NYC-based PIRA Energy Group reports that the creeping stock surplus continues. In the U.S., overall commercial stocks built last week with the build in both products and crude.. In Japan, crude runs and imports are higher and crude stocks built fractionally. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Creeping Stock Surplus Continues
Preliminary data is now in for end November and it shows that commercial oil inventories in the three major OECD markets – United States, Europe and Japan – drew just 12 million barrels (400 MB/D) compared to a year earlier 37 million barrel (1.2 MMB/D) decline. Commercial stocks in these markets began the fourth quarter 22 million barrels, or 1%, higher than the year earlier and have now ended November 76 million barrels, or 3.5% higher. This stock profile is consistent with PIRA's balances showing year on year supply growth outpacing demand growth by over 1 MMB/D. This imbalance grows even larger in 2015.
Data Issues Likely an Important Factor in Big U.S. Stock Build
Overall commercial stocks built last week with the build in both products and crude. Re-benchmarking occurred this week indexing the December 5 stock levels to the September PSM, which resulted in substantial upward revisions to stocks. Part of this adjustment could have inflated inventories and correspondingly deflated reported demand. An added factor could be the stock data for the prior Thanksgiving holiday week was underreported, thus distorting this week's stock change. Probably both factors are to blame but, nevertheless, this week's reported inventories reflect a growing surplus of inventory relative to last year.
Japanese Crude Runs and Imports Higher and Crude Stocks Built Fractionally
Crude runs were marginally higher on the week. Alignment with our planned turnaround schedules still looks good. Crude imports were higher and crude stocks built fractionally (0.2 MMBbls). Finished product stocks drew due to draws in all the products but jet.
Re-Weighting of Major Commodity Indices in January 2015 Boosts Brent but Lowers Natural Gas and European Gasoil
The S&P GSCI and the Bloomberg Commodity Index (BCI), the two major indices for passive investment in commodities, have recently announced the new weighting schemes that they will apply to their respective commodity indices effective January 2015. The BCI index will see $2.6 Billion flow into energy against a $0.5 Billion loss for GSCI. Natural gas is the big loser down $1.2 Billion in January 2015 vs. current levels, while Brent is the big winner picking up $2.6 Billion. WTI increases only $334 Million. Oil products over the same time period increase $407 Million. European gas oil is the other major loser in the re-weighting down 7 MMBBLs or $575 Million.
When Will the Bloodletting Stop?
Saudi Arabia's relinquishing its role as oil price anchor has caused a catastrophic decline in the demand for inventory which has resulted in oil prices collapsing. Both physical and financial "inventory" holders have been selling. The selling has had a snow ball effect because of a lack of liquidity, one of the consequences of Dodd Frank regulations, and ongoing producer hedging. With many U.S. shale oil producers under hedged in 2016, with say 15% coverage, versus 40-50% for 2015, the selling pressure will not end until prices drop to the level where hedging is uneconomic.
NGL Prices to Continue Falling
With crude oil prices likely to continue to push lower and U.S. LPG export economics continuing to flash negative, the path of least resistance seems to be lower for U.S. prices. Internationally, recent LPG gains on naphtha in Europe and Asia come at the expense of less attractive petrochemical feedstock margins. LPG's discount to the refined product will need to widen for higher consumption to occur.
Ethanol Output Reaches All-time High
U.S. ethanol production soared to a record 988 MB/D the week ending December 5, up 26 MB/D from the previous week. Stocks built by 461 thousand barrels to a seven-week high 17.75 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.
