PIRA Energy Group's Weekly Oil Recap
NYC-based PIRA Energy Group reports that Cushing stocks to rise in 4Q, while pipeline projects relieve congestion in other midcontinent markets. In the U.S., slight stock build matches last year’s. In Japan, crude stocks draw and finished product stocks continue rising. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Cushing Stocks to Rise in 4Q, While Pipeline Projects Relieve Congestion in Other Midcontinent Markets
Fourth quarter crude stock increases, both in Cushing and on the Gulf Coast, will very likely lead to contango for LLS and Mars and quite possibly for WTI as well. However, stronger fundamentals in other regions should lead to improved differentials for Canadian, Bakken, Rockies and Permian Basin crudes.
Slight U.S. Stock Build Matches Last Year’s
Overall inventories built this past week, keeping stocks just 3.2 million barrels above year-ago levels. The product stock build was 2.4 million barrels, as strong product demand offset a one-week surge in product imports. Crude stocks drew about one million barrels less than the week before, largely because of the decline in run rates. Refinery margins are great and refiners have been running more crude than last year over the last four weeks.
Japanese Crude Stocks Draw; Finished Product Stocks Continue Rising
Runs continued to rise with a still lower crude import rate that allowed crude stocks to draw. Finished product stocks continued rising. Gasoline and gasoil demand fell, and for both products there were stock builds of about 0.4-0.5 MMBbls. Kerosene stocks continued to build along seasonal norms. Refining margins remain poor, but there was a slight improvement in gasoline and gasoil cracks.
China Quarterly Oil Demand Monitor
Growth in China’s apparent oil demand exhibited extreme volatility in recent periods. On a smoothed (four-quarter moving average) basis, however, demand growth has been relatively stable and has tracked the path of GDP expansion. Physical indicators that can be tied directly to oil demand (such as car sales and ethylene production) have also expanded solidly of late. Looking forward, the short-term volatility in reported figures may very well persist, but the underlying pace of oil demand growth will remain constructive.
3Q14 Iraq Oil Monitor
Territorial gains by ISIS reignited Iraq’s sectarian crisis. U.S. airstrikes have stalled ISIS’s momentum for now, but the military stalemate is likely to persist. Current PM Maliki agreed to step down, but deep-rooted sectarian mistrust presents a challenge in forming a unified government. Flows through the Kurdish pipeline are nearing 200 MB/D and Kurdish cargoes continue to load from Ceyhan, but buyers are hesitant without U.S. approval. A new 1 MMB/D pipeline from the Halfaya and Missan fields to the Fao storage facilities removes one constraint from southern capacity expansion. However, bureaucratic holdups during government formation will likely constrain capacity growth. Furthermore, southern infrastructure could be at risk if ISIS switches to guerilla tactics.
What GDP Growth Rates Are Required for Positive Oil Demand Growth?
One commonly heard refrain in the oil industry is that GDP growth must exceed 2.5% in order to see positive oil demand growth. A recent PIRA report addresses this issue and determines that the GDP growth threshold is 2.1% for the U.S. and 2.3% for Europe. These results accord with PIRA's own rigorous bottoms-up approach, which includes fuel efficiencies, fuel substitution, lifestyle changes, etc. PIRA's long-term outlook, which calls for U.S. GDP to grow 2.7% per annum through 2020, forecasts oil demand growth of 0.4% per annum. Because European GDP growth lags at only 1.8% p.a., oil demand declines 0.5% per year.
Aramco Announces October Price Reductions for Differentials
Saudi Arabia's formula prices for October were just released. A reduction in differentials was enacted for all the key markets with the most aggressive reductions being to Asia. Prices into the U.S. were cut $0.40/Bbl, across the board, against the ASCI benchmark, after a $0.80/Bbl reduction for September barrels. Even with the reduction, Saudi barrels remain less competitive than like U.S. domestic grades by about $2-3/Bbl. In Asia, not surprisingly, terms were made more generous. The biggest reduction was for Arab Extra Light -$2.00/Bbl. Arab Heavy was reduced the least at -$1.20/Bbl. The reductions are seen as necessary to maintain refiner demand amid rising fall turnarounds and a very poor margin environment. Also, competiveness versus competing grades has waned, so a reduction in differentials was warranted.
U.S. LPG Prices Strengthen Despite Record High Stocks
U.S. LPG prices ripped higher this week despite sharply lower crude oil prices. Mt Belvieu propane futures increased 3.3% to the highest level since July 1 as open interest and trade volume soar to all-time highs on the contract. But with spot arbitrage movements to Europe and Asia turning flat to negative, U.S. prices make take a breather from recent strength and look to destination market prices for future direction.
Ethanol Prices Soar
U.S. ethanol prices jumped the week ending August 22 after a bullish DOE report indicated a huge inventory draw the prior week. Production was less than many expected, while the output of ethanol-blended gasoline was higher.
Ethanol Manufacture Increases
U.S. ethanol output rose to 921 MB/D the week ending August 29 as production outside of PADD II reached a record high 81 MB/D. Inventories increased to 17.7 million barrels, up 356 thousand from the prior week.
Source: PIRA Energy Group's weekly 'Energy Market Recap'
