LNG technology evolved as a solution to the problem of transporting large quantities of gas over long distances. Developments in the market over the next five years are expected to have a significant impact on both the construction of LNG carriers and the primary LNG trading routes.
The LNG carrier market is currently over-supplied. A combination of low commodity prices and a reduction in imports from key consumers such as Japan (following the re-start of its nuclear power stations), has resulted in a substantial decline in charter rates for LNG carriers to approximately $25,000 a day – considerably below typical breakeven costs of $40,000. We note that 36 carriers were delivered in 2015, and only four newbuilds having been ordered in 2016 at the time of writing.
However, this trend is expected to change over the 2017-2021 period, due predominantly to liquefaction projects expected onstream in Australasia and North America. Notably, the USA is forecast to increase its LNG export capacity from 11mmtpa in 2016 to 77mmtpa by 2021. In the World LNG Market Forecast Report 2017-2021, DW forecasts the delivery of over 150 units yet to be ordered over the 2017-2021 period, in addition to the current order book, in order to satisfy this additional supply.
With the USA on track to be become one of the world’s largest exporters of LNG, this will result in a diversification of the primary trade routes for LNG transportation. Notably, the expansion of the Panama Canal enables it to accommodate larger LNG tankers, and also provides a means for vessels travelling to Asia and South America from the Gulf Coast to reduce their voyage times. This is ultimately expected to introduce greater competition to LNG trading routes.
Katy Smith, Douglas-Westwood London
U.S. Crude Market Flat in August, But Tightening Is AheadCrude prices and regional differentials were nearly flat in August, but prices will improve through year-end, as an open export arb and closed import arb lead to a reduction in net crude imports and falling crude stocks. Production has returned to normal in Western Canada, but it continues to decline in the U.S. Midcontinent — except in the Permian Basin, where production is beginning to stabilize as the rig count rises.
U.S. production was again impacted by temporary shut-ins. While the losses tied to Tropical Storm Hermine were minor, it marked yet another of many events that have limited production during the injection season.
The large drop in French nuclear output so far this summer, by almost 7 GW year-on-year in September to date, is pushing gas plants to set French prices more often, and, in turn, this fact makes French prices naturally closer to its Italian counterparts, resulting in lower French flows to Italy. With the current Italy-France differential further narrowing for the upcoming winter months, we might not see a sustained flow from France. If the flows from France dry up, those from Switzerland, Austria and Slovenia might not be sufficient to fill the gap.
New England REC pricing has moved well below ACP levels, indicating adequate supply for the highest value markets. Near-term pricing may respond to expected load growth later this year into 2017. Between now and 2020, REC requirements increase, but they also fluctuate according to MA solar carve-outs. New wind development is critical: although there is significant capacity in the queue, additional wind build (beyond what is under construction) is required to meet demand. Longer term, valuing RECs depends on RPS policy and the desire for strong REC price signals — and initiatives such as IMAPP call this into question. Policies such as the recent MA law increasing clean energy purchasing and encouraging offshore wind can diminish the importance of RECs in incentivizing renewables.
Global equities were broadly lower on the week. In the U.S., only the energy tracking index posted a gain. Housing, consumer staples, and materials performed worse than the overall 2% decline. The international indices all did better than the U.S. The best performer was the Chinese tracking index, while Latin America was the worst performer.
For September, the markets should be focused on old crop/new crop soybean carry outs in the WASDE and new crop corn yield in the Crop Production report. How aggressive the World Board and NASS get in these two categories will set the tone moving forward, in our opinion. While both numbers should be objective, the bean carry out will certainly contain some subjectivity.
Manufacturing margins improved to the highest level in over five weeks. RIN values give back some of their recent gains.
Over the past 12 months, several large oil-exporting countries have been forced to address their subsidy burden and raise domestic fuel prices. Major policy changes for this group of countries have the potential to slightly dampen future oil demand, as most oil exporters still price domestic fuels at a fraction of the global average. But political pressure and internal dynamics are likely to prevent a widespread move towards market pricing. Recent history suggests that any further reforms will continue to be modest and gradual, while rising oil prices will relieve some of the urgency to raise domestic fuel prices. In the rest of the world, the vast majority of countries price domestic fuels at or above market levels. PIRA maintains its view that the threat to future oil demand from subsidy reform is overstated.
Despite a sizeable rise in pricing on Monday and Tuesday (pushing FOB Newcastle prices above $70/mt for the first time since mid-2014), coal prices closed on Friday down week-on-week, in response to the agreement between the Chinese government and coal producers to lift output. While PIRA believes that there will be some stimulation in China's coal production from the summit this week, import demand will likely remain strong over the next 30-60 days due to winter stocking requirements. However, beyond this period, we believe that if coal producers are given some discretion to fluctuate output (as it appears as if they have), they will exercise some discipline, as many mining companies in China are just now moving out of the red into the black. If this proves to be correct, import demand could remain fairly robust, perhaps even upward trending year-on-year over the next six to nine months.
Huge crude stock draw pulls overall commercial stocks down 13.7 million barrels this past week while the strongest reported product demand of the year limits product inventory build. Gasoline had its largest stock draw this summer as real demand was very strong, imports moderated and refiners substantially reduced refinery production. Crude stocks are forecast to decline again next week despite a rebound in crude imports with Cushing contributing 0.6 million barrels to the draw. Gasoline stocks to draw again, albeit at a much slower pace as seasonal demand weakness kicks in. Distillate demand should rebound, limiting its stock build in next week’s EIA data.
Significant power sector gas demand is starting to creep into European gas balances. The problem remains that this demand is not coming in fast enough to replace even the declining demand from storage injectors. While the month is still young, we are seeing how in late summer/early winter it sometimes has to be producers or Mother Nature (temperature) who save market balances from loosening, not power demand. We had forecast far more German gas-fired power demand coming in this month relating to the profitable hedging possibilities of the spark spread for the full month of September; however, as of yet this has not kicked in.
The EPA finalized regulations limiting May-September NOx emissions to assist with non-attainment problems for Ozone. It is generally similar to the proposal from last fall, though aggregate state-level caps/budgets have been relaxed slightly, and North Carolina is no longer covered under the program. Critical for currently traded allowances, EPA has finalized provisions to transition the accumulated CSAPR seasonal allowance surplus/bank with a discount factor. Current seasonal CSAPR allowance pricing is in the range of EPA’s high-end estimates of the costs needed to induce existing SCR controls to run harder and the costs of turning on idled SCRs/installing additional combustion controls. Assumptions regarding the cost of ammonia/urea are critical.
The S&P 500 moved significantly lower on the week as interest rates ticked higher and the market reflected on rising odds for a September rate hike by the FED. Volatility increased, but high yield debt and emerging market debt indices held firm. There was an uptick in longer-term interest rates in all the major countries we track, particularly Japan. The total commodity index was actually higher on the week, despite the decline in equities.
U.S. LPG prices gained as strong increases in propane demand led to a sharp drop in inventory gains. Mont Belvieu October propane futures prices improved by 2¢ or 4.4% to settle just above 49¢/gal Friday. Butane at the market center gained 4.6% to 65.2¢. Conway LPG prices outperformed those in TX, but remain about 3¢ lower on both species. Natural gasoline prices improved by 5.2%, easily beating out RBOB’s week-on-week gain. Ethane prices were also stronger, regaining a 20¢/MMBtu premium above Henry Hub gas –after dipping below it in recent weeks.
The production of ethanol-blended gasoline increased to 9,271 MB/D. Total inventories fell by 272 thousand barrels to 20.7 million barrels.
Technically, the books will not be closed on the 2015/16 Marketing Year until the end of this month, when the September 1 Quarterly Stocks report is released. Through a combination of various USDA reports as well as Census Bureau statistics, which often contradict USDA numbers, an almost final picture of the 2015/16 Marketing Year is getting clearer.
Runs eased only modestly, though maintenance should be gearing up. Runs will continue declining at an accelerating rate through much of the month. Crude imports remained little changed and a modest crude stock draw ensued. Finished product stocks built due to higher naphtha and kerosene. Demands were mostly lower. Refining margins have begun to improve from abysmal levels. For the most part, all the cracks improved on the week.
Poland’s state oil and gas company PGNiG does not foresee an out-of-court settlement with Russia’s Gazprom to reconsider natural gas prices, PGNiG Management Board President Piotr Wozniak said Sept. 8. PGNiG filed a lawsuit against Gazprom over gas prices last February, following its 2014 call for the energy giant to revise its gas price deal in line with recent gas market trends. Wozniak declined to disclose the terms acceptable for his company, saying that "only Gazprom knows the terms to which we will agree; it is not necessary to speak publicly about it."
The September RGGI auction cleared at $4.54, up one cent from June. Registered bidders numbered 50 — at the low end of the range for 2015/16. Players with compliance obligations picked up the majority of the allowances, but less than what was observed in recent auctions, suggesting that interest in speculative buying may be returning. Negotiations among RGGI partners regarding post-2020 caps have intensified, with some New England states favoring steeper reductions. Market players are still waiting for the next Stakeholder meeting date, scheduled for “early fall,” to get additional clues as to what the Model Rule could look like.
PIRA’s periodic survey of U.S. Refinery Turnarounds indicates that the next several months should see an above-average level of downtime. Planned crude unit outages are expected to amount to about 1.6 MMB/D in September, increasing to over 2.4 MMB/D for October. Outages are likely to be even higher because of unplanned events. On a weekly basis crude downtime peaks at around 2.6 MMB/D during early to mid-October. Upgrading unit downtime follows a similar but lower path, peaking at around 2.1 MMB/D in October. FCCs account for around one-half of the upgrading unit outages peaking in early October at about 900 MB/D. The first quarter of 2017 is also expected to be an active period for refinery turnarounds.
While last winter was characterized by energy demand losses due to the warming effects of El Nino, it's worthwhile to anticipate the reverse effects of the expected La Nina this winter, even though it may not be as strong as the stimulative 2010-12 La Nina. LNG demand outside of the growth markets of India and China is taking a hit on several fronts, not least of which has been caused by the weather.
Year-on-year growth in China’s fixed asset investment has decelerated sharply in recent periods. Investment in the manufacturing sector (which accounts for about a third of the total) was a key contributor to the slowing. The slump in this category, in turn, was related to the government’s push to reduce industrial overcapacity. China’s provincial GDP data for the first half of 2016 also pointed to the cost of economic restructuring, as provinces like Liaoning (a major producer of steel) and Shanxi (famous for its coal production) reported sluggish results. In Europe, economic data in the post-Brexit vote period have generally been better-than-expected.
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.
A key theme at the SMM Conference in Hamburg last week (and highlighted in Douglas-Westwood’s keynote address) was the innovation within both the offshore (oil & gas and renewables) and marine markets aimed at reducing costs and improving operational efficiency. This is bringing more oil and gas projects over the economic threshold of viability and also moving the offshore wind nearer the point where it can compete directly with other power generation options such as nuclear.
Douglas-Westwood (DW) has recently updated its work-class ROV outlook and sees potential for nearly 7.5% compound annual growth in expenditure from 2016 to 2020. This is function of recovery in the IRM, drill-support and construction support markets (which employ just over 900 WROV units), all of which have been impacted by the downturn.
Operating through the downturn has been a challenge for many ROV/vessel companies. We have seen distressed sales of units and expect more to come. Price pressure on the vessel contractors has reduced margins dramatically. Uptime of the vessel becomes highly critical – a few lost-days of vessel availability means the difference between a small margin or a loss on the project.
Moray Melhuish of ROV specialists ROVOP made this point in his address at the conference, highlighting that ROV technology is moving forward rapidly and a young fleet of units with modern (and manufacturer-supported) equipment and controls is key to ensuring uptime. Some of the technology drivers in the industry include the adoption of sonar and HD cameras and the ability to work in turbulent shallow-waters (to service the growing offshore wind market).
Like many other areas of the offshore market, footprint on the vessel (or platform) is also critical and development of electric tooling has the potential to reduce this, or allow the ROV to carry a greater payload.
Cost-efficient project development is of paramount importance to E&P companies and we continue to see projects re-evaluated and re-tendered. We are tracking this on a project-by-project basis and are already seeing the impact (in development costs/bbl capacity) for newly sanctioned projects.
Steve Robertson, Douglas-Westwood Faversham
U.S. Crude Stocks Build AgainCrude stocks continued to build, rising by 2.3 million barrels this past week, as imports surged to a multi-year high while the inventories of the three major light products were about flat. For next week, PIRA sees lower crude imports, higher runs, and reduced production due to weather-related shut-ins, and causing a large crude stock decline. Cushing crude stocks declined 1.04 million barrels this past week, and lower Canadian imports should ensure another significant decline in next week’s EIA data.
On Tuesday, August 30, NYMEX October futures assumed prompt-month status and immediately saw a sharp bout of selling. In particular, prices have been in a steady state of erosion since topping ~$2.90/MMBtu to start the week, as Thursday’s outsized storage report and less supportive weather forecasts, showing potentially cooler temperatures aided by tropical storm activity, have weighed on sentiment.
While the eclipse of coal in the U.K. comes with little surprise, the behavior of coal units on the Continent is now more intriguing. While older and inefficient units have clearly moved out of the money, a more interesting issue is at which point the most efficient coal units will start switching off. Generation data show gas trending higher in Germany, although steam coal is still generally dominating the German mix.
Forward coal pricing moved notably higher this week, with prices rising initially due to the suspension of loading activity at Puerto Bolivar, although after the suspension was lifted, prices rose to even loftier highs. In fact, 4Q16 prices for FOB Newcastle and API#2 are now just marginally below their recent highs. For prompt pricing, API#4 forwards generally underperformed relative to API#2 and FOB Newcastle, giving FOB the premium spot back. Continued strength in the Chinese market remains the driving force for pricing, as it is becoming increasingly apparent that the limitation of working days at Chinese coal mines will not be relaxed.
The RGGI cap and trade program is at a crossroads, as partners negotiate the post-2020 cap declines, with PJM states reportedly resisting the steeper reductions favored by New England and NEPOOL looking at an alternate wholesale market structure. RGGI prices received a boost from the June Stakeholder Meeting, but declined on news of the NY nuclear subsidies in July. August prices averaged lower than July, but were moving towards the $5 mark. PIRA expects the Sept. 7th auction to be dominated by compliance buying as the market continues to await a draft Model Rule, expected this fall. Longer term, it must be decided whether the RGGI price signal will be the primary mechanism to reach climate goals.
Global equities posted another gain on the week. In the U.S., the “growth” indicator outperformed the “defensive” indicator. Banking, materials, and utilities, led the performance. Energy was down slightly, -0.4%. The international tracking indices also gained, with China, emerging markets, and Europe doing the best.
The seasonal meltdown in tanker markets in this year’s third quarter has been especially severe, and little relief is anticipated before 4Q 2016. OPEC production growth is slowing and is not adequate to offset rapid fleet growth this year or next. Nigerian production outages and competition from VLCCs have decimated rates in the Suezmax sector, which have been driven well below cash operating cost levels.
Asian LPG markets were the standout winners last week with notable outperformance vs. broader markets. Prices in the destination market were buoyed by increases in Saudi contract prices from September FOB loaders. Cash and futures prices for propane converged to near $300/MT after 3% declines last week. Butane prices were mostly unchanged, being called near $328/MT on Friday afternoon.
Stocks build to highest level in six weeks. Output of ethanol-blended gasoline dropped for the fourth straight week.
The first full week of metrological autumn will see both combines roll and a rather dramatic cool down in the NW Belt. Low temperatures will be in the mid-30’s as far south as Cedar Falls, Iowa, by Thursday, September 8 even though it would appear that freezing temperatures will not infringe on major growing areas.
This week saw finished stocks draw 1.7 MMBbls, with noted declines in naphtha and gasoil stocks. Crude stocks were only marginally lower. Runs also eased slightly, but they will show more significant drops in the next few weeks. Gasoline demand remained strong, but stocks built slightly on higher yield and lower exports. Gasoil demand rebounded with lower yield and strong exports, and stocks began to correct a four-week rise. Kerosene stocks continued to build. Refining margins remain very weak, though there was some improvement in cracks in the last week.
After a bottom for the year seen in July, a reversal in German gas generation is currently underway, and with 2.5 GW dispatched in August, gas is up by 37% month-on-month and 66% year-on-year. Lower power flows from historically cheaper France have been a major relief for German conventional/thermal generators, albeit August saw both higher solar generation (+1.1 GW), together with higher wind output (over 1 GW year-on-year), dampening the bullish impact of the lower French flows.
While France has been seen shifting toward net importer status from Belgium and Germany, PIRA sees an unprecedented market context in Germany during September, when gas units will be more competitive against coal, and gas will potentially be able to meet — together with lignite — the entire need for fossil fuel generation. We have seen coal units ramping down during renewable-induced power prices collapses, but will coal switch off to allow gas to generate? German prices appear vulnerable to downsides in the shorter term, considering the resilience of coal-fired generation and further weakness ahead for gas prices. However, German winter prices are largely undervalued assuming our expected thermal demand (~36 GW on average). This level of thermal demand requires prices in the low €30/MWh, at current fuel prices.
U.S. RIN values rise early in the month, but fall later. Brazilian ethanol output declines in the first half of August.
Corn yield comparisons to 2014 have given traders that déjà vu feeling all over again. Always searching for some sort of analog, the late-September/mid-December 50 cent corn rally in 2014 is starting to draw comparisons to 2016, although the Funds aren’t looking at it that way. With the 2016 rally a month earlier than in 2015, some are of the opinion that this year’s recovery can also be a month earlier than 2014.
We estimate that incremental gasoline demand over five U.S. public holidays averages about 290 MB/D. Downstream buying begins as early as two to three weeks before major holidays like the end-of-year Christmas/New Year period. Dealer buying for minor holidays appears to take place a week before or even in the same week.
Garnering perhaps more attention than the fact that YTD Indian LNG imports (uncontracted) of Australian LNG have registered 5 mmcm/d versus no first half buying in 2015, Chevron has announced the finalization of a long-sought supply contract with China's ENN for volumes from Gorgon. Although the volumes are, at just under 1-bcm/yr., low compared with previous China/Australia contracts, the contract is notable for several reasons.
Although on-peak prices remained volatile in August, weaker cooling loads in the Southwest reduced Palo Verde average prices by about $4/MWh from July. SP15 prices also edged lower, but warmer weather, lower hydro output and rising gas prices led to a small gain at NP15 and a sizable jump at Mid-Columbia (+$4). Implied heat rates have been supported this year by weak gas prices and strong cooling loads, but we expect heat rates to move lower through 2018 in response to a rebound in gas prices and rising solar capacity. Southwest coal and California gas retirements will not provide sufficient support to avert weakness.
The Chinese market continued to be a sizably net bullish factor for seaborne coal prices despite the normalization of weather conditions. Domestic coal production continues to fall; thermal coal imports are comfortably above prior-year levels for the year-to-date. Seaborne coal supply growth will remain limited, while the demand side is showing some improvement. While the considerable pricing rally that has occurred over the past eight months has started to fade, we believe that there continues to be more upside to prices, with a bullish oil pricing outlook providing much of the stimulus.
U.S. August job growth fell somewhat short of market expectations, but it did not represent a disappointment. On a trend basis, the labor market has picked up pace considerably. In spite of a tightening in labor conditions, wage growth (based on average hourly earnings) has not accelerated. There are flickering signs, however, that this may soon change. Recent data from emerging markets (such as the August confidence readings from China, and July industrial production for South Korea and Brazil) were constructive for the outlook.
EIA just released its final monthly June 2016 (PSM) U.S. oil supply/demand data. June 2016 demand came in at 19.83 MMB/D, which was 100 MB/D better than PIRA had assumed in its balances. Demand grew 1.2% versus year-ago, or 242 MB/D moving back closer to the 296 MB/D average growth seen Feb.-Apr. Gasoline and kerojet outperformed the barrel average, with gains of 2.9% (273 MB/D) and 4.7% (77 MB/D), respectively. Gasoline performance was in line with the improved June VMT growth, which was 3.2% versus 2% in May. End-June total commercial stocks stood at 1,382.4 MMBbls, which were 7.6 MMBbl higher than the preliminaries, but 9.5 MMBbls lower than PIRA had assumed in its balances.
The Argentinian government is set to propose a lower price hike for residential gas following a rejection of original increase by the Supreme Court. The new price model was decided September 1, Infobae reported, without saying how it obtained the information. The government will submit the new price increase in a non-binding national public hearing scheduled for Sept. 16. S&P 500 Moves Higher The S&P 500 closed slightly higher on the week. As would be expected, volatility moved lower, while high yield debt and emerging market debt indices generally held firm. The dollar mostly strengthened, and the total commodity index fell back on the week.
EIA recently released its June oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, declined to a new cyclical low of 8.81 MMB/D. This is the lowest figure seen since June 2014. From the April 2015 peak, the decline has been a cumulative 1.15 MMB/D, or about a 10%, annualized decline rate. Domestic field crude production also reached its lowest level since June 2014, and the year-on-year decline rate reaccelerated back to about 620 MB/D, or -6.6%.
Broader fundamental considerations will drive prices beyond $3/MMBtu before year end. While such levels are likely to be sustained into 2017, there is an “expiration date” attached to such heights, especially if end-March storage is left near 2 TCF.
Saudi Arabia's formula prices for October were just released. With more crude available for sale in October due to refinery maintenance, pricing in Asia and the U.S. was made less generous to customers. This sends a constructive message to the market.
The Rough outage announcement in June sent storage spreads to levels unseen for several years, encouraging a full Continent to inject as much as possible to help the U.K. with its storage shortfall. Now that Rough is back, there is a lot of gas in storage that is hedged to withdraw in 1Q, and it could spell trouble for deliveries.
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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