Oil prices have been extremely volatile since the first trading day of 2016 and hit 12-year lows last week with Brent dropping below $33 a barrel for the first time since 2005. The fall in the Chinese manufacturing index, the Saudi-Iran standoff and North Korean nuclear test have all had a significant impact on shaping oil price trends.

Brent crude rose to a three-week high of $38.91 a barrel on the 4th January as a consequence of the Saudi-Iran geopolitical risk but these gains were quickly diminished due to concerns over economic slowdown. Rising tensions in the Middle East typically trigger an increase in the price of oil, yet it seems that bearish sentiment elsewhere has prevailed over potential risk.

China’s manufacturing sector shrank for the fifth consecutive month and the Shanghai Composite stock index finished 10% down for the week; leading to uncertainty over the outlook for energy demand in China. It is a clear indication that oil demand from the world’s number two oil consumer is slowing and that the current oversupply of oil may be more persistent than expected.

Adding to uncertainty over the growth in China, news of the North Korean nuclear test came on the 6th January, which triggered Japanese and South Korean stocks in Asia to decrease overnight as investors looked to less risky assets. Whilst this has contributed to further geopolitical uncertainties, it is unlikely that it will have a sustained impact on oil prices.

Nevertheless, oil prices are likely to remain at low levels until the supply-demand balance tightens, with prospects of production declines or a pick up in the global state of the economy seeming unlikely in the short-term.

Following the announcement of Douglas-Westwood joining the ESIA Group on 7th December, we were delighted to be able to exhibit with our new colleagues at PROSPEX 2015 in London on 9th and 10th December. Together with ESIA members Hannon Westwood, Novas Consulting and Richmond Energy Partners, we looked to showcase the group’s well-established E&P consulting and analytics offering alongside DW’s respected oilfield service-focused capabilities.

PROSPEX 2015 commenced with the OGA’s Gunther Newcombe providing an overview of the current state-of-play in the North Sea and information on the upcoming 29th and 30th licensing rounds. The 29th round will feature acreage in the frontier Rockall basin, an area opened up considerably by a government-sponsored 3D seismic shot earlier this year. Additionally, Mr. Newcombe outlined the OGA’s strategy for the coming years – looking to encourage exploration in both mature and frontier areas as well as greater collaboration between operators.

Ireland proved to be a key theme over the two days of PROSPEX following the country’s most successful licensing round this year with 43 applications submitted – mostly for acreage on the Atlantic Margin. This is nearly three times the number of applications received in the 2011 offering.

As is the usual focus for PROSPEX, a host of independents exhibited oil & gas prospects from around the world. Many companies were advertising promising opportunities around the British Isles, whilst some players chose to introduce prospects from unexplored international regions. Tullow Oil demonstrated the potential of a number of blocks from either side of the Atlantic whilst Envoi showed-off finds from all corners of Africa.

With a mere four orders so far this year the Floating Production System (FPS) sector is suffering. However, things are anticipated to be better next year, with the US Gulf of Mexico (GoM) in particular, having a surprisingly bright future. The area is expected to have as many orders next year as there were globally in 2015 and this positive upturn has already started with the Appomattox Floating Production Semi-Submersible (FPSS) being awarded in Q3, the most expensive unit ordered all year.

A few years ago this would have been unthinkable, with interest in the deepwater GoM waning as numerous companies gave up their offshore acreage to focus on the shale market onshore. Yet the declining oil price has, if anything, bolstered interest in the region. An employee of a major engineering company recently told Douglas-Westwood (DW) of their surprise at how many tenders they were invited for in the GoM.

This demonstrates the fact that the US GoM is an attractive investment area at a time of low oil prices, with field development approvals despite the low oil price. This highlights the appeal to operators of a well-established, politically stable investment climate and until the oil price improves, most frontier areas are likely to be ignored.

A crucial point found in DW’s new World Floating Production Market Forecast 2015-2019, Q4 update, however, was that units ordered next year will be significantly cheaper than those ordered before the downturn. For the US, cheaper developments were already the norm due to smaller reserves, leading to a preference for ‘mini-FPS’ developments. The downturn has seen even these costs slashed with the Mad Dog Phase 2 development that was uneconomical at $110 a barrel being ready for a final investment decision next year, after numerous front end engineering design revisions, despite the bleak oil price forecast.

Regardless, any upturn after a dismal 2015 will be greeted gratefully from the array of shipyards and suppliers who are hurting badly in the current environment.

Marathon Oil Corporation (NYSE: MRO) announces that the Company has signed an agreement for the sale of its operated producing properties in the greater Ewing Bank area and non-operated producing interests in the Petronius and Neptune fields in the Gulf of Mexico for $205 million. The buyer will assume all future abandonment obligations for the acquired assets. These assets represent a majority of the Company's operated and non-operated producing properties in the Gulf of Mexico. The effective date of the transaction is Jan. 1, 2015. Closing is expected before year end.

Marathon Oil will retain its interests in certain other producing assets and acreage in the Gulf of Mexico, as well as its interests in the Gunflint development and Shenandoah discovery.

Marathon Oil Corporation is a global exploration and production company. Based in Houston, Texas, the Company had net proved reserves at the end of 2014 of 2.2 billion barrels of oil equivalent in North America, Europe and Africa. For more information, please visit the website here.

NYC-based PIRA Energy Group believes that Brent crude prices continue to struggle and will remain weak in 1Q16. In the U.S., a surprising U.S. crude stock build leaves overall inventories flat. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices continue to struggle and will remain weak in 1Q16 with Iran’s return, refinery maintenance, and an ongoing stock overhang of nearly 500 million barrels above normal levels. Demand growth and slowly declining non-OPEC crude production will stabilize stocks in 2016 but not substantively reduce them until 2017. Gasoline cracks will stay unusually firm for the winter due to relatively tight inventory coverage which will persist into next year. That will underpin a strong 2016 gasoline season. Naphtha cracks will tag along for the ride at least in the first quarter. For middle distillates, stocks are very high and will stay well above average next year, capping distillate cracks.

Late Month NYMEX Rally “Rescues” Henry Hub Cash Prices

Notwithstanding the holiday-impaired liquidity in the futures and cash markets, the long-awaited arrival of more seasonable weather that also impaired production, prompted an outsized ~70¢ rebound in the NYMEX nearby futures contract that resulted in a HH Bidweek price of ~$2.37. Amidst the two-way volatility affecting Henry Hub (HH) this month, basis differentials were often distorted, especially out West where weather conditions happened to also be relatively cold in contrast to the rest of the county.

Western Grid Market Forecast

Despite a strong finish tied to cold weather and soaring gas prices late in the month, December spot on-peak energy prices are expected to average flat to slightly below November levels. Eastern U.S. weather was much warmer than normal and with gas storage already at high levels, gas prices plunged below $2/MMBtu. In the Northwest, the return to a more typical seasonal runoff pattern is expected to support heat rates in the mid-high 9,000s during Jan/Feb. Southwest heat rates have been revised down in response to somewhat improved California runoff prospects, the likelihood of incremental energy from the Northwest and weak December results. A tightening gas market during 2H16 and 2017 combined with higher renewable generation associated with tax credit extensions will maintain downward pressure on heat rates through 2017.

2016 Offers Little Hope of a Recovery in Coal Pricing

Coal prices remained on a downward trajectory this month, with weaker oil prices and a stronger U.S. dollar pushing the curve lower. While there have been some signs that fundamentals are recalibrating (weaker Russian exports, promises of supply cuts in Australia, and the reduction of the import tariff in China), PIRA continues to assert that there is limited upside for pricing over the next year. Substantially milder than normal weather in Europe and continued year-on-year declines in imports from China and India will weigh on balances and pricing over the short-term.

Tighter PJM REC Markets Now, But More Supply after 2018

The slowdown of growth in qualified renewable capacity and generation together with rising requirements will support PJM RECs in the near to midterm. The extension of the PTC/ITC boosts incentives for new renewable build, which along with major transmission projects will flood the market with supply, driving down REC prices after 2018. Post- 2020 carbon policies will offer additional incentives, so REC price support would need to come from tighter RPS policy requirements.

U.S. Ethanol-blended Gasoline Manufacture Soared to a Two-month High

The week ending December 25, ethanol inventories declined for only the second time in nine weeks. Ethanol output rose 19 MB/D from the prior week to 992 MB/D.

New Year, Same Story

Ags are suffering from a bit of a New Year’s hangover with HRW making new contract lows overnight, despite the flooding and unfavorable Midwest weather of late, while SRW sits within 5 cents of its contract low, March corn within just a few cents, and soybeans tread water.

Global Equities

Global equities were modestly lower on the week. In the U.S., the best performers were consumer discretionary and utilities. Energy and materials were the laggards. Internationally, only Japan moved higher on the week, with EEM, China, and BRICs all underperforming. For 2015, the global market fell 3.8%, with Asia outperforming, and down only 1%. Europe was near the global average, down 3.9%, while the Americas were down 5% and weighted down by poor performance in Brazil, Canada, Mexico, and Argentina. The U.S. market eased only 1.8%.

Surprising U.S. Crude Stock Build Leaves Overall Inventories Flat

With a rebound in crude imports and domestic crude supplied, crude stocks posted an unexpected build, and finished the last full week of the year about 102 million barrels higher than last year. The three light product stocks built, while the rest of the product barrel had a large draw, keeping the overall commercial stock profile flat. The impact of the Christmas and New Year’s holiday period should be felt primarily in data for the week ending January 1, with weaker gasoline and distillate demand. Crude runs moved up this week, and we expect them to move up again for the week of January 1, but then begin to fall, as refinery maintenance picks up during January.

Japan EG Losses Set to Accelerate on Eve of New Australia/ US Contracts

The imminent restart of two large scale nuclear reactors at Japan’s Kansai Takahama facility sends further shivers through Asian LNG markets and will serve to weaken the current spot price floor, which already is at 18 month lows.

Hydro Shortfall Limits Winter Downside

German exports surged to a new maximum of 9.3 GWs on average during December. We expect German exports to stay strong toward the Alpine region for the balance of the winter, given the sizable hydro deficit. France remains more exposed to bearish gas prices, but hydro/weather risks could still be countering this bearish impact – at least for 1Q 2016. We expect a further narrowing of the France-Germany spreads in 2Q and 3Q 2016.

Slight Ease on Financial Stress

On the holiday shortened week, financial stresses appear to have eased a bit. The S&P 500 closed higher on a weekly average basis, while high yield debt (HYG) and emerging market debt (EMB) indices also improved slightly. However, the S&P 500 was fractionally lower for the year. Total commodities posted another modest gain for the week and non-energy now appears rather flat for the past several weeks. The U.S. dollar looks mixed, and the U.S. 2-year yield continues to trend higher as the markets digest the higher Fed target interest rates.

U.S. Ethanol Prices Followed a “V-Shape” Pattern

U.S. ethanol prices fall early during the week ending December 25 before rebounding. Manufacturing margins worsened as average product prices declined more than corn costs.

E-Commerce Impact on U.S. Gasoline and On-Highway Diesel Demand

E-Commerce has been gaining market share from brick and mortar stores. We present evidence that as these on-line retailers grow and set up distribution centers closer to their end users, short haul truck distances traveled to deliver their clients' merchandise decline. The logistical efficiencies achieved may reach as far as long haul traffic with the combined effect implying reduced diesel consumption over earlier retail practices. By contrast, gasoline demand appears to be unaffected by E-Commerce.

Gas Flash Weekly

Thursday’s EIA reported 58 BCF storage draw was slightly on the lower end of an exceptionally wide outlook ranging from the high-teens to high-70s BCF. Yet, this week’s draw was strong in comparison to the prior-week and year-ago draws. The response of the newly minted February contract was initially muted following a pre-release rally, which had raised the price to ~$2.31 from yesterday’s $2.21 settlement. As forecasts for cooler weather persisted, the nearby contract settled at ~$2.34/MMBtu. This Gas Flash Weekly includes an update to our 2016 full-year price forecast.

U.S. October 2015 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly October 2015 (PSM) U.S. oil supply/demand data today. October 2015 demand came in at 19.35 MMB/D, which is 134 MB/D higher than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 284 MB/D. Even so, all of the major products were revised higher, while “other” was lowered. October 2015 versus October 2014 (PSA) demand declined 341 MB/D, or 1.7%. Kero-jet was the strongest performer, +7.1% (+105 MB/D) versus year-ago. Gasoline also outperformed the barrel average by gaining 102 MB/D, or 1.1%, but distillate was down over 6%. Compared to the weekly preliminary data, DOE raised commercial stocks 11.1 MMBbls, with products being raised 7.9 MMBbls.

Upward Revisions to Oklahoma Production and Record Crude Stocks in October PSM

The crude balances in the October 2015 PSM had upward revisions to Oklahoma production even as current production trends downward. October 2015 monthly crude stocks set a new record high.

Seven Issues Driving European Gas Fundamentals in 2016

Seven key issues will drive European gas fundamentals in 2016. At the top of the list will be coal-gas switching economics, along with the evolving role of European gas storage as a global force for balancing. Critical decisions made by Russian gas exporters will have the potential to impact gas prices from the Utica Basin to Tokyo Bay. The direct interaction between Russia pipeline gas and U.S. LNG in Europe will be met by a market that will struggle to grow beyond a correction for weather and the initial stages of recovery for gas use in the power sector.

Saudi Arabia Raises Domestic Fuel Prices

Saudi Arabia has just enacted an increase in domestic fuel prices, which will cover gasoline, diesel, and kerosene, potentially along with other fuels. Even with the increase, Saudi will still have among the lowest domestic fuel prices in the world. Heavy state subsidies in a time of falling oil revenues have put an increased burden on its fiscal balances. According to the IMF, the Saudi government net fiscal balance has gone from a surplus of 5.8% of GDP in 2013 to a 21.6% deficit of GDP in 2015. The Saudi currency has been pegged against the dollar since 1987 at 3.75 SAR/USD. Recent appreciation on a trade-weighted basis might argue for a devaluation versus the peg, but the negative implications would be significant, and as a policy option, appropriately rejected.

Saudi Arabia Increase Methane and Ethane Prices

On Monday, officials said the government ran a record deficit of nearly 367 billion Saudi riyals ($98 billion) this year, or about 15% of gross domestic product, as low oil prices depressed revenue, pushing it to cut planned spending by 14% in 2016 amid expectations that income from oil sales will remain under pressure. Shortly after unveiling the budget for 2016, Saudi Arabia increased domestic fuel prices in a move that suggests that the government is willing to adopt some difficult measures as it deals with cheap oil. Gas prices for local power generation increased on Tuesday and ethane, the main feedstock for petrochemicals, rose more than 100%.

December Weather: The U.S., Europe and Japan Warm

December was 25% warmer than the 10-year normal for the three major OECD markets with a loss of 1203MB/D of oil-heat demand versus normal. The markets were 28% warmer on a 30-year-normal basis.

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 Brent crude prices will continue to struggle due to a large global commercial oil stock surplus. In the U.S., the commercial stock surplus increased. In Japan, crude runs resume rising and product demands improve. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices will continue to struggle due to a large global commercial oil stock surplus which PIRA estimates will total 500 million barrels above normal levels by end 2015. Oil markets are likely to run out of onshore crude storage in 1Q16. Brent will perform better than WTI over the very short term. Gasoline cracks will stay reasonably firm this winter due to relatively tight inventory coverage which will underpin a strong 2016 gasoline season. For middle distillates, stocks are very high and will stay well above average next year, capping distillate cracks. Europe has effectively assumed a larger role as swing regional refiner supplying gasoline to the Atlantic Basin as required but limited by oversupply and softer pricing for middle distillates.

Nearly All Prices Struggling Under Weight of High Storage, Especially Henry Hub (HH)

The debut of Jan-2016 futures as the NYMEX nearby contract was greeted with a wave of selling that resulted in new contract lows, albeit amidst light volume. Even so, it is still nearly 10% above cash Henry Hub (HH) prices, as well as many all other regional prices that are also near the $2 mark. More material heating loads would help HH cash reconnect with the NYMEX contract, but the benchmark may continue to exhibit weakness relative to other markers to promote gas burn that would absorbs residual supply surpluses in the region abetted by bloated South Central storage. While the MW was at the heart of the regional flow changes that unfolded this month, the South has been impacted as well — directly and indirectly. And more changes loom.

Western Grid Market Forecast

Spot energy prices fell at all hubs in November with on-peak price declines from October ranging from ~$3/MWh at Mid-Columbia to ~$4/MWh at Palo Verde and NP15 and $5/MWh at SP15. Off-peak markets saw smaller price declines with the largest drop about $2 at Mid-Columbia. Weaker gas prices and a sharp seasonal decline in the call on gas-fired generation were the major factors. In the Northwest, near term forecasts indicate above normal temperatures which will limit seasonal increases in heating loads and may lead to stronger runoff (i.e., rain vs. snow). As a result we have revised down near term heat rate projections. In the Southwest, the call on gas through the winter months is expected to increase year-on-year due to lower net imports from the Northwest and some gains from coal. Heat rate projections remain up year-on-year (by ~10%), but we have revised them down relative to last month.

Asian LPG Prices Roll Over Despite Higher CPs

Cash LPG prices cratered in Asia as the trading window transitioned to January arrivals. Propane cargoes were called an astonishing $66/MT lower at $457/MT while butane was felled by $61 to $481/MT. Such was the response to a hard to understand increase in Saudi contract prices, which were increased by $65 (to $460/MT) for propane cargoes loading in December. With spot VLGC tanker freight from the Middle East gulf to Japan around $70 currently, and the Asian propane premium to CP’s negative, contract holders can’t be too happy about these latest developments.

California Carbon: Reserve Price Guiding Prices

CA set the minimum auction reserve price for 2016, which was also the level at which the Nov. auction cleared. With 13 MT of offsets used for compliance, an allowance bank after CP1 of 50 MT will likely double after 2015 year results. The role of the cap and trade price signal post-2020 will depend on the Scoping Plan update and cost containment is a key issue. Linkage potential has been prominently discussed, with plans for Ontario coming into focus, and with WA state, Manitoba, and Northeastern U.S. states on the horizon.

OPEC Breakevens Flat at $100/Bbl in 2016, But Still No Impact On Oil Price

PIRA estimates OPEC budgetary breakeven prices will remain flat to slightly down at $100/Bbl in 2016. Breakevens are down $10/Bbl from 2014 levels, mostly due to currency depreciation and government spending cuts. Many OPEC countries still face significant budget deficits. Yet the widening gap to Brent oil prices (PIRA forecasts $49/Bbl in 2016) highlights the limitations of budgetary breakeven analysis in general. Breakevens provide interesting insight into countries’ budgetary pressures. However, we have long argued that breakevens are not a useful predictor of oil prices, or a price level (or floor) that OPEC will support. Countries are more likely to adjust to the reality of low oil prices by cutting spending or drawing on reserves, just as we’ve seen over the past year.

Biofuels Weekly Update

U.S. ethanol prices rose Monday and Tuesday November 23 and 24 boosted by higher corn and petroleum values. Assessments then declined before the Thanksgiving holiday, pressured by record production that led to the highest inventory in 16 weeks.

U.S. Job Growth Is Solid; the Euro Is Stronger After ECB Easing

U.S. job growth in November exceeded market expectations, though details were somewhat mixed. Latest data on the good-producing sector (the ISM index and exports) were disappointing, though the current U.S. industrial slump is not yet particularly severe from a historical perspective. The European Central Bank expanded its quantitative easing programs, yet the value of the euro area currency strengthened – apparently, some speculative financial positions for a weaker euro had to be unwound quickly after the action fell short of expectations. India’s economic growth was faster than China’s during the third quarter. Brazil’s recession deepened.

North American Midcontinent Oil Forecast

Crude stocks rose in November in Cushing, as well as in West Texas and Western Canada. Differentials vs. WTI were stronger for northern grades from Alberta to Clearbrook, in advance of two new pipeline start-ups. Differentials weakened in Midland and Guernsey – two locations where prices had been well above pipeline parity for several months.

Will Switching Economic Be Broad Enough to Offset Weather-Related Losses?

Coal-to-gas switching will remain the hot topic in Europe, as temperatures continue to cool. The problem for sellers is that temperatures are not cooling fast enough, so what is being gained in terms of demand growth from the power sector is being handed right back in terms of losses in the R/C sector. The dynamic is well under way in the U.K. and continues to spread to other markets. November was even warmer than normal than the previous year and the 10-day outlook is serving up more of the same in the early part of the month.

Exports to Southern Markets Underpin French Prices

While weather conditions have been milder than normal over the Continent, pockets of price strength have emerged. In France, nuclear output is now recovering, but stronger flows toward Switzerland and the Southern markets, in part due to drier weather and lower plant availabilities, are preventing French prices from moving lower.

Are RGGI Allowances Like “Forever Stamps”?

The December RGGI auction exceeded secondary market pricing on the day of the auction, with bullish implications for the market. Price increases are not tied to current program balances - PIRA projects RGGI to be oversupplied through 2020. Rather, they are tied to this year's Program Review to result in stricter post-2020 caps. RGGI representatives confirmed at the November Stakeholder Meeting that currently-traded RGGI allowances will carry forward at full value – potentially more similar to U.S. Post Office "forever stamps."

U.S. Commercial Stock Surplus Increases

Another overall U.S. inventory increase this past week pushed the stock surplus to last year up by 3 million barrels. The crude stock surplus hit a new 2015 high as inventories quickly approach last April’s all-time weekly high. The gasoline inventory surplus narrowed to just 8 million barrels (4%), as it remains the one standout in a rather glutted market.

Production Lags, Export Opportunities Narrow

Canadian dry gas production declined sequentially in 3Q15, a likely sign of things to come. The quarter-on-quarter loss was symptomatic of a shrinking export market, as gas from Appalachia displaces traditional TransCanada (TCPL) markets in eastern Canada and the northeastern U.S. These conditions are exacerbated as storage in eastern Canada is near capacity, leaving less appetite for new gas from Alberta or B.C. Consequently, production in Canada is expected to decline through 4Q15 and into next year.

Japanese Crude Runs Resume Rising, Product Demands Improve

Japanese crude runs rose in broad agreement with our turnaround schedules. Crude imports increased from very low levels, but crude stocks still posted a modest draw. Finished product stocks declined with all the products other than kerosene posting draws. Refining margins remain strong with gasoline, naphtha, and fuel oil cracks posting gains.

Chennai Refinery Flooded

Flooding has closed the Indian Oil Corporation’s Chennai refinery in southeast India. It is too early to determine the duration of the outage. Production lost is roughly 50 MB/D of naphtha/gasoline and 120 MB/D of middle distillates. However, with the new Paradip refinery (300 MB/D) now in the process of starting up, its production should cover some of the Chennai shortfall, particularly if it were to last into 2016.

What Will Paris Talks Mean for Gas Demand?

In the near term, Chinese gas growth has slowed significantly and LNG imports remain down YTD by around 3% or 2-mmcm/d. It’s not a large amount, but does help explain many of the supply tenders popping up around Asia for 2016. Since so much LNG demand growth hinges on new supply dedicated to the Chinese market, this lack of buying does not bode well for sellers. China, being the largest producers of solar panels in the world, also undermines the use of gas as a power generation fuel in the future, as the largest incremental buyer of LNG in the world is also trying to solve environmental problems at multiple levels. Gas will play a role in solving these issues, but it has moved from a starring role to being more of a supporting cast member.

Aramco Pricing Adjustments for January – Europe Tightened, Asia and U.S. More Generous

Saudi Arabia's formula prices for January were just released. The adjustments made to differentials against their key regional benchmarks suggests Saudi Arabia is striving to maintain volumes and liftings. European pricing was tightened, but terms for Asia and the U.S. were generally made more generous.

More Bearish Momentum

Weather is proving to be the prime driver in fundamentals as the market waited past the traditional start of the heating season for the first reported weekly withdrawal. Now, the latest mild turn in forecasts has rocked the prompt contract, bringing it to new lows. In line with these recent forecasts, PIRA has adjusted its GWHDD assumption for December to 12% milder than the 10-year normal.

EPA Finalizes Renewable Fuel Standards Through 2016

After long delay and under court order, the EPA on November 30th issued a regulatory announcement finalizing the overall renewable fuel requirements for 2014, 2015 and 2016 as well as the 2017 mandate for biomass-based diesel (BBD). Those looking for the EPA to match its earlier May 15th proposal, were disappointed. The mandates are significantly higher than proposed in May.

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 oil sands and other high cost developments will be required to balance the market. In the U.S., the total commercial stock surplus widened to the largest of the year. In Japan, crude runs began rising and the stock bulge corrected back downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Longer-Term Oil Price Outlook Marked Down vs. August

We have brought the post-2020 price outlook down and are now limiting the upside. We still believe that oil sands and other high cost developments will be required to balance the market. However, price responsive US and global shale should limit the upside central tendency.

Growing Concern over Medium Term Downside Price Risk

We have not changed our longer-term Reference case for US natural gas prices vs. August. However, we have boosted the probability of the low case to reflect both demand side concerns and the potential for lower supply cost. If cost reductions in Haynesville are widely confirmed, we will reconsider the Reference case outlook.

As Gas Is Being Repriced along the Curve, European Power Is at a Turning Point

With spot and forward gas prices continuing to look for a bottom, European power appears to be moving toward a new dispatching equilibrium. While the recent years have seen plummeting spark spreads and large losses in gas-fired generation, the current fuel pricing dynamics suggest that gas will be moving back into the stack, displacing more efficient coal units. In other words, we expect a structural recovery in the spark spreads both in the U.K and the Continent.

European Carbon: Stronger Fundamentals Needed to Maintain Price Gains

Eastern European countries have started their 2015 power sector free allocations. Looking ahead, EUA auction volumes/supply will increase from 2016-2018 with the easing of backloading. Longer term emissions growth is expected to be weak, especially with the announced German lignite plan. Implied carbon prices from fuel switching have been moving strongly lower as well. Substantial Phase IV ETS reform discussions are not expected until next year.

Coal Pricing falls again Amid Wider Energy Market Weakness

Seaborne coal pricing faded yet again last week, with weaker oil and gas prices driving the market lower. API#2 (Northwest Europe) prices lost the most amount of ground as heavy European imports of LNG drove NBP gas prices down considerably from the prior week. With a lack of support from the oil market, and persistently weak coal fundamentals, it is difficult to envision a scenario where coal prices rise appreciably over the balance of the year, and into 2016. However, PIRA’s expectation of a rebound in 2H16 oil prices should give coal prices some uplift, if only from higher production cuts and technical trading factors.

Weaker Asian LPG Markets Search For Direction

Asian LPG prices were pulled lower with Crude oil last week. Cash and futures propane prices continue to look disconnected with physical cargoes arriving in December called near $465 while futures for the same month traded $30 lower. The front futures spread is now steeply backwardated at +$40/MT – the most since the end of last winter, indicating weaker demand lies behind the prompt needs. Butane prices were crushed more than 10% lower to be called near $475, just $10 above cash propane.

Ethanol Prices Tumble

U.S. ethanol prices plummeted the week ending November 6, as demand for ethanol-blended gasoline decreased the prior week, while plant output and inventories increased. Margins only dropped slightly as corn prices also fell.

New Data on Chinese Growth, Emerging Market Industrial Output, and European GDP

October Chinese data showed different sectors continuing to expand at different paces. Data on manufacturing remained disappointing, but vehicle sales experienced a major upturn as the government’s latest stimulus program kicked in. Emerging market industrial production data improved broadly in recent months, though there were some exceptions (most notably, Brazil). A modest pace of GDP growth continued in Europe during the third quarter.

Lows Not Safe

The November WASDE has made it even more difficult to be constructive across the board. While new lows were made this week in major contracts with the exception of SRW, those lows are very vulnerable in our opinion.

U.S. Stock Surplus Widens

The total commercial stock build for the week of November 6, compared to a draw last year, widened the total commercial stock surplus to the largest of the year. Crude stocks built in spite of crude runs increasing sharply, and we expect crude runs to continue to increase as refinery turnarounds rapidly decline in the next few weeks. Overall export-adjusted and HDD-normalized product demand growth has been struggling of late, down 1.1% over the most recent four weeks. Year-to-date adjusted product demand is up 0.46 MMB/D, or 2.5%. The most recent employment news is positive, even as the industrial sector lags.

Tighter Balances, But Still Anxious for More Seasonal Heating Loads

With November at nearly the halfway point, the market is being driven not only by weather that is on track to average ~15% milder than the 10-year normal, but also by a supply trajectory that for now appears aware of the market’s limitations with 4.0 TCF in stocks and its heavy reliance on price-induced gains from coal-to-gas substitution.

Eastern Grid/ERCOT Market Forecast: November 2015

On-peak prices fell month-on-month in most markets as cooling loads and gas prices both faded. Price increases were observed only in New England (the only market to see stronger gas prices) and at MISO's TX hub. Despite a strong October employment report suggesting a healthy economy, weather-adjusted loads declined across the East. Unadjusted loads fell by 2.8 aGW from the prior year. Gas prices have been revised down with larger adjustments at the front end of the forward curve, particularly in the Northeast markets. As a result, power price forecasts have also been reduced with the exception of the Ontario market (up about $2/MWh). Implied heat rate projections are mostly higher than in last month's report.

Ethanol Values Decrease Again

U.S. ethanol prices followed corn futures lower. In its World Agricultural Supply and Demand Estimate the USDA projected higher corn production and lower consumption, a bearish signal.

Nervous Markets

While the world rightfully focused on the horrific Paris attacks over the weekend, traders wondered what it would mean to U.S. equity markets, oil prices, and the dollar. Grain traders spent the weekend lamenting what Friday’s new low closes for corn and soybeans would mean come Sunday night.

Japanese Runs Begin Rising, Crude Stock Bulge Corrects Back Downward

Crude runs increased as turnarounds wind down. Crude imports moved sharply lower allowing crude stocks to correct back downward after the large build seen the previous week. Finished product stocks drew again due to declines in naphtha and kerosene stocks. Gasoline and gasoil stocks changed only slightly. Margins remain good and strengthened on the week due to higher cracks for middle distillates and naphtha.

It Will Take Time For U.S. Shale Oil Activity To Pick Up Once Crude Prices Recover

Massive industry layoffs and the reduction in inventory of working drilling rigs will contribute to a slow recovery in activity once oil prices start to rebound in 2016. Several sources estimate that the industry has so far lost around 200,000 jobs worldwide and many drilling rigs have been scrapped. In addition, banks and operators will want to see improved prices for a sustained period of time (i.e. several months) before increasing lending and drilling activity respectively. The high activity levels experienced in 2014, when WTI was close to $100/Bbl, will probably not be seen for many years.

Record Norwegian Exports for November Hint at Aggressive Defense against LNG

But this is not just a story of the traditional pas de deux between spot and oil-indexed gas prices, as plenty of fundamental evidence for weakness is also in plain sight. Let’s start on the supply side with Norwegian gas exports, which are not just well above normal for November; they are approaching an all-time high for any month on record. Why Norway would be exporting record amounts of gas when we are experiencing a year-on-year decrease in weather-based demand is a root issue here.

European Oil Demand Growth Finally Turns Positive in 2015

After a decade of negative oil demand growth, demand turned higher this year. Demand growth was centered in Mediterranean Europe and got a significant boost from oil demand in Turkey. While lower oil prices were clearly helpful in boosting demand, economic growth is still too anemic to account for all the positive growth. Our demand model includes only the key drivers of oil demand like price and GDP; other unspecified factors are implicitly included in our forecast error. Evidence points to the positive role these unspecified, non-traditional factors played in oil demand growth this year.

Asian Stock Levels Lend Support to Winter Spot Price Run-Up

Storage availability for Asia’s key utility buyers has played a role in the recent uptick in imports, though it is nowhere near as big as current estimates of available capacity might suggest. PIRA estimates for end Sept. storage levels across Asia show storage levels between 55% to 70% of capacity for the top buyers.

Key Indicators, Commodities Fall

The S&P 500 moved lower for the week, having its worst week in three months. Most of the related indicators deteriorated (Russell 2000, volatility, and U.S. high yield credit, emerging market bond credit). Overall, commodities declined rather sharply, both energy and ex-energy. With regard to currencies, the U.S. dollar was again mostly stronger. U.S. government bond yields have continued to inch higher on short and longer term maturities as markets continue to contemplate the Fed raising short-term rates at their next meeting which will conclude December 16th.

U.S. Shale Oil Operators Point Towards Continued Declining Activity & Production

Capex spending has fallen dramatically through the course of 2015, resulting in a lower rig count, and for the first time quarter-on-quarter (Q/Q) production decline of shale oil in the U.S. In 3Q15, PIRA estimates that U.S. shale crude and condensate production declined by about 3.2% Q/Q to 4,200 MB/D. Shale operators that have reported guidance (about a third of total shale oil production) point to a further 3.8% Q/Q decline in 4Q15.

Iran and Iraq Come to Deal on Natural Gas

Iran has signed a new contract with Iraq to export natural gas to the country’s southern port city of Basra. Based on the contract, Iran will pipe 20-25-mmcm/d of gas to Basra for a period of six years. The supply – that will increase to 45-60-mmcm/d in a later stage – will be used to feed the main power plant of the city. Exports will start with an initial supply of 7-mmcm/d for three years and will then increase to the target volume.

Global Equities Decline Broadly

On the week most of the tracking indices lost ground, with some falling back sharply. In the U.S, only “utilities” managed a small gain. The worst performers were retail, consumer discretionary, and energy. Most of the international indices also posted losses with only the Japanese tracking index able to post a largely neutral performance.

November Weather: U.S., Europe and Japan Warm

At midmonth, November looks to be 14% warmer than normal on the 10-year-normal basis for the three major OECD markets. On a 30-year-normal basis the markets are 21% warmer. The November forecast takes into account first half actual weather and the current forecast for the rest of the month.



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.

Anadarko Petroleum Corporation (NYSE: APC) has announced the following statement from Chairman, President and CEO Al Walker:

"We constantly strive to make Anadarko a better company. As part of these efforts to enhance value, and after extensive analysis of public information, we recently sent Apache Corporation a non-binding offer to acquire the company. The proposed all-stock transaction, which included a modest premium, would have been highly accretive to Anadarko on a cash flow per-share basis, even before synergies. Further, based on public information and Apache's historic financial and operating underperformance, the proposed transaction offered shareholders of both companies numerous value-creation opportunities given Anadarko's demonstrated success at building value through operational excellence, proven capital allocation, and active portfolio management.

"Our efforts to enter into a mutually acceptable confidentiality agreement for the purpose of exploring the merits of a potential transaction were summarily rejected and no discussions of substance occurred. We are unwilling to pursue the transaction without access to detailed non-public information, and based on our analysis, which shows that Apache appears to trade at or near full value currently, the offer was withdrawn."

2015 was a tough year. Spending and headcounts have been slashed across the industry and the spectre of bankruptcy is an all too common concern. Recent trends in commodity prices have not helped. Late December saw Moody’s downgrade its price forecast for 2016 by 17% and a further dip in the price of oil – Brent falling to the lowest level since 2004. Producers have continued to produce and new Iranian output may result in even more oversupply. By all accounts, 2016 is shaping up to be just as challenging as 2015. Where does this uncertainty leave the industry and what lies ahead?

If prices remain low, one thing is clear – 2016 is lined up to be a year of consolidation. Cost savings are required to ensure future developments are economically viable. Project optimization and supply chain improvements will be key in reducing costs. However – at current prices – industry consolidation will play a large part in ensuring the cost-effective development of projects.

In all likelihood, 2016 will see the completion of two blockbuster E&P and OFS deals – with Shell and Halliburton acquiring BG and Baker respectively. Further M&A activity is expected – those with strong balance sheets are in line to benefit from a wealth of distressed assets. This is particularly clear in the drilling sector – since 2014’s drop, firms have relied on credit markets to keep rigs going. With prices below $40, this option will dry up, forcing a search for partners. 2016 looks to be a difficult year for all involved. Yet, for those well positioned, there is likely to be a plethora of opportunities.

In November, Energy Secretary Amber Rudd announced her vision for the energy system: to put consumers first, increase competition and secure electricity generation for the UK. In addition to a proposal to end unabated coal-fired power stations and prioritise gas-fired power stations, the Energy Secretary disclosed a commitment to offshore wind (OW) whereby the government will support the target of 10GW of capacity by 2020, if costs reduction conditions are met.

According to Rudd, the cost of contracts for OW have reduced by 20% over the last two years, but costs need to reduce further to secure government support. If the government’s conditions are met, there will be funding for three auctions by the end of 2016.

This is good news for companies involved in the OW supply chain who have already seen the benefits of increased activity in the sector in recent years. OW projects have been delivered on schedule and on budget: 3.7GW of capacity has been installed over the past five years, whilst costs have been reduced, resulting in a 38% reduction in government subsidy.

Given the current downturn in O&G activity, many companies are looking to diversity into the OW sector. Halfan Brustad, VP of Statoil recently noted that OW can learn from the O&G industry, and vice versa:

“Project management for OW farms can be learnt from O&G as well as marine & logistics"

“Renewables has a strong commercial mind set to specifications and materials choice which is key to keep low margins - we could take this back to oil and gas [during this period of cost-cutting]."

In addition to O&G companies moving into the OW supply chain, a number of start-ups are entering the OW sector. This has been evident to DW, who in addition to covering this sector via our Offshore Wind Market Forecast series, have recently provided bespoke consulting for new companies looking to take advantage of this growing sector. Given the announcement by the Energy and Climate Change secretary recently, the opportunities for investors wishing to cash-in on this rapidly growing sector are significant.

As the end of October saw upstream operators release disappointing Q3 results, with Shell in particular announcing record losses, a completely different picture is being painted in the downstream sector. A host of North American refiners, including Tesoro, Valero Energy, Phillips 66 and Marathon Petroleum have seen profits soar as the low oil price has improved margins; WTI cracking margins for Q3 2015 averaged $22.02 compared to $14.01 in 2014.

With refiners benefiting from high margins amidst the oil price decline, the impact on those companies providing maintenance services to the sector is rather more complex. On one side, higher margins are increasing utilisation – Tesero reports that during Q3 their plants were running at 101% of their officially stated capacity – intensifying the level of maintenance required to prevent downtime. Conversely, refiners will seek opportunities to delay large turnaround programs in order to take advantage of the high margins.

This has been apparent as a number of refineries announced delays in their maintenance schedule, with some refiners, such as Cepsa, postponing to January 2016. However, the extent to which refiners are able to delay plans is limited due to both the project lead times, which can be up to 16 months in advance, and the vital nature of maintenance work, particularly when plants are run at an elevated capacity. North America has already seen a series of refinery shutdowns resulting from over utilisation, including the large BP Whiting plant and an explosion at Exxon Mobil’s Torrance refinery, highlighting the importance of routine maintenance work.

Whilst the effects on the downstream maintenance industry are somewhat complex, it is clear that the sector is currently an attractive industry for investment. Despite the prospect of some delays in maintenance work, Douglas-Westwood’s “World Downstream Asset Maintenance Market Forecast 2015-2019” expects the market to remain strong, growing at a 4.8% CAGR between 2015 and 2020. As maintenance remains particularly vital to the smooth running of plants during this period of above average utilisation, the sector is likely to remain relatively sheltered from the industry downturn and struggle that upstream has borne.

NYC-based PIRA Energy Group reports that October crude prices traded within a narrow range. In the U.S., total commercial stocks drew again this week. In Japan, crude runs eased again while crude imports and stocks surged. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

October crude prices traded within a narrow range, with bullish sentiment related to declining domestic production offset by a bearish 20+ million barrel U.S. crude stock build associated with seasonal refinery maintenance. The majority of that stock build occurred in PADD III, resulting in weaker crude differentials in both West Texas and the Gulf Coast, relative to Cushing, where crude stocks were unchanged. Meanwhile, Bakken and Canadian light grades strengthened on the imminent start-up of two new northern pipelines.

Upside Production Surprise Before Abrupt Ongoing Downturn

Last Thursday's storage injection brings total inventories to 3,929 BCF assuring a new end-October record high. Updated balances now point to a 3.98-4.00 TCF weekly peak for the season with a daily foray above 4.0 TCF still in the cards. The inability to post an even higher peak underscores the extent to which supply and demand responses were needed to limit builds given feasible storage limits, namely within the Producing Region (PR), where stocks are projected to peak a bit above 1.4 TCF by mid-November. Such a level would be ~94% of demonstrated capacity — a figure that also highlights the need of incremental demand and the additional pullback in production of late needed to keep storage in check.

As Marginal Costs for Coal Units Hold Up, German Power Sets to Remain Firm

This week will see wind output rise well above normal levels, bringing German day-ahead prices down with them. There are, however, some structural factors that will continue to underpin German prices. While EUAs remain at multi-year highs, marginal costs for coal units are also relatively stronger than anticipated. In fact, critically low water levels in key stations along the Rhine River imply higher delivery costs by at least 0.8 to 2 euro/MWh. Power generators have announced possible disruptions, especially as water levels are moving further lower.

Brief Bullish Run Tamped Down, Market Returns to Downward Trajectory

The modest coal rally that occurred in late October into early November came to an end last week, with the entirety of the three major forward curves falling compared to the end of the previous week. FOB Newcastle (Australia) generally lost the most ground, while API#2 (Northwest Europe) and API#4 (South Africa) also fell, but to a lesser extent. API#5 prices (higher ash, lower cv FOB Newcastle coal) fell sharply to a new low for the year. This is a reflection of how weak buying activity, particularly from China, is in the current market. With underlying Chinese coal demand and thermal coal imports continuing to contract year-on-year, it will be very difficult for prices to structurally rise.

Interest in California Offsets Prior to Compliance

PIRA expects a continued slow escalation in carbon price — with upward pressure from the increasing reserve price will be muted somewhat by bearish emissions data, weak inflation figures (impacting reserve price), and compliance offset usage. November has seen the milestone Compliance Period 1 surrender and will see the final auction of 2015. Interest in offsets drove prices higher and narrowed the spread vs. allowances.

European LPG Prices Mixed

Large cargo butane import prices were crushed 9% lower to be called below $360/MT, as low Rhine River levels are stifling barge traffic to Germany. Although higher prices persist up the river, halted barge traffic has disconnected inland markets and the Amsterdam/Rotterdam/Antwerp cargo market. Propane prices gained $11/MT to $367/MT for December futures — a level that has the arbitrage from the United States wide open.

Ethanol Prices Higher

U.S. ethanol prices increased the week ending October 30. Assessments were supported by higher gasoline and corn values.

Dollar Pressure

With commodity indices struggling to maintain multi-year lows, and farmers extremely undersold on 2015 production, it’s hard to find much to be bullish about.

Strong U.S. Labor Market Report Significantly Raises Odds of December Fed Tightening

Last week’s better-than-expected U.S. data for October removed worries about the economy’s momentum. They also suggested that the country’s labor market is increasingly running out of slack. There were signs of faster wage growth, but they remained tentative. The relationship between unemployment and wage inflation is likely to be a key concern for U.S. policymakers going forward. Asian manufacturing confidence data for October showed encouraging improvements.

U.S. Commercial Stocks Draw Again

Total commercial stocks drew this week, the second draw in a row. A drop in crude and product imports seems to be the primary driver. Total commercial stocks are down 6.0 million barrels from the all-time high. With larger draws the same few weeks last year, the commercial stock excess. Crude stocks built and the surplus widened to the highest of the year. With crude runs still low due to maintenance, this is not an unexpected outcome.

U.K. Gas Enters the Switching Band with Coal, but Effect Limited at this Point

The slide in NBP prices is leading gas to a more competitive position relative to coal. At current market prices, PIRA will be upgrading the utilization of U.K. gas-fired generation by roughly 1 GW through the end of the year and about 2 GWs in 1Q 2016.

U.S. Coal Market Forecast

Warm weather (actual and balance of month) is depressing natural gas prices and inflating coal stock levels, stirring memories of 2012. The downside price risks for gas and coal, which we warned about the past few months, have already arrived. More supply-side destruction in fossil fuel markets is expected.

WCI Carbon Market to Carry Surplus Forward, 2015 With Record Expected Length

Newly released California and Quebec GHG emissions data, through 2014, contained few surprises. The Compliance Period 1 allowance surplus is at least 35 MT, not accounting for use of offsets. Should 2014 CA broad scope emissions levels persist for 2015, the surplus would be about 35 MT for that year alone. CCA prices were not affected by the release.

Key Ethanol Industry Indicators Reverse

The week ending October 30, U.S. ethanol and production and stocks rose and the manufacture of ethanol-blended gasoline fell.

Key Indicators Continue to Gain

The S&P 500 posted a fifth week of gains. Most of the related indicators improved again (Russell 2000, volatility, and U.S. high yield credit). Emerging market bond credit performance has been flat the last several weeks, while the U.S. indicators have continued to improve. Overall, commodities eased again, as did ex-energy. Oil was slightly higher. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro, yen, British pound, and key eastern European currencies. U.S. government bond yields have inched higher on short and longer-term maturities as markets continue to contemplate the Fed raising short-term rates at its next meeting, which will conclude December 16th.

Japanese Crude Runs Ease Again, Crude Imports and Crude Stocks Surge

Crude runs eased again and crude imports rose sharply from very low levels such that crude stocks ballooned 7.9 MMBbls. Finished product stocks posted a draw, though kerosene continued to build seasonally and there was a minor build in gasoline. Margins remain good and strengthened on the week due to higher cracks on all the major products.

Ukraine Receiving Gas Cheaper from Western Europe Despite Deal to Lower Russian Price

The price of natural gas (delivered to Ukraine) from the European Union under some contracts with national joint-stock company Naftogaz Ukrainy has fallen to the level that is lower than the price of Russia’s Gazprom, Business Development Director at Naftogaz Yuriy Vitrenko has stated. “Last week we’ve signed an agreement at the price lower than Gazprom’s [price]. This week we’ve also bought at a price lower than Gazprom’s [price],” he said.

CSAPR Emissions Below Cap — Awaiting New Regs

Emissions data for the Cross State Air Pollution Rule are complete through Q3 2015 (including the Ozone Season) and show significant year-on-year emissions decreases, with all programs set to finish 2015 at or below even tighter Phase II caps. The Seasonal NOx market awaits the new federal Transport Rule for 2008 Ozone NAAQS; it is unclear whether current allowances will be recognized. EPA must also address certain states’ budgets/caps, while a decision is soon expected from the D.C. Circuit on MATS.

Global Equities Gain on the Week

Global equities gained on the week. In the U.S., growth sectors led the complex higher. Banking and energy well outperformed and posted strong gains. Defensive sectors underperformed as evidenced by declines in consumer staples and utilities. Internationally, many of the tracking indices were higher, led by a strong gain for China.

Petrobras Oil Workers Strike — A Step Toward a More Politicized Movement

The Petrobras oil workers' strike has spread to producing fields in the Campos Basin, which account for 65% of Brazil’s crude oil output. Oil production losses on Monday and Tuesday averaged 226 MB/D and reportedly increased on Wednesday. The company is trying to reduce the damage to production by sending contingency teams to the affected platforms. The downstream impact of the strike is likely to be limited since, by law, refining operations must meet a minimum requirement in order to avoid serious disruptions of supply. Unlike most previous labor actions, which focused on wages and have ended with typically little impact, the unions this time are demanding a say in management business decisions. PIRA’s best guess is that the strike does not last more than two weeks. Production losses will mostly impact exports, but not initially because ample stocks can be drawn down, but inevitably they will be lower than they would have been because of the output losses.

Poor Showing in China LNG Will Remove Support for Asia Spot

The illusion of spot price support in Asia is bound to be short lived if only for a severe slowdown in China, which has subscribed to a large portion of the new regional LNG supplies on offer.

Aramco Pricing Adjustments for December: Europe More Generous, Asia Tightened

Saudi Arabia's formula prices for December were just released. The most significant change was more generous terms for European destinations, with Northwest Europe being cut more aggressively than the MED. U.S. pricing was lowered by a modest amount, while Asian pricing was raised. The adjustments, in a broad sense, were in line with what fundamental pricing drivers would have suggested.

Keystone XL Pipeline Rejected

On Friday, U.S. President Obama formally rejected TransCanada’s application to build an oil pipeline from Alberta to Steele City, Nebraska, where it would connect with the existing Keystone pipeline system, increasing its capacity by 830 MB/D. This was a political decision and the President made it clear that fighting climate change is a priority for his remaining 14 months in office. In the near term, this decision will not have much impact on Canadian price differentials. However, by the end of this decade, new capacity will be needed to avoid steeper discounts for Canadian grades.

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 oil prices have come under more downward pressure, as the global surplus looks likely to grow further through year-end. In the U.S., after a six-week run up, year-on-year U.S. inventory surplus had a significant decline. In Japan, crude runs continue to rise along with stronger demands. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

After Six-Week Run Up, Year-on-Year U.S. Inventory Surplus Has Significant Decline

Total U.S. commercial stocks, primarily crude, declined this week, narrowing the year-over-year surplus. Gasoline and jet stocks show a narrow surplus versus last year, although distillate still has a significant surplus. Total demand recovered to over 20.0 MMB/D this week, with strength is gasoline and jet, while distillate demand was very weak. PIRA (and others) were somewhat puzzled the change in sign of the crude balance item to -0.6 MMB/D, after averaging over 0.45 MMB/D for over 8 weeks. Since this balance item is a residual, all parts of the balance could have contributed to the move, but we suspect rebenchmarking to a new monthly final for December 4 data, along with some uncertainty in the timing of stocks versus import accounting, led to the big change.

LNG Price Drop Brings Out More Buyers

PIRA always likes to remind clients that even short- or medium-term changes in prices can have a long-term impact on both new contracts and decisions to build additional infrastructure. China aside, no place is this type of influence more on display than in the Mideast, which is offering the rare positive outlook for LNG demand amid domestic and regional gas shortages among countries looking to burn less oil, even at current prices.

Dry Weather and Looming Coal Retirements a Blessing for Gas-Fired Generation

PIRA remains optimistic about the recovery spark spreads. In Italy, the freshly updated official statistics suggest that extremely dry weather has contributed to drive the increases in day ahead prices over the past month, as hydro output is near a 10-year low. Going forward, Italian prices may also be impacted by the acute hydro shortfall in Switzerland, while Swiss nuclear output is still constrained.

Limited Bullish Catalysts for European Carbon

Warmer weather is suppressing short-term demand, but a short-term price rise (in thin markets) could follow the final 2015 auction, subsiding in January when auction volumes rise. Auction supply will be rising every year through 2018, and demand looks weak. We are not expecting any price reaction from the Paris talks. Long term implied CO2 prices are expected to be far lower for the rest of Phase III and Phase IV, limiting upward price potential for EUAs, absent further intervention.

Falling Oil Prices Push Coal Lower

Coal pricing once again experienced significant week-on-week declines, with 1Q16 API#4 and FOB Newcastle prices each sliding by $1.45/mt, while API#2 prices declined by just $0.70/mt after exhibiting the most downside in pricing over the previous several weeks. Plunging global oil prices and a sharp decline in China’s thermal coal imports were the impetus for the downturn in pricing this week. Potential for a rise in pricing is considerably limited with low oil prices and a lack of reaction by both supply and demand from the weakness in pricing.

U.S. LPG Prices Fall with Crude, Natural Gasoline Remains Stable

Mt Belvieu LPG prices fell in tandem with WTI last week, with January propane losing 10% week-on-week and butane falling 11% to 56.3¢/gal. Natural gasoline at the Gulf Coast market center held strong, decreasing by just 1.6%, having taken its cues from NYMEX RBOB which managed to gain fractionally in last week’s energy price carnage.

Better Data from Emerging Markets, but Challenges Remain

Chinese economic data releases for November were better-than-expected, though fragilities remained in key sectors (housing and exports). Most emerging economies reported third quarter GDP data by now, and they were constructive by and large. Looking to 2016, however, challenges remain. One issue is elevated private sector debt levels (especially in emerging Asia), and an increasing need to curb borrowing. There are also concerns about how emerging markets will actually react to the upcoming U.S. monetary tightening.

Inventories Drew After Building for Five Straight Weeks

The week ending December 4, U.S. ethanol production rebounded to 993 MB/D from a five-week low 956 MB/D during the preceding week. Inventories were drawn by 168 thousand barrels to 19.8 million barrels, breaking a streak of five consecutive weekly builds.

WASDE Offers Few Changes

PIRA doesn’t see the corn crop getting smaller in the all-important January report, so the obvious focus is on demand from here on out. This week’s reduction in exports was warranted, an increase in ethanol grind not so much.

Asia-Pacific Oil Market Forecast

Oil prices have come under more downward pressure, as the global surplus looks likely to grow further through year-end. Any substantial and sustained improvement will wait until Iran fully returns to oil markets and the global surplus, now pushing 500 MMBbls, shows signs of appreciably lessening.

3Q15 U.S. Gas Producer Survey: Appalachia Still Helping Keep Production Afloat

Despite extreme price weakness and steep related cuts in capital spending, the 51 companies included in PIRA’s Gas Producer Survey (“PIRA Group”) managed to realize moderate sequential and year-on-year U.S. gas production growth in 3Q15, in contrast to the Group’s marginal losses experienced in the prior quarter. Driven in large part by the continued ramp up of Appalachian production, total domestic production was up quarter-on-quarter by ~1 BCF/D and year-on-year by 4.3 BCF/D. Based on PIRA’s overall assessment, production gains outside of the survey (“non-group companies”) were again more substantial. Even so, PIRA Group companies reported a collective ~1.7 BCF/D year-on-year 3Q15 production increase; while less than prior quarters gains, an impressive feat considering the price environment.

Eastern Grid/ERCOT Market Forecast

A solid majority of eastern power markets saw m/m price declines in November as gas prices fell and loads remained weak. Gas prices were down in all markets with Henry Hub averaging below $2.10/MMBtu, the lowest monthly average since April 2012. On a year-on-year basis. Loads in the East fell by over 20 aGW as temperatures averaged above normal across the region. With gas prices down sharply, gas-fired generation rose by 20 aGW while coal dropped by over 30 aGW and oil also moved down. Looking ahead, gas prices have been revised down as continued mild weather may lead to a substantial storage overhang at the end of the heating season. Power prices are lower in all markets with the sharpest drops in New England and eastern NY winter prices.

EPA Regs in TX Pressuring Coal, Opportunity for Gas

EPA’s final Regional Haze Plan for Texas, did not change the costly requirements from last year’s proposal for new scrubbers and scrubber upgrades across 14 coal-fired units in a 3 to 5-year timeframe. The covered plant operating and retirement decisions can have major implications for reserve margins and natural gas demand. Litigation is inevitable, and PIRA believes the decision on the venue (which could come as early as 2Q16) could well determine whether the rule will ultimately be upheld.

Global Equities Broadly Lower

All our tracking indices lost ground on the week. In the U.S., utilities and consumer staples held up the best, but still declined. Banking and energy were the weakest performers. Internationally, all the tracking indices fared worse than the U.S. average. Emerging markets were the weakest, followed by China and emerging Asia.

D6 RIN Prices Come Back Down

U.S. ethanol prices were little changed the week ending December 4 as downside pressure from high ethanol inventories was balanced by soaring D6 RIN values, which are embedded in the assessments. D6 RIN assessments came down late in the week.

USDA Baseline Projections

Usually released during February in conjunction with its annual Outlook Forum, the USDA decided to release their so-called baseline projections for the next 10 years “early” this time around.

Japanese Crude Runs Continue to Rise, Along with Stronger Demands

Crude runs rose again in broad agreement with our turnaround schedules. Crude imports increased enough to provide for a small crude build. Finished product stocks also built slightly due to a large naphtha build more than offsetting declines in gasoline, gasoil and kerosene. There were strong demand gains in gasoil and kerosene which drove the resulting stock draws for those products. Refining margins remain strong, though cracks, other than naphtha, generally eased on the week.

Greek Gas Price Change to Impact Power Prices

An upcoming re-assessment in the price of Greek gas could depress power prices from Jan. by bringing down the cost of gas-fired generation below lignite-fired units, market participants said. Power producers in Greece buy gas from natural gas incumbent DEPA, with contracts indexed to Brent crude prices via an algorithm. DEPA carries out a readjustment every quarter.

Beyond the Capacity Auction, How the U.K. Mix is Changing

The second U.K. capacity auction – for delivery in 2019/20 – cleared at ₤18/KW versus ₤19.4/KW at last year’s auction. The outcome, once again, offers several implications for the U.K. energy mix, even in the shorter- and medium- term. While the future of several coal units is tied, in part, to the outcome of the auction, traditional combined cycle gas turbines (CCGTs) will now face additional competition from growing participation by distributed generation. A higher reliance on embedded generation adds a layer of risks – with the wholesale market most likely set to reflect those challenges down the road. Finally, the policy debate will continue to intensify on whether the introduction of the capacity market in the U.K. may effectively be beneficial for the system's reliability.

Financial Stress Grows

Financial stress grew substantially this past week. The S&P 500 fell sharply. All of the accompanying indicators also performed poorly, including Volatility (VIX), Russell 2000, high yield debt (HYG) and emerging market debt. The cautionary signal and underperformance that we noted last week with regard to high yield credit and emerging market debt proved prophetic this week. Commodities remain in a downtrend, though ex-energy has been rather flat as energy remains the strong drag to the overall complex.

Stock Surplus Widened in November

Commercial stocks in the three major OECD markets – United States, Europe and Japan – were close to flat in November, declining just 3 million barrels or 0.12% versus the prior month. So far in the fourth quarter stocks are down 4 million barrels, or 0.16%. This relatively flat stock profile compares with a typical decline over these two months. Also, the sharp increase in VLCC freight rates since September is clearly telling us there is more oil on the water. Thus, as expected, the global oil surplus continued to widen in November. By the end of the fourth quarter, PIRA is forecasting the global stock surplus will be 500 million barrels.

What will Drive the NBP–TTF spread for the Balance of Winter?

As we approach the midpoint of winter and the gas complex reaches new lows, it is easy to lose touch with the relationships among Europe’s multiple spot trading hubs. NBP and TTF remain the most important of these hubs, particularly now that the Dutch gas market’s role in the fundamental underpinning of the market is radically shifting. As absolute prices go down, spreads will narrow and when they do, implications will emerge on future flows and activity.

4Q15 Iraq Oil Monitor

The KRG stopped transferring crude to SOMO in Ceyhan, but ~600 MB/D of independent Kurdish exports continues to find its way to market. Meanwhile, a power struggle between Abadi and his political opponents persists, and the lack of reforms and fiscal stress are exacerbating tensions throughout the country. The fight against ISIS remains broadly stalemated. Ongoing Turkish military operations against the PKK in Syria, plus rising tensions between the PKK and KRG, are interrupting flows on the 650 MB/D export pipeline to Turkey. Southern operators are reviewing development plans after the oil ministry requested 2016 investment cuts at major fields. Strong November southern exports were supported by stocks accumulated in October (when bad weather limited exports) and the start of a fourth SPM.

Gas Flash Weekly

Despite Thursday’s bullish storage report, NYMEX price action underscores the market’s increasing concern over the intensity of the El Niño and the related potential for heating load shortfalls extending into next year. The evolving “super” El Niño clearly has increased the potential for unusually mild weather next quarter, but for the time being, PIRA’s Reference Case only assumes 5% fewer GWHDDs than the 10-year normal.

December Weather: The U.S., Europe and Japan Warm

At mid-month, December looks to be 21% warmer than the 10-year normal for the three major OECD markets, bringing the month oil-heat demand to 1030 MB/D below normal. On a 30-year-normal basis, the markets are 24% warmer.

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.

Click here for additional information on PIRA’s global energy commodity market research services.

NYC-based PIRA Energy Group believes that entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. In the U.S., the commercial stock surplus made a new high. In Japan, crude runs eased and stocks corrected downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

The global oil surplus grew in 4Q15. Entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. Strong demand growth in 2016 and declines in non-OPEC supply eliminate the imbalance but excess inventory remains.

Ukraine to Align Gas Royalties with Market Rates

The Ukrainian parliament has amended the Tax Code and changed the conditions of calculating the sale price of natural gas for royalties for the use of deposits during gas production. The amendments to the Tax Code bring the calculation of the royalty in line with the requirements of the law on the natural gas market. Previously, the calculation of the royalty was pegged to the upper price of natural gas set by the National Commission for Energy, Housing and Utilities Services Regulation (NCER) before October 2015.

Switching Away from Coal

An extremely long LNG market is translating into a structural recovery of the spark spreads, while the dark spreads have collapsed, especially in the summer months, mirroring the ineluctable eclipse of coal in favor of gas. Our balances have now been changed to reflect a higher risk that French net power exports will be moving lower, especially during the summer. This shift means that French prices will eventually converge more closely toward Germany, also in light of the recent announcement that Belgium’s Doel 3 and Tihange 2 will be soon reconnected to the grid. Germany is relatively less affected by a bearish gas market, as it is pricing closer to marginal costs for efficient coal, which is relatively more difficult to displace.

Dry Bulk Freight Outlook Cut on Iron Ore Outage, China Weakness

The prospects of a late rally in Cape freight rates during the remainder of 2015 have faded. In the Atlantic, the disaster at Samarco’s 30 MMmt/year iron ore operations in Brazil will reduce cargo volumes and restrict long-haul shipments to the Far East. Over in the Pacific, a structural realignment in China’s steel industry finally appears to be taking place, with crude steel production, steel exports and iron ore imports all down in October. The Cape market looks grim for the rest of this year having hit bottom earlier compared to last year. We will be marking down our near-term Cape demand forecasts following the loss of Samarco exports plus its consequential impact on Atlantic to Pacific trade and ballasting patterns. We also have a more bearish outlook on China’s dry bulk demand and on the outlook for Cape freight rates in 2016.

Less-Than-Bullish WCI Auction with New 2016 Reserve Price

The California/Quebec joint carbon auction saw current vintage allowances clear at the projected 2016 minimum reserve price. This mirrored the November 2015 auction, but is lower than secondary market pricing at the time of the auction suggested. Though the future vintage auction saw solid bidding interest, it cleared a bit lower than expected. 88 bidders registered for the auction with 3 new bidders and a number of formerly active bidders taking a break. See PIRA’s excel sheet summary of the auction results and participants.

U.S. Ethanol Prices Decline

U.S. ethanol prices tumbled during most of November, although assessments bounced off the bottom the last few days. The market softened because of higher production and lower demand for ethanol-blended gasoline. As a result, stocks built to a 16-week high.

Corn Demand Picking Up

Export Sales for the week ending November 19th, as released Friday, showed strong corn sales as seasonality hopefully starts to takes over. Soybean sales were average, while wheat sales once again lagged. Corn sales/exports have made up significant ground against last year’s numbers but remain 23% behind, while soybeans are 17% behind last year’s pace at this point.

Global Equities Modestly Changed

Global equities were fractionally changed on the week. In the U.S., the indices were modestly higher. For individual sectors, retail, consumer staples, and energy all outperformed. Utilities were the weakest. Internationally, many of the tracking indices declined. The poorest performers were Latin America, BRIC’s, and emerging markets.

Freight Market Outlook

Wide monthly swings in tanker rates have become the new normal, and October was no exception. VLCC rates plunged from a high of WS 88 in early October to WS 46 by the end of the month, but they have bounced back since. Rates in other size sectors also experienced wide swings. The current glut of oil (500 MMB by end 4Q 15) has helped the tanker sector in a number of ways. Higher OPEC production and expanding waterborne trade have been added substantially to vessel demand, but a bloated supply chain has also contributed. Higher land inventories have caused excess port time and discharge delays, especially in China. In addition, charterers knowing that discharge delays are inevitable on arrival are slowing vessels down on their laden legs while capturing contango credits, reducing fleet efficiency. Floating storage economics are improving and the volume of crude stored in tankers will grow in 1Q16.

U.S. Stock Surplus Makes New High

The U.S. commercial stock surplus has increased to the highest surplus of the year. Coming out of turnarounds, crude runs continue to ramp up, and are now 1.0 MMB/D over early October run rates. This alters the balance to where refined product stock builds have been outpacing crude stock builds, and we expect the same for the week of November 27. Domestic crude supply, however, is remaining high, reflected by crude stocks posting small builds instead of draws, with the ramp up in crude runs.

Coal-to-Gas Switching Enters the Discussion

The central focus on gas demand growth should be on power generation. Lower spot and contract prices have reached the point where a competitive position versus coal is beginning to enter the conversation. The market for gas to replace the least efficient coal units with the most efficient gas units began to emerge in the U.K. in recent months and is now spreading to the Continent, as day ahead and front month prices slowly deteriorate on an absolute basis and relative to ARA coal, which has bottomed out to a greater extent.

U.S. Coal Stockpile Estimates

Power sector coal stocks continued to expand this month as mild weather east of the Rockies, and resulting slack gas prices, deflated coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 185 MMst as of the end of this month, their highest level in three years.

RGGI Fundamentals Weak but Policy Support Strong

Even with additional nuclear retirements, our latest modeling indicates a fundamental cumulative surplus in RGGI through 2020 without any CCR tons. The Dec. auction is expected to affirm prevailing higher price levels seen since the Sept. auction, though the market has also seen strong interest gains in put options. At its Stakeholder Meeting, RGGI confirmed that it wants lead on climate – offering a transition to a post-2020/CPP-compliant RGGI market that supports the value of currently-traded RGGI allowances.

Mixed Week for Key Indicators

The S&P 500 moved modestly higher on the week. Some of the related indicators also improved (Russell 2000, VIX, emerging market debt). The notable outlier was the decline in high yield credit for the third straight week. This is believed to be an important leading indicator with regard to overall market health. Commodities remain in a downtrend, both energy and ex-energy. Precious metals were again lower along with copper and aluminum. With regard to currencies, the U.S. dollar was again mostly stronger. The strength was focused against the euro and the British pound, along with key Eastern European currencies.



Record Ethanol Output

U.S. ethanol production soared to 1,008 MB/D last week, eclipsing the mark of 994 MB/D set in the third week of June. Record outputs were established both inside (916 MB/D) and outside (92 MB/D) of PADD II. Total manufacture was up from 975 MB/D in the prior week. Inventories rose for the fourth consecutive week, building by 378 thousand barrels to 19.6 million barrels.

Japan Crude Runs Ease, Crude Stocks Correct Downward

Crude runs eased in line with our turnaround schedules. Crude imports fell back sharply and produced a strong crude stock draw. Finished product stocks also drew due to a decline in gasoil and naphtha stocks. Kerosene stocks continued building. The most recent holiday appeared to have minimal impacts on the data. Refining margins remain strong with all the major product cracks improving further on the week.

LNG and Seasonal Storage: The Next Major Conflict

A delay of a few weeks here and a few months there on new supply is managing to support spot prices in Asia, but the second quarter of 2016 is sizing up as one of the weakest we have ever seen. Asia is capable of storing very little LNG on a seasonal basis, which will shift the burden to Europe.

Intangibles Sealed the Deal to Lower PIRA’s Reference Oil Prices

Lots of assumptions go into forecasting global supply/demand balances which are aggregated from data for over 140 countries of the world. In recently revising 2016 crude oil prices, PIRA was reflecting in prices a higher starting surplus stock position and higher end year 2016 stocks. Another important factor which contributed to the decision to lower prices was the intangibles associated with our forecast having more downside than upside risks. This is the case despite the greater surplus in our revised November balances.

More Extended Price Weakness

Directionally the answer to near-term HH price prospects is that aside from all important winter weather, prices should remain under enough downward pressure to keep gas competitive against coal for electric generation (EG) — a need reflected by PIRA’s price markdown for the first several months of 2016 tied partly to lower prices going into 1Q16.

OPEC to Meet Dec 4 with Little Flexibility

PIRA’s view is that the most likely outcome of the upcoming December 4 OPEC meeting is a rollover, continuing the current market share policy. The Organization faces four rather big problems which are unlikely to be resolved.

Another Bearish Bidweek Signals Weak Fundamentals Ahead

Last week's report revealed 4,009 BCF in the ground setting a new record for U.S. storage. With such high storage, the need for gas to continue to price low enough to stay competitive with coal in the EG queue remains paramount, though seasonally rising heating loads, however delayed at this point, will support sequential increases in demand and mitigate the overall tenor of substitution necessary.

Qatari Marketing Challenges Offer New Solutions to Pricing Conundrums

It’s back to the future for the Qatari marketers that just agreed in principle to a significant downward price revision on an existing long-term contract. The move will essentially halve the sales price for the 10.8-bcm/yr. (7.5 million tons) the Qatari's sell to India’s Petronet.



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.

Piper Jaffray Companies (NYSE: PJC), a leading investment bank and asset management firm, today announced that it has reached a definitive agreement to acquire Simmons & Company International (“Simmons”).

Founded in 1974, Simmons is one of the largest and most experienced independent investment banks specializing in the energy industry, offering M&A advisory, capital markets execution and investment research. With over 170 investment banking, sales & trading, equity research and private equity professionals, the firm’s broad range of coverage spans the entire energy spectrum, including energy services & equipment, exploration & production, midstream and downstream. The average tenure for a managing director at Simmons is in excess of 15 years, and during its 41-year history, Simmons has executed more than 830 strategic advisory transactions, over 330 private and public financings, representing total transaction value of approximately $260 billion. Simmons also manages two private equity funds in the U.K. that specialize in energy. Headquartered in Houston, the firm also has a major presence Aberdeen, as well as offices in London and Dubai.

“Simmons is the preeminent firm in energy investment banking and we are proud to have the opportunity to partner with such an accomplished team. This addition represents a major step in our drive towards $500 million in annual investment banking revenue,” said Andrew Duff, chairman and CEO of Piper Jaffray.

“This is a milestone transaction as we meaningfully increase the firm’s investment banking footprint. Expanding into the energy sector has been a long-term goal for us and we are pleased to have found the ideal partner to fulfill this strategy,” added Scott LaRue, global co-head of Piper Jaffray investment banking. “We look forward to combining our broader product suite with Simmons’ sector expertise, unmatched reputation and extensive relationships to build on the firm’s long history of success.” “Simmons has been a name synonymous with excellence in energy investment banking and providing quality service to clients for over 40 years. This transaction is a logical step in taking our firm to the next level as we expect our entire investment banking and equities groups to transition to Piper Jaffray in a seamless manner. Our clients will greatly benefit from the enhanced breadth of products and capabilities that Piper brings to the table,” said Michael Frazier, Simmons’ chairman, president and CEO. “On behalf of my partners, we are additionally pleased to be combining with a firm that shares similar values and our client-focused culture.”

Piper Jaffray intends to operate the business under the Simmons brand as a Piper Jaffray company and it will continue to run its energy practice from Simmons’ Houston and Aberdeen locations. The business will be integrated into Piper Jaffray’s equities and investment banking group, with senior leaders at the firm assuming senior leadership roles with Piper Jaffray. Fred Charlton will be appointed chairman of energy investment banking and will serve as co-head of energy investment banking together with James Baker. Bill Herbert will become head of global energy research, and Will Britt will continue to lead specialized energy equity sales. Ira Green will become head of energy capital markets and Coling Welsh will become head of international energy investment banking and executive chairman of Piper Jaffray’s U.K. subsidiary, and continue to lead Simmons’ international activities. Michael Frazier, Simmons’ chairman, president and CEO, has entered into a consulting agreement with Piper Jaffray and will continue to serve in a senior role that leverages his relationship and experience.

Simmons generated revenue of $96 million, including $65 million in advisory revenue, in its most recent fiscal year ended June 30, 2015. The transaction is expected to be accretive to Piper Jaffray’s non-GAAP earnings during the first full year of operation. Piper Jaffray intends to offset dilution from shares issued in the transaction with future share repurchases under its existing share repurchase program.

The transaction is subject to regulatory approval and customary closing conditions and expected to close in the first quarter of 2016.

History repeats itself. In January 1959 the first LNG vessel shipped out from Lake Charles, Louisiana to deliver its trial cargo to Europe. Soon, another important LNG shipment is going to leave the Gulf of Mexico. This time, the destination is Lithuania – one of the first deliveries from Cheniere’s Sabine Pass LNG export terminal will be sent to Port of Klaipėda in January 2016.

Driven by significantly higher natural gas prices compared within Western-Europe, Lithuania took the decision to reduce dependence on Russia by building an LNG import terminal. The project was executed within three years and the Independence FSRU (Floating Storage and Regasification Unit) started operations in December 2014. If planned gas infrastructure developments are delivered in the future, Lithuania will be able to cover domestic natural gas demand from LNG and even export gas to its neighbors. As a result, Gazprom has offered a gas price discount of almost 20% to the country.

Other Central-Eastern European countries are seeking to diversify their gas import sources through LNG. After a two-year project delay, the Polish LNG terminal is scheduled to start its commercial operation in May 2016. The Croatian Government has also announced the construction of an LNG import terminal as a strategic investment project which has recently received the location permit on Krk Island. If Hrvatska LNG passes the final investment decision next year, the plant could be commissioned in 2019.

Currently, 26 LNG import terminals are in operation in the EU-28 countries, with annual regasification capacity of 195bcm. An additional 23bcm/y of capacity is currently under construction with 13bcm/y expected to come online this year with the start of the Dunkerque LNG Terminal in France. Total European LNG import capacity already exceeds recent Russian exports volumes. With extensive LNG export infrastructure developments in North America and Australia, and slowing gas demand growth in China and Japan, more LNG is anticipated to be available to European gas markets, potentially reshaping the continent’s natural gas landscape significantly.