Crude Prices Rise in March, Led by Syncrude and Bakken

Crude prices rebounded strongly in March, despite a large U.S. stock build, but the rebound may be short-lived. Syncrude and Bakken differentials surged, as oil sands upgrader maintenance approached a seasonal peak, but all northern grades should weaken in April — in part, the result of uncertainty surrounding the recent shutdown of Keystone pipeline. Following a minimal draw in March, Cushing crude stocks could see a small build in April, before stock draws begin in May and continue for most of the rest of the year.

Injection Season Coal-to-Gas Sensitivities

In light of elevated natural gas storage, U.S. gas demand in the power sector during the injection season will be of the utmost importance if physical constraints on storage facilities are to be avoided. To this end, PIRA undertook a series of simulations to illustrate the sensitivity of gas demand to different price levels. Flexing injection season NYMEX prices downwards by 25% results in an incremental ~3.0 BCF/D pick-up in gas-fired EG demand, or ~3.5 BCF/D more than PIRA’s current Reference Case, while flexing injection season NYMEX prices upwards by 25% results in a ~2.5 BCF/D decline in gas-fired EG demand (~27.0 BCF/D), or 2 BCF/D less than PIRA’s current Reference Case.

French-Italian Spreads Narrowing, but Largely Driven by Italian Weakness

Two fundamental factors are looking spooky for French price developments in the upcoming months: the sizeable increase in gas-fired dispatching and the gain in French imports from the Germany-Belgium. Under these conditions, the spread between summer and winter prices could further widen. The spreads between French and Italian prices have been narrowing, mostly because of a downward move on the Italian side. Terna has announced that the Sorgente-Rizziconi will be commissioned by June 2016, although we believe that the market may be too pessimistic regarding the impact of this interconnector on prices.

India Demand Growth Strong, But Is It Strong Enough?

Seaborne coal pricing mirrored global energy and equity markets last week, pushing lower early in the week, followed by a strong rally on Friday capping off the week. Despite the end of week rebound, coal prices finished the week in the red vis-à-vis the prior week ending April 1, with API#4 (South Africa) and FOB Newcastle (Australia) prices notably losing the most amount of ground. Demand growth globally remains somewhat soft, particularly as Chinese imports continue to pull back relative to prior-year levels. India’s electricity generation surged in March, but even a 15.3% year-on-year increase in coal-fired generation during the month did little to chip away at the historic high coal stocks at power plants.

CA Court Order Clarifies Timeline in CCA Auction Litigation, Narrows Issues

The California Court of Appeals has issued an order narrowing the issues that the Court is still considering and offering an updated timeline in which we can expect a decision. PIRA’s sense is that the Court’s request for supplemental briefing is generally a bullish factor for the auction’s validation. Final word is now expected from the CA Supreme Court in 2H 2017.

Underlying U.S. Economic Condition Is Solid; Japan Is Worrisome

A tracking estimate of the first quarter U.S. GDP growth has increasingly turned weaker. But concerns about a recession remain implausible. For one thing, the U.S. does not face the threat from broad-based economic imbalances. Traditional drivers of growth, such as housing and consumer purchases of durable goods, are also likely to supply sufficient momentum in the coming periods. The U.S. dollar’s recent weakness has generally been constructive for market confidence. The Japanese yen’s recent strength may reflect the market’s concern that the Bank of Japan may be running out of ways to ease policy.

Expanded Panama Canal to Change LPG Trade Flows

Spot VLGC tanker freight rates continue to decrease with prices on the benchmark Ras Tanura to Chiba route easing an additional 4.5% last week to under $27/MT. Spot freight from Houston to Japan fell to near $65/MT. These next months will likely see the last series of cargoes being fixed on the longer Horn of Africa route to Asia. The opening of the expanded Panama Canal in June should lead to the elimination of the longer route, as PIRA calculates that the canal voyage will save an estimated $1 million per round trip under current spot freight and fuel price conditions.

U.S. Prices and Margins Rise

The week ending April 1, U.S. ethanol prices rallied to the highest levels of the year. Production margins jumped as corn costs plunged.

Indiana

Friday’s route through west central and northwest Indiana saw much of the same as Ohio. Spring weather, if you can call it that, consisted of snow, sleet, rain, some sun, and more snow. Farmers were left looking at the sky and wondering if spring would ever arrive. Then again it was only the first week of April, but crop prices have every producer on edge and poor planting weather is just one more thing to worry about.

Healthy Seasonal Gasoline Cracks Will Outperform Diesel

Refining margins will stay generally healthy and runs reasonably high through the summer, propelled by firm gasoline cracks, before weakening in the autumn. Refiners are shifting yields from middle distillates toward gasoline. Product stock levels are high, but not uniformly, with Atlantic Basin gasoline stock coverage relative to local/export demand tracking on the low side, but distillate staying much higher than normal. Diesel cracks will only gradually recover.

Gorgon Sneezes; China Breathes a Sigh of Relief

The LNG market may not be flinching at this exact moment at the news of a Gorgon commissioning phase shutdown. After all, such issues are commonplace, as systems are tweaked and glitches sorted out. But what happens if the loss is sustained for a longer period of time?

PJM 2019/2020 Capacity Auction: The Party's Over … For Now?

Driven by large downward revisions to load forecasts, combined with continuation of the 80% Capacity Performance (CP) construct for the forthcoming 2019/2020 capacity auction, PIRA expects the RTO auction to clear at $130-$140/MW-day for the CP product (significantly weaker year-on-year). The EMAAC and ComEd LDAs should continue to clear higher, though not as strong as last year. These weaker results could be a temporary blip, however, as the subsequent auction (2020/2021) should again see stronger clearing prices with implementation of 100% CP.

Maryland GHG and Renewables Bills Advance

The Maryland legislature has passed a GHG bill (already signed into law) and a bill strengthening the state’s Renewable Portfolio Standards (RPS). Increases in the solar and Tier 1 RPS requirements will have direct impacts on the MD Solar REC market and MD and wider PJM REC markets as well.

Global Equities Retrench

Global equities fell back slightly on the week. In the U.S., all the tracking indices lost ground, other than energy, which gained 2.2%. Retail and banking were the weakest performers. Internationally, the tracking indices were mostly lower, though Japan posted a decent gain. Among specific markets, the Argentinian market posted a steep drop.

Production and Stocks Decline

About 808 thousand barrels were drawn from U.S. ethanol inventories the week ending April 1, lowering them to 22.2 million barrels. PADD I stocks plummeted from a four-year high, while PADD V inventories built for the first time in five weeks.

Western Ohio

40F with rain, sleet, and snow are not exactly conducive to planting, but those were the conditions that greeted us Thursday in central and southwest Ohio. Needless to say there wasn’t a lot of activity, but locals told us that a fair amount of anhydrous has already been applied this spring, so once the weather breaks, which looks like it’s about a week away, it will be all systems go.

Bullish U.S. Crude Stats

An increase in crude runs and a drop-off in crude imports drove an unexpectedly large crude stock draw. Total products had a net build, for an overall commercial stock build, to a new record high commercial stock level. With a larger total build this week last year, the surplus did narrow. Also of note, the week-to-week increase in total demand which was a function of the EIA using a sharply lower total assumed product exports estimate. Next week a decline in crude runs and an increase in crude imports should return the U.S. crude balance to a small build, while that same decline in crude runs and increase in real product exports drive draws for the three major light products.

Promising Signs of Supply-Side Balancing

Thursday’s EIA storage report revealed a new record end-March inventory level of 2,480 BCF, besting the previous record of 2,477 BCF set in 2012. Yet, the market’s foray back to ~$2/MMBtu suggests attention is shifting beyond the massive year-on-year surpluses in place — for the U.S. as a whole or for the even more ominous situation in the Gulf producing region, where inventories are at nearly ~80% of useable working gas capacity. Other considerations have apparently attracted the market’s attention, including late-breaking weather demand and early signs of a slowdown in domestic production.

Japanese Crude Runs Declines, Imports Rose and Stocks Built

Crude runs were lower and crude imports rose, which produced a small crude stock build of 0.5 MMBbls. Finished product stocks drew moderately, with all the major products, other than kerosene, seeing lower levels. Gasoline demand increased strongly with much higher yield such that stocks drew only slightly. Gasoil demand was also modestly higher, with lower yield and a big surge in exports, thus stocks drew moderately. Kerosene demand declined seasonally and the stocks reverted back to building. Refining margins remain good. Naphtha and gasoline cracks remain strong, while heavier product cracks eased.

China Looks at Simplifying End-to-End Gas Prices

China may harmonize wholesale natural gas prices for residential and industrial users as early as this year in an effort to make pricing of the fuel more market based. The National Development and Reform Commission is discussing a plan to set a single wholesale gas price for all users in 2016 and let suppliers and customers negotiate rates around the benchmark. Industrial and commercial users in most regions pay a premium for gas compared to residential consumers.

Market Eases Back

After seven straight weekly gains, the market eased back slightly. High yield debt and emerging market debt both posted slight gains, while volatility (VIX) increased a bit. The yield of the BAA-rated corporate bond has continued to decline. The U.S. dollar has been generally weaker lately. Commodities, including total, energy, and ex-energy, again eased slightly this past week after having posted solid gains.

California Carbon Below Auction Floor

California carbon allowances are trading below the auction floor price. Although balances are not tight in the near term, the allowance bank is not particularly large. PIRA expects ongoing buying needs to bring secondary market prices in line with the auction reserve by the May auction. Regulatory actions later this year will provide clarity for post-2020. PIRA believes the auction is ultimately likely to be upheld by the courts.

January 2016 U.S. Crude Production Declined, Even as Domestic Crude Supply Increased vs. Last Month

The January 2016 Petroleum Supply Monthly showed another decline in U.S. crude production, although a revised swing positive in the balance item resulted in domestic crude supply being up 250 MB/D versus December 2015. Rail movements of crude continue to have substantial ongoing revisions, and those revisions flow through to PADD-level crude balances, going back to the start of 2014 in the latest release. EIA Crude production data reported using Form 914 have significantly fewer revisions than prior methods, but large and volatile balance items still imply uncertainty in the production data.

Italy Will Take More LNG, But at What Cost?

As the global LNG market looks for a home to park its growing oversupply, marketers and traders will need to compete hard for Italy’s burn. Despite being surrounded by illiquid markets like southern France, Switzerland, and Slovenia, Italy has developed a diverse supply mix. The country’s LNG suppliers include Algeria and Qatar, while the contracted pricing includes Norway, Russia, Libya, and Algeria. Between 2011and 2015, delivered LNG prices linked more closely to higher priced Italian contracted pipeline supply. However, since then LNG has been forced to link closer to Italian market prices (PSV) to move all its volume to Italy. We certainly expect this flow to continue into the future and to force down Italian premiums.

EIA Begins Reporting Rail Movements of Ethanol and Biodiesel, Driving Revisions to PADD Gasoline Demand

The EIA has begun publishing ethanol and biodiesel movements by rail, with the release of the January 2016 Petroleum Supply Monthly. The data extend back to January 2014. The data provide insight into the importance of rail transportation to biofuels, and it now drives PADD-level ethanol and biodiesel net receipts. Net-net, these changes to regional ethanol balance drive revisions to PADD gasoline demand, some significant. The revisions to PADD distillate demand are smaller.

U.S. January 2016 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly January 2016 (PSM) U.S. oil supply/demand data last week. January 2016 demand came in at 19.06 MMB/D, which was 150 MB/D lower than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 550 MB/D. Distillate was revised higher by 344 MB/D. Year-on-year demand declined in January 2016 by 194 MB/D, or -1% led by weak distillate demand, declining almost 10%, or 419 MB/D. End-January total commercial stocks stood at 1,345.4 MMBbls, which was very close to what PIRA had assumed. Relative to the final January 2015 data, total commercial stocks are higher than year-ago by 162.1 MMBbls.

Aramco Pricing Adjustments for May — Remaining Market Competitive

Saudi Arabia's formula prices for May were just released. U.S. differentials were raised across the board. The move was consistent with the trend currently being seen and expected in the refining margins on competing domestic grades in PADD III. In Asia, the two lightest grades were raised, while Arab Light was cut $0.10/Bbl, Arab Medium was left unchanged, and Arab Heavy cut $0.35/Bbl. Here too, it was consistent with key pricing drivers. In Asia there has been strength in gasoline and naphtha cracks, along with weaker fuel oil cracks. In Europe, extra-light was raised $0.60/Bbl, while both of the heaviest grades were cut. Arab Light was left unchanged, which was very close to what our pricing model had forecast.

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.

Whilst 2016 has so far seen much discussion surrounding the oil price, oversupply and the almost daily mini-rallies that appear as fickle as my two-year old’s breakfast selection, not a great deal of attention has been paid to the gas outlook.

From 2016 production levels, Douglas-Westwood currently forecast a 16.2% increase in global gas production to 2020 compared with just a 3.3% increase for oil during the same period. Is this simply a case of stronger demand or is there more to it?

As a geographic spread we see 95% more countries increasing YoY gas production during 2017 as those reducing, this compares to just 44% for oil. The production spread (difference between the largest increase and the largest decrease) between the 59-61 countries covered within the DW D&P report shows a spread of 703 kboe/d for oil and 826 kboe/d for gas during 2017 decreasing to 383 kboe/d for oil and 443 kboe/d for gas in 2020.

So not only will gas see a more rapid relative production increase but it will also experience a slower decrease in YoY production post-2017. However, DW expects to see YoY gas production continuing to increase to the end of our current forecast period in 2022, whereas oil is expected to start showing negative production growth from 2021.

The oil supply glut will return in 2017 thanks in large part to the ramping up of Iranian production and already committed Canadian oil sands projects coming online, offsetting large drops from the likes of the USA –207 kboe/d and Nigeria –121 kboe/d. The South Pars field in the Arabian Gulf along with new shallow water gas projects in Australia supported by the demand for LNG/CBM feedstocks are significant, although demand-based, contributors to the gas outlook.

With the recent lifting of sanctions on Iran and the growth of South Pars there will almost certainly be opportunities for well-placed and well-informed Western OFS providers.

So 2017 really is the wildcard year, or perhaps more appropriately, the production Twin Peaks. The question is surely not if, but how high.

Gareth Hector, Douglas-Westwood London

NYC-based PIRA Energy Group believes that fundamentals at weakest point; forward look Is supportive. In the U.S., there was a modest stock increase. In Japan, crude runs were marginally higher, imports rose and stocks still drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Fundamentals at Weakest Point; Forward Look Is Supportive

Physical crude markets are currently at their maximum period of weakness because of refinery maintenance. Overall global oil supplies increase much less in 2016 than demand growth which will surprise to the upside. The huge difference between supply and demand should force global surplus stocks down in second half 2016 and, in turn, drive oil prices substantially higher. Oil supply disruptions surged in March amidst heightened political risks, and these risks look likely to continue. Margins and refinery runs will strengthen through the summer before weakening.

Supply Challenges Remain

With the 2015-2016 “heating season” officially complete, the market’s focus on weather has clearly slackened. Moreover, it appears spring is already stoking more bullish price expectations despite massive storage surpluses, not to mention the early arrival of injections in some regions, most notably in the South Central (SC). The inherent limits on injections in that region in particular is more than capable of limiting any sustained Henry Hub price strength given the needed increased reliance on demand gains in the electric generation sector. Moreover, the heightened risk of SC storage congestion in 2Q16 stands to distort regional basis relationships, especially in the Midwest (MW). Downstream prices in the MW appear to have already begun to decouple with HH amid the heightened supply competition. Excess SC supply will likely migrate into the MW region, despite the high risk of incremental supply from the WCSB, Rockies, Midcontinent and/or Appalachia.

Wet March Boosts WECC Hydro Prospects

Above-normal precipitation in the Columbia River Basin above The Dalles boosted March hydro generation and lifted April to September runoff projections to above-normal status. With California precipitation also above normal, hydro output forecasts have been revised up WECC-wide. Gas prices averaged below February levels at all Western hubs, with declines ranging from 11% at the PG&E Citygate to 18% at Sumas. However, despite the huge storage overhang, gas spot prices have rallied since early March as markets factored in negative supply impacts from this winter’s price rout. March on-peak energy prices fell from February levels at all hubs with declines ranging from $2/MWh at Palo Verde to $5 at SP15. Given the turnaround in gas markets and warmer-than-normal spring/summer weather forecasts, Southwest power prices should begin to move higher, but strong hydro and rising solar output will pressure gas unit margins for the balance of 2016.

Global Equities Mostly Positive

Global equities posted an aggregated gain of 0.6%, week-on-week. In the U.S, all the tracking indices, other than energy, moved higher. The best performers were housing, technology, consumer staples and consumer discretionary. Internationally, all the tracking indices gained, other than Japan. BRICs, emerging Asia, and China performed the best.

Ethanol Stocks Build

U.S. ethanol production declined for the second straight week as several plants have started to undergo annual maintenance. Inventories built by 503 thousand barrels to 23.0 million barrels, with PADD I stocks increasing to a four-year high.

Funds Selling Corn Again

For the two weeks ending March 29th, Non-Commercials covered 85+K corn shorts, something they probably wished they hadn’t done. While the net short was 142K contracts as of last Tuesday, volume and open interest statistics lead us to believe that the Fund net short is back over the 200K contracts entering a new week of trading. The net soybean short from two weeks ago had turned into 40K contract net long as of last Tuesday, a result of 47K contracts in net buys over the two-week period, and it is currently estimated around 42K contracts.

Coal Market Remains Weak, but Signs of Life for 2017

Forward prices moved decidedly higher in March, particularly for late-2016 and Cal-17. This brings forward prices more in line with PIRA’s outlook from February. While prices are expected to soften over the next two months, we remain generally bullish for 2017 pricing, on the expectation of higher oil prices and slowly realigning fundamentals. There is measurably less upside for CIF ARA pricing due to further weakening in demand.

Russia Confirms Removal of Discount on Ukraine Gas

The discount on the gas price for Ukraine that was valid in the first quarter of the year expired, and from April 1 the price of gas will be in compliance with the current contract, Russia’s Energy Minister Alexander Novak said. The discount was agreed within the framework of the so-called "winter package" by Russia, Ukraine and the European Union. From April 1 of this year, the price of gas for Ukraine will fully comply with the current contract between Gazprom and Naftogaz of Ukraine, the minister said.

Modest U.S. Stock Increase

U.S. commercial oil inventories increased this past week, about half last year’s build for the same week. Crude and distillate narrowed their surplus to last year, while gasoline and the rest of the barrel modestly increased it. Overall stocks remain a huge 150 million barrels (12%) above last year. Higher crude runs and higher product demand have resulted in the first crude stock draw in eight weeks and modest product stock declines.

LNG Looms as We Look Forward to Injection Season

After four straight months of significant demand destruction, March was relatively normal with only 416 MMCM lost due to warmer-than-normal weather. Still, this winter marked the third winter in a row of above-normal temperatures that led to a deterioration in spot prices. This year’s deterioration has been the largest of the last three winters in both absolute (11p/th) and percentage terms (28%). This price loss also confirms our assumption that the relationship between temperature deviations and price is actually growing in significance due to the demise of gas use in the power sector (until recently).

Financial Stress Lower

For the seventh straight week, the S&P 500 rose on a weekly average basis. It also posted a solid gain of about 1.8% week-on-week. Of note was a weakening in the high yield debt tracking index (HYG), though other indicators retained a constructive bias. There continues to be a decline in the yield of BAA rated corporate bonds, which suggests financial stresses have lessened.

Stocks Remain Elevated

U.S. coal stocks remain at elevated levels, as massive supply cuts have been neutralized by extreme demand weakness due to very low natural gas prices and a mild winter. The production constraint does set the stage for material stock declines in the future as natural gas prices rise.

U.S. Ethanol Prices Follow Corn Cost Lower

U.S ethanol prices declined March 31 after corn prices plunged following a bearish report.

Farm Economy Concerns Intensify

As if on cue, the Kansas City Federal Reserve sent out a report titled “Mounting Pressure in the U.S. Farm Sector” Thursday morning before the annual Prospective Plantings and Quarterly Stocks reports were released. Once the numbers were disseminated to the markets, the picture went from worrisome to bleak.

Japanese Crude Runs Marginally Higher; Imports Rose and Stocks Still Drew

Crude runs were marginally higher and crude imports rose, though crude stocks still drew. Finished product stocks also drew slightly. Gasoline demand eased post-holiday, but higher yield was offset by higher exports and stocks drew slightly. Gasoil stocks built on lower demand and much higher yield. Kerosene demand was little changed and stocks continued to post an end-of-season draw. Margins remain good. Cracks were higher week-on-week due to strength in gasoline and naphtha.

Second-Half Price Rebound Ahead

PIRA’s bullish price outlook has been tempered by the collapse of gas-weighted heating degree days (GWHDDs) and the related inflation of end-March storage. During 2Q, the ~1 TCF year-on-year storage surplus should ultimately limit recovery. An end-March exit of ~2.5 TCF will mandate ~40% less year-on-year net injections. Unlike 2012, when EG gains from coal to gas curbed injections, the 2016 remedy will be more back-loaded, tied to declining production and stronger non-EG demand. Indeed, PIRA has maintained a bullish post-2Q HH price posture from expected structurally corrective factors gradually taking firmer control of the market.

Spreads Unsustainably Squeezed

German forward prices have been stabilizing, thanks to higher API 2 coal and carbon prices, but spreads are barely allowing existing coal units to cover their fixed costs. Hedging strategies are in part to blame, as power generators continue to sell, while demand is limited. French prices are too low relative to the forward curve, especially during the winter, considering that the French conventional fleet has narrowed considerably. Even in the U.K. market, where reserve capacity margins are razor thin, prices and spark spreads remain fairly weak. Cash-out prices on March 10 spiked to a multi-year high, suggesting market tightness is already happening during days with lower plant availability.

March Weather: U.S. and Japan Warm, Europe Cold

March weather for the three major OECD markets turned out 6% warmer than the 10-year normal, bringing the month’s oil-heat demand in these markets to a negative 97 MB/D versus normal. They were warmer than the 30-year normal by 13%.

Interplay of Nigerian and Qatari LNG Spot Sales Tell an Important Tale

PIRA sees the flow of Nigerian LNG to Asia and Qatari LNG to Europe as central drivers in spot price formation in the emerging LNG spot trade. These two producing countries alone accounted for 50% of all spot deals in 2015 (and the previous two years) and a vast majority of all LNG moving to markets outside their own region. PIRA sees the role of Nigerian LNG shifting significantly in the years to come, as the opportunity to place spot volumes in Asia will become harder to justify on a netback basis.

Mixed Data on U.S. Economic Growth, but Positive Surprises on Global Manufacturing

There were three main takeaways from this week’s U.S. data releases: key indicators of economic momentum showed strength; data used as inputs for computing GDP, in contrast, pointed to sluggish growth; and inflation has begun to firm. So the question was: how do these developments impact the U.S. growth and monetary policy outlooks? Globally, key confidence indicators on manufacturing revealed surprising strength during March.

LPG Freight Rates Keep Falling

Spot VLGC freight rates continue to plumb new lows. The benchmark Ras Tanura to Chiba, Japan, rate fell another 12% last week to just $28/MT – 82% below the 2015 high. Freight rates are currently at their lowest levels since 2010. There seems to be little relief in sight as new-build tanker deliveries will continue to flood into the fleet throughout 2016 and with, as PIRA predicts, lower exports out of the U.S. in the second half of this year.

Slow Start to the Injection Season Motivates Buyers

Thursday’s 25 BCF storage draw could be the year’s final week-on-week net reduction, despite a shift to colder-than-normal weather in early April. That said, U.S. balances this month should provide greater clarity on the difficulty ahead of adequately curbing year-on-year storage injections given an end-March carryout of ~2.48 TCF. Moreover, while PIRA’s April balances appear constructive, bearish risks exist on both sides of the ledger.

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.