NYC-based PIRA Energy Group believes that falling crude prices to slow midcontinent production growth. In the U.S., the stock excess versus last year increased and with a significant draw last year, the commercial excess should grow even more for the week of November 7. In Japan, crude runs fell, imports rose and stocks built. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Falling Crude Prices to Slow Midcontinent Production Growth
Crude prices plunged in October, with Brent falling nearly $10/Bbl and WTI ending the month below $80. Midcontinent differentials were little changed, except for those in the Permian Basin, where new pipeline capacity allowed prices to rebound from deep third quarter discounts. Midcontinent production is still rising, but lower prices will greatly reduce next year's growth.
Creeping Excess Storage
A look back at the most recent month of DOE weekly data shows a significantly smaller stock draw, compared to the same month last year, in spite of demand being up, year-on-year. A 630 MB/D difference in U.S. commercial stock change is a reflection of a global imbalance of supply over demand, this year compared to last year, of over 1 MMB/D. Far from being a mystery, this imbalance is apparent in stocks around the world. For winter, we expect the surplus to manifest itself in smaller draws, which will be reflected in a creeping stock excess. Come the spring, this surplus will appear as higher outright inventory levels. For this week, the stock excess versus last year increased to 15.4 million barrels, and with a significant draw last year, the commercial excess should grow even more for the week of November 7.
Japanese Crude Runs Fall, Imports Rise, Stocks Build
Crude runs eased to their lowest level since early July. Crude imports rose such that stocks built. Gasoline and gasoil demands were modestly changed and both product stocks drew, with the biggest draw being for gasoil. Kerosene demand was relatively strong and stocks posted their first seasonal draw. Refining margins are better with all the major product cracks firming.
Medium-Term Crude and Gas Price Outlooks Revised Down
Many of the bearish guideposts for our low case have emerged in the past six months. In the absence of new supply disruptions, we are likely to see prices at or below current levels for the next several years. We still believe that demand growth will return to a trend of 1.2 MMB/D, and combined with high-cost project cuts, this will lead to strengthening prices later in the decade. In the case of North American natural gas, the extremely strong growth in supply, even at sub-$4 prices and declining rig counts, suggests that prices are likely to stay lower for longer. Those changes, coupled with a weaker outlook for global gas demand growth, have led to reductions in the European and Asian gas outlooks as well.
U.S. LPG Stocks Remain Stubbornly High
Last week, U.S. propane inventories posted their second draw this heating season. The relatively small draw was influenced by a decline in both imports and in apparent demand. Inventories ended the week at 77.7 MMB, while the surplus expanded to 18.4 million barrels as the year ago withdrawal of 2.5 MMB stood much higher than the recent one. High U.S. stocks will ultimately need to clear by export. National LPG stocks are now well poised to both supply the harshest of winters and an increasing export market. Weaker prices relative to export destinations will be necessary for exports to increase.
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.
