Oil Market Report: 09 August 2013

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  • WTI futures hit 16-month highs in July, narrowing the gap with Brent, amid surging US refining runs and crude draws. The benchmark gained $8.90/bbl m-o-m, to $104.70/bbl. Brent rose $4.09/bbl to $107.43/bbl, a four-month high, on supply outages in Libya and Iraq. WTI was last trading around $103.50/bbl and Brent at $106.70/bbl.
  • Global oil demand growth is expected to accelerate in 2014 to 1.1 mb/d, compared with 0.9 mb/d in 2013. The forecast of demand growth for 2014 has been trimmed by 0.1 mb/d on reduced GDP expectations from the IMF, while that for 2013 is largely unchanged.
  • Global supply is estimated to have increased by 575 kb/d m-o-m in July, to 91.85 mb/d, led by higher non-OPEC production. Strong growth in North America is expected to lift 2H13 total non-OPEC supply by an average 1.4 mb/d y-o-y, to reach 55.4 mb/d in 4Q13.
  • OPEC crude oil supplies edged down by 165 kb/d m-o-m in July, to 30.41 mb/d, on supply disruptions in Libya and Iraq and despite higher Saudi output. The 'call on OPEC crude and stock change' for 3Q13 was revised upwards by 200 kb/d, to 30 mb/d, on higher demand projections for the quarter.
  • Global refinery crude demand surged by 3.1 mb/d in June, its highest monthly increase on record, and likely rose further in July, ahead of autumn maintenance. At 77.2 mb/d, June runs were almost 2.0 mb/d above year-earlier levels. Global runs were pegged at 74.8 mb/d for 2Q13, rising to 77.3 mb/d in 3Q13.
  • OECD industry inventories built seasonally by 11.9 mb in June, to 2 663 mb. Steep gains of 33.6 mb in product inventories led the increase, offsetting large crude draws. Refined product stocks covered 30.5 days of forward demand at end-June, up 0.8 day on the month.

Mugged by reality

Widespread expectations of loosening oil market fundamentals in the medium term stand in contrast with today's tighter but potentially transient conditions. Many commentators, recognising in the new North American supply a defining feature of tomorrow's market, are questioning its implications for the future of OPEC. The producer group, they argue, ineluctably faces the test of having to rein in supply and accommodate rising volumes of shale oil - unless falling prices curb shale oil production first. Right now, though, OPEC's main challenge seems to be less future demand softness than practical difficulties in bringing production to market. OPEC output last month was down 1.1 mb/d on the year for reasons that had very little to do with lack of demand or competition from North American supply, and everything to do with domestic developments in some member countries.

On the demand front too, there are signs of strength. Global refinery runs jumped by 3.1 mb/d in June, the highest monthly increase on record, extending those gains into July. From April to July, global throughputs soared by an estimated 5.1 mb/d, more than twice the five-year average. Meanwhile in the US, end-user demand swung back to growth in four of the last six months, compounding the impact of recent gains in product exports.

Current market conditions are not necessarily a precursor of future trends. Recent shifts in the futures curve seem to reflect market expectations of short-lived firmness. WTI crude futures at the NYMEX, long in contango, have slipped into deepening backwardation. On the ICE market, backwardation in Brent, having narrowed earlier to near-contango levels, has widened again. No one can predict how long MENA unrest may last. But refinery runs are likely to ratchet back down after this month: runs have risen faster than end-user demand, leading to exceptionally large and early builds in product inventories and reduced refining margins. A heavy maintenance schedule looms in the fall.

Recent developments nevertheless look set to overshadow the impact of revised non-OECD demand estimates for 2011 and prior years. This is the time of year when this Report takes in the IEA's annual Energy Statistics of Non-OECD Countries, better known as the 'Green Book', highlights of which are presented in the accompanying Annual Statistical Supplement. Despite significant adjustments in demand estimates for some countries, incorporating those data has only a marginal impact on OMR aggregate balances: a cut of just 0.1 mb/d to demand estimates for 2010 and no change at all for 2011.



  • Projections of global oil demand growth for 2013 and 2014 have been trimmed slightly following lower macroeconomic forecasts released by the International Monetary Fund (IMF) in July. The 2013 growth forecast has been marginally reduced by 30 kb/d to 895 kb/d, as the assumed pace of global GDP growth eases back to 3.1% from the IMF's April 3.3% forecast. Although oil demand growth remains forecast to pick up pace in 2014, the growth projection for that year has been cut to 1.1 mb/d, from 1.2 mb/d. The underlying economic growth trend in 2014, while still accelerating, is now two-tenths of a percentage point lower at 3.8%.
  • Signs of recovery in the US economy have been associated with rising oil consumption in recent months. US demand has grown y-o-y in four of the first six months of the year, raising the US growth forecast for 2013 as a whole to +0.3% (0.0% previously). US oil demand nonetheless is expected to edge down over the longer term.
  • The Japanese demand forecast for 2014 has been trimmed to reflect the increased likelihood the government will adopt a slightly more accommodative stance with regard to nuclear power. Demand for residual fuel oil and 'other products' (including crude oil used in the power sector) lead the revision.

  • The divergence in oil demand trends between the OECD and non-OECD regions has shown signs of abating recently, as growth in emerging-market and developing economies and contraction in mature economies have both slowed somewhat. Nevertheless, non-OECD economies continue to drive global oil demand growth throughout the forecast period, while OECD consumption trends downward. Non-OECD oil demand is now forecast to overtake that in the OECD in 3Q13.

Global Overview

New demand data from the 2013 edition of the IEA's annual Energy Statistics of Non-OECD Countries (the 'Green Book') have been incorporated, resulting in a net reduction of 0.1 mb/d to the 2010 estimate, to 88.3 mb/d. Demand estimates were revised upwards for a number of countries, including Qatar (+90 kb/d), China (+85 kb/d), Venezuela (+85 kb/d) and Singapore (+80 kb/d). In the case of India, however, adjustments to the Green Book data for the purpose of this Report resulted in a net downward revision of 255 kb/d, offsetting upward adjustments elsewhere and skewing the overall global demand adjustment to the downside. There were also other small-scale downward revisions, such as Saudi Arabia (-70 kb/d) and Syria (-45 kb/d). Although most of these changes simply reflect the detailed historical work undertaken by the IEA's Energy Data Centre, the large Indian reduction arose due to a reassessment of inputs/outputs from Reliance's Jamnagar facility. Green Book adjustments to historical Chinese demand were also handled conservatively, in a bid to better capture potential product stock builds and minimise prospective discontinuities arising from changes in methodology.

Estimates for 2011 were left unchanged on balance, as Green Book revisions offset each other, but this flat headline figure conceals a regional redistribution of demand growth which, when carried forward, led to upward adjustments to 2012 estimates of about 0.1 mb/d, to 89.9 mb/d. Broadly speaking, revisions to historical data have raised the baseline for the demand forecast by about 0.1 mb/d moving forward. On the other hand, the forecast of annual demand growth has been curtailed since last month's Report on the back of reduced expectations of macroeconomic growth. The International Monetary Fund (IMF) in July cut its global economic growth projections by 0.2 percentage point for both 2013 and 2014. Projections for 2013 now sit at 3.1% (3.3% in April's World Economic Outlook), and at 3.8% in 2014 (previously 4.0%). Accordingly the global oil consumption growth estimates have been reduced to 895 kb/d for 2013 (930 kb/d previously) and 1.1 mb/d in 2014 (1.2 mb/d before).

The now long-established bifurcated pattern of demand growth - up for emerging market and developing economies, down for OECD member countries - remains, but the split appears to have narrowed in recent quarters. Not only has non-OECD demand growth recently slowed, with 2Q13 estimates up just 2.7% y-o-y (well down on the previous five-year average of 3.6%), but so has the pace of OECD declines. OECD consumption inched down by a marginal 0.2% in 2Q13, versus the five-year average decline of 1.6%.

Top 10 Consumers


Delivery data for May closely tracked last month's forecast, with an average 18.6 mb/d of oil products delivered in the US50. This is down 0.8% on the year, broadly in line with the 12-month average. A contrast has emerged in recent months between products that closely track industrial activity, such as gasoil and LPG, which have shown rising demand, and others like fuel oil and gasoline, demand for which has been eroding.

Based upon the latest weekly releases from the US Energy Information Administration we have revised up our forecast of June demand by 235 kb/d, to 19.0 mb/d. With a y-o-y gain now demonstrated in June, this leaves four of the first six months of 2013 above their year earlier reading, marking the strongest sequence in US consumption data since 1Q11.

The latest weeklies suggest even stronger growth in July, but, if experience is any guide, that could stem at least in part from an understatement of exports. From January to May, for example, the discrepancy between the weekly demand numbers and the revised monthly data series varied between -0.7 mb/d and +0.5 mb/d. Weekly gasoline demand estimates for July look particularly robust. Although US gasoline demand traditionally increases during the US driving season (see 'Reports of the Demise of the US Driving Season Look Premature', OMR June 2013), the upward swing reported in the US weekly series exceeds expectations.

Feeding off the recent data flow, the IEA has raised its forecast of US demand growth for 2013 as a whole to 0.3% (0.0% previously). Despite this revision, which takes stock of the latest uptick in delivery patterns US demand remains projected to edge down over the medium term. Remarkably, while the US demand outlook for 2013 looks more upbeat, the IMF in its July World Economic Outlook has reduced its forecast of US GDP growth for 2014, to 2.7% from 3.0% in the April WEO. That adjustment, coupled with our own assessment of relatively high efficiency gains in 2014, bolsters the forecast of a 0.2% demand decline.


Despite recent signs of slowdown in the Chinese economy, last month's forecast of domestic demand growth for 2013 is roughly unchanged, at 3.7%. The baseline estimate has, however, been raised to reflect revisions to the historical timeline. Additionally the short-dated consumption trend has been surprisingly strong. In June, for example, apparent demand (defined as the sum of refinery output and net product imports, minus product inventory builds) rose to a six-month high of 10.3 mb/d. June's rising refinery runs appear to have more than offset the effect of slower economic growth. Manufacturing sentiment fell to an eleven-month low, according to HSBC/Markit's Manufacturing Purchasing Managers' Index, while the government cut its GDP growth target to 7.0% from 7.5% earlier.

Naphtha and jet/kerosene led June's upside momentum with y-o-y demand growth of 19.9% and 22.9%, respectively, although absolute growth spanned all main product categories bar LPG and gasoil. After growth of 3.7% in 2013, demand is projected to expand at more or less the same pace in 2014, to 10.5 mb/d, but the forecast is subject to significant downside risk.


Despite a recent uptick in economic activity, the Japanese demand forecast has been curtailed since last month's Report, reflecting surprisingly weak June data and expectations of a more accommodative stance on nuclear power. Figures for June showed product deliveries of 3.9 mb/d, nearly 0.2 mb/d less than in the previous edition of this Report. Although reports of very hot weather in July may offer some offset to the low June numbers, demand has generally been on a declining track. After a forecast drop of 3.8% in 2013, a further 2.6% contraction is projected for 2014 (to 4.4 mb/d), led by rapidly declining power sector demand. With the government now thought to be taking an increasingly supportive approach to returning nuclear capacities in 2014, the oil demand forecast has been reduced (-1.8% previously). The sharpest declines forecast in fuel oil and 'other product' demand.


India's transition from a slowdown in demand growth to actual declines has come as something of a surprise. As recently as 3Q12, consumption was still rising by about 6% y-o-y, but growth has since slowed to 2.9% in 4Q12 and 2.0% in 1Q13. Changes in the pace of demand growth for gasoil, the mainstay of Indian consumption, have driven the overall market shift, with gasoil demand contracting in June after growing by 10.8% in 3Q12. A combination of weak agricultural use, as abundant rainfall has curtailed the need for energy-intensive irrigation, and steadily declining price subsidies helps explain the downside trend. As already alluded to in the Global Overview, a downward adjustment of 255 kb/d was applied to baseline 2010 series, due to a reassessment of inputs/outputs from Reliance's Jamnagar facility. The forecast remains roughly unchanged, with growth of around 2.8% projected for 2013, accelerating to 3.4% in 2014 as the underlying economics are forecast to improve.


A sharp uptick in Russian consumption recently is chiefly attributable to robust gains in the fuel oil and 'other products' categories, both of which are closely linked to industrial and power-sector usage. With relatively supportive macroeconomic fundamentals expected to persist for Russia (the IMF predicting GDP growth of 3.3% in 2014), average annual demand growth of around 3.2% is forecast for 2013-2014. Transportation fuels, notably gasoline and jet/kerosene, likely providing the key upside support.


At roughly 3.1 mb/d in May, Brazilian oil demand came in just above the previous six-month trend and up by around 4.3% on the year earlier. Such a robust growth consumption pattern, which has emerged despite macroeconomic concerns, is largely attributable to vigorous domestic transport fuel demand, with gasoil/diesel up 5.9% and gasoline 4.4% higher. The estimate of baseline demand was marginally reduced, by 15 kb/d, to reflect the latest 'Green Book' data, with 'other products' accounting for most of the revision. Growth for 2013 as a whole is forecast to average around 3.6% before decelerating slightly in 2014 to 3.1% on increasingly efficient oil use.

Saudi Arabia

Following a recent slowdown in the pace of demand growth to just 2.2% y-o-y in May (3 mb/d), the forecast of Saudi demand expansion has been trimmed to an average of around 3.9%, 2013-2014, from the previous projection of 4.1% growth. Movements in the power sector towards natural gas, dampening oil use. Slowing government spending targets also act as a key restraining influence, with growth of just 2% forecast for 2013 according to the Middle East Economic Digest, possibly even falling in 2014. Such weak spending growth was almost inevitable following a prolonged period of double-digit gains.


Roughly 2.5 mb/d of oil products were delivered in Germany in May, which, when coupled with preliminary estimates of 2.6 mb/d for June (based on inland deliveries data), marks four consecutive months of annual demand growth - the longest uninterrupted growth period in two and a half years. Forecast momentum for the year as a whole has been raised, to 0.2% in 2013 (-0.1% previously), a revision attributable the higher May-June data.


Canadian consumption averaged 2.3 mb/d in May, down marginally on the year, as strong gasoline and jet/kerosene demand offset declines elsewhere. A recent cold spell also required more gasoil to be used for home heating. The overall growth profile has been amended slightly to reflect revised IMF economic projections, with oil demand now being forecast to rise by around 0.8% in 2013 (versus 0.7% in last month's Report) as the projected GDP profile has been raised (1.7% versus previous 1.4%).


Consumption slipped back into demand contraction in June, although this largely reflected an unusual spike in demand the year earlier, itself a consequence of escalating naphtha use in the petrochemical sector. Despite a spike in April, a relatively flat demand trend is projected for the next couple of years, inline with the government's explicit target.


Despite signs of slower contraction in 2Q13, the average trend in OECD demand remains very much a declining one. Indeed, preliminary data for June suggest a return to a steeper downtrend, with aggregate demand contracting by an average 1.8% y-o-y, as faster contraction in Japanese demand offset any stronger-than-expected demand in the OECD Americas.


Demand growth has shown signs of gaining momentum in the OECD Americas. Preliminary data for June show growth of around 0.5% y-o-y, continuing the generally rising trend seen earlier in 1H13. Momentum is forecast to weaken in 2H13, however, reflecting stronger demand in the reference period. Demand in 1H13 also got a boost from exceptionally cold winter weather, a factor unlikely to be repeated in 2H13.


Contraction in European demand has slowed, with preliminary 2Q13 statistics showing a decline of just 0.2% y-o-y, versus drops of 3.8% in 2012 and 2.8% in 2011. Exceptionally cold late-winter weather helps explain the more robust demand patterns in 2Q13. Yet the forecast for the year as a whole remains subdued, down by 1.7% to 13.5 mb/d, as economic momentum remains weak. The IMF expects euro-area GDP to swing back into growth of 0.9% in 2014, after a decline of 0.6% in 2013. Yet caution is advised, as the debt problems that undermined the euro zone economy in the first place have yet to be resolved. The latest Eurostat figures, for example, depict EU27 government debt, as a ratio to GDP, rising to 85.9% in 1Q13, compared to 83.3% in 1Q12.

Consistent with our somewhat conservative European demand outlook, French consumption data for June were very weak, with demand contracting by around 5.6% y-o-y to 1.7 mb/d. Preliminary estimates for Spain also show demand falling heavily in June, with a double-digit percentage point drop taking consumption back to around 1.1 mb/d on the month.

Asia Oceania

The previously strong growth trend, supported by large-scale fuel switching from nuclear to thermal power generation in Japan, appears to have passed an inflection point. Preliminary June data show a particularly steep contraction on the year. The forecast remains muted moving forward, with Japanese power sector demand likely to ease back. Meanwhile in Korea, the Government embarked on a policy to curb oil use, while in Australia weakening commodity markets may undermine economic growth and put the brakes on oil consumption.


Emerging market oil demand continues to dominate global growth, rising in 2Q13 by 1.2 mb/d (or 2.7%) to 44.9 mb/d, and more than offsetting an OECD decline of 110 kb/d. The pace at which non-OECD oil use expands has, however, slowed from the heights seen at the turn of the year (+1.8 mb/d or 4.2% in 4Q12), with notable slowdowns experienced in China, India, Thailand, Chinese Taipei and South Africa. Weaker emerging market growth reflects the somewhat more subdued economic outlook in those countries.

Within the non-OECD, the Middle East looks likely to remain one of the main engines of growth, with gains of 2.4% and 3.0% forecast for 2013 and 2014, respectively. The expected delivery of additional oil-fired power generation capacity in Lebanon continues to provide support to a sector that has disappeared almost everywhere else. Two plants are planned near Beirut in 2014, according to a contract drawn up with Danish company Burmeister & Wain, adding nearly 200 megawatts of oil-fired capacity at the Zouk power plant and 80 megawatts at Jiyyeh. The plants will initially run on gasoil, but can switch to natural gas later on. Historical data revisions from the IEA Green Book added roughly 35 kb/d to the Jordanian demand estimate for 2011, a steep 26.8% increase on 2010 data as additional oil products were needed in the power sector to stem losses resulting from natural gas import disruptions due to pipeline attacks in Egypt.

Dampening the non-OECD demand picture were reports of weak residual fuel oil sales in Singapore. The Maritime and Port Authority of Singapore reported bunker fuel sales of 745 kb/d in June, 35 kb/d below the year-earlier level. Green Book data revisions, however, added 80 kb/d to the 2010 Singapore consumption estimate, with naphtha, gasoline and fuel oil the key contributors. Talking of Asian naphtha demand, in 3Q13 it could ease somewhat, following the unexpected taking of maintenance at the Formosa naphtha cracker in Chinese Taipei.



  • Global supplies in July rose by 575 kb/d month-on-month, to 91.8 mb/d, with increased non-OPEC output only partially offset by reduced OPEC crude production. Supplies were up 785 kb/d from year ago levels, with a rise in non-OPEC output and OPEC NGLs of 1.84 mb/d eclipsing a decline of just over 1.1 mb/d in OPEC crude production.
  • Non-OPEC supplies rose by 570 kb/d in July to 54.9 mb/d, with North America providing around 40% of the growth. Canada, rather than the US, was responsible for most of this increase. OECD Europe also rose strongly in July, by nearly 170 kb/d, though this was mostly the result of a lull in North Sea maintenance, where a sharp decline is forecast for August as work resumes. Smaller gains in the OECD Pacific region and non-OPEC Africa contributed most of the balance of growth while some large producers experienced declines, including Russia.
  • OPEC crude oil supplies edged lower in July, down 165 kb/d to 30.41 mb/d due to supply disruptions in Libya where civil unrest continues to derail exports and despite higher Saudi output. The 'call on OPEC crude and stock change' was revised up by 200 kb/d on higher demand numbers for 3Q13 and full year, to 30 mb/d and 29.8 mb/d, respectively. OPEC NGLs are forecast to rise by around 175 kb/d, to 6.57 mb/d on increased supplies from Algeria, Angola and the UAE.
  • Iraqi crude oil production fell below the 3 mb/d mark for the first time in five months and exports are forecast to plummet by around 500 kb/d starting in September following the announcement of planned infrastructure work at southern shipping terminals. Increased attacks on the key northern pipeline to the Mediterranean port of Ceyhan continue to disrupt flows, with sharply reduced exports of Kirkuk crude behind the reduced July supplies.

All world oil supply figures for July discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska 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 May 2011, 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 ?200 kb/d for non-OPEC as a whole, with downward adjustments focused in the OECD.

OPEC Crude Oil Supply

OPEC crude oil supplies edged lower in July, down 165 kb/d to 30.41 mb/d due to continued supply disruptions in Libya and despite higher Saudi output. Iraqi production fell below the 3 mb/d mark for the first time in five months and volumes are now forecast to plummet by around 500 kb/d starting in September following the announcement of planned infrastructure work at southern export terminals (see 'Iraqi Output Forecast to Tumble Near Term on Temporary Export Constraints').

The 'call on OPEC crude and stock change' was revised up on higher demand by 200 kb/d for both 3Q13 and full year, to 30 mb/d and 29.8 mb/d, respectively. The upward revision brings the 'call' more closely in line with OPEC crude production year to date, at 30.6 mb/d, but is still about 600 kb/d above the group's 30 mb/d target. Continued supply outages in Iraq and Libya, however, may reduce the group's output in coming months. OPEC's 'effective' spare capacity in July was estimated at 3.08 mb/d compared with 3.13 mb/d in June, with Saudi Arabia holding near 80% of the surplus.

Saudi Arabia's crude oil production in July rose to a 12-month high of 9.8 mb/d, up 150 kb/d. Saudi Arabia typically increases production during the seasonally stronger demand in April-September to meet increased domestic use of crude for power generation in the peak summer air-conditioning season. This year the uptick in demand for crude burn at power plants has been moderated by increased supplies of domestic natural gas. In 2012, crude for direct burn increased by an average 300 kb/d to 675 kb/d during the seasonally stronger demand period from April to September. Latest data from JODI for April-May show crude for direct burn was down about 8% to an average 465 kb/d this year compared with the same period in 2012.

Iranian crude oil supplies were estimated at 2.65 mb/d in July, down 50 kb/d from June levels. Just five countries reported importing crude from Iran in July—China, Japan, South Korea, Turkey and the UAE. That compares with liftings from 16 countries in January 2012. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports. Preliminary data show total crude imports from Iran averaged 1.16 mb/d July from a relatively low 960 kb/d in June, largely due to a rebound in Chinese imports last month. Chinese imports from Iran rose to 660 kb/d in July versus 385 kb/d in June, when port congestion in China reduced volumes. Japanese imports from Iran rose to 160 kb/d last month compared with 130 kb/d in June. Preliminary data indicate there were no liftings from India in July, reportedly due to companies' inability to secure insurance for shipping and refining operations. India imported 200 kb/d on average this year from Iran compared with around 310 kb/d in 2012.

Iran continues to expand its shipping fleet in a bid to sustain crude sales in the wake of increasingly stringent international sanctions. The National Iranian Tanker Co (NITC) took delivery of a further four VLCCs since May, in addition to the three that were brought into operation earlier this year, as part of a $1.2 bn deal for 12 vessels from China, which was inked in 2009. NITC's fleet now stands at 37 VLCCs with a combined capacity of 64 mbs and 14 smaller crude tankers with capacity 12.5 mb. The expanding shipping fleet should provide the state oil company more flexibility in marketing its crude and for use in floating storage, which stood at 30 mb at end-July, unchanged from June.

The US House of Representatives moved to tighten sanctions on Iran further in July specifying a cut of an additional 1 mb/d—though the language in the bill did not say from what level the cut would take place from. Previous legislation simply called for a 'significant reduction' in imports from Iran. The bill, however, still has to be passed by the Senate in September, which observers say is unlikely in its present form. In addition, any final bill passed by both houses of Congress would have to be signed off by President Barack Obama before becoming law.

Iran's new president, Hassan Rouhani, took office in early August, sparking speculation that diplomatic efforts over the country's nuclear programme would soon resume. In his first press conference President Rouhani struck a conciliatory note, saying he was "seriously determined" to find a solution to the standoff with the international community. While the US responded that it would be a "willing partner" if Tehran were serious, analysts remained sceptical. Nonetheless, markets seemed assuaged by the change in tone. The international negotiating group of six countries - Russia, China, Britain, France, Germany and the US - is reportedly laying the groundwork for a fresh round of talks. A meeting between officials from the group of six and Iran last April in Kazakhstan had failed to move negotiations forward.

Supplies from Kuwait and the UAE were off marginally in July, down 20 kb/d to 2.8 mb/d and 25 kb/d to 2.7 mb/d, respectively.

Iraqi Output Forecast to Tumble Near-Term on Temporary Export Constraints

Iraqi production fell below the 3 mb/d mark for the first time in six months and exports are now forecast to plummet by around 500 kb/d in September following reports from State Oil Marketing Co (SOMO) of planned infrastructure work at southern export terminals. Officially, volumes will be curtailed only in September but the fear is the shut-in could drag on for months given the scope of the work as well as the country's poor record of delivering projects on time. The plans call for one of the two floating Single Point Moorings (SPM) to be shut for between 30 and 45 days so that work can proceed on connecting a newly installed metering and manifold platform. There are reports that the South Oil Co then plans to shut down the second SPM for infrastructure work as well as complete repair work at jetties at the Basrah and Khor Al-Amaya shipping terminals. If the back-to-back work plan is implemented, export flows could be reduced for anywhere from 4-6 months.

The two SPMs each have a nameplate capacity of 900 kb/d, or a total 1.8 mb/d, but average around 600 kb/d given that only one mooring can be operational at a time. Once the work is completed, Baghdad expects exports to rise to at least 3.5 mb/d. Accordingly, the shut-in export capacity is expected to constrain production levels by a similar amount and may be behind a delay in the planned mid-July start-up of the Majnoon field until later in 4Q13.

The lack of clarity on the programme of work has injected a high level of uncertainty on availability of supplies and helped push price differentials for alternative crudes such as Urals in Europe to record levels. On a regional basis, July Basrah exports to Europe averaged 400 kb/d and the US (including small volumes to South America) were just under 400 kb/d. Asian refiners were the largest buyers at 1.29 mb/d. Refiners have been complaining of the vacillating and declining quality of the crude since early 2012.

Iraqi output in July was off by 60 kb/d, to 2.99 mb/d, with marginally higher exports from the southern shipping terminal of al-Basrah offset by exceptionally low exports of Kirkuk crude from the northern pipeline to the Mediterranean port of Ceyhan amid increased militant attacks.

Total Iraqi exports were down by around 60 kb/d to 2.27 mb/d in July. Exports of Basrah crude fell by 55 kb/d to 2.08 mb/d. Kirkuk exports from the north continued to hover at five-year lows again in July, off 5 kb/d to 190 kb/d, including 14 kb/d trucked to Jordan. Persistent militant attacks on the Kirkuk-pipeline running to the Mediterranean port of Ceyhan have undermined export flows since a 2013 high of 345 kb/d in March. The suspension of exports from the Kurdistan region to the Kirkuk-Ceyhan crude pipeline, which is controlled by the central government in Baghdad, accounts for around 100 kb/d of the export shortfall.

Northern exports are expected to remain constrained indefinitely given the lack of progress between Baghdad and the Kurdistan Regional Government (KRG) over payment and contract terms. Crude production in the KRG area was estimated at 140 kb/d in July, with around 60 kb/d of supplies exported via truck and around 80 kb/d refined. KRG plans for a new pipeline running from the region to the Mediterranean port have also angered Baghdad, which considers the exports illegal.

Libya has seen oil supplies plummet amid worsening labour disputes and civil unrest, with exports plunging by one-third in early August. The burgeoning crisis, the worst since the onset of the civil war in early 2011, is weakening already fragile government institutions and choking off vital revenues. Workers striking for better pay and management changes at the country's main shipping terminals and oil fields have halted exports and forced the closure of oil producing fields off and on since the end of May. After reaching a 2013 high of 1.42 mb/d in April, production fell to an average 1 mb/d in July, down 150 kb/d on the month, and slipped further in early August to around 400 kb/d.

On 8 August, workers at the country's Arabian Gulf Oil Company (AGOCO) agreed to progressively reduce production by 90% to protest changes to the company's management and organisational structure. AGOCO produces 425 kb/d from the Sarir, Mesla, Nafoora, and Hamadi fields. Workers plan to slash output to just 40 kb/d. The fields output is exported from the Marsa el Hariga port as well as feed the Ras Lanuf refinery, which has been closed since end-July due to yet another strike action by workers. Strike action has also closed the Es Sider and Ras Lanuf oil terminals. As a result, the Es Sider, Amna and Sirtica oil fields, which produce light sweet oil, have been shut-in due to full storage tanks at the terminals.

Nigerian crude supplies recovered somewhat in July but remained below the 2012 average of 2.1 mb/d. Output rose 60 kb/d to 1.92 mb/d in July with pipeline damage from oil thefts constraining exports. Nigerian benchmark Bonny Light remains under force majeure since April, affecting about 150 kb/d. The Trans-Niger pipeline resumed operations briefly in early July but was closed again a week later after further attacks. There is currently no date for restart.

Angolan crude output edged lower in July, down to 1.73 mb/d from 1.78 mb/d in June, while Algerian output recovered last month, reaching 1.15 mb/d from 1.12 mb/d in June.

Venezuelan production fell 30 kb/d to 2.45 mb/d in July. Despite the partial start-up of several heavy oil projects in the Orinoco belt, the country is struggling to maintain production levels. Signalling a shift from the Chavez era, the new Venezuelan president, Nicolas Maduro, has announced a quasi-privatisation programme aimed at increasing production from the country's Lake Maracaibo region. PDVSA is hoping a hybrid production-for-profits contract will lead to the reactivation of more than 1 000 shut-in oil wells in the area. PDVSA reportedly has floated the plan to private service firms whereby the companies would bid on single wells, which they would reactivate and manage. The state oil company would be responsible for selling the crude with the earnings then placed into an account that would pay a percentage to the new operators. Most of the wells identified for restart were closed

some 10 years ago due to relatively low flow rates, in the hundreds to low-thousands of barrels a day. The proposed model is reportedly similar to previous 'service contracts' that were cancelled by former president Hugo Chavez.

Non-OPEC Overview

Non-OPEC supplies rose by 570 kb/d m-o-m in July, to 54.9 mb/d, with North America accounting for roughly half of the increase (280 kb/d). Unlike in some previous months, Canada rather than the US accounted for most of this gain. Its mined synthetic output and NGLs each rose by 100 kb/d. OECD Europe supplies also grew strongly in July, by nearly 170 kb/d, though this was mostly the result of a lull in North Sea maintenance, and a sharp decline is forecast for August as maintenance resumes. Smaller gains in the OECD Pacific region and non-OPEC Africa contributed most of the balance of growth but some large producers experienced declines, including Russia and China. The decline in China was slight, however, at 40 kb/d, and the trend for the next few months is for very little change m-o-m.

We expect non-OPEC total supply to continue growing for the remainder of this year, to average 54.6 mb/d in 3Q13 and 55.4 mb/d in 4Q13. In 1Q14, production is forecast to post the first quarterly decline (albeit a small one) since 1Q13. As noted in previous reports, non-OPEC supply growth to the end of 2014 is strongly predicated on North American growth. Non-OPEC Africa and Latin America are also forecast to make contributions, though political risk in places such as Colombia and Sudan/South Sudan remains. The situation in Egypt was discussed in last month's Report, and recent thwarted energy infrastructure attacks in Yemen highlight the volatile situation in that country.

OECD Americas

US - July preliminary; Alaska actual, other states estimated: US crude oil production averaged 7.3 mb/d in 2Q13, 1.1 mb/d higher than in 2Q12. For 3Q13, crude oil production is forecast to rise to 7.4 mb/d and to 7.6 mb/d by 4Q13. Recent weekly US Energy Information Administration figures for July show crude oil production at about 7.5 mb/d. This level of production is supported by continued strong growth in tight oil, particularly in Texas and North Dakota. Total tight oil production is forecast to rise from about 2.2 mb/d in 1H13 to just under 2.6 mb/d in 2H13. North Dakota's crude oil production exceeded 800 kb/d for the first time ever in 2Q13, and we expect it to reach 900 kb/d by the end of the year. Not all areas of the country are experiencing as large a boom: some latecomer companies to acquisitions of tight oil properties in other regions of the US have found that production curves are below expectations. In addition, conventional crude production in Alaska continues its decline, although at an expected much-reduced rate in 2013 y-o-y compared to 2012 y-o-y (when it was down 6% on 2011). The declines have raised questions about the minimum throughput required to keep the Trans-Alaska Pipeline flowing long-term, and encouraged the State government to change the tax regime in the spring of this year to foster exploration and production. Since then, there has been an effort in Alaska to hold a referendum on repealing those tax changes.

Although revised May data now indicate that US NGL production was only 60 kb/d higher in 2Q13 than in 1Q13, the increase for 4Q13 y-o-y will be higher, at 120 kb/d. Large-scale investment in increased NGL export capacity on the US Gulf coast by a number of companies indicates market confidence in continued production growth in the next few years. It also represents a potential outlet for the Bluegrass NGL pipeline, which would bring 200 kb/d of NGLs to the Gulf Coast from the Utica and Marcellus shale plays by 4Q15. Phase one of the $1 billion Utica East Ohio NGL project came onstream in July, with the second phase to be completed in December. The project, when complete, will be able to process 135 kb/d of NGLs.

Canada - May preliminary: Total oil production increased from 3.7 mb/d in May to 3.8 mb/d in June despite flooding in Alberta, as total mined synthetics jumped from 700 kb/d to 870 kb/d, mostly on the increased production at Suncor's projects after May maintenance events. Even with this June increase, 2Q13 production of Canadian mined synthetic output, at 820 kb/d, was the lowest quarterly figure since 2Q11. Production at CNRL Horizon's oil sands project fell by 90 kb/d in May due to maintenance, with full restoration of production not achieved until sometime in June.

Total liquids output for July is estimated at 4 mb/d, thanks in part to a 100 kb/d increase in Suncor's production, despite restrictions on Enbridge's regional oil sands pipeline in the first half of the month. A ramp-up in production at Imperial's new Kearl 1 mined-bitumen project, from levels of just 5 kb/d in May, its first full month, also helped lift supplies in both June and July. On the other hand, Syncrude's July output has been affected by the Coker 8-1 and LC finer turnarounds, taking off about 100 kb/d. Offshore in the east of the country, the 50 kb/d Terra Nova FPSO will have extended maintenance from four to 11 weeks, starting in September.

Additional planned investment in transport infrastructure in order to avoid potential constraints on production growth include two new crude oil rail terminals in Alberta (both planned to be online in 1H14) and a proposed 1.1 mb/d "Energy East" crude oil pipeline to refineries and ports in eastern Canada. This 4 400 km pipeline project also includes the construction of new tank terminals and marine facilities, and will make use of an existing natural gas pipeline on part of the route. Seaborne imports into eastern Canada would be greatly reduced if the project is completed as planned. Growth in Canadian total liquids production for 2013 is expected to be 250 kb/d, to 4 mb/d for the year, with an additional 150 kb/d of growth forecast for 2014.

Mexico - June actual: Crude oil production fell by 1% in 2Q13 to 2.52 mb/d compared to the same quarter the previous year, although there was a slight uptick in June compared to May. Since the first quarter of 2010, crude oil production has declined by 3.5%, a marked contrast to growth in the rest of North America (31%). However, Pemex has succeeded in slowing the overall rate of decline compared to the previous decade, and we forecast that crude oil production will decline only slightly to 2.48 mb/d for 4Q13. Cantarell continues to decline but Pemex brought online two new small fields earlier this year that are at 30 kb/d (combined) and now there is an additional 65 kb/d (combined) from the new Kuil and Onel fields that reportedly came online in June. Maintenance on the KMZ fields has led to increased production on what is one of Pemex's largest production complexes. Other important investments include: a new platform in the shallow-water Bay of Campeche; four new jack-up drilling rigs (for a total of 40 in service); 18 unconventional (horizontal) wells; and four semi-submersible rigs in the deepwater Gulf.

Large investment expenditures, combined with Pemex's large obligatory payments to the Mexican treasury are difficult to reconcile without the company adding to its already considerable debt. In addition, net exports are declining at a faster rate than production, given increasing domestic consumption (and increased domestic crude demand from the reconfigured and expanded Minatitlán refinery). Hence, policies and efforts to stem the decline and increase oil production in a financially viable way are high on the national agenda. Multi-party talks on the issues are ongoing, and the governing PRI is now scheduled to announce its proposal next week. However, in the near term (through the end of 2014) any new reforms are unlikely to be implemented in time to make a substantial difference in the production outlook.

North Sea

A reduction in seasonal maintenance increased Norwegian liquids supply by about 150 kb/d in July, as production returned to normal at the Ekofisk and Eldfisk fields. Production of both crude and total liquids was down only 20 kb/d for the second quarter of 2013, to 1.44 mb/d and 1.8 mb/d, respectively. On an annual basis, total liquids output in 2Q13 was down 175 kb/d. Maintenance at the Ekofisk system also impacted the UK sector, as fields in the Ekofisk-Teesside pipeline system were affected. The UK's largest field, Buzzard, has been operating at 25 kb/d or more below capacity of 210 kb/d due to scheduled maintenance at the Kinneil processing terminal and experienced some equipment failures in late July that temporarily further reduced output. For most of June, the CATS terminal and pipeline were shut for maintenance, affecting NGLs and associated fields such as Huntington. Given maintenance on smaller fields as well as a cut to Forties pumping rates in late July, UK total liquids production fell by 110 kb/d in June and was flat in July. Total UK production in 2Q13 was 820 kb/d, down nearly 200 kb/d year-on-year. BFOE crude production for July is estimated to have increased on June's lowest-month-for-2013 average of 620 kb/d by 180 kb/d. Additional maintenance in August will bring down expected output to 690 kb/d for the benchmark blend crude.

As highlighted in June's Report, heavier maintenance has resumed this month, and will continue into September. The Forties Pipeline System closed for the first five days of August, and Buzzard is expected to go offline for two weeks this month. In the Norwegian sector, maintenance on the Heimdal Riser Platform will affect Oseberg and three other fields for four days. UK total oil production is expected to fall to the second-lowest monthly level seen in several decades this August, at 650 kb/d, before rebounding to 720 kb/d for September. In Norway, maintenance is more evenly spaced over the next two months, leaving expected total liquids production at 1.67 mb/d for both months.


Latin America

Brazil - June preliminary: Brazilian crude production increased by 110 kb/d in June from May levels, to 2.1 mb/d, thanks in part to a reduction in maintenance outages. Pre-salt fields reached 310 kb/d as one FPSO on the Lula field was restarted and another, Cidade de Paraty, was launched in June. The country's three largest fields - Marlim Sul, Roncador, and Marlim - contributed 720 kb/d. The restarted and new FPSOs on the Lula field indicate continued monthly growth of this field's production to 160 kb/d in 1Q14. ANP announced in July that Chevron's Frade field (60 kb/d) will not be returning to production until a study of production leaks is completed. Another setback for the sector was OGX's declaration that the Tuburão Azul field is not commercially viable with current technology, although state regulator ANP announced in July that it is investigating whether that is indeed the case. Onshore, crude oil production continued its slow decline of about 10 kb/d per year, at 180 kb/d for June, despite the start of production in the state of Maranhão (albeit at very low rates). Brazil total liquids production is expected to increase by 20 kb/d this year to 2.2 mb/d, but 4Q13 will be about 190 kb/d higher than 2Q13, at 2.3 mb/d.


Sudan and South Sudan: South Sudan steadily ramped up production (to 200 kb/d by early July) since April's restart, following a dispute with Sudan over transit terms that led to the shut down of the export pipeline to the Red Sea and subsequent shut in of production for over a year in 2012-2013. However, political disputes with Sudan have again affected the production outlook. In early June, Sudanese President Omar 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." This created the expectation that the transit pipeline would be shut down by 7 August, and the Juba government in South Sudan ordered oil fields to begin shutting down 18 July in anticipation of the pipeline's imminent closure. More recently, African Union (AU) mediation has obtained an extension of the pipeline shut-down date to 22 August as Khartoum has apparently given the AU time to investigate its claims of Juba's involvement with armed groups operating in Sudan.

Although there have been press reports that production in South Sudan had been cut to as little as 75 kb/d, South Sudan's Ministry of Petroleum has said that production will continue in a 100-180 kb/d range until any further political decisions are taken post 22 August. This seems to reflect confidence that a political solution will be found and the pipeline will not close again. It should be noted that a shut-down is costly for Khartoum as well as Juba, as transit fees are important to the Sudanese economy. However, there is a significant political risk that the pipeline could close again Even if the transit route remains open, production is expected to remain below capacity, at 170 kb/d for 4Q13.

Middle East

Syria: Current crude oil production is assessed to have gradually declined from about 100 kb/d at the beginning of 2013 to 50 kb/d by July, down from 350 kb/d prior to the civil conflict that began in March 2011. In the early months of the conflict, the government was able to maintain production levels, with significant output cuts beginning at the end of 3Q11 as the EU imposed oil sanctions and the conflict intensified. Since then, the quality of data for Syrian oil production has suffered, but it seems clear that production continued to decline. By 4Q12, output was estimated to have fallen to less than 160 kb/d. It was reported last month that Iran is supplying Syrian with a $3.6 billion line of credit, so that government-controlled areas of the country can obtain oil and oil products. Press reports of attacks on pipelines and power stations; of fighting at north-eastern oil fields; and of wells under rebel control being used for small-scale, primitive refining and occasional tanker truck exports, provide further evidence of setbacks. There are also reports that some oil is being pumped to the Syrian coast via neutral middlemen. If the conflict continues in its current state, production is expected to hover around current levels at approximately 15% of pre-war level.

Former Soviet Union

Russia - July preliminary:  Russian total liquids production fell by 250 kb/d in July, a 2% decline, to 10.6 mb/d from 10.9 mb/d. In terms of crude oil, output from PSA operating companies fell by 110 kb/d. Much of the decline shown in Gazprom's production was condensate and NGLs, as these declined by about 90 kb/d. Gazprom's Surgut gas condensate stabilisation plant was under maintenance in July, and summer declines in associated natural gas output (due to weak natural gas demand) can lead to declines in NGLs. Nevertheless, Russia maintained its status as the world's largest oil producer. Total production for 2Q13 was 10.85 mb/d. For 3Q13, output is forecast to decline to 10.69 mb/d, reflecting both the July dip and reported September maintenance at Sakhalin 1 and 2 that will reduce these projects' production for that month by about one third.

Although output is projected to rebound in 4Q13 to 10.7 mb/d, the general expectation is of flat production for the remainder of the forecast period (i.e. 2014). One reason for this is that Rosneft's giant Vankor field, a strong driver of annual production growth over the last year, is now forecast to plateau at a level some 70 kb/d lower than previously estimated. Rosneft has announced that the Suzunskoye, Tagulskoye and Russkoye fields acquired through its purchase of TNK-BP will be brought online much earlier than the previous TNK-BP management had planned. As specific start-up dates prior to the end of 2014 have not (yet) been indicated, however, the forecast has not been changed to adjust for this. It remains to be seen whether recently-announced tax breaks on tight oil production will spur investment in the production of this crude that has revolutionised the US oil sector.

Azerbaijan - June preliminary:  Although 1Q13 crude oil production for the country rebounded by 8% to 840 kb/d, reversing 4Q12 declines of 50 kb/d, the average for the first half of 2013 is still 30 kb/d lower than that of 1H12. Output from the country's mainstay offshore ACG fields fell by 50 kb/d to 670 kb/d in 2012, prompting government criticism of BP, the fields' operator. Given that BP has announced that production averaged 666 kb/d for the first half of 2013, and that the company has put in place various drilling and completion investments, we expect that production will not experience another such sharp annual decline for 2013. However, August maintenance is expected to cut into the 3Q13 average. Operator BP has acknowledged that the complex is in decline, but believes that production can be stabilised at between 650 kb/d and 700 kb/d through 2017. A lack of available rigs for drilling wells has hastened the declines of the past few years. 

FSU net exports rebounded by 190 kb/d to 9.6 mb/d in June. Product shipments surged by 490 kb/d, their largest monthly increment since November 2012, as refinery output rose after the completion of seasonal maintenance. Crude exports slumped by 290 kb/d compared to May as increased refinery runs constrained the supply of crude available for export. Much of this decrease was accounted for by lower volumes of largely Russian crudes shipped via the Transneft network, which dipped by 230 kb/d. Baltic terminals, bore the brunt of this cut as exports sent via Ust Luga and Primorsk plunged to a combined 1.4 mb/d, the lowest level since August 2011. Indeed, these low volumes pushed Urals in Northwest Europe to trade at a rare premium to Urals in the Mediterranean in June.

Elsewhere, volumes exported via Russian pipelines remained relatively constant on a year-on-year basis. However, this masks the fact that more oil is heading East through the ESPO system at the expense of the Druzhba pipeline where volumes remain at close to 1 mb/d, well below the line's 2 mb/d capacity. Data indicate that the Czech and Slovak Republics have maintained their Druzhba deliveries at year-ago levels of 70 kb/d and 120 kb/d, respectively. Poland and Germany, on the other hand, have cut their imports through the Druzhba line significantly and turned instead to seaborne Urals imported via their Baltic terminals.

In the Black Sea, reports indicate that the start-up of a new crude unit at Rosneft's Tuapse plant will constrain exports of the Siberian light grade but likely lead to an increase in product exports from the region. Outside of Russia, shipments of Azeri crudes through the BTC pipeline remained flat in June at 730 kb/d while flows through the CPC pipeline stood at 700 kb/d.

Shipments of fuel oil, gasoil and 'other products' (kerosene, gasoline and naphtha) were all hiked on the month. On a year-on-year basis, and amid the 60:66 tax regime designed to stimulate investment in secondary oil processing at the expense of primary oil processing, total refined product shipments are a significant 700 kb/d greater with fuel oil, gasoil and 'other products' shipments rising by 350 kb/d, 220 kb/d and 130 kb/d, respectively.

OECD Stocks


  • OECD industry inventories built seasonally by 11.9 mb in June, to 2 663 mb. Stocks of refined products led the build, rising by 33.6 mb on a combination of surging US propane holdings and increasing OECD-wide refinery activity. Refined product inventories covered 30.5 days of forward demand, a rise of 0.8 day on end-May.
  • The estimate of OECD industry total oil inventories for May was adjusted downwards by 32.0 mb. Europe and the Americas account for the bulk of the revisions. End-May inventories are now estimated at a 45 mb deficit to five-year average levels, narrowing to 39 mb at end-June.
  • Preliminary data point to a strong counter-seasonal 13.6 mb draw in OECD commercial inventories in July as a combined 29.4 mb draw in crude, NGLS and feedstocks outweighed a 15.8 mb build in refined products. These estimates do not include European data which were unavailable at time of writing.
  • US crude stocks drew by a steep 20.3 mb in July. The draw centred in PADD 2 with inventories at the Cushing storage hub falling by 9.5 mb to 40.2 mb, their lowest level since April 2012.

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

Commercial total oil inventories in the OECD rose seasonally by 11.9 mb to 2 663 mb by end-June. As in previous months, surging stocks of propane in the US, here counted under 'other products', led refined product builds, estimated at 33.6 mb. Rebounding refinery activity across the OECD was a major contributing factor behind the build. Stripping out 'other products', refined product stocks rose counter-seasonally by 12.8 mb, compared to a five-year average draw for the month of 1.6 mb. Middle distillates and motor gasoline accounted for the bulk of that build, rising over the month by 6.3 mb and 5.5 mb, respectively, while stocks of residual fuel oil inched up by 1.1 mb. At end-June, refined product inventories covered 30.5 days of forward demand, up by 0.8 day on the previous month. On the flip side, rising refinery throughputs drew crude stocks by a steep 20.9 mb.

Based on more complete official data, the estimate of total OECD stocks for May was revised downwards by 32.0 mb. Instead of building by 4.8 mb, as suggested in last month's Report, and taking into consideration April's 9.3 mb downward adjustment, stocks are now estimated to have drawn steeply by 17.8 mb in May, in stark contrast with a 17.2 mb five-year average build for that month. The revision centred in Europe, where total oil stocks were 20.3 mb lower than previously estimated, with refined product holdings accounting for the bulk of the adjustments. Inventories in the Netherlands and Italy were assessed 10.2 mb and 9.4 mb lower, respectively, with the Italian adjustment reportedly resulting from a refinery outage not captured in preliminary data. In addition, stocks in the OECD Americas were revised lower by 10.7 mb with 'other products' and motor gasoline seen 6.7 mb and 4.4 mb below levels reported last month.

The result of these revisions is that OECD total oil inventories at end-May are now assessed at a 45 mb deficit to five-year average levels, their widest since December 2011. In June this narrowed to 39 mb. European stocks look particularly low by historical standards, at 87 mb below average levels. Meanwhile, OECD Americas and Asia Oceania stand 46 mb and 2 mb in surplus to the average, respectively. For 2Q13 as a whole, end-June data suggest OECD commercial inventories remained relatively flat, building marginally by 60 kb/d.

Preliminary data point to an unseasonal 13.6 mb decline in OECD commercial inventories in July following OECD Americas and OECD Asia Oceania drawing by a steep 7.5 mb and 6.1 mb, respectively. However, Euroilstock data were unavailable at the time of writing. In the absence of updated data, European inventories have been kept flat. Excluding Europe, on a product-by-product basis, a combined 29.4 mb draw in crude oil, NGLs and feedstocks, centred in OECD Americas, more than offset a 15.8 mb build in refined products.

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Commercial total oil inventories in the OECD Americas rose by 12.0 mb in June, led by refined products, whose steep 22.2 mb build offset a seasonal draw of 10.3 mb in crude oil. As in previous months, 'other products' accounted for the lion's share of the upside, rising by 18.8 mb on the month as propane in the US continued to surge above seasonal levels. Stripping out 'other products', regional refined products stocks rose seasonally by 3.4 mb, thanks to a 700 kb/d hike in throughputs. Builds in motor gasoline (+2.8 mb) and residual fuel oil (+1.4 mb) offset a counter-seasonal 0.8 mb draw in middle distillates.

By end-June, regional refined products inventories stood 20.0 mb above the five-year average, with surpluses in 'other products' (24.9 mb), motor gasoline (14.2 mb) and residual fuel oil (+0.7 mb), offsetting a 19.8 mb deficit in middle distillates. In aggregate, refined products covered 29.6 days of demand at end-June, a rise of 1.3 days compared to a month earlier.

According to preliminary data from the US Energy Information Administration, US crude oil stocks plunged by 20.3 mb in July, roughly three times the 6.5 mb five-year average draw for the month. This draw was centred in PADD 2 where inventories dropped by 12.1 mb as BP's Whiting refinery returned to service following extended maintenance (see Refining). As PADD 2 throughputs rose and new pipeline links helped evacuate crude towards the Gulf Coast, stocks at the Cushing, Oklahoma, storage hub dropped by 9.5 mb to 40.2 mb at end-month, their lowest level since March 2012. PADD 3 crude stocks also drew steeply, falling by 6.9 mb, as record refinery runs outpaced crude movements into the region from elsewhere in the US and abroad. US total oil stocks drew counter-seasonally by 7.5 mb as a seasonal 16.0 mb build in refined products failed to offset the crude draw. Despite high throughputs, refined product builds were reportedly tempered by healthy product exports.

OECD Europe

OECD European industry total oil inventories drew by 2.6 mb in June. Although the headline draw broadly followed seasonal trends, the factors behind it were more unusual. Crude oil inventories plunged counter-seasonally by 11.6 mb following an unexpectedly steep hike of 600 kb/d in refinery throughputs. On the flip side, higher refinery activity set refined products on their restocking course one month earlier than usual, with a steep June build of 9.7 mb. Contrary to seasonal patterns, the build spanned all product categories, with middle distillates (+4.6 mb) and motor gasoline (+3.7 mb) posting the steepest gains. All told, refined products covered 37.7 days of forward demand at end-June, 0.5 day above end-May. Regional total oil inventories remained at a steep 87 mb deficit to five-year average levels, unchanged from end-May. All oil categories remain in deficit to the average with crude, NGLs and refinery feedstocks posting a combined 41 mb shortfall and refined products accounting for the remaining 46 mb.

Trade reports suggest that German tertiary heating oil stocks continued to rebuild in June, reaching 55% of capacity by early-July. This represents a rise of two percentage points on the previous year and five percentage points above early-July 2011. Information pertaining to refined products held in independent storage in Northwest Europe suggest that stocks increased over July as builds in gasoil, residual fuel oil and jet kerosene offset draws in gasoline and naphtha amid reportedly healthy gasoline exports to the US where the driving season ramped up.

OECD Asia Oceania

Commercial total oil holdings in OECD Asia Oceania (for now still excluding Israel) rose seasonally by 2.6 mb in June. Inventories moved to a 1.7 mb surplus to average levels from the slight 0.5 mb deficit posted at end-May. Despite a 600 kb/d surge in regional refinery throughputs, crude stocks inched up by 1.0 mb on the back of a steep 3.6 mb build in Korea, offsetting a counter-seasonal 1.9 mb draw in Japan, where imports failed to keep pace with high runs. High regional refinery runs lifted product inventories counter-seasonally by 1.8 mb, in contrast to the 2.5 mb five-year average draw for the month. Middle distillates and 'other products' drove this rise, increasing by 2.4 mb and 1.7 mb, respectively, and offsetting seasonal draws in residual fuel oil (1.4 mb) and motor gasoline (1.0 mb). At end-June, refined products covered 20.6 days of forward demand, 0.2 day less than in the previous month.

Preliminary weekly data from the Petroleum Association of Japan (PAJ) point to a strong 6.1 mb draw in Japanese total oil inventories in July. A steep, counter-seasonal draw of 4.1 mb in crude led stocks lower as refinery throughputs remained high. If confirmed, this would be the second consecutive sharp draw and leave crude holdings well below the seasonal range. Refined products slipped by 0.2 mb after a 3.0 mb increase in middle distillates failed to offset draws in 'other products' (2.0 mb), motor gasoline (1.0 mb) and fuel oil (0.3 mb).

Recent Developments in Singapore and China Stocks

Weekly data from International Enterprise indicate that land-based stocks of refined products in Singapore slipped by a combined 0.9 mb in July, with the draw spanning all product categories. Residual fuel oil inventories fell by 0.6 mb but remained on par with both last year and the five-year average. In contrast, stocks of both light distillates (-0.1 mb m-o-m) and middle distillates (-0.2 mb m-o-m) drew for the third consecutive month and slipped below the five-year seasonal minimum as refinery outages kept Taiwanese imports on the low side. Total products stocks also slipped below their seasonal range.

According to data provided by China Oil, Gas and Petrochemicals (China OGP), Chinese commercial oil inventories declined by an equivalent 0.2 mb in June (data are reported in terms of percentage stock change) as a 3.1 mb draw in crude outweighed a 2.9 mb build in refined products. Commercial crude stock changes do not account for changes in China's strategic petroleum reserve. Moreover, there have been no recent trade reports of Chinese SPR building, a point data appear to confirm since the implied crude stock change (calculated as the sum of net crude imports and domestic production minus refinery throughputs) does not suggest a large unexplained build over the previous quarter. Gasoil inventories built by 1.9 mb, reversing three consecutive monthly declines. Gasoline and kerosene stocks also built by 0.9 mb and 0.2 mb, respectively, as refinery runs rebounded following seasonal maintenance.



  • Futures prices for West Texas Intermediate (WTI) traded at 16-month highs in July, with WTI posting steep increases relative to Brent for much of the month. A sharp increase in US refining runs and a steady draw in crude stocks, especially in the Midwest, were catalysts for the surge in WTI NYMEX futures, up almost $9/bbl to $104.70/bbl. Brent crude posted a more modest month-on-month increase of $4.09/bbl to a four-month high of $107.43/bbl, supported by supply outages from Libya and Iraq. The upward price momentum stalled in early August, with WTI last trading around $103.50/bbl and Brent at $106.70/bbl.
  • An array of significant supply outages from Libya, Iraq, Yemen and Sudan helped underpin futures prices and prop up prompt month contracts. The forward M1-M12 price spread blew out to almost $12/bbl in early August, after more than doubling to $10.60/bbl in July from $4.42/bbl in June.
  • Refined product crack spreads largely declined in July on the back of stronger benchmarks crudes and product stock builds. Middle distillate cracks in Asia and gasoline cracks in the US were the exceptions. The bottom of the barrel was weak in July and, in particular, low-sulphur fuel oil cracks fell steeply in all regions.
  • Freight rates for VLCCs and Suezmax tankers rose to unseasonal highs in early July on strong demand but, after briefly exceeding $13/mt, rates on the benchmark route between the Middle East Gulf and Asia eased back to under $9.50/mt by early-August under the weight of surplus tonnage. In contrast, rates on the benchmark West Africa-US Gulf Coast Suezmax trade surged throughout July and early August as the supply and demand of tankers remained more balanced.

Market Overview

Futures prices for West Texas Intermediate (WTI) traded at the highest level in 16 months in July, with WTI posting steep increases relative to Brent for much of the month. A sharp increase in US refining runs and a steady draw in crude stocks, especially in the Midwest, were catalysts for the surge in WTI NYMEX futures. WTI rose by $8.90/bbl to an average $104.70/bbl. By contrast, Brent crude posted a more modest month-on-month increase of $4.09/bbl to a four-month high of $107.43/bbl, supported by supply outages from Libya and Iraq. Futures prices turned lower in early August, however, with WTI last trading around $103.50/bbl and Brent at $106.70/bbl.

The upward price momentum in July was in large part fuelled by an exceptional increase in global refinery runs as seasonal maintenance work came to an end, with throughput rates climbing a steep 5.1 mb/d from a low of 73.2 mb/d in April to a record 78.3 mb/d in July. 

The sharply narrowing WTI-Brent price spread made headlines last month when WTI eclipsed Brent briefly during intraday trading in early July. At closing, the WTI discount posted a three and a half year low of $0.02/bbl on 19 July, and by early August was running just under $2/bbl. On average in July the WTI-Brent spread narrowed to -$2.88/bbl in July versus -$7.54/bbl in June. That compares with a 2013 peak of -$23.20/bbl on 8 February. The relatively sharper rise in WTI prices was fuelled by an increase in US refining throughput rates of more than 1 mb/d between May and July and a steep drawdown in crude oil inventories at the Cushing, Oklahoma storage terminal following the much anticipated expansion of the region's pipeline network.

An array of significant supply outages, from Libya, Iraq, Yemen, Sudan, also underpinned futures prices for most of July and propped up prompt month contracts. The forward M1-M12 WTI price spread blew out to $12/bbl in early August, after rising more than 50% in July to $10.60/bbl from $4.42/bbl in June. The Brent M1-12 contract spread widened to $6.60/bbl in early August compared with $6.16/bbl in July and $3.68/bbl in June.

The oil markets' more bullish sentiment was assuaged when Iran's new president, Hassan Rouhani, struck a conciliatory note during his first press conference in early August, saying he was "seriously determined" to find a solution to the standoff with the international community. While analysts remained sceptical, markets warmed to the tone.

Traders were also fretting that the US Federal Reserve will end quantitative easing as early as September, taking the wind out of asset prices in general. On 1 August, the S&P 500 Index broke the 1700 level for the first time after central banks stated they would maintain stimulus and global manufacturing data came out higher than forecasts. On the same day, Brent crude oil futures jumped by $2.85/bbl to $109.54/bbl. 

Futures Markets

Activity Levels

Between 25 June and 30 July, NYMEX hedge funds steadily increased their net-long positions in WTI futures, surpassing the previous peak during the 2011 Libyan civil war. Over the same period, rapidly shifting market sentiment saw ICE hedge funds net-long positions post their largest drop on record, before recovering to record highs, with the largest week-on-week gain historically in early July.

The product side mirrored crude activity, with hedge funds increasing their bullish positions, peaking in the third week of July, before easing again at the end of the month. Money managers turned net-long on both NYMEX Heating Oil and ICE Gasoil after being short since end-April, closing the month on net-long wagers comparable to the end of the winter season. Hedge funds took a longer stance in RBOB as well, following a $3/bbl increase over the period.

In terms of outstanding contracts, the two crude benchmarks have been growing in lockstep following a price surge on both sides of the Atlantic. Trading volumes in futures contracts went up m-o-m for both crude contracts, 18% for ICE Brent and 17% for NYMEX WTI. Looking at the gains on a year-on-year basis, WTI volumes posted a strong 42% growth while Brent grew by a more modest 4%. This highlights the comeback in trading volumes of the US benchmark, which now appears to be consolidating its recovery.

Financial Regulation

On 12 July, the US Commodities Futures Trading Commission (CFTC) approved its final guidance on the cross-border reach of swaps rules that followed the Dodd-Frank reform. The approval process of the guidance was closely watched by the industry as it potentially affected all entities doing business with US firms. In the final provision the CFTC granted exemption letters up to 21 December 2013 for EU member countries. The same exemption was granted to Switzerland, Canada, Hong Kong, Japan and Australia.

On 25 July, the CFTC signalled its intention to keep margin rules that prohibit brokers from using deposits from one customer account to cover temporary shortfalls in another. The rule has met with opposition from the industry, which argued that it would entail disproportionate costs. A final draft of the rule is expected by the end of August.

Looking beyond August, the Volcker rule is expected to be finalised by the end of the year, as stated by Federal Reserve Chairman Ben Bernanke. Such a rule would restrict US banks from making certain kinds of speculative investments deemed not to benefit their customers, effectively banning proprietary trading.

Spot Crude Oil Prices

Crude oil markets rallied across the board in July, propelled by increased refinery runs in the US, Europe, Asia and the Middle East and supply outages in Libya, Iraq and Yemen. US WTI posted the largest increase on the back of a drawdown in Midcontinent crude stocks and a steep rise in refinery throughput rates. WTI breached 16-month highs in July, up nearly $9/bbl to $104.69/bbl on average.

North Sea Brent was up by almost $5/bbl in July, to $107.91/bbl, supported by reduced crude supplies heading to the Mediterranean in the wake of sharply lower exports of Libyan crude due to a strike-related shutdown of shipping terminals and a shift in Russian crude exports to Asian markets. Spot Dubai prices rose a more modest $3.17/bbl to around $103.46/bbl in July but demand for medium to heavy sour crudes was strengthening in early August.

The US spot crude market was exceptionally strong in July against a backdrop of surging US refinery throughputs, up 1 mb/d between May and July. Increased runs partly reflect stronger domestic demand as well as a growing market for refined products exports to neighbouring Latin America. US product exports also have benefitted from low US natural gas prices, which confer a strong competitive advantage on US refiners in international product markets.

As a result, the relative strength of WTI to Brent saw the former trading at a premium to the North Sea benchmark during intra-day trade at times in July. WTI, however, continued to close at a discount to Brent. The discount has narrowed to $3.36/bbl in July from $7.16/bbl in June, compared with a 2013 peak of $23.44/bbl on 8 February. Long expected, new pipeline capacity is breaking the logjam of crude stocks stored at the NYMEX delivery point at landlocked Cushing, Oklahoma. High throughput rates have also drained supplies there, which declined for five straight weeks, down a total 9.5 mb, and are now at the lowest level since March 2012 at 40.2 mb for July.

Increased runs have also underpinned stronger prompt spot barrels, with the WTI M1-M2 price spread widening to $0.75/bbl in early August compared with an average $0.30/bbl in July and -$0.13/bbl in June.

European spot crude markets were strengthened by supply disruptions in Libya as mounting civil unrest among workers angry over salary and management issues forced the closures the country's three major export terminals in recent weeks. Expectations for reduced Iraqi Basrah supplies to Europe, which averaged 400 kb/d in July, also supported spot prices. A seasonal low in North Sea production in August due to scheduled maintenance work, combined with Russia higher domestic consumption and increased shipments to Asia away from Europe, have also tightened the market in the Mediterranean.

Spot prices for Urals crude versus Brent were off the charts again in July on sharply lower Russian crude exports to the Mediterranean, bolstered by reduced Iraqi and Libyan supplies. Urals crude traded at a $0.83/bbl premium to Brent on average in July compared to a more typical discount against Dated Brent, which averaged -$0.20/bbl in June.

An unexpected loss of Iraqi crude exports in September is having a ripple effect across European, Middle Eastern and Asian spot crude markets. Iraq's state oil marketing arm, SOMO, told customers in recent weeks that exports would be cut in September by around 25% due to planned infrastructure work at southern export terminals. Officially, volumes will be curtailed by 500 kb/d in September but traders fear the shut-in could take 4-6 months given the scope of the project (see OPEC Supply, 'Iraqi Output Forecast to Tumble Near Term on Temporary Export Constraints').

The lack of clarity on the programme of work has injected a high level of uncertainty on availability of supplies and pushed price differentials for alternative crudes such as Urals in Europe to record levels while Dubai and Oman grades are in demand in Asia. However, the relative strength of Brent over Dubai increased the discount between the two grades. Dubai was trading a $4.75/bbl discount in early August compared with an average $4.44/bbl in July and $2.66/bbl in June. A rush to replace Iraqi barrels was also behind a rise in prompt month spot prices with the Dubai M1-M2 price spread increasing to $0.57/bbl in July compared with $0.33/bbl in June.

Spot Product Prices

Refined product crack spreads largely declined in July on the back of stronger benchmarks crudes and rising product inventories. Seasonal demand for middle distillates in Asia and gasoline in the US, supported by high RIN prices, were the exceptions. The bottom of the barrel was weak in July and, in particular, low-sulphur fuel oil cracks fell sharply across all regions.

Gasoline crack spreads inched up in most regions bar Northwest Europe, peaking in mid-July before easing towards the end of the month. Notably, Singapore cracks peaked at over $25/bbl and then plummeted to $12.25/bbl by the end of July. US prices seesawed throughout the month on speculation over potential new rulings over the controversial Renewable Identification Numbers (RINs), with prices ramping up as high as $1.48/gal in mid-July (See Refining, 'US Biofuel Certificates Surge on Uncertainty over Mandates and Blend-Wall Hit'). Meanwhile, many US refiners are reportedly choosing to export gasoline rather than bearing the additional RIN cost. Prices were also supported by a decline in US gasoline stocks in mid-July, implying stronger-than-expected demand. Strong exports of gasoline to Africa from Europe as well as firmer demand within Asian region kept the crack spreads strong.

Naphtha crack spreads closed the month weaker in Europe and slightly firmer in Asia. In Europe, demand from refiners to reform naphtha into gasoline eased, pressuring cracks. In contrast, petrochemical producers in Asian continued to favour naphtha as a feedstock over LPG, given the latter's higher price.

Gasoil crack spreads were weaker in Atlantic basin markets but strengthened in Asia ahead of seasonally stronger demand for middle distillates. Reduced supplies of Russian diesel tempered the decline in European crack spreads. In Asia, firm demand from Indonesia, the Philippines and Africa amid refinery disruptions in northeast Asian and Middle Eastern countries put a floor under markets, although cracks eased over the month.

Jet/kero crack spreads initially fell as the peak demand season neared the end in Europe and the US but by the second half of July differentials showed signs of recovery in Europe. In contrast, Singapore crack spreads ebbed and flowed over the month but largely continued their positive trend in July, supported by refinery maintenance in some Asia countries.

Fuel oil crack spreads fell sharply in all regions. Bunker fuel buying from shippers was reportedly weak during July. However, demand from Asian and Middle Eastern utilities for summer power generation was reportedly relatively strong. Crack spreads for LSFO abruptly fell in early July compared with the steady downward trend seen in HSFO, although they showed some modest signs of recovery later on.


Following brisk demand, rates for VLCCs and Suezmax tankers were pushed to unseasonal highs in early July. Thereafter these carriers experienced mixed fortunes with Suezmax vessels outperforming larger tankers. Indeed, after briefly exceeding $13/mt in early-July, rates on the benchmark VLCC route between the Middle East Gulf and Asia plummeted back to under $9.50/mt by early-August, as the bloated tonnage pool, despite reportedly healthy demand, drove rates lower.

In contrast, rates on the benchmark West Africa-US Gulf Coast Suezmax trade surged throughout July and early August as the supply and demand of tankers remained more balanced than elsewhere. Rates extended their gains despite a severe drop-off in transatlantic trade as fixings to Europe remained steady. At the time of writing, rates stood at $16.70/mt, their highest level since late 2012, although the upward momentum might not be sustained as reports are circulating of vessels amassing in the region.

Northwest European crude tanker markets have followed seasonal patterns where maintenance in the North Sea and seasonally low Russian exports have limited tanker demand. Indeed, although rates for Aframax tankers on trades out of the Baltic and North Sea firmed slightly in mid-July as charters scrambled to cover date-specific cargoes, rates soon fell back to previous levels of approximately $5.50/mt.

It was also a story of contrasts in product tanker markets as the Atlantic Basin outperformed East of Suez markets. In the Atlantic Basin, the benchmark UK - US Atlantic Coast gasoline trade rebounded from a 2013 low of $16.80/mt in early-July to a high of $25.80/mt at the time of writing. This surge reflected both higher demand, as the US driving season ramped up, and an initial lack of available vessels in Northwest Europe, where many owners were reportedly unwilling to ballast back across the Atlantic while rates remained low. With rates now at a higher level, this will likely attract ballasters, which is liable to put downward pressure on rates as these vessels arrive in Europe. In the East, rates on the Singapore-Japan trade have remained in decline since early-April as despite recent healthy refinery activity, regional trade has remained weak leaving tonnage slack.



  • Global refinery crude demand surged by 3.1 mb/d in June, its highest monthly increase on record. At 77.2 mb/d, global throughputs stood 2.0 mb/d above year-earlier levels. Refinery activity is expected to have risen further to reach a seasonal peak in July, before autumn maintenance curbs runs from August onwards.
  • Global throughput estimates for 2Q13 have been revised upwards by 0.1 mb/d since last month's Report on higher baseline data and exceptionally strong June and July refinery activity, partly offset by higher-than-expected outages in the Middle East and Africa. The incorporation of annual 'Green Book' data for non-OECD countries lifted the 2011 baseline by 190 kb/d. Global runs are now assessed at 74.8 mb/d for 2Q13, rising to 77.3 mb/d in 3Q13.
  • Refinery margins fell in all regions in July, as benchmark crude prices rose faster than product prices. Strong global crude demand, and reduced supplies of North Sea grades and Urals in Europe, underpinned European declines in margins, while a stronger WTI slashed US Midwest margins. At the same time, high refinery activity led to product stock builds in key consuming countries, limiting product price increases.
  • OECD crude runs rose steeply in June, with increases of around 0.6 mb/d in each of the three OECD regions. Aggregate OECD throughputs averaged 37.7 mb/d, up 1.9 mb/d m-o-m and 0.6 mb/d above a year earlier. While a steep seasonal increase had already been factored into last month's Report, the actual ramp-up in refining activity exceeded expectations, leading to an upward revision of 0.8 mb/d for the OECD as a whole.

Global Refinery Overview

Global refinery crude throughput estimates have been raised by 100 kb/d for 2Q13 and 340 kb/d for 3Q13 on a combination of higher baseline data and surging refinery activity. Preliminary data for the OECD show significant increases in refinery runs spanning all regions in June. In aggregate, OECD runs rose by 570 kb/d y-o-y, which if confirmed by official data submissions would be the highest annual increase since February 2012. From May, OECD runs surged by 1.9 mb/d, with gains equally distributed across the three regions. In the non-OECD, Chinese refinery runs rebounded by an unexpectedly steep 440 kb/d in June, to 9.7 mb/d, from relatively modest levels earlier in 2013. US and Russian runs at near-record highs in July provided further upside to 3Q estimates.

Baseline adjustments to several non-OECD countries have been made for the years up until 2011. Non-OECD crude runs have been revised upwards by 80 kb/d for 2010 and 190 kb/d for 2011, based on the incorporation of annual data from the IEA's Energy Statistics of Non-OECD countries (2013 edition). The 'Green Book', as the statistical publication is better known, is being released by the IEA Energy Data Centre simultaneously with this Report. Most of the revisions focus on FSU and Middle East countries for which little information is available on a monthly basis.

Notwithstanding strong runs in the OECD in June and continued high runs in the US into July, annual growth in crude throughputs continues to be dominated by non-OECD countries. In 2Q13, non-OECD Asia and the FSU accounted for most of the increase. Growth is expected to be more broadly dispersed in 3Q13, with annual increases also coming from the Middle East, Latin America and Africa, due to new refinery capacity and lower outages expected. In all, global crude throughputs are forecast to rise from 74.8 mb/d in 2Q13 to 77.3 mb/d in 3Q13.

Global Crude Demand Surges at Record Pace

The seasonal uptick in refinery crude demand has been stronger than normal this time of year, as the start-up of new capacity compounded the impact of significant refinery outages over April and May. Since its seasonal low-point in April, when global crude throughputs were assessed at 73.2 mb/d, refinery intake has risen to an estimated 78.3 mb/d in July, a remarkable 5.1 mb/d increase over the three months. By comparison, over the past five years, the increase in the same period has averaged 2.3 mb/d.

While the increase has to be seen in the context of an exceptionally weak April, when significant planned and unplanned outages curbed refinery activity to its lowest level since October 2011, this is the first time we see such a three-month surge since the IEA started gathering monthly global refinery activity levels in 2004.

The largest monthly increase came in June, at 3.1 mb/d, with strong gains in both the OECD and the non-OECD region. OECD runs were up by 1.9 mb/d m-o-m, spread across the three regions. Non-OECD runs were boosted by a recovery in Chinese runs and the expected return of Middle Eastern and African refineries from heavy maintenance. Seasonal increases in Russian throughputs, to near record highs, also lifted runs.

The exceptional seasonal increase in crude demand is coming at a time of lower crude supplies both from planned and unplanned outages and goes a long way towards explaining recent increases in Brent and WTI crude oil prices to four and 16-month highs, respectively.

Refining Margins

Refinery margins fell in all regions in July, as benchmark crude prices rose faster than product prices. Strong crude demand and reduced supplies of North Sea and Urals grades in Europe underpinned European declines, while a stronger WTI caused margins in the US Midwest to nosedive. At the same time, high refinery activity led to product stock builds in key consuming countries, limiting product price increases.

European refinery margins declined by an average $1.40/bbl in Northwest Europe and a steeper $2.06/bbl in the Mediterranean in July. Simple refineries moved firmly into the red. Urals margins were particularly weak due to the grade's recent strength. Reduced exports of Russian crude, due to both field maintenance and strong Russian refinery demand, coupled with lower Iraqi Kirkuk supplies, has provided strong support to Urals prices compared to other benchmarks, reversing the traditional Urals discount to Brent into a premium.

In the US, Midcontinent margins plummeted for a second consecutive month, due mostly to strong gains in WTI. The WTI discount to Brent narrowed to only $3.21/bbl in July, from $7.16/bbl in June and $14.80/bbl a year earlier. The start-up of BP's expanded Whiting refinery caused regional crude demand to soar. As the plant's new secondary units have yet to be commissioned, the plant is running light sweet crudes instead of the heavy Canadian feedstock for which it is desgined. Midcontinent WTI cracking margins fell from a high of $38/bbl in early June, to $12/bbl in early July, but had recovered to over $18/bbl by end month. Regional margins remain high compared to other benchmarks, however, ranging from $15-$22/bbl in July, excluding fixed and most variable costs. Declines on the US Gulf Coast were more muted, and held up for Maya/Mars coking configurations.

Singapore refining margins generally declined in July, except for Dubai hydrocracking margins, which held up due to more muted increases in Dubai crude compared to other benchmarks, and on improved product cracks for light and middle distillates.

OECD Refinery Throughput

Preliminary data show OECD crude throughputs surged 1.9 mb/d in June, the sharpest monthly increase since November 2002, apart from November 2010 when French refineries returned from strike action a month earlier. If confirmed by official statistics, this would be the steepest increase for this time of year since at least 1996. The surge in refinery activity spanned all regions, with roughly equal gains in Europe, Asia Oceania and the Americas. OECD Americas throughputs were 680 kb/d higher, led by the US, although Canada also reported growth as refineries returned from maintenance. European runs were higher across the board, in part supported by improved economics. For the first time since September 2012, regional runs rose above year-earlier levels, albeit by a modest 80 kb/d. The largest surprise came in the Pacific, however, with Japan and South Korea reporting monthly increases of close to 0.3 mb/d each. Japanese turnarounds seem to have been completed earlier than normal this year, with crude throughputs running some 320 kb/d above last year's levels.

The estimate of 2Q13 OECD crude runs has been lifted by 100 kb/d since last month's Report, to 36.4 mb/d. Only American runs surpassed year-earlier levels for the quarter, up 120 kb/d year-on-year. Estimates for 3Q13 have been revised upwards by an even steeper 365 kb/d, to average 37.6 mb/d. Surging US refinery runs in July and stronger-than-expected Japanese runs underpin the upgrade. European runs, estimates of which have also been revised upwards for 3Q13, are expected to continue to contract on an annual basis. Indeed, we forecast that the annual reduction in European runs will gain momentum, widening to 400 kb/d in 3Q13, from just 130 kb/d in 2Q13. Underlying regional demand remains weak, and refinery margins have come down from June's improved levels. Furthermore, as refinery runs in North Africa increase with the return to full rates of Algeria's 335 kb/d Skikda plant after prolonged maintenance and upgrades, some export demand will also vanish.

Crude throughputs in the OECD Americas in June were lifted by gains in both the US and Canada. Canadian crude runs rebounded by 270 kb/d from a month earlier, after maintenance at Valero's 265 kb/d Quebec and Suncor's 140 kb/d Edmonton plants reduced rates over April and May. Crude oil processed by US refiners rose by 400 kb/d, with month-on-month increases mostly accounted for by the US Gulf Coast and the Midcontinent. Despite recent gains in WTI prices, US crude runs continue to be supported by healthy margins due to discounted feedstock as well as rising export demand.

Compared with a year earlier, the US Gulf Coast and East Coast posted particularly steep gains. Increases on the Gulf Coast followed the start up of Motiva's Port Arthur refinery expansion earlier this year, while on the East Coast, the restart of the Trainer refinery near Philadelphia under new ownership in September 2012 underpinned growth. Delta Air Lines Inc. bought the 185 kb/d plant from ConocoPhillips earlier last year, after the latter shut it in September 2011 due to poor returns.

Weekly data from the US Energy Information Administration (EIA) show US refinery activity ramping up further into July, to its highest level since 2005. Total crude intake surpassed 16.2 mb/d in the week ending 12 July, before falling back slightly towards month-end. For the month as a whole, crude intake was 345 kb/d higher than June, and 395 kb/d above year-earlier levels, at 16.0 mb/d.

The sharpest increases came, not surprisingly, from the Midwest and the Gulf Coast. Gross inputs into Midwest plants have surged 0.6 mb/d from May's low-point. The start-up of a new 260 kb/d crude unit at BP's Whiting refinery in Illinois and the completion of regional refinery maintenance underpinned the increase. BP is in the process of upgrading the refinery to process more heavy Canadian crude, with the installation of a 102 kb/d coking unit and a 105 kb/d hydrotreater. The coking unit, which will be the largest of its kind in the US, is scheduled to start up later this year. In the mean time, the plant is processing light crudes. Providing a partial offset, a 105 kb/d crude unit at the same plant has reportedly been taken offline for maintenance from mid-July.

Even more noteworthy, US Gulf Coast crude runs reached a massive 8.4 mb/d on average in July, almost 0.5 mb/d above the same time last year. The year-on-year increase stems largely from Motiva's new 325 kb/d crude unit at its Port Arthur plant. The unit only came on line at the end of January this year after experiencing problems at start-up last year. The entire 600 kb/d refinery was shut for about three weeks from mid April for maintenance work.

RINs Rally Casts Spotlight on Renewable Policy

On 6 August, the US Environmental Protection Agency (EPA) released its final rule governing the volumes of biofuels to be blended in the nation's transportation fuels this year. The Agency maintained its overall target for biofuel use in 2013, requiring that a total of 16.55 billion gallons (or 1.1 mb/d) of biofuels be blended into US gasoline and diesel supplies this year, up from last year's target of 15.2 billion gallons. Uncertainty over the EPA's decision, which was more than eight months overdue, and concern about the US motor fuel market's limited capacity to absorb more ethanol in years to come, have sent the price of so-called Renewable Identification Numbers, or RINs, soaring this year.

The 'blend wall' represents the maximum volume of ethanol that can practically be blended into the gasoline pool. While E15, a gasoline blend with 15% ethanol content, has been approved for use by the EPA in 2001 or newer model-year vehicles, it is still widely accepted that ethanol use in gasoline should not exceed 10%. Retail stations have been hestitant to propose E15 gasoline. Since they will need to continue to provide regular fuel for older cars and power equipment, they are required to install a new underground storage tank and pump to offer E15 at significant expense. Even if E15 was offered, consumers have been reluctant to switch due to concerns over damage to engines and warranty issues. BMW, Chrysler, Nissan, Toyota and VW have said their warranties will not cover fuel-related claims caused by E15. Ford, Honda, Kia, Mercedes-Benz and Volvo have said E15 use will void warranties, citing potential corrosive damage to key components.

Because of falling US gasoline demand, oil markets are expected to hit the E10 blend wall in 2014. EPA noted in its latest statement that it would consider reducing the mandate for both advanced biofuel and total renewable volumes in its forthcoming 2014 proposal, which will be published in September. Industry still fears that there will be a shortage of RINs for next year, and market participants have been hoarding RINs because of the uncertainty over how much blending will have to be done this year and in 2014. Some industry participants warn that a shortage of RINs will force firms to reduce the gasoline volumes offered in the US market in 2014 and after. Instead, gasoline production could be exported as only fuel supplied to the US market require a RIN certificate.

The impact of the biofuel blending requirements and the increasing cost of RINs have an uneven impact for US refiners. Those refiners who do more of their own ethanol blending into refined fuels, rather than leave it to pipeline companies or other third parties, can help mitigate the cost. Blenders generate a credit, while those who sell unblended fuels must buy RINs in the open market to meet the mandate. Valero, which is hardest hit by the soaring RIN prices, is having to spend up to $800 million this year on RIN certificates according market estimates. Independent refiner PBF Energy, which runs three refineries on the US East Coast, spent $69 million on biofuel credits in the first half of 2013, and expects to spend more than $200 million for the year as a whole. Others, such as Exxon, say they have enough blending capacity to keep RIN costs at a minimum. With winners and losers in the US fuel production and marketing space, concerns are that in the end the cost is being passed on to consumers in the form of higher retail gasoline prices.

Refinery activity in OECD Europe also rose sharply in June, by 610 kb/d, to 12.1 mb/d, its highest level since September. The increase was widespread, as refiners in most countries completed spring maintenance and margins generally improved. In all, average 2Q12 European crude runs were unchanged from last month's report, at 11.7 mb/d.

In July, Italy's API restarted the idled Falconara refinery. The 85 kb/d plant had been shut for the last six months in order to upgrade the power station. The company had said earlier that the plant could be closed for up to one year. Meanwhile, ENI resumed normal operations at its 100 kb/d Gela refinery which had been running at reduced rates and its 120 kb/d Taranto plant, which had mostly been shut since last year due to poor margins.

High European runs are unlikely to continue beyond the peak-summer-demand months, however, given continued poor economics and the onset of autumn maintenance. Exxon's 246 kb/d Antwerp refinery, BP's 400 kb/d Rotterdam refinery, UK's 200 kb/d Lindsey refinery and Repsol's 220 kb/d Bilbao plant are all scheduled to undertake maintenance in September and October. Cepsa's Tenerife refinery however has moved forward its planned autumn shutdown to July due to weak profits. While 3Q13 estimates have been raised by 100 kb/d on average since last month's report, regional runs are still seen declining 400 kb/d annually, to 12.2 mb/d.

Refinery throughputs in OECD Asia Oceania rebounded sharply in June, despite reports of continued high offline capacity. The region as a whole rose almost 600 kb/d from a month earlier, with gains of 290 kb/d and 270 kb/d in Japan and South Korea, respectively. Weekly data from the Petroleum Association of Japan show Japanese crude runs continuing to rise in July, in line with seasonal trends. Japanese crude runs will likely peak in August before maintenance again picks up from September onwards. Cosmo Oil permanently shut its 140 kb/d Sakaide refinery in July, to comply with government mandates to reach certain upgrading ratios.

Non-OECD Refinery Throughput

Non-OECD refinery throughputs for 2Q13 are unchanged since last month's report, though that aggregate figure masks mutually offsetting regional changes. Higher-than-expected Asian crude runs, in particular in China in June, were offset by downward revisions to Middle Eastern and African throughputs. Maintenance cuts in Kuwait in April and Saudi Arabia in May exceeded expectations, taking regional runs an estimated 330 kb/d below year-earlier levels. On the other hand, Chinese refiners processed the most crude since February, after several months of sluggish activity. At 38.4 mb/d, 2Q13 non-OECD throughputs were 0.5 kb/d above a year earlier, with growth mostly accounted for by non-OECD Asia and the FSU.

Annual growth is forecast to accelerate to 1.6 mb/d in 3Q13 and span virtually all regions. Latin American and African throughputs are expected to rebound from depressed levels a year earlier, when planned and unplanned outages reduced runs. Refinery runs in the Middle East will also rebound as maintenance was completed in 2Q13 and Saudi Arabia's 400 kb/d Jubail refinery ramps up towards full production, while growth in the FSU and non-OECD Asia is expected to continue at current rates. The incorporation of historical 'Green Book' annual data lifted the non-OECD baseline by 80 kb/d for 2010 and 190 kb/d for 2011.

Chinese refinery throughputs rose sharply in June, averaging 9.7 mb/d, due both to lower plant maintenance and better margins. According to data from the National Bureau of Statistics, June refinery runs surged 10.0% y-o-y and 4.8% on a monthly basis. The increase comes despite demand concerns amid signs of a slowing economy. Offline capacity due to maintenance was about 250 kb/d lower than in May, at only around 350 kb/d. On the other hand, refinery margins rose throughout the month of June, to the highest level so far this year by the end of the month after the government raised product prices. Lower crude import costs in June also helped margins. Industry surveys of planned refinery output in July show production steady from June, though runs are expected to fall in August as maintenance picks up again. PetroChina's 200 kb/d Pengzhou refinery is now scheduled to start up in October. The company had stalled the start-up since late last year because of a shortage of crude and an earthquake. The company has now agreed a supply deal of 140 kb/d Russian crude from January next year.

In Other Asia, Indian crude runs were relatively unchanged in June at 4.3 mb/d, but 220 kb/d lower than expected. Reliance's export refinery increased its intake by 65 kb/d from reduced rates in May due to an unexpected shutdown. A full shutdown of Numaligarh Refinery Ltd's 60 kb/d plant in the Indian state of Assam, due to a fire at the end of May, and lower runs at IOC's Panipat plant provided an offset, however. A fire at the Malacca refinery in Malaysia forced it to shut in mid-June. While the 100 kb/d CDU has reportedly restarted, technical issues forced the shutdown to last longer than expected and the refinery is still running at a reduced rate.

Russian refiners set yet another record in July, processing 5.7 mb/d of crude according to preliminary data. While throughputs were only 70 kb/d higher than a month earlier, the ramp up since April's low point now totals more than 800 kb/d. The recent high Russian crude demand has restricted crude exports and provided strong support to Urals prices, which recently have been showing a premium to Brent. Regional runs are expected to fall steeply in September and October after seasonal maintenance peaks. Almost 0.9 mb/d of Russian capacity is forecast to be offline in September and 600 kb/d in October, up from around 300 kb/d over the June-August period. Since last month's Report, some historical data for Belarus, Turkmenistan and Uzbekistan has been included, lifting the 2011 baseline by some 120 kb/d from previous estimates. 

Refinery crude runs in the Middle East rose by 435 kb/d in May, from a seasonal low-point in April. Throughputs are assessed rising sharply in both Kuwait (+175 kb/d) and Saudi Arabia (+100 kb/d) as maintenance started to wind down. Saudi runs likely rose further in June when the 400 kb/d Yanbu refinery resumed full rates, after a near two-month maintenance shutdown from mid-March to mid-May. The ramping up of runs at the newly commissioned Jubail refinery should also support runs towards year-end, when the plant is expected to be fully operational.

In Africa, Libya's Ras Lanuf refinery reportedly halted operations in late July due to worker's protests and civil unrest. Workers at the 220 kb/d plant reportedly went on strike at the end of July following similar protests at the major crude oil terminals Ras Lanuf and Es Sider earlier in the month. In South Africa, refinery runs have been revised lower for May and June due to a shutdown of Sapref's 180 kb/d Durban refinery since April. The plant was scheduled to resume operations in early July. Algerian throughputs rose by 50 kb/d in May, to 400 kb/d, as the country's largest refinery, the 335 kb/d Skikda plant, completed prolonged maintenance. Runs were assessed higher yet for June as the refinery reached full output levels.