Oil Market Report: 13 November 2015

Download full reportDownload tables


  • Crude oil benchmarks were locked in a narrow range during October as continuing oversupply in world markets and a strong US dollar limited the impact of strikes in Brazil and geopolitical tensions. At the time of writing, ICE Brent was trading at $44.43/bbl and NYMEX WTI at $41.75/bbl.
  • Global demand growth is forecast to slow to 1.2 mb/d in 2016 after surging to a five-year high of 1.8 mb/d in 2015. Momentum eases towards its long-term trend as recent props - sharply lower oil prices, colder-than-year earlier winter weather and post-recessionary bounces in some countries - are likely to give way.
  • Global oil supplies breached 97 mb/d in October, as non-OPEC output recovered from lower levels the previous month. Despite the resilience of producers such as Russia, non-OPEC supply is forecast to contract by more than 0.6 mb/d next year. US light tight oil (LTO), the driver of non-OPEC growth, is expected to decline by 0.6 mb/d in 2016.
  • OPEC crude supply held steady in October at 31.76 mb/d with declines in Iraq and Kuwait offset by higher supply from Libya, Saudi Arabia and Nigeria. A slight tightening in fundamentals lifts the 2016 'call' on OPEC by 0.2 mb/d from last month's Report to 31.3 mb/d.
  • OECD commercial inventories rose counter-seasonally by 13.8 mb to stand at a record near 3 billion barrels by end-September. The pace of global stockbuilding slowed during the third quarter to 1.6 mb/d from 2.3 mb/d in 2Q15, but remained significantly above the historical average.
  • Global refinery runs sank by 1.2 mb/d in October to 78.2 mb/d with seasonal maintenance in full swing, leading to a significant reduction in annual throughput growth. Margins edged lower in October versus September but remained robust despite high product stocks.

3 billion barrel cushion

Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil. Demand growth has risen to a five-year high of nearly 2 mb/d, with India galloping to its fastest pace in more than a decade. But gains in demand have been outpaced by vigorous production from OPEC and resilient non-OPEC supply - with Russian output at a post-Soviet record and likely to remain robust in 2016 as well. The net result is brimming crude oil stocks that offer an unprecedented buffer against geopolitical shocks or unexpected supply disruptions.

The stock overhang that first developed in the US on the back of soaring North American crude production, has now spread across the OECD. Since the second quarter, inventories in Asia Oceania have swollen by more than 20 million barrels. In Europe, record high Russian output and rising deliveries from major Middle East exporters are filling the tanks. Crude oil stocks are also piling up in the non-OECD, with China building inventories at a 0.7 mb/d clip during the third quarter and India starting to pour oil into its strategic reserves. This surplus crude provides some relief, with OPEC's spare production buffer stretched thin as Saudi Arabia - which holds the lion's share of excess capacity - and its Gulf neighbours pump at near record rates.

The shock absorber provided by oil stocks is no longer restricted to just crude. As refineries ran flat out to meet soaring demand for gasoline in top consumers the United States and China, distillate inventories ballooned as a consequence. This is not only due to seasonal factors: lower oil prices are also having an uneven influence on consumers. While motorists are responding relatively quickly to cheaper gasoline by purchasing bigger cars and taking to the roads, middle distillate demand growth has failed to match the heights seen in gasoline as industrial activity in many countries wavers.

Moreover, world demand growth is forecast to ease closer to a long-term trend of 1.2 mb/d in 2016 as supportive factors that have recently fuelled consumption are expected to fade. The impact of oil's steep price plunge on end users is unlikely to be repeated and economic conditions are forecast to remain problematic in countries such as China.

As winter approaches, stocks of diesel - the heating fuel of choice for Europe and the US Northeast - are now brimming. Between February and August, OECD middle distillate stocks surged by over 84 mb. By end-August they stood close to 600 mb, their highest absolute level since 2010. By end-September they remained a comfortable 36 mb above average and 49 mb above a year ago.

This could protect the market from a supply crunch should there be a lengthy spell of cold temperatures. But the current forecast is for a mild winter in Europe and the US. If it turns out to be true, bulging stock levels will add further pressure and oil market bears may choose not to hibernate.



  • World demand growth is forecast to slow to 1.2 mb/d in 2016 after surging to a five-year high of 1.8 mb/d in 2015. Momentum eases towards its long-term trend as recent supports - such as post-recessionary bounces in some countries and sharply falling crude oil prices - likely prove temporary.
  • Global growth is likely to have peaked in 3Q15 at +2.1 mb/d on a year-on-year (y-o-y) basis and is expected to ease to 1.5 mb/d in 4Q15. Third quarter gains were particularly strong in Europe and non-OECD Asia - notably India, and to a lesser extent China. Gasoline dominated global growth, accounting for roughly two of every extra five barrels delivered in 3Q15.
  • Indian demand growth soared to its fastest pace in more than a decade in September, supported by strong gains across the barrel, particularly diesel and gasoline. As Aristotle warned, "one swallow does not make a summer", but with increased economic optimism, an ambitious road building programme and rising car sales, relatively robust Indian demand conditions are expected to hold. Chinese demand, up by around 0.8 mb/d y-o-y in 3Q15, also beat earlier expectations.
  • The latest official US demand data for August were significantly below earlier official weekly statistics. Growth softened to a four-month low versus 2014, as gains in gasoline eased to a six-month low. Preliminary estimates for September-October suggest the slowdown will continue, as the positive impact of lower oil prices fades and the macroeconomic outlook appears fragile.
  • Resilient European demand growth continued in 3Q15 adding 0.3 mb/d over a year ago, as strong gains in Italy, Turkey and the UK exceeded declines in countries such as Germany and Netherlands.

Global Overview

Strong gains in Europe and non-OECD Asia took global oil demand growth up to a four-and-a-half-year high of 2.1 mb/d y-o-y in 3Q15, with momentum dominated by gasoline. With OECD growth expected to weaken in 4Q15 and predictions of relatively mild northern hemisphere temperatures, global demand growth is forecast to ease towards 1.5 mb/d. For the year as a whole, growth comes in at a five-year high of 1.8 mb/d, as global deliveries average 94.6 mb/d. A slowdown to +1.2 mb/d is forecast for 2016, as many of the recent demand supports - such as post-recessionary bounces in some countries, sharply falling crude oil prices - are likely to prove transitory.

Gasoline, accounting for roughly two-out-of-every-five-extra barrels of oil products consumed in 3Q15, dominated global demand growth - albeit not at the same pace as 4Q14 when roughly two-out-of-every-three-extra barrels of oil products delivered were to satisfy additional gasoline demand. Strong global 3Q15 gains were also seen in gasoil/diesel (particularly in India and Europe), jet/kerosene, naphtha and LPG (which includes ethane). The main 3Q15 global laggard was residual fuel oil, which continued to see sharp declines in Japan (along with 'other products' on falling power sector use) and Europe, where bunker fuel demand continues to switch over to marine diesel in response to the tightening in sulphur regulations imposed in 2015.

As global demand growth decelerates to +1.2 mb/d in 2016, gasoline's share eases further as two of the key supports in 2015 - China and US - slow. Gasoil/diesel and LPG are forecast to take up the slack, as non-OECD growth is likely to remain robust - underpinned respectively by still-expanding industrial and petrochemical sectors.


Supported by absolute 3Q15 gains across all three main OECD regions, total OECD oil product demand averaged 46.6 mb/d, 0.7 mb/d (or 1.6%) up on a year ago, and a four-and-a-half year high. For gasoline, it was a more than a decade high - with the US accounting for most of the growth. Looking ahead, we assume a resumption of the flat-to-falling OECD demand outlook in 2016 as many of the previous demand-supports fade.


The scale of demand growth seen in the OECD Americas remained broadly unchanged on recent months, rising by 0.4 mb/d on a y-o-y basis in 3Q15. Gasoline played a dominant role, accounting for roughly three-out-of-every-four-extra barrels delivered in 3Q15, compared to the year earlier. Rising by a much more muted 0.1 mb/d in 2016, OECD American demand growth is forecast to decelerate on lower US demand growth - with the stimulus from the near-halving in oil prices this year unlikely to be repeated.

US oil demand growth has already decelerated somewhat. The latest official data for August show US oil product demand growth of 415 kb/d (or 2.1%) compared to a year earlier, a four-month low triggered by decelerating gasoline, its previous key support. US gasoline demand growth eased back to a six-month low of 155 kb/d (or 1.7%) in August, as its key recent determinant - growth in US vehicle usage - eased to a nine-month low of 2.3% according to the latest data from the US Department of Transport's Federal Highway Administration.

The recent slowdown in US industrial activity is restraining total US demand growth, particularly in distillates but also taking some of the gloss off gasoline. The US Federal Reserve citing industrial output growth easing to a near six-year low, of 0.4% y-o-y in September, as sharp contractions in the 'mining' sub-index dampened prospects overall. The University of Michigan's closely watched US consumer confidence index attained a fresh four-month low in September, while the Institute of Supply Management's Manufacturing Purchasing Managers' Index (PMI) dropped to a similar three-month low in August before deteriorating still further September-through-October. Indeed, this key forward-looking measure for tracking industrial activity is testing near net-pessimistic territory once again in October, a depth not previously explored in over two years.

Preliminary estimates of demand in September and October, based upon the latest weekly data provided by the US Department of Energy's Energy Information Administration, point towards a further easing in US growth. At approximately 19.6 mb/d in 4Q15, the demand in the 50 states of the US carries only a modest 0.4% premium over the year earlier, a much slower clip than the respective y-o-y gains of 2.5%, 2.5% and 2.1% seen in the previous three quarters. A similarly flat US demand trajectory is forecast for 2016, as deliveries average 19.6 mb/d. The breaks have been applied due to an increasingly precarious macroeconomic outlook, potentially warmer winter weather and the fact that consumers are more than a year into a lower oil price environment. Milder-than-average winter weather conditions are forecast for the northern and western US as one of the strongest El Ninos on record exerts a strong influence over US conditions, according to National Oceanic and Atmospheric Administration estimates. Although colder temperatures are envisaged in the southern and eastern US, the net effect is for a mildly warmer winter than last year. The risk of much colder 1Q16 temperatures in the Northeast, however, is a prospect that we will continue to monitor closely.

Having initially ended a nine-month period of consecutive y-o-y declines in July, Mexican demand has seen growth in each of the three months through September. Deliveries of 2.0 mb/d in September were up 65 kb/d (or 3.4%) on the previous year. Strong gains in gasoline, residual fuel oil and gasoil/diesel drove the up-surge, as lower prices, additional economic activity and resurgent power demand filtered through. The Instituto Nacional de Estadistica y Geografia (INEGI) reported business confidence at a three-month high of 53.84 in September, well above the 50-threshold that signifies the break-even point between net-optimism and pessimism. INEGI also cited for 3Q15 economic growth at its highest rate thus far in 2015, +0.6% on a quarter-on-quarter basis or 2.4% y-o-y. Having likely declined by around 25 kb/d (or 1.3%) in the year as a whole on very weak 1H15 data, a flattening in Mexican demand is forecast for 2016, at around 2.0 mb/d.


European demand continues to rise, up by approximately 310 kb/d (or 2.2%) y-o-y in 3Q15, after increases of 185 kb/d in 2Q15 and 490 kb/d in 1Q15. Strong 3Q15 gains reported in Italy, Turkey, the UK, Poland and Spain, offset persistent weaknesses in the Netherlands, Germany and Switzerland. After anticipated growth of around 0.3 mb/d (or 2.2%) in 2015, the European demand forecast flattens in 2016, as deliveries average 13.7mb/d in both years. This vanishing act for European growth occurs as many of the factors that previously raised demand disappear, such as the post-recessionary bounces that supported economic growth in many European countries in 2015, the sharp crude oil price declines and the exceptionally cold 1Q15 weather conditions. Early forecasts for winter weather point towards a mixed picture, although last year's localised cold spells in big heating oil markets such as Germany are unlikely to be repeated (see Snow on its bill?).

Snow on its bill?

Will this winter be warmer?" is a key question for Europe after colder-than-year-earlier winter conditions in 1Q15 pushed European gasoil demand growth to a multi-year high. Although predicting weather patterns more than a few days in advance is an inexact science, it is necessary when it comes to demand forecasts. With all-else held equal, repeat winter weather conditions would lead to minimal-to-muted gasoil demand growth, warmer climes potentially triggering y-o-y declines, while much colder conditions would support projections of additional gasoil consumption.

Unlike both the US and Japan, where the current consensus is that this winter will be warmer, the outlook for Europe is less clear. AccuWeather updated its winter outlook in mid-October as mildly warmer with abnormally cold conditions forecast for Scandinavia, a seasonable northwest, late season "cold shots" in the northeast, frequent storms across central Europe and mild conditions in the south. The shadow cast by El Nino potentially magnifies the uncertainty, with the UK Met Office stating that "in El Nino years there is a tendency for early winter to be warmer and wetter than usual and late winter to be colder and drier".

Weather forecast uncertainty, and hence projections of heating demand, are perhaps best demonstrated by the disproportionate amount of media attention aligned to the record early arrival of migratory Siberian swans into the UK on 11 October - a full 25 days ahead of 2014. Regardless of the apt Russian proverb - "the swan brings snow on its bill" - we cautiously anticipate that a warmer European winter this year will trigger a marginal decline in European 1Q16 gasoil demand. Such weather-related forecasts, however, carry an additional level of forecast uncertainty.

At an upwardly revised 2.4 mb/d in August, total German oil product deliveries were roughly unchanged on last year. Not only did this official number carry a 90 kb/d premium over the estimate based on inland-delivery statistics, the best source available when publishing last month's Report, it also amounted to a six-month high in German oil demand data. Weak petrochemical demand was offset by gains in gasoline, residual fuel oil and diesel - product sectors that garnered support from a combination of rising industrial output and lower prices. Industrial activity gaining 2.3% y-o-y in August, according to Deutsche Bundesbank data, while August pump prices eased to six-month lows. Preliminary estimates of September demand allude to a similarly flat trend, down 0.7% y-o-y, as likely declines in petrochemical and gasoil demand offset modest gains in gasoline, jet and residual fuel oil. A similarly flat demand trajectory is foreseen in 2016, as deliveries average 2.4 mb/d.

Asia Oceania

Posting two successive y-o-y gains of nearly 2%, in August and September, 3Q15 deliveries in OECD Asia Oceania rose in y-o-y terms for the first time since 1Q14. Growth re-emerged as gains took hold in Japan, alongside persistent robust expansion in Korea. Deliveries are forecast to remain roughly unchanged at around 8.1 mb/d in both 2015 and 2016, as tenacious declines in Japanese power sector usage roughly offset ongoing industrially-led gains in gasoil.

At an estimated 3.9 mb/d in September and up by 65 kb/d (or 1.7%) on the year earlier, preliminary estimates of Japanese oil product demand show a second consecutive month of growth, a feat previously not seen since March 2014. The recent Japanese demand strength supported flat (y-o-y) 3Q15 deliveries, ending a five quarter trend of absolute declines. The 3Q15 reprieve is, however, likely to be little more than temporary. Most of the key 3Q15 demand supports are unlikely to be repeated going forward, such as the extremities of the price declines already seen or the very weak 3Q14 baseline data that supported 3Q15 y-o-y growth estimates. With a second nuclear reactor expected to resume commercial operations in 4Q15 and forecasts from the Japanese Meteorological Agency of warmer early winter weather, the Japanese demand forecast is unlikely to receive any additional support from the heating/power sector. Thus, for the year as a whole, deliveries are forecast to average 4.2 mb/d, 105 kb/d (or 2.4%) down on the year prior, before declining by a further 85 kb/d in 2016 as additional drops in power sector usage coincide with efficiency gains across both industry and transport.

Strong gasoil demand underpinned recent Korean demand strength, with consecutive y-o-y gains of 70 kb/d and 60 kb/d in August and September posted in gasoil, accounting for roughly three-quarters of total Korean growth. Deliveries averaging 2.4 mb/d in 3Q15, 65 kb/d (or 2.7%) up on the year earlier, were supported by economic growth at a near five-year high and resurgent industrial activity. Statistics Korea reporting industrial output growth at 2.4% y-o-y in September, while the Bank of Korea's consumer confidence index climbed to a four-month high of 103, whereby any reading above 100 implies an improving outlook. Having likely risen by around 3.6% in 2015, Korean momentum is forecast to ease to a more sustainable 1.8% in 2016, as transport demand growth in particular falls back on efficiency gains and potentially easing price supports.


Having somewhat stalled earlier in the year, non-OECD momentum has picked up steadily, rising by around 3% through the middle of 2015. With relatively robust gains in gasoline demand throughout, the majority of the recent uptick is attributable to additional gains in the petrochemical and industrial sectors, triggering additional naphtha and gasoil deliveries. Looking ahead, the region as a whole should see growth of around 1.2 mb/d in 2016, raising average non-OECD demand to around 49.5 mb/d, with notably gains foreseen in the transport and petrochemical sectors.


September's heavy product stock draw, a second consecutive monthly reduction, supported otherwise anaemic Chinese demand. Due to the paucity of comprehensive Chinese statistics, we traditionally measure Chinese apparent demand as the sum of Chinese refinery output, plus net product imports, minus any product stock-builds. Without the latest product stock data, from China Oil, Gas and Petrochemicals (China OGP, published by China's Xinhua news agency), which showed a 450 kb/d net-product destocking in September led by big declines in gasoil/diesel inventories, estimates of Chinese oil demand would have been struggling to rise above parity on a y-o-y basis. Taking all of the components of the apparent demand calculation into consideration, however, September growth came in at around 460 kb/d (or 4.2%) y-o-y.

Long amongst the lagging growth product categories, Chinese gasoil demand has shown modest signs of picking up recently, rising (y-o-y) in both August and September as reports of heady net-diesel exports were offset by even larger reductions in gasoil stocks. Official customs data for September, for example, showed net-light diesel exports of 275 kb/d, while China OGP reported an even larger 525 kb/d drop in Chinese gasoil stocks. A re-emergence of Chinese gasoil demand growth is unlikely to prove sustainable going forward, as prospects for one of the key determinants of such growth - industrial output - look bleak. Falling heavily since June, the Caixin/Markit Manufacturing PMI plummeted to a six-and-a-half year low, approaching 47 in September, whereby any reading below 50 signifies net-pessimism. This bleak forward-looking indicator, which provides a useful proxy for industrial activity six months ahead, implies anaemic gasoil demand conditions in 4Q15 through 1Q16.  Indeed, our Chinese demand model foresees persistent weakness in gasoil/diesel demand growth through all of 2016, as forecast Chinese gasoil deliveries essentially flatten at 3.4 mb/d. Other restraints on Chinese demand growth in 2016 are likely include residual fuel oil, which is forecast to continue its recent declines, and decelerating momentum in the key transport markets.

We have revised up our forecast for the year as a whole, by 60 kb/d compared to last month's Report to 11.2 mb/d. We accurately anticipated the dramatic slowdown in September demand growth, but did not fully envisage the heavy reduction in Chinese product stocks that would raise the otherwise ailing demand data. Incorporating this adjustment, the Chinese growth forecast for 2015 has been modestly raised to +5.3%, accounting for roughly a third of the total global expansion in demand. Moving into 2016, momentum is likely to ease, with forecast growth of around 2.9% based on dire forward-looking indicators of manufacturing activity and the unlikelihood that the steep oil price declines of 2015 will be repeated.

Other Non-OECD

Rising at a pace roughly four-times faster than China, Indian y-o-y oil product demand growth at +15.3% in September posted its sharpest gain in over a decade. Strong growth is taking hold right across the barrel. Road transport fuels and bitumen led the way, surging as increased economic optimism, an ambitious road building programme, lower prices, heady vehicle sales and low base-year numbers (a consequence of last year's flooding), combined to sharply stimulate additional oil product deliveries in September. The latest industrial output numbers from the Ministry of Statistics and Programme Implementation showed a 6.4% y-o-y gain in August, a near three-year high. Having risen by an estimated 6.6% in 2015, thanks to sharp oil price declines and the relatively robust Indian macroeconomic situation, momentum eases back to an estimated 4.6% in 2016. Indian oil product deliveries thus rise to approximately 4.2 mb/d in 2016.

Russian oil product deliveries eased to an estimated 3.7 mb/d in September, nearly 200 kb/d (or 5.1%) below their year earlier levels, as Russian demand plummeted as predicted in last month's Report. The chief protagonists were lower residual fuel oil, 'other products', jet fuel and gasoil demand, as economic activity retracted. The Federal State Statistics Service reported industrial output sank for an eighth consecutive month in September, down by 3.7% y-o-y. It also reported business confidence in general down to an eight-month low of -7 in September, whereby any number below zero signifies net-pessimism. Jet/kerosene demand, meanwhile, eased back sharply as consumer confidence, as measured by the Federal State Statistics Service's consumer confidence index, slipped to -24 in 3Q15, dramatically below the zero 'neutrality' threshold. In this stark economic landscape, further sizeable declines in Russian oil deliveries are anticipated, -85 kb/d y-o-y in 4Q15 and -30 kb/d in 2016, when demand is forecast to average 3.6 mb/d.

The weak recent Brazilian demand trend continued, down by 3.4% over the year earlier in September, having declined by 2.7% in August, as increasingly anaemic economic activity dampens both the industrial and private sector oil requirement. Gasoil/diesel demand fell particularly sharply, down by 7.6% y-o-y in September and 6% in August, as the latest industrial output numbers for the economy as a whole, from the Instituto Brasileiro de Geografia e Estatistica, showed a 9% y-o-y slide in August. Despite the recent decline, a relatively flat trajectory is foreseen for the year as a whole (-0.6%). The volatile nature of Brazilian demand has seen strong gains in some months roughly offset declines elsewhere. A similarly flat trend is foreseen for 2016, as persistent economic weakness likely eradicates the prospect of demand growth, while the likely relative improvement in the projected decline rate for the economy reduces the prospect of further drops in demand. The International Monetary Fund, in October's edition of the World Economic Outlook, predicted an economic contraction of 3% in 2015, easing back to -1% in 2016.



  • Global oil supplies, including biofuels, breached 97 mb/d in October, as non-OPEC output rebounded from reduced levels a month earlier. Total oil supplies stood 2.0 mb/d above a year earlier, of which non-OPEC supplies accounted for a third.
  • OPEC crude oil output held steady in October at 31.76 mb/d with declines in Iraq and Kuwait offset by higher supply from Libya, Saudi Arabia and Nigeria. Overall OPEC output stood 1.1 mb/d above a year ago as Saudi production remained in excess of 10 mb/d for an eighth straight month and Iraq continued to pump near record rates above 4 mb/d.
  • A marginal tightening in fundamentals lifts the 2016 'call on OPEC crude and stock change' by 200 kb/d versus our previous Report to 31.3 mb/d. The 'call' in 2H16 rises by 1.4 mb/d from 1H16 to 32 mb/d, which is higher than the group's current production. OPEC ministers are due to meet on 4 December in Vienna to review the market outlook for 2016.
  • The outlook for non-OPEC supply growth in 2016 has dimmed since last month's Report, with steeper declines foreseen for US light tight oil (LTO). Non-OPEC supply is expected to contract by more than 0.6 mb/d next year to 57.7 mb/d, despite resilient production in a number of countries.
  • Continued declines in US drilling activity suggest steeper drops in US LTO output lie ahead. Producers pulled another 36 rigs out of service in October, to 578, and the number of new wells completed dropped to 800, the lowest rate since February 2011. As a result, US LTO production is forecast to contract by 600 kb/d next year compared with declines of 400 kb/d expected previously.
  • Record-high output in Russia provides a partial offset. Despite signs of accelerated decline at mature fields, the outlook for Russian oil supply has been lifted versus last month's Report. Russian producers are favouring developments that boost output in the near term, while the ruble's depreciation and Russia's oil taxation system are neutralising the impact of lower prices and spending curbs.
  • Non-OPEC oil production bounced back by 0.4 mb/d in October, after outages in Norway, Brazil and Canada curbed output a month earlier. A worker's union strike from early November threatened to cause the biggest disruption to Brazilian output in 20 years. At the time of writing, however, contingency plans limited losses to around 130 kb/d.

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

OPEC crude oil supply

OPEC crude oil output inched down by 20 kb/d in October to 31.76 mb/d with reduced flows from Iraq and Kuwait offset by higher production in Libya, Saudi Arabia and Nigeria. Weather-related export delays led to a 100 kb/d decrease in production from Iraq, including the Kurdistan Regional Government (KRG), although output of 4.2 mb/d was not far off an all-time high hit the previous month. Scheduled field maintenance cut Kuwaiti output by 80 kb/d, while Saudi production edged up 50 kb/d to 10.25 mb/d as exports rose to world markets. African producers pumped more during October, with Libyan output climbing to a five-month high of 430 kb/d. The recovery may prove fragile, however, after deteriorating security at the eastern port of Zueitina forced Libya's National Oil Corp. to declare force majeure in early November.

In the run-up to OPEC's scheduled meeting on 4 December in Vienna, Saudi Arabia shows no sign of reversing its year-old policy to defend market share rather than price. It was Riyadh that led OPEC's decision in November 2014 to maintain the group's official production ceiling despite oil's collapse from above $115/bbl last summer. Since then, Saudi Arabia and Iraq - the group's largest producers - have each ramped up by an average 500 kb/d. Overall OPEC production is running more than 800 kb/d higher at an average 31.2 mb/d. The group's slightly lower output in October lifted 'effective' spare capacity to 2.37 mb/d versus 2.35 mb/d in September, with Saudi Arabia accounting for 85% of the surplus.

When it last met in June, OPEC agreed to maintain its official 30 mb/d output target. OPEC is expected to adjust that ceiling at its December meeting when Indonesia re-joins as the group's thirteenth member. The Asian producer suspended its membership in 2008 when it became a net oil importer. It currently pumps around 800 kb/d of crude.

A slight tightening in fundamentals has meanwhile raised the 2016 'call on OPEC crude and stock change' by 200 kb/d versus our previous Report to 31.3 mb/d (excluding Indonesia). The 'call' in 2H16 rises by 1.4 mb/d from 1H16 to 32 mb/d, which is higher than the group's current production.

Production in Saudi Arabia edged 50 kb/d higher in October to 10.25 mb/d as an increase in exports more than offset declines in domestic refinery runs and crude oil for direct burn in power plants. The Kingdom's oil fields have been pumping more than 10 mb/d since March to support Riyadh's policy to preserve market share and satisfy internal demand. Oil sales to world markets rose during October, with much of the increase destined for Asia, according to preliminary tanker tracking data. In November, Riyadh is targeting new customers in northern Europe (see Sour Wars).

During the blistering heat of summer, Saudi Arabia burns higher quantities of crude oil to generate power for air conditioning. It has also been supplying more crude to domestic refineries to boost product exports that reached a record 1.35 mb/d during August, according to the latest figures submitted to the Joint Organisations Data Initiative (JODI). Scheduled maintenance during October at the 400 kb/d Yanbu Aramco Sinopec Refining Co. (Yasref) joint-venture refinery eased the requirement for crude at home.

Saudi crude exports meanwhile ran at around 7.4 mb/d from January through August compared to about 7.2 mb/d during the same period in 2014, according to JODI data. Total Saudi oil exports, excluding condensates and NGLs, averaged around 8.4 mb/d during the first eight months of the year versus 8.0 mb/d during the same period in 2014.

A 50% drop in oil prices since June 2014 has burdened Riyadh with a budget deficit that is expected to exceed $100 billion. The government, under pressure to cut spending, has started to draw down sizeable foreign reserves that have piled up over the past decade. On the oil front, state Saudi Aramco has said it would renegotiate some contracts and delay some projects due to the low oil price environment.

Elsewhere in the Gulf, scheduled maintenance cut Kuwaiti output by 80 kb/d to 2.73 mb/d during October, but flows recovered by the end of the month after work was completed at a gathering centre. Kuwait has been doing its utmost to compensate for a loss of output from the Neutral Zone that it shares with Saudi Arabia. A year-long row between the Gulf neighbours has slowed output to a trickle from 400 kb/d. Production in the UAE dipped 20 kb/d to 2.89 mb/d, but held near a record high of 2.91 mb/d. Qatari supply bumped up to 670 kb/d.

Output in Iraq, including the KRG, declined by 100 kb/d to 4.2 mb/d in October as bad weather in the Gulf cut southern exports sharply and northern shipments eased a touch. Average exports from the country's giant southern oil fields fell by 300 kb/d to 2.7 mb/d during October, having scaled record rates of 3.1 mb/d earlier in the month before high winds played havoc with loadings. OPEC's second biggest producer, however, continued to pump in excess of 4 mb/d for a fifth consecutive month, with much of the crude oil that was unable to load routed into storage tanks, industry sources said.

All of the federal government's exports were sold via the Gulf, while northern shipments of 595 kb/d via Turkey were sold solely by the KRG. The semi-autonomous northern region has increased independent oil sales since mid-June and has cut allocations to Iraq's State Oil Marketing Organisation (SOMO) in an escalating row over budget payments and export rights.

Iraq's oil ministry is meanwhile in talks with ExxonMobil and PetroChina to revive a water injection project that is crucial to maintaining output from prized southern oil fields. A lack of finance and delays to the multi-billion dollar project led Baghdad to open negotiations with Exxon and PetroChina, which each hold a 25% stake in the West Qurna-1 project.

Iraq is struggling with the stress of $50/bbl oil and a costly battle with the Islamic State of Iraq and the Levant, whose militants control a large swathe of the country after their advance in June 2014. The financial strain has forced Baghdad to ask foreign contractors to cut 2015-16 budgets and hold output steady. Production, including from the KRG, is likely to remain broadly flat next year versus 3Q15 levels of around 4.2 mb/d.

Iran continues to flag plans for a substantial output increase following an anticipated easing of international sanctions. Iranian Oil Minister Bijan Zanganeh has said Tehran will immediately deliver an additional 500 kb/d to world markets when that day arrives. Production during October was steady at 2.88 mb/d. Iranian oil fields were pumping around 3.6 mb/d in 2011 before the US and European Union enforced tighter financial measures. Our estimate remains that Tehran is capable of ramping up production to 3.4 to 3.6 mb/d within six months of sanctions being suspended.

As for international oil sales, Iran's crude exports have slumped from roughly 2.2 mb/d at the start of 2012 to below 800 kb/d during October, according to preliminary data, versus roughly 1.1 mb/d the previous month. Lower purchases from India, Japan, Korea and Turkey offset higher imports from Taiwan and Syria. Deliveries this year have been running at roughly 1.1 mb/d, steady on 2014. Purchases of condensate - ultra-light oil from the South Pars gas project - rose from about 100 kb/d in September to around 190 kb/d - the highest this year. The above import figures are subject to revision.

There is unlikely to be a significant rise in Iranian production before next year, but oil stored at sea could start to hit world markets before then. Iran had about 38 mb of oil, of which 63% was condensates, in floating storage at the end of October.

Production from African OPEC members rose in October, led by Libya. The country's oil fields ramped up 60 kb/d month-on-month (m-o-m) to 430 kb/d - the highest since May - but a small fraction of the 1.6 mb/d pumped before the downfall of Muammar Gaddafi four years ago. And October's production improvement may prove fleeting. By early November, output had sunk to around 415 kb/d after the eastern port of Zuetina was closed due to deteriorating security. A long-running fight between the officially recognised government in the east and the so-called Libya Dawn administration in Tripoli has forced a halt to operations at vital oil fields and terminals. The country's eastern fields run by state Arabian Gulf Oil Co (Agoco) now form the production backbone. El Feel and El Sharara in the southwest, which together could produce nearly 500 kb/d, have been closed since the start of the year due to pipeline blockages and a strike by oil security guards. The ports of Ras Lanuf, Es Sider and Zueitina are also shut. Output from neighbouring Algeria inched down month-on-month to 1.1 mb/d. Supply from West African producers rose by 60 kb/d in October. Angolan supply edged up to 1.79 mb/d. Chevron has started up the deepwater, 40 kb/d Lianzi field in the zone between Angola and Congo (Brazzaville). Production in Nigeria climbed by 40 kb/d m-o-m to 1.9 mb/d. Nigerian President Muhammadu Buhari has, as expected, appointed Nigerian National Petroleum Corp. head Emmanuel Kachikwu as minister of state for oil. Buhari remains senior oil minister.

Sour wars

An overabundance of crude oil has left suppliers targeting energy-hungry Asia with cut-price barrels and much has been made of the battle between OPEC's Middle East producers for a share of the region's sour market. But with less fanfare, a second front has opened up in Europe as Asia grows more crowded.

While the headlines focus on Russia and Saudi Arabia jostling for position on the continent, it is Iraq that has stolen a march on its regional rivals. Europe imports over 9 mb/d of crude from outside the region, and sour grades account for more than 6 mb/d. Although Russian Urals continues to dominate with around 55%, Iraq has gained substantial market share since 2012 after international sanctions were tightened on Iran. A bit more space was created with Russia pivoting eastward. It shot past top exporter Saudi Arabia to rank as China's largest supplier during September.

OPEC's top two producers Saudi Arabia and Iraq now appear to be locking in additional supply to Europe before sanctions are eased on Iran. Before Tehran was banned from selling oil to Europe, it was delivering about 1 mb/d of high-sulphur sour crude - mostly to refiners in the Mediterranean. Now, however, Iran supplies only about 100 kb/d to Turkey.

By targeting Iran's former buyers, Iraq - with its fast growing exports - has managed to increase significantly its European customer base. Iraqi sales into the Netherlands, Germany and Poland are especially brisk. Since mid-2014, Iraq's overall exports have risen by about 40% to above 3 mb/d after infrastructure bottlenecks - both north and south - were overcome. Deliveries of 1 mb/d to Europe during July and August raised Iraq's market share to 17% - allowing it to overtake Saudi Arabia.

Iraq and Saudi Arabia are also courting northern European refiners who have traditionally relied on Russia as their steady source of sour crude supply via the Druzhba pipeline and through tanker loadings from Baltic ports. Iraq was the first Middle East producer to blaze the trail into Poland, offering discounts to Urals in the range of $2-$4/bbl, according to market sources. Its sales have risen to an average 45 kb/d this year.

Shipping data suggest that regular imports via the Adria pipeline into Hungary only began once the KRG started marketing crude from northern Iraq.

Saudi, too, is venturing deeper into the Polish market and has cut the Arab Light differential for December-loading cargoes to northwest Europe by $1.30/bbl. Polish refiners PKN and Lotos are due to receive Saudi cargoes during November and Poland's biggest refiner PKN sees Saudi pricing terms as "attractive". Saudi Aramco is also due to deliver a cargo to Sweden's Preem - the first sale in two decades.

Iran meanwhile is keen to reclaim its European customer base once sanctions are eased. Previous regular buyers in Italy, Greece and Spain would prefer to use Iranian crude as their baseload feedstock, according to Iranian industry sources (See 'Iraq, Iran in market focus', Supply, October Report). Tehran has already lined up buyers in Europe and Asia for at least an extra 400 kb/d, they say. The additional Iranian barrels may back out similar sour quality crude from Saudi Arabia, Iraq and Russia. For this reason, producers are likely to grow still more competitive on pricing.

Non-OPEC overview

The outlook for non-OPEC oil production has deteriorated since last month's Report, with steeper declines expected at US LTO plays. Producers pulled another 36 rigs out of service in October, while the number of wells completed dropped to the lowest since the start of 2011. As such, we forecast US shale output to decline by nearly 600 kb/d next year, offset by continued gains in offshore output and natural gas liquids. According to the latest official statistics from the US Energy Information Administration (EIA), the US Gulf of Mexico became the largest source of supply growth in August as onshore production gains eroded.

Output outside of the US continues to defy expectations, posting healthy gains in spite of lower prices and spending cuts. Russia, non-OPEC's second largest oil producer and its biggest crude and condensate supplier, posted yet another record-high in October. At 10.78 mb/d, crude and condensate output stood 135 kb/d above a year earlier. Production gains are coming mostly from smaller producers, and most notably from SeverEnergia's new condensate project in Western Siberia. In response to lower prices, companies are shifting their focus to domestic developments that can boost output in the near term. While it looks increasingly likely that Russia can sustain output rates at elevated levels into 2016, financial strain and accelerated decline rates at mature fields are likely to have a bigger impact on output down the line.

China, Viet Nam, Oman and the North Sea are other producers that have been able to boost output. Brazil, a significant contributor to growth earlier in the year, is seeing its output gains ease and at the time of writing, the country was facing an additional challenge. In protest against Petrobras' revised Business and Management plan and planned divestments, workers affiliated to the Federal Petroleum Union (FUP) were shutting in oil output from platforms in the Campos Basin, cutting into projected growth for the year.

All told, non-OPEC supplies are on track to post annual gains of more than 1.3 mb/d this year, to 58.3 mb/d. The OECD Americas remains the most significant contributor to growth, followed by Latin America and Brazil in particular. The outlook for 2016 has been curbed by 0.1 mb/d since last month's Report, to 57.7 mb/d, or 0.6 mb/d below 2015 estimates, despite a more upbeat view on Russia, China and Oman. As long as non-OPEC producers are able to sustain output levels at these high levels in order to maximize income, a continued slowdown in US LTO seems inevitable.


North America

US - Alaska October actual, others estimated: Total US oil output dropped by 50 kb/d in August, the most recent month for which a complete set of official data are available. In line with previous expectations, output rates were lower for all major oil producing regions, except for the Gulf of Mexico. The biggest monthly drop stemmed from Alaska, where Prudhoe Bay flows dropped by 40 kb/d due to maintenance. Production also declined in key producing states such as Texas (-27 kb/d), North Dakota (-20 kb/d) and Oklahoma (-14 kb/d).

In contrast, offshore production posted sharper than expected gains. According to EIA data, Gulf of Mexico production rose by more than 60 kb/d in August to 1.65 mb/d, its highest level since February 2010. With year-on-year gains of 210 kb/d, the US Gulf of Mexico took over as the largest contributor to US supply growth in August. At 12.9 mb/d, total US oil production was 675 kb/d above a year earlier, its weakest annual increase in nearly four years. Gains in natural gas liquids production also eased to around 180 kb/d, from more than 400 kb/d on average in 2014, largely in line with expectations.

Gulf of Mexico drives US supply growth

As output from new projects ramps up, the US Gulf of Mexico took the number one rank of US supply growth sources in August. Posting annual gains of more than 210 kb/d, total Gulf of Mexico production averaged 1.65 mb/ d in August, its highest since February 2010. While higher output was largely anticipated, the latest figures are more than 100 kb/d above our previous expectations. Field level data reported by the Bureau of Safety and Environmental Enforcement (BSEE) through August were not complete at the time of writing so the full production increase cannot yet be fully accounted for.

The latest BSEE data nevertheless show Anadarko's Lucius spar ramped up to full capacity near 80 kb/d in July only six months after reporting first oil. Chevron's Jack and St Malo fields, which started up in December 2014, ramped up to a combined 74 kb/d in August. Output from the first stage of development is expected to rise to 94 kb/d over the next year before a second stage boosts production to 190 kb/d by 2019. Tubular Bells, operated by Hess and co-owned by Chevron, which reported first oil in November 2014, has also contributed to growth - producing around 30 kb/d since April.

Further gains are expected in 2016. Anadarko is on track to bring on its Heidelberg unit, identical to its Lucius spar, in mid-2016, while Shell plans to commission its 50 kb/d Stones development in 2016. Noble is on track to complete its Rio Grande Development, which includes the Big Bend and Dantzler fields. In addition, Noble says first production from the Gunflint field is expected in mid-2016.

A reported drop in infill drilling, needed to sustain production at existing projects, risks providing a partial offset as field declines at producing assets accelerate. Total Gulf of Mexico output is nevertheless expected to increase by about 130 kb/d both this year and next, lifting output to nearly 1.7 mb/d on average in 2016.

US onshore oil production meanwhile is clearly on the decline. Excluding the Gulf of Mexico, US oil output fell by 110 kb/d in August and preliminary data suggest steeper declines ahead. Indeed, the EIA's Drilling Productivity Report suggests output at the seven most prolific shale plays fell by nearly 80 kb/d over September and October before accelerating to nearly 95 kb/d in November. Decline rates could be even steeper, as producers pulled another 36 rigs out of service during October, to leave 578 active rigs at the start of November. According to Rystad Energy, the number of new completed wells was estimated to have dropped to only 800 in October, less than half the number of wells completed in the same month a year earlier. As such, we see steeper declines in US LTO output in 2016 than previously forecast. Production is now expected to drop by 600 kb/d, leaving total US oil production at 12.4 mb/d, down 425 kb/d on 2015.

Canada - Newfoundland September actual, others estimated: Total Canadian oil production surged by 100 kb/d in August, to nearly 4.6 mb/d, a six-month high. Higher output at Albertan oil sands upgraders lifted total Albertan oil output to 3.2 mb/d from 3.1 mb/d in July. Despite a resumption of oil flows from the offshore Terra Nova installation, Newfoundland production was largely unchanged due to a drop in output at Husky's White Rose field. The rebound in Synthetic crude output was likely short-lived as Syncrude's Mildred Lake upgrader reported a production drop from more than 300 kb/d in July and August to around 60 kb/d in September when a fire forced the company to halt operations. Canadian Oil Sands reported normal operations had resumed on 2 October, lifting output for that month to 215 kb/d on average.

US rejects Keystone XL pipeline

In early November, US President Barack Obama rejected the proposed Keystone XL pipeline from Canada to the US Gulf Coast. The 800 kb/d pipeline, which was to take crude from Alberta and North Dakota to refineries in Illinois and eventually to the US Gulf Coast, where it could be shipped to world markets, has been hotly contested since it was first proposed seven years ago. Obama said the pipeline "would not make a meaningful long-term contribution to our economy" and that it would not reduce gasoline prices. Shipping "dirtier" crude from Canada would not increase US energy security, he said. US Secretary of State John Kerry, who determined the pipeline was not in the country's interest before Obama's final decision, said approving Keystone "would significantly undermine our ability to continue leading the world in combating climate change."

While the rejection is a blow to both its owner TransCanada and oil producers in Alberta - hoping to grow output via Keystone's expanded capacity - a number of other pipeline options remain on the table.

  • Enbridge's Line 67 expansion project - part of its mainline system that expanded capacity of the line from 450 kb/d to 570 kb/d. Line 67, also known as the Alberta Clipper Pipeline, goes from the Hardisty in southeastern Alberta to Manitoba where it connects to the US portion of the system and continues to Superior, Wisconsin. The project was mechanically completed in the third quarter of 2014.
  • Enbridge is currently in the process of filling its Line 9 pipeline, which it has expanded and reversed to take crude from Alberta to refineries in Eastern Canada. The line, which will transport 250 kb/d of light and 50 kb/d of heavy crude to Montreal, should deliver first oil in December.
  • Enbridge's Line 3 replacement project - part of its mainline system that will increase current capacity from 390 kb/d to 760 kb/d. Line 3 goes from Hardisty, Alberta to Manitoba, where it connects to the US portion of the system. The project is scheduled to be completed in the second half of 2017.
  • TransCanada's Energy East pipeline from Alberta to New Brunswick with a capacity of 1.1 mb/d. Formal application for a permit to build the pipeline was submitted in October 2014.
  • Kinder Morgan's proposed Trans Mountain Expansion Project which would increase Trans Mountain's capacity by from 300 kb/d to 890 kb/d by twinning the existing pipeline in Alberta and British Columbia. Trans Mountain filed an application with the NEB in December 2013. According to the company, if regulatory application process is successful, construction of the new pipeline could begin in 2016, with oil flowing in late 2018.
  • Enbridge's Northern Gateway pipelines from Alberta to coastal British Columbia with capacity to export 525 kb/d of crude oil and import 193 kb/d of condensate. In June 2014 the Northern Gateway pipeline project was approved by the federal government, subject to 209 conditions.

Increased shipments by rail remains an additional option to make up for a shortfall in pipeline capacity. Since the 2013 oil train disaster in Lac Mégantic, however, rail safety has become a major concern. According to data from the National Energy Board, crude oil volumes exported by rail has declined from a peak of 165 kb/d in 3Q2014 to less than 85 kb/d in 2Q15.

Mexico - September actual, October preliminary: Mexico's crude and condensates output was largely unchanged in October from a month earlier, just shy of 2.3 mb/d. Including NGLs output was 2.6 mb/d. Annual output declines shrunk to their lowest so far this year - only 120 kb/d, compared with 230 kb/d on average over the first nine months of the year. Accelerated field decline is expected to continue to restrict output in 2016. Observed field decline at Pemex' legacy Cantarell field has seen a marked acceleration to more than 27% y-o-y in recent months, compared with 15% on average in 2014 and as little as 4% at the start of that year. In all, we forecast total Mexican oil output to average 2.5 mb/d next year, down 90 kb/d, but less than the 210 kb/d drop this year, when output was also hit by deadly explosion at an offshore installation.

North Sea

The supply of North Sea crude remained healthy, with latest data showing robust year-on-year gains. While Norwegian production dipped in September, most likely due to field maintenance, preliminary data suggest UK output rebounded sharply - in line with loading schedules for key North Sea crudes. Supply of the four North Sea crude streams that underpin the dated Brent benchmark - Brent, Forties, Oseberg and Ekofisk (BFOE) - loaded at a seven-month-high above 1 mb/d in September, before easing by 70 kb/d in October, to 950 kb/d. Scheduled loadings for both the BFOE crudes and North Sea supplies more generally suggest companies were planning to maintain output at relatively high levels through December.

In a statement accompanying its latest quarterly earnings, Norwegian oil major Statoil announced it has again put back the start date of its $7 bn Mariner field on the UK side of the North Sea. Mariner is now expected to be commissioned in the second half of 2018, compared with an earlier targeted start-up date in 2017, as development costs have risen by 10% from the original plan. Mariner, located about 150 km east of the Shetlands, is the largest development on the UK continental shelf in more than a decade. It is expected to produce more than 250 million barrels of oil over its 30-year lifespan, with peak production estimated at about 55 kb/d. The company also delayed its Aasta Hansteen field, in the Norwegian waters just inside the Arctic Circle.

Norway - August actual, September provisional: Norwegian oil output fell to its lowest level so far this year in September. Output declined to 1.86 mb/d, from 1.92 mb/d in August. While September marked a second month of decline, total output nevertheless exceeded that of a year earlier by 70 kb/d. For the first nine months of 2015, output was up by 60 kb/d on average.

UK - August actual, September provisional: Preliminary data suggest UK oil production rebounded in September after posting a slight decline a month earlier. UK oil production eased by about 50 kb/d in August, to just shy of 900 kb/d, with both lower crude and NGL volumes. Preliminary data for September, however, suggest output recovered, on a 60 kb/d increase in offshore crude production. Lower NGL output provided a partial offset. In early November, Nexen confirmed it had deferred a planned maintenance shutdown of its Buzzard oil field from November 2015 to 2016. Buzzard is the largest field contributing to the Forties oil stream, the chief contributor to the Brent crude oil benchmark. UK-listed Premier Oil announced it is expecting first oil from its Solan development to start in 4Q15, one year beyond the original target. Initial production is expected at a rate of 24 kb/d following ramp up according to the company.


Latin America

Brazil - September actual: In September, Brazil's oil output saw its largest monthly decline since March 2013, slipping by 150 kb/d to 2.49 mb/d. While declines were widespread, the biggest drop stemmed from the Campos basin. Maintenance curbed Roncador oil output by nearly a third, to 254 kb/d. After months of robust gains, total Brazilian oil output stood at the same level as a year ago, with gains in the Santos Basin of 270 kb/d offsetting declines of nearly the same magnitude in the more mature Campos Basin.

While output is estimated to have rebounded in October, a workers' strike crippled supplies in early November. In protest against Petrobras' new Business and Management plan, which significantly cut the Company's planned spending and included plans for the sale of assets worth up to $15.1 billion over 2015 and 2016, workers declared an indefinite strike on 1 November, paralysing operations at 22 of Petrobras' 44 offshore platforms in the Campos Basin. Another eight production units were functioning partially according to the union, while the control of five rigs was handed over to the company's contingency teams The remaining nine rigs continued normal operations. The strike was also affecting gas production as well as refineries, terminals and a fertilizer plant.

Petrobras had announced a disinvestment plan this year to cope with a crisis triggered by a drop in global oil prices, fall in profits, increase in debt, difficulties in raising capital and losses incurred due to an estimated $2 billion corruption scandal. The company said on 11 November that due to its contingency plans taking effect, cumulative lost production through 9 November was 1.17 mb, or an average 130 kb/d since the start of the strike.

Elsewhere, Colombian oil production rebounded to above 1 mb/d in September after attacks had shut in output over the two previous months.


China - September actual: China's oil output surprised to the upside again in September, rising 40 kb/d from August to near 4.4 mb/d. Production stood 160 kb/d above a year earlier, lifting annual gains for the year to date to 120 kb/d on average, or 2.8%. Despite high output in 3Q15, weaker oil prices are hitting Chinese oil producers hard. In their latest financial filings, China's top oil firms revealed a plunge in earnings for the first 9 months of the year. PetroChina, China's largest oil and gas producer saw its net profits drop 68.1% from the same period a year earlier. Sinopec, which has a larger downstream presence, saw profits slip by nearly half, as the company's refining segment posted healthy profits. China National Offshore Oil Corp. Ltd. (CNOOC) meanwhile saw its oil and gas sale revenues falling by a lesser 32.3% year-on-year in 3Q15. CNOOC's output from its operations offshore China increased 28.2% year-on-year to 83.3 million boe in 3Q15, due to new projects coming on stream in the Bohai and Eastern South China Seas.

Former Soviet Union

Russia robust through 2016

Despite myriad challenges to its energy sector, Russia is hitting record output month after month as oil from new projects more than makes up for declines at ageing fields. Preliminary October data show oil output, (excluding gas plant liquids), hitting a post-Soviet high of 10.78 mb/d. Non-OPEC's biggest crude and condensate producer looks likely to keep pumping at these higher rates into next year as companies prioritise developments that deliver immediate growth. We have raised our 2016 forecast for total oil supply including NGLs by about 120 kb/d, to just under 11.1 mb/d since last month's Report -on par with this year's level - as the ruble's depreciation and Moscow's oil tax system to a large degree shelter Russian companies from the pain of $50/bbl oil and spending curbs.

Ten months into this year, output looks on track to post an annual gain of around 140 kb/d as the ruble's depreciation has largely offset oil's 60% collapse since last summer. The decline in Russia's currency has also underpinned cost deflation, in turn tempering companies' spending curbs on oil field developments. Even before sanctions, Russian companies were making strides to source more of their supplies and services at home and are estimated to have about 90% of their costs in rubles. Moscow's oil tax structure has also protected companies' operating profits, with the government's budget taking the biggest hit so far from oil's

decline. Lower mineral extraction and export taxes on oil at $50/bbl versus oil at $110/bbl also lessen the impact on companies' bottom line, with some experts estimating that net-profit of Russian oil companies has only fallen from around $6.50/bbl to around $5.50/bbl.

The most impressive output gains this year have been posted by Novatek (Russia's largest independent natural gas producer). In the first nine months of 2015 it lifted liquids output (including its share from joint ventures) by 53% year-on-year. Condensate production from SeverEnergia, its joint venture project with Gazprom, reached 170 kb/d in October - more than 100 kb/d higher than a year ago. The launch of Novatek's Termokarstovoye field in May and increased crude oil output from new wells drilled at the East-Tarko field contributed to growth.

Gains have also been notched up by Bashneft, Gazprom-Neft and smaller state companies. Bashneft, Russia's fifth largest producer, pumped just over 400 kb/d in October and is on track to exceed its 2015 target of 390 kb/d - up from 360 kb/d in 2014. It aims to lift output to just over 400 kb/d next year by ramping up drilling and exploration to sustain output levels in the mature fields in the Bashkortostan region. Russia's fourth largest producer Gazprom-Neft also expects robust growth in the next several years. The oil arm of state-controlled gas giant Gazprom will continue its programme of intensive drilling and aims to produce at least 1.57 mb/d of oil this year, up 12% from 2014. Growth is stemming from its Prirazlomnoye

field in the Pechora Sea, where it expects to more than double output this year to 16 kb/d. Next year output at the field, which is Russia's only producing offshore field in the Artic, should double.

While companies focus on projects that maximise output, some of the mature fields operated by Russia's largest producers are experiencing accelerated declines. Despite drilling 800 new wells in 1H15, Rosneft, Russia's Yuganskneftegas, producing 1.25 mb/d in October, has declined steadily since the start of 2013. The company's Orenburgneft fields - producing a combined 300 kb/d - are declining at nearly 10% per year. Samotlorneftegaz, operating in one of Russia's largest oil and gas fields, Samotlor, is seeing declines accelerate to around 4%. Reduced drilling at Lukoil's Western Siberia fields has pushed observed decline rates to 8% from 2% only a year ago. Russia's second largest producer is also taking a more cautious stance on expansion abroad and considering slowing down its Caspian plans. Lukoil plans to start commercial drilling of its Filanovsky field in December, with oil flowing by mid-2016, but have stated it might scale back plans from an earlier target of 100 kb/d next year.

With the Federal budget in deficit, the Ministry of Finance is meanwhile looking for ways to increase its income from the oil and gas sector. Companies successfully lobbied the government against increasing the Mineral Extraction Tax earlier this year. Instead, the government will freeze the export duties on oil exports at the current level of 42% of the actual oil price minus $25, instead of a planned drop to 36% next year and 30% in 2017 - in accordance with the so-called tax manoeuvre that went into force at the start of the year. The freeze would last only for eight months of 2016, which would bring an additional 133 billion rubles to the state budget according to Energy Minister Alexander Novak.

While Russian production may be immune to lower prices for now, there could be a bigger impact down the line from international sanctions, accelerated declines at mature fields, spending cuts and an increasing fiscal burden.

Other FSU - September actual: In Kazakhastan, output inched higher at the Tengichevroil project, after maintenance cut output by 100 kb/d in August. Karachaganak meanwhile saw production drop by more than 40 kb/d from a month earlier taking overall volumes down slightly from August to 1.56 mb/d, including gas plant liquids, or 1.48 mb/d for crude only. Azeri output inched up 20 kb/d to 860 kb/d on higher output from the ACG complex.

FSU net exports surged by 820 kb/d in September to 9.3 mb/d as both crude and product shipments rebounded from their mid-summer lows. Crude exports rose to 6.6 mb/d (+690 kb/d m-o-m), their second highest ever and only 25 kb/d below the record set in March 2015. This increase came against the backdrop of a 400 kb/d decline in regional refinery throughputs as refineries entered seasonal turnarounds while crude production remained above year-ago levels. Seaborne exports from terminals on the Baltic and Black Seas accounted for the lion's share of the increase although only about half of the increase came from Russia with the rest accounted for by Kazakhstani and Azeri exports. In the Baltic, volumes sent via Primorsk and Ust Luga rose by over 100 kb/d apiece. In the Black Sea, flows through the CPC pipeline exceeded 1 mb/d for only the second time on record. Meanwhile, exports of Urals shipped via Novorossiysk slipped by 60 kb/d to their lowest level this year.

Record Russian oil production and loading schedules suggest that FSU crude exports will likely break records in October with increases expected across all major routes. Consequently, the discount of Urals to regional benchmark North Sea Dated has widened over October. By early-November, Urals delivered to customers in Northwest Europe stood at a $3/bbl discount against North Sea dated, its steepest since Mid-2014.

Despite the fall in regional refinery throughputs, refined product shipments rose by 140 kb/d to 2.8 mb/d. Fuel oil (+110 kb/d) accounted for the majority of the increase after increased volumes were delivered to Black Sea terminals and then subsequently shipped to OECD Mediterranean countries. In contrast, deliveries of gasoil remained relatively stable at 810 /kb/d as a fall in 10 ppm diesel delivered to Baltic terminals was offset by an increase in likely-lower specification cargoes sent via the Black Sea to Singapore.

OECD stocks


  • The pace of global stock building slowed during the third quarter to 1.6 mb/d from 2.3 mb/d in the second quarter but remained significantly above historical averages. OECD commercial stocks accounted for nearly 60% of this (0.9 mb/d) as they continued to build at close to the same rate as during the previous two quarters to touch a record near 3 billion barrels by end-September.
  • OECD inventories defied seasonal trends building by 13.8 mb in September to extend recent records. At end-month OECD stocks stood at 2 989 mb, a staggering 257 mb above average levels. The monthly build was split roughly equally between crude and products both of which rose counter-seasonally. By end-month, refined products covered 32.1 days of forward demand, level with end-August but 1.5 days above one year earlier.
  • After building steeply over the summer and with winter approaching, OECD middle distillate stocks stood 36 mb and 49 mb above average and the previous year, respectively, at end-September. Both the Americas and Europe stood at surpluses to the average while Asia Oceania was at a small deficit.
  • Preliminary data point to OECD commercial inventories remaining remarkably stable in October as they inched down by 0.1 mb, a far shallower draw then the 20 mb average draw over the last five years. Despite refinery throughputs increasing as refiners come out of seasonal turnarounds, product holdings drew by 27.2 mb while crude, NGLs and other feedstocks added a combined 27.1 mb.

Global overview

The pace of global stock building slowed during the third quarter to 1.6 mb/d from 2.3 mb/d in the second quarter but remained significantly above the historical average. OECD commercial stocks accounted for 60% of this (0.9 mb/d) as they continued to build at close to the same rate as during the previous two quarters to touch a record near 3 billion barrels by end-September. Unlike the previous two quarters, the build was relatively evenly spread across OECD regions whereas previously it was centred in North America.

Outside of the OECD, Chinese inventories continued to rise at a rate of over 0.7 mb/d during the quarter. The main difference with the second quarter in the non-OECD is that stock building at key terminals East of Suez has ground to a halt as capacity has likely been filled. As discussed in last month's Report, pricing signals do not suggest that global stocks are bumping against capacity limits, but high inventories are putting pressure on crude and product prices. At the time of writing, time spreads stood at around $0.50 /bbl per month over the M-3 and M-12 ICE Brent futures contracts.

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

OECD inventories defied seasonal trends and built by 13.8 mb in September to extend recent records and end the month at 2 989 mb, a staggering 257 mb above average levels. Stocks in all OECD regions stand above average, although the lion's share is located in OECD Americas. The build was split roughly equally between crude and products, both of which rose counter-seasonally. As crude added 6.9 mb, its surplus to average levels widened to 173 mb while products stood 69 mb above average after rising by 7.3 mb. All product categories stand above average except fuel oil, which has been hit in 2015 by declining OECD demand for power generation and from the introduction of stricter bunker fuel legislation. The upshot of this is that fuel oil is now being swiftly shipped to non-OECD markets, notably Asia.

Motor gasoline inventories soared by 10.0 mb in September as holdings in the Americas continued to build. Meanwhile, middle distillate inventories declined by 7.2 mb and 'other products' inventories rose by 2.5 mb as their seasonal replenishment after demand for crop drying increased. All told, at end-September refined products covered 32.1 days of forward demand, level with end-August but 1.5 days above one year earlier.

OECD middle distillate stocks more than comfortable ahead of winter

As winter approaches, the focus of many market participants turns towards middle distillates, a product category that includes ultra-low sulphur diesel (ULSD), the liquid space heating fuel of choice in Europe and the Northeast US and kerosene in Asia, as it is the preferred heating fuel in Japan.

Between February and August, OECD middle distillate stocks surged by over 84 mb as output increased after OECD refiners hiked throughput to take advantage of exceptional gasoline cracks. By end-August they stood at close to 600 mb, their highest absolute levels since 2010. Although stocks drew seasonally by 7.2 mb in September, by end-month they remained a comfortable 36 mb above average and 49 mb above one year earlier. Despite near-500 kb/d year-on-year growth in OECD middle distillate demand, OECD stocks also appear comfortable on a days of forward demand basis. At end-September, they stood 1.3 days and 2.5 days above average and one year earlier, respectively.

The bulk of the overhang is located in OECD Europe as stocks there have been propelled higher by US and Russian imports. In September, European middle distillate inventories stood 31 mb above the average and the previous year. Forward demand cover also stood well above average (+3.2 days) and the previous year's (+3.0 days) levels. Additionally, data suggest that German end-consumers have continued to restock their tanks with ULSD over the summer, levels stood at 61% of capacity at end-September.

In the Americas, and despite high US distillate exports, middle distillate stocks stood 6.3 mb above average, while in days of forward demand terms they stood on a par with average levels but 3.3 days above one year earlier. In the Northeast US (PADD 1) - which remains the world's largest distillate heating oil market despite the recent intrusion of natural gas into the space heating fuel mix - commercial distillate stocks stood at 59 mb at end September. This was a comfortable 6.7 mb above average and 17.7 mb (43%) above one year earlier.

In Asia Oceania, the picture remains tighter, at end-September stocks stood a slim 1.7 mb and 2.9 mb below the five-year average and last year, respectively. They also remained towards the bottom of the five-year range in terms of forward demand cover. However, it should be noted that the middle distillate market remains smaller here than in other OECD regions and the arrival of one or two cargoes can make stock levels move from the bottom to the top of the five-year range. Additionally, middle distillates inventories in Singapore remain at close to record levels.

The comfortable middle distillates holdings in key markets could cushion markets from a hard landing in the event of a prolonged spell of cold weather. A lengthy cold snap in the US last January quickly depleted already-low distillate inventories, causing prices to surge and drawing in distillate cargoes from as far away as Europe, Russia and India. Moreover, high stocks could limit the prospect of soaring product prices leading crude prices higher.

On the receipt of more complete data, OECD inventories were revised upwards by a steep 32.1 mb that saw the 28.8 mb August stock build presented in last month's Report adjusted upwards to 60.7 mb, the third steepest build posted over the last four years. The revision was centred in OECD Europe where stocks were raised by 22.6 mb with middle distillates accounting for 10.3 mb. Meanwhile, levels in OECD Americas were adjusted up by 6.4 mb, again concentrated in middle distillates. Inventories in OECD Asia Oceania were 1.2 mb higher than previously presented.

Preliminary data point to OECD commercial inventories remaining remarkably stable in October as they inched down by 0.1 mb, far shallower then the 21 mb average draw for the month over the last five years. However, this masked significant disparities between crude and product inventories with seasonally low maintenance-affected refinery throughputs leading to a 27.2 mb draw in products while crude added 28.7 mb. Meanwhile, NGLS and other refinery feedstocks drew by 1.5 mb. On a region-by-region basis, stocks remained relatively stable in the US where they slipped by 0.5 mb while in Europe inventories drew by 6.9 mb and in Japan they built by 7.3 mb.

Recent OECD industry stock changes

OECD Americas

Commercial inventories in the OECD Americas built for the seventh consecutive month in September as they rose by 13.4 mb. Since this was more than double the 5.2 mb seasonal build for the month, stocks' surplus to average levels widened to an astounding 190 mb. Despite regional refinery throughputs falling by 750 kb/d, soaring refined products holdings led total stocks upwards. However, in contrast to previous months this was not driven by the seasonal restocking of 'other products' which slowed appreciably as US agricultural demand grew. Rather, it was led by a steep 9.8 mb build in motor gasoline inventories. These holdings had drawn relatively steeply during the first seven months of the year to briefly sit below average in July but have since reversed course and at end-September once again stood 12 mb above average. In contrast, middle distillate holdings declined by 3.7 mb but still stood 6.3 mb and 20.9 mb above average and one year earlier, respectively. All told, regional refined product holdings covered 31.3 days of forward demand at end-September, 0.3 days above end-August and 1.8 days above one year earlier. Meanwhile, crude oil holdings added 4.4 mb while NGLS and other feedstocks drew counter-seasonally by 1.8 mb.

Preliminary weekly data from the US Energy Information Administration (EIA) suggest that US commercial inventories remained relatively flat in October after they drew by a slim 0.5 mb. However, this masked diverging trends in crude and product holdings. As refinery throughputs remained seasonally low as a number of refiners conducted turnarounds, crude stocks surged by 22.7 mb. The build was concentrated in PADD 2 (the Midcontinent) and PADD 3 (the Gulf Coast). In the Midcontinent (+6.6 mb), stocks rose at refineries and terminals outside of Cushing, Oklahoma where levels remained flat at 53 mb and capped gains in NYMEX WTI. Additionally PADD 2 refinery throughput began to rebound in mid-month on the completion of turnarounds. Stocks soared on the Gulf Coast by 12.5 mb, as the region's refinery throughput remained significantly lower than during mid-summer.

Conversely, the lower refinery throughput saw product stocks tumble seasonally by 22.2 mb with all product categories drawing except fuel oil (+2.2 mb m-o-m). Middle distillates holdings adhered to seasonal trends and drew by 11.3 mb amid distillate exports breaching 1.3 mb for the first time. By end-month, stocks stood 6.4 mb and 23.8 mb above average and last year, respectively. Motor gasoline inventories dropped by 8.0 mb as refiners drew stocks ahead of the switch to lower-specification winter-grade product. 'Other products' (-5.1 mb) drew for the first time since February as propane demand in the agricultural sector where it is used for crop drying, and for household space heating, rose.

OECD Europe

Commercial inventories in OECD Europe remained relatively flat (-0.2 mb m-o-m) at around 960 mb in September. Over the past five years, European inventories have drawn by over 15 mb on average in September. Since this did not occur this year, at end-month the surplus of regional inventories to average levels widened to 41 mb, the largest since March 2009. Both crude and product inventories remained relatively flat and drew by a combined 1.1 mb which was almost offset by a combined 0.9 mb increase in NGLs and other feedstocks.

On the products side, motor gasoline inched up by 0.5 mb while fuel oil added 0.1 mb. In contrast, middle distillates and other products slipped by 0.7 mb apiece. By end-month regional refined products stocks stood at 550 mb, 17 mb above average. Due to a forecast seasonal fall in product demand going forward, on a days of forward cover basis, at end-September they covered 40.4 days, a rise of 0.7 days compared to end-August.

Market reports suggest that despite regional product inventories remaining healthy, in October, Switzerland experienced some localised tightness in product markets. Due to an unplanned shutdown of the Cressier refinery (following the permanent close of the Collombey plant earlier this year) and extremely low water levels on the river Rhine - the main artery for transporting product between Rotterdam and Switzerland - the government recently chose to release emergency stocks of gasoline and diesel totalling about 1.6 mb. With the refinery having restarted in early-November it is anticipated that this is only a short-term measure.

Preliminary data from Euroilstock indicate that regional inventories slipped seasonally by 6.9 mb in October. Crude stocks drew counter-seasonally by 4.2 mb while refined products declined by 2.6 mb, far shallower than the 11.4 mb five-year average draw for the month. Elsewhere, reports suggest that refined products held in independent storage in Northwest Europe have declined slightly during recent weeks but remain at close to record levels with the low water levels on the Rhine hindering the draining of product from the region.

OECD Asia Oceania

Industry stocks in OECD Asia Oceania built by a slim 0.7 mb in September, slightly less than the 3.2 mb seasonal build for the month. Consequently, inventories' surplus to the five-year average shrank to 25.8 mb from 28.3 mb one month earlier. As a number of regional refiners undertook seasonal turnarounds, crude stocks built by 2.8 mb, likely as imports remained buoyant. On the flip side, lower refinery activity saw product stocks draw by 2.6 mb. Accordingly, their deficit to average levels widened to 6.3 mb from 1.8 mb one month earlier. On a days of forward demand basis, stocks covered 21.0 days at end month, 1.5 days lower than at end-August. Product stocks were pressured lower by a steep 2.8 mb draw in middle distillates which saw inventories slip to a deficit against average levels for the first time since June. 'Other products' and motor gasoline drew by 0.7 mb and 0.3 mb, respectively, more than offsetting a 1.1 mb build in fuel oil.

Preliminary weekly data from the Petroleum Association of Japan suggest that stocks there rose counter-seasonally by 7.3 mb in November. Considering that Japanese refinery throughputs remained low, crude stocks built by an exceptionally steep 10.2 mb as imports likely remained high. On the other hand, product holdings drew by 2.4 mb with middle distillates (-1.7 mb), 'other products' (-0.8 mb) and motor gasoline (-0.2 mb) posting draws. Fuel oil stocks inched up by 0.4 mb.

Recent developments in Singapore and China stocks

According to China Oil, Gas and Petrochemicals (China OGP), Chinese commercial crude inventories rose by an equivalent 5.7 mb in September (data are reported in terms of percentage stock change) as imports remained high while refinery throughputs fell. Nonetheless, it is likely that national crude stocks built by a greater amount as crude supply (production plus net imports) exceeded refinery throughputs by 860 kb/d leading to a 20 mb unreported build. All told, using this methodology, Chinese crude inventories added 68 mb over 3Q15 with a large volume of this expected to have been added to newly completed SPR sites (see China fills up SPR in OMR dated 11 September 2015).

Chinese commercial product stocks drew by a combined 13.5 mb after gasoil fell by 15.8 mb while motor gasoline and kerosene holdings rose by 1.2 mb and 1.0 mb, respectively. Bearing in mind a year-on-year increase in refinery throughputs and recent underwhelming Chinese gasoil demand growth, it is increasingly apparent that Chinese refiners are choosing to export gasoil. Recent shipping data suggest that the majority of these exports have headed to Singapore which has seen inventories there remain at close to record levels. Moreover, as a global trade hub, Singapore is increasingly used for the breaking of bulk with gasoil subsequently being shipped all over Asia Pacific and even as far as Africa.

Data from International Enterprise indicate that land-based inventories in Singapore slipped by 2.3 mb during October as residual fuel oil holdings dropped (-1.3 mb) from their lofty levels. By early-November, fuel oil stocks stood at a four-month low as bunkering activity picked up, an increase in exports to Malaysia and less product arrived from the West. In contrast, middle distillate stocks added 0.2 mb as Chinese and European arrivals remained high.



  • Global benchmark crudes held within a narrow band during October as continuing oversupply in global oil markets and a strong US dollar limited the impact of strikes in Brazil and geopolitical concerns. By early-November, ICE Brent was trading at $44.43/bbl with NYMEX WTI slightly lower at $41.75 /bbl.
  • Sour crude markets appear especially oversupplied with discounts versus sweet grades widening. Europe is awash with competing sour crudes from the FSU and Middle East and US sour crudes remained depressed by refinery maintenance. Meanwhile in Asia, middle-distillate-rich light, sweet grades gained strength from the increased production of heating fuels.
  • Spot product prices were mixed in October with brimming inventories hitting prices for gasoline and middle distillates. Monthly average prices in Northwest Europe fell sharply after logistical issues affected the draining of ARA stocks towards inland markets while product cracks in the region weakened more than elsewhere as ICE Brent held its price better than other benchmark crudes.
  • Surveyed freight rates had another extremely volatile month, particularly for crude vessels. VLCCs moving from the Middle East Gulf to Asia saw another dramatic plunge from early October highs, as eastward loadings dropped significantly while North European Aframax markets tightened on record Russian exports and high North Sea production.

Market overview

Global benchmark crudes oscillated in a narrow band in October as the continuing oversupply in global oil markets, a further strengthening in the value of the US dollar and brimming inventories limited price rallies. In Europe, ICE Brent gained $0.75/bbl on a monthly average basis, drawing strength from a light European autumn refinery maintenance schedule, strikes in Brazil, continuing disruptions to Libyan exports and Russian involvement in Syria, which saw the North Sea marker briefly touch $50/bbl in early-November. Nonetheless, the rally was short-lived and Brent was last trading at $44.43/bbl.

Meanwhile in the US, the bullish impact of declining domestic LTO production in the face of persistently low prices has helped to prop-up benchmark WTI and negate the impact of soaring stocks due to US refinery turnarounds. US crude inventories added a steep 23 mb over October while levels at the Cushing, Oklahoma delivery hub remained stubbornly high at close to 53 mb over the month. WTI strengthened by $0.82/bbl on a monthly average basis and was last trading at $41.75/bbl.

At the time of writing sour crude markets appear especially oversupplied with discounts versus sweet grades widening over the month. In the US, refiners on the Gulf Coast running sour crudes ramped up their maintenance while in Europe supply remains abundant in the face of record FSU exports. Middle Eastern exporters have increasingly targeted the region ahead of the expected return of Iranian crude once sanctions are eased sometime in 2016. Nonetheless, light crudes are also struggling to find a home and despite the narrower LLS - ICE Brent spread, there remains an overhang of African barrels for November delivery waiting to be cleared despite the release of barrels for December delivery.

High inventories are also hitting product markets with middle distillate stocks standing significantly above average heading into winter. US product inventories in key demand centres remain high while refined product inventories in Singapore remain at close to record levels, buoyed by increasing flows from new Middle Eastern refineries and China. In Europe, prices are being hit especially hard by logistical bottlenecks hindering the movement of product from coastal terminals in the key Amsterdam Rotterdam Antwerp (ARA) region to demand centres in inland markets.

Futures markets

The contangos in benchmark crude markets steepened during October as, despite prompt prices strengthening over the month on an average basis, prices by early November stood below one month earlier. The contango in the NYMEX WTI market is now at its deepest for several months as prompt prices have been pressured lower by high inventories at the Cushing, Oklahoma storage hub. With the back of the curve having slipped by a lesser amount this suggests that market participants believe stocks at the hub will once again draw when refinery throughputs ramp up on the completion of seasonal maintenance. At the time of writing, monthly time spreads over M1-M3 stood at $0.63/bbl per month compared to $0.33/bbl per month over M4-M12. In comparison, time spreads in the ICE Brent market remain more uniform over the first 12 months of the contract at $0.57/bbl per month for M1-M12 and $0.53 /bbl per month for M1-M3.

By comparison, product futures slipped over the month with contangos steepening as high stocks weighed on prompt prices. Accordingly, the contango in the ICE gasoil contract stood at $1.34 /bbl over M1-M3 compared with $0.90/bbl one month earlier. These time spreads are insufficient to cover floating storage costs. Diesel and jet kerosene cargoes are nonetheless moving into floating storage off ARA as logistical bottlenecks hinder the transport of product into the continent.

Market activity

October was a fairly quiet market for futures and options oil markets. Hedge funds expressed moderate optimism throughout the month, as their overall exposure to both ICE Brent and NYMEX WTI inched up. Expected future volatility implied by three-month forward options contracts eased from September to around the 35% mark, as overall sentiment was moderately positive, and the actual volatility of the realized prices - typically providing an anchor for future expectations - decreased as well. Outstanding shares in the United States Oil fund, the largest oil-based  fund traded on a stock exchange, rose again, to just shy of previous highs. The fund's number of outstanding shares normally has an inverse relationship with oil prices, suggesting that shares tend to be bought in expectation of a rebound in prices.

Financial regulation

US Commodities Futures Trading Commission (CFTC) chairman Timothy Massad reportedly signalled the CFTC's intention to curb high-speed-trading in multiple asset classes, including commodities. The chairman explicitly addressed not only manipulative practices, but explicitly addressed the potential for disruptive 'flash events', reportedly saying that the CFTC is looking into proposing design requirements for the testing and supervision of automated trading systems.

Spot crude oil prices

European benchmark North Sea Dated firmed by $0.90/bbl to $48.51/bbl on a monthly average basis in October. Despite coming under pressure from high supply, brimming European inventories and geopolitical issues, upward momentum came from a relatively light European refinery maintenance schedule which saw refiner demand for crude remain healthy and from preliminary loading programs indicating a drop in Norwegian exports in December.

US benchmark West Texas Intermediate (WTI) gained strength from declining US LTO production as producers scaled back drilling activity in the face of low prices. Prices experienced a brief rally towards end-month as midcontinent crude demand rose after a number of refiners exited turnarounds. Nonetheless, persistently high stocks at the Cushing, Oklahoma storage hub capped gains. On a monthly average basis WTI gained $0.75/bbl and was last trading at about $42.93/bbl.

Refinery throughputs remained low on the US Gulf Coast as refiners undertook a maintenance schedule in line with the historical average. Accordingly, this saw crude stocks surge by 23 mb during October. During the first half of the month, sour Mars weakened against Louisiana Light Sweet (LLS) as a number of US Gulf refiners who normally run sour crudes were in maintenance. However, from mid-October onwards the differential began to rebound as refiners slowly ramped up throughput. On the other hand, Louisiana Light Sweet (LLS) saw its premium to WTI erode over the month as crude stocks in the region built. By end-October the differential narrowed to about $0.25/bbl but at the time of writing had rebounded to about $1.70/bbl on increasing refinery throughputs.

The WTI - Brent spread remained relatively stable at about $2.20/bbl for most of the month. However, as high inventories pressured LLS, the arbitrage to ship Atlantic Basin crudes westwards narrowed with Brent's premium to LLS exceeding $2.50/bbl in mid-month. However, as LLS once again began to strengthen, the premium narrowed steadily and by the time of writing, LLS stood at a small premium to Brent. This could once again see an uptick in arrivals of light, sweet African crudes into refineries on the Gulf Coast and in PADD 1.

Bakken crude has proved to be remarkably resilient considering the recent narrow differential between LLS and ICE Brent which has seen a closing of the arbitrage to rail Bakken eastwards to PADD 1. This has seen refiners in the region increase their imports of light, sweet African crudes. The main driver for the resilience of Bakken has been the decreasing drilling activity and falling LTO production in the formation since early-Summer. Accordingly, from standing at a $4.00/bbl discount to WTI in mid-July, Bakken has strengthened against the regional benchmark so that by early-November it stood at a $0.75 /bbl premium. However, not all mid-continent grades have traced the same path. The discount of WCS to WTI remained at close to $14/bbl, and not even the news that the Line 9 pipeline will soon begin shipping Albertan crudes eastwards to Montreal area refineries provided any lasting upward momentum.

Light, sweet African crude prices were pressured by a significant overhang of West-African barrels for November delivery. This only began to clear from mid-October onwards after the price of Bonny Light fell far enough to entice European buyers. Some cargoes reportedly headed to Asia. African sour grades fared better due to strong buying interest from Asia, notably China. At the time of writing, this had seen much of Angola's December loading program sold.

Amid record domestic crude production and exports from Russian terminals, Urals slumped versus benchmark North Sea Dated in October. With much of the increase in exports coming out of Baltic terminals, the discount of NWE Urals versus North Sea Dated plummeted to a nadir of $3.35/bbl in mid-month, a differential not seen since Brent was trading at over $100/bbl. By comparison, Urals in the Mediterranean held up better as, despite the region reportedly being awash with Middle Eastern sour crude, Urals exports decreased on the month as more oil was diverted northwards and eastwards. Most of the extra exports coming out of the southern FSU were of the lighter CPC Blend crude that saw its premium to Urals eroded to less than $0.25/bbl.

Global sour crude markets look set to remain weak going forward after Saudi Arabia sharply cut its official selling prices for European customers for December loading with the discount of Arab Light versus ICE Brent falling to its lowest level since February 2009. Additionally, reports indicate that the Kingdom is attempting to increase supply to non-traditional European states including Poland and Sweden that have previously taken significant volumes of sour Russian Urals (see Sour Wars in Supply section).

East of Suez markets stayed weak due to the competition between African and Middle Eastern producers. Nonetheless, as Asian demand remained relatively strong, regional benchmark Dubai gained $0.47 /bbl on a monthly average basis. In Asian light, sweet markets, distillate-rich Malaysian Tapis drew strength from regional refiners who turned their attention towards the production of middle distillate heating fuels. Nonetheless, considering the relative strength of North Sea Dated, Tapis remained at a discount which should limit arrivals from the North Sea. Arrivals from West Africa, however, could provide some competition.

Spot product prices

Spot product prices experienced a mixed month in October with brimming inventories hitting prices for gasoline and middle distillates. Only naphtha saw strength on the back of a seasonal change in gasoline specifications and demand from the Asian petrochemical industry. Cracks in Northwest Europe slipped more than elsewhere after logistical issues affected the draining of ARA stocks towards inland Europe while Brent held its price better than other benchmark crudes.

Gasoline spot prices dropped across all surveyed markets although losses were steeper in the Atlantic Basin than in Asia. European prices slipped by around $4/bbl on a monthly average basis amid logistical difficulties transporting product into central Europe. The window to ship European product to the US remained shut for most of the month, although export demand to Latin America and West Africa provided some offset. In Singapore, relatively strong regional demand, especially from China, tempered price losses compared to other markets.

Naphtha markets went from strength to strength in October as spot prices rose on demand from both the Asian petrochemical industry and from gasoline blenders - winter grade product can contain a higher proportion of naphtha compared to summer grade product. In Europe, where competing LPG remains more economical for many petrochemical plants, large volumes of product were arbitraged to Asia and by end-month cracks in both Northwest Europe and the Mediterranean stood in positive territory for the first time since 1Q15.

Despite refiners turning their attention to middle distillate production, middle distillate prices appear depressed across all surveyed markets. Much of this can be pinned on inventories in the key markets of Europe, the US and Singapore standing significantly above year-ago levels (see OECD middle distillate stocks more than comfortable ahead of winter in OECD Stocks section). Diesel cracks which before mid-summer had held up relatively well, are now languishing at levels not seen since global benchmark crudes were trading at over $100/bbl.

In Europe, ULSD cracks stood at close to $10/bbl in late-October, pressured lower by close-to-record volumes held in independent storage in Northwest Europe as low water levels in the river Rhine hindered the movement by barge of product to demand centres in Germany and Switzerland. This has forced traders to turn to floating storage despite monthly forward time spreads in the ICE gasoil market being insufficient to cover costs. According to market reports, a number of European gasoil and diesel cargoes have been shipped eastwards. These have helped to propel middle distillates inventories in Singapore higher as they have come at a time of rising Chinese gasoil exports as Chinese state refiners are compensating their refineries for supplying less profitable export markets. This saw Asian gasoil prices slip by $0.35/bbl on a monthly average basis while cracks against benchmark Dubai dropped by a steeper $0.82 /bbl.

Kerosene prices in Europe remain depressed due to logistical issues hindering transport away from coastal terminals. In addition to low water levels in the Rhine, Nato's Central European Pipeline System (CEPS) which connects the ARA region to a number of the region's main airports is reportedly running at capacity. In comparison, losses in Asia were smaller as prices and cracks were buttressed by tighter fundamentals given ongoing regional refinery maintenance and higher demand for kerosene for space heating. By early-November, Asian kerosene cracks exceeded $15/bbl, about $1.50/bbl higher than in Europe and the US.

Fuel oil spot prices fared better than gasoline and middle distillates after surging Asian bunker demand saw markets tighten and stocks in Singapore draw. Accordingly, prices for both LSFO and HSFO in the region firmed over the month with cracks strengthening accordingly. Northwest European cargoes were drawn towards Asia, especially in late-October as the arbitrage window widened, which saw LSFO prices gain $1.00/bbl on a monthly average basis.


Surveyed freight rates had another extremely volatile month, particularly for crude vessels. Very large crude carriers (VLCCs) moving from the Middle East Gulf to Asia saw another dramatic plunge from early October highs, as eastward loadings dropped significantly, removing support. After trending sideways for much of October as trade remained scarce, Suezmaxes on voyages from West Africa have seen the rates surge over recent days as European and Asian refiners entered the market in response to price cuts. This saw an overhang of November's loading program swiftly cleared while date-specific cargoes for December delivery have also left the region. At the time of writing the rates had exceeded $20/mt for the first time since 2Q15 as the available tonnage pool was depleted due to a number of owners being reluctant to send their vessels to Nigeria, despite the government rescinding a ban on 113 vessels. In Northern Europe, Aframax markets were tightened in October as spot activity increased significantly. Data indicate that exports from Russian Baltic terminals hit a high in October while North Sea production remains comfortably above year-ago levels as maintenance at a number of fields has been postponed.

Clean rates for the 75Kt MEG Japan rate, carrying almost exclusively naphtha, stagnated in October, as inquiry didn't pick up and tonnage remained abundant. Shipments of other products from the Middle East remained low with Asian stocks remaining plentiful despite a number of regional refiners conducting turnarounds. Reports also suggest that amid scarce trade, vessels supply remained plentiful on routes between Singapore and Japan which saw the rate remain at $15/bbl for much of the month. In the Atlantic Basin, rates for voyages between the UK and Atlantic Coast remained subdued as the gasoline (front haul) and diesel (back haul) arbitrage windows remained shut throughout October with product prices on both sides of the Atlantic remaining depressed in the face of brimming inventories.



  • Global refinery throughput sank by 1.2 mb/d in October to 78.2 mb/d, with seasonal maintenance in full swing. Runs are expected to return to much higher levels in November and December - 79.8 mb/d and 81.0 mb/d, respectively - as maintenance finishes.
  • Annual throughput growth has slipped into a much lower 1-2 mb/d range, well below the record 3 mb/d seen in July. The OECD and Middle East contribute most of the year-on-year (y-o-y) growth, while China's gains are marginal.
  • October margins edged down from September, but remained robust. Profits edged up by $2 /bbl in early November, as gasoline cracks reversed earlier October losses. Naphtha is the main prop, with fuel oil and gasoline adding support. Diesel cracks remain subdued.

Global refinery overview

The global refining sector plods on, undeterred by bearish margin signals, although slightly less buoyant than a few months ago. Yearly throughput growth has eased into a much lower 1-2 mb/d range, well down on the 3 mb/d July record.

Global crude run estimates for 3Q15 have been lowered by 90 kb/d from last month's Report to 80.4 mb/d. The downward revisions, split over most of the non-OECD, were offset by an unexpectedly large upward adjustment in Europe. The estimate of 4Q15 crude runs was also revised down by 220 kb / d to 79.7 mb/d, mostly due to a large 370 kb/d downward revision from the Americas partly offset by a 145 kb/d upward revision spread over most non-OECD regions. The quarterly US downward revision originated in preliminary October US figures being 0.7 mb/d below our expectations in last month's Report.

Global throughput figures for August show a 0.2 mb/d month-on-month (m-o-m) increase, due mostly to the OECD, for a total of 80.9 mb/d. Annual growth topped 2 mb/d, with gains of 1.3 mb/d in the non-OECD, primarily China. Global September throughput estimates came in 1.4 mb/d lower m-o-m, due to the start of maintenance season, and October is expected to fall a further 1.3 mb/d to 78.2mb/d -the lowest since July 2014. However, maintenance did not play out similarly in all regions. September figures for Europe are 0.1 mb/d higher m-o-m, which is 0.5 mb/d higher than expected in last month's Report. September global y-o-y growth amounted to 1.8 mb/d, led by Europe and the Middle East, with very little contribution from China.

November and December are expected to return to much higher levels as maintenance ends, to 79.8 mb/d and 81.0 mb/d, respectively.


Margins in October and early November followed different and somehow surprising paths. Gasoline and, to a lesser extent, diesel were under pressure during October but picked up in early November - boosting margins by up to $2/bbl above end-October values. European margins suffered the most, with gasoline cracks falling below $10/bbl for most of the month and diesel cracks nearing this level mid-month. Their average October values were respectively $5/bbl and $3/bbl below September.

In Singapore, losses for gasoline and diesel cracks were only $2.30/bbl and $0.80/bbl, respectively, with distillates in a small backwardation. In the US Gulf, gasoline cracks lost $1.80/bbl while diesel cracks gained $0.40/bbl. Cracks for fuel oil narrowed marginally, with stocks in Singapore showing a sharp drawdown. The strongest product was naphtha, supported by strong petrochemical demand. Its crack ended up above $1/bbl in NWE and $5/bbl in Singapore in early November. It is rather unusual to see margins in this season supported by naphtha, fuel oil and, to some extent, gasoline.

These product trends impacted regional margins differently, with European cracking margins losing the most, -$3/bbl for Brent and $1.5/bbl against a weaker Urals. Singapore margins were down by roughly $1 /bbl, while US Gulf coking margins were stable. Other cracking margins in the US Gulf were marginally higher than in September. However, US Midcontinent margins lost between $2-$4/bbl as WTI strengthened relative to LLS. It is worth noting that, when compared with the past four years, the average October margin remained at relatively strong levels in every region. November will see a tug-of-war on margins, with crude surpluses competing with product weakness.

OECD refinery throughput

In September, the most recent month for which a complete set of monthly data is available, OECD refinery crude runs reached 38.1 mb/d, 0.9 mb/d lower than in August, but still 1.0 mb/d higher y-o-y. The decline took place mostly in the Americas (-0.76 mb/d or -3.9%) and in Asia Oceania (-0.27 mb/b or -3.9%). Europe inched up by 0.06 mb/d, and stood 0.9 mb/d higher y-o-y. As a result, refinery utilisation rates compared with August decreased by four percentage points in the US, by five percentage points in Asia Oceania and increased by one percentage point in Europe. The net result was an overall decrease of two percentage points. OECD throughput for 3Q15 is 38.6 mb/d, unchanged from last month's estimates.

Preliminary figures for October show OECD runs decreased seasonally by 1.4 mb/d to reach 36.7 mb/d - 0.3 mb/d higher y-o-y. Runs are expected to pick up rapidly in November and December unless margins prove too disappointing.

OECD Americas

The Americas September crude throughput estimate was revised by -0.16 mb/d from last month's Report, essentially in the United States, where maintenance reduced runs by a sharp 0.58 mb/d. The 18.9 mb/d figure for North America is 0.1 mb/d lower than at the same period last year, and is the biggest y-o-y decrease in Americas' crude runs since February 2013.

In the United States, middle distillates cracks tested a multi-year low of $10/bbl, but moved higher at the end of the month, while overall margins were supported by healthy gasoline cracks. In addition, sour crudes became more desirable in the USGC, with strong coking margins encouraging refiners to shift their crude slate. Canada processed 0.2 mb/d less crude in September than in August, with runs at 1.58 mb/d, and October runs expected to be another 0.1 mb/d lower. In Mexico, throughput for the first nine months has been on average 120 kb/d below last year. The lower rate explains an increase in gasoline deliveries from US refineries, which rose 80 kb/d above last year in July-August to reach 260 kb/d.

OECD Europe

Europe sent mixed signals in September. On the one hand, very strong crude runs after an upward revision of 0.53 mb/d from last month's Report. On the other, lacklustre margins and weak crude differentials - especially in the Mediterranean. Differentials for Urals crude were unusually low, perhaps due to the high export program generated by record output and heavy Russian refinery maintenance. The most significant upward revisions took place in Denmark, France, Greece, Poland, Portugal, Spain and Sweden. We expect October crude runs to be 0.5 mb/d below September, as maintenance peaks. Post-maintenance, we consider it unlikely that margins will justify such high crude runs as seen this summer and forecast levels around 12 mb/d for most of the winter.

A notable event was the announcement by three Northwest European refiners - Sweden's Preem, Poland's PKN Orlen and Lotos - of purchases of Saudi crude oil test cargoes, with term supply contracts under consideration. This is another development in the battle for market share between Russia, Saudi Arabia and Iraq (see Sour wars) before the return of Iran after sanctions are eased.


OECD Asia crude intake decreased to 6.7 mb/d in September, 0.27 mb/d lower m-o-m, but still 0.18 mb/d above a year ago. South Korea reduced runs the most, by 0.18 mb/d, with a turnaround at S Oil's Onsan refinery, while Japan cut runs by 0.13 mb/d. High middle distillates stocks in the region may lead to run cuts down the road. In October, however, margins remained at good levels, supported by strong local gasoline demand, keeping gasoline cracks above $15/bbl.

Non-OECD refinery throughput

In August, non-OECD refinery throughput was stable at 41.9 mb/d, taking into account a 0.3 mb/d downward revision to last month's Report, borne essentially by the Middle East. Throughput is forecast to start decreasing in September to 41.4 mb/d as maintenance kicks in. Despite seasonal turnarounds, we forecast 4Q15 throughputs to be marginally higher than in 3Q15.

In China, September crude runs decreased counter-seasonally by 0.1 mb/d to 10.3 mb/d, 0.1 mb/d higher than a year earlier. Over the first nine months, y-o-y growth averaged 5.5%, in line with demand growth. As per last month, these high runs combined with weak diesel demand generated record high 0.28 mb/d diesel exports. Overall in 2015, gasoil exports are forecast to rise 65% y-o-y, to 0.15 mb/d. This month, Sinopec posted a 34% increase in its refining sector profits over the first nine months of 2015, while PetroChina's refining and petrochemical sector profits turned to a positive CNY3bn ($0.5bn), compared to a CNY9bn ($1.5bn) loss in the same period last year.

In Other Asia, crude throughput was stable at 10.1 mb/d in August. Indian crude runs decreased in September by 0.2 mb/d to 4.4 mbd, as three refineries totalling 570 kb/d entered into maintenance (Essar's Vadinar, MRPL's Mangalore and IOC's Koyali). There is a stark contrast between India's impressive demand growth (+15.3% y-o-y in September) and its rather stagnant refinery throughput. Longer term, it will imply a choice between rebalancing imports and exports or building new capacity. In Indonesia, Pertamina is planning to restart its 98 kb/d Trans-Pacific Petrochemical Indotama (TPPI) condensate splitter by year-end, reducing gasoline import requirements.

Asia experienced the most robust margins of all regions during October, supported by strong local gasoline demand plus operational problems in a number of large refineries (Shell Pulau Bukom in Singapore, Kuwait's Shuaiba and Thailand's Formosa Mailiao) which reduced rates and delayed a number of gasoline and gasoil cargoes. Only in Mailiao are such problems expected to be resolved before year-end. Shell's 220 kb/d crude unit in Singapore will restart in January at the earliest. Shuaiba should keep running at 75% until its permanent closure, which has been advanced to April 2017. CPC's 220 kb/d Kaoshiung refinery - reported to have only 100 kb/d operational capacity - will be permanently shut next month, but this closure is due to be compensated later by the expansion of CPC's 300 Kb/d Dalin plant, also in Kaohsiung.

In the FSU, August crude runs edged up to 7.2 mb/d before the start of the maintenance season, which is expected to result in a 0.5-0.6 mb/d decrease. Russia's crude runs in September fell 0.5 mb/d to 5.5 mb/d on heavy maintenance, which helped to boost crude exports and led to the weak price differentials seen for Urals crude.

Diesel woes: chance or a risk for European refiners?

It may be premature to discuss the impact on demand for various oil products from the on-going story on under-rated diesel emissions, but it is worth mentioning some factors that frame the debate on this issue.

  • Diesel private fleet turnover is relatively slow, thus a change in consumer behaviour would take time to significantly impact fuel consumption. Diesel used in passenger transport is around 40% of the 4.7 mb/d of OECD Europe road diesel - the rest is for freight transport. Even if there were a step change in buying patterns, the slow turnover of the European fleet means it will take time for a significant change. For instance, if the share of diesel in new car registrations dropped from the current 54% to 40% from 2016 onwards, there would be 17 million less diesel cars in Europe by 2025 - for a current 250 million passenger vehicle fleet. This implies an approximate reduction of 0.3 mb/d of diesel demand, leaving Europe still net short. Seen over time, it corresponds to an annual 0.8% decrease of European diesel demand, which would mostly offset the 1.1% growth seen over 2007-2014.
  • Changes in taxation or emission regulations could speed the transition. The decision to buy a diesel car will most probably still rest on the perceived savings for diesel, so it would take a substantial shift in fiscal fuel policies to massively discourage diesel car purchases. France has started a slow move, with an equalisation of diesel and gasoline taxes in the next five years. Two measures could accelerate the transition: a ban on diesel cars in city centres, and the implementation of real-world conditions for tests, which could force manufacturers to add expensive equipment to be compliant. Currently, according to the sustainable transport group Transport & Environment, only one out of 10 cars complies when tested in normal driving conditions. 
  • Purely a European story. Only in Europe do diesel passenger vehicles represent a significant share of the passenger fleet - roughly 40%. Because of this crisis, diesel will effectively be ruled out as occupying any significant role in the automotive mix in the U.S. or other non-European countries for the foreseeable future. In these regions, diesel will remain restricted to heavy transport, being the quasi-exclusive fuel used by trucks.
  • Short term loss, long-term gain for Europe's refiners. Although the diesel yield in European refineries is twice that of gasoline - a unique regional feature - European refineries still produce much more gasoline than needed. The surplus has to be exported at a lower netback, and therefore, a re-balancing between gasoline and diesel in the long term should be a positive factor. In the short term, however, any decrease in diesel demand could translate into a lower diesel margin - or crack - implying a lower overall European refining margin.

Middle East crude runs in August were roughly stable at 6.7 mb/d, after a 0.3 mb/d downward revision from last month's Report. The revision includes a 0.2 mb/d upward adjustment in Kuwait and a 0.46 mb/d downward revision in Saudi Arabia. For Kuwait, the planned 265 kb/d Mina Abullah maintenance shutdown apparently had no impact on reported throughputs according to data reported to the Joint Oil Data Initiative (JODI). For Saudi Arabia, we assumed the new Yasref Yanbu refinery would generate significant y-o-y growth. But according to JODI, 2015 crude runs have been for the past three months at 2014 levels - despite August product exports being reported 300 kb/d above June and July. We still forecast higher Saudi September intake, before significant maintenance in October and November (SASREF, PetroRabigh, Ras Tanura) puts a lid on crude runs. In Iraq, crude runs in September are the highest since June 2014 when the advance of ISIL militants forced the Baiji refinery to stop operating.

Latin America's crude intake in August dropped by 0.3 mb/d, because of large maintenance shutdowns in Venezuela and Brazil. Over the first eight months, refinery throughput has been exactly equal to that of 2014. However, we expect a take-off on 4Q15 due to the ramp-up of Ecopetrol's long-delayed Cartagena plant. September crude runs in Brazil edged up from August to 2.05 mb/d, 1.5% higher m-o-m, but still 1.2% lower y-o-y. The weak processing level in Brazil can be attributed to the country's severe downturn but also to an increase in mandated level of biofuels. Last March, the mandated ethanol level in gasoline was boosted from 25% to 27%, after an increase from 5 to 7% of the proportion of biodiesel in diesel last November. On 1 November, Brazil's biggest oil workers union announced a strike, which reportedly crippled important refineries, including the Paulinia and Maua plants.

In Africa, crude throughput was stable in August, at 2.2 mb/d, including the continued closure of Morocco's Samir refinery. This closure and weak numbers for Algeria explain most of the relatively low figures for the previous months. In Nigeria, the re-start of local refineries still seems to be facing severe problems and the country issued its fourth quarter gasoline import quotas amounting to 80 kb/d. It also announced the replacement of previous offshore processing agreements totalling 210 kb/d and their replacement by straightforward crude sales and product purchases contracts.