NYC-based PIRA Energy Group believes that Global economic momentum is stabilizing, which is supportive for the demand for inventory. In the U.S., peak refinery turnarounds drive DOE petroleum balances. In Japan, crude runs ease and stocks jump. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Global economic momentum is stabilizing, which is supportive for the demand for inventory. Global oil demand growth is strong, especially in China, India and the industrialized countries, and will remain so in 2016. Supply growth is quickly eroding. Capacity constraints limit OPEC growth while non-OPEC crude/condensate is about to fall below year-ago levels. Oil markets will need more oil and prices will have to signal this. However, short term, there are strong headwinds for oil prices, but once January is front month and December inventory declines are evident, prices will rally strongly. Political risks to supply are turning higher with more turmoil in Iraq and a rising potential for infrastructure attacks in Nigeria.

Less Potential for Weather-Driven Demand Erases Upside Risk; Supply Builds

The strong supply out of Russia and Norway, combined with the growing presence of unsold LNG in the Atlantic Basin, makes the short-term outlook continuously vulnerable to the downside. PIRA does not expect a major selloff to emerge, and if one were to come, it would not be until mid-December at the earliest due to the need to protect storage going into 1Q peak demand season.

Dutch Imports at Three-Year Lows in Spite of Coal Retirements Ahead; Weaker Gas Prices Will Keep Prices in Check

Total Dutch net imports plummeted to only roughly 100 MWs so far during October, or a three-year minimum. While 1.6 GWs of coal is set to be retired by the year end, the removal of the coal tax, combined with significant weakness in the gas pricing picture, will keep the Dutch prices in check, translating into structurally lower imports in the months ahead.

China’s Coal Demand Struggles Continue; Market Recovery Still Distant

The coal market pushed lower again last week on weaker oil pricing, a strong U.S. dollar (particularly relative to the euro), and continued softness in coal fundamentals. The weakness in pricing was most notably apparent for API#2 (Northwest Europe), likely due to the drop in the euro, while FOB Newcastle (Australia) prices also fell, but to a lesser degree. Demand continues remain soft in many key demand markets, and outside of India, there has been limited rationalization of uneconomic supply. Absent any unforeseen supply disruptions and/or mine idlings or closures, weakness in pricing will persist.

LPG Pulled Lower, Ethane Rebound Continues

U.S. NGL markets were pulled lower by the broader energy markets. November Mt Belvieu propane futures fell 3.5% to near 43¢/gal, outperforming to more than 5% decrease in global crude prices. Butane at the market center fared slightly better, losing 2.8% to settle near 58.5¢/gal on Friday. Ethane’s outperformance continues with prices flat week-on-week despite the plunge in Henry Hub prices, which led to ethane’s premium in Btu terms surging to 64¢/MMBtu — the largest premium in years.

Clean Power Plan Published, Additional Info Released

The Clean Power Plan is finally set to be published in the Federal Register, with regulations for new/modified power plants and the proposed Federal Implementation Plan (FIP) / Model Trading Rule. Stakeholders will have access to technical support documents on proposed free allocations for the individual covered units, "Gas Shift" ERCs for rate trading. Publication will start the 60-day clock to file legal challenges to final rules and the 90-day comment period for the proposed FIP/Model Rule.

U.S. Ethanol Prices and Margins Fall

U.S. ethanol prices decreased the week ending October 16 and manufacturing margins dropped to the lowest levels since January. D6 and D5 RIN values rose after the EPA implied that the final biofuels mandates will probably be higher than those proposed on May 29.

All About the Dollar

After spending most of the trading week eking out modest gains, the ECB’s forward guidance on rates resulted in an extended rally for the dollar and an apparent end to any immediate bullish hopes for the grain/oilseed quadrant.

Asia’s Manufacturing Indicators Remain Sluggish, but Other Data Are Looking Better

China’s economic data suggested that the country’s economic momentum was roughly stable. The recent resiliency came from the service sector, while the industrial sector continued to struggle. Housing indicators were encouraging. China’s latest rate was not a surprise and is basically seen as a calibration of the government’s policy stance. Data from Japan, Korea, and Taiwan were mixed, but contained encouraging signs.

Peak Refinery Turnarounds Drive DOE Petroleum Balances

We are still around the peak of the refinery turnaround season and this past week’s data, like the prior week, showed a large crude stock, which was almost offset by a large product draw. The resulting 1.5 million barrel overall stock increase was 2.9 less than the increase last year in the same week, narrowing the year-on-year stock excess slightly to 165 million barrels. Sixty percent of the stock excess is in crude oil and 21% is in the two major light products.

Gas Flash Weekly

Another all-time record high for salt storage helped pull total Producing Region inventories deeper into new high ground. Still, maneuverability remains considering that non-salt inventory is ~65 BCF below its high, and capacity remains available in the Consuming East and West. While space remains to absorb surplus supply, the pall of a mild start to the heating season is not only placing an effective cap on near-term prices, but keeping alive the risk of even lower levels.

U.S. Coal Stockpile Estimates

Power sector coal stocks saw a strong seasonal build this month as fall weather patterns and weaker gas prices sapped coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 180 MMst at the end of this month, or 85 days of forward demand based on our forecast of Nov./Dec. average coal burn (vs. 63 days one year ago).

U.S. Ethanol Production and Stocks Increase

The U.S. ethanol industry was stable the week ending October 16, with production rising only 2 MB/D from the previous week to 951 MB/D. Stocks built 84 thousand barrels to 18.9 million barrels, with the only draw occurring in PADD I.

Little Enthusiasm

The last week of the month usually brings with it an anticipation for the upcoming WASDE, but this month feels a little different than most. Whether it’s the general malaise around trading contracts that remain range-bound, or the realization that harvest is quickly coming to an end and with it any chances of a “surprise,” there’s just not a lot of enthusiasm about the November WASDE, scheduled to be released on Tuesday, November 10th.

S&P 500 Continues to Improve

The S&P 500 posted a third week of solid gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased slightly, as did ex-energy. Oil was also slightly lower. With regard to currencies, the most noted move was strength in the Korean won and Thai baht. Korea reported rather strong GDP growth in 3Q of 5% annualized, which was better than expected. China moved to lower interest rates last Friday morning in an attempt to further stimulate their growth prospects.

Japanese Crude Runs Ease; Crude Stocks Jump

Crude runs eased along the lines suggested by our maintenance schedules. Crude imports rose sharply and stocks built 4.9 MMBbls. Finished product stocks drew slightly, but gasoline, naphtha, gasoil, and kerosene stocks built as those demands eased back. The indicative refining margin remains good, though most cracks, other than naphtha, eased.

Seasonal Demand Rises, but Supply Gains Are Formidable

A wide disconnect between incremental, fully operational and functional liquefaction capacity and incremental buying is emerging with no signs of abatement in the coming years.

Global Equities Post a Another Strong Week

Global equities gained again. In the U.S., many of the tracking indices were positive on the week, with technology and industrials performing the best. Retail and energy lagged and were lower on the week. Internationally, many of the tracking indices gained. The Japanese tracking index did slightly better than the U.S. market, but most of the other international indices did not do as well. Latin America was the only index to post a decline.

China Using Carrot Rather than Stick to Rationalize Tea Kettle Refineries

For years, China has been trying to rationalize its inefficient tea kettle refining capacity despite opposition from local/provincial governments and the tea kettle refining companies. China seems to have now found an effective strategy by offering crude import quotas to those refiners rationalizing small CDUs. Eight refiners have already applied for or been granted crude import quotas. PIRA expects the total effect will be a rationalization of 500-600 MBD of capacity, higher utilization of remaining Chinese refining capacity, and higher quality products.

Azerbaijani Company AzMeCo Suspends the Purchase of Gas for Methanol

“Due to the fact that the world prices for methanol decreased, the purchase of gas from Gazprom at the current price has become unprofitable for the company,” said AzMeCo. “As a result, it was decided to suspend the purchase of gas, as methanol production is unprofitable under existing conditions.” During the contract period, AzMeCo received more than 100-mmcm of Russian gas. Azerbaijan Methanol Company (AzMeCo) planned to purchase up to 2-bcm/y of gas from Russia’s Gazprom Export.

U.S. Refiners Creep Capacity Faster

2014 was a banner year for U.S. distillation capacity creep; 2015 also appears to be a good year for creep, although below 2014. With favorable refining margins and crude runs approaching effective capacity, refiners are able to justify a greater amount of creep investment.

Costs Are Down in Low Price Environment, but Current and Future Supplies Are Still at Risk

The current low oil price environment has made it cheaper to operate existing oil fields and to develop new supplies. Compared to last year, Brent-equivalent costs to produce current supplies have decreased by around 9%, while costs to develop new supplies have been reduced by 25% for U.S. shale and 12% for non-shale projects worldwide. However, in spite of these reductions, some high-cost existing production remains at risk of being shut in were Brent prices to fall below $40/Bbl. Also, many new projects require Brent prices well above $50/Bbl to become profitable. Low-cost, non-OPEC supplies and the likely increase in OPEC supplies will not be sufficient to meet future demand. Therefore, higher-cost supplies, including oil sands and deepwater, will be required to balance global supply and demand, requiring prices to rise from current levels.

Analysts Obsession with Conventional Oil Discoveries May No Longer Be Warranted

Conventional oil discoveries have dropped significantly in the past 50 years in spite of record exploration activity, especially in recent years. In the past, this would have driven concerns over reserves replacement, R/P ratios and remaining years of production. However, as unconventional volumes (bitumen/extra heavy oil and shale oil) play a more significant role in meeting future oil demand, the focus increasingly shifts from reserves to costs. But, higher oil prices will still be required for development of high cost unconventional volumes needed to meet demand growth and decline from existing fields.

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 recent JCPOA agreement reached between Iran and the P5 +1, and approval of by the Iranian Parliament, is a big step forward in normalizing Iran’s relations with the international community. In anticipation of the removal of the economic sanctions, Iran has produced a list of fifty oil & gas projects worth an estimated $185 billion that it intends to develop. These projects will be presented at a post-sanctions summit in London planned for February 2016, and auctioned to secure much-needed foreign investment in Iran’s oil & gas sector. A number of IOCs, including BP, Shell and ENI, have expressed interest in re-entering the Iranian market.

Despite these positive developments, DW takes a conservative view with regards to Iranian hydrocarbons production. Total onshore production post-2015 is expected to rise steadily at a 2% CAGR through to 2021, with additional output coming predominantly from projects in the Khuzestan region, including the North & South Azadegan field developments. Several phases of the giant South Pars gas and condensate field development are expected to come onstream within the next few years, contributing to a significant rise in offshore hydrocarbons production to over 5 mboe/d in 2019. However, DW does not expect Iran to reach its 2016 target of raising total oil production to over 4 mb/d until 2018.

There is significant upside potential for this forecast, with projects such as the North Pars, Golshan and Ferdowsi field developments listed amongst those Iran plans to auction for foreign investment. However, Iran’s ability to secure the necessary investment is dependent upon its compliance with the terms of the JCPOA, some of which could take several months to implement. Smooth implementation of the JCPOA will also depend on a continued dialogue between Iran and International Atomic Energy Agency. It is therefore unlikely that Iran will be able to fulfill the commitments needed to lift the sanctions before the end of 2015 or early 2016. Uncertainty also remains surrounding the structure of the new Iranian Petroleum Contract, due to be introduced at the London summit. Therefore, despite the positive outlook for hydrocarbons production, limitations to growth in the short-to-medium term remain.

NYC-based PIRA Energy Group Reports that there are further markdowns to long-term fossil fuel prices. In the U.S., low runs and stronger demand pull product stocks lower and push crude stocks higher. In Japan, runs continue to ease and crude stocks are sharply lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Low Runs, Stronger Demand Pull Product Stocks Lower, Push Crude Stocks Higher

Refinery turnarounds continue to dominate the U.S. petroleum balance sheet. Low crude runs are causing crude stocks to build, and product stocks to draw. Total weekly petroleum inventories set a new record, and increased their surplus over last year. Recent trends in gasoline and distillate demand coming in under modeled values could be an indication of an upward revision when we see the monthly data, but it also could be an indication of weakening economic trends. We expect one more week of peak refinery maintenance, followed by crude runs trending back up.

Even Lower Price May be Needed

With October halfway through, U.S. balances remain on course to end the month with storage near 4 TCF, which would mark a new high and also best the year ago level by ~0.4 TCF. Underlying balances for the month are pointing to more of the same with production still largely range bound and gas burn in the power sector somewhat stronger year-on-year. In sum, though, storage refills have remained relatively stout.

Eastern Grid/ERCOT Market Forecast

On-peak prices recorded a strong m/m increase (+33%) in Ontario (nuclear outages), saw moderate weather-related gains in the Northeast (MA Hub, NY-J, NY-G and PJM-W), fell slightly in the Great Plains (rising wind generation), and declined more sharply in ERCOT and MISO South (fading cooling loads). Northeast winter prices have been revised down as weaker fuel oil and LNG prices are expected to limit upside risk in gas prices. Winter prices are down year-on-year in most markets assuming normal weather (Feb 2015 was much colder than normal).

Bearish Fundamentals Continue to Depress Coal Pricing

The coal market returned to its downward trajectory this week, with prices essentially giving back all the gains made last week. Weaker oil prices, the end of the labor strike in South Africa, the extension of the lifting of the rail ban in Colombia, and news that Chinese import declined again in September all served to push the market lower. The market continues to search for a bottom, but with no end in sight to the declines in Chinese imports (particularly with domestic producers cutting prices) and limited production cutbacks, PIRA believes that this bottom has not yet been reached.

Pakistan Reveals RLNG Prices

Pakistan’s Oil and Gas Regulatory Authority (Ogra) has issued the much awaited RLNG (Regasified liquid natural gas) prices and announced the provisional rates of the gas. The authority, however, refused final determination of the RLNG prices until certain condition are met…the authority has agreed to determine the RLNG prices on provisional basis, the notification said.

Asian LPG Outperforms, Arbs Open

Asian LPG markets were by far the best performers last week, especially considering they didn’t have a chance to perform in the West’s Friday afternoon rebound. Propane and butane both lost around 2.5% of value, far less than seen in Western markets. The relative strength in Asia led to the opening of the spot arbitrage from the U.S. by the largest amount since June.

RGGI Nuke Retirements Tighten Balances

Nuclear units are a key source of non-emitting generation in the RGGI cap and trade region. Entergy announced it would close Massachusetts’ Pilgrim nuclear plant (680 MW) no later than June 1, 2019 and the James A. Fitzpatrick plant in NY, is facing some of the same challenges. Replacing power from these two plants with in-region natural gas combined cycle generation would add to emissions, challenging the RGGI compliance cushion.

U.S. Ethanol Prices and Margins Lower

Ethanol prices fell the week ending October 9, pressured by lower corn prices. Margins also declined, partly due to a drop in co-product DDG values.

Iowa is Dry and Confused

After a brief two-day visit to Iowa last week, two things are certain; it’s extremely dry, resulting in little propane use for crop drying, and there’s a lot of uncertainty about what 2016 will bring acreage-wise with these below profitable-level-prices in corn.

Freight Market Outlook

Rising tonnage demand and modest fleet growth have allowed excess capacity to be absorbed in 2015 and this has produced the strongest tanker markets since 2008, helped further by very cheap bunker fuel prices. But volatility remains as evidenced by the wide swings in tanker rates. VLCC markets staged a remarkable rally rising from their lowest levels of the year in late August to their highest in early October. But so far the knock-on benefits of higher VLCC rates have not filtered down to the other tanker groups, creating some unusual rate spreads and perhaps signaling that the VLCC rally was overdone.

Euro Area’s Economy Is Strengthening Broadly, but U.S. Is Still Ahead of the Curve

The U.S. and the euro area updated data on consumer spending, inflation, and manufacturing output this week. Key takeaways: household spending data have been mostly solid; excluding energy and food prices, inflation has been trending resiliently; and a recent slowing in U.S. manufacturing growth is potentially a worrisome sign. Next week’s major data releases include third quarter GDP from China.

Canadian Federal Elections: Lack of Outright Majority Signals Political Uncertainty To Come

Only a few days remain until Canada’s October 19 federal election, and the race is looking increasingly tight. At this point, it appears unlikely that any party will win an outright parliamentary majority. But at the very least an end to the Conservative Party’s four years of majority rule would have implications on the energy sector. On balance, the Conservatives are more supportive of pipelines and LNG projects, while the centrist Liberals and center-left New Democratic Party (NDP) favor more stringent carbon policies. Although the makeup of the next government is highly uncertain, we believe the lack of an outright majority will make the government formation process more complicated and reaching a consensus on core issues may be more difficult over the coming years.

Japanese Runs Continue to Ease, Crude Stocks Sharply Lower

For the week, crude runs eased again with very low imports such that crude stocks drew a sharp 5.5 MMBbls. Finished product stocks rose mostly on a naphtha stock build. Gasoil and kerosene stocks posted draws. Indicative refining margins remain good but were lower on the week.

Suppliers Immediately Responds to Weather-Induced Demand and Then Some

The response to colder than normal weather has been immediate and decisive by a variety of suppliers and shows that even in a relatively bullish environment for storage in Germany, the price risk to the upside is limited. If just-in-time-supply can perform for the entire winter like it has over the past week, the relatively lean storage situation compared to last year is not going to be an issue.

French Front Month Dive in Spite of Early Cold Snap

With colder weather emerging this past week, the most interesting dynamic was the ability of all gas-fired markets connected with France to lower their call on French power, with Italy even shifting into a net exporting position - an outcome we have not seen in a while. However, is this dynamic justifying France pricing at €40/MWh for the balance of the year?

Ethanol Stocks Rise

U.S. ethanol Inventories built by 144 thousand barrels to 19.0 million barrels the week ending October 9. Production was relatively flat the week ending October 9, decreasing slightly to 949 MB/D from 950 MB/D in the prior week.

Interest Waning

A quick look at Fund interest shows very little interest in corn and beans on a net basis with a continuing short position in wheat. Consensus pointed towards a short bean/long corn position going into last week’s WASDE and when the numbers failed to confirm the positioning an exodus ensued.

Fracking Policy Monitor

EPA, in August, issued a significant regulation impacting fracking, implementing President Obama’s Methane Strategy. Another higher profile federal effort suffered a setback as a judge called into question BLM’s authority to regulate fracking at all. Fracking rules are the subject of policy riders on still-pending federal budget bills. North Dakota continues to be responsive to industry concerns, relaxing regulations where production or profits are threatened. Seismic activity in Oklahoma continues to be a growing issue. Local authority to regulate fracking remains in question.

Key Indicators Continue to Improve

The S&P 500 posted a second week of gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased slightly, but ex-energy was higher. Oil was slightly lower. With regard to currencies, many of the currency groups that had been performing poorly continued to post renewed strength. The U.S. dollar was slightly weaker against the euro and British pound. The Cleveland Fed released their expected inflation series for October, and all tracking maturities showed a lower rate of expected inflation.

Stock Build Slows

Commercial oil inventories in the three major OECD markets — United States, Europe and Japan — based on preliminary data increased 42 million barrels in the third quarter, down from 63 million barrels in 2Q and 92 million barrels in 1Q. The third quarter 2015 stock build was 9 million barrels less than the year earlier stock increase and, therefore, modestly reduced the year-on-year stock surplus to 181 million barrels (or 8%). While not a record, the end 3Q inventories were the highest level since 1990.

More Nuclear Restarts are Just the Beginning for Reduced Gas Demand in Japan

Almost everything about Japanese gas demand will be looked at to be some level of bearish at this point. Short of a full stop in nuclear restarts, both short and long-term considerations will mean the world's largest importer of LNG will be buying less and less in the months and years to come.

Saudi Arabia: Relying on Oil in Power Generation

Faced with rapidly increasing domestic demand for oil and gas in the power sector at still heavily subsidized prices, Saudi Arabia's stab at rebooting its energy policy squarely focuses at diversifying its supplies away from traditional sources. Such a transition is going to take time, but the goals are just as clear in Saudi as they are in Europe; a movement away from fossil fuel use in areas where both strategic and cost effective alternatives exist. An ambitious announcement of a large nuclear program of 16 reactors over the next several decades and a plan to bring online over 40 GWs of solar capacity by 2040 are the end game, but the Kingdom will continue to see increasing domestic oil and gas burning in the short- and medium-term in order to meet aggressive electricity demand growth.

Weak Fundamentals To Weigh on European Carbon Gains?

Higher auction volumes, combined with potential additional industrial sales, could increase EUA supply in 2016-2018. Emissions demand growth remains weak, and lower gas prices are leading to lower implied carbon prices. There are no upcoming policy developments until post-2020 reform discussions begin in earnest next year. Market sentiment can still play a major role, but stronger fundamentals may soon be needed to maintain the price increases of the last few months.

Global Equities Post a Third Straight Positive Week

Global equities gained again. In the U.S., many of the tracking indices were positive on the week, with utilities and technology performing the strongest. Energy was slightly higher, but underperformed. Internationally, all the tracking indices other than Latin America posted gains, with China doing the best.

Third Quarter Asian Demand Looking Robust

Partial third quarter demand data is now available for seven countries in Asia which represent over 24 MMB/D, or 77% of Asian oil demand. The data is admittedly preliminary but it is indicative and does show that this group of important Asian countries are growing 1.4 MMB/D, or 6% year on year. China and India account for 96% of the growth of the seven countries.

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

The new heating season is off to a cold start in Europe and Japan and warm weather in the U.S. With half the month completed and a second half forecast, October is expected to be 18% warmer than the 10-year normal and 5% warmer on a 30-year-normal basis.

Further Markdowns to Long-Term Fossil Fuel Prices

As a result of our bi-annual development of our long-term energy balances, PIRA has marked down its long-term fossil fuel price projections for crude oil, international gas (NBP and Asian LNG), and coal. In the case of oil, the principal driver was the view on long-run supply cost and price responsiveness. International gas price reductions reflected both lower crude prices and the impact of potential gas supply that looks likely to far exceed demand growth. The reductions in coal were primarily associated with greater competition from lower priced gas and lower costs associated with oil.

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.