NYC-based PIRA Energy Group reports that Cushing stocks hit a record high in March. In the U.S., the crude stock surplus hits a new high. In Japan, crude runs ease with higher maintenance and crude and finished product stocks post slight builds. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Cushing Stocks Hit Record High in March
Cushing crude stocks rose to record levels in March, causing the NYMEX WTI contango to widen and strengthening most onshore crude differentials, as Cushing WTI prices weakened relative to regional grades. Outright prices weakened through the first half of March, but began to recover by month end, helped by improved refining margins and geopolitical risks. Stocks at Cushing are expected to peak just above 60 million barrels in April or May. But WTI will remain in contango until stocks fall toward the 30-35 million barrel level — not likely until at least mid-2016.
U.S. Stock Surplus Hits New High
With the largest weekly inventory increase of the year, the year-on-year inventory surplus swelled to 177 million barrels, or 17%. Crude stocks are almost 100 million barrels higher than last year. Gasoline and distillate inventories are a combined 33 million barrels higher.
Japanese Crude Runs Ease with Higher Maintenance; Crude and Finished Product Stocks Post Slight Builds
Crude runs eased and remain in good alignment with our turnaround schedules. Crude imports also declined, but crude stocks still posted a modest build. Gasoline and gasoil stocks drew slightly despite falling demands. Kerosene stocks built as demand seasonally ebbed. The indicative refining margin remained strong, though major product cracks softened on the week.
Aramco Differentials Announced, Asia Raised
Saudi Arabia's formula prices for May were just released. U.S. and European differential adjustments were mixed and seen as minor. European differentials were tweaked, higher on the lightest and heaviest grades, and cut marginally on Arab Light. U.S. differentials were lowered on Arab Extra Light and Light and lowered on Arab Medium and Heavy. Differentials to Asia, however, were raised more significantly and across the board. The adjustments for all regions are seen as keeping in step with refiner demand for crude and downstream profitability.
Saudi Arabia Producing 10.3 MMB/D: Bullish or Bearish?
On balance, Saudi Arabia producing 10.3 MMB/D in March 2015 is bullish. Incremental Saudi crude burn demand could push its volume this summer to levels that would substantially reduce global spare capacity, at a time when oil markets will be tighter and geopolitical risks to supply are growing. Look for Saudi Arabia to continue to increase prices to restrain demand as it has done the last two months. All of this will be supportive to higher oil prices in second-half 2015.
Asian Steam Cracker Margins at 2015 Highs
Asian steam cracker margins have been in a broad upswing since January of this year. Margins improved yet again last week and continue to make new 2015 highs. Naphtha cracks added 2¢ to 53¢/lb, but they look increasingly challenged by LPG in the coming weeks as heating demand deteriorates and prices weaken. Butane margins jumped 14% to 51¢/lb while propane cracks added 5¢ to 49¢/lb.
U.S. Ethanol Prices and Margins Increase
The week ending April 3, U.S. prices advanced to the highest levels of the year. Rising petroleum prices and robust demand for ethanol-blended gasoline were the main drivers. Margins also reached a 2015 high last week, as corn prices fell after bearish USDA reports.
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.
Despite major cost reduction measures, Q1 2015 earnings for supermajors are expected to be the weakest in recent memory. Operational and financial indicators for FY 2014, however, reveal that recent performance amongst the big 5 has been far from homogeneous.
In short, the Americans outperformed the Europeans. Exxon and Chevron posted high net margins of 8.3% and 9.1%, respectively. Shell’s was a more modest 3.5%, whilst BP (1.1%) and Total (2.0%) struggled badly. Chevron and Total were the most aggressive risk takers, as their CAPEX-to-Sales ratios for the year stood at 19% and 14%, respectively, while the other majors conservatively avoided spending more than 10% of sales.
Among other factors, refining interests are a key driver of this disparate performance. While Exxon, Chevron and Shell refined broadly as many barrels as they extracted in 2014 (113%, 105% and 94%, respectively), BP and Total were much more exposed to upstream (55%, 83%) and have not benefitted from the traditional buffer effect of downstream activities in a low price environment.
Looking at the long-term indicators, not much change can be seen in the 2014 Proved Reserves-to-Production ratio – XOM 17.4, CVX 11.8, RDS 11.6, BP 15.2, TTA 14.7 (expressed in years). In an oversupplied market, the challenge is not to bring volumes, but value. In this respect, the Europeans looked to offset poor performance by building strong net cash positions – between $20-30 billion at year-end 2014 – to maintain dividends and shareholder confidence. However, while Exxon, Chevron and Shell managed to keep their Gross Debt-to-Equity ratio at around 20%, BP and Total ended the year with a degraded financial structure, at 47% and 62%, respectively.
Considering the above, Shell seems to be the healthiest among the European majors, but crucially lacking in long-term organic growth opportunities. In this light, the £47bn takeover of BG Group makes sense: it will boost Shell’s production by 20% and reserves by 25%, and also provides exposure to high-potential Brazilian assets. With similarly modest leverage and potential for quick cash generation, Exxon and Chevron are well positioned for their own M&A moves now the starting gun has sounded.
Antoine Paillat, Douglas-Westwood London
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Diversification in to renewables and interconnector market rewarded Ecosse Subsea Systems Ltd (ESS) more than trebled profits to £3.4 million and increased revenue by 88% to £15.6 million according to its latest published accounts.
The Aberdeenshire-based subsea engineering specialist attributed the phenomenal growth to a diversification from its traditional oil and gas market in to renewables and interconnectors.
ESS has developed technologies which are in high demand for seabed clearance work, trenching and cable laying projects. In the past two years the company has made huge inroads in to the emerging renewables sector which now accounts for 55% of projects and builds upon an earlier focus on oil and gas contracts.
The accounts to March 2014 show turnover increased from £8.3 million to £15.6 million, while operating profit (EBITDA)* rose from £1.02 million to £3.4 million in the same period.
The drivers for ESS’s most successful trading year to date was a £5.4 million contract on the Baltic 2 windfarm offshore Germany and a multi-million pound cable-lay contract on behalf of an European utilities provider in the Humber Estuary.
Last month ESS also announced it had signed a Letter of Intent with ABB to provide seabed clearing and trenching services on the 100-mile £1.2 billion Caithness-Moray electricity transmission link project, which could end up as the company’s largest ever contract award.
The company employs 70 offshore and at its headquarters in Banchory near Aberdeen, which rose to 110 during the execution of offshore projects, and in the last year it has invested more than £1 million in research and development.
ESS managing director, Mike Wilson, said: “The results are extremely encouraging and confirm that our technologies are equally suited to and easily transferable between the oil and gas sector, which is where we cut our teeth, and the green energy market. Added to that, we have just won our first contract in the interconnector sector and we hope success on the Caithness-Moray project will lead the way to further awards in this field.”
Mr. Wilson said other parts of the business, including its engineering consultancy and personnel recruitment arms, had enjoyed a successful year and added significantly to the bottom line, while continued investment in new technologies was now bearing fruit.
He added: “We benefited greatly from research and development in our technologies starting to come through, and recognition from clients that we have developed a suite of tools which deliver measurable time and cost savings.
“Diversification is paying off for us as can be seen in these latest financial results and we will continue to look for new opportunities in other markets, including oil and gas and interconnector projects in Arctic waters where we have already received some interest.”
Mr. Wilson noted that ESS had already suffered from the effects of a low oil price with the cancellation of a number of oil and gas projects and said that while 2015 turnover would increase on the previous year, that margins would be tighter.
He added: “With a healthy balance sheet and debt-free status, we are in a strong position to counter the challenges facing the oil and gas industry while capitalizing on new opportunities in other markets.”
NYC-based PIRA Energy Group believes that the positive impact of lower oil prices on global economic growth is beginning to be seen but oil markets remain oversupplied. In the U.S., oil inventories built this past week. In Japan, turnarounds gear up, but crude and product stocks draw. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast, March 2015
The positive impact of lower oil prices on global economic growth is beginning to be seen but oil markets remain oversupplied with a 2 MMB/D surplus in the second quarter, which will continue to negatively impact physical markets. New price lows for Brent are unlikely and WTI is not expected to go below $40/Bbl. Both prices are anchored by the back of the market and available storage capacity, even if it is floating. The magic of price is working to tighten oil markets but it takes time. Gasoline season looks healthy but new refinery capacity will pressure distillate. Political uncertainties are on the rise with this weekend's Nigerian elections, Saudi Arabia's direct military involvement in Yemen, and turmoil in Libya, among other things.
U.S. Inventories Lead the March Surge
U.S. oil inventories built this past week, bringing the March stock build to nearly 1 MMB/D. Relative to last year U.S. inventories are 164 million barrels, or nearly 16% higher than last year. Over half of the excess is in crude oil.
Japanese Turnarounds Gear Up, but Crude and Product Stocks Draw
Crude runs eased again as maintenance continues to pick up pace. Crude stocks drew to a record low on a low import figure, while finished product stocks also drew on higher demands and lower runs. The indicative refining margin remained strong.
LPG Stocks Building from Record Base
U.S. propane inventories increased by 638 MB, the second consecutive weekly build - signaling that the bottom for stocks has likely been put in, and that stocks will continue to build thru September from this high base level of 50.3 MMB. Stocks of NGLs and LRGs (excluding propane) more than doubled their prior week's gain to 1.1 MMB, bringing inventories to 77.3 million barrels, 15.2 MMB above the year ago volume.
Ethanol Stocks Decreased for Third Consecutive Week
U.S. ethanol prices declined at the beginning of the week ending March 20, but strengthened after the DOE reported an inventory draw for the third consecutive week. The output of ethanol-blended gasoline rose to a twelve-week high.
Biofuels Programs Continue in Over 60 Countries
Canada imported 1.2 billion liters (318 million gallons) of ethanol in 2014 to help satisfy its 5% ethanol mandate. Essentially all imports come from the U.S. In Mexico, PEMEX awarded contracts for the supply of up to 123 million liters (32.5 million gallons) per year from locally sourced sugarcane and sorghum.
Yemen: Saudi Intervention Adds $3-$5 Risk Premium Only Temporarily Because Of Low Physical Supply Risks
Saudi Arabia's intervention in Yemen with Kuwait, Qatar, the UAE, Bahrain and Egypt contributes to growing instability and unpredictability in the region, but poses little direct threat to oil and gas supplies. While the physical supply risks are low at this point, Saudi's decision does add $3-$5/Bbl to the risk premium, which began to be priced in late yesterday. This premium will gradually erode over time if large supply disruptions do not materialize (which is what we expect).
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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