NYC-based PIRA Energy Group believes that cyclical strengthening is currently underway in the global economy with the U.S. in a better position to support global growth. In the U.S., stock excess modestly widens. In Japan, crude runs ease, but crude stocks draw. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast
Cyclical strengthening is currently underway in the global economy with the U.S. in a better position to support global growth. OPEC cannot rebalance oil markets because the surplus is too large. Even with PIRA's assumed substantial OPEC cuts at the upcoming November 27 meeting, supply will be over 1 MMB/D higher than demand in 2015. Oil markets will have to be rebalanced via price. The market will see greater contango but prices in the front of the market will inevitably be anchored by bullish medium term oil supply/demand balances.

U.S. Stock Excess Modestly Widens
This past week's inventory increase was slightly larger than the increase last year in the same week, widening the year-on-year inventory. Crude stocks still remain 2.1 million barrels below last year, middle distillate nearly 1 million barrels below, and gasoline 11.1 million barrels lower. Gasoline stocks are relatively low, but with resupply expected from higher runs and imports, gasoline has recently taken a drubbing. Not surprisingly, the one major product category showing a large surplus to last year's inventory is "other" products, which is mostly NGLs.

Japanese Crude Runs Ease, But Crude Stocks Draw
Crude runs eased, while crude imports declined sufficiently to draw crude stocks moderately. Finished product stocks resumed building with much of it being kerosene. Gasoline demand was modestly higher, and stocks posted a small draw. Gasoil demand was surprisingly weak, but lower yield tempered the stock build. Kerosene demand continued to run at seasonally low levels with higher yield, which boosted the stock build rate to a strong 132 MB/D. Refining margins remain soft with all the major product cracks, except for middle distillates (kero and gasoil) weakening.

The Sensitivity of Shale (and Other) Oil Production to Lower Price
We expect shale oil production to be relatively sensitive to a drop in oil prices, but the response will not occur immediately. A price lower than $80 on an LLS basis will reduce production, both due to the deterioration of the economics of the key shale plays as well as the reduction of cash flows and borrowing capability for the operators. However, the production impact during the first year will emerge slowly, as existing hedges, rig obligations and high-grading of drilling will initially temper the effect of lower prices. In the long-term, these impacts will grow substantially although lower activity levels should also eventually lead to lower costs, partially offsetting the price effect.

U.S. NGL Complex Spirals Lower
December Mont Belvieu propane futures continued to spiral lower, falling 5.4% to $0.86/gal the lowest price since July 2014. Ever increasing stocks and challenging export economics continue to complicate matters for the fuel/feedstock. Midcontinent propane markets were slightly better, only 3.4% lower, widening the Conway premium to 6.5¢/gal – the highest this season. Next week, falling crude prices will continue to drag on NGL prices while closed spot arbitrage economics will hinder exports to Europe and Asia.

U.S. Production Margins Improved After Declining for Eight Straight Weeks
The cash margins for U.S. ethanol manufacture rebounded the week ending October 17 as the market tightened. Ethanol was $1.78 per gallon in Chicago on Friday, up 21.9% from its $1.46 bottom on October 2.

U.S. Ethanol Stocks Fall to Seven-Week Low
U.S. ethanol inventories declined for three consecutive weeks, dropping to a seven-week low 17.9 million barrels. Ethanol production rebounded to 896 MB/D the week ending October 17, up from 885 MB/D during the preceding 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.