Oil Market Report: 12 June 2013

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Highlights

  • Futures prices for benchmark grades traded in a narrow range in May and edged lower in early June. Bearish market sentiment prevailed throughout most of May against the backdrop of a more anaemic economic outlook. Brent last traded at $102.15/bbl while WTI was pegged at $94.50/bbl.
  • The forecast of global oil demand growth is little changed at 785 kb/d (0.9%) for 2013. Absolute demand estimates have been trimmed on account of revised historical data for Russia.
  • Global supplies edged lower by 90 kb/d m-o-m to 91.2 mb/d in May on Canadian maintenance, but rose by 180 kb/d y-o-y, led by OPEC NGLs and non-OPEC supply. Maintenance will cut North Sea supplies from 3.0 mb/d in 1Q13 to 2.6 mb/d in 3Q13.  Non-OPEC supply growth is forecast at 1.1 mb/d for 2013, unchanged since last month.
  • OPEC crude oil supply in May rose by 135 kb/d to 30.89 mb/d, a seven-month high. Increased output from Saudi Arabia, Iran, the UAE and Kuwait was partially offset by reduced supplies from Iraq, Libya and Nigeria. The 'call on OPEC crude and stock change' for 2H13 was trimmed by 200 kb/d to 29.8 mb/d due to lower demand expectations.
  • The seasonal ramp-up in global crude throughputs is expected to be steeper than normal this year, with runs increasing by 2.2 mb/d from 2Q13 to 3Q13. That seasonal increase, centred in the non-OECD, is due to new Saudi distillation capacity, increasing Chinese runs after heavy spring maintenance, and recovering throughput at Venezuela's Amuay plant after a 2012 fire
  • OECD commercial oil stocks built by seasonal 16.7 mb in April, to 2 680 mb, led by crude oil, NGLs and refinery feedstocks. On a forward-cover basis, OECD product stocks fell seasonally by 0.2 days, to 30.6 days. Preliminary data suggest total oil stocks built by a further 11.1 mb in May.

Pressure points

Changes in the oil map are occurring at all levels of the supply chain, not least, as highlighted in the recently released Medium-Term Oil Market Report (MTOMR) 2013, in the refining industry. A first test of how those changes might affect broader oil markets may be around the corner.

The MTOMR expects as much as 9.5 mb/d of new crude distillation capacity to come on stream in 2013-18, substantially more than the forecast increase in crude production capacity, let alone global demand growth. This transformation will not happen overnight. Large-scale expansion of refining capacity, mostly East of Suez, will take years to come through. But neither is it a distant prospect.

Major refining capacity additions have already occurred over the last year, but scheduled maintenance and unplanned outages provided an offset in 2Q13, keeping global throughputs below 75 mb/d. Moving into the third quarter, however, throughputs look set for a step change. With the start-up of new Asian and Middle Eastern capacity, including Saudi Arabia's 400 kb/d Jubail refinery, the end of outages at Venezuela's giant Amuay refinery and other plants, and the unwinding of seasonal maintenance in North America, Europe and Asia, global refinery runs may rise by more than 2 mb/d.

Should it be confirmed, this spike in crude runs from 2Q13 to 3Q13 would exceed both forecast product demand growth of 1.7 mb/d and incremental non-OPEC supply of 0.7 mb/d for the same period. While Europe's economic woes are taking a toll on demand, there are mounting signs that China's oil use, like its economy, may have shifted to a lower gear. Slower growth in demand than in runs could lead to product stock builds.

Against such a supply and demand outlook, a step change in refining activity could cause both product stock builds and crude draws, undermining margins. While that would normally prompt refiners to drop their throughputs, market participants may not be equally receptive to such price signals. New refining capacity would likely be the last to cut back on runs if refining economics turned south. On the other hand, older plants in mature markets, saddled with comparatively high costs, might feel the heat. That those plants should find it increasingly tough to compete is a widely anticipated outcome of the current downstream restructuring. But pressure on those plants may be mounting even faster than expected. That in turn would contribute to speeding up the pace of change across the global oil supply chain.

Demand

Summary

  • Global oil consumption is forecast to expand by a somewhat muted 785 kb/d in 2013, to 90.6 mb/d, roughly unchanged since last month's Report. Relatively sluggish macroeconomic conditions are expected to keep a lid on growth in 2013, with absolute declines still projected across much of the OECD.


  • Baseline data revisions have trimmed the estimates of global demand for 2012 and 2013 by 75 kb/d and 80 kb/d, respectively. Demand for 2012 is now assessed at 89.8 mb/d. Revised estimates of Russian oil consumption account for the bulk of the adjustments.
  • The forecast of Chinese oil demand in 2013 has been slightly trimmed, reflecting lower projections of economic growth. Chinese oil demand is now forecast to grow by 3.8%, down from 3.9% previously. Following the release of its World Economic Outlook in April, in which Chinese GDP was projected to expand by 8.0% in 2013, the International Monetary Fund cut its forecast to 7.75% in May, consistent with a swing back to 'contraction' in HSBC/Markit's latest Chinese manufacturing outlook.
  • Despite our weak 2013 global demand outlook, growth is forecast to pick up momentum in 2H13, as underlying macroeconomic momentum slowly improves. Global demand growth is expected to reach 1.1 mb/d (or 1.2%) in 4Q13 year-on-year, compared to an average 785 kb/d (0.9%) for the year.
  • Emerging market and developing economies continue to lead demand growth through the forecast. Thanks to stronger relative economic growth and generally higher energy intensities, non-OECD economies are forecast to outperform the OECD in oil demand growth by +1.3 mb/d to -0.5 mb/d. Total non-OECD oil consumption is projected to exceed OECD in 2Q13, but will not hold this position consistently until 2Q14.

Global Overview

Sluggish global macroeconomic conditions remain the leading factor behind the forecast of oil demand growth for 2013, which in this Report is held roughly flat at 785 kb/d. Although the aggregate growth forecast is little changed, the regional distribution of growth has been revised, but the adjustments are mostly small and mutually offsetting.

Since the Oil Market Report first unveiled its demand outlook for 2013 last July, the forecast has been adjusted downwards by just 0.3 mb/d, due mostly to reduced expectations of European economic growth. Most reductions to the demand estimate have been applied to both 2012 and 2013 data, leaving the growth forecast for this year relatively flat. This month's net downward revisions to the 2012 demand estimate totals 75 kb/d, while the forecast for 2013 has been reduced by 80 kb/d. Cuts to the Russian demand assessment (caused by historical data revisions) are the main factor in both years and are compounded by downwards adjustments to the macroeconomic forecasts for China and Europe. The IMF reduced its forecast of Chinese GDP growth to 7.75% in May, from 8.0% in its World Economic Outlook, released in April. The new forecast is in line with the consensus of Asian economists, and is also supported by the latest Purchasing Managers' Index (PMI) figures, which show the Chinese manufacturing sector flipping back into 'contracting' territory in May, i.e. below 50.

Several European economies have reported 'double-dip' recessions in recent months, including France in 1Q13. Weakening growth conditions in an already ailing Europe further undermine the outlook for European oil demand.



Recent oil data are a 'mixed bag'. Final March data are now available for most countries. On the downside, the largest demand revisions focus on Canada (cut by 135 kb/d), Brazil (-90 kb/d) and Turkey (-85 kb/d). On the upside, adjustments centre on Thailand (+50 kb/d), Japan (+45 kb/d) and Argentina (+40 kb/d). Preliminary data for April have also become available for some countries, with notable upwards revisions for Germany (+230 kb/d), France (+120 kb/d) and Korea (+95 kb/d) more than offsetting cuts in China (-155 kb/d), Russia (-100 kb/d) and Poland (-55 kb/d).

While demand is projected to remain relatively sluggish overall, growth is expected to gain momentum through the end of the year, rising from a low of 215 kb/d y-o-y in 2Q13 to 1.1 mb/d by 4Q13, as the underlying macro-economy strengthens. Both oil demand growth and the underlying economic expansion are expected to see their weakest growth in 2Q13. JPMorgan/Markits' global PMI fell to a six-month low of 51.9 in April (though still 'expanding'), but the consensus of macroeconomic opinion envisages an acceleration of growth into 2014.

Top-10 Consumers

US

The latest data from the US Energy Information Administration (EIA) are in line with expectations. March US50 demand is now estimated at 18.5 mb/d (roughly matching the forecast carried in last month's Report). This amounted to a 1.4% expansion on the year-earlier level, as colder weather lifted heating oil consumption, while low prices fuelled petrochemical demand for ethane, a key component of our LPG demand estimate. Preliminary April estimates, based on the latest US EIA data, show a similarly close match to last month's forecast, with roughly 18.2 mb/d of oil products consumed.





Despite recent gains, a contraction of around 0.1% in US demand is still forecast for the year as a whole. We remain sceptical as to whether support from the US macroeconomic recovery will be sufficient to offset other factors that have been driving the declining trend in US oil demand. An average of around 18.6 mb/d is forecast to be consumed in the US50 in 2013, 25 kb/d less than in 2012, thanks to a combination of efficiency gains, changing consumer patterns and fuel switching at the margin (see 2013 Medium-Term Oil Market Report).



Reports of the Demise of the US Driving Season Look Premature

Given gasoline's oversized share of the US and global demand barrels, any assessment of global oil demand hinges in part on getting US gasoline demand right. This is especially true of the summer, when US driving demand ramps up and lifts gasoline's share of the US and global demand barrels to even greater heights than during the rest of the year. Anecdotal reports that the driving season has recently receded in

importance appear overdone. While the seasonality of US gasoline demand seemed to fade during the Great Recession of 2008-2009, it has since returned and gasoline demand is forecast to show a seasonal bump of around 0.3 mb/d this summer.

The scale of US gasoline consumption is staggering when compared with total oil demand across the globe. In 2012 gasoline consumption in the 50 US states averaged around 8.7 mb/d. Although below recent peaks of 9.3 mb/d reached in 2007, this was still equivalent to nearly 10% of total world oil demand. Measured in barrels, daily average US gasoline demand is as large as the total oil consumption of Mexico, Canada, Germany, France and New Zealand put together. Although the relative share of global demand attributable to US gasoline has eased from 11.3% in 2002, it remains a vital component of global consumption. Hence, it is essential to have a good understanding of its ebbs and flows.



The US summer driving season traditionally extends from the Memorial Day holiday weekend in late May to the Labour Day holiday in early September. For the sake of simplicity, we will define it as running from June through August. In the last ten years, 2003-2012, incremental gasoline demand for those months versus annual demand levels averaged out at 270 kb/d, with significant variations throughout. In 2008, for example, the summer demand 'premium' slipped to roughly half its ten-year average, as pump prices tested for a first time $4 per gallon, compounding the impact of the early stages of the Great Recession. Cash-strapped consumers sought to economise on journeys during this period, but since then the summer driving premium has re-emerged strongly at an average rate of 285 kb/d, 2010-2012. Given the IMF projection of US economic growth of near 2% for 2013, we assume that this pattern will be extended.

Within the US, clear regional contrasts can be found in summer gasoline demand patterns. Over the last ten years, the Midwest (PADD 2) and East Coast (PADD 1) have shown the most seasonal variation in gasoline demand, with summer 'premiums' averaging 95 kb/d and 115 kb/d, respectively. On a relative basis, the Midwest showed the widest seasonal swings, with a 3.7% increase in summer gasoline demand over the annual average, followed by the East Coast with a 3.5% increase. In the three years since the 2008-09 financial crisis, those increases have reached 4.7% and 3.6%, respectively. The West Coast (PADD 5) and Rocky Mountains (PADD 4) offered the next biggest premiums, at 45 kb/d and 20 kb/d respectively (2003-12). In contrast, the Gulf coast (PADD 3) showed little if any seasonal variation in driving demand. Further analysis suggests PADD 3 demand tends to rise seasonally early in the winter, around November-December, rather than during the summer. The PADD 3 early-winter bump in gasoline demand averages around 40 kb/d, or 3.1%, versus annual levels.

Given recent signs of recovery in US gasoline demand growth, coupled with the comparative strengthening seen in the US macroeconomic backdrop (1Q13 US GDP growth averaged 0.6% quarter-on-quarter, from nearly flat growth in 4Q12), seasonal factors are forecast to boost gasoline demand by 0.3 mb/d this

summer. This will not be enough to stop average US gasoline demand from edging down in 2013, however. This Report still forecasts a contraction of 0.1% in US gasoline demand for the year as a whole (thus maintaining average demand at around 8.7 mb/d). Although the factors behind this forecast -- such as the vehicle fleet's increasing fuel efficiency -- are still expected to prevail, this downwardly sloping trend in US gasoline demand is nevertheless expected to remain consistent with continued seasonality in demand patterns.

China

A recent spate of relatively subdued Chinese economic indicators supports our long-held view that Chinese oil demand growth has shifted gears. In view of those data, we have trimmed our forecast of the country's oil demand growth for 2013 to 365 kb/d (or 3.8%) from the 380 kb/d (or 3.9%) assessment carried last month.

Two key factors account for the adjustment: weaker economic growth and lower than previously forecast March/April consumption data. The IMF has reduced its estimate of Chinese economic growth for 2013 to 7.75% from 8.0% in its April WEO. In addition, the closely watched HSBC/Markit Chinese Manufacturing PMI index flipped back to 'contracting' territory in May. Meanwhile, based on the latest data, the estimates of Chinese apparent oil demand for March and April have been cut by 60 kb/d and 155 kb/d from last month's Report, respectively.



Gasoline consumption, up 11.8% y-o-y in April to 2.0 mb/d, bucks the otherwise relatively lacklustre Chinese demand trend (3.2% for all products), reflecting years of robust Chinese car sales. The latest light-vehicle sales figures, for example, hint at continued strong growth in Chinese gasoline demand, which is forecast to rise by 8.8% in 2013 to 2.1 mb/d. Light vehicles sales in April rose by 13% y-o-y, according to the China Association of Automobile Manufacturers.

Japan

Japanese demand contracted by 3.3% in April, according to Ministry of Economy, Trade and Industry statistics, to 4.2 mb/d, only 15 kb/d above our month-earlier forecast. Leading April's downward momentum were the sharp declines in power sector usage of both fuel oil and 'other products', which includes crude oil for direct burn in electricity generators. Figures confirmed by the Federation of Electric Power Companies show the 10 largest power utilities consuming just 190 kb/d of fuel oil in April, a 21.9% decline y-o-y. The petrochemical sector bucked the generally falling Japanese demand trend, with 13.3% y-o-y more naphtha consumed in April at 725 kb/d.



India

Preliminary April consumption data came in roughly as forecast in last month's Report, up 3.1% on the year to an average of around 3.8 mb/d, with gasoil and naphtha leading the upside momentum. The Indian growth trend has clearly eased back from its previous near-4% trajectory (2011-12), following steps to reduce long-standing but economically restrictive diesel subsidies. In January, the government commenced a monthly subsidy cutting programme, reducing prices by roughly half a rupee per litre (equivalent to nearly 1 US cent). After a temporary suspension in March-April, the scheme resumed in May and is likely to proceed, at least intermittently, through the remainder of the year.



Further curbing the future demand trend, car sales in April fell by 10% y-o-y, to 150 790, according to the Society of Indian Automobile Manufacturers, extending to six months the negative monthly sales trend. Despite the overall bleak Indian car sales data, a modicum of positivity can be gleamed from gains in both the sports utility vehicle and moped markets.

Russia

The Russia demand story has lost some of its allure recently, with preliminary April data showing only 3.1 mb/d of oil products being consumed, equivalent to 1.2% annual growth. That aggregate growth figure obscures contrasted trends, however. On the one hand, weakness in Russia's industrial sector has recently undermined gasoil demand. On the other hand, strong growth has been seen in naphtha and jet/kerosene. Naphtha demand is continuing to rise supported by relatively robust petrochemical demand, while jet/kerosene demand remains supported by the thriving air transport sector. The number of air passengers, for example, rose by 17% in 2012, to 166.8 million.



Brazil

Consumption of oil products in Brazil averaged 3.0 mb/d in March, 90 kb/d below our previous forecast, as demand inched down y-o-y for the first time in nearly four years. The drop reflected general macroeconomic concerns that have arisen recently, namely the impact of recent shifts in Chinese economic activity on commodity exporters such as Brazil, whose growth in the past few years had been largely underpinned by Chinese import growth. We have accordingly trimmed our Brazilian growth forecast to 3.2% in 2013, from 3.3% previously.

Saudi Arabia

Saudi Arabia consumed close to 2.8 mb/d of oil products in March, just 0.3% off last month's forecast. We continue to forecast oil demand growth in excess of 4% in the Kingdom for 2013. Although transportation fuels are forecast to continue to lead growth in 2013, with gasoline up by around 5%, this is a sharp curtailment from 2012's 8.4% expansion as consumer confidence has shown signs of easing recently. Nielsen's Global Survey of Consumer Confidence showed a 14% contraction in consumer confidence between 1Q13 and 4Q12, as disposable income has fallen under pressure from high inflation.



Germany

The latest German demand data came out ahead of expectations, as preliminary April statistics put average consumption up to 2.5 mb/d, its highest level since November 2012. The robust April estimate came about despite the ongoing economic malaise, as manufacturing indicators remain in 'contracting' territory (Markit/BME PMI falling to 48.1 in April, it has since risen to 49.4 in May), with a combination of the relatively cold late-winter weather and the early arrival of the Easter in 2013 supporting demand. Easter closures in 2013 straddled both March and April, whereas in 2012 the holiday was entirely located in April, raising the y-o-y industrial fuel consumption figures for April.

Canada

Consumption of oil products in Canada dropped surprisingly steeply in March, down 5.1% on the year to 2.2 mb/d, as a seasonal spring dip in demand seemed to come early. The earlier arrival of the Easter holiday in 2013 compared to 2012 may partly explain the decline. RBC's Canadian Manufacturing PMI also slipped into 'contracting' territory in March, to 49.3, its weakest reading since 2010, with the output and new orders components at all-time lows. Recent weakness in Canadian demand has trimmed the demand forecast for the year by 20 kb/d to 2.3 mb/d, implying a y-o-y contraction of 0.4%.



Korea

South Korean oil consumption posted a surprisingly strong 6.5% y-o-y jump in April, to 2.2 mb/d, bucking seasonal trends. Whereas consumption usually falls in April, this year cold weather has raised heating requirements even as industrial sentiment has proved surprisingly robust. HSBC/Markit reported manufacturing sentiment, as tracked by the PMI, rising at its fastest pace in more than two years, to 52.6 in April, implying heightened requirements for industrial fuels, such as gasoil and fuel oil. Accordingly, gasoil demand showed one of the sharpest rises in April, up 10.2% y-o-y to 420 kb/d. Sub-seasonal temperatures raised jet/kerosene demand ahead of our earlier forecast, by 20 kb/d over our earlier forecast to a total jet/kerosene demand of 140 kb/d in April.



OECD

Flat-to-falling macroeconomic conditions, continued efficiency gains and some product switching, notably to natural gas in the power sector, combined to suppress OECD demand. The rate of decline, which currently stands at around 2% on the year earlier, is forecast to moderate somewhat through the second half of the year, as economic conditions improve. Regional differences will exists throughout the OECD, with particularly sharp declines forecast for Europe and Asia Oceania, whereas relatively flat oil demand is forecast for the Americas.



Americas

Total demand in the OECD Americas region in March was roughly unchanged on the year, although this headline figure conceals strong regional contrasts. While US demand was well above its earlier reading (+1.4% y-o-y in March), the opposite was true in Canada, Mexico and Chile. Mexican oil demand bounced back strongly in April, to 2.2 mb/d (up 2.3% y-o-y), reversing March's dip to a 26-month low of 2.0 mb/d. The 6.9% y-o-y contraction in March was largely due to a dramatic drop in fuel oil demand, which tends to fluctuate widely in Mexico as the power sector attempts to move over to natural gas but occasionally has to deal with shortages.



Europe

European oil consumption continues to fall sharply against the backdrop of double-dip recession in several of the region's economies. With regional unemployment at an all-time high, manufacturing output is also deteriorating, suppressing consumption of both industrial and transportation fuels. The PMI for the euro zone fell to 46.9 in April, deep in 'contracting' territory.  Even Germany, the region's largest manufacturer, posted a five-month low of 49.2. Smaller manufacturing hubs, such as Poland, particularly struggled, with the Polish PMI falling to a 46-month low in April while Spain dipped to its worst level in four months. Nevertheless, European gasoil demand outperformed many other products, garnering support from unseasonably cold weather in March.  Temperatures returned to more normal levels in April, only to fall back to unseasonable lows in May. Preliminary estimates for some of the big European countries show additional support for gasoil (y-o-y) in April from the early onset of the Easter holiday this year.



More service-orientated European economies also showed signs of weakness In the UK, for example, weak consumer confidence, coupled with an ailing manufacturing sector and year-earlier stockpiling of transportation fuels combined to keep oil consumption suppressed at around 1.5 mb/d in March, 7.1% down on the year earlier. Of special note this month, the British authorities reduced their assessment of January demand by 100 kb/d to 1.4 mb/d, with revised estimates of 'other products' accounting for the majority of the correction.



French consumption data surprised on the upside in April, according to preliminary statistics. Demand was roughly 120 kb/d above our forecast, at 1.8 mb/d. Gasoil accounted for the majority of this additional demand, as April industrial use rose y-o-y due to the earlier Easter break in 2013. Nevertheless, the projected trend for the year remains one of heavily falling consumption as the economy entered double-dip recessionary territory in 2013.

Asia Oceania

Consumption in OECD Asia Oceania has fallen in recent months, largely due to the return to structurally declining oil demand in Japan. In the period 4Q11-3Q12 this factor reversed, as Japanese consumption rose strongly on the back of additional nuclear replacement demand. Looking forward, such incremental Japanese fuel switching will no longer be a factor. Thus, with all else being held equal, demand in the Asia Oceania region is forecast to contract by 2.0% in 2013. After a period of strong growth, 4Q11-3Q12, demand of fuel oil and 'other products' (which includes crude used for direct burn in the power sector) are forecast to lead the predicted correction of 2013.



Non-OECD

Non-OECD oil consumption is forecast to overtake the OECD in 2Q13. However, we do not expect non-OECD demand to continuously exceed the OECD until 2Q14, as seasonal factors (such as the northern hemisphere winter) come into play. Post-2Q14, non-OECD consumption will have risen sufficiently to allow non-OECD demand to exceed the OECD regardless of the season.



In Argentina, oil consumption gained surprising momentum in April, with y-o-y growth escalating to 11.7%, its fourth consecutive rise (from December 2012's recent low of +2.0%). Gasoline demand led the uptick, with double-digit percentage point gains seen throughout 2013 thus far, as persistent subsidies continued to shield drivers from an otherwise high inflation.



Supply

Summary

  • Global supplies fell by 90 kb/d m-o-m to 91.2 mb/d in May, as higher OPEC crude production failed to offset a decline in non-OPEC output. On an annual basis, supplies stood 180 kb/d higher than last year, with rising OPEC NGLs and non-OPEC supply outpacing an 810 kb/d decline in OPEC crude.
  • Non-OPEC supply fell by 230 kb/d in May to 53.8 mb/d due to maintenance in Canada that offset gains elsewhere. Annual supply growth is forecast to average 1.1 mb/d in 2013, consistent with last month's estimate.
  • North Sea summer maintenance typically shaves 260 kb/d from output but may be more severe than usual in 2013, affecting the Brent, Forties, Oseberg and Ekofisk blends as entire oil and gas pipeline systems, gas processing plants, terminals and oil fields enter turnaround mode. Scheduled maintenance stands to reduce BFOE crude production in June to just 550 kb/d, around 60% of 1Q13 levels. Production is expected to rebound in July but to fall back to 640 kb/d in August.
  • OPEC crude oil supply rose by around 135 kb/d to 30.89 mb/d in May, led by Saudi Arabia. The 'call on OPEC crude and stock change' was adjusted lower due to a downward revision in demand, by an average 200 kb/d to 29.8 mb/d for 2H13 and by 100 kb/d to 29.5 mb/d for the full year. OPEC NGL production is forecast to average 6.5 mb/d in 2Q13 and 6.7 mb/d in 2H13. OPEC's 'effective' spare capacity dipped in May, to 3.23 mb/d versus 3.47 mb/d in April.
  • As expected, OPEC rolled over its 30 mb/d production ceiling at the 31 May ministerial meeting in Vienna. Several member countries raised concerns about the growing impact of ever-increasing shale oil production on OPEC's market share. In response, ministers agreed to set up a special committee to review the outlook for non-conventional oil. OPEC ministers will next gather to review the market on 4 December 2013.


  • 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 in May rose to its highest level in seven months due to increased output from Saudi Arabia and, to a lesser extent, Iran, the UAE and Kuwait. May OPEC output was up by around 135 kb/d to 30.89 mb/d, with higher output from the Gulf producers only partially offset by reduced supplies from Iraq, Libya and Nigeria, where terrorist and militant activity continued to undermine production levels.

As widely anticipated, OPEC, at its 31 May ministerial meeting in Vienna, rolled over its 30 mb/d production ceiling originally agreed in January 2012. With the decision to maintain the current output ceiling a near-foregone conclusion going into the conference, several producers raised concerns about the growing impact of ever-increasing shale oil production on OPEC's market share. In response, ministers agreed to set up a special committee to review the outlook for non-conventional oil such as light, tight oil and shale production. OPEC ministers will next meet to review the global oil market on 4 December 2013.



The 'call on OPEC crude and stock change' was adjusted lower due to a downward revision in demand, by an average 200 kb/d to 29.8 mb/d for 2H13 and by 100 kb/d to 29.5 mb/d full year. Increased output reduced OPEC's 'effective' spare capacity in May, to 3.23 mb/d versus 3.47 mb/d in April.

Saudi Arabia's crude oil production rose to six-month highs in May, up a steep 220 kb/d to 9.56 mb/d. The higher production level likely reflects the seasonal uptick in domestic use of crude for burning at power plants during the peak air-conditioning period. Saudi crude burn last year increased by around 300 kb/d during the seasonally stronger demand period from April to September, to an average 675 kb/d, with similar growth expected this year. Aramco continues to ramp-up production from the first 500 kb/d tranche of the 900 kb/d heavy oil offshore Manifa field following its 10 April start-up. Saudi Aramco's newly released 2012 annual report showed crude production, excluding Neutral Zone, averaged 9.51 mb/d, in line with OMR estimates.



Iranian output was marginally higher at 2.68 mb/d, up 30 kb/d from April. From January to May output has averaged around 2.69 mb/d with exports of around 1 mb/d over the same period despite logistical and shipping challenges poised by international sanctions. Iranian crude held in floating storage was estimated at 30 mb at the end of May, unchanged from April.

Total imports of Iranian crude in May, from both OECD and non-OECD countries, were estimated at a relatively high 1.39 mb/d in May compared with an exceptionally low 835 kb/d in April. Indeed, preliminary data show Iranian supplies to China surged to 715 kb/d in May compared to 370 kb/d in April, according to latest data on discharge data from tanker trackers show. The steep m-o-m change, however, largely reflects congestion at Chinese ports at end-April, with discharge from ships delayed until early May. Around 16 cargoes of Iranian oil were offloaded in China during May compared to just 9 ships in April. Import volumes are based on data submitted by OECD countries, non-OECD data from customs agencies, tanker data and news reports.



The US State Department on 5 June renewed six-month waivers to Iranian sanctions for nine countries, including major buyers China, India and South Korea. At the same time, the US Congress announced plans to strengthen sanctions against Iran in a bid to choke off Iranian crude oil exports further and deny Tehran funds to develop its nuclear programme. Discussions are also ongoing to tighten the standards for granting exceptions and more clearly define the volumes countries are required to cut rather than using the current vague definition of "significantly reduced" purchases. Waivers were also granted to Malaysia, Singapore, South Africa, Sri Lanka, Turkey and Taiwan. In March, the State Department granted six-month exemptions to Japan and 10 EU countries.

In addition, the Obama Administration on 3 June issued an executive order imposing sanctions on financial institutions that transact trades in the Iranian rial. Lawmakers in Congress also hope to pass legislation this summer that could further limit Iran's access to its foreign currency accounts, which are largely held in Euros. US moves to strengthen sanctions come against the backdrop of Iran's presidential election on 15 June.

Iraqi production fell by 100 kb/d to 3.14 mb/d in May. Exports fell by around 135 kb/d to 2.48 mb/d, with reduced shipments from both the south and the north. Basrah exports were off by around 115 kb/d to 2.2 mb/d while Kirkuk volumes were down by 20 kb/d to 285 kb/d. Kirkuk shipments were curbed by repeated attacks on the northern Ceyhan-Kirkuk pipeline during May as well as the continued suspension of crude exports from the Kurdish region to the Ceyhan-Turkey pipeline due to the ongoing payment and contract disputes between Irbil and Baghdad. However, exports from the Kurdistan Regional Government (KRG) administered area are steadily rising via truck, much to the chagrin of the central government in Baghdad. Total KRG output rose to 140 kb/d in May compared with 120 kb/d in both March and April and 40 kb/d in the first two months of the year. Reports suggest that roughly 80 kb/d of KRG production is being refined locally as a number of new teapot refineries have been brought online, with growing volumes of products trucked to Turkey. 

In an effort to renew negotiations over the long-running dispute over oil revenues and contracts with the Kurdistan Regional Government (KRG), Iraqi Prime Minister Nuri al-Maliki met with KRG President Masoud Barzani on 9 June. While no discernible progress was made on the divisive issues, analysts say the high-level meeting was a positive step towards confidence building.

Kuwaiti output edged up by 30 kb/d in May, to 2.84 mb/d while UAE production rose by 25 kb/d to 2.73 m/d. Qatar's output was unchanged at 725 kb/d in May.



Angolan crude production rose by 40 kb/d to 1.78 mb/d. 2Q13 output from the Plutão, Saturno, Vénus and Marte (PSVM) complex is hovering between 70 kb/d-90 kb/d and is not expected to reach peak capacity of 150 kb/d until early 2014. Operator BP has reported that the start-up of the Plutão field in January will be followed by output from Saturno and Vénus fields in 2H13 and from Marte in 2014. Crude production from the Kizomba D Satellite Clochas Mavacola fields is also ramping up to full capacity of 140 kb/d in 2Q13.

Nigerian crude output declined to six-month lows, down 20 kb/d to 1.96 mb/d, as oil theft-related damage to pipelines continued to curb production. Lower May volumes are due in part to Shell's 15 April force majeure on roughly 150 kb/d Bonny Light and Forcados crudes. The shut-in was expected to be lifted in six weeks but still remains in place as of 10 June.  Shell was forced to close the Nembe Creek pipeline for repairs linked to pipeline theft damage. More than 50 break points were discovered along the near 100 km Nembe Creek Trunkline. Total declared force majeure on Usan crude lifting on 30 May. Roughly 125 kb/d of crude was to be lifted in June. Total gave no reason for the shut-down but the 180 kb/d offshore Usan field, which started production in 2012, reportedly has experienced technical issues in the past.



Libyan crude oil production edged lower in May, off by 40 kb/d to 1.38 mb/d, following continued labour-related disruptions to oil flows. The security situation continues to deteriorate as tribal militias further destabilise the country. At end May, protesters demonstrating for jobs, among other issues, forced the shut in of the 130 kb/d El Feel oilfield in the country's southwestern desert, which is part of the Mellitah operation run by a joint venture between Libya's state energy firm, the National Oil Corporation (NOC) and Italy's Eni.

OPEC NGLs

OPEC natural gas liquids, including condensates, are forecast to average 6.5 mb/d in 2Q13, rising by 170 kb/d in 3Q13. Angola's long-delayed Soyo LNG plant started test production in early June but full operations are not expected to start-up until mid-August. The new LNG project is expected to produce around 50 kb/d of natural gas liquids and 10 kb/d of condensates when it reaches full capacity. Algeria's El Merk project has added 20 kb/d of NGLs and 20 kb/d of condensate production in 2Q13 and is expected to build up to capacity of 30 kb/d each in 3Q13.

Saudi Arabia, OPEC's largest producer of NGLs, is expected to add around 25 kb/d of condensate supply in 3Q13 following the start-up of the first 500 kb/d phase of the offshore Manifa oil field in early April. Peak condensate flows from Manifa is expected to reach 65 kb/d when the second 400 kb/d tranche of production is brought online in 2015.

Non-OPEC Overview

Seasonal maintenance, in Canada, the US, and the North Sea reduced total non-OPEC supply in May by 0.2 mb/d m-o-m to 53.8 mb/d. Relatively speaking, year-on-year production growth remains strong, estimated at around 0.7 mb/d in May and 1.1 mb/d in 2013 driven primarily by steep increases in North America. US total liquids output, not including biofuels, reached 10.0 mb/d in April and May, while in Canada, maintenance at upgraders kept production in check at 3.6 mb/d. In Russia, high oil prices have kept brownfield production elevated and are driving a strong focus on Gazprom's natural gas condensate assets.

Downside risks to the outlook remain. Sudan threatened to shut down one of the export routes from South Sudan, and tensions could possibly derail April's African Union-brokered agreement. Taking out South Sudan's contribution would reduce the 2H13 forecast of non-OPEC supply by around 200 kb/d. The impact of planned maintenance in the US, Canada, Brazil and the North Sea could be more severe than forecast. If past years are any indicator, seasonal maintenance has the potential to last longer than planned. In the North Sea, supplies are expected to fall by 0.2 mb/d in 2Q13 and a further 0.2 mb/d to 2.6 mb/d in 3Q13 (see 'Forecasted Impacts of North Sea Maintenance' in this section).

Overall, the non-OPEC supply forecast has been revised up slightly by 10 kb/d to 54.5 mb/d with downward revisions to the North Sea offsetting upwards revisions to North America and Russia. The continued strong performance of Russian liquids supply has resulted in a 100 kb/d upwards revision to 10.7 mb/d in 2H13. Downward revisions of around -130 kb/d in 2Q and 3Q13 in the North Sea now take into account more widespread planned maintenance. Non-OPEC supplies are seen on average 40 kb/d lower in 2Q13, and 30 kb/d higher in 2H13.

OECD Americas

US - May preliminary, Alaska actual, other states estimated: Total liquids output (not including biofuels) reached 10.0 mb/d in April and May despite planned maintenance in Alaska and the Gulf of Mexico (in May). Growing production in major tight oil plays, primarily the Permian, Eagle Ford, and Bakken, remains behind the rapid annual increase. After a small pause in m-o-m production growth in January in the Bakken (North Dakota) due to severe weather, production reached a record 720 kb/d in March, despite continued weather-related problems. Production in the Bakken is forecast to exceed 800 kb/d in the coming months on the back of operational efficiency improvements and a backlog of around 400 wells awaiting completion. The US forecast is revised slightly upwards by 30 kb/d in 2013 due to strong production growth in Texas, Oklahoma, and Kansas.

Annual maintenance on the Trans-Alaskan Pipeline System reduced Alaskan North Slope supply for a week in mid-May by 100 kb/d to as low as 420 kb/d, but production subsequently rebounded in the remainder of the month and in June to more than 550 kb/d. Maintenance at BP's Na Kika complex and at Thunder Horse reduced Gulf of Mexico crude supplies by about 0.1 mb/d to 1.2 mb/d in May. This offshore work coincided with maintenance at the BP-operated Pascagoula Gas Processing Plant during May and early June. Maintenance will disrupt processing from several operators in the Eastern Gulf of Mexico including from the Horn Mountain and Marlin Hubs. As the hurricane season commences in the US Gulf of Mexico, it is important to note that the forecast includes a -80 kb/d seasonal adjustment in 2H13 based on a five year rolling average of hurricane impacts.

Canada - March estimated: The latest statistics from the Alberta Energy Conservation Resources Board (ERCB) indicate that synthetic crude output (SCO) returned in March to levels of over 1 mb/d, last seen in December 2012. But as indicated several months ago, SCO output is expected to have declined to around 750-kb/d in May as a result of planned maintenance at Suncor's Millennium upgrader and CNRL's Horizon upgrader. Mined and in situ bitumen production is also expected to break through the 1 mb/d mark in June on the back of new production from Imperial's Kearl project and rebounding production from Suncor's Firebag project. Canadian production stands to grow by 260 kb/d to 4.0 mb/d in 2013, around 30 kb/d higher than last month's estimate due to stronger-than-forecast 1Q13 SCO production.

OECD Asia

Australia's production fell sharply in January to 350 kb/d due to cyclone-related shut ins and maintenance at the Mutineer-Exeter and Vincent FPSOs, but rebounded to 390 kb/d in March. Production is expected to average 480 kb/d by 4Q13 as operators complete planned maintenance and as the new Fletcher-Finucane field starts. Australia's 2011 and 2012 production estimates have been revised up slightly with the addition of Blacktip and Kitan to the monthly production survey. Partial adjustments were made last month to take into account the eventual inclusion of these fields in the historical series. This month, the inclusion of the official data for 2011 and 2012 results in upwards revisions of 10 kb/d each for those years.

North Sea

Seasonal maintenance is expected to reduce North Sea output in June, August, and September bringing Q2 and Q3 average to 2.8 and 2.6 mb/d, respectively, from 3.0 mb/d in 1Q13. The beginning of planned maintenance coincides with the Elgin/Franklin fields' return to production and the start or restart of fields in both the UK (Athena, Huntington, Jasmine, Tonto, Gryphon) and Norway (Jette, Vigdis NE). TAQA's Cormorant Alpha remains offline, affecting about 20 kb/d in the Brent system, possibly through 3Q13.



Forecasted Impacts of North Sea Maintenance

Since 2006, North Sea planned and unplanned maintenance has reduced supplies by 260 kb/d from May through September (compared to Jan through April) on average, net of natural field decline. In 2013, we estimate that planned maintenance will reduce supplies by 330 kb/d on average during these months excluding other unforeseen outages. This year, maintenance is expected to reduce Brent, Forties, Oseberg, and Ekofisk (BFOE) crude production in June to just 550 kb/d, around 60% of 1Q13 levels. Production is expected to rebound briefly in July, but is forecast to fall to 640 kb/d in August. Specifically, Ekofisk stream production could fall by more than 200 kb/d, to less than 50 kb/d, in June from the prior month. Later in the summer, gas-processing plant maintenance has the potential to reduce Norway's liquids output to 1.6 mb/d in August and 1.7 mb/d in September, on average 30 kb/d less than in the same months last year when the country suffered from worker strikes. In sum, maintenance in 2013 could be quite severe and will impact the BFOE blends as entire oil and gas pipeline systems, gas processing plants, terminals and oil fields enter turnaround mode.

Although the annual onset of seasonal maintenance at North Sea fields is largely anticipated by market participants, its exact scope and duration, and the potential for delayed restart at aging fields, could prove problematic. The impact on production depends on the duration and the nature of the work, but facilities may be unable to return to service as planned; indeed, as fields age, their ability to bounce back from turnarounds is highly uncertain. Moreover, tracking when this maintenance is expected to occur and its impact on oil production is difficult. Gas-related maintenance is made public under the EU's Regulation on Energy Market Integrity and Transparency (REMIT), but no such public disclosure obligation holds for oil facilities, leaving the oil impact more uncertain. In general, maintenance at gas-processing plants will impact oil production since assets cannot produce oil if there is nowhere for their associated gas to go. Based on these public disclosures and other information about periodic oil field turnarounds, one can calculate the estimated impact on oil supply.



Ekofisk maintenance in June. Most of the associated midstream and downstream infrastructure downtime is aligned with a three-year field turnaround cycle as shown in the Ekofisk chart. In June 2013 as in June 2010, the Norpipe gas pipeline that takes gas from ConocoPhillips' Ekofisk system in Norway to Emden, Germany, will shut down. This year the operator will install a bypass around a compressor station. All fields in the Ekofisk system, many of which produce both oil and gas, are tied into the Norpipe gas line, and do not have other export alternatives. Oil is exported via the Norpipe oil pipeline to the Teesside terminal in the UK, where maintenance will also occur. The system brings crude and other NGLs from Norway's Ekofisk area fields, some of BP's Norwegian fields and the Fulmar system and J-Block fields in the UK, and terminates at Teesside. In the same area, the onshore CATS gas processing terminal will also be undergoing maintenance for most of June.

Gas processing plants and gathering platforms offline in August, September. In August, part of the same system will undergo maintenance when the offshore natural gas gathering structure, called the CATS riser platform, will go offline for 25 days likely shutting-in oil fields with associated gas (see table). Other



processing plants and gathering systems in Norway and the UK will undergo maintenance in August and September, denting both NGL and crude output. The Heimdal riser platform, which takes gas from the Oseberg field and others, will go offline in late August. In the UK in August, BP's Forties Pipeline System (FPS) will undergo five days of maintenance around the time that the 200-kb/d Buzzard field will go offline for two weeks. Originally, the FPS was supposed to be offline for two weeks, but BP deferred this to 2014. Finally, both Kårstø (Norway) and St. Fergus (UK) gas terminals will be offline or operating at reduced rates in September. These terminals process gas from fields in the Brent and Fulmar systems as well as some offshore loaded fields.

Seasonal maintenance, compounded with unplanned maintenance in the same systems, can reduce the physical supply of the BFOE price benchmark, causing upward price pressures. The impact of unplanned outages, which now occur frequently in the North Sea, is amplified during the summer maintenance season.

Non-OECD

Former Soviet Union

Production growth in the Former Soviet Union is averaging 130 kb/d in 1H13 y-o-y at 13.8 mb/d. May production is estimated to be 70 kb/d lower than the prior month.

Russia - May preliminary:  May liquids output increased by 160 kb/d y-o-y or 40 kb/d m-o-m to 10.9 mb/d, though production estimates for March and April have both been revised downwards by 20 kb/d based on new government data. Gazprom's development of the liquids-rich layers at the Zapolyarnoye and Urengoy gas and gas condensate fields support the annual growth in condensate. Some greenfield projects such as Rosneft's Vankor and Uvat (formerly owned by TNK-BP) are reaching plateau production rates sooner than anticipated. The strong condensate performance and strong production results from greenfields leads to a 100 kb/d upwards revision for 2H13. That said, Eastern Siberian greenfield production growth is not expected to remain as robust in the second half of the year. For example, Vankor's current output of 430 kb/d is only 20 kb/d from Rosneft's forecast peak. TNK-BP (now Rosneft's) Uvat has already reached 165 kb/d but in January TNK-BP forecast production would rise to only 200 kb/d by 2015. In sum, Russian production is expected to grow slightly by 40 kb/d in 2013 to 10.8 mb/d.

In the Caspian, production at the ACG complex in Azerbaijan has reportedly rebounded slightly to around 660 kb/d in 2013 compared to 610 kb/d in 4Q12. In Kazakhstan, production is up only slightly on an annual basis to 1.6 mb/d in 2Q13 as the market awaits the Kashagan megaproject, forecast to start in October. Maintenance at the Karachaganak field reduced liquids output by around 100 kb/d to 1.5 mb/d in May.



FSU net exports rebounded by 560 kb/d to 9.8 mb/d in April, their highest level in twelve months, largely after regional refinery maintenance reached a seasonal peak, freeing up more crude for export. Increased crude shipments (+ 480 kb/d) drove the rise as seaborne shipments were hiked by a combined 490 kb/d. Cargoes shipped via Baltic ports posted the largest increase (+ 360 kb/d) to reach a historical high of 1.96 mb/d as volumes shipped via Ust Luga reached a new record of 560 kb/d (+ 70 kb/d m-o-m). As more oil was diverted to the Baltic, Druzhba flows once again dropped to below 1 mb/d with German and Hungarian customers bearing the brunt of these cuts.

In the Black Sea, volumes remained close to 1.9 mb/d, following increased flows of Kazakhstan's Tengiz crude to the previously underutilised Georgian ports of Supsa and Kulevi. This could be a short-term measure since reports suggest if Tengizchevroil (TCO) can agree on terms with the BTC pipeline consortium, Tengiz crude could be shipped via the line from summer onwards. This would, of course, still require trans-Caspian shipments but directed to Baku. Elsewhere, following increased Azerbaijani production, BTC flows grew by 110 kb/d to 680 kb/d, their highest level in a year. With regional refinery runs projected to rebound by close to 500 kb/d in May, FSU crude exports are expected to decline. Provisional loadings at Russian ports indicate that seaborne exports are likely to fall at Primorsk, Ust Luga and Novorossiysk.

Product shipments inched up by 100 kb/d to 3.0 mb/d after fuel oil shipments (here including vacuum gas oil) were hiked by 220 kb/d, reportedly reflecting the start of river shipments following milder weather. This offsets a 180 kb/d fall in gasoil shipments, likely resulting from product being diverted to domestic markets to offset lower product output as seasonal refinery maintenance peaked. Shipments of 'Other Products' grew by a slight 40 kb/d after an 80 kb/d climb in naphtha loadings offset a 35 kb/d decrease in gasoline exports.

Latin America



Brazil - April preliminary: Brazilian crude production slid by 200 kb/d y-o-y in 1Q13 to 2.0 mb/d. The decline was especially high because the 70 kb/d Frade field was still operating at that time last year. Preliminary data for April show production fell again by 100 kb/d y-o-y to 1.9 mb/d. Part of the monthly decline was not only due to planned maintenance at Petrobras' Roncador P-54 platform, but also due to Shell conducting maintenance at the Peregrino, Ostra, and Argonauta fields. Production is expected to increase from 2.0 mb/d in April to 2.4 mb/d by December after the completion of some of the planned maintenance as well as new production from the Cidade de Paraty FPSO at the Lula field and P-55 at the Roncador field.

Colombian production is set to average more than 1.0 mb/d in 1H13, around 80 kb/d higher than 1H12. Pipeline sabotage remains an acute downside risk to the 2H13 production forecast of around 1.0 mb/d for the remainder of the year, despite media reports that a peace agreement between FARC and the Colombian government may be within reach. Rebels bombed a small pipeline in the southern Putomayo province, resulting in a two-day closure in May. Shippers are awaiting the commissioning of the first phase of the new Bicentennial Pipeline in July, though linefill has already commenced. Initial capacity is expected to range between 40-50 kb/d. The first phase of the pipeline will reduce the reliance of some shippers on more expensive truck routes. Shippers currently employ a 40-kb/d capacity truck offloading facility in Banadia.

Africa

Sudan and South Sudan: On 9 June, Sudanese President Bashir ordered companies to shut down the export of South Sudanese crude, accusing South Sudan of using oil revenues to "buy arms for rebels and mercenaries."  Production had restarted at the Thar Jath field in Block 5A in South Sudan in early April and the Central Processing Facility received its first crude shipment from the southern part of Blocks 1/4 in early May. Wells at the Palogue field in Block 3/7 also restarted. In June, CNPC offered 1.2 mb of its Dar blend crude from Block 3/7, which implies an almost-month-long production rate of around 40 kb/d. Production had been expected to return to 185 kb/d by the end of June. The Oil Market Report  in recent months has held to a conservative forecast of South Sudan production and has highlighted the challenges associated with restarting facilities and pipelines that have not been used in over a year and the persistent above-ground tension between the two states that could at any time derail the exports. Companies acknowledge that production could take up to a year to reach pre-shut down rates. In light of the fluid situation, the South Sudanese production forecast is mostly unchanged at around 180 kb/d for 2H13.

Middle East

Yemen's state-owned oil exploration and production authority, PEPA, said production had fallen to around 180 kb/d due to repeated attacks against the Marib pipeline. The pipeline, which was reported to be running at 125 kb/d (compared to capacity of 180 kb/d), was attacked again and was offline for several days at the end of May. Yemen's output is projected to average 160 kb/d this year, down 20 kb/d from last year.

OECD Stocks

Summary

  • OECD commercial total oil inventories built by 16.7 mb in April to stand at 2 680 mb, led by crude oil, NGLs and refinery feedstocks. Since the increase was in line with the seasonal 17.5 mb average build for the month, holdings retained a marginal 0.8 mb surplus to five-year average levels.
  • OECD product inventories rose by a counter-seasonal 2.8 mb. Despite this build, total products cover slipped by 0.2 days on the month to 30.6 days. Cover remains 0.8 days above year-ago levels.
  • Preliminary data suggest that OECD inventories posted a third consecutive monthly build in May, increasing by 11.1 mb on the month after builds in OECD Americas and Europe offset a draw in OECD Asia Oceania.
  • US crude inventories at the key Cushing, Oklahoma storage hub remained historically high, at over 50 mb, throughout May. Data from the US Energy Information Administration (EIA) show that 1 mb of working capacity was added at Cushing over 4Q12-1Q13, raising total working capacity there to 65.3 mb.


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

Commercial oil inventories in the OECD built by 16.7 mb in April to stand at 2 680 mb by end-month. Since this rise was in line with the average 17.5 mb build for the month, OECD holdings retained a marginal 0.8 mb surplus to the average. OECD Americas continues to drive this surplus, as it has since late 2011 with this region's overhang versus the five-year average standing at a hefty 60 mb. This partially offsets a 66 mb deficit in OECD Europe where stockholders are still adjusting to lower regional demand. Elsewhere, OECD Asia Oceania stood 7 mb in surplus to the five-year average at end-April.

Based on final March data, it now appears that OECD industry total oil inventories built by 180 kb/d over 1Q13, rebounding from the 700 kb/d draw posted in 4Q12. A 460 kb/d surge in crude oil led the increase on the back of booming OECD American production. This offset a 300 kb/d decrease in refined products as 'other products' and middle distillates inventories extended their winter draws. NGLs and feedstocks accounted for the remaining 20 kb/d.

April builds of 17.7 mb in the OECD Americas and 3.3 mb in OECD Europe more than offset a counter-seasonal 4.3 mb draw in OECD Asia Oceania for the month. Seasonal builds of 7.6 mb and 6.3 mb were recorded in crude oil and aggregate NGL inventories and refinery feedstocks inventories, respectively, while refined products rose by a counter-seasonal 2.8 mb. Despite this build, total products cover fell by 0.2 days on the month, consistent with seasonal patterns, to stand at 30.6 days. Cover remains 0.8 days above year-ago levels.



Preliminary data suggest that OECD inventories posted by a third consecutive monthly build in May, increasing by 11.1 mb on the month. Stocks were pushed higher by a stronger-than-seasonal 16.4 mb build in OECD Americas, led by seasonal 'other products' restocking, which more than offset a counter-seasonal 6.5 mb draw in OECD Asia Oceania. Meanwhile, OECD European stocks increased by a slight 1.1 mb.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Industry total oil inventories in OECD Americas rose by 17.7 mb in April, a significantly steeper build than the 11.4 mb five-year average for the month. Total products drove the build, increasing by a strongly counter-seasonal 12.6 mb as 'other products' surged by a seasonal 9.3 mb after propane inventories climbed following a fall in imports and amid still surging supplies. Middle distillates rose counter-seasonally by 5.9 mb/d, compared to a five-year average 1.9 mb draw for April. Motor gasoline, stocks of which fell by 5.3 mb, was the only product to post a draw. All told, by end-April total products covered 28.5 days of forward demand, 0.3 days above a month earlier.

Since the monthly build was steeper than seasonal, the region's overhang compared to average levels climbed to 60.3 mb from 54.0 mb at end-March. Much of the overhang is attributed to surging US light, tight oil (LTO) production. Indeed, at end-April, US crude oil holdings stood 39.4 mb and 21.9 mb above the five-year average and 12 months ago's level, respectively.



Weekly data from the EIA indicate that US industry stocks built by a further 16.4 mb in May. If confirmed, this would be the country's third consecutive monthly build, bringing its surplus to five-year average levels to 60 mb, roughly 10 mb above the surplus posted at end-February. As with April, the May build was driven by increasing propane stocks, which lifted 'other products' inventories by an exceptionally steep 19.3 mb. That April build in 'other products', fuelled by surging domestic tight gas production, was the steepest monthly build since 1986, and occurred even as propane exports rebounded to hit new heights exceeding 200 kb/d.

A feature of 2013 so far has been localised gasoline supply tightness in the US. In January, it was the US East Coast (PADD 1) that experienced tightness as stocks there dipped below 55 mb before extra supplies could be brought in. With the driving season now underway, the PADD 1 market now looks relatively loose. Gasoline stocks rebounded by 6 mb from early-April to mid-May and, despite a slight downward correction, still exceeded 60 mb at end-May, 5 mb above the seasonal average. In contrast, the US Midwest (PADD 2) has recently been hit by maintenance at several refineries there that combined to cut gasoline supplies. As such, PADD 2 inventories have tumbled by 6 mb since early April, to reach a seasonally low 48 mb by mid-May. That helped strengthen local prices, which were recently reported near four-year highs.



Despite increased takeaway capacity to evacuate crude from PADD 2 to PADD 3, Midwest crude stocks remain stubbornly high with inventories at the key Cushing, Oklahoma storage hub still exceeding 50 mb by late-May. The US EIA recently published the results from its twice-yearly survey of working and net available shell storage capacity. The survey indicates that over 4Q12-1Q13 tank owners added another 1 mb of working capacity at Cushing, which has taken total capacity there to 65.3 mb. Thus, even with recent high inventories, there is still ample spare capacity at the storage hub, which may partially explain why high stock levels have not prevented WTI prices from firming recently.

OECD Europe

Commercial total oil inventories in OECD Europe built counter-seasonally by 3.3 mb in April, compared to a 4.9 mb five-year average draw for the month. Regional total oil inventories now stand at a deficit of 66 mb to the five-year average, of which refined products make up 39 mb, while the remaining 27 mb is accounted for by a combination of crude, NGLs and refinery feedstocks.



Surging crude inventories (+10.8 mb m-o-m) led stocks higher as import gains outpaced a 200 kb/d m-o-m increase in refinery throughputs. Despite the higher throughputs, total product inventories dropped by 7.6 mb, broadly in line with seasonal trends, after stocks of middle distillates and motor gasoline drew by 5.2 mb and 2.2 mb, respectively. The draw in middle distillates was concentrated in France (-2.8 mb m-o-m). In Germany, information suggests that following the end of cold weather and before the commencement of seasonal restocking, end-consumer heating oil stocks remained at 49% of capacity at end-April, above both the five-year average and last years' levels. Motor gasoline holdings likely drew amid reports of healthy exports to the Americas. Nevertheless, gasoline stock cover now stands at 47.8 days of forward demand, 4.3 days above average. Following the draw, total product inventories covered 39.5 days at end-April, 0.9 days below a month earlier.

Preliminary data from Euroilstock suggest that EU-16 inventories rose by a slight 1.1 mb in May led by a 1.0 mb rise in crude oil. Refined product storage inched up by 0.1 mb after a 1.1 mb draw in motor gasoline offset a 1.1 mb build in middle distillates. Information pertaining to refined products held in independent storage in Northwest Europe indicates that levels posted their sharpest fall since 2009 in May after gasoline, naphtha and gasoil all fell. Gasoline inventories likely fell amid high volumes of transatlantic trade.

OECD Asia Oceania

Industry stocks in OECD Asia Oceania drew counter-seasonally by 4.3 mb, compared with an 11.0 mb five-year average build for the month. Following earlier draws, this has caused the region's overhang in total oil inventories to significantly narrow, falling to a slight 6.5 mb surplus to average levels at end-April from 18.8 mb at end-February. Crude oil stocks led the decline, plunging by a counter-seasonal 6.8 mb after Korea posted an exceptionally steep 7.4 mb draw. Reportedly, crude imports there plunged by 400 kb/d, more than offsetting a 200 kb/d drop in refinery runs. This could however be a market correction following March's exceptionally strong 12.3 mb build. All refined products posted draws bar fuel oil. Middle distillate stocks, in particular, fell by a counter-seasonal 1.3 mb. Total products now cover 21.9 days of forward demand cover, 0.4 days less than at end-March. The monthly draw was unevenly distributed across the region, with Japan reporting a seasonal 6.5 mb build spanning all products, while Korea posted an exceptionally steep 11.3 mb counter-seasonal draw, driven by crude.



Weekly data from the Petroleum Association of Japan suggest that stocks there fell by a counter-seasonal 6.5 mb in May with all oil categories posting monthly draws. Refined products slipped by a combined 4.4 mb, largely following a 330 kb/d decline in refinery runs on the month. Crude oil inventories inched down by 0.4 mb following a decrease in imports, which offset the lower refinery activity.

Recent Developments in Singapore and China Stocks

Information published by China Oil, Gas and Petrochemicals (China OGP) pertaining to the percentage stock change in Chinese commercial inventories suggests that total oil inventories dropped by 4.4 mb in April. Crude stocks inched up by 0.3 mb, after a drop in refinery throughputs, which offset reported slips in both imports and domestic production. Refined product inventories decreased by a combined 4.7 mb after gasoil plunged by 6.1 mb, its largest draw since July 2012. This offset builds in gasoline (+1.3 mb) and kerosene (+0.1 mb).



Weekly data reported by International Enterprise concerning land-based refined product inventories in Singapore suggest that stocks continued to trend close to their five-year average levels in May. April and May inventories were lifted by the sustained building of fuel oil stocks in the wake of wide arbitrage opportunities to ship product to the region. Accordingly, and despite a slight draw at end-month, fuel oil inventories built by 2.8 mb in May, their largest increment since late 2009. This more than offset a sharp decrease in light distillates (-1.8 mb) over May with middle distillates (-0.7 mb) also posting a slight draw.

Prices

Summary

  • Futures prices for benchmark grades traded in a narrow range in May and edged lower in early June. Bearish market sentiment prevailed throughout most of May against the backdrop of a more anaemic outlook for the global economy. Futures prices for Brent were last trading at $102.15/bbl while WTI was pegged at $94.50/bbl.
  • Spot crude oil prices for benchmark grades were mixed in May, with WTI outstripping North Sea Brent's more modest gains. WTI prices were propelled higher by improved margins while North Sea Brent steadily declined over the month on surplus supplies in Europe. Middle East marker Dubai crude posted a relatively sharp decline in the wake of plentiful heavier, sour supplies and Asian refinery turnarounds.
  • Spot product markets diverged in May between the Atlantic basin and Asia. Gasoline crack spreads were healthy across all major refining centres, though slightly lower month-on-month in Europe. The onset of the peak summer driving season is supporting US cracks while refining outages propped up Asian markets.
  • The market for Very Large Crude Carriers (VLCCs) has experienced a slight firming of late amid rising demand for Middle East crudes as Asian and European refiners return from maintenance. Rates steadily rose throughout April and May and by early June exceeded $13/mt, a level unseen since November 2012.


Market Overview

Futures prices for benchmark grades diverged slightly in May but overall traded in a narrow range throughout the month. An overall bearish market sentiment prevailed throughout most of May against a backdrop of anaemic economic growth. Brent futures averaged $103.28/bbl in May, down about $0.15/bbl from April and the lowest monthly average in 9 months. By contrast, WTI futures rebounded, up by around $2.75/bbl to an average $94.80/bbl. At press time Brent futures were last trading at $102.15/bbl while WTI was pegged at $94.50/bbl.

Despite a seasonal uptick in global demand in the second half of the year, relatively sluggish macroeconomic conditions are expected to keep a lid on growth in 2013, with demand forecast to rise just under 800 kb/d, to 90.6 mb/d expected for the full year. Even China's economic outlook became a focus of market concern following new data which showed industrial output down to the lowest level since October 2012, when prices started their latest upswing. The lacklustre economic outlook is in stark contrast to the rally in financial and equity markets. Earlier signs of correlation between WTI prices and the S&P 500 have weakened this year. After closely tracking the upward momentum of the broader financial markets in 2012, WTI hovered in a fairly narrow trading range, even as the S&P 500 kept breaching new highs, reaching a historical high on 21 May.



Geopolitical turmoil in oil producing countries, including Iraq, Iran, Syria and Libya, may temper downward momentum in the near term. The end of refinery maintenance turnarounds coupled with annual summer North Sea maintenance work may also provide twin pillars of strength in the near term. Moreover, Middle East producers have reduced official selling prices for July and August, which in turn may lead to increased refining margins and run rates.

The structure of forward price spreads showed the two markets moving in opposite directions but converging in May. WTI continued its upward shift into backwardation as increased crude transport capacity from Cushing, Oklahoma to the US Gulf Coast refining centre eased bottlenecks and relieved downward price pressure at Cushing. As a result, the WTI M1-12 forward spread strengthened to around $3.40/bbl in May compared with $2/bbl in April and $1.57/bbl in March. By contrast, increased supplies of African light, sweet crude on offer in Europe was behind the narrowing of Brent's backwardation.  The Brent M1-12 contract averaged $3.35/bbl in May, close to the WTI M1-12 spread, versus $3.16/bbl in April and around $6/bbl in March.



Futures Markets

Activity Levels

Crude prices traded in a narrow range between 4 June and 30 April, with open interest in futures contracts little changed for both crude benchmarks over the period, each down 2%. Open interest between ICE Brent and NYMEX WTI over the five-week period posted a negligible change in the ratio, of less than 0.5 percentage points. NYMEX WTI still leads in terms of outstanding contracts on the outer part of the curve (delivery over one year forward) but it stands unchanged year-on-year. In contrast, open interest in ICE Brent is up 24% from the same time last year, and has closed the gap on the near part of the curve, in particular for the first six months.

Trading volumes in futures contracts saw ICE Brent dropping 16% month-on-month and still rising a modest 2% y-o-y, whereas NYMEX WTI rebounded 11% y-o-y and 3% m-o-m, almost catching up with ICE Brent volumes. This happened at a time where the cumulative volumes on both sides of the Atlantic (CME and ICE) for Brent surpassed WTI in March and April for the first time historically, though they were slightly lower in May driven by the m-o-m drop in London ICE.



Market participants' positions in crude oil were also little changed, as both benchmarks moved in a $2-$3 per barrel range. An exception were ICE Brent money managers raising their net long bets at their highest since February, notwithstanding Brent inching lower in May. Net long positions of NYMEX WTI hedgers (the "producers" category, including producers, merchants, processors and end-users) reached an all-time high. "Producers" net long positions presents a growing trend over time, confirming the disconnect from its historical inverse relationship with crude price. Such a relationship still holds for ICE Brent and NYMEX products, mirroring producers' locking in the price as it rises, and suggesting a growing presence of processors and users of NYMEX WTI in the financial market.



Hedge funds started short selling NYMEX heating oil and ICE gasoil following the drop in prices at end of April (first time historically since reporting for ICE began). Hedge funds or non-commercials continued to hold a net short position also when prices recovered in mid May, potentially signalling market expectations by some that the price would fall again, as it in fact did in the second half of May and in first week of June. RBOB gasoline followed a similar pattern to that of NYMEX heating oil, but less pronounced, with hedge funds reducing their long exposure as prices inched lower.



Financial Regulation

On 16 May the CFTC approved a number of rules governing swap execution facilities, involving:

  • procedures to establish minimum block size for off-facility swaps and block trades;
  • processes for a designed contract market (DCM) or swap execution facilities (SEF) to make a swap "available for trade";
  • "core principles" and various requirements for SEFs, covering trading and product requirements, compliance and surveillance obligations, operational capabilities and financial requirements.

At the same meeting, the CFTC approved interpretive guidance on disruptive trading practices, such as buying a contract at a price higher than the lowest available price offered, or what is commonly known as "spoofing", i.e., bidding or offering with the subsequent intent of cancelling before execution to manipulate the price.

On 17 May, the CFTC approved the quote-request rule, compelling traders to request quotes from two counterparties. The rule requires that transaction prices must be made public after the swap has been cleared. Public criticism came from three CFTC commissioners about the cross-border application of Dodd-Frank rules. With the exemption from cross-border rules set to expire on 12 June, the CFTC can either finalise the current guidance before the deadline or drop it entirely, leaving the issue to be handled by generic phrasing in of the Dodd-Frank Act. The Act generically applies to transactions having a "direct and significant" impact on US markets. Such phrasing would need further clarification. Later in June, regulators may also issue final rules on margin and capital for derivatives.

Spot Crude Oil Prices

Spot crude oil prices for benchmark grades were mixed in May, with WTI outstripping North Sea Brent's more modest gains. WTI spot prices rose on average by around $2.75/bbl to $94.76/bbl on stronger refining margins and despite relatively high stock levels. North Sea Dated rose on average by $0.58/bbl to $102.50/bbl, with prices steadily declining over the month before edging higher again in early June. Middle East market Dubai posted a relatively sharp decline in the wake of plentiful Middle East supplies and Asian refinery turnarounds, with spot prices off $1.35/bbl to $100.35/bbl in May.



WTI spot prices were also propped up by increased transport routes from the landlocked US Midcontinent and the end of refinery maintenance work.  Stronger WTI prices relative to weaker Dated Brent narrowed the price differential for the two grades to around $7.75/bbl in May compared with $9.90/bbl in April, $15.55/bbl in March and $21.04/bbl in February.

North Sea Brent spot prices traded in a narrow $101-105/bbl range over the month despite upcoming scheduled summer maintenance work.  Major work on the Ekofisk system may lead to higher-than-normal supply outages in the coming months. BFOE output is expected to decline to 550 kb/d in June compared with 860 kb/d in May (see Non-OPEC Supply, 'Forecasted Impacts of North Sea Maintenance').

North Sea grades were also supported by South Korea's decision to enhance an existing law that provides a freight rebate on crude imports of non-Middle East crude supplies. In a bid to diversify supply away from the Middle East, the Korean government provides a rebate on freight costs for crude oil imports from the Americas, Africa and Europe. Effective 1 June, the government will reimburse 90% of the freight charge difference with Middle East shipments if import volumes reach just 2 mb a year compared to the previous 7 mb threshold.

At the same time, new rules aimed at closing a legal loophole that allowed some companies to double dip on a tax break will go into effect on 1 July. Currently crude oil imported from EU countries that South Korea has a free trade agreement with, including the UK, are exempt from a 3% crude import tax. Rules in place since July 2011 allow domestic refiners to buy North Sea crude without paying the 3% import duty. South Korean refiners also benefit from a tax rebate on refined product exports, even if they are processing duty-free crude as part of the free trade agreement. Starting 1 July refiners running tax exempt crude are not entitled to claim a rebate on freight costs. As a result, the economic benefits that fuelled brisk North Sea-Korea trade over the past few years will be reduced.

Elsewhere in Europe, spot prices for Urals crude in the Mediterranean rose by about $0.85/bbl, to an average $102.35/bbl in May, with markets particularly strong early in the month and trading at near parity with Brent. The higher prices stemmed from sharply lower Russian crude exports in May and June as domestic refiners held on to more barrels. Urals was also supported over the month by chronic supply disruptions of Iraqi shipments of Kirkuk from the Ceyhan terminal on the Mediterranean Sea. As a result, the price differential between Urals and Brent narrowed in Mediterranean markets, trading at a much smaller $0.15/bbl discount to Brent in May compared with discounts of $0.40/bbl in April and $1.64/bbl in March.

Heavier Middle East sour grades weakened on plentiful supply with Asian refiners in turnaround.  Dubai's discount to Brent widened to around $3.50/bbl in the first week of June compared with $2.16/bbl in May and just $0.22/bbl in April. The Dubai M1-M2 price spread, however, steadily narrowed over the month, on expectations of increased demand for crude as refiners, especially in non-OECD Asia, come out of maintenance in June-July. The Dubai M1-M2 averaged $0.37/bbl in May versus $0.69/bbl in April.




Spot Product Prices

Spot product markets diverged in May between the Atlantic basin and Asia. Gasoline crack spreads were healthy across all major refining centres, though slightly lower month-on-month in Europe. Asian and US gasoline cracks were supported, in part, by refinery problems in both regions curbing supply. With the onset of the peak summer driving season in the US, gasoline demand is forecast to rise an average 300 kb/d during the June-August period (see Demand section, 'Reports of the Demise of the US Driving Season Look Premature').



Unplanned outages and/or extended maintenance in parts of North America, notably the US Midwest and  Western Canada, tightened gasoline supply and supported crack spreads in the US. In Asia, reduced supplies due to planned refinery outages in Taiwan and unplanned maintenance in India helped cracks reverse their downtrend  of the previous month. On the other hand, European gasoline crack spreads fell due to weaker-than-expected import demand from the US ahead of the summer driving season.

Naphtha crack spreads in May partially recovered from April's sharp decline across major refining regions. Petrochemical producers in Asia were reported active in buying the feedstock, although seasonally cheap propane curtailed naphtha buying interest. Also, arbitrage opportunities for European suppliers to export to Asia helped support naphtha crack spreads.



Gasoil crack spreads were lower during May in the Americas and Europe but strengthened in Asia. Relatively weak economic growth in Europe and low demand in the US put downward pressure on spreads for the second consecutive month. By contrast, in Asia, refinery outages in Taiwan and India helped support gasoil cracks.  Meanwhile, diesel crack spreads in Asia recovered in May as Middle East countries raised imports and build stocks ahead of Muslim Ramadan holiday. Indeed, Saudi Arabia is expected to import exceptionally high volumes of diesel fuel volumes this summer in order to meet peak electricity demand for air-conditioning and increased travel within the region during Ramadan, which this year falls between 9 July and 7 August.

Jet/Kerosene crack spreads fell in May in Europe and the US Gulf. US refiners were maximising jet fuel output as it is not subject to Renewable Identification Number (RIN) rules. On the other side, Asian crack spreads rose due to unexpectedly low temperatures in early May in Japan, as well as increased jet fuel exports to the western US after Tesoro's Ewa Beach refinery in Hawaii shut down permanently in May.



Fuel oil crack spreads in May showed differing trends depending on sulphur content. Crack spreads for low-sulphur fuel oil increased across the board on stronger feedstock demand from complex refineries in Northwest Europe and the US. A dip in Russian exports of straight-run fuel oil after the start-up of new upgrading capacity also helped. On the other hand, high-sulphur fuel oil crack spreads in the US and Singapore weakened in May due to lower bunker fuel demand.



Freight

The market for Very Large Crude Carriers (VLCCs) has firmed of late amid rising demand for Middle East crudes as Asian and European refiners return from maintenance. Rates rose steadily throughout April and May and by early-June exceeded $13/mt, a level unseen since November 2012. However, it is unlikely that this level will be sustained as the VLCC market still has significantly excess tonnage and a number of new builds are due to enter the market over the coming months.



Suezmax markets are still adjusting to the reduction in US imports as domestic production there surges, with West African suppliers looking towards Europe, China and India as outlets for their crudes. Consequently, the Atlantic Basin Suezmax market has remained relatively subdued so far in 2013 with very few rate spikes resulting from tight tonnage. Indeed, the benchmark West Africa - US Gulf Coast rate weakened over the past couple of months so that by early-June it stood under $13/mt and below rates for VLCCs, a relatively rare occurrence over the past two years.

In contrast, rates for shipments from Baltic ports experienced a short-lived spike in April when levels breached $20/mt following an unexpected surge in Russian Urals exports and a consequent shortage of available ice-class tankers in the region. As Urals exports fell back and ice-class requirements at Baltic ports were relaxed, by early-May rates had retreated to more seasonal levels below $6/mt with these levels being sustained through early-June.

Product tankers have experienced a sustained weakening over the past couple of months, although it should be noted that rates on all benchmark routes currently remain above those posted during the sector's recent lull over 2010-11. Despite reported healthy transatlantic trade in gasoline, rates plunged during May so that by late-month they stood just over $21/mt, their lowest level since 4Q12. In the East, despite many refineries in China and Japan undergoing maintenance over 2Q13, import demand has reportedly remained subdued as refined product inventories, especially in the OECD, have been drawn down from their healthy levels. Consequently, the benchmark Singapore - Japan rate plunged by $8/mt over April - May with rates hovering at just over $18/mt by early-June. A similar trend is evident on the Middle East Gulf - Japan route where rates slipped steadily from $30/mt in early-April to $21/mt by early-June.

Refining

Summary

  • The seasonal ramp-up in global crude throughputs is expected to be steeper than normal this year, with runs increasing by 2.2 mb/d from 2Q13 to 3Q13. That seasonal increase, centred in the non-OECD, is due to new Saudi distillation capacity, increasing Chinese runs after heavy spring maintenance, and recovering throughput at Venezuela's Amuay plant after a 2012 fire.
  • Global crude throughputs in 3Q13 are projected to be 1.2 mb/d higher than in 3Q12. The major drivers of incremental growth include China (+590 kb/d), Africa (+380 kb/d) India (+200 kb/d), and Russia (+100 kb/d).
  • Global refinery crude throughput estimates for 2Q13 have been adjusted downwards by 190 kb/d since last month's Report, to 74.7 mb/d. This revision reflects lower expectations of Asian crude runs as margins in the region have remained weak and refinery turnarounds were even heavier than expected.
  • In non-OECD countries, estimated runs for 2Q13 have been revised downwards by 200 kb/d, to 38.4 mb/d.  Unplanned outages in India compounded the impact of heavier-than-expected plant maintenance, accounting for the bulk of this revision.
  • The estimate of OECD throughputs for 2Q13 is almost unchanged from last month's Report, at 36.4 mb/d, but the regional spread of refining activity has been revised. The runs estimate was trimmed by 150 kb/d for OECD Asia but raised by roughly 140 kb/d for OECD Europe. Crude runs in OECD Americas are projected to be 20 kb/d higher than previously forecast. 

Global Refinery Overview

Global refinery throughputs have been revised downwards by 190 kb/d for 2Q13, due to a heavier than expected maintenance schedule in both the OECD and non-OECD Asia, as well as slightly lower runs in the Middle East. Weak Asian margins in April and May could have encouraged refiners to move up maintenance schedules and reduce runs at the margin. Lower than expected Asian runs in May were partially offset by a relatively healthy Atlantic Basin market. Relatively robust margins in the US (especially in the Midcontinent), and to a lesser extent Europe, supported runs in those markets, as well as in Latin America. Global crude throughputs for 2Q13 are now expected to average 74.7 mb/d, an increase of 400 kb/d from the same quarter in 2012. 



With refinery turnarounds coming off their April peak, crude throughputs are expected to ramp up through the second quarter, with a stronger lift as we head into 3Q13. Throughputs in 3Q13 are forecast to average 77.0 mb/d, an increase of 1.2 mb/d from the same quarter in 2012 and 2.2 mb/d over 2Q13. If realised, this would represent the highest runs for any single quarter on record.  Continuing refinery capacity additions close to centres of oil demand growth in the non-OECD, particularly in China and Saudi Arabia, are helping global runs meet new demand, even as rationalisation continues apace in the OECD. 

Refinery margins diverged along geographic lines during the first two months of 2Q13, with Atlantic Basin markets holding up relatively well following healthy crack spreads in February and early March, while margins for Asian refiners languished. The brightest spot globally for margins was the US Midcontinent, which, despite relative strength in WTI, saw already healthy margins expand in May following a series of refinery glitches.

Glitches in refining operations in the US Midcontinent also helped support margins in the US Gulf Coast, as an increasingly rare arbitrage opportunity opened on the back of high physical prices for gasoline in the Chicago market, pulling barrels north from the Gulf. In Europe, margins have been relatively steady in 2Q13, with May levels slightly below those at the end of the prior quarter, after notching up slightly in April. European margins continue to be split along complexity lines, with more sophisticated refineries remaining competitive globally, while margins at hydroskimming facilities stay mired in or near negative territory.



In Asia, margins have remained in the doldrums, except for more complex refiners running Dubai or medium to heavy sour grades. Increasing global naphtha supplies stemming from US LTO growth have weighed on naphtha prices and pushed more naphtha into Asian markets. Moreover, growth in Chinese refining capacity has kept markets amply supplied, with Chinese refiners turning to export markets rather than significantly cutting runs amid seasonally weaker domestic demand.  





OECD Refinery Throughput

OECD refinery crude throughputs are expected to be largely unchanged in 2Q13 from 1Q13 at 36.4 mb/d.  However, that number is 250 kb/d less than runs in 2Q12 as a structural shift in refining activity towards non-OECD economies continues. OECD crude throughputs are expected to increase slightly more than is seasonally typical in 3Q13, but at 37.3 mb/d they are still forecast to be 480 kb/d below last year's level as rationalisation in Europe and Japan leads to y-o-y declines.

Projected 2Q13 OECD runs of 36.4 mb/d are almost unchanged from last month's Report. However, the regional distribution of OECD runs has been revised, with Europe now expected to see throughputs 140 kb/d higher than in the May Report, while Asia Oceania runs have been revised down by 150 kb/d. The Americas saw a slight upward revision of 20 kb/d.



OECD Americas crude runs are expected to increase by 510 kb/d from 1Q13 to reach 18.2mb/d in 2Q13, in line with seasonal trends. In 3Q13, throughputs are projected to gain an additional 260 kb/d to 18.5 mb/d, an increase of 120 kb/d y-o-y, making the Americas the only OECD region expected to see y-o-y growth in 2Q13 or 3Q13. Growth is being driven by increasing throughputs in both the US and Mexico. Compared to last year, US runs are getting a boost from Motiva's expanded Port Arthur plant, which was hampered with problems shortly after its new crude unit commenced operations in June 2012 but which is now back to normal, and also from the Trainer, Pennsylvania refinery, which restarted in late September 2012 under the ownership of Monroe Energy (a unit of Delta Airlines), after its previous owner idled it in late 2011. These effects have been partially countered by a recent spate of outages in the Midwest. On the US West Coast, the 2Q13 restart of Chevron's Richmond, California refinery after an August 2012 fire has obscured in the data the April closure of Tesoro's 94 kb/d Kapolei refinery in Hawaii. The closure of Kapolei, one of two refineries in Hawaii, will likely leave the state more reliant on imports from Asian markets, particularly for jet fuel, a key product on the islands. Additionally, Mexico's refineries are expected to run 50 kb/d more crude on average in Q2 and Q3 than they did last year. Higher crude runs in Mexico have somewhat stemmed demand for US product exports in the country, compounding the impact of decreased US product export to Venezuela since idled capacity at Venezuela's Amuay refinery resumed production.



OECD Europe crude throughputs are expected to average 11.7 mb/d in 2Q13 and increase to 12.1 mb/d in 3Q13, equating to y-o-y declines of 180 kb/d and 520 kb/d, respectively. Lower runs in the middle quarters of 2013 are commensurate with rationalisation in the European refining sector. Refinery capacity in 3Q13 is expected to be 500 kb/d lower than 3Q12. The largest among the European closures was the 1Q13 closure of Petroplus's 162 kb/d Petite Couronne refinery in France after it failed to find a buyer. Closures at Shell's 110 kb/d Hamburg refinery and ERG's 89 kb/d Rome plant have contributed to lower European runs in 2013.



Despite y-o-y declines, which are by now part of a familiar trend, 2Q13 runs are expected to be 140 kb/d higher than in last month's Report. Initial data indicate that April throughputs were much higher than expected in Spain, Belgium and France. With second-quarter runs significantly reduced in Algeria and Libya, demand from across the Mediterranean is likely supporting runs in these European countries.  Additionally, forecast July and August throughputs were revised upwards, which largely reflects an earlier than expected return to service for API's Falconara 85 kb/d refinery in Italy. After an agreement between management and union workers at the plant, it is now slated to start running crude in mid-July; previous expectations had Falconara down for all of 2013.  

Crude intake at OECD Asia Oceania refineries is expected to average 6.4 mb/d in 2Q13, a downward revision of 150 kb/d from the previous Report and 110 kb/d lower that last year's second quarter reading. OECD Asian refineries have reduced runs this quarter because of weak margins as new Chinese capacity and increased exports from that country have weighed on regional crack spreads. South Korea saw the largest revisions to its forecast with April runs coming in 260 kb/d below last month's Report as refineries reduced runs more quickly than expected following fairly robust refinery activity in the first quarter.



The weak margin environment may have prompted some refiners to move up maintenance schedules. Japan saw its expectation for crude throughputs in May slashed by 180 kb/d as Showa Shell and Fuji Oil proceeded with work on their respective Sodegaura facilities, while repairs at Idemitsu's Chiba refinery lasted longer than anticipated. As maintenance eases in 3Q13, OECD Asia Oceania refineries are projected to up their crude runs by 220 kb/d from the second quarter, to almost 6.7 mb/d. However, that still represents an 80 kb/d y-o-y decline in runs, as a tough margin environment continues to squeeze the refining sector in Asia's more mature markets.

Non-OECD Refinery Throughput

Non-OECD refinery throughputs are expected to average 38.4 mb/d in 2Q13, a 200 kb/d downward revision from May's Report, but this figure is still 640 kb/d higher on a y-o-y basis.  The main driver of the reduced 2Q13 outlook is a number of unexpected outages in India. However, outputs are expected to ramp up sharply moving into 3Q13 with non-OECD refiners increasing runs 1.3  mb/d above 2Q levels due to a combination of seasonal demand growth, easing outages, and  capacity expansions. Crude throughputs in 3Q13 are expected at 39.7 mb/d, a 1.7 mb/d y-o-y increase.



China is projected to process almost 9.4 mb/d of crude in 2Q13, up by 400 kb/d from the same period last year. Higher y-o-y throughputs are being driven partly by the commissioning of Sinopec's new Maoming refinery last November. The plant started operating at full rates earlier this year.

Changes to the outlook for Chinese refinery throughputs from last month's Report are modest. May saw slightly heavier maintenance than anticipated, which reduced the 2Q13 forecast by 110 kb/d. Outages at Sinopec's 270 kb/d Guangzhou refinery and 184 kb/d PetroChina's Fushun refinery kept May crude runs muted despite the return of PetroChina's 210 kb/d Dalian plant.  Additionally, slowing spring demand kept a lid on runs at smaller refineries in the Shandong province, the location of the highest concentration of the so call "teapots".  However, May should be the high mark for Chinese turnarounds giving way to a strong ramp up in runs, which are expected to grow q-o-q by 300 kb/d in 3Q13 to 9.7 mb/d, a 590 mb/d increase from the same quarter in 2012.     

In 'Other Asia', Indian refinery runs were the main driver of change from the last forecast. India is now expected to see crude throughputs of 4.5 mb/d, 130 kb/d lower that previously thought. May throughput bore the brunt of the outages as unexpected maintenance on a 330 kb/d crude unit at Reliance's Jamnagar facility along with a May 16 fire that took down a 60 kb/d crude unit at HPCL's Visakhapatanum refinery prompted forecast revisions. The Jamnagar unit is believed to have already returned to service. However, initial indications were that HPCL's unit would be down for about four weeks.  Indian runs are not expected see an increase moving into 3Q13, with runs for next quarter expected to remain at 4.5 mb/d. Flat runs through the middle quarters are typical for the Indian refining sector. Despite battling unexpected outages, Indian crude runs are expected to be about 200 kb/d higher y-o-y during the middle two quarters of 2013. 

For non-OECD Other Asia as a whole, runs are expected to climb from 9.5 mb/d in 2Q13 to 9.7 mb/d in 3Q13, with much of the seasonal lift coming from Taiwan, as Formosa Petrochemical's Mailiao refinery comes out of relatively heavy 2Q13 turnarounds. 



Russian crude runs are projected to average just under 5.3 mb/d in 2Q13, a dip of 150 kb/d from the first quarter which is in line with seasonal norms. Russia saw heavy refinery maintenance in April that caused runs to dip. Following the turnarounds, Russian runs rebounded strongly in May, and are expected to continue to increase through the summer with Q312 runs hitting 5.5 mb/d, which is 100 kb/d higher than the same period in 2012.  Russian throughputs in 2013 have been bolstered by increasing exports opportunities to Europe.



Middle East crude throughputs are forecast at 5.7 mb/d in 2Q13, a 75 kb/d drop from 2Q12.  This drop in y-o-y growth is seen as temporary from a region that expects to be a leader in global refining activity in the coming years. Second quarter runs were hampered by a major turnaround in April and May at Kuwait's Mina Abdullah plant as well at a shutdown at Samref's Yanbu, Saudi Arabia refinery from March through late May.  Crude throughputs in the Middle East are expected to jump to 6.1 mb/d in 3Q13, a record for the region, and a major reason for the sharp quarter-over-quarter increase in global runs.  The return of the large Saudi and Kuwaiti facilities will help drive the seasonal increase. Some additional increase will come as crude processing starts at the first phase of Satorp's new 400 kb/d Jubail refinery, a Saudi Aramco-Total joint venture, which according to the joint venture partners could hit full capacity as phase two comes online by year's end.



In Latin America, a slightly more sanguine outlook for Venezuela and continued strength in Brazilian runs have led to modest forecast upgrades. Latin American runs are expected to average 4.6 mb/d in 2Q13, 35 kb/d higher than expected in May's Report, but still 80 kb/d below same quarter 2012.  Based on the most recent information, the recovery in runs at Venezuela's Amuay refinery at the massive Paraguana complex following an August 2012 fire proceeded slightly faster than anticipated in last month's Report.  Venezuela is expected to have run an average of 790 kb/d in 2Q13 up from 650 kb/d in 1Q13.  Venezuela is expected to contribute significantly to the strong third quarter ramp up in global runs. Throughputs are slated to hit 870 kb/d in 3Q13, similar to the level from a year earlier when the fire occurred. However, information on the status of Venezuela's refineries is murky and the possibility for new setbacks at Amuay lingers. Moreover, we do not see Venezuela's runs approaching 2011 levels of more than 1 mb/d in the near term.  



Brazilian refineries continue to run at high rates. Reported crude runs came in 90 kb/d higher than expected in April. Brazilian throughputs have remained at record levels of almost 2.1 mb/d  during 1H13, and while they are expected to back off slightly to just above 2.0 mb/d in 3Q13, they are still expected to be 50 kb/d  higher y-o-y in that quarter. Pulling the Latin American forecast in the opposite direction, PdVSA's Curacao refinery is undergoing maintenance in the second quarter that is temporarily helping keep a lid on run growth in the region. In Argentina, the fire-related outage at the La Plata that began in April has dragged on longer than expected, tempering May runs as well.

Crude throughputs in Africa are on pace to average just over 2.2 mb/d in 2Q13, a modest increase over year ago levels.  The forecast has been downgraded slightly because of ongoing issues at Libya's Ras Lanuf refinery. Previously, the refinery had been scheduled to restart in April. However, corporate restructuring negotiations among the joint venture's partners have held up that restart. Currently, expectations are that crude processing at Ras Lanuf will begin in June.  With increasing runs from Ras Lanuf and a return of Algeria's Skikda refinery, which saw maintenance that was slated to end in March drag on until mid-May, 3Q13 runs in Africa are forecast to reach 2.3 mb/d.