NYC-based PIRA Energy Group believes that the global economy will expand at above trend pace in the second half of 2014. In the U.S., products increased and crude stock declined. In Japan, crude stocks built as imports rebounded from storm impacts. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast
After a sub-par first half, the global economy will expand at above trend pace in the second half of 2014, led by manufacturing. First half weakness in the economy undermined global oil balances with inventories building back to year ago levels. The U.S. crude inventory situation is quite tight while Europe is very long, although the worst of the European prompt crude price weakness has likely passed. The sharp decline in financial net length is supportive for nominal oil prices.
Again, a Product Increase and Crude Stock Decline
Overall U.S. commercial oil inventories increased compared to last year’s decline for the same week, expanding the year on year inventory excess. The product stock increase was roughly the same compared to the week earlier, as crude runs, product imports and reported demand did not change much. The crude inventory gap narrowed by 3.5 million barrels - to a still large 4 million barrels.
Japanese Crude Stocks Build as Imports Rebound from Storm Impacts
Runs continued to rise as turnarounds wind down. Crude imports jumped higher following typhoon disruptions and crude stocks built. Gasoline demand was only slightly higher, despite the upcoming holiday and stocks built from record lows. Gasoil demand was higher with a big surge in exports such that stocks drew 1 MMBbls. Kerosene demand remained low and stocks continued building.
Profitability of U.S. Shale Oil Plays: The Paradox of Company vs. Well Results
It is possible that individual shale wells may have breakevens well below current oil prices while the companies that are drilling those wells are struggling against cash flow limitations. The inability of companies to turn cash flows positive has raised the question of whether the shale industry is really viable financially in the long-term, or just supported by cheap money. An in-depth analysis of the play economics shows that negative cash flows are mostly a result of aggressive drilling behavior that should eventually reward investors.
LPG Scorecard
U.S LPG prices remained stable despite large increases in domestic inventories. The promise of increased exports has the bears on the sidelines, for now. Mt Belvieu propane settled at 104¢/gal, up marginally on the week. August/February contango in the propane forward curve increased by 0.6¢ in the week, to 5.2¢. Butane prices were flat. Ethane at Mt Belvieu fell with Henry Hub natural gas. Ethane’s fractionation margin remains negative, albeit by only 1¢/gal, reflecting the lack of outlets and high inventories currently facing the cracker feedstock. High and rising inventories will contain prices while the prospect of higher exports and the nearing end of summer will be supportive for U.S. LPG prices next week.
U.S. Ethanol Manufacturing Margins Lower
Chicago and Gulf Coast ethanol prices were stable the week ending July 18, but values in Southern California rose while prices in New York fell. Ethanol manufacturing cash margins were down slightly, as falling DDG values outweighed lower corn costs.
U.S. Ethanol Output Rises
U.S. ethanol production increased to 959 MB/D the week ending July 18, the second highest output of the year. Inventories were relatively flat, declining by only 5 thousand barrels to a five-week low 17.9 million.
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.
