NYC-based PIRA Energy Group reports that Brent crude prices have moved higher and are likely to stay strong. On the week, U.S. commercial stocks increased. In Japan, crude imports rose sufficiently to produce a moderate stock build. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Bullish Oil Prices

It is hard not to be bullish oil prices with the global economy gradually improving, tight physical oil markets and MENA turmoil, which is already substantially reducing global oil supplies and has the potential to reduce supplies further. Current positioning and likely September deflationary type headlines, due in part to a challenging calendar, but also the startup of Iranian nuclear negotiations, pose downside risks to oil prices. Yet, the burgeoning momentum to own oil seems poised to push oil prices higher for now with SPR chatter somewhat limiting the upside.

Slight U.S. Commercial Stock Build

Commercial inventories increased for the week ending August 30 as product stocks swung from a draw the week before to a build. Added supply resulted from reported product demand weakening and product output increasing. This more than offset a product import decline. Last year for the same week, product stocks declined as refinery operations were curtailed by Hurricane Isaac. Hence the year on year product stock excess widened with the bulk of the excess in gasoline and other products.

Japanese Crude Runs Decline as Turnarounds Gear Up

Crude runs began to decline as turnarounds started to gear up and crude imports rose sufficiently to produce a moderate crude stock build. Gasoline demand eased modestly, while gasoil demand remained strong. Stocks of both posted only modest changes on the week. Kerosene demand perked up and with a lower yield the stock build rate slowed. Refinery margins remain very poor.

Saudi Formula Crude Prices for October Tightens for Asia, Less Aggressive in Europe

Saudi’s formula prices for October were recently released. In Asia, differentials were raised most aggressively on lighter grades, but the differential for Arab heavy was left unchanged. While the price adjustment was termed "less aggressive" than market expectations, refiners still cannot be too pleased given the woefully weak refining margins, particularly for topping configurations.

Cushing Stocks Drop 15 Million Barrels in Last 9 Weeks

Crude stocks at Cushing, Oklahoma have fallen for nine consecutive weeks – a total of 15 million barrels since late June. Southern price spreads remained tight, with WTI discounts to Atlantic Basin light crudes averaging $4-5/Bbl in August. Northern spreads were mixed, as oil sands upgrader maintenance restricted synthetic crude supplies while raising bitumen production.

Slow Stock Building in U.S.

Propane building season continues but at a slow pace, despite the latest week's surge, in the U.S. as exports remain quite high, petchem feed usage is ongoing and the crop drying season is just weeks away. Europe is starting to attract cargoes as North Sea maintenance continues and petchem feedstock usage is quite favorable. The Northern Hemisphere needs to start preparing for the upcoming heating season.

U.S. Ethanol Prices Soar

U.S. ethanol prices rose to a two-month the week ending August 30. The jump was primarily due to the scarcity of corn in the Midwest, causing ethanol production to drop to a 21-week low. Also providing support were petroleum prices which rose to a two-year high.

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.

NYC-based PIRA Energy Group believes that burgeoning momentum to own oil seems poised to push oil prices higher for now. On the week, U.S commercial stocks built led by crude, while Japanese crude stocks drew strongly. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Bullish Oil Prices

It is hard not to be bullish oil prices with the global economy gradually improving, tight physical oil markets and MENA turmoil, which is already substantially reducing global oil supplies and has the potential to reduce supplies further. Current positioning and likely September deflationary type headlines, due in part to a challenging calendar, but also the startup of Iranian nuclear negotiations, pose downside risks to oil prices. Yet, the burgeoning momentum to own oil seems poised to push oil prices higher for now with SPR chatter somewhat limiting the upside.

U.S. Commercial Stocks Build Led by Crude

Overall U.S. commercial oil inventories increased for the week ending August 23 according to the latest weekly DOE data with the entire build occurring in crude, while product inventories declined. Overall U.S. oil inventories are in the upper end of their historic range, in part because of high "other" products. Crude and the four major products stocks (gasoline, distillate, jet and resid) are at the average of their historic range, although crude stocks are indeed relatively high. The stock increase for the same week last year was higher, thereby narrowing the year-on-year stock excess. Nearly the entire excess is in gasoline.  

Strong Crude Stock Draw in Japan, Refinery Margins Very Weak

Crude runs were little changed, but a very low crude import figure drew stocks strongly. Gasoline demand remained strong and gasoil demand rebounded from abnormally low levels. The kerosene stock build rate moderated. Refinery margins collapsed to very weak levels as all cracks gave ground. While cracking margins are weak, topping margins are even worse. 

Withdrawal of Half of Libya’s Oil From the Market

Crude oil trade flows have been significantly altered in 3Q13 by the withdrawal of nearly half of Libya’s 1.4 MMB/D of oil from the market and the subsequent increase in production from Saudi Arabia to record levels to compensate for these losses and to accommodate growing global demand over the second half of the year. Tanker markets are adjusting with more West African crude staying in the Atlantic Basin, which is shifting tonnage demand to smaller vessels. More sour crude production has also benefited ship operators by lowering bunker prices, which have risen less than crude. 

LPG Market Appears Tight

The slow pace of propane stock building has pushed prices higher and will keep prices supported as crop drying and winter heating demand are approaching.  Gasoline blending season is starting, increasing the pull on butanes. Prompt European LPG markets are relatively tight given low arrivals in August and North Sea maintenance. More imports will be attracted from the USGC and West Africa.

Ethanol Output Drops to 21-Week Low

Ethanol output fell to a 21-week low of 820 MB/D the week ending August 30 from 844 MB/D in the preceding week, while imports dropped to 4 MB/D from 19 MB/D over the same period.  Inventories decreased by 232 thousand barrels to 16.3 million barrels as PADD II stocks fell below 5.0 million barrels for the first time since the DOE began reporting weekly ethanol data in June 2010. 

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.

Anadarko Petroleum Corporation (NYSE: APC) has announced it has entered into a definitive agreement with ONGC Videsh Ltd. (OVL), a wholly owned subsidiary of Oil and Natural Gas Corporation Limited, to sell a 10-percent interest in Mozambique's Offshore Area 1 (Area 1) for $2.64 billion in cash. Anadarko will remain the operator of Area 1 with a working interest of 26.5 percent.

"This transaction demonstrates our continuing ability to create substantial value through exploration and to again accelerate the value of our longer-dated projects through attractive monetizations and third-party capital," Anadarko Chairman, President and CEO Al Walker said. "Mozambique LNG is a premier global energy project, and we look forward to working with our partners and the government to advance this world-class development.

"As the operator of Area 1, we are very pleased to have reached this agreement with OVL, which values our pre-transaction interest at more than $9.6 billion. We expect to use the net proceeds from this transaction to further accelerate the short- and intermediate-term oil and liquids opportunities we have in the Wattenberg field, Eagleford Shale, Permian and Powder River basins, as well as the Gulf of Mexico and other evolving plays in our portfolio. Our objective with this allocation of capital will be to further increase our cash-flow growth with attractive wellhead margins, while providing additional value to our shareholders as evidenced by our recent dividend increase and continued portfolio-management activities."

The transaction is expected to close around the end of 2013, and is subject to existing preferential rights, governmental approvals and other customary closing conditions.

Area 1 is operated by Anadarko Moçambique Area 1 Limitada (a wholly owned indirect subsidiary of Anadarko) and is located in Mozambique's deepwater Rovuma Basin. The block contains the Prosperidade and Golfinho/Atum natural gas complexes that combined hold an estimated 35 to 65-plus trillion cubic feet (Tcf) of recoverable natural gas resources. In cooperation with the Government of Mozambique, Anadarko, its partners, and Eni (as the operator of the adjacent Area 4 block) continue to advance the development of an LNG park with first LNG cargoes expected in 2018.

Anadarko's partners in Area 1 include Mitsui E&P Mozambique Area 1, Limited (20 percent), BPRL Ventures Mozambique B.V. (10 percent), Videocon Mozambique Rovuma 1 Limited (10 percent) and PTT Exploration & Production Plc (8.5 percent). Empresa Nacional de Hidrocarbonetos, E.P.'s (ENH) 15-percent interest is carried through the exploration phase.