Oil Market Report: 13 July 2016

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Highlights

  • Global oil supplies rose by 0.6 mb/d in June to 96 mb/d after outages curbed OPEC and non-OPEC supplies in May. World production was 750 kb/d below last year as higher OPEC output only partially offset non-OPEC declines. Non-OPEC supplies are set to drop by 0.9 mb/d in 2016, to 56.5 mb/d, before rising 0.2 mb/d in 2017.
  • Robust European demand supported 2Q16 global demand growth at around 1.4 mb/d y-o-y, momentum that will be roughly matched through the year as a whole. A modest deceleration is foreseen in 2017, as growth eases to 1.3 mb/d taking average deliveries up to 97.4 mb/d.
  • Crude oil prices eased from an early June peak above $52/bbl, and traded within a $45-$50/bbl range. Growing uncertainty over the global economy and a stronger dollar weighed, but the downside was limited by further declines in US production and inventories.
  • OPEC crude output rose by 400 kb/d in June to an eight-year high of 33.21 mb/d, including newly re-joined Gabon. Saudi Arabia ramped up to a near-record rate of 10.45 mb/d and Nigerian flows partially recovered from rebel attacks. Middle East producers sustained record levels, building market share and pushing OPEC's total output 510 kb/d above a year ago.
  • OECD commercial inventories built by 13.5 mb in May to end the month at a record 3 074 mb. Preliminary information for June suggests that OECD stocks added a further 0.9 mb while floating storage has continued to build, reaching its highest level since 2009.
  • May global refinery throughput plunged by almost 1 mb/d from April and stood 1.5 mb/d lower year-on-year, as heavy outages took a toll in many regions. This lowered the 2Q16 estimate for global refinery intake, to 78.5 mb/d - the first y-o-y drop in three years. Our forecast for 3Q16 throughput is more steady at 80.95 mb/d.

Balancing act ? could it tip over?

After the drama we saw at the beginning of this year when prices were sliding daily, the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers. For some time now this Report has signalled a return to balance as being the big picture direction in which the market is heading. The adjustments to our data this month suggest that little has changed with the market showing an extraordinary transformation from a major surplus in 1Q16 to near-balance in 2Q16. In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in 1Q16 refinery runs growth was 60% higher than  refined product demand growth. Despite the regular upwards revisions to demand that we have seen in recent Reports there are signs that momentum is easing; and, although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices. With global refinery runs expected to fall by 0.8 mb/d in 2Q16 before surging by 2.4 mb/d in 3Q16, we may well see crude oil stocks fall back but there is a risk that, unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure.

In China, for example, data for May suggests that year-on-year demand growth was only 130 kb/d, part of a recent trend of smaller increases. For the United States, estimated gasoline deliveries in April were up just 75 kb/d up on the year earlier and 410 kb/d below our expectations. Somewhat unexpectedly, the saving grace for oil demand has been Europe where, in 2Q16 y-o-y growth reached a five-quarter high. This is unlikely to last, though, with the ongoing precariousness of the European economies now dealing with added uncertainty following the result of the UK referendum on membership of the European Union.

On the supply side of the balance, our forecasts for non-OPEC production have proved to be accurate so far in 2016. Non-OPEC production remains on course to fall by 0.9 mb/d this year before staging a modest recovery in 2017. For low-cost Middle Eastern OPEC countries plus other regional producers, including Bahrain and Oman, production has grown steadily in recent years, with notable increases contributed by Iraq in 2015 and Iran in 2016. In the heady days when US shale production was moving upwards very fast it became fashionable to talk of lower reliance on traditional suppliers. Our chart shows that in fact oil output from the region rose to a record high in June, with production above 31 mb/d for the third month running. As such, the Middle East's market share of global oil supplies rose to 35%, the highest since the late 1970s and an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets.

Investment will also be important, as the IEA has regularly stated. Chevron's announcement that it is moving ahead with a $37 billion expansion of the Tengiz field in Kazakhstan is good news, but the fact that the project will partly utilise existing infrastructure is key to making it viable at today's oil prices. There is still an ominous investment gap building up in the oil industry that might, depending on how quickly today's record high oil stocks are eroded, create the conditions for sharply higher prices over the medium term.

Our underlying message that the market is heading to balance remains on track, but the modest fall back in oil prices in recent days to closer to $45/bbl is a reminder that the road ahead is far from smooth.

Demand

Summary

  • Estimates of global demand for 2016 have been raised by 0.1 mb/d since last month's Report, to 96.1 mb/d, an upgrade largely attributable to Europe's resilience. Growth of approximately 1.4 mb/d is now envisaged in 2016.
  • Into 2017, global demand is forecast to rise by a further 1.3 mb/d to 97.4 mb/d. The majority of the projected upside in 2017 is attributable to non-OECD consumers, chiefly in Asia, with India's demand forecast to be the world's most rapidly growing in 2017, rising by 280 kb/d, closely followed by China.
  • European oil consumers offered the biggest 2Q16 demand surprise with preliminary data showing demand rising at a five-quarter high of 240 kb/d year-on-year (y-o-y) as relatively low crude oil prices continued to offer support.
  • Estimates of US oil demand have been modestly revised, with 25 kb/d added to the 2016 estimate and 35 kb/d for 2017. Official data for April fell below expectations, but preliminary May-June demand numbers exceeded our forecasts while manufacturing business sentiment indicators posted surprising mid-year optimism.
  • Japanese consumers provide the biggest decline in demand in 2Q16, with total Japanese demand falling by 205 kb/d y-o-y, pulled down mainly by oil's retreat from the power generation sector.
  • The recent deceleration in Chinese demand growth continued into May, as y-o-y gains eased back to 130 kb/d (just over 1%), due to softness in gasoline and diesel demand.



Global Overview

Rising by 1.4 mb/d in 2016, our global demand estimate has been hiked by 0.1 mb/d compared to last month's Report to 96.1 mb/d. Demand grew by 1.6 mb/d in 1Q16, and we have revised up our 2Q16 number to 1.4 mb/d, feeding through into the higher number for 2016 as a whole. Compared to the stellar growth for 2015 as a whole at 1.8 mb/d, 2016 is clearly seeing slower growth, but is still solid in historical terms. Growth in 2016 is underpinned by Europe and what seems to be solid strength in India.

On a product-specific basis, gasoline's previous dominance has waned recently, with its share of global oil demand growth declining from over a half in 4Q15, to 45% in 1Q16 and an estimated 35% in 2Q16. Notably lower rates of decline in residual fuel oil demand proved a central catalyst, as did sharp upticks in LPG (including ethane), while additional gasoil/diesel demand also provided support in 2Q16. Although remaining substantial in 2Q16, global gasoline demand, 0.5 mb/d higher than the year earlier, is only equivalent to roughly half its 3Q15 gain. Sharply decelerating Chinese demand is the main factor slowing down gasoline, alongside significant slowdowns in Brazil, the US, Japan and Saudi Arabia.

The sharp declines in residual fuel oil demand that plagued 2015, with global deliveries averaging 0.2 mb/d less than the year earlier, were abated or reversed in 1H16 on easing European declines and rising US fuel oil deliveries. Additional demand in Europe and the US supported sharply accelerating LPG demand, as global 1H16 gains doubled compared to 3Q15. Only after a difficult 1Q16 - when demand eased by 0.2 mb/d - did global gasoil/diesel rebound, adding 0.4 mb/d y-o-y in 2Q16, as European demand significantly accelerated whereas the previous sharp declines in US diesel demand eased.

The moderation in global demand growth that has taken place since the peak mid-2015 looks set to continue through 2017, albeit decelerating only very modestly from early 2016. Prospective global oil demand growth eases to 1.3 mb/d in 2017, as global deliveries average 97.4 mb/d. Just over 90% of the 2017 global oil demand growth is attributable to non-OECD consumers, the rest in the much slower growing OECD. Potentially higher crude oil prices act as a break on the rate of future demand growth, although there is considerable uncertainty as to how fast - if at all - oil prices will rise. The result of the UK referendum on membership of the European Union has added to the uncertainty. At this stage, it is difficult to draw conclusions about the short-term impact on oil demand of the UK's decision to leave the EU. In the coming weeks we will be watching this issue closely to see if there is any impact on our 2016 and 2017 demand outlook.

Notable 2Q16 data upgrades, compared to the numbers in last month's Report, include Canada (+105 kb/d), France (+90 kb/d), the Netherlands (+35 kb/d), Australia (+60 kb/d) and Korea (+25 kb/d). Partially offsetting 2Q16 downgrades were seen in Japan (-180 kb/d), India (-100 kb/d), the US (-45 kb/d) and Belgium (-30 kb/d). Historical OECD baseline revisions, following the comprehensive updates from the IEA's statistical division, based on revised data from member countries, respectively added 85 kb/d and 35 kb/d to the 2014 (45.8 mb/d) and 2015 (46.2 mb/d) OECD demand estimates.

OECD

This month's story is all about the remarkable resilience of OECD oil demand, specifically in Europe. Total OECD oil product deliveries averaged a preliminary 45.9 mb/d in 2Q16, 0.6 mb/d up on the year earlier but perhaps most significantly 85 kb/d above the previously envisaged level. Rising by an estimated 240 kb/d y-o-y in 2Q16 to 13.8 mb/d, persistent strong gains in European oil product demand (chiefly gasoil/diesel) proved central to the overall OECD demand strength, alongside strong gains in the OECD Americas, 275 kb/d higher y-o-y at 24.5 mb/d. Even the previously sharply declining OECD Asia Oceania region rose, albeit modestly (+50 kb/d to 7.6 mb/d), in 2Q16, further furnishing the generally strong OECD demand gain.



Americas

Rising by 275 kb/d or 1.1% y-o-y in 2Q16, the net OECD American demand estimate of 24.5 mb/d is 70 kb/d above our month-earlier forecast, chiefly attributable to baseline data revisions for Mexico, Canada and Chile. Indeed, the latest US 2Q16 demand estimate, of 19.6 mb/d, is 45 kb/d below the month earlier forecast on the publication of 'soft' April data from the US Energy Information Administration (EIA). At 19.26 mb/d in April, the official EIA number was 315 kb/d less than previously envisaged, based on adjusted weekly data, bringing US demand growth down to a three-month low of 225 kb/d compared to the year earlier. Much lower than previously forecast gasoline demand proved to be the main laggard, as estimated US gasoline deliveries of around 9.2 mb/d were just 75 kb/d up on the year earlier and 410 kb/d below prior expectations. April's 0.8% y-o-y US gasoline demand growth significantly underperformed the latest miles travelled statistics from the US Department of Transport's Federal Highway Administration, as travel on all roads rose by an estimated 2.6% y-o-y (an additional 6.8 billion vehicle miles) in April.



Weak gasoil/diesel demand, falling by 175 kb/d y-o-y in April or 4.4%, also played an important role restraining US oil demand growth, dampened by the ongoing US industrial malaise. The US Federal Reserve cited industrial activity falling by 1.4% y-o-y in May, a tenth successive monthly y-o-y decline. Having seen persistent declines since 3Q15, US gasoil demand should continue to decline through mid-2016 before tentatively picking up in 2H16, supported by cautiously recuperating manufacturing sentiment. The Institute for Supply Management's Manufacturing Purchasing Managers' Index (PMI) bottomed-out at a heavily pessimistic 48 in December 2015-January 2016, but has since risen sharply back, to 53.2 in June 2016, highlighting the notable uptick in confidence that has since followed.



Estimated to average 19.6 mb/d in 2016 as whole, 240 kb/d or 1.2% up on the year, significant upside is envisaged in motor gasoline and LPG (includes ethane) while gasoil (although picking up in 2H16) acts a sizeable restraint. Despite 45 kb/d being trimmed from 2Q16 demand, compared to last month's Report, the forecast for the year as a whole carries a modest 25 kb/d premium as preliminary estimates of May-June demand, based on EIA weekly statistics, coupled with continued gains in business confidence furnish a still relatively robust US demand forecast. Growth is forecast to decelerate in 2017, to 0.7%, curbed most significantly by slower gains in gasoline and jet fuel, as their underlying retail prices potentially edge higher.

Historical baseline revisions to the Canadian demand data added roughly 70 kb/d to the 2015 estimate, to an upwardly revised 2.4 mb/d - essentially flat on the year earlier. The majority of the baseline adjustments were seen in the 'other products' category, which came out at an upwardly revised 355 kb/d in 2015. Not only was the baseline data revised up but also the latest data point came out significantly above prior forecasts, at 2.3 mb/d, 45 kb/d up on the year earlier, led higher by strong gains in gasoil and gasoline. Incorporating these changes, the forecast for 2016 as a whole has been revised up to 2.4 mb/d, 75 kb/d above the prior estimate but 45 kb/d below 2015.


Europe

Rising by a much stronger than expected 240 kb/d y-o-y in 2Q16, European growth reached a five-quarter high. At 13.8 mb/d, 2Q16 demand stood at its highest level since 3Q15, when global growth peaked at a near five-year high. European deliveries were 125 kb/d higher than estimated in last month's Report as consumers continued to binge on relatively low prices and an improving macroeconomic backdrop. Across OECD Europe, the Netherlands, France, Spain, Finland and Greece accounted for the majority of the forecast upgrade, counteracting lower 2Q16 demand data for Belgium and Poland.



Surging by a heady 100 kb/d y-o-y in April, the latest demand figures from the Netherlands showed deliveries of exactly 1.0 mb/d, supported by strong gains in the petrochemical sector. We have accordingly revised up the 2016 Dutch demand forecast to 985 kb/d for the year as a whole, 4.1% up on the year. Growth then decelerates in 2017, to 1.0%, as projections for the volume of goods exported - a key for a heavily trade-dependent economy like the Netherlands - ease back (the IMF anticipating that the volume of export growth eases to 1.9% in 2017, from 3.7% in 2016, according to their latest World Economic Outlook).



Historical French data additions raised the 2015 demand estimate by 45 kb/d to 1.7 mb/d, an upgrade largely attributable to higher baseline naphtha and 'other products'. Coupling these additions with some surprisingly robust y-o-y growth figures for May, the 2016 French demand forecast has been raised by 65 kb/d, compared to last month's Report, to 1.7 mb/d - essentially on a par with 2015. A very modest decline is then foreseen in 2017, as underlying prices potentially edge higher once again. Having fallen by 20 kb/d in April, y-o-y, growth re-emerged with vengeance in May, rising by 130 kb/d y-o-y, as pre-emptive buying ahead of strike-action added a short-term premium to French demand.


Asia Oceania

Easing back below 4.0 mb/d in April, Japanese oil product deliveries not only fell to a four-month low (in absolute terms) but they also contracted by 185 kb/d compared to the year earlier. With a similarly sized (150 kb/d) decline envisaged in May, to 3.4 mb/d, Japanese oil deliveries fell to their lowest level since our monthly records began. Two key product categories lay at the heart of the sharp declines: residual fuel oil and 'other products', respectively falling in y-o-y terms by 40 kb/d and 120 kb/d in April and 105 kb/d and 110 kb/d in May, as ongoing switching out of oil in the power sector continues. With both April and May demand estimates coming out significantly below prior forecasts, alongside some sizeable annual data revisions (-80 kb/d in 2014 and -90 kb/d in 2015, to 4.1 mb/d), the 2016 demand estimate has been revised down accordingly (-160 kb/d), to 3.9 mb/d, equivalent to an annual decline of 175 kb/d. A more modest decline, of 85 kb/d, is then foreseen for 2017, to 3.9 mb/d still, as the potential for further power-sector demand switching, out of oil, has been suppressed.



Surging by approximately 310 kb/d, or 14.1% on the year earlier, Korean demand averaged 2.5 mb/d in May. With particularly strong gains registered in the petrochemical and industrial sectors, the sharpest gains were seen in LPG, naphtha, gasoil and residual fuel oil, this despite overall industrial output declining compared to the year earlier as persistent low prices proved a greater stimuli. Statistics Korea cited a 2.8% y-o-y decline in April industrial activity, a second consecutive decline, while manufacturing sentiment (as tracked by the Nikkei South Korean Manufacturing PMI) struggled to get back into neutral territory at 50.1 in May.



Ratcheted up on significant baseline data revisions, the latest Australian demand estimate for the first four months of 2016 had deliveries averaging 1.1 mb/d, 55 kb/d higher than the estimate cited in last month's Report. Similarly sized upgrades were applied through the Australian data running back four years, as the IEA's annual data service found significant upgrades in estimates of Australian gasoil and 'other product' demand. Also, at 1.1 mb/d in April, the latest demand estimate carried a 40 kb/d gain on the corresponding month in 2015, supported by particularly sharp gains in gasoil/diesel (+20 kb/d).


Non-OECD

Having surged up by just over 1.4 mb/d y-o-y in 1Q16, preliminary indicators of 2Q16 non-OECD oil product demand imply a slowdown, with a 2Q16 gain of 0.9 mb/d y-o-y now envisaged. This slowdown is caused mainly by sharp deteriorations in China and Saudi Arabia. Asia continues to dominate non-OECD demand growth, rising by 1.0 mb/d y-o-y in 1Q16 and 0.8 mb/d in 2Q16, gains largely attributable to additional Indian and Chinese demand. Rising by 0.3 mb/d y-o-y in 1Q16, extra Russian deliveries also played a major role, but this is likely to vanish in 2Q16 as momentum fades. Similar deteriorations are likely in Saudi Arabia, as April data suggest the strong demand gains of 2015 have ended. Decelerations in the rate of gasoline, gasoil/diesel, LPG and 'other products', combined with absolute declines in non-OECD residual fuel oil demand, trim back non-OECD demand growth to a two-and-a-half year low. The outlook brightens, post-2Q16, as many non-OECD economies benefit from a marginally stronger macroeconomic situation, while Chinese gasoline demand growth likely rebounds from a dire 2Q16.



China

Restrained by the ongoing downturn in the Chinese economy, demand stuttered severely in May - rising by just over 1% on the year earlier - with momentum undermined by particular weaknesses in gasoil/diesel and bitumen. Perhaps most surprisingly, and with potential implications for the sustainability of our relatively robust Chinese demand forecast, was the drop in apparent Chinese gasoline demand, as the previously strongly rising trend lost steam.



Weakening Chinese gasoline tallies with a high net-export position: Chinese gasoline imports all but vanished in May, according to the latest Customs Data, while nearly 800 thousand tonnes were exported, producing a heady net-export position of roughly 210 kb/d. As a key component in our Chinese apparent demand calculation - i.e. refinery throughput plus net-product imports minus product stock additions - higher gasoline exports equate, with all else being equal, to a lower estimate for Chinese domestic demand. Further trimming the May gasoline demand estimate were reports, from the Xinhua news agency's China OGP, of gasoline stocks being built by 30 kb/d.



The main restraint on recent Chinese demand data continues to be the weakening of the domestic economy, with official estimates of economic growth easing to 6.7% on a y-o-y basis in 1Q16, a third successive quarter of lower growth and the lowest reported number since the Great Recession of 2009. Industrial fuels, such as gasoil and bitumen, have been the major Chinese demand laggards, as reported industrial activity eased to +6.0% y-o-y in May, significantly below March's recent 6.8% high. Forward-looking indicators, such as Caixin's Manufacturing PMI, eased to a three-month low of 49.2 in May, dampening the outlook for 2H16.

Given the recent weakening in Chinese demand growth, coupled with the deteriorating macroeconomic situation, our 2016 Chinese demand forecast has been trimmed to 11.7 mb/d, 50 kb/d below the estimate cited in last month's Report. This lower estimate amounts to a 275 kb/d or 2.4% gain on the previous year. Given the widely-held belief amongst economists, that a further (modest) deceleration will occur in Chinese economic growth in 2017 - the IMF trimming a further 0.3 percentage points - Chinese oil demand growth likely eases further, to 2.3%, in 2017. Furthermore, the IMF's April's World Economic Outlook cited that it expected no more than a 1.6% gain in the volume of Chinese exports in 2017 - dampening a previous staple of China's economic strength.


Other Non-OECD

Pulled down by subdued transport fuel demand, Saudi Arabian oil products demand growth all but disappeared in April (y-o-y), as deliveries averaged an estimated 3.1 mb/d. The weakening macroeconomic backdrop, coupled with much-reduced transport subsidies, triggered respective y-o-y declines of 40 kb/d and 60 kb/d in gasoline and gasoil/diesel. Having risen rapidly in 2014-15, when growth averaged 160 kb/d, Saudi Arabian oil deliveries are expected to fall in 2016, down by approximately 20 kb/d to an average 3.3 mb/d, a modest uptick is then foreseen in 2017 (+35 kb/d) largely dependent upon higher oil prices.





The Indian demand story of rapid growth continues, albeit not at the breakneck pace seen in recent months, with Indian oil deliveries up roughly 7% y-o-y in May. Having posted average growth of nearly 9% y-o-y in the preceding four months, May's deceleration is not insubstantial but there is little doubt that structural demand for oil remains strong. The most rapid gains remain those linked to the transport sector - with gasoline rising by over 13% y-o-y and both bitumen and diesel posting near 8% gains - as domestic vehicle sales continue to rise sharply. The Society of Indian Automobile Manufacturers (SIAM) reported just over 230 thousand domestic vehicles sales in May, 6.3% up on the year earlier. Gasoline continues to outpace diesel, a trend that has been in place in percentage terms since 4Q15, as even stronger gains in the overwhelmingly gasoline-powered two-wheeler sector lead the way, rising by just under 10% y-o-y in May. Momentum is forecast to ease in 2H16, as recent vehicle sales growth has decelerated - SIAM reported domestic vehicle sales growth of 11.0% in April, alongside two-wheeler sales growth of 21.2% - leaving an average gain of approximately 7.6% for 2016 as a whole, easing to 6.5% in 2017. Total Indian oil demand is accordingly forecast to average 4.3 mb/d in 2016 and 4.6 mb/d in 2017.

The entrenched seasonality of Indian oil demand

India's oil demand shows significant seasonal changes. After peaking in May, demand drastically declines to August, before traditionally ramping up again in September-November, forming a "V" shape pattern. The five-year average decline rate is approximately 10%.

This seasonal change is largely due to the cyclicality of Indian gasoil/diesel, which accounts for nearly 40% of total oil demand. Gasoil is mostly used in goods transportation and agricultural operations, and agricultural demand is seasonal. Five-year (2011-15) average data shows that from May to August, gasoil demand drops significantly by 19.6%. Such a seasonal decrease also appears in the demand for 'other products', with an average decline rate May-to-August of 11.4%.  Other major oil products like gasoline and LPG do not show distinct seasonal changes.

The reason for this seasonality is mainly the monsoon rainfall season from late-May to September, which heavily reduces the use of gasoil for irrigation in agriculture and may also affect some transportation. Although India is now promoting the substitution of gasoil with gasoline in transportation, the push to develop manufacturing will keep gasoil demand on a high level, and the seasonal change in oil demand will continue. Assuming, as we are, that relatively normal seasonal trends continue, both our gasoil/diesel and 'other product' demand forecasts ease by a combined 290 kb/d between May and August 2016, with a traditional fourth quarter rebound to come.

Rising by an estimated 85 kb/d y-o-y in April, the latest oil product demand data for Egypt show resurgent gains in gasoil/diesel and gasoline, as transport sector demand rebounded supported by a tentative recovery in consumer demand and the fact that Egypt is now roughly one-and-a-half years into a period of sharply reduced subsidies. At an estimated 165 kb/d in April, Egyptian gasoline demand posted its most rapid y-o-y gain in seven months, while gasoil surged by a five-month high. Total deliveries are forecast to average 880 kb/d in 2016, up by 20 kb/d on the year earlier or 2.4%, accelerating in 2017 - up by 30 kb/d to 910 kb/d - as the underlying macroeconomic situation likely solidifies. The IMF forecast, in April's World Economic Outlook, Egyptian economic growth of 4.3% in 2017 after a gain of 3.3% in 2016.



Falling to a four-month low of just over 3 mb/d in May, Brazilian demand came out 50 kb/d below the year earlier. The drop was chiefly attributable to sharp declines in gasoil/diesel and residual fuel oil demand, themselves pulled down by ailing Brazilian industrial activity. The Instituto Brasileiro de Geografia e Estatistica quoted industrial production falling by 7.8% y-o-y in May, squeezing industrial oil use with 30 kb/d y-o-y declines seen in both gasoil and residual fuel oil. Forecast to average 3.10 mb/d in 2016, Brazilian oil deliveries will lose roughly 85 kb/d or 2.7% on the year earlier, before stabilising in 2017 on the assumption that the economy itself flattens as expected by the IMF.



Supported by surprisingly robust gains across the majority of the industrial fuels, albeit restrained by weak consumer demand, Russian oil product demand rose by 135 kb/d, or 3.8%, compared to the year earlier. At 3.77 mb/d in May, sharp gains were seen in gasoil/diesel (+65 kb/d), residual fuel oil (+95 kb/d) and 'other products' (+35 kb/d), momentum that was supported by the recent uptick in industrial activity. The Federal State Statistics Service of Russia reported y-o-y industrial output gains in three of the four months through May, and a 0.7% gain in May, ending the generally declining trend of 2015. With forward-looking industrial output measures such as Markit's Manufacturing PMI even turning upbeat mid-year to 51.5 in June having previously been sub-50 December-through-May, the outlook for 2H16 is for modest industrial oil product demand growth. Projected gains in Russian industrial oil use support potential oil demand growth of approximately 70 kb/d in 2016, averaging 3.67 mb/d, with the momentum trimmed by ongoing weakness in both Russian gasoline and jet fuel.

Supply

Summary

  • Global oil supplies rose by 0.6 mb/d in June, to 96 mb/d, after outages curbed OPEC and non-OPEC supplies in May. World production was 750 kb/d below a year-earlier as robust output in the low-cost Middle East was not enough to offset declines elsewhere. Middle Eastern oil production rose to a record-high of 31.5 mb/d in June, lifting its market share to 35%, the highest since the late 1970s.
  • OPEC crude output rose by 400 kb/d in June to an eight-year high of 33.21 mb/d, including newly re-joined Gabon. Saudi Arabia ramped up to a near-record rate of 10.45 mb/d and Nigerian flows partially recovered from rebel attacks. Middle East producers sustained record pumping rates, consolidating market share and pushing OPEC's total output 510 kb/d above a year ago.
  • Iran has made swift post-sanctions gains, with production in June up by 750 kb/d since the start of the year. By contrast, supply in cash-strapped Venezuela is declining fast. Output in June slipped to 2.18 mb/d - down 240 kb/d on the previous year.
  • Non-OPEC oil production is estimated to have increased by 205 kb/d in June, to 55.9 mb/d, following a partial recovery in Canadian oil production and seasonally higher biofuels output. Total supplies nevertheless stood more than 1.4 mb/d below a year earlier, with notable declines in the US, Canada, China and Colombia.
  • The forecast for non-OPEC supply is essentially unchanged since last month's Report, with supplies declining by 0.9 mb/d in 2016 to 56.5 mb/d, before a slight recovery lifts output by 0.2 mb/d - to 56.8 mb/d in 2017. A tentative improvement in business sentiment and activity supports our view that output declines will ease in the coming months before growth returns in 2017.

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

OPEC crude oil supply

OPEC crude output rose by 400 kb/d in June to 33.21 mb/d - including Gabon, whose membership was re-activated at the group's 2 June meeting. Supply from Saudi Arabia rose by 200 kb/d to 10.45 mb/d - just shy of last June's all-time high - as domestic power plants burned more fuel to cover peak summer cooling demand. Nigeria also posted a notable increase - a rise of 140 kb/d to 1.58 mb/d - after repairs and a pause in rebel attacks allowed for a partial recovery. Repeated attacks on Nigeria's oil network have pushed crude oil production down by 170 kb/d compared to June 2015. Libya's oil sector has also been under siege, but the re-opening of the Marsa al-Hariga export terminal allowed supply to rise by 30 kb/d during June. Iranian output climbed still higher during June and flows of 3.66 mb/d were up 840 kb/d on a year ago.



Middle East members saw record supply in June, pushing total OPEC crude oil output 510 kb/d above a year ago. Output from the group's 14 members during June was at the highest level since July 2008. OPEC's "effective" spare capacity was 2.11 mb/ d, with Saudi Arabia accounting for 83% of the cushion.



While Iran is clearly OPEC's biggest source of supply growth this year, Venezuela is notching up the largest decline. A severe economic crisis is taking a toll on Venezuelan production, which has fallen by 170 kb/d since the start of the year. Output in June slipped to 2.18 mb/d - the lowest since February 2003 in the aftermath of an oil workers' strike. The worst may be over for now - from April to June supply fell by 120 kb/d - but further declines are expected during 2H16 - resulting in a year-on-year drop of around 200 kb/d (see Venezuelan spiral). Iraqi supply edged lower for a second month.

Crude oil supply in Saudi Arabia rose by 200 kb/d during June to a near-record level of 10.45 mb/d in order to meet increased domestic needs. The Kingdom burns more crude in its power plants during the sweltering summer months (typically twice the amount used the rest of the year) to meet a surge in air conditioning requirements. The latest data from the Joint Organisations Data Initiative (JODI) show that 500 kb/d of crude oil was used during April for power generation.

Last year Saudi power plants consumed an average 860 kb/d from June through August out of roughly 10.4 mb/d of crude produced. This year, the ramp up of the 2.5 billion cubic feet per day Wasit gas plant is expected to reduce the crude burned at power plants by around 100 kb/d. Saudi Energy Minister Khalid al-Falih has said that once the Wasit facility is fully up and running, about 300 kb/d of crude could be spared from direct burning in power plants.



As for crude oil exports, shipments held relatively steady during June, according to preliminary tanker tracking figures. JODI data show Saudi Aramco shipped roughly 7.6 mb/d of crude oil during the first four months of this year, keeping a steady pace on the same period in 2015. The ramp up of new capacity at the Kingdom's domestic refineries pushed exports of total liquids, excluding condensates and NGLs, to an average 9 mb/d during the first four months of 2016, up 570 kb/d on a year ago. Saudi Arabia also drew down crude stocks at an average rate of 285 kb/d during January-April compared to an average draw of 40 kb/d during the same period in 2015, according to JODI data.

Production from neighbouring Gulf countries held relatively steady month-on-month (m-o-m). Kuwaiti output edged up 20 kb/d in June to 2.87 mb/d - the highest rate so far this year. In a bid to raise its production capacity, Kuwait has awarded service contracts for oil field development projects. BP has won an enhanced technical service agreement (ETSA) for Burgan, one of the world's biggest oil fields, while Royal Dutch Shell reportedly has secured an ETSA for the Ratqa oil field. A planned water injection scheme at Burgan is expected to hold output steady at 1.7 mb/d beyond 2020.

Supply in the UAE and Qatar held steady in June at 2.91 mb/d and 660 kb/d, respectively. In Qatar, Total has won a 30% stake in a new 25-year contract to run al-Shaheen - the country's largest oil field. Qatar Petroleum (QP) will hold the remaining 70% in the new joint venture. Total plans to invest more than $2 billion in developing the offshore field that now pumps around 300 kb/d. Six international oil firms, including BP and Shell, had bid to operate the field. The deal is a setback for Maersk, which operates the field under a 25-year production sharing contract that expires in mid-2017.

Iranian output rose to 3.66 mb/d during June, up 50 kb/d on May and up 750 kb/d since sanctions were eased at the start of the year. Exports of crude oil also continue to edge higher, with shipments in June around 2.1 mb/d - near pre-sanctions levels. Iran's drive to regain market share has seen exports nearly double since January. The National Iranian Oil Co (NIOC) has been placing roughly 2 mb/d of crude to customers in Asia and Europe since April, which suggests that higher production rates can be sustained.

Iran was shipping around 2.2 mb/d before sanctions were tightened in mid-2012, with Europe lifting around 600 kb/d. NIOC has gone some way to regain its European market share, with exports of nearly 500 kb/d during April and May. Shipments in June were lower at 430 kb/d, according to preliminary data. Repsol and Polish refiner Grupa Lotos have meanwhile joined the list of European buyers that includes Total, Tupras, Cepsa, Lukoil and Shell.



Purchases from China, Iran's biggest customer, rose in June to 725 kb/d from around 640 kb/d in May. Buying from Japan dipped by 25 kb/d in June to roughly 175 kb/d. Shipments to India climbed by 60 kb/d to 390 kb/d, while exports to South Korea fell to 165 kb/d from 220 kb/d in May. Shipments of condensates slowed to 140 kb/d from 185 kb/d in May. Iran is storing 44 million barrels of ultra-light oil from Iran's South Pars gas project at sea.

Iran is meanwhile considering developing its oil fields using the former buy-back model that was unpopular with foreign companies due to its tight returns, rigidity and limited time-span. Iran had been hoping to attract at least $70 billion worth of investment under a new Iran Petroleum Contract (IPC), an improved version of the buy-back model that offered more flexible terms.

Newly-appointed managing director of NIOC Ali Kardor was quoted as saying oil fields could be developed either through buy-backs or on an engineering, procurement, construction and financing (EPCF) basis. Kardor was one of the architects of the IPC in his previous position as NIOC's deputy director of investment and financing. Iran's Supreme Leader Ayatollah Ali Khamenei has said that no new contracts would be awarded to international oil companies without necessary reforms.

Iraqi crude oil production, including the Kurdistan Regional Government (KRG), edged down 20 kb/d to 4.25 mb/d during June. Although slightly up - 65 kb/d - on a year ago, production in June was sharply lower than the record rate of 4.43 mb/d scaled in January.

Ongoing power outages and higher domestic consumption restricted exports from the south. Overall exports, including from the KRG, eased to 3.68 mb/d in June, with the south slipping by 25 kb/d and shipments from Kurdistan through Turkey dipping 10 kb/d to 500 kb/d. Oil's rally during June meant that slightly lower exports of southern Basra crude (3.175 mb/d versus 3.2 mb/d in May) earned the federal government $3.845 billion, up roughly $100 million on May. A second month of export declines from the south saw June exports down by 190 kb/d from near record rates reached in April. Iraqi officials say higher domestic demand has limited the amount of crude available for export. In the meantime, the first 2,000 tonne cargo of LPG was shipped from Khor al-Zubair in the Gulf.

Output in Libya rose by 30 kb/d to 310 kb/d in June following the reopening of the Marsa al Hariga export terminal. During much of May, exports from the eastern terminal were blocked by a marketing feud between rival governments in the west and east. In a positive step, the National Oil Corp (NOC) agreed in early July to merge with a competing company that was set up in the east. Mustafa Sanalla, the current NOC chairman, will stay at the helm and former eastern NOC chief Nagi el-Maghrabi will join the united NOC board. NOC is working with the UN-backed government of national accord, which is seeking to restore unity between competing factions that have been battling to run the country.

Offering further hope of an output recovery, Libya's Petroleum Facilities Guard (PFG) said it was preparing to reopen oil fields that have been shut in. The PFG controls the eastern ports of Ras Lanuf and Es Sider that have been closed since December 2014. If reopened, these vital terminals could handle nearly 600 kb/d of exports between them. A re-start could take time, however, as repeated attacks by Islamist militants have damaged some of the infrastructure. As a result, Libya is now producing only a small fraction of the 1.6 mb/d pumped before the fall of the Gaddafi regime in 2011.

Nigeria posted a substantial gain in June, an increase of 140 kb/d, after repairs and fewer militant attacks allowed for a partial recovery of production that had sunk near 30-year lows. Output rose to 1.58 mb/d in June from an upwardly revised 1.44 mb/d in May, when more complete data showed that flows were not as badly set back by industry sabotage as initially assumed. The rebound, however, may prove short-lived. A 30-day ceasefire struck between militants and the Nigerian government in mid-June was broken in early July after rebels in the restive Delta region claimed a round of fresh attacks.

Despite the setback, Shell Nigeria on 7 July lifted a force majeure on exports of Bonny Light crude oil that had been in place for nearly two months. Two other Nigerian crude streams, Brass River and Forcados, are still under force majeure. Nigeria depends on crude oil sales for roughly 70% of its state revenue and most of its oil is pumped from the Delta region. Militants want a greater share of the country's oil wealth. Adding to Nigeria's woes, a trade union representing oil workers began a strike on 7 July.

Nigerian President Muhammadu Buhari meanwhile replaced Oil Minister Emmanuel Ibe Kachikwu as group managing director of the Nigerian National Petroleum Corp (NNPC) as part of a wide-ranging revamp. Maikanti Kacalla Baru, previously group executive director for exploration and production, will take over from Kachikwu, who will remain on the board as chairman.

Supply from Angola held steady in June at 1.72 mb/d, while Algerian production edged up 20 kb/d to 1.11 mb/d. Output in Gabon was stable at around 220 kb/d. Output held steady in Ecuador and Indonesia at 550 kb/d and 740 kb/d, respectively. In a sign of deepening cooperation with Iran, Indonesia's Pertamina plans to sign a memorandum of understanding with the National Iranian Oil Co to develop oil and gas blocks in Iran. Pertamina is also planning to import a 1-million-barrel cargo of Iranian Light crude oil during 3Q16 to test the grade at its Cilacap refinery in Central Java.

Venezuelan spiral

Lower oil prices and sliding production are a double whammy for Venezuela, which is caught in the grip of an economic and political crisis. Since the start of the year, supply has fallen by 170 kb/d to reach 2.18 mb/d in June. Although the worst may be over - electricity shortages that sparked a 120 kb/d decline in the April-June period have eased - further losses are expected in 2H16. A year-on-year drop of around 200 kb/d looks unavoidable as foreign oil service companies reduce their activity and international oil companies face repayment issues and daily operational challenges.

The biggest production losses are in the mature fields in the east. Fields in the west around Lake Maracaibo are also suffering. Even when oil was above $100/bbl, these ageing oil fields were already struggling due to years of under-investment and poor reservoir management. Natural declines have accelerated due to the power crisis and cash crunch. Even production in the southeast Orinoco Belt is starting to dip due to a lack of light crude for blending and reduced investment from foreign partners. Venezuela has hoped to increase production from the vast Orinoco Belt, which accounts for roughly half the country's production, to counter output losses in mature oil fields.

China has meanwhile sprung to Venezuela's financial aid by reportedly stretching out payments due under a previous oil-for-loans deal. The sharp decline in oil prices cut 2015 revenues at Petroleos de Venezuela (PDVSA) by 41% from the previous year. Revenue fell to $72.2 billion from $121.9 billion in 2014. As the cash crunch deepens, there is growing concern that acute shortages of food and medicine could trigger nationwide rioting. In turn, Venezuelan President Nicolas Maduro has piled pressure on PDVSA to boost crude oil production immediately, cut costs and repair refineries.


Non-OPEC overview

The outlook for non-OPEC production is essentially unchanged since last month's Report, with supplies declining by 0.9 mb/d in 2016, before a slight recovery lifts output by 0.2 mb/d - to 56.8 mb/d in 2017. Gabon, which re-joined OPEC effective from 1 July, is excluded from non-OPEC aggregates from this month's Report.

In June, a partial recovery in Canadian oil supplies - affected by wildfires since early May - as well as seasonally increasing biofuels output is estimated to have lifted non-OPEC output by around 0.2 mb/d from May's level. Technical problems in Ghana were also resolved with output at Tullow's Jubilee field recovering to near pre-outage levels. Elsewhere, production continues on a downtrend trend. Scheduled maintenance curbed North Sea supplies last month, while more structural declines following hefty investment cuts continue to drag down output in a number of countries such as China, Colombia and, most prominently, the US.



US oil production readings for April, the latest month for which comprehensive statistics are available, show total supplies, including crude oil, natural gas liquids and additives dropping 160 kb/d from March to just over 12.6 mb/d. While the overall output figure was in line with our previous forecast, the decline in crude oil production slightly exceeded expectations. Crude oil production fell by 220 kb/d, its largest monthly decline since 2008. At 8.9 mb/d, US crude oil output was 760 kb/d less than a year ago.

While we expect US crude production to continue falling into 2017, the rate of decline is expected to ease. Declines from already producing legacy wells are diminishing, and companies are reporting ever-higher output per rig and better performance of new wells. Signs that activity might start picking up are also emerging. According to Baker Hughes, US producers added rigs in five of the past six weeks. A survey of 152 energy firms conducted by the Federal Reserve Bank of Dallas suggests that business activity improved in the second quarter and that production declines eased compared with 1Q16. Respondents were also more positive on oil prices and spending levels in 2017.

It is not only in the US where operators are taking a slightly more optimistic view. In Colombia, state-run Ecopetrol, the country's largest producer, is taking over operations of the Rubiales and Cusiana fields and has pledged to increase drilling - if prices stay above $45/bbl - in a bid to maintain production levels. Over the first five months of 2016, Colombian crude output has plunged by an average of 90 kb/d, or nearly 10%.

Although there will be no impact on supply until after 2020, Chevron and its affiliate TengizChevroil (TCO) took a long-delayed final investment decision to expand the Tengiz field in Kazakhstan. TCO will spend nearly $37 billion to lift the project's capacity by 260 kb/d. The investment is the single largest since the downturn of 2014, and the first investment of more than $10 billion this year.


OECD

North America

US - April actuals, Alaska - June actuals: US crude oil production dropped by 220 kb/d to 8.9 mb/d in April, the latest month for which comprehensive oil statistics are available, with output down across the lower 48, Gulf of Mexico and Alaska. Lower 48 onshore output fell by 140 kb/d, mostly because of weaker North Dakota and Texas production, which slid by 65 kb/d and 45 kb/d, respectively. The decline recorded for Bakken production in North Dakota in April was in part due to state-imposed road restrictions rather than well decline rates, suggesting output likely saw a rebound in May. Well level data from Rystad Energy also show that completion activity increased by 50% from April to May, spurred on by improved market conditions, while declines in already producing wells were lower than a month earlier.

Output in the Gulf of Mexico saw a 50 kb/d drop in April, although production is expected to have rebounded in May and June. In July, however, the shut-in of production at the Thunder Hawk and Delta House offshore platforms resulting from a fire at a natural gas processing facility in Pascagoula, MI, likely curbed output once again. Natural gas liquids output, meanwhile, continues to flow at robust levels. Production hovered around 3.5 mb/d in April, roughly 190 kb/d higher than a year earlier.



While the decline in light tight oil (LTO) production is not expected to reverse course until mid-2017, signs are that the pace of decline is easing. After plunging from a high of 1,609 in in October 2014, the rig count has started to inch up; suggesting producers are once again boosting spending. US crude prices since late May have traded in a narrow $45-50/bbl range, high enough for some producers to return to the well-pad. Companies added rigs in five out of the past six weeks, augmenting the total number by 35 over the period. Over the past two weeks, through 8 July, 21 new rigs were put into operation. As such, the total rig count stood at 351 in early July, compared with 645 a year ago, according to Baker Hughes data. In the Permian basin in West Texas, the number of rigs rose by 21 over the past six weeks to 158, its highest since February. The current oil price however, is likely not high enough to restore growth and LTO output is expected to continue to decline through mid-2017. In all, US LTO production is forecast to decline by 500 kb/d in 2016 and a further 200 kb/d next year.



Another sign of improved business sentiment came from the Federal Reserve Bank of Dallas' survey of 152 energy firms in June, which showed business activity up 2Q16 at 13.8, from -42.1 in 1Q16[1]. Exploration and production (E&P) firms reported that oil and natural gas production fell again in the second quarter, but at a slower pace than in the first. The oil production index was -19.7, up from -49.4, while the natural gas production index rose 23 points to -24.7. Capital spending declines also moderated in the second quarter, particularly among services firms. The aggregate capital expenditures index came in at -9.3, compared with -46.6 last quarter. Outlooks six months out improved, particularly among E&P firms, with the index coming in at 19.0, a pronounced reversal from -24.5 seen in 1Q16. Reflecting this, the index of expected E&P capital spending in 2017 jumped 40 points to 25.4, suggesting producers have revised upward their expenditure estimates for next year.

Canada - Alberta April actual, others estimated: Albertan oil production dropped by 330 kb/d in April, with synthetic crude oil output taking a hit from scheduled maintenance at several of the region's upgraders. Synthetic crude oil output dropped from 990 kb/d in March to only 615 kb/d, its lowest since May 2011. Total Canadian oil supplies are estimated to have fallen by a further 650 kb/d in May, to 3.5 mb/d, as the entire area surrounding Fort McMurray had to be evacuated due to wildfires. At its peak, the wildfires shut in 1.5 mb/d of production capacity. During June, operators in the affected areas returned to work, gradually ramping up output. By early July, around 350 kb/d of capacity was still offline at the joint venture Syncrude project and Suncor Energy's Mackay River thermal plant. Syncrude said it expects a full ramp up of production following completion of scheduled maintenance by mid-July.

Changes to the official methodology to calculate and classify oil flows have clouded the supply picture for Canada since the start of the year. In its June monthly oil statistics submission to the IEA, Canada includes pentanes plus in its crude production numbers, rather than in natural gas liquids as was previously the case. A new more comprehensive source for imports of NGLs from the US is also used. Until historical data based on the new methodology is available, we will continue to include pentanes plus with other NGLs in this Report.

Mexico - May actual, June Preliminary: Mexican crude production held steady in May, just shy of 2.2 mb/d and in line with our previous forecast. Production stood 50 kb/d below a year earlier, driven lower by continued output drops in Cantarell. The legacy field is currently seeing annual decline rates of around 25%, and was last producing 215 kb/d. Preliminary data show production little changed in June.



In early June, as part of the reform to open the country's oil sector, Pemex's board approved a proposal to advance the company's first-ever farm-out, which would offer a stake in the deep-water Trion field in the Gulf of Mexico's Perdido fold-belt. Mexico's energy reform requires new Pemex partnerships to be adjudicated via an open public bid round. Regulators and the country's finance ministry will consider the request, with full details expected to be revealed by the end of July. The farm-out tender will be realised in parallel with bids for the fourth phase of Mexico's Round 1 public auction for deep-water blocks opened on 5 December. The area is estimated to hold resources of 485 million barrels of oil equivalent and require investment of around $11 billion. Pemex said that other farm-outs, proposed in a total of ten fields in areas including onshore, shallow water and heavy oil, were expected in due course.

Pemex also awarded an engineering, procurement, construction and installation contract to build and commission the Abkatun-A2 platform and associated structures to replace a platform destroyed last year in a deadly explosion. The deal, estimated at $454 million, is for an eight-legged, three-deck platform and bridge infrastructure to tie into other platforms in the Abkatun-Pol-Chuc area. The platform will have a maximum capacity of 220 kb/d of oil and 352 million cubic feet of natural gas and is to be delivered in the fourth quarter of 2018.

North Sea

North Sea oil production continues to exceed expectations, with output for the first five months of 2016 up by an average 180 kb/d compared with the same period a year earlier. Growth stems both from Norway and the UK. While no official output figures for June were available at the time of writing, loading data compiled by Reuters suggests that production fell sharply in June, confirming reports that Conoco would start its three-yearly maintenance cycle at the Ekofisk field. Output is on track to rebound in July, as Norwegian operators and unions agreed terms during labour negotiations averting strikes and output curbs. 



Norway - April actual, May provisional: Norwegian oil production inched up by 25 kb/d in April, to 2.03 mb/d. Total output was 90 kb/d higher than a year earlier, of which crude oil accounted for 50 kb/d and NGLs another 40 kb/d. As in recent months, gains stemmed primarily from new fields. Most notably, Knarr, which started pumping last March are currently producing around 40 kb/d. Edvard Grieg, which started up last December produced 62 kb/d in April. Goliat, which saw first oil in March, had ramped up to 30 kb/d in the latest monthly data.  

UK - April actual, May preliminary: UK total oil production stood at 1.08 mb/d in April, unchanged from a month earlier but 85 kb/d above the year prior. In comparison, output in 1Q16 was 175 kb/d higher than a year ago on average. Preliminary data for May, as submitted to the Joint Oil Data Initiative (JODI) suggest crude production increased a further 23 kb/d in May. EOG's Conwy field, which started up in March and Premier Oil's Solan field, started up in April, likely contributed. The Solan field reportedly achieved rates as high as 14 kboe/d from the first producer well. Output is expected to rise to around 25-28 kboe/d by midyear once a second well comes on line. Meanwhile, output at the Ninian South platform in the UK North Sea was temporarily shut in late June due to a small fire.



While a number of new project developments are still underway, the outlook for UK supply growth looks fragile. Data released by the Department of Energy & Climate Change show drilling figures for 1Q16 plunging to unprecedented lows. Only one exploration and appraisal well was started in 1Q16, compared with nine in the equivalent period in 2015. The number of development wells drilled offshore fell to 19, compared to 27 a year ago - and the lowest since at least 1998, when the DECC data series started.

Non-OECD

Latin America

Brazil - May actual: Brazilian oil production rebounded in May, after planned and unplanned outages had sharply curbed output so far this year. Production jumped 190 kb/d from April's level, to nearly 2.6 mb/d. A particularly large increase was recorded from the Lula field, where maintenance curbed output in April. Production was up 130 kb/d from a month earlier and 140 kb/d above the previous year. A 55 kb/d increase also came from the Peregrino field, which had seen output drop the previous month. Brazilian independent OGPar, meanwhile, resumed output at its marginal Tubarao Martelo field in the Campos basin after shutting the field on 6 March due to low productivity and weak oil prices.



Colombia - May actual: Colombian crude oil production averaged 904 kb/d in May, only slightly below April's level but nearly 12% lower than a year earlier. Field level data through April as published by ACP, the Colombian Petroleum Association, show that during the course of the first four months of 2016, total Colombian output fell by 85 kb/d on average from the same period a year earlier. The biggest drops came from the country's largest field, Rubiales, which has been in decline since 2013.

In an attempt to increase its overall oil output by 60 kb/d and to stem declines, Colombia's largest producer, Ecopetrol, announced in June that it would take over full operations of the Rubiales field. Ecopetrol is taking over a 43% stake previously held by Canada's Pacific Exploration. Output at Rubiales has fallen from a peak of more than 210 kb/d in 2013 to around 140 kb/d currently. The company's president said Ecopetrol plans to drill hundreds of new wells in a bid to stem declines and that the field will be profitable as long as prices do not fall below $45/bbl. Ecopetrol is also taking over operations at the light oil and gas condensate Cusiana field after ending a long-term contract with partners Equion Energy and Emerald. The field reached its peak production in late 1998 with more than 300 kb/d of output, which at the time represented more than 37% of all Colombian production, but is currently only producing around 5 kb/d.

Africa

In Ghana, UK independent Tullow Oil plc announced in its latest operational update on 30 June that its Tweneboa, Enyenra and Ntomme (TEN) project remains on schedule and that oil is expected to flow in coming weeks. The company targets a gradual ramp-up in oil production towards the FPSO capacity of 80 kb/d by the end of 2016, with output for the year averaging 23 kb/d.  Production at the company's Jubilee field meanwhile had recovered to around 90 kb/d in June after issues with the FPSO turret resulted in an extended shut down period in April into early May. In its latest update, the operator said it expects production from the Jubilee field to average 85 kb/d in the second half of 2016. Tullow also announced that the FPSO will need to be shut down for 8-12 weeks during the first half of 2017.

Asia

China - May actual: Chinese crude supplies slipped to their lowest level in nearly three years in May as hefty spending cuts by major producers continue to impact. According to the latest data from the National Bureau of Statistics, China produced 3.97 mb/d of crude oil in May, a drop of 65 kb/d from April, and 300 kb/d lower than a year earlier. China's leading producer, CNPC, is targeting crude output of 2.53 mb/d in 2016, a drop of nearly 5% from last year. Sinopec is also expecting its crude oil production to fall by around 5%, or 50 kb/d, this year, to just over 0.9 mb/d while CNOOC is targeting supplies of around 1.3 mb/d this year compared with output of around 1.35 mb/d on average in 2015. The drop in domestic supplies had contributed to a sharp increase in crude oil imports into China this year. At 7.62 mb/d, crude oil imports in May were slightly lower than the all-time high of 7.96 mb/d reached in April. Over the first five months of the year, Chinese net crude imports averaged 7.5 mb/d, an increase of 1.05 mb/d or 16% from the same period a year earlier. For the year as a whole, crude oil production is expected to decline by 270 kb/d, to 4 mb/d, with output dropping by 90 kb/d next year to 3.9 mb/d.



Viet Nam's crude oil output continues to lag year earlier levels. The government estimated June output at 308 kb/d, a drop of 45 kb/d, or 13%, from a year earlier. Actual crude oil production in May was reported at 305 kb/d, largely in line with preliminary estimates. The country's crude oil exports during the first six months of this year averaged 144 kb/d, a decline of 23% compared with 2015, the government said in its latest update. Planned maintenance at the joint production area of Malaysia and Vietnam will reduce Bunga crude export in August according to press reports.

Former Soviet Union

Russia - May actual, June provisional: Russian crude and condensate output was largely unchanged month-on-month in June, at 10.84 mb/d, but up 120 kb/d from a year prior. So far in 2016, Russian oil output has averaged 175 kb/d more than in 1H15, with growth largely accounted for by Bashneft, PSA ventures and Novatek. Output at Russia's largest producer Rosneft continues to lag year-earlier levels despite increased drilling at Yuganskneftegas and Vankor. Lukoil output is similarly declining compared to the previous year.



Kazakhstan - May preliminary: Kazakhstan's crude production plunged to a 45-month low of 1.45 mb/d in May as year-on-year declines accelerated to 180 kb/d, their steepest level since at least 2000. Volumes at the Karachaganak field were lower, due to maintenance that started in late April and reduced CPC loadings in June. Kazakh oil production is expected to get a boost later this year or in 2017, once the giant Kashagan field resumes production. Further ahead, additional volumes are set to come from the Tengiz field. Chevron announced on 5 July that its 50% owned affiliate, Tengizchevroil (TCO), has finally approved a major expansion project that will increase production by about 260 kb/d to over 850 kb/d. The Future Growth Project is currently estimated to cost nearly $37 billion.

Azerbaijan - May actuals; Azeri oil production was largely unchanged in May, at just over 900 kb/d. Supplies nevertheless bounced 100 kb/d above year earlier levels when the Guneshli platform suffered from output losses due to a fire. Output at the BP operated ACG complex was unchanged in 1Q16 at around 650 kb/d.

FSU net exports were largely unchanged in May, inching down by just 40 kb/d from a month earlier, as both crude and product posted small changes on April. Shipments from the Black Sea slipped on pipeline maintenance into the Novorossiysk port, and were offset by higher Caspian Azeri light crude volumes. Preliminary June data, based on tanker tracking and IEA calculations, points to a slight decrease in crude shipments, led by easing Baltic and BTC volumes. The Artic Gateway terminal, located in the Murmansk region in Northern Russia, has officially opened on 25 May. The terminal has a capacity of 90 kb/d, and handles Gazpromneft's Novy Port Light crude exports.


Middle East

Oman - May actual: Omani crude production hit a record 910 kb/d in May, while condensate output added another 90 kb/d, for a total of 1 mb/d of supplies. So far this year, crude and condensate output has averaged 998 kb/d, exceeding the government's target for the year of 990 kb/d. Most of the growth is stemming from Oman's largest producer Petroleum Development Oman (PDO), which in 2015 accounted for two thirds of the country's output, or a total of 670 kb/d.  PDO, which produced 589 kb/d of crude last year, is targeting output levels of 600 kb/d in 2016, three years ahead of an earlier schedule. Figures from oilfield services firm Baker Hughes show the number of active oil rigs averaged 57 for the first six months of the year, compared with 54 in the same period last year.

Stocks

Summary

  • Global stock builds have recently slowed as markets move towards equilibrium. Preliminary data suggest that OECD inventory builds have slowed to less than three quarters of their previous pace while volumes held in floating storage have also risen. This therefore implies that inventories in the non-OECD have started to draw.
  • OECD commercial inventories built by 13.5 mb in May to end the month at a record 3 074 mb. However, since this build was only approximately half of the seasonal build for the month, the surplus of inventories against the five-year average narrowed to 340 mb, from 353 mb at end-April.
  • OECD Stock builds in May were led by refined products which rose across all OECD regions. By end-May, refined products covered 33.0 days of forward demand, level with end-April but 2.3 days and 3.3 days above last year and the five-year average, respectively.
  • Preliminary data indicate that OECD inventories inched up counter-seasonally by 0.9 mb in June after draws in crude, NGLs and other feedstock were offset by a build in refined products. This suggests that OECD stock builds have slowed to 0.28 mb/d in 2Q16 from 0.4 mb/d in both 1Q16 and 4Q15.
  • Short-term crude floating storage rose to the highest level since 2009 by end-June. However, unlike 2009 when volumes held at sea increased due to the economics of a steep contango, today it is driven by logistical and marketing issues with time spreads in crude and product markets insufficient to cover storage costs.

Global Overview

As more data for 2Q16 become available, indications are that global stock builds have slowed as the market moves towards equilibrium. Global supply and demand balances put this figure at 0.2 mb/d, a rapid deceleration from the 1.3 mb/d posted in 1Q16 and significantly less than the 2.2 mb/d posted one year ago. Although preliminary readings are open to revision, recent data suggest that OECD stocks inched up 0.28 mb/d over 2Q16, a slowdown on the 0.4 mb/d posted in both 1Q16 and 4Q15. Additionally, floating storage increased by 180 kb/d in the second quarter. This implies that stocks in the non-OECD countries have drawn. Data suggest that Chinese stocks continued to rise over 2Q16, implying that offsetting stock draws occurred elsewhere.

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

OECD commercial inventories built by 13.5 mb in May to end the month at a record 3 074 mb. However, since this build was only approximately half of the seasonal build for the month, the surplus of inventories against the five-year average dropped to 340 mb, from 353 mb at end-April. The increase was led by refined products that added a steep 19.7 mb with all OECD  regions posting stock builds. The largest build (8.4 mb) was located in the OECD Americas, although  this came against the continued seasonal re-stocking of propane in the US that largely bypasses the refinery system. Moreover, this build offset draws in all other product categories that pass through the refinery system. This came amid relatively low refinery activity in the OECD Americas, which constrained product output.

The majority of refined product builds in Europe (5.5 mb) and Asia Oceania (5.8 mb) were composed of products passing through refineries. While runs in Europe remained lower than a year earlier, those in Asia Oceania posted year-on-year growth. By end-month, OECD refined product holdings covered 33.0 days of forward demand, level with end-April but 2.3 days and 3.3 days above last year and the five-year average, respectively.

All told, although OECD throughputs remained lower than one year earlier, they did post month-on-month growth. Consequently, OECD crude oil holdings slipped by 0.6 mb as an 11.0 mb decline in the Americas was offset by builds of 8.9 mb and 1.6 mb in Asia Oceania and Europe, respectively. Additionally, NGLS and feedstocks dropped by a combined 5.7 mb with stocks falling in all OECD regions.



Following the receipt of more complete data, OECD inventories were adjusted downwards by 4.3 mb in April. Together with a 0.9 mb downwards revision to March data, the 14.4 mb stock build for April presented in last month's Report was adjusted to a slimmer 11.1 mb build. April data for the OECD Americas were revised lower by 9.2 mb as crude stock levels came in 12.3 mb lower than first assessed. Meanwhile, inventories in Asia Oceania were revised down by a slim 0.8 mb while some offset came from a 5.7 mb upward adjustment to European holdings.



Preliminary data for June suggest that OECD inventories inched up counter-seasonally by 0.9 mb in June after a combined 10.2 mb draw in crude, NGLs and other feedstock was offset by an 11.1 mb build in refined products. Crude oil holdings fell by 11.6 mb, centred on the Americas and Europe where refinery runs ramped up as maintenance continued to wind down. In contrast, Asia Oceanian crude stocks rose as refinery runs fell month-on-month. As in May, the rise in refined products was led by 'other products' which surged by 21.8 mb on propane restocking in the US. Motor gasoline stocks dropped by 1.6 mb but still stood 30.7 mb above average. Subject to confirmation by subsequent, more complete data, preliminary data indicate that OECD stock builds have continued to slow over the second quarter, falling to 0.28 mb/d, compared to 0.4 mb/d posted during both 1Q16 and 4Q15.

Recent OECD industry stock changes

OECD Americas

Industrial oil inventories in the OECD Americas slipped counter-seasonally by 5.0 mb in May as draws in crude oil (11.0 mb) and NGLs (2.4 mb) and other feedstocks offset an 8.4 mb build in refined products. These came as regional refinery throughputs remained close to their lows for the year as an increase in US runs was offset by lower runs elsewhere. The build in refined products was entirely centred on 'other products' (+17.5 mb m-o-m), stocks of which were boosted by the continued seasonal re-stocking of propane in the US.  This build more than offset draws in products that pass through the refinery system that totalled 9.0 mb. As the US driving season ramped up, regional motor gasoline holdings dropped seasonally by 2.6 mb while middle distillates drew by 3.6 mb and fuel oil slipped by 2.9 mb. Despite these draws, by end-month all product stock levels remained above average in both absolute and days of forward demand terms. As regional gasoline demand is forecast to increase over the coming months, motor gasoline holdings covered 23.8 days of forward demand at end-May, 0.3 days below end-April but one day above one year earlier. Total regional refined products stocks covered 31.1 days of forward demand at end-month, 0.1 day below end-April but 1.9 days above one year earlier.



Weekly data from the US Energy Information Administration (EIA) indicate that US commercial inventories rose by 8.3 mb during June as builds in refined products (18.5 mb) more than offset a combined 10.2 draw in crude oil and NGLs and other feedstocks. As in May, the build in refined products was entirely centred on 'other products' (+23.8 mb) which surged as propane holdings continue to increase seasonally while NGL production remains elevated. In contrast, other product categories which pass through refineries drew by a combined 5.4 mb as refinery activity continues to remain subdued amid less-than-healthy margins.

Motor gasoline inventories inched down by 0.3 mb at a national level. However, holdings in the key PADD 1 (Atlantic Coast) market rose by 3.8 mb to stand at approximately 72 mb at end month, around 12 mb above one-year earlier. Despite these stocks amounting to less than 75% of working storage capacity in PADD 1, reports suggest that a number of gasoline-carrying vessels are moored in New York Harbour due to the high utilisation of terminals in the area. As with last year's logistical bottlenecks in the ARA region, this could result from market participants leasing terminal space but not necessarily utilising it.



US crude stocks remain comfortable despite falling seasonally by 9.5 mb as refinery activity ramped up. Crude inventories exceeded 530 mb at end-month (according to IEA methodology), 126 mb and 52 mb above average and last year, respectively. The June draw was centred on PADD 2 (Midcontinent) where inventories declined by 5.7 mb. About half of this draw came at the Cushing, OK, storage hub where stocks declined to about 64 mb at end-month, their lowest since the last week of January. Nonetheless, capacity at the hub remains under pressure as at end-month stock levels stood at around 86% of working capacity that in turn has seen WTI remain under downward pressure.

OECD Europe

Commercial oil holdings in OECD Europe rose counter-seasonally by 5.7 mb in May as builds in crude oil (1.6 mb) and refined products (5.5 mb) more-than-offset a 1.3 mb draw in NGLs and other feedstocks. The increase in crude oil came as refinery throughputs hit a seasonal low. This suggests that the rise in refined products came more from strong product imports rather than being domestically produced. All product categories posted builds; other products, middle distillates and fuel oil rose by 1.8 mb, 1.6 mb and 1.3 mb, respectively, while motor gasoline posted a more modest rise of 0.8 mb. At end month, all products stood at surplus to average levels. On a days of forward demand basis, refined products inventories covered 42.4 days, 0.1 days above end-April and 4.4 days higher than one year earlier.



Considering that France was gripped by refinery strikes through late May, data suggest that commercial oil stocks were not adversely affected. However, data show that government holdings of middle distillates and motor gasoline were released during the month. On a days of forward demand basis, French total (government plus commercial) product inventories covered 65.6 days at end-May, 0.6 days below end-April but 1.5 days higher than one year earlier.

Preliminary data from Euroilstock suggest that European inventories sank seasonally by 6.8 mb in June. As regional refinery activity surged by 400 kb/d, crude oil holdings drew by 2.1 mb. On the other hand, despite the increase in runs, refined product holdings fell by 4.7 mb. Draws of 2.1 mb, 1.8 mb and 1.2 mb were posted by motor gasoline, fuel oil and middle distillates, respectively, with only 'other products' (+0.4 mb) increasing.

OECD Asia Oceania

OECD Asia Oceania inventories built seasonally by 12.8 mb in May as both crude and product holdings rose. Accordingly, refined product cover rose by 0.4 days on the month to 22.0 days at end-June, 0.3 days above one year earlier. The monthly build was centred on Japan where both crude (+5.0 mb) and products (+5.6 mb) posted increases. While the crude build was in line with the prevailing seasonal trend, as maintenance saw 400 kb/d of refining capacity taken offline, the rise in products was steeper than average. Much of this came from a steep 3.2 mb rise in 'other products' (largely naphtha) with this likely to have been driven by high imports, particularly from the Middle East and Europe. Preliminary June data from the Petroleum Association of Japan (PAJ) suggest that commercial Japanese inventories slipped seasonally by 0.6 mb in June. Stocks were led lower falling naphtha stocks that drew sharply in June amid healthy petrochemical demand as reports suggest that a number of crackers came out of maintenance.


Recent developments in non-OECD stocks

According to data published by China Oil, Gas and Petrochemicals, Chinese refined product holdings slipped by an equivalent 2.9 mb in May as gasoil stocks drew by 5.0 mb amid high exports. On the other hand, gasoline and kerosene inventories added 0.9 mb and 1.1 mb, respectively. Chinese commercial crude stocks rose by an equivalent 1.9 mb (0.9%) in May. However, the implied unreported stock change calculated by comparing crude supply (net imports plus domestic production) with refinery crude demand suggests that stocks built for a fourth successive month as imports remained significantly above year-ago levels. Reports also suggest that much of the recent building has been by independent refiners as they have switched their feedstocks to crude oil from fuel oil. Additionally, some other volumes have likely been added at the recently completed Yangpu storage terminal. Initial indications are that stocks have continued to rise in June buoyed by high crude imports.   

The National Energy Administration (NEA) has recently released draft regulations for the strategic petroleum reserve that state that for the first time private companies are obliged to build compulsory stocks. Reports from China also indicate that the storage capacity of China's private oil companies is 1679 mb, nearly ten times government storage capacity.



In Singapore, record high bunker sales and decreasing imports in June led to a draw in residual fuel oil stocks, which make up roughly half of the country's inventories. Shipments from North Western Europe eased from exceptionally high 1Q16 levels, as the world's largest bunkering hub remains well supplied. However, even with a $4/bbl differential, fuel oil, loaded on VLCCs, still keeps flowing from Europe, helped by depressed freight rates. Ten VLCCs were reportedly fixed from NWE in late June, and the latest weekly stock data shows signs of a rebound. May bunker consumption data, compiled by the Singapore Maritime Authority, for the largest part heavy fuel oil, shows a strong increase in bunker sales, due to the per vessel intake rather than increased traffic, suggesting that shippers are choosing to stock up as much as possible, in expectation of higher prices ahead.

Recent developments in floating storage

Short-term crude floating storage inched up by about 1 mb in June to stand at 95 mb at end month, the highest level since 2009. However, unlike 2009, when volumes increased due to the economics of a steep contango market, which made the holding of oil on ships profitable, today volumes are primarily driven by logistical and marketing issues with time spreads in crude and product markets insufficient to cover storage costs. 

During June, the global distribution of floating storage changed considerably over the month. Volumes in the Middle East Gulf dropped by 2 mb as a VLCC previously storing crude in the region shipped the oil elsewhere. Meanwhile, the fleet of NITC vessels storing Iranian condensate remained stable at 21, carrying a combined 42 mb of oil. Two vessels storing crude off Northwest Europe offloaded volumes there so floating storage fell by 3 mb to 4 mb at end-month. However, in Asia, volumes rose by 6 mb to 24 mb. Expectations are that volumes held off Asia should grow in coming months with reports indicating that two international oil traders have leased VLCCs in recent weeks to store crude in the region. Product storage continues to be driven by cargoes of fuel oil moored off Singapore as market participants struggle with brimming onshore inventories and sluggish regional demand as Chinese independent refiners continue to switch from running fuel oil to crude oil. Reports have also started to emerge of clean products being held offshore of key terminals in the Atlantic basin, notably in the ARA and New York Harbour regions, as land-based inventories, notably of gasoline, in these areas remain extremely high.


Prices

Summary

  • Crude oil prices eased from an early June peak above $52/bbl, but traded within a $45-$50/bbl range. Growing uncertainty over the global economy and the related dollar strength weighed, but the downside was limited by further declines in US production and inventories. Supply disruptions in Canada and Nigeria began to ease, but ongoing militant attacks in Nigeria made for a fragile recovery.
  • Spot crude markets also eased from earlier highs, as a partial recovery in Nigerian and Canadian production added pressure. Dubai flirted with contango as refiners in Asia geared up for seasonal maintenance, potentially dampening demand. Saudi Aramco cut monthly formula prices to Asia and the Mediterranean to stay competitive versus other Middle East producers.
  • Spot product prices continued to strengthen in June in line with crude prices that firmed month-on-month (m-o-m). Nonetheless, there appears little chance of a repeat of last year's spike in gasoline cracks, as price increases for gasoline were less than for other products due to high stocks and concerns over gasoline demand in key markets. Moreover, as diesel prices increased relatively strongly in June, European and Asian gasoline and diesel cracks traded at parity for the first time in more than a year.
  • Freight rates for very large crude carriers on the Middle East to Asia route hit their lowest in more than a year as tanker supply was abundant and weather delays in the Far East eased.



Market overview

Crude oil prices eased from a 2016 high above $52/bbl reached in early June, as an upheaval in financial markets and growing economic uncertainty following the UK's vote to leave the EU weighed. A stronger US dollar also pressured prices. Prices stayed locked within a $45-$50/bbl range as the downside was capped by lingering supply disruptions in Nigeria and Canada and emerging signs of deeper declines in US domestic production and inventories that have fallen for almost two months running. June marked the fourth straight month of average price rises in Brent and WTI futures. ICE Brent futures climbed by $2.28/bbl, or nearly 5%, from May to an average $49.93/bbl during June. NYMEX WTI rose by $2.05/bbl to average $48.85/bbl, up around 4% on May.



ICE Brent's contango structure held steady during June, with the M1-M2 spread at a -$0.53/bbl discount compared to -$0.48/bbl in May. A similar picture emerged on NYMEX WTI, with the discount of prompt month to second month at -$0.62/bbl in June versus -$0.59/bbl in May. By early July, however, the contango widened and, together with low freight rates, could lead to further building of onshore storage. On forward curves, the WTI M1-M12 spread widened to -$3.13/bbl in June from -$2.79/bbl in May. The Brent M1-M12 contract spread was stable at -$3.13 /bbl in June versus -$3.15/bbl in May.


Spot crude oil prices

Spot crude markets eased from earlier highs reached in June, as a partial recovery in Nigerian and Canadian production piled on pressure. Hefty volumes of West African crude are set to move into India and China during July. Militant attacks on Nigeria's oil sector have disrupted loadings of Nigerian crude in recent months and eroded buying interest as customers sought more secure sources of supply. With force majeure being lifted on Bonny Light, buyers are starting to regain confidence in supply. Abundant supply put North Sea grades under pressure. Ekofisk dropped to a discount to Dated Brent. With North Sea crude under pressure, the arbitrage window to Asia is wide open.



Urals prices in Northwest Europe and the Mediterranean are diverging. The Urals differential to Dated Brent in the Mediterranean has firmed to around -$1.05/bbl - the narrowest since the end of last year due to a short July loading programme, while differentials in Northwest Europe are around -$2.15/bbl. As a result, the arbitrage window has opened between Northwest Europe and the Mediterranean and an armada of cargoes is expected to add to an already well-supplied market. Caspian CPC Blend rose to a $0.70/bbl premium to Dated Brent as refiners sought to blend the barrels with Basra crude to make an alternative to Urals. The sour crude market share battle in Europe is meanwhile heating up between Russia, Iran, Iraq, Saudi Arabia and Kuwait. A cargo of Iranian crude was sold into Poland, where Saudi Arabia has already made inroads. Saudi Aramco lowered its monthly formula prices for August loadings of crude oil destined for the Mediterranean Europe and rival Middle East producers are expected to follow suit.

Of the global benchmarks, WTI posted the strongest month-on-month (m-o-m) performance in June, rising $2.02/bbl to $48.74/bbl as domestic supply tightened, inventories declined and Canadian outages lingered. North Sea Dated Brent rose $1.49/bbl over May to average $48.28 /bbl for the month. Middle East Dubai gained $1.95/bbl to average $46.25/bbl in June. Russian Urals climbed $1.59 /bbl m-o-m to average $46.60 /bbl in June.



Reflecting weakening market sentiment, the front-month Dubai structure flirted with contango in early July. Dubai has weakened as refiners in Asia gear up for seasonal maintenance, which could dampen demand. An average $0.20/bbl backwardation held during June, but by July, Dubai had flipped into a $0.50/bbl contango. A steady flow of North Sea barrels into Asia has hit shorter-haul crudes such as ESPO Blend and Murban.

Saudi Aramco cut monthly crude oil formula prices for shipments to Asia, the US and the Mediterranean - with a notable reduction for Arab Extra Light. Saudi Aramco intends to boost output from the recently expanded Shaybah oil field and is offering additional barrels of Arab Extra Light.

In the US, with Canadian output improving, the differentials for Canadian crude are weakening. The discount of Canadian Heavy widened from -$12/bbl towards -$14/bbl and Canadian syncrude is seeing its premium decrease. In the Midwest, the Bakken differential to WTI has moved back to a discount, and at about -$1/bbl is at the weakest since mid-April.




Spot product prices

Spot product prices continued to strengthen in June in line with crude prices that firmed m-o-m. Although gasoline prices posted month-on-month gains, these were weighed down by brimming inventories and concern over demand strength in key markets. This saw gasoline cracks change course in mid-June and fall. In contrast, middle distillate prices performed relatively well as stock draws helped to propel prices higher with cracks firming across all markets. The different paths of gasoline and diesel cracks saw these approach parity in Europe and Asia by early-July.

Despite gasoline spot prices increasing in the wake of firmer crude prices in June, they were weighed down by brimming inventories and concerns over the strength of gasoline demand in key markets. Consequently, cracks in all markets remained significantly below the year-ago levels. The weakness was acutely illustrated in the US where prices remained weak in the face of record inventories in the key PADD 1 (Atlantic Coast) market following a plethora of transatlantic imports. Moreover, stocks are so high that market participants have been forced to turn to floating storage in the New York Harbour area. Accordingly, by early July US cracks stood below $13/bbl, approximately $25/bbl below twelve months ago.

In Asia and Europe, the picture was similarly weak with gasoline cracks in both markets standing about $10/bbl lower than a year earlier in July. In Asia, spot gasoline prices actually fell on a monthly average basis as prices came under pressure from high Chinese exports with reports suggesting that Chinese independent refiners have begun to export product. In Europe, prices largely reflected the weak US market, which limited the opportunity to ship European gasoline westwards. This also saw product stock levels increase at key Northwest European terminals.



Naphtha markets remain weak with spot prices closely tracking crude prices. In Asia, cracks continued to sink further into negative territory as naphtha demand continues to remain lacklustre with competing LPG continuing to be a cheaper feedstock in regional steam crackers. In contrast, European cracks turned the corner and firmed for the first time since March after spot prices rose as some upward momentum came from regional gasoline blending demand and an open arbitrage to ship product to Asia.



Middle distillates spot prices in all surveyed regions rose strongly in June, as stock draws in a number of key producing and consuming countries added to bullish sentiment. Despite the increase in diesel prompt prices, the ICE Gasoil market remained in contango during June. Indeed, the contango steepened, particularly over the first three months where time spreads increased to about $3.20/tonne from $2.80/tonne one month earlier. In the US Gulf Coast market, ULSD cracks firmed by $1.64/bbl, however, these were outstripped by heating oil cracks that increased by over $2.00/bbl on an increase in exports to Latin America where colder weather has arrived and a number of refineries, particularly in Venezuela, are experiencing outages. In Europe, middle distillate cracks firmed by less than the US amid high inflows from the FSU and the Middle East. However, some upward momentum came as US flows were diverted to Latin America. Both Northwest Europe and the Mediterranean saw jet kerosene cracks rise at a faster clip than diesel due to seasonal demand peaking.



Fuel oil cracks in Europe and Singapore increased steeply in late-June on tightening fundamentals as a fall in Russian supplies combined with an uptick in Asian demand. By early-July, both HSFO and LSFO cracks stood at their highest levels since end-February, although they remained in negative territory in all markets. Asian prices were supported by healthy bunker activity with latest data for the Singapore region showing that sales are comfortably above one-year earlier levels. Further upward momentum came as on-land inventories declined steeply although a number of cargoes currently remain in floating storage. In Europe, spot prices and cracks strengthened in the wake of the strong Asian markets with the arbitrage to ship product to Asia further boosted by low VLCC freight rates. Mediterranean prices also remain above those in Northwest Europe on exports to North Africa where fuel oil is also being run as a feedstock and used for power generation. 


Freight

Freight rates had a subdued month across the board in June. Rates for very-large-crude-carriers (VLCCs) on the Middle East to Asia route hit their lowest in more than one year, as tanker supply remained abundant and weather delays eased in the Far East.

Suezmaxes on the West Africa - UK Continent route saw some strength mid-month but ultimately receded, as Nigerian loadings remain subdued despite some improvement in fixtures. Aframaxes in the North Sea and Baltic showed some improvement but then eased again, as tonnage caught in French ports was reportedly released into the market after the strikes. Rates were even weaker in the Caribbean, falling to the lowest since 2009, on lower cargoes and ample tonnage supply.



Surveyed product freight rates saw further weakness in June. In the Atlantic Basin, Medium-Range (MR) rates were pressured by building US gasoline stocks in PADD1, and the backhaul US Gulf - UKC diesel route suffered from ample distillate inventories in Europe.

East of Suez, chartering activities on the larger Long-Range (LR) vessels was subdued, as the Far East remained generally well-stocked in naphtha, even as petrochemical activity remains robust. Preliminary data from the Petroleum Association of Japan (PAJ), shows a naphtha draw in early July (see 'OECD stocks'), which could inject some life into July cargo inquiry if crackers activity doesn't recede.


Refining

Summary

  • May global refinery throughput plunged by almost 1 mb/d on a month-on-month (m-o-m) basis, down 1.5 mb/d year-on-year (y-o-y), as heavy outages took their toll in many regions. This lowered 2Q16 estimate for global refinery intake, to 78.54 mb/d - the first y-o-y drop in three years.
  • Our forecast for 3Q16 throughput is more steady at 80.95 mb/d, up on the previous quarter by 2.4 mb/d, the largest-ever seasonal ramp-up, and by 1 mb/d y-o-y.
  • Refinery throughput growth is decoupling from demand growth, both seasonally, and structurally, resulting in the need for a more nuanced interpretation of headline oil demand numbers.

Global refinery overview

The latest estimate for April refinery runs is lower by 145 kb/d as the US data is revised down by 130 kb/d compared to the preliminary data, and Saudi Arabian crude intake continued to decline after seeing record levels in February. Only about 60% of Middle East and Latin American throughput is actualised for April, with the rest still estimated. The situation with reported data is better in other non-OECD regions, however, further revisions to April numbers cannot be ruled out.



Flat y-o-y, April's unimpressive refining activity was only a prelude to a more dramatic May, when some major refining regions performed worse than expected. Global throughput in May is now estimated to be down by 1.5 mb/d y-o-y, a third of which, though, is due to force-majeure in France and Canada, where, respectively, labour strikes and wildfires curtailed refinery runs. In terms of m-o-m trends too, May's performance stood out as the usual seasonal increase was replaced by an estimated drop of almost 1 mb/d. This coincided with a temporary tightening in crude oil markets due to the Canadian wildfires and the Nigerian shutdowns, which explained why there was not much appetite for refiners unaffected by maintenance or force majeure to ramp up runs to compensate for outages elsewhere.

Thus, after 1Q16's 1.3 mb/d gain, the refining sector is taking a breather and dipping some 330 kbd/ y-o-y in 2Q16 despite the estimated 1.4 mb/d increase in demand. In theory, this would imply substantial stock draws. In practice, a certain degree of decoupling of total demand from refined product demand has emerged over the last few years that limits the need to increase refinery output as more and more products are supplied outside the refining sector (See The burden of the light-hearted demand growth)



The burden of the light-hearted demand growth

As discussed above, our latest estimate for 2Q16 runs indicates a y-o-y drop of some 330 kb/d while demand growth is at 1.4 mb/d. At the same time, OECD product stock draws between January and May (latest available data) have failed to impress. In the non-OECD, China has turned into a major regional exporter, Brazil manages to export products even at lower crude throughput rates, and Saudi Arabia is sending more products overseas. How do these conflicting developments tie up?

The explanation lies in the gradual decoupling of the headline oil demand growth from the refined product demand growth. Currently, there is a gap of 15-16 mb/d between global demand and refinery runs, as some product supply bypasses refineries. Biofuels account for over 2 mb/d of this gap, and refinery processing gains amount to another 2 mb/d. A small proportion is taken up by fuels produced in gas-to-liquids and coal-to-liquids processes, while the biggest share comes from natural gas liquids (NGL) such as LPG, ethane and light naphtha (pentanes plus). These light products are not only finding a natural home in the globally expanding petrochemical sector, but increasing their market share in residential heating and cooking, and also in road fuels. Lower oil prices help LPG become a fuel of choice in developing regions with low-income population, in their effort to decrease the reliance on highly polluting traditional biomass for cooking. In India, for example, prime-minister Modi declared 2016 "Year of the LPG consumer" when launching a programme to make the fuel available to all households by 2018.



Our estimates of net refined product demand and refinery run growth show that since 2014 refinery runs growth has exceeded refined product demand growth. Even with 2Q16's expected y-o-y decline in refinery runs, refined products stocks will not necessarily draw in the first half of this year, as the 1Q16 runs growth was 60% higher than refined product demand growth. Indeed, since 2010, the growth rates of light products from natural gas liquids (ethane, LPG, naphtha) have been double the rates of the main refined products demand growth (gasoline, kerosene, diesel).


Our runs forecast for 3Q16 is also revised slightly lower, by 120 kb/d, primarily due to weaker Chinese and Brazilian throughput. Still, the non-OECD is entirely driving 3Q16's y-o-y gain of 1 mb/d, towards a new record level of quarterly run rates. In our first look into 4Q16, expectations for October are at a relatively robust 1.2 mb/d y-o-y change, once again, all the net increase comes from non-OECD refiners.

Margins

The French disruption helped European margins in June move to their highest levels since January, and the dynamic in other refining centres too was overwhelmingly positive even as crude oil prices strengthened further. Interestingly, the same counterintuitive correlation between crude price and refinery margin movement continued into July as lower crude prices coincided with lower margins This is possible with gasoline cracks behaving counter-seasonally and hitting the lowest levels across all refining centres since February. In Europe and Singapore, they are now down to single digits. Diesel cracks, that were supported by European tightness in June, are also sliding lower in July. Stock draws implied by US weekly data are well in line with seasonal levels, which means that the overhang is not disappearing yet, and starts acting as a firm lid on gasoline cracks even at the seasonal demand ramps up.




OECD refinery throughput

April refinery throughput in OECD was finalised with small revisions to preliminary numbers: lower US and European numbers were not fully offset by higher Japanese throughput. Thus, April is confirmed to have seen the first y-o-y drop in total OECD runs in two years, to the tune of 460 kb/d. It is the European refiners that first started running out of steam earlier this year. For some time though, the overall OECD y-o-y- trend remained positive, until the US joined in reducing throughput.



May preliminary numbers came in some 330 kb/d lower than our estimate, following the same pattern of lower than expected North American and European runs with higher OECD Asia Pacific throughput. The disruption from labour strikes in France was some 100 kb/d higher than our estimate, with runs down to 900 kb/d from 1.2 mb/d in average. Spanish throughput in May was unexpectedly 220 kb/d lower from April, which most likely indicates refinery maintenance, rather than substantial run cuts. European capacity utilisation rates dropped below 80% in May, with runs down 640 kb/d y-o-y. At the same time, Korean and Japanese throughput exceeded expectations by a combined 240 kb/d. Currently, OECD Asia has the highest utilisation rate in the OECD, at 87%, which puts it ahead of many other regions in the world. This is largely thanks to the Japanese measures to address overcapacity by implementing mandated shutdowns.

In total, May OECD throughput was down 740 kb/d y-o-y to some 36.8 mb/d, the lowest level since October 2014. The June throughput estimate is also weighed down primarily due to the higher expected impact of the French strikes that continued well into the month, with two of Total's refineries reported as fully back online only during the first week of July. US and Canadian weekly data indicated a slightly worse performance in June than expected, while Japanese weekly data came in stronger than our previous forecast that was weighed down by heavy maintenance plans. Overall, the estimate for 2Q16 OECD throughput is now lowered by 90 kb/d.





The forecast for 3Q16 throughput is largely unchanged, with downward revisions for North America and Asia, and upward revisions for Europe. US runs are forecast to be slightly down y-o-y, by 60 kb/d as the start of the gasoline season has failed to impress, with the stocks overhang not easing and cracks dwindling lower. European runs are down by about the same amount y-o-y, a much more modest decline compared to the average 280 kb/d negative change since the start of the year. Thanks to 130 kb/d y-o-y growth in Korean runs OECD Asia Oceania is also overall higher y-o-y.

In October, European runs are expected to resume serious y-o-y losses, at about 530 kb/d, while North American and OECD Asia runs are forecast to be 330 kb/d and 100 kb/d higher y-o-y respectively.

Non-OECD refinery throughput

While the non-OECD as a whole is now firmly driving global throughput gains, in reality, it is only the East of Suez that is growing, while Latin American, African and FSU throughput has mostly seen declines this year. In April, for example, the latter three regions registered a combined 620 kb/d drop y-o-y, more than offset by 780 kb/d growth shared equally between China and other Asia, and 230 kb/d growth from the Middle East.

Chinese and Indian May actual throughput numbers came in 130 kb/d and 150 kb/d lower than the forecast due to more extensive shutdowns than expected. Chinese 2Q16 growth estimate is now lowered by 60 kb/d to 200 kb/d y-o-y, still at the record quarterly throughput level at 10.66 mb/d. Our forecast for 3Q16 is also revised down by 70 kb/d to 10.73 mb/d, for a y-o-y gain of 390 kb/d. The Chinese government recently halved the product export quota allocations for the third quarter to just over 0.5 mb/d, to match the volumes refiners actually exported during 2Q16. Indian 2Q16 runs were revised down by 66 kb/d, seasonally lower than 1Q. Our forecast for 3Q16 implies the highest ever quarterly run rate for India of 4.96 mb/d, up almost 500 kb/d y-o-y. This growth rate will persist until at least October.

In the Middle East, April throughput in Saudi Arabia was down for a second consecutive month to 2.5 mb/d, still a robust 290 kb/d y-o-y increment. For the region as a whole, our 2Q16 runs estimate is unchanged, while 3Q16 is revised down by 100 kb/d to 7.2 mb/d, up 520 kb/d y-o-y. October throughput is forecast to see a substantial 380 kb/d annual gain.



In Latin America, Brazil's runs did not pick up from the low April levels, with finalised May numbers some 180 kb/d lower than our forecast, and showing a drop of 250 kb/d y-o-y. The expectations of higher runs before the summer Olympics did not materialise. This either implies a shutdown for regular maintenance or for additional conditioning work on the new units that came online last year, or, that, quite simply, Petrobras is keen to maintain crude export levels with domestic oil output experiencing declines, diverting crude away from domestic refining. Due to these potential factors, we have revised down our 3Q16 forecast by 100 kb/d, with throughput now not expected to reach 2 mb/d throughout the forecast horizon to October.

Crude runs in Russia in June were a big surprise, exceeding our forecast by 440 kb/d, and reaching 5.7 mb/d. After having registered an average 200 kb/d y-o-y decline in the January-May period runs were up by 60 kb/d y-o-y. Our forecast for 3Q16 throughput is now revised higher by 150 kb/d, to an average of just under 5.5 mb/d, still down some 290 kb/d y-o-y. October runs will seasonally decline to 5.2 mb/d. 



Russian downstream responds to fiscal changes

Just before the recent Libyan conflict, in 2010, Russia exported almost as much fuel oil as Libya did crude oil. Fuel oil yields in some Russian refineries were reaching 40%, and a multitude of small topping plants had sprung up in the country to benefit from the export tax arbitrage, whereby product exports were taxed at lower rates than crude oil, making the domestic refining -- especially the most unsophisticated form of it -- a rather profitable business. Partly thanks to this, Russian domestic refining volumes grew in line with crude output growth, eating away at crude exports. In the five years to 2014, the record Russian throughput year, refinery runs increased by 1 mb/d, while crude production was up by about 150 kb/d.

Last year, finally, the tax legislation was amended to introduce punitive taxes on fuel oil exports, and lower crude oil export duties, with a view to encouraging, or forcing, domestic refiners to increase the yields of higher value light and middle distillate products, as well as to supply transport fuels meeting new specifications set to gradually tighten. The financial incentive for the necessary investments into upgrading units, and, simultaneously, the disincentive for continuing to run topping operations, seem to be working now. Many refiners have already launched the range of heavy residue cracking, coking and gasoline component units that had been stuck in the planning stage for years. This has resulted in a clear emphasis of the refinery yields towards middle and light distillates.

Fuel oil yields are down by 6% percentage points, to 19%, which is still high compared to the global average. Middle distillate and gasoline yields have gained 1% point each. Thus, in January-May, while refinery runs were down 200 mb/d y-o-y, fuel oil output was down by 260 kb/d to 1 mb/d, while diesel lost only 35 kb/d. As a result, fuel oil exports are down by third y-o-y to 700  kb/d. Given the tightening sulphur specifications in its main export market - bunkers - the loss of high-sulphur Russian fuel oil volumes has not been very dramatic. Moreover, as Chinese teapots - the smaller independent refiners - change their feedstock from imported fuel oil to crude oil, residual fuel oil markets remain well-supplied.