Oil Market Report: 14 April 2016

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Highlights

  • Crude oil prices rallied to a four-month high in mid-April as further evidence emerged of accelerating declines in US output, while market participants held out hope that upcoming producer talks would agree a deal to help manage a still massive supply overhang. At the time of writing, Brent was at $44.30/bbl and US WTI was at $41.75/bbl.
  • Growth in global oil demand will ease to around 1.2 mb/d in 2016, below 2015's 1.8 mb/d expansion, as notable decelerations take hold across China, the US and much of Europe. Preliminary 1Q16 data reveal this is already occurring, with year-on-year growth down to +1.2 mb/d, after gains of +1.4 mb/d in 4Q15 and +2.3 mb/d in 3Q15.
  • OPEC crude oil production fell by 90 kb/d in March to 32.47 mb/d as ongoing outages in Nigeria, the UAE and Iraq more than offset a further increase from Iran and higher flows from Angola. Supply from Saudi Arabia dipped in March but held near 10.2 mb/d.
  • Global oil supplies sank by 0.3 mb/d in March to 96.1 mb/d, with annual gains shrinking to 0.2 mb/d, from 1.7 mb/d a month earlier and 2.7 mb/d in 2015. The outlook for non-OPEC production in 2016 is largely unchanged since last month's Report, at 57.0 mb/d, 710 kb/d less than the 2015 average.
  • 1Q16 global refinery runs are estimated 79.3 mb/d, 1.2 mb/d up year on year (y-o-y), in line with global demand growth. The forecast for 2Q16 throughput is at 79.7 mb/d, up only 0.8 mb/d y-o-y, slower than forecast 1.1 mb/d demand growth. All of the net growth in the first half of 2016 comes from non-OECD refiners.
  • Commercial stocks in the OECD built counter-seasonally by 7.3 mb in February to end the month at 3 060 mb. Accordingly, the overhang of inventories against average levels widened to 387 mb at end-month. Preliminary information for March suggest OECD holdings rose further while volumes of crude held in floating storage increased.  

Market balance draws near

For some months now in this Report we have anticipated steady oil demand growth and falling non-OPEC supply. This scenario is now taking shape and the oil market looks set to move close to balance in the second half of this year. Oil prices are on the rise with Brent crude oil trading currently well above $40/bbl.

Part of the recent support for prices arises from expectations of the meeting of leading oil producers scheduled to take place on Doha, Qatar, on 17 April. We cannot know the outcome but if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited. The publication date of this Report falls just ahead of the meeting and, accordingly, we have made no changes to our supply assumptions.

The latest rather downbeat global economic outlook from the International Monetary Fund might affect market sentiment but we have not made changes to our demand numbers. We remained confident that in 2016 global oil demand will grow by 1.2 mb/d. In the meantime, India could be replacing China as the main engine of global demand growth. Revised data for late 2015 and early data for 2016 shows year-on-year (y-o-y) growth of approximately 8%. For 2016 as a whole, India will see growth of around 300 kb/d - the strongest ever volume increase. Reforms to the rules allowing refiners to directly import crude oil are all part of a general trend towards liberalisation that should underpin India's growth momentum.

For now though, the main focus is on the supply side of the balance and our view held since the beginning of 2016 of forecast of a fall in non-OPEC supply in 2016 of 700 kb/d looks to be spot-on. In March the year-on-year fall was estimated at 690 kb/d, and, in particular, there are signs that the much-anticipated slide in production of light, tight, oil in the United States is gathering pace. By early April the rig count had fallen nearly 80% from the peak seen in October 2014 and more anecdotal evidence is emerging of financial problems taking their toll on the shale pioneers. Within the group of non-OPEC producers there are few areas of growth with only a handful of countries likely to increase production this year, unless Russia, which has surprised us all with continued growth in production, does not carry out its professed support for a production freeze. Within the ranks of OPEC's members, the pace of Iran's return to the market is more measured than some expected but production in March was still nearly 400 kb/d higher than at the start of the year, in line with our forecast. While nuclear sanctions have been lifted, some financial sanctions remain in place and the financing of Iran's crude oil trade is not always straightforward. Nor is access to markets, as shown for example by reports of marketing difficulties for Iran's condensates stocks.

For the time being, based on a conservative scenario for OPEC crude oil production of 32.8 mb/d in 2Q16 and 33.0 mb/d in both 3Q and 4Q, our outlook suggests that after big build-up of stocks in the first half of 2016 of 1.5 mb/d the surplus will fall to 0.2 mb/d in both 3Q and 4Q. A tighter market outlook seems to be supported in at least part of the pricing structure: the ICE Brent contango nearly vanished in early April after holding steady at a discount of $0.65/bbl during February and March. The prompt month contract is flirting with backwardation, partly on the back of summer maintenance plans in the North Sea, but also due to the general feeling of impending market tightness. Our demand and supply numbers are, of course, highly provisional: even if they turn out to be too bullish, there is no doubt as to the direction of travel for the supply/demand balance. As always, the data will change. It is inevitable that in a 96 mb/d market it will be impossible to account for every barrel that we believe has been produced, especially in times of major supply surplus such as we have today. These "missing" barrels may eventually be re-allocated to revised supply and/or demand or to physical stocks, but in the meantime we must accept that data uncertainty is a fact of life.

In the June edition of this Report we will publish our detailed forecast for 2017. This will provide greater clarity as to when in the year will come the market re-balancing.

Demand

Summary

  • World oil demand is forecast to average 95.9 mb/d in 2016, a potential increase of 1.2 mb/d versus 2015. Reasonably robust gains in non-OECD countries lead the projected expansion while OECD deliveries will be flat.
  • Recent demand data came out ahead of earlier expectations, raising both 4Q15 and 1Q16 demand estimates by 0.2 mb/d. Regardless of the upgrade, 1Q16 growth at 1.2 mb/d year-on-year (y-o-y) remains well below the near five-year peak of 2.3 mb/d seen in 3Q15. Growth has eased due to lower demand in many European and North American consumers.
  • This month's Report examines the sharp recent slowdown in gasoil/diesel demand, highlighting how growth has fallen from a peak of 0.6 mb/d y-o-y in 3Q15 to 0.1 mb/d in 4Q15 and is forecast to turn negative in 1Q16. The end of gasoil demand growth is not yet upon us, as modest gains are forecast towards the end of the year as the underlying industrial situation improves worldwide. Also, the return to more normal seasonal temperatures in 4Q16 may stimulate gasoil demand.
  • Strong gains in India remain one of the most persistent demand supports showing that if an economy remains fundamentally robust lower-oil prices can stimulate additional demand. Despite trimming 100 kb/d from our January Indian demand estimate, deliveries still grew by 335 kb/d versus last year.

Global Overview

Strong gains in India, Thailand and Korea could not offset the sluggish performances elsewhere that saw growth fall back from a five-year peak of 2.3 mb/d y-o-y in 3Q15 to 1.4 mb/d in 4Q15 and 1.2 mb/d in 1Q16. In OECD countries, distillate demand growth in particular faded (see Global gasoil demand crumbles) pulled down by slower industrial activity and the generally mild recent winter temperatures. That is not to say that non-OECD economies were completely shielded from the global slowdown, as economically hamstrung Brazil and Russia also saw sharp 4Q15 declines.

Global oil deliveries will average 95.9 mb/d in 2016, a gain of 1.2 mb/d on the year - with projected 2016 growth unchanged in over six months of Reports - as the forecast non-OECD expansion remains relatively supportive while OECD deliveries essentially flatten. Lower oil prices provided a boost to global demand in mid-2015 but this is not expected to carry into 2016 while poorer economic prospects in many countries have seen the demand outlook pared back. It was the more consumer-focused fuels, such as gasoline and jet/kerosene, that grew the most strongly in 2015 and growth in these markets is expected to ease in 2016. Rising by approximately 1.0 mb/d on a y-o-y basis in 3Q15, global gasoline demand growth should halve in 2H16. Peak jet/kerosene demand growth, of approximately 0.3 mb/d in 3Q15, subsides to around half this level in 2016 as a whole.

The severity of the slower growth environment is slightly eased compared to last month's Report, with approximately 0.2 mb/d of oil demand added to both 4Q15 and 1Q16 global delivery estimates, taking the totals to 95.5 mb/d and 94.8 mb/d respectively. These upgrades were chiefly attributable to additional Russian and Chinese deliveries.

Global gasoil demand crumbles

That famous maxim 'when the US sneezes, the rest of the world catches a cold' can be applied to middle distillate markets in recent months, although like all adages it perhaps oversimplifies the true situation. Both China and Japan had long seen weaker gasoil/diesel demand before US growth eased in mid-2015. By 4Q15 the US, China and Japan were all experiencing sharp y-o-y gasoil demand falls and the same occurred in Europe in 1Q16.

A consequence of the deliberate effort to switch the focus of the Chinese economy away from heavy manufacturing towards a more consumer-focused structure triggered China's gasoil growth slowdown post-2013. Japanese gasoil demand, meanwhile, eased in association with the persistent industrial contractions that emerged in 2H14. More of a surprise was the sharp reversal in US gasoil demand in 4Q15, as creaking manufacturing activity (see Americas) pulled down gasoil demand, along with unseasonably mild winter temperatures.

Prior to 1Q16, the European gasoil consumer demonstrated stolid resistance, a resolve that cracked in 1Q16 (down 75 kb/d) as key consumers France and Germany endured sharp declines, falling compared to the year earlier by 50 kb/d and 20 kb/d, respectively.

This changing demand-dynamic is in stark contrast to the recent experiences of the overall oil market, and the investment flows into the refining industry. Prior to 2014, gasoil accounted for roughly one out of every two extra barrels of oil consumed in the period 2009-13. The two years that followed saw gasoil account for a more muted one barrel in six. In our forecast, we expect stronger global gasoil demand growth to resurface in 4Q16, albeit only tentatively, with gasoil demand growth projected to inch up towards 0.4 mb/d by 4Q16. Two major 4Q16 supports will be the US and India.

OECD

Blighted by recent sharp reversals in the OECD Americas and OECD Asia Oceania, the overall OECD oil demand trend has flipped from strongly rising (+1.5%, 3Q15), to flat-to-falling (-0.1% in 4Q15 and -0.6% in 1Q16). The latest preliminary numbers depict OECD oil deliveries down by 0.7% y-o-y in February, to 47.2 mb/d, after declines of 0.8% in January and a gain of 0.4% in December.



Americas

The demand strength seen in the US from December 2014 to August 2015 buttressed the rising overall OECD American trend. This has now clearly waned and indeed has turned negative. Although initially pulled down by sharp declines in industrial oil use, particularly propane, gasoil and 'other products', the latest official monthly series for January 2016 showed the contagion spreading to gasoline. One month of data is far too early to call an end to gasoline's strength, but the slowdown is still noteworthy.



Having fallen by an estimated 50 kb/d y-o-y in January, to 8.7 mb/d, US gasoline demand growth is forecast to re-emerge over the remainder of 1Q16, as January's dip was partially attributable to the extreme strength seen one year earlier, while lower pump prices remain relatively supportive of additional demand. We estimate that for the whole of 1Q16, based upon weekly data from the Energy Information Administration, US gasoline deliveries were 9.0 mb/d, 140 kb/d up on the year earlier. This 1Q16 gain is near half the average 2015 expansion, and we believe that the most price-sensitive US drivers have already reacted to much reduced pump prices, leaving little leeway for further strong gains. Recent escalations in US economic concerns further dampen US consumer confidence. The University of Michigan's consumer sentiment index reflects this. It fell to a five-month low of 91.0 in March, with both current and future expectations down compared to the month earlier.



The largest recent US demand weakness was reserved for the gasoil/diesel market (see Global gasoil demand crumbles). Deliveries fell by 420 kb/d y-o-y in January, their fourth consecutive decline, pulled down by a combination of mild winter temperatures and weakening industrial activity, particularly in PADD 3 (the Gulf of Mexico), as slowdowns in the oil and gas sector dampened gasoil use. Although further sharp declines are anticipated through to April, we foresee the US gasoil market bottoming-out around the middle of the year, as forward-looking industrial activity indicators, like the Institute of Supply Management's Manufacturing Purchasing Managers' Index (PMI) broke back into expansionary territory once more in March, at 51.8. Further support for US gasoil demand in 2016 should emerge in 4Q16 as the return of traditional seasonal temperatures potentially triggers a spike in demand.



Overall, having risen strongly in 2015 (+290 kb/d), US growth is expected to moderate in 2016, to around 110 kb/d, as the early-year weakness in gasoil/diesel coincides with notable slowdowns in consumer-focussed products, such as gasoline and jet fuel. Thus, for the year as a whole, total oil demand across the 50 states of the US averages 19.5 mb/d.

Supported by strong gains in the gasoline, jet/kerosene and 'other products', Mexican oil demand posted its third consecutive month of y-o-y growth in February. Up by 30 kb/d on the year earlier, total Mexican deliveries averaged 2.0 mb/d in February. Reinforced by relatively resilient business confidence and the recently lower oil-price environment, Mexico appears tentatively to have exited the declining demand trend that existed before. Y-o-y growth averaged 30 kb/d in the three-months through February compared to -30 kb/d in the preceding 12-months. The latest release from the Instituto Nacional de Estadistica y Geografia cites Mexican business confidence in February 2016 at its second highest level since October, at a net-optimistic 52.57.


Europe

Sharp drops in a number of European countries - notably Belgium, Hungary, the Czech Republic, Greece, Portugal, Switzerland and Austria - pulled Europe back towards low-growth in 1Q16, as we had anticipated in recent issues of this Report. For example, the relative Belgian demand strength seen 4Q14-through-3Q15, has since largely faded. Dominating this change has been the sharp reversal in the momentum of gasoil (see Global gasoil demand crumbles), switching from an average y-o-y gain of 25 kb/d, 4Q14-3Q15, to a decline of 10 kb/d, October 2015-through-January 2016. Deteriorating gasoil has led the overall market from an average 35 kb/d gain, to a decline of 10 kb/d. Further falls are envisaged for 2016 as a whole pulling total Belgian deliveries down by around 1% in 2016 to 655 kb/d as the initial price-driven stimuli wanes in the face of a very testing macroeconomic environment. Similarly, Hungary, having risen strongly since mid-2014, saw deliveries in January fall back below year earlier levels, with weak conditions seen right across the barrel.



Preliminary Spanish oil demand numbers for February show that the generally rising y-o-y trend has recently returned. Estimated deliveries rose by 2.4% y-o-y in February, little changed from the +2.6% September 2014-August 2015 average. Indeed, fifteen of the twenty months through January 2016 (or sixteen of twenty-one if preliminary February data are included) posted higher y-o-y deliveries, with surging middle distillate demand the key support. Over the twenty-one months through February, Spanish oil demand growth averaged 15 kb/d y-o-y (1.3%), with gasoil/diesel up by on average 15 kb/d and jet/kerosene 5 kb/d. Much of this demand resurgence is a combination of price-driven rallies and the temporary response to the sharp declines that previously co-existed alongside the weak economy. A roughly flat demand picture is foreseen in 2016, as deliveries average 1.2 mb/d; the underlying macroeconomic data (with GDP growth of 2.6% forecast by the International Monetary Fund) unable to support much more of a response.


Asia Oceania

Roughly as forecast in last month's Report, the 1Q16 Japanese demand estimate of 4.5 mb/d depicts a still heavily falling trend, as estimated deliveries fell by 340 kb/d compared to the year earlier pulled down by sharp drops across all of the major product categories. For example, LPG (including ethane) demand fell by 90 kb/d in 1Q16, y-o-y, while naphtha deliveries dropped by 35 kb/d, gasoil -40 kb/d, residual fuel oil -110 kb/d, gasoline -15 kb/d, jet/kerosene -10 kb/d and 'other products' -40 kb/d. For the year as a whole a more modest 140 kb/d decline is foreseen, to 4.1 mb/d, as the majority of the previous downside was chiefly attributable to the power-sector where oil's share has almost completely been by-passed by alternatives, such as gas, coal and now nuclear.





Underpinned by strong gains from the industrial and petrochemical sector, Korean demand growth remains near multi-year highs. Indeed rising by an estimated 150 kb/d y-o-y in the six-months through February 2016, this amounts to a 6.3% y-o-y gain. As crude oil prices, suggested by the futures curve, potentially edge up over 2H16 and industrial activity stutters - with Markit's Manufacturing PMI for Korea in sub-50 territory, January to March - momentum potentially eases, leaving Korean product demand forecast to average 2.5 mb/d in 2016, 4.3% up on the year earlier.

Non-OECD

Early indicators of 1Q16 non-OECD demand imply a modest acceleration (+3.3%, compared to a 3.0% gain in 4Q15), as strong gains in the petrochemical sector across the board, robust growth across all the major Indian product categories and some surprising resilience in Russia and China provided support. Indeed, non-OECD consumers are projected to account for almost all of global oil demand growth in 2016, although this is more a story of weak OECD demand than very strong non-OECD gains.

China

With a complete set of monthly data not yet available for the first two months of the year, a consequence of the extended Chinese New Year holidays, we report the two months in unison. At an average 11.4 mb/d in January-February, our 'apparent demand' estimate stood 320 kb/d (or 2.9%) above the year earlier. The number would have been even higher had it not been for the heady 17.3% month-on-month (m-o-m) product stock build reported by the Xinhua News Agency for February, as this is essentially deferred consumption or exports and is not treated as 'true' demand in our calculations.





Big increases in Chinese diesel stocks potentially put a sizeable dampener on 'true' Chinese gasoil/diesel demand. The Xinhua News Agency reported diesel stocks higher by close to one-third in February on a m-o-m basis. We caution, however, that the Chinese New Year vacation may have caused heightened volatility on the monthly data. With gas-powered heavy vehicles denting diesel's market share, while many of China's domestic industries struggle with overcapacity and closure, gasoil/diesel demand has stuttered, falling by roughly 8% in the first two months of the year compared to the year earlier. Forecasting growth of around 3% for the year as a whole, or 0.3 mb/d, our Chinese demand forecast assumes something of a bottoming-out in the recent Chinese gasoil malaise. With industrial optimism indicators, such as Caixin's Manufacturing PMI, having risen sharply in March, to 49.7, a 15-month high, we at least foresee the projected scale of gasoil's y-o-y demand declines lessening as the year progresses.

Other Non-OECD

Having risen relatively strongly in the latter stages of 2015, early indicators of 2016 demand in Chinese Taipei show a deceleration, as January growth eased to a three-month low of +1.9% y-o-y. Indeed, deliveries eased below 1.0 mb/d in January for the first time since October 2015, pulled down by stuttering industrial activity. The Ministry of Economic Affairs reported industrial activity across Chinese Taipei down by 6% y-o-y in January. The consumer sector fared even worse according to an index published by the Research Centre for Taiwan Economic Development, which fell to a three-year low, of 80.9 in January, significantly below the 100-optimisim threshold. With this and Markit's Manufacturing PMI remaining suppressed in February we foresee oil demand growth in Chinese Taipei decelerating to around 1% in 2016 as a whole. Oil demand of approximately 1.0 mb/d is forecast for 2016.



The very high growth rates of Indian oil demand alluded to in last month's Report turned out to be somewhat exaggerated. Official numbers, from oil companies and the Ministry of Petroleum & Natural Gas, showed growth of 8.8% y-o-y in January, nearly four-whole percentage points below the previous estimate based on data from the Petroleum Planning & Analysis Cell (PPAC), a unit of the ministry. Despite trimming a net 100 kb/d off the January estimate, a strong 335 kb/d gain on the year earlier remains, supported by particularly strong gains in gasoil/diesel, gasoline and 'other products', most notably bitumen used in India's extensive road building programme. Preliminary February numbers, derived from PPAC data, suggest that the strong gains persist. Indeed, for the year as a whole growth of approximately 0.3 mb/d is forecast, taking deliveries to around 4.2 mb/d.



Some surprisingly resilient demand numbers towards the end of 2015, rolling over into early 2016, triggered an upward revision of 15 kb/d to the 4Q15 demand estimate for Thailand. Much stronger than previously anticipated gasoline, gasoil and residual fuel oil demand raised the overall number. These increases were largely carried across into January, which showed growth escalating to a near two-and-a-half year high of 4% compared to the year earlier.



Raised by higher-than-anticipated February deliveries, for Russia the 1Q16 demand estimate of 3.6 mb/d is not only a rare y-o-y gain (+205 kb/d) but it is also 130 kb/d more than the estimate in last month's Report. Additional residual fuel oil, LPG, naphtha and 'other product' deliveries were the key contributors, while gasoline and jet/kerosene demand remain on a declining trend. Although a modest decline of 0.2% is still foreseen for 2016 as a whole to 3.6 mb/d, the projected drop has been curbed dramatically from 2015's 1.7% contraction. The projected easing in the Russian decline rate is chiefly attributable to additional oil use in manufacturing, as industrial activity seems to at least be tentatively picking up. Russia's Federal State Statistics service reported that for February industrial output posted its first y-o-y rise in roughly a year of +1.0%.



Despite offering little change from 0.8 mb/d since October 2015, the Iraqi oil product statistics posted eight consecutive months of y-o-y demand growth through January 2016. Having showed declines in the majority of the previous fifteen months, the reversal that followed is a clear trend. Strong gains in gasoline, residual fuel oil and 'other product' demand led the apparent Iraqi demand resurgence. For residual fuel oil and 'other products', the gains were chiefly attributable to additional power demand, while gasoline demand rose on slowly improving consumer confidence. Looking ahead in 2016, a near 2% gain in average deliveries is foreseen at 0.8 mb/d.



Undermined by particularly weak residual fuel oil and 'other product' demand numbers at the turn of the year, Saudi Arabia, in December, posted its first y-o-y decline in more than two-years. The drop took average deliveries down to around 3.0 mb/d, a nine-month low. Even after temporary weather effects have fallen out of the equation Saudi Arabian oil demand growth likely vanishes. Having risen by over 4% in 2015, very modest overall growth is foreseen in 2016, with an outright fall envisaged in 'other products' as significant increases in domestic gas production curb the prospective power-sector oil-burn. With details emerging of production starting at Saudi Aramco's huge Wasit gas facility, industry experts foresee crude oil's traditional extra summer power-sector demand being curtailed by between 0.1 mb/d and 0.2 mb/d. A further dampening factor in 2016 is the likely deceleration in economic growth: forecasters such as the International Monetary Fund foresee GDP growth falling to around one-third of its previous level (+1.2% in 2016 versus 3.4% in 2015).


Supply

Summary

  • Global oil supplies dropped by nearly 0.3 mb/d in March to 96.1 mb/d, with non-OPEC accounting for two-thirds of the decrease. Year-on-year (y-o-y) gains shrank to only 0.2 mb/d, from nearly 1.7 mb/d a month earlier and the 2.7 mb/d average over 2015, as non-OPEC production contracted for a second consecutive month, while OPEC gains were pared by outages in Nigeria, the UAE and Iraq.
  • OPEC crude oil production fell by 90 kb/d in March to 32.47 mb/d after a second month of supply outages from Nigeria, the UAE and Iraq more than offset a further increase from post-sanctions Iran and higher flows from Angola. Supply from Saudi Arabia, OPEC's largest producer, dipped in March but held near 10.2 mb/d.
  • Major oil producers are due to meet in Qatar on 17 April to discuss freezing output at levels pumped at the start of the year. With Saudi Arabia and Russia already producing at or near record rates and very little upside seen apart from Iran - which has vowed to ramp up production to a pre-sanctions level of 4 mb/d - any deal struck will not materially impact the global supply-demand balance during 1H16.

  • Non-OPEC oil production eased another 180 kb/d in March to 56.8 mb/d, 690 kb/d below a year earlier. Evidence that spending cuts are starting to impact on US production mount, with the latest estimates showing tight oil output falling below year-earlier levels by as much as 450 kb/d in March. Maintenance and unscheduled outages curbed supplies in Canada and Ghana. In contrast, Russian production hit yet another high in March, standing nearly 230 kb/d above year-ago levels.
  • The outlook for non-OPEC production in 2016 is largely unchanged since last month's Report, at 57.0 mb/d, which is 710 kb/d less than the 2015 average. Total US liquids production is expected to decline by 480 kb/d this year as higher Gulf of Mexico and NGL output provide a partial offset to declines in onshore crude oil production. Other notable declines are expected from China, Mexico, Colombia and Kazakhstan, while Russia, Canada, Brazil and Congo  remain amongst the few countries expected to post gains this year.

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

OPEC crude oil supply

A second month of supply outages in Nigeria, the UAE and Iraq more than offset a further rise in Iranian production - pushing down overall output to 32.47 mb/d during March, a decrease of 90 kb/d month-on-month (m-o-m). Pipeline sabotage in Nigeria and Iraq and oil field maintenance in the UAE have shut in nearly 600 kb/d of supply since the start of the year. OPEC production might climb higher during April as oil fields in the UAE come out of maintenance and should Iraq's northern production recover from pipeline issues and Iran manage to boost crude oil exports that hit 1.6 mb/d during March. Libyan flows, which slipped in March, could also recover if a political settlement holds following the establishment of a new national unity government. Supply from Nigeria - at the lowest since July 2009 - is likely to be suppressed for a third month in April due to ongoing force majeure on some 250 kb/d of Forcados crude oil loadings.



The further increase in Iranian crude oil flows - output of 3.3 mb/d in March is up nearly 400 kb/d since the start of the year - comes ahead of a 17 April meeting in Qatar of major oil producers to discuss freezing production to help stabilise oil prices. Iran, OPEC's third largest producer, wants to reclaim market share it lost during the period under sanctions and has said it will not take part in any effort to freeze or cut output.



OPEC has been pumping vigorously since the group opted in November 2014 to defend market share rather than price, with output in March from the 13-member group up 740 kb/d on the previous year. Crude supply from Iran - released from nuclear sanctions in mid-January - was up 510 kb/d year-on-year (y-o-y), output from Iraq, OPEC's second biggest producer, stood 490 kb/d above March 2015 and Saudi production was steady y-o-y. OPEC's "effective" spare capacity was 2.71 mb/ d in March, with Saudi Arabia accounting for 76% of the surplus.

Crude oil production in in Saudi Arabia dipped by 30 kb/d in March to 10.19 mb/d, with exports to world markets edging slightly lower, according to preliminary tanker tracking data. The Kingdom's resolve to preserve market share through competitive pricing and meet domestic demand has kept output above 10 mb/d since March 2015.

Saudi Aramco and Egypt's SUMED pipeline operator have meanwhile struck a deal to increase the flow of Saudi crude to Europe and explore the use of SUMED facilities for housing Saudi oil. Volumes were not specified. The SUMED pipeline, which runs from the Ain Sukhna terminal on Egypt's Red Sea coast to the Mediterranean port of Sidi Kerir, is half owned by Egyptian General Petroleum Corp. Saudi Arabia, Kuwait and the UAE each have a 15% share and Qatar holds 5%.

Crude oil sales to world markets have been running well above the 7 mb/d mark and surged to 7.84 mb/d in January - the highest since March 2015, according to the latest official figures submitted to the Joint Organisations Data Initiative (JODI). Saudi refineries ran 2.47 mb/d of crude during January versus 2.31 mb/d in December, while exports of refined oil products dropped to 1.34 mb/d in January from 1.44 mb/d the previous month. Total Saudi liquids exports, excluding condensates and NGLS, rose to a record 9.18 mb/d in January, up 250 kb/d on the previous month. Crude oil used to generate power dropped in January to 290 kb/d from 390 kb/d in December.



Saudi Arabia is poised to burn less crude oil in its power plants this summer when domestic demand surges after the anticipated ramp up of the 2.5 billion cubic feet per day Wasit gas plant, which will process non-associated gas from the offshore Arabiyah and Hasbah fields (see Demand). Industry sources say crude burn might be reduced by at least 100 kb/d. Saudi Arabia last summer delivered more than 800 kb/d of crude oil into power plants, nearly double what it used during the rest of the year. The spike in domestic crude consumption typically pushes Saudi crude production higher. Output last year surged to a record 10.5 mb/d in June.

Crude supply from Kuwait held steady in March at 2.83 mb/d. Significantly, Kuwait said it had reached agreement with Saudi Arabia to restart production from the shared 300 kb/d Khafji offshore oil field in the Neutral Zone, although there is little sign of an imminent restart. Saudi Arabia shut down Khafji in October 2014, citing environmental reasons. Thousands of workers at Kuwaiti oil and gas companies are meanwhile due to stage a strike from 17 April in protest over wages and benefits. A Kuwaiti official said exports and production will not be affected. Qatari output was unchanged from February at 670 kb/d. Qatar is pressing on with plans to tender its 300 kb/d al-Shaheen oil field during April. Maersk Oil operates the offshore field under a 25-year production-sharing contract that expires in mid-2017. Al-Shaheen accounts for nearly 45% of Qatari output. UAE production fell by 50 kb/d to 2.73 mb/d during March due to ongoing maintenance at the Murban oil field development, which saw a peak volume of more than 300 kb/d of production taken offline. Production is expected to ramp up swiftly towards record rates upon completion of the field work in April.

Iraqi crude oil production eased 30 kb/d to 4.19 mb/d in March after the federal North Oil Co (NOC) halted supplies to the Kurdistan Regional Government's (KRG's) export pipeline to Turkey. Overall exports, including from the KRG, were just shy of 3.6 mb/d in March - up a touch on the previous month.

Southern Basra exports of 3.26 mb/d in March - up 30 kb/d on the previous month - earned the federal government $2.9 billion. March is the fifth consecutive month with Basra crude shipments running higher than 3.2 mb/d, which suggests the robust rates can be sustained. Northern exports along the KRG's pipeline to Turkey fell to 330 kb/d in March, down 20 kb/d on February, due to a three-week stoppage on the Turkish side of the pipeline. Despite the lower exports, revenues to the autonomous northern region rose to $557.3 million, boosted by $350 million in loans and pre-payments.

Flows of northern crude have failed to recover to previous levels of more than 600 kb/d since restarting on 12 March after NOC halted pumping of some 150 kb/d of crude into the KRG's pipeline due to a long-running payment dispute between Baghdad and Erbil. Pipeline flows are currently running at roughly 500 kb/d.

Iraq, OPEC's second biggest producer, is in the grip of a political and economic crisis that threatens to undermine the federal government and its crucial oil sector. Iraqi Prime Minister Haider al-Abadi has proposed a cabinet revamp that aims to combat corruption by appointing a technocrat government. Abadi has presented Jabbar Allibi, the former head of the South Oil Co (SOC), as the candidate for the oil ministry's top post. Adel Abdul Mahdi resigned as oil minister in March and Fayadh Nima is currently serving as acting minister.

Strong leadership is required for Iraq's strategic oil sector, where a number of vital projects are already facing lengthy delays. Low oil prices and reduced revenues have forced the federal government to cut the budgets of the international oil companies (IOCs) developing its prized oil fields to $9 billion this year from $13 billion in 2015. The country's financial crisis has also left Baghdad running an estimated $3 billion to $6 billion behind in payments to the IOCs working in the southern fields that pump most of the country's oil. Industry sources say the payment arrears could lead to a drop in production next year because contractors are cutting investment to avoid exposure to payment deferrals and slowing down drilling programmes.

Iran continued to ramp up production following the January easing of international sanctions, with output rising by 80 kb/d to 3.3 mb/d in March. Exports of crude oil rose to 1.6 mb/d - up around 100 kb/d from February and may climb higher still in April. Before sanctions were tightened in mid-2012, Tehran was selling roughly 2.2 mb/d of crude on world markets, with Europe accounting for around 600 kb/d.

Higher exports in March were due mostly to hefty buying from India, according to preliminary data. Purchases from India surged above 500 kb/d in March from around 220 kb/d the previous month, after private refinery Reliance Industries reportedly resumed purchases.



Crude oil sales to Europe held steady in March at around 300 kb/d, according to preliminary data, with Total, Cepsa, Lukoil and Turkish Tupras steady buyers. Deliveries may increase in April with Total due to lift considerably higher volumes and Greek refiner Hellenic Petroleum due to restart imports. Although some European banks reportedly are growing more confident in financing Iranian trade, some potential customers say the National Iranian Oil Co (NIOC) has yet to demonstrate sufficient flexibility with credit terms to entice them. Iran is also continuing discussions with Egypt to resume use of the SUMED oil pipeline, which could offer an additional export route to Europe. However, Saudi Aramco's deal with SUMED to increase flows through the pipeline may limit the opportunity for Iran to use the route.

While crude oil loadings have increased, condensates are proving to be a tough sell. Exports have slowed in part due to a shutdown at a Chinese petrochemical producer that processed substantial quantities of Iranian condensate. As a result of the slower sales, Iran has been storing ultra-light oil from Iran's South Pars gas project at sea. Volumes stored rose by 4 million barrels in March to 46 million - the highest since August 2015. There are now 22 Iranian VLCCs engaged in storage - 50% of the National Iranian Tanker Co fleet - as well as one chartered vessel.

Angola posted the biggest m-o-m increase after Iran, with output rising 40 kb/d to 1.8 mb/d during March. Shipments of Angolan crude to China are reportedly running at roughly 1 mb/d as the country's independent refiners lap up West African oil. The prolonged period of low oil prices has led Angola to seek a loan from the International Monetary Fund (IMF) to keep its oil-dependent economy solvent. Output in Nigeria sank 60 kb/d to 1.70 mb/d due to an ongoing disruption to Forcados shipments following an attack on a sub-sea pipeline. Supply in March was at its lowest since July 2009, when unrest in the Niger delta suppressed production. The Forcados terminal in Delta State, one of Nigeria's biggest terminals, was scheduled to load 250 kb/d of crude. At $40 /bbl, Nigeria could stand to lose an estimated $1 billion between February - when force majeure was declared - and May, when repairs are expected to be completed. Attacks on oil installations have risen since President Muhammadu Buhari vowed to stamp out corruption and oil theft.

Libyan output, already at a small fraction of the 1.6 mb/d pumped before the country's civil war, slipped 30 kb/d to 340 kb/d in March due to power outages and technical issues. There are flickers of hope, however, of an oil sector comeback following the long-awaited formation of a unity government. The new UN-backed Government of National Accord (GNA) has received support from the Petroleum Facilities Guard (PFG), which has said it is prepared to reopen the eastern ports of Zuetina, Es Sider, and Ras Lanuf and free up more than 600 kb/d of export capacity. A re-start could take time, however, as some of the infrastructure at the strategic ports, closed since December 2014, has been damaged following repeated attacks by Islamist militants. Libya has in the meantime been relying on two offshore terminals in the west for exports. Prior to the UN peace deal in December 2015, two rival governments were battling for control - the so-called Libya Dawn administration in Tripoli and the officially recognised government in the east.

Venezuelan crude oil output slipped by 20 kb/d to 2.35 mb/d in March after equipment failures at the country's 1.5 mb/d Jose export terminal created logistical bottlenecks that slowed supplies. Oil field operations are also under stress due to power shortages and difficulties getting basic goods and services to the fields.

Non-OPEC overview

The outlook for non-OPEC supply is largely unchanged since last month's Report, with 2016 output on track to decline by 700 kb/d to 57.0 mb/d on average. The latest oil statistics confirm earlier estimates showing US production starting to decline, with crude and condensate output contracting y-o-y since December. This is in stark contrast to just one year earlier, when the world's third largest crude oil producer saw annual output gains surge to more than 1.6 mb/d. Preliminary data and estimates through April show tight oil output slipping further, with operators idling another 30 oil rigs in March.



Signs that lower oil prices and spending curbs are impacting supplies are becoming evident also outside of the US. As noted in last month's Report, production plans for Brazil, Colombia, China and Kazakhstan have been revised lower. With the presentation of 2015 annual reports and investor updates the outlook for China has been further downgraded, with all major oil producers expecting domestic output to fall (see China downgraded). The number of casualties in the North Sea is also starting to pile up, with operators choosing to shut a number of projects ahead of schedule, and development plans for others delayed or cancelled (see North Sea projects fall victim to oil price slump).

In contrast, Russian oil producers continue to defy expectations, sustaining recent output gains. Preliminary data show crude and condensate output inching up to 10.91 mb/d in March, some 220 kb/d above a year earlier and a new post-soviet high. Ahead of the 17 April Doha meeting where major producers are set to discuss freezing production, Energy Minister Alexander Novak said Russian crude output this year would average between 10.76 mb/d and 10.82 mb/d should Russian and other producing states agree to freeze output at January levels. Our current forecast is for output to average 10.83 mb/d this year, 115 kb/d higher than in 2015.

While the most recent production statistics for Brazil show output in one of non-OPEC's key sources of growth slipping below year-earlier levels over January and February, the completion of maintenance and the start-up of new production units should underpin growth through the remainder of the year. A new floating production storage and offloading vessel starting production at the prolific Lula field in February and another vessel is on track to be delivered in 2Q16.

Preliminary production data released by Colombia's Ministry of Mines and Energy suggest the impact on output from attacks on the country's largest crude pipeline was less severe than first thought, with production only 55 kb/d lower than a month earlier. Technical problems at the Tullow-operated Jubilee field in Ghana and scheduled upgrader maintenance in Canada meanwhile looked set to temporarily curb output in March and into April. Several Canadian oil sands operators reportedly moved up scheduled maintenance to March in response to weak domestic crude prices.


OECD

North America

US -January actual, Alaska - March preliminary: US crude and condensate production declined another 55 kb/d in January, marking a second consecutive month of y-o-y declines. Standing just shy of 9.2 mb/d, total US crude and condensate output was 160 kb/d below a year earlier, following drops of 280 kb/d the previous month. Output in the largest producer state, Texas, inched up from a month earlier, however, to 3.4 mb/d, flat from year-earlier levels. Lower US NGLs and other non-crude output took total US liquids production down a combined 200 kb/d from December, to 12.6 mb/d, or 200 kb/d below the same month a year earlier.

Preliminary indications are that output declines are accelerating. US shale production has been more resilient to lower prices and the drop in drilling activity than expected, in large part due to increased productivity gains and as hedging programmes, often required by lenders, insulated producers from the full impact of lower prices.

In its latest shale production update, the Energy Information Administration (EIA) forecast total US shale production dropped by 103 kb/d in December, 76 kb/d in January and 61 kb/d in February. The EIA's drilling productivity report meanwhile saw total oil output from the seven most prolific shale plays dropping by a combined 320 kb/d over the January to April period. According to this report, production from shale plays has declined by 600 kb/d from a peak of 5,470 kb/d in March 2015. Both reports estimate output falling below year-earlier levels since December 2015.



Meanwhile, the number of oil rigs operating in the US dropped by another 30 in the four weeks to 1 April, of which thirteen were removed from the Permian basin. The total US rig count was 362 on 1 April, 78% below the October 2014 peak.

Output in the Gulf of Mexico, meanwhile, held steady at just over 1.6 mb/d in January. After posting average gains of more than 140 kb/d last year, the latest output numbers stood 114 kb/d above a year ago. Offshore output is expected to gain another 155 kb/d this year, lifted by supplies from new fields. Notably, Anadarko reported first oil from its 80 kb/d Heidelberg project in January. Other projects scheduled to be commissioned this year include Stones, Julia, Coelacanth and Gunflint.



Canada - Newfoundland February actual, others December actual: Canadian oil production in January fell 60 kb/d from a month earlier, following a drop in Albertan bitumen production. Output of bitumen upgraded into synthetic crude dropped by nearly 20 kb/d m-o-m, while un-upgraded production slipped by some 40 kb/d. Consolidated production numbers for December peg Canadian oil production 100 kb/d higher than initial estimates. An upward adjustment to reported natural gas liquids output from 735 kb/d to 840 kb/d lifted total oil supply to 4.65 mb/d. In its monthly oil statistics submission to the IEA, January gas liquids output was also revised up from 704 kb/d to 799 kb/d.

Output is estimated to be lower in March, on major maintenance at upgrading and oilsands facilities. MEG Energy announced it had moved up maintenance of its Christina Lake facility from 2Q16 to the end of 1Q16, partly in response to weak prices. Connacher similarly brought forward maintenance of its Great Divide plant while Suncor moved the full shutdown of its Upgrader 2 up to March.



Mexico - February actual, March preliminary: After dropping 45 kb/d a month earlier, Mexican crude oil production largely held steady in March, at 2.2 mb/d. Total oil output stood 140 kb/d below a year ago, compared with an annual decline of 170 kb/d in February. While the country's historic upstream opening should boost exploration and development in coming years, Pemex has in recent years struggled to find and develop new resources to offset the decline at its mature fields. As such, over the past decade total Mexican oil output had dropped by a third from nearly 4 mb/d in 2005, to 2.6 mb/d on average last year. For this year, production is expected to decline a further 100 kb/d on average, roughly half the output loss seen last year, when unscheduled outages amplified the natural decline.

In a March update, Mexico's Ministry of Economy announced it has opted to set a low local content requirement for the upcoming deepwater bid round in December. The new rule says oil and gas companies must use 8% local content in deep and ultra-deep waters by 2025, rising from the 3% established in 2015 for a few projects operated by Pemex. According to the Hydrocarbon Law, exploration and extraction activities performed for onshore and shallow water projects should achieve on average at least 35% domestic content.


North Sea

Norway - January actual, February provisional: Preliminary data from the Norwegian Petroleum Directorate show oil production inching up another 12 kb/d in February. At 2.05 mb/d, supplies stood an impressive 130 kb/d, or 9%, above a year earlier, with a number of new fields contributing. Notably, the recently commissioned Edvard Grieg field saw output surge to 60 kb/d in January, up from 38 kb/d in December, its first month of production. Other gains came from the Knarr field, which started up last March and Gudrun which has steadily ramped up production to around 70 kb/d since its April 2014 start-up. In mid-March, Eni finally started production from the Goliat field, three years behind schedule and almost 50% over budget. Goliat, which is the first oil field to start production in the Barents Sea, is expected to reach daily output of 100 kb/d. Production will take place through a subsea system consisting of 22 wells, of which 17 are already completed.

While the commissioning of Edvard Grieg and Goliat is expected to underpin robust growth in Norwegian output this year, a return to more normal maintenance and outage levels is nevertheless expected to cap gains in 2016. Statoil, the largest operator on the Norwegian continental shelf, is planning to cut output by 25 kb/d on average in 1Q16 due to maintenance, compared with only 10 kb/d in 1Q15. For the year as a whole Statoil is planning to take 60 kb/d offline due to maintenance, compared with an average of 40 kb/d last year, with 2Q traditionally the peak maintenance period. Further maintenance shutdowns are expected from Ekofisk which is operated by ConocoPhillips who announced the field will be subject to its three-year maintenance shutdown around mid-year. Ekofisk output averaged 110 kb/d in January, the latest month for which field-level production data is available.



UK - January actual, February provisional: UK oil production dropped by a sharper-than-anticipated 80 kb/d in January, to 980 kb/d, narrowing y-o-y gains to just 40 kb/d compared with an average 170 kb/d increase over the preceding six months. Preliminary data reported through JODI shows output dropping further in February, though maintaining year-on-year gains. Output is expected to drop more sharply over summer months as maintenance picks up. The Buzzard field, the UK's largest, is expected to be closed for maintenance during most of July. Buzzard produced an average of 163 kb/d over 2015. The closure of the North Sea Cats gas pipeline for a month from 6 June is likely to result in a number of UK North Sea fields going off line during the maintenance period.

North Sea projects fall victim to oil price slump

The commissioning of new oil fields over the past few years has reversed a decade of falling oil production in the North Sea, while high oil prices have provided incentives for companies to extend field life, employ enhanced recovery techniques and improve field reliability to reduce downtime. As such, North Sea producers managed to post a second consecutive year of growth in 2015, adding 160 kb/d of supply. Ahead of the start-up of Johan Sverdrup towards the end of the decade, further growth looks at risk, however, as lower oil prices force companies to slash upstream capital expenditures and re-evaluate plans for both fields currently producing and those under development.

Det Norske has been shopping cheap assets in recent years and is clearly repositioning itself in the North Sea. Recent reports suggest that the company is contemplating scrapping the development plan for Vette (previously known as Bream). Det Norske bought the field from Premier Oil late last year, after the latter postponed the final investment decision for the project due to lower oil prices. Det Norske, which received a good price after netting out the tax carry forwards, was looking to negotiate cost savings on a planned floating production storage and offloading unit. Now, the combination of weak oil prices and lower potential production is challenging the economics of the project forcing its closure. According to the company, the final decision will be taken together with the other partners in the license; Kufpec (30%) and Tullow (20%).

For fields in production, operators in Norway are starting to turn off the taps early at fields approaching the end of their productive life. Following its decision to shut down the Volve field by end-2016, years later than its initial life expectancy, Statoil has announced it is also looking to shut its Veslefrikk oilfield. In contrast to Volve, however, the shutdown of Veslefrikk comes two years earlier than planned as production has slipped to 6 kb/d amid low oil prices. An application has been filed with the Ministry of Petroleum & Energy to halt

production in the second quarter of 2018, coinciding with a planned stoppage on the Oseberg field that shares its export route with Veslefrikk. Statoil is set to make a final decision on the shutdown of the field in the second half of 2017, with submission of a decommissioning plan presently scheduled for the first quarter of next year.

Poor economics led Repsol to shut down its small Varg field, which produced 5 kb/d in January, five years ahead of earlier plans. The FPSO is scheduled to leave the field by 1 August.

Similarly, ExxonMobil will retire its Jotun field five years early this October, meaning that Det Norske's Jette field, which is tied back to the Jotun B platform, will also cease production. Moreover, the Jette field has been producing mainly water in recent months with oil and gas recovery being hit by reservoir and under-performing well issues, effectively making the field no longer commercially viable. All supplies from the Jotun and Jette fields have been processed at Norway's Slagen refinery in recent years and they will now have to look at similar crude, like the Statfjord blend, to take its place.

Dong Energy intends to shut down its Oselvar field, more than a decade earlier than planned, and just five years after first oil in 2013. Dong has reportedly seen a significant decline in recoverable reserves as reservoir pressure has dropped faster than expected at Oselvar, and might be looking to use parts of the infrastructure at the Centrica operated Butch field the UK side. Dong is now looking to shut down Oselvar, which is currently producing only 2 kb/d, as early as 2018.

While current production of the these fields stood only at around 30 kb/d in January, their shutdown means that nearly 65 mboe will be left untapped, of which the Vette field contributes the majority. Perhaps more significantly longer term, however, is the delay and the potential risk to projects such as Snorre2040, which will extend the lifetime of the field by adding 200-300 mb of recoverable reserves, and the development of other major finds such as Johan Castberg.



Outside of Norway, first oil from Dong's Hejre oil project in Denmark has also been delayed from its scheduled start up in 2017. In its 2015 annual report released in March, Dong Energy announced that the project "continues to be in a challenging situation and that first oil in 2017 is no longer a likely scenario". Dong Energy and partner Bayerngas terminated the EPC contract for the production platform, holding the supplier consortium, consisting ofTechnip France and Daewoo Shipbuilding and Marine Engineering in breach of its contractual obligations. 

In the UK, field shutdown announcements have been so far been limited. One exception is A.P. Moeller-Maersk, whose oil unit has sought approval from UK authorities to shut the North Sea Janice field in the second or third quarter. UK lobby group Oil & Gas UK (OGUK) warns that the number of mature fields expected to cease output between 2015 and 2020 has jumped by 20% over the past year to more than 100.

Non-OECD

Latin America

Brazil - February actual: Brazilian crude and condensate production was largely unchanged in February, at just over 2.4 mb/d. For a second month running, supplies ran short of year-earlier levels as Petrobras carried out maintenance work at offshore installations. February output was 113 kb/d below a year earlier, slightly less than the 140 kb/d decline seen in January.

In February, Campos Basin output stood 280 kb/d below a year ago, more than offsetting gains in the Santos Basin, which includes the massive Lula and Saphinoa fields. The two fields produced 443 kb/d and 192 kb/d respectively, a combined 225 kb/d above a year earlier. Output at Roncador and the Marlim fields in the more mature Campos Basin meanwhile continued to see y-o-y declines, of 40 kb/d and 120 kb/d respectively.



Indeed, Lula output reached a new high in February. According to state regulator ANP, Lula is producing an impressive 24.5 kb/d per well on average, with some wells flowing at much higher rates (the best well flowed at more than 34 kb/d last December). Lula is currently producing close to 450 kb/d of oil from five FPSOs. The Cidade de Marica entered operations at the Lula Alto area in February and the Cidade de Itaguai is still ramping up. A sixth unit, Cidade de Saquarema, is on track to enter operations at Lula Central in the beginning of the second quarter. While it took Petrobras a little over 18 months to reach peak production at the first two FPSOs at Lula, the company achieved the same target in just 12 months with the third floater, and is already producing more than 80 kb/d at the Cidade de Itaguai FPSO just six months after first oil. Each unit is able to produce 150 kb/d.

Construction of the replica floaters for Lula South and Lula Extreme South is also progressing well according to Petrobras, and these units are on schedule to start production in 2017. The same applies  for the replica floater meant for Lula North in 2018. Petrobras has delayed the start of production at Lula West from 2020 until some point in the next decade.

Further ahead, Petrobras is pushing back by at least three years to beyond 2020 first oil production from the FPSO vessel to be deployed at the Atapu North field in the Santos basin pre-salt province. According to project partner Galp Energia, two FPSOs will be installed in the area formerly known as Great Iara in 2018, one unit in the Atapu South field and another in the Berbigao-Sururu field. However, the location of a third floater, originally meant for Atapu North, is now receiving further technical evaluation.

Colombia - February actual: According to preliminary data from the Colombian Ministry of Mines and Energy, oil production dropped by a less than anticipated 30 kb/d in February, to 955 kb/d.  Attacks on the state controlled Cano Limon pipeline reportedly halted crude throughputs through the 210 kb/d line for two weeks in February, and also protests occurred at the country's main export terminal. A full year production forecast of 940 kb/d slightly exceeds Bogota's output target for 2016 which was recently cut again amidst industry spending cutbacks. Ecopetrol, Colombia's largest producer, recently applied for permission to temporarily shut in production at its onshore Akacias field, just weeks after having suspended operations at the Can Sure heavy oil field.

Asia

Chinese production slows

China's domestic oil production is often overlooked, with attention focussed on crude oil imports, apparent demand and stock building. According to data from the National Bureau of Statistics of China (NBS) domestic output of crude oil in 2015 was 213 million tons, or nearly 4.3 mb/d on average, representing an increase of 1.7% compared with 2014. As such, China ranks as the world's fifth-largest producer behind Saudi Arabia, the US, Russia and Canada.



While still preliminary, recent data suggest oil production could be slipping fast. NBS traditionally releases only combined data for the first two months of the year because the weeklong Spring Festival holiday, which is based on the traditional lunar calendar and can fall in either month. Output for January and February averaged 4.16 mb/d, 75 kb/d less than over the same period a year earlier. Production is expected to continue on a downward trend in 2016 as China's major oil companies are adjusting to rising costs and lower prices.

Notably, PetroChina, the listed subsidiary of CNPC, announced that it expects its oil output to drop by 5% in 2016 as it plans to shut wells returning negative margins and slash capital expenditure on uneconomic upstream projects. According to its 2015 annual results released in March, China's largest producer plans to cut capex by 6.1% this year to Yuan 192 billion after a 32% drop last year. The company is also planning to cut the use of enhanced oil recovery techniques on ineffective wells both in China and at overseas operations. As such, CNPC's overall crude oil output is expected to fall to 2.52 mb/d 2016, from 2.66 mb/d in 2015. The company's domestic production declined by 2.1% in 2015, to 2.2 mb/d, with at least a further 3% or 60 kb/d cut planned this year to 2.16 mb/d. China's largest oilfield Daqing is expected to see output fall by at least 30 kb/d to 740 kb/d.

Sinopec, Asia's largest refiner, meanwhile, plans to cut capital expenditure by close to 11% this year, to $15.4 billion, following spending cuts of 27.4% last year. Nearly half of the budget is expected to be allocated to domestic oil and gas exploration and development projects. China's third-largest producer also said it plans to reduce its crude oil production by up to 5%, to 0.91 mb/d. Sinopec plans to cut its domestic production from 0.76 mb/d this year, down from 0.81 mb/d produced in 2015. The company announced last month that it would shut four marginal fields at the large Shengli complex in an attempt to stem losses. The average cost of production from the complex is $52/bbl. Output has fallen steadily to around 500 kb/d over January and February, compared with 550 kb/d at the start of 2015.

China National Offshore Oil Corp, CNOOC, which surpassed Sinopec as China's second largest oil producer last year expects to cut spending by another 10% this year after having slashed spending by 38% in 2015. The company lowered its oil and gas production target for 2016 - the first such cut in recent years. CNOOC said it aims to produce 1.28-1.33 mboe/d in 2016, compared with 1.36 mboe/d in 2015 as fewer new fields are expected to be brought on line compared with earlier years. CNOOC is expecting output from new four new fields commissioned in 2016 to add 28 kboe/d, compared with 117 kboe/d added last year. CNOOC saw its domestic crude production increase by 20% last year to 886 kb/d, and expects 2016 output of 860 kb/d.

The forecast for Chinese oil production has been cut by 85 kb/d since last month's Report, to 4.2 mb/d, a decline of 135 kb/d compared with 2015.

Africa

Production from Ghana's Jubilee field - operated by Tullow Oil - was expected to resume around 22 April, almost five weeks after force majeure was declared due to a technical hitch at the FPSO facility. The company's 80 kb/d Tweneboa, Enyenra and Ntomme (TEN) project is expected to start up in July or August, lifting total oil production in Ghana to 175 kb/d by year-end.

A reassessment of historical production from Gabon, Congo and South African coal-to-liquids plants lowered the output for the period of 2013-2015 by a combined 30-60 kb/d.

Former Soviet Union

Russia - February actual, March provisional: After posting a marginal decline a month earlier, preliminary statistics released by the Central Dispatching Unit, the statistical arm of the Russian Energy Ministry show Russian crude and condensate output inched higher still in March, reaching yet another record high of 10.91 mb/d.

The latest production statistics showed that companies categorised by the ministry as "small producers" were behind the higher production total, accounting for an increase of 1.5% to 1.16 mb/d in March. An 11.9% rise in output from joint ventures with foreign oil companies, to 357 kb/d, also contributed to the increase in total production. Meanwhile, output from major Russian oil companies fell last month, led by a 0.7% output decline at world's biggest listed oil producer Rosneft. Output at Lukoil and Surgutneftegaz edged down by 0.1%. Both Rosneft and Lukoil have announced plans to keep production unchanged this year after falling by 0.9% and 1.1%, respectively, in 2015.



Sustained output growth is coming on the back of determined efforts to pump as much oil as possible to offset the impact of low oil prices. According to Sberbank, development drilling expanded 11.7% y-o-y in the two first months of 2016, with growth ranging from 40-50% at Rosneft, Slavneft and Tatneft to 70% at Bashneft. In contrast, Lukoil drilling was 40% lower than a year earlier, though from a high 2015 base.

The annual rate of decline from mature West Siberian fields remains relatively high at 3%, however, suggesting companies could struggle to hold production steady and avoid output declines. Lukoil has been unsuccessful in stemming output decline in Western Siberia, while Rosneft output has held up somewhat better. March production at Yuganskneftegaz was only 1% lower y-o-y, following a 3.2% decline in 2015.

Leading oil producers, including Russia, are due to meet in Doha on April 17 for talks on a prospective oil output freeze. Currently it is suggested that that output will be frozen at January levels, slightly below the most recent production levels, which saw Russian output reach highs not seen since 1987. Russian Energy Minister Alexander Novak said that the high level of production seen in March would not be an obstacle to the expected agreement on a production freeze, local news agencies reported.

Kazakhstan - February actual: For the second month running Kazakh crude and condensate production held steady in February, at nearly 1.6 mb/d,  57 kb/d below year-earlier levels. Kazakhstan's oil output is set to decline this year for the third year in a row due to spending cuts by some local producers in the face of lower crude prices as well as delays in launching commercial output at the huge Kashagan field.

Production at Kashagan was halted shortly after the initial launch in 2013 because the pipes connecting it to an onshore processing plant were leaking gas. State oil company KazMunayGaz, meanwhile, recently said that Kashagan field will re-start production in October. The history of chronic delays and uncertainty surrounding the replacement of the pipelines lead us to maintain our forecast of an early 2017-startup in for the time being. The first phase of the project is expected to produce up to 370 kb/d once it is fully operational.



Azerbaijan - February actual; Azeri production was relatively unchanged in February, standing 40 kb/d below a year earlier at 830 kb/d. Azeri output is forecast to drop by 40 kb/d for the year as a whole to just over 800 kb/d.

FSU net oil exports eased to 9.83 mb/d in February after hitting a ten-month high in January, with weaker product exports offsetting higher crude volumes, as spring refinery maintenance began. Crude exports increased by 200 kb/d on the month, led by seaborne loadings, particularly from the Baltic and BTC terminal at Ceyhan. The Black Sea saw volumes from Novorossiysk decrease due to storms. Shipping data suggests that volumes picked up in March to their highest level so far in 2016, helped by Russian production inching up again and as refinery maintenance intensified.

Refinery shutdowns dragged product exports down by more than 500 kb/d in February weighing particularly on fuel oil output, which dropped by more than 30% compared to January. Fuel oil was disproportionately affected as maintenance affected primarily simpler refiners, notably Rosneft's Tuapse plant. The bulk of the reduction came from ports in the Baltic and in the Black Sea.


Stocks

Summary

  • Commercial stocks in the OECD continued their relentless rise and built counter-seasonally by 7.3 mb in February to end the month at 3 060 mb. Accordingly, the overhang of inventories against average levels widened to 387 mb at end-month.
  • Despite drawing by a shallow 11.5 mb in February, refined products holdings remain comfortable, covering 33.5 days of forward demand by end-month, 3 days above the year earlier level. Following steep builds in 2H15, middle distillate stocks remain ample,  100 mb above one year earlier, with warmer than average Northern hemisphere temperatures so far in 2016 resulting in lacklustre space heating demand. 
  • Preliminary data for March suggest that OECD inventories built for a thirteenth consecutive month, adding 11.1 mb as a build in crude - centred in the US - more than offset a draw in refined products.
  • A number of terminals in the OECD region have recently reopened, or are due to reopen over coming months will alleviate storage capacity concerns. The largest of these is the 32 mb Limetree Bay terminal in the US Virgin Islands.

Global Overview

While much attention has been paid to stocks of crude oil over recent months, what is becoming clear is that stocks of middle distillates are more than ample which could negatively affect refinery economics in coming months. So far this winter, warmer-than-average temperatures in parts of the northern hemisphere have kept a lid on space heating demand which has seen OECD middle distillates inventories remain at close to record levels. By end-February, they stood 78 mb above average. Meanwhile, Chinese gasoil inventories surged by over 1 mb/d in February with refiners pushing extra product into an already  saturated market as they struggle to keep pace with robust domestic gasoline demand. At the same time, middle distillate inventories in Singapore remain well above average. With refiners needing to hike gasoline production in 2Q and 3Q, especially in the US, middle distillates stocks will likely rise further. If markets remain saturated, then high stocks could well see gasoil and diesel cracks come under further pressure.

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

Commercial stocks in the OECD continued their relentless rise and built counter-seasonally by 7.3 mb in February to end the month at 3 060 mb. Accordingly, the overhang of inventories against average levels widened to 387 mb at end-month. Stocks were driven upwards by crude oil holdings which added 20.1 mb with approximately two thirds of this accounted for by the OECD Americas.

Despite drawing by 11.5 mb in February, refined products holdings remain comfortable covering 33.5 days of forward demand by end-month, 0.2 days and 3.0 days above end-January and one year earlier levels, respectively. These ample stocks have weighed heavily on product prices across the barrel over recent months. The monthly draw was far shallower than the 34.8 mb five-year average draw for the month and came against the backdrop of warmer than average winter weather in parts of the northern hemisphere that heavily impacted on demand. Consequently, middle distillate stocks only slipped by 4.4 mb, far less than the 18.9 mb average draw for the month. These stocks have built sharply over the last nine months and at end-February stood nearly 100 mb above one year ago, although short of record levels in both absolute and days of forward demand terms.

Getting the balance right

This month, the Miscellaneous to balance line item for 2015 in Table 1 of this Report is revised down by 0.2 mb/d compared to the figure presented last month. This revision stems from an upward adjustment to global demand and a smaller downward adjustment for global supply, both heavily focussed on Africa.

The Miscellaneous to balance item displays the difference between observed supply and demand, having taken account of observed OECD inventory and shipment changes and is used as a check on data integrity. Historically, the item averages less than one percent of global demand and the 0.6 mb/d figure for 2015 falls well within this range. The recent positive bias could represent timing differences between crude supply and product demand, understated demand, overstated supply or that non-OECD inventories are building.

Reliable, timely information on non-OECD inventories is scarce which, for the moment, prevents this Report from including a specific line item in Table 1 to account for non-OECD inventory changes. Nonetheless, over the last few years, this Report has tracked and discussed non-OECD stock changes in a number of key economies. This analysis has shown that over the past decade, non-OECD stocks have built as downstream and midstream infrastructure has expanded. This expansion was necessary, as the region, especially non-OECD Asia, has become the engine for global oil demand growth. This trend accelerated in 2015 as crude and products markets moved into contango and oil prices fell.

Much of the Miscellaneous to balance for 2015 is attributable to oil stocks building in a number of key non-OECD economies; China, for example, accounted for approximately two thirds of the total build, with crude entering newly-commissioned SPR tanks and both crude and products being stored at recently completed refineries and at unreported commercial storage sites. Elsewhere, official information becomes rarer but market intelligence suggests that stocks built at a number of commercial sites in South East Asia, notably in Malaysia and Indonesia, capturing 'spill over' from the Singapore storage hub. Meanwhile, India filled the first of its crude SPR sites and commissioned the 300 kb/d Paradip refinery at year-end.

Our Report must also contend with historic data revisions, from OECD and non-OECD countries that can change the oil market balance significantly as final data are often published with several months and even years delay. The IEA is continually working with colleagues in other agencies to improve data accuracy across the oil balance but, inevitably, at times it is difficult to reconcile demand and supply gaps with observed stock numbers, especially when, as now, oil supply is considerably in excess of demand.

Despite warmer than average temperatures in the US Midwest, stocks of 'other products' drew (-12.2 mb) in line with seasonal trends, as space heating demand for propane likely remained seasonally high. Fuel oil holdings increased counter-seasonally in the OECD Americas and Europe, against the backdrop of weakening prices and closed arbitrage opportunities to ship product to Asia. Gasoline inventories inched up counter-seasonally by 0.4 mb and by end-month, inventories stood 11 mb and 25 mb above last year and the five-year average, respectively, with demand cover standing at 29 days.

February data were revised upwards compared to preliminary estimates presented in last month's Report that indicated that stocks drew for the first time in a year in February. This stemmed from a steep build in Korea (13.8 mb) for which data were previously unavailable while European stocks came in slightly higher. Upon the receipt of more complete data, January inventories were also revised upwards by 19.5 mb with the bulk of the adjustment being made to European inventories (+15.1 mb) as stocks in the Netherlands, Italy and France were higher than previously assessed.

Preliminary data for March suggest that OECD inventories have continued to build, adding 11.1 mb by month-end. Although this was broadly in line with seasonal trends, crude increased by a weak 12.5 mb, compared to the 30.6 mb five-year average build for the month while refined products fell by a slight 2.2 mb, far less than the 19.2 mb seasonal draw. The build in crude was centred in the US where refinery throughputs remained seasonally due to maintenance and imports remained relatively high. Elsewhere, European oil stocks dropped counter-seasonally by 7.3 mb as crude bucked seasonal trends and dropped by 5.1 mb while products fell by a relatively weak 2.2 mb. In contrast, stocks in Asia Oceania adhered to seasonal trends and built by 7.5 mb, led by crude.

Recent OECD industry stock changes

OECD Americas

Industry inventories in the OECD Americas rose counter-seasonally by 5.1 mb in February after a 14.8 mb increase in crude oil holdings, more-than-offset a 10.6 mb draw in refined products. By end-month, inventories stood a record 271 mb above average with crude oil accounting for over 150 mb of the surplus. The build in crude came as refinery throughputs dropped to a seasonal low during peak maintenance and as imports, especially from West Africa, rose as the WTI - Brent spread remained narrow.



Refined products drew by approximately half of the seasonal decrease for the month. The fall was centred in 'other products' (-13.3 mb) with propane demand likely remaining high from both residential consumers and the petrochemical industry. Both middle distillates and fuel oil posted counter-seasonal builds of 2.8 mb and 2.5 mb, respectively while gasoline holdings followed seasonality and fell by 2.6 mb. At end-month, demand cover fell by 0.4 days to 32.0 days but remained 3.0 days above February 2015.

Commencing with this Report, 1 mb of previously unaccounted for gasoline inventories have been added to government holdings in the United States. These account for volumes contained in the US Northeast Gasoline Supply Reserve, established following the logistical difficulties encountered in the aftermath of Hurricane Sandy. The gasoline is stored at 3 sites; New York Harbour (0.7 mb), Boston (0.2 mb) and Maine (0.1 mb). Historical data contained in the Monthly Oil Data Service have been revised back to the establishment of the reserve in August 2014.

Preliminary weekly data from the US Energy Information Administration (EIA) point to US inventories posting a further 10.8 mb build in March - in line with seasonal trends. Crude oil increased by 11.0 mb with a further 0.8 mb build coming from NGLs and other feedstocks. The build in crude was centred in PADD 3 (the Gulf Coast) where refinery throughputs remained seasonally low due to planned maintenance. Stocks at the Cushing, Oklahoma storage terminal (the delivery point of the NYMEX WTI contract) remain stubbornly high and by early April exceeded 66 mb, keeping NYMEX WTI under downward pressure.

Refined products inched down by 0.9 mb, considerably weaker than the 8.1 mb five-year average draw for the month. The draw was tempered by a sharp 8.6 mb build in 'other products' as residential demand for propane tailed off. Additionally, middle distillates stocks increased counter-seasonally by 1.7 mb as stocks of ULSD and kerosene built. By end-March, ULSD holdings stood 34 mb above one-year earlier, with 23 mb of the difference being located in PADD 1 (the Atlantic Coast).



Reports suggest that the shuttered Hovensa refinery at St Croix on the US Virgin Islands will reopen in April as a storage facility to be renamed Limetree Bay Terminal. It was closed in 2012 and purchased in January 2016 by ArcLight Capital Partners and Freepoint Commodities. When fully opened, the terminal will have approximately 32 mb of capacity available for the storage of refined products and crude oil. Reportedly, 10 mb of tankage has already been leased by Sinopec on a long-term basis. As a US territory, stock changes in the Virgin Islands are not included in US official stock numbers. Nonetheless, during coming months we will estimate stock changes at Limetree Bay based on shipping information. At the time of writing, tanks were empty with no vessels having called at the facility since January 2015.

OECD Europe

Commercial stocks in OECD Europe built counter-seasonally by 4.0 mb in February after refined products increased by 3.3 mb while NGLS and feedstocks rose by a combined 1.8 mb which more than offset a 1.1 mb draw in crude oil. This saw inventories end the month 87 mb above average. Considering that regional refinery runs dropped by 140 kb/d on the month, this would suggest that imports of both crude and products remained strong.



The increase in refined products was led by motor gasoline (+3.5 mb) and fuel oil (+2.3 mb). Gasoline built limited opportunities to ship product to the US and West Africa. A similar picture prevailed for fuel oil, where inventories grew as the arbitrage window to ship product to Asia remained closed for much of the month. Middle distillates fell by 2.5 mb, less than half the average draw for the month, as winter heating demand remained lacklustre amid warmer-than-average winter temperatures. Indeed, this saw German consumer heating oil stocks increase in February, a month when they would normally draw.

Preliminary data from Euroilstock suggest that inventories in EU15 + Norway drew counter-seasonally by 7.3 mb in March. The fall was led by crude (-5.1 mb) as a number of Mediterranean countries posted draws. Meanwhile, refined product holdings declined by 2.2 mb as all product categories dropped. Additionally, reports suggest that stocks of refined products held in independent storage in Northwest Europe remain close to record levels. This continues to impact tanker traffic with a number of vessels anchored offshore waiting to discharge into the region's main hubs.

UK midstream company Greenergy has announced the opening of an oil storage depot on the site of the closed Coryton refinery on the Thames estuary. The plant, previously owned by Petroplus, was closed permanently in early 2013 and the new terminal will be used for the supply of fuel to Southeast England, including London. It will have an initial capacity of about 1.2 mb used for storing mainly middle distillates and will be expanded by an extra 0.4 mb, likely to be completed by September. 

OECD Asia Oceania

In contrast to other OECD regions, commercial holdings in OECD Asia Oceania followed seasonal trends and drew by 1.8 mb in February after a 4.2 mb fall in refined products outweighed a combined 2.5 mb build in crude oil, NGLs and other refinery feedstocks. There were diverging trends in crude oil inventories in Japan and Korea; while Japanese inventories drew by 15.5 mb as refinery runs rose and imports fell back, Korean inventories added 13.8 mb as imports surged by close to 15%, which more than offset the impact of higher runs. In terms of days of forward demand, refined product inventories are not as comfortable as in other OECD regions; at end-month they covered 20.7 days, 0.6 days above end-January and 0.9 days higher than one year earlier. In absolute terms, product inventories remain in line with average levels.



Preliminary data from the Petroleum Association of Japan (PAJ) suggest that Japanese stocks rebounded by 7.5 mb in March. The build was driven by crude oil holdings, which rose by 6.6 mb; data also show that crude runs were hiked by a further 200 kb/d suggesting that crude imports increased. As refinery activity rose, stocks of refined products inched upwards by 0.9 mb. Fuel oil added 1.2 mb, middle distillates fell by 0.2 mb while stocks of motor gasoline and 'other products' remained largely flat. By end-month, Japanese total oil stocks stood at an 11.5 mb deficit to average levels, with all inventories except fuel oil standing below average.

Recent developments in non-OECD stocks

According to data from International Enterprise, land-based refined product inventories in Singapore drew by 3.6 mb in March to stand at approximately 53 mb at end-month. Despite the monthly draw, stocks hit a record 58.4 mb in mid-March, led by surging residual fuel oil holdings. These stocks rose as arrivals from Iran and Europe increased, before drawing steeply over the final two weeks of the month as imports fell back. Consequently, stocks hit 30 mb for the first time before falling back to 25 mb by end-month. Light product holdings also remain at near-record levels, although arrivals from Europe tailed off at end-March as the arbitrage window shut, offsetting low import demand from Japan.

Information published in China Oil, Gas and Petrochemicals (China OGP), indicate that Chinese commercial product inventories surged by an equivalent 27.3 mb (data are reported in terms of percentage stock change) in February, the steepest build on record,  after gasoil holdings soared by 30.3 mb, kerosene added 1.3 mb and gasoline fell by 4.3 mb. The increase in gasoil holdings to record levels (110 mb) comes as Chinese refiners recently hiked gasoil production in tandem with gasoline output as they struggle to keep pace with domestic demand for the latter product. Considering the softness of global middle distillates markets amid high stocks in key terminals, and warmer-than-average winter temperatures in many parts of the northern hemisphere, this large stock build in China could suggest that Chinese refiners are having trouble finding export markets for excess gasoil. Indeed, although gasoil exports rose in January to 200 kb/d, they remain below the record levels attained in 4Q15.

Chinese commercial crude inventories added an equivalent 2.4 mb in Feb as crude imports hit a record 8.0 mb/d. Deliveries from Saudi Arabia remained at near-record levels while imports from Angola, Russia and Oman also remained high. Much of the increase was driven by independent refiners, holding newly-distributed import quotas, reportedly increasing their buying. The sharp increase in imports also saw crude supply (net imports plus domestic crude production) outstrip officially reported refinery runs for the tenth consecutive month, which suggests an unreported stock build of 43 mb (1.5 mb/d). Preliminary indications for March suggest that Chinese national crude stocks could have risen further but the pace of builds would likely be lower than February.



Data from the Joint Organisations Data Initiative (JODI) suggest that Saudi Arabia increased its crude oil stocks by a slight 17 mb (50 kb/d) between January and December 2015, a period when it ramped up crude production by 0.6 mb/d, which suggests that almost all of the production increase was exported immediately. However, in January 2016, crude stocks drew by a steep 11.4 mb/d (370 kb/d), the largest draw since May 2011 as crude exports hit 7.8 mb/d and refinery runs came close to record levels. Indeed, despite the commissioning of the YASREF refinery at Yanbu, Saudi product stocks remained remarkably level over 2015 increasing by a slim 3 mb over the year, underlining the export orientation of the plant.

Recent developments in floating storage

Data from EA Gibson shipbrokers suggest that volumes of crude oil held in tankers increased by nearly 7 mb in March to about 79 mb by end-month. The increase was led by volumes of crude held in the Middle East as two VLCCs were added to the fleet moored in the region storing Iranian condensate while one VLCC was added in Asia Pacific. On the product side, brimming fuel oil and light product inventories in Singapore have seen market participants forced to store product on tankers due to a lack of available tank space with these seen as demurrage rather than floating storage. At the time of writing, at least four vessels holding products appeared to be engaged in the activity but considering that time spreads in product markets are less than levels required to cover storage costs, this is likely due to logistical rather than speculative reasons.


Prices

Summary

  • Crude oil prices rallied to a four-month high approaching $45/bbl in mid-April as further evidence emerged of accelerating declines in US output and market participants held out hope that upcoming producer talks would agree a deal to help manage a still massive supply overhang. A weaker US dollar also lent support. At the time of writing, Brent was at $44.30/bbl and US WTI was at $41.75/bbl.
  • North Sea Dated Brent rose on the perception of tighter supplies during summer maintenance while WTI gained ground compared to Brent as US refiners ran flat out. West African sales to China neared record levels, with independent refiners drinking in Angolan grades. Robust supplies of Urals pressured the Russian grade in the Mediterranean.
  • Spot product prices followed crude prices higher in March with all the major products across all surveyed markets posting double digit price increases in percentage terms. Nonetheless, considering the strengthening in crude prices, cracks were mixed with any increases posted being minor. Moreover, while gasoline cracks remain on par with year-ago levels, those for middle distillates are languishing at about half that of a year earlier, weighing refinery margins down.
  • Crude volumes loading in the Middle East Gulf headed to East Asia seesawed through the month. Total sailings remain strong, and just an inch off February record 16.8 mb/d loaded, according to Lloyd's List Intelligence data.

Market overview

Crude oil prices strengthened into mid-April - reaching a four-month high approaching $45/bbl - on more signs of hastening declines in US supplies after still more rigs were taken out of action and high hopes that a producer meeting on 17 April in Qatar would agree a deal to limit production. If a deal is struck, however, it is unlikely to speed up a rebalancing of the oil market - especially during the first half of the year. A weaker US dollar is also propping up oil prices as it makes purchases of dollar-denominated oil cheaper for countries using other currencies. A plan by thousands of oil and gas workers in Kuwait to go on strike from 17 April lent further support, although a Kuwaiti official said production and exports would not be affected. ICE Brent was last trading at $44.30/bbl. US WTI was at $41.75/bbl.

The ICE Brent contango structure, where prompt oil is cheaper than future months, nearly vanished in early April after holding steady at a discount of -$0.65/bbl during February and March. The prompt month contract is flirting with backwardation - when prompt oil is more expensive than future months - finding support from summer maintenance that will tighten North Sea crude supplies.



As for NYMEX WTI, with US refiners running flat out and domestic supply tightening, the discount of prompt-month to second-month WTI narrowed to -$1.52/bbl in March compared to -$1.98/bbl in February. On forward curves, the WTI M1-M12 spread shrank to -$5.85/bbl in March from -$9.71/bbl in February in anticipation of tighter US supplies. The Brent M1-M12 contract spread narrowed to -$5.01 /bbl in March versus -$6.88/bbl in February due to expectations of lower North Sea supply during upcoming maintenance.



ICE Brent futures rose by $6.26/bbl, or 19%, from February to an average $39.79/bbl during March. NYMEX WTI gained $7.34/bbl to average $37.96/bbl, up 24% from February.

Spot crude oil prices

North Sea Dated Brent rose on the perception of tighter supplies during summer maintenance, although the prompt market was amply supplied. The steady shipment of Forties crude into Asia ground to a halt due to lacklustre demand from South Korea - which has been the biggest importer of the UK grade. Its discount to Dated Brent, however, was unaffected and held at around $0.30/bbl. North Sea supplies from May, however, are set to tighten due to slower loadings of the four benchmark grades - Brent, Forties, Oseberg and Ekofisk - that are reportedly set to fall to a nine-month low of 910 kb/d. The reduced flows come ahead of scheduled summer oil field maintenance that will further tighten supplies.



Of the global benchmarks, US WTI posted the strongest month-on-month (m-o-m) performance in March, rising $7.38/bbl to $37.76/bbl as more drilling rigs were taken out of action. North Sea Dated Brent climbed $6.03/bbl over February to average $38.49 /bbl for the month. Russian Urals gained $5.99 /bbl m-o-m to average $36.85 /bbl in March. Middle East Dubai rose by a similar amount to average $35.12/bbl in March.

West African crude sales to China are due to breach 1 mb/d during April due to heavy buying from Angola. Demand from China is expected to remain strong for West African cargoes loading in May, which will arrive in June following seasonal refinery maintenance. The narrow discount of US WTI to North Sea Brent and lower domestic production are meanwhile luring more Nigerian cargoes into North America and supporting differentials. The premium of Qua Iboe to Dated Brent has risen to $1.20/bbl versus $1 /bbl during the previous month. Although US imports of Nigerian crude are significantly below the 1 mb/d level of five years ago - before the LTO boom - purchases have risen above 500 kb/d.



Demand for crude oil was sluggish in Asia, currently in refinery maintenance, and the contango structure in the Dubai market widened out as a result. Higher supplies of Russian Espo, which competes with Abu Dhabi's Murban, pressured the grade and its premium to benchmark Dubai has sunk to $2.50/bbl for May-loading cargoes from around $4.50/bbl for April loadings. May-loading spot cargoes of sour Murban crude from the UAE traded at a discount of around $0.45/bbl to official prices, weakening along with the arrival of additional supply after the Murban development came out of maintenance. Despite the softer market in Asia for light crudes, Saudi Aramco raised its official formula price for Arab Extra Light for May loading by $0.15/bbl to $1.80/bbl above the Dubai/Oman average.

Saudi prices to the US strengthened for all grades, with the biggest rise on Arab Extra Light, which increased by $0.75/bbl. WTI gained ground against Brent, reflecting higher US refinery runs and a tighter crude balance. WTI could gain more support as US refinery maintenance in April has been reduced. An outage along TransCanada's 590 kb/d Keystone pipeline widened out Canadian heavy crude differentials.

Reflecting weakness in the Mediterranean sour market, Saudi Aramco cut its differentials for medium and heavy crude grades in its latest European official selling prices (OSPs) for May. Rising supplies of Urals pressured the Russian grade in Northwest Europe. Urals exports in May are expected to decrease as Russia comes out of refinery turnaround season.


Spot product prices

Spot product prices followed crude prices higher in March with the major products across all surveyed markets posting double digit price increases in percentage terms. Nonetheless, considering the strengthening in crude prices, cracks were mixed with any increases posted being minor. Gasoline cracks remain on a par with a year ago while those for middle distillates are languishing at about half of year ago levels as inventories remain stubbornly high. In turn, this is proving to be a millstone for refinery margins.

Gasoline prices in surveyed markets experienced a sharp rebound in March buoyed by the switch to summer grade product. Prices on the US Gulf Coast soared on tight supply for winter-grade product as refiners turned their attention to producing the more expensive summer grade. Consequently, stocks fell with data suggesting that on a national level they drew by about 9 mb over the month. Price increases were more acute for Regular Unleaded which surged by 30%. By end-March, spot prices for Premium Unleaded stood at nearly $65/bbl, their highest since November 2015 with cracks standing at levels not seen since end-Summer 2015.

In Europe, gasoline prices increased by about 11% on a monthly average basis, despite exports to the US Atlantic Coast remaining low for much of the month. Also there are persistently high stocks, notably in the key ARA region. One bullish factor came from a surge in import demand from Nigeria, which remains mired in a gasoline supply shortage. Meanwhile, market intelligence suggests that the supply of cheaper winter-grade product remained tight with prices soaring at-end March as the arbitrage to ship product westwards widened. Accordingly, by early April, prices stood at levels not seen since end-2015. Although, due to the recent strength in crude prices, cracks in both the Mediterranean and Northwest Europe declined on a monthly average basis to about half of the levels posted at the turn of the year.



Naphtha prices strengthened steadily in March and by end-month cracks had returned to positive territory in all markets. Despite the arbitrage to Asia remaining closed for much of early March, European naphtha prices increased by close to 20% while cracks firmed to stand at $2.50/bbl by end-month. Upward momentum came from consecutive regional stock draws and higher gasoline blending demand with more naphtha being required to replace previously-used butane. Additionally, demand from the European petrochemical industry remained high. A similar pattern was noted in Asia where petrochemical demand, especially in Korea and China, remains high. Accordingly, Singapore prices rose by about 15% but regional cracks slipped on a monthly average basis after being outstripped by gains in Dubai. Nonetheless, cracks remained firmly in the black by early-April at over $7.00/bbl, with the high spot prices sufficient to reopen the arbitrage to ship product to Asia from Europe and the Middle East.



ULSD prices in Europe maintained their upward trend despite the lack of a prolonged cold weather event and healthy imports from refiners in the FSU, the US and East of Suez markets which has seen stocks at key terminals remain persistently high. Prices increased in the US by less than elsewhere as preliminary data indicate that exports of ULSD abruptly fell while stocks remained flat rather than followed their usual seasonal trend downwards. Considering the relative strength of LLS, ULSD cracks slipped on a monthly average basis. Furthermore, despite cracks in Europe and Singapore firming, they still remain at about half the levels of one year ago, weighing on refinery margins.



Kerosene prices increased less than for other middle distillates in all markets with high stocks and closed arbitrage windows tempering gains. In Europe, kerosene inventories reportedly remain high in key North Sea terminals with vessels storing product offshore until tank space becomes free. Meanwhile, in the US, (LLS) cracks fell to their lowest level in several years, barely in positive territory, as stocks continue to climb counter-seasonally as exports have declined.



Residual fuel oil cracks remained weak in March as, despite spot prices increasing over the month, crude prices increased by more. Prices in Singapore remain under pressure from stubbornly high stocks and relatively high imports from the Atlantic Basin although imports dropped off in the second half of the month after arbitrage economics were eroded by an uptick in freight rates. Reports also suggest that despite Asian bunker demand remaining low, upward pressure is being put on Asian fuel oil prices from an increase in demand from utility companies who are burning fuel oil rather than more expensive natural gas.


Freight

Very-large-crude-carriers loading in the Middle East Gulf (MEG) headed to East Asia seesawed through the month. Total sailings from the Gulf remain strong, and just an inch off February's record 16.8 mb/d loaded, according to Lloyd's List Intelligence data. The breakdown of record-high Chinese crude imports of 8.9 mb/d in February shows a record 3.9 mb/d coming from Middle Eastern countries. Delays of up to two weeks in the East caused hiccups in shipping availability, injecting volatility into freight rates as the market was squeezed. Charterers quickly reacted to spikes to over $15/t by splitting VLCC cargoes into two Suezmax stems, thus capping rates, according to multiple reports.



The National Shipping Company of Saudi Arabia (Bahri) has announced the securing of financing to commission five more VLCCs, which would bring the total up to forty-one.



Overall volumes loaded in West Africa remain at a record-low, as the Forcados terminal remains offline. Angola's shipments increased, supported by Chinese buying, and provided some offset for eastbound flows, but overall shipments from the region were down about 250 kb/d on the month, dragged down by Nigeria. Transatlantic shipments took the hit, largely on lower volumes to the US, supported by narrowing LLS differentials. Canadian refiners took advantage of some of the slack in US intake, drawing in a record 270 kb/d from West Africa in March. The freight market drew some strength from MEG VLCCs but closed flat as owners and charterers were in balance. Subdued liftings left freight rates on the Suezmax WAF - UKC benchmark route sitting at their lowest in more than a year, flirting with the $10 / t mark.

Aframaxes in the North Sea and Baltic had a very subdued start as inquiry for cargoes remained subdued and tonnage well supplied. Freight rates shot up in mid-month, on cancellation of late running ships in the Baltic. A very strong April loading schedule was published for both Primorsk and Norway.

In South-East Asia, a number of ships were reportedly taken on timecharter and for short-term storage. The price support from storage was short lived, and the rate settled back by month-end. In the North-East, the Chinese Kozmino buying spree seems to be over, as independent refineries reportedly stocked up on ESPO crude, whose lower sulphur content is more suitable for less complex plants. The ESPO-Dubai premium touched $7/bbl in Feb, prompting the freight rate up to $1.2/bbl, the highest in 2016 so far. The rates eased later as volumes retraced.



Product trading West of Suez reached new lows, particularly on the benchmark UK - US Atlantic route, which saw two-year lows, as PADD1 gasoline inventories continue to rise, closing arbitrage opportunities to Europe. Demand for gasoline in West Africa drew in some cargoes from the UK Continent and provided some support for rates.

East of Suez, rates for Long-Range naphtha cargoes on the MEG - Japan route gradually found some strength, bouncing back from their lowest levels in a decade, as inquiry picked up. Rates remain under pressure as tonnage is abundant. Owners reportedly considered switching into the stronger Aframax market. Weakness in the clean MR market also prompted charterers to load onto smaller vessels. The softer tone also spilled over to larger vessels.

Refining

Summary

  • 1Q16 estimate for global refinery runs were revised up by 0.2 mb/d to 79.3 mb/d since last month's Report, 1.2 mb/d up on year-on-year (y-o-y), with better than expected January actuals and a higher forecast for March runs as maintenance shutdowns are now expected at slightly lower rates.
  • The forecast for 2Q16 throughput is similarly revised higher by 0.27 mb/d, reaching 79.7 mb/d. Unlike 1Q16 runs though, y-o-y growth in 2Q16 throughput shows a slowdown compared to demand growth as high product stocks and lacklustre margins in some key regions discourage more intensive refining. 
  • Refinery margin trends diverged once again in March, in line with historical seasonal patterns. Indicative US margins both midcontinent and Gulf coast improved last month, as the region is getting ready for a seasonal demand boost for gasoline in 2Q, while European and Singapore hubs showed further deterioration in margins with the conclusion of the heating season. 

Global refinery overview

The picture of 1Q16 refinery activity is getting clearer even though the actual reported numbers are far from complete for March (see chart). By the time the Report is finalised, reasonably good estimates for the previous month are available for the US and Japan among OECD countries, and Russia, and, occasionally, China, among non-OECD countries. These four countries collectively account for about 45% of global runs.

Mostly finalised January data shows a remarkable 2 mb/d y-o-y growth, with two-thirds coming from the non-OECD. Though still preliminary, the estimate for 1Q16 runs is revised higher to reflect somewhat firmer runs in the US, and, among non-OECD countries, lower than expected maintenance outages in Asia.  Publicly available information shows less peak maintenance this spring compared to last year.

Discretionary run cuts, while occasionally mentioned in the press, do not seem to have had much impact. The net result is that 1Q16 runs are now estimated at 1.2 mb/d higher than last year, in line with demand growth. OECD runs grew by 0.2 mb/d y-o-y thanks to US gains, while non-OECD ramped up by an impressive 1 mb/d, which, however, falls short of their collective 1.5 mb/d y-o-y demand growth.

Our forecast for 2Q16 throughputs is also revised higher by 270 kb/d, to reach a more modest 750 kb/d y-o-y growth, which is below the expected headline demand growth of 1.1 mb/d. With publicly reported shutdowns significantly lower for 2Q this year compared to last, indicating possible upside revisions in the coming weeks, it would seem that the most likely direction for potential revisions of 2Q16 runs is lower. A more bullish outlook for 2Q16 is constrained by either lacklustre margins, such as in Europe, or high product stocks, such as in the US and China.

In our first look into 3Q16, our estimate for July shows a higher y-o-y change of 1.2 mb/d, with global runs expected to cross the 81 mb/d mark for the first time.





Margins

In March, crude prices moved higher by about $5-7/ bbl on average, indicating further pressure on refinery margins that were already suffering from a stocks overhang. Margins moved lower in the European and Singapore hubs, while US refiners saw better economics. Our current methodology, based on transparent trading hub prices, does not quite capture the margins that the vast majority of non-OECD refiners are exposed to, but anecdotal evidence suggests that in India and China, for example, where both crude oil and products trade, as well as pricing, are mostly regulated, local refining margins continue to thrive.

Among the losers, European refiners were the worst affected as March average Brent cracking margins were just half of the January levels. European distillate cracks did manage to firm slightly compared to February as refinery maintenance had a small nominal impact. The flat price increase had the symmetrical (i.e. opposite) effect on fuel oil cracks. Gasoline cracks on a monthly average basis drifted lower in March, but, having started the month at the lowest levels for the past 15 months, they more than tripled towards end-March, contributing to a visible uptick in margins.



In the US, midcontinent margins further improved after rebounding from early February lows, while the Gulf coast saw their year-to-date lows in early March, but recovered to register month-on-month (m-o-m) gains.

In Singapore, hydrocracking margins had posted small losses in March, but simple refining margins based on Dubai were negative for the first time since October.  

Seasonality: not so certain any more

Life used to be quite simple for OECD refiners serving markets mostly located in the temperate latitudes of the northern hemisphere. In winter, they produced gasoil (and partially, kerosene) for heating; in summer, they produced gasoline for driving. Across the Atlantic Basin, and in the Pacific, refiners were dealing with predictable demand patterns. Borrowing a phrase from the fuels blending business, margins had predictable drivers: cetane in winter, octane in summer. However, things are changing, and previous seasonal patterns do not necessarily hold up any more. In the March Report, we discussed the emerging new pattern of 1Q-2Q demand changes that, with the growing importance of non-OECD demand, has turned from seasonal decline to growth.

Within the OECD region itself, there have been significant changes in seasonality patterns for an important product group: middle distillates. A quick look at the European cracks, for example, suggests that diesel had no Christmas this last winter. In fact, gasoline cracks in Europe were almost a dollar higher than diesel cracks over the October to March period, an exceptional phenomenon compared to the historical "supremacy" of diesel. As recently as the 2014 winter season, diesel cracks were on average $8-9/bbl higher than for gasoline cracks, and for two winters prior to that, the gap was even higher at $13/bbl. Looking at demand trends for middle distillates in Europe, it becomes evident that the seasonal pattern has flipped. For the last three years, summer demand, which includes seasonal jet fuel and increased road diesel use in 2Q and 3Q, is now higher than winter demand.



Indeed, while heating demand in Europe has generally declined over the last decade due to efficiency measures and tighter standards for boilers, it is oil products that have taken the biggest hit. The latter (predominantly gasoil, with some kerosene) used to account for a quarter of heating demand in Europe, but their share is now down to just 17%. This is a loss of about 450 kb/d of middle distillates, equivalent to about 6% of current European demand for diesel and kerosene.  



In the US the gap between summer and winter middle distillates demand too, has been decreasing, although there still remains a clear winter peak due to heating oil seasonality. In Japan, winter demand for kerosene use for heating contributes to a huge seasonity of middle distillates demand, with winter consumption

almost a third higher than summer consumption, compared to 2-3% in the US. Thus, while diesel has grossly underperformed recently, the strength of gasoline cracks looks all the more impressive when stocks both in Europe and the US are at or close to seasonal peaks both in terms of absolute levels and days of forward coverage.


One explanation for the relative strength of gasoline cracks has been the lack of high-octane components. This is possibly due to; on the one hand, lower refinery supply as the crude slate in the US now includes more domestic light tight oil and Canadian extra heavy oils, both not particularly rich in high-quality gasoline components, and, on the other hand, increased demand for high-octane gasoline. In a recent report[1], EIA analysis shows that one way the car manufacturers can meet current Corporate Average Fleet Economy (CAFE) standards that were finalised in 2012 for model years 2017-21, is through turbocharged engines, which require the use of high-octane gasoline. According to EIA estimates, the share of turbocharged vehicles grow from 3.3% in model year 2009 to almost 18% in model year 2014, which has driven up the demand for premium gasoline in the US.  Thus, it is the chase for the highest quality gasoline blending components that drives the gasoline cracks, rather than general market tightness. 

The change to summer grade gasoline too, which happens over March/April is generally supportive for the cracks as butane blending, which is a much cheaper component, is constrained by summer RVP[2] regulations, and prices of the more expensive blending components are bid up by refiners and blenders. Thus, the strength of gasoline cracks is likely to continue, but at the same time, European summer demand for middle distillates is now expected to fare better than in winter, which may provide, however small, support for diesel cracks.

OECD refinery throughput

Finalised January numbers for OECD refinery throughput came in marginally higher than our previous estimate, by 100 kb/d, marking a robust 700 kb/d y-o-y gain, mostly driven by the US refiners. By contrast, preliminary February numbers are flat y-o-y as a 350 kb/d annual gain in the US and a seemingly inexorable rise in Korean throughput that broke through 3 mb/d for the first time in February, with a 300 kb/d yoy gain, were offset by declining runs in Europe, Japan and Canada. Weekly data for US March throughput do not show any effect from suggested run cuts, or pipeline outages later in the month as the runs increased both m-o-m (360 kb/d) and some 200 kb/d y-o-y, crossing the 16 mb/d mark, a level not seen in March before. Overall, the estimate for 1Q16 OECD runs is for a y-o-y growth of 200 kb/d. In 2Q16, this flips to a 200 kb/d decline y-o-y as the US growth eases while Europe and Asia Pacific decline, with Korean and Japanese runs levels affected by turnaround outages. Our first estimate for July runs continues the declining trend y-o-y, on the back of an expected 400 kb/d decline in Europe, flat US runs and only slightly firmer Japanese and Korean throughput.




Non-OECD refinery throughput

Non-OECD accounted for two thirds of the global 2 mb/d gains in January and for almost all of the 800 kb/d increase in February in our preliminary estimates. In both 1Q16 and 2Q16 the runs are expected to grow by almost 1 mb/d y-o-y, reaching 42 mb/d for the first time in 2Q16. With the exception of throughput increases in Brazil and Colombia, where recent refinery projects are ramping up, bringing an additional 100 kb/d y-o-y, all the increase is East of Suez. 



The Middle East is expected to lead the throughput increase as Saudi Arabia is ramping up new refineries. Refinery runs[3] are expected to reach over 7 mb/d in 2Q16, which amounts to just under 30% of crude output in the region.

Chinese runs continue growing, despite reported stock builds and unfavourable export economics. Official data for January and February show a 4% increase, while March is estimated to be flat y-o-y due to turnarounds. A Chinese oil company representative voiced concern in the press about independent refiners increasing their runs at the expense of majors as Sinopec and Petrochina reportedly cut runs by about 2.5% y-o-y. This would imply that the independent refiners hiked their runs up by about 30% y-o-y, fuelled by the more liberal crude import regime introduced last year. The Chinese government hastily tripled the oil products export quota, but actual outflows are constrained by both logistics and export economics. The extent of the country's excess refining capacity was made apparent by comments from a former chairman of Sinopec who warned last month that the refining sector was facing even worse overcapacity than the steel industry.

In a similar development to China's crude import regime changes, but aimed at state-owned, as opposed to independent refiners, the Indian government finalised plans to allow state-owned refiners to independently import crude oil. This will increase the share of spot deals and increase the flexibility in varying the crude slate with changing prices. Indian refiners already run at above nominal capacity rates, so any gains in throughput would come from new refineries. This could be an interesting opportunity for Indonesia's Pertamina, which has been reportedly talking with Indian and other Asian refiners on the possibility of tolling contracts to process batches of crude oil that Pertamina delivers, to ship the produced fuels to Indonesia. Indonesia has not reported any refinery intake data since September 2014, but the throughput is estimated at low utilisation rates of about 70%. It is one of the biggest gasoline importers in the world as the local refineries do not produce enough of the fuel.

Russian refinery runs continued dropping in February, losing another 240 kb/d y-o-y, but they stabilised in March at just under 5.6 mb/d. Turnaround season is wrapping up, but we expect that discretionary run cuts in the second quarter will drive runs even lower, to 5.5 mb/d.