NYC-based PIRA Energy Group believes that monetary reflation is eliminating the risk of deflation, positively impacting financial assets and increasing economic growth. In the U.S., strong demand and high runs narrow stock surplus. In Japan, refiners continue maintenance, with higher crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast, May 2015
Monetary reflation is eliminating the risk of deflation, positively impacting financial assets and increasing economic growth. Oil demand is strong but so is supply, with supply growth concentrated in first half 2015. Even with crude markets tightening in second half 2015, large volumes of crude in storage will require time spreads remunerating storage. There are very powerful pillars of support for oil prices from Middle East turmoil, current low spare capacity, an improving global economy and the magic of low prices. Actual supply disruptions have recently ticked higher. Financial length is particularly low from a value point of view and will likely continue to support prices. Strong refinery margins will face some pressure later in the third quarter. Gasoline should outperform distillate.
U.S. Strong Demand and High Runs Narrow Stock Surplus
This is the seventh consecutive week the stock surplus to last year has narrowed. Most of the excess inventory position remains in crude and other products. The excess gasoline position narrowed while the excess distillate position widened. Crude stocks fell largely related to low imports and high runs. Crude runs (4-week average) are about 400 MB/D higher (2.5%) than last year, and they are being supported by strong demand growth.
Japanese Refiners Continue Maintenance, with Higher Crude Stocks
Crude runs dropped another 61 MB/D, but imports surged and crude stocks built strongly. Finished product stocks fell modestly with draws in fuel oil and the jet-kero complex. Gasoline demand rose back after a post-holiday lull and stocks were modestly higher. Gasoil demand continued to gain, and despite higher yield and lower exports, stocks were little changed. Kerosene demand fell back, but yield was very low and stocks put in one last draw on this past heating season. The indicative refining margin remains good with all the major light product cracks firming on the week.
China Quarterly Oil Demand Monitor
China’s GDP growth is expected to decelerate gradually in 2015 and 2016. Though several recent data releases have disappointed, the government has been easing policy actively and will prevent a hard landing scenario from materializing. At the same time, the political leadership’s emphasis on the new economic normal paradigm will likely cap the upside surprise potential for GDP growth. Oil demand is projected to register constructive gains in both 2015 and 2016. Recent declines in retail energy prices are providing a boost for oil demand.
Maximizing Profits from Shale Oil in a Low Crude Price Environment
The industry keeps making remarkable improvements in the extraction of hydrocarbons from shale oil deposits, which, coupled with the recent reductions in service costs, continue to push down breakeven costs. However, we are not out of the barrel yet. The improvements and service cost reductions, likely to continue for some time at diminishing rates, are not sufficient to stop decline in U.S. shale oil production. Only an increase in crude prices will turn things around. PIRA forecasts continued decline in shale oil production until mid-2016, when Brent is expected to recover from the current $65/Bbl to around $75/Bbl. Until then, these continuous improvements and service cost reductions will permit production from new wells that would otherwise be uneconomic in the current low crude price environment. Reduced drilling times, higher well productivity and lower service costs can significantly improve profitability of new wells as illustrated in this analysis.
Freight Market Outlook
Tanker markets have thus far eluded the usual second quarter seasonal rate swoon. Record inventory builds seen over 1H 2015 have not translated into a steeper contango or significant floating storage, but tanker markets have been resilient nonetheless. While bullish market sentiment has contributed, the main drivers are related to positive global oil fundamentals. OPEC and Saudi crude productions are near record levels while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Chinese imports hit record highs in April. Tanker operators have also helped themselves uncharacteristically by not over-building over the past several years and are purportedly maintaining operations in slowdown mode despite low bunker prices and high spot tanker earnings.
Volatile Week for U.S. NGLs
Rumor of propane containment issues at Mont Belvieu due to heavy rainfall sent cash and futures prices plunging to multi-year lows midweek. Cash non-LST propane lost 15% by Thursday but rebounded as concerns fizzled and on Friday’s broader energy complex rally. Week-on week June Mont Belvieu propane futures were 2.6% higher, while butane, which followed propane lower earlier in the week, ended 3.3% higher. Ethane was pulled 4.5% lower with the natural gas sell off.
Ethanol Production Increases
U.S. ethanol production rose for the third consecutive week the week ending May 22, after falling to a 29-week low at the end of April. Output increased to 969 MB/D last week from 958 MB/D in the prior week.
EPA Proposes Sharp Reduction to Biofuels Requirements
The EPA proposed biofuels requirements for 2014, 2015, 2016 and biodiesel for 2017. Ethanol RIN prices plummeted.
U.S. Ethanol Prices and Margins Fall
U.S. ethanol prices plunged during the second half of May. Manufacturing margins also declined.
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.
Apparently undeterred by low oil prices, oil & gas output from ultra-deepwater (>1,000m water depth) fields will continue the relentless growth seen in recent years. In the latest World Drilling & Production Forecast, DW predict combined oil & gas production from such fields will grow 7.7% year-on-year over 2015-2021 from 6.5 mboe/d to 10.2 mboe/d. This will come from the drilling of 1,470 ultra-deepwater wells, an increase of 68% on the seven years prior. A key factor is that at these water depths, only the most highly productive plays are being targeted. Additionally, deepwater projects typically have funding secured several years ahead of first production – hence the projected medium term growth.
Leading the way with increased production will be the historically big deepwater producers – Angola, Brazil, Nigeria and the US. The latter will see the strongest growth of the four with ultra-deepwater oil output set to climb from 1.5 mboe/d in 2015 to 2.1 mboe/d in 2021. This will be the result of 11 floating production platforms being brought online, including the recent additions of Anadarko’s Lucius spar, Llog’s Delta House and Chevron’s Jack/St. Malo (both floating production semisubmersibles). This, combined with Petrobras’ continuing success in Brazil’s pre-salt reservoirs and West Africa’s ultra-deepwater plays apparent resilience to the oil price downturn, global ultra-deepwater production will rise from 6.5 mb/d in 2015 to 10.1 mboe/d in 2021.
It must be noted, however, that such projects will be vulnerable to cancellation and delay in the long term should the current low oil price situation be sustained. Operators may look to improve the economics of projects currently in the pipeline by boosting reserve bases through conducting additional appraisal activity – well demonstrated by Statoil’s recent gas discoveries in the area around the site of the future Aasta Hansteen spar.
DW anticipate $378 billion will be spent on floating production platforms and subsea hardware over the next seven years. Forty-five percent of this will be spent on ultra-deepwater fields, reflecting their importance in the global oil & gas supply picture.
NYC-based PIRA Energy Group reports that Basrah Heavy enters the market. In the U.S., another counter-seasonal U.S. stock draw. In Japan, crude runs decline, with much lower crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Basrah Heavy Enters the Market
Basrah Heavy, a new Iraqi crude grade, will begin loading in June 2015. The crude is quite heavy (23.5° API) and high in sulfur (4.2 wt. %), and is more similar to Mexican Maya crude than most other Middle East grades. SOMO, the Iraqi oil marketing authority, has introduced this crude because the average quality of Basrah production from southern Iraq has been declining over the last several years due to inclusion of new production from heavier fields including West Qurna 2, Missan and Halfaya. PIRA believes SOMO has crafted a sensible marketing strategy to deal with changing production quality and capture high value for their sales.
Another Counter-Seasonal U.S. Stock Draw
Overall commercial oil inventories fell 2.1 million barrels this past week following the week earlier stock decline of 5.5 million barrels as product demand remained very strong. Year to date, the DOE weekly demand data adjusted for normal degree days and actual product exports (versus the DOE assumptions) is up 440 MB/D. Sixty percent of this increase is in gasoline certainly suggesting price matters despite a weak U.S. economy. The latest four week average adjusted demand is running 740 MB/D, or 4.0%, higher than last year.
Japanese Crude Runs Decline, with Much Lower Crude Stocks
Crude runs dropped 174 MB/D with low imports such that crude stocks drew strongly. Finished product stocks rose modestly. Gasoline demand fell back after the holiday, while gasoil demand rebounded. Kerosene demand was moderately strong and the stock build rate fell back. The indicative refining margin remains good with all the major product cracks firming on the week.
U.S. Shale Oil Independents Also Winning Reserves Additions Battle
For the period between 2010 and 2014, the average reserves replacement ratio of a group of U.S. independents has been twice as high compared to Big Oil (216% versus 105%). However, a large portion of these newly added reserves are associated with future shale oil/gas drilling locations that may need to be drilled within a five year period or be taken off the books. If drilling activity stays at the current low level due to sustained low crude prices, it may be a challenge for the independents to keep all those reserves in the proved category. For independents, this can affect their ability to get favorable financing or issue equity.
Asian Arbitrage Hampered by Soaring Freight
Saudi CP Propane futures languished as soaring spot freight continued to make the arbitrage East unworkable. June CP futures lost 7% to $407/MT, approaching the low levels plumbed in January. Meanwhile, the Far East Index dipped 2.6% to near $500 while butane prices were steady at $542/MT. LPG prices in Asia remain in tight competition with naphtha for petrochemical use, necessitating lower source pricing for triggering incremental demand.
U.S. Ethanol Prices and Margins Increase
Chicago ethanol prices rose the week ending May 15, supported by robust demand in the domestic markets, as well as the third straight week of stock draw. Manufacturing margins improved for the ninth consecutive week to levels not experienced since December.
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 the US energy industry, 2014 will be remembered as the year when crude oil prices fell below 50 $/bbl, resulting in significant realignments in the sector. Aside from the oil price collapse and the historic high of domestic natural gas production, several other energy records were set last year. Both solar and wind energy production reached an all-time high in the US, contributing to a record 9.8% of total primary energy supply.
The US is ranked the second largest producer of wind energy. With more than 65 GW installed capacity in 39 states, wind energy represented over 4% of national power generation in 2014. Annual installations peaked in 2012 when some 13 GW of new capacity came online. At the time of writing, onshore wind energy is approaching cost-competitive levels around the country. However, while the US is internationally recognized for its strong offshore energy operations, there has been no utility-scale offshore wind energy production in the country to date.
Several groups have been working on offshore wind project plans, but they have faced funding difficulties and public resistance, which have negatively impacted their ability to reach a final investment decision. Throughout two rounds, the US Department of Energy selected three Offshore Wind Advanced Technology Demonstration Projects which are expected to start their operation in 2017.
Ahead of the government supported projects, and after seven years of planning, the construction of the Block Island Wind Farm – the first US offshore wind plant – finally began in April 2015. The 30 MW farm which will be located 18 miles from the coast of Rhode Island, consists of five turbines and is expected to start its operation in Q4 2016. The feasibility of the project is secured by a 20-year power purchase agreement. Compared to the European sites, the Block Island project is tiny, but it could prove the commercial viability of such projects for policy makers, utilities and capital funds, boosting further investment in the US offshore wind energy sector.
Patrik Farkas, Douglas-Westwood Houston +1-832-591-0202 or This email address is being protected from spambots. You need JavaScript enabled to view it..
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