NYC-based PIRA Energy Group believes that so far market sentiment has deteriorated more than oil balances. In the U.S., commercial stocks flat on the week while EIA revises down U.S. crude output. In Japan, crude runs recovered and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast
There are more risks to the forecast lift in global economic growth in second half 2015. So far market sentiment has deteriorated more than oil balances. The back of the market has led prices lower as speculators are no longer convinced higher oil prices are required to balance future oil supply and demand. PIRA disagrees with this view, but a “show me” mindset regarding tightening balances will keep prices lower than forecast earlier.
Latin American Oil Market Report
Increased United States/Canada crude production has significantly reduced U.S. imports of Latin American crudes over the last few years. More Latin American crude moved to Asia, mainly India and China. Mexico has proposed an exchange of up to 100 MB/D Mexican heavy crude for U.S. light crude that if approved would help to reduce the light crude overhang in the U.S. and enhance Mexican gasoline/diesel production and thus reduce their product imports. Latin American gasoline/diesel product imports will rise even with new refinery start-ups in Brazil and Colombia, and the U.S. will supply the vast majority. Near term planned/unplanned refinery outages in Venezuela and Mexico along with seasonal demand impacts are adding to Atlantic Basin product strength in 3Q15. PIRA’s outlook is for generally weaker Atlantic Basin gasoline/diesel cracks over the remainder of the year.
Commercial Stocks Flat on the Week While EIA Revises Down U.S. Crude Output
A 4.2 million barrel commercial crude stock draw offset a similar sized product inventory build leaving stocks virtually flat on the week. The stock excess to last year stayed roughly the same at 145 million barrels. Noteworthy is that the EIA revised down its Lower-48 crude production by 151 MB/D in this week’s report. This is an indication that the upcoming May 2015 Petroleum Supply Monthly will most likely show downward revisions to crude production for some months of 2015. May 2015 U.S. total crude production should come in significantly lower than the 9.65 MMB/D shown in the most recent STEO forecast.
Japanese Crude Runs Recover and Stocks Build
Crude runs and imports rebounded following the typhoons, which had resulted in operational and berthing disruptions. Crude stocks surged, while finished product stocks rose only slightly. Gasoline and gasoil stocks were marginally lower, while kerosene stocks continued building, though at a slower rate. The indicative refining margin has come well off its June peak, though it is in the upper half of its statistical range.
This Time is Different
It is PIRA’s belief that crude oil and product prices are set simultaneously in both the physical and paper markets. Commercial entities that have physical positions, which they hedge in the futures markets, are the connective tissue between these two markets. Post 2003, fears that the world would be running out of crude led speculators to increase their paper length, which raised deferred futures prices enough to allow physical players to find and develop higher cost crude. What is different this time is the role of prime mover has shifted from speculators to commercials. This time commercials have become increasingly short, encouraging through lower prices speculators to enter the long side of the market.
Petroleum Refining Remains an Important Market for Natural Gas
The EIA’s latest annual report of refinery fuel use for 2014 does not contain many surprises regarding natural gas use in the refining sector. Direct fuel use of natural gas averaged a little less than 2.5 BCF/Day, and natural gas use to produce hydrogen in refineries averaged a little more than 0.5 BCF/Day. This represented 14% of industrial sector natural gas use, and 4% of total U.S. natural gas consumption. Natural gas use per barrel of crude run seems to be related to the prevailing API in each PADD. The national average natural gas use of 0.2 MMBTU per barrel of crude run implies a 20¢ per barrel margin impact, for every $1.00/MMBTU change in the price of purchased natural gas.
Freight Market Outlook
Tanker markets entered the second half of 2015 on a high note, but they are due for correction as a number of temporary elements of support unwind. The Iranian nuclear agreement has the potential to significantly alter both the crude and tanker markets, but this will take time to unfold. Incremental Iranian crude exports estimated at 500 MB/D by the end of 2016 are not expected to hit the market until the second quarter of next year. Perhaps of more importance to shippers and tanker operators is the potential for the marginalized Iranian tanker fleet (including 37 VLCCs) to return to active service in 2016 adding to the already accelerating capacity growth.
Asian Ethylene Prices Drop in July
Ethylene prices in China and Southeast Asia fell over 20% in July. Exports from the mainland increased as poly plants slowed on greater uncertainty in the local economy. Chinese exports are facing muted demand in the north where prices are falling in tandem amid rising inventories. Supplies are likely to continue rising, and prices falling, as long as ethylene production margins remain robust.
Ethanol Inventories Decline
U.S. ethanol production has declined for three consecutive weeks, with last week's output dropping to a ten-week low 965 MB/D. After two straight weeks of falling stocks, inventories reversed course and built by 89 thousand barrels to 19.6 million barrels.
Ethanol Prices and Margins Bottom
U.S. ethanol prices were volatile in July, rising early in the month but then falling sharply, tracking corn’s reversal. Ethanol manufacturing margins bottomed mid-month after declining for nine consecutive 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.
China’s stock markets have been suffering considerable volatility, sending the central government scrambling in an attempt to pick up the pieces to support the crashing market. Although Chinese economic growth slowed during the past year and local companies’ profits proved unsubstantial, investment in Chinese stocks remained high, creating a bubble which popped on June 12 with the Shanghai index losing a third of its value. Additional signs of market weakness have spread throughout the Chinese manufacturing industry as sector jobs are cut at a rate unobserved since February 2009. Likewise, the effects of slower than anticipated Chinese growth are already being felt by the energy industry, as China remains the world’s largest energy consumer.
China’s weakening economic prospects and stock market plunge have led crude oil futures to fall to uncommonly low levels in early July as evidence of weakening Chinese energy demand growth mounts. Despite significant reductions in Capex, many US producers are still reporting high crude output levels as operators develop and produce formerly drilled wells, although recent EIA data show declining output collectively in the seven major unconventional basins.
Supply growth is now focused on OPEC where crude production this past month increased to 31.7mbbl/d according to the IEA. Led by growth in output from Iraq, UAE and Saudi Arabia, OPEC is now producing an additional 1.6mbbl/d compared with January levels, approximately 85% of the current supply overhang. Iraq’s crude exports reached uncommonly high levels in July while a record outpour of UAE crude hit the market. Moreover, Saudi Arabia suggested further increasing production levels to retain market share.
As oversupply in the crude market continues, a sudden reduction in Chinese energy consumption growth may continue to apply downward pressure to crude prices. OPEC, however, seem more bullish, announcing last week that “signs of a more balanced market in 2016 may provide much desired stability to the oil market in the longer-term, a prerequisite for the continuity of timely and adequate investments.”
Adjusted 1st Half 2015 revenues increased 13.1% to €759 million at current rates (-1.7% at constant rates), which demonstrates good operational resilience in a very challenging market.
First Half 2015 adjusted revenues reached a company record of €758.8 million, confirming BOURBON’s position as a world leader in the OSV market.
Aside from the impact of a stronger US dollar on revenues, activity remained robust, despite adverse market conditions, on the back of a:
Compared with the second semester of 2014, adjusted Revenues decreased by 6.8% at constant rates Compared with the preceding quarter, adjusted revenues decreased 2.2%, reflecting the additional impact of average daily rate renegotiations and further stacking of vessels.
"The first half of 2015 was highlighted by a continued slowdown in activity in most regions and negotiations with clients on commercial terms. Throughout this difficult period, BOURBON has demonstrated resilience, evidenced by the revenue progression, thanks to our strategy of operating a safe, modern and efficient fleet", says Christian Lefèvre, Chief Executive Officer of BOURBON. "While the duration of this downturn is uncertain, BOURBON is constantly adapting to the market and is unwavering in its focus on excellence in service execution and reducing its costs. This focus will not only improve the group’s resilience in the current cycle but will make it even stronger going forward."
(a) Adjusted data: The adjusted financial information is presented by Activity and by Segment based on the internal reporting system and shows internal segment information used by the principal operating decision maker to manage and measure the performance of BOURBON (IFRS 8). As of January 1, 2015, the internal reporting (and thus the adjusted financial information) records the performance of operational joint ventures on which the group has joint control using the full integration method. Adjusted comparative figures are restated accordingly.
NYC-based PIRA Energy Group reports overall commercial stocks built but the excess modestly narrowed. In Japan, crude runs declined due to typhoons and crude stocks drew on low imports. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
U.S. Stocks Build but Excess Modestly Narrows
Overall commercial stocks built 2.9 million barrels, 2.3 million barrels less than last year’s increase for the same week, narrowing the year-on-year stock excess to a still hefty 144.4 million barrels, or 12.8%. The crude stock surplus to last year widened to 93 million barrels, or 25%. Cushing crude stocks are 39 million barrels over last year, a new high for the year.
Japanese Crude Runs Decline Due to Typhoons, Crude Stocks Draw on Low Imports
Crude runs declined due to the impacts from a typhoon, which also kept crude imports very low such that crude stocks posted a large draw. Finished product stocks rose due to a build in jet-kero and fuel oil. Gasoline demand was higher from holiday impacts and stocks drew. Gasoil demand was also higher, producing a modest stock draw. The indicative refining margin remained good and was little changed.
Gas Tanker Rates Falling
Spot VLGC tanker rates look to have peaked with the benchmark Ras Tanura to Chiba, Japan rate falling $20 to $120/MT after reaching the year’s highest levels a week ago. LPG length in the AG has led to suppliers leaning on term purchasers to lift contracted volumes, which squeezed an already extended gas tanker market. Supply in Asia, set to benefit from additional AG deliveries, has reacted to crimp spot arbs from the U.S. by the most in a year – which may very well lead to an increase in spot VLGC availabilities – and thus the peak may now be in for tanker rates. With new build tanker deliveries accelerating from here thru next year – rates may not return to these levels for some time.
Ethanol Prices Decline
The week ending July 17, U.S. ethanol prices tumbled to the lowest level in almost a month, tracking the decline in corn and oil values. The six-week low output of ethanol-blended gasoline during the preceding week was also bearish.
U.S. Ethanol Output Lower
Ethanol production fell for the second consecutive week as some plants have been operating at lower rates due to poor margins. Inventories dropped by 181 thousand barrels to 19.6 million barrels, though PADD III was the only region where stocks decreased.
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.
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