Oil Market Report: 11 July 2013

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Highlights

  • Despite a lacklustre economic outlook, futures markets were buoyed by upheaval in Egypt and supply-side issues. Futures edged mildly higher in June but posted stronger gains in early July, with Brent last trading at $108.30/bbl and WTI at $105.20/bbl.
  • Global demand is forecast to grow by 1.2 mb/d in 2014, following upwardly-revised growth of 930 kb/d in 2013. Unseasonably cold weather in the OECD helped to raise the estimates for 2Q13 and full-year 2013 by 645 kb/d and 215 kb/d, respectively.
  • Non-OPEC supply is forecast to increase by 1.3 mb/d in 2014, higher than an upwardly revised 1.2 mb/d for 2013. Global supplies fell by 0.3 mb/d to 91.2 mb/d in June m-o-m, as lower OPEC crude output more than offset an 80 kb/d gain in non-OPEC supply.
  • Disruptions in Libya, Nigeria and Iraq cut OPEC crude oil supplies by 370 kb/d in June, to 30.61 mb/d. The 'call on OPEC crude and stock change' for 1H13 was raised by 350 kb/d to 29.6 mb/d, as cold weather lifted 2Q13 demand. For 2014, the 'Call' is forecast to decline by 200 kb/d to 29.4 mb/d.
  • OECD commercial total oil inventories built seasonally by a relatively weak 4.8 mb in May, to 2 683mb. Product stocks rose by 16.8 mb, leaving forward demand cover unchanged at 30.4 days. Preliminary data show that stocks built by a further 23.2 mb in June.
  • North American crude runs surged in May and June ahead of an exceptionally steep seasonal ramp up in global throughputs expected in 3Q13.  Global crude throughputs are expected to ramp up by a steeper-than-normal 2.3 mb/d from 2Q13 to 3Q13, in line with previous forecasts and driven by the non-OECD region.

A conflicted outlook for 2014

Whether you are an oil bull or a bear, this market has something to please you - and worry you.

Oil bears were in for a scare last month as prices ramped up from a low of $93.31/bbl in early June to $105.20/bbl at the time of writing for WTI, a $12 swing. While the headlines zeroed in on Egypt as the reason for the rally, it probably was not the only one, nor even the main one. Mass protests in Egypt and the ouster of President Mohamed Morsi on 3 July certainly brought the country's importance as a key oil transit route back into focus, two years after the 'Arab Spring' first swept through it in January 2011. But oil shipments were unimpeded then, and there has again been no interruption or direct threat this time around to either the Suez Canal or the 2.4 mb/d SUMED pipeline.

Rising refinery runs in the US Midwest and flooding in Alberta may have been more immediate -- if less noted -- factors behind recent price gains. Supply disruptions in the oil sands, as Enbridge shut a pipeline as a precaution, may help explain why WTI prices rose faster than Brent, bringing the spread between the two to its narrowest in over two years - even as  mounting unrest and attacks in Libya, Nigeria and Iraq slashed OPEC output by 370 kb/d.

Meanwhile, unseasonably cold weather in the OECD sparked a demand surprise, at a time of year - the second quarter - when demand normally hits a low point. The latest OECD data raised our estimate of second-quarter demand by a steep 645 kb/d, lifting the full-year average by 215 kb/d.

While this might sound bullish, the 2014 outlook, which this Report lays out in detail for the first time, should also give oil bulls some cause for alarm. Non-OPEC supply growth looks on track to hit a 20-year record next year, surpassing the 1.3 mb/d high reached in 2002. While demand growth is also forecast to pick up momentum, rising to 1.2 mb/d in 2014 from an upwardly revised 930 kb/d in 2013, this will still fall short of forecast non-OPEC supply growth. As a result, the "Call on OPEC plus Stock Changes" is set to edge down in 2014 to 29.4 mb/d, from 29.6 mb/d this year.

But there are many uncertainties to this forecast. Demand projections remain subject to revision. This Report's projections have yet to take into account the latest downgrade in the IMF forecast of global economic growth, as it came too late in our data processing cycle. Nor do they incorporate the forthcoming 'Green Book', the IEA annual collection of detailed non-OECD statistics, to be completed later this summer. Given how the market's centre of gravity has shifted towards the emerging economies, revisions to non-OECD historical data could have a bigger impact on the overall oil market outlook this year than ever before.

On the supply side, upheaval in the Middle East and North Africa remains an overarching concern. As noted in the 2013 Medium-Term Oil Market Report (MTOMR), the onset of the 'Arab Spring' two years ago was just the beginning of a far-reaching process of political and social transition. Above-ground disruptions in the MENA region already have provided a major offset to rising North American supply, and may continue to do so. The North American supply outlook has its own uncertainties, premised as it is on continued high oil prices.

Oil supply and demand, the focus of our 2014 outlook, are not the only factors that will shape oil markets this year and next. Tectonic shifts in the midstream and downstream industries, described in more detail in the MTOMR, will be equally important. Already US refineries have begun ramping up from spring maintenance, leading to an expected steep increase in global refining activity in 3Q13. This Report casts a spotlight on how some European refiners have been adjusting to rising international competition. Whether they will get more than temporary reprieve in view of the sector's rapid transformation remains unclear.

Demand

Summary

  • Global oil demand is forecast to grow by 1.2 mb/d in 2014 to 92.0 mb/d, from an upwardly revised 930 kb/d in 2013. Momentum is forecast to build in 2014 as the economic backdrop that underpins demand is thought likely to brighten. The International Monetary Fund's April World Economic Outlook depicts global GDP growth rising from 3.3% in 2013 to 4.0% in 2014. Given the current state of the world economy, however, particularly heightened risks surround forecasts of both economic progress and oil consumption. Non-OECD demand continues to lead global growth, to such an extent that it is forecast to take a leading share over the contracting OECD from 2Q14.
  • Unseasonably cold late-winter weather in 2Q13, compounding the impact of baseline revisions to 2012 data, has raised the global growth estimate for 2013 by 145 kb/d. Demand for the year is now assessed at 90.8 mb/d. The recent spike in heating demand was the main driver behind upward revisions of 645 kb/d to preliminary demand estimates for 2Q13, now pegged at 90.1 mb/d.
  • OECD baseline data revisions have added roughly 75 kb/d of additional consumption to the 2012 estimate, now assessed at 89.8 mb/d. Upward revisions to demand data for Australia (+85 kb/d), Italy (+45 kb/d) and South Korea (+35 kb/d) led the adjustment.


Global Overview

This month's Report includes both extended forecast data and revisions to historical figures. Looking forward, detailed monthly estimates for 2014 have been added to the forecast. Aggregate demand growth of 1.2 mb/d (or 1.3%) is now forecast for 2014 (to 92.0 mb/d), up from 930 kb/d in 2013 (to 90.8 mb/d), and is consistent with the trend of the five-year outlook unveiled in the 2013 Medium-Term Oil Market Report (MTOMR), released in May. As in the MTOMR, the pick up in demand growth is underpinned by improving macroeconomic conditions. Unlike the MTOMR, however, this month's Report provides a complete breakdown of the 2014 projection by quarter. Looking backward, baseline revisions have been applied to OECD data following the comprehensive data collection process conducted annually by the IEA's Energy Data Center, our statistical division, which was just completed. The net result of those baseline revisions is to raise the estimate of 2012 global oil demand by roughly 75 kb/d, to 89.8 mb/d.

Upward revisions to the baseline estimate of OECD demand for 2012 were led by adjustments to Australia (+85 kb/d), Italy (+45 kb/d), South Korea (+35 kb/d) and the Netherlands (+25 kb/d). Downward revisions to Mexico (-45 kb/d) and Norway (-40 kb/d) provided a partial offset. Net upward adjustments of 75 kb/d lift the aggregate demand estimate of OECD consumption to 46.0 mb/d for 2012.

While notable, those changes to the OECD baseline are outstripped by a 645 kb/d upward adjustment to the estimate of global demand for 2Q13, to 90.1 mb/d. Several large revisions to preliminary April data underpin this increase. Thus, the estimate of German demand for April has been revised higher by 125 kb/d, based on the latest inland delivery statistics. Other big April additions include the US (+370 kb/d), Australia (+125 kb/d), Brazil (+125 kb/d) and Canada (+110 kb/d). On the other hand, a few countries provided offsetting reductions versus earlier forecasts. Those included Saudi Arabia (-50 kb/d) and Taiwan (-40 kb/d), but most of the changes were to the upside.

A number of preliminary releases for May also contributed to the higher 2Q13 estimate, with notable above-forecast preliminary data coming out for the US (+265 kb/d), Russia (+110 kb/d), Germany (+85 kb/d) and France (+80 kb/d). Reductions in China (-215 kb/d) and Mexico (-105 kb/d) were a partial offset.

Despite the higher 2Q13 estimate and underlying OECD baseline, the general structure of this year's demand forecast remains unchanged. Hence, the 2013 consumption outlook has only been raised by 145 kb/d. In the year as a whole, the world is now forecast to consume an average of around 90.8 mb/d, up 930 kb/d from the revised 2012 global demand estimate. Nor did we fundamentally alter the make-up of the 2H13 forecast, as upward revisions to the 2Q13 estimate seem to stem in part from one-off factors such as unseasonably cold late-winter weather in many countries. Indeed, a gasoil demand spike in April accounted for much of the revision, consistent with the notion of a short-lived jump in heating demand.



Demand Forecast Extended to Include 2014

This month's demand forecast has been extended to include detailed quarterly projections for 2014. Overall, global demand growth is expected to gain momentum in 2014, rising to 1.2 mb/d from an upwardly-revised growth forecast of 0.9 mb/d for 2013. Accelerating oil demand growth is expected to be supported by a stronger macroeconomic backdrop, in line with the International Monetary Fund's April World Economic Outlook forecast of 4% global GDP growth in 2014, up from 3.3% in 2013. As always, efficiency gains will curb the impact of stronger economic activity at the margin.

Demand growth is forecast to be unevenly distributed across the barrel. Extending earlier trends, gasoil (which includes diesel) is expected to lead 2014 growth (with incremental demand of around 0.4 mb/d), followed by gasoline (+0.3 mb/d) and LPG (+0.2 mb/d). Gasoil demand growth had briefly dipped below that for gasoline in 2012-13, but is expected to leap ahead again on the back of stronger industrial and manufacturing growth.

It will not come as a surprise that emerging markets and developing economies are forecast to lead demand growth in 2014, as they have for some time, more than offsetting the continued OECD contraction. Non-OECD oil consumption is forecast to average out at around 46.5 mb/d in 2014, up by 1.4 mb/d (or 3.1%) on the year and well above the OECD average of 45.5 mb/d. China is forecast to remain the main engine of demand growth in 2014 (+385 kb/d), followed by the rest of non-OECD Asia (+325 kb/d) and the Middle East (+225 kb/d). While demand in the OECD region is expected to contract, it will do so at a much slower pace than has been the case in the last few years since the 2008 financial crisis, edging down by 0.4% in 2014 compared to the 0.8% drop of 2013. This forecast slowdown in OECD demand contraction reflects expectations that OECD economies will on average return to growth in 2014.

Significant risks are associated with this demand forecast, macroeconomic uncertainty foremost among them. The IMF, for example, highlighting, in April, "the absence of strong fiscal consolidation plans in the US and Japan" as a worry, and points to the danger of "high private sector debt, limited policy space, and insufficient institutional progress in the euro area". Given the downside risks to the IMF's 4.0% growth forecast for 2014 estimate, our 1.2 mb/d oil demand growth forecast for that year could also prove optimistic (or pessimistic, depending upon how economic growth unfolds).

Top-10 Consumers

US

Revised data from the US Energy Information Administration have added roughly 370 kb/d to the estimate of April demand, now pegged at 18.6 mb/d. The majority of the additions applied to industrial fuels, notably gasoil (+190 kb/d, to 3.9 mb/d) and LPG (+105 kb/d, to 2.2 mb/d), although estimates of transportation use were also revised higher. Based on this revision, aggregate US demand now looks to have grown year-on-year (y-o-y) for a second consecutive month. The forecast of US demand for the year has been adjusted upwards to show roughly flat growth, rather than the marginal contraction forecasted earlier.



Preliminary estimates of May demand have also been revised upwards, by around 265 kb/d, with industrial fuels once again leading the upside. Amended May data showing an addition of 160 kb/d for gasoil consumption, to 3.8 mb/d, and 70 kb/d for LPG to 2.2 mb/d. The forecast of annual demand for 2013 has been raised to 18.6 mb/d, roughly on par with 2012, as accelerating US economic recovery offsets the impact of a structural decline in consumption. A modest dip, down by 0.1% to 18.6 mb/d, is then forecast for 2014, as efficiency gains continue to dampen the US demand outlook.



China

Amid signs of a slowdown in the economy and reports of potential banking problems, a dip in Chinese apparent demand (defined as the sum of refinery output and net product imports, minus product inventory builds) to a one-year low of 9.4 mb/d in May might not come as a surprise. Although May demand still shows y-o-y growth it amounts to a reduction of roughly 215 kb/d on our month earlier forecast. Aside from China's slower economic growth, heavy seasonal maintenance, which has slashed product output at refineries, and heavy rains in the south, which have curbed diesel use, appear to have been key factors behind the revisions.







While diesel dominates the Chinese demand barrel, growth has been slower in 2013 than for any other product. Consumption from both the agricultural and industrial sectors is reported weak. The closely-watched HSBC Chinese Manufacturing Purchasing Managers' Index (PMI) fell to a nine-month low in June, its second consecutive month in 'contracting' territory. Although we continue to forecast that oil demand growth will gain momentum in the second half of the year, recent weakness has cut the growth outlook for the year as a whole to 3.7% from 3.8% a month earlier. Average consumption for 2013 as a whole remains projected at approximately 10.0 mb/d. A modest acceleration, to 3.9%, is forecast for 2014, taking consumption up to around 10.3 mb/d.

Japan

Preliminary assessments of Japanese demand for May have been revised upwards by nearly 60 kb/d, led by 'other products' and gasoil, following a long series of downward revisions to early Japanese demand estimates. Fuel switching in the power-generation industry away from nuclear and towards thermal generation no longer serves as a major driver of annual oil demand growth as most nuclear power plants have been idled for more than a year. Total product demand has been wavering between contractions of 1.3% in April and a dip of 7.8% in March. For 2013 as a whole, demand is forecast to decline by 3.4% to 4.6 mb/d. A further decline, of around 1.8%, is foreseen for 2014 as the use of both fuel oil and crude oil in the power sector are forecast to further unwind.



India

The forecast for Indian demand growth is left roughly unchanged at around 2.8% in 2013. The latest data for April and May were broadly in line with expectations. Preliminary May data pointed towards y-o-y growth of 2.3%, to 3.9 mb/d, only 20 kb/d below last month's forecast. Specifically, diesel use fell after recent subsidy cuts lifted pump prices. Overall, Indian demand growth is forecast to pick up momentum in 2014, to +3.5%, supported by the strengthening economic backdrop.



Russia

The Russian demand trend reaccelerated in May, taking average Russian consumption up to a five-month high of around 3.3 mb/d. Leading the upside momentum were particularly sharp gains in naphtha, fuel oil and 'other products'. Demand growth in Russia is forecast to stabilise at around 3.3% in 2013-14, supported by relatively robust macroeconomic conditions and associated gains in projected income growth.



Brazil

The sharp upturn in Brazilian oil consumption in April came as something of a surprise and belied the recent economic news flow, with demand growth back up to the level unseen since the turn of the year. As in other Christian nations, the earlier arrival of Easter in 2013 may have played a role. The Easter holiday spread over both March and April in 2013, whereas in 2012 it fell in April only. This may have helped raise y-o-y industrial fuel consumption figures for April 2013. This fits the revised Brazilian data, as gasoil and LPG posted the largest revisions.



Saudi Arabia

Preliminary April demand data for Saudi Arabia saw a continuation of the recent below-trend growth, with consumption only modestly above year-earlier levels for a second successive month, reversing the previous strongly rising trend. Weak March-April growth reflects a combination of cooler weather and sharply falling consumer confidence, as highlighted in last month's Report. Near 4% per annum demand growth is forecast over the next couple of year, as oil usage closely reflects the economic backdrop.



Germany

After a period of steep contraction in German oil demand, the three months from March to May have seen something of a trend reversal. Having fallen by a y-o-y average of 2.5% in the previous seven months, demand swung to growth averaging 6.4% in the three months to May. Unseasonably cold late-winter weather was likely a major driver behind the rebound, though there are early signs that the beleaguered German economy may be on the mend. Service sector output, as tracked by Markit's Services Purchasing Managers' Index, re-entered an 'expansionary' environment in June.



Canada

The latest Canadian demand data were surprisingly robust at roughly 2.3 mb/d for April, a gain of over 4% y-o-y. Three key factors led the growth: the earlier arrival of Easter in 2013 compared to 2012, unseasonably cold late-winter weather, and the early arrival of traditional peak jet/kerosene demand (which rose sharply in April, rather than May as usual).



Korea

South Korean demand edged up in May by 1.9% y-o-y to about 2.3 mb/d, as relatively robust transport fuel demand offset declines for residual fuel oil and 'other products'. Although relatively flat consumption growth remains projected for 2013, there is a chance that fuel switching out of nuclear for power generation may cause upward revisions to that forecast. Due to the unexpected shutdowns of a number of nuclear plants in Korea, the possibility that replacement demand might spread to oil exists, though at present the nuclear closures have mostly benefited demand for natural gas and coal.

OECD

Overall developed world oil demand remains on a declining trend, with monthly demand contracting by 2.0% in May y-o-y. April data have been revised upwards, however, and now show annual growth of 2.1% y-o-y for that month. This appears to reflect the earlier onset of the Easter holiday in 2013 than in 2012, as well as unseasonably cold temperatures in Europe and elsewhere in the OECD region. The role of heating demand is reflected in the fact that middle distillate demand led the April growth. Even in May, when OECD demand flipped back into contraction, unseasonably cold weather boosted Europe's heating oil market.



Americas

Whereas cold weather prevailed in Europe through most of the spring, in the OECD Americas an April cold snap led to more normal temperatures in May, causing heating demand to fall seasonally. Oil use in the region is forecast to rise marginally for the year as a whole, supported by modest gains in Canada and Mexico and stronger growth in Chile. US consumption is projected to stay roughly flat.



Mexican demand data have been volatile recently, with demand plummeting in May after a sharp uptick in April and an earlier plunge in March. May's 2.1% y-o-y decline, to 2.1 mb/d, marks the fourth successive month that Mexican demand growth switches direction. Wild oscillations in fuel oil demand is the main factor behind this see-saw pattern, as the Mexican power sector increasingly moves towards natural gas for its base-load capacity but still uses fuel oil as its swing resource. Modest demand growth of around 0.6% is forecast for 2013, to 2.2 mb/d, as Mexico's ongoing industrial strength continues to support demand, before reversing, albeit very modestly, down by 0.4% in 2014 as power sector usage increasingly switches out of oil products and into natural gas.

Europe

Multiple revisions have added roughly 0.3 mb/d to the 2Q13 OECD European demand estimate, which now averages 13.6 mb/d in 2Q13. Upward adjustments to April data for Germany (+125 kb/d), the UK (+90 kb/d) and Turkey (+65 kb/d) led the revisions. The earlier arrival of the Easter holiday this year than in 2012 likely provided some April support, as did rebounding UK gasoline sales (which had been artificially depressed in April 2012 by destocking ahead of expected strike action that never occurred). Reports of robust 2Q13 heating oil sales across the continent, triggered by unseasonably cold late-winter weather, also played a role. Despite these revisions, however, overall European demand remains on a declining trend, down by 0.2 mb/d (or 1.6%) in 2Q13 y-o-y. Reports that some of the strength in 2Q13 heating oil demand stemmed from above-trend consumer stockpiling could presage weaker demand later on.

Divergent 2Q13 growth trends are forecast across the European product mix, with growth projected for gasoil and LPG but contraction forecast for gasoline, naphtha and residual fuel oil. Demand for jet/kerosene saw an estimated contraction of 1.6% in 2Q13 y-o-y, matching the regional growth for total product demand. Eurocontrol, the European Organisation for the Safety of Air Navigation, has downgraded its forecast for growth in the total number of European flights in 2014 to 2.6%, from 2.9% previously. This reduction in the forecast of European flights occurred as Eurocontrol reported that it had previously underestimated potential load factors. Whereas previously Eurocontrol set its maximum potential load factor at 85%, recent experience led it to raise it to 90%. Eurocontrol's latest two-year flight forecast now includes a 1.3% decrease in the total number of European flights in 2013, consistent with our forecast of jet fuel demand.



Turkey contributed to the rising European demand trend in April, as oil use rebounded after a brief March dip. When looking at Turkey it is always prudent to focus on the wider timeframe, as the monthly series can be choppy. Thus for 1Q13 as a whole, a gain of around 3% was posted y-o-y, with consumption averaging out at around 595 kb/d. Despite recent political unrest, demand growth is expected to remain positive in 2013, before accelerating into 2014 as the macroeconomic backdrop is forecast to improve.

Asia Oceania

Demand contraction has returned to OECD Asia Oceania after an 18-month hiatus, from mid-2011 to end-2012, when consumption got a boost from nuclear outages in Japan and the resulting replacement oil demand from that country's electrical utilities. Demand in Asia Oceania has remained in contraction since February, with the notable exception of April, when unseasonably cold Korean weather and briefly lifted year-on-year growth. Australian consumption growth looked especially strong in April, even though the Australia Industry Group's PMI slumped to a near four-year low, a sign of weakening manufacturing sentiment. The early onset of Easter was likely the main reason for that somewhat counter-intuitive growth reading.



Non-OECD

Non-OECD oil demand averaged around 44.8 mb/d in 2Q13, 2.6% above the year earlier, according to preliminary estimates. While non-OECD demand growth has slowed from the heady pace of recent years, with incremental demand for 2Q13 at roughly two-thirds of the four-year average, it still more than offsets the OECD decline. Such divergent trends should see total non-OECD consumption climb above total OECD demand in 2Q14, a lead it should hold in perpetuity. China, India and the Middle East were among the countries and regions where demand growth slowed the most, with estimated 2Q13 growth down to around 45%, 50% and 40% of their respective four-year averages.

Beside the leading non-OECD economies discussed above, this month's Report has seen significant developments in Qatar, Africa and Chinese Taipei. Supporting the Qatari demand forecast are reports that its government has unveiled a record budget for fiscal year 2013-14 (April-to-March), up 5.7%. The ambitious construction plans included in the budget will likely support robust gasoil demand, which is forecast to rise by 16.6% - albeit from a low base - in 2013, to 40 kb/d. Although strong growth is foreseen across all products, supported by rising domestic incomes (themselves boosted by the budgeted wage growth), the formal opening of a new airport is forecast to support particularly heightened jet/kerosene growth of around 30% in 2013, to 50 kb/d.

April data have led to numerous but mutually offsetting revisions in African demand estimates. South Africa leads the downward adjustments from last month's Report with a 35 kb/d cut, followed by Nigeria (-30 kb/d). Both forecasts were reduced on account of lower gasoline use. Offsetting these reductions was a large upward revision to the Egyptian demand estimate now pegged at 820 kb/d, roughly 85 kb/d over the previously forecast. Consumption in Egypt has been rising strongly in recent months, but the outlook remains far from clear-cut given the recent unrest.

The Chinese Taipei demand estimate for April was adjusted downwards by 40 kb/d, to 960 kb/d, due to weaker-than-expected naphtha demand. Despite manufacturing activity in Chinese Taipei remaining supported above the key 50 threshold separating contraction from expansion, oil use came out below expectations as manufacturing sentiment deteriorated sharply in April. The official manufacturing PMI fell to 56.8 in April, from 62.4 in March, on account of notably slower growth in new orders and production.

Supply

Summary

  • Global supplies fell by 290 kb/d month-on-month to 91.2 mb/d in June, as increasing non-OPEC crude production failed to offset a 370 kb/d decline in OPEC output. On an annual basis, supplies stood 700 kb/d higher than last year, with rising OPEC NGLs and non-OPEC supply outpacing a 1.0 mb/d decline in OPEC crude.
  • Non-OPEC supply rose by 80 kb/d in June to 54.1 mb/d as rebounding Canadian supplies and rising US tight oil production offset planned maintenance in the North Sea and pipeline sabotage in Colombia. Supply growth averages 1.2 mb/d in 2013, 0.1 mb/d higher than last month's estimate.
  • Non-OPEC supply growth is forecast at 1.3 mb/d in 2014, a level reached only once (2002) on an annual basis in the last twenty years. In 2014, North American supply is expected to grow by close to 1 mb/d, but other countries including Brazil and Kazakhstan are also poised to contribute.
  • OPEC crude oil production fell by 370 kb/d to 30.61 mb/d last month amid worsening supply disruptions in Libya, Nigeria and Iraq. The 'call on OPEC crude and stock change' for 1H13 was adjusted higher by an average 350 kb/d to 29.6 mb/d, largely due to a weather-related upward revision in second-quarter demand. For full year, the 'call' was raised by 100 kb/d, to 29.6 mb/d. For 2014, the 'call' is forecast to decline by 200 kb/d to 29.4 mb/d year-on-year, with higher non-OPEC supply meeting the projected 1.2 mb/d rise in demand.


All world oil supply figures for July discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Indonesia and Russia are supported by preliminary July supply data.

Note: Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from July 2007, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast. This totals ?500 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

The non-OPEC supply overview this month focuses on the roll out of our forecast to 2014, with discussion of key changes in production. However, to avoid duplication, several of the themes underpinning this analysis are elaborated upon in the MTOMR 2013 Edition, released in May 2013. Readers should consult the MTOMR for more detailed discussion of factors affecting supply in 2014 and beyond.

OPEC Crude Oil Supply

OPEC crude oil production in June turned lower amid worsening supply disruptions in Libya, Nigeria and Iraq. OPEC output fell by 370 kb/d to 30.61 mb/d last month. Mounting civil unrest by oil workers in Libya led to shut-ins of oil fields and export terminals while oil theft activity in Nigeria inflicted further damage to oil infrastructure. Iraq output was constrained by pipeline damage in the north and bad weather in the south. Production from Algeria and Kuwait also edged lower in June. Marginally higher output from Saudi Arabia, Iran and Angola partially offset reduced supplies from other members. OPEC's 'effective' spare capacity in June was estimated at 3.13 mb/d compared with 3.23 mb/d in May.

The 'call on OPEC crude and stock change' for 1H13 was adjusted higher by an average 350 kb/d to 29.6 mb/d, largely due to a weather-related upward revision in second-quarter demand. For full year, the 'call' was raised by 100 kb/d, to 29.6 mb/d. For 2014, the 'call' is forecast to decline by 200 kb/d to 29.4 mb/d year on year, with higher non-OPEC supply meeting the projected 1.2 mb/d rise in demand.



Saudi Arabia's crude oil output edged up by 100 kb/d to 9.7 mb/d, the highest level in seven months. Increased domestic demand for crude during the peak summer cooling season is partly behind the rise in production in recent months. Saudi use of crude for direct burn rose by an average 300 kb/d to 675 kb/d during the seasonally stronger demand period from April to September. Last year Saudi Arabia raised production to an average 9.89 mb/d from June-August, in part to meet higher domestic demand. Increased natural gas supplies, however, appear to be tempering demand for crude in power use this year, with latest data indicting crude for direct burn averaged 380 kb/d in April compared with 440 kb/d for April 2012.



Iraqi crude output hit a three-month low in June, off by 150 kb/d to 3.05 mb/d. June exports fell to the lowest level in 15 months due to a combination of technical problems, militant activity and weather-related export disruptions. Total Iraqi exports were down by around 155 kb/d to 2.33 mb/d, with lower supplies from both the southern and the northern shipping terminals. Exports of Basrah crude fell by around 65 kb/d to 2.14 mb/d, with high winds reportedly affecting loadings during the month.

Exports of northern Kirkuk crude plunged to the lowest level in more than five years, off 95 kb/d to just 180 kb/d, including 14 kb/d trucked to Jordan. Kirkuk volumes plummeted due in part to pipeline damage along the northern line running to the Mediterranean, following a resurgence of attacks by opposition groups in Iraqi territory. The ongoing suspension of crude flows from Kurdistan to the Ceyhan-Kirkuk crude oil pipeline, which is controlled by the central government in Baghdad, also contributed to the low export volumes.

Kirkuk exports were halted on 21 June due to pipeline leaks and low levels of oil in storage and, at the time of writing, had yet resumed. Persistent attacks on pipeline by insurgents have caused significant damage to the key pipeline in recent months and worsening security issues have delayed repair work. Militants have also stepped up attacks on repair technicians sent out to fix the damage. Baghdad has reinforced vulnerable areas with additional security forces and is reportedly reviewing plans to improve security.

Increased militant activity on the Ceyhan line has also served to amplify the continuing halt in pipeline flows from the Kurdistan region. Discussions over payment and contract disputes, however, remain stalled between Baghdad and the Kurdistan Regional Government (KRG). Crude production in the KRG area was estimated at 140 kb/d in June, with around 60 kb/d of supplies exported via truck and around 80 kb/d refined locally at a growing number of teapot refineries.

Kuwaiti output was slightly lower in June, down 20 kb/d to 2.82 mb/d while preliminary data indicate production was unchanged in the UAE and Qatar, at 2.73 mb/d and 725 kb/d, respectively.



Iranian production was pegged at 2.7 mb/d in June, up 20 kb/d from the previous month. Import data of Iranian crude from OECD and non-OECD countries showed a downturn in June, with lower volumes from Japan, India, Turkey and China. Preliminary data show total imports in June were around 800 kb/d, off 36% from a downwardly revised 1.25 mb/d in May. China's imports from Iran in June fell to 390 kb/d from 550 kb/d in May, according to latest tanker tracking data. Port congestion in China is largely behind the lower import levels. Japanese imports from Iran were also down, to just under 100 kb/d compared with 240 kb/d in May, reportedly due to a delay in negotiations over contract volumes. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports



Another round of new US sanctions on Iran went into effect 1 July which are aimed at trade with Iran's shipping and auto industries, gold sales and financial institutions that transact business in the rial. The country's new president Hassan Rouhani, a former nuclear negotiator, has stated he will take a softer approach in foreign relations when he takes office in early August. But analysts are divided on whether Rouhani will be willing to compromise on the country's nuclear programme, including international demands to halt work at the underground Fordow nuclear facility where uranium is enriched, and limit fissile concentration to 20%. Diplomatic efforts to launch a new round of talks are underway following the election of Rouhani but no date has yet been set. Iranian officials and the group of six countries, Russia, China, Britain, France, Germany and the US, last met in Kazakhstan in April.

Growing civil unrest and militia activity in Libya and Nigeria during June continued to undermine production levels, down a combined 270 kb/d last month. Libyan crude oil production fell by a steep 200 kb/d to 1.15 mb/d in the wake of escalating labour disputes at oil production facilities and export terminals against a backdrop of worsening security problems with tribal militias. Workers are seeking an array of demands, including improved pay packages and management changes. Power supply to some of the country's oil infrastructure has been unreliable and reportedly affecting field production levels.

Production from a number of major fields has been shut in during June and early July, including output from El Sharara, Elephant, Zueitina, Sarir and Messla, as a result of worker protests at various oil facilities scattered around the country. State-owned National Oil Corporation (NOC) reported in mid-June that there had been a "massive" decline in production at some of Libya's major fields. By early June, Libyan volumes reportedly tumbled to around 1 mb/d before posting a modest recovery by end-month. Reports emerged on 9 July of an imminent restart of some shut-in infrastructure but the timing is unclear. The government is working to resolve the labour and security issues, but considerable challenges remain. A tentative agreement was reportedly reached between government officials and security guards who had blocked workers in early July from the eastern Libyan Es Sider and Ras Lanuf export terminals. Libyan oil facilities are under the protection of a special force that operates under the Ministry of Defence, but the majority of the members lack military training and infighting among the various units is a problem.



Nigerian crude output trended lower for the third month running in June, down 70 kb/d to 1.88 mb/d. Damage to pipelines and other infrastructure stemming from oil theft is behind the drop in output. Key export crudes like Bonny Light have been under force majeure since April, affecting 150 kb/d. Total's 30 May force majeure on liftings from the 180 kb/d Usan field also remains in place.

In an effort to reduce oil theft and pipeline damage that has led to an estimated annual loss of 60 kb/d and caused massive environmental problems, Nigeria's largest producer Shell plans to invest $1.5 bn on a new pipeline. Shell was forced to close the Nembe Creek pipeline for repairs after discovering more than 50 break points along the near 100 km trunkline. In 2010, Shell spent $1.1 bn to replace the Nembe Creek pipeline due to damage. The new pipeline, called the TransNiger Pipeline Loop-line, should help reduce oil spills in the Niger Delta because it will circumvent the Ogoniland region of Nigeria, where a large volume of bunkering and pipeline damage takes place.

Angolan crude output rose by 20 kb/d to 1.78 mb/d in June. Production at block 15 from the Kizomba D Satellite fields and Clochas Mavacola also increased output near nameplate capacity of 140 kb/d in June.

Non-OPEC Overview

The completion of maintenance in Canada and rising supplies of tight oil production in the US raised non-OPEC supplies by 80 kb/d in June to 54.1 mb/d, or 1.5 mb/d higher than last year. Compared to May, supplies fell 300 kb/d in the North Sea due to maintenance and by 40 kb/d in Colombia due to unrest. Non-OPEC supply growth is expected to gain further momentum in 3Q13, when production is projected at 54.7 mb/d, up 1.7 mb/d y-o-y, despite planned maintenance in the North Sea, Brazil, and the US Gulf of Mexico. Rapidly increasing supplies of US LTO as well as upward baseline revisions have led to a 120 kb/d increase in the forecast for 2H13 and an 80 kb/d increase to the 2013 forecast, to average 54.6 mb/d.

The growth forecast in 2014, detailed in this Report for the first time, is more of the same: North American supplies are set to grow strongly, outpacing declines elsewhere. New projects in Brazil and Kazakhstan, as well as rebounding supplies from South Sudan, also are expected to contribute to growth in 2014. The outlook has been revised slightly upwards since the May release of the 2013 MTOMR, by 90 kb/d to 55.9 mb/d. Upwards adjustments to the forecast of US crude and NGL production, based on a higher 2013 baseline and a closer look at field start-ups, are the main reason for the increase (see 'Americas to Dominate Non-OPEC Supply Growth' in this section). There are both strong upside and downside risks to this forecast that are explained below.

Renewed unrest in Egypt, following mass protests against President Mohamed Morsi and his ouster by the military, has emerged as a focus of market concern. Violence erupted between his supporters and the Egyptian military, which has assumed leadership of the country. Though not a top oil producer, Egypt produced 730 kb/d of liquids in 2012, twice the amount of Syria's production in 2011. Perhaps more importantly, Egypt is also a key transit area for both crude and refined products between the Red Sea and the Mediterranean. Observers worry that the political confrontation in Egypt, like the Syrian civil war, could drag on and worsen before it gets better, and the instability could theoretically threaten production and transit through the Suez Canal (see Prices). At this time, we have not adjusted the production outlook for Egypt in either 2013 or 2014, but we are closely monitoring the events and may adjust the outlook accordingly.



OECD Americas

US - June preliminary, Alaska actual, other states estimated: US crude oil production averaged 7.3 mb/d in 2Q13, 1.0 mb/d higher than 2Q12. Weekly production statistics from the US Energy Information Administration suggest that US crude production fell slightly from April's high of 7.37 mb/d during May and June due to maintenance in the Gulf of Mexico and Alaska. US total liquids production, not including biofuels, grew by 1.0 mb/d in 2012, and is forecast to rise by 1.0 mb/d in 2013 and 0.7 mb/d in 2014.

NGL production also increased in 2Q13 to 2.5 mb/d, 180 kb/d higher than the same period last year. A surge in NGLs from new tight oil plays in Texas and Oklahoma has lifted supplies of propane and butane at storage caverns near Mt. Belvieu, TX, putting downward pressure on prices in June. The commissioning of DCP Midstream Partners Sand Hills and Southern Hills NGL pipelines adds 375 kb/d of new transit capacity, which will allow unprocessed NGLs to flow from the Eagle Ford, Permian, and Woodford tight oil plays to fractionators on the US Gulf Coast. New transit capacity will allow operators to achieve a better netback for their NGL production.

Canada - April estimated: Total oil production fell from 3.8 mb/d to 3.6 mb/d in May as synthetic crude oil producers underwent maintenance. Despite flooding, June preliminary estimates indicate production rebounded to 3.7 mb/d. The latest statistics from the new Alberta Energy Regulator (formerly the Energy Resources Conservation Board) and company data indicate that synthetic crude output (SCO) fell by 300 kb/d to 720 kb/d from March to May. In June, severe flooding in Alberta caused a precautionary shutdown of the Enbridge pipeline system in the Fort McMurray region, which is where most oil sands production is centred. Suncor reported that it would slow down production due to its inability to evacuate oil from the area.  By 1 July, Enbridge confirmed that the shut down segments of its pipeline had returned to service. The flood related outage and baseline adjustments to synthetic crude oil output with new historical data result in a 40 kb/d downward revision to Canadian production in 2013 to 4.0 mb/d. Production is still forecast to grow by 230 kb/d in 2013, roughly on par with last year.

Kinder Morgan's planned reversal of the Cochin pipeline will allow more US condensate to flow to Canada to be used as a diluent for bitumen exports. Canada's National Energy Board approved the reversal of the pipeline, which traditionally moves 76 kb/d of propane eastward from Alberta to the US midcontinent and further to Windsor, Ontario. The reversed line, expected in service by July 2014, will transport up to 60 kb/d of light condensate to Fort Saskatchewan, Alberta.

North Sea

Seasonal maintenance reduced Norwegian liquids supply by 200 kb/d m-o-m, reducing North Sea supply to 2.7 mb/d in June, down 300 kb/d m-o-m and 450 kb/d y-o-y. Planned maintenance was centred in the Ekofisk group of fields and associated midstream processing and transport infrastructures, as highlighted in this section of last month's Report. Unplanned maintenance at the UK's Buzzard field and a gas leak at Norway's Asgard gas and gas liquids field also lowered output in June. Preliminary estimates indicate that BFOE production fell to around 630 kb/d in June, down 250 kb/d from May. BFOE loadings schedules released in early July indicate that production levels likely rebounded in July by 100 kb/d but then indicate a fall back again in August.

UK offshore crude production is forecast to fall by 110 kb/d to 830 kb/d in 2013, then rebounding to 810 kb/d in 2014 when new fields are added. In Norway, total liquids production is forecast to fall by 110 kb/d kb/d this year to 1.8 mb/d. New fields will keep Norway's output level in 2014, offsetting declines elsewhere. Recent data indicate that production has started at the Stjerne structure at the Oseberg South field, lifting production from around 30 kb/d to 50 kb/d, and at the 10-kb/d Jette field.

Asia

Australia  - April preliminary:  Production rose above 400 kb/d in April, after cyclones and planned maintenance dented output to 370 kb/d in 1Q13. Production is expected to increase further in coming months with the start of the Fletcher/Finucane and the Montara fields, averaging 460 kb/d in 2H13. The Montara field finally began steady production in June after a major fire and oil leak during development drilling in October 2009. Thai operator PTTEP had to redevelop the field after a platform and jack-up rig were destroyed. The output is expected to reach around 20 kb/d in an initial phase and then reach up to 30-35 kb/d. New field additions barely offset declining production at other fields, raising output by 20 kb/d to 450 kb/d in 2014.

Non-OECD

Latin America

Brazil - May preliminary: Brazilian crude production increased by 70 kb/d from April to 2.0 mb/d in May but remained  2.7% lower than May 2012. Planned maintenance at two platforms in the Albacora field and at an FPSO in the Lula field lowered production levels. Production is expected to increase by only 10 kb/d this year to 2.1 mb/d, with around 150 kb/d of growth concentrated in 2H13. Compared to last month's Report, production growth has been ratcheted down by 10 kb/d in 2013 due to lower expectations from OGX-operated fields. Brazilian crude production is expected to rebound strongly by 210 kb/d in 2014, though, to 2.28 mb/d. A list of Brazil's incremental projects is included in the special feature on the 2014 outlook in this section.

Colombia - June preliminary: Production remained above 1.0 mb/d in May, slightly higher than April, but fell by 40 kb/d to 970 kb/d in June. The government said that problems related to "public order" were responsible for the decline. Press reports indicated that militants bombed the Cano Limon Covenas pipeline in two separate locations in early July. The pipeline is expected to remain offline for repairs until 15 July. Ecopetrol indicated that the attacks would not impact oil production. Pipeline sabotage and labour unrest kept production at 950 kb/d in 2012 and just over 1 mb/d in 1H13. New pipelines and more wells at the Castilla, Rubiales, and Quifa fields are forecast to raise production to 1.1 mb/d in 2014.



Africa

Sudan and South Sudan: South Sudanese production is steadily increasing, and exports have begun. China imported 60 kb/d of the country's exports in May. The Thar Jath field in Block 5A and the Palogue field in Block 3/7 are both producing. In early June Sudanese President Bashir ordered companies to shut down the export of South Sudanese crude within 60 days, accusing South Sudan of using oil revenues to "buy arms for rebels and mercenaries." The Chinese government sent diplomats to calm the tension, coinciding with statements from Sudan's government that exports would be allowed to continue, contingent upon the fulfilment of the two countries' agreements. South Sudanese production is expected to grow to 190 kb/d by 4Q13 and is forecast to average 230 kb/d in 2014.

Americas to dominate Non-OPEC Growth in 2014

Non-OPEC supply growth stands to reach record levels of over 1.3 mb/d in 2014, extending an upward trend that goes from growth of 150 kb/d in 2011, 600 kb/d in 2012, and forecast growth of 1.2 mb/d in 2013. As in 2013, North American oil sands and light, tight oil production (LTO) growth account for the largest increments, with also a strong contribution from Brazil in 2014 after a lacklustre 2013. Growth of 1.3 mb/d from countries outside of OPEC is unusual in historical terms and has only been achieved once in the last twenty years on an annual basis.

Since even before the 1990s, the only time that supplies from non-OPEC countries grew at a rate of 1.3 mb/d was in 2002. At that time, NYMEX futures prices had increased on an annual basis by over 50% from a low of $14/bbl in 1998 to average $30/bbl in 2000. Prices fell only slightly on an average basis to $26 in 2001 and 2002. The rapid recovery in prices to above $20/bbl spurred a flurry of investment in non-OPEC countries. Russian production growth benefitted from higher world oil prices and the rouble devaluation in 1998. Output grew by an impressive 700 kb/d between 2001 and 2002, led by LUKoil, Sibneft, and Yukos. Higher prices enabled greater drilling activity and the application of more expensive Western technology.

North America is forecast to be the only source of production growth on a regional net basis in 2013. North American production will remain robust in 2014 with US crude production forecast to add 530 kb/d and oil sands projected to add 140 kb/d. In contrast to 2013, other countries stand to make a contribution. Major pre-salt projects in Brazil, the Kashagan field in Kazakhstan, West Chirag in Azerbaijan, and several new fields in the North Sea are expected to offset declining production elsewhere. We assume that production from South Sudan continues to rebound in 2014 to 220 kb/d, but will still fall short of the 340 kb/d the country produced in 4Q11 before it halted exports.

Downside risks to the outlook include geopolitical-related unrest, mechanical outages, rising costs, and falling prices. Geopolitical risk is most acute in the Middle East and North Africa (MENA) region. Yemen, Sudan/South Sudan, Egypt, and Syria all have the potential to produce less in 2014 than in 2013 because of the heightened threat to energy production and transit infrastructure. Unplanned outages in the North Sea could again dent output as before. We include a -140 kb/d contingency factor for the North Sea, leading to a forecast 1.2% decline to 2.8 mb/d in 2014. This is part of a contingency factor of -500 kb/d maintained in the non-OPEC supply forecast.

Also, rising costs, aggravated by intense demand for oilfield services especially in North America, could cut producer margins and lead to a decline in investment activity and even production levels. Generally, companies with diversified portfolios may be able to more quickly adjust drilling activity and investment levels at LTO assets than in other parts of the world, making these projects most sensitive to cost inflation. A wide range of breakeven costs at tight oil plays in the US makes it possible that a rise in costs (from labour or infrastructure constraints or from transport bottlenecks) in one location may lead companies to shift investment to other plays with different cost structures. Bernstein Research recently calculated that finding and development costs increased by 44% last year.

On the other hand, production could prove even higher than forecast in Russia, the US, Canada, and Brazil, especially if prices remain at or above current levels. Russian producers are benefitting from recent tax changes and high Urals prices and stand to gain even more if the government approves tax breaks for hard-to-recover oil. Some project slippage is assumed in Brazil, but output growth there could increase by another 100 kb/d if FPSOs are delivered on schedule. If US production growth were to average 1 mb/d in 2014, as it did in 2012, and if Russian production were to grow at the 1.2% rate it did in 2012, non-OPEC supplies could increase by 1.8 mb/d, or 0.5 mb/d above the current forecast.

In sum, a combination of these upside and downside possibilities is likely in the cards for 2014. North America looks certain to dominate the 2014 non-OPEC supply landscape, and the geopolitical unrest in non-OPEC MENA countries in 2013 is likely to continue or even worsen in 2014.



Former Soviet Union

Russia - June preliminary:  High oil prices and a reduction in the crude export duty enacted as part of the '60-66-90' tax regime in October 2011 continue to stem the decline at Russia's mature fields. Supply continues to exceed expectations. The forecast for 2013 has been increased by 30 kb/d to average 10.8 mb/d, a growth of 0.6% annually. June liquids output increased to 10.9 mb/d, 2.1% higher y-o-y and 40 kb/d higher m-o-m. Rosneft and Gazprom each increased output by over 50 kb/d in June from prior-year levels. Brownfield production fell by only 0.5%, down from a 1.4% decline over the prior year. Rosneft's Vankor field stayed at 430 kb/d in June, on par with April and May. On the other hand, Lukoil's Western Siberian unit, which produced 890 kb/d in 2012, saw its production decline accelerate to -1.7% in 2Q13, from -0.1% during 2012.

The Russian State Duma accepted a proposal that allows the government to ease export duties and adjust the Mineral Extraction Tax (MET) for hard-to-recover oil, likely leading to incremental output. A new version of the offshore taxation law also includes an extension of the zero-MET period for the frequently delayed offshore Prirazlomnoye field from 2019 to 2022. The extension of the contract was an outstanding issue that Gazpromneft awaited before preparations could begin for a production start. The operator is now expecting production to start in Q4 but because of the field's location offshore and its complexity we expect the start date to slip to 2014. 

FSU net exports slumped by over 500 kb/d to 9.4 mb/d in May following the end of seasonal refinery maintenance in the region, as rebounding throughputs reduced the availability of crude for export by as much as 340 kb/d. As expected, shipments of Russian crudes via Baltic ports were hardest hit, plummeting by 350 kb/d, including declines of 280 kb/d via Primorsk and 60 kb/d via Ust Luga. Despite a 300 kb/d monthly fall in total Transneft shipments, eastbound deliveries remained relatively constant. ESPO grade sent via Kozmino even hit a new record of 460 kb/d (+30 kb/d m-o-m), although this may have been at the expense of flows through the pipeline's Chinese spur which inched down by a similar amount.

Looking forward, preliminary loading schedules indicate that producers will cut exports of Russian Urals via Baltic and Black Sea ports in 3Q13. Primorsk is only slated to export 910 kb/d in July, a five-year low. The scarcity of the grade in Europe appears to have been borne out in the markets since its premium to North Sea Dated in the Mediterranean touched a 20-year high of $0.85/bbl in the first week of July.

Outside of Russia, Kazakhstani supplies shipped via Russia's rail network slipped by 90 kb/d while supplies shipped via the Ukrainian ports of Taman and Feodosiya also fell by a combined 90 kb/d. Elsewhere, flows through the CPC pipeline remained relatively stable at 710 kb/d. Meanwhile, despite the end of refinery maintenance, product exports dropped by a considerable 150 kb/d with all product categories falling, notably fuel oil which fell by 90 kb/d.



OECD Stocks

Summary

  • OECD commercial total oil inventories built by 4.8 mb in May, to 2 683mb, on seasonal restocking of 'other products' in the US. OECD refined products inventories rebounded by a seasonal 16.8 mb, leaving forward demand cover unchanged from the previous month at 30.4 days.
  • Following recent downward revisions, OECD total oil stocks now look to have remained at a small deficit to five-year average levels since January 2013. At end-May this deficit stood at 12.9 mb.
  • Preliminary data suggest that OECD industry inventories continued to build for a third consecutive month as they rose by a sharp 23.2 mb in June. This was significantly stronger than the 6.1 mb five-year average build for the month after all regions posted builds.


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

OECD commercial total oil inventories built by a seasonally weak 4.8 mb in May to stand at 2 683mb by end-month. This rise was driven by the continued seasonal restocking of 'other products' (+17.6 mb m-o-m), notably in the US. Consequently, OECD refined products inventories rebounded by a seasonal 16.8 mb, leaving forward demand cover nominally unchanged from the previous month at 30.4 days. Crude oil holdings edged marginally higher, by 0.3 mb, in contrast to the 8.1 mb five-year average draw for the month. A significant 6.1 mb build in crude in OECD Asia Oceania, after high maintenance and poor margins combined to curtail runs there, offset draws of 3.5 mb and 2.4 mb in OECD Europe and the OECD Americas, respectively. On a region-by-region basis, total oil stocks rose by a stronger-than-seasonal 18.1 mb in OECD Americas, which more than offset draws of 9.9 mb and 3.4 mb in OECD Europe and OECD Asia Oceania, respectively.



There have been a number of downward revisions made to OECD stock data over the past few months. While some of these are the result of final data submissions, others - notably in OECD Europe - stem from the reclassification of industry stocks as government stocks. The upshot of these revisions is that OECD industry total oil inventories are now assessed to have remained at a small deficit to the five-year average since January 2013. On the flip side, government stocks now look higher than originally reported. Prior to these revisions, data suggested that industry inventories had held a small surplus to average levels since September 2012. The revisions have sharpened regional contrasts. While the OECD Americas holds a significant surplus to the five-year average, OECD Europe now stands in wide deficit and OECD Asia Oceania fluctuates between small surplus and deficit.



Based on final data, preliminary assessments of OECD commercial oil inventories have been revised downwards by 4.5 mb for March and 1.7 mb for April. As a result, OECD commercial stocks now look to have stood at a 1.0 mb deficit to five-year average levels at end-April, rather than the 0.8 mb surplus reported earlier. Preliminary data for May suggest that the stock build for that month was weaker than the 16.7 mb seasonal average. If confirmed, this would have caused the deficit of total oil stocks to average levels to widen in May to 12.9 mb, its largest since February.

Preliminary data suggest that OECD industry inventories continued to build for a third consecutive month as they rose by a sharp 23.2 mb in June, significantly stronger than the 6.1 mb five-year average build for the month. Holdings in all regions rose with the 14.2 mb and 1.6 mb increases in the OECD Americas and Asia Oceania seasonally strong while the 7.3 mb build in Europe being counter-seasonal. Surging refined products (+29.1 mb) drove stocks higher, after 'other product' restocking in the US continued to overshoot seasonal norms. Meanwhile, motor gasoline built by a strong 4.9 mb while middle distillates posted a surprise counter-seasonal 1.8 mb draw. Following rising OECD refinery throughputs, crude oil drew by a stronger-than-seasonal 6.5 mb.

Analysis of Recent OECD Industry Stock Changes

OECD Americas



Industry total oil inventories in the OECD Americas built seasonally in May by a relatively steep 18.1 mb, compared to the 15.1 mb five-year average build for the month. A 20.1 mb surge in 'other products' led the increase. While 'other products' do build seasonally at this time of year, the trend has been exacerbated by burgeoning production of natural gas and associated propane in the US. Despite healthy demand from the petrochemical sector and soaring exports, US propane holdings (here included under 'other products') remain in surplus to the five-year average.

Crude oil stocks drew seasonally by 2.4 mb on the month and NGLs and refinery feedstocks posted a steep, counter-seasonal 5.1 mb decline as regional refinery runs surged by 440 kb/d. The higher refinery activity caused inventory builds in middle distillates (+4.1 mb) and motor gasoline (+3.8 mb). The latter was in sharp contrast to the five-year average 2.5 mb draw for the month and leaves regional gasoline inventories well above seasonal ranges, in terms of volume and days of forward demand. All told, refined products surged by 25.6 mb, nearly twice the five-year average 14.3 mb build, to leave demand cover at 29.0 days, 0.8 days above end-April levels.



Preliminary weekly data from the US EIA suggest that stocks built by a seasonal 14.2 mb by end-June (data up to 27 June). Refined product stocks built by a further 21.5 mb, extending earlier gains, and led by 'other products' (+17.4 mb) and motor gasoline (+4.9 mb), builds of which were stronger than typical for that time of year. Meanwhile, crude oil stocks dropped by a further 7.5 mb as refinery runs continued to ramp up (+400 kb/d m-o-m) after BP's Whiting refinery came back on-stream. Regardless of higher crude runs, and despite an upward creep in US crude exports to Canada, recently exceeding 140 kb/d, US run cover stands at 24 days, well above the seasonal range.

OECD Europe



OECD European industrial total oil inventories drew by a steep 9.9 mb in May. All oil categories except fuel oil posted declines. Crude oil and NGLs and other feedstocks dropped by a combined 7.2 mb on lower imports and despite relatively flat refinery throughputs, which only inched up by 50 kb/d. Refined product inventories also slipped, down by 2.8 mb or 0.3 days of forward demand cover, which fell to 38.7 days. Motor gasoline led the product draws with a seasonal 2.2 mb decline, while middle distillates and 'other products' each drew by 0.4 mb. Indications are that German consumers of heating oil began their seasonal restocking with tertiary stocks reportedly reaching 52% of capacity by end-May. Although May normally marks the beginning of heating oil restocking by German consumers, this three percentage-points increase was steeper than in previous years, leaving residential tanks in May higher than over the previous three years.

Preliminary data from Euroilstock indicate that following builds in all oil categories, commercial total oil holdings rose by 7.3 mb in June. Following a rise in refinery throughputs, refined product stocks rose by a heady 7.1 mb, counter-seasonal to the 5.0 mb five-year average draw. Motor gasoline and middle distillates accounted for the lion's share of the build, rising by 3.1 mb and 2.6 mb, respectively. Meanwhile, net crude imports appear to have kept pace with the rising throughputs since crude holdings inched up by a seasonal 0.2 mb. Data suggest that inventories of refined products held by independent storage operators in Northwest Europe fell in June after holdings of gasoil and fuel oil and gasoline drew.

OECD Asia Oceania



Commercial total oil inventories in OECD Asia Oceania fell by 3.4 mb in May, in sharp contrast to the 4.6 mb five-year average build for the month. This resulted in part from a counter-seasonal 6.0 mb draw in refined products, after poor refining margins and plant maintenance slashed regional refinery throughputs by 460 kb/d m-o-m. As refinery intake dropped, crude stocks built by a counter-seasonal 6.1 mb. Stocks of NGLs and other feedstocks drew by a counter-seasonal 3.5 mb, however, likely driven by petrochemical demand.



As refiners drew their stocks of refined products, forward demand cover fell by a sharp 1.1 days to 20.6 days. Stocks of middle distillates slumped by 4.5 mb, in sharp contrast to the 3.7 mb average build for May. These inventories have now swung to a 4.7 mb deficit to average levels from the 3.6 mb surplus posted at end-April.  Meanwhile, a counter-seasonal draw was reported in 'other products' (-2.1 mb) while motor gasoline and fuel oil posted slight upticks of less than 0.5 mb each.

Preliminary weekly data from the Petroleum association of Japan (PAJ) suggest that total oil stocks there inched up by 1.6 mb in June. Inventories were lifted by seasonal builds in crude oil and NGLs and feedstocks, which rose by a combined 1.1 mb. Despite an increase in regional refinery throughputs, product builds were tempered by seasonal draws in middle distillates (-1.0 mb), fuel oil (- 0.8 mb) and motor gasoline (-0.5 mb) while 'other products' rebounded by a strong 2.9 mb.

Recent Developments in Singapore and China Stocks

Information provided by China Oil, Gas and Petrochemicals (China OGP) indicates that commercial oil inventories in China built by the equivalent of 3.6 mb in May (stock changes are reported in percentage terms). Crude oil holdings surged by 4.8% (10.0 mb), their largest monthly gain since June 2012, after refinery runs dropped by over 100 kb/d. Following this fall in refinery activity, product stocks drew by a combined 4.5% (6.4 mb). Gasoil (-8.9% or 6.5 mb) posted its third consecutive monthly fall. Gasoil inventories have now declined by an equivalent 16.8 mb since end-February. Kerosene also posted a fall of 1.9% (0.2 mb) while gasoline inched up by 0.6 % (0.4 mb).



Data from International Enterprise pertaining to the land-based storage of refined products in Singapore indicate that following monthly draws for all products, levels declined by 2.7 mb by end-June to sit below both last year and the five-year average. Following a 1.5 mb draw, middle distillates hit an 18-month low by end-month, reportedly after a refinery outage in Malaysia lifted exports to that country. Meanwhile residual fuel oil stocks, which had been building over the previous couple of months, nosedived over the last two weeks of June following high demand in the region as prices fell.



Prices

Summary

  • Despite a bearish undertone in the market over lacklustre economic growth prospects, futures and spot markets were supported by developments unfolding in Egypt and supply-side issues going into the seasonally stronger third quarter. Futures markets edged moderately higher in June but posted stronger gains in early July, with Brent last trading at $108.30/bbl and WTI at $105.20/bbl.
  • The political upheaval in Egypt has brought the importance of the country as a key oil transit route back into focus two years after the 'Arab Spring' first swept through the country in January 2011. Although there has been no direct threat to either the Suez Canal or the 2.4 mb/d SUMED pipeline, global oil prices edged higher following the ousting of President Morsi by the army on 3 July.
  • Spot crude oil markets in June strengthened in the Atlantic basin but were marginally weaker in Asia. The WTI-Brent price spread narrowed to two and a half-year lows in early July, falling to around $3/bbl at writing compared with a February 2013 peak of $23.18/bbl. The steady attrition in WTI's discount to Brent partly reflects new pipeline capacity moving crude from the landlocked US Midcontinent, which has provided a relief valve for the bottlenecked region.
  • Freight rates on all benchmark routes for crude carriers soften as the bloated fleet again weighed heavy on the market in June but by early-July rates out of the Middle East had begun to surge following unrest in Egypt and an upsurge in Asian demand that quickly tightened tonnage lists.


Market Overview

Futures markets edged moderately higher in June but posted stronger gains in early July, spurred on by supply outages in several OPEC producing countries as well as political unrest in Egypt. Despite a bearish undertone in the market over lacklustre economic growth prospects, futures and spot markets were supported by geopolitical developments and supply-side issues. Benchmark WTI posted the strongest monthly gains in June, up $1/bbl to an average $95.80/bbl. By contrast, Brent futures were up by just $0.06/bbl to $103.34/bbl in June. By early July, however, futures prices rose a further $5-9/bbl, with Brent last trading at $108.30/bbl and WTI at $105.20/bbl.

More than two years after the 'Arab Spring' first swept through Egypt, global oil markets were once again focussed on supply flows through the Suez Canal and SUMED pipeline following mass protests against Egyptian President Mohamed Morsi leading to his ouster by the Army on 3 July. To date, there has been no direct threat to either the Suez Canal or the 2.4 mb/d SUMED pipeline, yet oil prices briefly rose on market concern about any potential disruption. Although a hypothetical disruption to one or both of these routes would undoubtedly unsettle markets, it would not altogether take supply off the market since the oil could presumably be rerouted via the Horn of Africa, adding an extra 15 days to a voyage from the Arabian Gulf to Europe (see 'Choke Points in Egypt Back In Focus').

While fears of supply disruptions in the wake of the Egypt crisis rattled markets, civil unrest and militia activity in Libya, Nigeria and Iraq, which combined took around 400 kb/d off the market in June, helped prop up North Sea prices. The end of refinery turnarounds in the US and Asia has also led to an increase in demand for crude. Global refinery throughputs are forecast to rise by a steep 2.3 mb/d between 2Q13 and 3Q13, with Chinese refiners expected to step up buying after a heavy maintenance season.

Nettlesome macroeconomic indicators are making headlines but oil and financial markets nonetheless remain buoyant. Even after the IMF cut the global growth forecast to 3.1% on 9 July from its earlier estimate of 3.3%, stock markets continued to show signs of strength, with the S&P 500 in early July breaching the 1 650 resistance found back in mid-June.



In keeping with this cloudy outlook, current geopolitical and supply issues are boosting prompt months relative to outer months. The WTI futures curve moved into steep backwardation as new transport routes relieved downward price pressure in the Midcontinent. The forward M1-M12 prices spread nearly doubled to $8.35/bbl in early July from about $4.40/bbl in June. The Brent M1-12 contract spread widened to $5.20/bl in early July compared with $3.68/bbl in June.



Futures Markets

Activity Levels

NYMEX hedge funds took a longer stance in their net-long positions, up 20% over the period to reach levels unseen since May 2011, on the back of bullish WTI. Other "non-reportable" market participants turned their positions to net long in the past two weeks. Across the Atlantic, there was not much activity on the Brent front, consequent to the North Sea benchmark trading in a narrow $5-$6/bbl range since April, hovering around $103/bbl in June and reaching the $108/bbl mark only in the second week of July, not captured yet by CFTC data.

On the products side, as ICE Gasoil futures prices rebounded in June, hedge funds turned bullish, going from net short wagers to net long, while producers cautiously increased their short exposure. Following the drop of RBOB to under $2.75 per gallon, NYMEX hedge funds cut their net-long positions by a staggering 41% week-on-week at end June. The cut more than offset the gains in the first half of the month, resulting in an overall monthly reduction of 25%.



Between 28 May and 2 July, as prices surged and WTI climbed back over $100/bbl, open interest in ICE Brent futures grew slightly more than in NYMEX WTI, posting a 31.7% year-on-year growth versus 23.5%. On a monthly basis, WTI grew faster than Brent but dropped 2.2% in the last week, halting its overall month-on-month growth to 1.4%, versus 2.9% for ICE Brent. As a result, the spread between the two benchmarks slightly narrowed over the period.

Trading volumes in futures contracts saw a trend reversal from previous months. As London ICE Brent volumes plunged by 23% y-o-y and NYMEX WTI volumes gained momentum, the latter overtook the former for the first time since April 2012. This happened only a few months after that Brent had surpassed WTI also in terms of global volumes (i.e., considering both sides of the Atlantic) for the first time historically in April and March 2013, marking the recovery of the Cushing-based benchmark.







Financial Regulation

On 4 June, the US Commodities Futures Trading Commission (CFTC) granted no-action exemptions from swaps central clearing obligation to financial entities that hedge on behalf of non-financial firms, in fact extending the so-called "end-user exception" to firms that outsource their commercial hedging.

On 14 June, the European Commission pushed push back its 15 June deadline for the European Securities and Markets Authority (ESMA) to decide whether third-country derivatives rules are to be considered equivalent to the EU ones. The new deadline for Japanese and US regimes is now 1 September and 1 October for other third-countries.

On 19 June, the CFTC released 19 other no-action letters. Those letters provide temporary exemptions on many swaps rules for swap execution facilities (SEF), regarding portfolio reconciliation, annual reporting and the fingerprinting of non-US persons for background checks.

On 12 July, the CFTC will meet to vote on its Cross Border Final Guidance for swaps regulations, determining how its new rules will apply to foreign firms seeking to do business in the US. The same day, an open meeting will be held both on the substance of the rules and the phasing-in of the compliance. The US regulator has been under pressure from the EU and other foreign regulators to extend the 12 July deadline to enforce its cross-border rules, as the exemption for non-US entities will expire.

Federal Reserve Chairman Bernanke said the Volcker rule will likely be completed by the end of the year. The rule aims to restrict US banks from making certain kinds of speculative proprietary trading investments deemed not to be "in the best interest of their clients".

Spot Crude Oil Prices

Spot crude oil markets in June strengthened in the Atlantic basin but were marginally weaker for Middle East grades in Asia. WTI was up just over $1/bbl to around $95.80/bbl, outpacing Brent month-on-month as US refiners ramped up throughput rates. North Sea Dated rose by a smaller $0.45/bbl to $102.95/bbl, bolstered by seasonal field maintenance work and lower availabilities of Russian Urals, Libyan grades and Iraqi Kirkuk in European markets. Spot Dubai prices posted a modest decline in line with increased supplies of African and Mideast crudes in Asia, with prices off $0.06/bbl to around $100.30/bbl in June.



The WTI-Brent price spread narrowed to two and a half-year lows in early July, falling to just under $3/bbl at writing compared with a February 2013 peak of $23.18/bbl. The relative strength of WTI to North Sea Dated Brent helped narrow further the price differential between the two benchmarks in June and early July but the trend had already started gaining traction at the start of the year with the inauguration of the Seaway pipeline. The WTI-Brent spread has steadily declined from around $21.05/bbl in February, $15.55/bbl in March, $9.90/bbl in April, $7.75/bbl in May and to around $7.15/bbl on average in June.

The steady erosion in WTI's discount to Brent partly reflects the ramp up in new pipeline capacity moving crude from the NYMEX's delivery point at Cushing, Oklahoma, which has provided a long-awaited relief valve for the bottlenecked region. Reversal of pipelines in West Texas towards the Gulf Coast region has also alleviated the downward price pressure on WTI. Markets also received a fillip from large crude stock drawdowns as refiners ramped up runs. The WTI M1-M2 price spread narrowed to $0.13/bbl in June compared with $0.23/bbl in May and $0.31/bbl in April. Meanwhile, flooding in Alberta disrupted shipments of Canadian crude to the US Midwest, which helped strengthen prompt spot prices.

North Sea crudes were also well supported in European markets, particularly in early July in the wake of the turmoil in Egyptian and fears of supply disruptions to Suez oil flows. There has been no direct threat to either the Suez Canal or the 2.4 mb/d SUMED pipeline, however, following the regime change on 3 July (see 'Choke Points in Egypt Back in Focus'.) Spot prices for Brent were buoyed by scheduled summer maintenance work in the North Sea. North Sea supplies, which underpin the Brent market, are expected to reach seasonal lows in August.

The cutback in supplies of Libyan and Iraqi crudes due to civil unrest and sabotage has had a more pronounced affect on spot markets in Europe. Libyan crude exports have plummeted in recent months due to workers protests shutting in oil fields and port facilities. Production has tumbled from around 1.38 mb/d in April to just 1.15 mb/d in June. The Urals-Es Sider price spread changed tack in early June, with the former trading at a premium in the Mediterranean once a again, at around $1/bbl in early July compared with $0.15/bbl on average in June, -$0.20/bbl in May and $0.50/bbl in April.



Spot prices for Urals crude have reached record highs as refiners paid top dollar against Dated Brent on sharply lower Russian crude exports as domestic refiners ramped up units after maintenance. Urals crude posted a premium to Brent by as much as $0.80/bbl cents per barrel in early July compared to a more normal discount against Dated Brent, which averaged -$0.20/bbl in June and -$0.40/bbl in April. In addition to increased domestic refinery runs, exports to China jumped, which combined, pushed Russia exports to Europe to exceptionally low levels. 

Increased supplies of Middle East grades saw Dubai's discount to Brent widen to an exceptionally weak $4.65/bbl in the first week of July compared with $2.66/bbl in June and $2.16/bbl in May. The Dubai M1-M2 price spread, however, hovered in a narrow range on expectations of stronger refiner demand from Asian buyers in the third quarter. The Dubai M1-M2 averaged $0.37/bbl in May versus $0.69/bbl in April.

Choke Points in Egypt Back in Focus


Recent political upheaval in Egypt has brought the country's importance as a key oil transit route back into focus two years after the 'Arab Spring' first swept through the country in January 2011. Although there has been no direct threat to either the Suez Canal or the 2.4 mb/d SUMED pipeline, global oil prices edged higher following the ousting of President Morsi by the army on 3 July, thus underscoring market concern about any potential disruption. Market perception is that the Suez Canal is more susceptible to disruption than the SUMED pipeline due to its proximity to the major cities of Suez and Port Said, whereas for the majority of its length the SUMED runs through sparsely inhabited areas.

Official data for 2011 (the last full year for which final data are available) indicate that on average 3.8 mb/d of crude and products transited Egypt in either direction via the Suez Canal and the SUMED pipeline. The vast majority (80% or 3.1 mb/d) of this oil was shipped northbound, using both routes from the Red Sea to the Mediterranean. However, southbound trade is exclusively via the Suez Canal and amounted to 780 kb/d in 2011. It should also be noted that the 200 mile long SUMED pipeline solely carries crude from Ain Sukhna on the Red Sea to Sidi Kerir on the Mediterranean.

Most northbound crude (1.7 mb/d) flows via the SUMED with only 540 kb/d carried through the Suez Canal. However, data suggest that Middle Eastern crude producers, notably Saudi Arabia and Iraq, send cargoes via the SUMED and Suez Canal depending on the size of vessel transporting them.

According to provisional vessel tracking data for 2012, Saudi Arabia and Iraq accounted for 60% and 34% of flows through the SUMED. Northbound flows through the Suez were far more diverse although the bulk of transiting vessels carried products loaded in India (260 kb/d) or crude loaded in Iraq (120 kb/d). It is notable that Iranian oil was recently barred from the SUMED with deliveries to Turkey (~100 kb/d) now confined to the Suez Canal.

Southbound crude flows in 2012 largely originated from Libya (240 kb/d) and Azerbaijan (110 kb/d), although a small number of cargoes were loaded in Russia, the UK, Syria and Mexico. Meanwhile, the origins of refined products included the Netherlands (130 kb/d) and the FSU (130 kb/d).

Destinations of the crude and products were diverse, with most northbound flows remaining in the Mediterranean Basin while China, India, Singapore and Korea imported a large proportion of southbound flows.

These data highlight the importance of Egypt to the global oil trade. Although a hypothetical disruption to one or both of these routes would undoubtedly unsettle markets, it would not altogether take supply off the market, since the oil could be rerouted via the Horn of Africa, adding an extra 15 days to a voyage from the Arabian Gulf to Europe. Moreover, if only traffic in the Suez Canal were to be disrupted, the SUMED pipeline is estimated to currently have approximately 0.9 mb/d of spare capacity.

Spot Product Prices

Spot product markets diverged in June. Average monthly gasoline crack spreads were lower in the Atlantic basin but surged in Asia. The crack spreads for middle distillates and naphtha as well as low-sulphur fuel oil rose in June in all major markets, unlike that of high-sulphur fuel oil.

Gasoline crack spreads fell in Europe and the US. The average US gasoline crack spreads in June were down after spiking in May. Supply problems at Chicago area refiners eased, causing gasoline prices to fall back to April levels. ExxonMobil's 240 kb/d Joliet, Illinois refinery restarted in mid-June. In Europe crack spreads decreased due to weak demand for export to the US. In Asia, firm demand for gasoline and reduced stocks resulted in a relatively high rise in the crack spreads.



Naphtha crack spreads rose in Europe and Asia. Petrochemical producers continued to prefer feeding naphtha to LPG, because the prices of the latter were relatively high. Normally, European petrochemical producers tend to switch to LPG in the summer time, but this year the LPG price is firm due to low refinery runs.

Middle distillates markets were strong across the board. Gasoil crack spreads were firm in June. In Europe, supplies were tight due to reduced import from the US and Middle East and flood in the river Rhine area, amid seasonally strong demand. In the Middle East, seasonal diesel demand for power generation increased. Also, Chile imported increased volumes of diesel after the drought limited hydropower generation.



Jet/Kero crack spreads rose in all the regions. In Europe, congestion after the flood in the river Rhine, as well as low refinery runs and decreased imports limited supply. In the US, jet fuel stock decrease in the midcontinent pushed the spreads, though the refiners were maximising jet fuels supply to avoid biofuel mandate cost. In Asia, export demand to the US west coast offset the soft demand from China.

Fuel oil crack spreads were mixed according to the sulphur contents. Low-sulphur fuel oil crack spreads rose in contrast to high-sulphur fuel oil. In Singapore, fuel oil stocks rose, implying low demand for bunker fuels. In anecdotal reports, the demand for the low viscosity high sulphur fuel oil (180 cst) in Singapore was strong as blenders are preparing for the import of high viscosity fuels in the summer.





Freight

June saw freight rates on all benchmark routes for crude carriers soften as the bloated fleet again weighed heavy on the market. Notably, rates on the VLCC Middle East Gulf - Asia trade sank steadily from $13/mt at end-May to under $10/mt by end-June. However, by early-July rates for routes out of the Middle East had begun to surge following unrest in Egypt and an upsurge in Asian demand that quickly tightened tonnage lists.

Suezmax markets similarly suffered in June as demand waned and tonnage built. Rates on the benchmark West Africa - US Gulf coast route have retreated steadily from early-May onwards as the US has continued to decrease its imports of light, sweet grades from the region. By early-June the rate stood below $12/mt, its lowest since early-2011. However, that rate surged in early-July on the back of the Egyptian unrest and uncertainty over the Suez Canal (see 'Choke Points in Egypt Back in Focus') which also boosted rates for carriers moving FSU crudes from the Black Sea.



A similarly weak picture was evident across product tanker markets as rates softened steadily throughout June. Notably, the transatlantic gasoline trade continues to underwhelm with rates on the UK - US Atlantic route having sunk steadily since early-May to now stand below $18.50/mt, their lowest level this year. These low rates reportedly resulted after volumes traded fell as the arbitrage window narrowed with a ready supply of vessels continuing to weigh heavy. On the other hand, not all trade in the Atlantic Basin has suffered, as rates on the Caribbean - US Atlantic Coast trade firmed gradually so that by end-June exceeded $16.50/mt, their highest this year. This pattern has followed healthy US product exports to Latin America. Meanwhile, in the east, all benchmark rates have been pressured lower by a lack of tanker demand and lengthy tonnage lists.

Refining

Summary

  • Global crude throughputs are expected to ramp up seasonally by a steeper-than-normal 2.3 mb/d from 2Q13 to 3Q13, in line with previous forecasts. Non-OECD growth drives the increase, including 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 y-o-y. The major drivers of incremental growth include China (+480 kb/d), Africa (+430 kb/d), India (+150 kb/d), Russia (+110 kb/d), and Saudi Arabia (+90 kb/d). Growth for 3Q13 is partially offset by declining OECD runs, which are expected to be 510 kb/d lower y-o-y.
  • The estimate of OECD throughputs for 2Q13 is almost unchanged from last month's Report, at 36.3 mb/d, despite large but mutually offsetting regional revisions. Throughputs in OECD Asia were estimated to be 220 kb/d lower than previously expected, while new data raised OECD Americas estimates by 150 kb/d. OECD Europe saw a more modest 40 kb/d upward revision.
  • The estimate of non-OECD throughputs for 2Q13 is also roughly unchanged at 38.4 mb/d. Minor upward revisions to the FSU, Latin America and Africa provided a counterweight to an Asian market that struggled with outages in May and June.

Global Refinery Overview

Global crude oil throughputs are estimated to have averaged 74.7 mb/d during 2Q13, unchanged from last month's Report but down by 1.3 mb/d from 4Q12 throughputs. Although the aggregate quarterly figure is broadly unadjusted, there were sizeable but mutually offsetting regional revisions centred mostly in OECD economies. In OECD Asia, heavy refinery maintenance in Japan and South Korea dragged on into May after peaking in April and delayed the expected seasonal increase in crude runs, slashing regional estimates. South Korea was hit particularly hard by turnarounds. On the other hand, estimates for North America were revised upwards, as May and June data for Canada and the United States came in above preliminary assessments. On the non-OECD front, changes were more subdued. Chinese plant maintenance kept a lid on runs in June, adding to the list of downward Asian revisions, but offsetting stronger-than-expected data from Russia.



All told, sluggish 2Q13 throughputs continued to set the stage for a steep 3Q13 seasonal ramp-up, consistent with earlier projections. Forecast global throughputs for 3Q13 were also unchanged from our June Report at 77.0 mb/d, leaving the q-o-q increase at 2.3 mb/d - an unusually steep jump that reflects both continued expansion in non-OCED refining capacity to keep up with emerging market demand, and a low Q2 base. While the latter caused OECD Asia Oceania product stocks to post steep, counter-seasonal draws in April and May, significantly higher crude throughputs are expected to help rebuild product stocks in 3Q13.

Refinery outages in Asia in 2Q13, both OECD and non-OECD, lifted Singapore margins somewhat in June after they had failed to respond to lower production in April and May. In June, margins at complex Asian refineries registered the biggest increase among the set of margins tracked by IEA/KBC. Despite downward revisions to our Chinese throughput forecast, relatively subdued domestic demand led Chinese refiners to export more products into Asian markets recently, partly offsetting the margin lift from major outages in South Korea, Japan and India in 2Q13. Additionally, margins at less complex refineries remain weak, as Atlantic Basin naphtha supplies continue to make their way to Asian markets.



North American margins were a mixed bag in June. The biggest change was in the US Midcontinent where rising crude oil prices and falling gasoline markets slashed margins. WTI's discount to Brent narrowed to its lowest level in more than two years. At the same time, an earlier spate of refinery outages in the Midwest market eased. Large facilities such as BP's Whiting refinery and ExxonMobil's Joliet plant began to ramp up, which helped raise runs in PADD 2 by nearly 400 kb/d from late May through late June.



In Europe, margins in the Mediterranean continue to outpace those in the Northern refining hubs. Whereas the latter have been hard hit by declining domestic demand, Mediterranean refiners have been able to rely on export markets, notably in North Africa. Turkish diesel demand also has supported the market in the Eastern Mediterranean. Urals margins were the weakest in Europe for June, as higher Russian refinery runs and more Russian crude exports to Asia kept a lid on Urals shipments to Europe, lifting Urals prices versus Brent.



OECD Refinery Throughput

OECD refinery crude throughputs averaged 36.3 mb/d for 2Q13, with a projected 0.9 mb/d increase to 37.2 mb/d for 3Q13, all unchanged from the June Report. Despite the seasonal increase, y-o-y declines in throughputs remain a hallmark of the OECD forecast with 2Q13 and 3Q13 throughputs running 270 kb/d and 510 kb/d below same quarter 2012 levels, respectively.  

Crude runs in the OECD Americas region are estimated at 18.4 mb/d for 2Q13, 150 kb/d higher than last Report's number. Bucking the general trend of declining OECD runs, 2Q13 runs in the Americas increased by 200 kb/d on the year as discounted Midcontinent crude prices lifted US and Canadian utilisation rates. Runs are expected to increase further by 140 kb/d to 18.5 mb/d in 3Q13, in step with seasonal trends.

Both US and Canadian estimates for 2Q13 were revised upwards. The ramp-up in crude throughputs in the June US weekly data was much sharper than expected, driven by a relatively quick normalisation of market dislocations in the Midwest following the return of ExxonMobil Joliet and BP's Whiting facilities. Whiting had been running at low rates for more than two years during the installation of a new coker to increase the plant's ability to process heavy Canadian crudes. With that plant now fully back online at a distillation capacity of 405 kb/d, it should further reduce the need to move product north from the US Gulf Coast. In the short term, it should also help drain Cushing barrels somewhat; the plant will run light sweet crude until the coker is fully up and running, likely later this year, at which point it will significantly increase its processing of heavy crude from Canada. Meanwhile, US Gulf Coast runs have surged with the winding down of the maintenance season. With the US Gulf Coast refining complex now in full swing, the impact of Motiva's Port Arthur expansion is evident, as Gulf Coast refiners ran a record high 8.5 mb/d of crude oil for the week ending 28 June.



In Canada, monthly throughput data for May came in significantly higher than the weekly estimates, driving a 300 kb/d upward revision for the month. As Canadian refiners source more discounted landlocked crudes, both domestic and from the US, they have pushed runs in 1H2013 about 90 kb/d above 1H12 levels. However, Atlantic Basin market pressures are still evident, as Imperial Oil announced it would be closing its 88 kb/d Dartmouth, Nova Scotia refinery by year's end.

In OECD Europe, crude throughputs are expected to have averaged 11.7 mb/d in 2Q13 and are forecast to increase to 12.1 mb/d in 3Q13, equating to y-o-y declines of 140 kb/d and 510 kb/d, respectively. Throughput expectations for both 2Q13 and 3Q13 are unchanged from the June Report. Notwithstanding the steady rationalisation of the European refining industry, there have been bright spots. Most notable among these have been Spain and Greece, which have seen throughputs sustained by demand in the southern and eastern Mediterranean.



A Club Med Vacation for Southern Europe's Refiners?

Refining operations throughout Europe have felt the pinch of market forces in recent years. Declining demand and competition from abroad have prompted 1.7 mb/d of capacity rationalisation since 2008. On the back of this shuttered capacity, OECD Europe refining throughputs have fallen to historical lows, averaging 11.6 mb/d from January-May 2013, the lowest for that time of year since 1989. Increasing oil efficiency combined with sluggish economic growth in major Eurozone markets has cut demand for oil products to a two decade low. While economic growth has been missing recently in most of Europe, contraction has been particularly acute in southern European countries, such as Greece, Spain and Italy.

Yet not all is doom and gloom in the European refining sector. Some of the hardest hit economies have seen their refining sectors hold up relatively well. In the last three years, major European refiners in the Mediterranean basin, particularly in Spain and Greece, have seen a surprising revival in refining throughputs, bucking the trend in domestic oil demand. From 1Q10 to 1Q13, total throughputs for Europe fell by 4% (510 kb/d) while Spanish runs grew by 18% (180 kb/d) and Greek throughputs increased by 6% (20 kb/d).

In Greece, the rebound in production has largely gone to satisfy demand from its eastern Mediterranean neighbour Turkey, where refining capacity has been unable to meet rising gasoil demand. Unlike its southern European counterparts, Turkish GDP has been growing by 3-4% y-o-y since 2011; this robust economic growth has in turn spurred gasoil demand, which grew 16% (40 kb/d) from 1Q10 through 1Q13. Turkey has not seen any refinery expansions during that period, significantly upping its gasoil import requirements. Turkish gasoil imports have increased from a 1Q10 average of 170 kb/d to 200 kb/d in 1Q13. Most of this incremental supply has come from Greece.

Spain's story is more complex and reflects an internal restructuring of the European refining market. Unlike other refiners that responded to falling margins by closing down their simple refineries in recent years, Repsol has invested in upgrading capacity to increase competitiveness. For example, in 2011 it added upgrading capacity at its Cartagena and Bilbao refineries. As a result, in recent years Spanish exporters have begun to supply other European markets beset by refinery rationalisation. Chief among Spain's new export markets are France and Italy, where overcapacity and flagging competitiveness have led to some of the largest cuts in refining capacity in Europe. Spanish exports of gasoil to France and Italy have risen in the last two years by 20 kb/d and 40 kb/d, respectively, representing 10% of total gasoil imports in France and 71% in Italy. That Spanish refiners like Repsol have been able to weather the downturn by adding heavier crude processing capacity shows investment can still make a difference in Europe's refining sector.

Even as Spain has been increasing gasoil exports to Italy, Italian refiners have been sending more gasoline to North Africa. While Italian capacity and domestic demand have been one of the hardest hit in Europe, refiners in the country have been partly supported by demand across the Mediterranean. Persistent refinery outages and insufficient capacity in North Africa have combined with growing consumption to increase import demand, especially for gasoline. During the 2008-10 period, Libyan refineries ran an average of about 350 kb/d of crude oil. Since the onset of the Libyan Civil War, runs have been averaging about 110 kb/d, and the country has ramped up gasoline imports from Italy by an average of more than 30 kb/d (50 kb/d in some months) to help make up for the supply gap. Algeria has also suffered a major temporary cutback in refining capacity due to upgrades at the country's largest refinery. The country's demand for gasoline has grown by 50% between 1Q10 and 1Q13, while refining throughput has fallen by 35% over the same period. Like Italy, albeit to a lesser extent, Spain has also sent gasoline across the Mediterranean to meet Algerian demand. The extent to which export demand will continue to buoy runs varies by country. The increase in North African import demand that has been supporting Italy's refiners may not be sustainable. The return to full operation of Sonatrach's 335 kb/d Skikda refinery in Algeria during 2Q13 will significantly reduce Algeria's import needs, much of which had been supplied by Italy. Likewise, after a bumpy road to





OECD Asia Oceania refinery throughputs are estimated at 6.2 mb/d for 2Q13, a 330 kb/d y-o-y decline and 220 kb/d lower than in the previous Report. The downgrade to the forecast reflects May data from South Korea and Japan that pegged actual runs well below projections. May runs in Asia sagged, as refinery maintenance projects dragged on longer than expected. South Korea, the source of the largest revision in May, saw almost 20% of its distillation capacity in turnaround during April, and much of this maintenance appears to have spilled over into May. Outages at plants including Hyundai Oilbank Daesan, S-Oil Ulsan, and SK Ulsan, contributed to the lower South Korean throughput numbers. In Japan, additional to a sizable list of May closures expected in the previous Report, Tonen General took down their Sakai refinery from May until late June.



The heavy maintenance appeared to be clearing up as 2Q13 wound to a close, and OECD Asia crude throughputs are slated to rebound in 3Q13 to 6.6 mb/d. That number is 150 kb/d less than in 3Q12, highlighting the challenging environment these refiners face from expanding non-OECD Asian capacity.

Non-OECD Refinery Throughput

The non-OECD crude throughput estimates for 2Q13 and 3Q13 are mostly unchanged from the June Report, at 38.4 mb/d and 39.7 mb/d, respectively. Changes to the non-OECD forecast for 2Q13 were largely offsetting, with downward revisions for China, where maintenance kept a lid on runs in June, balancing stronger-than-expected Russian readings for that month. In terms of growth, 2Q13 runs represent an increase of 630 kb/d y-o-y, and 3Q13 a hefty 1.7 mb/d gain, supported by expansions in Saudi Arabia and China and a return to service of Algeria's large Skikda plant.

China saw its 2Q13 forecast cut by 120 kb/d, with runs now averaging an anticipated 9.2 mb/d. Despite the downgrade, y-o-y growth is still robust, at 290 kb/d. Increased maintenance expectations for June account for most of the cut. Notably, WEPEC's 200 kb/d Dalian refinery went into turnaround in mid-June and is not expected back online until mid-to-late July. Additionally, last month's Report assumed work on units at Sinopec's 270 kb/d Guangzhou refinery would wrap up in early June, but portions of the plant remained down most of the month. Domestic demand in China has hit a relative soft patch in 1H13, but refiners only responded with modest run cuts, lifting product exports to neighbouring Asian markets instead. 

Moving into 3Q13, Chinese refiners are projected to push runs to almost 9.6 mb/d, representing y-o-y growth of 490 kb/d. Growth versus last year continues to be driven by the commissioning of Sinopec's Maoming refinery last November.



India, the biggest piece of the 'Other Asia' group, has seen fairly sluggish throughputs during 2Q13. Final May data from the Indian government came in 210 kb/d under forecast. An increase to the outage forecast chopped another 80 kb/d off June estimates bringing the total 2Q13 number to 4.4 mb/d. Indian runs for 3Q13 are forecast at 4.5 mb/d, 50 kb/d lower than in the June Report. Growth in runs at India's refineries has slowed somewhat from late 2012 and early 2013 and is now pegged at 90 kb/d y-o-y for 2Q13 and 150 kb/d for 3Q13. India was hit with fairly widespread outages in 2Q13, including a fire at HPCL's Visakhapatnum plant that kept the facility down from late May through much of June. Further, a planned outage at Indian Oil Corporation Limited's Mathura plant running from late August through mid October is helping temper the 3Q13 forecast.

Downgrades to India's forecast were countered by stronger throughputs data coming out Singapore and Thailand. Singapore saw 2Q13 estimates raised by 100 kb/d, as work slated for April and May at Shell's Bukom refinery did not dent runs to the extent expected. Meanwhile, Thailand saw an upward revision of 70 kb/d for April, as incoming government data beat estimates from last month's Report. In total, non-OECD Other Asia refineries are expected to have run 9.5 mb/d of crude in 2Q13, stepping up to 9.7 mb/d in 3Q13. These represent y-o-y increases of 170 kb/d and 390 kb/d, respectively.



Crude throughputs in Russia surprised to the upside in June, with government data coming in above 5.6 mb/d, just under the post-Soviet high set in November 2012. The June reading was 150 kb/d above expectations. Russian refiners have been running at historically high levels in 1H13, averaging 130 kb/d above year-ago levels. These runs have been supported by investment at Russian refineries to maximise distillate production, following changes to the export tax regime that incentivised diesel exports at the expense of other products. Indeed, Russian exports of distillate fuel to OECD Europe were up 37% y-o-y through April. Overall, higher Russian data is driving robust growth in the total FSU forecast. Throughputs in the FSU are expected to increase to 6.8 mb/d in 3Q13 from 6.6 mb/d in 2Q13, y-o-y growth of 240 kb/d and 190 kb/d, respectively.   



The Middle East is one of the main drivers of the 3Q13 surge in throughputs. There were no major changes to the Middle East forecast this month. Runs during 2Q13 were lacklustre, setting the stage for strong growth through the summer. A heavy maintenance schedule in Saudi Arabia was the main factor behind slowing runs in the region. Work in April at Aramco's Yanbu refinery on the Red Sea took longer than anticipated, leaving April's JODI estimate for Saudi Arabia below expectations. However, lighter than expected turnarounds in Kuwait left the 2Q13 throughput number unchanged from the June Report at 5.7 mb/d, 110 kb/d below 2Q12 levels. Runs are slated to ramp up to 6.1 mb/d in Q313, returning the region to y-o-y growth. Almost all of that lift comes from Saudi Arabia, as Satorp, the Aramco-Total joint venture, commences operations at the first phase of its 400 kb/d Jubail refinery. The refinery is expected to hit full capacity as phase two comes online by the end of 2013.



Latin America's forecast saw very modest upward revisions of 50 kb/d for both 2Q13 and 3Q13. The region's refineries are estimated to have run 4.6 mb/d of crude oil in 2Q13, and that number is expected to increase to 4.8 mb/d in 3Q13. The modest revisions come as there have been no setbacks to date in the progress of Venezuela's Amuay plant following the major fire in August 2012. As noted in previous Reports, however, information on the status of Venezuela's refineries is murky, and the potential for setbacks in a sector that has suffered from chronic underinvestment remains. Brazilian runs have also provided support to Latin America's throughputs, as incoming May data beat previous estimates. In addition to Venezuela and Brazil, Latin American crude runs will get a boost moving into 3Q13 from YPF's La Plata refinery in Argentina and PdVSA's Curacao plant, both of which returned to service in June after being down for much of 2Q13.



Crude oil throughputs in Africa during 2Q13 are expected to have averaged just under 2.3 mb/d and are expected to ramp up by 60 kb/d to just over 2.3 mb/d in 3Q13. These represent slight upward revisions from the previous Report. Y-o-y growth in African crude runs was flat during the first half of the year. However, throughputs in 3Q13 are expected to be 430 kb/d higher than 3Q12. This owes mostly to Algeria, where work at the country's largest refinery, 335 kb/d Sonatrach Skikda, has depressed throughputs for much of the last year. With the gradual return of Skikda during 2Q13, Algerian crude runs are set for a large y-o-y increase.