PIRA Energy Group’s Oil Market Update for the Week Ending March 30

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PIRA Expects Volatility in Global Oil Prices in 2012.

PIRA Energy Group
Oil prices will be volatile over the course of 2012 since global spare capacity is razor-thin, stocks will decline in 2H12, and hopes of an Iranian compromise are likely to be dashed.

NYC-based PIRA Energy Group believes that global oil prices will be volatile over the course of 2012, despite reduced economic tail risks, as spare capacity is limited, stocks will decline, and a compromise with Iran is unlikely. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*Global Oil Prices to be Volatile in 2012. Global economic growth is tracking a 3.5% rate in 1Q12 and tail risks have been significantly reduced. Oil prices will be volatile over the course of 2012 since global spare capacity is razor-thin, stocks will decline in 2H12, and hopes of an Iranian compromise are likely to be dashed.

*Atlantic Basin Product Price and Refining Margin Outlook Firms. The outlook for Atlantic Basin product prices and refining margins is firmer as refinery closures in Europe, U.S. PADD I, and the Caribbean tighten balances.

*U.S. Commercial Stocks Build Week on Week. For the week ending March 23, a very large U.S. crude stock build overwhelmed a small product inventory decline, leaving overall stocks up on the week. The stock increase was larger than the same week's build last year, widening the year-on-year inventory excess. The largest year-on-year inventory deficit is in distillate, while the largest year-on-year inventory excess is in other products, primarily due to higher NGL inventory.

*Japanese Product Stocks Decline Week on Week. Following two straight weeks of builds, Japanese finished product stocks eased back in the week ending March 24. Gasoil inventories declined moderately, and naphtha and fuel oil inventories declined by smaller amounts. However, gasoline stocks built for the third straight week. Product stocks remain below the bottom of their four-year range.

*Sanctions on Iran Will Tighten Tanker Balances in 2H12. The Iranian situation has taken center stage for both the oil and transport markets, as details emerge on the timing and implementation of sanctions. The U.S. seems to be walking a fine line between insisting on reductions in Iranian crude purchases by Far East buyers, while simultaneously ensuring that the oil markets are adequately supplied. For shippers, the inability to insure Iranian cargoes after July 1 is a major constraint and will complicate logistics in 2H12, directionally tightening tanker balances. Tanker deliveries continued strongly after the surge in January. VLCC rates have also been stronger, while the MST groups have not fared as well.

*U.S., propane stock levels in the U.S. are expected to reach record highs as production stays robust and export capacity remains constrained until 4Q12. Ethane stocks are expected to increase given the extent of cracker downtime. In Europe, the first half of April is balanced, despite the end of the heating season, as petrochemical operators show sustained interest in LPG and cargoes continue to leave the region. There is upside potential to LPG demand for cracking in both Europe and the East, provided prices stay competitive relative to naphtha.

*Global Biofuels markets sees U.S. Ethanol Prices Following Corn Costs Higher. U.S. ethanol prices jumped March 30, following soaring corn prices. Cash manufacturing margins remained relatively poor, but improved slightly in March as corn costs fell faster than ethanol. Margins are expected to continue to rise in April as several plants reduce output, which will help bring the market back into balance. However, any advances will be limited by the recent build in inventories, which are near all-time highs. Even without the Volumetric Ethanol Excise Tax Credit (VEETC), rising gasoline prices are increasing the incentive to blend ethanol. January U.S. exports of non-beverage grade ethanol were down from December 2011’s record as shipments to Brazil decreased.

*Further, U.S. Ethanol Production Declines week on week. U.S. ethanol production declined to a six-month low of 889 MB/D for the week ending March 23, despite improving margins. Stocks fell by 85 thousand barrels from a record high 22.7 million barrels to 22.6 million barrels. PADD I inventories reached record levels for the fourth consecutive week, due mostly to 18 MB/D imported into the region. The output of ethanol-blended gasoline rose to 8.083 MMB/D, up 15 MB/D from the previous week, as total gasoline production increased and the blending incentive improved. The percentage of ethanol-blended gasoline fell slightly, but remained near record levels.

For Additional Information

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.

PIRA Energy Group
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New York, NY 10016
212-686-6808
sales(at)pira(dot)com

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