HIGHLIGHTS - .NET Framework

16 January 2009
HIGHLIGHTS • Forecast global oil demand in 2009 is revised down by 1.0 mb/d,
following a halving of assumed GDP growth to 1.2%, given the worsening outlook. Global oil demand is now projected at 85.3 mb/d in 2009 (0.6% or 0.5 mb/d yearonyear). The 2008 estimate is revised down 70 kb/d to 85.8 mb/d (0.3% or 0.3 mb/d versus 2007). The expected twoyear contraction in oil demand would be the first since 1982 and 1983.
• Global oil supply was flat in December at 86.2 mb/d, with curbed OPEC output offset by gains elsewhere. NonOPEC supply for 2008 and 2009 is forecast at 49.5 mb/d and 50.0 mb/d, lowered by 60 kb/d and 30 kb/d versus last month’s report. 2008 output declined by 150 kb/d, partly due to the first fall in Russian supply since 1996. 2009 growth is forecast at 0.5 mb/d, in addition to a 0.6 mb/d increment in OPEC NGLs.
• December OPEC crude supply was 30.9 mb/d, down 330 kb/d versus November. This was 1 mb/d below September 2008 levels, and nearly 2 mb/d below mid2008 highs. OPEC agreed a new target of 24.8 mb/d from January, equivalent to OPEC13 output of 28.2 mb/d versus a reduced 2009 ‘call’ of 29.530.0 mb/d.
• 1Q09 global refinery throughput is forecast at 72.3 mb/d, 1.2 mb/d lower than last month’s report. Weaker global demand and poor economics continue to hamper crude runs. Evidence of more structural changes to the refining industry is emerging in addition to reduced plant operation rates.
• OECD industry stocks fell by 2.0 mb to 2,658 mb in November, as a US build was offset by lower European crude and Pacific distillates. Despite a downward revision to October data, endNovember forward demand cover remains high at 56.4 days on lower OECD demand. Preliminary December data indicate an OECD draw of 8.0 mb.

OECD Europe .......................................................................................................................................................................31 OECD Pacific .........................................................................................................................................................................32
PRICES ..............................................................................................................................................................................................35 Summary .......................................................................................................................................................................................35 Overview......................................................................................................................................................................................35 Spot Crude Oil Prices ............................................................................................................................................................36 Refining Margins ........................................................................................................................................................................38 Spot Product Prices .................................................................................................................................................................39
16 JANUARY 2009 3
A MOVING TARGET One problem analysts currently face is that as the economic outlook worsens, so the shelf life of prevailing forecasts for GDP and oil demand shortens. Exceptionally this month, we try to preempt widely flagged, but as yet unspecified, downward revisions to global GDP growth forecasts from the major international institutions. We normally rely on projections from the IMF, the OECD and Consensus Economics in trying to construct a balanced GDP view and consciously avoid dabbling in macroeconomic crystal ball gazing ourselves. This month we are forced to anticipate upcoming institutional revisions on the likelihood that the IMF and others will shortly cut their forecasts. Our GDP changes try to reflect the worsening trends evident since midDecember when we published our last Oil Market Report (OMR). Crucially, the IMF’s managing director has gone on record saying its next forecast will incorporate sharply lower global growth, with China in particular prone to a steep slowdown.
We now assume 2009 global real GDP growth of 1.2%, versus the IMF’s November estimate of 2.1% we employed last month. Much of our interim revision rests on the recent Consensus Economics survey. The nonOECD GDP projection is cut by nearly a quarter, to 4.1% for 2009, while OECD contraction is pushed to 0.9%, from an earlier decline of 0.2%. Many forecasters go lower still, and although our assumptions are provisional and prone to adjustment, we await the IMF update before going further. For China, a recent spate of lower GDP forecasts range from 5% (mainly commercial banks) to 7.5% (World Bank). We have gone midrange at 6.5%, acknowledging that uncertainty for China is high. Combined with a lower 4Q08 demand baseline, this has dramatic implications for our 2009 oil demand forecast, which now stands at 85.3 mb/d, down by 1.0 mb/d from last month, and a contraction of 0.5 mb/d from 2008 (itself some 0.3 mb/d lower than 2007). OECD 2009 demand is cut by 0.5 mb/d (declining by 1.2 mb/d vs 2008), and the Chinese outlook is cut by 0.3 mb/d, suggesting 2009 growth of less than 0.1 mb/d. Not only demand has been cut since the last OMR however. NonOPEC supply and OPEC NGL have been trimmed by a combined 0.1 mb/d for 2008 and 2009. The IEA has previously flagged the need for sustained investment when economic slowdown occurs, in order to avoid a renewed supply squeeze when demand growth recovers. While government stimulus packages can help sustain investment in clean energy forms, private sector, conventional upstream oil and gas investment is already being hit. That said, modest nonOPEC growth should resume this year, reinforcing OPEC’s desire to cut output in the face of weak demand, even if questions persist over compliance. In fact, OPEC’s production target looks to us to be below the underlying ‘call’ for 2009. Commercial inventory could therefore tighten, even while spare capacity increases, albeit 4Q08 stocks are starting from a high base at 56 days plus of forward cover. Lower winter temperatures and interrupted Russian gas supplies via Ukraine have supported heating oil, but have also put a floor under crude prices in Europe at least.
OMR 2009 Oil Demand & GDP Forecast Evolution
85.0
85.5
86.0
86.5
87.0
87.5
88.0
100 120 140
Sep 08 Oct 08 Nov 08 Dec 08 Jan 09
$/bbl
4 16 JANUARY 2009
However, it would be wrong to suggest that minor adjustments to nonOPEC supply and commercial stocks come close to offsetting a weaker global economic and oil demand trend that has yet to bottom out. Highlighting the weak state of demand, both for oil and for seaborne transport, floating storage is estimated to have risen recently to between 5080 mb. This will eventually find its way into onshore storage, possibly offsetting some of OPEC’s attempts to deflate what it sees as an OECD commercial stock overhang. Meanwhile, consuming nations like China and the US are taking advantage of prevailing prices to build strategic stocks. Demand will eventually rebound to absorb this oil currently struggling to find a market, but predicting the timing and extent of the rebound remains as elusive a target as ever.
INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT DEMAND
16 JANUARY 2009 5
DEMAND Summary • Forecast global oil demand has been sharply revised down for 2009, following a reassessment of
global economic prospects partly based on the latest survey by Consensus Economics (the forthcoming IMF economic assumptions, to be released by the end of January, will be incorporated in next month’s report). Global GDP growth has been roughly halved to 1.2%, given the worsening outlook in OECD and nonOECD countries alike, notably in Asia and Latin America. Global oil demand is now projected at 85.3 mb/d in 2009 (0.6% or 0.5 mb/d yearonyear and 1.0 m/d lower than our last report). The estimate for 2008 remains broadly unchanged, at 85.8 mb/d (0.3% or 0.3 mb/d versus 2007 and 70 kb/d lower than previously estimated). The expected twoyear contraction in oil demand will be the first since the early 1980s.
• Forecast oil demand in the OECD remains virtually unchanged at 47.5 mb/d in 2008 (3.3% or 1.6 mb/d versus 2007). In 2009, oil demand is forecast at 46.3 mb/d (2.5% or 1.2 mb/d on a yearly basis), about 530 kb/d lower than previously estimated. This revision is in line with the downward adjustments to GDP assumptions. The forecast still assumes that OECD demand destruction will bottom out next year and that demand will begin to gradually recover in 2H09, on the basis that a repeat of the near financial meltdown of 2H08 is unlikely.
Global Oil Demand (2007-2009)
(million barrels per day)

• Forecast nonOECD oil demand is revised down by 65 kb/d to 38.2 mb/d in 2008 (+3.7% or +1.4 mb/d) and, more significantly, by 480 kb/d to 38.9 mb/d in 2009 (+1.8% or +0.7 mb/d compared with the previous year). As with the OECD, these revisions are related to much lower economic assumptions, notably for Asia and Latin America. China’s economy, in particular, appears to have sharply slowed down as its main export markets tumble. Therefore, nonOECD demand growth in both 2008 and 2009 is now seeing failing to offset the severe demand contraction expected in the OECD.
• A new oil product price regime has been implemented in China. Although the new regime comes a step closer to aligning domestic prices with international benchmarks, it remains far from more conventional, marketbased mechanisms. A gap remains between domestic retail prices (currently at roughly US$60/bbl) and international crude prices (which hover around US$40/bbl). The price cuts will arguably ease costs for drivers, airlines and manufacturers – and help defuse social tensions over high fuel prices – but they could arguably contribute less than required under the present circumstances to cushion the economic downturn.
Global Overview This month’s report includes a significant downward adjustment to our 2009 GDP assumptions. The November and December 2008 editions of this report were based on economic forecasts published by the IMF in early November (which in turn were significantly lower than its October predictions). However, the relentless worsening of global economic conditions has once again made these prognoses outdated. On the one hand, the IMF itself has strongly hinted that it will release new – and much lower
DEMAND INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT
6 16 JANUARY 2009
– economic projections in the forthcoming weeks. On the other hand, the latest survey of private sector economists by Consensus Economics (Consensus Forecasts, December 2008) depicts a much gloomier picture for the global economy, not only in OECD countries – where the current turmoil began – but also in most emerging countries, notably in Asia and Latin America, which are increasingly affected by developments in mature economies.
Global Demand Growth 2007/2008/2009 thousand barrels per day
(mb/d)
Global Demand Growth
283 228 136
-114
-298
110
-1204
-642
As such, we have adjusted our global GDP assumption on the basis of the latest Consensus Forecasts, which as noted see marked downward adjustments across all regions. The global economy is now posited to expand by only 1.2% yearonyear in 2009 – at almost half the pace previously expected – with OECD countries firmly in recession (shrinking collectively by about 0.9%) and nonOECD economies growing by only 4.1% (1.25 percentage points lower). Regarding China, we have not used Consensus Forecasts as a source, given the precipitous deterioration of the country’s economy, notably in the second half of December (after the survey was taken). Instead, we have settled for a midpoint (6.5%) between the most recent institutional forecast (the World Bank’s 7.5% in early December) and gloomier privatesector prognoses (currently at around 5.05.5%).
From a seasonal perspective, the global economy should see a moderate recovery in 2H09, since a repeat of the sharp 2H08 slump, when the financial system came close to collapsing, is unlikely. In addition, we have lowered our oil price hypothesis to $60/bbl for 2009, versus the $80/bbl assumption that we have kept over the past two months (however, given the severity of the global economic contraction, a lower price will only have a limited offsetting effect upon oil demand).
Needless to say, these economic assumptions are temporary and likely to be revised in the light of new IMF prognoses. Yet the revisions to the 2009 global oil demand forecast are significant (roughly 1.0 mb/d lower when compared with our previous
% change 2009 WORLD 1.24
OECD (0.85) OECD, North America (1.11) OECD, Europe (0.85) OECD, Pacific (0.15)
Non-OECD 4.05 Africa 3.29 Latin America 2.01 China (excl. Hong Kong) 6.50 Other Asia 3.74 Non-OECD Europe 2.64 FSU 2.87 Middle East 3.69
WORLD (0.90) OECD (0.63)
OECD, North America (0.62) OECD, Europe (0.64) OECD, Pacific (0.66)
Non-OECD (1.25) Africa (1.15) Latin America (0.92) China (excl. Hong Kong) (2.00) Other Asia (1.17) Non-OECD Europe (0.61) FSU (0.44) Middle East (1.06)
Sources: Consensus Economics, IEA
16 JANUARY 2009 7
report). Thus, at 85.3 mb/d, world demand is seen contracting by 0.6% or 500 kb/d versus 2008 – a fall for a second consecutive year, something not seen since the early 1980s. OECD According to preliminary November data, OECD inland deliveries (oil products supplied by refineries, pipelines and terminals) plunged by 6.8% yearonyear. As in the previous month, all three regions recorded losses, highlighting the worsening outlook for most advanced economies. In OECD North America (which includes US Territories), oil product demand contracted by 6.9% on prevailing weakness across all product categories bar diesel. Demand in OECD Europe shrank by 4.4%, as heating oil deliveries lost steam despite remaining in positive territory. In OECD Pacific, demand plummeted by 10.7%, dragged down by very feeble Japanese and Korean deliveries in virtually all product categories, notably for key products such as naphtha and diesel.
OECD Demand based on Adjusted Preliminary Submissions - November 2008 (million barrels per day)
mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa
OECD North America* 10.42 -3.8 1.58 -17.6 4.09 4.1 0.99 -20.0 1.13 -12.1 5.56 -12.05 23.78 -6.9 US50 8.85 -4.1 1.34 -18.7 3.55 3.1 0.46 -27.9 0.70 -8.7 4.15 -13.8 19.05 -7.2 Canada 0.74 -2.3 0.14 -10.9 0.20 0.1 0.38 -3.2 0.16 2.8 0.76 -2.7 2.40 -2.6 Mexico 0.75 -1.4 0.06 -19.7 0.29 -1.5 0.12 -1.5 0.16 -37.2 0.58 -11.8 1.95 -9.4
OECD Europe 2.26 -6.8 1.21 -5.4 4.24 -4.7 2.17 1.1 1.63 -7.9 3.66 -3.8 15.17 -4.4 Germany 0.47 -2.6 0.18 -5.2 0.68 -2.4 0.56 33.3 0.18 1.5 0.54 -7.7 2.59 2.3 United Kingdom 0.38 -7.8 0.33 -5.2 0.44 -4.1 0.14 -10.0 0.08 -12.4 0.35 8.6 1.72 -3.8 France 0.18 -16.2 0.15 -5.7 0.61 -11.2 0.31 -14.2 0.10 -31.4 0.51 -2.2 1.85 -10.9 Italy 0.26 -10.0 0.07 -14.5 0.52 -7.2 0.11 -9.7 0.22 -18.3 0.38 -10.1 1.56 -10.6 Spain 0.14 -7.9 0.10 -10.6 0.49 -8.8 0.24 -9.5 0.21 -2.7 0.36 -4.9 1.53 -7.3
OECD Pacific 1.53 -1.6 0.96 -8.4 1.24 -7.0 0.48 -17.0 0.89 -9.6 2.72 -16.5 7.83 -10.7 Japan 0.97 -3.3 0.65 -10.2 0.57 -10.1 0.33 -18.9 0.53 -2.1 1.54 -19.8 4.59 -12.3 Korea 0.18 5.3 0.18 -7.9 0.28 -9.7 0.13 -14.0 0.32 -21.1 0.98 -13.8 2.06 -12.6 Australia 0.34 -0.8 0.11 1.2 0.33 -0.6 0.02 -1.0 0.04 -1.0 0.18 1.6 1.02 -0.1
OECD Total 14.21 -4.0 3.75 -11.7 9.58 -1.5 3.65 -8.2 3.65 -9.7 11.94 -10.8 46.78 -6.8 * Including US territories
RFO Other Total ProductsGasoline Jet/Kerosene Diesel Other Gasoil

46 47 48 49 50 51 52 53
Jan Apr Jul Oct

(2.0) (1.5) (1.0) (0.5)
mb/d Transport Heating Power Gen. Other Total Dem.
Revisions to preliminary figures were again significant, mostly driven by changes in North America. However, by contrast to previous months, the October adjustments were positive (+1.5 mb/d). According to revised data, OECD demand fell by only 3.4% during that month, versus an earlier estimate of 6.0%. Coupled with preliminary data for November (and December for the US), this results in a revision of +30 kb/d in 3Q08 and 70 kb/d in 4Q08. Overall, OECD demand is expected to have averaged 47.5 mb/d in 2008 (3.3% or 1.6 mb/d versus 2007, virtually unchanged versus our last report). In 2009, given weaker economic assumptions, OECD demand is seen contracting by 2.5% on a yearly basis (roughly 1.2 mb/d) to 46.3 mb/d (530 kb/d lower when compared with our previous assessment). This forecast still posits that OECD demand destruction will bottom out this year and that OECD economies
8 16 JANUARY 2009
will begin to gradually recover in 2H09 – or at least stop declining when compared with 2H08, when they came close to the brink of financial meltdown.
Total OECD Demand by Product (million barrels per day)
Latest month vs. Sep 08 Oct 07
LPG & Ethane 4.82 4.68 4.93 5.16 4.58 4.33 4.42 4.03 4.52 0.49 -0.12 Naphtha 3.24 3.07 3.27 3.28 2.99 3.01 3.10 2.93 2.91 -0.01 -0.23 Motor Gasoline 14.92 14.44 14.84 14.23 14.73 14.47 14.61 14.05 14.43 0.39 -0.51 Jet & Kerosene 4.12 3.98 4.24 4.35 3.86 3.81 3.83 3.74 3.70 -0.04 -0.45 Gas/Diesel Oil 13.14 12.95 13.60 13.40 12.64 12.60 12.06 13.25 13.79 0.54 -0.09 Residual Fuel Oil 3.96 3.66 3.95 3.85 3.62 3.52 3.44 3.43 3.55 0.12 -0.31 Other Products 4.97 4.76 5.01 4.63 4.82 4.89 4.89 4.71 5.13 0.42 0.02 Total Products 49.17 47.53 49.86 48.91 47.24 46.63 46.34 46.14 48.04 1.91 -1.69 * Latest official OECD submissions (MOS)
2007 2008 4Q07 1Q08 2Q08 3Q08 Aug 08 Sep 08 Oct 08*
North America According to preliminary data, oil product demand in North America (including US Territories) plummeted by 6.9% yearonyear in November, falling for the eleventh month in a row. Demand weakness in the United States (7.1% yearonyear) dragged down the whole region. Canada and Mexico, however, are also now clearly showing the effects of the US recession, with demand in both countries declining by 2.6% and 9.4%, respectively.
OECD North America: Total Oil Product Demand
22
23
24
25
26
27

(1.2)
(0.8)
(0.4)
mb/d Transport Heating Power Gen. Other Total Dem.
Revisions to October preliminary data, largely driven by the US, were very large, but contrary to previous months, positive (+1.5 mb/d), suggesting that earlier weekly estimates had been too bearish. Despite these revisions, however, demand in OECD North America still contracted by 2.6% yearonyear during that month. Regional oil demand is now estimated at 24.3 mb/d in 2008 (4.7% or 1.2 mb/d on a yearly basis and 140 kb/d higher when compared with our last assessment). In 2009, demand is expected to reach 23.7 mb/d (2.6% or 0.6 mb/d, 160 kb/d lower than previously estimated) on the back of lower GDP assumptions.
OECD North America Demand by Product (million barrels per day)
LPG & Ethane 2.92 2.76 2.97 3.10 2.63 2.53 2.68 2.19 2.70 0.51 -0.10 Naphtha 0.41 0.35 0.41 0.36 0.37 0.34 0.30 0.31 0.31 -0.01 -0.12 Motor Gasoline 10.84 10.55 10.84 10.47 10.74 10.51 10.72 10.05 10.60 0.55 -0.23 Jet & Kerosene 1.89 1.78 1.90 1.84 1.84 1.81 1.89 1.70 1.66 -0.05 -0.25 Gas/Diesel Oil 5.24 5.01 5.24 5.29 4.96 4.77 4.71 4.84 5.31 0.48 -0.01 Residual Fuel Oil 1.25 1.14 1.18 1.14 1.22 1.07 1.06 0.93 1.06 0.12 -0.07 Other Products 2.97 2.74 2.95 2.63 2.77 2.72 2.77 2.57 3.13 0.56 0.13 Total Products 25.53 24.32 25.49 24.84 24.52 23.75 24.14 22.60 24.76 2.16 -0.66 * Latest official OECD submissions (MOS)
2Q08 3Q084Q07 1Q082007 2008 Sep 08Aug 08 Oct 08*

16 JANUARY 2009 9
Adjusted preliminary data for the continental United States continue to reflect the ongoing economic recession. Inland deliveries – a proxy of oil product demand – contracted by 6.3% yearonyear in December. Virtually all product categories registered significant contractions, most notably jet fuel/kerosene (13.0%), gasoline (4.0%) and gasoil (11.4%). By contrast, residual fuel oil deliveries, which had declined since December 2007 (excepting a brief interruption in July 2008), grew by 8.3% yearonyear. Given the fall in international oil prices and subdued natural gas prices due to higher production and relatively mild weather (heatingdegree days in December were only slightly higher than the 10year average and the same month of the previous year), residual fuel oil is indeed once again competitive visàvis natural gas as a fuel of choice for power generation. Both fuels are now (mid January) practically at par, at about $6.44/mm Btu on average.
US: Total Oil Product Demand
18,000
19,000
20,000
21,000
22,000

kb/d
The demand picture would have been gloomier had preliminary weekly data not been corrected up in October. The revisions (across all product categories bar naphtha and jet fuel/kerosene) totalled 1.2 mb/d, implying an annual decline of 3.7%, instead of 9.6% as previously estimated. Although this positive adjustment bucked the trend of the past several months (of large downward revisions), it is premature to conclude that demand is rebounding – previous revisions had largely stemmed from the fact that gasoline and distillate volumes had been counted as ‘product supplied’ (a proxy of demand) rather than as exports. Indeed, the weakness in gasoline demand has if anything intensified: despite much lower gasoline prices (retail prices, at about $1.60/gallon, are about 50% lower year onyear), weekly gasoline demand is still contracting by some 34% on a yearly basis. Meanwhile, new car sales continue to plummet (35.7% yearonyear in December), hitting both domestic and foreign manufacturers. On the basis of October’s revisions, preliminary November and December data, and a new GDP assumption of 1.3% for 2009, and assuming that demand destruction will bottom out this year, US oil demand is now expected to contract by 5.6% yearon year in 2008 to 19.5 mb/d (some 140 kb/d higher than in our previous report). In 2009, demand should fall by 2.8% to 19.0 mb/d (about 140 kb/d less than previously anticipated).
Heating Degree Days USA
Dec 07 Mar 08 Jun 08 Sep 08 Dec 08
Days
D if f to 10-year A vg D if f to P revio us Year
US Motor Gasoline Demand & Price Growth (4-week avg vs previous year)
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
-40%
-20%
0%
10 16 JANUARY 2009
Preliminary data show that the free fall of Mexico’s oil product demand accelerated sharply in November (9.4% yearonyear). The plunge has a structural component – the substitution of residual fuel oil (37.2% yearonyear) by natural gas – but also reflects the economic slowdown triggered by the US recession. Indeed, the Mexican economy is set to contract by 0.1% in 2009. For the first time since July 2005, gasoline demand fell on a yearly basis (1.4%); meanwhile, jet fuel/kerosene demand shrank for the seventh consecutive month (19.7%), providing further evidence that air travel is weakening significantly. Total oil demand is thus now expected to fall in both 2008 (1.0% yearonyear to 2.10 mb/d) and 2009 (2.2% to 2.05 mb/d).
Mexico: Total Oil Product Demand
1,850
1,950
2,050
2,150
2,250

Range 2003-2007 5-year avg 2007 2008
Seeking to temper the economic slowdown, in early January the Mexican government decided to freeze retail energy prices, most notably of transportation fuels, which had started to rise on a monthly basis in 2H08 amid concerns that fuel subsidies (some $20 billion in 2008) would become unsustainable. The sharp fall in international oil prices had made the monthly price increase politically untenable, with protests erupting amid several constituencies (ranging from truck drivers to fishermen), while stoking inflation as well. In addition, the fiscal stimulus plan also mandates a 10% cut in LPG prices, which should benefit poor urban households (LPG is the main cooking fuel). Europe Oil product demand in Europe shrank by 4.4% yearonyear in November, according to preliminary inland data. All product categories bar heating oil registered losses, notably gasoline (6.8%), jet fuel/kerosene (5.4%), diesel (4.7%) and residual fuel oil (7.9%). Although heating oil deliveries remained positive (+1.1%), they lost momentum, partly because of mild temperatures (the number of heatingdegree days in November was well below both the 10year average and the same month of the previous year). Revisions to annual submissions for October, meanwhile, stood at 200 kb/d. However, given weakerthanexpected preliminary figures and lower economic growth expectations, forecast demand in OECD Europe has been revised to 15.2 mb/d in 2008 (0.8% or 130 kb/d, some 60 kb/d lower than previously estimated) and to 14.9 mb/d in 2009 (2.0% or 300 kb/d, 160 kb/d below last month’s projection). It should be noted that this forecast has not yet taken into account the potential effects of the ongoing Russian disruption to European natural gas supplies. A similar situation in early 2006 led to a spike in residual fuel oil demand in countries such as Italy. This time, however, gasoil demand may have increased, judging by an uptick in prices (residual prices, by contrast, have barely moved). Moreover, the unfolding economic contraction is arguably depressing electricity use,
Heating Degree Days OECD Europe
-60 -40 -20
Nov 07 Mar 08 Jul 08 Nov 08
days
16 JANUARY 2009 11
although the cold spell of early January most likely led to strong demand for powergenerated heating. As such, we will wait for more precise data before making further adjustments to our prognosis.
OECD Europe: Total Oil Product Demand
14.0
14.5
15.0
15.5
16.0
16.5

(0.6)
(0.4)
(0.2)

LPG & Ethane 0.95 0.96 0.98 1.05 0.98 0.87 0.83 0.91 0.87 -0.04 -0.05 Naphtha 1.17 1.13 1.20 1.22 1.07 1.08 1.17 1.06 1.08 0.03 -0.11 Motor Gasoline 2.50 2.37 2.43 2.29 2.44 2.45 2.40 2.46 2.36 -0.11 -0.18 Jet & Kerosene 1.31 1.31 1.30 1.27 1.30 1.41 1.39 1.40 1.34 -0.06 -0.04 Gas/Diesel Oil 6.10 6.23 6.49 6.31 5.96 6.26 5.88 6.76 6.82 0.07 0.12 Residual Fuel Oil 1.75 1.61 1.76 1.65 1.51 1.60 1.54 1.64 1.68 0.04 -0.07 Other Products 1.52 1.56 1.50 1.41 1.63 1.72 1.68 1.72 1.61 -0.11 -0.02 Total Products 15.30 15.17 15.65 15.20 14.89 15.39 14.89 15.95 15.76 -0.19 -0.34 * Latest official OECD submissions (MOS)
2Q08 3Q084Q07 1Q082007 2008 Aug 08 Sep 08 Oct 08*
Inland deliveries in Germany rose by 2.3% yearonyear in November, according to preliminary estimates, given the sustained firmness of both heating oil (+33.3%) and, to a lesser extent, fuel oil deliveries (+1.5%), which offset losses in all other product categories. Heating oil consumer stocks averaged 64% of capacity by endNovember, higher when compared with both the previous month (62%) and the previous year (59% in November 2007). This suggests that German households continued to take advantage of falling prices to replenish their inventories. Nonetheless, the unfolding economic recession is bound to hit oil demand: assuming heating oil demand follows refilling patterns and weather conditions in line with the historical 10year average, overall oil demand may contract by as much as 2.0% in 2009.
Germany: Heating Oil Demand

40 45 50 55 60 65 70
Jan Apr Jul Oct
Range 2003-2007 5-year avg 2007 2008
In France, by contrast, total oil demand plunged by 10.9% yearonyear in November. As the economic slowdown bites, key products such as diesel are bearing the brunt. Indeed, diesel deliveries fell by 11.2%, in line with the continued declined in new vehicle sales (5.0% yearonyear in November and
12 16 JANUARY 2009
15.8% in December). Meanwhile, gasoline demand (which faces a structural decline) contracted by 16.2%, over twice as much as the JanuaryOctober average (although this could be partly due to two working days less in November 2008 relative to the previous year).
France: Diesel Demand

Range 2003-2007 5-year avg 2007 2008
A similar situation prevails in Italy, where total oil product deliveries plummeted by 10.6% yearonyear in November, with diesel demand – about a third of the total – shrinking by 7.2%. In addition, jet fuel/kerosene deliveries faced yet another sharp contraction (14.5%) as the saga involving near bankrupt stateowned carrier Alitalia unfolded (the airline, which has cancelled many flights over the past months, has now found new partners; its situation and thus jet fuel demand could improve in the months ahead). Finally, it is worth noting that residual fuel oil demand plummeted by 18.3%, due to both higher hydro power supplies and lower electricity demand given mild weather and lower industrial activity. In Spain, whose economy is facing a severe economic recession, the demand picture mirrors that of France and Italy. Oil demand plummeted by 7.3% yearonyear in November, according to preliminary figures, with all product categories bar naphtha posting sharp losses, particularly gasoline (7.9%), jet fuel/kerosene (10.6%) and diesel (8.8%). Contrary to other large European countries, however, Spain’s slump in new vehicle sales has been particularly marked (49.6% yearonyear in November). Pacific According to preliminary data, oil product demand in the Pacific plummeted by 10.7% yearonyear in November, dragged down by persistent demand weakness in both Japan and Korea. All product categories registered losses, notably naphtha (12.6%), jet fuel/kerosene (8.4%), diesel (7.0%) and heating oil (17.0%). The shrinking deliveries of kerosene and fuel oil are arguably related to mild weather (the number of heatingdegree days in November was inferior to both the 10year average and the same month of the previous year), but the overall fall is largely related to the sharperthanexpected economic slowdown in Japan and Korea, which is sharply curbing industrial production and power consumption.
Spain: Diesel Demand
Heating Degree Days OECD Pacific
-50
0
50
100
150
Dec 07 Mar 08 Jun 08 Sep 08 Dec 08
days
16 JANUARY 2009 13
Revisions to October preliminary data totalled 60 kb/d, split roughly evenly between Japan and Korea. Coupled with the reassessment of the region’s economic outlook, oil demand in the Pacific is now seen averaging 8.0 mb/d in 2008 (3.7% on a yearly basis or 300 kb/d, 80 kb/d down versus last month’s report) and 7.8 mb/d in 2009 (3.1% or 250 kb/d, 210 kb/d versus earlier projections).
OECD Pacific: Total Oil Product Demand
7.2 7.7 8.2
8.7 9.2 9.7

(0.4)

LPG & Ethane 0.96 0.96 0.99 1.01 0.97 0.92 0.90 0.93 0.96 0.03 0.03 Naphtha 1.65 1.59 1.66 1.69 1.55 1.59 1.62 1.55 1.52 -0.03 0.00 Motor Gasoline 1.57 1.52 1.57 1.48 1.55 1.51 1.49 1.53 1.48 -0.05 -0.10 Jet & Kerosene 0.93 0.89 1.04 1.24 0.72 0.60 0.55 0.63 0.70 0.06 -0.16 Gas/Diesel Oil 1.80 1.70 1.87 1.80 1.72 1.57 1.47 1.66 1.65 -0.01 -0.20 Residual Fuel Oil 0.96 0.92 1.01 1.06 0.89 0.85 0.83 0.86 0.81 -0.04 -0.16 Other Products 0.48 0.46 0.56 0.59 0.42 0.45 0.45 0.42 0.39 -0.02 -0.08 Total Products 8.35 8.04 8.72 8.87 7.82 7.50 7.31 7.58 7.52 -0.06 -0.69 * Latest official OECD submissions (MOS)
Sep 082007 2008 4Q07 1Q08 2Q08 3Q08 Oct 08*Aug 08
Oil demand in Japan tumbled in November (12.3% yearonyear), for the third consecutive month, as the economic recession compounds the country’s structural oil demand decline. As such, demand for products directly associated to economic activity continues to plummet (naphtha and diesel, for example, fell by 15.1% and 10.1%, respectively). In addition, diminishing power use – as a result of reduced industrial operations – has led to lower deliveries of ‘other products’ (which include crude for direct burning) and residual fuel oil, which contracted by 42.5% and 2.1%, respectively. The country’s largest power utility, Tokyo Electric Power Company (TEPCO), is now expecting to use 14% less crude and fuel oil over the October 2008March 2009 period than earlier anticipated – despite the fact that its huge KashiwazakiKariwa nuclear power plant is likely to remain shut. Indeed, electricity consumption from TEPCO’s main industrial customers is drying up (notably from car manufacturers, which are drastically curbing production).
Japan: Total Oil Product Demand
4,000
4,500
5,000
5,500
6,000
6,500

1,900 2,000 2,100 2,200 2,300 2,400 2,500 2,600
Jan Apr Jul Oct

14 16 JANUARY 2009
A similar situation prevails in Korea, where oil demand contracted by 12.6% yearonyear in November, according to preliminary data, as the economy’s main engines – exports and domestic consumption – stall. Deliveries of all product categories bar gasoline thus continued to post sharp losses. Naphtha demand, which accounts for roughly 40% of the total and is the main feedstock of the petrochemical industry, dived by 10.2% yearonyear despite lower prices. Diesel deliveries, meanwhile, fell by 9.7%. Non-OECD China According to preliminary November data, China’s apparent demand (refinery output plus net oil product imports, adjusted for fuel oil, direct crude burning and stock changes) fell by an estimated 1.9% yearon year, for the first time since June 2005. All product categories bar gasoil posted losses, leading to a downward revision of about 450 kb/d for the month compared with our previous estimate.
China: Total Oil Product Demand
5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500
Jan Apr Jul Oct

(600) (400) (200) - 200 400 600 800
1,000
Transportation Fuels Other Products
Three factors may explain this abrupt fall. First, the Chinese economy is clearly losing momentum as its export markets, notably in OECD countries, dry up. The slump is more sudden than anticipated, thus prompting the sharp revision to the country’s 2009 GDP outlook discussed earlier. For example, freight indicators, which had risen almost continuously over the past several years, show a dramatic slowdown. Freighttonnes per kilometre plunged by 8.0% in November after falling by 10.0% in October, thus likely weighing on gasoil demand, which expanded by only 1.1% yearonyear – the lowest pace since May 2003. Similarly, power generation – largely driven by industrial production – fell by an unprecedented 9.6% yearonyear in November for the second month in a row, following October’s 4.0%. Although this decline may be partly due to relatively mild weather, electricity output had risen almost uninterruptedly over the previous decade and a half. Second, the fall in oil demand could also be related to some destocking, which would exaggerate the weakness of China’s apparent demand (this, however, is impossible to ascertain, since Chinese stock data is virtually nonexistent). Both net crude imports and refinery output fell sharply monthonmonth in November (by 14.3% and 5.1%, respectively), arguably in anticipation of changes to the country’s price system (see China’s Price Regime Reform: Elegant but Partial). Moreover, even though net oil product imports jumped by 29.5% monthonmonth, this resulted essentially from a 89.7% increase in net fuel oil imports (which accounted for almost 93% of the month’s total). Imported residual fuel oil (generally Russian M100, used as a feedstock by many ‘teapot’ refineries) became reportedly more competitive relative to domestic wholesale prices. More significantly, net gasoline exports rose by 62.2% monthon month, underlying the newfound weakness of gasoline demand, which contracted by 0.7% yearonyear in November after rising uninterruptedly since May 2007. In the same vein, after seven consecutive months of net imports, the country became again a net exporter of jet fuel, as domestic demand plummeted (18.5%).
16 JANUARY 2009 15

China’s Price Regime Reform: Elegant but Partial As anticipated in last month’s report, a new oil product price regime was finally approved on 19 December by China’s National Development and Reform Commission (NDRC), ostensibly to match recent developments in international oil markets. The main features of the new system include the following:
• The immediate cut of exrefinery and retail prices for transportation fuels. Exrefinery gasoline prices were reduced by 13.9% to 5,580 yuan/tonne (roughly $92/bbl), diesel prices were cut by 18.1% to 4,970 yuan/tonne ($98/bbl), and jet fuel/kerosene prices were slashed by 32.2% to 5,050 yuan/tonne. Meanwhile, gasoline and gasoil retail prices fell by roughly $21/bbl and $25/bbl, respectively.
• The ‘indirect’ linkage of domestic prices to international benchmarks. Domestic exrefinery prices will be based on international crude oil benchmarks, to which ‘average’ processing costs and a ‘reasonable’ profit margin will be added (thus setting the ‘guidance’ retail price). How this will be precisely done, however, remains unclear. Unconfirmed reports suggests that if crude oil trades below $80/bbl, domestic exrefinery prices will fluctuate freely; between $80/bbl and $130/bbl, refining margins will be curbed to minimise the impact on retail prices; above $130/bbl, the government will set retail prices.
• The reduction of the tolerance band around guidance retail prices. The allowed fluctuation around ‘guidance’ retail prices (exrefinery prices + costs + profit margin) falls from +/8% to +/4%.
• The increase of consumption taxes, to be applied from 1 January 2009 and to be absorbed by refiners. Gasoline and diesel consumption taxes were raised by 400% to 1 yuan/litre ($23/bbl) and by 700% to 0.8 yuan ($19/bbl), respectively.
• The abolition of road and waterway maintenance charges and tolls on second class roads. Tolls on highways and first class roads will remain, but several constituencies (such as farmers) will be subsidised. It should be noted that the increase of fuel consumption taxes and the removal of road taxes roughly cancelled each other out.
• The reduction of the fuel oil import tax. The tax was slashed from 3% to 1% on 1 January 2009.
Although the new regime comes a step closer to aligning domestic prices with international benchmarks, it remains well away from more conventional, marketbased mechanisms. The government has been reluctant to further reduce prices, although in midJanuary it announced another – marginal – cut (2.5% for gasoline and 3.2% for diesel, effective on 15 January). As such, a gap remains between domestic retail prices (currently at roughly US$60/bbl) and international crude prices (which hover around US$40/bbl). The price cuts will arguably ease costs for drivers, airlines and manufacturers – and help defuse social tensions over high fuel prices – but they will probably contribute less than required under the present circumstances to cushion the economic downturn.

16 16 JANUARY 2009
On the basis of the revisions discussed above, a lower GDP assumption and much lower expectations of naphtha, gasoline and gasoil consumption (which together account for almost twothirds of total oil product use), Chinese oil demand is now expected to rise by only 1.1% to 7.95 mb/d in 2009 (270 kb/d less than previously anticipated), well below the 4.2% growth rate expected in 2008 (to 7.86 mb/d, almost 80 kb/d below versus our previous forecast). The 2009 yearonyear growth (+90 kb/d) would thus be the lowest since 2001. As shown in the table below, growth is expected to be marginal for most product categories bar residual fuel oil (which is seen expanding on the admittedly strong assumption of sustained competitive import prices). As such, this forecast is bound evolve as the current state of the Chinese economy becomes clearer. In addition, the effectiveness of the new price regime – in terms of its impact upon demand patterns – will be tested in the months ahead.
China: Demand by Product (thousand barrels per day)
Annual Chg (kb/d) Annual Chg (%)
2007 2008 2009 2008 2009 2008 2009 LPG & Ethane 669 611 615 -58 3 -8.6 0.5 Naphtha 812 794 821 -18 26 -2.2 3.3 Motor Gasoline 1,257 1,429 1,428 172 -1 13.7 -0.1 Jet & Kerosene 280 288 305 9 16 3.2 5.7 Gas/Diesel Oil 2,576 2,882 2,901 306 20 11.9 0.7 Residual Fuel Oil 744 596 638 -148 43 -19.9 7.2 Other Products 1,204 1,261 1,244 57 -17 4.7 -1.4 Total Products 7,542 7,862 7,951 320 89 4.2 1.1
Demand

Other Non-OECD According to preliminary data, India’s oil product sales – a proxy of demand – rose by 2.0% yearonyear in November, resuming the growth trend that had been briefly interrupted in October (0.8%, after accounting for data revisions). The increase was largely driven by strong gasoline (+5.8%) and gasoil (+8.8%) demand, which are subsidised (demand for both fuels probably rose further in December following the retail price cuts). Fuel oil sales also rose markedly (+9.7%), possibly due to both higher power needs and less availability of both natural gas (LNG) and naphtha, which are mainly used by the petrochemical industry. The government, however, is seeking to provide cheaper naphtha as an alternative to more expensive LNG; in early December it waived (until 31 March 2009) the 5% naphtha import duty. The move should help utilities and other industries that are able to switch fuels (such as steel producers and, to a lesser extent, fertiliser producers).
India: Total Oil Product Demand
2,200
2,400
2,600
2,800
3,000
3,200
3,400

(10)
(5)
Y-o-Y % Chg
Transportation Fuels Other Products
The relative strength of India’s oil demand does not mean that the country is insulated from the global economic downturn. Given the country’s subsidy regime, the burden will mostly be borne by the government or, more precisely, by stateowned oil companies, which are expected to collectively lose some $21 billion in the current fiscal year ending 31 March. Assuming the Indian economy slows down
16 JANUARY 2009 17
slightly – albeit less markedly than other Asian countries – oil demand, estimated at 3.1 mb/d in 2008 (+4.3% on a yearly basis and unchanged versus our last report), is expected to expand by 3.0% to 3.2 mb/d in 2009 (25 kb/d less than previously expected). Yet the subsidies appear to be insufficient – that is, prices are still perceived to be too high by some constituencies. In early January, tens of thousands of Indian truck drivers, notably in Gujarat, went on strike demanding additional reductions in diesel retail prices. The truckers’ reaction is partly related to the fact that the government had not further revised diesel prices down since the cut in early December – but had continued to slash jet fuel prices in a bid to help domestic airlines. As a result, jet fuel is now cheaper than diesel – India is possibly the only country in the world where this occurs. Still, the truckers’ strike lost steam and was called off a few days later. It should be noted that, at the time of writing, the government was reportedly envisaging further price cuts to gasoline, diesel and LPG. More significantly, some 50,000 employees from several stateowned oil companies and utilities (IOC, ONGC, BPCL, OIL and GAIL) went also on strike on 7 January, demanding higher pay. This strike was called off three days later after the government issued stern warnings to strikers to return to work or face harsh consequences, but it nonetheless severely disrupted oil refining operations and product deliveries, notably to retail outlets and airports. For example, most service stations in large cities such as Mumbai, Delhi, Bangalore and Kolkata had reportedly run out of stocks. As such, oil demand data for January are likely to register unseasonal weakness, but at this point it is difficult to estimate the strikes’ impact.
SUPPLY INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT
18 16 JANUARY 2009
SUPPLY Summary • Global oil supply was unchanged in December at 86.2 mb/d, with reduced OPEC output offset by
gains in OECD North America, Brazil and China. Yearonyear, monthly average production is down around 200 kb/d , largely due to recent OPEC production curbs having taken output well below December 2007 levels.
• NonOPEC forecasts for 4Q08 and 1Q09 are revised down by 140 kb/d and 90 kb/d, respectively, following several oil fieldrelated incidents and some project slippage in Brazil, China and Russia, though this is partly offset by a higher 4Q08 number for Norway.
• Total nonOPEC output is now forecast at 49.5 mb/d and 50.0 mb/d for 2008 and 2009, following downward revisions of 60 kb/d and 30 kb/d, respectively. This implies a yearonyear drop of nearly 150 kb/d for 2008, the first decline since 2005. Disrupted US and Azeri supply in 2008 was compounded by the first decline in Russian output since 1996. Renewed 2009 nonOPEC growth of around 0.5 mb/d derives from the Caspian, US ethanol, offshore GOM, Brazil and OECD and nonOECD Asia. Moreover, OPEC NGLs are forecast to add a further 0.6 mb/d to total supply in 2009.

All world oil supply figures for December discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, and Russia are supported by preliminary December supply data.
Note: Random events present downside risk to the nonOPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weatherrelated supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricanerelated stoppages) in North America. In addition, from July 2007, a nationally allocated (but not field specific) reliability adjustment has also been applied for the nonOPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast. This totals 410 kb/d for non OPEC as a whole, with downward adjustments focused in the OECD.
OPEC Crude and Non-OPEC Oil Supply January 2006 to December 2009
28
30
32
34
mb/d
43
48
53
58 mb/d
N o n-OP EC (R H S) OP EC N o n-C rude (R H S) OP EC C rude (LH S)
Entire series based on OPEC Composition as of December 2007 onwards (including Angola & Ecuador)
INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT SUPPLY
16 JANUARY 2009 19
OPEC Crude OPEC crude supply in December averaged 30.9 mb/d, down 330 kb/d versus November. The December total was 1 mb/d below both levels of a year ago and our own estimate for September 2008, the apparent reference point for recent adjustments in OPEC target. It was, however, a more fulsome 2 mb/d below the recent high point in production attained in June 2008. December curbs in supply were widespread, and volumetrically most significant from Saudi Arabia and Kuwait. However, these cuts were partly offset by increases from Iran, the UAE and Iraq, with the latter two seeing, respectively, field recovery after maintenance and higher supplies for export in December. This month’s installed OPEC capacity estimates remain unchanged from last month, totalling 35.8 mb/d. Nonetheless, as producers cut supply to keep pace with weakening demand, so spare capacity is inevitably freed up, potentially undermining OPEC’s efforts to support prices. While notional spare capacity is approaching 5 mb/d, we think that readily available, effective spare capacity may be closer to 3.8 mb/d based on December production levels. This latter level excludes notional spare capacity held by producers who have, for some time, experienced problems boosting supply, namely Indonesia, Iraq, Nigeria and Venezuela (Indonesia’s OPEC membership is suspended from January 2009, and remains in our estimates here, but will be removed from OPEC calculations in next month’s report). Regardless of the ambiguities of spare capacity, it is clear that if OPEC continues to reduce supply in early 2009, as looks likely, one side effect could be a wider margin of spare capacity, something that has tended in the past to eventually undermine OPEC attempts at production discipline. While lower prompt volumes appear to be placing a floor under prices currently, ironically the emergence of a wider capacity margin, if it begins to unravel production discipline, could dilute this support for prices. A Saudi Arabia driven increase in OPEC installed capacity of nearly 1.0 mb/d is expected during 2009, potentially exacerbating the gap between earlyyear market demand and supply potential. That said, the immediate fact is that OPEC’s target, if realised, lies below our underlying ‘call on OPEC crude and stock change’ for 2009 of 29.530.0 mb/d, so tighter stocks will accompany any rise in spare capacity. We have trimmed our November estimate for Saudi Arabia’s production from 9.05 mb/d to 8.9 mb/d, but struggle to corroborate lower third party November estimates of 8.58.8 mb/d with tanker tracking data. However, sharply lower supply does look more likely for December, and this is provisionally estimated at 8.45 mb/d. Term export allocations for January and February to Asian and North American destinations have also been cut sharply, with some suggestions in the market that output may have been curbed to 8.0 mb/d this month, and potentially as low as 7.7 mb/d for February. US buyers have seen the sharpest cuts for February. Already in December the Kingdom was producing within 5% of its January target, and concerns over global demand slowdown may already have pushed supply close to the Kingdom’s 8.0 mb/d quota.
Quarterly Call on OPEC Crude + Stock Change
24
26
28
30
32
2007 2008 2009
Entire series based on OPEC Composition as o f December 2007 onwards (including Angola & Ecuador)
OPEC Crude Oil Production
mb/d
2005 2006 2007 2008
Entire series based on OPEC Composition as o f December 2007 onwards (including Angola & Ecuador)
SUPPLY INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT
20 16 JANUARY 2009
More Credible Than It First Seemed? A flurry of cuts to OPEC production targets for 4Q08 matched frequent GDP revisions from economic forecasters. OPEC Ministers on 17 December agreed a new collective production target of 24.8 mb/d,

Documents

HIGHLIGHTS - .NET Framework