Oil Market Report: 11 June 2015

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Highlights

  • Product market strength and rising tension throughout the Middle East supported global crude oil prices in May and through early June. At the time of writing, ICE Brent was trading at around $65.95/bbl, while US WTI was at $61.50/bbl.
  • Global oil supplies fell by 155 kb/d in May to 96 mb/d on lower non-OPEC output, but remained at a steep 3.0 mb/d above last year. Annual growth slowed marginally from March and April and remained roughly split between non-OPEC and OPEC countries. The forecast of non-OPEC supply growth for 2015 have been raised to 1 mb/d.
  • OPEC supply in May edged up 50 kb/d to 31.33 mb/d, the highest since August 2012. Saudi Arabia, Iraq and the UAE pumped at record monthly rates to keep output over 1 mb/d above OPEC's official supply target for a third month running. Oil ministers agreed to maintain that target at their 5 June meeting.
  • The estimate of global demand growth has been revised up to 1.7 mb/d for 1Q15 and 1.4 mb/d for 2015 as a whole. Momentum is expected to ease somewhat in 2H15, assuming a return to normal weather conditions and given a recent partial recovery in oil prices.
  • Global refinery crude runs reached an estimated 77.9 mb/d in April, 0.3 mb/d lower than March, and 1.7 mb/d above a year earlier. Delayed new capacity of 1.5 mb/d in non-OECD regions has lifted product cracks and OECD refining utilisation rates, and caused backwardation to re-appear in oil products markets.
  • OECD industry oil stocks built by a steep 38.0 mb in April, to stand 147 mb above average levels, as refined-product stocks moved to their widest surplus in over four years. Preliminary data indicate that OECD inventories added a further 12.6 mb in May although US crude stocks posted their first draw in nine months.

Imbalancing act

Short-term imbalances in the global refining industry appear to be supporting oil prices - whether directly for products or more indirectly for crude - in the face of a lingering supply overhang, the latest available data suggest. These imbalances could go some way towards resolving an apparent disconnect between crude prices and fundamentals: on the one hand, prices appear to have stabilised after staging a partial recovery earlier this year, and the contango in crude futures has narrowed; on the other hand, inventory builds continue amid signs of persistent oversupply.

Market participants typically take their cue from crude supply and product demand data, often leaving the midstream and downstream sectors of the industry off the radar. Developments in those sectors can at times play an important role in setting oil prices, however. This was notoriously the case in 2008, when global tightness in distillate production capacity not only underpinned a diesel rally but also sent crude markets to record highs, followed by a collapse. Refining tightness is not expected to resurface as an issue today amid generally rising global over-capacity, but a temporary imbalance has emerged as project delays and setbacks have prevented emerging non-OECD refiners from keeping up with local demand growth, even as consolidation has significantly reduced capacity in the OECD region. Glitches at US refineries have also prompted gasoline supply shortfalls in some parts of the US amid rising domestic demand.  The result of those twin developments has been an unexpected surge in refining activity, including where it was least expected: in the ageing and relatively uncompetitive European refining sector.

Two sets of data points capture this imbalance: non-OECD demand has grown by 1 mb/d year-on-year in 1H15, but non-OECD refinery runs have only gained an estimated 0.3 mb/d over the same period, as outages and delays at a series of mega-refineries - Saudi Arabia's Yanbu, the UAE's Ruwais, India's Paradip and Brazil's Abreu e Lima plants, as well as Colombia's Cartagena expansion - have caused as much as 1.5 mb/d in aggregated capacity shortfall. In contrast, OECD demand has grown more slowly - by about 0.6 mb/d - but runs have surged by an estimated 1.1 mb/d as refiners have sought to not only meet local demand but also ship products to far-flung market outlets. 

Recent oil market strength of course partly stems from unexpectedly strong global oil demand growth, which in 1Q15 surged to 1.7 mb/d, from an average 0.7 mb/d in 2014. Demand growth alone, however remarkable, could not have been the only source of oil price support, dwarfed as it was by a surge in global liquid supply to a towering 3.1 mb/d over the same period. Despite signs of a slowdown in non-OPEC supply, notably in the US, global production growth remains exceptionally high. As a result, oil inventories have soared, but their breakdown by product and region doesn't quite match that of demand. More than the rise in demand itself, it is that mismatch between product supply and product demand that seems to have supported prices. In particular, gasoline prices have found support from robust US demand, leading to a surge in crack spreads. Clean tanker owners have been enjoying a moment in the sun amid surging product-shipping demand. Pockets of product tightness in effect seem to have helped support the oil complex, pulling crude prices along.

Changing market expectations - as opposed to current conditions - may also explain the seeming divergence between prices and fundamentals. Supply responses are inevitably delayed, and the looming impact of oil companies' recent spending cuts, while not fully apparent, may already be baked into prices. Statistics also have a poor track record of capturing rapid market changes, as the statistical process often entails adjustments and extrapolations from recent trends, which naturally tend to assume business as usual. Current markets could thus be tighter than reflected in recent data. It remains that product imbalances have likely been a key factor behind recent oil price strength, and that particular source of support might soon wane as long-delayed refineries eventually reach full production.

Demand

Summary

  • Global oil demand averaged an estimated 93.3 mb/d in 1H15, up roughly 1.6 mb/d on the year and 0.4 mb/d above the estimate in last month's Report. All four of the world's largest oil consuming countries posted higher-than-expected and rising year-on-year (y-o-y) deliveries. Demand expanded in Europe and in Russia contracted more slowly than forecast.
  • Three key factors have been lifting oil demand growth in 1H15: the global economic recovery, lower oil prices and colder-than-year-earlier winter weather conditions in many large consuming countries. Demand growth was particularly robust in the US, where consumers are more directly exposed to the plunge in dollar-denominated oil prices than those in countries with higher retail oil taxes or whose currency has been weakening versus the dollar.
  • Global demand is forecast to average 94.0 mb/d for 2015, 1.4 mb/d up on the year and 0.3 mb/d higher than in last month's Report. After a resurgent 1H15, annual growth is forecast to ease somewhat in 2H15, to 1.2 mb/d, a deceleration largely attributable to projected deterioration in OECD growth, as lower-price support potentially wanes and initial post-recessionary bounces in many countries fade.  
  • Upwardly revised March US demand data raised the 1Q15 estimate by 155 kb/d, to 19.3 mb/d, an addition counter to downwardly revised economic statistics. The US economy contracted by 0.7% in annualised quarter-on-quarter (q-o-q) terms, consequential on cold weather in the northeast, a port strike and further gains in the dollar, while lower oil prices dampened oil company revenues.
  • After a year of decline, last year's sales tax hike saw Japanese oil demand rise in April. Although declining power-sector usage continues to act as a break on momentum, the upside support provided by both the petrochemical and transport sectors proved more than sufficient to support absolute growth.

Global Overview

Since bottoming out at a five-year low in 2Q14, global oil demand growth has steadily increased, as additional economic growth, colder-than-year earlier European winter weather conditions and more recently price effects have filtered through. The very latest demand data shows 1H15 deliveries at 93.3 mb/d, roughly 1.6 mb/d up y-o-y and 0.4 kb/d above the estimate cited in last month's Report. All four of the world's largest oil consuming countries posted higher-than-expected and rising y-o-y deliveries in 1H15, while long-lagging Europe has grown and the world's fifth-largest consumer - Russia - has declined at a less rapid pace than previously forecast.

Diverse factors raise 1H15 demand

Recent months have seen a steady acceleration in global oil demand growth, but due to the temporary nature of many of the factors that contributed to the upside, annual growth may subside in 2H15. Back in 2Q14, demand conditions were in the doldrums, with growth easing to a five-year low of +0.2 mb/d y-o-y. Three quarters later, growth has surged to a four-year high of 1.7 mb/d in 1Q15. Looking forward, less supportive underpinnings could confirm 1Q15 to be the peak of the current growth cycle, as annual gains ease to 1.4 mb/d in 2Q15 and 1.2 mb/d in 2H15.

Three key factors, or forces, contributed to the dramatic acceleration in global oil demand earlier this year: additional economic growth; colder-than-year-earlier winter weather conditions in Europe, which supported additional space heating demand; and lower prices. However, there are doubts that this trio will persist in 2H15. First, one cannot count on a repeat in 2H15 of the colder European weather conditions of 1Q15. The number of European heating-degree days, i.e. the number of degrees that a day's average temperature is deemed as 'requiring heating', surged by approximately 15% y-o-y in 1Q15. The last time Europe experienced anywhere near such a sharp jump was 4Q10. Secondly, crude oil prices have partially recovered since the sharp reductions seen July 2014 to January 2015. This partial rebound lessens, at least for now, support to demand across much of the world.

It is only really in the US where the price effect has appeared to play a greater role than previously forecast. Not only has falling 1Q15 US economic growth worked against the overriding US oil demand data but also given the lack of currency-effects or high retail taxes in the US, consumers there are exposed to a greater share of lower crude oil prices than in most other countries. Not until December 2014 did US demand data post a substantial uptick, equivalent to a lag of five months between crude prices falling and demand growth markedly changing, when WTI dipped below $60/bbl. In the three months that followed, with WTI averaging less than $50/bbl (roughly half June 2014 levels), US demand growth averaged 2.5% y-o-y. The traditionally more price-responsive gasoline and jet/kerosene segments led the upside, respectively rising by 3.4% and 3.7% in 1Q15. US vehicle mile travelled statistics, from the US Department of Transport's Federal Highway Commission, neatly encapsulate the increased willingness of US drivers to put additional 'miles on the clock', up 5% y-o-y in December and 3.9% in 1Q15. US gasoline prices fell by approximately one-third between June 2014 and December, while the equivalent domestic currency gasoline price fell by just 13% in Germany, 10% in the UK and 8% in Japan.

What does the future hold in store for prices? The IEA does not forecast prices as a policy. That said, monthly crude oil prices bottomed out in January, and between that month and May they rose by about one third. Futures markets are currently pricing in further crude oil price gains through the end of the year. If forward prices prove right, there could well be reduced support for demand in 2H15. Demand growth, of course, has the potential to exceed the projections carried in this Report. If, for example, economic growth came in ahead of current expectations (3.5% in 2015, according to International Monetary Fund's April World Economic Outlook, up from 3.3% in 2014), and/or further price declines were seen, and/or exceptionally cold 4Q15 winter weather struck, then additional demand growth would likely emerge, and vice versa.

Recent data contain notable upside revisions, compared to last month's Report, for both March and April. For March, the largest upgrades being the US (+450 kb/d), Brazil (+150 kb/d) and Turkey (+100 kb/d); while for April, China (+350 kb/d), Japan (+230 kb/d), Russia (+210 kb/d), India (+105 kb/d), Korea (+100 kb/d) and Brazil (+75 kb/d).

OECD

The biggest change in oil markets recently, at least from a demand perspective, has been the evolution of OECD demand from a long declining, seemingly entrenched, trend to a rising one. The 1.9% y-o-y December increase, followed by four successive monthly gains, signalled an about-face from the previously declining trend, but is only partially forecast to hold in 2H15 (see Diverse Factors Raise 1H15 Demand). Seasonally adjusted 1Q15 economic growth came in at +0.4% in the European Union, 0.6% in Japan and -0.2% in the US (the -0.7% number, popularly quoted in the press, being 'annualised'), according to the latest OECD data, versus respective 4Q14 estimates of +0.4%, 0.3% and +0.5%. Very crudely this amounts to a 0.4 percentage point growth discount, 1Q15 over 4Q14, at a time when y-o-y OECD oil demand growth completely flipped, from contracting territory (-0.5%) to growth (+1.6%). As already alluded to, a combination of the heightened US 1Q15 price-effect and additional European space-heating demand proved critical, although the exact cause of the sharp uptick in European gasoil/diesel (+465 kb/d) is likely attributable to both colder climes and lower prices. European end-user diesel prices were down by approximately 17%, June 2014-January 2015, significantly less than the 23% decline in the US, but roughly on-parity with the changes seen in Japanese local currency prices. Gasoline prices, respectively, fell by 18% in Germany, 43% in the US and 16% in Japan, June 2014-January 2015. Prices have since risen in Europe, for both gasoline (+15%, January-May) and diesel (+11%), had a mixed response in the US (gasoline up 28% and diesel down 7%) and been roughly unchanged in Japan. A decelerating OECD oil demand trend is forecast through to the end of the year, as both lower price supports and additional winter heating demand fall out of the outlook.



Americas

Upwardly revised 1Q15 US demand data raised the estimate for the OECD Americas as a whole, to 24.2 mb/d, equivalent to a gain of 1.2% on the year earlier. A dramatic upgrade in the March US demand estimate, 450 kb/d higher than the previously cited forecast to 19.2 mb/d, emerged as gasoline exports turned out to be much lower than previously assumed in Energy Information Administration (EIA) weekly statistics. Gasoline demand growth of 4.2% is now being cited, to 9.1 mb/d, marginally outpacing the 3.9% y-o-y gain posted by the US Federal Highway Administration on miles travelled as additional SUV sales potentially curbed the efficiency gains of the US vehicle fleet.



Upwardly revised US demand estimates go against the grain of macroeconomic revisions, as the latest economic data depicts a q-o-q contraction of 0.2% in total 1Q15 US economic activity. Compared to previous, preliminary estimates, approximately $40.7 billion has been removed from 1Q15 US economic output, as corporate profits posted their largest drop in a year weighed down by dollar gains. Looking at 2Q15, based initially on adjusted weekly EIA data, a further gain of 305 kb/d (or 1.6%) is foreseen to 19.0 mb/d. The 2Q15 estimate is upwardly revised compared to last month's Report by 45 kb/d. Persistent gains in the gasoline, gasoil and jet/kerosene categories continue to underpin the rising US delivery statistics. For the year as a whole, an average gain of 250 kb/d (1.3%) is forecast, to 19.3 mb/d, led by the transport and petrochemical sectors.


Europe

A combination of colder-than-year-earlier winter weather conditions, lower retail product prices and persistent macroeconomic gains supported the upwardly revised 1Q15 demand estimate, 4.4% up on the year earlier. Up by 60 kb/d compared to last month's Report, the 1Q15 estimate rose consequential on notable March upgrades for Turkey (+100kb/d), Italy (+45 kb/d) and Greece (+30 kb/d), offsetting March downgrades to the UK (-35 kb/d) and Norway (-25 kb/d). Although only available for a limited number of countries, preliminary April statistics have also contributed towards the upside revisionist bias, raising the 2Q15 European demand estimate by 40 kb/d to 13.5 mb/d. The Turkish 1Q15 demand estimate, of 765 kb/d, showed strong gains in gasoline, gasoil/diesel, residual fuel oil, jet/kerosene and naphtha, as the Turkish Statistical Institute reported industrial production up 4.7% y-o-y in March. For the year as a whole, a rapid gain of approximately 60 kb/d is foreseen to 780 kb/d, as the relatively strong macroeconomic momentum (+3.2% in 2015, according to the IMF's April World Economic Outlook) coexists alongside much reduced retail prices.



Up nearly 7% in April, the preliminary Italian demand estimate shows deliveries averaging 1.3 mb/d, 70 kb/d above prior expectations, as robust gasoil/diesel demand inflated the overall estimate. The severity of the 2014 downturn played a key supportive role to the 2015 upside, as April 2014 saw an even larger y-o-y change (-8.5%). It can be argued that strong recent growth is largely simply clawed-back demand from two years previous, but the changing composition of deliveries suggests more is afoot. Comparing April 2015 deliveries with those of April 2013 shows a net-30 kb/d of 'lost demand' but sharp gains in transport fuels, with gasoline, gasoil/diesel and jet/kerosene, residual fuel oil and 'other products' down. Gasoline and jet fuel demand have solidified as unemployment rates have fallen recently, although notably they remain well up on two-years prior, while consumer confidence indicators, such as ISAE/ISTAT's at 108 in April, are just shy of a fourteen year high. Gasoil/diesel demand gained additional impetus as industrial output growth returned in March (+1.5% y-o-y), after a near half-year hiatus, a bullish sentiment enhanced by Markit's latest Manufacturing Purchasing Manager's Index (PMI) which showed four consecutive months of 'optimism' since January.


Asia Oceania

Partially a consequence of last year's sales tax hike, preliminary Japanese demand data ended a year of declines in April, with notable gains in both transport fuels and petrochemical feedstocks. Power-sector demand continues to fall but at a less fast clip, while tightening macroeconomic conditions are likely to prove sufficient to leave a relatively flat, 4.3 mb/d demand forecast for 2015. GDP has risen for two consecutive quarters, as of 1Q15, while consumer confidence (as tracked by the Cabinet Office) has risen to its second highest level in one-and-a-half years and manufacturing sentiment has turned 'optimistic' for 2H15. Despite plans to reopen two 890 megawatt nuclear reactors at its Sendai power plant, pending permission, Kyushu Electric has left unchanged its planned oil requirement, at 35 kb/d through the peak summer months.



The strong recent Korean demand trend continued, rising in April for a fourth consecutive month at above 4%, to an estimated 2.4 mb/d. The majority of April's growth is attributable to robust petrochemical and transport sector gains. Despite concerns that weaker macroeconomic conditions could curb Korean oil demand growth over the remaining two-thirds of the year, an average gain of 65 kb/d (or 2.8%) is still foreseen for the year as a whole, as deliveries average 2.4 mb/d in 2015.




Non-OECD

The most rapid demand gains generally remain in non-OECD countries but here, in contrast to the  dramatically accelerating OECD landscape, non-OECD demand growth has eased back recently. Plus 2% per annum non-OECD demand gains have largely been the theme since early-2013, the last time growth maintained a substantial 3% premium. The recent relative easing in non-OECD demand growth is largely attributable to more modest Chinese growth and slower gains/contractions in many net oil-exporting economies. As oil export revenues have eased, post mid-2014's dramatic oil price correction, domestic has also often slowed/fallen, notably in Brazil and Russia.

China

Preliminary estimates of Chinese demand showed a stronger-than-anticipated 0.5 mb/d y-o-y gain, to 11.0 mb/d in April, as reports of heavy product destocking, higher than anticipated Chinese refinery throughputs and a general recuperation in Chinese consumer confidence filtered through. Particularly strong gains were seen in the Chinese transport sector, with motor gasoline demand growth depicting remarkable resilience in the face of generally slowing domestic economic growth. Transport fuel demand rose as consumer confidence indicators continue to expand despite the steadily slowing domestic economy. The National Bureau of Statistics reported consumer confidence, in April, at its second highest level in just over a year, to 107.6. Any reading above 100 implies net-optimism. Slowing but still relatively buoyant car sales data continue to underpin the likely long-term resilience of Chinese gasoline demand, as total passenger vehicle sales over the first four months of the year, at 7.0 million, were 7.7% up on the corresponding period one year earlier. Resurgent sales of SUVs are proving particularly supportive, with a near doubling in SUV sales over the first four months of the year compared to the year earlier period.





Falling residual fuel oil demand provided an offset, as persistent weaknesses in industrial demand remain. April data showing HSBC's Manufacturing PMI deteriorating for a second consecutive month, to 48.9, whereby any reading below 50 signifies net-pessimism, it has since risen to 49.2 in May. Total industrial output, across the Chinese economy as a whole, posted its second weakest growth rate in over six years in April, rising by 5.9% y-o-y according to NBS data. For the year as a whole, oil demand will likely average 10.8 mb/d, a gain of approximately 3.1%, as 6-to-7% economic growth underpins strong gains in gasoline, jet fuel and petrochemical demand while continued efforts to control air pollutants keep gasoil/diesel demand fairly flat.


Other Non-OECD

The latest Russian oil demand data, at 3.4 mb/d in April, surpass the dramatic declines implied by the latest macroeconomic statistics as agricultural demand in particular exceeded earlier expectations. Up 30 kb/d on the year, Russian oil product demand rose counter to the latest industrial output numbers, from the Federal State Statistics Service, which depicted a 4.5% y-o-y decline in April, or the unemployment rate, which in April rested only marginally below its previous two-year high. Jet/kerosene demand, despite sliding 2.1% y-o-y in April, held up remarkably well considering Federal Air Transport Agency data depicted air passenger numbers down 12.5% y-o-y, an anomaly attributable to additional military usage and emptier planes. For the year as a whole, Russian oil deliveries are forecast to average 3.5 mb/d, down by 155 kb/d (or 4.2%) on the previous year, as further macroeconomic contagion likely impacts oil demand statistics as the year progresses.



March deliveries, at 1.0 mb/d, in Chinese Taipei surprised on the upside, as naphtha demand seemingly sprung back up despite reports of water shortages/rationing heavily impacting water-dependent industries such as the petrochemical sector. At an estimated 410 kb/d in March, naphtha deliveries posted a surprise 65 kb/d month-on-month gain, essentially unchanged on the year earlier. The Central Weather Bureau reported average rainfalls between 4Q14 and 1Q15 at their lowest levels since records began, back in 1947, triggering water rationing at 7.5% of normal usage levels, rising to 10% on 15 April. Heavy rains, towards the end of May, will reduce the pressure to continue rationing. Other demand supports were attributable to generally escalating macroeconomic activity, with the Ministry of Economic Affairs reporting industrial output up 6.7% y-o-y and the Research Centre for Taiwan Economic Development cited consumer confidence up to a near 15-year high.



Recent Indian numbers include revisions to both the downside and upside, with March demand data having been revised down (-110 kb/d) and April up (+105 kb/d). The overall picture remains little changed, with demand set to average 4.0 mb/d in 2015, 5.3% up on the year earlier as macroeconomic momentum builds. The revised data leave absolute demand roughly flat in y-o-y terms in March, as heavy rains curbed agricultural diesel demand, rebounding in April to support an overall growth rate close to 9% y-o-y, and taking India up to third in the list of the world's largest oil consumers, ahead of previous incumbent Japan.



The outlook for Middle Eastern oil demand growth remains relatively sanguine, despite compressed oil prices dampening domestic revenues in many countries and in-turn their spending power. The International Monetary Fund's April World Economic Outlook cited economic growth of 2.9% in 2015 in "Middle East, North Africa, Afghanistan and Pakistan". This additional economic activity supports Middle Eastern oil demand growth of around 130 kb/d in 2015. Continued gains from the industrial and transportation sectors are forecast to cement this projection, with even the globally shrinking oil-fired power-sector showing signs of relative stability in the Middle East. Recent citations across a number of Middle Eastern countries, such as Oman for example, point towards continued gains in the Middle Eastern power-sector. Omani power demand rising by around 10% per annum over the next seven years, according to the Oman Power and Water Procurement Company, as strong gains in government expenditure, personal incomes and housing starts underpin rapidly expanding power sector needs. Although natural gas is the dominant means of generating power in Oman, large swathes of diesel-powered capacity also exist. The Rural Areas Electricity Company operates 67 megawatts (MW) of diesel-fired power plants in Duqm, and plans to add another 80 MW in 2017, as well as 96 MW in Musandam.



Weak transportation fuel demand in March curbed the overall pace of oil demand growth in Saudi Arabia to a sixteen month low. Having previously undertaken strongly rising trends, both gasoline and gasoil/diesel deliveries saw absolute y-o-y contractions in March, the second time this double occurrence has happened in nine months. For the year as a whole, projected deliveries will average roughly 3.3 mb/d, 2.8% up on the year.



Nigerian oil product deliveries continue to fall sharply, in y-o-y terms, according to the latest monthly data, plummeting as escalating fuel shortages plague the country enthralled in a dispute between the government and national fuel marketers. Many businesses have been running below maximum capacity citing insufficient diesel to run generators, while airlines have curtailed internal flight schedules alluding to lack of jet fuel. Deliveries really started to break below year earlier levels mid-2014, and the y-o-y decline rate has generally deteriorated ever since. Tracking forward the hope is that a deal can be brokered, otherwise our 2015 demand forecast of 280 kb/d, 1.9% down on the year, looks somewhat optimistic, as does the IMF's April forecast of near 5% economic growth.



With South African industrial output posting a surprisingly strong uptick in March, total oil product deliveries also rose sharply, with particular impetus in gasoil/diesel and gasoline. At an estimated 635 kb/d in March, the South African demand estimate is 25 kb/d above the forecast in last month's Report, reflecting ongoing economic growth. Statistics South Africa, for example, reported industrial production across the economy as a whole rising by 3.8% y-o-y in March, the sharpest increment since September, while car registrations rose to 35 550 from 34 905 in February.

The latest Brazilian oil demand data remains relatively weak, -0.4% y-o-y in April to 3.2 mb/d, but significantly higher (+75 kb/d) than assumed in last month's Report as relatively buoyant gasoline demand returned despite the persistent and growing macroeconomic gloom. Gasoline deliveries, at 1.1 mb/d in April, posted a surprise leap on the year earlier (+4%) as demand shrugged off the escalating weakness in consumer and business confidence alike. The Confederacao Nacional da Industria reported consumer confidence falling to a near fourteen year low, of 99 in April, while business confidence shrunk to its second lowest reading ever, of 38.5 in April. Largely because of such macroeconomic headwinds, the demand outlook for the year as a whole remains at an essentially flat 3.2 mb/d, demand momentum suffering as further declines in the value of the Brazilian real make imported goods more expensive.


Supply

Summary

  • Global oil production fell by 155 kb/d in May, to 96 mb/d, as lower non-OPEC output offset a small increase in OPEC. While annual gains eased from March and April's highs, growth nevertheless stood at a robust 3 mb/d, split roughly equally between non-OPEC and OPEC countries.
  • OPEC crude supply edged up 50 kb/d in May to 31.33 mb/d - the highest since August 2012. Saudi Arabia, Iraq and the UAE pumped at record monthly rates to keep OPEC output more than 1 mb/d above the group's official 30 mb/d supply target for a third month running. OPEC oil ministers agreed to maintain the production target at their 5 June meeting.
  • Barring unforeseen outages, OPEC is likely to keep pumping at around 31 mb/d during the coming months as Middle East producers sustain higher rates to preserve market share and meet summer domestic demand. OPEC's lofty production reduced 'effective' spare capacity to 2.38 mb/d in May. Upward revisions to demand have lifted the 2H15 'call' on OPEC by 150 kb/d to 30.2 mb/d.
  • Lower oil prices and a drop in capital spending are taking time to curb non-OPEC supply, with growth for 2015 revised up by 195 kb/d since last month's Report, to nearly 1 mb/d. An upward revision to the US baseline and the expectation of fewer summer field maintenance shutdowns than previously forecast in the North Sea and the FSU underpin the higher figure.
  • Non-OPEC supply is estimated to have dropped by 200 kb/d in May, to 58 mb/d, as wildfires and scheduled maintenance lowered Canadian output and maintenance in the North Sea got underway. New projects also failed to offset field decline in Brazil, where output is estimated to have declined for a fifth consecutive month, and annual gains slipping to half their 360 kb/d 1Q15 average. A seasonal increase in biofuels production and an expected recovery in Mexican and Australian production from recent lows likely provided a partial offset.
  • The estimate of US oil production has been raised by 90 kb/d for 4Q14 and more than 200 kb/d for 1Q15, based on latest data from the US Energy Information Administration (EIA). As such, US total liquids growth was lifted to 1.6 mb/d in 2014, and more than 1.7 mb/d in the first quarter of this year. Sharp cuts in drilling rates are nevertheless starting to curb supplies. In all, US oil production is expected to average 12.7 mb/d in 2015, up 0.8 mb/d from year ago.


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

OPEC crude oil supply

OPEC crude oil production of 31.33 mb/d in May edged up 50 kb/d on the previous month to reach the highest level since August 2012. Record monthly production from Saudi Arabia, Iraq and the UAE offset losses from Libya, Nigeria, Kuwait and Iran. May marked the third straight month with output more than 1 mb/d above the group's official 30 mb/d supply target, which OPEC ministers agreed to maintain at their scheduled gathering in Vienna. Production in May stood 1.12 mb/d above the previous year.

Barring unforeseen disruptions, OPEC is likely to keep pumping at around 31 mb/d during the coming months. Middle East producers are expected to sustain lofty rates to defend market share and meet summer domestic demand. Iraq, which has smashed export records for three months in a row, could see further gains in June after it launched a new system to ship heavy crude. And although Libyan production fell in May, the North African producer could yet surprise to the upside.

Upward revisions to demand have lifted the 'call on OPEC crude and stock change' for 2015 by 100 kb/d to 29.4 mb/d. For 2H15, the call was raised by 150 kb/d to 30.2 mb/d - above OPEC's official target but 1 mb/d below what it has been producing in recent months. OPEC's 'effective' spare capacity was estimated at 2.38 mb/d in May, down from April's 2.55 mb/d, with Saudi Arabia accounting for close to 90% of the surplus.



Crude supply from Saudi Arabia rose to a record monthly high of 10.25 mb/d in May, up from an upwardly revised 10.16 mb/d estimate for April as Riyadh burned more oil at home and sought to preserve its market share worldwide. May marked the third straight month with production running in excess of 10 mb/d and Saudi Oil Minister Ali al-Naimi has said the country's oil fields will continue to pump at around that level.

Saudi Arabia's internal demand is meanwhile rising as domestic power plants consume more crude during the blistering heat of summer. Direct use of crude in 2014 climbed from roughly 360 kb/d in March to almost 900 kb/d in July, according to figures submitted to the Joint Organisations Data Initiative (JODI). In March 2015, Saudi Arabia's power plants used about 350 kb/d. Saudi domestic refinery runs are also expected to rise as Riyadh brings the 400 kb/d Yasref refinery - a joint venture between state-owned Saudi Aramco and China's Sinopec - up to full speed. In March 2015, domestic refiners processed 1.9 mb/d of crude, according to JODI.

Record output rates during May reduced Riyadh's spare capacity to an estimated 2.09 mb/d. In an interview with the Saudi-owned al-Hayat newspaper published on 5 June, Naimi said OPEC's top producer could, if needed, reach full output capacity of up to 12.5 mb/d in 90 days by moving rigs from exploration work to new drilling sites. Saudi Aramco now has more than 200 oil and gas drilling rigs in operation, according to industry sources.



As the driving force behind OPEC's decision last November to maintain the group's 30 mb/d supply target, Riyadh has repeatedly made clear that it will not cut output on its own to rebalance the world oil market. State oil company Saudi Aramco has been increasing its crude shipments to Asia - and China, in particular. Beijing's oil imports fell about 11% in May from a year ago - the steepest drop since November 2013. Preliminary tanker tracking data, however, showed Saudi exports to China rose in May. Overall exports of Saudi crude during May were flat to lower compared to April, according to tanker trackers.

The latest figures from JODI meanwhile show Saudi crude shipments in March soared by 550 kb/d from February to 7.90 mb/d - the highest level in nearly a decade and in line with increased production. Exports of products edged up to 838 kb/d from 815 kb/d in February. Overall Saudi oil exports, excluding condensates and NGLs, rose to 8.74 mb/d in March versus 8.17 mb/d in February.



Crude oil production from Saudi Arabia's Gulf allies was steady m-o-m. Qatari supply was stable at 670 kb/d and the UAE kept up record output of 2.87 mb/d during May. The UAE has ordered 14 new onshore and offshore drilling rigs at a cost of $543 million as it seeks to reach official target capacity of 3.5 mb/d by the end of the decade. The Abu Dhabi National Oil Co. (Adnoc) is aiming to raise the total rig count from 69 to 100 by the end of this year and to 122 by 2017 to support its capacity effort.

Production from Kuwait edged down by 40 kb/d to 2.76 mb/d in May due to a decline in output from the Neutral Zone it shares with Saudi Arabia. The onshore Wafra oilfield, which had been pumping at around 150 kb/d, was shut down in early May following a reported operational dispute between the two sides. It will remain shut until the issues are resolved. Chevron, which operates Wafra on behalf of Saudi Arabia, has said difficulties in securing supplies and work permits for its expatriate staff have impacted operations. Saudi Arabia unilaterally closed the 300 kb/d offshore Khafji oilfield in the Neutral Zone last October ostensibly due to environmental concerns. Average Neutral Zone output in May slipped to 70 kb/d versus 150 kb/d in April.

Crude output from Iraq, including the Kurdistan Regional Government (KRG), rose to a new post-1979 high of 3.85 mb/d in May versus 3.75 mb/d in April. May was the third consecutive month of record-breaking exports, with overall shipments - including oil from the north delivered via the Turkish Mediterranean port of Ceyhan - climbing to an average 3.14 mb/d, up from 3.08 mb/d the previous month.

Baghdad's 2015 budget calls for exports of 3.3 mb/d and June could see OPEC's second largest producer edging closer to that target thanks to the launch of a new export system for heavy crude. Sales of crude oil in May rose largely due to higher flows from Iraq's giant southern oilfields, which lifted Basra Light exports to 2.69 mb/d. That was up from 2.62 mb/d in April and not far off a record 2.76 mb/d hit in December.



In June, Iraq started to export its new Basra Heavy grade alongside Basra Light, which should boost overall shipments from the south and stabilise the quality of Basra Light. Some heavy crude from southern oil fields such as West Qurna-2, Halfaya and Gharraf had been shut in to enhance the quality of Basra Light. But now this lower quality crude with an API of below 24 degrees is being pumped to two dedicated single point mooring (SPM) buoys for export. Basra Light is being shipped via a third SPM, the Basra Oil Terminal and Khor al-Amaya.

Preliminary loading schedules for June showed southern exports topping the 3 mb/d mark with Basra Heavy volumes at 1.2 mb/d and Basra Light at 1.85 mb/d. Such initial plans, however, are subject to revision and often fall short of initial targets. Iraq is hoping to route much of its Basra Heavy to Asia, but refiners in the region are so far reluctant to buy big quantities due to limited desulphurisation capacity and lingering concerns over quality.

Continued cooperation between the central government and the KRG is also contributing to Iraq's strong export and production performance. Baghdad said its northern export sales of 450 kb/d during May were steady m-o-m. The KRG said it transferred 449 kb/d to Iraq's State Oil Marketing Organisation (SOMO) during May that was shipped via its pipeline to Turkey. The KRG also said it made 184 kb/d of independent sales in May. Industry sources say some 650 kb/d of crude from northern Iraq - from the KRG and Iraq's North Oil Company (NOC) - is now flowing through the KRG's pipeline to Turkey. NOC is contributing about 200 kb/d, according to industry sources.

An export deal agreed late last year 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.

Iraq has managed so far this year to raise output to an average 3.6 mb/d versus 3.33 mb/d in 2014, with much of the increase due to the KRG/Baghdad export deal that created an outlet for northern Kirkuk crude that was shut in by the advance of Islamist militants last summer. Despite the impressive gains, low oil prices combined with the amount the government has to spend on weapons and militia salaries to fight the Islamic State of Iraq and the Levant (ISIL) means there is less left over to reimburse the international oil companies developing the country's southern oil fields. Baghdad has advised them to go slow and has, as a result, revised down its ambitious 2020 production target of 9 mb/d to 6 mb/d. Our Medium Term Oil Market Report shows output capacity rising to 4.7 mb/d by the end of the decade.

With the 30 June deadline looming for a final nuclear deal between Iran and the P5+1 (the United States, UK, France, Russia, China and Germany), Tehran continues to prepare for the day when international sanctions are lifted. Iranian oil fields pumped 2.85 mb/d in May, easing 30 kb/d from April's relatively high level - and are in theory capable of producing as much as 3.4 mb/d to 3.6 mb/d within months of sanctions being lifted. Iranian Oil Minister Bijan Zanganeh said in early June that Tehran could boost exports by 1 mb/d roughly seven months after sanctions are removed.



Preliminary tanker tracking data show that imports of Iranian crude surged to 1.4 mb/d during May - up 235 kb/d on April - and the highest level since June 2012, the last month before rigorous financial measures were enforced by the US and EU. It is unclear how much, if any, of the May volume came out of floating storage. A significant amount of the crude for delivery in May could have been produced during April, when Iran's output rose to its highest since sanctions took effect.

Those sanctions have cut exports of Iranian crude to around 1.1 mb/d from roughly 2.2 mb/d at the start of 2012. A nominal 1 mb/d cap was set on Tehran's crude exports under a November 2013 preliminary deal that partially eased sanctions, with buyers required to hold imports near that level.

Since then, China and India have emerged as Iran's top customers and Tehran is expected to target Asia for its additional crude if and when sanctions are lifted. India raised its imports of Iranian crude oil in May by 110 kb/d to 370 kb/d - the highest level since March 2014. The higher purchases in May arrived after India cut its imports to zero in March in response to international pressure. Turkey boosted purchases to 150 kb/d - up 120 kb/d on the previous month - the highest since the imposition of sanctions. Japan raised imports by 120 kb/d in May to 190 kb/d. Syria imported 90 kb/d in May versus 30 kb/d in April. China, Iran's top buyer, scaled back imports by 170 kb/d to 540 kb/d in May. Purchases of condensate - ultra light oil from Iran's South Pars gas project - shrank to 60 kb/d in May, the lowest since December 2013 and far below the 2014 average of 190 kb/d. Import volumes are based on data submitted by OECD countries and non-OECD statistics that come from customs agencies, tanker movements and news reports.

Libyan oil fields fell victim to protests, poor security and pipeline blockades in May with production declining 70 kb/d m-o-m to 450 kb/d. For months, the ongoing fight between the country's two rival governments - the so-called Libya Dawn administration in Tripoli and the officially recognised government that fled to the east - has forced a halt to operations at strategic oil fields and terminals. State oil firm the National Oil Corp (NOC) in December declared force majeure, which removes contractual liability, on exports from the main terminals of Ras Lanuf and Es Sider after fighting between the two sides broke out in the area. And repeated attacks by militants reportedly aligned with ISIL led NOC in March to declare force majeure on a dozen oilfields.

Major oil fields such as El Sharara and Elephant in the southwest remain shut due to a strike by security guards demanding more jobs. Technical glitches, along with poor security and pipeline blockades, are also hindering a production recovery in the central Sirte basin oil heartland. Despite the ongoing chaos and militant attacks, output in the North African producer had risen to 600 kb/d in early April - the highest so far this year. That level is some distance from the 1 mb/d achieved last October and far below the 1.6 mb/d produced before the 2011 civil war that unseated Muammar Gaddafi.

Theft and sabotage caused pipeline leaks and sank production in Nigeria by 40 kb/d to 1.76 mb/d in May. Nigeria's new President Muhammadu Buhari, sworn in on 29 May, has vowed to combat militancy in the Niger Delta and stamp out corruption throughout the oil sector. Buhari reportedly might not appoint a new oil minister immediately and try to combat the fraud himself. Nigeria's oil production continues to be hampered by large-scale theft in the Niger Delta.



Output in Angola, OPEC's other west African producer, rose by 40 kb/d m-o-m to 1.77 mb/d in May. The launch of new production by ExxonMobil and Eni in April has helped lift supply. Eni started up the Cinguvu field, which is pumping around 60 kb/d, while Exxon brought production online ahead of schedule from a cluster of offshore fields known as Kizomba Satellites Phase 2. Peak production at the project is estimated at 70 kb/d.

Non-OPEC overview

Non-OPEC oil production is estimated to have fallen by 200 kb/d in May, to 58 mb/d, as wildfires curbed output in northeastern Canada and maintenance got under way both in Canada and the North Sea. Preliminary data suggest US output eased further in May (with the sharpest declines from Alaska's Northern Slope), while sustaining robust annual gains of nearly 1.2 mb/d. In all, non-OPEC output was estimated 1.6 mb/d above a year earlier, only modestly weaker than growth seen in previous months. An upward revision to US production data from the start of 2014 lifted non-OPEC supply growth to 2.4 mb/d for 2014 and 1Q15.



While the new EIA supply data point to even stronger output gains in the US through the first quarter, lower oil prices and steep cuts in upstream spending are starting to take their toll on supply. Both the EIA's weekly production estimates and its Drilling Productivity Report show output declining over April and May. The latter report sees output in selected onshore shale plays dropping by 55 kb/d in May and another 85 kb/d in June. The Bakken and Eagle Ford plays are expected to see the sharpest declines, while output in the Permian Basin is likely to hold up better.



Output also continues to defy expectations in Russia, which, despite facing the twin challenges of lower prices and international sanctions, has again managed to lift production. In May, total liquids output inched up another 40 kb/d to a new record of 11.04 mb/d, including 10.71 mb/d of crude and condensates. Such growth does not appear to be sustainable, however. While several new projects will add to supplies later in the year, as the country's largest producers struggle to obtain necessary financing to service debt and develop new projects, field decline is nevertheless expected to drag down production by the end of 2015.

Field decline is also curbing output in Brazil, which saw its oil production slip for a fourth consecutive month in April. New field start-ups failed to offset mature field declines and outages in the Campos Basin and annual gains slipped to 180 kb/d, compared with 360 kb/d average annual growth in 1Q15. A string of outages slashed output in Australia and Mexico in March and April, with both countries seeing recent-year lows. In the North Sea, output has held up above expectations this year, and loading schedules through July suggest relatively light maintenance shutdowns planned in coming months. Output could thus be maintained above year-earlier levels in the next few months.

Finally, the ramping up of Indonesia's large Banyu Urip field in ExxonMobil's Cepu block in East Java could reverse field decline in the former OPEC member. Indonesia's oil output has been in continual decline since peaking at around 1.6 mb/d in the mid-1990s, with lack of investment and operational problems impeding output targets. The Banyu Urip field, estimated to hold more than 450 mb of recoverable resources, was discovered in 2001, making it one of the largest discoveries to be made in Asia in the past 15 years. Exxon announced output had already ramped up to 75 kb/d in April, with peak production of 165 kb/d targeted by year-end.

OECD

North America

US - May preliminary, Alaska actual, others estimated:  Estimated US liquids production slipped by 40 kb/d in May, to 12.9 mb/d. While lower activity levels at onshore shale plays have started to impact output, the largest drop in output came from Alaska's Prudhoe Bay. A disruption to the delivery of supplies to Alaska's North Slope oil fields likely contributed to the drop in output. Unprecedented flooding has caused intermittent road closures for more than two months, forcing supplies to be brought in by air. The road reopened in early June.



With further declines in May, the US oil rig count has now fallen for 26 consecutive weeks through the week ending 5 June. Baker Hughes data show the overall US rig count in early June had dropped to 868, of which 642 were oil rigs and the remainder natural gas rigs. While the total oil rig count was 37 fewer than a month earlier, the rate of decline was less steep than in previous months. Over April and May, the rig count dropped by 145 and 173, respectively.

However remarkable the drop in the rig count may seem in its rapidity and scale, totalling nearly 60% since its October peak, recent improvements in drilling efficiency and productivity in key output areas are no less noteworthy. The EIA's Drilling Productivity Report shows a simultaneous impressive increase in output per rig, of 40% in some cases. As producers have taken the least productive rigs out of service, output per rig rose to 720 b/d in the Eagle Ford region, up 20% from October. Gains were even more impressive in the Permian Region, where production rose 43% on average, to 296 barrels/day per rig. Producers in the Utica lifted output by 40% to 253 b/d per rig, while Bakken saw gains of 30% over the same period to 631 b/d rig in June.

Despite the gains in output per rig, the Drilling Productivity Report estimates that output in the seven most prolific US oil shale plays will continue to fall in June. Output was seen 85 kb/d lower m-o-m, after having lost 55 kb/d in May. The EIA estimates that the sharpest declines will again come from Eagle Ford, followed by Bakken and Niobrara. Annual growth was nevertheless impressive, at 925 kb/d in June, though at its lowest in 16 months. Permian, the largest US shale play in terms of liquids output, was the only one seen higher m-o-m, though gains had eased to only 7 kb/d.



Quarterly reports posted by major US shale drillers show how the drop in oil prices hit earnings in 1Q15. On 4 May, Anadarko Petroleum reported a $3.3 billion loss for the first three months of the year, despite record quarterly production. The company said it had cut its average cost of drilling a well in the Eagle Ford shale by 14% since 4Q14. Similarly, EOG Resources, Noble Energy and Concho Resources each reported drops in both income and operating costs. Noble reported a $22 million loss for the quarter, but said it had greatly improved drilling efficiency. Concho, which operates in the Permian Basin in West Texas, saw its net profit drop to $7.5 million and said it had reduced its number of rigs by half since the start of the year, to 18. EOG, which operates mostly in Texas, the Rocky Mountains and the Bakken formation in North Dakota, cut its spending by nearly 40% as it reduced the number of rigs from 32 to 18. EOG saw output increase, by 5% to 590 kb/d, but nevertheless reported a net loss of $169.7 million. Pioneer Natural Resources, one of the largest US shale producers, reported its first quarterly loss since 2009, of some $79 million. Both EOG and Pioneer have indicated they are preparing to step up production again as oil prices have recovered somewhat.

In the Gulf of Mexico, meanwhile, Chevron's Big Foot platform, which was due to start up later in 2015, has reportedly been indefinitely delayed due to damaged subsea installation tendons at the tension leg platform.

Final monthly production data for March led to a sharp upward adjustment from preliminary estimates. Production rates for as far back as the start of 2014 were also revised upwards. The sharpest revisions were made to Texas output, which now looks to have grown by 0.7 mb/d y-o-y in 1Q15, up from average growth of just over 0.6 mb/d for 2014. In all, US historical data was lifted by 70 kb/d for 2014, and 145 kb/d on average for January and February 2015. As such, US total oil supply gained 1.6 mb/d, to 11.9 mb/d in 2014, of which 8.7 mb/d was crude and condensates. US production growth is expected to slow to 0.8 mb/d in 2015, to average 12.7 mb/d, with crude oil output making up 9.3 mb/d.

Canada - March actual:  Canadian oil production fell by 145 kb/d in March, to 4.5 mb/d, as both crude and gas liquids output declined. Total crude output was 85 kb/d lower, while mined synthetics output declined by 35 kb/d and NGLs fell by 25 kb/d. Canadian output likely saw further declines from April through June, as planned maintenance firstly curbed synthetics output before wild fires shut in bitumen output from May. Four major upgrading facilities were planning maintenance in 2Q15, including Canadian Oil Sands' 100 kb/d Syncrude's Coker 8-3, Shell's Scotford upgrader, and Suncor U1 and U2 upgraders. Canadian oil output was curbed further in May, as wildfires across northeastern Alberta caused the shutdown of Natural Resources' Primrose and Kirby South oil-sands projects, as well as Cenovus' Foster Creek plant. In total an estimated 235 kb/d of bitumen output was taken offline from the last week of May. At the time of writing, the fires had abated and companies were looking to resume production.

Separately, Conoco reported it had started commercial operations at its 118 kb/d Phase 2 Surmount project in northern Alberta. First oil is expected in 3Q15 with production ramping up through next year. The project is a joint venture between Conoco and Total. Total is also developing the 160 kb/d Fort Hills project with Suncor Energy, but recently announced it will put its Alberta Northern Lights project with Sinopec on the 'long back burner'.



Mexico - April actual, May preliminary:  The slide in Mexican oil production continued in April, with crude oil output slipping another 120 kb/d from March's low, to 2.2 mb/d. Lower NGL volumes took total output to only 2.5 mb/d, 150 kb/d below March and 340 kb/d below a year earlier. As noted in last month's Report, a deadly explosion at Pemex's Abkatun Permanente platform in the Gulf of Mexico on 1 April shut in offshore output. The platform, which is part of the Abkatun Pol Chuck (APC) system, was producing over 300 kb/d prior to the outage. The Cantarell field slipped another 13 kb/d to 285  b/d, down 123 kb/ d from a year ago, while Ku-Maloob-Zaap produced 850 kb/d, largely unchanged from the previous year. Weekly preliminary data for May show an increase of 30 kb/d in Mexican crude oil production in May, to 2.2 mb/d. Natural gas liquid production is thought to have rebounded by 30 kb/d from April's low of just 310 kb/d.

On a more positive note, the Mexican government announced in early June it had prequalified 19 individual companies and seven consortia to take part in the country's inaugural tender for access to Mexican oil reserves. The announcement by Mexican upstream regulator CNH clears the firms to present bids for 14 shallow-water exploration blocks in Mexico's first upstream auction since a 2013 energy reform ended state-owned producer Pemex's 76-year monopoly. The minimum percentage of profits that companies must bid to win the contracts will only be revealed 15 July, when the tenders are awarded. The regulator was previously expected to publish the minimum requirements ahead of the auction.

Also in May, in its third call for bid in the past five months, CNH opened the bid process for 26 onshore extraction contracts. The bids, which are due on December 15, 2015, follow the earlier calls for bid that pertained to shallow waters (both exploration as well as extraction blocks). Interestingly, the prequalification technical and financial requirements were materially lowered and the technical criteria now focus on the teams and not on the individual companies being prequalified. For the first time, CNH also offered a License instead of a Production Sharing Contract.

North Sea

North Sea oil production is estimated to have dropped by 170 kb/d in May, as field maintenance reduced output at a number of fields. At nearly 2.9 mb/d, supplies were 150 kb/d higher than a year earlier, when a large number of Norwegian fields, including Brage, Grane, Heidrun Oseberg and Veslefrikk, had planned shutdowns. BFOE loading schedules suggest North Sea maintenance could be relatively modest this year. The supply of North Sea crude that underpins the Brent contract, was set to average 870 kb/d in July, only marginally lower than an upwardly revised June, and only 60 kb/d below the May allocations. As such we have slightly trimmed the forecasted seasonal drop in North Sea output since last month's Report. North Sea total oil supply is forecast at just over 2.9 mb/d for 2015 as a whole, up 20 kb/d on the previous year.



Norway - March actual, April preliminary:  Norwegian oil output averaged 1.96 mb/d in April, of which 1.58 mb/d was crude. Output was marginally higher than March and April the previous year, and output continues to exceed official government prognoses; the latest data 5.6% above the Department of Energy's prognosis from last year. Final data for March show output at the Gudrun field falling to only 5 kb/d in March, from 35 kb/d a month earlier and 55 kb/d at the end of last year.

UK - February actual, March preliminary: In line with earlier estimates, UK offshore oil output fell steeply in February, down 70 kb/d from January and 140 kb/d below a year earlier. The Forties system, which includes the core Buzzard field, saw the sharpest declines, of 27 kb/d m-o-m, as the field recorded a drop of 16 kb/d to 155 kb/d. Preliminary data show that total UK oil output rebounded by around 70 kb/d in March.

Asia Oceania

Australia - March actual:  Australia's oil production plunged to its lowest levels in more than a decade, as maintenance, industrial action and cyclone activity compounded natural declines at mature fields. Total supplies were 75 kb/d less than in February and 125 kb/d lower than the previous year. Of the total output of 295 kb/d, 100 kb/d was condensate while NGLs accounted for 45 kb/d.

The drop in output was widespread. Production from Santos's Mutineer-Exeter/Fletcher-Finucane wells had been shut-in since mid-January as the FPSO was taken offline for scheduled maintenance until early May. Output at the Gippsland JV project, operated by ExxonMobil, averaged only 14 kb/d in 1Q15, a drop of more than 60% from 4Q14, as industrial action shut the crude oil plant for 45 days in the quarter. Production reportedly only resumed on 29 April. Cyclone activity during the month further cut NWS and Stybarrow output. The Stybarrow field, which has seen its output fall from a peak of 66 kb/d in 2008, produced less than 4 kb/d in 1Q15 and will be decommissioned later this year. On a more positive note, Apache finally brought on line its Coniston field in May after numerous delays. Output, which is expected to average 18 kb/d in the first year, will be tied back to the nearby Van Gogh FPSO.

Non-OECD

Latin America

Brazil - April actual:  Brazilian oil production fell for a fourth consecutive month in April, as new projects again failed to offset maintenance and field declines, with annual gains half those seen on average in 1Q15. At 2.5 mb/d, output was 20 kb/d lower than a month earlier, with declines mostly accounted for in the Campos Basin. Among others, Petrobras' P-58 FPSO, moored in the Parque de Baleias field in the Campos Basin, was reportedly stopped for preventive maintenance from 18 March to 8 April, while Statoil's Peregrino oil field declined by 50 kb/d to only 35 kb/d. Extended decline at the Marlin Fields also took its toll, with output at Marlim Sul dropping to only 165 kb/d, 90 kb/d less than a year earlier. Total Brazilian oil output was nevertheless up an impressive 270 kb/d from a year prior, with annual gains of 110 kb/d each at Saphinoa and Roncador, while the massive Lula field raised output by 180 kb/d to 308 kb/d in the latest month.



Heavily indebted Petrobras continues efforts to raise capital in the wake of a massive corruption scandal and huge write-downs that have crippled the state-controlled company. Petrobras has seen its access to capital constrained as its cost of borrowing surged. In June, the state-run company sold $2.5 billion worth of 100-year bonds, at a 6.85% yield. The bonds were sold at only 81.07% of face value however, raising only $2.03 billion and lifting the yield to 8.45%. The sale shows that despite its numerous problems, the company can still raise capital though investors are demanding higher returns. Petrobras signed $7 billion-worth of loans with the Chinese Development Bank in May during a visit to Brasilia by Chinese Premier Li Keqiang. The company also announced it had finalised a five-year export financing loan worth nearly $1 billion from Brazil's second largest private bank Banco Bradesco.

In all, Brazil's production is expected to grow by 110kb/d in 2015, to 2.5 mb/d, with most of the gains already completed. While new projects will struggle to offset field decline this year, production should get a boost from the start-up of the P-61 platform at the Papa-Terra Field, which Petrobras operates with JV partner Chevron in the southern tip of the Campos Basin. The P-61, Brazil's first tension leg wellhead platform, started operations in March. The platform will operate alongside the P-63 FPSO, which started production in November 2013, and has the capacity to process 140 kb/d of oil and 1 mcm of gas.

Colombia - April actual: Total oil production in Colombia averaged just shy of 1.03 mb/d in March and April, up 40 kb/d and 90 kb/d above the previous year, respectively, and nearly 60 kb/d higher than forecast for both months. Output is nevertheless expected to ease from current levels, as heavy spending cuts by state-run Ecopetrol, which produces more than half the country's oil, and the country's largest independent producer, Pacific Rubiales, take a toll on production. Both companies and the country's private-sector oil producer's oil association, ACP, have downgraded their expectations for the Latin American producer. ACP has stated it expects the country to struggle to sustain production above 1 mb/d through the end of the year, while Ecopetrol recently cut its production target from 1 mb/d in 2020 to 870 kb/d as lower prices and cutbacks in oilfield E&D investments filter through to output.

Asia

Indonesian comeback?

Seven years after leaving OPEC, Indonesia has announced it is looking to re-join the producer group, according to its Energy Minister Sudiman Said. Indonesia suspended its membership in 2008 after a combination of declining domestic production and surging internal demand saw the country become a net importer. Since peaking at a rate above 1.6 mb/d in the mid-1990s, Indonesia's crude oil production has consistently lagged government targets, as a lack of investment has resulted in steep declines at its maturing oil fields. Indonesia produced around 835 kb/d of oil in 2014 and consumed more than twice as much.



The year 2015 could mark a trend reversal, however. After numerous delays, ExxonMobil and JV partner Pertamina finally began ramping up production at the Banyu Urip field, which is part of the Cepu block in East Java. At planned peak production, Banyu Urip is expected to produce as much as 165 kb/d - a target which some reports indicate has been revised to 200 kb/d. According to a company statement, the oilfield was already producing 75 kb/d at the end of April. The Banyu Urip field, which was discovered in 2001 and is one of the largest discoveries made in Asia in the last 15 years, has faced numerous development delays due to disagreements between the US oil major and the Indonesian state oil company. The field could help Indonesia offset decline this year, enabling it to post its first annual production growth in nearly 20 years. Banyu Urip is a light to medium waxy crude with very low sulphur content that will yield good output of diesel, kerosene and vacuum gas oil according to ExxonMobil. The company estimates recoverable resources at the field at more than 450 million barrels. At full production, Banyu Urip will be Indonesia's largest oil project, ExxonMobil said. Further increases this year could come from the Bukit Toa field in East Java, operated by Petronas Carigali, could reach peak production of 20 kb/d by the end of the year.

Former Soviet Union

Russia - April actual, May preliminary: Russian crude and condensate production continued to defy expectations in May, rising another 40 kb/d, to 10.7 mb/d. Increased drilling operations by Russian producers of around 15% y-o-y during the first four months of the year has offset decline at mature fields, while condensate production has also increased as new projects are coming on stream. Russia's largest producer, Rosneft, saw its production decline, despite increased drilling operations. In particular, Rosneft has embarked on a programme to stabilise production at is massive Samotlor field. Rosneft was also reported to have brought on stream the 94 mb Protzanovskoye field at its Uvat project in west Siberia, which will add 20 kb/d once it reached peak production. Rosneft brought on line a new block at West Siberia's 1-billion-bbl Samotlor field, which should help offset decline at the giant field. Bashneft and Gazpromneft showed the highest output growth rates, along with Novatek, who brought on new projects. Most recently, Total announced that it had started production at its Termokarstovoye field, which is a joint venture with Novatek. The field will produce 233 mcm/d of gas and 20 kb/d of condensates when fully operational.

Faced with the need to balance debt repayments and new investments, Rosneft is looking for huge new loans as it seems to have exhausted possibilities to obtain pre-payments from buyers and traders. The company is seeking to raise up to Rbs 10 trillion ($200 billion) reportedly mainly on a short term basis from three Russian state controlled banks (VTB, Russian Regional Development Bank and Gazprombank). Rosneft was reportedly to ask its shareholders for approval to borrow the money on its shareholder annual general meeting (AGM) on 17 June. Rosneft has been forced to reduce and delay its investment programme, not only due to lower oil prices and international sanctions but also to its debt obligations. Rosneft had debt of $45 bn at the end of 2014 after borrowing heavily mainly to finance its 2013 acquisition of TNK-BP, of which $23.5 billion is due in 2015. Rosneft has also been looking to the government for support from the National Wealth Fund, from which it sought $40 billion (Rbs 1.5-2 trillion) to finance 28 projects. The Government indicated it would not be able or willing to allocate the full amount, and that it would only consider financing specific projects. Rosneft raised $10 billion in a rouble bond issued ahead of a December 2014 deadline to repay $7 bn of debt. In January, the company raised another $6 bn in another rouble bond issue ahead of a $7 bn debt repayment on 13 February, 2015. Another loan was reimbursed using company cash flow in May 2015.



Other FSU: April actual: Azeri output averaged 870 kb/d in April, largely unchanged from a month earlier. BP suspended operations at its West Azeri platform in the Caspian Sea on 21 May for 22 days and plans to halt output at its Chirag platform for maintenance in early August. Both the West Azeri and the Chirag platforms operate at the massive ACG field in the Caspian Sean and produced at 129 kb/d and 54 kb/d in 1Q15, respectively. Kazakhstan's production was unchanged at 1.75 mb/d, while in Turkmenistan higher output from the Cheleken and Nebit Dag fields continued to support growth.

FSU net exports dropped by 260 kb/d to average 9.9 mb/d in April, marking the first time this year that they have sunk below 10 mb/d. Crude oil shipments fell by 130 kb/d, although much of this fall came from Kazakh and Azeri exports while Russian exports through the Transneft network remained relatively stable at 4.4 mb/d as domestic demand for crude fell as seasonal refinery maintenance ramped up. Exports from southern terminals fell by nearly 300 kb/d as flows through the CPC and BTC pipelines decreasing by 80 kb/d and 30 kb/d, respectively, while volumes shipped via other non-Russian Caspian ports slipped by approximately 70 kb/d. Russian exports from Novorossiysk fell by 100 kb/d as exporters likely diverted flows to other outlets amid reports of unsold sour cargoes in the Mediterranean.



In the east, exports from Kozmino, the end-point of the ESPO pipeline, hit a new record of 670 kb/d with ship -tracking data indicating that Korea upped its purchases from the terminal, while seaborne exports to China remained at about 270 kb/d, about double the 2014 average. China also imported a combined 460 kb/d of FSU crudes via the Amur spur pipeline to Daqing and the Atasu - Alashankou pipeline.

As Russian refineries entered maintenance, product exports were curbed by 100 kb/d to 3.5 mb/d in April. However, they remained over 100 kb/d above year-earlier levels. The spur for this year-on-year growth has not necessarily been the recent changes in Russian product export taxes but rather the current year-on-year contraction in Russian oil demand as the country remains mired in a recession.

OECD stocks

Summary

  • Stock builds have persisted into the second quarter as global supply continues to outstrip demand.  Preliminary indications are that builds have been centred in China, the US and Europe, while product builds have begun to catch up with crude, especially in the OECD.
  • OECD commercial inventories built by a steep 38.0 mb in April, ending at a 147 mb surplus versus average levels, the widest since April 2009.
  • Following revisions to March data, OECD refined product inventories are now seen at a surplus to average levels for the first time since January 2011. By April, the surplus had widened to 28 mb as OECD product holdings climbed by a steep 26.9 mb. On a days-of-forward-demand basis, inventories covered 30.7 days at end-April, 0.4 days above end-March.
  • The deficit of European inventories to average levels has narrowed sharply over recent months; by end-April they stood a slim 0.5 mb below average. The deficit remains centred in refined product holdings, offsetting a surplus in crude oil.
  • Preliminary data indicate that OECD inventories added 12.6 mb in May led by a 13.6 mb rise in refined products while crude stocks added a slim 0.4 mb as US posted its first month-on-month decline in crude holdings for nine months.
  • The implied national crude build in China ballooned to 33 mb in April as net imports hit a record level. In May, despite imports falling steeply, data imply that Chinese crude inventories likely continued to build. Chinese crude stock have now built by approximately 90 mb over the first five months of 2015.

Global overview

Preliminary data indicate stock builds continued into the second quarter. Global supply and demand balances suggest that the pace of builds is not expected to slow until the third quarter when supply growth is projected to be reined in. Indications from the OECD suggest the builds have begun to spread outside of the US. In April, European inventories moved to their smallest deficit against average levels in nearly four and a half years. There is also evidence that product builds are starting to catch up with crude; OECD product inventories now stand in surplus to average levels for the first time since 2011.

Meanwhile, despite a sharp fall in crude imports in May, China is still building crude stocks and has accumulated approximately 90 mb of crude over the first five months of the year. Reports from shipbrokers also indicate that over March to May floating storage built, mostly located off Asia. However, as the contango structure of many markets flattened over recent weeks, indications are that these volumes are being swiftly offloaded and will likely be transferred to on-land tanks where storage costs are lower.

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

OECD commercial inventories rose seasonally by 38.0 mb in April to leave stocks at 2 818 mb by end-month. Since this was steeper than the 23.5 mb average build for the month, inventories' surplus to average levels widened to an astounding 147 mb, the largest since April 2009 and up from 133 mb one month earlier. Although April marked the first month this year that builds were led by products, rather than crude, there were few signs to suggest that the large overhang in OECD crude inventories, centred in the US and built up over the first quarter, was being processed into refined products. The vast majority of the refined products build was in 'other products' and located in the US. These holdings were primarily composed of propane and ethane, products which largely bypass the refinery system and which built steeply as winter space heating demand ebbed. Moreover, when excluding 'other products', US product inventories only added a slim 2.6 mb.

Following upwards revisions to March data, OECD refined product inventories climbed to a surplus against average levels during that month for the first time since January 2011. By April, the surplus had grown to 28 mb as OECD product inventories rose steeply by 26.9 mb, compared to a five-year average build of 0.6 mb/d. On a days-of-forward-demand basis, products inventories covered 30.7 days at end-April, 0.4 days above end-March. Middle distillates rose counter-seasonally by 7.6 mb and by end-month stood 8.6 mb below average, their smallest deficit since March 2012. Residual fuel oil inventories now account for the bulk of the deficit in refined products. The fuel oil deficit is concentrated in OECD Europe where stock holders appear unwilling to build inventory amid declining regional demand following the recent switch to more stringent bunker fuel specifications.



Upon the receipt of more complete data, OECD industry stocks were adjusted upwards by 13.2 mb in March. The revision came from a 19.6 mb adjustment to European crude stocks (centred in Italy and the Netherlands) which more than offset downward revisions elsewhere. Together with a 3.0 mb upward adjustment in 'other oils', this saw European stocks soar counter-seasonally by 27.5 mb in March compared to the 7.8 mb build presented in last month's Report. Since inventories also built counter-seasonally by 0.4 mb in April, the deficit of the region's stocks to average levels stood at a slim 0.5 mb at end-month, its smallest since January 2011.

Preliminary data indicate that OECD inventories added 12.6 mb in May, led by a steep 15.2 mb build in Japanese holdings which more-than-offset a 4.5 mb draw in European inventories. Refined products posted a 13.6 mb build with all product categories except motor gasoline (-12.8 mb) posting builds. Notably, 'other products' rose by 18.6 mb as the seasonal restocking of propane inventories continued apace. Middle distillates rose by 4.2 mb, far steeper than the 0.8 mb five-year average build for the month, which saw their deficit versus average levels narrow further to 5 mb. Crude oil built by a slim 0.4 mb, although for the first time in several months this was not led by the US as crude stocks there posted a 9.6 mb draw to arrest recent steep builds.


Recent OECD industry stock changes

OECD Americas

Industry inventories in OECD Americas increased by 34.8 mb in April, roughly twice their seasonal build for the month, which saw their surplus to average levels widen to a steep 178 mb. The monthly build was driven by a 23.6 mb rise in 'other products', largely propane and ethane, the supply of which largely bypasses the refinery system and which rose as space heating demand fell. As refiners came back from maintenance, crude oil stocks added 10.7 mb, slightly steeper than the 7.3 mb average build for the month but significantly less than recent builds which had averaged nearly 25 mb per month over the first quarter. Motor gasoline inventories dropped by a relatively weak 3.5 mb as refiners destocked ahead of the switch to summer-grade product. Middle distillates rose counter-seasonally by 1.5 mb, which saw their deficit to average levels fall to 3.3 mb, the smallest since March 2012. All told, refined products covered 29.8 days at end-April, 0.7 days above end-March.



Preliminary weekly data from the US Energy Information Administration (EIA) indicate that during May the pace of stock builds in the US slowed from previous months. Total oil inventories added a slim 1.9 mb, significantly less that the 19.9 mb five-year average build after a 14.5 mb increase in refined products more-than-offset a combined 12.6 mb draw in crude oil, NGLs and other feedstocks.

Crude oil decreased steeply by 9.6 mb, bringing to a halt eight consecutive monthly builds totalling 122 mb. The main catalyst for the decline was a 300 kb/d m-o-m reduction in crude imports largely after wildfires and upgrader maintenance in Canada stymied imports into PADD 2 (the Midcontinent). An additional drain on crude stocks came from a 70 kb/d hike in refinery throughputs as plants continued ramping up runs to meet higher summer demand after completing seasonal maintenance. Cushing stocks drew by 2.6 mb during May and by end-month stood at 60 mb, equating to 83% of working storage capacity at the hub according to the most recent March 2015 EIA survey of storage capacity. According to reports, it is likely that a portion of the oil destocked from Cushing was destined for the SPR located on the Gulf Coast which is in the midst of replenishing the 5 mb it sold during a test sale in 2014.



Despite the increase in refinery throughputs, US refined product inventories, excluding 'other products', drew counter-seasonally by 1.5 mb. This draw was led by motor gasoline which defied seasonal trends and dropped by 7.6 mb. Although national gasoline inventories remain above average levels, they have drawn steeply by nearly 20 mb over the past three months with the draw concentrated in PADDs 1 and 2. Despite reports of localised supply tightness in these two regions, recent data indicate that stocks in both regions remained above average by end-May.

OECD Europe

European commercial inventories built counter-seasonally by a slim 0.4 mb in April. Consequently, their deficit to average levels narrowed to 0.5 mb, the smallest since March 2012. The deficit is centred in refined products, which at end-April, stood 16.1 mb below average, while crude, NGLs and other feedstocks remained 15.6 mb above average. The monthly build resulted from a counter-seasonal increase in refined products (+1.1 mb) which was likely driven by relatively strong refining activity. Despite throughputs falling on a monthly basis as a number of plants conducted maintenance, they remained higher than a year earlier amid strong margins. The strong refinery activity weighed on crude stocks which increased by a slim 0.4 mb, during a month when they have built 6.0 mb on average over the past five years. NGLs and other feedstocks adhered to seasonal trends, drawing by 1.0 mb.



The monthly build in refined products was driven by middle distillates, which rose by 4.6 mb, counter-seasonal to the 4.0 mb five-year average draw for the month. Gasoline followed seasonal trends and drew by 2.7 mb amid healthy exports to West Africa and the US Atlantic Coast. All told, at end-April, refined product holdings covered 38.2 days of forward demand, 0.3 days lower than end-March as demand is seen rising over coming months. All product categories bar gasoline continue to lag average levels. Notably fuel oil remains 11.5 mb below average, likely as stockholders have reduced their inventories of the product as regional demand has decreased in line with the recent switch to low sulphur bunker fuels.

Preliminary data from Euroilstock for EU15 plus Norway, indicate that European commercial inventories followed seasonal trends and drew by 4.5 mb in May. Stocks were driven lower by a 6.0 mb draw in refined products which more-than-offset a 1.5 mb build in crude oil. Motor gasoline inventories fell by a steep 6.2 mb amid reports of strong transatlantic gasoline exports while middle distillates holdings remained stable at 264 mb, which saw their deficit to average levels narrow to 1.8 mb.

OECD Asia Oceania

Industry oil inventories in OECD Asia Oceania added a slim 2.8 mb in April, which saw the regions deficit versus average level widen to 29.6 mb at end-month, a remarkable turnaround considering regional inventories stood in surplus in October 2014. A portion of this is likely linked to the ongoing rationalization of the Japanese refining industry as refiners reduce their feedstock holdings as capacity is closed. By end-April Japanese combined stocks of crude, NGLs and other feedstocks stood 12 mb below one-year earlier and 22 mb below the five-year average. Some of the closed plants will be turned into import terminals with crude storage switched over to products. However, this transformation will likely take some time bearing in mind recent, similar projects in Europe.



The monthly build in stocks was driven by refined products which posted a seasonal build of 3.1 mb spanning all product categories. By end-April, refined products covered 20.2 days of forward demand, 0.6 days higher that at end-March. Crude inventories retreated counter-seasonally by 1.8 mb driven by a 3.5 mb draw in Japanese inventories as crude imports there fell.

Weekly data from the Petroleum Association of Japan indicate that stocks added 15.2 mb during May as crude oil holdings rose steeply by 8.5 mb. Despite refinery throughputs slipping by close to 300 kb/d due to seasonal maintenance, refined products added 5.1 mb amid reports that extra cargoes of clean products were shipped to Japan from the Middle East. All product categories posted builds, notably the increase in motor gasoline (1.0 mb) was counter-seasonal.

Recent developments in Singapore and China stocks

According to weekly data from International Enterprise, land-based refined product inventories in Singapore rose by 3.0 mb in May. Surging fuel oil holdings (+3.1 mb) drove the build and by end-month they stood at close to 25 mb, their highest level in over 5 years. A wide arbitrage to ship product to Asia from Europe attracted cargoes to the region with stockholders content to increase inventories amid healthy regional bunker demand and ahead of summer when inflows from Saudi Arabia are expected to be curbed. Light distillates added 0.2 mb to stand above their five-year range while middle distillates drew steadily over the month and by month-end remained 0.3 mb below one month earlier.



Data from China Oil, Gas and Petrochemicals (China OGP) suggest that Chinese commercial crude inventories (excluding the strategic petroleum reserve) inched up by an equivalent 1.2 mb in April (data are reported in terms of percentage stock change) as crude net imports hit a new record of 7.3 mb/d and outstripped refinery throughputs. Nonetheless, according to preliminary crude supply and refining data, the national crude build was much steeper since the gap between crude supply (crude production and net imports minus refinery throughputs) ballooned to 33 mb, its largest since April 2014. Although information on the construction schedule of Chinese SPR sites is sketchy, it is likely that no new sites have been commissioned so far in 2015. Therefore, most of the extra build is likely to have taken place at unreported commercial storage sites such as bulk terminals. Despite preliminary May data showing a sharp fall in crude imports, crude supply still outstripped estimated refinery demand which saw implied crude stocks build. Over the first five months of this year data imply that China has accumulated approximately 90 mb of crude inventory.

Chinese refined products inventories dropped by 3.5 mb in April led by a 4.7 mb draw in diesel stocks. Relatively high exports weighed on diesel stocks, as amid sluggish domestic demand, they exceeded 110 kb/d, their highest since June 2014. Additionally, kerosene holdings slipped by 0.6 mb while gasoline inventories added 1.7 mb.


Prices

Summary

  • Product market strength and conflict in the Middle East supported global crude oil prices in May and through early June. OPEC's 5 June decision to stick with its official 30 mb/d production ceiling and market expectations the group would continue to pump around 1 mb/d above that target limited oil's upside potential. At the time of writing, ICE Brent was trading at around $65.95/bbl while US WTI was at $61.50/bbl.
  • An overhang of light, sweet crude in the Atlantic Basin spot market has depressed differentials for North Sea and West African barrels versus Dated Brent. But still-healthy demand for sour Middle East crude oil in Asia led Saudi Arabia to raise its monthly formula price for Arab Light loading in July to customers in the region.
  • Spot product prices increased across the board on a monthly average basis in May amid reports of healthy demand for motor fuels and as future supply concerns weighed on fuel oil markets. Tightness in the US gasoline market saw cracks surge there to their highest levels in nearly three years while in Europe, markets were supported by seasonal refinery maintenance and export demand.
  • Recent data indicate that outside of the US, consumers have seen very little benefit of lower crude prices with falls in the pump price of motor fuels not matching falls in crude due to the effect of high taxes and the strength of the US Dollar.
  • Rates for very-large-crude-carriers (VLCCs) from the Middle East Gulf to China reached their highest monthly average since the 2008 supercontango.

Market overview

Oil prices edged higher month-on-month (m-o-m) in May, stoked by product market strength and rising tension in Yemen, northern Iraq and Syria. The upside was limited, however, by plentiful supplies and a firmer US dollar which makes dollar-denominated crude more expensive for holders of other currencies. Adding pressure, OPEC oil ministers meeting in Vienna swiftly agreed to sustain the Saudi-led strategy put in place last November to defend market share rather than price.

While trading far above a six-year low of $45/bbl in January, ICE Brent is 45% below last June's peak above $115 /bbl. Its premium over US WTI has fallen by about 35% since mid-April, narrowing to $4.25 /bbl. In the United States, higher refinery runs to meet gasoline demand during peak driving season and slower light tight oil (LTO) output growth have helped to drain down bulging stocks and support WTI.



Global crude oil benchmarks have held relatively steady since the end of April. ICE Brent futures rose $4.47 /bbl, or 7.3%, from April to an average $65.61/bbl in May. NYMEX WTI strengthened by $4.74 /bbl, or 8.7%, versus April to an average $59.37/bbl in May. ICE Brent was last at around $65.95/bbl. US WTI was trading at roughly $61.50/bbl.

Refiners' robust demand for crude meanwhile flattened the contango structure - where prices for immediate delivery are discounted versus forward months - for both Brent and WTI during May. Brent's flatter contango is starting to draw some crude sales out of floating storage. The discount of prompt-month to second-month Brent shrank to -$0.58/bbl in May versus -$1.02/bbl in April. The NYMEX WTI M1-M2 spread narrowed to -$0.77/bbl in May compared to -$1.50/bbl in April.



Forward curves showed a similar flattening. The Brent M1-M12 contract spread pulled in to -$4.09 /bbl in May compared to -$6/bbl in April. The WTI M1-M12 spread contracted to -$3.55/bbl in May versus -$6.49 /bbl in April.


Financial markets

Market activity

In May, investors in WTI-based funds reduced their overall net investment for the first time in a year. Index-investment data, compiled monthly by the US Commodity Futures Trading Commission, encompasses a wide array of funds and investment vehicles (both on and off exchange) designed to track the WTI oil price. Oil attracted a big inflow of capital after the 2014 price crash, as investors poured money into WTI-based funds as they sought a good return. The US Oil Fund, the largest exchange-traded oil-based fund by capitalisation, cut shares by as much as 30% from its peak in late March.



Hedge funds adopted a decisively more bearish stance towards ICE Brent in the second half of May. The 'long-to-short ratio' indicating funds' average exposure slowed down and then had a brisk reversal before the 5 June OPEC meeting. In contrast, fund's interest in NYMEX WTI remained stable throughout the month, as the Cushing-delivered benchmark moved in a relatively narrow range and remains relatively disconnected from global markets.


Financial regulation

The deadline for the publication of the draft technical standard for the EU Market in Financial Instruments Directive (MiFID II) has been postponed by the European Commission from July to September 2015, at the request of the European Securities and Markets Authority (ESMA). The technical standards will determine the threshold of capital employed in financial instruments above which utilities and physical traders would need to comply with the directive, adding to trading costs.

Spot crude oil prices

An armada of unsold June-loading Nigerian crude has lengthened the Atlantic Basin spot market and depressed differentials for sweet West African and North Sea barrels versus Dated Brent. By early June, the North Sea benchmark had dropped below $61/bbl. But Brent's flatter contango - narrower discounts for prompt oil versus future deliveries - has started to lure some crude out of floating storage.



Middle East OPEC producers are meanwhile expected to keep pumping flat out to preserve market share. OPEC's top supplier Saudi Arabia is producing at near-record levels. Shipments from Iraq, OPEC's second-biggest producer, are at the highest-ever and are expected to climb further in June.

A stronger Middle East Dubai market has meanwhile narrowed the Brent/Dubai spread and sellers sought to shift some of the Atlantic Basin overhang into Asia. Dubai posted the largest m-o-m increase, rising $5.21/bbl to $63.58/bbl in May. North Sea Dated Brent firmed to an average $64.35/bbl during May, for a gain of $4.57/bbl on April. US WTI climbed $4.81/bbl from April to average $59.27/bbl in May. Russian Urals was up only $4.23/bbl m-o-m to a May average of $63.67/bbl. Higher anticipated exports of Russian crude during June and July are expected to put the sour grade's differential to Dated Brent under pressure. Algerian Saharan Blend was pressured by higher volumes of competing grades and a softening in naphtha margins in the Mediterranean.



Still-healthy refiner demand for sour barrels in Asia led Saudi Arabia to raise its monthly formula price for Arab Light crude loading in July to customers in the region. Refiners in Asia appear reluctant to buy big volumes of Iraq's new Basra heavy due to limited desulphurisation capacity and lingering concerns over quality. Muted interest has sunk the sour grade to a $1/bbl discount to its official formula price.



Upgrader maintenance and forest fires in Alberta kept Canadian output offline and pushed differentials against US WTI sharply higher for heavy crude. At WTI minus $7/bbl, the differential for benchmark Western Canadian Select was at its narrowest since April 2009. The discount of US Bakken crude to WTI also contracted sharply, pulling in to near parity with WTI. At the same time, Brent's shrinking premium versus WTI is threatening the economics of shipment by rail from the Midwest to the US coasts. As a result, some East Coast refiners have opted to source crude from overseas, with imports of light sweet crude from Nigeria edging above 100 kb/d in early May.


Spot product prices

Spot product prices increased across the board on a monthly average basis in May amid reports of healthy demand for motor fuels and as future supply concerns weighed on fuel oil markets. Tightness in the US gasoline market saw cracks surge there to their highest levels in nearly three years while in Europe, product markets tightened on seasonal refinery maintenance and export demand. In Singapore, despite naphtha cracks sliding on reduced gasoline blending and petrochemical demand, firming gasoline, middle distillate and fuel oil provided some respite for refiners.





Spot gasoline prices on the US Gulf surged by an impressive $10/bbl in May as the US driving season began with the Memorial Day holiday weekend and as initial indications from US EIA weekly data show gasoline demand remaining well above year-ago levels. As US gasoline supplies ramp up, expectations are that markets will loosen as the backwardation in the M1-M3 spread steepened over June.

As spot prices soared and outstripped gains in LLS, the US Gulf gasoline crack surged to over $35 /bbl, levels not seen since summer 2012. Anecdotal reports suggest that extra product from the Gulf was required in the Midcontinent to offset reduced output at Exxon's Joliet and Citgo's Lemont refineries. This in turn saw less product shipped from the Gulf Coast to the Atlantic Coast which pulled in extra transatlantic cargoes. Consequently European prices firmed by over $5/bbl as increasing shipments to the US offset a drop in exports to Nigeria amid the current standoff there between gasoline importers and the government. Since the increase in spot prices was less than in the US, European cracks only firmed by approximately $1/bbl and by month-end remained close to $17/bbl.



European and Asian cracks in the middle of the barrel have remained remarkably resilient over the past twelve months as gasoil and diesel prices have largely tracked crude markets. Gasoil cracks in these markets have remained at close to $15/bbl while diesel cracks have been a couple of dollars more reflecting the product's higher specifications. Meanwhile, cracks on the US Gulf have been more volatile, especially during 1Q15 with diesel cracks notably reflecting weather-related supply tightness during the first quarter.



In Singapore, prices for both high and low sulphur fuel oil posted impressive gains in both absolute and percentage term amid reports of y-o-y growth in marine bunker fuel sales and future supply concerns as Middle Eastern exports are expected to be curbed over the summer. Although remaining negative, regional fuel oil cracks improved on the month despite fuel oil inventories in Singapore hitting a five-year high as the future supply concerns, stemming from delays to a number of non-OECD refinery start-ups, weighed heavy. High Asian prices have seen the Singapore's premium to Rotterdam HSFO widen to exceed $10/bbl in late-May, easily enough to cover shipping costs and attract inflows from Europe. This saw European spot prices firm by nearly $4/bbl on a monthly average basis as supplies also remained relatively tight against a backdrop of refinery maintenance. Moreover, reports from shipbrokers indicating that fuel oil is now being shipped from Europe to Asia on larger and larger vessels to take account of economies of scale.

Drivers outside of the US see little benefit from lower crude prices

It is now 12 months since global crude prices began their descent, but despite ICE Brent hitting a low of $48/bbl in January 2015, it is evident that falls in consumer product prices have not matched those in crudes. By end-May, Brent stood approximately 40% below its June 2014 level but product prices only lost between 5% and 25% of their prices over the same period.

Within the OECD, US consumers which have reaped the most benefit from lower crude prices. Not only are motor fuel taxes there low but unlike elsewhere they see no negative effect from a strengthening US Dollar. With gasoline being the US motor fuel of choice, recent data indicate that consumption of the fuel has received a boost from lower prices with reports of increasing sales of less-efficient larger vehicles. Average US gasoline prices in May stood at $0.76/litre, approximately 75% June 2014. However, it should be noted that US gasoline prices have been strengthening of late unlike in other economies. After tracking crude prices for much of the past year, US gasoline prices have, to a certain degree, recently become dislocated from crude prices. The catalyst for this has been high gasoline prices amid localised short-term gasoline supply tightness in the midcontinent.

Outside the US, the strengthening US Dollar has offset much of the positive effect from the fall in crude prices for consumers paying in other currencies. This has been particularly noticeable in Europe where taxes on motor fuels are among the highest globally, further reducing the impact of lower crude prices. For example, German gasoline and diesel prices averaged €1.49/litre and €1.27/litre, respectively, in May, approximately, 95% and 91% of June 2014 prices. Outside of the Eurozone, Norwegian motorists are currently paying record prices for gasoline, in part due to the Norwegian Krone's weakness against the US Dollar. While in Japan, diesel and gasoline prices remain at 85% and 83% of their June 2014 prices, respectively. Despite indications of moderately increasing motor fuel demand in OECD Europe, there is little evidence to suggest that this is a response to lower pump prices.

Outside of the OECD, the scarcity of accurate monthly pricing data makes comparison difficult. Nonetheless, a number of countries including Indonesia, India, and Nigeria have taken the opportunity of lower crude prices to reduce or remove subsidies for certain fuels.  In India, prices for gasoline - which has not been subsidised for several years - have fallen by around 12% since June 2014 while in China the fall has been approximately 18%.


Freight

Surveyed freight rates for crude carriers had a strong month across the board, due mostly to strong peaks in mid-May. Rates then retreated by end-month. Rates for very-large-crude-carriers (VLCCs) from the Middle East Gulf to Asia reached their highest year-to-date in spite of subdued eastward loadings due to a brief shortage of available tonnage. VLCCs rates held their strong momentum, as growing demand has met with a fleet unchanged in size (See New oil landscape boosts tanker industry earnings).

Fixtures data showed a single cargo trade sending the Suezmax West Africa-UK rate from $15 /mt to $23 /mt in May. The rate spike froze the market, but thin trading saw the rate pare some of the gains. Suezmax rates got a boost from higher demand for longer haul voyages as Libyan exports remain mostly offline and Iraqi shipments are at record levels. Healthy activity in the North Sea and Baltic sustained rates for Aframaxes, particularly in the Baltic.



Product tanker rates inched up on the month, particularly on eastbound cargoes leaving the Middle East Gulf, on the back of strong naphtha shipments, as Japanese petrochemical demand stays strong (see Demand). The UK-US Atlantic product route had a volatile May amid ample trading volumes, as strong gasoline attracted more cargoes from Europe. As the rate rose, it drew cargoes from the US Gulf.

New oil landscape boosts tanker industry earnings

The new global oil market reality has been vastly beneficial to crude tanker owners in the last year, driving earnings to surge to their highest levels since 2008. The oil price collapse halved the price of bunker fuel which represents by far the largest component of marine shipping costs. At the same time, increased crude trade arising from extra volumes out of the Arab Gulf met with a stagnant fleet growth; this in turn sent freight rates to their highest since the 2008 super-contango on the major benchmark routes.



Arab Gulf loadings inject new life to VLCCs. Crude vessel fundamentals have been tightening since 2013, as the global crude fleet posted very limited growth once the 2008-2010 boom ended, particularly for larger classes of crude tankers. Data compiled by EA Gibson shipbrokers shows that overall crude fleet growth decreased substantially from 2010 to virtually zero in 2014. Such relative tightening in vessel supply was offset in 2013 and 2014 by shrinking long-haul crude trade volumes, as more oil was being refined closer to the wellhead, essentially in North America (See '2015 Medium Term Oil Market Report, Refining and Product Trade'). Vessel supply was however still growing in 2013 when demand first declined; owners that came late in the market have been struggling to get returns for their investment.



The balance finally turned in 3Q14, as soaring volumes out of the Arab Gulf, the highest since the 1980s at just shy of 12mb/d, met with a still tight fleet, boosting earnings to their highest since the 2008 super-contango. Very-large-crude-carriers (VLCC), the larger 2-million-barrel ships employed in the Arab Gulf eastward shipments, reaped the biggest benefit. Eastward volumes leaving the Gulf reached their highest average on record in 1Q15, prompting rates to over $15/mt, and earnings to $60 000 /day, according to IEA calculations. The surge in earnings is lending support to the size of the fleet, as the demolition of older tankers is being delayed across size classes, data compiled from VesselsValue shows. Newbuild prices are still contained and nowhere near those of 2008, signaling that shippers are being relatively cautious about engaging in another construction boom - at least for now.

Refining

Summary

  • Delayed capacity ramp-up totalling 1.5 mb/d in non-OECD regions has forced OECD refining to compensate, pushing utilisation rates high. Globally, high demand combined with limited throughput has kept product stocks in check, product cracks supported and caused backwardation to re-appear in a number of oil products markets. In this product-driven market, product strength supports crude prices, and contributes to a narrowing of the crude contango.
  • Global refinery crude runs for April reached an estimated 77.9 mb/d, 0.3 mb/d lower than March, and an impressive 1.7 mb/d above a year earlier. Preliminary May figures shows OECD refinery runs continuing with steady annual growth in spite of May marking the peak of the maintenance season. Global refinery maintenance this year should peak at 5.6 mb/d of capacity. For the second consecutive year, however, spring maintenance has been relatively subdued, as refiners sought to capture high margins, likely resulting in higher levels of maintenance later on.
  • Global throughputs averaged 78.2 mb/d in 1Q15, unchanged from last month's Report. Small downward revisions in the Middle East were offset by slightly higher runs in North America. Annual growth in 1Q15 throughputs is a still steep 1.4 mb/d, decreasing to 1.3 mb/d in 2Q15. In both quarters, OECD countries account for most of the annual growth. 3Q15 annual growth remains at the same level but shifts to non-OECD.
  • Global refinery margins generally remained elevated in May, but regional trends varied. Simple margins remained positive in all regions, supporting high crude runs. Cracking margins eased slightly in Europe but increased in the US and in the rest of the world. In the US Mid-continent, margins gained around $3/bbl, reaching over $20/bbl, but failed to match March's recent highs. A rising gasoline crack, reaching over $35/bbl, was the supportive factor of US margins. Other regions did not experience such gasoline strength.

Global refinery overview

Regional imbalances in the global refining market appear to have caused widespread ripple effects on the whole oil market recently. Confronted with unexpectedly high product demand, the non-OECD refining system has not been delivering, essentially because of delayed start-ups at a number of new large refineries in the Middle East, India and Latin America.  Those include the Yanbu, Ruwais, Paradip, Cartagena and Abreu e Lima plants, together accounting for as much as 1.5 mb/d of capacity.

The delays in refinery completion have three important consequences. Firstly, the OECD refining industry has had to compensate with unusually high throughput - especially in Europe - and deliver extra supply for both the OECD and the non-OECD regions (OECD and non-OECD demand growth for 1H15 is estimated at 0.6 mb/d and 1.0 mb/d respectively, compared with gains of 1.1 mb/d and 0.3 mb /d for OECD and non-OECD throughput over the same period). Secondly, higher than expected demand growth has kept product stocks in check and product cracks supported despite high OECD crude runs. This explains how OECD refiners can benefit at the same time from high throughputs and high margins, and why backwardation is appearing in a number of oil-product markets. Thirdly, the recent strength in product markets have been a supportive factor to crude prices and contributed to the recent narrowing of the contango previously seen in crude prices.

This situation, where oil products tightness is supporting prompt prices and market structure of crude oil, may last only until these non-OECD refineries eventually ramp up to full capacity, within a few months. Nevertheless, it could continue to provide support to crude prices until the crude supply/demand situation becomes less in surplus than currently, which is expected towards the end of 2015.



Global refinery markets continued to exhibit remarkable strength in May, as OECD crude runs showed steady annual growth in spite of May marking the peak of the maintenance season, with 2.6 mb/d of capacity offline. Non-OECD performance seems to have been more diverse, with various delays in the start-up of new refineries in the Middle East and Latin America limiting output growth.

In March, the most recent month for which a complete set of monthly data is available, OECD refiners recorded an increase of 1.4 mb/d year-on-year (y-o-y) in aggregate crude throughputs. In contrast, non-OECD refinery runs expanded by only 0.4 mb/d. Europe is still leading the increase with gains of 0.8 mb/d, due in part to an exceptionally poor showing in 2014, followed by North America with an advance of 0.5 mb/d. In April, preliminary data show that OECD runs increased by 0.3 mb/d month on month (m-o-m), with refinery utilisation rates inching up by another 2 percentage points m-o-m in North America and by one percentage point in Europe. However, OECD y-o-y throughput gains were lower in April (1.1 mb/d) than in March and expected to be even lower in May (0.4 mb/d).

Global crude run estimates for 1Q15 remain at 78.2 mb/d. Some downward revisions took place in the Middle East, offsetting higher runs in North America. Annual growth is now seen at 1.4 mb/d in 1Q15, decreasing slightly to 1.3 mb/d in 2Q15 - still historically very high. The estimate of 2Q15 crude runs was revised downwards, by 0.1 mb/d, with all non-OECD regions bar China showing declines, and all OECD regions up.

Compared to last month's Report, significantly more refinery capacity has been reported offline, with additional outages spanning most regions except Europe. Those include the US in April-May, Russia (an average 150 kb/d over April/July), Latin America (the Abreu e Lima, Brazil, and Cartagena, Colombia, refineries), Asia Pacific (the Ulsan, Korea, refinery) and Other Asia. Yet, the level of offline capacity is roughly equal to last year's, and remains well below those of two and three years ago. This could mean higher maintenance this autumn.



Margins

Refinery margins took diverging paths in May, easing off in Europe but rebounding in Singapore and even more in the US. Simple refinery margins remain largely positive in all markets, supporting high refinery runs. Once again, US mid-continent margins reached impressive numbers, above $20/bbl, supported by large discounts for local crude oil. 



All product cracks - gasoline, diesel and high sulphur fuel oil - have remained relatively stable recently, except for the US Gulf gasoline crack. The latter shot up above $35/bbl at the end of May, boosting all US margins. The gasoline price spike occurred even though gasoline stocks remained above average. Various refinery outages on the US Gulf, and the need to ship gasoline to the US Mid-continent, could have provided localised tightness supporting gasoline prices, however. High sulphur fuel oil cracks remained relatively narrow globally. In Singapore, despite very high fuel oil stocks, cracks hovered around a rather narrow minus $5/bbl.



The "noise" of the daily changes seen on the margins in the graphs above masks an unusual situation for yearly margins. Not since 2008 have margins been as high as today, be it on a cracking or on a hydroskimming basis. How long might these good time for refiners last?



Finally, China's refinery runs have recently been at record highs - as opposed to those in most other non-OECD regions. Margin calculations based on international seaborne crude and oil product markets are not relevant within inland China, but recently margins calculated on the basis of the internal market prices have also been shooting up, supporting high crude runs.

OECD refinery throughput

OECD refinery crude runs rose 0.3 mb/d in April from March, to 37.6 mb/d despite an increase in maintenance activity. Reported shutdowns in April were 0.3 mb/d higher than a month earlier. Throughputs were revised from last month by +0.2 mb/d in both Europe and Asia Oceania and total OECD is now 1.1 mb/d higher y-o-y. Utilisation rates have inched up by 1 percentage points in Europe and in the US, reaching 84 and 88 percent, respectively.



1Q15 and 2Q15 OECD throughputs were revised up by 0.1 mb/d and 0.3 mb/d to 37.5 mb/d and 37.1 mb/d respectively, since last month's Report. They are now 1.2 mb/d and 0.9 mb/d higher y-o-y.



Refinery activity in the OECD Americas picked up in April, reaching 18.9 mb/d. Various operational problems curtailed US runs in May, both in the US Gulf, mostly catalytic crackers shutdowns, and on the West Coast. ExxonMobil's 155 kb/d Torrance refinery is reported to have reduced rates until June. However, despite these snags, the ending of the strikes in some refineries and the strong runs elsewhere boosted the crude intake to 16.1 mb/d. The average US utilisation rate in May reached 92.6%, the highest number for a month of May since 2005. Marathon's Cattlesburg refinery planned shutdown was postponed from April to September, another example of maintenance being delayed most likely to take advantage of the current high margins.

In Mexico, runs remained roughly unchanged from March, despite two CDU shutdowns in Pemex's Salina Cruz and Gadereyta refineries



European April refinery runs reached 12.0 mb/d, barely higher than in March. Germany and Netherlands picked up a little from their lows in March, while the UK and Spain posted very strong numbers, the latter at a record high at least January 2004. France was the only major European country showing a monthly decline, of 110 kb/d. Other OECD Europe was also down by 90 kb/d, due to large shutdowns in Scandinavia.

Gunvor's Antwerp refinery had a fire at end May, expected to take the plant offline for two weeks. Some refineries - for instance Total's Donges in France and Phillips' Humber in the UK - seem to have substantially deferred outages planned in May-June-July, most likely to take advantage of current margins.

OECD data are starting to show the impact of the changes in bunker sulphur specifications in Northern Europe, with an increase of roughly 90 kb/d for gasoil use in bunkers. The increase is twice less than forecasted, because a good part of the demand is being met with specific low sulphur/high density bunker fuels specially manufactured by refiners. These limited gasoil quantities should still act as a support to European diesel cracks.

Euroilstock preliminary data for Europe 16 in May confirms that crude runs are on the decrease from April, although a bit less than in our expectations, and remain 0.4 mb/d higher y-o-y. 



OECD Asia April crude runs declined seasonally by 140 kb/d, to 6.7 mb/d. They now stand at the top of their five-year range, in contrast with 2014, when they had been mostly at the bottom of the range. A strong South Korean showing accounts for the difference.

In Japan, the utilisation rate slipped to 80.8 percent of capacity, down 1.1 percentage point m-o-m, but still higher by 1.7 percentage points y-o-y. A fire at JX's Kashima refinery at end-May shut down a 190 kb/d crude unit, with no indication of a restart date. Nippon Oil's Toyama facility will shut its 60 kb/d CDU for maintenance for two months starting in June.

In South Korea, refinery runs declined by 130 kb/d to 2.6 mb/d on higher refinery maintenance, but are still higher by 280 kb/d y-o-y. Runs will likely remain low until the end of the maintenance season in June. SK's Ulsan refinery maintenance shutdown, scheduled over March/April, has been deferred to June/July.

Non-OECD refinery throughput

In March, non-OECD refinery throughput remained nearly stable at 40.9 mb/d, with tepid annual growth of just 0.4 mb/d. China showed the largest y-o-y increases (+0.7 mb/d), followed by Africa and Europe, while the largest losses were seen in the FSU (-0.3 mb/d), the Middle East and Latin America. For 1Q2015, non-OECD throughput reached 40.8 mb/d, 0.2 mb/d higher y-o-y. Runs should decrease to 40.6 mb/d in 2Q15.

Official Chinese refinery data for April show that runs remained at their previous month record of 10.5 mb/d, higher by 0.3 mb/d from February. Runs are expected to be negatively impacted in May by the maintenance season. April maintenance was estimated 0.4 mb/d higher than in March, and May figures should be another 0.3 mb/d higher. Diesel stocks are running high, which caused a reduction in diesel margins, sustained diesel exports, and incentivised refineries across China to maximise gasoline at the expense of diesel.

Sinopec and PetroChina announced at the end May their financial results, which showed weaker refining margins. PetroChina and Sinopec both showed refining losses of roughly 4 billion yuans ($650 million), vs. positive results one year ago. Consequently, Sinopec announced a reduction by half of its forecast refining capex.



Lower sulphur road fuel specifications: diverging paths…

Two of the world's largest economies - China and Russia - have adopted similar policies regarding road fuels' sulphur content: adopt increasingly strict specifications in stages until the implementation of Euro 5 standards, which mandate a maximum of 10 parts per million (ppm). Today, however, China and Russia have diverging paths: while the former is accelerating adoption, the latter had been considering delaying it.

Coming after Euro 2 in 1996, Euro 3 in 2000 and Euro 4 in 2005, Euro 5 standards became mandatory in Europe in September 2009 and Euro 6 in September 2014. These specifications, for passenger cars and light commercial vehicles, affect both the road fuels themselves and the vehicles using them, as they define the maximum allowable emissions of certain pollutants by new vehicles. One of the main pollutants targeted by the regulations is sulphur: Euro 2 implemented sulphur content limits of 500 ppm, which Euro 3 then tightened to 350p ppm for diesel and 150 ppm for gasoline. Euro 4 lowered this maximum to 50 ppm and Euro 5 to 10 ppm. Euro 6 did not reduce the maximum allowable sulphur content of road fuels any further, but set tighter emission limits for nitrogen and particulate matters, making it for instance necessary to use an after-treatment of diesel engine emissions to comply with NOx limits.

Most countries outside Europe have opted to gradually implement the same specifications, but according to very different timelines (the US is a notable exception and follows its own specifications, set by the US Environmental Protection Agency, with a sulphur cap of 15 ppm, slightly above that of Euro 5). Singapore, after implementing Euro 4 in 2014, is set to adopt Euro 5 in 2017 and Euro 6 from end 2017/early 2018. India's Bharat 3 standard, on the other hand, is only equivalent to Euro 3, or a limit of 350 ppm for diesel, with no stricter target in sight. Many countries have yet to implement any sulphur limits, or have very high ones.

In China, in the face of severe pollution challenges, the authorities announced in May that the implementation of Phase 5 standards (equivalent to Euro 5) for gasoline and diesel would be moved up to January 2017, one year earlier than planned. In addition, China's premier Li Kequiang announced that, after Beijing, Shanghai and Guangdong Province, all 11 Provinces of Eastern China would fast track the adoption of Phase 5 standards to January 2016. Finally, the National Development and Reform Commission announced that Phase 6 specifications would become mandatory by 2019. That would make China one of the very few countries in Asia to adopt Euro 6.

In Russia, Euro 5 had been set to become mandatory by January 2016. However, domestic oil companies, led by Rosneft, asked the authorities for a delay on account of the difficulties generated by Western sanctions in financing the refinery modernisation program and obtaining the Western equipment required to meet the new standards. However, on June 9th, the Russian authorities confirmed that the ban on Euro 4 motor fuels will go ahead as scheduled in January 2016. Major companies, such as Lukoil, Bashneft or Gazpromneft are reportedly ready for the switch scheduled end 2015. Delays have been seen in the past: Euro 3, 4 and 5 were initially planned for 2009, 2010 and 2013, respectively, but Euro 3 was implemented only in 2013 and Euro 4 in 2015. This time, however, the decision seems final, but the implementation of Euro 6 specifications remains to be scheduled.

In March, other non-OECD Asia crude runs were slightly down, to 10.0 mb/d. In India, refinery throughput is down 0.4 mb/d m-o-m in April, to 4.2 mb/d. Reliance defered maintenance in Jamnagar from March/April to July/August, but an unusually large number of partial or full shutdowns compensated for this: IOC's Koyaly and Mathura, HPCL's Mumbai, MRPL's Mangalore, PCL's Numaligarh and BPCL's Bina plants. As a result, this is the lowest monthly figure since April 2012.  Shell's Bukom refinery In Singapore began a shutdown in mid-May for 1.5 month, and SRC Jurong refinery  will stop two weeks in June. In Thailand, March crude runs remained at a high 1.2 mb/d, boosted by high margins. For 1Q15, throughputs averaged 10% higher y-o-y.



Russian refinery throughputs were stable at 5.5 mb/d in April, even though it is the peak spring maintenance month, with 0.7 mb/d of capacity taken offline. In addition, Surgutneftegas' Kirishi plant also had an unscheduled shutdown. Preliminary figures for May show a rebound in runs to 5.7 mb/d. It remains to be seen whether such strong thoughtputs will continue to end-2015. Various local forecasts (CDU TEK and Bashneft) had announced that 2015 throughputs were expected to be lower than in 2014, due to the difficult economic conditions and the tax reform. In June, Lukoil plans to bring online a new 120 kb/d crude distillation unit (CDU) at its 195 kb/d Volgograd refinery. In June, Lukoil plans to bring online a new 120 kb/d crude distillation unit (CDU) at its 195 kb/d Volgograd refinery.

In Ukraine, the Kremenchug refinery apparently continues to process minimal amounts of crude despite the troubled environment.

Middle East crude runs have been revised downwards because of the apparently slow start-up of the new Ruwais refinery in the UAE. Some technical issues are reported to have reduced the throughput of Ruwais below 50 percent of capacity at the end of May. The refinery would now be running nearly at normal, however, so we have assumed the refinery ramping up progressively over February-June.  The total revisions for March in the Middle East is a negative 0.2 mb/d. March throughput stands at 6.3 mb/d, 0.1 mb/d lower than a year ago.



Reported refinery throughputs in Saudi Arabia in March were nearly 0.2 mb/d below February and on par with 2014. The figures were sharply lower than our earlier expectations, based on the assumption of that the country's two new refineries would ramp up, and with no reports of any maintenance shutdowns. Furthermore, JODI estimates of oil products output was reported higher by 90 kb/d m-o-m.

In Latin America, March runs were stable at 4.5 mb/d, 0.15 mb/d lower y-o-y. Brazil April refinery processing inched marginally upwards on the month, but remained 6% lower y-o-y. Reduced throughput is expected for the rest of this year, both because of the weak economic situation, and because trouble is continuing at the RNEST refinery.  The completed 115 kb/d first train at the RNEST Abreu e Lima refinery is limited to 50 kb/d until the  desulphurisation unit is eventually started, which in a best-case scenario is expected to happen in July. Moreover, the second train (115 kb/d) is 80% complete, but completion is "postponed for an extended timeframe". Petrobras's Revised Business Plan 2015-19, due soon, should shed some light on the fate of this second train. In Colombia, the full shutdown for expansion of Ecopetrol's 165 kb/d Cartagena refinery, that was supposed to last until end May, has been prolonged to at least end-September, and could take up to five months to reach its projected production rate.