Overview of the macro environment
World economy: Moderating growth
The global economy went through a transition period from a strong bounce-back phase seen in the first half of 2010 to a less rapid but apparently more sustainable growth path in the second half of the year. The main driving force behind the overall recovery was the continuing strong performance of leading emerging economies, which increasingly relied on domestic consumption for their growth. At the same time, the recovery of advanced economies remained slower, although the US and Japan performed significantly better than previously expected due to additional stimulus measures. The main source of weaknesses within the advanced economies group was the troubled periphery of the Eurozone. The Greek debt crisis in Q2 caused severe market turbulence and prompted the EU to set up an unprecedented EUR 440 bn bailout fund to contain the fallout from future crises, which prevented a more widespread spillover from the periphery to the core of the Eurozone in case of the Irish bailout later in Q4. Nevertheless, the risk of future liquidity crises and bailouts within the Eurozone remains high, and volatility in exchange rate movements is likely to continue. Another downside risk to the global recovery is the combination of low interest rates in advanced economies and stellar growth in emerging ones, resulting in massive capital inflows which are fueling inflation and may create bubbles and destabilize growth in developing economies. Overall, the IMF estimates that global economic growth will somewhat moderate from 5.0% in 2010 to 4.4% in 2011 due to the necessary fiscal consolidation in most advanced economies.
Oil markets: Significant price increase underscored by rapid demand growth
Oil prices strengthened significantly during 2010 and averaged at 79.5 USD/bbl, nearly 29% higher than a year ago. The price increase was more or less gradual with only two significant corrections seen in May and August. The first temporary reversal was caused by a shift in market sentiment following the Eurozone debt crisis, and the second by more general concerns about the outlook for global growth in light of an apparent slowdown in China. Nevertheless, the overall growing trend was fully justified by the annual 2.8 mn bbl/day demand growth in 2010 from the previous year, which is one of the strongest such figure in decades. Other fundamentals were also increasingly bullish throughout 2010. OPEC’s effective spare capacity slowly eroded to below 5 mn bbl/day by Q4 2010, while OECD industry stocks hovered around 59 days of forward demand cover throughout the year compared to above 60 days figures in most of 2009. The fact that the growing trend in oil prices continued in spite of the diminishing quota compliance of OPEC, which dropped to around 58% by December from around 63% a year ago signals the slow return to a tighter oil market similar to the one seen in the pre-crisis years.
Refining margins: Slowly improving crack spreads
Refining margins remained below the 5-year average in 2010. The healthy rate of recovery pushed up product demand in emerging economies and to a lesser extent in OECD Europe and North America as well, which resulted in stronger product crack spreads across the board in 2010 than in the previous year. Nevertheless, persistently high inventory levels as well as ample spare refining capacities worldwide combined with the slow pace of closing uncompetitive refineries limited the strengthening of crack spreads. Overall, naphtha and gasoline spreads exceeded their 5-year averages, but followed a mildly declining trend, while diesel and jet fuel crack spreads remained below their historical levels, but followed a slowly strengthening trend throughout the year. This may indicate a slow return to the pre-crisis environment characterized by an ever tightening market for middle-distillate products. The historically negative fuel oil crack spread remained stronger than the 5-year average in 2010, but it started to inch continuously towards pre-crisis lows from the second half of the year.
The Brent-Urals spread recovered somewhat to around 1.4 USD/bbl in 2010 from below 1 USD/bbl in 2009, but followed a relatively volatile pattern throughout the year. It soared to above 3 USD/bbl by Q2 due to a longer-than-usual refinery maintenance season which mostly took out conversion capacities resulting in a fuel oil overhang and a depreciation of the fuel-oil heavy Urals type. The Brent-Urals differential briefly fell below zero USD/bbl in Q3 following a series of simultaneous supply shocks affecting Urals, but returned to around 2 USD/bbl by the end of Q4 as fuel oil crack spreads started to weaken, thereby reducing the value of the heavier Urals relative to Brent.
CEE economy: Two-speed recovery continued
The CEE region’s recovery progressed at two-speeds during most of 2010 with Poland, Slovakia and the Czech Republic performing strongly, while Hungary, Croatia and Romania, among others, continued to lag behind. The recovery throughout the region is still mostly driven by the manufacturing boom in Germany rather than by domestic demand, which is depressed by stubbornly-high unemployment rates and continuously weak credit growth. Economic growth will face headwinds as most countries in the region will carry out some degree of fiscal consolidation throughout 2011. The foremost downside risk to the CEE region’s recovery remains the continuing sovereign stress in the Eurozone. However, the impact of a deepening Eurozone debt crisis on most CEE economies would be manageable as long as it remains confined to the euro area’s periphery, while the region’s main export markets remain relatively intact in the core of the currency union.
CEE fuel demand: Poland and diesel saves the day
The motor fuel demand drop across the CEE region remained modest in 2010 with gasoline decreasing by a notable 4.9% but diesel growing by 1.9% resulting in and overall fuel demand drop of only 0.1%. This was due to the continuing strong performance of the Polish economy, without which CEE diesel demand would have also been in the negative and the overall motor fuel demand drop much more significant. To lesser extents, Austria and Slovakia also contributed positively to the CEE diesel demand increase thanks to their favorable excise duties on diesel.
Hungarian economy: Slow recovery with uncertainties
The Hungarian economy recorded a modest 1.2% growth in 2010, according to the preliminary data of KSH. The slow recovery was mainly driven by a strong export performance, while domestic demand contributed little as both retail sales and credit growth remains weak and unemployment still high. The market perception of the new government’s economic policy has so far been mixed as the general direction towards deficit reduction and a more competitive tax regime helped to maintain confidence at sufficient levels, but several measures increased perceived uncertainty regarding the regulatory and tax regime at the same time.
Hungarian demand: Delayed demand drop hit in 2010
Hungarian motor fuel demand suffered a hard hit in 2010 as the effects of the economic recession translated into depressed demand in a delayed manner resulting in a 12.7% fall in gasoline, a 6.7% drop in diesel and 8.7% decline in motor fuel demand in 2010. The delayed drop came as the gradually strengthening forint (together with an excise tax increase in January 2010) canceled out the positive effects of fuel tourism on demand seen during most of 2009, and as loan repayments of households (household deleveraging) put a dent on private consumption first and on fuel demand only later.
Slovak economy: Sharp recovery with an expected moderation
The Slovak economy experienced a sharp V-shaped recovery on the back of the German manufacturing boom during 2010 and, as a result, both industrial production and exports returned to their pre-crisis levels by H2 2010. Slovak GDP grew by 4.0% in 2010, according to the Slovak Statistical Office. The government’s announced fiscal consolidation package - designed to bring down the budget deficit to below 3% of GDP from the current unsustainable level of around 8% of GDP - represents a short-term headwind for growth. A slowdown in the core economies of the Eurozone also poses a near-term downside risk to the relatively healthy outlook, given Slovakia’s high dependence on exports and the continuously weak domestic consumption in the country.
Slovakia fuel demand: Outstanding growth
Motor fuel demand recorded a very healthy 15.4% growth in Slovakia during 2010 with gasoline consumption increasing by 1.5% and diesel demand growing by a spectacular 22.4% y-o-y. This significant increase was fuelled mainly by the strong industry-driven rebound of the Slovakian economy, but a significant 23.5% reduction of the diesel excise tax as well as the low basis of 2009 (when fuel demand suffered a particularly hard hit in Slovakia) added further to the bullish figures.
Croatian economy: Slow return to recovery
The recovery is proceeding very slowly in Croatia as the economy returned to a sluggish growth only in H2 2010 while industrial production growth remained in negative territory and unemployment continued to rise during most of the year. The main causes of the poor performance are still tight credit conditions coupled with weak labor markets at home, which are constraining domestic demand, as well as a relatively weak rebound in Italy, Croatia’s main export market, compared to the record-breaking recovery seen in Germany, the key market for most other CEE countries. The preliminary figures of the Statistical Office indicate that Croatia’s GDP contracted by 1.4% in 2010 and it is expected to expand by a modest 2.0% in 2011, according to the EBRD.
Croatian demand: Declining consumption amid the weak recovery
The motor fuel demand in Croatia dropped by 5.4% in 2010 with both gasoline (-4.3%) and diesel (-5.9%) consumption contracting significantly amid the continuing economic slump, rising unemployment and weak private consumption. Without the positive effect of the relatively strong tourist season, gasoline demand would have been even more disappointing.