New York, NY (PRWEB) July 03, 2012
NYC-based PIRA Energy Group believes more constructive oil market balances in 2H12, along with heightened geopolitical risks to supply, will counteract the European drag on macroeconomic sentiment, providing some support to oil prices. In addition, North American inland crude prices are weak on constrained logistics, while European refinery margins remain strong. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
-*Tighter Balances and New Political Risks will Support Oil Prices in 2H12.
More constructive oil market balances in 2H12, along with heightened geopolitical risks to supply, will counteract the European drag on macroeconomic sentiment, providing some support to oil prices. Crude stocks have substantially rebuilt and should start to draw in August. Major product markets are backwardated, supported by low refinery runs and thin inventories. Strong refinery margins should result in substantial increases in global refinery runs. The WTI-Brent spread should continue to narrow. The outlook for a compromise between Iran and the P5+1 looks dim, putting the threat of an attack on Iran’s nuclear facilities back on the market’s radar.
-*Constrained Logistics Contribute to Weak North American Inland Crude Prices.
Oil prices remain sub-$100/Bbl as OPEC continues to meet the market call for heavier crudes and Asian buyers have not bought enough West and North African light crudes to clear the Atlantic Basin surplus. North American inland light and heavy crude prices have taken a disproportionate brunt of the bearishness, compounded by unplanned refinery downtime in PADDs II and III in May and June. The lack of sufficient takeaway capacity or the ability for producers to re-direct surpluses in a timely manner has resulted in crude builds at Cushing and elsewhere. Without a means to export crude to offshore markets, North American refiners continue to have more optionality than crude producers.
-*European Refinery Margins to Remain Strong.
In Europe, tight inventories in key products and weaker crude prices are resulting in strong refinery margins, even in simpler capacity. Margins will stay generally stronger than last year, reflecting regional refinery closures and outages, despite some restarts and new capacity.
-*Latin American Net Product Imports Increasing.
Latin America’s diesel deficit is increasing, with net imports increasing year-on-year in 2012. Refinery closures and increased demand are forcing the region to import more product, particularly from the U.S. Gulf Coast, but also from Europe and India. The only visible sources of diesel exports in the region are Curacao and Trinidad and Tobago. Net regional gasoline imports are also up year-on-year, with Mexico as the largest importer by far. Regional imports are likely to continue to grow in 2013 as the startup of major new refining capacity in Brazil has been delayed.
-*Lower Imports and Higher Demand Push U.S. Stock Build Lower.
Commercial stocks built for the week ending June 22, driven entirely by other products. Crude oil and the four major products showed slight inventory declines. In all four major products, reported demand picked up on the week, while crude and product imports fell, substantially reducing the inventory build from the prior week.
-*Japanese Crude Runs Drop, Stocks Draw.
In what appeared to be the impact from typhoon Guchol, Japanese crude runs fell in the week ending June 23 and the crude import rate was low, allowing crude stocks to draw sharply. Crude stocks fell from the top of the four-year range to the midpoint in just one week.
-*North Sea and Russian ESPO Crude Arbitrage to Korea; ESPO Pipeline Expansion.
The crude trading patterns supplying Asia have changed on the margin over the last two years. First, in 2010 Phase I of the Eastern Siberia-Pacific Ocean (ESPO) pipeline opened. Second, in July 2011 a Free Trade Agreement (FTA) between the EU and South Korea went into effect, eliminating import tariffs on North Sea crude shipped to Korea. Since most other imported supply pays a tariff, the FTA effectively subsidized the arbitrage of North Sea crude movements to Korea. While the volumes are modest compared to total Mideast crude sales to Asia, this movement of spot-traded crudes helps balance prices and volumes between Europe and Asia.
-*Falling Heating Oil Demand a Reflection of Lower Market Share Due to Higher Price.
The number of U.S. homes using heating oil has been greatly reduced by the high price of heating oil versus natural gas, along with consumer preference and some state laws allowing gas utilities to subsidize natural gas conversions. Consequently, heating oil demand has declined, both in absolute terms and as a share of total distillate demand. Heating oil demand will still have seasonal peaks, but at reduced levels from prior years. Heating oil demand has also become more concentrated in the Northeast.
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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