PIRA Energy Group's Weekly Oil Market Recap for the Week Ending September 29th, 2013

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Asia Pacific Refinery Margins Begin Recovering, Global Crude Markets Supported

PIRA Energy Group

PIRA Energy Group

U.S. octane value has trended higher in 2012 and 2013. One of the main reasons is that the U.S. has effectively reached its maximum ethanol utilization, and gasoline blenders cannot adjust octane with additional volumes of ethanol.

NYC-based PIRA Energy Group believes that Asia Pacific refinery margins begin recovering and global crude markets are supported. On the week, the U.S. had a small stock build, while Japanese stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Pacific Refinery Margins Begin Recovering, Global Crude Markets Supported

Refinery margins in Asia are starting to recover from poor levels amid increasing refinery turnarounds and good demand growth. Global crude markets are supported by continuing supply outages, and with strong crude stock draws resuming in November and increasing sharply into December. Product demand growth increases seasonally through year-end which should support improved cracks, particularly gasoil, and refinery margins.

U.S. Small Stock Build

Crude stocks surprised to the upside with a sharp drop in runs for the week ending September 20, making the week earlier 16.1 MMB/D print an outlier, while product stocks fell for the second consecutive week. Crude stocks remain above average, but this is largely due to new infrastructure to service growing U.S. production, while the inventories of the four major products are below the historic average. The stock excess to last year widened, particularly gasoline. Last year's stocks were especially low and the current gasoline inventory level is equal to the average of 2009-2011.

Japanese Crude Runs Continue Declining, But Crude Stocks Draw

Crude runs continued declining as turnarounds ramp up. The crude import rate was sufficiently low to produce a large crude stock draw. Gasoline demand was higher with a low yield that drew stocks. Gasoil demand stayed low reflecting holiday impacts and despite lower exports, yield dropped sufficiently to keep stocks flat. Refining margins began to improve, but remain statistically poor.

Higher U.S. Octane Values Here to Stay

U.S. octane value has trended higher in 2012 and 2013. One of the main reasons is that the U.S. has effectively reached its maximum ethanol utilization, and gasoline blenders cannot adjust octane with additional volumes of ethanol. In addition, increasing runs of paraffinic U.S. shale crudes are putting downward pressure on catalytic reforming yields and generating substantial quantities of low octane light naphtha.

Refiners Continue to Maximize Diesel/Gasoil Yield

In the Atlantic Basin, refiners have responded to the higher price of diesel/gasoil vs. gasoline by steadily increasing diesel/ gasoil yields as a percentage of crude. Even in Western Europe, where it was thought refiners were close to maximum diesel/ gasoil yields in 2007-8, yields have continued to creep up. In the United States, diesel/ heating oil yields have increased from roughly 26-27% to over 30% or more. Hydrocracking additions have played an important role.

VLCC Rates Improving

VLCC rates improved somewhat when chartering activity picked up substantially in September as production from Saudi Arabia continued at record levels. While this has produced only a modest increase in rates, it has at least kept rates from falling further in an over-supplied market. On the vessel supply side, the international order book seems to have bottomed with the focus increasingly on product tonnage. The biggest new developments are in the U.S., where high rates, thin spot markets, and uncertain availability have prompted a significant increase in orders for Jones Act tonnage.

Chemical Demand Supporting Propane

Preparations for winter are beginning, with a far better crop drying season than last year anticipated. Higher demand and exports will keep U.S. propane inventory relatively low. Propane remains a preferred feedstock over naphtha in international markets.

Ethanol Manufacturing Margins the Highest Since November 2011

Ethanol prices rose in most of the U.S. the week ending September 20, reversing some of the prior week’s losses. Cash Margins for ethanol manufacture were the highest since November 2011. RIN prices fell to the lowest values since February.

Ethanol Output and Inventories Decline

U.S. ethanol supply was tight the week ending September 20 as production fell to 832 MB/D from 838 MB/D in the previous week and inventories declined by 565 thousand barrels to 15.6 million barrels. PADD I stocks are at the lowest level in over 3 years.

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.

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