NYC-based PIRA Energy Group reports that midcontinent crude differentials strengthen in April. On the week, another U.S. commercial stock build narrows the stock deficit versus last year. In Japan, total commercial stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Midcontinent Crude Differentials Strengthen in April

Canadian crude differentials strengthened relative to WTI in April, and all Midcontinent crude prices strengthened relative to Brent and LLS. Stocks continued to fall in Cushing, as recently installed pipeline capacity continues to move the PADD II crude surplus into PADD III.

Another Commercial Stock Build Narrows the Stock Deficit Versus Last Year

Although U.S. crude stocks posted their first weekly draw since the end of March, a total commercial stock build for the week of May 2 narrowed the year-over-year stock deficit by building at about twice the rate as the same week last year. The deficit of the four major refined products actually widened, while the deficit of propane and all other products was almost halved. Propane led the way with the largest weekly build in at least 10 years.

In Japan, Oil Balances Reflect Golden Week Holidays

Due to the "Golden Week" holidays, two weeks of data were reported this past week, both April 26th and May 3rd. Total commercial stocks built with finished products and crude rising. Runs declined in both weeks. There were two consecutive stock builds for both gasoline and gasoil. Gasoline demand didn't exhibit as much of a "holiday pop" as expected and stocks built both weeks. Gasoil demand declined due to holiday impacts and stocks built for both weeks.

Ethane Prices Tied to Natural Gas Prices

Low shoulder season demand will continue to pressure propane prices. Next week’s propane inventory report will be an important indicator. Excess ethane due to surging production will leave ethane prices tied to natural gas prices for some time to come.

Ethanol Prices Plummet

After a brief pause at the end of April, U.S. ethanol prices resumed their freefall the week ending May 2, as inventories built for the second straight week, reaching the highest level since July 2013. Cash margins declined again, but they are still substantially higher than at this time last year.

Aramco Announces Crude Price Differentials for June

Saudi Arabia's formula prices for June have just been released. Most notably, U.S. formula prices were increased by $0.80/Bbl versus the sour benchmark and stand at their highest levels seen yet. Since December 2013 the price for Saudi crude for U.S. destinations has risen by $3/Bbl compared to local competing USG grades. This will ultimately result in lower liftings by U.S. refiners and consequent repositioning of Saudi exports more toward growing Asian import markets.

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.

NYC-based PIRA Energy Group believes that the physical markets are recovering. In the U.S., commercial stocks continue to March higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Physical Markets Are Recovering

PIRA's economic growth forecast is on track. Market positioning is more of a concern for next month's prices than seasonality. Physical markets are recovering, especially in the Atlantic Basin, supported by relatively low stocks and higher crude run demand. As expected, low inventories have strongly kicked off the gasoline season, but with higher crude runs gasoline stocks will build back towards more typical levels. Diesel tightness will ease over the next few months, but stocks will stay generally low all year.

European Oil Market Forecast

Atlantic Basin crude supply growth in light grades supports continued relative strength in Urals differentials hurting refining margins for medium-sour grades. Light product exports from Russia will increase and VGO/straight run resid exports will decline, this year and next. Refining margins in Europe will remain challenged this year with marginal FCC/visbreaking capacity modestly attractive through midyear but then weaker in the 4th quarter. Gasoline cracks will peak early as stocks will build back quickly over the next few months. Distillate inventories will remain low and prices will strengthen further as demand picks up after midyear.

U.S. February 2014 DOE Monthly Revisions

DOE released its final monthly February 2014 (PSM) U.S. oil supply/demand data today. Demand came in at 18.99 MMB/D versus the 18.77 MMB/D PIRA had assumed in its balances. Compared with the weekly preliminary data, total demand was revised higher by a large 538 MB/D, with distillate demand revised higher by 601 MB/D, and gasoline higher by 226 MB/D. This is because of much lower exports than the DOE was assuming. End-February total commercial stocks stood at 1,047 MMBbls, nearly identical to PIRA's projection.

The Freefall in Ethanol Prices paused at the end of April

U.S. ethanol prices declined sharply during most of April as the weather in the Midwest improved and the gridlock in the rail system eased. The last few days of the month, prices stabilized as some companies needed to purchase ethanol to meet April supply commitments.

Ethanol Stocks Build

Ethanol inventories built to the highest level since July 2013 the week ending April 25, rising by 694 thousand barrels to 17.2 million barrels. Ethanol production fell to 898 MB/D from 910 MB/D during the preceding 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.

Aker Solutions will split into two companies to speed up a streamlining process that will reduce costs and better position all parts of the group to meet the needs of customers in an increasingly competitive global energy industry.

The Subsea, Umbilicals, Engineering and Maintenance, Modifications and Operations (MMO) areas will form a new company under the Aker Solutions name. The company will be more strategically aligned, have a narrower focus and deeper synergies to strengthen its leading position through its unique subsea technology and state-of-the-art offshore field design.

The other units, including Drilling Technologies, Aker Oilfield Services and Process Systems, will be developed independently as part of a new oil-services investment company, named Akastor. These business areas, which have significant operational, technological and commercial differences, will have greater strategic freedom to develop individually through both organic growth and transactions.

The split, which will take place as a spin-off of the new Aker Solutions, is scheduled to occur around the end of September. Both companies will be listed on the Oslo stock exchange.

"The new Aker Solutions will be a leaner and more focused company that will be able to offer customers the unique and cost-effective technology and design they need to succeed," Executive Chairman Øyvind Eriksen said. "The company will, through a commitment to operational excellence and organic growth, be better placed to build on its leading position in the fastest growing areas of the global energy markets."
 
Shareholders will get one new Aker Solutions share for each stock held in the existing company at the time of the separation. They will also keep their shares in the remaining business, which will be renamed Akastor at the time of the split, ensuring that the existing shareholder structure is implemented in each company.

The transaction has met with approval from Aker Solutions' largest shareholders, Aker Kværner Holding and Aker ASA. An extraordinary general meeting will be held in August to vote on the separation.
 
"We are taking a major step in a transformation that began 12 years ago with the merger of Kværner and Aker Maritime," said Eriksen. "After this transaction and the 2011 Kværner spin-off, we will have created three distinct companies to service the global energy industry, providing offshore construction, unique subsea technology and field design and oilfield services. We have also divested NOK 12 billion in assets as part of the process."

New Management 
Luis Araujo, the regional president for Aker Solutions in Brazil, will be chief executive officer of the new Aker Solutions. Frank Ove Reite, currently managing partner at Converto, will become CEO of Akastor. Øyvind Eriksen will remain chairman of the board of Aker Solutions.

"While I will continue to play an active role as chairman, it is time for new leadership to take these companies forward," Eriksen said. "Luis has proved more than capable in managing our expansion in Brazil and will provide inspired leadership as the new Aker Solutions builds on its success in the subsea and deepwater markets. Frank has a long experience within the Aker group and is excellent at developing businesses and pushing them toward their full potential. I look forward to working closely with Luis and Frank to unlock the great values in both companies."

Leif Borge, current chief financial officer of Aker Solutions, will be CFO of Akastor. Svein Oskar Stoknes, who heads the subsea area's finance function, will take on the role as CFO of the new Aker Solutions. 
 
Synergies
The new Aker Solutions will be streamlined to focus on the fast-growing deepwater and subsea oil-services markets and in areas with operational, commercial and strategic similarities. There will be a swifter realization of synergies as the subsea and field design areas share the same customers and main markets. The company will have a simpler strategy focused on value creation through technological development, organic growth and operational excellence. It will be uniquely positioned to design, equip, build and maintain the future subsea production factory and will build on its expertise within project execution and offshore field design.

"The new Aker Solutions will benefit from greater synergies and a more coordinated customer approach, leading to a stronger market position and higher and more predictable returns on capital," said Eriksen. 
 
The Akastor management team has extensive experience in developing companies and creating value through operations, restructuring and transactions. The company will provide a structure where the businesses Drilling Technologies, Aker Oilfield Services, Process Systems, Surface Products and Business Solutions will be developed as largely independent entities with management teams, boards of directors and strategies aimed at maximising their value. Each company will have greater strategic and transactional freedom because it will no longer be constrained by the competing needs of other businesses. The entities will be able to focus marketing efforts on core customers and invest strategically. Akastor will also hold financial and real estate assets representing about 20 percent of the company's balance sheet.

Drilling Technologies will be the largest business within Akastor, accounting for about 60 percent of the earnings and workforce.

"There is a strong industrial logic underpinning this move," Eriksen said. "The businesses that will make up Akastor have significant operational, technological and commercial differences that have prevented them from achieving synergies with the other businesses in Aker Solutions. Through this separation, we will be able to more fully realize the industrial and return potential of all our business areas and create value for our shareholders."