Very Sharp Drop in Crude Prices That We Are Currently Observing Is Not Sustainable
NYC-based PIRA Energy Group believes that the very sharp drop in crude prices that we are currently observing is not sustainable. In the U.S., commercial stock excess continues to expand. In Japan, both crude and finished product stocks draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Long-Term Crude Price Revised Down
The very sharp drop in crude prices that we are currently observing is not sustainable. Over time, the loss in global liquids at Brent prices below /barrel would cause non-OPEC growth to grind to a halt while global demand growth would be rejuvenated. However, there will be some lasting impacts from current developments, particularly on the cost side. We believe that industry will finds ways to maintain profitability during the next several years of low prices via cost efficiency steps, productivity improvements, and pressure on suppliers for both shale and other high cost supplies. These steps should ratchet down breakeven costs, and as a result we have made a downward adjustment to our long-term price outlook.
U.S. Commercial Stock Excess Continues to Expand
With a 12.6 million barrel commercial stock draw during this week last year, it was a good bet that we would see an increase in the year-over-year stock surplus, and that is exactly what happened. This week’s total commercial stock build increased the commercial stocks excess to the widest of the year. This surplus is also a sharp contrast to the commercial stock deficits that persisted for the first half of 2014.
Both Japanese Crude and Finished Product Stocks Draw
Crude runs were marginally lower on the week. Alignment with PIRA’s planned turnaround schedules suggests runs should move a bit higher before year-end. Crude imports were slightly lower on the week, and crude stocks drew. Finished product stocks drew, with about half being in jet-kerosene stocks. Gasoline demand was slightly lower with higher yield such that stocks built a bit. Gasoil demand was higher, but higher yield and lower incremental exports built stocks. Kerosene demand rose sharply and stocks drew at a rate of 236 MB/D. The indicative refining margin was weaker.
Cost of Existing Oil Supplies (U.S. and Canada)
In the short term, the response of oil supply to low oil prices will be small, but at the price levels we are currently observing the volumes at risk are growing. At very low crude prices, some existing U.S. (stripper wells, heavy oil) and Canadian (bitumen, syncrude, heavy oil) production will become uneconomic. If low prices prevail for an extended time (several months), at WTI /Bbl, we could lose around 300 MBD and at WTI /Bbl around 600 MBD due to operators not being able to cover cash costs. However, actual losses will probably be lower due to producers cutting additional expenses and field operational issues.
December Weather: The U.S. and Europe Warm, Japan Cold
At midmonth, December looks to be 1% warmer than the 10-year normal for the three major OECD markets, bringing the month oil-heat demand to 62 MB/D below normal. On a 30-year-normal basis, the markets are 5% warmer.
LPG Price Scorecard
LPG prices have outperformed the broader crude and gas markets over the past several weeks. With sky high U.S. stocks and consistently uneconomic spot export margins, it is hard to see how recent strength continues. International LPG looks more fairly priced with C3 and C4 beating out naphtha in the petrochemical feedstock pool. This leaves room for some improvement, albeit little.
Ethanol Prices and Manufacturing Margins Pull Back
U.S. ethanol prices trended downward for the third straight week due to record production, rising inventories, weakening demand and collapsing petroleum values. Manufacturing margins worsened as corn costs increased.
Ethanol Output Sets New Record
U.S. ethanol production climbed to a record 990 MB/D the week ending December 12, up 2 MB/D from 988 MB/D in the preceding week. Stocks remained near a seven-week high, declining by just 91 thousand barrels to 17.7 million barrels.
Venezuela: Economic Difficulties Worsening, but Major Supply Losses Unlikely
The recent collapse in global oil prices has raised serious concerns about the possibility of a Venezuelan default and highlights continued economic hardship in the country. PIRA believes Venezuela is among the worst positioned to weather the impending period of low oil prices. Still, we do not expect oil production will be significantly impacted by a deteriorating economy. Longer term, an acute economic crisis increases the likelihood of a change in government policy that could eventually improve Venezuela’s long-term investment climate and promote supply.
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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Posted On: New York, NY December 23, 2014