PIRA Energy Group's Weekly Oil Market Recap for the Week Ending June 22nd, 2014

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Baiji Refinery Under Siege and Has Ceased Operation

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Iraq’s Baiji refinery is likely to be idle for a prolonged period, requiring Iraq to import additional refined products. Possible sources are other Middle Eastern countries, Turkey and India.

NYC-based PIRA Energy Group reports that Baiji refinery is under siege and has ceased operation. On the week, U.S. crude stock draw widens commercial stock deficit. In Japan, crude runs drop again, crude stocks build. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Baiji Refinery Under Siege and Has Ceased Operation

Iraq’s Baiji refinery is likely to be idle for a prolonged period, requiring Iraq to import additional refined products. Possible sources are other Middle Eastern countries, Turkey and India. There is capability to import products at the southern port of Basrah, but deliveries by truck from neighboring countries will certainly be needed. This could prove difficult with the ISIS fighters in control of much of northern Iraq. With Baiji operating in 2013, Iraqi product imports totaled 200 MB/D. If all of Baiji’s light product production needed to be replaced, imports would need to increase by an additional 120 MB/D, or consumption will fall.

U.S. Crude Stock Draw Widens Commercial Stock Deficit

While total commercial stocks built the week ending June 13, crude oil stocks drew, compared to a build last year, contributing to the widening out the total commercial stock deficit. The four major refined products built, compared to a draw last year, narrowing their collective deficit. Crude stocks are now about -13.0 million barrels under their recent peak during late April, while the four major product stocks are now 10.7 barrels over that same week.

Japanese Crude Runs Drop Again, Crude Stocks Build

Crude runs dropped another 65 MB/D, and while crude imports also dropped, crude stocks built for the third straight week. Finished products drew slightly. Refining margins were slightly softer on the week with margins remaining near statistical lows despite ongoing refinery downtime.

Freight Market Outlook

The situation in Iraq has taken center stage in the oil markets. Iraq is now in a state of sectarian civil war and the most likely situation is that the country will become mired in a protracted Syria-like conflict, with the population divided along ethno-sectarian lines. But this offers little upside for currently depressed tanker markets. Northern Iraqi exports are unlikely to return soon but the 2.6 MMB/D of current southern exports remain relatively well-protected. Previously forecast production growth from Iraq is now unlikely. This will translate into higher flat crude prices and higher bunker prices versus PIRA’s previous assessments and ultimately lower global oil demand and trade.

LPG Prices Rally, Supplies Seen as Sufficient

U.S. LPG prices rallied this week on a lower than expected inventory increase and higher crude prices due to ongoing unrest in Iraq. Propane’s price surged 5% to end the week at 108.7¢/gal, the highest price since the end of April. Northwest European butane prices have ripped 11% higher over the past two weeks, easily outpacing crude’s rally. Increasing petchem demand for the feedstock and a tight prompt supply environment has propelled butane higher in Europe.

U.S. Prices and Margins Lower

Ethanol prices declined the week ending June 13 due to growing production, building inventories, and falling corn costs. Manufacturing margins also decreased, with the biggest factor being the plummeting co-product DDG value, as China has stopped buying this animal feed component from the United States.

Ethanol Output Reaches All-Time High

Ethanol production skyrocketed to a record 972 MB/D the week ending June 13, shattering the previous high of 963 MB/D set in the final week of 2011. Ethanol-blended gasoline production reached a near-record 8,931 MB/D from 8,708 MB/D during the prior week as the economic incentive to blend rose to highest level in nearly two 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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