PIRA Energy Group has released its weekly Energy Market Recap for the week ending 31 August 2015.
Oil market forecast
Financial market turmoil is undermining global economic growth and reducing the demand for inventory, which is especially negative for oil prices given over 300 million bbls of surplus inventory. This surplus is hardly eroded in 4Q15 making prices vulnerable to weakness if financial turmoil worsens. The lower prices are now, the stronger they will be later. Global light product demand has been strong and will remain so. Refining margins will continue to decline as gasoline cracks come off further and distillate stocks continue to build. Supply disruptions have ticked higher and significant political risks to supply remain.
Production growth and storage
Since last month’s forecast, Henry Hub (HH) gas prices have taken a sizable hit reflecting the continuing storage surplus coupled with anticipated 4Q production growth led by Appalachia. Sagging prices come despite a late July/early August heat wave and lackluster production, which helped boost gas fired electricity generation (EG), narrowing the storage surplus somewhat faster than earlier expected. Yet, the market’s tepid response to those bullish weather episodes called attention to heightening concerns over bearish gas balances in the months ahead.
US ethanol prices edged down the week ending 21 August, pressured by plunging oil prices. Manufacturing economics improved slightly due to lower corn costs, breaking a two week slide.
US ethanol output dropped to a 15 week low 952 000 bpd the week ending 21 August as some plants cut back production due to poor margins. Stocks increased slightly for the second consecutive week, building by 67 000 bbls to 18.63 million bbls.
Japanese crude runs ease
Crude runs eased back from peak levels and crude imports remained sufficiently high to build stocks slightly. Gasoline demand eased back following the holiday, which built stocks. Gasoil demand conversely rebounded, with lower yield and higher exports, so to draw stocks. Kerosene demand jumped a bit and moderated the seasonal stock building. The indicative refining margin remains acceptable, with lower gasoline, naphtha, and fuel oil cracks being mostly offset by higher middle distillate cracks.
Asia demand weakness
The inefficient mechanisms that pervade LNG pricing, particularly in Asia, were once again highlighted in July. At this point, the fragmented nature of pricing should not come as a surprise given the even odder behaviour of demand. The outlook on the demand front is simply not good, which will do little to boost future support for Asian prices, oil prices notwithstanding, particularly as overall global supply increases are inevitable.
US commercial stocks reach new record level
In spite of a larger than expected crude stock draw, total commercial stocks built a combined 2.9 million bbls this week, to a new record high level. With a smaller overall build last year, the year on year excess widened. Commercial stocks began to grow quickly the first week of September last year, and that is likely when we will see the surplus decline.
Producing region (PR) storage congestion
Thursday’s market miss and the expected rapidly increasing storage builds as the shoulder season starts to get underway highlight both a seasonal denouement of summer peak electric generation cooling demand, as well as the lack of any significant heating demand coming back into play until October.
OECD crude stocks
While Thursday’s crude market certainly reversed trend, the crude price sell off over the last few weeks has obscured an important fundamental view: PIRA expects crude stocks in the three major OECD regions to continue cleaning up through the end of the year, although October will see stocks build because of refinery maintenance.
Bulgarian gas prices
Natural gas prices in Bulgaria are expected to be cut by 13.65% as of next quarter. Chairperson of Bulgaria’s Energy and Water Regulatory Commission (EWRC) Ivan Ivanov announced the news speaking with journalists. “I believe that the natural gas price will be a total of 30% cheaper for the year. The initial reports of Bulgargaz show that the natural gas price for the next quarter should be 13.65% cheaper,” he said.
Ample supply supports demand growth and injection gains
LNG did not flow to Europe in the volumes PIRA expected during the third quarter, with only Qatar really pushing cargos into its own terminals. It is an important lesson for the future; global length does not necessarily mean that Europe will be a dumping ground for LNG in the years ahead, although the emergence of US export volumes could change the equation. Well priced pipeline supplies from contract sources have stepped in front of LNG to boost storage injections and meet incremental demand.
US LPG prices firm
US LPG prices ripped higher on Friday with crude prices. September propane futures jumped 9% higher to US$0.416/gal. and butane gained US$0.24 to US$0.542/gal. LPG prices, in anticipation of higher seasonal demand in the months to come, have outperformed versus crude oil thus far in August. Propane prices have gained 8.5%, and butane 2.5%, versus a 4% decrease in crude prices. Ethane prices fell to US$0.189/gal., sliding with natural gas, but remained above gas on a Btu basis. Ethane prices, after trading at a discount to gas for a year or so, are now approaching levels necessary to economically incentivise incremental production.
Adapted from press release by Rosalie Starling