Oil Market Report: 12 May 2016

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Highlights

  • Crude prices firmed on the back of unscheduled supply outages in Nigeria, Ghana and Canada that exceeded 1.5 m/d by early May. This more than offset bearish sentiment in the wake of the mid-April Doha output talks. At the time of writing, crude oil prices were approaching 2016 highs: ICE Brent was $47.00/bbl. NYMEX WTI was $45.88/bbl.
  • Global oil supplies rose 250 kb/d in April to 96.2 mb/d as higher OPEC output more than offset deepening non-OPEC declines. Y-o-y world output grew by just 50 kb/d in April versus gains of more than 3.5 mb/d a year ago. 2016 non-OPEC supply is forecast to drop by 0.8 mb/d to 56.8 mb/d.
  • OPEC crude output rose by 330 kb/d in April to 32.76 mb/d as a 300 kb/d jump in Iranian flows and a boost in Iraqi and UAE supplies more than offset outages in Kuwait and Nigeria. Saudi output was steady near 10.2 mb/d. Iranian supply rose to 3.56 mb/d, a level last hit in November 2011 before sanctions were tightened.
  • Global oil demand growth for 1Q16 was revised upwards to 1.4 mb/d, led higher by strong gains in India, China and, more surprisingly, Russia. For the year as a whole, growth will be around 1.2 mb/d, with demand reaching 95.9 mb/d.
  • Stock builds are beginning to slow in the OECD; in 1Q16 they grew at their slowest rate since 4Q14 and in February they drew for the first time in a year. In March OECD commercial inventories fell by a slim 1.1 mb, with April preliminary data suggesting that stocks rebounded while oil held in floating storage rose.
  • 2Q16 global refinery throughput is forecast at 79.6 mb/d, with 0.7 mb/d y-o-y gains falling below anticipated demand growth of 1.2 mb/d. The 1Q16 estimate has been revised higher by 0.2 mb/d to 79.5 mb/d. India and Saudi Arabia are set to lead global annual increases this year.

Staying on course

Changes to the data in this month's Report confirm the direction of travel of the oil market towards balance. The net result of our changes to demand and supply data is that we expect to see global oil stocks increase by 1.3 mb/d in 1H16 followed by a dramatic reduction in 2H16 to 0.2 mb/d.

Once again, we have left unchanged our outlook for global oil demand growth in 2016 at a solid 1.2 mb/d. However, for 1Q16 revised data shows demand growing faster at 1.4 mb/d, in spite of the northern hemisphere winter being milder than usual. This strong 1Q16 performance might raise expectations that demand will remain at this stronger level causing us to raise our average figure for 2016. On the other hand, there are economic headwinds identified by the International Monetary Fund that, in April, revised down its expectations for global GDP growth in 2016 from 3.4% to 3.2% and for 2017 from 3.6% to 3.5%. In the meantime, India is the star performer: oil demand in 1Q16 was 400 kb/d higher year-on-year, representing nearly 30% of the global increase. This provides further support for the argument that India is taking over from the China as the main growth market for oil. Any changes to our current 2016 global demand outlook are now more likely to be upwards than downwards, as gasoline demand grows strongly in nearly every key market, more than offsetting weakness in middle distillates. Slower demand growth in OECD countries is not unexpected; it represents a return to the norm.

The supply side of the oil market balance always throws up surprises and in this report there are two main ones: first, wildfires in Canada have caused the shut-in of 1.2 mb/d of production capacity; and second, Iran's oil production and exports increased slightly faster than expected following the lifting of sanctions. In the case of Canada, at the time of writing we do not know how long oil production will be impacted by wild fires. For Iran, oil production in April was close to 3.6 mb/d, a level last achieved in November 2011. Even more important for global markets, oil exports reached 2 mb/d, a dramatic increase from the 1.4 mb/d seen in March. Elsewhere in OPEC, offsetting Iran's rise, there are concerns about falling production in Libya, Nigeria, where, on May 10th Shell declared force majeure on Bonny Light production, and the ability of Venezuela's oil industry to maintain operations in the face of power cuts and other shortages. The proposed economic changes in Saudi Arabia have seen the appointment of a new minister to replace the long serving Ali al-Naimi. At the forthcoming OPEC meeting on June 2nd we will see if there are any major policy changes from the Saudis with respect to supply to the oil market.

Meanwhile, non-OPEC oil production is currently more than 0.8 mb/d lower than this time last year. For 2016 as whole, we have revised our forecast for the fall in non-OPEC production from 0.7 mb/d to 0.8 mb/d.

A few years ago, shut-ins such as we have seen in Canada would have sent oil prices sharply higher. However, recently Brent crude oil prices have hovered around $45/bbl, with little reaction seen to the Canadian wildfires. General oil market sentiment seems to have improved to such an extent that Brent prices fell into short-lived backwardation in April for the first time since mid-2014, aided by expectations of heavy North Sea field maintenance. Further oil price rises, though, are likely to be limited by brimming crude oil and products stocks that will remain a feature of the market until more normal levels of inventory are reached. In this Report we note that OECD stocks grew in 1Q16 at the slowest pace since 4Q14 and in February they declined for the first time in a year. This lends support to our view that the global supply surplus of oil will shrink dramatically later this year.

In next month's Report we will publish for the first time our detailed forecast for 2017, thus providing clarity on when the oil market could reach its much-anticipated balance.

Demand

Summary

  • The world will consume 95.9 mb/d of oil products in 2016, 1.2 mb/d more than in 2015, with substantive non-OECD gains offsetting flat OECD deliveries. At +1.2 mb/d, the 2016 growth estimate has remained unchanged for seven consecutive monthly Reports.
  • Higher baseline figures for a number of consumer countries raised the 2015 historical demand estimate by 20 kb/d, to 94.7 mb/d. The most notable additions were in South Africa and China. Incorporating these upward revisions, the latest global 2015 demand estimate shows growth of 1.8 mb/d versus 2014, a five-year high alongside crude oil prices falling to an eleven-year low.
  • The most recent demand data has raised the 1Q16 global oil demand estimate to 95.0 mb/d. Despite being 0.2 mb/d above the previous estimate, 1Q16 demand growth shows a clear deceleration from the rapid gains of mid-2015. The 1.4 mb/d year-on-year (y-o-y) gain in 1Q16 is roughly 60% lower than the heady five-year y-o-y peak of +2.4 mb/d seen in 3Q15. The slowdown really took hold in 4Q15, when growth first eased to +1.4 mb/d, a level repeated in 1Q16.
  • Having slowed dramatically towards the end of last year, the latest US data show renewed strength. Rising by on-average 0.5 mb/d y-o-y in the first eight months of 2015, the US declined in the following five months (falling by an average 0.1 mb/d), before flipping once again to growth. US deliveries rose by 0.3 mb/d y-o-y in February 2016 and by an average 0.2 mb/d March-April.
  • Rising by an estimated 400 kb/d in 1Q16, India saw the largest volume growth globally, led by transport fuels. With demand at 4.4 mb/d in 1Q16, India is the world's fourth biggest oil consumer, behind the US, China and Japan. In 1Q16 it was the clear leader in terms of growth.
  • China's oil demand has been raised by government policies aimed at supporting the domestic economy. In 1Q16 Chinese demand increased by 355 kb/d y-o-y to 11.5 mb/d. This pace of growth will be maintained over the year as a whole, a marginally more bullish outlook than published in last month's Report. One factor behind this increase was the raising by the IMF of China's GDP growth forecast for 2016.

Global Overview

Rising by an estimated 1.4 mb/d in 1Q16, and with global growth forecast to hold steady at 1.2 mb/d for the year as a whole, at first glance the global demand outlook looks robust. This momentum is underpinned by a relatively benign global macroeconomic environment, based on April's World Economic Outlook from the IMF which depicts global economic growth of 3.2% in 2016, albeit one-fifth of a percentage point below the previous projection. We might have expected that as oil prices fell sharply in 1Q16 -- to below $30/bbl at one point -- there might be evidence of another growth spurt similar to that seen in the first half of 2015. But instead, a combination of non-price-related factors kept downward pressure on demand, including faltering economic conditions in a number of important consumer countries and some unusually mild northern hemisphere winter temperatures (see Warmer early-winter weather suppresses OECD oil demand in OMR dated 19 January 2016).

Notable growth slowdowns, between 3Q15 and 1Q16, were those seen in China, Japan and the US. Recent months have also seen lower growth in many other countries, with industrial oil use particularly heavily impacted. Hong Kong oil deliveries, for example, fell sharply in February as business confidence, tracked by the Census and Statistics Department of Hong Kong, dropped to a seven-year low, pulled down by severe gloom in the manufacturing, trade, construction and retail sub-sectors. Weakness in the industrial sector is a key factor behind 2016's lower rate of global demand growth versus 2015.

Although global oil demand growth has recently slowed sharply, robust gains are a feature in many non-OECD consumer countries. For example, India posted not just its strongest ever pace of demand growth in 1Q16, at +0.4 mb/d, but Indian oil demand growth was also the fastest growing country in the world in 1Q16. Following India in terms of oil demand growth were China and Russia, respectively higher by 355 kb/d and 275 kb/d in 1Q16. We currently expect that India will maintain pole position in the proverbial growth league in 2016, closely followed by China, with transport fuel growth the biggest factor. With new demand data received, we have revised upwards our estimate of 1Q16 global oil demand to 95.0 mb/d, 0.2 mb/d above the previous estimate. Most notably, the US (+ 95 kb/d), Russia (+70 kb/d), Thailand (+40 kb/d), Brazil (+35 kb/d), India (+35 kb/d) and Germany (+30 kb/d) were upgraded, partially offsetting downgrades in Saudi Arabia (-65 kb/d), Chinese Taipei (-20 Kb/d), Hong Kong (-20 kb/d) and Portugal (-20 kb/d).


OECD

Down by an estimated 0.2 mb/d in 1Q16, y-o-y, OECD oil deliveries appear to have returned to their previous 'normal' downtrend. However, within the data, three conflicting directional movements exist. On the upside, European oil demand, at 13.5 mb/d in 1Q16, was marginally higher than a year ago. On the downside, demand in OECD Asia Oceania fell by 2.0% y-o-y to 8.6 mb/d. A third state of flux - flatness - was apparent in the OECD Americas, with demand unchanged at 24.2 mb/d. Mixing these three trends, total OECD oil deliveries averaged 46.3 mb/d in 1Q16, 0.2 mb/d or 0.4% down on the year earlier.

Americas

The recent weakening in the OECD Americas oil demand trend after months of relatively strong growth was triggered by declining US deliveries. These have since recovered somewhat but now there is weakness in Canada. Having enjoyed a relatively buoyant economy since 2009, supported by high oil prices, lower oil prices since 2014 have taken their toll. Oil demand fell by around 3.1% or 70 kb/d y-o-y in 1Q16. The forecast is for further Canadian declines in 2016, potentially worsening, depending on the extent of the damage caused by the recent fires.



A sharp upwards revision to February US demand data, added 250 kb/d to the total compared to the number cited in last month's Report. The majority of the additions was seen in gasoline, as US drivers continue to drive more miles, while less efficient vehicle choices - such as Sports Utility Vehicles (SUV's) or four-wheel-drives - remain very much in vogue, a consequence of persistently lower retail pump prices. The Department of Transportation's Federal Highway Administration reported a 5.6% y-o-y gain in vehicle miles travelled in February, as double-digit SUV sales growth put a break on underlying US vehicle efficiency gains. The increase in miles driven was more than matched by higher US gasoline demand (+6.4% y-o-y).



With growth having slowed dramatically in the period September to January, recent US demand data suggests that stronger growth has returned. The average decline of 0.1 mb/d y-o-y seen in September to January was replaced by a 285 kb/d gain in February and average growth of 190 kb/d y-o-y March-April, based on weekly statistics from the US Energy Information Administration. With the odd exception, such as January 2016, when it fell by 50 kb/d y-o-y, US gasoline demand has seen robust growth in recent months. The main laggard in the US demand picture is distillates. US gasoil/diesel demand fell heavily, by an average 370 kb/d y-o-y, in October 2015 to February 2016, as the mild US winter reduced heating oil demand. Industrial demand was also subdued. The Manufacturing Purchasing Managers' Index (PMI), from the Institute for Supply Management (ISM), eased to a multi-year low, of 48.0 in December, while the US Federal Reserve's industrial output measure posted its seventh consecutive monthly y-o-y decline in March 2016, down by 2.0% y-o-y, in line with the generally declining y-o-y trend seen since November.



There is considerable uncertainty as to the direction of US industrial output and thus uncertainty about distillate demand. On the basis, of the IMF's April World Economic Outlook projecting US GDP growth of 2.4% for 2016, and the latest ISM's PMI turning more upbeat, prospects look a little less bearish. We expect US oil demand growth of 155 kb/d in 2016 - less than 1% - with deliveries at 19.6 mb/d.



Rising strongly in March, preliminary Mexican oil demand added 60 kb/d y-o-y, a six-month growth high, supported by strong gains in residual fuel oil and gasoline. Mexican fuel oil demand rose to a three-month high, of 135 kb/d, as the Mexican Secretaria de Energia reported that the notoriously volatile power sector increased oil use by over two-and-a-half times compared to year earlier levels. 

Europe

Ending a one-year period of strong European oil demand growth, momentum flattened in 1Q16. Deliveries averaged 13.5 mb/d, essentially unchanged on the corresponding quarter of 2015. Easing gasoil demand growth proved the key downside contributor as total European gasoil deliveries fell by 100 kb/d on a y-o-y basis, whereas the prior twelve-months saw European gasoil demand growth average +245 kb/d y-o-y.



Germany has been one of the more resilient European markets. Deliveries rose by an estimated 35 kb/d in 1Q16 and posted a fourth consecutive month of y-o-y growth in March. German demand averaged 2.4 mb/d in 1Q16, buttressed by particular strength in industrial oil use, which supported strong gains in gasoil, LPG and residual fuel oil. Underpinned by economic growth of 1.5% in 2016, according to the IMF's April World Economic Outlook, and recent buoyancy in the German industrial sector, deliveries are forecast to average 2.4 mb/d in 2016 as a whole, 15 kb/d up on 2015. Deutsche Bundesbank cited industrial activity in January rising by a five-month high of +1.8% y-o-y, with a further gain of 1.3% earmarked for February. This, along with reports of new car registrations at a one-year high of 323 000 in March, according to the Federal Motor Transport Authority, supported additional German demand.

Asia Oceania

Sharp declines in LPG, gasoil and residual fuel oil in 1Q16 pulled total oil deliveries in OECD Asia Oceania down sharply, falling by 170 kb/d y-o-y, after a decline of 65 kb/d in 4Q15 and a gain of 100 kb/d in 3Q15. Within the regional total, a huge 330 kb/d Japanese decline more than offsets 1Q16 y-o-y gains across the rest of OECD Asia Oceania. For the region as a whole, deliveries were down by 2% to 8.6 mb/d, with both LPG and residual fuel oil falling by 8.9%. At 4.7 mb/d in February, Japanese oil deliveries continue to fall sharply versus last year, pulled down by sharp dips in every major product category, albeit overall showing a 25 kb/d less severe drop than foreseen in last month's Report. Preliminary indicators of March demand suggest a further 360 kb/d y-o-y decline. In 2016 as a whole, oil deliveries in Japan should average 4.0 mb/d, 190 kb/d down on last year, with declines seen in the transport, industrial and power sectors.



Gains in Korea, Australia and New Zealand provided a partial 1Q16 offset. Korea, for example, saw estimated demand growth of 140 kb/d y-o-y in 1Q16 buttressed by very strong gains in the petrochemical, industrial and transport sectors. Through 2016, gains are forecast for Korea alongside modest gains in New Zealand, Israel and Australia. 

Non-OECD

Supported by strong gains in India, China and, more surprisingly, Russia, oil demand in the combined non-OECD region climbed by 1.6 mb/d in 1Q16 compared to the year earlier to 48.8 mb/d. This latest update for 2016 supports our long-held conclusion that non-OECD countries will dominate growth in 2016. Indeed, for the year as a whole, we assume non-OECD demand growth of 1.3 mb/d, with next-to-no growth for OECD economies.



China

Government policies to support the economy have raised oil product demand in China. In 2015, deliveries averaged 11.4 mb/d, 0.7 mb/d up on the previous year. Early indicators for 2016 demand imply a gain of 0.4 mb/d y-o-y in 1Q16, to 11.5 mb/d. Along with a loosening in bank lending requirements, the Chinese government has also embarked upon an ambitious spending programme, widened export credit insurance and introduced company-specific tax rebates. Industrial fuels have particularly benefitted, with gasoil/diesel demand, for example, essentially flat in 2015. This is a significant improvement from earlier forecasts, while LPG has surged as new propane dehydrogenation capacity comes online.



Garnering less support from government policies, Chinese transport fuel demand - largely gasoline and jet fuel - remains relatively robust, although even here momentum has slowed recently as the initial stimuli from lower prices fades and consumer confidence wanes. Even with SUV sales remaining high (up two-fifths in March on a y-o-y basis), transport fuel demand growth has slowed. The National Bureau of Statistics (NBS) showed neutrality returning to its consumer confidence index in March, ending a two-year bull run. China's Civil Aviation Administration reported passenger numbers up 11.6% y-o-y in February, to 38.98 million. On the downside for the aviation industry were reports that the freight load factor dropped by 2.7 percentage points to 68.2%.



Offsetting adjustments in Chinese product stocks had little overall impact on the 11.6 mb/d March Chinese apparent demand estimate, as the official Xinhua news agency reported conflicting directional adjustments. Specifically, big reductions in Chinese gasoil/diesel stocks, down by 0.2 mb/d in March compared to February, raised the gasoil demand estimate, while builds in gasoline and jet fuel stocks curbed their respective demand numbers. Having risen by an estimated 0.4 mb/d, y-o-y, in 1Q16 to 11.5 mb/d, a similarly paced expansion (+0.3 mb/d) is foreseen for the year as a whole taking deliveries up to an average 11.7 mb/d. The outlook has been marginally raised on modestly higher projections for underlying economic growth, as the IMF raised its 2016 GDP forecast by one-fifth of a percentage point to +6.5%, although it is far from clear-cut as forward-looking indicators of industrial demand (such as Caixin's Manufacturing PMI) remain net-pessimistic in early-2016.


Other Non-OECD

Oil demand in Hong Kong fell heavily in February, by 50 kb/d y-o-y to 340 kb/d, pulled down by particularly pronounced declines in industrial fuel use, chiefly gasoil/diesel and residual fuel oil. The Census and Statistics Department (CSD) reported business confidence in 1Q16 falling to a seven-year low, while Moody's lowered its long term debt rating to negative from stable. Having consistently risen in the twelve months through September 2015, residual fuel oil deliveries in Hong Kong have fallen since November 2015 and at an accelerating rate. The sharp declines in residual fuel oil deliveries could be a harbinger of reduced trade flows to come. The latest Hong Kong Shipping Statistics, from the CSD, show total port cargo throughput down 24.5% y-o-y, to 26 million tonnes in 4Q15, with heavy drops cited with tonnages from China and the US. This sentiment is reflected in the CSD's business confidence index, which showed sharp drops in expectations of 'import, export and wholesales'. The magnitude of the recent fuel oil declines are not yet forecast to hold for 2016 as a whole, as projections of economic growth, including the IMF's April estimate of +2.2%, remain supportive to oil demand growth overall. Particularly relevant for Hong Kong, as a big shipping hub, are the IMF's projections for the global volume of imports of goods rising by 3% in 2016, thus potentially supporting renewed bunker fuel demand growth in 2016.



Easing somewhat in 1Q16, demand growth in Chinese Taipei failed to match the heady heights seen in 4Q15, as weakening momentum took hold in the industrial fuels. For example, gasoil demand growth, having risen at a five-month high of +5.8% y-o-y in 4Q15, eased back considerably in 1Q16 (-3.2%), pulled back by sharp declines in industrial activity across the economy as a whole. The Ministry of Economic Affairs reported industrial activity down 3.6% y-o-y in March, while Markit's Manufacturing PMI became pessimistic, i.e. sub-50, in February and April.



Following the publication of a more complete data set from India's Ministry of Petroleum & Natural Gas, we see that total oil demand in February was 4.4 mb/d, up 265 kb/d y-o-y, or 6.3%. Dramatic gains in the main transport fuels were key factors. Diesel was particularly strong, up 105 kb/d to 1.7 mb/d, although gasoline demand growth was not that far behind, rising by an estimated 45 kb/d y-o-y in February to 550 kb/d. Preliminary estimates for March demand portray growth accelerating further, adding 580 kb/d compared to the year earlier, to 4.5 mb/d, led by strong gains in gasoline, diesel, LPG and bitumen. Both diesel and gasoline demand rose sharply due to a rapidly expanding Indian vehicle market. Low rainfall raised diesel use in agriculture, and bitumen use soared on the country's ongoing road building programmes. Bringing in this latest March estimate suggests 1Q16 growth of 400 kb/d, the largest contribution of any single country in the world and 28% of global growth.



Falling back into negative y-o-y growth territory once again in February, Egyptian oil demand failed to post its normal seasonal uptick, with industrial oil use particularly weak. For example, the five-year average for February gasoil/diesel demand was a month-on-month gain of 10 kb/d, but this vanished in 2016. Having in February posted its weakest y-o-y performance in five months, Egyptian demand growth is expected to be fairly modest in 2016, at around 10 kb/d on the year, taking average deliveries up to around 870 kb/d for the year as a whole.



Having seen South African oil deliveries stutter in recent years, the publication of a spate of mid-2015 data releases from the Joint Organisation Data Initiative (JODI) showed distinct signs of an upturn emerging. Rising since the turn of 2015, and sharply since July 2015, South African oil deliveries averaged 670 kb/d January-through-October, the last months for which monthly JODI data are available. Pulled higher by accelerating transport fuel demand, y-o-y growth in 3Q15 climbed to a two-and-a-half year high. Gasoline demand growth accounted for four-tenths of 3Q15 momentum, gasoil/diesel five-tenths, the remainder jet/kerosene and LPG. Although the heady gains of mid-2015 are not likely to be repeated in 2016, absolute demand growth should remain a feature of the South African landscape, with growth forecast at around 2%, as deliveries average 680 kb/d.

The strength of the recent Russian demand data built further in March, as total oil deliveries surged by 440 kb/d compared to the year earlier, to 3.7 mb/d, supported by sharp gains in industrial fuels and road transport demand. Russian industrial output posted a rare gain in February, up by 1.0% y-o-y according to the Federal State Statistics Service (the first growth in over a year). A further sign of strength were new vehicle registrations up 13% March-over-February, according to the latest data from the Association of European Businesses in the Russian Federation. We have posted consecutive monthly y-o-y gains in the first three months of 2016, tentatively raising the Russian oil demand forecast for the year as a whole, despite bearish GDP projections from the IMF. We now foresee Russian oil demand growth of 1.5% in 2016, taking deliveries up to an average 3.6 mb/d, a rise largely consequential on the remarkable resilience thus far seen in 1Q16 and counter to the IMF trimming eight-tenths of a percentage point from its GDP projection, to -1.8% in April's World Economic Outlook.



Continuing to post sharp declines, in tune with the ongoing macroeconomic malaise, Brazilian oil product demand actually surprised to the upside in March, at 3.1 mb/d - 55 kb/d above the forecast cited in last month's Report but still down by 105 kb/d compared to the year earlier. Particularly sharp declines in gasoil/diesel, residual fuel oil and jet/kerosene pulled down the overall demand number, offsetting gasoline and 'other products' which held up reasonably well. For the year as a whole, Brazilian oil deliveries are forecast to average 3.1 mb/d, 70 kb/d down on the year earlier and marginally below the previous forecast as the IMF has lowered its projected rate of economic growth to -3.8%, three-tenths of a percentage point below the previous forecast published in January.



A dramatic drop in Saudi Arabian oil product demand pulled deliveries down by around 5% y-o-y in February to 2.8 mb/d, as gasoil, gasoline and 'other products' all fell sharply. Demand eased as the increasingly problematic economic situation - lower oil prices are pressuring the domestic economy - coincided with unusually high deliveries last February, artificially dampening the y-o-y comparison. For the year as whole, Saudi Arabian oil deliveries should average 3.3 mb/d, roughly the same as in 2015, as a combination of reduced subsidies, increasing fiscal constraint and the start-up of the huge Wasit gas facility curb prospective oil demand.

Supply

Summary

  • Global oil supplies rose by 250 kb/d in April, to 96.2 mb/d, as higher OPEC output more than offset deepening non-OPEC declines that nearly wiped out annual world supply growth. Compared with gains of more than 3.5 mb/d just a year ago, world oil production grew by a meagre 50 kb/d in April.
  • OPEC crude output rose by 330 kb/d in April to 32.76 mb/d - the highest since August 2008 - as a 300 kb/d jump in Iranian flows and higher Iraqi and UAE supplies more than offset outages in Kuwait and Nigeria. Saudi Arabia held production steady. Riyadh replaced veteran Oil Minister Ali al-Naimi on 7 May, three weeks after output freeze talks between major producers ended without agreement.
  • Iranian oil fields pumped 3.56 mb/d in April - a level last reached in November 2011 before sanctions were tightened - and in line with our forecast that output could rise towards 3.6 mb/d within six months of sanctions relief. Iran is seeking to regain lost market share and crude exports surged to reach 2 mb/d in April - close to pre-sanctions levels - compared to 1.4 mb/d in March. Some of the higher April crude sales could be due to loadings carried over from March.

  • The outlook for non-OPEC supply for 2016 has been curbed by 0.1 mb/d since last month's Report due to unscheduled outages in April and May. A devastating wildfire raging across Alberta shut in around 1.2 mb/d of oil sands production in early May, while unscheduled shutdowns cut output in Ghana and Italy. Non-OPEC supply is forecast to average 56.8 mb/d this year, a decline of 0.8 mb/d from 2015.
  • Non-OPEC oil production dropped 125 kb/d in April to 56.6 mb/d as planned and unplanned outages added to declines caused by lower oil prices and spending cuts. Output is expected to drop further in May due to the wildfires in Northern Canada. Total non-OPEC production was more than 0.8 kb/d below April 2015, with the US accounting for the most substantial decline.

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

OPEC crude oil supply

A substantial boost in Iranian supplies, a further improvement in flows from Iraq and higher post-maintenance output in the UAE pushed OPEC production up by 330 kb/d in April to reach 32.76 mb/d - the group's highest level in more than seven years. The increases - Iran posted the sharpest at 300 kb/d - more than outweighed losses in Kuwait due to a short-lived strike in mid-month and an ongoing and deepening outage in Nigeria due to pipeline sabotage and security issues. Saudi Arabia held output just shy of 10.2 mb/d in April. The Kingdom has replaced Oil Minister Ali al-Naimi, who steered policy for more than 20 years, as part of a wider cabinet reshuffle. Markets will watch for any major shift in Saudi oil policy when new Energy Minister Khalid al-Falih makes his first appearance at OPEC's 2 June Vienna meeting (see New Saudi energy order). Output freeze talks between major producers on 17 April in Qatar ended without agreement. The stumbling block appeared to be Riyadh's insistence that Iran be included in any deal. Iran has refused to restrict supply until its output reaches a pre-sanctions level of 4 mb/d.

In the weeks ahead of the Vienna meeting, OPEC production may rise higher still with Saudi Arabia likely to lift output to cover higher domestic requirements for summer power generation and Kuwaiti output fully recovered from a three-day workers' strike. Iran and Iraq may also post further gains although their potential for substantial increases may be limited due to near-term production capacity constraints.



Iranian oil fields in April ramped up to 3.56 mb/d - scaling a level not seen since the end of 2011 before sanctions were tightened, and in line with our previous production assumption. Iran has vowed to swiftly reclaim lost market share and crude oil exports in April soared by roughly 600 kb/d to 2 mb/d, according to preliminary data. Some of the higher April crude sales may be due to loadings that spilled over from March.

While Middle East OPEC members continue to turn in strong production performances, producers such as Nigeria, Libya and Venezuela are unable to keep up (see The struggle for some). Libyan output edged higher in April but upward momentum may be halted by a marketing dispute that cut production in early May. Supply from Nigeria has sunk to the lowest in more than two decades and is likely to be restricted for a fourth month in May due to ongoing force majeure on some 250 kb/d of Forcados crude oil loadings as well as attacks on the country's oil network. On 10 May, Shell also declared force majeure on Bonny Light exports due to the closure of a trunk line for repairs.

OPEC has meanwhile kept the taps open ever since the group agreed in November 2014 to defend market share rather than price, with output in April up 710 kb/d on the previous year. Crude supply from Iran - released from nuclear sanctions in mid-January - was up 680 kb/d year-on-year (y-o-y); output from Iraq, OPEC's second biggest producer, stood 600 kb/d above April 2015 and Saudi flows were steady y-o-y. OPEC's "effective" spare capacity was 2.49 mb/ d in April, with Saudi Arabia accounting for 81% of the surplus.



New Saudi energy order

Saudi Arabia's replacement of long-serving Oil Minister Ali al-Naimi on 7 May and its ambitious new strategy to kick its "addiction to oil" have thrust the Kingdom's oil sector onto centre stage. Under Riyadh's Vision 2030, the newly created Ministry of Energy, Industry and Mineral Resources will be run by Aramco Chairman Khalid al-Falih, who promptly vowed to maintain Saudi oil policy. "We remain committed to maintaining our role in international energy markets and strengthening our position as the world's most reliable supplier of energy," he said. "We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity."

Falih is part of a small group that has the ear of Deputy Crown Prince Mohammed bin Salman, the most powerful figure in Saudi Arabia's oil sector and the force behind the economic transformation plan. Both support the bold policy to defend market share rather than price that Naimi set in motion at OPEC's meeting in November 2014. If anything, Riyadh's free market policy may now become even more entrenched. A central plank of Vision 2030 is to revamp and sell up to 5% of Aramco, the world's biggest oil company. After its listing, oil market decision-making "will be fully controlled by the board of Aramco and the Saudi government will not have a large role in [shaping] Aramco's production," Prince Mohammed said at a press conference in Riyadh.

The powerful royal - along with Falih - is also unfazed by low oil prices. Thus world oil markets for now are preoccupied with whether Saudi Arabia will engage in a new turf battle with Iran, after talks in mid-April over a production freeze ended without agreement. Riyadh refused to sign the deal without participation by Tehran, which has swiftly raised exports close to pre-sanctions levels. It was reportedly Prince Mohammed's last minute intervention that prompted Riyadh to insist that all major producers take part in the agreement.

And just days before the discussions between major oil producers in Qatar, Prince Mohammed told Bloomberg in an interview the Kingdom could boost production to 11.5 mb/d immediately "if we wanted to". "If all major producers don't freeze production, we will not freeze production," he said. "If we don't freeze, then we will sell at any opportunity we get."

So could the Kingdom ramp up by more than 1 mb/d virtually overnight? Technically, yes, but the comments by Prince Mohammed may just have been intended to signal the ability of OPEC's largest producer to raise output rather than actually pump more and flood the market. On an operational level, roughly 5% of

additional Saudi production is immediately available. Saudi oil fields that have pumped at around 10.2 mb/d for more than a year could ramp up towards 11 mb/d without strain. It would also take little time to raise supplies to 11.5 mb/d, though it would prove costly to do so since more expensive offshore production would have to be tapped.



As yet, there is no indication of a substantial increase in oil sales, with production in April steady at 10.19 mb/d compared to March. Saudi Aramco also raised most of its monthly formula prices for June to Europe and Asia, which could temper buying enthusiasm. Riyadh does, however, appear to be taking a slightly more flexible approach in its marketing effort. It reportedly sold a June-loading Arab Heavy cargo to Chinese independent refiner Shandong Chambroad Petrochemicals out of storage in Japan. This was Aramco's first spot sale to a so-called teapot refiner and could signal more spot sales to Asia. Aramco typically sells its crude through term supply contracts, rather than spot trades. The sale follows Saudi Arabia's move to export bigger volumes to northern Europe that began last summer.

Early soundings meanwhile suggest that supplies during the coming months may rise by 300 kb/d or so with most of the increase expected to cover higher domestic requirements for power generation. 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 consumption typically pushes up crude production. Saudi crude supply reached a record high of 10.5 mb/d last June. This summer it could burn at least 100 kb/d less crude oil in its power plants 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.

Production in the UAE came back strongly in April following the end of maintenance work on the oil fields that pump Murban crude. Output rose 90 kb/d month on month (m-o-m) to 2.82 mb/d in April and may climb towards record rates of around 2.9 mb/d in May. Abu Dhabi's core onshore fields that churn out Murban returned to pre-maintenance levels of around 1.5 mb/d to 1.6 mb/d towards the end of April following declines of as much as 300 kb/d when rehabilitation was at its most extensive.

Kuwait posted the sharpest decrease in April, with crude supplies falling by 100 kb/d m-o-m after a three-day oil workers' strike that began on 17 April cut supply by 60%. Production swiftly recovered to previous levels following the end of the protests over wages and benefits by thousands of Kuwaiti oil and gas workers. Crude oil exports were unaffected as Kuwait drew down oil from storage. There is no sign of an imminent restart of the Khafji offshore oil field in the Neutral Zone shared between Kuwait and Saudi Arabia. Kuwait had voiced optimism that the 300 kb/d offshore field - shut since October 2014 after Riyadh cited environmental reasons - would resume operations.

Qatari output dipped by 10 kb/d to 660 kb/d during April. In Qatar, bids were submitted at the end of April for the re-tender of the 300 kb/d offshore al-Shaheen oil field, currently operated by Maersk Oil under a 25-year production-sharing contract that expires in mid-2017. Al-Shaheen accounts for nearly 45% of Qatari output.

Iran's post-sanctions market share drive revved up in April, with crude supplies rising 300 kb/d m-o-m to 3.56 mb/d - just shy of pre-sanctions levels in 2011. On the export front, loadings of crude oil jumped by around 600 kb/d from March to roughly 2 mb/d, according to preliminary data, with China buying big and Europe loading substantially more. Some of the rise in crude oil exports in April - nearly double the rate since sanctions were eased in mid-January - may have been due to loadings that spilled over from March. It is also unclear how much, if anything, is being drawn from onshore storage at Kharg Island.

Before sanctions were tightened in mid-2012, Tehran was selling about 2.2 mb/d of crude on world markets, with Europe accounting for around 600 kb/d. In April, buyers in Europe loaded roughly 500 kb/d - more than double the previous month - with Total and Turkish Tupras accounting for a large chunk of the volume. Italy's Iplom and Greek Motor Oil Hellas also lifted in April, along with Cepsa and Lukoil.



China was by far the biggest buyer of Iranian crude in April, according to preliminary data, lifting more than 800 kb/d compared to 510 kb/d in March. Japan returned to lift roughly 250 kb/d in April after a hiatus in March due to the expiry of special shipping insurance cover provided by the government. After a 500 kb/d buying spree in March, India loaded fewer barrels in April at just over 300 kb/d - reportedly due to the expiry of free freight. India and Iran reportedly have agreed to use European banks to process pending oil payments to Tehran, which will free up $6.4 billion of frozen funds. Exports of condensates slowed to 120 kb/d in April from 265 kb/d the previous month. Iran is storing 46 million barrels of the ultra-light oil from Iran's South Pars gas project at sea.

On the upstream front, Iran is aiming to tender around 15 projects under its new Iran Petroleum Contract (IPC) this summer after much delay. Iranian oil officials hope the new contract terms will be finalised swiftly, after a strong show of support for Iranian President Hassan Rohani in 30 April parliamentary elections.

Although Iranian negotiators say the final IPC terms will be a vast improvement on its former buyback deals, some prospective international investors remain unconvinced. Even so, international oil companies (IOCs) such as Total, OMV, Lukoil, Wintershall and Saipem are already jockeying for position and BP is reportedly taking steps to open up an office in Tehran. In the early phases of development, Iran will focus on fields that straddle the borders with its neighbours as well as the core fields Ahwaz, Gachsaran, Marun and Agha Jari that require enhanced oil recovery (EOR) to sustain or boost production. US companies are, for now, out of the race while Washington's non-nuclear-related sanctions remain in place.

Iraqi crude oil production rebounded to 4.36 mb/d in April, up 170 kb/d m-o-m, after a recovery in flows along the Kurdistan Regional Government's (KRG's) export pipeline to Turkey and as shipments from the south neared record highs. Overall exports, including from the KRG, rose to 3.87 mb/d in April up 260 kb/d on the previous month.

Iraq is striving to sustain production at all-time highs in order to fund a costly battle against the Islamic State of Iraq and the Levant (ISIL) and to pull the country back from the brink of financial collapse. Southern Basra exports of 3.36 mb/d in April - up 80 kb/d on the previous month - earned the federal government $3.343 billion, roughly $450 million more than in March.

Oil exports from the Kurdistan region through Turkey rose to an average of 510 kb/d despite the continued suspension of 150 kb/d of oil from northern Kirkuk oil fields controlled by the federal North Oil Co (NOC).  Baghdad called a halt to federal contributions to the KRG export pipeline in March due to an ongoing feud over revenues and control of reserves.

As a result, the autonomous northern region has reduced throughput at its two main refineries - Kalak and Bazian - in order to boost export flows. Although exports were 180 kb/d higher in April than in March, when shipments were suppressed due to an outage on the KRG pipeline to Turkey, the export figure is still well below a high of 600 kb/d set earlier in 2016. Revenue from the KRG's exports from Ceyhan totalled $376 million in April. As for NOC, much of the 150 kb/d that it is producing is being re-injected into the Kirkuk oil field's Baba Dome.

Iraq is in political turmoil due to Prime Minister Haider al-Abadi's attempt to stamp out corruption by replacing party-affiliated ministers with a technocratic government. A divided parliament has failed to approve his candidates. Abadi's concern is that the ongoing chaos will set back the fight against ISIL, which controls large sections of northern and western Iraq. The radical group hit the 30 kb/d Khabbaz oil field near Kirkuk in early May. It is also targeting the south with suicide car bombs.

The struggle for some

While OPEC's Middle East members flex their production muscles, producers such as Nigeria, Libya and Venezuela are urgently trying to keep pumping rates from falling further. Between them, these countries have already lost 450 kb/d of output versus a year ago due to ongoing civil unrest in Nigeria and Libya and economic upheaval in Venezuela. The worst affected so far is Nigeria, where supplies in April sank to 1.62 mb/d - the lowest since August 1994 - due to a continuing suspension of Forcados shipments following an attack on a sub-sea pipeline in February as well as a temporary disruption to loadings of Brass River crude. Repairs on the Forcados pipeline, damaged by a militant attack in February, which was due to carry 250 kb/d of crude, are now expected to be completed by June. The risk of further oil sector attacks is rising and the same group of militants - Niger Delta Avengers - claimed they hit a Chevron platform in the oil-rich Niger Delta in early May, reportedly cutting roughly 35 kb/d of supplies. Just days after that attack, Shell workers were evacuated from the Bonga oil field after a threat by militants. And on 10 May, Shell declared force majeure on Bonny Light exports due to the closure of the Nembe Creek Trunk Line for repairs.

President Muhammadu Buhari has promised to crack down on pipeline saboteurs in the Delta region, which pumps most of the country's oil, and is considering a permanent pipeline security force. Production in April was down 180 kb/d compared to April 2015. Buhari extended an amnesty signed with militants in 2009 along with an accompanying sponsorship scheme, but lower oil prices forced the government to reduce payments. The militants say they want a larger cut of oil revenues.

Libya is also struggling, with production in April of 360 kb/d down 160 kb/d on the previous year - which was already a small fraction of the 1.6 mb/d pumped prior to the country's civil war. Hopes are fading that the oil sector would recover after the long-awaited formation of a unity government. A marketing feud between rival governments in the west and east is rumbling on and has slowed production to a trickle. The standoff has prevented loadings at the eastern Marsa al-Hariga port and due to limited storage capacity, reduced output in early May to just above 200 kb/d. The eastern administration in Bayda has established its own National Oil Corp (NOC) alongside the Tripoli-based NOC.

But Libya may yet surprise to the upside as it has the potential to double output to more than 700 kb/d, provided the eastern ports of Ras Lanuf and Es Sider are re-opened. Earlier this year militants attacked the vital terminals - closed since December 2014 - that can handle nearly 600 kb/d of exports between them. The bulk of any near-term production increase would be provided by the core, southwestern oil fields of Es Sharara and Elephant, that are now shut in. For now, however, the Petroleum Facilities Guard (PFG) militia continue to block the ports. The PFG said it would recognise a UN-backed unity government under Prime Minister Fayez Serraj, which arrived in Tripoli at the end of March, but it has yet to do so. Restarting production from the oil heartland in the eastern Sirte Basin, damaged by militant attacks, will be much more of a challenge.

In Venezuela, output slipped to 2.33 mb/d in April, down 110 kb/d on a year ago with operations under strain due to difficulties in servicing the oil fields and worsening power outages. Production could slow further due to Schlumberger's decision to reduce operations in the country because of insufficient payments. The concern for Caracas is that other service companies will also scale back due to unpaid invoices and further exacerbate the crucial oil field maintenance effort as well as drilling challenges. Cash-strapped Venezuela has grown more dependent on joint-venture partners and service firms to sustain its production but it has amassed huge debts to the companies in the process. Some of the recent gains in the massive Orinoco Belt are at risk due to Petroleos de Venezuela's inability to finance the diluents needed to transport the extra heavy oil. A worsening power crisis due to critically low reservoirs at the Guri hydropower complex could meanwhile put some of the country's refining and production at risk - particularly if outages occur near fields or facilities that do not have an independent source of power.

Supply from Angola drifted 30 kb/d lower m-o-m to 1.77 mb/d in April, while production from Algeria slipped by 20 kb/d to 1.09 mb/d. Ecuador's output edged 20 kb/d lower to 530 kb/d - although crude oil production was unaffected by a devastating earthquake that rocked the country in April. Indonesian crude oil production nudged up to 740 kb/d in April.

Non-OPEC overview

Non-OPEC oil production continued to fall in April as a number of outages added to declines caused by lower prices and spending curbs. Output is estimated to have dropped by another 125 kb/d from March, to 56.6 mb/d, or more than 0.8 kb/d below a year ago, with m-o-m declines stemming primarily from Canada, Russia, Ghana and Italy and the US.



Output is forecast to have dropped more sharply in May, after a devastating wildfire blazed across the heartland of Alberta's oil sands region and shut in more than 1.2 mb/d of production in early May. It is too early to know the full impact on production from the fire, but at the time of writing the risks from the wildfire was subsiding, with no damage to installations reported. One company had already resumed production at reduced rates and others were looking to return staff to assess damage and critical infrastructure needed to restart production.

Even before the fires, Canadian oil production was forecast to decline over April and May due to scheduled maintenance at a number of facilities. While maintenance also curbed Russian production in April to 10.84 mb/d, according to preliminary data, total crude and condensate output stood 170 kb/d above a year earlier. Increased drilling levels and new field start-ups should support growth in Russian output this year, estimated at 110 kb/d compared with 2015.



April output was also reduced by unscheduled outages in less prominent areas. In Italy, a corruption probe forced Eni to suspend output in the Southern Val d'Agri region, which produces around 75 kb/d - the majority of the country's oil output. In Ghana, technical problems at the floating production, storage and offloading vessel operating at the Jubilee field, led operator Tullow to suspend production and declare force majeure on liftings in mid-March. Operations resumed at a reduced rate in early May. Providing a partial offset, the resumption of output after maintenance and outages in Brazil is likely to have lifted production from recent lows.

Oil production in the US continues to decline. Output in February, the latest month for which consolidated monthly production data are available, saw crude and condensate output dropping by 50 kb/d, to 9.13 mb/d, or 320 kb/d less than a year earlier. This is in stark contrast to just one year earlier, when output was growing by 1.3 mb/d. Preliminary indications for March and April suggest output continued to fall, as producers removed another 72 oil rigs from service over the past 10 weeks.

The recovery in the price of oil since mid-January has prompted some producers to suggest that the rig count might have hit bottom and that the more upbeat outlook for prices could prompt a drawdown in drilled but uncompleted wells (DUCs). Other producers have suggested that if oil prices hover around $50/bbl for some months, they would look to increase activity to spur new growth. Constrained capital spending budgets will likely lead companies to be cautious as they redeploy rigs, however, slowing any significant ramp-up in the rig count. Exploration and production companies have planned for capital expenditures at about half of last-year's levels. There will also be a significant time lag between when rigs are redeployed and a supply response is seen. As such, we maintain our forecast for US LTO output to decline by 540 kb/d this year, resulting in a net fall in total US oil output of 480 kb/d. On the back of the latest unscheduled outages, total non-OPEC supply estimates for 2016 have been lowered by 115 kb/d since last month's Report. At 56.8 mb/d, non-OPEC production in 2016 is more than 800 kb/d below the 2015 level.

OECD

North America

US -April Alaska actual, others estimated: US production continues to fall. In February, the latest month for which a complete set of supply data are available, crude and condensate output fell by 50 kb/d from a month earlier to 9.13 mb/d. The steepest declines stemmed from onshore Texas, which fell by 40 kb/d m-o-m, and offshore Gulf of Mexico, down 34 kb/d from the prior month. In contrast, output in North Dakota and New Mexico inched up by 7 kb/d and 26 kb/d respectively.



Total US crude and condensate output stood more than 320 kb/d lower than just twelve months earlier, in stark contrast to growth of more than 1.3 mb/d in February 2015. Preliminary weekly production statistics suggest that the year-on-year declines are accelerating, and by early May stood at around 450 kb/d on a four-week moving average. The decline was in part due to lower output in Alaska, however, where a production outage curbed Prudhoe Bay output.

While the US rig count continued to see steep falls in April, with producers pulling another 34 land based oil rigs out of service over the past five weeks, some producers have been signalling that activity might have bottomed out. The number of active oil rigs in the US has fallen for seven consecutive weeks, to a seven-year low of only 328 in the early May, compared with 668 a year earlier and as many as 1 600 rigs in October 2014 when activity peaked.

As oil prices have recovered to within sight of $50/bbl, the rig count might start to rise. In its latest quarterly earnings presentation, Anadarko cited an improving outlook for prices. Pioneer stated they would add rigs if oil stays near or rises from $50/bbl, while Whiting Petroleum Corp, the largest oil producer in North Dakota, said it would soon frack 44 wells to bring them online - just weeks after saying it would freeze virtually all new work. According to Rystad Energy, the number of drilled but uncompleted wells has dropped from around 4 050 at the end of 2015 to just over 3 900 in April.

Companies are expected to be cautious as they redeploy rigs, however. A review of Securities and Exchange Commission filings from a representative sample of 31 US-based independent exploration and production companies show announced capital budgets being cut 58% this year, following a 37% cut in 2015. Yet, production guidance for this year is only 6% below 2015 levels on a barrel of oil equivalent basis. As in 2015, hedging will provide some relief to producers, but to a lesser extent. For 2016, the group of companies has announced oil hedges covering 22% of target production at an average floor price of $66.68/bbl, and gas hedges covering 18% of target production at a floor price of $3.14 per mmbtu. This compares with commodity hedges in 2015 for the same group covering 28% of oil production at a weighted average floor price of $84.92/bbl, and 31% of gas production at a floor price of $4.04 per mmbtu.



Despite the cushion provided by hedges and the drastic reduction of budgets, the group's financial situation remains dire. If production targets are achieved, and gas and NGL prices remain near current levels throughout the year, the operators need a market oil price ranging from $49/bbl to $66 /bbl to achieve neutral free cash flow. The range depends on how aggressively cash operating expenses can be slashed, with $49/bbl corresponding to a 20% reduction in cash expenses versus 2015. As a comparison, cash operating expenses fell by about 5% between 2014 and 2015.

The risk posed by oil prices below this range is yet another round of fund raising in an environment with strong headwinds. Equity issuance in the first quarter of 2016 was reported to be about half the level seen in 1Q15, and credit lines continue to be reduced by bankers in an effort to limit exposure to non-performing loans. Asset sales should provide some help, but the sector remains a buyer's market.

Wildfires curb Albertan oil sands output

The devastating wildfire burning through vast areas in and around Fort McMurray forced nearby oil sands companies to shut down 1.2 mb/d of production in early May and evacuate staff from more distant locations. While it is still too early to fully assess the impact on production from the outage, we assume that the affected sites will gradually restart operations over coming weeks and ramp up towards the start of June.



As a result, total Canadian oil supplies are forecast to fall by 660 kb/d in May, to just over 3.7 mb/d, a reduction of nearly 1 mb/d from the start of 2016 and 160 kb/d less than in May 2015, which also saw output curbed by fires. For the year as a whole, our Canadian oil production estimate has been cut by 85 kb/d since last month's Report, nearly wiping out previously forecast annual gains.

With the fire spreading over 230 000 hectares, at its peak, 13 oil production sites were forced to evacuate staff and fully or partly shut down operations. At the time of writing, the fire conditions in the province remained extreme but the risks from the fires were subsiding near oil installations. As such, companies were looking to return staff and to assess the damage to facilities and critical infrastructure to plan for the resumption of operations.

Indeed, Royal Dutch Shell reported it was flying in staff to restart its mining operations 95 kilometres north of Fort McMurray at reduced rates on 9 May. Shell's 250 kb/d Muskeg and Jackpine (Albian Sands) mining operations was shut on 6 May. Shell added it plans to fly staff in and out.

Suncor, which had evacuated approximately 4 100 personnel and shut down operations at its Base Plant and the MacKay River and Firebag in situ mining operations last week were also looking to resume production. The company was planning to fly back workers to the sites over the next couple of days, with unconfirmed reports that they many begin the restart process in as early as next week. Prior to the fire, Suncor's Base Plant was reportedly operating at reduced rates of around 120 kb/d as it undertook a planned turnaround.



Syncrude Canada, meanwhile, shut its Mildred Lake plant on 7 May, evacuating all 1 500 staff in order to ensure "the safety of the personnel and the integrity of the operations". The company restarted power generation at its oilsands mine in Aurora on 10 May and were reportedly finalising their restart plan The Syncrude upgrader produced an average 315 kb/d in 1Q16, slightly below capacity of 350 kb/d.

With the fire still raging, and nearly 90 000 people displaced, significant uncertainty remains surrounding the possible restart of production from the affected sites. While officials have warned they could be fighting the blaze for months, weather conditions have improved and oil companies are doing their utmost to protect oil installations, with no substantial damage reported thus far. While most companies' plans for restarting operations seem fairly advanced, the timing will depend on the fire threat, power availability and pipeline restarts as well as labour availability.

Projects closer to Fort McMurray, which rely more heavily on a nearby workforce, could see lengthier start-up delays as the damage to the city is extensive and alternative housing for workers might have to be found. The further the projects are from Fort McMurray, the more companies tend to rely on workers who fly in for three- week shifts. Housing camps are reportedly mostly intact as are the airstrips, which should allow workers to return fairly rapidly once conditions allow. Operators that left equipment idling, rather than shutting down completely as with maintenance outages, will have an easier time resuming production. Large steam-driven projects, like Husky's Sunrise and Nexen's Long Lake, could take a few weeks to fully restart, while mining operations could return much sooner.

Mexico - March actual, April Preliminary: Mexican crude production averaged 2.2 mb/d in March, slipping 30 kb/d in April to 2.19 mb/d. Pemex announced it will cut production by 100 kb/d this year, to 2.134 mb/d as it reduces investment in upstream projects whose costs exceed a $25/bbl target. Pemex will cut those investments as part of a broad Pesos 100 billion (USD 5.5 billion) reduction in spending this year to Pesos 378 billion due to the drop in oil prices. Most of the production cuts will come from non-conventional fields and from extra-heavy crude. The largest discoveries in recent years, Ayatsil and Tsimin, are due to come into production in early 2017. Both produce extra-heavy oil and Pemex could seek to farm them out or set up a joint-venture for their development. After declining by 210 kb/d in 2015 to 2.6 mb/d, total Mexican oil production, including NGLs, is forecast to decline by a total of 115 kb/d in 2016.

North Sea

Norway - February actual, March provisional: Preliminary production figures from the Norwegian Petroleum Directorate (NPD) show a slight dip in Norway's output level from February to March. According to the NPD data, total oil output averaged 2.01 mb/d in March, 51 kb/d less than a month earlier, but nearly 70 kb/d higher than the previous year. New output from Eni's Goliat platform, Norway's first producing oilfield in the Barents Sea, commenced production on 13 March, though a gas leak on the floating production unit resulted in a temporary production halt only a month after start-up.

Total Norwegian oil production is forecast to decline by a slight 15 kb/d this year, to 1.9 mb/d, as a return to normal seasonal levels and field declines offset the ramping up of new production units. Notably, planned maintenance at ConocoPhillips' Ekofisk field is expected to curb output sharply in June.



UK - February actual, March preliminary: Preliminary production estimates released by the UK Department of Energy and Climate Change (DECC) show UK total oil output surging to nearly 1.1 mb/d in March, the highest level since October 2011, and 170 kb/d above a year earlier. Furthermore, revised DECC production estimates for January and February were hiked by a substantial 80 kb/d and 150 kb/d respectively from its initial assessments.

In April, Premier Oil reported first output from its Solan development. Once fully on-stream, the field is expected to produce around 20-25 kb/d. Meanwhile, maintenance on the Buzzard field, the UK's largest, has reportedly been deferred to September, from an originally planned start date in July. Buzzard produces around 180 kb/d and is the largest contributor to the Forties crude stream, one of the four grades underpinning the Brent benchmark. As such, total UK oil production for 1Q16 is now pegged at 1 mb/d, more than 170 kb/d higher than in 1Q15. Growth is expected to slow however, and output for the year as a whole is expected to be 910 kb/d, only slightly above the 2015 average.

In Italy, oil production in the southern Val d'Agri (Agri Valley) area was suspended in late March after several Eni employees were arrested on suspicion of illegal waste trafficking. The Agri Valley lies in the southern Basilicata region. ENI plants there produce 75 kb/d. It is unclear when output will resume. Italian crude oil production averaged 100 kb/d in 2015, but had dropped to 80 kb/d in March, the latest month for which production data are available.

Non-OECD

Latin America

Brazil - March actual: A number of outages curbed Brazilian oil production by another 70 kb/d in March, extending year-on-year declines. Averaging 2.35 mb/d in March, total Brazilian supplies fell short of the year prior by nearly 160 kb/d, the third consecutive month of annual declines. A drop of 340 kb/d in Campos Basin output more than offset a 212 kb/d increase from the Santos Basin.

In its latest operational update, Petrobras, which accounts for more than 80% of Brazil's oil production, said its crude and NGL production fell below 2 mb/d in March. The company attributed the decline to planned stoppages at several of its larger units as well as corrective maintenance undertaken at the P-31 floating, production, storage and offloading (FPSO) vessel operating at the Albacora field. Petrobras was forced to shut down production from P-31, located at the Campos Basin field, due to gas and oil leaks in January. Output at the Albacora field, which averaged 50 kb/d in 2015, dropped to 9 kb/d in March. A fire at the P-48 platform located in the Barracuda & Caratinga complex, also located in the Campos Basin further reduced production. Production at the P-31 and the P-48 platforms resumed on 28 March and 16 April, respectively.



The ramping up of output of the Cidade de Marica, which entered operations in February, and the planned start-up of the Cidade de Saquarema and Cidade de Caraguatatuba FPSOs in 2Q16 and towards year-end will support growth later in the year. Petrobras also said there would likely be fewer stoppages in the second half of the year. Annual guidance was maintained at 2.145 mb/d, an increase of less than 20 kb/d from 2015.

Africa

In Ghana, UK independent Tullow announced in early May it had resumed output at its offshore Jubilee field, but at reduced rates of around 30 kb/d, compared with just over 100 kb/d on average in 2015. The Jubilee field was shut in March due to damage to the FPSO turret bearing. According to the company, temporary off-take procedures have been implemented and new production guidance will be re-issued once the new operating arrangements have stabilised. Tullow's TEN project, meanwhile, is now 90% complete and first oil remains on target for July/August 2016.

Asia

China - March actual: Chinese crude oil production dropped to 4.09 mb/d in March, from 4.15 mb/d on average over the first two months of the year, and 160 kb/d less than a year earlier. For 1Q16 as a whole, average output was 105 kb/d lower than a year earlier. Chinese oil companies have been cutting spending and output targets in response to lower oil prices (see Chinese production slows in OMR dated 14 April 2016). In 2016, we expect total Chinese oil supply to fall y-o-y by 0.16 mb/d, to 4.2 mb/d.? Petrochina's output will shrink by 90 kb/d (-4.1%) as it shuts down aging and high-cost fields.

Former Soviet Union

Russia - March actual, April provisional: Russian crude and condensate output fell by nearly 60 kb/d in April to 10.84 mb/d, as maintenance curbed Gazprom output by nearly 50 kb/d m-o-m. While production slipped from recent highs, total output nevertheless stood 170 kb/d above a year earlier with gains primarily stemming from smaller producers such as Novatek (+90 kb/d), Bashneft (+40 kb/d), PSA Operating companies (+50 kb/d) and other small producers.

Output from Russia's main producers, however, continued to fall. Lukoil, the second largest producer saw its output drop nearly 20 kb/d in April, to just below 1.66 mb/d, or more than 80 kb/d below a year earlier, with the majority of the decline from its Western Siberian fields. In contrast to its peers, Lukoil curbed its development drilling by 35% in 1Q16 from a year earlier. Rosneft and Bashneft meanwhile expanded development drilling by more than 50% in the same period. Rosneft output inched up by 18 kb/d last month, but, at 3.77 mb/d, nevertheless stood 40 kb/d below the previous year. Surgutneftegaz meanwhile held output steady from both a month and year earlier at around 1.2 mb/d.

While increased drilling rates (total drilling rates are up 13% from 1Q16 versus 1Q15) have enabled producers to stem declines at mature fields, it is clear that field management at brownfields is deteriorating. Rosneft, but especially Surgut, are believed to drill simple wells using old-fashioned and inefficient methods. Over 2/3 of Rosneft's new metres drilled in Q1 2016 were vertical while Surgut only 6% of Surgut's meters drilled in the same period were horizontal.  Russian producers are nevertheless expected to post annual gains of 110 kb/d this year, in part due to the start-up of new fields. Amongst others, Lukoil is expected to commission its Filanovskoe field in the second half of the year, with production reaching 20 kb/d by year-end.

Azerbaijan -March actual; Kazakhstan - March actual: Azeri oil production inched higher in March, to 0.87 mb/d, as output from the fire-affected Gunashli field resumed. Kazakhstan's output held steady at 1.61 mb/d, some 50 kb/d below a year earlier. Over the past month, conflicting statements by different stakeholders surrounding the resumption of production from the massive Kashagan project have been reported. An official from Chinese partner CNPC said the project will relaunch in June 2017, six months later than the official schedule given by consortium partners developing the project. Kazakhstan's KazMunaiGaz, which holds the largest share of the project, has said previously that the field would restart by the end of the year.

FSU net oil exports increased by 290 kb/d in March, to 10.16 mb/d, roughly unchanged from a year earlier. The increase was led by higher crude shipments, which broke the 7.0 mb/d mark for the first time on record, while product exports rebounded from a February low.

Most of the crude increase came from the Black Sea, where Rosneft diverted volumes from the Baltic, aided by maintenance at pipelines delivering to Primorsk. Loadings from Novorossiysk doubled on the month, as two February cargoes were delayed because of storms, and Azeri Socar resumed deliveries after a three month hiatus. ESPO loadings at Kozmino were also sustained above 600 kb/d, while flows into Europe through the Dhruzba pipeline fell slightly on maintenance at Mol's Bratislava refinery.

Russian fuel oil shipments bounced back after dipping in February. Gasoil exports also inched up, to 1.21 mb/d, the highest in more than a year. The export of other products, including naphtha and gasoline meanwhile dropped by 140 kb/d, as lower refinery output reduced supplies.


Stocks

Summary

  • Stock builds are beginning to slow in the OECD; in 1Q16 they grew at their slowest rate since 4Q14 and in February drew for the first time for a year. Meanwhile, stock building in non-OECD countries remains brisk and we have not changed our view that global inventories will not begin to draw steadily until 2017.
  • OECD commercial inventories drew by a slim 1.1 mb in March to stand at 3 044 mb by end-month. Since the draw was counter-seasonal to the 13.9 mb five-year average draw, inventories' surplus to average levels narrowed to 357 mb from 372 mb one month earlier.
  • Falling OECD refined products stocks led inventories lower in March but due to a sluggish demand prognosis over the coming months, forward demand cover remained relatively steady at 33.3 days, 0.1 day lower than at end-February.
  • Upon the receipt of more complete data, February OECD inventories were revised 15.1 mb lower with the adjustment centred in the Americas. The upshot is that the 7.3 mb February build presented in last month's Report has swung to a 7.2 mb draw. This was the first OECD stock draw in twelve months.
  • Preliminary data suggest that OECD inventories rebounded by a weak 5.7 mb in April. As OECD refinery throughputs remained relatively low, crude holdings built by 14.7 mb. On the other hand, low throughputs saw refined product stocks defy seasonal trends and slip by 8.0 mb.
  • Despite the tentative disappearance of a contango structure in parts of the crude oil market, volumes of crude stored at sea increased by 10 mb to their highest level since June 2015 as a number of logistical bottlenecks forced market participants to turn to tankers.

Global overview

While global stock building remains brisk, with inventories increasing at a similar pace in 1Q16 to end-2015, initial indications are that OECD inventory builds are beginning to slow. Data for 1Q16 indicate that OECD commercial inventories built at the slowest rate (0.3 mb/d) since 4Q14 and posted their first monthly draw for a year in February, while over recent weeks the contango in many crude and products markets has flattened. ICE Brent moved into backwardation in mid-April as the contract for delivery two months ahead stood at a discount to oil for prompt delivery. Nonetheless, global stocks are not projected to draw steadily until some point in 2017.

Our current demand and supply balances imply that in 1Q16 the bulk of the global stock build took place in non-OECD countries where inventories are thought to have increased by 0.8 mb/d. As has often been the case recently, the majority of this build is attributable to China where stocks have risen on the back of soaring crude imports. Meanwhile, inventories have likely grown in India as the Paradip refinery - which has a crude oil processing capacity of 300 kb/d - has started up. The latest JODI data (not including March) suggests that other builds have been seen in South East Asia and the Middle East.

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

OECD commercial inventories fell by a slim 1.1 mb in March to stand at 3 044 mb by end-month. Since the decline was counter-seasonal to the 13.9 mb five-year average build for the month, inventories' surplus to average levels narrowed to 357 mb from 372 mb one month earlier. The March draw was not the first for this year; new February data saw stocks revised sharply lower by 15.1 mb, reversing an initial 7.3 mb build into a 7.2 mb draw. This marked the end of one year of consecutive monthly builds that added an astounding 291 mb.



In March, stocks were driven lower by refined products, which declined by 5.5 mb, more than offsetting a combined 4.4 mb build in crude, NGLs and other refinery feedstocks. The draw in refined products was weaker than the 19.2 mb five-year average draw for March and came as 'other products' built by a steep 10.2 mb, centred in the US. This followed lethargic propane space heating demand due to above normal temperatures in many parts of the mid-continent while preliminary data suggest that exports remained lower than in previous months. In contrast, motor gasoline inventories adhered to seasonal trends and dropped by their steepest monthly increment in a year (-12.4 mb). Middle distillates holdings remained stable (-0.7 mb m-o-m) at close to 610 mb. On a days-of-forward demand basis, refined product cover remained broadly flat at 33.3 days, 0.1 day lower than end-February.

Crude oil holdings rose by 9.8 mb, however, the increase was far shallower than the 30.6 mb average build for March, after holdings in Europe drew counter-seasonally by 1.7 mb, while inventories in Asia Oceania inched up by a weak 0.8 mb. Initial indications are that imports into these regions remained low. In the Americas, inventories increased by 10.6 mb, although this was slightly weaker than average as regional refinery throughputs hit a record for the month (nearly 0.5 mb/d above one year earlier) while regional production has fallen on a year-on-year basis as producers struggle with a prolonged period of low oil prices. Meanwhile, NGLs and other feedstocks fell counter-seasonally by 5.3 mb with the draw centred in Europe and Asia Oceania.

Upon the receipt of more complete data, February OECD commercial inventories were revised downwards by 15.1 mb. Together with a 0.6 mb downward adjustment to January inventories, the net effect was that the 7.3 mb February build presented in last month's Report became a 7.2 mb draw. The February revision was centred in the Americas where 'other oils', total products and crude oil were adjusted downwards by 6.6 mb, 3.7 mb and 0.5 mb, respectively. In contrast, stock levels in Europe and Asia Oceania were lowered by 2.9 mb and 1.5 mb, respectively.



Preliminary data suggest that OECD inventories rose by a weak 5.7 mb in April. OECD refinery throughputs fell by 220 kb/d over the month that saw crude holdings post a steep 14.7 mb build while refined products fell counter-seasonally by 8.0 mb. On a region by region basis, stocks built by 13.8 mb in the US while European holdings drew by 8.0 mb and inventories in Asia Pacific remained flat. If confirmed by final data, this weak build will see the surplus to the five-year average level fall to 342 mb, the narrowest this year.

Recent OECD industry stock changes

OECD Americas

Commercial oil stocks in the OECD Americas adhered to seasonal trends in March and added 11.9 mb. Despite slowing regional crude production growth, so far in 2016 stocks remain on a very similar upward path to 2015. Indeed, over the first quarter inventories rose at a rate of 320 kb/d, just 90 kb/d shy of last year's build. The bulk of recent regional builds has been in crude oil as refineries entered seasonal maintenance. In March, these inventories added 10.6 mb with NGLs and other feedstocks inching up by 0.5 mb. Refinery maintenance, especially at plants on the US Gulf Coast, appears to be less than last year with regional crude runs higher year-on-year across the first quarter. Other factors underpinning growing crude oil stocks include higher imports encouraged by a narrower WTI-Brent spread.



Regional refined product inventories inched up unseasonally by 0.8 mb in March, likely boosted by refinery runs being 470 kb/d higher than a year ago. Nonetheless, since demand is projected to increase over the coming months, on a days-of-forward demand basis, cover slipped by 0.1 day to stand at 31.6 days at end-month. Holdings of 'other products' (+9.5 mb) began their seasonal climb as propane restocking commenced; by end-month they stood nearly 14 mb above one-year earlier - largely due to US natural gas production remaining on an upward path. In contrast, motor gasoline inventories dropped seasonally by 8.9 mb as refiners continued to destock winter-grade product; by end month, inventories stood 18 mb above one year earlier. Middle distillate inventories increased counter-seasonally by 2.2 mb, amid anaemic US distillate demand that was 0.4 mb/d lower than in 2015. Stocks were also boosted by the fact that US exports to Europe were lower than a year earlier as ample European stocks depressed import requirements.

Data from the US EIA suggest that US oil stocks added a further 13.8 mb in April. As during March, crude inventories (+12.3 mb) led the rise, although as refiners came back online, the build likely came as crude imports into PADDs 1 and 3 (the Atlantic Coast and Gulf Coast) surged. Stocks at the Cushing, Oklahoma storage hub remain stubbornly high at close to 65 mb. Refinery maintenance in the midcontinent has been particularly heavy this year with April throughputs standing approximately 450 kb/d below a year ago while crude imports from Canada remained above year-ago levels.



US refined products inched up seasonally by 1.5 mb/d, driven by a 13.9 mb increase in 'other products' as the restocking of propane continued apace. Motor gasoline inventories declined by 2.2 mb due to lower refinery runs and outages at gasoline producing units that offset the effect of higher US refinery runs, with the draw concentrated in PADDs 2, 3 and 4. Inventories on the Atlantic Coast (the country's largest gasoline market) rose by 3.1 mb after an armada of cargoes arrived from Europe attracted by the wide transatlantic arbitrage created by the outages (which also had the effect of closing the seaborne arbitrage window to ship product northwards from the Gulf Coast).

OECD Europe

Industry oil holdings in Europe drew counter seasonally by 10.4 mb during March, with the region's surplus versus average levels narrowing to 73 mb by end-month from 85 mb at end-February. Crude, NGLs and other feedstocks declined by a combined 3.9 mb, in contrast to the 8.8 mb five-year average build for the month. With regional crude production remaining flat and refinery runs dropping by over 200 kb/d in March, it is likely that imports fell as refiners chose to utilise their stockpiles rather than import crude. Refined products declined by a broadly seasonal 6.5 mb in March as refinery output fell. Accordingly, holdings of motor gasoline, middle distillates and fuel oil fell by 3.4 mb, 1.8 mb and 1.7 mb, respectively. By end-month, refined products covered 42.8 days of forward demand, 0.8 days below end-February but 4.2 days above one year earlier.

Preliminary data for April suggest that European inventories fell by a broadly seasonal 8.0 mb in April after a 1.0 mb build in crude oil failed to offset a 9.0 mb draw in refined products. Following a fall in transatlantic inflows, middle distillates holdings dropped by 6.0 mb, more than twice the average draw for the month. Motor gasoline inventories declined by 1.4 mb, amid a notable uptick in exports to the US encouraged by a wide arbitrage window. Meanwhile, German end-user heating oil stocks abruptly changed course and drew to stand at 57 % of capacity in April. 


OECD Asia Oceania

Commercial oil holdings in OECD Asia Oceania declined counter-seasonally by 2.6 mb in March which saw the region's surplus to average levels slip to 20 mb at end-month from 27 mb at end-February. There was a steep 3.6 mb draw in NGLs and other feedstocks, centred in Japan, which more than offset minor rises in crude oil (0.8 mb) and refined product (0.2 mb) stocks. The increase in refined product holdings came as regional refiners cut runs, with fuel oil and 'other products' increasing counter-seasonally by 0.9 mb and 0.4 mb respectively, while motor gasoline (-0.1 mb) and middle distillates (-1.1 mb) adhered to seasonal trends and drew. All told, refined products covered 21.6 days of forward demand at end-March, 0.7 days above end-February and 1.6 days above one year earlier.



Data from the Petroleum Association of Japan point to Japanese inventories remaining remarkably flat in April as they inched down by 0.1 mb. Refined product holdings slipped counter-seasonally by 0.5 mb as product imports are likely to have fallen. This draw was centred in 'other products' which declined counter-seasonally by 2.2 mb. Meanwhile, middle distillates, motor gasoline and fuel oil holdings rose by 0.9 mb, 0.6 mb and 0.3 mb, respectively. Refinery activity remained low during the month which saw crude inventories increase counter-seasonally by 1.3 mb.

Recent developments in Non-OECD stocks

According to data from China Oil, Gas and Petrochemicals (China OGP), Chinese commercial crude oil inventories remained relatively steady in March, inching down by an equivalent 0.8 mb which saw stocks sit about 14 mb below one year earlier. The draw came as both crude imports and refinery runs remained relatively stable on a daily basis. Nonetheless, data suggest that unreported crude stocks rose for a tenth consecutive month as crude supply (domestic production plus net imports) remained well above refinery runs, with stocks likely to have risen by approximately 1 mb/d. Preliminary estimates for April suggest that total Chinese crude stocks continued to build.

Refined product holdings also remained steady, increasing by a slight 0.2 mb in March. Nonetheless, this disguised the contrasting movements within product categories; while gasoil dropped by 6.8 mb, kerosene added 1.0 mb and gasoline surged by 6.0 mb, the steepest monthly increment since at least 2008. The increase in gasoline holdings reportedly came as Chinese refiners increased their gasoline production by nearly 9% compared to one year earlier as they struggle to keep up with strong domestic demand.



Land-based refined product inventories in Singapore drew by 1.8 mb in April to a three-month low as holdings of middle distillates dropped by 3.3 mb. This draw was the steepest since at least 2009 and came as shipments of gasoil and kerosene to the region fell due to refinery maintenance in the Middle East and as regional demand remained high owing to refinery turnarounds in Korea and Japan. By end-April, middle distillate stocks stood at their lowest since last June. In contrast, residual fuel oil holdings added 1.0 mb as arrivals of large cargoes on VLCCs from Europe remained steady and offset relatively healthy bunker activity. Meanwhile, light distillate holdings remained stable over the month at just under 15 mb.

Recent developments in floating storage

Despite the contango structure in crude markets disappearing during April, volumes of crude oil held on tankers increased by 10.3 mb to 88.9 mb at end-month, the highest since June 2015. However, this increase was due to a number of bottlenecks rather than market participants storing oil for speculative reasons. While volumes in the Middle East Gulf remained close to 65 mb as the Iranian fleet remained unchanged on the month, volumes stored in Northwest Europe surged by more than 4 mb as a number of Forties cargoes remained unsold at end-April as the arbitrage window to ship crude to Asia remained firmly shut. Volumes stored off Asia increased to 15.4 mb after a further 4 mb of crude was stored off China following congestion at a number of major ports, notably Qingdao. A similar picture is seen in the US Gulf with one VLCC reportedly storing crude due to delays in offloading crude at the LOOP terminal arising from a recent significant uptick in imports due to the narrow WTI-Brent spread.


Prices

Summary

  • Benchmark crude oil prices strengthened in April on the back of unscheduled production outages in, amongst other places, Nigeria, Ghana and Canada, which by early-May exceeded 1.5 mb/d. This more than offset bearish sentiment that emerged in the wake of the inconclusive Doha production talks in mid-April. At the time of writing, benchmark crudes were hovering at close to year-to-date highs: ICE Brent was last trading at $47.00/bbl with NYMEX WTI slightly lower at $45.88/bbl.
  • April saw the contango in crude and products futures flatten, eroding the economics of oil storage. During mid-month, the first two months of the ICE Brent contract flipped into steady backwardation for the first time since mid-2014 on expectations for heavy seasonal maintenance in the North Sea and for the current supply overhang in global crude markets to diminish.
  • Spot crude prices continued to strengthen in April driven by numerous supply outages. Sour crude prices in Asia posted the steepest rises as regional demand rose on strong cracking margins while further upward momentum came from a workers' strike in Kuwait. In contrast, rises for North Sea crudes were muted as supplies remained ample amid lacklustre regional crude demand.
  • Spot product prices followed crude higher and increased across the board in April. Gasoline posted the steepest increase after a number of outages at production units in the US saw a flotilla of European cargoes head west. Gasoline cracks in the Atlantic Basin underpinned refinery margins there.
  • Freight rates for very-large-crude-carriers (VLCCs) on the benchmark MEG - East Asia route weakened in April to a level unseen since August 2015. Weather delays in the Far East, which provided support and volatility in March, waned and, combined with abundant tonnage available, gave charterers the upper hand.

Market overview

Benchmark crude prices hit year-to-date highs in April following production outages in Nigeria, Ghana, Canada and elsewhere. This offset any bearish sentiment arising from the inconclusive Doha meeting of oil producers. ICE Brent hit a high of $48.14/bbl in late-month but by early-May had retreated slightly to last trade at $47.00/bbl. NYMEX WTI saw its discount to Brent narrow steadily over the month, reflecting declining US supply. WTI peaked at $46.03 in late-April before falling back to $45.88/bbl at the time of writing.

Despite global balances showing a significant supply overhang for the whole of 2016, bullish sentiment appears to reign supreme in oil markets. Speculative investors increased their long positions to all-time highs during the month, while contango in crude and product markets flattened with ICE Brent even flipping briefly into backwardation.



Nonetheless, despite all benchmark crudes strengthening, there were regional disparities. Asian markets increased strongly on robust crude demand as refiners reacted to healthy cracking margins. Accordingly, Dubai increased sharply in comparison to other benchmarks, which saw the grade's premium against ICE Brent vanish by early-May. Prices also strengthened in the US, although the momentum came more from declining domestic supply than from increased refinery activity. In comparison, increases in the price of North Sea crudes were modest as regional supply remains ample. European refiners are faced with margins significantly below year-ago levels and buying interest is limited.

Futures markets

April saw the contango structures of crude and products futures markets flatten. During mid-month, the first two months of the ICE Brent contract flipped into backwardation and remained so until early-May. This marked the first steady period of backwardation since mid-2014 and reportedly came amid expectations for heavy summer maintenance in the North Sea and for the current supply overhang in global crude markets to diminish. Backwardated markets erode the economics of oil storage and come at a time when the pace of growth of OECD stocks has slowed. By early May, the contract had flipped back to contango on news that maintenance on the UK's Buzzard field would be delayed until September. Accordingly, timespreads widened to $0.30/bbl per month over both the first three and first twelve months of the contract, levels sufficient to cover most market participants' storage costs.



In the US, NYMEX WTI remained in contango throughout April, although timespreads diminished somewhat over the month. As has been the case for some time, the prompt month remained under pressure from persistently high stocks at the contract's delivery point in Cushing, Oklahoma. During April inventories at the terminal were around 65 mb. By early May, the contango had widened slightly with time spreads over the first three months of the contract standing at $0.36/bbl per month compared to $0.27 /bbl per month over the first twelve months.



Investors have increased their bullish bets on Brent financial contracts to all-time high levels, according to data provided by the Intercontinental Exchange (ICE). Unhedged long positions soared to more than 400 000 contracts, the highest since data was first published. The long-to-short ratio, an indicator of funds' overall positioning, was more than 2.5, signalling a very clear directional bet.

Spot crude oil prices

Spot crude prices continued on an upward trajectory in April driven by numerous supply outages. Sour crude prices in Asia posted the steepest incremental increase as Asian demand rose as margins for complex refiners strengthened while further upward momentum came from a workers' strike in Kuwait. In contrast, North Sea crudes posted more moderate increases as regional demand for crude remained lacklustre. US crudes increased on the back declining US production and from supply disruptions in Canada, with LLS moving to a rare premium against North Sea Dated in early May.



The increase of $2.99/bbl for Dated Brent in April versus March was lower than for other light grades. Brent was pressured by anaemic regional demand for crude. This resulted in a number of unsold Forties cargoes being stored on tankers near the Hound Point terminal. Considering the wide sweet - sour spreads during early April which closed the arbitrage eastwards, Asian buyers reportedly shunned Forties in April. Indications are that as VLCC rates fell further and as Brent's premium to Dubai disappeared during late April, Chinese buyers re-entered the market with at least one previously unsold cargo heading eastwards.



Urals saw its discount to North Sea Dated narrow in late-April following the release of a May loading program that was less than expected. This is because Russian domestic crude demand will increase as refineries exit turnarounds and as pipeline maintenance is projected to curb exports from the Black Sea port of Novorossiysk. By early May, Urals for delivery to Northwest European (NWE) customers was offered at a $2.40/bbl discount to the North Sea benchmark, the narrowest since December 2015. In mid-month, Urals NWE saw its widest discount to Urals Med since February, after the Med grade was lifted by strong regional demand and the aforementioned supply concerns. This opened the opportunity to ship Urals from Baltic ports to Mediterranean customers.

In the US, benchmark WTI gained $3.19/bbl on a monthly average basis as domestic production continues on a downward path with preliminary April data suggesting that US supply was 600 kb/d lower year-on-year (y-o-y). With gains in North Sea Dated being more modest, spot WTI rose to a small premium against the European benchmark in late-month.



Canadian crudes gained some support during mid-April as maintenance curbed supplies, but Western Canadian Selects (WCS) remained at a $12/bbl discount to WTI. Following the shut-in of close to 1 mb/d of Canadian production capacity in early-May as wildfires hit the state of Alberta, this saw the differential narrow further. With midcontinent refiners continuing to ramp-up operations amidst uncertainty at the impact of the wild fires, this could see the differential narrow further. In response to 2015's wild fires, the WTI - WCS differential narrowed to less than $10/bbl.

Bakken crude continues to stand at a premium to WTI as LTO production contracts. In April, this premium averaged $0.60/bbl keeping the arbitrage window to rail crude to Atlantic Coast refiners firmly shut. Consequently, crude imports into PADD 1 remained well above year-earlier levels. A further increase in imports has resulted from the narrowing of the LLS - North Sea Dated spread over the past few weeks. Indeed, in late April LLS moved to a premium versus North Sea Dated as refiners on the Gulf Coast ramped up runs. In the last week of the month, the premium exceeded $3/bbl, the widest since January, and despite falling back in early May, it remained at $2.20/bbl at the time of writing.



African grades fared better in April compared to previous months. Following the continuing outage to the light, sweet Forcados stream and ongoing strong transatlantic demand (with US imports of West African crudes likely exceeding 400 kb/d in April), Nigerian Bonny Light strengthened steadily against Brent, and at the time of writing was being sold at a premium of $0.70/bbl, its highest since November 2015. An additional boost also came as the premium of Brent to Dubai narrowed at end-April, making African crudes more attractive for Asian buyers. Nonetheless, reports continue to circulate that there are a plethora of cargoes still available from both the Nigerian and Angolan June loading programs.

On a monthly average basis, Dubai crude strengthened by $3.88/bbl in April, the steepest amongst benchmark crudes as Asian demand increased on strong cracking margins and as a number of regional refineries emerged from maintenance. Additional upward momentum came as the Kuwaiti workers strike propelled the grade higher in mid-month. The Brent - Dubai spread narrowed steadily over the month so that by the time of writing, Dubai was trading at parity to Brent. 

In early May, Saudi Aramco reflected the strong Asian sour crude market and strong margins for complex refiners and raised its June official selling price formula for the Arab Light grade delivered to Asian customers by $1.10 /bbl, the steepest increment in over a year. In contrast, the price of the grade for European customers was only increased by $0.15/bbl, reflecting the recent lacklustre demand for crude there. US customers saw their prices remain at the same $0.35/bbl discount against the Argus Sour Crude Index as in March.

Spot product prices

Spot product prices followed crude higher and strengthened across the board in April. Gasoline posted the steepest increases after a number of outages on production units in the US saw a flotilla of European cargoes head westwards. Consequently, gasoline cracks are currently underpinning refinery margins across surveyed markets as middle distillate cracks remain significantly lower than a year ago amid high inventories and ample supply both in the Atlantic Basin and Asia.



On a monthly average basis, spot gasoline prices in the Atlantic Basin posted double-digit price increases in percentage terms following multiple outages on gasoline producing units in the US. Accordingly, prices in the US Gulf Coast surged and briefly touched $70/bbl at end-April, their highest since October 2015. These high prices shut the seaborne arbitrage to ship product northwards to the Atlantic Coast region and drew in multiple cargoes from Northwest Europe and the Mediterranean where product was roughly $10 /bbl cheaper - easily enough to cover shipping costs. By early-May, European prices stood at about $55 /bbl, their highest since November 2015.



While gasoline spot price increases in the Atlantic Basin outstripped firmer crude prices with cracks strengthening accordingly, gasoline cracks in Asia softened as supply remained ample. Consequently, on a monthly average basis, cracks in Singapore slipped by $2.07/bbl. Meanwhile, cracks in the US Gulf Coast and Europe rose by $5.18/bbl and $6.97/bbl, respectively, with gasoline cracks underpinning refinery margins in these regions.

Naphtha cracks suffered from lower petrochemical consumption in Europe and Asia as falling LPG prices reportedly encouraged petrochemical plants to switch to the cheaper feedstock. Despite regional gasoline blending demand remaining healthy, naphtha cracks in Europe retreated into negative territory by early-month, the first time they had stood in the red in for two months. In Singapore, the picture was even worse as Dubai crude soared and trumped a slight increase in naphtha spot prices. Cracks plummeted so that by early May they stood at -$0.20/bbl, the lowest since last September.



Middle distillate cracks remain significantly lower than a year ago due to ample supply and lacklustre demand in key markets. Diesel prices followed crude prices higher in all surveyed markets with the US Gulf Coast and Singapore regions posting the steepest increases. In Singapore, further upward momentum came from consecutive stock draws amidst lower shipments from the Middle East and high regional import demand from Japan and Korea where refineries were undergoing turnarounds. Price increases in Europe were more moderate considering that regional stocks remain ample and imports from Russia remained relatively robust offsetting fewer arrivals from the US. As European prices firmed, the contango in forward prices flattened and at the time of writing, the front two months of the ICE Gasoil contract were trading at approximate parity, thus not covering on-land storage costs.



Fuel oil crack spreads weakened in all regions bar the US as product prices struggled to match the increase in benchmark crudes. European cracks have suffered from sustained Russian fuel oil exports (See 'Supply'). Singapore cracks weakened, but the region still shipped multiple cargoes from Northwest Europe, with at least three VLCCs reported to have loaded in Rotterdam. The arbitrage window remains slightly open, despite Singapore residual fuel oil stocks remaining ample, supported by extremely cheap VLCC freight rates and solid Asian bunker demand. Moreover, preliminary data compiled by the Singapore Maritime Authority show March vessel arrivals at their highest in more than one year.

Freight

Freight rates for very-large-crude-carriers (VLCCs) weakened in April, breaking below the $10/t mark on the benchmark MEG - East Asia route, a level unseen since August 2015. Weather delays in the Far East, which provided support and volatility in March, waned and combined with abundant tonnage available, gave charterers the upper hand. VLCC activity was weak also in the North Sea, with South Korea not taking any Forties cargoes in April, and only one long haul sailing was reported leaving Hound Point. Depressed VLCC rates, combined with fuel oil weakness in Rotterdam, are sustaining NWE-Singapore flows as the arbitrage economics remain marginal.



Suezmaxes rates for West Africa loading remained sustained despite 200 kb/d of Forcados production remaining  offline. April voyages were for a longer haul, which helped supporting rates, with increased volumes moving to China and less to Europe. Even with Forcados out of the picture, both tanker reports and tracking data suggest that Nigerian grades like Qua Iboe are struggling to find buyers.

Aframaxes rates loading in the North Sea and Baltic found support from sustained North Sea production but were capped by the Ust Luga terminal undergoing maintenance until 17 May. In South East Asia, rates kept dropping on vessel oversupply.

Large product tankers experienced further weakness in April, as weaker demand met with an abundant supply of tonnage. West of Suez, refinery outages in the US supported the gasoline arbitrage from NWE. However, the backhaul route US Gulf - Europe remained unprofitable, which put a lid on rates. Weaker demand from West Africa, helped by the restart of Nigerian runs, piled weakness on rates. Caribbean rates were also subdued, on weak differentials between the US Gulf and the US Atlantic.

Refining

Summary

  • 1Q16 refinery runs estimates were revised upwards by 0.2 mb/d mostly on stronger OECD runs and delayed maintenance. 1Q16 throughput reached 79.5 mb/d, or 1.5 mb/d higher year-on-year (y-o-y).
  • 2Q16 runs, on the contrary, were revised down by 0.1 mb/d to account for rescheduled maintenance in Asia from 1Q16. Throughput in this quarter inches up to 79.6 mb/d, up 0.7 mb/d y-o-y.
  • Gasoline cracks continue to single-handedly support refining margins in key regions, offsetting the effect of higher crude prices and middle distillate oversupply on diesel cracks. 

Global refinery overview

As more 1Q16 actual throughput data arrives, the estimates move higher, reflecting the willingness of refiners to run crude to store products even in a relatively low margin environment. The growth in 1Q16 runs exceeded the estimated global demand growth by 0.1 mb/d. In 2Q16 though, the growth in runs is expected to fall behind demand, adding only 0.1 mb/d versus demand growth of 0.3 mb/d from the previous quarter. Similarly, the annual oil demand growth of 1.2 mb/d will be matched by just 0.7 mb/d of throughput gain. After five quarters of strong growth rates, throughput in OECD Europe declined in 1Q16, albeit by a marginal 160 kb/d y-o-y, while in 2Q16 the US is expected to see its first quarterly y-o-y loss in throughput in four years due to maintenance and unscheduled outages.

India and Saudi Arabia are forecast to lead global throughput gains, each accounting for half of the projected net global runs gain in 2Q16. FSU refiners remain on a long-term decline trend, while underperforming Latin American refiners might yet turn the corner.



Margins

Despite the rally in crude oil prices and a temporary backwardation at the front of the Brent curve, refinery margins fared well in April, rising in all main regions except Singapore. In NWE, diesel cracks improved towards the end of the month, but in monthly average terms, they were down from March from $8.6/bbl to $8.1/bbl. Once again, gasoline not only supported the margins but also boosted them higher. Gasoline cracks in NWE almost doubled in April to $14/bbl. In the US, gasoline cracks improved by $5/bbl in average, with diesel lower month on month (m-o-m). In Singapore, all cracks were pressured by excess supply in the region, with gasoline too, moving lower m-o-m, although remaining above European levels.



OECD middle distillate stocks are still well above normal seasonal levels. In terms of days of forward demand cover, they are at a record high. Diesel cracks reflect this oversupply, but refining margins are not that affected. In fact, the support from gasoline cracks has been so high since last year that were diesel prices to go to parity with crude (i.e. zero cracks), complex refining margins in all regions would still be mostly in positive territory.


OECD refinery throughput

February throughput in the US was finalised at a slightly higher rate, with a 110 kb/d upwards revision. March preliminary monthly data also came in marginally higher than our estimate, with both months showing a robust y-o-y growth of 470 kb/dand 440 kb/d respectively. The weekly data for April, though, marked a dramatic revision of a trend as the runs dipped visibly below y-o-y levels for the first time in three years. Although March was expected to be the peak of spring maintenance, more capacity was offline in April due to refinery restart issues and crude pipeline problems (Transcanada's 500 kb/d pipeline carrying diluted bitumen from Alberta to US Midwest was shut for a few days early April due to a leak).



April runs are now estimated at just above 16 mb/d, some 230 kb/d lower y-o-y. The weaker performance is expected to continue in May, with some scheduled maintenance, but also incorporating the impact of Canadian wildfires on reduced supplies to the US as some traders of Canadian crude oil announced force majeure on deliveries in May. Canada is the biggest foreign supplier of crude oil to the US, providing an equivalent of 20% of the US refining throughput. Its share is especially high in landlocked refining regions of the country, with PADD 2 (Midwest), the second biggest refining region of the country, relying on Canada for about half of its crude intake. 2Q16 runs are forecast at 120 kb/d lower y-o-y, with July and August runs marginally higher or flat y-o-y. Canadian and Mexican runs in February were finalised with little changes from the preliminary numbers, leaving outlook unchanged, adding another 30 kb/d y-o-y decline to North American runs in 2Q16. Mexican refinery runs follow the path of crude production: having reached an all-time low utilisation rate of just 64% in 2015, they are not expected to recover soon.



Finalised numbers for February runs in OECD Europe came in 80 kb/d lower than cited in last month's Report, on UK and Turkey revisions, bringing the total to just under 11.8 kb/d. By contrast, preliminary numbers for March exceeded the forecast by 150 kb/d with stronger German runs and higher Spanish activity as some of the expected refinery turnaround possibly did not go ahead. With 1Q16 average runs showing a 160 kb/d y-o-y decline, 2Q16 is now expected to perform better, largely mirroring downward revisions to US runs which should result in a good gasoline arbitrage opportunity for European refiners. In July and August though, the decline trend resumes.



If preliminary numbers for March are confirmed, South Korea will have seen a record high quarterly throughput figure of 3 mb/d in 1Q16. This, however, is not expected to continue as both planned maintenance and the seasonal slowdown cut runs by 200 kb/d in 2Q16, but throughput resumes at above 3 mb/d levels in July and August. The government recently announced its intention to add 1.8 mb to its strategic petroleum reserves, almost all for crude oil, which is explained by growing refinery runs. End-March commercial crude stocks in Korea stood at double the seasonal average for 2010-14. However, this increase has only seen the country reach the lower range of refinery run coverage levels observed in other OECD regions. Preliminary monthly data for March indicate that y-o-y declines in Japan may have halted for the moment. The forecast for runs from April through August is flat y-o-y, following the seasonal decline pattern of about 400 kb/d from 1Q to 2Q.





European refining -the future is never bright

The stellar year of 2015, when European refiners contributed a third of the global throughput increase, has not swayed many observers from the view that in the long-run, European refining will be pulled down by strong gravitational forces of structural demand decline and competition from refiners in other regions. In March this year the CEO of Spanish refiner CEPSA proposed at a public forum that the EU should follow the example of Japan's Ministry of Economy, Trade and Industry, and set specific targets for refinery closures. There will be refinery shutdowns, either in a planned manner, or, more spontaneously. His idea was that it would be easier if the closures were specifically mandated. The EU in response distanced its institutions from mandating or coordinating refining industry reorganisation, so it will be up to the invisible hand of the market to conduct the process.

A recent paper by the Dutch think-tank Clingendael International Energy Programme attempted to identify refineries in North-West Europe that have a more assured future versus refineries that are the most likely candidates to close. The authors analysed all refineries located in the five principal countries of the NWE trading hub: Netherlands, Belgium, Germany, France and the UK. If a refinery did not fall into one of the four 'must-run' categories (captive demand, petrochemical integration, downstream integration and surplus coking capacity), it was identified as exposed. Of the 34 refineries, only 12 qualified for the 'must-run' status. Thus, the paper concludes that half of the close to 7 mb/d of capacity in the region is a candidate for restructuring in the long term. The differences by country are even more striking. Germany's refining sector is the most protected, with only a third of the capacity in the danger zone, while all of France's and all but one UK refinery are exposed. The authors also considered the barriers to exit, such as the refinery site's environmental clean-up costs or political intervention driven by public protests at job losses. This would add back nine refineries, with a total of 1.5 mb/d capacity, to the must-run list, reducing the hypothesised NWE capacity closures to about 35% of current capacity.

In the business of refinery closures, the first mover is at a disadvantage. Margins, even if temporarily, tend to improve, but it is the companies that did not part with their unwanted capacity that benefit most. This variation of the prisoners dilemma adds further complication to refinery industry rationalisation in the free markets.

Non-OECD refinery throughput

Indian runs reached a record 5 mb/d mark for the first time in March, a league that has only ever had three other members: the US, China and Russia. This was a 436 kb/d upward revision to our estimate as a previously expected March maintenance of a Jamnagar CDU is now set for May. April runs are estimated to have been slightly lower with a minor maintenance programme, while May throughput will be affected by the Reliance maintenance, and, quite possibly, some operational run cuts due to the worst drought in decades. The drought has affected water supply to refineries as regional administrations imposed emergency water consumption controls. Mangalore Refining and Petrochemical Company announced in early May that it would shut down a CDU for one week, with a possible extension if conditions do not improve. India's runs are not expected to reach the 5 mb/d mark again in our forecast horizon through August.

Although the drought is also affecting the sugarcane harvest, Indian oil marketing companies have reportedly secured contracts to procure required volumes of ethanol, a byproduct of sugar mills, to meet the government target of 5% ethanol blending in gasoline, which would reduce the demand for refined gasoline. Set in 2012, the target has yet to be fully met. This will only very slightly moderate runaway gasoline demand in India, and the ban on diesel taxis in Delhi that came into force on May 1, will most likely have the same minimal effect. The Supreme Court on 9 May somewhat relaxed the diesel ban at the request of both the federal government and India's hugely important business services outsourcing industry. The latter suddenly faced the close to impossible task of ferrying thousands of workers to the offices with the inadequate public transport system.

Chinese refinery throughput in March was slightly higher than our estimate, at 10.6 mb/d, marking a y-o-y growth rate of 0.5%. In April, while the two Chinese majors both reported 3.5% declines in 1Q16 crude runs versus a year earlier, independent refiners secured landmark deals with western majors to directly import crude oil for the first time. Even Saudi Aramco supplied an independent refiner from their Japanese storage facilities. Granted a total of 1.6 mb/d worth of licenses to refine imported crude oil, independent refiners increased their runs by just over 500 kb/d y-o-y in 1Q16. 2Q16 throughput is expected, however, to grow at a slower rate as independent refiners this summer are reportedly embarking on delayed maintenance from last year, some combining it with the upgrades necessary to improve fuel quality. This may provide some relief to the oversupplied domestic market.



There is a notable contrast between Chinese and Indian refining industry developments. In both countries, crude runs over the last 12 months (to March 2016) have increased by less than the total demand, relative to the previous 12-month period. In India, the crude throughput growth did not match the demand growth for the entire distillates group (gasoline, middle distillates and fuel oil), resulting in lower product exports. In China, LPG and naphtha, which are by-products from refining, accounted for a larger share in the demand growth, building up diesel and gasoline stocks and pushing for export opportunities.  Both Sinopec and Petrochina tried to address the mismatch between diesel output and domestic demand for diesel by lowering diesel yields and boosting gasoline yields.

April throughput volume in Russia at under 5.3 mb/d matched our forecast, resuming a y-o-y decline trend of about 230 kb/d. Although runs will pick up after seasonal maintenance, the y-o-y decline May through August will accelerate to 270 kb/d on average. A Russian energy ministry representative recently estimated that about 40 mt, or 14%, of the country's crude throughput comes from simple topping plants that should close down and free up crude volumes for export. The ministry forecasts crude runs down to 4.8 mb/d in 2020 from about 5.5 mb/d this year. As already discussed in the supply section, the FSU region as a whole exported a record volume of crude in March, reaching 7 mb/d for the first time, as refinery runs in 1Q16 were down 140 kb/d, with a decline of almost 200 kb/d forecast for 2Q16.



Refinery throughput is declining in another major crude exporting region: Latin America. In the absence of Venezuelan official data since September 2015 and Colombian data since the start of 2016, less than 60% of our 1Q16 throughput number is based on actual data. Venezuelan runs are estimated 80 kb/d lower y-o-y on average from January through August due to persisting problems and emergencies that started in autumn last yea. Brazil's March throughput was surprisingly lower, in the absence of any reported maintenance. Instead of an expected 150 kb/d growth, runs were down 125 kb/d y-o-y. The forecast for 2Q16 and July-August are unchanged, with runs about 200 kb/d higher than 1Q16. Runs probably did pick up in April as there was a small stream of Europe-bound diesel cargoes from Brazil, reversing the more usual inward flow of US Gulf Coast or Rotterdam cargoes, although it remains to be seen if this was also a result of low diesel demand. 

Saudi Arabia's February throughput was at a new record high of 2.7 mb/d, up by 0.6 mb/d y-o-y. While ramping up refining runs at home, Saudi Aramco also looks overseas to increase its exposure to the downstream business (see Saudi Aramco's downstream ambition). In Africa, the restart of Morocco's Samir plant, halted since August last year due to financial troubles, is pushed back to June. The refinery had acquired a cargo earlier in the year that would cover less than a week of its full run, but operations will resume at lower rates. It is still looking for potential buyers. Nigeria reported having restarted the Port Harcourt refinery in April, at a rate of about 25 kb/d, some 10% of the nameplate capacity, after months of complete shutdown at all three Nigerian refineries. The government has talked again about possible privatisation or joint ventures with Western majors, some of whom have reportedly expressed interest in rehabilitating the plants. By the admission of the country's petroleum resources minister, the refineries have not had proper maintenance for 15 years. 



Saudi Aramco's downstream ambitions

Saudi Aramco recently announced plans to double its global refining capacity portfolio from the current level of 5.4 mb/d, of which they fully own 3.1 mb/d. It would be tempting to think that this is aimed at securing markets for their crude oil in the light of competition from Iran or other suppliers. In reality, the company could be attempting to increase its vertical integration to be more in line with international majors. The ratio of Saudi Aramco's refining capacity (wholly-owned) relative to crude output is very low when compared to international oil companies.

The total crude output of six international oil companies: BP, Exxon, Shell, Total, Lukoil and Sinopec, matches that of Saudi Aramco at about 10.4 mb/d, but their total refining volumes are more than five times higher than Saudi Aramco's. Downstream integration proved very useful in the current phase of oil price cycle as for many of the majors the loss in the upstream earnings was partially offset by downstream profits. 



Representatives of both Saudi Aramco and the government have been quoted expressing interest in a number of refining projects in India, Indonesia and China, all expected to become net refined product importers longer-term. In March, Saudi Aramco also announced a deal with Shell to take full control of their joint venture refinery in the US, the 600 kb/d Motiva plant in Texas. The US is already a net refined product exporter, but the robust refining industry, especially in the Gulf Coast, still proves to be attractive.