NYC-based PIRA Energy Group believes that so far market sentiment has deteriorated more than oil balances. In the U.S., commercial stocks flat on the week while EIA revises down U.S. crude output. In Japan, crude runs recovered and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

There are more risks to the forecast lift in global economic growth in second half 2015. So far market sentiment has deteriorated more than oil balances. The back of the market has led prices lower as speculators are no longer convinced higher oil prices are required to balance future oil supply and demand. PIRA disagrees with this view, but a “show me” mindset regarding tightening balances will keep prices lower than forecast earlier.

Latin American Oil Market Report

Increased United States/Canada crude production has significantly reduced U.S. imports of Latin American crudes over the last few years. More Latin American crude moved to Asia, mainly India and China. Mexico has proposed an exchange of up to 100 MB/D Mexican heavy crude for U.S. light crude that if approved would help to reduce the light crude overhang in the U.S. and enhance Mexican gasoline/diesel production and thus reduce their product imports. Latin American gasoline/diesel product imports will rise even with new refinery start-ups in Brazil and Colombia, and the U.S. will supply the vast majority. Near term planned/unplanned refinery outages in Venezuela and Mexico along with seasonal demand impacts are adding to Atlantic Basin product strength in 3Q15. PIRA’s outlook is for generally weaker Atlantic Basin gasoline/diesel cracks over the remainder of the year.

Commercial Stocks Flat on the Week While EIA Revises Down U.S. Crude Output

A 4.2 million barrel commercial crude stock draw offset a similar sized product inventory build leaving stocks virtually flat on the week. The stock excess to last year stayed roughly the same at 145 million barrels. Noteworthy is that the EIA revised down its Lower-48 crude production by 151 MB/D in this week’s report. This is an indication that the upcoming May 2015 Petroleum Supply Monthly will most likely show downward revisions to crude production for some months of 2015. May 2015 U.S. total crude production should come in significantly lower than the 9.65 MMB/D shown in the most recent STEO forecast. 

Japanese Crude Runs Recover and Stocks Build

Crude runs and imports rebounded following the typhoons, which had resulted in operational and berthing disruptions. Crude stocks surged, while finished product stocks rose only slightly. Gasoline and gasoil stocks were marginally lower, while kerosene stocks continued building, though at a slower rate. The indicative refining margin has come well off its June peak, though it is in the upper half of its statistical range.

This Time is Different

It is PIRA’s belief that crude oil and product prices are set simultaneously in both the physical and paper markets. Commercial entities that have physical positions, which they hedge in the futures markets, are the connective tissue between these two markets. Post 2003, fears that the world would be running out of crude led speculators to increase their paper length, which raised deferred futures prices enough to allow physical players to find and develop higher cost crude. What is different this time is the role of prime mover has shifted from speculators to commercials. This time commercials have become increasingly short, encouraging through lower prices speculators to enter the long side of the market.

Petroleum Refining Remains an Important Market for Natural Gas

The EIA’s latest annual report of refinery fuel use for 2014 does not contain many surprises regarding natural gas use in the refining sector. Direct fuel use of natural gas averaged a little less than 2.5 BCF/Day, and natural gas use to produce hydrogen in refineries averaged a little more than 0.5 BCF/Day. This represented 14% of industrial sector natural gas use, and 4% of total U.S. natural gas consumption. Natural gas use per barrel of crude run seems to be related to the prevailing API in each PADD. The national average natural gas use of 0.2 MMBTU per barrel of crude run implies a 20¢ per barrel margin impact, for every $1.00/MMBTU change in the price of purchased natural gas.

Freight Market Outlook

Tanker markets entered the second half of 2015 on a high note, but they are due for correction as a number of temporary elements of support unwind. The Iranian nuclear agreement has the potential to significantly alter both the crude and tanker markets, but this will take time to unfold. Incremental Iranian crude exports estimated at 500 MB/D by the end of 2016 are not expected to hit the market until the second quarter of next year. Perhaps of more importance to shippers and tanker operators is the potential for the marginalized Iranian tanker fleet (including 37 VLCCs) to return to active service in 2016 adding to the already accelerating capacity growth.

Asian Ethylene Prices Drop in July

Ethylene prices in China and Southeast Asia fell over 20% in July. Exports from the mainland increased as poly plants slowed on greater uncertainty in the local economy. Chinese exports are facing muted demand in the north where prices are falling in tandem amid rising inventories. Supplies are likely to continue rising, and prices falling, as long as ethylene production margins remain robust.

Ethanol Inventories Decline

U.S. ethanol production has declined for three consecutive weeks, with last week's output dropping to a ten-week low 965 MB/D. After two straight weeks of falling stocks, inventories reversed course and built by 89 thousand barrels to 19.6 million barrels.

Ethanol Prices and Margins Bottom

U.S. ethanol prices were volatile in July, rising early in the month but then falling sharply, tracking corn’s reversal. Ethanol manufacturing margins bottomed mid-month after declining for nine consecutive weeks.

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.