Oil Market Report: 12 August 2015

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Highlights

  • Crude oil prices fell sharply during July and into early August, pressured by an abundance of supply and a strong US dollar. By early August, global benchmarks had sunk around 25% below end June levels. At the time of writing, ICE Brent was trading at around $49 /bbl while NYMEX WTI was at $43.30/bbl.
  • Global oil demand in 2015 is expected to grow by 1.6 mb/d, up 0.2 mb/d from our previous Report and the fastest pace in five years, as economic growth solidifies and consumers respond to lower oil prices. Persistent macro-economic strength supports above-trend growth of 1.4 mb/d in 2016.
  • World oil supply fell nearly 0.6 mb/d in July, mainly on lower non-OPEC output. OPEC crude production held steady near a three-year high. As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 mb/d to 1.1 mb/d this year and then contract by 200 kb/d in 2016.
  • OPEC crude supply inched 15 kb/d lower in July to 31.79 mb/d as Saudi output eased and offset record high Iraqi production and increased Iranian flows. The 'call on OPEC crude and stock change' rises to 30.8 mb/d in 2016, up 1.4 mb/d on this year due to a stronger demand outlook and stalling non-OPEC supply growth.
  • OECD inventories rose counter-seasonally by 9.9 mb to hit another all-time high of 2 916 mb in June with their surplus to average levels widening to a record 210 mb. As the seasonal restocking of 'other products' continued apace, refined products by end-month covered 31.3 mb days of forward demand, 0.2 days above end-May.
  • Global refinery runs reached a record 80.6 mb/d in July, 3.2 mb/d up on a year earlier, but fissures are showing. High distillate stocks have pushed cracks in Singapore down to their lowest level since 2009 and prompted run cuts in Asia. Elsewhere, especially in the US, still-soaring gasoline cracks supported high margins and throughput.

Long and winding road

From the driller in the Bakken to the motorist at the pump, oil market players are adjusting to a world of lower prices. Our latest forecast shows stronger-than-anticipated demand and non-OPEC supply growth swinging into contraction next year. While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016 - suggesting global inventories will pile up further.

Oil's plunge below $50/bbl from triple digits a year ago has seen demand react more swiftly than supply. As a result, the world is now expected to use 1.6 mb/d more fuel in 2015 than the previous year as economic growth consolidates and consumers burn more oil. That's the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 0.7 mb/d in 2014.



On the other side of the equation, global supply continues to grow at a breakneck pace - currently running 2.7 mb/d above a year earlier - despite a collapse in oil prices. Muscular pumping from OPEC's top producers Saudi Arabia and Iraq has boosted the group's flows to 31.8 mb/d - the highest in three years. Since the Riyadh-led OPEC decision last November to defend market share rather than price, output from the 12-member group has soared by 1.4 mb/d and it looks as if there is no backing down.

But OPEC only accounts for a bit more than half of the annual increase in world oil supply. While non-OPEC output growth has sunk from its heights of 2014, supply in July was still running 1.2 mb/d on a year earlier thanks to hefty investment made previously. Oil's second lurch below $50/bbl has prompted major oil companies and independents alike to revisit investment plans and take an axe to them. While a drop in costs and efficiency improvements will help to offset some of the spending cuts, output is likely to take a hit soon. As such, non-OPEC supply growth is expected to decelerate through the end of the year and decline in 2016 - with the US hardest hit.

Even with the slowdown in non-OPEC production and higher demand growth, a sizeable surplus remains. Our latest balances show that while the overhang will ease from a staggering 3.0 mb/d in 2Q15, its highest since 1998, the projected oversupply persists through 1H16. Assuming OPEC production continues at around 31.7 mb/d (its recent three-month average) through 2016, 2H15 sees supply exceeding demand by 1.4 mb/d, testing storage limits worldwide. The surplus drains down to about 850 kb/d in 2016, with 4Q16 marking the first quarter of a potential stock draw. This outlook does not include potentially higher Iranian output in the case of sanctions being lifted.

Against this backdrop, many participants in the oil industry have adopted a new mantra - "lower for longer''. But how low and how long? While reduced capital spending will help rebalance the market in the short term, it will no doubt also lead to lower future supply growth. This will become increasingly sensitive if demand continues above-trend, as it has so far in 2015.

Demand

Summary

  • Global oil demand is forecast to average 94.2 mb/d in 2015, 0.3 mb/d above last month's Report and 1.6 mb/d up on a year ago as economic growth solidifies and US consumers, in particular, respond to sharply lower oil prices. The 2016 forecast rises by 0.4 mb/d to 95.6 mb/d - an above trend 1.4 mb/d gain - on higher baseline numbers and expectations of a more robust economy.
  • The 2Q15 global demand estimate has been revised up by 380 kb/d compared to last month's Report to 93.5 mb/d as baseline non-OECD data has been adjusted up alongside notable upgrades to demand estimates for China, Russia and Brazil. This upside support, along with strong gains in US demand due to lower oil prices, fuelled 2Q15 global year-on-year (y-o-y) demand growth of 1.7 mb/d.
  • The latest Chinese oil demand numbers show relatively robust gains despite recent cracks in the country's economic data. Near 5% y-o-y Chinese oil demand growth in 1H15 bucked stalling property prices and pessimistic business sentiment. Recent petrochemical expansions, coupled with the ongoing strength in the transport sector, offset any downside impact from the ongoing macroeconomic malaise, at least in the short-term.
  • Baseline 2013 non-OECD demand has been revised up compared to last month's Report following the publication of the IEA's 2015 annual Energy Statistics of Non-OECD Countries - the most comprehensive reassessment of historical non-OECD deliveries available. The fresh 2013 non-OECD demand estimate of 45.9 mb/d is 0.1 mb/d higher than last month's citation. China, Malaysia, Kazakhstan and Iran account for the bulk of the increase.

Global Overview

One swallow does not a summer make, to quote Aristotle, but a year into a major price correction and oil demand has clearly accelerated. Having peaked above $115/bbl in June 2014, Brent crude now trades at less than half this level. Over a comparable period, demand growth is up, from 0.3 mb/d y-o-y in 2Q14 to 1.7 mb/d in 2Q15, a near six-fold increase. This is not to say that sharply lower prices are the sole reason for the additional demand, as economic momentum has also solidified; but the emerging trend shows a clear link between sharply lower prices, accelerating oil demand growth and recuperating economic conditions.



Lower crude prices logically have a positive impact upon demand, ceteris paribus, but the price adjustment needs to be very sizeable to raise demand growth significantly as was the case in 1H15. A repeat along this scale is unlikely and future demand growth is expected to decelerate due to the return of some long-entrenched efficiency gains. Thus, global oil demand growth is projected to fall from a 1H15 high of 1.8 mb/d, to 1.4 mb/d in 2H15. For the year as a whole, global deliveries average 94.2 mb/d, 0.3 mb/d above the estimate cited last month and 1.6 mb/d (or 1.7%) up on the year, a five-year high for growth. About 0.1 mb/d of this 0.3 mb/d addition is attributable to historical non-OECD data amendments (see Non-OECD 2013 Baseline Data Revisions), the remainder is due to higher-than-forecast 2Q15 numbers in the US, China, Brazil and Russia.

A further 0.4 mb/d is added to the 2016 global oil demand estimate, since last month's Report, raising the outlook to 95.6 mb/d. The majority of this revision is attributable to the raised baseline forecast (i.e. 0.3 mb/d added in 2015), with the remainder due to the more rapidly accelerating macroeconomic assumptions that our demand model now includes. The near $10/bbl parallel reduction in the 2016 forward price curve also supports the adjustment. Economic growth assessments, as outlined by the International Monetary Fund (IMF) in its July edition of its World Economic Outlook, incorporate a sharp half-a-percentage point acceleration in global economic growth in 2016, to +3.8%, a notable ratcheting up compared to the three-tenths-of-a-percentage point acceleration that the IMF forecast in April's study.

OECD

OECD oil demand growth has eased back considerably, from the heady heights achieved in 1Q15 (+1.9%) to 0.4 mb/d (or 0.9%) on a y-o-y basis in 2Q15, due largely to easing impetus from Europe. Oil demand in Europe rose by 0.6 mb/d (or 4.6%) y-o-y in 1Q15, as colder-than-year-earlier winter weather conditions struck. This additional space-heating requirement has since dropped out of the equation, as predicted, with European growth all but vanishing in 2Q15. For the year as a whole, near 1% OECD demand growth is foreseen, to around 46.1 mb/d. Momentum is likely to ease in 2016, as additional efficiency gains roughly offset the demand support provided by additional economic growth and lower crude oil prices.

Americas

Rising for a seventh consecutive month, deliveries across the OECD Americas are once again just shy of where they were in in 2010. Exceptionally strong LPG (including ethane) and gasoline demand led the recovery that initially commenced in 1Q13, before stuttering in 2Q14-3Q14 and then returning to growth in 4Q14-2Q15. Universally rising delivery data have not been seen across the region, with strong gains in the US and Chile, as macroeconomic momentum built, offsetting declines in Mexico and Canada. Falling oil prices dent growth prospects, for demand, in Canada and Mexico. Looking forward, growth likely continues in 2H15-2016, as macroeconomic sentiment remains broadly supportive. The extremes of early US demand growth likely subside as the previous sharp retail price declines ease into the memories of more price-dependent drivers.



With an upwardly revised US demand estimate of 19.1 mb/d now being cited for May, this amounts to the sixth consecutive month of absolute y-o-y growth. Strong gains in the transport and petrochemical sectors led May's upside; as additional LPG (including ethane), gasoline and jet/kerosene accounted for over 90% of the total 0.6 mb/d (or 3.3%) y-o-y expansion. Not only did May's official release confirm the strongly rising US demand trend but it also revealed a further 60 kb/d of oil demand above the estimate quoted in last month's Report, with additional 'other product' demand the leading contributor. Up by 2.6% y-o-y (or 235 kb/d) in May, to 9.3 mb/d, US gasoline demand growth closely reflected the 2.7% gain in US vehicle miles travelled, as reported by the US Department of Transportation's Federal Highway Administration.



Preliminary estimates of June demand, based upon the latest weekly data from the US Energy Information Administration (EIA), point towards a further y-o-y gain of 0.8 mb/d to 19.6 mb/d. Persistent upticks in gasoline and LPG (largely additional petrochemical demand) dominate June growth, in contrast to jet/kerosene and residual fuel oil which fell. At 53.5 in June, the Institute of Supply Management's closely watched Manufacturing Purchasing Managers' Index (PMI) was not only at a five month high but also clearly above the key 50-threshold that signifies the discrepancy between 'optimistic' and 'pessimistic' business sentiment, a level it has maintained for 30 consecutive months through June. The modest dip, to 52.7 in July, may signify something of a slowdown in 2H15 industrial growth, as the PMI is a useful gauge of economic sentiment six-months ahead. Remaining above 50, however, the index still clearly shows the majority of US manufacturing business leaders still foresee 2H15 growth. Accordingly the US demand forecast for 2H15 is for y-o-y growth of 1.5%, roughly half the heights achieved in 1H15, but still firmly in positive territory and with gains in transport fuel demand leading the way. A 2H15 slowdown in US demand is likely as the heady heights of 2H14 - when the initial price stimuli occurred - are unlikely to be repeated.



At an average of 19.4 mb/d in 2015, the US demand forecast is 0.4 mb/d (or 2.1%) up on the year, supported by very strong gains in US gasoline (+0.3 mb/d) and LPG (+0.1 mb/d). US oil demand growth is then forecast to ease in 2016, to +0.2 mb/d (+0.9%), as additional efficiency gains filter through, keeping US gasoline demand in particular flat compared to the year earlier. This is where one of the greatest forecast uncertainties lie, however, as the strong gains in US gasoline demand so far in 2015 are outstripping the efficiency gains that had been expected. Robust demand growth in 2015 has been supported by a near perfect storm of higher SUV sales, sharply increased vehicle usage and anecdotal reports of multi-car families switching their vehicle choices to use their least efficient models in response to lower pump prices. Although it is not our base case scenario, similar pressures, potentially garnering support from persistently low product prices, could raise US gasoline demand further in 2016. 



Roughly flat on the year earlier, at 2.0 mb/d in June, Mexican oil product demand ended a five-month spell of heavily declining deliveries, as strong transport fuel demand offset further falls from the power sector. The long running decline in Mexico's power-sector requirement continued in June, encouraging a near 6% y-o-y contraction in residual fuel oil demand, a trend confirmed by statistics from the Secretaria de Energia which showed a compensative surge in natural gas use in the power sector (+12.0% y-o-y). Overall in 2015, having been tainted by some very sharp declines January-through-May, Mexican oil product demand is forecast to average 1.9 mb/d, 3.1% down on the year earlier. The relative growth trend should then flatten in 2016, as additional macroeconomic momentum builds, supporting additional demand from the transport and industrial sectors. Continued, although more muted, declines in power sector demand provide a partial offset.


Europe

Although still marginally up in y-o-y terms, European momentum eased back considerably in 2Q15 (+0.3%) compared to rapacious 1Q15 (+4.6%) consumption. The slowdown came as little surprise, however, matching our month earlier 13.4 mb/d 2Q15 European forecast and only marginally (0.1 mb/d) below the estimate quoted in February's Medium Term Oil Market Report. Exceptionally strong gasoil demand drove the 1Q15 European uptick, which was largely attributable to much colder-than-year-earlier winter weather conditions, a support that waned in 2Q15. Looking ahead to the year as a whole, growth should average 1.4%, Europe's first annual gain in nearly a decade, taking average deliveries up to 13.6 mb/d. Projected growth will all but vanish in 2016, as less dramatic price supports offset persistent macroeconomic stimuli. The IMF is forecasting, in July's edition of its World Economic Outlook, euro area GDP growth of 1.7% in 2016 after a gain of 1.5% in 2015.


Asia Oceania

Down on the year earlier in both May and June, the demand trend for OECD Asia Oceania generally continues to show y-o-y declines, albeit with a decelerating hue. Relatively slower declines in Japan and easing growth in Korea, co-exist alongside y-o-y gains in Australia, New Zealand and Israel. Having peaked at 2.5 mb/d in February, total Korean oil deliveries have since plummeted, falling to 2.2 mb/d in May and with only with a very modest recovery seen in June to 2.3 mb/d. The dramatic recent reversal took hold as heady climb-downs hit industrial oil use, consequential on the creaking industrial backdrop. The latest data, from Statistics Korea, depict a heavy 2.8% y-o-y contraction in industrial output in May, while forward-looking business sentiment indicators such as Markit's Manufacturing Purchasing Manufacturers' Index (PMI) have been net-pessimistic since March. For the year as a whole, Korean deliveries are forecast to average 2.4 mb/d, equivalent to a gain of 2.6% on the year earlier. This acceleration, compared to the recent easing, is largely attributable to the much stronger gains that were seen January-April. A further moderation, to +1.4% growth, is foreseen for 2016, as efficiency gains eat into the upside otherwise provided by likely economic growth of at least 3%.



Down by 45 kb/d (or -1.2%) y-o-y in 2Q15, Japanese oil product demand posted its shallowest relative decline in just over one year, as the relative decline rates in residual fuel oil and 'other product' deliveries eased. Additional products, such as gasoline, gasoil and naphtha, also provided some support as their respective growth rates increased, or fell by a lesser degree. The Ministry of Economy, Trade and Industry quoted three consecutive months of y-o-y retail sales growth in June, the first time such a sequence has occurred this year and at its sharpest pace of growth since early 2014. Gasoline prices, as quoted by the Japanese Agency for Natural Resources and Energy, were roughly one-quarter below year earlier levels in 2Q15. These factors, together with only very muted 2Q15 declines in residual fuel oil and 'other product' demand, supported the shallowest relative contraction in Japanese oil product demand in over a year.


Non-OECD

Demonstrating renewed vigour in 2Q15 (+2.8% y-o-y), non-OECD demand growth accelerated to its fastest pace in two years. Particularly sharp gains were seen in the transport and petrochemical sectors, with non-OECD Asia, notably China and India, playing a dominant role. For the year as a whole, deliveries are expected to average 48.2 mb/d, equivalent to a gain of 2.4% on the year, before accelerating with growth of 2.6% in 2016 to 49.4 mb/d as macroeconomic pressures build. The IMF is forecasting economic growth of 4.7% in 2016 in its close proxy for non-OECD, "emerging market and developing economies", half a percentage point up on the 4.2% gain envisaged for 2015.

Non-OECD 2013 Baseline Demand Revisions

Once a year the IEA publishes its comprehensive annual data analysis work, supplying a better annual demand series plus revisions/improvements to the older historical series. This month sees the publication of the 2015 editions of both the IEA's Annual Statistical Supplement and the IEA's annual Energy Statistics of Non-OECD Countries (sometimes referred to as "Green-Book"). Previous estimates of 2013 non-OECD oil demand were based on a combination of national source statistics, JODI numbers, internal demand estimates and other reports and journals.

Only a modest 0.1 mb/d of additional non-OECD oil demand has been found in 2013, compared to last month's Report, to 45.9 mb/d. China, Malaysia, Kazakhstan, Thailand, Libya, Iran and South Africa accounted for the largest additions, offsetting notable downside adjustments to Egypt, Russia, Indonesia and India. Of the major 2013 demand revisions, the 95 kb/d Chinese addition draws particular attention, consequential on the slightly convoluted method of monthly data calculation: i.e. apparent demand = refinery throughput + net product imports - any product stock additions. The 2015 edition of the IEA's annual Energy Statistics of Non-OECD Countries shows much higher levels of Chinese diesel, LPG and 'other product' demand, compared to last month's Report, and lower levels of naphtha, residual fuel oil and gasoline.

The Malaysian demand estimate, which at 715 kb/d in 2013, has been revised up by 65 kb/d compared to last month's Report, carries an additional premium attributable to extra road transport fuel demand. Other notable 2013 sectorial upgrades include Thai petrochemical demand and extra road transport fuel use in Kazakhstan, South Africa and Libya. Like every coin, however, there are two sides to the story. Notable curtailments have been applied to estimates of 2013 road transport demand in Egypt, with lower industrial oil use in Russia, India and Indonesia.

China

Some very significant upgrades to the recent and baseline (see Non-OECD 2013 Baseline Demand Revisions) data have resulted in an upwardly revised 11.1 mb/d estimate for 2Q15 demand. Not only is this 0.2 mb/d above the prediction cited in last month's Report, it is also 0.6 mb/d higher than demand a year ago as robust gains in the petrochemical and transport sectors supported strong growth in the LPG (including ethane), gasoline and jet/kerosene product sub-categories. Indeed, even long-suffering gasoil/diesel strengthened in 2Q15 as a number of additional government-led infrastructure investments projects came on-stream.



The latest data, also at 11.1 mb/d in June, reflects the same general demand strength as the overall Chinese 2Q15 metric, at least in most of the major oil product categories bar jet/kerosene. Having long highlighted the possibility that the Chinese economy is struggling, June's absolute decline in industrial profits (-0.3% according to the National Bureau of Statistics, NBS) came as little surprise. From an oil demand perspective, however, such weaknesses are unlikely to be wholly negative, potentially dampening growth in some specific product categories, such as jet, while supporting others, such as gasoil, as additional government infrastructure spending and/or lower interest rates provide some short-term support. For example, NBS estimate that the 1Q15 Chinese infrastructure spend rose by roughly 20% y-o-y. Deliberate efforts to curb retail product prices, meanwhile, buttress road transport fuel demand. The Chinese gasoline market, for example, traded at a $1/bbl discount to crude in June, a far cry from the $7/bbl premium seen in Singapore. Economic regulator, NDRC, cut retail product prices, early-July, by approximately $2/bbl for both gasoline and diesel.



The relative Chinese oil demand strength seen in 1H15 is not forecast to hold in 2H15, as we envisage weaker growth across some of the key product categories as economic growth comes under pressure. Forward-looking business sentiment indicators, such as Markit's Manufacturing PMI, have alluded to a 'pessimistic' bias in the data since March 2015, while the recent destruction of roughly one-third of the value of the Chinese stock market also points to cause for concern. Despite such a flagging outlook, the overall forecast for 2015, at 10.9 mb/d, is 0.2 mb/d up on the month earlier prediction, due to a combination of the higher baseline annual series and the recent monthly demand strength, leaving a net annual growth estimate of 0.4 mb/d in 2015. Growth moderates to +0.3 mb/d in 2016,  as the IMF's latest prediction remains for a near 50 basis point deceleration in Chinese GDP growth, to 6.3% from 6.8% in 2015.


Other Non-OECD

Recent Argentinian data has rebounded, with 2Q15 deliveries at an average 780 kb/d posting their first y-o-y gain in just over a year, supported by particular upticks in gasoline and gasoil/diesel demand. Gasoil deliveries rose on additional industrial usage, with the Instituto Nacional de Estadistica y Censos reporting that total industrial output was up, on a y-o-y basis, for the first time in nearly two years in June. Gasoline deliveries, meanwhile, put on an extra 8.3% y-o-y in 2Q15 to 150 kb/d, as the Universidad Torcuato di Tella's consumer confidence index rose to a three-and-a-half year high. For the year as a whole deliveries are expected to average 770 kb/d, a modest 0.6% gain on 2014, with little change envisaged in 2016 as the underlying macroeconomic backdrop remains precarious.





Brazilian demand data surprised in June, up 4.3% over the year earlier to 3.2 mb/d, as sharp upticks in both gasoline and gasoil deliveries fed through and raised total Brazilian demand despite the generally weaker domestic economy. With industrial output, as quoted by the Instituto Brasileiro de Geografia e Estatistica, falling heavily in May (-8.8% y-o-y) and trending lower for over a year, it is hard to see June's additional gasoil demand (+3.2% y-o-y) as anything other than a temporary aberration. Despite June's gain we envisage Brazilian gasoil demand declining once again in 3Q15, as the economy continues to creak, leaving average total deliveries roughly flat for the year as a whole at 3.2 mb/d. Only very modest growth, +0.8% to 3.3 mb/d, is forecast for 2016 on the assumption that economic conditions improve somewhat, albeit modestly, up 0.7% according to the IMF's July World Economic Outlook.



Heavy June rains dampened Indian oil product demand growth, with June's 2.8% y-o-y expansion the weakest pace since the latter stages of 2014. Agricultural demand particularly suffered, but this mid-year weakness is likely to prove as transitory as the weather; we have therefore only modestly curtailed our net 2015 growth forecast of +4.3% to a 3.9 mb/d average in 2015 as a whole. The first half of 2015 has been particularly supportive of Indian jet fuel demand as lower airfares, a consequence of sharply lower crude oil prices, have boosted domestic air passenger numbers by 20% y-o-y. A similar pace of expansion is foreseen in 2016, to 4.1 mb/d, as economic growth is predicted to come in at 7.5% in both years according to the IMF's July World Economic Outlook.



The Russian oil demand growth forecast has been revised up, compared to last month's Report, as recent oil delivery data held up better than previously expected and the IMF revised up its still recessionary macroeconomic projections. The latest Russian June oil demand estimate - at an upwardly revised 3.7 mb/d, 140 kb/d above that cited in last month's Report and roughly unchanged on a year ago - is a far cry above our previously 'bearish' stance on Russia. Industrial oil use appears to have held up better than previously foreseen. Although the economy has undoubtedly contracted, the recent sharp declines in the value of the domestic currency have, in some cases, made Russian industry costs competitive again. The previously ailing Russian steel industry is now reportedly much more cost-competitive in international markets, and is therefore supporting additional industrial oil use through increased activity. Similarly, the May delivery estimate has been revised up by 90 kb/d to 3.5 mb/d, still down by around 130 kb/d on the year earlier.



The IMF's July update of its World Economic Outlook added four-tenths of a percentage point to its 2015 Russian economic growth forecast, to a still contracting -3.4%, and added a further 1.3 percentage points to its 2016 GDP estimate, to +0.2%. This still bleak but notably less bearish economic outlook, coupled with stronger-than-previously-foreseen May-June delivery numbers, has raised the 2015 Russian oil demand forecast to -1.9%, versus -4.2% previously; the 2016 forecast has also been raised to -0.8%, compared to -2.2% before. Despite such relative additions, lower baseline numbers, a consequence of the IEA's annual Energy Statistics of Non-OECD Countries for 2015, curbed the net 2015 Russian oil demand estimate to 3.5 mb/d, only 15 kb/d up on last month's estimate, with a similarly subdued 65 kb/d addition applied to 2016, also to 3.5 mb/d.




Supply

Summary

  • Global oil supply fell by nearly 0.6 mb/d in July to 96.6 mb/d mainly on lower non-OPEC production. OPEC oil output was largely unchanged, as an increase in NGLs offset a slight decline in crude. Despite the monthly decrease, total output stood 2.7 mb/d above a year earlier, of which OPEC crude and NGLs accounted for nearly 60%.
  • OPEC crude oil supply held steady in July at 31.79 mb/d, close to a three-year high. Saudi output eased from an all-time high, offsetting another record-smashing month from Iraq and the UAE and slightly higher Iranian production. Total OPEC production stood 1.3 mb/d above a year ago.
  • A stronger demand outlook and slower non-OPEC growth have raised the 'call on OPEC crude and stock change' for 2016 to 30.8 mb/d, up 1.4 mb/d year-on-year (y-o-y) and a 600 kb/d revision to last month's Report. The 'call' in 4Q15 is expected to rise to 30.6 mb/d, up 650 kb/d from 3Q15.
  • As lower prices and reduced spending take their toll, non-OPEC supply growth is expected to decelerate sharply through the end of the year and decline in 2016 - with US growth hit hardest. Non-OPEC output is forecast to add 1.1 mb/d, to average 58.1 mb/d in 2015 and contract next year by 200 kb/d to 57.9 mb/d. That compares with record growth of 2.4 mb/d in 2014.
  • Non-OPEC oil output declined by almost 0.6 mb/d in July to 58.1 mb/d due to slowing US supply and seasonal North Sea maintenance. Total supplies were nevertheless nearly 1.2 mb/d above a year ago, with the Americas accounting for most of the growth.

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

OPEC crude oil supply

OPEC crude oil output inched 15 kb/d lower during July to 31.79 mb/d - close to a three-year high. Supply from OPEC's top producer Saudi Arabia eased from June's record rate of 10.48 mb/d, offsetting output from Iraq - the group's second in rank - that hit an all-time high and record flows from the UAE. Iranian production also edged up during July, as Tehran and the P5+1 (China, France, Russia, the UK, US and Germany) clinched a historic nuclear accord. Libya, Qatar and Nigeria posted modest month-on-month (m-o-m) declines. OPEC's lofty production put supply 1.3 mb/d above the previous year and about 1.8 mb/d above the group's official 30 mb/d supply target. The group's 'effective' spare capacity stood at 2.22 mb/d in July versus 2.17 mb/d in June, with Saudi Arabia accounting for 87% of the surplus.

With Iraq opening the taps and Saudi pumping hard, OPEC supply has soared by 1.4 mb/d since November when the group's 12 members agreed to preserve market share rather than price. Iraq has ramped up by nearly 800 kb/d since November, while Saudi oil fields during July also produced about 800 kb/d above November levels. Initial soundings suggest that OPEC supply is likely to remain substantially higher than 31 mb/d during 3Q15.



The 'call on OPEC crude and stock change' for 2015 and 2016 has been revised up by 200 kb/d and 600 kb/d, respectively, since last month's Report due to stronger expectations for demand and a further reduction in non-OPEC supply growth. The 'call' in 2016 is estimated at 30.8 mb/d, up 1.4 mb/d y-o-y. The 'call' is expected to rise by 650 kb/d from 3Q15 to reach 30.6 mb/d in the final quarter of 2015.



Iran nuclear deal could pave way to higher output

After nearly two years of negotiations, Iran and the P5+1 struck a landmark nuclear deal on 14 July that could pave the way for Tehran to boost production and exports to world markets. It may take at least four to six months to execute the complex agreement that limits Iran's nuclear work in return for a lifting of sanctions that have cut the country's exports by more than 1 mb/d since 2012. The US Congress and Iranian parliament are now scrutinising the 159-page document.

Timeline for Iran sanctions relief

  • 14 July - Nuclear accord clinched by Iran and P5+1.
  • 19 July - US President Barack Obama sends the deal to Congress for a 60-day review; vows to  veto any attempt to reject it.
  • 20 July - UN Security Council endorses agreement.
  • 17 Sept - Deadline for US Congress to approve or reject deal.
  • By 15 Oct - Tehran to answer questions from International Atomic Energy Agency (IAEA).
  • 15 Dec/early 2016 - IAEA to verify that Iran is in compliance with the deal and issue report on Tehran's research programme. EU, US to lift nuclear-related sanctions (non-nuclear sanctions to remain in place).

While significantly higher production is unlikely before next year, oil held in floating storage - at the highest level since sanctions were tightened in mid-2012 - could start to reach international markets before then. The addition of three VLCCs of condensate during July has lifted the total stored at sea to 46 mb from 40 mb at the end of June. Some 60% of the overall volume stored at sea is condensate.

In terms of production capacity, Iranian oil fields that pumped roughly 2.87 mb/d in July - up 50 kb/d on June - are estimated to be capable of ramping up to 3.4 mb/d to 3.6 mb/d within months of sanctions being removed. Iran's Oil Minister Bijan Zanganeh has said Tehran expects to boost output by 500 kb/d as soon as sanctions are lifted and by 1 mb/d within months.

Since strict financial measures were enforced in mid-2012, Iran's crude exports have fallen from roughly 2.2 mb/d at the start of 2012 to around 1.1 mb/d. China has emerged as Iran's top oil buyer, with India ranking second. South Korea, Japan and Turkey are also regular lifters. 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.

According to preliminary data, imports of Iranian crude inched down to around 1.0 mb/d during July versus 1.03 mb/d the previous month. Lower purchases from China, India and Korea offset higher imports from Japan, Turkey and the UAE. Imports of condensate - ultra-light oil from Iran's South Pars gas project - slipped to about 105 kb/d from roughly 160 kb/d the previous month and well below the 2014 average of 190 kb/d.



Once sanctions are lifted, Iran is expected to seek to raise oil sales swiftly to regular buyers in Asia and try to recapture market share in Europe, which accounted for about 30% of pre-sanctions crude sales. To help shift barrels more quickly post-sanctions, the National Iranian Oil Co (NIOC) may continue to offer competitive pricing and credit terms, as it has under sanctions, industry sources said.

Iran will also strive to reclaim its spot as OPEC's second biggest producer after Saudi Arabia - a post now occupied by neighbouring Iraq. But with Iraq - OPEC's main source of capacity growth - now pumping in excess of 4 mb/d, Tehran will have some catching up to do. Once it regains full access to capital markets, it should - under its own steam - be able to bring in more advanced technology and gradually raise production capacity beyond 3.6 mb/d.

That effort will come at considerable cost. Iran's Industry Minister Mohammad Reza Nematzadeh was quoted as saying it would take around $100 billion to rebuild the country's oil sector. And with the help of foreign cash and cutting-edge technology, Tehran may be able to push capacity back up to the 4 mb/d mark towards the end of the decade. The country's oil fields last pumped near that level in 2008.

Iran is meanwhile hoping to woo some of the same companies - such as France's Total, Royal Dutch Shell, Italy's Eni and Russia's Lukoil - that are already at work in the giant oil fields of southern Iraq. To drum up interest, its new integrated petroleum contract (IPC) will have to offer attractive commercial terms, especially in the environment of low oil prices in which companies are cutting capital expenditure.

European and Asian firms are already positioning for a return, with high-ranking officials from Germany, France, Italy and Japan travelling to Tehran in the days and weeks after the accord was struck. At the end of July, Zanganeh spoke of a "new chapter of cooperation" with Total following a meeting with French Foreign Minister Laurent Fabius. Total, Shell and Eni invested heavily in Iran's oil fields before sanctions.



As for Asian companies, China may also seek to expand its presence in Iran's energy sector. The country's state oil giants - China National Petroleum Corp (CNPC) and Sinopec - have maintained a presence in Iran and are reportedly set to bring on new oil in 4Q15 from the fields of Yadavaran and North Azadegan that border Iraq. US companies, however, might find themselves out of the race while Washington's non-nuclear-related sanctions remain in place.

For its part, Tehran has wasted no time in sketching out a post-sanctions business scenario that would appeal to international investors and revive its ageing oil fields. It hopes by 2020 to secure nearly $200 billion worth of oil and gas projects with foreign partners. The new IPC investment model and 50 oil and gas projects are due to be unveiled at a conference set for 14-16 December in London.

July marked the fifth straight month of double-digit output for Saudi Arabia, although crude supply pulled back to 10.4 mb/d from an upwardly revised 10.48 mb/d in June - a record monthly high. Oil sales to world markets, although still running around the 7 mb/d mark, appeared to be slightly lower in July, according to industry sources.

Riyadh led OPEC's decision late last year to maintain the group's 30 mb/d supply target and says it will not make a unilateral output cut to balance the market. Early soundings suggest Saudi oil fields are likely to pump in excess of 10 mb/d for some time to come in order to keep pace with demand for its oil at home and abroad. Blistering summer heat has raised demand at Saudi power plants and domestic refiners have revved up so the Kingdom may be meeting some of the additional requirements from its domestic storage.

The latest figures submitted to the Joint Organisations Data Initiative (JODI) show that internal consumption is on the rise. Power plants burned about 680 kb/d of crude in May, up 320 kb/d m-o-m. Riyadh's domestic power requirement typically soars during the summer period when the use of air conditioning peaks and crude burned to generate power rose to nearly 900 kb/d in July last year. The latest JODI data also show that Saudi refineries - including the 400 kb/d Yasref plant that opened at the start of 2Q15 - ramped up to a record 2.4 mb/d in May versus 2.2 mb/d in April.



As for the international market, crude oil shipments sank to a five-month low of 6.9 mb/d in May, well down from April's brisk pace of 7.7 mb/d, according to JODI data. Product exports rose to 1.3 mb/d from 950 kb/d in April and accounted for 16% of overall oil sales. Excluding condensates and NGLs, total Saudi oil exports eased to 8.25 mb/d in May from 8.69 mb/d in April.

Neighbouring Kuwait held supply steady m-o-m at 2.74 mb/d, but the ongoing operational dispute over the Neutral Zone it shares with Saudi Arabia has sunk the country's output to the lowest in more than two years. Production from the onshore Wafra and offshore Khafji oil fields in the Neutral Zone has slowed to a trickle from 400 kb/d last September before the row kicked off. Elsewhere in the region, the UAE hit a record rate of 2.91 mb/d during July, while Qatari output dipped by 30 kb/d to 630 kb/d after a rig collapsed in early July at the offshore al-Shaheen field.

Iraq's strong performance continued in July, with output - including from the KRG - rising to an all-time high of 4.18 mb/d. Production in July stood 1 mb/d above a year ago, when the advance of militants from the Islamic State of Iraq and the Levant (ISIL) took its toll on oil operations in the north of the country.

Giant oil fields in the south cranked out record Basra crude exports of 3.06 mb/d, up about 40 kb/d on June. Roughly 2.24 mb/d of the shipments from Iraq's Gulf terminals were Basra Light, with Basra Heavy accounting for the remainder.

Shipments from the north eased 50 kb/d to roughly 520 kb/d due to rising tension between Baghdad and the Kurds over payments and an end-July sabotage attack on the pipeline carrying the crude to the Turkish Mediterranean. Exports resumed on 6 August and Ankara has vowed to beef up security around the line that had been moving more than 600 kb/d of Kurdish and Kirkuk oil to Ceyhan prior to the attack by the Kurdistan Workers Party (PKK).

The KRG has been routing most of that oil into independent exports and said it cut its transfer of crude to the central government's State Oil Marketing Organisation (SOMO) by half to roughly 70 kb/d in July. The KRG agreed in December to export 550 kb/d via SOMO in return for the restoration of budget payments from Baghdad. The bulk of July's shipments were from fields under the KRG's control. It said Iraq's North Oil Co in Kirkuk contributed only about 130 kb/d. The semi-autonomous northern region has meanwhile vowed to pay part of its revenue from independent oil sales to producers from September. International oil companies operating its oil fields have not received revenue from exports since late last year, although they receive some cash for domestic sales.

Supply from Libya dipped to 390 kb/d in July as the country's oil fields continued to be plagued by security issues and technical hitches. Production had edged up to 430 kb/d in early July and further increases were anticipated after state National Oil Corp (NOC) lifted force majeure at its 200 kb/d Ras Lanuf terminal. But guards that protect the strategic export outlet have reportedly refused to allow tankers to load.

Negotiations are continuing 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. The major fields in the southwest have been closed since December due to a strike by security guards demanding more jobs.

Output in the North African producer had climbed to 600 kb/d at the start of April- the highest so far this year, but still far below the 1.6 mb/d produced before the 2011 civil war that toppled Muammar Gaddafi. A protracted 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 vital oil fields and terminals. The United Nations is attempting to resolve the conflict.

Loading disruptions trimmed crude output in Nigeria by 20 kb/d m-o-m to 1.77 mb/d. But President Muhammadu Buhari is moving swiftly to make a clean sweep of the oil sector. In early August he appointed a new head of the Nigerian National Petroleum Corp - Emmanuel Ibe Kachikwu, a former ExxonMobil executive - who promptly dismissed the company's top brass. Buhari has vowed to stamp out corruption in the country's oil industry, which earns roughly 70% of the government's revenue.

Elsewhere in Africa, Angolan supplies inched 20 kb/d higher m-o-m to 1.8 mb/d in July. France's Total brought on an extra 20 kb/d from Block 17, which will help boost output from the deep offshore Dalia complex to around 200 kb/d. Production in Algeria was steady at 1.1 mb/d. Two new oil fields came on line in early August - the 20 kb/d Bir Sebaa and the 12 kb/d Bir Msana - which will help stem declines.


Non-OPEC overview

Lower oil prices and sharp spending cuts are expected to slow non-OPEC supply dramatically through the end of this year and swing it into decline in 2016 - the first contraction since 2008. Majors and independent oil producers alike have embarked on a new round of budget cuts, dimming hopes for a significant uptick in activity over the months to come. In all, non-OPEC supply is forecast to average 58.1 mb/d in 2015 and 57.9 mb/d in 2016. After record growth of 2.4 mb/d in 2014, the non-OPEC supply expansion slows to 1.1 mb/d in 2015 and is projected to decline by 0.2 mb/d in 2016. US growth rates are expected to fall the most. Although the latest US oil rig count readings from Baker Hughes through end-July showed an uptick in drilling for the first time since last October, the recent plunge in oil prices could derail earlier plans for increased activity.



Some producers have meanwhile opted for a very different response to the lower oil price environment- raising output to offset reduced revenues due to declining prices. Viet Nam is a case in point, as the country's oil ministry recently lifted the 2015 oil output target for PetroVietnam by 1 million mt in order to help offset the impact of lower prices on the country's budget and economic growth. Improved efficiencies through better well performance and cost control could also prop up output rates, as oil companies tighten their belts during the downturn. US LTO producers in particular have been reporting steep productivity increases and impressive reductions in operating costs. But while some producers might be successful in lifting output in the short-run, we expect the majority will struggle to sustain higher rates over longer periods due to steep spending curbs.

With more data becoming available, June production has been revised up by 400 kb/d since last month's Report. After a bumper month in May, North Sea producers posted a second month of strong growth in June, up by more than 300 kb/d from a year earlier, on improved field reliability, lower maintenance and as new projects - commissioned during the period of sustained high oil prices - ramped up. The high output rates led to an armada of unsold North Sea cargoes over June and July, despite record-high global refinery demand. Seasonal maintenance likely curbed output from July onwards, as indicated by loading schedules for key North Sea grades. Surging oil production in China led by new offshore field start-ups by CNOOC also underpinned the higher June levels. And US output was adjusted slightly higher on surprisingly robust natural gas liquids output, despite the slowdown in oil and gas drilling and weak fractionation spreads.

The most recent comprehensive monthly data made available for the US, however, shows crude and condensate output slipping by nearly 200 kb/d in May, in contrast to preliminary weekly data, which had shown an 80 kb/d increase. The drop was in line with our earlier estimate, however, and did not result in any major revision to our forecast which shows US output easing through September. As the Hurricane season draws to a close in October, we expect US output to stabilise as new offshore projects ramp up - offsetting declines in LTO from lower drilling and well completion rates. Recent Canadian April data also showed steeper drops than those reported in preliminary data, in particular for Albertan syncrude output.



Majors take knife to spending plans

Tumbling oil prices have forced oil majors to axe capital expenditure (capex) budgets, with several reducing head count and/or cutting output targets. Cutbacks across the industry total $180 billion so far this year and are the deepest since the oil crash of 1986, according to Rystad Energy. Further cuts of 5% to 15% are expected in 2016 following a 21% cut this year, said the Oslo-based consultants.

In its latest quarterly earnings update, Exxon Mobil reported its lowest profit since 2009 as spending cuts failed to keep up with the oil price drop. Exxon was amongst the first to tighten its belt after crude prices started their downward spiral. After cutting the budget by 9.3% in 2014, this year's reduction looks on track to exceed the original 12% target. While Exxon maintained its latest capex guidance of $34 billion for 2015, it said it would cut spending on major projects like floating crude platforms and gas-export terminals by 20% to $6.746 billion during the quarter. The company nevertheless reiterated its goal of raising production to 4.3 mboe/d in 2017 from 3.979 mboe/d in 2Q15.

Chevron's profit dropped to $571 million, the lowest in more than 12 years, from $5.665 billion a year earlier. Its oil and gas production unit meanwhile posted a loss of $2.219 billion (offsetting healthy downstream returns) as the company recorded a $1.96 billion write-down on assets and another $670 million charge for taxes and projects suspended due to weaker economics. Chevron said the latest oil price slump convinced it to lower its long-term outlook for crude oil prices. As a result, it plans to cut spending by $3 billion mainly by reducing operating expenditure (opex) and laying off 1 500 staff in the US.

Royal Dutch Shell pledged further measures to cut costs and rein in spending. In response to what it said could be "a prolonged downturn" which "could last for several years" it laid out plans to cut another $3 billion from capital spending, reduce its operating costs by 10% (or $4 billion) and cut its global headcount by 6 500. Of the more than 7% reduction to its work force this year, roughly one quarter is related to the company's cost reduction and efficiency efforts. Shell plans further cuts and improvements in 2016. Its downstream earnings jumped to $2.96 billion from $1.35 billion a year earlier.

BP said its 2015 capex would come in less than its previous $20 billion guidance due to cost deflation and project deferrals. The company had initially planned to spend as much as $24-26 billion. BP swung to a loss in 2Q15 after taking a $10 billion pre-tax charge related to a settlement of most of its remaining Gulf of Mexico oil spill liabilities. Its upstream earnings dropped from $4.7 billion a year ago to $0.5 billion. Exploration write offs contributed to weaker-than-expected upstream results. The UK-based company nevertheless announced it would spend $1 billion on lifting output and extending the life of its ETAP oil fields in the North Sea.

French major Total's earnings are already seeing the benefits of aggressive cost reductions and company-wide staff cuts. The company's earnings beat analysts' expectations, netting $2.797 billion - only 8% below a year earlier despite the halving of oil prices. The company's bottom-line was helped by an impressive increase to its 2Q15 downstream unit earnings, with a threefold annual increase to its net operating income from the segment to $1.349 billion. "The excellent downstream results highlight the resilience of our integrated model," said CEO Patrick Pouyanné. Total reported its upstream opex had been cut by 20% in 1H15, and is on track to exceed its $1.2 billion opex savings target this year. The company expects its capex to fall below $20 billion from 2017. While it has seen a significant drop in rig and seismic costs, it is waiting for platform construction costs to fall further before moving ahead with new projects.

Statoil cut its spending forecast for this year to $17.5 billion from an earlier $18 billion and will reduce spending further in 2016. The Norwegian company said it expected efficiencies worth $1.7 billion to pre-tax cash flow from 2016. It said North Sea opex has fallen faster than expected, vindicating its earlier decision to delay final investment decisions on some projects to preserve flexibility of $5-7 billion spending.

In contrast, Repsol announced it would maintain its capital spending plans at around $4.5 billion this year, and aims to keep spending flat in 2016. The Spanish major, which spent $13 billion acquiring Canadian oil producer Talisman earlier this year, said the focus going forward would be on capital discipline and cost efficiency rather than growth.

OECD

North America

US - July Alaska actual, others estimated: Official monthly oil statistics for the US for May contrast with preliminary weekly statistics and confirm our earlier estimates of falling US production. The latest data update from the US Energy Information Administration (EIA) show total US crude and condensate output falling 180 kb/d in May, to 9.5 mb/d on average, while natural gas liquids output slipped by 65 kb/d, to 3.2 mb/d. While many had anticipated declines in LTO output, most of the monthly decline stemmed from offshore production with BP's Thunder Horse platform, amongst others, undergoing maintenance. Texas output saw smaller declines of roughly 40 kb/d, while Alaskan production dipped by 35 kb/d.

While the weekly statistics suggest further increases in June, the latest data series also shows output easing in July. We forecast a 280 kb/d monthly decline in US crude production. The EIA's Drilling Productivity Report estimates output declines in the seven most prolific shale plays accelerating to 80 kb/d in July and 89 kb/d in August and 93 kb/d in September. In the absence of any hurricane outages, US Gulf of Mexico production will likely be higher than our base case scenario, which includes some downtime adjustments for August, September and October.



Ahead of the latest oil rout, US operators had showed signs of reversing the slide in the US oil rig count, as measured by Baker Hughes. A total of 36 rigs were added over July, 17 of which were in the Permian Basin. In contrast, rigs in the Eagle Ford play dropped another 5, to 78 over July, while the Williston Basin, where the Bakken formation is located, lost a further 3 rigs, to a total of 71. Despite the recent additions, at 664 active rigs at end-July, total US drilling activity was nevertheless down steeply from the October 2014 peak with 59% less rigs operating at end-July.



Low oil prices force US producers to re-think priorities

A prolonged spell of lower prices has forced US independent oil producers to rethink their output strategies and spending plans. Better-than-expected drilling efficiencies and significant declines in the cost of services have allowed companies to raise output despite the lower capital spend. But as lower prices persist, the group's impressive output gains could come to an abrupt halt as the debt-laden sector struggles to cover capex and dividends from operating cash flow.

In spite of spending cuts, ConocoPhillips, the largest US independent producer, still believes it can achieve a production target of 1.7 mboe/d in 2017, up from 1.595 mboe/d in 2Q15. However, it will prioritise dividends over production growth and will cut its deepwater exploration spending and terminating the deal for a drilling ship in the Gulf of Mexico. The company's operating cash flow was not enough to cover capex and dividends, raising its debt by $2.4 billion to $24.9 billion.

Anadarko, another large US independent producer, has maintained its no-growth strategy through 2015. The company has been taking a cautious stance and has "no interest in adding to an oversupplied market with production that doesn't give us a good rate of return". Anadarko targets output of around 820 kb/d for full year 2015, roughly on par with 2014.

EOG has cut capital spending for 2015 by a further $200 million, and echoed Anadarko's view stating that it does "not want to grow production until we see the oil market is firmly rebalancing". The company announced it had made further improvements in well economics, and said it is focussing on capital efficiency to improve returns and quickly transition itself to be successful in a lower commodity price environment.

Bucking the trend, Pioneer announced plans to ramp up its drilling program and confirmed it had put two more rigs to work in the Spraberry/Wolfcamp play. It said it would add a total of 12 by the end of the year if the outlook for prices "remains constructive".

Whiting Petroleum cut its 2015 budget to $2.15 billion in July, only two weeks after raising it to $2.3 billion, following the latest slump in oil prices. The company, one of North Dakota's largest producers, plans to run eight drilling rigs, three fewer than it had previously planned. For 2016, the company cut capex and discretionary cash flow to be roughly $1 billion. The capex cuts will result in output dropping from 169 kboe/d in 2Q15 to 147 kboe/d next year.

Marathon, Continental and Apache announced they had achieved higher-than-expected well production rates and in some cases lower capital spending than budgeted. While Continental hiked its 2015 output target on improved well efficiency, the company announced it would drop its Bakken operated rig count by 20% by year-end if low commodity prices persist. Lastly, Apache raised its output target for 2015 as a result of better-than-expected output so far this year, and now sees a 1% - 2% increase in North American production for full year 2015, despite a 60% reduction in its capital spending compared with 2014.

Canada - Alberta, Newfoundland, Saskatchewan May actual, others estimated: Partial data for Canada for May confirm earlier estimates of a significant output drop, extending April's steep decline. Preliminary estimates peg output at just over 4 mb/d, 140 kb/d lower than in April and 50 kb/d below the same month a year earlier. Final April data show that month's drop already 200 kb/d below earlier estimates as maintenance reductions to syncrude output were more significant than first assumed. Mined synthetic crude oil (SCO) output averaged only 815 kb/d, compared with 1070 kb/d in March, as output at Syncrude's Mildred Lake and Shell's Scottford upgraders dropped by 120 kb/d and 110 kb/d, respectively - exceeding the decline reported in data submitted by the Canadian administration to our Monthly Oil Statistics by 150 kb/d.

In May, synthetic crude output likely rebounded while wildfires curbed Albertan crude and bitumen output by nearly 90 kb/d on average, to 1.78 mb/d in total. Scheduled maintenance at the offshore Terra Nova and Hibernia fields in Newfoundland further cut output. An oil spill from a Nexen pipeline in northern Alberta led the company to shut in production at its Kinosis/Long Lake project. Nexen, a subsidiary of China National Offshore Oil Corp. Ltd. (CNOOC), started the first 20 kb/d phase of the Long Lake project in 2014. Plans to expand the plant's output to its 70 kb/d regulatory approved capacity were slowed earlier this year, with Nexen announcing company layoffs following the decline in oil prices.



Canadian oil output is forecast to average 4.3 mb/d in 2015, relatively unchanged from 2014, before expanding by 160 kb/d in 2016 as new projects ramp up production. Amongst others, Cenovus Energy plans to add 100 kb/d oil sands output next year as it expands its Christina Lake (Phase F) and Foster Creek (Phase G) facilities. Canadian Natural Resources Limited is also on track to expand output at its Horizon project towards the end of 2016 and 2017.

Mexico - June actual, July preliminary:  Mexican oil output continued its recovery in July, following a deadly explosion at an offshore installation that has curtailed output since April. Total production inched up another 55 kb/d to 2.6 mb/d after recovering 20 kb/d a month earlier. As supplies rebounded, the year-on-year contraction eased to 120 kb/d compared with an average of 255 kb/d through 1H2015.

After a disappointing Round One of Mexico's oil sector opening to foreign investments, the National Hydrocarbons Commission postponed its auction for deep-water blocks in the Gulf of Mexico to the end of September from July to improve the terms and generate more interest. The auction is the fourth, and most coveted package of blocks under the country's licensing round that kicked off in December 2014. The first round, which included 14 shallow water exploration blocks, resulted in only two awards in July, falling short of the Governments targets. Bidders had to reach or exceed two targets set by the Finance ministry, revealed only after the bids were entered. The first target was a minimum state stake in operational profit. For most blocks that target was 40%, though for others it was set at 25%. The second target was the "increment in the minimum work program" but that was set at zero on all the blocks. Mexican start-up Sierra Oil and Gas in a consortium with Talos Energy and Premier Oil won both the blocks that were awarded. Bids from a consortium of Murphy Oil and Petronas for two other blocks were rejected as they fell 5% short of the target set by the government. A second auction, including five shallow water development contracts will be awarded on 30 September and a third for 26 onshore blocks on 15 December.

North Sea

Norway - May actual, June preliminary: Norway's total oil output exceeded expectations again in June. At 1.95 mb/d, total output was nearly 50 kb/d higher than a month earlier and almost 10% above the same month a year ago when significant maintenance work and unscheduled outages curtailed output. NGLs production accounted for roughly 350 kb/d of total output.

Statoil announced it had started production at its Gullfaks South project at end-July, only three years after the project for improved oil recovery was approved. The satellite installation, part of Statoil's fast track project, is expected to add 65 mb of output to the mature field, which was first brought on line in 1998. The company also announced it had drilled the first production well at its Gina Krog field in July.



UK - May actual, June preliminary: UK oil producers posted another month of strong output in May, recording the highest monthly average since February 2012. At 1085 kb/d, total output stood 115 kb/d above a year earlier on improved efficiencies and due to production from new fields such as Nexen's Golden Eagle field and the BP-operated Kinnoull field, both which feed into the Forties pipeline system. While preliminary data indicate UK output slipped in June by around 110 kb/d as summer field maintenance picked up, output remained 105 kb/d up on the year prior.

North Sea loading schedules for crudes underpinning the Brent benchmark suggest North Sea output slipped further in July and August as field maintenance intensified, before rebounding sharply in September. The Brent benchmark is based on four crude streams, including Brent, Forties, Oseberg and Ekofisk (BFOE). Initial schedules show that loadings were to rise to 980 kb/d in September, from a downwardly revised 870 kb/d in August and 840 kb/d and 910 kb/d in June and July, respectively. The biggest increase in September was to come from the Forties stream, which was set to lift loadings by 110 kb/d to 460 kb/d.



With higher output from both Norway and UK offshore fields in the first half of the year, North Sea oil production looks on track to post an annual increase of 65 kb/ d in 2015, to nearly 3 mb/d. Offshore output rose already in 2014, by 35 kb/d, after higher prices prompted increased investments reversing years of field decline. If confirmed, 2015 would mark the first time with two consecutive years of North Sea output growth since 1999-2000. The latest oil rout will likely contribute to another production slump in 2016, as companies curtail spending and decline rates accelerate once again. Total North Sea output is forecast 150 kb/d lower in 2016, of which Norway and the UK account for roughly equal shares.

Non-OECD

Latin America

Brazil - June actual: After posting a small monthly increase in May, Brazilian oil supplies nudged down in June. A 20 kb/d monthly increase in Santos Basin output was not enough to offset declines in the Campos Basin, taking total supplies down by 12 kb/d compared with the month earlier. At 2.50 mb/d, total oil output nevertheless stood some 150 kb/d above a year earlier.



Growth remains firmly rooted in the Santos Basin, where the massive Lula field continues to ramp up. In June, output at the massive field averaged nearly 300 kb/d, contributing 150 kb/d to annual gains. The second largest contributor to growth was the Sapinhoá field, which added 100 kb/d from a year earlier, to reach 200 kb/d. In the Campos Basin, an increase of 115 kb/d in Roncador output was not enough of offset declines at Marlim Sul and smaller drops at a number of other fields. Total basin output was down 100 kb/d from a year earlier. Lula output will get a further boost in coming months following the start-up of the Cidade de Itaguai FPSO at the end of July - ahead of earlier expectations. The 150 kb/d vessel, which is moored at the Iracema Norte area of the Lula field, will ramp up towards its 150 kb/d capacity through early 2017. Another five FPSOs will be added before the end of 2016. This will offset declines at more mature fields and lift output to 2.65 mb/d in 2016 on average, up from 2.52 mb/d expected this year.

Asia

China - June actual: Chinese crude production surged by nearly 140 kb/d in June to a record-high above 4.4 mb/d. While no field level data was available at the time of writing, increases likely stemmed from offshore fields operated by China National Offshore Oil Company (CNOOC). In its 2015 Business Strategy and Development plan published in February, CNOOC announced it planned to increase production capacity by 120 kb/d this year with the start-up of seven projects. Following an announcement on 30 June that the 30 kb/d Bozhang field had started operations, in July the company reported first oil from its Luda 10-1 project in the Bay of Bohai. Earlier in the year, the Jinzhou 9-3 oilfield in North Liaodong Bay in Bohai was the first project to be brought on stream in February, followed by the shallow-water Kenli 10-1 oilfield, which lies to the south of Bohai, in April and its Dongfang1-1 project ahead of schedule around mid-June. Two more projects, Weizhou 12-2 oil field joint development and Weizhou 11-4N oil field Phase II, both in Western South China Sea, are scheduled to commence production in second half 2015. These two projects, together with the other five brought on stream earlier, would enable CNOOC to achieve its 2015 net production target of around 475 to 495 mboe.



Viet Nam - July actual: After a temporary dip in May, Vietnamese oil production rebounded sharply over June and July, registering annual increases of roughly 50 kb/d for both months. While Viet Nam has increased its production by 11% over the first half of 2015, to 8.38 million mt, or roughly 345 kb/d, the decline in global oil prices has seen revenues contributed by crude oil sales to the national budget curtailed. In an attempt to make up for the shortfall and amid concerns that lower oil price would impact negatively on economic growth, Viet Nam recently revised up its crude oil output target for 2015. The country's oil ministry announced in early July that the national oil and gas group PetroVietnam would have to produce an extra 1 million mt of crude in 2015, raising the full-year target to 15.74 million mt from 14.74 million mt a year earlier to achieve a target of annual economic growth of 6.2%.

In Indonesia, ExxonMobil cut production at its newly started Banyu Urip project in the Cepu block in July to facilitate the installation of new production units allowing it to ramp up to capacity. The field was reportedly producing around 85 kb/d in early July and the shutdown was expected to temporarily reduce output by about 20 kb/d. According to upstream regulator SKK Migas, production may already reach 149 kb/d in August. Exxon, in its latest quarterly earnings report, raised peak output target from 165 kb/d previously to 200 kb/d. Indonesia targets crude production to average 825 kb/d in 2015.

Former Soviet Union

Russia - June actual, July provisional: Crude and condensate production in Russia showed a monthly drop of around 75 kb/d in July, to 10.65 mb/d as maintenance at Gazprom's Surgut gas condensate plant curbed output. Supplies were nevertheless 250 kb/d higher than a year earlier, with small independent producers and PSAs, as well as Gasprom, Bashneft and Novatek providing the bulk of the additions. Russia's number one and two producers - Rosneft and Lukoil - meanwhile saw annual output declines of 50 kb/d and 20 kb/d, respectively.

In its latest earnings report, Bashneft announced that it had increased output 10.4% y-o-y, to 390 kb/d in 2Q15, confirming the company as the fastest-growing oil producer. Novatek meanwhile confirmed its target to double liquids output to 8.6 million mt in 2015 while lifting gas output 27% to 68.1 bcm, as outlined in its 2011-2020 strategy presented to investors at the end of 2011. The company has brought on several JV projects in 2015 and plans to start up its 75 kb/d Yarudeiskoye field before the end of this year.

Despite the success of Novatek, Bashneft and other independent producers, Russia's output is expected to decline later this year and next. Including gas plant liquids output, total Russian production is seen falling from an average 10.99 mb/d in 2015 to 10.85 mb/d in 2016, as lower prices and sanctions takes their toll on output growth.


OECD stocks

Summary

  • The supply overhang has persisted and reached a staggering 3.0 mb/d in 2Q15, the widest gap in 17 years, as ever-higher flows of oil hit world markets. The pace of stock builds should ease over 2H15 as non-OPEC supply growth is expected to slow and projected demand growth remain above trend. Of the 273 mb global inventory overhang in 2Q15, 160 mb can be accounted for; OECD stocks climbed by 102 mb, Chinese inventories added 50 mb and Iranian floating storage rose by 8 mb.
  • After posting a 9.9 mb counter-seasonal build, OECD inventories hit an all-time high of 2 916 mb in June. Consequently, inventories' surplus to average levels rose to a record 210 mb from 200 mb one month earlier.
  • OECD refined product inventories rose by a steep 14.0 mb as the seasonal restocking of 'other products' continued apace. By end-June, refined products covered 31.3 mb days of forward demand, 0.2 days above end-May. Middle distillates rose counter-seasonally by 1.2 mb and by end-month stood at a 25 mb surplus to the five-year average.
  • Preliminary data point to OECD stocks adding a further 21.2 mb in July after refined products continued to build along seasonal lines, NGLs and other feedstocks rose steeply and crude oil drew by a weaker-than-normal 5.0 mb.
  • China's stockpiling of crude may continue for some time to come. Beijing has built up inventories over recent months following the commissioning of a further tranche of its Strategic Petroleum Reserve capacity. There could be an additional two SPR sites ready to take oil by the end of the year with combined capacity of 50 mb.

Global overview

Rising volumes of oil on world markets widened the gap between supply and demand in 2Q15 to an exceptional 3.0 mb/d, the highest since 1998. The global inventory overhang grew to a notional 273 mb, of which approximately 160 mb can currently be accounted for. OECD stocks rose by 102 mb, Chinese inventories added 50 mb while volumes of Iranian crude held on tankers increased by 8 mb. Going forward, our forecast suggests the pace of stock builds should ease over the second half of 2015 as non-OPEC supply growth gradually slows and demand remains above trend.

While it has been suggested that inventories are approaching tank tops, pricing signals indicate this is not the case. Benchmark crude prices for prompt delivery weakened significantly over July, but the back of the forward curves moved in tandem with the front so the contango structure - where prompt oil is cheaper than future months - remained relatively steady. For example, by late July, the spread between M1-M3 contracts for ICE Brent widened slightly to $1.34/bbl from $1.08/bbl one month earlier. If storage was brimming, the prompt price would weaken faster than at the back of the curve to a level which would encourage storing oil on tankers at sea - a so-called 'supercontango'. The last 'supercontango' occurred over 2008 -2010, during which the spread in the M1-M3 ICE Brent contract exceeded $8 /bbl. In contrast, the M1-M3 contango in the ICE gasoil contract has widened over the past month to stand at $6.50 /bbl at the time of writing. This is not necessarily a signal that inventories are full. Instead, it may reflect that inventories in the ARA region, which includes Rotterdam - the delivery point of the contract, are at very high levels. Indeed, in July, it was reported that volumes stored in independent storage in Northwest Europe had reached a multi-year high.

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

After posting a 9.9 mb counter-seasonal build, OECD inventories hit a record 2 916 mb in June. As a result, inventories' surplus to average levels increased to a record 210 mb from 200 mb one month earlier.



Three factors caused inventories to defy seasonal patterns. Firstly, as in previous years, the June stock build was driven by the replenishment of 'other products' centred in the US that are composed mostly of ethane and propane - closely linked to natural gas production. As US natural gas output has posted significant year-on-year growth over the past few years, stocks have grown steadily outside of the peak winter space-heating demand season. The build-up in June this year was even steeper than average. By end-month, OECD 'other products' stood 36.7 mb and 35.5 mb above average and last year, respectively.

Secondly, crude oil stocks drew by 4.3 mb, less than half the seasonal draw over the past five years. Despite inventories in the OECD Americas falling seasonally as refiners there continued to ramp up throughput, stocks elsewhere in the OECD remained on an upward path. European refinery intake stood 1 mb/d above a year earlier, but crude inventories steadied, suggesting that regional crude supply remained high. Meanwhile, stocks rose counter-seasonally by 1.8 mb in Asia Oceania after Japanese holdings added a steep 4.0 mb with refinery activity slowing as maintenance and run cuts took hold.

Finally, middle distillates increased by 1.2 mb, counter-seasonal to the 4.3 mb average draw for the month. As discussed in last month's Report, middle distillates stocks are rising as OECD refiners boost gasoline output. Nonetheless, OECD gasoline holdings are broadly following seasonal trends and dropped by 1.6 mb in June, marking the fourth consecutive monthly draw. Nonetheless, by end-month, OECD gasoline holdings remained above last year and average levels in both absolute and days of forward cover terms.



All told, refined products added 14.0 mb in June, more than twice the seasonal build for the month. Accordingly, the surplus of inventories versus average levels widened to 56 mb from 49 mb one month earlier. Even when discounting the overhang of 'other products' on the basis that they have limited use and largely bypass the refinery system, refined product stocks stood more than 19 mb above average. The only product category in deficit to average levels is fuel oil, which now has limited use in the OECD due to recently-introduced stricter bunker fuel regulations in Northwest Europe and North America. At end-June, refined product stocks covered 31.3 days of forward demand, 0.2 days above end-May.



Upon the receipt of more complete data, OECD inventories in May were revised up by a considerable 30.3 mb with the net-effect being that the 38.0 mb build presented in last month's Report is now seen considerably steeper at 64.2 mb, the highest for 12 months. OECD Americas (predominantly the US) accounted for broadly half of the revision with all oil categories except 'other products' now seen higher. European inventories were adjusted up by 6.4 mb on a 8.5 mb upward revision to Germany which more-than-offset downward adjustments to Italy and the UK. Likewise, OECD Asia Oceania's holding were revised up by 6.0 mb

Preliminary data for July suggest that OECD inventories have remained on an upward trajectory in July and added 21.2 mb over the month with all OECD regions posting builds. Although refined products added 20.8 mb, this was weaker than the 28.9 mb average build for the month as fuel oil (-3.0 mb) and motor gasoline (-2.8 mb) drew relatively steeply. Crude oil fell by a weak 5.0 mb as European stocks built counter-seasonally while NGLs and other feedstocks added a steep 5.3 mb after builds in the Americas and Asia Oceania.

Recent OECD industry stock changes

OECD Americas

Commercial inventories in OECD Americas rose by a steep 15.8 mb in June, nearly double the five-year average build for the month. This saw stocks end the month a record 179 mb above average and 163 mb higher than one year earlier. Refined products rose by a steep 19.9 mb as the seasonal restocking of 'other products' continued apace. Propane accounts for the majority of this category and inventories have risen in tandem with surging US natural gas production and despite US propane exports hitting a record 500 kb/d in June.

Stocks were lifted further by middle distillates holdings, which rose by 7.4 mb, steeper than the 0.4 mb average build for the month. In contrast, motor gasoline inventories drew counter-seasonally by 1.7 mb. Although gasoline stocks stand above average and last year's level on an absolute basis, the opposite holds on a days-of-forward-demand basis due to stronger regional motor gasoline demand. All told, regional refined products holdings covered 30.4 days of forward demand at end-June, 0.9 days above one month earlier. Meanwhile, regional crude inventories adhered to seasonal trends and slipped by 6.0 mb as refinery throughputs continued to ramp up but nonetheless remained 108 mb above average.



Preliminary weekly data from the US Energy Information Administration suggest that US commercial inventories followed seasonal trends and rose by 10.1 mb in July as an 18.8 mb increase in refined products more-than-offset a 10.3 mb fall in crude oil. The decrease in crude oil holdings was centred on the Gulf Coast (PADD 3, -6.3 mb m-o-m). In contrast, stocks in the midcontinent (PADD 2) only inched down by 0.7 mb after they were buttressed by a rebound in imports from Canada which were disrupted by wildfires the previous month. Moreover, NYMEX WTI was pressured downwards after levels at the Cushing, Oklahoma storage hub remained stubbornly high on the rise in imports. By end-July, they stood at about 57.2 mb, more than 39 mb above one year earlier.



Stocks of refined products rose for the fifth consecutive month as the seasonal replenishment of propane inventories continued at a faster-than-average pace. Middle distillates also added a steep 9.4 mb, which saw their surplus to average levels widen to 12 mb. In contrast, motor gasoline inventories slipped counter-seasonally by 0.7 mb. The draw was concentrated on the Atlantic Coast (PADD 1, -0.4 mb) and the Rocky Mountains (PADD 4, -0.6 mb) while stocks on the Gulf Coast rose by 1.8 mb. Following the closure of a number of PADD 1 refineries over recent years, the region has become increasingly gasoline short, which has seen it import increasing volumes from PADD 3. Over recent months, extra volumes have been required which have had to be sourced from outside the US due to prohibitively high freight rates and little spare pipeline capacity.


OECD Europe

European commercial inventories slipped by 3.0 mb in June after crude inventories remained remarkably stable considering that refinery throughputs stood more than 1 mb/d higher than one year earlier. In contrast, and despite the higher runs, refined products drew seasonally by 3.2 mb to cover 38.4 days of forward demand at end-month, 0.6 days below end-May. Healthy margins on the back of high gasoline cracks stimulated refiners to run harder than usual. Reports suggested that the extra gasoline produced was exported to markets including the US Atlantic Coast and West Africa. This is confirmed by inventory data as gasoline holdings inched down by 0.1 mb. A surprising 5.3 mb draw in middle distillate holdings appears counter-intuitive and open to subsequent revision given that the region remains awash with middle distillates as refinery output remains high, demand remains on a par with one year earlier and the region has been a target for US and Russian imports. The only product category to post a build was fuel oil (+2.6 mb), which rose as trade to Asia dried up in response to surging inventories in Singapore.

Recent data suggest that refined products held in independent storage in Northwest Europe remain at close to record levels after recent builds. Meanwhile, data from Euroilstock suggest that inventories in EU15+Norway rebounded counter-seasonally by 4.4 mb over July. Inventories were propelled upwards by crude oil that defied seasonal trends and added 4.8 mb despite throughputs rising on the month. Refined products inched down by 0.4 mb with all product categories posting draws except middle distillates (+1.9 mb).

OECD Asia Oceania

Industry inventories in OECD Asia Oceania fell by a broadly seasonal 2.9 mb after a 2.7 mb draw in refined products and combined a 1.9 mb drop in NGLs and other feedstocks more-than-offset a 1.8 mb rise in crude oil. The build in crude stocks was centred in Japan where stocks added a sharp 4.0 mb as refiners cut runs amid shrinking margins and seasonal maintenance. Overall, regional refinery throughputs fell by 360 kb/d with simple refiners in particular cutting runs after margins turned negative. Consequently, fuel oil production fell and inventories dropped by a relatively steep 1.7 mb. Meanwhile, middle distillates and 'other products' posted draws of 0.8 mb and 0.5 mb, respectively. The only category to build was gasoline, which added a slim 0.2  mb. All told, regional refined product inventories covered 21.2 days of forward demand at end-June, 0.6 days below end-May.

Weekly data from the Petroleum Association of Japan (PAJ) suggest that Japanese commercial inventories rose seasonally by 6.7 mb in July. As Japanese refinery runs rebounded by nearly 450 kb/d, product holdings increased by 2.5 mb as middle distillates and 'other products' added 2.8 mb, respectively. On the other hand, gasoline stocks dropped seasonally by 0.6 mb while fuel oil stocks fell by a further 1.3 mb. Despite the increase in refinery activity, crude oil inched up by 0.5 mb likely on increased imports, while NGLs and other feedstocks soared counter-seasonally by 3.7 mb.

Recent developments in Singapore and China stocks

Data from China Oil, Gas and Petrochemicals (China OGP) indicate that during June Chinese commercial crude inventories fell by an equivalent 5.1 mb (data are reported in terms of percentage stock change). However, these stock changes do not include China's SPR. During June, as crude imports hit their second highest-ever monthly level, the surplus between crude supply (domestic production plus net imports) and refinery runs signalled that unreported crude stocks built by 38 mb. Moreover, initial indications are that crude supply has continued to run ahead of demand in July with stocks potentially rising by a further 15 mb. Much of this extra oil was likely destined for a newly-completed SPR site at Huangdao, which reportedly opened in June with 19 mb of working capacity. Over the second half of 2015, two new SPR sites located at Huizhou and Jinzhou with a combined capacity of over 50 mb could be commissioned. Additionally, an 8 mb commercial facility located in Hainan is due to commence filling before end-August.

In June, OGP data point to commercial product stocks increasing by a combined 6.4 mb as refinery throughputs ramped up to a record 10.5 mb/d. All product categories built, notably gasoil added an equivalent 4.6 mb amid reports of sluggish domestic demand and as exports hit a new record. Gasoline stocks rose by 1.3 mb, likely tempered by healthy consumption, and kerosene holdings increased by 1.2 mb.



Data from International Enterprise point to on-land refined product inventories in Singapore surging by 7 mb in July. Most of this build came in the third week of the month when both middle distillates and fuel oil holdings soared upon the arrival of a flotilla of cargoes. By end-month, middle distillates, fuel oil and gasoline stood 3.6 mb, 2.5 mb and 1.0 mb above one month earlier.


Prices

Summary

  • Crude oil oversupply and a strong US dollar weighed heavily on benchmark crude prices, which fell sharply during July and into early August. By early-August, prompt month futures prices had dropped by around 25% from end-June levels. At the time of writing ICE Brent was trading around $49/bbl while NYMEX WTI was at $43.30/bbl.
  • While oversupply weighed heavy on the front of futures curves, the 14 July agreement over Iran's nuclear programme had a more marked impact on the back of the curve. By late-July, the contango structure - where oil for immediate delivery is cheaper than future months - of the M1-M12 spreads for WTI and ICE Brent had widened to double that at end-June.
  • Despite record high refinery runs, spot crude prices fell across the board as crude supply continues to outstrip demand with refiners holding ample inventory. WTI suffered the sharpest losses as US Light Tight Oil (LTO) output continues to be extraordinarily resilient while imports climbed.
  • Product prices tracked crude prices in July and weakened across the board. The scale of losses varied: tight Atlantic Basin supply buttressed gasoline prices, while brimming inventories pressured products in the middle and bottom of the barrel.
  • Despite high OPEC crude output, freight rates for VLCCs on trades between the Middle East and Asia ended July lower than where they began as Saudi exports dipped seasonally in-line with an increase in domestic crude burn for electricity generation.

Market overview

Crude prices sent a strong signal during July and early August that world markets are oversupplied. All marker crudes posted steep losses as Middle East OPEC producers continued to pump at high rates while concerns of a weak economy, especially in China, added pressure. Turmoil in Greece and concern over a 'Grexit'also weighed and saw the Euro weaken against the US dollar in early-July.

Losses on US WTI were steeper than other benchmarks due to the resilience of US domestic production and stubbornly high inventories at the Cushing, Oklahoma storage hub. At the time of writing, the contract for prompt delivery stood at $43.30/bbl, having lost $16.20/bbl (27%) from end-June. Over the same period, ICE Brent lost $14.60/bbl (23%) and was last trading around $49/bbl. In Asia, where much of the extra Middle East crude has been heading of late, Dubai had lost $10.40/bbl and by early-August was trading at $49.86/bbl.



Futures markets were pressured lower by the current supply overhang and after Iran and the P5+1 reached a deal over Tehran's nuclear programme that could see an eventual increase in Iranian exports hitting an already-oversupplied market. Given the current overhang in crude markets, the front-month contango structure remained relatively steady. ICE Brent briefly flirted with backwardation in early July on the expiry of the August contract. By end-July, however, the contango between the first and second months remained about $0.60/bbl - on a par with a month earlier and similar to the contango in the NYMEX WTI contract. On the other hand, market expectations that extra volumes of Iranian oil will not hit world markets until 2016 pressured the back of futures curves downwards. Despite this, the premium of oil for delivery in twelve months' time compared to cargoes for immediate delivery widened over the month. By early-August, The M1-M12 spreads doubled from a month earlier to -$6.85 /bbl and -$6.30 /bbl for ICE Brent and NYMEX WTI, respectively.


Financial markets

Market activity

Hedge funds dramatically slashed their positions in crude oil futures and options contracts in July as prices fell below $50/bbl and $45/bbl for Brent and WTI, respectively. Long positions dropped and short positions doubled for both benchmarks, resulting in a dramatic reduction in the 'long-to-short' ratio, which indicates overall funds' positioning - and suggesting that investors were betting on lower prices persisting. The drop was particularly marked in WTI as the Cushing benchmark came under stronger pressure.



In contrast, the latest drop in oil prices has attracted more money into oil-based funds. WTI-linked funds had previously seen outflows for three third straight months up to June, data compiled from the US Commodity Futures Trading Commission (CFTC) showed. However, more recent data show how investors in the United States Oil fund, the largest exchange-traded fund tracking the WTI price, stepped up their buying again.


Financial Regulation

The Volcker Rule, one of the most prominent new rules under the 2010 US Dodd-Frank financial reform, came into force on 21 July. The rule forbids commercial banks ('insured depository institutions') from engaging in proprietary trading. The rule also limits banks' stakes in hedge and private equity funds. Exceptions are made for activities such as hedging, trading government bonds, insurance activities and market making.

Spot crude oil prices

The Atlantic Basin appears to be awash with light crudes as competing grades jostle for market share. Benchmark Dated Brent lost $5.15/bbl (8.4%) over July as reports suggested that relatively high production over June left many cargoes unsold. Indications are that European refiners are well supplied and inventories are high. Additional downward pressure came from South Korea, which throttled back its imports of Forties as low prices for similar Asian grades such as Malaysian Tapis coupled with high freight rates eroded the economics of this long-distance play.

As global gasoline production remains high amid exceptional cracks, light sweet African crudes continued to look attractive to refiners in Europe and Asia. During early June, premiums to Dated Brent widened and held steady even as benchmark crudes weakened.



North American crudes posted the sharpest losses across global benchmarks. WTI lost $8.91/bbl (14.9%) on the month, its steepest monthly fall since January, and saw its discount to ICE Brent widen to $5.58 /bbl in July from $1.83/bbl the previous month. WTI was pressured by counter-seasonal inventory builds at the Cushing, Oklahoma storage hub - the delivery point of the NTMEX WTI contract. Additionally, US imports rose by approximately 500 kb/d as Canadian pipeline imports increased. Seaborne imports rose with Russian ESPO reaching the West Coast for the first time since summer 2014. Additionally, as LLS ran at a premium to North Sea Dated in June, imports of Atlantic Basin crudes are likely to have risen. With LLS moving back to a more-usual discount to Dated Brent in June, it is likely these import flows were choked off.



Persistently high inventories at Cushing also pressured other North American grades heading into the US mid-continent. Both WCS and Bakken saw their prices fall at a faster clip than WTI. On a monthly average basis, the discount of Bakken to WTI widened to $3.31/bbl in July compared with $1.31 /bbl over June. Canadian crudes fared worst as supplies increased in July following lower supplies in preceding months due to syncrude maintenance and as wildfires curbed Albertan production. Consequently, at end-July, the discount of WCS to WTI had widened to $14.34 /bbl from $8.45 /bbl at the start of the month.

Northwest European sour crude markets remained weak over July with Urals' discount to North Sea Dated widening over the month as Russian exports from Baltic ports remained relatively robust. Refiners in the Mediterranean also appear to be well supplied with sour crude as OPEC's Middle East members continue to pump at high rates. Consequently, Urals shipped via Novorossiysk (Urals MED) has weakened more swiftly than Urals shipped from Baltic ports (Urals NWE). Even the loss of Iraqi sour-crude exports through the Kirkuk pipeline in late-July could not reverse its fortunes, with Urals MED at a small discount to Urals NWE for the first time since January. By the second week of August, however, Urals NWE had weakened against MED as imports from Baltic ports rose.

Asian refiners also seem well supplied ahead of the third quarter with benchmark Dubai weakening at a faster pace than ICE Brent. One reason for this is that as the supply overhang persists in the Atlantic Basin, cargoes of West African crudes are reportedly being offered to Asian refiners at substantial discounts. Moreover, in early August, Saudi Arabia signalled its intention to keep its crude competitive by increasing the price formula for Arab Light to Asian customers by a relatively small amount compared to the expectations of traders.

Spot product prices

Spot product prices tracked crude prices to a large extent in July and weakened across the board. Nonetheless, the scale of losses varied across products. Gasoline prices were buttressed by tight Atlantic Basin supply, while products in the middle and bottom of the barrel plummeted amid plentiful supply as output increased in tandem with gasoline production. Crack spreads told a similar story with gasoline in the US and Europe firming on a monthly average basis while middle distillates cracks plummeted in all surveyed markets.



July was a tale of two halves as far as gasoline was concerned. Spot prices generally maintained their upward momentum during early-July but turned sharply lower from mid-month onward. Despite these falls, cracks in the US and Europe firmed on a monthly average basis with cracks in all surveyed markets remaining above year-earlier levels. Gasoline cracks on the US Gulf Coast surged to 10-year highs with that for super unleaded against LLS exceeding $50/bbl in mid-month as Atlantic Basin supply remained tight amid healthy y-o-y demand growth and inventory draws. These levels proved unsustainable and eventually spot prices were dragged lower by crude prices. Nonetheless, by early-August, cracks remained elevated at approximately $40 /bbl. European cracks experienced a topsy-turvy month. After initially firming on export demand to the US and West Africa, levels fell back after the economics of these trades were eroded by soaring spot prices and freight costs. By-early August cracks were once again strengthening on regional refinery outages.



In contrast to gasoline, middle distillates markets remain under pressure amid oversupply with kerosene, diesel and gasoil prices posting double-digit percentage point losses across surveyed markets. In part, the oversupply is resulting from middle distillate output increasing in tandem with refiners maximising their gasoline output. Diesel cracks in Singapore had the poorest performance across surveyed markets and had plummeted to less than $7/bbl by early-August, their lowest since late-2009. Catalysts for this have been rising stocks and record exports from Chinese refiners, who faced with high production and sluggish domestic demand, are increasingly targeting international markets. European cracks were pressured lower throughout the early part of month on high imports from Russia and the US but by late-July began to rebound after refinery problems in Germany.



The diverging trends between gasoline and diesel have seen gasoline prices rise to record premiums across surveyed markets. In the US, gasoline trading at a large premium to diesel is not a new phenomenon. Gasoline is by far the most popular motor fuel and the US exports significant volumes to markets including West Africa and Latin America. However, in Europe, where diesel has a larger share of transport demand and significant volumes are imported, the picture is more seasonal. The current situation appears to stem from the strength of US gasoline demand coupled with logistical difficulties and associated costs to transport product from the Gulf Coast refining centre to the demand centre on the Atlantic Coast. This has necessitated the import of significant volumes from Europe, buttressing prices there. Meanwhile in Europe, diesel demand remains on a par with a year earlier and is unable to soak up the extra regional diesel production and high imports from the US. These factors have seen gasoline recently trade at a $13/bbl premium to diesel in Europe.

European Naphtha prices performed particularly badly in July as, despite relatively high demand from gasoline blenders, the arbitrage window to ship product to Asia slammed shut in mid-month amid prohibitively high freight rates. Further downward momentum came from the reported switching of a number of European steam crackers to run on LPG as its spread to naphtha widened considerably over the month amid a glut of imports from the US.



Fuel oil markets remained weak over July with all cracks across surveyed markets standing firmly in the red. Cracks in Singapore weakened steadily over the month as regional inventories rose amid ample supply and as arrivals from Europe remained high. By-early August cracks had bottomed out as arrivals from the west dried up. European cracks remained under pressure from limited regional demand, high supply as simple refiners maximised gasoline output and limited arbitrage opportunities to ship product to eastwards over July. However, by early-August, cracks had turned a corner as low regional spot prices made eastwards arbitrage once-again economic.

Freight

Despite high OPEC crude production, very-large-crude-carriers (VLCCs) on trades between the Middle East and Asia ended July lower than where they began. Although mid-month saw rates spike above $20 /mt on weather delays in the Middle East Gulf, exports remained seasonally lower on fewer Saudi shipments, which tend to ease during the summer when domestic crude burn for electricity generation rises (See 'Refining'). Suezmaxes out of West Africa seesawed through the month to settle at a slightly lower rate than in June, as supply of vessels remained abundant. Rates for Aframaxes in the Baltic and North Sea returned to their floor as discharging delays ended and summer maintenance began.



Rates for product carriers had a generally stronger month, led by shipments on larger 75 Kt vessels on the Middle East Gulf - Japan route that firmed to an historic high of $45/mt in mid-July on high naphtha exports. Clean, high-value product exports from the Gulf have been steadily rising recently as new refining capacity has been commissioned. The latest data from JODI shows Saudi Arabia alone posted record exports of 1.3 mb/d in May. The cross-Atlantic 37 Kt route saw some strength in mid-July as the gasoline arbitrage between the UK and US East Coast shot up on operational issues which lured cargoes from Singapore and the UK (See 'Refining'). The rate then eased and settled around $25/mt.

Refining

Summary

  • The global refining sector is going from strength to strength, with crude runs rising to 80.2 mb/d in 3Q15 from 79.2 mb/d in the previous quarter. Throughput in July rose to a record 80.6 mb/d. Annual throughput growth is now assessed at a staggering 3 mb/d for 2Q15 and 2.2 mb/d for 3Q15, with China showing the biggest gains.
  • Middle distillate crack spreads have started to collapse due to brimming stocks, with levels in Singapore falling below $7/bbl - the lowest since 2009 - and dragging margins down. Singapore hydroskimming margin even turned negative and the first batch of run cuts took place in Japan, China and Taiwan. The market is now facing a potential oversupply of middle distillates along with crude oil, with Saudi Arabia a pivotal force in both markets. New Saudi refineries, geared towards distillates, are exporting massive quantities of middle distillates towards Europe and Asia.
  • Elsewhere, however, margins remain high, supported by still-soaring gasoline crack spreads that showed further improvement in the US. Throughput rose along with margins, with Europe stable and the US posting record high runs.

Global refinery overview

The global refining sector continued its strong performance, with record throughput of 80.6 mb/d estimated for July and utilisation rates at the highest in eight years. Nevertheless, fissures are appearing. Diesel supplies are building, stocks are piling up and crack spreads are decreasing. As a result, hydroskimming margins in Asia turned negative, prompting the first batch of run cuts. In addition, the end of the US driving season next month will withdraw the support provided to margins by robust gasoline crack spreads, which could have implications for the crude market.



Sky-high refinery throughput had, until recently, supported crude demand and prices. This support will fade if lower margins force more run cuts on top of throughput reductions from upcoming seasonal maintenance. The market is now facing a potential oversupply of middle distillates along with crude oil, with Saudi Arabia a crucial player in both markets. New Saudi refineries, geared towards distillates, are now exporting massive quantities of middle distillates towards Europe and Asia. The Kingdom's Yasref joint venture refinery tendered 2.8 mb of ULSD for loading late July-early August, adding to already ample supplies of middle distillates.

Since the end of 2014, refinery throughputs have increased y-o-y well above the million barrels per day or so required to balance demand (in addition to NGLs and biofuels). Average growth over 4Q14-3Q15 is estimated at 2.2 mb/d, with Europe - surprisingly - contributing the most (0.7 mb/d), followed by China (0.6 mb/d) and other Asia (0.4 mb/d). The Middle East and OECD Americas each account for 0.25 mb/d, the latter bumping up against capacity limits. Europe is expected to be hit in 3Q15 by lower margins, while the Middle East only started to feel the positive impact of its new refineries ramping up in 2Q15.

Global crude run estimates for 2Q15 have been raised by 380 kb/d since last month's Report, to 79.2 mb/d. The estimate of 3Q15 crude runs was also revised upwards by a hefty 610 kb/d to 80.2 mb/d. In both quarters, upward revisions took place in the non-OECD regions, including China, FSU, other Asia and Middle East. Growth in 3Q15 y-o-y is expected to reach 2.2 mb/d, led by China (650 kb/d), the Middle East (620 kb/d) and other non-OECD Asia (510 kb/d). OECD also contributes 640 kb/d overall. The FSU bucks the trend, slowing by 170 kb/d.



Global throughput figures for May show a 0.6 mb/d month on month (m-o-m) increase after a 0.8 mb/d increase from non-OECD refiners offset a 0.2 mb/d decrease in the OECD. The resulting figure is 79.3 mb/d. The Americas edged up by 0.2 mb/d, while seasonal maintenance curbed OECD Asian runs by 0.3 mb/d. In non-OECD regions, other Asia increased by 0.5 mb/d and the FSU by 0.2 mb/d while China decreased by 0.2 mb/d. Annual growth in May was a whopping 3.1 mb/d with non-OECD regions accounting for 1.8 mb/d and the OECD for the remainder.

In June, the most recent month for which a complete set of monthly data is available, OECD refiners posted a 0.2 mb/d m-o-m increase in crude throughput to 37.7 mb/d - 2.0 mb/d above a year earlier. OECD Americas increased by 0.21 mb/d to 19.48 mb/d, while OECD Europe edged up by 0.05 mb/d and OECD Asia declined by 0.09 mb/d, with Japan leading the decline at -0.37 mb/d. Preliminary figures for July show OECD runs should increase seasonally by 0.8 mb/d and reach 38.5 mb/d - 0.9 mb/d higher      y-o-y. High runs are also expected in August with maintenance only starting in September.

Margins

In June, a simple view on margins does not reveal the huge underlying changes in the oil product cracks. Gasoline crack spreads kept growing from a high base in the US and in Europe. They reached a peak above $30/bbl in early July in the USG (calculated vs. LLS) and Europe, as the price for crude fell more swiftly than gasoline. Gasoline demand was supported by heavy buying from Asia and Latin America along with refinery issues in the US, although stocks in NWE were reported to be at their highest level in more than a year.



Diesel crack spreads declined in July, especially in Asia. Middle distillate stocks are brimming as demand in Asia fades due to the monsoon season and economic growth slows in China. Diesel crack spreads in Singapore fell from $15/bbl in mid-May to $7/bbl at the end of July, the lowest since the end of 2009. The ample supply of middle distillates is also hitting refining profits, with hydroskimming margins now negative in Asia and barely positive in Europe, especially for sour crude. Run cuts are on the agenda and have already started in Asia, suggesting that there could be an even bigger dip in throughput during the seasonal maintenance period this autumn. Paradoxically, diesel crack spreads edged up in the US Gulf Coast at a time when total US stocks well above their five-year average.

Supported by lofty gasoline crack spreads, refining profits increased by a couple of dollars in the US Gulf Coast and shot up by $2-5/bbl to above $25/bbl in the Midcontinent. European cracking margins remain around a very comfortable $9/bbl level, well above Singapore hydrocracking margin, which fell to a weak $3.4/bbl on Dubai. However, gasoline crack spreads are expected to deflate as the driving season nears its end, affecting margins - especially cracking ones - negatively.





Gasoline tightness: how real?

Concern over gasoline tightness was sparked in July after gasoline crack spreads peaked at a record $30/bbl in the US (RBOB vs LLS) and Europe, while Singapore crack spreads surged to $25/bbl in June. But is the gasoline supply-demand balance really all that tight? First off, the rise of gasoline crack spreads over the first few months of this year tracked normal seasonal behaviour; they began to diverge from usual trends only at the end of June when demand initially exceeded supply.

Demand growth is impressive. In non-OECD regions, 1Q15 gasoline demand showed 4.6% y-o-y growth, the largest of all oil products, and double 1Q15 global demand growth of 1.9% y-o-y. In 1H15, gasoline y-o-y demand growth reached 6% for China and 15% for India, which imported eight times more gasoline than a year ago. In the US, supported by lower retail prices, vehicle-miles-travelled (VMT) were up nearly 4% y-o-y and 1H15 demand was up 3.4% y-o-y. In the OECD, y-o-y gasoline demand growth for the first five months reached 1.7%,  higher than previous full years (0.3% in 2014, 0.6% in 2013 and -1.4% in 2012).

However, supply eventually seems to have responded in a timely manner. In the OECD, production in the first four months of 2015 was 2.9% higher than in 2014, underpinned by refinery crude runs that were 2.4% higher y-o-y. In OECD Americas, which accounts for two thirds of OECD gasoline supply and demand, supply rose to a record 10 mb/d (see OECD Americas paragraph). Production figures are not yet available for non-OECD regions, but China continued to export substantial amounts of gasoline in 2Q15 despite growing demand.



More importantly, gasoline stocks showed no sign of tightness: OECD stocks (60% held in the Americas and over 30% in Europe) were relatively high until May and remain adequate to day. It appears that rising crude runs - over 2 mb/d higher than a year earlier - effectively covered the higher gasoline demand. The level of gasoline crack spreads in June and July is therefore a bit surprising, but two elements may have contributed:

  • Local shortages due to operational glitches, like in the US West Coast or the US Gulf Coast, reinforced by Mexican and Venezuelan outages - with much attention given to such bullish news.
  • An octane shortage, which contributed to make finished gasoline more expensive. Octane spreads (Super unleaded vs. RBOB) doubled in the US Gulf Coast from mid-May to early June.

Although the $30/bbl level for gasoline crack spreads is striking, summer peaks recently have not been much lower, in a $20-25/bbl range.

OECD refinery throughput



OECD refinery crude runs increased by 0.2 mb/d from May to an average 37.7 mb/d in June, 2.0 mb/d y-o-y. Asia accounted for some decline, while Europe was stable OECD Americas posted 0.2 mb/d gains on an already-high May. Refinery utilisation rates inched up by two percentage points in the US, and declined by one in Asia Oceania. OECD throughput for 2Q15 and 3Q15 inched up to 37.6 mb/d and 38.3 mb/d, respectively, exhibiting a 1.45 mb/d and 0.65 mb/d y-o-y growth.



OECD Americas

In the United States, operational issues shut down a number of FCCs and curbed runs on the West Coast. As a result, local gasoline prices shot up and attracted gasoline cargoes from as far afield as Singapore. Despite the refinery glitches, US weekly crude throughput reached a new 17.07 mb/d record in the week to July 31st, supported by stellar gasoline crack spreads. The resulting utilisation rate of 96.1% had not been reached since 2006. Gasoline demand reached its second highest level - 9.7 mb/d - since the beginning of records in 1991. As a result, gasoline imports and production both increased. Imports - mostly from Europe into PADD 1 - continued to grow in July, whereas in the past two years they peaked in May. Imports were also significantly higher in June-July than in the past two years, while domestic output neared 10 mb/d.



Distillate exports to non-OECD Americas and Europe are reported to have significantly slowed in the second half of July. In addition, domestic demand was 3.6% lower y-o-y in June while distillate stocks were 13% above last year's level.

Canada processed 7% more crude than in May, with runs up to 1.67 mb/d - still 0.2 mb/d below last year, when throughput was exceptionally high. Despite stable refinery runs at 1.1 mb/d, both in May and June, Mexico experienced a growing gasoline shortfall, and had to increase imports substantially from the Gulf and West Coast.

OECD Europe

Europe appears to be the target for most of world's excess middle distillate: China is sending jet fuel and the Middle East is routing diesel exports from the Jubail and Ruwais refineries, and Russian gasoil exports  are higher by 12% from last year. Gasoil stocks in ARA reportedly rose to new highs. NWE jet crack spreads are at very low levels, that is, sub-$10/bbl. Gasoline continues to hold up the whole margin complex, helped by cracker glitches in Germany and despite high ARA stocks. Gasoline crack spreads have eased from the $30/bbl levels seen in the first half of July but remain in a very comfortable $20-$25/bbl band. Demand is particularly strong for high-octane components to the US. Otherwise, the trans-Atlantic arbitrage is narrowing due to high US refinery throughputs and stocks. European crude runs were stable in June, at 11.9 mb/d. Italy and France posted the largest losses, offset by the UK. Runs are still 1.1 mb/d higher than in 2014, but just below the 2010-2014 average.


OECD Asia

OECD Asia crude intake barely decreased to 6.3 mb/d in June, 0.1 mb/d lower m-o-m, and 0.45 mb/d above the year earlier - despite maintenance shutdowns and weaker margins. Japan reduced runs the most, by 0.37 mb/d, partly offset by South Korea. JX Nippon Oil & Energy, Japans' largest refiner, said on 4 August it would cut runs by 4% - to the lowest level since August 2010 - due to excess supply of middle distillates. Singapore diesel crack spreads plummeted to $7/bbl by the end of July. Conversely, gasoline crack spreads were firm at around $20/bbl, supported by regional tenders: India's IOC tendered for 0.7 mb over August-September and Pakistan's PSO for 3.3 mb over August-October. As further evidence of the weakness in Asian markets, a Forties cargo destined for Asia made a U-turn back to Europe to be sold ship-to-ship or put in storage.

In Japan, Royal Dutch Shell agreed at the end of July to sell 33% of its 35% stake in Showa Shell Sekiyu to Idemitsu Kosan Co. for 169 billion yen ($1.4 billion). Showa Shell owns three refineries totalling 445 kb/d while Idemitsu has three refineries totalling 535 kb/d. The two companies are expected to merge at a second stage; Idemitsu would thus control about a third of the domestic market under the deal, as much as JX Energy, currently the country's largest refiner. Autumn maintenance season is now approaching and the first shutdowns announced are, in Japan, Cosmo's 100 kb/d Sakai refinery, TonenGeneral's 132 kb/d Wakayama refinery and JX's 140 kb/d Mizushima-A refinery. In South Korea, S-Oil's Onsan plant will cut 240 kb/d off over mid-August to mid-November (CDU n°2 of 240 kb/d followed by CDU n°3 of 250 kb/d).

Non-OECD refinery throughput

In May, non-OECD refinery throughput increased by 0.8 mb/d to 41.8 mb/d, after a 1.1 mb/d upward revision to last month's Report. The FSU accounted for half the adjustment, with the rest in other non-OECD Asia and in the Middle East. Throughput is forecast to edge up another 0.2 mb/d in June. Overall, estimated 2Q15 figures show crude intake of 41.6 mb/d, 0.9 mb/d higher than in 1Q15. The 1.5 mb/d y-o-y growth includes 0.7 mb/d in China, 0.6 mb/d in other non-OECD Asia, 0.4 mb/d in the Middle East, and -0.2 mb/d in FSU.



In China, June crude runs increased to a record 10.55 mb/d, 3.6% higher than a year earlier. Over 1H15, the y-o-y growth reached 5.8%. June oil product output growth was led by jet/kero (0.8 mb/d, or 19.5% y-o-y growth), gasoline (2.9 mb/d, or 8.9% y-o-y growth) and LPG (0.9 mb/d, or 7% y-o-y growth).

Strong gasoline demand stimulated higher crude runs, which also resulted in excess middle distillate production. Consequently, exports of jet and diesel increased, respectively, from 0.17 mb/d to 0.22 mb/d, and from 0.09 mb/d to 0.17 mb/d. Beijing has meanwhile issued higher diesel export quotas for 3Q15 - more than doubled those of  2Q15. Surprisingly, however, gasoline exports also increased, from 0.1 mb/d to 0.14 mb/d, while naphtha imports grew from 0.9 mb/d to 0.19 mb/d. An indication of possible future run cuts, Sinopec announced plans on 6 August to cut crude runs by 5% - or 250 kb/d - in 4Q15 compared to 1H15 because of high diesel inventories and lower demand.



In India, crude throughput reached a record 4.74 mb/d in June. Still, with a weak 1Q15, the y-o-y increase for 1H15 is only 2%, when oil product demand grew 5.1% y-o-y over the same period. Over 2Q15, diesel and gasoline net exports both fell by over 20%, to a respective 290 kb/d and 390 kb/d. Other Asian countries put in much stronger figures than India. For instance, over the first five months, crude runs grew by 9% in Thailand - reaching 1.3 mb/d - by 13% in Malaysia and by approximately 20% in the Philippines (with a correction in March 2014 due to the typhoon).

Chinese independents win crude import quotas: still teapots?

As the world's second-largest oil consumer, China has strict rules for importing crude. While five state-owned companies-PetroChina, Sinopec, CNOOC, Sinochem and Zhuhai Zhenrong - can import unlimited amounts of crude, scores of other companies have to import crude via a quota system. In 2014, crude import quotas for non-state companies reached 690 kb/d, or roughly 10% of the country's overall crude imports. In 2015, the quota volume increased by 160 kb/d to 750 kb/d.

But until recently, China's so-called "teapot" refiners - small, unsophisticated plants that traditionally were  unable to churn out transport fuel to meet the latest emission standards - were shut out from the crude import quota system. The teapots that account for roughly 30% of China's refining network of 14.4 mb/d, had been forced to rely on the supply of foreign crude imported by the "Big Five", on domestic crude or on straight run fuel oil or bitumen blend for their feedstock.

The teapots usually run at very low utilisation rates. For instance, in Eastern China's Shandong province, where 80% of the teapot refineries are located, April run rates were reportedly only 40% of nameplate capacity, while utilisation rates for state-owned refineries usually hover around 80%.

Now they, too, are winning import quotas. Ten to twelve teapot refineries have applied for crude licenses to replace straight run fuel oil or bitumen blend. They will have to decommission their smaller crude distillation units (CDUs) and commit to producing road fuels meeting China V emission standards by the end of 2015, with principally a lower sulfur content. The quotas are recommended by the National Development and Reform Commission (NDRC) after a proposal by the China Petroleum and Chemical Industry (CPCIF) and finally awarded by the Ministry of Commerce. The Ministry said later on August 10th that it will grant licenses to two independent refineries - Dongming Petrochemical and Panjin Beifang -  to directly import crude oil, shortly after these companies won import quotas.

Dongming Petrochemical, the country's largest independent teapot refiner, was awarded the first quota at 120 kb/d, higher than initial expectations of 100 kb/d but smaller than the 150 kb/d the NDRC recommended. Dongming will retain two CDU's with 100 kb/d and 50 kb/d capacity and close 3 older CDUs totalling 70 kb/d. Overall, Dongming's capacity will be reduced from 220 kb/d to 150 kb/d. However, it had only run 110 kb/d in 2014 (51% utilisation rate), with most of its crude supplied by PetroChina.

The CPCIF also recommended six other quota allocations, which are pending (see below). These seven companies will cut 344 kb/d or 32% of their nameplate capacity, but the quotas received in exchange should allow them to process at a higher level than before. This trend is expected to continue, however the fate of  smaller companies is questionable, both due to the need to upgrade road fuels specifications and to the uncertain profitability of running straight run fuel oil or bitumen. Could the charming name of "teapot" one day fade into memory?


Early July, Russia's Rosneft signed a framework agreement with Essar Oil to acquire 49% of Essar and supply 100 mt of crude oil over 10 years (200 kb/d). The two companies would also work together towards expanding the 400 kb/d Vadinar refinery to 900 kb/d and the retail network from 1600 to 5000 outlets. Conversely, the acquisition of a part of PetroVietnam's Dung Quat refinery in Vietnam by Gazpromneft is reported to be stalling.

In Chinese Taipei, Formosa's Mailiao 180 kb/d scheduled maintenance is due to end in mid-August. In India, Essar's Vadinar refinery will enter maintenance in September, followed in October by BPCL's Kochi. In Malaysia, Shell's Port Dickson 156 kb/d refinery will undergo maintenance for 30-40 days from the second half of August.

Russia's crude runs in June were unchanged m-o-m at 5.65 mb/d. However, y-o-y they are 0.3 mb/d lower due to a combination of weaker domestic demand plus lower profitability due to the tax manoeuvre. Bashneft reduced its 2015 processing target by 6%. However, over 1H15, Russian refinery crude runs were only cut by 1.6% y-o-y. This more conservative trend is expected to continue over the rest of the year. Lukoil and Bashneft cut production by 14.9% and 10%, respectively, while Rosneft increased by 1.8%. Fuel oil output was lower than average, reduced by 4% y-o-y, while gasoline production increased by 3.5%, a result of the new tax regime and the upgrading investments.

Middle East crude runs in May were revised up by 0.2 mb/d, mostly in Saudi Arabia because of the strong performance of its new refineries. Regional run now reach 6.8 mb/d, 0.1 mb/d higher m-o-m, and 0.25 mb/d higher y-o-y, despite the continued shutdown of Iraq's 170 kb/d Baji refinery.



The UAE's Ruwais refinery is reported to be running at a reduced rate for a couple of weeks due to an FCC shutdown and is trying to resell some crude. Otherwise there is a raft of scheduled maintenance planned: in Kuwait, the 265 kb/d Mina Abdullah plant in August-September followed by the 200 kb/d Shuaibah refinery in October-November and the 120 kb/d Mina Al Ahmadi in December. In Saudi Arabia, the 400 kb/d PetroRabigh plant will shut down during October-November.

In Kuwait, Kuwait National Petroleum Co. finally awarded $11.5 billion worth of contracts to build the al Zour refinery. The last package is expected to be awarded in August. The start-up of the plant is targeted for 2019, but is likely to be delayed.

Latin America's crude intake in May was stable at 4.7 mb/d, on a par with last year. Over the first five months, it was lower by 2% y-o-y, but we expect 2H15 to be at a similar level than a year earlier, and Ecuador's Cartagena refinery is due on-stream by the end of this year. In Brazil, crude runs are picking up and reached 2.1 mb/d in June. Still we expect 2H15 figures to be substantially lower than a year earlier.



In Africa, crude throughput appeared to be edging up and reached 2.25 mb/d in May, up 0.14 mb/d y-o-y. Over the first 5 months of 2015, crude runs increased by an average 1.8%. Egypt showed the largest gain at 5.4%, while South Africa and Algeria were roughly stable.

In Nigeria, changes appear to be around the corner: the government named ExxonMobil Africa's executive vice-chairman Emmanuel Ibe Kachikwu to head Nigeria's state-owned oil company. Meanwhile, maintenance is ongoing at the 210 kb/d Port Harcourt and 125 kb/d Warri refineries, and NNPC announced that these refineries could be working at 80% starting in August.