Oil Market Report: 11 March 2016

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Highlights

  • Crude prices rose to their highest in three months in early March, stoked by tightening supply, proposed new producer talks on co-ordinated output action and US dollar weakness. At the time of writing, Brent was at $39.80/bbl and US WTI was at $37.30/bbl.
  • Sharp decelerations in demand growth - particularly in the US and China - pulled global growth down to a one-year low of 1.2 mb/d in 4Q15, compared to the year earlier, dramatically below the near five-year high of 2.3 mb/d in 3Q15. A gain of around 1.2 mb/d is forecast for 2016.
  • Global oil supplies eased by 180 kb/d in February, to 96.5 mb/d, on lower OPEC and non-OPEC output. Production stood 1.8 mb/d above a year earlier, as a slight decline in non-OPEC was more than offset by OPEC gains. Non-OPEC production is estimated to fall by 750 kb/d, to 57.0 mb/d in 2016, 100 kb/d less than in last month's Report.
  • OPEC crude oil production eased by 90 kb/d in February to a still-robust 32.61 mb/d with losses from Iraq, Nigeria and the UAE partly offset by a substantial rise in flows from post-sanctions Iran. Saudi Arabia, OPEC's largest producer, held supplies steady.
  • OECD commercial inventories gained 20.2 mb in January while forward demand cover remained comfortable at 32.7 days. Preliminary data suggest that in February, OECD inventories drew for the first time in a year while volumes of crude held in floating storage increased.
  • Global refinery throughputs are estimated at 79.1 mb/d in 1Q16, reflecting weak OECD refinery throughput and a shift of peak spring maintenance to 1Q. Annual growth in 4Q15 fell to below 1 mb/d in 4Q15 amid product stock builds and in line with a slowdown in global oil demand growth.

Light at the end of the tunnel?

International crude oil prices have recovered remarkably in recent weeks. From a nadir of $28.5/bbl in mid-January Brent crude is now trading around $40/bbl. This should not, however, be taken as a definitive sign that the worst is necessarily over. Even so, there are signs that prices might have bottomed out.

The factors cited in this report that currently support higher prices include: possible action by oil producers to control output; supply outages in Iraq, Nigeria and the UAE; signs that non-OPEC supply is falling; no reduction in our forecast of oil demand growth; and recent weakness of the US dollar.

Later this month some oil producers are expected to meet to discuss a possible output freeze. We cannot know what this might be and in any event it is rather unlikely that an agreement will affect the supply/demand balance substantially in the first half of 2016. Before any production freeze or cut is agreed, we have seen supply disruptions in Iraq, Nigeria and UAE. Production from these countries fell in February by 350 kb/d. Meanwhile, Iran's return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220 kb/d and, provisionally, it appears that Iran's return will be gradual.

The focus is on non-OPEC countries to see if high-cost output is falling. There are already signs that this is happening: in the US, we expect production this year to fall by 530 kb/d, and we have downgraded our 2016 outlook for Brazil, Colombia and others. For the non-OPEC countries we now expect production to fall by 750 kb/d: our view last month was that this number would be 600 kb/d. Of course, there is no guarantee that this trend will continue, but there are clear signs that market forces - ahead of any production restraint initiative - are working their magic and higher cost producers are cutting output.

We have warned in earlier Reports that the risks to global oil demand growth are almost certainly on the downside. For now, we have left unchanged at 1.2 mb/d our estimate for growth in 2016. Many reports claim that strong demand for US gasoline is a factor behind recent price bullishness but they overlook weakness in other products e.g. middle distillates. Our view is that total demand in the world's biggest market will be flat in 2016, but if prices maintain their recent upward momentum there could be further weakness. In the world's second biggest demand market, China, we maintain our view that growth this year will be only 330 kb/d, well below the ten-year average growth rate of 440 kb/d. We expect India and other smaller non-OECD Asian economies and the Middle East to provide most of the 2016 growth. The foundations for global demand growth are sound, but not rock-solid.

The impact of the changing value of the US dollar on oil markets is thought by some to be a major driving force in the recent price recovery. Where this factor leads us in the next few months depends on how well commodity-dependent economies and net oil-importing economies have adjusted to lower prices; whether commodities prices have truly bottomed out as some believe; and on changes to interest rates.

We have looked at stocks data for both the OECD - where commercial stocks levels increased in January to yet another record high - and non-OECD. It is clear that China has added significant volumes to both commercial and strategic stocks during 2015 culminating in an apparent build of 1.4 mb/d in December. We have also re-analysed our data for floating storage and oil in transit and further reduced the uncertainty in the supply/demand balance that is described as "missing barrels". The figure usually described as such is now 0.8 mb/d, well within the normal range considering the vagaries of oil data. 

In this report we present an essentially unchanged picture for the overall oil supply/demand balances. For the first half of 2016, the implied surplus of supply over demand remains high at 1.9 mb/d in 1Q and 1.5 mb/d in 2Q. To the extent the oil price is forward-looking, comfort will be taken from our view that in the second half of 2016 the gap between supply and demand narrows significantly to 0.2 mb/d in both 3Q and 4Q.

For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance. It is clear that the current direction of travel is the correct one, although with a long way to go. Without an increase in demand expectations high cost oil suppliers will continue to bear the brunt of the market-clearing process.

Demand

Summary

  • Oil demand will grow by 1.2 mb/d (1.2%) in 2016, significantly below the five-year peak hit in 2015 (+1.8 mb/d). The main factors are an uncertain macroeconomic backdrop, mild 1Q16 OECD winter temperatures, an acclimatisation of consumers to lower prices and non-OECD subsidy cuts.
  • Rapid recent demand growth in many of the big Asian net oil-importing economies, e.g. Korea, India and the Philippines, is in stark contrast to the weak gains/absolute declines in some more industrial and commodity-dependent economies, e.g. Brazil.
  • Modest-to-weak demand gains are seen in many OECD economies, 4Q15-1Q16, as the majority of the previous, largely price-driven, stimulus waned against an increasingly uncertain macroeconomic background.
  • Hefty product stock builds in China between November and January, trimmed our apparent demand estimate there, as large quantities of refinery output went into product inventories and not 'true' demand. IEA demand estimates subtract stock builds since these are considered delayed future consumption. Having risen relatively sharply in the first ten months of 2015, the next three months saw growth ease to a fifth of this level.

Global Overview

From a demand perspective, the oil market presents a very mixed picture as we move into 2016. Surging deliveries in many of the big Asian net oil-importing economies, e.g. India, Korea, Indonesia and the Philippines, contrast with outright falls/weakness in Brazil, Japan and France. Low oil prices continue to provide a welcome fillip to buoyant importer nations, but on the other hand low oil prices dent the spending power of the major oil exporters. Commodity-dependent economies are increasingly cash-strapped and momentum is further squeezed as many of them lower subsidies. Notable examples include Saudi Arabia, Venezuela, Bahrain and Oman (see this year's Medium-term Oil Market Report).

With the macroeconomic situation remaining uncertain in 2016, it is difficult to see much scope for higher oil demand growth than the current forecast with the associated risks almost completely skewed to the downside. The International Monetary Fund (IMF) published its World Economic Outlook (WEO) in January 2016, forecasting global GDP growth of 3.4% for 2016, two-tenths of a percentage point below its October estimate and four-tenths of a percentage point below last July's outlook. Many banks, such as Citibank, Credit Suisse and HSBC, have cited sub 3% growth as a possibility for 2016, which would bring prospective global economic growth down into the territory that the IMF traditionally warned of as 'equivalent to a global recession'. Our demand outlook reflects a more positive view for now, with the majority of January's preliminary data releases coming out in favour of this belief, particularly Germany, Russia, Korea and China.

Notable historical data revisions contained in this month's Report include an updated monthly series for Indonesia. After a hiatus, Indonesia - recently having reactivated their membership of OPEC - has provided detailed demand numbers to the Joint Organisations Data Initiative (JODI), and, although the numbers are still preliminary, roughly 75 kb/d has been added to the Indonesian 2015 demand estimate of 1.9 mb/d. In light of this additional data, a smaller, albeit still sizeable +30 kb/d addition has also been applied to the 2014 estimate, raising global demand.

Unpicking potential 2Q demand swings

Changes in oil demand have always been subject to seasonal factors. In the second quarter (2Q), for example, OECD demand traditionally wanes as the northern hemisphere winter ends. Recently, however, this effect has diminished, as many consumers have switched out of oil products for their heating requirements. Globally, the impact diminishes further as non-OECD consumption takes an ever-greater share of the global total.

With occasional exceptions, such as the unusually cold 1Q14 and 1Q15, the scale of 2Q OECD demand contractions has eased in recent years. From a peak of -2.3 mb/d in 2Q06, the 2Q-over-1Q OECD decline has diminished to a recent five-year average of -1.0 mb/d in 2011-15. The 10-year average is nearer -1.3 mb/d. Having fallen to -0.2 mb/d on a quarter-on-quarter (q-o-q) basis in 2Q13, the next two years saw colder 1Q weather, raising the potential 2Q OECD demand contraction. OECD demand declined by three- and four-years highs of -1.0 mb/d in 2Q14 and -1.2 mb/d in 2Q15. Compared to 1Q13, average OECD heating-degree days rose by 6% in 1Q14 and 4% in 1Q15. With early indicators pointing towards milder conditions in 1Q16, this curbs the inevitable 2Q16 OECD downside demand pressure to -0.7 mb/d q-o-q in our forecasts. The US, for example, with the exception of a spectacular, but short, cold spell in January, has enjoyed a generally mild winter. The UK, meanwhile, has seen average winter temperatures climb to their highest level in over one hundred years. Early indicators of OECD winter temperatures roughly match the forecast cited in the 13 November 2015 edition of this Report.

Outside the OECD, the 2Q demand pattern is a near polar-opposite, hence the changing global 2Q seasonal picture as non-OECD consumers rise in prominence. Additional cooling requirements in many non-OECD economies play an important role, for example in Saudi Arabia where the five-year average 2Q gain came to +445 kb/d through 2Q15. Exceptionally cold 1Q conditions in others, for example Russia (+160 kb/d, 2Q11-2Q15), dampen business activity, as do traditional vacations such as the Chinese New Year, with the average 2Q Chinese demand gain +200 kb/d 2Q11-2Q15. Non-OECD oil deliveries rose by a q-o-q average of 1.2 mb/d, 2Q06-through-2Q15, or 1.2 mb/d 2Q11-through-2Q15, a rate of progress that is only modestly foreseen to ease in 2Q16, to +1.1 mb/d q-o-q.

With non-OECD oil product demand surpassing that of the OECD in 2Q13, persistently from 1Q14, the global 2Q demand trend has increasingly become a rising one. The average declines of old, consistently reverting to gains from 2Q12, furnish the IEA's +0.3 mb/d q-o-q global demand forecast for 2Q16 (+1.0 mb/d in year-on-year (y-o-y) terms). These projections very much depend upon the status-quo remaining with oil prices and economic activity; a dramatic further deterioration in economic activity (or sharply higher oil prices), for example, would reduce the demand forecast, and vice versa.

OECD

Roughly flat in January, according to the latest preliminary numbers, the OECD demand trend has essentially been treading water since 3Q15, when it rose by 1.5% y-o-y supported by very strong gains in the US and a rare increase in Japanese oil product demand. In 4Q15 OECD demand growth has vanished, with persistent strong gains in Europe offset by declines in the OECD Americas and OECD Asia Oceania.





Americas

The strongly rising OECD Americas demand trend that hatched in 4Q14, turned negative in 4Q15, as its main instigator, US demand growth flipped. Pulled down by a combination of sharply lower distillate demand and decelerating gasoline demand growth, the US boom has ground to a halt. Average US oil demand growth of 0.5 mb/d y-o-y in the first eight months of 2015 slowed down to only 0.1 mb/d in the September to December period. To some extent, the strong growth in the first eight months of 2015 was from a low base in the same period of 2014 but momentum has definitely waned since the industrial outlook worsened. Furthermore, most of the reaction by US drivers to low prices has already happened, trimming the possibilities for further strong growth. The last US official monthly data release showed demand averaging 19.5 mb/d in December 2015, roughly on a-par with the year earlier, as continued strong gains in gasoline offset sharp contractions in gasoil/diesel. Preliminary estimates of January and February demand show total US demand easing back to 19.3 mb/d and 19.4 mb/d respectively.

Lower US distillate deliveries are a symptom of three consecutive months, November to January, when industrial production fell y-o-y. The contraction in industrial output in December was 1.8% y-o-y and this was followed by a 0.7% y-o-y fall in January. Tentative signs of life, however, may already be emerging, as the Institute of Supply Management's forward-looking Manufacturing Purchasing Managers' Index (PMI) - which we used to forecast accurately the climb-down in US distillate demand from January 2015 through 1Q16 - turned up sharply in February. The previous PMI uptick in May/June 2015 was followed by three consecutive months of rising y-o-y gasoil demand, in contrast to the overall 2015 trend.


Europe

Compared to other OECD regions, European demand growth remained strong, up by around 205 kb/d (or 1.5%) y-o-y in 4Q15, supported by strong gains in Germany, the Netherlands, Italy and Turkey, more than offsetting persistent weaknesses in France and Finland. Lower oil prices provided a particular support to German demand, which has now risen y-o-y in each of the three months through January, with particularly strong gains apparent in the transport and petrochemical sectors. Having roughly flat-lined in 2015, a similar picture is envisaged for 2016 as a whole, as German oil deliveries average roughly 2.4 mb/d in both years. The overall OECD European demand picture is for a similarly flat 2016 outlook, as forecast deliveries remain roughly on-a-par with 2015 at 13.7 mb/d.



Record vehicle usage in the UK continues to support the relatively strong gasoline/diesel numbers, which respectively rose by 0.1% and 1.2% on a y-o-y basis in December. The UK Department for Transport reported 7 billion more vehicle miles driven in 2015, compared to 2014, rising to a total of 317.8 billion miles, four billion above the previous all-time high set in 2007. Light commercial vehicles accounted for the majority of these extra miles, hence the outperformance of diesel compared to gasoline in the UK demand statistics in 2015 - growing by 3.3% versus a decline of 1.9% for gasoline - as internet-home-delivery rose sharply.


Asia Oceania

Despite persistently strong gains in Korea, Israel, New Zealand and Australia, the region as a whole saw a decline of 0.7% in 4Q15 to 8.3 mb/d, as sharply falling Japanese demand impacted the overall picture. Preliminary releases for January point towards a further 1% decline in OECD Asia Oceania, as Japanese deliveries fell by approximately 6% on the year earlier, to 4.4 mb/d, a decline magnified by the deteriorating macroeconomic environment. The Cabinet Office in Japan reported that the economy contracted by an annualised 1.1% q-o-q in 4Q15 (revised from an earlier estimate of -1.4%), as inherent weakness in domestic demand pulled down GDP, with weak wage growth acting as a severe restraint on consumer spending. A further decline in Japanese economic activity in 1Q16 would see the economy fall back into a technical recession for a second time in one-and-a-half years, dragging down the already ailing Japanese oil demand statistics. Gasoil, naphtha, 'other products' and residual fuel oil showed the greatest downside in January for Japan. The outlook for the year as a whole is for deliveries to fall by just over 3% to an average of around 4.1 mb/d.



Australian demand surged ahead in 4Q15. Economic growth rose to a two-year high of 3.0% in 4Q15, y o-y, supporting renewed impetus in Australian oil demand. Rising by 1.3% in 4Q15, to 1.1 mb/d, Australian oil deliveries rose to an all-time high, supported by particularly sharp gains in gasoil, gasoline and jet/kerosene. This is particularly notable in the view of the weak backdrop for commodities prices on which Australia is heavily dependent.

Non-OECD

Pulled down by sputtering economic activity, non-OECD oil demand growth has decelerated sharply in recent months: rising by approximately 2.6% on a y-o-y basis in 4Q15 compared to a previous five-year average of over 3%. Although lower oil prices have provided a windfall to many net oil-importing economies, particularly India, the converse is true for net oil-exporters. Furthermore, many net-importers have also seen their prospects dampened by the generally spreading macroeconomic malaise that the very sharp declines in commodity prices brought about. Individual cuts in oil product price subsidies, such as those recently embarked upon in Venezuela and Saudi Arabia, further cull the non-OECD demand outlook, which shows a prospective gain of 1.2 mb/d (or 2.5%) in 2016, to 49.6 mb/d.



China

While the Chinese New Year celebrations have caused a delay to data releases, preliminary data suggest that only weak growth in refining activity (see Refining), lower net product imports and reports of heavy product destocking since November, have restrained Chinese oil demand. This adds up to estimated deliveries of approximately 11.2 mb/d in January, up by only 0.3 mb/d versus last year continuing the weaker growth trajectory that has infected China since November.





With the Xinhua New Agency's China Oil, Gas and Petrochemicals (China OGP) publication showing a hefty five million barrel (160 kb/d) gasoil stock-build in January, along with trade data from the General Administration of Customs (GAC) depicting sharp gains in diesel exports, weak gasoil demand continues to weigh on overall Chinese growth. Falling industrial oil use is partially offsetting still relatively robust growth in jet fuel and gasoline, chiefly attributable to persistent strength in the consumer sector as travel demand was strong ahead of February's extended holiday. The outlook is restrained by ongoing economic weakness, keeping Chinese oil demand growth at around 0.3 mb/d in 2016, with industrial oil use particularly lagging. Caixin's forward-looking Manufacturing PMI fell to a five-month low in February 2016 and has implied net-pessimistic manufacturing sentiment since February 2015. The government's decision not to pass through lower product prices, with crude below $40/bbl, further undermines potential Chinese oil demand growth.


Other Non-OECD

The recent upturn in Hong Kong oil deliveries that started towards the end of 2014, persisted, indeed gained momentum through the final months of 2015. At an estimated 405 kb/d in December, total Hong Kong oil demand posted a near 4% gain on the year earlier. Particularly strong gains in gasoil led Hong Kong's upside, as lower prices allowed Hong Kong to shrug-off the restraints otherwise applied by the ailing industrial backdrop. The Nikkei Manufacturing PMI has been in 'contracting' territory for each of the 11 months through January, easing to 46.1 in January from 46.4 in December 2015, whereby any reading below 50 signifies a net-contraction in manufacturing business sentiment.



Up roughly 12% on the year earlier, Indian oil demand growth in January shows the impact of sharply falling oil prices. The overall GDP figures for India provide a strong background; recently the Ministry of Statistics and Programme Implementation (MOSPI) released data showing a 7.3% y-o-y gain in 4Q15. More timely data releases, albeit not capturing every sector of the economy, include MOSPI's industrial activity number, which surprisingly fell by 1.3% y-o-y in December, acting as a note of caution on the short-term demand outlook. More supportive of potential Indian demand prospects has been the Nikkei Manufacturing PMI, which at 51.1 in both February and January, rose to its highest level since September 2015 and is clearly in expansionary territory.





Total estimated Indian oil product demand increased to 4.2 mb/d in January, with particularly sharp gains seen in petroleum coke (listed in the IEA's 'other products' demand classification), naphtha, jet fuel and gasoline. Indeed, all of the major Indian demand categories experienced y-o-y rises in January, except for kerosene. Having risen by approximately 5.7% in 2015, a similarly paced expansion is foreseen for Indian oil demand in 2016 (+6.3%), momentum that will be supported by the robust economy and the likely low oil price.



Reflecting the recent, consumer-driven strength that has been notable in some Asian net-oil importing nations, strong gains have been seen in the Philippines recently. Oil product deliveries there posted double-digit percentage point gains in each of the five months August-through-December 2015, with demand peaking at 410 kb/d in November. Strong economic underpinnings, at least on the consumer and service sides of the economy, supported heightened gains in gasoline. A rapid +6.3% expansion is foreseen in oil use in 2016, to an average 0.4 mb/d.

Ending a year-long data hiatus, Indonesia has finally published a complete monthly data set of demand statistics for 2015 and even though we treat the JODI release with extreme caution, the numbers overwhelmingly came out ahead of initial expectations. The Indonesian economy has undoubtedly benefited from lower oil prices being a net oil-importer - consuming roughly 1.9 mb/d of oil products in 2015 versus our crude oil production estimate of 0.7 mb/d. Even so, Indonesia has recently reactivated their OPEC membership. As in other net oil-importing, but still significant oil producing, economies like the UK, lower oil prices provided more of a support than a restraint, supporting accelerating economic growth and in turn additional oil demand through the each of the final two quarters of 2015. Statistics Indonesia cited GDP growth of 4.74% y-o-y in 3Q15, building on the 4.66% gain posted in 2Q15, accelerating to 5.04% in 4Q15. This growth supported an extra 0.1 mb/d of Indonesian oil demand in 2015, with a similarly sized gain forecast for 2016 when demand is projected to average 2.0 mb/d.



After roughly one year of declining y-o-y Russian oil demand the country finally turned positive once again in January, as estimated deliveries increased by 4.8% to 3.6 mb/d. Strong gains in industrial oil demand led the January resumption, more than offsetting the persistent decline seen in gasoline. A plateauing out in the pace at which Russian industrial output declines provided some support to January oil demand, as did the additional military use related to the uptick in activities seen recently. Having fallen by, on average, 1.7% in 2015, a further decline in Russian oil demand, of around 0.8%, is seen for 2016.

Sharp declines in Brazilian oil product demand in January carried on the falling demand trend that took root in mid-2015. January's near 10% y-o-y contraction is chiefly attributable to very weak industrial demand - with gasoil down by 16.3% - although declines were seen across the product spectrum. Dragging gasoil demand down has been the much suppressed level of industrial activity. Instituto Brasileiro de Geografia e Elastatistica reported five consecutive double-digit percentage point declines through January. With total Brazilian oil demand having fallen by around 35 kb/d (or 1.1%) in 2015, a further decline of around 1.9% (or 60 kb/d) is foreseen in 2016, to 3.1 mb/d, as underlying economic activity remains under severe pressure. Indeed, the recent decline in Markit's Brazilian Manufacturing PMI, to a fresh three-month low at a clearly pessimistic reading of 44.5 in February, indicates tough times are ahead.



Some relatively hefty late-year declines across the transport sector confirmed the September-October upturn in Kuwaiti demand momentum to be a temporary phenomenon, as y-o-y progress slowed to around 2% November-December, from nearer 10% in the previous pair of months. Persistent gains in the industrial sector kept overall Kuwaiti oil demand in growth territory, more than offsetting double-digit percentage point declines in jet/kerosene and gasoil/diesel. Growth potentially dips below 1% in 2016, as persistently lower energy prices dampen economic activity, which in turn restrains potential oil demand growth.



Unusually cool December weather pulled Saudi Arabian oil demand down to parity with the year earlier, to 3.0 mb/d. Thus for the year as a whole, Saudi Arabia consumed an average of 3.3 mb/d, 4.6% up on the year earlier, momentum that will fall to around one-third in 2016 (+1.4%) as the economy struggles. Ahmed Alkholifey, deputy governor of the Saudi Arabian central bank, cited (3 March) that economic growth would "not reach 2%", while alluding to the existence of "predictions that it will decrease to less than 1%".

Supply

Summary

  • Global oil supplies eased by 180 kb/d in February, to 96.5 mb/d, on lower output from both OPEC and non-OPEC producers. Production nevertheless stood an impressive 1.8 mb/d above a year earlier, as a slight decline in non-OPEC output was more than offset by gains made by OPEC countries.
  • OPEC crude oil production eased by 90 kb/d in February to a still-robust 32.61 mb/d with losses from Iraq, Nigeria and the UAE partly offset by a substantial rise in flows from post-sanctions Iran. Saudi Arabia, OPEC's largest producer, held supplies steady. Saudi Arabia, Venezuela, Qatar and Russia offered in mid-February to freeze output in an effort to stabilise prices (see Deep Freeze).
  • On the face of it, a mid-February offer by Saudi Arabia, Venezuela, Qatar and Russia to hold output steady at January levels will not make an immediate impact on a over-supplied world oil market. But the pain caused by $30/bbl oil was at least enough to trigger a first stab at co-ordinated action that is intended to stabilise prices. A new round of freeze talks has been suggested for the end of March or early April.

  • After sliding by 785 kb/d month-on-month (m-o-m) in January, non-OPEC supplies are estimated to have dropped another 90 kb/d in February, to 57.1 mb/d, which, in turn, is 250 kb/d below last year. The outlook for 2016 as a whole is downgraded by 100 kb/d since last month's Report, to 57.0 mb/d, 750 kb/d below 2015 output.
  • The latest oil price rout, seen since the start of the year, has prompted companies worldwide to further curtail spending and output plans. US producers removed another 106 rigs from service in February and cut 2016 output targets in their latest investor updates. Production plans were revised lower in Brazil, Colombia, China and Kazakhstan.

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

OPEC crude oil supply

A 220 kb/d rise in flows from Iran during February tempered losses from pipeline outages in northern Iraq and Nigeria and field maintenance in the UAE. OPEC's 13 members pumped 32.61 mb/d in February, down 90 kb/d on a month-on-month (m-o-m) basis, but up 1.85 mb/d on the previous year with the group's top three producers Saudi Arabia, Iraq - including the Kurdistan Regional Government (KRG) - and Iran posting strong year-on-year (y-o-y) gains.

Saudi production was stable in February at 10.23 mb/d - up 520 kb/d y-o-y. Output from Iraq, OPEC's fastest source of supply growth in 2015, fell 210 kb/d from January's record 4.43 mb/d due to a halt in northern exports, but still stood 890 kb/d above a year ago. Iran, in the first full month freed of nuclear sanctions, pumped at a four-year high of 3.22 mb/d, up 380 kb/d on the previous year. Tehran is making good on its vow to boost supplies immediately following sanctions relief and has increased crude output by 300 kb/d since the start of the year. That is more modest than a surge of 400 kb/d reported by Iran. Export volumes gained pace in February after Iran resumed crude sales to Europe and raised supplies to regular buyers in Asia. Higher production will be required in March to fill Iranian shipments that are due to climb by around 150 kb/d from February to roughly 1.6 mb/d, according to preliminary data.



While Iran is making strides on the supply front, disruptions in Iraq and Nigeria have shut in roughly 850 kb/d of exports since the middle of February. Iraq's northern pipeline that ships some 600 kb/ d to world markets is expected to be online shortly, but force majeure on some 250 kb/d of Nigerian Forcados crude oil loadings may be in place for some time. OPEC's 'effective' spare capacity stood at 2.69 mb/ d in February, with Saudi Arabia accounting for 75% of the surplus.



Deep Freeze

On the face of it, a mid-February offer by Saudi Arabia, Venezuela, Qatar and Russia to freeze production at January levels will not make an immediate impact on a massively over-supplied world oil market. But the pain caused by $30/bbl oil was at least enough to trigger a first stab at co-ordinated action that is intended to stabilise prices. The eventual target is believed to be an oil price of around $50/bbl.

Brent crude is now trading at around $40/bbl and a new round of freeze discussions has been suggested for the end of March or early April. A meeting of Latin American oil producers - including Venezuela, Ecuador, Colombia and Mexico -was due to take place on 11 March, but reportedly has been postponed.

The initiative to hold output at January levels agreed in Doha is conditional on the participation of other major producers inside and outside OPEC. "A freeze is the beginning of a process," Saudi Oil Minister Ali al-Naimi said at the IHS CERAWeek conference in Houston on 23 February. "If we can get all the major producers to agree not to add additional barrels then this high inventory we have now will probably decline in due time." He insisted the proposal did not signal an imminent production cut. "That is not going to happen because not many countries are going to deliver," he said. "There is no sense in wasting our time seeking production cuts." This initiative may also signal that Riyadh is subtly shifting its market policy from completely hands-off to one of a light touch.

As for current supply dynamics, the world's leading oil exporters Saudi Arabia and Russia were pumping at or near record highs during January. In terms of OPEC supply, only post-sanctions Iran is expected to show any significant upside potential. It is, however, unlikely that Iran, which plans to boost crude exports to 2 mb/d this summer, will participate in any agreement to restrain supply.

Iraq, OPEC's second biggest producer, has yet to commit although its growth prospects this year are limited - not just by reduced spending but also by heightened instability. For OPEC countries, the freeze would be based on the January production level of 32.34 mb/d that was reported by secondary sources to the group's secretariat. Those figures peg output from Saudi Arabia at 10.09 mb/d, Iran at 2.93 mb/d and Iraq at 4.38 mb/d.

The freeze initiative has been described as a trust-building exercise that is the first step of a bigger process. It is worth noting, however, that previous attempts to orchestrate OPEC and non-OPEC action have shown mixed results. Russia has endorsed the freeze at the highest level, but it remains to be seen if it will cooperate fully. In 2001 Moscow agreed to curb supply along with OPEC, but never delivered and actually increased exports.

In any case, the Russian Energy Minister Alexander Novak has said 2016 production is to stay roughly equal to the 2015 average, which implies that output would decline from current highs. Major oil companies have also cut production targets in response to lower oil prices and spending cuts, while smaller companies, which made up most of last year's gains, have few new projects in the pipeline for this year.

Output in Saudi Arabia inched up 20 kb/d in February to 10.23 mb/d, with exports to world markets holding relatively steady, according to preliminary tanker tracking data. A determination to defend market share and satisfy internal demand has pushed the Kingdom's production above the 10 mb/ d mark for a solid year.



Our view is market forces determine the price of oil and we will maintain our market share and markets will recover," Saudi Foreign Minister Adel al-Jubeir said on 5 March. To that end, Saudi Aramco adjusted formula prices for oil loading in April in line with market expectations, but capped the increase in a bid to stay competitive with rival crudes. The official selling price (OSP) for flagship Arab Light for loadings to Asia - Saudi Arabia's biggest export market - was raised by $0.25/bbl versus March to a discount of $0.75 /bbl to the Oman/Dubai average.

This competitive pricing strategy saw Saudi crude exports in 2015 average 7.4 mb/d - up 300 b/d on the previous year, according to the latest official figures submitted to the Joint Organisations Data Initiative (JODI). Total Saudi liquids exports, excluding condensates and NGLS, averaged around 8.5 mb/d last year, a rise of 500 kb/d on 2014.

Production in Kuwait and Qatar was also steady in February at 2.83 mb/d and 640 kb/d, respectively. Output in the UAE fell by 50 kb/d to 2.86 mb/d due to maintenance at the Murban oil field development. The UAE has meanwhile appointed Sultan al-Jaber as director general of the Abu Dhabi National Oil Co (Adnoc), which controls the majority of the UAE's production. He replaces Abdulla Nasser al-Suwaidi, who had been in charge of Adnoc since June 2011. Jaber is a minister of state and a member of the federal cabinet. He is also chairman of Masdar, Abu Dhabi's renewable energy company, and chief executive of Mubadala Energy.

Iraqi production fell by 210 kb/d to 4.22 mb/d in February after reported sabotage halted some 600 kb/d of flows along the northern pipeline that delivers crude to the Turkish port of Ceyhan. The pipeline and supply setback that began in mid-February follows a banner month in which Iraq pumped a record 4.43 mb/d. Repairs on the Turkish section of the pipeline are reportedly due to be completed shortly.

Shipments from the northern Kurdish region and Kirkuk in February were cut nearly in half to 350 kb/d - a devastating disruption for the cash-strapped KRG. The Kurdish region was left with just $233 million in February export revenue after it allocated $70 million to producers. That is less than half the $650 million it received for crude oil sales in January.

By contrast, southern Iraq continued to turn in a strong performance. Shipments of flagship Basra crude dipped by 60 kb/d in February to 3.23 mb/d due to stormy weather - but have held above the 3.2 mb/d mark for four months running. Even so, low oil prices meant that Baghdad's earnings fell to $2.2 billion from $2.26 billion in January.

The falling oil revenues and budgetary strain have forced the federal government to slash the budgets of the international oil companies developing its southern oil fields. Foreign operators had initially proposed to spend $23 billion, but Iraqi Oil Minister Adel Abdul Mahdi said Baghdad's 2016 oil expenditure has been cut to "a little more than $9 billion" from $13 billion last year.

The KRG is struggling to make timely payments to foreign contractors including to those producing from key exporting fields such as Taq Taq, Tawke and Shaikan. In a setback to the KRG's oil development plans, Genel Energy, a key operator in Kurdistan, made a major downgrade to reserves at the Taq Taq field and said its production performance is likely to deteriorate due to geological issues. Taq Taq is now pumping only around 80 kb/d - a dramatic decline from a rate of 150 kb/d reached last year. Output is expected to slump to as low as 50 kb/d by 2018.

Iranian production rose by 220 kb/d to a four-year high of 3.22 mb/d in February following the mid January lifting of nuclear sanctions. A resumption of crude oil sales to Europe during the first full month of sanctions relief and higher sales to existing customers in Asia helped push crude oil exports above 1.4 mb/d - up from around 1.15 mb/d just before sanctions were eased.

Shipments of crude in March, much of it Iranian Heavy, are expected to rise by around 150 kb/d, according to preliminary data. Before sanctions were tightened in mid-2012, Tehran was exporting roughly 2.2 mb/d of crude to world markets. Europe accounted for around 600 kb/d of that total.

Crude oil sales to Europe in February were around 140 kb/d - with Total, Cepsa and Litasco - the Swiss-based trading unit of Lukoil - making purchases. Exports are expected to climb to 250 kb/d in March, with Total importing more than half the volume. Italian refiner Iplom is also expected to buy Iranian crude. Iran is poised to make more headway in Europe when Greek refiner Hellenic Petroleum restarts imports and supply arrangements with Eni and Saras are finalised.



Regular buyers in Asia including South Korea, Japan and India have also stepped up purchases. South Korea's imports of around 200 kb/d so far this year are nearly double that of 2015. Progress in ramping up crude sales has been somewhat slowed by the wariness of banks and ship owners to do business with Iran. To compensate, the National Iranian Oil Co (NIOC) is reportedly offering deferred payment options to major buyers. Iran is also negotiating with Egypt to resume use of the Sumed oil pipeline, which could offer an additional export outlet to Europe. Storage at the end point of Sidi Kerir on the Mediterranean coast is full, however, and free tank space might not be available for several months.

While crude oil loadings have increased, exports of condensate were just 80 kb/d in February. That compares to average exports of roughly 130 kb/d in 2015. Iran has also been storing at sea more of the ultra-light oil from Iran's South Pars gas project. Volumes stored rose by 4 million barrels in February to 42 million - the highest since August 2015. There are now 21 Iranian VLCCs engaged in storage. This is 50% of the National Iranian Tanker Co fleet.

Royal Dutch Shell has meanwhile paid 1.77 billion euros ($1.94 billion) it owed NIOC. The outstanding debt was a result of Iranian deliveries that Shell was unable to pay for while nuclear sanctions were in place. Payment was made in euros as dollar transactions still fall under US sanctions.

For OPEC's African members, February offered little cheer. In Nigeria, output fell by 90 kb/d to 1.78 mb/d after an attack on a sub-sea pipeline forced the shut-in of 250 kb/d of Forcados production. Shell declared force majeure on Forcados shipments on 21 February after it found an oil spill near the terminal. Industry sources said it might be weeks before loadings restart, as the damage is extensive. The incident is also affecting domestic gas supply. Attacks on oil installations have increased since President Muhammadu Buhari pledged to stamp out oil theft and corruption. The government has responded by sending extra troops to guard oil facilities in the Niger delta. Production in Angola held steady at 1.76 mb/d in February. Similarly, in South America, output in Ecuador and Venezuela was stable month on month (m-o-m) at 530 kb/d and 2.37 mb/d, respectively.

In North Africa, Libyan output dipped by 20 kb/d to 360 kb/d in February, the lowest in a year and a small fraction of the 1.6 mb/d that was pumped before Muammar Gaddafi was ousted in 2011. Direct targeting of the oil sector by militants linked to Islamic State escalated at the start of the year, with strikes on the terminals at Es Sider and Ras Lanuf. These vital ports have been closed since December 2014 and now only two of seven onshore loading terminals are operational. Libya is stuck in a battle between the officially recognised government in the east and the so-called Libya Dawn administration in Tripoli.

Crude oil supply in Indonesia inched up to 710 kb/d in February. Production from the ExxonMobil-operated Cepu block at the Banyu Urip field reportedly reached 165 kb/d in early March. A new target of 185 kb/d has been set for the block, which has the potential at least to sustain the country's crude output.

Non-OPEC overview

Lower prices and spending curbs are clearly starting to impact non-OPEC oil production. In the latest round of investor updates, oil companies in the US, Latin America, the Caspian, the North Sea and China took another axe to spending plans and output targets for 2016.



December, the latest month for which actual data is available, marked the first month of real declines in US crude and condensate output. Total US oil production slipped by 165 kb/d month-on-month, despite a rebound in output from the Gulf of Mexico (GoM). US producers removed another 106 rigs from service over the month of February, with the total rig count now standing 76% below the peak seen in October 2014. Major shale producers such as EOG, Continental, Hess and even Pioneer lowered spending and production targets for this year as oil at $30/bbl makes investment too costly. This is a clear signal of lower supplies to come.

The latest round of cuts was not limited to the US, however, with Petrobras, faced by a crippling corruption scandal, huge debts and political instability in Brazil, also curbing its output and spending plans yet again in February. The beleaguered state producer now expects only marginal output growth in 2016, despite a number of new production units set to enter service. Renewed attacks on oil infrastructure in Colombia add to the challenge of maintaining output levels. Furthermore, state-controlled Ecopetrol has applied for permission to suspend operations at some marginal fields, prompting the government to curb its output expectations for the year as a whole.

After underpinning Chinese's production gains in 2015, offshore producer CNOOC, announced that it expects its domestic output to slip by 1.5% this year, much like PetroChina and Sinopec whose mature fields are in decline. Sinopec also announced it would shut four smaller fields at its massive Shengli field over the course of 2016 to stem financial losses. Marginal oil fields are also being shut in the North Sea.

Preliminary data and estimates suggest that non-OPEC production fell by a substantial 785 kb/d in January followed by another 90 kb/d in February. The fall in January is attributed to a seasonal decline in biofuels production (-245 kb/d), further expected declines in the US (-210 kb/d), Brazil (-180 kb/d), Peru (-55 kb/d), China (-110 kb/d), and preliminary indications of lower North Sea production. February's production decline is expected to be dominated by the US and Mexico.

As a result, we have marginally cut our estimate for non-OPEC production for 2016, to 57.0 mb/d. That is 100 kb/d less than in last month's Report and represents a decline of 750 kb/d compared with 2015 output levels. The United States remains the main source of 2016 production declines, contracting by 530 kb/d. Other sources of decline are Mexico (-85 kb/d), Colombia (-80 kb/d), China (-50 kb/d), Kazakhstan (-50 kb/d), Norway (-40 kb/d) and Azerbaijan (-35 kb/d).


OECD

North America

US - February Alaska actual, others estimated: Total US oil production fell by 165 kb/d in December from a month earlier, to 12.87 mb/d, slipping below year earlier levels for the first time since the start of 2011. The fall in US onshore crude output was partly offset by a rebound in US GoM production, resulting in a drop of only 45 kb/d in total US crude and condensate supplies. Natural gas liquids output and the supply of other non-hydrocarbon liquids (additives and oxygenates) fell by 120 kb/d (60 kb/d each) from the month prior.

While total US crude and condensate production slipped by a marginal 45 kb/d in December, onshore oil production was down by a more significant 155 kb/d with output in the major shale producing states dropping sharply. Notably, North Dakota production fell by just under 30 kb/d from a month earlier, to 1.14 mb/d according to the latest EIA data, or 85 kb/d below year-earlier levels. Production in Texas, the largest US producing state by volume, dropped by 65 kb/d from November. At 3.34 mb/d, output was 172 kb/d less than a year prior. Other LTO producing states such as Colorado, Oklahoma and New Mexico also saw monthly declines, of 10 kb/d, 10 kb/d and 40 kb/d, respectively.



December's output drop is likely only the start of what is in store for US LTO producers in 2016. Continental, Hess Corp and EOG slashed their 2016 budgets last month for the second straight year. Continental announced it would pump 9% less oil this year as it can no longer afford to extract more crude at low prices. EOG cut its capital budget by 50% for this year, to $2.6 billion, and targets a production drop of 5%. Even Pioneer, which has so far refrained from dropping rigs and cutting its budget, announced in its latest investor update that it will cut its 2016 capital spending by 9% from last year to $2 billion and cut its rig count to half of the late 2015 levels. The company nevertheless expects to grow production by 10% this year.

Because of the spending cuts, the number of oil rigs operating in the US has declined sharply in recent months. The latest update from Baker Hughes shows the number falling to 392 in early March, 106 less than at the end of January and 144 fewer than at the end of 2015. The number of oil rigs working in the US now stands 76% lower than at its peak in October 2014. 

In its latest Drilling Productivity Report released on 7 March, the US EIA estimated that declines in oil output in the seven most prolific shale resource basins will accelerate through April, to as much as 106 kb/d on a monthly basis. Total LTO output in April is estimated to fall to 4.87 mb/d in April, 420 kb/d less than in October 2015, after six consecutive months of decline.



In contrast, and providing a partial offset, output in the US GoM rebounded in December from month-earlier levels. Total output rose by 112 kb/d, to 1.6 mb/d. New projects commissioned over 2015 underpinned annual gains of 180 kb/d in the latest month. Output is expected to continue to rise this year, with several new projects commissioned. Notably, Anadarko's 80 kb/d Heidelberg field started up in January, ahead of schedule. Later this year, several other developments will come on stream: Shell's Stones development (60 kb/d), ExxonMobil's Julia (34 kb/d), Walter Oil & Gas' Coelacanth (30 kb/d) and Noble's Gunflint (20 kb/d). In all, total US oil output is forecast to decline by nearly 530 kb/d this year, to 12.4 mb/d. US crude and condensates, and, most notably, LTO production see the sharpest declines.

Canada - Alberta, British Colombia December actual, others estimated: After posting a sharp monthly recovery in November of nearly 250 kb/d, total Canadian oil production levels are estimated roughly unchanged in December, at around 4.55 mb/d. Production in Alberta, accounting for two-thirds of total output, inched up another 40 kb/d to 3.06 mb/d, as a slight drop in synthetic crude output was more than offset by increases in bitumen.

Lower prices are forcing Canadian producers to re-evaluate spending and production for this year. Husky Energy reduced its guidance output levels by 15 kb/d to 315-345 kboe/d, while cutting its spending plans by C$800 million to C$2.1-2.3 billion. The company said it would "eye savings by deferring discretionary activities in Western Canada". Benchmark Western Canadian Select touched lows of $16/bbl in January and February, but has since recovered, to stand at nearly $27/bbl by 7 March.



Suncor, meanwhile, announced it had increased the production capacity of its Firebag oil facility from 1 January, lifting output to 200 kb/d. Suncor is focussing on lowering cost and has revised its capital budget down by C$750 million to C$6-6.5 billion. The company maintains its oil sands production guidance of 430 kb/d to 455 kb/d. Also, Suncor is spending money to complete its 180 kb/d Fort Hills and its 150 kb/d Hebron projects offshore Newfoundland and Labrador with first oil for both projects on track for late 2017. Total Canadian oil production will increase by 75 kb/d in 2016, to 4.45 mb/d, compared with growth of 100 kb/d in 2015 and 280 kb/d in 2014.

Mexico - January actual, February preliminary: After reporting steady output in January of nearly 2.6 mb/d, Mexican oil production slipped 55 kb/d in February according to preliminary data from Pemex. At 2.53 mb/d, total oil output was 160 kb/d below year-ago levels. In January, total oil output was unchanged and posted its first annual gain since the start of 2013, despite continued declines at the mature Cantarell field. The latest monthly figures show Cantarell output at just over 230 kb/d in January, a drop of 70 kb/d from a year ago.



Pemex faces a 100 billion peso ($5.5 billion) cut to its 2016 budget, to Ps478 billion under adjustments announced by the finance ministry and the central bank. The latest budget cut comes in addition to the Ps62 billion reduction already announced for 2016 compared with the 2015 budget.

North Sea

Norway - December actual, January provisional: Preliminary data from the Norwegian Petroleum Directorate (NPD) shows oil production averaging 2.04 mb/d in January, a slight decrease from December. Output nevertheless stood an impressive 115 kb/d above the year earlier level. Final data for December were revised up 40 kb/d compared with preliminary estimates from the NPD, to 2.05 mb/d in total. Notable increases are coming from Lundin's Edvard Grieg project, which started production in December. In its first month of production, output exceeded expectations at 31 kb/d. Gross plateau production is expected to be 100 kboe/d. Despite getting the approval to start-up production at its much-delayed Goliat field in the Barents Sea, and statements that output would start in February, Eni has yet to commission its Goliat field in the Barents Sea.



UK - December actual, January preliminary: UK oil output inched marginally higher in December, marking its fourth consecutive month of growth. At 1.06 mb/d output was more than 130 kb/d higher than a year earlier, and 8 kb/d above that of November. Preliminary data published to the Joint Oil Data Initiative suggest output dropped off in January by 40 kb/d, though the preliminary data submitted for December was subsequently revised higher.

UK independent producer Premier Oil announced further delays to its Solan field, west of the Shetland Islands. The field, which was originally expected to start up in 2014, has again been delayed and is now expected to commence operations by the end of March. The field will reach a plateau of 20-25 kb/d and reportedly has operating costs of $26/bbl. Total meanwhile started up its delayed Laggan Tomore field, also west of Shetland, in February. While most of the field's 90 kboe/d output will be gas, around 15% is estimated to be condensate.

With monthly data for 2015 complete, it is clear that UK crude oil production increased 13% in 2015 to 895 kb/d, the first significant rise since 1999. Total oil output, including NGLs, increased by 90 kb/d to nearly 960 kb/d according to statistics from the Department of Energy and Climate Change (DECC). The UK Oil and Gas Authority (OGA), an executive office part of the DECC, revised up its base-case projections of UK Continental Shelf crude oil and natural gas liquids through 2021. In its February update, OGA lifted its oil output expectations for 2016 to 910 kb/d, from 830 kb/d estimated last November. The 2020 projections were also revised up from 625 kb/d to 790 kb/d, slightly lower than our own 2020 forecast published in the recent Medium-Term Oil Market Report.

Non-OECD

Latin America

Brazil -January actual: Brazilian oil production plunged by 180 kb/d in January, to 2.45 mb/d, on sharply lower Campos Basin output. Total supplies stood 125 kb/d below a year ago, the first decline since the start of 2014, as higher Santos Basin output (+187 kb/d) failed to offset declines at Campos basin fields.

Output from Brazil is expected to increase in coming months, however. Petrobras brought online the 150 kb/d capacity Cidade de Marica floating production and storage unit (FPSO) in mid-February. The vessel, which started producing in the Lula Alto subsalt field, is the first of four new vessels expected to come on line in 2016. The Cidade de Saquarema FPSO will go to work on the Lula Central field towards the middle of the year, and the Cidade de Caraguatatuba FPSO will be installed at the Lapa field in the second half of the year. Petrobras also plans to start long-term well tests at the Libra field towards the end of 2016. The four vessels will have a combined nameplate capacity of nearly 500 kb/d once operational and will offset declines at mature fields in the Campos Basin.



Amid the ongoing corruption scandal, which has paralysed Brazilian industry, and lower oil prices, Petrobras has again taken the axe to its spending and production plans. In its latest update, the company cut its 2016 production target by 40 kb/d, to 2.145 mb/d, and its 2020 target to 2.7 mb/d from the 2.8 mb/d announced in the previous five-year business plan (and as much as 4.2 mb/d planned initially). It also cut spending for the five-year period to $98.3 billion from the $130.3 billion announced last year. Petrobras produced 2.128 mb/d in 2015, an increase of 4.6% from the previous year. The scandal, which also involves many of Petrobras' suppliers including shipbuilders, construction companies and engineering firms, threatens more significant delays to the delivery of production systems needed to develop the prolific sub-salt areas.

In more positive news, Petrobras secured a $10 billion loan from the China Development Bank (CDB) potentially providing a lifeline to the company, which faces more than double that amount in maturities over the next two years. The loan is part of a deal to supply crude to China, though information on the volumes and terms agreed are not yet clear. This is the latest major deal between Petrobras and China. In 2009, a $10 billion arrangement with China included a commitment to export as much as 150 kb/d of oil in the first year and 200 kb/d over the subsequent nine years. In May, Petrobras announced a $10 billion agreement with three Chinese banks that included $5 billion in loans from CDB. Petrobras Chief Financial Officer Ivan Monteiro said in November the company was studying ways to borrow against future crude exports in an effort to cut its dependence on international capital markets after the company's debt was downgraded to junk status by credit agencies. Brazil's senate also approved the removal of the mandate for Petrobras to hold a minimum 30% operating stake in sub-salt projects on 24 February. If approved by the lower congressional house, IOCs could step in, and potentially speed up the development of Brazil's vast resources. 

Colombia - December actual: Colombian crude and condensate production inched up by 10 kb/d in December to just shy of 1 mb/d according to data from the Ministry of Mines and Energy. For 2015 as a whole, output averaged just over 1 mb/d, an increase of 1.5% from the previous year with a major factor being a sharp decline in attacks on oil infrastructure by the leftist guerrillas Revolutionary Armed Forces of Colombia (FARC) and National Liberation Army (ELN). Renewed attacks on pipelines look set to curb output in early 2016, however. State-run Ecopetrol was forced to suspend operations of its Cano Limon pipeline on 8 February after it was targeted by two bomb attacks. The 780 km pipeline transports around 210 kb/d of crude. Only a week later, guerrillas from ELN reportedly blew up a section of the 200-mile long Transandino crude oil pipeline, which carries 85 kb/d of oil to the Pacific Tumaco port in February.

Colombian oil production is expected to drop in 2016 as, in addition to renewed sabotage, three years of investment cuts are beginning to impact output. In response to lower prices, Ecopetrol asked the regulator for permission to shut in output at its onshore Akacias field in early March. The field produces just under 7 kb/d. Ecopetrol received the approval to shut another marginal field (Cano Sur) last month. The Colombian finance ministry has again cut its 2016 output goal from an initial target of 955 kb/d, and 944 kb/d announced last month, to 921 kb/d. Consequently, we have slightly downgraded our forecast for Colombian production for 2016, which is now seen declining by 80 kb/d y-o-y to 930 kb/d.

Asia

China - January preliminary: According to data issued by the National Development and Reform Commission (NDRC), in late February, Chinese crude oil production fell to 17.69 mt, or 4.17 mb/d in January, sharply lower than both the previous month and a year earlier. While the National Bureau of Statistics (NBS) will only release January and February production data later in March due to the Lunar New Year celebrations, final NBS data show output declining by nearly 70 kb/d from a year earlier in December, taking full year crude production levels to 4.28 mb/d, some 70 kb/d above the 2014 average levels. The gains stemmed from China's National Offshore Oil Company (CNOOC), which brought on line several new offshore fields in the Bohai and South China Sea last year and provided an offset to field decline elsewhere.

Chinese total oil production, including non-conventional oil supplies, is expected to decline in 2016, by 50 kb/d, to average just under 4.3 mb/d. Lower prices are forcing Chinese oil companies to scale back output plans, and even CNOOC has announced it will cut domestic production by 1.5% this year, after leading gains in 2015. The offshore producer plans to cut 2016 capital expenditures by 11%, after slashing spending by 37% last year.

The country's two largest producers are also expected to see output declines this year. CNPC's domestic oil production is set to decline due to lower output from aging fields, e.g. Daqing and as more marginal wells are shut due to poor economics. PetroChina, which controls the group's domestic oil fields, produced 2.2 mb/d of crude in the first nine months of 2015, down 1.5% y-o-y according to the latest available company update. Output at Daqing, China's largest oil field, dropped by 30 kb/d last year and the company has stated that output will decline by a similar amount each year in the period 2016-20.

State-owned Sinopec, meanwhile, announced in February that it will shut four marginal oilfields at its Shengli field this year. Shengli, China's second largest field producing 540 kb/d, lost $1.4 billion in 2015 due to tumbling oil prices. Output at the Xiaoying, Yihezhuang, Tahoe and Qiaozhuang fields, with output of 60,000 mt/year, or 1.2 kb/d, will be suspended during 2016. According to the company's most recent operations report, Sinopec cut its domestic output by 4.34% y-o-y over the first nine months of 2015:

Viet Nam - February preliminary Vietnam's crude oil production fell by nearly 20 kb/d in February to 310 kb/d, according to government data. Actual output for January was revised up from preliminary estimates of 315 kb/d to 330 kb/d, showing a 15 kb/d year-on-year decline.

Former Soviet Union

Russia -January actual, February provisional: Amid talks of freezing output at January's level, Russian crude and condensate production was essentially unchanged in February, near 10.9 mb/d. Output was 25 kb/d lower than the previous month, but stood more than 220 kb/d above a year earlier. The latest data published by the Central Dispatching Unit, the statistical arm of the energy ministry, show the three production sharing agreements (PSAs) raised output by 12.7% from the previous year, to 235 kb/d in February. Other notable gains came from Bashneft and other smaller producers, such as Novatek. Following record growth in 2015, of 51%, Russia's second largest gas producer plans to increase its crude and condensate production from 180 kb/d in 2015 to 235 kb/d this year. The majority of the gain will come from the company's 70 kb/d Yaudeyskoye field, which it launched in January. SeverEnergia, Novatek's JV with Gazprom Neft accounted for most of the growth last year.

Russia's three largest producers, Rosneft, Lukoil and Surgutneftegaz, meanwhile, continue to see output declining marginally. The three companies, which made up 60% of Russian crude and condensate output in the most recent month, saw output decline by 92 kb/d from a year earlier. Surgutneftegaz announced earlier this year that it expects its crude production to drop by 0.4% in 2016, as output from new fields will not be enough to offset declines at mature fields in Western Siberia. Lukoil, which saw the steepest declines in recent months, could get a boost this year, once it launches its Filanovsky field in the Caspian Sea. CEO Vagit Alekperov said recently that the field will see first output in August or September. Russia's largest producer, Rosneft, is facing natural declines, with some sources saying the company expects a 2% decline in output this year.

Kazakhstan - January actual: Oil output in Kazakhstan was largely unchanged in January at 1.7 mb/d, of which 1.6 mb/d was crude oil and condensates. The latest oil price slump has prompted Kazakh oil companies to further reduce drilling and workover operations. Nostrum Oil and Gas, which operates projects in northwest Kazakhstan, scaled back drilling plans for 2016, thus lowering its output forecast for 2017. The company now expects output to be 45-60 kb/d in 2017, compared with an earlier target of 70 kb/d. While Tengizchevroil has yet to publish production plans for its giant Tengiz and Korolev fields for 2016, planned maintenance at the field's second generation plant and sour gas injection facilities in August is expected to curb output. The company increased output by nearly 2% last year, to average 595 kb/d, close to the facility's 600 kb/d nameplate capacity. Chevron, which holds a 50% stake in the Tengizchevroil joint venture, said in late January it remains committed to a planned expansion project that would lift output by 250-300 kb/d, but reiterated that it is holding off from taking a final investment decision.

The Kazakhstan government has revised down its crude production forecast for 2016 and its oil price assumption for the budget. It now expects crude production to fall to 1.54 mb/d, from 1.59 in 2015, due to the maintenance planned at the Tengiz field, decline at mature fields and delays to new capacity coming on line. The government still hopes that the long-delayed Kashagan project will be restarted this year, though we anticipate that the project will more likely only start up in 2017. The new budget is based on an oil price of $30/bbl for 2016, down from $40/bbl used previously.



Azerbaijan - January actual: After dipping to just 800 kb/d in December, Azeri oil production bounced back by 40 kb/d in January. Output had fallen back after a fire at Socar's Gunashli platform in the Caspian Sea on 4 December forced the company to shut the pipeline system connecting the field's 28 oil and gas wells. The fire was extinguished in on 10 February, and Socar expects to resume normal operations by end-May. The outage is expected to curb Socar's production by an average of 10 kb/d for 2016, according to the company.

Output at BP's nearby Azeri-Chirag-Deepwater Gunashli (ACG) complex was unaffected by the fire. Production at the complex averaged 634 kb/d in 2015, marginally lower than in 2014, in part due to maintenance. Declines at the Azeri-Chirag-Guneshli (ACG) fields, which account for most of Azerbaijan's oil output, are largely responsible for the expected decline in total Azeri oil production in 2016, of nearly 40 kb/d. This will take production down to 810 kb/d.

FSU net oil exports FSU net-exports soared by 0.66 mb/d to hit 10.14 mb/d in January, their highest level for ten months. Crude exports increased by 0.27 mb/d to 6.7 mb/d with Russian volumes shipped via the Transneft network accounting for the lion's share (0.24 mb/d) of the increase. The bulk of the extra cargoes were shipped via Novorossiysk on Russia's Black Sea coast. Shipping data suggests that most of these volumes were imported by European refiners in Greece, Italy and Turkey.



Deliveries to Baltic ports remained relatively stable (+0.06 mb/d m-o-m), although this masked that exports via Ust-Luga rose by 140 kb/d which more than offset a 90 kb/d fall in shipments via Primorsk. Flows through the Druzhba pipeline have remained relatively constant at just over 1 mb/d in recent months with customers in Central and Eastern Europe maintaining their imports despite the competition from Middle Eastern sour crudes.

In the East, shipments in January via the ESPO pipeline exceeded 1 mb/d for the second consecutive month, with 350 kb/d shipped via the spur line to Daqing and the rest shipped via the Kozmino terminal which has now been expanded to accept 1 mb Suezmax sized vessels. Shipping data suggest that China is importing more and more ESPO crude and at the end of 2015 overtook Germany to become Russia's biggest customer. In January, China imported nearly 60% of all cargoes leaving Kozmino while teapot refiners in the north of the country have recently begun importing crude via train from Russia.

Exports of refined products rose by 0.39 mb/d in January with gasoil accounting for 0.29 mb/d of the increase. Refiners hiked deliveries of 10 ppm product to northern ports, by a total of 0.17 mb/d with much of these being railed to the Latvian terminal of Ventspils. Shipping data suggest these volumes were destined for northern Europe. Meanwhile, gasoil shipments from Black Sea ports increased by 0.13 mb/d. Much of this material was likely to be sub-Euro 5 specification and thus shipped to markets in Africa and Asia. Exports of fuel oil have fallen in the wake of last year's Russian tax manoeuvre and as refiners use more VGO as a feedstock following the completion of a raft of upgrading projects. Accordingly, in January, exports were 0.1 mb/d below one year earlier.

OECD stocks

Summary

  • End-2015 was characterised by stockholders in both the OECD and non-OECD continuing to fill their tanks at impressive rates. Stocks in the OECD added 0.3 mb/d in 4Q15 while those in the non-OECD, could have risen by up to 1.1 mb/d over the same period. China may have accounted for more than half of this, and evidence suggests that inventories built in India and in the Singapore region.
  • OECD commercial inventories gained 20.2 mb in January, although since this was less than the 32.2 mb average build for the month, the overhang of stocks versus average levels fell to 338 mb from a record 350 mb one month earlier. Demand cover remains healthy with OECD refined products inventories covering 32.7 days of forward demand at end-January, significantly above both year ago and average levels.
  • Preliminary data suggest that OECD inventories drew for the first time in a year as they fell by 6.3 mb in February. As refinery maintenance in the OECD ramped up, crude oil stocks increased by 10.8 mb while refined products drew by a relatively shallow 14.7 mb. Middle distillates inched down by 3.6 mb during a month when they have drawn by 18.9 mb on average over the past five years as heating demand remained lacklustre in key markets.
  • Chinese national crude stocks built by a record 1.4 mb/d in December with some of these volumes destined for newly completed strategic storage capacity at Zhoushan and Jinzhou. The pace of builds has likely dropped in January and February.
  • At end-February, 72 mb of crude oil was stored on the water, approximately 17 mb above a year earlier. Volumes continue to be driven by cargoes of Iranian condensate held on NITC-owned tankers in the Middle East Gulf, which totalled 42 mb at end-month. Other volumes are stored off Singapore and Northwest Europe.

Global overview

At the end of 2015 and in the early part of 2016 stockholders in both the OECD and non-OECD filled their tanks at impressive rates. According to the revised (see Recent developments in floating storage) Miscellaneous to balance line item carried in Table 1 of this Report, non-OECD stocks could have added up to 1.1 mb/d in 4Q15. Chinese inventories likely accounted for more than 50% of this as information suggests that first oil could have reached tanks at newly commissioned strategic sites. Elsewhere in Asia, evidence suggests that crude stocks built in India at the recently completed Paradip refinery. Although land-based product stocks in Singapore fell in the fourth quarter, reports circulate that stocks increased in neighbouring countries. Other components of the Miscellaneous to balance line item include higher stocks held at refineries and pipeline fills in the Middle East, Latin America and Asia.



In the OECD, the fourth quarter build was split between the Americas and Europe, which increased stocks of both crude and products while holdings in Asia Oceania fell. A similar regional picture has prevailed into January. Although while crude has built in the Americas, as refiners there have entered maintenance, product holdings have increased in Europe as imports from the Americas, the FSU and the Middle East have remained high. This in turn has helped to pressure product cracks, notably for middle distillates, to multi-year lows.


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

OECD commercial inventories gained 20.2 mb in January, although since this was less than the 32.2 mb five-year average build for the month, the overhang of stocks versus average levels fell to 338 mb from a record 350 mb one month earlier. Crude inventories added a slim 1.8 mb over the month as a steep 17.3 mb draw in Asia Oceania nearly offset a 20.7 mb build in the Americas. Meanwhile, NGLs and other refinery feedstocks increased by a combined 10.6 mb with all OECD regions posting builds. Refined products holdings rose by 7.9 mb, although this was far shallower than the average 16.9 mb build for the month, after the increase was tempered by plummeting 'other products' stocks (essentially propane) in the US as space heating demand picked up. Refined products inventories covered 32.7 days of forward demand at end-month, 0.4 days, 2.3 days and 2.1 days above the previous month, the previous year and the five-year average respectively.

By end-month, stocks of all refined product categories stood above average in the OECD with the overhang of total products standing at 96 mb. The lion's share of the overhang was accounted for by middle distillates that stood 59 mb above average after having built for nine of the last 12 months, during which they added over 80 mb. These bloated inventories, and the lack of sustained cold weather in key heating oil markets, has put pressure on middle distillates cracks, which currently remain at multi-year lows.

Upon the receipt of more complete data, December inventories were adjusted upwards by a slim 1.8 mb with Asia Oceanian and European stocks now being seen 8.6 mb and 4.0 mb, higher, respectively, more than offsetting a 10.8 mb downward revision to inventories in the OECD Americas. Considering that November holdings were also adjusted downwards by 0.5 mb, the net-effect of the revisions is that the counter-seasonal 7.6 mb December stock build, presented in last month's Report, is now even steeper at 10.0 mb which saw that month's inventory overhang reach a record 350 mb.



Preliminary data suggest that OECD stocks drew for the first time in a year as they fell by 6.3 mb in February. Total stocks were pressured lower by a steep 15.5 mb draw in Japanese inventories that more than offset counter-seasonal builds in the Americas (8.3 mb) and Europe (0.9 mb). With refinery maintenance in the OECD ramping up, crude oil stocks increased by 10.8 mb, although this was significantly less than the 15.4 mb five-year average build for the month. On the other hand, NGLs and other feedstocks adhered to seasonal trends and drew by 2.5 mb while refined products fell by a combined 14.7 mb, although this less than half the 34.7 mb seasonal average draw. Refined products holdings were buttressed by counter-seasonal builds of gasoline (0.6 mb) and fuel oil (0.9 mb) while middle distillates drew by 3.6 mb, far shallower than the 18.9 mb average draw for the month.

Recent OECD industry stock changes

OECD Americas

Commercial industry stocks in the OECD Americas rose by a steep 23.7 mb in January after crude added 20.7 mb and NGLs and other feedstocks rose by a combined 5.0 mb, more than offsetting a seasonal draw in refined products (-2.1 mb). The build was nearly four times the average build for the month and saw the surplus of inventories to average levels balloon to 256 mb from 238 mb one month earlier. Crude oil holdings account for the majority of the overhang, despite regional production growth slowing over the past six months. At end-January, inventories stood 151 mb and 86 mb above the five-year average and one year earlier, respectively.

Regional refined products holdings drew as 'other products' inventories plummeted by 27.6 mb in the US on a seasonal increase in propane demand for space heating. Despite this decrease being more than 2.5 times the five-year average draw for the month, 'other products' inventories stood 29.7 mb above average at end-month. Meanwhile, middle distillates built counter-seasonally by 2.7 mb while gasoline holdings soared by 21.2 mb (centred entirely in the US), more than twice the seasonal build for the month as US refinery output of the product remained high against a backdrop of falling demand. Total regional refined products inventories covered 32.0 days of forward demand at end-January, level with end-December and a significant 2.2 days higher than one year earlier.



Preliminary weekly data from the US Energy Information Administration (EIA) suggest that US industry inventories defied seasonal trends and rose by 8.3 mb in February. Stocks of crude oil built by a steep 17.2 mb as domestic production has remained at relatively robust levels while crude imports have remained above year-ago levels buoyed by a narrower WTI - Brent spread. At end-February, US commercial crude holdings stood at close to 520 mb. On a like-for-like basis, crude stocks have filled about 75% of working capacity.

The overhang in US crude stocks is concentrated in PADD 3 and PADD 2 with a combined excess over the average of 126 mb. Despite an increase in pipeline capacity and flexibility, stocks at the Cushing, Oklahoma, storage hub have remained stubbornly high and in February hit a record 67 mb, equating to about 90% of working capacity. One factor behind these high inventories is that crude imports to the midcontinent from Canada have remained about 0.3 mb/d above a year earlier while refinery throughputs are only up about 0.1 mb/d y-o-y. Meanwhile, transfers south to PADD 3 have remained relatively static despite pipeline operators reportedly cutting their tariffs significantly due to substantial spare capacity on a number of lines.



Product inventories slipped by a weak 9.7 mb in February as middle distillates and fuel oil posted seasonal trend-defying builds of 3.5 mb, 2.2 mb, respectively which partly offset draws of 14.0 mb and 1.7 mb in 'other products' and motor gasoline, respectively, the former draw came against the backdrop of continuing healthy demand for propane. Despite the monthly gasoline draw, stocks hit a record 259 mb in mid-February amid high imports, low exports, lacklustre demand and high refinery output. By end-month, gasoline demand cover approached 29 days, two days higher than a year earlier.

OECD Europe

Industrial holdings in OECD Europe rose by 11.1 mb to stand at 999 mb by end-January. However, since this build was gentler than the 24.1 mb five-year average build for January, the overhang of inventories versus average levels narrowed to 63 mb from 76 mb one month earlier. Crude oil stocks inched down counter-seasonally by 1.7 mb, pressured lower by draws in Italy and the Netherlands, while NGLs and other feedstocks rose by a broadly seasonal 1.5 mb. Refined products built by 11.3 mb, significantly less than the 20.8 mb five-year average build for January after the increase was tempered by draws of 2.9 mb and 1.4 mb in fuel oil and 'other products', respectively. Middle distillates and motor gasoline inventories rose seasonally by 9.3 mb and 6.3 mb, respectively, although the former build was about 3 mb less than average. At end-January, refined products stocks covered 41.9 days of forward demand, 0.1 days above end-December and 3.2 days above a year ago.



Meanwhile, consumer holdings of heating oil in Germany posted a third successive monthly draw to stand at 57% of capacity in February, 5% below one year earlier. Indications are that volumes of refined products stored in independent storage in Northwest Europe have remained high so far this year, with recent reports suggesting that this has led to significant port congestion as vessels wait outside the region's main terminals for an opportunity to discharge their cargoes.

OECD Asia Oceania

Commercial oil holdings in OECD Asia Oceania drew counter-seasonally by 14.6 mb in January. Accordingly, regional inventories' surplus to average levels narrowed to 19 mb at end month, from 36 mb one month earlier. Nonetheless, at end-month, stocks remained 21 mb above year-ago levels. The monthly draw came from a steep fall in crude stocks (-17.3 mb) as holdings in both Japan and Korea posted sharp draws of 7.3 mb and 10.2 mb, respectively. Considering that refinery throughputs in both countries remained relatively stable in January, it is likely that stocks drew after crude imports declined. Meanwhile, refined products holdings inched counter-seasonally down by 1.4 mb with middle distillates and fuel oil decreasing by 2.8 mb and 2.4 mb, respectively, more than offsetting builds of 2.1 mb and 1.8 mb in 'other products' and motor gasoline, respectively. Following a more pessimistic regional demand prognosis going forward, at end-month refined products covered 19.8 days of forward demand, a rise of 0.5 days on end-December and 0.4 days higher than a year earlier.

According to preliminary weekly data from the Petroleum Association of Japan (PAJ), commercial stocks in Japan plummeted by 15.5 mb in February with crude holdings (-4.6 mb), NGLs and other refinery feedstocks (-3.3 mb) and refined products (-7.6 mb) all posting draws. Despite throughputs remaining broadly level month-on-month, shipping data indicate that product imports, especially from the Middle East dropped back.  


Recent developments in Non-OECD stocks

Chinese commercial crude inventories drew by an equivalent 8.5 mb in January, which saw stocks sit approximately 26 mb below year-ago levels. Meanwhile, the gap between crude supply (production plus net imports) and crude demand (refinery throughputs) suggests that national stocks remained stable in January since non-reported stocks rose with preliminary indications for February suggesting that national crude stocks have once again increased. Considering that national crude stocks built at a staggering pace (1.4 mb/d) at end-2015 as crude net-imports surged to 7.8 mb/d and outstripped refinery runs, it is likely that a large portion of this unreported stock build was destined for newly-completed strategic tanks at Zhoushan and Jinzhou.

Chinese product stocks increased by an equivalent 6.2 mb in January after gasoil holdings surged by an equivalent 5.0 mb while gasoline and kerosene inventories added 0.8 mb and 0.4 mb, respectively. The increase in gasoil stocks was the steepest since July 2015 and came against the backdrop of Chinese refiners holding with excess gasoil as they maximise gasoline output to supply strong domestic markets. In recent months, this has seen Chinese refiners exporting increasing volumes of gasoil to elsewhere in Asia but in January, these shipments fell back by about 50 kb/d from the 4Q15 levels to 175 kb/d.



Land-based refined product inventories in Singapore climbed by 7.7 mb in February to sit at a record 56.8 mb by end-month. Soaring residual fuel oil stocks (+5.2 mb) pressured total stocks higher as a raft of arrivals from Europe and elsewhere in Asia outpaced exports while bunker demand has reportedly been lacklustre. This build put regional residual fuel oil spot prices under severe pressure. Meanwhile, light distillates posted their fourth consecutive monthly build as naphtha inflows remained strong. By early March, stocks stood at a record 15.5 mb, 2.4 mb above a year earlier. Middle distillates added 1.3 mb over the month and by end-February stood 1 mb and 1.3 mb above a year earlier and average levels, respectively.

Indications are that the Indian government has not yet begun to fill either of the two remaining Phase 1 strategic sites at Mangalore and Padur with crude. Apparently, structural work has been completed but work is continuing on the pipelines to connect them to port infrastructure. The UAE's Adnoc is in advanced discussions to store oil in at least one of these facilities with India understood to have first refusal on the oil in the event of an emergency. The Indian government is also currently discussing allocating funds to build an additional 90 mb of strategic capacity with sites earmarked for new tanks including Bikaner, Rajkot, Chandikhol and Padur. Although completion of the remaining Phase 1 strategic sites is delayed, Indian crude stocks likely built in 4Q15 as tanks at the recently inaugurated Paradip refinery were filled with heavy crude. According to the refinery operators IOC, the plant has 4 mb of crude storage.

Recent developments in floating storage

At end-February, 72 mb of crude oil was stored on the water, approximately 17 mb higher than a year ago. Volumes continue to be driven by cargoes of Iranian crude and condensate held in NITC (National Iranian Tanker Company)-owned tankers in the Middle East Gulf, amounting to 42 mb at end-month. Other volumes were stored around Singapore and one 2 mb VLCC was reportedly anchored off Northwest Europe. Other volumes of oil stored on the water but not counted as floating storage include cargoes of both crude and products in tankers waiting to discharge at congested terminals in China and the ARA region. Following a revision to quarterly floating storage and oil in transit data carried in Table 1 of last month's Report, it has been discovered that a portion of these volumes were misallocated in 2015 only. Consequently, the quarterly floating storage and oil in transit data for 2015 (the misallocation did not affect annual volumes) have been revised in Table 1 of this Report with implications for the Miscellaneous to balance line item.


Prices

Summary

  • Crude oil prices rose to their highest in three months in early March, stoked by tightening supply, proposed new talks between major producers on co-ordinated action and US dollar weakness. At the time of writing, Brent was at $39.80/bbl and US WTI was at $37.30/bbl. Global benchmarks diverged during February as ballooning US stockpiles pressured WTI and export disruptions in Iraq and Nigeria strengthened Brent.
  • Spot crude markets also derived some benefit from supply outages and arbitrage plays, with prices firming across the board in early March. North Sea benchmark Dated Brent was supported by the shipment of UK Forties crude into Asia, while Nigerian barrels made their way into India and the US.
  • Spot product prices weakened in February for products at the top of the barrel in the face of brimming inventories, lacklustre demand and high supply with cracks slipping in tandem with strengthening crude prices. Despite middle distillate spot prices firming over February, cracks only posted slim increases which left them languishing significantly below year-ago levels across all markets which consequently dragged down refinery margins.

Market overview

Crude oil prices rallied into early March as tightening supplies and the possibility of fresh producer talks on orchestrated action brightened market sentiment. In addition, the US dollar weakened, providing further support for oil importers. Further evidence is emerging of a slowdown in US output as drillers continue to remove rigs while reported sabotage in Iraq and Nigeria has halted 850 kb/d of exports since mid-February. The possibility of further rounds of producer talks in late March or early April also helped boost Brent from sub-$30 /bbl levels touched in mid-January. Price gains are being capped, however, by a massive supply overhang that has brought prices down from triple-digit highs reached in mid-2014. During February, international benchmarks diverged as record high US commercial crude oil inventories above 500 million barrels pressured WTI and export outages in Iraq and Nigeria strengthened Brent.

With US oil inventories at record highs, cargoes of crude oil are being offered into Europe for arrival during April and May. A number of tankers have already crossed the Atlantic from the US after the lifting of the crude oil export ban. The arbitrage window opens for European sales when Brent's premium to WTI reaches around $3/bbl. During February, Brent's premium to WTI was an average $2.91/bbl - up from just $0.15/bbl during January.



The wider spread is due to supply disruptions in OPEC producers that have propped up Brent and bulging US stocks that have pressured WTI. During February, ICE Brent futures rose by $1.60/bbl, or 5%, from January to an average $33.53/bbl. NYMEX WTI fell by $1.16/bbl, or 3.7%, from January to average $30.62/bbl. ICE Brent was last trading at $39.80/bbl. US WTI was at $37.30/bbl.



Record US stockpiles have widened out the NYMEX WTI contango structure - where prices for immediate delivery are discounted versus forward months. The discount of prompt-month to second-month WTI deepened to -$1.98/bbl in February compared to -$1.24/bbl in January. The Brent M1-M2 spread in February was broadly steady at -$0.64/bbl versus -$0.54/bbl in January. A similar trend was seen on forward curves. The WTI M1-M12 spread widened out to -$ 9.71/bbl in February versus -$7.83 /bbl in January. The Brent M1-M12 contract spread pulled in a touch to -$6.88/bbl in February compared to -$7.27/bbl in January.

The contango structure in products markets meanwhile showed little fluctuation despite the recent recovery in gasoil prices to stand at about 50% above their mid-January lows. Prompt months continue to trade at a discount to product for delivery at a later date. Considering that the monthly time spreads in the ICE gasoil contract continue to make floating storage unprofitable, this adds weight to the belief that the numerous product cargoes which are stored on tankers off Northwest Europe are anchored due to port congestion resulting from high stock levels at key terminals.


Spot crude oil prices

Spot crude oil prices strengthened in early March as the Atlantic basin market tightened up following the steady movement of Forties crude into Asia and the lengthy shut-in of exports from northern Iraq (600 kb/d) and Nigeria (250 kb/d). Shipments of Forties to Asia are reportedly running as high as 200 kb/d, helped by the economics of low VLCC freight rates. The UK grade looks attractive versus rival Middle East crudes such as Murban and its discount to the UAE grade has dropped to about $1.60/ bbl. Recently released loading programmes, however, indicate that the North Sea will remain amply supplied with flows in April expected to rise to the highest in four years.

The lengthy outage of northern Iraqi exports has made alternatives such as southern Iraqi Basra Light look more attractive although the sour crude market remains well supplied with a number of refineries in the midst of maintenance. Urals availabilities were plentiful, with its discount to Dated Brent widening to around $1.90/bbl in the Mediterranean. Sales of Iranian crude are on the rise with Europe returning to buy during February - the first full month of sanctions relief for Tehran. Shipments of around 140 kb/d headed for the continent in February and around 250 kb/d is slated to load during March, according to preliminary data. When European shipments are added to Asian movements, we estimate that overall Iranian liftings ran at more than 1.4 mb/d in February and could reach 1.6 mb/d in March. Iran meanwhile raised its April official selling prices (OSPs) for most of its crude oil grades for loading to Europe and Asia, except for the Mediterranean, where differentials dipped. Market sources say Iran has not been heavily discounting its crude oil.



Of the global benchmarks, US WTI posted the weakest month-on-month (m-o-m) performance in February, falling $1.19/bbl to $30.38/bbl as stockpiles filled to the brim. North Sea Dated Brent strengthened, rising $1.71/bbl over January to average $32.46 /bbl for the month. Russian Urals rose by a similar amount versus January to average $30.87 /bbl in February. Middle East Dubai climbed the most - rising $2.52/bbl over February to average $29.33/bbl.

Lower oil prices sent China on a buying spree at the start of the year. Imports jumped nearly 20% from January to February to about 8 mb/d as so-called teapot refiners stepped up purchases of Russian crudes and robust refining margins stoked demand. A Brent price above $40/bbl could slow the pace of purchases during the second quarter during the peak refinery maintenance season. That could depress spot prices for Middle East and Asia-Pacific crudes when trade for May-loading cargoes starts later in March. Strong demand from China for Russian ESPO has pushed up the grade's premiums, although levels for April-loading cargoes have started to slip.



In the meantime, India is also buying on a big scale. Purchases of Iraqi Basra crude for April loading reportedly are as high as 10 million barrels, supported by IOC's purchases for its new 300 kb/d Paradip refinery. India is also snapping up Nigerian grades. In Europe, Nigerian barrels are under pressure due to weaker refining margins. Increasing supplies from Nigeria are, however, heading to the US as domestic light tight oil output slows. Falling domestic supply has in turn boosted the price of North American grades, with Bakken rising to a record premium to WTI - closing the arbitrage opportunity to move barrels by rail to the East Coast. The LLS/Brent differential is close to parity, signalling that the end of light crude imports to the Gulf Coast might be drawing near.

Saudi Arabia followed market trends by lowering its monthly formula prices for April shipments to the US, while increasing the differential on its flagship Arab Light grade for sales to Europe and Asia. Benchmark Dubai fell below $30/bbl at the start of the year, boosting demand for Middle East and Russian crude in Asia. That pushed up prompt prices versus future months, narrowing the contango structure - an indication that higher Middle East formula prices were to be expected.


Spot product prices

In February, spot prices weakened for products at the top of the barrel in the face of brimming inventories, lacklustre demand and high supply. Considering that over the same period, benchmark crude prices strengthened, gasoline cracks in Europe and the US consequently fell to below year-ago levels. Despite falling from their previous lofty levels, naphtha cracks remained above a year ago with only those in Europe slipping into negative territory. Even as middle distillate spot prices firmed during February, cracks only posted slim increases that left them languishing significantly below year-ago levels and consequently dragged down refinery margins.

On an average monthly basis, gasoline spot prices posted the steepest losses across surveyed markets in February. In the Atlantic Basin, prices sank to multi-year lows in the wake of steadily climbing US inventories that hit record levels early in the month. Accordingly, spot prices for Super Unleaded on the US Gulf Coast touched $40/bbl in mid-month, their lowest since December 2008. Nonetheless, as inventories drew thereafter and export demand picked up, prices rebounded to $53/bbl in early-March, but this was nearly $30/bbl below year-ago levels. Gasoline cracks dropped by over $3/bbl over the month in the region but remained only slightly below a year earlier.



In Europe, the picture was little improved as prices softened in the wake of slim demand to ship product to West Africa and the US Atlantic Coast, although prices stabilised in late-February after the arbitrage window to ship product westwards reopened as US prices firmed. On average, European cracks weakened more steeply than in the US, although this was due to the relative strength of Brent in February. In Singapore, gasoline prices were also hit by brimming inventories as light distillate stocks hit their highest in several years, with cracks softening more than in other markets due to Dubai's strength.

Naphtha cracks across all surveyed markets have fallen back over the past couple of months as, although demand from the petrochemical sector has remained robust, demand from gasoline blenders has waned. Throughout 4Q15, Asian naphtha demand had, to a large extent, sustained naphtha cracks elsewhere. However, as inflows to Asia from these markets outstripped demand, stocks built and spot prices weakened. This in turn closed the arbitrage to Asia which saw European and Middle Eastern cracks fall to levels last seen in 3Q15. Nonetheless, Asian spot prices turned the corner in late-February, boosted by an uptick in gasoline blending demand, and as supply tightened from less inflows, although cracks continued to weaken in line with strengthening crude prices.

Diesel cracks across all markets languished at levels not seen in several years as supply continued to outstrip demand across many markets. In Europe, exports from the FSU swamped markets while inventories remain high and as winter weather heating demand continues to be underwhelming. Nonetheless, in February, spot prices increased towards the end of the month. Consequently, cracks inched up, although by early-March they only remained at about half of last year's levels.



US cracks followed a similar pattern as weak fundamentals in Europe closed the window to ship diesel from the Gulf Coast eastwards. In Singapore, brisk regional demand has helped to temper the negative effect of Middle Eastern refiners increasingly targeting the region with exports. This saw diesel cracks there firm throughout the second half of the month.

Fuel oil markets were fragile in February as bloated inventories saw HSFO prices in Singapore remain extremely low. This shut the arbitrage window to ship product to Asia from the Middle East, Europe and the Americas. Consequently, as arrivals in the region dried up in mid-February and fundamentals tightened, prices recovered from the second half of the month onwards which once again attracted cargoes to the region from elsewhere. By early-March this export demand had seen Rotterdam spot prices rise to $22/bbl, their highest since early December.


Freight

February was another strong month for crude markets east of Suez, with overall volumes out of the region remaining at sustained levels, as outages in Iraq were compensated for by higher Iranian volumes (see 'OPEC Supply'). Sailings from the Middle East Gulf continued to pivot eastwards as China drew in record-high volumes of crude oil. Imports of crude hit a record high of 8 mb/d in February, according to Chinese customs data.



West African crude sailings increasingly moved westwards across the Atlantic, at the expense of Europe and India. As extra volumes of Iranian crudes headed towards Suez, West African grades into the region were pushed below the 1 mb/d mark, Lloyds List Intelligence shipments data shows, and pivoted westwards, reaching as far as the Pacific Coast, something unseen in more than a year. North America, one of the key destinations of West African crude before the shale revolution, is now drawing more than 750 kb/d of crude from the region, chiefly to the US, after having imported about 220 kb/d on average in 2015. One very-large-crude-carrier (VLCC), the larger class of tankers carrying up to 2 million barrels, discharged a load of Nigerian Qua Iboe in the US Gulf. The last VLCC on the route loaded in December 2014. Loadings at Nigeria's Forcados terminal were halted in mid-February after force majeure (see 'OPEC Supply'). The overall effect on Nigerian monthly loadings was concealed by higher output from other grades.



In the North Sea and Baltic markets, activity remains sustained on the back of UK, Norway and Russian output being little changed over the month. Rates remained however subdued, as tonnage was reportedly abundant.



Product shipments eased on the main East of Suez route MEG - Japan as naphtha differentials eased, after having widened in early 2016, particularly the differential to Europe, shutting arbitrage opportunities.

Product tankers West of Suez markets also saw little transatlantic movement. The NWE - US Atlantic gasoline arbitrage remained firmly shut during the month, as gasoline stocks remained abundant in the US (See 'OECD Stocks'). Reported US ULSD pipeline maintenance in late February US didn't affect overall monthly gasoil volumes out of the US Gulf, as a depressed freight rate on the US Gulf - UK backhaul route appears to confirm.




Refining

Summary

  • 1Q16 refinery runs estimates are revised down by 0.5 mb/d to 79.1 mb/d to reflect weaker January performance numbers for OECD refiners and a shift of peak spring maintenance to 1Q. This is still 0.9 mb/d higher than refinery throughput in 1Q last year. Planned maintenance is expected to decline in 2Q16.
  • Year-on-year growth rates in 4Q15 fell to below 1 mb/d, a significant slowdown compared to average growth rates of above 2 mb/d in the first three quarters, amid products stocks builds and in line with a slowdown in global oil demand growth in part due to a warmer than average northern hemisphere winter.
  • January OECD throughput numbers showed a 0.9 mb/d decline from December mostly on the back of seasonally lower US runs. With non-OECD runs estimated to be flat month-on-month     (m-o-m), global overall crude demand was lower by 1 mb/d in January compared to December. 
  • Margins moved lower globally with the exception of the US Midcontinent as the January uptick from lower 4Q2015 values proved to be short-lived. Product stocks may prevent the traditional boost from the maintenance season.

Global refining overview

The outlook for global refinery runs in the first quarter of 2016 has been revised down by 0.5 mb/d with the shift of the spring maintenance peak to February-March from the more usual April-May period. Unusually strong margins last year reportedly prompted many refiners to push back planned maintenance, so there is a backlog of work to complete. Even with the downward revision, 1Q16 runs are still 0.9 mb/d higher year-on-year (y-o-y), with most of the growth coming from the non-OECD. Within the OECD, runs increase by almost 200 kb/d y-o-y, but this is a net result of higher US runs and lower OECD Europe crude throughput. In the second quarter, global refinery runs increase by less than 0.5 mb/d y-o-y as OECD throughput declines and non-OECD growth eases.



With finalised December data now in for most countries covered in our refinery statistics, 4Q15 runs registered a marked slowdown of annual growth rates compared to previous quarters. Growth eased to just over 0.8 mb/d as opposed to an average growth rate of 2.1 mb/d over the previous three quarters, following a similar trend in demand. Quite uncharacteristically, OECD drove the global gains, with European refiners accounting for half of the global runs increase in 4Q15 while non-OECD refiners barely added to their throughput.  This raises questions whether the refinery runs seasonality has changed over the last few years, and whether the growing throughput East of Suez is creating more visible swings in crude oil flows on a seasonal basis. We will analyse these in upcoming Oil Market Reports.



Margins

In February, the overwhelming direction of margin movement was negative. While global refinery margins had been coming off their recent years' peak registered in the third quarter of last year, reaching their annual lows in November-December, they had a brief reprieve in January as the crude oil price decline accelerated. In February, crude oil futures changed course, gaining in average $2/bbl for the month as a whole. With products market over-supplied prices did not follow crude with a consequent decline in global margins across the board.



Hydroskimming margins in Europe sank into negative territory again, while cracking margins went down y-o-y. US Gulf Coast margins too, slipped in February, and even Midcontinent refiners started feeling the pain. In the northern hemisphere winter season, when middle distillates used in heating usually support refinery margins as  gasoline demand falls back, the milder than average weather that continued well into 1Q16 was a major contributor to further deterioration in diesel cracks.



The impressive refinery margins of 2015 eventually proved to contain the seeds of their own destruction. OECD refiners that increased the throughput collectively by over 1 mb/d in 2015 to capture the margin gains, contributed to significant stock builds, as demand growth lagged refinery output growth.

Effectively, a quarter of the OECD refinery runs gains went straight to stock builds, as industry product stocks added some 100 mb in 2015, or about 270 kb/d. Of this, about half was in OECD Europe's middle distillate stocks, providing an additional 6-7 days of demand coverage. Thus, the onshore commercial stocks of middle distillates in Europe have now surpassed previous peaks in 2010. This has brought the distillate cracks to single digits, levels not seen since 2009.



Across the Atlantic Ocean, the product oversupply is mostly reflected in gasoline stocks. Even though US gasoline stock build into January is a given seasonal fact, the January stocks registered an all-time record at nearly 260 mb. Coupled with middle distillate stocks at seasonal highs, refineries are hard-pressed to find margin support. Another challenge for the refiners is that the gasoline stocks need to turn over partially to allow full operational switch to summer grade gasoline later this month.



Thus, two of the major global refining centres are entering the spring maintenance season well-supplied for their main products. If the spring maintenance season coincides with economic run cuts, as some smaller sized US refiners have reportedly been considering, margins may get the necessary boost. Otherwise, the OECD refiners, especially in Europe, may soon be reversing their last year's gains.

OECD refinery throughput

OECD runs declined 930 kb/d in January from December levels, which is a reflection of a large seasonal swing in the US, where the throughput was 840 kb/d lower. OECD Europe also saw runs decline 270 kb/d, while a Japanese throughput increase more than offset the declines elsewhere in the region, bringing OECD Asia into a net m-o-m gain of 100 kb/d. Even with a significant downward trend from December to January, overall OECD throughput was still almost 600 kb/d higher than a year earlier. Unlike last year, when Europe led the annual growth in OECD runs, 2016 started with the US taking the lead again while European refiners registered only a modest gain, and OECD Asia ran flat y-o-y. In 1Q16, OECD refiners overall are expected to slow down y-o-y gains even more, to just 170 kb/d as falls in Europe and Asia offset much of the US increase. This trend turns into a y-o-y decline in 2Q16 for the OECD as a whole, as the US barely adds to output while OECD Asia accelerates the decrease.





The US slowdown in January was largely seasonal and within the recent historical range. Preliminary weekly data in February show further declines, especially in PADD 2, where refiners were heard contemplating run cuts due to lower margins amid high product stocks. A major refiner also noted that the shift back towards more heavy imports in its crude slate from the previous diet with higher US tight oil content requires time to adjust the refinery kit, which may result in lower intensity operations. Publicly available information shows lighter spring maintenance programmes this year compared to 2015, some 200 kb/d lower on average. If the programme matches last year's volumes, there is the chance of a downward revision of the US 1Q16 estimates and the 2Q16 forecast from current levels of 15.8 mb/d and 16.5 mb/d, respectively. Elsewhere in the OECD Americas, Canadian runs were higher vs December, but lower y-o-year by 70 kb/d, while Mexico registered a 110 kb/d y-o-y throughput increase, the first sizeable gain in two years.

OECD Europe still registered an annual throughput increase in January, but at a mere 120 kb/d, it was the lowest rate since the start of the margins renaissance in 4Q14. The forecast for 1Q16 and 2Q16 is for net annual declines with runs dipping below 12 mb/d, as deteriorating margins weigh on refinery profitability.



Japanese refiners halted the long-term declining trend last year, as the throughput volumes did not change from 2014, but our forecast for 1Q16 and 2Q16 sees this trend resuming with runs falling y-o-y. South Korea registered record high throughputs in December at just below 3 mb/d. The closure of Australian refineries has been a boon for export-oriented Korean refiners that have increased shipments to Australian ports. The gap between average annual runs in South Korea and Japan is now as close as ever - it halved to 340 kb/d last year. As the deadline for METI's phase II ordinance calling for the shutdown of 370 kb/d of Japanese refining capacity is just a year away, the ministry is considering another potential round of cuts, with the report scheduled to be completed later this year.

Non-OECD refinery throughput

While non-OECD refiners were not in the driving seat last year for the first time in many years they are set to again take the leading role this year. Estimates for 4Q15 runs, with a slight downward revision of 200 kb/d from the previous Report, show rather modest y-o-y gains by recent historical standards. Throughput estimates for 1Q16 and our forecast for 2Q16, however, show non-OECD driving the global increase with throughputs likely breaking through 42 mb/d, a level that the OECD had not reached.

Chinese data for January as published by the National Bureau of Statistics are not yet available, but secondary sources indicate a 2% decline in refinery throughput over December, which still implies a 2.5% annual gain. Chinese refiners were suffering from product oversupply at home, but exports were not an obvious solution as the domestic price floor policy (with crude pegged at $40/bbl) meant that the margins gained by exporting to international markets were lower than from domestic sales. With international futures recently trading around $40/bbl, this may open the door. The fuel specification changes that came into force at the start of this year have reportedly resulted in unusual arbitrage flows of gasoline blending components, such as reformate, from Europe to China as some refiners there, especially poorly-equipped independents struggle to produce on-spec volumes. Also, with Chinese majors reporting shutting down several clusters of small production fields for economic reasons, some independent refiners were deprived of their main feedstock and had to turn to international markets.



India's refining throughput reached a record high, at 4.85 mb/d in January. State refiners reported very good 4Q earnings as lower oil prices propped up domestic demand. The country's authorities are now considering partial deregulation of the crude imports policy to allow state-owned refiners to import crude on spot basis rather than necessarily having to go through a tendering process, which is the current requirement. This may help firm the margins even more as it will provide Indian refiners with the flexibility to change their crude slate to benefit from volatility in crude prices and differentials.  

Russian refinery runs in January were down 300 kb/d from December and 200 kb/d from January last year, to 5.56 mb/d. The government agreed to postpone the deadlines for a few remaining upgrade projects towards a later date, but, to compensate for lower upstream taxes, swiftly introduced and adopted excise duty hikes for transport fuels. This will increase domestic pump prices by at least 2%, from April, and may yet result in higher exports of diesel and even gasoline.

Elsewhere in the non-OECD, the estimate of 4Q refinery throughput in the Middle East is slightly revised up to 6.8 mb/d, with a 700 kb/d annual gain, reflecting further ramp-up of new capacity in Saudi Arabia. In Africa, Nigerian refineries were reported to be re-opened this month after attacks in January. The country is still undergoing major reforms of the oil sector, both upstream and downstream. Overall for Africa, 4Q estimates were higher with stronger throughput numbers in Algeria and Egypt coming in for December.

The estimate for Latin American refinery runs in 4Q was revised down by 120 kb/d due to outages in Venezuela. Brazil's refinery runs came in stronger in January, reaching 1.94 mb/d. Argentina finally allowed its refiners to import international crudes that are priced lower compared to regulated prices for domestic production and are also of higher quality that the heavier domestic crudes. Rumours circulate again about a possible restart of the Aruba refinery, a 235 kb/d facility that Valero shut down in 2012 but did not completely mothball. PDVSA is now reportedly considering using the refinery as an upgrader of its extra-heavy oil before it can be processed by regular refineries. The Aruba refinery is located 30 km offshore from the Venezuelan coast. In theory, the company could use some diluents to ship the extra-heavy oil to the refinery and then recycle the diluents back upstream to save on their procurement costs.