As strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain. Setting aside both the deeply troubling social impact for Greek citizens and other major forces – from Chinese equities to an Iranian nuclear deal – the threat of Greece leaving the Euro is already dampening crude prices. The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar.

Greece herself consumes less than 0.4% of global crude, produces fewer than 9,000 barrels per day and had an economy of $240bn last year – around 0.3% of the global total. An exit from the Euro, however, threatens the breakup of the Eurozone itself, a major global economy and consumer of 9.7 million barrels of oil per day. Should Greece ‘walk away’ from her debts, exposure to the debt in other member states, coupled with premiums for borrowing (particularly in Southern Europe) could be expected to usher in another period of recession. Estimates from the IMF suggest a contraction of between 2% and 5% is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360 kboe/d per year in consumption. Tiny indeed, but in an over-supplied market, every portion of demand is important.

Ever-deeper uncertainty within Eurozone economies however, is likely to increase the flight of capital to dollar-based equities, The Euro has already fallen 18% against the dollar in the past 12 months and a Greek exit would likely dampen this significantly as investors look nervously at other debt-laden Euro members. A strong dollar weakens international oil demand as the commodity, traded in USD, is more expensive on a relative basis.

If ‘Grexit’ becomes a reality it will serve to further dampen the recovery in oil price – It will be interesting to see the impact of the weekend’s ‘In-Out’ meetings in Athens and Brussels on oil prices in the week ahead.

NYC-based PIRA Energy Group believes that crude stock draws have already begun and will pick up momentum in the third quarter. In the U.S., crude and products stocks showed builds. In Japan, crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Wage gains in developed world to drive faster second half global economic growth with Greece risks muted by potential aggressive ECB/Fed action if needed. The worst of oil market imbalance is over with inventory overhang being much less than generally expected. Crude stock draws have already begun and will pick up momentum in the third quarter. Longer-term supply/demand fundamentals are bullish. The United States is becoming a big factor in the NGL market. MENA geopolitical risks to supply remain substantial, and while an Iranian nuclear deal looks more likely than not, oil markets are expected to have to wait until 2016 for more Iranian oil, and by that time it will need it.

Robust U.S. Stock Build

Commercial stocks built this past week, as both crude and products showed builds. This reversed eight consecutive weeks of crude stock draws, but we expect the crude draws to continue next week. Total demand growth remains strong, including gasoline and distillate. We think the April and current weekly reported crude production values are too high, most likely driven by an overstatement of Texas production.

Japanese Crude and Finished Product Stocks Draw

Crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Major product demand performance was much stronger, up nearly 0.5 MMB/D. All the major finished product stocks levels declined. The indicative refining margin remains very good, though softer on the week as all the major cracks gave ground.

Freight Market Outlook

Tanker markets have been counter-seasonally strong in all size groups during May and June. OPEC and Saudi crude production are near record levels, while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Unintended floating storage has also provided support as international markets are struggling with surplus barrels. As a containment step while seeking a buyer, these unplaced cargoes are being slowed down while in-transit or delayed upon arrival resulting in substantial opportunity and demurrage costs well in excess of current contango credits. The recent surge in rates is not likely to persist unless floating storage expands further, which is unlikely in PIRA’s view.

U.S. NGL Field Production Soars

U.S. NGL field production has been increasing at accelerating rates. New data from the EIA show that at 3,314 MB/D, April total NGL field production was nearly 14% higher than a year ago. Year-on-year production increases have been running between 13-15% for each month of this year thus far. PIRA had expected to see field production increases begin to abate due to lower drilling and investment activities; however, this has yet to occur in any meaningful way.

Ethanol Prices Increased

Ethanol prices strengthened during the last half of June as stocks drew and the production of blended gasoline hit record levels. Assessments were also supported by rising raw material costs.

U.S. Output and Stocks Lower

U.S. ethanol production dropped to a six-week low 968 MB/D the week ending June 26 as heavy rain and flooding disrupted operations at some Midwestern plants. Inventories have plummeted by nearly 1.2 million barrels over the past two weeks as ethanol-blended gasoline production soared to a near-record 9,106 MB/D last week.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Petrobras has long been a pioneer in the adoption and deployment of deepwater technology. This has enabled them to build huge reserves of some 16 billion barrels of oil. Converting these reserves to production, however, is another matter and Petrobras has a history of setting ambitious targets, with a poor record of meeting them.

The long delayed ‘2015-2019 Business and Management Plan’ released last week is a reflection of the new reality for Petrobras. With collapsed oil prices and unfavorable exchange rates, Petrobras has slashed their expenditure plans by 40% from the plans announced a year ago. Recognizing the upstream challenges, the company is now allocating 84% of its budget to E&P compared to 70% in the previous plan. The biggest cut goes to their refining and supply sector which has seen its budget reduced by 67% compared to last year’s plan.

Production decline from existing fields is a huge challenge with around 200,000 bpd of capacity eroded each year. Brazil’s huge deepwater potential remains constrained with Petrobras having to revise their production target for 2020, which now forecasts domestic oil output to increase to 2.8 million barrels per day – 40% lower than its projection 12 months ago. Douglas-Westwood predicts that over the forecast period, Brazil will need to drill around 300 development wells in deepwater, in order to sustain and reach its production target. However, of the 29 new rigs being built by the company, many are under threat from either funding problems or yards withdrawing from the contracts. Douglas-Westwood had already taken a conservative position on Brazil and the cut in production target now brings in line Petrobras’ expectations and our own ‘DW D&P’ forecast. The scale and importance of Brazil in the overall offshore sector means that the impact of the latest spending revisions will be felt throughout the oilfield service industry supply-chain.

Mark Adeosun, Douglas-Westwood London, This email address is being protected from spambots. You need JavaScript enabled to view it.