Oil Market Report: 14 March 2014

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Highlights

  • Oil prices edged higher in February with gains in WTI far outpacing ICE Brent. WTI futures traded above $100/bbl for the first time in five months on bitterly cold weather and strong refiner demand. Both benchmarks trended lower again in early March ahead of planned refinery turnarounds, with WTI last trading at $98.20/bbl and Brent at $108/bbl.
  • Global supplies rose by 600 kb/d in February to 92.81 mb/d, led by a 500 kb/d jump in OPEC crude output. Total non-OPEC supplies grew by 1.3 mb/d in 2013 and are expected to increase by a further 1.7 mb/d in 2014, the highest rate of growth since at least the early 1990s, driven primarily by the US and Canada. Russia, China and Brazil will contribute.
  • OPEC crude supplies in February breached the 30 mb/d mark for the first time in five months, led by a surge in Iraqi output to 35-year highs. OPEC supply rose by 500 kb/d to 30.49 mb/d. The 'call on OPEC crude and stock change' was lowered by 100 kb/d to 28.9 mb/d for 1Q14 but was raised by 250 kb/d to 30.2 mb/d for 2H14. 
  • Global oil demand growth of around 1.4 mb/d is forecast for 2014, to 92.7 mb/d, as the macroeconomic backdrop improves. Emerging markets, despite their recent volatility, are forecast to provide the majority of this growth, with non-OECD Asia accounting for roughly half of the gain.
  • OECD total oil inventories dropped counter-seasonally by 13.2 mb in January to 2 551 mb, as unusually cold weather in North America drew stocks of heating fuels. The deficit of inventories to the seasonal average widened to 154 mb at end-December while refined product cover dropped by 0.2 days to 29.0 days.
  • The US Department of Energy said on 12 March that it would sell 5 mb of crude from the Strategic Petroleum Reserve to test the capabilities of the reserve system infrastructure. Deliveries are expected in April.
  • Global refinery crude throughputs are on track to expand by 1 mb/d in 1Q14, to 76.6 mb/d. Robust growth in the US, the Middle East and Russia is partly offset by contracting runs in Asia and Europe. Seasonal maintenance is set to curb refinery activity to a low of 74.8 mb/d in April, taking global runs to 75.9 mb/d on average for 2Q14, or up 1 mb/d year-on-year.

Markets remain calm

Aside from a brief and short-lived spike in oil prices on 3 March, oil markets so far have taken the standoff between Russia and the West over Ukraine in their stride.  At the time of writing, oil futures prices were actually down on their February close. One factor in the market's relative calm is almost certainly the fact that Ukraine is not a major transit country for Russian-origin oil sold to the West. 

Despite the "Asian pivot" of Russian oil companies that has had the effect of gradually redirecting some of Russian crude exports from the Atlantic to the Pacific, Russia and the West are closely linked in a producer-consumer relationship that remains very important to both parties.  In 2013, OECD Europe still received as much as 36% of its net crude imports from Russia, which in turn relied on Europe for 71% of its crude exports.  A 7% dip in Russian crude exports to OECD Europe versus 2012 levels was largely offset by a rise in net product exports, which jumped by 15%. 

The latest trend in oil fundamentals points to other reasons that may explain the market's calm. On the surface, headline draws in OECD commercial oil inventories are staggering: a cold snap in the US led a further, counter-seasonal drop of 13 mb in oil stocks in January, extending their 4Q13 plunge reported last month, and leaving their deficit to the seasonal average at a whopping 154 mb, its widest in more than a decade.



But an improving supply outlook partly offsets these recent draws. Not only is non-OPEC supply set to soar by as much as 2 mb/d in 1Q14, but OPEC itself managed a surprise 500 kb/d surge in production last month, bouncing back over the 30 mb/d mark for the first time in four months, and bringing the steady year-on-year decline of 2013 to a sudden halt. A new dip in Libyan output was more than offset by an unexpected jump in Iraqi production volumes, which surged to their highest in 35 years. After many false starts, one of the major bottlenecks at Iraq's southern terminals was finally removed, allowing a long-awaited increase in exports to materialise. Whether this gain can be extended or even sustained is an open question, as Baghdad continues to face formidable above-ground challenges. But the latest spike in Iraqi exports proves that even in the face of these obstacles, Iraq's huge potential as supplier cannot be dismissed.

Meanwhile, the cold weather that dug into stocks in January has abated. Product demand in general is dropping seasonally while refining maintenance looks set to curb global crude demand by some 700 kb/d in 2Q14 from 1Q14, allowing stocks to rebuild. After record-high US oil exports in December, US crude runs, despite their seasonal dip, have remained nearly 900 kb/d above last year. Recent US crude price drops, on the back of weekly stock builds and the first test sale of crude from the US Strategic Petroleum Reserve since the Gulf War, have helped margins and may keep runs historically elevated. While international tensions may be on the rise, pressure on oil markets, ceteris paribus, seems set to ease.

Demand

Summary

  • Global oil demand rose by 1.3 mb/d to 91.3 mb/d in 2013, according to the latest, now near-complete set of data for the year. This estimate is 45 kb/d over the assessment carried in last month's Report. Demand in non-OECD economies expanded by 1.2 mb/d, while OECD deliveries inched slightly upwards, following two consecutive years of decline.
  • Demand for 2014 is forecast to expand by 1.4 mb/d, to 92.7 mb/d (95 kb/d above last month's Report). Growth momentum is expected to benefit from a more robust global economic backdrop. The pace of growth will likely build through the year, as underlying macroeconomic conditions improve, but the standoff in Ukraine has increased downside risk to the forecast.


  • US demand growth continues to show signs of strengthening. US demand expanded by a steep 5.2% in December year-on-year (y-o-y), the latest data confirm. Early indications point to continued y-o-y growth in 1Q14, albeit likely at a somewhat slower pace.
  • In contrast, Chinese demand growth continues to slow. Having fallen, in y-o-y terms, in both November and December, a further modest decline is foreseen for January. This slowdown reflects a combination of weaker underlying economic growth, as the government attempts to redirect the economy from heavy reliance on exports to domestic consumption, and, at the margin, environmental measures designed to curb air pollution.

Global Overview

This month's Report includes for the first time a near-complete set of demand data for 2013. Based on these figures, the estimate of global oil demand for the year has been revised slightly upwards, to 91.3 mb/d. Demand growth for the year is now estimated at 1.3 mb/d (or 1.4%), with the total 2013 demand number now 45 kb/d above last month's estimate, as December demand exceeded expectations along side some baseline revisions. While non-OECD demand continued to lead the growth, rising by 1.2 mb/d for the year, this gain reflects a somewhat slower growth rate than seen in recent years.

For 2014, global oil demand is expected to average about 92.7 mb/d, up by 1.4 mb/d (or 1.5%) on the year earlier. All of the growth is forecast to be attributable to non-OECD in 2014, with non-OECD Asia the greatest likely contributor, accounting for roughly half the global gain. Overall demand momentum is forecast to accelerate, albeit modestly, in 2014, supported by a strengthening global macroeconomic backdrop. The International Monetary Fund's World Economic Outlook dated January 2014 forecasts global economic growth of 3.7% in 2014, 70 basis points above the 3.0% gain seen in 2013.

The 4Q13 global demand estimate was adjusted upwards by 35 kb/d since last month's Report, to 92.2 mb/d, reflecting a combination of some raised historical numbers and on balance stronger than expected deliveries in December. Several countries accounted for the bulk of the upwards adjustments for December, including Russia (+65 kb/d), Turkey (+45 kb/d), Iran (+35 kb/d) and Switzerland (+25 kb/d). The US provided a partial offset with a downward adjustment of 115 kb/d, as did Germany (-50 kb/d) and Sweden (-35 kb/d).

Top 10 Consumers

US

The US demand estimate for December has been revised down by 115 kb/d since last month's Report, based on the latest official monthly data. US demand is now estimated at 19.1 mb/d for the month, with deliveries of both LPG and 'other products' significantly below preliminary estimates. Despite this downward adjustment, US demand jumped by a steep 950 kb/d (or +5.2%) in December y-o-y.



Based on the latest weekly data from the US Energy Information Administration (EIA), US demand growth remained remarkably steep in early 2014. Strong gains in LPG and gasoil/diesel, driven by exceptionally cold weather, offset dips in fuel oil, gasoline and naphtha. The latest US heating degree-day statistics show increases over the year earlier for November-through-February. Despite ongoing colder weather conditions, early estimates of US demand in February point towards demand growth tapering out somewhat, to below +1% y-o-y once again, and our forecast for the year as a whole thus remains essentially unchanged. Growth of around 0.5% is forecast in US oil demand in 2014, to 19.0 mb/d.



US Energy Secretary Ernest Moniz on 19 February said that the US intends to take a "three-pronged" approach to lowering its oil dependence, emphasising the importance of improving vehicle efficiency standards and widening the electric vehicle fleet. This appears consistent with our forecast of an average decline rate of around 0.6% per annum in US gasoline demand in the next five years. Dr. Moniz outlined plans for the Department of Energy to work alongside the private sector to develop long-term fuel economy standards for medium- and heavy-trucks, noting that in an ideal world, the efficiency of Class 8 long-haul trucks (i.e. trucks that weigh 33 000 lbs, 14 969 kg, or more) would be improved by 50%.

China

The forecast of Chinese demand has been modestly curtailed since last month's Report, on account of a reduced 1Q14 estimate. The estimate for January has been adjusted down by 80 kb/d, to 10.0 mb/d, reflecting stronger-than-expected Chinese product stock builds that month. Once again gasoil demand was relatively weak, as industrial growth eases back and less gasoil is reportedly needed to move coal across the country. In contrast, gasoline demand remained relatively strong, supported by hefty car sales, while demand for jet/kerosene extended the steep growth shown in recent months. Looking forward, it is these two transportation fuels, along with naphtha and LPG, that will likely provide the bulk of Chinese demand support through 2014.











Japan

Japanese oil demand for January averaged roughly 5.0 mb/d, 35 kb/d below our month-earlier forecast and down 240 kb/d (or 4.6%) y-o-y. Unusually mild winter weather helped suppress kerosene and heating oil deliveries, while the ongoing power-sector movement out of oil products further dampened demand. The country's 10 major power companies used 82.5% y-o-y less fuel oil in January, according to the Federation of Electric Power companies. The demand estimate for December was adjusted marginally upwards by 15 kb/d to 5.2 mb/d, still down by 270 kb/d (or -4.9%) y-o-y. Thus for 2013, deliveries averaged about 4.6 mb/d, down 3.5% y-o-y, with a similar decline expected for 2014, to 4.4 mb/d, as the power sector makes further adjustments out of oil products. LPG demand should remain relatively muted through 1Q14, as Tokyo Electric Power Company, for one, is not expecting to purchase any more LPG in March.



India

Preliminary estimates of Indian demand for January show a near 1% y-o-y contraction, led by dips in gasoil, naphtha, kerosene and fuel oil. Reductions in diesel subsidies have helped slash Indian gasoil demand by nearly 3% y-o-y. Diesel requirements further suffered as electricity supplies became somewhat more reliable, thus curbing the use of emergency diesel-powered generators. The reported peak-hour power deficit fell to 4%, from 11.4% a year earlier. Having expanded by a downwardly revised 0.5% in 2013 (last month +0.6%), to 3.4 mb/d, Indian demand looks likely to accelerate, albeit modestly, by 2.4% in 2014, supported by an expected uptick in macroeconomic activity.



Russia

Deliveries of around 3.3 mb/d were seen in January, with steep gains in gasoil/diesel, 'other products', fuel oil and jet/kerosene. Based on these preliminary Russian demand estimates, January deliveries rose by approximately 175 kb/d (or 5.5%) y-o-y, and exceeded expectations by 90 kb/d. As a result, the forecast for the year as a whole has been revised upwards to 3.0% growth, versus 2.7% last month. The largest additions over the previous forecast for January demand were seen in gasoline and 'other products', which includes bitumen used for road building, likely reflecting building activity spurred by the Winter Olympic Games. Estimates for 2012 and 2013 have been raised by 5 kb/d and 10 kb/d respectively.



Brazil

Brazilian demand in January was higher than expected, reaching approximately 3.0 mb/d or 40 kb/d more than our month-earlier forecast. The projection for 2014, as a whole, has been marginally increased over previous editions of this Report. Brazilian oil demand growth of around 2.8% is now being forecast for 2014, up on the previous 2.7% projection, with transport fuels leading the growth. Having risen by an estimated 7.0% in January, gasoline demand in Brazil is forecast to also lead the way in 2014, rising by around 4.6% to 970 kb/d, while both gasoil/diesel and jet/kerosene are forecast to post 3.8% gains on the year, respectively to 1.1 mb/d and 130 kb/d. These Brazilian transportation fuel gains have themselves been underpinned by the resilient, and seemingly now strengthening, consumer sector, as the Confederacao Nacional da Industria's consumer confidence indicator depicted sentiment rising to an eight-month high of 113.9 in January.



Saudi Arabia

Saudi demand for December was estimated at 2.7 mb/d, in line with expectations. This month saw further evidence of the Saudi government's bid to diversify its power sector away from oil. Direct crude burn for power generation carries an opportunity cost for the Saudi government, as barrels used for power generation fail to bring export revenues. The latest potential evidence of a further future diversification away from oil in the Saudi Arabian power sector comes from the Saudi Electricity Company which has announced plans for a 600 megawatt independent power project, due to run on a combination of solar and natural gas.



Germany

Unusually mild early winter weather helped keep the overall German demand estimate suppressed at around 2.2 mb/d in December. Total gasoil demand came in at around 935 kb/d in December, 8.8% down on the year earlier and 90 kb/d less than the forecast carried in last month's Report. Preliminary estimates of January demand, however, hint at a bounce, as absolute demand growth is forecast to return, supported by particularly robust gains in transportation fuel demand.



Canada

Canadian oil deliveries averaged 2.2 mb/d in December, causing a slight upward adjustment to the 2013 Canadian demand estimate, to around 2.3 mb/d. Demand in December was 6.3% below year earlier levels, the sharpest decline for one-and-a-half years. A combination of weak business confidence (at a five-month low), exceptionally cold weather and escalating concerns about job stability curbed oil deliveries. Despite such concerns, demand momentum should pick-up in 2014, as macroeconomic conditions solidify once more. As in 2013, the transport fuels will provide the majority of the upside momentum, more than offsetting the forecast absolute declines in fuel oil (a momentum that will likely particularly accelerate towards the end of the year as marine bunkers increasingly switch to lower sulphur gasoil.



Korea

With Korean business confidence still hamstrung in negative territory at the turn of the year, January demand was estimated at 2.3 mb/d, down on the month and 55 kb/d lower than forecast. Fuel oil and LPG led the downward revisions. Demand for both fuels fell sharply y-o-y, by 14.6% and 9.7%, respectively. Total Korean demand came out 2.4% below the year earlier. Weak business sentiment, with the Bank of Korea's gauge falling to a four-month low of 76 in January, at least partially explained the contraction, as did a reduced number of working days on account of the Lunar New Year. Tracking forward, relatively flat, +0.3%, demand growth is projected for 2014, to around 2.3 mb/d.



OECD

Having risen in both November and December, OECD demand fell back in January y-o-y, led by European demand. Two key factors played a dominant role in January's OECD decline: (a) unseasonably warm weather outside of the Americas; and (b) the continued frailness of the OECD economic momentum.

Americas

Demand in the OECD Americas expanded for a fifth consecutive month, to an estimated 24.0 mb/d in January. Not only is this 1.0% up on the year earlier but it is also a rise underlined by absolute gains in all of the main product categories, bar gasoline and fuel oil. For 1Q14 we anticipate demand averaging out at around 23.9 mb/d, equivalent to a gain of roughly 0.8% on the year earlier, while growth of around 0.5% is forecast for the year as a whole.

Europe

Preliminary OECD European oil deliveries, at around 12.8 mb/d in January, were down by around 1.0% on the year earlier. December's 0.2% rise is, thus, little more than a temporary break from trend, with the long-entrenched downwards trend forecast to return through the majority of 2014, albeit only modestly declining for the year as a whole.



The latest UK oil demand figure, down 3.8% y-o-y to an estimated 1.5 mb/d in December, came out in-line with the forecast of last month's Report. The December product-mix, however, varied with higher-than-anticipated gasoil and fuel oil demand near-perfectly counterbalanced by lower jet/kerosene, 'other products' and LPG demand. For 2013 as a whole a flat demand trend was seen, as deliveries averaged 1.5 mb/d, with gasoil/diesel demand performing particularly well, up by 2.3% on the year, to 590 kb/d, reflecting raised vehicle activity, itself a function of the recent improvements in the wellbeing of the UK economy. GDP rose by an estimated 1.8% in 2013, supporting this additional transport demand but with the unfortunate side effect of increased road congestion, as confirmed in a study by traffic consultant INRIX. Congestion levels soared by around 3.5% in 2013, as UK drivers spent on average 30 hours stuck in traffic jams, with a near 14% increase seen in the capital. London ranked as second, only to Brussels, in the unwanted battle for the prize as Europe's most congested city, at an average of 82 hours in traffic in 2013, versus 83 hours for Brussels.

Asia Oceania

In OECD Asia Oceania demand fell by 3.4% y-o-y in January, to 8.8 mb/d, consequential on sharply contracting (y-o-y) Japanese power sector oil-needs. Fuel oil, previously a key source of Japanese power-sector use, logically led January's downside, although absolute declines were seen across most of the key product categories in the OECD Asia Oceania region in January. The forecast decline rate for 1Q14 is tempered, at around -1.8% y-o-y, with a similarly pace drop forecast to hold for the year as a whole, as Korean oil demand is forecast to remain roughly unchanged in 2014, while Japanese oil deliveries are forecast to fall relatively sharply. Official data for Australia confirmed our own, month earlier, forecast at 1.1 mb/d in December, with deliveries of jet/kerosene posting a near 7% y-o-y gain.



Non-OECD

Recent months have proved particularly testing for emerging markets, with absolute non-OECD oil demand growth easing back to a near-five year low of 1.6% y-o-y in 4Q13. Even in barrel terms this was still a near-five year low, as only approximately 725 kb/d of additional non-OECD deliveries were thought likely to have been added in 4Q13, compared to 4Q12. Notable sub-trend growth was seen in the Middle East and non-OECD Asia in 4Q13, with flat-to-falling Chinese demand proving particularly culpable (mainly Chinese gasoil/diesel). Having likely overcome this flat-spot in 4Q13, non-OECD demand momentum is forecast to accelerate once again in 2014, starting with a forecast gain of 2.0% in 1Q14. Non-OECD oil demand growth is then forecast to average out at around 3.1% for the year as a whole, or 1.4 mb/d.



Looking specifically at emerging market product demand, the recent weakness in gasoil/diesel deliveries has been the most noteworthy take-away. The 0.8% y-o-y gain in non-OECD gasoil demand in 4Q13 being a mere fraction of the previous near-5% five-year trend (2007-12), as Chinese demand in particular reversed. An absolute decline was also seen in non-OECD residual fuel oil demand in 4Q13, but as total fuel oil deliveries traditionally account for a much smaller share of oil demand than gasoil, plus it is a sector that is not immune to occasional dips, the reported 1.9% y-o-y drop in non-OECD fuel oil demand came as less of a surprise. Weak petrochemical sector demand, coupled with a reduced Indian fertiliser needs, meanwhile accounted for relatively flat non-OECD naphtha deliveries in 4Q13. All of the main non-OECD product categories are forecast to return to rising demand trends in 1Q14.



The recent trend, away from oil in the non-OECD power-sector, seemingly continues. Various reports of additional countries investing in non-oil power-sector projects are likely to reduce the medium-to-long power-sector's dependence upon oil. This change is anticipated across the non-OECD region, but particularly in the Middle East and Africa. Indeed, notable plans have been announced recently in Algeria, with 930 megawatts of renewable capacity due to come online by 2016. This is up sharply from 2011, the last year for which the IEA has complete data, when the Algerian power-sector was completely dominated by gasoil use, at roughly 0.8 mb/d, itself up dramatically from the year earlier (0.3 mb/d in 2010) as shortages of natural gas increased the need for diesel.



Nigerian oil demand averaged 340 kb/d in 2013, with growth of 4.7% forecast for 2014 with notably strong gains envisaged in the transportation fuel markets. The changing make-up of domestic price subsidies, however, remains a potential wild-card to the sharply rising Nigerian oil demand forecast, as it has been speculated recently that the sacking of the head of the central bank may not have been completely unrelated to its publication of a report documenting the full costs of the ongoing subsidy programme.

Supply

Summary

  • Global supplies jumped by 600 kb/d in February to 92.89 mb/d, led by a significant rise in OPEC crude output of 500 kb/d. Compared with a year ago, February production stood 2.03 mb/d higher, with non-OPEC supply up by 2 mb/d and OPEC crude output nearly unchanged (-5 kb/d).
  • Non-OPEC oil production rose by 100 kb/d to 55.9 mb/d in February, led by marginally higher output in Canada and the US. Output barely rose outside of North America, with a meaningful rise occurring only in Latin American countries, most notably Colombia.
  • Total non-OPEC supplies grew by 1.3 mb/d in 2013 and are expected to increase by a further 1.7 mb/d in 2014, the highest growth rate since at least the early 1990s. The projected 2014 increase in non-OPEC supply is expected to be driven by relentless growth in US and Canadian supplies and gains in Russia, China and Brazil.
  • OPEC crude supplies in February breached the 30 mb/d mark for the first time in five months, led by a surge in Iraqi output. OPEC supply rose by 500 kb/d to 30.49 mb/d, as a downturn in Libyan production only partially offset the jump in Iraqi volumes as well as increased output from Saudi Arabia. The 'call on OPEC crude and stock change' was lowered by 100 kb/d, to 28.9 mb/d, for 1Q14 but was raised by 250 kb/d to 30.2 mb/d for 2H14.
  • Iraqi crude oil production in February surged to the highest level in 35 years, up around 15% over January levels, to 3.62 mb/d. After a protracted delay, one of the major bottlenecks at Iraq's southern export terminals was removed, allowing shipments to rise more than half a million barrels per day.


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

Note: Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from May 2011, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast. This totals -200 kb/d to -400 kb/d for non-OPEC as a whole.

OPEC Crude Oil Supply

Crude oil supplies from OPEC in February breached the 30 mb/d mark for the first time in five months, led by a surge in Iraqi output. OPEC supply rose by 500 kb/d to 30.49 mb/d, with a downturn in production from beleaguered Libya only partially offsetting the surprise jump in Iraqi volumes as well as increased output from Saudi Arabia and Nigeria. After a protracted delay, one of the major bottlenecks at Iraq's southern export terminals was removed, allowing shipments to rise a half a million barrels per day (see 'Stars Align to Propel Iraqi Crude Production to 35-Year Highs').



The 'call on OPEC crude and stock change' was lowered by 100 kb/d, to 28.9 mb/d for 1Q14 but was raised by 250 kb/d for 2H14 on higher forecast demand and reduced OPEC NGLs. The 'call' on OPEC supplies for 2H14 is now estimated at an average 30.2 mb/d. OPEC's 'effective' spare capacity in February was estimated at 3.18 mb/d, up from 3.15 mb/d in January, largely on increased Iraqi crude oil production capacity.

Saudi crude oil production in February rose by 90 kb/d to 9.85 mb/d. Saudi supplies to the market, which include sales from domestic and overseas storage facilities, were reported at 9.9 mb/d in February, around 15 kb/d below the previous month. In February, Saudi Arabia renewed for a further three years its crude oil storage arrangement with Japan and significantly raised the agreed volumes, to 6.3 mb from 1.3 mb previously. The agreement provides cost-free storage to Saudi Aramco and allows Japan first rights to crude held at the facility in Okinawa in the event of an emergency. Saudi Aramco also has 3.9 mb of storage in Rotterdam.

The market had expected a decline in Saudi output last month given reduced crude burn at power plants, which typically dips to seasonal lows of around 300 kb/d in January and February before ramping up in the spring ahead of peak summer cooling demand. Crude burn averaged 660 kb/d during the May-September demand period last year, about double the January-to-February averages.



Relatively high Saudi production in February may in part reflect increased demand from the country's new Jubail refinery. The ramp-up of capacity at the 400 kb/d Jubail refinery has been underway since the end-2013 and is designed to process heavy oil crude from the Manifa field. The offshore, shallow-water 900 kb/d Manifa field started production of the first tranche of 500 kb/d in April 2013. The second tranche of 400 kb/d is expected online at end-2014.

Iranian crude oil production was estimated unchanged in February at 2.78 mb/d. Production so far in 2014 is about 100 kb/d above the 2013 average of 2.68 mb/d. Crude oil held in floating storage rose to about 32 mb at end-February, up 2 mb from end-January levels, latest tanker data show.

Global imports of Iranian oil, which includes condensates, peaked at one-year highs, of 1.41 mb/d in both January and February. That compares with average imports of 1.1 mb/d in 2013. January import volumes were revised up by 90 kb/d on more complete data. India posted the largest change in January, up around 175 kb/d to 415 kb/d, while Japan and China's estimates were reduced by about 45 kb/d and 40 kb/d, respectively. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports.

Higher Iranian imports in recent months reflect, in large part, increased sales of condensates to Asian buyers. Imports of condensate from Iran's Asaluyeh terminal averaged around 315 kb/d in December and 255 kb/d in January. That compares with an average 100 kb/d for 2013. Preliminary data for February are incomplete but expected to be similar to January levels. Almost all of Iran's condensate is bought by China and Japan, with the recent increase in shipments attributed to stronger Asian naphtha demand. In 2013, India, Turkey and Taiwan each took one cargo.



In February, Chinese imports of Iranian oil fell by 180 kb/d to 385 kb/d, but shipping sources report that there are still three VLCCs of Iranian crude anchored off the country's coast. In addition, this month tanker trackers report about 70 kb/d arrived at Indonesia's Batam Island, which has frequently been used as a ship-to-ship transfer point for Iranian supplies to China. As a result, Chinese imports are likely to be revised upward next month on final data.

India, the second-largest importer of Iranian crude in 2013, also reduced volumes in February, by 240 kb/d to 175 kb/d, after imports had surged in January. In February, the US reportedly requested that India reduce imports from Iran to end-2013 levels. India imported 200 kb/d in 4Q13 from Iran. At a meeting in India, US officials emphasised the importance of limiting Iranian exports to around 1 mb/d as part of the interim agreement known as the Joint Plan of Action signed on 24 November between Iran and international powers and implemented in January.

By contrast, imports of Iranian oil surged in Japan and South Korea, albeit from exceptionally low January levels. Japanese imports jumped by 155 kb/d to 365 kb/d, while South Korea's rose by around 145 kb/d to 210 kb/d. Turkey also increased volumes, by 80 kb/d to 170 kb/d in February. Syria imported approximately 34 kb/d in February, compared to none in January. In 2013 Syria imported on average 30 kb/d.

Meanwhile, expert level meetings between Iranian officials and delegates representing the so-called P5+1 - the five UN Security Council members plus Germany and the EU - took place in mid-February and early March. Officials reported that the talks over Tehran's nuclear programme were "substantive and useful" ahead of the next formal meeting of political negotiations on 18 March. Building on the interim Joint Plan of Action, Iran and the international community have set a deadline of late July to reach a final agreement. The Joint Plan of Action is explicitly intended as a temporary measure to allow breathing space for negotiations toward a permanent agreement. While the political will to achieve a resolution appears strong, major issues and differences over Iran's nuclear programme remain and success is far from assured.



Kuwaiti crude oil production was unchanged at 2.78 mb/d in February, though export volumes were sharply higher following power outages at all three of the country's refineries in January and into February (see Refining section). Crude supplies from the UAE and Qatar were down a small 20 kb/d in February, to 2.7 mb/d and 700 kb/d, respectively. The UAE's Abu Dhabi National Oil Company (ADNOC) has scheduled field maintenance at the Upper Zakum field in April. The Upper Zakum field is undergoing enhanced oil recovery work to raise production capacity from 650 kb/d to 800 kb/d by end-2014. Qatar is also undergoing in March partial maintenance at the 300 kb/d offshore al-Shaheen field.



Stars Align to Propel Iraqi Crude Production to 35-Year Highs

Iraqi crude oil production in February surged by 530 kb/d to 3.62 mb/d, as upgrading of infrastructure projects in the country's southern oil-producing region and debottlenecking at its Gulf export facilities converged to boost output to the highest level since 1979. It was also smooth sailing for tankers, as adverse weather, a chronic cause of shipping delays that regularly curb southern exports, lifted in February.

Crude oil exports soared by 572 kb/d to 2.8 mb/d in February. Basrah shipments posted an exceptional increase of 470 kb/d to 2.51 mb/d, spurred higher by the mid-February start-up of dual loading at two of the offshore single point moorings (SPMs). Previously, only one of two operational SPMs could load at once due to pressure problems related to the delayed installation of gas-fuelled turbine pumps. Work is ongoing at a third SPM but is not expected to be completed until mid-2014 at the earliest.

Loading programmes for March indicate liftings are expected to fall back to around 2.15 mb/d, or more than 300 kb/d below February's record level, before recovering to around 2.5 mb/d in April.

Northern exports of Kirkuk crude to the Mediterranean port of Ceyhan, Turkey, rose by 100 kb/d to 293 kb/d. Crude exports from the KRG region to the Kirkuk-Ceyhan pipeline remain suspended due to ongoing payment and contract disputes between Irbil and Baghdad. Trucked exports of Kirkuk crude oil to Jordan also remain suspended due to security issues in Anbar province.

In February, KRG production, which Baghdad does not include in its official data, was estimated at 240 kb/d. Approximately 80 kb/d to 100 kb/d is being exported via trucks, with higher volumes fuelled by attractive price discounts on crude. Truckers are reportedly buying the pipeline-constrained KRG crude for as little as $60/bbl for Tawke crude and $75/bbl for Taq Taq oil. The remainder is processed at several refineries, including at the growing number of teapots in the region. Conflicting reports emerged in early March that Baghdad and Erbil had reached an agreement on a payment mechanism that would allow the KRG to export crude through a new pipeline that ties into the Iraq-Turkey Pipeline (ITP) at Fishkabur but these appear overstated and no deal has been reached yet.



The exceptional increase in February's exports has been an unexpected boost for the country, which has struggled to meet production targets over the past five years. For 2014, Iraq has set an export target of 3.4 mb/d, which includes 400 kb/d from the KRG. The figures suggest the country is aiming for total production of 4 mb/d once domestic use at refineries and crude burned at power plants is factored in. Iraqi production averaged around 3.1 mb/d in 2013 and sceptics believe an increase of 900 kb/d to be overly optimistic. Iraq continues to struggle with chronic problems expanding its capacity, in large part due to limited institutional capacity to manage its ambitious plans. Upcoming elections in April are expected to see the reappointment of Prime Minister Nouri al-Maliki, but building a coalition is expected to be an arduous process that could take months to agree upon, which will likely cause further delays to project timelines.

Nonetheless, increased export capacity and the start-up of new production in the south holds the promise of higher output this year. The start-up of several major fields, including West Qurna 2, Majnoon and Halfaya, is expected to add more than 500 kb/d by the end of the year. West Qurna 2 operator Lukoil has moved forward its start-up schedule to end-March versus May as previously planned. Lukoil is aiming to bring on 300 kb/d of capacity this year.

Libyan crude supplies ebbed again in February, down by 140 kb/d to an average 360 kb/d last month. Unrest and protests by separatist militias seeking a greater share of the country's oil wealth and disgruntled ethnic groups have held hostage the country's eastern production for eight months against a backdrop of a weak and battered central government. In a sharp escalation of the pandemonium gripping the country, an eastern-based separatist militia grouping led by Ibrahim al-Jathran loaded a North Korean-flagged tanker with $30 million worth of crude at the Es Sider port. Prime Minister Ali Zeidan ordered the government forces to seize the vessel but after a failed attempt by the latter to do so, the vessel departed for international waters, with its destination unknown. The North Korean flag is often used to conceal the vessel's ownership.

The rebels successful effort to export oil via the rogue tanker prompted Parliament to vote the prime minister out of office on 11 March and heightened fears that the fragile country is at a breaking point. Defence Minister Abdallah al-Thinni was temporarily appointed to replace Mr Zeidan, with a new prime minister slated to be elected by deputies within the next several weeks. Former Prime Minister Zeidan reportedly fled to Europe, underscoring the increasingly dangerous political climate gripping the country.

The latest developments put in further doubt a recovery in Libya's oil production near-term. Rebel militias currently control the major ports of Es Sider, Ras Lanuf and Zueitina. In the western region, the 350 kb/d El Sharara field was shut down on 12 February after an armed group shutdown the pipeline to Zawiya. Production resumed on 10 March after protesters suspended the blockade, with output reaching 200 kb/d by 12 March.

Angolan crude oil output edged up 30 kb/d in February, to 1.68 mb/d but production is still stymied by operational issues plaguing the Greater Plutonio floating production, storage and offloading facility. Apparently, a marlin fish punctured a hose, which connects the Greater Plutonio floating production storage and offloading facility FPSO to an oil tanker. Operator BP declared force majeure on Plutonio for five days before lifting it on 18 February. Production is expected to fall to more than two and a half-year lows again in March due to extensive maintenance scheduled at the 180 kb/d Greater Plutonio fields.



Crude oil production from Nigeria rose by 60 kb/d to 1.98 mb/d in February. Nonetheless, theft and sabotage continue to undermine the country's output. Once again, operator Shell was forced to close on 22 February the Nembe Creek Trunk oil pipeline to stop leakage caused by theft. The pipeline carries benchmark Bonny.

Venezuelan oil production declined by around 40 kb/d, to 2.42 mb/d, in February. The worsening political situation in Caracas has so far had a negligible impact on oil markets, not least because the country's oil production, refineries and export facilities are situated far from the city centres where the protests are taking place. Reports suggest that Venezuela's oil operations are functioning normally. Protests by disgruntled civilians and opposition groups against Venezuela's chronic economic woes and escalating crime rate and an ever-growing shortage of food and other basic staples have led to widespread calls for the resignation of President Maduro.

The government, however, appears to have remained firmly in control of the major blocs of power, including the military, Congress and the oil sector (state-owned Petroleos de Venezuela, or PDVSA, is mostly staffed by regime loyalists since a 2002 general strike). For the time being, analysts and observers agree that the current level of unrest is unlikely to lead to regime change in Venezuela in the short term.

Non-OPEC Overview

Non-OPEC oil production is estimated to have risen by about 100 kb/d to 55.9 mb/d in February, led by higher output in North America. Growth in North American supplies was somewhat lower than the recent average, as adverse weather hampered production in the US midcontinent and Texas. Overall, US production rose about 65 kb/d m-o-m, while Canada posted an increase of 75 kb/d in February. Outside of North America, non-OPEC output growth was scarce, and a meaningful rise occurred only in Colombia.

Although non-OPEC production grew overall, a number of countries saw declines in February due to adverse weather, technical problems and civil unrest. Output in Russia fell slightly as weather-related production problems persisted into February. Outages at offshore facilities in Brazil's Campos Basin affected February supply, compounding the effect of seasonal biofuels production declines. Pipeline attacks in Yemen and unrest in South Sudan led to lower output for the month. The breakdown in negotiations between the South Sudanese factions in late February led to the evacuation of foreign workers from the oilfields in the Malakal area.



Non-OPEC output is expected to grow by 1.7 mb/d y-o-y in 2014, with relentless growth in US and Canadian supplies leading the increase. Production is also forecast to grow in Russia, China and Brazil. Since last month, our overall non-OPEC supply estimates for 2013 and 2014 have remained relatively unchanged. Minor downward revisions to US and UK output were offset by slight increases in production in Canada, Russia, and other FSU. 

OECD

North America

US - February preliminary, Alaska actual, others estimated: In December, production totalled 10.8 mb/d, of which 7.9 mb/d was crude oil and 2.6 mb/d was NGL output. The final December 2013 data showed that production stood nearly 1 mb/d higher than one year prior, but that it declined slightly month-on-month (m-o-m), undoubtedly due to freezing weather in the Gulf of Mexico and North Dakota. Overall US output averaged 10.3 mb/d in 2013. This figure reflects final production data for December, which were revised downwards by about 200 kb/d from last month's Report as preliminary estimates based on weekly numbers were too high. Production of LTO in North Dakota's Bakken formation averaged 863 kb/d in December, down about 50 kb/d m-o-m. Bakken production averaged 794 kb/d in 2013 and is expected to reach just shy of 1 mb/d in 2014. 

US crude oil production stood at 8.1 mb/d in February, according to preliminary data, roughly in line with expectations. Total US production rose to about 11.1 mb/d in February and the 2014 output is projected to average 11.4 mb/d, an increase of more than 1 mb/d y-o-y.

Gulf of Mexico production increased slightly in February, where Shell started production from the Olympus platform at its Mars B development six months ahead of schedule. The new platform's design capacity is 100 kb/d and it is the company's largest deep-water platform in the Gulf. Shell expects that the platform will help extend the Mars basin development to 2050 or beyond. In February, North Dakota's state regulators approved new safety and environmental requirements, including provisions aimed at reducing natural gas flaring at the Bakken formation. These requirements will be imposed on new drilling permits and are expected to result in limiting gas flaring during well completion and well workovers.



The continued development of LTO is expected to drive projected US growth in 2014. Several companies have announced expansion of their operations in the near future. Pioneer Natural Resources thus plans to more than double the number of horizontal rigs in West Texas directed at the Spraberry/Wolfcamp formations. Non-LTO production will also see a boost in investment. BP, the operator of the Prudhoe Bay field, announced that it will raise its investment in Alaska by 25% in 2014, including activities designed to increase production. According to BP, higher investment was incentivised by recently-enacted oil tax reforms in Alaska, which provide more attractive terms to oil companies.

Meanwhile, in response to recent incidents involving crude oil transported by rail, the US Department of Transportation (DOT) issued an emergency order in late February, requiring all shippers of Bakken crude oil to test and properly classify loaded cargoes, in essence, necessitating that all Bakken crude be transported on DOT-111 tank cars setting this type of rail car as the new minimum standard. Although this order likely will not materially affect current flows of Bakken crude via rail as the order bans only about 3% of the rail fleet that handles the crude, it imposes new rules on labelling, spill response plans, and first responder notification. DOT likely will issue a more comprehensive rule on crude-by-rail transport by the end of 2014.

Canada - December actual: Oil production rose to an all-time high of 4.2 mb/d in December. Although production remained relatively flat m-o-m in January, preliminary data indicate that it rose another 75 kb/d in February, to approximately 4.3 mb/d, thanks mostly to higher bitumen, NGL, and light conventional output, which rose about 100 kb/d combined. In contrast, total synthetic crude production fell by 20 kb/d m-o-m. Overall Canadian production in 2014 is expected to reach 4.2 mb/d, rising by about 220 kb/d y-o-y.

The continued increase in Canada's production and the need for southward transportation capacity are prompting pipeline companies to mull various projects, pending the still-unsettled outcome of Keystone XL's protracted approval process. In order to avoid another lengthy permitting process and the need for Presidential approval, Enbridge is considering a complete replacement of its existing Line 3 between Alberta and Wisconsin. The plan would increase the pipeline's capacity to 2.85 mb/d, from 390 kb/d currently. Enbridge is also in the midst of the approval process for its Alberta Clipper pipeline, the cross-border capacity of which it seeks to increase to 570 kb/d from 450 kb/d.

Canada's National Energy Board in February approved Enbridge's Line 9B reversal and expansion project, which will run from Westover, Ontario to refineries in Montreal, Quebec, where approximately 20% of Canada's refining capacity is located. Currently, the pipeline flows from Quebec to Ontario at 60 kb/d. The proposed expansion would increase the pipeline's capacity to 300 kb/d.

Meanwhile, TransCanada reported delivering the first batch of heavy Canadian crude in late February from Alberta to Texas via its 700 kb/d Gulf Coast pipeline, which runs between Cushing, Oklahoma and Nederland, Texas. The Alberta crude was delivered via the existing Keystone pipeline to Cushing prior to making the rest of the journey on the new line. Gulf Coast pipeline was initially planned as the southern leg of an integrated system with the Keystone XL line. TransCanada expects that shipments on the line will average 525 kb/d in 2014. This line has been a proximate cause of a decline in stocks in Cushing, Oklahoma and build in the US Gulf Coast, affecting price differentials. For more on this, see the sections on Stocks and Prices.



Mexico - January actual: Mexico's oil production remained relatively flat in January compared with the month prior and preliminary data for February show that total output rose by about 30 kb/d to 2.9 mb/d. Of the 2.9 mb/d total, approximately 2.5 mb/d was crude and about 380 kb/d NGLs. In January, total liquids production fell short of last year's by approximately 65 kb/d but we expect total 2014 production to only be about 10 kb/d lower than 2013 output. The Ku-Maloop-Zaap (KMZ) and Cantarell fields produced approximately 860 kb/d and 430 kb/d, respectively in January. KMZ's production is expected to average around this level for the year, while Cantarell's  output is forecast at about 420 kb/d in 2014.

North Sea

Norway - December actual, January preliminary: Norway's total liquids production averaged 1.9 mb/d in December, increasing about 10 kb/d m-o-m. Preliminary data published by the Norwegian Petroleum Directorate (NPD) indicated a further increase of approximately 30 kb/d in January, as the Heidrun, Norne and Skarv fields returned to normal operating levels. However, Draugen, Ekofisk, Gullfaks and Sklud saw reduced production rates in January due to various technical problems. The Haltenbanken system, which includes Åsgard, Draugen, Morvin and Tyrihans fields produced about 330 kb/d in January. Norway's total output is expected to average 1.8 mb/d in 2014, only slightly higher than the average production of 2013.



UK - November actual, December preliminary:  Average production in November stood at 830 kb/d, up by about 50 kb/d m-o-m, as Buzzard and other UK fields saw a rebound in production. December preliminary data show that UK production rose to 928 kb/d, mainly driven by an increase in output at the Forties System. Including the latest data, UK's total 2013 production is estimated to have averaged 865 kb/d, a decline of about 75 kb/d y-o-y, and we expect total production to decline by a further 85 kb/d in 2014.

Following a very tough start to 2014 for the Buzzard field, the UK's largest, output finally returned to normal levels in February. However, a newly released maintenance schedule points at more severe outages in both length and magnitude than originally expected for 2014. Buzzard is expected to undergo up to nine weeks of maintenance in 2014. Starting in late July, the field will be offline for 25 days of planned maintenance, which coincides with the 14-day shutdown of the Forties Pipeline system. The 25-day shut-down of Buzzard is in addition to the maintenance planned for May and September. Given the new timeframe for the July/August maintenance, we expect that Buzzard output will fall to 165 kb/d in 2014. The North Sea Enoch field restart was delayed to 2Q14, following extensive maintenance work and an extended outage. The field was shut down in early 2012 due to mechanical issues related to subsea equipment. While repairs took place through 2012 and 2013, the field cannot resume production until pipeline connection and inspections have been completed.

Preliminary data for 1Q14 indicate that production of Brent-Forties-Oseberg-Ekofisk (BFOE) rose by about 45 kb/d compared with the previous quarter. However, production of the stream underlying the North Sea Dated price remained flat at 949 kb/d, about 60 kb/d lower than loadings, as some cargoes that were scheduled for January actually loaded in February. The BFOE March schedule indicates a decrease in loadings of about 40 kb/d, with production remaining at roughly the same level as in February.

Non-OECD

Latin America

Argentina - December actual: Oil production in Argentina totalled 620 kb/d in December, falling approximately 15 kb/d m-o-m. Crude output averaged approximately 520 kb/d with the remainder produced as NGLs. Preliminary data for January indicate that production remained relatively flat for the month. The country's total oil production averaged 628 kb/d in 2013, a decrease of about 30 kb/d y-o-y, and we expect that Argentina's production will decrease by about another 10 kb/d in 2014.

Argentina's YPF announced that it added 284 million barrels of oil equivalent to its proved reserves in 2013, the company's best reserve replacement in more than a decade. The reserves are about evenly divided between liquids (crude oil, condensate, and NGLs) and natural gas. The reserve additions occurred amid development of the country's unconventional oil and gas resources in the Vaca Muerta shale play, located in the Neuquen Basin. Possibly paving the way to further the development of the Vaca Muerta shale play, Argentina's government, which expropriated the majority stake in YPF from Repsol in 2012, finally reached a compensation agreement with the company. Under the agreement, Repsol will receive a package of dollar-denominated government bonds and sovereign debt valued at approximately $4.76 billion; in exchange, it will forego any legal claims against YPF. In March 2014, YPF contracted for 10 new rigs to work the Vaca Muerta play, with deliveries over the next few quarters.



Brazil - January actual:  Brazil's total output fell by about 50 kb/d in January, mainly as a result of decreased ethanol production, although crude oil also fell during the month. Output totalled 2.2 mb/d in January, approximately unchanged from prior-year levels. Preliminary data for February indicate that production fell by another 70 kb/d to 2.1 mb/d. Two shut-in offshore units in the Campos basin, the Marlim field's P-20 and FPSO Brasil, likely affected the January and February output. The Marlim field P-20 platform was producing 22 kb/d prior to its shut-in; Petrobras announced that it will return to production before the end of 1Q14. The P-20 platform was shut-in to repair fire damage. The FPSO Brazil is being decommissioned, resulting in a decrease of 29 kb/d of oil production in January. However, the wells that were connected to the FPSO are being connected to platforms at the Roncador field and the shut-in production was expected to come online during March.

Petrobras' full-year 2013 output fell for the second year in a row due to delays in production from new units in the Campos basin and challenges related to the installation of riser buoy systems at two of its pre-salt fields. The production delays in 2013 in the Campos basin occurred at the Roncador, Parque das Baleias and Papa-Terra fields. Meanwhile, its new five-year investment plan, released in late February, reduced planned expenditures by $16 billion to a total investment of $221 billion between 2014 and 2018. The decrease in planned investment is due to rapidly expanding debt and lower company profits, as noted in the October 2013 Report. Increased domestic demand for gasoline produced by Petrobras and sold at administered prices well below market value has taken a deep bite out of its profits, adding to its debt and prompting it to revise its investment and strategic plan.

Asia

China - January preliminary:  Total oil production in China rose slightly in January and February, averaging approximately 4.3 mb/d in February. Overall, we expect that production in 2014 will reach 4.3 mb/d as the Peng Lai field continues to recover to its pre shut-in level and several other fields continue to ramp up production. The ConocoPhillips-operated Peng Lai field offshore China, which consists of the main Peng Lai 19-3 field, 19-9 and 26-6, produced a total of about 80 kb/d in 2013. The field was producing approximately 120 kb/d before a leak of oil and drilling mud shut in Peng Lai 19-3 in mid-2011. Although the Chinese government has approved the resumption of operations, the field has yet to reach its previous production level.

Former Soviet Union

Russia - January actual, February preliminary:  Russia's total oil production in January remained above the 11 mb/d mark, although very slight production declines were apparent in both January and February. Extreme weather that affected production in January continued into the first two weeks of February, with severe temperatures causing power outages and drilling problems. For the second month in a row, Rosneft's legacy oil fields saw significant declines, resulting in a decrease of the company's output of 2% m-o-m to 3.7 mb/d in February. This large decrease in production occurred despite increases in output from its newer fields. Although Russia's total liquids production lags behind that of the US, it produced the highest volume of crude oil of any OPEC or non-OPEC producers.  

Given the fairly large decline rates in its legacy fields, Rosneft plans to invest approximately $83 billion over the next decade in new East Siberian upstream projects in an effort to increase production to more than 1 mb/d by 2025. The bulk of the spending will be aimed at a number of fields including the Vankorskoye, Suzunskoye, Tagulskoye and Lodochnoye fields. In 2013, Rosneft produced less than 600 kb/d in East Siberia, out of a total of about 3 mb/d in Russia. Lukoil, too, is attempting to boost domestic production. The company has already commenced drilling in its recently-acquired Western Siberia Imilorskoye field, six months ahead of the original schedule, with pipelines, roads, and a bridge already constructed to facilitate drilling and production. The field is estimated to have 1.4 billion barrels of recoverable reserves and is one of the very few undeveloped fields in Western Siberia. Lukoil expects to produce first oil at the field sometime in 2015.

Ukraine's Oil Transit Role in Focus

The recent events in Ukraine have raised concerns about the risks of disruption in Russian energy exports, especially given its importance as a transit corridor to Europe. Ukraine's vital role as a transit country for Russian gas exports already came to the fore when Russia briefly halted gas exports through Ukraine in 2006 and again in 2009. Russia is as important an oil exporter to Europe (of both crude and refined products) as it is a gas exporter, but unlike for gas, only a relatively small portion of its overall oil exports to Europe transit through Ukraine. Crude exports through Ukraine loom large, however, in the energy supply of three European countries: the Slovak Republic, Hungary and the Czech Republic. Ukraine itself has also historically relied on Russia for much of its imports of refined products. Yet both for Ukraine and for the Slovak Republic, Hungary and the Czech Republic, alternative supply sources can be found.

To date, there has been no disruption in physical oil and gas supplies to or through Ukraine. Europe imports natural gas from Russia through a number of different routes, but gas flows through Ukraine to Europe totalled about 82 billion cubic metres (bcm) in 2013, roughly half of all Russian flows to Europe. Alternative supplies and routes to replace the 82 bcm of gas may be limited, depending on available pipeline capacity and timing of the disruption.

Ukraine itself is very dependent on Russian oil. In 2013, Ukraine produced an average of about 65 kb/d of crude oil and petroleum liquids, and consumed 280 kb/d. Most of Ukraine's consumption was met by petroleum products from Russia, estimated at about 190 kb/d, but petroleum products also came in from Poland, Greece, Italy, and Hungary (for a total of about 20 kb/d). Overall, only about 25% of Ukraine's consumption was met by domestically refined products, as only a fraction of Ukraine's refining capacity was operational in 2013 (see Ukraine's Refinery Hopes Fall Victim of Crisis in the Refining section).

Beyond Ukraine, other countries rely to varying degrees on Russian oil that shipped via the Druzhba pipeline. Of the more than 3 mb/d of crude exported by Russia to Europe in 2013, about 300 kb/d travelled via the southern spur of the Druzhba pipeline, which runs through northern Ukraine from near the town of Ovruch to Uzhgorod. Crude volumes shipped through Ukraine via that 400 kb/d-capacity pipeline spur have declined in 2012 and 2013 by over 100 kb/d as Russia's deliveries of crude oil to Baltic ports increased. Due in part to a lack of cost-effective alternatives for land-locked states along the pipeline route, further declines seemed unlikely prior to the recent events in Ukraine. The Slovak Republic imports 100% of its crude requirements via the Druzhba, while Russian crudes account for 94% and 65% of imports to Hungary and the Czech Republic, respectively. In addition, Bosnia reportedly imports a small amount of crude via the Druzhba spur.

Alternative supply routes exist in the event of a disruption to the southern leg of the Druzhba line. Hungary can potentially import crude via the 200 kb/d Adria pipeline running to the Croatian port of Omisalj. There is an onward link from Hungary to the Bratislava refinery in Slovakia. Reports suggest that this 90 kb/d line remains closed but has been maintained in a serviceable condition. Czech refineries are also fed by the  Ingolstadt-Kralupy-Litvonov (IKL) pipeline which permits them to import a maximum of 180 kb/d via Germany.

While flows through the southern Druzhba have remained stable, crude volumes shipped via Ukrainian ports have fallen from an average 300 kb/d in 2009 to 30 kb/d in 2013. Shipments of Russian crudes have dropped accordingly following Moscow's policy of diverting oil exports away from transit states while those from Kazakhstan have declined in light of the reportedly unfavourable economics of Ukrainian ports compared to other outlets. Data indicate that Odessa is now the only Black Sea port routinely used for crude exports with cargoes sent via the Crimean port of Feodosiya drying up in April 2013.

Similarly, volumes of refined products delivered via Ukrainian terminals have also been cut from an average of 120 kb/d in 2009 to 50 kb/d in 2013 with the bulk of these products being residual fuel oil. The two main ports used for exports are Odessa and Sevastopol, the latter of which is in Crimea. Moreover, a portion of the fuel oil delivered to the Odessa terminal in 4Q13 was likely domestically produced by the Odessa refinery, although reports suggest that crude processing at this refinery has now halted due to a payment dispute over crude supplies. Meanwhile, the refinery has been transferred to VTB bank as the previous owner was unable to repay the debts.

Kazakhstan - January actual, February preliminary:  Total liquids production in January fell by about 40 kb/d to 1.7 mb/d, driven by declines in crude oil production. Preliminary data for February indicate that Kazakhstan's production bounced back by about 30 kb/d m-o-m. In January, crude oil and NGL output declined by 40 kb/d (to 806 kb/d) and by 15 kb/d (to 325 kb/d), respectively. Kazakhstan's total production is expected to average 1.7 mb/d in 2014, about 40 kb/d higher y-o-y, with Kashagan contributing marginal volumes to the total production and only in the last quarter of the year.

Kazakhstan's oil minister recently revealed that welding problems might have caused the pipeline leaks that forced Kashagan to shut down only weeks after start-up. However, no official announcement has been made related to the possible restart date of the field's production although some suggest that the resolution to the pipeline leak may take another year. Meanwhile, the field partners face more bad news: the Environment and Water Resources Ministry in a statement said that the consortium may have to pay $727 million for illegal gas flaring that occurred in the aftermath of the field's shutdown in September and October 2013. On 12 March, the Minister of Economy and Budget Planning announced that Kazakhstan's crude export duties will increase from $60/ton to $80/ton. The new rates will take effect on 1 April.

FSU net exports increased by 220 kb/d to 9.2 mb/d in January. A 180 kb/d hike in product deliveries, driven by gasoil, took the lion's share of the rise in net exports. Crude shipments rose by 60 kb/d, led by flows through the Transneft network, which rose by 80 kb/d. In contrast, cargoes shipped from Baltic and Black Sea ports contracted by a further 30 kb/d and 60 kb/d, respectively. The latest data thus appear to show an ongoing shift in export direction, with the extra oil being shipped almost exclusively eastwards. Volumes transported via Kozmino rose by 70 kb/d m-o-m to over 500 kb/d. Meanwhile, following the start-up of new term contracts between Rosneft and Chinese refiners, total exports to China via the Transneft network, hit a record 470 kb/d, of which about 320 kb/d was shipped through the ESPO spur.



Russia's Oil Trade with Europe

OECD Europe imports of Russian crude oil in 2013 averaged about 3.05 mb/d, accounting for approximately 36% of total net crude oil imports into the region. Although OECD Europe receives a large share of its imports from Russia, the importance of the European market for Russia is also very high, as 71% of the country's crude oil exports and 36% of petroleum product exports were destined for OECD Europe in 2013. Although OECD Europe exports large amounts of products as well, particularly gasoline, and is, hence, only a relatively small overall net product importer (about 530 kb/d in 2013), gasoil imports from Russia are quite important to the European market. Of total net gasoil imports of about 620 kb/d, some 69% on a net basis were from Russia. Overall, oil from Russia, whether crude, products, or other feedstocks and NGLs, represented about 44% of net oil imports into OECD Europe in 2013.

Import dependence from Russia for crude oil is higher on an absolute basis than for products, although Russia's share of net product imports is higher. Overall, net Russian oil imports represented about 32% of OECD European demand in 2013.



In 2013, Russian net crude oil exports to Europe declined by about 7%, or 240 kb/d. Market participants expect further declines ahead. Russian state oil company Rosneft last year tied up a significant proportion of future production in a prepayment deal with China's CNPC, causing additional Russian crude export volumes to head east rather than west (see 'A New Supermajor: How the TNK-BP Acquisition Could Affect Trade Flows' in the April 2013 Report). As noted above, transneft shipments to China have reached record levels of late. In addition, Russia's tax policy is increasingly designed to incentivise product exports at the expense of crude exports, even as Europe's crude import requirements are set to decline on the back of falling domestic demand and reductions in regional refining capacity and throughputs. Nevertheless, Russia and OECD Europe remain closely linked as oil trading partners: on the one hand, Russian crude export volumes to Europe, despite their decline, remain extremely large and Europe continues to rely on Russia for a large share of its crude import needs. On the other hand, falling crude exports to Europe have been largely offset by rising product exports, and the 2013 experience of increased net product exports to Europe can be expected to continue. Net product exports from Russia into OECD Europe grew about 15% in 2013, or by 130 kb/d.



OECD Stocks

Summary

  • OECD total oil inventories dropped counter-seasonally by a further 13.2 mb in January to 2 551 mb, as unusually cold weather in North America steeply drew stocks of heating fuels. The deficit of inventories to the seasonal average expanded to 154 mb, its widest since February 2003, from 97 mb at end-December.
  • Inventories of refined products covered 29.0 days of forward demand at end-January, 0.2 days lower than at end-December.
  • OECD total oil inventories remained about flat in February, based on preliminary data. A 16.6 mb aggregate gain in crude oil, NGLs and feedstocks, centred in OECD Americas, offset a 16.7 mb fall in refined products, also centred in the Americas.
  • On 12 March, the US Department of Energy offered 5 mb of crude from the US Strategic Petroleum Reserve up for sale to test the capabilities of the reserve system infrastructure. Potential buyers had until 14 March to submit bids for the oil, with delivery planned from 1-30 April, the DOE said.


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

OECD total oil inventories dropped by a further 13.2 mb in January, extending their steep 4Q13 losses, and in sharp contrast to the 43.4 mb five-year average build for that month. Stocks ended the month at 2 551 mb. Since the draw was counter-seasonal, the deficit of inventories to the five-year average grew to 154 mb from 97 mb at end-December. This gap is now at its widest since February 2003 with all OECD regions standing in deficit. Moreover, inventories in the OECD Americas sank to a 40 mb deficit from an upwardly revised 2 mb surplus at end-December. The monthly draw in OECD inventories appears even more staggering when considering that restocking has taken place during every January since 2008. However, this year, January was characterised by extreme cold weather in North America that saw refined product inventories there plummet (see Freezing Weather Causes Chaos in US Heating Fuel Markets in Report dated 13 February 2013). All told, OECD American inventories contracted by 26.6 mb in January, while holdings in Europe and Asian Oceania adhered to seasonal patterns; rising by 9.3 mb and 4.1 mb, respectively.

On a product-by-product basis, 'other products' accounted for the bulk of the monthly draw with a dip of 24.4 mb, while middle distillates slipped by 2.0 mb. At end-January, refined products covered 29 days of forward demand, 0.2 days lower than at end-December. Meanwhile, crude inventories fell by a counter-seasonal 5.6 mb, centred in OECD Europe after refinery throughputs rose.



Upon the receipt of revised data, November and December inventories were adjusted upwards by 5.5 mb and 5.6 mb, respectively. The upward revision to December refined products was led by an 8.9 mb adjustment to European middle distillates. 'Other products' were also revised up by 8.8 mb. Both of these adjustments helped to cancel out a 9.2 mb downward revision in 'other oils' concentrated in the OECD Americas. Despite these revisions, the stock draws for 4Q13 and for 2013 as a whole  remain at 1.5 mb and 0.2 mb, respectively, unrevised from last month's Report.

Preliminary data indicate that OECD inventories remained relatively stable in February, inching down by just 0.1 mb. An aggregate 16.6 mb gain in crude oil, NGLS and other feedstocks, centred in OECD Americas, offset a 16.7 mb fall in refined products, also centred in the Americas, where the recent slide in heating fuels was arrested by end-month. All refined product categories drew on the month, notably 'other products' (-4.8 mb) and motor gasoline (-4.4 mb).



Recent OECD Industry Stock Changes

OECD Americas

Commercial oil inventories in OECD Americas drew by 26.6 mb, counter-seasonal to the 14.9 mb five-year average draw for the month. High heating demand, in the wake of extremely cold weather, rapidly depleted inventories of heating fuels, including propane and 10-ppm distillate fuel oil. Consequently, stocks of 'other products' (including propane) plunged by 26.1 mb, as high midcontinent demand combined with strong exports. This draw leaves 'other products' holdings towards the bottom of the five-year range, a remarkable turnaround considering that they sat above the seasonal range at end-3Q13. Middle distillates drew by 11.7 mb on the month to leave inventories below the seasonal range in both absolute and days-of-forward-demand terms. All told, regional refined products fell by a counter-seasonal 30.3 mb to cover 26.8 days of forward demand at end-January, 1.2 days lower than one month earlier. Meanwhile, crude oil stocks inched down by 0.7 mb, compared with their 13.4 mb five-year average build, as regional refinery throughputs remained 600 kb/d above year-ago levels.



Preliminary data from the US Energy Information Administration (EIA) indicate that US industry stocks remained relatively stable during February, increasing by a slight 1.2 mb. As cold weather abated, data indicate stocks of distillate fuel oil and propane reversed their steep draws in the second half of February. Distillate fuel oil posted its first build for some time in the week ending 21 February and propane in the following week. Meanwhile, despite cold weather reportedly tempering driving demand, US gasoline stocks drew by a steep 6.0 mb as net-imports fell below 400 kb/d in February.



Following the recent commissioning of new pipelines from PADD 2 to PADD 3, notably TransCanada's 700 kb/d Gulf Coast pipeline, crude oil inventories at the Cushing, Oklahoma, storage hub have been on a steep downward trajectory throughout February. Stocks at the hub fell by 8.1 mb to 32.1 mb over the course of February to sit close to the seasonal low by end-month. Pipeline capacity out of the Midwest to the Gulf Coast is now estimated at 1.5 mb/d. This drain had supported WTI prices, which have seen their discount to coastal grades such as LLS narrow considerably over February.

Conversely, stocks in PADD 3 rose by 12.3 mb on the month, to 182 mb, despite refinery throughputs there remaining at 7.8 mb/d, approximately 0.7 mb/d above year-earlier levels. According to the most recent EIA working storage survey, commercial crude storage capacity at refineries and tank farms in PADD 3 stood at 273 mb as of September 2013. Current inventory levels thus amount to 66% fill, indicating that there is plenty of scope for these stocks to rise further.

On 12 March, the US DOE offered 5 mb of crude from the US SPR up for sale to test the capabilities of the reserve's infrastructure. The SPR oil is stored in 62 salt caverns located at four sites in Texas and Louisiana. The DOE will release 4 mb from West Hackberry, Louisiana, with the remaining 1 mb coming from Big Hill, Texas. Potential buyers have until 14 March to submit bids for the oil, with delivery planned from 1 -30 April.



OECD Europe

Industrial inventories in OECD Europe rose by 9.3 mb in January, weaker than the 22.1 mb five-year average build for the month. Consequently, the region's deficit versus the five year average level widened to 100 mb from 87 mb one month earlier. Crude oil drew by an unseasonal 5.8 mb after refinery throughputs rose by 100 kb/d. Stocks of refined products built by a seasonal 16.1 mb to cover 38.3 days of forward demand at end-month, 0.5 days above one month earlier. Rising middle distillate inventories (+10.7 mb), as the weather remained unseasonably warm throughout most of Europe, accounted for the lion's share of the refined product build. Nonetheless, German end-user heating oil consumer stocks reportedly drew by 3% to stand at 55% of capacity by early February.



Preliminary data from Euroilstock indicate that inventories rose by a further 1.5 mb in February, counter-seasonal to the 10.7 mb five-year average draw. Increasing crude oil stocks (+2.4 mb) offset a 1.0 mb draw in refined products driven by a 2.0 mb contraction in fuel oil. Meanwhile, motor gasoline and middle distillates rose counter-seasonally by 0.7 mb and 0.4 mb, respectively.

OECD Asia Oceania

Total oil stocks in Asia Oceania rose by a seasonal 4.1 mb over January to leave inventories 14.2 mb in deficit to five-year average levels. Crude oil inched up by a weak 0.9 mb while NGLs and other feedstocks built by a combined 2.1 mb. Refined products increased by a slim 1.1 mb to cover 20.2 days at end-month, 0.9 days above end-December. Product builds were tempered by middle distillates which fell by 1.0 mb despite warmer-than-usual weather.

Preliminary data from the Petroleum Association of Japan (PAJ) indicate that total industry stocks fell by 2.8 mb in February, led by a 4.4 mb drop in refined product stocks, which more than offset a 3.8 mb build in crude. A steep 5.2 mb draw in kerosene pressured refined products lower. Indeed, kerosene stocks now stand below their seasonal range. Reports suggest this was driven by high exports. The draw is somewhat counter-intuitive, given that unseasonably warm weather kept Japanese heating demand exceptionally low for most of the month. These preliminary data remain subject to revision pending the release of official data next month.



Recent Developments in Singapore and China Stocks

Data from China Oil, Gas and Petrochemicals (China OGP) indicate that Chinese commercial crude stocks rose by 8.0 mb in January, largely after imports reached a record 6.7 mb/d. Companies upped purchases from Iran, Oman, Venezuela and Colombia ahead of the Lunar New Year holiday, which this year fell at end-January. Product inventories surged by 18.1 mb, their steepest build since February 2011. Despite relatively high exports, gasoil stocks built by a sharp 14.4 mb while motor gasoline and kerosene rose by 2.9 mb and 0.8 mb, respectively.



Weekly data from International Enterprise pertaining to the land-based storage of refined products in Singapore indicate that inventories rose by 4.2 mb in February and continued to trend close to five-year average levels. Light distillate stocks (including gasoline, reformate, naphtha but excluding gases) accounted for 2.7 mb of the build as they surged to 14.3 mb, the highest since records began in 1998. Meanwhile, middle distillates rose by 1.6 mb as arrivals, notably of Japanese kerosene, remained high, offsetting reportedly buoyant import demand from Malaysia, the Philippines and Vietnam. On the other hand, stocks of residual fuel oil drew by 0.2 mb.



Prices

Summary

  • Oil prices edged higher in February with gains on the NYMEX WTI contract far outpacing ICE Brent futures. WTI front month futures surged above the $100/bbl mark for the first time in five months on exceptionally cold weather, robust refiner demand and a draw in stocks at the Cushing, Oklahoma delivery point for NYMEX crude futures. Brent posted smaller gains month-on-month, with continued outages in Libya and the unfolding crisis in Ukraine providing support. By early March, however, both benchmark crudes eased again, with WTI last trading at $98.20/bbl and Brent at $108/bbl.
  • Fund managers increased net long positions in NYMEX WTI futures to record highs between 28 January and 4 March. Fund managers raised their stake for eight consecutive weeks in line with higher WTI prices. The ratio between long and short hedge fund positions is now well above the 2 to 1 threshold, a level unseen since May 2011. Money managers were bullish on ICE Brent as well, particularly in the last two weeks of February, bringing their long exposure to a five-month high.
  • Most surveyed spot product prices rebounded from January's slump, firming on a monthly average basis in February. Crack spreads were mixed, with European product price increases outstripping gains in crudes. In the US, increases were tempered by the narrowing differential of LLS to Brent and the end of the recent cold-weather spell.
  • Rates for crude carriers experienced a poor month with refinery turnarounds, few weather delays and plentiful vessel supply capping gains. Meanwhile, product tanker markets experienced a mixed month with rates on trades East of Suez firming gently while Atlantic Basin markets remained volatile.


Market Overview

Oil prices edged higher in February with gains on the NYMEX WTI contract far outpacing ICE Brent futures. WTI front month futures surged above the $100/bbl mark for the first time in five months on exceptionally cold weather, strong refiner demand and a drawdown in stocks at the Cushing, Oklahoma delivery point for NYMEX. WTI rose $5.82/bbl to an average $100.68/bbl. WTI prices trended lower again in early March ahead of scheduled refinery turnarounds, last trading at $98.25/bbl, or $2.45/bbl below the February average. ICE Brent futures posted smaller gains of $1.72/bbl to $108.83/bbl with continued outages in Libya and the unfolding crisis in Ukraine providing support. By early March, Brent, like WTI, eased again, last trading at $108.25/bbl.

Despite the persistent supply outages and volatile geopolitical developments, Brent futures prices have remained remarkably stable for the past eight months, trading in a $3.80/bbl range. A sharp increase in US crude production has proved a critical buffer against reduced Libyan output, as lighter grades typically earmarked for the US, such as Nigerian grades, are backed out and diverted to Europe and China. Libyan output plummeted on a sharp escalation in tensions between militias and the central government in Tripoli, pushing production down to just 360 kb/d in February from last April's high of 1.42 mb/d, or a cumulative supply loss of almost 250 million barrels over the period. In addition, in February Iraq boosted exports by around 500 kb/d to the highest levels since 1979, which also muted the impact of lost Libyan supplies (see OPEC Supply, 'Stars Align to Propel Iraqi Crude Production to 35-Year Highs').



The disparate gains in WTI and Brent saw the price spread plummet to around $7.15/bbl in early March compared with an average of $8.15/bbl in February and $12.25/bbl in January. An ongoing increase in pipeline and railroad flows within North America, and especially a January ramp up in TransCanada's 700 kb/d Gulf Coast pipeline, has led to a steady drawdown in Cushing stocks and greatly reduced downward pressure on the landlocked crude. Inventories at the Cushing storage hub fell by 8.1 mb to 32.1 mb over the course of February, to sit close to the seasonal low by the end of the month.

The stronger price structure for US crudes also led to the WTI M1-M2 time spread moving out of contango and into backwardation in late January. The spread strengthened further in February, to $0.55/bbl, compared with -$0.23/bbl in January. By contrast, in line with the weaker Brent price gains, the Brent M1-M2 price spread narrowed to around $0.45/bbl in February compared with $0.60/bbl in January.



Futures Markets

Activity Levels

Managed money increased net long positions in NYMEX WTI futures to all time highs between 28 January and 4 March. Fund managers raised their stake for eight consecutive weeks in line with higher WTI prices. The ratio between long and short hedge funds' positions is now well above the 2 to 1 threshold, a level unseen since May 2011. Money managers were bullish on ICE Brent as well, particularly in the last two weeks of February, bringing their long exposure to a five-month high.

In terms of outstanding contracts, both WTI and Brent fell below 1% year on year, but both remained up about 3% on the month, leaving the spread between the two benchmarks unchanged. Trading volumes kept trending lower in tandem on the year, alternating for the lead for seven consecutive months.



On the product side, hedge funds increased their long stance in both RBOB gasoline and NYMEX heating oil. Particularly in heating oil, long managed-money positions consistently grew throughout the period, to settle to levels higher than during the January freeze, on the back of rebounding price markers. Funds also raised their exposure to ICE gasoil, though less aggressively.







Financial Regulation

Mandated trading of swaps contracts on electronic exchanges, called swaps execution facilities (SEFs), started on 15 February. A key component of the Dodd-Frank reform, the rule for the moment encompasses certain interest-rate swaps. The US Commodity Futures Trading Commission (CFTC) granted no-action letters and exemptions in order to phase in the transition. Two days before deadline, the CFTC granted no-action to US entities trading on European platforms not registered as SEFs, provided some minimum requirements were met. US banks had previously sued the CFTC in December 2013, claiming that the US agency had no jurisdiction over US entities' business overseas.

Meanwhile, a vote on the EU benchmark regulation (formally 'Indices used as benchmarks in financial instruments and financial contracts') was postponed until the EU Parliament elections in May. The vote would likely not take place until new European Commissioners are appointed after the end of the current term on 31 October.

The European Securities and Markets Authority (ESMA) has sent a letter to the European Commission asking them to clarify the definition of physically-settled commodity forward. ESMA pointed out how different definitions across EU Member States would lead national authorities not to implement the related provisions in the European market infrastructure regulation (EMIR).

Spot Crude Oil Prices

Spot prices for benchmark crudes posted uneven gains in February, with WTI rising by 6.2% to an average $100.72/bbl on blustery winter weather, exceptionally strong refiner demand and new pipeline capacity to evacuate crude from the landlocked Cushing, Oklahoma storage hub to the US Gulf Coast refining centre. By contrast, North Sea Brent was up by a meagre 0.6% to $108.84/bbl, with the escalating supply outages in Libya and the Russia-Ukraine crisis in the second half of February offsetting early month weakness. Spot prices for Dubai were up about $1/bbl to $105/bbl, with support coming from healthy demand for heavier grades in Asia, especially from China.



The relative strength of crude prices in February was expected to ease on weaker demand going into the spring refinery turnaround season, with global refinery throughputs forecast to plummet by 2.1 mb/d to a seasonal low of 74.8 mb/d in April from January levels (see Refining).

The discount of Dubai crude to Brent narrowed in February on more robust demand in Asia for heavier, sour grades, with the price spread between the two narrowing to $3.84/bbl in February compared with around $4.15/bbl in January.



In Europe, the Brent-Urals price spread in the Mediterranean was largely unchanged month-on-month at around $0.80/bbl, with the continued loss of Libyan crude supplies already built into the differential. That compares with a narrower -$0.02/bbl in December when Libyan supplies were on the rise.

US crude oil markets went from strength to strength in February due to a combination of robust domestic refinery throughputs and continued cold weather across the Midwest and Atlantic coast seaboard. US refinery runs have eased seasonally but are still almost 1 mb/d above year-ago levels in February. Increased flows through the new 700 kb/d Gulf Coast pipeline also lifted WTI prices previously under pressure in the US Midcontinent. The evacuation of crude oil from the Midcontinent to the Gulf Coast refining centre that has supported WTI prices has also led to a narrowing of its discount to other domestic grades used at the regional refining hub. The WTI-LLS price spread contracted by $2.25/bbl over February, to an average of around -$5.50/bbl in February compared with -$7.75/bbl in January.



The price discount for Western Canadian Select (WCS) compared with WTI deepened again in February ahead of refinery turnarounds after strengthening in January on robust demand, when it fell below $20/bbl for the first time in more than six months. The WCS-WTI price differential widened in February to just under $24/bbl compared with $19.05/bbl in January, $26.30/bbl in December and $34.25/bbl in November. The ongoing expansion of capacity at BP's 405 kb/d Whiting, Indiana, refinery may help narrow the price spread again. The plant is currently running at 350 kb/d, which includes 160 kb/d of Canadian heavy oil. BP plans to further increase processing of Canadian heavy oil to 280 kb/d over the next several months, which is expected to lend further support the grade.



Spot Product Prices

Surveyed spot product prices rebounded from January's slump by firming on a monthly average basis in February. However, naphtha markets continued to soften as demand from the Asian petrochemical sector weakened. Competing feedstock LPG remains a significantly cheaper option for Asian petrochemical manufacturers. This also decreased the demand for European product to be shipped eastwards. Elsewhere, high-sulphur fuel oil (HSFO) prices in Singapore continued their downwards trend amid comfortable stocks as bunker fuel demand reportedly remained low.

Crack spreads were mixed on a regional basis, with European product price increases outstripping gains in crudes while in the US increases were tempered by the narrowing differential of LLS to Brent and the end of the recent cold weather spell. Meanwhile, in Singapore, cracks were negatively affected by the strength of Dubai as the demand for sour crudes remained high while spot product price increases were tempered in the face of relatively weak seasonal demand.



Gasoline cracks performed well across all surveyed markets, especially in the US Gulf, where the super unleaded crack surged by $6.60/bbl on average following a 6 mb fall in US inventories. As LLS weakened and a further stock draw sent spot gasoline prices surging, the crack exceeded $25/bbl by early-March, its highest level since summer 2013. In Europe, gasoline cracks rose by $2.60/bbl on average with support coming from expectations that upcoming US refinery maintenance would open up an arbitrage opportunity. In Singapore, the $0.90/bbl increase was tempered by reportedly healthy supplies, notably, record-high Singapore light distillate stocks.

Atlantic Basin diesel markets returned to normality in February. As cold weather and 10-ppm distillate heating oil prices eased, the arbitrage opportunity to move European and FSU product to the US closed and the front end of the NYMEX heating oil forward price curve retreated sharply over the course of the month. Although PADD 1 distillate stocks remain seasonally low, reports suggest that a number of unsold 10-ppm diesel cargoes moored in NY Harbour may sail back to Northwest Europe if buyers cannot be found. The recent high import volumes have weighed heavy on the USGC diesel crack, which weakened by $0.52/bbl over February.



Jet kerosene cracks performed poorly in Europe and the US over February as slow aviation fuel demand and the steep backwardation in ICE gasoil futures tempered buying. Asian kerosene markets were pressured lower by reportedly high Japanese exports and unseasonably warm weather across Asia, curbing heating demand. Nonetheless, by the end of the month Japanese heating demand had risen to year-ago levels as cold weather finally arrived, with the Singapore kerosene crack improving by a slim $0.20/bbl on average over January.



The bottom of the barrel saw diverging trends for low-sulphur fuel oil (LSFO) and HSFO cracks, with the latter weakening across the board on weak bunker demand in Asia and low import demand from US refiners. Meanwhile, European refiners running Brent benefitted from surging LSFO spot prices following strong import demand from US utilities and high demand from other regional refiners using it as a straight-run feedstock. As such European LSFO cracks rose by $5.60/bbl on average.



Freight



Rates for crude carriers experienced a poor month with refinery turnarounds, relatively few weather delays and plentiful vessel supply capping earlier gains. Notably, the benchmark VLCC Middle East Gulf - Asia route experienced a choppy month. Following an uptick in demand for Middle Eastern sour grades from Asian refiners, the rate surged to a high of $16.80/mt in mid-month. However, demand for tankers waned ahead of Asian refinery turnarounds in March, consequently tonnage lists lengthened and rates plummeted back to $11/mt by early-March. Suezmax rates fared even worse as they continued their steep descent from lofty highs posted in January. By mid-month, the West Africa - US Gulf Coast rate had bottomed out at close to $12/mt. Demand for West African grades soon picked up and the rate recovered somewhat to $15/mt by early-March, $3/mt higher than year-earlier levels. Northwest European tanker markets retreated back to seasonal norms in early-February as a lack of weather delays, seasonally low Russian exports from Baltic ports and an oversupply of tankers in the region kept a lid on gains.

Product tanker markets experienced a mixed month, with rates on trades East of Suez firming gently while Atlantic Basin markets remained volatile. After initially weakening early-month following slow demand for transatlantic shipments, the UK - US Atlantic Coast route recovered mid-month onwards as US gasoline imports picked up ahead of US refinery maintenance and following strong draws in US stockpiles. At the time of writing, rates stood at over $22/mt, $10/mt higher than their mid-month nadir. In the East, rates gently firmed over the month. The Singapore - Japan trade gained some momentum over February as, despite reportedly lacklustre fixings, the tonnage pool remained tight, which pushed rates to over $15/mt at the time of writing. Meanwhile, rates on the long-range Middle East Gulf - Japan trade remained buoyant following firm demand which helped to keep tonnage relatively tight.

Refining

Summary

  • Global refinery crude throughput estimates for 1Q14 are largely unchanged from last month's report, at 76.6 mb/d, as weaker than expected activity in China was mostly offset by higher US and Saudi Arabian throughputs. Refinery activity is set to fall through 1Q14 and 2Q14, hitting a seasonal low of 74.8 mb/d in April when maintenance in Asia, the FSU, the US and, to a lesser extent, Europe coincide to curb activity. In all, global crude runs are forecast to average 75.9 mb/d in 2Q14.
  • After contracting by 0.1 mb/d year-on-year (y-o-y) in 4Q13, global refinery crude throughputs look set to expand by 1 mb/d in 1Q14, when robust growth from the US, the Middle East and Russia is expected to offset contraction in Europe and OECD and non-OECD Asia. African runs also inch marginally higher. For 2Q14, global throughputs are projected at around 75.9 mb/d, up around 1 mb/d year-on-year.
  • OECD crude throughputs declined by 0.6 mb/d in January, to average 36.6 mb/d, as refinery activity in the OECD Americas retreated from end-2013 highs. Throughputs in Europe and Asia Oceania were largely unchanged. Total OECD throughputs averaged 0.1 mb/d more than a year earlier, as a 600 kb/d yearly gain in the Americas offset structural declines in Europe and the Pacific.
  • Refinery margins improved across Europe and in the US mid-continent during February while the picture was mixed elsewhere. The greatest gains were posted by refiners with access to cheaper, light crudes or by those which were able to take advantage of surging low-sulphur fuel oil (LSFO) cracks. Meanwhile, margins for refiners running sour crudes were tempered by relatively high feedstock prices and muted high-sulphur fuel oil (HSFO) cracks.


Global Refinery Overview

The outlook for global refinery crude runs for 1Q14 is largely unchanged since last month's Report, at 76.6 mb/d. Growth is on track to average 1 mb/d y-o-y, led by the US, the Middle East and Russia. Both OECD and non-OECD Asia look set to contract y-o-y, by a combined 0.4 mb/d, while China is largely unchanged from a year-earlier. Refinery outages and weaker margins have curbed Asian runs in recent months, and a heavy spring maintenance schedule could further constrain activity. Diverging signals are coming from China, however, with two new grassroots refineries commissioned in January and record crude oil imports since December suggesting a strong uptick in crude demand. The most recent data released by the National Statistics Bureau show a 1% y-o-y contraction in Chinese refinery activity over January and February. Company plans point to subdued throughputs also in March.

Despite a slight improvement in European refinery margins through February, structural weakness persists. That said, regional runs have recovered somewhat from the exceptionally weak levels recorded in the second half of 2013, when throughputs contracted by an average 1.0 mb/d, and hit their lowest level in more than 25 years. In contrast, refinery activity in the US continues to surprise on the upside. After reaching eight-year highs in December, when finished-product exports surged to a record-high of 3.3 mb/d, both refinery runs and margins retreated in early 2014. Preliminary data nevertheless show US throughputs gaining an impressive 0.9 mb/d on average over January and February compared with the same time last year. With a lighter than normal maintenance schedule this spring, and continued favourable economics, US throughputs will likely remain robust in coming months.

Refinery runs have also been strong in the Middle East as new capacity ramps up. Saudi Arabian refinery intake surged to record highs in December, and further gains are expected through 2014 and 2015 as the Satorp's new Jubail refinery continues to ramp up production and the 400 kb/d Yanbu refinery is completed towards year-end. Further gains in the Middle East is also set to come from the UAE, with the completion of the 420 kb/d Ruwais plant on track for 4Q14.





Refinery Margins

Refinery margins improved across Europe and in the US Midcontinent during February, while the picture elsewhere was mixed. The greatest gains were posted by refiners with access to cheaper feedstock or those which were able to take advantage of surging European LSFO cracks. An additional burden was felt by refiners running sour crudes as these generally strengthened versus lighter grades while gains in HSFO cracks were muted or even negative.

All surveyed margins in Northwest Europe and the Mediterranean rose in February on the back of firming product prices. Moreover, following surges in gasoline and LSFO cracks, simple refiners running low-sulphur crudes Brent and Es Sider in both regions saw their margins firm to eight-month highs. Indeed, refiners running Brent saw their margins gain month-on-month for the first time since the end of summer 2013. Meanwhile refiners processing Urals suffered from relatively poor cracks for HSFO.



In Singapore, margins were hit by poor cracks across the barrel following reports of low seasonal demand that left the region seemingly awash with product, as evidenced by Singapore stocks surging over the month. Additionally, refiners running Dubai were at a distinct disadvantage compared to those refining Tapis, after Dubai firmed strongly on increasing demand for sour crudes. Indeed, the Tapis cracking margin moved further into positive territory to once again exceed $2/bbl, on a par with year-ago levels.



In the US Midcontinent, refiners saw their margins inch up and remain in strongly positive territory. With the discount of West Canadian Select (WCS) and Bakken crudes to WTI widening, refiners running the latter grade saw their margins firm by only $1/bbl. In comparison, margins for WCS and Bakken rose by $3.40/bbl on average. However, on a monthly average basis, Midcontinent margins remain $10 to $15/bbl below year ago levels. In the US Gulf, the picture was largely determined by sulphur content. Refiners running sour crudes saw their margins fall on the back of rapidly retreating HSFO cracks while those running sweet crudes such as LLS saw their margins firm, driven by rising cracks at the very top of the barrel.

OECD Refinery Throughput

OECD refinery crude inputs declined by 570 kb/d in January, to average 36.6 mb/d, on sharply lower US throughputs. Refinery crude intake in the OECD Americas fell by 680 kb/d in the month to 18.4 mb/d, from 19.1 mb/d at end-2013. Refinery operating levels in Europe and Asia Oceania were largely unchanged m-o-m, at 11.2 mb/d and 7.0 mb/d, respectively.

While aggregate OECD crude throughputs were little-changed in January y-o-y, regional contrasts observed since 2012 persisted into early 2014. Despite a monthly dip of nearly 0.7 mb/d, US refiners processed 830 kb/d more crude in January than a year earlier. In contrast, structural declines in OECD Europe and Asia Oceania remained entrenched, nearly offsetting the entire US gains. In all, OECD refinery crude throughputs were up 0.1 mb/d y-o-y.



OECD crude throughputs are projected to average 36.5 mb/d in 1Q14, largely unchanged from a year earlier and from last month's Report. North American refinery crude intake looks set to rise by 0.5 mb/d y-o-y, while OECD Europe contracts by 0.3 mb/d and OECD Asia Oceania by 0.2 mb/d. In 2Q14, OECD refinery runs are forecast to fall seasonally, to 36.2 mb/d, as spring turnarounds gather pace, in particular in OECD Asia Oceania. Also compared to a year earlier, OECD crude runs are expected to fall back in 2Q14, as gains in North America abate from recent highs while decline in other regions continue. In all, OECD crude runs are forecast to decline by 215 kb/d year-on-year in 2Q14, to 36.2 mb/d.



North American refinery crude intake fell 680 kb/d in January on the back of lower US throughputs. US refiners scaled back utilisation rates in early 2014, after hitting eight-year highs leading to record product exports at end-2013. US finished product exports averaged a record 3.3 mb/d in December, while total oil exports surged to 4.4 mb/d. Despite the near-0.7 mb/d monthly decline in January, US refinery activity remained an impressive 0.8 mb/d above year-earlier levels. Annual gains largely stemmed from Gulf Coast refiners, which lifted runs by 620 kb/d y-o-y, though refinery throughputs also rose by 150 kb/d on the West Coast and by 90 kb/d in the Midcontinent.



Preliminary weekly data show US refinery crude intake falling 180 kb/d m-o-m in February, to 15.2 mb/d, some 275 kb/d higher than expected. The bulk of the monthly decrease came from the Gulf Coast, which saw runs 190 kb/d lower, partly offset by higher runs in the Midcontinent (up 70 kb/d m-o-m). Weaker cracking margins on the US Gulf Coast in January and February seem to have had little impact on actual run rates, as margins in general remained healthy. A lighter maintenance schedule this year, compared with last, also likely provided support. A report published by the US Energy Information Administration (EIA) on 27 February, show US planned refinery shutdowns for both 1Q14 and 2Q14 significantly below 2013 levels. Taking into consideration the historical average for unscheduled shutdowns, however, puts total US outages slightly above historical averages for both quarters. The EIA report estimates that total US outages could peak in March, at 1.6 mb/d, up from 1.3 mb/d in February and only 0.7 mb/d in January.

Source: EIA



European refinery throughputs rose 100 kb/d in January, to 11.2 mb/d. The largest increase came from France, where refinery activity recovered from strike action in December. Significant increases also stemmed from the Netherlands and Sweden, with runs in the Netherlands rising to their highest level since September 2012. A slight improvement in refinery margins in mid-February could have provided temporary relief to refiners. Indeed, preliminary data from Euroilstocks, released 11 March, show European crude runs inching up by some 200 kb/d m-o-m, largely in line with our previous forecast.



Maintenance is expected to curb runs again in March and April, though current low utilisation rates and spare capacity in the system could mute its impact. Also in Europe, refinery maintenance looks lighter this year than in 2013, with a total of 1 mb/d seen offline at peak time in March, compared with 1.4 mb/d over March and April last year. Notable shutdowns that have already been announced include those at Tupras' Izmit refinery in Turkey from February, Sines' Galp refinery in Portugal from March, Ineos' Grangemouth refinery in the UK, Total's Gonfreville refinery from March and OMV's Schewchat refinery in Austria sometime in 2Q14.

Refinery activity in OECD Asia Oceania was largely unchanged in January from a month earlier, at 6.9 mb/d. Only in Japan did throughputs exceed year-earlier levels. South Korean throughputs remained constrained, contracting by 220 kb/d annually. Weekly data from the Petroleum Association of Japan (PAJ) show Japanese refinery crude throughputs holding up at 3.5 mb/d in February. Japan's largest refiner, JX Nippon Oil and Energy, announced it was planning to curb runs by 5% from a year earlier in March amid expectations of weaker kerosene demand. JX's 127 kb/d Marifu refinery was shut for maintenance from 12 February to 26 March and the company announced it would shut a 95 kb/d crude unit at its Mizushima-B plant for two months from 21 March. Runs are set to decline steeply through June, as offline capacity due to maintenance peaks at around 0.7 mb/d over May and June.

As noted in previous versions of this Report, permanent capacity reductions due by the end of March could also further curb runs. In addition to the 400 kb/d in capacity reductions already announced, Cosmo Oil said recently it would cut capacity at its Yokkaichi refinery by 43 kb/d effective 31 March to comply with the new government rules. Discussions over possible new regulations to improve local refiner's productivity, including potential further capacity reductions, are underway in Japan. METI intends to complete a report that will be used for future oil policy discussion by June.



On 21 February, Shell said it had concluded talks to sell its Australian downstream businesses to Vitol for approximately $2.9 billion. The deal includes Shell's 120 kb/d Geelong refinery, which was under threat of closure, and an 870-site retail business along with its bulk fuels, chemicals and part of its lubricants businesses. Shell had previously said that it would permanently shut the Geelong plant by 2015, unless a buyer was found. Shell already closed its 90 kb/d Clyde refinery in October 2012 and Caltex is on track to convert its 135 kb/d Kurnell refinery to an oil terminal by 4Q14, leaving Australia with total refining capacity of around 570 kb/d at five sites by end-2014. 

Non-OECD Refinery Throughput

Non-OECD refinery run estimates for 4Q13 and 1Q14 have been revised slightly lower since last month's Report, to 39.9 mb/d and 40.1 mb/d, respectively. Annual growth is expected to average 0.9 mb/d in 1Q14, up from 0.8 mb/d in 4Q13, as strong growth in the Middle East is partly offset by weak activity levels in China and other non-OECD Asian countries. While maintenance in Asia and the FSU is expected to cut non-OECD refinery runs seasonally in 2Q14, to 39.7 mb/d, annual growth is expected to accelerate to 1.2 mb/d.

Company surveys show subdued throughput levels extending into March, as refinery maintenance starts up. Sinopec is planning to shut its Changling refinery from end March, while PetroChina is planning to shut its entire 410 kb/d Dalian refinery for two months starting in April. An average 700 kb/d of capacity has been announced that it will be taken offline in 2Q14, compared with minimal shutdowns of 170 kb/d scheduled for March and no known shutdowns over January or February.

In 'Other Asia', Indian crude throughputs were largely unchanged in January from a month earlier, at an average 4.4 mb/d. For the fourth consecutive month, Indian refinery runs contracted y-o-y in January, by 4.5%, or 200 kb/d. A power failure curbed throughput rates at Reliance's 660 kb/d Jamnagar plant in December and January, while lower runs at BPCL's Bina refinery and MRPL's Mangalore plants also contributed to the most recent weakness. Indian throughputs are expected to remain subdued in March and April, as Reliance shuts a 330 kb/d crude unit for maintenance for up to a month starting 20 March.



Elsewhere in the region, maintenance is expected to curb runs also in Thailand, Chinese Taipei, the Philippines and Vietnam in the second quarter. Vietnam's sole refinery, the 135 kb/d Dung Quat plant, is scheduled to shut for around 45 days from mid-May. Formosa is expected to shut a 180 kb/d crude unit from early April, while Petron will shut its 180 kb/d Bataan plant sometime in the first quarter. In Pakistan, Byco reportedly finally started up its new 120 kb/d refinery in February after protracted delays. The plant, which Byco had bought from Petroplus in 2006 and shipped to Pakistan, had, according to the company website successfully completed test runs in March 2013. The plant is now expected to ramp up runs to 100 kb/d within two months. We have revised down 2013 data accordingly.

In the Middle East, Kuwaiti refinery runs returned to normal in the second half of February. KNPC's Mina al-Ahmadi and Shuaiba refineries shut down on 23 January due to a power outage. Power was restored on 27 January and the refineries resumed runs shortly thereafter. Saudi Arabia's new Jubail refinery continued to ramp up throughputs in December, lifting the Kingdom's throughputs to an estimated 2.0 mb/d. Saudi Aramco reportedly booked its first cargo of diesel to ship to Europe, set to load on 23 January to the Med. The Middle East remains the largest contributor to growth in refining activity in early 2014, admittedly from an exceptionally low base in 2013, when significant capacity was offline for maintenance.



According to preliminary data, Russian refinery runs inched slightly higher in February, to 5.75 mb/d on average. Russian throughputs had already averaged 5.7 mb/d over the previous three months, and increased by 150 kb/d annually for 2013 as a whole. Russian Energy Ministry data shows that domestic refiners plan to take less capacity offline on average in 2014 than in 2013. According to Ministry data, Ukrainian refinery crude intake averaged 92 kb/d in January, compared with 59 kb/d a year earlier and 68 kb/d for 2013 as a whole.

Ukraine's Refinery Hopes Fall Victim of Crisis

Earlier hopes of a rebound in Ukrainian downstream activity have dimmed. Ukraine, which holds nominal refinery capacity of nearly 0.9 mb/d spread across six plants, processed only 70 kb/d of crude in 2013. The 80 kb/d Odessa refinery had resumed operations in September of last year, following a three-year hiatus, after it was sold by Lukoil to Ukrainian VETEK. Recent reports however indicate that VETEK's owner, Serhiy Kurchencko, has left Ukraine and that the refinery had not been able to repay the loan it had received from Russian state bank VTB to buy the plant. The refinery has been transferred to the bank, Odessa governor told a news conference on 11 March. According to press reports, VETEK had been in talks to sell the refinery to Rosneft. The latter already took over Ukraine's 320 kb/d Lisichansk refinery from TNK-BP last year as part of Rosneft's complete acquisition of TNK-BP and was reportedly planning to resume processing later in 2014, after completing repair works. The current standoff between Russia and Ukraine may put these plans into question. In addition to the Lisichansk refinery, the smaller Kherson (35 kb/d), Drogobyck (70 kb/d) and Nadvima (50 kb/d) refineries remain offline. Only UkrTatNafta's 360 kb/d Kremenchuk now remains operational, but it too has been operating at only a fraction of its nameplate capacity. Since the initiation of the Customs Union of Belarus, Kazakhstan and Russia in 2011, Ukraine's refining sector has become uncompetitive with that of its neighbours and the country relies on product imports for about 80% of its domestic fuel consumption.

In Africa meanwhile, throughputs in Algeria surged to a new high of 610 kb/d in December as maintenance and improvement works at the country's largest refinery, the 335 kb/d Skikda plant was completed. In Libya, refinery activity remains constrained, with runs currently estimated at around 120 kb/d. The 220 kb/d Ras Lanuf plant remains offline, though it seems the 120 kb/d Zawiyiah refinery has been getting crude supplies from Sharara and Sider, when the former field is offline. The smaller Tobruk plant was reportedly operating near capacity of 20 kb/d, processing crude stored at the Hariga port.