NYC-based PIRA Energy Group reports that Basrah Heavy enters the market. In the U.S., another counter-seasonal U.S. stock draw. In Japan, crude runs decline, with much lower crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Basrah Heavy Enters the Market
Basrah Heavy, a new Iraqi crude grade, will begin loading in June 2015. The crude is quite heavy (23.5° API) and high in sulfur (4.2 wt. %), and is more similar to Mexican Maya crude than most other Middle East grades. SOMO, the Iraqi oil marketing authority, has introduced this crude because the average quality of Basrah production from southern Iraq has been declining over the last several years due to inclusion of new production from heavier fields including West Qurna 2, Missan and Halfaya. PIRA believes SOMO has crafted a sensible marketing strategy to deal with changing production quality and capture high value for their sales.
Another Counter-Seasonal U.S. Stock Draw
Overall commercial oil inventories fell 2.1 million barrels this past week following the week earlier stock decline of 5.5 million barrels as product demand remained very strong. Year to date, the DOE weekly demand data adjusted for normal degree days and actual product exports (versus the DOE assumptions) is up 440 MB/D. Sixty percent of this increase is in gasoline certainly suggesting price matters despite a weak U.S. economy. The latest four week average adjusted demand is running 740 MB/D, or 4.0%, higher than last year.
Japanese Crude Runs Decline, with Much Lower Crude Stocks
Crude runs dropped 174 MB/D with low imports such that crude stocks drew strongly. Finished product stocks rose modestly. Gasoline demand fell back after the holiday, while gasoil demand rebounded. Kerosene demand was moderately strong and the stock build rate fell back. The indicative refining margin remains good with all the major product cracks firming on the week.
U.S. Shale Oil Independents Also Winning Reserves Additions Battle
For the period between 2010 and 2014, the average reserves replacement ratio of a group of U.S. independents has been twice as high compared to Big Oil (216% versus 105%). However, a large portion of these newly added reserves are associated with future shale oil/gas drilling locations that may need to be drilled within a five year period or be taken off the books. If drilling activity stays at the current low level due to sustained low crude prices, it may be a challenge for the independents to keep all those reserves in the proved category. For independents, this can affect their ability to get favorable financing or issue equity.
Asian Arbitrage Hampered by Soaring Freight
Saudi CP Propane futures languished as soaring spot freight continued to make the arbitrage East unworkable. June CP futures lost 7% to $407/MT, approaching the low levels plumbed in January. Meanwhile, the Far East Index dipped 2.6% to near $500 while butane prices were steady at $542/MT. LPG prices in Asia remain in tight competition with naphtha for petrochemical use, necessitating lower source pricing for triggering incremental demand.
U.S. Ethanol Prices and Margins Increase
Chicago ethanol prices rose the week ending May 15, supported by robust demand in the domestic markets, as well as the third straight week of stock draw. Manufacturing margins improved for the ninth consecutive week to levels not experienced since December.
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.
