Oil Market Report: 13 March 2013

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  • Oil futures prices reversed their upward course in mid-February. By early-March, prices for benchmark Brent crude had fallen to nine-week lows and were last trading around $110/bbl, while WTI was pegged at $93/bbl.
  • Sluggish economic signals spanning several key economies underpin our projection of 0.9% or 820 kb/d annual growth in global oil demand for 2013, to 90.6 mb/d. This contrasts with a 1.4 mb/d growth average for non-recessionary years.
  • Global oil supply inched up in February by 90 kb/d, to 90.8 mb/d, led by a 150 kb/d hike in OPEC crude, to 30.49 mb/d. Increased Iraqi supply was the main factor behind the OPEC gain. Heavy spring refinery maintenance cut the 'call on OPEC crude and stock change' for 2013 by 100 kb/d from last month's estimate, to 29.7 mb/d.
  • Non-OPEC output slipped by 60 kb/d in February to 54.1 mb/d but remained 0.6 mb/d higher than last year, as North American output growth offset lower European and Latin American supply. Non-OPEC supply is forecast to grow by 1.1 mb/d in 2013, to 54.5 mb/d.
  • OECD commercial oil holdings rebounded by 22.5 mb to 2 689 mb at end-January. Total product stocks covered 30.7 days of forward demand, 0.1 day higher than last month. Preliminary data show OECD stocks fell by 12.9 mb in February, as a 20.2 mb draw in refined products outweighed a build in crude.
  • The estimate of global refinery crude runs has been cut to 74.8 mb/d on heavy US refinery maintenance and sluggish refining activity in Europe. As seasonal maintenance winds down in the US and Europe, Asia is just getting started, with a very heavy turnaround schedule from March onwards.

Crisis and opportunity

The oil market is so used to war and upheaval that some say it has resilience to political crisis in its DNA. The oil-producing world today is in the midst of a once-in-a-generation transition of far-reaching consequences. Rarely has the market's ability to withstand crisis been so tested as in the two years since the start of the so-called 'Arab Spring'. Yet the market seems to have taken it all - civil uprisings, terrorist attacks, natural disasters, production outages, trade embargoes - in its stride. The biggest challenges may still lie ahead, however, and the market's success in weathering the storm so far should not blind us to looming risks- nor should it cause us to miss the opportunities that crises can offer.

Despite potential uncertainty from President Chavez's death in Venezuela, oil prices continued their recent downtrend. The fact that Venezuelan oil-industry officials made a conscious effort to convey a sense of business-as-usual may have something to do with it. National oil company Petroleos de Venezuela was ready with a reassuring press release on 5 March, and the oil workers' union followed suit the next day. Having withstood other events relatively unscathed, the oil market did not sense any cause for alarm.

Yet the market's calm should not conceal an abundance of risk. That market participants managed to weather recent crises without crippling price spikes or supply shortfalls owes as much to serendipity (the North American supply revolution) and cyclical factors (economic weakness) as to effective and timely responses by policy makers in major producing or consuming countries. 

The challenges ahead cannot be overestimated. Much of the Middle East and North Africa region remains in turmoil. Civil war in Syria threatens to spread and the Iranian nuclear dispute is still unresolved. The only thing clear is that the current stalemate between Iran and the West is unsustainable: Sooner or later, something has to give. In Libya, the new leadership scored points by restarting production faster than anyone expected after the civil war, yet security risks linger there and have now spread to Algeria and beyond. In many emerging MENA democracies, what passes for political peace is often just a precarious balance of diverse if not conflicting interests among tribal, ethnic and religious groups. This is hardly a recipe for clear, stable and predictable oil policies let alone supplies.

Pundits and oil analysts seem nearly unanimous in predicting a win for Hugo Chavez's designate successor, Nicolas Maduro, in the upcoming presidential election. But that's about where the consensus ends. Whoever he may be, Venezuela's next leader faces a Catch 22 situation: current oil policies - namely, the diversion of oil revenues to fund costly social programmes - cannot continue without putting the oil industry - and the country's entire economy - at considerable risk. But neither can they be reversed without the risk of social unrest and political chaos.

The future of the Venezuelan oil industry, and of Venezuela itself, may well hinge on finding the right balance between the divergent needs of caring for the population and nursing a long-neglected oil sector back to health. A policy exclusively driven by the social agenda would be as doomed in the long run as one solely catering to business interests. Striking the right balance between the two has proved elusive in modern Venezuela, whose history can be described - at the risk of over-simplification -- as a pendulum swinging between 'Apertura' and Nationalism. The political transition underway may be an opportunity to learn from experience and get the balance right.



  • The macroeconomic environment underpinning oil demand, as of yet, shows little sign of short-term improvement. A string of recent developments, including the US sequester, worsening Chinese business sentiment and continued deterioration in European employment lend support to the IEA's demand growth forecast of 820 kb/d (or 0.9%) for 2013, which is below both the majority of other forecasters and the 1.4 mb/d average of the last five non-recessionary years. Together these three economic "hits", affecting as they do the world's three largest economies and oil consumers, appear to further delay an elusive turnaround in global economic, and in turn oil demand, growth.
  • At the same time, continued high oil prices weigh on the global economy and further undermine the likelihood of a strong recovery in either economic or oil-demand growth in the near future. The subdued growth rate of oil demand now looks increasingly entrenched in the face of high oil prices and weak economic growth. The IMF is forecasting only a very moderate uptick in global GDP growth in 2013, to 3.5%, from 3.2% in 2012.
  • Chinese consumption estimates, at the end of 2012, were inflated by higher refinery runs and a likely build in product stocks. An emerging disconnect between Chinese refining activity and oil demand growth, coupled with a number of recent economic signals casting doubt on the sustainability of the earlier pace of recovery, lead us to maintain our below-consensus forecast for Chinese oil demand growth in 2013, at 3.9%.
  • Estimates of 4Q12 demand have been revised steeply downwards, by 205 kb/d to 90.8 mb/d. That in turn has trimmed the 2012 average to 89.8 mb/d, 40 kb/d below the estimate in last month's Report. Turbulent end-year economic conditions curtailed estimated 4Q12 oil demand in both the US (-175 kb/d) and Germany (-50 kb/d), whilst baseline downward revisions cut the estimate of Turkish demand by 50 kb/d.

Global Overview

Continued deterioration in the European economic environment, signs of a potential slowdown in China and automatic US government spending cuts, combined to suggest that oil demand growth might remain relatively weak in 2013. The world's largest oil consumer, the US, which had been showing signs of a pick-up in the pace of economic recovery, now has to absorb $85 billion in government spending cuts - the so-called 'sequester' - unless US politicians come to a late agreement at the end of the month. Meanwhile, having weathered turbulent macroeconomic conditions in 2012, business sentiment in the world's fastest-growing oil consumer, China, is showing signs of waning. New Chinese inventory data also provide fresh evidence that steep product stock builds had much to do with an apparent increase in Chinese demand towards the end of 2012. Finally, the potential economic recovery remains sluggish at best in Europe. For example, euro-zone unemployment surged to new highs of 11.9% in January.

Demand growth of 820 kb/d is forecast for 2013, a reduction of 20 kb/d on last month's Report, taking global consumption up to an average of around 90.6 mb/d. This contrasts with consensus expectations of roughly 1 mb/d in annual growth this year and an average annual expansion of 1.4 mb/d for the last five non-recessionary years. Extending earlier trends, emerging and recently industrialised markets continue to outperform mature economies, reflecting stronger economic performance and more energy-intensive sectors of economic activity. Demand for middle-distillates also continues to outpace that of heavier products, such as fuel oil, with growth rates of 1.2% and -0.5%, respectively, in 2013.

Based on the latest data, earlier estimates of 4Q12 global consumption have been adjusted downwards to 90.8 mb/d, 205 kb/d (or 0.2%) less than forecast in last month's Report. Several countries accounted for the bulk of the adjustments for December, including the US (-520 kb/d), Germany (-155 kb/d), Turkey (-55 kb/d) and Taiwan (-45 kb/d). The UK provided a partial offset with upward adjustments of 95 kb/d to December demand, as did Japan (+60 kb/d), Russia (+35 kb/d), Saudi Arabia (+30 kb/d), Canada (+30 kb/d) and Egypt (+30 kb/d). Steep 4Q12 downward adjustments to demand estimates were not replicated for 1Q13, however. Based on still very patchy preliminary data, 1Q13 estimates have been trimmed by a mere 45 kb/d, to 90 mb/d, reflecting weaker-than-anticipated preliminary January numbers for the US (-85 kb/d), Italy (-65 kb/d) and a number of smaller revisions, nearly fully offset by higher-than-expected data for India (+170 kb/d) and Argentina (+45 kb/d).

Top-10 Consumers


Despite concerns about the recent steep gasoline price rally, preliminary data suggest this has yet to dampen consumption. There are signs that gasoline demand, after a protracted period of contraction, may have stabilised somewhat. Whereas demand, in the ten-months April 2011-through-January 2012, fell by an average of 3.2% y-o-y, the trend has since flattened (no change in the 12 months through January 2013). The latest EIA data even imply growth of around 3% in the first couple of months of 2013, but may not fully capture exports. Total US car sales, at 1.04 million in January, were up 14% on the year, with sales of relatively oil-intensive trucks particularly strong. February data for the major manufacturers showed continued gains: Ford +9.3%, GM +7% and Chrysler +4.1%. It is, however, far too early to call an end to the falling US gasoline demand trend. Assuming that US consumer sentiment strengthens further, US gasoline demand is forecast to rise by around 0.4% in 2013, to an average of around 8.7 mb/d.

Total US50 consumption (which includes all products), on the other hand, is forecast to lag that of gasoline, unchanged on the year at an average of 18.6 mb/d. The recent declines in demand for heavier products, such as residual fuel oil look set to continue, albeit at a lessened pace in 2013, as consumers increasingly substitute to natural gas. LPG continues to post gains, up 1.3% in 4Q12 and is forecast to rise by a further 1.6% in 2013, to 2.3 mb/d, with demand supported by the rapid take-up from the resurgent US petrochemical sector.

The risks to the US demand forecast remain heavily weighted to the downside, a sentiment reflected by the IMF's warning that automatic spending cuts could strip a further 0.5% from its already below-trend 2% GDP forecast for 2013. An eventual budget deal in Washington later this month would reduce the threat of the $85 billion sequester hit, however. Austerity cuts across the developed world will keep the economic climate and oil demand constrained. Further downside pressures are attached to the possibility of more rapid substitution towards cheaper natural gas.


Latest Chinese oil data leave our forecast of 3.9% in Chinese oil demand growth for 2013, to 10 mb/d, relatively unchanged. Based on preliminary estimates, apparent demand (i.e. refinery output, plus net product imports, minus product inventory builds) averaged 9.9 mb/d in January, equivalent to y-o-y growth of 770 kb/d. That is 190 kb/d less than the expansion seen in December (960 kb/d y-o-y), but only 30 kb/d less than assumed in last month's Report. In hindsight, it is becoming clear that December's more rapid 960 kb/d expansion, to 10.4 mb/d, was largely attributable to higher refinery runs seen at the end of the year. Anecdotal evidence confirms expectations that the start-up of new refining capacity led to a surge in oil product inventories.

The emerging disconnect between Chinese refining activity and oil demand growth, coupled with a number of recent economic signals casting doubt on the sustainability of the earlier pace of recovery, lead us to maintain our below-consensus forecast for Chinese oil demand growth in 2013, at 3.9% (or 380 kb/d). Most other forecasters are predicting Chinese demand growth of around 5% for 2013, although the spectrum of estimates varies widely, from lows around 3.8% (OPEC) to highs of 5.2% (several bank forecasts).

Always favourite indicators of real-time economic developments, the Purchasing Managers' Indices (PMI) are a worry given the degradation seen recently. HSBC's closely watched manufacturing PMI fell to 50.4 in February, from a revised 52.3 in January. Although any indicator above 50 still signals more business leaders reporting 'expanding' sentiment than 'contracting', the deterioration depicts a dampening in optimism. The official government PMI, which focuses on larger state-run companies, confirmed this message, falling to 50.2 in February (50.4 in January). Despite talk of rebalancing the economy towards domestic expenditures, China is still heavily dependent upon export sales, which suffered a sharp deceleration in 2012 (+8.4%, from 20.7% in 2011). Export sales remained strong in January and February, respectively rising on a y-o-y basis by 25% and 21.8%. Domestic demand concerns, however, widened as imports fell 15.2% y-o-y in February, after January's 28.8% gain, the rhetoric at present being that the timing of the Lunar New Year holiday (in February 2013, opposed to January 2012) caused the import swing. Careful attention must be paid to these numbers moving forward.

Chinese apparent demand growth is expected to show signs of a slowdown in February, in part a reflection of the Chinese New Year holiday lull, though potential draws in recently accumulated product stocks could be concealing stronger end-user consumption. The holiday calendar this year likely boosted January apparent demand, up 8.5% on the year, at the expense of February, up 6.2%. Such a calendar-driven distortion was likely especially pronounced in products used for industrial purposes such as gasoil (+3.6% in February), naphtha (+2.9%) and fuel oil (+2.9%), while gasoline demand (+7%) may have been less directly affected. A further drop in demand growth is forecast, through mid-2013, as seasonal refining maintenance is expected to slash crude throughputs from March onwards. Momentum should accelerate once again towards the end of the year on stronger economic activity, supported by an additional period of destocking. The assumption of stronger economic conditions in 2H13 is supported by reports that Standard & Poor's has raised their outlook on the Chinese housing market, from negative to stable. Furthermore, new home sales rose by 1% in the month of January, according to a survey by SouFun Holdings, the real estate company, its biggest gain in two years and its eighth consecutive rise.

Having outperformed the overall market in 2012, gasoline demand is forecast to once again lead momentum in 2013, albeit at a diminished pace (+5.1% in 2013, +7.7% in 2012) as car sales ease (China Automobile Dealers Association predicting a gain of 5% in 2013, half that of the previous year). The longer-term trend remains, in our opinion, one of relatively subdued growth, as car purchases in recent years have been largely of a more efficient variety, gaining support from subsidised efficient-car-purchasing schemes such as that seen in 2008-2010. Recent hikes in retail prices of both gasoline (+3.5%) and diesel (+3.8%) slow the very short-term momentum, although they remain supportive over the medium-term as they maintain refining margins. Other rapidly expanding product segments, such as naphtha are forecast to grow by around 75 kb/d in 2013, as additional ethylene capacity comes online.


Revised 4Q12 statistics show Japanese consumption rising by around 30 kb/d y-o-y (or 0.7%), to 4.9 mb/d. This is the slowest level of growth since 3Q11, as Japanese oil demand had previously been strongly rising in the wake of the Great East Japan Earthquake of March 2011, with fuel oil/crude demand supported by the need to make up for lost nuclear power output and gasoil consumption ratcheted up in the reconstruction effort. December data came out 60 kb/d ahead of prior expectations, as colder weather conditions boosted kerosene demand, up 8.1%, whereas we had forecast a 4.3% gain. The recent slowdown has occurred for two key reasons: first, growth is now measured against a much lower benchmark for the reference period; and, secondly, economic conditions have deteriorated since the Japanese economy entered a recession in 2H12. GDP fell by around 0.1% between 4Q12 and 3Q12.


Demand growth in India rose to a 14-month high of 7.9% in January, as consumption averaged 3.8 mb/d. Support came from additional early-month purchases ahead of mid-January's diesel subsidy reduction programme (equivalent to a price hike of one US cent per litre, per month). Diesel demand in January rose by 8% on the year (or 105 kb/d), to 1.4 mb/d. Gasoline consumption posted even stronger growth, up 12.1% (or by 40 kb/d), albeit from a much lower base, to 375 kb/d. Assuming that the diesel-subsidy reduction programme continues, given the muted political opposition seen in January, gasoline demand could well out-pace diesel in 2013: rising by 3.8% as opposed to diesel's 3.1% forecast gain. Overall Indian consumption growth of around 2.8% is forecast in 2013, to 3.8 mb/d, as rising diesel prices dampen the optimism otherwise generated by strengthening macroeconomics.


Significant upward revisions to historical Russian demand estimates left a more bullish spin on the 2012 demand story, with growth of around 140 kb/d (or 4.2%) now estimated, to 3.4 mb/d. Last month's Report put the 2012 increase at a more subdued 115 kb/d, as revisions to the 2012 series (45 kb/d higher) outpaced those applied to 2011 (+20 kb/d). Similarly paced growth is foreseen in 2013, as the macroeconomic underpinnings remain relatively unchanged for Russia, at around 3.6% anticipated growth in both years. Transportation fuels are forecast to lead the upside momentum in 2013, led by rising incomes.


Official Brazilian data for December were in line with expectations, at 3.1 mb/d, a gain of 3.5% on the year earlier. Transportation fuels continue to lead the upside, with gasoline demand 5.5% higher and gasoil/diesel rising by 4.8%. Demand conditions solidifying towards the end of the year as the strengthening industrial backdrop supports inflated consumer spending patterns. Further consumption growth of around 2.8% is forecast for 2013, as the economy remains supportive (IMF forecasting GDP 3.5% higher in 2013) but government-induced price gains (gasoline +6.6%/diesel +5.4% in January, with a further 5% diesel hike in March) keep momentum in check.

Saudi Arabia

Revised data put Saudi Arabian consumption at 2.7 mb/d in December, just 30 kb/d above last month's forecast, as gasoil/diesel posted its strongest growth rate (+9.3% y-o-y) since September. Domestic transport fuels led December's upside, underpinned by hearty consumer sentiment indicators (Nielsen's consumer confidence index for Saudi Arabia came in at 112 in 4Q12, whereby a reading above 100 indicates a bias towards optimism), with gasoline up 11.9% y-o-y. Robust non-oil manufacturing activity, depicted by the strongly plus-50 SABB/HSBC manufacturing PMI, supported gasoil and LPG (+2.5% in December) demand. Despite easing in November, the PMI remained buttressed above the key 50-expansionary threshold. Stripping back the PMI results, output and new orders are picking up, supporting further rises in employment. Having expanded by around 4.8% in 2012, a deceleration is forecast to 3.8% in 2013 (to 3.1 mb/d) consequential on eased macroeconomic momentum.


Korea experienced a relatively flat demand trajectory in January, at 2.4 mb/d, only 0.2% higher than the year earlier. The status-quo was maintained as robust growth in gasoil/diesel and gasoline, offset sharp contractions in LPG and fuel oil. A cold spell saw jet/kerosene demand reversing its previously sharply falling trend (prior six-month trend -7.7%), rising by 0.1% in January. Similarly sized total consumption, i.e. 2.4 mb/d, was seen in December, depicting a y-o-y decline of 1.5%. Despite predictions of strengthening economic growth in 2013, oil consumption growth is forecast to essentially vanish as the government makes a concerted effort to restrict the import bill, through a package of regulations and tax incentives that will support the usage of hybrid/small cars, public transportation and lower air conditioning use.


Large historical data revisions leave a more upbeat sheen on the Canadian oil demand picture, with our 4Q12 estimate now put at 2.4 mb/d, 60 kb/d more than envisaged in last month's Report with modified estimates for LPG and gasoline leading the way. The year-on-year growth trend, at +4.8%, is its most rapid clip since 1Q11, as an economy already buttressed by robust growth in oil sands looks to be gaining additional industrial momentum, with RBC's manufacturing PMI pointing towards strongly 'expansionary' territory. The transportation fuel markets, of jet/kerosene (+24.8%) and gasoline (+4.6%) look particularly strong in 4Q12 as strengthening employment prospects increase Canadians' propensity to travel.


Mexican consumption fell heavily in December, down by 3.5% on the year, to 2.2 mb/d. The fall saw a reversion to the previous negative trend, after a two-month hiatus (with an average gain of 6.4% seen between October and November) triggered by the temporary closure of the large Reynosa gas processing facility. Fuel oil momentarily filling the gap as a replacement fuel for natural gas. The average total decline rate in the three-months prior to October was 1.7%, hence the second half of the year saw little change overall on the year earlier.


Preliminary data for January implies a flattening in the y-o-y trend decline, though we are not confident this will hold in 2013. Indeed, this is not the first time the decline rate has abated, it also did so in October only to fall again sharply in November and December (down by an average of roughly 2%), while OECD consumption even rose by around 2% in May only for the gain to prove temporary the next month. Transportation fuels led January's upside, with gasoline 0.9% higher and jet/kerosene up 2.3%.


Preliminary OECD Americas demand estimates for January depict the weakest conditions in the US, with US50 consumption up 0.4% against a regional gain of 0.8% y-o-y, to 23.4 mb/d. Slow US demand growth reflecting the relatively weak economic picture at the turn of the year. Lighter products are leading the upside, for the region as a whole, with gains of 2.7% seen in jet/kerosene and 2.4% for gasoline, whereas heavier products, such as fuel oil (-17.2%), fell heavily. The forecast is for very modest overall demand growth in 2013, up 0.1% (or 20 kb/d), as meek macroeconomic supports offset continued efficiency swings and early stage substitution out of oil products over to natural gas.


Demand in Europe remains blighted by the harsh economic headwinds, with the euro zone economy in 4Q12 falling by its fastest pace since the collapse of Lehman Brothers. GDP declined by 0.6%, between 3Q12 and 4Q12, with the two largest economies - France and Germany - both falling heavily, respectively contracting by 0.3% and 0.6%. Business surveys, which imply how economic momentum will pan out over the following six months, paint a mildly more optimistic picture, hence the predicted easing in the rate at which European oil demand falls in 2013, now forecast to decrease by 2.2% (to 13.4 mb/d), after the decline of 4.5% seen in 2012. With an unpalatable euro-zone record unemployment rate of 11.9% breached in January, consumption of oil products that are heavily dependent upon consumer sentiment, such as transport fuels, has been particularly dented.

A uniform outlook is not expected across OECD Europe, with sharper declines forecast in the more highly indebted southern European states, while the relatively more robust northern European nations post less rapid descents. This is relative, however, as most of Europe is forecast to see falling oil consumption in 2013, it is just degrees that vary. Countries such as France and the UK, which sit in the middle of this notional divide, will accordingly under-perform northern Europe, but outperform the south. French consumption is forecast to fall by around 45 kb/d (or -2.5%) in 2013 (to 1.7 mb/d), a decline greater than that forecast for Germany (-1.4%, see Germany in Top-10 consumers), as the pace of the predicted decline reflects the IMF's relative economic estimates: with GDP growth of 0.4% forecast for France in 2013 and 0.9% for Germany. The national statistics agency of France, Insee, reported a 2.3% decline in French manufacturing output, 3Q12 to 4Q12, a drop to which "all major (manufacturing) branches contributed" and the sharpest fall since 1Q09.

Downwards revisions to recent German statistics took 155 kb/d off the December demand estimate (to 2.2 mb/d), leaving an amended decline rate of -3.7% y-o-y (versus +3.1% wrongly gleaned from preliminary delivery statistics). Notable curtailments were made across all of the main product categories: naphtha (-70 kb/d, to 375 kb/d) and gasoil/diesel (-45 kb/d, to 1 mb/d). For 4Q12 as a whole, German consumption averaged 2.4 mb/d, 0.5% (or 10 kb/d) less than 4Q11, as the economy shrank by roughly 0.6%, 3Q12 to 4Q12, reflecting the weak performance of net exports and investments in plants and machinery.

The historical Turkish data series have been revised heavily since last month's Report, as comprehensive annual data releases are now available, stripping 55 kb/d out of the amalgamated 2012 series although an average of 50 kb/d was added 2009-through-2011. The substantially lower 2012 Turkish demand estimate is chiefly attributable to lower estimates of naphtha and 'other products', respectively curtailed by 30 kb/d and 20 kb/d. The combined revisions result in a declining consumption trend of -3% in 2012, to 670 kb/d. Turkish demand fell as the country's economy has grown more reliant on providing manufactured goods to Europe. This shift has left Turkey highly susceptible to the European debt crisis. Indeed, economic growth in Turkey of around 2.6% in 2012 is down substantially from the 8.5% expansion seen in 2011.

Other notable European data revisions, incorporated in this month's Report, include the 95 kb/d addition made to the UK December demand data. Revised government statistics reveal UK consumption averaging 1.5 mb/d in December, essentially unchanged on the year earlier whereas we had anticipated a 6% drop in-line with the previous six-month trend (-7.7%). The majority of December's revision was attributable to higher LPG demand, as a petrochemical facility came back on-line (as opposed to an underlying strengthening in the British petrochemical sector). Consumption growth is likely to weaken in 1Q13, with February demand a particular concern for gasoil and fuel oil as the manufacturing PMI fell to 47.9 in February. Having fallen by around 5.5% in 2012, a further decline in total UK oil demand of around 2% is forecast for 2013, a result of expected continuing weakness in the macroeconomic situation (+1% GDP, according to IMF), although not as subdued as in 2012 (-0.2%).

Asia Oceania

The trend of robust OECD Asia Oceania demand growth, that took root mid-2011 amid the Japanese earthquake and tsunami, has effectively ended. Having peaked at 7.5% in 2Q12, OECD Asia Oceania demand growth has gradually declined, falling to around 0.1% in January, according to preliminary data. The key Japanese replacement fuels - i.e. residual fuel oil and 'other products' (including crude oil for direct burn in the power sector) - led the climb-down. Fuel oil demand growth peaked at over 30% y-o-y in 2Q12 before easing back to 1.5% in January. The expansion in 'other product' demand growth maxed-out at 46% in 4Q11, before easing into negative territory in December, down 1.2% y-o-y. The total OECD Asia Oceania forecast for 2013 is for an average decline rate of 1.6% on the year, to 8.4 mb/d.


Emerging markets continue to provide the majority of the growth in global oil demand, as preliminary estimates of non-OECD demand point towards a 4.2% y-o-y gain in January, to 43.6 mb/d. Supported by a much more resilient economic backdrop, non-OECD consumption is forecast to expand by a further 2.8% in 2013, to 45.1 mb/d. All of the main product categories saw robust January expansions, although jet/kerosene demand growth eased somewhat (to 3.1%, from 5% in December), as reports of a notable airline closure in the Middle East, Bahrain Air, highlighted a possible weakness. Strong profit numbers at other Middle Eastern airlines, however, suppressed fears that non-OECD jet/kerosene demand is due for a correction. Air Arabia reported rising passenger numbers (5.3 million in 2012), whilst Kuwaiti Jazeera airways posted record profits ($49.3 million in 2012, up 32% on the year) and Flydubai reversed two years of losses.

This month's analysis is somewhat unusual given the exceptionally small size of the December revision, with just 25 kb/d (or 0.05%) added to the previous forecast number. Notable December additions include Saudi Arabia (+30 kb/d) and Egypt (+30 kb/d) are more than enough to offset the large (-45 kb/d) Taiwanese curtailment.

The number of large closures in the Taiwanese petrochemical sector led to a deterioration in oil demand conditions in December, with only 945 kb/d of oil products consumed. This revised December estimate is 45 kb/d below the forecast we carried in last month's Report and a 5 kb/d reduction on the year earlier. The prior four-month average was for an increase of 45 kb/d y-o-y. Naphtha led the downside, with numerous crackers such as CPC's Linyuan petrochemical facility operating at reduced capacity due to maintenance. Taiwanese naphtha demand averaged 370 kb/d in December, a gain of 40 kb/d on the year earlier as opposed to previous four-month average increase of 75 kb/d.

Stronger-than-expected Algerian demand in December added 20 kb/d to the 2012 estimate, of 375 kb/d. Terrorist attacks in 1H13 will likely keep the forecast growth track subdued in 2013, at around 15 kb/d, well below the 25 kb/d expansion seen in 2012. Assuming relative calm through to the end of the year, transportation fuels will lead forecast demand growth in 2013: gasoline +6.8%, gasoil/diesel +4.9% and jet/kerosene +4.6%. Recent revisions, meanwhile, imply the corresponding political disruptions in Egypt have had a lesser impact on oil demand than previously predicted. Egyptian consumption rose by 5.5% y-o-y, to 730 kb/d in December, a number 30 kb/d more than assumed in last month's Report. Similarly sized additions have been carried across the Egyptian forecast for 2013, to 750 kb/d for the year as a whole due to strengthening economic growth (IMF foresees 3.3% in 2013, after the 2.2% expansion in 2012 and 1.8% in 2011). Recent price increases limit the scope for more rapid gains in consumption, with Reuters reporting industrial price hikes of up to 50% (19 February), for gasoil, fuel oil and natural gas. Cash constraints are forcing the government to reduce unaffordable energy-subsidies, in an effort to secure emergency loans from the IMF totalling $4.8 billion. Long queues at filling stations suggest that higher prices are required, as do black market diesel prices that are reportedly double official rates.



  • Global supplies rose in February m-o-m by 90 kb/d to 90.8 mb/d on the back of increasing OPEC output, while non-OPEC supply decreased slightly. Compared to 2012, February production stood 110 kb/d lower, as growth in non-OPEC liquids and OPEC NGLs failed to offset a 930 kb/d decline in OPEC crude.
  • Non-OPEC output for 1Q13 is expected to average 54.1 mb/d, a gain of 720 kb/d y-o-y but a 170 kb/d dip from lofty 4Q12 levels.  Maintenance at Canada's oil sands facilities, new unplanned outages in the North Sea and a seasonal decline in biofuels are the main factors behind the quarterly decrease. Supplies are expected to grow by 1.1 mb/d to 54.5 mb/d in 2013. 
  • OPEC crude oil supply was marginally higher in February, up 150 kb/d to 30.49 mb/d, largely on increased supplies from Iraq. Demand for OPEC crude remained subdued by cutbacks from refiners as the peak spring turnaround period gets underway, especially at plants in Asia. The 'call on OPEC crude and stock change' for both 1Q13 and full year 2013 was revised down by 100 kb/d on higher non-OPEC supplies, to 29.7 mb/d for both periods.
  • Increased militant activity across North and West Africa, however, may curb output from Libya and Nigeria in March. A raft of kidnappings and murders of foreign workers has further destabilised Nigeria and marks a new chapter in the violent campaigns by Islamic extremists targeting Europeans across the region.
  • Venezuelan oil operations have remained stable following the death of President Hugo Chavez on 5 March after 14 years of rule, though upcoming special elections in April may prove challenging.

All world oil supply figures for February 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 was marginally higher in February, up 150 kb/d to 30.49 mb/d. Increased supplies from Iraq as well as smaller increments from Iran, Algeria, Qatar, Nigeria and Libya offset lower output from Angola. Demand for OPEC crude remained subdued by cutbacks from refiners as the peak spring turnaround period gets underway, especially at plants in Asia. Increased militant activity in Libya and Nigeria, however, may curb output in March. The passing of Venezuela's president, Hugo Chavez, had no immediate impact on output, though upcoming special elections in April may prove challenging (see 'Daunting Challenges Ahead for Chavez's Successor'.

OPEC's 'effective' spare capacity in February was estimated at 3.59 mb/d versus 3.8 mb/d in January. The 'call on OPEC crude and stock change' for both 1Q13 and full year 2013 was revised down by 100 kb/d on higher non-OPEC supplies, to 29.6 mb/d and 29.7 mb/d respectively.

Saudi Arabia's crude production was steady at 9.25 mb/d in February. Seasonally lower domestic use of crude for burning at power plants and reduced refiner demand from Asian customers undergoing refinery turnarounds have capped production in recent months, which is running around 500 kb/d below the 2H12 average of 9.78 mb/d.

Looking forward, however, Saudi Aramco has lowered April official selling prices again for Asian customers. The easing is in line with weaker prices for benchmark Dubai crude (see Prices section). From April onward, the Saudis look poised to slowly ramp-up production to meet higher demand from refiners as they come out of turnaround, seasonally increased demand for crude burn and higher shipments to domestic refineries following the planned inauguration in mid-year of the new 400 kb/d Jubail facility, Saudi Aramco's joint venture with Total. Start-up of the new heavy oil Manifa project this summer will also increase capacity, with the timing designed to dovetail with that of the new domestic refinery.

After running below the 3 mb/d mark for the previous two months, Iraqi production rebounded smartly in February, up by 170 kb/d to 3.14 mb/d. Exports increased just shy of 200 kb/d, to 2.58 mb/d, with higher shipments from both the southern and the northern exports routes. Basrah exports rose by around 135 kb/d to 2.24 mb/d. Volumes were somewhat constrained by weather-related delays in the Arab Gulf but the end of field maintenance work at Rumaila led to higher production flowing southward. Increased output from JV projects in early 2012 has led to an overall lowering of quality of Basrah crude. However, the long-delayed installation of storage tanks at the Fao terminal has now enabled the blending of existing and new crude flows, which led to an overall slight increase in API quality in February, according to industry sources.

Northern Kirkuk volumes via the Ceyhan terminal on the Mediterranean were up by 65 kb/d to around 325 kb/d. A further 15 kb/d of Kirkuk crude was trucked to Jordan. There were no exports via Ceyhan from the Kurdish region again in February due to the ongoing dispute between Baghdad and Erbil over payments.

The ongoing dispute over oil revenues between the central government in Baghdad and the Kurdistan Regional Government (KRG) continue to constrain production potential in the northern region of the country, with tensions worsening in recent months over revenue sharing and payments for past shipments.

Iranian output edged marginally higher in February, with increased output reportedly going to China and India. Output was estimated up by 70 kb/d to 2.72 mb/d. Iranian tanker company NITC reportedly put in service old tankers overhauled from the scrap yard by foreign middlemen, with shipments earmarked for China. The refurbished tankers are in addition to the 12 new contracted builds from Chinese shipyards, of which two VLCCs were delivered in January, bringing the total to five to date. Some of the new tankers are expected to be used for floating storage. Iran also is building new onshore storage tanks, according to recent reports, with plans to add just over 8 mb of storage in six months. Iran's 20 mb of storage at Kharg Island and 5 mb at Lavan Island are reportedly full of unsold crude.

Imports of Iranian crude in OECD and non-OECD countries rose in February, to 1.28 mb/d from an upwardly revised 1.13 mb/d for January. Preliminary data for the current month, based on tanker data, are now being adjusted higher by around 180 kb/d based on recent trends. Import volumes are based on data submitted by OECD countries and non-OECD data from customs agencies and news reports. By contrast, tanker data is the only source of information for the most current month. As expected, tanker data are inevitably biased by Iran's instructions to its tanker fleet to turn off its tracking beacons. We have therefore applied an adjustment based on a three-month rolling average to the most recent month to provide a more accurate assessment of current levels.

New US sanctions implemented in February, which bar Iran from repatriating earnings from its oil exports, appear not to have had an impact on February shipments. Customers must make payments into an escrow account at a bank in the importing country, effectively limiting Iran's use of the proceeds to buying goods within that country. Countries that violate the expanded sanctions risk being banned from the US financial system.

Meanwhile, the latest round of negotiations between Iran and the UN P5 +1 nations (the US, UK, France, Russia, China plus Germany) on 26 February in Kazakhstan achieved little of substance. Like the last meeting in June 2012, no progress was made on the standoff on Iran's nuclear development plans. The P5+1 were prepared to ease some sanctions on financial transactions and trade related to gold and precious metal, but not oil, if Iran agreed to halt its work to enrich uranium to 20% grade at the Fordo site, but no compromise was reached. A working level meeting is scheduled to take place 17-18 March in Istanbul with the next formal talks between the P5+1 and Iran scheduled for 5-6 April again in Almaty. Iran also appears to have low expectations for a breakthrough in the stalemate, if its new budget presented for the fiscal year starting 21 March 2013 is any guide. The government has budgeted for an average 1.3 mb/d in the new year compared with an average 1.4 mb/d in the first ten months of the current year. This figure is in line with OMR estimates of an average 1.38 mb/d for the same period.

Elsewhere in the Gulf, Kuwait and the UAE marginally reduced output in February, by 30 kb/d to 2.79 mb/d and 50 kb/d to 2.55 b/d, respectively.

Libyan supplies rose by 20 kb/d to 1.4 mb/d in February but volumes are poised to fall again in March amid partial shut-in at several Eni and National Oil Company-operated fields following clashes between local militias. Natural-gas production was suspended at the Mellitah complex and output shut-in at the Elephant and Wafa fields by 25%, and may be cut by up to 50% from its regular output of 210 kb/d until security is restored. The regionally important 10 bcm/y Greenstream gas project was shut after clashes between local militias forced the closure of the coastal Mellitah facility, which processes gas from the offshore Bahr Essalam gas field and the onshore Wafa field.

Production in neighbouring Algeria was estimated at 1.16 mb/d, flat with a downward adjusted January output level. While the In Amenas terrorist attack affected natural gas and gas liquids output, no crude production was affected.

Nigerian output rose by 20 kb/d to 2.02 mb/d in February. Slightly higher Bonny and Forcados output was partially offset by the continued force majeure on Qua Iboe volumes through much of the month. However, Shell announced force majeure on 5 March due to attacks on the Nembe Creek trunkline. The company reported that between 22-25 February 12 flow stations producing into the pipeline were shut down by safety systems three times due to oil thefts. It is unclear when the line will be up again. A raft of kidnapping and murder of foreign workers has further destabilised Nigeria and opens a new chapter in the violent campaigns by Islamic extremists targeting Europeans across North and West Africa, a growing concern of IOCs operating in the region.

Angolan output remained on a downtrend, off 50 kb/d to 1.72 mb/d, due to continued technical issues. New offshore PSVM production is running below expectations. The BP-operated complex of fields is producing around 70 kb/d from the Plutao field as part of the first phase. Additional output is not expected until later this year when production from the Venus and Saturno fields come online. Start-up of the last field, Marte, is not expected until early next year, which will bring nameplate capacity to 150 kb/d. A total of 40 oil production, gas and water injection wells will be connected via 15 subsea manifolds to the 1.6 mb storage capacity FPSO. In February, Technip was awarded a five-year service contract for the under-performing Greater Plutonio and new PSVM FPSO facilities.

Daunting Challenges Ahead for Chavez's Successor

Venezuelan oil operations have remained undisturbed by the death of President Hugo Chavez announced on 5 March after 14 years of rule. Special elections are now set for 14 April. At present, Chavez's anointed successor, Vice-President Nicolas Maduro, is widely tipped to win the election against opposition leader Henrique Capriles. If so, a Maduro presidency could see a further degradation of the state oil company and the country's oil prospects. Chavez, the architect of the country's nationalistic oil policy, left a legacy of mounting economic pressures, a financially stressed state oil company, PDVSA, an aging oil infrastructure in dire need of fresh investment both upstream and downstream, and future oil production partly mortgaged to Chinese lenders. Under Chavez's watch, Venezuela, once a large product exporter, has become a net gasoline importer. Near term, the post-Chavez transition to a new leadership could prove raucous, but oil production operations are expected to remain unaffected with Energy Minister Rafael Ramirez remaining at the helm of the oil sector.

In the medium term, Venezuela's oil industry faces enormous challenges, from severe under investment by state PDVSA, and decaying infrastructure, to an oil policy that kept foreign partners waiting in the wings for a serious reorganisation. At the same time, the country's political leadership, whether drawn from the ranks of the Chavistas or the opposition, may find it expedient, for the sake of social stability, to continue Chavez's policy of raiding PDVSA coffers to fund ambitious social programmes, at least for some time.

PDVSA has long been the cash cow that fuelled President Chavez's expensive social programmes to the detriment of investment in the country's oil sector. Under Chavez's rule, crude oil production fell some 700 kb/d, from around 3.2 mb/d in 1998 to 2.5 mb/d on average in 2012. Venezuela's production reached a peak of 3.7 mb/d in 1970 but the 1976 nationalisation of the country's oil industry and launch of state oil company PDVSA led to a steep drop of investment in production following the departure of foreign oil companies. After production hit a 1985 low of 1.68 mb/d Venezuela launched its 'Apertura,' or opening via service contracts to international oil companies in 1991, which led to a rapid increase in production of a steep 1.1 mb/d in just seven years, from a 1990 average of 2.1 mb/d to 3.2 mb/d by 1997.

The election of Hugo Chavez in 1998 triggered yet another crisis for the oil sector. A battle for control of PDVSA between Chavez and the companies' executives led to a workers' strike and Chavez firing 18,000 staff at the end of 2002. By January 2003 production dipped to a new low of 1.3 mb/d. The recovery in output ebbed and flowed and has yet to reach pre-strike levels of 2.8 mb/d. The 'renationalisation' of contracts whereby PDVSA took a majority interest in projects in 2007 forced a number of IOCs to leave the country and a raft of law suits ensued. The partial nationalisation of oil service firms and takeover of assets in 2010 undermined production elsewhere in the country. Several companies, including Chevron, BP, Statoil and Total accepted the less attractive terms for their projects in the Orinoco belt, which have to date proved disappointing given lack of funding by PDVSA.

Because of the country's shifting oil policies and unstable investment climate under Chavez, Venezuela produces at just a fraction of its potential given its ranking as the world's top proven holder of reserves, which are defined as discovered volumes having a 90% likelihood of being developed. Development of its massive Orinoco heavy oil belt is way behind schedule, largely due to a lack of funding from PDVSA. Project timelines for the six major contracts in Orinoco remain stubbornly vague. Token amounts of production from some Orinoco projects were announced ahead of last year's election but apparently add up to only a few thousand barrels a day.

Estimates for Orinoco output have held in a steady range of just below 400 kb/d due to chronic operating problems and despite first output in September 2012 from the 200 kb/d Petromacareo joint venture with PetroVietnam and the much smaller 45 kb/d Petromiranda project, with Russian partners Rosneft and Lukoil. CNPC's 400 kb/d Junin Block 4 joint venture and ENI's 240 kb/d Junin Block 5 project are both expected online in 2013, however, ramp up in all projects is expected to be extremely slow given financial and operating constraints.

The Orinoco developments are expected to add 1.24 mb/d of gross capacity at peak production by 2017. Over the forecast period, however, net capacity growth will rise by just over 200 kb/d, to 2.8 mb/d, with the bulk of production not fully online until after the end of our forecast horizon.

Irrespective of who is elected president, maintaining social spending may prove unavoidable in the near to medium term. PDVSA's finances, however, were nearly emptied by the Chavez government to fund a massive wave of social projects to woo voters ahead of last autumn's election. Indeed, Venezuela requested an urgent loan from China in November 2012 and again this February but Beijing reportedly declined. Whether the new leadership can maintain calm in the face of an increasingly strained and complex economy is unclear. The debt-laden country has made it a priority to maintain its payments under the Chavez government but the new government may find it difficult to meet its obligations against a backdrop of stagnant production and revenues.

The first Chavez programme tipped to unravel may be its oil diplomacy programme with neighbouring countries. The costly subsidised oil sales to Central American and Caribbean nations has been a bone of contention within the country for some time and may be scuppered in favour of increased crude oil exports at market prices given current strained finances.

Agreements of oil for loans between China and Venezuela proved a windfall for Chavez's coffers initially but the bilateral relationship has proved difficult and disappointing for Beijing. China has provided Venezuela with relatively cheap financing than standard debt issuance, with loans now totalling some $30 billion. In turn, Venezuela is obliged to ship some 600 kb/d to China every month. In reality, both the volumes and quality of crude vary month to month. Venezuela's erratic adherence to the contracts has become a major cause of concern of Beijing, with speculation that China could delay disbursements of funds if the problems are not resolved, or worsen, under the new government. It is unlikely China will provide another oil-for-loan arrangement in the near term, especially after turning down requests as recently as last month.

Analysts say it is only a question of how long the current precarious financial and economic can be sustained before the country's faces yet another crisis. The burgeoning national debt, hyperinflation, capital flight, shortages of goods as well as a high crime rate add yet more instability. Oil prices below $110/bbl could add further pressure. "It is difficult to determine a precise level of oil prices that allows the country to fund itself. However, with Brent at an average of $108 a barrel in 2012, the country still runs a 5% of GDP consolidated government deficit (including PDVSA)," according to Citibank.

Non-OPEC Overview

North American oil sands and light tight oil (LTO) continue to drive unprecedented annual growth in non-OPEC supply. Each month seems to see new annual growth records, and the pace of growth is set to abate only slightly in the upcoming months. A y-o-y gain of 1.1 mb/d in US oil supply in 4Q12 was a record not only for that country but also for any non-OPEC producer since at least 1994. In Canada, mined synthetic crude output reached an all-time high of 1 mb/d in 4Q12, while the spread of LTO production from the US to Canada lifted Alberta light and medium output to its highest level in a decade.

For 1Q13, non-OPEC output is expected to average 54.1 mb/d, a 720 kb/d increase y-o-y but a 170 kb/d dip from the high of 54.3 mb/d reached in 4Q12. Maintenance at Canada's oil sands facilities, new unplanned outages in the North Sea and a seasonal decline in biofuels are the main factors behind the quarterly decline. Other setbacks include continued pipeline sabotage in Colombia, while Brazil and Russia are expected to achieve only marginal output growth. The restart of oil exports from South Sudan increased in probability this month with the signature of the final and most contentious agreement on border security. And, Total announced that it would restart production from the Elgin/Franklin fields though at reduced rates.

Since last month, we have adjusted our non-OPEC supply estimates by +30 kb/d for 2012, to 53.4 mb/d, and by +60 kb/d for 2013, to 54.5 mb/d. Annual growth in 2013 thus now looks slightly higher than last month, at 1.1 mb/d. Upwards revisions to baseline Texas production account for most of the adjustment. There were also a series of smaller, mutually offsetting revisions. Australian government statistics for 2012 have been revised downwards, while Indonesia's output has been adjusted upwards. Regarding biofuels, we now take a more optimistic view of US biodiesel and Brazilian ethanol output for 2013, but a more pessimistic view of US ethanol output. Higher maintenance than expected at Canadian mined synthetic crude facilities also reduces the estimate for Canadian output by 90 kb/d in 2013. 



US - February preliminary, Alaska actual, other states estimated: US crude oil production stayed at 7.1 mb/d in February, preliminary weekly data from the US Energy Information Administration (EIA) indicate. For December, the latest Petroleum Supply Monthly (PSM) report from the EIA pegged crude production at 7.03 mb/d, a gain of 890 kb/d y-o-y and of around 20 kb/d m-o-m. For 4Q12, liquids production surged by a staggering 1.1 mb/d y-o-y, the steepest annual growth rate posted by any non-OPEC country since at least 1994. However, a 100 kb/d fall in NGL output dragged down total liquids output by 90 kb/d in December, to 9.7 mb/d. EIA also revised upwards historical 2011 and 2012 data for Oklahoma and Colorado. Carried forward, this adjustment resulted in a slight uptick in the forecast for these states. EIA revised Texas (and thus US) output upwards by around 10 kb/d in Q1-Q3 of 2012 but a substantial 60 kb/d in October and November 2012, resulting in a higher baseline, which has been carried forward through the Texas forecast. Increased drilling activity accounts for additional adjustments to the outlook for Permian and Eagle Ford output. In sum, our forecast of US liquids output has been raised by 160 kb/d in 2013 to 9.99 mb/d, a growth of 840 kb/d y-o-y. Texas accounts for 73% of the change and other Lower-48 accounts for 33%.

Canada - December preliminary: Canadian oil production has increased rapidly over the last several months, reaching an all-time high of 4.1 mb/d in December on the back of a record 1 mb/d in synthetic crude output from surface mining operations. Canada's eastern offshore production returned to around 90% of pre-maintenance output of 250 kb/d. Alberta Light and Medium output reached 440 kb/d, the highest level in a decade, on the back of new LTO development. Suncor reported that it had completed tying-in, and producing from, new wells in December in Alberta's Cardium tight oil formation. Multistage fracturing techniques are increasing output in the Viking and Cardium tight oil plays in Alberta, as well as in Saskatchewan and Manitoba. On balance, Canadian output is expected to increase by 200 kb/d to 4.0 mb/d in 2013.

But planned maintenance at surface mining projects is likely to dent Canada's output over the next several months. Some maintenance projects had been announced and included in prior estimates while others had not. This month, Suncor will begin maintenance for 14 weeks at its 350-kb/d capacity Millennium upgrader. Suncor's earnings guidance noted that additional maintenance at the facility is planned for seven weeks sometime in 2Q13 and is also separately planned in 3Q13 for an unspecified amount of time. Suncor's Firebag in situ project, which has increased output to over 120 kb/d, will also undergo maintenance this year. CNRL's 110-kb/d Horizon upgrader will undergo an 18-day shutdown in May. So, after reaching 1 mb/d in December, mined synthetic crude output is likely to decline to around 810 kb/d in 2Q13. The projection of Canadian output is revised downward by 100 kb/d to take into account this planned maintenance in 2013. There are two downside risks to this outlook. First, last year's maintenance proved longer than initially announced, and this year could see a repeat. Second, with Western Canadian Select prices still experiencing a steep discount to WTI, operators may have an incentive to delay the restart of operations to a later time when the differential is more advantageous.

Mexico - February preliminary: Mexican oil production totalled 2.95 mb/d in February, around 20 kb/d higher than the prior month. While crude output has remained resilient in light of mature field decline, Mexico's NGL output declined in 4Q12 to around 330 kb/d due to two separate fires at the Burgos and the Nuevo Pemex gas processing centers. We expect NGL production to rebound to around 380 kb/d in 2013. We now assume that the Ku-Maloop-Zaap (KMZ) field, which produced 850 kb/d in February, will remain at these levels though the end of 2013. This results in a small +30 kb/d revision to the outlook. In sum, Mexican oil output is expected to inch down by 1.0% (-30 kb/d) to 2.89 mb/d in 2013. Mexican output has been declining at an annual average of 0.7% from 2010-2012 compared to -6.9% for 2007-2009.

North Sea

North Sea production continued to increase in 1Q13 by around 100 kb/d from the prior quarter to 3.0 mb/d, which is 380 kb/d (or 11%) below 1Q12. Production of Brent-Forties-Oseberg-Ekofisk (BFOE), the stream underlying the North Sea Dated price, remained at about 780 kb/d in February. In Norway, liquids output fell slightly to 1.83 mb/d in February, slightly lower than 4Q12's average 1.85 mb/d. Output is expected to remain at about the same level through June as rising output from the Valhall, Skarv, Skuld, and Jette fields offset natural declines and other outages. In June, planned maintenance in the Ekofisk system for around half of the month will reduce output by 100 kb/d and will drag BFOE output below 650 kb/d.

In the UK, continued problems at the Cormorant Alpha platform caused a five-day shut-in of the Brent pipeline system in early-March. Estimates of loadings do not indicate that production has been impacted, and media reports indicate that the fields that had been shut in January due to related problems have restarted. However, the platform remains offline pending an investigation of the leaking pipes. In the Forties system, output is expected to fall to 360 kb/d this month due to a three-day maintenance outage at the Buzzard field in early March. Trade press indicates that the field was producing only 80 kb/d before the shutdown due to power issues. Total's Elgin/Franklin fields restarted but at only 50% of their design capacity of around 60 kb/d. Huntington's start is also expected to slide to late March, after a missed February start. Overall, only small revisions were carried through the forecast based on recent field-level data. We therefore expect UK oil output to fall by 100 kb/d (-10.6%) to 850 kb/d in 2013.


Australia - December preliminary: A discrepancy between industry and government statistics for Australian crude and condensate production noted in the January edition of this Report has now been resolved. The Australia's Bureau of Resources and Energy Economics downwardly revised crude and NGL production statistics by 100-200 kb/d for the July-November 2012 period, in line with industry estimates. Consequently, OMR estimates have been revised downwards by 40 kb/d for 3Q12 and by 110 kb/d for 4Q12 in this Report. Latest estimates for December indicate oil production at 410 kb/d, or 80 kb/d lower than the prior year. Production is expected to fall slightly in January and February due to cyclones and the onset of maintenance at the 35-kb/d Vincent field. Maintenance at the 20-kb/d Van Gogh field is deferred to 1H14.


Latin America

Colombia - January preliminary: Colombia's Ecopetrol announced on 23 February that the 110 kb/d Caño Limón-Coveñas pipeline, jointly operated by Ecopetrol and Occidental, had been bombed for the second time in three days. The two attacks, in addition to the attack earlier in the month on the 40-kb/d Transandino pipeline, follow the end of a two-month ceasefire by the Fuerzas Armadas Revolucionarias de Colombia (FARC) insurgent group. FARC also attacked other energy infrastructure in February and March by detonating explosives at the Mirto Uno oil well and by setting fire to trucks carrying crude oil in the Putomayo region. Government statistics showed production exceeded 1 mb/d on average in January. Data for February have yet to be released. We estimate that these attacks will keep liquids output to 990 kb/d in 1Q13, 60 kb/d higher than a year earlier.

Brazilian Biofuels Take a Turn for the Better

Global biofuels output is expected to total 2 mb/d in 2013. While we see US ethanol output reaching only 860 kb/d (-1.1% y-o-y), Brazilian ethanol output could climb 13.6% to 440 kb/d averaged out over the course of the year or 750 kb/d during the peak season. The combination of a projected strong sugarcane harvest, favourable economics for ethanol versus sugar and an increase in the ethanol blending mandate point to a banner year for Brazilian ethanol output. US biofuels policy and the worst drought in 50 years in the US corn belt will also increase US demand for Brazilian ethanol in 2013.

The ethanol industry has gone through a rough patch in recent years in Brazil, the world's second largest biofuel producer, as producers faced financial difficulties and around 40 mills (10% of the total) were reported in bankruptcy. A poor harvest and high sugar prices led the government to lower the ethanol blending mandate to around 20% in October 2011. Concurrently, continued regulation of gasoline prices made ethanol relatively unattractive to owners of flexible fuel vehicles (FFVs), dampening domestic ethanol demand.

But recently announced government policies stand to improve the outlook for Brazilian ethanol in 2013. First, the government increased gasoline prices sold from Petrobras' refineries by 6.6% (for Sao Paolo state this would bring gasoline prices to around $2.53/gallon before taxes and distribution fees), and would serve to raise ethanol consumption for owners of FFVs.  Second, the government is planning to reduce or remove both the taxes paid by fuel distributors for selling fuel ethanol and those paid by mills. Finally, the government is planning to re-raise the minimum blending mandate for ethanol to 25% effective 1 May. In combination, these actions are expected to revive investment in Brazil's sugarcane ethanol industry and bring ethanol mills welcome financial relief at a time when they had been struggling with rising input, labour and land costs. Clearly some of the government incentives described above will raise ethanol demand, increase the likelihood that ethanol prices will stay higher than sugar, and lead to a high level of ethanol output in Brazil in 2013.

Some economic and policy uncertainties remain. First, Brazil's sugarcane harvest is expected to total around 580-590 m tonnes for the 2013/14 season according to industry group UNICA, or around 7-9% higher than the prior crop year. So, the recent fall in global sugar prices are partly a function of global surplus sugar supplies and partly a function of the expected near-record harvest of sugarcane in Brazil. Since no sugarcane processing into either ethanol or refined sugar is taking place at the moment it remains unclear how mills will respond to the ethanol/sugar relative price level once processing begins. Industry sources estimate that a premium of 2-3% needs to be maintained for the first couple months to continue to incentivise ethanol production rather than sugar. Ethanol installed industrial capacity depends on yearly decisions made by individual plants to produce sugar and/or ethanol. According to USDA, the industry responds to the theoretical ratio of 40:60 to change from sugar to ethanol production or vice versa from harvest to harvest. Once producing units adjust their plants to produce a set ratio of sugar/ethanol in a given year, there is much less flexibility to change it during the crushing season. Despite these uncertainties, the sugar surplus is likely to keep sugar prices in check, which should favour ethanol production. Though weather could still impact the amount of  sugarcane harvested in 2013/14, we project ethanol output this year at 440 kb/d, just shy of the record set in 2010 at 450 kb/d. 

Trade Impacts. For several years, Brazil was the most important country of origin for US ethanol imports, while only small volumes were shipped in the opposite direction. The situation changed in 2009, when world sugar prices were rising rapidly and led many mills to shift more of their output towards sugar production. At the same time a strong real-dollar exchange rate meant that Brazilian domestic ethanol lost its economic advantage compared to US corn-based ethanol, in particular in light of a USD 0.54/gal import tariff.

Exports remained small until 2011, when Brazilian domestic ethanol prices rose and US corn ethanol production exceeded the RFS2 quota, allowing for considerable exports. Amid the Brazilian government's decision to abolish import tariffs for US ethanol as of April 2011, US exports to Brazil climbed to more than 25 kb/d on average during 2011.

Outlook: Prospects for Brazilian Ethanol Exports to the US. In 2012 US corn ethanol production was depressed due to a severe drought, and domestic production of "advanced biofuels" (produced from sources other than corn) fell short of the RFS2 quota. Brazilian sugarcane ethanol was therefore a likely choice for blenders to use to meet the advanced biofuel requirement, and resulted in imports of the fuel of over 50 kb/d in 2H12.

Based on current production expectations, it is unlikely that US ethanol exports to Brazil and Brazilian ethanol exports to the US will reach the levels seen in 2011 and 2012. The severe drought in the US is likely to keep corn ethanol exports low in 2013 at least until the next corn harvest in 3Q13.  Amid a mostly positive outlook for the 2013/14 sugarcane harvest, total Brazilian exports may increase in tandem with rising domestic demand driven from the higher mandatory ethanol share of 25% and from favourable tax policies.

But Brazilian ethanol export levels to the US in 2013 remain a wildcard. Now that the US biodiesel blender credit (of $1/gallon) has been reintroduced, increasing quantities can be used to satisfy the advanced biofuels requirement of the Renewable Fuels Standard 2 (RFS2) in lieu of Brazilian ethanol. The price difference between US-made biodiesel and Brazilian sugarcane ethanol is too close to clearly signal that one fuel will be favoured over the other. An important factor in assessing the future role of Brazilian ethanol exports to the US is that the US gasoline market is saturated with ethanol as the "blend wall" is close to being reached, and biodiesel faces no comparable blending limitations at the moment.

Brazil - January preliminary: Brazilian crude output fell slightly on the month to 2.05 mb/d, 150 kb/d below prior year levels. Production edged down because Petrobras needed to complete the installation of the FPSO at the Baúna field, which had been producing around 15 kb/d in 2012. With the new 80-kb/d capacity FPSO in place, the field is assumed to ramp to 60 kb/d over the course of 2013. Scheduled maintenance and technical issues at the Parque das Baleias and the Marlim Leste fields also reduced output in January, respectively. Test production at the Tartaruga Mestica field (in the Oliva area), on the scale of around 10 kb/d during 2012 also ended in January and is not expected to come back until 2017 when Petrobras will begin commercial production from an FPSO. Another important development in February was the beginning of test production from the Sapinhoá Norte area at a level of around 15 kb/d for a maximum of six months. This asset is not to be confused with production that started from the 120-kb/d capacity FPSO Cidade de Sao Paolo on 7 January. The main Sapinhoá field will produce at 15 kb/d for three months from one well, and will then ramp to 120 kb/d by the first half of 2014 according to Petrobras.

Middle East

The 110-kb/d Marib pipeline in Yemen was attacked in two separate spots in early February. It remained offline for repairs until 20 February when gunmen fired on the line and saboteurs bombed it in two separate places according to news reports. We believe the pipeline continued to pump normally until saboteurs bombed the line again in early March, but the line was repaired within a day. We estimate that Yemen's oil production in 2013 will remain at 2012 levels of 180 kb/d.

News reports indicate that in Syria the Free Syrian Army has taken over the large Suwaidiyah heavy oil field, as well as the al-Raqa and al Tabaqa fields. Oil from these fields has been transported via government-controlled pipelines to reach the Homs and Banias refineries.  We expect some impact to production from this takeover because only some remaining production can be used locally and because the facilities were likely to have been damaged during fighting in the western and northwestern parts of the country. Therefore, we have lowered output in 2013 by 20 kb/d to 120 kb/d, a y-o-y decline of 40 kb/d.

Former Soviet Union

Russia - February preliminary:  February liquids output increased by 120 kb/d to 10.8 mb/d y-o-y. Like last month, 50 kb/d of the increase came from strong output growth from Gazprom. Greenfield projects including Rosneft's Vankor field continue to reach new heights each month. At 420 kb/d, we expect 30 kb/d of further gains by the end of the year, in line with company guidance. TNK-BP's Uvat field reached 145 kb/d and the Verkhnechonskoye field reached 150 kb/d, all of which contributed to year on year growth. Yet overall, Russian crude production has gradually fallen by 60 kb/d since November, to 10.01 mb/d, due to accelerating decline at brownfield assets. In 1H12, brownfield production fell by 0.1%, in 2H12 it dropped by 0.8%, and in the first two months of this year it has fallen by -1.1%. We expect this trend to continue in 2013.  Coupled with planned maintenance at Sakhalin-1, it is expected to reduce overall Russian oil output from 10.73 mb/d in 2012 to 10.69 mb/d in 2013.

In Kazakhstan news reports indicate that despite operator and government hopes that Kashagan's output could begin as early as April, the field is not expected to begin commercial production until June, in line with our expectations. Kazakhstan's oil output is forecast to grow by only 30 kb/d in 2013 to 1.65 mb/d despite the startup of the 350 kb/d Kashagan field due to planned maintenance at the Tengiz field this summer and due to mature field decline.

FSU net exports inched up by 70 kb/d to 9.0 mb/d in January. Product shipments led the rise, growing by 140 kb/d on the month which offset a 60 kb/d drop in crude volumes. While Russian crude volumes rose by 50 kb/d, total crude exports were pressured lower by falling Kazakhstani and Azerbaijani shipments. Indeed, shipments of crude out of Black Sea terminals fell by a considerable 170 kb/d to 1.6 mb/d with non-Russian shipments from the region declining by 210 kb/d. Moreover, despite icy weather in the Baltic, Russian crude was reoriented away from the Black Sea towards northern outlets. Consequently, Urals volumes sent via Novorossiysk slumped by a further 90 kb/d to 670 kb/d in January, reportedly their lowest level in a decade. Much of this is due to the 2Q12 start up of Ust Luga. Since end-2011, Novorossiysk volumes have plummeted by close to 350 kb/d while Ust Luga volumes have averaged over 400 kb/d over the past six months with total Baltic exports reaching 1.7 mb/d in January. This glut of crude coming out of the Baltic has pressured NWE Urals prices since 2Q12. Indeed, despite reports of Urals Med becoming heavier as more light western Siberian crude heads into the ESPO, the price premium of Urals MED to NWE has averaged $0.60/bbl since the turn of the year with the differential noticeably widening in January. However, loading schedules for February and March indicate that Urals exports from Novorossiysk are likely to bounce back as icy weather has reportedly led to delays in the Baltic, this likely explains the brief return of Urals NWE to holding a premium over Med in early March.

Elsewhere, exports via ESPO remained steady at 750 kb/d (including 320 kb/d sent along the Chinese spur) and Druzhba flows remained under 1 mb/d for a third consecutive month, although Czech volumes held up at 70 kb/d providing further indication that refiners there are now willing to pay a higher price for their crude. Product shipments rose with all oil categories increasing on the month as Russian domestic demand remains seasonally weak. Shipments of gasoil were also likely hiked as NWE gasoil prices remained strong in January after colder weather reached the region.


Sudan and South Sudan:  The African Union (AU) mediated the negotiation and signature of a Security Arrangements Agreement on 8 March, which should lead to the withdrawal of troops from a demilitarised border zone on 14 March, and to troop removal by 5 April. The Agreement calls for a UN-supported Joint Border Verification and Monitoring Mechanism to be deployed afterward. Though several agreements about border security have been made in the past and have not been implemented, the AU announcement highlighted that this final agreement on security was the sole remaining obstacle to full implementation of the other nine agreements signed by the Presidents in September 2012, including the one concerning oil.

On 10 March, the parties also agreed on an "implementation matrix", including the key issue of when oil exports could resume and under what circumstances. South Sudan's information minister noted that now that the Security Agreement is complete, "we shall start preparing our facilities to resume exports." Subject to the conditions in the agreement and matrix, companies will be given orders to restart production on March 24. Delays are likely, however, due to technical issues with restarting production and exports and non-technical issues related to the implementation of the Security Agreement. For this reason we expect that South Sudanese production can restart slowly as soon as May, one month earlier than forecast in last month's report, and reach around 220 kb/d by the end of the year, which is still well below pre-independence capacity of around 350 kb/d.  There is zero net revision to the forecast for flows in 2013 compared to last month because of a downward adjustment to the 4Q13 estimate.

At the time of writing, an oil workers union had just announced a strike in Gabon. The country produced around 250 kb/d in February and Total, Shell and Sinopec are the major producers in the country. With scant information available, we assume the strike will be short-lived and have reduced March output by 50 kb/d to 200 kb/d.


Indonesia's oil production slid by 40 kb/d (-4.7%) in 2012 to 890 kb/d based on newly available company and field-level government statistics. The new statistics result in a 20 kb/d upward revision to the previous estimate for 2012 that was based on JODI and other secondary sources of monthly production information. In the absence of new fields, Indonesian production is assumed to continue to decline at a rate of 70 kb/d to 820 kb/d in 2013.

OECD Stocks


  • OECD commercial oil holdings rebounded by 22.5 mb to stand at 2 689 mb at end-January. Builds spanned all regions, but were consistently shallower than the average builds for January. Consequently, inventories' position relative to the five-year average slumped to a 4.4 mb deficit.
  • At end-January, total product inventories covered 30.7 days of forward demand, 0.1 day higher than the previous month. Final data for December indicate that a 700 kb/d draw in 4Q12 was 150 kb/d steeper than previously assessed.
  • Preliminary data indicate that OECD holdings fell by 12.9 mb in February as a 20.2 mb draw in refined products outweighed an 8.5 mb build in crude. Middle distillates fell by a seasonally moderate 5.2 mb.
  • Following the commissioning of new refining capacity, Chinese commercial stocks built by 12.4 mb, their largest increment in 12 months in January. Gasoil stocks surged by 10.9 mb, while gasoline and kerosene stocks increased by 3.5 mb and 0.2 mb, respectively.

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

Total OECD commercial oil holdings rebounded by 22.5 mb to stand at 2 689 mb at end-January. Since the monthly build was less than half the 48.4 mb five-year average build for the month, inventories' position relative to five-year average levels slumped to a 4.4 mb deficit, the first time inventories have stood at a deficit since end-August 2012. The build spanned all OECD regions, but regional rises were consistently weaker than the five-year average builds for January. Stocks in the OECD Americas increased by 3.5 mb, while those in OECD Europe and Asia Oceania rose by 12.8 mb and 6.3 mb, respectively. Rising inventories of motor gasoline (+11.7 mb m-o-m) and crude oil (+15.2 mb m-o-m) led the gains. All other oil categories posted seasonal builds bar 'other products' and fuel oil, which drew by 19.4 mb and 2.6 mb, respectively. At end-January, total products covered 30.7 days of forward demand, 0.1 day higher than the previous month.

A further steep draw in 'other products' (-19.4 mb), extending earlier declines, blunted the effect of builds elsewhere. Centred in the US, this draw provides further evidence that US propane buying has continued apace, spurred on by cold weather, export demand and seasonally low prices. The build in motor gasoline was also below the seasonal norm, especially in the OECD Americas, where stocks inched up by just 2.8 mb, roughly 11 mb below average.

This month, Italian stock estimates have been revised downwards from January 2010 onwards by about 10.4 mb across the board. This baseline revision is meant to fix inaccuracies that were found in the accounting of refined products by the administration. Stripping it out, November stocks remained relatively unchanged (-5.1 mb) with downward adjustments centred in Australian crude oil holdings. Final December data were revised downwards by 11.3 mb, pointing at a substantially steeper stock draw for that month than previously thought, 28.2 mb versus 22 mb in last month's Report. Crude oil inventory estimates were revised downwards by 14.7 mb, accounting for the bulk of the December adjustment - a revision in crude stocks that was more or less evenly spread across all three OECD regions. Stripping out the Italian revisions, however, total products inventories for December were adjusted upwards by 19.1 mb.

These adjustments have altered the 2012 quarterly and annual stock changes estimates versus last month's Report. The 4Q12 stock draw is now seen at 700 kb/d, a much steeper decline than the 550 kb/d draw reported in last month's Report. Similarly, the 2012 stock build now averages 165 kb/d, a shallower gain than the previous estimate of a 200 kb/d build.

Preliminary data indicate that OECD holdings inched lower by 12.9 mb in February, far less than the 30.2 mb five-year average draw. Refined product inventories led the decline with a drop of 20.2 mb, shallower than the 34.4 mb average draw for February. As in January, 'other product' stocks accounted for the bulk of the product draw, declining by 10.9 mb, while motor gasoline and middle distillates fell by 7.4 mb and 5.2 mb, respectively. The latter's contraction was far shallower than the five-year average 23.5 mb draw for that month, if these data were confirmed the deficit to the five-year average would narrow to 25.2 mb. In contrast, crude oil stocks built seasonally by 8.5 mb as many OECD refiners entered turnarounds. Almost all the re-stocking was located in OECD Americas (+9.7 mb) while European inventories built by 1 mb and those in OECD Asia Oceania drew by an unseasonal 2.2 mb.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Industry total oil holdings in OECD Americas increased by a weaker-than-seasonal 3.5 mb in January. A seasonal crude oil build (+9.7 mb) led the gains, while NGLs and feedstocks rose by a further 7.1 mb. Meanwhile, total products were pressured lower after 'other products' plummeted by 14.5 mb. Despite 'other products' drawing strongly for a fourth consecutive month, inventories still stood at 170 mb in January, 8 mb above the previous seasonal maximum.

Total products fell by 13.3 mb to cover 29.2 days of forward demand at end-January, a fall of 0.5 days on the previous month. Despite cold weather hitting the region during the month, middle distillate inched up by a counter-seasonal 0.5 mb. Nonetheless, inventories remain tight, standing 15.8 mb below five-year average levels. However, this lag has been reduced significantly from the 33 mb posted at end-November. Against a backdrop of high US gasoline prices and healthy exports to Latin America, regional motor gasoline holdings rose by 2.8 mb on the month to stand at 268 mb, towards the top of the five-year range.

Preliminary weekly US EIA data indicate that commercial total oil inventories there fell by 16.9 mb in February. As with January, a significant draw in 'other products' (-12.2 mb m-o-m) pressured stocks downwards with total product inventories falling by 25.3 mb, stronger than the 16.6 mb average draw for the month. With a prolonged cold spell hitting the East Coast, middle distillates fell by a seasonal 8.5 mb but their deficit to the five-year average remained at 15 mb. A 9.7 mb build in crude stocks tempered the draw in total oil as refiners entered seasonal turnarounds and reduced throughputs.

Since the turn of the year US crude stocks have built by close to 20 mb, however unlike previous years the location of these builds is not in the Midwest (PADD 2), where stocks have remained at 115 mb. The main source of the incremental growth has been the Gulf Coast (PADD 3), where following the start-up of the expanded Seaway pipeline and despite lingering bottlenecks, crude is gradually making its way, boosting local stocks.

OECD Europe

Industry oil inventories in OECD Europe rose by 12.8 mb in January, significantly weaker than the 23.9 mb average build for the month. Following a reduction in regional throughputs, crude oil stocks rose by 3.1 mb. Total products rose by an additional 7.3 mb, after high regional product prices drew in imports from outside the region. At end-month total products covered 40.7 days, a rise of 0.3 day compared to end-December.

On a product-by-product basis, motor gasoline rose by a seasonal 6.8 mb while middle distillates continued their upwards trajectory, building for the second consecutive month as they rose by 3.8 mb. 'Other products' provided some offset as they drew by a seasonal 3.1 mb. On a country-by-country basis, France and Germany accounted for half of the regional build, as they replenished inventories by 2.8 mb and 3.3 mb, respectively. German middle distillates holdings posted a surprising counter-seasonal 0.8 mb draw, accordingly inventories' deficit to five-year average levels widened to 3 mb.

Harsh winter weather arrived in the region in February, which resulted in tertiary stocks drawing, consequently, German consumer heating oil stocks dropped to 56% of capacity. Since these inventories replenished disappointingly over 2012, if this cold weather was to prolong into March, levels could fall below seasonal minimums. Data from Euroilstock indicate that European total oil inventories inched up by 0.8 mb in February. Crude oil stocks rose by 1 mb after refinery throughputs fell as refiners entered turnarounds. Refined product inventories inched down by 0.2 mb after motor gasoline and 'other products' fell by 2.4 mb and 0.4 mb, respectively. These were offset by counter-seasonal rises in middle distillates (+2.3 mb) and fuel oil (+0.4 mb). Reports suggest that refined products held in independent storage in Northwest Europe grew for a third consecutive month in February driven by the strongest build in gasoline reported for two years and a lesser rise in gasoil holdings which more than offset draws in naphtha, jet kerosene and fuel oil.

OECD Asia Oceania

Industry inventories in Asia Oceania (still excluding Israel) built by a seasonal 6.3 mb in January. All oil categories adhered to seasonal patterns as only fuel oil and 'other products' posted contractions. Crude rose by 2.3 mb to stand at 160.7 mb by end-month, above last year's depressed level but below the five-year average. Since regional runs remained relatively stable it is likely that crude imports increased further from January's elevated 7.2 mb/d. Total products rose by 1.6 mb to cover 19.5 days of forward demand at end-month, 0.8 days above the previous month. Middle distillates rose by 1.6 mb but with regional demand set to rise over the remainder of 1Q13, stocks look less comfortable on a forward demand basis, standing at 22 days, approaching the minimum level posted over the previous five years.

Preliminary weekly data from the Petroleum Association of Japan suggest that in February inventories there rose by a counter-seasonal 3.3 mb after a 5.2 mb build in total products outweighed a 2.2 mb draw in crude oil. This resulted from refiners increasing throughputs to their highest levels since before the 2011 earthquake and tsunami with refinery utilisation increasing steadily over the month to a high of 86%. All refined products built with middle distillates posting a strongly counter-seasonal 1.1 mb build while gasoline, fuel oil and 'other products' rose by 1.1 mb, 1.3 mb and 1.7 mb, respectively.

Recent Developments in Singapore and China Stocks

Chinese commercial oil inventories surged in January following the commissioning of new refining capacity. With Chinese refining capacity now closer to domestic demand requirements, high runs now offer greater potential to boost product inventories. According to data from China Oil Gas and Petrochemicals (China OGP), stocks rose by an equivalent 12.4 mb (data are reported in terms of percentage stock change), their largest increment in 12 months. Crude stocks dropped by 2.1 mb while products rose by 14.5 mb. Gasoil stocks surged by 10.9 mb (18.05 %) while gasoline and kerosene stocks increased by 3.5 mb (5.47%) and 0.2 mb (1.37%), respectively.

Weekly data from International Enterprise suggest that land-based refined product storage in Singapore fell by 0.2 mb in February after a 1.2 mb build in residual fuel oil was counter-balanced by a 1.2 mb draw in middle distillates while light distillates inched down by 0.2 mb. The build in residual fuel oil arrived towards the end of the month after arrivals from the Atlantic Basin, Middle East and India picked up as Asian prices climbed.



  • Oil markets retreated in mid-February after rallying in the first six weeks of 2013. An abrupt shift in market sentiment saw prices for benchmark Brent crude fall to nine-week lows by mid-March. Futures prices for Brent were last trading at $110/bbl, down $6/bbl from average February price levels while WTI fell by a smaller $2.50/bbl over the same period, to $92.75/bbl.
  • Spot crude oil prices for benchmark grades rose on average in February, with gains ranging from a low of around $0.50/bbl for WTI to a high of $3.35/bbl for North Sea Dated. The higher month-on-month levels, however, masked a sharp plunge in spot prices mid-month, which continued into early March. Earlier-than-expected and deeper cuts to global refinery throughputs during the turnaround season underway have largely been behind weaker crude markets.
  • Spot product markets posted strong gains in February due to tighter supplies on the back of earlier-than-usual refinery maintenance turnarounds and unplanned plant shutdowns. Gasoline crack spreads rose counter-seasonally, especially on the US East Coast, even as market participants also faced a dramatic spike in ethanol blending credits.
  • Reduced crude oil production by Middle East exporters, especially Saudi Arabia over the past few months, sharply reduced demand, and hence, freight rates, for very large crude carriers (VLCCs) on trades out of the Middle East Gulf throughout February. Suezmaxes fared much better, despite very limited opportunities to move light West-African crudes to the US, as rates surged to over $16/mt in late-February after a rush of fixings tightened the tonnage list.

Market Overview

Oil markets eased in mid-February after rallying in the first six weeks of 2013 as traders appeared to reassess the outlook for the economy and oil demand. An abrupt shift in market sentiment saw benchmark Brent crude fall to nine-week lows by mid-March. Futures prices for Brent were last trading at $110/bbl, down $6/bbl from average February price levels while WTI fell a smaller $2.50/bbl over the same period, to $92.75/bbl.

The exuberance seen in financial and equity markets continues apace, but a number of developments converged to add downward pressures on oil futures and temper demand prospects near term. China's economic outlook became a focus of market concern following new data, including industrial production estimates for January and February, which showed output declined to the lowest level since the upswing that got underway in October 2012. In the US, failure of the US Congress to reach a deal on budget cuts ushered in the so-called 'sequester', or the automatic trigger for $85 billion of spending cuts, which could reduce GDP growth by 0.5 percentage point by some estimates. Analysts fear the economic burden on US consumers will lead to weaker-than-expected oil demand growth. Meanwhile, the latest forecast for the Eurozone from the European Commission now shows GDP for the region contracting by 0.3% in 2013 compared with earlier projections of growth for 2013.

The steep run-up in prices in the first half of February was only partially offset by lower levels later in the month. Brent futures posted an average gain of $3.75/bbl, to $116.07/bbl. By comparison, WTI futures rose by a smaller $0.49/bbl to $95.32/bbl. Indeed, the daily change in the WTI M1 contract was muted on the month. As a result, the Brent-WTI price spread, which had narrowed to around $17.50/bbl in January widened to $20.75/bbl in February.

After closely tracking the upward momentum of the broader financial markets in early February, oil prices diverged by the last week in February. The S&P 500 continued its march above 1500 while WTI futures peaked on 14 February before cascading lower. The stock market rally has been fuelled by investors moving cash into equity markets.

Forward price spreads for Brent narrowed as prompt month prices weakened in early March following the restart of shut-in North Sea capacity. The M1-M12 contract averaged about $7.20/bbl in the first week of March compared with around $7.85/bbl in February. Continuing problems with production of the four North Sea crude streams that physically underpin the Brent futures market propped up the steep backwardation in Brent prices.

In the US, the WTI M1-12 forward spread moved into backwardation on expectations that incremental Seaway pipeline capacity would start moving surplus inventories at Cushing out of the congested region. The WTI M1-M12 contract spread narrowed to $0.44/bbl from -$0.02/bbl on average in February, +$0.13/bbl in January and from -$2.70/bbl in December.

Futures Markets

Activity Levels

Market activity on the two main oil exchanges, measured as open interest in futures contracts, saw NYMEX WTI rebound relative to ICE Brent to an all-time record high of 1.71 million contracts on 5 March. At the beginning of the month, ICE Brent had almost closed the gap with the New York benchmark, as their differential reached a historical low of 67,000 futures contracts on 1 February. On 5 March, the ratio between the two benchmarks settled at 91.8% for futures contracts, and 76.2% for futures and options combined, indicating a still significant prominence of NYMEX WTI in the options market.

Trading volumes in oil futures have been stable on a year-on-year basis for the London ICE Brent contract, with trades in February up a modest 0.3% y-o-y, to 12.2 million trades. By contrast, WTI futures contracts volumes were down 21.5% y-o-y, to 11.5 million trades on the NYMEX and down 12% for ICE WTI. The trend in crude volumes indicates a growing preference for the North Sea benchmark.

Money managers reduced their net long exposure in crude oil futures on both sides of the Atlantic between 29 January and 5 March, after raising their bullish bets throughout January. Following WTI down from $97.44/bbl to $90.98/bbl over the same period, hedge funds reduced their bullish wagers by 30.9% in futures only contracts, after inching slightly higher in the first half of February. In London ICE Brent futures, money managers also reduced their net long position, following Brent prices falling from $117/bbl to $110/bbl from mid-February to the first week of March.

NYMEX WTI traders in the producers/merchants/processors/users category (hereinafter producers) consistently raised their bullish wagers through February, reaching an historical all-time high of 25,700 net long contracts in futures contracts only by the end of February, finally settling slightly lower in the first week of March to 23,400 contracts. The overall trend that began in March 2011 saw producers' net position become progressively less short until it became net long in January 2013 for the first time since the CFTC reported the disaggregated commitment of traders. On the London ICE, producers reduced their Brent short wagers by 13.3% to 196,600 net short futures-only contracts.

At the end of the reported period, money managers in NYMEX WTI held 31.5% and 23.1% long and short positions in futures-only contracts, respectively. Producers had only a small portion of the long positions at 17.4% and 16.1% of short positions. This highlights a more significant role of hedge funds in the NYMEX with respect to physical players, due also to the disconnect of the landlocked WTI from the global physical markets. In contrast, London ICE Brent money managers hold only 19.8% of long positions and 11.8% of short positions, with a much more significant role of producers, which hold 42.1% and 54.6% of long and short positions, respectively.

Financial Regulation

In February and during the first half of March some important rules under the Dodd-Frank Act have come into force. On 19 February the communications record-keeping rule for swap dealers entered into force. Under this rule, major swaps dealers are requested to record "all oral communications concerning quotes, solicitations, bids, offers, instructions, trading and prices" leading to the execution of a transaction in a commodity interest. From 28 February registered swap dealers are required to report data regarding equity, foreign exchange and commodity swaps including energy. This will require real-time public reporting of certain transactions and pricing data to a registered swap data repository. The first deadline for interest rate swaps and credit default to be backed up by a clearinghouse (i.e., "cleared"), requiring a margin to guarantee the trade, is 11 March. The central clearing of over-the-counter (OTC) swaps is one of the major changes coming under the Dodd-Frank Act that followed the 2008 financial crisis.

In the EU, the European Market Infrastructure Regulation (EMIR) will come into force on 15 March, following passage of the technical specifications by the EU Parliament and Council on 29 February. The EMIR regulation mandates, among other provisions, central clearing, data reporting standards and margin specifications for any form of derivatives contracts.

Spot Crude Oil Prices

Spot crude oil prices for benchmark grades rose in February, with gains ranging from a low of around $0.50/bbl for WTI to a high of $3.35/bbl for North Sea Dated, to $95.26/bbl and $116.31/bbl, respectively. The higher month-on-month levels, however, masked a sharp plunge in spot prices mid-month and the downtrend continued into early March. Earlier and deeper cuts than expected to global refinery throughputs during the maintenance season underway likely account at least in part for the weaker crude markets.

Spot prices for Dubai posted a monthly increase of $3.20/bbl to $111.13/bbl on average in February but the M1-M2 differential collapsed over the period as the market shifted into contango. The M1-M2 price spread fell to -$0.11/bbl in February compared with $0.72/bbl in January and $1.32/bbl in December. Major refinery maintenance for China, South Korea and India has already undermined prompt demand. Asian markets are well supplied with heavier Mideast barrels. Refinery runs in Asia are forecast to decline by near 1.5 mb/d from 26.7 mb/d in January to a seasonal low of 25.3 mb/d in April.

Most Mideast grades weakened relative to benchmark Brent against a backdrop of steep refinery run cuts and both scheduled and unplanned supply outages at North Sea fields. Dubai's discount to Brent rose to -$5.20/bbl in February versus -$5.05/bbl in January and -$3.18/bbl in December. By early March, however, the Dubai-Brent differential narrowed to -$4.25/bbl. With refinery turnarounds in Asia getting underway in earnest, a sustained recovery in demand for Middle Eastern crudes is not expected until May. However, price differentials for sought after Murban crude oil narrowed relative to Brent, to -$0.60/bb in early March compared with around -$1.46/bbl in February and -$1.53/bbl in January.

A recovery in North Sea output in early March, which underpins the Brent benchmark, however, may lead to a tightening of differentials to Mideast grades. The Buzzard field is rebounding following the completion of scheduled maintenance while the Brent oil pipeline system has restarted following an outage. European crude markets were also awash in supplies despite outages in the North Sea. Higher volumes of Russian Urals and West African grades were on offer. The differential between Urals and Brent in the Mediterranean widened sharply in February to -$1.35/bbl compared with -$0.33/bbl in January.

Spot Product Prices

Spot product markets posted strong month-on-month gains in February due to tighter supplies on the back of earlier-than-usual refinery maintenance and unplanned plant shutdowns. Indeed, gasoline crack spreads were unseasonably strong, especially on the US East Coast where ethanol blending mandates had the unintended consequence of pushing differentials to record levels. Middle distillate crack spreads in all major markets were higher in line with seasonal demand in February. By contrast, fuel oil markets were relatively weak due to lower demand for bunker fuels. Strong gains early in the month, however, masked the steady downturn in crack spreads from mid-February onwards.

Gasoline crack spreads in the US and Europe posted steep increases due to refinery maintenance and amid strong demand for scarce ethanol blending credits. Gasoline crack spreads on the NYMEX surged over $40/bbl in the first week of March, up from $31.23/bbl average for February and $24/bbl in January. Some market commentators linked the strength in the front month RBOB contract with fears of a shortage of renewable fuel credits, known as Renewable Identification Numbers (RIN). The market for credits, which are used to meet compliance with the federally mandated Renewable Fuel Standard (RFS), appear to have bumped up against the so-called 'blend wall,' a term that refers to the saturation of the ethanol market once ethanol blending nears 10% of the gasoline pool. The 10% threshold is theoretically the highest percentage of ethanol than can be blended into gasoline, aside from the 85% blend which is limited to the E85 niche market. Companies argue any higher above 10% would subject them to liabilities since it is unclear if older cars can run safely above 10%.

Once against the wall, in the absence of a Congressional amendment to the RFS, refiners and other obligated parties are under pressure to run higher ethanol blends or buy RINs. In 2010, a spike in biodiesel RIN prices was associated with a surge in diesel exports, as exported volumes are exempted from RFS regulations. Another factor that can cause RIN prices to rally, aside from blending limits, is a shortfall in ethanol supply.

Whatever effect RIN prices may have had on gasoline markets, the high gasoline price in the US induced large import volumes from Europe, which temporarily led to an easing in gasoline cracks. Gasoline cracks for WTI at New York jumped by $7.10/bbl to a record $43.90/bbl in February. Crack spreads at the Gulf Coast were also stronger but running about half the level posted in New York, up around $9.45/bbl to$22.70/bbl. Strong US demand for imports of premium gasoline also supported European markets, with the arbitrage for Rotterdam barges averaging $23.40/bbl in February. Crack spreads for super unleaded in Europe gained $6.25-$7.23/bbl in February, to $12.10/bbl in Rotterdam and to $14.15/bbl in the Mediterranean.

Crack spreads for gasoline in Singapore also strengthened last month, in part due to reduced supplies from refinery turnarounds. Gasoline cracks to Dubai rose just over $7/bbl to $21.78/bbl in February compared with $14.74/bbl in January.

Naphtha markets strengthened month-on-month, with Singapore crack spreads now profitable. However, in Europe cracks turned lower again by end-February and early March but still managed to post a monthly increase. Crack spreads rose by $3.49-4.60/bbl in Europe, to -$4.75/bbl in Rotterdam and -$6.35/bbl in the Mediterranean. In Asia, strong petrochemical demand for cheaper naphtha relative to higher-priced feedstocks supported crack spreads, Singapore differentials to Dubai rose by $2.90/bbl, to $0.68/bbl on average in February. In Asia, reduced supply due to refinery maintenance also buttressed the naphtha price.

Gasoil markets were strong in first half February on cold weather and reduced refinery output but crack spreads dipped as concern over winter supplies eased. Gasoil crack spreads in Europe and Singapore were also supported by weak benchmark crude prices in the second half of the month. Gasoil cracks to Urals in the Mediterranean rose by an average $1.32/bbl to around $17.08/bbl. In Asia, crack spreads against relatively weak Dubai crude increased by $2.50-$2.85/bbl, to $21.60/bbl in Singapore, $22.45/bbl in Japan and $20.65/bbl in South Korea. In the US, gasoline crack spreads in New York to WTI were up by $5.25/bbl to $40.85/ on average in February and at the US Gulf Coast crack spreads for Mars increased by $1.85/bbl to $19.90/bbl.

Fuel oil crack spreads remained in negative territory in all major markets, but the US and Europe posted modest improvements. In Europe, crack spreads for low-sulphur fuel oil were up $2.95/bbl to -$7.40/bbl in the Mediterranean and by a smaller $0.85/bbl to -$11.35/bbl in Rotterdam. By contrast, Singapore cracks were down on reduced bunker fuel oil demand, by -$0.35/bbl to around -$8.50/bbl.


Following lower regional production and a bloated tanker pool, rates for very large crude carriers (VLCCs) on trades out of the Middle East Gulf remained at very depressed levels throughout February. Accordingly, rates on the benchmark Middle East Gulf - Asia trade remained anchored at, or below, $9/mt from late-January through early March. Indeed, the monthly average rate of $8.83/mt for February was the lowest since April 2009. Suezmaxes fared much better as, despite very limited opportunities to move light West-African crudes to the US, rates surged to over $16/mt in late-February after a rush of fixings tightened the tonnage list. However, as has occurred so often recently, this was a short-term market imbalance and rates had lost most of their ground by early-March. In Northwest Europe, and despite the arrival of cold weather in the Baltic, no ice-related rate surges have been posted. There has been a general firming on both of the benchmark Aframax routes but compared to previous winters, this has been underwhelming.

Product tanker markets demonstrated a distinct east - west split with buoyant Asian demand buttressing rates there while Atlantic Basin markets weakened despite ongoing healthy US trade. East of Suez markets firmed steadily over the month with rates on Middle East Gulf - Japan trade finally rising for the first time since 4Q12 similarly, the Singapore - Japan route arrested three months of softening as rates rose to above $20/mt by early-March.

Despite steadily firming since mid-2012, rates on the benchmark transatlantic UK - US Atlantic Coast gasoline trade slumped by more than $5/mt over the month to stand at close to $26/mt by early-March, approximately $5/mt above levels posted 12 months ago. The resurgence of the trade has been startling  and has been the result of major two factors; Firstly, refinery closures on the US East Coast that have increased the region's import requirement as Gulf Coast refiners are unable to make up the shortfall since the Colonial pipeline is running at capacity. Secondly, surging US exports to Latin America have helped to tighten the Atlantic Basin tanker market.



  • Global refinery crude throughput rates for 1Q13 have been revised downwards by 280 kb/d, to 74.8 mb/d, as broader-than-expected seasonal maintenance in the US, Asia, the Middle East and Europe cut runs ahead of expectations.
  • In the US, an average of around 1.4 mb/d of refining capacity is projected to be offline during the first quarter, as heavier-than-usual maintenance activity pushed North American throughputs down to 17.6 mb/d, 105 kb/d lower than a year ago. In Europe, runs have been trimmed by 340 kb/d as sluggish economic conditions and refinery closures compound the impact of seasonal maintenance turnarounds. Overall, 1Q13 OECD runs are now estimated at 36.1 mb/d, down 585 kb/d y-o-y.
  • In contrast, the estimate of non OECD runs for 1Q13 is set at 38.7 mb/d, 870 kb/d higher than last year, as Chinese refineries have been processing at still high utilisation rates in January and February despite the Lunar New Year holidays. But the refining maintenance season is expected to be particularly heavy in Asia, from March onwards, as major turnarounds in South Korea, China and India are expected to keep about 1.7 mb/d of refining capacity offline.
  • Expectations of tightening product supply because of refinery turnarounds buoyed refining margins across all markets. Atlantic basin refiners saw their margins reach unseasonably high levels on the back of strong gasoline cracks as US East Coast refinery capacity utilisation dropped to 74% in February. Singapore margins reached $8.60/bbl, a level unseen since 2008, on expectations of market tightness as heavy refinery maintenance is starting and strong demand from Asian petrochemical plants.

Global Refinery Overview

The assessment of global throughput for 1Q13 has been reduced by 280 kb/d, to 74.8 mb/d, on lower-than-expected OECD crude runs, especially in Europe, and slower non-OECD growth than had recently been the case. In January, crude runs dipped 2.5% m-o-m, to 75.6 mb/d, with the reductions spanning all regions except Asia Oceania and Latin America. Declines were more pronounced in OECD countries, where crude throughput contracted by more than 3% as US refiners started seasonal maintenance early and idled more capacity than usual.

Over the first quarter, around 1.4 million b/d of US refining capacity will be offline. US refinery maintenance further tightened the Atlantic oil products markets where stocks of refined products were already unusually low, providing support to North West Europe refining margins. Declines in US throughput also compounded the impact of a steep drop of 4% m-o-m in European crude runs, caused by a combination of plant closures, unplanned maintenance and adverse economic conditions.

Even as spring refinery maintenance season nears completion in North America and Europe, Asia is expected to follow suit with an exceptionally heavy turnaround schedule starting from March onwards. Over the next three months, about 1.7 mb/d of refining capacity will be offline, with major turnarounds expected in South Korea, China and India. After an earlier tightening in Atlantic Basin product markets, this is expected to have a substantial impact on those in Asia, especially since several Middle Eastern refiners will be conducting maintenance operations at about the same time. Global refinery throughput for 2Q13 is forecast at 74.8 mb/d as Asian maintenance will constrain crude runs through mid-May. Only in June are crude runs forecast to rebound in a big way.

Refining margins strengthened in all regions in February with European cracking margins up by $2.70-2.90/bbl, USGC margins up by $3-4.60/bbl and Singapore margins up by $2.8-3/bbl. Margins were supported mainly by strong  gasoline cracks on healthy demand in Asian countries and heavy maintenance in the US.

In February, Atlantic basin refiners were enjoying unseasonably high margins, with North West Europe Brent cracking margins averaging as much as $5.64/bbl, as US East Coast refinery utilisation dropped to 74%, from 83% a month earlier. Urals refining margins were also very strong, at $5.62/bbl on average for cracking margins in North West Europe and $6.22/bbl in the Mediterranean. Though product prices supported margins, it also helped that Russian crude prices plunged to 10-month-lows as bearish fundamentals in Europe and increased supply at loading terminals compounded the impact of reduced demand for crude due to plant maintenance.

US Gulf Coast margins have recovered from recent lows, led by coking margins that reached $7.28/bbl on HLS/LLS and $5.14/bbl on ASCI. Not only did US Gulf Coast margins benefit from the effect of record-high maintenance levels for the season, but robust exports of petroleum products, mainly in Latin America, provided markets with additional support, as did cyclical preparation for seasonal fuel specification changes. Midcontinent margins increased considerably in February getting close to $30/bbl on Bakken and WCS crude as flows on the expanded Seaway pipeline remained below expectations.

Dubai hydrocracking margins spiked up by around $2.80/bbl to $8.60/bbl, their highest level since 2008. Support has stemmed from strong regional demand as well as some tightness in light products markets as several refiners started maintenance operations. Asian margins were also boosted by an increase in naphtha cracks as Asian petrochemical firms were running their ethylene crackers at high capacity.

OECD Refinery Throughput

OECD refinery crude runs fell by 1.2 mb/d in January to 36.5 mb/d, down 285 kb/d y-o-y due to heavy refinery maintenance plans in the US and weaker European refining activity. In the US, seasonal maintenance will idle an estimated 1.4 mb/d of refining capacity in 1Q13, a record, pushing North American crude runs for February down 565 kb/d y-o-y to 17.4 mb/d. Although European maintenance per se is expected to be on the lighter side this spring, crude runs have nevertheless been revised down by 490 kb/d in January and 160 kb/d in February, reflecting low regional product demand and plant closures in Italy and elsewhere.

Overall, the estimate of OECD refinery throughput for 1Q13 is set at 36.1 mb/d, 585 kb/d lower than last year's level. In contrast with Europe and the Americas, refining activity was more sustained in Japan and South Korea. As maintenance work comes to an end in North America and major refineries, including Motiva's Port Arthur plant, resume full operations, OECD refinery crude runs are expected to bounce back to 36.3 mb/d in 2Q13. Even then, though, persistently low European runs are expected to keep OECD runs 290 kb/d lower than last year.

North American crude runs fell by 800 kb/d in January, to 17.8 mb/d, as refiners moved deeper into maintenance. In the US, crude runs were assessed at 14.6 mb/d, down 4.6% m-o-m, though up 210 kb/d y-o-y. Refinery utilisation fell to 86%, driven by the Gulf Coast (PADD 3), down 9 percentage points to 87%. Crude runs continued to dive in February, when utilisation rates averaged 84%. This time, the East Coast (PADD 1) led the drop with an 11-percentage-point decline, to 74%.

Colonial Pipeline Co., which operates the largest line linking US Gulf Coast refiners and East Coast markets, has completed a 60 kb/d expansion of its multiproduct Line 3, lifting refined-product shipments to the US Northeast to 945 kb/d. Another expansion project is under way to increase capacity by an additional 100 kb/d by 2Q13. These projects are part of a larger program, which could raise Colonial capacity to 2.4 mb/d.

Over the last three years, four East Coast refineries have been closed (Sunoco's Eagle Point/Westville, New Jersey plant; Western Refining's Yorktown, Virginia, facility; Sunoco's Marcus Hook, Pennsylvania, refinery and Hess's Port Reading, New Jersey unit), with a combined capacity of around 400 kb/d. Since the closure of these East Coast refineries, shipping capacity constraints on the Colonial and Plantation pipelines have been one of the factors behind a run-up in gasoline prices, as alternative gasoline supply has to be brought in from Europe and as far away as India.

The estimate of US refinery throughput for 2Q13 is set at 15.3 mb/d, up 6% q-o-q as the turnaround season comes to an end. Some refineries have already resumed normal operations, including Motiva's Port Arthur plant, which the company said in early March was now fully operational at planned rates.

Hess and PDVSA have finally agreed to sell their 350 kb/d Hovensa refinery at St. Croix in the US Virgin Islands. After the refinery was shut in 2012 for economic reasons, its owners had proposed to operate it as an oil storage terminal. The Governor of the Virgin Islands rejected that proposal, however, forcing the parties to either operate or sell the refinery. Hovensa was a major source of Atlantic Coast supply until decreasing gasoline demand in PADD 1 and increased competition with USGC refiners benefiting from low natural gas prices forced Hess and PDVSA to shut it after three consecutive years of losses. Its location in the US Virgin Islands is seen as particularly attractive nowadays, as it allows for use of low-priced US crude imported from the continent without being subject to the Merchant Marine Act of 1920 (Jones Act).

OECD European runs fell by over 483 kb/d in January to 11.5 mb/d, nearly 0.6 mb/d less than a year earlier. Runs are particularly weak in Italy, averaging 285 kb/d less than last year in January, at 1.3 mb/d. Planned maintenance and economically-driven shutdowns explain this historical low refinery throughput in January. Anonima Petroli Italiana SpA (API) is closing its Falconara refinery (85 kb/d) on the Adriatic coast for both technical and economic reasons. The refinery will be offline for one year during which the company will revamp its power plant. Falconara was one of the first refineries in Europe to be equipped with an Integrated Gasification Combined Cycle (IGCC) technology for transforming heavy residues into synthetic gas (syngas) to produce electricity and steam. ENI's Porto Maghera refinery (80 kb/d) was also shutdown on scheduled maintenance in January and returned online only by the end of February. Uncertainties regarding the economic viability of this plant remain. ENI said in 2012 that the plant would be closed permanently in 2Q13 and be converted into a biodiesel facility, but recently it announced that the closure was now scheduled to take place in 3Q13. Refinery throughput in Italy should remain below historical levels for the coming months, with ENI's Sannazzaro refinery (200 kb/d) to be closed for a full maintenance turnaround in April and its Gela refinery (105 kb/d) operating at 40% of nameplate capacity since last July for economic reasons.

On top of planned maintenance outages, many technical issues in February have contributed to limit refinery production. Unscheduled shutdowns have been reported in Germany at the 268 kb/d Gelsenkirchen refinery, which was operating at half capacity after an unplanned outage at its hydrocracker, at the Schwedt refinery following a fire affecting a crude distillation unit, in UK at the Grangemouth refinery (diesel hydrotreater) and in Greece at the Elefis refinery (flexicoker).

OECD European refinery throughputs are expected to plunge to 11.2 mb/d in March as Shell will close its 110 kb/d Hamburg refinery and many other refiners will start spring maintenance, including ExxonMobil's Port Jerome-Gravenchon (310 kb/d) refinery in France, Shell's Godorf refinery (327 kb/d) in Germany and Grupa Lotos' Gdansk (210 kb/d) refinery in Poland.

In France, the fate of Petroplus's Petit Couronne refinery is expected to be announced by mid-April. Recently, two bidders, Libyan group Murzuq Oil and Switzerland-based investors Terrae International, merged their offers, while Egyptian group Arabiyya Lel Istithmaraat withdrew its own. Storage activities at Petroplus' Reichstett refinery, closed in 2011, were taken over in January by Rubis Terminal, a France-based international company specialised in the storage, distribution and sale of petroleum, LPG and chemicals.

Overall, OECD European crude runs for 2Q13 are estimated at 11.5 mb/d, down 3.5% y-o-y, as regional maintenance intensifies and economically-driven, temporary shutdowns further reduce throughput.

OECD Asia Oceania runs were mostly in line with expectations for January, at 7.2 mb/d, up 100 kb/d m-o-m on higher South Korean and Japanese throughputs. Refinery throughput for 2Q13 is estimated at 6.5 mb/d unchanged from last year. Preliminary data from PAJ shows Japanese crude runs close to 3.6 mb/d amid strong winds, which disrupted operations in many oil terminals and refineries in February.

Refinery throughputs increased after Japan's largest refiner JX Nippon Oil & Energy progressively resumed normal operation at its Mizushima-B (205 kb/d) plant. The refinery was shut in July 2012, after finding the company had violated safety regulations with regard to its LPG tanks and some other units. Spring maintenance in Japan will start in March with Kyokuto Petroleum Industries Chiba refinery (175 kb/d), followed by Idemistsu Kosan Chiba refinery both planning turnaround activities. However, impact of refinery maintenance plans should be mitigated by the restart of the Cosmo Chiba refinery in April, nearly one year after it was shut for maintenance and repair.

Japanese refiner TonenGeneral has decided to scrap about 16% of its refining capacity closing a 67 kb/d crude distillation unit at its Kawasaki plant and a 38 kb/d CDU at its Wakayama refinery. TonenGeneral's decision come as Japanese refiners are required to raise the residue cracking ratios of their CDUs to around 13% of their total refining capacity, from 10% earlier, under regulations that take effect at the end of March 2014.

In South Korea, crude runs reached a historic record high of 2.7 mb/d in January. A prolonged cold spell with temperatures dropping to the lowest level in 27 years pushed refiners to increase their activity to satisfy additional demand. Crude throughputs are expected to be lower in March and April as SK Energy plans to shut part of its major Ulsan refinery (840 kb/d) for maintenance.

Non-OECD Refinery Throughput

Non-OECD refinery crude runs were revised up by 400 kb/d in December to 39.7 mb/d on much higher throughput in Latin America, Other Asian countries and Africa. As a result, annual growth in non-OECD throughputs surged by 4.5% in 4Q12, from an average of 1.2% over the first three quarters. In the first semester of 2013, annual growth is expected to be lower and average 2.2% on higher-than-expected spring refinery maintenance in Asia and the Middle East.

Chinese refinery runs in January dipped slightly below 10 mb/d, as some independent refiners were cutting throughput on low refining margins and suspended production ahead of the Chinese Lunar New Year Holidays. China crude runs for 1Q13 are revised down by 100 kb/d to 9.8 mb/d as some refiners have anticipated their maintenance operations.

Most Chinese refineries will start early maintenance operations in March with about 700 kb/d of crude capacity offline. Major refineries expected to undergo maintenance include Petrochina's Guangxi, Qinzhou and Dhalian Petrochemical refineries and Sinopec's Shijiazhuang plant. Maintenance operations are slated to peak in China in April when other major refineries like Petrochina's Liaoyang and Sinopec's Guangzhou refineries will start their turnaround schedule. Overall, about 780 kb/d of equivalent crude capacity will be offline, representing about 7% of total crude throughput. Another round of heavy maintenance is scheduled for October and November but its impact on crude throughput could be mitigated by new refining capacity expected to come online in the last quarter of 2013.

Other Asian refinery throughputs for December were revised up by 125 kb/d on higher crude runs from Taiwan, which reached 975 kb/d, a level not seen since 2010. Overall, 2012 regional crude runs are now estimated at 9.4 mb/d, up 5.5% compared with 2011.

Preliminary data for January in India shows a 3.2% reduction in crude runs. Indian refiners are facing difficulties regarding the renewal of their insurance policies for Iranian liftings following more stringent US and EU sanctions against Iran. Insurers will not provide cover to plants running Iranian feedstock. HPCL and Mangalore Refinery & Petrochemicals Ltd. have all declared that they will accordingly reduce substantially their Iranian crude imports in the current fiscal year. After surging 6% in 2012, Indian crude runs should increase again in 2013 with the completion by the end of the year of the Indian Oil Corp.'s 300 kb/d Paradip refinery on the country East coast. India 1Q13 crude runs is estimated at 4.35 mb/d as Reliance Industries' Jamnagar export refinery is partially shut down for a maintenance turnaround, which started in mid February and is expected to last for four weeks.

In Thailand, crude runs for December were above 1.0 mb/d as throughput at Bangchak refinery surged 14% m-o-m, to 111 kb/d. Since late August, the refinery was operating at a reduced rate after a fire shutdown a major crude distillation unit.

Elsewhere in Asia, unplanned shutdowns have been reported at Pertamina's 125 kb/d Balongan refinery in February and in Singapore, where works on a pipeline connecting Shell's 500 kb/d Pulau Bukom refinery to a single point mooring buoy started in February and should last up to the end of March.

Accordingly, our regional crude runs forecast for 1Q13 is now estimated at 9.4 mb/d in line with our last report. Regional global offline capacity is expected to peak in March and April, as planned maintenance work is scheduled at Petronas' Malacca, Pertamina's Balikpapan, BPCL's Mumbai and Reliance's Jamnagar refineries. Heavy refinery maintenance work will keep regional crude runs in 2Q13 constrained to last year level at close to 9.4 mb/d.

In Ukraine, latest data for January show crude runs below 60 kb/d, down 110 kb/d compared with last year. Crude oil supplies to the country's six refineries decreased by 47% in 2012 following the shutdown of the Lysychansk oil refinery but also on declining Russian oil deliveries for economic reasons. Contrary to Belarus and Kazakhstan, which are part of the Customs Union and therefore buy Russian crude oil duty-free, Ukraine does not benefit from any crude oil price advantage from Russia. Lately, Lukoil has signed an agreement with a local company, Vetek Group to sell its Odessa refinery. The refinery has been closed for economic reasons since October 2010.

Russia has increased its crude oil export allocation to Kazakhstan's Pavlodar refinery, boosting Kazak refinery runs to a record high of 330 kb/d in December. Overall, in 2012, Kazakhstan crude runs increased by 3.3% y-o-y to 285 kb/d. In January, crude oil processing decreased by 15% to 279 kb/d mostly on reduced throughput from the Shymkent refinery, which is currently undergoing a revamping and modernisation. Kazakhstan is currently increasing the capacity of its three refineries and upgrading them to produce Euro5 fuels by 2016.

In Latin America, Brazilian crude runs rebounded in January to a record high of 2.1 mb/d, boosting our regional throughput estimate for January by 160 kb/d to 4.6 mb/d. However, the region is still expected to continue experiencing a slump in refinery throughput in 1Q13 with crude runs estimated at 4.7 mb/d, down 3.7% y-o-y. Technical issues with refineries in Venezuela and Trinidad and planned maintenance in Colombia and Ecuador will keep crude runs below last year levels during the first half of the year.

As part of its plan to sell all non-core assets to fund its exploration and expansion plans, Petrobras is in talks to sell a stake in its refineries in Argentina to local company Oil Combustibles. The two refineries concerned are the Ricardo Elicabe refinery in Bahia Blanca (30 kb/d) and the Refinor's Campo Duran refinery (28.5 kb/d) located in the province of Salta. Other refining assets owned by Petrobras and which could be sold include a 100 kb/d refinery in the US (Pasadena) and a 100 kb/d refinery in Japan (Nansei Sekiyu's refinery in Okinawa). After increasing gasoline and diesel prices in January by respectively 6.6% and 5.4%, Petrobras has announced in March a further 5% price increase in diesel. This price hike amid rising inflation was welcomed by financial markets as Petrobras is in the midst of a $237 billion investment plan through 2016.

In Trinidad, the revamping and gasoline optimisation project continues to negatively affect the operations at the Petrotin's Point à Pierre refinery (168 k/d). Latest data for December shows a crude run of only 36 kb/d, down 90 kb/d y-o-y. Technical issues at Trinidad's refinery are impacting oil product supply in the Caribbean as Petrotin supplies about 20% of the regional market.

In Venezuela, one of Amuay's refinery biggest crude distillation units, which was damaged by the refinery blast and fire last summer, is set to return to operation by the end of April, according to PDVSA. However, the flexicoker, partially restarted in February, was to stay out of service until April for unplanned maintenance and repairs. Currently, the CRP refining complex, including Amuay, Cardon and Bajo Grande refineries, is currently producing at 62% capacity. Consequently, the country remains dependent on imports to satisfy its domestic market with petroleum product imports from the United States hitting a new record of 197 kb/d in December.

Based on the latest JODI data, Peruvian crude throughput in December increased by 32% m-o-m to 190 kb/d, a level not seen since 2005.  Last month, the Government announced that it had cancelled expansion and upgrading plans at its Talara refinery (62 kb/d) due to increased costs. A project for a new desulfurization plant to produce 50-ppm petroleum products is under study.

Middle Eastern crude runs for 4Q12 are in line with our last month report at 5.7 mb/d. Based  on the most recent available data, 1Q13 runs have been lowered by 75 kb/d to 5.6 mb/d as many refineries in the region are preparing for spring maintenance. Maintenance operations are expected to peak in March and April with on average 800 kb/d of crude distillation capacity idled as refineries in Bahrain, Kuwait, Oman, Saudi Arabia and Abu Dhabi will start shutting down. Total refinery runs in the Middle East region for 2Q13 are estimated at 5.7 mb/d due to reduced runs resulting from heavy maintenance in Saudi Arabia and Oman.

In Oman, the Sohar refinery (116 kb/d) shutdown in early March for planned maintenance. The refinery has embarked on an upgrading program in an effort to boost its gasoline and diesel production and enable Oman to produce asphalt for the first time. The project will be completed by 2016, requiring the country to continue importing gasoline and diesel for the next three years.

In Saudi Arabia, a turnaround is taking place at all the major refineries of the country in the first half of 2013. The construction of the new 400 kb/d Jubail refinery is almost complete and the shareholders have announced that it should reach full capacity by the end of the year. This refinery will be integrated into a major petrochemicals complex at Jubail Industrial City, estimated to be completed by 4Q15.

Iran and Pakistan are studying the feasibility of a new 400 kb/d refinery at Gwadar, in Pakistan southwestern Balochistan province. Under the deal, Iran will lay an oil pipeline to Gwadar to transport crude oil for processing.

African refinery throughputs for 2012 are estimated at 2.1 mb/d, down 5.5% y-o-y as the region suffered from multiple refinery outages mainly in North Africa. In Algeria, Sonatrach has indicated that it will resume full operations at its Skikda refinery in the first week of March. The refinery, which has been undergoing maintenance and upgrade work since last summer, has experienced various technical faults and forced the shutdown numerous times of its two crude distillation units. In Libya, following the closure of the Ras Lanuf refinery at the end of January due to technical issues and an employee strike, the operator had declared a force majeure until early March.

In Uganda, the parliament passed a new law on petroleum refining, opening the way for the construction of a new refinery with an initial capacity of 20 kb/d, expandable to 60 kb/d. Following oil discoveries in the Lake Albert Rift Basin, the refinery project is now seen by the government as a means to cut its high import costs as the land-locked country currently imports all its petroleum products from Kenya. At this time, there is only one functioning oil refinery in East Africa, Kenya's Mombasa refinery, owned jointly by the Kenyan government and India's Essar Energy, which is operating only at 50% capacity.

In Nigeria, some of the new Lekki refinery investors are stepping back in view of a revision to the proposed Petroleum Industry Bill (PIB). The discussions regarding the new PIB are still ongoing between the government and the oil industry. This bill is expected to redefine the operations of the oil industry in the country but also reshape taxes and royalties as well as restructure NNPC. Major oil firms have argued that the fiscal terms in the PIB are too harsh and would prevent new investment. The 300 kb/d Lekki refinery project was scheduled for operation in 2017 and is supported by the Lagos State government and the NNPC in collaboration with a consortium of Chinese investors.

We now estimate African crude runs for 1Q13 at 2.1 mb/d, up 110 kb/d y-o-y even though Nigeria Port Harcourt refineries will finally be shut for planned maintenance in May. Refinery throughputs for 2Q13 could reach 2.3 mb/d with the return of the Skikda refinery in Algeria and a gradual restoration of Libyan refinery utilisation. This increase in refinery runs in North Africa will compensate refinery shutdowns in South Africa where both Sapref's Durban (170 kb/d) and Caltex's CapeTown (110 kb/d) refineries will undergo maintenance.