NYC-based PIRA Energy Group believes that with both the physical market and financial length bottoming, oil prices are at or near their lows. In the U.S., sharp crude stock reduction is offset by a product build. In Japan, crude stocks posted a large draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Sharp U.S. Crude Stock Reduction Offset by Product Build
Crude stocks fell for the week ending July 11, 2014 while product inventories built, causing an overall inventory build. This inventory pattern fits with record crude runs. Last year for the same week, inventories were down slightly so the year-on-year inventory excess widened. Crude oil and other products are up on last year while the four major product inventories are down.
Japanese Crude Runs Rise, Crude Stocks Post a Large Draw
Despite typhoon Neoguri hitting Japan the last week, runs still posted a sizable gain, while imports dropped and crude stocks drew. Product balances for gasoline and gasoil were little changed, while kerosene stocks resumed building. Both gasoline and naphtha stocks drew to record lows. Refining margins remained good with cracks little changed.
Freight Market Outlook
Crude markets have been whipsawed recently by the sectarian civil war in Iraq and changing perceptions on the return of Libyan supplies to the market. Dated Brent prices increased by $6/B to $115/B following the June 10th fall of Mosul to ISIS insurgents. But as it became apparent that exports from Basrah were unlikely to be impacted while prospects for the return of Libyan supplies increased, the price of Dated Brent fell by more than $12 per barrel to $103/B with a steep contango structure at the front end of the forward price curve. This has prompted the opportunistic storage of crude on tankers and increased incentives for the movement of additional long-haul volumes out of the Atlantic Basin to Asia, causing a counter-seasonal rise in crude tanker rates in the Atlantic. For tanker operators there are double benefits with higher spot tanker rates and lower bunker prices, at least for the moment.
Strong Week for International LPG
Tightness in LPG supplies in Europe, particularly in butane, had prices bid up this week. European supply has tightened considerably on lower export volumes out of Russia, and refinery maintenance in Antwerp and the UK. Russian maintenance at gas processing plants has lowered prompt Russian output. Coaster sized parcels of butane in NWE ended the week 4% higher at $838/MT. Asian prices were also higher on strong demand -- as soaring VLGC freight rates have industrial consumers worried that supply will be impacted.
Ethanol Prices Decline
U.S. ethanol prices showed some strength early in the week ending July 11, but then resumed their recent descent, weighed down by rising inventories. Ethanol manufacturing cash margins improved for the second consecutive week, largely due to plunging corn costs.
Ethanol Output Up, but Inventories Down
U.S. ethanol output rebounded to 943 MB/D the week ending July 11, up from 927 MB/D during the holiday-shortened week ending July 4. Inventories declined by 341 thousand barrels to a four-week low 17.9 million.
Political Risk Scorecard
Concerns about potential further sanctions on Russia, along with Iraqi instability, will support prices next 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.
