PIRA Energy Group's Weekly Oil Market Recap for the Week Ending November 30th, 2014

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China and India SPR to add Oil in 2015, mostly in 2H

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While the global price elasticity of oil demand and supply is extremely low, the price elasticity faced by the Saudis, as a swing producer, is much higher.

NYC-based PIRA Energy Group reports that China and India SPR to add Oil in 2015, Mostly in 2H. In the U.S., commercial stocks drew. In Japan, crude runs rose, crude imports were higher and crude stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

China and India SPR to Add Oil in 2015, mostly in 2H

PIRA assumes in its global supply/demand balances that China and India will each add barrels to their respective SPRs in 2015. The limiting factor is capacity availability. In the case of China major new facilities are not expected until at least the second quarter while in India, after years of delay, the first facility is expected to start operating in 2Q15.

U.S. September 2014 DOE Monthly Revisions

DOE released its final monthly September 2014 (PSM) U.S. oil supply/demand data today. Demand came in at 19.04 MMB/D compared to 19.16 MMB/D PIRA had estimated in its balances. Compared with the weekly preliminary data, total demand was revised down 206 MB/D, with "other" lowered 495 MB/D, primarily due to an upward revision to exports. End-September total commercial stocks stood at 1,144.0 MMBbls versus the 1,140 MMBbls adjusted stock level that PIRA carried in its balances. Compared to the weekly preliminary data, DOE raised total commercial stocks 7.9 MMBbls, with 1.4 MMBbls being crude, and 6.5 MMBbls being products. Relative to year-ago, using final September PSA data, total commercial stocks are higher by 6.6 MMBbls.

Japan Crude Runs Rise, Crude Imports Higher, Crude Stocks Built

Crude runs rose incrementally out of turnarounds. Alignment with our planned turnaround schedules still looks good. Crude imports were higher and crude stocks built. Finished product stocks drew marginally due to draws on gasoline and naphtha. Gasoline demand was higher, as expected, due to the holiday. Gasoil demand was marginally lower, and stocks built modestly. Kerosene demand was slightly higher, but stocks still built a bit.

OPEC Will Let the Market Set Prices for Now

There is just too much supply relative to demand at anything near $100/Bbl Brent. Hence OPEC will let the market set prices for now and see what price the market needs to inevitably balance supply and demand. PIRA believes initially the market needs to see a 6 handle for WTI and the low 70’s for Brent. This should slow supply growth and help to rejuvenate demand. The price experiment has been unfolding for some time but now the world will know. It should have some interesting twists and turns.

Let the Market Rule: Why Saudi Arabia Didn't Want to Cut Output

Under current and expected market conditions, cutting output to support price would be self defeating, making the structural imbalance even worse. The oil market has lost its price anchor; so markets will dictate prices.

The Saudi Dilemma

While the global price elasticity of oil demand and supply is extremely low, the price elasticity faced by the Saudis, as a swing producer, is much higher. In fact, if they are required to absorb 100% of the swing in the call on OPEC, the medium term elasticity faced by the Saudis is likely greater than 1 meaning that their export revenue will fall in response to a price increase. Thus in an environment like now, where it is hard to see the Saudis getting cooperation from other OPEC (and/or non-OPEC) members, a decision to cut production will likely prove to be a revenue loser after several years. Of course, the Saudi decision on production volumes will not be based solely on export revenue maximization.

LPG Feedstock Economics in Asia Mixed

Propane’s discount to naphtha in Asia improved by $1 to $27/MT in last week's turbulent trade. At these levels propane remains expensive relative to other feedstocks for petrochemical usage. As in Europe, PIRA’s spot generic cracking margins indicate that butane is currently the most economic feedstock in NE Asia. Naphtha’s cracking economics fell by 5¢ to 32¢ while butane’s improved to 41¢. Propane remains at the back of the pack at 31¢/lb ethylene produced.

U.S. Ethanol Production Sets New Record

The week ending November 21, U.S. ethanol manufacture reached 892 MBD, shattering the record 892 set the week ending June 14. The manufacture of ethanol-blended gasoline jumped to a four-week high 8,724 MB/D.

U.S. Ethanol Prices and Margins Soar

U.S ethanol prices and manufacturing margins skyrocketed during November despite record ethanol production. Inventories had gotten extremely low as output had been light for several months when companies shut down for maintenance turnarounds.

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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