Oil Market Report: 14 November 2013

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Highlights

  • Futures prices trended lower in October and early November to around four-month lows. A plunge in WTI prices far outpaced the drop in Brent. Markets appeared well supplied in October, with global refinery runs at seasonal lows. Brent last traded at $107.20/bbl and WTI at $93.30/bbl/.
  • The estimate of global oil demand for 2013 has been raised marginally following stronger-than-expected 3Q13 European demand. Demand growth is projected at around 1.0 mb/d for 2013, gaining momentum to 1.1 mb/d in 2014 as the underlying economy continues to improve.
  • Global oil supplies grew by 0.6 mb/d in October to 91.8 mb/d on record-high non-OPEC output. Year-on-year, October supplies rose 640 kb/d, as a 1.84 mb/d surge in non-OPEC liquids and OPEC NGLs offset a 1.20 mb/d plunge in OPEC crude. Total non-OPEC supply growth is forecast at 1.3 mb/d for 2013 and 1.8 mb/d for 2014.
  • OPEC crude supply fell in October for the third month running, led by a cutback in Saudi output. Ministers will meet on 4 December to discuss the outlook. Several ministers said they expect an unchanged output target of 30 mb/d. The 4Q13 and 1Q14 'call on OPEC and stock change' is unchanged at 29.6 mb/d and 28.6 mb/d, respectively.
  • The forecast for 4Q13 global refinery runs has been cut by 0.6 mb/d to 76.7 mb/d on reduced European throughputs. Year-on-year growth in throughputs is now expected to slow to 0.4 mb/d in the quarter. Weak margins and seasonal plant maintenance slashed European runs in September to their lowest level since April 1991.
  • OECD industry stocks built counter-seasonally in September, reversing August's draw. Stocks of refined products covered 30.8 days of forward demand at end-September. Preliminary data point to an unusually shallow draw of 7.6 mb in total oil inventories in October.

Riding the roller coaster

Oil prices have staged a spectacular reversal since their summer rally. Middle East politics may have something to do with the moves in both directions, but that's only part of the story. Seasonal swings in supply and demand likely played at least as big a role. This year the effect of those seasonal cycles has been especially dramatic, compounded as it was by coincident, structural shifts in liquids production and global refining capacity. Although the medium-term outlook seems to be one of easing fundamentals and first-quarter balances look comfortable on paper, the same short-term cycles that have recently undermined prices may soon cause them to come under renewed upside pressure.

Front-month WTI futures prices on the NYMEX fell by more than $15/bbl in October and into early November from their September highs, retracing their summer gains. Brent eased by nearly $10/bbl. A string of Middle East news headlines served as backdrop for this roller coaster: prices initially surged along with rising concerns about potential western military strikes on Syria, which at one point seemed imminent. Their decline started when a deal with Syria dispelled those fears in early September, and accelerated amid rising hopes of a breakthrough in negotiations between Iran and the P5+1. Market commentators were quick to connect the dots, blaming high prices on a Syrian "risk premium" and crediting hopes of an Iranian "peace dividend" for their decline.



Market perception of supply risks associated with news events may have contributed to the price changes, but swings in refining demand for crude were likely as powerful a driver. A seasonal surge in global refinery throughputs helped spark the summer rally. This year that seasonal increase was unprecedented in scope, compounded as it was by the commissioning of new, non-OECD refining capacity and the unwinding of exceptionally steep spring maintenance. Refinery runs have since gone into reverse, plummeting by 3.6 mb/d from their July peak to October - a plunge also consistent with seasonal trends but steeper than usual. Europe's ailing refiners exacerbated the decline, with regional runs plummeting by more than 1 mb/d over September and October to what may be their lowest level since 1989. Reduced US runs also affected US Gulf Coast prices.

Meanwhile, liquid supply has remained robust, as surging North American production has so far more than offset disruptions elsewhere. Despite continued OPEC production problems, for now global oil markets seem well supplied: OECD total oil inventories built counter-seasonally in September as crude stocks swung back to a surplus versus average levels. Iranian oil in floating storage surged by an estimated 11 million barrels in October.

If seasonal cycles in crude and product demand are any guide, the recent easing of prices may be relatively short-lived. End-user demand is on the verge of a seasonal ramp-up, while refinery throughputs look set for a steep rebound in November and December. The recent trend in refining suggests that the bounce in crude demand could again be steeper than usual. Meanwhile production problems in Libya and Iraq, among others, continue to relentlessly fester, and may prove more market-supportive in a context of rising demand than they have been during the recent shoulder season. Given proverbial uncertainties about the weather and geopolitics, the market might not be at the end of its roller coaster ride.

Demand

Summary

  • A spate of higher-than-anticipated 3Q13 demand data have raised the projection of global demand for 2013 by 45 kb/d, to 91.0 mb/d. Europe accounted for the bulk of the upward revisions, led by Germany, France, the UK, Italy and Turkey.
  • Overall demand growth of around 1.0 mb/d is forecast for 2013 as reduced expectations of economic growth partly offset upward revisions to 3Q13 demand. The International Monetary Fund (IMF) lowered its GDP forecast for 2013 and 2014 in its latest World Economic Outlook (WEO), released in October. The weaker economic outlook has trimmed the growth forecasts for 4Q13 and 2014.
  • Growth of around 1.1 mb/d is forecast for 2014, a modest acceleration on 2013 as the macroeconomic backdrop likely improves. A gradual restart of idled Japanese nuclear power generation capacity and the assumption of a return to more normal winter weather limit the upside for 2014.


  • Countries whose demand outlook has been reduced for 2014 include the two largest economies, the US and China. The adjustments reflect lower expectations of economic growth from the IMF for both countries, but considerable uncertainty remains. GDP growth of 2.6% is forecast for the US in 2014, but the unresolved US debt-ceiling question could test this momentum. The outlook for China's efforts at transitioning from an export-driven economy to one more focused on domestic consumption is equally uncertain and could test the IMF's prediction of 7.3% GDP growth in 2014.

Global Overview

Higher-than-expected oil product deliveries in several economies in 3Q13 have raised the global 2013 demand forecast by 45 kb/d, to 91.0 mb/d. The 2013 growth assessment has also been raised by 50 kb/d, to 1.0 mb/d. The effect of those upward revisions has been tempered by reduced IMF macroeconomic projections, however. For 2014, the forecast growth rate has been trimmed by a marginal 30 kb/d, to 1.1 mb/d, reflecting the slightly more pessimistic IMF outlook. Under this revised forecast, global oil consumption is expected to average 92.1 mb/d in 2014.

The 3Q13 global demand estimate was adjusted upwards by 135 kb/d since last month's Report, to 91.8 mb/d, based largely upon revised demand data for August. Several countries accounted for the bulk of the adjustments for August, led by Chinese Taipei (+105 kb/d), the UK (+75 kb/d), Turkey (+70 kb/d) and Belgium (+50 kb/d). Saudi Arabia provided a partial offset with a downward adjustment of 95 kb/d in August, as did Canada (-80 kb/d) and Russia (-50 kb/d). Preliminary data revisions for September near-cancelled themselves out, with a marginal downside-bias. Notable September cuts include Mexico (-155 kb/d), China (-135 kb/d), Japan (-125 kb/d) and South Korea (-80 kb/d), whereas the upward adjustments were clearly centred around Europe, with Germany up 90 kb/d on our month earlier forecast, France (+60 kb/d), Italy (+60 kb/d) and Russia (+130 kb/d).

Outweighing this higher base-effect are reduced macroeconomic assumptions. The IMF, in its October WEO, lowered its global economic growth projections for both 2013 and 2014, versus the previous WEO released in July. The world economy is now forecast to grow by around 2.9% in 2013, down from 3.2% in the July WEO. Growth is forecast to accelerate to 3.6% in 2014, down on July's 3.8% forecast. Lower expectations of economic growth for North America, the FSU, non-OECD Asia and Latin America have negatively impacted forecasts of oil demand growth in 4Q13 and across 2014 as a whole.

Top 10 Consumers

US

The US demand forecast has been curtailed modestly, with growth of 0.5% now expected for 2013, versus the 0.6% forecast carried in last month's Report. The growth estimate has been reduced on account of the IMF curbing its US economic growth prognosis for 2013 to 1.6%, against the IMF's 1.7% growth projection released in July. Preliminary estimates of US oil deliveries for September imply that the traditional seasonal dip in demand has remained true, with the end of the driving season seeing gasoline deliveries plunge to a six-month low. At roughly 18.4 mb/d, the estimate of oil deliveries for September is little-changed on last month's forecast.







Despite a seasonal lull, the US oil demand estimate still grew y-o-y in September, rising as relatively strong manufacturing conditions supported an uptick in industrial fuel demand, notably naphtha, LPG and gasoil. The US Census Bureau reported some upside in orders of US-produced manufactured durable goods, while the Institute for Supply Management's manufacturing sentiment index rose in September, up to its highest level since April 2011. US oil demand for 3Q13 reflects this trend, with relatively robust gains seen in naphtha, diesel and LPG, whereas the more consumer-driven gasoline sector has lagged a little behind, although it too is showing y-o-y growth.

Based upon the latest weekly releases from the US Energy Information Administration we have revised up our forecast of October demand by 80 kb/d, to 18.6 mb/d. Indeed, the latest weeklies suggest even stronger growth in October, but, if experience is any guide, that could stem at least in part from an understatement of exports. From January to August, for example, the discrepancy between the weekly demand numbers and the revised month series varied between -0.6 mb/d and +0.4 mb/d. We lend an extra degree of caution to the October numbers as the near two-week US government shutdown curbed public sector oil use, dampened consumer confidence and likely dented US driving demand. The University of Michigan's closely watched consumer sentiment indicator for October eased to 73.2 versus 77.5 in September.



China

Estimates of Chinese oil demand imply a continuation of the recent softness, with only very modest y-o-y growth expected in October, up by around 1.5% to 9.9 mb/d, as ongoing refinery overhauls kept refinery runs, which are a key component of the Chinese apparent demand number, relatively low. An even smaller demand reading would have been seen had it not been for recent evidence (China, Oil, Gas and Petrochemicals) that showed some product destocking has been occurring, which has raised the y-o-y demand trend.



Continued concerns about the sustainability of the Chinese banking sector, and official confirmation that the IMF has reduced its projections for Chinese economic growth, have curbed oil demand forecasts for both 2013 and 2014. Growth of around 3.8% is now assumed for 2013 (4.0% in last month's Report) and 3.7% in 2014 (3.9% before). The quantity of bad loans written off in 1H13 by the biggest banks tripled according to media report, raising concerns, expressed by some financial institutions, of a fresh wave of potential defaults.



Japan

Continued replacement of oil as a source of power in the Japanese energy mix, coupled with the end of summer demand, saw a sharp drop in Japanese oil product deliveries, which fell to 4.1 mb/d in September, down 7% y-o-y and 125 kb/d below the estimate carried in last month's Report. Sharp upticks in coal and hydro-power usage in electricity generation have trimmed 3Q13 oil demand. The pace at which Japanese oil consumption falls on a y-o-y basis will likely ease in 4Q13 and into 2014, however, after Kansai Electric Power Ohi shut its two remaining nuclear reactors for maintenance in September. A restart is likely conditional on compliance with the new, more stringent security standards implemented in July, likely delaying the resumption of Japanese nuclear capacity until 2014.

Demand from Japan's petrochemical sector is expected to get a boost in 4Q13 from the restart of Mitsubishi Chemical Co.'s newly expanded, 540 000 tonne-per-year naphtha cracker unit at its Kashima facility. Nevertheless, the overall forecast for 2014 is one of contracting Japanese demand, as the gradual resumption of idled nuclear capacity compounds the impact of a projected slowdown in economic growth, to +1.2%, from nearly 2% in 2013.



India

Indian demand swung back into y-o-y growth of 1.4% in September, arresting several consecutive months of decline. Gains in LPG and bitumen demand led the small September gain. The growth forecast for the year as a whole has been reduced to 1.4%, from +1.5% in last month's Report, as both data through to the end of September and IMF GDP projections have been curtailed. Momentum is still forecast to accelerate in 2014, to 3.1%, but is down on the previous estimate, as the underlying macroeconomic acceleration is expected to moderate.



Russia

Growth of around 3.2% is forecast for Russian demand in 2013, roughly unchanged on last month's Report, as a downwardly revised IMF forecast of Russian economic growth is counter-balanced by the persistent strength of the recent data flow. The current demand strength has emerged, since mid-year, supported by an uptick in Russia's usage of industrial fuels. Supporting such a trend are reports from the Federal Statistics Service that industrial production rose by 0.3% y-o-y in September, with the oil-intensive utility sector demonstrating particularly robust growth.



Brazil

The Brazilian demand forecast for 2013 has been revised up marginally, with annual growth of 3.7% now forecast for 2013 versus the previous 3.5% estimate carried in last month's Report, in line with stronger-than-expected data for recent months. Official data for August came out roughly 35 kb/d ahead of our previous forecast, supported by particularly robust gasoline demand and gasoil/diesel at an all-time high. Consumer confidence, as expressed by the Confederacao Nacional da Industria, rose to a five-month high of 110.7 in October. Any reading above 100 denotes 'optimism'.



Saudi Arabia

Weaker-than-expected transport fuel demand led to a downward revision of 95 kb/d to the August estimates carried in last month's Report. August oil demand averaged about 3.3 mb/d, down 2.1% y-o-y, marking the first annual contraction in nine months, as consumer confidence indicators fell into 'pessimistic' territory. The decline in demand spanned all transport fuels, including gasoline, jet/kerosene and gasoil/diesel. The growth forecast for 2013 has accordingly been reduced, to 3.4%, on account of this surprisingly weak August demand, whereas the forecast for 2014, at 3.6%, remains less affected supported by the IMF maintaining its 2014 forecast of an economic uptick to 4.4% from 3.6% in 2013.



Germany

German demand rose y-o-y in September, up for the second month running, which in-turn lifted the forecast for 2013 as a whole as the macroeconomic backdrop appears to improve. Industrial production figures for September, as reported by Deutsche Bundesbank, showed a 1% y-o-y gain, while Markit's manufacturing Purchasing Manufacturers Index (PMI) for October rose to 51.7, its fourth consecutive month above 50, the dividing line between expansion and contraction. The IMF, despite revising its global GDP projections downwards, lifted its economic outlook for Germany in its October WEO. The WEO now projects German GDP growth of 0.5% in 2013, up from 0.3% in the July report, accelerating to 1.4% in 2014 (previously 1.3%). The demand projections for both years have accordingly been raised.

Canada

Canadian demand contracted by 5.5% y-o-y in August, to an estimated 2.3 mb/d, extending July declines. August data fell 80 kb/d short of the forecast carried in last month's Report. Lower industrial fuel demand accounted for the bulk of the revision, a trend that may be reversed if a sharp upturn in manufacturing sentiment reflected in RBC's Manufacturing PMI is confirmed, as many analysts believe it can. The growth forecast for the year as a whole is thus left unchanged at around 0.5%.



Korea

Recent weakness in the South Korean manufacturing sector has curbed industrial demand, with preliminary data for September showing the most rapid y-o-y decline in oil demand in 18 months. Deliveries of only 2.2 mb/d in September were roughly 80 kb/d below forecast in last month's Report and marked the lowest level of demand since March 2013. Gasoil, fuel oil and naphtha led the declines versus last month's Report, as HSBC's Manufacturing PMI remained below 50 for the fourth consecutive month, denoting 'contracting' manufacturing sentiment and hence lessened demand of industrial fuels. The Korean oil demand forecast for the year as a whole has accordingly been trimmed, to -0.1% from +0.3% previously, with notable curtailments applied to the gasoil/diesel, jet/kerosene and fuel oil demand forecasts over last month's Report. Consumer confidence, as measured by the Bank of Korea, fell to a five month low in September, curbing 3Q13 demand somewhat. A swing to modest growth, of 0.3%, is then projected for 2014, as underlying macroeconomic momentum is forecast to accelerate amid forecasts of continued gains in the oil efficiency of the Korean economy.



OECD

According to preliminary data for September, OECD oil demand was roughly flat y-o-y, as heavy declines in Asia Oceania offset gains in Europe and the OECD Americas. Transport fuels have led recent gains in OECD demand, in line with improving consumer confidence, while oil demand for power generation - a relatively small piece of oil demand in the OECD as a whole - declined in Japan and Mexico, the two OECD countries that use the most oil for electricity generation. The preliminary OECD demand estimate is for an average of 45.0 mb/d in September, 0.1% below its confirmed year earlier level. The OECD Americas accounting for over a half of total OECD oil demand, followed by Europe at just under one-third and OECD Asia Oceania, at 17.4% in September.



Americas

Preliminary data suggests that the y-o-y demand trend has risen in September, up 0.5% to 23.2 mb/d, a reflection of the US demand trend. Declines have, however, been seen in Canada and Mexico. Mexican oil consumption fell particularly sharply in September, down 5.2% y-o-y, as power sector fuel oil use switched over to natural gas. Other contributing factors to the sharp Mexican decline included falling road transport demand. The Instituto Nacional de Estadística y Geografía's consumer confidence indicator fell to 94.1 in September, its second consecutive monthly drop and well below the key 100-threshold that separates 'optimism' from 'pessimism'.





Europe

European oil demand is showing signs of life, in line with underlying economic data depicting that the euro zone officially came out of recession in 2Q13. Preliminary oil data for September show demand growing y-o-y for the third consecutive month. Whether the trend will persist after 3Q13 is an open question, as post-recession demand bounces tend to be short-lived, while the ECB has raised additional concerns about the macroeconomic vitality of Europe by announcing a surprise interest rate cut in early-November. Underlying GDP growth in Europe is likely to remain subdued in 2014, with the IMF's October WEO predicting only modest growth of 1.0% for next year. The negative-demand impacts from ongoing efficiency gains are also likely to remain in force. Together these factors will likely weigh on European demand patterns, resulting in a modest net decline of 0.7% in 2014.

For 3Q13, the European demand estimate has been adjusted upwards by roughly 245 kb/d since last month's Report, to 14.0 mb/d, thanks in part to upward revisions to August assessments. The largest August additions versus last month's Report include the UK (+75 kb/d), Turkey (+70 kb/d), Belgium (+50 kb/d) and France (+45 kb/d). Based on a relatively limited sample of preliminary September releases, projections for that month were also revised upwards, led by revisions for Germany (+90 kb/d), France (+60 kb/d) and Italy (+60 kb/d).



The effect of those revisions to 3Q13 demand estimates was compounded by slightly more optimistic projections of European economic growth from the IMF. Together, those two factors conspired to raise the 2013 European demand forecast. In its October WEO, the IMF raised its euro zone GDP growth forecast for 2013 to -0.4%, from the -0.6% assessment carried in July's WEO. The outlooks for France, Spain, Germany and Portugal were all revised upwards, as were those of a few non-euro zone nations such as the UK. In contrast, the 2014 European demand outlook is little changed from that shown in last month's Report, as the underlying economic backdrop remains roughly on par with the IMF's July release.



Asia Oceania

The sharp declines in Japanese power sector oil use, that we have been highlighted in many previous editions of this Report, once again played a dominant downside contributing role to the dramatic decline that appears to have been seen in OECD Asia Oceania oil demand. Preliminary estimates of OECD Asia Oceania oil demand in September show it falling by 5.0% on the year earlier to 7.8 mb/d, with the sharpest declines seen in the fuel oil and 'other products'. Extending recent trends, Japanese power sector oil use continues to drop, with some movement in the electricity generation segment over to coal and hydro. Evidence of frail manufacturing data from South Korea has likely contributed to September's weakness by denting industrial fuel use there too. A further demand contraction is forecast for OECD Asia Oceania in 2014, led by falling Japanese demand as the country gradually returns its idled nuclear power plants to service.



Non-OECD

Demand in the non-OECD region continues to outpace that in the OECD - growing by an estimated 1.3 mb/d in 3Q13 versus an OECD gain of 0.1 mb/d - but the divergence between the two regions is becoming increasingly less pronounced in recent months. Not only has non-OECD momentum growth been creeping along at slightly below its earlier trend, but the trajectory of OECD demand contraction has become flatter. This narrowing of the wedge may be short-lived. Many OECD economies have either just exited recession or otherwise enjoyed an uptick in their previously subdued economic performance, resulting in a post-recessionary bounce in oil consumption in the region. Given that a period of relatively weak, but rising, OECD economic momentum is now envisaged, this OECD bounce is unlikely to be able to persist for very much longer. Non-OECD momentum, meanwhile, has been slightly below trend in recent months, as the region's fast-growing economies go through something of a soft spot. Again, this pattern may prove transient.





The non-OECD 3Q13 demand estimate has been raised by 35 kb/d since last month's Report to 45.9 mb/d, equivalent to a y-o-y gain of 2.9%. Latin America accounted for the bulk of the revision over the previous forecast, led by a 35 kb/d upward adjustment to the Brazilian demand estimate for August (versus last month's Report). The non-OECD Latin American region is now forecast to see y-o-y growth of around 3.4% in 3Q13 and 3.1% for the year as whole, to 6.8 mb/d.



Chinese Taipei accounted for another large data revision, with 105 kb/d added to its August demand estimate. Naphtha demand was revised up by around 80 kb/d in August, following the earlier-than-expected restart of an idled petrochemical unit. Naphtha demand came in at approximately 370 kb/d, a four-month high, and up 18.4% y-o-y. Total oil consumption in Chinese Taipei, in August, rose by around 9.9% on the year earlier, to 975 kb/d, a level of demand that is just below where it is expected to average for the year as a whole.

Along with the generally foreseen acceleration in non-OECD oil demand in 2014, Middle Eastern jet fuel use is forecast to receive an additional boost as the UAE opens its Al-Maktoum International airport to passenger services. The Dubai airport previously only handled cargo flights and some private passenger services. From 4Q13 it will open its doors to international travellers, with a capacity of five million passengers per year potentially expandable to seven million a year. The existing Dubai International Airport is much bigger, already handling 75 million people each year, and could potentially loose travellers to alternative airports such as the new Al-Maktoum, particularly as there are plans to expand Al-Maktoum to 160 million passengers per year by 2020 with the addition of three more terminals and five more runways. Providing additional support to projections of rising UAE transport fuel demand, consumer confidence (as tracked by Nielsen) rose to a three-quarter high of 111 in 3Q13, whereby any reading above the key 100-threshold implies 'optimism' prevails.



Supply

Summary

  • Global supplies posted a monthly gain of 600 kb/d in October to 91.8 mb/d, with a surge in non-OPEC output only partially offset by lower OPEC production. Year-on-year (y-o-y), October supplies stood 640 kb/d higher, with 1.84 mb/d rise non-OPEC liquids and OPEC NGLs compared with a steep 1.20 mb/d decline in OPEC crude.
  • Non-OPEC supplies increased month-on-month (m-o-m) by 740 kb/d in October, to 55.53 mb/d, as strong gains in the North Sea, North America, Russia, and Ghana pushed global output to a record level. The y-o-y gain for October was 1.77 mb/d. Total non-OPEC production growth is forecast at 1.3 mb/d for 2013 and 1.8 mb/d for 2014.
  • OPEC crude oil supply in October trended lower for the third month running, with a steep cutback in output by Saudi Arabia behind the downturn. OPEC production fell by 105 kb/d to 29.89 mb/d. Production has fallen below the group's 30 mb/d output ceiling for the second consecutive month. OPEC oil ministers will gather on 4 December in Vienna to discuss the market outlook for 2014. Several ministers expect that the output target will remain unchanged.
  • The 'call on OPEC crude and stock change' was unchanged for 4Q13 and full-year 2013, at 29.6 mb/d and 30 mb/d, respectively. The 'call' for 1Q14 was unchanged at 28.6 mb/d. OPEC NGL output was revised down by an average 100 kb/d for 2H13 and by 200 kb/d for 1Q14, largely due to continued supply constraints in Libya, Algeria and Angola. OPEC NGL output is now estimated at 6.4 mb/d for 4Q13 and at 6.5 mb/d in 1Q14.


All world oil supply data for October discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Mexico and Russia are supported by preliminary October 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 to -400 kb/d for non-OPEC as a whole.

OPEC Crude Oil Supply

OPEC crude oil supply trended lower for the third month running in October, down by 105 kb/d to 29.89 mb/d, with a steep cutback in output by Saudi Arabia leading the downturn. Production has fallen below the group's 30 mb/d output ceiling for the second consecutive month. Lower output from Saudi Arabia as well as from Kuwait, Nigeria, Angola and Algeria more than offset a rise in output from Libya, Iraq and Iran. The partial recovery in Iraqi output, however, may be derailed by escalating security issues and export problems in November (see 'Iraq's Key Southern Basrah Producing Region Hit by Escalating Security Problems'.)

OPEC ministers will gather on 4 December in Vienna to discuss the market outlook for 2014, when demand for the group's supplies is widely forecast to remain constrained by the relentless rise in non-OPEC production. Nonetheless, ministers are expected to maintain their formal 30 mb/d production ceiling originally agreed in January 2012, with Saudi Arabia likely to calibrate output to market needs.

The 'call on OPEC crude and stock change' was unchanged for 4Q13 and full-year 2013, at 29.6 mb/d and 30 mb/d, respectively. The 'call' for 1Q14 was unchanged at 28.6 mb/d, which is 1.4 mb/d below the group's output target. OPEC's 'effective' spare capacity was estimated at 3.32 mb/d in October compared with 2.90 mb/d in September.



Saudi Arabia's crude oil production averaged 9.75 mb/d in October, off 370 kb/d from the previous month and below the 10 mb/d mark for the first time in three months. The lower Saudi production in October is in line with seasonally reduced domestic demand for crude burn at power plants. After peaking in the third quarter at an estmated 700-750 kb/d on average, crude burn typically declines to around 350 kb/d to 400 kb/d in the fourth quarter and to a lower 300 kb/d to 325 kb/d in first quarter. This year, increased use of gas and fuel oil at power plants may reduce crude burned in power plants below historical levels.



Iraq's Key Southern Basrah Producing Region Hit by Escalating Security Problems

Iraqi crude oil output partially recovered in October from exceptionally low levels in September, up 150 kb/d to 2.97 mb/d. In early November, a worsening security problem in the country's main Basrah producing region and export bottlenecks at the southern terminals, however, may reduce production. The BP-operated Rumaila field was completely shut-down for several days due to export bottlenecks. Attacks on the main export pipeline to the southern ports combined with bad weather forced the company to completely shut-in its production.

In addition, attacks on foreign workers in early November forced oil service firms Schlumberger and Baker Hughes to suspend operations, with the latter declaring force majeure. The attacks on expatriate staff by angry Shiite Muslim workers were precipitated by claims that foreign workers insulted their religion. It is unclear what the impact on production will be from the withdrawal of Schlumberger and Baker Hughes staff. Schlumberger suspended its operations in response, not only in Rumaila but at the other oilfields in Basra province while Baker Hughes has declared force majeure on its operations.

Total October crude exports rose by 130 kb/d to 2.20 mb/d, with higher shipments from the southern ports partially offset by reduced supplies from the northern region. Basrah exports rose by 180 kb/d to 2.0 mb/d, 200 kb/d below the average year-to-date.

The first stage of planned maintenance and expansion work at southern ports has been completed, but Iraqi crude oil exports are expected to remain below capacity until the end of 1Q14, curtailing shipments by an estimated 200 kb/d to 250 kb/d. Officials reported that the installation of new metering and a manifold platform at two loading berths at the Basrah terminal was completed over September and October, and that work at the other two berths would be done in the fourth quarter of this year. Once work has ended at the last two fixed berths, expansion projects will commence at two of the four single point moorings (SPMs) which are aimed at relieving pressure problems related to the delayed installation of gas-fuelled turbine pumps.

Given continued export constraints, officials are trying to balance curtailing existing production with new output increases expected from a number of field start-ups underway. Production from the 1.4 mb/d Rumaila field has been curtailed since September due to export constraints and the field was completely shut-in for several days but was reportedly being brought back on at writing. In early October, production from the giant Majnoon oil field started up, with output forecast to rise to 175 kb/d by end-year, as well as from the smaller Gharaf field, with first oil at 35 kb/d and plans to increase volumes to 70 kb/d by end-year.

Exports of Kirkuk crude from the northern region fell by 50 kb/d to 200 kb/d in October. Continued attacks on the key Kirkuk-Ceyhan pipeline running to the Mediterranean port in Turkey have curtailed shipments, while production volumes have also fallen sharply this year due to reservoir problems. Kirkuk exports have averaged just 250 kb/d in the first 10 months of the year, off 125 kb/d from the average 375 kb/d in the same period last year. BP said at a conference in Abu Dhabi on 10 November that it had started work on the Kirkuk field, the country's oldest producing field, as part of an 18-month reservoir management project. BP CEO Bob Dudley reported Kirkuk production capacity has fallen to 220 kb/d recently. BP is hoping to secure a longer-term contract for rehabilitation and development of the aging field. Discovered in 1927, the Kirkuk field was Iraq's first commercial development and at one point produced 1.5 mb/d.

Crude oil production from the KRG region in October averaged 180 kb/d, with an estimated 60 kb/d exported by truck and the remaining volumes processed at mostly small "teapot" refineries. A new 300 kb/d KRG pipeline linking to the Kirkuk-Ceyhan line was reportedly nearing completion, but officials in Baghdad and Irbil have so far failed to reach agreement over KRG plans to independently operate the line. Baghdad reiterated last month that the KRG's plan for an independent oil pipeline through Turkey is unlawful. Iraq's Deputy Prime Minister for Energy Hussain al-Shahristani has repeatedly said that Turkey is aware of Baghdad's objections to the KRG pipeline plan and received assurances that they will not allow any export of Iraqi crude without the permission of the federal government in Baghdad.

The UAE increased output by 20 kb/d in October, to 2.76 mb/d, surpassing Kuwait for the first time since June 2011. Kuwait output declined by around 50 kb/d, to 2.74 mb/d, due to scheduled field maintenance, which will continue until mid-November. UAE volumes are poised to increase this month with the start-up of new production from the onshore Qusawirah field in early November. First oil was brought onstream at 30 kb/d and will slowly build to 60 kb/d in 2017.



The UAE increased output by 20 kb/d in October, to 2.76 mb/d, surpassing Kuwait for the first time since June 2011. Kuwait output declined by around 50 kb/d, to 2.74 mb/d, due to scheduled field maintenance, which will continue until mid-November. UAE volumes are poised to increase this month with the start-up of new production from the onshore Qusawirah field in early November. First oil was brought onstream at 30 kb/d and will slowly build to 60 kb/d in 2017.

Abu Dhabi's onshore capacity expansion via water and gas injection development projects is expected to ultimately add around 200 kb/d to capacity by 2017. Abu Dhabi has yet to settle the fate of the legacy contracts with only two months to go before the onshore concessions expire. The offshore concessions expire in 2018. At a conference in Abu Dhabi in early November, the CEO of the Abu Dhabi Company for Onshore Oil Operations (ADCO), Abdul Munim al-Kindy, said the contract bids were still under review. Abu Dhabi's Supreme Petroleum Council, led by the UAE's ruler, Sheikh Khalifa Bin Zayed, is expected to make the final decisions. ADCO is owned 60% by the Abu Dhabi National Oil Company (ADNOC); BP, Shell, ExxonMobil and Total with 9.5% each; and Portugal's Partex with 2%. Among the shareholders, only Partex has not been invited to renew its contract.



Iran Discounts Oil Sales Amid Bid for Sanctions Relief

First steps toward reaching an interim international agreement to freeze Iran's nuclear programme stumbled in Geneva on 9 November, but the market took on board the display of political will among the negotiating parties to work towards resolving the contentious debate that has at times injected a high level of volatility into oil prices over the past decade. While hopes for a breakthrough had faded by the time the three-day talks ended on 9 November, concurrent talks between the UN/IAEA and Iran that concluded just one day later ended with partial success, with Iran granting "managed" access to some, but not all, of the nuclear sites that had previously been off limits to IAEA inspectors. It is against this mixed backdrop that senior officials representing the P5 + 1 and Iran will resume talks on 20 November in a bid to secure a preliminary agreement which might include a halt in Iran's nuclear plans in return for some form of sanctions relief (sanctions on oil and banking are reportedly not included in the interim talks). The interim agreement would be just the first stage of a process, intended to give diplomats and officials a six-month window for more in-depth talks to reach a long-term agreement.



Iran's crude oil production rose by 100 kb/d to 2.68 mb/d in October but signs are emerging that the National Iranian Oil Company (NIOC) is finding it increasingly difficult to place barrels against the backdrop of sanctions. An estimated 300 kb/d appears to have moved into floating storage in October, bring total volumes unsold on ships to 37 mb, latest tanker data show.

Moreover, preliminary data indicate total crude imports from Iran declined by a steep 45% in October, falling to the lowest level since January 2012, when the stricter sanctions regime was first implemented. According to press reports, state NIOC has been offering steep price discounts in the form of credit terms to move the oil stranded by sanctions. Iran is reportedly offering free delivery of crude exports to India, equating to a discount of about $1/bbl. NIOC is also offering 90-day credit on crude sales to Indian refiners compared to the more normal 30 days. Unconfirmed reports suggest Indian refiners are also being pitched a volume discount, by which prices per barrel would decline as volumes purchased rise. Despite all these incentives, the latest crude import data show India slashed its purchases from Iran by nearly half in October, to around 165 kb/d, from around 300 kb/d in September.

For October, preliminary data indicate total crude imports from Iran fell to 715 kb/d compared with 1.26 mb/d in September. That compares to an average of 1.1 mb/d for the first nine months of the year. Import estimates are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports. Latest tanker data show China reduced imports from Iran to 300 kb/d in October compared with 475 kb/d the previous month. However, roughly 6 mb of the 10 mb in floating storage is reportedly sitting off Chinese ports. Japanese refiners also sharply reduced liftings of Iranian crude in October, to under 100 kb/d compared with 250 kb/d in September. South Korea reduced imports in October, to around 65 kb/d versus 135 kb/d the previous month.

While the timeline for reaching a permanent agreement between the international community and Iran remains uncertain, the country's government is already working hard to attract IOCs to its upstream oil and gas sectors once sanctions are lifted. Bijan Zanganeh, a former oil minister well regarded by the oil industry, was reappointed at the ministry's helm in August, a clear signal of a turn in Tehran's oil policy. In turn, Zanganeh brought back experienced industry hands to run NIOC, who are working on proposals to replace the widely criticised buy-back contracts with a more attractive investment framework.

Libyan oil production posted a month-on-month increase of 150 kb/d to an average 450 kb/d in October but output declined again to just 250 kb/d by early November amid worsening political turmoil and labour disputes. The start-up of the 130 kb/d Elephant field and the 200 kb/d El-Shahara field in the Western region of the country proved short-lived, with both fields shut-in again in late October due to striking workers and protests. In addition, protesters shut down the Mellitah gas export pipeline to demand more rights (and Parliamentary seats) for the Berber minority in the southern desert.

For the past three months, the country's supply has largely been held hostage by rival tribal groups in the eastern region of the country who have shut in production and blockaded export terminals in a bid for independence from Tripoli. In late October, the head of the Petroleum Defence Guards, Ibrahim al-Jathran, declared independence for the Cyrenaica region  and unveiled a new cabinet after announcing that his group, which controls the Es Sider, Ras Lanuf, Marsa el-Hariga and Zueitina oil terminals, formed a new government, the Political Bureau of Cyrenaica (PBC). A rival group to the PBC, called the Cyrenaica Transitional Council, has also emerged. The latest moves towards regional independence are reminiscent of the system maintained by King Idris in the 1950s when Libya was split into three semiautonomous states. Exacerbating the problem, the PBC announced on 3 November that it has formed its own oil marketing company as well as a new regional central bank. The move to take control of oil sales was seen as largely symbolic since there is little chance oil traders would engage with the tribal groups.

The latest developments have created formidable challenges for Prime Minister Ali Zeidan's fragile government structure. The crisis commission in the General National Congress, which was set-up in August to negotiate with protesters, reported that the two sides had reached a stalemate in talks. The central government on 3 November threatened unspecified action within 10 days against the protesters and rebel groups controlling the country's oil infrastructure. Prime Minister Zeidan also raised the spectre of foreign countries intervening to quell the dissent.



Nigerian output was marginally lower in October, off 55 kb/d to 1.99 mb/d. Shell lifted a force majeure on Bonny Light crude oil exports on 18 October following completion of some repairs on the Trans Niger Pipeline but work continues on a section of the line, curbing flows. Brass River supplies recovered in October after Eni also lifted its force majeure, which had been in place since March. Latest export schedules indicate volumes could trend lower again in November, in part due to field-maintenance work at the giant offshore Bonga field.  

Angolan output was down by 20 kb/d to 1.7 mb/d in October. In September, BP lifted force majeure on its Saturno crude, which had been declared in late August after a brief technical problem, and volumes recovered to around 100 kb/d in October. In its latest budget, the government has forecast crude oil production of 1.8 mb/d for 2014, slightly higher the year-to-date average of 1.74 mb/d.



Algerian production edged lower in October, down 30 kb/d to 1.12 mb/d, despite slightly higher output from the El Merk field. Output from El Merk started in May but the official inauguration of the project took place in late October, when output was estimated at 85 kb/d. The $4 billion project is expected to increase total production from the Berkine basin area to more than 300 kb/d. Sonatrach holds 51% of El Merk under a production sharing contract with partners Anadarko, Eni, Maersk, ConocoPhillips and Talisman.

Meanwhile, state-owned Sonatrach reported its largest discovery in more than 20 years at the Hassi Dzabat block 439 in the Amguid Messaoud basin. The discovery could reportedly hold as much as 1.3 billion barrels of crude. Sonatrach's upstream Vice President Said Sahnoun reported that the field will require new, high-cost technology due to the need to use hydraulic fracturing; production could begin within four years. Sonatrach has stepped up its exploration efforts after poor contract terms discouraged international investment. The country's production capacity outlook has long been constrained by relatively unattractive investment terms, corruption scandals and bureaucratic inertia. The unprecedented deadly terrorist attack on the country's In Amenas natural gas facility in mid-January heightened security concerns and some IOCs remain cautious about asking expatriate staff to return. Algeria has said it plans to review its fiscal terms to encourage foreign investment.

OPEC NGLs

OPEC NGLs were revised down by 100 kb/d for 2H13 and by 200 kb/d for 1Q14, largely due to continued supply constraints in Libya, Algeria and Angola. Output for 3Q13 is now estimated at 6.5 mb/d and falling to 6.4 mb/d in the fourth quarter. For 1Q14 NGL supply is forecast at 6.5 mb/d.

In Libya, the shutdown of fields and export terminals has sharply reduced the country's output of condensate and NGL, with only a trickle expected now for the fourth quarter. Prior to the civil war, Libya produced 110 kb/d of NGLs.

Algerian NGL output has been reduced by an average of 50 kb/d for the 3Q13-1Q14 period due to continued constraints on condensate output at the In Amenas facility and by the slower-than-expected ramp up from the El Merk project.

Angolan NGLs have been reduced by 30 kb/d as part of planned maintenance at the new Soyo liquefied natural gas (LNG) plant. The Chevron-operated project was scheduled to undergo a two-month maintenance from August but this was delayed until October due to gas leaks affecting onshore pipelines.

Understanding the Semantics of 'World's Largest Producer'

Which is the world's top oil producer? The question might not matter much to the oil market and industry, which are much more concerned with actual production levels than country rankings. But it has been very much in the news lately, as incremental production from the world's three leading producers - surging US LTO production, recent increases in Saudi output to highs of more than 30 years, and gains in Russian supply - has left them vying for first place in news reports.

The world's three largest producers - in alphabetical order: Russia, Saudi Arabia, and the US - have been fairly close in their output levels in recent months, and differences in production between the three easily fall within the margin of error. How one defines production -- i.e., which liquids are or are not included -- will also alter their ranking. Some of the main liquids categories include:

  • Crude oil - a mixture of hydrocarbons that exists in liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities.
  • Natural gas liquids (NGLs) - the liquid or liquefied hydrocarbons produced in the manufacture, purification and stabilisation of natural gas. These are those portions of natural gas which are recovered as liquids in separators, field facilities, or gas processing plants. NGLs include, but are not limited to, ethane, propane, butane, pentane, natural gasoline and condensates.
  • Processing gains - the volumetric increases in liquid supply that take place during the refining process itself, due to the lower density of most refined products compared to crude and other feedstock.
  • Biofuels - fuels derived from biomass or waste feedstocks; includes ethanol and biodiesel.
  • Oxygenates - substances which, when added to gasoline, increase the amount of oxygen in that gasoline blend. Fuel ethanol, Methyl Tertiary Butyl Ether (MTBE), Ethyl Tertiary Butyl Ether (ETBE), and methanol are common oxygenates. There are also other additives put into fuels, such as anti-knock agents, dyes, and antioxidants. Fuel ethanol can be a biofuel - for the purposes of the US here, non-redundancy is assumed. 
  • Needless to say, the market for crude oil is not the same as the market for butane. And processing gain really is not production, but rather transformation. Nevertheless, liquids output, in the broadest possible sense, can be understood to include all of these categories.

    Given the challenges in assessing processing gain (which this Report does not break down by country) and the fact that it is the result of hydrocarbon processing rather than actual production, it makes sense to limit our comparison of the world's leading producers to liquids output. For this purpose, 3Q13 is used as the period of reference, as it is the most recent quarter for which relatively comprehensive data are available, and quarterly averages are a more reliable reflection of sustainable production than more volatile monthly data. Here we run into an issue: there are no monthly data available on Russian and Saudi production of oxygenates and additives. Keeping that in mind, the chart below offers the components of a tentative ranking (all figures in kb/d):



    Based on crude oil production alone, Saudi Arabia and Russia were equivalent in 3Q13, and had significantly larger output than the US. Adding in NGLs, however, means that Saudi Arabia was a much larger liquids producer than Russia and the US. Throw in biofuels, supply of which is non-existent or insignificant in Saudi Arabia and Russia, and the US outranks Russia, but not Saudi Arabia. The ranking does not change if oxygenates and additives are added, even though the US is the group's only producer of those fuels on record. Thus, Saudi Arabia was the world's largest liquids producer in 3Q13, and tied with Russia for crude oil production.

Non-OPEC Overview

Non-OPEC production grew by a robust 740 kb/d in October to 55.53 mb/d, the highest monthly total for the year. The North Sea came back strongly, with OECD Europe production up 460 kb/d m-o-m. Other monthly gains include Canada (145 kb/d), Ghana (95 kb/d), Russia (70 kb/d) and the US (65 kb/d). Excluding refinery processing gain and biofuels, October output increased by an even stronger 800 kb/d, coming off what now appears to be a slight decline in September of 80 kb/d.

Based on the latest production data, the non-OPEC supply growth projection for 2013 has been raised by 100 kb/d from last month's Report, to 1.3 mb/d. The 2014 forecast has increased slightly to 1.8 mb/d, on higher US and Russian supplies. As more data become available, 3Q13 production growth now looks even more impressive y-o-y at 1.97 mb/d. Gains in 4Q13 are expected to be more moderate at 1.48 mb/d y-o-y, though high by recent historical standards.



The role of North America, led by the surge in US light tight oil (LTO), as the main engine of non-OPEC supply growth has been well-documented in this Report. Perhaps less well highlighted has been the continued importance of Russia, which has had y-o-y quarterly growth of at least 100 kb/d since 2Q09. The significance of Russia and the US to non-OPEC output can hardly be overstated: excluding processing gains and biofuels, the two countries represent 42% of non-OPEC output, and together with Saudi Arabia account for 38% of global supply (please see 'Understanding the Semantics of 'World's Largest Producer'').

OECD

North America

US - September crude oil preliminary; Alaska actual, others estimated: Final data show that US crude oil production averaged 7.5 mb/d in August, a small dip of about 10 kb/d m-o-m due to reduced output in Alaska and the US Gulf of Mexico (GOM). August production was up a combined 100 kb/d in Texas and North Dakota, however, a trend that continued into September, when US crude oil production is estimated to have risen to about 7.8 mb/d, based on preliminary numbers. For October, we show a slight m-o-m decline, -45 kb/d, as there was some effect on production in Colorado from flooding and in the GOM from temporary shut-ins due to a tropical storm, though some of the latest weekly preliminary numbers show that this effect was likely very slight.

US output is expected to show strong gains in November and December, lifting the 4Q13 average by 740 kb/d y-o-y. If confirmed, US crude oil output would have grown by 950 kb/d in 2013, or roughly 15%. The evidence of rising crude oil production over the past two months can be seen in the widening spreads of not only Bakken compared to WTI-Cushing, but also WTI-Cushing vs. WTI-Midland. The Bakken discount takes into account the price differential needed to offset transport costs, particularly rail (which transports two-thirds of Bakken LTO) to distant coastal US and Canadian refineries that would otherwise import seaborne light, sweet crude (see Prices section). Surging production in the Permian Basin (WTI-Midland) has outpaced new pipeline capacity to Gulf Coast refiners, though refinery maintenance may also have temporarily affected the spread. It is expected for crude oil production to grow monthly through the first half of 2014. Everything from newly designed wells that boost initial production rates to increased new production per rig, to learning how to target the most productive parts of a formation with hydraulic fracturing, has enabled continued LTO production growth despite declining rig counts. New offshore projects in the GOM should also begin yielding net increases in output in that area by 4Q14.



Total US liquids output (excluding processing gain and biofuels) reached 10.4 mb/d in August, and is estimated to have increased to 10.5 mb/d in September and 10.6 mb/d in October, levels not achieved since the 1980s. For 4Q13, total liquids production is forecast at 10.7 mb/d. US NGL production achieved a record 2.7 mb/d in August, and while a slight seasonal decline is expected to have occurred in September, quarterly and y-o-y growth continues unabated. For 4Q13, NGL output is expected to grow by 120 kb/d y-o-y.

Increasing NGL output is being driven in part by the favourable economics of wells that produce both oil and (wet) natural gas rather than just dry natural gas on the shale plays, as the overall percentage of mixed wells has increased to 56% in 2012 from 37% in 2007. Given  relatively low US natural gas prices, producers are increasingly focusing their efforts on deposits that have a high liquids content, including crude and condensates. Hence, NGL production growth is increasingly linked to the prospects for crude oil growth, rather than simply natural gas output that could grow at a slower rate because of low prices. The September Report discussed the Mariner and Atex ethane pipeline projects, which are key to eliminating a glut of ethane that could potentially affect wet natural gas production on the Marcellus and Utica plays, where so-called ethane "rejection" reaches saturation levels. (Ethane rejection means that processors do not extract it from the natural gas but leave it in the methane.)  Some companies have begun writing contracts that penalise gas producers that reject ethane rather than send it to fractionators, as low ethane prices have often made it otherwise unprofitable to process it out of the stream.

Canada - Newfoundland September actual, others August actual:  Growth in Canadian liquids supply for 2014 is expected to average 210 kb/d, taking average production next year to 4.2 mb/d. For 3Q13, Canadian liquids production is up 370 kb/d y-o-y.

August liquids production grew by 170 kb/d, to 4.1 mb/d, as both bitumen and synthetic crude experienced strong increases of 100 kb/d and 45 kb/d, respectively. Maintenance ended at the Mildred Lake upgrader, and government data confirm that the Kearl project has begun ramping up strongly, having reached nearly 50% of capacity in August. NGL production reached 650 kb/d, up slightly m-o-m, but still below the record levels exceeding 700 kb/d achieved in January and February of this year.

In September, total output is estimated to have dipped by about 50 kb/d on maintenance at Suncor's Upgrader 2 and a slight decline in Newfoundland actuals. Bitumen output is estimated flat for the month.

In October, natural gas supplies were briefly disrupted to several of the major synthetics projects, affecting output for a few days. On non-upgraded production, steam injection began at Christina Lake 2B in October, with production to begin ramping up in 4Q13 to an eventual capacity of 35 kb/d.

In order to transport bitumen, diluent is needed, and insufficient diluent supplies could potentially slow future output growth. Much of the diluent used in Canada is condensate/natural gasoline sourced domestically or imported from the US. (In August, Canada produced 30 kb/d of field condensate and 125 kb/d of pentanes plus.) Enhancing both domestic production, such as from the condensate-rich Duvernay shale play, and import capacity from the US are thus priorities. Three pipeline operators on the Marcellus/Utica shale play in the US have formed a consortium to develop a new pipeline system to take condensate from the area to western Canada. In the other direction, Pembina Pipelines, which is one of the largest transporters of diluted bitumen from Alberta projects, as well as a major transporter of NGLs, will add 167 kb/d of new pipeline capacity this quarter on the Peace (crude) and Northern (NGL) Pipelines.

Mexico - September actual, October preliminary: In September, Pemex achieved crude oil production of 2.52 mb/d, an increase of 10 kb/d on August, and preliminary October data shows a further 20 kb/d increase in October. While such increases are small compared to crude production of more than 2.5 mb/d, they are a step toward Pemex's recently stated goal of achieving 2.6 mb/d by the end of 2013. Though Mexican crude production is projected closer to 2.5 mb/d than 2.6 mb/d for 4Q13, Pemex's achievement in arresting production declines and keeping output fairly flat for 2H13 is noteworthy. Pemex has had some success expanding output on the Chicontepec field with 29 new horizontal wells brought online in 2013, and Cantarell production has been stabilised of late — 3Q13 output was 450 kb/d, down less than 10 kb/d y-o-y. Total liquids output in September was 2.9 mb/d; the expected decline for 2014 is -25 kb/d, to 2.86 mb/d.

Pemex reported a loss of $3 billion in 3Q13, despite receiving an average price for the quarter of about $101/bbl, as it pays taxes on revenues rather than profits. The company is short of cash for reinvestment to maintain production levels in the medium term, a problem which a broad reform of the oil sector proposed by President Peña Nieto in August is attempting to address (please see OMR 12 September 2013). Recently, the financial press has reported that the government was negotiating an even more ambitious reform than the one first proposed and discussed in the September Report, including a clear ability for companies other than Pemex to book reserves and production sharing agreements on higher-risk projects.

North Sea

Norway - August actual, September provisional:  Norwegian total liquids production data for August were revised upwards by about 70 kb/d, to 1.89 mb/d. August production exceeded year-earlier levels for the second consecutive month, reflecting a relatively low amount of unplanned outages this year compared to last. Whereas July marked a monthly high in Norwegian output so far this year, preliminary data suggest that September may mark a low point, with much of the summer maintenance concentrated in that month. Crude production in September is estimated at 1.33 mb/d; total liquids at 1.6 mb/d. In September, planned maintenance was carried out on the Draugen, Kristin, Norne, Skuld, Tordis, Tyrihans, Vigdis and Åsgard fields. The Kårstø processing plant was also shut for maintenance for three weeks in September, affecting NGL production from fields such as Åsgard and condensate from Sleipner. The Njord field has remained offline since the end of July for maintenance that will take about a year to complete, but the field has had numerous problems in the last few years, and has not produced more than 20 kb/d since February 2011. Dong has announced that the Alve and Marulk fields will come back online in 4Q13.

One of the most important fields adding to output in 2013 is Skarv, which came online at 7 kb/d in January, and had attained 71 kb/d by August. BP announced that target production of over 80 kb/d had been achieved by October. In late October, the $4.7-billion Ekofisk South project came online. Ekofisk, the North Sea's largest producing oilfield in terms of reserves, produced 127 kb/d in August. Ekofisk South, with a new platform and 35 production wells, one of which is producing, is eventually expected to add 60 kboe/d. We expect production levels in October and November to bounce back from September to July levels, given the end of the maintenance season and higher October and November loading schedules. This will contribute to overall liquids production declining by just -50 kb/d for 2013 to 1.87 mb/d, the smallest y-o-y decline since annual declines began in 2002.



UK - July actual, August provisional:  Although complete UK field-level data for July are not yet available, reported aggregates show 850 kb/d of liquids production for that month, a slight increase on June. Unlike Norway, where September was the peak maintenance month, in the UK sector it appears to have been August, when total liquids fell below 700 kb/d to 670 kb/d, and offshore crude oil production dropped to 590 kb/d, which, as mentioned last month, is the second-lowest offshore crude output in decades. It is estimated that offshore crude oil production increased to 740 kb/d for September, as maintenance ended, particularly on the Forties system. Scheduled Forties loadings had fallen to 252 kb/d in August, 135 kb/d below July loadings. Forties loadings rose above 350 kb/d in September and October, and scheduled loadings reach 400 kb/d in November.

The Forties stream feeds into the Kinneil oil stabilisation and gas separation plant, which uses steam from the Grangemouth refinery. Hence, the recent threat of closure of the refinery was of serious concern to Forties producers. Although, it seems that closure is no longer imminent, a project to replace the Grangemouth steam with steam from a Fortum power plant is underway, so that Forties production will not be dependent on the Grangemouth refinery in the near future.

Offshore UK crude production is projected to reach 790 kb/d for October, with total liquids at 890 kb/d. UK total liquids production is no longer able to exceed 1 mb/d; the last time that this was achieved was June 2012. Although a 135 kb/d quarter-on-quarter (q-o-q) increase is forecast for 4Q13, to 910 kb/d, UK production is forecast to decline steadily, quarter after quarter, in 2014. New fields are usually small, and often satellites to existing fields, and cannot make up for continuing declines at mature fields. In addition, the UK's largest producing field of recent years, Buzzard, has had difficulty maintaining consistent production levels month-to-month.

Although September was the likely overall crude oil output low for the year on the North Sea, BFOE production was lower in June (655 kb/d) than in September (an estimated 740 kb/d). BFOE loadings of 850 kb/d were scheduled for October, with BFOE production estimated at 905 kb/d. Scheduled loadings then surge to 980 kb/d in November. Our production forecast for that month is 960 kb/d.

Non-OECD

Latin America

Brazil - September actual:  Further m-o-m growth in crude oil production was observed in September, when output reached 2.1 mb/d, its highest level in 2013. Normal output levels on the largest offshore fields (the three Marlim fields, Roncador, Barracuda, Lula, Jubarte), combined with increases on Sapinhoa and Baúna as these two projects ramp up, made for a successful month. Nevertheless, Petrobras, which operates about 90% of the country's production, has acknowledged that 2H13 would not meet initial output expectations. Heavy maintenance in July, project delays and problems at non-Petrobras fields mean that 2H13 crude oil output will be up less than 60 kb/d on 1H13 in our estimate. The start of production on the P-55 platform project on Roncador was delayed until December and initial output of the P-63 Papa Terra FPSO into 2014. Chevron's Frade field has still not been able to resume pre-shutdown levels since the May restart and the now-bankrupt OGX's Tubarão Azul field was shut down in July. An additional problem in October was a week-long Petrobras workers strike that likely helped push production that month below September levels.

The government received only one bid on the giant pre-salt Libra field at October's bid round, and that single bid came in at the minimum rate of return for the government. This giant field, with reserves of 8-12 billion barrels, will be developed by Petrobras as per the government's mandate that the national company operate all pre-salt fields, in which it must also have a minimum stake of 30%. First expected output from Libra will not be until the next decade, but for Petrobras, taking on this huge project, even as it manages another 26 contracted additional offshore production units between 2014 and 2018 will be a challenge. Brazil's government has mandated that a second state oil company, Pré-Sal Petróleo S.A., will have 50% control on the operational committee for Libra and other future pre-salt fields but not possess an equity share. It remains to be seen if this unusual arrangement will present either an additional complication or an additional aide to Petrobras.



Colombia - September actual:  Crude oil production in Colombia dropped 3.5% in September, to 995 kb/d, as guerrilla attacks on pipelines and some permitting delays affected output. Given their vast experience dealing with sabotaged pipelines, oil workers in Colombia are remarkably quick in undertaking repairs to lines such the oft-attacked Caño Limón-Covenas. Nevertheless, output was affected, and given the intensification of attacks by rebel groups in October, it is our expectation that production declined yet further in that month, to about 975 kb/d. The announcement of renewed progress on peace talks with the rebel FARC group in early November bodes well for reduced attacks. Previous to September, it had been quite a successful year in the sector, with state oil company Ecopetrol achieving record quarterly output in 3Q13, and y-o-y growth for the total output of the country for each quarter. Production for 2013 as a whole is forecast to be up by 65 kb/d, to 1.01 mb/d, and  by another 95 kb/d in 2014.

The 120-kb/d first phase of the Bicentenario crude oil pipeline started flowing at the end of October. The pipeline takes Vasconia Blend crude to the Caño Limón-Covenas pipeline, but future phases will allow Vasconia Blend to reach port without needing to feed into Caño Limón-Covenas. Colombia and Venezuela reached an agreement in October to link their crude oil pipeline networks with a short new connecting pipeline.

Asia

China - September actual: Total liquids production in China (99% of which is crude oil) increased by about 60 kb/d to 4.1 mb/d in September, as production in Shaanxi and Daqing continued to increase following the summer's flood-induced outages.  We expect that 2013 production will show a y-o-y decline of about 20 kb/d. Nevertheless, important new investments continue. In the first three quarters of the year, Sinopec spent, by its own account, $6.7 billion on developing tight oil in south Hubei and heavy oil at the West Shengli field, on developing the Tahe oilfield, as well as on various natural gas projects. CNOOC brought online the Wencheng 19-1 (Pearl River Mouth Basin) and Weizhou 12-8 (Beibu Gulf) offshore fields in October, though production levels are unclear.

Africa

Ghana - October provisional: Ghana's production, which comes entirely from the offshore Jubilee oil field, had 3Q13 production of about 80 kb/d. Production at the FPSO is normally about 110 kb/d, but maintenance in September shut the field down for three weeks. Kosmos, one of the companies participating in the project, has said that it expects production to increase by another 10 kb/d to 120 kb/d by the end of 2013.

Former Soviet Union (FSU)

Russia - September actual, October provisional: Russian output hit a post-Soviet monthly record of 10.12 mb/d for crude and 10.89 mb/d for total liquids in September. It provisionally did it again in October, when crude output is estimated to have reached 10.18 mb/d and that of total liquids 10.96 mb/d. As mentioned in last month's Report, Russian producers have been making sufficient investment to overcome large natural declines at the country's many mature fields. West Siberia, where the fields tend to be older, has experienced only a slight drop (some 30 kb/d) since January 2012, and East Siberian fields have more than made up for this deterioration, with an increase in output of about 170 kb/d between January 2012 and September 2013.

Bashneft has been particularly successful, having steadily increased production quarter after quarter for the past few years, achieving record output of 330 kb/d in 3Q13 through its successful new Trebs field but also mature fields in Bashkortostan. Gazprom Neft is drilling and bringing online horizontal wells at fields in the Orenburg region, some of which have output of 1 500 b/d per well. NGLs/condensate output has also expanded, and in November Novatek initiated two new gas condensate stabilisation trains (combined capacity of 3 million mt/y) to handle expanded production at Severo-Urengoyskoye. Two more equal-sized trains will be added in 2014 or 2015. Rosneft's giant Vankor field is now expected by the company to expand by just 10 kb/d in 2014, however, after achieving 65 kb/d of growth y-o-y in 2013.

As noted in the September Report, Russia has lowered the Mineral Extraction Tax on hard-to-extract onshore reserves, such as shale oil. In 2014, a new offshore tax regime will come into force, with numerous reductions and incentives, in order to stimulate offshore investment. Given the levels of investment and sustained output levels on certain Russian fields, we now expect crude oil production to grow by 40 kb/d y-o-y in 2014 - still basically flat in percentage terms.

Azerbaijan - August actual: Total liquids in Azerbaijan averaged 900 kb/d in August, of which NGL production was 75 kb/d. We estimate that 3Q13 figures are 890 kb/d and 72 kb/d, respectively. BP, operator on the Azerbaijan International Operating Company's (AIOC) ACG fields, was under pressure this year to stabilise output, as the fields suffered annual declines in 2011 and 2012 (and commensurate declines for total output). The company appears to have achieved its objective. We expect that ACG output will remain at 670 kb/d for 2013, flat y-o-y, based on production levels through August and our projections for ACG for the remainder of the year. AIOC spent $1.3 billion in capex on ACG in 1H13, and delivered five new producing wells and two new water injector wells. An additional $1.2 billion in capex on ACG was planned for 2H13. State oil company SOCAR has forecast steady production for the country as a whole for 2014, but we expect a small decline of about -30 kb/d, to 845 kb/d total liquids.

Kazakhstan - September actual:  Kazakhstan total liquids output rose 60 kb/d in September, to 1.65 mb/d, mostly on the return to full output of Tengiz after August maintenance. Crude output was 1.35 mb/d. The super-giant Kashagan field started in September, and achieved just 7 kb/d for the month. The field has experienced numerous problems since starting up, and has only been online for 16 days in total since its 11 September start. After restarting on 6 October, the field achieved at least one day of commercial-level production of 75 kb/d, but shut down on 9 October due to a gas leak. Although operating consortium North Caspian Operating Company (NCOC) initially indicated that it was a problem with a particular pipe that could be fixed within a few weeks, it now seems that the problems are more profound, and that production will not resume until next year, according to a recent statement by the CEO of NCOC member Total. It is mostly likely that consistent commercial production and commensurate exports will not be achieved until around April 2014. Hence, 4Q13 output will be about the same as 1Q13, at 1.72 mb/d, and significant output increases will not be seen until 2Q14.

FSU net oil exports rebounded by a significant 340 kb/d to 9.2 mb/d in September after refinery maintenance reduced Russian domestic demand for crude freeing up more for export. Consequently, crude carried by the Transneft network rose by 490 kb/d, its largest increment since December 2008. Baltic ports were the main beneficiaries of the extra crude with Urals deliveries via Primorsk and Ust Luga reaching 1.1 mb/d and 480 kb/d, respectively. In the Black Sea, crude shipments were also hiked with Novorossiysk exports hitting 790 kb/d after an extra 120 kb/d of Urals was delivered to the terminal.

Despite Sakhalin production being 30 kb/d lower than August and 100 kb/d lower than 2Q13, due to scheduled field maintenance, combined shipments from De Kastri and Sakhaklin Energy totalled 260 kb/d, level with a month earlier. This therefore indicates that stocks were drawn down with a reduction in exports likely to arrive in October.



Outside of Russia, flows through the Baku-Tbilisi-Ceyhan (BTC) pipeline sank to 570 kb/d in September, less than half of its 1.2 mb/d nameplate capacity. Looking forward, Tengiz crude should enter the line for the first time since end-2010 after Tengizchevroil (TCO) came to an agreement with the BTC consortium to end their tariff dispute. Indeed, loading schedules indicate BTC flows at 630 kb/d in October with 710 kb/d pencilled in for November. Preliminary CPC loading data for October indicate that no oil from Kashagan arrived in the line after ongoing production problems at the field. Furthermore, these problems also forced Total to cancel two cargoes of Kashagan oil it was planning to ship via Primorsk. At the time of writing no Kashagan cargoes had reached market with senior Kazakhstani officials stating that oil exports from the project would be "delayed indefinitely".

Following a fall in Russian refinery throughputs, refined product exports slipped by 50 kb/d in September as refiners preferentially supplied domestic markets. Deliveries of 'other products' and gasoil slipped by 50 kb/d and 10 kb/d, respectively while some offset was provided by fuel oil which inched up by 20 kb/d.

OECD Stocks

Summary

  • OECD industry stocks built counter-seasonally by 8.6 mb in September, reversing August's draw, to end at 2 676 mb. Since this was in sharp contrast to the 15.5 mb five-year average draw for the month, the deficit of inventories to average levels narrowed to 42.9 mb from 67.0 mb at end-August.
  • Crude oil inventories surged counter-seasonally by 18.2 mb in September as OECD refinery throughputs plummeted. Stocks of refined products drew by 5.8 mb, to cover 30.8 days of forward OECD demand at end-September, 0.3 days lower than at end-August.
  • Inventories built by an estimated 12.5 mb over the third quarter as a whole, or 140 kb/d, as rising refined product stocks more than offset a dip in crude. Data released in last month's Report have been revised upwards for every single month of the third quarter.
  • Preliminary data point to a 7.6 mb draw in October total oil inventories, weaker than the 16.0 mb five-year average draw for the month on the back of plunging refined product inventories.


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

OECD industry stocks reversed their August draw and built by 8.6 mb in September, in sharp contrast to the 15.5 mb five-year average draw for that month. At 2 676 mb, commercial inventories now stand 53.0 mb below a year ago and 42.9 mb in deficit to the five-year average. Since the September stock build was counter-seasonal, the deficit to average levels has narrowed significantly, from 67 mb at end-August. Broken down by products, the deficit is concentrated in refined products, stocks of which stood 40.9 mb below average in the OECD as a whole and 51 mb below average in Europe. In contrast, crude stocks stood at an 11 mb surplus to the average, largely on high inventories in the Americas as North American domestic production soars. OECD holdings of NGLs and refinery feedstocks lagged the five-year average by 13.0 mb.

An unseasonal 18.2 mb rise in crude oil inventories drove the September stock build, as maintenance and poor refining margins slashed refinery throughputs across all OECD regions. Accordingly, crude stocks in OECD Americas, Asia Oceania and Europe built by 10.8 mb, 3.9 mb and 3.5 mb, respectively. Despite the drop in refinery activity, refined products' holdings slipped by a relatively muted 5.8 mb, compared to the 12.5 mb five-year average draw for the month. Falling stocks of fuel oil (-4.8 mb) and middle distillates (-4.5 mb) drove product inventories lower, although the distillate draw was shallow compared to the 14.2 mb average draw for the month. All told, refined products covered 30.8 days of forward OECD demand at end-month, 0.3 days less than at end-August.



Inventories for July, August and September have all been revised upwards since last month's Report, bringing the 3Q13 build in OECD stocks to 12.5 mb, or 140 kb/d. Following high refinery activity in July and August, refined products built by 28 mb (310 kb/d) over the quarter, which more than offset a 17 mb (190 kb/d) decrease in crude.

Since last month's Report, the September build in total OECD oil stocks has been adjusted upwards by 6.9 mb, from a preliminary estimate of 1.7 mb. Upon the receipt of more complete, official data, end-August OECD stocks were also revised upwards, by 7.9 mb. This, which coupled with an upwards 5.4 mb adjustment to end-July data, weakened the 7.8 mb counter-seasonal draw for August presented in last month's Report to 5.3 mb. Revisions to August data were concentrated in OECD Americas (+9.0 mb), while minor adjustments of -0.2 mb and -0.1 mb were made to Asia Oceania and Europe, respectively.



Preliminary data point to a 7.6 mb draw in October total oil inventories, weaker than the 16.0 mb five-year average draw for the month. On a product-by-product basis, refined products plummeted by a sharp 35.8 mb, likely after OECD refinery runs remained depressed amid poor margins. Meanwhile, crude oil stocks soared by 25.6 mb, more than three times the 6.5 mb five-year average build for October. On a geographical basis, inventories in OECD Americas and OECD Asia Oceania dropped by 8.7 mb and 5.6 mb, respectively, more than offsetting a 6.7 mb build in OECD Europe.

Recent OECD Industry Stock Changes

OECD Americas

Commercial stocks in OECD Americas rose by 6.0 mb in September, led by a steep 10.8 mb build in crude, which more than offset a 2.6 mb draw in refined products. NGLs and feedstocks drew by 2.2 mb. Since the overall build was in line with seasonal patterns, the region's surplus to five-year average levels remained at 38.9 mb, level with end-August. The build in crude occurred as plunging refining margins slashed regional refinery throughputs by 400 kb/d. Refined product stocks were pressured lower by a seasonal 2.2 mb fall in middle distillates with 'other products' and fuel oil inching down by 1.5 mb and 1.1 mb, respectively. At end-September, refined products covered 30.2 days of forward demand, a dip of 0.3 days on end-August.



Preliminary weekly data from the US Energy Information Administration (EIA) point to a seasonal 8.7 mb draw in US commercial stocks over October. Product stocks plunged by 30.5 mb, roughly double the five-year average draw for the month, as US refiners slashed runs by a further 690 kb/d amid maintenance and continuously subdued margins. 'Other products', middle distillates and motor gasoline inventories destocked by 11.4 mb, 9.9 mb and 9.2 mb, respectively. With winter approaching, middle distillates inventories (including low-sulphur diesel and heating oil) stood level with a year-ago but 23.5 mb in deficit to the five-year average level.



In contrast with product stocks, crude oil inventories soared by 17.6 mb, nearly three times the 6.2 mb five-year average build for October, on a combination of high domestic output and lower refinery runs. Following increased inter-PADD crude movements from the Midwest to the Gulf Coast, stocks in PADD 3 surged by 8.5 mb, as higher crude deliveries compounded the impact of a drop in Gulf Coast refinery runs of nearly 500 kb/d. PADD 3 crude inventories now stand at 195 mb, well above their seasonal range, having built by a significant 16.5 mb over the past two months. In comparison, PADD 2 stocks rose by a lesser 6.9 mb in October, bringing their builds of the last two months to a relatively muted 5.6 mb.

OECD Europe

OECD European commercial inventories inched down by 4.7 mb in September, far shallower than the 22.1 mb seasonal draw for the month. As such the deficit of stocks to the five-year average, which spans all oil categories, narrowed to 76.5 mb from the record 93.8 mb gap posted at end-August. Although refined product inventories led the draw, dipping by 6.1 mb, that decline was less than half the 13.1 mb average product draw for the month. Measured in days of forward demand, refined products covered 37.6 days, 0.3 days more than a month earlier. Meanwhile, crude oil holdings increased by an unseasonal 3.5 mb following another underwhelming month of regional refinery activity.



The draw in refined product inventories spanned all categories bar gasoline. Middle distillate inventories slipped by only 3.3 mb, much less than the 11.7 mb seasonal average, narrowing their deficit to average levels to 17.0 mb from 25.5 mb a month earlier. On a days of forward demand basis, the picture is improved slightly with the 35.8 days at end-September lagging average levels by 0.6 days, down from the 3.9 day lag at end-May. Amid excess gasoline production, gasoline forward demand cover continues to stand at a surplus to average levels, although this surplus has narrowed compared to summer 2012. The overhang in forward demand cover is unevenly distributed. Among top consuming markets, the UK, which is short middle distillates, appears awash with gasoline, stocks of which now cover 33.6 days of demand, 13 days above five-year average levels. OECD trade data indicate that UK gasoline exports have been running at close to 250 kb/d throughout the second and third quarters, up by approximately 40 kb/d on the same period in 2012, but this has clearly not been enough to keep gasoline stocks from soaring.

Preliminary data from Euroilstock indicate that regional inventories rose counter-seasonally by 6.7 mb in October. Stocks rebounded on the back of a 9.6 mb increase in crude oil holdings, sharper than the 1.0 mb seasonal build for the month and likely after another month of underwhelming regional refinery throughputs. Despite this, refined products slipped by 2.9 mb, weaker than the 8.3 mb five-year average draw for the month. Declining middle distillates (-2.6 mb) led products lower and more than offset a 0.9 mb increase in 'other products'. Meanwhile data pertaining to refined products held in independent storage in Northwest Europe point to a draw with all products destocking bar naphtha.

OECD Asia Oceania

Industry inventories in OECD Asia Oceania built by 7.3 mb in September, a much larger gain than the slight 0.5 mb five-year average build for the month. Both refined products (+3.0 mb) and crude oil (+3.9 mb) posted strong rises, while an additional 0.4 mb came from NGLs and refinery feedstocks. As in other OECD regions, the build in crude followed low refinery activity in September, when regional runs fell by an estimated 310 kb/d on the month. Refined products restocked on the back of rises in 'other products' (+4.6 mb) and middle distillates (+1.0 mb), with some offset provided by draws in residual fuel oil (-2.0 mb) and motor gasoline (-0.6 mb). All told, refined products covered 21.6 days of forward demand at end-September, 0.8 days below end-August.



Preliminary weekly data from the Petroleum Association of Japan (PAJ) indicate that Japanese inventories drew by 5.6 mb in October, compared to a 0.8 mb five-year average draw for the month. Crude stocks slipped by a seasonal 1.6 mb. It now appears that following this summer's shutdown of the Sakaide refinery, Japanese crude inventories have experienced a step change and now seem set to fluctuate at around 90 mb, as compared to the previous level of 100 mb. Refined products stocks drew counter-seasonally by 2.4 mb, with 'other products', fuel oil and motor gasoline holdings retreating by 1.4 mb, 0.9 mb and 0.5 mb, respectively, while middle distillates inched up by 0.4 mb.

Recent Developments in Singapore and China Stocks

Data from China, Oil, Gas and Petrochemicals (China OGP) suggest that Chinese commercial crude oil inventories built by an estimated 3.3 mb (stock changes are reported in percentage terms) in September amid record crude net imports of 6.3 mb/d and subdued refinery runs. However, when examining the implied stock change calculated as crude net imports plus production less refinery runs, it appears that the monthly build is significantly greater than that reported by OGP. Indeed, over time OGP data has a tendency to underestimate builds compared to the implied change, although both move in similar directions. Meanwhile, refined product stocks dropped by an estimated 1.4 mb, led by gasoil draws of 3.5 mb (5.5 %) which more than offset builds in kerosene (1.2 mb, 10.3%) and gasoline (0.9 mb 1.6 %).



According to weekly data from International Enterprise, land-based stocks of refined products held in Singapore declined by 4.0 mb in October. Falling residual fuel oil stocks (-2.8 mb m-o-m) led the draw, reportedly after major exporters such as Russia and the Netherlands cut exports to Singapore on the back of rising domestic winter demand. An additional drain on stocks came from firm Asian demand, notably from Malaysia which increased its Singaporean imports. Middle and light distillates inventories drew by 1.1 mb and 0.1 mb, respectively. Following these draws, light distillate inventories stand at a 0.5 mb surplus to the five-year average while those of middle distillates remain at a 3.5 mb deficit.



Prices

Summary

  • Futures prices trended lower in October and early November, with benchmark crudes hovering near four-month lows. Markets appeared well supplied in October, with global refinery runs at seasonal lows amid extensive plant maintenance. The onset of the peak winter heating season in the Northern Hemisphere, coupled with turmoil in Libya and Iraq, may keep something of a floor under prices in the near term.
  • Market concerns about the risk of confrontation in Iran has eased following discussions in Geneva between the P5+1 and Tehran over the latter's nuclear programme. Although initial steps toward reaching an interim agreement to freeze Iran's nuclear programme stumbled after three days of talks, the market appeared to take on board the participants' display of political will to work towards resolving their dispute.
  • Middle distillates and fuel oil crack spreads increased across all regions in October as demand strengthened ahead of winter and supplies tightened in line with sharply reduced refinery throughputs for scheduled maintenance.
  • Rates for Very Large Crude Carriers (VLCCs) on voyages out of the Middle East Gulf surged to 18-month highs in October on the back of firm demand for regional crudes from Asian buyers, notably China. Despite the ongoing dearth of cargoes coming out of Libya, Suezmax markets saw healthy demand for transport of light, sweet crudes from West Africa to Asia.


Market Overview

Futures prices trended lower in October and into early November, with benchmark crudes hovering near four-month lows. The downturn in WTI prices far outpaced Brent losses. Markets appeared well supplied in October with global refinery runs down to a seasonal low amid extensive maintenance. Nonetheless, the onset of peak winter heating demand in the Northern Hemisphere and turmoil in Libya may keep something of a floor under prices in the near term.

WTI declined $5.60/bbl month-on-month, averaging $100.55/bbl in October. By early November WTI had fallen a further $11/bbl from October levels, pressured lower by increased supplies of domestic crudes and heavier Canadian grades. By contrast, futures prices for Brent were off a smaller $1.80/bbl in October, to an average $109.44/bbl and fell a further $2/bbl by early November. Brent's relative strength was partly due to the deteriorating situation in Libya, where output has once again tumbled. Exceptionally poor refining margins in Europe have prompted European refiners to put the break on crude purchases. WTI was last trading at around $94.30/bbl while Brent was at $107.20/bbl.

Against the backdrop of diverging market dynamics on either side of the Atlantic basin, the WTI-Brent price spread widened in October, reaching more than $13/bbl at one point at end-month, to average $9/bbl for the month. Even more dramatic, reduced US demand for crude during seasonal refining turnarounds saw the price spread between WTI and WCS widened to near $40/bbl by early November (see Spot Crude Markets).



Underscoring the weaker prompt market and reduced concerns about short-term geopolitical risks, the backwardation for M1-M2 contracts continued to narrow in October and into early November. The Brent M1-M2 spread contract was nearly flat in early November compared with around $0.65/bbl in October and $1.20/bbl in September. The WTI M1-M2 spread continued to contract and flipped into contango in mid-October on seasonally lower refining runs and rising crude inventories in both inland markets and coastal refining centres.

Further out, the Brent M1-M12 spread saw a similar narrowing, to under $4/bbl in early November versus an average $6.25/bbl in October and around $8.60/bbl in September. After reaching a 2013 peak of $13.50/bbl on August 28, the WTI M1-M12 spread continued to narrow to an average $11.40/bbl in September, $6.40/bbl in October and just $3.50/bbl by early November.



Market commentators have noted reduced concerns about the risk of military confrontation in Iran and Syria in recent weeks. Expectations of western strikes in Syria ran high at end-August and early-September, but were dispelled after a deal was brokered by which Syria agreed to dismantle its stock of chemical weapons. The early November meeting in Geneva between the P5+1 and Iran concluded reaching an interim agreement to freeze Iran's nuclear programme, the market took on board the display of political will to work towards resolving the contentious debate that has at times injected a high level of volatility into oil prices over the past decade (see OPEC Supply, 'Iran Discounts Oil Sales Amid Negotiations for Sanctions Relief').



Futures Markets

Activity Levels

The downturn in oil futures market during October saw hedge funds and money managers steadily reduce their long positions throughout the month and into early November. Between 1 October and 5 November, ICE Brent hedge funds reduced their long exposure by 31.5%. Money managers' Brent long/short ratio is now well off the end-August peak, sitting at a six-months low. On the NYMEX, money managers maintained relatively stable positions throughout the period as the US benchmark moved in a narrow $7/bbl range. On the product side, money managers reduced their net long exposure across the board in both exchanges as prices eased over the month.






NYMEX trading volumes were up 18% year-on-year, consolidating their upwards trend, inching above ICE Brent volumes this month. WTI trading volumes rose even farther above Brent volumes when both ICE and NYMEX trades in the two contracts are taken into account. In terms of open interest, both contracts were up significantly on a y-o-y basis, 15.7% for ICE Brent and 14.3% for NYMEX WTI futures contracts only. On a monthly basis Brent was down 3.5%, while WTI down 0.6%, resulting in a widening of the spread between the two benchmarks.





Financial Regulation

On 5 November, the US Commodity Futures Trading Commission (CFTC) approved a new rule limiting the speculative positions that a firm can hold in future contracts and economically-equivalent swaps for 28 different commodities. The rule covers the four major NYMEX energy contracts, namely WTI, RBOB gasoline, Heating Oil and Natural Gas. The limits are set to 25% of deliverable supply in the month when a futures contract matures (so-called 'spot-month'). Firms will be allowed to hold five times the spot-month position limit in cash-settled contracts, provided that they do not hold any physically-delivered contract. For non-spot months, the limit is set to 10% of open interest for the first 25 000 contracts and 2.5% above this threshold. Those caps are different from the ones already put in place by exchanges, which apply only in the last three days before contract expiry. 'Bona fide' hedgers, i.e. commercial operators who hedge a physical flow, are exempt from the cap.

After the approval of the position limit rule, Bart Chilton, the longest-serving commissioner of the CFTC, announced his intention to step down 'in the near future'. This will bring to three the vacant spots in the five-member CFTC panel after the resignation  of Jill Sommers last July and the expiration of Chairman Gary Gensler's term in early 2014. US President Barack Obama nominated senior Treasury Department official Timothy Massad as Gensler's successor. The nomination is subject to Senate confirmation.

The CFTC on 30 October passed new customer protection rules forbidding brokerages from using one customer's account surplus to cover another's temporary shortfall. US law already prohibits using one client's funds to guarantee another's. However, this has been the practice for fluctuations before that a customer effectively covers the 'margin'. The rule would require firms to put aside enough liquidity to cover for margins.

Spot Crude Oil Prices

Spot oil prices for benchmark crudes were down by $1.65-$5.75/bbl in October, with WTI posting the largest decline. Exceptionally high stocks and US run cuts pressured WTI and other US domestic grades, with WTI spot prices tumbling by near $6/bbl to an average $100.50/bbl. The sharp plunge in refinery runs for seasonal maintenance reduced demand for crude across the US, but also had a knock-on effect for Canadian crudes. In addition, the rising supply of US crude output, up 950 kb/d so far this year, is also weighing on the differentials to benchmark WTI, with inland crudes and imports from Canadian especially hard hit. The recovery in runs should help price spreads recover (see Non-OPEC Supply). The discount of Western Canada Select (WCS) to WTI deepened by around $7.80/bbl to a near $40/bbl in early November compared with $32/bbl in October and around $29/bbl in September.



Brent was down a more modest $2.75/bbl in October, to $109.15/bbl, with a 2013 peak in North Sea output and poor refining margins partially offset by the loss of Libyan supplies. The weaker market for Brent continued into November with the M1-M2 spread moving into contango. North Sea output is set to rise in November and December following completion of field maintenance.



By contrast, stronger demand for heavier Mideast crudes provided spot Dubai crude with some support. Dubai prices were off by a relatively small $1.65/bbl in October, to an average $106.60/bbl. As a result, the Brent-Dubai spread narrowed to just -$0.50/bbl by early November, compared with an average -$2.56/bbl in October and around -$3.65/bbl in September. The narrowing Brent-Dubai spread led to an increase in arbitrage flows, with Asian refiners scouting out North Sea and West African crudes pegged to Brent prices.

Saudi Aramco made small upward adjustments for December official selling prices (OSP) to Asia but reduced OSPs for European and US customers. Several Asian refiners argued the increase was not warranted but OSPs partly reflect stronger naphtha and gasoil prices in Asia, despite weak margins.

Urals' discount to Brent widened in October to -$0.76/bbl on reduced European runs and ample supply. The spread started to narrow again through October and early November on expectations of reduced Russian exports in November, as domestic refiners crank up throughputs after maintenance and in response to improved refining margins.



Spot Product Prices

Middle distillates and fuel oil crack spreads increased across all regions in October as demand strengthened ahead of winter and supplies tightened in line with sharply reduced refinery throughputs due to seasonal plant maintenance. In contrast, gasoline cracks weakened further on a weak end- user demand and ample supplies. 

Gasoline crack spreads against benchmark crudes fell for the second consecutive month in all the regions on seasonally weakened demand and high stocks. Fuel switching to winter-grade gasoline in the US may also have weighed on crack spreads. The downturn, however, was partially tempered by run cuts, especially in Asia and Europe.



Middle distillates crack spreads improved significantly due to relatively low stocks ahead of winter. Tightened supply also lifted gasoil/heating oil crack spreads as refineries in Europe and Asia underwent heavy seasonal maintenance and cut production. Jet/kerosene crack spreads equally rose on tightened supply across the board. Asian refiners were reportedly maximising kerosene production at the expense of jet fuel, which in turn limited jet fuel exports to Europe. In the US, many companies were reportedly blending jet fuels into heating oil, tightening jet fuel supply. However, as Chinese jet fuel net imports were expected to decline with increased refining capacity, crack spreads in Asia rose less than in Atlantic basin.

Fuel oil crack spreads improved over October, narrowing the discounts against benchmark crudes in all regions. Fuel oil markets strengthened on reduced supplies out of Europe and the Mediterranean. In Asia, markets were underpinned by a seasonal uptick in Chinese demand and by healthy bunkering demand.





Freight

Rates for Very Large Crude Carriers (VLCCs) on voyages out of the Middle East Gulf surged to 18-month highs in October on firm demand for regional crudes from Asian buyers, notably China. Consequently, at the time of writing, rates on the benchmark Middle East Gulf - Asia route stood at a year-to-date high of more than $16/mt, almost double the lows of mid-August, with cargoes continuing to enter the market at a brisk pace.

Despite the ongoing dearth of cargoes coming out of Libya, Suezmax markets also saw healthy activity on the back of strong Asian demand for light, sweet West African crudes. An additional support to rates, especially on West African routes, came from a lack of vessels ballasting to the region. Indeed, vessels ballasting from Asia preferred to head to the Middle East Gulf, rather than the Atlantic, due to the high returns currently on offer there. Accordingly, rates on the benchmark Suezmax West Africa - US Gulf Coast trade rose steadily to a high of $14.80/mt at end-October before slipping slightly heading into November.



In the Baltic, freight rates received an unexpected and unseasonal push in mid-October after recent healthy long-haul chartering activity tightened tonnage. This increased long-haul trade is a consequence of sour crude tightness in Asian and Mediterranean markets which is drawing in NWE Urals. However, as the month wore on, rates receded sharply back to their seasonal norms after ballasters arrived in the region.

In comparison to crude tankers, product tankers experienced a poor month in October. Markets softened both East and West of Suez. Atlantic basin markets fared especially badly. As noted last month, a recent switch has occurred on trades between the US and Northwest Europe as the eastward gasoil trade out of the US (traditionally seen as the back-haul trade route) has become more profitable than the once-prevalent westward Europe - US gasoline trade.

With US markets still awash with gasoline, rates on the benchmark UK - US Atlantic Coast trade languished below $12/mt throughout October, their lowest since summer 2009. Reports suggest that upward pressure on rates may not be forthcoming, with a surplus of clean tonnage in Northwest Europe also weighing heavily. In Asia the picture was not much better with the Middle East Gulf - Japan trade losing approximately $9/mt over October, leaving rates at $21/mt in early-November largely after Asian product imports began to wane.

Refining

Summary

  • The forecast for 4Q13 global refinery crude runs has been slashed by 555 kb/d since last month's Report on plummeting European throughputs. Dismal refining margins compounded the effects of seasonal maintenance in Europe, taking regional runs in October to their lowest level since April 1989. Global throughputs for 4Q13 are now projected at 76.7 mb/d, up 0.4 mb/d year-on-year (y-o-y).
  • The estimate of 3Q13 global refinery runs is unchanged at 77.2 mb/d, up 1.2 mb/d y-o-y. Strong growth in non-OECD Asia and OECD Americas more than offset contractions averaging 860 kb/d in European throughputs.
  • Poor margins and seasonal plant maintenance curbed OECD crude throughputs by 1.3 mb/d in September, to 36.5 mb/d. The drop spanned all OECD regions, though US runs fell less than normal and remained unseasonably strong, surpassing year-earlier levels by some 700 kb/d. European runs, in contrast, sank to their lowest levels since April 1991, at only 11.3 mb/d, down 1.1 mb/d y-o-y. Preliminary data suggest OECD throughputs continued their downturn in October, with steep declines in both the US and Europe.
  • Sharply lower refinery activity in September and October failed to revive refining margins, which remained weak in most refining centres. Lower crude prices brought some relief from mid-October, however. The greatest rebound came from the US Gulf Coast, where margins had collapsed in September on unseasonably high runs. Lower run rates in October and robust crude supply cut crude prices and lifted Gulf Coast margins by $2.83/bbl on average.


Global Refinery Overview

Global refinery crude runs plunged by 1.4 mb/d in September and an estimated 1.5 mb/d in October, hitting a seasonal low of 74.6 mb/d in October. European refinery throughputs fell to their lowest levels since April 1991 in September, and likely contracted further in October, on heavy scheduled plant maintenance and poor refining economics. European refinery runs contracted 0.9 mb/d on average in 3Q13 y-o-y, their steepest quarterly drop since 4Q09.

The plunge in global throughputs over the two-month period can almost entirely be pinned on the OECD, where crude runs plummeted by an average 1.3 mb/d in September, despite above-normal US runs. US refiners cut runs by a steep 685 kb/d in October, however, as margins collapsed and maintenance work commenced. Nevertheless, both US and overall North American throughputs remained above year-earlier levels, buoyed by increased capacity and better margins than international competitors. Record-high product exports also helped support US runs. According to weekly EIA estimates, US product exports averaged 3.4 mb/d in October, up 600 kb/d y-o-y. In contrast, European refiners continue to struggle with lacklustre regional demand and increased international competition. European crude runs sank to 11.3 mb/d in September, their lowest level since April 1991, and some 1.1 mb/d below year-earlier levels. Preliminary data for the US, Japan and Europe suggest OECD runs plunged by a further 1.3 mb/d in October. If confirmed, that would represent the lowest OECD crude throughputs in three years.

Non-OECD refining activity also declined seasonally through October, but less steeply than in the OECD. Both demand and refining activity typically show less seasonal variation in non-OECD economies than in the OECD. Only in Russia is maintenance concentrated over two distinct spring and autumn periods as in the OECD. Non-OECD throughputs are expected to see a sharp upturn towards year-end as Russian maintenance winds down and new capacity ramps up in China and Saudi Arabia. In all, global throughputs are set to fall to 76.7 mb/d in 4Q13, from 77.2 mb/d in 3Q13. Annual growth in global runs likewise is expected to edge down to 0.4 mb/d in 4Q13, from  1.2 mb/d in the previous quarter. OECD runs contract in both quarters, led by Europe, while non-OECD growth continues apace at 1.6 mb/d in 3Q13 and 1 mb/d in 4Q13.



Refining Margins

Refining margins generally improved in October on lower crude oil prices but remained below historical norms. Deteriorating gasoline cracks continued to pressure Atlantic Basin margins, with European refiners particularly hard hit. Exceptionally weak European margins in September led refiners to slash throughputs, a rare occurrence during peak turnarounds. The steepest recovery in margins in October came from the US Gulf Coast, where margins rebounded by about $2.80/bbl on average. US Gulf Coast refiners had stayed roughly 700 kb/d above year-earlier levels in September, causing margins to plummet. As refiners subsequently cut runs in October, margins responded.

Despite sharply lower refinery output in October, Northwest European and Mediterranean refining margins only saw modest gains. On average, Northwest European margins rose $0.49/bbl, and even declined slightly for Brent cracking margins, while Mediterranean margins rose by $0.78/bbl on average. Continued supply problems in Libya supported regional crude prices relative to other markets, while a ballooning gasoline supplies and weak naphtha demand cut into gross product worth. A late start to the winter and high inflows of products kept a lid on distillate cracks. European margins were $5.85/bbl lower than a year earlier on average in October, an improvement from the $9.95/bbl y-o-y decline recorded in September.



US Gulf Coast margins rose as several refineries underwent seasonal maintenance amid rising crude oil stocks, which in turn caused crude prices to weaken. Also, a recovery in middle distillate crack spreads kept overall gross product worth from worsening further, despite sharply lower gasoline crack spreads.



Singapore refining margins rose by $0.90/bbl on average in October, buoyed by firm demand for middle distillates and high-sulphur fuel oil ahead of the Northeast Asian heating season. Singapore's fuel oil stocks plunged in October to their lowest level in three months, supporting hydroskimming margins which saw sharper gains than more complex plants. That said, simple margins remained negative, and more than $5.70/bbl less than a year earlier.



Weak Margins Hit Companies' Bottom Line

Quarterly earnings reports for 3Q13 reveal that none of the major oil companies was spared by the recent downturn in refining economics. Surplus capacity and weak gasoline markets were generally cited as the main reasons for the currently weak margin environment.

Not surprisingly, the steepest declines in profits were suffered by independent refining companies such as Valero, Marathon Petroleum and Phillips66. These companies saw their 3Q13 earnings fall 53.7%, 86.3% and 66.5%, respectively, from a year earlier. Marathon cited lower crack spreads, narrower crude differentials and higher RIN costs as contributors to its lower earnings. The independents are rapidly adapting to the market; Valero is expanding LTO processing capacity and Phillips66 is refocusing its business towards NGLs.

Majors ExxonMobil, BP, Shell and Total did not fare much better. Exxon cited "increased industry capacity" behind the drop in its downstream earnings from $2.6 billion a year ago, to only $592 million in 3Q13. Exxon's overall earnings were down 17.8% to $7.87 billion. Shell's profits fell by 34.7% to $4.7 billion, as downstream earnings plunged 49% to $892 million. Total, meanwhile, saw its earnings decline 19% y-o-y, to €2.7 billion. The company had earlier stated that its refining margin indicator had plummeted to $10.6/Mt in 3Q13, from $51/Mt last year. Lastly, BP announced that third-quarter margins fell from "near record levels" last year, underpinning a 33.6% drop in earnings, to $3.5 billion.

OECD Refinery Throughput

OECD refinery crude intake plummeted by 1.3 mb/d in September as seasonal maintenance and weak margins curbed runs in all regions. European crude throughputs fell the most, by 550 kb/d month-on-month (m-o-m) and 1.1 mb/d y-o-y, to 11.3 mb/d, their lowest level since April 1991. North American throughputs also fell seasonally by 400 kb/d, but remained well above their year-earlier levels, at 18.7 mb/d, supported by strong US throughputs. Refinery activity in OECD Asia Oceania fell 310 kb/d m-o-m, to 6.5 mb/d.

Preliminary data for October suggest OECD refinery runs fell another 1.3 mb/d in that month. European refinery runs plunged to new record low, while US refiners slashed runs on maintenance and weak margins. In all, OECD runs are now seen averaging 37.4 mb/d in 3Q13, falling to 36.4 mb/d in 4Q13.





OECD North American runs declined seasonally, by 400 kb/d, in September to average 18.7 mb/d. US throughputs stood an impressive 730 kb/d above year-earlier levels, however. US refiners have expanded crude distillation capacity by 220 kb/d this year. Another 130 kb/d is planned for next year, and 325 kb/d over 2015/2016. Most of the new capacity is geared toward processing new light sweet crude or domestic condensate supply.

Weekly data from the EIA show US crude runs falling sharply in October, however, down by 685 kb/d. The steepest declines came from the US Gulf Coast, were runs dropped 470 kb/d m-o-m, having trended above 8 mb/d for five consecutive months. A delayed start to the maintenance season was in part responsible, though lower gasoline cracks and margins contributed.



East Coast runs also plunged from September, to 0.9 mb/d on average in October, as Phillips66's Bayway and PBF's Paulsboro refineries in New Jersey underwent maintenance. Also on the East Coast, Delta Air Lines reported the first quarterly profit at its Trainer refinery in 3Q13. Monroe Energy LLC. hopes to increase profitability at the plant further by processing Bakken crude and increasing jet-fuel yields.

In the Midcontinent, crude throughputs rebounded quickly from an early October low of 3.2 mb/d, as BP restarted a 110 kb/d CDU at its recently upgraded 405 kb/d Whiting refinery. The unit had been shut since 4 October. The company announced that the Whiting refinery would reach full production in 1Q14 and that a new 100 kb/d coking unit, intended to let it process cheaper Canadian crude oil, would come on stream in November. At end-October, PADD 2 runs had rebounded to more than 3.5 mb/d, despite an unscheduled shutdown of Citgo's 175 kb/d Lemont refinery. A fire forced the company to shut the plant on 23 October, but the unit was reported to be in restart mode at the time of writing.



OECD European crude runs fell to 11.3 mb/d in September, their lowest level since April 1991. The 550 kb/d m-o-m decline, which took throughputs a steep 1.1 mb/d below year earlier levels, was somewhat larger than indicated by preliminary Euroilstock information, leading to a 325 kb/d downward revision from levels indicated in last month's Report. The largest drop in throughputs came from Sweden, which saw runs fall 190 kb/d m-o-m, to only 175 kb/d, as Preem's Gothenburg and Lysekil refineries were both undergoing maintenance. French, UK and Dutch refinery runs also declined by more than 100 kb/b m-o-m due to maintenance at Total's Feyzin and La Mede plants; Essar's Stanlow and Total's Lindsey refineries; and at BP's Rotterdam, KPC's Europoort and Shell's Pernis plants, respectively. In all, European refinery maintenance amounted to 1.3 mb/d in September.

Crude throughputs in OECD Asia Oceania fell by 310 kb/d in September to 6.5 mb/d, broadly in line with expectations. While Japanese throughputs fell the most m-o-m, these remained above year-earlier levels for the fourth consecutive month, despite reduced distillation capacity. Weekly data from the Petroleum Association of Japan suggest Japanese throughputs fell further in October as maintenance intensified. In addition to planned shutdowns, JX Nippon had to take a 110 kb/d CDU at its Mizushima B refinery off line following a fire while Idemitsu Kosan had to shut the crude distillation unit at its 220 kb/d Chiba refinery also after fire broke out near the unit in October. Japanese throughputs rebounded sharply from the week ending 26 October, however, and runs are set to rise further towards year-end as refiners maximise kerosene output to meet winter heating demand.



In contrast, South Korea's refinery runs were 200 kb/d less than year earlier in September, due in part to heavier maintenance this year compared with last, but also due to weaker domestic demand and poor margins. South Korean oil product demand contracted by 3.5% in September, and by 0.3% so far this year, while net product exports plummeted to only 295 kb/d in the first nine months of this year, their lowest level since 2010 .

Japanese Refiners Adapt to Changing Demand

The changing patterns in Japanese product demand resulting from the Fukushima disaster in 2011 and the subsequent intermittent nuclear power generation are having an interesting impact on refinery output. Japanese refiners are currently striving to meet a METI ordinance that mandates increasing the nation's upgrading ratio by March 2014 and thus limits the production of fuel oil. Recent data, however, show that refiners still maintain flexibility to adapt to changing domestic fuel needs.



During the winter of 2011/2012, increased oil burn for power generation caused Japanese fuel oil demand to surge more than 40% from a year earlier to average 522 kb/d in 4Q11 and 600 kb/d in 1Q12. Refiners had just managed to reduce fuel oil output to 9.1% in November 2010, from 16.3% a decade earlier and almost 20% in 1995. Due to the surge in domestic fuel oil needs, Japan's refiners re-geared their plants to maximise fuel oil output again, to almost 14% during the peak summer demand season of 2012.

Since September 2012, however, and as nuclear power plants and alternative electricity generation capacity have come back on line (see Demand section and 'Uncertainty over Nuclear Clouds Japanese Outlook' in October 2013 OMR), fuel oil yields at Japanese refiners have declined steadily to reach a new record low of 9% in August (the last month for which full data is available). As the Japanese power sector continues to adjust to cheaper alternatives to fuel oil for its power generation needs and refiners complete adjustments to configurations to meet government targets, we are likely to see further reduction in Japanese fuel oil output.

Please See Table 16 in the full table section on the OMR website for regional product yields.

Non-OECD Refinery Throughput

Non-OECD refinery crude throughputs came off their seasonal high in August, declining 380 kb/d m-o-m. Refinery activity slowed in all regions except the FSU, where throughputs peaked in August. Despite a 135 kb/d downward revision, based on lower data for Asia and the Middle East, annual growth remained impressive at 1.4 mb/d. An upward readjustment to Latin American historical data, based on new information for Venezuela, lifted 1H13 runs by 190 kb/d. It seems that outages at PDVSA's massive Amuay complex, following a deadly fire last summer, did last as long as previously assumed. In all, non-OECD refinery runs are now assessed at 39.9 mb/d in 3Q13 rising to 40.3 mb/d in 4Q13, representing annual growth of 1.6 mb/d and 1.0 mb/d, respectively.



China's refinery intake rose by 270 kb/d in October, to average 9.7 mb/d, in line with our forecast. The increase came as several refineries completed maintenance in September, and despite a steep drop in crude imports. China had imported a record high 6.3 mb/d of crude in September, in part to offset lower domestic supplies due to flooding at key fields. In October however, customs data show crude imports falling to 14-month lows of only 4.8 mb/d. The increase in runs came despite lower domestic fuel prices, which curbed refining margins to their weakest level this year. Runs are likely to rise further as maintenance at Sinopec's 400 kb/d Maoming plant and PetroChina's 240 kb/d Fujian refinery concludes in November and new capacity ramps up.



As discussed in earlier editions of this Report, a significant volume of new distillation capacity is set to be commissioned in 4Q13. PetroChina had announced that it would start up its 200 kb/d Pengzhou refinery in Sichuan province late October, but this seems to have been delayed again. The company's Urumchi plant expanded distillation capacity by a net 70 kb/d last month. A further 440 kb/d of new capacity is scheduled to be completed by year-end, dominated by Sinochem's new 240 kb/d Quanzhou refinery and Sinopec's Yangzi expansion (+90 kb/d net). The Quanzhou refinery received its first crude cargo in November, of Angolan Cabinda crude, and is reportedly on track to start operations in December. Nevertheless, the full effect of these refinery start-ups will likely only be felt in early 2014, as operations could be limited to trial runs over the next few months. Overall, we are forecasting that Chinese refinery runs could average 10 mb/d in 4Q13, up 120 kb/d from 4Q12.

In August, China was a net exporter of fuel oil for the first time in over a decade. Lower throughputs by independent refiners in the Shandong region, which mainly process fuel oil rather than crude, curbed imports to 254 kb/d, their weakest level in almost five years. China's product exports are expected to rise sharply in 4Q13, as the government increased product export quotas almost threefold from 3Q13, to 5.5 Mt (440 kb/d). The government granted Petrochina product quotas of 2 Mt, while Sinopec received 3.5 Mt. Indeed, October net fuel imports fell 62% y-o-y to around 115 kb/d, according to customs data, due mostly to high diesel exports by Sinopec.



Indian refiners processed 4.5 mb/d of crude in September, up 335 kb/d from a year earlier but slightly below August's levels. HPCL's Visak refinery processed only 88 kb/d, compared with 180 kb/d a month earlier, due to a fire on 23 August. The plant has since returned to full operations. Indian Oil Corp's new 300 kb/d Paradip refinery start-up has been delayed by a further two months due to labour shortages caused by the recent cyclone that hit the Indian coast. The plant is now only scheduled to start up by April-May and to reach full capacity within six months of commissioning. The plant is built to process Latin American crudes such as Maya, Castilla, Vasconia and Marlin, but in the initial year of operation, IOC will reportedly process low sulphur oil from the Middle East and West Africa.

Indonesian state firm Pertamina announced in early November that it had restarted its Tuban refinery and petrochemical plant in East Java after a near two-year shutdown. The plant, which is operated by TPPI through a tolling agreement, will now be run for a six-month period and will process 55 kb/d to 80 kb/d of condensate. The restart is aimed at reducing imports of refined products and chemicals, and thus reduce the country's current account deficit. Indonesian import costs have been rising due to currency depreciation.

Preliminary data put Russian crude intake in October at 5.24 mb/d, down 140 kb/d from September but 150 kb/d above a year earlier. October's drop was almost 90 kb/d less than the level forecast in last month's Report based on maintenance schedules, suggesting that some capacity was taken offline for longer than previously announced. More than 900 kb/d of capacity was reported offline in September and just over 800 kb/d in October. Refinery activity is set to pick up sharply in November as turnarounds are completed, to average 5.5 mb/d over the two last months of the year.

Latin American refinery throughput estimates have been raised for 2013 and earlier. New data for Venezuela lift our 2013 estimate by 150 kb/d since last month's Report. Totals for 2012 have been lifted by 20 kb/d, while only minor adjustments have been made to 2010 and 2011 (+8 kb/d and +1 kb/d). It seems that a fire at PDVSA's 955 kb/d Paraguana complex in the summer of 2012 did not have as prolonged an impact as first assumed, with PDVSA's Venezuelan crude intake averaging just over 900 kb/d for the first half of 2013. An adjustment to throughputs at the Curaçao refinery lifted 2013 estimates by 23 kb/d and lowered 2012 by 6 kb/d.



Brazilian throughputs fell by almost 100 kb/d in September, to average 1.97 mb/d. Lower runs at Petrobras' 226 kb/d Henrique Lage (Revap) refinery in São Paulo State led the decline. This is the first time this year that Brazilian throughputs have slipped below year-earlier levels, for the first eight months of 2013 y-o-y gains averaged 175 kb/d. Compared with installed refinery capacity of 2.1 mb/d, utilisation rates were 98% in 3Q13 compared with 99% in 2Q13. Despite the high refinery output, record diesel demand (which according to Petrobras peaked at 1.169 mb/d on 30 August) led to increased imports during the Brazilian's winter.

Middle Eastern refinery crude intake dipped slightly lower in August, mainly on lower Kuwaiti throughputs. This latter fell 100 kb/d from July, to 785 kb/d on average. Repairs to an 80 kb/d crude distillation unit at the Mina Abdullah refinery were extended into September, after a fire broke out at the plant on 21 August. In Saudi Arabia, the 305 kb/d Saudi Aramco-Shell joint-venture plant at Jubail announced it would shut one crude unit in the 4Q13 for routine maintenance. The timing and extent of the shutdown is unknown. In Syria, a recent report published by the UNDP and UNRWA and prepared by the Syrian Center for Policy Research puts output at the country's Homs and Banias refineries at 4.072 Mt (109 kb/d) in the first nine months of 2013, 8 kb/d less than our previous assessment.



In Africa, Libya's 120 kb/d Zawyia refinery in the west of the country is reported at reduced rates, while the 220 kb/d Ras Lanuf plant in the East has been shut since August. Zawyia reportedly completed maintenance of secondary units in October, but securing crude supplies for the plant remains a challenge. The plant normally processes crude from the Sharara field in southwestern Libya, which was shut by protests in October. According to press reports, crude oil from the Marsa El-Hariga field may be sent to feed the refinery instead. In Algeria, Sonatrach reportedly shut a 120 kb/d condensate splitter at its Skikda refinery for maintenance in September.