NYC-based PIRA Energy Group reports that the outlook for 2014 global oil demand growth was revised down significantly. In the U.S., stocks built this past week for the seventh consecutive week of inventory builds that have uncharacteristically occurred in the middle of the winter. In Japan, crude stocks draw, but finished products build. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Why Was 2014 Oil Demand Growth So Weak?
The outlook for 2014 global oil demand growth was revised down significantly over the course of the year. Some of the deterioration in the outlook since January 2014 can be attributed to slower economic growth, but the 0.5 MMB/D over-prediction of demand growth from June 2014 cannot. The lion's share of the discrepancy occurred in Japan (0.2 MMB/D) and the U.S. (0.2 MMB/D) – the demand forecast for the developing world was almost perfect. The source of the forecast errors in Japan and the U.S. appear to be for a number of reasons unrelated to longer term trends.
Another New High in U.S. Commercial Stocks
Stocks built this past week for the seventh consecutive week of inventory builds that have uncharacteristically occurred in the middle of the winter. Inventories are at all time highs and are now 119 million barrels, or 11.4% higher than last year. Crude stocks had the largest weekly build in over ten years and are now 13.3% higher than last year. Product inventories are 9.4% higher than last year but the bulk of that is outside the four major products.
Japanese Crude Stocks Draw, but Finished Products Build
Crude runs rose fractionally on the week and crude imports declined sufficiently to produce a crude stock draw. Finished product stocks built, with all the major products other than kerosene showing an increase, but nothing dramatic. Demands on gasoline and gasoil were modestly higher, but stocks built for both due to a rise in yields. The kerosene draw rate throttled back on the week as yield rose and demand was slightly softer. Indicative refining margins remain strong.
Prompt Demand Sends Asian LPG Flying
The action this week was in the Asian LPG markets. Prices roared higher on stronger prompt demand, particularly out of Japan, and thin immediate availability. Cash propane prices ripped $100/MT higher for cargoes arriving 2nd half February to the highest levels this year. Butane prices also rose in illiquid cash markets to be called at a $30 premium to C3. Saudi CP futures gained, with current bets on a $25 improvement in February CPs. However, steep backwardation in the CP and propane FEI curves hints that the prompt strength in Asian LPG markets may not persist for too much longer.
Ethanol Prices Fall
The week ending January 16, U.S. ethanol prices tumbled to their lowest values since June 2005. Stocks were the highest and manufacturing margins were the poorest since January 2013.
Ethanol inventories Rise to Two-year High
U.S. ethanol production rose to 979 MB/D last week, up slightly from 978 MB/D during the preceding week. Inventories built by 158 thousand barrels to 20.4 million barrels, the highest in nearly two years.
Death of Saudi Arabia's King Abdullah Unlikely to Alter Oil Policy
King Abdullah of Saudi Arabia died January 23. Crown Prince Salman has assumed the throne, and Prince Muqrin was named the new Crown Prince. Furthermore, the succession plan now appears to include a younger generation. PIRA believes the change in leadership is unlikely to alter Saudi Arabia's current oil policy of letting the market dictating prices and protecting market share.
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.
In their January Oil Monthly Report, the IEA noted "A price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn" and their demand growth forecast of 900,000 bbl/d for 2015 was maintained. They are not alone, the EIA expects global consumption to grow by 1.0 million bbl/d in both 2015 & 2016, and some forecasts suggest U.S. gasoline demand may, in 2015, grow by the most since the 1970s as falling prices boost consumption.
Oil prices are presently being held down by oversupply – but for how long? Production from wells declines naturally at some 9% p.a., and even with costly intervention at perhaps 5% p.a. With global demand at some 92 million bbl/d, this suggests a requirement to replace in excess of 4.5 million bbl/d of production in 2015 and more in 2016, etc., but where will the new oil come from? The IEA has suggested the U.S. oil production may grow by 0.5 million bbl/d in 2015 but could start to peak as early as 2016.
Investment in production is already being hard hit. Around 400,000 low output stripper wells each pump less than 10 bbl/d, but in total produce three-quarters of a million bbl/d and are prime candidates. At the other end of the scale, BHP Billiton for example has said it would cut back on its planned $4bn spending on its US shale assets. Projects underway worldwide will of course add production and OPEC probably already has near 2.5 million bbl/d of spare capacity. So overall, we may reach a point of balance in 2015-16 and then see undersupply of oil and rising prices. Furthermore, we must not forget there is always potential for supply disruption, OPEC has at times lost some 2 million bbl/d, non-OPEC producers near 1.2 million.
The bottom line is that unless we keep adding production, surplus capacity will be quickly eroded. The next oil price surge is already being set up.
John Westwood, Douglas-Westwood London
+44 203 4799 505 or This email address is being protected from spambots. You need JavaScript enabled to view it.
www.douglas-westwood.com
With Mexican oil open to private investment for the first time, the country's initial bidding round is expected to remain competitive despite low oil prices, delays and a number of uncertainties, according to research and consulting firm GlobalData.
The company's latest report* states that the first bid round, which began on 11 December 2014 by offering 14 shallow-water exploration blocks, is currently scheduled to offer additional areas, including unconventional and deepwater opportunities, in the first half of 2015.
Adrian Lara, GlobalData's Senior Upstream Analyst for the Americas, states that no indication has been given of the expected levels of biddable profit oil in the shallow-water Production Sharing Contract (PSC). Furthermore, full details of the other contract models are yet to be released.
Lara comments: "With the international crude oil price having dropped from nearly $110 per barrel (bbl) in the first half of 2014 to its current price of below $50 per bbl, the government has already been forced to deviate from its original schedule.
"In the past week, the government has admitted that it may need to further delay high-cost areas, such as unconventionals. On top of this, the new schedule appears ambitious for a regulatory agency organizing its first ever licensing round."
Despite these delays, Will Scargill, GlobalData's Upstream Fiscal Analyst, notes that the lower oil price should not significantly affect the competitiveness of bidding on the shallow-water exploration blocks, as the adjustment of royalties to prevailing prices and profit shares to profitability mean that it should remain possible for investors to achieve attractive rates of return.
Scargill explains: "Comparison of the regime with that applicable to shallow-water areas in the US Gulf of Mexico at oil prices of $60 to $80 per bbl suggests that bids offering the government an initial 20% share of profit oil may be competitive. When discovered fields are offered, the government take is likely to be higher due to the lower risk.
"For deepwater areas later in the round, the government is expected to offer royalty and tax licenses, reflecting the high costs and risks associated with this type of exploration and development. Although the full details of this contract model have not yet been disclosed, it is expected to use a similar adjustment mechanism for the biddable additional royalty to that used in the PSC."
the past 12 years, Quest Offshore's consulting division has been commissioned by leading energy companies, industrial conglomerates, tier one OEMs, the finance industry and other members of the supply chain as well as industry lobby groups to provide expertise in assessing the current and future market conditions of a variety of offshore oil and gas related industries.They have successfully assisted their clients in understanding the complex dynamics of the global oil and gas production and exploration market, and have provided expert analyses allowing them to make optimal strategic decisions in reaching their short and long-term goals.
Despite the negative implications of and uncertainties around today's lower oil price environment, Quest believes that significant opportunities exist for companies willing to make immediate long-term strategic decisions. As with any significant structural shift in a large industry, the recent outlook changes will create inefficient market situations that well-positioned and opportunistic companies will be able to seize. Quest expects that as oil prices begin to stabilize, merger and acquisition activity will increase. Suppliers to project development activities will undergo significant restructuring, reshuffling the dynamics of most offshore oilfield service markets. Companies who take advantage of these opportunities will be well positioned for the next growth cycle.
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