PIRA Energy Group's Weekly Oil Market Recap for the Week Ending March 10, 2013

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Midcontinent Crude Oil Fundamentals Improve in February.

PIRA Energy Group

PIRA Energy Group

Midcontinent Crude Oil Fundamentals Improve in February, With the Exception of Cushing.

NYC-based PIRA Energy Group reports that Midcontinent crude oil fundamentals improved in February, with the exception of Cushing. On the week, U.S. product stocks declined and crude stocks increased, while Japanese crude stocks drew strongly. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*Midcontinent Crude Oil Fundamentals Improve in February, With the Exception of Cushing

Midcontinent crude oil fundamentals improved in February in all regions except Cushing, with stronger price differentials in western Canada, North Dakota, the Rockies, and the Permian Basin. Cushing fundamentals will remain soft through April, but a rapid drop in crude stocks from May onward will reconnect WTI to the Gulf Coast market by 3Q13.

*Japanese Crude Stocks Draw Strongly

Japanese crude stocks drew as the implied crude import rate remained relatively low, and crude runs remained strong. Finished product stocks built on the week, with jet and fuel oil building more than gasoline and gasoil. U.S. dollar-based refinery margins remained relatively strong.

*U.S. Petroleum Year in Review: 2012

During 2012, crude production increased sharply, with all of the annual increase in Lower 48 Onshore, especially Texas and North Dakota. Sweet crude imports fell more than total imports. These items, along with higher crude runs and a lower SPR draw, resulted in a significant 2012 crude stock build. Year-end 2012 crude stocks were the highest on record. 2012 U.S. product net exports also set a record. Petroleum use per dollar of GDP continues to decline, even as petroleum expenditure per dollar of GDP grows.

*April Saudi Crude Prices: Attractive to Asian Refiners, Responsive to Weak European Market

Saudi Aramco lowered its April crude prices for Asia and Europe relative to March. The formula prices for the U.S., which key off of ASCI (sour crude index), changed only slightly with some ups and downs. The decrease in Arab Light price for Asia looks very attractive when compared to the increasing incentive for Singapore refiners to run Arab Light relative to Cabinda. The decrease in Arab Light for Northwest Europe is line with the falling refining incentive for Arab Light relative to Urals for refiners in Northwest Europe.

*RINsanity Hits the Fuel Market

RIN prices have skyrocketed this year. This price escalation has significant implications for gasoline costs as well as trading. It encourages increased exports of gasoline and ULSD and decreased gasoline imports to avoid RIN purchase. Some companies fear they will not be able to blend enough ethanol or there will be insufficient RINs to purchase to meet their RFS obligations. PIRA believes this will not be a problem in 2013 for most companies, but in 2014 RINs will be short unless the government intervenes to modify the rules.

*1Q13 Iraq Oil Monitor

Sunni groups have held mass government protests since December, with sectarian tensions likely to increase heading into the April 20 provincial elections. The spillover from the Syrian civil war, the return of Al Qaeda, and the re-emergence of Shia militias are also contributing to the rise in sectarian violence. The Baghdad-Kurdish stalemate persists over disputed oil payments, with Kurdish oil exports suspended and Baghdad continuing to pressure oil companies with deals in Southern Iraq and the Kurdistan Regional Government.

*U.S Propane Stocks Draw

The transition week between February and March saw a relatively large draw on U.S. propane stocks. This was far larger than last year and substantially narrowed propane's excess position. While stocks have been declining quite rapidly over the last couple of months, they remain at a high level as the end of winter is approaching. Increased exports will help mitigate the pace of seasonal storage building. Butane blending season will come to an end shortly as refiners switch to lower RVP gasoline.

*Margins for Ethanol Manufacturing Stable

U.S. ethanol prices tracked corn prices higher for the second consecutive week. The profitability of ethanol production was little changed as the increases in ethanol and co-product DDG prices approximately balanced the higher corn cost. Brazil plans to cut taxes on ethanol manufacture to stimulate production and a mandate was issued to increase the concentration of anhydrous alcohol in gasoline to 25% from the current level of 20% on May 1.

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
3 Park Avenue, 26th Floor
New York, NY 10016
(212) 542- 1677
info(at)pira(dot)com

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