Oil Market Report: 16 January 2015

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Highlights

  • The price of oil continued to collapse into January as rising supplies collided with weak demand growth and OPEC maintained its commitment to not cut production. Brent crude futures last traded at $48.40/bbl, near a six-year low. NYMEX WTI was at $47.75/bbl.
  • Macroeconomic weakness continues to restrain global oil demand growth, with 4Q14 deliveries estimated just 0.6 mb/d above year-earlier levels. Despite lower prices, demand growth is only forecast to accelerate to 0.9 mb/d in 2015, unchanged since last month's Report.
  • The oil selloff has cut expectations of 2015 non-OPEC supply growth by 350 kb/d since last month, to 950 kb/d. Effects on North American supply are so far limited to 95 kb/d and 80 kb/d to the Canadian and US forecasts, respectively. Projections for Colombia are cut by 175 kb/d and a further 30 kb/d for Russia.
  • OPEC output rose by 80 kb/d in December to 30.48 mb/d, as Iraqi supply surged to 35-year highs, offsetting deeper losses in Libya. Downward revisions to the non-OPEC supply outlook raise the 'call' on OPEC for 2H15 to an average 29.8 mb/d - just shy of OPEC's official target of 30 mb/d.
  • Global refinery crude throughputs surged to a new record high of 78.9 mb/d in December, lifting the 4Q14 estimate to 78.2 mb/d. Throughputs are forecast however to ease seasonally to 77.8 mb/d in 1Q15 amid brimming product inventories, weakening margins, lower demand and increased refinery maintenance.
  • OECD commercial inventories drew less than usual in November, falling by 8.7 mb to 2 697 mb. As OECD refiners hiked runs, crude stocks drew while product stocks increased. Preliminary data indicate a 12.5 mb build in December, which would see stocks rise to their widest surplus versus the five-year average since August 2010.

What now?

Another month, another milestone. Brent and WTI futures prices crashed to near six-year lows in early January, before recouping some losses at mid-month. At the time of writing, both Brent and WTI were trading around $48/bbl, down by $16/bbl and $12/bbl, respectively, since last month's Report, and some 60% below their June highs. While supply and demand forecasts have long pointed at a market imbalance and associated stock builds in 2H14 and beyond, few would have expected such a sudden price collapse. Today's market participants are not ruling out further declines, however, despite the recent rebound. How low the market's floor will be is anybody's guess. But the selloff is having an impact. A price recovery - barring any major disruption - may not be imminent, but signs are mounting that the tide will turn.

The most tangible price effects are on the supply front. Upstream spending plans have been the first casualty of the market's rout. Companies have been taking an axe to their budgets, postponing or cancelling new projects, while trying to squeeze the most out of producing fields. For the most part the supply effects will not be felt immediately, but further down the road, through project delays and faster decline rates. Nevertheless, expectations of non-OPEC supply growth for 2015 have already been downgraded, with growth for the year adjusted downwards by 350 kb/d since last month's Report and more steeply so for 2H15. Colombia and Canada lead the declines. Expectations of US light, tight oil production growth have also been revisited, but so far the cuts do not exceed 80 kb/d compared with our already conservative previous estimates, as many producers appear to be well hedged against short-term price drops.

Signs of a demand response remain more elusive. With a few notable exceptions such as the US, lower prices do not appear to be stimulating demand just yet. That is because the usual benefits of lower prices - increased household disposable income, reduced industry input costs - have been largely offset by weak underlying economic conditions, which have themselves been a major reason for the price drop in the first place. Other factors, including weak currencies in consumer economies, subsidy cuts, consumer tax hikes, lower spending in producer countries and mounting deflationary concerns, have kept demand growth in check thus far. Demand growth is still forecast to pick up somewhat this year from last, but is not expected to exceed 900 kb/d, unchanged since last month.

The net result of these changes is that implied stock builds are set to continue through the first half of this year, albeit at a marginally lower rate than previously expected. Downward pressures from stockpiling continue, as reflected in the futures curve's steeper contango structure - when prompt barrels trade at discount to later ones - and signs of growing market interest in floating storage. But a rebalancing may begin to occur in the second half of the year, when the "call on OPEC and stock changes" is now forecast to rebound to an average 29.8 mb/d, just a shade below the group's long-standing production target. For 2015 as a whole, the "call" has been revised upwards by 300 kb/d since last month's Report. Longer-term effects will be discussed in the upcoming Medium-Term Oil Market Report, to be released on 10 February. 

Rebalancing of the market does not equate to a return to the status quo ante. It is clear that the market is undergoing a historic shift. OPEC's embrace of market forces last November is a game changer. So is the US light, tight oil revolution. Thanks to its short lead-time and low upfront capital costs, LTO may prove quicker to ramp up production than conventional supply. Oil's place in the global energy mix is also transforming. While there might be light at the end of the tunnel for producers as far as prices are concerned, the next few years could nevertheless prove a period of reckoning for a market and an industry that, through the course of their 150-year history, have had to periodically reinvent themselves.

Demand

Summary

  • Total global oil product demand averaged 92.4 mb/d in 2014, a gain of 620 kb/d (or 0.7%) on the year earlier. This marked a five-year low for growth as sharp declines in OECD Europe and OECD Asia Oceania coincided with notable slowdowns in China, the FSU and Latin America. Global growth is forecast to modestly accelerate in 2015, to 910 kb/d (or +1.0%), as macroeconomic momentum is tentatively forecast to pick-up.
  • Steep drops in crude prices are only providing a limited boost to demand, as the price decline is itself at least partly demand-driven. The US is a notable exception.
  • OECD demand growth shows diverging trends, with 4Q14 North American demand bucking the year-on-year (y-o-y) contractions shown in Europe and Asia. After contracting in y-o-y terms in 3Q14, US oil product demand swung back into growth of 0.3 mb/d in 4Q14, supported by strong gains in transport fuel demand. The forecast for 2015, however, remains somewhat muted, as the 4Q14 US uptick is expected to remain short-lived and US price effects are expected to be offset by efficiency gains in 2H15.

Global Overview

Preliminary data suggest that, with the notable exception of the US, weak global demand conditions continue to act as a depressant on prices, as opposed to low prices stimulating additional demand. Global oil demand growth remained at a relatively suppressed 585 kb/d y-o-y in 4Q14. There are several reasons why lower crude oil prices so far seem to have failed to stimulate demand. Those include heightened deflationary risks in both Europe and Japan; adverse revenue impacts on net-oil-exporters; a global trend towards reductions in energy price subsidies and/or increases in oil consumption taxes; and the heavy falls experienced by many currencies, versus the US dollar, negating the impact of lower crude prices in domestic currency terms. Reflecting the downwardly revised macroeconomic backdrop, mid-January saw the World Bank revise down its 2015 global economic growth forecasts to 3.0%, versus 3.4% in June 2014, still an acceleration on 2014 (+2.6%) but notably less-so than previously assumed. The International Monetary Fund releases its own global macroeconomic update on 20 January 2015.

The US has been the notable exception to this weak demand trend in recent months. Having generally stagnated, mid-2014, US oil demand growth regained momentum in 4Q14, when it increased by 1.6% on the year earlier, its sharpest gain in a year. Demand growth, specific to the US, benefited from a combination of strong underlying economic expansion and relatively low consumption taxes (compared to other OECD members), which allows more of the crude oil price decline to be passed on to consumers. The lack of any currency effects, as oil prices are dollar-denominated, further compounded the more direct feed-through compared with other economies. Estimates of US demand have been revised upwards repeatedly since the beginning of the oil price drop. Compared to the Report dated 11 July 2014, roughly 0.2 mb/d has been added to the US 3Q14 q-o-q growth estimate and 0.3 mb/d to that for 4Q14.

Overall, the global estimate of 4Q14 demand has been revised down by 90 kb/d since last month's Report, to 93.4 mb/d, as multiple downside revisions for November more than offset the upward adjustments for October. The most significant November cuts were those applied to France (-105 kb/d), Brazil (-100 kb/d), Mexico (-100 kb/d), Japan (-95 kb/d), Korea (-80 kb/d) and Germany (-50 kb/d). A small number of November upgrades have been applied, most notably to the US (+305 kb/d) and China (+80 kb/d). October's upside bias adjustments were led by higher estimates of US (+340 kb/d) and Chinese (+90 kb/d) deliveries, with a large number of downside adjustments also applied, including Italy (-60 kb/d), the Netherlands (-45 kb/d), Korea (-35 kb/d) and Chinese Taipei (-35 kb/d).

OECD

Recent data suggest that OECD demand has been falling by around 1% y-o-y through 2H14, as sharp declines in both power-sector and petrochemical usage offset modest gains in the transport sector. Japan led the power-sector's downside, while heightened US cracker maintenance played a big role undermining 2H14 petrochemical demand. In contrast, the US provided the majority of the offsetting upside support in OECD transport demand in 2H14.



Americas

Higher-than-anticipated 4Q14 US oil product demand led an upward revision to the demand estimate for the OECD Americas, now estimated at 24.6 mb/d, 250 kb/d higher than in last month's Report. The 4Q14 US estimate was raised by 280 kb/d due to a steep upward revision to the estimate for October in monthly US data versus the preliminary estimate based on weekly data for that month. At 19.6 mb/d in October, the official US oil product demand estimate was raised by about 340 kb/d, compared to last month's Report, equating to an absolute gain in October of 285 kb/d (or 1.5%) on the year earlier supported by strong growth in road transport fuels.



October's strong gains in US transport fuel demand were underpinned by a combination of additional vehicle miles travelled (VMT) and, where possible (for example in multi-car families), switching to less efficient vehicle choices. The latest sports utility vehicle (SUV, or 4x4) sales data show a gain of over 10% y-o-y in 4Q14, while the US Department of Transport's Federal Highway Administration reported an increase of 2.6% y-o-y in US VMT in October to 264.2 billion. This supported growth of approximately 2.7% y-o-y in US gasoline and roughly 5% y-o-y for gasoil/diesel, the latter gaining additional traction on heightened agricultural and industrial demand (the US Federal Reserve reporting industrial production growth of 4% y-o-y in October).



Accelerating industrial activity in November (+5.2% y-o-y) contributed towards the upwardly revised (+305 kb/d) November demand estimate, with additional US distillate demand once again one of the key causes. Other significant growth contributing fuels in November included gasoline and jet/kerosene. Having risen by around 1% y-o-y in November, December is likely to see a further acceleration, as additional price declines provide some extra stimulus and the severe winter freeze of December 2013 was not repeated.

Fuel-switching away from oil in the Mexican power sector, to alternatives such as hydro continues to put the overall Mexican demand trend under pressure, as do falling gasoline deliveries. Total oil product demand slipped by 1.5% y-o-y in November, to 1.9 mb/d, the ninth monthly decline in 2014. Gasoline deliveries fell by 3.8% y-o-y in November, to 730 kb/d, their greatest decline in about a year. For the year as a whole, demand is estimated to have contracted by 3.8% (-3.2% previously), to an average 2.0 mb/d, with particularly steep declines in residual fuel oil and gasoline demand.




Europe

The 4Q14 European demand estimate has been revised downwards by 225kb/d from last month's Report, to 13.3 mb/d, as economic growth remained tepid while relatively mild early-winter weather conditions were seen across the continent. Notable November curtailments included France (-105 kb/d) and Germany (-50 kb/d), while large October adjustments for Italy (-60 kb/d) and the Netherlands (-45 kb/d) further dampened the 4Q14 estimate. This revised 4Q14 European demand projection was 2.1% down on the year earlier, as Markit's composite Purchasing Managers' Index (PMI) reported its worst performance in over a year.

Preliminary estimates of French November demand depicted a sharp 6.8% y-o-y contraction, to 1.5 mb/d. A mid-2014 relative strengthening in French demand appeared to abate in November, with particularly sharp downside pressure felt on gasoil (-8.1% y-o-y). The latest data reflect the protracted softening in economic sentiment, with November's Manufacturing PMI falling to a three-month low, of 48.4 according to Markit, significantly below the key 50 expansionary threshold, while other indicators such as INSEE's consumer/business confidence indicators confirm this 'pessimism'.



At 895 kb/d in October, the Dutch demand estimate offered its sharpest y-o-y decline in nearly four years (-8.6%) following Shell's closure of its Moerdijk cracker. The discovery of a leak at the 800 000 tonne per year cracker forced its closure, accordingly and sharply curbing oil demand from the petrochemical sector. The forecast for 2015 also had to be curtailed, at least through 1Q15, on reports that the facility will not resume operations until 1H15.


Asia Oceania

Heavy downside revisions, to both the Japanese and Korean 4Q14 demand estimates, resulted in approximately 115 kb/d being removed from 4Q14 OECD Asia Oceania demand, which now averages 8.2 mb/d. Within the overall 4.3% y-o-y OECD Asia Oceania decline were particularly steep drops in residual fuel oil and 'other products', respectively down by 15.8% and 19.0% y-o-y in 4Q14.



Signs of a deterioration in Japan's economic outlook echoed in recent oil demand data. Sharply curtailed transport fuel demand played a key role, as did continued heavy declines in power-sector oil use. Preliminary estimates of November oil deliveries show a near 10% y-o-y contraction, to 4.3 mb/d, as readings of consumer confidence fell for a fourth consecutive month and industrial production offered an absolute decline. The Ministry of Economy Trade and Industry reported a 3.8% y-o-y contraction in total Japanese industrial output in November, while the same month saw the Cabinet Office's consumer confidence index fall to a heavily 'pessimistic' 37.7, its weakest reading since April 2014.

The latest Korean oil demand data estimate, at 2.4 mb/d in November, was down heavily on the year earlier (-3.4%). Steep declines in demand for LPG, gasoline and residual fuel oil led earlier demand estimates for the month to be revised downwards. Relatively mild early-winter weather, coupled with low LNG prices, kept both residual fuel oil and LPG deliveries below year earlier levels. Further denting the overall Korean demand trend were reports, from the Bank of Korea, that consumer confidence slipped to a one-year low. For the year as a whole, we estimate that Korea consumed roughly 2.3 mb/d of oil products in 2014, 0.9% up on the year.


Non-OECD

Preliminary data suggest that non-OECD demand growth fell to +2% y-o-y in 4Q14, its lowest level in roughly one year. Within the total 4Q14 non-OECD demand estimate of 47.2 mb/d, the most sluggish growth predictably occurred in the crisis-hit economies of the FSU (which was flat on a y-o-y basis) and non-OECD Europe (+1.1%), while sharply lower commodity prices reduced both the income and oil demand growth estimates for Latin America (+1.3%) and the Middle East (+1.2%).



China

Preliminary estimates of November Chinese demand suggest a rise of 3% on the year to 10.7 mb/d, as reports of product destocking coincide with heady refinery throughput numbers (see Refining). Product stocks fell by around 110 kb/d y-o-y in November, according to the latest data from China Oil, Gas and Petrochemicals, with a particularly notable gasoil decline reported.



Gasoline led the still relatively moderate pace of Chinese demand growth reported in November, with implied demand for the fuel surging by nearly 9% on the year earlier to 2.3 mb/d, offsetting weak fuel oil use. Ongoing macroeconomic worries, decelerating car sales and air-quality-control measures that restricted traffic and sharply reduced industrial activity in and around Beijing during the Asia Pacific Economic Cooperation (APEC) summit restrained 4Q14 demand. The China Association of Automobile Manufacturers reported 1.8 million passenger car sales in November, up 4.7% y-o-y, the weakest pace of growth in roughly one-and-a-half years. This weakening in car sales data, along with increased consumption taxes on oil products (which deprive Chinese consumers from the full benefit of the recent declines in crude prices) and a more subdued macroeconomic outlook, will combine to keep the overall Chinese growth forecast suppressed at around 2.5% in 2015.


Other Non-OECD

Edging modestly down in November, to 3.2 mb/d, Brazilian oil product demand posted its weakest y-o-y performance in just over two years. Sharp declines in gasoil/diesel led November's drop, as recent weaknesses in industrial activity stripped back domestic diesel demand. The Instituto Brasileiro de Geografia e Estatistica has reported y-o-y declines in total industrial output for every month since February 2014. Demand estimates for November have been revised down by 100 kb/d from last month's Report. A slower clip is now assumed for the year as a whole, +3.5% to 3.2 mb/d, versus 3.9% last month. Lower oil prices dampen the Brazilian macroeconomic outlook for 2015, resulting in a decelerating oil demand forecast, +2.7% in 2015 to 3.3 mb/d.





Weak demand right across the Argentinean product spectrum saw only 735 kb/d of oil products delivered in November, 55 kb/d (or 6.9%) below the year earlier. Weak industrial output particularly undermined demand for gasoil, LPG and 'other products'. The Instituto Nacional de Estadistica y Censos reported that industrial production contracted by 2.1% y-o-y in November, its ninth consecutive decline. The estimate of Argentinean demand for 2014 as a whole has accordingly been curbed, to 765 mb/d (1.2% down on 2013). Ongoing macroeconomic concerns are likely to result in a further slight decline (of around 0.7%) in 2015, to 760 kb/d.



Preliminary data show Indian oil product deliveries rose to 3.9 mb/d in November, nearly 35 kb/d above expectations, on supportive macroeconomic activity and lower crude prices. LPG, prices of which remain subsidised in India, led the gains with growth of 14.5%, to 0.6 mb/d, with notable gains in diesel and gasoline also offsetting y-o-y declines in naphtha and jet/kerosene. Overall, Indian demand is estimated to have averaged roughly 3.9 mb/d in 2014, up 2.5% on the year. Growth is forecast to reach 3.6% in 2015, bringing average demand for the year to 4.0 mb/d, supported by underlying economic growth.



At roughly 1.0 mb/d in October, the Chinese Taipei demand estimate has been revised down by 35 kb/d since last month's Report as petrochemical demand came out below earlier expectations. This, coupled with confirmed reports that an 84 kb/d cracker closed late-November, triggered a 20 kb/d downside adjustment in the 4Q14 Chinese Taipei demand estimate, to 1.0 mb/d. For the year as a whole, a modest gain of 1.6% is estimated, with particularly strong (near 3% y-o-y) 1H14 demand growth offset by a much weaker 2H14.

Down 0.5% on the year earlier, the October Iranian demand estimate came out 30 kb/d below the month earlier projection, as sharply falling oil prices dented domestic coffers sufficiently to reduce oil demand, with domestic transportation markets particularly suffering. For the year as a whole, roughly 1.8 mb/d will be delivered, little changed on the year earlier, before picking up very marginally in 2015 as mildly stronger macroeconomic activity likely supports additional oil use, albeit to a much reduced degree on lower oil prices.

Supply

Summary

  • Global production rose by 155 kb/d month-on-month (m-o-m) in December to 94.2 mb/d, with non-OPEC and OPEC contributing roughly equal shares. Total supplies were a robust 2.1 mb/d higher than a year earlier.
  • The rapid decline in oil price, reduced capex and political factors have cut non-OPEC supply growth for 2015 by about 350 kb/d since the last Report. So far, the effect of lower prices on North America's production is marginal, with downward revisions to the US and Canada at 80 kb/d and 95 kb/d, respectively.  Other notable revisions include Russia (-30 kb/d) and Colombia (-175 kb/d).
  • A downward revision of 450 kb/d to the 2H15 non-OPEC supply outlook raises the 'call' on OPEC to an average 29.8 mb/d - just shy of OPEC's official target of 30 mb/d. For 2015 as a whole, the 'call on OPEC crude and stock change' for 2015 has been adjusted up by 300 kb/d to 29.2 mb/d.
  • Non-OPEC total liquids supply is forecast to expand by 950 kb/d in 2015, following growth of 1.9 mb/d in 2014. As in 2014, North America will provide most of the growth, offsetting declines elsewhere. Latin America is expected to contribute meaningful volumes (+150 kb/d), with non-OECD Asia also growing (+50 kb/d). Russia's oil output will fall by about 140 kb/d year-on-year (y-o-y).
  • OPEC output rose by 80 kb/d in December to 30.48 mb/d, with a surge in Iraqi supply to 35-year highs offsetting new losses in Libya due to an escalation in armed conflict. Top producer Saudi Arabia kept output steady.

All world oil supply data for December discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Mexico and Russia are supported by preliminary December 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 production rose to 30.48 mb/d in December, up by 80 kb/d from the previous month, as a collapse in Libyan output was offset by Iraqi oil fields that pumped at the highest rate since 1979. Libyan production fell by 250 kb/d, the biggest month-on-month (m-o-m) decline in more than a year, after the country's vital oil export terminals, which had until then been spared by the fighting, came under attack. Iraq turned in an impressive month with record exports from the south and higher shipments from the north following an export agreement between Baghdad and the Kurdistan Regional Government (KRG). Top exporter Saudi Arabia kept flows steady.

Since the group agreed at its 27 November meeting to maintain its official 30 mb/d supply target despite oil's price rout, prices have fallen by around $20/bbl - prompting cash-strapped Venezuela, Iran and Algeria to renew calls for output cuts. But Saudi Arabia, which steered the OPEC decision, and other core Gulf producers are standing firm. Saudi Arabia's oil minister Ali al-Naimi was reported as saying that it was "not in the interest of OPEC producers to cut their production, whatever the price is". December marked the eighth straight month with OPEC supply in excess of its official target and output was up 560 kb/d year-on-year (y-o-y).

Slower anticipated growth from producers outside of OPEC in the wake of the price collapse has led to a 300 kb/d upward adjustment of the 2015 'call on OPEC crude and stock change' to 29.2 mb/d. A downward revision of 450 kb/d to the 2H15 non-OPEC supply outlook boosts the 'call' on OPEC for 2H15 to an average 29.8 mb/d - just short of OPEC's official target.

OPEC's 'effective' spare capacity was estimated at 3.39 mb/d in December compared to 3.45 mb/d in November, with Saudi Arabia accounting for about 80% of the surplus.



Supply from Saudi Arabia held at 9.6 mb/d in December, with Riyadh determined to preserve market share. Oil Minister Naimi was reported as saying that OPEC would not cut production - even if oil fell to $20/bbl. Saudi Crown Prince Salman, speaking on behalf of King Abdullah - who is hospitalised with pneumonia - defended the Saudi-driven OPEC policy, saying Riyadh would deal with the challenge of lower oil prices 'with a firm will'.

Major buyers of Saudi crude oil said OPEC's top producer shows no sign of holding back supply to world markets. According to the most recent data submitted by Saudi Arabia to the Joint Organisations Data Initiative (JODI), Saudi crude exports in October rose to 6.9 mb/d - up 175 kb/d on September. Exports of products climbed to 910 kb/d in October compared to 790 kb/d in September.

The latest JODI figures showed Riyadh consumed 515 kb/d of crude for power generation in October. During 3Q14, when power-generation needs rise seasonally with air conditioning, it burned an average 770 kb/d. Crude burn typically fall seasonally during the fourth quarter and in 4Q13 it averaged 380 kb/d.



In terms of crude oil pricing, state oil company Saudi Aramco continues to adjust monthly formula prices to remain competitive in a well-supplied market. In early January, Aramco made sharp cuts to prices for crude loading in February for Europe (see Prices). Riyadh made moderate increases to prices for Asian destinations and reduced its key Arab Medium to the US price for a sixth month in a row. The US imported 825 kb/d of Saudi crude in October, down from 1.6 mb/d in April.



Iranian crude oil production edged higher in December, up 30 kb/d to 2.84 mb/d, as diplomats from Iran and the so-called "P5+1" (the US, UK, France, Russia, China and Germany) prepared for a fresh round of talks over a nuclear deal. The two sides have until the end of June to secure a long-term settlement that would lead to the removal of rigorous economic sanctions imposed on Iran by the US and the EU. Until then, a partial easing of sanctions under a preliminary deal in November 2013 remains in place. Under that agreement, a nominal 1 mb/d cap was set on Iran's crude exports. During 2014, shipments of Iranian crude, as measured by estimated receipts by importers, were running around 90 kb/d above the target, and about 70 kb/d higher than the previous year. Production for 2014 is estimated at about 2.8 mb/d - roughly 130 kb/d higher than 2013.



For December, preliminary figures show deliveries of Iranian crude at 1.1 mb/d, up 130 kb/d m-o-m. Purchases in October and November had dipped below the nominal 1 mb/d target. Syria returned as an importer in December, with deliveries of 60 kb/d. India, Iran's second biggest customer, raised purchases by 70 kb/d to 320 kb/d. Deliveries to China, Iran's top buyer, were relatively steady at 560 kb/d versus 545 kb/d in November. Japan cut imports by 60 kb/d to 105 kb/d in December, while Korea increased purchases by 45 kb/d from November to 130 kb/d. Deliveries into Turkey held steady at around 90 kb/d.

Shipments of condensate - ultra light oil from Iran's South Pars gas project - averaged about 190 kb/d for 2014 versus 85 kb/d during the previous year. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports.

Kuwaiti production, which has slowed due to the extended closure of the Khafji oil field run jointly with Saudi Arabia in the Neutral Zone, showed little m-o-m change at 2.77 mb/d in December. A similarly flat trend was seen in Qatar, while production from the UAE rose 50 kb/d m-o-m to 2.76 mb/d.



In West Africa, Nigerian output fell by 50 kb/d to 1.87 mb/d due to maintenance and disruptions affecting various export streams. Angolan supply rose by 30 kb/d m-o-m to 1.72 mb/d. Both countries showed slight decreases for the year as a whole. Nigeria was down 50 kb/d to an average 1.91 mb/d in 2014, while Angola slipped 60 kb/d to 1.66 mb/d.

Iraqi production races ahead

Crude oil production from Iraq, including the Kurdistan Regional Government (KRG), climbed 290 kb/d to a 35-year high of 3.7 mb/d in December thanks to record southern exports and rising shipments from the north. Looking ahead, Iraq could break new records if infrastructure and weather permit. Iraqi oil marketer SOMO has issued a preliminary schedule of February exports from southern terminals of 3.3 mb/d - its highest-ever allocation.

Given oil's price rout and Iraq's budget needs, OPEC's second biggest producer has every incentive to ramp up exports as fast as it can. But the price collapse has blunted the revenue gains urgently needed for Iraq, where the battle against Islamic militants is depleting the financial resources of the federal government and the KRG. Baghdad says earnings from December exports of 2.94 mb/d were around $5.2 billion. In June, when the price of oil reached its 2014 peak, exports of 2.4 mb/d raked in nearly $8 billion.

December southern Basra Light shipments of 2.76 mb/d, the best ever rate, provided the bulk of Iraqi exports. Shipments rose by 260 kb/d from November due to the efficient use of export facilities and clearer weather in the Gulf that eased loading delays. Due to ongoing infrastructure bottlenecks, the southern export facilities are currently capable of handling up to 2.8 mb/d on a sustainable basis, industry sources reckon. Storage is limited to around 7 million barrels. Iraq's state oil marketer SOMO initially allocated 2.7 mb/d of Basra Light exports for January. Preliminary February loading schedules are even higher although such initial plans are subject to revision and often fall short of initial targets.



In the wake of an export agreement between Baghdad and the KRG, shipments from northern Iraq via the KRG's pipeline to Turkey climbed to 180 kb/d in December - up from 30 kb/d the previous month - the first month of substantial exports since early in the year. Some of that volume was loaded from storage, industry sources say. Baghdad had been shipping close to 300 kb/d from its northern fields until a federally-controlled pipeline to Turkey was shut in early March due to repeated attacks by Islamist militants. The KRG has meanwhile been shipping oil independently of Baghdad via its own pipeline to Turkey since the end of May. The export deal of 2 December calls for the KRG to provide 250 kb/d to SOMO to sell and allows for another 300 kb/d from Kirkuk to flow through the KRG's pipeline system. In return, the central government is to release the KRG's 17% share of national revenue.

Exports of northern crude are expected to rise to about 300 kb/d in January, with Iraqi state North Oil Company (NOC) exporting Kirkuk crude for the first time since March. In January, NOC started to pump 150 kb/d from the Kirkuk field's Baba dome and the Jambur oil field. The crude travels through a new pipeline that links the fields to the KRG's export system.

A preliminary loading schedule for January shows 300 kb/d of northern Iraqi crude exports, with about 250 kb/d designated as "Kirkuk Co." and 50 kb/d labelled as "Kurdish Co.". Industry sources in the region say overall flows through the pipeline have reached 450 kb/d. Despite the progress made under the export arrangement, there is still some confusion among potential buyers as to which entity will market the crude. Baghdad has long disputed the legality of the KRG's independent pipeline shipments, saying only the federal government has the right to market Iraqi crude. KRG officials have said that oil in excess of the 250 kb/d would be sold by the KRG rather than SOMO. Lifters of the "Kurdish Co." oil do not appear on the schedule. Turkey's Tupras and Russia's Lukoil appear to be the major buyers of "Kirkuk Co." oil, with Italy's Eni and Spanish Repsol due to load small cargoes.

Around 120 kb/d of the KRG's production of about 500 kb/d is drawn from the Kirkuk field's Avana dome and the nearby Bai Hassan, which had previously been run by NOC. After Islamist militants swept across northern Iraq this summer, the KRG took control of these northern assets. The giant Kirkuk oil field is divided into three geological domes - Avana, Baba and Khurmala. The KRG has been managing Khurmala, the northernmost formation, since 2008.

Libyan crude production sank to 440 kb/d in December, down 250 kb/d m-o-m, as fighting between the country's two rival governments, the so-called Libya Dawn administration in Tripoli and the officially recognised government that fled to Tobruk in the east, spread to the vital eastern oil ports of Es Sider and Ras Lanuf. By early January, output had sunk towards 200 kb/d - the lowest level since 2Q14 - after an end-December rocket attack by Libya Dawn forces struck crude storage tanks at the Es Sider terminal. Violence is raging between the Libya Dawn forces that took over Tripoli last summer and the Tobruk government.

The resulting fires at the terminal damaged six of 19 tanks and led to the loss of around 1.5 mb of crude in storage. Exports from Es Sider and Ras Lanuf, which between them can handle 560 kb/d, had already been suspended earlier in the month after clashes between armed groups. The country's crude oil shipments have slumped to a mere 60 kb/d.

The North African producer's oil fields had briefly ramped up to 1 mb/d in October, before the conflict spread to the oil sector. After the war that ousted Muammar Gaddafi in 2011, output managed to climb as high as 1.45 mb/d. That level was last touched in November 2012.

Industry sources say production is unlikely to rise significantly from its current 200 kb/d level while there is heavy fighting around the terminals and the front line between Libya Dawn and troops led by former Gaddafi Army General Khalifa Haftar remains in the area.

Oil below $50/bbl is proving especially stressful for recession-hit Venezuela, where supply eased to 2.42 mb/d, and Ecuador, where output held at 550 kb/d. Both South American countries lobbied China in early January for additional funding. Venezuelan President Nicolas Maduro also sought financing from fellow OPEC member Qatar. Venezuela's precarious financial situation has stoked concerns of a sovereign debt default. Caracas has renewed its call for an OPEC supply cut and Maduro met Saudi Arabia's Crown Prince Salman in Riyadh to discuss the plunge in oil prices.

Non-OPEC Overview

Non-OPEC production rose by 70 kb/d in December m-o-m, to 57.24 mb/d. A sharp seasonal fall in global biofuels supply, mainly Brazilian ethanol, was not enough to offset petroleum liquids production increases in North America and the FSU. On the year, non-OPEC supplies stood 1.3 mb/d higher in December, thanks to rising North America and Latin America supplies, which more than offset decreases in virtually every other region. For 2014 as a whole, total non-OPEC output is estimated to have grown by a record 1.9 mb/d, to 56.5 mb/d.

Although much lower oil prices will take a toll on spending and production in 2015, non-OPEC supplies are nevertheless forecast to increase by less than 1 mb/d for the year, to 57.5 mb/d. The US and Canada will continue to be the top two sources of non-OPEC production growth, but lower crude oil prices since mid-2014 have caused a significant reduction in capital expenditures, which will dampen growth in 2H15. Rigs drilling and drilling permits in the US substantially decreased in 4Q14 and at the beginning of 2015, with perhaps further reductions subsequently foreseen. The forecast of US production growth for 2015 has been reduced by 75 kb/d since last month's Report, to 850 kb/d, and that of Canadian supplies by 95 kb/d, to 220 kd/d. Overall, the forecast of non-OPEC supply growth has been reduced by an aggregate 350 kb/d. 



Brazil, which saw an impressive jump in production in the second half of 2014, will continue as the third-largest source of non-OPEC growth in 2015. Although much of Brazil's production is profitable with crude at around $50/bbl, national oil company Petrobras's enormous debt will limit the availability of investment to further develop the country's prolific pre-salt deposits.  Lower oil prices coupled with continued problems associated with a corruption probe of Petrobras provide significant uncertainty surrounding the Brazil outlook.

Although Russia posted a new post-Soviet high in terms of production for 2014, its outlook for 2015 turned more negative compared with the last Report. The country is entering a deep recession as low oil prices, international sanctions, a devalued currency and high interest rates all take a toll on the oil sector. The latest forecast Russia production reflects a downward revision of 30 kb/d since last month's Report.

OECD

North America

US - December preliminary, Alaska actual, others estimated: Estimated US liquids output fell slightly to 12.4 mb/d in December, a decrease of 60 kb/d m-o-m. Production of crude oil rose by about 30 kb/d, offset by seasonal declines in NGL production. LTO, the most price-responsive source of supply, posted another month of gains, growing by about 30 kb/d.   Freezing weather conditions in the Permian Basin in Texas have affected oil output in December, albeit marginally. We estimate that weather will be a factor in January as well, with about 80 kb/d of combined oil output shut-in in the Permian Basin and the Bakken. Pioneer Natural Resources already reported in early January that icy weather caused extensive power outages and facility freeze-ups in the Spraberry/Wolfcamp area. Final data for October show that total US liquids production, excluding biofuels and refinery processing gain, rose 170 kb/d to 12.3 mb/d. Gains of 105 kb/d in NGL production accounted for most of this increase.

With ten months of data finalised for 2014, US liquids fuels production is estimated to have grown to 11.8 mb/d on average for the year, 1.5 mb/d higher than in 2013. Crude oil production rose by 1.2 mb/d to 8.6 mb/d. NGL production increased to 2.9 mb/d, accounting for more than 50% of total non-OPEC NGL output. US production outlook has been revised downward by 50 kb/d for 2015, with cuts to growth occurring in the second half of the year. Further downward revisions are possible, however, should prices decline into the mid- to low $40s per barrel and remain there for an extended period, a sizeable share of US production may be unprofitable.

Although production data show no sign of a let-down in US crude oil supply growth just yet, the latest drilling data hint at a slowdown to come. Drilling data published by Baker Hughes on 9 January show the largest weekly rig count drop since March 2009, to 1 750, a decrease of 61 rigs. The number of horizontal rigs, which are used in tight rock formations, decreased by 35. Overall, the US rig count stands at its lowest level since the end of 2013.

The least productive rigs were likely to be taken offline first, making it difficult to quantify the impact on supply in the future. While US LTO is the most price-responsive source of supply due to its short lead time when prices are rising, its downside price responsiveness has yet to be tested in this way. Other risk factors to LTO production in a low price environment are the high operating costs facing LTO producers, which coupled with high debt levels and negative cash flows, may change the upstream landscape in the US shale arena. Contract drillers are reporting early rig contract terminations, such as Pioneer Energy Services, as drilling responds to prices.

Meanwhile, companies are reviewing and revising their capital expenditure plans for 2015, with estimates for decreases ranging between 10% and 50%. However at least some of the decrease in capital expenditures is offset by deflating oil service costs, which may decline by more than 15%. There have been reports of small operators in the US filing for bankruptcy.

Canada - December estimated: Canadian total liquids production rose to 4.3 mb/d in December, extending earlier gains. Alberta bitumen production rose by 85 kb/d to 1.3 mb/d compared with November, reversing the declines registered that month. NGL production rose to 690 kb/d, the highest level since February 2014.  Low crude oil prices are having an effect on Canada's production outlook for 2015. Oil output in 2015 is expected to increase to 4.3 mb/d, about 95 kb/d lower than last month's Report, a change necessitated by oil price declines. The lower growth comes on the back of lower capital expenditures, particularly new capital-intensive projects.

Imperial reportedly started its 40 kb/d Nabiye oil sands facility in Alberta, with first production expected online sometime before the end of 1Q15. The project, which begins operations after years of planning and developing, is part of the Cold Lake development. It will use the cyclic steam-stimulation technology (CSS) that involves completing cycles of steam injection, soaking and oil production. Meanwhile, Husky Energy postponed the start-up of two of its heavy-oil projects in Saskatchewan, each of which is slated to produce 10 kb/d. The Rush Lake project was delayed to 3Q15 while the Edam East projects is now expected to come onstream in 3Q16. The delays at these two projects are reportedly not related to the recent oil price declines.

Mexico - November actual, December preliminary: Crude oil production declined about 85 kb/d m-o-m in November, to 2.6 mb/d. NGL production also fell to 340 kb/d in the month, and likely remained at that level for December. Preliminary crude oil production figures for December show output roughly flat with November at 2.6 mb/d.

Mexico's government finally launched the much-awaited Round One in mid-December of its historic upstream reform. Following a feedback period by the industry, Mexico published the preliminary contracts for the 14 shallow-water exploration blocks in the Southeastern Basin that it is offering up for bidding. Blocks offered are in the Salina del Istmo and Mascupana areas. Mexico has also released details regarding the fiscal terms of the contracts. The production sharing contracts will operate a return-based adjustment mechanism, with profit takes gradually decreasing as higher levels of internal rate of return are reached. According to some estimates, production costs in Mexico's shallow water fields are roughly $20 per barrel, and the area is fairly well explored with vast amounts of seismic data already available. This offer is the first stage of Round One, which will be awarded through the summer of 2015. Round One is focused on five areas: shallow water, extra heavy oil, Chicontepec and unconventional oil and gas, onshore and deep water.

North Sea

Total North Sea production was estimated at 2.9 mb/d in December, rising about 100 kb/d m-o-m, however January volumes are expected to average roughly 40 kb/d lower. BFOE January loadings are scheduled at 890 kb/d, falling by about 95 kb/d m-o-m. Current loadings volume scheduled for February is roughly flat compared with January.

Norway - October actual, November preliminary:  Total liquids output rebounded by about 130 kb/d in October and a further 15 kb/d in November despite technical problems at the Fram H-Nord, Gullfaks Sør, Oseberg Sør, Skarv, Skuld, Ula and Visund fields. The recent levels of output show a recovery from a September low of 1.79 mb/d that was mainly the result of planned and unplanned maintenance. Crude output for November is estimated at 1.47 mb/d, 75 kb/d lower than last year. With final data for the last two months of the year still outstanding, current estimates indicate that Norway's total output for 2014 was 1.88 mb/d, 40 kb/d higher than in 2013. Production is set to decline slightly this year, averaging 1.85 mb/d.

Much potential remains in the North Sea, with new fields coming online in Norway since December. Conoco launched the Eldfisk II, part of the Greater Ekofisk Area. The field is expected to ramp up over the next three years as additional wells are placed into service. A total of 40 production and water injection wells are expected to come online at the field within the next three years, however it is not clear if this project will be re-evaluated in light of lower prices. Statoil, too, started the Valemon gas and condensate field, part of the company's fast-track program. The field's estimated recoverable reserves are 192 million boe.



UK - November preliminary: Offshore crude oil production rose to 780 kb/d in October, up by about 50 kb/d m-o-m and extending September's recovery from multi-year lows recorded in August. However, some of these gains appear to have since been reversed, with production estimated to have declined somewhat in November. Overall in 2014, UK liquids output averaged an estimated 860 kb/d, a fall of about 30 kb/d y-o-y. Although UK production continues to show a declining trend, the magnitude of the declines is significantly lower than those recorded since 2011. The slower pace of decline is undoubtedly due to new projects coming online, which are offsetting declines at legacy fields in the UK offshore. In the latest such development, BP announced that it has started production at the Kinnoull field, part of the rejuvenation of the Andrew field.

Non-OECD

Latin America

Brazil - November actual: Crude oil and total liquids output (excluding ethanol) each fell by about 35 kb/d in November m-o-m, to 2.34 mb/d and 2.4 mb/d, respectively. The monthly decline, which was due to maintenance, was the first in 10 months. Petrobras stopped output at three floating, production, storage and offloading facilities (FPSO) in order to install new oil and gas processing equipment. Pre-salt volumes totalled about 600 kb/d, decreasing slightly m-o-m. Ethanol production fell by 505 kb/d in November in line with seasonal patterns, and is estimated to have dropped by a further 275 kb/d in December. Even with the November dip in production, Brazil's liquid fuels production remains about 260 kb/d higher y-o-y. Overall, Brazil's 2014 production is estimated to have averaged 2.3 mb/d, an increase of roughly 210 kb/d from 2013. Continuing this year's trend of growth, Brazil's 2015 output is forecast to rise to 2.5 mb/d.

Amid the positive developments in production, Petrobras' legal woes continue. In yet another setback for the company, a corruption probe further delayed the publication of its 3Q14 financial results. The US Securities and Exchange Commission has issued a subpoena for documents related to the corruption investigation, and the company is now also facing a class-action complaint in US federal court. While Petrobras has received permission from its creditors to postpone the publication of its unaudited earnings statement until the end of January, any further delays could trigger an acceleration of the company's debt repayments and may bar the company from international bond markets. Lack of access to additional funds may make it impossible to continue financing upstream developments, including the prolific pre-salt areas. 

Colombia - November estimate: Colombia's production was estimated at roughly 1.0 mb/d in December, flat m-o-m. The 2014 output is estimated to have averaged 990 kb/d, a 20 kb/d dip compared with 2013. Although Colombia has the potential to increase its output, the country has seen eroding oil production during 2014, mainly due to the recurrence of political unrest and pipeline attacks, which have coincided with reduced support for FARC rebels from Venezuela. In addition to a worsening security situation, lacklustre exploration results, operational problems at mature fields and declining oil prices have necessitated a downward revision to Colombia's outlook for 2015. Ecopetrol, Colombia's largest producer, announced a 25% reduction in expected production in 2015, and deep cuts to planned investment during the year. Pacific Rubiales, Colombia's largest independent producer, is also reducing its upstream budget in response to low prices, with a 32% cut in planned capex for 2015. Overall, we expect Colombia's output to average 930 kb/d in 2015, a downward revision of 170 kb/d.


Former Soviet Union

Russia - November actual, December provisional:  December data show that Russia's production increased to 10.99 mb/d, including 10.15 mb/d of crude oil. State-owned Rosneft, by far the country's largest producer with 3.7 mb/d of production, continued to struggle to halt the declines at its West Siberian fields, while smaller companies accounted for the monthly production increases.  Overall, in 2014, Russia's oil production inched up by about 50 kb/d on the year to a new post-Soviet high of 10.93 mb/d, its sixth consecutive annual increase. Russia's 2015 output is expected to fall by 140 kb/d, reflecting the effects of low oil prices compounded by international sanctions that restrict its access to capital. The latest forecast Russia production reflects a downward revision of 30 kb/d since last month's Report.

Russia is heading for a deep recession. The low oil prices, sanctions-related restrictions on technology and financing and the declining rouble all present severe challenges to Russia's oil sector, exacerbating the overall effect of natural declines at the country's brownfields. The second-largest non-OPEC producer relies on its oil and gas exports for most of its revenue, and the slump in prices is having far-reaching consequences for the economy.

FSU net exports FSU net exports inched up by 50 kb/d to average 9.03 mb/d in November. Lower crude exports (-130 kb/d) were offset by stronger product exports (170 kb/d) as Russian refiners ramped up their runs on the month whereas crude production was little changed. Exports from the Black Sea were kept up by the highest volumes out of CPC terminal to date, although not enough to compensate for declines elsewhere, particularly from the Baltic and the BTC. Within products, gasoil and fuel oil led the increase at the expense of other products, notably naphtha. Preliminary tanker data suggests overall FSU waterborne crude exports inched down in December, led by declines in Baltic loadings, partially offset by a rebound in volumes shipped from Ceyhan (BTC).


OECD stocks

Summary

  • OECD commercial inventories fell by 8.7 mb in November to stand at 2 697 mb at end-month. Since this draw was slightly below the 10.9 mb five-year average decline for the month, the surplus of stocks versus the seasonal average widened slightly to 6.7 mb.
  • Preliminary data indicate that stocks soared counter-seasonally by 12.5 mb in December. As refined products holdings surged, this saw inventories' surplus swell to 74.0 mb, the widest since August 2010.
  • As the contango in ICE Brent steeped over early-January, interest in floating storage was re-ignited with reports of trading houses booking up to 30 mb of long-term floating storage capacity by mid-January. Nonetheless, at the time of writing, actual levels of floating stocks were still estimated on a par with end-December.
  • Crude holdings plummeted by 12.6 mb in November after refiners hiked runs, with products stocks soaring counter-seasonally by 9.8 mb. At end-month, OECD refined product inventories covered 30.0 days of forward demand, 0.1 days above end-October. Meanwhile, stocks of NGLs and other feedstocks slipped seasonally by 5.8 mb.
  • October inventories were revised down by 14.5 mb following a 9.1 mb downward adjustment in OECD Europe. Consequently, the 18.3 mb surplus of inventories to seasonal levels in October presented in last month's Report was adjusted downwards to 6.7 mb.

OECD inventory position at end-November and revisions to preliminary data

OECD commercial oil inventories fell by 8.7 mb to stand at 2 697 mb at end-November. Since this draw was slightly below the 10.9 mb five-year average draw for the month, the surplus of stocks versus the seasonal average widened slightly to 6.7 mb. This was less than the provisional 18.3 mb surplus presented in last month's Report due to a 14.5 mb downward adjustment to October data, centred in OECD Europe, mainly Italy.

Soaring refinery throughputs in November caused crude oil stocks to plummet by 12.6 mb. Simultaneously, the high refinery activity saw product inventories rise counter-seasonally by 9.8 mb, led by Europe and Asia Oceania. Product holdings in the Americas fell after draws in 'other products', here including ethane and LPG, which largely bypass the refinery system.

Widening contango re-ignites interest in floating storage

With the contango between the first and third months in the ICE-Brent contract steepening over early-January, interest in floating storage has been re-ignited with ship-broker reports in that trading houses are rapidly booking 2 mb VLCC tankers on long-term charters with options for storage. Reports indicate that up to 15 VLCCs have already been booked with storage options which, when combined with high 'oil on water' volumes, has seen VLCC rates surge to five-year highs in early January.

Current crude price structures appear to support floating storage. As ICE Brent has plunged to below $50/bbl over early-January, the M1-M3 spread widened to $2.55/bbl from $1.38/bbl one month earlier. Meanwhile, the M1-M12 spread currently stands at $10.48/bbl. These spreads are now at the level where market participants can cover their storage costs including charter fees, bunker fuels, insurance and loading and discharge fees, and expect to make a profit. Nonetheless, at the time of writing, no increase in short-term floating storage (not including Iranian volumes held on tankers for logistical reasons) had been confirmed with global levels remaining on a par with December.  Considering the steep global stock build projected for 1H15, the likelihood of an uptick in floating storage would increase as global supply outstrips demand over the next few months.

Considering the contango in the NYMEX WTI contract, another option for traders has been the Cushing storage play. By early January, the NYMEX WTI M1-M12 spread had widened to $7.54/bbl from $2.23/bbl one month earlier. In the second week of January WTI briefly traded at a premium to Brent with market reports indicating increased crude being bought and put directly into storage at the hub. Despite the limited options for shipping oil from Cushing to market, storage at the hub is attractive since land-based storage costs are less than at sea and there is currently close to 37 mb of available capacity at the hub.



On a product-by-product basis, OECD middle distillates stocks rose by a steep 7.8 mb, reducing their deficit versus seasonal levels to 35 mb, from 42 mb one month earlier. Motor gasoline inventories surged by 12.7 mb, faster than the 8.3 mb five-year average build for the month, as refiners in the US built stocks of winter-grade product and those in Europe likely had difficulty disposing of excess gasoline produced as a result of maintaining high middle distillate production. All told, OECD refined product inventories covered 30.0 days of forward demand at end-November, 0.1 days above end-October.

Preliminary data indicate that OECD inventories built counter-seasonally by 12.5 mb over December, compared to an average draw of 54.8 mb for the month. The stock surplus to seasonal levels swelled to 74.0 mb, the widest such surplus since August 2010, and a startling turnaround, considering that inventories had been in deficit until September 2014. The build centred on OECD Americas (+22.8 mb) where product stocks surged as refinery runs hit record levels. Inventories in OECD Asia Oceania dropped by 9.9 mb, about half the seasonal average, while European stocks slipped by 0.4 mb. If these stock changes are confirmed, OECD inventories will have added 10.5 mb over 4Q14 and 143 mb over the year as a whole.


Recent OECD industry stock changes

OECD Americas

Industry inventories in OECD Americas followed seasonal trends adding 6.9 mb in November. Despite regional refinery throughputs surging by over 800 kb/d, crude stocks only inched down by 0.4 mb as domestic production continued to soar. By end-month, regional crude stocks stood at 538 mb, 16 mb above the previous year and 40 mb above the five-year average.

High refinery activity did not stop regional product inventories from decreasing seasonally by 2.9 mb. Stocks of 'other products', a category that includes LPG, propane and ethane and largely bypasses the refinery system, sank by 11.3 mb, slightly steeper than the 10.5 mb seasonal average draw for the month. In contrast, refined products (including motor gasoline, middle distillates and residual fuel oil) rose by a combined 8.4 mb.

After posting lacklustre builds over the second and third quarters, regional stocks of middle distillates, including among others, ultra-low sulphur diesel, still the region's liquid heating fuel of choice, remain historically low. In November, they stood 3.2 mb below last year and 30.8 mb below the five-year average. Following the seasonal destocking of summer-grade product and associated switch to the production of winter-grade product, motor gasoline inventories rebounded by 8.8 mb. By end-month, regional refined product stocks covered 28.3 days of forward demand, level with one month earlier.



Preliminary weekly data from the US Energy Information Administration (EIA) point to US inventories defying seasonal trends and soaring by 22.8 mb in December. The upward momentum came from surging refined product stocks (+ 23.2 mb m-o-m) as, despite margins easing, US refiners hiked runs by a further 460 kb/d to 16.4 mb. The bulk of the build came in motor gasoline (+24.0 mb) and middle distillates (+17.7 mb), offsetting a 15.0 mb draw in 'other products' which came against the backdrop of propane exports hitting new highs exceeding 500 kb/d. The latter build saw the deficit of US middle distillates holdings to the five-year average nearly halve to 17.0 mb.



On the crude side, stocks at the Cushing, Oklahoma storage hub (the delivery point of the NYMEX WTI contract) extended recent builds and added 7.5 mb over the month to stand at 32.1 mb by the beginning of January. Nonetheless, inventories at the hub remain 6.3 mb and 8.6 mb below the five-year average and last year, respectively.

OECD Europe

OECD European oil inventories rose seasonally by 4.7 mb in November. However, this masked seasonality-defying stock movements which largely offset one another. Amid high margins, European refiners maintained throughputs above year-earlier levels which saw crude stocks drop counter-seasonally by 4.5 mb, with stocks of NGLs and other feedstocks slipping by an additional 0.6 mb. On the other hand, high refinery activity saw product holdings build by a steep 9.8 mb. Therefore, the deficit of refined products to average levels narrowed to 29.8 mb at end-month, its smallest since September 2012.

Builds spanned all product categories except 'other products', stocks of which fell by 1.8 mb. Notably, middle distillates inventories surged by 6.3 mb, twice the seasonal average, as European weather remained warmer than normal. Motor gasoline stocks built by 3.3 mb as regional refiners reportedly struggled to place product in other markets including the US Atlantic Coast and Africa. All told, at end-November regional refined products holdings covered 39.6 days of forward demand, 0.5 days above end-October.



Information and market reports pertaining to refined products held in independent storage in Northwest Europe point to volumes approaching historical highs by end-2014 and reportedly testing capacity limits. Nonetheless, preliminary data from Euroilstock indicate a surprising 1.5 mb December draw in refined products in Europe 15 plus Norway. Rising crude oil holdings (+1.0 mb) provided some offset with total oil stocks building by 0.4 mb

OECD Asia Oceania

Commercial inventories in OECD Asia Oceania fell seasonally by 6.4 mb in November. A combined 9.4 mb draw in crude, NGLS and feedstocks more than offset a 2.9 mb build in refined products. There too, as in Europe, counter-seasonal changes in crude and product stocks prevailed. Crude stocks drew by 7.6 mb on high refinery activity while products built simultaneously by 2.9 mb. Product builds spanned all categories bar fuel oil, stocks of which drew by 0.9 mb. Middle distillates added 2.7 mb on the back of unseasonably warm weather, which decreased demand for kerosene, the region's liquid space heating fuel of choice, while stocks of motor gasoline and 'other products' added 0.6 mb and 0.5 mb, respectively. At end-month, regional refined products holdings covered 20.6 days of forward demand at end-month, a rise of 0.7 days on end-October.



Preliminary weekly data from the Petroleum Association of Japan (PAJ) indicate that Japanese inventories dropped by 9.9 mb in December, less than the 14.5 mb five-year average draw for the month. The draw was centred on crude oil (-6.4 mb) as refinery throughputs soared by another 500 kb/d. Despite the increase in refinery activity, refined products drew by 4.3 mb with all categories declining. Notably, middle distillates slipped by 1.8 mb as the weather turned colder and combined with reportedly healthy jet-kerosene demand from the aviation industry. By end-month jet-kerosene inventories sat level with the five-year average.

Recent developments in Singapore and China stocks



According to data from China Oil, Gas and Petrochemicals (China OGP), Chinese commercial crude inventories decreased by an equivalent 4.6 mb in November (since August 2010 data are reported in terms of percentage stock change). The difference between net crude supply (domestic production plus net imports) and refinery runs remained in positive territory in November, signalling an unreported crude build of 8.8 mb (290 kb/d). This oil could be destined for China's Strategic Petroleum Reserve or commercial storage capacity, which, according to market reports, expanded towards end-2014. Preliminary information suggests that the 'gap' between reported and implied inventory changes may widen for December as imports surged to a record 7.14 mb/d, outstripping refinery runs.

On the products side, stocks drew by a combined 3.4 mb despite domestic refinery runs remaining above 10 mb for a third successive month. Gasoil led product draws, falling by 2.8 mb while kerosene and motor gasoline inventories declined by 0.4 mb and 0.2 mb, respectively. With product exports slipping slightly during the month, this suggests that the bulk of product drawn from stocks was destined for the domestic market.

Weekly data from International Enterprise indicate that land-based refined products inventories in Singapore inched down by 0.1 mb in December. Total stocks were pressured lower by middle distillates and light distillates, inventories of which decreased by 1.2 mb and 0.5 mb, respectively, while residual fuel oil holdings rose by 1.5 mb.


Prices

Summary

  • Oil prices continued to fall in December and into January as rising supplies collided with weak demand growth and OPEC maintained its commitment not to cut production. Brent crude dropped below $46/bbl in early January, 60% down from a June peak, as markets anticipated further stock builds. NYMEX WTI held up versus Brent, and at the time of writing - the two benchmarks had recouped some earlier losses and were last trading near parity around $48/bbl.
  • Spot crude oil prices were pressured by surging supply from Iraq, which hoisted December output to a 35-year high, as well as an increase in exports from Russia. Top exporter Saudi Arabia in early January made sharp cuts to its monthly formula prices to Europe in response to falling benchmark crude prices and a surge in sour oil supply.
  • Spot product prices continued to plummet over December so that on a monthly average basis they stood between 16% and 26% lower than one month earlier. In absolute terms, middle distillates posted the steepest declines. Consequently, cracks in the middle of the barrel weakened at a faster pace than elsewhere.
  • Freight rates for crude oil carriers posted a strong month. Rates for very-large-crude-carriers (VLCCs) spiked to a six-year high in mid-December on strong eastward activity.

Market overview

Supplies piled up and weighed on oil prices, with Brent tumbling in early January below $46/bbl - its lowest in nearly six years - as markets braced for stock builds. Global benchmarks continued to drop despite an escalation of violence in OPEC producer Libya that shut key oil terminals and fields and cut output to around 200 kb/d versus 690 kb/d in November. Prices fell heavily after Saudi Arabia's oil minister said in December it was "difficult if not impossible" for OPEC to cut output on its own to shore up prices when those outside the group were producing more. Ali al-Naimi was also reported as saying it was "not in the interest of OPEC producers to cut their production, whatever the price is". Oil "may not" trade at $100/bbl again, he said.

Adding further pressure, the dollar index rose for the sixth straight month in December - making dollar-denominated oil more costly for holders of other currencies and less attractive as a currency hedge. Lower oil prices may in principle boost consumer spending and the world economy by increasing household disposable income and slashing industry input costs, but oil's sharp drop since June has also stoked deflationary concerns.

December saw global benchmarks Brent and WTI posting month-on-month (m-o-m) losses of more than 20%, extending earlier declines. ICE Brent futures dropped $16.36/bbl from November to an average $63.27/bbl in December, for a m-o-m decline of 20.5%. NYMEX WTI plunged $16.52/bbl from November to an average $59.29/bbl in December, for a m-o-m drop of 21.8%. After averaging around $110/bbl from 2011 to 2013, ICE Brent - at the time of writing - had recovered some earlier losses to trade at $49.80/bbl. NYMEX WTI held up versus the North Sea benchmark and was last trading at near parity around $48/bbl.



Reflecting the loosening supply-demand balance, the NYMEX WTI M1-M2 spread widened out to an average -$0.29/bbl in December from $0.02/bbl in November, moving more decisively into a contango structure - where prompt oil is cheaper than future deliveries. By early January, the discount of prompt-month to second-month contracts had widened to -$0.49/bbl. Brent has been in a solid contango structure since July, but the abundance of sweet crude pushed the North Sea benchmark into a deeper contango of -$1/bbl in early January. The ICE Brent M1-M2 contract spread was at an average -$0.54/bbl in December and -$0.49/bbl in November. Early January marked the first time the entire oil complex of crude and products shifted into contango since 2009.



Forward curves sank into deeper contango, with the Brent M1-M12 contract spread widening in December to -$6.45/bbl versus -$4.53/bbl in November. The WTI M1-M12 spread also shifted down to an average -$3.88/bbl in December compared to -$0.68/bbl in November. A steeper decline on NYMEX WTI widened the front-month differential to ICE Brent to nearly $4/bbl versus $3.82/bbl in November. On 15 January, the NYMEX WTI front-month contract traded briefly at a premium to ICE Brent.


Financial markets

Market activity

Hedge funds appeared to take a slightly more optimistic stance towards ICE Brent in December, as their 'long-to-short ratio', an overall indicator of market sentiment, regained some previously lost ground, having peaked in May 2014 on the back of collapsing oil prices. Their partial rebound, following a steep plunge, suggests funds may now see a price recovery as somewhat more likely. The long-to-short ratio nevertheless remains at low levels for the year, and the funds overall maintain a cautious stance. Option contracts now make up to 35% of Brent open interest and funds' 'spreading' positions are at all-time highs, both signs of heightened uncertainty on the future ahead. Funds' net positioning in NYMEX WTI remained stable, with a slightly more bullish uptick in late December.





The number of outstanding ICE Brent future contracts held above NYMEX WTI throughout December. It is the first time that this happens for a sustained period. The gap in open interest between the two contracts has been continuously narrowing, as traders look at Brent as the global benchmark for crude prices. The gap is narrowing even faster when accounting both future and option contracts. This is a departure from established patterns, as the WTI options market had traditionally been significantly more active than that in Brent options.

Financial regulation

The US Federal Reserve extended the deadline for banks to liquidate their stakes in hedge funds and various funds under the so-called Volcker Rule by two years to 2017, following banks' claims that selling those stakes quickly could require them do so at a discount. The July 2015 deadline was maintained however for the other pillar of the Volcker Rule, the banks' ban from proprietary trading.

The US Commodities Futures Trading Commission has re-opened the comment period on its proposed rule on speculative position limits for 45 days, until 22 January. The final rule is expected in spring 2015.

The EU Commission published the list of non-EU countries whose regulatory requirements for central clearing are 'at least equivalent' to EU ones. Non-EU Central clearing counterparties still need to be recognised by EU authorities, in order to avoid higher capital requirements. The compliance deadline has been pushed back from 15 December 2014 to 15 June 2015, to allow more time for the CCPs authorisation process.

Spot crude oil prices

A surge in Iraqi supply to the highest level since 1979 and an increase in Russian export flows weighed on spot markets. Further disruptions to Libyan supply have knocked output down towards 200kb/d now versus 440 kb/d in December, but markets have paid scant attention given the abundance of alternatives on offer.

Global benchmarks buckled under the weight of plentiful supplies. As sellers struggled to find outlets for their crude - Nigerian barrels were especially difficult to place - some oil companies reportedly were considering the possibility of hiring tankers to store oil at sea.



Dated Brent sank to $62.57/bbl during December, a loss of $16.37/bbl versus November. By early January, the North Sea grade had plunged to $49.46/bbl, its lowest since April 2009, as loading programmes suggested supplies of its component grades - Brent, Forties, Oseberg and Ekofisk - would increase in February. US WTI dropped $16.87/bbl to average $59.47/bbl during December. Middle East benchmark Dubai fell $16.17/bbl from November to an average $60.22/bbl.

Russian Urals took the biggest hit, losing $17.58/bbl versus November to average $61.34/bbl. In Europe, an uptick in anticipated loadings of sour Urals crude for January weakened differentials for the grade versus Dated Brent. Urals is now trading at roughly $2/bbl under Dated Brent. Export tariff adjustments encouraged Russian producers to delay loadings of Urals crude to January from December.



Increased shipments of Iraqi crude added to the downside pressure. Exports from Iraq rose to 2.95 mb/d in December, with Basra Light loadings hitting a record of nearly 2.8 mb/d thanks to reductions in weather-related delays and a more effective use of export infrastructure (see Supply). An agreement between Baghdad and the Kurdistan Regional Government has helped boost Iraqi exports from the Turkish Mediterranean port of Ceyhan to around 300 kb/d in January.

In an apparent response to falling benchmark crude prices and a surge of sour oil supply to Europe, Saudi Aramco in early January made sharp cuts to its official selling prices for crude lifting in February for Europe. For deliveries into the Mediterranean, Aramco widened the discount of Arab Extra Light versus the ICE Brent weighted average (BWAVE) by $2.10/bbl to a $3.10/bbl.

Saudi Arabia increased the premium of crudes loading for Asia in February versus the average of Oman and Dubai by $0.55-$0.70/bbl, after cutting prices by $1.50-$1.90/bbl the previous month. Riyadh made modest cuts to its prices to the US. The changes reflect Saudi Aramco's determination to keep its prices competitive in order to sustain its market share. The US imported 826 kb/d of Saudi crude in October, down from 1.58 mb/d in April. Riyadh also lost market share in China after absolute volumes fell.



Sellers of Nigerian crude have meanwhile found it difficult to place their barrels into Asia due to sluggish demand, high freight rates and lower Middle East crude oil prices. Qua Iboe fell to its lowest level against Dated Brent since April 2009.

US Gulf coast crudes have fallen against WTI on expectations that refinery maintenance will increase crude stocks. A drop in demand depressed Canadian heavy sour crude Western Canada Select.


Spot product prices

Product prices continued to plummet over December so that on a monthly average basis they stood between 16% and 26% lower than one month earlier. In percentage terms, spot prices for products in the middle of the barrel posted the smallest declines after support came from a seasonal uptick in demand for heating fuels and jet kerosene. Products at the top and bottom of the barrel weakened at a faster pace as fundamentals remained looser than in the middle of the barrel. Nonetheless, in absolute terms, middle distillates posted the steepest declines across the barrel due to their higher prices which saw cracks in the middle of the barrel weaken at a faster pace than elsewhere.



Spot prices on the US Gulf Coast saw the steepest falls as refiners there continued to run at very high rates which pushed extra product onto an already saturated market and saw stocks, particularly of light and middle distillates balloon. These losses outstripped the drop in LLS and saw cracks plummet. A notable exception came from No 6 3% fuel oil which held its price in absolute terms better than other products, consequently its crack firmed by $2.38/bbl in December.



A bright spot in Europe came from naphtha cracks which posted m-o-m gains on healthy demand from regional gasoline blenders and an open arbitrage to ship product to Asia. Cracks also improved at the bottom of the barrel as, despite a change in bunker fuel specifications in the Northern European ECA, Rotterdam LSFO fuel oil cracks improved by $0.55/bbl on a monthly average basis. Upward momentum came from fewer imports of Russian product and healthy trade to Asia. In the Mediterranean, fuel oil cracks firmed by over $1/bbl on export to Asia.



Product prices in Singapore generally remained higher than elsewhere on comparatively buoyant Asian demand, which helped draw in product from the Middle East and Europe. However, cracks remained relatively muted as Dubai prices fell less than those of other crudes on an absolute basis.  The one exception was the LSWR crack which surged by $3.72/bbl m-o-m, its highest level in over 12 months.

Freight

Crude rates had a very strong month, particularly for larger carriers. Very-large-crude-carriers (VLCCs) on the benchmark Middle East to Asia route spiked to a four-year high in mid-December.  Average prices for the month jumped to a six-year high. The rate eased in the last week of the month, as activity slowed down. Rates for Suezmaxes leaving West Africa had another strong month, particularly in the second half, reportedly on traders fixing ahead of holidays, although overall the December rate was slightly lower than previous months' peaks. Aframaxes in the North Sea also had a strong month, with loadings at their highest in three years. Healthy activity and pre-holiday fixing propped rates to their highest since July 2014.



Surveyed product freight rates generally trended down throughout the month, although the monthly average was up on November. Rates for 37Kt UK - US Atlantic product vessels remained sustained in December by arbitrage opportunities for shipping gasoline to the US Atlantic coast and diesel back to Europe, but eased in early January on the back of narrowing spreads, as both sides of the Atlantic were well supplied with products (see 'Product prices'). The product rate for the 38Kt Caribbean - US Atlantic route also had a stronger December, although gradually trending down, to finally begin 2015 below its recent peaks. In the East, the 75Kt Middle East Gulf to Japan benchmark route eased as the tonnage list built faster than activity throughout the month. The rate now sits at its lowest in six months.


Refining

Summary

  • Global refinery crude throughputs surged to new highs in December, reaching 78.9 mb/d, according to preliminary data. A 370 kb/d monthly increase extended November's gains of 1.5 mb/d, as plants returned from seasonal maintenance, with stronger than expected runs in the US and OECD Asia-Oceania. As a result, the estimate of global refinery crude throughputs for 4Q14 has been raised by 0.2 mb/d since last month's Report, to 78.2 mb/d.
  • Global refinery crude runs are set to fall to 77.8 mb/d in 1Q15, in line with seasonally falling demand and increased refinery maintenance. Burgeoning product holdings and deteriorating margins will likely amplify the declines in mature markets, as new capacity in the non-OECD continues to ramp up. Annual gains are set to ease to 1.0 mb/d in 1Q15 compared with gains of 2.2 mb/d in 4Q14.
  • Plummeting refinery margins in December will likely cause refiners to scale back runs in early 2015, especially in the US. Calculated US Midcontinent margins plunged by $9.65/bbl on average in December to end the month in negative territory, as throughputs surged on the back of rising crude supplies. Gulf Coast margins also retreated on rising product inventories. European and Singapore margins saw more modest declines and remained well above levels seen a year earlier.
  • OECD refinery crude throughputs surged 1.3 mb/d in November, to 37.5 mb/d. Gains stemmed from both the Americas and Asia Oceania, as refiners completed maintenance, while European rates were unchanged from October. Total OECD runs stood 865 kb/d above the previous year, thanks largely to a recovery in European rates from weak 2013 levels.

Global refinery overview

Despite lacklustre economic and oil-demand growth, global refinery activity remained exceptionally robust through year-end, and 4Q14 estimates have been lifted by 235 kb/d since last month's Report. At 78.2 mb/d, global crude runs stood more than 2 mb/d above year earlier levels in 4Q14, compared with oil product demand growth of only 0.6 mb/d.

The sharp plunge in crude oil prices since June has provided a welcome boost to refiners across the globe. Product price declines have generally lagged those of crude, providing refiners with an opportunity, however short-lived, to capture higher margins. Refiners in the US and Europe raised throughputs by nearly 1 mb/d in total in 2H14 from a year earlier. US refiners lifted throughputs to fresh record-highs in early December, while European refiners took advantage of margins rising three-fold since June to raise runs to levels not seen in more than a year.

Non-OECD refiners also pushed runs higher at the end of 2014. After contracting for four consecutive quarters, non-OECD Asian throughputs finally recovered towards year-end. Shuttered capacity in India came back on line and Singapore started a new condensate splitter. Chinese refiners also increased runs, by almost 0.5 mb/d from a year earlier, in part to restock depleted product inventories. The ramping up of Saudi Arabia's two new mega-projects underpinned Middle Eastern gains, while Russian refiners maintained high rates to take advantage of a favourable export duty scheme before its expiration at year-end.



These high refinery runs have led to a significant build in product inventories in key markets. US product stocks swelled by more than 23 mb/d in December, while independent storage levels in Northwest Europe reportedly surged to three-year highs. Product stocks normally draw during the northern hemisphere winter. Not surprisingly, refinery margins fell in December, as product prices caught up with earlier crude-price declines.

The drop in refinery margins was particularly pronounced in the US, where Midcontinent refiners lost an average $9.65/bbl from December, and Gulf Coast refiners shed $2.07/bbl on average. Midcontinent refiners briefly saw negative returns in late December, as US product price declines were particularly steep.



Gulf Coast cracking margins have been negative for certain grades some time now, with coking margins faring only slightly better. US refinery runs are expected to fall sharply from January, in line with seasonal patterns. Over the past five years, US refinery crude intake dropped by on average 570 kb/d from December to January. Swelling product inventories and weak margins, despite signs of recovering US demand growth, will likely result in a steep drop in runs in January, and we project a 710 kb/d monthly decline for this year. Indeed, weekly EIA data for the week ending 9 January show total US refinery runs dropped 530 kb/d from a week earlier.

Also in Europe, weak regional and export demand depressed product cracks in December, though margins remained high compared to recent levels. As such, refiners maintained runs at relatively high levels through year-end. Singapore margins saw more modest declines and in general held up better than for most of the year, supporting slightly higher runs towards year-end.



The timing and speed of the ramp-up of new non-OECD capacity in 2015 will be key to wider refinery market movements in 2015. Saudi Arabia's 400 kb/d Yanbu refinery and the first phase of Brazil's first new refinery in 35 years have already been commissioned and will continue to increase runs in coming months. Petrobras reportedly shipped its first naphtha cargo in early January, while Yanbu followed suit loading a diesel cargo mid-month. The UAE's 420 kb/d Ruwais extension and India's much delayed 300 kb/d Paradip refinery, and the restart of Colombia's expanded Cartagena plant, should also commence crude processing in coming months if all goes well. With product inventories rebuilding counter seasonally and oil demand projected to fall seasonally, margins will remain under pressure in the near term.



Global refinery crude runs are expected to decline through April as refinery maintenance intensifies. In all, global throughputs are pegged at 77.8 mb/d for 1Q15, 395 kb/d less than the 4Q14 average and 1 mb/d above a year earlier. Growth will again be concentrated in non-OECD countries, extending recent trends.


OECD refinery throughput

OECD refinery throughputs rebounded in November, by 1.3 mb/d from October's low, to average 37.5 mb/d. Higher-than-expected throughputs in Asia Oceania led to an upward revision of 260 kb/d from last month's Report. The Americas led the monthly gain with an increase of 815 kb/d, followed by the OECD Asia Oceania region, which saw gains of 490 kb/d, while European refiners kept runs roughly unchanged from the previous month. Overall OECD refinery activity held on to annual gains seen since August, processing almost 0.9 mb/d more crude than a year earlier in the latest month. Only in Asia Oceania did throughputs contract year-on-year in November, while refiners in the Americas and Europe reported annual gains of 305 kb/d and 680 kb/d, respectively. After years of contractions, European plants lifted throughputs for a fourth consecutive month, on the back of significantly improved margins.



Throughputs look to have surged further in December, but sharp seasonal declines are forecast for 1Q15. OECD refinery runs normally see seasonal drops between December and January. A monthly decline of 0.9 mb/d is forecast in January 2015, compared with a five-year average decline of 0.7 mb/d, as burgeoning product inventories and a steep drop in margins amplify the seasonal change. OECD refinery runs generally fall further through 1Q, as maintenance intensifies. In all, we forecast OECD runs to average 36.4 mb/d in 1Q15, a decline of 0.8 mb/d from 4Q14, but still 175 kb/d above 1Q14.



Refinery throughputs in the OECD Americas rose by 810 kb/d in November, to 18.9 mb/d. The US accounted for 90% of the increase, with Canada contributing 100 kb/d. Canadian refinery runs have been subdued since September, when a number of refineries shut for maintenance work. According to weekly data from the National Energy Board (NEB), Canadian crude processing rebounded to 1.6 mb/d in November, compared with 1.5 mb/d in September and October. The ramp-up continued through December, with runs reaching 1.7 mb/d in the second half of the month. Suncor announced in early January it had completed maintenance of its Montreal refinery, which had been underway since 22 September. Suncor also performed maintenance at its Sarnia and Edmonton plants over the past months, as did Shell at its Sarnia refinery. Imperial Oil started decommissioning its Dartmouth refinery in Eastern Canada in September



In the US, runs rose in all regions except the East Coast in November, with the steepest gains in the Gulf Coast followed by the Midcontinent, which raised runs by 470 kb/d and 200 kb/d, respectively. Preliminary weekly data show that US refiners finished 2014 on a high note, matching July's record high of 16.6 mb/d in the first week of December. For the month as a whole, crude throughputs were at their second highest ever, averaging 16.4 mb/d, an increase of 325 kb/d from November and 325 kb/d above the previous year. As in November, the monthly increase stemmed from Gulf Coast and Midcontinent refiners, who raised runs by 100 kb/d and 215 kb/d, respectively.

US throughputs are expected to decline sharply in January, with the fall exceeding seasonal trends, as December's collapse in margins will likely amplify maintenance shutdowns. Amongst others, Phillips 66 is shutting some units at its 356 kb/d Wood River refinery for maintenance. The refinery, which is a JV between Phillips 66 and Cenovus but operated by Phillips 66, imports around 180 kb/d of heavy Canadian crude. On the Gulf Coast, Exxon started maintenance at its 557 kb/d Baytown refinery in January and Phillips 66 is undertaking work at its 250 kb/d Belle Chasse plant in Louisiana.

Additionally, a string of unplanned outages in January also contributed to take runs lower in January. Philadelphia Energy Solutions had to shut its 335 kb/d refinery for several days after a series of operational issues and small fires. Fires caused both Husky Energy to shut its 155 kb/d Lima, Ohio refinery, and Marathon to halt operations at its 212 kb/d Robison, Illinois refinery. BP, meanwhile, reportedly had to shut a 90 kb/d crude unit at its Whiting, Indiana plant due to freezing temperatures.



In Europe, refiners continued to benefit from an improvement in margins to keep runs relatively high in November. Higher German and Italian refinery runs were mostly offset by declines elsewhere, leaving regional runs roughly unchanged on the month, at 11.8 mb/d. Regional throughputs exceeded year-earlier levels for a fourth consecutive month, with runs up 680 kb/d y-o-y in the latest monthly data. Preliminary data released by Euroilstocks on 12 January show refiners maintained runs at relatively elevated levels in December, with total crude throughputs now pegged at 11.7 mb/d, only 175 kb/d less than in November. Regional refinery activity is expected to slip further in early 2015, as the region's demand contract further and new capacity hikes products exports to the region. While regional runs slip to 11.3 mb/d on average in 1Q15, from 11.8 mb/d in 4Q14, they are expected to surpass year-earlier levels in early 2015 (though annual growth slips from 935 kb/d on average in 4Q14 to 155 kb/d in 1Q15).



Refiners in OECD Asia Oceania increased runs by 0.5 mb/d in November, to 6.7 mb/d on average. The gains came primarily from Japan, which had seen sharp maintenance cuts the previous month, but also South Korea, which hiked throughputs by 125 kb/d. According to preliminary data, Japanese refiners lifted runs further in December, by 200 kb/d, to average just under 3.4 mb/d, adjusted for NGLs included in the preliminary data. In December, capacity utilisation stood above 90% of its 3.95 mb/d nameplate capacity, compared with about 88% the previous month.

Non-OECD refinery throughput

Non-OECD refinery throughputs surged to a new high of 41 mb/d in 4Q14, up 0.7 mb/d on 3Q14 and 1.1 mb/d on 4Q13, preliminary data suggest. Gains were largely accounted for by non-OECD Asia towards year-end, after relatively subdued runs earlier in the year. The start-up of Saudi Arabia's 400 kb/d Yanbu refinery in late 2014 and UAE's 420 kb/d Ruwais expansion and India's 300 kb/d Paradip refinery, once commissioned sometime this year, will likely push further pressure on existing capacity in early 2015, inducing further consolidation efforts in OECD and non-OECD countries. Indeed, Shell recently announced it was evaluating options for its Malaysian refinery, due to overcapacity in the market, in a step further towards reducing its worldwide downstream presence.



According to official data from China's National Energy Board (NEB), Chinese refinery throughputs averaged 10.3 mb/d in November, 465 kb/d above the year earlier. For the first 11 months of 2014, Chinese refinery runs were 310 kb/d up on the year earlier, slightly exceeding domestic demand growth. To accommodate increased refinery output amid lacklustre demand, China's Ministry of Commerce just approved larger product export quotas for gasoline, diesel and jet fuel for PetroChina and Sinopec for 2015. Sinopec got a quota to export 260 kb/d of oil products this year, an increase of 45 kb/d from last year, while PetroChina's export quota was left unchanged at 180 kb/d.

Refinery-operations data for December are not yet available, but company schedules indicated runs would rise further in that month. In particular, the restart of CNOOC's Huizhou refinery after a prolonged shutdown likely contributed to higher volumes. PetroChina reportedly delayed the restart of its 200 kb/d Penzhou refinery in Sichuan due to lack of feedstocks. The refinery, which was commissioned only a year ago, has been shut since mid-October and was scheduled to restart in December.

Chinese refiners typically build diesel inventories in December and January, and unusually low diesel inventories at end of November could provide some support to refinery runs in coming months. Despite repeated cuts to regulated prices in China, domestic refinery margins were relatively healthy, possibly providing further support.

After six months of subdued runs, due in part to unscheduled outages, Indian refineries finally increased their throughputs in November. At 4.7 mb/d, Indian runs were 175 kb/d higher than a month earlier, including an 80 kb/d increase at HPCL's Visakh refinery after maintenance in October and a 50 kb/d gain at BPCL's Mumbai refinery. Delays continue to plague IOC's 300 kb/d Paradip refinery project, which is now only expected to be commissioned towards the end of 1Q15. On 10 December, private refinery company Essar signed a 10-year deal to buy 200 kb/d of Russian crude from Rosneft, to supply its 400 kb/d Vadinar refinery. The value of the deal amounts to nearly $10 billion over a 10-year period with shipments to start possibly already this year.



In Singapore, Exxon reportedly cut runs at its 302 kb/d Jurong mainland refinery in October and November. The refinery is connected to a 290 kb/d plant located on Jurong Island, also operated by the company. In November, Singapore Refining Company was reported to have started maintenance at its 290 kb/d refinery, also on Jurong Island. Jurong Aromatics Company, meanwhile, was reported to have shut its 100 kb/d condensate splitter in mid-December for two months amid weak margins. The splitter had only been commissioned in August of this year, to process Australian and Qatari condensates into petrochemical feedstocks and transportation fuels. Elsewhere, Taiwan's Formosa lifted runs to nearly 90% utilisation in January, compared with only 70% in December, when one of the plant's RFCC units had a malfunction.

Official monthly statistics data from the Russian Oil Ministry showed refiners processing nearly 6 0 mb/d in November, up 275 kb/d from a month earlier and 300 kb/d above the year earlier. Increases came from Rosneft's Syrzan and Angarsk refineries as well as Gazprom Neft's Omsk refinery and Gazpromneftekhim's Salavat plant. Preliminary data show Russian refinery runs eased slightly in December to average 5.9 mb/d, as forecast in last month's Report. Russian refinery runs are expected to drop in January, but remain largely in line with last year's levels as refiners adjust to a revised export-duty scheme. The new export duties prop up margins of sophisticated refineries with high light product output and exports, while penalising those with a high fuel-oil yield.

In the Middle East, Iraqi refinery runs remained constrained due to the shutdown of the country's largest plant in Baiji since June. Crude supplies to state refiners averaged 405 kb/d in November, compared with 600 kb/d in May prior to the IS assault. An additional 160 kb/d of crude oil is estimated to be processed or used directly in KRG-controlled territory. In Saudi Arabia, meanwhile, latest data showed the Kingdom processed 2.06 mb/d of crude oil in October. The recently commissioned Yasref refinery in Yanbu started trial runs in September and had originally scheduled product exports from November, but this has been delayed until early 2015. The crude-run forecast for the UAE for December and January has been slightly lowered since last month's Report, as it seems Tankreer's new Ruwais refinery will only be commissioned in early 2015, as opposed to earlier announcements that the plant would start up before the end of 2014.



In Latin America, Brazilian refinery runs were largely unchanged in November, at 2.1 mb/d. As previously noted, Petrobras started trial runs at its Abreu e Lima refinery in early December. The first 115 kb/d crude unit is expected to ramp up throughputs before the second crude distillation tower and secondary units are commissioned in May. A malfunction of a cracking unit at the company's 208 kb/d Repar refinery in late December, which forced the plant to run at reduced rates for two weeks into early January, could provide a partial offset.