NYC-based PIRA Energy Group reports that oil prices have continued declining under the weight of growing oversupply. In the U.S., a sharp decline in crude imports minimizes commercial stock build. In Japan, crude runs rose while imports rebounded such that stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

Oil prices have continued declining under the weight of growing oversupply. In addition to the physical surplus, the macroeconomic environment has become more unsettled with increased downside risks now being factored into the pricing of "risk assets". Refining margins, which had been healthy, have now come under pressure, thus ultimately pushing back on crude demand which compounds the growing pressure to find a home for crude supply. Containing the surplus will require filling up the least economic onshore storage and using floating storage which will deepen contango structure, weighing on prompt prices.

Atlantic Coal-Gas Switching: Temporary or Structural?

Gas and power markets on both sides of the Atlantic are headed down similar paths in 2016. Storage surpluses are building, gas supply cuts are slow to emerge, and the development of greater gas use in the power sector will offer concrete stages of growth in the weeks and quarters ahead. While European spot and contract prices are still roughly twice the level of Henry Hub prices, both gas markets are competing for coal demand in a manner that suggests more than just a temporary emergence of substitution. Given the price difference, the U.S. market is much farther down the road, but a more structural change is under way within the power sectors of both North America and Europe that will be increasingly linked once LNG exports begin to add to gas demand in the U.S. and gas supply in Europe.

Load Weakness Continues, Renewable Build Grows

Eastern Interconnect weather-adjusted daily average peak loads fell by 1.3% in January. Load growth continued in ERCOT and several Southeast balancing authorities. Spot on-peak power prices increased m/m in most markets with the strongest gains in the Northeast (greater than 60%) as gas basis widened seasonally. On-peak energy prices increase year-on-year in most markets during 2H16 as gas prices move higher. Growth in wind, new TVA nuclear unit and modest forced coal burn limit gas burn gains during 1H16. Eastern coal generation falls by 1.2% in CY16 with a strong second half recovery.

Friday Rally Not Enough to Prevent Week-on-Week Slide for Coal

Despite a notable rally on Friday, coal prices again finished the week down from the end of the prior week. For most of last week, downward pressure on coal pricing came from a variety of sources, including steep declines inequity markets, weaker oil/gas pricing, and lower dry bulk freight rates. Looking forward, coal pricing generally, and FOB Newcastle (Australia) prices specifically, will heavily depend on China’s domestic consumption and import demand. This situation will be cloudy over the next 30-60 days due to the impacts of the Chinese Lunar New Year, and the corresponding lack of clarity in energy data.

Weak Asian LPG Prices Squeeze Global Export Economics

Cash propane cargoes arriving in the Far East in late March were assessed 3% lower near $320/MT. With Saudi Aramco propane CP futures currently expecting a contract price reduction of $5-$10 in March, and spot VLGC freight to Asia near $45, next month’s arbitrage economics look questionable at best. This winter’s milder conditions continue to hamper regional demand, just as the world’s LPG exporters increasingly look to the region to absorb higher flows. Cash butane prices were called 3.6% lower near $345/MT.

Global Equities Again Move Lower

Global equities again broadly fell back on the week. In the U.S., most of the tracking indices lost ground, though the defensive indicator, along with retail and consumer staples managed to post gains. The weakest performer was banking. Internationally, all the tracking indices lost ground. China was closed for their New Year, but Japan, India, and Hong Kong posted significant losses, along with Latin America.

U.S. Ethanol Assessments Strengthened to the Highest Level in about Seven Weeks

U.S. ethanol assessments strengthened to the highest level in about seven weeks. Assessments were boosted by prospects for higher exports, and prices gained despite rising stocks and lower oil and corn values. Production has dropped during the last few weeks, tightening the supply/demand balance. Manufacturing margins were sharply higher, surging as the weekend approached.

Major Contraction

Agri-giant Bunge confirmed this week what ADM said a few weeks ago; 2016 will be challenging. Other agri-related companies like The Anderson’s from Ohio, and Green Plains Energy from Nebraska had their equities decimated this week as earnings sank and major layoffs ensued. Processors of agricultural products are now starting to feel the pain that farmers are all too familiar with after 2015.

California Carbon Declines; Awaits Auction Court Decision

Going into this month’s allowance auction, benchmark contract prices declined again, reflecting oversupply and a lack of concrete long term cap and trade policy signals. Clarity on potential market drivers will begin to emerge in 2016, including the Scoping Plan Update and a verdict on the allowance auction lawsuit, expected any day. PIRA believes auctions would continue, even with an adverse decision, pending appeal to the CA Supreme Court. Otherwise, transportation sector emissions are expected to grow this year, while large declines anticipated for the power sector.

Sharp Decline in Crude Imports Minimizes U.S. Commercial Stock Build

Total commercial stocks built this week to a new record high stock level. With a larger stock build last year, the surplus narrowed to 160 million barrels. A decline in crude imports and another sharply lower domestic crude supply reading were reflected in the first crude stock draw since January 1, narrowing the crude surplus.

New Supply Regime Less Concerned with Adjusting to Weather Deviations

No reason can be seen in the fundamental outlook to expect anything but a further deterioration in spot prices for the balance of the quarter. A few colder than normal days next week and heavy snowfall across portions of the Alps are not going to be enough to turn around prices, which continue their slow deterioration in the face weaker gas demand outside the power sector. Residential/commercial use is clearly the dominant demand center for gas at this time of the year. On average, this week should be the coldest of the year, but nothing could be further from the truth at this point. Storage withdrawals remain well below normal and point toward an upcoming entrance to injection season where stocks will be above the five year average on April 1 despite showing significant deficits going into the previous winter.

No Bottom in Sight for Carbon, but Floor for German Power Approaching

EUA prices continued to fall through early February, and, in spite of Friday's rebound, they are at their lowest level since mid-2013. PIRA believes that downside risks for carbon prices remain: greater supply, a lack of policy action in 2017-2018, reduced demand from forward hedging, and lower gas prices that encourage fuel switching away from coal. There is no doubt that lower carbon compliance costs are a relief for high-emitting units, but in January and February thus far, German lignite units have been ramping down heavily in response of lower prices, suggesting some supply discipline has been emerging.

U.S. Supreme Court Stays Clean Power Plan

The Supreme Court voted 5-4 to stay implementation of the Clean Power Plan (CPP). No compliance efforts need be undertaken until legal review is completed. Efforts to develop CPP compliance approaches have now lost urgency. PIRA had not expected the CPP would survive as written and it was not in our reference case forecast. This decision is unlikely to change California's GHG approach, but it may make RGGI less ambitious in its current program review. Without a replacement for the CPP, prospects for another extension of the renewable tax credits improve.

Japanese Crude Runs Rose, Imports Rebounded Such that Stocks Built

Crude runs rose 103 MB/D on the week, while crude imports rebounded such that crude stocks built 4.4 MMBbls. Finished products drew 1.35 MMBbls, largely on a draw in kerosene stocks and supported by smaller draws for gasoline, gasoil, and fuel oil. Major product demand was higher with gains primarily in gasoil and gasoline. Refining margins continue to weaken from peak levels with gasoline and naphtha cracks falling sharply from lofty levels and fuel oil also easing. Margins, on balance, are still deemed acceptable but off significantly from earlier levels.

High Winter Stocks Warrant Low Prices — for Now

Following a price “correction” from a high north of $2.30 to a dip below $2.00, traders established a tighter range with the front-month contract retracing Monday’s rally on subsequent warmer forecast changes and an anemic inventory release.

Stay of Clean Power Plan Bearish for RGGI

With weakened prospects for carbon pricing for RGGI’s neighbors, the Supreme Court’s stay of the Clean Power Plan is bearish for RGGI pricing expectations, and RGGI allowance prices have declined in response. However, the RGGI program review, to be completed this year, will ultimately set post-2020 caps for the program, determining its stringency.

Negative Interest Rates Are Driving Market Nervousness

The Bank of Japan introduced a negative interest rate on bank reserves two weeks ago. While this move was intended as economic stimulus, it has instead turned out to be a destabilizing influence for financial markets. The prospect of competitive monetary easing by central banks has become more real, as different countries will begin to test how negative policy interest rates can feasibly go. Further, the BOJ action has highlighted the possibility that Japan is nearing the limit of quantitative easing. Key data releases for the U.S. were encouraging, but manufacturing data from Europe and India disappointed.

U.S. Ethanol Stocks Reach All-Time High

U.S. ethanol inventories spiked to a record 22.96 million barrels last week, surpassing the previous peak set in March 2012 by 243 thousand barrels. Stocks are 1.8 million barrels higher than they were at this time last year. Ethanol production increased to 969 MB/D from 959 MB/D during the preceding week, breaking a string of three consecutive weekly declines. The manufacture of ethanol-blended gasoline soared to 8,632 MB/D after having plummeted to 8,155 MB/D in the prior week because of higher overall gasoline output.

China Rally?

Global equity and commodity rallies (ex-gold) are being attributed to Chinese Central Bank currency support which continued after the conclusion of their New Year’s celebrations. A fundamental grain/oilseed problem continues to exist in China however, which could make this most recent “risk on” opinion in ags short-lived.

Financial Stress Remains Elevated

The S&P 500 fell Friday to Friday and on a weekly average basis, though Friday produced a large short covering rally ahead of the holiday weekend. All of the other indicators, such as volatility, high yield debt and emerging market debt, also worsened on the week. The U.S. dollar generally fell in value, particularly against the euro, yen, eastern European currencies and some of the Asian currencies. Commodities had a mixed week with some downward bias still remaining.

U.S. and Brazil Total Fuel Ethanol Exports Up in 2015

The U.S. shipped 799 million gallons of fuel ethanol in 2015, down 1.3% from 809 million gallons in 2014.Brazil exported 493 million gallons of ethanol in 2015, up 33.6% from 369 million in the preceding year.

Proposed Increase in Russian Taxes Would Significantly Reduce Operator’s Margins

PIRA estimates that a recent proposal to increase Mineral Extraction Tax (MET) in 2016 would cut operator’s margins by 40% and reduce drilling activity. The proposal would reduce by half the current $15/Bbl MET tax free allowance and would bring an additional $12 Billion in revenue to the government. On a yearly average, PIRA estimates Russian production to be slightly up in 2016 (140 MB/D decline January to December 2016) and decrease by 170 MB/D in 2017. Our forecast already anticipates a more burdensome tax regime in 2016 but we will continue to monitor the situation and revise our forecast as needed.

Plainly Spain: Europe's Number 1 Gets Knocked out of Position by UK

Having been nudged out of its place as the number one buyer of LNG in Europe, Spain will still play a critical role in balancing Atlantic Basin supply due to the considerable amount of contracted LNG in its portfolio (see chart below); contracted LNG that it has underlifted for many years. With limited pipeline access to the rest of Europe, Spain has quickly re-invented its role in the LNG market by re-exporting, diverting, or reselling to the wider spot market, in essence providing a key connection between the Atlantic Basin and Asian markets in a way that no pure portfolio player has been able to do thus far. It has been a lucrative business as well, but its role is fading now that both LNG producers and many buyers have taken to tendering unwanted volumes. The fact that LNG deliveries to the U.K. have surged past Spain is indicative of a supply push to Europe that is just beginning on the part of other Atlantic Basin and Mideast suppliers.

UK Gas Prices Set to be Reduced

British Gas and EDF Energy have announced they are cutting their gas prices, the last of the big six energy suppliers to do so. British Gas unveiled a 5.1% price reduction, followed swiftly by EDF's announcement of a 5% cut. British Gas's price change takes effect on 16 March, while EDF's kicks in eight days later. The moves benefit customers on a standard domestic gas tariff. Britain's big six energy suppliers have been under pressure to pass on savings to customers after a 57% drop in wholesale gas prices since this time last year. E.On was the first to announce a cut this year of 5.1%, followed by similar reductions by SSE, Scottish Power and Npower.

Euro Carbon Sensitive to Natural Gas Prices; Subject to Downward Price Triggers

EU ETS oversupply conditions have not changed: higher auction volumes, upcoming 2016 free allocations, and incentives for industrial sales. Weak structural demand is accompanied by low gas prices, reducing coal-fired generation competitiveness. EUAs are nearing parity with implied carbon values and will more closely track natural gas price movements. We do not currently expect near-term policy support for prices. A downward price trigger, like a cancelled auction, could have a sustained negative market impact.

February Weather: U.S., Europe and Japan Warm

At midmonth, February looks to be 6% warmer than the 10-year normal for the three major OECD markets with oil-heat demand weaker than normal by 279 MB/D. However, the three major regions are roughly 12% warmer on a 30-year-normal basis.

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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Iran’s position in the international O&G market was expectedly one of the highlight topics of IP Week. Approximately one month after the lifting of EU and US nuclear sanctions on Iran, the country’s Energy Minister has announced Tehran needs to attract a huge $200 billion in international investment to modernize its existing oil infrastructure.

Unwinding of sanctions, coupled with discussions over a new Iranian Petroleum Contract offering more flexible terms and conditions, serve as direct incentives for international investors. Oil majors and former business partners of Iran including Total, ENI and Repsol have already expressed clearly their interest to resume business in the country. A sustained return of 500,000 barrels per day to the crude markets from Iran would create significant downside risk on Douglas-Westwood’s (DW’s) expectation of a slow-paced 2H2016 price recovery. The importance of Iran was confirmed recently by the US EIA’s Short-Term Energy Outlook: “most of the increase in global surplus crude oil production is attributed to Iran”.

DW holds a conservative view on the sustainability with which Iran can return significant additional crude volumes to the market. A degree of uncertainty on the timing, structure and implementation of the new oil contract model remains. Given the level of required investment, significant involvement will be required from international parties who will need clarity on the new Iranian operating environment before committing capital and resource. Given the remaining uncertainties and the enduring risk attached to operating in Iran, the sector will take time to attract required investment.

Nevertheless, as outlined in the recently published “Iran Oil & Gas Market Forecast 2015-2019”, DW anticipates a meaningful upside potential for drilling and production over the next five years from projects that were stalled, delayed or under-invested during the sanction period. Notably, the North Pars, Goldham and Ferdowsi gas fields, as well as the South Pars oil layer are likely to tender for international investment. Any immediate growth in Iranian petroleum exports, however, is likely to originate from existing storage capacity, whereas more significant rises in production will be coming to the market after depletion of storage oil reserves.

Marina Ivanova, Douglas-Westwood London

NYC-based PIRA Energy Group reports that dated Brent traded below WTI in January, on a monthly average, for the first time since 2010. In the U.S., there was a new record high stock level. In Japan, crude runs fell, imports moved lower and stocks drew again. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

Dated Brent traded below WTI in January, on a monthly average, for the first time since 2010. Both crudes fell to new 12-year lows, dipping below $30/Bbl on occasion. Differentials of onshore crudes remained strong relative to LLS, as PADD III stocks also hit record highs. Cushing is struggling with oversupply and this will persist.

Updated Weather Outlook Prompts Price Meltdown

Judging from last week’s price correction, from a high in the nearby contract that topped $2.30/MMBtu last week to this week’s dip below $2.00/MMBtu, the market appears to have gleaned additional clarity on the weather to justify breaking out of its former holding pattern. The decided shift to even warmer temperatures this month and the related rapid decline of storage draws (from 200+ BCF last week to 152 BCF this week and next week’s projection for a draw less than half that) are the driving forces influencing price perceptions.

UK: More Coal Retirements Will Further Tighten the Market

The proposal to close three out of four Fiddler's Ferry units is quite bullish for the UK market. While retiring Fiddler's Ferry, SSE will have to unwind its capacity contract for delivery 2018-19, setting a precedent that other plant operators may follow as well. The fallout of these decisions will probably lead to a revision of the capacity market design, which will, however, take time to finalize while a messy policy debate will continue in the UK. In the meantime, power generators will be dashing to secure additional Supplemental Balancing Reserve contracts. From a wholesale pricing standpoint, we are wondering if there is a risk that the activation of this reserve may undermine price formation, but we believe this risk should be quite small, based on current information.

Coal Prices Deteriorate on Lack of Fundamentals, Weaker Gas Pricing

Coal pricing in the Atlantic Basin moved lower last week, with API#2 (Northwest Europe) prices falling by the largest extent. Another round of mild European weather, easing oil and natural gas prices, and news that more coal-fired generating capacity will likely be retired in the U.K. pushed 2Q16 API#2 prices down. API#4 (South Africa) prices also faded, although declines were more moderate than API#2, while FOB Newcastle (Australia) prices were mixed. Prices do not have a fundamental anchor at this point, and high stockpiles in many markets will make it difficult for prices to appreciate over the next 90 days.

U.S. Supreme Court to Decide on Stay of Clean Power Plan: Possible, But Not Likely

On January 21st, the D.C. Circuit Court of Appeals declined to stay EPA's Clean Power Plan pending legal review. In a highly atypical move, the state petitioners appealed the denial of the stay to the U.S. Supreme Court on January 26th. While granting the stay is a possibility, PIRA believes respect for the standard judicial process will persuade Chief Justice Roberts to vote to deny a stay, even if — as we believe — he would vote against the rule when it eventually comes before the Court. A decision by the Court could come as soon as this week.

U.S. LPG Prices Rising as Supply Tightens

March Mt. Belvieu LPG prices strengthened as another large national stock decline narrowed the year-on-year surplus appreciably. Winter heating demand and strong export flows are pulling LPG stocks down just as PIRA expects domestic production growth to wane, tightening supply levels throughout 2016. LPG shrugged off broader market declines with propane adding 2% to 36.6¢ and butane a healthy +5% to 53¢/gal.

No Love for the Dollar

The U.S. dollar appeared headed for its largest weekly decline (pre-NFP) since 2009, and yet grains/oilseeds remained mired in narrow trading ranges, presumably heading for lower weekly closes. Some would call it somnolence. Then again it was Groundhog Day last week.

Ethanol Stocks Build to Near a Four-Year High

Ethanol inventories soared to a near four-year high the week ending January 29. Ethanol production declined slightly.

Financial Stress Remains Elevated

The S&P 500 fell Friday to Friday, although the weekly average was higher for the second week in a row, as were the weekly averages for other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB). The U.S. dollar generally fell in value, and commodities were mixed.

Weaker Economic Projections Set the Tone for a Challenging Year in Latin America

Slower economic growth in Latin America signals flat to declining demand for diesel, but gasoline is still showing growth in 2016. Consumption of the four major products (gasoline, diesel, jet/kero and fuel oil) is projected to stay flat this year at about 7.24 MMB/D. Year-on-year gasoline demand is forecast to increase, while diesel is flat and fuel oil is lower. Product imports into the region are expected to contract but remain fairly high. Planned and unplanned refinery outages continue to impact the region. In 2015 regional CDU offline capacity averaged 625 MB/D, while FCC downtime reached 200 MB/D.

Gas-to-Renewables Switching Is Happening in the UK. Soon the Rest of Europe?

Coal-to-gas switching will continue to be a central focus of our analysis, as spot gas prices fall into an area (below 27p/th) where such switching will intensify. However, gas demand will depend on more than just what coal prices do. Focus on gas-to-wind switching is already playing out in the U.K. as a significant issue and may be a preview of additional switching issues on the Continent.

U.S. Coal Market Forecast

U.S. coal demand continues to erode in the face of persistently low natural gas prices and milder weather, as well as a weak international coal market. We are seeing growing signs of a supply-side response from producers, setting the stage for a market recovery in 2017.

Key Themes Impacting U.S. Distributed Solar PV Penetration

Policy, cost, and electricity market drivers will define the level and location of U.S. distributed solar photovoltaic (PV) penetration. Policy uncertainty remains, especially related to net metering changes, state-level renewable energy targets without an explicit carve-out, and grid modernization efforts. Flat to declining PV costs in the coming years will ultimately support increased penetration. Retail electricity prices under current rate design could support penetration, but potential changes to rates add risk.

U.S. Ethanol Prices and Margins Improve

Ethanol prices rose the week ending January 29 as production tumbled and the market tightened. Manufacturing margins rose as higher product values outweighed the increase in corn cost.

Global Equities Largely Negative

Global equities generally fell back on the week. In the U.S., most of the tracking indices lost ground, though materials and utilities were able to post gains. The weakest performers were consumer discretionary, retail, housing, and technology. Internationally, the Latin America tracking index posted a gain, while all the other tracking indices lost ground. China and the other BRICs posted the largest declines.

New Record High U.S. Stocks

Commercial U.S. oil inventories increased this past week, led mostly by crude oil, as runs made a marginally lower low and crude imports ramped up to the highest level in eight weeks. Product demand weakened on the week as the record snow storm took its toll on demand, turning the week earlier 9.4 million barrel product stock decline into a 1.7 million barrel build. One silver lining: the stock build was larger last year for this week so the year-on-year stock surplus narrowed.

Russia Looks at Lowering Contracted Gas Prices

Gazprom could lower its prices to keep European customers locked into long-term supply contracts, maintaining an arrangement that has for decades helped Moscow secure political leverage in Europe. However, Russia will only be able to preserve its long-term contracts for the next few years and will eventually have to sell more of its gas on the spot market, loosening its hold over customers. The long-term deals, some of which span 25 years, have been the bedrock of Gazprom's dealings with Europe.

Japanese Crude Runs Fell, Imports Moved Lower and Stocks Drew Again

Crude runs fell yet again reflecting the full impact of a known turnaround that had begun. Crude imports moved lower such that crude stocks drew again, this week by 4.6 MMBbls. Product stocks also drew, with over half their 3 MMBbl decline being in kerosene. In January, refining margins have come off their peak with further easing as we enter February. While all the major cracks softened on the week, margins remain statistically good.

Russian Outage Affects Japanese Markets More than Other Asian Buyers

Project delays and unplanned production outages will create support for Asian spot prices in the short term, but do not expect the rally to persist. The issue is not a shortage of volume; it is the repositioning of portfolios to adjust to the various outages and delays that will work themselves out in a few weeks. PIRA certainly foresaw this coming, as weak market conditions were not exactly a motivating force among the producer class to add incremental supply to the market in 2016 and 2017.

U.S. Recession Scenario Is Not Plausible

The view that the U.S. economy will experience a recession this year has found some traction in recent economic commentary. As recessions are difficult to forecast in advance, the possibility of significant economic disruptions should not be dismissed outright. But based on analysis of key data (including those pertaining to the January labor market conditions), it is difficult to make a case that a recession is under way. In fact, a reasonable assessment of the current condition is that the U.S. economy is not too hot (where aggressive monetary tightening by the Fed becomes a risk), nor too cold (where a recession is a risk).

Global Biofuel Supply and Demand to Increase

The driving forces for biofuels consumption still exist. However, the collapse of energy values will slow growth in consumption.

Atlantic Basin Gasoline Demand Outlook in 2016 and 2017

The decline in gasoline prices since mid-2015 has given a boost to gasoline demand on both sides of the Atlantic. PIRA's current forecast calls for gasoline demand in the U.S. to increase by 1.6% and 0.3% in 2016 and 2017, respectively. Gasoline demand in Europe is projected to grow 0.9% this year and by 0.3% in 2017. A key factor in our forecast for 2017 is the lagged positive effect that declining prices in 2015 and 2016 will have on demand in 2017. PIRA's analysis makes the case that these price declines could result in even faster demand growth next year.

Special Report: The Oil Market in 2017

The year 2017 is looking more and more like the year when the turnaround in fundamentals that have been depressing the oil market since mid-2014 will take hold. The imbalance between supply and demand will have been eliminated and declines in surplus inventories will occur. This turnaround has taken more time than initially expected. Over the past year, oil demand for 2015 was significantly revised up, but oil supply was revised up much more, putting oil prices on a downward path from their monthly 2015 high of $64/Bbl for Brent in May to $30.69/Bbl for January 2016. The year 2016 is seen as a transition year when monthly fundamentals swing to promote firming of the market.

Fire at Tupras's Izmit Refinery and Its Impact

A fire apparently broke out at Tupras’ 220 MB/D Izmit refinery in Turkey on February 3, and it is not clear how many and which units are affected. In a worst case scenario, light product losses would be 70 MB/D gasoline, 60 MB/D jet fuel, 90 MB/D diesel, and 20-30 MB/D more fuel oil would be produced.

Aramco Pricing Adjustments for March: — Staying the Course

Saudi Arabia's formula prices for March were just released. The adjustments made to differentials against their key regional benchmarks were within market expectations and do not suggest any change in Saudi export pricing policy, which has been to maintain competiveness with regard to volumes, liftings, and pricing in key markets. Pricing in both Asia and Europe was cut on the lighter grades and raised on the heavier grades, reflecting weaker light product cracks and firmer fuel oil cracks.

IMO Study Under Way — 2025 Implementation Is Reference Case, But Earlier Is Possible

The IMO has initiated a study to help decide when to implement a global requirement of 0.5% sulfur maximum for marine bunker fuels. Recent events such as the collapse in crude prices have increased the chances that the implementation date will be earlier rather than later. This change will be very disruptive commercially for the global bunkering business and would require significant changes in investment/operations for the global refining industry.

Projects Continue to Be Delayed in Low Crude Price Environment

New projects continue to be delayed or cancelled due to low oil prices. PIRA estimates a cumulative net impact of 600 MB/D of oil from these delays in 2016 and growing to 1,300 MB/D by 2018. As expected, most of the delays come from projects that have high development costs. The most affected areas are Canadian oil sands and offshore projects (GOM, North Sea, Angola, and Nigeria.

World Trade Growth and World Bunker Consumption

The slowdown in world trade growth in 2015 has been laid at the feet of a slowdown in Chinese economic activity. The reasons for last year's trade slowdown actually reflect generalized weakness in GDP in non-OECD apart from China. Applying PIRA forecast growth rates for GDP we expect world trade to grow 3.2% in 2016 and 6.0% in 2017. This implies world-wide bunker demand to grow 1.5% and 2.6% in 2016 and 2017, respectively.

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.