Supply Rebalancing Is Well Under Way
Supply rebalancing is well under way. Year-on-year non-OPEC output declines are accelerating, while demand growth has not disappointed. Worries of excessive Saudi, Iranian or Libyan supply growth are unwarranted. Prices will have to rise to the level where they begin to create supply. The signal will have to be there at least one year in advance for shale crude reserves to significantly contribute. The end of OPEC market management will lead to more price volatility and PIRA continues to see elevated risks of supply disruptions in the near future. Product markets are carefully balanced with strong demand growth and high refinery production/stock levels.
Too Soon
Despite growing bullish sentiment, the market deemed it too soon for $2+/MMBtu gas as per the final settlement price for the May futures contract. The related tepid May contract termination underscores concerns regarding the timing of supply rebalancing. With the June contract now in the “pole position,” traders will be more focused on weather and related demand prospects this summer. Yet, HH cash will still remain susceptible to renewed weakness due to building storage congestion — at least for the next few weeks. Such a backdrop would require supply to be pushed (or kept) out of the region, thus requiring MW basis premiums. Meanwhile, the more acute price weakness in western Canada is being “exported” into the West — especially when demand is weak — as highlighted by the depths prices at Sumas reached this month.
NP15 Rises on Firmer Gas While SP15 "Ducks"
On-peak prices rebounded at NP15 and Palo Verde assisted by a rebound in Southwest gas prices and the start of a refueling outage at Palo Verde 1. Mid-Columbia and SP15 markets continued to move lower, however. PIRA expects gas prices to move higher during the second half of the year as a tighter supply/demand balance shrinks the storage overhang. Higher gas prices will exert downward pressure on implied heat rates in most markets. The CA ISO released a preliminary assessment of summer 2016 loads and resources in late March, but it did not include possible impacts of the Aliso Canyon outage. PIRA believes that mitigation measures will be largely successful in preserving LA Basin reliability except under severe weather/outage conditions.
Coal Prices Rally; PIRA Remains Bullish for 2017
Seaborne coal prices moved up notably from the end of last month, particularly deferred prices, flattening the backwardation and bringing the market up to PIRA’s Reference Case. We have moved our pricing outlook for 2017 over the past month, on a stronger oil price forecast and some evidence that demand in Asia will strengthen next year.
Why Did Distributed PV Developers Abandon Nevada? A Comparison of Policy Drivers in Nevada and California
Nevada recently moved to address the contentious issue of cost-shifting from customers with distributed photovoltaic (PV) installations to those without via implementation of new and additional charges for distributed PV. Afterwards, three major distributed PV developers exited the state. Nevada’s experience can offer guidance for the numerous states that are considering new charges for distributed PV or revisiting Net Energy Metering policy. Nevada’s revisions immediately reduced the value proposition for distributed PV installations, but the revisions could still result in lower customer annual electricity costs relative to no solar. By comparison, California’s recent decision to address cost-shifting through broader retail rate design changes may have little practical impact on distributed PV penetration for the foreseeable future and earned solar industry support.
Global Equities Ease
Global equities generally fell back on the week. In the U.S., energy continued to outperform, up 0.7% for the week. Utilities and consumer staples also posted gains. Technology and housing were the worst performers and posted moderate declines. Internationally, many of the indices lost ground. Latin America, however posted a strong gain, while Japan posted a sharp decline as the yen strengthened.
An Impressive April Comes to a Close
After making a low of $3.5125 on April 1st, the day after the surprise 93.6 million acres in the Prospective Plantings at the end of March, July corn had quite the month, closing up 38 cents, although no fireworks were set off at the close of this impressive month of trading. July soybeans had an even more impressive month, closing up $1.13 at the end of the 21 trading days, but nothing out of the ordinary there either. As compared to the 10.7% gain in corn and 12.3% in soybeans, wheat couldn’t even return 2% for the month.
Ethanol Output and Stocks Plunge
For the week ending April 22, output plunged as many plants were shut down for maintenance. The output of ethanol-blended gasoline surged to the highest level since October.
U.S. Commercial Stocks Build
Overall stocks built 5.3 million barrels this past week, with a 2 million barrel build in crude oil, mostly in Cushing. Gasoline inventories had their largest build (1.6 million barrels) in the last nine weeks, while distillate stocks had their second consecutive weekly decline (-1.7 million barrels). Domestic crude supply continues to average 8.92 MMB/D in April, 30 MB/D below March and 770 MB/D below last year.
Ukraine’s End-Users See Gas Price Revision
Ukraine’s new government overhauled household heating prices to help restart a $17.5 billion loan from the International Monetary Fund as the U.S., another major donor, told the ex-Soviet republic it must start prosecuting corrupt officials. A cabinet meeting Wednesday in Kiev approved a new natural gas tariff to strengthen the budget, as sought by the IMF. The new gas tariff eliminates separate winter and summer prices for households, and it unifies what they pay with the cost for industrial customers.
Is the Price Surge Justified?
For the moment, PIRA doesn’t see an extended contract price breach as sustainable over the course of a season. Additionally, PIRA believes that the supply and demand for forward gas is very different than for spot gas, making NBP and TTF very vulnerable to these sharp swings upward. Many natural gas producers avoid forward selling, leaving the forward curve to be filled with net buyers. This forward market imbalance can create high spike risk when strong hedging activity gets concentrated in a short amount of time, which may have easily been the case here.
S&P Eases, Key Indicators Mixed
The S&P 500 eased up this past week. It was only the second decline in 11 weeks. The key indicators were mixed with high yield debt (HYG) and the Russell 2000 improving, while volatility increased and emerging market debt eased off. The yield on the BAA-rated corporate bond has continued to decline, although the pace of decline has slowed. The U.S. dollar was mixed. The British pound strengthened, as did many of the currencies of the key commodity producers, along with the South African rand. The Polish zloty has been notably weaker. Commodities, including total, energy, and ex-energy, were again higher on the week.
Freight Rates Rally on China Optimism
Freight rates rallied in April, having been pulled up by surging steel and iron ore price in China. Bunker fuel prices have continued to climb, adding upward pressure on spot rates. We have trimmed our Cape fleet supply projections, but we have also downgraded our Cape demand forecasts, largely due to the slump in the Chinese steel market over the winter. The net effect was to leave our Cape utilization and freight rate forecasts largely unchanged. PIRA expects bunker fuel prices to increase in the coming months, boosting spot freight rates.
The Soybean Games
The length in soybeans seems to have fallen into slightly less stronger hands. The drop in open interest suggests to us that strong players have left the arena, leaving latecomers with some length. Soybeans remain a money game at this point as fundamental confirmations remain unfounded, except maybe for the Brazilian real continuing to find a bid. PIRA would not be surprised to see this week’s soybean highs hold for a while, while corn may have some room to go.
U.S. Ethanol Price Surged
Lower production and stocks drove the market. Rising corn and oil prices were supportive.
Japanese Crude Stocks Drew
Crude runs rose under the influence of the Kawasaki restart, while imports fell sharply and crude stocks drew 4.8 MMBbls. Finished product stocks built slightly. Gasoline stocks were little changed despite higher demand, while gasoil stocks drew due to a low refinery yield. Kerosene stocks reverted back to building at a rate of 33 MB/D, with higher yield. Refining margins were modestly higher on the week, but they have clearly weakened.
PEMEX Cash Infusion; Production Outlook Unchanged
U.S. gas exports to Mexico continue to ramp higher, with April exports projected to near 3.6 BCF/D, ~1 BCF/D more than the prior year. For the year as a whole, exports to Mexico look equally striking, topping the year-ago period by a similar margin. Such growth has been particularly impressive given that daily flows on Net Mexico (range-bound since January) suggest the commissioning of Los Ramones Phase II – North may have been delayed. Moreover, despite the government’s recent ~$4B capital infusion to PEMEX, reversing structurally declining production will remain difficult, particularly as financial strains within the company limit its ability to invest.
French Policy and Oil Reverse Bearish Run
While the fuel pricing complex has been rallying, driven primarily by recovering oil prices, French President Hollande's formal endorsement of a unilateral carbon floor in France has added a significant dose of risk for prices in the upcoming year. The French proposal is ironically also a gift for German coal-fired generators, as it will lead to higher German exports toward France. At the same time, reported nuclear availability is bullish for German forward prices. Downside risks for gas prices remain a concern for German margins, but we believe current 2017 power prices are already aligned with PIRA's bearish gas prices.
Stocks Mirror 2012 Levels
PIRA estimates that power sector coal stocks have seasonally risen by ~5 MMst as of end-April with demand losses in the power sector to natural gas and other renewables (hydro, wind) exceeding falling production levels. To add insult to injury, mild April weather resulted in flat load levels. PIRA estimates U.S. electric power sector coal stocks will reach 202 MMst as of the end of this month, close to its historic maximum level.
LPG Weekly Scorecard
U.S. propane prices narrowly outperformed the broader energy market last week with May Belvieu 5.2% higher. Butane was better bid, up 6.8% to just under 63¢/gal. Ethane was up only marginally, while natural gasoline prices improved by 3%.
U.S. February 2016 DOE Monthly Revisions: Demand and Stocks
DOE released its final monthly February 2016 (PSM) U.S. oil supply/demand data. February 2016 demand came in at 19.68 MMB/D. Growth was particularly strong for gasoline (+6.4%, 556 MB/D), kerojet (+5.8%, 83 MB/D), and "other" (+4.8%, 218 MB/D), though the overall barrel was up 1.5%, or 284 MB/D. The performance was stronger than PIRA had been assuming in its balances, and total stock levels came in lower than assumed by 4 MMBbls. Warmer temperatures depressed distillate demand performance, but also boosted gasoline demand. End-February total commercial stocks stood at 1,349.5 MMBbls, lower than what PIRA had assumed by 4 MMBbls, but revised up 3.5 MMBbls compared to the preliminary data.
NYMEX Futures Trying to Look Beyond Storage Overhang
The supply-side rebalancing currently under way has seemingly provided the necessary encouragement for sidelined investors, with broad price gains lifting the NYMEX price curve closer to PIRA’s forecast. Moreover, the collapse in drilling and protracted capital constraints implies more headroom for recovery — not just in 2017, but also for 2H16.
April Weather: U.S. Cold, Europe and Japan Warm
April weather was warmer than normal by 2% in the three major OECD markets, bringing the month’s oil-heat demand below normal by 17 MB/D. The three-region composite was almost 11% warmer on a 30-year-normal basis.
Market Takes "Show Me" Attitude
Thursday’s EIA release marked the onset of larger and more normal injections after a final push of late season cold limited builds earlier in the month. For the next two releases, PIRA estimates point to similar week-on-week additions near 70 BCF. While that would still trail the year-ago figure, matching those 2015 levels is not an option with a storage surplus at 870 BCF and expected end-month storage near levels seen at the end of June last year.
French President Hollande Blesses the French Carbon Floor
While uncertainties exist on the timing, magnitude and form, the fact that President Hollande — the central political figure in France — blessed the introduction of a French carbon floor "unilaterally" is very notable. The impact of a carbon tax similar to the U.K. could be more significant for French winter pricing, with the summer prices less impacted. With the French market significantly interconnected, this policy move would end up lending support to the surrounding markets, primarily Germany.
The Fed Is Not Likely to Rock the Boat, but What About the BOJ?
U.S. GDP growth during the first quarter, while sluggish, was in line with the market expectation. The Fed stood pat at its policy meeting last week. Based on various signals, it is unlikely that the central bank will make a move at its next meeting in June. The Japanese currency strengthened sharply against the dollar after the Bank of Japan stood pat at its meeting this week. At this point, the monetary easing cupboard may be bare for the Japanese central bank. European GDP data for the first quarter were encouraging, while South Korean data disappointed.
Brazil Production to Remain Buoyant in Low Price Environment
Brazil has been one of the main drivers of ex-U.S. Non-OPEC crude and condensate production growth, growing 375 MB/D from 2012 to 2015 (6% CAGR). Growth is expected to continue at a much lower pace (2% CAGR) until 2020 despite low prices as projects under construction — sanctioned when crude prices were higher — come online. Longer term, Brazil represents the third largest Non-OPEC source of growth (behind U.S. and Canada), with development breakevens around $50/Bbl and a world class resource in the pre-salt formations. More robust growth (4% CAGR) is projected between 2020 and 2025, as new developments come on line.
Solving India's U.S.-Sourced Cargo Dilemma
India’s chronic shortage of gas comes from two fundamental truths: End-user prices are not necessarily high enough to support additional LNG imports for many buyers without additional subsidies, and domestic production is stymied by government limitations on what producers may charge. These structural issues often make LNG imports by India difficult to predict and this past week showed just the latest example. The same week that India was broadly swapping out its long position in U.S. LNG, it was also importing U.S. LNG cargoes for the first time. The longer-term swap arrangement highlights what PIRA sees as an emerging trend around the world: end-user buyers optimizing import costs by cutting new deals with portfolio players in a position to do the optimizing for them.
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.
The Johan Castberg development has faced numerous challenges since inception. If production in the Barents Sea wasn’t difficult enough, Statoil has had to contend with changes to Norwegian Tax laws as well as disappointing drilling results. In May 2014, it was confirmed that of five exploration wells drilled in the area, only two yielded oil reserves: the Skavl and Drivis fields. This initially challenged the viability of commercial development, however, it now appears Statoil may have found a solution.
Low oil prices have pushed back Johan Castberg’s onstream year considerably. In the current climate, development of such a technically challenging field – in the hostile waters of the Barents Sea – might seem an impossible proposition. However, against the odds, it appears the project could go ahead with first oil in 2022. Statoil’s Chief Executive recently stated production costs at the field have been nearly halved since the oil slump, which raised the question - how?
Construction costs have dropped considerably since the downturn, with EPC providers bidding aggressively on the few contracts available. Yet with oil prices remaining low, reduced contractor rates are not enough to ensure the viability of complex projects. Put simply, a pragmatic approach to developments is needed. Costs at Johan Castberg have been cut by reducing the number of planned production wells and choosing a single FPSO rather than an FPSS and pipeline – reducing the break-even price for the field from ~$80 a barrel to ~$45.
The story is remarkably similar to that of Mad Dog Phase 2 – another field that has arguably suffered from over-engineering and has endured numerous development plans: A spar, TLP and an FPSS were all considered by BP, before committing to an FPSS – later cancelled due to inflated costs. With lower supplier costs and a company focus on re-engineering BP have managed to make the project commercial, bringing the break-even price down from ~$110 a barrel to ~$50.
Both fields demonstrate that even in a low oil price environment, complex fields can still be developed by utilising a pragmatic approach. Keeping costs at a manageable level over the next cycle will be the challenge - when the oil price recovers will the industry revert to its old ways?
Mike Green, Douglas-Westwood London
Scanning the newspapers, social media and analyst coverage this year, there is consensus that a recovery in oil prices is coming, as a function of a reduction in over-supply, and that we should expect upward movement in prices later this year.
The extent to which this view is built upon analysis of data or gut feel is unknown (and in all likelihood there is a bit of both) but our analysis of Douglas-Westwood’s own drilling & production (D&P) data supports this view. We expect to see a fall in US production this year of nearly 900,000 bpd, the largest drop in output for a country since Libya in 2011 (civil war) and Saudi Arabia in 2009 (OPEC cuts). There will be production growth in a number of countries, the most-significant being Iran and Iraq, with the result that overall global production will increase by 460k bpd. With demand growth forecast at 1.2 million bpd this year, the overall net position is a reduction in net over-supply of some ¾ million bpd. This reduction in over-supply should put upward pressure on oil prices as it develops over the course of the year.
So can we expect the same trend to continue into 2017? Analysis of the data (which is built-up on a project-by-project basis) suggests not. Whilst there will be further demand growth, this will be offset by significant production. We anticipate net increases in production both onshore and offshore. Most of the additional volumes are from offshore (net 1.1 million bpd increase) with an overall impact (taking into account demand growth) of a slight increase in over supply in 2017. In the years that follow, we expect reduction in over-supply every year to 2020.
Why the blip in 2017? Put simply, we are not over the hangover from several years of record levels of industry spend (2011-2014). Major projects were committed to at that time and the lead times for some of these projects are long. But this dynamic works both ways. The current hiatus in spend is brewing a major supply problem towards the end of the decade – if nothing changes, the data suggests under-supply of oil by 2020.
Steve Robertson & Matt Cook, Douglas-Westwood London
Latin American Light Product Imports Level Off/Decline
Latin American oil demand is downshifting in 2016 with gasoline expected to grow only slightly and diesel to contract. Product imports into the region are down, but there is upside risk stemming from operational issues in the Venezuela refining system. Latin American refinery runs are expected to improve in Mexico, Colombia and Brazil, but Venezuela is deteriorating. PIRA’s analysis of Latin American heavy crude values in different markets shows that since 2015 Maya has been relatively more attractive versus alternatives in some European/Asian coking capacity. Whereas for the U.S., Maya remained in the middle of the range of competition.
The Recovery in U.K. Gas Production Is Not the Start of a New Trend
A key shift in European gas balances in the years ahead will be increasing dependence on LNG and Russian gas in N.W. Europe. U.K. and Dutch production are both shadows of their former selves at 121 mmcm/d and 184 mmcm/d, respectively, in 2015, and declines almost guarantee this shift to occur. Buyers have prepared by investing in more import infrastructure and working gas storage, while sellers are also positioning themselves to be more competitive. Gazprom has recently converted more major customers to spot gas indexation, and if Nord Stream 2 does manage to be built, access to Russian gas at the farthest reaches of N.W. Europe will be in play and more transparent pricing will make it a more competitive environment.
Gas Units Online After Years of Hibernation, with the Help of Resilient Carbon Prices
Increased dispatching of gas has already emerged in the U.K. so far this year, with an extra 5 GWs on average dispatched year-on-year, but as the oversupply in the LNG markets continues to build, coal-to-gas switching will increasingly become a reality on the Continent. Gas prices have been drifting low enough to push RWE to announce that it will bring back online the Dutch MOERDIJK 2 gas unit (430 MWs). This move suggests that the positioning of gas is improving relative to coal on the Continent, with this outcome also in part the result of resilient carbon prices. Will carbon pricing continue to ignore the overwhelmingly bearish underlying fundamentals?
Gas Surplus Weighs on Coal
Low gas prices continue to result in cannibalization of coal dispatch, aided by robust growth in wind generation due to new capacity in service. At the same time, U.S. coal producers are slashing output dramatically, especially in the PRB. This sows the seeds for a market recovery in 2017 once gas and coal stocks normalize and natural gas prices recover.
Freight Market Outlook
Volatility in the tanker sector seems to be increasing as evidenced by wide swings in VLCC rates. Rates in the benchmark AG-Asia trade plunged from WS 115 early in January to WS 49 early in March then back to WS 97 by mid-March, only to fall again to WS 60 in April. But the daily drip feeding of new tonnage into the fleet with few offsetting deletions will ultimately result in lower peaks and deeper rate troughs in 2016 and next year. Tanker demand has also been helped immensely by a bloated supply chain, but PIRA expects this support to wane as global inventories start to decline beginning late in 2Q with the decline accelerating in 2H16.
European LPG Catches a Bid
Closed arbitrage economics from the US to NW Europe over the past months have led to reduced cargo flow between the regions. This has helped tighten supplies in local European propane markets, which is beginning to affect a price response. May propane futures added a solid 5% last week to $298/MT — a premium of over $100 to Belvieu propane, the largest since January. Butane continued to languish however, as a lack of gasoline blending hinders demand. Cash butane cargoes were at a $20/MT discount to propane futures on Friday.
Brazilian Political Upheaval
Lots of moving parts as a new trading week begins, and we’re not just talking tractors with planters attached. With that said, there’s very little in the way of surprises as the OPEC meeting in Doha yielded no agreement, the Brazilian lower house voted to move forward with impeachment proceedings against Dilma Rousseff, and weekend weather saw an awful lot of planting activity from Minnesota and Iowa east. With soybeans leading this most recent rally, the question on everyone’s mind is whether or not the real will continue to rally now that a vote has been taken and remain the force behind higher prices.
U.S. Ethanol Prices and Margins Jump
Ethanol assessments climbed to new 2016 highs for the week ending April 8 as the long anticipated reduction in output and stocks finally materialized. Strengthening corn and oil prices supported the move.
April EUA Price Bump Temporarily Camouflages Bearish Market
Despite the expected EUA price bump during the April compliance period, bearish indicators remain in the EU ETS. Power sector EUA demand is weak, with competitive gas generation, coal retirements and a downward revision in implied CO2 prices. The bearish supply picture includes incoming 2016 free allocations, higher auction volumes, and little expectation of pre-2019 policy support. Excepting the possibility of greater alignment with rising oil prices, there is little upside price potential through summer 2016.
Global Equities Resume Their Advancing Trends
Global equities resumed their broad based gains for the week. In the U.S., the banking index had a particularly strong performance. Retail and materials also outperformed. Only consumer staples posted a small decline. Internationally, all the tracking indices gained and outperformed the U.S. overall tracking index.
Crude Imports and Crude Stock Build Drive Record U.S. Commercial Stock Level
A sharp week-to-week increase in crude imports, partially driven by a recovery from fog-impeded flows the week before, contributed to a 6.6 million barrel crude stock build. This crude build drove a 6.9 million barrel build in total commercial stocks, driving them to a new record high. With a similar build last year, the surplus remained about the same. Domestic crude supply increased sharply on the week, but we think another week of data will better gauge April’s apparent production recovery.
Competing Forces Emerge in Near-Term LNG Spot Price Discovery
Don’t forget that for key LNG buyers in Japan and Korea, low spot priced cargos, as attractive as they may be, cannot always find a home owing to limited LNG storage. In the second quarter, when Asian demand is at its seasonally weakest point, this effect is exacerbated, particularly as Asian buyers emerged from a warmer-than-normal winter with stocks intact. For now it appears that current levels of spot gas are not yet low enough to trigger a substitution effect for coal, at least not in Japan.
Fuel Forwards Rally; Power Prices Lag
Influenced by mild weather, March spot power prices were down from February levels in every market except NY-A, where transmission congestion caused spreads with Ontario to expand to nearly $40/MWh. Since bottoming in late February, NYMEX winter 2016-17 gas contracts have risen, bringing the market into closer alignment with PIRA’s forecast. Wind provided over 20% of SPP and ERCOT generation in March, limiting gas burn. Fewer nuclear outages are scheduled this spring and fall than in 2015, which will also restrain gas burn.
Fresh Chinese Data Release Points to Potential Coal Demand Stabilization
Seaborne coal pricing moved decidedly higher last week, aided by a firming in oil prices and newly released data showing a potential resurgence in Chinese coal demand. Atlantic Basin prices rose more than Pacific Basin pricing, with stockpiles at ARA declining last week and shipping data indicating a sizeable reduction in Colombian exports in March, particularly in Europe. Additionally, tightness has emerged for higher grades of South African coal, causing API#4 (South Africa) to remain out of sync with API#2 (Northwest Europe) and FOB Newcastle (Australia) prices.
Financial Stress Stable
The S&P 500 gained on the week after a slight decline the previous week. It has now posted gains the past eight of nine weeks. Most of the other key indicators improved. The yield of the BAA-rated corporate bond has continued to decline. Commodities, including total, energy and ex-energy, were higher on the week. The Cleveland Fed released its inflation expectations series for April, which showed a raise for all maturities.
Ethanol Manufacture Plummets
U.S. ethanol production plunged 38 MB/D last week to a six-month low 938 MB/D as more plants reduced output to perform annual maintenance.
Producer Selling Opportunity
Fundamentally there is still no reason to own these markets, but the power of money flow was on full display last week after a mundane WASDE on Tuesday. Planting conditions and soil moisture profiles were impressive for many we visited in the Midwest. Planters were starting to roll late week and should be out in earnest by the weekend. Planting in Iowa and Missouri was ahead of pace this past week while others are just biding some time while watching the impressive rally.
Japanese Crude and Product Stocks Build, with Weaker Demands
Crude runs were modestly lower and crude imports remained around 3.8 MMB/D, which built stocks 2.8 MMBbls. Finished product stocks built with increases in gasoline, gasoil, and kerosene. Naphtha stocks continued to decline. Gasoline demand fell back from strong levels with much lower yield, and stocks posted a minor build. Gasoil demand also fell back with much lower yield and a drop in exports, such that stocks built similarly to gasoline. Kerosene demand again declined seasonally. Refining margins remain good, but have eased. All the cracks gave ground on the week.
Shoulder Season Stockpiling Threatens Early Entrants
With NYMEX prices challenging $2/MMBtu earlier in the week, or ~25% higher than last month’s lows, cautious optimism might be returning to the market. Signs of slowing domestic production and recent “tightness” revealed in early April storage reports have arguably fueled more bullish sentiment than the prior month, when Henry Hub (HH) cash traded $1.49/MMBtu. The lethargic pace of restocking thus far, i.e. ~2.5-3 BCF/D less than 2012, has provided fodder to those looking to build opportunistic length. Should such tightness continue, gas prices would naturally recover to levels more aligned with lifting costs. However, extrapolating early-season tightness is probably unreasonable given looser shoulder season balances.
April Weather: U.S., Europe and Japan Warm
At midmonth, April looks to be warmer than normal (-7%) in the three major OECD markets with a net effect on oil-heat demand to be -91 MB/D. On a 30-year-normal basis, the markets are almost 17% warmer.
Upside Surprises for China, But Downbeat Data from the U.S.
In China, the first quarter GDP reading matched the market’s expectation exactly. Underlying data from four key sectors (manufacturing, housing, consumer spending, and trade), on the other hand, were better-than-expected, and indicated a strengthening in the economy’s momentum. These improvements owed significantly to the Chinese government’s recent policy stance on credit creation. In the U.S., the latest industrial production data disappointed significantly, but manufacturing is still expected to strengthen in the coming months.
Asian Demand Update: China and India Pushing Faster Growth
PIRA's latest update of Asian product demand shows improved growth due to acceleration in China and India. China and India show combined growth of over 1 MMB/D, a pickup from the last update and incorporating the latest three-month actuals through March. China posted growth of 528 MB/D (vs. 394 MB/D in last update) and India was higher by 528 MB/D (vs. 358 MB/D, previously).
Fracking Policy Monitor
President Obama has taken aim at regulating methane emissions from the oil and gas sector, announcing new EPA regulations for existing oil and gas sources but leaving follow-through to the next administration. 2016 Presidential candidates have shown predictably opposing views on the importance of fracking along party lines. The USGS released its seismic forecast, for the first time taking account of induced quakes, prompting policy discussion on the state level. Oklahoma is likely to continue with its current voluntary compliance scheme despite increased quakes, lawsuits, and a difficult business environment. Limits on local control remain a key issue in Colorado and West Virginia.
Iran Set to Lower Petrochemical Gas Feedstock Price
Iran is preparing to cut the price of natural gas as a feedstock for petrochemical plants for the next six months, the deputy minister of oil for planning and supervision of hydrocarbon reserves Mohammad-Mehdi Rahmati said on April 11. He said that the final price hasn’t been set yet, but it would be announced in a week. It will be the first time for two fiscal years that Iran has cut the gas price for petrochemicals despite falling oil prices since mid-2014.
Electric Vehicle Outlook: Tesla, Batteries, and the Transport Fuel-Power Intersect
Tesla Motors unveiled its all-new Model 3 electric vehicle on March 31, 2016, attracting a record-breaking number of pre-orders. PIRA does not view Tesla’s new vehicle and pre-order announcement alone as reasons for adjusting the short- or long-term outlook, which already models significant growth in plug-in electric vehicle (PEV) sales after 2017. Nevertheless, competitive pressures from additional PEV models, the downward trajectory of battery costs, and upcoming Environmental Protection Agency (EPA) standards review will be important trends to watch over the medium term.
PIRA Expects Record Summer Gasoline Demand, Albeit with Lower Hydrocarbon Portion
PIRA expects gasoline demand this coming summer to finally exceed the peak period of 2006-2007. Demand had fallen sharply following a period of high prices and weak economic activity. The increased use in ethanol, however, means the hydrocarbon portion of demand this summer will be down from previous peaks. From the refiners' perspective, this fact is mitigated by a significant reduction in net imports of total gasoline, requiring record production this summer to meet domestic and export demand.
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.
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