Oil Market Report: 10 July 2015

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Highlights

  • Crude oil prices fell to their lowest in nearly three months in early July, pressured by ever rising supply while financial turmoil in Greece and China unsettled world markets. At the time of writing, Brent was around $59/bbl and US WTI at $53.10/bbl.
  • Global oil demand growth is forecast to slow to 1.2 mb/d in 2016, from an average 1.4 mb/d this year, with strong consumption expected in non-OECD Asia. World oil demand growth appears to have peaked in 1Q15 at 1.8 mb/d and will continue to ease throughout the rest of this year and into next as temporary support fades.
  • Global oil supply surged by 550 kb/d in June, on higher output from OPEC and non-OPEC. At 96.6 mb/d, world oil production gained an impressive 3.1 mb/d on 2014, of which OPEC crude and NGLs accounted for 60%. Non-OPEC supply growth is expected to grind to a halt in 2016, as lower oil prices and spending cuts take a toll.
  • OPEC crude supply rose by 340 kb/d in June to 31.7 mb/d, a three-year high, led by record high output from Iraq, Saudi Arabia and the UAE. OPEC output stood 1.5 mb/d above the previous year. The 'call on OPEC crude and stock change' for 2016 is forecast to rise by 1 mb/d, to 30.3 mb/d.
  • OECD industry inventories hit a record 2 876 mb in May, up by a steep 38.0 mb. Product holdings led the build and by end-month covered 30.7 days of forward demand. Global supply and demand balances suggest that the rate of global stock builds quickened rapidly to an astonishing 3.3 mb/d during 2Q15.
  • Robust margins spurred stronger-than-expected OECD refinery runs, lifting 2Q15 global throughput estimates to 78.7 mb/d. Global refinery throughputs are forecast to increase by a further 0.7 mb/d in 3Q15, with annual gains shifting to the non-OECD. New capacity start-ups in 2015 and 2016 will put margins under pressure.  

Reaching for the floor

Oil prices tumbled again in the last month, with front-month WTI futures down about 14% and Brent roughly 10% lower at the time of writing. That is a testament to the continued headwinds facing the oil industry, a recurrent theme of this Report. The rebalancing that began when oil markets set off on an initial 60% price drop a year ago has yet to run its course. Recent developments suggest that the process will extend well into 2016, as shown in our quarterly supply/demand balances for that year, unveiled here for the first time.

The rolling out of next year's oil market forecast, a rite of summer for this Report, is an opportunity to revisit the projections of the Medium-Term Oil Market Report released in February. To be sure, some of the intervening developments have come as a surprise: the financial market's exuberant response to the falling US rig count, the persistent vigour of North American supply, the odds-defying, record-breaking surge in Russian and Brazilian output, the paradoxical race of Riyadh and Baghdad to scale new production highs. The expected timing of the rebalancing has shifted a bit, but the story line has not changed. The supply response to lower prices is on the way, and US light tight oil (LTO) production is feeling the impact. While LTO output may be more price sensitive than conventional crude supply, it cannot stop on a dime: lags remain. Barring a major supply disruption elsewhere, it may also take another price drop for the full supply response to unfold.

Two nagging questions have recently emerged whose answers will shape the short-term outlook: why, in the face of a large second-quarter market imbalances and rapid stock builds, have oil prices not fallen faster? And could stock builds in 2Q15 really have been as large as implied by the 'total stocks change and miscellaneous to balance' line item of our 'Table 1', at a massive 3.3 mb/d? The key to the first enigma lies in the US gasoline market - the world's largest. Few consumers love a low oil price more than the American driver. Surging US gasoline demand since the oil price collapse has supported gasoline imports into the US East Coast and beefed up refiners' earnings worldwide, lifting global throughputs to records. This cannot last, given the challenge of finding a market outlet for the by-products of gasoline. Refining margins are already coming down from their highs.  

As to the second riddle, the bottom line is that available data only go so far towards explaining a notional stock build of such magnitude. Preliminary reports show builds in the OECD - roughly half the global market - of 740 kb/d in 2Q15. China, India and Singapore together may have added another 350 kb/d.  Refinery start-ups in Asia, the Middle East and Latin America could have absorbed large amounts of extra oil, as refiners typically store up to 35 days worth of crude runs and 15 days of product output. Oil on the water also surged, as crude cargoes from West Africa to the North Sea struggled to find buyers while Iranian floating storage and fuel oil on tankers in Asia have also built. All this might not amount to the full notional 2Q15 build. Nevertheless, even if the inevitable data revisions are taken into account, it remains that the oil market was massively oversupplied in 2Q15, and remains so today. It is equally clear that the market's ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give.

That something is, first and foremost, LTO supply, thanks to its short lead times and steep decline rates. Cost savings, efficiency gains and producer hedging have let LTO producers defy expectations until now, but growth ground to a halt in May and will likely stay there through mid-2016 - down from annual gains of 1.0 mb/d in the first five months of 2015 and 1.8 mb/d in 2014. Total US supply will keep growing through 2016, but much more slowly than in 2014, and thanks to NGL and new deepwater plays rather than onshore crude supply.

Non-OPEC supply as a whole, after expanding by a massive 2.4 mb/d in 2014, looks on track to slow to 1 mb/d in 2015 and stay flat in 2016. Demand growth, meanwhile, is projected to reach 1.2 mb/d in 2016, slightly above the MTOMR's forecast. On the face of it, that makes for a tightening market next year, when the 'call on OPEC and stock changes' looks set to jump to 30.3 mb/d, up 1 mb/d on the year. That is still a whopping 1.4 mb/d below current OPEC production, however. And the group is not slowing down. On the contrary, its core Middle East producers are pumping at record rates and the outlook for Iraqi capacity growth - accounting for most projected OPEC expansions - keeps improving. Meanwhile, Tehran has made clear its intention to lift exports as soon as the ink dries on an accord with the P5+1, which at the time of writing was still under negotiation. The bottom of the market may still be ahead.  

Demand

Summary

  • Global oil product deliveries are forecast to average 95.2 mb/d in 2016, a rise of 1.2 mb/d. The global gain stems almost entirely from additional non-OECD demand.
  • At least two 'curve-balls' are contained within the demand forecast: Greece, to the downside, and Iran, to the upside. A possible Greek exit from European Monetary Union could dampen not only Greek oil product demand, but also potentially curb deliveries across the continent if macroeconomic activity were to weaken. The upside Iranian risk surrounds the possible removal of sanctions and the additional economic growth and oil product demand that could follow. 
  • Having peaked at around 1.8 mb/d in 1Q15, global oil demand growth has since eased and is expected to continue to do so through to the end of the year. Preliminary 2Q15 estimates show growth falling, to +1.4 mb/d on a year-on-year (y-o-y) basis, before further easing to +1.2 mb/d in 2H15. This deceleration takes hold as one of the key 1Q15 supports was likely transitory, the unusually cold European winter weather, which proved particularly supportive to European gasoil demand.
  • US demand data have surprised to the upside recently, coming in at 19.0 mb/d in April, 205 kb/d up on last month's Report, attributable to additional LPG (includes ethane), gasoil and 'other products'. April marked the fifth consecutive month of y-o-y growth in US demand.
  • In contrast with US demand, recent European, Japanese and Brazilian data have come out below prior forecasts. European demand growth is now assessed at +0.6% y-o-y in 2Q15, down from 4.6% in 1Q15, confirming that 1Q15 demand strength was largely attributable to a combination of a post-recessionary bounce and colder-than-year-earlier winter weather. Japan saw falling y-o-y deliveries in May, showing April's gain to be temporary. Brazilian demand, meanwhile, fell by a larger-than-expected 130 kb/d y-o-y in May, as worsening underlying macroeconomic conditions took hold.

Global Overview

This month's Report includes, for the first time, comprehensive monthly forecasts for 2016. With the transitory demand supports of 1Q15 not thought likely to be repeated in 2016, projected global oil product demand growth eases to 1.2 mb/d. This slowdown in global growth takes average deliveries up to an estimated 95.2 mb/d in 2016, significantly below most of the existing projections for oil supplies. Unlike 2015, non-OECD countries completely dominate the growth outlook for 2016, particularly non-OECD Asia which accounts for nearly two out of every three additional barrels consumed. The absolute OECD oil demand growth, seen in 2015, likely turned out to be a temporary phenomenon, driven by one-off factors in 2015. OECD oil demand growth will likely vanish in 2016, as long-entrenched efficiency gains cancel-out the potential OECD demand gains attributable to economic growth.

Looking at 2015, with neither the colder European winter weather of 1Q15 nor recent post-recessionary bounces likely to be repeated soon, global oil product demand momentum likely peaked in 1Q15. Indeed early indicators of 2Q15 deliveries cement this view, as global growth, which climbed to a four-year high of 1.8 mb/d y-o-y in 1Q15, eased to around 1.4 mb/d y-o-y in 2Q15. Recent European data magnify this change, with European demand growth easing from +600 kb/d on a y-o-y basis in 1Q15 to 80 kb/d in 2Q15. A further moderation of this trend is foreseen in 2H15, with global oil product demand forecast easing to +1.2 mb/d y-o-y, taking prospective annual growth to an average of 1.4 mb/d in 2015. Under this forecast, total global oil product deliveries average 94.0 mb/d in 2015.

Notable April revisions, compared with the forecasts cited in last month's Report, include the US (+205 kb/d), Japan (+90 kb/d), Turkey (+70 kb/d) and Italy (+55 kb/d) to the upside, and to the downside Egypt (-65 kb/d), France (-50 kb/d) and Nigeria (-35 kb/d). Notable May revisions include, to the upside, China (+225 kb/d) and Mexico (+55 kb/d), and France (-145 kb/d), Japan (-140 kb/d), Germany (-115 kb/d), Brazil (-95 kb/d) and Italy (-45 kb/d) to the downside.

Two key, conflicting directional risks surround current oil product demand forecast. On the upside, there is a risk of higher Iranian oil product demand, related to the possibility of the removal of sanctions against the country and additional economic activity this would bring. On the downside, the risk of a Greek exit from the European Monetary Union (EMU) has been raised, following early-July's "no" vote on certain austerity measures. Not only would such an exit potentially reduce Greek oil demand, but it could also dampen prospective European deliveries if economic turmoil in Greece were to spread to other EU countries.

OECD

Forecasts for OECD oil demand in 2016, included for a first time this month, show OECD deliveries averaging 46.0 mb/d, much as they did in 2015. Such a flat forecast, however, masks some conflicting trends across the key product sub-markets, with absolute gains in LPG and gasoil, consequential on escalating underlying macroeconomic momentum, but absolute declines in gasoline and jet fuel, as expected OECD efficiency gains filter through once more.



Having topped out at four-and-a-half year high of 0.9 mb/d y-o-y in 1Q15, OECD growth has since moderated, to around +0.5 mb/d in 2Q15, as gasoil demand growth eased. Three key, somewhat related, factors underpinned the adjustment. Firstly, European gasoil demand received a temporary support from much colder-than-year-earlier winter weather conditions. Secondly, many countries/regions saw additional growth in 1Q15, as their economies came out of recessions, specifically Europe and Japan. Thirdly, oil prices plummeted 4Q14-1Q15 but have since clawed back some of this lost ground in the following two quarters, 1Q15-2Q15.



Americas

At a net 24.0 mb/d in 2Q15, the OECD Americas saw deliveries post a second consecutive +1.5% y-o-y gain with consistently robust gains in the transport sector underpinning 1H15 growth. Gains have not, however, been universally shared across the OECD Americas, as strong growth in the US offset absolute declines in Canada and Mexico. Canadian deliveries dipped on reduced road transport use, while Mexican demand fell on sharply curtailed power sector demand. Despite such ongoing weakness, the historical Mexican series has been revised up, with 45 kb/d added to the 2013 demand estimate to 2.1 mb/d, chiefly on account of upwardly revised official data for residual fuel oil, 'other products' and LPG.



US demand averaged 19.0 mb/d in April, up by an upwardly revised 255 kb/d y-o-y, the latest official monthly data show. Not only was this a fifth consecutive monthly y-o-y rise, but it also amounted to a 205 kb/d addition over the month earlier forecast. Sharp gains in gasoline, LPG (includes ethane) and the 'other products' category led April's upside. At 9.1 mb/d in April, US gasoline deliveries rose to a six-month high and were 1.8% up on the year earlier, a pace that was shadowed by the latest vehicle-miles-travelled statistics consequential on efficiency gains. The US Department of Transportation's Federal Highway Administration reporting that total US vehicle miles travelled rose by 3.9% y-o-y in April.



Persistent gains in the industrial sector supported additional gasoil/diesel deliveries, up 25 kb/d y-o-y in April, LPG 80 kb/d higher and 'other products' adding 55 kb/d. The US Institute of Supply Management's closely watched Manufacturing index depicted an increasingly upbeat short-term outlook and one that has risen steadily since temporarily stalling at the end of 1Q15. Of the 18 manufacturing sectors tracked, 11 are reporting growth, notably including 'chemical products' consistent with the growth seen in LPG deliveries recently.



Preliminary estimates of May demand, based on the US Department of Energy's Energy Information Administration's weekly series, showed total US oil deliveries rising to 19.1 mb/d in May. Up by nearly 3% on the year earlier, the preliminary May series contained particularly sharp gains in petrochemical feedstocks and transport fuels, which more than offset persistent softness in residual fuel oil use. Looking forward, total US deliveries are forecast to average 19.3 mb/d in 2015 as a whole, 1.6% up on the year, as both the recuperating macroeconomic backdrop and starkly lower prices inflated oil product demand. US demand momentum then roughly halves in 2016, as additional efficiency gains filter through alongside the likely plateau in underlying macroeconomic momentum.


Europe

Playing a vital role in the escalation in global demand growth, to a four-year high in 1Q15, changing European momentum proved critical in the deceleration that followed. Within the global 1Q15 uptick, Europe accounted for 70%, then in the resultant 2Q15 slowdown the deceleration in Europe went as far as to exceed the global climb-down. Baseline data revisions also took 115 kb/d off the 2013 European demand estimate, to 13.6 mb/d, as new historical series for France and Italy, in particular, were incorporated.



Preliminary estimates of May French demand suggest a second consecutive y-o-y decline, to 1.5 mb/d, as the previous four-month uptick now increasingly looks to have been a temporary aberration induced by colder-than-year-earlier weather. The demand forecast for 2015 as a whole remains at -1.5%, likely easing back to -1.0% in 2016 as macroeconomic momentum is forecast to build.



The latest preliminary data for Germany paint a similar picture, as total deliveries fell to 2.3 mb/d in May, a second consecutive y-o-y decline reversing the prior four-month uptrend. As with France, colder-weather conditions played something of a role, with the number of heating degree days December-March roughly one-sixth up on the year earlier. 'Other gasoil' demand accounted for just over 40% of the total December-March German demand growth and 60% of the April-May decline. This is unlikely to be due to the refilling of heating oil stocks, as data show they have drawn steadily through June. In 2015 as a whole, growth of around 1.1% is foreseen, taking average deliveries up to around 2.4 mb/d, before declining modestly in 2016, albeit still averaging 2.4 mb/d, as the negative impact from efficiency gains are likely to exceed any upside support from tentative macroeconomic gains.



Finance turmoil in Greece

With serious questions being raised about Greece's ongoing participation in the European single currency, and amid Greece's unsustainable debt levels and one-quarter of the populace out of work, the macroeconomic outlook for Greece and potentially Europe has come under threat. This brings with it the prospect of weakening oil demand. Demand in 1Q15 in Europe and Greece rose by 4.6% y-o-y (or 600 kb/d) and 15% (or 40 kb/d), respectively, as their economies grew by 1.5% and 0.2%. Such strong oil demand growth looks unsustainable, with Greece almost certain to see a short-term reversal. This is because a large part of 1Q15 Greek growth was likely the result of cold weather, as the number of heating-degree days carried a 30% premium and 'other gasoil' accounted for 80% of the 1Q15 gain. Furthermore, the recent imposition of daily cash withdrawal limits and refusals of credit cards at petrol stations will limit access to oil products.

Although current forecasts of Greek demand point to a contraction, falling from 290 kb/d in 1Q15 to 275 kb/d by 4Q16, additional downside pressures loom amid concerns over Greece's participation in the single European currency. If Greece were to exit the euro, any replacement currency it adopts could be severely debased; bringing additional downside to Greek oil product demand as goods and services priced in US dollars would become more expensive. Already a net exporter, with recent estimates of refinery outputs exceeding demand, future currency weakness would encourage further exports at the expense of domestic demand. In a recent study of crisis-hit exchange rate regime changes, JPMorgan concluded that the average depreciation in the first year of trading is between 40% and 80% versus the US dollar. Argentina, for example, saw 70% wiped off the value of the peso in 2002 alongside contractions of 10.9% in GDP and 8.6% of oil product demand; a similarly sized contraction in Greece in 2016 would remove a further 15 kb/d. The possibility of Greece's economic woes spilling over to other EU countries also bears watching, as this could curtail oil demand growth across the region.

Asia Oceania

Lagging the rising OECD demand trend in recent months, even still contracting OECD Asia Oceania has posted notably slower declines. Preliminary May data showed deliveries in OECD Asia Oceania down by 110 kb/d (or -1.4%) on the year earlier, roughly one-third the size of 2H14 drops. Important baseline revisions have accompanied this month's OECD Asia Oceania release, with approximately 45 kb/d added to the 2013 baseline series, to 8.4 mb/d, reflecting sharply higher historical petrochemical usage. Japan saw the largest OECD Asia Oceania baseline revision, with 35 kb/d added to the 2013 estimate, to 4.6 mb/d, on additional LPG and residual fuel oil.



Preliminary May data for Japan confirm our month earlier forecast that the increase seen in April (+3.1% y-o-y) would prove to be a short-term move, driven largely by weaknesses in year earlier demand triggered by a sales tax hike. Falling by approximately 125 kb/d y-o-y in May, average Japanese oil product demand likely slipped to around 3.7 mb/d, with particularly sharp declines in LPG, jet/kerosene, gasoil/diesel and 'other products'. Having declined by, on average, 2.1% in 2015, to 4.3 mb/d, a lesser drop of 1.7% is forecast in 2016, to 4.2 mb/d, as the downside momentum in the power sector, in particular, bottoms-out.

Non-OECD

Relatively weak non-OECD gasoil demand growth continues to constrain the overall pace of non-OECD demand growth, with Brazil, Russia, Saudi Arabia and, to a lesser degree, China the main protagonists of slow/falling gasoil demand. Total non-OECD oil product deliveries rose by around 2% in 1H15, as non-OECD gasoil demand growth struggled to get much above 1%, this despite robust gains in LPG, gasoline and 'other products'. The forecast for 2H15 is much the same, equating to non-OECD oil demand growth of approximately 2.1% on the year as a whole, as deliveries average 47.9 mb/d in 2015. Gently accelerating macroeconomic momentum in 2016 should then support a modest acceleration in non-OECD oil demand growth, to 2.5%, as deliveries average 49.1mb/d in 2016.



China

The recent relative recuperation in Chinese oil demand continued into May, as apparent demand added roughly 0.5 mb/d (or 5.4%) on the year earlier, taking deliveries up to around 10.7 mb/d. This gain amounted to a fourth consecutive month of +0.4 mb/d y-o-y growth, as momentum continued to build along with the precarious but still expanding domestic economy. The latest National Bureau of Statistics (NBS) data, for example, shows industrial output rising by 6.1% y-o-y in May while their Manufacturing PMI posted its third consecutive month of 'expanding' activity in May, albeit only modestly at 50.2. Economic growth in China is, however, far from clear cut, as NBS reported GDP growth of 7% in 1Q15, a six-year low, while the stock market entered bear-market territory in July, although still up 80% on the beginning of the year. Furthermore, oft-quoted alternative measurements of economic activity, like power output, remain flat. A policy of four interest rate cuts in seven months, coupled with reductions in size of deposits banks need to hold in reserve, shows the continued determination of the government to support underlying economic activity. Chinese oil demand growth of approximately 3% is forecast for both 2015 and 2016, well down on the double-digit percentage point gains seen only a few years back, as the economy has made a clear structural change away from export-orientated manufacturing increasingly towards domestic consumption. Accordingly, relatively strong gains are foreseen in gasoline, jet fuel and LPG, while gasoil and residual fuel oil continue to lag.



Robust growth has been seen across the Chinese product spectrum recently, with jet/kerosene and LPG particularly dominating May's upside. Up by approximately 65 kb/d y-o-y in May, Chinese jet/kerosene demand rose to its third highest level ever, this despite reports that China has starting exporting jet fuel to Europe, a consequence of its own even more rapidly expanding refining capacity. In late-May, the Norwegian-flagged SKS Driva was reported to have loaded nearly 100 000 tons of jet fuel from Sinopec's Hainan refinery, destined for Gibraltar, with visits planned for the Welsh port of Milford Haven and French storage hub Le Havre. LPG deliveries, meanwhile, rose to an all-time high of 1.0 mb/d in May, supported by May's near 6% gain in industrial activity and the start-up of additional propane dehydrogenation capacity. Even previously hamstrung Chinese gasoil/diesel demand posted modest growth on a y-o-y basis, rising to an estimated 3.4 mb/d in May, supported by reports of a second consecutive monthly destocking.

At an upwardly revised 10.7 mb/d in May, Chinese apparent demand is approximately 225 kb/d higher than the forecast cited in last month's Report, an upgrade chiefly attributable to higher-than-expected refinery activity. The near 3% per annum gains that are foreseen for Chinese oil demand, 2015-16, are underpinned by 6-to-7% GDP projections and very much depend on the economy not underperforming, hence the risks of much lower demand are not insubstantial.




Other Non-OECD

A relatively modest, near 3% y-o-y gain, was reported for Indian oil product demand in May as, with the power of hindsight, it now appears that some of April's sharp near 8% y-o-y gain was attributable to displaced May oil demand, as many consumers reportedly bought additional volumes in April in anticipation of a late-April retail price hike. Strong May gains were seen in Indian LPG demand, as the expanding dealer network supported additional delivery-flows. The May slowdown is likely to only provide temporary respite, however, with a near 4.4% gain forecast for the year as a whole, taking average oil product deliveries up to around 4.0 mb/d in 2015 and 4.2 mb/d in 2016.





The recently reported uptick in Chinese Taipei deliveries continued in April, as total demand averaged 1.0 mb/d for a second successive month, largely on account of resurgent naphtha demand. Also occurring for a second consecutive month, total deliveries rose on a y-o-y basis. Burgeoning demand was largely attributable to the additional petrochemical demand, post the 4Q14-1Q15 drought, which forced many companies to ease back on output. Looking forward, a modest near 1% gain in total deliveries is foreseen in 2015, to 1.0 mb/d, accelerating to +1.6% in 2016 as macroeconomic momentum builds.



Exceptionally weak industrial activity curbed Brazilian oil deliveries, as they plummeted by around 130 kb/d on the year earlier in May, to 3.1 mb/d, with particularly sharp declines seen in both gasoil/diesel and residual fuel oil. Manufacturing sentiment, as tracked by HSBC/Markit, endured a fourth consecutive 'pessimistic' month, having fallen to 45.9 in May, while the latest industrial output data, from the Instituto Brasileiro de Geografia e Estatistica, plummeted by 7.6% y-o-y in April. Looking forward, although macroeconomic-watchers like the IMF foresee economic growth rebounding in 2016, only a very modest +1.0% increase in Brazilian oil product demand is foreseen for 2016, to a fresh average of approximately 3.2 mb/d.



The recent trend of negative y-o-y growth in Iranian oil deliveries continued into April, but to a lesser degree than forecast in last month's Report, with notable declines in gasoline, residual fuel oil and diesel. Having likely seen sub 1% demand growth in both 2014 and 2015, Iranian oil demand growth is forecast to accelerate in 2016, taking deliveries up to an average of around 1.9 mb/d on a brightening macroeconomic backdrop even if sanctions are not relaxed. Potential changes in the level/persistence of sanctions remain the big wild card for Iran, as their removal would likely support not only much stronger economic growth but also an even faster pace of oil demand growth.

Heady gains in motor gasoline and LPG supported the near 120 kb/d y-o-y gain in Saudi Arabian oil product demand in April, which rose to an estimated 3.2 mb/d, a seven month high. The gain would have been even larger had it not been for the late arrival of hotter weather this year, as relatively cooler April climes curbed the direct crude oil burn, with the number of cooling degree-days roughly 10% down on the year earlier. Given the generally transitory nature of such factors, as hotter temperatures return post-April, the overall demand forecast continues to show near 3% growth in 2015, as deliveries average 3.3 mb/d, easing to 2.2% in 2016 as macroeconomic momentum itself likely decelerates.



Still falling heavily, the latest Egyptian demand data showed a 2.5% y-o-y contraction through the first four months of the year, as the precarious macroeconomic backdrop particularly dampened LPG and jet/kerosene. For the year as a whole a modest, near 1%, expansion in average oil deliveries is foreseen to 885 kb/d, before accelerating sharply in 2016 (+3.5%) to 915 kb/d, as additional macroeconomic momentum builds. The IMF, in April's World Economic Outlook, predicted that Egyptian GDP growth would escalate up towards 4.3% in 2016. Efforts to curb oil-price subsidies act as a constraint on oil demand growth; the recently published 2015-16 budget cited the share of spending dedicated to oil subsidies falling below 7% from 20% in 2012-13.

Hamstrung by acute product shortages, the latest Nigerian data depicted just 230 kb/d of oil products being delivered in April, a contraction of 65 kb/d on the year earlier. A dispute between national fuel marketers and the Nigerian government triggered the shortages, that have yet to be fully appeased, despite an agreement being reached late-May. Nigeria dominant fuel, gasoline, saw the sharpest y-o-y correction, down by 30 kb/d in April to an estimated 170 kb/d. Despite such problems, indeed partially because of such problems, an impending bounce-back in demand is now foreseen for 2016, when a near double-digit percentage point gain is envisaged lifting deliveries to an average 295 kb/d.

Supply

Summary

  • Global oil supply surged a further 550 kb/d in June, on higher output from both OPEC and non-OPEC producers. At 96.6 mb/d, world oil output stood an impressive 3.1 mb/d above the previous year, with OPEC crude and NGLs accounting for 60% of the gain.
  • After expanding by a massive 2.4 mb/d in 2014, non-OPEC oil production growth is expected to ease to 1.0 mb/d in 2015 before grinding to a halt in 2016, as lower oil prices and spending cuts take a toll on output. The Americas, led by the US, Canada and Brazil will continue to expand through 2016, offsetting declines in other regions. In all, non-OPEC supply averages 58 mb/d for 2015 and 2016.
  • While the US maintains its position as the largest source of non-OPEC supply growth in 2016, annual gains are set to decline to 0.3 mb/d from an impressive 1.7 mb/d in 2014 and 0.9 mb/d for 2015. In contrast to recent trends, gains will stem from new projects in the Gulf of Mexico and from NGLs, while growth in light tight oil supplies is curbed by the recent drop in drilling activity.
  • The 'call on OPEC crude and stock change' for 2016 is forecast to rise by 1 mb/d to 30.3 mb/d as growth from producers outside the group is expected to stall. The 'call' for 2015 is steady at 29.3 mb/d.
  • OPEC crude supply rose by 340 kb/d in June to 31.7 mb/d, a three-year high, led by Iraqi output of more than 4 mb/d, an all-time high. Record monthly rates from Saudi Arabia and the UAE and higher Nigerian flows also helped push OPEC output 1.5 mb/d above the previous year. Robust OPEC output lowered 'effective' spare capacity in June to 2.27 mb/d versus 2.38 mb/d in May.
  • Non-OPEC total oil production rose by 200 kb/d in June, to 58.3 mb/d, on the back of a seasonal increase in biofuels supplies, and an expected recovery in Canadian and Australian output after outages over April and May. Year-on-year growth remained at a hefty 1.2 mb/d, of which the United States accounted for 75%. Growth is expected to taper off in coming months, with particularly steep declines expected in US LTO output gains.


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

OPEC crude oil supply

OPEC crude oil output climbed by 340 kb/d from May to 31.7 mb/d - the highest since April 2012 - with June marking another record-breaking month for Middle East producers. Supply from Iraq, including the Kurdistan Regional Government (KRG), rose to 4.1 mb/d - the highest-ever rate. Saudi Arabia, OPEC's top producer, scaled a record monthly 10.35 mb/d, while neighbouring UAE lifted output to an all-time high. Muscular pumping in June put OPEC's supply 1.5 mb/d above the previous year and a whopping 1.7 mb/d above its official 30 mb/d supply target.



Since November, when OPEC agreed its strategy to defend market share at the expense of price, supply has risen by 1.3 mb/d. Saudi Arabia and Iraq, OPEC's second largest producer, have each increased output by more than 700 kb/d over the November-June period. Their strong performance helped drive OPEC's 1H15 supply to an average of nearly 31 mb/d. Indications are that flows will remain well above the 31 mb/d mark during the coming months. Riyadh is expected to keep pumping above 10 mb/d during the peak summer demand season. Iraq posted a fourth straight month of record-breaking exports in June and will strive for higher oil sales. And Libyan supply could start to ramp up following the early-July lifting of force majeure at the Ras Lanuf terminal.



The 'call' on OPEC for this year is steady at 29.3 mb/d, but is forecast to climb by 1 mb/d in 2016 to 30.3 mb/d as non-OPEC growth grinds to a halt. OPEC's 'effective' spare capacity was estimated at 2.27 mb/d in June, down from 2.38 mb/d in May, with Saudi Arabia accounting for roughly 90% of the surplus.

OPEC capacity: How quickly can it be brought on line?

As of last month's Report, the IEA's definition of OPEC's sustainable capacity has changed to "capacity levels (that) can be reached within 90 days and sustained for an extended period" from "capacity levels (that) can be reached within 30 days and sustained for 90 days". The change is intended to better reflect the reality of how quickly reserve production can be brought to the market. It does not change the IEA's assessment of OPEC capacity, nor does it affect how the IEA would act, if needed, during an oil supply disruption.

The IEA's current assessment of sustainable capacity in both its monthly Oil Market Report and in the Medium Term Oil Market Report (MTOMR) strives to accurately reflect sustainable production based on existing oil field development programmes and expected increases coming from planned investments. It is worth noting that Saudi Oil Minister Ali al-Naimi, in a 5 June 2015 interview with the Saudi-owned al-Hayat newspaper, said Saudi Arabia needed 90 days to reach full production capacity of up to 12.5 mb/d, in order to move rigs from exploration work over to drill new wells to raise production.

This is not to say that all of OPEC's spare capacity, most of it in Saudi Arabia, would take as long as 90 days to come to the market. But to ramp up production more quickly would be challenging, incur great expense and require tremendous effort and sustained commitment.

As OPEC seeks to maximise market share following its agreement last November, the group's spare capacity has shrunk. With OPEC output at 31.7 mb/d in June, effective spare capacity has been reduced to 2.27 mb/d.

Crude supply from Saudi Arabia edged to a record monthly high of 10.35 mb/d in June, up from an upwardly revised 10.3 mb/d in May, marking a fourth consecutive month of double-digit output. Higher seasonal demand at domestic power plants, increases in domestic refining capacity and brisk sales to international markets are likely to keep Saudi oil fields cranking out more than 10 mb/d during the coming months.



Riyadh steered OPEC's decision last November to stick with the group's 30 mb/d supply target and has made clear that it will not reduce production unilaterally to rebalance the world oil market. To that end, it appears to be aiming to sustain oil sales of roughly 7.5 mb/d, according to industry sources. The latest figures submitted to the Joint Organisations Data Initiative (JODI) show crude exports during the January to April period running at 7.6 mb/d, up 510 kb/d on the annual average rate for 2014.

Saudi crude shipments in April eased to 7.7 mb/d from March's robust 7.9 mb/d, according to JODI data. Exports of products rose to 950 kb/d from 840 kb/d in March. Overall Saudi oil exports, excluding condensates and NGLs, dipped to 8.69 mb/d in April versus 8.74 mb/d in March.

Saudi consumption is meanwhile on the rise as power plants burn more crude during the summer months and the new Yasref refinery, a joint venture between state-owned Saudi Aramco and China's Sinopec, reached full throttle. The Kingdom's refineries revved up to a record 2.2 mb/d in April, according to JODI figures. Saudi power plants consumed about 350 kb/d in April 2015, steady on March. Riyadh's direct use of crude rose last year from around 360 kb/d in March to nearly 900 kb/d in July.

Little month-on-month (m-o-m) fluctuation was evident in crude oil production from Saudi Arabia's Gulf neighbours. The UAE lifted flows to a monthly record of 2.9 mb/d in June. Kuwaiti supply dipped to 2.74 mb/d in June as output from the Neutral Zone it shares with Saudi Arabia slowed to a trickle due to ongoing operational dispute between the two sides, industry sources say. Qatari production held steady m-o-m at 660 kb/d.

Iraq output strides to boost OPEC capacity

Strong production gains by Iraq are expected to drive estimated OPEC capacity to 35.2 mb/d in 2016 - marking a return to growth for the producer group for the first time since 2012. After losing nearly 700 kb/d in aggregate capacity over the past three years, a 430 kb/d expansion is projected for next year and Iraq is due to account for more than half of it. Iraq's sustainable capacity this year is estimated at 4 mb/d, rising to an average 4.2 mb/d in 2016.

Already in 2015, OPEC's second-biggest producer has made huge strides to expand output despite the twin challenge of low oil prices and a costly battle against the Islamic State of Iraq and the Levant (ISIL). Crude output from Iraq, including the KRG, rose by 270 kb/d from May to reach an all-time high of 4.12 mb/d.



Production in June stood 845 kb/d higher than a year ago. And exports - as reported by Baghdad - set new record highs for a fourth-month running in June, with a big surge in southern supply making up for lower exports from the north. Overall shipments rose to an average 3.19 mb/d in June versus 3.14 mb/d the previous month.

Sales of crude from Iraq's giant southern oil fields leapt by nearly 330 kb/d from May to just over 3 mb/d -a post 1979-high - after Baghdad started up a new export system for heavy crude. Roughly 620 kb/d of new Basra Heavy crude was exported alongside Basra Light deliveries of some 2.4 mb/d, according to industry sources. Some heavy crude from oil fields such as West Qurna-2, Halfaya and Gharraf had been shut in to enhance the quality of Basra Light. The separation of the grades has allowed for significantly higher overall exports and stabilised the quality of Basra Light.

In the north, the fragile export deal between the central government and the KRG is showing signs of strain, although overall shipments of northern crude remained steady m-o-m at roughly 570 kb/d. The KRG cut its transfer of oil to Iraq's State Oil Marketing Organisation (SOMO) to just 150 kb/d in June versus 450 kb/d in May. At the same time, it sold roughly 400 kb/d on its own behalf through Turkey's Ceyhan port during June versus about 130 kb/d in May. The export deal agreed late last year granted SOMO the right to sell 55  kb/d of northern Iraqi crude from Ceyhan in return for payment to the KRG. The deal was seen as a breakthrough in a long-standing feud over oil rights and revenue sharing, but it has grown increasingly tenuous. The KRG says it has not been paid in full by Baghdad, which - in turn - says the KRG has not delivered the agreed volumes.

Rising tension between Baghdad and the Kurds could threaten the security of Iraq's northern crude shipments, but the infrastructure is finally in place to support the southern export effort. Every attempt will be made to keep up record Basra crude oil shipments and Iraqi and Western industry sources say Iraq should be able to sustain the lofty volume for a while, at least.

The worry is that output could drop off later in the year due to budget cuts at oil field mega-projects. Low oil prices and the fight against ISIL have left Baghdad with little cash to repay the international oil companies at work in the country's southern oil fields. Baghdad has advised them to slow down and has agreed lower 2015 budgets for Rumaila, run by BP, and West Qurna-1, where ExxonMobil is in charge. The amended plan at West Qurna-1, now pumping around 400 kb/d, has cut investment to $1.1 billion from $1.6  billion. Spending this year on Rumaila, Iraq's biggest oil field, was cut to $2.5 billion from $3.5 billion. It is producing around 1.3 mb/d and is expected to reach 1.4 mb/d by 2016.

Outside of Iraq, Libya is the only other country due to post a material increase in OPEC capacity (150 kb/d) in 2016 - provided it can overcome security and infrastructure issues. A smaller gain of roughly 80 kb/d is expected from Saudi Arabia.

In addition to its projected crude oil capacity gains, OPEC is expected to add 300 kb/d of natural gas liquids (NGL) capacity in 2016, with Iran and Angola expected to provide the bulk of the increase.

Crude oil production from Iran edged down by 50 kb/d to 2.8 mb/d in June against the backdrop of crucial negotiations for a nuclear deal between Tehran and the P5 +1 (the US, UK, France, Russia, China and Germany). An agreement to curb Tehran's nuclear programme could include the removal of US and European Union sanctions and pave the way for Tehran to raise oil output. At the time of writing, talks were ongoing.

Iranian oil fields are estimated to be capable of pumping up to 3.4 mb/d to 3.6 mb/d within months of sanctions being lifted. (For further details, please see "Framework agreement opens door for potential Iran export increase" in the Report dated 15 April 2015.) But Tehran could raise exports immediately out of floating storage. Iran was housing roughly 40 mb of oil on vessels at the end of June, according to IEA estimates. At least 17 mb is crude oil ready to be shipped - if and when allowed - into an already well-supplied market. The remaining 22 mb is condensate.



Since tough financial measures were enforced in mid-2012, Iran's crude exports have fallen to roughly 1.1 mb/d from around 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.

After running well above the 1 mb/d target at an average 1.16 mb/d in the first five months of the year, import volumes of Iranian crude eased back to roughly 1 mb/d in June, according to preliminary tanker tracking data. Deliveries in May climbed to 1.36 mb/d, the highest since June 2012 - the last month before strict financial sanctions were imposed by the US and EU. A substantial volume of the crude for delivery in May could have been pumped during April, when Tehran produced at its highest since sanctions took effect.

In June, meanwhile, India halved its imports of Iranian crude oil after it purchased 370 kb/d in May, the highest level since March 2014. Similarly, Turkey cut purchases to 65 kb/d - a sharp drop from the previous month when it bought 155 kb/d, the highest volume since sanctions were imposed. Japan also cut back - reducing imports to 115 kb/d in June from 190 kb/d in May. China, Iran's top buyer, and South Korea raised purchases. Beijing bought 580 kb/d versus 520 kb/d in May, while South Korea imported 130 kb/d in June versus 100 kb/d the previous month. Purchases of condensate - ultra light oil from Iran's South Pars gas project - edged up by 50 kb/d to 110 kb/d in June, still well 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.

Ongoing challenges with security and technical glitches trimmed Libyan production by 30 kb/d m-o-m to 420 kb/d. But state National Oil Corp. (NOC) is aiming to boost output following the lifting of force majeure in early July at its Ras Lanuf terminal. NOC said it was able to reopen the vital 200 kb/d export outlet - shut for six months - after security in the area improved substantially. A tanker was scheduled to load Sirtica crude on 8-10 July. Once loaded, NOC expects to start pumping up to 80 kb/d of Amna crude into tanks at the eastern port, industry sources said.

Negotiations with tribal elders in western Libya to reopen pipelines linking the core oil fields of El Feel and El Sharara to ports in the western Mediterranean also raised hopes of higher output. The major fields in the southwest have been shut due to a strike by security guards demanding more jobs.

Output in the North African producer had climbed to 600 kb/d in early April - the highest so far this year. That level is some way from the 1 mb/d hit last October and far below the 1.6 mb/d produced before the 2011 civil war that ousted Muammar Gaddafi. A long-running battle 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, for months, forced a halt to operations at strategic oil fields and terminals.

Crude oil output trended higher in Nigeria, rising 80 kb/d m-o-m to 1.84 mb/d in June. The West African producer is looking increasingly to Europe and India as supply outlets after the US light tight oil boom all but dried up sales to its once core customer. Output in June could have been higher had it not been for disruptions in loadings of Bonny Light crude. Nigerian production and exports also continue to be held back by industrial-scale oil theft and sabotage in the Niger Delta.

Output from fellow West African producer Angola edged 20 kb/d higher m-o-m to 1.79 mb/d in June. Angola relies on oil sales for about 80% of government revenue and low oil prices are causing budgetary pain. Nearly 50% of its oil exports are routed to China and President Eduardo dos Santos travelled to Beijing in June to discuss new forms of finance. Beijing has issued oil-backed loans to Angola for more than a decade.


Non-OPEC overview

Non-OPEC supplies rose 200 kb/d in June, to 58.3 mb/d, on seasonally higher biofuels production and an expected recovery of Canadian and Australian production after extended outages in April and May.

The forecast for 2015 non-OPEC supply is unchanged since last month's Report, at 58.0 mb/d, as an upwards adjustment to US output growth in 2Q15 is offset by expectations of lower supplies later on. The latest US monthly production estimates, for March and April, show stubbornly robust US production, with both crude and NGLs output surging to fresh highs. Production is nevertheless expected to start declining, both in the US and elsewhere, as cuts in spending and rig activity filter through. Overall robust growth estimates of 1.0 mb/d for 2015 mask a sharp deceleration in expansions towards year-end, with annual increases dropping from 2.4 mb/d in 1Q15 to 1.6 mb/d in 2Q15 and turning negative by year-end. June production was estimated up 1.2 mb/d on the year prior.



Non-OPEC oil supply growth is expected to grind to a halt in 2016, as the impact of lower oil prices and spending cuts filter through more fully. Production from the Americas is nevertheless forecast to post continued gains, with the US, Canada and Brazil all increasing output. While US production sees the sharpest declines in growth, from record highs in 2014 and early 2015, output growth remains positive at around 300 kb/d for the year as a whole, with increases stemming mostly from additional natural gas liquid volumes and output from new projects in the Gulf of Mexico. Canadian production is also expected to continue on it's upwards trend, adding 130 kb/d on oil-sands project expansions. Continued structural declines in Mexico provide a partial offset.

The only other country expected to add any meaningful increases next year is Brazil. Despite a number of challenges, partly resulting from the ongoing corruption scandal at Petrobras, Brazil is expected to add a further 150 kb/d of output in 2016 as new production facilities come on stream. In a much-awaited update of its business plan, Petrobras cut its target for 2020 production to 2.8 mb/d, from 4.2 mb/d previously. The more sober outlook brings Petrobras's projections more closely in line with those of the February 2015 Medium Term Oil Market Report (see Petrobras slashes production and investment plans).



Outside of the Americas, overall output is mostly expected to slip as new projects fail to offset accelerated field decline resulting from spending cuts. The sharpest decrease in absolute volumes stems from Russia, which, in addition to lower oil prices, faces international sanctions limiting access to capital and technology. Russian output is expected to fall by 120 kb/d, or 1.1%, in 2016, to 10.86 mb/d. Other key areas featuring output declines are Norway, China, Mexico, Malaysia and Egypt.


OECD

North America

US - April actual, May-June preliminary: According to the US Energy Information Administration's (EIA) latest official oil data, US monthly crude oil production continued to rise through April, hitting a 44-year high, above 9.7 mb/d. Natural gas liquids output also reached a record high, at 3.3 mb/d, propping up total US liquids supplies to 13.2 mb/d, 145 kb/d higher than in March and nearly 1.6 mb/d above the year prior. March production estimates were also revised up; when combined with April's strong performance, this underpins an upwards revision to US supplies of nearly 0.3 mb/d for 2Q15 and 0.1 mb/d for the year as a whole.

In April, US crude production was boosted by a 105 kb/d increase in output in the Gulf of Mexico, to 1 511 kb/d, its highest since January 2011, as new projects were ramping up. LLOG Exploration, a private US deepwater exploration company, announced it had commenced production at its Delta House platform in April. The semi-sub facility has a peak capacity of 100 kb/d of oil and 240 million cubic feet of gas per day, and LLOG plans to ramp up production with eight wells tied in by the end of the year.



Gulf of Mexico production, which already saw gains of around 140 kb/d to 1.4 mb/d in 2014, is on track to boost output by another 170 kb/d by2016, when it is expected to reach 1.6 mb/d. Output growth in 2015 is stymied by a hurricane adjustment factor in 3Q15, as no crude oil and natural gas production in the Gulf of Mexico was shut in during 2014. Recent Gulf of Mexico output gains stem in part from Chevron's 170 kb/d Jack-St Malo and the Hess-operated 60 kb/d Tubular Bells projects, which started production late last year. Anadarko's 80 kb/d Lucius Spar turned on the taps in January, and by March the platform had taken on additional production from ExxonMobil's Hadrian South development. Anadarko is replicating the production facility for its Heidelberg development, which is expected to be commissioned in 2016.

Looking ahead, Noble Energy is currently developing its Big Bend and Dantzler discoveries, with first production for Big Bend targeted for 4Q15 followed by Dantzler in 1Q16. Once fully operational, these two projects will produce an aggregate 120 kb/d. Also due for start-up in 2016 is Shell's ultra-deepwater Stones development, which will host the Gulf's second floating production, storage and offloading vessel (FPSO) after Petrobras' Cascade-Chinook development. Stones will be the world's deepest production facility at 9500 feet, with production capacity pegged at 50 kboe/d in its initial phase from two wells.

Additional supplies are also forthcoming for 2016 from the Exxon­Mobil-led Julia field, Murphy's Thunder Bird well, and Noble Energy's Gunflint field. Chevron's Big Foot project meanwhile faces significant delays due to damage to the facility's subsea installation tendons. The project had targeted first oil at end-2015.

In contrast to booming US offshore output, characterised by large projects with long lead-times, US onshore production continues to show signs of slowdown. The latest official data confirm that capital spending cuts and a plunge in drilling and well completion activity is starting to impact on supplies. Output in Texas, North Dakota, Oklahoma and Colorado fell in April. In its latest Drilling Productivity Report, the EIA reckons that output in key shale play locations saw accelerated decline in more recent months. The Report estimates that output in the seven most prolific US oil shale plays dropped by 45 kb/d in May and 70 kb/d in June and is projected to decline further by more than 90 kb/d in July, to 5.49 mb/d, with the steepest declines expected in the Eagle Ford.

Considerable uncertainty surrounds the outlook for US LTO production, with steep cost reductions, well efficiency improvements, as well as a large number of uncompleted wells clouding the outlook. Nevertheless, we expect output to stabilise around current levels through mid-2016, before growth picks up slightly, resulting in annual gains dropping from around 760 kb/d in 2015 to only 60 kb/d in 2016. In all, US total oil supplies are seen gaining 850 kb/d in 2015 then declining to 290 kb/d in 2016, compared with record gains of nearly 1.7 mb/d seen in 2014.

Canada - April actual: Canadian total oil production dropped 140 kb/d in April, to just under 4.4 mb/d on lower syncrude output as a number of upgrading units were undergoing maintenance. As highlighted in earlier Reports, 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 likely curbed further in May, as wildfires ravaged Northeastern Alberta, causing 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.

Conoco reported it had started commercial operations at its 109 kb/d Phase 2 Surmount project in northern Alberta in June. First oil is expected in 3Q15 with production ramping up through next year. Imperial Oil also announced it had completed its Kearl oil sands expansion project in June, ahead of schedule. The project is expected to double the plant's capacity, to 220 kb/d. Imperial's Cold Lake Nabiye projects also started production earlier this year, and is expected to ramp up output to around 40 kb/d by the end of the year. Further gains will come from expansions of Cenovus Energy's Christina Lake and Foster Creek projects as well as Canadian Natural Resources Limited's Horizon project, taking total Canadian output up 50 kb/d in 2015 and a further 130 kb/d next year, to 4.5 mb/d in total.



Mexico - May actual, June preliminary: Mexican oil production increased by 80 kb/d to just under 2.6 mb/d in May, as output at the Abkatun Pol Chuc system partly recovered after an explosion curbed supplies a month earlier. The fields saw further gains in June, contributing to an additional increase in total Mexican crude output of 30 kb/d. Despite efforts by Pemex to manage field decline with secondary and enhanced recovery techniques, structural decline will continue to drag down supplies in 2015 and 2016. The ramping up of new projects is nevertheless expected to slow the decline from 225 kb/d in 2015 to 65 kb/d in 2016, when total production is forecast at just over 2.5 mb/d, of which crude oil accounts for 2.15 mb/d.

In the near term, additional output is expected to come from Pemex's Tsimin-Xux oilfield. Pemex brought on line a new platform at the Tsimin-Xux complex at the end of 2014, CA-Litoral-A, with a capacity to process up to 200 kb/d. Pemex is also moving forward with its Ayatsil-Tekel project in the Bay of Campeche. The heavy-oil field, which was scheduled to start production in 2014, has faced delays after suffering damage to the wellhead platform during installation in 2013. Pemex is looking for an international partner to help develop the project, which features one VLCC-size FPSO and a network of five platforms,. Pemex announced first production on the Ayatsil field in early March at a rate of 5 kb/d and 16 mcf/d of gas. Pemex expects output to rise to a plateau of 136 kb/d by 2019, though further delays are possible. Contracting for the FPSO has been delayed as the project has been submitted to the farm-out process as part of Mexico's Energy Reform.

Beyond 2016, output could see a further boost from a shallow-water discovery, Pemex's biggest commercial find in five years. The four shallow-water fields in the Gulf of Mexico hold a total up to 350 mboe and could produce 200 kb/d of light crude oil, within 16 months according to Pemex. New output will likely only come after 2016, however.

The Five-Year Plan of Tenders for Exploration and Extraction of Hydrocarbons 2015-19 has been approved by the Mexican Energy Secretariat, based on proposals from Hydrocarbons Regulator CNH, and is now put to consultation by industry and federal states. The underlying official goal is to raise crude oil production by 500 kb/d by 2018 and 1 mb/d by 2025. The Plan comprises four bid rounds (including the ongoing Round 1), affecting 178,554 km2, with remaining total resources of 68,205 million barrels of crude oil equivalent (42,150 million of which is in Chicontepec) for extraction and a total prospective volume of 39,254 million barrels of crude oil equivalent for exploration. It includes a total of 244 oil fields, of which 182 are onshore, 13 extra heavy crude, 45 in shallow water and four in deep water. By 30 September, SENER will have to inform the Finance Ministry about the fields to put out for bid rounds in 2016.

North Sea

North Sea - May preliminary: Despite a sharp 220 kb/d drop in North Sea output in May. The region's producers look on track to post a second consecutive year of production gains in 2015. While preliminary data for both Norway and the UK show steep monthly declines, in line with seasonal trends, both countries have recorded robust output in recent months. Preliminary data for Norwegian oil production show that output declined by 85 kb/d on the month in May but was 220 kb/d higher than a year prior, when a number of fields were undergoing maintenance. Also UK offshore production has shown signs of strength lately, surging 90 kb/d in April, up 110 kb/d y-o-y. At 930 kb/d, UK offshore crude and condensate output was at its highest since December 2013. While preliminary data show also UK output slipping in May, North Sea loading schedules suggest maintenance outages over the summer months may be relatively light compared with previous years. Total North Sea loadings are expected higher for both June and July, with many cargoes in the earlier month reportedly struggling to find buyers.



As such, total North Sea output is expected to inch up 30 kb/d to an average 2.95 mb/d for 2015 as a whole. Field decline and return to more normal seasonal outage levels are expected to curb supplies in 2016, by around 100 kb/d in total. The start-up of new projects, such as BG's Knarr field, Enquest's Alma-Galia oil fields, Lundin's Edward Grieg, Statoil's Goliat oil and gas field, Premier Oil's Solan field and Nexen's Golden Eagle will provide a partial offset. Meanwhile, Dana Petroleum announced in early July that its Western Isles project, including the Harris and Barra oil fields, has faced a two-year delay, and that it now expects the project to come on stream in the second half of 2017.

Asia Oceania

Australia - April actual, May provisional: Australia's oil production saw a partial recovery in April, after plunging to its lowest level in more than a decade a month earlier on a number of planned and unplanned outages. Crude and condensate output gained 50 kb/d m-o-m, to nearly 300 kb/d, while natural gas liquids increased by 13 kb/d. Preliminary May figures indicate that total oil production, including natural gas liquids, dropped again in May, back to 305 kb/d, from 355 kb/d a month earlier.

Due to the recently low production figures, Australian liquids production is forecast to decline by 35 kb/d in 2015 on average. Crude and condensate supply coming from the massive Gorgon gas project and the newly commissioned Coniston oil field should prop up rates in 2016, however. Two years behind schedule, the Apache Energy-Inpex joint venture's Coniston field finally started up in offshore Western Australia on 10 May. The project will be tied back to the nearby Van Gogh field, whose FPSO recently came back from extended modification work in Singapore. The vessel has the capacity to process 150 kb/d of liquids. According to Apache, output is expected to average 18 kb/d in its first year. All in all, Australian production is expected to recoup 2015's losses next year, rising 55 kb/d, to 450 kb/d in total.

Non-OECD

Latin America

Brazil - May actual: Brazilian output inched higher by 20 kb/d in May, to 2.5 mb/d. The monthly increase, which reversed a five-month decline, came largely from the Campos Basin, and in particular the Peregrino and Jubarte field, following steep drops in earlier months. On an annual basis, output was up 225 kb/d, as a 270 kb/d increase in Santos Basin output, where the Lula and Sapinhoa oil fields are located, offset a small decline in output from the Campos Basin.

Petrobras slashes investment and production plans

On 29 June, Petrobras, one of the world's most heavily indebted oil companies, announced a revised business plan for 2015-2019 which foresees aggregate investments for the period of $130 billion, 37% less than projected in its previous five-year plan running through 2018, released in February 2014.

In addition to slashing spending, the company, which is grappling with one of the largest corruption scandals in history, aims to reduce its debt and raise capital by divesting assets in coming years. It outlined plans to divest $15.1 billion worth of assets over 2015/2016 alone, of which 30% is to come from exploration and production, 30% from its downstream sector and 40% from its gas and power business. A further $42.6 billion of divestments are planned for 2017/2018.

The new investment plan prioritises exploration and production projects in Brazil and most notably the pre-salt fields, with 83% of capex, or $108.6 billion, allocated to E&P for 2015-2019. Production targets for 2020 were slashed from 4.2 mb/d to 2.8 mb/d, representing only 800 kb/d aggregate net growth. Petrobras' total oil output averaged 2.0 mb/d in 2014, accounting for 85% of Brazilian output.

While Petrobras also cut its short-term forecast from 2.4 mb/d and 2.5 mb/d in 2015 and 2016, respectively, to 2.1 mb/d and 2.2 mb/d, this is largely in line with our earlier expectations. The Medium-Term Oil Market Report 2015 projected total Brazilian oil production growth of 130 kb/d in 2015 and 150 kb/d in 2016. MTOMR 2015 saw total Brazilian output reach 3.2 mb/d in 2020, and increase of 880 kb/d from 2014 levels, largely in line with the new Petrobras growth targets.

In the near term, output is expected to continue on its downward slope through the remainder of the year, before new production facilities ramp up and lift production through 2016. Increased output will come from the Saphinoa field in the Santos Basin, where a second FPSO (the 150 kb/d Cidade de Ilabela) has raised output since reporting first oil in November 2014. The Cidade de Mangaratiba FPSO working in the Lula field since October 2014 should also contribute to Santos Basin output growth.

Petrobras is on track to deliver five new FPSOs before the end of 2016. The Citade de Itagui is expected to start up in 4Q15 in the Iracema North area of the Lula field. The 150 kb/d FPSO Cidade de Marica will start production in Lula Alto in 1Q16 followed by the 150 kb/d Cidade de Saquarema added to Lula Central in 2Q16. Towards the end of the year, the 100 kb/d Cidade de Caraguatatuba should start production in the Lapa field, while a 50 kb/d FPSO will be added to Libra in 4Q16. Meanwhile, Brazilian independent Queiroz Galvao Exploration & Production (QGEP) is gearing up for first oil from the Atlanta development, adding an additional 46 kb/d FPSO in 2016.

Former Soviet Union

Russia - May actual, June provisional: Russian crude and condensate production inched up another 35 kb/d in May. At 10.7 mb/d, output was just 10 kb/d shy of January's record high and up 165 kb/d from a year prior. Again, the increase came from smaller independent producers, which lifted output by an aggregate 30 kb/d, accounting for 93% of the annual increase. Russia's largest producer, Rosneft, held production steady on the month, 25 kb/d below a year earlier. Preliminary data show Russian output unchanged in June, at around 10.7 mb/d.

Rosneft CEO Igor Sechin said in June that the company planned to hold its hydrocarbon output steady in 2015-2017, investing $5.6-6.5 billion into new large upstream projects over the period. Of key importance will be Rosneft's ability to stabilise the decline in brownfields, which requires larger drilling volumes, top-end technologies and investments. These will depend on the ability to generate enough cash flow or obtain credits in a context of high pre-payment to traders with redemptions due in 2015, debt repayment obligations and a commitment to maintain dividend payment levels unchanged.

Deputy Energy Minister Kirill Molodtsov, meanwhile, said Russia's output was expected to increase by 3 million mt per year, or roughly 60 kb/d. This implies that production could ease in the 2H15, in line with our forecast, as growth through June has averaged 130 kb/d. Annual increases stem mostly from higher gas condensate output from Gazpromneft and Novatek through their SeverEnergia affiliation. The company reportedly launched a third condensate field, the Yaro-Yakhinskoye, in mid-April, offsetting decline at mature fields. Looking to 2016, new projects such as Lukoil's Filanovsky field in the Caspian Sea, Rosneft's Suzun field, Gazprom Neft's Novoportovskoye and Messoyakha fields are expected to only partly offset field declines at mature assets. In all, Russian total oil production is estimated to average 10.98 mb/d in 2015, up 65 kb/d y-o-y, before declining 120 kb/d in 2016, to 10.86 mb/d (of which 10.5 mb/d is crude and condensates). It is noteworthy that according to Energy Minister Novak, Russia's draft new Energy Strategy to 2035 envisages stables liquids output at 10.5 mb/d over this period.



Other FSU -May preliminary: Oil production outside of Russia was unchanged from our previous estimate, as slightly higher than expected production in Azerbaijan offset lower volumes for Kazakhstan. Both countries saw output steady from a month earlier, though, while Kazakhstan posted annual gains of 100 kb/d, Azeri production dropped some 50 kb/d. BP had suspended operations at its West Chirage platform on 21 May for around 3 weeks of planned maintenance. In 2016, Kazakhstan output is expected to decline by around 50 kb/d 1640 kb/d, while Azerbaijan's production inch down to 845 kb/d.

Asia

China - April actual, May preliminary: Chinese crude oil production was unchanged in April from a month earlier, averaging 4.25 mb/d. An increase in output from the massive Daqing field, offset declines at offshore assets. Despite the m-o-m drop, offshore production was nevertheless up 270 kb/d from a year earlier. Preliminary data from China's National Bureau of Statistics indicate that Chinese crude oil production inched marginally higher in May, to 4.27 mb/d.

For 2015 as a whole, China's total oil production is expected to increase by 45 kb/d y-o-y, to 4.3 mb/d on average, as higher output from state-owned China National Offshore Oil Corporation (CNOOC Ltd.) is expected to offset declines by the country's two largest producers, PetroChina and Sinopec. CNOOC spent $17 billion on capital expenditures in 2014, and has already raised production from a year earlier. According to the company's 2015 outlook, output could be lifted by 135 kb/d by the end of the year. PetroChina and Sinopec meanwhile have both announced they expect domestic production to shrink by about 30 kb/d each for 2015. As a result, China's oil output is expected to decline by 65 kb/d in 2016, to 4.2 mb/d.



Malaysia - April actual: Malaysia's crude oil and condensate production slipped by 20 kb/d in April to 676 kb/d, according to the Malaysian Department of Statistics. Malaysian oil production is forecast to increase overall in 2015, by 60 kb/d, to 730 kb/d in total, boosted by the start-up of the offshore Gumusut-Kakap field. According to minority shareholder Murphy Oil, the field, which started production in October 2014, had ramped up to full rates of around 150 kb/d in March. The field is operated by Shell. In addition to Murphy Oil, ConocoPhillips and Petronas Carigali also hold shares. Bogged down by field decline at mature assets, Malaysian output is expected to slip by 60 kb/d, to 670 kb/d in 2016.

Regional output will also get a boost from Indonesia's recently commissioned Banyu Urip field (see Indonesian comeback? in June 2015 OMR). The field, which started production after numerous delays earlier this year, already produced 75 kb/d in April, according to operator ExxonMobil. Peak capacity of the project was targeted at 165 kb/d, which some reports suggest could be lifted to 200 kb/d. Further increases will likely come from the recently commissioned Bukit Toa field which is expected to peak at 20 kb/d by the end of the year. In all, Indonesia's oil production could see its output increase in 2015, by 35 kb/d, followed by another gain of 60 kb/d in 2016, stemming nearly 30 years of structural declines from a peak of around 1.6 mb/d. Indonesian production is expected to average 930 kb/d in 2016.

Viet Nam - June actual: Viet Nam's crude oil production inched up another 20 kb/d in June, to 355 kb/d, 50 kb/d more than a year earlier. Production has been boosted by the start-up of Su Tu Nau field in October 2014. Current production of the field is estimated at 50 kb/d. Output will get another lift by the restart of the offshore Dai Hung field in 3Q15, which has been shut since August 2014 for maintenance. In all, Viet Nam's oil production is forecast to increase by a net 30 kb/d in 2015, to 345 kb/d, before field decline reverses some of the gains in 2016, to take total output to an estimated 330 kb/d.

OECD stocks

Summary

  • OECD inventories hit a record 2 876 mb in May, up by a steep 38.0 mb on the month. Product holdings led the build and by end-month covered 30.7 days of forward demand, 0.2 days higher than at end-April.
  • Gasoline and middle distillates stocks showed diverging trends during May. While the former drew steeply in Europe and the US, the latter built as middle distillates production rose in tandem with gasoline supply.
  • Global supply and demand balances suggest that the rate of global inventory builds quickened rapidly to an astonishing 3.3 mb/d (300 mb) on average during 2Q15. Data suggest OECD stocks rose by over 67 mb, while reported stock builds in China and Singapore totalled 24 mb. Tanks were likely filled at several new refineries in the Middle East and Latin America and filling of the Indian SPR likely commenced, while volumes held on tankers increased markedly in the Atlantic Basin and Asia.
  • The baseline estimate of OECD commercial inventories has been revised upwards by 33.1 mb, taking account of previously unavailable data pertaining to stocks held under bilateral arrangements in OECD members for non-OECD countries and oil held in pipelines.

Global overview

Global supply and demand balances suggest that the rate of global inventory builds quickened rapidly in 2Q15 to an astonishing 3.3 mb/d, from 1.8 mb/d in 1Q15. Reported inventory data for OECD countries suggest stocks rose by over 67 mb during 2Q15 while available data for non-OECD countries indicate that inventories in the region added approximately 24 mb. Scarce data coverage of non-OECD inventories makes attributing the remainder of the build more difficult, but Middle Eastern and Latin American stocks likely rose as tanks were being filled at newly commissioned refineries in the UAE, Saudi Arabia and Colombia. Meanwhile, the long-awaited filling of the Indian SPR likely commenced. There are also anecdotal reports of builds at major terminals in the Middle East and non-OECD Asia.

Additionally, by late-June there was an armada of tankers holding unsold West African and North Sea crude in the Atlantic Basin. The fleet had built up in response to North American and European refiners being comfortably supplied following their restocking over 1Q15. Additional cargoes of residual fuel oil were being held on tankers off Singapore due to a combination of brimming onshore inventories and port congestion.

The vast majority of oil "on the water" is being held for logistical reasons. Recently, there has been little interest in speculative floating storage, as the contango in global crude futures markets has narrowed. By late June, the discount of front month ICE Brent versus month three stood close to $1/bbl, while the M1 - M12 spread stood at about $4.30/bbl, both significantly less than at the start of the year, when interest in speculative floating storage had increased. Following the narrowing contango, there have been numerous reports that on-land commercial storage plays were being wound down. However, for the moment that would not seem to be the case. For example, ship-tracking data suggest that tankers have not been moving crude out of the Saldanha Bay terminal in South Africa.

Second-quarter OECD stock builds have been more geographically dispersed than in 1Q15, when they had been largely concentrated in North America. Recently, inventories in both Europe and Asia Oceania have posted significant gains. Looking towards the second half of the year and 2016, the 'call on OPEC crude and stock change' is projected at 30.2 mb/d and 30.3 mb/d, respectively. While these mark a sharp increase from the assessed 'call' for 1H15, they are significantly below OPEC's current crude production level, which suggests that, ceteris paribus, there would be a potential for further global stock builds.

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

OECD commercial inventories rose seasonally by 38.0 mb in May to end the month at 2 876 mb. Following upward revisions to baseline data (see Improvements made to baseline commercial inventory data), stocks are now at a record high, after surpassing the previous high of 2 832 mb, posted in August 1998. Since the monthly stock build was approximately twice the average 19.8 mb build for the month, inventories' surplus to average levels rose to 170 mb from 152 mb one month earlier. This is a startling turnaround, considering that OECD inventories were in deficit to average levels as recently as August 2014. Since then, they have added 146 mb.

Soaring refined products holdings (+25.8 mb) drove total stocks upwards. 'Other products' (+22.3 mb) accounted for the majority of the build as US propane holdings continued to increase seasonally. At end-May, total refined product stocks covered 30.7 days of forward demand, 0.2 days above a month earlier.



During May, motor gasoline and middle distillates holdings posted diverging trends in both absolute and forward demand terms: Motor gasoline inventories slipped by a steep 14.0 mb as Atlantic Basin refiners struggled to keep up with demand. The draw was centred in the US (-8.8 mb), mostly on the Atlantic Coast (PADD 1). These draws at the start of the US driving season drove US gasoline prices higher. Consequently, transatlantic shipments surged and European inventories drew by a relatively steep 5.7 mb. As Atlantic Basin refiners increased their production of gasoline, middle distillate output rose in tandem, lifting middle distillate stocks to a surplus to average levels for the first time since March 2012.

OECD crude holdings added 10.2 mb in May. Unlike previous months, this was not led by OECD Americas, where inventories drew counter-seasonally by 12.6 mb on seasonally rising domestic refinery demand, as US crude production growth eased and as imports dropped by approximately 700 kb/d on the month. Heading into 2H15, Atlantic Basin refiners appear well supplied, with crude inventories in the OECD Americas and OECD Europe standing 103 mb and 16 mb above average, respectively.



Significant revisions were made to baseline stock data (see Improvements made to baseline commercial inventory data). These baseline revisions have been excluded from the above table, which indicates that, upon the receipt of more complete data, OECD inventories were adjusted down by 13.1 mb in April with all inventories in OECD regions being lower than initially assessed. The net effect is that the steep 38.0 mb stock build presented in last month's Report is now seen much more in line with seasonal trends at 23.0 mb. 



Preliminary data for June indicate that OECD inventories rose counter-seasonally by 5.8 mb in June with a fourth consecutive monthly build in the Americas (+11.8 mb) offsetting draws in Europe (-3.2 mb) and Asia Oceania (-2.7 mb). The continued restocking of 'other products' (+16.1 mb), centred on the US, was the largest single contributor to the monthly build and more-than-offset offset a 5.7 mb draw in crude oil. In total, OECD stocks added 67 mb over the second quarter with builds being more geographically dispersed than over the first quarter. Meanwhile, product inventories (+49 mb) accounted for the majority of the build in total oil.

Improvements made to baseline commercial inventory data 

A significant 33.1 mb upwards revision has been made to the OECD industry stocks baseline as previously uncounted stocks are included for the first time. This includes 23.8 mb of stocks held by OECD member countries for non-OECD countries under bilateral arrangements, and 9.3 mb of pipeline stocks held in OECD Europe.

The holding of physical volumes in the OECD on behalf of non-OECD countries has come into the spotlight in recent years when Japan and Korea began holding stocks for Middle Eastern producers. The past decade has seen a startling eastwards swing in crude trade flows, which is set to continue into the medium term and beyond driven by emerging Asian economies. Bilateral agreements have afforded Middle Eastern producers strategic sites with which to facilitate their supplying of Asian customers. These agreements have also proved beneficial to the OECD host countries, as they provide a cost-effective method to improve the country's energy security.  The data submitted by the Korean and Japanese administrations suggest that volumes held vary over time, often on a monthly basis, which indicates that the tanks volumes are being 'turned over' periodically as the stock holders use these tanks for their commercial operations.

Although the Korean administration regards the country-by-country breakdown of bilateral stocks as confidential, market reports indicate that in late-2006 KNOC signed an agreement with the Kuwaiti national oil company KPC to store 2 mb of crude on its territory. In 2012, KNOC signed a similar agreement with ADNOC - the UAE's national oil company - featuring a provision to store up to 6 mb of crude at the Yeosu terminal. According to official data, approximately 600 000 barrels of middle distillates are also held under a similar agreement. The historical series for Korea has only been revised from March 2012 onwards.

Japan embarked upon a similar pathway when in December 2009, JX Nippon Oil signed a contract with ADNOC to store up to 4.5 mb of crude for the UAE in tanks at the Kiire terminal in the southwest of the country. The data submitted by the Japanese administration for 2009 onwards suggest that the full 4.5 mb has never been reached, with volumes peaking at 4.2 mb in late-2014. As with Korea, the contract included a provision that in the event of a market disruption, Japan would have priority on the crude. Subsequently, JOGMEC signed a similar agreement with Saudi Arabia to store 3.8 mb of crude at Okinawa. This was then raised to a reported 6.3 mb at end-2013. The Saudi Arabian stocks have been included in the aggregate Japanese commercial inventories for several years and reports suggest that at end-May volumes were approximately 3 mb.

Pipeline stocks are volumes of oil held in oil pipelines for operational purposes. They have been added for Denmark (beginning January 1991), the Czech Republic (beginning January 1993), Switzerland (beginning December 1994), Hungary (beginning January 1997), Poland (beginning January 2000) and the Slovak Republic (beginning January 2001). Although thee volumes fluctuate over time, in March 2015 they totalled 9.3 mb, of which 8.9 mb was crude oil. Before these revisions, pipeline stocks were already included within German and Canadian commercial oil inventories. US stock data presented in this Report include aggregate volumes held in pipelines.

Recent OECD industry stock changes

OECD Americas

Inventories in the OECD Americas inched up by 0.4 mb in May, far less than the 18.2 mb five-year average build for the month. Crude oil drew counter-seasonally by 12.6 mb, amid a ramping up of refinery throughputs, slowing domestic production growth and a significant drop in imports, while holdings of NGLS and other feedstocks fell by 2.1 mb. Meanwhile, refined products provided some offset as they built by a steep 15.2 mb. That headline figure masked several important trends, however. Firstly, the continued seasonal replenishment of US 'other products' holdings (+18.3 mb m-o-m), of which propane and ethane are the two main components, and which largely bypass the refinery system. Secondly, a sharp 9.3 mb draw in motor gasoline, which coincided with the start of the US driving season. By end-month, gasoline holdings stood 2.2 mb above average and on par with a year earlier. Finally, after posting a 4.6 mb build in May, regional middle distillates holdings returned to surplus for the first time since February 2012. All told, refined products covered 29.5 days of forward demand at end-month, 0.3 days higher than at end-April.



Preliminary data from the US Energy Information Administration (EIA) indicate that US inventories followed seasonal trends and added 11.8 mb in June. This saw their surplus to average levels widen slightly to 146 mb in June. The build was tempered by crude oil (-11.8 mb m-o-m) which drew for the second consecutive month amid rising refinery demand, slowing production growth and imports remaining below year-earlier levels. Inventories at the Cushing, Oklahoma storage hub (which serves as the delivery point of the NYMEX WTI contract) fell by a further 2.5 mb to 56.5 mb by month-end. Inventories at the hub are now nearly 6 mb below their mid-April high. Meanwhile, inventories on the Gulf Coast (PADD 3), posted a 4.0 mb m-o-m fall as refinery throughputs there ramped up to reach 96 % utilisation.



On the products side, 'other products' continued to build seasonally by 16.7 mb, while motor gasoline posted a second consecutive steep draw (-2.9 mb) centred on the Atlantic coast, which again saw gasoline prices strengthen and draw in multiple cargoes from Europe and further afield. Middle distillates posted small counter-seasonal build (+7.8 mb) which saw their surplus to average levels widen to nearly 6 mb.

OECD Europe

After building counter-seasonally by 4.4 mb in May, European industry inventories moved to a small surplus versus average levels in May for the first time since January 2011. The monthly build was driven by a steep combined 5.6 mb build in crude oil, NGLs and other feedstocks, which came as regional crude imports likely offset a 100 kb/d increase in refinery throughput and a 100 kb/d decrease in regional production. Product stocks drew by 1.1 mb, significantly less than the 5.3 mb average draw for the month over the last five years. The hike in refinery throughputs was driven by relatively robust margins which drew strength from soaring motor gasoline cracks and booming transatlantic gasoline trade. Accordingly, gasoline stocks drew by 5.7 mb. In contrast, middle distillates holdings defied seasonal trends and surged by 7.7 mb. By end-May, they stood at a surplus (2 mb) versus average levels for the first time since December 2011. All told, regional refined product holdings covered 37.8 days of forward demand at end-month, 0.6 days lower than end-April with the fall resulting from a stronger demand prognosis going forward.



Preliminary data from Euroilstock suggest that commercial inventories in EU15+Norway drew by 3.2 mb in June as a 6.0 mb decrease in product holdings weighed heavy. The product draw was centered on middle distillates which slipped by 6.5 mb on the month while motor gasoline inventories inched up by 0.2 mb. Some offset came from a counter-seasonal 2.9 mb build in crude oil. Meanwhile reports suggest that refined product volumes held at independent storage terminals in Northwest Europe are brimming.

OECD Asia Oceania

Commercial inventories in OECD Asia Oceania surged by a record 33.1 mb in May. Consequently, they moved back to a 12.3 mb surplus against the five-year average after standing at a 15.7 mb deficit at end-April. Against a backdrop of seasonal refinery maintenance, regional crude oil holdings surged by almost 20 mb with Japan and Korea accounting for approximately 10 mb each. Considering that throughputs fell by 350 kb/d, the scale of the build suggests that regional crude imports rose by 300 kb/d. Despite the monthly fall in throughputs, refined products built by a steep 11.7 mb, with all product categories increasing during the month. Notably, middle distillates moved back to a surplus to average levels after building by 4.6 mb, while 'other products' rose by 4.8 mb. All told, at end-May refined products covered 21.9 days, a rise of 1.2 days on end-April.



Weekly data from the Petroleum Association of Japan (PAJ) suggest that Japanese commercial inventories slipped seasonally by 2.7 mb in June. Crude holdings posted a second consecutive monthly build (+ 3.3 mb) while NGLS and other feedstocks drew by a steep 4.1 mb. Despite recent builds, Japanese crude holdings continue to lag average levels, with the deficit standing at 13 mb at end-June. With refinery maintenance peaking, product holdings adhered to seasonal trends and drew by 2.0 mb. Residual fuel oil accounted for 0.9 mb of the draw, market reports suggesting that this was likely led by healthy exports to elsewhere in Asia, notably Singapore.

Recent developments in Singapore and China stocks

Data from China Oil, Gas and Petrochemicals (China OGP) suggest that, despite a significant fall in crude imports,  Chinese commercial crude inventories rose by an equivalent 3.1 mb (data are reported in terms of percentage stock change) in May. However, the 'gap' between crude supply (production plus net imports) and refinery demand turned negative in May which suggests an unreported crude draw of 0.6 mb/d. This would suggest that some of the oil which was built up at unreported commercial storage facilities over the past few months has been drained.

Initial indications for June suggest that crude stocks may have rebounded slightly. A portion of these volumes may have been destined for the 20 mb Qingdao SPR site which reportedly commenced filling last month. It is also understood that no further SPR sites are due to be commissioned until 4Q15 at the earliest. If confirmed by subsequent data, Chinese crude inventories (including reported and unreported commercial stocks and strategic reserves) could have built by up to 23 mb over 2Q15. On the product side, gasoil inventories continued to adhere to seasonal trends and drew by an equivalent 2.7 mb while gasoline and kerosene increased by 0.8 mb and 0.2 mb, respectively.



According to weekly data from International Enterprise, land-based refined product inventories in Singapore decreased by 3.8 mb in June as all oil categories drew. Residual fuel stocks drew by 1.5 mb during the month but this masked their surge to a five-year high of nearly 28 mb in mid-June. Reports suggest that as tank space was scarce, many market participants had to resort to storing residual fuel oil at sea, with some of these cargoes still waiting to be offloaded as ports in the territory remain congested. Meanwhile, light and middle distillates drew by 0.9 mb and 1.4 mb, respectively.


Prices

Summary

  • Crude oil prices fell in early July to their lowest in nearly three months, pressured by ever rising supply while financial turmoil in Greece and China unsettled world markets. At the time of writing, Brent was around $59/bbl and US WTI at $53.10/bbl. Global benchmarks had diverged during June, as an abundance of Atlantic basin barrels softened Brent while draining US stockpiles kept WTI steady.
  • Differentials for North Sea and West African crude sank to multi-year lows against Dated Brent during June spot trade due to plentiful supply. A narrow Brent/Dubai spread lured much of the surplus into Asia, with some barrels heading for the US. The arrival of Atlantic basin cargoes in Asia and slower anticipated demand due to upcoming refinery maintenance led Saudi Arabia to trim its monthly formula price for Arab light to the Far East.
  • Spot product prices generally weakened on a monthly average basis in June. The one bright spot was gasoline where prices continued to strengthen in the Atlantic Basin as refiners there struggled to keep pace with strong demand.
  • Ample oil supplies from OPEC Middle Eastern producers and unsold cargoes of North Sea and West African crudes in the Atlantic Basin supported freight rates for crude tankers in June. Increased shipments of Atlantic Basin crudes to Asia and even Latin America tightened available tonnage. Product rates meanwhile generally moved higher on increased transatlantic shipments of gasoline.

Market overview

Plentiful supplies of Atlantic basin crude pressured Brent crude oil throughout June, while a steady reduction in US crude stocks supported WTI. By early July, however, surging supply sent both benchmarks sharply lower. US oil drilling activity increased at the start of the month - the first weekly increase in the rig count in 30 weeks - an indication that higher prices may have convinced some producers to pick up activity. China's stock market turmoil and the Greek debt crisis also unsettled the oil market. Greece rejected debt bailout terms on 5 July, casting doubt on its membership in the euro and depressing the single currency against the US dollar. A strong US dollar makes dollar-denominated crude more expensive for holders of other currencies, which can put pressure on the price of oil.

Market participants were also keeping close tabs on nuclear talks between the P5+1 and Tehran, looking for any sign of a deal to lift sanctions on the major OPEC producer. An initial 30 June deadline for a final agreement, which could lead the way for higher Iranian oil exports, has been extended.



The weight of the Atlantic basin overhang has helped push global benchmarks to their lowest since mid-April. ICE Brent is about 50% below last June's peak above $115/bbl, though still considerably above the six-year low of $45/bbl hit in January. Its premium over US WTI has fallen by about 40% since mid-April, shrinking to an average $3.92/bbl in June. The US benchmark found support during June after imports slowed and refiners - running flat out to meet gasoline demand during peak driving season - drained crude oil stocks for eight straight weeks to mid-June. By early July, US prices slumped after crude stocks built following the steady draw down.

Since early May, Brent crude has been on a downward trend while US WTI had held in a range of around $57/bbl to $62/bbl. During June, ICE Brent futures slipped by $1.86/bbl, or 2.8%, from May to an average $63.75/bbl. NYMEX WTI edged up $0.46/bbl, or 0.8%, from May to an average $59.83/bbl in June. ICE Brent was last trading near $59/bbl. US WTI was at around $53.10/bbl.



The Atlantic basin overhang also widened out the contango structure - where prices for immediate delivery are discounted versus forward months - for North Sea Brent. The discount of prompt-month to second-month Brent widened out to -$0.70/bbl in June compared to -$0.58/bbl in May. Still-strong refiner demand for crude in the US during June meant the contango on NYMEX WTI continued to flatten. The WTI M1-M2 spread in June pulled in to -$0.39/bbl versus -$0.77/bbl in May.

A similar trend was seen on forward curves. The Brent M1-M12 contract spread widened out to -$4.60 /bbl in June compared to -$4.09/bbl in May. The WTI M1-M12 spread pulled in to -$ 2.67 /bbl in June versus -$3.60/bbl in May.


Financial markets

Market activity

Hedge funds positioning towards ICE Brent became markedly less bullish in early June. The long-to-short ratio, an overall indicator of funds' positioning, came down from a 2.2 peak, as net-short positions doubled from mid-May. Conversely, fund's overall portfolios of WTI contracts were essentially unchanged as of 30 June as the benchmark has traded in a very narrow $5/bbl range since May. Investors have been maintaining their positions as shown both by index-investors May data, compiled by the US Commodity Futures Trading Commission (CFTC), and outstanding shares in the US Oil Fund, the largest exchange-traded fund by capitalization, which tracks the WTI price.



On the product side, data from the CFTC suggests that refiners are locking in the exceptional margins led by gasoline (See 'Refining' and 'Product prices'). Data compiled by the US commodity agency shows physical hedgers' short positioning at their highest since March 2013.


Financial regulation

The European Securities and Markets Authority (ESMA) has published draft regulatory and implementing technical standards (RTS and ITS) for the Market in Financial Instruments Directive (MiFID II). The standards cover "authorisation, passporting, registration of third country firms and cooperation between competent authorities". The final report on the standards is expected by end-2015, after which the European Commission will have three months to decide whether to endorse the standards. MiFID II is expected to come into force in January 2017.

Spot crude oil prices

Abundant prompt supply in the Atlantic basin has seen buyers snap up North Sea grades at very wide discounts to benchmark Dated Brent. And recently-released loading programmes for August indicate that North Sea and West African availability will remain high. Spot crude oil trade during June saw UK Forties crude fall to a six-year low against the North Sea benchmark, while Ekofisk sank to its widest discount since 2004. Much of the Atlantic basin surplus has now moved far afield, encouraged by a narrow Brent/Dubai spread. North Sea Ekofisk sailed to China and - for the first time ever, to Uruguay, while UK Forties headed for South Korea.



Of the global benchmarks, US WTI turned in the strongest month-on-month (m-o-m) performance in June, rising $0.53/bbl to $59.80/bbl as stockpiles drained steadily. Dubai held up comparatively well, shedding $1.74/bbl over June to average $61.84/bbl. Russian Urals lost $2.10/bbl versus May to average $61.57 /bbl in June. North Sea Dated Brent took a bigger hit, losing $2.27/bbl over June to average $63.04 /bbl for the month.

Nigerian grades priced against Dated Brent continued to struggle. The West African producer's flagship export crudes Bonny Light and Qua Iboe are trading at multi-year lows. At the time of writing, roughly 10 mb of July-loading Nigerian crude was unsold. Bonny Light's premium to Dated Brent was just $0.20 /bbl. Nigeria is finding it especially difficult to find outlets for its crude after the relentless rise of US light tight oil has virtually shut out the African producer from its once-core market. Fellow West African OPEC producer Angola has found healthier demand for its heavier crudes in Asia, with China showing keen interest.

Light sweet North African crudes are meanwhile proving popular with refiners in Asia. Algerian Saharan Blend is moving to China for the first time in a year and India also bought a cargo of the gasoline-rich crude. US Gulf refiners have also expressed interest in Algerian barrels.



As Atlantic basin crudes move into Asia, competing Middle East grades are feeling the competition. August-loading spot cargoes of Abu Dhabi's light sour Murban have slipped to a $0.30/bbl discount to the Adnoc official selling price - from a $0.15/bbl premium in initial trade for August spot market barrels. The arrival of Atlantic basin cargoes and anticipated slower demand due to seasonal refinery maintenance in Asia prompted Saudi Arabia to lower its monthly formula price for Arab Light crude loading in August to customers in the region.



In the Mediterranean, lengthy loading delays on Iraqi Kirkuk and an anticipated drop in Russia Urals exports tightened the sour crude market, which saw discounts against Dated Brent shrink. The drop in Kirkuk has also boosted demand for spot supplies of Basra Light as well as South American crude. Europe could soon be seeing more light sweet crude after Libya lifted force majeure at the 200 kb/d Ras Lanuf terminal in early July following a six-month shutdown. The first cargo was due to load on 8-10 July.

Spot product prices

Spot product prices generally weakened on a monthly average basis in June. The one bright spot was gasoline where prices continued to strengthen in the Atlantic Basin as refiners there struggled to keep pace with strong demand. Product cracks were mixed as with light ends and fuel oil generally firming while middle distillates weakened on increased refinery supplies and stock builds.

Gasoline was the star of the show in June. The US market remains tight as demand ramps up seasonally, drawing stocks steadily over recent months so that by end-June they were approximately 26 mb below their February high. Additionally, a number of unexpected refinery outages including an FCC at Marathon's Garyville plant disrupted Gulf Coast supplies. Consequently, cracks in the region have continued to surge and by early-July approached an astonishing $50/bbl, the highest in nearly four years.



Logistical issues and rocketing freight rates for Jones Act tankers are hindering the movement of gasoline from the Gulf Coast to the key Atlantic Coast market (PADD 1). Consequently, numerous cargoes have been drawn in from Europe, which has helped to propel prices upwards there. By early-July, the arbitrage window to ship product westwards from Europe remained extremely wide with market reports suggesting that, even in the face of surging freight costs, a veritable armada of vessels were booked to take advantage. This has helped to offset a notable fall in volumes shipped to Nigeria in the wake of a dispute between the newly installed government and fuel marketers.



Naphtha cracks strengthened across the board on a monthly average basis, as, despite spot prices slipping over the month, they fell by less than for crude. In Europe, demand from gasoline blenders proved a partial buttress for prices as downward pressure came from a closed arbitrage to Asia amid high freight rates and reportedly reduced demand from the petrochemical industry. In Asia, naphtha use as a petrochemical feedstock waned with prices slipping accordingly.  



Middle distillate spot prices posted the sharpest falls across all surveyed markets in June. Higher Atlantic basin refinery throughputs, as refiners take advantage of soaring gasoline cracks, has led to excess middle distillate supply at a time of seasonally low demand. Accordingly, stocks on both sides of the Atlantic have built. This was especially evident in the US where gasoil cracks on the Gulf Coast sank to around $5 /bbl in early-June. The diverging paths of gasoline and gasoil prices and the importance of gasoline to refiners is illustrated by the soaring premium of the front month NYMEX RBOB crack to that of the heating oil crack, which stood at close to $8.00/bbl by early-July, its widest since 2009.



At the bottom of the barrel, prices for both HSFO and LSFO in Singapore fell sharply. The main catalyst for this was brimming onshore inventories, which reportedly led to a plethora of unsold cargoes in the region. Despite this, and even as the arbitrage opportunity to ship product to Asia closed, European prices have remained relatively resilient as extra volumes are being moved to North Africa for power generation.


Freight

Surveyed crude freight rates had a strong month across the board, with smaller tankers posting the most significant gains. Unsold North Sea Aframax cargoes tightened available tonnage, causing the rate to spike. Five cargoes reportedly were fixed from the Baltic for delivery in South Korea, roughly 320 kb/d, something not seen in more than two years. High OPEC Middle East production pushed the Arab Gulf - Asia route for very-large-crude-carriers (VLCCs) above $15/mt. A whopping 54 Suezmax cargoes were fixed for the West Africa-UK route, compared with a monthly average of 35 so far this year, which propelled the rate higher in June.



Product freight rates were mixed as only longer haul voyages posted gains. The UK-US Atlantic route reached its highest year-to-date, with the gasoline arbitrage window wide open (See 'Product prices'). Nearly 50 cargoes carrying a total of 13 mb of gasoline were booked in June alone. US Gulf-UK trade also saw robust gains and the highest fixtures in two years, as traders discharging gasoline on the US East Coast often ship gasoil back to Europe (so-called triangulation). The Arab Gulf-Japan route, served by larger 75Kt vessels, rose in early July and held the stronger levels - the highest since late 2014.

Refining

Summary

  • Global refinery crude run estimates for 2Q15 reached 78.7 mb/d, an all-time record, with  impressive 2.3 mb/d year on year (y-o-y) growth (similar to that in 4Q14). These estimates have been revised up by a massive 0.9 mb/d since last month's Report. The main upward revision - 0.65 mb/d - took place in the OECD. In the non-OECD, China was revised higher by 0.38 mb/d. The only meaningful downward change took place in FSU, at -0.27 mb/d.
  • For 3Q15, global refinery throughput is forecast to increase a further 0.7 mb/d, setting a new record of 79.4 mb/d, posting a 1.45 mb/d y-o-y growth.
  • Second-quarter maintenance peaked in May, abating rapidly in June. Maintenance remains in the lows of the historical range, with fewer outages than usual in Europe, North America and the Middle East. Asia bucked the trend; China in particular had very high maintenance in May/June, though that did not stop refiners from running flat out.  Reports suggest maintenance will be heavy in the Middle East this autumn.
  • In June, global refinery margins drew continued support from high gasoline cracks. Diesel and fuel oil cracks eased, especially in Singapore, amid rising stocks. Refining margins in China remained elevated, while reportedly low margins in Russia led to a drop in refinery runs.

Global refinery overview

Is the sky the limit? Month after month, the estimate of global crude runs is being revised upwards, with year-on-year growth regularly surpassing 2.3 mb/d. Refinery crude runs reach new highs, generating unusual movements such as the first export of Chinese jet fuel to Europe - despite very high freight rates. Gasoline cracks have gained another few dollars per barrel each month, compensating for the growing weakness of other products.

Current margins justify every installation running flat out to produce the desired gasoline, but for how long can this last? With gasoline, refiners also manufacture other "by-products" - notably diesel and fuel oil - for which there is less demand and growing stocks. The driving season is well advanced, and refiners should start seeing lower gasoline demand. Conversely, when margins subside - for instance internally in Russia - refinery runs are trimmed.



And where are all the refined products going?  Growth of 2 mb/d y-o-y in refining throughputs versus 1.2 mb/d for product demand suggests product stock growth of 0.8 mb/d, which is not fully reflected in OECD stock reports nor in reported non-OECD stocks. Some of it may be included in non-reported non-OECD commercial storage, in floating storage or in the operational stocks of new refineries, but a gap subsists. Finally, it is also puzzling to see that such strong refinery runs have barely dented crude stocks.

Spare refining capacity is a crucial parameter that influences margins. This month we detail our 2016 refinery capacity changes forecast (see Text Box: Refinery capacity additions in 2015-16 surpass the "call on refinery capacity"). Over the past few years, net refinery additions have been below the "call on refinery  capacity" changes - tightening global refinery markets. The situation is expected to change in 2015-2016 as more capacity is slated to come online than effectively required by demand forecasts. This said, refineries are prone to late completions rather than early ones, especially given constraints on capex. Petrobras is a case in point - the company deferred the completion of a number of refineries - and further project delays or refinery closures are expected elsewhere, reducing the capacity overhang toward a more balanced situation.



In April, the most recent month for which a complete set of monthly data is available, OECD refiners recorded an increase of 1.2 mb/d year-on-year (y-o-y) in aggregate crude throughputs, with Europe the strongest region in OECD. Non-OECD refinery runs also expanded by 1.3 mb/d.

Preliminary figures for May show that OECD runs should be slightly smaller despite lower maintenance levels and decrease by 0.3 mb/d to 37.4 mb/d. This decrease is expected to continue in June but over the summer, OECD throughputs are expected to rise again, with very robust levels estimated for 3Q15.   

Margins

Refinery margins remained robust in June, with hydroskimming margins remaining positive in all regions. In the latest two weeks, however, Singapore's hydroskimming margins lost $1.80/bbl and are now negative at -$1.60/bbl

Margins were significantly up in Europe, with North West Europe posting particularly strong cracking margins above $8/bbl. In the US Gulf Coast, most margins have risen by over $1/bbl, but US mid-continent margins were slightly weaker. In Singapore, Dubai margins - both cracking and hydroskimming - posted small declines.



Gasoline continues to exhibit exceptional strength; it is the oil product supporting margins. Gasoline cracks this month were above $20/bbl in Europe and Asia and even surpassed $45/bbl in the US Gulf Coast. However in the last two weeks, gasoline cracks in Singapore started to weaken substantially, losing $5/bbl to reach $16/bbl.



Despite the strength of gasoline, naphtha cracks have also been weakening early July in all regions. Diesel cracks are edging down everywhere except in Europe, but remain relatively firm considering the large increase of stocks in many regions. High-sulphur fuel oil cracks remained fairly narrow in Europe - another support for margins - but started to drop in Singapore, moving from -$4/bbl in early June to -$7/bbl in early July. The market finally took into account the overhang of fuel in Singapore, with dozens of vessels loaded with fuel oil apparently unable to find buyers and land storage brimming.


OECD refinery throughput

OECD refinery crude runs decreased by 0.4 mb/d in May from April, to 37.4 mb/d, a y-o-y increase of 1.2 mb/d.  A large 1.07 mb/d upward revision underpinned this strong y-o-y growth, spread between Asia Pacific (0.56 mb/d), Europe (0.35mb/d) and North America (0.16 mb/d). Estimates for April were also revised upwards by 0.6 mb/d. On average, those adjustments to April and May data have raised the estimate of OECD throughput for 2Q15 by 0.65 mb/d.



It is interesting to note the strength of OECD refining runs (except Japan). For instance, the April and May figures have been revised higher, for Asia Pacific by 214 kb/d and 558 kb/d respectively, adding to previous upwards revisions last month of 204 kbd and 228 kb/d, respectively. South Korea was the highest revision (+325 kb/d in May), followed by Japan (+211 kb/d). In North America, the estimate of monthly throughputs was revised upwards by 339 kb/d for May and 162 kb/d for April. In Europe, May throughput was revised upwards from last month by 348 kb/d, with Italy, the Netherlands and Spain posting the largest increases.



In the OECD Americas, May crude runs eased by -0.1 mb/d, to 19.1 mb/d, but are expected to rebound to 19.4 mb/d for June and to peak at 19.6 mb/d in July and August, matching the very high throughputs seen in the summer of 2014. In the United States, May crude runs remained at 16.3 mbd, 0.3 mb/d higher y-o-y. Over the first five months of this year, throughput was higher by an average 0.35 mb/d, or 2.2 %, on the year. It remains to be seen whether potentially lower margins in July will reduce these high throughputs. US motorists set a record for the number of miles driven in April, the highest for the month since the 1990s and up by 3.9% y-o-y. Weekly gasoline production was reported by the EIA to have reached over 10 mb/d, close to the all-time 10.2 mb/d of December 2014.

In OECD Europe y-o-y refinery run growth is being led by a group of southern countries coming out of recession, first Italy but also Spain and Portugal (Greece remains in negative territory). Turkey and Poland - two countries whose economies have been growing significantly - also contributed, as did Germany and the Netherlands Finland's negative showing is explained by the shutdown of the Porvoo refinery. The maintenance season is ending, with only 105 kb/d of capacity scheduled to shut down in July when the Philipps 66 Humber refinery is expected to come off-line.



In Germany, the ownership of refineries was restructured. Total sold its participation in the Schwedt refinery to Rosneft, and Rosneft and BP unwound their Ruhr Oel JV: Rosneft kept the share of the JV in Schwedt - thus obtaining the majority - in Bayernoil and in Miro refineries, while BP became the sole owner of Gelsenkirchen.

In the Baltic, Transneft announced that it would expand the capacity of the Sever pipeline exporting 10 ppm gasoil to Primorsk. It is currently 14 mt/yr and Transneft plans to bring it to 18 mt/yr in 2016 and 25 mt/yr in 2018 (however Primorsk loadport limitations will limit exports to 20 mt/yr until 2020). This is likely to increase the relative part of Russia in Europe's gasoil imports, although part of the increased loadings at Primorsk will only be a replacement of other Baltic ports like Ventspils.

In OECD Asia, the maintenance program was significant in June with 1.3 mb/d of capacity off-line; nine Japanese refineries made up 85% of the total. July and August will be much lighter with outages of 0.5 mb/d and 0.3 mb/d, respectively. Altogether, Asia refinery runs in June and July are forecast just a little higher than in 2014.



In South Korea, refinery runs continue at a very high rate, with a 12 % increase y-o-y over the first five months. SK's Ulsan refinery shut down in June/July will be followed by the shutdown of S-Oil's Onsan 240 kb/d refinery from mid-August, for an extended period. In Japan, a fire at the end of May forced JX Energy to shut its Kashima refinery. The affected units should ramp up progressively in July.

Non-OECD refinery throughput

In April, non-OECD refinery throughput remained nearly stable at 41.1 mb/d. , after an upward monthly revision of 0.45 mb/d. China posted the largest revision (+320 kb/d), followed by the Middle East and Africa, while other Asia was down by -265 kbd, essentially due to lower-than-expected Indian runs. April non-OECD figures are 1.3 mb/d higher y-o-y, two thirds of this increase being attributable to China, and the last third to the Middle East.  In May, non-OECD crude runs are expected to reach 40.7 mb/d, after a -0.2 mb/d downward revision. The downward move took place only in Russia (-655 kb/d), and overcame the upward changes in China (+329 kb/d) and Africa (+142 kb/d). After such revisions, the y-o-y throughput growth for May stands at 0.6 mb/d, and is mostly due to China and India.



For 2Q15 non-OECD throughput is estimated at 41.2 mb/d, higher by 1.0 mb/d y-o-y, with China, Other Asia and Middle East showing gains and only FSU lower (-0.35 mb/d). In 3Q15 non-OECD refinery intake is expected to reach 41.3 mb/d, a 0.9 mb/d increase y-o-y.

Chinese refinery runs continue at a high level, with May througputs estimated at 10.34 mb/d. Over the first five months of 2015, y-o-y growth averaged 0.6 mb/d or 5.8%, despite a record high announced maintenance program in May.



In India, refinery throughputs were back up to 4.64 mb/d in May, after a heavy maintenance program in April thant had reduced crude intake to 4.16 mb/d. August should see reduced throughput as both Essar's Vadinar and Reliance's Jamnagar 1 will undergo maintenance initially scheduled for June. In Singapore, ExxonMobil's refinery shut down reduced May crude runs to 1.17 mb/d. Shell's Bukom refinery shut down will also reduce local runs to 1.27 mb/d in August. Viet Nam received its first Russian ESPO crude following the commissioning of a new sulphur recovery unit at its Dung Quat refinery

Russian refinery throughput in May has slightly decreased to 5.31 mb/d, despite spring maintenance being completed. This is a decrease of 3.2% m-o-m or 7.8% y-o-y, consistent with weaker margins. Refining margins are increasingly under pressure. Bashneft for instance reported that "refining margins were close to zero in the first quarter", and reduced its 2015 processing target by 6% as a result.

Middle East April crude runs increased by 190 kb/d from March to 6.6 mb/d, 0.37 mb/d higher than in April 2014.  April figures were revised up by 228 kb/d, with higher numbers seen in Kuwait and Iran. Saudi Arabia April throughput reached 2.2 mb/d, 0.3 mb/d higher than in March and 0.37 mb/d higher y-o-y, a result of the ramping up of the new Yasref refinery. We expect Saudi crude runs later in 2015 to be consistently higher y-o-y by 0.3-0.4 mb/d.



In Latin America, April runs have edged up by 220 kb/d from March to 4.7 mb/d, -80 kb/d lower y-o-y. 2Q15 is equally forecast at 4.7 mb/d, -40 kb/d y-o-y growth. In Brazil, May runs are 80 kb/d higher than last month, and 70 kb/d higher y-o-y. Petrobras published its revised Business Plan for 2015-19, outlining investments of $12.8 billion planned for its downstream business. Two thirds of that sum is earmarked for maintenance, with the remainder mostly attributed to the completion of the second 115 kb/d train of the Abreu e Lima refinery. The Comperj refinery in Rio de Janeiro State is not slated to be completed in the near future.



Refinery capacity additions in 2015-16 surpass the "call on refinery capacity"

Global refinery capacity is expected to rise from 95 mb/d to 97.4 mb/d between 2014 and 2016, with substantial net increases of 1.1 mb/d in each of 2015 and 2016. The largest increases over 2015-16 take place in the US and China, each with 0.9 mb/d, then in the Middle East and non-OECD Asia with 0.6 mb/d and 0.5 mb/d, respectively. Announced shutdowns reduce Europe and OECD Asia Pacific capacity by 0.3 mb/d and 0.5 mb/d, respectively. Compared to our forecast in the MTOMR 2015 a number of changes have been incorporated,and are detailed on a regional basis below. They lift our expectations for 2015 by 0.2 mb/d and decrease the 2016 estimate by 0.3 mb/d.



Overall, non-OECD refining capacity additions remain fairly stable around 1 mb/d per year, while in the OECD, capacity reductions seen previously have given place to stability over 2015-2016, with growing US additions compensating the continuing reductions in Europe and Asia. On a cumulative basis, refinery additions remain below demand growth. In OECD, both demand and refining capacity seem to be stabilizing in 2015-2016; however, with ever-increasing measures to curb green-house gasses emissions and increase efficiency, we forecast OECD demand to resume its downward trend from 2017 onwards.



While global refinery capacity additions do not entirely meet expected demand growth, a part of this demand will continue to be met by supply elements that bypass refineries: biofuels, NGLs (natural gas liquids: ethane, propane, and butane) and refinery processing gains. What remains to be supplied by refineries can be defined as the "call on refining capacity". Strikingly, in 2014, this call was negative, as a 420 kb/d increase in OECD NGLs output - a result of booming US tight oil production - coincided with subdued demand growth. In 2012-13, net capacity additions were below the call on refining capacity, due to the OECD shutdowns, reducing the capacity surplus. Conversely in 2015-16, net capacity additions will be more than needed, which will cause the global utilization rate to decline and casts a doubt on the continuation of current unusually high refining margins. 



Regionally, expected North America refinery additions have been raised for 2015 by 0.1 mb/d due to an accelerated completion of condensate splitters in the US Gulf Coast and Midwest. Five new plants were completed: Marathon's Canton, Ohio, and Catlettsburg, Kentucky, installations; Kinder Morgan's two 50 kb/d trains at Galena Park, Texas; Castleton and Buckeye partners, both in Corpus Christi, Texas. In 2016, three more condensate splitters are also scheduled: in Corpus Christi, Texas, Martin Midstream 100 kb/d and Magellan 50 kb/d projects, plus Targa Resource's 35 kb/d installation in Houston, Texas. In addition, Marathon will add 30 kb/d extra distillation capacity in Robinson, Illinois, and Valero will increase nameplate capacity by 70 kb/d in Corpus Christi and 90 kb/d in Houston. All in all, 0.9 mb/d of new refinery capacity is expected to be added over the two year period.

In contrast, OECD Europe and Asia Oceania continue to see downward pressure on their refinery sector. An extra 260 kb/d of shutdowns has been added in OECD Europe: Switzerland's Collombey refinery in early 2015, followed by Total's La Mède refinery in France and part of UK's Lindsey refinery in 2016.

Two shutdowns totalling 130 kb/d have also been added in OECD Asia Pacific. In 2015, BP's Bulwer (Australia) and Petrobras's Okinawa plant in Japan are closing, and there will be small reductions of capacity from ldemitsu and Tonen General. In 2016, Cosmo Oil will cut the nameplate capacity of its Chiba and Yokkoaichi refinery by 100 kb/d and 63 kb/d respectively; however a 140 kb/d condensate splitter should come on stream in Hyundai's Daesan refinery.

An extra 80 kb/d reduction took place in FSU in 2015, coming from the advanced shutdown of the old Baku Azerneftyag refinery, partly compensated by CDU expansions in Volgograd and Nizhnekamsk, and by the new 70 kb/d condensate splitter built by Novatek in Ust-Luga.

In China, the pace of CDU capacity additions continues unabated, with additions in both 2015 and 2016 each 0.2 mb/d higher than previous expectations. In 2015 three refineries will be completed: CNPC's 100 kb/d Renqui (Huabei), Sinopec's Jiujiang (Jiangxi) 100 kb/d and a 100 kb/d condensate splitter built by CNOOC at the Yanchang oilfield. In 2016, six completions are expected: CNOOC's Taizhou (Zhejiang) 60 kb/d, Zhongjie (Hebei) 70 kb/d, Ningbo (Zhejiang) 140 kb/d and CNPC's Daqing (Heilongjiang) 90 kb/d, Karamay (Xinjiang) 60 kb/d and Kunming/Anning (Yunnan) 260 kb/d in 2016 (initially planned for 2017). In total we estimate 0.9 mb/d of capacity to be added over these two years.

The 2015 non-OECD Asia numbers were increased by 330 kb/d on account of the deferral of the 120 kb/d Byco Baluchistan (Pakistan) refinery from 2014 to 2015, and the closure of CPC's Kaoshiung (Taiwan) refinery delayed from end 2015 to early 2016. Indian Oil Corporation (IOC)'s 300 kb/d Paradip plant came on stream in spring, although with some delay. Conversely, 2016 figures were lowered by 270 kb/d, because of the delayed closure of Kaoshiung, but also by a delayed completion of IOC's Panipat (India) refinery, now estimated more likely in 2018. Still scheduled for 2016 are CPC's 150 kb/d Ta-lin (Taiwan) and Nagarjuna's 120 kb/d Cuddalore (India) plants. Overall, a total growth of 0.5 mb/d is foreseen over 2015-16 is expected.

Conversely, 2015 expectations for Latin America, were lowered by 115 kb/d due to the deferral of the completion of the first train of Petrobras's Abreu e Lima (Brazil) plant; with some offset provided by Ecopetrol's Cartagena (Colombia) refinery which will finally come online by the end of 2015. We estimate that the 60 kb/d first phase of the Santa Ines (Venezuela) plant could be starting in 2016, for a relatively limited 145 kb/d total growth. 

Finally, in the Middle East, ADNOC's Ruwais refinery is the only 2015 start-up  as Yasref's Yanbu refinery formally started in 2014. In 2016 two condensate splitters are due: the 115 kb/d NIOC Persian Gulf Star project in Bandar Abbas and the Qatar Petroleum 145 kb/d Ras Laffan plant. Still, we built a small downward revision, due to the advanced scheduled shutdown of the old Saudi Aramco Jeddah refinery towards end 2016 (which could eventually take place only after the completion of the Jizan refinery, a few years later). The Middle East will thus add 0.6 mb/capacity over 2015-2016.