Oil Market Report: 13 October 2015

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Highlights

  • After a relatively stable month in September, crude oil price benchmarks rallied in early October on expectations of lower US output and rising tension in the Middle East. At the time of writing, ICE Brent was trading at $51.90/bbl with NYMEX WTI lower at $48.80/bbl.
  • Global demand growth is expected to slow from its five-year high of 1.8 mb/d in 2015 to 1.2 mb/d in 2016 - closer towards its long-term trend as previous price support is likely to wane. Recent downgrades to the macro-economic outlook are also filtering through.
  • World oil supply held steady near 96.6 mb/d in September, as lower non-OPEC production was offset by a slight increase in OPEC crude. Non-OPEC accounted for just under 40% of the 1.8 mb/d annual increase in total oil output. Lower oil prices and steep spending curbs are expected to cut non-OPEC output by nearly 0.5 mb/d in 2016.
  • OPEC crude supply rose by 90 kb/d in September to 31.72 mb/d as record Iraqi output more than offset a dip in Saudi supply. A slowdown in forecast demand growth and slightly higher non-OPEC supply lowers the 2016 'call' on OPEC by 0.2 mb/d from last month's Report to 31.1 mb/d.
  • OECD commercial inventories extended recent gains and rose by 28.8 mb in August to stand at 2 943 mb by end-month. Since this was nearly double the 15.0 mb five-year average build for the month, inventories' surplus to average levels widened to 204 mb.
  • The onset of seasonal turnarounds in the OECD and the FSU is estimated to have curbed global refinery runs by 1.9 mb/d in September to 79.4 mb/d. Runs remained remarkably strong, particularly in Asia and the Middle East, leaving global throughputs up nearly 2 mb/d on a year ago.

Tipping the balance

Oil at $50/bbl is a powerful driver in rebalancing the global oil market, but the big question is just when will equilibrium be restored. To be sure, the world is using more oil and high-cost supply - primarily non-OPEC - is being forced out. But a projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels - should international sanctions be eased - are likely to keep the market oversupplied through 2016.



For now, lower oil prices are supporting strong demand growth. The world's top consumers, the US and China, are buying more oil - boosting growth this year to a five-year high of 1.8 mb/d, a leap on paltry gains of 0.5 mb/d in 2Q14 when oil was in triple digits. But the outlook for oil demand growth is looking softer next year. The International Monetary Fund, in its latest World Economic Outlook, cut 0.2 percentage points from 2015 and 2016 economic growth, with big markdowns in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. The stimulus from lower oil prices is also expected to fade next year with oil demand growth set to slow by 0.6 mb/d to 1.2 mb/d.

The previously relentless growth in non-OPEC supply is also shrinking fast. Although Brazil and Russia pumped at record rates in August and September respectively - pushing non-OPEC output nearly 0.7 mb/d above a year ago - that is down from gains of 2.7 mb/d in December 2014. Supply in the US - which had been the motor of growth - is already sinking swiftly: year-on-year gains have eased to just 0.3 mb/d from 1.6 mb/d during the first quarter. Total non-OPEC output next year is expected to contract by nearly 0.5 mb/d as global upstream spending cuts of more than 20% impact both new projects and existing production. A remarkable decline in costly infill drilling, required to stem declines at producing fields, is already evident with rates in some areas dropping by more than 50% so far this year - nearly double that seen in previous downturns.

Even low-cost OPEC producers are tightening their belts. Spending curbs and a severe financial crisis are limiting supply growth in the near term in Iraq, which now ranks as the world's fastest source of additional supply. Production from neighbouring Iran could be on the rise once it is released from international sanctions and ramps up towards 3.6 mb/d from 2.9 mb/d currently. How quickly Iran can bring those extra barrels to the market will make a big difference to 2016 dynamics.

Rising geopolitical tension, such as Russia's military intervention in Syria, is back in the frame, even if the present global oversupply is tempering the market's reaction. These moving pieces are creating uncertainty. Estimates of 2016 demand growth from a selection of leading forecasters swing by 0.6 mb/d, non-OPEC supply by 0.8 mb/d and the resulting "call on OPEC" by a hefty 1.0 mb/d. Some of this uncertainty may start to clear next year although, considering Iran, the market may be off balance for a while longer.

Demand

Summary

  • The demand outlook for 2016 is likely to return to long-term trend, as recent downgrades to the macroeconomic outlook and expectations that crude oil prices will not see repeats of the heavy losses of 2015 filter through. Global demand growth is expected to slow from its five-year high, of 1.8 mb/d in 2015, to 1.2 mb/d in 2016.
  • Global growth peaked at 1.9 mb/d in 2Q15, on a year-on-year (y-o-y) basis, supported by a near halving in the underlying crude oil price, recuperating OECD macroeconomic conditions and resilient transport fuel demand in China and the US. This year's upturn is all the more surprising as nearly a third of the growth comes from the OECD - a stark contrast to the region's previously declining trend.
  • Approximately 0.4 mb/d of global 2015 demand growth is attributable to rapidly expanding US oil deliveries, with sharply escalating gasoline the key driver. Recent data depicts a 0.4 mb/d y-o-y 3Q15 expansion in US gasoline alone, dominating the total 3Q15 US gain of 0.5 mb/d y-o-y.
  • Surprisingly resilient Chinese oil demand data have come in; our preliminary August estimate posted a near double-digit percentage point gain in y-o-y terms despite the otherwise ailing macroeconomic backdrop. Gasoline escalates sharply despite reports of falling car sales, as even these lower numbers support an expanding vehicle pool.

Global Overview

The demand outlook for 2016 looks markedly softer as downgrades to the macroeconomic outlook (see More Pessimistic Economic Outlook Curbs Oil Demand Forecast) and expectations that crude oil prices will not repeat the heavy declines seen in 2015, filter through. At an estimated 1.2 mb/d in 2016, global demand growth returns to its long-term trend, taking projected average demand up to 95.7 mb/d. The anticipated slowdown is in sharp contrast to surprisingly strong consumption this year that has been revised up to an estimated 94.5 mb/d - for growth of 1.8 mb/d (or 1.9%). Recent strength in global demand continued unabated into 3Q15, led by strong gains in US, Chinese and European deliveries. Up by around 1.9 mb/d y-o-y in 2Q15 and 3Q15, global growth attained its highest pace since 4Q10.

The much maligned Chinese economy is having little, if any, apparent negative impact upon Chinese oil demand growth, which at an estimated 0.6 mb/d in 3Q15 accounts for roughly one-out-of-every-three-extra barrels of oil delivered globally. Strong gains in Chinese gasoline and LPG (including ethane) led the way, as additional propane dehydrogenation plants required extra LPG deliveries while dips in new car sales failed to dent the sharp gains in the total size of the Chinese vehicle fleet.

Adding around 0.5 mb/d in both 2Q15 and 3Q15, US y-o-y growth estimates follow not far behind China's recent exuberance, also supported by rapid gains in gasoline and LPG. US gasoline demand rose by an estimated 0.4 mb/d in 3Q15, as sharp gains in vehicle usage coincide with a price-driven swing towards less fuel-efficient vehicle choices.

With an extra 0.2 mb/d y-o-y then added in Europe in 3Q15, preliminary estimates of European oil demand growth remain lifted by the severity of the economic slowdown that engulfed the economies of the region in 2014. Economic activity in the Euro Zone area, for example, has steadily built since 2Q14, according to Eurostat, which reported y-o-y growth of 0.8% in 2Q14, momentum that built each successive quarter through to 2Q15 (+1.5%). Lower crude oil prices also played a role, down by around one-fifth in domestic currency terms in 3Q15, compared to the year earlier.

Globally gasoline has dominated recent growth, accounting for just shy of one-in-every-two extra barrels delivered in 3Q15. The world's two largest consumers account for roughly two-thirds of this extra gasoline, with China 25% and the US 42% of global 3Q15 gasoline demand growth. Other product categories of notable recent strength include LPG and naphtha. LPG benefited from heightened petrochemical demand in China and the US; naphtha reaccelerated as recent price swings, versus LPG, encouraged additional petrochemical usage, particularly in Asia.

More Pessimistic Economic Outlook Curbs Oil Demand Forecast

With the International Monetary Fund (IMF) revising down estimates of global economic growth by about one-fifth of a percentage point for 2015-16, projections for commodity demand logically require some trimming. Not only did the IMF, in its October World Economic Outlook, revise its forecasts - it also alluded to the possibility that "long-run potential output growth may have fallen broadly … (as) slow expected potential growth itself dampens aggregate demand, further limiting investment, in a vicious circle." Having previously cited global demand growth at approximately 1.4 mb/d in 2016, weaker macroeconomic activity sees an associated reduction in the demand forecast to 1.2 mb/d.

As with the direction of the revisions in the latest economic numbers, many big commodity-dependent economies, such as Brazil, Venezuela and Saudi Arabia, took the brunt of this month's demand curtailment. Lower commodity prices, with all else held equal, eventually equate to lower public spending and a potential dampening in consumer expenditure in many of these countries, consequently curbing projections of gasoil/diesel and gasoline consumption in particular. The downside revisions are particularly heavy for Venezuela, which the IMF foresees experiencing a "deep recession in 2015 and 2016 (-10% and -6%, respectively), because the oil price decline since mid-2014 has exacerbated domestic macroeconomic imbalances and balance of payment pressures". With Venezuelan unemployment forecast to top 18% in 2016, inflation projected to rise above 200% and the current account balance up at around 2% of economic activity, the economic risks for Venezuela in 2016 are heavily skewed to the downside.

Indeed, globally, additional downside risks surround projections of both economic activity and oil demand in 2016, as the IMF alludes to the "downside risks to the world economy (being) … more pronounced than they did just a few months ago."

OECD

Contributing roughly a third of global oil demand growth in 2015, the dynamics of OECD deliveries have changed dramatically in recent months. Last year the amalgamated OECD metric remained tangled in the midst of a long-running declining trend, as OECD deliveries contracted by 0.3 mb/d amongst a global gain of 0.8 mb/d. As global demand growth accelerated to a five-year high of 1.8 mb/d in 2015, OECD flipped direction, up 0.6 mb/d or a third of global demand growth. Of this near net 1 mb/d about-face, Europe dominated switching from a 0.2 mb/d decline in 2014 to an estimated 0.2 mb/d hike in 2015. For the region as a whole, additional gasoline demand led the OECD revival, accounting for roughly half of forecast 2015 demand growth, followed by gasoil, jet/kerosene, LPG and naphtha, respectively.

Early estimates of 3Q15 OECD demand - based upon official July statistics, preliminary August numbers and forecasts for September - show growth at 0.8 mb/d with absolute y-o-y gains forecast in each of the main demand centres. The OECD Americas leading (+0.5 mb/d) the upside, followed by Europe (+0.2 mb/d) and Asia Oceania (+0.1 mb/d). Momentum likely wanes in 2016, as recent price supports fade, while the positive impact from post-recessionary bounces in many countries ease.



Americas

Escalating by approximately 2.7% (or 0.6 mb/d) in August on the year earlier, preliminary estimates of oil deliveries across the OECD Americas show the region marginally leading the overall OECD. Strong gains in gasoline (+0.4 mb/d) and LPG (+0.1 mb/d) dominated upside momentum; gains that were particularly attributable to rapidly expanding US demand in these categories. Although lower prices have played a key role underpinning the recent gasoline demand strength, as US pump prices fell by one-third in August versus the year earlier, strong underlying economic activity has also been a major support. Annualised quarter-on-quarter economic growth of 3.9% in 2Q15 came in just shy of its one-year high, according to US Bureau of Economic Analysis data, or 2.7% up on a y-o-y basis.



Official monthly data depicted total deliveries across the 50 states of the US at 20.0 mb/d in July, the first time such a threshold has been broken in seven-and-a-half years. Of the 0.7 mb/d overall y-o-y gain, approximately 0.2 mb/d was attributable to additional gasoline demand, 0.2 mb/d LPG, the remainder further jet/kerosene, residual fuel oil and 'other products'. Gasoline deliveries themselves surged to an eight-year high of 9.4 mb/d in July, or 2% up on the year earlier, as total US vehicle miles travelled rose by 4.2% y-o-y in July, according to the latest data from the US Department of Transport's Federal Highway Administration.

Preliminary estimates of August demand, based on weekly data from the US Department of Energy's Energy Information Administration, carry a continuation of the near 3% y-o-y growth recent experience, as estimated deliveries essentially maintain July's 20.0 mb/d average through August. For the year as a whole, deliveries are expected to average 19.5 mb/d, approximately 0.4 mb/d (or 2.2%) up on the year. US demand momentum is forecast to then ease back to around 0.1 mb/d in 2016, as deliveries average 19.7 mb/d, with a lot of the previous lower-price driven exuberance falling out of current market thinking. The current futures price strip showing crude oil prices edging higher in 2016.



At exactly 2 mb/d in August, the latest official data for Mexico shows its strongest y-o-y gain in two years, with approximately 45 kb/d (or 2.4%) of additional deliveries added compared to the year earlier. Sharp increases in residual fuel oil and gasoline led August's upside, respectively adding 35 kb/d and 25 kb/d over the year. Residual fuel oil deliveries in August posted their first y-o-y gain in nine months, as compensatory power use rose in response to declines elsewhere; the Mexican Secretaria de Energia reported power sector coal use down 8.1% y-o-y in August.

Down for a seventh consecutive month in July, Canadian oil product demand continues to fall compared to the year earlier. Total deliveries averaged 2.3 mb/d in the first seven months of 2015, 2.5% below the comparable period in 2014, as recent price-driven pullbacks in Canadian oil extraction activity dampened industrial oil use. For the year as a whole, deliveries are expected to average 2.3 mb/d, equivalent to a drop of 2.1% on the year earlier, before a further decline of around 1.4% sets stock in 2016.


Europe

Playing a key role in the OECD turn-around, since mid-2014, recent data has shown that the moderating European demand trend that we forecast in previous editions of this Report has indeed occurred. Up by approximately 0.5 mb/d in 1Q15, on a y-o-y basis, having fallen by 0.5 mb/d as recently as 2Q14, European demand growth edged down to 185 kb/d in 2Q15 and is forecast to ease further to 170 kb/d in 3Q15 and 150 kb/d in 4Q15. The key contributor being the y-o-y experiences of European gasoil/diesel, itself a consequence of both the unusually cold winter weather conditions endured in 1Q15 and the added impetus provided from the post-recessionary economic bounces experienced in many economies in the region. Gasoil demand contracting by 275 kb/d y-o-y in 2Q14, before surging to 435 kb/d y-o-y addition in 1Q15, then easing to 225 kb/d in 2Q15, 155 kb/d in 3Q15 and 90 kb/d in 4Q15.



The recent resurgence in Turkish jet/kerosene deliveries continued into July, rising to an all-time high of 125 kb/d, as airline activity thrives supported by the recent macroeconomic acceleration. We note, however, that the extremities of the apparent growth (+60 kb/d) have likely been magnified by the use of a new data collection methodology, whereby large quantities of international aviation deliveries were previously misreported as exports. We are still waiting for official revisions to the historical series using this method, hence pre-2015 jet fuel data may be revised. The International Air Transport Association reported for July a 16% y-o-y increase in Turkish airlines available seat kilometres, i.e. the sum of the products obtained by multiplying the number of passenger seats available for sale on each flight by the stage distance, as well as 28% y-o-y growth in freight tonne kilometres. The Turkish Statistical Institute cited economic growth of 3.8% y-o-y in 2Q15, the strongest pace of growth in more than a year. Netting around 940 kb/d in total in July, total Turkish oil product demand rose by approximately 180 kb/d on the year earlier and is forecast to average 840 kb/d in 2015 as a whole, 135 kb/d up on the year earlier.


Asia Oceania

Rising on a y-o-y basis in 3Q15, after five consecutive quarters of declines, projected deliveries in OECD Asia Oceania eked out a gain of around 105 kb/d (or 1.4%). Naphtha dominated the 3Q15 upside, most notably additional Japanese and Korean demand, but there were also strong gains in New Zealand gasoil. Along with these recent product specific gains, one of the key contributing factors to the 3Q15 turn-around in OECD Asia Oceania has been the apparent flipping in Japanese 'other product' deliveries, which include the 'direct crude oil burn' in the power sector. Japanese 'other product' demand falling in each of the five quarters 2Q14-2Q15, but rising in 3Q15 as reductions in hydroelectric output required some additional replacement oil to be 'burnt'.



Specifically in August, Japanese 'other product' deliveries totalled 475 kb/d, roughly 50 kb/d up on the year earlier and accounting for roughly two-thirds of total oil product demand growth. Overall, approximately 4.0 mb/d were delivered in August, resulting in Japan's first y-o-y gain in four months. Along with 'other products', strong gains in naphtha, gasoline and jet/kerosene played key supportive roles, as did the relatively muted decline in residual fuel oil (-7.3% compared to previous six month average of -10.8%). Both residual fuel oil and 'other product' demand exceeded their previous trends, as additional power sector oil use compensated for sharp declines in hydroelectric output. Gasoline and jet fuel deliveries, meanwhile, rose by 20 kb/d and 35 kb/d respectively in August, as lower retail prices and gently increasing consumer confidence indicators, such as that published by the Cabinet Office which showed Japanese confidence scaling a near two-year high in August, filter through. Naphtha's increased price competitiveness, versus LPG, triggered a relatively similarly sized switch from increased naphtha demand versus LPG in August, both moving by 45 kb/d on the year earlier. For the year as a whole, Japanese oil deliveries are forecast to average 4.3 mb/d, 2.2% down on the year earlier, before a similarly sized (-2%) takes hold in 2016, as nuclear restarts curb power sector oil use and underlying macroeconomic momentum likely remains muted.


Non-OECD

Early estimates 3Q15 non-OECD demand, at 48.5 mb/d, have been revised up by 45 kb/d compared to last month's Report, as both Chinese and Russian demand numbers continue to surprise to the upside. Such revisions marginally (+0.1 mb/d) raise the 3Q15 non-OECD growth forecast, to +1.2 mb/d y-o-y, little changed from the general pace that has set in since mid-2013. The US Federal Reserve's September decision to leave interest rates unchanged supports continued growth at around this recent trend in 3Q15, a forecast that is roughly envisaged to hold through to the end of 2016. Caution, however, surrounds the potential pace of emerging market economic activity if/when the potential unwinding in "over-borrowed" debt unfolds, putting an additional layer of uncertainty on non-OECD demand forecasts in 2016.



China

The latest Chinese demand data held up strongly versus the year earlier, particularly considering the country's well document macroeconomic woes, as robust gains in gasoline, jet/kerosene and LPG supported double-digit percentage point y-o-y growth once again in August. This preliminary estimate of August apparent demand, at 11.3 mb/d, carries a growth rate nearly five times higher than that experienced during the Great Recession, when the Chinese economy itself was still growing by close to double-digits. The degree to which financial markets have been spooked by the Chinese economic slowdown became increasingly apparent in September, as the US Federal Reserve's eagerly anticipated interest rate announcement became surprisingly focussed on China. US Federal Reserve Chairwoman Janet Yellen unusually took to highlighting potential problems outside of the US, specifically flagging up that there "might be a risk of a more abrupt slowdown (in the Chinese economy as) … developments we saw in financial markets in August reflected concerns of downside risk to Chinese economic performance." Although the latest estimates of Chinese economic growth depict a modest slowdown, to +7% y-o-y in 2Q15, alternative ad-hoc measures, such as electricity production, paint a more pessimistic picture, rising only modestly (+1% y-o-y) in August.



Transportation fuel demand remains strong in the face of mounting economic headwinds, with preliminary estimates of both gasoline and jet fuel up sharply in August, in y-o-y terms. Estimated gasoline deliveries rose by 0.4 mb/d on the year earlier, a strong gain counter to recent reports of falling new car sales. The China Association of Automobile Manufacturers reported new car sales of 1.4 million vehicles in August, 3.4% down on the corresponding month last year, a third consecutive monthly y-o-y decline. Although such declines mute the projected pace of medium-to-long-term transport fuel demand growth, their impact is negligible over the shorter term, as many previous years of rapid vehicle sales growth are likely to underpin continued robust short-term gasoline demand growth in China. Indeed, the first eight months of 2015 saw new car sales total 12.8 million units, still well in excess of the 0.7 million vehicles that we forecast being scrapped over the entirety of 2015. Even with declining Chinese vehicle sales, the total car pool still rises sharply, supporting continued gasoline demand growth 2015-16. Further supporting the short-term demand trend are reports of very strong SUV and MPV sales, respectively rising by 44.5% and 10% in August on a y-o-y basis, and undermining any efficiency gains that would otherwise have been made.



Even previously ailing Chinese gasoil/diesel demand, a direct consequence of the country's recent economic wobbles, posted modest y-o-y growth in August. According to preliminary estimates, Chinese gasoil demand rose once again in August, as the lifted fishing bans and rising industrial activity of around 6.1% on the year earlier, provided muted support. Reports of record gasoil exports curbed diesel's potential upside, with the General Administration of Customs citing Chinese gasoil exports at 722 516 tonnes in August, 33% up on a m-o-m basis and 77% y-o-y. State-owned refineries have applied for more gasoil export quotas this year, as weak domestic demand fails to keep-pat with the volumes they can produce. The Ministry of Commerce issued export quotas of 28.55 million tonnes in 2015, comprising 8.8 million tonnes gasoil, 6.4 million tonnes gasoline and 13.32 million tonnes jet fuel, late-August.



Recent petrochemical closures, following a number of explosions at facilities, late-July-through-August, ranging from Qingyang Petrochemical company's Gansu plant to Binyuan Chemical's Dongying facility, severely curbed 3Q15 naphtha demand. Weak naphtha deliveries could persist into 4Q15 as the government of Shandong, in eastern China, imposed a temporary ban on trial operations at new petrochemical projects and the government generally forces more strident safety checks on the industry.

Overall, Chinese oil demand is expected to average close to 11.1 mb/d in 2015, roughly 0.5 mb/d up on the year earlier. Growth then likely eases, to around 0.3 mb/d in 2016, as the exceptionally choppy macroeconomic headwinds, weaker car sales and rising gasoline prices potentially dampens transportation fuel demand. The National Development & Reform Commission (NDRC) announced a mid-September retail price hike for both gasoline and gasoil of 90 yuan per tonne; rises that come in sharp contrast to the six previous adjustments. Most recently, in early-September, prices were lowered, gasoline down by 125 yuan per tonne and gasoil 120 yuan per tonne, the last two Chinese price changes that fed into last month's Report.


Other Non-OECD

Preliminary August demand numbers for India, at 3.7 mb/d, came out 35 kb/d above the forecast cited in last month's Report, attributable to strong gains in gasoline, naphtha and LPG. Such strength at the lighter-end of the barrel, coupled with gasoil rising by its fastest clip in four months as heavy mid-year rainfall eased, saw overall Indian demand growth come in at 6.9% y-o-y. Deliveries are forecast to average 3.9 mb/d in 2015, equivalent to a gain of 4.7% on the year, with a modest deceleration then foreseen in 2016, as the stimulus from sharply lower prices in 2015 likely fades in 2016.

Big declines in Brazilian gasoil demand pulled down the overall metric, to an estimated 3.2 mb/d in August, 2.7% below the year earlier reading. Both gasoil and fuel oil demand fell heavily consequential on the contracting industrial backdrop, as the Instituto Brasileiro de Geografia e Estatistica's latest industrial output data shows an 8.9% y-o-y slide in July, the 17th consecutive monthly fall. Indeed, diesel imports fell heavily in August, down 95% y-o-y according to the Agencia Nacional do Petroleo, as the economic slowdown means that domestic requirements can increasingly be met by Brazilian products. At an estimated 3.2 mb/d, average Brazilian oil product demand declines by an estimated 0.7% in 2015, a level it is roughly forecast to maintain in 2016.



Having endured more than a year of heavily falling (y-o-y) Iraqi demand, preliminary July estimates point towards a gain of around 30 kb/d. Warm summer temperatures raised mid-year power demand, while the relative y-o-y statistics were tightened considerably by mid-2014 seeing some of the worst of the recent political troubles. For the year as a whole, an average decline rate of around 40 kb/d (or 5%) is foreseen, before picking up in 2016 as the geopolitical backdrop hopefully improves. The IMF's said in October's World Economic Outlook that the Iraqi economy would expand by approximately 7% in 2016, momentum that is forecast to support oil demand growth of around 25 kb/d. The recent strength demonstrated in Qatari demand continued into July, as the latest data depicts a 45 kb/d y-o-y gain to 280 kb/d, supported by robust transport demand. For the year as a whole, Qatari oil product demand is expected to average 270 kb/d, 35 kb/d up on the year earlier, with a notable deceleration foreseen in 2016 (+5 kb/d) as recent oil price declines potentially dampened public expenditure growth.



A sharp decline in gasoil/diesel demand took Saudi Arabian oil deliveries back down to around 3.5 mb/d in July, their lowest level since April and the weakest y-o-y performance since November 2013. Alongside falling (y-o-y and m-o-m) diesel deliveries, gasoline demand also maintained its traditional mid-year slump, falling by 60 kb/d in July to 490 kb/d, albeit still up in y-o-y terms (+20 kb/d). The key forecast variable is whether the traditional September-gasoline-bounce resurfaces or the prolonged period of lower international crude oil prices proves sufficient to dent consumer confidence enough to keep gasoline demand suppressed; current IEA estimates assume a modest September gasoline demand gain of around 25 kb/d in the month, equivalent to roughly two-thirds the previous five year average. For the year as a whole, total deliveries are forecast to average 3.2 mb/d, 85 kb/d (or 2.7%) up on the year, momentum that is then forecast to ease back to around 1.7% in 2016 as the economic backdrop for Saudi Arabia likely becomes even more precarious.



Down by just 70 kb/d (or 1.8%) in August, the latest estimate of Russian oil product, at 3.8 mb/d, exceeded our month earlier forecast by 120 kb/d as, despite the economy's recent domestic woes, gasoline demand in particular surprised to the upside in August. Although still beleaguered, the Federal State Statistics Service's consumer confidence index edged higher in 2Q15, to a still net-pessimistic -23, from -32 in 1Q15, while their business confidence index flattened for a fourth consecutive month in August, at a net-pessimistic -6. At 620 kb/d in August, Russian gasoil demand also posted absolute y-o-y growth, as recent currency weaknesses provided some cost-competitiveness stimuli to industry.




Supply

Summary

  • Global oil supplies held steady near 96.6 mb/d in September, as lower non-OPEC production was offset by a slight increase in OPEC crude output. Non-OPEC producers accounted for just under 40% of the 1.8 mb/d annual increase in total oil output.
  • OPEC crude oil supply rose by 90 kb/d in September to 31.72 mb/d as Iraqi output climbed to a record and more than offset a dip in Saudi production. Overall OPEC crude output stood 940 kb/d above a year ago as Iraqi oil fields cranked out 4.3 mb/d in September and Riyadh pumped in excess of 10 mb/d for a seventh month running.
  • A slowdown in forecast demand growth and slightly higher-than-expected non-OPEC supply lowers the 2016 'call on OPEC crude and stock change' by 0.2 mb/d versus our previous Report to 31.1 mb/d. The 'call' in 2H16 rises by 1.3 mb/d from 1H16 to 31.8 mb/d, which is just above the group's current production.
  • Non-OPEC supply growth is disappearing fast. Although record rates from Brazil and Russia pushed non-OPEC output in September nearly 0.7 mb/d above a year ago, that is down from growth of 2.2 mb/d at the start of the year. Much of the slowdown is in the US, where year-on-year (y-o-y) gains are estimated to have eased to just 0.3 mb/d from 1.6 mb/d in early 2015.
  • Lower oil prices and steep spending curbs are expected to cut nearly 0.5 mb/d from non-OPEC output next year, with the US, Russia and Norway hit hard. For now, however, record supply from Russia and Brazil and a faster-than-expected rebound in Canada have led to a 150 kb/d upward revision to 2015 and a 110 kb/d lift for 2016 since last month's Report. For September, non-OPEC supply fell by 180 kb/d to 58.3 mb/d on lower North American output.


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

OPEC crude oil supply

A banner month for Iraqi production pushed overall OPEC crude output 90 kb/d higher in September to 31.72 mb/d. Output from Iraq, including the Kurdistan Regional Government (KRG), rose by 130 kb/d to a record 4.30 mb/d as northern exports recovered from disruptions along the country's pipeline to Turkey. But severe budgetary strain and ongoing issues with security and infrastructure are likely to limit supply growth in the near-term for Iraq, now the world's biggest source of additional supply. Flows from top exporter Saudi Arabia dipped in September, but remained near record highs well beyond the 10 mb/d mark.



The continued strong performance from OPEC's two biggest producers - Saudi Arabia and Iraq - left the group's overall output in September running 940 kb/d higher than the previous year. Since March, OPEC has pumped in excess of 31 mb/d - raising its year-to-date average to 31.2 mb/d versus 30.2 mb/d in the first nine months of 2014. The group's official production ceiling is 30 mb/d.



With Riyadh showing little inclination to abandon its policy to defend volume rather than price and Iraq striving to at least sustain its record rates, overall OPEC supply looks set to hover around 31.5 mb/d during the coming months. The group's 'effective' spare capacity stood at 2.35 mb/d in September versus 2.27 mb/d in August, with Saudi Arabia accounting for 88% of the surplus.

The 'call on OPEC crude and stock change' for 2015 and 2016 has been revised down by 0.1 mb/d and 0.2 mb/d, respectively, since last month's Report due to an anticipated slowdown in demand growth and projections of slightly higher non-OPEC supply. The forecast 'call' in 2016 is estimated at 31.1 mb/d, up 1.4 mb/d y-o-y. The 'call' in 2H16 is expected to rise by 1.3 mb/d from 1H16 to reach 31.8 mb/d - just above the group's current production.

Iraq, Iran in market focus

Iraq and Iran are critical low-cost OPEC producers when it comes to determining how the global oil market balance evolves in 2016. Iraq is currently the world's fastest source of supply growth: average output of 4.2 mb/d during 3Q15 was 1 mb/d above a year ago. But oil's collapse and Iraq's severe financial crisis have forced the government to curb spending, hence output next year is likely to remain broadly flat versus 3Q15 levels. Iran, on the other hand, could see upside potential of some 600 kb/d - provided international sanctions are eased.

OPEC's second biggest producer Iraq has indeed performed better than many had anticipated despite its obvious security, infrastructure and institutional challenges. Output in September surged to a record 4.3 mb/d, after exports from the north of the country recovered from pipeline sabotage the previous month.

But there are clear signs of strain. The ongoing, costly battle with the Islamic State of Iraq and the Levant, whose fighters still control large tracts of the country since their incursion in June 2014, has been a drain on the Iraqi treasury - forcing the oil ministry to call time out on investment in new capacity and vital infrastructure projects. The semi-autonomous Kurdistan Regional Government (KRG) is also hard put to pay companies tapping the oil fields of northern Iraq, which is crimping investment. As a result, it may prove a challenge for Iraq to sustain output in the order of 4.3 mb/d. Expectations are for modest annual growth next year of 200 kb/d to 300 kb/d from output this year that is on track to average around 4.0  mb/d.

Tehran meanwhile intends to start ramping up its crude oil production and exports in early 2016, should sanctions be eased, and we estimate that crude oil output capacity of up to 3.6 mb/d could be brought on within six months. Iran also had 40 mb of oil, of which 60% was condensates, in floating storage at the end of September.

How quickly Iran's oil is available to the market will make a big difference to our 2016 market dynamics; if an additional 0.6 mb/d of oil was brought to the market over 2016, an assumed stock build of 0.6 mb/d would increase to 1.1 mb/d. Just looking at 2H16, market equilibrium would tilt into a renewed stock build.

Much of this anticipated increase from Iran - at least 400 kb/d - is already committed to buyers, according to Iranian oil industry sources. Some former customers in the Mediterranean would prefer to use Iranian crude as their baseload feedstock once sanctions are lifted and South Africa, Greece, Turkey and South Korea have reportedly shown interest. The additional Iranian barrels may end up replacing similar sour quality crudes from Saudi Arabia, Iraq or Russia - though much will depend on the pricing of Iranian crude.

For now, however, Tehran's production is hovering around 2.9 mb/d. It was pumping around 3.6 mb/ d in 2011 before the US and European Union imposed tighter financial restrictions. As for international oil sales - crude oil exports so far this year have been running at roughly 1.15 mb/d, down from around 2.2  mb/ d at the start of 2012 before sanctions were tightened.

Iran is meanwhile due to introduce its new upstream contract and 50 projects at a Tehran conference that is scheduled to take place on 21-22 November and in London on 22-24 February. Multinationals such as Royal Dutch Shell, BP, Total and Eni have been talking to Iran about possible post-sanctions upstream involvement.

The threat of snap-back sanctions should Tehran fail to honour its commitment under the terms of the Joint Comprehensive Plan of Action (JCPOA) may dampen the appetites of foreign investors and much will depend on contractual terms that Iran's oil ministry is fine tuning in preparation for sanctions relief.

Iranian Oil Minister Bijan Zanganeh has said Tehran will increase output immediately to regain the ground it has lost since rigorous financial measures were imposed in mid-2012. But Iraq has made impressive strides during this time - vaulting past its neighbour to become OPEC's second biggest producer after Saudi Arabia.

It is now exporting three times as much as Iran, with oil sales breaching 3.6 mb/d during September.

But it may prove a challenge for Iraq to sustain such lofty export rates due to its financial difficulties. Oil's decline to $50/bbl from a June 2014 peak above $115/bbl has forced Baghdad to renegotiate service contracts with international oil companies. And with a major investment opening in Iran on the horizon, Iraq will be under pressure to ensure its contract terms are competitive.



Note: Capital cost is per barrel per day of plateau rate production capacity (or maximum production in the case of LTO). Operating costs include all expenses incurred by the operator in day-to-day production operations, but not taxes or royalties or payments that might be due to the operator such as remuneration fees. The figures are for selected projects for which data were available, but are not representative of all projects of similar types or scale in the countries concerned.

To lure the international oil companies, Tehran has worked up a vastly improved version of its former buy-back investment contract that it believes is better than Iraq's. Foreign oil companies at work in Iraqi oilfields have often grumbled about slim margins, payment issues, contract delays and red tape. But they are unlikely to abandon Iraq in favour of Iran after building up their local operations and investing billions. Regardless, both countries offer low-cost oil fields that look more attractive to external investors in a low-price environment.

Production in Saudi Arabia dropped by 80 kb/d in September due to slightly lower exports and domestic consumption, but - at 10.2 mb/d - remained near record rates. September marked the seventh consecutive month of Riyadh pumping in excess of 10 mb/d and the Kingdom shows no sign of abandoning its policy to defend market share rather than supporting prices. Saudi Oil Minister Ali al Naimi said in an early October interview with India's Economic Times newspaper that "eventually, economic producers will continue to prevail". The influential Saudi oil minister convinced OPEC last November to maintain its official 30 mb/d output ceiling despite oil's collapse - arguing that to reduce output would only hand more market share to non-OPEC producers.

More than half of the Kingdom's crude oil sales are destined for Asia, where the battle for market share is at its most pitched. In early October, Saudi Aramco cut its official selling price for crude loading in November for customers in the region. The latest figures submitted to the Joint Organisations Data Initiative (JODI) show Saudi crude exports running at around 7.4 mb/d from January through July compared to about 7.3 mb/d during the same period in 2014. Total Saudi oil exports, excluding condensates and NGLs, averaged around 8.4 mb/d during the first seven months of the year versus 8.1 mb/d during the same period in 2014.



Output from Saudi's core Gulf neighbours was steady month-on-month (m-o-m). Qatari supply held at 650 kb/d. Kuwaiti production inched up to 2.81 mb/d and the country has vowed to keep spending on major upstream projects despite oil's collapse. The message was much the same from the UAE, which continues to invest in order to expand production to an official capacity target of 3.5 mb/d by 2017. Output in September dipped to 2.91 mb/d, but remained near record rates.

Output from West African producers picked up by 70 kb/d in September. Angolan supply climbed to 1.77 mb/d - a 40 kb/d m-o-m rise - after scheduled maintenance work was completed. Output in Nigeria bumped up to 1.8 mb/d. Royal Dutch Shell in early October launched production at the Bonga Phase 3 project, which is an expansion of the main deepwater Bonga field. The oil and gas from Bonga Phase 3 - with peak output of 50 kb/d - will be routed via an existing pipeline to the Bonga floating production storage and offloading facility, which has the ability to pump more than 200 kb/d of oil.

In North Africa, Algerian output ran a touch lower m-o-m at 1.12 mb/d. Seeking to slow a steady decline in production, Algiers is reportedly poised to award a contract to start a new development at its biggest oil field, Hassi Messaoud. Libyan flows held steady at 370 kb/d during September. The country's eastern oil fields run by state Arabian Gulf Oil Co (Agoco) are providing the bulk of the supply. The core fields of El Feel and El Sharara in the southwest, which together could produce up to 480 kb/d, have been closed since December due to a strike by oil security guards and pipeline blockades. Militants in early October meanwhile targeted the eastern port of Es Sider, which has been under force majeure since early December due to fighting between armed factions linked to the country's two rival governments. The prolonged battle between the officially recognised government in the east and the so-called Libya Dawn administration in Tripoli has also - for months running - forced a halt to operations at crucial oil fields.

Non-OPEC overview

Non-OPEC supply growth is clearly eroding. From 2.2 mb/d at the start of the year, and as much as 2.7 mb/d in December 2014, y-o-y growth had fallen to below 0.7 mb/d in September. The sharpest slowdown is in the US, where onshore crude and condensate production has started to drop. Further reductions in drilling activity since the start of September are expected to accelerate declines in US LTO production. After a brief recovery in active oil rigs in the US over July and August, producers pulled 70 rigs out of service in September and early October, reducing the total number of rigs to only 605 in the week ending 9 October. The sector could be tested further in October as banks re-evaluate credit lines that are crucial to operators with little or negative free cash flow. For the time being, it looks as though banks are maintaining lines, not cutting them, as they need the heavily indebted sector to maintain production to service their debt.

For September, non-OPEC oil production is estimated to have slipped by 180 kb/d to 58.3 mb/d on lower output in North America. Declining US onshore production and outages at Canadian oil sands facilities curbed output compared with a month earlier. Supplies nevertheless exceeded expectations, with Brazil and Russia recording record output levels during August and September, respectively, while North Sea production has continued to surprise to the upside.   



Major oil companies and independents alike continue to adjust to the lower price environment. French major Total cut its investment sharply to a "sustainable level" of $17-19 billion from 2017, compared with a peak of $28 billion in 2013 and $23-24 billion targeted for 2015. The company also raised its targeted reduction in operational expenditures (OPEX) to $3 billion by 2017, from $2 billion announced earlier. Brazil's Petrobras cut its spending plans for the second time in only three months, by $3 billion to $25 billion for 2015 and by a hefty 30% for 2016 (from $27 to $19 billion). Royal Dutch Shell meanwhile announced it had abandoned its exploration efforts in Arctic waters outside Alaska, ending a seven-year, $7 billion effort to drill in the region - potentially delaying US Arctic production by decades.



The outlook for the remainder of the year and 2016 is little changed since last month's Report. Total supplies are expected to fall by 0.5 mb/d next year, as lower prices and spending cuts filter through. Not only are new projects at risk of delay and cancellations from lower investments, but producing fields are also expected to decline faster as companies spend less money to sustain output. A notable decline in infill drilling, required to stem declines at producing fields, is already becoming apparent. Some estimates show infill drilling rates dropping by more than 50% so far this year, nearly double the rate seen in previous price downturns. As such, output declines are expected to be widespread. The producers most affected are expected to be the United States (-190 kb/d), Russia (-85 kb/d), Kazakhstan (-60 kb/d) Norway (-70 kb/d), the UK (-40 kb/d), and Colombia (-40 kb/d).

Over the hedge

Faced with plummeting prices, US independent producers have thus far surprised with their resilience. Many factors are contributing to this, including cost deflation, productivity gains, and - for integrated oil companies - relief from revived refinery margins. In addition, smaller US independents reaped the benefits of financial hedging in 2015. For producers, hedging secures in advance either a sale price (through a price swap) or, by paying a premium, a price floor (which is often combined with a ceiling in order to reduce the cost).

Although only a portion of 2015 production was hedged, quarterly filings for publicly listed companies that chose to protect against price risk show the remarkable impact of hedges on the final sale price so far this year. The premium received by producers compared with benchmark WTI reached as much as $20/bbl in 1Q15 for about 1mb/d of reportedly hedged production.

Not all independent producers adopted this strategy. According to the latest annual reports, larger US drillers (with more than 100 kb/d of output in 2Q15) had hedged around 20% of their production in 2015. Excluding Devon Energy Co, which has a significant portion of its production in Canada, the percentage falls to around 10%. Smaller companies hedged a substantially higher share of their production - on average, 60% for 2015. Those volumes were locked in at prices hovering around $80-85/bbl.

With banks and capital markets looking to re-determine credit lines secured by producer reserves in their twice-yearly credit re-evaluations, the focus is shifting to 2016. The latest filings show production for 2016 was far from secured by mid-year. Larger companies had then covered less than 10% of their expected 2016 volumes, whereas the share that had been covered by smaller producers was around 40%. Having locked in an oil price in the range of $75-80/bbl producers should still reap a nice benefit from this strategy. With prices now well below $60/bbl, and with the premium for option contracts having risen considerably (see 'Prices', 'Options volatility smile suggests hedging from rebound), producers are unlikely to have been able to lock in additional volumes at such thresholds.

More details will be available by early November, when most 3Q15 company filings will be made public and more detail becomes apparent regarding companies' ability to secure financing. It will be interesting to see whether producers took advantage of the $10/bbl rally over a few days in August to hedge a sizeable chunk of their production. The oil markets will be watching closely.

OECD

North America

US - August Alaska actual, others estimated: A faster than expected ramp up in Gulf of Mexico oil production underpinned a 120 kb/d monthly increase in US oil output in July, the latest month for which official data are available. Output from Texas onshore, North Dakota and New Mexico all saw modest declines from the month earlier. At 9.36 mb/d, US crude and condensate supplies stood more than 600 kb/d above a year earlier, with notable gains from Federal Offshore areas, offsetting a slowdown in onshore output growth. While supplies in Texas, North Dakota, New Mexico and Colorado still posted annual increases in July, gains in these four states alone had slipped from more than 1.2 mb/d at the end of 2014, to just above 450 kb/d in the latest month of official oil production statistics.



After a slight recovery in US drilling activity over the summer, the US rig count took another tumble and by early October hit its lowest level since July 2010. Producers, who added 47 rigs over July and August after the price of WTI recovered to $60/bbl in early June, again cut back on upstream activity as prices slumped to around $45/bbl. Over the last six weeks, through 9 October, producers cut their active rigs by 70 to 605 according to Baker Hughes Rig Count data. The steepest decline came in the Permian Basin, which shed 21 rigs, followed by the Eagle Ford (-16), Granite Wash (-11) and the Williston Basin (-8).



While the 60% drop in active US oil rigs has yet to translate into significant output declines, as the drop in activity levels have been offset by high-grading and other efficiency gains (see Oil rout slams brakes on US LTO growth in the September 2015 OMR), as well as a back-log of uncompleted wells, the most recent data are clearly showing that onshore production growth has stalled and output is starting to decline. EIA's Drilling Productivity Report estimates that output from the seven most prolific US shale plays continued to decline through October, losing a total of 350 kb/d of production since April, when output peaked near 5.6 mb/d. The biggest declines are seen in the Eagle Ford, which is estimated to have dropped by 300 kb/d in total over the May-October period. Niobrara has lost a cumulative 90 kb/d, while output in the Permian has continued to increase, adding 90 kb/d to surpass an estimated 2 mb/d in output in October.

Canada - Alberta, Newfoundland August actual, others estimated: Canadian oil production rebounded sharply in July, with output in Alberta surging 180 kb/d to breach the 2 mb/d mark for the first time. Bitumen production recovered to nearly 1.5 mb/d, supported by production from Imperial's Kearl expansion starting ahead of schedule in June. Once fully operational, the plant's production is expected to double to 220 kb/d. Bitumen output will see further gains towards the end of the year, with several new projects starting up. Most notably, ConocoPhillips reported first steam at its Surmont in-situ oil sands expansion in May, with first oil delivered at the start of September. The project will ramp up towards its 118 kb/d nameplate capacity through 2017.

Synthetic crude output rose another 155 kb/d to 1 085 kb/d in July, from only 700 kb/d in May and 930 kb/d in June. The completion of maintenance at Syncrude's Mildred Lake and Shell's Albian Sands upgraders lifted output. A pipeline spill at Nexen's Long Lake oil sands project, which forced the company to shut down its operations and a fire at Syncrude's upgrader on 29 August have since reduced output. Production at the latter was curbed from 308 kb/d in August to only 63 kb/d in September, according to the company website. Offshore oil production in Newfoundland also inched higher in July, to 155 kb/d, as the Terra Nova resumed production after a full maintenance shutdown starting in May. In all, Canadian oil production is forecast to rise 100 kb/d this year, to 4.37 mb/d, and a further 145 kb/d next year to 4.5 mb/d.



Mexico - August actual, September preliminary: Preliminary data show Mexican crude and condensate production inching up 15 kb/d in September, to 2.27 mb/d, reversing a similar decline in August. An expected recovery in natural gas liquids output following a rebound in natural gas production added a further 30 kb/d. Total output stood 120 kb/d below a year earlier, its smallest decline so far this year. Pemex' legacy Cantarell field accounted for the majority of the drop, while the large offshore Ku-Maloob-Zaap development saw stable output with gains in the Zaap field offsetting declines at the Ku and Maloob fields. For the last quarter of the year, persistent field decline is expected to take Mexican oil production 140 kb/d lower from a year earlier, compared with y-o-y declines of 220 kb/d over the first 9 months of 2015.

Mexico's upstream regulator, the National Hydrocarbons Commission (NHC), is moving forward with reforms that will end a 77-year upstream monopoly. NHC agreed in September to migrate several fields from existing service contracts to production sharing contracts, in accordance with the 2014 energy sector reform. Twelve fields, grouped into seven contracts, have been announced to be offered for such contracts through auction. The migrations will form part of what is known as Round Zero of the Reforms.

Furthermore, the second phase of a series of upstream bid auctions, part of Round One, took place on 30 September. Having eased the terms and conditions from the first phase, which only awarded two out  of 15 blocks, the NHC awarded three out of five blocks on offer. All the blocks were for development and production in shallow water of the Gulf of Mexico, with all but one having proven reserves, while the first phase included only fields for exploration. The winners of the blocks offered government revenue takes ranging from 70-83.5%, compared with the government's minimum requirement of around 35%. The government expects output from the fields could reverse the downward trend in output by 2018.

North Sea

North Sea oil production held up over July and August, posting robust annual gains, despite some seasonal declines in both Norway and the UK in August. In July, the most recent data for which official data are available for all countries, total North Sea oil output was nearly 200 kb/d higher than a year earlier, following year-on-year gains of around 400 kb/d over the preceding two months. Preliminary data and loading scheduled suggest output remained high in August and would remain so through November.



Loading schedules of benchmark BFOE crudes suggest output rebounded in September after an August dip. Moreover, the latest figures show a 30 kb/d increase in planned November loadings, from an upwardly revised October schedule of around 950 kb/d, to 980 kb/d. Schedules for the 12 main streams show planned October loadings of 2.065 mb/d, up nearly 50 kb/d from September and the highest since November 2013 according to Reuters calculations. September loadings were already up 80 kb/d from August.

Norway - July actual, August provisional: Norwegian oil output continues to surprise to the upside, exceeding the Norwegian oil directorates estimate by 13.5% in August (and 45 kb/d above our previous forecast). At 1.92 mb/d, total oil production was 30 kb/d lower than in July but 70 kb/d above that of a year earlier. Final data for July show output totalling 1.95 mb/d in that month, of which NGLs accounted for around 340 kb/d (18%).

Over the first eight months of 2015, Norwegian oil production posted annual gains of some 50 kb/d from a year earlier, with gains averaging 130 kb/d over the last four months through August. Field level data through July reveal a faster ramp-up in output from a number of recently commissioned fields than previously expected. Notably, Statoil's Gudrun field, which started production in April 2014, has added 33 kb/d so far this year with output last nearing 60 kb/d. Statoil's Svalin field, which also reported first oil last March had ramped up output to nearly 40 kb/d, while Knarr, which was completed in March 2015, produced 28 kb/d in July. ConocoPhillips is also ramping up output at Eldfisk II and Ekofisk South.

While the ramping up of output at these and other fields should continue to support output in coming months, the start-up of a few other major projects has been delayed. The start-up of Eni's Goliat field is starting to look elusive. The project, which has already endured numerous delays and cost overruns, is facing further delays as it awaits approval from the Norwegian Petroleum Safety Authority, which says more work and corrections must be completed before the project can start up. Earlier this year, Eni had targeted production start-up in July, and a peak of about 100 kb/d by end-year. We now expect the project to start up early next year. Total's Martin Linge project has been delayed, with the company announcing in early October it had pushed back a planned start-up from 4Q16 to 2018, due to engineering fabrication delays. Martin Linge is expected to produce 100 kb/d at its peak. While including only a small amount of liquids, the start-up of Statoil's Aasta Hansteen gas field could slip from 2017 to 2018 due to delays in building the platform the Norwegian government said in early October. Lundin Petroleum, meanwhile, is still targeting production start at its 100 kboe/d Edvard Grieg platform in 4Q15.



UK - July actual:  According to official data, total UK oil output slipped a further 25 kb/d in July, to 935 kb/d. Production nevertheless stood a robust 150 kb/d above the same month a year earlier, marking the third consecutive month with annual gains surpassing 100 kb/d. Growth has mostly come from the Forties system, where a number of fields are ramping up. Notably, BP's Kinnoull which reported first oil in December 2014, produced 38 kb/d in June. Nexen's Golden Eagle project, which started up last November, had reached 47 kb/d in June, with the recently commissioned Peregrine field adding another 10 kb/d. ConocoPhillips' Enochdhu field, expected to add 10 kb/d, reported first oil in June.

Annual gains are expected to be even higher in August, but from exceptionally weak output levels in August of last year. Little maintenance has been announced and loading schedules suggest output stayed high. Nexen announced in late September it had delayed planned maintenance at its Buzzard field by one month to November. Buzzard, the largest field contributing to the Forties benchmark, produced an average of 170 kb/d in 1H15. While the extent and the duration of the shutdown are not known, we expect an average of 50 kb/d of production for November to be affected.

Non-OECD

Latin America

Brazil - August actual: Brazilian crude and condensate output surged nearly 100 kb/d in August to 2.55 mb/d, surpassing the 2.5 mb/d mark for the first time. Including natural gas liquids, output averaged 2.64 mb/d. More than half of the monthly rise stemmed from the giant Lula field, where the start-up of the 150 kb/d Cidade de Itaguaí FPSO on 31 July propped up flows. After several months of sluggish output, Campos Basin fields also recovered to 1670 kb/d, from 1615 kb/d a month earlier.

On a year-on year basis, gains are heavily centred in the Santos Basin, where the Lula and Sapinhoa fields are located. In August total output was 230 kb/d above the previous year, with Lula (+195 kb/d), Sapinhoa (+110 kb/d) and Roncador (+75 kb/d) providing the bulk of the gains. Output declines at the Marlim fields dragged down Campos Basin totals to 60 kb/d y-o-y. Brazil is on track to expand output by a total of 215 kb/d this year on average to 2.57 mb/d. Production is expected to rise another 100 kb/d next year, despite further cuts to spending plans in early October.

As Petrobras' financial difficulties persist, the major oil company cut its spending plans for a second time in three months, from $28 billion to $25 billion for 2015, and by 30% to $19 billion from $27 billion in 2016. Meanwhile, Brazil's National Petroleum Agency put 266 blocks on offer at its 13th round auction of oil and natural gas exploration and concessions on 7 October. Low oil prices, and reductions in capex programmes from Petrobras and other large oil companies, saw only 14% of the 266 exploration blocks on offer being snapped up, with no major oil company participation.

Former Soviet Union

Russia - September preliminary: Russian crude and condensate production averaged 10.74 mb/d in September, a new record-high and just shy of our previous forecast. Year-on-year gains, of around 100 kb/d, were again underpinned by growth from independent producers offsetting drops in Russian output from Rosneft, Lukoil and other major oil companies. Record high output follows a boom in development drilling, up 8.9% y-o-y for the first 8 months of 2015 compared with the same period a year earlier, as well as a greater share of horizontal wells and a continued focus on brownfield maintenance.

Russian oil companies are meanwhile mulling the impacts of potential changes to the country's tax regime. Discussions of planned changes to oil taxation have intensified after the Russian finance ministry in September suggested raising the Mineral Extraction Tax for oil and delaying the planned reduction in oil export duties. The government, which has up until now borne the brunt of the drop in oil prices due to its flexible taxation system, which adapts to the oil price and the dollar exchange rate, is looking for ways to boost state budgets. The Energy, Natural Resource and Economy ministries, as well as oil companies themselves, are against raising the tax burden on companies, which they say will limit the companies' ability to make necessary investments to sustain production. While the proposed increase in the Mineral Extraction Tax seems to have been taken off the table for now, a delay in the reduction to export duties is still being considered. Energy Minister Novak said such a delay would divert $4.6 billion from producers to the national budget, reducing investments by the same amount. He estimated output could decline by 140-200 kb/d next year as a result.



Other FSU - August actual: Kazakh oil output fell by 80 kb/d in August, to 1590 kb/d, with declines stemming from the Tengiz field. Deputy Energy Minister Uzakbai Karabalin said last month that Kazakhstan had cut its oil production forecast for 2016 to 77 mt (1.6 mb/d) based on an oil price of $40 /bbl, but that output could be as low as 73 mt (1.52 mb/d) if prices fell below $30/bbl. Karabalin said that the laying of replacement pipelines at the offshore Kashagan field was ahead of schedule with 26 km installed and welded out of a total of 180 km of pipeline that has to be replaced. Karabalin said the field, which had to be stopped after only a month in operation in October 2013, is on track to restart at the end of 2016. Our forecast is that oil output will decline 60 kb/d next year to 1.61 mb/d, from 1.67 mb/d expected in 2015.

Azeri output was unchanged from a month earlier in August, at 840 kb/d, but 30 kb/d below the same month a year earlier. Azerbaijan is faced with structural declines and for the first 8 months of this year, output has fallen by an average of 40 kb/d. In all, production is expected decline by 20 kb/d for the year, to average 840 kb/d, before slumping by a further 35 kb/d in 2016, to 805 kb/d.

FSU net oil exports fell by 440 kb/d to 8.5 mb/d in August, their lowest level this year. Plunging crude exports accounted for the lion's share of the drop as they plummeted by 320 kb/d m-o-m to 5.9 mb/d, their lowest level since December 2014. This drop was entirely accounted for shipments of non-Russian crudes while Russian exports remained stable at 4.2 mb/d. The biggest drop was in volumes shipped through the BTC pipeline (-170 kb/d), where flows were constrained by maintenance to stem decline rates at the Azeri-Chirag-Guneshli (ACG) fields. Nonetheless, the latest export programmes suggest that deliveries of BTC blend crude to Ceyhan are expected to have rebounded steadily during September and into October. Exports via the CPC pipeline were also sharply lower at 780 kb/d in August (-120 kb/d m-o-m), as deliveries of both Russian crudes produced by Rosneft and of Kazakhstani crudes were lower.

In the east, flows through the ESPO pipeline to the Pacific port of Kozmino dropped by 70 kb/d over the month as maintenance and dredging work was carried out in preparation for the port being able to load Suezmax-sized vessels. Exports from the terminal are likely to be curbed into October and this, combined with rampant Chinese buying, has recently seen ESPO's premium to regional benchmark Dubai rapidly steepen to $6/bbl.

In falling by 120 kb/d in August, refined product shipments slipped for a fifth consecutive month and at 2.6 mb/d, stood 1 mb/d lower than recent highs posted in the first quarter. The monthly decrease came against a backdrop of refinery maintenance in the region, and especially in Russia, where nine refineries experienced some type of shutdown accounting for a combined 240 kb/d. All products posted falls, notably gasoline (included here under 'other products') exports slumped by 65 kb/d.


OECD stocks

Summary

  • OECD commercial inventories extended recent gains and rose by 28.8 mb in August to stand at 2 943 mb by end-month. Since this was nearly double the 15.0 mb five-year average build for the month, inventories' surplus to average levels widened to 204 mb.
  • Surging product inventories (+31.9 mb) led total stocks higher as OECD refinery throughputs hit a seasonal high and as the seasonal restocking of propane in the US continued apace. By end-August stocks covered 31.5 days of forward demand, 0.7 days and 0.8 days above end-July and one year earlier, respectively.
  • As on-shore refined product storage capacity in key European and Asian terminals has become constrained, a number of market participants have taken to storing refined products, notably middle distillates, at sea.
  • Preliminary data for September point to a counter-seasonal 14.8 mb build in OECD inventories, meaning that stocks have built for five consecutive quarters. Surging motor gasoline inventories led refined product holdings to build counter-seasonally. Meanwhile crude stocks rebounded as refiners entered seasonal turnarounds. 

Global Overview

As more data become available, it is apparent that although the pace of global stock builds has slowed in the third quarter, they still remain impressive at a notional 1.6 mb/d (147 mb). Nearly 60 mb of this can be attributed to China where crude reserves have continued to swell. Meanwhile, the pace of OECD stock builds has slowed. Crude builds ground to a halt over July and August as refiners have ramped up throughputs to take advantage of strong margins on the back of lofty gasoline cracks. In doing so, OECD refined product stocks have risen by over 50 mb to sit at their highest level in more than four years. Product stocks have also built in Asia, notably in Singapore where inventories added an impressive 8 mb over the quarter. The remainder is likely to have occurred in regions such as Latin America where the US has been exporting large volumes of products of late.

Although there is no suggestion that storage capacity is currently being tested on a global scale, these recent refined product builds appear to have put capacity at a number of key European and Asian hubs under pressure. Reports indicate that some market participants have recently resorted to storing refined products on tankers in these regions. However, it may not even be that these terminals are full, rather, it may be a reflection that all capacity is leased and some traders may not be able to place their product in on-shore tanks. Regardless, considering that the M1-M3 time spread in the ICE Gasoil contract currently stands at $0.80/bbl, insufficient to cover floating storage costs, it is apparent that the decision to store product at sea is being taken for logistical, rather than economic reasons.

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

OECD commercial inventories extended recent gains and rose by 28.8 mb in August to stand at 2 943 mb by end-month. Since this was nearly double the 15.0 mb five-year average build for the month, inventories' surplus to average levels widened to 204 mb. All OECD regions remained in surplus, although OECD Americas accounted for the vast majority (173 mb) while Europe and Asia Oceania stood 3 mb and 27 mb above average, respectively.



In August, total stocks were boosted by a 31.9 mb build in refined products that rose as OECD refinery throughputs hit a seasonal high of 39 mb/d. This also saw crude inventories draw by 2.9 mb, although this was significantly weaker than the 8.7 mb average draw for the month. Middle distillates inventories (+14.2 mb m-o-m) extended recent gains which, as discussed in recent issues of the Report, have resulted from middle distillates production rising in tandem with Atlantic Basin refiners maximising their gasoline output on the back of exceptional gasoline cracks. OECD middle distillates holdings had risen for six consecutive months up until August, during which they added over 66 mb to stand nearly 19 mb above average by end-August. This is a staggering turnaround considering that twelve months earlier they stood 72 mb lower, and 54 mb below average.

Despite the rise in refinery throughputs, a large portion of the increase in product inventories came from the continued seasonal restocking of 'other products' in North America. This product category includes propane that has risen in tandem with natural gas production growth and largely bypasses the refining system. By end-August, OECD refined product inventories covered 31. days of forward demand, a rise of 0.7 days on end-July and 0.8 days higher than one year earlier.



Upon the receipt of more complete data, OECD stocks have been revised downwards by 9.6 mb in July after holdings in OECD Americas, Europe and Asia Oceania were adjusted downwards by 5.3 mb, 3.5 mb and 0.8 mb, respectively. The revision to the Americas was centered in the US and masked a combined 10.0 mb upward adjustment in crude oil, NGLs and other feedstocks which was more-than-offset by a 15.3 mb downward revision to refined products, concentrated in middle distillates and ' other products'. Considering that June data were also adjusted 1.2 mb lower, the 18.0 mb OECD stock build for July presented in last month's Report is now nearly halved to 9.5 mb while the June stock build is now seen as a 0.4 mb draw, the first time stocks have declined since February. Despite this draw, the OECD stocks still rose by 1.0 mb/d over 2Q15, the same as presented in last month's Report.

Preliminary data for September point to a counter-seasonal 14.8 mb build in OECD inventories meaning that stocks have built for five consecutive quarters. Motor gasoline inventories surged by 9.7 mb, centered in the US, which pushed products up counter-seasonally by 8.2 mb. As refiners entered seasonal turnarounds, crude stocks rebounded by 6.4 mb with builds in the US and Japan more-than-offsetting a draw in Europe where refinery maintenance schedules have been weak compared to previous years.

Recent OECD industry stock changes

OECD Americas

Industry inventories in OECD Americas added a steeper-than-seasonal 12.7 mb in August as they were boosted by the continued brisk restocking of 'other products' (mainly propane) which hit a record 239 mb (+12.9 mb m-o-m in August). The seasonal restocking of 'other products' has been faster-than-normal this year amid rising natural gas production and by August had already exceeded last-year's maximum of 228 mb that was attained in September. Middle distillates rose seasonally by 5.3 mb while motor gasoline drew by a relatively weak 2.0 mb. All told, refined products added 14.9 mb in August, more than three times the 4.5 mb five-year average build for the month to cover 30.5 days of forward demand at end-month, 0.7 days and 1.2 days above the previous month and previous year, respectively.

As refinery throughputs remained high in August and as regional crude production declined, led by the US, crude oil inventories drew for the fourth consecutive month (-1.7 mb). Nonetheless, by end-month they stood 104 mb (17%) above one year earlier. Meanwhile, NGLs and other feedstocks slipped counter-seasonally by 0.5 mb to stand at 187 mb, more than 10.0 mb above year-ago levels.



Preliminary weekly data from the US Energy Information Administration (EIA) suggest that US inventories rose by 12.3 mb in September, approximately double the average build for the month. Refined products (+10.6 mb) continued to boost inventories, although builds in 'other products' tapered off (+3.7 mb) as propane demand rose as the harvest season began - propane is the crop drying fuel of choice in the US agricultural heartland of the Midwest. Middle distillates posted a draw (-3.1 mb) for the first time in seven months but still stood above average at end-month. In contrast, motor gasoline rebounded by 9.0 mb as the driving season drew to a close and despite the concerns of US market tightness over the summer, remained 7.8 mb above average at end-month.

US crude stocks rose counter-seasonally by 3.2 mb in September. This came against the backdrop of an uptick in imports, firstly from Canada into PADD 2 and then latterly from elsewhere in the Atlantic Basin which moved to the US following the narrow LLS - ICE Brent spread during August and September. Additionally, refinery throughputs continued to slip from mid-summer peaks and by end-September were 1.5 mb/d below their end-July peak. There has also been a sustained draining of crude from the Cushing, Oklahoma storage hub to the US Gulf Coast refining centre. In September, Cushing stocks drew by 3.8 mb while stocks in PADD 3 built by 12.3 mb. This saw Cushing pressured upwards over the month so that its spreads to both LLS and ICE Brent narrowed.

OECD Europe

European commercial holdings built weakly by 6.4 mb, which saw their surplus to average levels narrow to 3.4 mb from 6.5 mb one month earlier. As regional throughputs peaked seasonally, refined products rose by 8.3 mb. Despite the robust refining activity, crude oil inventories remained on a par with one month earlier, likely buttressed by relatively high North Sea production and imports. On the product side, middle distillates accounted for more than half of the build while fuel oil and 'other products' posted builds of around 2 mb each. On the other hand, gasoline stocks inched down by 0.4 mb amid reports of still-healthy transatlantic exports. Moreover, data indicate that the draw was concentrated in the Netherlands, the main European hub for transatlantic trade. At end-August, regional refined product holdings covered 38.7 days of forward demand, a rise of 0.7 days on end-July.

According to preliminary data from Euroilstocks for EU15 + Norway, regional inventories fell by 7.7 mb in September. However, this was weaker than the 15.5 mb five-year average draw for the month after refinery throughputs remained high as some maintenance was delayed. Refined products drew by 5.2 mb as only motor gasoline posted a build while crude inventories declined by a relatively weak 2.4 mb. In Germany, consumers took advantage of low gasoil prices and continued to seasonally restock their heating oil tanks. In September they reached 60% of capacity, their highest since February. Reports concerning refined products held in independent storage in Northwest Europe suggest that levels remain at close to historical highs. As spare capacity is becoming scarce, a number of market participants have taken to storing products on tankers in the region with market reports suggesting that these cargoes are generally middle distillates, notably jet fuel.

OECD Asia Oceania

Stocks in OECD Asia Oceania extended recent gains and rose by 9.8 mb in August. Since this was significantly more than the 1.4 mb five-year average build for the month, the region's surplus to average levels ballooned to 27.0 mb from 18.6 mb one month earlier. As with Europe, refinery throughputs touched seasonal highs that saw products increase seasonally by 8.6 mb. However, the healthy refinery activity did not drain crude inventories significantly since they slipped by a weak 1.1 mb compared to the 7.3 mb average draw for the month. This therefore suggests that imports remained high, especially in Korea where crude stocks built counter-seasonally by 3.0 mb.

The product build was led by middle distillates that rose seasonally by 4.1 mb while 'other products' and fuel oil added 2.9 mb and 1.5 mb, respectively. Motor gasoline, meanwhile, remained relatively stable rising counter-seasonally by 0.1 mb over the month. By end-month total products covered 22.4 days of forward demand, 0.8 days above end-July but 0.5 days lower than the year earlier.

Preliminary weekly data from the Petroleum Association of Japan (PAJ) suggest that stocks there surged by 10.2 mb in September, far steeper than the 1.6 mb average build for the month. Crude inventories bucked seasonal trends and climbed by 5.6 mb as a likely uptick in imports came as refiners reduced their throughputs by around 350 kb/d m-o-m. Despite the lower refinery output, product stocks (+2.8 mb) continued to climb as stocks of middle distillates (+2.3 mb), motor gasoline (+0.5 mb) and 'other products' (+0.1 mb) all rose and more-than-offset a 0.1 mb draw in 'fuel oil'.

Recent developments in Singapore and China stocks

Data from China Oil, Gas and Petrochemicals (China OGP) indicate that Chinese commercial refined product stocks drew by an equivalent 14 mb (data are reported in terms of percentage stock change) in August.  Despite refinery throughputs increasing by close to 200 kb/d, holdings of gasoil (-8.3 mb), gasoline (-5.3 mb) and kerosene (-0.4 mb) all posted draws. Nonetheless, it is evident that refined product inventories have been building this year amid healthy year-on-year growth in refinery throughputs. Commercial crude stocks posted a 0.3 mb draw in August against a backdrop of the high refinery throughputs and a decrease in crude imports. Nonetheless, the gap between crude supply (domestic production plus net-imports) and refinery throughputs remained in positive territory, implying an unreported build of approximately 6 mb, significantly less than estimated over recent months.



According to weekly data from International Enterprise, land-based refined product stocks in Singapore rose by 1.5 mb to end September at 52. 9 mb. Nonetheless, September was characterised by volatility in stock levels. After building rapidly, driven by rising residual fuel oil imports from Europe, total inventories hit a record 55 mb in mid-month. They then fell back sharply as imports fell so that by end-month they stood at nearly 53 mb.


Prices

Summary

  • Benchmark crude prices recovered in September from recent lows to trade in narrow bands before a further rally in early October on expectations of lower US output that could lead to an eventual market rebalancing. At the time of writing, ICE Brent was trading at $51.90/bbl with NYMEX WTI lower at $48.80/bbl.
  • Crude oil markets remained locked in contango during September. Dubai moved back into contango amid ample Middle Eastern sour crude supply while buying interest from Chinese traders cooled. The time spreads in ICE Brent and NYMEX WTI futures contracts remain at less than $0.50/bbl, enough to cover land-based storage but below levels needed to cover floating storage costs.
  • The WTI - Brent spread has recently narrowed to less than $3/bbl after WTI was supported by declines in US production and stock draws at Cushing while gains in Brent were capped by ample supply, stiff competition in Europe and regional refinery maintenance.
  • Spot product prices were mixed with gasoline continuing to tumble from its mid-summer highs, while fuel oil prices weakened on soft fundamentals. On the other hand, naphtha prices firmed on strong petrochemical demand.
  • Crude freight rates had an exceptionally strong month, particularly for larger classes of vessels. Daily prices for eastbound very large crude vessels (VLCCs) leaving the Middle East Gulf rebounded to their highest levels since 2008.

Market overview

Benchmark crude prices recovered from their August lows in September. After an early volatile period, prices stabilised mid-month and then oscillated within a narrow band. Prices rallied in early-October on data suggesting US production is in decline and forecasts that the oil markets could rebalance in 2016. At the time of writing, ICE Brent was trading at $51.90/bbl with NYMEX WTI lower at $48.80/bbl.

The present global oversupply is helping markets shrug off current geopolitical tensions with little initial bullish sentiment triggered by escalating Russian military intervention in Syria. Oil markets also paid little attention to the US Federal Reserve's decision to keep interest rates unchanged. Nonetheless, markets are still relatively volatile compared to historical averages and there is evidence to suggest that there is still significant uncertainty as to where oil prices are heading in the short-term. This is manifested in market participants paying still-hefty premiums on options contracts to insure themselves against price swings (see Why so serious? Option volatility 'smile' suggests hedging from rebound).



While NYMEX WTI gained strength from domestic production declines and stock draws at the Cushing, Oklahoma storage hub, gains in ICE Brent were capped by ample supply, stiff competition in Europe and regional refinery maintenance. This saw the spread between ICE Brent and NYMEX WTI narrow significantly over the month so that by early October it stood at less than $3/bbl. This spread has reopened the arbitrage opportunities to ship African crudes eastwards and relieved some pressure on African producers who, during mid-summer, had difficulty placing barrels.

Options volatility smile suggests hedging from rebound

Oil market volatility soared in late August, as prices swung by more than 10% within days, and climbed throughout September. Amidst that volatility, options prices sent a powerful signal on market expectations. Implied volatility - an indicator derived from options prices - can be used as a gauge of future uncertainty. The higher the indicator, the more dispersed are expectations with respect to the futures curve. Higher uncertainty typically commands a higher 'options premium', the price paid for locking in a price floor/ceiling while keeping the upside.



August and September data show two trends. Firstly, implied volatility climbed significantly as overall uncertainty grew over future price direction (See 'Futures Markets'). Secondly, as implied volatility can be calculated for different price levels (so-called 'moneyness'), its decreasing skewedness since early August shows that more market participants are expecting prices to have bottomed out. Skewedness is normally calculated as the ratio between implied volatility at 110% and 90% moneyness.

In concrete terms, the price for a refiner hedging against a 10% crude spike ('call option') versus the price a producer would pay to be hedged against a 10% price drop ('put option').

Such asymmetry is commonly referred to as the 'volatility smile' after the U shape in the chart, and it is the norm among most financial assets. Traders typically pay more to ensure against a price drop than against a rise and bullish positions are executed by buying the underlying futures. A few points difference in implied volatility translate more than proportionally to option premiums. For example, if one wanted to hedge oil trading at $45/bbl six months ahead, a put option locking in a $40/bbl floor would cost $0.34/bbl with implied volatility at 20%, $0.97/bbl at 30%, $1.73/bbl at 40%, and $2.56/bbl at 50%.

The call-to-put ratio normally hovers around the 90 mark. However, since prices rebounded in late August, such skewedness has been rapidly levelling. Indeed, even briefly reversing when 'call' options became relatively more expensive than 'put' options for a few days in late August. The ratio trending up, with its 30-day moving average moving towards the 95 level, the highest in in more than a year, suggests that after the recent price evolution, hedgers are prepared to pay more to lock in the low price, and speculators are more willing to bet on the bottom.

The last time the ratio stayed above the 95 threshold for a sustained period was in June-July 2014, just before the big slide, probably to hedge against (or speculate on) a price spike stemming from Middle East turmoil. In short, the options market shows us that - as of late - market participants have a less directional view on where prices are going to go next.

Futures markets

All markets remained in contango during September. The Dubai market moved back into contango as prompt prices were pressured lower after feverish trading between Chinese traders cooled down. At the same time, supplies of competing Middle Eastern sour crudes remained ample. By late-September the M1-M2 spread stood at over $1.50/bbl, its steepest since January. However, it narrowed once again to around $1.00/bbl in early-October. In the ICE Brent market, as prompt prices rose, the spread between the M1 and M12 contracts flattened and came in by about $1.70/bbl to $6.02/bbl. With an approximate spread of about $0.40/bbl per month over the duration of the M1-M12 curve, these are levels which barely cover land-based storage costs and are far below those which are required to cover floating storage costs.



While the NYMEX WTI forward curve is flatter than ICE Brent, the forward time spreads are more complex. Despite prompt prices recovering in September, the spread in the M1-M3 contract has remained relatively stable at around $1.20/bbl. However, the 12-month forward time spread has come in by about $1/bbl from early-September levels as the back of the curve has risen at a slower rate than prompt prices.

Market activity

Financial markets had a relatively quiet September, following volatility spikes during August. Hedge funds in both Brent and WTI took a slightly more bullish stance, with the 'long-to-short' ratio, an overall indicator of funds' overall positioning, inching up. Implied volatility, a gauge of future uncertainty derived from option prices, eased in September from August peaks of over 50%, although it still sits at levels of over 40%.



Activity levels in crude futures eased from August highs but were sustained by historical standards, particularly for WTI. The United States Oil fund, the largest oil-based retail fund by capitalisation, issued new shares in October for the first time in a month, a sign that small investors have regained some confidence towards WTI.


Regulation

The European Securities and Markets Authority (ESMA) published its final regulatory technical standards (RTS) on the Market in Financial Instruments Directive (MiFID II), one of the central pieces of the post-crisis legislation. The final draft was delivered three months later than initially scheduled as ESMA considered feedback from European energy firms and commodity trading houses. The RTS clarify the thresholds for a firm to fall within the scope of MiFID. For a firm to qualify for exemption, it has to pass two tests.

Firstly, the 'market share test' provides that the firm's EU market share, once deducted from the volumes related to physical hedging, market making and other exempt transactions, must remain under the 3% threshold for oil and oil products. Secondly, the 'main business test' determines that the size of a firm's speculative trading has to be less than 10% of its total trading. However, if the firm exceeds the 10% threshold, it may still be exempt, providing its EU market share remains below 1.5% (or 0.6% if speculative activity is more than 50% of total trading). This is to ensure that only 'sizeable participants' are captured by the regulation.

The final draft has been sent for endorsement to the European Commission, which has three months to approve it. After this, the EU Parliament and the Council will have one month to reject it. Once approval is formalised, MiFID II is expected to come into force in January 2017. ESMA is also expected to publish draft rules on position limits. It has anticipated that position limits will range between 5% and 35%, with a special regime for new and illiquid contracts.

Spot crude oil prices

The US sour crude market was unusually weak in September as refinery maintenance cut demand in both the Gulf Coast and Midcontinent refining centres. Gains in Mars were muted in the wake of maintenance at the 330 kb/d Pascagoula refinery. Consequently, Mars weakened against competing sour crudes while its discount to LLS widened to over $7/bbl by early-October, the largest since winter 2013. In the Midcontinent, Western Canadian Select was affected by increased supplies of oil sands while refinery maintenance in both the midcontinent and Gulf Coast regions reduced demand. Accordingly, its discount to WTI remained steep and widened over the second half of the month to approach $15 /bbl.



US light crude markets fared somewhat better - driven by declining US LTO production and stock draws in the midcontinent. WTI rose by $2.59/bbl on a monthly average basis, the highest across global benchmarks, after US EIA data suggested US LTO production is declining while stocks at the Cushing, Oklahoma storage hub have begun to drain. As US domestic production declines, notably in the Bakken formation, the price of light, sweet Bakken crude has strengthened and by early-October had risen to a small premium against WTI. This strength closed the arbitrage window to rail Bakken eastwards to PADD1 refiners, considering the narrow WTI - Brent spread, this has drawn in light African crudes to the region. Meanwhile, gain in LLS was relatively subdued (+$1.45/bbl on a monthly average basis) as a relatively weak Brent market, refinery maintenance and a raft of transatlantic imports, purchased during August when the LLS - Brent spread narrowed, added downward pressure.

North Sea crudes experienced a relatively weak month. Despite North Sea Dated making up ground after its exceptionally weak August, gains were capped by refinery maintenance and high stock levels. Additionally, North Sea supply remained high with BFOE loadings attaining a year-to-date high. Further downward pressure came from an uptick in arrivals of African and FSU crudes, the latter as loadings from Baltic ports rose sharply.

Considering the relative weakness of North Sea Dated and the strength in WTI, the spread between the global benchmarks has recently narrowed and by early October stood at less than $3/bbl. This narrow spread reopened the arbitrage to ship Atlantic Basin crude to the US with reports suggesting that some Russian and African crudes have already arrived in PADD 1 with more African cargoes en-route. It is also spurring Latin American customers to up their imports of transatlantic crudes. Market reports suggest that Colombia recently bought Nigerian Bonny Light for the first time in several years.

In the Mediterranean, light crudes were supported by buoyant naphtha cracks that saw refiners upping their purchases of light FSU crudes such as CPC blend and Azeri Light while Algerian Saharan Blend was also in demand. However, the sour market was much softer with increased volumes of Iraqi KRG crude coming out of Ceyhan and competing directly with Urals shipped via the Black Sea. Further bearish sentiment came from refinery maintenance that is due to peak in October.



Russian crudes experienced differing fortunes between western and eastern outlets. In the west, Urals for both Northwest European and Mediterranean customers weakened against North Sea Dated from mid-September onwards. In Northwest Europe it appears that amid high North Sea crude production and brimming stocks, regional refiners are particularly well supplied. In the Mediterranean, competition is fierce among sour crudes. In contrast, deliveries of ESPO blend from the pipeline's end-point at Kozmino have been lower of late as the port is dredged ahead of its expansion next year to take Suezmax sized tankers. Chinese buyers also reportedly increased their purchases of the grade that saw its premium to Dubai rise to a record $6/bbl by early-October before falling back to $5/bbl.



Light, sweet West African crudes were boosted by the narrow North Sea Dated - WTI/LLS spreads which saw renewed buying interest from trans-Atlantic customers. Nigerian cargoes reportedly moved across the Atlantic to the US and to Venezuela where they are also being used as diluent in heavy oil production. Consequently, Bonny Light's premium to North Sea Dated remained stable at about $1 /bbl over the month. Despite the picture being brighter than during mid-summer, Angolan crudes remained under pressure during September and it took price cuts to spur Asian interest with reports suggesting that Chinese buyers stepped up purchases and have brought a significant volume of Angolan barrels for October and November delivery.



Dubai was the only benchmark crude to fall on a monthly average basis in September as it slipped by $2.18 /bbl from August's exceptionally strong level after frantic buying by Chinese traders cooled down while supplies of other competing Middle Eastern grades remain high. Consequently, the grade moved back into a widening contango during early September. As it weakened, it moved back to a discount to North Sea Dated which by early-October stood at about $2.00/bbl. It appears that Dubai's unusual strength in August saw barrels arbitraged to the region from the Atlantic Basin with an uptick in arrivals from Africa and Latin America.

Now that Dubai has weakened, Middle Eastern crudes are likely back in vogue. Despite moving its official price formulae away from Dubai during August, Saudi Arabia has once again returned to its standard pricing methodology and taken account of the sharp drop in Dubai to cut its official price formulae for Asian customers more steeply than for customers in other regions. Considering the recent spike seen in rates for VLCCs travelling between the Middle East Gulf and China, it appears that Chinese buyers have stepped up their purchases of Middle Eastern crudes likely attracted by the low prices.

Improving regional naphtha cracks also saw Asian refiners stepping up their interest in lighter crudes. Notably, Malaysian Tapis garnered strength and saw its premium to sour Dubai briefly exceed $3.00 /bbl, a level not seen since early-2014.

Spot product prices

Spot product prices experienced a mixed month with gasoline prices continuing to tumble from mid-summer highs while fuel oil prices were weakened by soft fundamentals. On the other hand, naphtha prices firmed on strong petrochemical demand. In Europe and the US, the divergence of product and crude prices saw product crack spreads weaken. However, Asian cracks firmed due to Dubai standing apart from other benchmark crudes and weakening.



Atlantic Basin gasoline prices continued to tumble from their mid-summer highs with spot prices posting double digit falls in percentage terms over the month. Much of this stemmed from the end of the driving season in the US. This saw US stocks, particularly in the key PADD 1 market build steadily over the month putting downward pressure on domestic prices. Consequently, USGC conventional gasoline cracks dropped below $20 /bbl which put them on a par with year-ago levels. In Europe, spot prices dropped due to lower transatlantic exports although this decline could have been steeper had it not been for rising demand from Nigeria. During early September, the arbitrage window to ship European product westwards remained shut, although it reopened mid-month but this was not enough for cracks to turn upwards which saw them end the month below $12/bbl, about $8/bbl below one month earlier. In Asia, cracks benefitted from both the weakness of Dubai and strength in the gasoline market from mid-month onwards which saw spot prices firm on the back of tighter fundamentals.

Naphtha prices firmed across all surveyed markets in September, but prices remain low, stimulating an uptick in petrochemical demand where it faces stiff competition from LPG. On an absolute basis, Singapore spot prices saw the steepest rise by over $1/bbl with cracks surging by $3.22/bbl on a monthly average basis to stand in positive territory for the first time since the first quarter. In Europe, healthy eastbound trade saw spot prices rise and cracks briefly flirt with positive territory during late-September for the first time since April. Nonetheless, as spot prices firmed, exports reportedly waned as the arbitrage to ship product eastwards closed.



On a monthly average basis, Asian and European middle distillates prices firmed. However, to a certain extent this is misleading considering that after their early-September rally, they then resumed a downward trend. In Europe, diesel prices were depressed in the face of brimming stocks and higher arrivals from Russia and the Middle East. In Asia, despite concerns over sluggish Chinese demand, demand remained brisk while cracks benefitted from the weak Dubai market.

After initially rebounding from their August lows, fuel oil markets weakened in September. Stockpiles in Singapore hit record levels as imports from the Middle East and Europe remained high throughput the first half of the month. Asian HSFO prices steadily declined and once again stood below $35/bbl by late-September. Northwest European prices tumbled as opportunities to ship product to Asia remained scarce and by mid-month had stabilised at $30/bbl with cracks slipping to around -$15/bbl, their lowest level in over 18 months.



The premium of LSFO to HSFO remained under pressure during September as demand for LSFO has fallen. Japan has been steadily moving away from LSFO for power generation, towards natural gas and eventually nuclear, although the pace at which oil's share declined eased in August due to intermittent disruptions to other power sources, such as hydro. LSFO bunker demand has also taken a battering of late following the introduction of more stringent environmental legislation in Emission Control Areas which has reduced the maximum sulphur content of bunker fuel to 0.1% from 1% previously. This narrowing premium is most evident in the Americas and Northwest Europe, which are both located in ECAs, where by mid-September spreads had narrowed to less than $1/bbl from over $5/bbl one year ago.

Freight

Crude freight rates had an exceptionally strong September, particularly for larger classes of vessels. Daily prices for eastbound very-large-crude-vessels (VLCCs) leaving the Middle East Gulf rebounded to their highest levels since 2008, exceeding 22$/mt. Rates plummeted to new lows in August on the back of slowing Chinese imports and low bunker costs. Demand for Middle Eastern crudes picked up again strongly in September, with the majority of the volumes set to be lifted in October. Westbound Suezmaxes ex-West Africa also gained strength in mid-September from tightening fundamentals. Moreover, vessel owners were reportedly reluctant to send their vessels to Nigerian terminals, despite a ban on 113 vessels being lifted on 9 September. Rates for Aframaxes on voyages in the Baltic and North Sea eased slightly during the month despite volumes being lifted, as available vessels remained abundant. Further downward pressure came after a number of North Sea cargoes were combined and transported upon larger VLCCs.



Surveyed product rates fell across the board in September. Naphtha shipments from the Middle East Gulf to Japan eased as fundamentals softened. Rates settled at about half of July's peaks, which were set against the backdrop of healthy Asian petrochemical demand. Meanwhile, the cross-Atlantic UK-USAC route also weakened as the gasoline arbitrage window remained closed for most of the month. Diesel arbitrage was closed throughout September, prompting ships to ballast back to Europe from the US Atlantic Coast.


Refining

Summary

  • The onset of seasonal turnarounds is estimated to have curbed global refinery runs by 1.9 mb/d in September to 79.4 mb/d. The OECD and FSU accounted for the bulk of the decline, while runs remained remarkably strong in Asia and the Middle East.
  • Throughput in 3Q15 was steady at 80.5 mb/d and the 4Q15 estimate was slightly lower at 79.9 mb/d, due to higher announced maintenance shutdowns. Annual throughput growth is now estimated at 2.6 mb/d for 3Q15, easing to 1.7 mb/d for 4Q15. The contribution of OECD regions to year on year (y-o-y) growth remains significant, representing around 40% of total gains.
  • Refinery margins fell sharply in September, losing $2-3/bbl in Europe and twice as much in the US Gulf Coast, due to lower gasoline and fuel oil cracks. Diesel cracks were barely stable but naphtha proved surprisingly strong versus gasoline. Only in Singapore did margins edge up, supported by rising gasoline and distillates cracks, with Dubai relatively weaker than last month.

Global refinery overview

The outlook for the global refinery business is not much changed from last month's Report, and with few revisions. Crude runs started decreasing in September due to normal autumn maintenance, and as margins adjusted to more prevailing levels on seasonally lower gasoline cracks. Finally, the weakness in Asian distillates seems to have disappeared, with gasoil cracks back up to around $15/bbl. The one unexpected feature was the gasoline strength in Asia, where cracks moved up from $16/bbl to $22 /bbl, on demand from Vietnam, India and refinery issues.

Two facts, however, should be kept in mind. First, refineries are still running much higher than in the past years, with y-o-y throughput growth of 2.6 mb/d in 3Q15 - a lot more than the 3Q15 y-o-y growth for refinery capacity (1.5 mb/d) or demand (2.0 mb/d). Secondly, stocks remain at record levels. OECD crude stocks are 170 mb above their 5-year average. OECD product stocks keep rising, especially in "other products "(essentially propane, which by-passes the refining system) and middle distillates, with concurring reports of high fuel oil and distillates stocks in Asia (See 'Stocks').

With maintenance kicking in, crude stocks could rise faster than products, and margins may be preserved. This has been the case in the past few months, and year-to-date margins have been remarkably strong. However, for the time being, it seems that - barring unusually cold weather - no single product has the potential to support margins, which could be under pressure especially if crude prices picked up. One potential element of support for early next year, though, is the likely high level of spring maintenance in the OECD, as the backlog of deferred maintenance cannot be postponed indefinitely (see "A maintenance backlog in the OECD").



In July, global crude runs reached 80.7 mb/d. This represents 1.3 mb/d month-on-month (m-o-m) growth, and a massive 3.3 mb/d y-o-y growth. This y-o-y supply growth is now at its peak, and should decrease to more customary levels later this year.

In August, the most recent month for which a complete set of monthly OECD data is available, OECD crude runs edged up by 0.2 mb/d m-o-m to 39.1 mb/d - 0.8 mb/d above a year earlier. Estimates of global crude runs show them peaking at 81.3 mb/d, 0.3 mb/d higher than estimated last month. Preliminary figures and estimates for September show OECD runs lower by 1.4 mb/d, with the decrease spread equally among the three regions. Looking at the global picture, total crude processing for September would be 79.4 mb/d, 1.9 mb/d lower than in August, but still 1.9 mb/d higher y-o-y. On a quarterly basis, global crude run estimates for 3Q15 and 4Q15 stand at 80.5 mb/d and 80.0 mb/d, respectively. 

Margins

After gasoline margins plummeted last month, the picture was more varied this month. Gasoline cracks were stable in the US, with some strength showing at the end of the month. They weakened in Europe, eventually coming down under the $10/bbl mark, and picked up in Singapore to above $20 /bbl. Middle distillates cracks did not show a clear direction either, weaker in the US and, to a lesser extent, in NWE but a little stronger in Singapore. Distillate is now the largest contributor to margins in NWE and Singapore, while gasoline remains the major driver in the US. NWE fuel oil cracks went a couple of dollars lower, to an average value when compared to the close past. Only naphtha cracks did show a clear strength - up to a $5/bbl increase in Asia - supported by a shrinking propane-naphtha spread and growing Asian demand.



These product trends combined to generate lower refining margins in the US and Europe. In Europe, margins lost $2-3/bbl, with hydroskimming margins now barely positive, which should pressure crude runs lower and give some support to VGO markets.  In the US, the loss was more severe: -$5-7/bbl in the US Gulf and -$10-12/bbl in the US Midcontinent. Margins remain at decent levels in the US Gulf, and very high in the US Midcontinent, around $20/bbl. Margins in Singapore nominally increased vs. Dubai, but the strength of Dubai last month explains it for a part. Relative to Tapis, they slightly decreased.


OECD refinery throughput

OECD refinery crude runs increased by another 0.2 mb/d in August from July, to 39.1 mb/d. Japan was the only significant increase - up 0.34 mb/d - while the US showed the largest decrease - by 0.26 mb/d although the utilisation rate is still at a high 93 percent (vs. 94 percent in July). The Mexican refinery utilisation rate remains the lowest in the OECD, at 64 percent, which generates hefty oil products imports from the US Gulf. In Europe, runs were revised higher by 0.3 mb/d and are now flat y-o-y. Spain and Turkey experienced the highest upward revisions while France figures were revised slightly lower, leading to the lowest utilisation rate in Europe (78 percent) despite robust local demand. OECD throughput estimates for 3Q15 were revised down by 0.1 mb/b to 38.6 mb/d.



OECD Americas

In the OECD Americas, August crude throughput decreased to 19.7 mb/d, after a downward revision of 0.2 mb/d due mainly to a lower intake in the US.  In the US, estimated runs based on weekly figures decreased very significantly in September, down by 0.4 mb/d m-o-m to 16.2 mb/d). The margin for mid-continent crude railed to the Atlantic Coast seems to have eroded, prompting refiners to look more at West African grades.

Exxon Mobil announced an agreement to sell its 155 kb/d Torrance, California, refinery to PBF Energy. In June it had already agreed to sell to PBF its 190 kb/d Chalmette, Louisiana, plant. Another announcement took place, with the bid of Monarch Energy partners to buy and re-start the idled 650 kb/d Hovensa refinery in the US Virgin Islands. However this refinery has a long history of shutdowns and re-starts, and a previous bid in 2014 was turned down by the government.

Gasoline yields react slowly to high gasoline cracks

This summer has been glorious for gasoline cracks. Boosted by fast-growing demand, crude runs and gasoline production strongly increased and gasoline cracks surged well above their usual values.



One would have expected refiners to try maximizing their gasoline yields, especially in Europe, where diesel is the product that refiners usually seek to maximize. However, gasoline yields did not rise above the past values. This appears counter-intuitive, but the following factors may go a long way explaining it.

  • Gasoline yields are "diluted" by very high crude runs: to face high demand refineries run their CDUs at the highest rates possible - above 90% utilisation rate. But secondary units making finished gasoline - FCC, reformer, alkylation, MTBE plant - are usually relatively smaller than the CDU capacity and run at full rates well before the CDU does. Additional marginal crude runs thus have lower gasoline yield and higher fuel oil yields than the average at lower throughputs.
  • An unusual number of unplanned outages for gasoline-making units took place this summer in the US and Europe
  • A number of refiner's reactions take time to implement. Most refineries do not change their settings immediately, and some have limited flexibility in changing feedstocks or operating mode from a well established maximum distillates mode. It also probably took time for the decision-makers to realise that this strong gasoline demand was a lasting feature. Finally, some setup changes - catalysts for instance - need a turnaround to be implemented and cannot therefore follow short-term price signals.
  • OECD gasoline stocks were average during summer, and refiners were probably not to react, as they could have serviced gasoline demand with their inventory, without the need for extra production.

However, it seems July yields did finally recover and it remains to be seen whether August will be higher, in which case this would comfort the idea of a delay in the final reaction.




OECD Europe

Europe's crude processing in August remained stable at 12.3 mb/d. Despite persistently high stocks, middle distillates continued to sail to Europe from all regions - the US (although the arbitrage became closed in September, see Prices), Asia, Russia, Middle East - with some cargoes from Asia taking advantage of the contango to take the long route from Korea via the Cape of Good Hope. A similar movement, but from Europe to Asia, took place for fuel oil, with cargoes from all Europe re-loaded on VLCCs in Rotterdam bound to Asia, despite very high stocks over there and increasing freight rates. Notwithstanding these high stocks and continuing imports, diesel margins resisted around $15/bbl, decreasing just slightly in the second half of September. Combined with decreasing fuel oil and gasoline cracks, this brought hydroskimming margins very close to zero. Announced maintenance still appears to be particularly low this autumn, with only a few refineries reporting outages, generating expectations of 2016 maintenance to be above average.

On 8 October, Gunvor announced an agreement with KPC to buy its Rotterdam's 80 kb/d Europort refinery. It will be Gunvor's third European refinery, after Ingolstadt and Antwerp.

A maintenance backlog in the OECD

Seasonal maintenance is an essential factor in the safety of refinery operations. Maintenance turnarounds intervals are regulated, with a maximum interval depending on each unit. It is shorter if the operational conditions of a given unit are more severe, for instance for FCCs or hydrocrackers. In short, secondary units may have to stop every three to four years, while there may be up to five years between complete refinery turnarounds. When looking at the announced shutdowns for 2015, it is striking that, in OECD, the level of CDU maintenance was well below the usual range in 2014 and, in Europe, even more so in 2015 - which is clearly not the case for non-OECD regions.





The most likely reason is that OECD refiners are extremely responsive to margins and that they are takers of "market" margins. Since margins have not been as high over the summer for the past five years, refiners might have been ready to accept the trouble of deferring a turnaround to benefit from such unusually high margins. Similar reasons explain why non-OECD maintenance did not follow such a path: firstly, they mostly "receive" margins centrally set by local crude or ex-refinery product prices, and do not necessarily follow all the movements of free markets. But also because most non-OECD refining is state-owned and probably more responsive to centralised state-planning decisions than to instantaneous margins.



What does it mean for the future? As mentioned above, regulations create a tight frame for turnaround decisions, and turnarounds thus cannot be deferred for very long. It is therefore likely that we will see a very high maintenance in OECD during 2016. This would then put downward pressure on crude prices and upward pressure on product prices, a recipe or virtuous circle to support elevated margins. However, margins have already substantially weakened in September, despite the beginning of the maintenance season.

OECD Asia Oceania

OECD Asia Oceania crude runs rose by 0.3 mb/d in August to 7.1 mb/d, with the increase entirely due to Japan. This value comes unexpectedly above the past Five-year range. As discussed in last month's Report, August figures for South Korea do not reflect the run cuts announced by Korean refiners early August.  Gasoline and distillate cracks were supported by rising import requirements and some unplanned outages, such as Taiwan's Formosa 84 kb/d FCC.

Non-OECD refinery throughput

In July, non-OECD refinery throughput remained stable at 41.8 mb/d. August forecast is slightly higher, at 42.2 mb/d, before maintenance season kicks in. This is still nearly 2.0 mb/d above last year's figures, with the Middle East, China and Other Asia accounting roughly equally for all the growth. Estimated quarterly figures for 3Q2015 and 4Q15 are also 41.9 mb/d and 41.8 mb/d, respectively.



In China, despite announced run reductions, August crude runs edged higher to 10.44 mb/d, from 10.25 mb/d in June. Over the first 8 months, refining runs have been higher by 6.0% y-o-y. As a consequence of such high runs, and to alleviate pressure on bulging inventories, distillates exports remained at the elevated June levels: approximately 0.20 mb/d of jet/kerosene and 0.15 mb/d of diesel. This could go higher, as quotas have been approved for up to 0.27 mb/d of diesel, and as the local refining margin has somehow rallied. Nonetheless, all major companies still seem to be scheduling lower runs in Q4. To join its larger exporting peers, Sinochem also applied for product export licences for its Quanzhou, Fujian, refinery.



In Non-OECD Asia refinery crude intake in July dropped 0.4 mb/d to 10.1 mb/d, essentially because of India's lower throughput (4.4 mb/d vs. 4.7 mb/d last month) but also because of lower runs in Chinese Taipei (-0.2 mb/d). However, in August, runs in India recovered to 4.6 mb/d. In Singapore, runs will be lower until the end of this year, as Shell has delayed the restart of a 210 kb/d crude unit until 2016. Indonesia' Pertamina announced that gasoline imports next year would be cut by 90 kbd with the re-start of TPPI's 100 kb/d condensate splitter and the ramp-up of a new 60 kb/d FCC at its Cilacap refinery mid-October. In Singapore, JAC's 100 kb/d condensate splitter was shut down indefinitely as its owner went into receivership. 

In FSU, July crude runs moved up 0.2 mb/d m-o-m to 7.1 mb/d. August is forecast at similar levels, but crude runs will be reduced by 0.6 mb/d because of the seasonal maintenance starting September. In Ukraine, the Kremenchug refinery is still the only one operating, and well below capacity.

In September, Russian throughput started its seasonal decrease to 5.7 mb/d, flat y-o-y.  Asian naphtha demand strength made it possible to export directly from the Baltic to Japan two 80,000 tons shipments. Supporting the request of some refiners, and because a number of new units needed for the upgrade to Euro 5 are behind schedule, Russian authorities delayed by six months the ban on Euro 4 gasoline.



In July, Middle East crude runs reached 6.8 mb/d, 0.3 mb/d higher m-o-m and 0.6 mb/d higher y-o-y. They are expected to reach a record 7.0 mb/d in August and stay close to this level despite the high maintenance level in October and November, in part because of the full ramp-up of the Ruwais refinery and the re-start of Yemen's 150 kb/d Aden refinery.

In Latin America, the large 750 kb/d Paraguana refining complex in Venezuela stopped on October 1 due to a power outage. It is reported to be currently re-starting, but this could affect October throughput figures.

In Africa, July crude throughput is stable at 2.1 mb/d. Nigeria issued extra gasoline import quotas for Q3 (equivalent to 80 kb/d) to compensate for the delays in re-starting the local refineries, but quotas for Q4 are still not out.