PIRA Energy Group's Weekly Oil Market Recap for the Week Ending May 26th, 2013

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The Dated Brent-WTI Spread Will Continue to Narrow Further in the Weeks Ahead

PIRA Energy Group

PIRA Energy Group

Brent crude will gradually regain its trading range. Atlantic Basin gasoline cracks will be lower than last year with higher inventory levels but still generally healthy through midyear.

NYC-based PIRA Energy Group believes that the Dated Brent-WTI spread will continue to narrow further in the weeks ahead. On the week, U.S. commercial product inventories increased while crude stocks were down slightly. In Japan, a sharp drop in crude runs with higher crude imports led to a large crude stock build. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

*Brent Crude Will Regain Its Trading Range

Brent crude will gradually regain its trading range. Atlantic Basin gasoline cracks will be lower than last year with higher inventory levels but still generally healthy through midyear. Later, distillates will take the lead as demand increases seasonally while inventories remain on the low side. Overall, refining margins in Europe will be softer than last year. Refining margins in the U.S. will be strong though not as high as in 2012.

*Products Stocks Build

Overall product inventories increased for the week ending May 17, while crude stocks were down slightly. The product stock increase was higher than the week earlier because of increased refined product output, supported by greater use of blending components, as higher week-on-week reported demand matched increased product imports. Last year, the same week had barely any product stock increase because of a sharp decline in gasoline inventories. Therefore, the year-on-year inventory excess substantially increased, especially for gasoline.

*Japanese Crude Stocks Reverse Their Decline on Sharp Run Cuts

A sharp drop in Japanese crude runs with higher crude imports led to a large crude stock build for the week ending May 18. This mostly offset the large crude stock draw seen in the previous week. Gasoline demand improved and stocks drew slightly. Similarly, gasoil demand rose and stocks drew. Refining margins continue to show modest improvement but are still weak. For the second straight week, gains in light product cracks outweighed a softer fuel oil crack.

*Petrochemical Feedstock Usage Is Key in the Shoulder Season

Weak ethane prices remain a key impediment for gas processors, encouraging rejection. Increased steam cracker operations will be necessary to help redress the stock imbalance. Propane stocks keep seasonally building, but at a slower pace than otherwise due to the historic level of exports. Overseas markets are in transition during the shoulder season towards preparing for stock building for next winter. Petrochemical usage is key in the months ahead to consuming growing LPG supplies.

*RIN Prices Rise

U.S. ethanol prices dipped during the middle of the week ending May 17, but they rebounded on Friday. Prices were supported by higher corn values and low inventories. Weekly average manufacturing margins declined, with the lowest prices for co-product DDGs in almost a year a major factor. Prices for D6 RINs, essentially for grain-based ethanol, rose again and are likely to rise further this summer as demand increases.

*Ethanol Production Soars

U.S. ethanol production soared to a 47-week high of 875 MB/D the week ending May 17 as more plants ramped up to capacity due to high manufacturing margins. Ethanol-blended gasoline manufacture reached 8.62 MMB/D, the second highest volume of all time, up from 8.49 MMB/D in the previous week. Inventories continued to decline in nearly all of the country, falling to 16.2 million barrels, the lowest since November 2010.

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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