NYC-based PIRA Energy Group believes that low oil prices and cheap money will lead to stronger global economic growth and much stronger oil demand. In the U.S., the stock surplus widened again. In Japan, crude runs rose fractionally on the week and crude imports rose to produce a crude stock build. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast
Low oil prices and cheap money will lead to stronger global economic growth and much stronger oil demand than conventional wisdom would suggest. Nevertheless, for the next six months, oil supply will continue to overwhelm demand, in part because of rapid growth in Iraqi production as its government desperately seeks more revenue. Already wide contango will further widen as crude oil stocks in the three major OECD markets fill to the brim and floating stocks keep on increasing.

U.S. Stock Surplus Widens Again
Compared to last year, U.S. commercial oil inventories are now 125 million barrels, or 12%, higher, as this past week's inventory increase contrasted with last year's decrease for the same week. Crude stocks increased strongly this past week while products drew. So far in January the overall inventory increase has been the largest since 2009.

Japan Crude Runs Near Seasonal Maximums, Product Demands Slightly Better
Crude runs rose fractionally on the week and crude imports rose to produce a crude stock build. Finished product stocks fell with a strong draw on kerosene and lesser draws for gasoil and gasoline. Indicative refining margins remain strong.

Limited Oil Consumption Gains in Northeast Power Sector Despite Low Oil Prices
Despite colder-than-normal January weather, the Northeast of the United States is not seeing much in the way of substitution of oil for natural gas. In fact, oil consumption will be substantially below year-ago levels despite roughly comparable weather.

Can Global Oil Demand Really Grow 1.5 MMB/D in 2015?
PIRA's outlook for global oil demand growth in 2015 may seem quite bullish when compared with the actual growth of 0.7 MMB/D in 2014, but several factors make our forecast very reasonable, with potential upside. Moderately faster world GDP growth should push up demand growth by 130 MB/D, and the 50% decline in prices should add an additional 780 MB/D of demand growth, even using relatively modest price elasticity assumptions and accounting for the significant strengthening of the U.S. dollar.

Expiration of March WTI Contract of Increasing Importance
The expiration of the March WTI crude oil contract, along with the rolling of various commodity indices and ETFs, has the making of an interesting period of price dynamics over the next several weeks, because of the huge open interest in the contract. The March WTI contract will last trade February 20th, with various commodity indices and ETFs undergoing contract roll schedules in the first part of February (fifth to the 10th business day, or Feb. 6th-11th). This could contribute to a decline in flat price, given that the balance of power would seem to be in favor of the shorts because of the mechanical and widely known nature of the ETF and passive index rolls.

Floating Storage Expected to Play Key Role in Crude Containment
Over the next several months, the cost of storage and, in turn, the magnitude of the market contango will be a crucial factor in determining how low the spot price must go. With less expensive onshore storage expected to fill, floating storage is likely to be the market balancing step. The marginal costs of storing crude on VLCCs and Suezmax tonnage are expected to be the critical factors in setting the level of contango in the crude market. So key questions for the oil and tanker sectors are how much tonnage is available for placement into offshore storage and what will it cost?

European LPG Rises with Stronger Naphtha
Regional naphtha rallied to the highest levels of the year as high cracker runs, increased gasoline blending, and arbitrage cargoes to Asia have pulled NWE stocks down significantly. Cash butane barge lots rallied 16% to $398/MT on stronger naphtha and as Shell's Pernis refinery restarted an alkylation unit, which has helped clean up C4 length in the region. Large propane cargoes followed suit, gaining 4% last week.

U.S. Ethanol Prices Decline to Lowest Values in Almost a Decade
During the first half of January prices fell to the lowest level in almost 10 years, inventories built, and margins fell to the worst level in two years. Economics improved during the last half of the month.

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.