U.S. Crude Stocks Build AgainCrude stocks continued to build, rising by 2.3 million barrels this past week, as imports surged to a multi-year high while the inventories of the three major light products were about flat. For next week, PIRA sees lower crude imports, higher runs, and reduced production due to weather-related shut-ins, and causing a large crude stock decline. Cushing crude stocks declined 1.04 million barrels this past week, and lower Canadian imports should ensure another significant decline in next week’s EIA data.
On Tuesday, August 30, NYMEX October futures assumed prompt-month status and immediately saw a sharp bout of selling. In particular, prices have been in a steady state of erosion since topping ~$2.90/MMBtu to start the week, as Thursday’s outsized storage report and less supportive weather forecasts, showing potentially cooler temperatures aided by tropical storm activity, have weighed on sentiment.
While the eclipse of coal in the U.K. comes with little surprise, the behavior of coal units on the Continent is now more intriguing. While older and inefficient units have clearly moved out of the money, a more interesting issue is at which point the most efficient coal units will start switching off. Generation data show gas trending higher in Germany, although steam coal is still generally dominating the German mix.
Forward coal pricing moved notably higher this week, with prices rising initially due to the suspension of loading activity at Puerto Bolivar, although after the suspension was lifted, prices rose to even loftier highs. In fact, 4Q16 prices for FOB Newcastle and API#2 are now just marginally below their recent highs. For prompt pricing, API#4 forwards generally underperformed relative to API#2 and FOB Newcastle, giving FOB the premium spot back. Continued strength in the Chinese market remains the driving force for pricing, as it is becoming increasingly apparent that the limitation of working days at Chinese coal mines will not be relaxed.
The RGGI cap and trade program is at a crossroads, as partners negotiate the post-2020 cap declines, with PJM states reportedly resisting the steeper reductions favored by New England and NEPOOL looking at an alternate wholesale market structure. RGGI prices received a boost from the June Stakeholder Meeting, but declined on news of the NY nuclear subsidies in July. August prices averaged lower than July, but were moving towards the $5 mark. PIRA expects the Sept. 7th auction to be dominated by compliance buying as the market continues to await a draft Model Rule, expected this fall. Longer term, it must be decided whether the RGGI price signal will be the primary mechanism to reach climate goals.
Global equities posted another gain on the week. In the U.S., the “growth” indicator outperformed the “defensive” indicator. Banking, materials, and utilities, led the performance. Energy was down slightly, -0.4%. The international tracking indices also gained, with China, emerging markets, and Europe doing the best.
The seasonal meltdown in tanker markets in this year’s third quarter has been especially severe, and little relief is anticipated before 4Q 2016. OPEC production growth is slowing and is not adequate to offset rapid fleet growth this year or next. Nigerian production outages and competition from VLCCs have decimated rates in the Suezmax sector, which have been driven well below cash operating cost levels.
Asian LPG markets were the standout winners last week with notable outperformance vs. broader markets. Prices in the destination market were buoyed by increases in Saudi contract prices from September FOB loaders. Cash and futures prices for propane converged to near $300/MT after 3% declines last week. Butane prices were mostly unchanged, being called near $328/MT on Friday afternoon.
Stocks build to highest level in six weeks. Output of ethanol-blended gasoline dropped for the fourth straight week.
The first full week of metrological autumn will see both combines roll and a rather dramatic cool down in the NW Belt. Low temperatures will be in the mid-30’s as far south as Cedar Falls, Iowa, by Thursday, September 8 even though it would appear that freezing temperatures will not infringe on major growing areas.
This week saw finished stocks draw 1.7 MMBbls, with noted declines in naphtha and gasoil stocks. Crude stocks were only marginally lower. Runs also eased slightly, but they will show more significant drops in the next few weeks. Gasoline demand remained strong, but stocks built slightly on higher yield and lower exports. Gasoil demand rebounded with lower yield and strong exports, and stocks began to correct a four-week rise. Kerosene stocks continued to build. Refining margins remain very weak, though there was some improvement in cracks in the last week.
After a bottom for the year seen in July, a reversal in German gas generation is currently underway, and with 2.5 GW dispatched in August, gas is up by 37% month-on-month and 66% year-on-year. Lower power flows from historically cheaper France have been a major relief for German conventional/thermal generators, albeit August saw both higher solar generation (+1.1 GW), together with higher wind output (over 1 GW year-on-year), dampening the bullish impact of the lower French flows.
While France has been seen shifting toward net importer status from Belgium and Germany, PIRA sees an unprecedented market context in Germany during September, when gas units will be more competitive against coal, and gas will potentially be able to meet — together with lignite — the entire need for fossil fuel generation. We have seen coal units ramping down during renewable-induced power prices collapses, but will coal switch off to allow gas to generate? German prices appear vulnerable to downsides in the shorter term, considering the resilience of coal-fired generation and further weakness ahead for gas prices. However, German winter prices are largely undervalued assuming our expected thermal demand (~36 GW on average). This level of thermal demand requires prices in the low €30/MWh, at current fuel prices.
U.S. RIN values rise early in the month, but fall later. Brazilian ethanol output declines in the first half of August.
Corn yield comparisons to 2014 have given traders that déjà vu feeling all over again. Always searching for some sort of analog, the late-September/mid-December 50 cent corn rally in 2014 is starting to draw comparisons to 2016, although the Funds aren’t looking at it that way. With the 2016 rally a month earlier than in 2015, some are of the opinion that this year’s recovery can also be a month earlier than 2014.
We estimate that incremental gasoline demand over five U.S. public holidays averages about 290 MB/D. Downstream buying begins as early as two to three weeks before major holidays like the end-of-year Christmas/New Year period. Dealer buying for minor holidays appears to take place a week before or even in the same week.
Garnering perhaps more attention than the fact that YTD Indian LNG imports (uncontracted) of Australian LNG have registered 5 mmcm/d versus no first half buying in 2015, Chevron has announced the finalization of a long-sought supply contract with China's ENN for volumes from Gorgon. Although the volumes are, at just under 1-bcm/yr., low compared with previous China/Australia contracts, the contract is notable for several reasons.
Although on-peak prices remained volatile in August, weaker cooling loads in the Southwest reduced Palo Verde average prices by about $4/MWh from July. SP15 prices also edged lower, but warmer weather, lower hydro output and rising gas prices led to a small gain at NP15 and a sizable jump at Mid-Columbia (+$4). Implied heat rates have been supported this year by weak gas prices and strong cooling loads, but we expect heat rates to move lower through 2018 in response to a rebound in gas prices and rising solar capacity. Southwest coal and California gas retirements will not provide sufficient support to avert weakness.
The Chinese market continued to be a sizably net bullish factor for seaborne coal prices despite the normalization of weather conditions. Domestic coal production continues to fall; thermal coal imports are comfortably above prior-year levels for the year-to-date. Seaborne coal supply growth will remain limited, while the demand side is showing some improvement. While the considerable pricing rally that has occurred over the past eight months has started to fade, we believe that there continues to be more upside to prices, with a bullish oil pricing outlook providing much of the stimulus.
U.S. August job growth fell somewhat short of market expectations, but it did not represent a disappointment. On a trend basis, the labor market has picked up pace considerably. In spite of a tightening in labor conditions, wage growth (based on average hourly earnings) has not accelerated. There are flickering signs, however, that this may soon change. Recent data from emerging markets (such as the August confidence readings from China, and July industrial production for South Korea and Brazil) were constructive for the outlook.
EIA just released its final monthly June 2016 (PSM) U.S. oil supply/demand data. June 2016 demand came in at 19.83 MMB/D, which was 100 MB/D better than PIRA had assumed in its balances. Demand grew 1.2% versus year-ago, or 242 MB/D moving back closer to the 296 MB/D average growth seen Feb.-Apr. Gasoline and kerojet outperformed the barrel average, with gains of 2.9% (273 MB/D) and 4.7% (77 MB/D), respectively. Gasoline performance was in line with the improved June VMT growth, which was 3.2% versus 2% in May. End-June total commercial stocks stood at 1,382.4 MMBbls, which were 7.6 MMBbl higher than the preliminaries, but 9.5 MMBbls lower than PIRA had assumed in its balances.
The Argentinian government is set to propose a lower price hike for residential gas following a rejection of original increase by the Supreme Court. The new price model was decided September 1, Infobae reported, without saying how it obtained the information. The government will submit the new price increase in a non-binding national public hearing scheduled for Sept. 16. S&P 500 Moves Higher The S&P 500 closed slightly higher on the week. As would be expected, volatility moved lower, while high yield debt and emerging market debt indices generally held firm. The dollar mostly strengthened, and the total commodity index fell back on the week.
EIA recently released its June oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, declined to a new cyclical low of 8.81 MMB/D. This is the lowest figure seen since June 2014. From the April 2015 peak, the decline has been a cumulative 1.15 MMB/D, or about a 10%, annualized decline rate. Domestic field crude production also reached its lowest level since June 2014, and the year-on-year decline rate reaccelerated back to about 620 MB/D, or -6.6%.
Broader fundamental considerations will drive prices beyond $3/MMBtu before year end. While such levels are likely to be sustained into 2017, there is an “expiration date” attached to such heights, especially if end-March storage is left near 2 TCF.
Saudi Arabia's formula prices for October were just released. With more crude available for sale in October due to refinery maintenance, pricing in Asia and the U.S. was made less generous to customers. This sends a constructive message to the market.
The Rough outage announcement in June sent storage spreads to levels unseen for several years, encouraging a full Continent to inject as much as possible to help the U.K. with its storage shortfall. Now that Rough is back, there is a lot of gas in storage that is hedged to withdraw in 1Q, and it could spell trouble for deliveries.
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.
Hydraulic fracturing has been a hugely controversial subject in many countries and has increasingly become the focus of legislation in the US. The state of Colorado has seen the most recent push for new restrictions – activists have obtained over 200,000 signatures to introduce two new initiatives on Colorado’s November 8th ballot. If passed, these initiatives would impose the toughest regulations on the hydraulic fracturing industry to date – increasing local control and dramatically limiting where fracking can take place. Initiative 75 would provide local governments with the authority to regulate oil and gas development in a manner that supersedes statewide regulations, whilst initiative 78 would prohibit fracking within 2,500 feet of houses, parks, schools, playgrounds, and clean water sources.
Colorado accounts for a significant proportion of U.S. hydrocarbon reserves – more than ten percent of the nation’s largest natural gas fields. Amongst US states, Colorado ranks 7th in both natural gas and crude oil production. Upstream activity in the state relies heavily upon fracking, the proposed legislation, coupled with the slow oil price recovery would likely severely hinder hydrocarbon extraction in Colorado.
Strict limitations on fracking activity will also have severe consequences for the state budget. Pro-fracking groups argue that passing these initiatives in Colorado may cost the state 140,000 jobs and up to $217 billion in economic activity over the next 15 years. The implications of passing such a bill would likely reach much further than just the state of Colorado. With precedent set, increased regulation may be seen in other states. Greater regulation, combined with reduced activity as a result of the oil price downturn, could severely impact the future of the drilling sector in the US.
Both presidential candidates may also play a significant role in the future of fracking. Trump has stated that while he is in favour of fracking, he supports Colorado’s right to ban the activity as an issue of states’ rights. Clinton broadly supported fracking as Secretary of State – however, she has pledged support for increased investment in renewable energy and outlined a series of fracking “conditions”. With volatility shaking the industry, the United States presidential election could be decisive in deciding the industry’s direction.
Jacob Halevy, Douglas-Westwood Houston
There is a general consensus amongst industry analysts that the oil oversupply creating the current market downturn will narrow by the end of 2016. Douglas-Westwood (DW) data support this view, with our World Drilling & Production Market Forecast showing the first oil production decline in 2016 since 2009 – when OPEC strategically cut output in order to support prices. This is largely due to considerable reductions in oil production from the US shale plays as well as widespread outages in Nigeria as a result of militant attacks in the Niger Delta. Therefore, the oversupply will be eroded from the supply side with the demand side stuttering as a result of slowing Chinese economic growth and uncertainty surrounding the future of European markets.
DW’s 2017 view is less positive for the oversupply. The implementation of a host of offshore developments sanctioned before the oil price crash will lead to a 1.8 million barrels per day (mmbbl/d) increase in offshore oil output and a 2.1 mmbbl/d increase overall. Such projects include the ill-fated Kashagan project in the Kazakh Caspian. Kashagan alone is expected to contribute nearly 300 thousand barrels per day (kbbl/d) in 2017. Significant additions are also expected from the Middle East in the form of condensate output from the 24-phase South Pars development and around 300 kbbl/d Khafji field – previously shut-in due to environmental infringements and disagreements between joint operators Kuwait and Saudi Arabia. This pattern is expected to be seen globally, even mature plays in the North Sea and south-east Asia seeing increased output in 2017 as a result of the lag effect of offshore developments (the time between project sanctioning and first oil can be many years).
Demand outlooks from BP, EIA and IEA suggest 2017 demand growth around 1.2 mmbbl/d to 1.5 mmbbl/d, therefore it is highly likely the oversupply will increase once again next year. Whilst this is not certain to push oil prices down once more, it is likely to dampen the recovery until later this decade when a lack of project sanctioning in the last two years leads to a significant drop in offshore oil output additions towards to the end of the decade. This will cause offshore oil production to peak at 29.1 mmbbl/d in 2019 before declining slowly into the 2020s. Onshore oil production is unlikely to sufficiently offset this trend to keep pace with demand growth later this decade, therefore, this may be the point the market reaches equilibrium.
Matt Cook, Douglas-Westwood London
Exxon Mobil Corporation (NYSE: XOM) and InterOil Corporation (NYSE: IOC, POMSoX: IOC) announced an agreed transaction worth more than $2.5 billion, under which ExxonMobil will acquire all of the outstanding shares of InterOil (the ExxonMobil Transaction). “This agreement will enable ExxonMobil to create value for the shareholders of both companies and the people of Papua New Guinea,” said Rex W. Tillerson, chairman and chief executive officer of Exxon Mobil Corporation.
“InterOil’s resources will enhance ExxonMobil’s already successful business in Papua New Guinea and bolster the company’s strong position in liquefied natural gas.”
InterOil Chairman Chris Finlayson said, “Our board of directors thoroughly reviewed the ExxonMobil transaction and concluded that it delivers superior value to InterOil shareholders. They will also benefit from their interest in ExxonMobil’s diverse asset base and dividend stream.” Under the terms of the agreement with ExxonMobil, InterOil shareholders will receive:
When concluded, this transaction will give ExxonMobil access to InterOil’s resource base, which includes interests in six licenses in Papua New Guinea covering about four million acres, including PRL 15. The Elk-Antelope field in PRL 15 is the anchor field for the proposed Papua LNG project.
ExxonMobil’s more than 40 years of experience in the global LNG business enables it to efficiently link complex elements such as resource development, pipelines, liquefaction plants, shipping and regasification terminals, which it has demonstrated through the PNG LNG project, working closely with co-venturers, national, provincial and local governments, and local communities. ExxonMobil will bring to bear its industry-leading performance and strong commitment to excellence as it grows its business in Papua New Guinea.
The PNG LNG project, the first of its kind in the country, was developed by ExxonMobil in challenging conditions on budget and ahead of schedule and is now exceeding production design capacity, demonstrating the company’s leadership in project management and operations. ExxonMobil will work with co-venturers and the government to evaluate processing of gas from the Elk-Antelope field by expanding the PNG LNG project. This would take advantage of synergies offered by expansion of an existing project to realize time and cost reductions that would benefit the PNG Treasury, the government’s holding in Oil Search, other shareholders and landowners.
The ExxonMobil Transaction has been unanimously approved by the boards of both companies. The InterOil board unanimously recommends that InterOil shareholders approve the ExxonMobil Transaction.
The ExxonMobil Transaction will be implemented by way of a court-approved plan of arrangement under the Business Corporations Act (Yukon) and will require the approval of at least 66 2/3 percent of the votes cast by InterOil shareholders at a special meeting expected to take place in September, 2016.
In addition to InterOil shareholder and court approvals, the ExxonMobil Transaction is also subject to other customary conditions. Subject to obtaining the aforementioned approvals and satisfaction of closing conditions, the ExxonMobil Transaction is expected to close in September, 2016.
Further information regarding the transaction with ExxonMobil will be included in an information circular, which will be mailed to InterOil shareholders in due course. Copies of the key transaction documents for the ExxonMobil Transaction (being the arrangement agreement and the information circular) will be available online under InterOil’s corporate profile at www.sedar.com.
The InterOil board of directors, in consultation with its independent legal and financial advisors, determined that the ExxonMobil Transaction is superior to the previously announced transaction with Oil Search Limited (ASX:OSH, POMSoX: OSH) and so advised Oil Search on July 18, 2016. Immediately prior to entering into the arrangement agreement with ExxonMobil, InterOil terminated its previously announced arrangement agreement with Oil Search, and ExxonMobil is paying Oil Search the termination fee in accordance with the requirements of the Oil Search arrangement agreement on behalf of InterOil. The previously scheduled Special Meeting of Shareholders to vote for the approval of the Oil Search transaction has been cancelled.
Davis Polk & Wardwell LLP and Blake, Cassels & Graydon LLP served as legal advisers to ExxonMobil in relation to the ExxonMobil Transaction.
Credit Suisse (Australia) Limited, Morgan Stanley & Co. LLC and UBS served as financial advisers to InterOil in relation to the ExxonMobil Transaction, and Wachtell, Lipton, Rosen & Katz and Goodmans served as its legal advisers. Morgan Stanley & Co. LLC provided the InterOil board with a Fairness Opinion.
Offshore surveys are a necessary precursor for both Oil & Gas (O&G) and renewable energy installations on the seafloor. Particularly for new projects in remote regions, surveys (oceanographic, geotechnical, geophysical etc.) are critical for successful project design and implementation. However, current market conditions are forcing all parties in the supply chain to rethink their approach.
Douglas-Westwood (‘DW’) has engaged with industry experts within the market on future strategy and operator expectations. Feedback includes the obvious – “outprice competitors”, “meet highest standards”, “be flexible to operators’ needs” and “specialise” – but this is tough advice for those who are already attempting to accommodate all of these factors whilst trying to remain afloat. Within the tech-heavy survey sector, however, utilisation of new, innovative technologies is particularly appreciated by technical teams within the offshore client base, and continues to be a source of differentiation in a crowded market place.
If widespread automation of offshore assets and survey tools can be accomplished, cost savings will be significant. Autonomous Underwater Vehicle (‘AUV’) developments are therefore likely to play an increasingly important part in the future of the offshore survey market – DW’s World AUV Market Forecast shows a bright future for AUV demand, both for O&G and renewables.
As inertial navigation systems are refined, there is greater scope for exciting new tools to be piloted subsea: the use of technologies such as synthetic aperture sonar, seafloor drills and sea drones is set to rejuvenate operational methods and provide efficiency gains to the wider survey market.
Fresh technology could significantly advance offshore survey operations, acting as a differentiator for smaller companies in a difficult market. However, the ability of tech-driven companies to both invest in R&D and successfully commercialise it through the downturn will have a major bearing on their future prospects.
Celia Hayes, Douglas-Westwood London
High Light Product Stocks Weigh on Refining MarginsAlthough the lows are already past, oil prices are stuck in a $40-50/Bbl range for now. The market is not yet worried about creating supply with the current large stock surplus, but that surplus will drop in 2H16 and 2017. Ultimately this will drive prices over $60/Bbl to create supply to cover global oil demand growth. Softer refinery margins may prompt some trimming of discretionary runs this autumn as refiners are walking a delicate balance between gasoline vs. distillate yields and runs levels. European gasoline yields will likely trend lower than last year, while distillate yields will trend higher. Gasoline, diesel, and jet stocks are at/above historical range, but they will trend lower. Product markets will shift from gasoline toward distillate. HFO supply is lower with reduced Russian production helping to support cracks.
Since the start of August, the natural gas market has endured a rapid bout of speculative selling, driving the prompt month NYMEX contract down by more than ~8% to ~$2.60/MMBtu. Moreover, entering Friday, the market had registered an impressive streak of six consecutive negative sessions, the first such occasion since 2014. Certainly, recent trading has begun to take on a rather bearish hue, as prices effortlessly (with volume) sliced through key moving averages this week, while breaching ~$2.60/MMBtu, near the low end of the trading range in place since June.
Warmer-than-normal weather led to solid gains in On-peak prices in nearly all markets in July as loads increased by 2.5% (9.6 aGW) from the prior year in the East and 3.3% (1.7 aGW) in ERCOT. The return of more normal winter heating demand coupled with challenges for growing supply pose upside price risks for natural gas and coal. Prices will move higher in CY 2017 and 2018 as gas and coal prices rebound but implied gas heat rates are mostly weaker. Weakness in 2017 reflects loss of market share to coal and renewables and incremental gas-fired capacity.
Volatility in coal pricing was on full display this week, with daily swings of more than $1.00/mt occurring for the three major forward curves. The market moved decidedly higher this week, with gains on the order of $4.00 - $6.00/mt, offsetting the declines observed in the previous week. Stronger oil prices, constructive data in China, and some modest disruptions in the supply chain (weather- and labor-related) all served to drive prices higher this week. A flurry of data from China were released this week which was on balance considerably bullish for the market. This was led by a 4.4% year-on-year increase in thermal generation which was a confirmation of PIRA's Spotlight last week. The Spotlight noted that hot weather would likely push loads up enough to offset the strength in hydro generation.
CCA prices continued the upward trend, pushing above the Auction Reserve Price. This is not being driven by robust market activity, as weak volumes and a first-time-ever year-on-year loss in open interest suggests players are staying on the sidelines. The re-offering of unsold consigned allowances raises the auction quantity in August and will require a higher bidding volume to clear. PIRA again expects the auction to be undersubscribed – though a strong undersubscription could prove bullish for longer term balances. It will also take strong undersubscription of the November auction for market supply for CP2 compliance to be impacted. California power generator data through 2Q are showing emissions strongly down year-on-year, in line with expectations. All eyes are on the legislative front this month, with SB 32 facing hard negotiations for passage.
In July, year-on-year growth in Chinese industrial production decelerated slightly from June. The manufacturing sector stayed resilient, but the mining sector recorded a large year-on-year drop in output. There were both positive and negative signals about the industrial sector outlook in the latest data. Encouraging developments included recent sequential movements in the producer price index and a moderate depreciation in the country’s currency. On the negative side, business investment is apparently losing steam rapidly. PIRA’s overall assessment is that Chinese manufacturing activity will prove resilient and support global economic growth.
Output increased to 1,029 MB/D the week ending August 5, the second highest on record. Stocks drew by 143 thousand barrels to 2.46 million barrels, cancelling most of the build that occurred during the previous week.
Rainfall amounts of 1.5 to 8 inches late last week, mostly in the western Belt, have proven to be a God-send for some but a headache for others. At this point the rains will have a minimal effect on corn, although some late-planted acres will benefit with better kernel fill. However, the effect on soybeans can be dramatic as August through mid-September is a critical time.
Asian LPG markets were the worst performers among the three key regions last week. The physical market remains largely oversupplied, with cargoes arriving from both the East and West routes from the US Gulf Coast on top of the steady flow of Arab Gulf originated cargoes which are increasingly focused almost entirely upon Asia as an outlet. Cash propane cargoes arriving in the Far East in September were called $4 lower near $280/MT while the corresponding physical butane stems were unchanged near $295.
This past week’s EIA data showed U.S. commercial stocks increasing 2.5 million barrels, roughly split 50/50 between crude and products. Expected crude stock declines have not materialized as crude imports have stayed exceptionally high, and even Cushing crude inventories increased 1.2 million barrels last week. Product demand has continued to be strong, led by gasoline. For next week’s EIA data, PIRA sees lower crude imports and finally a sizable crude stock draw of 480 MB/D with Cushing crude stocks declining 110 MB/D. Gasoline stocks continue to decline, helped by stronger exports (+170 MB/D) and lower imports (-260 MB/D), while distillate stocks build modestly.
Estimating the price of supply contracts is always a moving target, especially now, as a growing number of these contracts are shifting their indexing from oil to gas. Traditional contract gas deals are generally a series of lagged rolling oil prices, and the data is further lagged, but we are seeing new opportunities to access more information. In particular, gas supply contracts are becoming more exposed to spot gas, while oil moves into more a broader role. Is greater spot price exposure in gas supply contract coming with longer or shorter lags?
The number of days in each month with positive spark spreads – both at peak and base – has been increasing in Germany. The rebound in API#2 coal prices, hovering at a two year high, is also leading to this outcome, but the reduction in nuclear generation in France has contributed as well. Higher gas storage levels in several European markets create further downside risks for gas prices at a time when power needs to move up for seasonal reasons (solar starts moving lower, while demand starts recovering).
The Massachusetts Solar renewable credit markets, SREC I and SREC II, are managed to limit the extent of any oversupply. The annual Solar Clearinghouse Auction serves as a price support point, while the Alternative Compliance Payment level (ACP) serves as an upper bound. Tightness in the SREC I market for 2015 and 2016 has pushed pricing to ACP levels, while SREC II prices are currently tied to the auction price level. However, increasing compliance obligations going forward will work to eliminate the SREC II surplus, with deficits possible beginning in 2018. Recent emergency regulations are allowing new solar build to continue beyond the original cap/target. Also, new legislation raised MA net metering caps and calls for development of a successor solar program.
Global equities were higher on the week, with strength coming from the various international indices that are tracked. All such indices bested performance in the U.S. where energy led all the tracking indices, higher by 1.7%. Retail also outperformed. Banking was the laggard and moved lower.
Ethanol prices bottom the week ending August 5. It’s just a pause before the decline continues. RIN prices were sharply lower.
It’s impossible to argue with the advanced state of this year’s corn crop when compared to historical averages. What can be argued is the effect of a hot June on some of the corn crop, which was not reflected in the August WASDE as no husks were harmed in the compilation of said report. The effect of August heat on kernel fill also has yet to be determined and will be a big deal given the record weight expected.
Global oil supply disruptions currently stand at 5 MMB/D, and how quickly these outages return is critical to oil markets at this juncture. In our view, the potential for the return of disrupted oil is limited. Production gains are possible out of Nigeria, Libya, and Yemen in the very near future. But we do not expect increases from any of these countries to exceed 100 or 200 MB/D, and security risks will remain high. Meanwhile, political and security situations in Iraq, Neutral Zone, Venezuela, Syria, and South Sudan show no signs of improvement. Also, a recent uptick in violence in Nigeria and northern Iraq/Kurdistan suggests growing risk of more disruptions. PIRA’s end-July Reference Case may be understating global oil supply disruptions by 200-300 MB/D in 4Q16.
Crude runs continued their rise following the winding down of maintenance. Crude imports dropped sufficiently for crude stocks to draw 2.5 MMBbls. Finished product stocks built 1.4 MMBbls, largely due to higher naphtha stocks and a seasonal kero build. Gasoline demand was helped by the Mountain Day holiday impact. Refining margins have been poor and have been getting worse.
Japan’s announcement of an inquiry into the legality of destination restriction clauses and its possible agreement on all its contracted volumes would pave the way for Japanese buyers to play a much more active role in the global LNG traded market, much as we have seen with key European buyers following the easement of destination restrictions in 2004. It is likely to help other regional buyers of LNG as well. This could deliver a fatal blow to the integrated value chain as we know it.
EUA prices are rising in August as ongoing auction volumes are seasonally cut. The cancellation of several Common auctions late in the month and French nuclear outages also support prices. Bearish signals may soon return, including higher auction supply, and a lack of policy developments. However, the correlation between EUAs and both Brent oil and NBP gas, which kept prices above €5 after this year’s first dramatic but short-lived price drop (in January) is rising again. With prices for both oil and gas still expected to rise in the balance of 2016, this correlation may serve to support higher EUA prices following the second major drop of the year.
The S&P 500 extended its move into record territory on Thursday and then eased slightly on Friday. Volatility moved lower, while high yield debt and emerging market debt indices generally moved higher. The dollar was slightly weaker, but it strengthened against the British pound. The total commodity index was fractionally changed on the week, while energy gained.
Saudi Arabia's still has a financial cushion to weather the current price environment, though that cushion is diminishing and its sustainability is not endless. Perhaps this is behind the recent price supportive statement from the Saudi Oil Minister given earlier price weakness. The decline in Saudi foreign exchange reserves continues, now down $176 billion from its peak or almost 24%. At today's prices, further declines are occurring, probably about $8-16 billion per month. Saudi's vulnerability to prices at today's level or lower has increased significantly since the last time reserves were drawn down during the financial crisis.
The sharp decline in the price of domestic natural gas in the first half of the current fiscal year is likely to lead to a saving in the Indian government’s subsidy outgo on urea by up to Rs.9,000 crore ($1.34-billion) in 2016-17. According to official estimates, the 20% price cut on domestically produced gas for the April-September period and the renegotiated price of imported LNG from Qatar’s RasGas Co. Ltd has reduced the price of pooled gas available to fertilizer factories by nearly a third from a year ago. However, should the price of domestic fertilizer be lowered, the subsidy could reverse track.
Last winter was extremely mild because of a record breaking El Niño. U.S. and Europe lost a combined 270 MB/D of middle distillate heating fuel demand. This upcoming winter will be influenced by the dramatic shift from El Niño to La Niña, which should lead to a substantial increase in heating fuel demand compared to last winter.
The condensate market East of Suez was generally balanced to long from 2014 through mid-2016, but with new condensate splitters starting up in 2016/17, the market looks poised to be short of condensate supplies. Furthermore, with U.S. condensate production flat to down for now, incremental condensate from the U.S. will not be available to help balance East of Suez markets unless it were displaced from current uses. While condensate prices are well correlated with naphtha cracks and naphtha cracks are affected by a number of factors (e.g., petrochemical margins, alternative steam cracker feed economics), the tightening of the East of Suez condensate market should give support to higher condensate prices and should directionally help naphtha cracks (all else being equal).
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.
Current Prices Near Lows Even Though Surplus Stocks Revised HigherGlobal macro landscape is brighter, especially with dovish central banks. Oil market rebalancing has temporarily stalled in 3Q16, but it should resume strongly in 4Q with much more robust demand growth. Global supply is declining with sharp declines in non-OPEC crude/condensate more than offsetting increases in non-crude liquids and OPEC crude production. Prices are currently too low and should rally from here. Political risks to supply have turned higher. U.S. crude exports should pick up and contribute to substantial U.S. crude stock draws in August and September. Refinery margins will be weak this autumn as ample light product stocks will be slow to work off.
Conventional wisdom suggests that the cure to low natural gas prices ultimately rests with producers. Yet, despite the record slump in cash prices, Canadian production appears to be defying convention, increasing ~0.3 BCF/D year-on-year during the first half of this year, with producer and midstream companies guiding toward a relatively stable supply outlook ahead. Robust Canadian production underscores the general resilience of North American supply, with slowing WCSB production growth more than offsetting declines from other conventional resources. In contrast to the Lower 48, where take-away pipeline has limited shale growth, only modest declines are taking hold this summer with Canadian production poised to rebound this winter.
An unusually high number of French nukes are offline for maintenance, bringing the load factor of French nuclear down to a multi-year low during July. Assuming nuclear stays at minimum levels of the historical range would bring French prices up to the low €40/MWh during the winter months. The current proposal of the carbon floor is shaping up as a penalty on coal units, which would have a very limited impact on shorter-term prices, but it increases the risks of retirements. The risk of plant closures, with oil units already being retired, makes French prices more likely to move toward Spain and Italy in the medium term. We see the UK market unable to balance for at least 90 hours in the upcoming winter, without calling CBR. Base and peak spark spreads for the winter ahead have surged in anticipation of these risks.
There is wide range in views on the optimal price of carbon — often based on price levels needed to achieve emissions reduction goals. U.S. government estimates of the social cost of carbon utilize a methodology based on academic models that calculate avoided damages. Already used for federal cost-benefit calcs, more recently these estimates have been used in international agreements, for state-level policy, and as a carbon price standard with commercial implications for energy market players. PIRA's report discusses how the social cost of carbon is calculated and used and how modeling choices lead to an estimate that reflects political realities as well as scientific calculations. Implementation of carbon prices generally ends up well below estimates of carbon’s social cost.
While most traders remain focused on production estimates for U.S. corn and soybeans, the wheat market quietly made a 10-year low of $4.035 for the prompt contract last week, and quietly is exactly the way the Non-Commercial shorts like it. The Non-Commercial short in SRW is quickly approaching 145K contracts according to last week’s COT, while the HRW short is nearer 37K contracts. Depending on how you look at some of these numbers the SRW short is probably the third largest in history and may even be at a record currently.
The latest U.S. GDP release disappointed, as it showed the pace of year-on-year economic growth slowing in recent periods. But underlying data suggested that a growth pick-up will materialize soon — after all, a large portion of the recent weakness was due to an inventory drawdown, and this will not continue; and outside of business investment, key activity sectors are in good shape. In the euro area, the pace of second quarter GDP growth matched expectations, and the resilience in business confidence surveys paints an encouraging picture for near-term growth. In South Korea, second quarter growth exceeded expectations, and a recent strengthening in industrial activity is encouraging for the outlook.
Rates in all the major tanker sectors in July have already hit or are fast approaching 2016 lows. Rates are unlikely to improve before the fourth quarter, although fleet capacity growth this year will also limit prospects for a meaningful winter rally.
U.S. ethanol manufacturing margins worsen. RIN generation increases. D6 values near $1.00.
Far East destination markets are rioting against an avalanche of LPG supply in-flows. Cash propane and butane cargo prices plunged last week, well below the newly printed Saudi Contract Prices. The prompt paper arbitrage to the Far East from the Arab Gulf plunged to near zero, indicating that even if freight was free, little money could be made by bringing cargoes to the region. Even more troubling, cash Far East prices are performing even worse, with physical C3 and C4 being called well below August CPs. PIRA believes that the recent glut may be partly due to the recent opening of the new lock system at the Panama Canal. Asia is now being barraged by USGC cargoes, arriving from both the east and west, and canal cargoes (with their significantly shorter voyages) are arriving before cargoes that set out earlier on the Horn of Africa route.
Crude stocks disappoint again, showing a 1.7 million barrel build as imports approach high of year at 8.44 MMB/D. Cushing crude stocks have largest build (1.1 million barrels) since early May. Reported product demand continued to improve, rising 150 MB/D on the week to a strong 20.8 MMB/D.
The prospect of new record-high storage in the U.S. and western Canada raises the risk for a “hard landing” for prices this season. While it appears unlikely that the market will once again probe sub-$2 prices, weakening fundamentals are at odds for sustained $3 prices — with the likelihood of a relapse looming ahead.
On-peak price levels and volatility soared in July amid strong cooling loads. Palo Verde on-peak prices averaged above $40/MWh, up more than $10/MWh from June. Mid-Columbia also gained $10/MWh to average in the low $30s. California hubs saw more modest ($5-6/MWH) gains to the high $30s. Bullish price action at the front of the curve has had relatively little impact on price forecasts with the exception of Palo Verde, where we believe a more bullish stance is justified, particularly for spring/summer 2017. In the near term, however, prices and heat rates are likely to ease as short-term weather forecasts indicate below-normal temperatures in the inland Southwest. In contrast, California heat rates are likely to increase as the call on gas generation reaches its annual peak in August/September amid ongoing gas storage constraints.
The S&P 500 was little changed on the week. Volatility remained low. Emerging market debt and high yield debt pulled back on the week. The dollar was generally weaker, particularly against the yen. It was noticeably stronger against the Russian ruble.
Cape demand is being boosted by improvements in 2Q16 Chinese steel industry numbers and the expansion in Guinean bauxite trade to China. Cape utilization is set to tighten notably in 2H17 and into 2018. Along with stronger bulker prices, PIRA expects a surge in freight rates in 2H17.
Emissions from aviation make up a small share of total global emissions, but they are growing quickly. The International Civil Aviation Organization is expected to unveil a program to keep post-2020 emissions at 2020 levels at its upcoming triennial assembly in September. PIRA estimates that, based on the most recent draft, it could cover at most 60-65% of total global aviation activity — requiring around 2 billion metric tons to be offset between 2021-2035. The main UNFCCC offsetting mechanism (CDM) should meet demand for offsets, but supply risks are related to the need to avoid double-counting of emissions reductions. Compliance costs are expected to make up a small share of jet fuel prices.
The week ending July 22, stocks draw to less than 21 million barrels for the first time in seven weeks. Production drops to 988 MB/D, falling from a record 1,029 MB/D the prior week.
Year-over-year price action similarities in corn have been hard to ignore. Last year, Dec. ’15 corn made a high of $4.5425 in early July. This year’s high of $4.49 was made in mid-June. Last year’s selloff was 97 cents from the highs. This year’s selloff, so far, has been 115.75 cents. Not a perfect match either timing-wise or price-wise, but close enough that a look at last August’s price action is warranted as July comes to a close.
Crude runs rose 81 MB/D on the week, reflecting the restart of Hokkaido. Refinery capacity continues to look underutilized, which suggests discretionary run cuts are occurring. Crude imports moved higher and crude stocks built 1.45 MMBbls. Finished product stocks built by 0.9 MMBbls, mostly due to a rise in naphtha. Refining margins remain very poor and should be inducing discretionary run cuts.
Although the forecast heat will likely limit August stockpiling for the first half of the month, less constructive fundamentals developing in the second half increases the risk of regional congestion. The prospect of new record-high storage in the U.S. and western Canada raises the risk for a “hard landing” for prices this season, with the month-on-month gains recorded in July likely reversing by September.
The emerging growth in Australian LNG output will make less and less room for other LNG supply to push its way into Asia from distant regions. Australia is still only producing 160-mmcm/d (up 90 mmcm/d year-on-year) and remains at a mere 51 % of the total production capacity (315-mmcm/d) it will have in place by 2019.
EIA just released its final monthly May 2016 (PSM) U.S. oil supply/demand data. May 2016 demand came in at 19.20 MMB/D, which showed growth of 85 MB/D, or 0.4%, versus year-ago. Gasoline, kero, and resid all outperformed. Distillate and “other” underperformed. Versus the weeklies, demand was revised lower by 1.1 MMB/D, with "other" revised lower by 627 MB/D, distillate lower by 257 MB/D, and gasoline lower by 213 MB/D. This comes on the heels of an 800 MB/D downward revision in the final April figures, when reported last month. Versus PIRA's Reference Case outlook, May is 450 MB/D less than forecast. End-May total commercial stocks stood at 1,384.1 MMBbls, which was 17.2 MMBbl higher than the preliminaries and 20 MMBbls higher than PIRA had assumed in its balances.
Thursday’s lighter-than-expected U.S. storage build, coupled with an anticipated single-digit addition to inventories for next Thursday’s report, should register as the lightest additions to working gas inventories for the remainder of the cooling season. These relatively low builds have helped propel the newly minted prompt contract beyond $2.90/MMBtu but bely weekly injections thereafter that could easily average 35-40 BCF, as cooling degree days seasonally decline in August.
In the face of sharply warmer-than-normal cooling conditions across most of the eastern and southern U.S., PIRA estimates that U.S. coal stocks are near flat year-on-year at 156 MMst. Though this remains above-normal target levels, some regions are drawing very close to normal seasonal target levels.
Global equities were modestly mixed on the week. Outside the U.S., the markets moved, on balance, higher. The international sectors were led by Japan and Europe, though Norway declined as oil prices weakened. In the U.S., the market was largely unchanged, though technology, retail, and housing moved noticeably higher. Energy lagged and declined on the week.
PIRA's latest update of Asian product demand shows a slowdown in growth from last month but still strong. The deceleration is concentrated in both China and India, but other Asian countries showed improvement, with either stronger growth or smaller year-on-year declines. Data actuals cover the three month period April-June for China, India, Korea, and Japan so this snapshot picks up the most timely data in the largest countries. Overall Asian demand growth slowed from 1.35 MMB/D in the June assessment to just over 1 MMB/D in the latest snapshot.
“New natural gas prices for industrial consumers and other business entities have been increased by 9% on average compared with the prices in June-July 2016, taking into account the price situation on the European natural gas market,” Naftogaz reports. The natural gas prices from the company’s resource are differentiated depending on the volume of purchases, payment conditions and the state of previous payments.
Despite weaker oil prices, the coal market rallied strongly this month. A sizeable drop in China’s domestic coal production from planned curtailments and wet weather saw its thermal coal imports increase again year-on-year in June, while exports supply from other major producing nations has been held in check largely by the weather. PIRA continues to believe that 2017 prices are undervalued despite the increase in pricing this month as stronger oil prices next year will push the curve higher.
Saudi Arabia's formula prices for September were just released. Prices were cut most aggressively to Asia, while U.S. customers saw cuts on the two lightest grades. Prices for delivery into Northern Europe were raised on all grades but the lightest, Arab Extra Light. The adjustments reflect weaker refining economics and narrower light product cracks, particularly in Asia, while the increase in Europe reflects a narrower discount on Urals vs. Dated Brent. The cut in the U.S. was in keeping with a narrowing of the LLS-Mars spread. The bottom line is that Saudi Arabia continues to respond to market conditions so to maintain its market share.
Seasonal gas demand will reach its low point in August, which will relieve some of the pressure on prompt prices and offer additional options for injecting gas on the Continent. Despite this, the run-up in gas prices has not turned away power sector gas demand, helped by strong coal and poor availability of the French nuclear fleet. Power production across France is up by 90% year-on-year in July. Breaking this down by gas grid, we are seeing a 60% rise in PEG-Nord power plant production and an amazing 340% rise in PEG-TRS production. This is particularly amazing given that southern French gas prices have been trading 7% higher, or €1.07/MWh, than their northern neighbors.
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.
Refinery Margins Soften and Focus Shifting from Gasoline to DistillateOil prices have moved lower in their current trading range on bearish news, but they will increase as the global stock surplus falls significantly in 2H16 and 2017. Refinery margins have softened and may prompt some trimming of discretionary runs, especially this autumn. Product stock levels are high with gasoline inventory coverage relative to local/export demand near the top of the historical band. Middle distillate stocks are well above their historical range, but rising seasonal demand will tighten inventory in terms of days of supply forward coverage. Product markets are getting an early start on the seasonal price shift from gasoline toward distillate, with gasoline cracks starting their seasonal decline earlier than normal. Diesel cracks will gradually recover and take the lead from gasoline.
A stout national cooling degree-day (CDD) count (more than 10% higher year-on-year) has spurred an expansive role for gas in electric dispatch this month, enabling further recovery in cash prices. To be sure, widespread heat and a host of supply-side maintenance issues culminated in setting the ~$2.80/MMBtu month-to-date price for Henry Hub (HH) deliveries. Yet, despite the one-two punch of weather-aided demand and production disruptions, only a few regional price points managed to outpace the benchmark, with the vast majority significantly underperforming. Generally, during July regional prices have displayed similar discounts recorded last month.
After a number of strikes hitting output during June (- 3 GW year-on-year), French nuclear output has further deteriorated in July, hitting a low since at least 2012 and leading to a sharp contraction in French net exports and higher utilization of French gas units. The detection of an anomaly in the steam generators channel head is also contributing to undermine availability and will continue to do so in the upcoming months, as outages are likely being extended. In a PWR reactor design as for the EDF units, the replacement of the steam generator channel head can be done during a planned outage, typically lasting from one to three months, whereas a typical shutdown for refueling, which is carried out once a year, takes only 35 days. For the time being, for the units that are not offline and are being affected by this specific anomaly, a temporary solution is likely to be a steadier operation of the plants.
Stronger weather-driven power demands and an upward shift in natural gas forwards has boosted our coal burn expectations. This is offset in 2016 by increased coal production levels in the quarter just ended. In 2017, however, we are projecting growing tightness in the PRB, as a call on incremental coal supply may be challenging to meet.
Spot VLGC freight rates have plunged to new cycle lows below $24/MT on the benchmark Ras Tanura to Chiba, Japan, route. Freight rates on these vessels are now trading well below breakeven economics for even the most efficient operators. Rates look to continue to suffer for the foreseeable future as the trinity of peaking LPG trade, rising tonnage, and the expanded Panama Canal plagues these freight markets.
Manufacturing margins decrease the week ending July 15. RIN prices slide after peaking Monday.
The S&P 500 continued to push to new highs. Again, volatility declined and high yield debt prices rose. Emerging market debt prices, however, pulled back after having posted strong gains in the previous weeks. The dollar was generally stronger. The Turkish lira was noticeably weaker in the wake of the failed military coup. Commodities were mostly lower, both total, energy and ex-energy.
The situation in Libya shows no real improvement despite the recent swell of optimism over a near-term ramp in Libyan crude production. On July 7, Ibrahim Jathran, commander of the central Petroleum Facility Guards (PFG), announced exports would resume from the long-shuttered Es Sider and Ras Lanuf terminals within a week. The military push to clear ISIS out of the region near Sirte has also been making territorial gains. However, the announced merger of the two rival NOC’s seems to have broken down. PIRA acknowledges the possibility that terminals may reopen shortly. But in our view, the chaotic political and security situation could derail any production gains just as quickly. The UN-backed unity government (the GNA) has been unable to exert control, stark divisions remain between the rival governments and their affiliated militaries, and the myriad of militias on the ground will act in their own interests.
The 5th Circuit Court has decided that they (as opposed to the more EPA-friendly DC Circuit) are the appropriate venue to decide legal challenges to EPA’s TX Haze FIP that would have required costly scrubbers on 14 coal units. They also stayed implementation of the rule, offering a good preliminary sense that the Court has issues with EPA’s arguments and approach — as PIRA has been highlighting. This decision comes on the heels of EPA’s final One-Hour SO2 designations, where EPA declined to take action on four areas where Texas coal plants were proposed to be in Nonattainment, offering an environmental reprieve for coal/lignite units in Texas and pushing off any near to mid-term expectations of EPA-induced retirements.
Oil market rebalancing continues, but initial onshore stock decline has been less visible. India’s oil demand remains strong but with growth easing in 2H16 due to a heavy monsoon season and moderating economic growth. China’s net exports of gasoil, jet fuel and gasoline is set to increase by some 25% from last year. Asia embraces crude supply diversification with rising crude imports, but the share of Middle Eastern crude imports in the region is expected to remain high as Middle Eastern countries will strive to maintain market share. Asia-Pacific net crude imports are expected to rise in 4Q16 and 2017. Asian refinery margins are expected to stay modest due to high product inventories.
The strong move upwards in 1Q17 pricing is not just a story of NBP overreaching to the upside, but is a story of how the Continent is not. Spreads in the first quarter of next year have widened by over €1/MWh — meaning, the Continent is showing confidence that the U.K.’s tightness is a local story not a Continent-wide one. PIRA believes that this confidence is well-founded and will eventually lead to a significant move downward in winter pricing.
The coal market moved lower last week, on the back of weaker oil and gas prices and perhaps a hangover from the sizeable rally observed in the prior few weeks. The decline in pricing was particularly acute in the Atlantic Basin, while FOB Newcastle’s (Australia) price declines were more muted. With China’s import demand showing signs of strength, exacerbated by wet weather impeding production in some key areas, it is not surprising that FOB Newcastle prices have held up relative to API#2 and API#4. The weather-related disruption to China’s production (on top of the drive to rein in overcapacity) skews the risk to the upside for FOB Newcastle over the next 90 days.
Global equities moved higher on the week, with gains concentrated in the Americas, of which the U.S. and Brazil performed the best. In the U.S., the strongest sectors were retail and technology, while energy was the worst performer. Internationally, Latin America did the best, while China and BRICs also outperformed.
U.S. ethanol production jumps to an all-time high of 1,029 MB/D for the week ending July 15, breaking the previous record of 1,008 MB/D set last November. Inventories were slightly higher.
Latin American product demand is improving but is still down year-on-year. Consumption of the four main refined products trends higher in 2H16 but lag 2015 levels. PIRA forecasts that 3Q16 gasoline demand will be lower year-on-year but higher vs. 2Q16. Diesel demand in 3Q16 is expected to be below 3Q15 but higher than 2Q16. Regional refinery crude runs still disappoint with 3Q16 by ~70 MB/D lower than a year ago.
The tighter balances that have fueled price support in Asian and European spot markets are simply not sustainable. The less ramp-up that occurs in 2016, the more ramp will occur in 2017. The possibility of Asian supply reaching the Atlantic Basin in the year to come cannot be dismissed, particularly if Nigerian and Angolan production continue to run into operational problems. Length in Asia balances will easily front run any tightness in the Atlantic Basin. It will be more apparent when Qatari volumes begin to shift west.
Economic data out of the emerging world have turned stronger of late. Encouraging signals include: trade volumes turning positive on a year-on-year-basis; widespread improvements in industrial sector output; solid readings for vehicle sales; and constructive financial sector sentiments. In Europe, a preliminary July business confidence reading suggested that the Brexit decision has not yet disrupted economic activity. Next week’s economic calendar is filled with significant events.
The U.S. GHG Inventory shows 2014 emissions up year-on-year but down 7% vs. 2005. It does contain large write-ups to historic methane emissions from oil and gas production and landfills. Methane regulations for oil/gas and landfill sectors have been finalized, a draft technical report for the auto CAFE review has been published, and an endangerment finding for aviation and an international agreement on HFCs are expected later this year. The U.S., Canada and Mexico set a challenging regional goal of generating 50% of electricity from non-emitting resources by 2025. 2016 elections will impact the survival of the Clean Power Plan and the arc of climate policy for the next four years. PIRA revised our long-term federal carbon prices/costs expectations given the CPP stay.
Product demand strongly rebounded this past week, narrowing the product stock build, while crude stocks fell less than expected despite very high crude runs as imports stayed elevated. Light product imports were very high and these should substantially decline in next week’s data. Cushing crude stocks were up slightly and month to date are roughly flat and near our forecast. Another small build is expected next week. PIRA is forecasting continued strong light product demand for next week, which should cause major light product stocks to show a slight draw. Crude stocks decline sharply next week as runs stay high and imports back off.
PIRA does not expect autonomous vehicles (AVs) to have a meaningful impact on the oil, electricity demand or emissions outlooks over the next 20 years. Fully autonomous vehicles, which would allow the driver the flexibility to pursue other activities, are still likely at least a decade or more away from a technology standpoint. If and when this technology arrives, its impact on gasoline demand is not clear cut. If there is a synergy between AVs and electric vehicles (EVs) it could accelerate electrification of the fleet, for both cars and some trucks. It may also improve the fuel efficiency of the operation of vehicles. However, the impact on miles driven could very well be positive, particularly if there is substitution for some portion of train, plane or public transport travel.
Commercial gas production from the Jubilee field, which is processed at the Ghana National Gas Company’s gas processing plant at Atuabo raised the prospects of a price war in the supply of gas for power generation when it debuted on the market last year. However, the Atuabo gas is now one of the priciest in the world — even more expensive than its regional competitor from Nigeria, the West Africa Gas Pipeline Company (WAGP). This year it is estimated that the Atuabo gas price will remain uniform but that of the average annual delivery price of WAGP gas to Volta River Authority (VRA) will drop slightly.
Crude runs rose slightly on the week as maintenance continues winding down. Even so, capacity looks underutilized, which suggests discretionary run cuts are occurring. Crude imports fell to low levels and crude stocks drew. Finished product stocks also drew. Refining margins have remained poor with little barrel support other than fuel oil and naphtha cracks.
In assessing where the costs of oil are likely to head in the future, it is extremely important to distinguish trends from cycles. Historically, costs to operate existing oilfields and to develop new supplies correlate closely with oil prices. Using the Bureau of Labor Statistics (BLS) Drilling Oil & Gas Wells Index as a proxy for cost changes, our model predicts deflation may be about over with costs expected to increase in 2017 in line with an expected increase in oil prices. A similar cycle took place in 2008-2010, when prices collapsed in late 2008 and started to recover in mid-2009. The model also predicts continued increase in costs as prices continue to rise.
Policy developments over the past quarter were mixed. A federal judge ruled the Bureau of Land Management (BLM) overstepped its authority in its proposed fracking regulation on federal/Indian lands. The Colorado Supreme Court decided that municipalities can’t ban fracking. The North Yorkshire council approved a permit to frack a well in the United Kingdom. On the other hand, the EPA issued new methane standards although implementation costs are expected to be non-material, Pennsylvania passed sweeping new oil and gas rules, and the EPA’s SAB has decided its draft study that concluded fracking causes no systemic adverse impacts on drinking water needs quantification. Going forward, we expect limited federal policy changes as the current administration comes to an end and a continuation of generally favorable state policies, particularly with the sector financially struggling.
Deferred futures are currently below long-run equilibrium levels because producers are under pressure from their bankers to hedge future production. To search out speculative interest for this supply of paper futures, producers are selling future production below long-run equilibrium values. As long as this forced selling persists, the burden of raising deferred futures will fall on speculators. As the balances tighten and surplus stocks are drawn down, there will be an increase in speculators' expectations and confidence that higher prices are justified. Backwardation will likely increase, although the back of the market will go up as well. This will continue until a long-run equilibrium between demand and supply is reached.
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.
Royal Dutch Shell plc, through its affiliate Shell Offshore Inc. (Shell), announced on Monday that it has an agreement to sell 100 percent of its record title interest in Gulf of Mexico Green Canyon Blocks 114, 158, 202 and 248, referred to as the Brutus/Glider assets, to EnVen Energy Corporation, through its affiliate EnVen Energy Ventures, LLC. In line with Shell’s global divestment plans, this transaction includes $425 million in cash.
The transaction is expected to close in October.
Shell Brutus oil platform. Photo credit: NOAA Ocean Explorer
The Brutus/Glider assets include the Brutus Tension Leg Platform (TLP), the Glider subsea production system, and the oil and gas lateral pipelines used to evacuate the production from the TLP.
The Brutus/Glider assets have a combined current production estimate of approximately 25,000 barrels of oil equivalent per day (boe/d).
Shell is a leading, global deep-water operator, with a strong development pipeline and production on-stream in the Gulf of Mexico, Brazil, Nigeria, and Malaysia as well as exploration and appraisal opportunities. Shell currently produces approximately 600,000 boe/d and plans to increase production to more than 900,000 boe/d by the early 2020s from already discovered, established reservoirs.
Record levels of drilling and production – particularly in the US – were fundamental factors in the downturn that swept across the oil and gas industry over the last 18 months. Much of the crude oversupply has been sent into storage – either at refining bases, storage hubs, strategic reserves or moored in crude carriers.
Such is the scale of the crude flows that oil prices routinely track movements in inventories at the world’s largest storage and trading hubs. EIA data shows US crude oil stocks hit peak levels of 543 million barrels (excluding the strategic petroleum reserve) in late April, which has since contracted to 523 mmbbls (week ending 29th July).
US storage draws since April have resulted in an uptick in refinery utilization, rising from 89.7% to over ~93% by the end of July. Much of this spike in utilization is due to the summer driving season – typically resulting in a marked increase in gasoline consumption. This has been a feature of the US downstream sector for a number of years, however, current utilization at US refineries is markedly lower than the peak seen in 2015 (96.1% in late July-early August).
It may be surprising that US refinery utilization is down on the same point last year – given the sheer volume of cheap feedstock available – yet, it is not altogether unexpected.
Refining margins which were routinely reaching levels not seen since 2012, are now back to $3-4/bbl due to a saturated products market. Consequently, incentives to delay routine maintenance and sustain high utilization have evaporated.
Early indications from DW’s soon to be released World Downstream Maintenance Market Forecast suggest that this may provide opportunities for those involved in MMO activities. However, consumers at the pumps are not likely to see further falls in prices without large scale storage draws. Fundamentally, operators of refineries must balance the allure of cheap feedstock with the risks of an over-saturated products market.
Matt Adams, Douglas-Westwood London
As battle lines were drawn during Libya’s long civil war, Libya’s National Oil Company (NOC) was split between East and West, with opposing governments in Tripoli and Torbruk competing over oil revenues. Libya holds Africa’s largest proven reserves of crude, however, ongoing conflict has seriously disrupted oil production and exports – Libya currently produces just 350,000 barrels per day (b/d), significantly below the 1.65 million b/d produced prior to the unrest.
With oil revenues a key source of income, attacks on oil installations have been frequent by rival groups vying for power. A statement on July 2nd – announcing the reunification of the NOC – could indicate that recovery in the Libyan oil sector is on the horizon. An NOC spokesman, Mohamed Elharari, stated that reopening the blockaded export terminals at Es Sider, Ras Lanuf, Zawiya and Zueitina was a top priority for the company. The four ports have a total export capacity of 860,000 b/d, and would significantly boost global crude supplies. Any improvement to the situation could have a substantial impact on global markets – the opening of these terminals would likely lead to downward pressure on oil prices.
However, years of war have ravaged Libya’s oil infrastructure, the lack of maintenance represents a significant barrier to increased production in the near term. Both Es Sider and Ras Lanuf have been the focus of attacks, with Ras Lanuf’s storage tanks particularly badly damaged. Key to restarting exports will be Ibrahim Jathran, head of the Petroleum Facilities Guard (PFG) – who have been blockading Libya’s export terminals since 2013. Initially set up as a politically neutral force to protect Libya’s oil facilities during the civil war, the group have arguably acted as a private militia under Jathran’s leadership. A deal between Jathran and the Tripoli-based government on the 25th July was condemned by the chairman of the NOC, Mustafa Sanalla, who stated that the deal set a “terrible precedent” for further extortion by armed groups controlling oil facilities.
As the disagreements continue, it is clear without the support of the NOC, the prospect of ports reopening remains unlikely. The reunification of Libya’s NOC is certainly a positive step for recovery, however, tremendous barriers remain – in the short to medium term, oil is unlikely to flow at the levels seen in the days of Gaddafi.
Joel Hancock, Douglas-Westwood London
Historically, Gazprom has monopolized all gas exports in Russia. Complete control over gas sales to both east and west did not incentivize Gazprom to explore new ventures in LNG projects. Instead, the company focused on the development of a conventional pipeline network – including the Nord Stream, South Stream and East Siberia-Pacific Ocean pipelines. Consequently – in terms of the LNG market – Russia is lagging behind other global gas producers, such as Australia or Qatar who have heavily invested in infrastructure over the past decade.
Given Russia’s extensive gas reserves, the country has the potential to be a leading LNG exporter. Recent landmark changes to the country’s operating environment may finally allow for this potential to be realized – with amendments to gas export law expected to challenge Gazprom’s gas monopoly. Russia’s oil & gas production giant Rosneft, as well as country’s largest independent gas producer, Novatek, have gained licenses to export LNG independently from Gazprom and are pushing projects forward.
Novatek’s Yamal development is a key example, prospects here have been boosted by both a financial injection from China (3.6bn EUR) and changes in the Russian gas export landscape. The project is a potential game changer for gas export and is expected to come onstream by 2018 with three (5.5 mmtp) trains.
DW expects both LNG and pipeline exports from Russia to Asia to increase significantly in the mid to long term as the country reduces its reliance on pipeline gas exports to Europe. Growing demand for natural gas in Asia will likely incentivize Russian players to continue to invest in liquefaction for export. Novatek has recently announced plans for new Arctic LNG plants to expand production in the region, with a second plant in the Gydan Peninsula.
With these new projects, Russia is positioning itself to be a serious competitor to leading LNG producers. The country’s vast gas reserves and geostrategic position place Russia in a unique position to meet the growing demand for gas in both Eastern and Western hemispheres.
Iva Brkic, Douglas-Westwood London
Oil Markets Are Tightening and Bullish Catalysts AheadThe global economic backdrop has improved. Oil markets are tightening and there are many bullish catalysts ahead. Demand growth is accelerating while supply growth is declining. Non-OPEC crude/condensate output has declined 1.9 MMB/D between its 4Q15 peak and 3Q16. This, combined with expected strong demand growth, more than offsets OPEC production struggling to increase despite Iran’s return from sanctions and higher non-crude liquids supply, forcing surplus stocks significantly lower in 4Q 2016. PIRA has raised its crude oil price forecast by $3/Bbl over the next 9 months. The downstream is also in the process of rebalancing with the upcoming refinery turnaround season expected to pull product stocks lower. Crude price differentials have been cycling and now call for less U.S. imports and more exports, a substantial change from the last two months.
Henry Hub (HH) cash prices recently neared the $2.60/MMBtu mark — a level not seen since late June — before rebounding back towards $2.90 this week as even hotter weather still grips many regions this month. The concurrent forecasts that have extended the threat of additional above-normal cooling degree days (CDDs) into September are also fostering more downward revisions to weekly storage refill expectations, buoying NYMEX futures. Even so, for the month as a whole HH cash prices are still on track to be modestly lower than the July average of $2.80. The same can be said for most prices around the country outside of New England, and even more so in the case of price markers in western Canada.
With around 14 GW of installed wind capacity, of which 9.7 GW connect to the high-voltage transmission network, and an estimated 10.7 GW of solar P.V. plants connected between distribution and lower level networks, renewables are now more influential in U.K. price formation. The historical analysis of the past four quarters shows spark spreads turn negative as wind share moves to 15% of demand and above. It appears that the increase in the solar share has so far limited implications on spot power prices on average, judging from the last four quarters.
The coal market moved modestly lower for most of the week, with a slight downturn in the oil market and continued easing in Chinese buying activity weighing down pricing. After the sizeable rise in seaborne prices essentially since June stemming from the surge in Chinese demand, the market is questioning the ability for prices to continue to rise, particularly as the weather in China has become less destructive to production and less supportive to demand. The skepticism that market has had over the ability for the market to rise was the most evident by Glencore showing a $395 million loss by hedging coal output ahead of the price rise in 2Q16. After several years of prices falling, keeping coal supply in check, higher prices may incent some suppliers to bring tonnage back to the market. While PIRA is wary of supply returning to the market, we believe prices will be able to hold on to recent gains for several months, particularly if oil prices move higher.
The August WCI Current Vintage auction saw an improved coverage ratio, but no CA state-owned allowances were sold. This puts them at risk, under the proposed cap and trade amendments, of being moved to the Allowance Price Containment Reserve (APCR), accessible only at a very high price point. The State Assembly did not wait to see these results to pass SB 32, and the State Senate also passed companion bill AB 197. While chances are good that these bills make it to the Governor’s desk, they did not achieve the 2/3 majority that could have offered protections from legal challenges that consider cap-and-trade auctions as taxes. There was no explicit mention of continuing the cap and trade program in the bills.
Global equities eased modestly, though Europe in the aggregate was higher. In the U.S, housing and banking posted gains as money was reallocated into some sectors that had lagged in the most recent up leg. Utilities, retail and energy were the laggards for the week, with energy down about 1.5%. Internationally, all the tracking indices other than Japan, lost ground.
The most recently reported EIA domestic propane inventory increase of nearly 2.4 million barrels comes as little surprise as decreased export volumes out of the United States have been noted by PIRA shiptracking efforts. This was the highest build for this particular week since 2010. Propane moved into a 411,000 Bbl surplus stock position versus 2015 levels.
U.S. ethanol manufacturing margins improve the week ending August 19. Renewable identification number (RIN) values also increase.
Overall commercial stocks had their largest build in the last several weeks, up 6.6 million barrels with a surprising crude inventory increase of 2.5 million barrels. Most of the product build was once again in propane and other NGLs, a typical seasonal occurrence. Product demand remained strong, and this continues to be a regular feature in the current low price environment. For next week, crude imports are forecast to drop sharply, forcing crude stocks to decline. Light product demand remains strong, keeping major light product stocks roughly flat, despite somewhat higher crude runs.
While generally we’ve focused on optimization across all suppliers, recently a new form of optimization popped up in European trade: Algerian balancing between LNG and pipeline gas exports, which is further strengthening Europe’s connection to global gas pricing. This optimization play makes perfect sense, but it is just not something that has emerged on a month-to-month basis until quite recently.
Total U.S. coal stocks continue to normalize due to supportive weather conditions, as residual coal production cuts on an annualized basis draw inventories. Days burn has levelized, as the peak of the summer burn season has passed. In addition, coal burns remain off slightly year-on-year given growth in renewable capacity and coal unit retirements. Gas forwards (12-month-strip is just over $3/MMBtu) suggest further gas-to-coal switching for lower cost coals such as PRB, other western, and ILB coals (in that order) over this coming winter.
The RGGI Program is at a crossroads, as partners negotiate the post-2020 cap declines, with PJM states reportedly resisting the steeper reductions favored by New England. Allowance prices received a boost from the June Stakeholder Meeting, but declined on news of the NY nuclear subsidies in July. Average August prices are lower than July, but they have recently moved up towards the $5 mark. PIRA expects the Sept. auction to be dominated by compliance buying as the market continues to await a draft Model Rule, expected this fall. Longer term, it must be decided whether the RGGI price signal will be the primary mechanism to reach climate goals.
The S&P 500 was lower on the week, after having set record highs. As would be expected, volatility was higher, while high yield debt and emerging market debt indices declined. The dollar generally strengthened. It moved particularly higher versus the euro and yen, while only being modestly changed versus the British pound. It also strengthened against most of the commodity producers, including the South African rand, as commodities declined.
Stocks increased 392 thousand barrels to 20.817 million barrels, up 2.19 million from last year. Output dropped to 1,028 MB/D, just short of the record high 1,029 MB/D the prior week.
Two weeks of data were reported coming off the mid-August holiday hiatus. Crude runs dropped back slightly. Crude stocks built in the first week, but then dropped as expected. Gasoline demand was seasonally strong and performed as expected. There was a good stock draw, followed by a modest build. Gasoil demand was seasonally damped by the holiday and significant stock builds occurred in both weeks. Refining margins remain very weak with little overall improvement.
The Federal Antimonopoly Service (FAS) has no plans to revise the current wholesale price of gas before the end of this year, the head of Department of Regulation of Fuel and Energy Dmitry Makhonin told Interfax. According to the PIRA forecast, an increase in wholesale gas prices by 2% in July was scheduled, but that did not happen. Meanwhile, the regulator representative confirmed that a project on liberalization of prices for natural gas in three pilot regions can be implemented in the first half of 2017.
Cape freight rates are struggling to find momentum despite continued signs of expansion in iron ore trades, particularly to China. PIRA expects iron ore exports in August to increase from Brazil and hit record levels from Australia. Slow steaming makes economic sense in the current market even at relatively low bunker fuel prices, artificially inflating bulk demand. Speed switching is not expected in late 2017 unless rates push close to $26,000/day, but further structural gains beyond that level will be more difficult as the fleet accelerates.
U.S. GDP growth disappointed in recent periods, as the economy was hit by three separate negative influences: a slump in business investment a lengthy inventory adjustment process and the strong dollar weighing on trade activity. But PIRA’s expectation is that all three will reverse course soon, and GDP growth will strengthen meaningfully in the second half of 2016. This week’s July data releases on durable goods orders, trade, business inventories, and new home sales all had positive implications for the U.S. economic outlook.
PIRA's latest update of Asian product demand shows a continued slowdown in demand growth. Our latest assessment of growth is now 640 MB/D versus year-ago. Data actuals cover the three month period May-July for China, India, and Korea, while Japan and Taiwan pick up data April-June. Our last assessment, in July, indicated growth of about 1 MMB/D. The slowdown in demand growth is along the lines expected, but that slowdown will reverse as we move increasingly into 4Q.
2017 is poised to be a breakout year for pipeline development, with more than 40 BCF/D of additional capacity announced for next year. If just 15 BCF/D of these pipelines commence service, or those having FERC approval, the potential supply response would overwhelm nascent structural demand growth. Yet, downsizing the projects to just half the proposed capacity would still likely tip the fundamental balance back into surplus, raising valid concerns about the extent and duration of the forthcoming recovery.
We are entering a period when new supply is outpacing disruptions from existing producers, which means the balances will be stretched like never before. Now the issue will be whether newer buyers can grow faster than older ones are shrinking.
Long-awaited U.S. natgas production declines arrived in 2Q16, as the combined pressure of low rig counts, bloated storage, and poor prices finally caught up with U.S. producers. The E&P companies in PIRA’s Survey Group shrank volumes by 0.6 BCF/D, or about 1% compared to 1Q16. Most of these losses were concentrated outside the Northeast, but even Appalachia growth was essentially flat quarter-on-quarter. The recent subdued production levels (aided by transitory disruptions) together with the assistance of warm weather helped rebalance the market and push storage levels closer to seasonally normal levels. Looking ahead, producers seem optimistic about production growth resuming with forward-looking statements highlighting plans to ramp up drilling in time for the heating season and beyond.
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.
North American Crude Prices Fall as Canadian Production ReturnsCrude prices fell in July, as Western Canadian oil sands production recovered from recent wildfires. Stocks rebuilt in Canada, weakening differentials for Bakken and Rockies, as well as Canadian grades. Cushing stocks were unchanged in July, but a small draw is likely for August, as overall U.S. crude stocks decline sharply.
Attempts to support spot price will be on two fronts: lower production ramp ups and finding new non-European pockets of demand (i.e. India), even if it means lower netbacks. Among the larger producers and portfolio marketers, the logic goes that it's better to make less money off a few cargoes than demonstrably damage the benchmark for all cargoes. As such, PIRA adjusted the LNG volumes we’ve projected would land on European shores.
The U.K. supply picture for the upcoming winter remains very fluid, with Eggborough Power Ltd announcing this week that its unit 4 coal plant (495 MW) will be available again in the wholesale market over the winter 2016/17, starting from September 16. This announcement comes a few months after the signature of a Supplemental Balancing Reserve (SBR) contract with National Grid for the provision of 681 MW of de-rated capacity from units 1 and 2 during the coming winter. The additional capacity that we potentially see coming back for winter 2016/17 is only the remaining unit at Eggborough. As for the other coal plants currently closed, we see the decision to come back online technically much more difficult to implement.
The coal market lost significant ground this week, with the three major forward curves shedding between $4.00/mt-$6.00/mt along the curve. The headline development of the week was the announcement that Turkey will be adding a $15/mt tax on imported thermal coal for power generation. Before this announcement, Turkey's imports had been one of the sole remaining sources of potential growth on the demand side in the Atlantic. The process of rebalancing for the coal market will continue, particularly as the outlook for Chinese import demand remains bullish. However, limitations on import demand such as what was announced in Turkey this week limit the upside for pricing, although our bullish expectations on oil pricing will drag the market higher as production costs escalate.
Mt. Belvieu LPG prices followed broader energy markets by changing little. September propane at the market center eased by 0.1% despite a very weak inventory build, which pushed stocks back into deficit vs. the year prior. Meanwhile, butane futures gained 1.3% to the settle above 61¢/gal as markets anticipate higher blending demand next season. Prompt August ethane prices plunged as the EIA reported another huge increase in production in June and a substantial inventory increase.
Manufacturing margins also declined. RIN prices decreased after soaring 30% since May.
The August WASDE could very well put in the high for corn yields as the euphoria around the 2016 crop peaks due to crop conditions. The December 2016/December 2017 corn spread traded down to -40 Thursday suggesting the market may even be looking at a 172 yield come next Friday, while PIRA is looking for a 170-171 number for the report.
This week’s U.S. July activity data (such as nonfarm payrolls and the ISM manufacturing index) suggested that the pace of economic growth will pick up in the second half of 2016. While wage growth has accelerated, it is not expected to impact the Fed policy outlook. The Bank of England delivered an easing package that went far beyond market expectations. Japan delivered a one-two punch of fiscal and monetary easing, but the Bank of Japan muddled its message about the upcoming policy action. A directional correlation between China’s manufacturing confidence and Brazil’s industrial production has continued to hold.
Overall stocks built 2.1 million barrels this past week with crude inventories building 1.4 million barrels but gasoline stocks declining 3.3 million barrels. This should be the last of the crude stock builds with offshore floating inventories relatively depleted thereby resulting in lower imports and a forecast 3.6 million-barrel stock decline in next week’s data. Cushing crude stocks fell 1.1 million barrels this past week and should decline another 0.5 million barrels in next week’s EIA report. Another gasoline stock decline is forecast for next week, albeit more moderate than this past week, while distillate stocks build just slightly.
Thursday’s 6 BCF U.S. storage pull was extremely rare — the last such cooling season event occurred a decade ago — driven by record-breaking gas power burn. Yet, barring a few transient spikes, NYMEX Henry Hub (HH) futures trading was relatively ambivalent. Part of this trepidation stems from looming shoulder season fundamentals that will weigh on gas burn for electric generation (EG). However, renewed production resiliency — until recently masked by transitory disruptions — may be even more influential in threatening balances in the weeks ahead.
The S&P 500 moved to another record high, though the Russell 2000 remained well short of its record high. Volatility moved lower, while high yield debt and emerging market debt indices generally moved higher in price. The UK long bond yield moved lower as the Bank of England lowered their overnight policy rate 25 basis points.
Inventories built to 20.6 million barrels the week ending July 29. About 10.6 million gallons of ethanol were imported. The production of ethanol blended gasoline increased to 9,439 MB/D the third highest on record.
Heading into the August WASDE this week there seems to be an inordinate amount of discussion around setting the lows “earlier than normal” this year. A lot of the discussion seems to center on reports from scouting farmers that this year’s corn crop is “good, but not great” and that it’s not as good as it looks from the road. More and more crop tours seemed to confirm these concerns last week, but the markets are “stuck” as the methodology employed by NASS for their August yield estimate solely counts stalks, which should not be an issue in any area with the exception of southern Minnesota and possibly far northern Iowa due to frost.
Crude runs rose 146 MB/D on the week, reflecting the restart of capacity previously in maintenance. Crude imports stayed sufficiently high to build crude stocks 0.77 MMBbls. Finished product stocks drew 0.57 MMBbls. Refining margins are poor and getting worse, which will prompt further discretionary run cuts that will ultimately tighten the market.
It’s probably safe to say that there really isn’t anything else left to delay this year with the exception of Australia Pacific LNG train 2, which PIRA has in its short term balance for October. The question then becomes should we should expect a similar number of delays in start-ups among the 12-odd trains on the books for 2017? The answer at this point is a firm maybe, as we have some evidence to suggest that this year’s flawed timing will be duplicated. One area where delays are mounting are on future projects. The rate of announcements delaying FIDs for the next generation of liquefaction is gathering force, as it becomes abundantly clear to even the most optimistic of project backers that lower oil prices are set to be a longer term feature of the market.
Global equities were broadly higher on the week. In the U.S., the growth indicator outperformed the defensive indicator as many of the growth sensitive sectors posted good gains. Banking and technology led the way higher, while utilities declined and underperformed. The international sectors performed even better than the U.S., and were led by Latin America, China, and emerging Asia. Europe fell back.
Over 70% of the gains in the rig count since May lows has been driven by private operators. Of these private rig additions, nearly 90% has come from operators that had been recently inactive. Many operators dropped to 0 rigs in the first quarter as WTI prices averaged $33/Bbl. As prices recovered, these operators have returned from 0 to 1 rig programs and they have been the primary driver of higher rigs. Now that a significant number of private operators have returned, PIRA thinks it is likely that gains in the rig count will slow.
The federal government has decided against raising the tariffs of petroleum related products despite Oil and Gas Regulatory Authority’s (OGRA) recommendation to raise prices, Finance Minister Ishaq Dar has said. Speaking to reporters in Islamabad, Finance Minister Ishaq Dar said that OGRA's summary was rejected after Prime Minister Nawaz Sharif directed not to raise the prices. He said that the current petroleum prices would remain unchanged until at least August 31, 2016.
EIA recently released their May oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, was unchanged month-on-month and the year-on-year decline rate slowed from about 900 MB/D to 550 MB/D. Looking to June, based on PIRA's adjusted weekly data through July 22nd, domestic crude supply for June is estimated to have declined by 155 MB/D, month-on-month and the year-on-year decline rate has reaccelerated back to 735 MB/D.
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.
As battle lines were drawn during Libya’s long civil war, Libya’s National Oil Company (NOC) was split between East and West, with opposing governments in Tripoli and Torbruk competing over oil revenues. Libya holds Africa’s largest proven reserves of crude, however, ongoing conflict has seriously disrupted oil production and exports – Libya currently produces just 350,000 barrels per day (b/d), significantly below the 1.65 million b/d produced prior to the unrest.
With oil revenues a key source of income, attacks on oil installations have been frequent by rival groups vying for power. A statement on July 2nd – announcing the reunification of the NOC – could indicate that recovery in the Libyan oil sector is on the horizon. An NOC spokesman, Mohamed Elharari, stated that reopening the blockaded export terminals at Es Sider, Ras Lanuf, Zawiya and Zueitina was a top priority for the company. The four ports have a total export capacity of 860,000 b/d, and would significantly boost global crude supplies. Any improvement to the situation could have a substantial impact on global markets – the opening of these terminals would likely lead to downward pressure on oil prices.
However, years of war have ravaged Libya’s oil infrastructure, the lack of maintenance represents a significant barrier to increased production in the near term. Both Es Sider and Ras Lanuf have been the focus of attacks, with Ras Lanuf’s storage tanks particularly badly damaged. Key to restarting exports will be Ibrahim Jathran, head of the Petroleum Facilities Guard (PFG) – who have been blockading Libya’s export terminals since 2013. Initially set up as a politically neutral force to protect Libya’s oil facilities during the civil war, the group have arguably acted as a private militia under Jathran’s leadership. A deal between Jathran and the Tripoli-based government on the 25th July was condemned by the chairman of the NOC, Mustafa Sanalla, who stated that the deal set a “terrible precedent” for further extortion by armed groups controlling oil facilities.
As the disagreements continue, it is clear without the support of the NOC, the prospect of ports reopening remains unlikely. The reunification of Libya’s NOC is certainly a positive step for recovery, however, tremendous barriers remain – in the short to medium term, oil is unlikely to flow at the levels seen in the days of Gaddafi.
Joel Hancock, Douglas-Westwood London
BP announced on July 14, that following significant progress in resolving outstanding claims arising from the 2010 Deepwater Horizon accident and oil spill, it can now reliably estimate all of its remaining material liabilities in connection with the incident.
As a result, taking into account this estimate together with other positive tax adjustments, BP expects to take an after-tax non-operating charge of around $2.5 billion in its second quarter 2016 results.
This charge is expected to include a pre-tax non-operating charge associated with the oil spill of around $5.2 billion. This would bring the total cumulative pre-tax charge relating to the Deepwater Horizon incident to $61.6 billion or $44.0 billion after tax.
BP believes that any further outstanding Deepwater Horizon-related claims not covered by this additional charge will not have a material impact on the Group’s financial performance. It will deal with remaining claims in the ordinary course of business.
Brian Gilvary, BP chief financial officer said: “Over the past few months we’ve made significant progress resolving outstanding Deepwater Horizon claims and today we can estimate all the material liabilities remaining from the incident. Importantly, we have a clear plan for managing these costs and it provides our investors with certainty going forward.”
Gilvary reconfirmed that BP expects to continue to use proceeds of divestments to meet Deepwater Horizon commitments in line with the financial framework laid out in previous quarters.
A year ago, BP reached agreements to settle outstanding federal, state and local government claims arising from Deepwater Horizon. In the months since, BP has made much further progress in resolving outstanding claims arising from the incident.
PSC settlement - the Court and the Deepwater Horizon Court Supervised Settlement Program have been progressing the remaining economic and property damage claims relating to the 2012 Plaintiffs’ Steering Committee (PSC) settlement, including through simplified and accelerated procedures for processing certain claims. Today’s announced charge includes the estimated cost of settling all outstanding business and economic loss claims under that settlement, which are expected to be paid by 2019.
Opt-out and excluded claims - there has also been significant progress in resolving economic loss and property damage claims from individuals and businesses that either opted out of the PSC settlement and/or were excluded from that settlement. In February 2016, the US federal district court estimated that there were more than 85,000 valid opt-out and excluded economic loss plaintiffs. The vast majority of these claims have since been settled or dismissed as an order of the court today confirms. An estimate of the cost of the remaining claims, expected to be paid by the end of 2016, is also included in this charge.
Securities litigation - in June, BP announced a $175 million settlement of claims from a class of post-explosion ADS purchasers in the MDL 2185 securities litigation, payable during 2016 - 2017. This cost is also included in today’s announced charge.
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