the assessment of 4Q12 non-OECD refinery crude runs at 38.9 mb/d, a 1.4 mb/d increase y-o-y, as refineries in Asia kept running at record highs. For 1Q13, non-OECD refinery throughput is expected to inch lower to 38.5 mb/d as seasonal maintenance starts in India and China.
  • Refinery margins ended higher in January on strong gasoline cracks in the Atlantic basin and the start of refinery maintenance operations on the US Gulf Coast. Asian refining margins showed a slight increase on the back of firm seasonal demand, restocking operations in many Asian countries, and the prospect of tight product supplies as India and China start seasonal maintenance.

Global Refinery Overview

Global throughputs for 4Q12 are now assessed at 75.9 mb/d, an impressive gain of 1.5 mb/d on the same period in 2011. More than 90% of the quarterly increase stems from China and India, as these two countries commissioned more than 700 kb/d of new capacity this year. The remainder is attributable to North America and mainly the US. In December, US crude runs hit a record for that month at 15.4 mb/d amid strong export demand from Latin American countries. European runs remain depressed, down 140 kb/d q-o-q on longer-than-usual seasonal maintenance and economic run cuts amid declining refining margins and mild temperatures.



For 1Q13, throughputs are forecast to fall seasonally to 75.1 mb/d.  Many refiners in the US Gulf Coast embarked on long delayed maintenance in January. Crude runs in Asia will also fall as India's Reliance is expected to shut down its Jamnagar 2 export refinery for scheduled maintenance in February. Chinese crude runs likely remained stable at 10 mb/d up to the extended Lunar New Year holidays, which started on 10 February, and then will fall as refiners target peak maintenance operations in April.



North West Europe refining margins increased sharply by the end of January on higher gasoline and middle distillate prices. The belated onset of cold winter weather supported the latter. Gasoline prices increased in the Atlantic basin after a fire shut down a reformer at Essar' Stanlow refinery in the UK and Hess announced the closure of its Port Reading refinery in New Jersey (see 'The Straw that Broke the Camel's Back') . Earlier, Shell had confirmed the closing of the Hamburg-Harburg refinery. In the last week of January, the Brent cracking margin rose to an average of $3.70/bbl from $0.70/bbl in the first week.

Mediterranean refining margins improved in January with Es Sider cracking margins averaging $4.60/bbl. Petroleum product markets in this region remained tight with persistent technical issues in Algerian and Libyan refineries and reduced crude runs in France, Spain and Greece.

US midcontinent margins on Bakken crude fell further as high runs of light crude oil boosted gasoline production and helped reverse an earlier draw in product stocks. Midcontinent margins recovered in the last week of January, on reduced flow on the recently expanded Seaway pipeline. Seaway throughput has been curtailed following high inventories at the Jones Creek Terminal due to turnaround work at the 260 kb/d Sweeny, Texas refinery. In the US Gulf Coast, refining margins in January recovered as maintenance operations started in many local refineries. An improvement in gasoline Atlantic Basin cracks also helped.







The Asian market showed a slight recovery on the back of firm seasonal demand with cold weather boosting demand for kerosene and gasoil. Restocking operations in many countries including Indonesia, Pakistan and Vietnam pushed gasoline cracks upwards to $19/bbl at the end of January, a level not seen since October. The prospect of tightening supplies in the next months, with upcoming refinery maintenance in the region and low refining activity in the Middle East, supported Dubai cracking margins, which ended the month at about $6/bbl. Fuel oil cracks improved slightly despite weak fundamentals, as supply remained ample amid high Russian and West European exports, while bunker demand in Singapore stayed weak.

OECD Refinery Throughput

OECD refinery crude runs rose by 860 kb/d in December to average 37.7 mb/d, with the US and Japan increasing their crude processing by 340 kb/d and 450 kb/d respectively. OECD Europe crude runs inched lower by 140 kb/d on low refining margins and mild temperatures. Preliminary data for January show a steep decrease in refinery throughputs mainly in North America as most US refiners started seasonal maintenance early. US crude runs are estimated to have fallen by 770 kb/d m-o-m.  In contrast, OECD Asia and Europe crude runs are estimated to have remained stable on low refinery maintenance downtime.

The estimate of OECD runs for 1Q13 is set at 36.6 mb/d, about 90 kb/d lower than last year's level on lower runs in Europe as maintenance began in February and refining capacity closure.



North American crude runs fell by 770 kb/d in January, as heavy maintenance got underway in the US. Turnarounds were much higher and sooner than expected as US refiners started maintenance work as early as January. Refinery runs have come down from the 90% utilisation rates seen in December to 86% in January, with crude runs totaling 14.6 mb/d, up 200 kb/d y-o-y.  Most of the refineries offline were in the US Gulf Coast, with Valero, Motiva, Lyondellbasell, Marathon, Phillips 66 and Holly Frontier all reporting maintenance work. The capacity utilisation rate in January fell sharply to 83% in mid-January before increasing again to 85% at the end of the month as some units went back in operation.



Low utilisation rates were also observed in PADD 5 (West Coast), as Valero's Wilmington (135 kb/d) and BP Carson (265 kb/d) plants were partially shut down for maintenance and a fire damaged a crude distillation unit at Chevron's Richmond refinery (243 kb/d).

The new crude distillation unit (325 kb/d) at the Motiva's Port Arthur refinery is said to have finally restarted and was reportedly operating nearing full production at the beginning of February. Delays in upgrading BP's Whiting refinery are mounting up and the delayed coker unit is not expected to be on-line before 2014, meaning deep discounts for Canadian crude are likely to persist through 2013.

The Straw that Broke the Camel's Back?

The Port Reading plant was Hess's last remaining refinery asset, after the company last year shut down its 350 kb/d Hovensa refinery in St. Croix, Virgin Islands, jointly owned with PDVSA. When Hess announced last month that it would close it and sell its US oil terminal network, bank analysts and investors hailed the move, while the stock market greeted the news of the closure with a rally in the company's share price. Gasoline markets also promptly responded. The April Nymex RBOB-Brent crack spread surged last week to a high of $20/bbl, from $12/bbl in early January.

Port Reading produced mainly gasoline and intermediate products used for blending. The refinery was running on vacuum gas oil (VGO) and imported low-sulphur straight run fuel oil (LSSR) as feedstock, much of it coming from West Africa after St. Croix was shut down. The market for LSSR is rather tight and current prices for this product are close to parity with Brent, hurting refining margins.



In 2012, Port Reading produced about 50 kb/d of gasoline, representing only 3% of total gasoline consumed in PADD1 (the US East Coast), estimated at 1.5 mb/d last year. Port Reading accounted for 10% of regional gasoline production, however, as many refineries have been shut down or idled in this region. Local gasoline production accounts for about 30% of total demand, with other sources of supply being mainly imports (30%), shipments from other PADDs (20%) and ethanol blending.



Hess's announcement helped trigger a steep increase in gasoline imports to 666 kb/d for the week ending February 1. Although the Hess closure is not seen as having a major impact on gasoline markets by the EIA, its announcement came as East Coast gasoline stocks are at the bottom of their five-year range and amid tightness in the entire Atlantic Basin gasoline market following a string of refinery outages on both sides of the Ocean. On the US side, two key FCC units were shutdown in January at Monroe's Trainer (185 kb/d) and Philadelphia Energy Solutions (330 kb/d) refineries while on the European side, a fire at Essar Oil's Stanlow refinery (296 kb/d) in the United Kingdom has affected a reformer unit which will be back in operation in early February.

Recent tightness in Atlantic Basin gasoline markets thus looked more like a temporary and regional imbalance than a structurally short global gasoline market. Outside of the Atlantic Basin, gasoline supplies continue to look comfortable, with high US Gulf Coast stocks. But the recent gasoline price rally on the East Coast, and its ripple effects elsewhere, may also illustrate the relatively high cost and logistical challenges involved in moving gasoline supplies to the East Coast on short notice, given current constraints in product pipeline capacity between the Gulf Coast and East Coast markets and Jones Act restrictions on inter-state and inter-PADD tanker and barge movements in the US. 

OECD European runs for December have been revised down by 320 kb/d to 11.9 mb/d on much lower than anticipated crude runs in Italy, France and Germany as refiners cut run rates at their plants in the face of declining refining margins and mild temperatures. Our January estimate is flat at 11.9 mb/d as further declines in France, Germany, Spain and the UK were likely counter-balanced by increases in Italy and the Netherlands, where BP's 188 kb/d Rotterdam plant and Shell's 400 kb/d Pernis refinery have returned from maintenance.





In France, five new offers submitted to buy the 162 kb/d Petit Couronne refinery in Normandy were all rejected and bidders invited to resubmit their bids by April 16. Among the bidders, a new company, Egypt's energy company Arabiyya Lel Istithmaraat, which runs 70 percent of Egypt's electricity network, received strong support from the French government, which would be ready to take a minority stake to support a takeover. The refinery was idled in late December after a processing deal with Shell expired.  Refinery runs in France will remain subdued in 1Q13, as Total will shut half its units in February for extended maintenance at its 230 kb/d Donges refinery (Atlantic Coast) for around two months.

In Germany, Shell has confirmed the shutdown of the Harburg refinery (110 kb/d). The site will be converted into an oil products storage terminals. Only the base oil plant, sold to Sweden's Nynas, will remain in operation for the production of specialty products, including base oils and lubricant components.

In the UK, a fire has affected a reformer unit at Essar's Stanlow refinery (296 kb/d). This refinery supplies about 15% of total UK's transport fuel requirements.

OECD European refinery throughput in 1Q13 is estimated at 11.8 mb/d, down 170 kb/d y-o-y as refiners start seasonal maintenance with main turnarounds expected in France, Germany, Italy and the UK.



OECD Asia Oceania crude runs were mostly in line with expectations for January, at 7.1 mb/d, unchanged from a year earlier. Weekly data from the Petroleum Association of Japan, show Japanese crude intake in January close to its record high for December, at 3.5 mb/d, despite the continued shutdown of the 220 kb/d Chiba refinery. Refiners increased their runs amid strong fuel oil and kerosene demand for thermal power generation and space heating as the country sustained a cold spell in December. The refining sector in Japan under-performed in 2012 with many firms posting only modest profit growth due to poor oil and petrochemical margins. Japan's refinery capacity is projected to drop by around 10 percent by the end of March 2014 as under the 2009 law for enhancing competitiveness, refineries must opt for either trimming capacity or investing in deep conversion units.

Elsewhere in the OECD Asia Oceania, South Korean refiners kept crude runs high, reaching an all-time record of 2.7 mb/d in December. South Korea processed 2.6 mb/d in 2012, up 2.2% on y-o-y basis. Despite an increase in utilisation rates, South Korean refiner S-Oil suffered a steep fall in Q4 profits on weak refining margins and a lower won/dollar exchange rate.

Non-OECD Refinery Throughput

Non-OECD refinery crude runs remained unchanged for December at 39.3 mb/d. Refineries in Asia kept running at record highs, boosting 4Q12 estimates for the non-OECD region by 1.4 mb/d y-o-y. Overall, 2012 refinery throughput is estimated at 38.2 mb/d, a 2% increase y-o-y, mainly attributed to higher runs in China, India and Russia. Estimates for 1Q13 have been revised downwards by 440 kb/d, to 38.5 mb/d as a heavy maintenance season is expected.



Chinese refinery runs reached another record high in December averaging 10.2 mb/d, almost 920 mb/d higher than a year earlier. In 2012, China processed on average 9.3 mb/d of crude, a 4% increase y-o-y. In 2012, about 400 mb/d of net refining capacity was added in China, mainly in the last quarter of the year. Refinery capacity growth should slow down in 2013, with total additions estimated at 300 kb/d, including one grassroots project, Sichuan Petchem (200 kb/d), expected to start mid-2013.

Preliminary data for January show that refinery throughput slightly fell as independent refiners were expected to reduce their runs amid negative refining margins on imported fuel oil. To mitigate the economic impacts for some independents, the Chinese government finally granted ChemChina a license to import 200 kb/d of crude oil in 2013. Beijing is also expected to increase gasoline and gasoil pump price by the end of February. The last price change was in mid-November, when fuel prices were cut by about 3.5%.

Overall, crude runs should remain above 10 mb/d in the first two months of 2013, as very little planned maintenance is scheduled. Refiners will head into a heavy turnaround season after the Chinese New Year holiday, in March, with a peak expected in April when about 6% of total installed capacity will be shut down.

Following the smog that engulfed Beijing and other major Chinese cities, the Government has announced measures for the implementation of tighter fuel specifications. Gasoline and gasoil grades equivalent to Euro 4 standards (50 ppm sulphur) will be mandatory by the end of 2014, and product specifications will be further tightened to Euro 5 equivalent standards (10 ppm sulfur) by the end of 2017. Since February, Beijing is the first and only city in China to have adopted Euro 5 specifications. Most major refiners in China are already prepared to produce Euro 4 transportation fuels, as they have upgraded a large amount of their refineries and have plans for further upgrading. Tighter fuel specifications will therefore mainly weight on some small independent refineries, which will not be able to bear the additional investment cost involved.

Other Asian refinery throughputs were largely in line with expectations for December, averaging 9.7 mb/d. Indian crude runs fell slightly by 1.3% monthly to 4.5 mb/d, due to lower runs at Reliance's 660 kb/d Jamnagar refinery following brief maintenance at one of its crude distillation units. A partial turnaround at the refinery is planned for February. The Government has made yet another attempt to rein in its massive fuel subsidy expenditure announcing deregulated diesel prices for bulk consumers and allowing oil companies to raise prices at the pump in small increments. Previously, it had announced a cut in subsidies for LPG, which resulted in refiners and marketers cutting LPG imports during the winter season, as consumers switched to other sources.

The decision to deregulate diesel price (see Demand section) has been hailed by the Reserve Bank of India and rating agencies, which were concerned about the growing fiscal deficit, should the diesel price reform not have taken place. Diesel under-recoveries represent 60% of total fuel under-recoveries. The deregulation could push private oil refiners finally to enter the bulk diesel market, increasing competition and could prepare for state divestment in public companies like Indian Oil Corporation Limited.

'Other Asia' throughput estimates for 1Q13 are revised downwards by around 190 kb/d to 9.4 mb/d on updated turnaround maintenance plans in India, Thailand and Taiwan with the partial shutdown of  Formosa Petrochemical's 540 kb/d Mailiao refinery.

Total FSU crude runs in December are estimated at 6.9 mb/d, down 1% from last month but increasing 400 kb/d y-o-y. Overall, 2012 FSU refinery throughput increased by 2.5% y-o-y to 6.6 mb/d.



Russian oil refineries crude runs fell slightly in December by 100 kb/d m-o-m but remain close to record levels at 5.5 mb/d. After being introduced in October 2011, it seems that the so-called 60-66 tax reform has finally encouraged the Russian refining industry to increase domestic runs and upgrade their capacity to produce higher-quality products. The 60-66 tax reform lowered the marginal tax rate on the export duty for crude oil from 65% to 60% and at the same time, product export duties were aligned at 66% of the export duty for crude, with the exception of naphtha and gasoline duties, which were set at 90% to prevent domestic shortages.

High refinery runs since 2H12 have helped meet domestic demand while boosting export levels to 3.2 mb/d in November. In particular, trade data from Transnefteproduct, Russian state transporter, show ULSD exports from Primorsk rising to 1 million tons, or 240 kb/d, in January. This new diesel influx in Europe, where demand remains subdued, added pressure on ultra-low sulphur diesel price (see refining margin section). Although many refineries have started upgrading, much remains to be done, as fuel oil yield remains high and the percentage of ULSD 10ppm produced small. According to Russia's energy ministry, refiners have committed to building or upgrading between 116 and 124 secondary processing units by 2020, raising diesel production to 1.8-1.9 mb/d (compared with 1.4 mb/d in 2012), gasoline production to 1.1-1.2 mb/d (compared with 900 kb/d in 2012), and cutting fuel oil output to 400-500 kb/d (compared with 1.4 mb/d in 2012). From February onwards, Russian throughputs are expected to fall as refineries begin seasonal maintenance.

In 2012, Kazakhstan crude oil throughput rose by 3.3% y-o-y to 285 kb/d. December crude runs reached a record high level at 328 kb/d, a figure not seen since 2009. However, at the end of January, part of the Atyrau refinery (104 kb/d) was shut after a fire broke out at a crude distillation unit.

FSU refinery throughput for 1Q13 remains unchanged from last month report at 6.7 mb/d, as refineries should not start seasonal maintenance before the end of March.

Latin American refinery throughput in 4Q12 remains down 7.5% q-o-q at 4.4 mb/d following Valero's Aruba refinery shutdown (235 kb/d), and many technical issues in Venezuelan and Trinidad refineries.

The Brazilian government has decided to raise domestic gasoline and diesel retail prices by 6.6% and 5.4%, respectively. The measure will bring some relief to Petrobras' financial situation, although investors were largely disappointed by the size of the price hike. In particular, the increase in gasoline price is considered to have only a limited impact on ethanol demand, as the price differential between the two fuels remains too narrow to shift consumers' behavior. In order to curb gasoline imports and support sugarcane producers, the Brazilian government announced late last week that the percent of ethanol blended into Brazilian gasoline would be increased from 20% to 25% starting in May. The mixture had been at 25% until October of 2011 when it was reduced to 20% due to poor sugarcane harvests. Overall, 4Q12 Brazilian refinery throughput is estimated at 2.0 mb/d, up 2% y-o-y.

Petroecuador has started maintenance operations at its largest refinery, Esmeraldas (110 kb/d). The production of the refinery will be impacted during most of the year as the refinery is going under a major rehabilitation plan up to 2014. Ecuador, which already relies on imports to satisfy its 230 kb/d domestic consumption, will need to increase its imports further adding pressure on its budget deficit as oil products are heavily subsidized.



In Venezuela, the 955 kb/d Paraguana Refinery Complex, which includes the Amuay, Bajo Grande and Cardon refineries, was operating at about 60% of its nominal capacity by the end of January. The flexicoker unit has been partially restarted before being shut down again for a third time, early February, due to a fuel line leak. A report from the Venezuela Central Bank shows that domestic crude runs in the second half of 2012 were 250 kb/d lower than in the first half, mainly attributed to the Amuay refinery explosion in August 2012. Venezuela imported up to 200 kb/d of petroleum products in September from the US. In October, imports halved but increased again in November to 110 kb/d, data from the EIA show.

We have revised down by 50 kb/d our Latin America refinery throughput for 1Q13 to 4.4 mb/d as crude runs will remain at reduced levels in Venezuela and maintenance in Columbia refineries is expected to start in February.

Middle Eastern crude runs for December are unchanged from our last report at 5.7 mb/d. According to latest JODI data, Saudi Arabian refinery runs were 1.8 mb/d in November, a 3% increase m-o-m but still an 11% drop on a y-o-y basis. Overall, 2012 Kingdom's refinery throughput is estimated at 1.7 mb/d almost unchanged from 2011. Crude runs should be lower in 1Q13 on heavy refinery scheduled maintenance as the Riyadh refinery (120 kb/d) was shut down in February for one month and the Samref Yanbu refinery (400 kb/d) will be shut down in March for 45 to 50 days. On top of that, the commissioning of the first phase (200 kb/d) of the Jubail refinery has been delayed by a pipeline technical failure and postponed to March. The second phase (200 kb/d) is expected to be on stream by end of June.



Kuwait refineries continue operating at very high rates although recently a fire shut part of the heavy oil hydrocracker at Shuaiba oil refinery (200 kb/d). Maintenance at the country's major refinery, Mina Abdullah (270 kb/d), is scheduled for March.

While no data is available for Iran's downstream operations since May 2012, we estimate that refineries in Iran are running at 85% of their capacity with an overall crude runs of 1.6 mb/d in November. Facing tightening US and EU sanctions, the refineries are struggling to process more crude domestically. In January, the government announced a plan to improve efficiency and production at the major refineries. Last year, Iran's refining capacity was increased to 2.0 mb/d.

Overall, total refinery runs in the Middle East region for 1Q13 are revised down by 170 kb/d at 5.6 mb/d, on reduced runs for heavy maintenance in Saudi Arabia and Kuwait and delays in commissioning Jubail refinery.

African refinery throughputs, for December, are estimated at 2.0 mb/d up 170 kb/d from last month as Nigeria delayed maintenance and upgrade work at its Port Harcourt refinery. The maintenance was initially planned for the last quarter of 2012 but was delayed to January as Japanese authorities gave negative travel advisory to JGC, the original builders of Port Harcourt.  The country has embarked on an ambitious maintenance and upgrading programme to increase the refining capacity of the nation's three refineries to 90% of installed capacity by 2014, against less than 30% today.

December crude runs remain slightly below last year's level as throughput in North Africa continues to be disrupted, boosting gasoline prices in the Mediterranean. In Algeria, the Skikda refinery upgrade is still not completed as one crude distillation unit and two reformers remained shut after one was affected by a fire early January and the second one was in maintenance for a change of catalyst. To meet the national needs, Sonatrach issued a tender to buy 300,000 tons of gasoline for delivery in February and March.

In Libya, the Ras Lanuf refinery has been closed down since the end of January due to technical issues, including a power failure and an employee strike. Facing technical difficulties operating their refineries at nominal capacity, Libya should import about 3 million tons of gasoline in 2013 to meet local demand from Lukoil and other foreign firms.

Egypt has reported through the JODI database crude runs of 568 kb/d in November, a level not seen since 2011. Refiners increased their production in order to reduce the strong diesel shortfall the country is currently facing. At the end of December, the Egyptian General Petroleum Corporation issued a tender requesting 450,000 tons of diesel per month from January until March to meet the country's fuel needs. Diesel shortfalls in Egypt are common as the country produces only 75% of its consumption and high fuel subsidies encourage a lucrative black market trade.