NYC-based PIRA Energy Group reports that the creeping stock surplus continues. In the U.S., overall commercial stocks built last week with the build in both products and crude.. In Japan, crude runs and imports are higher and crude stocks built fractionally. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Creeping Stock Surplus Continues
Preliminary data is now in for end November and it shows that commercial oil inventories in the three major OECD markets – United States, Europe and Japan – drew just 12 million barrels (400 MB/D) compared to a year earlier 37 million barrel (1.2 MMB/D) decline. Commercial stocks in these markets began the fourth quarter 22 million barrels, or 1%, higher than the year earlier and have now ended November 76 million barrels, or 3.5% higher. This stock profile is consistent with PIRA's balances showing year on year supply growth outpacing demand growth by over 1 MMB/D. This imbalance grows even larger in 2015.

Data Issues Likely an Important Factor in Big U.S. Stock Build
Overall commercial stocks built last week with the build in both products and crude. Re-benchmarking occurred this week indexing the December 5 stock levels to the September PSM, which resulted in substantial upward revisions to stocks. Part of this adjustment could have inflated inventories and correspondingly deflated reported demand. An added factor could be the stock data for the prior Thanksgiving holiday week was underreported, thus distorting this week's stock change. Probably both factors are to blame but, nevertheless, this week's reported inventories reflect a growing surplus of inventory relative to last year.

Japanese Crude Runs and Imports Higher and Crude Stocks Built Fractionally
Crude runs were marginally higher on the week. Alignment with our planned turnaround schedules still looks good. Crude imports were higher and crude stocks built fractionally (0.2 MMBbls). Finished product stocks drew due to draws in all the products but jet.

Re-Weighting of Major Commodity Indices in January 2015 Boosts Brent but Lowers Natural Gas and European Gasoil
The S&P GSCI and the Bloomberg Commodity Index (BCI), the two major indices for passive investment in commodities, have recently announced the new weighting schemes that they will apply to their respective commodity indices effective January 2015. The BCI index will see $2.6 Billion flow into energy against a $0.5 Billion loss for GSCI. Natural gas is the big loser down $1.2 Billion in January 2015 vs. current levels, while Brent is the big winner picking up $2.6 Billion. WTI increases only $334 Million. Oil products over the same time period increase $407 Million. European gas oil is the other major loser in the re-weighting down 7 MMBBLs or $575 Million.

When Will the Bloodletting Stop?
Saudi Arabia's relinquishing its role as oil price anchor has caused a catastrophic decline in the demand for inventory which has resulted in oil prices collapsing. Both physical and financial "inventory" holders have been selling. The selling has had a snow ball effect because of a lack of liquidity, one of the consequences of Dodd Frank regulations, and ongoing producer hedging. With many U.S. shale oil producers under hedged in 2016, with say 15% coverage, versus 40-50% for 2015, the selling pressure will not end until prices drop to the level where hedging is uneconomic.

NGL Prices to Continue Falling
With crude oil prices likely to continue to push lower and U.S. LPG export economics continuing to flash negative, the path of least resistance seems to be lower for U.S. prices. Internationally, recent LPG gains on naphtha in Europe and Asia come at the expense of less attractive petrochemical feedstock margins. LPG's discount to the refined product will need to widen for higher consumption to occur.

Ethanol Output Reaches All-time High
U.S. ethanol production soared to a record 988 MB/D the week ending December 5, up 26 MB/D from the previous week. Stocks built by 461 thousand barrels to a seven-week high 17.75 million barrels.

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.

Short-term investment models for shale make it more vulnerable to project cuts

With oil prices plummeting to a five year low, and project cut backs likely in 2015, short-term funding for US shale may lose out to the country's higher cost deep water developments, the latest article by leading petroleum industry advisor Gaffney, Cline and Associates (GCA) suggests.

The current low price of oil has been blamed on reduced demand and a global oversupply. Much of that oversupply is due to the huge increase in oil production from the US unconventional or shale industry.

New analysis from GCA indicates that where companies have the flexibility to choose, shale activity will most logically suffer first as a result of the price crash, leaving activity in other areas such as the Gulf of Mexico relatively more protected. However actual cuts will be influenced by a large number of individual company factors, and the squeeze on cash flow will undoubtedly cause cuts to be felt everywhere.

"Whilst high cost environments such as the deep water Gulf of Mexico would appear to be vulnerable, and undeniably cuts should be expected there, economic rationality suggests that the brunt of cuts should be directed at onshore unconventional investments. However, in the short term there is not always the operational flexibility to make decisions based solely on fundamentals," says the article's author Bob George, Executive Director and Senior Strategic Advisor at GCA.

Another key difference for deep "water projects is their longer-term investment lifecycle. In the Gulf of Mexico (GoM) for example, where a company's investment in a typical project may be US$1 billion or more, much or all of the investment will be committed and spent around five years before any returns are seen. The critical point for such projects is not the price of oil now, but its anticipated price in the future and where deferral in the short term may result in missed gains later.

"From a decision-making perspective, this means the risk lies in the expected price of oil in 2020. As a result, projects currently underway are less likely to be stopped. This is in contrast to onshore unconventional shale investment where decisions are often much more short term," says George.

"Shale drilling can be cut back or ramped up in fairly short order to accommodate the market conditions, resulting in more rapid response to fluctuating oil price."

At the end of October 2014 GCA posted an article* looking at the potential impact of US$80 per barrel on activity in unconventional shale oil plays in the United States. The article indicated that, using the "sweet spot" volatile oil window of the Eagle Ford as an example, activity was still profitable at that price although more fringe areas (and other basins with pricing disadvantages) might be more challenged. However, even the sweet spots in the Eagle Ford oil window started to look challenged at US$70 per barrel.

Co-authors Cecilia Jing Cui and Neil Abdalla point out that strong offshore GoM projects can still be viable down to US$60 per barrel. Economic rationality would suggest that where the opportunity exists, onshore shale spending would be a more appropriate short-term target for capital deferral because operating flexibility allows any adjustments made there to be reversed in equally quick order.

Bob George states, "Although pain is likely for areas like the offshore Gulf of Mexico in 2015, it should be much better placed to weather the storm of depressed oil prices in the short term than the US onshore unconventionals industry."

CGG notes the announcement made by Technip that it no longer intends to file a tender offer for CGG.

Since the beginning of this unsolicited approach by Technip on November 10, CGG remained open to dialogue and studied all proposals of Technip taking into account the interests of its shareholders, clients and employees. The board of CGG considered that none of the proposed options were creating value for the Company and its stakeholders.

CGG remains confident in the ongoing execution and the success of its strategy as an independent company. CGG is showing a solid resilient operational performance as highlighted in the third quarter results with important progresses achieved and milestones met in the transformation plan and the strengthening of the balance sheet.

With this plan initiated one year ago, accelerated and intensified during the year 2014 and with priorities given to cash generation, CGG is in a position to weather current difficult market conditions while fully benefiting from future geoscience market rebound.