PIRA Energy Group's Weekly Oil Market Recap

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PIRA Energy Group says LLS and Brent crude oil remain strongly backwardated.

PIRA Energy Group
Prices for Atlantic Basin light crudes like LLS and Brent remained strongly backwardated in November, keeping their premiums over WTI.

NYC-based PIRA Energy Group reports that LLS and Brent remained strongly backwardated in November. In the U.S., the commercial oil stock profile has deteriorated dramatically during 2012, while Japanese finished product stocks continued to draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*LLS and Brent Crude Oil Remain Strongly Backwardated
Prices for Atlantic Basin light crudes like LLS and Brent remained strongly backwardated in November, keeping their premiums over WTI. Meanwhile, pipeline problems in the North and refinery maintenance in the Southwest weakened Canadian and Midland differentials. U.S. crude and condensate production rose in September, with the majority of the increase due to recovery from Hurricane Isaac in the Gulf of Mexico, and decreasing maintenance in Alaska. Midcontinent production rose and Western Canadian oil supply fell.

*Oil Stock Profile Deteriorates Dramatically During 2012
Despite sanctions on Iran and massive unplanned non-OPEC supply losses, commercial oil inventories in the three major OECD markets ended October above 2011 levels despite starting the year in deficit. In the week ending November 30, very weak demand combined with higher crude and product imports for a large overall stock build. Crude stocks declined as expected, but the product inventory increase overwhelmed the crude stock draw.

*Japanese Finished Product Stocks Continue to Draw
In the week ending December 1, finished product stocks drew, despite a rise in crude runs, as most of the major product demands were strong. In the aggregate, finished stock levels remained below the bottom of the four-year range.

*November Weather was Colder than Normal
November weather for the three major OECD markets turned out to be colder than the 10-year normal, resulting in higher oil heating demand.

*Saudi Crude Formula Prices for January: Aggressive in Asia, Responsive to Market Weakening in Europe
Saudi Arabian formula prices for crude lifting in January bound for Asia were raised relative to December. Price differentials for Arab Super Light and Arab Extra Light were left unchanged in January, while prices for Arab Light, Arab Medium, and Arab Heavy increased from December.

*Impact of “Dumbbelling” of U.S. Crude Slate Exaggerated
The rapid growth of U.S. shale liquids and Canadian unconventional production will alter the crude slate for U.S. refiners. The proportion of lighter-API grades and heavier Canadian grades will increase, reducing the proportion of other (medium) grades flowing into U.S. refineries. The expected decrease of medium crudes has led to some concern of a deficit in middle distillate yields. This “dumbelling” of the crude slate is feared because both very light and very heavy crudes have lower yields of middle distillates relative to medium-API grades. However, PIRA’s bottom-up analysis of the U.S. crude slate shows that these worries are largely exaggerated.

*Situation in Iraq Affecting Markets
A military clash in Salahuddin province on November 16 and the ongoing dispute over oil autonomy have exacerbated tensions between Baghdad and the Kurdish Regional Government (KRG). Kurdish oil exports were reportedly curtailed in late November due to delays in oil payments and low provisions for 2013 exports. Spillover from the conflict in Syria and provincial elections scheduled for April 2013 could intensify sectarian mistrust and embolden extremists. Pipeline and infrastructure delays continue to limit field expansion.

*LPG Markets Tumbling
The U.S. is entering the heating season with propane inventories at record levels for this time of the year. Ethane tumbled last week to price levels that discourage production. Propane is also likely to be hit. In Asia, steep backwardation and a perception of adequate stocks is curtailing end user activity. Europe is supported by a surge in winter-related demand.

*Lower Gasoline Prices Reduce Incentive for Ethanol Blending
U.S. ethanol prices exhibited an inverted V-shape curve the week ending November 30, peaking Wednesday/Thursday before falling on Friday. The incentive for ethanol blending fell because of lower gasoline prices. Production and inventories have declined to near the lowest levels of the year. Manufacturing profitability remained extremely poor but is expected to rebound soon. The EPA missed its statutory deadline for setting renewable volume obligations for 2013. It is unlikely the requirements will be finalized by the end of the year. Brazilian ethanol output was robust during the first half of November.

*U.S. Ethanol Output Increases Week-on-Week
U.S. ethanol output rebounded to 835 MB/D the week ending November 30, the highest level since June. The U.S. also received 92 MB/D (27.0 million gallons) of Brazilian sugarcane-based ethanol, up from 27 MB/D (7.9 million gallons) the prior week. The manufacture of ethanol-blended gasoline fell to 8.05 MMB/D from 8.11 MMB/D as the penetration of blended gasoline declined. Ethanol stocks built by 994 thousand barrels to 19.3 million barrels, an 18-week high.

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) 542- 1677
info(at)pira(dot)com

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