Oil Market Report: 15 May 2014

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Highlights

  • Oil prices rose marginally month-on-month in April, supported by continued tensions between Russia and the Ukraine, supply outages in OPEC and non-OPEC countries and stepped up crude buying as refiners complete seasonal turnarounds. ICE Brent futures were last trading at $109.85/bbl and NYMEX WTI at $102.10/bbl.
  • Forecast global demand growth for 2014 has been raised marginally since last month's Report, to 1.32 mb/d, on higher 1Q14 data. Baseline adjustments to 2012 add 0.1 mb/d to the historical average and total demand, now pegged at 92.8 mb/d in 2014. 
  • Global supplies rose 700 kb/d month-on-month to 92.1 mb/d in April, with roughly half of the increase stemming from OPEC producers. Global supplies were 820 kb/d higher than a year earlier, with non-OPEC annual output growth of 1.8 mb/d more than offsetting an OPEC crude oil decline of 960 kb/d.
  • After hitting five-month lows in March, OPEC crude oil production rebounded by 405 kb/d, to 29.90 mb/d in April. The 'call on OPEC crude and stock change' for 2H14 was raised by 140 kb/d to 30.7 mb/d.
  • Global refinery crude throughputs hit a seasonal low in April, estimated at 75.4 mb/d, on plant maintenance and seasonally weak demand. Runs are set to rebound steeply until August as turnarounds unwind and demand increases. Global throughputs are projected to average 76.2 mb/d in 2Q14, 0.4 mb/d lower than in 1Q14.
  • OECD industry inventories slipped by 2.5 mb in March to 2 570 mb, as a steep drawdown of product stocks partly offset rising crude and feedstock holdings. Preliminary data indicate that OECD commercial stocks surged by 52.1 mb in April, reducing the deficit to the five year average to 79 mb from 110 mb at end March.

East side storage

April is the time of year when crude and product demand typically hits a seasonally low point, allowing markets to rebalance. The latest data show that this year was no exception. Yet crude prices remain elevated and forecast balances call for a significant rise in OPEC production from current levels for the second half of the year.  While OPEC has more than enough capacity to deliver, it remains to be seen whether it will manage to overcome the above-ground hurdles that have plagued some of its member countries lately.

This month's preliminary data also show a sharp rise in Chinese crude oil imports which is not matched by commensurate rises in demand or crude runs. If confirmed, the data imply an unprecedented crude stock build of 1.4 mb/d for April alone. This has fuelled reports that China might have begun filling a recently completed expansion of its strategic petroleum reserve facilities. While that would benefit energy security not just in China but globally, crude imports of that scale might also support oil markets and keep commercial stocks from rising further elsewhere.    

Indeed, despite recent builds, OECD stocks remain tight by historical standards. After sinking to a 110 mb deficit to their five-year average in February and March, OECD stocks bounced back in April by more than 50 mb on seasonally easing demand, preliminary data show. Product stock cover inched up by 0.5 days of forward demand, reversing declines in March, while a steep drop in global throughputs helped crude stocks extend earlier builds. Yet even if those preliminary builds are confirmed, OECD stocks would still stand at a nearly 80 mb deficit to average levels as of end-April. Product builds, welcome as they may be, are heavily concentrated in US propane, not the product most in demand. Much of the crude build also centres in the US, hence is not directly accessible to international markets.

While OPEC production gains of around 400 kb/d went some ways towards easing markets last month, that gain will be insufficient to meet market needs in the second half of the year, when consumption bounces back seasonally. In order to balance forecast demand, OPEC countries would need to hike third-quarter production by another 900 kb/d from April levels. Whether Libya can keep its ports open and unlock its exports is unclear. Meanwhile, Iraq faces renewed security threats in the North, while outside OPEC new politically-driven disruptions have intensified in Colombia and South Sudan.

China's crude import strategy is another factor not captured in supply and demand balances. Surging Chinese imports reached an all-time high of 6.81 mb/d in April, customs data show. This, according to tanker tracking data, includes steep increments from Russia, Oman, Angola and Iraq, imports from which surged to more than 700 kb/d, a record.  China's imports from Iran also jumped in April to over 600 kb/d based on preliminary data, the highest since June 2012.

How Chinese importers plan to use those barrels remains an open question. Reports of Chinese budget allocations to expand strategic reserves suggest that the oil is going into storage, a view backed by the fact that some of the Chinese ports where crude imports rose the most border the new strategic facilities in Tianjin and Huangdao. Beijing's plans going forward will affect how much crude becomes available to the larger market.

Then again, China's fast growing refining capacity is under-utilised amid a slowdown in demand growth. Two new refineries totalling 440 kb/d of capacity were just commissioned, adding to surplus capacity. Having become net exporters of key products in March, refiners may simply be planning to make more use of their plants, setting the stage for even higher product exports. In that case too, consumers will enjoy more supply, but the effect on international markets will play out differently.

Demand

Summary

  • The forecast of global oil demand for 2014 has been revised marginally upwards by 65 kb/d, to 92.8 mb/d, based on revisions to historical non-OECD demand and higher estimates for OECD deliveries across the 1Q14.
  • Baseline non-OECD demand has been adjusted higher, lifting the global demand estimate for 2012 by 85 kb/d, to 90.2 mb/d. India, China and Saudi Arabia lead the upward revisions based on new and more comprehensive demand data from those countries.
  • The assessment of 1Q14 demand has been raised by 190 kb/d to 91.3 mb/d, reflecting mostly stronger-than-expected demand in the US in February and other upward revisions for Japan, Germany and the UK.  
  • The forecast of global demand growth for 2014 is revised marginally upwards to 1.32 mb/d on revisions to the assessment of 1Q14 demand, partly offset by slightly lower expectations of economic growth for the year in the latest International Monetary Fund (IMF) forecast. Changes to non-OECD baseline demand are roughly growth-neutral.  


Global Overview

This month's Report incorporates upward data revisions to both baseline non-OECD demand and 1Q14 OECD deliveries, partly offset by moderately lower expectations of economic growth for 2014. In aggregate, those revisions lift the estimate of global demand for 2014 by around 65 kb/d, to 92.8 mb/d. The growth forecast, at roughly 1.3 mb/d for 2014, is only very marginally up (+35 kb/d) on last month's Report as the latest IMF quarterly economic update, which entails a slightly less strong pace of global economic growth in 2014, has curbed momentum.

Revisions to the non-OECD demand baseline add 85 kb/d to the 2012 global demand estimate to 90.2 mb/d, as more comprehensive data for India, China and Saudi Arabia have become available. Meanwhile, the estimate of 1Q14 global demand has been raised by 190 kb/d, to 91.3 mb/d, due to sizeable upward revisions to OECD demand, most notably Japan, the US, Germany and the UK.

The upward adjustment to the global 2014 demand forecast would have been even higher had it not been for the partially offsetting influence provided by the IMF's curbed macroeconomic assessment. The IMF's latest quarterly World Economic Outlook (WEO), published in April, cut roughly ten basis points from its 2014 global economic outlook, compared to January's WEO. Global economic activity is now

expected to rise by 3.6% in 2014, up from 3.0% in 2013 but below the 3.7% growth rate assumed in the IMF's January WEO. "In advanced economies, (economic) growth is expected to increase to about 2.25% in 2014-15, an improvement of about one percentage point compared with 2013", the IMF said. "Key drivers are a reduction in fiscal tightening, except in Japan, and still highly accommodative monetary conditions". Focusing on emerging markets, the IMF envisages growth picking up gradually, from 4.7% in 2013 to about 5% in 2014, but warned that "the global recovery is still fragile despite (recently) improved prospects, and significant downside risks - both old and new - remain. Recently, some new geopolitical risks have emerged (such as Ukraine). On old risks, those related to emerging market economies have increased with the changing external environment".

Top 10 Consumers

US

US Department of Energy monthly data show roughly 19.0 mb/d of oil products were delivered in February, up from a previous 18.5 mb/d estimate based on preliminary weekly statistics. Far from declining, US demand now looks to have grown by 1.3% year-on-year (y-o-y) for that month. Although the estimate of demand for February is 440 kb/d above last month's projection, the 1Q14 estimate at 18.8 mb/d, is only 45 kb/d higher than last month's forecast, as weekly estimates for March were considerably weaker. Those estimates remain subject to revision, however.



Estimates of US transport fuel demand led the large February US data revision, with gasoline deliveries now assessed at 8.7 mb/d and those of gasoil/diesel at 4.2 mb/d. These numbers are respectively up on the year earlier by 3.2% and 5.0%, suggesting that a combination of higher consumer confidence and lower prices at the pump has more than offset travel disruptions caused by exceptionally cold weather earlier this year. US gasoil demand likely gained some additional traction in February as the very cold weather raised space-heating requirements.

Looking at March, based on US Department of Energy weekly statistics, roughly 18.5 mb/d of oil products were delivered, 0.1% down on the year earlier and 240 kb/d less than our previous prediction. Absolute y-o-y declines in residual fuel oil and LPG roughly offset gains in gasoline and jet/kerosene. Looking forward to the year as a whole, a gain of around 0.4% is now foreseen, to an annual average of around 19.0 mb/d in 2014.

China

Relatively challenging economic conditions continue to dampen expectations of Chinese oil demand for 2014. An estimated 10.2 mb/d of oil products were delivered in March, up 2.0% on the year, trimming the approximation of 1Q14 demand to 10.1 mb/d. The Chinese oil demand estimate for March remained constrained by a combination of steeply falling gasoil/diesel and fuel oil deliveries, in line with the ongoing industrial slowdown that is sweeping the economy.



Other factors than the economy are also dampening the apparent demand figures, including reports of relatively high product exports - 2.8% up on the year earlier - and anti-pollution policies. Some cities are reportedly imposing quotas on new vehicles purchased, in an effort to ease pollution and ease congestion. Nonetheless, gasoline has been providing in recent months some of the strongest momentum to Chinese demand, alongside jet/kerosene demand, which continues to rise sharply in line with passenger traffic.



For 1Q14 as a whole, a relatively subdued +1.3% y-o-y growth trend is now projected as economic momentum appears to be easing back to an 18-month low. Growth, however, should pick up through the remainder of the year, as near 7.5% economic growth is forecast to support relatively strong gains in gasoline, jet fuel and petrochemical products to say the least. It is worth noting, finally, that April's implied 1.4 mb/d total (commercial and government) crude oil stock-build (see Stocks) is not part of implied apparent Chinese demand - which remains equal to the sum of refinery output and net product imports, minus product inventory builds.

Japan

A combination of upwardly revised historical numbers for both fuel oil and 'other products' contributed towards a revised 1Q14 estimate of 5.0 mb/d. Official data show residual fuel oil deliveries of approximately 565 kb/d in February, a shallower y-o-y decline than previously expected, based on stronger-than-expected demand from the power generation sector. The same factor supported demand for 'other products', which includes crude oil burnt for electricity generation. Preliminary estimates of March demand pointed towards deliveries of roughly 4.8 mb/d, 105 kb/d above our month-earlier forecast. Upwardly revised estimates for 1Q14 raise the 2014 forecast to 4.4 mb/d. Although this still represents a 3.1% decline for the year as a whole, consequential on the expectation that some the country's nuclear capacity will come back online in 2014, stronger 1Q14 data have considerably reduced the magnitude of the contraction.



India

Preliminary estimates show that Indian oil demand grew by 0.8% in March y-o-y, to roughly 3.6 mb/d. The March gain represents the eighth consecutive month of demand growth, reversing a protracted period of contraction around mid-2013, as rising sales of gasoline and LPG offset declines in most other product categories. Diesel deliveries, in particularly, have been falling since mid-2013 as government efforts to reduce the diesel subsidy have seen diesel prices rise in comparison to those of gasoline. In contrast, gasoline use has been on the rise. With revisions to March and February demand roughly offsetting each other, the growth forecast for the year as a whole has been left roughly unchanged at +2.6%, with total Indian oil demand forecast to average around 3.5 mb/d in 2014.



Russia

Despite concerns about the health of the Russian economy, recent oil demand data remain relatively robust. An estimated 3.4 mb/d of oil products were delivered in March, 5.3% up on the year earlier, marking 13 consecutive months of annual growth. The strongest gains are registered in the gasoil, residual fuel oil and 'other products' categories. Russian industrial output rose y-o-y in both February and March, by 2.1% and 1.4%, respectively, according to the Federal State Statistics Service. For the year as a whole, Russian demand is projected to grow by a relatively modest 1.7%, to 3.5 mb/d, consequential on forecasts that the underlying economy will be facing headwinds (see Report dated 11 April 2014).





Brazil

Weaker-than-anticipated gasoil demand led the sharp drop in overall deliveries seen in March, to 3.1 mb/d. This compares to the previous multi-month high of 3.2 mb/d seen in February. At an estimated 1.1 mb/d in March, gasoil deliveries came out 50 kb/d below the month earlier forecast, as economic tailwinds curbed industrial activity. Indeed the latest data from the Instituto Brasileiro de Geografia e Estatística reported industrial activity rising by just 0.4% on a month-on-month basis in February, while the most recent manufacturing sentiment indicators point towards a deterioration in expectations since the turn of the year.



Saudi Arabia

At approximately 2.9 mb/d in February, Saudi Arabian oil deliveries exceeded both month- and year-earlier levels. Year-on-year growth climbed to a seven-month high in February, supported by strong gains in gasoline and jet/kerosene, both products that have garnered support from a recent uptick in consumer confidence. The forecast for the year as a whole, at 3.1 mb/d, amounts to a gain of 3.2% on 2013 levels, and has been revised up on last month's Report, reflecting stronger-than-anticipated 1Q14 demand (with 70 kb/d added since last month's Report).



Germany

Strong growth in gasoil/diesel demand saw German oil deliveries average out at 2.4 mb/d in February, a three-month high. Official February government data surprised on the upside, 60 kb/d above our month-earlier assessment, the majority of this upside was attributable to the scale of the uptick in German gasoil deliveries. At 1.1 mb/d in February, total German gasoil demand broke multi-month highs and were roughly 3.4% up on the year. Earlier expectations of subdued German gasoil deliveries, on account of an unusually warm winter, apparently missed an additional industrial requirement that emerged. Total industrial output in Germany rose by 4.9% up on the year in February, and increased further in March, a seventh consecutive monthly gain. For the year as a whole, growth of 1.0% in total oil demand is being forecast, to 2.4 mb/d, on the back of the additional German economic momentum. At 295 000 in March, Germany car registrations were at a 21-month high, further underpinning both gasoline and diesel deliveries in 2014.



Canada

Strong gains in gasoline and gasoil use pushed annual growth in Canadian oil demand up to an eight-month high of 3.1% in February. Gasoil demand gained traction from cold winter temperatures, while gasoline deliveries rose to a five-month high on the back of rising consumer confidence. The Conference Board of Canada's index of consumer confidence rose by 4.2 points in February, with the balance of opinion rising across all the main categories. For the year as a whole, a relatively robust 1.0% gain is now being forecast for Canadian oil demand, one-tenths of a percentage point above our month earlier prediction on the strength of the higher 1Q14 estimate.



Korea

Strong petrochemical demand, plus continued gains in gasoil, saw total South Korean oil deliveries average out at around 2.3 mb/d in March, equivalent to growth of roughly 7.4% on the year earlier. At an estimated 1.1 mb/d in March, naphtha deliveries posted their sharpest y-o-y gain in 21 months, while gasoil demand, at 415 kb/d in March, was 2.2% above the year earlier level. Underpinning rising oil deliveries in recent months has been Korea's relatively supportive macroeconomic environment, with forward-looking surveys of business sentiment showing an 'expansionary' bias. The Korean economy grew by 0.9% in 1Q14 from 4Q13. For the year as a whole, total demand is forecast to average 2.3 mb/d, modestly up on the year as the relatively strong macroeconomic underpinnings partly offset projections of efficiency gains across the economy.



OECD

The OECD oil demand trajectory seems to have flattened out in y-o-y terms in February and March, with respective y-o-y changes of -0.1% and +0.4% posted. The key question now is what happens next. Despite signs of a rebound in oil demand in 2013, OECD oil markets remain entrenched in long-term structural decline as anticipated efficiency gains outstrip the effect of economic growth. The period 2Q13-4Q13 saw a break from this trend, as OECD economic momentum swung quickly from near-recessionary conditions to renewed growth, but oil demand gains look unlikely to outlast that economic bounce.



Americas

North America in 1Q14 has maintained its position as the relatively strongest rising OECD regional demand centre. Deliveries in the OECD Americas edged 0.4% higher on a y-o-y basis in 1Q14, to 23.8 mb/d. These figures mask the true picture, however, as oil demand has not consistently grown across the region: while Canada and the US posted growth in y-o-y terms, Mexican oil use plunged by 4.5% y-o-y in 1Q14, to 2.0 mb/d, as the power sector increasingly shifts from residual fuel oil to natural gas.

Despite declining Mexican demand for residual fuel oil and gasoline, most other product categories have seen outright y-o-y increases in recent months. Gasoline deliveries have trended down since the end of 2012, as the assumed efficiency of the Mexican vehicle fleet has increased at a more rapid pace than the total transport stock has expanded.



Europe

A recent uptick in German and UK oil demand helped lift the estimate of global demand for 1Q14. As noted above, German industrial activity is performing relatively well, having risen on a y-o-y basis in the seven months through March, with an equally robust performance seen in the UK recently. Driven largely by an uptick in LPG demand since the turn of the year, UK oil deliveries rose to a near two year high of roughly 1.6 mb/d in February. Increasing petrochemical usage accounted for a large portion of the additional LPG needs (at the expense of naphtha), while resurgent gasoil demand (+14.9% y-o-y in February to 640 kb/d) provided the proverbial icing on the cake. Given the recent uptick in oil demand data, the forecast for the year as a whole has also now been raised, with overall growth now projected at 0.8%, up from 0.6% previously.



Asia Oceania

With roughly 8.9 mb/d delivered in 1Q14, the OECD Asia Oceania region posted its shallowest quarterly y-o-y demand decline in over a year, down 0.5% y-o-y after contraction of 1.3% in 4Q13 and 2.7% in 3Q13. This relative easing was largely attributable to the corresponding adjustment (mostly in the power sector) that has occurred in the region's largest economy, Japan.



Non-OECD

Despite stuttering somewhat in 4Q13, non-OECD oil demand rebounded strongly in 1Q14, as the Indian demand trend in particular showed some improvement (see India section, above). Other notably stronger 1Q14 demand contributors, whence compared to 4Q13, were China, Brazil, Iran and Saudi Arabia. Momentum is likely to build over the course of the year as the underlying macroeconomic situation improves. Total non-OECD deliveries are forecast to average out at around 45.8 mb/d in 2014, 3.1% up on the year.

Venezuela will reportedly be forced to import around 35 kb/d of additional gasoil, to compensate for Colombia having to re-direct previously exported natural gas back to the country as drought severely reduces hydroelectric capacity. This relative upside in the Venezuelan demand balance could easily, however, be offset by declines elsewhere in the crisis-hit economy. Latest JODI data, which unfortunately end in September 2013, showed an 8.0% y-o-y contraction in demand to 735 kb/d. We forecast a modest uptick in Venezuelan demand in 2014, as additional power sector oil use, in response to the recent gas shortages, plus the ongoing presence of domestic price subsidies, should be more than enough to offset any economically-inflicted losses felt elsewhere. 



Within the total 2014 non-OECD demand forecast, Africa, Asia and the Middle East are forecast to post the strongest growth. Recently steep gains have also been seen in Latin America, although those may prove short-lived as the macroeconomic outlook for that region underperforms according to IMF data. Strengthening industrial growth, particularly from the petrochemical sector, plus ongoing expansions in non-OECD transportation fuel demand are forecast to supported relatively robust projections for non-OECD gasoline, jet, gasoil, LPG and naphtha demand in 2014.



Supply

Summary

  • Global supplies rose 700 kb/d to 92.1 mb/d month-on-month (m-o-m) in April, with more than half of the increase accounted for by OPEC producers. Compared with one-year ago, global supplies were 820 kb/d higher, with non-OPEC output growth of 1.8 mb/d more than offsetting the OPEC decline of 850 kb/d. OPEC crude oil production decreased by 960 kb/d year-over-year (y-o-y).
  • April 2014 total non-OPEC production rose by approximately 285 kb/d m-o-m, mainly boosted by increases in the US, UK and China. Although sizeable, the April gains were not high enough to offset the March declines, which totalled about 550 kb/d amid lower output in nearly every region outside of Latin America.
  • Political, technical and operational issues continue to weigh on non-OPEC supply. South Sudan and Colombia saw their 2014 outlook downgraded due to civil conflict, pipeline attacks and issues with local communities. Kazakhstan and Canada also saw reduced output forecasts as technical problems and heavier-than-expected maintenance took their toll on supply.
  • OPEC crude oil supplies flirted near the 30 mb/d mark again in April, led by higher output from Iraq, Saudi Arabia, Kuwait and Algeria. After hitting five-month lows in March, crude oil production rebounded by 405 kb/d, to 29.90 mb/d. The 'call on OPEC crude and stock change' for 2H14 was raised by 140 kb/d to an average 30.7 mb/d, bringing the full-year 2014 average to 30.1 mb/d.
  • OPEC ministers will gather on 11 June in Vienna to review the market outlook for the remainder of 2014. With prices trading in a narrow range and the 2014 'call on OPEC crude' in line with the current target, expectations are that ministers will maintain their 30 mb/d production ceiling.


All world oil supply data for April discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Mexico and Russia are supported by preliminary April 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 approximately ?200 kb/d to -400 kb/d for non-OPEC as a whole.

OPEC Crude Oil Supply

OPEC crude oil supplies flirted near the 30 mb/d mark again in April, led by higher output from Iraq, Saudi Arabia, Kuwait and Algeria. After reaching five-month lows in March, crude oil production rebounded by 405 kb/d, to 29.90 mb/d.

OPEC ministers will gather on 11 June in Vienna to review the market outlook for the remainder of 2014. With prices trading in a narrow range and the 2014 'call on OPEC crude' in line with the current target, expectations are that ministers will maintain the 30 mb/d ceiling originally agreed in January 2012. Supporting this view, Saudi Arabia's oil minister, Ali Naimi, said on 9 May that "supply is highly sufficient, demand is great and the market is fairly stable." He added "there is no reason for a change. Absolutely no reason." OPEC crude oil output in the first four months of the year has averaged remarkably close to the group's 30 mb/d target at 29.98 mb/d.



The 'call on OPEC crude and stock change' for 2Q14 was raised by 100 kb/d to 29.6 mb/d and for 2H14 by 140 kb/d to an average 30.7 mb/d. The increased call reflects a combination of modestly higher demand and reduced OPEC NGLs and non-OPEC supply numbers. For the full year 2014, 'the call' was raised by 200 kb/d to 30.0 mb/d. OPEC's 'effective' spare capacity in April was estimated at 3.45 mb/d, down from 3.53 mb/d in March.

Saudi Arabia's crude output averaged 9.66 mb/d in April, up by nearly 100 kb/d from the previous month. Saudi production is expected to increase further in coming months in line with the onset of seasonally higher domestic demand for crude burn at power plants. Crude burn typically falls to yearly lows of 300 kb to 325 kb/d in the first quarter before demand picks up for fuel oil burn at power plants starting in the second quarter, averaging last year between April and September at around 615 kb/d.



Saudi Arabia reduced official selling prices for its benchmark Arab Light for Asian customers by $0.20/bbl for June sales, with Arab Medium and Arab Heavy down more steeply by $0.40/bbl and $0.65/bbl, respectively. The steeper cuts for the medium and heavy grades largely reflects weaker fuel oil crack spreads in Asia. Saudi Aramco adjusts its monthly OSPs based on discussions with its regular customers and after calculating the change in the value of its oil over the past month, based on refining yields. Kuwait, Iraq and Iran typically follow the Kingdom's price changes, though the latter two countries have regularly undercut the Saudi prices in the past year.

Iraqi production rose by 140 kb/d to 3.34 mb/d in April following the start of new production in the southern region of the country and despite the continued suspension of pipeline flows from the northern fields to the Mediterranean port at Ceyhan, Turkey. Crude exports rose by 110 kb/d to 2.51 mb/d, with shipments of Basrah crude from the Gulf export terminals accounting for total exports last month. This marked a record high for southern exports, which rose by about 140 kb/d on the month.

Production from the giant West Qurna-2 field in southern Iraq started at end-March, with initial output building to 120 kb/d. However, Iraq's southern exports may remain capped at 2.5 to 2.6 mb/d for the remainder of the year due to technical constraints.

By contrast, exports of northern Kirkuk crude to Ceyhan, Turkey were totally suspended compared with around 30 kb/d in March following attacks to the Iraq-Turkey pipeline, which cut off pipeline flows from 2 March. Iraqi officials report that the violence continued in the region where renewed attacks forced workers to halt repair work.



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 in its dispute with Baghdad but the plan was suspended with the northern pipeline out of commission. Iraq typically trucks around 10 kb/d of crude to Jordan but these volumes also remain suspended due to security issues in Anbar province. KRG production was estimated at around 235 kb/d in April.

Iranian crude oil production rose marginally in April, up 30 kb/d to 2.83 mb/d. After declining by 10 mb last month, crude oil held in floating storage was down just 2 mb to 20 mb at end April, data from Gibson Shipbrokers show. Estimated April import volumes, however, were down by about 180 kb/d to 1.11 mb/d compared with 1.29 mb/d in March. Imports of Iranian crude reached a 20-month high of 1.58 mb/d in February but have since edged lower.

Preliminary data for April show increased imports from China at +60 kb/d to 615 kb/d, South Korea at +70 kb/d to 130 kb/d, Turkey at +30 kb/d to 125 kb/d and Syria at +15 kb/d to around 30 kb/d. The increase in crude imports, however, were more than offset by reduced volumes by India at -185 kb/d to 200 kb/d and Japan at -105 kb/d to just 35 kb/d. In March, NITC initially reported that Albania was the destination for its tanker called the "Swallow," which was carrying approximately 30 kb/d of Iranian crude, but the vessel ultimately offloaded in Turkey, shipping data shows. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports. Iranian imports in April also include increased sales of condensates, with volumes from Iran's Asaluyeh terminal averaging around 230 kb/d compared with 150 kb/d in March.



The fourth round of talks between Iran and the five permanent UN Security Council members plus Germany and the EU (P5+1) started on 13 May in Vienna, with talks expected to conclude on 16 May. The talks are at a difficult stage, with the 20 July end of the six-month period for reaching an agreement in the negotiations nearing. However, the agreement also allows for the negotiations to be extended by mutual consent under the interim deal, the Joint Plan of Action (JPOA), agreed in November in Geneva. The JPOA called for limited easing of sanctions on Tehran's oil and banking sectors but the overall sanctions regime remains in effect pending a permanent settlement of the nuclear dispute. The goal is a long-term settlement that would place broad, verifiable limits on the scope of Iranian nuclear activities in exchange for a phased removal of sanctions.

Many analysts believe the latest round of talks will be the most difficult. Issues still to be addressed include among others: the number of uranium-enriching centrifuges Iran is allowed to use; the future of Iran's research and development on sensitive technologies; the final terms of sanctions relief to Iran; and crucially, the fixed time-frame in which Iran must comply with the final agreement. Some Iranian officials are reportedly envisioning only a few years, while the US and other partners see a period of 20 years.



Kuwaiti crude output rose by 50 kb/d to 2.81 mb/d in April. By contrast, crude supplies from the UAE were down 90 kb/d to 2.69 mb/d in April while volumes from Qatar were off a small 10 kb/d to 700 kb/d.



Libyan crude supplies edged lower in April despite official reports that the government in Tripoli and the federalist rebels in the eastern region reached a deal in April to end the blockade and gradually reopen four idled eastern oil export terminals, which collectively account for around 700 kb/d of the country's export capacity. April output was off by 20 kb/d to 220 kb/d and officials say production in May is just 235 kb/d, well below the 1.5 to 1.6 mb/d the country was producing before the latest turmoil started unfolding in May 2013.

The deal reportedly reached in early April to reopen major oil ports controlled by rebels in the east unravelled over opposition to the appointment of the new prime minister, which strengthens the Islamists in the country. The two smaller eastern terminals of Hariga and Zueitina reopened, but the larger Ras Lanuf and Es Sider terminals, with a combined capacity of around 500 kb/d, remain shut. Since then, two smaller eastern fields have been shut-in, the Zultun and Raquba oilfields with a combined capacity of 40 kb/d. Libyan officials and protesters in the western region of the country said the Sharara and Elephant fields would reopen by 13 May but at writing there has been no restart. The two fields can collectively produce about 470 kb/d.



Angolan crude output rebounded in April to 1.6 mb/d, up 130 kb/d from a downwardly revised 1.47 mb/d in March, reflecting maintenance work at the Greater Plutonio floating production, storage and offloading (FPSO) facility. Operator BP restarted Plutonio on 15 April, with output building up to its 180 kb/d capacity by the last week in April. Meanwhile, Angola's LNG plant shut production on 25 April due to technical problems. Chevron $10 billion Angola LNG plant has suffered setbacks and operated below 50% since starting up last year. Prior to the shut down the plant was producing about 15 kb/d of NGLs.

Crude oil production from Nigeria edged marginally lower by 20 kb/d to 1.92 mb/d in April. Theft and sabotage continue to curb the country's output, with Forcados crude still under force majeure

Non-OPEC Overview

Non-OPEC supply fell by about 550 kb/d in March, amid lower output in nearly every region outside of Latin America. Even OECD Americas production edged marginally lower as an increase in the US of roughly 120 kb/d m-o-m only partially offset declines in Canada (-185 kb/d) and Mexico (-20 kb/d). Disruptions in Colombia, the Middle East and Africa contributed to the overall drop. Colombia's crude oil output was about 100 kb/d below capacity due to pipeline attacks and unrest. Yet total non-OPEC production in March was approximately 1.7 mb/d higher than a year earlier, and 1.8 mb/d higher in 1Q14 y-o-y. Production is estimated to have recovered somewhat in April, with supplies increasing about 285 kb/d to 55.8 mb/d.



Overall non-OPEC production is now expected to grow by about 1.5 mb/d for 2014 as a whole, roughly 100 kb/d below last month's forecast. The downward revision is due to lower forecasts for Azerbaijan, China, Colombia, Kazakhstan, Mexico and South Sudan, which more than offset upward revisions among a number of producers, including Brazil and Russia. Total non-OPEC supplies are expected to average 56.1 mb/d in 2014.

Compared with a high-water mark of 1.8 mb/d in a previous edition of this Report, our non-OPEC supply growth outlook for 2014 has been lowered by about 400 kb/d (OMR, October 2013, 'Looking at 2014 Non-OPEC Supply Growth'). This is in large part due to political factors in South Sudan and Colombia, but also technical and operational issues in Kazakhstan and Canada. In South Sudan, although we had not forecast a return of production to capacity levels for 2014, resurging turmoil and the outbreak of a civil conflict in December 2013 have significantly reduced supply expectations (from 210 kb/d in November 2013 to 140 kb/d in April 2014). Likewise, pipeline attacks and issues with indigenous peoples have curtailed Colombia's production in the first four months of the year, and significant supply risk remains.

The Kashagan field in Kazakhstan restarted in October 2013 after an initial aborted start-up in September, but only operated for a few days before leaks caused a shut-down. Since then, serious problems have emerged, such that the operating consortium has recently conceded that production will not restart until 2H15 at the earliest. Canadian synthetics projects are set to experience heavier maintenance than we had foreseen last year, and with unplanned outages, at least one major producer has downgraded its production outlook for the year. The Russian production outlook is also slightly lower, but on a percentage basis, relatively unchanged. Despite the lowered growth outlook for non-OPEC, the 2014 forecast remains the largest absolute y-o-y growth in non-OPEC liquids since 1984.

OECD

North America

US - April preliminary, Alaska actual, other states estimated: US crude oil production is estimated to have reached 8.3 mb/d in April as the US Gulf of Mexico (US GOM) raised output, the Bakken play resumed growth following a 1Q14 slowdown, and light tight oil (LTO) production in Texas continued increasing. Given that final data for February show that crude oil production exceeded 8.0 mb/d, barring a major outage, US crude oil output is expected to remain above 8.0 mb/d on a monthly basis in 2014 and to reach 8.6 mb/d in 4Q14. Texas alone (including state waters) is expected to add nearly 250 kb/d to the annual growth due to continued output expansion in the Eagle Ford play and the Permian Basin. Although new-well oil production per rig has been flat, the rig count rebounded to 509 in March, after falling to 446 as recently as October 2013. Moreover, new drilling on the Permian may yield improved results, as techniques perfected on the Eagle Ford and Bakken plays are now being implemented. The large but mature Spraberry field in the Permian is also being reappraised for the implementation of tight oil drilling techniques. Planned offtake capacity in the Permian region will grow as well, as the new 300 kb/d capacity BridgeTex line from Colorado City (Texas) to Houston is expected to start getting filled in late 2Q14, and the extant Longhorn Pipeline will implement a 50 kb/d expansion before the end of 3Q14.

Natural gas liquids production is estimated to have remained at just under 2.7 mb/d in April, roughly unchanged since March and February (final data). Production is expected to grow to more than 2.8 mb/d by 4Q14, however, as import demand from Canada (for pentanes plus and ethane) will be robust, and capacity to take liquids to the Gulf Coast for processing and export continues to grow. Although Williams Cos. decided in April to cancel the planned Bluegrass NGLs Pipeline from the Marcellus and Utica plays to Kentucky where it would have connected to a converted portion of the Texas Gas Transmission System, these two plays have other options. This Report has previously discussed Sunoco Logistics' Mariner West pipeline that takes NGLs to Ontario and the ATEX pipeline already taking NGLs to the Gulf Coast, and Sunoco Logistics is developing Mariner East to take NGLs to a terminal near Philadelphia. CSX announced in April that it will begin railing NGLs from fractionators on the Marcellus play within 18 months, and Norfolk Southern recently announced an expansion of its railed NGLs. The boom of NGLs production in Texas itself has also reduced capacity to take volumes from other regions of the country. In particular, offtake of ethane, which has more limited uses than other liquids, has been a concern, with estimates of US ethane rejection in 2013 exceeding 200 kb/d. Mariner East will eventually enable ethane exports to Europe, however, given the huge price differential, for example, between US ethane-based ethylene and naphtha-based ethylene in Europe. Already in early May, the 40-kb/d Vantage Pipeline began exporting ethane from the Williston Basin (which includes the Bakken play) into the Alberta Ethane Gathering System for use by petrochemical facilities.

Total liquids production in the US (excluding biofuels and processing gain) is estimated to have surpassed 11 mb/d in March (and again in April) for the first time since at least the 1980s. Final total liquids production in February was just slightly under 11.0 mb/d, with April estimated at 11.3 mb/d.

Update on North American Railed Crude Regulation

As often noted in this Report (most recently in the issue dated January 2014, 'Rail Transport of Crude Oil in the Spotlight in North America'), rail has taken an increasingly prominent role in the midstream petroleum sector in the US and Canada. With that increase, however, has come a series of accidents, prompting questions about the way in which railed crude is handled. Most recently, a CSX crude train derailed in Virginia and caught fire on 30 April. In response, Canadian and US regulatory authorities have taken new actions in recent weeks.

In Canada, the Ministry of Transport announced in mid-April that the original model DOT-111 oil tank car must be retrofitted to higher safety standards or retired within three years. This will affect at least 65 000 rail cars, according to one estimate, as far more cars enter Canada in a given year than are present in the country on a given day. About 5 000 of the oldest-model tank cars will have to be phased out even quicker. Given the integrated crude oil transport network, this may put pressure on US regulators to hasten actions in order to avoid restricting Canadian access to US rail cars in the future. As Canadian Minister of Transport Lisa Raitt noted in discussing the regulations, "If you have to start separating out the Canadian cars from the US railcars, I don't know if there is enough to go around."

The US National Transportation Safety Board has moved more deliberately than Canadian regulators. Nevertheless, the US Department of Transportation announced in early May a rule that companies transporting crude oil by rail must now inform officials of any shipments entering their state. The US Secretary of Transportation acknowledged in a non-binding safety alert that same week that the unreinforced DOT-111 cars are inadequate to transport crude oil from a safety perspective. The US Pipeline and Hazardous Materials Safety Administration continues to test Bakken crude oil for characteristics that create additional safety risks. Preliminary results indicate that it is more flammable than traditional US crude grades. A definitive finding of such could lead to specific additional regulations for handling Bakken LTO.

Canada - February preliminary: Total liquids production in February is estimated to have stayed even with January, at 4.3 mb/d. Synthetics and mined bitumen production remained at 2.2 mb/d, flat from December and January levels. Production of synthetics is estimated to have declined in March and April, however, as both scheduled maintenance (at Suncor's U-2 upgrader, from 8 March to 1 May) and an unplanned outage (at Canadian Oil Sands' (COS) Syncrude's 8-1 Coker since mid-April) have affected output. Given a downgraded outlook for the year by COS and further maintenance on other projects, 1Q14 is likely to be the peak quarter for the year as far as synthetics output is concerned. In contrast, bitumen production is expected to keep ramping up, thanks to projects such as Cenovus' Christina Lake E, which ramped up in 1Q14 (65 kb/d), and Suncor's 38 kb/d MacKay project, due to commence production in late 2014, with steam injection already started in April. The Kearl Project ramped up to just over 80 kb/d in January before falling slightly in February. Capacity output of 120 kb/d is not expected to be achieved before 2015.

Conventional and tight crude oil production, including field condensate, was about 1.4 mb/d in February, and is expected to decline slightly in 2014, to 1.3 mb/d, as conventional fields in Alberta experience declines. Canadian NGLs production was at about 720 kb/d in February, with the yearly average expected to be lower at 670 kb/d, given seasonality of supply and slowly declining ethane production.

Mexico - March actual, April preliminary: Mexican crude oil production fell slightly in March, to just under 2.5 mb/d. This is the first monthly total to decline to less than 2.5 mb/d since July 2013, when the offshore KMZ complex's production reached similarly low levels of about 840 kb/d. Mexican NGLs were up slightly in March, however, to 375 kb/d, the highest monthly output since August 2012. Total liquids production for the month was 2.9 mb/d. Preliminary April crude oil output was essentially flat m-o-m, at just slightly under 2.5 mb/d.

At the end of April, the government unveiled its draft reform laws for the energy sector that build on the constitutional reforms passed in December 2013 (OMR, January 2014, 'Watershed Energy Reform Approved in Mexico'). The package consists of eight new draft laws and 13 draft modifications to existing laws, and covers important topics such as state-owned Petróleos Mexicanos' (Pemex) tax burden, bid rounds on available acreage, Pemex's ability to partner with other oil companies, local content requirements, and guaranteed role for Pemex on cross-border fields among other issues. These draft laws, part of secondary legislation, were originally scheduled to be considered, modified, and voted on by 20 April, but it now appears unlikely they will be voted on by Congress before June. The legislation will be discussed in this Report once it is in its final form and has been approved.

North Sea

Total North Sea output (which includes Norway, UK, Denmark, Netherlands offshore and Germany offshore) in 1Q14 has fallen to 2.5 mb/d compared with prior-year levels of 2.9 mb/d. Seasonal maintenance is expected to reduce total North Sea production to about 2.3 mb/d in 3Q14 as Buzzard, Forties, Oseberg, Ekofisk and Grane undergo repairs. Overall North Sea output is projected to decline to about 2.4 mb/d in 2014.

Norway - February actual, March preliminary: Total oil output in Norway averaged 1.9 mb/d in February, inching marginally lower by about 15 kb/d m-o-m. Preliminary March data published by the Norwegian Petroleum Directorate indicate that production saw a further decline of about 35 kb/d during the month mainly due to technical problems and repair work at Oseberg Sør, Skuld and Volve. Norway's total liquids output is expected to average 1.8 mb/d in 2014, roughly flat y-o-y. Statoil began production from the Gudrun field on 7 April in the Norwegian North Sea, the first platform project in almost a decade. The field has approximately 184 million barrels of oil equivalent of reserves, and is a high-pressure and high-temperature field. Six other fields are projected to come online in 2014, including Brynhild, Boyla, Fram H North, Knarr, Svalin and Valemon in the North Sea. Eni's Goliat oilfield in the Barents Sea, although initially scheduled also to come online in 2014, likely will be delayed to 1Q15 as a result of significant work still outstanding to complete the FPSO. Goliat would be the first crude-oil producing field in Norway's Barents Sea, with peak production capacity of 109 kb/d.



UK - January actual, February preliminary:  UK production averaged about 850 kb/d in January, approximately 10 kb/d higher than in December. Preliminary February data indicate that output fell to about 810 kb/d, however, with NGLs accounting for about half of the monthly decline in production. The 1Q14 total UK output is estimated at about 800 kb/d and we expect that 2Q14 UK output will see a further decline to about 770 kb/d as the effects of both planned and unplanned maintenance take their toll on production. The Buzzard field experienced an unplanned outage in April, which resulted in an approximately 45 kb/d production decline for the month. Meanwhile, 2Q14 and 3Q14 are also expected to be busy maintenance periods for the UK's largest field.

Loadings of the North Sea crudes that underlie the Brent benchmark are expected to fall to 830 kb/d in May, revised upwards from an initially scheduled 775 kb/d. The newly released May loadings were boosted by two Forties cargoes that were deferred from April. June production of Brent, Forties, Oseberg and Ekofisk (BFOE) crudes is expected to fall to approximately 790 kb/d, roughly 125 kb/d lower than estimated May production, while loadings were scheduled at 880 kb/d.

Non-OECD

Americas

Brazil - March actual: Brazilian crude and field condensate production grew by about 45 kb/d in March over February, to an average of 2.2 mb/d. Although March production jumped by 14% y-o-y, that gain largely reflects the severity of the production problems experienced in 1Q13. Still, crude oil and condensate output is up about 65 kb/d over January 2014. Some of the increase is coming from pre-salt fields, which, according to Petrobras, hit an all-time production peak of about 430 kb/d in the first half of April, after averaging about 395 kb/d in March (itself a monthly record). The P-58 FPSO on the Parque das Baleias complex was producing about 50 kb/d from three pre-salt wells by mid-April after starting up in March. Marlim Sul maintained its position as Brazil's largest producing field, at about 265 kb/d. About 75% of Brazil's crude oil and condensate production was in the offshore Campos Basin for the month.

Petrobras, which produces about 91% of the country's oil, plans 15 more pre-salt wells in 2014, but success in the offshore pre-salt has come at a price. Costs for the company as a whole have increased by about 30% each year in the past three years just to maintain the company's total crude and condensate production at roughly 2011 levels, as legacy fields decline rapidly. To grow output, the company must successfully bring online projects such as the P-61 platform on the Papa Terra field and the Cidade de Ilhabela FPSO on the Sapinhoa Norte field planned for 3Q14, although we expect that these projects will be delayed.

Colombia - April actual: Colombian crude oil production fell to a 20-month low in April because of rebel attacks on infrastructure and indigenous protests that prevented repair workers from reaching affected infrastructure. Crude oil production was at 935 kb/d for the month, over 100 kb/d less than the country's production capacity. The largest outage was on the Caño Limón-Covenas line, which was attacked on 25 March. Repairs could not proceed until early May, when an agreement with an indigenous group was reached. Production was shut-in due to lack of storage near producing fields, although pumping had reportedly resumed on the line at the time of writing. The new Bicentenario Pipeline that offtakes Colombia's largest field (Rubiales) has also been hit by attacks and has been affected by the outages on Caño Limón-Covenas, with which it is connected.

The problems in Colombia have not been confined to April, however, as state company Ecopetrol, the country's largest producer, lost an average of 52 kb/d of crude oil production in 1Q14 from security, social and operational problems. Key foreign producers Occidental and Pacific Rubiales have also experienced production and transport shut-ins. There were 33 pipeline attacks in 1Q14. Nevertheless, crude oil production averaged about 1 mb/d for the quarter, evidencing the potential for rapid output growth should the political and security environment improve. Colombia has been expanding production capacity despite these periodic outages.

Asia

China - March actual:  March production data show that China's production fell to 4.2 mb/d, a decline of about 35 kb/d m-o-m. The decrease was mainly due to declines in offshore production during the month. Estimates for April show that China's output increased by about 90 kb/d, reversing the March production declines and reaching 4.3  mb/d. China's total output is expected to average 4.2 mb/d in 2014, approximately 1% higher than in 2013.

Former Soviet Union

Russia - April actual, May preliminary: Russia's April output averaged 10.9 mb/d of which 10.1 mb/d was crude oil. Production in April was about 20 kb/d lower than in March wholly because of declines in non-crude liquids production. Russia's total 2014 production is expected to average 10.9 mb/d (10.1 mb/d of which is expected to be crude oil), about 40 kb/d higher than the 2013 average. Rosneft once again saw its production slide in April, although declines were somewhat lower than in prior months, while Bashneft, Gazprom Neft and Gazprom registered m-o-m production increases. The latter's output rise was mainly due to the Orenburg, Yugra and Prirazlomnoye developments. The Prirazlomnoye field in the Pechora Sea was launched late last year but saw its first cargo shipped earlier this month to Europe. Although it is not expected to reach peak production at 133 kb/d until 2021, cargoes of the new Arctic Oil grade are expected to continue to be sold under direct contracts albeit at small volumes.



Kazakhstan - March actual, April preliminary:  Total liquids production in Kazakhstan increased to 1.7 mb/d in March, reversing the previous month's losses but still coming up short of the year-ago production level, as the country faces declines from its older fields and an expected production boost from Kashagan remains elusive. The increase in March production m-o-m occurred as Tengizchevroil boosted output, but these increases will be short-lived as the maintenance period for Tengiz approaches. Tengizchevroil announced that 60 kb/d of oil will be offline for the month of May, while June will see approximately 85 kb/d of oil affected by maintenance. The field is expected to bounce back to normal operating level by July. As a result, we expect that Kazakhstan's production will fall to 1.6 mb/d in 2014, a decline of about 45 kb/d y-o-y.



FSU net exports slipped by 370 kb/d to 9.16 mb/d in March. Declining product shipments accounted for 270 kb/d of the fall. In particular, naphtha volumes plummeted by 160 kb/d to 400 kb/d from their previous record levels as less product was shipped via Pacific outlets. Additionally, gasoil and fuel oil dropped by 80 kb/d and 40 kb/d, respectively.

Crude exports dropped by 100 kb/d in March led by a 90 kb/d drop in shipments through Russia's Transneft pipeline network. Volumes sent via the ports of Primorsk and Ust Luga on Russia's Baltic coast fell by 80 kb/d but these were offset by an 80 kb/d hike in cargoes sent via Novorossiysk on the Black Sea. Flows through the Druzhba pipeline contracted by 80 kb/d to 960 kb/d, its lowest volume in over a year as deliveries to the Slovak Republic and the Czech Republic via the southern spur fell. In the East, deliveries to China continued apace, with combined deliveries through the ESPO spur and via Kazakhstan reaching 460 kb/d, while tanker data indicate that an additional 90 kb/d was shipped via Kozmino. Recent reports indicate that since the crude shipped to China via Kazakhstan is delivered under a swap agreement for Kazakhstani crude, the export stream is lighter and sweeter than Urals at 38 API and 0.55 % sulphur and more closely resembles ESPO.

Outside of Russia, deliveries through the CPC pipeline slipped by 70 kb/d to 830 kb/d in March but volumes nevertheless remained 150 kb/d above last year, as capacity continues to be ramped up and construction to expand the line gradually draws to a close. Preliminary data indicate that flows reached a record level in April of over 900 kb/d. Meanwhile, despite the recent return of Tengiz crude to the BTC, flows along the route remained constrained at 580 kb/d in March, about 130 kb/d lower than last summer's highs.

OECD stocks

Summary

  • OECD industry inventories slipped by 2.5 mb in March to 2 570 mb, broadly in line with seasonal trends. The deficit of inventories versus five-year average levels remained at a wide 110 mb.
  • Refined product inventories fell seasonally by 24.2 mb, slightly more than average, to cover 28.6 days of forward demand at end-March, 0.6 days lower than at end-February.
  • Preliminary data indicate that OECD commercial inventories surged by 52.1 mb during April after stocks replenished across all regions. If confirmed by official data, that would reduce the deficit to the five-year average to 79 mb.
  • Chinese commercial crude inventories drew by 7.0 mb. However, preliminary data suggest that total crude inventories soared by 1.4 mb/d in April after imports outpaced refinery runs and production.


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

OECD industry inventories slipped by 2.5 mb in March to 2 570 mb, broadly in line with seasonal trends. Therefore, the deficit of inventories versus five-year average levels remained at a wide 110 mb. Refined products accounted for 98 mb of the deficit while crude stood at a 7 mb shortfall. On a geographic basis, the deficit continues to be centred in OECD Europe.



On a product-by-product basis, motor gasoline inventories plunged by 21.4 mb on the month, twice the seasonal average, as US refiners destocked ahead of a switch from winter to summer grade product. Meanwhile middle distillates fell by 10.1 mb, slightly weaker than the 13.9 mb five-year average draw for the month, to leave inventories at a 53 mb deficit to the average and 17 mb lower than year-ago levels. All told, OECD refined product inventories fell by 24.2 mb, slightly more than the 21.9 mb seasonal draw for the month. On a days-of-forward-demand basis, refined product inventories covered 28.6 days at end-March, 0.6 days lower than at end-February.

Some offset was provided by crude oil inventories, which built by a seasonal 18.8 mb, a figure that disguised strong regional contrasts. In the OECD Americas, crude oil jumped by 16.7 mb amid surging domestic production and in spite of throughputs remaining unusually strong. In OECD Asia Oceania, crude built by a counter-seasonal 2.4 mb after refiners entered seasonal turnarounds and despite a number of Japanese refineries running down inventories as they reduced capacity. Meanwhile, in OECD Europe, crude stocks plunged by 7.5 mb, even as refinery maintenance slashed regional throughputs by 280 kb/d.



Upon the receipt of more complete data, February data were revised upwards by 6.0 mb while January data were adjusted down by 1.1 mb. Therefore, a 6.5 mb preliminary draw in February OECD inventories presented in last month's Report has turned into a slight 0.6 mb build. Together with this month's slim draw, OECD stocks are now estimated to have built by a slender 5.4 mb, or 60 kb/d, during 1Q14. In comparison, over the past five years, OECD industry inventories have replenished by 270 kb/d in the first quarter on average.

Preliminary data indicate that OECD commercial inventories surged by 52.1 mb during April. All OECD regions restocked but the build was centred in the OECD Americas (+43.7 mb) where stocks of refined products rebounded. Meanwhile, holdings in OECD Asia Oceania adhered to seasonal trends, rising by 7.9 mb, while European inventories inched up counter-seasonally by 0.5 mb. If those preliminary data are confirmed, the deficit of OECD inventories to the five-year average would have narrowed to 79 mb. Crude oil accounted for the bulk of the build, rising by 26.3 mb on the month, while seasonal restocking of 'other products', notably propane in the US, accounted for a further 18.8 mb.

Recent OECD Industry Stock Changes

OECD Americas

Commercial inventories in the OECD Americas rose by 2.7 mb in March, significantly less than the 6.1 mb five-year average build for the month. Soaring crude oil holdings (+16.7 mb) drove stocks upwards as domestic production remained at record levels, and despite persistently high refinery throughputs. On the other hand, refined product holdings fell by 15.7 mb, twice the five-year average draw. The decline was concentrated in motor gasoline (-16.7 mb) as US refiners ran down stocks ahead of a switch from winter to summer grade and amid steady demand and soaring US exports. The draw was also likely amplified by US gasoline imports falling to an average of 410 kb/d over January and February, 150 kb/d lower than December. Inventories of middle distillates slipped by 3.3 mb, while stocks of 'other products' bucked the trend, building by 4.5 mb, broadly in line with seasonal patterns. At end-March, regional refined products covered 26.4 days of forward demand, 0.8 days above end-February.

US to Create Federal Gasoline Stockpile

In early May, the US Department of Energy (DoE) announced plans to stockpile 1 mb of gasoline in the US Northeast (PADD 1) to buffer against disruptions and fuel shortages such as those that occurred in the wake of Hurricane Sandy in 2012. The aim of the federal gasoline reserve is to bridge short-term supply gaps in the event of a failure in the region's infrastructure, based in part on the perception that the region's petroleum supply chain has changed over the past half-decade following the closure of a portion of refining capacity. Over this period, the region has increased its reliance on the Colonial Pipeline for refined product deliveries from Gulf Coast refiners. Therefore, any outage on this line would leave it relatively exposed given the constraints in acquiring adequate volumes of replacement product on available Jones Act compliant vessels.

The reserve will be run along similar lines to the existing Northeast Home Heating Oil Reserve. Although the gasoline will be acquired and owned by the US government, it will be held at leased commercial terminals at two sites, each containing 500 000 barrels; one in New England, likely close to Boston, and one in New York harbour. Initial information suggest that the reserve will be launched in late-summer 2014 upon the completion of contracts for storage, service and product acquisition and it will have a budget of $200 million, financed by the $495 million raised by the recent SPR test sale,  spread over five years covering product acquisition and storage costs.

Indications are that the reserve will be composed of both Reformulated Blendstock for Oxygenate Blending (RBOB) and Conventional Gasoline Blending Components (CBOB).  The site managers are expected to be responsible for dealing with stock turnover, including the transition from winter grade to summer grade inventory.  The purchaser of the RBOB or CBOB, in case of an emergency drawdown, would be responsible for ethanol blending.

Weekly data from the US EIA indicate that US industry inventories surged by 43.7 mb in April. Refined products led stocks higher rising by 24.3 mb with 'other products' climbing by 21.8 mb, far steeper than their 8.4 mb average build for the month, as US propane inventories restocked.



Crude oil inventories continued their almost relentless recent building, rising by a further 16.0 mb during April. Only in the final week of the month did they post a draw (2.5 mb). Moreover, this was only the second draw posted since the second week of January. During this period, crude stocks have soared by approximately 44 mb. This month, additional upward momentum came from the beginning of deliveries from an SPR test sale. Over April, the SPR declined by 2.9 mb to stand at 693 mb with these volumes bolstering US commercial inventories.

That aggregate build in US crude stocks was accompanied by strong regional shifts. An ongoing drain of crude inventories from PADD 2 to PADD 3 continued in April with PADD 2 holdings falling by 4.0 mb while PADD 3 stocks surged by 13.4 mb. Stocks at the Cushing, Oklahoma storage hub dropped by 3.2 mb to stand at 24.2 mb at end-month, roughly 25 mb below a year earlier, while at end-April PADD 3 stocks stood at a record 213.6 mb. According to the most recent EIA survey of storage capacity (based on September 2013 data), PADD 3 stocks now stand at 78% of working capacity. These diverging trends in crude stocks have been echoed by shifts in crude pricing; during April WTI held steady against Brent while LLS weakened by approximately $5/bbl against WTI.

OECD Europe

Commercial inventories in OECD Europe dropped by 7.5 mb during March, broadly in line with seasonal patterns, after refined products and crude oil fell by 5.2 mb and 3.8 mb, respectively. Some offset was provided by NGLs and refinery feedstocks (+1.5 mb). All told, the region's deficit versus the five-year average stood at 86 mb at end-month, a slight increase compared to a month-earlier.

The fall in crude oil was counter-seasonal - stocks built by an average 3.6 mb in that month for the last five years - and counter-intuitive as it occurred against the backdrop of a 280 kb/d drop in regional throughputs and peak seasonal refinery maintenance. On the product side, stocks of motor gasoline accounted for almost half of the draw, contracting by 2.5 mb on the month, while stocks of fuel oil and middle distillates fell by 1.2 mb and 1.6 mb, respectively. At end-month, refined products covered 37.1 days of forward demand, 1.0 days below one month earlier.



Preliminary data from Euroilstock point to a slim 0.5 mb build in European commercial inventories in April after a 2.7 mb draw in refined products was more than offset by a 3.1 mb increase in crude oil. All product categories bar middle distillates (+3.0 mb) declined, notably motor gasoline (-3.2 mb) and fuel oil (-2.0 mb). Since the rise in total oil was counter seasonal, the region's deficit to average levels narrowed to 83 mb.

OECD Asia Oceania

Total oil inventories in OECD Asia Oceania rose counter-seasonally by 2.4 mb in March. As a result, the region's deficit versus the seasonal average shrank to 7 mb from 11.5 mb at end-February. A 5.9 mb increase in crude oil, twice the seasonal average, led the build amid seasonal refinery maintenance. In Japan, however, crude inventories grew by a relatively shallow 1.4 mb. This was tempered by a number of refiners who depleted inventories ahead of a 1 April Government deadline for upgrading or shuttering simple units, resulting in a substantial reduction in the country's aggregate crude distillation capacity.

Refined product inventories in OECD Asia Oceania drew by 3.3 mb. The stock draw was led by seasonal declines in middle distillates and motor gasoline of 5.6 mb and 2.0 mb, respectively, which more than offset a steep 2.6 mb rise in fuel oil. Official Japanese data indicate a weak 1.7 mb draw in refined product inventories, significantly slimmer than the preliminary 8.1 mb draw suggested by weekly data from the Petroleum Association of Japan. The effect of a 1 April increase in the Japanese sales tax might thus have been less pronounced than first thought. On a days' of forward demand basis, regional refined product holdings covered 20.7 days at end-March, 0.4 days above end-February.



Latest weekly data from the Petroleum Association of Japan suggest that stocks there built by 7.9 mb in April after crude oil stocks climbed by a steep 7.2 mb as refiners reduced their throughputs. Nonetheless, all refined product categories built except 'other products' (-2.5 mb). Notably, motor gasoline and middle distillates restocked by 1.4 mb and 1.1 mb, respectively while NGLS and feedstocks drew by a combined 0.5 mb.

Recent Developments in Singapore and China Stocks

According to data from China Oil, Gas and Petrochemicals, Chinese commercial oil inventories drew by an equivalent 9.8 mb (data are reported in terms of percentage stock change) during March to bring to a halt three consecutive months of stocks building where inventories increased by an implied 60 mb. March crude inventories fell by 7.0 mb (-2.9%) after imports dropped from their recent record highs while refinery throughputs inched up to 9.9 mb/d. The impact of the high refinery activity was offset by high product exports. Indeed, China returned to being a net product exporter for the first time since January 2010. All told, March refined product inventories fell by 2.8 mb, driven lower by a 4.6 mb slump in gasoil inventories, offsetting builds in gasoline and kerosene of 1.2 mb and 0.6 mb, respectively.

Preliminary information suggests that crude imports rebounded to a record high of 6.81 mb/d in April. When combined with preliminary estimates of refinery runs and crude production, this implies a significant 1.4 mb/d rise in total (commercial and government) Chinese crude stocks. This build is 300 kb/d higher than those posted in 2Q12 when China was in the midst of filling a tranche of Phase 2 SPR capacity.



Weekly data from International Enterprise indicate that land-based refined product holdings in Singapore built by 2.6 mb during April. Rising residual fuel oil (+1.5 mb) led stocks higher after imports from the Atlantic basin remained high as arbitrage to the region remained open. At the lighter end of the barrel distillates built by 0.7 mb in March to stand 1.7 mb and 0.6 mb above the five-year average and twelve months earlier, respectively.



Prices

Summary

  • Oil prices rose marginally month-on-month in April, supported by continued tensions between Russia and Ukraine, supply outages in Libya and northern Iraq and stepped up crude buying as refiners come out of maintenance turnarounds, which combined to offset the impact of seasonally weaker demand. ICE Brent futures were last trading at $109.85/bbl and NYMEX WTI at $102.10/bbl.
  • Spot prices for benchmark crudes were buoyed by improved refining margins and increased throughput rates as plants return from maintenance turnarounds in the Atlantic basin. Prices for sweet crudes were especially robust on stronger demand for gasoline, increased runs and continued outages of lighter Libyan supplies while sour grade crudes were relatively weaker, especially in Asia, due to poor crack spreads for fuel oil.
  • Spot product prices firmed at the top and middle of the barrel in April, supported by strong petrochemical demand, seasonal product specification changes, refinery maintenance and strong product stock draws, notably in the US. On the other hand, fuel oil cracks remained muted at best.
  • Vessel oversupply continued to cap gains for both crude and product tankers over April. Rates for VLCCs on voyages between the Middle East Gulf and Asia weakened over much of April as Asian refinery maintenance limited demand for Middle Eastern grades.


Market Overview

Oil prices rose marginally month-on-month in April, supported by continued tensions between Russia and the Ukraine, supply outages in Libya and northern Iraq, and stepped up crude buying as refiners come out of maintenance turnarounds, which combined to offset the impact of seasonally weaker demand. ICE Brent futures were up by $0.34/bbl to $108.09/bbl while NYMEX WTI gained a stronger $1.52/bbl to an average $102.03/bbl. By early May, however, ICE Brent posted stronger gains, last trading at $109.85/bbl while NYMEX WTI was largely unchanged from average April levels at around $102.10/bbl. 

The front-month ICE Brent-Nymex WTI spread narrowed over the month on sharply lower stocks at Cushing, which are now a staggering 25 mb below year-ago levels, averaging around $6.05/bbl in April compared with $7.25/bbl in March.  

Oil futures markets were caught in the cross-fire of conflicting reports over the much touted imminent resumption of Libyan exports in April, which ultimately failed to materialise. Expectations that an end to the near 10-month stand-off between the rebels in eastern Libya and the central government in Tripoli were scuppered following the appointment of a new Islamist prime minister on 6 May. Libya's newly-appointed Prime Minister, Ahmed Maitiq, has publicly said he hopes to form a "crisis cabinet" to seek national reconciliation and improve security but even within the government opposition is fierce, following a turbulent parliamentary vote. The escalating security situation in Libya is expected to keep output severely curbed and exports at low levels in the near term.

While the continued loss of Libyan crude and cut-off of Iraqi Kirkuk supplies in April led to a tightening of physical supplies, an apparent surge in Chinese crude imports also played a role. Preliminary data shows that crude imports rebounded to a record high of 6.81 mb/d in April. When combined with latest estimates of refinery runs and crude production, this implies a substantial 1.4 mb/d rise in total (commercial and government) Chinese crude stocks. This implied build is 300 kb/d higher than those posted in 2Q12 when China was in the midst of filling a tranche of Phase 2 SPR capacity.



Heightened prospects of an increase in international sanctions on Russia following the worsening situation in Ukraine also continue to inject uncertainty into the futures market. Yet WTI prices have traded in a very narrow $2/bbl range in April. Underscoring the relative stability of markets, the Brent the M1-M12 futures contract are also little changed month-on-month. The Brent M1-12 spread averaged around $4.70/bbl in April compared with $4.65/bbl in March. Similarly, the WTI M1-M12 price spread averaged $9.35/bbl in April versus $9.20/bbl in March.



Meanwhile, market expectations for the lifting of sanctions on Iranian exports faded further this week as the fourth round of oil talks between Iran and the five permanent UN Security Council members plus Germany and the EU (P5+1) started on 13 May in Vienna. Talks are expected to conclude on 16 May. The initial optimism that Iran and the international community would reach a binding long-lasting agreement on the Tehran's nuclear ambitions that gripped oil market attention last autumn have been replaced with a more sombre realisation that negotiations will be protracted. With the 20 July end of the six-month period for reaching an agreement in the negotiations nearing, most analysts expect the negotiations to be extended. The interim deal agreed in November in Geneva allows for the negotiations to be extended by mutual consent. Key issues still have to be addressed, not least the final terms of sanctions relief to Iran.



Futures Markets

Activity Levels

Managed money net long positions in ICE Brent futures retreated in early May, after having previously climbed to highs unseen since September 2013 as the North Sea grade flirted around $110/bbl, to then edge lower by $2/bbl. Hedge funds saw little movement in their NYMEX WTI net long exposure throughout the month, as the Cushing benchmark moved within a narrow $4/bbl range. Net longs in RBOB gasoline futures retreated by 15% in early May as prices eased about $0.10/gal, after having broken the 100 000 contracts mark for the first time since February 2013. Also, net long futures positions in NYMEX heating oil (based on the New York Harbour ultra low sulphur diesel contract) built throughout the month, but finally retreated as prices eased.



In terms of outstanding futures contracts, ICE Brent inched up about 2% on the month, but was down 2.5% on the year, while NYMEX WTI was stable month on month (m-o-m) but dropped 7.5% year-on-year (y-o-y). The fall in WTI was even steeper when considering futures and options, down 14% y-o-y.

Global trading volumes were little changed on the month, albeit somehow converging, with WTI still slightly above Brent. Both contracts were down from the previous year in double digits, 16% and 23% for WTI and Brent, respectively.







Financial Regulation

The European Securities and Markets Authority (ESMA) has communicated its intention to ease the phasing in of the central clearing requirement for derivatives contract trades, addressing the so-called 'frontloading' requirement. The term refers to the clearing requirement, which came into force as of the first EU approval of a central clearing counterparty (CCP), on 18 March 2014. Within six months from the first CCP approval, ESMA is required to provide draft technical standards, defining the derivatives assets subjects to central clearing requirements. This leaves a period of legal uncertainty for derivatives traded after 18 March, hence the need to cover for higher capital cost, so-called 'frontloading'. ESMA is now proposing an eight to nine months relief period for trades executed during this period of legal uncertainty.

US regulator Commodity Futures Trading Commission (CFTC) extended no-action relief from phone conversation recordkeeping to commodity trading advisers who are members of designated contract (DCM) markets or swap execution facilities (SEF).

Another exemption, this time for EU-registered swaps-trading platforms to meet CFTC standards in order to register as swaps dealers in the US, is set to expire on 15 May. The CFTC had previously extended the deadline in order to allow for further clarifications and amended conditions to qualify for exemption.

Spot Crude Oil Prices

Spot prices for benchmark crudes in April were supported by improved refining margins and increased throughput rates as plants returned from maintenance turnarounds in the Atlantic basin. Global refinery runs are forecast to increase by 2 mb/d by June from April lows in order to meet rising summer demand and replenish low refined product stocks levels, especially of gasoline (see Refining). Spot prices for sweet crudes were especially robust on firming demand for gasoline, increased runs and continued outages of Libya supplies while sour grades crudes were relatively weaker, especially in Asia, due to poor crack spreads for fuel oil.



Brent prices were up only a modest $0.07/bbl to average $107.62/bbl in April on expectations of a recovery in Libyan supplies, increased exports of Iraqi Basrah crude and refinery turnarounds. Spot prices for Dubai were up by $0.40/bbl to $1.04/bbl, despite reduced runs, which hit a seasonal low in April of just 5.7 mb/d in OECD Asia. Stock building in China, however, may have lent support to the Asian benchmark during April. The Brent-Dubai price spread between the grades narrowed by around $0.35/bbl m-o-m, to -$2.90/bbl in April before widening again to -$4.35/bbl in early May.

Spot prices for WTI posted the largest increase in April, up $1.50/bbl to $102.07/bbl amid increased refinery throughput rates in the US after scheduled maintenance turnarounds. The relatively stronger price gains also defy the continued build in crude stocks at the US Gulf Coast region. However, WTI was supported by strong regional shifts in crude oil stocks, with volumes at Cushing declining by 3.2 mb to just 24.2 mb at end month, or a staggering 25 mb below year-ago levels.

The planned start up of more domestic pipelines will further ease the bottlenecks in and out of Cushing, Oklahoma by mid-year. Enbridge's 600 kb/d Flanagan South pipeline from Illinois to Cushing and its 450 kb/d Seaway Twin pipeline from Cushing to the Gulf Coast are expected online at end-2Q14. Magellan's 300 kb/d BridgeTex is scheduled to start line fill at the end of 2Q14 and will move crude produced in the Permian Basin to the Texas Gulf Coast (see Non OPEC Supply). The infrastructure bottlenecks saw the WTI Cushing versus WTI Midland price differential balloon to over $9/bbl in March compared with a 4Q13 average of around $3/bbl. The pending start-up the Magellan line has helped narrow the spread to $8.70/bbl on average in April and to a discount of $7.60/bbl in early May.  Meanwhile, the rising glut of crude oil stocks at the US Gulf Coast pressured the LLS - Brent spread in early May to around -$7.25/bbl compared with around $3.50/bbl.



European crude markets were whiplashed by reports of an imminent start-up of Libyan crude exports that failed to materialise. The price spread between Brent and Urals crudes in the Mediterranean fell to just $0.25/bbl in the first week of April on the reports but by early May had widened to $1.10/bbl when it became clear further delays were in store. The deal reportedly reached in early April to reopen major oil ports controlled by rebels in the east unravelled over opposition to the appointment of the new prime minister, which strengthens the Islamists in the country (see OPEC Supply).

In addition, the continued loss off Iraqi Kirkuk crude in April also helped strengthen Urals relative to Brent. Exports of Kirkuk have been suspended since 2 March following attacks on the Iraq-Turkey pipeline flowing to the Mediterranean port of Ceyhan. It is unclear when exports will resume following further attacks on workers attempting to repair the pipeline.



The loss of Buzzard production in the North Sea Brent basket also distorted price relationships among the crudes that make up the benchmark grade—Stratfjord, Ekofisk, Oseberg and Forties. The differentials are expected to steadily recover as Buzzard output, which is part of the Forties stream, is gradually restored in May following the unplanned maintenance work. Forties supplies remain ample, however, in May and June with the closure of Hound Point's VLCC jetty resulting in Forties cargoes staying  in Europe.



Spot Product Prices

Surveyed spot product prices firmed at the top and middle of the barrel in April, supported by strong petrochemical demand, seasonal product specification changes, refinery maintenance and strong product stock draws, notably in the US. On the other hand, fuel oil crack spreads remained muted at best.



Light products strengthened across all surveyed markets in April. Naphtha cracks remained on an upward path as petrochemical demand, notably in Asia, remained strong while supplies of competing feedstock LPG remained tight. Indeed, naphtha cracks in Singapore emerged into positive territory late-month for the first time since January. Gasoline cracks posted the sharpest gains across all surveyed products as they hit their highest levels since early-summer 2013 on the back of firming spot prices. In the Atlantic Basin cracks were supported by refinery maintenance, steep draws in US inventories as winter grade product was destocked and robust demand which spurred European refiners to ship product westwards while Gulf Coast refiners received an additional boost as LLS weakened against other global benchmarks. Singapore gasoline cracks were muted in comparison, as Dubai remained firm.

Cracks for products in the middle of the barrel posted slim gains over the month as supplies remained ample. European diesel cracks were tempered as European prices remained range bound amid high Russian and US imports and weak demand. Meanwhile diesel cracks on the US Gulf Coast strengthened during the month as exports, notably to Latin America and Europe, remained strong. In Asia, Singapore diesel cracks were tempered by plentiful supply as evidenced by inventory builds and a closed arbitrage to ship product to Europe.



Low sulphur fuel oil cracks weakened in Northwest Europe at the end of April amid strong supply and weak regional demand while the arbitrage to Asia remained closed limiting trade opportunities. A similar picture was prevalent in Singapore where cracks weakened, but remained in positive territory, against a background of underwhelming regional demand. However, in early-May, cracks began to firm again amid expectations for a seasonal uptick in bunker demand which offset negative sentiment coming from inventory builds.



Freight

Rates for crude carriers remained subdued across all surveyed benchmark routes in April. After initially firming over the first few days of the month, The VLCC Middle East Gulf - Asia route weakened steadily over the rest of the month, as demand for Middle Eastern crudes remained tepid on seasonal refining maintenance in Asia. Additional downward pressure came from the bloated tanker pool, which mopped up any cargoes arriving on the market.



The Suezmax West Africa - US Gulf Coast trade experienced a volatile month with any rate gains being short-lived at best with plentiful tonnage limiting any upward movement. By early-May, the rate stood below $13/mt, approximately $1/mt below one-month earlier. In Northwest Europe, rates garnered some strength from high tanker demand as volumes of North Sea cargoes and Russian exports from Baltic terminals remained strong. However, as elsewhere, vessel oversupply capped gains. Consequently, the benchmark Aframax cross UK trade finished April at $6.50mt, a rise of only $0.40/mt compared to one-month earlier.

Product tankers also experienced a lacklustre month as low tanker demand combined with plentiful vessel availability. Rates on voyages east of Suez generally weakened over the month as traded volumes remained thin. Rates for the benchmark Singapore - Japan trade remained at just under $16/mt for much of April but began to weaken into early-May, at the time of writing they stood at close to $15/mt. In the Atlantic Basin, the picture was worse. Despite reportedly high volumes of European gasoline being shipped to the US in the wake of steep inventory draws there, the swollen tonnage pool continued to force rates downwards. Consequently, rates on the UK - US Atlantic coast trade remained on a steady downward trajectory throughout most of the month, hitting a nadir of $14.80 in the third week of April. However, from thereon in, rates began to climb as demand for European cargoes increased further in the wake of delayed US refinery maintenance which finally managed to reduce the vessel pool.

Refining

Summary

  • Global refinery crude throughputs hit a seasonal low in April, estimated at 75.4 mb/d, on refinery maintenance and seasonally weak demand during the so-called 'shoulder' period between the northern hemisphere winter and the summer driving season. Runs are set to rebound steeply as turnarounds unwind and refiners rebuild depleted product stocks amid rising demand. In all, 2Q14 global throughputs are forecast to average 76.2 mb/d, 0.4 mb/d lower than in 1Q14.
  • Annual growth in global refinery activity recovered in 1Q14, to 0.9 mb/d, from only 130 kb/d in 4Q13. Gains largely stemmed from the Middle East, Russia and the US, while Asian and European refiners, whether in the OECD or the non-OECD regions, saw only modest gains, or even losses, from a year earlier. Growth is forecast to rise to 1.1 mb/d in 2Q14, as non-OECD Asian refinery runs are set to rebound. The US and the Middle East are expected to remain the key growth drivers.
  • OECD crude runs fell 530 kb/d in March from a month earlier, to 35.7 mb/d on average. Throughputs dropped by 280 kb/d and 190 kb/d in Europe and Asia Oceania, respectively, while runs in the OECD Americas were little changed as US refinery maintenance started to wind down from mid-month. Compared with a year earlier, OECD throughputs stood 440 kb/d lower, as a 420 kb/d year-on-year gain in the US tempered steep contractions in Europe, Japan and Canada.
  • Refinery margins generally posted a strong recovery in early April before plummeting again late-month. Surging gasoline cracks, following steep stock draws, bolstered returns in Europe and the US. US Gulf Coast margins gained the most, up $5.15/bbl on average from March, supported by weak regional crude prices. In Northwest Europe margins were $2.40/bbl higher on average while the Mediterranean posted gains of $1.45/bbl. Margins in the US Midcontinent and in Singapore also improved, though gains were tempered by relative strength in crude prices.


Global Refinery Overview

Global refinery crude throughputs hit a seasonal low in April, estimated at 75.4 mb/d, some 2.5 mb/d less than the December 2013 high. While refiners in the US and Europe mostly completed spring turnarounds over February and March, Russian and Asian outages peak in April and May. Global refinery runs are set to rebound in the coming months, as maintenance is completed and refiners strive to meet increased demand and rebuild depleted product inventories. In all, 2Q14 global throughputs are expected to average 76.2 mb/d, 0.4 mb/d lower than in 1Q14.

Growth in global refinery activity recovered in 1Q14, to 0.9 mb/d, from only 130 kb/d in 4Q13. Gains largely stemmed from the Middle East, Russia and the US, while Asian and European refiners, whether in the OECD or the non-OECD region, saw only modest gains, or even losses, from a year earlier. Global throughputs are forecast to rise by 1.1 mb/d year-on-year (y-o-y) in 2Q14, led by a rebound in non-OECD Asian refinery runs. The US and the Middle East are expected to remain the key contributors to growth.



The historical global crude runs series has been revised upwards since last month's Report, to account for crude processed by refineries in the semi-autonomous Kurdistan region of Iraq, currently excluded from official Iraqi refinery data. According to KRG official data, the region processed 180 kb/d of crude in 2013, up from 140 kb/d in 2012 and 85 kb/d in 2011. Since last month's Report, we have also increased our assessment of refinery crude intake in non-OECD Asia, largely on the back of an apparent rebound in Indian throughputs in March, but also due to a baseline revision to Malaysian refinery runs, based on an update of 2012 annual statistics.

Refinery margins generally posted a strong recovery in early April before plummeting again late-month. Surging gasoline cracks, following steep US stock draws, bolstered returns in Europe and the US. US Gulf Coast margins gained the most, up $5.15/bbl on average from March, as regional crude prices were pressured lower by ample supplies and surging inventories. Northwest European margins were $2.40/bbl higher on average while the Mediterranean posted gains of $1.45/bbl. Margins in the US Midcontinent and in Singapore also improved, but gains were tempered by relative strength in crude prices. The recovery in refinery margins was generally short-lived, however, with rates in both Europe and the US coming down from mid-April.



OECD Refinery Throughput

OECD refinery crude runs declined by 530 kb/d in March month-on-month (m-o-m), to average 35.7 mb/d. Throughputs remained firmly below both their five-year average and five-year range as structural shifts have become entrenched. Seasonal maintenance spanning all regions curbed runs, though by end-month US refinery throughputs were already on the rise, leaving North American crude intake only slightly lower, at 18.05 mb/d. In contrast, European refinery runs plunged by 280 kb/d, with weaker runs in Italy, Germany and Portugal dragging rates down. In OECD Asia Oceania, throughputs slumped by 190 kb/d, mainly on the back of weaker Japanese runs. Total OECD refinery crude intake were 440 kb/d below a year earlier in March, as a 420 kb/d annual gain in US throughputs was offset by y-o-y contractions in Canada, Japan and Europe. European refinery runs were down 560 kb/d from the same month in 2013, due to both capacity reductions and weak refinery margins. Regional benchmark cracking margins remained exceptionally weak in the first quarter of this year, dragged lower by lacklustre demand and increased product imports.



Refinery throughputs in the OECD Americas were little changed in March from a month earlier, reflecting flat US throughputs for the month on average. The latter slipped just below 15 mb/d in the first two weeks of March, their lowest since October, but by the last week of the month had climbed back to 15.3 mb/d as refineries returned from maintenance. A turnaround at Irving's Saint John, New Brunswick, plant curbed Canadian runs from March onwards, however, to an estimated 1.6 mb/d. According to preliminary data from the National Energy Board, Canadian throughputs fell further in April, to 1.4 mb/d on average, as Suncor's Montreal and Edmonton refineries were also taken offline for maintenance shutdowns.



According to preliminary data, North American crude runs leapt higher in April on the back of surging US throughputs. US refiners processed 15.8 mb/d of crude in April, some 660 kb/d above March and 910 kb/d higher than the year earlier. Both the monthly and annual increases were led by the US Gulf Coast and Midcontinent refiners, up 430 kb/d and 196 kb/d m-o-m, respectively. US Gulf Coast refinery margins surged $5.15/bbl on average in April, as a steep gasoline stock draws pushed up gasoline prices while regional crude markers were pressured lower on ample supplies.

US throughputs are expected to remain high in coming months, but y-o-y gains will narrow due to capacity constraints in the summer, when refineries traditionally push through utilisation rates of 90%. By the end of this year, 85 kb/d of new crude processing capacity may come on stream, including 50 kb/d from the first phase of a condensate splitter project at Galena Park, Texas (expected to start up in November), and the remaining 35 kb/d from two small refineries in Thunder Butte and Dakota Prairie, both in North Dakota.



In Europe, refinery activity slowed in March, cutting crude intake by 280 kb/d from a month earlier. Italian crude runs fell 120 kb/d m-o-m, while German throughputs dropped by 100 kb/d. In Italy, maintenance at Eni's Gela refinery and API's Falconara plant and a fire at Lukoil's Isab refinery curbed throughputs, while in Germany, Gunvor's Ingolstadt, Shell's Wesseling and Bayernoil's Neustadt and Vohburg refineries contributed to the decline. A shutdown of Galp's Sines refinery reduced Portuguese runs by 60 kb/d from February. In contrast, UK throughputs rose 95 kb/d m-o-m, providing a partial offset.



Regional refinery margins remained weak in March, despite extensive maintenance outages. European cracking margins averaged only $2.25/bbl, while simple margins were a negative $3.30/bbl. A sharp rebound in April, on the back of surging gasoline cracks was short-lived and by early May, ample regional supplies had eroded earlier gains.

Refinery crude runs in OECD Asia Oceania trended lower in March, as Japanese refiners scaled back operations. South Korean refiners, in contrast, raised runs by 80 kb/d, to 2.55 mb/d, a six month high. According to weekly data from the Petroleum Association of Japan (PAJ), Japanese crude throughputs continued to decline in April, to just over 3.2 mb/d (including NGLs) in early May. On a monthly basis, crude intake declined another 130 kb/d, after a 210 kb/d decline in March. Refinery utilisation rates remained at around 85%, however, as nameplate capacity fell to 3.9 mb/d, from 4.4 mb/d at the end of March, ahead of an April government deadline to upgrade or idle simple refinery units.



Non-OECD Refinery Throughput

Non-OECD refinery run estimates have been lifted since last month's Report by 350 kb/d on average for the first half of 2014, to 40.5 mb/d and 40.1 mb/d in 1Q14 and 2Q14, respectively. The bulk of the revision stems from the inclusion of crude processed in the semi-autonomous Kurdistan Regional Government of Iraq, previously not captured in the Iraqi throughput figures. Since last month's Report we have also increased our assessment of refinery crude intake in non-OECD Asia, largely on the back of an apparent rebound in Indian throughputs in March, but also due to a baseline revision to Malaysian refinery runs, based on an update of 2012 annual statistics. Annual growth is forecast to rise to 1.4 mb/d in 2Q14, up from 1.2 mb/d in 1Q14, driven in large part by the Middle East, and to a lesser degree the FSU. Chinese refinery crude demand growth is expected to resume in 2Q14, after two quarters of largely unchanged runs y-o-y.



Chinese refiners processed 9.9 mb/d of crude in March, and 9.6 mb/d in April, in line with our forecast. Throughputs rose 80 kb/d above the January-February average in March, before maintenance curbed runs in April. Throughputs were nevertheless 230 kb/d and 290 kb/d above year-earlier levels, respectively. Most recent data meanwhile show China returning to be a net importer of products in April. According to data from the General Administration of Customs, in March, China became a net exporter of key refined oil products for the first time since January 2010. The country imported 2.37 mt of key oil products (including naphtha, gasoline, jet, gasoil, fuel oil and some other products) in March, a drop of 24.3% y-o-y and the lowest level since August 2012, while exports of key products rose to 2.74 mt, their highest level since May 2013. On the back of slowing Chinese demand growth and surplus domestic refinery capacity, more refineries have been granted oil product export quotas recently.

Crude oil imports meanwhile rose and the most recent data show that Chinese crude oil imports increased to a record 6.78 mb/d in April, up from 5.5 mb/d in March and 5.6 mb/d a year earlier. The rise in imports comes at the onset of the refinery maintenance season, suggesting crude may be going to storage. PetroChina reportedly shut its 410 kb/d Dalian refinery from 10 April until end-May. Other notable shutdowns include those of Sinopec's Changling and Shijiazhuang plants as well as PetroChina's Dagang refinery.



Indian refinery runs declined by about 80 kb/d m-o-m in March, a slightly weaker drop than expected. Maintenance at Reliance's Jamnagar complex is estimated to have curbed throughputs by a further 140 kb/d m-o-m, to average around 0.5 mb/d. Reliance reportedly shut one 330 kb/d CDU at its older, domestic oriented refinery for about four weeks from 18 February. BPCL meanwhile is planning to shut its 120 kb/d Bina refinery for a month from September for maintenance. The company was completing maintenance of a 90 kb/d crude unit at its Kochi refinery in early May. The company is planning to raise capacity at the plant from 190 kb/d to 310 kb/d by end 2015.

Russian refinery throughputs followed their normal seasonal pattern, down 360 kb/d in April, to 5.4 mb/d on average, in line with expectations. Maintenance peaked in April and runs are expected to rise again from May onwards. So far this year, Russian crude intake is up 0.4 mb/d on average, with April posting the highest annual gains of 550 kb/d. 



Since last month's Report, we have raised the historical Middle Eastern crude throughput assessment to include crude processed in the semi-autonomous KRG region of Iraq and to better reflect crude runs in OPEC countries UAE and Qatar, to exclude condensates, as these are counted with NGLs on both the supply and demand side for OPEC member countries. Official KRG data show that a total of 180 kb/d of crude was processed in the region in 2013, up 40 kb/d from 2012. As recently as 2009, KRG runs averaged only 17 kb/d. A re-evaluation of crude runs in the UAE and Qatar provided a slight offset, however, as these two countries were revised lower by a combined 55 kb/d in 2013.

Saudi Arabian crude runs plunged in February, to 1.7 mb/d, according to the most recent JODI data. Maintenance at Aramco's 240 kb/d Yanbu refinery and its 90 kb/d Jeddah refinery curbed runs. Both plants were scheduled to resume operations before month-end, likely propping up runs from March onwards. A 45-day shutdown of a 120 kb/d crude unit at the company's Riyadh refinery started in mid-April. We expect Saudi runs to peak at around 2.1 mb/d over the summer months, as SATORP's new Jubail refinery reaches full capacity. Oman's 116 kb/d Sohar refinery was closed in early May for repair work after a cooling pipe forced it to shut late April.



In Latin America, Brazilian crude runs hit a new record high in March of 2.2 mb/d, up 130 kb/d m-o-m and 80 kb/d y-o-y. A power plant outage forced Petrobras to shut its 250 kb/d REDUC refinery outside of Rio de Janeiro on 30 April. Operations partially resumed on 5 May, though some hydro-treating units were still offline. In Colombia, Ecopetrol shut the single CDU at its 80 kb/d Cartagena refinery in early March, to undergo a planned expansion of the refinery that will double its capacity by 2015. The country's second refinery, the 250 kb/d Barrancabermeja plant, is currently being upgraded to produce cleaner fuels (ULSD), and its capacity expanded by 50 kb/d by 2018.