PIRA Energy Group Releases Its Oil Market Update for the Week Ending March 16, 2012

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Overall global oil demand set to ease Q/Q in 2Q12, but supply losses, "risk-on trading,” and political risks loom large for pricing

PIRA Energy Group
Founded in 1976, PIRA Energy Group is an international energy-consulting firm offering its more than 550 clients data, analysis, and forecasting on international oil, natural gas, and electricity markets

NYC-based PIRA Energy Group believes that global oil prices continue to be supported by an improving economy, continuing supply losses, and increased investment into "risk-on" assets as the financial environment mends. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Decreased Asian Demand Weighing on Cracks -- PIRA has factored in further reductions in Iranian supplies as the impact of economic sanctions increases in 1H12. Global demand is forecast to ease overall in 2Q12 relative to 1Q12. Asian demand declines have recently begun to weigh on cracks. However, Asian stocks remain relatively low, although some cushions have been built in middle distillates and fuel oil.

U.S. Refinery Turnaround Season in High Gear -- U.S. product stocks drew the week ending March 9, as refinery downtime hit the highest level so far this year and the highest weekly level since last fall's maintenance season. Crude inventories, on the other hand, built again reflecting weak refinery demand.

Japanese Finished Product Stocks Finally Build -- Japanese finished product stocks have been continually easing since mid-November. However, for the week ending March 10, product stocks finally built, with the exception of naphtha. Product stocks remain below last year's levels and well below the bottom of the four-year range. Crude stocks eased slightly.

Japanese Oil Use for Power Generation Sets a February Record -- According to recently released data, the use of crude and fuel oil for power generation in February 2012 in Japan jumped year-on-year. Oil use in power generation has been growing since the March 2011 earthquake and subsequent nuclear shutdowns. The loss of nuclear power generation has mostly been made up with LNG and oil. Due to LNG supply constraints, oil fuels have been the swing fuel in meeting generation requirements.

Political Risk Affects Non-Commercial Net Length -- PIRA's simple model to forecast non-commercial net length using the S&P 500 failed to capture variations in net length caused by increased political risk to oil supplies, especially during the Libyan civil war in 2Q/3Q11 and currently, with the heightened rhetoric around Iranian sanctions and the potential for military action. An index measuring political risk was used as a quantitative measure of fears about potential disruptions in oil supplies, was very well-correlated to the error in PIRA's model during these periods of increased political risk. Thus, political risk has a real and measurable effect on non-commercial net length.

In the U.S., propane's rally proved short-lived -- The flat price movement was due to hedging activity to secure export slots rather than any shift in fundamentals. Refiners have already begun the shift to lower-vapor-pressure gasoline, reducing the need for butane blending. In Europe and Asia, supply concerns in the East remain relevant, but it may be too soon for propane to be aggressively discounted to naphtha.

U.S. Ethanol Prices Decline as Production Rises Week-on-Week -- U.S. ethanol prices declined last week as a result of record inventories, lower corn prices, and relatively weak demand in gasoline blending. Cash manufacturing margins rose slightly, but are still very low compared to historical standards. At the same time, U.S. ethanol production fell to a five-month low of 892 MB/D last week as many ethanol plants are limiting production or shutting down due to record high inventories and relatively weak margins. Stocks fell by 27 thousand barrels to 22.0 million barrels, breaking a streak of twelve consecutive weekly gains. PADD I inventories reached record levels after the region received 14 MB/D (4.1 million gallons) of imports. The output of ethanol-blended gasoline rose to 8.160 MMB/D from 8.003 MMB/D the previous week, as gasoline production increased and the blending incentive soared.

For Additional Information

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.

PIRA Energy Group
3 Park Avenue, 26th Floor
New York, NY 10016-5989
Email: Sales(at)pira(dot)com
Tel: (212) 686-6808

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