PIRA Energy Group's Weekly Oil Market Recap for the Week Ending April 21, 2013

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Asian Refining Margins Under Pressure, Turnarounds Should Help Foster Improvement

PIRA Energy Group

PIRA Energy Group

Sour crude producers will inevitably react to lower crude oil netbacks from U.S. Gulf Coast sales by redirecting supply to Asia.

NYC-based PIRA Energy Group reports that Asian refining margins are under pressure and turnarounds should help foster improvement. On the week, U.S. oil commercial stocks built, and Japanese oil stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*Asian Refining Margins Under Pressure, Turnarounds Should Help Foster Improvement

Asian refining margins are being hurt by weak gasoline and naphtha cracks. Upcoming turnarounds, along with discretionary run cuts, should begin to tighten balances in coming months. There continues to be vulnerability on flat prices due to an unsettled economic environment, but strong demand growth as we move into 2H13 should provide good support for higher prices.

*U.S. Commercial Stocks Build W/W

Overall U.S. commercial stocks built the week ending April 12, crude stocks declined, while the product stock build brought stocks flat year-on-year. As a result the crude inventory excess narrowed to the lowest level this year. Winter is over and stock builds are quite typical, April/May is generally the low for global product demand.

*Japanese Crude Stocks Build, Refining Margins Remain Weak

Japanese crude runs rose slightly and crude imports also increased, building stocks the week ending April 13. Gasoline and gasoil demands eased, but yields were sufficiently low, drawing stocks on both slightly. Refining margins remain weak and hurt by continuing declines in gasoline cracks.

*Recent PADD I Gasoline Demand Decline Most Likely Overstated

After falling slightly during the first nine months of 2012, PADD I reported gasoline demand fell steeply from October 2012 to January 2013 in the latest PSM report. The demand decline was steeper than what PIRA estimated due to Hurricane Sandy, and it was also inconsistent with regional vehicle miles travelled, income, and price data. PADD III demand spiked during the same period, and PIRA suspects there is some understatement of shipments from PADD III to PADD I, causing PADD III demand to be overstated and PADD I demand to be understated.

*U.S. Gulf Coast Crude Oil Pricing

Sour crude producers will inevitably react to lower crude oil netbacks from U.S. Gulf Coast sales by redirecting supply to Asia. South American sour crude is replacing West African crude as the swing grade. Canadian crude oil pipeline projects to the East and West coasts will figure importantly into this process.

*Latin American Light Product Import Requirements to Grow Substantially in 2013

Latin American light product import requirements will continue to grow substantially in 2013, as regional demand grows and while no significant refining capacity expansion is expected in the region. In 2012, Latin America total net imports for gasoline and middle distillates were collectively up from 2011. This requirement for imports will increase in 2013. For Brazil, fuel oil exports will fall substantially, and although imports of gasoline will ease slightly, LPG, naphtha, diesel, and jet import requirements are expected to increase.

*U.S Ethanol Prices and RIN Values Mixed

U.S. ethanol prices increased early the week ending April 12, but declined after the DOE’s weekly supply report showed a large increase in production during the prior week. Chicago prices remained weak due to the large output in PADD II. Ethanol sold at a premium to regular gasoline in New York on April 12, but there was an incentive to blend elsewhere. Ethanol RINs rose to the highest level in a month following a report that less ethanol was produced in February, but they fell thereafter.

*Mixed Tanker Markets

Tanker markets have been mixed, with VLCC rates remaining exceptionally weak as Saudi Arabia and the other Middle East Gulf producers have cut exports. The midsized tanker groups have recently fared better than VLCCs, especially in Europe. Vessel earnings in all groups have been helped by a decline in bunker prices since March 1, mostly related to the decline in the flat price for crude oil.

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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