NYC-based PIRA Energy Group reports that Cushing stocks to rise in 4Q, while pipeline projects relieve congestion in other midcontinent markets. In the U.S., slight stock build matches last year's. In Japan, crude stocks draw and finished product stocks continue rising. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Cushing Stocks to Rise in 4Q, While Pipeline Projects Relieve Congestion in Other Midcontinent Markets
Fourth quarter crude stock increases, both in Cushing and on the Gulf Coast, will very likely lead to contango for LLS and Mars and quite possibly for WTI as well. However, stronger fundamentals in other regions should lead to improved differentials for Canadian, Bakken, Rockies and Permian Basin crudes.
Slight U.S. Stock Build Matches Last Year's
Overall inventories built this past week, keeping stocks just 3.2 million barrels above year-ago levels. The product stock build was 2.4 million barrels, as strong product demand offset a one-week surge in product imports. Crude stocks drew about one million barrels less than the week before, largely because of the decline in run rates. Refinery margins are great and refiners have been running more crude than last year over the last four weeks.
Japanese Crude Stocks Draw; Finished Product Stocks Continue Rising
Runs continued to rise with a still lower crude import rate that allowed crude stocks to draw. Finished product stocks continued rising. Gasoline and gasoil demand fell, and for both products there were stock builds of about 0.4-0.5 MMBbls. Kerosene stocks continued to build along seasonal norms. Refining margins remain poor, but there was a slight improvement in gasoline and gasoil cracks.
China Quarterly Oil Demand Monitor
Growth in China's apparent oil demand exhibited extreme volatility in recent periods. On a smoothed (four-quarter moving average) basis, however, demand growth has been relatively stable and has tracked the path of GDP expansion. Physical indicators that can be tied directly to oil demand (such as car sales and ethylene production) have also expanded solidly of late. Looking forward, the short-term volatility in reported figures may very well persist, but the underlying pace of oil demand growth will remain constructive.
3Q14 Iraq Oil Monitor
Territorial gains by ISIS reignited Iraq's sectarian crisis. U.S. airstrikes have stalled ISIS's momentum for now, but the military stalemate is likely to persist. Current PM Maliki agreed to step down, but deep-rooted sectarian mistrust presents a challenge in forming a unified government. Flows through the Kurdish pipeline are nearing 200 MB/D and Kurdish cargoes continue to load from Ceyhan, but buyers are hesitant without U.S. approval. A new 1 MMB/D pipeline from the Halfaya and Missan fields to the Fao storage facilities removes one constraint from southern capacity expansion. However, bureaucratic holdups during government formation will likely constrain capacity growth. Furthermore, southern infrastructure could be at risk if ISIS switches to guerilla tactics.
What GDP Growth Rates Are Required for Positive Oil Demand Growth?
One commonly heard refrain in the oil industry is that GDP growth must exceed 2.5% in order to see positive oil demand growth. A recent PIRA report addresses this issue and determines that the GDP growth threshold is 2.1% for the U.S. and 2.3% for Europe. These results accord with PIRA's own rigorous bottoms-up approach, which includes fuel efficiencies, fuel substitution, lifestyle changes, etc. PIRA's long-term outlook, which calls for U.S. GDP to grow 2.7% per annum through 2020, forecasts oil demand growth of 0.4% per annum. Because European GDP growth lags at only 1.8% p.a., oil demand declines 0.5% per year.
Aramco Announces October Price Reductions for Differentials
Saudi Arabia's formula prices for October were just released. A reduction in differentials was enacted for all the key markets with the most aggressive reductions being to Asia. Prices into the U.S. were cut $0.40/Bbl, across the board, against the ASCI benchmark, after a $0.80/Bbl reduction for September barrels. Even with the reduction, Saudi barrels remain less competitive than like U.S. domestic grades by about $2-3/Bbl. In Asia, not surprisingly, terms were made more generous. The biggest reduction was for Arab Extra Light -$2.00/Bbl. Arab Heavy was reduced the least at -$1.20/Bbl. The reductions are seen as necessary to maintain refiner demand amid rising fall turnarounds and a very poor margin environment. Also, competiveness versus competing grades has waned, so a reduction in differentials was warranted.
U.S. LPG Prices Strengthen Despite Record High Stocks
U.S. LPG prices ripped higher this week despite sharply lower crude oil prices. Mt Belvieu propane futures increased 3.3% to the highest level since July 1 as open interest and trade volume soar to all-time highs on the contract. But with spot arbitrage movements to Europe and Asia turning flat to negative, U.S. prices make take a breather from recent strength and look to destination market prices for future direction.
Ethanol Prices Soar
U.S. ethanol prices jumped the week ending August 22 after a bullish DOE report indicated a huge inventory draw the prior week. Production was less than many expected, while the output of ethanol-blended gasoline was higher.
Ethanol Manufacture Increases
U.S. ethanol output rose to 921 MB/D the week ending August 29 as production outside of PADD II reached a record high 81 MB/D. Inventories increased to 17.7 million barrels, up 356 thousand from the prior 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.
By: Arthur "Alex" Perez
Many non-U.S. companies may owe Uncle Sam federal income taxes if they conduct business on the US Outer Continental Shelf ("OCS"). And the IRS has indicated that it is actively seeking non US companies or individuals who may be performing a variety of activities for the energy industry on the OCS such as: providing services as contractors including seismic testing, drilling, repair, salvage, etc.; owners or operators of non US registered vessels that bareboat or time charter to others; or operating vessels to transport supplies or personnel between US ports and locations on the OCS.
A key question in determining US tax liability is whether a non-US company is considered to be "engaged in a US trade or business" for tax purposes. The IRS applies a fairly low threshold in determining whether companies are "engaged in a US trade or business" and therefore subject to US taxation and reporting requirements. And since the Outer Continental Shelf is considered to be part of the territory of the United States, any non-US business that provides services on the OCS may be subject to US taxation if they are engaged in a trade or business there.
Take for example the case of Bahrain based Adams Offshore Services Ltd, which recently challenged an IRS tax deficiency determination amounting to USD $24 million. The case will be decided in US Tax Court, however, many more companies may be in the same position and can expect to be contacted by IRS.
Even payments for vessels that are chartered out on a bareboat or time charter basis in US waters may be subject to US taxation. US tax law provides that such charter payments for the use of a vessel in US waters are subject to a 30% withholding tax on the gross rental payment. A US payor who fails to properly withhold such payments may be subject to penalties as well.
Foreign companies that fail to properly file tax returns reporting income from their US trade or business may be subject to liability for the delinquent income tax payments, as well as interest and penalties. A significant trap for such companies may include taxation on the GROSS amount of revenue generated by the US trade or business. In other words, foreign companies that fail to properly report their US trade or business may be taxed on gross revenue from the business, without deduction for expenses.
There may be ways to avoid or minimize US income tax liability, but such efforts are generally much more successful if foreign companies engage in tax planning before they receive a call from the IRS.
From a peak of 396 in 1996, numbers of wells drilled offshore UK fell to 164 in 2013, a low not seen since 1979. Development wells were down from 289 in 1998 to 120 in 2013. Exploration & appraisal drilling, on which offshore production ultimately depends, saw numbers fall from 224 in 1990 to 44 last year. Of these the key driver is of course exploration wells, down from 157 in 1990 to just 15 last year.
However, drilling activity is now expected to increase over the next few years as government and industry reacts to the recommendations in Sir Ian Wood's report – the "Wood Review" – to maximise UK offshore oil & gas recovery. The most significant of these being the need for a new regulator to help industry to work collaboratively and furthermore, to implement various strategies to address problems with exploration drilling and improved oil recovery, amongst other issues. Also stemming from the Wood Review are proposals for a simplified fiscal regime to incentivise investment and drilling activity and ease the burden upon the new regulator.
So what does this mean for the future drilling market? To meet production forecasts, DW expects that total offshore wells drilled will need to grow from 164 last year to 241 in 2018. Whilst the majority of these would be in shallow water and drilled by jackups, deepwater developments in Northern North Sea and west of the Shetland Isles will provide opportunities for semi-submersible drilling rigs. However, in the longer-term drilling activity will again decline, unless the new regulator can effectively use its new powers to incentivise long-term investment from operators to drill more wells and fully exploit the remaining hydrocarbons offshore UK.
NYC-based PIRA Energy Group reports that oil inventories are higher and crude demand is lower. In the U.S., stock surplus to last year is roughly flat. In Japan, crude stocks draw amid peak run rates. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast
Oil inventories are higher, crude demand is lower and PIRA is beginning to question the expected 2H 2014 and 2015 lift off in economic activity. Also, add in unrelenting upward revisions to U.S. oil supply growth with non-OPEC supply additions continuing to substantially outpace demand growth and you have a combination of factors pointing to lower prices.
Stock Surplus to Last Year Roughly Flat
This past week’s inventory increase kept the year-on-year overall stock surplus to around 4 million barrels. The crude inventory decline took crude stocks slightly below last year, and at current high run rates crude stocks are still relatively tight, which was reflected in September relative prices. The product stock change reflected lower product imports (to a new low for the year) being offset by weaker reported demand and higher product output.
Japanese Crude Stocks Draw Amid Peak Run Rates, Finished Product Stocks Continue Building
Runs rose fractionally on the week and lower crude imports led to a crude stock draw. Finished products, however, have continued rising amid peak runs. Gasoline demand was higher but is still seen as underperforming seasonal expectations. Gasoil demand rebounded from very low levels. Kerosene stocks continued to build along seasonal norms. All the product cracks improved on the week and our indicative margin indicator rose, but remains rather weak.
Impact of Russian Gas Flow Interruption on Oil Demand
In the low probability event of a complete Russian gas flow stoppage to Europe, oil demand could potentially increase 600 MB/D. In the more likely scenario, still just 30% probability, of a stoppage of flows through Ukraine to Europe, the impact on oil demand would not be material.
U.S. Refinery Turnarounds, September 2014 – December 2015
There was a relatively high level of crude unit downtime during August and the level of both planned turnarounds and other outages carrying over from the current month is expected to increase over the next couple of months.
Freight Market Outlook
A glut of crude oil in the Atlantic Basin has caused the flat price of crude to fall and regional grade differentials with Asia to narrow substantially. The Brent-Dubai spread has narrowed to its lowest value in four years, prompting a significant increase in the number of West African cargoes headed to Asia in August. In addition, the Dubai price structure is now in contango, with forward prices higher than those for the prompt month, making it easier to hedge cargoes on the long voyages from the Atlantic. This is a good omen for VLCC operators as more vessels are tied up on long voyages around the horn of Africa from the Atlantic to Asia. The flip side, of course, is that Mideast liftings to Asia in the fourth quarter will have to decline to make room for the added Atlantic Basin supplies.
Asian LPG Prices to Benefit from Lower Saudi CPs
LPG prices in Asia held steady this week, prior to this weekend’s imminent release of Saudi contract prices for Sept tons. CP futures prices indicate that the propane CP could fall while Asian destination markets show that the butane CP could remain flat or perhaps drop by $10/MT.
Ethanol Demand Soars
U.S. ethanol-blended gasoline manufacture soared to 8,904 MB/D the week ended August 22, up from 8,667 MB/D during the prior week and very close to the record 8,980 MB/D set in May. Ethanol output dropped to 913 MB/D, the second lowest rate of production since April.
U.S. Ethanol Prices Rise in August
Ethanol prices rose in August, after falling during the prior three months. The market tightened as stocks drew by the largest amount since March 2013.
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.
Offshore Source keeps you updated with relevant information concerning the Offshore Energy Sector.
Any views or opinions represented on this website belong solely to the author and do not represent those of the people, institutions or organizations that Offshore Source or collaborators may or may not have been associated with in a professional or personal capacity, unless explicitly stated.