NYC-based PIRA Energy Group believes that recent economic softness will be temporary and we continue to expect above-trend growth in 2014. On the week, pretty close to flat U.S. stock profile, while Japanese crude stocks built sharply. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Economic Softness Will Be Temporary

PIRA believes recent economic softness will be temporary and we continue to expect above-trend growth in 2014. While flat price has ignored weaker economic data, crude stock builds are forecast to somewhat undermine bullish sentiment. Global refinery runs will bottom in April and then move sharply higher by midyear. Light product inventories will remain low, but diesel cracks will seasonally ease while gasoline cracks strengthen. Political risks to supply are growing, raising the probability of even larger MENA disruptions than PIRA is assuming.

Pretty Close to Flat U.S. Stock Profile

Commercial oil inventories decreased a slight 0.50 million barrels this past week, all of which was in products. This is the seventh consecutive week of product stock declines. Large product stock declines are quite typical in February because it is a strong product demand month. In fact, last year's product inventory decline during February was even larger with this past week's decline being 7.0 million barrels.

Japanese Crude Stocks Build Sharply

Total commercial stocks jumped 7 MMBbls with crude moving higher by nearly 8 MMBbls due to a surge in implied imports. Finished product stocks fell largely due to a strong draw on kerosene but also smaller draws on the other major products. Gasoil demand was very strong at 992 MB/D, the third highest level in a year. The indicative refining margin was modestly lower with all the major cracks weakening slightly.

Prices Will Be Under Some Downward Pressure

Brent crude prices remain supported by relatively tight global supply-demand balances due to continued supply disruptions and low stocks. United States crude prices relative to Brent will be choppy with WTI stronger with new pipelines, while the entire USG complex will see inventory builds during U.S. refinery maintenance before tightening again later in the 2nd quarter. European distillate cracks will trend lower as demand seasonally eases and currently tight inventories build back when Atlantic Basin runs ramp up after maintenance. Gasoline cracks are likely to increase significantly over the next few months with Atlantic Basin inventories expected to be lower than last year.

December 2013 DOE Revisions

DOE recently released its final monthly December 2013 (PSM) U.S. oil supply/demand data. While demand was revised lower by 519 MB/D, strong year-on-year gains continued. Total commercial inventories were revised higher by 8.5, with all the upward revision in products. Inventory levels of both crude and product were in deficit compared to year-ago, with that deficit having grown from end-November comparisons.

Severe Winter Weather Impacts Rail Performance

Every few years, severe winter weather causes major problems for rail transportation. This winter the weather problems have caused a record deterioration in service performance for the major U.S. railroads. These problems have contributed to the slight decline in U.S. crude by rail volumes since early December 2013. It will take two or three weeks for the rail system to recover from the cumulative effects of the weather, assuming that the rest of the winter returns to “average.” So the impact on crude by rail volumes will continue to be felt until mid-March, at a minimum.

U.S. Propane Exports Set a Record

U.S. propane exports set a new record in 2013 and are expected to increase further during the course of 2014. This will tend to keep inventories relatively low during the upcoming year, especially with stocks ending 1Q at around a record low for the period. As the season ends it will be necessary for the European and Asian chemicals operations to pick up the pace of LPG feedstock usage.

The Output of Ethanol-Blended Gasoline Soars

The production of ethanol-blended gasoline increased to a two-month high of 8,364 MB/D the week ending February 21 from 8,069 MB/D in the preceding week. U.S. ethanol output climbed for the third consecutive week, reaching 905 MB/D for the first time in five weeks.

Russian Gas Risks Greater for Central Europe; Oil Risks Minimal

The Ukrainian corridor for Russian gas exports is not as important as it used to be, but it still plays a central role in European gas supply. PIRA's analysis of pipeline flows shows that Russia can divert a little over half of the gas it moves through Ukraine to locations all over Europe. Spare capacity in the Nord Stream (Baltic) pipeline to Germany and the Yamal pipeline through Poland will allow Western Europe to receive most of the gas it needs. Central Europe and the Balkans could face some scarcity if the Ukrainian route were to temporarily disappear, but this is considered unlikely. For oil, there is less potential impact than with gas since most Russian oil exports go by tanker from Russian ports in the Baltic and Black seas.

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.

NYC-based PIRA Energy Group believes that ongoing growth of shale continues to dominate both the oil and gas outlooks. On the week, the U.S. product stock draw resumes, while Japanese commercial stocks drew sharply. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Shale Growth Continues To Dominate

The ongoing growth of shale continues to dominate both the oil and gas outlooks. Even with a slowdown in growth from the recent pace, shale will remain a major contributor to global liquids growth and the US will still face a steady decline in import requirements. However, we continue to face increasing violence in Iraq, significant outages in Libya coupled with political turmoil, sanctions and extremely uncertain negotiations with Iran, growing unrest in Venezuela, and an unending war in Syria that could spread violence anywhere in the Middle East. The bounceback of global demand growth in 2013, even during a subpar economic growth year, confirms our view that reports of the death of demand growth are premature.

U.S. Stock Draw Resumes

Overall commercial oil inventories drew this past week with product stocks falling and crude building. This was the sixth consecutive weekly product stock decline and fifth consecutive crude inventory build. The entire product inventory decline was outside of the three major light products, for they built a combined 0.6 million barrels. A similar major light product inventory profile is forecast for next week. In contrast, crude inventories are forecast to decline, for the Gulf Coast faced extended weather related delivery delays which will keep imports low.

Japanese Commercial Stocks Draw Sharply

Total commercial stocks were sharply lower by 8.6 MMBbls due to a sharp drop in crude stocks and a much lower draw in finished products, which was mostly kerosene. Runs eased slightly and crude imports plunged. Gasoline and gasoil demands fell back slightly, and gasoline stocks build modestly, while gasoil stocks still were able to post a small draw on much lower yield and higher incremental exports. Kerosene demand perked up and the draw rate came in at its highest rate of the year

U.S. Refiners Have Significantly Reduced Yield of Fuel Oil + Asphalt

U. S. refiners have typically had the lowest yield of residual fuel products (residual fuel oil plus asphalt) compared to other refiners worldwide. However, beginning in 2008, U.S. refiners have reduced their yield of fuel oil/ asphalt at a faster rate than can be accounted for by facilities additions alone, from over 7% to less than 5%. With continued substitution of light shale crudes, PIRA estimates that the yield of fuel oil plus asphalt for U.S. refiners will continue to decline to around 4%.

U.S. Propane Stocks Will Continue Lower

Export cancellations and fog delayed shipping from the USGC led to a relatively low stock draw last week. The pace of inventory decline should pick up as new record low positions will continue to be set. The March trading arb is open. Winter is not yet over but sentiment shifted as it is close to winding down, but not before some late season cold blasts.

Ethanol Manufacturing Margins Rise

U.S. ethanol production margins improved significantly the week ending February 14 due to higher ethanol values, stable corn costs, and lower natural gas prices. Rising DDG and RIN values also provided support

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.

Net income was 11% up on 2012 due to diesel (20%) and gasoline (11%) price increases in 2013, increased production of oil products, cost optimization, gains from the sale of assets, lower write-offs for dry wells and lower foreign exchange impact due to hedge accounting. Adjusted EBITDA totaled R$ 62.967 billion, up 18% on 2012.

Fourth quarter net income was R$ 6.281 billion, up 85% on the third quarter. This result reflects higher oil export volumes, lower dry well write-offs, gains from sale of the interest in block BC-10 and tax benefits stemming from provision of interest on own capital.

2013 oil and natural gas production totaled 2.539 million barrels of oil equivalent per day (boed), down 2% on 2012, primarily due to delays in starting up new systems, natural decline of fields and sale of assets abroad. Fourth quarter domestic output was up 1% on the third quarter.

In 2013, five new platforms came on stream and another four systems were deployed at their permanent locations. A pre-salt daily output record of 371,000 bpd was set on December 24th.

Proven reserves in Brazil reached 16 billion barrels of oil equivalent, up 1.6% on 2012. The Reserve Replacement Ratio has been higher than 100% for 22 years in a row.

Average production of oil products in Brazil totaled 2.124 million bpd in 2013, up 6% on 2012, cutting back diesel and gasoline imports.
 PROEF (Campos Basin operational efficiency improvement program) contributed with additional oil output of 63,000 bpd. Operational efficiency reached 75% for the Campos Basin Operational Unit (UO-BC) and 92% for Rio (UO-RIO).

PRODESIN (divestment program) contributed R$ 8.5 billion to cash flow in 2013 .

PROCOP (operating costs optimization program) achieved savings of R$ 6.6 billion in 2013, exceeding the R$ 3.9 billion target set for the year.