Oil Market Report: 12 August 2014

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Highlights

  • Crude prices fell in July and early August as weak OECD refinery runs in June offset concerns about escalating conflicts in Iraq, Libya and Ukraine. At the time of writing, ICE Brent was below $105/bbl on hopes that US air strikes would lower disruption risks in major OPEC producer Iraq. WTI was around $98/bbl.
  • The global oil demand growth forecast for 2014 has been lowered to 1.0 mb/d on lower-than-expected 2Q14 deliveries and a weaker GDP outlook from the IMF. Growth is set to accelerate to 1.3 mb/d in 2015 as the economy improves. Baseline demand estimates have been raised to reflect new 2012 non-OECD annual data.
  • Global supply was up 230 kb/d in July, to 93.0 mb/d, with higher OPEC output offsetting slightly lower non-OPEC supply. Compared with a year ago, global supplies were 840 kb/d higher, with an increase of 1.2 mb/d in non-OPEC supplies more than offsetting a 360 kb/d decline in OPEC output.
  • OPEC crude oil supply rose by 300 kb/d to 30.44 mb/d in July, a five-month high, as a boost from Saudi Arabia to 10 mb/d and a tentative recovery in Libyan output more than offset losses in Iraq, Iran and Nigeria. The 'call on OPEC crude and stock change' averages around 30.8 mb/d in 4Q14, steady on 3Q14.
  • OECD industry stocks posted their sixth consecutive monthly build in June, rising 13.8 mb to stand at 2 671 mb at end-month, their highest level since September 2013. Inventories' deficit to the five-year average narrowed to 42.1 mb from 52.0 mb at end-May. The 2Q14 stock build of 88 mb was the largest quarterly build since 3Q06.
  • Global refinery activity saw diverging trends in June. A counter-seasonal fall in OECD throughputs contrasted with record highs in key non-OECD countries. Global refinery runs are estimated at 76.5 mb/d for 2Q14, up 1.3 mb/d year-on-year, and 0.2 mb/d higher than in our last Report. Projections for 3Q14 are unchanged at 77.8 mb/d.

Uneasy comfort

Oil prices seem almost eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world. After a brief spike in early June, oil prices retreated through early August almost as fast as Islamist forces had advanced in Northern and Central Iraq earlier on. At the time of writing, as Islamic State fighters near Kirkuk oil fields faced US airstrikes while Baghdad struggled to form a government, Brent futures prices had eased back below $105/barrel and WTI dipped below $98/barrel. In large part, this price weakness is demand driven: global demand in 2Q14 grew at the lowest pace since 1Q12, latest data reveal. At the same time, ominous as the current gathering of geopolitical clouds may be, the potential supply impact from these developments is not as straightforward as it might appear.

Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin, where surprisingly steep demand contraction recently compounded the effect of relentless North American supply growth. Remarkably low oil deliveries in both Europe and North America helped slash this Report's estimate of global demand growth for 2Q14 to less than 700 kb/d year-on-year - a low of more than two years - and by 180 kb/d for 2014 as a whole. In part, this is an optical effect stemming from new data from the forthcoming edition of the IEA's Annual Energy Statistics of Non-OECD Countries (the 'Green Book'), which has significantly raised the assessment of demand for 2012. Some of this upward adjustment has been carried through to 2013. At the same time, oil deliveries across the OECD contracted steeply recently, including surprisingly large drops in North America. In the OECD Americas and Europe, demand is thus estimated to have plunged by a combined 440 kb/d last quarter. That OECD refining activity was also exceptionally weak in June, with runs plummeting counter-seasonally by nearly 2 million b/d year-on-year, did not help crude markets. Neither did an apparent sudden stop in Chinese crude imports for strategic stock building.

In this context, Libya, where civil strife has been intensifying but where two long-blockaded crude export terminals have reportedly reopened, may matter more to the market as a downside risk than as an upside risk to prices. Fighting around Tripoli has grown so intense that many countries have repatriated their nationals and oil companies have removed personnel from fields and other facilities. But the Atlantic market is currently so well supplied that incremental Libyan barrels are reportedly having a hard time finding buyers. Many in the market seem more focused today on potential short-term downward price pressures from a further increase in Libyan production, last pegged around 450 kb/d, than on such upward price pressures as might result from an escalation of fighting.

US and EU sanctions on the Russian oil sector are not providing oil markets with much support either. The consensus in the industry seems to be that neither set of sanctions will have any tangible near-term impact on supplies. Even for the medium term, their impact appears questionable.  EU sanctions are highly selective, exclude agreed contracts, and can only be extended past one year by consensus. Their 'perimeter' seems loosely defined, potentially leaving room for finding ways around the most constraining measures. While the market will keep a watchful eye on the troop build-up along the Russia-Ukraine border, short-term supply disruptions do not seem on the cards, while on the other hand the sanctions (which are not limited to the oil sector) are expected to trim Russian demand.

Iraq is another matter. While the market has taken comfort from steady export flows from the southern fields, the growing toll of Islamist forces on northern production, signs of cracks in KRG defences and the evacuation of expatriate staff from northern and KRG oil facilities are worrisome developments. But the situation on the ground is highly fluid and infrastructure bottlenecks in the South, rather than the humanitarian disaster in the North, may remain the biggest hurdle to Iraq's ability to deliver the supply growth expected from it in the medium term. While the situation across these key producer countries remains more at risk than ever, so far the market appears confident that OPEC can deliver the production increase needed from it to meet rising demand expected in the second half of the year.

Demand

Summary

  • The global oil demand growth forecast for 2014 has been curtailed since last month's Report to a more modest +1.0 mb/d. Two key, somewhat related, factors are largely accountable for this revision. Firstly, demand growth in 2Q14, at 0.7 mb/d, fell to its lowest level since 1Q12. Secondly, the global macroeconomic outlook has been downgraded, with the International Monetary Fund (IMF) taking three-tenths of a percentage point off its 2014 global GDP growth forecast, to 3.4%.
  • Demand growth should then accelerate in 2015, to 1.3 mb/d, as underlying macroeconomic conditions themselves are widely expected to solidify. The pace of this forecast uptick has been downgraded, with 90 kb/d taken out of the growth outlook, as lower forecasts for China, Russia and Japan are now carried: the former two on weaker economic growth; the latter on a raised expectations for non-oil power sector use.
  • Despite these forecast growth curtailments, baseline demand estimates have been raised to reflect higher historical assessments of non-OECD oil use. For example, the global demand estimate for 2012, at 90.6 mb/d, has been revised up by 0.4 mb/d, reflecting the additional detailed sector-specific numbers that are included in 2014 edition of the IEA's Annual Energy Statistics of Non-OECD Countries. Among the greatest additions, that stemmed from this additional work, were those for Egypt, India, Libya and Russia.
  • A combination of higher historical numbers and weaker annual growth projections, for 2014 and 2015, left the respective absolute annual demand forecasts little changed on last month's Report, at 92.7 mb/d in 2014 and 94.0 mb/d in 2015. This, however, clouds a multitude of 'noise' in the quarterly numbers with, for example, the 2Q14 demand estimate revised sharply lower but 4Q14 notably raised. At 91.7 mb/d, the 2Q14 demand estimate is 200 kb/d lower than in our last Report on weaker than expected US and Japanese demand. In contrast, the 4Q14 forecast has been lifted by 130 kb/d to 94.0 mb/d, as most of the 2Q14 US/Japanese downgrade is expected to be transitory and as economic activity is expected to improve towards the end of the year.

Global Overview

This month's Report has seen two clearly conflicting forces at work. On the upside, historical estimates of non-OECD oil demand have been raised, reflecting the publication of the 2014 edition of the IEA's Annual Statistical Supplement (see 'Changes to Non-OECD Baseline Demand Estimates'), with approximately 0.4 mb/d added to the 2012 demand estimate, to 90.6 mb/d. On the downside, lower growth forecasts ensue on weaker macroeconomic assumptions.

By the time we get to 2014, the overall demand estimate is roughly on a par with last month's Report at 92.7 mb/d. A big downside correction to 1H14, coupled with weaker macroeconomic forecasts, eradicate any previous baseline upgrades. The IMF trimmed roughly three-tenths of a percentage point from its 2014 global economic growth outlook, to 3.4%, between the release of July's World Economic Outlook (WEO) and April's WEO, citing "the legacy of the weak first quarter, particularly in the United States, and a less optimistic outlook for several emerging markets."

Global oil demand growth is still forecast to accelerate in 2015, adding approximately 1.3 b/d for the year, as the IMF envisages an accelerating global economy, +4.0%. Even here, however, the absolute demand estimate, at 94.0 mb/d, is 85 kb/d less than that carried previously (the growth estimate has been reduced by 90 kb/d), with a curbed Chinese demand forecast the chief culprit. Other significant downside contributions in 2015 include the now reduced outlooks for Russia and Japan. The Japanese forecast is curtailed as expectations for the non-oil fired electric power generation edge modestly higher. The forecast for Russia, meanwhile, has been tempered as the implication of additional sanctions suppresses the economic outlook, with the IMF envisaging only 1.0% GDP growth in 2015 versus an April estimate of 2.3%.

Top 10 Consumers

US

Preliminary estimates of US 2Q14 demand have been reduced compared to the assessments carried in last month's Report. Not only do the latest weekly estimates from the US Department of Energy's Energy Information Administration (EIA) come out below previous expectations, but also official confirmation of May deliveries point towards an absolute year-on-year (y-o-y) contraction in US demand, a reversal from the gains implied in the EIA weeklies. Demand for LPG (including ethane) and gasoline led the downward adjustments. LPG deliveries fell by approximately 6.4% y-o-y in May, as maintenance closures trimmed available petrochemical cracker capacity. Gasoline demand flattened as the Federal Highway Administration reported softness in the vehicle miles travelled data for the US northeast (-1.0% y-o-y). The forecast of overall US demand momentum in 2014 has accordingly been curbed, to +0.3% versus the previous +0.6% estimate.



The overall 2Q14 US demand estimate of 18.7 mb/d is 235 kb/d below that carried in last month's Report, with 140 kb/d less demand attributable to a now reduced LPG (including ethane) estimate and -85 kb/d due to lower gasoline deliveries. Despite the large scale of this downside correction, we have raised the 4Q14 forecast, by 70 kb/d to 19.3 mb/d, as we are now taking a firmer stance on the potential uptick in US industrial activity, and hence oil use, towards the end of the year. The Institute of Supply Management's manufacturing index perhaps best encapsulates this mood, as its sentiment index rose an eight-month high of 57.1 in July. Not only has US manufacturing sentiment been firmly rooted in 'expansionary' territory, i.e. above 50, since May 2013, but it now looks very much as if the early-2014 climb-down was a temporary phenomena. Of particular significance for 4Q14, the most forward looking 'new-order' sub-index rose to 63.4 in July, its fourteenth consecutive gain. Furthermore, the US Department of Labour reported jobless claims down to a near eight-and-a-half year low in July.


China

This month's Report sees the forecast of Chinese oil demand growth reined in somewhat, consequential on ongoing weaknesses in the recent data and curbed projections for economic activity. Chinese oil demand growth of around 2.9% is now foreseen in 2014, versus the previous 3.3% estimate, with suppressed gasoil/diesel demand taking the largest hit. Despite recent weaknesses, the oil demand trend is forecast to continue towards an accelerating trend in 2015, as Chinese oil demand growth is forecast to rise to 3.8% in 2015, as indicators of business sentiment in the more heavily energy-dependent manufacturing sector become increasingly upbeat. Furthermore, the government has made it increasingly clear in recent months that it will make efforts to support economic activity if they wane too heavily. Relatively strong gains are foreseen across the key transportation and petrochemical sectors in 2015, supporting the relatively robust forecast gains in motor gasoline, jet/kerosene, LPG and naphtha demand.



Fitting with our now-curbed Chinese oil demand growth forecast, preliminary estimates of June deliveries, at 10.4 mb/d, came out 145 kb/d below our month earlier forecast. Despite this correction, overall Chinese oil demand maintained its normal seasonal upturn in June, rising by around 365 kb/d on May, as agricultural oil use reportedly rose during the peak summer planting season. Apparent oil demand estimates gained additional traction as the Chinese National Bureau of Statistics (NBS) reported that refinery throughputs in June rose to an all-time high. As already alluded to, the ongoing strength depicted in the Chinese gasoline sector continues to provide the majority of the overall gains seen in China, with strong car sales supporting an already rapidly rising Chinese car fleet alongside reports of relatively robust consumer confidence. The Chinese Association of Automobile Manufacturers reported passenger car sales of 1.56 million units in June, 11.5% up on the year earlier, or 9.63 million cars in 1H14, equivalent to a y-o-y gain of 11.2%. The NBS reported domestic consumer confidence at 104.7 in June, firmly supported above the key 100-threshold that signals the break-even point between 'optimism' and 'pessimism'.




India

Strong transportation fuel demand accounted for the sharp gain seen in Indian oil deliveries in June, to 4.0 mb/d. The recent reversal in the gasoil/diesel demand trend proved key. Having generally trended down since April 2013, in response to government efforts to reduce diesel subsidies, June's near 3% gain, to 1.5 mb/d, was the strongest y-o-y comparison in over a year. Consumer and business confidence alike are rising, buttressed by the change to a likely more pro-business government, supporting our forecast of a 2.9% expansion in Indian oil use in 2014, to 3.6 mb/d.



The baseline Indian data series has also been revised up, with 0.3 mb/d added to the 2012 estimate to 3.8 mb/d, due to a reassessment of inputs/outputs from Reliance's Jamnagar facility. Previous concerns were that some refineries flows were being double-counted, but after extensive work, with the co-operation of the Indian government, this risk is discounted. Further details are available in the 2014 edition of the IEA's Annual Energy Statistics of Non-OECD Countries.

Japan

Japanese oil demand, at 3.8 mb/d in May, has been reduced by 85 kb/d compared to last month's Report, with notably lower estimates of 'other products' demand (which include the direct crude burn of the power sector) the key contributor. Roughly 360 kb/d of 'other products' were delivered in May, 70 kb/d below the previous estimate and 145 kb/d below the year earlier, as the Japanese power sector increasingly switch to relatively cheaper alternatives such as coal. Preliminary estimates of June demand gauged it falling by 3% on the year earlier, to 3.7 mb/d, 110 kb/d below the estimate cited in last month's Report, as once again the power sector oil-requirement dipped. The 2014 forecast has accordingly been curbed, albeit only by a tempered degree as the IMF has raised its estimate of Japanese economic activity for 2014 (adding three-tenths of a percentage point to the 2014 Japanese GDP growth forecast, to 1.6%).



We have revised down our 2015 Japanese oil demand forecast - with a drop of 2.7% now forecast versus the previously projected 2.2% decline - on raised expectations for non-oil electric power generation. The availability of competing gas and coal are up, while July saw news that two Japanese nuclear reactors passed Nuclear Regulation Authority (NRA) safety approval. Kyushu Electric's two 890 megawatt nuclear reactors gained NRA consent in July, the first such announcement since the tighter standards were introduced last year. Furthermore, the Japanese Institute of Energy Economics (IEEJ) published a report citing as many as 19 nuclear reactors restarting operations by the end of 1Q16, equivalent to around 124.3 billion kilo watt hours of power.    

Russia

The Russian oil demand growth forecast has been pared since last month's Report, as additional sanctions trigger weaker economic activity dampening future oil use. Although little specifically was said on Russia, in the IMF's July update, the GDP growth forecast was reduced sharply, to 0.2% in 2014 (1.2% previously) and 1.0% in 2015 (2.3% before). Specifically the IMF cited that "activity in Russia decelerated sharply as geopolitical tensions further weakened (overall economic) demand" and that "investment is [now] expected to remain weaker for longer". The Russian oil demand growth forecast, for 2014, has accordingly been reduced to 1.3%, from the previous 1.9% estimate. Projected growth rates of gasoline, gasoil and 'other products' were all reduced on lower likely economic outlook. Similar curtailments are forecast for 2015. The risks to the Russian forecast are skewed to the downside, as additional sanctions have been adopted since the release of July's IMF update, both by the EU and the US while retroactive sanctions are also being considered by Russia. 


Saudi Arabia

Additional summer power sector oil demand saw Saudi Arabian deliveries clamber up to an average of around 3.3 mb/d in May, their highest level in eight months. Encompassed in this extra electricity requirement were the sharp gains seen in residual fuel oil and 'other products' (which include the direct crude burn). For the year as a whole, deliveries are forecast to average roughly 3.1 mb/d, 3.3% up on the year earlier. Oil demand growth is then forecast to accelerate still further in 2015, to 3.6%, as economic momentum builds.


Brazil

The Brazilian demand forecast has been modestly reduced since last month's Report, as the underlying macroeconomic environment has been curtailed. The IMF, in July, trimmed six-tenths of a percentage point off both the 2014 and 2015 economic growth forecasts for Brazil (compared to April's WEO), respectively to 1.3% and 2.0%. Despite relatively weak economic growth, Brazilian oil demand growth of around 2.5% is foreseen in 2014 as the transportation sector has thus far risen strongly, the desire for motorised vehicles in Brazil heavily outweighing economic growth.


Canada

The latest data depict Canadian oil demand continuing its recent downtrend. At 2.4 mb/d in May, total Canadian oil deliveries fell by around 2.2% on the year earlier with weak business confidence contributing to the sharp drop in jet/kerosene deliveries. Overall industrial output, however, continues to rise, up 2.3% y-o-y in May, supporting gains in diesel and LPG demand.

Korea

Preliminary estimates of June demand depict approximately 2.3 mb/d of total oil deliveries, roughly unchanged on the year earlier as naphtha demand waned somewhat. Overall, in y-o-y terms, the 1H14 saw relatively strong petrochemical demand, supporting an average 1H14 gain of approximately 70 kb/d y-o-y for naphtha. In June, however, y-o-y naphtha demand growth eased back to a mere 15 kb/d, as total industrial activity in Korea eased back by 2.1% y-o-y. Given the relatively strong March-May data, the year as whole is still forecast to see deliveries average roughly 2.4 mb/d, an all-time high for the country.


Germany

Preliminary estimates of German oil demand in June, at 2.4 mb/d, were revised sharply lower on our earlier forecast (-65 kb/d), as the economy showed signs of softening. For the 2Q14 as a whole, German oil demand came in at around 2.4 mb/d, nearly 6% down on the year earlier with particularly sharp contractions seen in gasoil, fuel oil and 'other products'. Such industrial fuel demand contracted as overall industrial output in the country showed signs of weakening. Despite this mid-year correction in German oil demand, growth momentum is expected to resume in 4Q14 as a return to normal seasonal weather patterns would imply additional heating oil demand. The outlook brightens in 2015, with oil deliveries forecast as rising by an accelerated 0.8%, after the 0.3% projected gain of 2014, as the IMF predicts economic growth of 1.7% in 2015.


OECD

Oil deliveries in 2Q14 were revised down by 425 kb/d across the OECD, as sharp curtailments were applied to estimates of US and Japanese deliveries. The reduced Japanese power sector requirement, coupled with a curbed LPG estimate for the US, led the 2Q14 downgrade. At an estimated 44.8 mb/d in 2Q14 this brought about a y-o-y decline of 630 kb/d, the sharpest contraction experienced since 2Q12. Despite such curtailments, momentum is expected to flip into modestly expansionary territory in 4Q14, up by approximately 150 kb/d on the year earlier, as not only does the macroeconomic picture likely brighten but also after relatively mild European winter temperatures in 4Q13 a return to normal seasonal patterns would raise heating oil use. A decline of around 0.4% is forecast for the year as a whole.



Americas

The sharp downgrade in 2Q14 US oil deliveries, outlined above, played a key role in the 290 kb/d downwards correction in the OECD American demand estimate, to 23.7 mb/d. Taking this adjustment onboard, a y-o-y decline of 0.6% is now seen, a dramatic reversal from the previously envisaged 0.7% gain. Although sharply lower US demand led this volte-face, significant weaknesses were also seen in Canada and Mexico. Strengthening economic conditions in 2H14 are forecast to result in a renewed upturn in demand, however, with 0.3% y-o-y growth in 3Q14 accelerating to 0.7% in 4Q14. The forecast for the year as a whole is a gain of around 0.3%, a projection that is tempered by approximately two-tenths of a percentage point as the 2Q14 data surprise on the downside.


Europe

The long ailing European demand trend is forecast to show modest signs of life in the 2H14, as economic activity is widely expected to pick up. Having fallen in both 2012 and 2013, respectively declining by 0.7% and 0.4%, euro zone GDP has returned to growth this year, with a near 1.1% gain now being forecast by the IMF. European oil demand is accordingly forecast to flatten in 2014, down by a relatively muted 0.7% on the year as a whole, a moderation that comes after three successive annual heavy falls.


Asia Oceania

Total oil demand in OECD Asia Oceania fell by around 2.3% y-o-y in 2Q14 to 7.7 mb/d, a 105 kb/d downside revision compared to last month's Report. Reduced Japanese power sector oil use played a key role, as did the significant downside revisions applied to the official Australian data series, chiefly 'other product' demand. For the year as a whole, a decline of around 1.6% is forecast, easing back slightly to drop of 1.45 in 2015 as the macroeconomic environment improves slightly.

Non-OECD

Estimates of non-OECD oil demand have been revised up since last month's Report, largely on account of the significant upgrades that have been applied to the historical data series. The 2012 non-OECD oil demand estimate was revised up by approximately 0.4 mb/d to 44.6 mb/d, with notable additions seen in the Indian, Egyptian, Libyan and Russian series (see 'Changes to Non-OECD Baseline Demand Estimates'). Indeed, this upside revision has brought forward the inflection point at which total non-OECD oil demand first exceed OECD, from 2Q14 in last month's Report to 2Q13 now. It is then from 2014 that total non-OECD oil deliveries maintains a consistent annual premium to OECD demand.

Changes to Non-OECD Baseline Demand Estimates

This month's Report includes the first feed through from the 2014 editions of both the IEA's Annual Statistical Supplement and the IEA's Annual Energy Statistics of Non-OECD Countries (commonly referred to as "Green-Book"). Previous estimates of 2012 non-OECD oil demand were based on a combination of national source statistics, JODI numbers, internal demand estimates and other reports and journals. Approximately 370 mb/d of additional oil demand has been added to the 2012 estimate since last month's Report, to 90.6 mb/d. India, Libya, Egypt and Russia saw some of the largest additions to their historical demand estimates, as gains in these countries (amongst many others) more than offset a number of notable curtailments such as Singapore and Malaysia. Revisions to prior years were also made, with notable additions included for Egypt, India, Panama and South Africa in 2011.

The Indian demand estimate for 2012, at 3.8 mb/d, was raised by approximately 0.3 mb/d following the adoption of a new data-collection methodology for Indian diesel and a careful reassessment of the input/output flows at Reliance's giant Jamnagar refining complex. As reported intake at the complex exceeded by far stated capacity, there had been concerns that intake and output at the refinery had been overstated, thus inflating demand. Those concerns were examined by the IEA's statistical arm in  extensive consultations with the Indian government and ultimately dismissed. Part of the refinery intake has however been reclassified as refinery feedstocks rather than crude, accounting for 'Other Inputs' to the Reliance Jamnagar refinery. These 'other inputs' were previously excluded from the OMR balance. The new gasoil methodology, whereby official retail sales figures were made available for the first time, as opposed to internal IEA estimates, added roughly 3.4% to the assessment of Indian gasoil demand in 2012. On a sector-specific note, both agricultural and private-generator diesel usage led the upside revision. Additional deliveries of petroleum coke were also reported, increasing the scale of 'other products' oil use in the Indian cement sector.

A revised Egyptian demand estimate of approximately 835 kb/d is now made for 2012, roughly 135 kb/d above our previous calculation as higher use of naphtha, residual fuel oil and 'other products' was seen. While all naphtha produced in Egypt was previously counted as exports, some of this product has been reclassified as domestic demand serving Egyptian petrochemical needs. The fuel oil and 'other product' demand estimates were also notably raised on account of the additional domestic power sector requirement and reports of some fuel imports in 2012.

At roughly 260 kb/d in 2012, the Libyan demand estimate was revised up by approximately 40 kb/d over the previous forecast. This additional Libyan oil demand arose out of notably higher gasoline, jet/kerosene and residual fuel oil deliveries. Additional estimates of domestic Libyan gasoline and jet fuel demand are now being made, as the transport requirement exceeded earlier expectations benefiting from the brief one-year uptick in underlying economic activity in 2012. The feed through in 2013-14 has, however, been muted, as the relatively dire estimates of macroeconomic activity in these years dampens the likely oil requirement. Furthermore, Libyan oil deliveries have been suppressed in recent years on account of the limited access to sufficient fuels, with domestic refinery activity hampered by outages.

Other notable upside revisions include Russia, Kuwait and Argentina. The Kuwait demand estimate for 2012 was revised higher by 25 kb/d for 2012, to 470 kb/d, with gasoil/diesel demand particularly higher as Kuwaiti industry clearly benefited more than previously foreseen from the specific plus 6% performance of the economy in 2012. At 3.4 mb/d in 2012, the Russian demand estimate has been revised up by 95 kb/d on a reassessment of the likely scale of naphtha demand. Similarly, the average Argentinean demand estimate, at 760 kb/d in 2012, has been revised up by 25 kb/d on the basis of new information about the country's LPG and gasoil requirements.

The 2014 editions of the IEA's Annual Energy Statistics of Non-OECD Countries and Annual Statistical Supplement not only include comprehensive series of 2012 non-OECD oil use, but they also include revisions for earlier years. For example, notable additions have been applied to estimates of Egyptian demand in 2011, alongside other historical revisions such as India, Panama and South Africa. It is with the addition of these more comprehensive series, plus a continued effort to strengthen the quality of our forecast that we attempt to paint an ever more accurate picture of global oil demand moving forward.

Having risen by around 2.3% in 2013, non-OECD growth momentum is forecast to accelerate modestly in 2014, to 2.7%, as the underlying non-OECD economic backdrop itself solidifies somewhat. Accelerating gain in gasoline, LPG and 'other product' demand are forecast to lead the acceleration. Gasoil/diesel demand growth in the non-OECD has lagged somewhat, consequential on the absolute declines seen in the two dominant non-OECD Asian economies of China and India. Further details on the main non-OECD economies, such as China, India, Brazil and Russia, can be seen in the Top 10 Consumers section, above.



Relatively strong gains have been seen across all of the main non-OECD regions in 2Q14. The recent acceleration in activity has occurred as preliminary estimates of oil demand have shown growth picking up in both Africa and the Middle East, an uptick that has gained traction as the relative decline rates in many of the recently crisis-hit economies, such as Libya and Egypt, have eased.


Supply

Summary

  • Global Supply was up 230 kb/d in July, to 93.0 mb/d. Compared with a year ago, global supplies were 840 kb/d higher, with an increase of 1.2 mb/d in non-OPEC output more than offsetting a 360 kb/d decline in OPEC output.
  • July 2014 non-OPEC production fell by 170 kb/d month-on-month, to 56.2 mb/d, on declines in Brazil, Mexico, and Russia, as well as attacks that took down output in Colombia and Yemen. Annual growth for 3Q14 is forecast at 1.4 mb/d, to 56.2 mb/d.
  • OPEC crude oil supply rose by 300 kb/d to 30.44 mb/d in July, a five-month high, with a boost from Saudi Arabia to 10 mb/d and a tentative recovery in Libyan output more than offsetting losses in Iraq, Iran and Nigeria. The 'call on OPEC crude and stock change' is expected to average around 30.8 mb/d in 4Q14, steady on 3Q14. For full year 2015, the 'call' is pegged at 29.9 mb/d, down a touch on the 30 mb/d estimate for 2014.

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

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

OPEC Crude Oil Supply

OPEC crude supply rose by 300 kb/d to 30.44 mb/d in July, with higher flows from Saudi Arabia and Libya more than offsetting lower output in Iraq, Iran and Nigeria. Saudi output rose into double-digit territory and Libyan supply climbed 190 kb/d to 430 kb/d even as rival militias battled for control over the North African producer. By the second half of the month, fields were pumping 500 kb/d and Libya may be able to hold onto those gains despite rising violence (see 'Libya's Tenuous Recovery'). Ongoing attacks by Islamist forces in Iraq took a deeper toll, with output from northern fields falling for a second month running. The militants' dramatic push towards the Kurdish region and march towards the Bai Hassan field near Kirkuk have raised the risk of further losses in the north (see 'Iraq's Northern Strife'). Far from harm's way, exports from the south - for now Baghdad's sole outlet - held steady at 2.4 mb/d in July. 



The 'call on OPEC crude and stock change' is expected to rise to 30.8 mb/d in 4Q14, steady on 3Q14. For full year 2015, 'the call' is pegged at 29.9 mb/d, down a touch from 30 mb/d in 2014. OPEC's 'effective' spare capacity was estimated at 2.87 mb/d in July compared with 3.25 mb/d in June, with Saudi Arabia holding 84% of the surplus.



Saudi Arabia's crude output climbed to an average 10.01 mb/d in July - the highest rate since September. Production rose 230 kb/d from June levels partly due to increased domestic consumption. Riyadh typically boosts supply in the summer to meet higher domestic demand for crude to fuel power plants. In 3Q13 it burned an average 720 kb/d versus 500 kb/d in 2Q13.

Saudi supplies to the market, which include sales from storage, were reported at 9.66 mb/d in July versus 9.75 mb/d in June.



Saudi Arabia cut official selling prices for its benchmark Arab Light for customers in Asia by $0.40/bbl for September sales, with Arab Medium and Arab Heavy down by $0.40/bbl and $0.30/bbl, respectively. Weak refining margins and competition from West African and North Sea barrels may have led to the price reduction.

In contrast with the ramp-up in Saudi output, crude oil production from Iran declined in July to 2.76 mb/d - its lowest level since December. Output was down 40 kb/d on June, with preliminary data showing that China may have temporarily cut back on its previously high imports. As always, these figures may be subject to revision. Iran and the five permanent UN Security Council members plus Germany and the EU (P5+1) agreed to extend nuclear talks by four months after they failed to meet a 20 July deadline for settling their dispute over Iran's nuclear program. Under the interim deal, Iran's crude exports are supposed to hold at around 1 mb/d.



After running at 1.4 m b/d for the first five months of the year, import volumes of Iranian crude eased to roughly 1.1 mb/d during June and July, according to preliminary figures. The data include condensate volumes of 120 kb/d in June and 157 kb/d in July. After stripping out the condensate volumes, imports of Iranian crude sank below the nominal 1 mb/d target during June and July. Import levels were last below the 1 mb/d mark in November.

July preliminary data show imports from China, Iran's top buyer, inching up to 560 kb/d in July from June's 530 kb/d - sharply down from robust levels of 800 kb/d in April and 760 kb/d in May. Imports into India, Iran's second biggest customer, were steady during June and July at just over 160 kb/d, down from an average 300 kb/d during the first five months of the year. Japan lowered imports in July to 148 kb/d versus 187 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. Imports also include condensates from Iran's Assaluyeh terminal, which averaged around 200 kb/d during the first half of this year.

Confusion meanwhile arose over the details of a major oil-for-goods barter deal between Russia and Iran. The Russian government was initially reported as saying that details of the agreement had been finalised, then was said to have withdrawn the statement. Media reports earlier this year said Tehran would supply 500 kb/d of Iranian oil to Moscow as part of a wider economic pact. The volume under discussion subsequently has reportedly fallen to as low as 50 kb/d.

Iraq's Northern Strife

Radical Islamist forces were keeping up their assault on Iraq's northern oil sector at the time of writing, closing in on fields and blocks in the Kurdistan region and making progress towards the core field of Bai Hassan near the city of Kirkuk. Several areas have variously been taken and lost by both Islamic State (IS) and Kurdish Peshmerga forces since the start of US air strikes on 8 August to reinforce the Kurdish capital Erbil. As IS forces pushed closer to Erbil and sent tens of thousands fleeing, international oil companies at work in the area - such as ExxonMobil and Chevron - evacuated some of their expatriate staff.

Ongoing attacks by the Islamic State, formerly the Islamic State for Iraq and Syria, on Iraq's northern oil infrastructure have already forced a dramatic curtailment of flows from the giant Kirkuk oil field, Bai Hassan - with capacity of 200 kb/d - and smaller nearby producers, halting exports to world markets since March.  Production has sunk from more than 600 kb/d in January to less than 200 kb/d. 

Operations at Kurdish oil fields - Khurmala and Shaikan are near the frontline - were continuing as normal as this month's Report went to press, but the region's output of some 350 kb/d is at risk of attack. The escalation in fighting between the Islamic State and Peshmerga has also brought the battle to a number of blocks operated by international oil companies - including two run by Exxon.

Despite the rising violence in northern Iraq, overall output has posted relatively modest losses. Total production, including areas under the control of Baghdad and from the Kurdistan Regional Government (KRG), dropped by 120 kb/d from June to average 3.1 mb/d in July - with much of that decline due to the situation at the country's biggest refinery at Baiji, a battleground between Islamist and Iraqi forces.

The fighting has forced Baiji offline and sharply reduced output by closing the major domestic channel for crude from the northern fields. Pumping from the fields has slowed since March, when sabotage along the Iraq-Turkey pipeline halted exports of some 250 kb/d. Production of about 160 kb/d continues, but most of it is re-injected into the Kirkuk field for lack of an outlet. About 30 kb/d is supplying the Kirkuk refinery.



Exports from Iraq's prized southern fields, insulated so far from the insurgents, nudged up to 2.44 mb/d in July. Scheduling snags and technical glitches at the loading terminal prevented higher shipments in July of Basrah Light crude - now the federal government's only source of exports - and these hurdles could yet stand in the way of increased loadings this month of Basrah Light crude - now the federal government's only source of exports - and these hurdles could yet stand in the way of increased loadings this month.

The militants' sweep towards KRG territory at the start of August allowed them to secure two small oil fields - Ain Zalah and Batma - in northwestern Nineveh province. Added to the fields of Najma, Qayara, Himreen, Ajeel and Balad they grabbed in mid-June, those new fields bring output under Islamic State control to about 80 kb/d. The group also has oil fields in the Syrian province of Deir al-Zor under its belt. Though small compared to Kirkuk, these fields allow the militants to secure their own fuel supplies and offer a potential source of revenue via smuggling.

Baghdad lost its grip on Kirkuk in June, when federal forces retreated from the Islamist forces' lightning advance. Kurdish Peshmerga forces swiftly filled the vacuum and by mid-July, the KRG effectively took over management of critical oil fields that had been run for decades by Iraq's North Oil Co. (NOC). It remains to be seen whether the KRG can hold onto Kirkuk, especially as Islamist militants at the time of writing were making progress towards Bai Hassan, only 30 km away.

The combined production capacity of the Kirkuk fields - including Kirkuk's Avana and Baba domes and Bai Hassan - totals around 450 kb/d although they are now pumping only about 160 kb/d. The Kirkuk area's third dome, Khurmala, pumps about 100 kb/d and has been under KRG control for years. KRG total production ran at around 310 kb/d in July, down about 40 kb/d on June as full storage tanks at the Turkish Mediterranean port of Ceyhan led to a brief halt in flows through the KRG pipeline to Turkey.

The capacity of the pipeline, now estimated at 150 kb/d, is expected to rise to around 300 kb/d shortly - possibly within weeks. KRG officials say Erbil needs to export about 400 kb/d to fuel its economy. Baghdad has cut the KRG budget since the start of the year over a long-running oil feud, piling pressure on a region that achieved a measure of autonomy in the wake of the 1991 Gulf War and - until the dramatic events of the past week - had been a relative safe haven since the 2003 US-led invasion.

KRG production capacity, estimated at about 400 kb/d, could be supplemented by the Kirkuk area fields it now effectively controls. Even before the militants began their march in June, the KRG had moved to connect NOC's production with its own network via a 36-inch pipeline with capacity of 700 kb/d. The KRG has linked the Khurmala and Avana domes and hooked up Bai Hassan to Avana and is working to pump at least 120 kb/d from these northern fields in the coming weeks. 

In a bid to achieve greater economic and political autonomy, the KRG is exporting crude oil independently of Baghdad, in spite of the federal government's protests that it has sole rights to sell Iraqi oil. The landlocked region has trucked crude to world markets via Turkey since the end of 2012. But the challenge to Baghdad became more critical after Erbil built its own pipeline through Turkey and began shipping its crude via the Mediterranean at the end of May.

Since then, six cargoes have loaded but only one has been successfully delivered - to Israel. Iraq's federal government has moved to block the ships from unloading at foreign ports. Erbil has asked a US court to throw out an order to seize some 1 million barrels of disputed crude that has been anchored near Texas and allow the cargo to be freely delivered. The United States has stopped short of banning US companies from buying the oil while warning them of potential legal risks.



Kuwaiti crude oil production inched up to 2.8 mb/d in July while UAE production held steady at 2.8 mb/d. Qatar's output remained unchanged at 730 kb/d.

Libya's Tenuous Recovery

Fragile gains in Libyan output appear to be holding for now, but a significant and lasting recovery is likely to be some time off as violence rages and expatriates flee the North African producer. After recovering to an average 430 kb/d in July, up 190 kb/d on June, output is now hovering around 450 kb/d.

A swift ramp-up at Libya's biggest oil field, El Sharara, which restarted in early July, lifted flows to 500 kb/d during the second half of the month even as rival militias battled for control of the country. Expectations are that Libya should be able to sustain current production levels, a solid improvement from earlier this year when output sank to 200 kb/d - but still only about a third of pre-conflict rates. After rising early in 2013 to 1.4 mb/d, the highest level since the 2011 civil war, flows fell back as strikes and protests gathered pace last spring.



  *This map is without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

A return to the heights of 2013 looks very unlikely in the near term given the risk of damage to the country's oil fields and infrastructure. It could, in fact, take months for output to climb to a sustainable rate of 600 kb/d to 800 kb/d, because of the wear and tear on oil fields, pipes and pumps after repeated starts and stops. There is also concern about reservoir pressure at some fields.

Even so, there were signs of a revival in Libya's oil sector after an agreement in early July to end an 11-month oil blockade and the restart of production at El Sharara. But there are few hopes now for near-term stability amid a worsening conflict that finds a weak central government struggling to keep itself together and provide security. 

The first formal session of a recently elected parliament was held on 4 August in the eastern city of Tobruk - far from Tripoli, where heated battle had erupted between rival militias from Zintan and Misrata. Fierce fighting at Tripoli's International Airport led to the withdrawal of Western diplomats and  some expatriate workers from oil companies such as France's Total and Italy's Eni. Clashes have spread to the western town of Zawiya, home to a large oil port, although the terminal remains secure.

Despite the rising violence, Libya's state National Oil Corp. (NOC) managed to boost exports in July to about 200 kb/d, up from roughly 165 kb/d in June, and has plans to more than double shipments this month.  A preliminary programme lists about 100 kb/d of Mellitah, 90 kb/d of Sarir, 90 kb/d of offshore Bouri and al Jurf, 80 kb/d of El Sharara, and 60 kb/d of Brega. Quantities of Es Sider are due to be sold out of storage.

Although the vital eastern terminals of Ras Lanuf and Es Sider - with combined capacity of 560 kb/d - reopened early last month, there have yet to be shipments from those ports as the facilities are still being inspected and repaired. NOC wants swift lifting of the August barrels. It made downward adjustments to its official selling prices last month in an attempt to be more competitive. Market sources said it might be even tougher for Libya to sell significant volumes this month given the well supplied European market.

The restart of the 340 kb/d El Sharara field has meanwhile freed up light sweet Brega for export. NOC had been diverting oil exports from the Marsa al-Brega port to feed the 120 kb/d Zawiya refinery when the southwestern oil field was down.  El Sharara exports resumed from the Zawiya terminal in July for first time since February.

Angolan crude output rose 50 kb/d on June to 1.70 mb/d in July as output increased from Total's 160 kb/d capacity deepwater Cravo, Lirio, Orquidea and Violeta (CLOV) project. August loading schedules for Angola are the highest since February on the rising CLOV output. Crude oil production from Nigeria slipped 30 kb/d to 1.93 mb/d in July due to intermittent loading disruptions.



Supply from Venezuela and Ecuador remained steady in June versus July at a respective 2.48 mb/d and 560 kb/d.

Non-OPEC Overview

Non-OPEC supply fell by 170 kb/d in July, to just under 56.2 mb/d, due to a combination of seasonal declines, event-driven losses and longer-term trends. A seasonal dip in Russian condensate production and declines on some of the country's mature fields (-180 kb/d in total) were the largest contributor to the m-o-m drop. Pipeline attacks took down output in Colombia and Yemen by 35 kb/d and 40 kb/d, respectively, while Brazil reverted to a more gradually-rising annual trend after an exceptional June. Mexico continued its recent accelerated decline.



On the year, July non-OPEC production was up 1.2 mb/d. July's decline, however, comes after a strong monthly gain in June of 390 kb/d, despite a monthly decline in North America (-125 kb/d) in that earlier month. Both Colombia and Brazil saw strong gains in June, and India and several countries in Southeast Asia experienced smaller gains. Norway also saw a boost on reduced maintenance.

Given steep maintenance in the UK in August, as well as a countervailing strong increase of light, tight oil in the US, 3Q14 non-OPEC production is forecast at 56.2 mb/d. With five or six months of actuals received for most major producers, 2014 growth is expected to be 1.6 mb/d, or 2.9%, compared with the 2.5% gain achieved in 2013. The forecast for 2015 growth remains at 1.2 mb/d, or 2.1%.

Compared with the variation in annual non-OPEC supply growth rates experienced last decade, 2013-15 rates are very similar. This is partially due to sustained high oil prices, which support robust drilling activity, particularly in the US where drilling and production growth are tightly bound.

OECD

North America

US - July preliminary, Alaska actual, other states estimated:  A 100 kb/d decline in Prudhoe Bay production in Alaska, due to maintenance, helped  trim US crude oil output slightly in July compared with June, to 8.4 mb/d. State data show Alaska output at 420 kb/d, its lowest level since August 2012, and some 120 kb/d below that of April, before the start of the maintenance season. Light, tight oil (LTO) production, in contrast, continues to grow strongly, up an estimated 65 kb/d in July. May final data show US crude oil output at 8.36 mb/d, down slightly on April on lower US Gulf of Mexico (GOM) output. May US crude oil production was, nevertheless, up 1.1 mb/d year-on-year (y-o-y), roughly equivalent to adding the total crude oil supply of Colombia to the world in just 12 months.

North Dakota Bakken LTO production increased to 975 kb/d in May, according to state data, and is estimated to have exceeded 1 mb/d in June. Bakken LTO production in North Dakota is expected to average more than 1.1 mb/d in 2H14, and surge past 1.2 mb/d by 2Q15. Additional Bakken LTO, upwards of 180 kb/d, is produced in neighbouring Montana and the Canadian province of Saskatchewan.

As discussed in the January 2014 issue of this Report, US federal regulators had initiated an investigation into whether the LTO from this play has particular volatile qualities that might require additional safety precautions, or even limited processing near the wellhead, prior to long-distance transport. After taking and testing 135 samples, the US Pipeline and Hazardous Materials Safety Administration (PHMSA) made a determination in a July report that Bakken crude is more flammable than other common US crude grades, with a high propensity to vaporise. This could lead to regulations limiting its ability to be railed, particularly in older-model cars, unless processed to reduce its volatility. Currently, over 700 kb/d of Bakken LTO is railed long distances to North American refineries. However, there are already plans to build nearly 1 mb/d in pipeline take-away capacity from the Williston Basin: Enbridge's 275-kb/d Sandpiper pipeline project to Superior, Wisconsin has already been submitted for regulatory approval, while Enterprise Product Partners has proposed a 320-kb/d line to the Cushing, Oklahoma storage hub, and Energy Transfer Partners has proposed a 340-kb/d line to Patoka, Illinois.

US NGL production surged in the first four months of the year, going from 2.6 mb/d in January up to 2.9 mb/d in April, before levelling off in May. Given reduced US petrochemical demand due to maintenance as well as high storage levels, we estimate that ethane production continued the 65 kb/d decline observed in May into June, with only a small recovery in July, as increasing amounts of ethane likely were rejected rather than added to storage. Nevertheless, ethane production is expected to be up about 100 kb/d on the year, to 1.1 mb/d. New regulations to reduce flaring in North Dakota will have a positive effect on NGL production. Oneok Partners has announced in July its intention to build a 2.06-billion cubic metre per year gas processing plant in the western part of that state by the end of 2015. US total liquids production, not including fuel ethanol and processing gains, reached 11.5 mb/d in July, and is expected to attain 12.0 mb/d by November 2014.

Canada - July estimated: Canadian total liquids production is estimated at about 4.1 mb/d for July, a level similar to May and June. Canadian production fell below 4.2 mb/d in April as project maintenance on synthetics upgraders began, and we estimate that it will remain between 4.1 mb/d and 4.2 mb/d until 4Q14, when production will start increasing again on higher bitumen output. Maintenance trimmed production from two offshore Newfoundland fields, White Rose in July and Terra Nova for four weeks from 6 August. Crude oil and field condensate production (including bitumen but excluding synthetics) is estimated at 2.6 mb/d for the month, a level it has held at since March, though down slightly in July on the offshore reductions. The Duvernay shale play in Alberta is yielding increasing quantities of field condensate, which, though still small by the standards of some plays south of the border, are expected to double in 2015 compared to 2013, to over 60 kb/d. Nearby, on the Saskatchewan portion of the Bakken, output is being increased through waterflooding via injector wells, with some 70 kb/d now being produced via this technology.

Even more important for growth prospects are in-situ Steam-Assisted Gravity Drainage (SAGD) projects. A recent Canadian Energy Research Institute study found that such projects have significantly lower costs than mined bitumen projects, let alone mining/upgrading projects. This finding is consistent with our forecast that about 400 kb/d of new in-situ capacity is expected to start up by end-2015, compared to only 10 kb/d of additional upgrading capacity (Horizon phase 2A) and 110 kb/d of mined bitumen production (Kearl 2).  

Mexico - June actual, July preliminary: Following a period of stabilisation, steep decline rates have returned to the Cantarell offshore complex. As preliminary data had indicated, Mexican crude oil production dropped by over 50 kb/d in June to 2.4 mb/d, final data confirm. Preliminary data indicate that output dropped further in July to just slightly below 2.4 mb/d, the first time in decades that production has fallen below that level on a monthly basis. State oil company Petróleos Mexicanos (Pemex) was able to maintain production at about 450 kb/d on the Cantarell complex throughout 2012 and the first three quarters of 2013, but since 4Q13 the field appears to have resumed faster decline rates. Production fell to 380 kb/d in June, and likely yet lower in July. Pemex has said that it is studying the unexpected acceleration in the decline rates on this complex, as well as on some other fields such as Ek-Balam, so that measures can be adopted to address it. Nevertheless, Pemex has reduced its crude oil production outlook for 2014, to 2.44 mb/d, in line with our expectation. NGL output in June was 360 kb/d, putting total liquids at just over 2.8 mb/d.

On 6 August, the Mexican Congress finished the approval process of the various secondary laws related to the reforms and constitutional changes approved in December 2013 (see 'Watershed Energy Reform Approved in Mexico' in the January 2014 Report). On 11 August, President Peña Nieto signed the laws in an official ceremony. The government is now able to fully implement the reform process of the country's energy sector in the next few years. Next month's Report will have a summary of the main components and effects of this secondary legislation on the petroleum sector.

North Sea

North Sea supply is undergoing a seasonal dip, but structural declines are slowing. Total North Sea production (including all Norwegian production areas) was just over 2.8 mb/d in 2Q14. Output for 3Q14 is forecast at 2.6 mb/d, on heavy maintenance in the UK sector. Output in the Danish sector fell to 150 kb/d in 2Q14, and while it is forecast to increase in 2H14, Denmark's mature fields are expected to continue declining gradually through the end of 2015. As the maintenance season unwinds, production is forecast to recover in 4Q14 to 2.9 mb/d, evidencing only a 50 kb/d y-o-y decline.

Norway - May actual, June preliminary: Final May data revised Norwegian total output down by about 20 kb/d, such that production rounds to 1.6 mb/d for the month, with crude production at 1.3 mb/d. Barring unplanned outages, May is likely to be the peak maintenance month on the Norwegian offshore for 2014, with crude oil production at 1.4 mb/d-1.5 mb/d for the remainder of the year, as maintenance is fairly evenly spread out through September. June preliminary data show crude oil output rising 80 kb/d to 1.4 mb/d and total liquids at 1.7 mb/d. This is still a seasonally reduced output level, as the Grane, Skuld, Snøhvit, Trym, Vigdis, and Visund fields had maintenance work (planned and unplanned). On 19 July, the Njord field came back online after cracks in the Njord A platform forced a shut down in July 2013. The field was producing just 7 kb/d in June 2013, though it had once produced as much as 70 kb/d. The Hyme field, which was undamaged but transports its output via Njord, also had to be shut down, and has reportedly restarted as well (June 2013 production was 16 kb/d). The fix is temporary, however, as Statoil has announced that the platform will have to be removed in 2016, and undergo two years of modifications before it can be reinstalled. The start up of the Valemon gas and condensate field has been delayed for a few months from its original target date of December 2014, on a delayed delivery of the topside unit from Korea. This platform will eventually add 35 kb/d of condensate capacity. The country is expected to maintain total production above 1.8 mb/d for 2015. 



UK - May actual, June preliminary: May total liquids output of 970 kb/d was equivalent to the 1Q14 average, as maintenance in the UK sector was still light that month. June production dropped to 880 kb/d, as maintenance commenced. July scheduled loadings on Brent and Forties were higher than those of June, however, other systems were likely to have experienced maintenance that month. In addition, the Buzzard field, the UK's largest by current output capacity, experienced a five-day outage in mid-July. Hence, July production is estimated to have been at a similar level to that of June, but August total output is expected to drop below 600 kb/d given that the Forties system is scheduled to be offline for several weeks that month.

Scheduled September BFOE loadings were not available at time of writing, but the revised August schedule shows loadings at 716 kb/d, commensurate with a production forecast of about 650 kb/d, given the Forties outage (some loadings will take oil produced in late July). September output is expected to rebound to 880 kb/d.

Non-OECD

Latin America

Spotlight on Argentina

In late July, Argentina defaulted on its debt as a result of a US court declaring in June that Argentina is liable to pay in full hold-out creditors from the 2001 default, and cannot pay creditors with which the country negotiated new terms unless it also pays the hold-outs. This circumstance has brought the country into the international spotlight, but the country's upstream oil sector is undergoing changes also worthy of interest since last looked at in depth in the May 2012 Report. In addition, the default could possibly negatively affect what has been a relatively positive outlook for the country's production, given other recent developments.

Argentinean crude oil output was 520 kb/d in June, essentially unchanged from May. A one-day strike of YPF workers likely reduced output by about 5 kb/d in July. Production levels have been steady since the start of 2013, ranging between 510 kb/d and 530 kb/d throughout the period. YPF is Argentina's largest producing company and has been majority-state-owned since the expropriation of Repsol's majority share in May 2012. Since the government has taken control, YPF has steadily increased its share of Argentina's oil production, from 35%-36% in the year prior to the expropriation to 42% as of June 2014. That increasing share is partially from declines on other companies' assets but also from a 20 kb/d increase in YPF's output. YPF's growth is focused on Neuquén province, where the company's output has increased 57% since April 2012. YPF has greatly expanded upstream investment under government ownership: for example, in 2011, the company had 24 rigs drilling new wells and 49 rigs on workovers; by 2Q14 the company had more than doubled that, to 68 and 92 rigs, respectively. The company plans to invest $1.6 billion on domestic drilling in 2014, with total capital expenditure to reach $7 billion. Overall, some 107 new-well rigs were operating in the country by the end of 2Q14, the highest number ever for the country.

While some small domestic companies, as well as Chevron on its mature fields, have experienced declines at the same time that YPF's output has increased, new investment related to the Vaca Muerta shale play is bringing expectations of increased output, and not only for YPF. A recent study by the consulting firm Accenture found Vaca Muerta to be the shale play outside of North America with the greatest prospects for growth, considering nine core criteria (resource size; fiscal regime; geology; land, water, and transport access; unconventional service companies; mid-stream networks; competition in the sector; and workforce skills). The 2014 MTOMR also identified Argentina as one of two countries outside of North America with the most important shale oil potential in the medium term. YPF is already producing about 25 kb/d on Vaca Muerta in a 50/50 partnership with Chevron. In July last year, YPF concluded a $1.24-billion exploration partnership with the California-based major, and reached another agreement in April of this year to drill over 1 000 new wells in the Loma Compana area of the play via a $1.6-billion deal. Wintershall of Germany has partnered with provincial government company Gas y Petróleo de Neuquén and will begin a $109-million drilling programme on the play by the end of 2014. Wintershall is also participating in Total's drilling on the Aguada Federal block, where the French major has two rigs drilling horizontal hydraulic fracturing wells. ExxonMobil has also invested in Vaca Muerta via a 42.5% farm-in on Petrobras' Parva Negra block in July, in addition to its own holdings of nearly 1 million acres. The US major has large discovery in the Bajo del Choique block of the play, and began producing a small amount in Argentina in April of this year. The nearby Los Molles shale play, also in Neuquén province, has also drawn some exploration rigs from smaller operators.

Two major 'above-ground factors' could greatly affect the outlook, though. One is a struggle between the federal government (and YPF) and the provinces (and their companies) over investment rules and the participation of provincial companies in new upstream concessions. A 2007 law gives provinces substantial control over hydrocarbons concessions. Some provinces, including, crucially, Neuquén and Mendoza, which encompass most of Vaca Muerta, have mandated that their provincial companies hold a designated stake in all concessions. These concessions are usually financed through a carried-interest regime that allows the provincial company to obtain a stake without upfront payments. Provinces have also created an assortment of royalty rates and other contractual terms. YPF and the federal government have sought to standardise concession terms and reduce or eliminate carried-interest investments, as these are seen as hindering investment and reducing the overall amount invested. Issues of control over the oil and its revenues between provinces and the federal government (via YPF) are behind much of the discussion. Changing legal terms, such that new investors might have a competitive advantage, is also an issue of contention.

Talks are ongoing between Buenos Aires and the provinces, but the stress on the federal government as a result of the recent default will likely push the provincial control issue to the side, as the federal government works to prevent the judgement from affecting investment flows (in addition to numerous other potential problems created by the judgement). YPF has stated that it is an independent company whose assets do not belong to the government, and as such "cannot be embargoed by the Republic of Argentina's creditors," although it is clearly state-owned. In any event, plans by YPF to return to international financial markets to finance upstream investment seem on hold until if and when it is clear that claims by bondholders could not be made against YPF. Various Wall Street analysts have posited that investors will now be quite wary to make new investments in the sector. Yet, it is difficult to see how deals that involve no federal government assets (i.e. only provincial companies) could be affected by bondholder claims. Financing costs in Argentina are likely to rise, but for majors sitting on huge cash reserves and looking out on a world of high-risk options, such concerns may be marginal, and significant investment in Argentina's shale resources is likely to continue. Many transactions in Argentina already work on a cash basis, including all of its oil and gas imports. 

Brazil - June preliminary:  Production built on high May output to exceed 2.3 mb/d, with crude and condensate production above 2.2 mb/d. This caps an outstanding quarter for the sector, with 2Q14 production up about 180 kb/d y-o-y. In addition to the start up of P-62 on Roncador in May, a new pre-salt well on the Caratinga field's P-48 platform, the end of maintenance on P-51 on Marlim Sul and an extended well test on Iara Oeste contributed to the rise in May and June output. Petrobras' Operational Increase Efficiency Programme (PROEF), which is a systematic approach to maintenance to improve the integrity and reliability of production systems, is yielding results (see the 2013 MTOMR). Operational efficiency averaged above 91% on all the company's production units in June, the highest level in several years. However, a fire on the small PNA-1 platform took offline about 2 kb/d from the end of July. July is estimated to be down somewhat on June's particularly successful month, but still at 2.3 mb/d.

With P-61 on the Papa Terra field to start up by the end of 3Q14, and the Cidade de Ilhabela and Cidade de Mangaratiba FPSOs to start up before the end of 2014, we expect y-o-y liquids growth of about 135 kb/d for 2014, to reach just under 2.3 mb/d.

Asia

China - June actual:  Chinese oil production continued its recent upward swing, rising some 80 kb/d on the month to 4.3 mb/d (of which about 35 kb/d is from CTL projects). Some of the increase has come about as Chinese operators coax another 2 kb/d-4 kb/d of incremental production each month out of the country's numerous mature onshore fields. For example, PetroChina Lioahe Oilfield Company (a subsidiary of CNPC) put into production 179 new wells on the large Liohe field in 1H14 in order to obtain output in June of 210 kb/d, less than 10 kb/d higher than January, given rapid declines on mature wells on that field. On the Changqing field, China's third-largest by crude oil output, the situation is different. Although parts of the field have been in production for a long time, the challenging local landscape, depth of the reserves, and complicated geology (e.g. ultra-low permeability) have meant that much of Changqing's 24 billion barrels of proven reserves (according to PetroChina, though this seems more likely an estimate of reserves in place) are still untapped. On Changqing, PetroChina has adapted a strategy of letting its business units bid against each other on well development, as well as using private contractors on some tasks, which has lowered costs and increased output. Production on the field has increased by about 50 kb/d since the end of 2012, to 510 kb/d in June, and is forecast to add another 40 kb/d of incremental production by the end of 2015. Small new offshore developments are also contributing. At the end of July, the Panyu 10-2/5/8 fields in the Pearl River Estuary basin started up, eventually adding nearly 15 kb/d. Chinese oil production is expected to average a bit over 4.2 mb/d for 2014, up 60 kb/d on the year.

Former Soviet Union

Russia - June actual, July preliminary: Russian total liquids output dropped to under 10.8 mb/d in July, as NGLs and condensates fell by 110 kb/d, and crude oil by 60 kb/d, m-o-m. Some of the decline is seasonal, as Gazprom's summer natural gas output drops (in response to lower demand) and July is nearly always the lowest month of the year for Gazprom gas condensate output. Nevertheless, a tipping point may have been reached where instead of new field production slightly outpacing declines on mature fields, as was the case in 2013, the opposite seems to be occurring in 2014. Declines are very small, however, compared to the size of Russian crude oil production, and output is expected to remain at around 10.1 mb/d for the remainder of the year, such that the yearly average will still slightly exceed that of 2013.

On 31 July, the European Union (EU) adopted certain sanctions that affect new contracts related to Russia's oil sector, in response to perceived Russian destabilising actions in Ukraine as well as Russian connections to rebels who are alleged to have shot down a civilian airliner. The oil sanctions, explicitly not retroactive, affect new exports and investments by EU-based entities in deep water, arctic, and non-conventional (shale) exploration and development. However, the conventional oil sector, as well as the natural gas sector, are unaffected. US sanctions, published on 6 August, appear to be more comprehensive than EU sanctions, affecting a broader scope of investment, with both the natural gas and oil sectors targeted. Existing agreements, however, are also exempted. The omission of the natural gas sector from sanction by the EU will likely mean that technological transfer and investment on shale plays will not be as greatly impeded as would otherwise be the case. This is because much of the technology overlaps and also because it can be difficult for regulators to draw a distinction. In any event, given the exemption of existing contracts and investments, the implications for Russian production are more in the medium-term, which would also necessitate the sanctions staying in place for some time. EU sanctions are set to expire in one year, unless an explicit decision is taken to renew them by the European Council. In the short term, a perception of higher risk could make some Russian companies more conservative in terms of their capital spending. Rosneft could also find that its acquisition (currently in process) of Morgan Stanley's energy trading practice is less valuable, as the company's ability to function as an oil trading company in the West is limited in some ways.

For 2015, crude oil production is expected to decline by about 80 kb/d, as declines outweigh new production a bit more than in 2014. Companies such as Slavneft and Tatneft are expected to experience output drops, and Rosneft's base production in West Siberia is forecast to fall as well. Rosneft's Vankor field appears to have plateaued at 440 kb/d since the start of 2014, with little scope for increase until associated fields are developed starting in 2016. Since the company's acquisition of TNK-BP in 2013 (the IEA began counting it as a single company in terms of production in September 2013), Russia's largest producer by far has had flat or falling quarterly output.  Foreign companies also play a role in expanding output - one of the most important contributors to new Russian production in 2015 will be the ExxonMobil-operated Arkutun-Dagi field, part of the Sakhalin-1 project, which is expected to reach 80 kb/d by the end of 2015. 

FSU net oil exports inched up by 70 kb/d in June after crude exports slumped to 6.0 mb/d (-100 kb/d m-o-m), their lowest level since November 2008 as FSU refinery throughputs increased by 160 kb/d to a record 7.2 mb/d, increasing regional crude demand. Shipments from Baltic ports fell by 200 kb/d m-o-m as liftings from Primorsk and Ust Luga were curbed by 70 kb/d and 120 kb/d, respectively. Despite this slump in Baltic shipments, Urals delivered from Baltic ports remained at a heavy discount to Urals delivered via Black Sea ports throughout June. One likely reason for this was a weak market for crude in Northwest Europe as refinery runs remained extremely low amid maintenance and weak margins. This weak market likely resulted in regional producers choosing to ship more crude via other routes, thereby amplifying the drop in Baltic volumes.



In the East, shipments via the ESPO line remained relatively stable at a combined 780 kb/d while 140 kb/d continues to be shipped to China via Kazakhstan through the Atasu-Alashankou pipeline. Elsewhere, combined volumes from Sakhalin 1 and 2 reached 305 kb/d, their highest level for four months. Outside of Russia, flows through the BTC pipeline rose by 110 kb/d to 640 kb/d after increasing volumes of Kazakh crude continued to be sent via the line. Reports suggest that BTC volumes are likely to slip in the 3Q14 as ACG fields are scheduled to undergo maintenance.

Refined products increased by a combined 180 kb/d in May in tandem with the increasing regional refinery activity. Fuel oil shipments surged by 230 kb/d, despite reports of extra product being destined for Russian bunker markets, which offset a 100 kb/d drop in shipments of 'other products'. The fall in 'other products' largely resulted from lower naphtha exports, which were likely curbed in response to weak European markets and limited opportunities to ship product to Asia.

OECD stocks

Summary

  • OECD commercial holdings replenished by 88 mb over the second quarter, the largest quarterly build since 3Q06 and equating to 970 kb/d. Over the first half of the year inventories rebuilt by 104 mb clawing back a large chunk of the steep 134 mb 4Q13 draw.
  • OECD industry stocks posted their sixth consecutive monthly build in June as they increased by a steep 13.8 mb to stand at 2 671 mb at end-month, their highest level since September 2013. Inventories' deficit to the five-year average narrowed to 42.1 mb from 52.0 mb at end-May. The deficit now stands at its smallest since October 2013 and remains centred in OECD Europe.
  • Stocks of refined products covered 29.3 days of forward demand at end-June, 0.3 days above end-May though still 0.5 days below one year earlier.
  • Preliminary data for July indicate that OECD inventories continued to replenish in July as they posted a further 14.3 mb build after a rise in 'other products', centred in the OECD Americas, more-than-offset a draw in crude oil. Since the increase was in line with seasonal trends, the deficit of inventories to the seasonal average remained at 42 mb.

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

OECD commercial inventories extended recent gains, posting their sixth consecutive monthly build as they increased by 13.8 mb to stand at 2 671 mb at end-June, their highest level since September 2013. This brings total building since their recent end-December 2013 low through to 99 mb, still short of clawing back the 134 mb which drew in 4Q13. At end month, stocks stood 10.1 mb above one year earlier, while May stocks were revised upwards to a 4 mb surplus over the previous year, marking the first time that stocks have stood above year-earlier levels since April 2013.

OECD industry stocks replenished by 88 mb over the second quarter, the largest quarterly stock build since 3Q06 and equating to a rate of 970 kb/d. However, total OECD stocks built by 81 mb after they were tempered by a 7.2 mb decline in OECD government stocks stemming from the recent 5 mb test sale of crude from the US Strategic Petroleum Reserve and some limited destocking in OECD Europe.

Since the June build was steeper than the 4.0 mb five-year average build for the month, inventories' deficit versus the five-year average narrowed to 42.1 mb from 52.0 mb at end-May. The shortfall now stands at its smallest since October 2013 and remains centred in OECD Europe where inventories stand 59.3 mb below average while stocks in OECD Asia Oceania sit a 12.7 mb deficit. The surplus of stocks in the OECD Americas increased to 29.8 mb, its widest since October 2013.

As with May, the June stock build was driven by the restocking of 'other products' in the OECD Americas (mainly US ethane and propane inventories). Although stockholders typically replenish these products at this time of year as heating demand diminishes, in June, the 26.9 mb surge was more than double the five-year average build for that month and 10 mb more than the rise posted in June 2013. Crude oil stocks built unseasonably by 4.8 mb, centred in OECD Europe as refinery throughputs there remained low against a backdrop of maintenance and depressed margins.



Despite the replenishment of 'other products', OECD refined product inventories remain tight by historical standards, standing 62.3 mb below average levels. In June, middle distillates stocks slipped by 9.6 mb, over twice the seasonal average draw, while inventories of fuel oil and motor gasoline dropped by 4.3 mb and 0.7 mb, respectively. All told, at end-June refined products holdings covered 29.3 days of forward demand, 0.3 days above end-May but 0.5 days below one year earlier.

Upon the receipt of more complete data, May inventories were adjusted upwards by 17.7 mb. Therefore, the 44.2 mb May stock build reported in last month's report is now seen at 59.0 mb, considerably steeper than the 7.7 mb five-year average build for the month. The largest upward revision of 11.6 mb was made to crude oil in the OECD Americas. OECD refined products holdings were adjusted upwards by 1.2 mb, although this obscured a significant downward revision in OECD Americas which was counter-balanced by a 9.4 mb upward adjustment to Europe.



Preliminary data for July indicate that OECD inventories continued to replenish in July as they posted a further 14.3 mb build. Since this was in line with the 14.5 mb five-year average build for the month, the shortfall versus the seasonal average remained at 42 mb. Soaring 'other product' stocks, centred in the OECD Americas, drove inventories higher. Crude oil holdings dropped by 6.0 mb, although divergent trends were apparent between OECD regions; while stocks in the OECD Americas dropped in line with a ramping up in refinery throughputs, those in OECD Europe soared after refinery activity remained depressed compared to a year earlier. 

Analysis of Recent OECD Industry Stock Changes

OECD Americas

Industry stocks in the OECD Americas rose by 15.6 mb in June, considerably steeper than the 9.0 mb five year average build. Surging 'other products' holdings boosted stocks as they rose by 25.5 mb on the month as stocks of propane and ethane built in tandem with soaring natural gas production. This increase was significantly steeper than the 9.7 mb five-year build for the month and nearly double the 13.0 mb rise posted one-year earlier. This build is even more impressive given that US propane exports have averaged over 300 kb/d in recent months, 100 kb/d above year-earlier levels. One likely reason for the steep build is that reportedly, throughputs of propane into US petrochemical plants have dipped in recent months following a number of shutdowns.



Crude oil stocks fell by 5.4 mb in June as regional refiners hiked throughputs by a further 120 kb/d from May. Despite this draw, crude holdings have now stood above the seasonal range for a second consecutive month. Total oil inventories currently sit 29.9 mb above average, their widest margin since October 2013. Following recent builds the only product category which remains at a significant deficit (20.8 mb) versus the five-year average is middle distillates, stocks of which drew counter-seasonally by 0.2 mb in June. All told, refined products inventories built by a steep 24.0 mb in June to cover 28.8 mb at end-month, 1.1 days above end-May and 0.1 days below one year earlier.



Preliminary weekly data from the US EIA suggest that stocks there inched up by a weak 1.4 mb as a further, steep 20.3 mb build in 'other products' was tempered by 18.1 mb slump in crude oil holdings. Crude stocks plunged in tandem with a 760 kb/d hike in refinery throughputs, as refiners, notably on the Gulf Coast and in the mid-continent, ran at high utilisation rates. Inventories of NGLs and other feedstocks drew by a further 1.3 mb.

The draw in crude oil was centred on the Gulf Coast where stocks drew by 7.9 mb, but PADD 2 inventories also fell by 5.5 mb, with inventories at the Cushing, Oklahoma storage hub dropping by 2.7 mb to leave stocks there sitting below 18 mb for the first time since November 2008. The steady draining of the hub over July helped support NYMEX WTI with WTI margins for midcontinent refiners considerably weaker than those for other US domestic grades.

OECD Europe

Commercial inventories in OECD Europe remain notionally tight as they slipped by 0.6 mb to stand at 885 mb at end-June, but less so in view of the fact that both demand and refinery throughputs have been on a declining path in Europe. Since the draw was less than the 5.3 mb five-year average draw for the month, the region's deficit versus seasonal levels narrowed to 59.3 mb from 64.0 mb one month earlier. Inventories also stand 11.2 mb above one year earlier. Crude oil built counter-seasonally by 4.6 mb and buttressed total inventories as refinery intake remained extremely low amid depressed margins and ongoing maintenance.



The low refinery activity pressured product stocks downwards as they drew by a steep 5.8 mb with only 'other products' posting a build (0.7 mb). Middle distillates continued on their recent downward trajectory, drawing by 5.3 mb on the month to leave inventories standing at a 24.3 mb deficit to seasonal levels. On an absolute basis, middle distillates' holdings remain 0.4 mb above year-ago levels but following a marginally more positive demand prognosis compared to a year-ago, they cover 0.3 days less of forward demand. At end-June regional refined products holdings covered 54.0 days of forward demand, 1.1 days lower than end-May. This is the lowest amount of cover for three years.

Preliminary data from Euroilstock indicate that European inventories climbed by 10.4 mb in July, counter-seasonal to the 1.4 mb five-year average draw for the month. Stocks were pushed higher as regional crude inventories soared counter-seasonally by 11.0 mb after, despite a slight month-on-month uptick, refinery runs remained lower compared to a year earlier. Low refinery activity also resulted in product stocks slipping by a combined 0.6 mb after draws in 'other products' (-0.9 mb) and middle distillates (0.8 mb) offset builds in fuel oil (0.6 mb) and motor gasoline (0.4 mb).

OECD Asia Oceania

Asia Oceania industry stocks inched down counter-seasonally by 1.2 mb in June after a steep 5.9 mb drop in refined products pressured stocks downwards. As a result, the region's deficit to the five-year average widened to 12.7 mb from 11.2 mb at end-May. The fall in refined products' inventories stemmed from a 140 kb/d drop in refinery throughputs as they hit a seasonal maintenance-affected low. Crude oil provided some offset, as stocks rose by 5.6 mb, over twice the average build while NGLs and other feedstocks slipped by 0.9 mb. On a product-by-product basis, inventories of all refined product categories bar 'other products' (+0.7 mb) posted draws. Notably, middle distillates holdings declined by 4.0 mb, ten times the seasonal draw for the month, to stand at a 7.6 mb deficit to the average. At end-month, refined products' holdings covered 23.9 days of forward demand, 1.0 day below one month earlier.



Preliminary data from the Petroleum Association of Japan (PAJ) suggest that Japanese inventories rose by 2.5 mb in July. Stocks of all oil categories posted builds bar motor gasoline (-0.5 mb) and 'other products' (-0.7 mb). Motor gasoline stocks have now been on a downward course for the past two months and by end-July stood at their lowest absolute levels since December 1991 and 2.7 mb below the five-year average. Crude oil built counter-seasonally by 1.0 mb, as despite refinery throughputs ramping up strongly in the second half of the month, crude imports likely remained high. Inventories of NGLs and other feedstocks rose counter-seasonally by 1.2 mb.

Recent Developments in Singapore and China Stocks

According to data from China Oil, Gas and Petrochemicals (China OGP), Chinese commercial crude stocks drew by an equivalent 5.7 mb over June (data are reported in terms of percentage stock change) as refiners came out of seasonal maintenance. Taking into account the reported stock change, crude supply (production and net imports) and refinery runs, the implied unreported stock change fell to zero in June, thereby signifying an abrupt halt to the filling of China's Strategic Petroleum Reserve. It is now estimated that China added 67 mb of crude to the SPR over the second quarter. Moreover, China OGP, published by the state controlled Xinhua news agency, reported in early-August that a part of 1H14 crude imports were destined for national strategic petroleum reserves. As refinery output increased in June, commercial product stocks rose by a combined 1.1 mb. Gasoline stocks rose by 2.7% (1.9 mb) while kerosene inventories increased by 4.3% (0.6 mb). On the other hand, gasoil holdings fell (-1.4 mb) for the fourth consecutive month.



Data from International Enterprise pertaining to land-based refined product inventories in Singapore indicate that  stocks there plummeted by 6.0 mb during July, marking the steepest monthly decline since May 2010. Falling residual fuel stocks (-4.0 mb m-o-m) pressured total stocks lower after bunker fuel demand reportedly picked up as prices fell in tandem with easing crude. Middle and light distillates inventories slipped by 1.1 mb and 0.9 mb, respectively, as Asian refinery maintenance curbed exports to the territory and caused some states, notably in Southeast Asia, to increase their imports from the territory.


Prices

Summary

  • Crude prices fell in July as plentiful supply in the wake of weak refinery demand in June eased concerns that escalating conflicts in Iraq, Libya and Ukraine would threaten the market balance. At the time of writing, ICE Brent was below $105/bbl - $10/bbl off the mid-June peak hit when Islamist militants began their advance through northern Iraq - as confidence grew that US air strikes would lower the risk of supply outages in OPEC's second largest producer. NYMEX WTI was around $98/bbl.
  • Hedge funds dramatically slashed their net long exposure to ICE Brent in July, after having built to record highs on the back of the turmoil in Iraq, as price gains did not materialize. Overall open interest collapsed, especially on the front end of the curve, and now sit at their lowest since January 2013, amid record-high trading volume.
  • Weak refining margins in Europe and Asia suppressed demand for crude, with the resulting overhang of Atlantic Basin and West African barrels weighing on spot markets - deflating North Sea Dated Brent prices and narrowing their premium versus WTI and Dubai. Russian Urals also firmed against Brent as European refiners anticipated reduced loadings in August.
  • Surveyed spot product prices slipped across the board, mid-July to early August as product markets remained weak amid plentiful supply. Nonetheless, cracks in Europe and Singapore generally firmed as benchmark crudes came off their recent highs. On the other hand, cracks on the US Gulf Coast weakened as LLS strengthened after PADD 3 refinery runs ramped up to record highs.

Market Overview

Oil prices declined month-on-month (m-o-m) in July, as surplus barrels from West Africa and the Atlantic Basin pressured markets despite escalating conflicts in Iraq, Libya and Ukraine that threaten to disrupt supply. ICE Brent futures were down by $3.78/bbl to $108.19/bbl while NYMEX WTI lost $2.76/bbl to average $102.39/bbl. Brent fell further - to below $105/bbl at the time of writing - as confidence grew that US airstrikes in Iraq would help contain the advance of Islamist fighters in the major OPEC producer. NYMEX WTI was around $98/bbl.

Reflecting the easing demand pressure on physical markets, North Sea Brent flipped into contango - where front-month futures trade at a discount to later months. In mid-July, front month Brent traded at more than a $1/bbl discount to September futures - the widest spread between the first two months in four years. At the same time, the Brent M1-M12 spread narrowed to $2.06/bbl in July versus $5.55/bbl in June. By contrast, US WTI was in backwardation, with front month futures at a premium to the second month contract. Record high US refinery run rates lent support (see 'Refining' section).

Prior to the US airstrikes, Brent futures surged towards an intraday high of $107/bbl as the dramatic advance by Islamist fighters in northern Iraq spooked the market. Militant attacks on Iraq's northern oil infrastructure have already sharply curtailed flows from the giant Kirkuk field and Islamist fighters are advancing on oil blocks in the Kurdish region (see 'Iraq's Northern Strife'). Iraq's prized southern oil fields, which pump virtually all the country's exports, so far remain insultated from the insurgents. Exports of Basrah Light from southern Iraq held steady in July and shipments from Libya bumped higher. Weak refining demand in Europe and Asia increased the pressure - leaving cargoes from the North Sea and West Africa in search of a home.



Oil prices barely reacted to the West slapping tougher sanctions on Russia over what Washington called "continued provocations in Ukraine". The front-month ICE Brent-Nymex WTI spread shrank further in July, averaging $5.80/bbl compared with $6.82/bbl in June - mostly due to the over-arching weakness in Brent. By the time of publication, however, Brent's premium to WTI was around $7/bbl.


Futures Markets

July was one of the most active months for the ICE Brent futures market. After having built to record high on the back of Iraq turmoil, overall open interest in ICE Brent collapsed in July, just shy of a 20% drop from its 1.65 mln contracts peak in late June. At the time of writing, overall open positions are sitting at their lowest since January 2013. By and large, the majority of the drop happened on the very front portion of the curve, namely the first five months, which alone shed more than 280 000 contracts from the late June peak.



Hedge funds dramatically slashed their net long exposure to ICE Brent, leading to the largest drop in net positions on record.  Contracts declined by about 110 200 during the month, of which 48 000 in the period between 8 and 15 July alone, the biggest weekly decline registered to date.

Put in relative terms, the 'long-to-short' ratio plunged from an historical peak of nearly 3-to-1 to a much more modest 2-to-1 ratio. Money managers operating in NYMEX also reduced their long stance in WTI from almost record-high levels, albeit less dramatically than their London counterparts.



Monthly trading volumes were at record highs for Brent, posting a 22% gain on the month and 30% y-o-y, to surpass the previous record by more than nearly 2 million trades. WTI also registered a strong 15% m-o-m gain but stayed below Brent for the third consecutive month.

On the products side, hedge funds reduced their buying of both heating oil and gasoil futures, eventually turning to a net short stance in NYMEX heating oil contracts in the second half of July, on the back of the general weak momentum for gasoil/diesel.





Financial Regulation

The US Commodity Futures Trading Commission (CFTC) issued no-action relief for swap dealers to report data for cleared swap contracts until 30 June 2015, as stakeholders requested more time in order to adapt their processes to the new requirement. The US agency is expected to finalize its rules on speculative position limits the coming autumn, after having reopened and then further extended public comment period until 4 August.

As the public consultation period closed on August 1, the European Securities and Markets Authority (ESMA) published the responses it received regarding its two 'discussion papers' on the technical standards for the main pillar of the EU financial reform, the Markets in Financial Instruments Directive (MiFID II). As the process proceeds, further public comment will be open from December 2014 to March 2015. The final standards are to be submitted to the European Commission by December 2015, while the legislation is planned to be phased in from 2016.

Spot Crude Oil Prices

Weak refining margins and ample supply piled pressure on spot prices for benchmark crudes in July, with global benchmark Dated Brent posting the biggest decline - down 4.5% m-o-m to an average $106.63/bbl. Spot prices for Dubai held up comparatively well, easing 1.8% to $106.12/bbl. Brent's sharp decline narrowed the gap between the North Sea benchmark and Dubai by $3.09/bbl to an average $0.51/bbl for July. WTI shed 2.2% to average $102.92/bbl, while sour Russian Urals was off 3.6% to $105.51/bbl for the month.



In Europe, markets for light sweet crude were under pressure on expectations that Libyan supplies would rise after the lifting of a year-long blockade at the Es Sider and Ras Lanuf terminals. Shipments for July rose versus June, although loadings have yet to resume from Libya's major terminals. Sluggish demand for sweet barrels in Europe pushed North Sea Ekofisk to a discount to Dated Brent from a premium of nearly $1.50/bbl in mid-June. Many West African grades sank to the lowest premiums versus Dated Brent this year.

Maintenance in the North Sea was expected to cut total loadings of Brent, Forties, Oseberg and Ekofisk (BFOE) to below 720 kb/d in August, more than 190 kb/d down on July (see 'the non-OPEC Supply' section). Supplies of Russian Urals were also expected to be reduced this month, reportedly due to the restart of Russia's Achinsk refinery. Urals firmed as a result, with its discount to Dated Brent narrowing to an average $1.12/bbl during July versus $2.16/bbl the previous month.



Crude trade in the US was more robust than in other markets, with soaring refinery use along the Gulf Coast supporting regional grades Mars and LLS relative to WTI. Sour Mars climbed from a discount to a premium to WTI, while light sweet LLS's premium to WTI strengthened. Rising output in Canada and limited pipeline capacity for exports widened the discount for heavy sour benchmark Western Canadian Select versus WTI.



Weak margins and a wave of crude from the North Sea, West Africa and the Caspian pressured spot market prices for Middle East grades in Asia. Russian light sweet ESPO Blend fell to a 15-month low relative to Dubai.


Spot Product Prices

Surveyed spot product prices slipped across the board from mid-July onwards as product markets remained weak amid plentiful supply. Nonetheless, cracks in Europe and Singapore generally firmed as benchmark crudes came off their recent highs. On the other hand, cracks on the US Gulf Coast weakened as LLS strengthened after PADD 3 refinery runs ramped up by about 550 kb/d m-o-m. The region also saw spot prices slide more steeply than elsewhere as the high refinery activity pushed extra products onto an already saturated market.



USGC gasoline cracks plunged by $6.0/bbl in July on average as the strength of LLS combined with an oversupplied market. However, by late month, cracks had arrested their decline as demand to ship product to the US East Coast strengthened. In Europe, cracks were supported as easing crude prices outpaced product price losses. However, from mid-month onwards, cracks changed course as spot gasoline prices retreated dramatically after import demand from the US East Coast waned while European demand remained weak. Cracks in Singapore initially received support from stock draws and tight supply but cracks eventually fell back as refinery throughputs rebounded.

European naphtha cracks briefly entered positive territory to hit a three and a half year high in early-July as demand from regional gasoline blenders and to export product to Asia remained high while product supply remained tight amid low refinery activity. However, as Asian spot prices weakened, the arbitrage to ship product eastwards narrowed with cracks slipping accordingly. Nonetheless, by early August, cracks remained on a par with the year earlier. A similar picture prevailed in Singapore as naphtha cracks there hit their highest level since 1Q13 on still rising Korean petrochemical demand and tight supply, but as refineries returned from maintenance cracks retreated to May levels.



European spot gasoil prices plunged in early-July on the back of weak regional demand and reportedly high supply as arrivals from the US and FSU remained elevated, The ICE gasoil contract moved into contango for the first time since 1Q13. In the Mediterranean, additional downward pressure came from lower exports to North Africa, exports to which have recently dwindled as gasoil production has risen on the completion of a number of Algerian refinery upgrades. USGC cracks plummeted to their lowest level in 15 months in mid-July on the back of high refinery production, limited export opportunities and stock builds. However, in late month the crack rebounded as LLS retreated and regional gasoil stocks drew.



Jet kerosene markets fared slightly better than gasoil in Europe as high summer demand buttressed spot prices with regional cracks firming by $3.15/bbl on average. This reportedly moved some European refiners to increase their jet kerosene yields at the expense of other middle distillates. Indeed, cracks continued on their upward trajectory into early-August despite reports of supplies arriving from Asia and the Middle East. In the US Gulf, cracks plummeted from $12/bbl to $6/bbl from mid-month onwards on firming LLS prices before roaring back to exceed $18/bbl by early-August as LLS weakened, the arbitrage to send product to East Coast markets widened and amid stock draws.

Freight

Rates for crude carriers strengthened during the second half of July, although by the end of the month rates had eased. Momentum built on the benchmark VLCC Middle East Gulf-Asia trade, with the rate coming rising above the $10/mt mark, to peak at $13.60/mt and before closing the month around $12.60/mt, as high Middle East loadings provided support. The benchmark Suezmax West Africa-US Gulf Coast rate firmed in the second week of July to surpass $25/mt, a spike unseen since January - then fell back to about $18/mt.

In Northwest Europe, rates for Aframax firmed in mid-month on stronger activity in the North Sea and Baltic, with support coming from the Caribbean Aframax market. Rates surged to the highest level since January, but the market lost steam after cargoes got covered.



Rates on product tankers were relatively steady except for the Aframax Middle East - Japan route which saw rates ramp up in the second half of July to the highest since August 2013. Monthly loadings were at the highest since January 2008, reportedly driven mostly by naphtha, as Japanese refiners ran at very low rates - increasing import demand from the petrochemical sector.

The 38kt Caribbean - USAC route posted stronger rates as the gasoline arbitrage window opened. The Caribbean-USAC route had a knock-on effect on the 37kt UK-USAC route - prompting ship owners even to fix at a discount to bring vessels to the East Atlantic.

Refining

Summary

  • Global refinery activity saw diverging trends in June, with a counter-seasonal fall in OECD throughputs contrasting with record-high runs in several key non-OECD countries. OECD refinery crude oil intake plunged by 1.9 mb/d from a year earlier. In contrast, throughput levels in China, Brazil, Russia and Saudi Arabia hit record highs. Global refinery runs are now estimated at 76.5 mb/d for 2Q14, up 1.3 mb/d year-on-year (y-o-y), and 0.2 mb/d higher than in our last Report.
  • The forecast of global refinery runs for 3Q14 is unchanged at 77.8 mb/d. While throughputs are rising seasonally through August, annual gains are expected to ease to 0.6 mb/d, in part due to a high baseline last year. Global refinery output exceeded product demand in recent months, keeping a lid on refinery margins and leading some refiners to scale back runs.

  • OECD refinery runs plummeted counter-seasonally in June to 35.7mb/d, a steep 1.9 mb/d y-o-y drop. In Japan, the effect of peak seasonal maintenance was compounded by reductions in capacity, sending runs to 25-year lows. Unscheduled outages took US throughputs lower, while persistently poor European margins, despite several plant closures, led European refiners to scale back runs. Preliminary data show US and Japanese activity rebounding in July, and European refinery runs rising seasonally.
  • Refinery margins continued their rebound into early-July after low OECD refinery runs in June helped to tighten supply and push up product prices. However, this upward momentum was short-lived. From mid-July onwards, margins retreated steeply after refiners increased throughputs. On a monthly average basis, margins in Europe and Singapore rose after benchmark crude prices weakened, while US refiners were negatively affected by the relative strength of domestic grades.

Global Refinery Overview

After months of robust growth, a counter-seasonal decline in OECD throughputs in June caused global refinery crude runs to contract y-o-y for the first time since October 2013. OECD refinery activity slumped as economically motivated run cuts compounded the effect of scheduled and unscheduled outages and refinery closures to take total throughputs 1.9 mb/d below the previous year. Both US and Japanese runs fell short of expectations due to high offline capacity. Japanese runs were at their weakest in 25 years, and US refiners missed their seasonal upswing ahead of the summer driving season as storms in the Gulf Coast caused unplanned outages. European refinery runs, meanwhile, contracted by 1.1 mb/d y-o-y, their steepest deficit in nine months.

In contrast, non-OECD throughputs showed remarkable strength in June, with several large refining countries posting record-high throughputs. Chinese refinery runs hit new highs in June of some 10.2 mb/d. After months of subdued runs, a monthly increase of 675 kb/d took runs 5.3% above year-earlier levels. Industry surveys of refinery plans suggest that the surge could have been temporary, however, and that operators already started scaling back runs in July. Russian crude runs also hit an all-time high in June at close to 6.0 mb/d. For the first half of 2014, Russia increased crude processing by 380 kb/d, or 7.1%, and exported most of the incremental output. As in China, refinery activity was pared back in July, earlier in the season than usual. After a brief respite in May, Brazilian refinery runs bounced back to record highs in June. Lastly, Middle Eastern throughputs, led by Saudi Arabia, surged in May (the most recent month for which data are available) to their highest level yet - almost 1 mb/d higher than a year earlier. Our estimates peg them higher still in June and coming months.



Preliminary data for July show both US and Japanese refinery runs rebounding steeply. Weekly data show US refinery runs reaching a record high of 16.5 mb/d for the month on average, a full 720 kb/d increase from the previous month. Japanese refinery throughputs also rebounded, while a recovery in margins in early July likely lifted European runs. Preliminary data released by Euroilstocks on 11 August indicate European runs remained firmly below year-earlier levels, though rising seasonally..

While recently announced capacity reductions by Italy's Eni had been largely expected, the news in late July that privately-held Klesch Group had agreed to buy the Milford Haven refinery in the UK from Murphy Oil and save it from closure came more as a surprise.

Refinery Margins

Refinery margins continued their rebound into early-July after low refinery runs in June put downward pressure on crude prices and helped to tighten product supply and push up product prices. This upward momentum was short-lived, however, as from mid-July onwards margins retreated sharply after refiners increased throughputs and product prices weakened again. Nonetheless, on a monthly basis, margins in Europe and Singapore rose after benchmark crudes there weakened, while US refiners were negatively affected by the relative strength of domestic grades.



Northwest European refining margins strengthened by $1.65/bbl on average in July as Brent and Urals came off their recent highs amid low regional runs. Margins peaked in mid-month as regional throughputs reached a likely nadir, only to slip again as refiners subsequently came back. Although Brent margins improved more than Urals margins on a monthly average basis, Urals margins at complex refineries surpassed those for Brent in mid-month to briefly exceed $7.50/bbl, their highest since 1Q13. One reason for this was low regional demand for Urals, which saw its differential to Brent narrow sharply. While crack spreads weakened for light products, refiners benefitted from strength in the middle of the barrel, notably for jet kerosene, regional demand for which remained relatively strong.

Refiners in the Mediterranean posted the strongest gains among surveyed markets. Margins in the region rose by $2/bbl on a monthly average basis as the weakening of benchmark grades outstripped declines in product prices. The resumption of limited Libyan exports saw Es Sider weaken by $5/bbl on average over the month while Urals dropped by $4/bbl. As in Northwest Europe, margins for more complex refiners benefitted from jet kerosene prices which held up well compared to other middle and light distillates. In contrast, gains for simple refiners were muted due to their exposure to depressed fuel oil markets.



In Singapore, margins improved by $1.65/bbl on average, but lost ground after peaking in mid-month as refiners likely hiked throughputs. Refiners running sour Dubai were at a distinct disadvantage after the grade held its price better than Malaysian Tapis, which weakened due to a reported high number of unsold light, sweet West African cargoes in the region. Thus, Dubai margins firmed by just $0.06/bbl on average, compared to gains of $3.20/bbl for Tapis. Complex refiners running Tapis saw their margins rise by an even steeper $3.50/bbl over the month as product prices at the light end of the barrel held up better than those at the middle and bottom.



In the US, refiners saw margins weaken as crude prices strengthened with surging refinery throughputs. On the Gulf Coast, the Mars cracking margin plummeted into negative territory for the first time since March as the grade strengthened by $5.70/bbl and gasoline and fuel oil cracks declined. At the time of writing, cracks had returned to positive territory as Mars weakened once again. In the Midcontinent, refiners running WTI saw margins slump below $10/bbl, their lowest levels since January, as the grade took strength from a drop in inventories at the Cushing, Oklahoma storage hub to their lowest level in over five years. In comparison refiners running Bakken and West Canada Select (WCS) saw their margins buttressed as these grades inched down across the month, but refiners were nonetheless negatively affected by product price falls.

OECD Refinery Throughput

OECD refinery crude intake fell 380 kb/d in June, to average 35.7 mb/d, with declines in Europe and Asia Oceania partly offset by a slight increase in the Americas. The slump in refinery activity was counter-seasonal, causing total OECD throughputs to plunge by a massive 1.9 mb/d below year-earlier levels. The steepest declines came from Europe, where refinery runs fell by 360 kb/d on the month and 1.1 mb/d on the year. At 10.9 mb/d, regional runs were at their lowest since last October. Throughputs fell short of year-earlier levels also in Asia Oceania and the Americas, by 620 kb/d and 180 kb/d, respectively.



While OECD refinery activity continues to be weighed down by poor margins and weak underlying demand, June's poor showing is expected to be temporary as it was amplified by exceptionally high outages in the US and Japan, both scheduled and unscheduled. Japanese runs plummeted to 25-year lows as heavy maintenance and recently completed refinery shutdowns curbed activity. US throughputs fell short of expectations as storm damage caused unscheduled outages on the Gulf Coast.



Indeed, preliminary data for July point to a sharp rebound in both US and Japanese throughputs. The former surged by 720 kb/d to 16.5 mb/d, their highest on record, while Japanese refiners increased intake by 460 kb/d on average, to 3.0 mb/d. Recently released data from Euroilstocks show European refiners also lifted runs in July as maintenance was completed and margins improved somewhat early-month. In all, we now estimate regional runs look to have risen by 560 kb/d in July to 11.4 mb/d, and OECD runs to have risen 1.8 mb/d to 37.5 mb/d.

The monthly increase in US throughputs in July stemmed largely from a rebound on the Gulf Coast, accounting for 75% of the gains (or 550 kb/d). PADD 3 throughputs had been surprisingly low in June as unscheduled outages compounded the effect of planned maintenance. Amongst others, Marathon had to shut one of two crude units at its 522 kb/d Garyville refinery at the end of May, as a tornado damaged a cooling water system supporting the unit. Exxon's Beaumont refinery also only resumed full rates at the end of June, after having completed a seven-week overhaul of the plant's 240 kb/d sour crude distillation unit.



On average, US Gulf Coast refiners pushed utilisation rates to 95% in July, while Midcontinent operators averaged 97% for the month, and even pushed plants to 100% in mid-month. Such rates are not seen as sustainable over time, and indeed the most recent data show operating levels came down towards the end of the month. A fire at CVR Energy Inc's 115 kb/d Coffeyville, Kansas, refinery on 29 July lowered runs in the Midcontinent. The fire was quickly extinguished but led to a drop in US crude prices, as the plant, located near the Cushing storage hub, is a large consumer of WTI. The company said that it could be shut for four weeks.



European refinery runs plunged 360 kb/d, to 10.9 mb/d, in June, their lowest since October 2013 and a massive 1.1 mb/d below year-earlier levels. France, Germany and the UK all saw runs some 200 kb/d to 300 kb/d below the previous year. The month-on-month (m-o-m) decline stemmed from Germany (-160 kb/d), the UK (-90 kb/d), Greece (-65 kb/d) and Belgium (-45 kb/d). Total was reported to have halted its 227 kb/d Leuna refinery in Germany for a six-week period starting in early June.



UK throughputs were curbed by the shutdown of Murphy Oil's 135 kb/d Milford Haven refinery in May, after the company failed to strike a deal with the London-based private equity fund Grey Bull. At the end of July, however, Murphy Oil announced that it had reached an agreement to sell the plant to the Swiss-based Klesch group. The deal is expected to be completed by 31 October, after which the refinery is set to resume operations. Also in the UK, India's Essar is reportedly going ahead with plans, first announced in February, to mothball 100 kb/d of capacity at its 296 kb/d Stanlow refinery later this year.

While a seasonal uptick in European refinery throughputs was expected for July, regional refinery activity will likely remain subdued through 3Q14, as refinery margins remain under pressure. A short-lived recovery in regional benchmark margins in July was not enough to sustain higher throughputs near year-earlier levels. Preliminary data from Euroilstocks show regional runs increased seasonally as expected, though runs remained firmly in contractionary territory compared with the previous year. In early August, BP closed one of two 200 kb/d crude units at its Rotterdam refinery for maintenance. Statoil's Mongstad refinery and Repsol's Cartagena refineries are among plants planning shutdowns in September/October.

Italy's Refining Industry Restructuring yet to Run its Course

Italy's refinery industry has long been under pressure due to declining domestic demand and increased competition from competitors abroad. Eni's latest strategic plan, calling for the closure or conversion of a further three refineries, reducing the company's refining capacity by more than 50% (from a previous plan of a 35% reduction), nevertheless came as a blow to the industry and employees who see Italy's entire industrial future at risk. Italy's three largest oil industry unions promptly called for a one-day strike on 29 July for all of Eni's domestic employees in protest of the plan.

The restructuring of Italy's refinery industry has already started, with four plants shut or converted since 2011. Eni closed its Porto Marghera refinery in Venice in 2013, and subsequently converted it to a green refinery. The plant now processes domestic and imported biofuels into green drop-in biofuels, mainly green hydrotreated vegetable oil (see 'A New Green Start for Italy's Venice Refinery' in OMR dated 11 April 2014). The company's Gela, Sicily, refinery has also been partially shut since March 2014, after earlier plans to invest $700 million to upgrade the plant were abandoned. Other companies have shut or converted a further three plants since 2011, including Tamoil's Cremona plant, Raffineria di Roma's Rome refinery and most recently MOL's Mantova plant. Including Porto Marghera, crude processing capacity has been cut by a total of 330 kb/d. Yet, Italy still has 11 operating fuels refineries (not including Alma's Ravenna bitumen refinery), with combined primary distillation capacity of 1.8 mb/d. Some of those plants are relatively small and unsophisticated. Eni's recently announced plan to idle another three refineries, assuming they are indeed shut or converted into terminals rather than sold,

would reduce Italy's primary distillation capacity to 1.6 mb/d, still up on current demand estimates for 2014 and 2015 of around 1.2 mb/d.

Meanwhile, product exports have fallen from 640 kb/d in 2007 to 500 kb/d in 2013, and 390 kb/d for the first five months of 2014. On a net basis, product trade has fallen from net exports of 390 kb/d in 2007 to net exports of 245 kb/d in 2013 on increased competition from Russia, Asia, the Middle East and the US, and declining demand in key export markets in OECD and non-OECD Europe. So however disruptive and difficult to accept recent and planned capacity closures might be for those directly affected, on balance it looks like consolidation in Italy's refining industry might not have run its course just yet.


Crude throughputs in OECD Asia Oceania extended earlier declines in June, taking regional runs to their lowest level since June 1995. The monthly declines of close to 0.3 mb/d in Japan was partly offset by increased runs in Australia where two refineries had been in maintenance in May. Australian throughputs will be curbed again in the second half of this year, after Caltex completes the shutdown of its 125 kb/d Kurnell refinery. After plunging to 25-year lows in June, Japanese refinery runs rebounded sharply in July, to 3.0 mb/d, according to preliminary weekly data (adjusting for NGLs).


Non-OECD Refinery Throughput

As 2Q14 data continues to trickle in, non-OECD refinery throughputs look set to post annual gains of nearly 1.6 mb/d for the quarter and 1.4 mb/d for 1H14 on average. Most recent data showed several countries processing record amounts of crude in June, a month when OECD refinery activity surprised to the downside. After months of subdued activity, Chinese refinery runs surged by 675 kb/d m-o-m, to a record high. Russian and Brazilian refinery throughputs also hit new highs, shooting up by 200 kb/d and 180 kb/d, respectively. Saudi Arabian refinery runs reached a record level in May, and likely increased further in June, lifting regional runs almost 1 mb/d above a year earlier. In all, 2Q14 non-OECD refinery crude runs averaged 40.4 mb/d. While runs are forecast to rise to 40.7 mb/d in 3Q14, annual growth eases from 1.6 mb/d in 2Q14 to 0.7 mb/d in 3Q14. 



Chinese refinery throughputs rose to record 10.2 mb/d in June, 0.2 mb/d higher than our previous forecast, from 9.5 mb/d in May. Refinery maintenance was scaled back from the April-May period, when an average of around 900 kb/d of capacity was offline, to only around 400 kb/d of capacity shut in June. While maintenance schedules and refinery shutdowns were relatively unchanged from June to July, company surveys indicate refiners throttled back runs in July, in due in part to weak underlying demand and poor margins. Maintenance work at PetroChina's Lanzhou and Jinzhou refineries was also expected to curb runs in July and into early August.

Indian refiners boosted crude runs to 4.5 mb/d in June, from 4.3 mb/d a month earlier. The increase came despite maintenance work at IOC's 300 kb/d Panipat and 275 kb/d Koyali refineries during the month. Throughputs are expected to have fallen in July, as Essar had to reduce activity at its Vadinar refinery, due to repair work on a pipeline feeding the plant. A fire on 20 June also forced the shutdown of BPCL's 180 kb/d Bathinda refinery, after which the management decided to move up maintenance scheduled for later in the year. On the other hand, BORL postponed maintenance for its 120 kb/d Bina refinery from September this year to early 2015.



Middle Eastern refinery crude runs posted annual gains of almost 1 mb/d in May, averaging 6.5 mb/d in total. Growth stemmed largely from Saudi Arabia, whose new 400 kb/d Jubail refinery is ramping up to capacity, and where maintenance had kept year-earlier runs unusually low. Saudi Arabian throughputs were an impressive 700 kb/d above year-earlier levels according to JODI data. Further gains are expected in the Kingdom's downstream sector later this year, if the 400 kb/d Yanbu refinery, jointly owned by Saudi Aramco and China's Sinopec, starts operations. The latest announcement from the Kingdom was that the construction was proceeding according to plan and that the plant would be fully operational in 3Q14. The refinery will process heavy crude from the Manifa oil field.



Iraq's largest refinery, the 320 kb/d Baiji plant, remained under siege in early August, with fresh attacks from Islamic State militants causing a fire and damage to storage tanks. The Baiji refinery has been the source of intense fighting since June, with Iraqi forces so far keeping IS forces at bay. We assume that the plant, which reportedly processed around 190 kb/d of crude prior to its shutdown, will remain offline for the remainder of this year.

Refinery activity in the Former Soviet Union looks to have peaked in June, when Russian refiners processed a record 5.96 mb/d. Preliminary data show Russian refinery runs eased in June, to 5.8 mb/d. A deadly fire and explosion at Rosneft's 140 kb/d Achinsk refinery in June forced a prolonged shutdown of the plant. The refinery, which was undergoing maintenance at the time of the accident, will likely be restarted in the fall of 2014. In Belarus, maintenance at Belneftekhim's 320 kb/d Mozyr plant and 220 kb/d Novopoltsk facility during August-October will sharply curb product exports in coming months.



Brazilian refinery crude runs rose 180 kb/d in June, to 2.2 mb/d, their highest yet. Petrobras' new 230 kb/d Abreu e Lima refinery (RNEST) is expected to start running at half capacity in November, before the second crude unit is brought on line in mid-2015. The refinery, which has faced numerous delays and cost overruns, will process heavy Brazilian and Venezuelan crude, once fully operational later next year.