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”.
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
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
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
Offshore Source keeps you updated with relevant information concerning the Offshore Energy Sector.
Any views or opinions represented on this website belong solely to the author and do not represent those of the people, institutions or organizations that Offshore Source or collaborators may or may not have been associated with in a professional or personal capacity, unless explicitly stated.