PIRA Energy Group’s Global Oil Market Update for the Week Ending December 1

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PIRA Believes Below-Trend Economic Growth Will Create Challenging Environment for Oil Markets

PIRA Energy Group
The range for oil prices will expand as 2013 progresses, with the floor for Brent prices moving lower as supply bottlenecks diminish in the U.S. midcontinent.

NYC-based PIRA Energy Group believes that below-trend economic growth will create a challenging environment for global oil markets. On the week, U.S. commercial inventories continued to decline, while Japanese crude stocks rose sharply. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*Below-Trend Economic Growth Will Create Challenging Environment for Oil Markets
The macro setting is fragile but improving directionally. Below-trend economic growth will present a challenging environment for oil markets. Non-OPEC supply will expand faster than oil demand, requiring OPEC, in particular core OPEC countries, to cut production to balance oil markets, increasing OPEC spare capacity. The range for oil prices will expand as 2013 progresses, with the floor for Brent prices moving lower as supply bottlenecks diminish in the U.S. midcontinent.

*U.S. Commercial Inventories Continue to Decline
U.S. commercial oil inventories continued to decline the week ending November 23, but at a slower pace than in prior weeks. The slower inventory decline on the week was partly due to lower weekly reported demand. The Thanksgiving holiday week typically has fewer delivery days, thus reducing demand. Higher crude and product imports also contributed.

*Japanese Crude Stocks Rise Sharply
In Japan, crude stocks built sharply in the week ending November 24, reversing the prior week’s large draw. The stock build was in large part caused by a jump in the implied crude import rate, as PIRA had expected based on the rise in spot tanker fixtures from the Middle East.

*Jones Act Restrictions and the U.S. Flag Tanker and Barge Fleets
The Merchant Marine Act of 1920, more commonly known as the Jones Act, requires that any shipping between U.S. ports use U.S.-flagged vessels owned and crewed by U.S. citizens or permanent residents. Due to the limited availability of U.S.-flagged vessels, the Jones Act makes it difficult to ship crude and products from the Gulf Coast to Atlantic Coast refineries. While the need for Jones Act tonnage is increasing because of the explosive growth in U.S. shale crude production, few tankers are being built because tanker construction in the U.S. is roughly four times more expensive than in Korea. Some Jones Act barges are available for coastal trade, but they are smaller and travel more slowly than tankers.

*U.S. LPG Markets
The U.S. is entering winter with ample propane stocks and limited export capability, at least until January. Ethane stocks built in September and are near all-time highs. In Asia, buying interest is reemerging at a time when spot availabilities from the Middle East are still thin. The weather has also turned more constructive.

*U.S. Ethanol Prices Rise, but Margins Remain Poor
U.S. ethanol prices broke out to the upside of a narrow trading range in November, but margins remained extremely poor. While corn values have been high over the past few months, the costs could not be passed through, even as ethanol sells at a discount to gasoline. Demand is seasonally weak and gasoline production has declined slightly this year. The industry is also up against the 10% blend wall, with sluggish growth of E15-E85. After strong exports in 2011, the U.S. has been a net importer recently with large amounts of sugarcane ethanol coming from Brazil to satisfy the advanced ethanol requirement in RFS2.

*U.S. Ethanol Output Declines Week on Week
In the week ending November 23, U.S. ethanol output declined for the third consecutive week, dropping to 803 MB/D from 811 MB/D during the prior week. The U.S. received 27 MB/D (7.9 million gallons) of Brazilian sugarcane-based ethanol, up from 6 MB/D (1.8 million gallons) the previous week. Stocks decreased by 580 thousand barrels to 18.3 million barrels, the third-lowest level of the year. The manufacture of ethanol-blended gasoline fell slightly to 8.11 MMB/D from 8.18 MMB/D though ethanol made up a larger percentage of the gasoline pool.

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.

Click here For Additional Information on PIRA’s global energy commodity market research services.

PIRA Energy Group
3 Park Avenue, 26th Floor
New York, NY 10016
212-686-6808
jsteele(at)pira(dot)com

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