NYC-based PIRA Energy Group reports that while the global economic backdrop continued to improve, oil market fundamentals are weakening. On the week, U.S. oil stocks built as product demand weakened, and Japanese crude stocks built as well. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following: *While Global Economic Backdrop Improves, Oil Market Fundamentals Weaken The global economy continues to improve, providing a positive backdrop for oil prices and other risk assets. However, the 2013 oil market itself is in general, not bullish. Non-OPEC supply will significantly outpace demand in 2013, causing core OPEC countries to cut production to balance markets.
*Asian Economic Data Appears to be Strengthening
Asian economic data had been looking distinctively weaker, but a turnaround appears to be underway. Global crude stock draws generally accelerate in December, but this is followed by a large inventory build in crude and products in January. Strong light product draws will begin in February and March as turnarounds gear up and product demand rises.
*Growing North American Crude Production Weakening Atlantic Basin Fundamentals
North American production is growing swiftly, which will negatively affect Atlantic Basin supply-demand balances, especially during 1H13 refinery maintenance. U.S. imports of light-sweet and medium-sweet crudes will continue declining rapidly. The WTI-Brent spread will narrow sharply into mid-2013.
*Latin American Heavy Crude Price Differentials to Remain Firm
In 2013, heavy crude price differentials will remain firm for Latin American grades. Global coking capacity will increase faster than heavy crude production, keeping vacuum resid balances tight and fuel oil cracks relatively strong. Coking refinery margins will only be at a narrow premium to cracking margins and some coking capacity will not be fully utilized.
*U.S. Oil Stocks Build Week-on-Week as Product Demand Weakens
U.S. commercial oil inventories increased the week ending December 21, as weaker product demand led to a product stock increase that more than offset a crude stock decline.
*Japanese Crude Stocks Build Week-on-Week
Japanese crude stocks rebounded the week ending December 22, following the sharp draw seen the prior week.
*Canadian Rail Options as Adjunct to Export Pipelines
Canadian oil pipeline infrastructure is becoming woefully inadequate relative to the current and growing level of anticipated future production. Expanded pipeline capacity to both the U.S. and the West Coast has been slowed by political opposition, placing in jeopardy new production from the oil sands. However, the growing attention to rail alternatives reflects the powerful economic incentives to find a way to move this crude to higher value markets.
*2013 U.S. Refinery Turnarounds are entering a relatively active period
After a high level of refinery downtime in 4Q12, planned downtime during the 1H13 is anticipated to be well above average. Given the difficulties of bringing units back into service and the potential for unplanned outages, it is likely that actual downtime will be even higher.
*Oil Tanker Markets End Year on a Positive Note
Tanker markets ended 2012 on a positive note, with spot rates in most trades safely above cash operating costs. Clean tanker rates, especially for the larger product groups, have been especially firm, hitting multi-year highs on strong naphtha demand from Asia. While excess capacity remains a problem, fleet growth slowed significantly in 2012 due to rationalization measures, including a slowdown in tanker orders and early scrapping of surplus tonnage.
*Higher LPG Stocks Limit Upside Price Potential
The U.S. weather maps point to a cold front moving in, which should be bullish for year-on-year comparisons for propane. However, high stocks limit the upside price potential. In Asia, demand is weak despite relatively cold weather. In Europe, weather-related demand has to materialize to stave off further price pressures.
*U.S. Ethanol Prices Fall in December
U.S. ethanol prices tumbled in December, primarily due to plunging corn costs. Demand was weak with ethanol selling at a premium to gasoline components in many parts of the country mid-month, causing the penetration of ethanol-blended gasoline to drop to the lowest level since January. Production rebounded from summer lows and inventories built to a 26-week high during the week ending December 14.
*U.S. Ethanol Output Down Slightly Week-on-Week
In the week ending December 14, U.S. ethanol output was 822 MB/D, down slightly from 824 MB/D the prior week. Production was higher than it was in July and early August, but much lower than the 943 MB/D output at this time last year. Imports of Brazilian sugarcane-based ethanol rebounded to 37 MB/D (10.9 million gallons) from 12 MB/D (3.5 million gallons) during the prior week.
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.
Source: PIRA Energy Group