U.S. Commercial Stocks Led Lower by Product DrawComing after a build the previous week, total commercial stocks commenced drawing, this week by almost 7 million barrels. Stocks have now declined for seven of the past eight weeks. Product stocks fell by 9.4 million barrels, while crude inventory added 2.4 million barrels. The four major products drew by 5.9 million barrels, led by gasoline off by 2.8 million barrels and distillate down over 1.9 million barrels. Colonial Pipeline’s gasoline line was restored to service on October 6th, as the outage prompted downstream product movement from primary storage.
Predominately warm weather forecasts have primed the market for a fourth consecutive weekly loss, with the nearby December futures contract targeting an 11¢ decline. The extended sell-off that began in mid-October is now approaching $1 in cumulative losses, with prices currently breaching key technical support levels. Indeed, the 50-day moving average has now fallen below the 100-day moving average. This indicator is also colorfully referred to as the ‘death cross’ and commonly signals the onset of a bear market on the horizon. Putting aside price data as a market barometer, current economics are likewise skewed negatively to price recovery. To be sure, the mild weather unfolding this month has extended the traditional injection season, placing an even larger premium on weather conditions in the months ahead to help work off the expanding inventory overhang.
On-peak prices were mostly higher year-on-year in October as above normal temperatures supported demand across the south and gas prices rose (outside of the Northeast). Loads in the East increased by 0.7% with much of the gain in the south as cooling degree days increased year-on-year in every region. ERCOT loads were up by nearly 8%. Gas prices have eased sharply from October highs amid mild actual and forecasted weather. Adding to bearish pressures were latest gas production estimates. With normal weather, year-on-year stock deficiencies should emerge before year-end and cause prices to firm again. In contrast, eastern coal prices strengthened due to soaring international met and thermal coal markets. In our view, the only regions where coal stocks could tighten to near long-term averages are ERCOT and SPP. Sharp price increases in power prices are expected in all markets through Q1 due to rising space heating loads and higher gas prices (once withdrawals begin).
The coal market moved decidedly lower this week along with the oil market in the wake of the uncertainty surrounding the aftermath of the U.S. election and on news that Chinese producers were signing term deals with major domestic consumers. For prompt pricing, FOB Newcastle prices retreated by the greatest extent, with 1Q17 prices falling by nearly $6.00/mt from the end of last week, while API#4 prices fell by $2.75/mt and API#2 prices only dipped marginally. Beyond the prompt market, the curves shifted $2.00/mt - $3.00/mt from the end of last week. While it is tempting to think that the bullish run prices have been on has run its course and the market is now starting to correct back lower, PIRA would caution against this view. While Chinese production is showing some signs of recovery and Indonesian output has also rebounded, coal demand in most markets is rising seasonally, and there are notable supply side risks within China and for seaborne supply from disruptive weather conditions.
A more balanced European LPG market has led to its outperformance versus other regions last week. A dearth of U.S. large cargo arrivals over the next few weeks has tightened the supply situation, leading to a 3.4% gain in NWE propane coaster prices and an unchanged cash large cargo price of $343/MT. Butane prices in the region were affected by a possible strike at the Shell Moerdijk cracker complex. Cash coaster butane was called 7.4% lower week-on-week at $364/MT while larger cargoes eased $8 to $352.
The week ending November 4, U.S. ethanol values were pressured by lower corn and oil values and a sharp rise in output. Manufacturing margins were slightly lower week on week. U.S. ethanol exports soared in September, due to a shortage and high prices in Brazil.
Usually not advisable to sell slow markets but that’s not a good enough reason for optimism. Seasonally we do see year-end rallies with frequency in grains/oilseeds, only to be disappointed in January, but this year there’s more uncertainty than usual with the election of an outsider to the White House.
The election of Donald Trump as the next U.S. president, combined with Republican majorities in both chambers of Congress, signals potentially notable changes to U.S. energy policy and oil markets. Much remains uncertain at this point. PIRA laid out Trump’s energy policy platform in a prior piece. The more likely changes we can point to at this time are fewer regulations and more support of the oil and gas industry while pursuing a pro-growth macro agenda. Still, we see little impact to near term domestic oil and gas production, as states remain the primary regulator of fracking on private lands. President Trump is likely to approve the Dakota Access pipeline and rejuvenate Keystone XL. He may also revisit and ultimately moderate 2017 renewable fuel mandates planned to be issued by November 30. Oil demand will be stronger under President Trump from faster economic growth, and longer term because of a potential roll back in fuel economy standards. Foreign policy is more opaque. Questions have been raised about the future of the Iran oil deal. President Trump may attempt to roll back the suspension of Iranian financial and banking sanctions which would make it difficult for Iran to sell oil. Imposing effective new multi-lateral sanctions would be very hard given the lack of international support. Meanwhile, political discord in the U.S. may bring OPEC together to reach a deal on November 30, in a show of political unity as an organization.
On the whole, financial markets’ initial reactions to the unexpected outcome of the U.S. presidential election were positive for the economic outlook. Developments in U.S. equity markets were constructive. Long-term U.S. interest rates jumped, as markets anticipated the new administration to pursue reflationary policies. These policies, when enacted, will trigger substantially faster growth in the U.S, and there will also be positive spillovers through global economic linkages. This week’s currency market movements were not worrisome, but equity market actions in the emerging economies raised some concern.
Crude runs rose with a vengeance by 371 MB/D, as refinery restarts entered the data. Crude imports rose from a very low 2.6 MMB/D to 3.6 MMB/D and stocks rose 2.3 MMBbls, despite the run rise. Finished products rose 0.7 MMBbls, with builds in gasoline, naphtha, and gasoil more than offsetting draws in jet-kero and fuel oil. Kerosene demand was again higher, and is still thought to be reflecting secondary and tertiary inventory pull on primary. The stock draw rate accelerated. Margins and cracks again improved on the week, with all the major product cracks showing gains.
In the wake of the U.S. election results, there were some major shifts in a number of key indicators. The broad market rallied strongly, with banking, financial, and industrial related drivers doing best. Many of the emerging equity markets did not participate in the broad equity rally. The U.S. dollar was generally stronger, while commodities were generally lower.
U.S. ethanol production declined 20 MB/D to 1,002 MB/D last week, giving back some of its recent gains. Inventories were drawn for the second consecutive week, falling by 510 thousand barrels to 19.2 million barrels. Ethanol-blended gasoline manufacture rose to 9,178 MB/D, up 5.3% from this time last year.
The loss of Dutch production has not only given a green light to Norway and Russia to sell more gas into Northwest Europe, but it has also given an important role to Bergermeer and other Dutch storage facilities to fill in those lost winter volumes. Dutch storage has taken the opportunity recently with net withdrawals this winter that are 480% higher than at the same point last year and this is linking well to gas exports from Holland. We are not talking small volumes either - according to the grid operator GTS, net Dutch gas exports to Belgium, Britain, and Germany reached 152 mmcm/d on November 8th. The market has not seen flow rates out of the Netherlands like that in November since 2013, when Groningen produced 5.8 BCM of gas.
PIRA’s first U.S. Power Storage Outlook examines recent developments in the power storage industry and provides a market penetration forecast through 2024. PIRA sees a convergence of technology, market, and policy factors that will propel substantial growth in the U.S. energy storage market, from 1.5 GW of installed non-pumped hydro storage capacity today to 5.0 GW by 2024. Power storage technologies are already reshaping ancillary services markets, deferring investment in transmission and distribution infrastructure, changing peak load profiles for large commercial users, and enabling greater behind-the-meter solar consumption.
With the recent start of production at the Kashagan field and the sanctioning of the new Tengiz field expansion, Kazakhstan is ready to start growing oil production. Long-term growth is expected to come primarily from these two oil fields. Kazakhstan has a very large resource base. However, the complicated conditions at Kashagan (reservoir, weather, sour gas), where most of the growth is expected, constrain larger or faster growth than what we have assumed.
The reduced system margins following the closure of a number of coal plants earlier in the year are adding an important premium to U.K. power prices and, in turn, are underpinning the spark spreads. In fact, the output of U.K. CCGTs has surged to levels not seen since January 2011. Looking at the Elexon data, week 49 looks particularly tight, with usable nuclear capacity in the U.K. reducing from Dec. 5 to 7 GW out of the nominal 8.9 GW. The latest RTE winter outlook, shows France is expected to be equally tight in the same week 49, and might need exceptional measures to balance the system with temperatures as cold as 3C below normal. The 2 GW interconnector between France and the U.K. is looking increasingly vital in balancing both markets, especially given the uncertainty over the German ability to export to France during the peak hours.
Global equities, in the aggregate, staged a broad gain on the week. Developed / industrial market performance was strong, but emerging markets weakened. In the U.S, the stellar performer was banking, up 14% on the week, but industrials and retail indices were also very strong. Defensive and interest sensitive sectors, such as utilities and consumer discretionary, declined. Internationally, many of the individual emerging market equity markets declined. Latin America was particularly weak.
Strong and stable winter pricing indicators out of Asia appear to have newfound fundamental support from Korea. Do not assume this support is sustainable post-winter, but it appears to be a fixture in the months to come due to weather- and power generation-based drivers.
World refining capacity (crude distillation plus condensate splitters) reached a milestone in 2016, moving beyond 100 MMB/D for the first time. Capability has been steadily increasing each year of this century gaining by an average of about 1.1 MMB/D per year to reach this benchmark. The capacity increases have outpaced the change in demand especially if factoring out the largely non-refinery production of biofuels and NGLs. As such, refinery utilization has been trending downward over the years.
Gas prices for Ukraine’s industrial consumers will increase through mid-winter. A key role at the moment is, of course, a seasonal factor. Moreover, the dynamics of gas prices is largely similar to the dynamics of oil prices. A significant increase in Naftogaz of Ukraine natural gas prices for industrial consumers in November was caused by wider regional factors. As reported, Naftogaz of Ukraine from November 1, raised the price of gas supplied to industrial consumers, on a prepayment basis, by 16.3%.
PIRA notes that Saudi's finances have improved since earlier in the year due to a mixture of higher oil prices, a very successful $17.5 billion sovereign debt issuance, and a lower expenditure burden. This improvement has allowed it to lessen the burn rate on its foreign exchange reserves. A lot of financial flexibility still remains on a host of fronts that can be employed with measures designed to find that sweet spot with regards to setting oil policy, along with balancing fiscal and social pressures. We see the Kingdom on a stable and sustainable glideslope as they approach the next decade.
State oil companies own around 64% of current crude and condensate supplies of 81 MMB/D and its share is expected to remain at that level for the next twenty years. They operate mostly large assets with lower base decline rates (2.5% versus 4% for oilfields held by public companies). As a result, they require less volume growth to increase net production. We estimate that 54% of future growth volumes will come from state companies. In addition, the cost to develop the new volumes is much cheaper than for public companies (81% of future growth at <$50/Bbl versus 55% for public companies). However, higher growth volumes from state companies are unlikely due to the political and economic constraints that they face.
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.
The Board of Directors of Saipem S.p.A., chaired by Paolo Andrea Colombo approved the Saipem Group’s Interim Report at September 30, 2016 (not subject to audit) and the Strategic Plan for 2017-2020.
The Board of Directors of Saipem S.p.A. has approved the Strategic Plan, which identifies a series of measures that will allow the Company to face more challenging market conditions, with the recovery expected to take longer than previously estimated. Refocusing the business portfolio, de-risking operations, optimizing costs, making processes more efficient, and emphasizing technology and innovation, are all reaffirmed as the basis of the Group's strategy. To achieve these objectives, it has been decided to adopt a new, leaner, more effective and more efficient organizational model, aimed at entrusting individual businesses with greater responsibility for project outcomes and performance. This will allow for increased decision-making agility, greater consistency between responsibility for results and attribution of decision making levers, complete autonomy in the identification of priorities, and greater focus on project execution.
Offshore Construction; Onshore Construction; Offshore Drilling; Onshore Drilling, and a new entity dedicated to high added value engineering activities and services, aimed at improving the offer in a structured way and bring the Company ever closer to its Clients’ needs. As well as generating greater efficiency in its European based facilities (reduction in headcount of around 800), thanks to the new and leaner operating processes the new organization will lead to a better deployment of human resources competences within the Group. This in turn will enable a process of professional growth - vital for ensuring the retention of key resources - which the economic downturn in the sector has impeded, at least in part. Moreover it will permit maximum flexibility in the evaluation of strategic options for each individual business sector. The Strategic Plan also includes rationalization of the asset base, mainly concerning a number of vessels and rigs in the Drilling and Offshore E&C sectors, in addition to several yards in the Offshore and Onshore E&C sectors.
“In the first nine months of 2016, we achieved results that are both encouraging and in line with expectations, thanks to solid performances by both the Offshore E&C and Drilling sectors, the latter still benefiting from long-term contracts. In the third quarter, alongside our commitment to continuing our already planned efficiency measures, we saw a positive downtrend in net debt, the completion of the inaugural bond issue and a strong performance in terms of new contract awards. This has enabled us to confirm the guidance previously provided for 2016. The downturn in our sector, which is lasting longer than initially expected, has affected market prospects and requires reduction in the value of the Company’s asset base. The Strategic Plan that we have just approved aims to respond to these challenges through the adoption of a new organizational model. This provides for the creation of five divisions/companies dedicated to the following sectors: Offshore Construction; Onshore Construction; Offshore Drilling; Onshore Drilling, and a new entity providing high added value engineering activities and services which will allow Saipem to improve its offer in a structured way and satisfy Client needs even more effectively. This industrial strategy follows on from and completes the extraordinary measures carried out this year, such as the change in shareholding structure, the capital increase and the refinancing of the debt, all of which have enabled the Company to achieve solid financial stability”.
A sustained low oil price environment is a challenging one, with ‘survival of the fittest’ being an undeniable reality of the sector. Upstream E&P operators, in the past two years, have scurried to re-evaluate their operational Business as Usual (BAU) practices, implementing a myriad of measures ranging from immediate cost cutting steps such as the downsizing of the workforce, the elimination of redundancies as well as the rebalancing of portfolios as they aspire to come out of this battle stronger.
Offshore MMO Expenditure by Region 2012-2021
Whilst complying with legislative standards, an apparent trend that has surfaced is the postponement of non-critical work which otherwise would have been sanctioned in a $100 oil period. For some upstream operators, associated Inspection Repair & Maintenance (IRM) requirements have retracted by some 20-30% relative to pre-downturn levels.
While efforts to reduce bottom line figures have paid off and continue to be in play, E&P operators must acknowledge the inevitable threshold levels of Maintenance, Modifications & Operations (MMO) and IRM spending that are required in the prevention of lost-time incidents. It’s inevitable that a current ‘fix on failure’ attitude is not sustainable and operators need to re-assess the long-term sustainability of their approach given ever growing cost accruals.
As the recent World Offshore Maintenance, Modification & Operations Market Forecast 2017-2021 shows, perhaps the only positive spin on the current trough for the wider industry is a foreseeable wave of upstream MMO and IRM contracts that are due to be awarded in the coming years given existing backlogs that can no longer be postponed.
Michelle Gomez, Douglas-Westwood Singapore
U.S. Crude Stocks Decline on Favorable Import/Export ArbUS crude stocks fell in September, as prices between domestic and foreign grades incentivized crude exports while discouraging imports. Cushing stocks fell only about 1 million barrels, as a continuing narrow LLS-WTI differential limited flows from Cushing to the Gulf Coast.
The fundamental basis for the recently sustained run up in NBP prices to the high side is tied to U.K. gas consumption in power, weak French nuclear output, and Norwegian gas exports that remained well below last year until this week. Throw in an early colder than normal forecast for the upcoming week and what you are left with is limited downside risk for the moment, but considerably more later on this winter if weather normalizes. High storage levels on the Continent will not yet deter the prices from remaining strong. The stocks are there, but not the will to use them. It is well known that storage holders are exceedingly reluctant to use storage early in withdrawal season and prefer to hoard storage until the first quarter.
With colder weather approaching and so much uncertainty surrounding nuclear availability, French power prices keep climbing. A signpost of improving availability for the upcoming winter months would be the restarts in the upcoming week. Among those, Chinon 1, affected by the channel head anomaly, should be reconnected on October 10. Such restart might impact market psychology, bringing an end to the upward trend for French prices.
The rally in seaborne coal prices that has been going on essentially since the beginning of 2016 has been accelerating over the past two weeks, with additional bullish developments exacerbating an already tight prompt market. For near term pricing, API#2 prices moved up by the greatest extent this week, rising by over $4.00/mt, and pushing over $75/mt for the first time since 3Q14. The force majeure declaration in Colombia and a further reduction in the European nuclear outlook was likely behind this rise in pricing. FOB Newcastle prices rose sharply as well, increasing by $3.35/mt, despite China's buying activity being subdued due to Golden Week. The most important factor for short-term pricing is how much supply can come into the market to tamp down this pricing run. After several years of extreme amounts of excess tonnage in the market, the move to rationalize supply (or at least minimize new supply), and an uptick in demand from China and elsewhere have strained the market.
The pace of U.S. job growth in September was about as expected. A continuing rising trend in the labor force participation rate, however, was something of a surprise. This is an important development, since it has the potential to reshape the Fed’s view of the labor market. In developed markets, fiscal policy options to stimulate economic activity are in the spotlight. In fact, Canada and Japan recently adopted the policy of larger government spending. Political winds in other areas suggest that more countries may join this trend.
U.S. total propane stocks increased by 736 thousand barrels to 104 MMB. The annual stock surplus narrowed by 865 MB to 3.7 MMB. This surplus has been declining since the week ending September 18th. On the other hand, other NGLs have been registering small builds or draws as of late. The latest 2.6 MMB draw is the largest draw of the past five years for this particular week.
U.S. ethanol prices peaked the week ending September 30, but ended the week to the downside. Manufacturing margins improved supported by higher corn and oil prices. RIN values increased.
Total commercial stocks experienced a huge stock draw of over 11.2 million barrels for the latest week, one of the largest of the year. Stocks were pulled lower by both products, down over 8.2 million barrels, and crude, which was almost 3 million barrels lower. Stronger product demand at about 20.6 MMB/D, up 1.3 MMB/D from the prior week, contributed to the draw. Crude runs fell by around 300 MB/D for the week to 16.03 MMB/D, the lowest weekly level in months. It is anticipated that runs will fall further to about 15.6 MMB/D as turnarounds increase sharply for the next week. For the next week crude stocks are expected to build by almost 2.7 million barrels as key light product inventory declines by over 3 million barrels.
Slowly rising tanker rates over the past 6 months are offering an early warning mechanism for the bearish turn in the market's future. A steady increase in LNG tonnage on the water is underway – most of it is running ahead of the new trains to which it is dedicated. The tonnage represents the natural manifestation of two essential problems facing the LNG industry over the next five years; finding enough demand growth for new LNG supply and selling the LNG at a price that offers a reasonable netback. PIRA sees two distinct methods emerging to alleviate these problems, although by no means will they solve them completely. How well they will work will be a matter of waiting and seeing, but the process is already underway and offers some support to prices in the near term.
Global equities were modestly mixed on the week. In the U.S., the broad index fell back 0.6%, but banking and retail indices posted solid gains. Energy was neutral, while utilities was the weakest performer. Internationally, Latin America was the strongest performer, while Asia also had a good week, with China and emerging Asia posting gains.
The week ending September 30, production dropped to a three-month low as plants outside the Midwest went through scheduled maintenance. There was a large drop in inventories to the second lowest level of the year. Ethanol blended gasoline rose after falling in seven of the prior eight weeks.
On the week, total commercial stocks drew 6 MMBbls and have become increasingly tight, relative to seasonal trends. This has supported the recovery in Japanese refining margins over the last month. Runs dropped 186 MB/D as maintenance continues. Crude imports stayed sufficiently low to induce another crude stock draw. Finished product stocks also drew, with gasoline hitting its low for 2016. Aggregate demand improved by 161 MB/D and the current pattern looks improved. Margins were little changed on the week and remain acceptable.
The S&P 500 moved lower on the week, with volatility slightly higher, and high yield debt and emerging market debt moving a bit lower in price. The dollar was generally stronger, particularly against the Japanese yen and British pound. There was noted strengthening in the currencies of Russia, Mexico, and Indonesia, against the U.S. dollar. For commodities, a strong performance in energy and oil helped carry the overall index higher, but ex-energy moved definitively lower. Precious metals, including gold, silver, platinum, and palladium weighed on the ex-energy complex. Among industrial metals, aluminum moved higher.
Following the implementation of the modified Rangarajan committee formula, the price of Indian domestic gas has been reduced around 18% for the six month period from Oct 1, 2016 to Mar 31, 2017. For the Fertilizer sector, the lowering of the domestic gas prices is expected to reduce the pooled prices during H2 FY2017 which should lead to subsidy savings of ~Rs.7-8 billion ($100-120-million) for the Government for H2 FY2017 (assuming the currency to remain stable).
Saudi Arabia's formula prices for November were just released. While cuts were made to most crudes in the key markets, they were less than the market expected. Saudi had additional barrels to sell in November due to lower crude burn and the Yasref refinery being down for maintenance. The price cuts were not aggressive enough to push those extra avails into the market. In Asia, the cuts were consistent with a modestly wider contango in Dubai structure, and in Europe they were consistent with a wider discount on Urals-Brent.
EIA recently released their July oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, again declined to a new cyclical low of 8.77 MMB/D. This is the lowest figure seen since March 2014. From the April 2015 peak, domestic crude supply has declined 1.19 MMB/D, or an annualized decline rate of -9.7%.
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.
The end of one of the worst downturns in the history of oil & gas may be in sight, as OPEC’s November meeting looms large – bringing with it fresh hopes of a production cut and consequent market rebalancing. In this context, DW has recently undertaken analysis of 15 major upstream players, to understand prospects for the industry should we see a near-term upswing in oil prices.
Since the downturn began, cutting Capex across all business segments has been one of the primary methods of improving profitability and free cash flow for E&P companies – with spend in the first nine months of 2016 ~45% lower than that of 2014. Over the same period, cash flow from operating activities has been squeezed, as falling oil prices have reduced revenues and price hedges have expired.
Despite the downturn, IOC dividend pay-outs have remained fairly steady, due to an emphasis on maintaining investor confidence in future performance – thus sustaining access to liquidity and credit. However, IOCs have had to pay a heavy price, cutting Capex, selling assets and increasing debt, with free cash flows generally turning negative, despite relatively strong downstream performance. While IOC free cash flows have generally made movements back to neutrality in Q3 2016, only Shell, ExxonMobil and Chevron have returned to the black. Given that dividend payments are unlikely to be cut by the group, a significant uptick in oil price after OPEC’s meeting will be required to spur new large-scale investment.
Non-OPEC NOCs, on the other hand, have generally been quick to cut dividend payments during the downturn, alongside Capex reductions, as greater emphasis is placed on profitability and free cash flow. The group had the highest free cash flow in Q3 2016 of the 15 companies studied by DW (5 of which Non-OPEC NOC), amounting to $10bn. As a result, this group is particularly well placed in the current market, as well as being able to quickly react to any improvements in project economics in the wake of the OPEC meeting.
Matt Adams, Douglas-Westwood London
Likely OPEC Output Cut to Accelerate RebalancingReflationary wind is positive for the global economy. A flow deficit between global oil supply and demand already exists, reducing surplus stocks by an average of 0.7 MMB/D the last two quarters. This decline will accelerate in 4Q. Disruptions to supply have waned, but political risks are on the rise. Refinery margins should stay healthy for the season with gasoline helped by strong demand and increased pull, especially from Mexico, while normal winter weather supports distillate.
A warm start to the 2016-17 heating season has caused the market to reconsider earlier expectations of evolving winter tightness. Yet, given the relatively low bar for achieving year-on-year demand growth, the developing pessimism on the balance of the season is probably unwarranted. Given the demand fallout in October and rising bearish risks for November, PIRA has marked down its price forecast for the remainder of the year. But tighter U.S. balances should enable prices to reach new highs — maybe before year end — assuming weather conditions revert towards normal in December.
France will need at least 4.0 to 5.2 GW of imports to balance during the time of maximum load in December and January, with this number growing significantly under extreme weather (five-year max as in Feb. 2012). We think that 4.7 GW could flow easily before resorting to imports from the U.K. With the U.K. market already tight, any reduction of flows from France increases the likelihood of utilization of the Contingency Balancing Reserve (CBR), starting from November. Beyond the short-term price risks, which now appear fully factored into current forward winter prices, the longer-term pricing picture does not appear to be mirroring any of the uncertainties over the need for replacement of anomalous components, and if there is such a need to replace the components, what’s the availability of the parts (or how long it may need to manufacture them). Finally, the presence of other anomalies could still extend the outage period of specific units.
The 180,000 DWT Cape tripcharter average weakened last week to close at just under $9,700/day. Meanwhile, Panamax tripcharter rates hit their highest level this year and Supramax rates strengthened slightly late last week. Soaring coking coal prices are encouraging steel mills to increase their use of higher grade iron ore and electric arc furnaces (using steel scrap), both of which could adversely impact Cape demand. Despite the potential downside in iron ore trade, Cape utilization is set to tighten in 2H17 and into 2018. This tightening underpins PIRA's view that monthly average Cape freight rates are expected to push over $20,000/day in late 2017.
The once-a-year release of annual cap-and-trade emissions data can be a market-moving event, though previous California data releases did not have a major short-term impact on CCA prices. In the past three years the release occurred on November 4th, and PIRA understands that it will take place in “early November.” 2015 emissions data will again include both narrow-scope and broad-scope sectors (facing compliance obligations for the first time in 2015). PIRA expects overall California 2015 emissions to be flat vs. 2014 levels. WCI partners Quebec and Ontario (joining in 2017) will likely release emissions data soon, which have a more substantial impact on CCA prices by offering first-time data and a chance to recalibrate emissions starting points.
The U.S., the U.K., South Korea, and Taiwan reported third quarter GDP this week, and results were all better than expected. In the euro area, the latest business confidence surveys pointed to stronger activity in the coming months. Reflation in producer prices was a reason for better data globally. Even though a Fed rate hike is very likely in December, there are no major signs of financial market distress in emerging economies. Developments in China, India, and Brazil have been key.
Total U.S. inventories declined by 2.1 MMB to 100.6 MMB. All PADDs are in deficits to a year ago with the exception of PADD I.
For the week ending October 21, ethanol prices rose, supported by higher corn prices. Manufacturing margins remained strong. September RIN generation fell, and, as a result, prices increased.
As the calendar turns to November tomorrow, North American farmers who have had some reported difficulty in getting crops to dry down in their fields will start to feel a bit more anxious about their standing crops. Transitional fall weather can be difficult at best to predict, but the near-term forecast for this week looks ideal for many to catch up on slowed harvests and relieve a sense of urgency.
Total commercial stocks drew 8.7 million barrels this past week, most of which was in products, though crude managed to decline a surprising 0.6 million barrels because of exceptionally low imports. Month-to-date U.S. domestic crude supply is down 840 MB/D year on year while four-week-average adjusted demand is up 800 MB/D, clearly a major contributor to global rebalancing. Both gasoline and distillate had healthy stock declines this past week and this should continue in this week’s data. Cushing crude stocks continued to draw last week, falling by 1.3 million barrels, but this week should see a 0.7 million barrel inventory build because of the Seaway outage. Crude imports should rebound sharply next week, but with higher runs, crude inventories are forecast to build just 290 MB/D, once again narrowing the crude stock excess to last year, which will fall below 20 million barrels.
The gas market has put much of its focus squarely on power demand, but this is obscuring plentiful gas supply. Demand from the power sector will stabilize at close to current levels and has broadly spread across much of Europe. Of particular note is France and its neighbors, who will need to handle the nuclear shortfall that has stood at around 8 GW this month. But with 34% more than normal injected this year, the European storage fleet is well positioned to handle nearly any winter, which is providing an early test this year. However, seasonal forecasts are pointing to a return to warmer temperature anomalies further down the road. Between healthy storage stocks, increased competitiveness of pipeline supplies, and changes in Qatari LNG pricing around the world, there are growing hints at downward price pressure for Europe.
Mid-Columbia on-peak prices fell by $5/MWh in October as Pacific Intertie maintenance and strong hydro production displaced thermal generation. Southwest markets were flat (SP15 and PV) to slightly lower (NP15) as maintenance outages and reduced flows from the Northwest offset declining cooling loads. Implied heat rates fell year-on-year at all hubs, led by a 16% drop at Mid-Columbia. Heat rate declines continue through much of the forecast as higher gas prices revive coal-fired generation while renewables extend gains. Weaker gas prices and above-normal runoff present credible downside price risks.
EIA data estimates for electric power sector stockpiles as of end-August came in higher than expected at 162.6 MMst, likely as a result of a greater draw from producer/distributer stocks than expected. However, this was the largest M/M draw for August since 2010, and stocks were only 6.0 MMst below prior-year levels as production cutbacks and marginally higher gas prices have drawn stocks from their peak of over 197 MMst in December. PIRA projects that U.S. coal stocks drew further since August and will have fallen 11.3 MMmt below prior-year levels by the end of October. This mirrors 86 days of forward demand based on our forecast of Nov./Dec. 2016 average coal burn (versus 109 days cover one year ago). By region, stocks range from a low of 57 days cover in the ERCOT/SPP region to a high of 286 days in the NPCC region. With U.S. power sector coal burn projected to rise year-on-year consistently through June 2017, further draws are a certainty.
The week ending October 21 there was a large build in inventories, which increased in four of the five PADDs. Production fell slightly. Ethanol breached the 10% blend wall making up 10.07% of the gasoline pool.
Global equities generally eased on the week. In the U.S, both the growth and defensive indicator were lower. Consumer staples and utilities did the best of any sector and posted good gains. Housing, retail, and energy were down and underperformed, with energy lower by 1.2%. Internationally, all the indices, other than Japan, moved lower on the week.
Crude runs eased slightly, but crude imports surged, such that crude stocks ballooned 9.2 MMBbls. Finished products drew by 1.8 MMBbls and have clearly become increasingly tight as maintenance continues. There were moderate draws in naphtha, fuel oil, and the jet-kero complex. Gasoline stocks drew to their lowest level since before 2003. Margins and cracks again improved on the week, with all the major product cracks improving. The net gain in margin for the week was about $0.75/Bbl. Levels remain good and supportive of rising runs as we move out of turnaround.
Despite the rollercoaster ride NYMEX futures took in October, cash prices were mostly unchanged month-on-month. In the northeast, upstream and downstream prices alike were decidedly lower despite the relative weakness already in effect during September. On the positive side of the ledger, the real standout performers were Houston Ship Channel and south Texas prices. Western Canadian prices likewise moved higher in October; however, the monthly gains merely allowed NOVA/AECO-C and west coast basis to “normalize” following a long stretch of weakness.
FOB Newcastle prices have surpassed $100/mt for the first time since April 2012, driven by strength in China's import demand and the continued pull of the even stronger coking coal market on thermal supplies. Despite prices being at such high levels, there is additional upside if there is any disruption to supply. Beyond the short-term, there is little doubt that prices will fall from current levels. However, we believe that the backwardation in the market is overstated, and we remain bullish relative to the forward curve.
The S&P 500 moved lower on the week, with the corresponding indicators moving appropriately. Volatility was higher, while high yield debt and emerging market debt moved lower. The dollar was mixed, and commodities were little changed. There continues to be a trend rate rise in longer-term yields for many key countries, with a lesser rise also noticeable on the short end.
The IMO has decided to tighten global marine bunker fuel specifications to a maximum of 0.5% sulfur beginning in 2020. While the decision provides clarity so that stakeholders can plan for this changeover, PIRA’s analysis indicates that this early implementation date will be disruptive for bunker suppliers, refiners and shippers. In particular, refiners will have difficulty disposing of all of the high sulfur residual fuel previously used as bunker fuel, which will drive product spreads sharply wider (distillate up, HS fuel oil down). Shipping costs will increase for all trades as bunker prices increase. Atlantic Arbitrage Closes In as U.S. Volumes Open Back Up Sabine Pass is ramping back up after a five-week maintenance outage on both operating trains. The ramp up coincides with a noticeable downtrend in what buyers of marginal LNG in the Atlantic Basin are willing to pay and could exacerbate the pricing trend. The big premiums to U.S. Henry Hub have faded, even as Henry Hub itself has risen.
There has been cautious optimism surrounding the future of Brazilian oil production since the discovery of massive fields Sapinhoa, Lula, Lapa, and Libra. The finds in the “pre-salt polygon” are world class in terms of resource size and well productivity, but economic troubles, scandal, and stringent nationalist regulations imposed in 2010 have limited foreign investment and hindered development. In recent weeks, regulatory moves have been lifting the prospects for Brazil’s pre-salt. Brazil is removing the sole operatorship mandate for Petrobras in the pre-salt. There are plans to relax local content requirements. Both changes make the pre-salt more accessible and attractive to foreign players. Combined with the quality of the resources and expected improvement in Petrobras’s financial position and operational efficiency, these developments are positive for medium-term production. Doubts remain, however, as Brazilian oil has a history of not living up to high expectations. PIRA maintains our view that Brazil crude and condensate production will grow from 2.5 MMB/D in 2016 to 3.2 MMB/D in 2025.
Toward the end of the injection season, weekly EIA inventory releases begin to hold less sway on the direction of futures prices. In large part, this disregard naturally occurs because the net inventory builds are often simply too slight to matter. Moreover, fine-tuning of overall stock levels conveys very little about the heating season ahead. Consequently, after taking a brief hiatus during the fall, short-term weather forecasts begin to make a comeback, moving to center stage in setting the direction for prices.
Permian production has defied the collapse in prices and continues to grow. Permian shale crude and condensate production has nearly doubled since mid-2014 to 1.1 MMB/D today. The substantial increase in Permian production is the result of a prolific resource, efficiency gains, and costs savings, which together have reduced breakevens by 42% since 2014 to a current average of $41/Bbl. The Permian is the most economic shale play in the U.S. and not surprisingly has been the primary beneficiary of incremental rig activity since May lows. Operators and investors are especially bullish on the play and this is reflected in recent transactions, with deals year-to-date averaging $28,000/acre. PIRA is optimistic about future Permian shale growth and expects crude and condensate production to almost triple by 2025 to 3.2 MMB/D (12% CAGR).
NJSC Naftogaz Ukrainy from November 1 will raise the price of gas for industrial customers on a prepayment basis by 16.3%. According to a company press release, the price is relevant for consumers buying gas in the amount of more than 50,000 cubic meters per month and who have no debts to the holding. The price for other industrial consumers will increase by 15.3%. 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
Leading international energy logistics group Peterson Offshore Group BV (“Peterson”),has announced its consolidated results for the 12 months ending 31st December 2015.
Commenting on the Group’s performance Erwin Kooij, CEO of Peterson said:
“Peterson has remained profitable in what continues to be a challenging time for the energy sector. We remain committed to supporting our clients to deliver safe, innovative, cost effective solutions that enable collaboration and drive efficiency in the supply chain. Throughout the downturn we continue to invest in the design of unique concepts, technology, equipment, infrastructure and in our people. In 2015, we committed £3.1m which included new cranes, trucks, trailers and SPMT’s (self-propelled modular transporters).”
The group’s UK based companies, including Peterson UK Ltd, 80:20 Procurement Services, Peterson Freight Management and Streamba Ltd contributed 50% of the group’s operating profit, with Peterson investing in new international opportunities. North Sea revenue1 was down on 2014 at £207m generating profit before tax of £4.4m down 32% on 2014.
We successfully retained existing contracts with Maersk, BP, ENI, Centrica, and were awarded new contracts with TAQA, Transocean and ONE. We are working in close partnership with a number of operators to establish a vessel pool to share resources in the Central & Northern North Sea (CNNS), similar to our long-established and successful model in the Southern North Sea. Our decommissioning facility in Great Yarmouth, which we opened in 2015, is now fully operational, and secured its first substantial decommissioning contract. We were awarded2 two long term contracts to provide logistics support for Statoil’s Dudgeon offshore wind farm; and we are firmly into the operational phase with our nuclear industry business.
We continue to invest to take our North Sea experience overseas. We opened new offices in Trinidad and Malta to support customers in these regions and we successfully secured a number of international logistics projects. Significant investment has been made in expanding the geographic footprint of our procurement business 80:20 and we are now operating in Norway, the Netherlands, Houston and Malta.
Our ongoing commitment to technology is focused on driving efficiency and generating maximum value across our clients’ logistics operations. We made significant investment into broadening our eSuite technologies. With a continued focus on asset utilisation across the industry, our new eHire application provides simple and effective visibility and control over all third party rentals, whether regular or high cost rental; and our receipt, store and pack tools support bar coding and Warehouse Management.
Sitting above all our applications is our unique proprietary technology VOR that seamlessly connects people directly and in real time to inventory and assets throughout the supply chain. VOR provides transparency, from ordering a piece of equipment quickly, to seeing what space is available on a vessel to ship it offshore, enabling better, data driven decisions.
Our people are fundamental to our ability to deliver operational excellence and we increased our headcount by 6% in the last year and currently employ 400 people in the Aberdeen area. We made a number of key appointments to further strengthen our management team and support the next phase of the company's growth.
Our parent company approaches its centenary with a strong balance sheet, this enables us to take a long view, invest for the future and allows our clients to trust in Peterson.”
For more information click here
1. Revenue, inclusive of vessel charters was down sharply on 2014, mainly driven by the reduction in vessel charter day rates with oversupply of vessels.
Last week we covered the OPEC announcement on production cuts, a strategy to reduce over-supply in the market and give a much needed boost to oil prices. Without higher oil prices, many new projects are thought to be uneconomic. Or are they? Douglas-Westwood has recently reviewed over 250 upstream capital projects sanctioned in the last four years to assess how industry costs are moving. The results are remarkable.
Oil & Gas Exploration & Production (E&P) companies have been under pressure in the downturn. Faced with much lower free cash flow from producing fields, the focus for many has been on managing costs so that dividends can be maintained through the downturn.
The sanctioning of many new projects has been deferred during this period as E&P firms instead focus on becoming leaner. However, three specific trends are driving a remarkable reduction in upstream capital costs, and bringing some uneconomic fields over the threshold of viability.
• The immediate impact of the downturn was a squeeze on the supply chain by the E&P companies. Demands of 10-15% price reductions to service and equipment companies were common. This trend was more or less immediate at the start of the downturn, and will most likely be eroded as soon as the market recovers.
• With reduced activity levels came massive over-supply of some asset classes. Rig utilization, vessel utilization, (amongst many other asset classes) has plummeted and day-rates have fallen in some cases over 60%. Over-supply will take some time to work its way out of the system as older units are scrapped.
• Re-engineering of existing projects, returning to conceptual or FEED studies to re-work the development scheme has also yielded substantial cost savings. Further gains are yet to be had from standardization of engineering approaches, equipment, and even people. These savings should be far more permanent in nature.
Our analysis of global upstream projects (onshore and offshore, including unconventional) shows that on average the spend per barrel recovered for newly-sanctioned projects has fallen an incredible 40% over the 2012 to 2016 period. In some locations, the cost reductions have been much greater than this average. The DW upstream capital projects study covering the 250 project previously mentioned will detail key drivers and initiatives that have led to this outcome. You can register your interest for updates on this study here.
Steve Robertson, Douglas-Westwood London
Gasoline Strength Supporting Refining MarginsOil prices are expected move higher with ongoing rebalancing, with non-OPEC supply still declining and demand growth healthy. OPEC cuts are not necessary for rebalancing but they would accelerate the drawdown of surplus stocks. Relatively firm gasoline cracks are supporting margins and runs despite the season. The IMO decided to implement tighter global bunker limits beginning in 2020. Gasoil-fuel oil spreads, sulfur spreads, crude quality differentials and freight costs will all increase substantially but not until ~2019/20.
Natural gas futures are headed for the largest weekly decline since January, with week-to-date selling postponing $3/MMBTU prices until mid-2017. With most of the sell-off occurring in the front of the curve, the Dec 2016 contract is now more aligned with injection season prices. The Q1 2017 strip has fared little better, maintaining only a slight premium to 2017 injection strip. To be sure, the contraction in the Mar17/Apr17 widow-maker spread — trading at a mere 6 cents, or the lowest recorded price — is a testament of how little concerned the market is about the industry meeting upcoming seasonal demand. Given how U.S. balances have shaped up so far, the market’s reassessment is more than understandable, especially with the storage carry-in shifting from less than 3.9 TCF to more than 4.0 TCF.
In a week when the front-month baseload German contract prices temporarily reached €50/MWh on the back of a new EDF statement on further delays for the restart of five units, STEAG provided some additional details around the future of its coal fleet. STEAG plans to close the units at West 1 and 2, Herne 3, Weiher and Bexbach, for a total capacity of 2.3 GW (BNetZA data) before the end of 2017. These closures are on top of the two units at Voerde already planned for closure by April 2017, whose combined capacity is 1.4 GW. PIRA calculated the additional coal capacity across Germany, other than STEAG, that may be at risk of closure.
The bullish march of seaborne coal prices continued this week, with 1Q17 FOB Newcastle prices rising by $7.00/mt from the end of last week, while API#4 and API#2 prices rose by $6.65/mt and $5.15/mt, respectively. With China's import demand remaining strong on a sluggish supply response to the strength in pricing, there are not many fundamental factors blocking further pricing increases. However, in a change from the past several weeks, the back of the forward curve gained more than the front, in a seeming acknowledgement of the view that the backwardation in the curve was too pronounced.
California 2015 cap-and-trade emissions data released today showed a slight decline year-on-year in overall emissions. In their first year with a compliance obligation, broad-scope emissions were up. However, narrow-scope emissions dropped, with imported power emissions coming in strongly lower. PIRA estimates that the cumulative California market surplus reflects a few months of emissions. Quebec recently released 2015 emissions data, but only for the narrow-scope sectors, which were flat year-on-year. We are awaiting Quebec’s first-time reporting of covered transport emissions, which could impact market outlooks and prices.
For the second consecutive week, Asian LPG markets performed best globally. December propane eased less than 1% to $382/MT. Meanwhile January and February Saudi Propane CP futures made big moves lower – dropping 4.5% and 5.8% respectively in last week’s trading. These futures track market expectations for Saudi contract prices, and their move lower is in opposition to the mostly flat market structure seen in MT Belvieu C3 markets.
Global equities generally were lower again on the week. In the U.S, all the tracking sectors lost ground. Materials and housing fared the best, while technology, retail, energy, and consumer staples were the weakest. Many of the sectors, now, have a cautionary tone. Internationally, all the indices also lost ground.
Ethanol prices rose to a four month high in October as the markets tightened. Manufacturing margins decreased slightly as co-product DDG values dropped while corn prices advanced. Brazilian ethanol prices soared but are leveling off as hydrous ethanol is becoming non-competitive with gasoline in most states.
Much like Chicago Cubs fans, the markets felt a bit hung over to end the week. Poor late-week volume can be attributed to the lack of interested traders but there’s also the most bitter U.S. election to “look forward” to next week as well as the November WASDE. Funds have reduced their positioning to very little in corn while remaining bullish beans and especially the over-priced soybean oil market. Wheat shorts are heavy as usual.
Amid evolving OPEC talks, Iraq’s field-level accounting of its own crude production has garnered significant attention. The Iraqi oil ministry claims that September output averaged 4.77 MMB/D, over 300 MB/D higher than both the volumes estimated by the OPEC Secretariat’s secondary sources and PIRA’s own calculations. The accounting discrepancy comes from estimates for northern Iraq, where the ministry is double counting (and overestimating) production from two fields formerly operated by NOC. Specifically, the Bai Hassan and Avana fields, under KRG control since 2014, are included in Baghdad’s calculations for both NOC and KRG production.
Latin American gasoline demand is projected to grow slightly in 4Q16 while distillate demand is estimated to be ~50 MB/D lower than 4Q15. Brazilian gasoline demand is forecast to increase vs. 4Q15, stimulated by lower pump prices. On the crude side, Brazilian heavy crude exports are falling but medium crude exports are rising fast. Castilla Blend exports from Colombia were partially displaced by Basrah Heavy in the Indian market but have found a home in China. On the refining space, PIRA expects L. American crude runs to drop 370 MB/D year-on-year in 4Q16.
Thanks to gas seasonality and increased power demand, spot gas pricing has risen 57% and is back over the coal switching price in Germany. Recently, coal has acted as a ceiling to gas pricing – this ceiling has finally been punctured. However, PIRA does not anticipate a huge divergence of gas over coal and expects this anchor to remain important and close to gas pricing for the moment. The shift north of the coal switching level has led to some declines in gas-to-power demand and is already relieving some pressure off of gas. Without gas rising drastically over coal and continued pressure on the European electrical grid relating to French nuclear outages, PIRA does not expect a major step back in gas-to-power demand.
Tesla introduced the residential storage Powerwall 2.0 unit, along with a new integrated rooftop solar design and updated specifications for its commercial-scale Powerpack product. The Powerwall 2.0, with a capacity of 7 kW-14 kWh, is double the size of the original Powerwall. The total installed price offers a 15% price reduction versus the original Powerwall system on a kWh basis. Although increasing the overall system costs, pairing storage with residential can also address ongoing changes to peak demand charges and net metering policies that may limit residential solar penetration.
CA Carbon trading activity has picked up, but is well below prior levels, with pricing on a halting upward path. Reported 2015 CA emissions were down slightly year-on-year and the implied surplus/bank after 2015 is at about 4 months’ worth of emissions. First time broad scope QC emissions and ON emissions are still to be released. An undersubscribed Nov auction could see unsold allowances moved to the reserve reducing CP2 supply. Inflation indicators have been creeping up, pointing to an even higher 2017 reserve price Through the Scoping Plan, CARB is pursuing a preferred option based on cap and trade, with new refinery measures to help address environmental justice concerns.
The S&P 500 moved lower by about 2%, while volatility increased. High yield debt and emerging market debt both moved lower in price. The U.S. dollar was generally weaker, and commodities were mixed.
Tanker rates are expected to improve seasonally in 4Q16 but weaken in 2017 as vessel supply growth outpaces demand.
U.S. ethanol production rose 31 MB/D to a nine-week high of 1,022 MB/D the week ending October 28, just 7 MB/D short of the record set earlier this year. Inventories fell by 180 thousand barrels to 19.7 million barrels following a large build in the preceding week. Ethanol-blended gasoline manufacture rose for the second consecutive week, reaching 9,160 MB/D, up 3.3% from this time last year.
A Republican or Democrat in the White House should make no difference to these markets in the near term; discounting a huge move in the dollar if the unexpected occurs. Then again grains, and especially oilseeds, have been disconnected from the expected inverse effect of the dollar for a while now.
PIRA estimates the average OPEC budgetary breakeven price will fall to $80/Bbl in 2017, marking the third consecutive decrease in annual breakevens since the 2014 peak of nearly $110/Bbl. The gap between Brent oil prices and breakevens is poised to narrow. Breakevens have been coming down on fiscal reforms and higher net oil exports out of Iraq, Iran, and Saudi Arabia. Currency depreciation has also played an important role. Even so, most OPEC members still face significant budget shortfalls, which is driving material policy reforms. We have already started to see some major OPEC countries cut fuel subsidies, loosen resource control policies, and make moves to reduce economic dependence on oil. More immediately, we believe the pinch from low oil prices is behind OPEC’s newfound spirit of cooperation, and will likely facilitate a production agreement on November 30.
While overall U.S. crude stocks rose in October, Cushing stocks declined 4 million barrels on reduced incoming flows from West Texas due to pipeline maintenance. The price of WTI climbed above $50/Bbl, before falling off at the end of the month. Differentials for Canadian and Bakken crudes declined, while Midland differentials strengthened.
Any possible concern about the profitability of sending cargoes into N.W. Europe has completely evaporated for the moment. European gas prices are spiking due to a combination of French nuclear problems, cross-border power constraints, below-normal temperature forecasts, and production problems in Norway. If there will ever be a moment to open the flood gates between the U.S. Gulf Coast and N.W. Europe, now appears to be the time.
Total commercial stocks built by 9.05 million barrels this past week, as crude stocks gained by 14.4 million barrels, partly offset by a 5.4 million barrel product draw. Highest weekly crude oil imports since 2012 of about 9 MMB/D led to the large crude oil stock build. Three major light product stocks declined by 5.5 million barrels. For the next week the key light product stocks are expected to continue falling. This week’s temporary outage of the Colonial Pipeline will lead to additional product imports in the following two weeks.
The price of natural gas sold domestically to Egypt’s industrial sector increased by about 50% as a result of floating of the Egyptian pound against the U.S. dollar. Factories’ agreements for gas were signed according to the official market rate at the time. The price of the U.S. dollar currently stands at EGP 14, while at the time of signing the agreement the price was EGP 8.88. The source expected industrial sectors to request maintaining a fixed price for the US dollar in contracts signed with EGAS and lifting their products on the market to cope with the increase.
In the U.S., after last week’s GDP data indicated solid growth for the third quarter, this week’s releases (job growth, business confidence, and vehicle sales) showed the momentum persisting in October. Medium-term drivers of economic growth pointed to further expansion in the future: the housing sector’s recovery still has a way to go; the recent pace of household formation has been constructive; and the labor market likely contains sufficient slack. The Fed is not likely to get in the way of continuing expansion.
Crude runs fell back to near the lows seen in early October as maintenance continues. Crude imports came in very low and crude stocks drew 2.1 MMBbls, after the large 9.2 MMBbl build the previous week. Finished products again drew. Gasoline demand was modestly lower and appeared to lack any uplift from the Culture Day holiday. Gasoil demand was fractionally lower, although stocks still drew. Margins and cracks again improved on the week with overall levels remaining very healthy.
China’s gasoil/diesel demand growth weakened over the past few years. Based on traditional apparent demand calculations, that slowdown continued into 2016 with gasoil/diesel apparent demand growth weaker versus last year. However, on a closer look at China Customs Statistics, imports of light cycle oil have increased sharply over the past two years.
The economy of Burma / Myanmar is going through a major transformation. After a long period of international isolation, political liberalizations in recent years have opened up doors for foreign investment in a major way. Oil demand growth has also picked up strongly in recent years, and there are no obvious reasons to expect a slowing.
Saudi Arabia's December formula prices for Asia and Europe tightened. The pricing adjustments were largely within market expectations. Our Saudi market share calculations for Asia are at the low end of recent history. If restoring market share was a tactical goal at this time, less aggressive tightening would have been necessary.
The Colonial Pipeline Company is dealing with a halt of flows of gasoline supplies from the USGC to the North and South East due to a fire. This is the second incident involving Colonial’s gasoline line in less than 2 months.
October weather for the three major OECD markets turned out to be normal compared to the 10-year normal and the resulting oil-heat demand impacts were 46 MB/D below normal. On a 30-year-normal basis, the markets were 11% warmer.
EIA recently released their August oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, rose off its July cyclical low by 203 MB/D, while the year-on-year decline in supply lessened to -494 MB/D for August, from -871 MB/D in July. This jump in domestic crude supply is viewed as a one-month occurrence, rather than sustained trend change.
EIA recently released its final monthly August 2016 (PSM) U.S. oil supply/demand data. August 2016 demand came in at 20.13 MMB/D, very slightly below what PIRA had assumed. Overall demand was revised lower by 536 MB/D, compared to the weeklies. Distillate demand was raised 150 MB/D. Total product demand increased 1.0% versus year-ago or 201 MB/D, compared to the August 2015 PSA data, and a snap back from the -2.1%, or 414 MB/D decline seen in July. End-August total commercial stocks stood at 1,367.7 MMBbls, which was 4 .1 MMBbls lower than PIRA had assumed in its balances, with product stocks coming in 5 MMBbls lower than assumed. Compared to final August 2015 PSA data, total commercial stocks are higher than year-ago by 101.2 MMBbls, versus an excess of 123.2 MMBbls seen at end-July.
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.
On Tuesday of last week, the British government announced its long-awaited decision on airport expansion, favoring the option of a third runway at Heathrow. Despite the clear and compelling economic benefits, it has taken nearly twenty years for the government to reach a decision on the now-critical requirement of increased capacity across the UK’s key airports; a decision that the Davies Commission estimates will deliver a GDP boost of $147bn over the next 60 years.
For the energy industry, the politicization of critical infrastructure decisions is nothing new. For decades energy investors’ calls for long term planning have been at odds with the oft short term horizons of political decision making. But the problem is not limited to the UK. It is symptomatic of a wider issue that stretches across the Atlantic to the United States – a lack of long-term, government-led planning on key infrastructure developments. Whilst there is no shortage of private cash ready to be invested into major infrastructure, there is a lack of political will to deploy it. Sanctioning and constructing critical energy infrastructure projects has never been more difficult.
In the United States, the associated challenges are felt particularly strongly among the gas producers of the north-eastern Marcellus mega-basin. Whilst production forecasts for the basin continue to outperform analysts’ expectations, stalling pipeline investment is likely to constrain the extent to which new wells can be connected. Despite the Federal Energy Regulatory Commission’s (FERC) publically-stated concerns about supply security, and President Obama’s positioning of gas as a “bridge fuel” to a low carbon economy as recently as 2014, impassioned opposition from environmentalists has led to major delays and cancellations of pipeline projects (most notably the Constitution project). The FERC has the authority to license pipelines, and has been open in its intentions to expedite key projects, but the strength of environmental and state-level opposition has surprised many, and halted numerous investments.
With the upcoming presidential election looming, it appears unlikely that the investment required to connect the body of new, highly productive wells being drilled in the Marcellus will be passed anytime soon. As energy investments become increasingly politicized, now, more than ever, strong governance is critical to ensure that the debate remains rational – giving due consideration to the interlinked, fundamental aims of adhering to climate change policy and securing economic growth.
Alec Mitchell, Douglas-Westwood London
Another Substantial U.S. Inventory RecoveryTotal commercial stocks fell 5.1 million barrels this past week led by an almost 10 million barrel stock decline in products, with refinery turnarounds near peak levels. The 3.7 million barrel reported distillate stock decline was one of the largest this year, signaling the U.S. is in the heart of the harvesting season. Reported U.S. crude stocks now exclude lease stocks, which lowered them by roughly 30 million barrels, and week to week crude inventories built 4.8 million barrels largely because of low runs. Cushing crude stocks fell 1.3 million barrels this past week and are forecast to decline 2.3 million barrels next week because of Basin pipeline maintenance. Another large stock decline is forecast for distillate next week (-580 MB/D) with another strong pull from the farm economy, while gasoline inventories modestly build from weaker demand because of the Columbus holiday and the aftereffects of Hurricane Matthew.
Dependency on Lower 48 gas will likely increase next year as expanding domestic production losses leave a widening import gap to serve incremental demand growth. In particular, another round of PEMEX budget cuts has recently been approved, setting the stage for oil and gas production to fall by more than 10% year-on-year. Fortunately, a host of critical infrastructure projects is set to emerge in 2017, enabling imports to meet the organic demand growth within the power and industrial sectors.
With APLNG T2, the last train of the six coalseam projects in Australia, starting production, China plays a key role. Not only does it have 25% equity in two of these unconventional projects, the second largest equity stake of any Asian buyer in any liquefaction project to date, but is also a big buyer from these projects. With a slowly recovering gas demand, LNG faces competition from increased domestic production and pipeline supplies.
Seaborne coal pricing was decidedly bullish this week, with continued tightness in the prompt market pushing forwards higher, particularly in Asia. 4Q16 and 1Q17 FOB Newcastle prices rose from last week as Chinese market players returned from the Golden Week holiday. FOB Newcastle prices are now up over 100% for the year. 4Q16 API#4 prices also jumped while API#2 prices finished the week down. Pricing in the Pacific Basin has shown virtually no signs of cooling off, particularly as coking coal price settlements have been confirmed at over $200/mt. With crossover supply moving into the coking coal market, there is not much prompt thermal coal supply that could come into the market to prevent further price gains.
The International Civil Aviation Organization agreed to adopt a market-based approach to cover global aviation GHG emissions, which requires acquiring and submitting carbon offsets to cover only the increases in international aviation emissions vs. 2019-2020 levels. Exact offsetting mechanisms eligible for compliance have yet to be specified, but the design of the program suggests that costs will be very low in the early years of the program. Voluntary country-level compliance begins in 2021, with mandatory compliance not starting until 2027. Efficiency initiatives also seek to reduce aviation fuel consumption, but PIRA expects aviation emissions to continue to grow, implying that increasing levels of offsetting will be necessary for compliance.
On-peak prices weakened in New England/Mid-Atlantic and Ontario but firmed in most other Eastern Interconnect markets — primarily due to warmer-than-normal weather. Loads in the East edged up 0.5% year-on-year, while ERCOT climbed 4.7%. Henry Hub prices through October have shown remarkable strength, especially in the context of waning shoulder season demand. In contrast, Appalachian prices have inflected sharply to the downside. Looking ahead, heating season power prices will likely lag year-on-year gas gains outside of the Northeast, reducing margins.
Regionally, Asian LPG markets performed best last week. Propane cargoes arriving in November were called 5% higher at $389/MT, and butane rose by the same amount in percentage terms to $418/MT. Butane’s discount to naphtha narrowed to just $27, a price at which it becomes increasingly non-competitive as a petrochemical feedstock.
The S&P 500 moved lower on the week, with volatility up slightly, while high yield debt and emerging market debt moved a bit lower in price. The dollar was generally stronger. For commodities, there continued to be a slight upward bias, but ex-energy appears to have weakened a bit. There continues to be noted declines in the precious metals complex and an upward movement in long-term yields for a host of countries, with a lesser rise on the short end of the curve.
With fairly good weather last week, PIRA expects a 10-15% increase in both corn and soybean harvest numbers today. After posting a 35% completion rate as of last Sunday, PIRA expects that between 45% and 50% of the corn should have been harvested as of Sunday. In soybeans we expect a number close to 55% in this afternoon’s report against 44% last week.
Crude runs eased once again, with higher crude imports such that crude stocks built 2 MMBBls. Finished product stocks drew, across the board, on higher demands. Gasoline demand was modestly higher and stocks drew 0.3 MMBbls to a new 2016 low. Gasoil demand was also modestly higher and helped draw stocks. Kerosene demand was hyped by secondary and tertiary inventories pulling on primary inventories. Stocks posted their first seasonal draw of 37 MB/D. Margins and cracks eased on the week for all the major products, but they staged a bit of improvement in the last few days. Margins in September and into October have improved nicely from the abysmal levels seen in August. Levels are now judged acceptable and supportive of rising runs, post-turnaround.
Coal-to-gas switching has been a big theme emerging in European energy since late last year, but only now are we seeing it come to a head. The switch has migrated from the U.K. to the Continent, which means a potentially larger swing in gas demand on a day-to-day basis. The major flag in recent weeks is that, despite a strong push in European gas prices of more than 50%, we haven’t seen gas-to-power demand disappear. Coal prices have also experienced similar, if not greater, strength due to supply reductions, and it looks like what was once a gas market that was desperate to encourage flexible demand with weak prices is now unable to jettison it.
U.S. ethanol prices rose the week ending October 7 after a bullish DOE report and support from higher corn and oil values. Manufacturing margins declined. D6 RIN values were higher as the EPA will finalize the 2017 margins soon.
Prices increased in September with continued weak trading, but they slipped in October, with the final auction at the 2016 reserve price a month away. Going into the November 1 partial surrender requirements, sources hold enough CP2 compliance instruments to cover emissions through 2016 and free allocations for 2017 are also on the way. A severely undersubscribed November auction could see unsold allowances go to the Reserve, reducing CP2 supply. The market may deem the federal Canadian carbon price proposal bearish, but PIRA believes it can be aligned with WCI cap and trade. Environmental justice concerns over cap and trade have intensified, the market awaits the auction court decision, and critical emissions data releases are expected in coming weeks (CA, QC, perhaps ON).
Permian Basin crude and condensate production growth, as in other U.S. tight oil plays, has slowed dramatically this year. But in contrast to other plays, growth is likely to remain positive, both in 2016 and 2017. In 2018, Permian crude and condensate production is projected to rise more than 300 MB/D. New pipelines out of West Texas have more than kept up with production growth so far. Nearly 1.5 million barrels per day of takeaway capacity have been added in the past four years, creating a pipeline surplus of around a half-million barrels per day this year. As production continues to grow, this pipeline surplus capacity will erode. The only new pipeline project currently planned is a 300 MB/D Enterprise Products line from Midland to Sealy, slated for completion in 2018.
The latest EIA Monthly Crude Oil and Natural Gas Production (914) report broadly reflects PIRA’s reference case, with all regions reported either flat or in month-on-month decline for July. However, the report fails to convey the complete narrative on real-time supply.
In September, global auto sales rose to their highest level on record. In the U.S., vehicle sales remained at elevated levels and played a key role in the expansion of consumer spending. In Europe, a jump in car sales during September sent an encouraging signal about industrial production. In China and India, major growth in car sales is driving gasoline demand substantially higher.
Pakistan’s Oil and Gas Regulatory Authority (Ogra) has said that no increase in the gas price for domestic as well as fertilizer feedstock was proposed by the authority. A spokesman clarified that a news item — that claimed an increase in gas prices by 36% was forthcoming — was not true. The spokesman further explained that the Ogra had issued its decisions with respect to SSGCL and SNGPL’s petitions for determination of prescribed price for FY 2016-17 on October 6, 2016. In the case of SSGCL, Ogra determined the average prescribed price at Rs354/MMBtu ($3.37/MMBtu). In the case of SNGPL, Ogra had determined its average prescribed price at Rs480/MMBtu ($4.57/MMBtu).
One side effect of the ongoing French nuclear issues is the disruption of the historical interconnector flows across Europe. Those French flows with Spain are no exception. Last week, Spain turned into a net exporter to France, reaching a daily flow of 2 GW on Wednesday, a multi-year high in the fourth quarter. This amount of exports is occurring even in the context of relatively stronger demand in Spain (weather-adjusted loads are reported to be up 1.6% year-over-year), together with low hydro and wind output, supporting domestic Spanish thermal generation from both coal and CCGTs.
The announcement of Mexico’s intention to export Maya to the USWC signals that the domestic refining system is struggling with operational issues and that the USWC could be an economically advantaged destination relative to Asia or Europe, the usual marginal Maya markets.
U.S. ethanol dropped 22 MB/D to 962 MB/D the week ending October 7, the lowest since June as some plants continue their seasonal maintenance. Stocks fell by 784 thousand barrels to 19.4 million barrels, the lowest level thus far in 2016. Ethanol-blended gasoline value was relatively flat.
Chinese car sales rose at a fast pace this year, and gains were particularly strong in September. The number of cars on the road, therefore, continues to expand rapidly, and gasoline demand is rising accordingly. PIRA’s model, comprised of car fleet size, distance traveled, and fuel efficiency, pointed to recent demand growth of about 300 MB/D year-on-year, and this estimate was roughly in agreement with reported demand figures. Recent gains in truck sales were more modest, and pointed to a small increase in transport-related diesel demand.
Global equities were broadly lower on the week. In the U.S., utilities posted a moderate gain and consumer staples were little changed, but all the other indices fell back. Energy basically matched the market decline of about 1%. Internationally, Latin America moved higher, but all the other tracking indices gave ground. Most of those declines exceeded that seen in the U.S. market.
The new heating season is off to a cold start in Europe and Japan while weather is warmer in the U.S. With half the month completed and a second half forecast, October is expected to be 6% colder than the 10-year normal and 7% warmer on a 30-year-normal basis.
French nuclear outages are an ongoing factor, but EU carbon prices also rose in early October in sympathy with strong rises in thermal fuels prices. Continued gains in thermal fuels prices should support carbon prices in their current range for the balance of 2016. An EU Parliamentary committee (ITRE) approval of post-2020 market reforms seems positive, but a lack of substantive progress in a more important committee (ENVI) ahead of a December vote is concerning. PIRA is not currently building in additional 2016 policy support, but constructive negotiations ahead of ENVI’s vote can push prices upward. Neither the supply nor the demand side support 2017 price gains, at a time when Brexit negotiations add policy risk.
At its Annual Client Seminar, October 6-7 in New York, PIRA tackled the subject of a challenging farm economy. Here is the presentation.
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.
Oil Prices Are Supported by Surplus Stocks DecliningThe economic backdrop will continue to be constructive, with growth improving in 2017. OPEC is unlikely to agree to any market action in Algiers, and this will put short-term downward pressure on prices. Winter supply/demand fundamentals are tight enough to generally keep crude oil prices in a $40-$50/Bbl range. Surplus stocks will continue to decline, which should be supportive to prices. Supply creation will become the market’s focus in 2017, and this will require higher oil prices. Product markets have been rebalancing, and upcoming turnarounds will help the process. Refining margin outlook is generally healthy for the upcoming season. U.S. crude price differentials and export incentives are encouraging U.S. exports for now. While supply disruptions have eased, political risks to supply will remain high.
Outages continue to pile up in the Atlantic Basin, while Asian supply continues to climb at a faster rate than demand growth. Less and less Mideast LNG will be required to balance the Asian market, but if this gas continues to move to the East, the bearish impact on prices will begin to build.
With French nuclear output set to remain below historical minima, the French dark and spark spreads have gained considerably in the last few days, moving even closer or even above Italian counterparts. A stronger spark spread for 1Q17 in France could be easier to justify in light of the likely introduction of the carbon tax on coal units (30 euro/MT), but less so in October and 4Q16, even assuming nuclear will remain at historically low levels.
Seaborne coal prices continued to rally, with the market still adapting to the emergence of tightness in the prompt market, which has been absent from coal supply/demand balances for several years. It appears as though the Chinese government has activated the "Tier-1" plan, allowing 74 coal mines to increase output by 0.5 MMmt/day because prices hit 500 yuan/mt for two consecutive weeks. This development took an edge off of the rally in pricing this week. Interestingly, API#2 prices gained the most ground, with 4Q16 prices rising by nearly $2.50/mt while API#4 and FOB Newcastle prices rose by less, respectively. PIRA believes this upward adjustment in API#2 was due to a stronger outlook for coal burn from the French nuclear situation. In general, there is not much incremental supply that could be called upon quickly to deflate this pricing rally, particularly as crossover tons are being pulled out of the thermal market into the coking market.
Environmental justice concerns were front and center at the hearing on the proposed Cap and Trade Amendments to promote a “cap and no trade” agenda focused on achieving localized reductions of criteria and air toxins (non-GHG) pollutants. A new report has linked the location of GHG emitters to disadvantaged communities and to particulate emissions, with little improvement in GHG emissions from CA entities since the start of Cap and Trade. The upcoming Scoping Plan will need to rigorously investigate alternative options to the Cap and Trade and must make the case for Cap and Trade in the context of environmental justice. PIRA expects related ongoing legal challenges and further market uncertainty.
The outcome of the Fed policy meeting was as expected. The central bank’s decision to stay put owed substantially to Fed policymakers’ shifting perspective on the economy’s long-run capacity. Specifically, in the last few years, meeting participants substantially reduced estimates for the potential GDP growth rate and the neutral policy interest rate. This shift means that (even though a rate hike in December appears to be a given at this point) the pace of tightening during 2017 will likely be slow. The Bank of Japan decided to target the yield of 10-year government bonds as a policy objective. The purpose of this move is to make the central bank’s quantitative easing program sustainable.
U.S. LPG price outperformance continues unabated. Mt Belvieu propane futures (Oct.) strengthened by 5.8% to 52.8¢/gal — a point at which it’s just about 50% of WTI value. Butane at the market center punched up by 4.1% to 68.5¢. Conway prices outperformed those in the gulf with C3 and C4 jumping 7.1% and 5.6% respectively. Conway butane ended the week at a narrow 2.75¢ discount to Belvieu, the tightest since May of this year.
U.S. ethanol prices were higher the week ending September 16. August RIN generation reached a record high. Manufacturing margins jumped.
Filling sandbags replaced running a combine for some in Northeast Iowa over the weekend as the Cedar River crested Saturday night in Waterloo and is expected to peak at 23 feet Tuesday in Cedar Rapids. Levels on the river so far have been slightly lower than those seen in the historic floods of 2008 as the crest moves south towards Iowa’s second largest city and home to major area grain buyers, including Quaker Oats.
Latin America 3Q16 gasoline demand is estimated at 2670 MB/D, down 15 MB/D year-on-year. Distillate demand is bearish at about 75 MB/D less year-on-year. Mexican gasoline demand at 805 MB/D in 3Q16 is marginally better than 3Q15. Brazilian 3Q16 gasoline demand is forecast to be 5 MB/D higher year-on-year, while diesel demand is projected to be 40 MB/D lower. PIRA expects the region to import ~900 MB/D of gasoline and components in 3Q16. Diesel imports in 3Q16 are estimated to be 950 MB/D. Brazilian exports of heavy crudes are trending down: expected to be 140 MB/D in 2017. Medium crude exports spike and will reach 740 MB/D in 2017. Latin American refinery crude runs in 3Q16 are forecast to be 5,190 MB/D, 470 MB/D lower year-on-year. The likely end of Brazilian incentives to import fuels and the completion of domestic refinery maintenance cycle will help increase refinery runs. Distillate cracks are expected to move upwards, pulled by higher demand for heating but capped by the very high stocks on both sides of the Atlantic.
The Henry Hub (HH) cash price rally has carried the benchmark to $3.14/MMBtu — a high not seen since 1Q15 — as unseasonably warm weather and maintenance delays at Sabine Pass buoyed the call on supply. Accordingly, HH cash prices for the month may top $2.95, and post a M/M gain of more than 15¢. Cooling-degree days (CDDs) are on track to average a whopping ~30% above normal this month, a tally that would mark the second hottest September on record, rivaling last year’s atypical heat in the process. Consequently, gas-fired electric generation (EG) has outperformed prior estimates, with total EG loads outpacing the “norm” by ~4 BCFe/D. Given this backdrop, weekly storage refills have seen a noteworthy “pruning” month to date, and as a result, odds of a sub-3.9 TCF end-October U.S. storage carry have risen.
National Joint-Stock Company Naftogaz Ukrainy from October 1 will raise the price of gas sold to industrial customers on a prepayment basis by 5.1%. According to a company release, the price is relevant for consumers buying gas in the amount of more than 50,000 cubic meters per month and who have no debts to Naftogaz. The price for other customers will rise by 5%. After the increase of gas prices for industrial consumers in August by 9.3%, Naftogaz decreased the price by 7.9% in September. Compared with July, gas prices in October will be higher by 5.6-5.8%.
Cape freight rates have hit their highest level of the year as capesize fixing volumes have surged while bunker prices have remained largely flat. The 180,000 dwt Cape average has moved to over $15,000/day, well above the $5,000 - $10,000 range the market has been trading at for most of the year. On the supply side, Cape fleet growth remains positive as scrapping has decidedly slowed of late, although there is 5 MMdwt of Cape tonnage that was built in 2003 that is susceptible to scrapping as ships approach their third special survey in 2018 because of a need to retrofit to a BWM system under the IMO convention. We believe that Cape rates will show a second bounce in Q4 and will push above $20,000/day in late 2017.
As the clock continues to wind down on the Obama presidency, attention is shifting to finalizing what has been begun rather than new proposals. While the Clean Power Plan is on hold, EPA continues work on the rules for implementation, projected for December — despite opposition from Congress. An endangerment finding for aviation GHG emissions was finalized in July, with GHG standards for heavy duty vehicles following in August. The final Cross State Air Pollution Update Rule for seasonal NOx imposes tighter caps and higher allowance prices in 2017, while a proposal for implementation of the 2015 Ozone NAAQS is forthcoming. The new regional Haze strategy, proposed in May, is expected to be finalized by year end.
The S&P 500, High Yield Corporate Bond Index, Russell 2000 and EMB Index all gained on the week, despite falling slightly on Friday, and VIX receded significantly. Total commodities and commodities excluding energy were both higher on the week. Precious and industrial metals gained. Agricultural commodities fell slightly at the end of the week, though it was higher on a weekly average basis. Long-term interest rates were generally lower (especially the U.S. Baa corporate bond yield).
Output fell 23 MB/D to 981 MB/D the week ending September 16. Inventories drew to a 10-month low of 20 million barrels. Manufacturing of ethanol-blended gasoline dropped to a 15-week low 8,118 MB/D.
Overall commercial oil inventories fell 6.0 million barrels this past week, entirely in crude oil. East Coast (PADD I) gasoline stocks had an historic stock decline (-8.5 million barrels) because of the Colonial Pipeline outage and likely panic buying, while PADD III gasoline stocks not surprisingly built (+4.8 million barrels). Reported oil demand fell 800 MB/D, largely because the EIA revised up product exports by 1.4 MMB/D, 1.2 MMB/D of which was in products other than the four major products. Cushing stocks built 0.5 million barrels this past week but should revert back to drawing next week. Overall crude stocks also decline but at a much more modest pace of 1.2 million barrels versus this past week. Strong distillate demand pulls stocks down next week by 350 MB/D, while gasoline inventories build modestly (80 MB/D) because of much weaker demand.
4Q is traditionally the most volatile gas demand period of the year, and PIRA expects this year not to deviate from this pattern. If anything, the introduction of more wind capacity is creating even more volatility in the gas demand outlook. As October and 4Q arrives, we experience steady and ever-increasing gas demand build. For Europe as a whole, average demand growth between now and the end of the year is 1,000-mmcm/d.
Data were delayed two days because of a national holiday. Crude runs declined on the week. Runs will continue declining through much of the month. Crude imports rose and a crude stock build of 2.37 MMBbl ensued. Finished product stocks rose 0.6 MMBbls, with most of it being in the jet-kero complex. Gasoline demand was lower as were yields. Exports, on the other hand, rose and stocks built slightly. Gasoil demand, yields, and exports were higher and stocks drew slightly. Kerosene stocks continued to build. On the week, all the cracks gained, with gasoline and naphtha doing the best.
Unlike previous years, when farmers pre-stocked their diesel requirements well before the start of planting and harvesting, this year farmers are buying fuel on as-needed basis. During the planting season earlier this year, this hand-to-mouth buying created a bulge in diesel demand during May and June. With this fall's harvest just underway, farm demand for diesel should pick up substantially once again.
Baghdad and the KRG agreed to resume 150 MB/D of shipments from NOC fields to the Kurdish export pipeline. Flows are currently capped at 100 MB/D due to technical limitations, and greater uncertainty will surface upon the deal’s expiration in 2017. In the south, fiscal problems and delayed FIDs will likely prevent a notable near-term increase in production capacity. A military offensive to retake Mosul appears increasingly likely this fall. The involvement of Shiite militias will stoke sectarian tensions and create large security challenges down the road.
Global equities moved broadly higher on the week. All the U.S. tracking indices gained, with utilities, industrials, and housing being the best performers. Retail posted the weakest gain, while energy underperformed. All the international tracking indices also gained and outperformed the S&P 500. Latin America and Japan posting the largest gains, while the ex-U.S., and emerging markets tracking indices also did well.
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.
Historically, the oil & gas industry has witnessed merger and acquisition (M&A) activity through cycles, as companies try to create value in volatile oil price environments. The current downturn has resulted in a number of M&A opportunities for suitably placed players, as illustrated below.
*This graph is not exhaustive, but it is illustrative of the extent of M&A activity in 1990-2016
However, last Monday’s merger announcement of General Electric (GE) and Baker Hughes (BHI) is of a different nature compared to what we have seen so far, whereby the merger will create a fullstream offering, encompassing the entire lifecycle from exploration to downstream and power generation. As operators are struggling with increasing production costs, and the need for production optimization and improved operational efficiency is growing, GE may be on to a winning diversification opportunity. If the merger is successful, GE will improve its core capability through product and service bundling, and thus create more value for its customers in a distressed oil price environment. The transaction has potential of significant cost synergies, currently projected at $1.6bn by 2020, according to GE, but it remains to be seen where these cost savings will stem from.
But is there enough demand for fullstream services? Since the downturn the industry has faced divestment activity, as operators have cut out less profitable segments of their businesses and moved away from the fully-integrated business model. Whilst a fullstream offering may improve cost competitiveness, indiscriminate cost-cutting and inefficient resource allocation could prevent companies’ potential to grow as the sector recovers. Total global OFS spend has been significantly impacted by the downturn, with expenditure falling 49% between 2014 and 2016. Through to 2020, DW expects OFS spend will only recover to 69% of 2014 levels.
GE’s merger with BHI matches the rationale of other recent deals, including Schlumberger’s acquisition of Cameron and Technip’s merger with FMC. These transactions are likely to result in increased standardization of manufacturing practices and improved project efficiency for cash-constrained operators, though demand has to be sustained for fullstream offerings to be successful. Supply chain players who are using the market correction to diversify offering are likely to be better positioned for the coming recovery, however the success of fullstream offerings will depend on companies’ tolerance towards risk and demand evolution in the transition period.
Marina Ivanova, Douglas-Westwood London
China's Pace of Refinery Capacity Additions Slowed, but the Rest of Asia Still AddingGlobal oil market rebalancing is underway and the process will quicken with any OPEC deal to cut production. The Asian kero/jet market is expected to tighten somewhat in 2017, with healthy demand growth. China’s refinery capacity additions are slowing, but the rest of Asia is still adding. Asia added cracking capacity more rapidly than primary distillation capacity over the past few years, but upgrading capacity additions will slow in 2017. China’s net exports of gasoil, jet fuel and gasoline are expected to increase by over 30% from last year to ~0.57 MMB/D this year, with further increases in 2017. India’s net exports of the three products have been steady this year but are expected to trend somewhat lower next year. Near-term Asian refining margins are to ease due to lighter refinery turnarounds despite stronger seasonal demand.
Poland's biggest gas firm PGNiG said last Monday that the average gas price for its biggest customers will rise by 4% as a result of the energy market regulator's decision on new gas tariff. The new tariff was approved and will be binding by Dec. 31, 2016, PGNiG said. Due to the higher prices of crude oil and natural gas across wholesale markets in Northwest Europe for the fourth quarter of 2016, PGNiG's total cost of gas grew beyond the cost assumed for the calculation of the existing tariff, PGNiG said in a statement.
The recent NYMEX strength that pushed the nearby contract beyond $3.35/MMBtu helped Henry Hub cash prices move decidedly above $3/MMBtu, despite the bearish weather conditions that have unfolded thus far during October. Yet, the possible continuation of the current warm trend appears to be causing the market to retrench back toward the psychological $3/MMBtu mark. U.S. temperatures this month are shaping up to yield the third warmest October on record. Moreover, gas weighted heating degree days will not only be decidedly below normal — by more than 25% — but also ~15% shy of October 2015. As a result, residential/commercial heating demand is on track to decline year-on-year by ~2.3 BCF/D.
China’s third quarter GDP growth matched expectations, but other data contained surprises. For one, manufacturing activity showed resilience, even though the trade sector stayed in a slump. In the housing sector, home sales were very strong, and homes in some cities are fetching New York City-level prices. Consumer spending, meanwhile, remained solid, as gains in jobs and wages lifted households. The European Central Bank deferred a critical decision about quantitative easing until December.
Ahead of the faceoff between the new LNG supplies, the U.S. has been able to eke out margins due to weaker Atlantic Basin flows. Winter heating in Asia, along with nuclear outages proliferating around the world, will support gas demand.
Several bullish factors have emerged for the U.S. coal market over the past month. U.S. natural gas prices have moved higher, and international steam and coking coal markets have surged, brightening prospects of stronger U.S. exports. PIRA takes a bullish outlook relative to current market forwards through the first half of 2017, but with our expectation of falling natural gas prices thereafter, we turn to a more neutral/bearish outlook for 2H17.
CARB’s most recent workshop saw “potential design changes” to the California Cap and Trade program to address AB197 (which encourages direct facility reductions). CARB asserts that AB197 does not preclude Cap and Trade and offers three ways to address concerns that it does not reduce facility emissions: reduce allowed offset use, reduce free allocations to industry, and retire unsold allowances. These can address EJ issues, while sacrificing some flexibility and increasing costs. Changes would take effect post-2020 coordinated with WCI partners. Commenters cautioned that CARB is acting prematurely, as AB197 is aimed at the Scoping Plan process in general. Scoping Plan options, with and without Cap and Trade, will be discussed more on November 7.
Total U.S. propane inventories fell by 1.2 MMB to 102.7 million barrels as seasonal demand improved. The annual surplus narrowed by 669 MB to 1.1 MMB. All PADDs showed declines except for PADD III. Last week’s inventory decline was the largest seen in the reference week in five years.
In the run-up to the November 8 U.S. elections, presidential candidates Hillary Clinton and Donald Trump campaigned on dramatically different energy policy platforms. Even so, PIRA sees little impact to near-term domestic oil and gas production under either candidate. Clinton is unlikely to implement prohibitive new restrictions on fracking, although she has stated she will expand President Obama’s methane strategy. Trump advocates for fewer regulations and increased drilling on federal and offshore acreage, but current legislative and commercial realities will likely be limiting. Longer term, oil demand may be stronger under a President Trump, who is less likely than Clinton to continue Obama’s fuel economy standards and promote energy efficiency. Implications for the power sector could be meaningful, with Trump less supportive of regulating emissions and Clinton promoting renewable-friendly policies and major investments in the grid. Yet neither party appears likely to win a filibuster-proof Senate majority, which will make it difficult for the next president to implement the majority of proposed energy initiatives.
Twice is certainly not a reliable pattern, more of a coincidence, but after gaining 16 cents last Monday, and jumping into a new trading range ($9.70 - $9.90) during last week, November soybeans are back it again this morning with a push towards $10.00. If history repeats itself, this week’s bean range will be $9.90 - $10.10.
U.S. ethanol prices rose the week ending October 14th. Manufacturing margins were relatively flat as corn prices increased, while coproduct DDG values declined. RIN assessments decreased.
Total commercial stocks decline again with this past week falling 3.6 million barrels, narrowing the year-on-year stock excess by another 5.1 million barrels. Distillate stocks drew 1.2 million barrels while gasoline inventories added 2.5 million barrels, but in both cases reported demand was likely substantially depressed by EIA re-benchmarking. Crude stocks surprised with a 5.2 million barrel decline this past week with imports making a new low for the year, while Cushing crude inventories fell 1.6 million barrels because of Basin pipeline maintenance. For this week, crude inventories build modestly (270 MB/D) as imports rebound and runs stay near turnaround season lows, but Cushing crude stocks decline again by 0.8 million barrels from continued low Canadian imports and less-than-full Basin pipeline flows as the pipeline ramps up. Light product stocks show big draws with reported demand rebounding, led by distillate’s 4.8 million barrel decline as farm use accelerates, nearing peak levels.
Between French nuclear reactors producing 8 GW less than last October and power markets favoring gas over coal, a lot more demand for gas has emerged. And yet gas is still fighting an uphill battle in the power sector. Overall thermal generation has been on a steady decline over the last 10 years by around 3% per year. Within that shift lower, a recent countertrend shows gas gaining market share within what’s left of the thermal mix, taking market share from coal and fuel oil. However, several pressing items this winter will be superseding issues tied to coal vs. gas or thermal vs. renewable switching. These issues center on French and British power margins.
The S&P 500 was higher on the week, with volatility noticeably lower, while high yield debt and emerging market debt moved higher in price. The dollar was generally stronger. For commodities, there continued to be a slight upward bias, but ex-energy appears lackluster. The precious metals complex has yet to gain renewed traction, while industrial metals have weakened. The agricultural complex has also shown a bit of strength of late, particularly coffee.
Policy developments over the past quarter were largely negative for the shale industry. The federal government intervened in the construction of the Dakota Access pipeline, adding regulatory uncertainty to the 60% complete project. The EPA’s methane rules went into effect in August, new fracking regulations went into effect in Pennsylvania in October, and a record breaking earthquake struck Oklahoma in September, spurring the OCC and EPA to further curtail injected wastewater volumes. Going forward, there is much uncertainty with the direction of the next administration and Congress. Yet we expect state policies to remain mostly accommodating, although increased seismicity in Oklahoma may spur local action.
With the French Nuclear Regulator imposing a three-month deadline to perform safety checks to five units potentially affected by the steam generator anomaly, the market focus has shifted from November to December and January prices. In fact, France will be facing lower nuclear availability even in the months of high peak demand, between December to mid-January. French January power prices appear aligned with the assumption that the hours of maximum demand, based on historical patterns, could require a full switch of France into a net importer, including the U.K., which is an interesting trading proposition, given the tightness in the U.K. market.
Coal prices continued to move upward rapidly over the past week, despite a midweek stumble. The front of the curve again moved notably higher than the back, making the backwardation in the market even more pronounced, particularly for API#2 and FOB Newcastle forwards. API#4 price forwards generally moved higher, although the gains paled in comparison relative to the other pricing points. Physical tightness in the prompt market continues to dominate price formation, as China's demand strength continues to signal that it is not yet abating. PIRA continues to assert that there is additional upside to the front of the curve, noting weather-related disruptions to supply that have already occurred, and the potential for other seasonal ones to develop (Australia) in light of La Niña conditions returning. We note that the last time there was a La Niña, disruptive flooding in Queensland and New South Wales sent prices soaring. If that were to occur this year, when the market is already tight, prices would certainly jump well beyond $100/mt, perhaps to the point where coal-to-gas switching emerges in several markets. Beyond the prompt, PIRA believes that the backwardation in the market is overstated in light of additional upside to China's import demand into 2017.
The significant increase in earthquake activity in Oklahoma is becoming a growing concern for the state’s oil industry. There appears to be a strong link between increased saltwater disposal and seismic activity, which has caused regulators to impose restrictions on the disposal of produced water. While we do not believe that significant production is threatened, more regulations will likely be imposed if the frequency or magnitude of earthquakes continues to rise. There are multiple solutions (e.g. shallower injection formations, inject saltwater outside of the affected area, etc.) to alleviate the problem and operators are actively pursuing them, but they would add to costs. PIRA estimates that less than 30 MB/D of crude would be impacted, which could continue to be produced but at an additional cost of less than $1 per barrel to find water disposal alternatives.
While not quite “lines in the sand,” these three resistance areas for corn, soybeans, and wheat all turned into support levels this past trading week, made more impressive for corn and soybeans by the fact that harvest weather cooperated for the most part and looks pretty wide open this week as well.
U.S. transportation indicators remain largely bullish. VMT growth remains relatively strong through August, but odds favor slowing over the remainder of the year, while gasoline demand growth also tends to slow. Transportation diesel indicators have shown a degree of slowing, but a pickup is expected for the remainder of the year. PIRA expects distillate demand in transportation to transition from decline to moderate growth over the next several months. The peak in air passenger miles has coincided with the seasonal peak in jet-kero demand. Cargo tonnage performance continues to lag that in the passenger travel segment.
Crude runs began to rise, with a very low crude import level, such that crude stocks drew a strong 2.8 MMBbls. Finished products also drew despite lower aggregate demand and higher runs. Gasoline demand was modestly lower, but stocks still posted a modest draw to another new 2016 low. Gasoil demand was also modestly lower, and stocks drew to their second-lowest level of the year. Kerosene demand was higher, due to a downward revision to the previous week. The initial seasonal draw seen last week was revised to a modest build. Margins and cracks improved on the week. Margins in September and into October have improved nicely from the abysmal levels seen in August. Levels are now judged acceptable and supportive of rising runs as we move out of turnaround.
Pricing for high-value PJM RECs has come down significantly, most recently accompanied by strong trading volumes and open-interest gains. Apart from the PTC extension, bearish factors have included lower loads, capacity additions and higher renewable generation, the veto of MD RPS legislation and the close of true-up periods for certain states’ programs. Given REC oversupply, additional price drops are possible. But stronger loads going into 2017, the unfreezing of the OH RPS and a possible overturn of the MD veto could boost prices. Longer term, the need for additional wind capacity, the phase-out of the PTC, and increasing state requirements can pressure REC prices. Major transmission adds, e.g. the Grain Belt Express, are a major potential bearish factor.
Global equities posted a positive week. In the U.S. the growth indicator had a positive gain, while the defensive indicator was unchanged. Over the last several weeks, growth sectors are outperforming defensive sectors. Banking and materials outperformed this past week, while energy matched the broad market. Internationally, Latin America again moved higher with a nice uptrend appearing to have taken root. The emerging market tracking index also had a good gain.
In the week ending October 14th, ethanol-blended gasoline manufacture was up 89 MB/D (1 %) from 8,986 MB/D at the same time last year. U.S. ethanol inventories drew to the lowest values in almost a year. Production rebounded to a five-week high, 998 MB/D.
PIRA's latest update of major country Asian product demand shows the first signs of demand growth acceleration. Our latest assessment of growth is now 534 MB/D versus year-ago. Our expectation is for demand growth to continue accelerating strongly through year-end (which will cover all of 4Q), with December growth pushing 1 MMB/D, and then growth will ebb in 1Q17. China demand growth remains a key driver, with gasoline demand growth providing fundamental support, while fuel oil demand growth in countries like Korea is also supportive to aggregate performance.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets
In a move to increase foreign investment amid the nation’s worsening economic position, Brazil’s Congress has approved legislation that will remove state-controlled Petrobras’ obligation as sole operator on the country’s pre-salt developments. Discovered in 2007, these ultra-deepwater fields represent a huge opportunity – they are the largest group of offshore reserves discovered this century.
Financial difficulties resulting from the ongoing low oil price environment, combined with the crippling impact from the “Operation Car Wash” corruption scandal, have slowed development in the prolific pre-salt fields, as mounting financial pressure has led the NOC to cut Capex plans and production targets. The opening of these deepwater assets to foreign investors is intended to increase development and production from the pre-salt fields, whilst allowing Petrobras to shift focus to more developed plays with existing infrastructure and lower Capex requirements.
Due to the significant potential the pre-salt fields offer, many international E&P companies can be expected to vie for a slice of the substantial pie – Shell has previously commented on the nation’s need to open up to foreign investment. However, E&P activities in Brazil are largely controlled by Petrobras – the few internationals currently active in deepwater Brazil, namely Shell and Anadarko, may see themselves tied to commitments elsewhere. Shell’s recent acquisition of BG sees the company bound to projects inherited through the deal; and Anadarko has the large Shenandoah discovery in the GoM, as well as advancing developments in Mozambique.
As such, the impact from last week’s legislation change may not be as significant as the nation’s government hopes. The current oil price environment has the potential to deter some operators from the huge Capex required for ultra-deepwater developments, particularly if not already present in the nation. However, if OPEC’s recent announcement to cut production results in a significant oil price rally next year, it may become somewhat of a moot point, increasing the attractiveness of the pre-salt fields to international investors.
Kathryn Symes, Douglas-Westwood London
Large U.S. Product Build The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
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