PIRA Energy Group’s Weekly Oil Market Update for the Week Ending May 13

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PIRA Energy Group Says Physical Oil Balances Will Tighten in 2H12.

PIRA Energy Group
Global oil prices have come under pressure recently, but physical balances will tighten in 2H12.

NYC-based PIRA Energy Group reports that global oil prices have come under pressure recently, but physical balances will tighten in 2H12. In the U.S., oil demand has increased year-on-year, while Japanese demand decreased month-on-month and relative to April 2010. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following major market drivers:

2H12 Physical Oil Balances to Tighten.
Oil prices have come under pressure due to concerns about economic growth, continuing financial problems in Europe, and soft physical balances. In 2H12, physical balances will tighten significantly, while Central Banks will increasingly take action to maintain economic momentum.

U.S. Oil Demand Increases Year-on-year.
In the U.S., the year-on-year growth in the four-week average adjusted oil demand is the strongest so far in 2012. Given lower year-on-year retail prices, U.S. oil demand implies a relatively healthy real GDP growth rate. The four major products had another large stock decline in the week ending May 4. Since mid-February, almost weekly declines in inventories of the four major products have led stocks to a five-year low. Overall stocks built as a build in crude and other product stocks more than offset the major products' decline.

Japanese Holiday Impact as Expected.
As expected in Japan, the two weeks of data released because of the holidays showed higher gasoline demand and lower gasoil demand. As such, gasoline stocks drew and gasoil stocks built. April oil demand was softer relative to March averages, but comparisons to April 2011 figures are distorted by the earthquake and tsunami. Relative to April 2010, demand is down in every product, except fuel oil, which is getting a boost from increased utility burn.

Shale Liquids Investment Continues.
With returns of 50-100% being earned on shale liquids investment, money continues to pour into the industry and production is rising rapidly. The status quo cannot continue. Costs will rise, realizations will fall, or some combination of both will occur.

LPG Demand Soars.
In the U.S., general market sentiment has clearly shifted with macroeconomic events adding a more bearish tone. Inventory building is affecting the complex, although the return of steam crackers will add to ethane and propane feedstock demand. International markets are also taking signals from the broader crude market. End-users and traders are hesitant to add stocks given the price structure and falling flat prices. Feedstock demand should continue to be favorable.

U.S. Ethanol Manufacturing Margin Falls Slightly.
The cash manufacturing margin for PIRA’s model U.S. ethanol plant decreased slightly during the week ending May 4, as corn costs rose but ethanol prices declined. Ethanol production and inventories increased during the preceding week as the market remains oversupplied. The 2012/2013 harvest in Brazil’s South-Central region began in April, but most companies waited until May before processing sugarcane. For the first half of April, ethanol output was down from last year, and domestic prices rebounded as the shortfall became apparent. European ethanol prices were mixed, with T2 prices declining slightly while T1 prices increased.

U.S. Ethanol Production Increases Week-on-week.
U.S. ethanol production increased slightly to 897 MB/D in the week ending May 4, up slightly from the prior week. Plants that had undergone regularly scheduled maintenance in early April are now back online. However, some facilities continue to operate at reduced rates as near-record inventories and relatively high corn prices combine for low margins. Stocks fell by 848 thousand barrels to 21.4 million barrels, still very high levels. The output of ethanol-blended gasoline rose to 8.252 MMB/D from 8.124 MMB/D during the previous week as gasoline production increased and the financial incentive to blend ethanol into gasoline remained 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
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New York, NY 10016

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