NYC-based PIRA Energy Group believes that crude stock draws have already begun and will pick up momentum in the third quarter. In the U.S., crude and products stocks showed builds. In Japan, crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast
Wage gains in developed world to drive faster second half global economic growth with Greece risks muted by potential aggressive ECB/Fed action if needed. The worst of oil market imbalance is over with inventory overhang being much less than generally expected. Crude stock draws have already begun and will pick up momentum in the third quarter. Longer-term supply/demand fundamentals are bullish. The United States is becoming a big factor in the NGL market. MENA geopolitical risks to supply remain substantial, and while an Iranian nuclear deal looks more likely than not, oil markets are expected to have to wait until 2016 for more Iranian oil, and by that time it will need it.
Robust U.S. Stock Build
Commercial stocks built this past week, as both crude and products showed builds. This reversed eight consecutive weeks of crude stock draws, but we expect the crude draws to continue next week. Total demand growth remains strong, including gasoline and distillate. We think the April and current weekly reported crude production values are too high, most likely driven by an overstatement of Texas production.
Japanese Crude and Finished Product Stocks Draw
Crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Major product demand performance was much stronger, up nearly 0.5 MMB/D. All the major finished product stocks levels declined. The indicative refining margin remains very good, though softer on the week as all the major cracks gave ground.
Freight Market Outlook
Tanker markets have been counter-seasonally strong in all size groups during May and June. OPEC and Saudi crude production are near record levels, while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Unintended floating storage has also provided support as international markets are struggling with surplus barrels. As a containment step while seeking a buyer, these unplaced cargoes are being slowed down while in-transit or delayed upon arrival resulting in substantial opportunity and demurrage costs well in excess of current contango credits. The recent surge in rates is not likely to persist unless floating storage expands further, which is unlikely in PIRA’s view.
U.S. NGL Field Production Soars
U.S. NGL field production has been increasing at accelerating rates. New data from the EIA show that at 3,314 MB/D, April total NGL field production was nearly 14% higher than a year ago. Year-on-year production increases have been running between 13-15% for each month of this year thus far. PIRA had expected to see field production increases begin to abate due to lower drilling and investment activities; however, this has yet to occur in any meaningful way.
Ethanol Prices Increased
Ethanol prices strengthened during the last half of June as stocks drew and the production of blended gasoline hit record levels. Assessments were also supported by rising raw material costs.
U.S. Output and Stocks Lower
U.S. ethanol production dropped to a six-week low 968 MB/D the week ending June 26 as heavy rain and flooding disrupted operations at some Midwestern plants. Inventories have plummeted by nearly 1.2 million barrels over the past two weeks as ethanol-blended gasoline production soared to a near-record 9,106 MB/D last 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.
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