PIRA Energy Group’s Weekly Oil Market Update for April 23

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European refining margins reach lofty levels and Asian light sweet crude prices will show relative strength.

PIRA Energy Group
The largest U.S. crude stock build of the year came at an inopportune time for oil prices.

NYC-based PIRA Energy Group reports that European refining margins reached very high levels, and Asian light sweet crude prices will show relative strength. Weekly U.S. commercial oil stocks declined, and Japanese demand trends look softer. The EPA's new oil and gas sector regulations took the middle ground. Specifically, PIRA’s analysis of last week’s oil market fundamentals has revealed the following:

The largest U.S. crude stock build of the year (for the week ending March 30) came at an inopportune time for oil prices. Risk markets in general are taking a hit from the recent Federal Reserve meeting and fears that Europe is sliding into another debt crisis. Meanwhile, the liquidity injections by Central Banks around the world are working.

European refining margins reach lofty levels. Oil price structure will be supported by refiners coming back from maintenance, continuing non-OPEC supply outages, the impact of sanctions on Iran, the threat of conflict in the Middle East, tighter physical balances in 2H12, and very limited OPEC spare capacity. European margins soared recently to levels not seen since the peaks in the "Golden Age," partially because of recent softness in prompt crude. Supply-demand fundamentals do not support that level of strength.

Asian light sweet domestic crude prices will continue to show relative strength as utility demand for direct crude burn and low sulfur waxy residue (LSWR) remains heightened over the summer. Refinery margins in Asia are currently good and will continue to be supported by relatively firm middle distillate cracks, a stronger fuel oil crack, and only modest easing in gasoline cracks.

Major petroleum products lead U.S. commercial stocks down again week-on-week. During the week ending April 13, low crude runs and product imports, along with relatively strong demand, led to another substantial decline in the stocks of the four major products. The inventories of both crude oil and other products built, but overall stocks were down week-on-week. For the first time since January, weather- and export-adjusted four-week average demand is running above 2011 levels.

Japanese petroleum produce demand trends soften. For the week ending April 14, finished product stocks built as demand trends have been looking weaker, even beyond the seasonal decline in kerosene demand. PIRA had been expecting softer demand in April and this appears to be playing out. While demand trends will likely continue to ease into early May, rising refinery maintenance should begin to temper stock-building.

Final EPA NSPS/NESHAP regulations find a middle ground for now. On April 18, the EPA released final New Source Performance Standards (NSPS) and National Emissions Standards for Hazardous Air Pollutants (NESHAP) for the oil and gas sectors. In the final rule, the EPA seems to have found a rare middle ground between environmentalists and industry. Government policies that restrict access or raise the costs of production are a key potential constraint to continued growth in the booming U.S. energy production industry. PIRA does not expect oil or gas drilling efforts to be materially affected due to compliance with the new regulations.

In the U.S., Mt. Belvieu LPG prices are being supported by buying ahead of ethylene plants coming back from turnarounds, as well as arbitrage hedging activity. In Europe, pressure is coming from inbound arbitrage, in addition to increased availabilities from West Africa and Algeria. A similar scenario is playing out in the East, where arbitrage cargoes are competing with increasing exports from the Arab Gulf.

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
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New York, NY 10016

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