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 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
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.
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
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