NYC-based PIRA Energy Group believes that Brent crude prices will continue to gradually strengthen for the next few months. In the U.S., commercial crude and product inventories both declined this past week. In Japan, crude runs decline while crude and product stocks rise. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
European Oil Market Forecast
Brent crude prices will continue to gradually strengthen for the next few months reflecting improving crude balances with higher refinery runs, increased shipments to Asia, flattening United States/non-OPEC crude production and rising geopolitical concerns. Refinery runs will ramp up as maintenance winds down, peaking in June-August in the Atlantic Basin.
First Major U.S. Stock Draw of 2015
U.S. commercial crude and product inventories both declined this past week. The strongest weekly product demand of the year combined with relatively low crude imports to push stocks lower. The year-on-year stock excess narrowed by 9 million barrels to 157 million barrels or to a still large 14.4%.
Japanese Crude Runs Decline, While Crude and Product Stocks Rise
Two weeks of data were released this past week covering the traditional May holiday period. Crude runs eased both weeks, while crude and finished product stocks rose both weeks. Gasoline demand was higher, while most other product demands eased. Kerosene stocks began to build seasonally. The indicative refining margin remains good, but it has been coming off its highs.
Asia-Pacific Oil Market Forecast
Oil balances are tightening. A global crude surplus has been built, but it is about to be reduced as runs continue to rise supported by healthy refining margins. The balances will be increasingly helped by slowing non-OPEC supply growth as 2015 plays out, and then outright year-on-year declines in non-OPEC supply as we move towards year-end. Over the summer, Middle East producers, particularly Saudi Arabia and Abu Dhabi, will have limited additional barrels for sale as new refineries continue their ramp up and increased summer burn absorbs supply. Strategic reserve purchases of crude oil in India and China will add to crude demand.
Energy Commodities Continue to Strengthen
On a weekly average basis the S&P 500 rose modestly, and closed at a record high on Friday. Emerging market debt prices fell slightly with higher yields. Bond yields on Greek debt eased modestly as a resolution to the Greek debt problem continues to be worked through. The total commodity index rose on the week, as did energy. The U.S. dollar has continued to weaken against many currencies with noted declines against the euro, British pound, and Russian ruble. The Shanghai Interbank Offer Rate eased for the tenth straight week. Bond yields for longer term maturities have risen in the U.S., Europe, Canada, UK and Japan. The Chinese policy interest rate (1-year banking lending rate) was cut again.
European LPG Imports Saturating Demand
Well supplied markets are facing limited incremental demand in Europe. Coaster sized lots of propane were called a significant $50/MT (13%) lower on the week near $320/MT while the spread to larger cargoes widened to $60, indicating that prices on the latter will face increasing pressure in the coming weeks. Large butane cargoes fell 7% to $399, while barges were little changed.
U.S. Ethanol Prices Higher
The rally in U.S. ethanol prices continued the week ending May 8 as many plants were shut down for spring maintenance. Higher petroleum values also provided support.
Ethanol Production Rebounds
U.S. ethanol production rebounded from a six-month low the week ending March 8 as several plants came back online following spring maintenance. Output rose to 912 MB/D from 887 MB/D in the previous week.
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.
When the price of oil started its tumble late last fall so too did the oilfield services (OFS) market. The rig count in the U.S. has been halved compared to this time last year and operators are struggling across the board to cut costs in this low price environment. Some of the major U.S. shale plays are being hit harder than others, some will bounce back quickly while others may start to fade away.
DW expects a 34% decrease in total U.S. oilfield services spend in 2015 for the 20 services that we cover. On a basin-by-basin level, the Barnett and the Bakken will be hit hardest. The Barnett rig count has continued its steep decline from a 2008 peak, now with only four rigs drilling for gas. With the fall in oil price, operators in the Bakken will spend 40% less on services in 2015. The Bakken is one of the more expensive shale plays and the low price environment will lead to fewer wells being completed and intense cost cutting pressure on services companies. Conversely, the Marcellus is likely to be hit the least as recently the gas drilling market has not suffered to the same extent as the oil plays.
To give one key OFS example, proppant is the sand or ceramic material designed to keep an induced hydraulic fracture open during or following a fracturing treatment. Here we expect Operators’ spend to fall by 42% in 2015 as a result of a strong decrease in demand and a shift away from ceramics towards cheaper sands. While all drilling and completion-led services will suffer in 2015, those driven more by the active wellstock will suffer less than new drilling activity. Historically, services such as artificial lift and slickline services for example have been less directly correlated to oil price and are less affected by downturns.
As the oilfield services industry continues to rebalance over the course of 2015, some basins and service lines will feel the pressure more than others.
Jacob Halevy, Douglas-Westwood Houston
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NYC-based PIRA Energy Group reports that Cushing crude stocks hit record high, but big draws coming. In the U.S., stock excess marginally narrows. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Cushing Crude Stocks Hit Record High, but Big Draws Coming
Crude prices rebounded in April, as rig counts continued to drop and shale production appeared to be leveling off. Cushing stocks rose to a record 62 MMB, but Canadian stocks dropped, as the flood of exports to the south continued. These volumes will be sharply lower over the next few months. In addition to less crude from Canada, Cushing will receive less from Midland, while sending more out to the Gulf Coast. Stocks at Cushing have likely peaked.
U.S. Stock Excess Marginally Narrows
The lowest crude and product imports of the year could not manage to substantially change the week-on-week stock build because reported demand fell sharply to the weakest level of the year. The overall inventory build was marginally lower than what occurred last year in the same week. The obvious noteworthy feature of the data was the first crude stock draw of the year. Gasoline and distillate stocks remain above last year, while the crude excess narrowed.
Aramco Differentials Generally Raised for June Barrels
Saudi Arabia's formula prices for June were just released. Adjustments have been made consistent with a number of important factors Saudi Arabia considers in setting its monthly prices: market value for their crude in the key importing markets, available supply for export against increasing domestic burn during summer, competitiveness against competing grades, and global refining margins. Differentials to Northwest Europe were raised most significantly, $1.10-1.40/Bbl, with the greatest increase on the heaviest grades. Elsewhere, changes were minor.
Constructing a Back-of-the-Envelope Model of the U.S. Jet Fuel Demand
Back-of-the-envelope models succinctly capture the important variables in forecasting a particular petroleum product’s demand. PIRA has built just such a model for U.S. kerojet demand. We capture the impact of ticket prices, revenue passenger miles traveled, available seat miles and load factors on kerojet demand. The model predicts U.S. jet fuel demand will increase 3.5% in 2015.
Panama Canal Expansion in 2016 Will Impact U.S. LPG and Condensate Exports More than Crude
When the Panama Canal Authority delivers on its long awaited $5.2 billion canal expansion project next year, the impacts will vary depending on the petroleum market. U.S. exports of LPG and condensate will gain significant competitive advantages due to reduced transit times to Asia, and the subsequent freight cost savings, while the changes to crude oil and refined product trade flow will be relatively minor.
LPG in Asia Dragged Lower
Asian LPG markets followed the rest of the world lower with the June Propane Far East Index losing $19 on the week to settle at $506/MT on Friday, just 50¢ higher than cash. Butane for June delivery was assessed at a $20 premium to C3. Regional LPG prices are becoming increasingly attractive to the petrochemical sector, with C3’s discount to naphtha now wider than $70/MT.
Ethanol Values Increase
U.S. ethanol prices advanced during April boosted by lower supply because many plants were shut down for spring maintenance. Higher petroleum values also provided support.
Ethanol Output Plunges
U.S. ethanol production plummeted last week, dropping to a 29-week low 887 MB/D from 921 MB/D in the previous week as several more plants went offline for spring maintenance. Only 35 thousand barrels were drawn from inventories, which remained at a relatively high 20.8 million barrels.
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.
When oil prices dramatically dropped in the fall of 2014, operators began to significantly alter their plans. As months passed, many thought service providers would gain clarity on the upstream situation and begin to develop their own strategic plans. However, as we have progressed toward mid-2015, as answers have been obtained, many new questions have arisen.
Conoco CEO Ryan Lance said many producers were trading at valuations that still reflected a price closer to US$80 per barrel while Private Equity executives have mentioned to DW that many bid-ask spreads are too wide on transactions for E&P producers, particularly U.S. unconventional shale players. This is inhibiting some of the necessary revaluation and consolidation that will lead to a more normalized market environment. So oilfield service providers remain in limbo and investors struggle to mark them to market. Until management of service companies can assess market pricing, future activity levels and an understanding of which of their customers are going to be active, short term strategic plans remain fluid and long term strategies in jeopardy.
So how have service companies and manufacturers managed the situation? Schlumberger, for instance, have been very proactive and cut jobs and capital spending relative to projected activity declines. Others are betting on a stronger and quicker recovery, have less aggressively cut, and hope to be well positioned for a market resurgence – which could lead toward greater cuts if the environment doesn’t rebound accordingly.
Strategic planning is crucially important to the investor community and will be scrutinized in critical moments. It will also be an indicator for how in-touch leaders of oilfield service providers are with their businesses. It will be nearly impossible for managers to make unanimously popular decisions, but they will be expected to make the right ones. Time will tell on what companies managed the uncertainty most appropriately.
Andrew Meyers, Douglas-Westwood Houston
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