NYC-based PIRA Energy Group reports that the oil export and revenue sharing agreement between the KRG and Baghdad has all but collapsed, but the Kurds are ramping up independent exports. In the U.S., stocks increased this past week marking a new all-time high. In Japan, crude stocks drew strongly, thus reversing the previous week’s rise. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Oil Market Ignores Overall Stock Build, Focusing on Large Cushing Draw
Total commercial U.S. stocks increased this past week, marking a new all-time high. Higher crude runs drove a crude stock draw, but those higher crude runs and sharply weaker product demand drove a product stock build. Wednesday’s WTI rally was most likely driven by the largest Cushing stock draw of the year. In addition, ongoing supply outages in Canada, declining U.S. sweet production, and the pending Line 9 startup have markets less worried about October maintenance-driven containment problems, and more focused on a tightening Midcontinent sweet balance later in the year.
2Q15 Producers Bogged Down, But Year-on-Year Gains Still Being Realized
Hampered by not only the mud season but also plant maintenance and forest fires, 2Q15 Canadian production retreated from the robust volumes witnessed in 1Q15. Despite the sequential decline, PIRA Survey Group companies still managed to achieve growth compared to the same period last year. However, year-on-year growth is not expected to continue into the second half of 2015, with declines forecast to begin in 3Q and enlarging in 4Q.
Eastern Grid/ERCOT Market Forecast
On-peak prices increased from July in the Northeast and Gulf Coast markets but were mostly lower in the Midwest and Southeast. Prices were consistent with weather patterns as Midwest temperatures remained below normal. One additional factor in the Northeast was a rebound in gas prices that boosted eastern NY markets close to prior year levels ($2.40s/MMBtu).
Week-on-Week Losses Persist in Bloated Thermal Coal Market
Despite a modest midweek rally when rising oil prices pushed the market higher, coal prices yet again moved lower last week. FOB Newcastle (Australia) prices again held up relative to API#2 (Northwest Europe) and API#4 (South Africa) across the forward curve, with marginal week-on-week increases for 1Q15 and Cal-18 recorded as well. The market still remains generally oversupplied, as evidenced by the fact that any rally in pricing is generally short-lived, with ample supply chasing limited demand. PIRA believes that coal prices will continue to balances on costs, which will keep the coal market following the trail cut by the oil market. This is not expected to provide much of an uplift over the next 90 days.
European LPG Demand Improving
LPG demand in the UK and France has increased noticeably this year. First half 2015 LPG demand in the UK of 1.399 million MT was 26% stronger than a year ago. Meanwhile, first half 2015 demand in France of 2.053 million MT was 18% higher year-on-year. A combination of lower prices and higher competitiveness vs competing feedstocks is supporting increased use of LPG, particularly in the petrochemicals sector.
Flurry of Activity as Obama Regulatory Window Closing
This summer was busy, led by the final Clean Power Plan, the new/modified unit NSPS rule, and proposed model FIP. President Obama's Methane Strategy was advanced with proposed rules for fracked oil wells and landfills. The controversial Ozone NAAQS, is due Oct. 1, while Renewable Fuel Standards for 2014-16 look to be finalized by their end-November deadlines. Truck emissions standards (beyond 2018) have a planned May 2016 finalization. Information on priority rulemakings will be available with the Fall Regulatory Agenda release.
Ethanol Prices Rise
U.S. ethanol prices moved higher last week, tracking rising corn values. Ethanol is selling at a premium to gasoline in most of the country.
Demand Remains the Question
Seasonal lows are typically put in for corn and beans within the next 6 weeks, with corn doing it last year on October 1st. Our concern this year, if you haven’t figured it out already, is demand. General malaise over most commodities resulting in the single largest week of Index liquidation on record a few weeks ago, along with a strong dollar, low gas prices, and relatively poor exports do not make us over-friendly.3.75 corn or 8.75 beans.
Worries about Emerging Economies (Particularly China) Delay Fed Tightening for Now
In a press conference after this week’s policy meeting, Fed Chair Yellen was explicit about why the central bank stayed put: growth concerns about China and other major emerging economies, and the resultant volatility in global financial markets. The Fed’s stance clouds the monetary policy outlook, since worries about emerging markets will probably not dissipate quickly. In particular, concerns about China are likely to linger, as the country’s latest data releases turned out to be disappointing.
Iraq Oil Monitor, 3Q15
The oil export and revenue sharing agreement between the KRG and Baghdad has all but collapsed, but the Kurds are ramping up independent exports. Multiple attacks on the ~650 MB/D northern export pipeline stopped flows to Turkey for nine days in August, increasing the risks to 750 MB/D of combined Kurdish and NOC production. Southern exports averaged 3 MMB/D from June to August, as the installation of new infrastructure facilitated the segregation of a Basrah Heavy grade. However, capex cuts at major southern fields could endanger additional production growth.
Making Sense of How Dutch Supply Will Be Replaced this Winter
Dutch gas production. We've always called it the invisible hand of the European gas market, but due to current circumstances it's not so invisible anymore and needs to be a focus for the emerging balances. Additional data on storage in Germany and the U.K. shows that each country will head into winter with lower-than-normal storage that will require a stronger pull on prompt supply if the weather turns colder than normal.
The Low Gas Price Effect on India Power Generation
Asian import prices overall have been on a steep downward trajectory since January, yet a corresponding uptick in demand has not been forthcoming to date. This is about to change, at least in one country. In India, a new government program to provide subsidies to power generators to import LNG for use in domestic power plants is now underway and garnering considerable interest.
China Looks to Reduce Industrial While Raising Residential Gas Prices
China’s National Development and Reform Commission (NDRC) could adjust downward non-residential gas prices by CNY0.5-0.6/cm ($2.18-2.62/MMBtu) within one to two months, sources close to the NDRC said. Meanwhile, the NDRC, the country’s top economic planner and price-setter of key commodities as oil and gas, would continue to optimize multi-tier pricing of residential natural gas, and overall prices of residential gas would go up. The adjustment of natural gas prices is based on performance of international oil prices in 2015 and would factor into environmental protection, economic stability, interests of energy companies as well as readjustment of energy structure.
Fuel Pricing Makes French Units More Competitive this Winter
Weather represents a major driver for French pricing during the upcoming months, with this year also featuring dry hydro conditions. The latest RTE monthly bulletin confirms that hydro output has plummeted to minimum levels in history, especially as a result of the July heat wave. However, other factors will be countering the likely lack of water in the upcoming months, with increasing wind capacity and plenty of cheaper fuel options likely keeping French power prices in check.
Stress Rises on Friday Selloff
On a weekly average basis, the S&P 500 gained for the third straight week, but Friday-to-Friday was little changed due to the selloff at end-week. Volatility also fell on a weekly average basis but rose on Friday’s selloff. High yield credit (HYG) and emerging market credit improved modestly for the week. Overall, commodities declined, but ex-energy was higher. The Cleveland Fed released their inflation estimates for September which were higher on all maturities.
Ethanol Inventories Fall
U.S. ethanol stocks dropped last week to the lowest level of 2015. Ethanol-blended gasoline manufacture fell to a 15-week low 8,788 MB/D as the peak driving season came to a close.
Shaky Soybeans
The soybean market feels like it’s holding on by its fingertips. Last night saw another test of the $8.65 area, a place that’s been tested a half-dozen times in the last month. If you throw out the spike lows of $8.55 on August 24th (Chinese equity collapse) and $8.5325 on September 11th (WASDE), you have what looks like a pretty good base, inferring to many that demand is strong between $8.65 and $8.75, something PIRA has commented on quite often of late.
Japanese Crude Stocks Draw Strongly, thus Reversing Previous Rise
Crude runs eased, but crude imports dropped sharply and crude stocks corrected back down following the surge of the previous week. Finished product stocks built despite modest draws on gasoline, gasoil, jet, and fuel oil. Kerosene demand eased and the stock build rate accelerated from 84 MB/D to 108 MB/D. The indicative refining margin remains good and cracks this past week again firmed.
Fast-Falling Power Loads to Accelerate Storage Builds
Thursday’s reported build served as a continuation of trends seen in recent EIA weekly releases — namely strong gas-fired electrical generation (EG) alleviating fears of storage congestion as the heating season approaches. Our projected end-October storage carry has hovered between 3.90 and 3.95 TCF for some time. While record heat in September has given weather-induced demand a healthy lift and tempered injections, wildcards in October do not take the threat of congestion completely off the table.
Global Equities Mixed
Global equities markets, on average, were modestly changed. In the U.S., the broad market declined due to the sell off on Friday. Utilities moved higher, while banking was the weakest performer. Energy largely matched the U.S. market average performance. Consumers staples and discretionary out performed. Internationally, Latin America posted a decent gain, while Europe and Japan declined, underperforming the average.
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.
For much of the period since the year 2000 – characterized by high and rising oil prices, and long-term concerns over global oil supply – decommissioning took a backseat. Asset lives were extended through improved recovery, enhanced maintenance, and, critically, successful divestment. Smaller, more agile operators found success extracting from fields that had ceased to be profitable under original ownership, and with market fundamentals pointing towards continued high prices, many agreed to the transfer of decommissioning liabilities.
But with oil at $45/bbl, the model no longer works. Buyers cannot absorb the liabilities associated with big oil fields whilst returning value for shareholders. For sellers, other options do exist: bundling of legacy assets alongside new, promising acreage has worked in the past, whilst the model of selling assets without the transfer of decommissioning liabilities has precedents and real scope to reduce the gap between buyer and seller.
DW believes, however, that the current fundamentals will lead to significant growth in decommissioning activity on the UKCS. Operators are under increasing pressure to reduce exposure to high-cost regions, and remove decommissioning liabilities from balance sheets. Without traditional sale routes, operators will increasingly make strategic decisions to push forward with asset decommissioning. Advantages for first movers are evident, with the opportunity to avoid constraints in the supply chain, and take advantage of suppressed rig rates for P&A.
Opportunities for related investment exist. Decommissioning is a nascent part of the industry, and represents a huge technical and operational challenge. The Wood Report estimates costs of up to $50bn for UKCS decommissioning. The final figure may be far higher. Companies offering solutions – products, services, or assets – that improve safety and efficiency will thrive. Companies involved in P&A will benefit, whilst maintaining an underlying level of demand associated with normal field operations.
For the North Sea, it’s not all doom and gloom: the region has extensive infrastructure in place, investment continues for the most promising fields, and the best existing assets remain profitable. But the region is mature. And producing in the North Sea remains expensive in a world awash with oil. For North Sea decommissioning, it appears that this time, it’s different.
NYC-based PIRA Energy Group Reports that U.S. commercial stock set a new record high, but surplus narrowed week-on-week. On the week, Japanese crude runs eased fractionally. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
U.S. Commercial Stocks set New Record High, but Surplus Narrows W/W
Total U.S. commercial stocks built to a new weekly record the week ending September 4th. However, with a much larger overall build last year, the year-on-year excess narrowed. The commercial stock surplus should narrow again this week. The DOE weekly crude production number reflected their new lower Short Term Energy Outlook forecast, but another large crude balance item resulted in domestic crude supply of 9.50 MMB/D. Total petroleum demand growth rates remained strong, with declining gasoline growth offset by increased distillate growth.
North America Natural Gas Market Takes on Shade of Optimism
The hot weather initially expected through the first week of September has not only packed a big punch, but extended into a second week bringing with it intense heat normally not associated with the shoulder season. The week-in-progress will have the highest CDD accumulation since records dating back to 1950. Electric generation burns in excess of 32 BCF/D for the Reference Week and the week-in-progress tied to hot weather, together with now complete storage data for August, should quell if not entirely eliminate storage congestion concerns ahead of the heating season.
U.S. Coal Prices Sustain Downward Trend W/W
Coal price again moved lower last week, primarily due to a downshift in oil prices early in the week, as well as a ruling that the Colombian rail constrain is effectively over. Despite this freeing up of Atlantic Basin supply, API#2 (Northwest Europe) held up by the largest extent in the prompt, compared to greater declines for API#4 (South Africa) and FOB Newcastle (Australia). Coal market fundamentals remain unconstructive to price gains, with slack demand and insufficient supply tightening. PIRA continues to assert that the coal market will move in concert with oil pricing over the short term, limiting the upside for coal over the next 90 days.
U.S. Ethanol Prices and Manufacturing Margins Higher
After being stable for over a month, U.S. ethanol prices were higher the week ending September 4. Manufacturing economics also improved, boosted by lower corn costs.
WASDE Review
So, what now? We heard a lot of comments this weekend from grain merchandisers that producers should “reward” this post-WASDE rally with additional sales, both in 2015 and 2016. The reason for this is both technical and the general negativity that continues to surround commodities.
Mixed Climate/Energy Legislation in California
A bill to set Greenhouse Gas reduction targets for California beyond 2020 did not pass, largely due to intra-governmental turf battles. The short-term impacts of the bill’s failure are muted; long term targets have been in place via executive orders (unlikely to be altered soon). Carbon markets remained largely unfazed and regulatory efforts to achieve reductions post 2020 are ongoing. A pared-down SB350 did pass, enshrining ambitious 2030 renewables and energy efficiency targets. Failure to cement long-term emissions goals adds to policy uncertainty.
Japanese Crude Runs Ease Fractionally W/W
Japanese crude runs eased fractionally the week ending September 5th, while crude imports surged and crude stocks more than recaptured the large stock draw in the prior week. Finished product stocks drew modestly. Gasoline demand was slightly lower, while higher yield was largely offset by a rise in exports, and stocks drew a bit. Gasoil demand was higher, but so was yield, and stocks built slightly.
U.S. Ethanol Production Rises for the First Time in Four Weeks
U.S. Ethanol output increased to 958 MB/D from 948 MB/D as more plants completed their summer turnarounds. Ethanol inventories were drawn by 360 thousand barrels to 18.6 million barrels, which was 621 thousand higher year-on-year.
U.S. LPG Prices Strengthen with Seasonal Demand
Strength in U.S. LPG prices is persistent. As the off-season inventory building season comes to an end with doomsday scenarios of soaring inventories never materializing, prices are recovering ground lost due to these fears. Propane and butane at Mt Belvieu outperformed broader energy markets by logging gains of 2% to 44.8¢ and 57.6¢/gal, respectively. Ethane gained 1% in line with natural gas prices to maintain a 13¢/MMBtu premium above Henry Hub prices.
Russian Natural Gas Prices at Excellent Value
It has been a good time for Russian gas marketers and policymakers to test the waters on both short- and long-term structural changes to how gas is marketed. Russian gas prices are an excellent value right now relative to competitors and it is an enticing "buy low" moment for its customers. And when we use the term "buy" in the European gas market context, the definition ranges from the buying of more gas now to the buying of the idea that auction sales and Nord Stream II are positive concepts for the future.
Financial Volatility Lessens W/W
Financial volatility as measured by the VIX index lessened the week ending September 11th, but stresses are still seen as elevated. With regard to currencies, there continues to be local currency weakness in the Asian export economies, the commodity producers, along with other currencies such as the Turkish lira and South African rand. Commodities remain generally in decline, though there was again strength in palladium, aluminum and copper. The non-energy commodity index was higher on the week.
Summer’s Last Gasp for Counter-Seasonal Market Balancers?
The vital role in balancing the market played by counter-seasonal Mideast and South American markets, as well as newcomers Egypt, Jordan and Pakistan, cannot be understated in a world that should have seen a large-scale supply surge with the addition of three new production trains in Asia. All this without a corresponding uptick in demand for contracted buyers of those new volumes.
Global Equities Mostly Positive W/W
Global equities posted mostly gains the week ending September 11th. In the U.S., the strongest performers were housing and technology, while the laggards were energy and retail. Internationally, gains were also posted, with China, emerging markets, and emerging Asia being the best performers, while Latin America was down slightly.
U.S. NGL Production Slightly Higher in June
U.S. NGL production inched higher in June compared to prior month. Strong NGL production implies that field producers are still focused on wet gas production. The small observed increase in total NGL production would have been significantly greater with deep cut ethane and propane recovery. As robust as the latest data are, year-on-year NGL production growth declined.
Vladivostok Fertilizer Producer Signs Gas Supply Agreement with Gazprom
Gazprom Mezhregiongaz and NChG have signed a 20-year contract for the supply of natural gas to the Nakhodka Mineral Fertilizers Plant at the Eastern Economic Forum in Vladivostok. Gas supplies will begin in 2019 and, from 2021, will amount to 3.15-bcm/y.
U.K. Spark Spreads Remain Compressed
U.K. spark spreads remain very compressed along the curve, with demand destruction and growing renewable generation hitting load factors for CCGTs and, generally, thermal assets. Numbers are looking slightly more constructive now than a few months ago, but fundamentals are still not strong enough to allow for a price recovery.
RGGI Auction Exhausts Reserve
The September Regional Greenhouse Gas Initiatives (RGGI) carbon auction cleared at $6.02, exhausting the entire Cost Containment Reserve. Players without compliance needs were active bidders again. PIRA believes the additional supply should soften post-auction secondary market demand, limiting further significant upside for allowance prices. A willingness to continue to build allowance inventories suggests expectations that policy developments will provide value for RGGI allowances beyond what is implied by the current program.
Fuel Price Subsidies: Subsidy Removal in Oil Exporting Nations to Remain Gradual
Over the past 12 months, weak oil prices drove several governments to reform fuel subsidy policies. The countries that moved first were those taking advantage of depressed oil prices to provide political cover to remove subsidies. Many of these countries faced a growing fiscal burden from rising oil imports, and the move away from fixed (and previously subsidized) prices often coincided with retail price cuts. Then, earlier this year large oil exporting countries also joined in on the moves. But in many cases fuel prices increased. Further subsidy removal from this group has the potential to dampen future oil demand. The group accounts for nearly 30% of global oil demand growth through 2020. Yet PIRA believes political pressure and internal dynamics will prevent a widespread move towards market pricing, at least for now.
WASDE Needs Answers
Fun with numbers. Report day came Friday with corn, soybeans, and wheat all trading at or near prices that end in .75. Corn was trading $3.75, wheat was $1.00 more expensive, while soybeans had a $5.00 premium to corn. Significant?
Power Sector CO2 Emissions Ease; Auction Supply Ramps Up
Overall demand for EU carbon at auctions remains weak—even as weather-driven (hot/dry) power sector fundamentals (except for Scandinavia and the U.K.) have been bullish. PIRA expects a slight EU Allowance price correction with the easing of weather-driven demand and the return of regular, higher auction volumes. Looking ahead, the level of back-loading drops (and auction supply increases) as of Jan 1. While upcoming Paris climate talks can buoy general sentiment, exactly how an agreement can support EU Emissions Trading System prices is less clear.
Gas Producers Quarterly Earnings Call 2Q15
PIRA’s Gas Producers Quarterly Earnings Call highlights and summarizes the operational achievements of the top publicly traded U.S producers and delineates current activity by resource play from the 2Q15 earnings season.
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.
As the year approaches the fourth quarter, many industry observers are dusting off their forecasts for 2016 and re-thinking. Last week, HSBC lowered its oil price outlook to $60/bbl for 2016. The EIA, in its latest Short Term Energy Outlook also revised its 2016 projection downward by $8/bbl to $59/bbl. As the oilfield community starts to reflect on 2015, the number one question will surely be: “where is the recovery?”
The problem is that oil remains in plentiful supply. Through the first half of 2015 we have seen a rapid increase in production globally, and particularly from the US and Saudi Arabia. US production peaked in the summer and is now declining but overall we still expect global production in 2015 to have increased by 1.5mmbpd over 2014.
The reasons we have such an overhang in supply are primarily twofold. We have seen record levels of upstream investment between 2011 and 2014 and given the scale of many of these projects there is a lag between the final investment decision (FID) and first production.Offshore projects can easily take four years from FID to first production.
OPEC for the last 12 months has been engaged in a war of attrition with US shale producers, not only refusing to cut supply but pressing ahead with its upstream investments. On the face of it this is a war that it appears OPEC will win, with the hedging positions taken by US producers now expired and many of them facing dire financial circumstances. However, if they do win it will be at the cost of substantial national deficits.
Furthermore, advances in downhole completions have significantly increased the initial flowrates achieved in shale plays in the USA, so whilst production is now declining, well productivity is increasing as the operators focus on the quality of plays.
However, there are signs that the supply / demand gap may start to narrow next year. The latest IEA Oil Market Report projects that oil demand will increase by 1.4mbpd next year whilst Douglas-Westwood’s latest analysis, published last week in Q3 of our World Drilling and Production Market Forecast, highlights additions of only 368kbpd in 2016, followed by additions of nearly 1mbpd in both 2017 and 2018. This tightening of the supply/demand outlook could well be the catalyst for a recovery in both oil prices and in-turn the oilfield services sector as a whole.
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