NYC-based PIRA Energy Group reports that Brent crude prices lost their earlier upward momentum over the last few weeks with on-going Atlantic Basin crude length. In the U.S., slight stock decline this past week further narrows stock excess. In Japan, runs drop Sharply and crude stocks surge. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices lost their earlier upward momentum over the last few weeks with on going Atlantic Basin crude length. But fundamentals are at an inflection point and will improve from here with high refinery runs this summer and sequentially declining U.S. crude production. As crude stocks erode, prices will gradually strengthen. Gasoline cracks are currently strong with declining inventories and increasing coverage requirements for local/export demand growth in the Atlantic Basin. Gasoline cracks should remain very healthy for the next few months. With high refinery production in the Atlantic Basin and new distillate-oriented refineries starting up in the Middle East, Turkey, and Latin America, middle distillate stocks will build. Diesel cracks will weaken, bottoming in July-August before seeing seasonal recovery. Recent European refinery margin strength, the best in many years, will gradually erode.

Slight U.S. Stock Decline this Past Week Further Narrows Stock Excess

The crude stock decline this past week more than offset the product inventory increase, leaving stocks slightly lower. This was the largest crude stock decline this year and it came as refiners ramped up runs to a weekly high for the year. For the same week last year, overall commercial stocks increased, resulting in the year-on-year stock excess narrowing. The bulk of this excess is in crude oil. Gasoline stocks are now just 1.8% higher than last year, and with recent demand up 4.6%, days supply forward inventory cover is a lot tighter than last year.

Japanese Crude Runs Drop Sharply, Crude Stocks Surge

Crude runs dropped sharply reflecting a major refinery fire and ongoing turnarounds. Crude imports rose and crude stocks surged 6.7 MMBbls. Finished product stocks drew 0.5 MMBbls. Gasoline demand rebounded with higher yield, and stocks posted a draw. Gasoil demand eased with a surge in yield and lower exports so stocks built. Kerosene demand was very low and the stock build rate came in at 41 MB/D, despite lower yield. The indicative refining margin remains very good.

Earthquakes in Oklahoma: Increased Costs Looming for Wastewater Disposal

The increasing frequency of earthquakes in Oklahoma is becoming a growing concern for the state’s fracking industry. While the causal link may not have been conclusively proven, regulators are already taking action to impose restrictions on the disposal of produced water. Additionally, insurance companies are denying coverage for "man-made" earthquakes, and lawsuits from parties suffering earthquake damage continue to increase in frequency. While we do not believe that production is threatened, costs are likely to rise. If shallower injection wells and lower pressures solve the problem, the cost impact will likely be minor. If water treatment is required, the costs would become meaningful, but we do not believe that is a likely case.

Propane Price Recovery Underway

U.S. NGLs prices were broadly higher last week as the plunge in propane over the past several weeks was seen as overdone. Market participants saw value at lower levels and scooped up length. Mt. Belvieu June NYMEX futures ripped 15% higher on conviction buying, with prices increasing every day of last week. Contango in the June-August propane spread has blown out to 6¢/gal, a price sufficient to make storage plays profitable in even the most expensive storage situations.

Manufacturing Margins Fell for the Third Straight Week

U.S. ethanol prices were slightly higher the week ending June 5, tracking corn values. Manufacturing margins fell for the third straight week as co-product DDG prices decreased.

U.S. D6 Values Plunge

U.S. ethanol production advanced to 992 MB/D last year matching the highest level ever reported in the DOE's weekly supply report. D6 RIN values plunged to the lowest levels in over a year.

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.