Oil Market Report: 11 April 2014

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Highlights

  • Crude oil prices were range-bound in March, with supply outages in the MENA and Russia-Ukraine tensions countering seasonally weaker demand. By early April, market expectations of an imminent restart of Libyan exports pressured Brent prices lower. Brent last traded at $107.75/bbl.
  • The forecast of global demand growth has been marginally trimmed to 1.3 mb/d for 2014, reflecting downward adjustments to the projection of Russian demand. The absolute demand estimate remains roughly unchanged, as upward revisions to baseline non-OECD Asian demand counterbalance lower Russian growth.
  • Global supplies plunged by 1.2 mb/d to 91.75 mb/d in March, led by steeply lower OPEC output, but remained up by 1.1 mb/d year-on-year, as non-OPEC growth of 1.98 mb/d more than offset a near-1-mb/d drop in OPEC crude. Reduced FSU supply expectations helped cut the non-OPEC supply growth forecast by 250 kb/d, to 1.5 mb/d.
  • OPEC crude oil supplies plummeted by 890 kb/d, to 29.62 mb/d, in March, on lower supplies from Iraq, Saudi Arabia and Libya. The 'call on OPEC crude and stock change' for the remainder of the year was raised by 300 kb/d to average 30.2 mb/d, reflecting a reduced forecast of non-OPEC supplies.
  • Total OECD commercial oil inventories inched down by 6.5 mb in February, to 2 567 mb, narrowing the deficit to their five-year average to 115 mb. Total industry stocks covered 29.4 days of demand at end-month. Preliminary data suggest that Japanese destocking helped slash OECD stocks counter-seasonally by 31.1 mb/d in March.
  • Global refinery crude demand is set to drop by 2.0 mb/d from February through April on planned maintenance in the Atlantic basin and the Pacific. Throughputs are set to average 75.9 mb/d in 2Q14, down from 76.4 mb/d in 1Q14, but up 0.9 mb/d on the year on higher runs in the US, Russia and the Middle East. 

TAKING STOCK

As expected, OECD oil stocks, after depleting at an alarming rate in late 2013, have shifted gears. Preliminary reports of a counter-seasonal January draw have been revised to show a small build. Destocking resumed in February, in line with seasonal patterns, but at an unusually slow pace, so that the deficit of inventories to their five-year average, while still large by historical standards, has appreciably narrowed. A seasonal rebalancing of oil markets is in full swing, including an estimated 2 mb/d dip in April refiner demand for crude versus February levels. But while market fundamentals show signs of cooling off for now, uncertainty about the outlook is on the rise.

One month after the events in Crimea, market watchers are taking stock of their impact on oil markets. Given the still volatile nature of the situation on the ground, there are more questions than answers. Both the IMF and the World Bank have reduced their forecast of Russian GDP growth for 2014, indicating that at a minimum, the Russian economy may take a short-term hit. Taking the World Bank's 'low-risk' assessment as base case, this month's Report trims the forecast of Russian oil demand for 2014 by 55 kb/d. This small downward adjustment roughly offsets upward revisions to baseline non-OECD Asian demand, keeping global oil demand projections for 2014 about unchanged, but cutting forecast global demand growth at the margin.



The reduction to the demand growth forecast is more than offset by the 250 kb/d cut that has been applied to the supply growth projection. Coincidentally, Russia and Kazakhstan take a large share of those adjustments, owing, in the case of Russia, to accelerating decline rates at Rosneft-operated brown fields, compounding stalled growth at the two green fields that had underpinned the company's production growth, Vankor and Verkhnechonsk. In the case of Kazakhstan, problems at Kashagan underpin the more pessimistic forecast. Downward adjustments for 2014 do not factor in the possible adverse effect of western sanctions on Russian borrowing costs and future supply growth, which would only be felt in the longer term.

While non-OPEC supply growth is still forecast to be the highest in decades, expectations are being toned down somewhat, lifting the "call on OPEC plus stock change". It may thus seem fortunate that the prospects for OPEC output are also on the rise - though not without considerable political risk. OPEC supply actually registered a steep drop in March from February highs, but this setback looks likely to be short-lived. On the plus side, Libya seems to be making strides towards resolving the crippling disputes that have held up exports and production in recent months. Iranian production and exports are creeping up too, with India steeply boosting its Iranian crude imports so far this year compared to 2013. But security risks continue to hover over the MENA region, and how long Iran can keep testing international oil sanctions is unclear.     

On the face of it, non-OPEC supply and global demand growth projections for 2014 as a whole look roughly in balance, though the risks to the forecast remain elevated. The balance also implies that OPEC, far from facing a supply glut, will have to raise production from March levels of 29.62 mb/d in order to meet the 'call' in the second half of the year.

DEMAND

Summary

  • The global demand forecast for 2014 is essentially unchanged on last month's Report, at 92.7 mb/d. Modest upward revisions to baseline non-OECD Asian data offset downward adjustments to the Russian demand forecast. Revised Asian data lift the 2013 estimate by 70 kb/d, to 91.4 mb/d, cutting the demand growth projection for 2014 accordingly to 1.3 mb/d, from 1.4 mb/d last month.
  • The forecast of Russian demand for 2014 has been trimmed by 55 kb/d, to 3.5 mb/d, in the wake of Russia's annexation of Crimea. This adjustment is in line with underlying downward revisions to Russian GDP by the World Bank and the International Monetary Fund. The former cut its forecast of economic growth to 1.1% in its 'low-risk' scenario, versus 2.2% prior to the annexation, while the latter envisages Russian GDP growth of 1.3% in 2014. The Bank also outlined a 'high-risk' scenario, whereby "an intensification of political tension could lead to heightened uncertainties around economic sanctions which would further depress confidence and investment activities." Under that scenario, GDP falls by 1.8% in 2014, lowering the Russian oil demand forecast by a further 150 kb/d, to 3.3 mb/d.


  • The forecast of US oil demand growth for 2014 has been trimmed marginally to 0.4% following lower-than-expected delivery data for January and February. The US forecast averages 19.0 mb/d in 2014, with gasoline dominating at around 8.8 mb/d.
  • Despite reports of faltering Chinese economic growth in early-2014, oil demand growth of 3.4% remains forecast for 2014, to 10.4 mb/d. The Chinese government has signalled that it would likely provide additional support if the economy flags, notably in the energy-intensive construction sector.

Global Overview

Downward adjustments to the forecast of Russian oil demand for 2014 helped trim the global demand growth estimate for the year to 1.3 mb/d, versus 1.4 mb/d in last month's Report. Developments in Crimea have weakened Russia's macroeconomic outlook, with World Bank essentially cutting its base-case projection for Russian economic growth in 2014 by half, to 1.1%, from its December estimate of 2.2%. In line with this revision, the projection of Russian oil demand has been trimmed by 55 kb/d, to 3.5 mb/d. Higher historical estimates of non-OECD Asian deliveries provide a partial offset, leaving the global oil demand estimate broadly unchanged at 92.7 mb/d. The International Monetary Fund has also since revised down its own estimate of Russian GDP growth, to a similarly sized +1.3% projection, hence also in line with our new Russian oil demand forecast. 

Given the dynamic nature of the situation in Ukraine, the Russian demand forecast remains subject to further revisions. In a March report on the crisis, the World Bank highlighted additional downside risks to the Russian economy and outlined a 'high-risk' scenario whereby "an intensification of political tension could lead to heightened uncertainties around economic sanctions which would further depress confidence and investment activities." In that case, an absolute decline in Russian economic activity of 1.8% occurs, which in the IEA's model strips a further 150 kb/d from the Russian oil demand forecast.

The demand forecast for 1Q14 is particularly affected. In addition to the reduced projection of Russia demand, January and February delivery data have been revised downwards for several countries, reflecting relatively mild winter weather conditions in Europe and Korea. Meanwhile in North America, extreme cold weather cut transportation and industrial demand. Several countries accounted for the bulk of the adjustments for January, led by the US (-165 kb/d), Russia (-80 kb/d), the UK (-50 kb/d), Switzerland (-40 kb/d), South Africa (-35 kb/d) and France (-25 kb/d). India provided a partial offset with an upwards adjustment of 60 kb/d in January, as did Iraq (+25 kb/d), Germany (+20 kb/d) and Chinese Taipei (+20 kb/d). Partial preliminary data for February also lead to a net downward adjustment. Curtailments include the preliminary estimate of US demand (-275 kb/d), alongside lower estimates for Germany (-170 kb/d), France (-70 kb/d), South Korea (-55 kb/d) and Italy (-45 kb/d), partly offset by upward adjustments for Brazil (+175 kb/d), China (+85 kb/d) and Japan (+80 kb/d).

Top 10 Consumers

US

The harsh winter weather conditions, experienced by the US in January and February had a mixed impact on demand. While additional heating needs lifted distillate deliveries in the Northeast and propane use in the Midwest, at least in January, domestic transportation use suffered, with many travel plans cancelled and business days lost due to the adverse weather. US oil deliveries contracted year-on-year (y-o-y), in February, for the first time in six months, to an estimated 18.5 mb/d. The y-o-y demand drop that month was the steepest in 14 months.



US gasoline demand contracted by an estimated 1.3% in February, down on a y-o-y basis for the second consecutive month, to 8.3 mb/d, close to early 2013 lows. Rising retail prices may have compounded the impact of harsh winter weather to curtail demand. With the onset of spring and continued improvement in the US economy, however, US gasoline demand is expected to return to growth, and our mildly positive growth forecast for US gasoline deliveries has been maintained for 2014.



In view of the downward revisions to January and February data, the forecast of US demand for the year has been trimmed by 20 kb/d from last month's Report, to 19.0 mb/d, equivalent to annual growth of just 75 kb/d (or 0.4%). Other than the travel sector, the LPG (including ethane) and gasoil/diesel categories are forecast to lead the upside momentum in 2014 on the back of stronger industrial activity.



China

A slowdown in Chinese oil demand growth, that emerged mid-2013, has continued in line with the underlying macroeconomic trend. Demand for industrial fuels (including gasoil/diesel, residual fuel oil and naphtha) has been particularly soft. Following a contraction of 1.0% in 4Q13, Chinese oil deliveries are projected to rebound by just 1.8% for 1Q14, in sharp contrast with average growth of roughly 7% per annum in the four years previous.



The closely tracked HSBC/Markit Chinese Manufacturing Purchasing Managers' Index (PMI), which takes survey data from business leaders to extract a forward-looking gauge of sentiment in the manufacturing sector, returned to 'contracting' territory in January and has since deteriorated in each month through March. Chinese oil deliveries have also struggled in recent months and the outlook for improvement in the next six-months appears limited.



Ironically, persistently weak economic news could raise the prospect of renewed government support for the Chinese economy. Premier Li Keqiang was quoted in March as stating that China has policies in reserve to support economic growth after the cabinet said it would accelerate construction spending. The Chinese demand forecast is maintained at around 10.4 mb/d for 2014, 350 kb/d (or 3.4%) up on the year earlier.



Japan

Reductions in the relative cost of oil products versus East-Asian LNG, and falling unemployment combined to raise Japanese oil demand up to an average of around 5.2 mb/d in February. Naphtha deliveries posted their sixth consecutive y-o-y gain of 8% or more, driven by demand from the Japanese petrochemical sector. Preliminary data for February showed stronger-than-expected power-sector oil use, with the Japanese crude oil burn rising to a near-one year high. A decline rate of around 3.5% in total oil product demand is forecast for the year as a whole, closely matching the January-February average, with particularly sharp contractions envisaged in the residual fuel oil and 'other products' categories.



India

Preliminary February demand points towards a break from the previously flat y-o-y trend, as total Indian deliveries rose by approximately 2.5% y-o-y in February. Strong gains in gasoline and LPG provided the majority of the upside support, while a protracted downtrend in gasoil deliveries came to an end. Gasoline demand, at roughly 430 kb/d in February, was 7.8% higher than the year earlier, an uptick supported by reports of increased motorcycle sales. February's overall increase came on the back of an upwardly revised January estimate, which together contributed to the addition of two-tenths of a percentage points to the 2014 growth forecast, to 2.6%.



Russia

Russian oil deliveries rose seasonally to 3.4 mb/d in February, roughly 220 kb/d up on January's downwardly revised 3.2 mb/d estimate. Weaker-than-expected deliveries of 'other products' trimmed the January estimate, which nevertheless remained up y-o-y. Despite expectations of slower Russian economic growth following the annexation of Crimea (see 'Reduced Russian GDP Projections Curb Demand Outlook'), Russian oil use is forecast to receive support from the relatively high number of infrastructure projects that have already been commissioned, such as the construction effort ahead of the 2018 football World Cup and the Moscow ring road scheme. Gasoil/diesel and 'other products' (including bitumen for road building), are amongst the main product categories expected to lead the upside in 2014.



Reduced Russian GDP Projections Curb Demand Outlook

Several institutional forecasters have cut their projection of Russian economic growth following Moscow's annexation of Crimea in March. Whereas in December 2013 the World Bank estimated that Russian GDP would rise by 2.2% in 2014, its March update has halved predicted growth to 1.1%, according to a 'low-risk' scenario that assumes no further escalation of military action. The Bank also outlined a 'high-risk' outlook whereby "a more severe shock to economic and investment activities" occurs, seeing Russian GDP contract by 1.8%. Both scenarios assume that the international community refrain from trade sanctions. 

In its 'low-risk' scenario, the Bank described recent events in Crimea as having "compounded [Russia's] lingering confidence problem into a crisis" and exposed the underlying "weakness of this [Russian] growth model". Such concerns, alongside predictions of heightened inflation, are expected to undermine economic growth as they add to the already severe pressures on the government to meet its fiscal targets.

Under its 'low-risk' scenario, which assumes "a limited and short-lived impact of the Crimea crisis", the Bank projects that Russian domestic consumption growth will fall well below its previous trend. Such weakness, alongside forecasts of significant labour-shedding, will severely dampen household income, reducing transport needs and hence growth prospects for gasoline and jet fuel. Weaker manufacturing activity will curb growth of industrial-fuel demand. Based on these assumptions, the forecast of Russian oil demand growth for 2014 has been cut to 1.7%, to 3.5 mb/d, roughly 55 kb/d below last month's forecast.  

In its 'high-risk' scenario, the Bank factors in a "more severe shock to economic and investment activities" and notes that "an intensification of political tension could lead to heightened uncertainties around economic sanctions which would further depress confidence and investment activities". Under such a scenario, Russian oil demand would be cut by a further 150 kb/d, to 3.3 mb/d.

Since compiling this research the International Monetary Fund has also released a reduced Russian economic growth forecast, of 1.3% in 2014. This piece, however, focuses on the Bank's work as it was the first such detailed revision released and its timing was early enough for inclusion in this month's Report. Either way, the Fund's estimate closely matches the Bank's 'low-risk' scenario. 

Brazil

Strong gains in motor gasoline demand lifted overall Brazilian oil demand to a four-month high of 3.2 mb/d in February, with rapid gains in ethanol also contributing. Industry group, UNICA, reported sharp gains in ethanol production. Although concerns remain about the sustainability of the Brazilian economy, a worry magnified in February as the Confederação Nacional da Indústria's consumer confidence index fell to a near-five-year low, forward-looking indicators remain supportive. For example, the manufacturing PMI has started to point up once again, supporting our forecast for Brazilian oil demand growth of around 2.9% in 2014 to 3.2 mb/d. However, a point of uncertainty going forward is the price of gasoline, as Petrobras has recently come under judicial pressure to explain its pricing.



Saudi Arabia

Total Saudi Arabian oil deliveries rose to a three-month high of 2.7 mb/d in January, led by strong gains in gasoil, 'other products' (including crude oil for direct burn) and LPG. Despite these gains, demand in the Kingdom remains in a seasonal lull, before summer air-conditioning needs ramp up once more. Deliveries traditionally peak in July. Saudi Arabian demand is forecast to add around 0.8 mb/d between its winter trough and summer peak. For the year as a whole, a growth rate of around 3.0% is forecast, to an average of around 3.1 mb/d.



Korea

An estimated 2.4 mb/d of oil products were delivered in February, 20 kb/d (or 0.9%) below the year earlier as economic growth struggled somewhat. Fuel oil demand posted the steepest contraction, as relatively mild February temperatures combined to dampen demand with an apparent weakness in manufacturing sentiment and increased availability of competing fuels such as natural gas and coal. Deliveries of LPG also fell heavily in line with the broader economy, as reflected by HSBC's Manufacturing PMI falling back into 'contracting' territory once again in February.



Canada

Demand in Canada fell by 3.0% y-o-y to 2.2 mb/d in January, its fourth consecutive y-o-y decline, led by lower deliveries of gasoline, LPG and 'other products'. LPG deliveries, at 420 kb/d, fell particularly sharply both in month-on-month (m-o-m) and y-o-y terms. Growth momentum is forecast to pick up later in 2014, averaging around 0.9% for 2014, two-tenths of a percentage point up on the revised 2013 estimate, thanks to a widely predicted uptick in economic growth. Industrial fuels such as gasoil/diesel and 'other products' are expected to lead the gains while transportation fuel demand is also forecast to rise in 2014, supporting motor gasoline and jet/kerosene usage.



Germany

Preliminary estimates of February deliveries, at 2.3 mb/d, imply a notably lower amount compared to both the year earlier and our previous forecast. Reports of temperatures above their seasonal norm were largely behind the February revision, as gasoil deliveries (including heating oil) led the decline. The underlying industrial trend remains supportive, with Deutsche Bundesbank's latest numbers depicting a 5% y-o-y gain in industrial output in January and Markit's Manufacturing PMI well above the key 'expansionary' threshold in both February and March. Despite such a supportive industrial backdrop, significantly lower-than-expected February data is curbing the forecast for the year as a whole, by ten basis points to +0.5%, with German deliveries expected to average around 2.4 mb/d in 2014.



OECD

Preliminary estimates of February OECD deliveries suggest a continuation of the decline that resumed in January. Other than the macroeconomic challenges still facing many OECD economies, unusual winter weather patterns across the OECD helped quell demand. Very cold conditions in the OECD Americas curtailed travel and disrupted industrial activity, resulting in an estimated y-o-y decline of 1.4% in regional deliveries, to 23.5 mb/d. Elsewhere in the OECD, including Europe and South Korea, exceptionally mild winter weather suppressed demand. OECD Europe saw a 0.6% drop (y-o-y) in February deliveries, led by 'other gasoil'. Relatively warm February temperatures in Korea also dampened OECD Asia Oceania demand. Other than the long-established, efficiency-driven, structural downtrend in OECD Asia Oceania motor gasoline demand, the residual fuel oil and jet/kerosene segments showed steep declines. The relatively low winter heating requirement in OECD Asia Oceania also curbed kerosene needs.



Americas

Severe winter weather in the US/Canada in January and February undermined OECD America oil demand, causing it to contract by 1.4% in February, to 23.5 mb/d. Sharply falling Mexican demand also played a role. Roughly 2.0 mb/d of oil products were delivered in Mexico in February, well below year-earlier demand. Fuel oil deliveries led the decline as the power sector continues to switch from residual fuel oil to natural gas. Falling Mexican fuel oil demand should prevail in 2014 as a whole, keeping the overall Mexican demand forecast in negative territory for the year.



Europe

With an absolute y-o-y decline of around 0.6% assumed for OECD Europe in February to 13.4 mb/d, it is clear that unusually mild winter weather in the region has dampened gasoil demand. Both the jet/kerosene and road diesel sectors are still expected to show demand growth across OECD Europe in 2014, especially in northern Europe. Despite the relatively warm weather, gasoil posted gains in many northern European countries in January. In Austria, officially released data depicted roughly 135 kb/d of gasoil delivered in January. Not only was this both up on the year and month earlier, but it was also the second successive month of positive y-o-y growth, a trend supported by robust industrial activity. Statistik Austria reported industrial production rising by 5% y-o-y in January, while the Bank of Austria's manufacturing PMI came in at 54, well above the 50-threshold for an 'expansionary' bias.



Several European economies saw surprisingly low January deliveries. At an estimated 610 kb/d in January, Turkish oil deliveries came out 1.4% below the year earlier and nearly 20 kb/d below last month's forecast. All of the Turkish key product categories, bar gasoil, saw contractions, as consumer confidence slipped to a three month low while bankruptcies rose to a 12-month high. In the UK, a sharp contraction in gasoline demand led a 25 kb/d drop in total deliveries. Overall growth of around 0.6% is now forecast for the UK in 2014, down slightly from the prediction carried in last month's Report.



The latest French data also surprised on the downside. February deliveries, although up roughly 100 kb/d on January, fell by 100 kb/d on the year, due to weakness in the economy and unusually warm late-winter weather. Gasoil deliveries, including heating oil, came in at roughly 975 kb/d in February, 55 kb/d (or 5.4%) below the year earlier. Weaker-than-expected deliveries in January and February are accountable for the near-70 basis point curtailment in the forecast French demand decline rate in 2014, to -2.0%.



Asia Oceania

Relative improvements in the Japanese and Korean demand numbers saw February OECD Asia Oceanian deliveries fall by a more modest 1.8% y-o-y, after dropping by 3.5% in January. The Japanese decline rate eased in February as the changing price-dynamics, between LNG and fuel oil, supported a less rapid deterioration in power-sector oil needs. The anticipated Korean decline, meanwhile, petered-out in February as domestic transportation needs turned higher.



Non-OECD

Rising to an estimated 45.5 mb/d in 1Q14, the non-OECD demand trend accelerated once more having struggled in 4Q13 as sharp currency depreciations in many countries made products more expensive. The most notable 1Q14 accelerations were seen in the Middle East, Latin America and non-OECD Asia, offsetting modest forecast decelerations in Africa, the former Soviet Union and non-OECD Europe. Overall, the greatest upside is observed in the LPG, jet/kerosene and 'other products' categories.



At roughly 560 kb/d in January, South African demand was well down on the year earlier as a consequence of sharp declines in transport use. Estimates for both gasoline and gasoil/diesel deliveries are down as the ailing domestic economic conditions seen in South Africa recently imply reduced vehicle needs. For example, the South African Bureau for Economic Research's consumer confidence indicator depicts a "very low" minus-seven reading for 4Q13, the latest period that data is available, well down on long-term averages. Despite such concerns, demand prospects are expected to pick up for the year as a whole, with growth of around 3% expected supported by recuperating economic conditions.



Latest forecasts of Moroccan oil demand, at around 310 kb/d for 2014 as a whole, imply a growth rate of 3.5%. Looking further ahead, however, the future growth trend is likely to ease back somewhat, as power-sector oil-needs ease on reports of an expected movement away from oil. The Moroccan government is working towards a target of 42% of power sector needs being addressed by renewables by 2020, which including a total wind power estimate of approximately 2 000 megawatts.



SUPPLY

Summary

  • Global supplies fell by a steep 1.2 mb/d to 91.75 mb/d month-on-month (m-o-m) in March, with a decline in OPEC crude output accounting for near 75% of the loss. Compared with a year ago, global production in March was still around 1.1 mb/d higher, with higher non-OPEC supply of 1.98 mb/d more than offsetting a decline of nearly 1 mb/d in OPEC crude output.
  • Non-OPEC oil supply fell by about 300 kb/d to 55.7 mb/d in March due to a combination of falling production in the FSU, Europe and Canada, which more than offset higher US output. A combination of factors including maintenance, operational issues, and higher declines at legacy fields contributed to this m-o-m decrease.
  • The forecast of total non-OPEC supply growth for 2014 has been revised downwards by 250 kb/d to 1.5 mb/d compared with last month's Report, reflecting lower projections for Russia and Kazakhstan. In Russia, accelerated decline rates at legacy fields reduce output estimates, while a more pessimistic outlook for Kashagan lowers Kazakhstan's  growth.
  • OPEC crude oil supplies plummeted in March, with lower supplies from Iraq, Saudi Arabia and Libya accounting for around 90% of the decline. Crude oil production fell by 890 kb/d to just 29.62 mb/d, the lowest level in five months. Meanwhile, imports of Iranian oil are also running well above 2013 levels for the third month running, with an upward revision for February pegging volumes at 1.65 mb/d, the highest level since June 2012, before easing again in March.
  • The 'call on OPEC crude and stock change' for 2Q14 was raised by 100 kb/d to 29.4 mb/d and for 2H14 by 350 kb/d to an average 30.6 mb/d following an upward revision to demand and a reduced forecast of non-OPEC supplies.


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

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

OPEC Crude Oil Supply

OPEC crude oil supplies plummeted in March, with sharply lower supplies from Iraq, Saudi Arabia and Libya accounting for around 90% of the decline. Crude oil production fell by 890 kb/d to just 29.62 mb/d, the lowest level in five months. Libyan and Iraqi output were down on worsening civil unrest and operational issues, respectively, while Saudi Arabia curbed supplies last month in the wake of weaker demand from refiners during the peak spring refinery turnaround period.

The 'call on OPEC crude and stock change' for 2Q14 was raised by 100 kb/d to 29.4 mb/d and for 2H14 by 350 kb/d to an average 30.6 mb/d following an upward revision to demand and reduced forecast for non-OPEC supplies. OPEC's 'effective' spare capacity in March was estimated at 3.53 mb/d, up from 3.31 mb/d in February.



Saudi crude oil production fell to the lowest level in almost a year in March, down by 285 kb/d to 9.57 mb/d from February levels. Saudi supplies to the market, which include sales from storage, were reported at 9.53 mb/d in March, around 370 kb/d below the previous month. Lower Saudi production reflected reduced demand from customers during the refinery maintenance season.

Production from Saudi Arabia is expected to rebound, however, as refineries start returning from scheduled maintenance and crude burn at domestic power plants edges higher with the onset of warmer weather. Saudi Aramco raised its official selling prices (OSP) for May sales to Asia in line with expectations. The company increased May OSPs for its flagship Arab Light grade to Asia by $0.30/bbl, to $1.85/bbl above the Oman/Dubai average. Higher prices for Asian customers partly reflect stronger Dubai prices and improved refining margins. After three months of no price changes, Saudi Aramco raised prices of its marker grade Arab Medium to the US by $1/bbl. European prices were left largely unchanged as weak margins there curbed refinery demand.



Imports of Iranian Crude Scale New Heights in February Before Easing in March

Iranian crude oil production was lower in March, down by 50 kb/d to 2.8 mb/d compared with an upwardly revised February estimate of 2.85 mb/d. Iran's production averaged 2.81 mb/d for 1Q14, or about 130 kb/d higher than the 2.68 mb/d produced in 2013. In turn, imports of Iranian oil are running well above 2013 levels for the third consecutive month. February import volumes were revised upwards on more complete data, by 240 kb/d to 1.65 mb/d, the highest level since June 2012. Data were revised higher for China (+168 kb/d), India (+93 kb/d) and Korea (+83 kb/d) while Japanese data were adjusted lower (-103 kb/d).

Preliminary data for March show imports from Iran declined to 1.05 mb/d but that figure will likely be revised upwards closer to February levels upon receipt of more complete data. Crude oil held in floating storage plummeted from 32 mb at end-February to just 22 mb at end-March, an average drop of around 320 kb/d, latest tanker data from E.A. Gibson Shipbrokers Ltd. show. Not all the ships have offloaded yet, which suggest imports from Iran could remain high for April. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker trackers and news reports. The most recent monthly is based on tanker movements, which are subject to significant revisions at times. Many of Iran's vessels operate without their transponders, making initial assessments very preliminary.  



In March, importers of Iranian oil also included Albania and Syria in addition to regular buyers China, India, South Korea, Japan and Turkey. It is unclear where this Albania cargo will go on to next. Tanker data for shipments into China show a decline of around 190 kb/d to 365 kb/d for March but consistent upward revisions to China data suggest final data may be higher. Chinese imports of Iranians supplies have averaged just under 500 kb/d in 1Q14 compared with 430 kb/d in 2013.

Preliminary data for India show volumes increased by 70 kb/d to around 335 kb/d in March, bringing the 1Q14 average to 340 kb/d. That is a steep increase of near 80% over 2013 levels of 190 kb/d. US officials recently visited India to discuss the country's high level of Iranian imports relative to the amounts envisaged under the interim agreement between Iran and the P5+1 of around 1 mb/d. By contrast, imports of Iranian oil from Japan were estimated at around 75 kb/d, down by 185 kb/d from a reduced estimate for February of 260 kb/d. Preliminary March data for South Korea show imports fell about 165 kb/d to 128 kb/d while Turkey's volumes fell by 80 kb/d to 90 kb/d.

Imports of Iranian condensates trended lower in February and March after reaching 250 kb/d in January.   Imports of condensate fell to 140 kb/d in February and just 110 kb/d in March, which is more in line with average 2013 levels of 100 kb/d. In addition, it appears that unsold condensate make up the bulk of Iranian floating storage at end-March. Of the 22 mb in floating storage, 20 mb is sitting off the Asaluyeh terminal. 

In the third round of talks this year, officials from Iran, the US, UK, France, Germany, China, Russia and the EU met in Vienna on 8-9 April. The two-day talks ended with officials from Iran and the EU saying in a joint-statement that "a lot of intensive work" remained to be done over the next three months. The next round of talks is scheduled for 13 May. Under the interim nuclear deal agreed in November 2013 in Geneva, Iran's exports are supposed to be held at an average 1 mb/d for the six months to end-July. The aim of the Vienna negotiations is to hammer out a long-term deal by 20 July that would limit the scope of Iran's nuclear program, in return for a lifting of sanctions that have crippled its oil-dependent economy.



After reaching 35-year highs in February, Iraqi production fell by 340 kb/d to 3.26 mb/d in March on sharply lower output in the northern region and a modest downturn in the south. Crude oil exports fell by 340 kb/d to 2.46 mb/d. March exports of Basrah crude from the southern Gulf terminals eased from February levels by around 85 kb/d but were still a lofty 2.42 mb/d. Strong winds have reportedly already disrupted exports in early April. In the wake of higher exports, reports of quality issues have emerged, with refiners complaining of high water content in the crude. The long awaited full start-up of dual SPMs is behind the higher exports but work on storage tanks, pumping stations and infrastructure is still needed to ensure the crude's quality. The next phase of upgrading work at the terminals is not expected to be completed before year-end, which could constrain growth.

Production from the long-delayed Lukoil-operated giant West Qurna-2 started at end-March, with initial output building to 120 kb/d. Plans to reach 400 kb/d by the end of the year, however, appear ambitious, not least because of export constraints at southern terminals. Should West Qurna 2 power ahead, production from other fields such as Rumaila may have to be curtailed to make room for the new crude.  



The recent rise in southern production comes ahead of Iraq's 30 April parliamentary elections, which many believe will help bolster Prime Minister Maliki's re-election. However, progress in negotiations over payment and contract issues with the KRG is not expected until a new government is formed, which could take months.

Shipments of northern Kirkuk crude to the Mediterranean port of Ceyhan, Turkey fell to just 40 kb/d compared with around 295 kb/d in February. A major wave of attacks on the Iraq-Turkey pipeline sharply reduced flows on 2 March and escalating violence in the region has meant repair work cannot take place. As a result, April exports of Kirkuk crude are expected to remain curtailed.

Crude exports from the KRG region to the Kirkuk-Ceyhan pipeline were expected to resume at 100 kb/d in April as a goodwill gesture on the part of the government in Irbil as part of negotiations in its long-running dispute with Baghdad. The planned exports, however, have been suspended with the northern pipeline out of commission. Meanwhile, trucked exports of Kirkuk crude oil to Jordan also remain halted due to security issues in the Anbar province. KRG production was estimated at around 240 kb/d.

Kuwaiti crude oil production was reduced by 20 kb/d to 2.76 mb/d in March while UAE supplies rose by 10 kb/d to 2.75 mb/d. Qatari output was unchanged at 700 kb/d.



Libyan crude supplies eased again in March, down by 140 kb/d to an average 220 kb/d, and by early April were just 100 kb/d. The central government in Tripoli and the federalist rebels in the eastern region of the country reportedly reached a deal that calls for four eastern terminals that have been shut and occupied for the past nine months to gradually be reopened. The terminals collectively account for roughly 700 kb/d of the country's export capacity. As a first step it was announced on 6 April that the Zueitina and Hariga ports, with combined capacity of just 180 kb/d, were to be reopened, but at the time of writing there is still no fixed date for the restart of the two terminals. Re-gaining central government control of the larger ports at Ras Lanuf and Es Sider, with a combined capacity of around 500 kb/d, looks to be a more challenging negotiating process and it could be at least four weeks before exports from those terminals resume.



Angolan crude oil production hovered at two-year lows in March at 1.62 mb/d, up a marginal 15 kb/d from February, due to field maintenance work at the 180 kb/d Greater Plutonio complex throughout March. Output is forecast to partially recover in April when the maintenance is scheduled to be completed mid-month.

Crude oil production from Nigeria was off by 40 kb/d to 1.94 mb/d in March. Theft and sabotage continue to undermine the country's output. Shell reduced liftings of Forcados in mid-March and declared force majeure on the crude on 25 March due to a pipeline leak. Bonny Light supplies were also lower in March following the 22 February closure of the Nembe Creek Trunk oil pipeline to stop leakage caused by theft.

Non-OPEC Overview

For 2014 as a whole, the non-OPEC supply forecast has been revised lower by about 250 kb/d compared with last month's Report due to downward adjustments to the forecast for the FSU, and to a lesser extent to smaller changes to Europe and Latin America output. Revisions to the FSU forecast resulted in large part to revisions to Russia's production outlook, where accelerated declines at legacy fields look set to result in a slight output decline in 2014. Additionally, Kazakhstan's production is projected to fall, mainly as a result of our current expectation that the Kashagan field will not enter into production again before the end of 2014 as extensive repairs on the field's leaky pipeline system are still being conducted. We now expect that Kashagan, which halted short-lived production in October 2013, may come back on line in the second quarter of 2015 at the earliest.

Maintenance projects in Canada, along with declining output in Russia, Mexico and the North Sea, among other factors, reduced total non-OPEC supply in March by about 300 kb/d m-o-m, although year-on-year (y-o-y) growth remained robust at 1.9 mb/d. US total liquids production stood at 11.3 mb/d in March, while ongoing maintenance in Canada limited production to 4.1 mb/d.

Risks to our production forecast remain elevated, particularly in Africa and the Middle East. Oil production in South Sudan faced a possible shutdown at the time of writing, as rebel militias prepared to capture oilfields in the Upper Nile state. If the crisis persists, the projected 160 kb/d of supply increase in South Sudan in 2014 is at risk. In addition, planned maintenance in Brazil, Canada and North Sea could be more severe in duration and magnitude than currently projected, if the length and volumes affected by last year's maintenance turns out to be the new normal.

OECD

North America

US - March preliminary, Alaska actual, other states estimated:  US crude oil production averaged 8.2 mb/d in March, according to preliminary data, a slight downward revision from last month's Report. Total liquids output, including NGLs, averaged 11.3 mb/d. Despite the downward revision since last month, total US output grew by 200 kb/d m-o-m and approximately 1.4 mb/d y-o-y, the highest annual growth in seven months. Alaska crude supply stood at 545 kb/d, and has remained well over 500 kb/d since September 2013. Meanwhile, production of Bakken light, tight oil (LTO) in North Dakota grew to 950 kb/d in March, lifting total North Dakota output above the 1.0 mb/d mark. The March numbers reflect a restoration of crude oil output following weeks of weather-related disruptions and lower production volumes due to well shut-ins. Approximately 100 oil wells in North Dakota were shut in to minimise natural gas flaring in January.

We expect that Bakken LTO production will grow to more than 1.0 mb/d by July 2014, averaging 990 kb/d for 2014 as a whole. Production from other US tight oil plays is also expected to grow in 2014, particularly from Eagle Ford, where drilling productivity has increased significantly in the last year and where planned investment may total approximately $30 billion in 2014. Production per rig in the Bakken and Eagle Ford formations rose by 184 and 139 bp/d, respectively, between January 2013 and April 2014, to 492 and 463 bp/d. Other tight oil plays have seen drilling productivity increases, albeit smaller than those recorded in the Bakken and Eagle Ford formations. Gulf of Mexico output grew in March by about 30 kb/d, as the third phase of BP's Na Kika deepwater field development began operating.

Final US data for January 2014 show that production rebounded by about 100 kb/d m-o-m to 10.9 mb/d, of which 7.9 mb/d was crude oil, following sizeable declines in December. Texas, Louisiana and North Dakota saw production increases, while the offshore Gulf of Mexico declined m-o-m. NGL production stood at 2.6 mb/d, about 25 kb/d higher than the previous month. As of January, US NGL production accounted for about 40% of total non-OPEC NGL production. Current projections indicate that NGL production will average 2.8 mb/d in 2014, with significant growth expected to continue through the medium term. In 2013, NGL output in the US grew by more than 10% while dry natural gas production rose by about 1%, reflecting the favourable economics of wet gas production. Although a number of projects have been proposed in the US for the next several years to accommodate this growth, such as steam crackers and petrochemical plants, new processing capacity may not be sufficient to absorb the additional supplies, likely resulting in increased exports of NGLs in the future, particularly LPG. However, despite planned investment in export facilities, there is some uncertainty whether the commensurate transport capacity to supply those export facilities will come online at the same time. For crude oil transport, the Association of American Railroads reported this month that crude oil delivered by rail increased by 83% in 2013, to 434 042 carloads, illustrating the growing importance of rail in the mid-stream.

Increasing domestic crude supplies and the potential for crude oil (or condensate) exports remain a focus of debate among US industry representatives and lawmakers. A newly proposed legislation would lift current restrictions on US crude exports but would let the President and Congress suspend exports when needed. It is unlikely that this or any other proposed legislation on US crude exports will pass both houses of Congress in the near future, however.

Canada - January preliminary: Total oil production averaged 4.3 mb/d in January, roughly unchanged on the month. Crude oil and condensate production, including mined bitumen, was estimated at 2.6 mb/d in January, a 50 kb/d m-o-m gain. In contrast, syncrude output, which is not included in the crude oil and condensate production total, edged down in January by about 35 kb/d. Estimates of syncrude production for February and March also show declines, and we expect that total syncrude output will erode further in April for the fourth consecutive month. The latest decline in syncrude output is at least in part due to maintenance.

Suncor began a six-week turnaround on its 280-kb/d U2 upgrader at the Fort McMurray oil sands projects on 11 March, which affected output by about 50 kb/d for the month. A further 90 kb/d is expected to be affected in April as well. Other significant maintenance is scheduled for 3Q14, with Syncrude Canada's facilities undergoing major turnarounds. This year looks to be the third consecutive year that major maintenance at oil sands projects limits syncrude production growth as older projects require more maintenance and staffing shortages affect workover duration. Limited resources of skilled labour are proving particularly acute in the Fort McMurray, Alberta area.

Mined bitumen meanwhile likely will lead the growth in Canadian oil sands output this year, with  bitumen production projected to increase by about 170 k/d y-o-y, driven by a ramp up in the Kearl oil sands project in northern Alberta, which is expected to reach full production capacity by 2H14. After a several month long delay, Phase 1 of the Kearl project began operating in April 2013 and reached 100 kb/d for several days, but production had to be decreased due to operational issues. Kearl output stood at 65 kb/d in December 2013. Phase 2 of the project is currently under construction and is expected to commence production in 2015, bringing on an additional 110 kb/d of production capacity.

Mexico - February actual: PEMEX liquids production edged marginally higher, to 2.9 mb/d, in February. Preliminary crude oil data for March show a fairly sizeable slide in output, however, with crude oil production falling to 2.5 mb/d. The production volumes reported by PEMEX for March show an accelerated decrease, with crude oil output falling to the lowest level since July 2013 as Mexico's two largest field complexes, Ku-Maloob-Zapp and Cantarell, saw eroding output.

Although PEMEX has been fairly successful in slowing production declines that began in 2005, any substantial reversal of this trend can only come from additional investment and participation by private companies in the oil sector. PEMEX and the Mexican government are opening participation by private companies, which is hoped will increase investment flows. Meanwhile, PEMEX has submitted a request to the energy ministry regarding areas it wants to keep under the so-called Round Zero, which reportedly include 83% of its proven and probable reserves along with 31% of Mexico's prospective resources. The energy ministry will decide by 17 September 2014 which of the requested areas the company will retain. The areas not awarded to PEMEX will revert to the state and will be offered to other companies in Round One, which is likely to be held sometime in mid-2015.

North Sea

Norway - January actual, February preliminary: Total oil output in Norway averaged 1.9 mb/d in January, falling approximately 35 kb/d m-o-m. Preliminary estimates indicate that production in February rose only by about 10 kb/d as the Draugen, Gullfaks, Skirne, Visund and Volve fields experienced outages and repair work during the month. In early April, Norway's industrial workers and their employers narrowly averted a strike that would have involved a number of oil services companies, including Aker Solutions, Aibel and WorleyParsons. In 2012, wage and terms renegotiations broke down, which led to a two-week strike among oil workers, reducing production by 50 kb/d and 60 kb/d in June and July, respectively.



UK - December actual, January preliminary:  UK average production in December stood at 800 kb/d, approximately 10 kb/d lower than the November average. Preliminary January data indicate that output bounced back to about 880 kb/d. Production of NGLs in January rose by about 25 kb/d, with the remainder of the increase mostly stemming from higher production on the Brent system. So far in 1Q14, total UK production is estimated near 850 kb/d, about 7% lower y-o-y. We expect that UK total output will average 750 kb/d in 2014, approximately 10% below the production average of 2013.

Loadings of the North Sea crudes that underlie the Brent benchmark are expected to fall to an 11-month low in May, according to recently released data, with 775 kb/d scheduled to load during the month. This level of crude loading stands in sharp contrast to the April planned crude loadings of 940 kb/d, possibly indicating a spring start to maintenance. We estimate that Brent-Forties-Oseberg-Ekofisk (BFOE) output in April will average about 930 kb/d, about 20 kb/d higher than in March.

Non-OECD

Latin America

Brazil - February actual:  Brazil's total output remained roughly flat at 2.2 mb/d in February. Preliminary data indicate that 1Q14 production averaged at 2.2 mb/d, approximately 150 kb/d higher y-o-y. Total production for the year is projected at 2.2 mb/d, only about 50 kb/d higher than 2013, as some of the major expansion projects continue to experience delays and setbacks.

Petrobras announced in March that its 180 kb/d P-58 FPSO at the offshore Parque das Baleias complex began operating following a four-month delay. This FPSO will operate in the northern group of fields within the complex, specifically at the Baleia Franca, Cachalote, Jubarte, Baleia Azul and Baleia Ana fields. The P-58 FPSO is central to Petrobras' plans to boost oil production in 2014 for the first time since 2011; our current projections indicate that Brazil's total output will remain about flat, however. Although delayed, the P-58 start-up appears to be a much-needed success for Petrobras following a string of project delays, cost overruns and accidents. In a recent incident, during the rigging operations at the P-55 floating platform, a steel pipe essential to the operations was lost at sea. This setback will delay expansion efforts at Roncador field by several weeks. The P-55 platform was designed to produce 180 kb/d of oil, and was already several months behind schedule when the pipe incident occurred. Although some volumes at P-55 are being produced using a provisional hook-up, full capacity volumes will require the installation of the subsea line. Nevertheless, Petrobras declared that it had achieved record pre-salt production of 387 kb/d in March, with gains concentrated on the Sapinhoá field and was able to restart production on P-20 on the Marlim field in early April.

Chevron received approval to resume full operations at its Frade field from Brazil's regulators. Production activities were halted in the aftermath of oil spills that occurred at the field in November 2011 and March 2012. In April 2013, ANP allowed Chevron to ramp up production to about 20 kb/d of oil and the latest approval clears the way for Chevron to restore production to pre-spill levels. Prior to the spill, Frade produced more than 70 kb/d of oil. Meanwhile legal troubles stemming from that oil spill continue. Prosecutors in that case were instructed by judges to reopen the criminal investigation against Chevron and some employees, despite the civil settlement the company reached with the government in which it agreed to pay about $41.9 million in damages.

Asia

China - February actual:  Final February data indicate that China's total production, nearly all of which is crude oil, fell by about 50 kb/d in February to 4.2 mb/d, reversing production gains achieved in January. The declines were spread among a number of fields, which individually saw small declines but in aggregate accounted for the 2% m-o-m drop in production. Despite the m-o-m decreases, China's total production was about 1% higher than in February 2013. Preliminary March production estimates show an increase in output of about 40 kb/d. We expect that China's oil production will average at 4.3 mb/d in 2014, approximately 80 kb/d higher than in 2013's flood-affected production.

Former Soviet Union

Russia - February actual, March preliminary: Russia's production in February fell by 80 kb/d m-o-m to 10.9 mb/d, led by crude oil. The majority of the decrease occurred at Rosneft-operated fields, which have seen decline rates accelerate in recent months. Furthermore, the two main fields that had previously underpinned Rosneft production growth, Vankor and Verkhnechonsk, have already reached peak production for 2014. The February crude oil production is Russia's lowest monthly output level since September 2013 and the preliminary March production numbers indicate that production will decrease by a further 190 kb/d m-o-m.

With an eye to future growth, Gazprom Neft, which has recently seen eroding production volumes, announced that is will undertake a shale oil study in the Bazhenov and Achimov formations in Western Siberia. The company will define drilling areas next year but in the meantime plans to study the potential of the two formations. The French major Total is also taking part in the development of Western Siberia's unconventional resources, having received licences to explore potential shale resources in the Vostochno-Kovensky, Tashinsky and Lyaminsky-3 Blocks. Total is also Lukoil's partner in a planned joint venture that also looks to develop unconventional resources in the Bazhenov formation in areas other than those studied by Gazprom Neft. ExxonMobil announced that it will start development drilling on the Artugun-Dagi field (part of Sakhalin 1) in August of this year, though achieving commercial production before the end of the year seems unlikely.



Kazakhstan - February actual, March preliminary:  Total liquids production in Kazakhstan fell further by about 30 kb/d to 1.7 mb/d in February, extending earlier losses. The February decline was mainly driven by Kazakhstan's two largest producers, Tengizchevroil and Karachaganak, which saw volumes slide by 4% and 5%, respectively, compared with the previous month. Included in the Karachaganak figures are NGL (condensate) volumes, which saw a 40-kb/d monthly decline. In 2014, Kazakhstan's total production is expected to average 1.7 mb/d, down about 30 kb/d y-o-y.

The Kazakhstan forecast reflects our latest assessment of Kashagan's production potential, which we now estimate will remain offline through the end of the forecast period. Given the most recent announcements related to the field, we expect that Kashagan will come back online in the second quarter of 2015 at the earliest. The companies participating in the North Caspian Operating Company (NCOC) consortium continue to work on a complete assessment of the problems caused by the gas leak, which forced the field to shut down in October 2013. Latest reports indicate that the full investigation may not be completed until the summer of 2014, after which NCOC may have to replace the 90-km gas line connecting offshore production facilities to an onshore processing plant, an undertaking that could delay the field restart by several months.

FSU net oil exports continued their rebound from recent seasonal lows, rising by 140 kb/d to 9.5 mb/d in February. Crude accounted for 90 kb/d of the rise with deliveries via the Transneft network increasing by 80 kb/d on the month. The bulk of the increase was in the Black Sea, where shipments reached 1.8 mb/d (+ 100 kb/d m-o-m) after the CPC hit a new record level of 910 kb/d (+160 kb/d m-o-m). This offset a 60 kb/d fall in exports via Novorossiysk to a record low of 870 kb/d, following weather-related loading delays at the terminal and less Azeri crude being blended into the Urals stream, after SOCAR opted to ship more oil via the BTC. The increase via the Black Sea offset a 80 kb/d drop in exports from Sakhalin 1 and 2 after inclement weather delayed loadings. Poor weather also affected Kozmino, where loadings fell 30 kb/d m-o-m. The year 2014 so far has seen a significant increase in Russian overland exports to China in the wake of a supply agreement struck between Rosneft and CNPC. Latest data indicate that approximately 330 kb/d is flowing via the ESPO spur to Daqing while an additional 140 kb/d is now being shipped via Kazakhstan using the Atasu - Alashankou pipeline.



Refined product exports rose by 70 kb/d on the month on the back of slightly higher refinery runs and firm gasoil markets in the Atlantic Basin. Cold winter weather lifted heating demand in the US, prompting Russian market participants to boost exports. 'Other products' were also hiked by 50 kb/d over the month. A significant portion of these 'other products' are naphthas, exports of which have soared over recent months. Indeed, naphtha exports exceeded 500 kb/d for the first time on record in February compared to an average of 270 kb/d over 2009-12. This surge in naphtha volumes followed the May 2013 commissioning of a condensate splitter, operated by Novatek, at the Baltic port of Ust Luga. The recent firming of European naphtha markets has also helped to spur recent exports as spot prices have recovered to approximately $105/bbl from the mid-2013 low of $85/bbl. These volumes could also include some gasoline blending components. Nonetheless, these soaring volumes are even more extraordinary given that naphtha exports are still subject to a prohibitively high export tax equivalent to 90% of the crude export duty, significantly higher than the taxes levied on middle distillates and fuel oil.

Russia's Recent Crude Pipeline Developments Leave it with Ample Export Capacity

While in North America, the crude transportation infrastructure has struggled to keep up with supply, in Russia the reverse is true: state-controlled pipeline monopoly Transneft's aggressive expansion plans have run ahead of crude production growth. The upshot is that at least on paper, Russia enjoys ample spare pipeline capacity that provides it with a great deal of flexibility in the geographical allocation of its crude exports.

Over the past decade, Transneft has invested a great deal of capital in decreasing reliance on transit states, boosting capacity to shift crude exports away from traditional Western markets. Most of these projects are now complete, leaving Russia with, according to recent data, approximately 1.4 mb/d of spare crude export capacity.



With current estimates of Russian crude production set to remain at close to 10 mb/d over the medium-term, spare export capacity may in theory be used by exporters to direct crude exports towards those outlets that offer the highest netbacks. Indeed, this trend has already begun. Over the past couple of years, Russian export volumes on certain routes have become more erratic, while other routes, notably the Druzhba pipeline, have seen their volumes fall. This suggests that, Russian crude producers may have become more adept at shifting export destinations according to market conditions, sending their crude via the most profitable outlets.

Notional spare capacity on the above chart has been calculated by comparing the average export volume in 2013 with the maximum export levels achieved over 2009-13 through any given outlet. This calculation makes no consideration of the supply volumes that may or may not be actually available to fill the lines, and only aims to assess the average amount of untapped transportation capacity. (Also, no allowance has been made for maintenance or weather-related downtime.) The chart suggests that the only outlet which is currently running at full capacity is the ESPO spur to the Chinese refining centre of Daqing. This line is running approximately 30 kb/d above its 300 kb/d nameplate capacity. Indeed, in the wake of last year's deals between Rosneft and CNPC, an extra 140 kb/d of Russian oil has also been shipped to China via Kazakstan so far in 2014.

As well as helping Russian producers to maximise their netbacks, the spare capacity permits Russia to minimise disruption to exports in the event of unscheduled maintenance or adverse weather at terminals, where previously exporters would have seen their shipments curtailed. Additionally, if the current low-freight-rate environment persists, large, notably Asian, consumers of Russian oil may pick up cargoes from any port where they are available at an attractive price. Over the past couple of years, China and South Korea have both imported Russian oil via Baltic ports.

Outside of the Transneft network, the two principal outlets are the Varanday terminal in Russia's far north, operated by Lukoil, and Sakhalin Island from which the Sokol and Vityaz grades are exported to Asia. Despite having some notional spare capacity, these terminals' export volumes are governed more by fluctuations in crude production at supplying fields than by market forces. Thus, it is doubtful whether these terminals could ship at their recent maximum levels for an extended period.

Regarding the above, an important caveat is that Transneft must give exporters the green light to move their crude to outlets as they see fit. Additionally, an important consideration limiting the utilisation of spare export capacity concerns crude quality. For example, there may not be enough light and medium crudes to send eastwards via the ESPO line, and thus heavy crudes would be required to fill up the excess capacity on the line. This would therefore compromise on quality and could reduce demand from refiners for the grade. Similarly, the quality of Urals shipped via Novorossiysk has suffered as exporters have sent more light grades eastwards or have refined them domestically. This has seen exporters penalised for the lower gravity and higher sulphur content. Therefore, if crudes cannot be blended to the required qualities to meet market demands, then this could partially negate the effect of Russia holding the spare capacity.

OECD STOCKS

Summary

  • Total OECD commercial oil inventories posted a relatively shallow seasonal draw of 6.5 mb in February, to 2 567 mb. Refined product inventories covered 29.4 days of forward demand, level with an upwardly revised January.
  • Following upward revisions to January data, that month's deficit to the five-year average narrowed to 132 mb, from an earlier estimate of 154 mb presented in last month's Report. In February, the gap closed further to 115 mb.
  • Preliminary data for March suggest an unseasonal 31.1 mb plunge in OECD inventories after Japanese crude and product holdings dropped counter-seasonally ahead of the 31 March deadline for the shuttering of a tranche of refining capacity and before the 1 April increase in sales tax.


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

Following exceptionally steep destocking in 4Q13 and preliminary reports of further large stock draws in January 2014, OECD commercial oil inventories changed course in February, when they posted a markedly smaller draw than typical for that month, falling by 6.5 mb to stand at 2 567 mb by end-month. Inventories of refined products led the decline, drawing by 17.5 mb, and outweighing a combined 11.0 mb build in crude oil, NGLs and refinery feedstocks. All product categories drew, most notably other products (-7.9 mb) and fuel oil (-6.2 mb). Refined product inventories covered 29.4 days of forward demand at end-February, on a par with an upwardly revised January level. Inventories in the OECD Americas stabilised after the severe cold weather that hit the region in January, bouncing back marginally by 0.8 mb, while draws of 5.2 mb and 2.2 mb were posted in OECD Asia Oceania and OECD Europe, respectively.

Following the receipt of more complete data, January inventories were adjusted upwards by 22.2 mb. The net effect of these revisions is that the 13.2 mb January stock draw presented in last month's Report has become a slim 2.4 mb build. Upward revisions focused on the OECD Americas (+13.0 mb) and OECD Europe (+9.3 mb). Within OECD Americas, a 9.9 mb upward adjustment was made to 'other products', centred in the US. Due to these revisions, the January deficit to the five-year average has narrowed from the 154 mb presented in last month's Report to 132 mb. Since February's draw was weaker than the 23.8 mb five-year average decrease, the shortfall of OECD inventories to the seasonal average has narrowed further to 115 mb.



Preliminary data for March point to an unseasonal 31.1 mb plunge in OECD March inventories where both crude and products fell. The majority of this draw (28.7 mb) was located in Japan where refiners drew down crude stocks ahead of the 31 March deadline for the shuttering of a tranche of refining capacity, while increased demand ahead of a 1 April hike in the sales tax led to lower product stocks. Elsewhere, US inventories rose by a seasonal 4.5 mb while European holdings contracted by a broadly seasonal 6.8 mb. On a product-by-product basis, crude oil stocks remained relatively stable (+0.8 mb) after a large build in the US, as seasonal refinery maintenance there reached a peak, offset the aforementioned draw in Japan.  Meanwhile, refined products dropped by 27.0 mb, led by falls of 18.6 mb and 12.4 mb in motor gasoline and middle distillates, respectively.



Recent OECD Industry Stock Changes

OECD Americas

Industry inventories in OECD Americas inched up by a slight 0.8 mb in February following January's cold-weather-related draw in heating fuel inventories. A flotilla of middle distillate cargoes arrived in the region in February, lifting middle distillate inventories (including 10 ppm distillate fuel oil) counter-seasonally by 3.3 mb. Inventories of 'other products' (including propane) continued to slide along seasonal lines, however, to stand at the bottom of the seasonal range by end-month. Crude inventories posted a relatively shallow seasonal build of 4.5 mb, while NGLs and refinery feedstocks soared by 6.3 mb. At end-month, refined products covered 26.9 days of forward demand, 0.5 days lower than at end-January.

The contrasting stock changes in middle distillates and 'other products' underscores the fact that while middle distillate inventories could be replenished by imports, the propane shortage was not as easy for market participants to respond to. While the global trade in middle distillates is highly developed with the associated infrastructure to support it, the global trade in propane and LPG is less liquid. Therefore, whereas extra middle distillate supplies from Russia and Europe could be quickly sourced, propane imports remained at their normal seasonal levels of approximately 100 kb/d in February.



Preliminary weekly data from the US Energy Information Administration (EIA) point to a 4.5 mb build in US inventories during March, led by an 18.0 mb surge in crude stocks. This headline figure conceals sharp regional shifts in crude holdings, however. As noted in last month's Report, Midcontinent (PADD 2) stocks have drained as new pipelines from PADD 2 to PADD 3 have come online. This trend slowed in March with PADD 2 stocks slipping by 1.1 mb while those in PADD 3 soared by 18.2 mb on the back of planned refinery maintenance, which reduced regional throughputs. The fall in PADD 2 inventories was centred on the NYMEX WTI delivery point of Cushing, Oklahoma, where stocks fell by 4.7 mb. This draw helped to prop up prices for the grade in comparison to other global benchmarks.



Refined product stocks fell by 15.3 mb in March, nearly twice the seasonal draw for the month, according to preliminary data. Much of this decrease was reported in motor gasoline (-15.6 mb) where refiners destocked winter-grade product in preparation for their switch to summer grade. PADD 2 stocks fell by 5.9 mb or 11% while those in PADD 1 dropped by 4.4 mb (8%). In contrast, PADD 3 inventories slipped by 2.0 mb, only accounting for 3 % of gasoline inventory there. On a national level, gasoline inventories covered 23.4 days of forward demand, one day less than the five-year average.

OECD Europe

OECD European industry inventories drew by a slim 2.2 mb in February. Since the fall was weaker than the 10.7 mb five-year average draw for the month, the region's deficit to the marker fell to 82 mb from 91 mb one month earlier. A 1.3 mb decrease in refined products offset a 0.6 mb rise in crude oil to pressure aggregate stocks lower. All told, at end-February refined products covered 38.9 days of forward demand, a rise of 0.1 days from end-January. With the European winter remaining warmer than normal, regional middle distillates inventories (including 10 ppm gasoil, the regional liquid fuel of choice for space heating) drew by a slight 1.1 mb, weaker than the 7.6 mb seasonal draw for the month. Consequently, the deficit of stocks versus the five-year average narrowed to 18.7 mb at end-month from 25.3 mb at end-January. End-user heating oil (10 ppm gasoil) stocks in Germany, the region's largest consumer, dropped by two percentage points to stand at 53% of capacity at month-end, level with one year earlier.



Preliminary data from Euroilstock suggest that European inventories fell by a broadly seasonal 6.8 mb in March with both crude (-3.3 mb) and refined products (-3.5 mb) posting draws. On the products side, all categories bar fuel oil (+0.3 mb) drew. Notably, middle distillates and motor gasoline fell by 2.3 mb and 1.2 mb, respectively. Data pertaining to refined products held in regional independent storage indicate that volumes rose, led by builds in light products. 

OECD Asia Oceania

Commercial inventories in OECD Asia Oceania drew by a seasonal 5.2 mb in February after a 6.2 mb fall in refined products more-than-offset a 1.5 mb rise in crude oil. Among refined products, only motor gasoline posted a build (1.1 mb). Middle distillates drew by a seasonal 3.8 mb to leave inventories at a slim 2.1 mb deficit to the five-year average. As the region's refineries approached the second quarter peak maintenance season, refined product stocks stood 5.9 mb below year-earlier levels but due to diminished demand covered 20.8 days of forward demand, 0.4 days above end-January and 0.3 days below a year-earlier.



Preliminary weekly data from the Petroleum Association of Japan (PAJ) indicate that stocks there fell by an exceptionally steep 28.7 mb in March. Crude oil inventories plunged by 15.5 mb as refiners ran down their feedstocks ahead of the 31 March deadline for the shuttering of a tranche of refining capacity. Refining capacity is being reduced in order to meet new government targets regarding the national average ratio between cracking and crude-distillation capacity.

Japanese refined product stocks dropped by an additional 8.1 mb as end-user demand reportedly picked up ahead of the 1 April increase in the sales tax, from 5% to 8%. With refiners reluctant to increase runs amid weak margins, product inventories have been on a steady downward trajectory since the turn of the year, led by a combined 15 mb draw in kerosene and gasoil.

OECD Asian Economies Building Storage to Take Advantage of Globalised Trade

As global oil trade continues to move away from the Atlantic Basin to the Pacific, Japan and Korea are jostling to position themselves as regional trading hubs. Korea, in particular, appears to have made the development of a large-scale storage hub, designed to support regional trade, a national priority.  In recent years, the administration has repeatedly voiced support for the development of the southeastern port of Ulsan to become the region's premier oil trade and storage hub. The hub has had considerable success, reportedly growing at a rate of 3% per year since 2001. Moreover, following a recent government feasibility study, the Ulsan tank farm will be expanded to store 28.4 mb of crude, refined products and petrochemicals by 2020. This would lift Korea's total commercial storage capacity to 58 mb, higher than that of the current Asian storage powerhouse, Singapore. The Ulsan expansion project will be undertaken by Korean companies KNOC and S-Oil in partnership with independent tank storage provider, Vopak.

Meanwhile, since 2011, Japan has also sought to leverage its oil-market experience and proximity to several  large Asian oil importers. The administration's strategy has been to strengthen its ties with Saudi Arabia, one of its major crude suppliers, by providing crude storage free of charge. Such an arrangement has permitted Japan to improve its energy security while at the same time allowing Saudi Arabia to pre-position crude in a key consumer market, beyond such naval chokepoints as the Straits of Hormuz and the Malacca Straits, through which most Middle East tankers bound for Asia must sail. Under the terms of the agreement, state-owned Japan Oil, Gas and Metals Corporation (JOGMEC) leases storage tanks at the Okinawa terminal to Saudi Aramco and in return has first refusal rights on the crude stored at the terminal in the event of an emergency. Such was the success of the deal that in late 2013, Japan announced that it was extending it for a further three years and increasing the amount of crude stored to 6.3 mb from 3.8 mb. Saudi Aramco uses the site primarily for strategic storage with shipping data indicating that only 13 crude cargoes have left the port since 2011 as the oil is likely periodically 'turned over'. Destinations of the cargoes include China, Indonesia, Korea, Taiwan and even the US West Coast.

Recent Developments in Singapore and China Stocks

Data from China Oil, Gas and Petrochemicals (China OGP) indicate that Chinese commercial inventories built by an equivalent 30.7 mb in February (data are reported in terms of percentage stock change), led by a 20.7 mb rise in refined products. This increase in products likely results from the commissioning of several new refineries in January. Gasoil stocks rose by 13.9 mb (20%) amid reports of sluggish domestic demand during the Chinese New Year holiday and of exporters not shipping their quotas abroad.



There has been much recent speculation about the possibility that China could be adding to Phase 2 of their Strategic Petroleum Reserve. After China likely refrained from further building strategic stocks in 2013, data indicate that crude supply (imports and domestic production) surged ahead of refinery runs in January and February, implying a larger crude stock build than indicated by OGP data. In January, as imports hit a record 6.7 mb/d, this gap between crude supply and demand widened to 850 kb/d, the most since May 2012, when China was in the midst of building Phase 2 storage. In February, the gap fell back to 110 kb/d.

Data from International Enterprise pertaining to the land-based storage of refined products in Singapore indicate that inventories dropped by a slim 0.4 mb in March after light distillates plunged from their previous record levels. Much of this drop can be pinned on lower imports, notably of naphtha from the Atlantic Basin, while demand from the Philippines and Vietnam - among others - remained high. Following healthy imports from Saudi Arabia and India, and amid reportedly low bunker fuel demand, residual fuel oil stocks soared by 1.7 mb over the month. Most of this build was posted in the final week of the month. Meanwhile, middle distillates stocks inched up by 0.5 mb over the month.



PRICES

Summary

  • Crude oil prices oscillated in a narrow range in March, with supply outages in Libya and northern Iraq as well as market anxiety over Russian-Ukraine tensions countering seasonally weaker demand and reduced refinery throughputs. By early April, market expectations of an imminent restart of limited Libyan exports pressured ICE Brent prices lower, last trading at $107.75/bbl. By contrast, a steady increase in US refinery demand supported NYMEX WTI at $103.50/bbl.
  • Spot prices for benchmark crudes in March were marginally lower month-on-month (m-o-m), with seasonally weaker demand and scheduled maintenance in the Atlantic basin and Asia curbing refining runs in all major markets, which in turn weighed on prices.
  • Spot product prices posted a mixed month with cracks at the top and bottom of the barrel outperforming middle distillates, which were hit by low seasonal demand and plentiful supply.
  • Rates for crude carriers experienced another underwhelming month in March as demand for crude was curbed ahead of the second-quarter refinery maintenance season while product tanker markets were characterised by a geographical split as rates for vessels on voyages to Asia firmed while those in the Atlantic Basin weakened.


Market Overview

Oil prices oscillated in a narrow range in March, with supply outages in Libya and northern Iraq and market anxiety over Russian-Ukraine tensions countering seasonally weaker demand and reduced refinery throughputs. ICE Brent futures remained near five-month lows, declining by $1.08/bbl to $107.75/bbl while NYMEX WTI was off a smaller $0.17/bbl to an average $100.50/bbl. By early April, market expectations of an imminent restart of limited Libyan exports pressured ICE Brent prices lower, last trading at $107.75/bbl. By contrast, a steady increase in US refinery demand supported NYMEX WTI at $103.50/bbl.

Oil markets are closely following difficult negotiations to end the port blockades between the federalist rebels in eastern Libya and the central government in Tripoli, with both sides issuing a raft of conflicting reports on the status of a planned resumption of exports. A resolution to the nine-month standoff may be near but the devil is in the details, and the timing of the resumption could face a multitude of problems and delays. Initial reports in early April suggested it was a matter of days before a resolution to the conflict would be reached, with Brent crude falling $3/bbl as the market began to factor in the return of Libyan supplies. By 9 April, however, it appeared that it could be weeks before exports resume and even then by a smaller volume than originally envisioned. Efforts are reportedly underway to restart the two smaller of the four ports, Zuetina and Hariga, which would amount to under 200 kb/d, but so far the central-government controlled oil protection force has been unable to secure the facilities. Plans to resume operations at the larger Es Sider and Ras Lanuf are still in limbo as negotiators thrash out details, including demands from the rebels that the group's leader, Ibrahim al-Jathran, be given amnesty. Another sticking point is to guarantee that former guard members who deserted the government-run Petroleum Facilities Guard (PFG) to join al-Jathran be allowed to return to their jobs.

The continued loss of Libyan crude combined with a near total cut-off of Iraqi Kirkuk supplies in March led to a tightening of sour crude markets. In addition, OPEC crude supplies posted an exceptional decline of near 900 kb/d to just 29.62 mb/d, the lowest level in five months. For all the geopolitical issues that could potentially unhinge markets, prices for the Brent M1-M12 futures contract have remained relatively stable. The Brent M1-12 contract narrowed marginally in March, to $4.65/bbl compared with $4.95/bbl in February and $4.50/bbl in January.



While market attention has been transfixed on supply issues in March and April, weaker demand data for 1Q14 have emerged, in part due to relatively mild winter weather conditions in Europe and Korea and a waning demand outlook for China. A slowdown in Chinese oil demand growth, that emerged mid-2013, has continued in line with the underlying macroeconomic trend, with demand for industrial fuels particularly soft.



By early April, markets seesawed. Uncertainty surrounding the return of Libyan supplies to the market, escalating tensions between Russian and Ukraine, suspension of Iraqi Kirkuk crude exports and expectations of a pick up in demand combined to lift prices briefly before they eased again. After posting a seasonal low in April, however, refinery throughput rates are forecast to rise 2.4 mb/d by June. A steady uptrend in financial markets may also lend support to commodity markets.



Futures Markets

Activity Levels

Managed money net long positions in NYMEX WTI futures eased between 25 February and 4 April after peaking to an all time high in late February and early March, as WTI retreated under the $100/bbl threshold. The ratio between long and short hedge funds' positions is now gravitating around the 2-to-1 level, which it had not reached in more than three years. Hedge funds reduced their net long exposure to ICE Brent as well, as the price eased throughout the month, although trading in a narrow $5/bbl range. On the products side, hedge funds raised their net long exposure to RBOB gasoline to their highest since August 2013, ahead of the switch to summer grade. Money managers also reduced their net longs in both New York ULSD and ICE Gasoil, as prices eased throughout the month.



In terms of outstanding futures contracts, ICE Brent inched up just above 1% y-on-y, while NYMEX WTI dropped by 5%. The fall in WTI was even steeper when considering futures and options, down almost 12% y-o-y. Global WTI trading volumes stood over Brent's for the second consecutive month, after being neck-to-neck for seven consecutive months. Both contracts were seasonally up on the month in double digits (12% Brent and 18% WTI). On a year-on-year basis, Brent was down 7%, while WTI was up almost 10%.







Financial Regulation

The US Commodity Futures Trading Commission (CFTC), citing problems in now-mandatory swaps data reporting, is seeking public comment on the reporting rules, aiming to improve the Commission's data reporting standards. The 60-day public comment process is part of the swap data review carried out by the CFTC in order to resolve reporting challenges. The internal working group in charge of the review is expected to make recommendations by the end of July.

The CFTC issued no-action letters on 21 March, dispensing firms dealing swaps with utilities from being registered as swap dealers, provided that they remain under the $8 billion per year threshold. The letter follows a petition from gas and power utilities requesting relief for hedging risk stemming from electric or natural gas operations.

EU registered swaps-trading platforms (so-defined Multilateral Trading Facilities) have now until 15 May to meet the CFTC standards in order to be exempted from registering as swaps dealers in the US, a deadline previously set on 24 March. The extended CFTC relief follows the Commission's announcement of further clarifications and amended conditions to qualify for exemption.

Spot Crude Oil Prices

Spot prices for benchmark crudes in March were marginally lower m-o-m, with seasonally weaker demand and scheduled maintenance in the Atlantic basin and Asia curbing refining runs in all major markets. Global refinery throughputs are forecast to tumble by 2 mb/d from February to a seasonal low of 74.9 mb/d in April before steadily recovering to meet peak summer demand.

In Europe, expectations of a recovery in Libyan supplies and relatively high exports of Iraqi Basrah crude combined to push Brent lower, down by $1.29/bbl to an average $107.55/bbl in March. Spot prices for Dubai were down a smaller $0.70/bbl to $104.30/bbl, with stronger demand for fuel oil-rich crudes tempering reduced demand overall from refiners. US WTI posted the smallest m-o-m loss at just $0.15/bbl to $100.57/bbl as domestic refiners started their ramp-up from maintenance turnarounds.



By early April, reports of an imminent start-up of Libyan crude exports to Europe and reduced refinery runs added further downward pressured on European markets. The price spread between Brent and Urals crudes in the Mediterranean, however, narrowed on tight sour markets. The near complete loss of Libyan and Iraqi Kirkuk crudes in March and helped strengthen Urals relative to Brent. Exports of Kirkuk have been halted since 2 March following sabotage to the key Iraq-Turkey pipeline to the Mediterranean port of Ceyhan. Technicians have been unable to make repairs to the pipeline due to attacks on workers.

The Brent-Urals differential narrowed from $0.95/bbl at the start of March to just $0.35/bbl by 31 March. After initial expectations in early April of an imminent resumption of Libyan exports, it appears conflicting negotiating demands and operational issues may delay the restart until at least 13 April, according to officials, and even then, volumes from the Zuetina and Hariga ports will be relatively modest at under 200 kb/d.



In Asia, relatively stronger demand for heavier, sour grades strengthened Dubai crude relative to Brent and lighter African grades. With the decline in spot prices of Brent outpacing Dubai, the discount between the grades narrowed by around $0.60/bbl m-o-m, to -$3.25/bbl in March compared with around -$3.85/bbl in February and an average -$4.15/bbl in January.

In the US, the WTI-Brent differential also narrowed as the benchmark was supported by rising refinery throughputs through March at the US Gulf Coast and a steady drawdown in crude oil stocks at the Cushing, Oklahoma storage terminal (see 'OECD Stocks' section). The WTI-Brent spread was just under -$7/bbl in March compared with about -$8.10/bbl in February and around -$13.30/bbl in January. The LLS has also steadily gained on Brent, with the differential narrowing in early April to -$1.90/bbl compared with -$3.35/bbl on average in March. 



Spot Product Prices

Spot product prices in major markets endured a mixed month, with cracks at the top and bottom of the barrel out performing middle distillates, which were hit by low seasonal demand and plentiful supply. US gasoline markets received a major boost from heavy stock draws ahead of the switch from winter grade product to summer grade. In the US Gulf cracks briefly exceeded $25/bbl in early March but then seesawed from thereon, gaining $3.40/bbl on average throughout the month. European markets were also buoyed by the US switch to summer grade product, and in late-March both the NWE and MED cracks soared to nearly $15/bbl, their highest level since summer 2013. In Singapore, the crack against Dubai lost some ground mid-month as reportedly high stocks in a number of key consumers dampened demand.



Naphtha cracks strengthened while remaining in negative territory, across all surveyed markets in March. European markets experienced the greatest uptick as demand from refiners for naphtha as a gasoline blending component remained strong. In late March, the NWE crack rose to a discount of close to $2/bbl versus Brent, its highest value since late 2012 after supplies to the region tightened after Mediterranean naphtha headed to Asia instead. Additional upward momentum came as volumes in independent storage declined. In Singapore, gains were not as impressive as in Europe as the crack against Dubai firmed by $0.40/bbl. Upward pressure came as arrivals from Europe remained scant while gains were tempered as demand from Korea's petrochemical sector remained underwhelming.



European middle distillate markets performed especially poorly throughout March. Gasoil cracks were dragged lower after a decline in Brent was outstripped by falls in spot product prices after underwhelming seasonal demand, in the wake of an especially warm winter, and plentiful supply. However, from late-month onwards cracks experienced a resurgence as imports reportedly tailed off and a number of refiners reportedly curbed runs for maintenance and in response to poor margins. In the US, diesel prices came under pressure from the closure of the Houston Ship Channel in late-month which disrupted exports while US stocks also built. In Asia, kerosene spot prices softened at a faster pace than falls in crude as the heating demand season finished while demand for transport use has yet to take off. Consequently the Singapore jet kerosene crack plunged by $2.10 over the month.



European residual fuel cracks continued their recent improvement as spot prices remained relatively stable while regional marker crudes weakened. Low sulphur fuel oil (LSFO) cracks exceeded year-ago levels as the discount versus crude narrowed to -$5/bbl in late March before falling back again by early-April. Much of the recent strength has come from import demand from Singapore as the arbitrage to move product there remains open, buoyed by low freight costs. LSFO cracks in Singapore remained firmly in positive territory for a third consecutive month after regional demand remand firm while the high sulphur fuel oil crack languished at -$10/bbl as high imports from the US and Europe capped gains.



Freight

Rates for crude carriers experienced another underwhelming month in March as demand for crude was curbed ahead of the second quarter refinery maintenance season. The benchmark VLCC Middle East Gulf - Asia trade has been especially hard hit. Rates stood at less than $10/mt in late-March, considerably down on the recent mid-February peak of $16.80/mt. This decrease can be attributed to Asian refiners cutting their purchases of Middle Eastern sour crudes ahead of the second quarter maintenance season when approximately 1.6 mb/d of regional capacity is expected to be offline.



West African Suezmax markets seesawed throughout the month as, despite the recent increase in long-haul trade to Asia, the supply of tonnage remained plentiful. In Northwest Europe, rates on trades from the Russian terminal of Primorsk suffered after the ice-class premium was removed as ice restrictions were lifted at the port ahead of schedule following an unusually warm winter. However, following a late-month uptick in Urals loadings at Baltic terminals, rates briefly rallied to $8/mt.

Product tanker markets were characterised by a geographical split as rates for vessels on voyages to Asia firmed while those in the Atlantic Basin weakened. In the East, rates on the Middle East Gulf - Japan route firmed by approximately $3.50/bbl over the month while gains on the Singapore - Japan trade amounted to a muted $0.50/bbl over March. It is likely that strength was gained from refiners stock building ahead of second quarter maintenance. Indeed, April normally coincides with a prolonged period of stock building in both OECD and non-OECD Asia economies.

In the Atlantic basin, product trade reportedly remained thin. Rates on the benchmark UK - US Atlantic Coast trade gradually softened over the month as the tonnage pool easily absorbed cargoes released onto the market. By early-April it sat approximately $2.50/bbl lower than in early-March. It should be noted that despite the closure of the Houston Ship Channel due to a fuel spill and reports of its disruption to US diesel exports, little effect was felt in tanker markets due to the plethora of suitable vessels in the Atlantic Basin.

REFINING

Summary

  • Global refinery crude demand inched slightly higher in February from a month earlier, averaging 76.8 mb/d. Refinery activity will decline seasonally through April on scheduled maintenance in the Atlantic basin and the Pacific. Global crude runs fall by close to 2.0 mb/d from February to April, before rebounding sharply to meet peak summer demand. Throughputs are set to average 75.9 mb/d in 2Q14, down 0.5 mb/d from 1Q14 but 1.0 mb/d higher year-on-year (y-o-y).
  • Global refinery throughput estimates for 1Q14 have been lowered by 135 kb/d since last month's Report, to average 76.4 mb/d, following weaker OECD activity. A rebound in Indian throughputs and robust Russian runs provided a partial offset. Annual growth remains pegged at 0.9 mb/d, with the US, the Middle East and Russia the main contributors. In contrast, European and Asian refinery activity contracted by a combined 0.7 mb/d.
  • OECD crude throughputs inched up marginally in February, to 36.5 mb/d, on the back of improved utilisation rates in Europe. Despite a seasonal decline, North American throughputs stood an impressive 710 kb/d above a year earlier, offsetting structural declines in Europe and Asia Oceania.
  • Seasonal refinery maintenance tightened product markets and provided a welcome boost to European and Asian benchmark refining margins in the second half of March and early April. On a monthly basis, however, surveyed refinery margins in Europe and Singapore were pressured lower in March from February by weaker product prices, while US refiners experienced a short-term boost courtesy of a seasonal change in gasoline specifications.


Global Refinery Overview

Global refinery throughput estimates for February are largely unchanged since last month's Report, at 76.8 mb/d, 265 kb/d higher than a downwardly revised January assessment. Final monthly data for January submitted by OECD member countries were some 230 kb/d lower than preliminary data had indicated, while weaker-than-expected monthly data for non-OECD countries reduced the January assessment by a further 120 kb/d. A stronger than expected rebound in Indian refinery activity in February, and surging Russian throughputs in March provided a partial offset, leaving 1Q14 global crude runs at 76.4 mb/d, down 135 kb/d compared to last month's Report. Annual gains totalling some 0.9 mb/d, were led by the US, (+690 kb/d), Russia (+320 kb/d) and the Middle East (+575 kb/d), partly blunted by continued contraction in Europe and Asia.

Refinery activity is set to plunge by nearly 2.0 mb/d from February through April due to spring maintenance. US refinery outages are expected to have already peaked in early March. European and Russian turnarounds are expected to peak over April and May, while maintenance in Asia Oceania runs is concentrated over May and June. Global crude run estimates for 2Q14 are largely unchanged since last month's Report at 75.9 mb/d, down 0.5 mb/d on average from 1Q14, but 1 mb/d higher than in 2013. As in 1Q14, annual gains stem from the US, the Middle East and Russia, though non-OECD Asian throughput growth (including China) is expected to improve after a period of marked weakness.



While European and Singapore benchmark margins staged a remarkable recovery in early April, structural weakness persists. The improvement most likely followed temporary supply tightness on the back of seasonal maintenance, rather than product demand strength. Simple refiners in mature OECD economies outside of the US remain under pressure, and capacity consolidation continues. BP announced in early April it will shut its 100 kb/d Bulwer Island refinery in Australia by mid-2015, arguing that "the growth of very large refineries in the Asia-Pacific region was driving structural change within the fuels supply chain in Australia and putting huge commercial pressure on smaller scale plants". This will be the third Australian refinery closing in four years, following the shutdown of Shell's Clyde refinery in 2012 and the scheduled closure of Caltex' Kurnell refinery later this year. Shell also recently agreed a deal to sell its Geelong refinery to European energy trader Vitol. In Japan, the first phase of a government plan to rationalise the country's downstream industry was just completed, with another 400 kb/d of capacity permanently shut effective 31 March. The latest plant closures bring total Japanese capacity reductions to 0.8 mb/d since 2008, leaving it with just over 4 mb/d of crude distillation capacity at the start of April. In Europe, the collapse in early April of exclusive talks between Murphy affiliate Murco and a potential buyer of UK's Milford Haven plant increases its risk of closure. The company, which has been trying to sell the refinery for the last three years, has entered into discussion with employees over the future of the site.

Refinery Margins

Surveyed refinery margins had a mixed month in March with weaker product prices in Europe and Singapore pressuring margins lower there while US refiners benefited from a seasonal change in gasoline specifications. The prevailing trend, outlined in last month's Report, of sour crudes strengthening versus sweet grades - especially in Europe and Asia - continued into March, with refiners running such grades as Urals and Dubai facing weaker margins.



Despite weakening crude prices, European refinery margins remained in the doldrums in March, softening by $0.45/bbl and $0.23/bbl on average in Northwest Europe and the Mediterranean, respectively. Complex refiners, especially in Northwest Europe, faced even steeper declines in margins than simple refiners, after middle distillate prices came under pressure from ample imports and weak demand following a warmer-than-usual winter.



Simple refiners, in contrast, managed to buttress their losses as fuel oil prices held up better than those for products at the lighter end of the barrel. The relative price of feedstocks also had a bearing on margins, with refiners running Brent benefitting from the grade weakening versus other regional markers. Nonetheless, European refinery margins experienced a remarkable resurgence of late, more than doubling from late-March onwards on the back of surging gasoline and gasoil cracks. Notably, the Brent hydroskimming margin returned to positive territory for the first time since summer 2013.

Despite rising US crude prices versus other global benchmarks, US refiners experienced the greatest gains of all surveyed regions. Gulf Coast refiners, in particular, saw their margins rise by $1.45/bbl on average, while those in the midcontinent soared by $2.90/bbl. As in previous months, midcontinent refiners benefitted from WTI and WCS trading at a discount to Gulf Coast markets. In general, US margins received a short-term boost from rising gasoline prices after refiners drew down their stocks of winter-grade gasoline ahead of their seasonal switch to summer-grade product. Elsewhere, some strength was seen in middle distillates and high-sulphur fuel oil.



Margins were mixed in Singapore. As outlined in last month's Report, refiners running Dubai remained at a distinct disadvantage to those running Tapis. Indeed, the trend became even more pronounced after Tapis again weakened significantly against Dubai: refiners utilising Tapis enjoyed an average increase of $1.05/bbl in their margins, while those running Dubai saw margins fall by $0.55/bbl. With product prices performing poorly across the barrel, Tapis weakness was the main factor propelling margins upwards.

OECD Refinery Throughput

OECD refinery crude runs inched up by 100 kb/d in February, to 36.5 mb/d on average, on a recovery in European throughputs. Overall, OECD throughputs were only slightly lower than a year earlier, though regional differences persisted. European refiners processed 250 kb/d more crude in February than a month earlier, narrowing their y-o-y deficit to 330 kb/d, from 430 kb/d in January and 1 mb/d on average in the second half of 2013. In contrast, the commencement of spring turnarounds curbed refinery activity in North America in February, lowering regional throughputs by 140 kb/d m-o-m. Averaging 18.2 mb/d, regional throughputs were nevertheless up 0.7 mb/d y-o-y, with US crude throughputs a massive 1.0 mb/d higher. Lastly, OECD Asia Oceania's refinery throughputs were largely unchanged from January, but 0.5 mb/d below the same month in 2013.

Preliminary OECD estimates for January have been revised downwards by 230 kb/d since last month's Report with the submission of official data. Japan led the downward revisions (-105 kb/d), followed by the US (-100 kb/d) and Germany (-80 kb/d). February estimates were also lowered by just over 200 kb/d, following weaker data for Europe and Asia Oceania. In all, 1Q14 throughputs are now pegged at 36.2 mb/d, 120 kb/d lower than the previous year and 190 kb/d less than in last month's Report.



Seasonal maintenance is projected to curb OECD throughputs by a further 0.9 mb/d through April, when OECD runs are expected to bottom out at 35.6 mb/d. After that, North American and European throughputs are expected to rebound seasonally, even as Pacific refinery activity edges down further through May. In all, OECD throughput estimates for 2Q14 are unchanged since last month's Report, at 36.1 mb/d, 210 kb/d below a year earlier.



Crude oil processed in North America declined by 140 kb/d in February, as both US and Mexican refiners scaled back runs. US throughputs fell 80 kb/d m-o-m, to average 15.2 mb/d, but stood a hefty 970 kb/d above year-earlier levels. The latest official monthly export data show US refiners exported 3 mb/d of oil products in January, of which 1.3 mb/d were middle distillates, down from a record 3.5 mb/d in December. Net imports were 1.7 mb/d, down from 2.3 mb/d in December and up from 1 mb/d a year earlier. Mexican throughputs declined by 120 kb/d m-o-m as Pemex's Madero refinery underwent planned maintenance.



In March, US refinery crude throughputs fell another 100 kb/d on average, with sharp declines in the US midcontinent offset by smaller gains elsewhere. Refinery maintenance curbed midcontinent crude runs by 290 kb/d m-o-m to average 3.3 mb/d, the lowest since May 2013. Husky reportedly reduced throughputs at its 160 kb/d Lima refinery while conducting maintenance and upgrading work. Phillips 66 was also undertaking maintenance at its 330 kb/d Wood River refinery in March, while a malfunction at BP's Whiting refinery briefly halted operations. Regional throughputs will likely remain subdued also in April, as Valero's Memphis refinery reportedly has had its planned six-week maintenance pushed back into April from March.



According to weekly data, US Gulf Coast throughputs were unchanged month-on-month in March, averaging 7.8 mb/d. Year-on-year gains narrowed to 350 kb/d, from 740 kb/d in February and 620 kb/d in January. By the week ending 28 March, however, regional crude throughputs had rebounded to 8.05 mb/d, their highest weekly level since early January. Regional refinery outages have included, among others, Phillips 66's 250 kb/d Westlake refinery, ExxonMobil's 500 kb/d Baton Rouge refinery, Motiva's 235 kb/d Convent plant, Phillips 66's 250 kb/d Belle Chasse facility and Marathon's 475 kb/d Texas City unit.

European throughputs rose 250 kb/d month on month, to 11.4 mb/d, but were 330 kb/d below a year earlier. Italy and the UK led the year-on-year declines. The former has closed 320 kb/d of capacity since 2008, but utilisation rates nevertheless fell to 59.9% in February, the lowest since at least the start of 2004. Eni's Gela refinery in Sicily halted operations after a fire and has yet to restart. UK throughputs were dragged down by maintenance at Valero's Pembroke refinery. The 210 kb/d Grangemouth refinery also started planned maintenance in early March. Also in the UK, exclusive talks between Murco and a potential buyer for the 106 kb/d Milford Haven refinery collapsed in early April. The company has been trying to sell the plant for over three years, and has entered into discussion with employees over the future of the plant. Unless a new buyer is found quickly, the risk of closure is looking increasingly likely.

A New Green Start for Italy's Venice Refinery

Italy's oldest refinery, Eni's Porto Marghera plant in Venice, is in the midst of a first-of-its-kind transformation. At a relatively limited investment of around €100 million, the simple 80 kb/d refinery, which halted operations in September 2012 due to poor margins, is being converted into a "biorefinery" as part of Eni's Green Strategy. The plant will be able to produce a new generation of high quality "drop-in" biofuels, mainly green hydrotreated vegetable oil (HVO) (80%), but also green naphtha and green LPG, to replace convential oxygenated biofuels (biodiesel FAME) which Eni currently sources in the market to meet its increasing blending obligations.

Due to fuel quality requirements set out in the EU Fuel Quality Directive, the share of FAME biodiesel in diesel is currently limited to max 7%, a constraint which may be overcome by using HVO. The new plant will thus provide Eni with more flexibility to meet the EU's current target of a 10% share renewable energy in the transport sector by 2020.

The "biorefinery" is based on a proprietary Ecofining technology, developed by Eni and UOP, which hydrogenates the triglyceride content in lipid materials such as vegetable oil, cooking oils, and animal fats. The first feedstocks processed will be palm oil imported from suppliers able to provide the sustainability certificates approved by the European Commission. Eni started the plant conversion process in the second quarter of 2013 and was to start biofuel production this month.

In this first phase, the Ecofining technology is being used together with existing refinery units, allowing a maximum biofuel output of 400 kt/y (or about 9 kb/d). Once the second phase is completed in 2015, a new steam reforming unit will increase hydrogen production and allow the plant to increase capacity to 560 kt/y (or 13 kb/d).

Refinery runs in OECD Asia Oceania were largely unchanged in February from a month earlier, averaging 6.9 mb/d. Regional runs stood some 0.5 mb/d below the previous year, however, with Japan and Korea leading the contraction. Significant capacity rationalisation compounded the impact of weak regional product demand and refining margins to curb runs. A further 400 kb/d of capacity was cut in March ahead of the 31 March deadline set by METI by which refiners had to choose between curbing crude distillation capacity or investing in new upgrading units to lift their upgrading ratio.

Weekly data from the Petroleum Association of Japan show Japanese crude throughputs falling by 85 kb/d in March, to 3.55 mb/d. As highlighted in earlier Reports, nameplate capacity reductions would not result in equal declines in processing volumes, as much of the idled capacity was already effectively mothballed. Overcapacity elsewhere in the system will also likely limit the impact. Seasonal refining maintenance through the end of June could, however, amplify the impact of permanent plant closures by reducing available capacity at other plants. Japanese refinery runs are expected to contract by 210 kb/d on average in 2Q14 y-o-y, taking regional throughputs to 6.1 mb/d.



Downstream Woes Down Under

As in Japan, Australia's downstream industry is currently going through a massive transformation and consolidation. In contrast to Japan, however, rationalisation efforts have not fallen out of coordinated government measures, but rather individual industry business decisions, and rather due to increased competition than declining demand. In the latest blow to the country's refining capacity, BP announced in early April it will cease refining operations at its 101 kb/d Bulwer Island refinery in Brisbane by mid-2015. Australia's refining and marketing sector, characterised by small and aging facilities, has undergone significant restructuring in recent years. The industry, counting eight refineries in Australia in 2003, has struggled to compete with new, larger plants operating in the Asia Pacific region.

As a result, Australia is on track to reduce the number of its refineries to four, with a combined capacity of 430 kb/d by next year, from 820 kb/d just a decade ago. ExxonMobil mothballed its 78 kb/d Port Stanvac refinery in 2003 and Shell converted its 79 kb/d Clyde refinery in Sydney to an import terminal in September 2012. The company averted the same fate for its 120 kb/d Geelong refinery however, as it agreed to sell the plant and 870-site service stations to European energy trader Vitol for $2.6 billion.

Caltex is on track to convert its 135 kb/d Kurnell plant to an import terminal by the end of this year, and with the Bulwer Island plant closing next year, Australia's refining capacity will have been nearly cut in half in a decade. According to the most recent IEA data, Australia consumed 1.1 mb/d of oil products in 2013, 150 kb/d higher than in 2003. Net petroleum product imports averaged 370 kb/d last year, of which 75% was middle distillates. Australia also imported some 240 kb/d of crude oil in 2013.

Non-OECD Refinery Throughput

Non-OECD refinery throughput estimates for 1Q14 and 2Q14 have been raised by 130 kb/d and 60 kb/d, to 40.2 mb/d and 39.8 mb/d respectively, on higher Russian and 'Other Asian' runs. Russian refinery throughputs surged 470 kb/d year-on-year in March, while Indian refinery runs also recovered in February after four consecutive months of year-on-year contractions. Non-OECD runs will nevertheless decline seasonally through April, as maintenance intensifies. Annual growth is unchanged at 1 mb/d for both 1Q14 and 2Q14. Annual gains are set to come from the Middle East and Russia, while Asian runs are expected to continue posting modest growth.



As no new official data for China's refinery operations had been released at the time of writing, the Chinese throughput estimates are left largely unchanged. According to the latest data from the National Statistics Bureau, Chinese refinery runs averaged 9.8 mb/d over January and February, 1.0% lower than the same period a year earlier. Seasonal maintenance is expected to curb runs from March onwards, partly offset by the ramping up of newly commissioned capacity. Seasonal maintenance commenced last month with Sinopec's 160 kb/d Jinling Petchem refinery going offline. Scheduled outages increase over April and May with CNPC's 400 kb/d Dalian plant and Sinopec's Changling, Yanshan, Shijiazhuang and Shanghai refineries planning extensive shutdowns. Newly commissioned capacity is nevertheless expected to underpin Chinese runs in coming months. Around 530 kb/d of new capacity came on line around the start of the year, including Sinopec's 90 kb/d Yangzi expansion, CNPC's new 200 kb/d Pengzhou refinery and Sinochem's 240 kb/d Quanzhou plant.



Rebounding Indian refinery throughputs in February boosted non-OECD Asian runs to an estimated 10 mb/d, from 9.8 mb/d a month earlier. After four months of annually contracting runs, Indian refiners posted year-on-year gains in February estimated at some 85 kb/d. At 4.6 mb/d, Indian throughputs were 135 kb/d higher than our previous forecast. The increase came despite a decline at state-owned IOC refineries, hit by a leak on the Salaya-Mathura pipeline that cut runs at the company's 160 kb/d Mathura refinery in the northern state of Uttar Pradesh. BPCL's 120 kb/d Bina refinery also saw lower runs, in this case due to a power outage. In contrast, Reliance's Jamnagar complex is estimated to have processed 1.38 mb/d, 130 kb/d more than a year earlier. Maintenance is expected to have subsequently curbed runs at the Reliance refinery in March, when a 330 kb/d crude unit went offline. BPCL is planning to shut a crude unit at its Mumbai refinery for 15 days in April-May as it performs maintenance on its cracker unit. India's oil product exports also bounced back in February, to 1.46 mb/d, up 8.3% on the previous month and 14% higher than in February 2013.

In Malaysia, Petronas finally approved the $16 billion RAPID project, which includes a 300 kb/d refinery and a petrochemical complex, after repeated delays. The project is to be built in the southern Johor state in Malaysia and is expected to start up in 2019, from an original target of 2016. Concerns over the project's economic viability, and in particular the LPG/Naphtha crackers ability to compete with ethane crackers in the US, had delayed the final investment decision. The partial lifting of fuel subsidies in Malaysia last year eased Petronas' subsidy burden and has made the project more attractive. The refinery will be Malaysia's largest and will increase the country's refining capacity to 880 kb/d. In comparison, Malaysia's oil product demand averaged 740 kb/d in 2013.

Preliminary ministry data show Russian refinery runs inching higher in March, to 5.78 mb/d from 5.75 mb/d a month earlier. Throughputs were an impressive 470 kb/d higher than the previous year, despite similar known outages. Just under 400 kb/d of capacity was reported offline in March, compared with 370 kb/d in the same month a year earlier. While turnarounds are expected to intensify over April, with 560 kb/d so far reported offline, this pales in comparison with the extensive 1.1 mb/d offline last year. As a result, April estimates have been adjusted upwards from the previous Report, to 5.4 mb/d.



Middle Eastern refinery throughputs are estimated largely unchanged in January from December, at an average 6.3 mb/d. According to JODI data, Saudi Arabian crude throughputs averaged 2.04 mb/d, 330 kb/d higher than a year earlier and in line with our forecast. According to a Total financial filing, the Total - Saudi Aramco JV Jubail refinery will reach full production capacity by mid-2014. The filing adds that all refining and petrochemical units were expected to be operational by the end of 1Q14, with production reaching full capacity by mid-year. Commercial exports started in September 2013. Kuwait's refinery runs fell 65 kb/d in January from a month earlier, to 860 kb/d, as a power outage affected all of the country's three refineries during the month. Iran's 330 kb/d Abadan refinery reportedly was shut on 10 March for one month, reducing the country's fuel oil exports, while Iraqi supplies to refineries fell in February, by 60 kb/d to 565 kb/d.

In Latin America, Brazilian refiners processed 2 mb/d in February, largely unchanged from both the previous month and a year earlier. After expanding throughputs by 130 kb/d on average in 2013, capacity constraints are expected to limit gains this year. The first phase of the 230 kb/d Abreu e Lima refinery in Pernambuco state (115 kb/d CDU) is set to be completed in 4Q14, with a second unit due to start up in 2Q15. The project, which Petrobras originally intended to undertake with Petróleos de Venezuela SA (PDVSA), has faced repeated delays and cost overruns. The latest cost estimates for the plant is some $18.5 billion, compared with a 2007 estimate of $4 billion.



In Colombia, state-owned Ecopetrol shut the crude unit at its 80 kb/d Cartagena refinery in February, to start integrating its operations with the $6.5 billion Reficar refinery which is being built on an adjacent site. The refinery project will raise nameplate capacity to 165 kb/d and make it possible for Colombia to process heavy domestic crudes, which up until now had to be exported. The refinery will reportedly remain offline until sometime in the first half of 2015, increasing the country's import requirements for the duration. Colombia imported some 170 kb/d of oil products from OECD countries in January 2014, almost entirely from the US. The country's largest refinery, the Barrancabermeja plant, is also currently being modernised, a project due to be completed in 2018.