NYC-based PIRA Energy Group reports that oil market rebalancing has begun, price lows are in. In the U.S., there was a flat profile for stocks of four major oils. In Japan, crude runs declined, imports plunged and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

With Oil Market Rebalancing Begun, Price Lows Are in

Oil market rebalancing has indeed begun with the stock surplus about to level off. OPEC/non-OPEC freeze is a change in strategy and positive for prices. Expect a new price anchor of $50/Bbl to be talked about. Prices will move higher like a step ladder, as required supply creation becomes more evident. Refinery margins and runs will generally be healthy through the summer before weakening. Political risks to supply are growing.

How Important Are LNG Price Levels to NBP Price Potential

The last time that storage came out of February at this high of the level was in 2014, which led to all-time storage highs by the end of October of that year. While high storage did not automatically translate into a collapse in spot prices, it is somewhat interesting that spot prices have been on a consistent decline from November 2014 to yesterday (except for February 2015).

U.K. Spark Spreads Remain Weak in Spite of Extremely Tight Market

With the market conditions changing considerably since the Capacity Market was established, the U.K. DECC has launched this week a new consultation with the aim of reforming the Capacity Market design. The proposed changes do not come totally as a surprise, but from a trading standpoint, the proposals do not change the big picture in the electricity market until at least the winter 2017-18, basically leaving the U.K. market still extremely vulnerable, with razor-thin spare capacities through the upcoming winter.

Litigation Around CA Cap and Trade Auction

Auctions have been a key feature of the California’s cap and trade program, with the auction reserve price offering guidance for a price floor in the secondary market. The ability of the state to sell allowances via auction has been under legal attack with news on developments expected soon. PIRA believes that in the event of an adverse decision, eventual market impacts may be limited — particularly if the auction of consigned allowances is allowed to continue. We also expect the California legislature would act to explicitly authorize auctions for all allowances. Quebec’s auction would be unaffected by this court ruling and Ontario will be offering a significant part of its cap at auctions when its program is slated to start — though both have significantly lower reserve prices.

Freight Market Outlook

Coming off their best year since 2008, tanker markets in 2016 have turned sharply lower over the first two months. VLCC markets led the slide with rates in the benchmark Mideast/Asia trade plunging by 50% as China reduced crude imports substantially in January from record levels in December and market sentiment turned negative. Rates in the other vessel groups have also registered significant declines since the start of the year. Furthermore, PIRA expects the rise in global stocks will reverse and start to decline in second half 2016, putting additional pressure on tanker rates as volumes contained via slowdown and floating storage start to shrink.

Thermal Coal Market Beginning to Show Signs of Moving Back into Balance

Physical coal pricing was mixed in February, with coal prices continuing to follow the lead of oil, although coal price movements remained relatively muted compared to oil. On top of the upward momentum in oil prices, the potential for a labor strike in Colombia gave pricing some tailwinds at the front of the curve, particularly in the Atlantic Basin, while the balance of the curve shifted lower, likely due to the announcement of the additional U.K. coal-fired capacity closures. In the Pacific Basin, Chinese thermal coal imports declined only marginally in January, a notable departure from the sizeable drops that occurred in every month in 2015. PIRA has long held the belief that it will be nearly impossible for coal pricing to recover appreciably in 2016 or 2017 if China's imports continue to fall.

Ethanol Production and Stocks Decline

U.S. ethanol production declined for the first time in four weeks, dropping to 987 MB/D from 994 MB/D during the preceding week. Ethanol inventories continued to sink from the record high set earlier in February, falling by 481 thousand barrels to 22.6 million barrels.

Dollar Weakness

All three grain and oilseed price reversals last week coincided with a double top formation Tuesday/Wednesday around 98.60 in the dollar index. The markets remain both starving for any new information and devoid of any spring weather risk premium. Option volatility is low and should remain that way this coming week despite a WASDE release.

Global Equities Post Another Positive Week

Global equities posted a third straight week of gains, rising 3.5%. Many of the tracking indices are now displaying significantly better looking trends. In the U.S., all the tracking indices were again higher on the week. Banking and energy outperformed, while consumer staples lagged. Internationally, the tracking indices also moved higher. The best performer was Latin America, specifically, Brazil, which posted an 18% gain in local currency and 21% gain in dollar terms.

Midcontinent Production Falls as Crude Stocks Rise

Crude prices bottomed out in early February, before recovering in the second half of the month. U.S. crude stocks continued to build, including a 2 million barrel build at Cushing. Brent and LLS both rebounded relative to WTI, and Canadian differentials rose sharply on upcoming oil sands maintenance. An open export arb for much of February should lead to record crude exports in March.

Japan EG Deregulation Looms Large Over Plummeting EG Demand

With Japan not operating a country-wide gas grid, it is the electricity grid and its future that will play a key role in determining the position of gas in a deregulated market. From the government on down, Japanese gas demand (and LNG imports) appears to be headed for a long, steady decline, one that is well under way and already applying downward pressure to spot prices in Asia.

Bearish Fundamentals, but LT Support From Program Review

RGGI pricing has recovered somewhat since the mid-February sell-off, but prices are still lower than they were going into last December’s auction. PIRA expects the March 9th auction to clear in line with the secondary market - without triggering CCR allowances available at $8/ton. We anticipate a weaker than usual coverage ratio – as a portion of demand was satisfied by sales from the price plunge. RGGI emissions fell 4% in 2015 and are expected to be down this year as well. While compliance players are not challenged by near-term allowance surrender requirements, a bank draw is required each year. PIRA expects prices will climb over the course of the year, particularly with forthcoming details from the 2016 Program Review.

Western Grid Market Forecast

Spot on-peak power prices saw significant declines at major Western hubs in February as temperatures rose well above normal and gas prices tumbled. Mid-Columbia prices averaged below $17/MWh, down $6 from January. Palo Verde fell by ~$2.50/MWh to average $19 while the California hubs averaged in the mid $20s. Above-normal temperatures also contributed to strong runoff in the Northwest despite below-normal precipitation. Continued above-normal temperatures will depress heating loads and boost runoff and hydro output in March, but we do not expect hydro generation to approach prior-year levels. Meanwhile, weak gas prices will sustain high gas-fired generation and implied heat rates. However, beginning in June several factors will converge to drive implied heat rates below prior-year levels including rising gas prices, stronger hydro and solar generation, higher imports from the Northwest, and weaker cooling loads in California.

Shortage Risks in Colombia Add Upward Pressure on Coal Pricing

Coal prices moved notable higher last week, on news that union members at the Cerrejón mine in Colombia voted overwhelmingly to strike. On top of this shortage risk, coal producers in China increased their prices this week to 10 yuan/mt ($1.54/mt) on some prompt tightness in supply. While a potential labor strike in Colombia would certainly be a phenomenon, PIRA is skeptical that the tightness in Chinese coal supply and the related rise in pricing is sustainable either. Outside of the potential shortage risk in Colombia, there is not much bullish support for pricing over the next 90 days.

U.S. Biofuels Manufacturing Margins Improve in February

U.S. ethanol prices were range-bound in February, with Chicago values varying between a ceiling of $1.42 and a floor of $1.35 per gallon. Recovering gasoline values and robust gasoline demand provided support, but record stocks kept a lid on the upside.

BRL Rally Helps Soybeans

A noticeable rally in the Brazilian real Friday was followed up by a Commitment of Traders report that saw some large additions to the already bearish positioning held by Non-Commercials. Soybeans had the largest reaction to the real move, in conjunction with a more muted peso rally, while corn and wheat failed to garner much upside enthusiasm on their own.

Belt-Tightening Continues in Latin America

The low oil price environment has continued to inflict pain to players in Latin America, triggering budget cuts and affecting oil production plans. Output from Mexico, Colombia and Venezuela remains on a downward trend while Brazil’s production is still going up thanks to ongoing projects (namely, sub-salt production). 2016 Latin America GDP is now projected to be negative 0.26%. This is impacting consumption of the four major refined products, which collectively, are expected to decrease in 2016. With expected sluggish demand, the region’s imports are also anticipated to shrink. In Brazil, higher crude runs and lower demand will reduce diesel and gasoline imports to 40 MB/D and zero, respectively. Budget cuts increase the risk of operational issues in refineries across the region.

Flat Profile for U.S. Stocks of Four Major Oils

The highest crude imports since mid-December drove a 10.4 MMBbl crude stock build. A sharp decline in reported product demand was reflected by a reduction in the rate of product draw from -8.5 MMBbls last week, to -0.5 MMBbls this week. Recent average demand growth is still strong, with the notable exception of distillate demand, whose decline is much beyond anything that warmer weather can explain.

Japanese Crude Runs Declined, Imports Plunged and Stocks Drew

Crude runs declined 113 MB/D on the week and crude imports plunged such that stocks drew 5.3 MMBbls. Finished products also drew strongly, by 3.4 MMBbls, with sizable draws on all the major products other than naphtha. Product demands were strongly higher. The indicative refining margin remains good. This week saw higher gasoline and naphtha cracks, more than offsetting weaker middle distillate and fuel oil cracks.

Awaiting Producers Response to Storage Glut/Price Collapse

Despite Thursday’s surprisingly “hefty” EIA-reported 48 BCF stock draw, fundamentals of late, weather in particular, have given gas bears lots to cheer about. Following a now “official” 12% milder-than-normal February, the latest guidance for March points to a stunning 20-25% shortfall versus the 10-year normal. Consequently, PIRA’s latest end-March storage is now projected to reach 2.42 TCF, aligning closely to the end of the 2011-12 “winter that wasn’t” heating season. If verified, post-March 2016 balances will require continued strength in gas-fired electric generation (EG) as well as weaker domestic production to keep the industry operating within system limits.

February Weather: U.S., Europe and Japan Warm

February’s heating degree days came in below the 10-year normal by 7% for the three major OECD markets with a composite net oil-heat demand loss of 347 MB/D. On a 30-year-normal basis, the markets were roughly 13% warmer than normal.

Global LPG Weekly Scorecard

April propane futures at Mt Belvieu gained 8.4% to settle at 45.2¢/gal. Butane at the market center underperformed, gaining only 2.4% week-on-week as winter gasoline blending demand diminished.

U.S. Light Product Exports Continued to Grow in 2015

U.S. exports of both distillate and gasoline increased by 8.2% (90 MB/D) and 12.6% (70 MB/D), respectively, in 2015 compared to the year earlier. Volumes of distillate shipped were about twice the size of gasoline shipments in both years. As in the past, Latin America continues to be the most common destination for both products.

Ukrainian Fertilizer Plant Signs New Gas Deals

Ukrainian Public joint-stock company Odesa Port-Side Plant has contracted gas supply in March from Slovakia. The conditions of shipment is DAP – Budince (Slovakia), 20 MMCM. Odesa Port-Side Plant will have to pay an additional charge for entering the Ukrainian gas transport system. In previous weeks the plant operators agreed a new loan facility and had gas agreements laid out with Gaz de France.

Decline in December 2015 Lower-48 Onshore Crude Production Leads Way in Falling Domestic Crude Supply

What is noteworthy in the December 2015 Petroleum Supply Monthly (PSM) is confirmation of declines in domestic crude supply seen in the weekly data. Lower 48 onshore production is leading the way, falling 154 MB/D during December, to 7.11 MMB/D, a production rate 350 MB/D lower than December 2014. The monthly decline in U.S. production was partially offset by a 110 MB/D increase in Offshore Gulf of Mexico production, which at 1.63 MMB/D stands at 180 MB/D over last year. The December 2015 crude balance item turned negative for only the second time in the last 15 months and, at -200 MB/D, stands -575 MB/D lower than December 2014. Domestic crude supply (production + balance item) for December of 9.06 MMB/D was 740 MB/D lower than December 2014, perhaps indicating that more declines are occurring, even if production data have not fully caught up.

Aramco Pricing Adjustments for April — Minor Tuning

Saudi Arabia's formula prices for April were just released. The changes made to differentials against its key regional benchmarks were all relatively small and do not suggest any change in Saudi export pricing policy, which has been to maintain competiveness with regards to volumes and pricing in key markets.

U.S. Coal Stockpile Estimates

While power sector coal stocks have fallen by as much as 20 MMst year-to-date due to falling production levels, milder shoulder season weather and cheap natural gas are limiting coal burn, thereby elevating days cover. PIRA estimates U.S. electric power sector coal stocks stand at 176 MMst as of the end of this month.

U.S. December 2015 DOE Monthly Revisions: Demand and Stocks

The primary light products of gasoline and distillate had strong upward demand revisions in the December 2015 PSM versus the preliminary weekly data, but all other products were revised down strongly. Most of the downward revision to other product demand was due to higher-than-assumed exports. While December 2015 commercial stocks were revised up 8.1 MMBbls, this was a significantly smaller upward revision than last month, and the year/year surplus commercial inventory narrowed from last month.

Global Data Are Mixed, but Key Areas Remain Supportive

In the U.S., healthy job growth during February was the latest in string of positive economic releases. But data on wages and the number of hours worked showed unexpected declines. The latest ISM manufacturing confidence index told a mixed story. China is apparently attempting to increase positive sentiments in financial markets on the heels of the successful G20 meeting in Shanghai last week. India’s 2016 government budget apparently managed to reconcile two conflicting goals. Activity data in Brazil remained weak.

Negative Cash Flows for U.S. Shale and Canadian Oil Sands in 2016

Globally, oil remains cash flow positive, with low cost regions like OPEC and non-OPEC conventional offsetting the cash burn in U.S. shale and Canadian oil sands. In 2016, shale and oil sands are expected to be cash flow negative despite significant capex reductions. Shale would be cash flow positive on further reduced capex, but oil sands cannot even cover operating expenses at PIRA's projected 2016 prices. Based on current spending plans, $50 Brent would be needed for shale to be cash flow neutral and $55 is required by Canadian oil sands.

Financial Stresses Continue to Ease

For the third straight week, the S&P 500 rose Friday to Friday and on a weekly average basis. All of the other indicators such as volatility, high yield debt and emerging market debt posted solid gains. The U.S. dollar has been increasingly mixed. It has strengthened against the euro and eastern European currencies, but has weakened against some of the commodity and precious metals producers. Commodities ex-energy are looking significantly better the past several weeks (a seven-week uptrend). Energy has also moved modestly higher the last few weeks.

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. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.

Click here for additional information on PIRA’s global energy commodity market research services.

Douglas-Westwood (DW) held their inaugural Business Breakfast event in London last week at Southwark Cathedral. The purpose of the event was to showcase DW’s latest research and to offer a network opportunity for their financial sector and energy industry clients.

DW founder John Westwood chaired the proceedings and also gave an introductory talk focusing on macro challenges and opportunities in the current cycle including skills transfer, geographic and sector diversity and cost-effective technical innovation. John also highlighted the significant drive towards the use of natural gas and the potential for the supply/demand gap for oil to narrow later this year.

Research Director Steve Robertson provided a summary of trends in a number of key offshore sectors including floating production, LNG, subsea, offshore logistics and compared the outlook for the onshore and offshore production, noting that we should expect significant extra oil production from long-lead time projects that were committed to prior to the downturn. A comparison was also made between the previous outlook for Deepwater expenditure one year ago and the current view now, with some 92 projects having been delayed/deferred or cancelled. It was also suggested that 2016 and 2017 could be very difficult years for subsea equipment providers that to-date have been partially-insulated from the downturn by significant backlogs – these backlogs are now rapidly declining and order levels remain low.

Ben Wilby provided an in-depth review of DW’s North Sea Decommissioning report, explaining the underlying data, methodology and outputs by country. Ben illustrated how the UK will provide the bulk of decommissioning opportunity overall and the vast majority of North Sea removal work that will occur in the next decade, as Norway (a less-mature producing province with significantly less installed infrastructure) sees most of its respective activity post-2030. The various approaches to decommissioning (including offshore and onshore ‘deconstruction’ and single-lift & transport to shore) were discussed along with potential cost savings from single-lift operations – providing they become commonplace.

Katy Smith finished the session by sharing DW’s latest views on Iran, including an update on sanctions, the outlook for oil and gas production, specific projects that are known to be moving ahead and the expectations for rig requirements, both offshore and onshore. It was explained how DW has taken a conservative view of the potential activity, given a number of evident challenges in working in Iran not least the bilateral US sanctions that remain in place, the caution amongst foreign banks regarding the processing of Iranian payments and the uncertainty surrounding the structure of the Iranian Petroleum Contract.

DW would like to thank everyone that attended – this will be the first of a series of such events throughout the year. If you are interested in attending, please register your interest with Ellie Pickering.

Steve Robertson, Douglas-Westwood Faversham

NYC-based PIRA Energy Group reports that Asia continues to drive global oil demand growth. In the U.S., product stocks drew. In Japan, crude runs are little changed; imports fell and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Continues to Drive Global Oil Demand Growth

Oil markets remain structurally weak for the near term due to turnarounds and as Iranian crude oil exports increase and will take time to rebalance. Asia continues to drive global oil demand growth despite the economic slowdown in China. Asian refinery runs will increase this year with capacity expansions and higher runs in Chinese “tea kettle” refineries. Gasoline cracks will continue to outperform diesel cracks this year.

Gas Prices Collapse Underweight of Outsized Storage Inventories

After briefly breeching the former low set in late December, the NYMEX nearby contract went off the board at ~$1.71/MMBtu — setting the stage for a March Henry Hub Bidweek price that will be ~50¢ below February and also marking a low for the benchmark not seen since March 1999. Much is riding on the demand and supply response to such prices considering the fallout on U.S. and Canadian storage tied to the collapse in heating loads during February. The South Central will account for ~50% of this month’s overall expansion in the year-on-year U.S. storage surplus. The resulting end-February overhang is clearly an impediment standing in the way of a near-term price recovery, especially after considering the South’s increased exposure to Appalachia supply tied to pipeline capacity additions between the regions. Still, given the lack of any draw last March, that surplus is likely to start to contract. Moreover, the acute price weakness now in effect also stands to accelerate U.S. production weakness — even in Appalachian.

February Blows Warm and Is Gone with the Wind

German forward prices are no longer allowing the most efficient coal units to fully recover their fuel, transportation, and carbon costs. Hedging strategies are in part to blame, as power generators continue to sell to secure cash. French prices are more likely to firm, as France will see a heavier nuclear outage schedule this year, while draconian cost cutting measures will undermine nuclear output. Italian prices have been undermined by improving hydro (not only in Italy itself, but also Alpine region) and higher imports from both France and Switzerland. 3Q contract is trading with a €2-3/MWh risk premium.

Coal Pricing Mixed Despite Stronger Oil Market

A general increase in oil pricing helped give the coal market an uplift, although API#2 (Northwest Europe) prices actually lost ground last week. API#2 gave back some, but not all, of the sizeable gains made last week when the market surged on labor strike risk from Colombia. In the Pacific, some signs of stabilization in China’s buying activity along with the rise in oil prices allowed API#4 (South Africa) and FOB Newcastle (Australia) to rise modestly. PIRA continues to believe that API#4 prices remain too strong relative to FOB Newcastle, and we expect more downside for API#4 over the next 90 days, barring unforeseen supply disruptions.

California Carbon Auctions Undersubscribed

With CA/QC allowance prices having fallen below the auction floor in the secondary market, auction results released today indicate both the current and future vintage auctions were undersubscribed — a first for California. Demand was more than sufficient to allow for the sale of all allowances consigned to auction on behalf of CA entities. Unsold allowances will be offered at future auctions — generally when/if auction pricing exceeds the reserve price for two consecutive auctions.

Production Rises, But Stocks Fall

U.S. ethanol production has increased for three consecutive weeks, reaching 994 MB/D, the fifth highest level ever reported. Ethanol inventories dropped from a record high in the previous week, falling by 113 thousand barrels to 23.1 million barrels.

Pressure Continues

Late Friday afternoon saw the wheat short set a record in one COT category while Nidera registered 227 new certificates for delivery against the March soybean contract. No wonder that SRW made a new low last week while soybeans had five losing days in a row.

Currency Depreciation Offsetting Some, But Not All, of the Consumer Benefit of Low Crude Prices

PIRA’s analysis of retail fuel prices around the world shows that the decline in fuel prices is not keeping pace with that of Brent. On a demand-weighted average basis, we estimate that global gasoline and diesel prices are down 40% from July 2014 to January 2016 in U.S. dollar terms, compared to Brent’s 70% fall. Part of the discrepancy can be attributed to subsidy and pricing reforms, fixed taxes, relatively stable downstream margins, and tight gasoline supplies in some locations. But currency depreciation is also having a notable impact. Gasoline and diesel prices in local currency terms are down less than 30% over the period. We estimate that currency weakness versus the dollar is offsetting roughly a third of the price benefit of low crude prices for local consumers. Even so, realized fuel price declines are still substantial and, in our view, will continue to support global oil demand this year.

Financial Stress Eases

Financial stresses eased again this past week. For the second straight week, the S&P 500 rose Friday-to-Friday and on a weekly average basis. All of the other indicators, such as volatility, high yield debt and emerging market debt, also staged varying degrees of improvement. The U.S. dollar has been increasingly mixed. Debate on a U.K. withdrawal from the EU has fed weakness in sterling. Commodities ex-energy are looking significantly better the last several weeks.

Gasoline Cracks Will Strengthen, But Not as Strongly as in 2015

Growing crude stocks continue to weigh on Brent structure for next few months, but fundamentals are starting to improve. Gasoline strength will return and will outperform diesel, partially echoing 2015. Product stock levels grow, but not uniformly as refiners shift yields from middle distillates toward gasoline. Refining margins will recover from recent decline and stay generally healthy, and runs stay reasonably high through the summer before weakening.

North American Gas Forecast Monthly

North American gas market fundamentals have assumed a much less bullish posture, starting with an end-March storage carryout now expected to be within striking distance of 2.3 TCF, ~0.2 TCF above our month-earlier Reference Case. A collapse of February gas-weighted heating degree days relative to normal was the principal cause, but other factors have played a role. Production, led by Appalachian Basin, has made a strong recovery of late, fostering doubts about a near-term Lower 48 rollover. PIRA’s Reference Case sees limited marketing opportunities and capital spending, making the region’s growth prospects even more vulnerable. Sequentially stronger western Canadian gas production of late, coupled with unusually flush inventories, also poses a greater perceived supply side threat to tighter U.S. gas balances.

European LPG Prices Pulled Higher by Broader Markets

European LPG prices firmed, but mostly due to the strength in crude and naphtha prices and not as a result of a tightening supply and demand situation. The region remains well supplied, particularly as larger fully refrigerated cargoes are now loading in Marcus Hook, Pennsylvania, and will be increasingly pointed at the region due to proximity. March propane futures added $22/MT to $256/MT, while cash butane cargoes were called a somewhat narrow $20 higher.

Outlook Forum Mission Accomplished

On paper, the USDA was able to keep carry-outs below 2 billion, 500 million, and 1 billion, its goal going into the Outlook Forum. The questions remains, however, can it last? Without a major weather disruption during the upcoming growing season, prospects for a price recovery seem bleak.

U.S. Ethanol Prices Increase

Ethanol prices rose last week despite record inventories. Manufacturing margins were steady and sufficient for most plants to operate at high rates.

Global Equities Post Another Positive Week

Global equities posted a second straight week of gains, rising 1.1%. The Americas continue to outperform. In the U.S, almost all the tracking indices were higher on the week. Retail, housing and materials all outperformed, while utilities lagged and were neutral on the week. Internationally, the tracking indices were more mixed. Japan, Latin America, and BRICs all outperformed.

Dry Bulk Shipping Market in Crisis Mode

Last month, we discussed the unprecedented collapse in dry bulk freight rates highlighting the breadth, speed, and extent of the rate declines. It is much the same story this month. Hopes that the Chinese, on returning to work after their Lunar New Year holidays, would provide some market momentum have been all but dashed. While Chinese economic data have been delayed by the holidays, the dry bulk freight market has provided its own measure on China’s faltering physical demand for raw materials and it remains ugly. As hopes of a demand-led shipping recovery dwindle, the focus is shifting to supply-side responses. The sheer scale of the dry bulk shipping crisis is starting to have some significant consequences.

U.S. Commercial Stocks Draw

Strong product demand was reflected in a product stocks draw for the week of February 19, while lower crude runs contributed to a crude stock build. This build in crude stocks occurred in spite of mounting evidence that the pace of declines in domestic crude supply has quickened. Gasoline production has begun to transition to a lower RVP content, and this will be reflected by lower butane use and lower gasoline yield. Next week we expect flat crude runs to contribute to another crude stock build, but low runs also contribute to product stock draws.

The Tug of Oil and the Weight of Supply/Demand

Gas is continuing its search for demand as it sets to enter the last month of the winter. February has been another warm month across major gas-consuming markets in Europe. Temperatures are up significantly over last month and are quite high historically.

California Allowances Can Be a Source of Cash for Challenged Oil Producers

California carbon allowance prices dropped dramatically, crashing through the auction floor, indicating expectations that the current vintage auction was undersubscribed — a first for CA. Environmental commodity markets well beyond California have also been sliding over the past two months. For California carbon, financially challenged oil producers that receive free allowance allocations but do not face immediate allowance surrender requirements could sell allowances to raise cash, in turn boosting near-term supply — a phenomenon observed in the EU ETS in the past.

Japanese Crude Runs Little Changed; Imports Fell and Stocks Drew

Crude runs showed very little change for the second straight week. Imports fell back and stocks posted a draw. Finished product stocks drew due to declines in naphtha, fuel oil, and jet-kero more than offsetting lesser builds in gasoline and gasoil. Demands were broadly lower and considered soft. Margins continued to weaken, extending their decline from peak December levels.

The U.S. Is Better, but It Can’t Carry the World Economy Alone

U.S. economic growth is picking up pace, powered by strengthening consumer spending. GDP growth for the fourth quarter was revised up, and households significantly increased their spending during January. Manufacturing-related activity data (such as industrial production and durable goods orders) were constructive in January. But based on a historical pattern, the U.S. strength is probably not sufficient by itself to lift the slumping global manufacturing sector. Important economic events pack the calendar for the next few weeks.

U.S. Exports Debut Amid Unstable Arbitrage Outlook

The recent plunge in Henry Hub prices, combined with some support for NBP prices at current levels, has made this U.S.-Europe trade look quite appealing — so appealing that it is hard to make a case for the U.S. LNG to go anywhere else other than to South America, which is typically looking at paying the netback equivalent that would be captured by sending the cargos to Europe. Europe also has several buyers in the Mediterranean gauging the relative value of LNG versus oil-indexed prices.

Gulf of Mexico Production to Demonstrate Short-Term Resilience, Medium-Term Weakness

Gulf of Mexico crude production has grown at a 7% CAGR since 2012 and is expected to continue to grow at this pace until 2017. The resilience is the result of the ramp-up of recent projects and the start-up of new projects already under construction. However, low prices will have medium-term impacts as project sanctioning has slowed, causing few projects to come online in the 2018-2020 period. PIRA expects GOM crude production to grow from 1,550 MB/D in 2015 to 1,800 MB/D in 2017, then decline by 200 MB/D to 1,600 MB/D in 2020. Longer term, we expect production to breach its 2017 highs by 2023 as projects currently in the appraisal/definition stage come online.

Supply Growth Becomes Increasingly Unaffordable

While March signals the approaching official end of the heating season, the dearth of degree days in February has seemingly convinced the market that the winter has already concluded — given the improbability of clearing excess seasonal inventories. Thursday’s extraordinarily light 117 BCF draw, relative to expectations pinned ~20 BCF higher, likely represents the final triple-digit draw of the season. The fundamentals for the week-in-progress suggest that withdrawals have plummeted to a historically bearish seasonal level in the low-30s, with only three other sub-40 weekly readings ever recorded in February (1995, 2006 and 2009). Thereafter, milder weather and the transition to spring will significantly limit the call on storage through end March.

Oil Substitution Re-Enters the Debate as U.S. LNG Turns South Before East

PIRA sees every reason for the deterioration of bids in Asian spot markets to continue in the month ahead. Regional gas markets will be entering the lowest period of the year for seasonal gas demand and, additional LNG supply from Gladstone, APLNG, and Gorgon is scheduled to emerge from Australia alone. Buyers may not be in too much of a hurry to lock down spot volumes given the circumstances and the position of buyers to lift more contract LNG as the new trains emerge.

Russia and Turkey’s Gas Price Dispute Leaves Gas Flows Lower

Russian Gazprom reduced daily natural gas supplies to Turkey by around 50% from Feb. 10 along the western line. The company decided to reduce its natural gas flow after a price dispute with private buyers in Turkey. Earlier it was reported that Gazprom, which was in discussions with six Turkish private companies on Jan. 29, cancelled the 10.25% discount applied on natural gas supplies from Gazprom from Jan. 1 this year.

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. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.