NYC-based PIRA Energy Group believes that Asian oil markets should remain supported. In the U.S., accelerated overall stock draw resuming so far in march. In Japan, kerosene stocks reach record lows. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Asian Oil Markets Should Remain Supported
Crude stock building peaks in March, and then in April builds will lessen. As we move further into the second quarter, refinery run increases absorb incremental crude. Asian gasoline cracks should improve seasonally with some further gains being forecast. Gasoil cracks have eased a bit, but further downward pressure is seen as limited as Asian turnarounds and low stocks levels help keep balances in check. Fuel oil cracks have been falling, but recently they have found a degree of support.
Japanese Kerosene Stocks Reach Record Lows
Total commercial stocks dropped on the week. Crude stocks fell only slightly, but finished product stocks declined 2 MMBbls, of which half was kerosene. This draw left kerosene stocks at record lows. Gasoil stocks declined for the eighth straight week and also remain very lean. This tight position in middle distillate stocks should prevent any large scale erosion in middle distillate cracks, though they have eased a bit of late. The indicative refining margin was modestly lower.
Inland North American Crude to Generally Reconnect to USGC, But Not Fully to Global Markets
The inland North America crude market is reconnecting to coastal markets as new infrastructure is put in place. Historically three distinct markets—the Northern Tier, Midcontinent and Gulf Coast — are now quickly becoming one integrated market. Producers' crude oil netbacks are generally aligning with coastal values after adjusting for quality and transportation costs, but there will still be occasions when inland congestion occurs. Moreover, the unlocking of inland markets by pushing crude oil supply to the Gulf Coast has unhinged Gulf Coast values from international prices, sometimes substantially. In a special report PIRA assesses the historical extent of crude prices disconnecting from refiner parity and our expectations for the remainder of 2014.
4Q13 Tight Oil Operator Review
Activity proceeded in line with operators’ expectations in 4Q13, notwithstanding temporary impacts from extreme weather. In this quarter, most operators shifted away capital from more gassy plays like the Woodford and focusing their attention on the Bakken, Eagle Ford, and Permian, where they reported better returns. Permian in particular experienced an industry-wide ramp in activity. In Bakken and Eagle Ford, operators focused mostly on improving the productivity of their acreage through better designs, well down-spacing, and tapping different intervals simultaneously. Significant cost reductions were not evident this quarter, but neither were there indications of cost escalation.
A Quick Note on Upstream Cost Escalation
There are two sources of reported increases in upstream costs that have very different causes and implications. One is the decision by industry to pursue upstream projects that have higher costs because these projects are now economic under a higher price regime. The second is the increase in costs for a given resource due to increases in contractor drilling, manpower and other capital or operating costs. It is extremely difficult to disentangle the two from company reports, but the former has been a major factor since prices began their sharp increase early last decade
Heating Season Coming to a Close
U.S. propane stocks will end the first quarter at quite low levels and comparisons will remain well behind the prior year. Exports continue to be quite active. Butane blending season is coming to a close soon. With the heating season ending, chemical feedstock users will be helping set the tone for the LPG markets in the months ahead.
Inventories Fall
The lack of rail movement continued to cause tightness in the market, particularly on the coasts. Inventories fell by 631 thousand barrels to a fifteen-week low 15.3 million barrels.
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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