NYC-based PIRA Energy Group Reports that global oil stocks will draw less than normal in 4Q15, increasing the inventory excess. U.S. commercial crude stocks built the week ending September 25th to a new record high. In Japan, crude runs dropped, but imports stayed sufficiently low to contain crude stock change. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
European Oil Market Forecast
Global oil stocks will draw less than normal in 4Q15, but the demand for inventory should set a floor for prices, limiting deterioration in the first half of the quarter. PIRA expects prompt crude prices to actually rally with stock draws later in the quarter but a sustainable rally will have to wait on physical balances substantially tightening in 2016. Gasoline cracks are declining seasonally. For middle distillates, high stocks will linger into next year capping diesel cracks. European refinery margins were the best in many years over the summer but are now coming off.
Bearish Storage Risks Ahead of Structurally Tighter Balances
Thanks to hot-weather-aided gas-fired electricity generation and tepid sequential production growth, concerns over storage congestion have diminished for the remainder of the injection season. Yet, bearish Henry Hub price risks persist in the near-term landscape; in particular, Producing Region stocks are still headed to an all-time end-October high.
Western Grid Market Forecast: September 2015
Strong cooling loads helped maintain California prices near July/August levels despite weaker gas prices. Mid-Columbia and Palo Verde markets both declined month-on-month. In the Northwest, below normal temperatures sapped late summer cooling loads while hydro output and net imports from BC held up well, supported by much above normal precipitation in the province. In the Southwest, seasonal cooling load declines reduced the call on less efficient generation and implied heat rates tumbled.
Coal Pricing Sinks Further on Softening Global Demand Growth Prospects
Physical coal prices again moved lower over the past month with weak macroeconomic data coming out of China, softness in the oil market, and generally unsupportive fundamentals. So long as China’s thermal coal imports decline year-on-year, it will be difficult for FOB Newcastle prices to rally. Both CIF ARA (Northwest Europe) and FOB Richards Bay (South Africa) prices also fell this past month, with slack demand from India driving the latter price lower. While Pacific Basin balances have the potential for tightening, weaker import demand in Europe and robust supply will keep Atlantic prices weak relative to Pacific.
European Electricity Markets Scorecard
The short-term pricing picture remains heavily tied to the French nuclear availability. Lower French nuclear availability adds a layer of risk, especially since colder weather is expected from the middle of the week. In addition, Belgium's nuclear output is now set to stay closer to 2014 levels, which is to say that we expect no change in the total Belgium net imports through the balance of the year. The increase in the NTC with Spain is also broadly bullish, but flows have been typically volatile in 4Q15, depending on Spanish wind conditions.
U.S. Crude Stocks Grind Higher W/W
U.S. commercial crude stocks built the week ending September 25th to a new record high, a level 167.3 million barrels over 2014 levels. Crude stocks had the highest surplus of the year. Demand growth has begun to sputter, with the latest four weeks of adjusted demand basically flat year-on-year. Gasoline demand and jet demand - possibly driven by accumulations for non-commercial uses - remain strong performers. Refinery turnarounds will continue to dominate crude balances for the next few weeks, although not enough to cause containment issues.
India Presses Forward with Gas Price Reduction
The Indian government reduced the price of the locally-produced natural gas by 18% for six months beginning Thursday (Oct-1), following a global slide in commodity prices. This is the second six-month revision since November when the government introduced a gas price formula linking it with international prices following demands from the industry that prices were too low to incentivize producers. Following the introduction of the formula, the prices went up by a third, but fell about 8% in the first revision in April.
Aramco Pricing Adjustments for November- Lower for Asia and the U.S., Europe Higher
Saudi Arabia's formula prices for November were released. Significant discounts were extended for Asian pricing, more modest cuts to the U.S., while European prices were mostly raised. The more generous terms to Asia suggest a desire to encourage more Asian refiner liftings, especially with imminent 2016 contract discussions. Pricing fundamentals in Asia suggested a less aggressive stance could have been taken. Refining margins in Asia had strengthened over the month, as had the economic incentive of running Saudi crude against competing grades.
Sluggish Tone of September U.S. Jobs Data Is Potentially Worrisome
The U.S. employment situation report for September was discouraging in key respects. The reported pace of job growth decelerated sharply in recent months, and the sluggishness was widespread across major industries. The unemployment rate was flat month-to-month, but a fall in the labor force participation rate was disappointing. As for GDP, the underlying pace of growth was probably decent in the third quarter, even though the drag from the trade and inventory sectors was substantial. Outside the U.S., August industrial production in Japan and Brazil had negative implications for growth.
Gas Regional Basis Monthly, September 2015
Mother Nature proved to be no match for gas market bears despite a valiant effort on her part in the form of record-breaking CDDs this month. Even so, many cash price markers, including Henry Hub are near, if not at, new lows for the year. And headwinds remain that could warrant even lower prices. In the South, the Producing Region set record highs for injections in both September and October last year, yet end-October storage still only reached 1,120 BCF — the lowest level since 2008. With September refills set to rival last year’s record, and stocks already nearing record highs, refills need to be upwards of 1 BCF/D lower than a year ago this October.
Asia-Pacific Oil Market Forecast
The global oil surplus has not materially diminished. PIRA’s 4Q15 balances now show a smaller commercial stock draw in the three major OECD markets than our previous estimate. The forecast draw is less than normal. Global economic weakness, centered in Asia, is a growing concern.
U.S. Ethanol Prices Increased During September
U.S. ethanol values rose during most of September as the market tightened, with inventories falling to the lowest level of the year. Manufacturing margins fell early in the month, though some improvement was achieved the last week of the month.
Pricing Parity Between Regions Strongly Implies More European Buying in 4Q/1Q
At this week's PIRA Client Seminar in New York, we will take an expansive look at the short and long-term outlook for LNG gas balances in the broader context of the global gas market. It is a story that will be making buyers smile and sellers looking for answers to difficult questions in the years to come.
U.S. July 2015 DOE Monthly Revisions
DOE released its final monthly July 2015 (PSM) U.S. oil supply/demand data today. July 2015 demand came in 430 MB/D higher than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 253 MB/D. Total demand for July '15 versus July '14 (PSA) grew 696 MB/D, or 3.6%, which maintained similar growth from June. End-July total commercial stocks stood at 1,273.5 MMBbls, lower than the PIRA's assumption for end-July by 13.9 MMBbls, with product lower by 10.2 MMBbls. Compared to the weekly preliminary data, DOE lowered total commercial stocks 0.4 MMBbls. While both crude and product remain in excess relative to last year, the crude excess grew only slightly, while the product excess fell a more significant 8.6 MMBbls.
U.S. Coal Market Forecast
U.S. Consumer stocks of both natural gas and coal are poised to remain above comfortable target levels (especially for the latter), with downside weather risks a notable concern for this coming winter given prospects for continued El Niño conditions through early 2016. This poses downside price risks for gas, and thus coal over this coming winter.
Japan Data Show Storm and Holiday Impacts
Two weeks of data were reported due to the string of holidays September 21-23. Japanese crude runs dropped both weeks, but imports stayed sufficiently low to contain crude stock changes. Gasoline demand was disappointing driven lower by a typhoon and then displayed only modest holiday uplift, with stock builds for both weeks. Gasoil demand was much higher in the first week, and then sharply lower. Kerosene stocks drew marginally the first week, on continuing good seasonal demand and then compensated with a sizable stock build on lower demand. Refining margins are strong and supported by a late-season resurgence in gas cracks.
Weather-adjusted Balances Fueling Renewed Downward Price Momentum
In spite of a major leg-up from September CDDs, more than 30% above normal, PIRA’s balances show considerable weakness in weather-adjusted gas-fired electrical generation along with further weakness in the industrial sector.
Harvest Low Chatter
Every year around this time we hear the seasonal traders talking about harvest lows. Last year it happened on October 1st for both corn and soybeans, so the short memories are still intact.
International Coal Markets Scorecard
Coal prices continue to test new lows last week, with the temporary lifting of the Fenoco rail ban in Colombia and weaker oil prices pressuring the coal market lower. There has been a decided lack of bullish developments in this market, with very limited upside for demand (with considerable downside if China’s imports continue to implode), and not enough supply coming off the market. The gas and oil markets are not providing any support for coal prices either, with input costs for coal producing dragging valuations lower.
Global LPG Weekly Scorecard
Recent fundamentals developments in global LPG, including price issues, international arbitrage, trade flows, petrochemical margins, operating rates, spot and forward feedstock preferences, as well as the divergent regional weather influences.
European Economy
Europe experienced a constructive pace of economic growth during 3Q15, according to recent activity and confidence indicators. Credit data also improved markedly, as the European Central Bank’s aggressive policy easing has begun to bear fruit. But the economic outlook has become somewhat uncertain recently, due to several worrisome developments. The list of concerns includes possible negative spillover effects from emerging market weakness, volatility in financial markets, and declining long-term inflation expectations.
Global Equities Rebound W/W
Global equity markets largely advanced the week ending October 2nd. In the U.S. equity market, materials and energy led the way. They had previously been two of the biggest laggards. Housing was the weakest performer and declined. Internationally, all the tracking equity indices advance strongly, other than Japan, which was neutral. On the week, the international equity tracking indices outperformed the advances made in the U.S.
Harvest Lows?
PIRA is not in the business of calling harvest lows, but we certainly respect the seasonality of these markets. Corn has held up better than beans for the loud chorus promoting a bottom, but corn has most definitely benefited from a wheat market that has led the way on many occasions over the past two weeks. Corn remains stuck between soybean weakness and wheat strength, not a great trading environment.
U.S. Ethanol Output Up/ Stocks Down
U.S. ethanol production rose 6 MB/D the week ending September 25 to 943 MB/D, rebounding from a 19-week low. Inventories declined by 118 thousand barrels to 18.8 million barrels, slightly lower than stocks at the same time last year.
European Gas Price Scorecard
Russian exports in September were the second highest of the year and will move higher as the weather becomes colder. With the ruble weakened and prices falling in dollars, the incentive for Russia to export as much gas as possible is both a strategic and financial imperative. Russian gas prices are more or less dead even with spot prices, although some buyers seem to have a discount to current NGC and Gaspool levels.
S&P 500 Higher at Week End
The S&P 500 declined on a weekly average basis. However, a strong performance on Friday allowed the market to close higher on a Friday-to-Friday basis even in the wake of a weak employment report. Volatility was higher, while high yield credit (HYG) and emerging market credit weakened (higher yields). Overall, commodities declined again, but ex-energy was flat. With regard to currencies, many of the emerging Asia currencies continued to weaken against the U.S. dollar, as did the Brazilian real and British pound. The Russian ruble strengthened.
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.
Oil prices have stabilized in the $45-50 range over the last month, however, performances of major oilfield stocks have continued to suffer. According to analysis undertaken by DW, decline of a further 8% has been seen through September, down 39% year-on-year.
As E&P firms start to plan for 2016, the current oil price is driving expectations of further cutbacks in industry investment. Drillers have borne the brunt of oil price decline since June 2014. Declining rig utilization has been compounded by industry-wide cost deflation which has hit all companies reliant on providing services to the oilfield. According to DW’s World Oilfield Services Market Forecast total OFS expenditure has declined 36% over 2014-2015, while onshore and offshore drillers have seen an average of 57% and 51% of their value been wiped off stock markets respectively.
The oilfield equipment sector, however, appears to be faring better, with average stock performance declining only 20% according to DW analysis. Falling input prices, particularly steel, has led to an ability to better accommodate the tightening of operator purse strings.
Exposure to multiple upstream segments has aided the majority of manufacturers, particularly those involved in subsea manufacturing. The current subsea hardware backlog is high at $13.4bn (due to a significant number of contracts being agreed in the years preceding oil price decline) and this will take some 18-24 months to work-through, by which time we may see a raft of new orders if oil prices recover.
Manufacturers with capabilities outside of upstream oil and gas have fared better still, with healthy activity remaining in both midstream and offshore production systems. According to initial outputs from DW’s World Oilfield Equipment Market Forecast, only a 4% decline in midstream spend is expected in 2015, compared to 26% in upstream equipment. A detailed analysis of some 60 categories of equipment spend is due to be launched later this month. We will continue to follow the sector with keen interest.
NYC-based PIRA Energy Group reports that improved sentiment is important to support demand for crude inventory and price, especially with the global stock surplus expanding in 4Q15. U.S. total commercial crude stocks drew the week ending September 18th, lowering stocks from prior week’s record. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Global Stock Surplus Increases and the Problem for Oil Prices
Improved sentiment is important to support demand for inventory and price, especially with the global stock surplus expanding in 4Q15. Supply/demand revisions also reduce 2016’s anticipated stock decline, but it still remains substantial and important to driving prices higher. Nevertheless, higher inventories lead to roughly 3-4% mark down in 2016 crude oil prices. Rig count declines must translate into inventory declines for prices to move higher on a sustainable basis. The problem for prices is production growth still remains strong, benefitting from local currency declines and legacy projects. Refinery margins will continue to benefit from demand growth outpacing refinery capacity (ex-China) and crude price contango.
Gas Flash Weekly
The prior Gas Flash Weekly published on September 17th indicated a string of triple-digit builds were on the horizon and the latest report confirmed how imminent those hefty builds were. Aside from the 106 BCF figure, preliminary balances suggest builds in the 100+ vicinity for at least the next two weeks. PIRA’s projected end-September carryout is now ~3.63 TCF and easily puts the market back on course for a new record end-October carry in excess of the 3.93 TCF set in 2012.
French Nuclear Availability to Keep Prices Strong in the Shorter-Term
French nuclear availability is a concern in the shorter-term and will keep French prices strong, but EDF's incentive to run the fleet harder is unchanged, considering Belgium's nuclear output remains down year-on-year for the time being. Availability of French oil and gas units is now more certain and bearish for French winter prices, especially given the weakness in the oil and gas balances.
Busy Week with Chinese PMI, U.S. / Europe Momentum Indicators, and Yellen Speech
As expected, latest indicators from the emerging Asia region (such as China’s purchasing managers’ index) turned weaker. Momentum indicators from the U.S. and the euro area, in contrast, were constructive, suggesting that the regions are largely insulated from difficulties in emerging markets. Policymakers from the U.S. and Europe are concerned about potential negative spillovers from emerging economies. An apparent message from Fed chair Yellen’s speech this week was that the Fed would not wait too long before making up its mind about monetary tightening – but the speech also contained dovish elements.
U.S. Commercial Crude Stocks Draw for the First Time Since End-July, Narrowing Surplus
U.S. total commercial crude stocks drew the week ending September 18th, lowering stocks from prior week’s record. This is the first weekly draw in total commercial stocks since July 31. U.S. total commercial stocks built this week last year, narrowing the year-on-year excess. Total reported petroleum demand spiked back up for the week following the period containing the Labor Day holiday. The latest four-week average of export-adjusted total petroleum demand, however, is up only 140 MB/D, or 0.7%.
Pakistan to Look to Offer Subsidized LNG for Fertilizer Industry
The Pakistan government is mulling over providing a subsidy on imported LNG supply to fertilizer plants that have been shut because of dearth of domestically produced natural gas – a significant move that will make urea available to farmers at affordable prices. Four fertilizer plants connected to the pipeline network of state-owned Sui Northern Gas Pipelines Limited (SNGPL) have been encountering gas supply problems because of shortage since the days of previous Pakistan People’s Party government.
European LPG Prices Push Higher W/W
Propane prices in Europe rose 6.1% the week ending September 25th, as seasonal demand increases and markets look tighter in October. Prices will have to continue to increase to attract additional volumes from the U.S. as current spot arbitrage economics remain challenged. Butane prices creeped higher, after larger increases in the prior week.
U.S. Ethanol Prices and Margins Higher W/W
U.S. ethanol prices rose the week ending September 18 as inventories drew to the lowest level of the year the prior week. Ethanol manufacturing margins were slightly lower, as co-product DDG values fell sharply.
U.S. Coal Stockpile Estimates
U.S. power sector coal stocks commenced a seasonal build this month despite warmer than normal weather conditions across the central U.S. on through the Northeast. PIRA estimates U.S. electric power sector coal stocks will reach 165 MMst as of the end of this month, or 86 days of forward demand based on our forecast of Oct/Nov average coal burn (vs. 60 days one year ago).
Low Natural Gas Stock Levels in Europe
Low natural gas stock levels in Europe validate both a comfort with the supply outlook and a lack of concern over peak demand this winter. A conscious decision has been made to rely on incremental imports to balance during peak winter gas demand with the decision tied to broader financial constraints as well as comfort with alternate fuels and forms of power generation available.
S&P 500 & Commodity Prices Fall W/W
The S&P 500 declined the week ending September 25th. Volatility was little changed, but high yield credit (HYG) and emerging market credit fell back. Overall, commodities declined for the third straight week. With regard to currencies, many of the emerging Asia currencies weakened again, particularly the Indonesian rupiah, while the Brazilian real also posted a noticeable decline. Bond yields on longer term Japanese debt continued their easing trend, while U.S. and Euro longer-term yields also eased on the week. Greek bond yields also continue to decline.
China’s 2017 Emissions Trading Scheme Spooks CY18 FOB Newcastle Prices Lower
International coal prices continued to move lower last week, with flat oil prices and a lack of fundamental support allowing for further reductions across the forward curve. Losses for CY18 FOB Newcastle (Australia) prices were most pronounced, likely as a result of China announcing a nationwide emissions trading scheme starting in 2017. Without a rebound in Chinese import demand, the market will remain over supplied, as there isn’t enough seaborne demand to offset continued losses in Chinese import s. With India’s imports exhibiting softness as well, PIRA continues to believe that the risks remain to the downside, although a recovery in oil prices would provide some upside to pricing.
Supply Length Drags Down Price; Will Demand Respond?
Balancing the LNG market is becoming a tougher and tougher proposition in the short term and if the new government-issued METI numbers for Japanese LNG imports by 2030 are anywhere near accurate, a perpetually soft market is not out of the question.
Global Equities Decline W/W
Global equity markets largely declined the week ending September 25th. U.S. equities out performed global equity averages, but still fell. The best performing equity sectors in the U.S. were banking, utilities, and consumer staples, which all posted gains for the week. The weakest performer was materials. Internationally, Japan equities moved higher, while Latin America was the worst performer, dragged down by big drops for Brazil and Argentina.
Dry Bulk Freight Market Forecast
There was a bounce back in Cape market sentiment the week ending September 18 with freight rates increasing sharply as evidence arose of increased iron ore loadings this month in both Brazil and Australia. Iron ore stock levels at Chinese iron ore ports also increased recently however, and with more iron ore afloat this month bound for China, there may be some downward pressure on iron ore prices. With little sign of a recovery in Chinese domestic steel demand and high volumes of Chinese steel exports, PIRA believes current FFA value for Q4 is slightly on the high side.
Stocks Up/Production Down W/W
U.S. ethanol production dropped to a 19-week low 938 MB/D the week ending September 18 as manufacturing margins remained relatively poor, largely due to low gasoline values. Ethanol inventories rebounded after having declined sharply to the lowest level since December 2014.
Brazilian Real Trumps Chinese Buys
13.18 million MT was a stunning number to come out of the Chinese delegation’s ceremonial soybean purchase yesterday in Des Moines, surpassing even the most aggressive estimates, but it was the Brazilian Finance Minister who is really responsible for Friday’s price support.
Soybeans Yields Getting Bigger
PIRA is re-issuing our expected soybean yields this week after inputting the all-important August 15-September 25 weather data in our model over the past few days. PIRA’s current objective yield model showed a similar gain to late August, but still didn’t quite get to the NASS Crop Production number in the September WASDE.
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.
Oil prices have finally crept up on drilling and production levels in the US. The onshore rig count has continued to soften as many operators, particularly some large independents, have chosen to wait for improved economics to continue operations. In other cases, smaller companies such as Sampson and Quicksilver Resources, have filed for bankruptcy protection amid economic stress – and more are likely coming with bank borrowing base assessments in October.
Slowing operations have led to a half a million bpd decrease in US production since April. While oil prices are very difficult to predict in the short-term and many do not expect a rapid price recovery, added confidence in the global oil supply/demand balance could help push some larger scale projects forward.
Large-scale developments with proprietary designs do not have the optionality of shale developments. Many long-lead offshore and oil sands projects have already been sanctioned and some have much of the major capital costs sunk – making full project break-even figures much less relevant than shale investments with steep production curves. In this case, long-term high-capital cost developments are likely to be pushed forward as they can be 30-year producing prospects and are not easily scalable to the short term environment.
So what does this mean for unsanctioned projects? Numerous IOCs are waiting to see if the U.S. production decline is signaling a bottoming out of the oil price slide. Then begins a process of reevaluation of their own asset portfolio in the new price and development cost environment. Schlumberger’s acquisition of Cameron displayed their observed importance of reducing costs for their customers through supply chain efficiencies. Future commitments to new developments will be driven not just by the oil price but also through the ability of the supply chain to deliver cost efficiencies.
Offshore Source keeps you updated with relevant information concerning the Offshore Energy Sector.
Any views or opinions represented on this website belong solely to the author and do not represent those of the people, institutions or organizations that Offshore Source or collaborators may or may not have been associated with in a professional or personal capacity, unless explicitly stated.