HIGHLIGHTS. 9 July 1998

Transcription

1 9 July 1998 HIGHLIGHTS C C C The rebalancing of world oil supply and demand has three aspects; a reversal of daily overproduction, absorption of excess oil already in the supply chain, and finally, a reduction of the exceedingly high level of onshore stocks. OECD industry stocks surged to record levels at the end of May, topping 2.6 billion barrels for the first time. However, the 2 mb/d average stockbuild in the first two months of the second quarter still is less than the difference between world supply and demand for the quarter, leaving additional barrels to be absorbed in the third, and possibly fourth, quarters. Production cuts agreed at the 24 June OPEC meeting to supplement those from a 30 March meeting were larger than expected, at mb/d, and are now intended to be maintained for a full year. But market reaction has been muted by scepticism. Following a dip to the lowest level in twelve years, crude oil prices rallied before the meeting, partly for technical reasons. But they receded in its aftermath, settling into a narrow range near levels that had precipitated the mid-march Riyadh agreement. C Weak apparent demand in the former Soviet Union and lower-than-expected Japanese deliveries to the power generation sector have led to a 220 kb/d downward adjustment to global demand in 2Q98. Partly due to this demand weakness, the quarter-to-quarter increase in global demand in 3Q98 is projected to be unusually large. The projected 1.1 mb/d increase in demand in 1998 remains significantly below last year s incremental demand of 2.1 mb/d. C C Net FSU exports in June averaged 3.1 mb/d, the highest in the post-soviet period. The Russian Government is determined to collect taxes, leaving cash-strapped oil companies to turn to high exports for hard currencies. Distillate markets continued to weaken on both sides of the Atlantic amid rapidly-shrinking free storage capacity. In Asia, weakness was evident in all major product markets, forcing refiners to cut throughputs. Refining margins improved in the US and Europe, while slipping in Singapore. Refinery maintenance activity in Japan and Europe caused OECD crude throughputs to decrease in May by 790 kb/d, to 34.4 mb/d. This nonetheless was 2.2% or 725 kb/d higher than last May.

2 CONTENTS HIGHLIGHTS... 1 A THREE-PART PROCESS... 3 DEMAND... 4 Summary... 4 OECD... 6 Demand in May in the G7 Countries... 6 OECD Demand in 1Q OECD Demand in 2Q OECD Demand in 3Q98 and Non-OECD Demand Trends in Leading Non-OECD Oil-Consuming Countries Former Soviet Union Apparent Demand in May Mexican Demand in May Brazilian Demand in April Indian Demand in April Korean Demand in May Chinese Apparent Demand in April Chinese Trade in April Non-OECD Demand SUPPLY Summary More OPEC Production Cuts OECD North America North Sea Pacific OPEC Former Soviet Union (FSU) Production Net Exports Other Non-OPEC OECD TRADE OECD STOCKS Industry Stock Changes in May Preliminary Stock Levels at the End of May OIL PRICES AND REFINERY ACTIVITY Summary Spot Crude Oil Prices CIF Crude Import Costs Spot Product Prices in June Europe Americas Asia-Pacific End-User Product Prices Refining Margins in June Refining Margins in 2Q Refinery Crude Throughputs in May Refinery Maintenance Shutdowns Downstream Industry Developments TABLES... 45

3 SPECIAL FEATURE A THREE-PART PROCESS Three things need to happen to bring the oil market back into balance. First, the excess daily flows must disappear. Second, the oil now slowly making its way to the market must be absorbed. Third, the enormous inventories accumulated by consuming countries must be run down. Recently announced production cuts substantially address the first problem. Third quarter figures (at the right of the table below) suggest that world demand will outstrip supply by 560 kb/d. That would be enough to run off only 60 mb of the observed 150 mb excess built up in onshore storage since the beginning of the year. Late-arriving barrels from first half overproduction (the 200 mb missing barrels left over from the first and second quarters) could swamp even that limited potential onshore stockdraw. Absorbing the oil slowly on its way to market could prove as difficult as stanching the daily flow of overproduction. There is evidence that some of this crude may already be showing up: one week in late June, a record 10 mb/d of crude arrived in the US. Assuming normal sailing times and allowing for increasingly prevalent slow-steaming, the onslaught of water-borne crude oil produced in the second quarter will hit the market this quarter. World Oil Supply/Demand for 2Q98 and 3Q98 p e April May June 3Q98 Current 9 June Revision Current 9 June Revision Level Change* Level Change* World Demand OECD Non-OECD World Supply Non-OPEC OPEC NGLs OPEC Crude Expected Stock Change Observed Stock Change OECD Industry Stk Chg e OECD Government Stk Chg e e Oil-in-Transit/Floating Storage Imbalance * month-to-month changes, except for 3Q98 e estimated p preliminary For reasons discussed in the Demand section, third quarter demand is projected to increase by a robust 1.7 mb/d from second quarter levels. Non-OPEC supply is now projected to fall slightly as a result of further non-opec Amsterdam cuts (see Supply section, page 19). OPEC production including some small increases from Iraq, would be 1.66 mb/d lower than in the second quarter if the Riyadh and Amsterdam agreements were fully implemented. Even if just one-third of the missing barrels showed up, inventories would increase further this quarter. Such a delay in reducing the onshore inventory overhang would reenforce the scepticism that is currently dominating market psychology (see Prices and Refining Activity section page 32). With fewer of the missing barrels arriving, the fourth quarter runoff of inventories could rise to over 2 mb/d. Under normal weather conditions, the quarter-to-quarter demand increase of nearly 3 mb/d would far exceed projected non-opec supply gains of 1.2 mb/d related to seasonal increases, the end of summer maintenance and new fields. Iraq is a major wild card. Although supply-enhancing equipment would only boost Iraqi exports modestly by the fourth quarter (as would full lifting of sanctions), lack of progress on the ending of sanctions could precipitate a confrontation resulting in an immediate shut-off of Iraqi exports. The one-year duration of the two production cut agreements suggests that time is on the side of market rebalancing. This is certainly true for stock draw, probably true as concerns weather effects and could also be true if an Asian oil demand recovery begins next year. Moreover, non-opec supply growth could be restrained next year by the lower company cash flow in Working against the rebalancing is the prospect that Iraqi output will grow rapidly over the first half of next year and the historical fragility of production agreements. 9 JULY

4 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT DEMAND Summary C Due to weak apparent demand in the FSU and lower-than-expected Japanese deliveries to the power generation sector, the projection of global demand in 2Q98 has been adjusted downwards by 220 kb/d to 72.8 mb/d. Weak Korean demand data for May conformed with expectations, but an upturn in Indian deliveries in April was greater than anticipated, possibly indicating that the recent downward trend in deliveries due to high gasoil stocks has ceased. Although Chinese apparent demand increased significantly in April by more than what is thought to be underlying consumption, the projection of Chinese demand in the remaining part of the quarter has been adjusted to leave quarterly demand unchanged, on the assumption of a imminent reversal in the inventory behaviour. On a year-on-year basis, the growth in global demand in 2Q98 is expected to have slowed to 0.7% from 1.7% in the first quarter, partly reflecting unusual secondary and tertiary stockbuild in 1Q98, which is likely to have led to weak deliveries in the second quarter, the period in which the post-heating season stockbuilding would normally have taken place. Global Demand in 1997 and 1998 Demand Annual Change * Changes from last month s Report (mb/d) (%) (mb/d) (mb/d) 1Q % 0.7-2Q % 2.4-3Q % 2.7-4Q % % 2.1-1Q % 1.3-2Q % Q % Q % % * year-on-year change (mb/d) C C Global demand in 3Q98 has been downgraded by 50 kb/d as minor downward adjustments to Other Asian demand and an anticipation of lower Japanese oil demand have more than offset an assumption of stronger US gasoline deliveries. The adjustment of US demand is based on most recent US gasoline data and it recognises that the underlying factors supportive of gasoline consumption (such as disposable income and retail prices) will remain favourable for longer than previously expected. A similar-sized, but offsetting adjustment has been made to Japanese demand, as a result of a downgrading of prospects for oil deliveries to the Japanese power generation sector. This revision is consistent with recent delivery data and is based on the assumption that the increased baseload capacity from nuclear and hydro sources will be used during the summer months, with current water levels sufficiently high to support output from these two sources. The demand projection for 1998 has also been revised downwards, by 70 kb/d to 74.9 mb/d, due to a deterioration in apparent demand in the FSU in 2Q98 and the downgrading of Japanese oil demand prospects for the rest of the year. These adjustments are only partly offset by an upward revision to US deliveries. Global demand is now projected to increase by 1.1 mb/d or 1.5%, significantly below incremental demand of 2.1 mb/d in JULY 1998

5 DEMAND Summary of Global Oil Demand Q96 2Q96 3Q96 4Q Q97 2Q97 3Q97 4Q Q98 2Q98 3Q98 4Q Demand (mb/d) North America Europe Pacific Total OECD FSU Europe China Other Asia Latin America Middle East Africa Total Non-OECD World Annual Change (% per annum) North America 0.2% 3.6% 2.2% 1.6% 3.3% 2.7% -0.2% 3.1% 3.8% 1.7% 2.1% 0.8% 1.8% 1.7% 2.3% 1.6% Europe 2.2% 2.1% -0.3% 3.9% 1.0% 1.7% -1.8% 4.0% 0.4% 1.2% 0.9% 3.9% -1.4% 1.4% 1.6% 1.4% Pacific 1.3% 1.3% 0.5% -0.5% 0.1% 0.4% -0.8% -0.9% 1.6% -2.1% -0.6% -3.4% -3.2% -1.8% 0.3% -2.0% Total OECD 1.1% 2.7% 1.1% 2.0% 1.9% 1.9% -0.8% 2.8% 2.3% 0.9% 1.3% 1.1% -0.1% 1.1% 1.7% 1.0% FSU -2.1% -9.9% -7.0% -7.7%-13.3% -9.6% -6.4% 4.8% 7.7% 7.2% 3.1% 6.6% -4.2% -2.9% 3.0% 0.6% Europe 2.1% 6.2% 5.9% 5.2% 5.2% 5.7% 4.8% 4.8% 4.8% 5.1% 4.9% 3.2% 3.2% 3.2% 3.2% 3.2% China 8.7% 14.9% 10.7% 0.6% 6.4% 7.9% 11.6% 3.9% 12.7% 12.3% 10.1% 6.0% 10.0% 8.0% 7.0% 7.7% Other Asia 8.8% 7.9% 6.1% 8.1% 8.0% 7.6% 6.2% 6.2% 7.7% 7.0% 6.8% -4.3% -1.0% -0.4% 0.5% -1.3% Latin America 0.9% 1.5% 5.4% 6.0% 5.5% 4.6% 3.3% 4.7% 4.7% 4.5% 4.3% 4.6% 3.2% 3.3% 3.6% 3.7% Middle East 1.5% 1.7% 2.3% 1.9% 0.1% 1.5% 0.4% -0.3% 0.5% 4.9% 1.3% 7.8% 3.0% 2.9% 3.6% 4.3% Africa 4.2% -2.0% 6.3% 1.9% 2.6% 2.2% 5.3% 2.1% 2.4% 1.8% 2.9% 2.4% 2.8% 2.7% 2.7% 2.6% Total Non-OECD 3.6% 2.6% 3.9% 2.8% 2.3% 2.9% 3.5% 4.1% 6.1% 6.4% 5.0% 2.6% 1.7% 1.9% 3.0% 2.3% World 2.1% 2.7% 2.3% 2.4% 2.1% 2.3% 1.0% 3.4% 3.9% 3.2% 2.9% 1.7% 0.7% 1.4% 2.3% 1.5% Annual Change (mb/d) North America Europe Pacific Total OECD FSU Europe China Other Asia Latin America Middle East Africa Total Non-OECD World Changes from Last Month's Report North America Europe Pacific Total OECD FSU Europe China Other Asia Latin America Middle East Africa Total Non-OECD World JULY

6 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT OECD 1 Demand in May in the G7 Countries OECD demand was weak in May as a result of the worsening economic situation in Japan, exacerbated by mild weather and fewer working days than last year. Inland deliveries of oil products declined by 0.3 mb/d in the seven largest oil-consuming countries of the OECD. The marked decline in Japan was also due to a continuing fall in oil deliveries to the power generation sector at the expense of other sources. Canadian deliveries declined for the first time in six months, reflecting weak residual fuel oil deliveries, in stark contrast to recent strong demand from the generation sector to compensate for nuclear closures. US deliveries increased by 0.22 mb/d, led by a significant increase in residual fuel and heating oil deliveries as wholesalers and end consumers increased stocks in response to low prices. In Europe, German deliveries of heating oil were particularly weak, as a result of an unusually strong consumer stockbuild in the first quarter. Conversely, the absence of a first quarter heating oil stockbuild in France contributed to a large increase in deliveries in May, encouraged by prevailing low prices. Despite the attraction of low residual fuel oil prices in the Mediterranean, fuel oil purchases by the Italian utility ENEL fell following strong deliveries earlier in the year. For the second successive month, gasoline and diesel deliveries in the UK dropped, suggesting an impact on consumption of recent excise tax increases, in addition to working day effects. Preliminary Inland Deliveries - May Gasoline Jet/Kerosene Diesel Other Gasoil RFO 2 Other Total Products mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa mb/d % pa 3 USA Canada Japan France Germany Italy UK European Four Total sources: US EIA, Japan MITI, France CPDP, Germany MWV, UK PIA, Italy Ministry of Industry, Statistics Canada 1 excludes refinery fuel and bunkers (except US) 2 includes direct use of crude oil 3 fifty states only. Diesel is estimated from preliminary indications of low sulphur gasoil deliveries percentage change is calculated versus May 1997 On a twelve-month moving average basis, G7 demand to May has increased by a combined 328 kb/d or 0.9%. The annual decline this May has contributed to a marginal weakening of the overall growth trend and has diluted the trend of strong demand for transport products and weak deliveries for heating and generation purposes. Even so, gasoline deliveries still increased by the greatest amount, led by robust growth in North America, which has more than offset sluggish European deliveries. Percentage growth has remained highest for naphtha deliveries, led by a strong upturn in German and US petrochemical feedstock requirements. G7 demand for heating and fuel oil has declined, consistent with a mild heating season and continuing substitution in the Japanese power generation sector. However, Canadian fuel oil deliveries increased significantly in the last year to compensate for nuclear closures. Overall oil demand has declined in only two countries: in Japan, due to fuel substitution and financial difficulties, and in the UK, where motor fuel retail price increases have dampened demand and the use of Orimulsion ceased in early Moving Annual Average Change in Oil Demand (12-Month Moving Average to May 1998) LPG Naphtha Gasoline Jet/Kero Diesel Other Gasoil RFO Other Total kb/d US 2.4% 14.8% 2.1% 0.9% 4.5% -3.6% -3.2% 1.0% 1.7% 312 Canada 8.9% -4.3% 3.5% 1.5% 0.2% 0.4% 14.0% 3.5% 3.8% 72 Japan -1.7% -1.4% 2.5% -0.3% -2.5% -1.5% -0.7% -12.5% -2.0% -115 France 2.5% -0.5% -1.7% 4.8% 4.9% -4.5% -3.5% 23.3% 1.9% 37 Germany -5.0% 18.9% 0.2% 3.6% 1.0% -4.3% -6.7% -0.2% 0.6% 19 Italy 2.3% 1.0% 0.6% 3.0% 11.0% -9.4% 1.6% 12.6% 2.5% 46 UK -1.5% 8.6% -1.9% 4.1% 2.4% -2.4% -26.2% -3.3% -2.3% -43 European Four -0.4% 9.5% -0.6% 4.0% 4.5% -4.8% -5.1% 6.7% 0.7% 59 Total 1.7% 5.0% 1.7% 1.2% 3.2% -3.5% -2.4% -0.2% 0.9% 328 kb/d excluding some Member countries, see note on back cover 6 9 JULY 1998

7 DEMAND OECD Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The very modest increase in US gasoline deliveries appears at odds with recent estimates of increased disposable income. Although estimates for the first quarter have now been revised downwards to 3.8% to reflect greater personal tax payments and even after accounting for trading day effects, the 0.4% increase is much below the recent trend. Retail prices increased from April levels, following the normal seasonal pattern, but gasoline prices were 14.5% lower than a year earlier (see table on page 9). The decline in diesel deliveries contrasts with an expectation of increased underlying consumption based on economic growth and a reported increase in agricultural land under cultivation. The increase in heating oil deliveries was inconsistent with mild weather after colder-than-normal weather last May (see graph on page 11). It probably indicates an earlier wholesaler and consumer stockbuild than last year. Weak jet/kerosene deliveries reflect particularly strong deliveries last year; economic and aviation indicators this May suggest that consumption increased from the commercial aviation sector. 8.6 US Gasoline Demand 5.0 New York RFO & Gas Prices January June $/mmbtu Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan95 Jul95 Jan96 Jul96 Jan97 Jul97 Jan98 Jun98 RFO 1% Sulphur Natural Gas Gas/RFO Differential The third successive month of year-on-year increases in residual fuel oil deliveries occurred despite the dampening effect of mild weather on industrial consumption and on overall electricity demand. However, consumption by utilities is thought to have increased due to fuel switching in response to lower fuel oil prices relative to natural gas. Fuel oil prices in New York were at a $0.56/mmBtu or 22% discount to natural gas in mid-may compared with a $0.16/mmBtu discount in May 1997 (see graph above right). 9 JULY

8 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT US Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec European Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Japanese Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 8 9 JULY 1998

9 DEMAND Other product deliveries increased by less than the trend, which has been notably strong thanks to increased naphtha demand over the last twelve months. Low weather-related demand for LPG may have been partly responsible for the limited other product deliveries but the preliminary estimate of other products is still considered to be sensitive to upward revision. The increase in other product deliveries reported by the Energy Information Administration (EIA) is significantly less than an estimated 1.7% increase shown by the American Petroleum Institute (API). The two bodies estimates of total oil deliveries in May are unusually similar, with the large difference in the estimates of other product and residual fuel oil deliveries tending to offset each other. Details are shown in the table on the right. Comparison Between Estimates of Annual US Oil Demand Growth in May 1998 EIA API EIA-API kb/d Gasoline 0.4% 0.2% 15 Jet/Kerosene -1.5% -3.4% 29 Diesel na -2.1% na Other Gasoil na 15.0% na Total Gasoil 1.9% 2.8% -29 Residual Fuel Oil 14.7% 23.2% -62 Other 0.9% 1.7% 66 Total 1.2% 1.1% 19 EIA=US Department of Energy, Energy Information Administration API=American Petroleum Institute Following a marked first quarter stockbuild of heating oil, a sharp year-on-year decline in German heating oil deliveries in April was followed in May by a further 110 kb/d or 18% year-on-year decline. The fall was consistent with ample consumer stocks and a mild end to the heating season. By the end of May, German consumer stocks were some 22 million barrels greater than a year earlier, as consumers brought forward purchases. German naphtha deliveries increased markedly, by 50 kb/d or almost 20%, for the second successive month, reflecting an upturn in petrochemical feedstock demand. Gasoline deliveries increased by more than the trend, possibly reflecting the impact of lower end-user prices and increased incomes on passenger car use. In contrast to Germany, and for the second successive month, French deliveries of heating oil increased as a result of a comparatively smaller stockbuild in 1Q98. Consumption is likely to have declined, however, following milder weather than last year. Gasoline deliveries declined by more than the trend despite favourable weather conditions that should have increased discretionary road travel. However, it is difficult to isolate the impact of one fewer delivery day since there is a different mix of number of Percentage Annual Change in Retail Prices in May (% per annum change in local currency) Gasoline Diesel Heating Oil RFO USA -14.5% na na na Canada -6.9% -5.2% 0.0% na Japan 2-7.8% -2.5% -10.9% 2.7% France -1.3% -3.0% -11.3% -6.9% Germany -4.9% -9.0% -18.1% -4.7% Italy -2.1% -3.3% -2.2% -5.0% UK 12.2% 11.1% -15.6% -4.6% Europe Four Avg. 1.0% -1.1% -11.8% -5.3% G7 Average 3-3.6% -2.0% -9.7% -3.7% 1 mid-month 2 Japanese heating oil is represented by kerosene 3 countries with missing data are excluded from the average calculations weekends and holidays from a year earlier. In contrast, diesel deliveries increased, but by less than the trend. Almost 40% of diesel in France is consumed in private passenger cars, far more than in the rest of Europe, but it is this mix between private and commercial use that makes monthly diesel delivery data very difficult to assess. In contrast to the rest of Europe, residual fuel oil deliveries increased, with purchases by EdF more than offsetting a 7.1% decline in deliveries to the industrial sector. Following strong growth in Italian residual fuel oil deliveries in 1Q98, deliveries declined in May for the second successive month, consistent with ample stocks, replenished earlier than usual this year. Although consumption of fuel oil in the Italian power generation sector has been boosted in recent months by the need to make up for a temporary shortfall in hydroelectric output due to drought, the situation reversed in May with hydro output increasing by 24% and use of hydrocarbons declining by 5.2%. In the UK, a 58 kb/d decline in combined gasoline and diesel deliveries was far below the already-weak trend and was not fully attributable to one less working day. With disposable incomes increasing, it has become evident that excise tax increases have dampened demand (see table above right). The weakness in fuel oil deliveries this May is thought to reflect continuing Italian Electricity Consumption May 1998 Year-to-Date TWh % pa TWh % pa Gross Electricity Output Thermoelectric Geothermal Hydro Electricity Imports Own Use/Losses Pumped Storage = Net Consumption Source: Ricerche Industriali de Energetiche substitution of natural gas for fuel oil in the industrial and power generation sectors. In contrast with the rest of Europe, there has been little evidence of an increased stockbuild so far this year. 9 JULY

10 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT Italian Fuel Oil Deliveries (thousand barrels per day) 900 *comprises crude oil, fuel oil, naphtha, LPG and NGLs Japanese Oil Deliveries in Electricity Generation* (thousand barrels per day) 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Japanese deliveries decreased year-on-year for the eighth successive month, reflecting a continuing decline in oil use in the power generation sector and an increasingly-apparent slowdown in economic activity. The decline in oil deliveries in May was the largest since July 1995 and was made worse by two fewer working days than a year earlier. Deliveries declined for all major products except motor gasoline, demand for which was unchanged, possibly due to lower retail prices (see table on page 9). Deliveries of crude for direct use in the power generation sector were particularly weak, declining by 53% or 130 kb/d. Although electricity demand increased marginally, consumption of crude oil and oil products declined significantly; use of all other electricity sources rose. Nuclear output increased by more than 20%, reflecting both significantly higher capacity and load factor than a year earlier. Hydro output also increased strongly in May, consistent with higher water levels. Hydrocarbon use continues to be constrained by the increased availability of other energy sources. Deliveries to the petrochemical sector declined by less than in recent months, with naphtha and LPG deliveries falling 3.3% and 1.9% or a combined 37 kb/d, consistent with lower economic activity and less export demand from the rest of Asia. Lower weather-related demand affected LPG, kerosene and heating oil deliveries. Jet fuel deliveries remained weak due to reduced Asian business travel. Japanese Electricity Generation May 1998 TWh May 98 May 97 % Change Hydro % Hydrocarbon % Nuclear % Total Utility Companies % Autoproduced % Total Output % Water Level (vs. Normal) % Nuclear Load Factor % Japanese Utilities' Position May 1998 Annual Change Stocks Stocks Deliveries Use (% pa) Open Close Coal 21.2% 40.1% 5.1% 37.1% LNG 32.2% -13.5% -4.3% 13.1% Crude 2.8% -63.9% -49.4% 0.9% NGL 0.4% -98.5% -63.1% -2.1% LPG -63.0% na -51.5% -50.0% Naphtha 3.9% % % 7.6% Residual Fuel 10.4% -41.5% -30.1% 5.6% Total Oil 4.0% -51.2% -40.4% 1.8% OECD Demand in 1Q98 Following the recent receipt of demand data from a number of smaller oil-consuming countries and revisions to other preliminary data, a more detailed analysis of OECD demand in the first quarter can be made. OECD demand was dampened by milder weather that depressed deliveries of heating fuels, although declining prices encouraged an usually large and early stockbuild of heating oil in Europe. 1Q98 OECD Oil Demand by Region 1Q97 1Q98 Annual Change Change from mb/d % Last Report North America Europe Pacific Total JULY 1998

11 DEMAND About half of the European increase was offset by a 3.7% or 240 kb/d decline in Japanese deliveries, primarily caused by a marked drop in crude oil for direct use in the power generation sector. In North America, a 2.4% or 200 kb/d increase in gasoline deliveries and a combined 140 kb/d or 5.0% increase in LPG and naphtha were partly offset by a 5.4% decline in residual fuel deliveries, consistent with lower demand by the US utilities. Total OECD demand increased most rapidly for LPG, closely followed by naphtha deliveries centred in the US and Germany. This reflects a cyclical upturn in petrochemical activity, encouraged by lower feedstock prices. Given the size and strength of the US gasoline market, OECD gasoline deliveries increased by the greatest amount, representing almost 60% of total net OECD incremental demand in the first quarter. Deliveries increased for all products except residual fuel oil, with declines in the US and the UK more than offsetting demand strength in Canada. 60% 40% Heating Degree Days in May versus Normal 10% 5% Heating Degree Days from 1 September* versus Normal * to end-may % Variation from Normal 20% 0% -20% % Variation from Normal 0% -5% -10% -15% -40% -20% -60% USA CAN FRA GER ITA UK EUR JAP -25% USA CAN FRA GER ITA UK EUR JAP /97 97/98 OECD Demand in 2Q98 In 2Q98, the seasonal drop of 1.6 mb/d in OECD demand from 1Q98 was less than the 2.0 mb/d average over the last decade; nonetheless, demand this quarter is marginally lower than a year earlier. This year s mild heating season and low prices in the first quarter encouraged an unusually early heating oil stockbuild in Europe, but they are likely to lead to a decline in demand in the second quarter. This weakness has been amplified by lower-than-expected crude oil deliveries to the Japanese power generation sector in May coinciding with a general economic slowdown in Japan. The main area of demand growth is the US, where continuing strong growth in gasoline deliveries has been reinforced by an upturn in residual fuel oil deliveries, given a greater price discount to natural gas. Interestingly, a recent sharp increase in gasoil deliveries may reflect greater use in the power 2Q98 OECD Oil Demand by Region 2Q97 2Q98 Annual Change Change from mb/d % Last Report North America Europe Pacific Total generation sector as small single cycle turbines have been used increasingly to meet peak electricity demand. The preliminary estimate of US deliveries in June, based on an extrapolation of deliveries up to the 26th day of the month, suggest that total deliveries increased by a hefty 4.7% or 860 kb/d, led by an 11.0% or 355 kb/d increase in gasoil. Motor gasoline deliveries increased by 2.2% or 175 kb/d and contributed to a 1.2% increase in US gasoline deliveries for the quarter. In contrast to recent months, residual fuel oil deliveries declined by 4.5%, consistent with a significant narrowing of the price differential between fuel oil and natural gas compared with a year earlier (see graph on page 7). OECD Demand in 3Q98 and 1998 Given the expected demand weakness in the OECD in 2Q98, the 1.3 mb/d projected quarter-to-quarter increase in demand in 3Q98 is significantly larger than the trend experienced over the last decade. On a year-on-year basis, the projected increase is lower than the trend, reflecting particularly strong demand in 3Q97, when robust US gasoline deliveries contributed to a 2.3% increase in OECD demand. The latest 9 JULY

12 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT projection of OECD demand in 3Q98 incorporates significant, but offsetting, changes to the expectation of demand growth in the US and Japan. Based on most recent US gasoline data and the recognition that the factors supportive of gasoline consumption (such as disposable income and retail prices) will remain favourable for longer than previously expected, North American demand has been revised upwards by 130 kb/d. However, a similar-sized, but downward adjustment has been made to the projection of OECD Pacific demand, primarily reflecting a downgrading of the prospects of oil deliveries to the Japanese power generation sector. This revision is consistent with recent delivery data and is based on the assumption that the increased baseload capacity from nuclear and hydro sources will be used during the summer months, with current water levels sufficiently high to preclude any constraints on output from these two sources. (Low water levels can also restrict nuclear generation through lack of 3Q98 OECD Oil Demand by Region 3Q97 3Q98 Annual Change Change from mb/d % Last Report North America Europe Pacific Total cooling water.) Oil consumption by utilities is greatest in the summer months when high air-conditioning demand contributes to a peakload that requires the increased use of swing output from oil-based generating plant. However, with greater baseload capacity from nuclear and hydro sources, the requirement for oil this summer is likely to decline. Even if increased oil use does result, for example, due to a particularly hot summer, stocks of oil at utilities are currently sufficient to allow increased burn to be met by a stock drawdown, limiting the scope for increased deliveries. OECD demand growth in 1998 is projected to slow from the 520 kb/d increase in 1997, due to the effects of a mild heating season and the downturn in the Japanese economy. OECD oil demand in 1998 (shown in the table on page 5) is essentially unchanged from last month s Report at 42.3 mb/d, representing an annual increase of 1.0% or 410 kb/d. North America demand is assumed to increase at the greatest rate, with Pacific demand projected to decline by 130 kb/d, primarily due to an expectation of a 2.5% decline in Japanese consumption. Non-OECD 2 Demand Trends in Leading Non-OECD Oil-Consuming Countries New demand data have been received for the nine largest non-oecd oil-consuming countries/groups. Recent data from the major non-oecd consuming countries generally reflect spring seasonal declines. All but three (Korea, Indonesia and the FSU) remain above year earlier levels and, except for Mexico, were in line with 12-month moving averages.. Chinese apparent demand is assumed to have increased by 14% in April, following a steep increase in imports. The decline in Korean deliveries continued in May, although naphtha demand remained robust. In India, high gasoil stocks, which have dampened deliveries in recent months, appear to have fallen sufficiently to enable an upturn in deliveries. Although Brazilian economic growth is expected to be moderating during 1998, oil deliveries continue to increase robustly, led by strong growth in road transport fuel demand. In contrast, Mexican consumption has been weak, partly due to increased domestic prices arising from currency depreciation. Non-OECD Demand - Leading Oil-Consuming Countries mb/d Change Versus 12-Month Latest Latest Year Previous Last Previous Moving Month Month Earlier Month Year Month Average FSU May % -10.8% 4.9% China* Apr % -9.1% 11.5% Korea May % -3.1% -0.6% Mexico May % -3.5% 5.1% India Apr % -4.5% 4.8% Brazil Apr % 1.7% 6.1% Iran May % 0.5% 3.9% Saudi Arabia Mar % 5.9% 4.0% Indonesia May % -7.2% 2.7% * adjusted apparent demand, reflecting more closely underlying consumption 2 including some OECD Member countries, see note on back cover 12 9 JULY 1998

13 DEMAND Former Soviet Union Apparent Demand in May Apparent demand in the FSU in May is estimated to have decreased by 350 kb/d or 8.1% to 4.01 mb/d. The weakness in apparent demand was derived from a 220 kb/d increase in net exports exacerbated by a 130 kb/d decline in indigenous production (discussed in detail in the Supply section). It is likely that the increased exports in May impacted stocks more than underlying consumption, as oil companies maximised exports to generate foreign revenues in the wake of a deterioration in the internal economics of the FSU. It is difficult to establish, however, whether the diversion of oil to the export market created any unmet demand. Nevertheless, the economic situation has had, and will continue to have, a dampening effect on consumption, with the original expectation of an acceleration in economic growth in 1998 now severely dented. The recent ballooning of interest rates is likely to lead to a further reduction in capital investment from already low levels. Changes to the projection of FSU demand in 1998 reflect only the receipt of recent historical data (including the incorporation of preliminary trade data for June) and remain sensitive to further downward revision, despite some scope for a rebuilding of stocks in the nearterm. Oil demand in 1998 is now projected to increase by a moderate 0.6%, or 30 kb/d, to 4.5 mb/d FSU Oil Demand 4.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Mexican Demand in May Mexican oil deliveries grew by 1.2% in May to 2.04 mb/d, considerably below the 12-month growth trend. Residual fuel oil demand continued to increase at the greatest rate, but also by less than the trend. Fuel oil deliveries have been boosted by increased use in the power generation sector to meet a shortfall in hydroelectric output in western Mexico caused by unfavourable weather conditions related to El NiÁo. Demand for road transport fuels was comparatively weak in May, with gasoline deliveries declining year-on-year for the first time in six months. Large increases in the retail price of gasoline and diesel, which have occurred primarily due to exchange rate depreciation, continued in May despite the fall in international oil prices. Gasoline and diesel prices averaged 14% and 17% higher than a year earlier. LPG deliveries declined, contrary to the trend, primarily due to particularly strong demand a year Mexican Oil Demand May 98 Annual Change 12-month kb/d kb/d % pa mov.avge Gasoline % 3.1% Gasoil % 6.8% Fuel Oil % 13.7% LPG % 3.9% Other* % na Total % 5.1% * includes adjustment to calibrate monthly data to the historical series Source: Pemex earlier, although sales may also have been dampened by end-user prices 14% higher than in last May. Economic growth is expected to slow from 7.0% in 1997 to 5.3% in 1998, in part due to lower oil receipts and a planned reduction in public expenditure. The Mexican economy would benefit from greater-than-expected US economic activity although an economic deterioration in Asia could lead to capital flight from emerging markets such as Mexico. Mexican oil demand growth is projected to slow to 3.5% in 1998, averaging 2.13 mb/d for the year and representing annual incremental demand of slightly more than 70 kb/d. 9 JULY

14 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT 2.3 Mexican Oil Demand 2.1 Brazilian Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Brazilian Demand in April Brazilian oil deliveries increased in April by 6.0%, in line with growth on a 12-month moving average basis. The latest data represents the second successive month of comparatively strong demand growth following a period of weak demand that tracked a slowing economy. The most recent resurgence in demand growth appears to be based on recovery in road transport fuel demand growth. This demand strength has been somewhat offset by a downturn in residual fuel oil deliveries following particularly strong demand a year earlier when a lack of spare generating capacity required increased oil use by utilities. Annual growth in economic output from the Brazilian economy is expected to decline from 3% in 1997 to 1% in 1998 in response to the tightening of fiscal and monetary policies. These were implemented to combat downward pressure on their currency due to a reappraisal of the prospects for emerging market economies by international investors in the wake of the Brazilian Oil Demand Apr 98 Annual Change 12-month kb/d kb/d % pa mov.avge Gasoline % 9.2% Alcohol % -4.7% Naphtha % 20.7% Diesel % 7.6% Fuel Oil % 3.3% NGL/LPG % 3.4% Other* % na Total % 6.1% * Includes adjustment to calibrate monthly data to the historical series Source: Brazil Energy Asian financial difficulties. Preliminary oil demand data for May indicate that inland deliveries increased by 3.7%, with a 9% increase in gasoline deliveries somewhat dampened by weak fuel oil deliveries and a modest 1.5% increase in diesel demand. Brazilian oil demand in 1998 reflects these changing economic conditions, with growth in 1998 expected to slow to 4.9% from the 6.2% achieved in Indian Demand in April Total Indian oil demand increased by 4.8% in April, in line with the 12-month moving average. This annual increase was notably above growth rates experienced since November As mentioned in previous Reports, some of the recent demand weakness was a result of overbuying of gasoil by the Government in the earlier part of With resulting high gasoil stocks, deliveries from primary sources were cut back accordingly. It would appear that wholesaler and consumer stocks have now been sufficiently drawn down to enable a recovery in diesel deliveries in April. In contrast to a 4.0% decline in diesel deliveries in 1Q98, deliveries increased by 5.8% in April and represented more than half of total incremental demand for the month. The above-trend growth in gasoline Indian Oil Demand Apr 98 Annual Change 12-month kb/d kb/d % pa mov.avge Diesel % 4.1% Gasoline % 5.8% Fuel Oil % 2.7% LPG % 10.0% Naphtha % 14.8% Kerosene % 3.7% Other * % na Total % 4.8% * Includes adjustment to calibrate monthly data to the historical series Source: Indian Ministry of Petroleum & Natural Gas 14 9 JULY 1998

15 DEMAND deliveries was due primarily to a 3% decline in deliveries a year earlier. Naphtha deliveries declined annually for the first time since May 1996, following a period of rapid growth in petrochemical capacity. The minor decline in naphtha deliveries also reflects a 59% increase in deliveries in the previous April. Assuming the April data is evidence that Indian demand in the rest of the year will pick up from the depressed first quarter levels, Indian demand in 1998 is now projected to increase by 4.7% to 1.93 mb/d, representing annual incremental demand of about 90 kb/d. 2.0 Indian Oil Demand 3.0 Korean Oil Demand Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Korean Demand in May Korean oil deliveries declined by 10.0% or 212 kb/d in May, compared with a 15.7% contraction in the first quarter. While a proportion of the weakness in the first quarter was due to wholesalers and consumers reducing purchases and drawing down stocks in the immediate aftermath of the currency devaluation, the delivery data for May are more consistent with weak underlying consumption caused by the continuing loss of purchasing power and the restrictive macro-economic policies adopted as part of the IMF package. Fuel oil deliveries continued to decline, consistent with reduced burn in the power generation and industrial sectors. The fall in kerosene purchases reflects the impact of a milder winter and attempts by consumers to reduce stocks. The continuing decline in diesel deliveries can be regarded as an accurate indicator of economic output through the movement of manufactured goods by commercial road haulage. Naphtha deliveries increased by 14.6% in Korean Oil Demand May 98 Annual Change 12 mth kb/d kb/d % pa mov.avge Diesel % -15.0% Gasoline % 0.5% Fuel Oil % -13.3% Naphtha % 31.3% Kerosene % -16.0% Other * % na Total % -0.6% * Includes adjustment to calibrate monthly data to the historical series Source: Korean Institute for Energy Economics 1Q98 and by 23.3% in May, reflecting both the commissioning of incremental petrochemical capacity and the incentive to run the capacity at high throughput levels. Growth in May was less than the trend, however, as the maintenance schedule for the country s petrochemical plants, which is normally spread across a number of months, is this year concentrated in the second half of May and in June. The timing of the turnarounds is itself a function of the impact of the economic recession on demand. The resulting drop in output from the petrochemical sector may enable high stocks of finished product to fall. The government raised a traffic tax on gasoline and diesel by 30% in early May, but the price to the consumer appears to have remained unchanged, as the price increase has been absorbed by refiners and suppliers due to severe competition. The tax increases were first proposed in April to mitigate urban pollution by dampening the growth in traffic. GDP is reported to have declined annually by 3.8% in 1Q98 with consumption and investment falling by 9.5% and 23.0% respectively. Imports fell back by 35.5% and exports increased by 8.7%. Domestic demand is expected to contract for 1998 as a whole, reflecting reduced capital investment in response to high interest rates and reduced consumption in the wake of lower personal incomes and higher consumer 9 JULY

16 DEMAND INTERNATIONAL ENERGY AGENCY - MONTHLY OIL MARKET REPORT prices. The OECD currently projects a 0.2% decline in Korean GDP in 1998 followed by a 4% recovery in However, these projections, which were published in June 1998, remain subject to revision. Deliveries in May were slightly weaker than expected but they have not led to adjustment to the projection of deliveries for the remainder of the year. Demand in 1998 is now anticipated to decline by 8.8% or 207 kb/d to 2.16 mb/d. Chinese Apparent Demand in April Chinese apparent demand, derived solely from trade and indigenous production data, increased by 14.2% or 530 kb/d in April to 4.26 mb/d. This growth is greater than underlying consumption and can be attributable to a marked increase in imports, which is likely to have led to even further increases in already bloated stocks. The wide variation in demand growth recorded in 4Q97 and 1Q98 was believed to misrepresent annual trends in actual Chinese demand and the data subsequently were modified. The April data remain unmodified, however, with projections for the remainder of 2Q98 lowered, leaving demand for the quarter unchanged from last month s Report, at 4.19 mb/d. Oil demand growth is expected to moderate in the second half of the year, reflecting not only strong growth last year but also indications of a slowdown in economic growth partly caused a loss of export competitiveness. Current economic projections indicate the Chinese output growth may slow in 1998 to 7.2% from 8.8% in the previous year, but Chinese Apparent Demand* * adjusted from July Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan this projection remains sensitive to downward revision. Consequently, the expected to slowdown in Chinese oil demand growth in 1998, from 10.1% in 1997 to 7.7%, may also be subject to further revision. Chinese Trade in April Chinese net imports in April remained close to the 1 mb/d level for the third consecutive month, averaging 0.99 mb/d. In April, the Chinese authorities still maintained a regulated pricing system, which set the domestic oil prices much higher than the imported oil price. China National Petroleum Corporation (CNPC) is reported to have sold its crude at $18.5/bbl from January until May during a period when international oil prices were collapsing. The increasingly large gap between the price of domestic oil and imported oil led to a significant rise in imports. Chinese domestic markets are reported to have been in turmoil due both to the influx of legal imports and to smuggling. Authorities have subsequently taken successful measures to curb imports, including the crackdown on smuggling and encouraging foreign joint ventures to use domestic crude. Hong Kong s product prices are reported to have declined in May as Chinese buyers became scarce and stocks in Hong Kong increased markedly in the absence of Chinese buying. The Chinese authorities have since deregulated the crude and product prices. Under the new pricing system, introduced on 1 June, domestic crude prices now float with the price of similar types of crude available on the Singapore spot market. The Chinese Crude Oil and Product Trade kb/d Latest Month v. Apr 98 Mar 98 Apr 97 Mar 98 Apr 97 Crude Imports % 17% Crude Exports % -63% Net Crude Imports % nm Product Imports % 37% Product Exports % 48% Net Product Imports % 33% Total Imports % 25% Total Exports % -47% Total Net Imports % 170% Product Net Imports LPG % 30% Naphtha % 279% Gasoline % 18% Kerosene % 75% Diesel % 41% RFO % 28% Other Products % nm Total Products % 33% State Development Planning Commission (SDPC) retains monitoring and authorisation functions. June prices were reported to be set between $16.86/bbl for the light crude and $12.86/bbl for the heavy crude. As for product prices, CNPC and China National Petrochemical Corporation (Sinopec) now have the 16 9 JULY 1998