New York, NY (PRWEB) June 26, 2012
NYC-based PIRA Energy Group believes that market dynamics specific to Forties crude are preventing the Brent structure from creating the incentive to store crude. In addition, the limited destination options for LLS crude have made it a less-representative benchmark for refiners. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
*A Slower-Moving Relief Valve for Crude.
Traditionally, excess crude supply in the Atlantic Basin would quickly drive Brent structure into contango, creating an incentive to store crude and providing relief to refiners and traders. However, it is much harder for this to occur now as market dynamics specific to Forties (the Brent marker crude) have prevented it from weakening enough to create this incentive. Thus, the crude oversupply seems worse than it really is. U.S. commercial oil stocks saw their second-largest weekly increase of the year in the week ending June 15.
*Japanese Runs Rise Again; Crude Stocks Jump.
For the week ending June 15, Japanese refinery runs continued rising as refineries wind down maintenance and turnarounds. Despite the rise in crude runs, crude stocks increased on a jump in the implied crude import rate.
*LLS Crude Less Representative as U.S. Gulf Coast Sweet Crude Price Benchmark.
Since early last year, Light Louisiana Sweet (LLS) crude has periodically disconnected from other U.S. Gulf Coast crude markets. LLS is priced at St. James, LA, which is the entry point for shipments on the Capline pipeline. Besides Capline, the options for shipping crude from St. James are limited. As more Canadian barrels flow to Midwest refineries, especially following the opening of the Keystone pipeline in 2010, the volume of crude flowing up the Capline has decreased. In addition, expanding rail facilities are receiving more domestic crude at St. James. Thus, LLS has become less representative as a Gulf Coast refinery marker for sweet crudes.
*In the U.S., Ethane and Propane Storage Remain at Extremely High Levels.
As crackers come back online ethane stocks should decline some. However, propane stocks will keep building, likely to record levels. Thus, recent relative propane gains are not likely to continue, especially as forward-buying subsides. Much will depend on the direction of crude prices in the coming weeks. In Europe and Asia, petrochemical valuations will set a ceiling on outright prices. In the absence of storage-buying, LPG cannot afford to lose an important outlet. July CP's will be set lower. There will be a mix of buying for immediate needs and some opportunistic activity.
*Ethanol Prices Decline Week-on-Week.
For the week ending June 15, U.S. ethanol prices headed lower, following a bounce in the prior week. As ethanol prices declined more than corn costs, PIRA’s model plant did not cover cash costs for the first time since June 2008. The manufacture of ethanol-blended gasoline reached an all-time high for the week ending June 8, as gasoline production rose sharply. Ethanol output increased slightly, while inventories declined. The EPA issued final approval of the waiver for E15 on the federal level, allowing the fuel to be sold for newer standard cars in the U.S.
*U.S. Ethanol Production Falls Week-on-Week.
U.S. ethanol production fell to 900 MB/D for the week ending June 15, down from 920 MB/D the prior week as more plants are shutting down or reducing production due to poor margins. Stocks rose by 519 thousand barrels to 21.2 million barrels, rebounding from a four-week low. The output of ethanol-blended gasoline fell to 8.406 MMB/D from a record 8.591 MMB/D during the prior week as gasoline production declined significantly. Due to the relatively high economic incentive to blend ethanol into gasoline, ethanol blends continue to make up a very large percentage of the total 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.
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