NYC-based PIRA Energy Group reports that the midcontinent crude stock build continued. In the U.S., this past week saw the largest stock build of the year. In Japan, crude stocks drew sharply. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Midcontinent Crude Stock Build Continues
The crude price plunge continued in January, with WTI falling to an average of $47.20. U.S. crude stocks rose 30 million barrels in January — 10 million in Cushing, 10 million on the Gulf Coast, and the rest mainly divided between the West Coast and other (non-Cushing) PADD II. The large crude builds will continue in February and likely into March and April, as well. As Gulf Coast tanks fill, and Cushing stocks reach 80-90 percent of operating capacity, stock builds will be pushed further upstream — to West Texas, Patoka, the Rockies and Western Canada.

U.S. Largest Build of the Year
This past week U.S. commercial oil inventories increased, driving the year-on-year stock surplus. The huge build was roughly equally divided between crude and products. Since the first week of the year, overall U.S. inventories are up 27 million barrels; product stocks are down 4 million barrels while crude oil inventories are up 31 million barrels (1.1 MMB/D). Some 55 million barrels of the year-on-year surplus is in crude oil. The bulk of the product surplus is in "other" products, but distillate inventories are now 21 million barrels (18%) over last year while gasoline is just 6 million barrels higher (0.4%).

Sharp Crude Stock Draw in Japan; Finished Products Slightly Lower
Crude runs eased fractionally on the week and crude imports dropped sharply producing a crude stock draw of 5.8 MMBbls. Finished product stocks were modestly lower. Indicative refining margins remain strong, while the expected rotation out of middle distillate cracks and into gasoline appears to be slowly taking shape.

The End of the "Saudi Put"?
The "Greenspan Put" referred to a market belief that the U.S. Federal Reserve would take action to put a floor on equity prices, thereby taking away downside risk and encouraging over-investment. In a sense, there has been a similar market belief in a "Saudi Put," which would take away downside oil price risk. With that "put" at least temporarily eliminated, the risk premium applied to oil investments is likely to be higher in the future, even as prices recover, potentially slowing the volume recovery from high capital cost projects.

Freight Market Outlook
Saudi Arabia continues to supply more crude oil than the market needs, and it is pricing aggressively, especially to Asia, to defend its market share while Iraqi production continues to grow as its government desperately seeks more revenue. For tanker operators this translates into more tanker demand for floating storage in the short term and from higher OPEC output and global crude trade as non-OPEC producers slash their capital expenses to adjust to the new low price environment.

Spot European Olefin Margins Plunge
Cracking economics in Europe plunged for all major feedstocks as their prices rallied amidst stable steam cracker product prices. Spot propane margins fell nearly 20% to 25¢/lb ethylene, but became the most profitable feedstock. Butane margins swooned 25% week-on-week to just 23¢ while naphtha cracking margins fell a remarkable 35% to just 18¢/gal. Persistent strength in naphtha has pulled regional LPG prices higher. This week's changes place spot European olefin manufacturing economics some distance behind those in Asia and North America.

U.S. Fuel Ethanol Exports Grow Sharply
The U.S. shipped over 810 million gallons of fuel ethanol in 2014, up 34% from 603 million gallons in 2013 and second only to 1.2 billion in 2011. This represented 5.7% of total U.S. supply.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA's current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

As China's onshore oilfields mature, its three state-owned oil companies (CNOOC, CNPC and Sinopec) are looking to develop the country's sizeable unconventional and deepwater reserves. Whilst more technically challenging to develop than historical oil & gas plays in northern China, these fields provide a chance to revive stagnant oil output as well as boost China's considerable gas potential. China holds the largest combined shale oil and gas reserves in the world, weighing in at 244 billion barrels of oil equivalent (EIA, 2013). In addition, 2014 saw the $6.5 billion deepwater Liwan-3 natural gas field, located in the South China Sea, brought online. This was China's first deepwater development and signals the start of a series of deepwater oil and gas projects over the coming years.

While these signs will be encouraging for China's NOCs, it is likely greater measures will be required to secure China's long term domestic hydrocarbon production. For both deepwater and shale plays, the expertise of IOCs will be crucial for effective development. Saudi Aramco has recognised this in recent years and has signed deals with several IOCs to explore and develop shale resources in southern Saudi Arabia. With respect to Capex-intensive deepwater projects, the financial clout of IOCs has been utilised by various West African NOCs. A major barrier to IOC involvement in China exists in the form of the current production sharing contract (PSC) structure. Currently PSCs in China are particularly demanding on participating foreign oil companies, with the non-state share of produced hydrocarbons subject to a series of reductions and taxes. These include the recovery of the NOC's exploration and development costs as well as corporation tax and special oil levy. The special oil levy varies with the price of oil, with 20% taken when spot prices are in the $55-$60 range and increasing to 40% when prices are above $75. At the time of writing, the Brent crude benchmark stands at $58.52, suggesting sustained low oil prices in 2015 and beyond could represent an opportunity for IOCs and independents to invest in Chinese assets whilst the special oil levy is at its lowest.

Matt Cook, Douglas-Westwood London
+44 1795 594735 or This email address is being protected from spambots. You need JavaScript enabled to view it.
www.douglas-westwood.com

Chevron Corporation (NYSE: CVX) has announced a $35 billion capital and exploratory investment program for 2015. Included in the 2015 program are $4 billion of planned expenditures by affiliates, which do not require cash outlays by Chevron. The 2015 budget is 13% lower than total investments for 2014.

"We continue to execute against a consistent set of business strategies which are focused on creating long-term value for our shareholders. Although commodity prices have fallen recently, we believe long-term market fundamentals remain attractive," said Chairman and CEO John Watson. "Our investment priorities are ensuring safe, reliable operations and progressing our queue of projects under construction. Once on-line, these new projects are expected to measurably increase our production and cash generation," he said.

"We will continue to monitor and be responsive to market conditions, and to actively pursue cost reductions throughout our supply chain in order to lower overall outlays. We anticipate growing flexibility in our spend as projects under construction are completed and as supplier contracts are renewed. We are testing our short-cycle investments, particularly base business and unconventional assets, at current prices and are selecting only the most attractive opportunities to move forward," Watson continued.

Highlights of the Capital and Exploratory Spending Program:

Chevron 2015 Planned Capital & Exploratory Expenditures in $billions
International Upstream 23.4
Total Upstream 31.6
U.S. Downstream 2.0
International Downstream 0.8
Total Downstream 2.8
Other 0.6
TOTAL (Including Chevron's Share of Expenditures by Affiliated Companies) 35.0
Expenditures by Affiliated Companies (4.0)
Cash Expenditures by Chevron Consolidated Companies 31.0

For Upstream, approximately $12 billion of planned upstream capital spending is directed at existing base producing assets, which includes shale and tight resource investments (~$3.5 billion). Roughly $14 billion is related to the construction of major capital projects already underway, primarily LNG (~$8.5 billion) and deepwater developments (~$3.5 billion). Global exploration funding accounts for approximately $3 billion.

Roughly 75 percent of affiliate expenditures are associated with investments by Tengizchevroil LLP in Kazakhstan and Chevron Phillips Chemical Company LLC (CPChem) in the United States.