The downing of flight MA17 has prompted calls for further sanctions on Russia targeted at its energy sector. Russia is the world's largest exporter of natural gas and second largest exporter of oil which together account for near 60% of its export earnings. Gazprom supplies 30% of Europe's gas - some 15% via Ukraine - and has warned exports will be affected if sanctions are expanded. But in its payments row with Ukraine Gazprom has already stated that it will "only be supplying the exact amount of gas requested by our European partners to the Russia-Ukraine border". Considering that Ukraine itself needs to draw gas supplies from the same pipelines, Europe is already threatened with gas shortages.

But Russia itself also faces challenges, namely in maintaining – let alone growing – production as existing fields deplete. In 2000, it drilled 3,770 wells and production was some 17 million boe/day. By 2013 it was drilling some 7,500 wells and achieved a production of 23 million boe/day – well numbers up 99% for a production gain of 35%. On this basis at DW we forecast it will need to be drilling over 8,800 wells in 2020 and in increasingly more difficult areas, hence the Exxon rig sailing to location in the Russian arctic (much to the embarrassment of some on Capitol Hill).

The Russian economy is already in a mess and to maintain its oil & gas production it increasingly needs to access western capital markets and advanced oilfield technologies. Sanctions that severely hit its energy production will indeed work and cripple the Russian economy, but could cause oil prices to soar and thereby impact the still fragile global economy.

But the real lesson of this whole affair is for Europe – it is far too reliant on imported energy. No single type of energy source or supplier is immune from problems and Douglas-Westwood have long warned that Europe is sleep walking into an energy crisis due to lack of investment in both 'home grown' base-load energy sources such as nuclear power and shale gas, in energy storage and Europe-wide integrated transmission networks.

www.douglas-westwood.com

NYC-based PIRA Energy Group believes that the global economy will expand at above trend pace in the second half of 2014. In the U.S., products increased and crude stock declined.  In Japan, crude stocks built as imports rebounded from storm impacts. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

After a sub-par first half, the global economy will expand at above trend pace in the second half of 2014, led by manufacturing. First half weakness in the economy undermined global oil balances with inventories building back to year ago levels. The U.S. crude inventory situation is quite tight while Europe is very long, although the worst of the European prompt crude price weakness has likely passed. The sharp decline in financial net length is supportive for nominal oil prices.

Again, a Product Increase and Crude Stock Decline

Overall U.S. commercial oil inventories increased compared to last year’s decline for the same week, expanding the year on year inventory excess. The product stock increase was roughly the same compared to the week earlier, as crude runs, product imports and reported demand did not change much. The crude inventory gap narrowed by 3.5 million barrels - to a still large 4 million barrels.

Japanese Crude Stocks Build as Imports Rebound from Storm Impacts

Runs continued to rise as turnarounds wind down. Crude imports jumped higher following typhoon disruptions and crude stocks built. Gasoline demand was only slightly higher, despite the upcoming holiday and stocks built from record lows. Gasoil demand was higher with a big surge in exports such that stocks drew 1 MMBbls. Kerosene demand remained low and stocks continued building.

Profitability of U.S. Shale Oil Plays: The Paradox of Company vs. Well Results

It is possible that individual shale wells may have breakevens well below current oil prices while the companies that are drilling those wells are struggling against cash flow limitations. The inability of companies to turn cash flows positive has raised the question of whether the shale industry is really viable financially in the long-term, or just supported by cheap money. An in-depth analysis of the play economics shows that negative cash flows are mostly a result of aggressive drilling behavior that should eventually reward investors.

LPG Scorecard

U.S LPG prices remained stable despite large increases in domestic inventories. The promise of increased exports has the bears on the sidelines, for now. Mt Belvieu propane settled at 104¢/gal, up marginally on the week. August/February contango in the propane forward curve increased by 0.6¢ in the week, to 5.2¢. Butane prices were flat. Ethane at Mt Belvieu fell with Henry Hub natural gas. Ethane’s fractionation margin remains negative, albeit by only 1¢/gal, reflecting the lack of outlets and high inventories currently facing the cracker feedstock. High and rising inventories will contain prices while the prospect of higher exports and the nearing end of summer will be supportive for U.S. LPG prices next week.

U.S. Ethanol Manufacturing Margins Lower

Chicago and Gulf Coast ethanol prices were stable the week ending July 18, but values in Southern California rose while prices in New York fell. Ethanol manufacturing cash margins were down slightly, as falling DDG values outweighed lower corn costs.

U.S. Ethanol Output Rises

U.S. ethanol production increased to 959 MB/D the week ending July 18, the second highest output of the year. Inventories were relatively flat, declining by only 5 thousand barrels to a five-week low 17.9 million.

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.

NYC-based PIRA Energy Group believes that with both the physical market and financial length bottoming, oil prices are at or near their lows. In the U.S., sharp crude stock reduction is offset by a product build.  In Japan, crude stocks posted a large draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Sharp U.S. Crude Stock Reduction Offset by Product Build

Crude stocks fell for the week ending July 11, 2014 while product inventories built, causing an overall inventory build. This inventory pattern fits with record crude runs. Last year for the same week, inventories were down slightly so the year-on-year inventory excess widened. Crude oil and other products are up on last year while the four major product inventories are down.

Japanese Crude Runs Rise, Crude Stocks Post a Large Draw

Despite typhoon Neoguri hitting Japan the last week, runs still posted a sizable gain, while imports dropped and crude stocks drew. Product balances for gasoline and gasoil were little changed, while kerosene stocks resumed building. Both gasoline and naphtha stocks drew to record lows. Refining margins remained good with cracks little changed.

Freight Market Outlook

Crude markets have been whipsawed recently by the sectarian civil war in Iraq and changing perceptions on the return of Libyan supplies to the market. Dated Brent prices increased by $6/B to $115/B following the June 10th fall of Mosul to ISIS insurgents. But as it became apparent that exports from Basrah were unlikely to be impacted while prospects for the return of Libyan supplies increased, the price of Dated Brent fell by more than $12 per barrel to $103/B with a steep contango structure at the front end of the forward price curve. This has prompted the opportunistic storage of crude on tankers and increased incentives for the movement of additional long-haul volumes out of the Atlantic Basin to Asia, causing a counter-seasonal rise in crude tanker rates in the Atlantic. For tanker operators there are double benefits with higher spot tanker rates and lower bunker prices, at least for the moment.

Strong Week for International LPG

Tightness in LPG supplies in Europe, particularly in butane, had prices bid up this week. European supply has tightened considerably on lower export volumes out of Russia, and refinery maintenance in Antwerp and the UK. Russian maintenance at gas processing plants has lowered prompt Russian output. Coaster sized parcels of butane in NWE ended the week 4% higher at $838/MT. Asian prices were also higher on strong demand -- as soaring VLGC freight rates have industrial consumers worried that supply will be impacted.

Ethanol Prices Decline

U.S. ethanol prices showed some strength early in the week ending July 11, but then resumed their recent descent, weighed down by rising inventories. Ethanol manufacturing cash margins improved for the second consecutive week, largely due to plunging corn costs.

Ethanol Output Up, but Inventories Down

U.S. ethanol output rebounded to 943 MB/D the week ending July 11, up from 927 MB/D during the holiday-shortened week ending July 4. Inventories declined by 341 thousand barrels to a four-week low 17.9 million.

Political Risk Scorecard

Concerns about potential further sanctions on Russia, along with Iraqi instability, will support prices next week.

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.