U.S. Commercial Stocks Draw as Demand Increases Sharply

U.S. commercial inventories drew for the second week in a row, the first time that has occurred this year. However, the decline was modest. Crude stocks saw a gain, while the four major products drew sharply; it was the largest weekly drop of the year and more than experienced at any weekly point in 2015.

Something Has to Give

NYMEX futures brief excursion back below $2/MMBtu suggests the market is having second thoughts about the industry’s ability to cope with surplus supplies this season. Though the largest weekly storage injections typically occur during the spring, when weather-related demand is at a low ebb, the recent acceleration in stockpiling has nevertheless reignited oversupply concerns.

Qatari LNG Pricing Is Getting More Competitive across Europe

LNG pricing around Europe is not so clear cut as Henry Hub + X or JKM – Y. As LNG globally is a continually maturing market, we are seeing gas pricing evolve in multiple ways across different regions of Europe. Based on volume of sales and available data, Qatari LNG prices offer the best window into the competitiveness of LNG on the Continent until now, but we are going to see U.S. LNG stake its claim in the months ahead and subvert the status quo.

U.S. Gulf LNG Cargos Ship Out; FOB Pricing Details Emerge. Liquefaction Costs?

As Shell’s first “contracted” cargo sets sail from Cheniere’s Sabine Pass terminal as part of a BG legacy tolling agreement, the first official FOB pricing data from February/March for U.S. Gulf-generated cargos at the export point at Sabine Pass is registering from U.S. government sources. The numbers, while striking, offer little in the way of information regarding the actual unit costs for U.S. liquefaction.

Indonesian Industrial End-Users Get Price Relief

The Indonesian government lowered the price of natural gas for seven industry sectors to accelerate economic growth and improve the competitiveness of national industry. The decline in gas prices retroactively from January 1, 2016, is contained in the Presidential Decree No. 40 of 2016. The seven industries that obtain the reduced gas prices are fertilizer, petrochemical, oleochemical, steel, ceramics, glass, and rubber gloves.

Italian Gas-Fired Dispatching Surges

In spite of a surprisingly low day-ahead price settlement, Italian day-ahead prices have been generally supported during May, in tandem with a significant recovery in the utilization of the Italian gas fleet, as shown by gas burn increasing over 25% Y/Y so far during May. While a lack of solar output has contributed to a larger increase in Italian gas dispatching over the past weeks, we see a structural trend toward a higher utilization of the CCGTs in the Italian market, in line with the recovery in the spark spread we have also seen along the curve. This is in part tied to the retirements of older steam units and, most likely, lower load factors of less efficient coal units.

A Tighter Market in 2017

PIRA’s outlook for the U.S. coal market in 2017 projects that the current trajectory of coal supply cuts will ultimately drive stockpile levels back into balance early next year. Rising natural gas (and oil) prices will result in potential coal market shortfall, as coal demand recovers against a backdrop of a much smaller and perhaps constrained coal logistics chain.

Massachusetts Supreme Court Decision: RGGI Is Not Enough

The Massachusetts Supreme Court handed down a unanimous opinion that found that the state’s DEP had failed to properly implement regulations as required under the state’s Global Warming Solutions Act. The DEP is now required to issue new regulations, but it is unclear how this can be enforced from a practical and political standpoint. The Court faulted the RGGI as inadequate because it allows Massachusetts entities to purchase out-of-state reductions. Massachusetts is the third-highest RGGI-emitting state and its emissions exceeded the state budget in 2015. More broadly, this decision highlights issues with the RGGI program review and its alignment with individual state climate goals.

Global Equities Fractionally Changed

Global equities were, on balance, modestly changed. The broad U.S. market was higher on a Friday-to-Friday basis. The growth indicator moved higher, while the defensive indicator gave ground. The strongest sectors were banking and energy. The weakest sectors were the defensive sectors of utilities and consumer staples. Internationally, most of the tracking indices moved higher, though Latin America posted a moderate decline.

Freight Market Outlook

Low oil prices are causing non-OPEC production to decline by 870 MB/D in 2016, offset by a near equal rise in OPEC output, benefiting the tanker sector. Most of the non-OPEC production declines in 2016 are for onshore grades in the U.S., China and Canada and shorter-haul grades from Mexico and the North Sea. These are being replaced by higher output from OPEC, mostly Iraq, Iran and Kuwait, boosting waterborne trade and ton-miles. While there are still substantial volumes of excess crude being contained on tankers via floating storage or operational slowdown, these will soon decline as excess stocks are worked down over the balance of 2016.

Propane Stocks in U.S. Build Slowly; Surplus Narrows

Strong export volumes and higher propane demand caused a relatively small build in propane (excluding propylene) stocks last week. The DOE reported the total propane inventory to be 70.2 MMB with a week-on-week build of 920,000 barrels. The year-on-year surplus narrowed by 1.3 MMB to a slim 4.6 MMB.

Stocks and Production Declined

Ethanol stocks declined for the ninth time in 13 weeks the week ending May 13. Output fell to 948 MB/D as several plants were undergoing routine maintenance.

Meal’s the Deal

Without question the meal market has been the bullish star since the May WASDE. The soybean complex is full of rumors as to why meal has outperformed everything else in the grain/oilseed sector, especially soybeans themselves. Speculative upside pressure continues to be strong despite an increase in futures margin last week, which seemed to do nothing but squeeze out some weak shorts. Traders appear desperate to find both a reason for the extended meal rally as well as searching for that elusive “top.”

Japanese Runs Ease; Both Crude and Product Stocks Build

Crude runs continued to fall amid increasing turnarounds. Crude imports fell back, but not sufficiently to prevent a crude stock build. Finished product stocks also built, largely due to middle distillate stocks moving higher. The kerosene stock build rate throttled back with higher demand and lower yield. Refining margins remain very soft, though on the week light product cracks improved.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter.

Biofuels Prices Increase the Week Ending May 13

The main driver of increased biofuels prices was sharply lower stocks. Rising corn and petroleum prices provided support. Margins jumped.

Freight Rates Hold Steady on China’s Solid Start to 2016

Cape fixing volumes have slowed and bunker prices have continued to climb, giving fundamental support to rates. In a rollercoaster month, 180,000 dwt Cape rates have generally covered typical operating costs although the Baltic 5TC average weakened recently to close at just under $7,000/day. With the Panama Canal Expansion now a reality, voyage calculations show that exporting Colombian coal to Asia via an expanded Panama Canal will prove hard to justify in comparison to sending fully-loaded Capes to Asia via the Cape of Good Hope.

D.C. Circuit Grants En Banc Appeal for Clean Power Plan Litigation

In another unusual move in a litigation that has been marked by unusual moves, the D.C. Circuit, of its own volition, decided to shorten the review of the Clean Power Plan by bypassing the three-judge panel and preemptively granting review to the entire D.C. Circuit Court en banc. PIRA had expected a review by the Court en banc in the event EPA lost in the initial panel decision. That it has been granted now does not change our expected timeline much. Key to whether the move actually impacts the CPP’s chances at being upheld is whether two Democrat-appointed judges on the D.C. Circuit — Merrick Garland, and Nina Pillard — will recuse themselves from considering the merits of the case, impacting the balance of power on the Court.

Saudi Arabia's Financial Cushion Remains Substantial

Saudi Arabia's ability to weather lower oil prices remains substantial. Foreign exchange reserves have been liquidated by $159 billion, or 21%, since peaking in August 2014. Even so, reserves of foreign exchange are $587 billion at end-March, still a substantial cushion. As oil prices have recovered from January lows, the rate of FX liquidation has slowed with the decline for March being $5.6 billion. However, if Saudi Arabia were forced to continue drawing down reserves, it would at some point put increased pressure to re-adjust (devalue) its currency, which has been pegged to the dollar at 3.75 SAR/USD since 1986.

Fed Inflation Expectations Rise

The Cleveland Fed released its assessment of inflation expectations for May, which showed a second straight rise in inflation across all the key timeframes. The S&P 500 eased slightly on a weekly average basis, but it was modestly higher Friday-to-Friday. High yield debt (HYG) and emerging market debt (EMB) rose slightly. The U.S. dollar was generally higher, and commodities continued their uptrend.

EPA Proposes Biofuels Requirements Higher Than this Year’s Mandates

The proposed total renewable fuel mandate for 2017 is 18.8 billion gallons, up from 18.11 billion in 2016. It is much less than the 26.0 billion gallons in RFS2. The proposal will be open to public comment through 2011.

Coal Pricing Moves Sideways Along with Oil

Prompt seaborne coal prices mirrored those of oil last week, with a modest rally on Monday largely negated by a downshift over the balance of the week. 3Q16 API#4 (South Africa) and FOB Newcastle (Australia) prices ticked up modestly, while API#2 (Northwest Europe) lost some ground. Coal fundamentals, specifically in the Atlantic Basin, offer minimal support to pricing currently, given weak demand from Europe and strong supply from Russia. The most bullish factor for coal pricing is the continued strengthening in the oil market.

Asian Demand Update: China Again Boosts Regional Growth

PIRA's latest update of Asian oil demand again shows improved growth due to further gains in Chinese apparent demand. The most recent demand growth assessment is 1.16 MMB/D. PIRA's April update of Asian demand had shown growth of 909 MB/D. China's most recent growth assessment, covering Feb.-Apr., is showing growth of 850 MB/D, an improvement from the 525 MB/D seen last month (Jan.-Mar.). It still needs to be emphasized that the Chinese improvement is not necessarily actual consumption, but is based on apparent demand calculations and reflects a crude import figure for April of 7.9 MMB/D.

RIN Balances to Tighten; Prices to Rise

The EPA’s proposed renewable fuel standards for 2017 is expected to tighten the RIN market and drive up prices. The volume of banked RINs is plummeting and is anticipated to be practically exhausted by the end of 2017. RIN prices are expected to surpass $1 by the beginning of next year.

Canadian Oil Sands Restart Plans Halted

The situation in and around Fort McMurray has degraded significantly. Fires are now moving north of Fort McMurray towards oil sands sites. On May 16 a mandatory evacuation was issued for the area north of Fort McMurray, affecting Syncrude and Suncor’s main operations. The Enbridge system has also been affected with fires encroaching within 1 km of the crucial Cheecham terminal. Given the deteriorating situation, PIRA now estimates the cumulative loss will be around 25 million barrels in a most optimistic scenario and 30 million barrels in a most likely scenario.

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.

Markets React Positively to Just Modest Stock Declines as Concerns Grow of System Failure

U.S. commercial oil inventories fell just this past week, but markets reacted very positively to the data. First, crude and the four major products had an inventory decline, the largest this year. Also, the crude stock decline came before any impact from the Canadian wildfires. Furthermore, product demand put in another strong performance. Finally, oil markets are beginning to get the sense of a growing problem of system failure. Oil prices are just too low and circumstances are unraveling in places like Venezuela and Nigeria, while Libya is in chaos and Iraq may be there any day. Very low oil prices are not just undermining supply and encouraging stronger oil demand, they are eating away at the social fabric in many oil exporting countries.

Cause for Pause

Although the first round of hot weather has arrived in some markets last week, as per recent temperatures readings in Houston and Dallas, conditions in many other areas have been relatively benign as underscored by near equal national cooling degree day (CDD) and heating degree day (HDD) counts. The lack of a more material assist from weather explains in part the ongoing tug of war between the nearby NYMEX futures contract and cash Henry Hub (HH) prices, with the latter struggling to hold above $2/MMBtu so far, as was the case for May Bidweek.

Renewable Surge and Lower Exports Undermine German Spot Prices, but Bearish Risks Already Factored in the German Curve

The price crash in the German day-ahead auctions recently are not changing our price outlook for 2017, which remains constructive for German power, as a result of a more supported fuel pricing complex, led by the gains in the oil market.

Oil Moves Coal Higher; Limited Fundamentals Support for Now

Taking a cue from the oil market, coal prices largely moved higher last week, although prices did not move higher across the board, with deferred prices mostly losing ground (except for South African prices) compared to the end of the prior week. Looking forward, PIRA believes that aside from the linkage with oil pricing, there will be little support for coal pricing over the next several months, particularly as demand is moving toward seasonal lows. We do retain a bullish outlook for 2017 prices, however, as fundamentals will be more balanced next year.

EPA Regulates Oil and Gas Sector Methane

On May 12th the EPA issued a suite of rules directly regulating methane for the first time and expanding 2012’s NSPS for fracked gas to oil wells as well as other parts of the supply chain. A number of changes from proposal to final were made, in many cases strengthening the rule in response to concerns from environmental groups. EPA estimates 11 MT CO2e of methane emissions reductions in 2025 mostly from fugitive emissions and oil well completions. The annualized compliance cost is estimated between $530 MM and $800 MM.

U.S. Ethanol Prices Slide the Week Ending May 6

A main driver was a lower output of ethanol blended gasoline. Lower corn values also put downside pressure on prices.

Global Equities Post Another Decline

Global equities generally fell back again on the week. Defensive sectors again did the best with utilities posting a gain, while consumer staples and technology were flat. Energy performed in line the overall market, down about 0.4%. Retail was the worst performer. Internationally, all the indices, other than Japan, posted a decline. China and emerging Asia were the weakest performers.

LPG Price Gains in Asia Lag Other Markets

Asian markets, while easily besting broader crude’s gains, increased by less than those in the West. Cash propane cargoes arriving in the Far East during June were called 6% higher near $350 and butane improved to $380/MT. Smaller gains in Asia vs. the U.S. translate to a further narrowing of the physical arbitrage, which has become increasingly uneconomic — posing significant challenges for long-term U.S. export contract holders.

Japanese Crude and Product Stocks Rose

Two weeks of data were reported due to the string of Japanese holidays. Broadly speaking, both crude and product stocks rose. Gasoline demand was helped by the holiday and then fell back. Gasoil demand fell slightly pre-holiday, but then dropped sharply, as would be expected. Gasoil stocks rose both weeks with an average build rate of 148 MB/D. Kerosene stocks continued to build at an average rate of 73 MB/D. Refining margins continue under pressure with little support within the barrel.

NBP Has Breached Contract Pricing: Has Anything Changed?

While Russian gas pricing is far from monolithic, data indicate that NBP breached Russian delivered prices to Germany for March and April of this year. This inversion is unusual territory for the gas market, as we’ve traditionally seen a reversal for only a month at a time, either sparked by weather or supply disruption. This time seems to be different and is certainly a warning call that raises the broader question of whether contract gas can still be considered a sustainable ceiling for spot gas down the road.

Power Prices Catching Up on the Rally

Spot on-peak power prices increased from March levels in nearly all Eastern markets, supported by higher gas prices and maintenance outages. Colder weather in the Northeast and Midwest nearly offset the impact of weaker cooling demand across the South. Given lackluster March heating loads, demand was only slightly weaker in April, and the loss was countered by lower hydro generation and imports. Gas prices are projected to increase for the balance of 2016, with Henry Hub spot moving above $3/MMBtu in December. Seasonal basis strength in the Northeast lift New England and NY prices above $5/MMBtu in December with further increases in Jan.-Feb. 2017. As a result, we look for a significant improvement in coal unit competitiveness during the 2016-17 winter.

EUA Prices See Volatility, Correlation to Nat Gas Emerges

The supply picture has not changed, and power sector EUA demand remains very weak. The market may be looking for price support in the form of policy developments, but this is overly optimistic. The recent lack of clear EU ETS fundamental indicators resulted in high volatility, but a high correlation with natural gas prices has also emerged. As such, we maintain a EUA price forecast in sympathy with natural gas prices that fall through summer 2016.

Ethanol Production Rebounds from 51-Week Low

U.S. ethanol stock draw was the largest this year. Output rebounded as plants returned to normal operation after spring maintenance.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter. In Japan, economic uncertainty is elevated.

Canadian Oil Sands Production to Resume

Oil sands operators have begun to resume production following the devastating Fort McMurray wildfires that started early last week. The fires continue to burn but have moved eastward away from Fort McMurray and oil companies are allowing workers to return to sites. The pace at which production returns will depend on pipeline restarts, power availability, and labor availability. PIRA expects most production will return by the end of this week, putting the cumulative loss around 15 MMB.

Asian LNG Buyers Shrug off Late-June Opening of Panama Canal

The Panama Canal Authority finally set a target date of June 27 for a first plus-sized cargo to transit the newly expanded locks. After years of anticipation and much hand wringing on the part of global LNG suppliers, particularly Trinidad and the U.S., both of which had long eyed the much more attractively priced Asia-Pacific market, including Chile in South America, the reality is that at this point Asian markets have lost all of their allure for Atlantic Basin suppliers.

Financial Stress Stable

The S&P 500 was modestly higher on a weekly average basis but declined Friday-to-Friday. Many of the other indicators were fractionally changed. High yield debt (HYG) was slightly lower, while emerging market debt (EMB) was slightly higher. The yield on the BAA-rated corporate bond was also slightly lower, extending its trend towards lower rates and narrower credit spreads. The U.S. dollar was generally higher, particularly against the euro, pound and yen.

OPEC Supply Reductions Providing Support for Oil Prices

OPEC supply disruptions surged in early May and show no sign of abating. In Venezuela, delinquent payments to service providers have caused companies to curtail activity in the country, reducing crude production to ~2 MMB/D in May. Similarly, economic problems in Nigeria have reduced amnesty payments to Niger Delta militants. This is the likely driver of a recent spike in oil infrastructure attacks, which have reduced output by upwards of 100 MB/D. In Libya, ongoing political disintegration is shutting in even greater export volumes, resulting in a ~100 MB/D output cut versus the April average. The situations in all three countries appear to be worsening, which will be constructive for oil prices amid the ongoing supply rebalancing.

Thailand’s Natural Gas Supplier Wants to Up Industrial Prices

PTT Plc is in talks with Thailand’s Energy Regulatory Commission (ERC) to restructure the price of natural gas sold to the industrial sector after the company suffered huge losses from current pricing, says a senior PTT official. Noppadol Pinsupa, senior executive vice-president for gas business, said the oil and gas conglomerate suffered a loss of about 3 billion baht ($85 million) in 2015 from selling gas at a price below market level. The price of gas sold to the industrial sector is pegged to the bunker oil price, which moves in line with the oil price, depressing the gas price 7% below the market price.

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 Middle East has been a relative bright spot for upstream activity during the oil price downturn. International land rig contractors, such as Saipem, are actively focusing their strategy and drilling campaigns on the region in the attempt to limit the negative impact of low oil prices.

Looking at drilling activity, it is clear why the Middle East is a good prospect for contractors hit by the falling rig count. Between 2014 and 2015, Douglas-Westwood’s Drilling & Production Market Forecast saw global onshore wells drilled fall by a staggering 32% as operators slashed drilling campaigns. The Middle East – characterised by low lifting costs and containing almost half of the OPEC membership – was relatively immune from this decline, growing at 3%. Douglas-Westwood expects the Middle East to continue to buck global trends, anticipating another 3% increase in the number of onshore wells drilled this year.

Despite this growth, the region has not been completely exempt from the impact of the downturn – NOCs such as Saudi Aramco have slowed progress at a number of projects. Indeed beyond drilling & production, heavily commodity dependent Gulf producers have felt the strain on their finances. Non-OPEC member Oman has been hit particularly hard, with both Moody’s and Standard & Poor lowering their credit rating – the latter to just one notch above junk status.

However, a regional reliance on oil exports is expected to support continued activity and there are clear bright spots within the region. Since economic sanctions were lifted in January, Iran has stood out as a potential golden opportunity for international rig contractors – Douglas-Westwood’s Iran Oil & Gas Market Forecast expects demand for land rigs to increase at 6% to 2020. However, some bilateral US sanctions remain. This has created uncertainty with regards to payment – understandably a key concern for any potential entrant. This may restrict US based contractors from entering the market directly, therefore, the opportunity – at least in the short term – is likely to be most accessible to indigenous contractors based in the Middle East. As a result, it may be contractors in neighbouring markets that find themselves with an early mover advantage.

Kathryn Symes, Douglas-Westwood London