Feature article: Assessment of the global economy
Oil market highlights 1 Feature article 3 Crude oil price movements 5 Commodity markets 11 World economy 16 World oil demand 39 World oil supply 48 Product markets and refinery operations 65 Tanker market 72 Oil trade 76 Stock movements 84 Balance of supply and demand 92
Oil market highlights
Crude Oil Price Movements
The OPEC Reference Basket averaged $54.06/b in February, representing a gain of $9.68 or nearly 22% amid a pickup in prompt demand from Europe and Asia and optimism that oil prices may have reached bottom. ICE Brent rose $9.04 to $58.80/b, while Nymex WTI gained $3.40 to stand at $50.72/b. The Brent-WTI spread widened to above $8/b in February.
World economic growth for 2014 is now seen at 3.3%, up from growth of 3.2% in the previous report. Global economic growth in 2015 remains unchanged at 3.4%. The OECD growth estimate is unchanged at 1.8% for 2014 and 2.2% in 2015. China’s growth forecast remains at 7.4% for 2014 and 7.0% for 2015. The growth forecasts for India in 2014 and 2015 have been revised higher to 7.2% and 7.5%, respectively, following large revisions by the country’s statistical office. Russia is now expected to see a contraction of 3.2% in 2015, compared to a contraction of 2.4% in the previous report. Brazil’s growth in 2015 has also been revised lower to 0.2%, from 0.7% previously.
World Oil Demand
The estimate for world oil demand growth in 2014 remains broadly in line with the previous report at 0.96 mb/d. For 2015, global oil demand growth is expected to average 1.17 mb/d, relatively unchanged from the previous month. Almost half of 2015 oil demand growth is projected to come from China and the Middle East.
World Oil Supply
Non-OPEC oil supply growth in 2014 is now expected at 2.04 mb/d, following an upward revision of 0.05 mb/d from the last report, mostly due to stronger-than-expected growth in 4Q14. In 2015, non-OPEC oil supply is projected to grow by 0.85 mb/d, unchanged from the previous assessment. OPEC NGLs in 2015 are forecast to grow by 0.19 mb/d. In February, OPEC crude production declined by 0.14 mb/d to 30.02 mb/d, according to secondary sources.
Product Markets and Refining Operations
Product markets continued strengthening in the Atlantic Basin in February. The more bullish sentiment was fuelled by the heavy maintenance season and some outages in the US, at a time when colder weather boosted demand for heating fuels. Meanwhile, the Asian market maintained most of the previous month’s recovery with support from stronger light distillate demand, which allowed margins to remain healthy.
Dirty tanker spot freight rates were mixed in February. VLCC and Suezmax rates encountered declines, mainly on the back of low activity and holidays in the east, while Aframax freight rates increased partially as a result of a tightening positions list, weather conditions and port delays. Freight rates on all reported routes remain higher than the same month a year ago.
OECD commercial oil stocks fell in January by 5.0 mb to stand at 2,695 mb. At this level, inventories are 22 mb higher than the five-year average. Crude showed a surplus of 54 mb, while product stocks remained 32 mb below the five-year average. In terms of days of forward cover, OECD commercial stocks stood at 59.3 days, 1.5 days higher than the five-year average.
Balance of Supply and Demand
Demand for OPEC crude is estimated at 29.1 mb/d in 2014, broadly unchanged from the previous assessment. In 2015, required OPEC crude is projected at 29.2 mb/d, also unchanged from a month earlier.
OPEC Monthly Oil Market Report – March 2015 1
Assessment of the global economy
Although still impacted by the remaining legacies of the global financial crisis, world economic growth is expected to continue improving this year. High debt levels in the private and public sectors in many major economies, a weak labour market in the Euro-zone, and slowing growth levels in emerging economies – with the exception of India – are all keeping global growth below potential for the time being. This dynamic has been positively counterbalanced by lower crude oil prices, which have supported consumption in some of the advanced economies, removed budgetary constraints in some emerging economies, and allowed major central banks to maintain monetary stimulus and even implement new measures. Global growth is forecast at 3.4% in 2015, slightly higher than last year’s 3.3%, mainly supported by the recovery in the OECD economies .
While the economies of the OECD are still facing various issues, their recovery since 2013 has been considerable with expected growth of 2.2% this year, after 1.8% in 2014 and 1.4% in 2013. The US is still the main growth engine within the OECD, although the Euro-zone slowly had continued to recover. Japan, however, still seems to face problems taking off from its low growth trajectory. Major emerging economies – which are the main drivers behind oil demand growth – are facing challenges in the current year, with the exception of India. Russia’s economy is forecast to face a significant decline, while Brazil’s economic growth is almost stagnant. Moreover, China just recently confirmed that it is not expecting to achieve previous high growth levels. The continuing trend of slowing momentum has also become visible in recent manufacturing purchasing managers’ indices (PMI) for the major emerging economies (Graph 2). Russia and Brazil remain in contraction territory, while China is only slightly above the growth level of 50. Meanwhile, India is performing relatively well, but also has been slowing somewhat in its manufacturing sector.
Monetary stimulus has certainly played an important role in the global economic recovery in the past years and this role is largely expected to continue. The low interest rate environment in key advanced economies has encouraged foreign investments and higher growth in the emerging economies. In addition, the recent volatility in crude oil prices – as a target of investment flows – along with the strong appreciation of the US dollar, and even other more volatile currency movements, have all been significantly impacted by monetary policies. In the advanced and emerging economies alike, monetary policies could continue to cause unexpected outcomes affecting the global economy, including impacting world trade volumes and the direction of capital flows. This is particularly the case given uncertainty regarding US Fed’s upcoming decision on monetary policy. Depending on the timing, magnitude and instruments used, this will result in varying impacts on different economies, as well as on the world economy as a whole, in the current year.
While many challenges remain, the expected improvement in the global economy will also result in higher oil demand growth of 1.2 mb/d, above last year’s increase of 1.0 mb/d. Given that the bulk of the increment will be coming from the emerging economies, any positive developments in these countries can add to oil demand growth.
OPEC Monthly Oil Market Report – March 2015 3
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Crude Oil Price Movements
The OPEC Reference Basket (ORB) ended February over 20% higher than the previous month, amid a pickup in prompt demand from Europe and Asia and optimism that oil prices may have reached a bottom. The ORB improved $9.68 to $54.06/b during the month, though still significantly down from a year ago. Crude oil futures defied fundamentals and moved up sharply after seven months of a declining streak that ended with values down by almost 60%. Despite a continuing imbalance in the global crude market, oil futures bounced back, supported by improving physical demand, supply outages and speculation that low crude oil prices have begun to affect US tight oil production. The ICE Brent contract surged $9.04 or 18% m-o-m to $58.80/b. The Nymex WTI contract was up $3.40 or 7.2% at $50.72/b. Meanwhile, speculative bets on higher ICE Brent prices further increased net length, but sentiment was less bullish on US crude. The Brent-WTI spread widened, as growing US crude stockpiles resulted in less of an increase in the Nymex WTI front-month contract. The Brent premium to WTI widened to above $8/b in February.
OPEC Reference Basket
The ORB rebounded in February by its largest percentage rise since December 2008, reflecting gains in the major benchmarks as prompt demand improved in European and Asian markets amid healthy refining economics, although oversupply worries continued to overwhelm oil markets.
The month-to-month gains in European and Asian oil benchmarks Brent and Dubai reflected healthy demand over the month, largely driven by refiners wanting to tap into rare strong refining margins, particularly in Europe, which came as a result of lower crude oil prices and a strong middle distillates market. European refinery utilization rose over the month as refining margins in some areas more than doubled. Although US refining margins were steady due to refinery outages, gains were capped by record-high crude inventories. The rebound in the oil complex was also supported in general by optimism that oil prices have reached a bottom, after plummeting by over 60% since mid-year 2014. Speculation that ongoing low prices have started to affect high-cost production areas, also supported prices.
Crude Oil Price Movements
On a monthly basis, the OPEC Reference Basket surged to an average of $54.06/b in February, up $9.68, or 21.8%, the highest percentage gain in more than six years. However, year-to-date, the ORB value is about 53% lower at $49.10/b from $105.03/b compared with the same period in 2014.
In addition to the improvement in the global oil benchmarks, particularly Dubai and Brent, ORB components benefitted from a rise in crude oil price differentials in the Atlantic Basin. North Sea Dated Brent and Dubai gained around 22% or $10.25/b, while the US light sweet marker WTI improved by $7.5% or $3.50/b over the month.
Prices rose sharply from recent lows on firm refiner demand amid robust refining margins that were the strongest in six years in Europe. Robust refining margins supported buying interest in light crudes in the Atlantic Basin, as did the revival of North Sea and West African crude arbitrage sales to the Asia Pacific amid a narrower Brent– Dubai spread.
Meanwhile, this firmer demand coincided with tighter supply in the Atlantic Basin. Libyan crude exports dropped to no more than 200,000 b/d in February because of disruptions at fields and terminals. Loadings of light sweet Caspian were also lower, while whether-related disruptions delayed crude loading in both the Black Sea and Iraq.
Demand in the Asia Pacific region for Mideast Gulf crudes firmed as high margins and the viability of putting crude into floating storage underpinned demand. On the US Gulf
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Coast (USGC), high crude inventories limited regional crude gains despite support from a widening WTI-Brent spread and healthy margins.
Brent-related Basket components Saharan Blend, Es Sider, Girassol and Bonny Light surged $10.15/b or 21.2% to $57.94/b in February, but remained below the previous year’s average of $109.31/b. Middle Eastern spot components and multi-destination grades increased by around $10 and $9.75 to $57/b and $53/b, respectively, but stayed substantially below the previous year’s levels. Among Latin American ORB components, Merey improved $10.45/b or a hefty 27.5% while Oriente edged up $4.74/b or 11.2% in February.
On 13 March, the OPEC Reference Basket stood at $51.66/b.
The oil futures market
ICE Brent and Nymex WTI crude oil futures defied fundamentals and moved up sharply, posting their first gains since June 2014 after seven months of a declining streak that ended with values down by almost 60%.
Since February, crude oil futures bounced back amid a mixture of factors, but largely supported by improving physical demand and supply outages, despite the fact that global supply continued to exceed demand. The rally was also triggered by short- covering spurred by speculation that the market had hit bottom amid geopolitical concerns in the MENA region.
Over the month the US rig count reported by Baker Hughes became a means of monitoring how the US oil industry is reacting to the fall in outright prices. Reported record falls in rig counts fueled expectations of a fall in US tight oil output, prompting oil markets to turn bullish. In the Atlantic Basin, demand was firm as refiners cashed in on strong margins and open arbitrage to Asia supported ICE Brent. US crude gains have been curbed by rising crude oil inventories in the United States, to stand at a record- high of 444 mb at the end of February, according to government data.
For the month, ICE Brent first-month futures settled up $9.04 or 18.2% at $58.80/b while Nymex WTI gained $3.44/b or 7.2% to finish the month at an average of $50.72/b. Compared with 2014, Nymex WTI and Brent were lower by $48.74 and $53.69 to stand at $49.03/b and $54.28/b, respectively.
On 13 March, ICE Brent stood at $54.67/b and Nymex WTI at $44.84/b.
Money managers’ bets on higher oil prices in the ICE Brent market rose over the month. Net length positions increased by 39,744 lots to 182,783 contracts as front- month futures prices increased by almost 18% over the month, according to figures from the ICE Futures Europe exchange.
Speculators were not as bullish on the US crude oil market, where they reduced their net length by 14,116 lots over the month. Net long US crude futures and options positions during the month slipped to 202,209 contracts, US Commodity Futures Trading Commission (CFTC) data show. Moreover, total futures and options open interest volume in the two markets decreased in February by 102,207 lots to 5.04 million contracts.
The daily average traded volume during February for Nymex WTI contracts increased sharply for a second month – by 240,796 lots – to average 1,066,477 contracts. ICE Brent daily traded volume rose slightly by 17,966 contracts to 852,310 lots. The daily aggregate traded volume in both crude oil futures markets increased by 258,761 lots, up 16%, to around 1.92 million futures contracts, equivalent to around 1.9 billion barrels per day. The total traded volume in Nymex WTI was up sharply at 20.26 million contracts, while ICE Brent was down at 17.05 million lots.
The futures market structure
The ICE Brent market structure contango eased over the month amid improving prompt demand from European refiners as they capitalized on rare strong refining margins. European refinery oil processing in February rose from a year earlier, and buying interest for prompt-loading grades picked up on the back of firm European margins. Demand was also supported by tightened supplies and arbitrage opportunities to move North Sea light sweet crudes to Asia.
The ICE Brent first-month discount to the second month decreased by 20¢ to 90¢/b. The Dubai market contango also dropped significantly by 80¢ to $1.60/b over the month amid support from robust refinery demand. Regional refiners have increased crude buying to benefit from strong profit margins.
In contrast, the US Nymex WTI contango widened two-fold to $1.10/b as available crude oil storage in Cushing Oklahoma continued to shrink. The inter-month spread must be large to cover the foreseen increase in storage costs. As the most affordable crude oil storage facilities like Cushing fill up, the cost of storage rises. This affects the economics of storing crude for forward selling, which requires a wider contango to break even.
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Growing US crude stockpiles dragged the Nymex WTI front-month contract below the futures of its fellow benchmark, ICE Brent. Rising US crude oil supplies are also keeping domestic crude prices from advancing as much as international prices. In February, Nymex WTI climbed 7% versus an 18% jump in ICE Brent, widening the European benchmark’s premium to more than $8/b from around $2.50/b in January. Firm demand and supply disruptions in Libya have boosted ICE Brent, while US crude inventories and production climbed to record highs. US stockpiles of crude increased sharply over the month to 444mb, the Energy Information Administration said, reflecting the greatest amount shown by government weekly data since it has been collected starting in 1982, and up 51.7 mb since early January. Stockpiles at Cushing, Oklahoma, the delivery point for Nymex WTI futures, climbed for the 12th week in a row, the longest streak since April 2004.
The prompt ICE Brent/Nymex WTI spread widened to $8.07/b from $2.43/b the previous month. This gowning gap should encourage US Gulf Coast refiners to purchase domestic crude over Brent-linked imports, as long as the differential is enough to cover the cost of delivery.
The light sweet/medium sour crude spread
Sweet/sour differentials narrowed in Asia and Europe, while on the USGC the spread remained flat.
In Asia, the sweet/sour spread – represented by the Tapis/Dubai spread – narrowed over the month, supported by healthy demand for Mideast Gulf crudes from Asia as seen in the narrowing Dubai market contango structure. Competitive prices and strong refining margins boosted Asian demand. Meanwhile, the narrower Brent/Dubai spread resulted in greater light sweet arbitrage volumes moving from Europe and Africa to the Asia Pacific region, somewhat pressuring Tapis, despite steady market conditions. Over the month, the Tapis crude premium over Dubai decreased by $1 to $5.69/b in February.
In Europe, the Urals medium sour crude discount against light sweet Dated Brent narrowed further by about 50¢ to 30¢/b in the Mediterranean as buying interest picked up on the back of firm margins, while supplies tightened due to weather-related delays. Urals also found support in disappointing inflows of Kirkuk crude, which turned out to be far below recent estimates of around 400,000–500,000 b/d. Inflows of Basra Light to Europe have also been delayed due to severe weather conditions in the Mideast Gulf.
In the USGC, the Light Louisiana Sweet (LLS) premium over medium sour Mars remained unchanged at around $4/b on average for the month. Meanwhile, US Gulf crudes were still under pressure as stockpiles in the region reached their highest point on record, while refinery runs were down amid refinery maintenance season. Nevertheless, USGC crudes gained ground relative to imported crudes, as a strong Brent market compared with US crude futures pushed differentials to one-year highs.
Energy commodities experienced their first increase since July 2014, on top of recovering oil prices. In the category of non-energy commodities, both agriculture and metals were down during the month. Precious metals declined on the expectation of the start of monetary policy normalization by the US Federal Reserve.
Trends in selected commodity markets
During the month of February, the US dollar further strengthened – maintaining a source of weakness to commodity prices, albeit at a lower pace than in January, mainly due to incoming implementation of the quantitative easing programme announced by the European Central Bank (ECB). Meanwhile, improvement in the labour market was ongoing in the US, suggesting that the Federal Reserve could potentially lift rates around mid-year, weakening the appeal for investment in precious metals.
Agricultural prices declined, due to a drop in food and beverage prices, while the cost of raw materials increased. In February, the US Department of Agriculture made small upgrades to its expectations for global ending stocks of wheat, corn and cotton, while also making small downgrades to soybeans and rice. Sugar prices declined on improving weather conditions in Brazil, weakening of the Brazilian real, which supports exports, and additional stimulus for sugarcane production by India’s government. Prices in the soy complex declined on the expectation of strong exports from Argentina and Brazil.
Energy prices reversed the downward trend started in August 2014, as crude oil prices recovered on the expectation of slower supply growth. Natural gas prices decreased in both Europe and the US. Withdrawals from inventories in the US have been in line with expectations over the month, in spite of colder-than-normal temperatures, while in Europe inventories declined to 35.9% of capacity at the end of February, versus 48.75% the previous year, however average import prices have fallen on the lagging effect of crude oil price declines.
Metal prices were under pressure due to continuing softness in manufacturing activity and excess supply. Purchasing Managers’ Index (PMI) figures increased for China to 50.7 vs 49.7 in January, were stable in the Eurozone at 51, and slightly down in Japan at 51.6 vs 52.2, while the Institute for Supply Management PMI declined for the US, moving to 52.9 from 53.3 in January, mainly due to the impact of the strike that affected ports in the West Coast. Copper prices were down on renewed pressure from rising inventories in the London Metal Exchange (LME) and continuing softness in the Chinese property market, in which home prices declined in January, according to the National Statistics Bureau. Iron ore declined sharply, as major producing companies’ capacities continued to expand, while January Chinese imports were down 9.5% from the same month a year earlier.
In the short term, the impact of the ECB’s quantitative easing could potentially drive a further appreciation of the US dollar, adding more weakness to commodity prices. The impact of the recently announced reduction in China’s GDP target, on the growth in demand for commodities in general, will also require close tracking.
Average energy prices in February increased by 11.7% m-o-m due to a 16.3% m-o-m increase in crude oil, after a continuing decrease in rig counts suggested slower growth in US oil production. Natural gas prices declined during the month in the US by 4.3% m-o-m while average import prices decreased in Europe by 10.6%.
Agricultural prices decreased by 1.5% due to a 2.3% decrease in food, a 1.7% decrease in beverages and a 1.2% drop in raw materials. Soy complex prices dropped with soybeans, soybean oil and soy meal declining by 4.0%, 3.7% and 3.1%, respectively, on record crops in the US and South America. Wheat continued its declining trend on a strong dollar and high global production. Sugar declined by 4.9% on improving prospects for Brazilian production and government support in India.
Base metals decreased by 1.2% m-o-m mainly due to a decline in copper by 1.7% on an additional increase in LME inventories. Nickel declined by 1.9% on increasing inventories, reversing the gains achieved the previous year due to Indonesia’s ore export ban. Iron ore declined sharply by 7.4% m-o-m on continuing increases in production capacity by major producing companies and decreased demand from China before the Lunar New Year holiday.
Precious metals decreased by 2.1% in January. Average gold prices decreased by 1.9% m-o-m in response to increasing bond yields in the US after further strengthening in the labour market. Silver prices decreased by 2.6% m-o-m.
In February, the Henry Hub natural gas price decreased after smaller-than-average withdrawals from inventories. The average price decreased by 12¢, or 4.3%, to $2.85per million British thermal units (mmbtu) after trading at an average of $3.97/mmbtu the previous month.
The US Energy Information Administration (EIA) said utilities withdrew 228 billion cubic feet (Bcf) of gas from storage during the week ending 27 February. This was slightly above market expectations of a 222 Bcf decrease. Total gas in storage stood at 1,710 Bcf, which is 40.4% higher than the previous year and 7.7% below the previous five-year average. One month ago it was 1.2% below that average. The EIA noted that temperatures were significantly colder than normal during the week, which increased gas consumption.
Investment flows into commodities
The total open interest volume (OIV) in major US commodity markets increased to 8.7 million contracts in February, with the OIV increasing by 6.8% for crude oil, 5.2% for agriculture, 3.2% for copper and 1.3% for natural gas. Meanwhile, the OIV declined by 6.9% for livestock and 0.7% for precious metals.
Total speculative net length positions in select commodities decreased by 30.41% m-o-m to 537,006 contracts in February due to decreases in net length for agriculture, precious metals, livestock and crude oil. Net shorts increased for natural gas and decreased for copper.
Agricultural OIV was up 5.2% m-o-m to 4,780,704 contracts in January. Meanwhile, the net length positions of money managers in agriculture decreased by 52.2% to 172,713 lots, their lowest point since September 2014.
Henry Hub’s natural gas OIV increased by 1.3% m-o-m to 1,003,692 contracts in February. Money managers increased their net short positions by 41.2% to reach 61,863 lots on withdrawals from storage in line with expectations.
Copper OIV increased by 3.2% m-o-m to 180,936 contracts in February. Money managers decreased their net short positions to 8,479 from 10,490 lots the previous month.
Gold OIV decreased by 3.8% m-o-m to 400,398 contracts in February. Money managers decreased their net long positions by 5.4% to 113,261 lots due to the potential for interest rate hikes in the US around mid-year.
While the global economic recovery continues, it remains impacted by some of the aftereffects of the global financial crisis. The growing importance of monetary policies, as well as continuing high debt levels in some key economies and a variety of structural deficiencies, mainly in emerging and developing economies, have all led to a global growth level that still remains below its potential. Taking these challenges into account, the 2015 GDP growth forecast remains at 3.4%, after 2014 growth of 3.3%. The OECD growth forecast for both 2014 and 2015 remains unchanged at 1.8% and 2.2%, respectively. However, some recent weaker-than-expected indicators in the US need to be carefully monitored in coming months. The situation in Japan remains challenging and while the circumstances of the Euro-zone economies continue to improve, they continue to deal with a variety of issues. China’s latest lead indicators point at possible lower growth in 2015 compared to last year. In India, based on the latest revisions by the government’s statistical office, the economy’s growth forecast has been revised to 7.2% and 7.5% for 2014 and 2015, respectively. Brazil and Russia are currently seen to be lagging the global momentum: Russia’s 2015 GDP growth forecast has been revised down to -3.2% from -2.4% and Brazil’s 2015 growth forecast now stands at 0.2%, compared to 0.7% in the previous month.
Some moderation in US 4Q14 GDP growth became apparent recently. However, this came after two consecutive strong quarters, so this should not have come as a surprise. Nevertheless, the level of growth was somewhat disappointing as it was expected to be higher. GDP growth in 4Q14 stood at a seasonally-adjusted annualized rate (saar) of only 2.2%, after reaching 4.6% q-o-q in the 2Q14 and 5% q-o-q in 3Q. This ties into many slightly weakening indicators seen in recent months. Industrial production, manufacturing orders and retail sales have all been slowing. And while industrial production recovered slightly in January, manufacturing orders and retail sales have remained clearly in the negative. Moreover, the strength of the US dollar may negatively impact exports in the current year. Also, the potential for an interest rate hike by the Federal Reserve Board (Fed) raises questions since it could be an influential factor for future growth. While it is expected that any increase in the interest rate will only be done after a careful consideration of the domestic economy’s
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performance, and the impact that such a rate hike might have on the global economy, it is not clear how markets will react once a policy change becomes likely.
On the positive side, the labour market continues improving, consumer sentiment is at record levels and private household consumption continues growing solidly. This should keep growth going. But, given the many slowing dynamics, in combination with the mentioned challenges, the magnitude of this year’s GDP growth remains uncertain to some extent.
In general, the US economy is improving, supported by an ongoing positive trend in job creation, rising house and equity prices, and other income-related factors that have, in the past year, led to rising consumption. This remains the most important driving force for US economic growth. Although it depends on the further development of the earnings situation and other wealth-related factors, the rise in private household consumption is forecast to lead to rising GDP growth in the current year. Personal consumption stood at a saar of 4.2% q-o-q in the 4Q14, after registering 3.2% q-o-q in the 3Q, which could be taken as a positive sign for growth in 2015.
The labour market has significantly improved over the past months and the latest batch of data confirms this trend. The unemployment rate fell to 5.5% in February. Non-farm payrolls grew by 295,000 in February, higher than in the previous month, when they stood at 239,000. The share of long-term unemployed improved to 31.1% from 31.9% in February.
The housing market continues recovering and while the pace of the recovery was slowing in the past months, prices in November and December, which are the latest available data points, have started to increase again at higher rates. Prices increased by at 5.5% y-o-y in December, after registering 5.2% y-o-y in the previous month, as reported by the Federal Housing Finance Agency. Positively, existing home sales have also continued improving, rising by 3.2% y-o-y in January and by 4.3% y-o-y in December.
Consumer confidence rose to a new record high of 103.8 in January and receded only slightly in February to 96.4, the latest available number, based on the index provided by the Conference Board. As a sign of deceleration, however, the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), fell again slightly to 52.9 in February from 53.5 in January. Positively, the ISM for the services sector, which contributes more than 70% to the economy, edged up marginally to 56.9 in February, from January’s level of 56.7.
The GDP growth forecast for 2015 remains unchanged at 2.9%, given the latest signals from output and based on lead indicators that suggest that the depth of the recovery in the current year remains, to some extent, uncertain. However, this year’s growth forecast is already at a much higher level than the final growth estimate of 2.4% in 2014, as provided by the Bureau of Economic Affairs (BEA).
In Canada, improvements continue as well, along with the US, its most important trading partner. A mild slowdown in exports and in the energy sector has become apparent recently, but industrial production growth in December grew at a solid 3.8% y-o-y, more than in November, when it decelerated to 2.5%. Given the challenges in the resource sector, mining, oil and gas extraction also decelerated to 3% in December. However, manufacturing had a strong rebound at 5.7% y-o-y. The PMI for manufacturing in January also indicated a slow-down and now stands at 48.8 for February, indicating a contraction in the sector in the near-term. This comes after registering levels of 53.9 in December and 51 in January. The growth forecast remains unchanged with 2015 GDP growth at 2.3%, after reaching 2.4% in the previous year.
Japan’s most recent developments have again pointed out that the economy is still facing multiple challenges and that it may still take some time before the economy is able to move back to higher growth levels. The latest GDP growth revision points at some weakness in the economy’s development. Also, the latest output and lead indicators do not provide much confidence for considerable growth in the current quarter. Positively, exports – constituting an important economic driver for the economy – had a strong recovery lately, also supported by a weakening yen. It remains to be seen, however, how this will develop in the near-term, given some obvious slow-down in China’s activity, a likely temporary slow-down in the US and a still relatively weak situation in the Euro-zone. Moreover, domestic demand has decelerated and industrial production has remained negative on a yearly basis. On the other hand, manufacturing orders turned positive in January after three consecutive months of decline. All this points at a still challenging situation and it remains to be seen whether exports continue at the current pace and whether the domestic situation improves.
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Domestic economic improvements will be challenging as past April’s sales tax increase has artificially pushed up total inflation to a level above 2%. In January, it remained at 2.4%. This was well above earnings growth, which had increased significantly in January and December, by 1.5% y-o-y and 2.0% y-o-y, respectively. Rising inflation has certainly depressed real income and should be considered an important factor that has so far dragged down any possible domestic improvements.
Moreover, core inflation without the April sales tax increase is significantly below the government’s target of around 2%. As the tax effect as of April will no longer be considered in the yearly comparison, low inflation will once again become an important issue. The government has been very clear about its aim, that, together with the policy of the Bank of Japan (BoJ), it would like to achieve inflation of around 2%. This now seems extremely challenging – even more so when one considers the much lower energy prices this year. Some positive developments in the budget deficit are expected this year, given last year’s sales tax increase. Declining energy prices, while negatively impacting inflation, are also a positive factor for lowering the economy’s import bills.
The current weakness in domestic demand led to a decline in retail trade of 2% y-o-y in January. This comes after already weakening numbers in the past months. Retail sales increased by only 0.1% y-o-y in December and by 0.5% y-o-y in November. Exports improved considerably in January, growing by 17.0% y-o-y, after a rise already of 12.8% y-o-y in December. Industrial production remained sluggish on a yearly comparison. It fell by 2.2% y-o-y in January, after a rise of 0.2% y-o-y in December.
The PMI numbers, as provided by Markit, show that the manufacturing PMI in February has only slightly receded to 51.6 from 52.2 in January. However, the very important services sector index fell to 48.5, considerably below the growth indicating level of 50.
Given the latest signs of a weakening economy, the 2015 growth forecast has been revised down to 0.9%, compared to 1.2% in the previous month. However, the risk to this growth forecast is slightly skewed to the downside. Growth in 2014 stood at 0% as reported by the government’s statistical office.
The South Korean economy continues to grow at a solid pace, despite a slight deceleration as the economy is impacted by the economic performance of its most important trading partners in the Asian region. Importantly, export growth declined in February. It fell by 0.7% y-o-y, after already limited growth of 1.2% in January. The economy’s development in the last quarter of 2014 confirmed the growth estimate of 3.4% for the year. The growth forecast of 2015 remains unchanged at 3.4%, with some downside risk to this forecast in the coming months if the current slow-down continues.
The Euro-zone continues to slowly, but persistently, recover. The speed of the recovery, however, is very different across its various economies and it is not a broad- based recovery yet. While the economy of the Euro-zone has continued to heal to some extent, the European Central Bank (ECB) has provided more details of its latest monetary easing measures, which will be pursued until at least September 2016. The ECB will purchase private and public sector bonds of a monthly magnitude of 60 billion euros. The combination of the economic recovery and the additional funding of the ECB have not only led to improving business sentiment, but also to higher consumer confidence. This is expected to drive growth higher in 2015, as already anticipated in the previous month’s forecast.
GDP in 4Q14 stood at a healthy seasonally-adjusted rate of 0.3% q-o-q. If annualised, the growth is 1.3%, which is still much lower than growth in the US, but the pickup in Euro-zone activity may lead to higher growth numbers in coming quarters. However, for the time being, quarterly growth is expected to remain at around these fourth-quarter levels as many challenges remain. The situation of the Euro-zone will be closely monitored before raising any quarterly growth estimates. Greece, for example, will remain a key topic in economic discussions in the Euro-zone. The deflationary trend is also still an important issue and banking sector-related issues also remain. Italy’s GDP growth was slightly in the negative in 4Q14 and France has also provided only anaemic growth. Germany’s growth dynamic has slowed recently with industrial production at only 0.3% y-o-y and manufacturing orders at -0.3% y-o-y in January. GDP growth in 4Q was at a solid level of 0.7% q-o-q in Germany, translating into a considerable number of 2.8% q-o-q if annualised.
The most recently published inflation number of -0.3% in February was only slightly better than the -0.6% y-o-y in January. However, with ongoing improvements in the economy and monetary stimulus, it is likely that this will return to positive territory again soon. Also, Germany’s inflation turned negative in January at -0.4% y-o-y and was flat in its most recent release in February.
While the situation for the Euro-zone’s banking sector remains challenging, some positive trends have become visible over the last months. Credit supply from financial intermediaries has shown a positive trend since the end of 2013 and while the transmission channels still seem to be somewhat impaired, loan growth turned positive in January for the first time in almost two years, growing by 0.3% y-o-y.
While some modest improvements have become apparent, the aftereffects of the 2007/2008 global crisis are still obvious in the Euro-zone. The unemployment rate remains at a high level of 11.2%, although this is the best level in more than two years. In fact, youth unemployment also fell below 23% for the first time in many years and stood at 22.9%, with the highest level of 50.9% in Spain.
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In general, the situation remains challenging. The recent PMI numbers point at a continuation of a modest growth level. The latest PMI for manufacturing, as provided by Markit, has improved slightly. It increased to 51.1 in February after 51.0 in January and 50.6 in December. The PMI for the important services sector also increased to 53.8 in February, after 52.7 in January and 51.6 in December.
While the recovery in the Euro-zone has improved compared to last year, this recovery remains challenged by various issues. Therefore, the GDP growth estimate for 2014 remains unchanged at 0.9%, while the 2015 forecast has also been kept at the previous month’s level of 1.2%.
The United Kingdom’s economy continues recovering. Lead indicators point at an ongoing solid momentum, while the 4Q14 GDP number has underscored a somewhat softening dynamic of the strong growth momentum that became apparent in 1H14. The revised 4Q GDP growth figure stood at a saar of 2.2% q-o-q. Although this is better than in the previous report, it is the lowest level in all of 2014. Yearly 2014 growth stood at 2.6%. The PMI for manufacturing was higher in February, when it moved to 54.1 after 53.1 in January. The services sector PMI declined slightly to move to 56.7 in February from 57.3 in January, still a very high level. Given the slight improvement at the end of the last year and improving conditions in the manufacturing sector, the GDP growth forecast has been revised to 2.6% from 2.5% in the previous month.
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Emerging and Developing Economies
GDP in Brazil contracted 0.2% y-o-y in 3Q14, following a 0.9% drop in 2Q. The rise in government spending and exports was not enough to compensate for the drop in investment and slowing consumption. Inflation increased further in February reaching 7.7% y-o-y, following 7.1% in January. On the back of GDP deceleration during 3Q14, the growth forecast was lowered to 0% for 2014. The base effect, together with stubbornly high inflation, a fall in export revenues and challenges to foreign investment, have all resulted in a downward revision of expected 2015 growth to 0.2%.
In Russia, the ruble lost 4.8% of its value against the dollar in February over the previous month, signalling the slowest pace of depreciation in four months. Inflation continued its upwards trend for the seventh consecutive month in February, increasing to 16.7% y-o-y, up from 15% a month earlier. This is the highest inflation since March 2002. On the services side of the economy, the correspondent February PMI remained in contraction territory for the tenth time in the past 12 months. While on the manufacturing side, the index indicated a marginal deceleration, staying slightly below the neutral level of 50. Considering the direct negative impacts of lower export revenues, GDP is anticipated to contract 3.2% in 2015, while Russia’s economy ministry forecasts a GDP contraction of 3% this year.
India’s economy advanced 7.5% y-o-y in the last quarter of 2014, following a revised 8.2% increase in the previous quarter, following from changes in the way the GDP is calculated. India’s GDP is now measured in market prices instead of factor costs and the base year was changed to 2011-12 from 2004-05. According to the revised figures, the economy grew 6.5% in the second quarter (5.7% under the previous methodology) and 8.2% in the September quarter (5.3% as initially reported). This was higher than China. In addition, the second budget of the government that came to power in May 2014 contains dozens of proposals that should boost economic growth and make it easier to do business in India. It will also focus on tax rationalisation and infrastructure investment.
According to China’s second annual government work report given at the National People’s Congress (NPC), the growth target for the economy was revised down to 7%, from 7.5%. Also, the People’s Bank of China (PBC) announced the first universal cut in the required reserve ratio (RRR) since May 2012. Chinese foreign direct investment (FDI) in China came to $13.9 billion in January, the strongest y-o-y gain since April 2011.
GDP contracted 0.2% y-o-y in 3Q14, following a 0.9% drop in 2Q. The rise in government spending and exports was not enough to compensate for the drop in investment and slowing consumption. Private consumption grew 0.1% y-o-y in 3Q, the slowest rate of expansion since 2Q of 2004. Gross fixed capital formation declined 8.5% in the same period, signalling the third consecutive quarter of deceleration in investment. Government consumption, on the other hand, increased 1.9% y-o-y in 3Q, following 0.9% in 2Q. The industrial sector decelerated by 1.5% in the same period, the second consecutive quarter of decline. Construction recorded the highest deceleration with a drop of 5.3%, followed by manufacturing with a 3.6% decline. In contrast, mining output rose 8.2%. The services sector expanded 0.5%, but trade contracted 1.8%. On a quarterly comparison, GDP barely grew 0.1% in 3Q14 from 2Q, signalling that the economy was by then out of a technical recession.
Inflation increased further in February reaching 7.7% y-o-y, following 7.1% in January. Last month’s inflation is the highest since June 2005 and well above the 6.5% ceiling of the central bank’s target range. In fact, the country’s stubbornly high inflation caused the central bank to raise the interest rate (Selic) to a six-year high of 12.75% in early March. As usual, high inflation reduced consumer sentiment, which was reflected in the consumer confidence index dropping to 85.8 in February, its lowest level ever. (The index data series starts from September 2005.) In February 2015, Brazil’s export revenues shrank 24.1% y-o-y, signalling the seventh consecutive slide in exports.
The HSBC Brazil Services Business Activity Index of February rose to a 15-month high of 52.3, up from January’s 48.4. A notable expansion in new orders supported the index. Meanwhile, the manufacturing PMI fell to its contraction territory last month, posting 49.6. The index reading of January was 50.7. The survey showed a marginal slowdown in new orders, while prices rose on the depreciation of the Brazilian real. On the back of the deceleration in GDP during 3Q14, the growth forecast was lowered to 0% for 2014. The base effect, as well as stubbornly high inflation, a fall in export revenues, and challenges to foreign investment, have all resulted in a downward revision of anticipated GDP growth for 2015 to 0.2%.
In February, the ruble lost 4.8% m-o-m of its value against the dollar, signalling the slowest pace of depreciation in four months. This followed depreciation rates of 12.5%, 20.8% and 11.4% m-o-m during November, December and January, respectively.
Inflation continued an upwards trend for the seventh consecutive month in February, increasing to 16.7% y-o-y, up from 15% a month earlier. This is the highest inflation since March 2002. Sugar prices rose by 67% y-o-y, and fruits and vegetables by 43% y-o-y. After raising its benchmark interest rate from 9.5% to 17.0% in December 2014, the central bank lowered it last month to 15%. In January, the unemployment rate increased for the fifth month in a row, highlighting the longest period of rising unemployment rate since the financial crisis of 2008/09.
The composite PMI reading of February suggests a faster deceleration in the economy as the surveyed output had its largest rate of decrease and fell to a 69-month low of 44.7. On the services side of the economy, the correspondent PMI of February remained in contraction territory for the tenth time in the past 12 months. In the Russian services sector, businesses received sharply lower new orders in February, the fastest drop in almost six years. While on the manufacturing side, the index indicated a marginal deceleration, staying slightly below the neutral level of 50. The manufacturing PMI of February posted 49.7, up from 47.6 in January. Import substitution improved domestic demand and resulted in higher manufacturing production. New export orders, however, slid at their sharpest pace since October 2014. The historic relationship between PMI and GDP suggests a 2% y-o-y decline in GDP on the basis of survey data of January and February 2015. This, however, does not take into account the direct impact of the country’s worsening trade balance. Considering the direct and negative impacts of lower export revenues, GDP is anticipated to contract 3.2% in 2015, while Russia’s economy ministry forecasts a GDP contraction of 3% this year.
India’s Central Statistics Office (CSO) has overhauled the country’s national accounts series. Although now the data produced should be more comprehensive than before, as well as closer to the methodology used by other countries, the changes have led to revisions, which have produced a surprising increase in the estimated GDP growth rates for recent quarters. GDP growth at market prices (rather than being based on factor costs) was revised up from 5% to 6.9% in 2014 and was reported to be 7.5% y-o-y in 4Q14, compared to 8.2% in 3Q. According to the new numbers, the GDP growth rate for 2014 has been revised to 7.2% from 5.2%. Also, the expectation for 2015 has been revised up to 7.5% instead of 6.1%, based on the new methodology.
Despite the official claims that the recent re-basing should improve the accuracy of India’s GDP data reporting and bring it closer to international standards, the revised figures have raised some concerns, since they completely change the view of the Indian economy over the past two years. Unlike the earlier view, the revised figures indicate that the economic slowdown that started in 2012 did not continue in 2014. In fact, the economy showed a strong “V-shaped” recovery, improving substantially during the year to reach a respectable rate of growth of slightly below 7% in 2013. This view is inconsistent with other macroeconomic indicators that painted a much gloomier picture of the past two years. It was previously believed that the slowdown in the Indian economy was driven by a sharp deceleration in domestic demand, with investment spending bearing the brunt of a slowdown. But the revised figures show real fixed investment contracting only in 2013 and then improving marginally in 2014. In addition, the rapid expansion in growth and investment suggested by the revised figures typically would be also accompanied by a strong growth in imports – which has not been seen. The upwardly revised figures for investment and manufacturing growth are also puzzling, since they presumably capture a greater share of the economy. The acceleration in production and investment would require additional financing.
Prices across non-food articles continued to slide for the fourth straight month, driven by a sharp decline in fuel and power prices. However, food inflation jumped to a six- month high of 8% y-o-y in January, while primary articles inflation also experienced an uptick. Manufactured goods inflation, often used in India as a gauge of core inflation, also moderated for a sixth straight month, partially reflecting the easing costs of raw materials and energy but also pointing to still weak domestic demand. The news comes after the figures released last week showed India’s industrial output in December easing again to 2.1% y-o-y.
India’s consumer price index (CPI) increased slightly from 119.5 in January to 119.7 in February 2015. The recent agreement between the Ministry of Finance and the Reserve Bank of India (RBI) calls for a 4% (±2%) inflation target. Amid concerns that such a target would limit its ability to continue with its current policy easing, the RBI clarified that it was only a medium-term target and that it would seek to bring down CPI inflation to the midpoint of the band (4%) by the end of a two-year period starting in 2016 (i.e. three years from now). Therefore, the target is unlikely to have any bearing on the near-term easing cycle.
The RBI cut the repo rate again in March by 25 basis points (bp) to 7.5% from 7.75%. It seems budget reforms, cutting subsidies, inflation targeting, the revised GDP figures under the new methodology, a strong rupee and downward inflation trajectory have led the RBI to cut the repo rate. Given low capacity utilisation and still-weak indicators of production and credit off-take, it may be appropriate for the RBI to be pre-emptive in its policy actions and utilise any available space for monetary accommodation.
In February, the manufacturing PMI declined for a second successive month and dropped 1.7 bp to 51.2, the lowest reading in five months. Both the output and new orders indexes fell by 2.8 bp and 2.5 bp, respectively. Meanwhile, the input price index declined for the third consecutive month, falling from 50.3 to 49.3.
In terms of India’s budget, the second budget of the BJP-led Indian government that came to power in May 2014 contains dozens of proposals that should boost economic growth and make it easier to do business in India, focusing on tax rationalisation and infrastructure investment. Although short on significant reforms, the budget was convincing enough to please investors, businesses and consumers alike. Still, the government’s ambitions had to be balanced with the need to remain on a fiscal consolidation path. Although this may not stimulate growth, it is necessary to improve India’s long-term financial health and maintain its favourable credit status. Therefore, the revised fiscal deficit target for the current fiscal year ending 31 March was left unchanged at 4.1% of GDP, with the government planning to offset the anticipated revenue shortfall with greater spending cuts (total expenditure during the 2014 financial year is estimated at INR 16.8 trillion ($271.4 billion), 6.3% below the budgeted amount.
The new budget introduced a number of tax changes in an attempt to revive business investment. Among the most important initiatives is the government’s renewed commitment to replace myriad complicated indirect taxes with the harmonised General Sales Tax (GST) by April 2016. The introduction of the GST could potentially boost the
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country’s GDP growth by an additional 2% by creating a common market, according to government projections. The budget proposal raised the revenue share of the states in union taxes to 42%, a jump from the earlier recommended level of 32%. As anticipated, the BJP’s new budget outlined an ambitious plan to upgrade India’s poor infrastructure, with INR 700 billion alone (nearly $11 billion) to be spent in 2015 on roads, railways, ports and other projects.
The budget seems to have provided a boost to infrastructure building, though it has slowed the pace of fiscal consolidation. Specifically, the deficit for the 2016 financial year is now pegged at 3.9% of GDP, versus the previous fiscal road map target of 3.6%. The government has reaffirmed its commitment to a 3% deficit target – but one year later than in the previous road map. Apart from increasing capital expenditures on infrastructure and providing a slew of off-budget infrastructure incentives, the budget also pushed institutional design by formalizing the monetary policy framework and announced the creation of a modern bankruptcy law, as well as a dispute resolution mechanism and a public debt management office. If the tax revenue assumptions don’t materialize, or asset sales don’t go through, or oil prices rise, the infrastructure capex increase would be at risk.
India’s new method for calculating GDP
India’s Central Statistics Office (CSO) has overhauled the country’s national accounts series. Though the resulting data should now be more comprehensive than previously, and the methodology closer to that used by other countries, the changes have led to a surprising increase in estimated GDP growth rates for recent quarters. Growth in GDP at market prices (now the headline series) was revised up to 6.9% in 2014 from 5% and was reported to be 7.5% y-o-y in 4Q14, compared to 8.2% in 3Q14. It is also the first time that the economy is projected to be bigger than $2 trillion.
The CSO’s overhaul of GDP calculations is comprised of three main changes:
- A change in the base year used for calculations, which is done routinely every five years or so. In the above-mentioned case, the government of India has changed the base year for estimating GDP from 2004-2005 to 2011-2012. This was done to incorporate the changing structure of the country’s economy, especially in rural areas.
- Another change was to adopt a new method for measuring output. Starting immediately, Indian GDP will be measured by using gross value added (GVA) at market prices, rather than factor costs. In other words, the new formula takes into account market prices paid by consumers. It is calculated by adding GDP at factor prices to indirect taxes (minus subsidies) and is expected to better capture the changing structure of India’s economy. In addition, it is more consistent with international practices, bringing India more in line with the internationally adopted National Accounts System (NSA). This helps align India’s statistical data with that of other countries using the same United Nations standards, making it easier to compare India to other emerging markets.
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3. The third change recalibrates the weighting given to different economic sectors, resulting in the services sector constituting a smaller proportion of overall GDP – with 50.91% rather than 57.03% under the previous method. The result is that India’s industrial sector now takes a larger proportion of GDP, with the manufacturing sector now comprising 17.06% of total GDP compared to 12.89% previously. Economists have been particularly surprised at these higher sectorial numbers for manufacturing.
The latest data shows that while agriculture, mining and trade, hotels and public spending all slowed in 2014, compared with the previous year, key sectors such as manufacturing, construction and financial sectors grew at a faster pace than a year ago.
Economists have been particularly surprised at the higher sectoral numbers for manufacturing, as well as the financial sector, reported by the new data series because this is not reflected in data on factory output and bank credit.
The second annual government work report was delivered to the National People’s Congress (NPC) in February. As widely expected, the government lowered its 2015 GDP growth target to 7% from 7.5%. The report also announced a list of major economic targets for 2015 (see Table 3.4), most of which are in line with expectations. The government set the 2015 fiscal deficit target at 1.62 trillion yuan (2.3% of GDP), up from 1.35 trillion yuan (2.1%) in 2014, but lower than the forecast of a 2.9% of GDP deficit.
This month, the PBC announced a first universal cut in the required reserve ratio since May 2012 – by 50 bp to 19.5% and by an additional 50 bp for banks that mainly lend to small- and medium-sized enterprises. It seems these cuts would inject CN¥ 650 billion (about $104 billion) liquidity into the financial system (which breaks down into about CN¥ 569, CN¥ 60 and CN¥ 20 billion, respectively, for small, medium and large institutions). The reasons behind the mentioned reserve ratio cut are related to weak growth momentum and disinflation, which has justified monetary easing. But there has been no new liquidity supply in the financial system in recent quarters, especially via the usual channel of accumulating foreign exchange reserves. In addition, recent regulatory measures (e.g. tightened rules on margin finance and umbrella trusts) have helped contain the risk of liquidity spill-over to the stock market. The global wave of central bank easing also may have played a role, but domestic considerations have largely spurred February’s cuts.
The announced fiscal budget deficit target was 2.9% of GDP. This is the result of a ‘fiscal drag’ caused by a shortage in public investment (especially in infrastructure) as the funding capacity of local governments is limited. Local governments have generally relied on three funding sources: fiscal revenues (including budget deficits), local government financing vehicles (LGFV) and land sale revenues. In recent years, the implicit local government deficit in the form of LGFV net borrowing has been much higher than the official fiscal deficit, which includes only the central government fiscal deficit and local government bond issues approved by the central government. (Under the reformed fiscal regime announced in 2014, local governments can no longer borrow via LGFV entities and are allowed to issue local government bonds.) There are two possible ways to avoid the fiscal drag: public private partnerships (PPP) and the
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sale of state-owned assets. A recent government report indicates that the government will promote PPPs as a major stabilizing measure in 2015.
FDI in China came to $13.9 billion in January, the strongest y-o-y gain since April 2011. At a seasonally adjusted rate, FDI rose 20.4% m-o-m in the month. In 2014, China became the world’s largest recipient of FDI, attracting $120 billion, even though the inflows have stayed almost flat since 2010. However, the composition of FDI in China has changed significantly.
In terms of FDI destinations, there has been a noticeable shift away from the manufacturing sector to the services sector. Manufacturing’s share of FDI fell to 37% in 2014 from 75% in 2004, while the share in the services sector rose to 62% from 23% over the same period. This coincides with China’s loss of its competitive advantage in labour-intensive manufacturing industries, reflecting rising labour, land and environmental protection costs as well as an appreciation of the renminbi. In contrast, global markets see China’s services sector as having significant potential. In 2014, manufacturing FDI declined by 11.3% y-o-y while services FDI rose 11.9%. In addition, FDI has shifted from the coast to inland China. By geographic destination, eastern China received 86% of total FDI in 2004 but only 67% in 2013. With regard to these FDI inflows to China, Hong Kong has been the main source. The share of FDI from Hong Kong rose to 68% in 2014 from 33% in 2007. By contrast, FDI inflows from the US, Germany, Japan, Singapore and Taiwan have remained relatively stable.
In terms of trade, China’s nominal exports in February grew considerably by almost 49%, the fastest monthly rate since 2010. The value of imports in January declined by more than 20% due to weak commodity prices. As a result, China’s trade balance remained over $60 billion, compared to its $22.5 billion deficit a year ago. By trading partner, export growth was especially strong to ASEAN countries, the US and the EU, which together accounted for about two-fifths of Chinese exports. Chinese imports from all major partners declined, generally at double-digit rates, highlighting the fact that the import contraction was not confined to commodities alone. Chinese exports of mechanical, electrical and high-tech products grew 30% y-o-y in January 2015, compared to a modest contraction in February. Those products together account for nearly 95% of Chinese exports by value.
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1Q 12 2Q 12 3Q 12 4Q 12
1Q 13 2Q 13 3Q 13 4Q 13
1Q 14 2Q 14 3Q 14 4Q 14
1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14
Exports of basic steel and aluminium products grew at even faster rates. China’s producer price index (PPI) also contracted at a faster rate, falling 4.7% y-o-y. Further deterioration in producer prices resulted from a 62.4% y-o-y decline in PPI for the petroleum and natural gas extraction sector, and a 19.1% y-o-y decline in PPI for the mining and quarrying sector. China’s CPI improved to 1.4% y-o-y in February, a two- month high. The rebound came as food price growth accelerated from a 65-month low in January, due to warmer than average climatic conditions. All other sub-indices of the country’s CPI also saw faster growth.
China’s February manufacturing PMI compiled by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing edged up 0.1 bp to 49.9, the first monthly increase in four months, but stood below the 50 expansion-contraction threshold for the second consecutive month, registering the second lowest reading since September 2012.
In general, the manufacturing PMI of the NBS tends to respond to ‘noise’ around the Lunar New Year holiday period. In the five years through 2014, the manufacturing PMI on average fell 0.5 bp in January and 0.9 bp in February, and then rebounded 1.5 bp in March. Thus, this February’s 0.1 bp increase, even from a depressed level, is noteworthy. The final reading for February’s manufacturing PMI, according to Markit, rose 1 bp to 50.7, compared to a flash reading of 50.1. China’s composite PMI pointed to a further increase in Chinese business activity in February, thereby extending the current trend to ten months. Though modest, the rate of expansion quickened to a five-month high, with the composite PMI registering 51.8 in February, up from January’s low of 51. Stronger growth of total business activity was supported by faster increases in output across both the manufacturing and services sectors in February. Manufacturing output increased at its quickest rate since last August, while growth in services activity picked up slightly since January’s six-month low. The latter was highlighted by the HSBC China Services Business Activity Index which registered 52 in February, up from 51.8 at the start of the year.
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The latest PMI data signalled that China’s services sector remained in expansionary territory in February, though the rate of growth remained modest. However, the solid rise in new orders suggests that activity growth may pick up in the months ahead, as firms continued to add to their payroll numbers amid a positive business outlook. Meanwhile, the renewed improvement in manufacturing operating conditions suggests that the Chinese economy is on a steadier growth path in February.
It seems the impact of monetary policy easing, other growth-supporting measures and the global oil price decline of the previous months have spurred a recent moderate pick-up in the Chinese economy’s growth momentum. Overall, the 2015 GDP growth forecast has remain unchanged at 7.0% y-o-y.
OPEC Member Countries
Saudi Arabia’s GDP grew 3.6% y-o-y in 2014. The economy posted growth of 6.4%, 3.7%, 2.4% and 2.0% in the four quarters of last year, respectively. Inflation rose 2.2% in January, slowing for the fourth month in a row. The unemployment rate stood at 5.7% in 4Q14. Foreign exchange reserves ended 2014 at around $718 billion. The non-oil-producing private sector in Saudi Arabia rose to a four-month high in February. The HSBC PMI posted 58.5 in February, up from 57.8 in January. The survey showed a market acceleration of total new orders, which was further supported by an increase in export business.
In Iran, GDP grew 4.6% y-o-y in 3Q14, accelerating from -2.2% and 3.8% y-o-y in the first two quarters of 2014, respectively. Gross fixed capital formation largely supported growth, increasing 26.3% in 3Q14. The economy added nearly 400,000 new jobs since March 2014, according to the Iranian Ministry of Cooperatives, Labour and Social Welfare.
Activity in the non-oil-producing sector of the United Arab Emirates continued to grow strongly in February. The HSBC PMI posted 58.1 in February, down from January’s 59.3. The survey showed slower increases in production, total new business and new orders for export. Lower fuel costs led to a slower rise in the private sector’s input costs.
In Indonesia, GDP grew 5.0% y-o-y in 4Q14, slightly higher than the 4.9% y-o-y in 3Q14. This brings growth for all of 2014 to 5% y-o-y, the slowest rate of growth since 2009’s 4.7%, on the back of a slowdown in private and public spending, and lower exports. The rupiah depreciated 8.2% in February against the US dollar. Inflation rose 6.3% y-o-y in February, the fourth month in a row of higher than 6.0% inflation. Activities in the manufacturing sector slowed further, with the PMI falling to a new low in February. Rising inflation negatively impacted demand, and production and new orders decelerated last month. Manufacturers also shed jobs for the seventh month in a row.
GDP growth in Vietnam registered 6.0% y-o-y in 4Q14. Industry and construction was the fastest growing sector by 7.1% y-o-y in the same period. For all of 2014, GDP growth now stands at 5.5% y-o-y, up from 2013’s 5.1%. In February, the country’s manufacturing sector expanded further due to faster growth in production and new business. Manufacturers increased hiring for the sixth month running. Manufacturing PMI was 51.7 February, fractionally up from the previous month’s 51.5.
Economic growth in South Africa slowed to 1.3% y-o-y in 4Q14 from 1.6% in the previous period. For the whole of 2014, GDP posted growth of 1.5% y-o-y, signalling the slowest pace of expansion since 2009. Gross fixed capital formation contracted in 2Q14 and 3Q14, while disaggregate data on 4Q14 has still not been published by South Africa’s Reserve Bank. Inflation slowed to 4.4% in January, its smallest increase since April 2011.
The non-oil private sector in Egypt showed further signs of weakness in February with the PMI dropping to a 17-month low of 46.8. This suggests a solid deterioration in operating conditions last month, with output and new orders falling at faster paces. The private sector shed jobs at its sharpest rate since September 2013, while currency depreciation led to intensifying cost pressures. The Egyptian pound lost 4.8% m-o-m of its value against the US dollar last month, the sharpest depreciation since January 2013. Inflation grew 9.4% y-o-y.
Inflation in Argentina increased 20.9% y-o-y in January as the peso depreciated 21.1% y-o-y in the same month. In February, the currency depreciation slowed to 10.6% y-o-y. In 3Q14, a drop in exports, investment and private consumption led to a 0.8% y-o-y shrinking of GDP growth. Gross fixed capital formation decreased by 4.7% and private consumption fell by 1.4%.
In February 2015, the central bank of Chile left the main interest rate on hold at 3%, signalling concerns about inflationary pressures and slow growth. Inflation increased 4.4% y-o-y in February.
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Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15
Inflation in the Czech Republic barely increased 0.1% y-o-y in February, while the currency slightly depreciated by 1.3% m-o-m in the same period. The country’s unemployment rate stood at a seasonally-adjusted rate of 5.8% in 4Q14. The manufacturing sector continued its overall strong performance last month with the index at 55.6, despite being lower than the 56.1 registered a month earlier. The survey showed a solid rise in new orders and production, though at lower rates than January. Input cost and output prices decreased in January and February 2015.
In Poland, GDP grew 2.8% y-o-y in 4Q14, bringing the entire year’s growth to 3.3%, which was notably higher than 2013’s 1.7%. Operating conditions in the manufacturing sector posted further improvements last month with the manufacturing index at 55.1, close to the 55.2 registered in January. The survey revealed the second-best rate of hiring in the survey’s history.
Oil prices, US dollar and inflation
Currency markets continue to experience volatility, influenced mainly by the monetary decisions of various central banks, but also impacted by some real economic and political developments. In particular, the sharp decline of the euro versus the US dollar at the beginning of March was an important recent development. Also, the considerable rise of the Swiss franc compared to the euro, and the generally strong appreciation of the US dollar over the past weeks have highlighted the impact that unconventional monetary policies are having. With the quantitative easing measures by the ECB, a continued expansionary policy in Japan, the potential of monetary tightening in the US and monetary decisions targeting growth in major emerging economies, the volatility in currency markets should be expected to continue.
In terms of numbers, the sharp rise of the US dollar versus all its major currency counterparts came to a halt with mixed results on average in February. The US dollar gained 2.2% compared to the euro, but was about flat compared to the yen. It fell 1.2% versus the pound sterling, but lost only 0.6% compared to the Swiss franc. The appreciating trend versus the euro continued in March. While, on average, the exchange rate to the euro stood at $1.1346/€ in February, it reached around $1.06/€ in March. The Russian ruble continued declining versus the US dollar in February, but at a more moderate rate of 4.8%. Also, the Brazilian real continued depreciating by 6.9%, on average, in February.
OPEC Monthly Oil Market Report – March 2015 37
Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15
In nominal terms, the price of the OPEC Reference Basket (ORB) rose by a monthly average of $9.68/b, or 21.8%, from $44.38/b in January to $54.06/b in February. In real terms, after accounting for inflation and currency fluctuations, the ORB rose by 23.1%, or $6.83/b, to $36.44/b from $29.61/b (base June 2001=100). Over the same period, the US dollar gained 0.9% against the import-weighted modified Geneva I + US dollar basket*, while inflation fell by 0.2%.
* The ‘modified Geneva I+US$ basket’ includes the euro, the Japanese yen, the US dollar, the pound sterling and the Swiss franc, weighted according to the merchandise imports of OPEC Member Countries from the countries in the basket.
38 OPEC Monthly Oil Market Report – March 2015
World Oil Demand
World oil demand grew by 0.96 mb/d in 2014, broadly unchanged from the previous month’s report, to average 91.2 mb/d, despite some minor adjustments. In 2015, world oil demand is anticipated to rise by 1.17mb/d to average 92.37 mb/d, also in line with the previous month’s report. The bulk of growth is projected to originate from non-OECD, as most of the OECD countries are anticipated to show a contraction.
World oil demand in 2014 and 2015
The latest US monthly data for December 2014 shows substantial increases in oil demand growth y-o-y, amounting to almost 0.6 mb/d, the strongest monthly growth since December 2013. Almost all main products rose with the bulk of increases seen in gasoline, distillate/residual fuel oil and jet fuel oil, while propane/propylene requirements were once more on the decline. The main oil demand drivers in the US in the last three months of 2014 were increasing gasoline, distillate/residual fuel and jet fuel oil requirements as a result of a growing economy, higher industrial production activities and lower pump prices, which led to increasing mileage.
The year 2014 ended with oil demand growing for the second consecutive year, with gasoline, distillates and jet fuel oil carrying the bulk of these increases. Preliminary weekly data for January and February 2015 implies a continuation of the healthy growth seen during 4Q14.
For 2015, oil demand growth in the US will very much depend on the development of its economy. Potential is pointing to the upside as a result of the picture seen during 2H14. Driven mainly by economic growth, 2015 US oil demand is projected to grow by approximately 0.2 mb/d over 2014’s recorded volumes. Similar to 2014, 2015 oil
OPEC Monthly Oil Market Report – March 2015 39
World Oil Demand
demand in the US will depend on the level of substitution between natural gas and other fossil fuels, the severity of the winter season and the overall pace of growth in the US economy.
The weakening Mexican oil demand trend seen in 2014 continued also into 2015, with January 2015 oil requirements being negative. Oil demand fell by almost 0.04 mb/d or 2% compared with the same month in 2014. All products registered drops of different magnitudes, with the exception of jet fuel, which was slightly positive. Similar to the trend in 2014, residual fuel oil registered declines, falling by more than 15%, mainly as a result of substitution with natural gas. Mexican oil demand slipped by around 0.1 mb/d in 2014, however, the picture is expected to improve in 2015 towards a reduced decline of 0.01 mb/d y-o-y.
In Canada, December 2014 oil demand fell by approximately 0.1 mb/d, or more than 4% y-o-y. All main product categories witnessed increases, which were, however, more than offset by declining demand for LPG. Canadian oil demand contracted slightly in 2014 by 0.02 mb/d. LPG and jet fuel declines have been partly offset by gains in the demand of other petroleum products, particularly gasoline and gasoil/diesel. 2015 Canadian oil demand is projected to increase slightly with the risks remaining unchanged since last month.
In 2014, OECD Americas oil demand increased by 0.10 mb/d, while oil demand during 2015 will grow by another 0.20 mb/d compared with 2014 oil demand levels.
The latest preliminary January 2015 data for the European Big 4 oil consuming countries shows a slightly increasing trend y-o-y. Losses in requirements for fuel oil and gasoline were more than offset by gains in demand for jet fuel/kerosene and LPG.
In general, the year 2014 ended showing a contraction for the whole region by around 0.19 mb/d, with the bulk of losses occurring in the first half of the year and with some signals for improvement thereafter. Nevertheless, caution is required for projections as 2015 still includes, to a large extent, low baseline effects from previous years. Undoubtedly, the current stabilizing oil demand contraction figures are in line with leading indicators, such as increasing industrial production and rising car sales. In fact, passenger car sales grew in January 2015 by almost 7% y-o-y for the biggest part of the region and for the seventh consecutive month. However, expectations for 2015 oil demand in the region remain unchanged since last month with potential towards the upside as the economy seems to be improving for most countries and as a result of the low historical baseline. Nevertheless, there are some significant downside risks that are directly related to the further development of the region’s economy during 2015.
In 2014, OECD Europe oil demand shrank by 0.19 mb/d, and oil demand is expected to decrease again during 2015, dropping by 0.10 mb/d compared with 2014.
In Japan, January 2015 y-o-y oil demand decreases were once more mostly in direct fuel and crude burning for electricity generation as a result of fuel substitution and warmer weather. Moreover, demand for gasoline and naphtha shrank further y-o-y, in line with drops in car registrations and a weakening economy. Decreases were partly offset by rising LPG and gasoil/diesel demand, which both grew by 2%. These developments led to an overall decrease of around 0.31 mb/d in Japanese oil demand for the month of January 2015, compared with the same month last year. As far as the outlook for 2015 Japanese oil demand is concerned, current indications remain roughly unchanged from last month’s forecasts, with the risks being skewed more towards the downside. Oil demand projections for 2015 are based also on the assumption that a couple of nuclear plants will re-join operation during the first half of the year.
In South Korea, January 2015 demand increased by 0.1 mb/d or almost 5% y-o-y with almost all the main product categories being on the rise, particularly gasoil/diesel, gasoline, naphtha and LPG. Hence, the bulk of increases concerned transportation fuels and feedstock for the petrochemical industry. On the other hand, and similar to previous months and the overall 2014 picture, residual fuel oil was lower by 4% y-o-y, mainly due to slower marine bunkering activities and less consumption for power generation as a result of warmer weather. 2015 oil demand growth in South Korea is expected to improve slightly from the levels seen in 2014 by around 0.03 mb/d.
OECD Asia-Pacific oil demand declined in 2014 by around 0.18 mb/d, resulting mainly from less Japanese direct crude/fuel oil burning for electricity generation and a weakening economy. For 2015, demand is projected to fall by 0.12 mb/d.
India’s oil consumption started 2015 on a positive note. Oil demand in January showed strong growth of 0.11 mb/d or 2.7% y-o-y, reaching total consumption of 4.03 mb/d, supported by strong demand for gasoline and diesel. Indian gasoline demand also rose in January, maintaining December’s healthy growth levels of above 50 tb/d. Gasoline demand grew by 69 tb/d or around 18% y-o-y in January, in spite of India’s government raising fuel taxes four times since November from 24% to 31% by almost $20/b, at a time of deteriorating oil prices. Demand growth for the product continues to grow at a steady pace.
Similarly, Indian diesel consumption continued its growth trend for the third consecutive month, higher by 51 tb/d or more than 3% y-o-y, reaching total consumption of 1.56 mb/d, despite consumption taxes increasing from 17% to 23%, to now stand around $17/b since November. Total consumption of LPG exceeded 0.57 mb/d, higher by 50 tb/d or 9% y-o-y. Total oil demand in India is anticipated to grow by around 94 tb/d or 2-3% in 2015, mainly as a result of better economic conditions in the country, promoting steady growth for gasoline and diesel of around 6% and 3%, respectively.
Taiwan’s oil consumption declined during the month of December 2014, while demand for products registered a decline of 53 tb/d from the levels seen in December 2013, equating to a negative 5% y-o-y. Total demand consumption for the country stood at 1.0 mb/d. The decline in oil consumption can mainly be attributed to slower overall economic momentum in the country as the purchasing managers’ index (PMI) was just at the threshold level of 50 points, above the contraction level. The 4Q14 PMI recorded the slowest reading in 2014.
In Indonesia, despite the positive total consumption growth level for the month of December 2014, with an increase of 40tb/d or around 3% y-o-y, gasoil/diesel consumption in the country demonstrated slower growth than in previous months, mainly as result of subsidy reduction taking advantage of lower oil prices. Cumulative data for the whole of 2014 indicates that oil consumption was higher than 2013 levels by 27 tb/d or just below 2% y-o-y.
Looking forward, the risks for 2015 Other Asia oil demand growth are expected to be balanced with a slight positive effect from India as more data seems to suggest stable- to-improving economic activity in the country. Transportation fuels are anticipated to be the main contributors to growth. In other parts of the region, subsidies on transportation fuels and the degree of their reduction may influence oil demand growth, however the current lower international prices should moderate the impact.
Other Asia oil demand is anticipated to grow by 0.21 mb/d in 2014. As for 2015, oil demand is forecast to be 0.25 mb/d higher than in 2014.
In Brazil, oil demand was strong going into January 2015, despite waning macroeconomic data. Oil demand recorded growth of around 0.13 mb/d y-o-y, with total consumption at 2.44 mb/d. Growth was led by gasoline, diesel and fuel oil. Gasoline demand was higher by 55 tb/d, or more than 7.6% y-o-y. Ethanol consumption was also on the rise by more than 30 tb/d or 13% y-o-y. Diesel demand continued to be strong, with total consumption of 0.96 mb/d in January, higher by 33 tb/d or more than 3% y-o-y. Diesel demand potential appeared despite slower industrial production in the country as an increase in consumption was linked to drought conditions, prompting additional demand from power generators and other sources. Fuel oil demand rose by
OPEC Monthly Oil Market Report – March 2015 43
World Oil Demand
9 tb/d or by more than 10% y-o-y to reach total consumption of 99 tb/d in January. Similar to diesel, fuel oil consumption was on the rise as persisting drought conditions in the parts of the country encouraged additional use of fuel oil to compensate for hydro-electrical power reduction.
Oil consumption in Argentina declined in December 2014 as well as on a cumulative basis for the whole of 2014, declining by around 3% and 1%, respectively. All transportation fuels were down during December with diesel declining by more than 14 tb/d or 6% y-o-y. Vehicle sales dropped by as much as 36% in 2014 to 614,000 units with the outlook remaining bearish for the sector going into 2015 as the expiration of the government’s subsidized car-purchasing scheme largely impacted sales growth.
Looking forward, the risks for 2015 currently point downward as economic activity in Brazil is anticipated to slow and government spending on projects is reduced. On the other hand, the presence of lower oil prices in addition to the expectation of the hotter summer season in the country should keep demand for power generation above average.
Latin American oil demand is anticipated to grow in 2014 by 0.20 mb/d. During 2015, oil demand growth is forecast to be in line with the levels seen in 2014.
In 2015, Middle East oil consumption is expected to continue growing at a steady pace, increasing by 0.28 mb/d from 2014 levels. Most of this growth is expected to come from Saudi Arabia with a forecast increase of 0.15 mb/d, more than half of the region’s expected growth.
The country’s growth rate for the month of January 2015 was at around 90 tb/d or 5% y-o-y, mainly due to fuel oil consumption in the country, which was higher y-o-y, possibly as a result of the product’s use as a burning fuel for power generation in the newly introduced refineries. However, demand for power generation usually slows down going into the winter season as consumption requirements for air conditioning usage is reduced. As a result, consumption for direct crude burning decreased sharply, dropping by more than 90 tb/d or 25% y-o-y. Nevertheless, yearly data for 2014 indicates better-than-expected growth in the country with an increase of more than 0.2 mb/d or 9% y-o-y. Most products were on the rise as the country continued to grow economically and demographically.
Other countries in the region showed mixed performances. While oil demand in Iraq declined in 2014 y-o-y, consumption in UAE, Kuwait and Qatar was on the rise. Going forward, Middle East oil demand is subject to the performance of various economies in the region, and the impact of lower oil prices on their spending plans will be an important factor to monitor.
Change Change, %
210 214 785 730 136 134 960 926
99 90 254 224
-4 -1.8 55 7.5 2 1.3 33 3.6 9 10.1 30 13.2
Total 2,444 2,319 125 5.4
44 OPEC Monthly Oil Market Report – March 2015
In 2014, Middle East oil demand growth was at around 0.25 mb/d, while oil demand in 2015 is projected to grow by 0.28 mb/d.
Saudi Arabia Iran, I.R. Kuwait UAE Others
China’s oil demand growth eased in January 2015 from the high growth levels seen in 4Q14. Demand growth for the country registered at around 0.2 mb/d compared with the same month a year earlier. In absolute figures, total oil demand for the country stood at 10.4 mb/d. Products, on the other hand, have been on the rise on a y-o-y basis, with LPG and gasoline leading the gains with more than 0.1 mb/d of growth y-o-y. It is worth mentioning that due to the Lunar New Year holidays and delays of data publication, the analysis was based on preliminary data
Gasoline growth was relatively modest when compared to monthly growth figures for the past 11 months. Gasoline demand growth was supported by the Lunar New Year holidays, which resulted in additional driving as well as increased car sales. In January, passenger cars provided good momentum to drive overall growth, with sales of passenger cars increasing to above 2 million units, more than 10% higher compared to the same period of last year, according to statistics and analysis of China Association of Automobile Manufacturers (CAAM). Sales of both types of vehicles, SUV and MPV,
OPEC Monthly Oil Market Report – March 2015 45
Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13
Jul 13 Aug 13 Sep 13
Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14
Jul 14 Aug 14 Sep 14
Oct 14 Nov 14 Dec 14 Jan 15
World Oil Demand
increased during the month by more than 51% and 17% y-o-y, respectively. Gasoline demand, in absolute terms, reached 2.32 mb/d in January 2015.
Furthermore, LPG demand grew by more than 0.11 mb/d or 12% y-o-y, which could be attributed to the country’s growing petrochemical sector, while preliminary data for gasoil showed a slowdown in consumption with a decline in growth of around 20 tb/d, mainly as the Lunar New Year holidays deferred operations in different sectors such as the mining and construction sectors. Consumption of fuel oil was largely waning as initial data seemed to suggest a decrease in growth of around 0.1 mb/d y-o-y. Weakened industrial activity and reduced teapot refinery margins seem to be the largest contributors to this slowdown.
The 2015 outlook is currently balanced in terms of potential and risks. The downside risks are focused on a possible easing in economic conditions in addition to policies supporting a reduction in transportation fuel consumption. On the other hand, the healthy petrochemical sector and expansion projects in the refinery sectors provide upside potential for China’s oil demand growth.
For 2014, Chinese oil demand is anticipated to grow by 0.40 mb/d, while oil demand in 2015 is projected to increase by 0.31 mb/d.
World Oil Supply
World Oil Supply
Non-OPEC oil supply is estimated to have averaged 56.33mb/d in 2014, achieving the highest growth rate since the emergence of the tight crude and unconventional NGLS output in the US and up by 2.04 mb/d y-o-y, as well as 0.10 mb/d over the previous Monthly Oil Market Report (MOMR). Growth in 4Q14 was mostly driven by around 290 tb/d in extra barrels from the US, Canada, Norway, Malaysia and China as well as upward revisions in other quarters, in general. Non-OPEC oil supply for 2015 is projected to average 57.16 mb/d, representing growth of 0.85 mb/d – mostly in 1H15 – unchanged compared with the previous assessment amid several upward and downward revisions. Output for the non-OPEC marginal barrel this year, particularly for US tight oil and Canadian oil sands output, will become more evident in the coming months, following ongoing declines in rig counts as well as cuts in capital expenditures by international oil companies.
OPEC’s natural gas liquids (NGLs) production is estimated to grow by 0.18 mb/d to average 5.83 mb/d in 2014 and 0.19 mb/d to average 6.02 mb/d in 2015. In February, OPEC crude production decreased by 0.14 mb/d to average 30.02 mb/d according to secondary sources. As a result, preliminary data indicates that global oil supply decreased by 0.06 mb/d in February to average 93.57 mb/d.
Estimate for 2014
Non-OPEC oil supply is estimated to have averaged 56.33 mb/d in 2014, an increase of 2.04 mb/d over 2013 and indicative of an upward revision in absolute supply volume of 0.10 mb/d from the previous MOMR. Moreover, 2012 and 2013 were also revised up, by 30 tb/d and 40 tb/d, respectively. Non-OPEC oil supply in 2014 encountered upward revisions in all four quarters by 11 tb/d, 29 tb/d, 34 tb/d and around 290 tb/d, respectively. Updated production data for 4Q14 from the US, Canada, Norway, Malaysia, Thailand and China led to this adjustment, as well as revisions in the other three quarters of 2014, as well as for 2013 and even 2012. These were primarily related to updates from Thailand. The only downward revision from 1Q14 to 3Q14 came out of Brazil.
Non-OPEC supply in 2014 saw its highest growth since 2007, the start of the tight crude and unconventional NGLS boom in North America, led by growing figures for tight crude and unconventional NGLs in the US, along with remarkable oil sands production in Canada. Strong growth was seen in OECD Americas and Latin America, as well as the former Soviet Union (FSU), Africa, China and the Asia Pacific region, while other regions showed declines. OECD Americas’ oil supply growth is estimated at 1.70 mb/d in 2014, while declines of 0.05 mb/d in Other Asia represented the largest contraction. Both growth and contraction in output were registered in North America, with the US at 1.61 mb/d and Mexico at -90 tb/d. Declines in the other regions were driven mainly by political, technical and weather-related factors. Disruptions in 2014 mainly affected output from Mexico, Syria, Colombia, Indonesia, the UK and the Sudans.
According to preliminary and estimated data, total non-OPEC supply in 4Q14 increased by 2.04 mb/d over the same period a year earlier. During 2H14, non-OPEC supply increased by 2.14 mb/d compared with the same period in the previous year.
On a quarterly basis, non-OPEC supply in 2014 is estimated at 55.62mb/d, 55.95 mb/d, 56.26 mb/d and 57.41 mb/d, respectively.
Total OECD oil supply for 2014 is estimated to have grown by 1.75 mb/d to average 23.97 mb/d, indicating an upward revision of 0.03 mb/d from the previous MOMR. Output in 4Q14 reached 24.68 mb/d, with an increase of 1.72 mb/d compared with the same quarter in 2013. The upward revision came from OECD Americas and OECD Europe, while OECD Asia Pacific remained unchanged compared with the previous MOMR.
On a quarterly basis, total OECD supply is estimated to average 23.38mb/d, 23.80 mb/d, 24.01 mb/d and 24.68 mb/d, respectively.
OPEC Monthly Oil Market Report – March 2015 49
World Oil Supply
OECD Americas’ oil supply is estimated to average 19.86 mb/d, showing growth of 1.70 mb/d compared with growth of 1.39 mb/d a year earlier. The US and Canada both saw remarkable growth in oil supply of 1.60 mb/d and 0.20 mb/d, respectively, in 2014, while that of Mexico is estimated to have declined by 90 tb/d.
On a quarterly basis, OECD America’s oil supply for 2014 is estimated to average 19.12 mb/d, 19.77 mb/d, 20.08 mb/d and 20.46 mb/d, respectively.
Total US oil supply – including the latest actual production data for December – is estimated to have increased by 1.60mb/d to average 12.83mb/d across 2014, representing an upward revision of 20 tb/d from the previous monthly report. Across 2014, crude output grew by 1.22 mb/d and NGLs by 0.36 mb/d. US total liquids output in December increased by 0.28 mb/d compared with November (crude output was higher by 187 tb/d), including conventional crude oil and NGLs, tight crude and unconventional NGLs. Finally, biofuel and other unconventional oil averaged 13.64 mb/d. Most of the m-o-m increase came from crude output, which rose to 9.23 mb/d, a record high, while NGL output recovered m-o-m to 3.12 mb/d. Unsurprisingly, crude output growth was not impacted by falling prices as hedging and commitments to drilling and lease contracts meant drilling continued.
Crude output rose to 9.22 mb/d in December for the first time since March 1986, higher y-o-y by 1.37 mb/d, due to the continuation of tight crude production. Production from the Gulf of Mexico (GoM) increased by 68 tb/d over November output to average 1.44 mb/d. Crude oil output increased by 39 tb/d and 49 tb/d in North Dakota and Texas in December to average 1.23 mb/d and 3.45 mb/d, respectively.
On a quarterly basis, US oil supply is estimated to stand at 11.95 mb/d, 12.79 mb/d, 13.12 mb/d and 13.45 mb/d, respectively.
Canada and Mexico
Canada’s oil supply registered growth of 0.20 mb/d in 2014 to average 4.23 mb/d, an upward revision of 20 tb/d compared with the previous month. Preliminary data places December Canadian oil production lower by 90 tb/d m-o-m at 4.34 mb/d. Nevertheless, output is higher by 100 tb/d in 4Q14 compared with 3Q14, indicating the earlier-than- expected return of the 0.11 mb/d Kearl project, and the initial start-up of the Foster Creek expansion with a capacity of 30 tb/d. However, Syncrude’s production fell by 40 tb/d m-o-m to 0.24 mb/d, due to an outage in a sour water treater.
On a quarterly basis, Canada’s 2014 supply is estimated to average 4.30 mb/d, 4.14 mb/d, 4.19 mb/d and 4.29 mb/d, respectively.
Mexico’s oil supply reached an average of 2.80 mb/d in 2014, showing a decline of 90 tb/d, unchanged from the previous month’s estimation.
Total OECD Europe’s oil supply, which declined by 0.20 mb/d to average 3.58 mb/d in 2013, increased by 20 tb/d in 2014 from the previous year to average 3.59 mb/d, revised up by 10 tb/d from the previous MOMR. Output growth was revised up in Norway, the UK and Other OECD Europe, though it remained unchanged in Denmark.
Updated OECD Europe oil supply figures indicate quarterly supply of 3.75 mb/d, 3.51 mb/d, 3.40 mb/d and 3.72 mb/d, respectively.
Updated oil supply data for Norway in 4Q14 led to an increase in growth by 10 tb/d to 60 tb/d compared with the previous MOMR, but average output remained unchanged at 1.89 mb/d.
On a quarterly basis, Norway’s production was seen to average 1.96 mb/d, 1.79 mb/d, 1.86 mb/d and 1.97 mb/d, respectively. The only change took place in 4Q14, which is 20 tb/d higher, compared with the previous MOMR.
The UK’s oil supply was registered at an average of 0.86 mb/d, representing a decline of 10 tb/d in 2014, y-o-y, though this figure was revised up by 10 tb/d from the previous MOMR. Total UK production in 2014 consisted of 0.78 mb/d of crude oil and 0.06 mb/d of NGLs.
On a quarterly basis, UK oil output in 2014 is estimated to average 0.97 mb/d, 0.90 mb/d, 0.71 mb/d and 0.87 mb/d, respectively. Only 4Q14 saw a change; it was 30 tb/d higher than the previous MOMR.
Total developing countries’ (DCs’) oil output reached 12.35 mb/d in 2014, indicating an increase of 0.20 mb/d, revised up by 30 tb/d from the previous MOMR. Growth in 2014 is expected after a significant decline was seen in 2013, due mainly to political, technical and weather-related factors. According to preliminary data, supply averaged 12.61 mb/d in 4Q14, up by 0.15 mb/d from the same period a year earlier.
On a quarterly basis, total oil supply in DCs is estimated to average 12.21 mb/d, 12.22 mb/d, 12.35 mb/d and 12.61 mb/d, respectively.
Other Asia’s oil production is estimated to have seen a decrease of 50 tb/d in 2014 to average 3.56 mb/d, representing an upward revision in growth of 20 tb/d from the previous MOMR. Other Asia’s supply was revised up for all quarters of 2014, due to an update in Thailand’s oil output, which was partly carried over to 2015.
On a quarterly basis, Other Asia’s supply in 2014 is estimated to average 3.56 mb/d, 3.55 mb/d, 3.50 mb/d and 3.64 mb/d, respectively.
Thailand’s production – based on new data – was revised up in 2012, 2013 and 2014 to 0.38 mb/d, 0.39 mb/d and 0.38 mb/d, respectively.
Malaysia’s supply is projected to have experienced an increase of 20 tb/d in 2014 to average 0.69 mb/d, constituting an upward revision of 10 tb/d from the earlier MOMR. This is due to strong production in 4Q14, particularly from the Gumusut-Kakap floating production platform offshore Malaysia. The platform is expected to reach peak production of 135 tb/d once it is fully ramped up. Work on gas injection facilities continues, with startup expected next year. Gumusut-Kakap is expected to contribute as much as 25% of the country’s oil production.
Latin America’s oil supply is estimated to have grown by 0.24 mb/d to average 5.03 mb/d in 2014, unchanged from the previous MOMR. Latin America is another main driver of growth among non-OPEC regions. Brazil and Latin America Others contributed to growth in 2014, while output from Colombia is likely to experience a decline of 20 tb/d in 2014 to average 1.01 mb/d.
On a quarterly basis, Latin America’s supply in 2014 is expected to stand at 4.86 mb/d, 4.92 mb/d, 5.10 mb/d and 5.23 mb/d, respectively.
52 OPEC Monthly Oil Market Report – March 2015
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15
FSU, other regions
FSU’s oil supply in 2014 is estimated to grow by 20 tb/d to average 13.43 mb/d, unchanged from the past MOMR.
Russia’s oil supply in 2014 also didn’t change over the month, remaining at 10.58 mb/d with growth of 70 tb/d.
Forecast for 2015
Non-OPEC oil supply is forecast to grow by 0.85 mb/d in 2015 to average 57.16 mb/d, unchanged from the previous MOMR. Various upward and downward revisions applied to nearly all quarters in 2014 were in part carried over into 2015. Non-OPEC supply growth in 2015 is expected to experience increases in all quarters on a y-o-y basis, but at a slower pace. The main factors behind a lower growth prediction in this monthly report are still low oil price expectations, a declining number of active rigs in North America, a decrease in drilling permits in the US and reductions in IOCs’ 2015 capex.
An important indication of uncertainty in the production growth outlook for the coming months is the number of active rigs around the world, particularly in regions with unconventional sources in which the oil production breakeven point is estimated much higher than current oil prices. According to the latest Baker Hughes report, the US rig count declined by 335 rigs over four weeks in February to 1,348 rigs, picking up the pace from the 199 rigs taken out of service the previous month. This is the 13th consecutive week of total decline and the lowest reading since the week ending 31 December 2009, according to the latest Baker Hughes survey.
Preliminary data for the first quarter of 2015 indicates that non-OPEC supply increased by 170 tb/d q-o-q to average 57.58 mb/d, a figure upwardly revised from the previous MOMR. This was mostly driven by upward changes in 4Q14 for OECD countries such as the US, Canada and Norway, as well as Malaysia, Thailand, Colombia, Yemen, Russia and China, and partially offset by downward revisions for FSU Others, the Sudans, Latin America Others, Norway and Mexico.
On a regional basis, OECD Americas is expected to have the highest growth by 0.86 mb/d, followed by Latin America, China, Other Asia and OECD Asia Pacific, while FSU, OECD Europe and the Middle East are seen to decline. Growth is expected to come mainly from the US, Brazil, Canada, China and Malaysia, while oil supply from Mexico, Colombia, Russia, Azerbaijan, Yemen, and the UK witnessed the biggest declines. The risks and uncertainties associated with the supply forecast due to the oil price drop remain high on both sides, especially for the US, Canada, Russia, Norway and the UK.
On a quarterly basis, Non-OPEC supply in 2015 is expected to average 57.58 mb/d, 57.18 mb/d, 56.89 mb/d and 57.02 mb/d, respectively.
OECD Americas’ oil supply is predicted to average 20.73 mb/d in 2015, showing growth of 0.86 mb/d compared with growth last year at 1.60 mb/d. The US and Canada are both expected to experience remarkable growth in oil supply of 0.82 mb/d and 0.14 mb/d, respectively, while that of Mexico is estimated to decline by 100 tb/d.
On a quarterly basis, OECD America’s oil supply in 2015 is estimated to average 20.66 mb/d, 20.70 mb/d, 20.71 mb/d and 20.82 mb/d, respectively.
US oil production is anticipated to average 13.65 mb/d in 2015, indicating slower growth by 0.82 mb/d, y-o-y. This is unchanged from the previous month’s prediction, as lower global oil prices compared to past years could impact marginal barrel output from unconventional sources such as tight crude and unconventional NGLs.
Tight crude producers are aware that typical oil wells in shale plays decline 60% annually, and that losses can only be recouped by drilling new wells. As drilling
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subsides due to high costs and a potentially sustained low oil price, a drop in production can be expected to follow, possibly by late 2015. In January, many uncontracted rigs were dropped by producers, given accelerated price declines. NGL output is more vulnerable than crude; rigs are being moved from wet gas plays to dry gas areas. As more rigs move to the core of the plays, crude and NGL output is likely to diverge in the near term. For instance, the Oneok company halted work on three NGL processing plants in the Bakken and Scoop plays.
According to the latest Baker Hughes report, the US rig count declined by 335 rigs during four weeks in February to 1,348 rigs, picking up the pace from the 199 rigs which were taken out of service the preceding month. This is the 13th consecutive week of total decline and the lowest reading since the week ending 31 December 2009, according to the latest survey from Baker Hughes. Two hundred and thirty-seven oil rigs have been idled until now, leaving 986 active rigs on 27 February, the lowest number of oil rigs in use since June 2011 and down 37% from 26 November 2014.
Active rigs in Texas declined by 174 in February to 599, also down by 99 rigs in January. The number of active rigs in Oklahoma, North Dakota, Louisiana and New Mexico dropped in February by 36, 34, 1 and 22 rigs, respectively. In February, the
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number of horizontal wells drilled in the US declined by 222 to 946 rigs, indicating a larger decline than the drop of 168 rigs one month earlier. In the meantime, oil output increased by 1.6%, while the WTI oil price rebounded by 7.7% from a low of $45.60/b.
Oil output in the Gulf of Mexico for 2015 will be supported by the start-up of the Tubular Bells and Jack/St Malo projects in 4Q14. The GoM’s output is likely to rise by 0.18-0.20 mb/d in 2015 with the Lucius project, which started up in January.
On a quarterly basis, US liquids supply in 2015 is expected to average 13.61 mb/d, 13.71 mb/d, 13.66 mb/d and 13.63 mb/d, respectively.
Canada’s oil output is forecast to average 4.37 mb/d in 2015, revised up by 20 tb/d due to a base change in 2014, a proposed increase of 0.14 mb/d over the previous year and unchanged from the previous MOMR. The 2014 revision comes on the back of higher-than-expected output figures late in 4Q14, which were carried over to 2015. Despite the upward revision for 2014 supply estimates, Canada’s oil production outlook for 2015 remains unchanged compared with the previous month’s forecast for expected conventional oil, though output from unconventional sources will be gradually affected by sustained low oil prices. Nevertheless, the seven oil sands projects listed below, with a total capacity of about 400 tb/d (peak production), are currently planned for start- up in 2015. Some small projects which are also candidates for exploitation have not been confirmed yet.
Syncrude’s production dropped by 40 tb/d in December, due to an outage at a sour water treater, but rose again by 48 tb/d m-o-m to 0.29 mb/d in January as technical problems eased. Nonetheless, January data indicates Canadian production fell by 30 tb/d m-o-m, likely attributable to inclement weather conditions which decreased output. Canadian oil sands projects exhibited significant sunken costs and came with lengthy payback periods, which should shield output from price declines. However, many companies have minimised their cash costs and some have delayed, postponed or cancelled future projects entirely. For instance, Statoil and CNRL are pushing back start-up dates at their Corner field and Kirby North oil sands facilities. Despite adding 0.40 mb/d of oil sands production from new projects in 2015, the forecast assumes 0.14 mb/d of growth for Canadian oil in the current year.
On a quarterly basis, Canada’s oil supply in 2015 is expected to average 4.36 mb/d, 4.30 mb/d, 4.34 mb/d and 4.49 mb/d, respectively
Liquids production in Mexico declined by 100 tb/d m-o-m to average 2.61 mb/d in January, the lowest level since October 1995. Crude output was lower y-o-y by 0.26 mb/d, with heavy crude output registering a y-o-y decline of 0.22 mb/d. Mexico’s oil supply is forecast to average 2.70 mb/d in 2015, showing a decline of 100 tb/d, revised down by 30 tb/d from the previous month’s estimation. All leading fields are in decline, and Pemex has not made any discoveries of note to take their place. Data for the first two months of this year pointed to a drop in crude production.
This was led by unusually low output from the KMZ field at 0.79 mb/d, lower y-o-y by 75 tb/d, likely due to maintenance. Indeed, preliminary data for February shows that KMZ output recovered to 0.87 mb/d, higher y-o-y by 3 tb/d, thus more in line with 2H14 averages. In January, Mexican crude oil production was at 2.25 mb/d, with a 10.2% annual decline. In February, the y-o-y decline was at about 7% as output rose to 2.33 mb/d. Meanwhile, output from the Cantarell field fell below 0.26 mb/d in January, with y-o-y declines above 0.1 mb/d. Preliminary output for February stood at 2.34 mb/d, lower y-o-y by 0.17 mb/d, with the majority of fields declining, except Chuc. It is expected that crude output will average 2.32 mb/d this year. Lower oil prices have forced Pemex to slash its 2015 capex by $4.2 billion, although this isn’t expected to impact crude output just yet; deepwater projects that have not already been sanctioned are likely to be delayed.
On a quarterly basis, Mexico’s supply is seen to average 2.69 mb/d, 2.69 mb/d, 2.71 mb/d and 2.70 mb/d, respectively.
Total OECD Europe’s oil supply, which increased by 0.02 mb/d to average 3.59 mb/d in 2014, is expected to decrease by 40 tb/d from the previous year to average 3.55 mb/d in 2015, revised down by 30 tb/d from the previous MOMR. Output from the region is expected to continue on an upward trend in 1Q15. OECD Europe’s 4Q14 was revised up by 50 tb/d due to higher output from Norway, the UK and even Other OECD Europe, which partially carried over to 1Q15.
OECD Europe is expected to see a quarterly supply of 3.67mb/d, 3.51mb/d, 3.41 mb/d and 3.63 mb/d, respectively.
Norway’s oil supply is predicted to decline by 10 tb/d from the previous year to average 1.88 mb/d in 2015, revised down by 30 tb/d from the previous MOMR. Preliminary production figures for February 2015 indicate an average daily production of about 1.93 mb/d of oil, NGLs and condensate. This is approximately flat compared with January. Average daily liquid production in February was 1.55 mb/d of oil, 0.33 mb/d of NGLs and 0.05 mb/d of condensate. Oil production is 0.3% above that of February a year earlier.
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Statoil started up production at its Oseberg Delta 2 development in the North Sea, expecting to produce around 77 million barrels of oil equivalent from the field.
Production fell in the Brynhild, Draugen, Ekofisk and Eldfisk fields in February due to various technical problems; the Gudrun field has been shut down since 18 February due to a gas leak. Based on information from the Norwegian Petroleum Directorate (NPD), oil production is about 2% above the prognosis for the month.
On a quarterly basis, Norway’s production in 2015 is seen to average 1.94 mb/d, 1.85 mb/d, 1.80 mb/d and 1.94 mb/d, respectively.
The UK’s oil supply registered an average of 0.83 mb/d, representing a decline of 30 tb/d in 2015, y-o-y, unchanged from the previous MOMR. UK liquids output rebounded seasonally m-o-m in January to 0.95 mb/d, higher y-o-y by just 69 tb/d, despite a weak base the previous year, when Buzzard was completely shut for parts of the year due to power outages.
Muted y-o-y growth was likely due to high underlying declines and some technical problems impacting output the previous month, including at the Buzzard field. Meanwhile, output at the 20 tb/d Huntington field remained restricted at just 1,500 b/d
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until end-February, due to problems at the CATS riser platform, which occurred in mid- December.
Notwithstanding steady output in the near term, the outlook for UK production remains bleak. Spending on new North Sea projects by the majors is expected to plunge by a third this year, due to lower oil prices, rising operating costs and a heavy tax burden. Output from the Buzzard field is also expected to decline this year, which will weigh on UK production.
On a quarterly basis, UK oil output in 2015 is forecast to average 0.87 mb/d, 0.81 mb/d, 0.77 mb/d and 0.87 mb/d, respectively.
Latin America’s oil supply is predicted to grow by 0.06 mb/d to average 5.09 mb/d in 2015, unchanged from the preceding MOMR. Nevertheless, the oil supply in Argentina and Latin America Others has been revised down by 10tb/d and 20tb/d, respectively. On the other hand, proposed production from Colombia and Trinidad and Tobago has been revised up by 20 tb/d and 10 tb/d, respectively. Colombian oil output is expected to decline by 70 tb/d due capex reductions by operators; higher output was seen in January over December. The forecast for Brazil’s output growth of 0.15 mb/d remains unchanged. Latin America is another main driver for growth among non-OPEC regions in 2015.
On a quarterly basis, Latin America’s supply in 2015 is expected to stand at 5.21 mb/d, 5.11 mb/d, 5.08 mb/d and 4.97 mb/d, respectively.
Liquids production in Brazil eased m-o-m to 3.15 mb/d in January, but was higher y-o-y by 0.43 mb/d. According to Petrobras, y-o-y added volumes were led by higher output from wells in the Lula and Sapinhoá fields of the Santos Basin and the P-52 and P-62 platforms of the Roncador field in the Campos basin. Production from pre-salt reservoirs also hit a record high of 0.67 mb/d. Petrobras will be increasing maintenance this year in order to improve efficiency, which will impact 50 tb/d of output, 20 tb/d more than in 2014.
Overall, output across 1H15 is expected to continue to benefit from the ramp up of projects that started in 2014, and which are likely to be stronger y-o-y given a weaker base.
FSU, other regions
Oil production in the FSU is expected to decline in 2015 by 0.13 mb/d, including 60 tb/d in Russia, 20 tb/d in Kazakhstan, 40 tb/d in Azerbaijan and 10 tb/d in FSU Others, mainly Turkmenistan. Kazakhstan’s January production declined m-o-m by 65 tb/d to 1.63 mb/d.
Tengiz output was lower by 50 tb/d, despite aims to keep it stable, much like in 2014. Kashagan is unlikely to start up until 2017, and the Tengiz expansion has been delayed to 2021. In Azerbaijan, January output was pegged at 0.87 mb/d, higher m-o-m by 30 tb/d. The ramp up of the central Azeri platform after maintenance in late November supported output.
FSU total output in 2015 on a quarterly basis is predicted to be 13.50mb/d, 13.32 mb/d, 13.21 mb/d and 13.17 mb/d, respectively.
Oil production in Russia is expected to decline by 60 tb/d in 2015 to average 10.51 mb/d, given the impact of sanctions, low prices and a lack of large projects expected to come online, making declines from Western Siberian assets more apparent. Nevertheless, the production outlook for the coming months is uncertain. Russia’s February oil output fell m-o-m by 60 tb/d to 10.65 mb/d from an upwardly revised January total, with y-o-y growth at 80 tb/d. The delayed start-up of Exxon’s Arkutun-Dagi field in early January provided a boost, but it is expected to decline later in the year.