NYC-based PIRA Energy Group reports that Brent crude prices lost their earlier upward momentum over the last few weeks with on-going Atlantic Basin crude length. In the U.S., slight stock decline this past week further narrows stock excess. In Japan, runs drop Sharply and crude stocks surge. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices lost their earlier upward momentum over the last few weeks with on going Atlantic Basin crude length. But fundamentals are at an inflection point and will improve from here with high refinery runs this summer and sequentially declining U.S. crude production. As crude stocks erode, prices will gradually strengthen. Gasoline cracks are currently strong with declining inventories and increasing coverage requirements for local/export demand growth in the Atlantic Basin. Gasoline cracks should remain very healthy for the next few months. With high refinery production in the Atlantic Basin and new distillate-oriented refineries starting up in the Middle East, Turkey, and Latin America, middle distillate stocks will build. Diesel cracks will weaken, bottoming in July-August before seeing seasonal recovery. Recent European refinery margin strength, the best in many years, will gradually erode.

Slight U.S. Stock Decline this Past Week Further Narrows Stock Excess

The crude stock decline this past week more than offset the product inventory increase, leaving stocks slightly lower. This was the largest crude stock decline this year and it came as refiners ramped up runs to a weekly high for the year. For the same week last year, overall commercial stocks increased, resulting in the year-on-year stock excess narrowing. The bulk of this excess is in crude oil. Gasoline stocks are now just 1.8% higher than last year, and with recent demand up 4.6%, days supply forward inventory cover is a lot tighter than last year.

Japanese Crude Runs Drop Sharply, Crude Stocks Surge

Crude runs dropped sharply reflecting a major refinery fire and ongoing turnarounds. Crude imports rose and crude stocks surged 6.7 MMBbls. Finished product stocks drew 0.5 MMBbls. Gasoline demand rebounded with higher yield, and stocks posted a draw. Gasoil demand eased with a surge in yield and lower exports so stocks built. Kerosene demand was very low and the stock build rate came in at 41 MB/D, despite lower yield. The indicative refining margin remains very good.

Earthquakes in Oklahoma: Increased Costs Looming for Wastewater Disposal

The increasing frequency of earthquakes in Oklahoma is becoming a growing concern for the state’s fracking industry. While the causal link may not have been conclusively proven, regulators are already taking action to impose restrictions on the disposal of produced water. Additionally, insurance companies are denying coverage for "man-made" earthquakes, and lawsuits from parties suffering earthquake damage continue to increase in frequency. While we do not believe that production is threatened, costs are likely to rise. If shallower injection wells and lower pressures solve the problem, the cost impact will likely be minor. If water treatment is required, the costs would become meaningful, but we do not believe that is a likely case.

Propane Price Recovery Underway

U.S. NGLs prices were broadly higher last week as the plunge in propane over the past several weeks was seen as overdone. Market participants saw value at lower levels and scooped up length. Mt. Belvieu June NYMEX futures ripped 15% higher on conviction buying, with prices increasing every day of last week. Contango in the June-August propane spread has blown out to 6¢/gal, a price sufficient to make storage plays profitable in even the most expensive storage situations.

Manufacturing Margins Fell for the Third Straight Week

U.S. ethanol prices were slightly higher the week ending June 5, tracking corn values. Manufacturing margins fell for the third straight week as co-product DDG prices decreased.

U.S. D6 Values Plunge

U.S. ethanol production advanced to 992 MB/D last year matching the highest level ever reported in the DOE's weekly supply report. D6 RIN values plunged to the lowest levels in over a year.

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.

A sustained supply glut has maintained Brent oil prices through the first five months of 2015 at some 47% lower than the same period in 2014. Industry observers expect low oil prices to eventually take supply out of the market and drive a price correction.

So, when will this happen? To-date, supply appears unaffected – latest figures from the EIA indicate that US production has risen almost 13% in the last 12 months. Saudi Arabia is much the same, production has hit a record rate of 10.3 mb/d. Many of the projects committed to over the 2011-2014 period (where we saw record levels of E&P Capex) are only just starting to come into production due to the long lead-times.

Returning off-market crude has further boosted supply. Political disruption notwithstanding, Iraqi oil production has hit new highs in 2015, while recent announcements by the Ministry of Oil (MOO) show crude exports in May hit record levels for the second consecutive month. What with OPEC’s 5th June meeting reaffirming the cartel’s decision to hold crude production at 30 mb/d, it is hard to see a supply-led oil price recovery any time soon.

Oil price recovery will instead hinge on growth in energy demand and, by association, economic growth. However, in April this year the IMF reported an expectation for 2015 of ‘moderate’ growth of 3.5% with “weaker prospects for some large emerging market economies”.

According to BP’s Energy Outlook 2035, liquids demand growth to 2020 will be focused outside of Europe and North America, with China playing a large part. Total growth in oil demand is expected to be 6%, while DW’s D&P forecast indicates supply growth of 5% over the same period. It follows logically that prices will recover, but that recovery is likely to be slow and gradual.

Matt Adams, Douglas-Westwood London

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NYC-based PIRA Energy Group reports that May WTI price rises as Cushing crude stocks fall. In the U.S., commercial stocks reach another new record level, even as surplus falls. In Japan, crude runs continue dropping with higher stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

May WTI Price Rises as Cushing Crude Stocks Fall

The rebound in crude prices continued in May, with WTI averaging nearly $60/Bbl and exceeding that level on several occasions. Crude balances remained tight in Canada and West Texas, and stocks began to decline from record high levels in Cushing and the Rockies. Most price differentials were little changed, remaining near or slightly above pipeline parity, except for heavy Canadian grades, which continued to strengthen on heavy demand and late-month wildfires.

U.S. Commercial Stocks Reach Another New Record Level, Even as Surplus Falls

Total commercial stocks built a combined 7.4 million barrels this week, but still built less than this week last year, so the year-over-year surplus narrowed. Demand fell about 1.1 million barrels a day this week, reflecting a similar fall last year, most likely influenced by the Memorial Day holiday. The total commercial stock level was a new record high.

Japanese Crude Runs Continue Dropping with Higher Stocks

Crude runs dropped another 89 MB/D, with a big reduction in the crude import rate such that the crude stock build was limited to 1.6 MMBbls. Finished product stocks rose primarily due to builds in naphtha and fuel oil with a lesser rise in kerosene. Gasoline stocks built slightly and gasoil stocks drew. The indicative refining margin remains good but slightly lower on the week due to narrower light product cracks but better fuel oil cracks.

2015 Iraq Oil Monitor

Rhetoric is escalating between Baghdad and the KRG over alleged noncompliance with the export- and revenue-sharing agreement. The need for revenue is expected to drive cooperation for now, but risks to the deal are rising. The fight against ISIS does not present an imminent danger to Baghdad or southern production, but the growing role of Shiite militias in Anbar province threatens to exacerbate sectarian tensions. Investment cuts could endanger anticipated production ramps, but new infrastructure and segregation of crude grades at Basrah should facilitate higher exports starting in June.

EIA’s Upwardly Revised U.S. Monthly Crude Production Not Necessarily Bearish

The recent upward revisions to monthly and weekly crude production data caught analysts off guard. We do not think this is a bearish development, however, because the offsetting decline to the crude balance item, following the upward revisions to crude production, minimizes the bearish impact of the higher reported production numbers. March crude stocks and stock change were revised down, not up, in spite of the highest reported monthly crude production since 1970.

OPEC

OPEC met to roll over the existing agreement. Efforts to have a non-OPEC/OPEC output cut have been thwarted by Russia’s unwillingness to participate. The recent strength in oil prices over the last month has reduced pressure for this initiative. The Gulf OPEC members see strong demand for their crude and expect prices to strengthen to end year with $75/Bbl Brent a distinct possibility.

Ethanol Prices Fall

U.S. ethanol prices tumbled the week ending May 29 pressured by higher production and lower corn values. The EPA's bearish announcement of proposed biofuel mandates added to the decline.

Ethanol Output Increases

U.S. ethanol production continued to advance the week ending My 29, rising to a four-month high 972 MB/D from 969 MB/D in the prior week. Inventories were essentially flat, declining by only 29 thousand barrels to 20.1 million barrels.

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.