Oil Market Report: 13 March 2015

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Highlights

  • Crude oil prices stabilised following early-February gains, with ICE Brent rising more than NYMEX WTI which was weighed down by swelling US stockpiles. At the time of writing, Brent was trading at around $58/bbl - up nearly 30% from a six-year low in January. WTI was at around $48/bbl.
  • Having bottomed-out in 2Q14, global oil demand growth has since steadily risen, with year-on-year gains estimated at around 0.9 mb/d for 4Q14 and 1.0 mb/d for 1Q15. The forecast of demand growth for 2015 as a whole has been raised by 75 kb/d to 1.0 mb/d, bringing global demand to an average 93.5 mb/d.
  • Global supply rose by 1.3 mb/d year-on-year to an estimated 94 mb/d in February, led by a 1.4 mb/d gain in non-OPEC. Declines in the US rig count have yet to dent North American output growth. Final December and preliminary 1Q15 data show higher-than-expected US crude supply, raising the 2015 North American outlook.
  • OPEC crude output edged down by 90 kb/d in February to 30.22 mb/d, as losses in Libya and Iraq offset higher supply from Saudi Arabia, Iran and Angola. A slightly higher demand forecast has raised the 2H15 'call' on OPEC crude to 30.3 mb/d, above the group's official 30 mb/d target.
  • Global crude refinery throughputs estimates have been raised to 77.8 mb/d for 1Q15 and 77.3 mb/d for 2Q15, on sustained high margins and a slightly more robust oil demand outlook. Annual gains are forecast around 1.0 mb/d in 1H15, down from a sharp 2.2 mb/d in 4Q14, and in line with projected oil product demand growth.
  • OECD commercial stocks rose by a weaker-than-average 23.1 mb in January, to 2 733 mb, trimming their surplus to average levels to 60.3 mb. US crude stocks rose to a record 72 mb surplus. Preliminary data show stocks drew by a weak 8.8 mb in February as extended US crude builds offset steep weather-related product draws.

Head fake

The partial rebound in oil prices that occurred in late January and early February seems to have marked a pause. Prices have since become range-bound, with Brent futures trading around $60/bbl and WTI closer to $50/bbl, and at the time of writing slightly below those levels. On the face of it, the oil price appears to be stabilising.  What a precarious balance it is, however.

Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for 4Q14 North American supply have been revised upwards by a steep 300 kb/d. The projection of 1Q15 supply has also been raised. Plunging US crude throughputs - due to seasonal and unplanned refinery outages, as well as weak margins and high gasoline stock builds in December - have seen US crude inventories soar, compounding the impact of robust supply growth. At last count, total US crude stocks stood at 468 mb, an all-time record.

The unwinding of seasonal refinery maintenance may slow US crude stock builds in 2Q15 but will not stop them, and stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive. While the US supply response to lower prices might take longer to kick in than expected, it might also prove more abrupt.

At the same time, supply disruption risks are on the rise. Producer countries that depend on high oil prices and that do not enjoy large buffers will find it hard to balance their budget and fund social spending programs at current prices. That is not a recipe for social stability. The surging dollar will also make it harder for companies such as cash-strapped Petrobras to pay back dollar debt and overcome financial hurdles. Iraq and Libya continue to experience disruptions amid MENA political turmoil.

Product markets, meanwhile, have proved unexpectedly strong. Not only have product prices lagged those of crude during the selloff - as is common in a downturn -- but they have raced ahead of them in the rebound, keeping refining margins remarkably firm, and supporting unexpectedly strong throughputs in once-depressed refining centres such as Europe and OECD Asia. Product demand has shown signs of life, with even European demand emerging from a secular decline to show strong growth of 3.2% in December and 0.9% in January. That demand strength has widened the deficit of OECD product inventories to their seasonal average, a trend largely obscured by surging US crude stocks.

Whether such strength in product demand and refining activity can be sustained is unclear. Both have benefited from one-off factors. Frigid weather in North America has raised heating demand, drawing distillates from across the Atlantic. Refinery outages in North and South America have also helped support margins elsewhere and fuelled long-haul product trade. Distillate cargoes were booked from as far off as Saudi Arabia and the UAE to make up for outages in Brazil and the US East Coast.

Demand may also have been supported by opportunistic buying and growing interest in storage plays. While that would have helped tighten product markets, such demand is less sustainable than that driven by underlying economic growth, and there are still few firm signs at this stage that lower prices are giving  the economy a real boost. China, for one, remains in cooling mode. Then again, information about demand lags supply and tends to be sketchier, so it may take time for any pickup in demand to be fully captured in the data. As to refining margins, the ramp up of activity at new Middle East refineries, coinciding with a seasonal downturn in global demand, might soon depress them.

Facing exceptional uncertainty, many market participants remain on the fence. But market forces are not sitting still.

Demand

Summary

  • The turn of the year saw a modest uptick in global oil demand growth. Momentum bottomed-out at a five-year low of 275 kb/d year-on-year (y-o-y) in 2Q14, it has since risen to 495 kb/d in 3Q14 and 870 kb/d in 4Q14, with a further 1.0 mb/d gain foreseen in 1Q15. Although this impetus has long been alluded to in previous editions of this Report, consequential on escalating economic activity, additional gains stemmed from one-off factors such as colder weather conditions and low data the year previous.
  • Confirmed data for the year as a whole depicted roughly 92.5 mb/d of oil products being delivered in 2014, 680 kb/d (or 0.7%) up on the year. Modestly escalating global economic growth, as forecast by the International Monetary Fund (IMF: +3.7% in 2015; +3.5% 2014), underpins an accelerating forecast of 2015, with demand putting on an extra 990 kb/d (or 1.1%), to 93.5 mb/d.
  • The United States and European demand trends have turned particularly supportive recently. Preliminary statistics for January, for example, show a second consecutive month of y-o-y demand growth in both the United States and Europe, a two-month pattern not having previously been seen for eleven- and sixteen-months, respectively.
  • The Chinese oil demand picture remains somewhat subdued, as relative macroeconomic weakness dampens demand despite numerous recent government price cuts. Relatively strong December demand gains were offset by estimates of softness returning in January, emphasising the apparent volatility that is contained in the monthly data, an occurrence heightened ahead of the Lunar New Year celebrations.  
  • One of the more resilient growth performers, given its recent relatively weak macroeconomic experience, has been Brazil, with near 5% y-o-y growth posted in December. Robust transport fuel demand growth continues to garner support from hardy consumer confidence, but even seemingly this last bastion of strong Brazilian economic sentiment is likely to wane in early-2015, hence the sharply lower currency. Consumer confidence, as tracked by the Confederacao Nacional da Industria (CNI) stood well above the key-100 'optimism' threshold in December, before falling to 'neutrality' through February.

Global overview

Tentative signs of a demand recovery have emerged with the turn of the year, with a heavy emphasis reserved for the word 'tentative'. Having bottomed-out, at a five-year low of 275 kb/d y-o-y in 2Q14, momentum has since picked up steadily, as global oil product demand rose by 495 kb/d y-o-y in 3Q14 and 870 kb/d in 4Q14. The forecast is for a further 1.0 mb/d y-o-y gain in 1Q15. Although the long anticipated global macroeconomic uptick underpinned the generally accelerating oil demand trend, one-off factors were largely responsible for the respective additions of an extra 200 kb/d and 130 kb/d to 4Q14 and 1Q15 demand compared to last month's Report. Notably colder weather conditions in many countries, in December and January versus the year earlier, temporarily boosted demand. Furthermore, y-o-y growth estimates carried a transitory premium on the exceptionally low numbers seen in many countries in the previous year. Additional macroeconomic activity still played a central role supporting the demand trend, but this was already largely factored into pre-existing forecasts consequential on the IMF's January World Economic Outlook, which predicted global GDP growth of 3.7% in 2015 after the 3.5% gain of 2014. Looking at global oil demand in y-o-y percentage terms, recent gains (+0.9% in 4Q14 and +1.1% in 1Q15) lag not just the trend seen prior to the Great Recession (+1.9%, 2001-07) but also roughly shadow the incredibly testing circumstances of recent years (+1.1%, 2008-14). Hence, the additional weighting this month on the word 'tentative', particularly considering the near halving that has occurred in crude oil prices, June 2014 through March 2015.

Underpinning the raised 4Q14 global demand estimate were a number of notable December upgrades over last month's Report, most notably Saudi Arabia (+220 kb/d), Brazil (+115 kb/d), the UK (+70 kb/d), Germany (+55 kb/d), Japan (+50 kb/d) and France (+40 kb/d). These additions proved more than enough to offset significant downgrades to the US (-240 kb/d), Chinese Taipei (-60 kb/d) and Iraq (-40 kb/d). A slightly higher 1Q15 estimate is also foreseen, with 130 kb/d added to the 1Q15 global demand estimate of 92.7 mb/d, gains largely attributable to additional European deliveries (+110 kb/d) most notably Germany (+35 kb/d) and Italy (+35 kb/d).

Looking ahead, the global oil demand trend is forecast to roughly maintain the predicted 1Q15 uptick through the year as a whole, though risks surrounding the macroeconomic backdrop remain high. The potential downside risks to the demand forecast at present are many and varied, including the escalating threat of a deflationary down spiral in economic activity and the potential eruption in geopolitical tension in one of the many countries currently at risk. The base-case forecast has global oil demand growth of 990 kb/d (or 1.1%) in 2015, accelerating from the 680 kb/d (or 0.7%) growth seen in 2014, an uptick supported by the IMF's January GDP outlook. Early macroeconomic indicators for the year are supportive of this forecast, with  JPMorgan's global all-industry PMI, for example, implying escalating business confidence, with a 52.8 reading in January whereby any reading above 50 implies net-optimism. Similarly, the Financial Times' Fulcrum estimate, which uses econometric techniques based on the work of economists Lucrezia Reichlin and Domenico Giannone, estimated economic activity in the major advanced economies (plus China) rising by around 4% y-o-y in January and 3.9% in February. They found that "the benefits to global economic activity from the oil shock … (were) almost exactly offset by a weakening in the emerging economies, and the US." Indeed at +1.1% the global 2015 oil demand forecast maintains a cautious/'tentative' air, as persistent (relative) gloom is forecast to remain indented in the forecasts for China and many net oil-exporters economies, while the European Central Bank's recent launch of a 60 billion euro-per-month quantitative easing programme clearly indicates all is not rosy in Europe.

OECD

Having fallen, on a y-o-y basis, through the majority of 2014, the latest data includes a noticeable uptick in the OECD oil demand trend. First in December 2014 and then in January 2015, OECD oil product deliveries rose. Escalating demand in Europe and the OECD Americas led the step-change, largely consequential on one-off factors such as subdued year-earlier deliveries and cold weather conditions in many countries. As the year progresses and these transitory forces wane more sustainable support is forecast to arrive in the form of additional economic activity, with the IMF predicting GDP growth of 2.4% from the 'advanced economies' in 2015 (+1.8% in 2014).



European demand growth, in December-January, demonstrated a particularly dramatic change as the previous 12 months only saw two months of y-o-y growth. Asia Oceania bucked the generally rising OECD demand trend, consequential on continued heady declines in dominant consumer Japan. Tracking forward is a relatively flat total OECD 2015 forecast, as total OECD oil deliveries are forecast to average 45.6 mb/d across the year as a whole, with projected growth in the OECD Americas counter-balancing declines in Europe and Asia Oceania.



Americas

Led by escalating US deliveries, recent months have seen a notable upturn in demand growth in the OECD Americas, with y-o-y growth seen in three of the past four months through January, the kind of positive sequence that has eluded the OECD Americas through most of the previous year. Indeed, the latest preliminary January data show a 0.9% y-o-y gain to 24.1 mb/d, as growth in the US offset declines in Canada and Mexico. Persistent sharp declines in residual fuel oil and 'other products' led the Mexican contraction, as total deliveries fell by 2.8% y-o-y to 1.9 mb/d, with further switches out of oil in the power sector filtering through. The Secretaria de Energia cited oil use in the power sector down sharply in January, versus strong gains in coal (+14% y-o-y) and natural gas (+3.3% y-o-y).



Consecutive y-o-y gains in transportation fuel demand were the central contributing factors behind the growth that encompassed US oil product demand at the turn of the year. Rising by around 2.8% y-o-y in December and 1.7% in January, demand rose for two consecutive months for the first time in eleven months, as US gasoline demand growth averaged roughly 4.6%, jet/kerosene 6.6% and gasoil 4.7% December-January y-o-y. Although the scale of the recent y-o-y comparisons have been magnified by the extreme cold winter weather conditions that disrupted much US economic activity last year, the basis of a clear uptrend has started to emerge recently with lower prices and strong macroeconomic conditions clearly providing some support to the transport sector. US economic growth, at +2.4% y-o-y in 4Q14, has exceeded 2% since 1Q14, a period that has also seen persistent positive quarter-on-quarter (q-o-q) growth (+0.5% in 4Q14, or 2.2% in oft quoted annualised terms).



Having risen to 9.0 mb/d in December, from 8.9 mb/d in November, US gasoline demand is expected to have fallen to 8.6 mb/d in January, according to the preliminary data. Although down in month-on-month terms, drops in January are a seasonal fact of life in the US for gasoline, thus it is more important to emphasise the near-5% January y-o-y gain, the fourth consecutive y-o-y increase. Preliminary estimates of February gasoline demand imply this positive US growth trend being drawn out to at least five months, a feat not previously achieved in roughly two years. The latest US vehicle miles travelled data, from the US Department of Transportation's Federal Highway Commission, underpin these numbers, with growth of 1.1% y-o-y reported for November and +1.4% y-o-y for the first 11-months of 2014. Less efficient vehicle choices, a consequence of the recent sharp price decline, exacerbate the situation, with roughly one-third of the strong US vehicle sales growth (+11% y-o-y in December) attributable to four-wheel-drive or sports utility vehicles (SUVs). Furthermore, the strongest growth was seen in the 'large SUV' category (+15.8% y-o-y in December), a grouping that includes massive vehicles with average efficiency rates (i.e. miles per gallon) roughly three times lower than many of the more fuel-efficient vehicle choices that are available.

Official December US data, at 19.5 mb/d, despite confirming the relatively upbeat short-term trend, came out roughly 240 kb/d below the previous estimate, based on the weekly US data. The majority of this downside correction is attributable to the 'other products' category and we include a proxy for this weekly-monthly mismatch in the short-term US demand forecast. Accordingly, the official 2014 US demand estimate of 19.0 mb/d was revised down, by around 20 kb/d, leaving deliveries flat for the year as a whole. Momentum is forecast to pick up in the US in 2015, +1.0%, as lower oil prices and additional economic growth filter through. This uptick underpins the overall increase that is projected for the OECD Americas, with a gain of 0.8% forecast in 2015 to 24.2 mb/d.

Europe

Tentative signs of a bottoming-out in the falling European demand trend have emerged recently, consequential, at least partially, on colder weather conditions in many countries compared to the year earlier, with strong y-o-y gains emerging in many nations in December, such as Germany (+10.1%), the UK (+5.4%) and France (+4.2%), and generally easing downtrends experienced elsewhere. For example, Italy saw a decline of approximately 1.8% y-o-y in December, roughly three-times less than the previous 12-month average. For the region as a whole, total oil product demand averaged roughly 13.5 mb/d in 4Q14, 0.5% down on the year earlier, its strongest relative y-o-y performance since 3Q13.

That rare sighting, of a y-o-y European demand gain, is even anticipated for 1Q15, with near 1% y-o-y growth foreseen in 1Q15 to 13.1 mb/d, following the recent uptick in demand. Middle distillates are forecast to lead the projected upside: with gasoil deliveries up 5% and jet/kerosene 2.3% higher; strong gasoil demand attributable to a combination of colder winter weather conditions, recuperating economic activity in many northern European nations and the changing bunker fuel legislation (see Medium Term Oil Market Report, 2015). Eurostat reported economic growth for the European Union of approximately 0.4% q-o-q in 4Q14 (1.6% annualised, or 1.3% y-o-y) and 0.3% for the Euro zone (1.2% annualised or 0.9% y-o-y), the IMF assuming Euro zone GDP growth of around 1.2% in 2015.



Rising by over 10% y-o-y in December, and by nearly 4% in January, particularly strong gains have been seen in Germany recently, chiefly attributable to sharply escalating gasoil demand. German drivers and industry alike are demanding escalating volumes of gasoil/diesel as the economy stages a double-pronged rally, supported not just by lower oil prices but also by much higher domestic income streams. The Deutsche Bundesbank, for example, reported 4Q14 disposable personal income rising to an all-time high of 450 billion euros, and 5 billion euros up on 3Q14. Business sentiment indicators, such as Markit's Manufacturing PMI and IFO's business climate index, show increasing and generally more 'upbeat' spirits. Having averaged approximately 2.4 mb/d in 2014, a contraction of approximately 1.5% on the year earlier, demand should essentially flatten in 2015 as additional economic activity offsets the negative demand-side influence from efficiency gains.


Asia Oceania

Sharp declines in Japanese deliveries kept the overall OECD Asia Oceania demand trend on a declining trajectory, down by 3.3% in 4Q14 to 8.3 mb/d. A further easing, of around 3.5%, is forecast for 1Q15, bucking the overall OECD 1Q15 recovery. Preliminary estimates of Japanese demand in January depicted a near 7% y-o-y decline in total oil deliveries, to 4.6 mb/d, as sharp drops in the residual fuel oil and the 'other products' categories restrained total demand. Curbed Japanese power-sector requirements played a key role, a trend that has been entrenched since mid-2014 as the industry increasingly switched out of oil-fuelled power generation over to alternative such as coal, renewables and natural gas. Having fallen by 5.0% in 2014, to 4.3 mb/d, Japanese oil demand will fall by a further 3.3% in 2015, to 4.2 mb/d. Smaller respective declines, of 2.4% and 1.4%, are foreseen for the overall OECD Asia Oceania region, consequential on the partially offsetting increases that are forecast for Korea, Australia and New Zealand.


Non-OECD

Modest non-OECD demand growth remains very much one of the central energy market themes of recent months, as non-OECD growth retains a notable premium over the OECD average but to a significantly reduced degree compared to previous years. Prior to 2014, for example, non-OECD oil demand growth averaged just under 4% per annum, 2009-13, whereas the OECD carried a near 1% average decline rate; thus overall equivalent to a near 5% per annum non-OECD growth premium. This additional non-OECD growth premium had fallen, to just-shy of 3%, in 4Q14 and is projected to slip below 2% in 1Q15, a change that has largely occurred as subdued Chinese, FSU, Latin American and non-OECD European demand progressions filtered through.



China

Record refinery runs in December, alongside heady product import figures, inflated the 4Q14 Chinese demand estimate and accordingly expectations of average 2014 demand. At 10.7 mb/d in 4Q14, the apparent demand estimate averaged 4.1% more than the year earlier figure and 55 kb/d above the estimate carried in last month's Report. Robust gains in the petrochemical and road transport sectors offset persistent weaknesses in residual fuel oil and gasoil. Any late-2014 Chinese demand strength is, however, likely to wane in 2015 as persistent macroeconomic weaknesses are still forecast to weigh on the forecast.





At 3.2 million tonnes, Chinese product imports were at an eleven-month high, and carried a 0.4 million tonne premium over exports, a nine-month high. Similarly record crude imports, of over 7 mb/d in December, took average in-flows for the year as a whole to 6.2 mb/d, a gain of nearly 10% on the year earlier. Much of the gain in crude imports is, however, attributable to bargain-hunting as crude prices slipped, with weaker comparable growth from the refining sector fuelling heady stock-builds and, hence, not a true reflection of anything more than mild end-of-year Chinese demand strength. Indeed, the apparent demand estimate for December, at 10.8 mb/d, showed an average gain of 4.2% on the year earlier, supported by an uptick in gasoil/diesel and persistent growth in gasoline and jet fuel.



Early indicators of 2015 Chinese demand imply a softening in momentum, with growth of approximately 2.7% forecast for the year as a whole, up to an average of approximately 10.7 mb/d. This mild deceleration is forecast as economic growth likely dips below 7%, the International Monetary Fund's January World Economic Outlook targeting 6.8% Chinese GDP growth in 2015. January data showed a notable product stock-build, a trend which if it continues through 2015 could further curtail projected demand.

Other Non-OECD

Weak petrochemical demand in Chinese Taipei saw oil product deliveries fall heavily, November/December, resulting in a 4Q14 y-o-y correction of approximately 4.0% to an estimated 1.0 mb/d. Although absolute demand declines were seen across most of the non-transport fuel demand categories, the majority of the downside was attributable to the sharp falls depicted in the LPG and naphtha product categories. Triggered, in 2015, by escalating economic growth and a resumption of previously closed petrochemical capacities, demand growth of around 1.8% is forecast for 2015. The International Monetary Fund, in January, predicted that economic growth in Chinese Taipei would approach 4% in 2015.





Despite falling in line with traditional seasonal patterns towards the end of 2014, the Saudi Arabian demand trend maintained a strongly rising y-o-y trajectory. At an estimated 3.0 mb/d in December, deliveries were 8.2% (or 230 kb/d) above the year earlier, with notable gains in residual fuel oil and 'other product' demand. Colder weather conditions in December played a key role, triggering additional heating demand, a key determinant within both fuel oil and 'other product' demand. In Saudi Arabia, roughly half of total power demand lies in the residential sector, with the air conditioning (which is also used to heat buildings) requirement dominating. The generation mix for Saudi Arabia is roughly composed of two-thirds oil and one-third natural gas, but in winter months demand falls sharply. Unusually cold months, such as December 2014, stimulate additional demand. Having risen by around 6.3% in 2014, total Saudi Arabian oil demand is expected to decelerate considerably in 2015, with nearer to 3% growth expected, as domestic revenue streams, and in turn the spending power of the economy, ease consequential on significantly lower oil prices.





At approximately 3.3 mb/d in December, the latest Brazilian demand estimate came out nearly 5% (or 155 kb/d) higher than the year earlier. Strong gains in gasoline demand led the upside, as the resilient consumer sector continues to resist the otherwise mounting downside pressures experienced across the Brazilian economy, a sentiment encapsulated in the sharp recent currency declines. The latest industrial output numbers showed a 2.7% y-o-y decline in December, while CNI's business confidence index ebbed to 45.2 (where any reading below 50 signifies 'pessimism'). Despite such gloom, estimates of Brazilian gasoline deliveries rose to an all-time high of 1.1 mb/d in December, 65 kb/d (or 6.4%) above the year earlier and 50 kb/d above our previous forecast as some additional purchases were likely brought forward ahead of pending tax hikes. CNI's consumer confidence index stood at a still 'optimistic', i.e. above 100, 109.2 in December. Having risen by approximately 4% in 2014, total Brazilian oil product demand growth is forecast to ease back to around 2.5% in 2015, as even this final bastion of macroeconomic strength - consumer confidence - wanes.




Supply

Summary

  • Global supply rose by an estimated 180 kb/d month-on-month (m-o-m) in February, to 94.0 mb/d, on increasing non-OPEC production, which more than offset declining OPEC crude. Annual gains of 1.3 mb/d occurred amid expanding non-OPEC supplies, which stood 1.4 mb/d higher compared with last year.
  • OPEC crude oil output edged down by 90 kb/d in February to 30.22 mb/d, with losses in Libya and Iraq - extending previous declines - offset by slightly higher supply from Saudi Arabia, Iran and Angola. Output in February, while in excess of the group's official 30 mb/d production target for a tenth straight month, ran 285 kb/d below the previous year.
  • Non-OPEC oil production is estimated to have risen by about 270 kb/d to 57.3 mb/d in February, led by higher output in North America. The increase in North America's production nearly reversed the declines registered in January that occurred amid adverse weather.
  • A notable revision of about 260 kb/d was included for 4Q14 in this Report, which is mainly due to revised historical data for Canada but also includes upward revisions to US production numbers as December data were finalised. The 2015 forecast upward revision to North American of 170 kb/d supply is due to the baseline changes in 4Q14 and higher-than-expected preliminary crude oil numbers in 1Q15 in the US.
  • Although oil directed rigs have decreased precipitously since their October highs and capital expenditure cuts are taking hold, oil production in the United States shows no signs of slowing down yet. Nonetheless, we expect US production growth to abate in 2H15.
  • A slightly higher demand forecast has raised the 'call on OPEC crude and stock change' by 100 kb/d to 29.5 mb/d in 2015. The revised outlook has also raised the 2H15 'call' to 30.3 mb/d - above the group's official output ceiling.

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

OPEC crude oil supply

OPEC crude oil production slipped to 30.22 mb/d in February, down 90 kb/d from the previous month, as further declines in Libya and Iraq outweighed gains in Saudi Arabia, Iran and Angola. Islamist militants stepped up attacks on Libyan oil fields, pipelines and personnel in February, sinking output to an eight-month low. By the time of writing, however, production had clawed back to around 400 kb/d - despite the rising violence. Iraqi output, including the Kurdistan Regional Government (KRG), dipped by 50 kb/d in February to 3.39 mb/d after bad weather played havoc with exports from Gulf loading outlets. A doubling of exports from Iraq's northern fields to the Turkish Mediterranean partly offset declines from the south. Iraqi oil sales - from both the north and south - were due to rise during March.

Three months on from OPEC's landmark, Saudi-led decision to drop price support in favour of market share, Riyadh - along with Gulf neighbours Kuwait, the UAE and Qatar - shows no sign of throttling back. February marked the tenth month running with supply in excess of OPEC's official production ceiling, although output was down by 285 kb/d on the previous year. "Today, it is not the role of Saudi Arabia, or certain other OPEC nations, to subsidise higher cost producers by ceding market share," Saudi Oil Minister Ali al-Naimi said on 4 March in a speech in Berlin.

A slightly higher demand outlook has meanwhile led to a 100 kb/d upward revision of the 2015 'call on OPEC crude and stock change' to 29.5 mb/d. The revised forecast has also raised the 2H15 'call' to 30.3 mb/d - above the group's official output ceiling. OPEC's 'effective' spare capacity was estimated at 2.9 mb/d in February, with Saudi Arabia accounting for nearly 90% of the surplus.



Crude oil supply from Saudi Arabia rose by 50 kb/d to 9.74 mb/d in February, as Riyadh continued to focus on sustaining market share. Major customers of Saudi Aramco said OPEC's top producer had no intention of curbing production and preliminary tanker tracking data showed a modest rise in exports during February.

The Saudi oil minister said in early March that Riyadh would not reduce production unilaterally to balance the world oil market and would continue to seek the cooperation of non-OPEC producers. The influential Saudi steered OPEC's November decision to maintain the group's official 30 mb/d supply target to defend market share amid relentless growth in US light tight oil supply and tumbling oil prices.

From my perspective, demand is gradually rising, global economic growth seems more robust and the oil price is stabilising," Naimi said on 4 March. "Saudi Arabia's quest for market share is simply an effort to satisfy rising customer demand." The Saudi oil minister was speaking the day after Saudi Aramco raised its monthly formula prices for oil being shipped to Asia and the United States during April (see Prices). The increases were largely anticipated by market participants.



The latest JODI figures showed Saudi crude exports in December were down 360 kb/d versus November to 6.93 mb/d. Exports of products meanwhile reached a record 1.05 mb/d - raising overall Saudi oil exports, excluding condensates and NGLs, to 7.98 mb/d. That figure, however, is still far below the all-time high of 8.58 mb/d scaled in February 2014.



Production from Saudi Arabia's core Gulf allies Kuwait, the UAE and Qatar held steady month-on-month (m-o-m). Kuwait sustained high flows at its giant Burgan oil field to make up for the extended closure of the offshore Khafji field run jointly with Saudi Arabia in the Neutral Zone, according to industry sources.

Iranian crude production inched up by 20 kb/d in February to 2.84 mb/d as negotiators from Iran and the so-called "P5+1" (the US, UK, France, Russia, China and Germany) sought to reach a framework accord by the end of March and a final deal by June to curb Tehran's nuclear programme in exchange for an easing of sanctions. US Secretary of State John Kerry and his Iranian counterpart Mohammad Javad Zarif are due to meet on 15 March in Switzerland for the next round of talks. Progress has reportedly been made although both sides say more work must be done to fortify any possible deal.

Until then, a partial easing of sanctions under a preliminary agreement in November 2013 remains in place. Under that deal, 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 around 90 kb/d above the target.



Crude oil purchases of around 780 kb/d in January appear to be the lowest since sanctions were expanded in 2H12. Deliveries rebounded in February, with preliminary figures showing imports at 1.2 mb/d, up 420 kb/d m-o-m. Deliveries to China, Iran's top buyer, rose by 130 kb/d to 600 kb/d in February. India held purchases at a sharply reduced rate of 90 kb/d versus an average 280 kb/d during 2014. Japan raised imports by 90 kb/d to 270 kb/d in February, while Korea lifted purchases by about 80 kb/d to 140 kb/d. Syria continued importing for a third straight month in February, albeit at a lower rate of 30 kb/d. Turkey's purchases held steady at around 100 kb/d. Taiwan returned to buy 70 kb/d during February, its first imports since October.

Deliveries of condensate - ultra light oil from Iran's South Pars gas project - fell to 90 kb/d during February versus 180 kb/d in January. Condensate shipments ran at around 190 kb/d for 2014 versus 85 kb/d the previous year. Import volumes are based on data submitted by OECD countries, non-OECD statistics from customs agencies, tanker movements and news reports.

Crude output from Iraq, including the KRG, eased by 50 kb/d in February to 3.39 mb/d with bad weather disrupting southern exports and preventing a return to record rates hit in December. Rising shipments from the north, however, offset slower exports of Basra Light from the Gulf which sank to 2.29 mb/d in February - down about 100 kb/d on January and well below December's all-time high of 2.76 mb/d.

Overall Iraqi shipments in March look set to rise. Weather conditions have improved in the south and exports of over 450 kb/d are planned from the north (from both the North Oil Company and KRG) - a level that if realised, would be the highest since October 2011, when Iraq shipped 460 kb/d through Turkey. Deliveries from northern Iraq via the KRG's pipeline to Turkey reportedly ran at about 340 kb/d in February, with state marketer SOMO handling some 300 kb/d.

Baghdad had been shipping roughly 300 kb/d from its northern fields until a federally-controlled pipeline to Turkey was shut in March 2014 due to repeated attacks by Islamist militants. The KRG has been shipping oil independently of Baghdad via its own pipeline to Turkey since the end of May. An export deal agreed on 2 December calls for the KRG to provide 250 kb/d to SOMO to sell and allows for another 300 kb/d of federal oil 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.



The KRG said on 10 March that it is on schedule with the implementation of the oil export deal and that by the end of February, it had met nearly 97% of its agreed supply of crude to SOMO. In return, the KRG expects Baghdad to provide it with its share of the budget. The KRG said that to date, Baghdad has released less than one-fifth of its 17% share of the budget for January, and nothing for February.

Oil's plunge to $60/bbl from over $100/bbl is meanwhile forcing cash-strapped Baghdad to renegotiate service contracts with international oil companies (IOCs) such as BP, ExxonMobil, China's CNPC and Russia's Lukoil that are developing its giant southern oil fields. As it struggles to repay the investors, the federal government has asked them to cut costs by revising 2015 work programmes, say industry sources. Foreign firms typically receive payment in crude that equates to the value of cash owed, but Baghdad has had to cut equity cargoes for most investors in February and March.

Baghdad already owes $9 billion to contractors for 2014 and is due to pay out around $18 billion to investors this year, but only $12 billion has been allocated in Iraq's 2015 budget to pay cost recovery and remuneration fees. To help ensure that it can compensate the companies, Iraq's central bank has approved $12 billion worth of treasury bonds - the first of which will be issued at the end of March.

Given the low oil price environment and Iraq's budgetary constraints, Baghdad cannot afford a high pace of spending so it needs to apply the brakes and slow down oil field development in the short term, industry sources say. The ministry of oil had hoped to finish contract renegotiations by the end of this month, they say, but negotiations are likely to stretch on - even until the end of the year.

The changes in commercial terms the ministry is considering could shape the contracts into something more akin to a production-sharing contract. "There are proposals to link the profitability of the companies with the oil price, and not just with a specific fee per incremental barrel (produced)," Iraqi Oil Minister Adel Abdul Mahdi was quoted as saying.

The KRG also needs to resolve its own payment issues with IOCs, many of whom have slowed investment. Kurdish operator Gulf Keystone has stopped exporting because of a lack of payment and others say they will prioritise domestic sales over exports.

In West Africa, Angola turned in a strong performance during February with production of 1.79 mb/d, the highest in more than two years. But challenges loom. Low oil prices are forcing state oil company Sonangol and its international joint-venture partners to cut costs - especially at expensive deep-water projects - and consider project delays. First production from Chevron's 150 kb/d Mafumeira Sul project is now due in 2016 rather than this year. Cobalt International has delayed the start-up of the Cameia sub-salt field to 2018 from 2017, and reduced the size of the floating production storage and offloading facility, to about 80 kb/d from an original 100 kb/d, to cut costs by $2 billion to an estimated $6 billion.



Nigeria's decision to delay its presidential election until 28 March from 14 February has heightened concerns over the country's political and economic wellbeing. Crude oil production dipped by 30 kb/d in February to 1.86 mb/d and the worry is that low oil prices and daunting above-ground challenges will set back production in the medium term. Spending on crucial infrastructure projects has halted and state-owned Nigerian National Petroleum Corporation has reduced its joint-venture capex budget for 2015 oil operations by 40%. It will thus find it difficult to meet funding requirements with core upstream partners - Total, ExxonMobil, Chevron, Eni and Royal Dutch Shell.

The direct targeting of Libya's oil sector by militants sank production to an eight-month low of 270 kb/d in February, down 70 kb/d m-o-m. Saboteurs in mid-February struck the pipeline linking the North African producer's core Sarir oil field to the port of Marsa el-Hariga - temporarily halting output of roughly 180 kb/d. But despite the escalating violence, overall production had climbed to about 400 kb/d by the time of writing following the restart of a number of eastern oil fields, including Sarir. That rate is some distance from the 1 mb/d level scaled in October 2014 and about a quarter of the 1.6 mb/d pumped before the civil war that ousted Muammar Gaddafi in 2011.

In the latest wave of attacks, up to ten foreign workers are missing after militants reportedly aligned with Islamic State stormed the al-Ghani oil field. And the deteriorating security situation forced the National Oil Company (NOC) to declare force majeure on 4 March at 11 oil fields that feed the country's biggest export outlets - the eastern ports of Es Sider and Ras Lanuf. These strategic terminals and the fields in the Sirte basin oil heartland have been shut since December due to fighting between rival factions. Included in the force majeure was the 40 kb/d Mabruk oil field, in which France's Total has a stake, which had been attacked by an Islamist group in early February. By declaring force majeure, the government is seeking to avoid liability for any loss of production and damage caused by militant attacks.

Vital terminals and oil fields have stopped operating due to the increasingly violent battle 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. The Tripoli-based government in early March carried out airstrikes on the ports of Es Sider and Ras Lanuf, although damage was said to be minimal. In response, the Tobruk government launched an airstrike on the Mitiga airport near Tripoli. The United Nations is hoping to broker a peaceful solution to the conflict.

Exports are meanwhile slowly rising from the eastern ports of Marsa el-Hariga and Zueitina. Libya also ships roughly 80 kb/d from two offshore fields - Bouri and al-Jurf.

The low oil price environment continues to cause pain for Venezuela, where supply eased by 30 kb/d in February to 2.37 mb/d. The Latin American country's precarious economic and political situation is leading some international oil companies to take a hard look at their investments in Venezuela's Orinoco heavy oil belt, which accounts for roughly 40% of the country's overall output. Adding to Caracas' woes, tension rose with the United States after Washington declared Venezuela a national security threat and slapped sanctions on seven officials. The executive order does not target the Latin American nation's energy sector or wider economy. Caracas ranks as the fourth-biggest supplier of crude to the United States, with average exports of more than 700 kb/d in 2014.

Non-OPEC overview

Non-OPEC oil production is estimated to have risen by about 270 kb/d to 57.3 mb/d in February, led by higher output in North America. The increase in North America's production nearly reversed the declines registered in January that occurred amid adverse weather. Overall, US production rose by 115 kb/d, while Canada's output posted a 70 kb/d increase. Outside of North America, non-OPEC month-on-month (m-o-m) growth was mostly limited to India and Norway.

Non-OPEC output is expected to grow by about 750 kb/d year-on-year (y-o-y) in 2015, a significantly lower growth rate than the 2.1 mb/d increase achieved in 2014. Although growth in North America is expected to slow due to the lower prices and decreased investment, US and Canadian supplies will continue to provide most of the growth. Brazil is expected to be the third-largest source of growth in 2015 at 110 kb/d. Compared with last month, our assessment of non-OPEC supply estimates for 2014 was revised upwards by about 60 kb/d on final data in North America. However, the 2015 forecast has remained roughly unchanged as downward revisions to Latin America and Europe offset higher North America numbers.



This month's Report includes a 300 kb/d upwards revision to North American supply for 4Q14 due to revisions of historical data as well as new final data for December for Canada and the US, which show higher output levels than previously estimated. The precipitous decline in US oil rigs has yet to show any effect on output: our expectation that production growth would start to slow slightly in 1Q15 has proven to have underestimated the resilience of US light tight oil production. Production growth continues apace as preliminary crude oil production data through mid- March show but we nonetheless expect to see a supply response in 2H15 due to lower prices and as US crude stocks continue to surge and threaten to test US storage capacity.

OECD

North America

US - February preliminary, Alaska actual, others estimated: In December, production totalled 12.6 mb/d, of which 9.2 mb/d was crude oil and 3.1 mb/d was NGL output. The final December 2014 data showed that production stood nearly 1.9 mb/d higher than one year prior, rising m-o-m by roughly 300 kb/d and reversing the output declines seen in November, and about 270 kb/d higher than last month's Report. Overall US production averaged 11.8 mb/d in 2014, rising 1.6 mb/d compared with the previous year. North Dakota's production of light, tight oil (LTO) continued to grow apace, averaging about 1.16 mb/d in December, up by about 40 kb/d m-o-m. Bakken production averaged just over 1 mb/d in 2014 and is expected to grow by less than 200 kb/d in 2015 as lower oil prices restrict output in the play and producers opt to not complete the wells drilled until a more favourable price environment returns. Continental Resources Inc. for example, will defer a quarter of well completions until prices rise. Similarly, in the Eagle Ford shale, producers opt to defer well completions in favour of reducing expenditures in the current price environment. In a recent announcement, Anadarko reported to have deferred completions on 125 wells.

In addition to Bakken LTO, US production was boosted by increases in Gulf of Mexico output, which rose about 70 kb/d on the month, buoyed by the continuing ramp-up of the recently started Tubular Bells and Jack-St. Malo projects. Production in the Permian Basin, especially the Wolfcamp and Spraberry formations, saw production increases as well.

The rig count continues to fall in the US, albeit at slower rates than at the end of 2014 and earlier this year. Nonetheless, oil rig count fell to 922 as of 6 March, 687 rigs lower than in the second week of October, the peak number of oil-directed rigs. Although the rig count has fallen dramatically and has reached the lowest level since April 2011, production has yet to show signs of a slowdown and this is undoubtedly at least in part due to companies focusing on high-yield areas of various shale plays. Other factors include continued strong production from wells already online but which due to the nature of shale oil production will show rapid declines following the initial production ramp-up.

Estimated US crude oil production stood at 9.2 mb/d in February, according to preliminary data. Total US production is estimated to have averaged about 12.6 mb/d in February, with total 2015 output expected to average 12.6 mb/d, an increase of more than 760 kb/d y-o-y. Although the expected increase is sizeable, it pales in comparison the production gains in 2014. The slide in prices has seen production expectations erode significantly over the last few months, with companies reporting capital expenditure reductions and revised investment plans across the board. Cash-strapped producers are looking at many ways of raising needed capital to continue operations and service their debt. Key producers in the prolific US shale plays such as Continental Resources, EOG and Pioneer have revised their investment plans, and in some cases growth outlooks. EOG, one of the largest independent US producers, is reportedly expecting flat y-o-y production in 2015.  Continental Resources saw its 2015 production outlook erode by 10 percentage points.

Despite the lowered outlook for US production in 2015 compared with our forecasts prior to January, LTO is expected to continue driving the expansions. Non-LTO production, such as offshore Gulf of Mexico and Alaska, will see fairly flat output in this year compared with 2014. In the Gulf of Mexico, newly started projects, including Anadarko's Lucius field along with upcoming start-ups, are expected to offset declines among older fields. Finally, natural gas liquids (NGLs), which accounted for 25% of US total production in 2014, are expected to grow by 160 kb/d in 2015, maintaining roughly the same proportion.

Canada - December actual: Oil production fell to 4.4 mb/d in December, declining about 120 kb/d m-o-m despite an increase in bitumen output. Synthetic crude output led the declines with a drop of approximately 70 kb/d.  Preliminary estimates for February indicate that production remained roughly at the same level as that seen in December. Overall, Canada's production is expected to average 4.3 mb/d in 2015, an increase of 120 kb/d y-o-y.

Canadian oil sands, the engine driving the country's output growth, have seen tough times due to low oil prices. Smaller operators in the Alberta oil sands sphere in particular are having difficulties, with oil prices exacerbating the high costs and high debt. Southern Pacific Resources, a very small producer of heavy oil and bitumen has solicited plans to sell or restructure the company while others such as Connacher Oil and Gas, which produced about 15 kb/d in 2014, have announced recapitalisation plans in order to remain operational. The bigger players in the industry appear to be marching ahead, at least for now, with their plans to bring online projects that are already underway, but delaying future ones. In one such recent instance, Shell announced that it is postponing the Pierre River Mine oil sands project in Alberta indefinitely, a project that was only marginally attractive to the company in a triple-digit oil price environment. Suncor has also deferred the second phase of its MacKay River oil sands project, while Cenovus and ConocoPhillips postponed future phases of Christina Lake and Foster Creek oil sands projects. 

Mexico - January actual: Mexico's oil production inched down in January on the month but estimates for February show that total output grew by about 65 kb/d m-o-m to 2.7 mb/d, including approximately 2.3 mb/d for crude and 360 kb/d for NGLs.

In January, total supply was 260 kb/d lower than last year, showing that Mexico's production continues its precipitous y-o-y declines: In November and December 2014, Mexico's production fell by 250 kb/d and 270 kb/d y-o-y, respectively, with the December declines reaching the steepest level since July 2009. The fall in output in January occurred mainly amid contraction in the Ku-Maloop-Zaap (KMZ) and Cantarell fields, which produced approximately 780 kb/d and 305 kb/d, respectively. KMZ's production over the last year has eroded by about 80 kb/d, with Cantarell seeing production slide by more than 110 kb/d. Mexico's 2015 production is expected to average 2.6 mb/d, a decrease of about 170 kb/d compared with last year. The increase of 65 kb/d in February production is due to slightly higher crude and NGLs output as the big drops in January in KMZ fields is expected to be only temporary and production is expected to return to 830 kb/d from the 780 kb/d in January.

Caught between low oil prices and declining production, Mexico's government is pushing ahead with Bid Round One, its first competitive tender in over seven decades. The upstream regulator, Comision National de Hidrocarburos (CNH), has approved nine additional shallow-water fields to the bid round, expanding the area of shallow water initially offered.  The government is attempting to improve the terms of Mexico's upstream amid falling prices by adjusting tax terms for potential bidders. The finance ministry announced that is has modified the so-called adjustment mechanism, which ensures that revenues for the state will rise with higher oil prices or higher discoveries. Under the modified rule, companies can secure a 20% return before the adjustment mechanism kicks in compared with the previously set 15%.  Pemex, meanwhile, continues to struggle to stem production declines and turn a profit: the state-owned company reported a $17.6 billion loss in 2014 due to a combination of falling output, lower oil prices and high tax burden.

North Sea

Total North Sea production averaged just over 3 mb/d in February, remaining roughly flat compared with month prior. Forecast March North Sea production shows a decrease of about 30 kb/d mainly due to an expected slight fall in Norway's output. Meanwhile, Brent-Forties-Oseberg-Ekofisk (BFOE) March scheduled loadings at 929 kb/d will be 100 kb/d lower than February loadings, which were the highest since November 2013. However, production of the stream underlying the North Sea Dated price is expected to remain flat at 880 kb/d, about 50 kb/d lower than loadings.

Norway - December actual, January preliminary: Norway's total liquids production averaged 1.9 mb/d in December, flat compared with month prior. The Haltenbanken system, which includes Åsgard, Draugen, Morvin and Tyrihans fields produced about 370 kb/d in December increasing about 30 kb/d m-o-m. Preliminary data for January, however, indicate a decrease of approximately 30 kb/d in January, as Draugen, Ekofisk, Valhall and Visund experienced various technical problems during the month.  Norway's total output is expected to average 1.9 mb/d in 2015, remaining at roughly the same level as 2014 production.  The upward revision compared with last month's Report is due to the inclusion of final December data and new January preliminary data, which slightly raised the baseline.



UK - November actual, December preliminary:  Average production in November stood at 900 kb/d, up by about 40 kb/d m-o-m, as some of the offshore fields saw increases during the month, including continued ramp up in recently started fields. December preliminary data show that UK production remained flat compared with the month prior at 910 kb/d, as increases in both Brent and Forties systems offset m-o-m declines elsewhere. With final data nearly complete for the year, total UK production is estimated to have averaged 870 kb/d in 2014, a decline of about 20 kb/d y-o-y, and we expect total production to decline by a further 20 kb/d in 2015.

Non-OECD

Latin America

Brazil - January actual:  Brazil's total output fell by about 50 kb/d in January, mainly due to a seasonal fall in ethanol production, although crude oil also declined during the month. Output totalled 2.4 mb/d in January, approximately 230 kb/d higher than prior-year levels, a robust growth following relative successes in developing the pre-salt deposits. However, preliminary data for February indicate that production fell by about 60 kb/d to 2.3 mb/d. A disruption at the Marlim Sul platform likely affected the January and February output. Production at the platform remained affected at time of writing, so March output too will see volumes shut-in. Overall 2015 production is forecast to average 2.4 mb/d, rising about 110 kb/d y-o-y, boosted by the ramp-up of projects started in 2014 and two FPSOs due to start this year.

While production growth continues apace, legal and financial problems continue to weigh on Petrobras, bringing into question the company's longer-term viability in the face of its inability to raise capital. Recently, Moody's downgraded the company's long-term debt to junk in response to the growing risks facing Petrobras. In fact, Moody's downgraded all of the company's credit ratings, stripping it of its investment grade status. The rating agency highlighted how Petrobras' liquidity risk and lower spending plans will affect large parts of Brazil's oil and gas production chain, including construction and infrastructure. Meanwhile, the plunge in the real, which fell to a decade low, appears to be providing little relief to the company. With production costs mostly denominated in Brazilian real and revenues denominated in US dollars, many of the Brazilian upstream companies are currently enjoying somewhat of a windfall. In the case of Petrobras, however, the company's relative benefit is wiped out by the dollar-denominated debt it continues to service. Nonetheless, the fall in the currency and dollar-denominated oil revenues provide strong incentives for Petrobras, and indeed all upstream companies, to boost production as much and as quickly as possible.

In an effort to reduce its debt load and preserve cash reserves, Petrobras has approved a $13.7 billion divestment plan for this year and next, significantly increasing the targeted asset sale compared to what was  foreseen in its five-year spending plan a year ago. The new program expects 30% of the proceeds to come from E&P assets sold in Brazil and abroad, 30% from downstream assets and 40% from its Gas & Energy segment, allowing the company to focus on "priority investments". The asset sale may be the only way for Petrobras to extend its liquidity as it continues to be barred from international credit markets. 

Former Soviet Union

Russia - January actual, February preliminary:  Russia's total oil production in January stood at 10.9 mb/d, falling by about 20 kb/d m-o-m. Preliminary data for February show that production during the month remained roughly even with January. Crude oil production stood at 10.2 mb/d in February, while NGL production averaged approximately 770 kb/d during the month. Compared with one year ago, Russia's total output is only slightly lower but we expect production to decline by about 100 kb/d this year as Western sanctions frustrate Russia's ability to finance greenfields, which are desperately needed to offset brownfield declines in the medium term. However, in the short term, maintenance and well workovers will see difficulties as funds become scarce, leading to higher decline rates. The expected declines are limited by the Russian rouble's depreciation as most production costs are rouble-denominated.

The Russian government continues to bail out energy companies and projects in the face of Western sanctions. In the latest such instance, the government bought $1.2 billion in bonds issued by Yamal LNG, which was financed by the National Wealth Fund. Rosneft had previously received government assistance in much the same way, although the bailout fell far short of what it had requested. Meanwhile, Russia's economy continues to head into dire straits: Moody's downgraded Russia to junk level following a recent downgrading by Standard and Poor's on the back of the continued conflict in Ukraine, oil price declines and weak currency. Massive capital outflows exacerbate Russia's current financial problems, signalling a deep recession in 2015 and possibly beyond.



FSU net exports surged by a steep 1.7 mb/d in January, their largest increment ever, to hit a record 10.2 mb/d in January. Exports had remained relatively low in 2H14, as Russian exporters waited for the 1 January 2015 implementation of changes in the export tax regime before hiking shipments. One major component of these changes saw the tax burden shift from crude exporters to producers. Together with a sharp fall in crude prices (the export tax is based on the previous month's Urals price), this saw the Russian crude export tax slashed by nearly 40% between December and January. Consequently, FSU crude shipments rose by 1.3 mb/d, of which volumes transported by Russia's Transneft pipeline network accounted for 1.1 mb/d. With the ESPO pipeline having been running at close to capacity over 2H14, the bulk of the increase was seen at terminals in the Baltic (+0.6 mb/d m-o-m) and Black Sea (+0.4 mb/d).

Product shipments also posted an impressive 0.5 mb/d increase to hit a record 3.7 mb/d. This hike also likely resulted from changes in the product export duty regime, which were intended to stimulate refinery upgrades by making it more profitable to export valuable light and middle distillates at the expense of fuel oil. Upon the regime's introduction, fuel oil shipments slipped by 0.1 mb/d while exports of gasoil and 'other products' (principally light distillates) surged by 0.3 mb/d and 0.2 mb/d, respectively, to hit new record levels.

OECD stocks

Summary

  • The overhang in OECD inventories continues to be unbalanced with a 74 mb surplus in crude oil, centred in OECD Americas, continuing to offset a wide 30 mb deficit in refined product inventories. Middle distillates in particular stand a significant 34 mb below average.
  • After several months of posting higher-than-average builds, OECD commercial inventories rose by a weaker-than-average 23.1 mb in January to stand at 2 733 mb by end-month. This saw their surplus to seasonal levels fall to 60.3 mb from 75.1 mb at end-December.
  • Preliminary data indicate that OECD inventories drew by a weak 8.8 mb in February after surging US crude stocks largely mitigated steep weather-related draws in refined products. Reports indicate that volumes held in floating storage have not increased so far in 2015 as the contango structure in the ICE Brent and ICE gasoil contracts supporting the play has weakened.
  • Latest weekly data indicate that US crude stocks have built by 63 mb so far in 2015 to stand at a record 468 mb at end-February. As inventories at the Cushing storage hub surged to 70% of working capacity, NYMEX WTI came under downward pressure, taking the benchmark from a small premium to ICE Brent in January to a $10/bbl discount in late-February.

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

After several months of posting higher-than-average builds, OECD commercial inventories posted a weaker-than-average 23.1 mb build to stand at 2 733 mb by end-January. This saw their surplus versus seasonal levels fall to 60.3 mb from 75.1 mb at end-December. However, this overhang is unbalanced with a 74 mb surplus in crude oil, centred in OECD Americas, continuing to offset a wide 30 mb deficit in refined product inventories with middle distillates in particular standing a significant 37 mb below average. At end-January, refined products covered 30.6 days of forward demand, level with one month earlier but 1.2 days above the previous year.

Soaring US crude stocks (+31.6 mb), resulting from a sharp drop in refinery throughputs, strong domestic production growth and an uptick in imports, pushed OECD inventories upwards and offset an unseasonal 4.6 mb drop in refined product holdings. The draw in refined products was concentrated in 'other products'. This category includes propane, commonly used for space heating in the US Midcontinent, and stocks of which drew amid high exports and plunging temperatures.

Upon the receipt of complete data submissions for all OECD countries, December inventory levels were revised upwards by 10.1 mb since last month's Report. Crude oil holdings in OECD Americas and Europe were adjusted upwards by 8.5 mb and 10.3 mb, respectively, offsetting 10.5 mb and 1.0 mb downwards revisions to 'other oils' and refined products, respectively. The net effect is that last month's 5.3 mb draw has been reversed and is now seen as a 5.3 mb build. Stocks added a slim 9.1 mb over 4Q14 with commercial inventories now assessed to have built by a record 144 mb during 2014.



Preliminary data indicate that OECD inventories drew by a weak 8.8 mb in February as a steep 41.7 mb draw in refined products, resulting from cold weather and seasonally lower refinery activity, offset soaring US crude stocks. Stocks of 'other products' plummeted by a further 23.6 mb, centred in the United States, while middle distillates dropped across all regions.   

Despite reports of increased interest in floating storage, recent shipbroker reports indicate that this has not translated into an increase in volumes stored on the water. Iranian volumes held on National Iranian Tanker Company (NITC)-owned vessels are still leading global volumes with approximately 30 mb being stored for logistical, rather than speculative, reasons. Since the flurry of interest in early-January, the contango in the ICE Brent market has weakened while the ICE gasoil and NYMEX heating oil contracts have flipped into backwardation, taking out the incentive for opportunistic storing at sea. The only contract which remains in steep contango is the NYMEX WTI contract delivered at the landlocked Cushing, Oklahoma storage hub.


Recent OECD industry stock changes

OECD Americas

Commercial oil inventories in OECD Americas built by 24.5 mb in January as crude oil holdings surged by 29.6 mb, offsetting a steep 14.6 mb drop in refined products. US crude inventories soared by 31.6 mb, a record since the IEA began collecting monthly data in January 1988, after a near-1 mb/d fall in US refinery intake. This offset a counter-seasonal 4.4 mb draw in Mexican oil stocks, which were led lower by declining refined products holdings.

Since the build in total oil was five times the seasonal average, the region's surplus against the five-year average widened to a record 142 mb while inventories stand an astonishing 172 mb above one year earlier. As cold weather hit the region, plunging stocks of 'other products' (-16.6 mb), including propane, pressured total product stocks 14.6 mb lower. By end-month, total products stood at 711 mb, 23 mb and 59 mb above the five-year average and year-earlier level, respectively. On a days-of-forward-demand basis, total products covered 29.6 days, 0.4 days lower than at end-December.



Weekly data published by the US Energy Information Administration (EIA), indicate that US crude inventories surged by a further 31.3 mb in February. At end-month, US commercial crude stocks (including US territories) stood at 468 mb, 83 mb higher than one year earlier, and accounting for 85% of total working storage capacity. However, as pointed out recently by the EIA, this figure can be misleading since stock levels include oil in pipelines, on ships in transit from Alaska and lease stocks while storage capacity estimates capture only capacity at refineries and tank farms. Excluding oil in transit, the US EIA put fill levels at close to 60% of capacity.

US crude stocks have built by over 1 mb/d during January and February. Much of this increase can be attributed to a seasonal drop in US refinery throughputs which plunged by over 1 mb/d between December and January. Further upward momentum in February came from the arrival of barrels from the Atlantic Basin and the Middle East, which were purchased during January when ICE Brent briefly traded at a discount to NYMEX WTI. Additionally, imports of Canadian crude into PADD 2 (Midcontinent) remained at record levels of close to 2.5 mb/d. Nonetheless, if record inventory levels persist going forward, a release valve could come from crude exports to Canada with latest data indicating that they hit a record 500 kb/d in February.



Ballooning crude stocks, particularly in the Midcontinent, have put downward pressure on NYMEX WTI, which at the time of writing stood $10/bbl below ICE Brent. As stocks at the Cushing, Oklahoma storage hub have steadily built over recent months, the contango in the WTI contract has steepened which has further incentivised stock building. By end-February, Cushing stocks stood at 49.2 mb, 31.3 mb above last summer's recent low and equating to 70% of total working storage capacity at the hub.

All told, US total stocks rose by 6.2 mb in February. NGLs and other feedstocks added 1.2 mb while total products dropped by a steep 24.3 mb, led by a 19.5 mb draw in 'other products' after cold weather drew stocks of propane. Middle distillates stocks marginally dropped by an aggregate 10.3 mb, but plunged to the bottom of their five-year range in PADD 1 (the East Coast). As cold weather remained into early-March, and with no spare capacity on the Colonial Pipeline, seaborne distillate supplies were drawn into the East Coast from Europe and Russia.

OECD Europe

OECD European inventories added a slim 4.5 mb in January. Since this was significantly less than the 26.1 mb seasonal build for the month, the region's deficit versus average levels widened to 69 mb from 48 mb one month earlier. As regional refinery runs remained robust, supported by healthy margins, crude stocks dropped counter-seasonally by 9.1 mb. Meanwhile, refined product inventories built by 12.9 mb with all product categories posting builds. Notably, middle distillates inventories added 8.7 mb over January but remained 24 mb below average levels by end-month. Reports also suggest that despite German end-user stocks of heating oil declining by 2 percentage points in January, they stood at 62% of capacity by early-February, a recent record for the time of year. All told, refined products covered 38.9 days by end month, half a day above end-December.



According to preliminary data from Euroilstock, European commercial inventories remained stable in February and posted a 0.1 mb build in contrast to the 10.9 mb five-year average build for the month. Crude inventories (+5.0 mb) buttressed stocks and offset a 4.9 mb seasonal draw in refined products. Reports also suggest that some independent refined products storage capacity in Northwest Europe remains unfilled. Additionally, since the M1-M3 spread in the ICE gasoil contract flipped into backwardation in later-February, there is less incentive to build product stocks in Europe.

OECD Asia Oceania

Industry oil inventories in OECD Asia Oceania drew counter-seasonally by 5.8 mb in January, which pushed them to a 12.4 mb deficit versus seasonal levels. Crude oil holdings slipped by 3.9 mb as Japanese holdings retreated by a steep 5.9 mb. With Japanese refinery throughputs remaining stable on a month-on-month basis, this would appear to come from a fall in imports. Refined products fell counter-seasonally by 2.9 mb with all product categories except motor gasoline posting small draws. By end-month, regional refined products covered 20.2 days of forward demand, 0.5 days above end-December and 0.1 day above one year earlier.



Preliminary weekly data from the Petroleum Association of Japan suggest that Japanese commercial inventories fell for a fifth consecutive month as they posted a steep 15.1 mb draw. A 10.5 mb draw in refined products led total stocks lower. Middle distillates (-5.5 mb) accounted for the lions share after cold weather likely caused a spike in kerosene demand (the country's oil-product space heating fuel of choice). Crude oil stock levels remained at 93 mb, approximately 10 mb below one year earlier as 440 kb/d of refining capacity has been shuttered in the interim.

Recent developments in Singapore and China stocks

Data published by China Oil, Gas and Petrochemicals (China OGP) pertaining to changes in Chinese commercial inventories indicate that, in January, crude stocks rose by an equivalent 10.1 mb (data are reported in terms of percentage stock change), their steepest absolute rise since August 2013. Data also suggest that China thus far has not added to its SPR in 2015. On the product side, commercial gasoil holdings rose steeply for a second consecutive month (+7.2 mb). Chinese gasoil stocks traditionally build at the beginning of the year before the Chinese New Year, which this year fell in February. Meanwhile, gasoline and kerosene added 2.3 mb and 0.3 mb, respectively.



According to International Enterprise, on-land inventories of refined products in Singapore rose by a slim 0.2 mb to remain above five-year average levels by end-February. Middle distillates increased by 0.8 mb amid reports of higher imports from the Middle East which offset set robust shipments to South Africa. Meanwhile, light distillates (-1.2 mb) fell from their previously lofty levels and by end-month stood level with one-year earlier.

Cheaper oil facilitates the building of strategic reserves

Since oil prices began their rapid retreat last June, the import bills of oil-importing economies have declined. This has assisted governments in many of these countries in either adding to their strategic reserves or putting in place firm budgetary provisions to increase oil holdings.

The largest volume added over 2014 globally was located in China where the crude strategic petroleum reserve (SPR) increased by up to 150 mb over the year as a number of new sites were commissioned. On the other hand, in the OECD, government stocks decreased by a marginal 3 mb after the US sold 5 mb of crude oil from their SPR in a 'test sale' during the second quarter, which more-than-offset rises in European government-controlled inventories, notably in Portugal and Poland.

With global supply and demand balances pointing to a potential 220 mb rise in global inventories over the course of 2015, further volumes are expected to end up in government-controlled reserves. Since strategic reserves are generally held for the longer-term and not routinely drawn unlike commercial holdings, the removal of oil from the market for the purpose of filling them could, to a certain extent, mitigate against current weak fundamentals.

China is expected to again stockpile crude in 2015 as a number of SPR sites are tentatively slated to be completed over the year. India is also expected to finally fill Phase 1 of its long-delayed SPR. Reportedly, the first site at Visakhapatnam which was completed at end-2014 and capable of holding just under 10 mb of crude, is now ready to receive its first cargo. The Indian administration has also approved a $388 million budget to cover the filling of the SPR over 2015. Considering current prices, this could amount to between 6.5 mb and 7 mb of crude. According to the most recent annual report (published in March 2014) by Indian Strategic Petroleum Reserves Limited - the body set up to oversee the construction and running of the SPR - two further Phase 1 sites located at Mangalore and Padur, with capacities of approximately 10 mb and 18 mb, respectively, are scheduled to be completed in 4Q15. Additionally, four Phase 2 sites at Padur, Chandikhol, Bikaner and Rajkot with a total capacity of around 92 mb, have already been selected, although these are not expected to be commissioned until the end of the decade at the earliest. Elsewhere in the non-OECD, Vietnam reportedly increased crude stocks at the Dung Quat refinery to 1.2 mb from 300 000 barrels previously, through a subsidiary of state-owned PetroVietnam with plans in place to purchase up to another 11 mb over the remainder of the year.

In the OECD, the South Korean administration has recently signalled its intention to increase its strategic reserves above the 92 mb which the government currently controls. These stocks are held at nine sites managed by the Korean National Oil Company (KNOC) and 79 mb is held in the form of crude oil. The government has reportedly allocated $50 million to augment these stocks, which is likely to buy approximately 800 000 barrels at today's prices with government officials stating that tenders will likely take place over the second quarter.


Prices

Summary

  • Crude oil benchmarks diverged in February after Middle Eastern supply disruptions lifted prices to a greater degree in the Atlantic basin while swelling US stockpiles weighed on WTI. At the time of writing ICE Brent was trading at around $58/bbl - up nearly 30% from a six-year low in January. NYMEX WTI was around $48/bbl.
  • Spot crude oil prices benefited from strong refining runs, especially in Europe and Asia - weighing on WTI respective to other grades. In apparent response, top exporter Saudi Arabia in early February raised its monthly formula prices worldwide for crude oil loading in April.
  • Spot product prices firmed across the board in February with prices for all surveyed products posting double- digit percentage increases. Cracks at the top and middle of the barrel in the US and Europe received support from cold weather and a raft of planned and unplanned outages in the US while those in Singapore were mixed with only light distillates receiving support from healthy regional demand.
  • While crude freight rates were largely steady in February, increased product shipments supported clean tanker rates. Freezing temperatures on the US East Coast caused refinery outages and increased demand for heating fuels which supported the transatlantic route. Higher product loadings from new refineries in the Middle East to Asia supported the 75k Middle-East-Gulf-to-Japan route.

Market overview

Oil prices bounced higher in February - after sinking to six-year lows the previous month - amid export outages in Libya and Iraq and a seasonal uptick in product demand. Libya's oil sector is increasingly under assault: its state oil company declared force majeure on 11 oil fields in early March and up to ten foreign workers were missing after Islamist militants attacked an oil field. Bad weather had slowed exports from Iraq's southern outlets during February. However, a recovery in flows from both OPEC producers in March has weighed on Brent. Even as Libya lurches further into chaos, output has recovered to more than 400 kb/d - up from an average 270 kb/d in February, while calmer seas allowed for higher Iraqi shipments.

North Sea and US crude benchmarks have meanwhile diverged after Middle East supply disruptions lifted prices in the Atlantic basin and swelling US stockpiles weighed on WTI. Brent had traded at around $60 /bbl from mid-February until early March, rebounding from about $45/bbl hit in January - despite lingering concerns about global oversupply. At the time of writing, however, ICE Brent had sunk below $60 /bbl, partly in response to a firmer US dollar that reached more than an 11-year high - making dollar-denominated oil more expensive for holders of other currencies. NYMEX WTI, under pressure from record high crude stockpiles, lagged - with its discount to Brent sinking to about $10/bbl (see Bulging US stockpiles blow out WTI-Brent spread).



Market participants were also keeping close watch on talks between major powers and Iran over its nuclear programme. Any sign of a final agreement between Tehran and the so-called P5+1 group could result in a hefty increase of Iranian crude exports. More talks have been set for 15 March in Switzerland ahead of a deadline for a framework deal by the end of March.

February marked the first m-o-m rise in global benchmark prices since Brent crude collapsed from its mid-June peak above $115/bbl. ICE Brent futures rose $9.03/bbl from January to an average $58.79/bbl in February, for a month-on-month (m-o-m) increase of 18.1%. NYMEX WTI edged up $3.39 /bbl from January to an average $50.72/bbl in February, up 7.2% m-o-m. At the time of writing, ICE Brent was trading at around $58/bbl - up nearly 30% from a six year low around $45/bbl touched in January. NYMEX WTI was trading around $48/bbl.



In response to the swift rise of US crude inventories to record levels, the NYMEX WTI M1-M2 spread widened out to an average -$1.08/bbl in February from -$0.57/bbl in January. As stockpiles continue to swell, the contango structure - where prompt oil is cheaper than crude for future delivery - has deepened and was last near $2/bbl. In contrast, the discount of prompt-month to second-month Brent shrank to -$0.90/bbl in February compared to -$1.09/bbl in January. In early March, the spread had narrowed to just -$0.45/bbl.



Forward curves remain in contango, although the Brent M1-M12 contract spread narrowed in to - $8.13/bbl in February versus -$9.88/bbl in January. The WTI M1-M12 spread shifted into a deep contango with February at an average -$9.94/bbl versus -$7.96/bbl in January. By early March the WTI forward curve was around -$10/bbl. The recent contango in WTI's forward curve has provided a strong financial incentive to store oil in the midcontinent for sale at a later stage.

Bulging US stockpiles blow out WTI-Brent spread

As US crude output growth continues apace despite lower prices, inventories are filling fast and pushing benchmark WTI's discount to North Sea Brent into double digits as a result. And the relative strength of global benchmark Brent, bolstered in February by supply disruptions in Libya and Iraq, has helped to widen the spread. WTI sank to nearly a $13/bbl discount to Brent in late February, although the spread in early March had narrowed in to around $9/bbl.

Domestic WTI is feeling the pressure from US crude inventories that have piled up to a record 468 mb amid strong production growth and a 1 mb/d reduction in refinery throughput since the turn of the year (see OECD Stocks). Further pressure came in February from a short-term surge in imports, likely purchased when WTI briefly traded at a premium to Brent. In the first week of March, US crude stocks rose by 4.5 mb.

WTI's contango structure - where prompt oil trades at a discount to future deliveries - is encouraging market players to fill up storage at Cushing, Oklahoma - the delivery hub for NYMEX WTI. In early March, the WTI M1-M12 spread had widened out to -$10/bbl - up from an average -$7.96/bbl in January. The current contango covers short-term storage costs.

Inventories at Cushing, Oklahoma have risen for 14 weeks running, the latter part of which refiners have been in maintenance. Upon the completion of seasonal turnarounds in April, refineries will burn more crude - just ahead of the start of the US driving season in May when product demand typically rises. This could slow the building of crude stocks, which - in turn - could relieve some of the pressure on WTI and narrow its discount to Brent.

Financial markets

Market Activity

Hedge funds took a progressively more optimistic stance towards ICE Brent throughout January and February. The long-to-short ratio, an indicator of funds' overall positioning, climbed from 1.3 to about 1.6, a level unseen since late July 2014. The overall number of outstanding Brent future contracts recovered to levels prior to the price collapse, at the expense of the total share of option contracts, suggesting that hedge funds now see a less uncertain future ahead.



Funds' positioning was far more bearish towards NYMEX WTI, where some short-lived optimism in early 2015 gave way to pressures as crude piled up at Cushing (see OECD Stocks). At the time of writing, the long-to-short ratio of funds' exposure to the US benchmark is sitting at its lowest since December 2011.

On the products' side, funds showed some timid optimism on the New York ultra-low sulphur diesel (ULSD) contract, although still keeping a bearish stance, as the overall positioning remains entrenched in short-selling territory. Conversely, funds' outlook towards ICE Gasoil has been gaining steam and moving increasingly into positive territory, on the back of strengthening European gasoil demand (See Demand).


Financial regulation

In the upcoming months, the US Commodity Futures Trading Commission (CFTC) could finalise rules on speculative position limits. As the rules have been the centre of much debate, the government agency extended the period of public comment on proposed rules to the end of March. The CFTC is also working on an exemption from margin requirements for end-users of uncleared swap contracts.

The European Securities and Markets Authority (ESMA) is receiving comments on its Addendum Consultation Paper on its Markets in Financial Instrument Directive and Regulation (MiFID II), the main pillar of the EU financial regulatory framework. The final technical standards are due to be submitted to the European Commission by December 2015. MiFID II is expected to come into force on January 2017.

Spot crude oil prices

Spot crude oil prices benefited in February from robust demand from refiners, especially in Europe and Asia. Prices have stabilised for the past three weeks, although markets are not yet in balance. Higher anticipated exports from Iraq (see Supply) and the North Sea began to weigh in March and the onset of refinery maintenance in Asia and Europe could also dampen demand.



Dated Brent rose to an average $58.09/bbl during February, for a gain of $10.25/bbl on January. The North Sea benchmark has hovered around $60/bbl since mid-February, with US WTI lagging by about $10/bbl. The US marker rose just $3.34/bbl to an average $50.61/bbl in February. Middle East benchmark Dubai and Russian Urals bounced back more strongly versus January. Dubai rose $9.80/bbl to average $55.42/bbl in February, while Urals climbed $11.13/bbl to $57.61/bbl in February.

Mediterranean crude oil markets were pressured by Iraq's plan to boost northern exports via Turkey to about 480 kb/d - the highest level since June 2011. Sour Urals differential to Dated Brent - already weakening on the back of a higher Russian March loading programme - has widened by about $0.50/bbl to roughly -$1.35/bbl as a result. In response to softening Urals prices, Saudi Aramco cut its monthly formula price for April loadings from Sidi Kerir for Arab Heavy and Medium grades.



Demand from Asia appeared to be relatively firm during February on the back of healthy margins, although the start of refinery maintenance could put Middle East benchmark Dubai under pressure. Relatively strong interest from India lured March-loading Nigerian grades and strengthened premiums versus Dated Brent. China's thirst for Angolan crudes remained steady and South Korea's buying helped boost UK Forties to a four-month high versus Dated Brent.

Noting the strength in the Dubai market, Saudi Aramco raised the monthly official selling price (OSP) for its April-bound cargoes to Asia by $1.20 to $1.40/bbl. The April price rise followed steady reductions since June 2014. Dubai's narrowing contango and stronger refining margins had led traders in Asia to anticipate an increase in formula prices.



Saudi Aramco raised its April formula prices by $1/bbl for US customers, many of whom are running more Canadian and domestic grades. WTI's widening discount to Brent has meanwhile driven up differentials on other domestic grades. Sour Mars crude was at a $0.60/bbl premium in February - up $3/bbl on January. The premium of LLS to WTI had expanded to around $5/bbl from about $1.50/bbl in January, although it, too, is feeling the pressure of record US stock levels. The Brent-LLS premium widened, discouraging imports. The discount for Western Canadian Select has meanwhile narrowed versus WTI, from -$16/bbl in December to -$13.10/bbl in January and -$11.50/in February on average.


Spot product prices

Spot product prices firmed across the board in February with all surveyed products posting double digit percentage increases. In the US and Europe, prices at the top and middle of the barrel received support from cold weather and a raft of planned and unplanned outages in the US which saw refinery throughputs there plunge by over 1 mb/d. Cracks subsequently firmed for most products, although gains were most pronounced in the US where crude remained comparatively cheaper. Those in Singapore were mixed as gasoline and naphtha benefitted from healthy regional demand but gains elsewhere were limited at best.



ULSD cracks in the US and Europe received a boost from a spell of prolonged cold weather on the US Atlantic Coast in February. This rapidly drew regional stocks of ULSD (the region's liquid space heating fuel of choice) and due to capacity constraints on the Colonial Pipeline, extra supplies could not easily be shipped Northwards from the US Gulf. As spot prices firmed, this opened a rare arbitrage window to ship ULSD to the US Atlantic Coast from Europe and flipped the ICE Gasoil forward price curve into backwardation. On a monthly average basis, US Gulf Coast ULSD cracks firmed by over $5/bbl to stand at $21/bbl while those in Europe increased by approximately $1/bbl as downward pressure came from high Russian exports to the region.



Cracks at the light end of the barrel increased across all surveyed markets as both gasoline and naphtha posted heathy spot price gains. In Europe, prices were driven higher by a reported uptick in regional demand and higher exports to Central and Latin America and West Africa. In the US, unplanned outages at Exxon's Torrance and BP's Whiting refineries, coupled with ongoing industrial action, helped to tighten supplies which saw US Gulf unleaded spot prices surge by over 25% on a monthly average basis. Despite regional inventories remaining high, the crack in Singapore firmed by over $3/bbl compared to January due to import demand from elsewhere in Southeast Asia.



Naphtha spot prices in Europe mirrored those of gasoline as naphtha demand for gasoline blending surged while export demand from Asia and Brazil reportedly stayed firm. In Singapore, the naphtha crack remained entrenched in positive territory following strong demand for naphtha as a petrochemical feedstock as prices for the competing feedstock, propane, remained high. Further upward momentum came from demand from gasoline blenders.



At the bottom of the barrel, the Singapore low-sulphur fuel oil (LSFO) crack was supported by brisk bunker demand while demand for HSFO was disappointing. Further downward pressure came from barrels arriving from Europe where cracks remain depressed amid oversupply. Despite the change in bunker fuel specification in Northwest Europe, LSFO in the region continues to command a premium over HSFO with export demand from non-ECA areas soaking up much of the excess supply.

Freight

Crude freight rates had a generally subdued month. Very large crude carrier (VLCCs) rates on the benchmark Middle East Gulf - Asia route inched down on the month as tonnage remained sufficient to cover demand. Westward Suezmaxes leaving West Africa seesawed through the month, finding some support from increased shipments to Northwest Europe and weather-related delays in the Mediterranean and the Black Sea. Rates in the Baltic for Aframaxes returned to under $10/mt levels as the knock-on effects from weather conditions wore off in late January.



Products freight rates had a strong month led by 37 kt vessels on the UK - US Atlantic route, which saw the rate spiking as refinery outages in the US East Coast drew in distillates from Europe - a rare move. The 38 kt Caribbean to US Atlantic found some support from tighter tonnage availability as fixtures out of the region were up mostly on increased deliveries to Mexico. Product loadings from Middle East Gulf to Japan in larger 75 k vessels were just shy of 250 kb/d, the highest since September 2012, propping the rate up to a monthly average of about $27/mt, a relatively modest increase, as subdued eastward shipments from the Gulf kept the price in check.


Refining

Summary

  • The estimate for global crude runs has been lifted to 77.8 mb/d in 1Q15, 0.3 mb/d higher than in last month's Report as sustained strong refining margins prompted stronger-than-expected OECD throughputs, offsetting a weaker non-OECD outlook. Annual growth is now seen averaging just under 1.0 mb/d in 1Q15, down from 2.2 mb/d in 4Q14, and in line with projected oil demand growth
  • The onset of refinery maintenance in Europe and Asia is set to curb global refinery runs in 2Q15 to 77.3 mb/d. Annual growth is expected to remain near 1.0 mb/d, but will shift from the OECD to non-OECD countries, mostly in the Middle East and non-OECD Asia. European refinery activity, meanwhile, is forecast to ease, after an extended period of unexpected strength.
  • A bout of winter demand strength, amid seasonally falling refinery activity, has sustained robust margins in early 2015. With a few exceptions, such as Singapore margins and Urals margins in Europe, margins continued to rise in February. The strongest gains came in the US, where reduced refinery runs and swelling inventories cut domestic crude prices, while cold weather boosted product demand. Margins rose by $9.60/bbl on average in the Midcontinent and by $5.40/bbl in the Gulf Coast.
  • OECD refinery crude runs fell by 750 kb/d in January due to a steep decline in US refinery activity. US refiners cut runs by 1 mb/d from December, as a sharp drop in margins in late December amplified planned maintenance shutdowns. In contrast, runs in Europe and Asia Oceania inched higher from a month earlier, maintaining robust annual gains of 630 kb/d and 180 kb/d, respectively.

Global refinery overview

The forecast of global refinery activity for 1Q15 has been raised by 0.3 mb/d since last month's Report, as stronger-than-expected oil product demand and sustained robust margins prompted unexpectedly high throughputs in Europe and to a lesser extent in OECD Asia Oceania. Pockets of winter demand strength in Europe and the US East Coast, and lower runs in the Americas due to scheduled and unscheduled outages, underpinned elevated European refinery runs compared with the year-earlier. While seasonal plant maintenance is expected to curb European refinery activity from March onwards, extending the seasonal downturn in global runs since December, announced turnaround schedules suggest a lighter maintenance programme than in recent years. Given a still lacklustre outlook for economic growth, unexpectedly strong demand in December and January are not expected to be sustained. Product inflows from new refineries in Saudi Arabia and the UAE, will likely add pressure. Both refineries were still ramping up in 1Q15 with few product cargoes scheduled so far. The full effect of the new plants will reverberate from 2Q15 onwards.



Increased refinery output and product exports from North America are also expected to hit markets in coming months as US refiners exit turnarounds towards the end of March. Refinery margins surged over February to nearly $20/bbl for Bakken crude in the US Midcontinent and around $13.5/bbl for ASCI-grade crude on the Gulf Coast. Lower US refinery demand since December, due to both scheduled and unscheduled outages, sent record crude volumes to storage, undermining domestic prices. Gasoline prices were supported by an explosion at ExxonMobil's Torrance, California, refinery in February. The explosion, the third such accident in the US so far this year has sparked concerns over safety at US plants. Safety is in focus in a dispute between labour unions and oil companies that has resulted in strikes at 15 US refineries and chemical plants since 1 February. So far the industrial action, the widest in 35 years, has had little impact on actual product supplies, but fear that output will be affected unless a deal is struck is weighing on markets.

In Brazil, several unplanned outages curbed refinery activity in January and February. The shutdowns, which saw Brazilian throughputs fall by nearly 240 kb/d in January, lifted Latin American product import requirements and provided further support to global markets. Indeed, press reports indicated that one of the very first product shipments from the newly commissioned Ruwais refinery in the UAE was heading to Brazil, to cover product shortfalls from the recent outages. A cargo of off-specification road diesel, meanwhile, was shipped from Saudi Arabia's new Yanbu plant to the US East Coast after freezing temperatures there not only supported heating oil demand but also to several refinery shutdowns in the region. Chinese refinery crude throughputs averaged 10.2 mb/d over January and February, an increase of around 350 kb/d from the year earlier, but down sharply from the high rates recorded at end-2014. Industry surveys suggest only a slight decline in refinery run rates in March.

In all, global refinery crude runs are expected to decline seasonally from the record 78.3 mb/d average recorded in 4Q14, to 77.8 mb/ d in 1Q15. While stronger than previously expected, annual growth also eases from 2.2 mb/d in 4Q14 to just under 1.0 mb/d in 1Q15, in line with forecast global oil product demand growth. Global refinery activity is set to slip further in 2Q15, to average 77.3 mb/d, on seasonally lower European and Asian throughputs. While growth is expected to remain largely unchanged around 1.0 mb/d, it will likely be entirely accounted for by non-OECD countries. While this shift is in part due to exceptionally high US and weak European runs a year ago (limiting the US growth potential this summer and exacerbating recent gains in Europe), it reflects the broader structural shift of oil demand and refinery capacity out of the OECD to non-OECD countries.


OECD refinery throughput

OECD refinery crude throughputs plunged by 750 kb/d in January, to average 37.2 mb/d, led by sharply lower North American refinery activity. In contrast, runs in both Europe and Asia Oceania inched higher, supported by healthy refinery margins. On a year-on-year basis, OECD runs were 730 kb/d higher, with gains of 630 kb/d in Europe and 180 kb/d in Asia Oceania partly offset by a small contraction in the Americas. As maintenance intensifies, first in the US, then in Europe and lastly in Asia, OECD throughputs are expected to fall seasonally through April before rebounding from May onwards. In all, OECD refinery runs are projected to average 36.8 mb/d in 1Q15 and 36.2 mb/d in 2Q15, down from 37.2 mb/d in 4Q14.





Lower US and Mexican refinery runs accounted for much of the decline in OECD refining activity. US refiners cut throughputs by more than 1 mb/d from December's highs, due not only to the onset of seasonal maintenance but also to a sharp deterioration in profitability. Margins in both the US Gulf Coast and the Midcontinent turned negative at the end of 2014 as product output exceeded demand and inventories rose. US gasoline stocks in particular saw steep gains towards year-end, putting severe downward pressure on gasoline cracks and margins.



According to preliminary weekly data from the US Energy Information Administration (EIA), US refinery activity eased further in February, down 120 kb/d for the month on average. The bulk of the decline stemmed from the East Coast, as a cold spell triggered outages at several plants. PADD 1 refinery activity slipped to a low of only 775 kb/d in the week ending 24 February, and was down by 190 kb/d for the month on average. Monroe Energy, a subsidiary of Delta Airlines, had to shut its catalytic cracker and other units as the river water used for cooling froze. Philadelphia Energy Solutions' 335 kb/d refinery also had to reduce runs due to boiler problems. A crude unit was also taken offline for planned work in February, while Phillips66's Bayway plant shut a crude unit for planned work from 4 February.

According to a report issued by the US EIA on 26 February, US refiners planned to take less than 0.8 mb/d of crude distillation capacity offline in February and 0.7 mb/d in March, compared with 1.1 mb/d and 1.3 mb/d in the corresponding months one year earlier. According to the EIA data, additional unplanned outages normally average around 0.5 mb/d during the first half of the year. The report concluded that planned refinery maintenance this spring is not expected to adversely affect fuels supplies and that barring unforeseen outages or higher-than-expected demand, the supply of gasoline and distillate should be adequate in all US regions.

US refinery strike spreads but impact limited so far

At the time of writing, no agreement to end the largest US refinery strike in 35 years had been reached. Negotiations between the United Steelworkers Union (USW), which represents more than 30 000 US oil workers, and Royal Dutch Shell, the lead negotiator for the oil industry, resumed on 9 March after an extended stalemate.

The conflict, which affects more than 200 refineries, oil terminals, pipelines and chemical plants, has been ongoing since 1 February after negotiations to renew a labour pact covering salary, benefits, working conditions and safety collapsed. The USW had rejected several offers put forward by Royal Dutch Shell, putting nine refineries on strike on 1 February.

Since then, the industrial action has expanded to include a total of 15 facilites, including 12 refineries  with combined capacity of 3.6 mb/d, or nearly one-fifth of total US distillation capacity, making it the largest such dispute at oil facilities since 1980, when a work stoppage lasted three months. Only Tesoro's 165 kb/d Martinez refinery in California has been completely halted, however, and only partly due to the strike. The plant was due to commence a multi-unit overhaul affecting about half its output prior to the strike, and Tesoro decided to shut the entire facility instead. Another 11 refineries, with total capacity of around 3.4 mb/d, are currently operating under contingency plans.

The contingency plans enacted by companies have so far allowed refineries to maintain operations without union labor workers. Companies are also training and deploying relief workers to keep plants running at normal rates. While refiners have so far been able to limit the impact on supplies, concerns are that unless the parties can come to an agreement, the strikes could escalate, limiting the industry's ability to replace union workers and to offset outages at other plants. Lower product supplies in the run-up to the summer driving season could significantly affect not only domestic but also global product markets.

European refinery activity continues to be supported by healthy margins. The decline in crude oil prices since last summer has outpaced declines in product prices, which have been underpinned by signs of demand strength. Preliminary data show European refinery runs increased again in January, by roughly 100 kb/d, to 11.8 mb/d. Regional runs stood an impressive 630 kb/d above the same month a year earlier. According to data released by Euroilstock on 10 March, European refinery runs continued to rise in February, lifting the estimate of European throughputs through 1H15 upwards since last month's Report. Such strong runs may not be sustainable, however, and we expect regional throughputs and margins to come under renewed pressure amid rising product inflows from competing regions, swelling product inventories and faltering demand growth. Refinery maintenance will further cut rates, with Shell's Pernis, Total's Donges, and the German Karlsruhe refineries amongst others planning work.



Despite the recent uptick in margins since mid-2014, most companies with exposure to the European downstream see the current improvement as a temporary phenomenon and continue to push ahead with restructuring plans. Total announced in mid-February that it would halve capacity at its UK Lindsey refinery as it adapts to lower regional fuel demand. The plant, which has a nameplate capacity of 207 kb/d, split between two crude distillation units, will shut one crude unit by the end of 2016. Total's plan to improve the site's efficiency and competitiveness calls for investments of $51 million. The company further added it would announce plans for its French refineries in the spring, after a pledge to the government not to curb domestic refinery capacity for five years lapsed at the start of 2015. Expectations are that the company will announce further partial plant capacity reductions, rather than full site conversions.

In OECD Asia Oceania, refinery activity also surprised to the upside in January, posting an increase of 130 kb/d from December, to 7.1 mb/d on average. The monthly increase came about largely on account of higher South Korean runs, which reached their highest level since at least 1996, at 2.8 mb/d. In Japan, refinery runs were largely unchanged through January and February at around 3.4 mb/d. Maintenance is expected to significantly curb regional runs in 2Q15, with more than 1 mb/d of crude capacity taken offline at the peak in May and June.


Non-OECD refinery throughput

Non-OECD refinery throughputs trended higher towards the end of 2014 with record high Chinese refinery runs and the start-up of new Middle Eastern refineries. A recovery in Indian refinery operations and continued robust throughputs at Russian plants also contributed. Total non-OECD refinery run estimates for 4Q14 have been lifted since last month's Report, by 150 kb/d, to 41.1 mb/d on average, representing annual growth of nearly 1.1 mb/d.

In contrast, the assessment of 1Q15 non-OECD refinery runs has been lowered by nearly 240 kb/d since last month's Report. Non-OECD crude runs are now seen at 41.1 mb/d, on par with 4Q14 levels and with annual growth easing to 0.5 mb/d. Lower than expected refinery runs in China over January and February, compared with record-high December levels, a sharp decline in Brazilian runs due to outages, higher maintenance and perpetual delays to new plant start-ups underpin the lower numbers.



While no new capacity is expected to be commissioned in China in the near term, and India's Paradip refinery will likely come on-stream in the second half of the year, annual non-OECD refinery growth is expected to pick up in 2015 from exceptionally weak levels in early 2014. It is however Middle Eastern refiners that will take centre-stage in 2015 with at least 800 kb/d of new refinery capacity hitting global markets. Saudi Arabia's Yanbu refinery has already exported several cargoes of clean products and the UAE's Ruwais refinery is on track to follow suit shortly, with a diesel and a jet cargo already scheduled for mid- March. A string of unscheduled outages in Brazil in early 2015 could create an unexpected outlet to absorb some of the additional product volumes.

Chinese refinery crude throughputs averaged 10.2 mb/d over January and February, an increase of around 350 kb/d from the year earlier, but down sharply from the high rates recorded at end-2014. Industry surveys suggest state owned refiners planned to keep runs steady in March. Latest customs data show Chinese crude oil imports surged by nearly 11% year-on-year in February, to 6.69 mb/d on average, up from 6.62 mb/d in January. Aggregate product imports rose compared with both January and a year earlier, despite sharply lower fuel oil imports. Chinese "teapot" refineries have sharply curbed their fuel-oil intake since the end of 2014, following changes in the tax code. Product exports meanwhile dropped by 16.8% year on year, resulting in the highest net import figure for key products since the start of 2014. The higher net imports, of 1 million mt, were likely in part due to stock building ahead of the Lunar New Year celebration.



In non-OECD Asia, Indian refinery runs were largely unchanged in January from a month earlier, at around 4.6 mb/d. Runs were nevertheless up more than 200 kb/d compared with January of last year, when Reliance's domestically-oriented Jamnagar plant was running at low rates. Reliance announced it will start maintenance work in March this year, while Essar is expected to shut its 405 kb/d Vadinar plant for about four weeks over May and June. IOC's Koyali plant was also undergoing maintenance in March and April, while HPCL was planning some shutdowns of its Mumbai and Vizag plants over April/May and June/July, respectively. The latest announcements regarding Indian Oil Corporation's new Paradip refinery suggest that the 300 kb/d plant will reach full rates by end-year. Despite repeated start-up delays, commissioning is still expected to start around mid-year. Elsewhere, Sri Lanka shut its sole refinery, the 50 kb/d Sapugaskanda plant, for five weeks from end February. Taiwan Formosa Petrochemical Corp, meanwhile, announced it would raise runs at its 540 kb/d Mailiao plant to 90% of capacity in January, up from 70% in December, as a damaged residue FCC unit was restarted early month.

Russian refinery activity slipped by just over 100 kb/d month-on-month in January, to nearly 5.8 mb/d. Runs were nevertheless 65 kb/d above a year earlier. Bad weather in the Black Sea reportedly forced the independent Afinsky and Ilsky refineries to curb runs, while maintenance at Rosneft's Syrzan refinery further reduced throughputs. The company's Tuapse refinery lifted runs to 189 kb/d from only 140 kb/d in December following a leak at a major crude pipeline. Gazprom's Salavat plant also ran at reduced rates. Preliminary February data show that refinery intake rose some 165 kb/d, to 5.9 mb/d on average. Maintenance normally picks up from March and peaks in April.



Middle Eastern refinery activity continues to ramp up and in December, the latest month for which data are available, regional throughputs surged to 6.3 mb/d. Saudi Arabia accounted for almost all of the nearly 0.5 mb/d monthly increase from November with gains of more than 400 kb/d from only 1.8 mb/d a month earlier. The 400 kb/d Saudi Aramco/Sinopec JV Yanbu refinery started trial runs in September 2014 and commercial operations in late January. The plant was expected to reach full capacity by mid-February, when it was reported that a second diesel cargo had been exported following a first cargo in mid-January. The second cargo, which reportedly did not meet road fuel specifications, was shipped from Yanbu and went to the US East Coast to be used as heating oil. The joint venture refinery had already shipped its first gasoline cargo earlier in the month, reportedly to Fujairah in the UAE. Meanwhile, Saudi Aramco announced in late February that it aims to start up the first units at its third new mega-refinery, the 400 kb/d Jizan plant in 2017, with final completion targeted for 2018.

The UAE's Adnoc is in the process of starting up its own mega-refinery project, a 417 kb/d crude unit expansion at its Ruwais refinery. According to press reports, the new crude unit was running at 50% to 60% in early March. The company had scheduled to load its first diesel cargo in mid-March followed by a jet cargo a week later. The plant will start gasoline shipments once the residual fluid catalytic cracker (RFCC) comes on-stream in April.



In Latin America, Brazilian refinery activity took a plunge in January, when runs slipped below 1.9 mb/d from 2.1 mb/d a month earlier. A power outage and subsequent explosion in late January at Brazil's second largest refinery, the 323 kb/d Landulpho Alves plant in Bahia, cut runs at the plant by more than 50% from a year earlier, to less than 150 kb/d. Petrobras also curbed activity at its 250 kb/d REDUC refinery by 20% in January, due to repairs to a cracking unit at the facility, while the 208 kb/d REPAR plant in the south of the country reduced throughputs by 10.4% due to a malfunction and two-week shutdown of its cracking unit.