Oil Market Report: 13 February 2014

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Highlights

  • Oil markets rallied in mid-January as bitterly cold weather in the US pushed up demand for heating fuels, but on average benchmark prices weakened month-on-month (m-o-m). Upcoming seasonal refinery maintenance later put downward pressure on markets before prices rebounded in early February, with ICE Brent futures last trading at $109.25/bbl and NYMEX WTI at $101.25/bbl.
  • Total OECD industry stocks plummeted by a further 56.8 mb in December, taking 4Q13 OECD stock draws to 1.5 mb/d, the steepest quarterly decline since 4Q99. At 2 559 mb, total OECD oil stocks stood 103 mb below their five year average at the end of December, while product stocks covered 28.8 days of forward demand.
  • Global supplies fell by 290 kb/d in January, to 92.1 mb/d, on lower non-OPEC output. Supplies were up 1.50 mb/d year-on-year (y-o-y), however, as steep growth of 1.90 mb/d in non-OPEC output and OPEC NGLs surpassed a drop of 390 kb/d in OPEC crude production. Forecast non-OPEC supply growth for 2014 is unchanged at 1.7 mb/d.
  • OPEC crude oil supply rose marginally in January, by 85 kb/d, to 29.99 mb/d, with a downturn in production from Iraq offset by a partial recovery in Libyan output. The 'call on OPEC crude and stock change' is unchanged at 29 mb/d for 1Q14 but has been raised by 0.2 mb for the remainder of the year on higher forecast demand.
  • OECD oil demand growth rebounded in 2H13, but non-OECD countries still accounted for more than 90% of global growth of 1.2 mb/d for 2013 as a whole, and will make up all of the 1.3 mb/d increase forecast for 2014, as the OECD resumes its structural decline. Demand growth is expected to accelerate in 2014 in line with the broader economy.
  • Global refinery crude runs are set to fall by 2.8 mb/d from December through April on seasonal plant maintenance. Global throughputs are nevertheless set to grow by 1.1 mb/d y-o-y in 1Q14 to average 76.6 mb/d, led by the US, China, Russia and the Middle East. Plummeting European runs led global throughputs to contract in 4Q13.

The glut that never was

Forecasters and market observers have been warning of an oil glut and price slide for months. Instead, prices have remained stubbornly high. Far from drowning in oil, markets have had to dig deeply into inventories to meet unexpectedly strong demand. OECD commercial stocks plummeted by a whopping 1.5 mb/d in 4Q13 (137 million barrels in total), the steepest quarterly decline since 1999, bringing their deficit to the five-year average to more than 100 million barrels for the first time in nearly ten years. At year-end, stocks stood at their lowest since 2008. While there are good reasons to expect the market to rebalance in the next few months, a glut is looking increasingly elusive.

What accounts for this unexpected tightness? Firstly, the surprising robustness of global oil demand, especially in the OECD. While there has been much focus on an apparent slowdown in Chinese demand growth, China is only part of the story. The real surprise has been the recent resurgence of OECD demand growth. Far from continuing its previous downward trend as expected in the second half of 2013, OECD demand bounced back, jumping by 370 kb/d in 3Q13 and 300 kb/d in 4Q13. This strength more than compensated for weaker-than-expected demand from emerging-market economies, so that the latest estimates of global demand growth for 2H13 exceed our forecast of six months ago by roughly 500 kb/d. Even European demand inched up in 2H13. While non-OECD economies are still expected to overtake the OECD in oil demand, the time when that happens has been pushed back to later in 2014.



Meanwhile, global supply has disappointed, due chiefly to continued problems in OPEC. Average Libyan production in 2H13 collapsed by nearly 1 mb/d compared to an April high of 1.42 mb/d - a cumulative supply loss of more than 170 million barrels for the period. High hopes for Iraqi production failed to materialise as output could not sustain its April peak of 3.24 mb/d, falling back to an average 3 mb/d in 2H13 on the back of southern port maintenance and the usual litany of above-ground issues - logistical constraints, attacks on oil facilities, discord between Erbil and Baghdad.

Some of these problems may be short-lived. Cold weather in the US helped boost heating demand but will not outlast winter. European demand strength may not be more than a post-recessionary correction. On the supply front, Iraqi maintenance, having taken a toll on supply, may eventually unlock more of it. Other factors behind the current market tightness will have more staying power, however. US demand strength likely reflects in part a structural response to the country's supply bounty, namely a revival of manufacturing and petrochemical activity. And it may be some time before Libya sorts out its problems and brings supply back to pre-Civil War levels.

At this time of year, when the global oil market enters a season of lower demand, it is common for market participants to worry about excess supply or the perceived need for OPEC production cuts. Such concerns today would be particularly misplaced, as the market needs to replenish exceptionally low stocks. That the "call on OPEC and stock change" for 1H14 is below current OPEC production levels is a relief: the "call" is a blunt instrument that fails to capture storage requirements. OPEC will need to produce well above it if badly depleted inventories are to be rebuilt.

Demand

Summary

  • With a near complete set of 2013 data now available, oil deliveries for the year are currently estimated at around 91.3 mb/d, 1.2 mb/d up on the year. OECD demand expanded by 80 kb/d, reversing its previously declining trend, whereas non-OECD demand growth slowed to 1.2 mb/d, from 1.6 mb/d in 2012.
  • Non-OECD economies are projected to overtake those of the OECD in 2Q14, later than previously expected as relative growth trends have diverged. Despite the recent rebound in OECD demand and the slowdown in non-OECD growth, emerging-market economies continue to catch up in oil use with the industrialised world and are set to overtake it in 2Q14.
  • Global demand growth is expected to gain momentum in 2014, with deliveries forecast to expand by 1.3 mb/d to around 92.6 mb/d, as the underlying macroeconomic backdrop strengthens. Despite the recent rebound in OECD demand, all the growth is forecast to come from the non-OECD in 2014, as more normal trends rates return (post 1Q14).
  • The forecast of 1Q14 non-OECD oil demand growth has been trimmed since last month's Report in the face of currency weakness in many emerging-market economies. The negative 1Q14 impact upon non-OECD oil demand stems from the associated increase in the cost of doing business, as interest rates have been hiked in many countries in an effort to defend domestic currencies. Roughly 80 kb/d has been shaved from the 1Q14 non-OECD demand forecast, to 45.2 mb/d. OECD economies have not been immune to this phenomenon, with Turkey and Hungary also impacted.


  • The International Maritime Organization's (IMO) expansion of its Emission Control Area (ECA) to include the US areas of the Caribbean Sea, effective 1 January 2014, will likely marginally lift US marine gasoil demand for bunkers at the expense of residual fuel oil. A further shift in bunker demand from residual fuel oil to gasoil is anticipated towards the end of 2014, as shippers prepare themselves for the 2015 lowering of the ECA sulphur limit to 0.1%, from 1% currently.

Global Overview

The recent rebalancing of oil demand growth continued into 4Q13, with the previously rapidly expanding non-OECD demand sector showing continued signs of easing back somewhat onto a slightly lower-growth trajectory, while a protracted contraction in the OECD  gave way to modest growth. OECD oil demand rose by an estimated 0.7% y-o-y in 4Q13, rebounding from the previous five-year average decline rate of 1.6% seen in 2008-2012. Non-OECD growth, meanwhile, slowed to around 1.6% y-o-y in 4Q13, less than half its previous five-year average of 3.6%. A number of prominent features took root this month, all largely stemming from a single development: the apparent acceleration of the US economy to a point where the exceptionally loose monetary policies carried through recent years might no longer be deemed necessary.

At the end of 2013, the US Federal Reserve trimmed back its monthly asset purchasing programme, or 'quantitative easing', by $10 billion with a further $10 billion stripped in January 2014, to the current monthly purchase level of $65 billion. This reduction in government support, commonly referred to as 'tapering', is widely expected to continue at a pace of an additional $10 billion every six weeks according to the consensus of experts. If so, the current phase of quantitative easing, QE3, may come to an end by 4Q14, a prospect that has triggered steep currency declines in some emerging-markets.

Essentially, US 'quantitative easing' created a wave of cheap money that supported both domestic and overseas markets, as investors often fled OECD economies in the search for returns. A decline in liquidity would thus adversely affect the value of many emerging-market currencies, as experienced at the end of 3Q13 when potential reductions in quantitative easing were first widely discussed (see Emerging Market Currency Depreciation Set to Impact Demand in the Report dated 12 September 2013). At that time, many cash-strapped non-OECD economies reacted by reducing increasingly burdensome oil subsidies, thus curbing oil usage, a process that has since been ongoing and will continue to impact demand in the year ahead. Such non-OECD subsidy cuts were seen again this month, for example in Argentina where the government has agreed to reduce subsidies to the extent that gasoline and diesel prices are effectively hiked by 6%. Although pressure to further reduce emerging market subsidies remains, this time the largest likely additional impact upon oil demand is expected to be through the detrimental effect of higher interest rates on economic growth. Numerous countries have, in the face of sharply depreciating domestic currencies, hiked interest rates. Accordingly, we have adopted a more conservative stance with regard to our 1Q14 non-OECD forecast, shaving 80 kb/d from the 1Q14 non-OECD demand estimate.

The overall global demand forecast for 2014 has nevertheless been slightly raised since last month's Report, to 92.6 mb/d (125 kb/d above last month's estimate), as a more robust OECD outlook, particularly from OECD Americas, more than offsets the reduced non-OECD projection. Expectations of global economic growth have been solidifying in recent months, lifting the outlook for oil demand. This month's Report incorporates the latest International Monetary Fund (IMF) forecast of global economic growth, which has been raised to 3.7%, from 3.6% last October. Oil demand growth forecasts for the US, Japan, Spain, the UK and Germany have all been revised up, reflecting the upgraded IMF assessment of their economic outlook.

For 4Q13, the global demand estimate has been adjusted upwards by 85 kb/d since last month's Report, to 92.2 mb/d, based on data for November. Several countries accounted for the bulk of the upward adjustments for November, led by Japan (+165 kb/d), as power-sector oil needs exceeded expectations, significantly lifting fuel oil and 'other products' deliveries. Other large November upward adjustments include Chinese Taipei (+50 kb/d), Iran (+40 kb/d), Portugal (+30 kb/d), Argentina (+30 kb/d) and Thailand (+30 kb/d). Germany provided a partial offset with a downward adjustment of 70 kb/d, as did Iraq (-55 kb/d) and Belgium (-40 kb/d). Partial preliminary data for December contributed towards some downside 4Q13 impetus, although not enough to offset November revisions, with negative December adjustments seen for Canada (-85 kb/d), the US (-45 kb/d) and Japan (-40 kb/d), more than offsetting upward revisions for Argentina (+35 kb/d) and Korea (+10 kb/d).

Top 10 Consumers

US

Recent strength in US demand growth continued in late 2013 and early 2014, with preliminary data pointing towards a year-on-year (y-o-y) gain of roughly 6% in December and 2% in January. Notable increases in LPG, naphtha, jet/kerosene and gasoline demand provided the lion's share of the upside, as heightened petrochemical usage supported deliveries of naphtha and LPG (which includes ethane in the IEA's OMR figures), and escalating transportation needs ratcheted up gasoline and jet/kerosene demand. LPG and heating oil demand garnered additional support from the continued cold weather, with a 22% y-o-y increase in heating degree days in January.

Despite the y-o-y growth, the latest demand estimates for January and December depict a declining month-on-month (m-o-m) trend. In January roughly 19.1 mb/d of oil products are estimated to have been delivered in the US, 90 kb/d below the December estimate of 19.2 mb/d, which itself was down by 240 kb/d on November levels. Seasonal declines in the jet/kerosene and 'other products' led the January dip, alongside a sizeable contraction in gasoline.



In November, total US demand averaged around 19.4 mb/d, almost exactly as forecast in last month's Report and 4.8% above the year earlier. The product mix was slightly different than forecast, however, with gasoline demand up by 3.1%, to 8.8 mb/d, versus the previously anticipated 4.2% increase. Demand from the 'other products' category, in contrast, jumped by 12.4% to 2.1 mb/d, much faster than the previously foreseen 5.6% increase.



China

Sluggish growth in the Chinese industrial sector continued to take its toll on the country's oil use, with the latest estimate putting Chinese apparent demand down at around 10.4 mb/d in December, a contraction of around 1.8% on the year earlier. Gasoil/diesel led the decline, reflecting the recent dip seen in closely-tracked manufacturing-sentiment indicators (such as HSBC/Markit's which flipped back into 'contracting' territory at the turn of the year) and reports of ailing heavy transport demand, as the country has made a concerted effort to move less coal across the country. For 2013 as a whole, Chinese oil demand is now estimated at around 10.1 mb/d, just 280 kb/d (or 2.8%) above 2012.





Although the IMF, in its updated GDP projections of last month, raised its forecast of Chinese economic growth for 2014 to 7.5%, from 7.3% previously, the forecast of Chinese oil demand growth has been marginally reduced on last month's Report. The curbed Chinese demand numbers are attributable to a combination of recent weaknesses in the data and expectations of greater energy efficiency, a long-established policy goal of the Chinese administration that seems to be gaining traction recently. Following a near doubling of net diesel exports in 2013, as gasoil demand has struggled, further gains in diesel exports are foreseen in 2014 with both Sinopec and PetroChina reportedly gaining large export licenses for 1Q14.



Japan

At roughly 5.2 mb/d in December, preliminary estimates of Japanese oil demand show both a seasonal spike and the continuation of the broader y-o-y contracting trend demonstrated across 2013. For 2013 as a whole, demand is estimated at an average of around 4.6 mb/d in Japan, down by 165 kb/d (or -3.5%) on the year earlier. All of the main product categories, bar naphtha and diesel, saw notable declines, with the sharpest contractions experienced in fuel oil and 'other products', respectively down by 19.1% and 9.7%. The overall forecast for 2014 has been raised to reflect an upward revision of four-tenths of a percentage point in the IMF forecast of Japanese economic growth forecast, to +1.7%. Accordingly we now foresee Japanese oil demand falling by roughly 3.5% in 2014, to an annual average of around 4.4 mb/d, versus the previous -3.7% forecast. Deliveries are still forecast to fall in 2014, led by particularly sharp declines in the fuel oil and 'other products' categories, as the country's idled nuclear capacity starts coming back on-line in 2014.



India

After a long period of flat-to-falling y-o-y growth, the Indian demand trend edged higher in December, up by 1.2% y-o-y to an average of around 3.4 mb/d, roughly in line with last month's forecast. The gasoline and diesel sectors showed diverging trends, with demand for the former in December up by around 7.4% on the year earlier, to 410 kb/d, while gasoil/diesel demand fell by 2.5%, to 1.4 mb/d. Government efforts to reduce diesel subsidies may have encouraged some product switching to gasoline. For 2013 as a whole, Indian oil demand averaged roughly 3.4 mb/d, up 0.6% y-o-y. Demand growth is expected to regain momentum in 2014, reflecting both an expected acceleration in economic growth and the diminishing impact of subsidy reductions, which already cut demand in 2013. Indeed, we have revised up the projected acceleration in 2014 to 2.6%, from 2.4% previously, as the IMF raised its forecast of Indian GDP growth by two-tenths of a percentage point, to 5.4%.



Russia

The strong recent Russian demand trend continued through the second half of 2013, although growth in deliveries has been tempered somewhat since its September peak as the underlying momentum in the Russian economy has slowed. Preliminary December estimates suggest oil deliveries of around 3.5 mb/d, a gain of 4.6% on the year earlier, which is nearly half of September's peak growth rate. Robust industrial usage has supported demand for gasoil/diesel, naphtha and coke (included in our 'other products' category), with Russian gasoline demand also edging gently higher as car registrations, as quoted by the Association of European Business in the Russian Federation, rose by 13.9% in the month of December (roughly 5% higher on the year). Supporting the industrial fuels, meanwhile, was a reported 0.8% m-o-m gain in Russian industrial production.



As business confidence deteriorates in 2014, so too does the prospective growth trend of oil demand, which is forecast to rise by just 2.7% for the year. Notably, HSBC's Russian Purchasing Managers' Index (PMI) slipped to 48.0 in January, a 55-month low and well below the 50 threshold separating contraction from expansion. HSBC concluded that declines in sentiment were "registered for output, new order, exports, employment and purchasing", further accounting for the forecast deceleration in Russian oil deliveries in 2014.



Brazil

The Brazilian demand estimate for 2013 is roughly unchanged from last month's Report, which already included November data. Brazilian oil deliveries totalled close to 3.2 mb/d in November, 80 kb/d (or 2.6%) up on the year earlier, supported by particularly strong gasoline demand. For 2013 as a whole, growth is estimated at around +4.0%, to 3.1 mb/d, but is projected to decelerate in 2014 to +2.7%, as the sharp gains in road transport fuels seen in 2013 seem unlikely to be repeated. The 2014 Brazilian growth forecast has been modestly curbed from last month's Report, when it was estimated at +2.9%, reflecting revisions in the IMF's January World Economic Outlook, which cut the economic growth projection for Brazil to 2.3%, from 2.5% previously.





Saudi Arabia

At 2.7 mb/d, the latest Saudi Arabian demand estimate for November came out in line with expectations. Deliveries fell for a fourth consecutive month, with the demand estimate down by 265 kb/d on the month earlier as direct crude oil burn continued its decline, reflecting curbed power-sector usage. For the year as a whole, Saudi Arabian oil demand is assessed to have averaged out at around 3.0 mb/d, a gain of 60 kb/d (or 2.1%) on the year earlier. Momentum is forecast to build further in 2014, up by 90 kb/d (or 3.0%) to an annual average of around 3.1 mb/d, as the macroeconomic backdrop also strengthens.



Germany

At just 2.4 mb/d in November, the latest German demand estimate came out nearly 70 kb/d below the projection carried in last month's Report. The naphtha and residual fuel oil markets accounted for the bulk of the correction. The previous estimate was based on inland delivery statistics, which sometimes distort the true scale of deliveries by failing to fully capture trade flows. More recent and complete data show naphtha deliveries averaged only 405 kb/d in November, 30 kb/d below last month's estimate and 10 kb/d under year-earlier levels. German fuel oil demand came in at 115 kb/d in November, 20 kb/d below forecast and down 15 kb/d (or -11.4%) y-o-y. For 2013 as a whole, the German demand estimate has been marginally reduced to 2.4 mb/d, 5 kb/d less than the prediction carried in last month's Report, and equivalent to a y-o-y gain of 20 kb/d (or +0.9%).



Canada

The recent weakening in Canadian demand data appears to have continued through to the end of 2013, with preliminary data for December depicting average deliveries of just 2.2 mb/d, down 5.3% y-o-y. This marked the third consecutive month that Canadian demand declined y-o-y. Momentum has gone into reverse recently as business confidence, after a strong run, started to show signs of weakening. This, alongside an unusually mild late autumn, has curbed 4Q13 demand, which is now estimated to have contracted by 5.2% y-o-y. After the relatively flat trend of 2013, Canadian oil demand is forecast to accelerate in 2014, as industrial oil needs kick-on supported by widely held projections that the underlying economic impetus will build in the year.



Korea

South Korean demand returned to y-o-y growth in December after a three-month hiatus, as particularly strong demand for industrial fuels led an upsurge in momentum. December demand of 2.5 mb/d, up 1.4% y-o-y, was roughly in line with expectations, however. Supporting this upturn has been a recovery in the widely tracked Korean business confidence indicators, with HSBC's Manufacturing PMI breaking back into 'expansionary' territory in 4Q13 after a mid-year slump.

OECD

Whereas previously the medium-term trend in OECD oil demand was clearly downwards, as an average decline rate of 1.6% was seen over the five-year period 2008-12, the last three quarters of 2013 experienced absolute y-o-y gains in demand, with growth of 0.1% y-o-y seen in 2Q13, accelerating to 0.8% in 3Q13 and 0.7% in the 4Q13.



Shipping Industry Faces Widening Legislative Curtain

The global shipping industry consumes roughly 4 mb/d of bunker fuels, of which high-sulphur marine fuel oil represents an estimated 84% and marine gasoil/diesel most of the remainder. These heavier-sulphur fuel oils have been faulted, by the International Maritime Organisation (IMO) and others, for causing serious air pollution. Such concerns led to the establishment of Emission Control Areas (ECA) in sensitive high-volume shipping waters such as the North Sea, the Baltic Sea and coastal areas off North America. Under IMO rules the sulphur content of burnt shipping fuel must currently not exceed 1% within the ECA. In January 2014, a raft of additional legislative changes were introduced, most notably (from a demand point of view) the widening of the ECA to include the US areas of the Caribbean Sea. This effectively means that ships that pass through waters adjacent to the coasts of Puerto Rico and the US Virgin Islands must also now adhere to tighter ECA emissions controls, potentially lowering the total US fuel oil requirement, in favour of less polluting marine gasoil.

The IEA does not include these US territories in its US50 demand estimates, instead treating this region separately as "US territories". It is this category that will likely see some additional marine gasoil demand in 2014 at the expense of high-sulphur fuel oil. Last year the US territories consumed roughly 85 kb/d of fuel oil and 70 kb/d of gasoil. Although there are no available estimates of demand from the marine sector, an approximation can be garnered from patterns observed in neighbouring Caribbean countries. Thus in 2014, following the widening of the ECA to include the US Caribbean Sea, fuel oil demand in the US territories region is thought likely to contract by around 5.7%, while the gasoil demand in the US territories is forecast to rise by an estimated 7.3%.

More importantly, in 2015 ECA-wide sulphur limits are due to be further reduced to 0.1%. This new, tighter ECA sulphur limit is expected to result in a sharp upturn in OECD marine gasoil demand, at the expense of marine fuel oil. These numbers have been included within our OECD forecast, hence the relative strength that is demonstrated in the total 4Q14 OECD gasoil growth rate compared to overall OECD demand: OECD 4Q14 gasoil demand rising by 1.6% y-o-y versus a wider forecast increase in total OECD demand of 0.1%.

Americas

Strong US deliveries lifted aggregate demand for the OECD Americas region in 4Q13, with a gain of 2.3% to 24.3 mb/d now assumed. This in turn raised the average for 2013 as a whole to 24.0 mb/d, up 1.6% on the year earlier. Expansion in the US masked contraction elsewhere, however. Mexico reported a 6.7% y-o-y decline in December, followed by Canada (-5.3%) and Chile (-0.4%, although the latest Chilean data are only available for November).



Europe

Europe's switch back into demand growth mid-2013, after a seemingly entrenched downtrend, reversed in 4Q13 despite an upturn in European business sentiment. In the five years from 2008-12, European oil demand fell by an average of around 2.3% per annum, but bounced back in 2Q13 (up 0.1% y-o-y), gaining momentum with a further gain of 1.1% in 3Q13. As forecast, the rebound proved relatively short-lived, driven as it was by a temporary, post-recessionary bounce. A mild contraction in European oil demand is then forecast for 2014 as a whole.



The outlook for the UK has been raised, since last month's Report, to reflect the more bullish stance now being taken by economic forecasters. The IMF in January added roughly three-fifths of a percentage point to its 2014 UK GDP projection, to 2.4%. Our demand forecast has accordingly been increased, with growth of 0.8% now forecast for 2014, up from the previous 0.6% estimate.

In other European countries, the demand forecast has been reduced. That is in particular the case of those economies whose currencies have recently weakened, such as Hungary and Turkey. The picture for Turkey, where the 2014 oil demand growth forecast has been trimmed marginally, to 2.9%, is further clouded by partially offsetting revisions to historical estimates. New data added approximately 20 kb/d to the 2012 baseline demand estimate, to 690 kb/d. Demand is now estimated at 730 kb/d for 2013 and is forecast to rise to an average of around 750 kb/d in 2014.



Asia Oceania

The OECD Asia Oceania region has seen its own demand trend hit in recent months, as the effect of an earlier spike in oil demand from the Japanese power sector following the 2011 East Japan earthquake and tsunami faded in 2013, while the broader economic backdrop lulled. Elsewhere in the OECD Asia Oceania region, the demand trend has generally been a rising one recently, and is projected to remain so in 2014, although this will not suffice to offset expected power-sector declines in Japan. In Australia, after rising by roughly 0.9% in 2013 to 1.1 mb/d, demand is forecast to ease back to growth of around 0.5% in 2014 as the forecast of economic growth has also been curtailed since last month's Report (by two-tenths of a percentage point).



Non-OECD

The recent slowdown in non-OECD momentum continued in 4Q13, with a somewhat modest 1.6% y-o-y increase posted, less than half the previous five-year average of 3.6% seen 2008-12. With many emerging market currencies hit hard in January, forcing interest rates up in some countries (such as South Africa) and subsidies down in others (for example Argentina), the outlook for 1Q14 is also one of slowing growth. For 2014 as a whole, only a relatively modest 3.0% increase in non-OECD oil demand is foreseen, taking demand up to an average of around 46.6 mb/d. Despite such concerns the non-OECD region is forecast to take the dominant share of the global oil demand from 2Q14 onwards.

Reports of particularly harsh Iranian winter weather conditions, coupled with natural gas shortages in the world's second-largest natural gas reserve holder, have raised the 4Q13/1Q14 Iranian demand projection, up to a winter average of around 1.8 mb/d. Also, tracking forward, we have raised the 2014 growth forecast, with a gain of around 2% now foreseen, versus the previously assumed increase of closer to 1%. The additional Iranian demand forecast is consistent with the marginally less bearish macroeconomic consensus that is now emerging.



November saw Iraqi demand fall in both y-o-y and m-o-m terms, to an average of around 730 kb/d, as a seasonal decline was magnified by a particularly pronounced drop in gasoil/diesel. An estimated 225 kb/d of gasoil was delivered in November, 35 kb/d below October and 25 kb/d under the year earlier level. Given that the revised November demand number was 55 kb/d below our month earlier forecast, the estimate for the year as a whole has been curbed to 780 kb/d, up by 4.4% on the year. Momentum is forecast to accelerate somewhat in 2014, to 5.1% to 820 kb/d.



In non-OECD Asia, the recent data flow has surprised on the upside. Thailand saw deliveries of approximately 1.3 mb/d in November, 30 kb/d above the month earlier forecast on account of some surprisingly strong LPG deliveries. The Thai demand estimate for the year as a whole has accordingly been revised upwards, to 1.3 mb/d in 2013, equivalent to a gain of 3.1% on the year with a roughly similarly paced trajectory assumed for 2014.



The Argentinean 4Q13 demand series was revised up by 20 kb/d, since last month's Report, to 785 kb/d, reflecting the latest official data. The robust y-o-y growth trend that has been seen since 4Q12 continued into 4Q13, with a 4.1% gain posted, thus equating to an annual gain of 5.2% for the year as a whole to an average demand level of 770 kb/d. Gasoline led the gains, supported by underlying strength in consumer confidence. The recent sharp depreciation in the value of the Argentine currency, the peso, however, is thought likely to curb 1Q14 demand, with a deceleration in economic growth now expected. January's near-quarter depreciation of the peso pushed up refining costs to such an extent as to force the government to reduce subsidies, in effect raising both gasoline and diesel prices by 6%. For the year as whole, a more modest expansion of around 2.7% is now forecast, as Argentinean demand averages out at around 790 kb/d in 2014.





Supply

Summary

  • Global supplies declined by 290 kb/d to 92.1 mb/d in January from December levels, with non-OPEC production behind the downturn. Supplies were up by 1.50 mb/d year-on-year (y-o-y), however, as steep growth of 1.90 mb/d in non-OPEC output and OPEC NGLs surpassed a decline of 390 kb/d in OPEC crude production.
  • With complete-year data available for nearly all producers, non-OPEC liquids supplies show growth of 1.33 mb/d in 2013, to 54.68 mb/d. Total non-OPEC supplies are expected to grow by another 1.75 mb/d in 2014, mainly as a result of relentless advances in North American production, and to a lesser extent Latin American and FSU production gains.
  • Non-OPEC supplies fell by 390 kb/d month-on-month (m-o-m) in January, to 55.64 mb/d, as crude oil production declined by 200 kb/d and ethanol production continued its seasonal drop, dipping by another 255 kb/d during the month. Non-OPEC NGL production rose by about 80 kb/d m-o-m.
  • OPEC crude oil supply in January was marginally higher, up by 85 kb/d to 29.99 mb/d, with a downturn in production from Iraq offset by a partial recovery in Libyan output. January volumes are about 480 kb/d below the annual 2013 average. Upcoming spring refinery turnarounds are expected to mitigate the impact of reduced supplies from OPEC.
  • The 'call on OPEC crude and stock change' was unchanged at 29 mb/d for 1Q14 but was raised by 200 kb/d for 2H14 on higher forecast demand. The 'call' on OPEC supplies for 2H14 is now estimated at an average 30 mb/d, or 1 mb/d above that for the current quarter. OPEC's 'effective' spare capacity in January slipped to 3.15 mb/d from 3.33 mb/d in December.


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

Note: Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from 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, with downward adjustments focused in the OECD.

OPEC Crude Oil Supply

OPEC crude oil supply in January was marginally higher, up by 85 kb/d to 29.99 mb/d, with a downturn in production from Iraq offsetting a partial recovery in Libyan output. Iran, Nigeria and Angola also posted modest increases last month. January volumes, however, are still running 480 kb/d below the annual 2013 average. Upcoming spring refinery turnarounds are expected to mitigate the impact of reduced supplies from OPEC. Looking forward, continued operational problems and field maintenance plans are expected to curtail output from Iraq and Angola through March.

The 'call on OPEC crude and stock change' was unchanged at 29 mb/d for 1Q14 but was raised by 200 kb/d for 2H14 on higher forecast demand. The 'call' on OPEC supplies for 2H14 is now estimated at an average 30 mb/d, or 1 mb/d above that for the current quarter. OPEC's 'effective' spare capacity in January was estimated at 3.15 mb/d, down from 3.33 mb/d in December, with Saudi Arabia accounting for around 85% of the surplus.



Saudi crude oil production in January was pegged at 9.76 mb/d, down a marginal 60 kb/d from December levels. Saudi supplies to the market, which include sales from storage, however, are estimated at a higher 9.92 mb/d in January, around 70 kb/d below the previous month. In March, Saudi Aramco is expected to curtail output from the 750 kb/d Shaybah field as it undertakes work to tie in production facilities as part of its plans to increase output to 1 mb/d. The loss of Arab Extra Light production from the field during the work programme will be offset by increases elsewhere, albeit likely a heavier grade. The 250 kb/d capacity increase is expected to be completed in April 2016.



Iraqi production in January fell by 140 kb/d to 2.99 mb/d. Crude oil exports fell by 113 kb/d to 2.23 mb/d, the lowest level in four months. Basrah exports were down 45 kb/d to 2.04 mb/d as weather-related delays and ongoing maintenance work at southern ports in the Gulf reduced liftings. Maintenance work is expected to continue over the next several months. Northern exports of Kirkuk crude declined by around 60 kb/d to 192 kb/d in January, with volumes once again constrained by attacks on the key pipeline running to the Mediterranean port at Ceyhan, Turkey as well as the continued suspension of crude exports from the KRG region to the Kirkuk-Ceyhan pipeline, due to ongoing payment and contract disputes between Irbil and Baghdad. Trucked exports of oil from Iraq to Jordan halted due to deteriorating security in Anbar province where militants overran the city of Fallujah in January. Iraq normally exports between 8 kb/d to 10 kb/d in this way. KRG production was estimated at around 200 kb/d in January, which Baghdad does not include in its official data. Roughly 60 kb/d is exported via trucks and the remainder used at several major refineries as well as teapots in the region. There are still no crude exports of KRG crude through the new pipeline that ties into the Iraq-Turkey Pipeline (ITP) at Fishkabur, and it is likely no progress will be made until after the April elections.



Iranian crude oil production edged higher in January, up by 30 kb/d to an estimated 2.78 mb/d. Iran is holding an estimated 30 mb in floating storage at end-January, which includes 6 mb sitting off China, up 2 mb from end-year levels, latest tanker data show. Imports of Iranian crude increased in January also, up by an estimated 100 kb/d to 1.32 mb/d, with increased sales to China (+95 kb/d), Japan (+90) and India (+50) only partially offset by reduced deliveries to Korea (-68 kb/d), Syria (-61 kb/d) and Taiwan (-2 kb/d). Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports.



The next stage of negotiations about Iran's nuclear programme with the so-called P5+1 - the five permanent United Nations Security Council members plus Germany and the EU - is scheduled to take place at the United Nation's offices in Vienna on 18 February. An interim agreement signed on 24 November between Iran and the P5 +1, known as the Joint Plan of Action, was implemented in January. Among the key outcomes was a decision by Iran to suspend its most sensitive nuclear activity in exchange for a limited easing of some international sanctions. The Joint Plan of Action is explicitly intended as a temporary measure to allow breathing space for negotiations on a permanent agreement and the February meeting will mark the start of that process. While the very limited easing of international sanctions included in the interim agreement are not sufficient to facilitate significant new investment into Iran's oil sector, Iran has been actively courting foreign companies on the apparent hope that the Joint Plan of Action will eventually lead to a more comprehensive and permanent agreement. A French delegation of more than 100 executives visited Iran in early February, the largest foreign delegation to do so since the 1979 revolution. Iran announced that it is currently revising its unattractive buyback contracts in a bid to attract foreign investors to its oil and gas sector. While the new contract structure has not been finalised, the government has qualified that there will be no concession or production-sharing agreement on offer since they violate the country's laws on foreign ownership.

State-owned National Iranian Oil Company (NIOC) plans to unveil the draft of the new development, exploration and production terms to potential investors in Tehran later in February, which will be followed by seminars, with the finalised contract terms due to be unveiled in London in June or July.

Despite the optimism generated by the successful conclusion of the Joint Plan of Action, the vast majority of sanctions against Iran remain in effect, as was clearly demonstrated in early February when the US Treasury Department identified some 35 companies and individuals violating Iran sanctions, the largest group to be targeted to date. Under US laws and regulations, the sanctioned companies and individuals will face severe penalties, including restrictions on doing business in the US and the seizure of any property under its jurisdiction. The crackdown comes amid US efforts to underscore the fact that the Joint Plan of Action is a limited, temporary measure and that there will be no significant easing of economic sanctions until a permanent, comprehensive agreement is finalised.

Kuwaiti production in January was off by 30 kb/d to 2.78 mb/d while UAE output remained unchanged at 2.76 mb/d. Qatar output was lower by a modest 10 kb/d at 720 kb/d in January.



Crude oil production in Angola rose by a modest 15 kb/d in January, to 1.65 mb/d, but remained near two and half-year lows for the third month running, largely due to operational problems at the Greater Plutonio fields. Planned maintenance at the BP-operated fields was already pencilled in to sharply reduce supplies from end-February through March even before the latest operation problems. The Plutonio floating production, storage and offloading facility experienced technical problems in January, which has led to reduced volumes and loading delays. In addition, there appears to be an issue with the medium, sweet crude's salt content, which has reduced the value of the grade and prompted some refiners to shun it since high salt levels can corrode refinery units. Plutonio has a history of problems, which have largely been connected with the water injection system. While the extent of the latest issues with the floating platform and crude quality is unclear, industry experts say that the extensive March maintenance scheduled should subsequently restore production to more normal levels.



Libyan crude supplies rose to the highest level in five months at an estimated 500 kb/d, up by 270 kb/d following the restart of the El Sharara field in January. The 350 kb/d field in the western region had been shut in since last October before it reopened in January, albeit intermittently. However, production at Sharara was cut by 75% on 12 February after a group of armed men shutdown the pipeline to Zawiya export terminal. Output remains significantly constrained below estimated capacity, by some 700 kb/d. Reports have emerged that damage to Libya's oil fields and export infrastructure has reduced production capacity to 1.2 mb/d, from 1.7 mb/d prior to the country's 2011 civil war. Armed protesters retain control of the country's key eastern ports of Ras Lanuf, Es Sider and Zueitina, which account for around 600 kb/d of export capacity. Negotiations to end the standoff have so far come to naught.

Statements from the Prime Minister's office that troops would soon be sent to break-up the blockade at export terminals have not materialised, and the political and security problems that have caused pandemonium across the country may worsen in coming weeks with the third anniversary of the civil war on 17 February and elections for the constitutional commission scheduled to take place on 20 February.



Nigerian supplies were up a modest 20 kb/d to 1.94 mb/d in January. Oil theft and sabotage continue to plague the country's production with output below 2 mb/d since March 2013. Part of the key Trans-Niger Pipeline was shutdown for 10 days in January due to leakages caused by oil theft. A parallel 24-inch pipeline, however, is closed for maintenance and no date has been given for its reopening.

Algerian production edged lower by 30 kb/d to 1.12 mb/d despite the ramp-up of output from the El Merk field. The field's production has now reportedly reached nameplate crude capacity of 100 kb/d.

Non-OPEC Overview

Non-OPEC production fell in January for the second consecutive month, declining about 390 kb/d m-o-m to 55.64 mb/d amid shrinking OECD liquid fuels production and seasonal declines in global biofuels supply. Non-OECD output showed a slight increase in January although a number of large producers, notably Russia, China and Brazil, posted declines. OECD 4Q13 supplies grew by about 510 kb/d compared with 3Q13. Non-OECD production also rose by about 485 kb/d in 4Q13, the highest quarter-on-quarter (q-o-q) growth since 3Q04. Overall 2013 non-OPEC growth rate stood at 1.33 mb/d, exceeding the record y-o-y growth in 2010.



Despite this monthly drop, the forecast of non-OPEC supply growth for 2014 has been raised marginally by about 40 kb/d from last month's Report, to 1.75 mb/d which resulted from lower 2013 baseline due to data revisions. In contrast, non-OECD growth rates have been trimmed from last month by about 20 kb/d for 2014.

OECD

North America

US - December preliminary, Alaska actual, others estimated:  Total US production in November stood at 10.8 mb/d, about 170 kb/d lower than the estimate published in last month's Report, as final production data indicated a smaller-than-previously-estimated output for the month. Crude oil output in November rose only by 15 kb/d m-o-m, to 7.77 mb/das technical issues that resulted in production decreases in the Gulf of Mexico nearly offsetting gains elsewhere. In the Gulf of Mexico, production averaged 1.18 mb/d in November, the lowest output since June 2013, as a number of platforms saw output declines due to pipeline operating issues.

North Dakota's Bakken production rose above 900 kb/d in November for the first time and  production inched further up in December, albeit at a smaller rate (about 10 kb/d) than the average growth rate recorded in between June and December 2013 (more than 20 kb/d). Although final December production data are still outstanding for Texas, a number of companies have reported lower output for 4Q13 than 3Q13 as severe weather in the western part of the state caused power outages, equipment freezing, and access problems to drilling and production facilities. Apache, Energen, and Pioneer were among the producers that reported lower q-o-q output from their Permian Basin operations. Pioneer alone shut in 7 000 wells in the Sparberry/Wolfcamp play. Permian Basin operations returned to normal for the most part by the end of January.

Overall, US oil output increased by 1.1 mb/d in 2013, to 10.3 mb/d. The annual average for 2013 was lowered from last month's Report due to revisions to 4Q13 production estimates in the Lower 48, mainly November production numbers.

Preliminary estimates indicate that US crude oil production averaged nearly 8 mb/d in January, down slightly from December, marking the first monthly crude oil output decline in three months. The January output fall is at least in part due to cold weather conditions that have affected production in Texas, and to a lesser extent in North Dakota's Bakken shale formation. Despite these declines, US total liquids production (excluding biofuels and refinery processing gain) is expected to rise by 1.04 mb/d in 2014, with crude oil accounting for roughly 800 kb/d of the increase. NGL production, which grew by about 150 kb/d in 2013 is expected to add another 220 kb/d this year to reach 2.78 mb/d, the highest y-o-y growth since at least the early 1990s, spurred by expanding ethane and propane production.



The seemingly relentless increase in US production continues to highlight our belief that additional transport infrastructure will be required. A number of midstream infrastructure projects to ease crude oil bottlenecks are in planning and construction phases. In the latest such development, TransCanada started delivering crude oil through its new Gulf Coast pipeline from Cushing, Oklahoma to refineries in Texas. The 784-kilometre, 700-kb/d pipeline started deliveries of light, sweet crude oil on 22 January, although as part of the larger Keystone XL system, it had been planned to transport heavier crude sourced from Alberta's oil sands.

Meanwhile, crude oil producers will continue to rely heavily on rail for transport within North America. Since our last Report (see 'Rail Transport of Crude Oil in the Spotlight in North America' in January 2014 OMR), which included a special focus on rail transport of crude in North America, there has been a flurry of activity among regulators and industry participants to address crude-by-rail safety concerns. Transport officials from the US and Canada issued a series of joint non-binding recommendations in late January in response to recent crude-by-rail incidents. The proposed rules include recommendations on crude oil shipments routes (avoid populated and sensitive areas), classification and treatment of the cargo (make it more akin to that of dangerous cargo), and security and safety (develop spill-response plans).

There also seems to be an increase in scrutiny of cargoes transported via rail, with US Department of Transportation's Pipeline and Hazardous Materials Safety Administration issuing notices of cargo classification violations in early February to three companies. Hess Corp., Marathon Oil Corp. and Whiting Gas and Oil Corp. were fined $93 000 for misclassifying crude oil transported from the Bakken to rail facilities. The shippers, too, are taking proactive steps. US refiner Tesoro announced that it would replace its older cars ahead of potentially tighter standards and shift all of its rail transport to newer DOT-111 crude railcars.

The US Department of Commerce has authorised limited re-exports of crude oil to Europe, the first time such permits were issued since 2008. Two licences were issued for re-exports to the UK and two to Italy, while one application for re-exports to Germany remains under review by the department. The licences allow for re-exports of foreign crude oil, not of domestically-sourced supply. While 120 licences to ship crude overseas have been approved since January 2013, nearly all of these were issued for exports of US crude to Canada. US crude oil exports to Canada have increased in 2013, with November 2013 exports exceeding 200 kb/d for the first time since April 1999.

Canada - November actual:  Oil production recovered from the declines recorded in September and October, climbing by 325 kb/d in November, more than offsetting the previous two months' dips. The recovery occurred as Alberta's bitumen production rose by about 50 kb/d m-o-m, and output in Saskatchewan increased by about 45 kb/d during the month. Production of synthetic crudes in Canada rose by 80 kb/d to slightly over 1 mb/d. NGL production also recovered, rising by more than 60 kb/d to 670 kb/d in November, the highest NGL production level since February 2013.



Estimated total production rose further in December and January from the 4.15 mb/d level reached in November due to an increase in bitumen and synthetic crude output. However, the growth rate for 2014 has been revised downwards this month because of lower projected output at a number of oil-sands projects, including the Kearl site. The 110-kb/d project produced less than half of its capacity in 4Q13, and we expect it to remain below capacity through 2014. This month's lowered forecast also reflects the recently announced maintenance schedule at Suncor's projects, including a six-week turnaround at Upgrader 1 and nine-week maintenance at Upgrader 2, which will affect 90 kb/d and 45 kb/d of output, respectively, for the duration of the work. Additionally, the Terra Nova and the Husky Energy/Suncor-operated White Rose projects offshore Newfoundland will undergo maintenance in August and July.

Meanwhile, the Alberta Energy Regulator has placed five oil sands projects on hold as it works on new rules related to the extraction of shallow in-situ bitumen in the Wabiskaw-McMurray deposit in the Athabasca oil-sands area. The five projects affected are Ivanhoe's 20-kb/d Tamarack facility; the 18-kb/d Phase 2 McKay project of Southern Pacific Resources; Value Creations' 15-kb/d Advanced Tristar facility; Grizzly Oil Sands' 12 -kb/d Thickwood unit and Silver Willow's 12-kb/d Audet facility. The review was initiated due to concerns that steam and reservoir fluids could flow to the surface when the resources are mined. Projects that can demonstrate sufficient cap rock thickness across the entire area so that steam and heated fluids cannot seep to the surface will be allowed to proceed.

Mexico - December actual: Mexico's total oil production stood about 20 kb/d lower in December than the month prior, totalling 2.87 mb/d, but still exceeding last year's level at this time by nearly 35 kb/d. Much like in 2012, Mexico's production has remained relatively stable in 2013, declining only by approximately 30 kb/d to an average of 2.89 mb/d for the year. Ku-Maloob-Zaap (KMZ) production increased slightly in 2013 to average 859 kb/d. Cantarell's output declined only slightly by about 10 kb/d to 445 kb/d, marking the second year in a row that the field has seen essentially stable output. Preliminary January production data show a m-o-m rise of roughly 45 kb/d in production, with Mexico's total output reaching 2.91 mb/d.

North Sea

Norway - November actual, December preliminary:  Total liquids production stood at 1.90 mb/d in November, increasing by 115 kb/d m-o-m, as output from some fields recovered from planned and unplanned maintenance. The Haltenbanken system production rose to 335 kb/d during the month, recovering from the two-decade-low production level in September.

December production rose slightly m-o-m to 1.92 mb/d, based on preliminary estimates. Production was affected by continued technical problems and repair work at the Draugen, Heidrun, Norne, Skarv and Sklud fields. Given the latest data, Norway's total production for 2013 averaged 1.84 mb/d, falling by about 80 kb/d y-o-y. Meanwhile, January 2014 estimates show that production fell by about 45 kb/d to 1.87 mb/d during the month. Production from Statoil's Statfjord C offshore platform was suspended for four days at the end of January due to an oil leak, which resulted in a release of about 200 barrels of oil into the North Sea. Statfjord produced an average of 28 kd/d during 2013.

In a continued effort to stem further production declines, the Norwegian Petroleum Directorate conducted its annual permit awards during the second half of January, granting a record 65 licences to 48 companies in the North Sea, the Norwegian Sea and the Barents Sea. These areas had been offered for exploration and development previously and are located near the Sleipner, Oseberg, Gullfaks, Gjoa and Ula fields in the North Sea, and the Norne, Åsgard, Heidrun, Njord and Draugen fields in the Norwegian Sea.



UK - October actual, November preliminary: Crude oil production in October fell to 720 kb/d compared with the previous month, offsetting increases in NGL production, with total output averaging 784 kb/d, flat from September. November preliminary estimates indicate that production rose by 90 kb/d to an average of 874 kb/d, mainly due to an increase from the Forties system. Total UK production is estimated at 869 kb/d in 2013 and it is expected to decline by roughly another 100 kb/d to 773 kb/d in 2014. The declines in UK production are at least in part due to larger-than-expected maintenance at the Buzzard oilfield. The field is expected to undergo a total of nine weeks of maintenance in May, August, and September 2014. The maintenance in May and August will lower production by 55 kb/d, while the work in September will affect 15 kb/d of output.

Meanwhile, the unplanned outages at Buzzard continue. The latest and reportedly fourth unplanned outage of 2014 occurred in early February. However, Nexen, the Buzzard field operator announced on 10 February that that the field was returning to normal operating level.

BFOE production decreased to 940 kb/d in January, and loadings for the month approximately equalled production. Four cargoes of Ekofisk crude were delayed from late January to early February due to lower production. The four deferred cargoes boosted February loadings to 990 kb/d, despite production increasing only marginally to 940 kb/d compared with January.

Non-OECD

Latin America

Brazil - December actual: Output of crude oil and NGLs in 4Q13 averaged 2.17 mb/d and is expected to remain at approximately the same level in 1Q14. Production of crude oil totalled 2.11 mb/d in December, rising by about 75 kb/d m-o-m. Consistent with normal seasonal patterns, Brazil's ethanol production fell by approximately 330 kb/d during the month. The increase in December crude oil production came amid higher output at the Lula, Marlim, and Marlim Sul fields. Overall, the Campos Basin accounted for 50 kb/d of the m-o-m increase, while Santos Basin production rose by more than 20 kb/d. The newly-started Papa Terra field continued to ramp up its production and it is estimated to have produced 7 kb/d in December. We expect the field to reach 20 kb/d of production by the end of 1Q2014. Brazil's January production was estimated to have fallen to 2.16 mb/d due to a drop in crude oil output. Ethanol production meanwhile was estimated at a little over 70 kb/d during the month.

In January, Petrobras announced it reached a new pre-salt output record at more than 390 kb/d. Total pre-salt production includes all fields operated by the company in the Campos and Santos Basins. The new record is at least in part due to a second oil-production well that was linked to the Cidade de Paraty FPSO. Petrobras plans to connect a total of 17 wells in the Santos Basin to existing FPSOs, further boosting total pre-salt production in 2014.

Asia

China - December actual: China's oil production inched up by 30 kb/d in December to 4.23 mb/d and January preliminary estimates indicate a further, albeit smaller, increase, to 4.25 mb/d. With full-year 2013 data now available, China's production looks to have remained flat at 4.18 mb/d compared with 2012. The main driver of the y-o-y decline is the huge output drop during the summer 2013, which pulled down the average production for the year. Production form the Peng-Lai field continues to lag its pre-shut in production level. The field was shut-in in mid-2011 following a leak of oil and drilling mud, and some production has come back online since then. Pre-shut-in production capacity likely will be reached again pending government approvals.

CNOOC, China's third-largest oil company and majority interest holder in the Peng-Lai field, released its output targets for 2014 and aims to increase its production by about 5% as it plans to start seven to ten new projects during the year. The company announced that its capital expenditures will total between 105 billion yuan and 120 billion yuan, including 19% of that slated for Canadian subsidiary Nexen, which the company acquired in early 2013.

Former Soviet Union

Russia - December actual, January preliminary: Russia's production broke 11.0 mb/d in December for the first time in more than two decades, posting a gain of 20 kb/d for the month. Preliminary data indicate that total output fell in January for the first time since July 2013, albeit by only about 5 kb/d. Despite the slight dip, production was 195 kb/d higher y-o y - an all the more impressive gain in view of the extreme weather that affected Russia's main producing region, with temperatures falling to minus 40 degrees during the last 10 days of the month. The severe temperatures caused power outages and resulted in problems with drilling and well workovers. Rosneft saw decreases in output in its legacy fields, with newer fields like Uvat and Priobskoye barely offsetting the natural declines at brownfields. Despite the cold snap, Vankorneft managed to increase production during the month.

For 2014, liquids production is forecast to increase by about 80 kb/d compared with the 2013 average of 10.87 mb/d. The limited growth in 2014 is due to the increased costs and difficulty of stemming brownfield declines, and to lower-than-hoped-for volumes produced from newer fields. This is a particular concern for Rosneft, which has seen its output drop in 2013 despite its acquisition of TNK-BP assets. The company had not anticipated output declines until 2015, and its recently announced plans to stem the brownfield declines are meant to complement production from newer developments. These include the increased use of horizontal drilling with multi-stage fracking, as well as development of the remaining areas of the Yugansk producing fields. Rosneft also plans on maintaining Vankor production at 440 kb/d by developing the Ryabchik formation.



Azerbaijan - December actual: Production at the ACG fields rose to 645 kb/d in December, with Azerbaijan's total production averaging around 860 kb/d. With the full-year data complete, Azerbaijan's 2013 production was 885 kb/d, flat from 2012. Production in 2013 failed to increase despite relatively strong output in the first half of the year (Jan-Jun average production was 903 kb/d), as declines in the last six months of the year nearly offset the earlier gains. However, it took a significant amount of investment by operator BP to maintain steady production.

During the last week of January, production began from BP's West Chirag platform at the ACG complex (part of the $6-billion Chirag Oil Project), which may help limit the declines at the ACG fields. The platform's production capacity is 185 kb/d and six wells are planned by the end of this year. Despite the new production at West Chirag we expect overall total liquids output for Azerbaijan in 2014 to fall by about 60 kb/d to 823 kb/d.

Kazakhstan - December actual, January preliminary: Liquids production remained flat at approximately 1.73 mb/d in December and January preliminary data indicate that production remained at about the same level during that month as well. Overall production for 2013 stood at 1.68 mb/d, about 60 kb/d higher than the year prior. The increase in 2013 production was led by Chevron's Tengiz field, which saw its output increase by 60 kb/d y-o-y. Production has not restarted yet at the Kashagan field. The outlook for Kashagan continues to be negative, with recent reports indicating that in addition to gas pipelines, oil infrastructure may also have defects. Pending any further announcement related to resolutions of the various problems associated with the Kashagan field, Kazakhstan's overall production is still projected to average 1.73 mb/d in 2014, nearly 50 kb/d higher than in 2013.

FSU net oil exports dropped by a seasonal 140 kb/d to 9.0 mb/d in December, their lowest volume in a year. Tumbling crude shipments caused the fall with Russian exports through the Transneft network sliding 300 kb/d and deliveries from other FSU states dropping by a further 110 kb/d. An increase in product exports of 260 kb/d provided some offset. On an annual average basis, total crude exports remained at 6.39 mb/d in 2013, level with 2012. Following rising Russian demand and a ramp-up in Russian refinery throughputs, Transneft crude exports fell by 140 kb/d compared to 2012. On the same basis, refined product deliveries inched up by 20 kb/d compared to the previous year. Moreover, the increasing complexity of regional refineries following the upgrading of a number of facilities is reflected in increased gasoil (+50 kb/d) and 'other products' (+60 kb/d) exports compared to falling fuel oil shipments (-90 kb/d).



December crude exports were characterised by deliveries via the ESPO system being largely maintained at previous levels of 770 kb/d while shipments via Baltic and Black Sea ports dropped by a combined 310 kb/d. However, volumes shipped to European customers via the Druzhba pipeline rose to 1.1 mb/d, their highest level since May 2012, with Poland taking the lion's share of the increase. Producers preferentially chose the Druzhba line rather than exporting via Baltic ports after their netbacks fell as tanker freight rates surged to a peak of $14/mt. With Russian Urals and fuel oil recently being exported via Baltic ports to a number of long-distance customers in Asia and the Americas, the regional tanker pool has tightened considerably as vessels are being tied-up for longer. Freight rates surging to close to $20/mt in early-January could cap Baltic exports in the short term.

OECD Stocks

Summary

  • Following steep draws in crude and 'other products', OECD commercial total oil inventories drew by a stronger-than-seasonal 56.8 mb to stand at 2 559 mb at end-December. Refined products covered 28.8 days of forward demand at month-end, level with end-November.
  • OECD inventories drew by 1.5 mb/d over 4Q13, the steepest quarterly decline since 4Q99. The deficit to five-year average levels widened to 103 mb, the first time the 100 mb level was exceeded in nearly a decade.
  • Preliminary data indicate that OECD inventories rose by a slight 1.3 mb in January, far less than the 43.7 mb five-year average gain for the month after a sharply unseasonal draw in the US tempered stock builds.
  • Recent harsh winter weather in the US has sent stocks of distillates and propane plummeting, in turn pushing prices higher and drawing in supplies from as far away as Europe and the FSU.


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

OECD commercial total oil inventories continued their downward trend in December, drawing by 56.8 mb, a much steeper drop than typical for that time of year. This marked the third consecutive monthly decline in inventories, bringing their plunge to a whopping 137 mb (1.5 mb/d) over the fourth quarter, the steepest quarterly decline since 4Q99. Over 2013 as a whole, commercial inventories drew by a shallower 0.2 mb/d, as 2Q13 and 4Q13 draws were partly offset by builds of 0.2 mb/d and 0.4 mb/d in the first and third quarters, respectively.



At the end of December commercial inventories stood at 2 559 mb, their lowest absolute level since 2008. Moreover, the stock deficit to five-year average levels widened slightly to 103 mb, the first time the 100 mb level was exceeded since mid-2004. December inventories were pressured lower by a 39.3 mb plunge in crude oil holdings, driven primarily by a surge in US refinery throughputs. Product stocks edged down seasonally by 4.5 mb but demand cover rose to 28.8 days at month-end, ; level with end-November. 'Other products' stocks plummeted by 31.5 mb led by US propane stocks on strong winter heating demand. Some offset was provided by motor gasoline (+11. 9 mb) and middle distillates (+12.8 mb) which built more than normal for the season. Despite the monthly build, the deficit of middle distillate inventories versus seasonal levels remained at a hefty 54 mb at end-month. On a region-by-region basis, inventories in the Americas fell by a steep 36.4 mb while those in Asia Oceania and Europe fell seasonally by 16.0 mb and 4.4 mb, respectively.

Upon the receipt of revised data, an upward adjustment of 8.6 mb was made to November OECD inventories. Europe (+3.5 mb) and the Americas (+3.2 mb) led the revisions, while Asia Oceania is now seen 1.9 mb higher. Total products accounted for the bulk of the upward adjustments (+14.8 mb), including revisions of 9.2 mb for middle distillates and 7.6 mb for 'other products.'



Preliminary data indicate that OECD inventories rose by a slight 1.3 mb in January, far less than the 43.7 mb five-year average build for the month. An unseasonal 22.0 mb draw in the US, led by declines in heating fuels following freezing weather, tempered stock builds. Elsewhere, inventories in Europe and Asia Oceania rose by 8.2 mb and 15.1 mb, respectively.

Freezing Weather Causes Chaos in US Heating Fuel Markets

The arrival of the so-called 'polar vortex' in the US during January (see Winter Freeze in the Report dated 21 January 2014) sent temperatures and inventories of heating fuels plummeting. Although most US homes now use electricity and natural gas for space heating, oil is still used to that end in parts of the US (please see The Changing Seasonality of Oil Demand in the Report dated 11 December 2013). The liquid fuels of choice for space heating in the US are 15 parts per million (ppm) gasoil, used mostly in the Northeast, and propane, the dominant heating fuel in the Midwest.

As US exports of propane took off in 2013, stocks flipped from a surplus to a deficit against seasonal levels. An additional drain in 4Q13 came from high demand for crop drying following a bumper corn crop and a particularly wet harvest. Since the start of 2014, national stocks have drawn by approximately 12 mb to stand at 31 mb, their lowest level since 2011, and approximately 24 mb and 11 mb below year-ago and five-year-average levels, respectively. The majority of this draw was concentrated in the midcontinent (PADD 2, 3.5 mb) and the Gulf Coast (PADD 3, -5.6 mb). PADD 2, where inventories have sunk to their lowest level since 2008, has been especially hit hard by cold weather throughout January, which has seen demand remain strong. Aside from high demand, logistical issues have also weighed heavily on the PADD 2 propane market as the pipeline network is configured to evacuate product from PADD 2 to PADD 3 but not vice versa. This has seen distributers move to trucks to evacuate product from the PADD 3 Mont Belvieu, Texas storage

hub northwards. Moreover, a number of emergency orders were issued relaxing the strict laws on working hours governing truck drivers to further aid distribution.

These supply issues have pushed propane prices at the Conway, Kansas, storage hub to a record premium to Mont Belvieu. During mid-January, US propane exports hit a record high of close to 400 kb/d which prompted a number of Members of Congress to petition the White House to curtail exports. However, the redistribution of propane to Northern states has also been restricted by a lack of available Jones Act compliant barges. This has resulted in an unusual open arbitrage for supplies coming from Europe. The high prices at Conway have also spurred some midstream companies holding pipeline assets to consider reversing pipelines running from PADD 3 to PADD 2. Although these moves are currently only being mooted, with a few months of winter left to run the likelihood of reversals would increase if the price differential between Conway and Mont Belvieu remained wide.



The cold weather also caused US and especially Northeast (PADD 1) middle distillate inventories to tighten at end-2013 and to fall to a steep deficit to average levels. Similar to propane, 15-ppm ULSD stocks were drawn significantly over January due to cold weather. US distillate stocks dropped by 9 mb over the month on surging space heating demand, led by an 8.0 mb draw in PADD 1, where at end-month stocks stood at 30 mb, down 12 mb and 24 mb on year-earlier and five-year average levels, respectively. As in PADD 2 with propane, logistical issues hindered the replenishment of depleted PADD 1 ULSD inventories, with transfers to the region from the US Gulf limited by capacity constraints on pipelines and a shortage of available Jones Act tankers. Meanwhile, data suggest that there is no shortage of distillates in the Gulf Coast region with exports running at close to 1.3 mb/d in January, near record levels. The distillate tightness in PADD 1 has sent NYMEX ULSD futures and New York Harbour spot prices soaring (see Product Prices section). This has opened the arbitrage to move gasoil from Europe to the US. Reports also suggest that additional supplies are being drawn in from the FSU. With latest data from the US Energy Information Administration for PADD 1 indicating a further 2 mb draw in the last week of January and distillate imports remaining at under 20 kb/d, it is evident that tightness is persisting while the region awaits the armada arriving from across the Atlantic.

Recent OECD Industry Stock Changes

OECD Americas

Commercial inventories in the OECD Americas dropped by 36.4 mb in December, steeper than the 22.3 mb five-year average draw for the month. Crude oil led stocks downwards, plunging by 29.2 mb, more than twice the seasonal draw, as high refining margins lifted regional throughputs by 500 kb/d. Despite these strong runs, refined products only inched up by 0.5 mb as regional demand strengthened and US exports hit new records. The 'other products' category was especially affected by these issues as freezing temperatures boosted heating demand for propane while US exports hit a record 290 kb/d. Consequently, 'other products' stocks plummeted by 24.6 mb, more than twice the seasonal draw. Some offset was provided by broadly seasonal builds in motor gasoline (11.7 mb) and middle distillates (9.6 mb). Despite their increase, middle-distillate stocks remained 29 mb in deficit to the five-year average at end-month. All told, at end-December, regional refined products covered 27.8 days of forward demand, an increase of 0.1 days on end-November.



Preliminary weekly data from the US EIA point to a further 22.0 mb drop in commercial inventories in January, compared to an average build of 15.7 mb in the last five years for the month. As a result, the region's deficit versus seasonal levels ballooned to 32 mb. Plunging middle distillate and 'other products' inventories (see Freezing Weather Causes Chaos in US Heating Fuel Markets) led refined product stocks lower by a counter-seasonal 24.7 mb while crude stocks inched down by 1.0 mb.

OECD Europe

OECD European commercial inventories slipped by 4.4 mb in December, slightly more than the 2.4 mb five-year average draw. Crude stocks slipped by 3.6 mb, weaker than the 6.1 mb seasonal draw. Since crude production and refinery runs remained flat, regional crude imports likely slipped. Meanwhile, NGLs and other feedstocks fell by a seasonal 1.3 mb. Refined products inched up 0.4 mb, muted in comparison to the 5.6 mb five-year average build. Days of forward demand covered by refined products stood at 36.8 days, 0.2 days less than at end-November. Stocks of middle distillates and motor gasoline each posted seasonal builds of 1.3 mb, keeping the former's deficit to seasonal levels at close to 30 mb. Fuel oil posted an unseasonal 1.3 mb draw amid reports of healthy trade to Singapore and the US.



Preliminary data from Euroilstock indicate that European inventories rose by 8.2 mb in January, significantly weaker than the 22.3 mb seasonal build. Gains were tempered by crude oil, which inched down by a counter-seasonal 0.4 mb. Refined products built by a weak 8.5 mb. Middle distillates posted a 5.6 mb increase which amounted to less than half the average seasonal build. Meanwhile, information pertaining to refined products held in independent storage in Northwest Europe point to all oil categories building. Moreover, amid reports of healthy distillate trade to the US East coast, gasoil actually built on the month as arrivals from the US Gulf Coast and Russia remained high.

OECD Asia Oceania

Industry inventories in OECD Asia Oceania dipped by 16.0 mb, a shallower drop than the 20.0 mb five-year average draw. Crude oil slipped by a weak 6.6 mb, a draw concentrated in Korea (-6.0 mb) after crude imports (notably from Qatar, Kuwait and the UAE) fell month-on-month while refinery runs remained relatively stable. NGLs and other refinery feedstocks also drew by a seasonally steep 5.0 mb. Refined products slid by 4.4 mb, a fraction of the 12.8 mb seasonal draw for the month. Products were dragged lower by a 6.1 mb drop in 'other products' with stocks of LPG and naphtha decreasing on the month, likely in response to high regional petrochemical demand. Middle distillates increased by an unseasonal 1.9 mb. As such, stocks moved to a 5.0 mb surplus versus the five-year average, from a deficit one month earlier. All told, refined products covered 19.2 days of forward demand at end-December, 0.1 day above end-November.



Preliminary data from the Petroleum Association of Japan indicate that stocks there surged by 15.1 mb in January with all oil categories bar fuel oil posting builds. Despite a number of Japanese refineries being earmarked for closure in 1Q14, these refineries do not appear to be running down their feedstocks, with stocks of crude building by 3.9 mb and those of NGLs and other feedstocks surging by 5.3 mb over the month. Product stocks built by 6.0 mb, led by seasonal increases of 3.6 mb, 1.5 mb and 1.4 mb in middle distillates, fuel oil and motor gasoline, respectively.

Recent Developments in Singapore and China Stocks

Data from China, Oil, Gas and Petrochemicals (China OGP) indicate that Chinese commercial crude inventories fell by 2.0 mb (0.9%) in December. Complete data for 2013 imply that commercial crude inventories drew by 13.0 mb over the year. There is little evidence to suggest that China added large volumes to its SPR in 2013. Indeed, the gap between crude supply (production and net imports) and disposition (refinery throughputs) leaves less than 10 kb/d unaccounted for. On the products side, December gasoil stocks rose by 1.1 mb, bringing to a halt five consecutive monthly declines, while motor gasoline and kerosene posted builds of 1.6 mb and 1.2 mb, respectively.

Data from International Enterprise pertaining to the land-based storage of refined products in Singapore indicate that inventories increased by 1.4 mb in January as builds of 2.5 mb and 0.7 mb in middle and light distillates, respectively, offset a 1.7 mb draw in fuel oil. By end-January, middle distillates had increased to their highest level since October 2011 after the arrival of a number of Korean cargoes while demand from elsewhere in Southeast Asia remained tepid.



Prices

Summary

  • Oil markets rallied in mid-January on bitterly cold weather in the US and strong distillate demand, reversing earlier declines, but on average benchmark futures prices weakened month-on-month. The upcoming seasonal refinery maintenance put downward pressure on prices in Europe and Asia in the second half of January before rebounding in early February, with ICE Brent futures last trading at $109.25/bbl and NYMEX WTI at $101.25/bbl.
  • Hedge funds increased their long exposure to NYMEX heating oil to a five-month high in January, as New York ultra-low sulphur diesel (ULSD) reached a mid-day high of over $140/bbl on the back of exceptionally cold US weather. Since May 2013, NYMEX heating oil futures are being based on 15 ppm ULSD in New York Harbour. January trading volumes for New York heating oil futures surged to peaks unseen since October 2012 on NYMEX and posted an all-time high on ICE exchange.
  • Spot crude oil prices weakened in January month-on-month, in part due to expectations of weaker demand heading into the spring refinery turnaround season as well as earlier-than-expected throughputs rate cuts in non-OECD Asia.
  • While spot product prices in surveyed markets generally fell in January, Northeast US ULSD markets tightened on extreme cold weather. ULSD spot prices in the Northeast surged to a premium over Rotterdam, which opened an otherwise increasingly rare arbitrage to move product from Europe.
  • Crude tanker rates experienced a volatile month in January with benchmark rates surging early in the month on high Asian demand, tight tonnage and weather-related delays. High levels proved unsustainable as rates fell back from mid-month onwards as fundamentals softened.


Market Overview

Oil markets rallied in mid-January on bitterly cold weather in the US and strong distillate demand, reversing earlier declines, but on average benchmark futures prices weakened month-on-month. Oil markets eased in January on expectations of weaker demand for crude ahead of the upcoming seasonal refinery maintenance amid a perception of oversupply. Futures prices in January for Brent declined by about $3.60/bbl to an average $107.11/bbl while WTI fell by a smaller $3/bbl to $94.86/bbl. By early February, however, benchmark crudes resumed their upward path, with Brent last trading at $109.25/bbl and WTI at $101.25/bbl.

Relatively stronger US futures prices helped reduce the price differential to Brent, with the spread narrowing to under $10/bbl in early February compared with $12.25/bbl on average in January and $12.80/bbl in December. The diminishing gap may partly reflect investors pulling out of heavy positioning in the spread because of reportedly large losses in the second half of the year. The 22 January start-up of the 700 kb/d TransCanada Gulf Coast Project, which initially will carry 300 kb/d from the congested Cushing, Oklahoma storage hub to the US Gulf Coast refining centre, also helped strengthen WTI relative to Brent as well as propel the WTI M1-M2 price spread into backwardation. The spread widened in early February to around +$0.65/bbl from +$0.05/bbl in January, around -$0.20/bbl in December and -$0.41/bbl in November. The Brent M1-M2 strengthened on intermittent supply outages in the North Sea, to an average $0.60/bbl in January from around $0.35/bbl in December. 



The arrival of the so-called 'polar vortex' in the US during January sent temperatures and inventories of heating fuels plummeting. Tight distillate supply in the US Northeast, or PADD 1, has sent NYMEX ULSD spot prices soaring. This has opened the arbitrage to move gasoil from Europe to the US. Reports also suggest that additional supplies are being drawn in from the FSU (see Stocks, 'Freezing Weather Causes Chaos in US Heating Fuel Markets').

While refiners are expected to curb crude purchases significantly as they head into the seasonally weaker second quarter, the exceptional drawdown in OECD commercial inventories at year-end may temper downward price moves. OECD commercial total oil inventories underwent a much steeper drop than typical for December and reached their lowest absolute level since 2008.



Futures Markets

Activity Levels

Between 31 December and 4 February, hedge funds ramped up their NYMEX heating oil long exposure to a five-month high, as New York ultra low sulphur diesel (ULSD) climbed to over $140/bbl. The arrival of the so-called 'polar vortex' in the US during January sent temperatures and inventories of heating fuels plummeting (see OECD Stocks, 'Freezing Weather Causes Chaos in US Heating Fuel Markets').

Since May 2013, NYMEX heating oil futures are being based on 15 ppm New York Harbour ULSD. January trading volumes for New York heating oil futures surged to peaks unseen since October 2012 on NYMEX and posted an all-time high on ICE exchange.

Meanwhile in Europe, ICE gasoil futures managed money positions were little changed and trading volumes in line with seasonal expectations, as prices were stable throughout January, after a steep year-end drop.



NYMEX RBOB gasoline saw little changes in hedge funds positioning as it moved in a narrow $0.10/gal range amid thin trading volumes, showing signs of recovery only in early February.

On the crude side, both benchmarks' outstanding positions remained almost unchanged on the year, with increments under 1%. Brent was the most traded crude benchmark globally in January, having alternated with WTI for the lead since August 2013. Both grades' trading volumes were seasonally up on the month. While WTI volumes were down on a year-on-year basis on both sides of the Atlantic, a more than twofold increase in NYMEX Brent volumes kept global trades of the North Sea benchmark in positive territory.







Financial Regulation

On 24 January, the European Parliament's Industry, Research and Energy Committee (ITRE) published its opinion on the proposed EU regulation on financial indices and benchmarks, recommending that physical commodities be excluded from the scope of the current draft, if the benchmark is complying with the 'Principles for Oil Price Reporting Agencies' issued by IOSCO (International Organization of Securities Commissions). The draft is now back to the Economic Affairs committee, which will vote on 17 February. The document will then be presented in the EU Parliament plenary session on 4 April.

The European Commission issued its 'Proposal on banking structural reform' on 29 January, proposing a ban on proprietary trading by banks as in the US Volcker rule and that supervisors be given powers to require separation of risky trading activities. The proposal would apply to banks of 'systemic importance', often referred to as 'too big to fail', and would become effective in January 2017. A final vote is expected no earlier than end-2014.

On 12 February, new derivatives reporting rules came into force in Europe under the European Market Infrastructure Regulation EMIR regulation. Both exchange and over-the-counter transactions will have to be reported to one of six EU-approved trade data repositories.

The European Court of Justice (ECJ) has dismissed a UK challenge to the EU's short-selling regulation, allowing the European Securities and Markets Authority (ESMA) to ban short selling in "market emergencies", clarifying that the EU financial markets watchdog mandate has the power to require the ban. The UK is also challenging plans for a financial transaction tax and a cap on pay bonuses for bankers.

Spot Crude Oil Prices

Spot crude oil prices weakened in January month-on-month, with Atlantic basin benchmarks off $2.65/bbl to $3.40/bbl, to $108.17/bbl for North Sea Dated and $94.86/bbl for WTI. Mideast Dubai, a heavier crude grade than Brent and WTI, declined by a steeper $3.88/bbl to an average $104.02/bbl for January. Expectations of weaker demand heading into the spring refinery turnaround season, added downward pressure on prices, with global refinery throughputs forecast to plummet by 2.5 mb/d from 77.4 mb/d in January to 74.9 mb/d in April (see Refining). However, prices strengthened in second half January, with new pipeline flows lifting WTI and intermittent supply disruptions in the North Sea as well as fresh outages in Libya supporting Brent.



Spot prices for Dubai weakened on ample supply of Mideast and African crudes into Asia, with the M1-M2 differential narrowing to around $0.05/bbl by early February, compared with around $0.40/bbl in January, $0.90/bbl in December and $1.50/bbl in November.

In line with the downturn in spot prices, Saudi Aramco lowered March oil prices for Asian customers, who buy around two-thirds of the country's output, by more than expected amid weak refining margins. Saudi Aramco reduced the March official selling price (OSP) differential for Arab Light to an eight-month low of $1.75/bbl over the average of Oman and Dubai, compared to a $2.45/bbl premium for February sales. Dubai's price discount to Brent widened to around $5.15/bbl in early February from $4.15/bbl in January and $2.90/bbl in December.

Relatively milder winter weather in key Asian buyers China and Japan, coupled with upcoming seasonal refinery maintenance in 2Q14, added downward pressure on Middle Eastern grades like Dubai in January. Refiner demand for heavier Middle East grades in Asia is expected to remain under pressure for the next several months, but differentials for lighter grades like Malaysian Tapis against Brent have strengthened, to -$6.72/bb in January compared with around -$6.32/bbl in December.



Dated Brent spot prices and differentials ebbed and flowed over the month with sporadic supply outages in the North Sea and conflicting reports regarding the supply of Libyan crude to markets. The differential between Urals and Brent in the Mediterranean widened in January to $0.80/bbl from $0.02/bbl in December. Demand from European refiners has been weak given continuing low margins.



The WTI-Brent price spread narrowed to an average of about $9.85/bbl for the first week of February, from an average of about $13.30/bbl in January. The Brent premium to WTI fell as cold weather hit the US. In addition, a 1.6 mb draw at the Cushing, Oklahoma storage hub in the last week of January helped prop up WTI. This was the first weekly draw since the last week of December, and came as TransCanada's Gulf Coast Pipeline started commercial service on 22 January. This was expected by market participants but nonetheless drove WTI prices higher as North Sea Dated (Brent) prices held steady.



With increased transport outlets for Permian and Midcontinent crudes, WTI is expected to gradually approach global prices for similar grades, such as Brent. Over the past 12 months steady increases in domestic production pressured prices lower relative to Brent. The spread between the two grades topped $20/bbl in early 2013, but narrowed as the Seaway and Permian Express pipeline expansions and the reversal of the Longhorn Pipeline came online over the year (see 'The Crude Wall and US Crude Exports' in the Report dated 21 January 2014).

Western Canadian Select's (WCS) differential to WTI narrowed sharply in recent months on robust demand for oil sands crude following the ramp up of BP's 405 kb/d Whiting, Indiana, refinery in February, which is designed to process the cheaper, heavy Canadian crude, and expectations of a relatively light refinery maintenance schedule this spring. The WCS-WTI price differential averaged about $19.05/bbl in January, $26.30/bbl in December and $34.25/bbl in November. January was the first month when differentials dropped below $20/bbl since July. Surging oil sands output in 2013, combined with limited transport capacity aimed exclusively at the US market, put pressure on WCS, with prices falling below $60/bbl by the end of October. According to the Canadian Association of Petroleum Producers, oil sands (bitumen and synthetics) production exceeded pipeline offtake capacity by an average of 530 kb/d in 2013.

Massive investments in rail, however, have partially offset the pipeline shortage. The decrease in the differential from its peak in early November of over $40/barrel has come as the West Coast of the US, particularly California, has imported increasing volumes of Canadian crude by rail, and several US Midwestern refineries have also been able to increase purchases. Still, bottlenecks remain, and recent increases in the differential reflect this. Differentials in inland North American crudes can also reflect temporary factors affecting production, such as temporarily reduced output on the Bakken due to weather that spiked prices and sharply lowered the differential in early January.



Spot Product Prices

Surveyed spot product prices softened across the board in January. The one exception was gasoline in the US Gulf Coast (USGC), prices of which were driven higher by healthy regional demand. In the USGC, product cracks retreated by $1.90/bbl on average after severe cold weather constrained US crude production mid-month, buoying LLS prices. In Northwest Europe, falling product prices outstripped declines in Brent, with cracks subsequently weakening by $0.80/bbl on average. It was a different story in the Mediterranean where Urals softened against Brent and cracks improved by $0.30/bbl. The best performing market was Singapore where Dubai crude dropped by $3.90/bbl over the month and outstripped falls in product prices, causing cracks to gain $1.60/bbl over the month.

In January, 15-ppm ultra-low-sulphur diesel (ULSD) markets in the Northern US tightened considerably in the wake of extremely cold weather which depleted inventories and caused logistical chaos as suppliers scrambles to acquire extra product (see 'Freezing Winter Causes Chaos in US Heating Fuels Markets' in the OECD Stocks section). Consequently, spot ULSD prices surged to over $144/bbl at the time of writing, a premium of over $20/bbl on comparable USGC prices. Moreover, it surged to a rare premium of $20/bbl above Rotterdam prices, which opened a wide arbitrage to ship product from Europe to the US East Coast. Despite this trading opportunity, cracks in both Northwest Europe and the Gulf Coast remained subdued as product prices weakened, thereby indicating that the volumes required by US East coast markets may have been relatively small.



Gasoline cracks remained below year-ago levels in Europe, as spot prices stayed under pressure from relatively high inventories both in Europe and in the US. Nonetheless, at end-month and into February, European spot prices firmed in tandem with an uptick of imports into PADD 1 as well as Latin America. In the US, despite severe winter weather in the North and midcontinent limiting gasoline demand, USGC cracks firmed in late-month as regional demand rose.



European naphtha cracks remain firmly in the red as spot prices steadily weakened over the month. Since naphtha traded at a $2.70/bbl discount to NWE in the Mediterranean, Asian petrochemical producers preferentially shipped the product from Mediterranean refiners to Korea and Singapore where naphtha crackers were reportedly running at close to full utilisation. Following high Asian LPG prices, naphtha has replaced LPG as the petrochemical feedstock of choice. Moreover, with such strong Asian demand, Singapore cracks were pushed into positive territory in January for the first time in almost a year. In the US, the crack was buttressed by firm demand for naphtha as a pipeline diluent to ship heavy crudes.

European fuel oil cracks surged in late-January following healthy exports to the US and Asia where demand for low-sulphur vacuum gasoil (VGO) to be used as a feedstock is high. Meanwhile the Singapore crack rose by $3.60 in January, following tight bunker supplies as shipping demand picked up ahead of the end-month Chinese new year holiday. Further upward pressure to cracks came from a 1.7 mb draw in land-based Singaporean residual fuel oil inventories over the month.



Freight

Rates for very large crude carriers (VLCCs) on voyages out of the Middle East Gulf experienced a volatile month in January. Early-month demand for regional grades waned ahead of the Chinese New Year and combined with lengthening tonnage lists to pressure rates down to a low of $10/mt. Post-Chinese New Year, activity picked up as more cargoes entered the market, quickly mopping up the excess tonnage with rates propelled to a high of $19/mt. However, these levels proved unsustainable as excess vessels once again dragged rates back down in early February.

High demand for African crudes, tight tonnage lists and weather-related delays propelled rates on the benchmark Suezmax West Africa - USGC trade to the lofty heights of $32/mt in mid-January. However, these levels proved short-lived as they tumbled towards end-month as demand for African crudes from Asian refiners weakened. Tonnage lists also built as a number of ships ballasted to the region from the Middle East Gulf.

A similar boom-and-bust picture was evident in Northwest Europe where early-month bad weather and scarce vessel availability pushed rates on the cross-UK Aframax trade to a high of $15/mt in mid-month but as the weather improved and vessels returned from long distance voyages the rate plummeted back to under $8/mt by early-February. In the Baltic, despite regional crude exports remaining at a relatively subdued 1.3 mb/d in January, rates to the UK surged to a high of $20/mt in mid-month but fell back to $8/mt by early-February as low export volumes started to weigh heavy on the tonnage list.



Product tanker markets experienced a mixed month. In the Atlantic Basin, product exports from Europe to the US Atlantic Coast remained high. Subsequently, rates peaked at $26/mt in late-month. Reports suggest that the bulk of cargoes were not gasoline but rather ULSD as freezing weather in the US Northeast depleted inventories and pushed up spot prices. Accordingly, a rare arbitrage to move ULSD westwards opened. Asian product tanker markets benefitted from high naphtha demand in the petrochemical industry with large volumes reportedly being shipped from the Middle East Gulf. Consequently, rates for 75 Kt vessels on voyages between the Middle East Gulf and Japan strengthened from mid-January onwards to a high of over $21/mt at the time of writing.

Refining

Summary

  • The forecast of global refinery crude oil runs for 1Q14 has been trimmed by 0.2 mb/d since last month's Report, on a weaker outlook for non-OECD Asian throughputs. Recent year-on-year (y-o-y) contractions in India, Chinese Taipei, the Philippines and Singapore could be extended into early 2014, on poor margins and extensive refinery maintenance. Global 1Q14 throughputs are now estimated at 76.6 mb/d, up from 76.0 mb/d in 4Q13.
  • With nearly complete 2013 data now available, 4Q13 global refinery crude oil demand looks to have contracted y-o-y for the first time since 4Q09. Sharply lower OECD throughputs (especially in Europe) were only partly offset by an 860 kb/d increase in non-OECD runs, resulting in a 20 kb/d overall decline. Growth in global refinery throughputs is nevertheless expected to reach 1.1 mb/d in 1Q14, as the European contractions is forecast to ease while growth continues apace in the US and non-OECD countries.
  • OECD refinery crude oil throughputs rose by 0.5 mb/d in December month-on-month (m-o-m), to 37.2 b/d on average, with the OECD Americas accounting for the majority of the gains. Runs in OECD Europe and Asia Oceania were largely unchanged. Total OECD runs stood 0.6 mb/d below year-earlier levels, as a 0.5 mb/d annual gain in the Americas only partly offset drops in Europe and, to a lesser extent, Asia Oceania.
  • Refinery margins were mixed in January, but generally remained weak or even negative for simple refinery configurations. Refiners processing Urals, WTI and Dubai crude saw their margins improve as prices for these grades fell sharply. US Gulf Coast margins plummeted in mid-January as record-high throughputs in December put downward pressure on product prices. European margins deteriorated further on weak regional demand and high import flows, while Singapore margins improved on higher gasoline and fuel oil cracks.


Global Refinery Overview

The outlook for global refinery crude throughputs for 1Q14 has been cut by 0.2 mb/d since last month's Report, to 76.6 mb/d, on a lower forecast for non-OECD Other Asian activity. Recent data for a number of countries, including India, Chinese Taipei, Singapore and the Philippines have shown activity levels below a year earlier, due to relatively poor margins and a string of planned and unplanned outages. After four quarters of average annual growth of close to 0.6 mb/d, non-OECD Asian regional runs contracted by 15 kb/d in 4Q13 and could contract by as much as 220 kb/d in 1Q14. Refinery maintenance in India, Thailand and the Philippines is set to curb runs in early 2014, albeit from exceptionally high 1Q13 levels.

Global throughput estimates for 4Q13 have also been lowered, upon the receipt of more complete monthly data, to an average 76.0 mb/d. Minor adjustments to a number of countries for November and December lowered OECD runs by a total of 140 kb/d compared with our previous forecast, while non-OECD throughputs were revised down by 190 kb/d on lower Other Asian activity. Global crude processed is now assessed slightly below year-earlier levels in 4Q13, as a 1.1 mb/d contraction in OECD Europe more than offset gains in the US and the non-OECD. Within the non-OECD, gains stemmed from Latin America, the Middle East, the FSU and Africa.



Growth in global refinery activity is expected to recover in 1Q14, to an average 1.1 mb/d. Gains in non-OECD runs are set to accelerate to 1.0 mb/d, as new capacity in China and the Middle East ramps up. Two new refineries, with a combined capacity of 440 kb/d, started trial runs in China in January, and the 400 kb/d Jubail refinery in Saudi Arabia is expected to reach full capacity sometime in 1H14. In the OECD, we expect the sharp contractions recently seen in Europe to abate, despite dismal refinery margins at the start of the year, while US refinery activity comes off the high levels seen at the turn of the year. Indeed, the latest weekly data for January show runs plummeted by more than 1 mb/d over the month, in line with our previous forecast.

Refinery Margins

Refinery margins were mixed in January, but generally remained weak or indeed negative for simple refinery configurations. Refiners processing Urals, WTI and Dubai crude saw their margins improve as these grades fell sharply. US Gulf Coast margins plummeted in mid-January as record-high throughputs in December put downward pressure on product prices. European margins deteriorated further on weak demand and high import flows, while Singapore margins improved on higher gasoline and fuel oil cracks.

Northwest Europe remains the worst performing of all surveyed markets, as margins retreated by $1.00/bbl on average from December's levels, though diverging trends emerged depending on the crude processed. Refiners running Urals saw their margins hold better than those processing Brent as the latter was propped up by ongoing supply disruptions in Libya and to the Buzzard field. Moreover, simple refiners are now seeing their margins languish at levels not seen since 2006. Further downward pressure came from product prices, which weakened in line with low seasonal demand due to mild weather, coupled with comfortable stocks of gasoline and high distillate imports from the US, Asia and the FSU.



On an absolute basis, refiners on the US Gulf Coast fared worse than those in the US midcontinent. Gulf Coast margins retreated by $0.90/bbl on average, as product prices were capped by volume constraints on the Colonial Pipeline which hindered the shipment of extra product to the weather-hit Northeast (see 'Freezing Weather Hits US Heating Fuels Markets' in OECD Stocks Section). However, refiners running Mars and crudes priced off ASCI were worse off than those priced off relatively-weaker LLS. Indeed, their margins briefly turned negative mid-month, after bad weather in the Gulf delayed Mexican exports with both grades strengthening accordingly. Midcontinent margins were also mixed in January, with WTI margins increasing by approximately $5/bbl as its price tumbled by $3/bbl over the month and refiners processing Bakken and WCS seeing margins weaken over the month as these grades held their prices in the wake of freezing weather affecting their production (for more on this, see Prices). Midcontinent margins remain approximately $4/bbl below year-ago levels, averaging between $12/bbl and $17/bbl.

Singapore margins also saw diverging trends, with refiners running Dubai crude, which was pressured lower amid strong competition from similar Middle Eastern and African grades, seeing their margins firm by $1.30/bbl on average. In comparison, those running Malaysian Tapis saw margins drop by the same amount. Margins received a boost from improving gasoline and fuel oil cracks, as the latter moved further into positive territory on strong regional bunker demand and a draw in Singapore inventories.



OECD Refinery Throughput

OECD refinery crude throughputs surged by another 0.5 mb/d in December, to average 37.2 mb/d. The month-on-month increase stemmed mostly from the US, which saw refinery runs rise by 0.48 mb/d to eight-year highs. In Europe and Asia Oceania, refinery throughputs were relatively unchanged from a month earlier, though this masked country-level contrasts. In Europe, steeply lower French refinery activity, due to industrial action, offset higher runs in the UK, where refineries returned from outages. In Asia Oceania, a 180 kb/d increase in Japanese throughputs partly offset reduced throughputs in South Korea. Overall, OECD runs were 0.6 mb/d lower than year-earlier levels, with a 0.5 mb/d year-on-year increase in North America providing only a partial offset to sharply lower runs in Europe and, to a lesser degree, Asia Oceania.



The outlook for OECD runs in 1Q14 is largely unchanged since last month's Report. Total OECD crude throughputs are expected to increase to an average 36.4 mb/d, from a downwardly revised 4Q13 level of 36.1 mb/d. The bulk of the gain is set to come from Europe where operating rates sank to record lows in 4Q13. On the back of dismal refinery margins, European throughputs are expected to remain weak, at an average 11.3 mb/d in 1Q13, only slightly higher than December's level. While European refinery runs are still forecast to contract y-o-y, by 0.3 mb/d in 1Q14, this marks a notable improvement from the 1.0 mb/d y-o-y contraction seen in 2H13.

Throughputs in the OECD Asia Oceania region are also expected to increase seasonally in 1Q14, to average 7.0 mb/d, from 6.7 mb/d in 4Q13. Regional runs continue to see structural contraction, due to lacklustre regional demand and increased competition for export markets. Providing further downward pressure, Japanese refinery capacity is set to drop by a further 0.5 mb/d at the end of the quarter, as discussed in previous editions of this Report.

In contrast, refinery activity in the OECD Americas is expected to fall seasonally in 1Q14, to average 18.1 mb/d, from 18.6 mb/d in 4Q13. While year-on-year gains of around 0.3 mb/d are expected for both quarters, US runs are forecast to come off their recent highs. Indeed, preliminary weekly US data show sharp declines over the month of January, in line with our previous expectations. Further curbs are expected in February and March as plants undergo seasonal maintenance.



Refinery crude intake in OECD Americas surged by another 0.5 mb/d in December, to average 19.15 mb/d. Runs stood 0.5 mb/d above year-earlier levels, with a 0.8 mb/d gain in the US partly offset by dips in Canada and Mexico. After relatively robust refinery runs in the first half of 2013, since September refinery runs in Mexico have been weaker than expected due to maintenance and unplanned outages. Canadian throughputs were also trending below year-earlier levels recently. According to preliminary weekly data from the National Energy Board, Canadian crude runs averaged 1.7 mb/d in both December and January, 0.2 mb/d and 0.1 mb/d less than the same months a year earlier, respectively.



As discussed in last month's Report, US crude throughputs surged to eight-year highs in December, averaging 16.1 mb/d. Surging regional feedstock supply, an unexpected recovery in domestic end-user demand and continued high product exports underpinned the gains. According to preliminary weekly data from the EIA, US refinery crude intake plummeted by 1.1 mb/d from end December to end-January, and by 730 kb/d for the month on average. As much as 60% of the monthly decline came from refiners on the US Gulf Coast, who likely reacted to a collapse in margins in December. US Gulf Coast margins fell by more than $10/bbl from 22 November to 19 December, and by $3.20/bbl on average for the month, on a collapse in gasoline cracks. Margins fell further in January, with cracking margins negative mid-month, before a partial recovery at month-end. Throughputs fell by about 100 kb/d in each of the other PADDs, except for PADD 4 (the Rockies) which saw runs unchanged month-on-month.

In the week ending 17 January, US midcontinent (PADD 2) throughputs dipped to 3.3 mb/d, but quickly rebounded to 3.6 mb/d by end-month. A power outage caused Husky to suspend operations at its 155 kb/d Lima, Ohio refinery, while a fire at the JV Phillips-Cenovus Wood River, Illinois, refinery shut down the coking unit and likely curbed crude runs temporarily. BP announced in early February that production continues to ramp up at its 405 kb/d Whiting, Indiana refinery in February. The company completed a $4 billion upgrade in the fourth quarter, allowing it to process cheaper, heavy Canadian crude oil.



Despite the steep monthly decline, total US crude runs were still 835 kb/d higher y-o-y in January, up from annual growth of 805 kb/d in December and 565 kb/d in November. Runs are expected to come down in February and March, however, due to both weaker margins and seasonal maintenance. US refinery maintenance normally peaks in March.

In early February, Flint Hills Resources LLC announced it intends to permanently shut its 220 kb/d North Pole refinery in Alaska in May due to poor economics and the "enormous" cost of cleaning up soil and groundwater. The company had already shut the plant's Number 1 crude unit in early 2012 due to challenging economic conditions.

OECD European throughputs fell by 50 kb/d m-o-m in December, to average 11.1 mb/d, a drop of some 880 kb/d from a year earlier. French runs were 180 kb/d lower m-o-m, in line with expectations, due to a strike at Total's domestic refineries. UK refinery runs rebounded by 200 kb/d, however, from sharply lower runs over October and November. Refinery margins remained weak in January, suggesting limited uptick in operating levels in early 2014.

Regional refinery runs are expected to fall seasonally through April as maintenance picks up. API's Falconara refinery is scheduled to shut for 20 days from March 18, while Saras' Sarroch refinery will also start work in March. On the other hand, in Spain, Cepsa's Tenerife refinery reportedly restarted on 20 January. The plant halted operations on a few occasions in 2013 on poor margins. In Turkey, Tupras shut its Izmit refinery in January to carry out work on its upgrading project



Preliminary data from Euroilstocks, released on 11 February, show an improvement in runs for January with the 15 European Union countries plus Norway raising throughputs by 115 kb/d, largely in line with our previous forecast.

In OECD Asia Oceania, crude throughputs were slightly weaker than expected in December, due to lower South Korean runs. Since the start of the second quarter of 2013, Korean refiners have felt the pressure of increased competition for export markets and weak regional demand, and have curbed runs by an average 150 kb/d year-on-year. South Korea's top refiner, SK Innovation, reported 4Q13 throughputs fell 18.7% from a year earlier. As much as 61.1% of the company's products supplied are exported. The company operated its 1.1 mb/d of capacity at 75% in 4Q13 and plans maintenance at its Ulsan refinery some time in 2Q14-3Q14. GS Caltex reportedly plans a 30-day shutdown of a 180 kb/d CDU at its Incheon refinery in 2Q14.



Japanese refinery crude intake in January averaged 3.5 mb/d, unchanged from December and in line with expectations. Runs were 60 kb/d higher than a year earlier. Japan's largest refiner, JX Nippon, announced that it will cut runs by 5% from a year earlier in February due to maintenance at the 127 kb/d Marifu refinery from 12 February to 26 March. At the same time, the company announced that it plans to double product exports in the face of weaker domestic demand. The February planned exports are still lower than in January, which saw company product exports surge fourfold compared with the previous year.

Non-OECD Refinery Throughput

Non-OECD refinery throughput estimates for 4Q13 and 1Q14 have been slightly lowered since last month's Report, to average 39.9 mb/d and 40.2 mb/d, respectively. The downward revisions largely stem from non-OECD Asian countries, based on weaker than expected throughputs in November and December. With more complete data for 4Q13 now available, non-OECD Asia (excluding China) looks to have contracted year-on-year for the first time since 3Q10, in contrast to annual growth of almost 0.6 mb/d over the previous four quarters. In particular, Indian crude runs contracted annually in each of the three consecutive months through December, after robust year-on-year gains over the past few years. Chinese Taipei's refinery runs contracted by 160 kb/d on average over the four months from August to November, while the deadly typhoon hitting the Philippines on 8 November further curbed regional runs. Non-OECD Asian runs are expected to remain below year-earlier levels in 1Q14 on a string of planned maintenance shutdowns, though Chinese runs are expected to gain as new capacity starts up. The Middle East, FSU and Africa will further add to growth, lifting total non-OECD runs by 1.0 mb/d over year-earlier levels in 1Q14, from 0.8 mb/d in 4Q13.



Demand Worries Curb Chinese Refinery Expansion Boom

With Chinese oil demand growth dropping to a six-year low in 2013, of some 280 kb/d (or 2.8%), Chinese and international oil majors are reconsidering their refinery investment plans. Less than a year ago, some 4.3 mb/d of new primary distillation capacity was scheduled for completion by 2018, by far exceeding expected demand growth even at that time. Growing concerns over the risks of oversupply in the Chinese fuels market have led at least four projects to be cancelled in recent months.

The latest headline came in late January, when news emerged that BP had dropped plans to invest in a refinery in China and was dismantling the team asssigned to the project. BP had considered investing in PetroChina's 200 kb/d Qinzhou refinery, which started operations in 2010, and is currently being upgraded to handle a wider feedstock slate.

PetroChina also announced in January that it had put off starting up two new refineries and delayed the expansion of another due to the threat of overcapacity. The company now plans to start its 200 kb/d Kunming refinery in the Yunnan province in 2016, two years later than originally scheduled. The proposed 400 kb/d Jieyang refinery in Guangdong province, a joint venture with Venezuelan state oil company PDVSA, is now slated for completion in 2017, compared with an earlier target of 2013. The 100 kb/d expansion of the company's Huabei refinery has also been postponed from 2014 to 2015, according to officials.

The latest news follows a number of project delays and cancellations over 2013. Sinochem's 240 kb/d Quanzhou refinery and PetroChina's 200 kb/d Pengzhou only started trial runs in January this year, after numerous delays. PetroChina's plans to build a refinery and petrochemical complex in east China with Royal Dutch Shell and Qatar Petroleum also stalled last year due to land issues and as PetroChina decided to cut back on refinery spending. The proposed 400 kb/d Taizhou refinery and the 1.2 mt/y ethylene plant were to cost $13 billion and would have been the largest downstream investment so far by PetroChina.

With no new data available for Chinese refinery operations since the release of last month's Report, our forecast for Chinese refinery throughputs remain unchanged, averaging 9.8 mb/d in 4Q13 and 10.1 mb/d in 1Q14. Newly commissioned refinery capacity is expected to underpin throughput growth in early 2014, and as domestic demand growth has slowed, an increasing share of refinery output is expected to be exported. Indeed, the Chinese government recently granted new, record-high diesel export quotas. The diesel quota for 1Q14 was raised to 154 kb/d, up from 138 kb/d in 4Q13. Average diesel exports in 4Q13 averaged only 62 kb/d however. It is likely that diesel exports were also below the allowed levels in January as suppliers replenished domestic stocks ahead of the Lunar New Year.



The latest data available for 'Other non-OECD Asian' countries has led us to revise down regional crude throughputs for 4Q13 by 130 kb/d since last month's Report. In November, runs in the Philippines were 75 kb/d lower than expected; those in Chinese Taipei were 50 kb/d below expectations and 25 kb/d below forecast in Indonesia. December throughputs have been revised down by 235 kb/d, largely on weaker-than-expected Indian runs. Regional runs are now assessed at 9.8 mb/d for 4Q13, largely unchanged from the year earlier, and in sharp contrast to year-on-year growth of some 0.6 mb/d over the previous four quarters. The contraction stems in large part from India.

Indian refiners processed 1.7% less crude oil in December compared with a year earlier, the third consecutive month of y-o-y contraction. At 4.4 mb/d, crude intake was largely unchanged from November. Reliance's 660 kb/d Jamnagar 1 plant saw runs slump by 110 kb/d due to a power failure in mid-December, while IOC's Mathura refinery resumed runs after maintenance over the two previous months. Reliance was scheduled to restart a 300 kb/d crude unit at its Jamnagar 1 complex in February, after two weeks of maintenance.



Regional runs are expected to be curbed further in early 2014 by maintenance in Thailand, the Philippines and Vietnam. Thailand's Star Petroleum will shut a 150 kb/d refinery for 40 days starting in February. Petron will shut its 180 kb/d Limay refinery in the Philippines for two to three weeks in 1Q14 and PetroVietnam is scheduled to shut its 140 kb/d Dung Quat refinery for 50 days starting in May.

In the FSU, preliminary data show Russian refiners processed 5.7 mb/d in January, unchanged from a month earlier and 220 kb/d higher y-o-y. Official monthly statistics for December show refinery throughputs in that month rising some 140 kb/d year-on-year. While regional runs are expected to decline seasonally through April, as maintenance activity picks up, healthy refinery margins are expected to support year-on-year growth in 2014. Our 1Q14 growth forecast for FSU runs remain unchanged since last month's Report at 175 kb/d, to average 6.9 mb/d.

On 3 January 2014, the Russian government amended the structure of the fuel oil export duties for 2014. Instead of raising the fuel oil duty to 75% of that of crude oil as previously announced, the government left it unchanged at 66%. The planned increase of the duty to parity with crude oil in 2015 was reaffirmed. The lower duty improves the profit margin of simple refineries with high fuel oil yields. Russian throughput growth could see further support from lower turnarounds this year compared with last. The most recent Energy Ministry data showed that Russian companies plan to take offline 305 kb/d of primary distillation capacity for maintenance in 2014, compared with 350 kb/d in 2013.



Brazilian crude runs averaged 2.0 mb/d in December, down 110 kb/d from November, and 25 kb/d higher than the previous year. The monthly decline was less sharp than expected. Petrobras' Repar refinery, which was shut due to a fire for most of the month, processed only 65 kb/d of crude in December, compared with 207 kb/d a year earlier, though other plants partly made up for the loss.



In the Middle East, a power outage forced all three of Kuwait's refineries to shut in January. The three plants, which have a combined capacity of 930 kb/d, halted operations for several days before output could be gradually restored by month-end. The latest monthly data for Saudi Arabian refinery output, for November, suggest a steep drop in refinery operations from October to November, compared with the expectations of an increase in runs as the new 400 kb/d Jubail refinery ramped up. Separately, Saudi Arabia's oil minister announced in January that the 400 kb/d YASREF Yanbu refinery, a joint venture between Saudi Arabia and China's Sinopec, was on schedule to be operational in 3Q14. The plant will process heavy crude oil from the Manifa oilfield, as will the recently commissioned Jubail refinery, and produce 263 kb/d of 10 ppm ULSD and 90 kb/d of gasoline. As noted in last month's Report, Abu Dhabi's 415 kb/d Ruwais refinery is also slated for completion before the end of 2014. The refinery will process Abu Dhabi's Murban crude. State-run Kuwait National Petroleum Company announced on 10 February that the Kuwaiti government had approved $12 billion worth of bids to upgrade and expand its two of its refineries. The Clean Fuels Project, which intends to lift capacity at the two plants by 264 kb/d to 800 kb/d by 2018, has faced numerous delays due in large part to political instability.