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OPEC MOMR Feb. 0516/2/05
The adoption of stricter product specifications in Asia could again focus price pressure on light sweet crudes, possibly triggering a substantial widening of the spread between sour and sweet grades, according to the OPEC Monthly Oil Market Report for February 2005. “In seeking to maintain oil market stability, the potential for such a development would also need to be
taken into consideration,” the report said.
One of the key factors driving last year’s surge in prices for light sweet crudes was the specification changes for gasoline in the USA, which raised fears of a supply shortage as refiners were not expected to be able to meet the stricter new requirements. This concern has now moved to the Asian market, as refiners in India and China are facing lower sulphur requirements for transportation fuels, the report said. In India, refiners are required as of 1 April to slash the sulphur content of gasoline and diesel to 500 ppm from 1,000 ppm and 2,500 ppm respectively. These restrictions are even more severe in eleven metropolitan cities that have adapted the Euro-III standard which lowers the sulphur limit to 350 ppm for diesel and 150 ppm for gasoline. The Indian government recently denied a request to postpone the new specifications by domestic refiners who do not foresee finalizing the necessary upgrading of their refineries until towards the end of 2006.
In China, refiners are facing a similar situation due to their inability to make the necessary technical changes on time to meet Euro-II requirements for gasoline and gasoil as of 1 July 2005. These specifications call for the sulphur content of gasoline and gasoil to be reduced to 500 ppm from the current 800 ppm and 2000 ppm respectively. The challenge in meeting these new targets is made even more difficult by the fact that the hydrotreating capacity in China is very low. Some industry publications have put China’s hydrotreating capacity at 306,000 b/d, or 5.5% of its 5.7 mb/d capacity.
These developments are likely to result in Asian refiners increasingly seeking more lighter crude from West Africa, drawing sweet barrels away from the Atlantic basin and thus further pressuring light sweet benchmarks WTI and Brent, the report said.
In contrast, the prospect for heavy sour grades looks less promising and may even weaken if the high sulfur fuel oil market remains at the steep discounts seen last year. With the decline in global fuel oil consumption by at least 1.5% per year, this situation will likely persist in 2005, adding further pressure on heavy sour grades, the report said.
Despite this challenging outlook for heavy sour crude, as well as the expected seasonal drop in demand in the second quarter, OPEC decided at its 134 Meeting of the Conference on 30 January to maintain currently agreed production levels in order to provide a greater cushion of supply to the market, the report noted. At the same time, OPEC will continue monitoring market developments very closely, in particular price developments and commercial crude oil stock levels, both in absolute terms and in days of forward demand cover, given the continued strength of demand observed in recent years, it said.
In its review of the market, the OPEC monthly report said that world oil demand growth in 2004 was estimated to have grown by 3.2% or 2.6 mb/d to average 82.1 mb/d. There were minor downward revisions to the data for the first three quarters while the absolute fourth-quarter figure was revised up by 0.3 mb/d. The lion’s share of the upward revision to the fourth quarter data took place in China where demand was underestimated by 0.29 mb/d in the last MOMR. The world oil demand forecast for the present year has been revised upwards in line with projections of stronger world GDP growth. According to the latest figures, the world’s economy is now expected to grow 4.2 % or 0.09 % higher than the previous estimate of 4.1 %. Thus, average world oil demand is projected at 83.78 mb/d, implying a gain of 2.1% or 1.7 mb/d over total 2004 consumption.
Turning to the supply side, OPEC crude oil production in January, based on secondary sources, is estimated at 29.2 mb/d, a drop of 0.6 mb/d from the revised December figure, according to the report. Non-OPEC oil supply for 2004 is estimated at 49.7 mb/d, which is 1.1 mb/d over the 48.6 mb/d estimated 2003 figure. Non-OPEC supply in the current year is expected to reach 50.8 mb/d, an increase of 1.1 mb/d over the 2004 estimate.
The report noted that US commercial oil stocks experienced a further seasonal draw for the second consecutive month, falling by 8.1 mb or 0.3 mb/d to 957.7 mb during the period 31 December–28 January. An upward revision to the December figure helped oil stocks in Eur-16 (EU plus Norway) to reverse last month’s downward trend to display a contra-seasonal build of 11.4 mb or 0.4 mb/d to 1,085 mb in January. At the end of December, total commercial oil stocks in Japan stood at 189.9 mb, falling by 15.7 mb or 0.5 mb/d compared with the previous month.
The OPEC Basket in January saw a monthly average of $40.24/b, a rise of nearly 13% or $4.54 over the previous month and a $4.19/b jump from last year, the report said.
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