Oil Market Report: 11 July 2014

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Highlights

  • Oil futures surged in mid-June by $5/bbl to a nine-month high of more than $115/bbl for Brent as Islamist forces gained ground in Iraq, but later reversed their gains on confidence that Baghdad's southern fields would remain untouched and improved prospects for a recovery in Libyan exports. Brent last traded at $108/bbl, WTI at $102/bbl.
  • OPEC supplies were virtually unchanged in June at 30.03 mb/d, as lower Iraqi production offset gains in Saudi Arabia, Iran, Nigeria and Angola. The 'call' on OPEC for 2H14 was cut by 350 kb/d to 30.6 mb/d on improved non-OPEC supply and lower demand, and is forecast to dip to 29.8 mb/d in 2015 from 29.9 mb/d in 2014.
  • Non-OPEC supply is forecast to grow by 1.2 mb/d in 2015, down slightly on 2013 and 2014 forecast levels. Global supplies were largely unchanged month-on-month in June, at 92.6 mb/d, but 995 kb/d higher than a year ago. Annual non-OPEC output growth of 1.7 mb/d more than offset OPEC declines of 765 kb/d.
  • Global oil demand growth is forecast to accelerate to 1.4 mb/d in 2015 from 1.2 mb/d in 2014, as macroeconomic conditions improve. The estimate of 2014 demand has been trimmed by 90 kb/d to 92.7 mb/d following weaker-than-expected mid-year economic data.
  • Global refinery crude runs dipped below year-earlier levels in June, for the first time since October. Planned and unplanned outages, capacity rationalisation and weak margins cut runs by 0.9 mb/d on the year, to 76.8 mb/d. The 2Q14 estimate has been lowered by 0.3 mb/d, to 76.2 mb/d, while the 3Q14 forecast is unchanged, at 77.8 mb/d
  • OECD commercial oil inventories built by a steeper-than-usual 44.2 mb in May, to 2 639 mb. Their deficit to the five-year average narrowed to 69.6 mb from a revised 106.1 mb at end-April. Refined products covered 29.0 days of demand at end-May, up 0.4 days on the month. Preliminary data show that OECD stocks rose by 8.3 mb in June.

Oil prices swing on shifting market concerns

After surging to a nine-month high of more than $115/bbl for Brent on 19 June in the wake of the ISIS offensive in Iraq, oil prices quickly retraced their gains in late June and early July, with Brent slipping below $108/bbl and the Brent futures curve flipping into contango, indicative of a more relaxed, well-supplied market. The supply worries that had sparked last month's rally have since abated somewhat, but that is only part of the story. Market concerns also appear to have shifted to demand, with both product deliveries and refinery throughputs showing signs, perhaps short-lived, of counter-seasonal softness.

On the supply front, markets appear to have taken comfort in Iraq's ability so far to maintain stable levels of exports and production in the midst of a brutal sectarian conflict. At the same time, news that rebels in eastern Libya had lifted a months-long blockade of the Ras Lanuf and Es Sider terminals raised hopes that long-disrupted Libyan exports may soon ramp up. Production patterns in Saudi Arabia, which in the last two years has been prompt to respond to upward and downward shifts in global crude demand, suggest that crude markets are already well supplied. Contrary to seasonal patterns, the Kingdom barely hiked production in June, a sign that demand for its crude may not have significantly increased.



While markets may be more optimistic about future supply, current production levels have not changed much from May to June. Demand patterns may also go some way towards explaining the recent selloff. Product deliveries in Europe and OECD Asia fell somewhat faster than expected year-on-year in April and May, while disappointing economic indicators recently prompted the IMF to hint that its forecast of economic growth might be trimmed. Though Chinese strategic stockbuilding has kept crude imports elevated, Chinese demand growth remains sluggish. Last but not least, global refinery runs seem to have fallen short of expectations in June, dipping year-on-year for the first time since October, with runs plunging counter-seasonally in Europe and sinking to their lowest level in recent memory in Japan.

While the market may thus be going through something of a soft patch, prices remain historically high and there is no sign of a turning of the tide just yet. Global refinery throughputs already seem to be rebounding steeply, buoyed in part by record runs in Russia, capacity increases in Saudi Arabia and a return from unplanned outages in the United States. The global economy is still expected to gain momentum in 2015. Supply risks in the Middle East and North Africa, not least in Iraq and Libya, remain extraordinarily high.

The oil outlook for 2015, unveiled here in detail for the first time, also does not suggest any letup in market conditions. Non-OPEC supply is projected to stay high at 1.2 mb/d, driven mostly by further North American gains, while global demand growth is forecast to accelerate to 1.4 mb/d, from 1.2 mb/d in 2014. The 'call on OPEC plus stock change' looks set to inch down to 29.8 mb/d from 29.9 mb/d, but OPEC supply risk remains high. Product markets may also experience occasional turbulence as the global refining industry continues to restructure and capacity growth in Russia and East of Suez forces further closures in Europe and Japan. Whether in crude or product markets, there is little room for complacency.

Demand

Summary

  • Global oil deliveries are forecast to average 94.1 mb/d in 2015, up by 1.4 mb/d year-on-year (y-o-y). As in recent years, the greatest upside is envisaged from non-OECD economies, which alone are forecast to rise by approximately 1.5 mb/d in 2015, thus more than offsetting a modest curtailment in OECD demand, driven by efficiency gains.
  • The estimate of global oil demand for 2Q14 has been revised downwards by 90 kb/d, to 91.9 mb/d, on the back of weaker-than-expected recent delivery data. China, Germany, Italy and Iraq led the revisions. The European demand outlook has been curtailed in the wake of some disappointing economic news, although macroeconomic forecasts for the year as a whole still points towards modest GDP growth for Europe in 2014. Chinese deliveries, meanwhile, came out marginally below prior 2Q14 expectations, as heavy rainfall curbed already weak industrial oil use. Expectations of Iraqi demand have been lowered on the latest data releases and the ISIS military offensive in northern and central Iraq (see OPEC Supply).
  • For 2014 as whole, the global demand forecast at 92.7 mb/d has been curtailed by 90 kb/d since last month's Report, reflecting the lower 2Q14 estimate and the growing realisation that macroeconomic conditions, although still likely to strengthen in the second half of the year, will probably now do so at a less dramatic pace than previously forecast. International Monetary Fund Director Christine Lagarde in early July called the global recovery "modest, laborious (and) fragile" and hinted that the 3.6% global GDP forecast for 2014 (accelerating to 3.9% in 2015), released in April, may have to be trimmed. Reflecting this mildly less bullish sentiment, the forecast of global oil demand growth for 2014 has been trimmed to 1.2 mb/d, down 0.1 mb/d from the previous forecast.
  • At 10.4 mb/d, the Chinese oil demand forecast for 2014 has been marginally curtailed since last month's Report, with curbed estimates of industrial fuel use leading the correction. We now anticipate growth of approximately 3.3% in 2014, two-tenths of a percentage point below the previous estimate, as the latest data flow has surprised to the downside and we have restrained our assessment of the magnitude of the potential second half uptick.


Global Overview

This month's Report sees the inclusion of detailed 2015 oil demand forecasts, with total global oil deliveries for the year predicted as rising by 1.4 mb/d (or 1.5%) on the year to 94.1 mb/d. Newly industrialised and emerging market economies are once again forecast to lead the gains, rising by approximately 1.5 mb/d to 48.2 mb/d, while OECD demand is forecast to decline by around 0.1 mb/d, to 45.9 mb/d.

The estimate of global demand for 2Q14 has been revised down by 90 kb/d, to 91.9 mb/d, from last month's Report. The latest European and Chinese economic numbers caused some alarm, as did fighting in Iraq, as lower economic activity has the potential to dampen the oil-use estimate in many regions. Notably reduced estimates of April deliveries are seen in this month's Report, with Italy (-75 kb/d), the UK (-70 kb/d), Iraq (-55 kb/d) and Turkey (-45 kb/d) being the main contributors. Only a few offsetting upward adjustments were seen in April, most notably for the US (+105 kb/d) and the Netherlands (+45 kb/d). Preliminary estimates of May oil deliveries also came in below expectations, with notable curtailments for China (-150 kb/d), Japan (-105 kb/d), Germany (-75 kb/d), Mexico (-55 kb/d) and France (-50 kb/d). Sizeable additions were however applied to May demand for Korea (+95 kb/d), the US (+55 kb/d) and Brazil (+50 kb/d), but that was not sufficient to offset overall reductions in the 2Q14 demand numbers.

The oil demand forecast for the year as a whole has also been curtailed, following a reduced 2Q14 estimate and signs that the global economic recovery may have eased back somewhat, mid-2014. Christine Lagarde, the Director of the International Monetary Fund (IMF), hinted in an early-July speech that a reduction in the IMF global growth forecast might be forthcoming. In April, the IMF reported that having risen by approximately 3.0% in 2013, the global economy would accelerate with growth of 3.6% in 2014 and 3.9% in 2015. While Ms. Lagarde talked about global growth potentially being weaker and investment subdued, she still highlighted that the "global economy is gathering speed" and that a "significant rebound" is expected for the US, while "looking at emerging Asian countries, and in particular China, we are reassured because … (growth has become) more sustainable." Reflecting this marginally weaker macroeconomic outlook, global oil deliveries are now forecast to average 92.7 mb/d in 2014, 90 kb/d below the forecast held in last month's Report, curbing the projected growth rate by 0.1 mb/d to 1.2 mb/d in 2014.

Oil Demand Looks Set to Accelerate in 2015

As is the norm for July's edition of the Oil Market Report, a detailed forecast for the year ahead is included for the first time. Total oil product demand is forecast to rise by around 1.4 mb/d in 2015, to 94.1 mb/d. The non-OECD demand sector, having overtaken that of the OECD in 2014, is forecast to widen its lead in 2015, rising to an average of roughly 48.2 mb/d, while OECD deliveries are projected to inch lower to 45.9 mb/d. The risks associated with the 2015 forecast are, however, particularly high. Notably, geopolitical uncertainty in Iraq, Ukraine, Libya, Nigeria and Venezuela bring with them macroeconomic uncertainty, which along with concerns expressed in early-July by the IMF's Christine Lagarde that "the global economy is gathering speed, though the pace may be a bit less than we previously predicted," also impact the demand forecasts.

Broken down by quarter, total oil product demand is forecast to average 92.9 mb/d in 1Q15, before rising steadily to a peak of about 95.3 mb/d in 4Q15. Quarter-on-quarter (q-o-q) growth will likely peak seasonally for the year in the third quarter, with 3Q15 demand forecast at 94.8 mb/d, up 1.5 mb/d on 2Q15 as peak summer driving demand lifts deliveries.

Gasoil/diesel will lead demand growth, followed by LPG (including ethane) and gasoline. Industrial demand will support demand for gasoil/diesel and LPG, while gasoline demand growth is expected to be particularly steep east of the Suez, extending current trends. On the other hand, demand for residual fuel oil and 'other products' will contract on account of reductions in power sector usage, with Japan likely to be a key contributor.

Two factors underpin the divergence in OECD and non-OECD demand trends. Firstly, a generally stronger rate of economic growth is forecast for non-OECD economies than for the OECD, with an expansion rate of around 5.3% assumed for the former, versus 2.3% for the latter. Secondly, oil demand per capita is considerably lower in non-OECD economies than in the OECD, and economic growth is typically more oil-intensive in the former than in the latter. Many non-OECD economies are entering a stage of development where rising household incomes and expanding industrial activity typically fuel relatively fast oil consumption growth.

Demand in the non-OECD region also typically follows different seasonal patterns than in the OECD. Traditionally, OECD oil demand dips in the second quarter. In 2015, OECD demand is thus forecast to contract by 0.6 mb/d from the first to the second quarter, causing global demand growth to slow to a q-o-q low of 0.3 mb/d in 2Q15. Momentum is then forecast to accelerate in 3Q15, when OECD demand is forecast to rebound by around 0.9 mb/d q-o-q, lifting global q-o-q growth to 1.5 mb/d, consequential on a seasonal uptick in OECD gasoline demand, particularly in the Americas.

Top 10 Consumers

US

US oil deliveries were revised up to 18.7 mb/d for April, equivalent to y-o-y growth of 0.7%, versus the 0.1% increase projected in last month's Report. This made April the eighth successive month of y-o-y growth. The US economy turned a corner in 2013, supporting a more robust industrial trend and hence additional oil use. The Institute for Supply Management's closely tracked manufacturing index, having been in 'contracting' territory mid-2013, rose into 'expansionary' terrain by 4Q13. Growth slowed in January due to harsh winter weather but later edged higher through May. At the same time, industrial fuels, such as gasoil and LPG (which includes ethane in our definition), led associated gains in oil consumption, with gasoil demand rising by an average 4.9% in the eight months from September to April and LPG deliveries expanding by 2.8% over the same period.



Preliminary estimates show US demand rising to approximately 18.8 mb/d in May, its highest level since February and a ninth consecutive y-o-y gain. The key drivers of this growth remain the relatively strong gains seen in US industrial and transportation demand. Preliminary estimates point to a further demand gain in June, to 19.2 mb/d, the highest level of US deliveries since end-2013. For 2014 as a whole, US demand is forecast to rise by 0.6% to 19.0 mb/d, with a further 0.2% gain projected in 2015, to 19.1 mb/d.

China

Chinese oil demand growth remained relatively subdued in May, when deliveries were estimated at 10.1 mb/d, up 1.9% on the year. Absolute declines were seen in demand for both residual fuel oil and gasoil/diesel. While relatively low refinery runs suppressed overall Chinese oil deliveries as refineries entered peak maintenance season, heavy rainfall also curtailed both agricultural and construction diesel use.



Looking forward, we maintain our forecast for stronger Chinese oil demand growth in the second half of the year, taking the overall growth estimate for 2014 as a whole to +3.3%, as total deliveries average around 10.4 mb/d. The stronger demand growth forecast for the second half of the year reflects the trend in forward-looking indicators of Chinese manufacturing activity, such as the Manufacturing Purchasing Managers' Index (PMI), which flipped back to 'expansionary' territory in June after a five-month hiatus. The transportation sector, including both road and air transport, is forecast to lead the upside, with the continued expansion of the Chinese petrochemical sector also lifting naphtha demand. Moving into 2015, overall momentum is forecast to accelerate to +4.2%, as government support is expected to keep GDP growth above 7% and gasoil/diesel returns to stronger growth.



Japan

Japanese oil deliveries fell to a three-year low of 3.9 mb/d in May, down 5.9% on the year, as both the power and petrochemical sectors saw lower oil requirements. Naphtha demand fell on account of the Mitsubishi Chemical Corporation announcing the permanent closure of a major cracker, while fuel-switching to abundant and relatively low-cost coal undermined power-sector demand. With industrial output in Japan also now rising at its weakest clip in nine months, +0.8% y-o-y in May, this compounded the downside pressure on industrial fuel use, hence the y-o-y declines seen in gasoil, fuel oil, naphtha and 'other products' in May. April's sales-tax hike, coupled with ailing consumer confidence, also played a key role in the sharp contraction seen in gasoline deliveries. The Cabinet Office's monthly consumer confidence index, which assesses household confidence against a threshold whereby any reading above 50 indicates 'optimism' and that below 'pessimism', stood at a worrying 39.3 in May. In view of the weaker-than-anticipated April-May trend, the Japanese oil demand forecast for the year as a whole has been curbed by 25 kb/d to 4.4 mb/d. This amounts to a 3.6% reduction in oil deliveries in 2014, with a further 2.2% contraction projected in 2015, to 4.3 mb/d, as economic activity in Japan is widely expected to slow while the power-sector oil requirement further eases.



India

Indian diesel deliveries were surprisingly robust in May, at 1.5 mb/d, posting their first annual gain in more than a year. This uptick in diesel deliveries lifted total Indian oil demand to 3.7 mb/d, up by about 60 kb/d on both April 2014 and May 2013 levels. Diesel accounted for a large swathe of May's m-o-m growth, driven by additional consumption associated with the general election and increased use of back-up diesel generators amid widespread power outages reported during the month. Over the course of the year, total Indian demand is expected to average around 3.6 mb/d, a gain of 2.7%, with growth then forecast to accelerate in 2015 as economic growth also gains momentum.



Russia

Russian oil deliveries rose to 3.3 mb/d in April, up 6% y-o-y, led by the transport fuel sector, including gasoline, gasoil/diesel and jet/kerosene. This represented a six-month high in demand growth. With macroeconomic conditions likely to deteriorate in the second half of the year, Russian oil demand growth is expected to ease back to around 2% for 2014 as a whole, to 3.5 mb/d. A similar growth rate is foreseen for 2015.

Brazil

Despite recent weaknesses in the Brazilian economy, oil product demand has remained relatively strong, rising by nearly 4% y-o-y in the first five months of the year. Preliminary data show May oil demand at roughly 3.2 mb/d, up by 3.4% on the previous year, with particularly strong gains seen in the Brazilian transport sector. Contractions in industrial output in March and April did little more than quell the pace at which oil demand grew. The outlook for the second half of 2014 is more subdued (+2%), as the growth forecast decelerates on account of the anticipated post-World Cup economic climb-down. HSBC's Manufacturing PMI fell back into 'contracting' territory in April and has remained there through June, implying more subdued manufacturing activity in the second half of the year. The forecast for 2015 is for a gain of around 2.3% in total Brazilian oil use, underpinned by a near 2.7% expansion in economic activity overall.



Saudi Arabia

Saudi Arabian oil demand remains relatively robust, rising by around 3% y-o-y in 1Q14 to 2.8 mb/d, and is expected to maintain this momentum through the course of the year as total oil use is buttressed by continued economic growth. Rapid gains in demand for gasoline and jet fuel are forecast to lead oil demand growth, buoyed by relatively hearty consumer confidence. The Nielsen Global Survey of Saudi consumer confidence and spending intensions depicts Saudi Arabian consumer confidence in 1Q14 rising to its highest level since the end of 2012. Oil demand growth is forecast to accelerate to 3.6% in 2015, to 3.2 mb/d, as the strengthening underlying economic growth trend continues, while the commissioning of new petrochemical capacity will also support oil use.



Germany

At 2.4 mb/d in April, German oil deliveries were roughly 7.4% below the year earlier and 25 kb/d below the estimate carried in last month's Report. The downside revision reflects slower growth in industrial activity, up just 1.8% y-o-y in April, the shallowest gain in six months. Absolute declines were seen in most of the major product categories in April. Only naphtha and jet/kerosene demand grew, respectively by 8.1% and 3.2%. Preliminary estimates show May demand falling to 2.3 mb/d, led by steep drops in gasoil and residual fuel oil use. This correction in industrial oil use has occurred as manufacturing sentiment has stuttered somewhat, reversing an earlier strong run. For the year as a whole, total German oil use is forecast to rise modestly, up by around 0.3% to 2.4 mb/d, a level that it is roughly forecast to be maintained in 2015.

Korea

A dramatic uptick in Korean naphtha demand saw total South Korean oil deliveries clamber up to approximately 2.3 mb/d in May, roughly 65 kb/d (or 2.8%) above the year earlier level. Naphtha deliveries surged to 1.1 mb/d, up by nearly 85 kb/d y-o-y on account of relatively light cracker maintenance. Road transport demand also rose in May, with deliveries of both gasoline and gasoil/diesel up on the year-earlier, as the Ministry of Land, Transport, Maritime Affairs reported total car registrations rising to an all-time high of 19.7 million in May.



Despite the strength of May's demand data, the forecast for the year as a whole has not significantly been raised since last month's Report as business sentiment indicators for the second half of the year, such as HSBC's Manufacturing PMI, have turned back into 'contracting' territory. Moving into 2015 the forecast points towards modestly declining Korean oil use, as efficiency gains are expected to outweigh the demand support provided by the relatively resilient macroeconomic backdrop.  



Canada

The latest official Canadian demand data depicted a sharp drop in total deliveries, to 2.2 mb/d in April, with notable curtailments reported in gasoil/diesel, fuel oil and 'other products', both in y-o-y and m-o-m terms. Demand fell on a combination of curbed industrial optimism and warmer weather conditions in the country. After a relatively flat year in 2014, the Canadian demand trend is forecast to head south once again in 2015, as the effect of industrial and vehicle efficiency gains outweigh the upside that arises on account of continued economic growth.





OECD

Preliminary estimates of May deliveries suggest that the rising y-o-y OECD demand trend, that took hold at the end of 2013, was little more than a temporary aberration. Having risen in y-o-y terms in each of the 2Q13, 3Q13 and 4Q13, breaking the previously strongly declining demand trend that largely held through mid-2011, absolute y-o-y OECD declines returned in 1Q14 (-0.1%), before taking root in April and May. This reversal fits with the forecast we have carried for some time now, and will likely continue for the year as a whole and into 2015, as the negative demand-side influence from the assumed efficiency gains and continued product switching out of oil are forecast to more than offset the positive influence provided by the likely recuperation in economic activity.



Americas

Rising by an estimated 0.7% y-o-y in May, oil deliveries in the OECD Americas bucked the overall declining OECD trend, consequential most of all on continued strong gains in industrial fuel use in the US. Conditions across the region are not uniformly supportive, with absolute demand declines still being seen in Canada and Mexico. At just 2.0 mb/d in May, the Mexican demand estimate came out roughly 55 kb/d below the month earlier forecast, as gasoline use posted its sharpest y-o-y decline in six months (down 2.0% to 770 kb/d). Mexican gasoline demand has been falling recently, as relatively weak income growth co-exists alongside sharp price gains (+12% in 2013, with a further 10-12% expected for 2014) and ongoing engine efficiency improvements. The weak domestic transportation fuel market, coupled with further power-sector shifting out of oil products towards natural gas, saw total Mexican oil deliveries fall by 2.5% y-o-y in May.



Europe

One of the main contributing factors to the reduced global 2Q14 demand estimate, over last month's Report, was the curtailed outlook for Europe. Deliveries in Europe came in at around 13.3 mb/d in May, 2.9% down on the year earlier and 95 kb/d below the estimate previously carried as starkly lower German (-75 kb/d) and French (-50 kb/d) demand filtered through. This follows on from the similarly sized curtailments applied in April, with notably lower statistics released for Italy, the UK and Turkey. Behind these revisions lie the recent economic weakness, with manufacturing confidence (as tracked by HSBC's PMI) falling to a six-month low in May, while unemployment remains ratcheted up in double-digit territory (10.3% for the EU in May) and general (non-oil) deflationary pressures stir. Indeed this last fear encouraged the European Central Bank to move into unchartered territory by cutting deposit rates down below zero in a move that, along with reductions in refinancing rates and a package of other "targeted" easing methods, highlighted the seriousness of their concerns. The 2Q14 European demand estimate, at 13.5 mb/d, is accordingly 2.1% down on the year earlier.

UK deliveries, at approximately 1.5 mb/d in April, continue the recent negative y-o-y trend, roughly 55 kb/d (or 3.4%) below the year earlier level and 70 kb/d below the forecast carried in last month's Report. At 1.2 mb/d in April, Italian demand came out 75 kb/d below the previous forecast, and down 9.9% on the year earlier, reflecting some fairly sizeable curtailments in both 'other product' and naphtha deliveries. Turkish deliveries, meanwhile, came out at a revised 705 kb/d in April, 45 kb/d below the previous estimate, as both gasoil and naphtha demand surprised on the downside. Overall the Turkish demand metric for April depicted a 4.2% y-o-y decline, with particularly sharp drops seen in naphtha.



The European demand outlook, at 13.6 mb/d in 2014 and falling to 13.5 mb/d in 2015, continues to contract, albeit not at the heady pace of recent years. This slowdown in the forecast decline rate occurs as a combination of waning efficiency gains (see Medium Term Oil Market Report, 2014) and the stronger macroeconomic backdrop increasingly feed through. Indeed, despite the severity of the recent economic concerns, the overall GDP growth trend likely remains supported above 1.5% for Europe in 2014, accelerating to 1.8% in 2015. The 1Q14 saw y-o-y GDP growth of 0.9% for the more subdued euro area, while more rapidly expanding non-euro zone economies such as the UK rose by 3.0% y-o-y. Even one of the much quoted reasons for downgrading the European economic outlook recently, the falling business survey or PMI numbers, remains supported above their key 'expansionary' threshold of 50, suggesting continued industrial output growth (after April's 1.4% y-o-y gain in euro zone production) through the second half of the year.



Asia Oceania

Preliminary data suggests that the previously entrenched falling OECD Asia Oceania oil demand trend (2006-09) has returned and will continue through the forecast. Down 2.2% on the year earlier in May, to 7.7 mb/d, and with a revised April estimate of 7.9 mb/d, down 2.9% y-o-y, the forecast for the year as a whole has been modestly curtailed to 8.3 mb/d, equivalent to a decline rate of 1.6%, with sharply curtailed power sector usage in Japan the key forecast laggard. A further decline of around 1.1% is assumed for 2015, taking forecast oil deliveries down to 8.2 mb/d, with lower electricity generating demand in Japan once again the key deterrent.

Non-OECD

Recent demand data suggest relatively strong non-OECD oil product demand growth conditions remain, with preliminary 2Q14 estimates at 46.7 mb/d, pointing towards a 3.0% y-o-y gain. This 2Q14 growth spans all of the main product categories, though gasoil/diesel demand growth continues to be slowed by contraction in China. For the year as a whole, growth is expected to average around 3%, lifting demand to 46.7 mb/d, before accelerating economic growth raises oil demand growth to 3.2% in 2015, to 48.2 mb/d.



While it is impossible to predict how recent events in Iraq will unfold, it seems certain that ISIS advances and continued armed confrontation in parts of the country will take a toll on economic growth, and therefore, oil demand. The estimate of Iraqi demand growth had been previously based on the assumption of near 6% economic growth in 2014, accelerating to 6.7% in 2015. The current climate suggests anything more than 3% is unlikely. Lines have been reported at filling stations as the Baiji refinery shutdown curbed gasoline/diesel deliveries (see Refinery section), while domestic and business confidence have been adversely affected by the fighting and trade flows have been disrupted by border closures.  Additional military oil use will likely provide only a partial offset. Overall, the Iraqi demand forecast has been trimmed by roughly 25 kb/d since last month's Report, to 830 kb/d, on the curbed macroeconomic outlook, with a further 35 kb/d removed from the 2015 estimate to 850 kb/d. As with any conflict, however, the risks are large and heavily skewed to the downside.



After a two-year hiatus, Libya released a sizeable backlog of JODI demand data this month, hence the large scale of the Libyan revisions for 2012-14. The revised 2012 Libyan oil demand estimate is now roughly 220 kb/d, 10 kb/d below the previous estimate, while the amended 2013 number is 210 kb/d, 35 kb/d less than expected in last month's Report. Downward adjustments spanned all the major product categories but were particularly pronounced for gasoil/diesel, reflecting the dire state of industrial activity in the country.



Early July saw the Egyptian authorities make strides to reduce energy subsidies, with gasoline prices nearly doubling in some areas and talk of more upward adjustments to come. Higher prices, if they stick, will likely curb demand, hence this month's downward adjustment to the Egyptian demand forecast. In a recently released budget, for the fiscal year 2014-15, the government cut the budget allocation for energy subsidies to 100 billion Egyptian pounds (approximately $14 billion), a 30% reduction on the previous estimate. Planning Minister Ashraf al-'Arabi stated on 2 July that "the cost of gasoline, diesel, heavy fuel oil and gas deliveries to factories will rise, whereas the price of cooking gas will remain unchanged".

Subsidy cuts have looked to be necessary in Egypt for quite some time but successive administrations have avoided the move for fear of political backlash. Although Egypt's new president won a 96% majority in elections held in May (where the turnout was admittedly low), protests over the subsidy cuts, by taxi drivers, which caused many roads to be blocked and disrupted traffic flows in early-July, suggest that public acceptance of reduced energy subsidies is far from clear-cut. Nevertheless, our 2014 Egyptian demand forecast of 770 kb/d has been cut by 15 kb/d since last month's Report.

Supply

Summary

  • Global supplies were largely unchanged month-on-month (m-o-m) in June, up around just 20 kb/d to 92.6 mb/d. Compared with one-year ago, global supplies were 995 kb/d higher, with non-OPEC supply growth of 1.7 mb/d more than offsetting the OPEC decline of 765 kb/d.
  • Non-OPEC supply growth in 2015 is forecast at 1.2 mb/d, which is in line with 2013 and 2014 growth levels. The US and Canada remain the mainstays for growth, but sources are expected to be more diverse than in 2014.
  • June 2014 non-OPEC production rose by 55 kb/d m-o-m, as a seasonal increase in biofuels supply largely offset a 130 kb/d drop in all other liquids output. The North Sea maintenance season is in full swing, with production in that area falling by over 0.5 mb/d from 1Q14 to 3Q14. Maintenance in places as far flung as Canada, Kazakhstan, and Malaysia is expected to significantly reduce production this summer.
  • OPEC crude oil supply was off a marginal 40 kb/d to 30.03 mb/d in June, with a decline in Iraqi output partially offset by small increases from Saudi Arabia, Iran, Nigeria and Angola. The 'call on OPEC crude and stock change' for 2H14 was reduced by an average 350 kb/d to 30.6 mb/d following a downward revision to demand and an upward adjustment to non-OPEC supply numbers. For full year 2015, 'the call' was pegged at 29.8 mb/d, with increased non-OPEC supplies forecast to provide the lion's share of higher demand.


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

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

The non-OPEC supply overview and OPEC NGL section this month focuses on the roll out of our forecast to 2015, with discussion of key changes in production. However, to avoid duplication, several of the themes underpinning this analysis are elaborated upon in the MTOGM 2014, released on 17 June 2014.  Readers should consult the MTOGM for more detailed discussion of factors affecting supply in 2015 and beyond.

OPEC Crude Oil Supply

OPEC crude oil supply was off a marginal 40 kb/d to 30.03 mb/d in June, with a decline in Iraq output partially offset by small increases from Saudi Arabia, Iran, Nigeria and Angola. Iraq production of Kirkuk crude remained offline in the wake of surging militant activity in the region while exports of Basrah oil from southern ports were beset by technical issues. Higher crude oil output from the Kurdish region, however, partially offset declines elsewhere in the country following the controversial start-up of new export routes (see 'Iraq Under Siege'.)

The 'call on OPEC crude and stock change' for 2H14 was reduced by an average 350 kb/d to 30.6 mb/d in line with a downward revision to demand and an upward adjustment to non-OPEC supply numbers. Despite the reduced assessment of the call for 2H14, OPEC would still have to raise production by more than 500 kb/d from June levels in order to balance the market. For full year 2015, the 'call' was pegged at 29.8 mb/d, with increased non-OPEC supplies forecast to meet the lion's share of higher demand.  OPEC's 'effective' spare capacity was estimated at 3.25 mb/d compared with 3.27 mb/d last month, with Saudi Arabia holding 80% of surplus.



Saudi Arabia's crude output averaged 9.78 mb/d in June, up by 70 kb/d from May levels. The relatively modest increase reportedly reflects reduced buying from refiners, especially in Japan. Typically Saudi Arabia increases production in the summer to meet seasonally higher domestic demand for crude burn at power plants and stronger demand from refiners. Last year crude burned at power plants during the peak air-conditionning season between April and September averaged 615 kb/d compared to 360 kb/d in 1Q14. Saudi Arabia increased production last July to 10 mb/d, up 350 kb/d from June 2013 levels.



Crude oil production from Iran rose by 50 kb/d to 2.85 mb/d in June against the backdrop of a looming deadline to reach an agreement for the country's nuclear programme. Iran and the five permanent UN Security Council members plus Germany and the EU (P5+1) are in the final stretch of negotiations ahead of the 20 July deadline but progress to date has reportedly been limited. Under the interim deal, the Joint Plan of Action (JPOA), agreed in November in Geneva, negotiations can be extended by a further six months by mutual consent. Reaching 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, is not assured.



After running well above the 1 mb/d target at an average 1.42 mb/d in the first five months of the year, import volumes of Iranian crude eased back to 1.08 mb/d in June, of which included 115 kb/d of condensate. June's volumes compares with an upward revision to May levels of 1.45 mb/d. Imports of Iranian crude reached a 20-month high of 1.58 mb/d in February. Regular buyers include China, India, Japan, South Korea and Turkey.

June preliminary data show imports from China retreated to just over 510 kb/d in June compared a lofty 760 kb/d in May and 800 kb/d in April. The rise in Chinese imports of Iranian crude coincides with an apparent increase n the country's strategic reserves for the same period (see Stocks, 'China Adds to its Strategic Petroleum Reserve'). India posted the second largest monthly decrease, off 115 kb/d to an average 141 kb/d. That compares with an average 310 kb/d for the first five months of the year. 

Japan reduced imports to around 120 kb/d in June, down 65 kb/d from May and 50 kb/d below the average 170 kb/d for the January-May period.  South Korea is the only country to post an increase, up 95 kb/d to 160 kb/d in June. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports. Iranian imports also include some condensates from Iran's Assaluyeh terminal, which ebb and flow on a monthly basis, with volumes averaging around 190 kb/d for the first six months of this year.



Iraq under Siege

A month-long military campaign by radical militants from the Islamic State for Iraq and Syria (ISIS) has shaken Iraq's foundation and threatened oil operations in the north of the country, but the prized oil fields in the south are so far insulated from the fighting.

Output fell by around 260 kb/d in June to 3.17 mb/d after the assault forced the closure of the country's biggest refinery at Baiji and cut production from the giant Kirkuk field that feeds it to a trickle. Hundreds of kilometres from harm's way, exports from Iraq's giant southern fields were down 160 kb/d, to an average 2.42 mb/d, in June. Shipments were nearly 300 kb/d below the initial 2.7 mb/d loading schedule for the month, due mostly to logistical snags and maintenance at the Basra terminal. The northern Kurdistan region, however, increased output by 130 kb/d to 360 kb/d in June as ships began to load crude oil delivered via its independent pipeline to Turkey.

Barring more technical problems, Iraqi exports from the south could recover this month to around 2.6 mb/d, thanks to brimming storage tanks at Fao and added capacity from the fields of West Qurna-2 and Majnoon. The brutal Islamist campaign has led some international oil companies to withdraw non-essential staff, including ExxonMobil and BP, but company officials at work in the south say exports above 2.5 mb/d could be sustained because Iraqi engineers are fully capable of running the relatively simple operations at fields such as Rumaila, Iraq's biggest producer, West Qurna-1 and Zubair. The country's southern producing region is capable of cranking out production of roughly 2.8 mb/d, provided the kit works.

Iraqi production, including output from the Kurdish region, during the first half of this year ran at 3.3 mb/d versus an average of 3.1 mb/d in 2013. Baghdad may be able to maintain these higher flows for now, but prolonged sectarian bloodshed may shake investor confidence and set back longer-term growth in the country that had been poised to provide the biggest source of new OPEC capacity over the next decade. Even before Sunni extremists stepped up their campaign, the country's weak institutional capacity along with various logistical and infrastructure hurdles were jeopardising expansion plans.



The insurgents' lightning advance has already left them in command of large swathes of northern and western Iraq - home to the Baiji refinery, about 200 km north of Baghdad, as well as the gas fields of Mansuriyah and Akkas. ISIS forces have captured and are controlling the Ajeel oil field, which is pumping just shy of 30 kb/d as well as the largely untapped oil fields of Qayara, producing about 3 kb/d, and Najmah - loading output from the fields onto tanker trucks and selling it into Kurdistan.

With the 300 kb/d Baiji complex - which includes a power plant - off-line, acute product shortages are now impacting the northern region, including the Kurdish region - where petrol is being rationed. The Kurdish government is working to speed up gasoline imports, with priority given to its Peshmerga forces.

Repeated attacks by the Islamist militants have kept oil exports of some 250 kb/d from the Kirkuk field off-line since early March. Since then, the closure of the Baiji refinery - fed by Kirkuk - has slowed production at the ageing oil field to the bare minimum. The northern fields run by Iraq's North Oil Co (NOC) are pumping about 140 kb/d, of which more than 100 kb/d is being re-injected back into Kirkuk. The country needs the fields' associated gas, but has nowhere to place the oil.

The Kurdistan Regional Government (KRG) has meanwhile capitalised on the upheaval to make further strides towards independence from the besieged central government. With Kurdish Peshmerga guards in control of the Kirkuk field - the biggest prize in the north - and revenue coming in from its independent oil

sales, the KRG is in a far stronger position with Baghdad, especially with the Peshmerga putting up the most effective resistance to the ISIS fighters. Since the end of May, the KRG has shipped four tankers loaded with one million barrels each of Kurdish crude out of Turkey's Ceyhan port in the Mediterranean in addition to the hefty volumes that it is still trucking through Turkey and Iran.

With Kirkuk offline, a material increase in the country's production is likely to depend on growth from the Kurdish region since pipelines and pumps tying into export infrastructure in the south are bumping up against capacity. And an immediate boost from Kurdistan could prove problematic, since the KRG has found difficulty marketing its crude after Baghdad - still strongly opposed to Kurdistan exporting via its own pipeline - warned buyers to steer clear of what it calls "smuggled" oil. Only one of four KRG cargoes that has sailed from Ceyhan has found a home, having reportedly been discharged at the Israeli port of Ashkelon. Erbil has meanwhile threatened to take legal action against buyers of Iraq's oil unless the Kurdish region is paid its share of revenues from any sales.



Around 120 kb/d of Kurdish crude is being routed by pipeline to Ceyhan and Kurdish Minister of Natural Resources Ashti Hawrami has said exports would rise to 400 kb/d by the end of the year. The pipeline can now handle sustained exports of around 150 kb/d and rates of at least 300 kb/d should be possible before the end of the year.

Kurdish production in June rose to around 360 kb/d, with the region's three core producing fields of Taq Taq, Tawke and Khurmala each providing around 100 kb/d. Around 150-200 kb/d is run through the country's two larger refineries and small 'teapots', with 120 kb/d exported by pipeline and the remainder trucked through Turkey and Iran. Similar rates are expected in July.

The KRG has also offered to use its own pipeline system to allow the federal government to export crude oil that has been stranded at the Kirkuk field due to the closure of the Iraq-Turkey pipeline since early March after repeated militant attacks. Kurdistan is building a pipeline spur that links Khurmala, the northernmost dome of Kirkuk which it controls, to the field's Avana dome, which - together with the Baba dome - is managed by the central government. Sources say the Kurds so-called "Peace Pipe" is nearly finished.

Baghdad and the Kurds are no closer to settling their dispute over land and oil rights. Baghdad signed a deal last year for UK major BP to revive Kirkuk, which is suffering from massive declines. Output at this 79-year-old field had slumped to around 250 kb/d from 900 kb/d in 2001 after years of injecting water and dumping unwanted crude and products into the field. Once rejuvenated, Baghdad hopes the field will pump around 600 kb/d.

Although Iraq's southern oil fields have so far remained untouched by the violence sweeping through the north and west, the risk remains that militants will target the region's vital infrastructure and cause a substantial or lengthy disruption. Should ISIS militants strike the southern oil network - now churning out nearly all of Iraq's supply to world markets and generating most of Baghdad's revenue - Asia, which takes roughly 60% of Basra Light shipments, would be most vulnerable. China, the biggest buyer of Iraqi oil, while India - Iraq's second largest customer - would have to replace around 500 kb/d. Europe and the US import relatively smaller volumes.

Kuwaiti crude oil production remained flat at 2.78 mb/d while UAE output declined by 30 kb/d to 2.72 mb/d in June. Qatar's production remained unchanged at 700 kb/d for the month.  



Libyan production inched up 20 kb/d to 240 kb/d in June. The prospect for higher flows in July, however, seemingly improved after rebel militias announced an end to their 11-month blockade of vital oil terminals that has crippled the state's finances. Libya's state-owned NOC on 6 July lifted force majeure - a waiver of contractual obligations - at the eastern ports of Ras Lanuf and Es Sider,   which between them handle 600 kb/d, but a significant sustained increase in exports may be weeks away as terminals and oil fields must be inspected for damage and necessary repairs completed.

Analysts also caution that the agreement between militia leader Ibrahim Jathran and interim Prime Minister Abdullah al-Thinni to resume output and exports, though a positive step, could still break down as the terms of the agreement are unclear. There should be more clarity after 20 July, when the Council of Representatives is due to be announced, setting the stage for the appointment of a new prime minister or the confirmation of Thinni in his current role.

At the time of writing, Libyan oil fields were pumping roughly 320 kb/d - a small fraction of the 1.4  mb/d produced a year ago. A burst of extra oil could reach markets from storage tanks at the ports, which house at least 6 million barrels of crude, according to industry sources. Establishing a regular flow of exports will be more complicated, however, and may be weeks away. To begin with, NOC has to restore commercial basics - such as term supply contracts - in order to sell to regular buyers. Crucial repairs at the surface facilities and ports must be completed and evacuated expatriate workers must return to the oil fields.

In the remote southwest of the country, pumps have failed and work-over rigs are required at the core Es Sharara oil field, which has just resumed operations and is due to ramp up slowly; it could take months to reach full capacity. Protesters have blocked the 340 kb/d field and its pipelines system on several occasions in support of political and financial demands. Output has restarted before, but was swiftly shut in again as the unrest across Libya continued to impact on field operations.

In order to sell again to the European market - which is amply supplied - NOC may have to offer steep discounts on its oil, industry sources say. NOC oil marketers have been preparing the logistics for a return to international oil markets.



Angolan crude output rebounded in June to 1.68 mb/d, up 60 kb/d from the previous month. Output, however, is still running well below capacity due to technical problems and extended maintenance work, averaging just 1.61 mb/d in 1H14 or 200 kb/d below its rated nameplate capacity. Last month scheduled maintenance work at the Girassol floating, production, storage, and offloading (FPSO) curbed output. First oil from Total's 160 kb/d deepwater Cravo, Lirio, Orquidea and Violetta (Clov) started operation on 12 June, with production building to peak capacity by year end.

Crude oil production from Nigeria rose by 60 kb/d to 1.96 mb/d in June after lifting the force majeure on Forcados crude in May.  However, Shell declared force majeure on 40 kb/d of its output from the offshore EA field to repair equipment damaged by bad weather.

In Algeria, production remained unchanged at 1.12 mb/d in June. More than a year and a half since their departure, foreign oil workers are returning to work at Algeria's In Amenas gas plant, which was the target of a murderous Islamist attack in January 2013. Statoil and BP demanded improved security before returning workers. The In Amenas plant was producing 50 kb/d of condensate before the attack.

Venezuelan oil production edged marginally lower in June, down 20 kb/d to 2.48 mb/d. State-owned Petroleos de Venezuela (PDVSA) latest 2013 annual report showed India as the top importer of the country's crude in 2013 at just over 400 kb/d in 2013 followed by China at around 295 kb/d. India overtook China last year following the 15-year, 400 kb/d export/financing deal arrangement between PDVSA and India's Reliance Industries signed in 2012. 

Ecuador has steadily raised its production since last year, reaching 560 kb/d in May and June, up from an average 515 kb/d in 2013. Increased output is mainly from state's Amazon operations, which are being supported by increased activity by service companies in the region.

The 2015 Outlook for Non-OPEC Supply

Overview

The forecast for 2015, detailed in this Report for the first time, shows a slightly more moderate yearly increase (1.2 mb/d) compared to 2013 or 2014, though it is still high by recent historical standards. Although the US and Canada are likely to remain mainstays of non-OPEC growth, 2015 is expected to have more diverse sources of supply augmentation compared to 2014. (See '2015 Diversifies Non-OPEC Growth, though North America Remains the Mainstay' in this section.) Looking at production by liquid, NGLs increase by about 100 kb/d to 6.0 mb/d in non-OPEC for 2015, and conventional crude oil and field condensate are forecast to make up about 79% of supply, or some 45.5 mb/d.



Non-OPEC supply fell by 210 kb/d in May month-on-month (m-o-m), to 56.1 mb/d, despite a seasonal increase in biofuels of 210 kb/d. OECD output fell by 350 kb/d, as late spring and summer maintenance began in the North Sea and there was a major turnaround on a unit at a synthetics upgrader in Canada. The US also experienced a modest monthly decline. Outside of the OECD, maintenance also took down production in Kazakhstan. Yearly growth remains substantial, however, at 1.9 mb/d for May. June saw a 50 kb/d m-o-m increase, but again, without a continued seasonal increase in biofuels, non-OPEC would have declined for the month by 130 kb/d. Production dropped again slightly in the US due to small outages in Alaska and the US Gulf of Mexico (GOM), while even heavier maintenance outages affected the North Sea. Looking ahead to 3Q14, production holds steady compared to 2Q14, and yearly growth declines by 1 mb/d, to 1 mb/d for the quarter.

OECD

North America

US - June preliminary, Alaska actual, other states estimated: US crude oil production is estimated at 8.4 mb/d for June, as an outage for several weeks in Alaska on Lisburne (includes McIntyre, Niakuk, and Raven fields) for maintenance, and ongoing repairs on the Marco Polo platform from a May fire, kept production at a similar level to April's final estimate of 8.4 mb/d. This is despite the fact that production growth on the main shale plays in North Dakota and Texas continues apace. Texas crude oil production attained the milestone of 3 mb/d in April, and is estimated to have increased by 40 kb/d each month since. The Eagle Ford shale play's production is the mainstay of the production increases (see 'Eagle Ford Booming'). Likewise, North Dakota crude oil production also reached a milestone in April, of 1 mb/d, led by continuing increases at the Bakken shale play.

On 1 June, the State of North Dakota unveiled new regulations to reduce natural gas flaring on oil wells in the state, as flaring accounts for as much as 30% of all natural gas produced there, according to North Dakota state data. Much of this flared gas is as a by-product of oil production. The policy, to take effect on 1 October 2014, will limit oil production when operators do not capture specified quantities of natural gas. Also, on 1 June a new policy took effect that requires applicants for drilling permits to also submit a plan for capturing the natural gas produced at the site, with restrictions on oil production also to be imposed if plans are not followed. Forecast production growth on the Bakken play in North Dakota is expected to be only very modestly affected by these new regulations, though they may increase producer costs.

In early July, Enterprise Product Partners announced that the twin (a second equivalent pipeline laid beside the first one) of the Seaway crude oil pipeline had been completed, doubling capacity on the line from Cushing to the Gulf Coast to 850 kb/d. Line fill will begin in 3Q14, with this added capacity meaning that some 1.55 mb/d of capacity will be available to take crude oil from Cushing in the midcontinent to the Texas Gulf Coast. Inventories, already haven fallen precipitously in Cushing as they have moved to the Gulf Coast, could drop yet further. Enterprise and Pioneer Natural Resources received permits from the US government earlier this year to export field condensate (the type of condensate not defined as 'pentanes plus' by the US Energy Information Administration).

Natural gas liquids (NGL) production is estimated to have been 2.8 mb/d in June, a slight seasonal decline from April's all-time monthly peak of 2.9 mb/d. Total liquids production was at 11.4 mb/d in June, and is expected to remain well above 11 mb/d for the forecast period, absent a major outage, to average a just over 11.4 mb/d for the year, of which 9.0 mb/d is crude oil.

Eagle Ford Booming

The Eagle Ford Shale Play, located in south Texas, is one of the most dynamic non-OPEC plays at present, with production forecast to grow by 360 kb/d (34%) in 2014 to 1.4 mb/d. Producers on this formation have surpassed analyst expectations earlier in the year, and we have revised up our forecast for 2014 by about 50 kb/d, based on actual data for the first five months of the year. Production capex on Eagle Ford is enormous, having grown from $3.5 billion as recently as 2010 to $16 billion in 2014, with $18 billion set for 2015, according to Rystad Energy. In just one example, Marathon has budgeted $2.3 billion of its $5.9-billion 2014 capex programme on Eagle Ford, with this company alone set to drill over 250 wells before the end of the year. New-well oil production per rig also continues to increase, having reached 470 b/d for each new rig in May, up from 259 b/d per new rig as recently as May 2012, according to the US Energy Information Administration (EIA). While EIA data

do not currently distinguish between field condensate and crude oil production, it is well-known that a significant share of production on the play - at least one-third - is field condensate, and the condensate recently granted permission for export (see above) was sourced from Eagle Ford. For 2015, production on Eagle Ford is expected to exceed 1.6 mb/d for the year, as growth in new-well production slows, and the rig count stays fairly constant on the play.

Canada - June estimated: After dipping in May due to maintenance on a Syncrude coker, June production (total liquids) bounced back to 4.1 mb/d as the turnaround was completed and other production grew slightly. NGL production is estimated to have increased seasonally by about 30 kb/d in June to 640 kb/d, including 130 kb/d of pentanes plus. Canada maintains separate statistics for field condensate, which are estimated at 40 kb/d in June. These liquids provide vital diluent for bitumen production. Crude and condensate production together for the month, which excludes synthetics, was 2.6 mb/d, which is expected to be the yearly average for 2014. In June, the Canadian federal government approved the $6-billion, 1 177-kilometre, 530-kb/d capacity Northern Gateway pipeline, which would take diluted Alberta bitumen to world markets via the Pacific port of Kitimat, British Columbia. The project also includes an import pipeline for diluent such as naphtha and condensate (Canada's domestic production of diluent is insufficient even for present levels of bitumen production, making the country reliant on these imports). The project is still subject to meeting 209 conditions, and faces local and indigenous-group opposition in British Columbia.

Mexico - May actual, June preliminary: Mexican crude oil production remained just under 2.5 mb/d in May, about the same as the previous two months. The June preliminary estimate is that production fell another 50 kb/d on the month, to just over 2.4 mb/d. Mexican crude oil production is forecast to be unable to surpass 2.5 mb/d on a monthly basis through the end of 2015. Production on mainstays Cantarell and the KMZ complex cannot be raised in this timeframe, and new Petróleos Mexicanos (Pemex) projects that could counteract these declines are still years away. Pemex announced plans in June to invest $6 billion to sustain production at the giant Cantarell field complex, but it will not take place until 2017. Cantarell produced over 2 mb/d a decade ago, but recent production figures have it around 340 kb/d. Relatively smaller fields under development by Pemex, such as Ayatsil-Tekel and Tsimin-Xux will start contributing in 2015, but these fields will only help keep the annual decline for that year to around 70 kb/d. Mexican NGL production hovered around 350 kb/d in 1H14, and is set to decline at a somewhat slower rate than crude oil production for 2015.

North Sea

Total North Sea production (including all Norwegian offshore areas) is estimated to have fallen from 3.1 mb/d in 1Q14 to 2.8 mb/d in 2Q14, as seasonal maintenance set in. Production for 1Q14 grew by 120 kb/d y-o-y, the first such annual gain for any quarter since 2004 (with 4Q13 being flat y-o-y). This is perhaps an early sign of a turnaround, which is expected for 2015 as a whole, but the remaining quarters of 2014 will experience significant annual declines with heavy maintenance and notably, the Forties Pipeline System shut in for much of August. 

Norway - April actual, May preliminary: Norwegian production was essentially flat in April compared to March, at just over 1.9 mb/d, as significant maintenance had not yet been implemented, and output was only 15 kb/d below the 1Q14 average. However, May data shows production falling by about 270 kb/d to just below 1.7 kb/d, as the Brage, Grane, Heidrun, Oseberg and Veslefrikk fields had reduced production for planned maintenance. These outages are expected to be fairly evenly spread through September, with total liquids staying at slightly more than 1.7 mb/d until October, and crude oil production between 1.3 mb/d and 1.4 mb/d. Loadings data for Norwegian systems show May and June declining before an increase in July. For the year, Norwegian total liquids output is forecast at 1.8 mbd, down about 20 kb/d y-o-y.



UK - March actual, April preliminary: Total liquids production was 1.0 mb/d in March, with 880 kb/d of that from North Sea crude and condensate. April total liquids is seen to have declined to 930 kb/d as Forties and some smaller systems already experienced some maintenance. Peak maintenance months are expected to be June and August on the UK sector, as Brent plus Forties loadings declined from 523 kb/d to 440 kb/d from May to June, and preliminary August loadings for these two systems are scheduled to be a paltry 212 kb/d. Scheduled Forties loadings fall to a minimal 77 kb/d for that month, as a full maintenance shut down of the Forties Pipeline System is set for the first two weeks of August.

Given this, BFOE loadings are scheduled to fall from 929 kb/d in July to 695 kb/d in August, with total North Sea production forecast to fall to 2.3 mb/d in August, down approximately 700 kb/d from April and down 350 kb/d from July. Forties most often sets the price for North Sea Dated Brent, given that its relatively sour quality usually makes it the lowest-priced of the four grades. However, the limited trading volumes to be available in the period could impact liquidity on the market, and the restricted supply of Forties could increase its price versus Ekofisk and Oseberg. This could set the stage for Ekofisk to yet again set the benchmark prices, as it did for some days in June. BFOE production is forecast to decline in August to about 550 kb/d on heavy planned maintenance and risk of some additional outage, before rising to 810 kb/d in September.

Non-OPEC Growth Diversifies in 2015, though North America Remains the Mainstay

With nearly two quarters of actual data for 2014 now available for many countries, 2014 supply looks like it will slightly surpass our expectations at this time last year, with growth for non-OPEC at just under 1.5 mb/d, including roughly 85% from North America alone. US light tight oil (LTO), mostly from North Dakota and Texas, and Canadian bitumen, represent well over half of 2014 non-OPEC supply growth. Growth levels above 1.2 mb/d used to be exceptional years for non-OPEC, with only two years (2002 and 2010) exceeding that yearly increase in 2000-2012. The revolution in LTO development in the US has changed that, even as net non-OPEC increases outside of North America slipped into negative territory in 2011 and 2012. At the same time, certain OPEC countries have experienced severe disruptions, so North America has made the difference in terms of avoiding severely constrained global supply and all of the implications of that for the oil market.

Looking further ahead, we now expect growth of 1.2 mb/d, to 57.5 mb/d for 2015. This is a small (about 150 kb/d) upward adjustment since the 2014 MTOMR, reflecting a raised 2013 baseline and anticipated higher LTO output in Texas, particularly on the Eagle Ford play (see 'Eagle Ford Booming in this section'), based on data that have become available since completion of MTOMR modelling. Nevertheless, a gain of 1.2 mb/d is no longer exceptional, considering the increases experienced in 2013 and projected for 2014.

In 2015, North America's contribution is forecast to be about two-thirds of the net non-OPEC supply increase. Some producing countries that are projected to experience declines in 2014 look set to contribute to growth in 2015, namely the UK (+50 kb/d), Viet Nam (+20 kb/d), Malaysia (+10 kb/d) and Norway (+10 kb/d). New fields coming online, as well as a difficult 2014 in terms of maintenance in all these countries but Viet Nam, make for the change. Colombia is a special case: we had expected growth for 2014, but the recent intensification of attacks on infrastructure in that country, as well as no sign of a near-term let-up, have made for a downward adjustment for 2014. This, in turn, makes for a higher yearly gain in 2015 (+100 kb/d), though 2015 has also been adjusted downward somewhat for the lower baseline and an assumption that some elevated political risk continues into 2015.

Brazil stands out as the largest source of growth in the 2015 forecast (after the US and Canada), as projects that are to come online towards the end of 2014 ramp up (Cidade de Ilhabela FPSO, Cidade de Mangaratiba FPSO), and new important fields such as the Cidade de Itaguaí FPSO and the Atlanta floating production system start production. Chinese growth is small in 2014, and mostly reflects a recovery from flooding problems in 2013, but in 2015 EOR on the mature but massive Changqing field as well as various new offshore projects, such as the Enping complex, deliver the majority of the forecast expansion. Russia continues to grow very slightly in 2015, basically unchanged on a percentage basis, as new projects and EOR efforts are expected to just barely compensate for declines at mature fields. South Sudan is expected to again show an increase if some measure of political stability can hold. In Ghana, new gas processing infrastructure will allow an uptick in production on the Jubilee field, starting in 3Q14. Finally, in Australia, the start-up of offshore fields such as Balnaves (crude) and Gorgon (NGLs and condensates) is forecast to overcome declines at the country's many mature fields.

Among declining countries for 2015, Mexico suffers the largest drop, as large mature fields such as Cantarell and the KMZ complex are expected to continue their decline. As has been noted in this Report, effects of the recently inaugurated reform process in Mexico are not expected to advance sufficiently by 2015 to stimulate production. In Azerbaijan, the earlier-than-expected start of the 50-kb/d West Chirag in 1Q14 will not be enough to make up for declines at the other offshore fields operated by the AOC consortium. Indonesia's government acknowledged publicly in June 2014 that its original target of 900 kb/d of crude oil production for 2015 would not be met. The main phase of Banyu Urip will not start until well into 2015, and will take time to ramp up, with many of Indonesia's legacy fields waning rapidly in the meantime. Likewise, in Kazakhstan, the giant Kashagan field will not restart production in 2015, so declines on mature fields and extended annual maintenance on Tengiz makes for a small drop. Egypt's fields are declining, and investment in the upstream sector has been weak in an environment of political uncertainty and some companies having difficulty receiving payment from the government. Although Argentina's Vaca Muerta shale play continues to be developed, in 2015 output will still be too small to make up for declines at conventional fields. Denmark has no new fields coming online until Hejre in 2016 at the earliest.

As always, political factors must be factored in. Conditions in Colombia, South Sudan, Yemen, and Syria remain a concern for 2015 (though Syrian production has bottomed out already), while a much-improved environment remains a possibility as well. Other countries could face political problems by 2015 that are not yet on the horizon. Outages resulting from weather, maintenance (planned and unplanned), strikes, and accidents occur every year. Likewise, projects are often delayed, as fabrication and transport takes longer than expected. The forecast includes about 400 kb/d of adjustment for these factors.

A sustained and significant drop in prices could have some effect on production, though even many projects with high operating costs would continue for sometime in order to reduce losses and pay back debts. Hedging also mitigates a price effect. As shown in the 2014 MTOMR, over 75% of LTO projects in the US are forecast to have a breakeven price of $60 per barrel or less in 2015.

Non-OECD

Americas

Brazil - May actual: Brazil attained its highest monthly liquids output since February 2012 in May, at just under 2.3 mb/d, of which about 2.2 mb/d was crude oil, despite a two-week outage on the P-51 platform in the first half of the month (a loss of 24 kb/d). Petrobras initiated in May production on the P-62 platform on the Roncador field, which was Brazil's largest producing field for the month, at 250 kb/d. Initial production from P-62 was marginal, but after P-62 is connected to 14 production wells and eight water injection wells in the remaining months of this year, its production capacity will attain 180 kb/d. In addition, new wells have also been connected to the P-58 platform at the Parque das Baleias field, the P-63 platform at the Papa-Terra field and the P-55 platform,  also on the Roncador field. Some of these wells have staggering flow rates in excess of 35 kb/d for a single well, helping Petrobras achieve production on pre-salt fields of over 500 kb/d by late June. The massive P-61 tension-leg drillhead platform, which has been delayed for some months, partially due to weather, is set in place, and expected to come on stream sometime in 3Q14. Moored in 1000-metre-deep waters, P-61 will be connected to the P-63 FPSO already producing from the Papa Terra field.

Facilities at older fields in the Campos basin are to undergo additional maintenance in the next four years in a new Petrobras programme to extend their field life beyond 30 years, although it may mean more outages in the near term. Nevertheless, the success of new projects, even if delayed, indicate net production growth of 120 kb/d for the year, to 2.24 mb/d, with similar growth in 2015.

Asia

China - May actual: Chinese production rose about 50 kb/d in May, to 4.2 mb/d. Some of the increase was offshore production, as CNOOC brought online the 35 kb/d Kenli 3-2 shallow water cluster that month. Very large onshore mature fields such as Shengli and Changqing (about 0.5 mb/d each) held steady as well. Given the floods in 2013 that affected fields such as Daqing and Shaanxi, these are expected to show increases. Total liquids, which is nearly all crude oil, increases by about 25 kb/d for the year, to 4.2 mb/d.

Malaysia - April actual: Malaysian crude and condensate production averaged 590 kb/d in April, having hovered around this level since November 2013. Output of total liquids, including NGLs and gas-to-liquids (GTLs), was 665 kb/d for the month. Shell's Bintalu GTL facility produces about 15 kb/d. While normal slight declines on mature fields are expected through July, it has been reported that exports of the benchmark crude Tapis will be severely restricted by field maintenance to be carried out in August. Tapis is undergoing EOR in order to sustain production levels in a joint, $2.1-billion effort of ExxonMobil and Malaysian state oil company Petronas.

Former Soviet Union

Russia - May actual, June preliminary: Russia oil production held steady in June, at 10.9 mb/d, with crude oil production likewise steady at just over 10.1 mb/d. Novatek announced that an April fire at the Urengoyskoye condensate field will shave the company's production growth for the year by several percentage points, to between 2% and 3% - hence, growth closer to 5 kb/d rather than 10 kb/d. Progress continues at the Arkutun-Dagi field, part of the Sakhalin-1 Project. The topside of the Berkut offshore drilling platform was installed in June, with production on the 90 kb/d project to commence in December according to operator ExxonMobil. In late June, the Russian government approved new tax breaks on certain Arctic areas (Gydan, Yamal Peninsula and Nenets) as well as for projects offshore in the Japan Sea until a field development reaches 25 million tonnes of yearly output (50 kb/d). 

FSU Exports



FSU net exports dropped seasonally by 550 kb/d in May to 9.3 mb/d. A 500 kb/d decrease in crude exports led the decline as regional demand for crude rose after seasonal refinery maintenance was completed. All major export routes posted month-on-month declines, notably combined shipments from Black Sea ports dropped to 1.6 mb/d. This was led by a 150 kb/d drop in flows through the CPC pipeline to 760 kb/d. Preliminary data indicate that CPC flows are likely to remain constrained at 720 kb/d in June before rebounding to approximately 860 kb/d in July. However, these volumes are significantly above year-ago levels, following recent expansion work on the line. In the east, exports from Kozmino remained stable at 480 kb/d in May but preliminary loading data suggest that shipments from the terminal should breach 500 kb/d over the summer. These levels are likely to be maintained into the fourth quarter as production in East Siberia ramps up.

Refined product exports dropped by 80 kb/d on the month to 3.2 mb/d, but remained 30 kb/d above a year ago, as an increase in 'other products' (mainly light distillates) offset decreases of 80 kb/d in gasoil and 20 kb/d in fuel oil.

About half of the year-on-year growth in product shipments has come from gasoil. Shipments of the product have been increasing in recent months as a number of Russian refineries have commissioned new units producing 10 ppm ultra-low sulphur diesel (ULSD) to supply European markets. Indeed, gasoil exports have now exceeded 1 mb/d for four consecutive months, which had not occurred since 2009 when the region exported significant volumes of 500 ppm gasoil, the market for which has diminished over recent years in line with tightening environmental regulation. At present, much of this new 10 ppm product is leaving Baltic terminals and heading to Europe. Reports also suggest that the first phase of the southern Yug pipeline could be brought on-line as soon as the third quarter. The pipeline will transport ULSD from a number of refineries in southern Russia to Novorossiysk and then onward to southern European markets such as Turkey.

Other Sources of Supply Growth - Biofuels



Global biofuel supply is expected to increase by 90 kb/d in 2015, to reach 2.2 mb/d. Of this, US ethanol production is forecast to increase by a slight 10 kb/d, to 910 kb/d, and Brazilian ethanol is seen to stay even with 2014, at about 490 kb/d. Due to the sugar cane harvest, Brazilian ethanol output surges in the second quarter of the year, peaks in the third quarter, and declines in the fourth and first quarters. Shifting policy grounds in combination with a persistent "blend wall" continue to limit growth in US ethanol production. While the difficult economic situation in the Brazilian sugarcane sector is expected to keep production growth down through 2015, Brazil's biodiesel sector will benefit from an increase in the biodiesel blending from 5% to 7% as of January 2015.

Considering US Condensate Exports

Two US oil companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, were reported in June to have received permits from the US Department of Commerce's Bureau of Industry and Security (BIS) earlier in the year to export US-produced condensate to locations outside of North America. Given questions about the capacity of the North American market to absorb further growth in US oil production

unless current restrictions on crude and field condensate exports are relaxed or other steps are taken to open outlets for this new supply, the BIS rulings attracted close attention in industry and policymaking circles.

The permits, the result of a procedure known as 'private ruling', apply only to a certain amount of condensate applied for by each company, and have no broader legal effect on other potential shipments. Any more general policy to ease restrictions on condensate exports will require the input of the US Congress and look sure to raise complicated legal and political questions. Nevertheless, the decision by the BIS as well as recent statements by Department of Commerce officials have been greeted by some as a first step towards a more relaxed US attitude to crude and condensate exports, though the decision has also attracted the attention of some in the US Congress. Whether additional exports of condensate might be allowed in the future is of particular interest to the US oil industry in light of booming condensate production in some parts of the US (see 'Eagle Ford Booming').

The US Administration has noted that the condensate was allowed to be exported because it was processed (run through a distillation tower and had volatile compounds removed) and therefore, is considered a petroleum product. However, all condensate must undergo some form of processing and stabilisation to be fit for transport. The BIS rulings thus seem to raise more questions than they answer, in particular: what type or degree of processing is to be required by the US government for condensate to qualify for export? In other words, what would be defined as qualifying for export if there were a broader policy change? And, would exports be limited by quantity as well as by quality specifications?

As it is now, petroleum products such as pentanes plus - which is chemically very similar to condensate, although its extraction from natural gas requires a more complicated process - face no export restrictions whatsoever. Pentanes plus are not classified as a type of crude oil under US regulations, unlike lease condensate, at least in the form that comes from the wellhead.

US officials indicate that the issue of definitions, as well as that of the volumes of condensate that might be eligible for export is currently under discussion in Washington. Changing the definition of lease condensate could make it broadly eligible for export by excluding it from the export-restricted category of crude oil. This topic was recently reported in The Washington Post to be high on the agenda of EU-US trade talks.

Meanwhile, the first purchase of US-sourced condensate outside of North America was concluded in early July, with press reports stating that a Japanese trading company had bought a 400 000 barrel cargo from Enterprise, for delivery in September. Price differentials of $10/bbl or more between condensate in the US and in Asia, where condensate splitter capacity is quite large, indicate that there is ready market for expanded export of US condensate, while the US domestic market for condensate is limited. Companies have been considering adding splitters and other investment so as to take advantage of increasing US condensate production. These companies will likely seek clarity on US condensate export policy so as to be able to make appropriate downstream investment decisions.

OECD stocks

Summary

  • OECD commercial inventories posted their fifth consecutive monthly build in May as they soared by a steeper-than-average 44.2 mb to stand at 2 639 mb by end-month. Inventories' deficit versus five-year average levels narrowed to 69.6 mb from a revised 106.1 mb one month earlier.
  • Following a significant 28.7 mb downward revision to April data, centred in Japan, that month's stock build is now seen lower at 12.4 mb, compared with the 39.8 mb presented in last month's Report.
  • OECD refined products covered 29.0 days of forward demand at end-May, 0.4 days above end-April but 0.2 days below year-ago levels, respectively, reflecting both stock builds and marginally reduced demand expectations.
  • Preliminary data suggest that OECD inventories rose by 8.3 mb in June after 'other products' continued to rebound strongly while crude holdings inched up as refinery runs remained subdued.
  • Recent data suggest that China added up to 73 mb to its Strategic Petroleum Reserve over 2Q14 at a rate of 800 kb/d. This would take the Chinese SPR to approximately 215 mb, less than half of the administration's target to hold 500 mb by 2020.


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

OECD commercial oil inventories continued to build seasonally in May as they soared by a sharp 44.2 mb, their fifth consecutive monthly build. Compared to last month's Report, the absolute level of restocking was tempered somewhat by a significant 28.7 mb downward revision to April data, centred in Japan. May's stock build is now seen at a weaker-than-seasonal 12.4 mb, compared to the 39.8 mb presented previously. Despite the steep monthly build, OECD inventories remain tight, standing at 2 639 mb by end month, 13.7 mb less than a year-earlier and 69.6 mb below the five-year average. However, since the build was greater than the 7.7 mb five-year average gain, the deficit versus the seasonal average decreased considerably from the revised 106.1 mb posted at end-April. The deficit remains led by product holdings which stand 66.7 mb below year ago levels. In comparison, crude oil stocks were 4.0 mb above the five-year average.

May's build was led by the restocking of 'other products' (+28.3 mb). This build was located in the OECD Americas where inventories of propane and ethane have recovered following their steep first quarter cold-weather-related draws. Middle distillates stocks also continued to seasonally rebuild, increasing by 3.0 mb over the month, but remain tight compared to historical levels, at a 49.7 mb deficit to the five-year average but on a par with a year-ago. On a days-of-forward-demand basis, OECD refined products stocks covered 29.0 days at end-May, 0.4 days above end-April but 0.2 days below year-ago levels, respectively. Meanwhile crude oil stocks rose counter-seasonally by 12.4 mb as refinery maintenance ramped up. Stocks of NGLs and other feedstocks rose by a weaker-than seasonal 1.7 mb.



Preliminary data indicate that OECD inventories continued to build in June as they rose by 8.3 mb, slightly more than the 4.0 mb five-year average build for the month. Crude oil inched up by a counter-seasonal 1.0 mb as OECD refinery runs remained subdued and below year-ago levels. Stocks of refined products rose by a steeper-than-usual 12.2 mb with 'other products' surging by 27.6 mb, centred in the US, more than twice the seasonal average build. On the other hand, stocks of middle distillates plummeted by 10.9 mb while fuel oil rose by 4.8 mb. NGLs and other feedstocks dropped by a counter-seasonal 4.9 mb.



Recent OECD Industry Stock Changes

OECD Americas

Commercial stockholders in the OECD Americas continued to restock in May, lifting regional inventories by a steeper-than-average 21.7 mb. Regional total oil stocks have now posted five consecutive monthly builds totalling 72 mb, halving the region's deficit versus the five-year average to 15 mb in May, from 32 mb in January. Two factors are behind the build: Firstly, 40 mb is accounted for by crude oil and NGLs and other feedstocks, inventories of which have soared as domestic supply has outstripped refinery throughput. Secondly, 'other products' have risen by 39 mb driven by the restocking of propane and ethane after their significant cold-weather-related drawdowns during 1Q14. Both of these builds have helped to offset a steep 19 mb seasonal draw in motor gasoline, likely resulting from healthy year-on-year (y-o-y) demand growth and surging exports that have approached 600 kb/d over recent months.

Regional refined product stocks built by 29.4 mb on the month after a 24.9 mb surge in 'other product' holdings. Refined products now stand at a slim 1.8 mb surplus to the five-year average, covering 28.1 days of forward demand, a rise of one day on end-April. However, when excluding 'other products' from total products, refined product inventories appear much tighter, standing at a 11.7 mb deficit to the five year average and 4.1 mb lower than in May 2013. Notably, regional middle distillate stocks remain tight, standing 17 mb below the five-year average. Despite strong seasonal replenishment over recent months, the lack of strong restocking in 2013 has proved hard to offset.



Preliminary weekly data from the US Energy Information Administration (EIA) indicate that US commercial inventories rose by 27.5 mb in June as 'other products' continued their seasonal restocking. Notably, propane inventories surged by 12.1 mb on the month to sit at a surplus to the five-year average for the first time since October 2013. Meanwhile, US crude stocks posted their first monthly draw since December 2013 (-5.6 mb) as refiners came back from turnarounds. The bulk of the draw (4.1 mb) was located in the Gulf Coast (PADD 3) where stocks hit record levels in April. As new pipelines, notably TransCanada's 700 kb/d Marketlink, have been commissioned over 1H14 evacuating crude from the midcontinent to the Gulf Coast, inventories at the Cushing, Oklahoma storage hub have plummeted. Indeed, stocks at the hub drew by 0.9 mb in May, extending earlier draws, to leave them at 20.4 mb in the last week of the month, their lowest since November 2008 and less than half of the 49.7 mb posted one year ago.



OECD Europe

OECD European commercial oil inventories rose by 7.2 mb in May, counter seasonal to the 9.1 mb five-year average draw consequently the region's deficit to average levels narrowed to 75 mb from 92 mb at end-April. The May build was led by crude oil, stocks of which built counter-seasonally by 10.5 mb, compared to a 2.1 mb five-year average draw. Regional refined product inventories remain tight, having fallen seasonally in May by 3.9 mb to stand 62 mb and 9 mb below the five-year average and last year's level, respectively. Middle distillates led the monthly draw, falling counter-seasonally by 4.6 mb, which more-than-offset builds in fuel oil (1.5 mb) and 'other products' (0.6 mb). At end-month regional refined product inventories covered 35.5 days of forward demand, 0.6 days lower than one month earlier and 0.3 days below May 2013.



Preliminary data from Euroilstock suggest that European inventories retreated by 11.3 mb in June, over twice the average draw for that month. With refiners cutting runs further from May, stocks of refined products dipped by 11.6 mb, considerably more than their 3.7 mb five-year average draw. Middle distillates accounted for 9.4 mb of the draw while fuel oil fell by 3.1 mb. Only 'other products' posted a build, climbing by 1.3 mb over the month. As refinery demand for crude decreased, crude oil holdings inched up by a counter-seasonal 0.3 mb.  

OECD Asia Oceania

Industry stocks in OECD Asia Oceania replenished by a steeper-than-usual 15.3 mb over May following a steep 8.0 mb build in crude oil as refinery maintenance ramped up. Since the rise in total oil was stronger than the 1.4 mb five-year average build, the region's deficit to the seasonal average narrowed to 9.3 mb from 23.3 mb at end-April. Despite a 270 kb/d m-o-m fall in refinery throughputs, product stocks posted a stronger-than-seasonal build (4.6 mb) with all product categories bar motor gasoline (-0.7 mb) restocking to leave refined products inventories covering 20.6 days at end-month, 0.3 days higher than one month earlier.



Preliminary weekly data from the Petroleum Association of Japan (PAJ) suggest that industry stocks there inched up by 0.7 mb in June. A steep 6.3 mb rise in crude oil, following a peak in seasonal refinery maintenance, led stocks higher. This offset a 3.7 mb draw in refined product stocks as domestic demand likely outpaced refinery output. Meanwhile, NGLs and other feedstocks slipped seasonally by 1.9 mb.

Recent Developments in Singapore and China Stocks

Data from China, Oil, Gas and Petrochemicals (China OGP) imply that commercial crude stocks rose by a steep 9.5 mb in May as crude imports remained strong while, refinery throughputs were curbed in tandem with a peak in seasonal maintenance. An additional driver behind this could be the building of stocks at newly commissioned refineries including those at Fujian, Pengzhou and Quanzhou. Meanwhile, refined products drew in line with the lower refinery output. Gasoil holdings plummeted by 8.2 mb while kerosene inched down by a slight 20 kb which offset a 0.6 mb in motor gasoline.



Weekly data from International Enterprise pertaining to the land-based storage of refined products in Singapore indicate that inventories there slipped by 0.4 mb during June after light distillates continued their downward trend from the recent highs posted in April. Light distillates drew by 1.2 mb in June as Asian refinery maintenance curbed exports to Singapore whilst also increasing the demand for imports into Japan and Korea. Meanwhile, residual fuel oil and middle distillates posted builds of 0.4 mb each. Moreover, inventories of these products have remained on an upward trajectory throughout the second quarter.

China Adds to its Strategic Petroleum Reserve

Despite the opacity of information concerning China's crude oil Strategic Petroleum Reserve (SPR), available data suggest that up to 73 mb of recently completed SPR capacity was filled during 2Q14 at an average of 800 kb/d, marking the first additions to the reserve since early 2012. Recent assessments of stock builds are based on the 'gap' between crude supply (net imports plus domestic production) and domestic refinery runs. The magnitude and prolonged nature of the implied build suggests that it cannot be accounted for by unreported commercial stock changes or statistical differences. The administration does not disclose information pertaining to the SPR.

Over April and May crude supply surged ahead of refinery activity as refiners entered scheduled maintenance while crude imports touched record levels. Excluding commercial crude stock changes calculated from percentage change reported in China, Oil, Gas and Petrochemicals, in April the implied SPR build reached a record 39 mb (1.3 mb/d) as imports hit 6.8 mb/d for the first time. In May, the build slipped to 18 mb (0.6 mb/d) as imports fell slightly while refinery maintenance peaked and a significant amount of crude was added to commercial holdings. Initial indications for June suggest that the implied build has remained at 0.6 mb/d (17 mb) despite a forecast 400 kb/d ramp up in refinery throughputs. However, the June SPR build will not be known until commercial percentage stock change data and actual refinery operating levels are released later in July.

The addition of 73 mb to the SPR would likely take the total Chinese SPR to approximately 215 mb. This is less than half of the administration's target to hold 500 mb by 2020 and thus despite the growth already achieved, there remains a significant tranche of capacity to be completed and subsequently filled. Current information suggests that 163 mb of SPR capacity could be completed over the course of 2014. If the recent 73 mb of fill proves to be accurate, this could leave 90 mb of tank capacity due to be completed by end-2014. If the administration decided to fill this over 2H14 this would equate to a fill rate of approximately 500 kb/d.



The destination of the crude remains unclear. However, 20.1 mb of capacity at Tianjin, in Northeastern China and controlled by Sinopec, was recently completed and is now likely filled. This would tie in with official customs data that indicate that China substantially increased its seaborne imports. Shipments of Middle Eastern sour crudes rose over April - May, notably Saudi Arabian and Iranian grades. Despite current sanctions, shipments of Iranian crude hit a record 760 kb/d, in May. A further site at Huangdao, also in the Northeast and controlled by Sinopec, is reportedly undergoing a 'test phase' and thus is also a likely destination for seaborne cargoes.

Elsewhere, another potential destination would be the CNPC-maintained site at Shanshan in land-locked Xinjiang province. Kazakhstan has recently been shipping an extra 140 kb/d of domestic crude along the Alashankou - Dushanzi pipeline under a swap agreement with Rosneft and thus these deliveries represent volumes agreed between Rosneft and CNPC under their $270 billion supply agreement signed in 2013.



Prices

Summary

  • Oil futures surged by $5/bbl in mid-June, reaching a nine-month intraday high of $115.71/bbl on 19 June on the back of rapid territorial gains by Islamic State of Iraq and Syria (ISIS) militants in northern Iraq. Brent crude futures, however, retreated by early July as confidence grew that the country's giant southern oil fields were largely insulated from the turmoil. Improved prospects for a recovery in Libya's oil exports also tempered price gains. ICE Brent futures were last trading at $108/bbl and NYMEX WTI at $102/bbl.
  • Managed money net long positions in ICE Brent futures soared to an all time record in late May and remained at high levels into June on the back of the crisis unfolding in Iraq. In the last week of May, hedge funds' unhedged long futures positions outnumbered short ones by a factor of almost 3 to 1.
  • Spot crude oil prices spiked in mid-June on turmoil in Iraq but eased again as supply concerns faded and refinery demand waned, especially in Asia where seasonal turnarounds took place. By early July, weaker than anticipated refining margins and throughput rates tentatively reduced demand for sweet crude from the North Sea and North Africa as well as sour grades from the Middle East.
  • Refined product crack spreads were partly undermined in early and mid-June by the rapid run-up in crude prices on the back of geopolitical instability in Iraq. Nonetheless, after crude prices retreated during late-June and into early-July, cracks recovered some of their losses.


Market Overview

Oil prices rose month-on-month (m-o-m) in June, supported by concerns that prolonged conflict in Iraq could trigger supply disruptions in OPEC's second biggest producer. Gains were limited by slower than anticipated demand from refiners on the back of plant outages and maintenance. ICE Brent futures were up by $2.73/bbl to $111.97/bbl while NYMEX WTI posted a more robust gain of $3.36/bbl, to an average $105.15/bbl. By early July, however, futures prices edged lower by around $3-$4/bbl on expectations of a potential recovery in Libyan supply, with ICE Brent last trading at $108/bbl while NYMEX WTI was around $102/bbl.

Brent crude oil futures surged by $5/bbl in mid June, reaching a nine-month intraday high of $115.71/bbl on 19 June after Islamist militants marched through the north of Iraq and forced the shut-in of the country's biggest refinery at Baiji. However, prices pulled back as investors grew less concerned over the possibility of short-term supply disruptions from Iraq's giant southern oilfields - hundreds of kilometres out of harm's way - that have been providing virtually all the country's exports in recent months. In addition, higher exports from the northern Kurdish region offset losses of Kirkuk crude, with four tankers of crude loaded at the Turkish Mediterranean port of Ceyhan. It remains to be seen whether Kurdish exports via pipeline will continue to rise, or indeed stabilise, as only one shipment has reportedly found a home. Iraq's central government has warned end-users not to touch the Kurdish exports, which it says are illegal.

Oil's gains were also limited by the expectation of higher Libyan flows after rebel militias ended their 11-month blockade of eastern export terminals. Libya's state-owned National Oil Company (NOC) lifted force majeure on 6 July at the key terminals of Es Sider and Ras Lanuf, which between them handle 600 kb/d. However, the resumption of shipments is expected to be a gradual process.



In the US, brimming crude oil stocks weighed on WTI prices but the US benchmark was supported in mid-June by Washington's decision to issue permits to two firms to export stabilised condensate. The Brent/WTI spread narrowed following the export news. The front-month ICE Brent-Nymex WTI spread contracted in June, averaging $6.82/bbl compared with $7.45/bbl in May, partly on the possibility that the export of distilled condensate could remove some of the overhang along the Gulf Coast.

The fierce campaign by Islamist militants in Iraq lifted the back end of the curve above $100/bbl for the first time in over a year but the Brent M1-12 spread was slightly down in June on May, averaging around $5.55/bbl compared with $5.65/bbl.



Futures Markets

Managed money net long positions in ICE Brent futures grew throughout June and reached a record in early July, on the back of Iraqi turmoil. In the last week of May, hedge funds' unhedged long futures positions outnumbered short ones by a factor of almost 3-to-1 and settled later at around 2.5-to-1 as firms then hedged their long positions. Hedge funds saw relatively less movement in their NYMEX WTI net long exposure throughout the month, as the Cushing benchmark moved within a narrow $5/bbl range, although the long-to-short ratio is sitting at levels unseen since 2011.



Managed money net longs in RBOB gasoline futures grew 12% on the month as prices inched up $0.15/gal although, on a longer timeframe, the long-to-short ratio remains on a downward trend. Net long futures positions in NYMEX heating oil (based on the New York Harbour ultra low-sulphur diesel contract) built throughout the month but eased in early July as prices stabilised.

In terms of outstanding futures contracts, NYMEX WTI was up 8% on the month and down 1% y-o-y, while ICE Brent was up 4% month-on-month (m-o-m) and on the year. Global Brent volumes rose 25% both on the month and on the year. In contrast, WTI was up 12% m-o-m but down 13% on the year.

For the first time historically, the portion of Brent future trades carried on the NYMEX surpassed the 10% mark, confirming the growing global dominance of the North Sea benchmark even as the production of the crudes underpinning it continues to decline.







Financial Regulation

The US Commodity Futures Trading Commission (CFTC) has reopened the comment period for its proposed rule on position limits for physical commodities, after holding a public roundtable on 19 June. The US government agency will also be receiving public comment until 4 August.

The European Securities and Market Authority (ESMA), the EU's derivatives regulator, started the consultation process for technical standards for the revised Markets in Financial Instruments Directive (MiFID II), adopted by the European Council on 13 May 2014.

ESMA will receive feedback from stakeholders on its draft papers until 1 August 2014, and has held three open hearings between 7 and 8 July. The regulator is due to submit the Regulatory Technical Standards (RTS) draft to the European Commission by June 2015, and the Implementation Technical Standards by December 2015. The legislation is to be phased-in starting in 2016.

Spot Crude Oil Prices

Spot prices for benchmark crudes firmed in June, supported by concern that Islamist militants would disrupt oil supplies in Iraq, but pulled back on signs that exports from the country's giant southern oil fields were continuing at near record rates. The prospect of higher Libyan crude oil exports also weighed. Lower-than-expected throughput rates in Asia put pressure on differentials for sweet crudes from the North Sea to North Africa, while sour grades from the Middle East found muted interest in the Far East.



Brent prices were up $2.07/bbl to an average $111.67/bbl in June as the prospect of a major supply disruption in Iraq spooked the market. Spot prices for Dubai averaged $108.06/bbl, up $2.39/bbl from May. As a result, the Brent-Dubai price spread between the grades narrowed to $3.60/bbl in June compared to $3.92/bbl in May. The Brent-Dubai differential has contracted further in early July, to around $1.50/bbl, supported by Asian refineries returning from maintenance and summer driving demand. Spot prices for WTI in June climbed $3.37/bbl from May to average $105.24/bbl.

Weak refining margins and lower-than-expected refinery runs diminished the appetite for North Sea barrels, weighing on regional differentials. Light sweet Oseberg and Ekofisk - two of the four grades underlying North Sea Dated - found initial support from Chinese buying, but premiums to Dated Brent came under pressure after buyer interest waned. It remains to be seen whether China will route North Sea barrels more regularly to the East. South Korean refiners have already established this trade flow. For more on North Sea supply, see the Supply section.



Light sweet crude supplies in the Mediterranean are expected to rise after exports resumed from Libya's Mellitah and Marsa el-Hariga terminals. Output could climb higher in July provided the Ras Lanuf and Es Sider terminals restart. Demand for these premium barrels remains weak, however, and Algeria's Sonatrach cut its July official formula price for light sweet Saharan Blend to a $0.10/bbl premium to North Sea Dated, down $0.90/bbl versus June loading cargoes.

In Europe, the value of Urals in the Mediterranean was pressured due to weak refining margins with the Russian benchmark's discount to North Sea Dated widening in June relative to May, to roughly $2.15/bbl versus $1.65/bbl, respectively. With Libyan crude possibly returning to the market, the overall amount of oil available could further pressure the market. Iraq's northern Kurdish region has loaded 4 million barrels of sour crude from the Turkish port of Ceyhan since the end of May - but with Baghdad warning off buyers, it remains to be seen where all the oil will end up. One cargo reportedly was discharged at Israel's Ashkelon port.



Asia stepped up its purchases of sweet West African crude in July, especially China. Refiners in India - in search of light sweet, gasoline-rich crude - also ramped up purchases. Thailand and Japan reportedly snapped up light sour Murban from the UAE for August loading, which boosted premiums to the ADNOC official price. Unsold barrels of heavier Basra Light were, however, on offer, with reports some refiners in Asia are shying away from Iraqi spot crude fearing a potential disruption to liftings, preferring alternative grades.  

Saudi Aramco, the world's largest oil exporter, lowered the premium for August cargoes of its benchmark Arab Light grade to Asia. Aramco cut the August official selling price (OSP) of Arab Light to Asian refiners to a premium of $2.05/bbl over Oman/Dubai, down from $2.25/bbl for July. The OSP tends to reflect moves in the Brent-Dubai spread, which has narrowed.



US Gulf Coast markets strengthened initially after Washington's approval of limited distilled condensate exports for two US companies lifted light sweet LLS. But gains were capped by a growing surplus of light sweet crude in west Texas and along the Gulf Coast. The level of stabilised condensate exports remains to be seen. Stronger demand and higher refinery runs along the US Gulf Coast lifted sour Mars crude, narrowing its discount to WTI. North Dakota's Bakken crude showed signs of strengthening as coastal refiners sought to replace more expensive foreign imports with cheaper domestic oil from the midcontinent. Heavy barrels of Canadian pipeline benchmark Western Canadian Select traded largely steady to light sweet WTI.  Meanwhile, medium sour Colombian Vasconia eased on meagre demand in the US and Europe, but supply is expected to tighten after Colombia's Ecopetrol declared force majeure on the 220 kb/d Caño Limón-Coveñas pipeline following rebel attacks that also targeted the Caño-Limón oil field itself.



Spot Product Prices

In June, surveyed crack spreads were generally undermined in early and mid-month by spot product prices failing to keep pace with crude markets, which surged on the back of geopolitical instability in Iraq and Ukraine. Nonetheless, after crude prices retreated during late-June and into early-July, cracks at the top and bottom of the barrel recovered some of their losses. On a product-by-product basis, gasoline cracks were boosted by reports strong demand across the Atlantic basin. Meanwhile, middle distillates cracks weakened across all markets while at the bottom of the barrel fuel oil cracks were mixed.



European gasoline cracks firmed by $2.53/bbl on average in June. Prices were propelled higher by plentiful opportunities to export product to the US East Coast during early-June as maintenance on the Colonial Pipeline curbed supplies from the Gulf Coast. Despite a fall in spot prices late month, European cracks remained strong after unexpected refinery outages tightened European supplies while crude prices weakened. Consequently, by early-July the NWE crack had exceeded $15/bbl for the first time since April 2013. Meanwhile, on the US Gulf Coast gasoline cracks rose by $2.14/bbl as US East Coast demand remained buoyant as the driving season ramped up. In Asia, Singapore cracks were boosted from mid-month onwards as supplies tightened following a number of refinery outages in India, Taiwan and Malaysia and an associated draw in Singapore land-based light distillate inventories. Nonetheless, on a m-o-m basis they weakened by a slight $0.09/bbl.



Despite weakening on a m-o-m basis in June, naphtha markets reversed course from mid-month onwards. In Asia, naphtha supplies, mainly used by its booming petrochemical industry, were tightened by ongoing refinery maintenance, which saw the Singapore crack approach positive territory by early-July. This also had the effect of widening the arbitrage to move European supplies to Asia. Accordingly, the NWE crack firmed to -$3.06/bbl at end-June.



Cracks in the middle of the barrel performed poorly over June. On the US Gulf Coast, the diesel crack plummeted in late month as US diesel stocks continued their recent builds, at end-June the crack stood at approximately $13.40/bbl. In Europe cracks held up better after US imports decreased somewhat and refinery outages helped to tighten regional supplies. Nonetheless, by late-month, US imports rebounded and Russian shipments increased further, which moved prices downward. European jet kerosene supplies also tightened on run cuts which helped push spot prices up in early-month but the tide soon turned and they plummeted back as cargoes reportedly arrived from the Middle East and Asia and volumes held in independent storage rose.

Fuel oil markets diverged in Europe in June, which narrowed the HSFO - LSFO differential. HSFO cracks firmed month-on-month as the arbitrage to move product to Asia opened although some downward pressure came late-month from a number of unsold cargoes amid unexpected refinery outages (refiners often run HSFO as a feedstock). Meanwhile, LSFO cracks weakened following low demand and a closed arbitrage to move product eastwards. In Asia HSFO cracks weakened by a slight $0.15/bbl as Singapore inventories built over the month and amid disappointing demand.

Freight

Rates for crude carriers showed modest strength in the second half of June, whilst remaining generally subdued. The VLCC Middle East Gulf - Asia route firmed towards the end of June as Asian refiners came back from maintenance and turned to Middle Eastern grades. Momentum on Suezmax West Africa - US Gulf Coast trade remained strong on firm activity in the US Gulf. Rates inched down during the first half of the month but then recovered to peak at $19.40/mt, their highest level since January, finally settling around $18/mt or approximately $2/mt above a month earlier at the time of writing.

In Northwest Europe, rates were choppy during the second half of the month, with the Baltic Aframax rate briefly jumping above $10/mt, before closing the month $1.20/mt above a month-earlier as vessel oversupply capped gains. Rates on the North Sea Aframax trade flirted with $10/mt due to an uptick in Russian exports but quickly reverted to prior month levels of about $6.25/mt.



Product tankers had a subdued month except for the US Gulf Coast - US Atlantic route, as maintenance on the Colonial pipeline in the second half of June pushed maritime shipments up. The lack of available Jones Act compliant tankers available then prompted the 38 Kt rate up from $9/mt to nearly $15/mt.

Rates for the Singapore - Japan 30 Kt benchmark trade remained at just above $15/mt throughout June and into early July, trading within a narrow $0.30/mt range. In the Atlantic Basin, the picture is still depressed due to an oversupply of 37 Kt vessels, whose rates are sitting at their lowest since November 2013, and on a steady downward trend, inching below $14/mt in early July. US shippers are reportedly switching to larger (over 50 Kt) tankers to benefit from economies of scale. The Middle East Gulf - Japan trade had a lacklustre month for 75 Kt ships due to vessel oversupply, at the time of writing the rate stood at $22/mt, its lowest since January.

Refining

Summary

  • Global refinery crude throughputs look to have slipped below year-earlier levels in June, for the first time since October 2013, when European throughputs dived to 25-year lows. Refinery outages on the US Gulf Coast in mid-June and plummeting runs in both Japan and Europe curbed OECD runs, while shutdowns in Iraq, India and China, amongst others, curtailed non-OECD refinery intake. Estimates of 2Q14 global refinery runs have thus been lowered by 300 kb/d since last month's Report, to 76.2 mb/d on average.
  • The forecast of global refinery runs for 3Q14 is largely unchanged since last month's Report, at 77.8 mb/d. Our earlier forecast was already seeing annual easing to 0.4 mb/d, from 1.0 mb/d in 2Q14, as US refinery runs bump up against capacity limits, and outages curb throughputs in Latin America and Africa. Middle Eastern refinery throughput gains are also expected to scale back, from the 0.5 mb to 0.7 mb/d levels seen in the first half of 2014, before Saudi Arabia's new 400 kb/d Yanbu refinery starts up, possibly already in 3Q14, fuelling further growth.
  • OECD refinery crude runs fell by 220 kb/d in May on the month, to 36.2 mb/d. OECD throughputs were 480 kb/d higher than a year earlier, with growth in North America tempered by structural declines in Europe, but were 80 kb/d above our month-earlier forecast. Seasonal declines in Japan were less steep than projected, 320 kb/d lower than in April. Preliminary data indicate that OECD runs failed to rise seasonally in June, due to more extensive maintenance in Japan and unplanned outages on the US Gulf Coast as well as a counter seasonal decline in Europe on the account of weak margins.
  • Despite a significant improvement in light product cracks, refinery margins were mixed in June with the choice of feedstock proving to be crucial to refiners' profitability. Turmoil in Iraq lifted Brent-related crude grades and noticeably tempered gains in Europe and Singapore, while in the US, midcontinent refiners benefitted from access to relatively cheaper feedstocks. US Gulf Coast margins got a temporary boost from heavy outages mid-month.


Global Refinery Overview

Global refinery crude throughputs look to have slipped below year-earlier levels in June, for the first time since October 2013, when European throughputs dived to 25-year lows. Refinery outages on the US Gulf Coast in mid-June and record-low runs in Japan compounded the effect of counter-seasonal curbs in European activity to take OECD throughputs, if confirmed, almost 1.7 mb/d below year earlier levels. Shutdowns in Iraq, India and China, amongst others, meanwhile curtailed non-OECD refinery intake. Estimates of 2Q14 global refinery runs have thus been lowered by 300 kb/d since last month's Report, to 76.2 mb/d on average.

Despite the slightly lower 2Q14 estimates, global throughputs still hovered 1.0 mb/d above year-earlier levels. Growth came in particular from the Middle East, due to a low 2Q13 baseline and more importantly to the start-up of the 400 kb/d Jubail refinery in Saudi Arabia in September 2013. Record-high Russian crude intake in June, or nearly 6.0 mb/d, also underpinned gains. While Chinese refinery activity has underperformed recently, both in terms of utilisation and investments, the country still processed close to 0.3 mb/d more crude in 2Q14 than a year earlier. In the OECD, structural decline in Europe and Asia Oceania almost perfectly offset annual gains of 425 kb/d from the Americas.

Refinery crude demand is set to increase in 3Q14, to 77.8 mb/d, largely unchanged from last month's Report. Maintenance in Asia is mostly completed and refiners are expected to raise runs to meet peak summer demand. Growth could ease to 0.5 mb/d, however, as US refiners bump up against capacity limits and Middle Eastern growth is curtailed by the shutdown of Iraq's Baiji refinery, its largest. As of now, there is no known damage at the 330 kb/d plant, which had to shut in mid-June due to insurgent attacks. It has been reported that ISIS insurgents recognise the value of the refinery to their own aims and do not wish to damage it. The plant could presumably be brought back online as soon as stability is restored and staff returned, but given the current situation, we exclude it for the remainder of the period covered in these estimates. Offsetting lost Iraqi throughputs, the 400 kb/d Aramco/Sinopec JV Yanbu looks to be on track to be completed and operational in 3Q14 ahead of earlier estimates, lifting Middle Eastern throughputs further. The shutdown of Colombia's Cartagena refinery and Ecuador's Esmeralda plant for upgrades is expected to keep Latin American runs below year-earlier levels in 2H14. Brazil's new 230 kb/d Abreu e Lima refinery is planning to start one CDU in November of this year, and the other by mid-2015.



Refinery Margins

Although light product prices have been strengthening, refinery margins were mixed in June with the choice of feedstock proving to be crucial to refiners' profitability. Turmoil in Iraq lifted crude grades traded in Europe and Asia and noticeably tempered gains in Europe and Singapore while in the US, midcontinent refiners benefitted from access to relatively cheaper grades.

Northwest European refining margins experienced a rare uptick in late month as refiners reportedly cut runs while crude prices retreated. Nonetheless, margins for simple refiners remain firmly entrenched in negative territory. On a month-on-month basis, refiners running Brent were distinctly disadvantaged due to the grade's relatively high price against a backdrop of geopolitical instability. Meanwhile refiners running Urals, which weakened against Brent, saw their margins firm by $1.25/bbl over the month. Surging regional gasoline cracks, driven by additional export demand to the US East Coast and West Africa, provided upward momentum. A further boost to refiners running sour Urals came from strengthening HSFO prices. In the Mediterranean, the picture was similar with refiners running Urals seeing their margins firm by $0.15/bbl compared to May. In comparison, refiners running light, sweet Es Sider saw margins slide $0.50/bbl on average as Libyan exports remain severely curtailed. Gains in gasoline prices were not as pronounced as in Northwest Europe but some upward momentum was provided by surging HSFO prices.



In the US, refiners' fortunes depended on whether they were located in the Midcontinent or on the Gulf Coast, as Midcontinent grades WTI and Bakken weakened against LLS and sour grades used in Gulf Coast refineries. Additionally, Midcontinent refiners running light WTI and Bakken benefitted from surging gasoline and jet kerosene prices. Although the gross product worth of gasoline increased on the Gulf Coast, the increase was about half the magnitude posted in the Midcontinent. On a month-on-month average basis, Midcontinent refiners saw their margins strengthen by $0.93/bbl while those on the Gulf Coast saw their margins drop $1.49/bbl. Furthermore, at end-month, margins for midcontinent refiners stood approximately $13/bbl above their counterparts on the Gulf Coast. US Gulf Coast refinery margins did receive a boost mid-month due to extensive outages and lower runs, but retreated again as plants came back online. 



The effect of high crude prices was most evident in Singapore where the increases posted by both Dubai and Tapis, supported by political upheaval in Iraq, outstripped product price gains across the barrel. Refiners there are now seeing their margins further entrenched in negative territory or, in the case of more complex refiners, touch lows not seen since autumn 2013. Refiners running Dubai saw margins weaken by $1.50/bbl on average while those refining Tapis saw margins retreat by $1.18/bbl due to its higher middle distillate and gasoline yields.



OECD Refinery Throughput

OECD refinery crude intake fell 220 kb/d in May, to 36.2 mb/d on average. The drop in throughputs stemmed almost entirely from Asia Oceania, in particular Japan, where seasonal maintenance intensified. Overall operating levels in the Americas and Europe were largely unchanged from a month earlier. Year-on-year gains hovered around 0.5 mb/d, with a 180 kb/d annual contraction in Europe partly mitigating gains in the US and to a lesser degree in OECD Asia Oceania.

Preliminary data for June show much weaker-than-expected throughputs in all regions. US refinery activity was curtailed mid-month by a series of unplanned outages, and Japanese maintenance seems to have been more heavily concentrated in June compared with previous years. Also, recent capacity rationalisation in Japan is now beginning to affect run rates, as run cuts due to maintenance at some plants can less easily be offset by run hikes at other plants. In Europe, preliminary data from Euroilstocks indicate a counter-seasonal decline in regional activity, to only 11 mb/d, from 11.3 mb/d in May. Despite the very weak runs, if confirmed, margins failed to pick up materially, highlighting the dire state of the European refining market.

OECD throughputs, thus, were in all 0.2 mb/d lower in June than in May, but look set to surge by 1.5 mb/d in July. A sharp rebound is expected in Japanese throughputs, which in June, plunged to their lowest since 2011, when the earthquake and tsunami hit. Gains are also expected from the Americas; indeed, the latest weekly data from the EIA show US crude throughputs had recovered to 16.2 mb/d in the last week of June, more than 800 kb/d above the mid-June low, reaching their highest level since December 2013. While a seasonal increase is expected in Europe in July, regional runs remain very weak. OECD runs are forecast to continue to contract y-o-y, as US refiners bump up against capacity constraints in the summer months, and both European and Japanese throughputs continue to contract.



In all, OECD throughputs are estimated at 36.2 mb/d in 2Q14, 190 kb/d below a year earlier as gains in the Americas of 0.4 mb/d were offset by continued declines in Europe and the Pacific. OECD refinery runs are forecast to rise to 37.1 mb/d in 3Q14, 180 kb/d less than in the same period a year earlier. This assumes a 150 kb/d increase in the Americas tempering declines of 200 kb/d and 130 kb/d in Europe and Asia Oceania, respectively.



Refinery crude runs in the OECD Americas were largely unchanged in May from April, averaging 18.7 mb/d. Annual gains, mostly accounted for by higher US throughputs, plunged from April's high of over 1 mb/d, to 560 kb/d. Preliminary data for Canada also show a 170 kb/d year-on-year gain in May offsetting contractions of roughly the same magnitude in Mexico in the same month.



Weekly data for June show US refinery runs slipping below year-earlier levels for the first time this year, to a low of 15.4 mb/d in mid-month, from 16.1 mb/d only two weeks earlier. The drop was centred on the US Gulf Coast, where tornadoes caused power outages on various pipelines and forced Marathon's Garyville refinery to curb runs. The 520 kb/d refinery, the third largest in the US, had to shut one CDU. Exxon Mobil also shut a 240 kb/d crude unit at its Beaumont, Texas, refinery for a seven-week overhaul starting in mid-May, and undertook maintenance at its Chalmette, Louisiana, refinery in May and June. Providing a partial offset, US Midcontinent throughputs reached an all-time high of 3.7 mb/d.



In the last week of June (ending 4 July), however, US refinery crude throughputs rebounded to nearly 16.3 mb/d, its highest since July 2005, taking total US runs to 15.8 mb/d on average for the month, down 70 kb/d from May. US Gulf Coast runs recovered to 8.6 mb/d in early July, the highest this year, after unplanned shutdowns in the middle of the month. In early July, Phillips 66 announced it would shut most of the production units at its 146 kb/d Borger, Texas refinery for a month, to repair damage following a power outage early in the month.

In line with expectations, European throughputs inched up 55 kb/d in May, to 11.3 mb/d. Gains in Portugal, Italy, Spain and Austria were partly offset by declines in France and Germany. Galp completed maintenance at its 225 kb/d Sines refinery at the end of April, allowing Portuguese runs to rebound from only 95 kb/d in April to 245 kb/d in May. The company was planning to shut its 110 kb/d Oporto refinery for a month from mid-July.

According to preliminary data from Euroilstocks, European throughputs fell counter-seasonally in June, to only 11 mb/d, from 11.3 a month earlier. Regional refinery activity remains under pressure by increased competition from the US, Russia and the Middle East and lacklustre internal demand. Furthermore, Total/Lukoil's 150 kb/d Flushing refinery in the Netherlands was shut for most of May and June and in early July, BP reportedly shut one crude unit at its Rotterdam refinery. Weak margins likely contributed further to keeping runs depressed, also putting downward pressure on regional crude grades. Urals prices were at two-year lows against North Sea dated in June. Low runs, and refinery outages in Russia and Europe supported gasoline prices however. The FCC at Total's La Mede refinery has reportedly been shut since mid-June, supporting gasoline cracks. 

On a more positive note, ExxonMobil announced in June it plans to add a delayed coking unit to its 310 kb/d Antwerp refinery in Belgium. The new unit will upgrade high-sulphur fuel oil into light transportation fuels, and allow the plant to process heavier crudes, such as heavy Latin American grade or Canadian bitumen. In a Financial Times interview, Exxon's European refinery director, Steve Hart, urged the EU not to block imports of heavy crude from Canada's oil sands, stating:  "Any time Europe start blocking or restricting access, its' going to have a negative impact on the refining industry, and on European energy supplies". Negotiations between Murphy and the Klesch Group, a Geneva based commodity firm about a potential sale of Murphy's 130 kb/d Milford Haven refinery in Wales are still ongoing. The plant has reportedly not been operating since April.

Refinery activity in Asia Oceania fell seasonally in May, by 270 kb/d, to 6.2 mb/d on average. The decline stemmed entirely from Japan, where refiners embarked on a heavy maintenance schedule. In contrast, South Korean throughputs inched up 65 kb/d m-o-m. While regional throughputs were higher than expected in May, by 150 kb/d, preliminary data for Japan indicate Japanese throughputs plummeted in June to their lowest level in recent history, of only 2.6 mb/d (including NGLs) in mid-June. It seems some refinery maintenance had been delayed from May to June this year, adding to the impact of recently shuttered capacity

While refinery activity was expected to rebound in July, an approaching typhoon forced at least one refiner to halt operations. Nansei Sekiyu suspended all operations at its 100 kb/d Nishihara refinery in Okinawa on 7 July, as a precautionary measure.



METI Outlines New Plans for Japanese Refinery Industry Rationalisation

Having just completed a first round of refinery restructuring and rationalisation in March, Japan's Ministry of Energy, Trade and Industry (METI) promptly announced in June a new round with updated targets of capacity reduction. Under the recently completed first phase, Japanese refiners shut 405 kb/d of capacity earlier this year in response to a METI ordinance ostensibly aimed at boosting Japan's overall refining complexity. Today, Japan's refinery capacity is 3.95 mb/d, compared with 4.8 mb/d a decade ago.

The latest proposal, released in June, urges refiners to boost upgrading capacity above 50% by April 2017, from 45% currently. The new rule now includes catalytic cracking, residue desulphurisation and solvent deasphalting units as upgrading capacity, in addition to residue cracking and coking capacity which were previously the only ones to be counted. Refiners would have to scrap 400 kb/d of crude distillation capacity to comply with the new targets without adding new upgrading capacity.

Domestic oil demand has been in decline for more than a decade and refiners are likely to reach the new targets by cutting crude distillation capacity rather than investing in expensive upgrading units. According to METI, poor infrastructure makes it difficult for Japanese refiners to compete against new, state-of-the-art capacity coming online overseas and thus makes it unrealistic for them to increase product exports to regional markets in a significant way. METI reckons that Japanese product demand will fall to 3.3 mb/d over the next five years, from 3.9 mb/d currently. 

Japan currently exports around 300-350 kb/d of oil products, mostly middle distillates, predominantly to South Korea. But Japanese exports to Korea are at threat of rising competition from other exporters, notably China. Product imports average around 1.2 mb/d recently, of mostly LPG and naphtha for its petrochemical industry as well as some fuel oil for power generation in the wake of the Fukushima disaster in 2011.

Non-OECD Refinery Throughput

Non-OECD crude throughputs dipped in April, the last month for which monthly data is available through JODI. Total non-OECD runs were 1 mb/d lower than in March, as refiners in the FSU, Asia and the Middle East all started maintenance. Asian throughputs were 570 kb/d lower, of which 240 kb/d stemmed from China. At 39.6 mb/d, total throughputs nevertheless stood 1.8 mb/d higher than a year earlier, after having posted a 1.7 mb/d annual gain in March. Growth is set to slow over coming months, due to shutdowns and outages over the summer, before picking up steam again towards the end of 3Q14. Middle Eastern throughput gains have been curbed for 3Q14 by the closure of Iraq's largest refinery, the 330 kb/d Baiji plant north of Baghdad.



Latest official data show Chinese refinery intake slipped by 135 kb/d in May from a month earlier, to 9.5 mb/d on average. The latest number was 80 kb/d higher than expected, taking runs 275 kb/d above year-earlier levels. Faced with sluggish internal demand growth, China again turned net oil product exporter in May, for the first time since December 2004. Net exports of key products (excluding LPG, petroleum coke and some other minor products such as lubricants) averaged 125 kb/d, compared with net imports of 40 kb/d in April. While no new data is yet available for June, industry surveys show state owned refiners planned to steeply raise runs from May's low. Refinery maintenance wound down sharply, from over 900 kb/d of capacity offline in May, to just over 400 kb/d in June, with PetroChina's 400 kb/d Dalian plant in the northeast resuming full operations at the end of May. The plant, which is PetroChina's largest, had been shut since 10 April for scheduled turnarounds. Operations at the plant were disrupted again at end-June, however, as flows on a 130 kb/d pipeline connecting the refinery with port facilities was shut due to a fire. While China's CNPC resumed pipeline flows shortly thereafter, flows on the line are expected to remain below capacity for about a month curbing throughput rates at the refinery. Sinopec was also forced to shut its 160 kb/d Yangtze refinery on 11 June after an explosion at a sulphur recovery unit.

As the Chinese refinery industry continue to be weighed down by surplus capacity and poor returns, Total became the latest in a series of foreign companies trying to pull out of the Chinese downstream sector. The French company is reportedly in talks to sell its share in the WEPEC refinery, also in Dalian, which has been loss-making for years and is in need of serious upgrading. Total holds a 22.4% stake in the refinery, alongside PetroChina (28.4%), Sinochem (25.2%) and Dalian Construction Investment Corp (15.5%). The refinery is the only foreign JV refinery still in operations, other than the Fuijan Refining and Petrochemical company, which is a JV between Sinopec, Saudi Aramco, ExxonMobil and the Fuijan Government. Rosneft, PDCSA and Kuwait Petroleum are still committed to JV projects planned for coming years. 



Indian refinery throughputs were unchanged in May, compared with April, at 4.3 mb/d. A rebound in throughputs at Reliance's Jamnagar refinery after maintenance was offset by lower runs at IOC's Panipat plant and HPCL's Mumbai refinery. Unplanned outages continued to curb activity through June and July. Notably, HPCL was forced to shut its 180 kb/d Bathinda refinery on 20 June, due to a fire, for around 25-35 days. In early July, operations at Essar's 400 kb/d Vadinar refinery were also disrupted, due to repair works on a pipeline feeding the plant. The plant was expected to run at half of its capacity for about 5-6 days before ramping up to normal levels. The unplanned outages led to unusual Indian imports of gasoline over the summer months, supporting gasoline cracks in both Singapore and Europe.

IOCL has officially delayed the commissioning of its 300 kb/d Paradip refinery to 4Q14, in line with expectations in our Medium Term Oil Market Report published in June. The plant was originally slated to start-up in December 2013, but Cyclone Phailin, which hit the Indian coast in October 2013, delayed the construction work. Full commissioning of the plant, which will supply Indian with 125 kb/d of gasoil, 80 kb/d of gasoline, 30 kb/d of jet fuel and 5 kb/d of naphtha, could take another year before reaching full commercial operations.

Preliminary monthly data indicate Russian refinery crude intake reached a new all-time high in June, of almost 6 mb/d. At 5.96 mb/d, refinery runs were 200 kb/d above a month earlier and 330 kb/d higher than the same month a year earlier. The increase came despite a fire at Rosneft's Aschinsk refinery mid-month, that forced it to suspend operations. The incident, which killed at least six people, broke out in the fractionation unit. Some reports said that the damage was extensive and could force the 140 kb/d plant to remain shut for months. In May, Russian throughputs had already risen more than 300 kb/d m-o-m, in line with seasonal trends and normal maintenance schedules.



In Latin America, Brazilian throughputs fell sharply in May, to their lowest level in seven months. At 2.0 mb/d, crude intake was 130 kb/d lower than in April and 90 kb/d below the same month a year earlier. Lower runs came from the 190 kb/d REFAP refinery in Porto Alegre, and the 320 kb/d RLAM plant in Northeastern Bahia. Throughputs are expected to rebound over June and July as refiners strive to meet increased fuel demand in relation to the soccer World Cup. Colombia shut the sole crude distillation unit at its Cartagena refinery in March, as the plant is being expanded to double its capacity. It is not clear how long the refinery's CDU will remain offline, but we assume it will only restart in 2015 once the project is completed. Ecuador's largest refinery, the 110 kb/d Esmeralda plant is also being upgraded, with a total shutdown planned for October and November.



Middle Eastern refinery throughputs are expected to be significantly curtailed in coming months, due to the shutdown of Iraq's 330 kb/d Baiji refinery, just north of Baghdad, from mid-June. While there is no known damage to the plant, we for now assume the plant will remain offline for months to come. The plant was shut down due to attacks by the Islamist militant group ISIS (see Iraq under Siege). The shutdown of the plant, Iraq's largest, has led to fuel shortages in both the northern Kurdistan region and further south. The Baiji refinery normally provides over half the country's gasoline supplies and approximately 40% of the Kurdish region's gasoline demand. 

Despite a temporary month-on-month decline in refinery activity in April, Saudi crude runs were on track to ramp up steeply through July as the new 400 kb/d Jubail refinery reached full capacity. The plant, which started up in September 2013, was most recently reported to have reached utilisation rates of 80%, with some secondary units also in the ramp-up face. Aramco's 120 kb/d Riyadh refinery was shut from mid-April to end-May. The new 400 kb/d Aramco/Sinopec JV Yanbu refinery is nearing completion and is likely to start operations in 3Q14 or early 4Q14.