PIRA Energy Group's Weekly Oil Market Recap for the Week Ending January 11th, 2015

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Cushing Crude Stocks Build on Tight LLS-WTI Spread

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Narrower Gulf Coast grade differentials kept the Cushing-Houston arb firmly shut, which, along with year-end tax incentives, contributed to a very large stock build at Cushing.

NYC-based PIRA Energy Group reports that Cushing crude stocks build on tight LLS-WTI spread. In the U.S., there was a rare December stock build. In Japan, crude stocks drew at year-end and remained low as the new year began. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Cushing Crude Stocks Build on Tight LLS-WTI Spread

As WTI prices continued to fall in December, plunging another $17/Bbl, improved takeaway capacity lent support to Canadian and Rockies crudes. Narrower Gulf Coast grade differentials kept the Cushing-Houston arb firmly shut, which, along with year-end tax incentives, contributed to a very large stock build at Cushing. A tightening LLS-WTI spread (currently less than $2/Bbl) will ensure that Cushing receives a major share of the large first quarter U.S. stock build — with stocks likely approaching 80% of capacity by this spring.

Rare December U.S. Stock Build

The last time the United States built inventories in December was in the middle of the financial crisis in 2008. Preliminary weekly data are pointing to a 23 million barrel December 2014 inventory build, 9 million barrels higher than the December 2008 stock build. The way things currently look, the United States did not draw inventories in the fourth quarter, nor did the three major OECD markets combined. Not surprisingly, the “creeping” stock surplus has already become quite apparent, and there will be more to follow. This fear of what lies ahead is damaging to an already extraordinarily weak demand for inventory, which will have to cope with increased inventory supply. A rare bullish catalyst will begin with index rebalancing, which should lead to net new purchases of some 60 million barrels of crude, mostly Brent.

Japan Weekly Oil Data Updates through Year-End and into January 2015

Two weeks of data were reported this past week. Crude runs rose at year-end and then fell back. Crude stocks drew at year-end and remained low as the new year began. Gasoline demand jumped higher due to the holidays and then eased a bit. Gasoil demand was slightly weaker at year-end and then plunged as the new year began, with economic activity off for the holidays. Kerosene demand posted a strong draw at end-year and then a contra-seasonal build. Refining margins remain relatively strong.

U.S. Drivers Buying Less Efficient Vehicles with Lower Fuel Prices

Recent U.S. vehicle sales data suggest that, with lower fuel prices, vehicle purchasers are placing less importance on vehicle efficiency and are buying fewer hybrid and alternative fuel vehicles. Vehicle sales in 2014 have been very strong, and relative to 2013 a higher proportion of these vehicles are SUVs and light trucks, rather than cars. Even a short period of high sales of low-efficiency vehicles can have a long-term impact on fuel demand since vehicles remain within the fleet for longer than a decade — often much longer.

European LPG Price Rout Continues

European LPG prices swooned as the market adjusted to significant discounts in contract prices from Algeria and Arabian Gulf exporters. February propane futures plunged 11.3% to $302/MT, while cash butane was a remarkable 20% lower week-on-week. Large butane cargo prices, at under $280/MT, are back below those for propane, as cracker outages and low blending demand continue to plague the feedstock. Low demand and poor olefin prices will continue to pressure LPG in Europe. High prices relative to naphtha in Asia and expectations of lower Saudi contract prices in February will keep buyers on the sidelines for the time being.

Saudi Arabia Announces Pricing for February Barrels

Saudi Arabia's formula prices for February were released. Differentials to Northwest Europe were lowered across the board $1.40-1.70/Bbl, with the greatest reductions on the lightest grades. Asian pricing was raised across the board $0.55-0.70/Bbl. For the U.S., pricing was raised on Arab Heavy but lowered on all the lighter grades: Medium, Light, and Extra Light. The February differentials appear to focus on individual market pricing particulars as opposed to sending a message of expanding Saudi market share. Economics favored tighter differentials for Asia, while Europe continues to be plagued by an oversupply of Atlantic Basin crudes, hence the cut.

U.S. Ethanol Prices Continued to Pull Back at the End of Last Year

The fuel additive remained above gasoline values, although the premium narrowed. Manufacturing margins declined for the fifth straight week.

Ethanol Inventories Soar

U.S. ethanol production fell to an eight-week-low 949 MB/D the week ending January 2 from 972 MB/D during the preceding week peaking. Inventories soared by 751 thousand barrels last week to a 96-week-high 18.845 million barrels.

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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