NYC-based PIRA Energy Group reports that PIRA's restructured U.S. gasoline balances provide greater clarity and insight. In the U.S., large crude stock build, small product stock draw, and widening commercial stock excess. In Japan, crude stocks build despite higher runs. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

PIRA's Restructured U.S. Gasoline Balances Provide Greater Clarity and Insight
PIRA's restructured gasoline balances are in response to the steep decline in volume and the relevance of finished gasoline stocks and imports. The changes to the EIA's finished balance came about as a result of the decline in MTBE and the rise in ethanol, as the oxygenate of choice. We have compiled a total gasoline balance, but one that also separates the major sources of gasoline supply, namely refinery output, ethanol input, and total gasoline imports. In contrast, the EIA's refinery and blender production of gasoline is a combination of refinery production, imported blending components, and ethanol.

Large U.S. Crude Stock Build, Small Product Stock Draw, Widening Commercial Stock Excess
U.S. crude stocks built, but less than the build for the same week last year, so the crude stock deficit increased. The four major refined products built as opposed to a draw last year, so the deficit for this group narrowed. In combination, crude and the four major refined products are in deficit -17.8 million barrels. All other product inventories drew less than last year's draw, widening out the year-on-year excess.

Japanese Crude Stocks Build Despite Higher Runs
Crude runs rose and imports were sufficiently high to build crude stocks. Finished product stocks also rose slightly. Gasoline demand was fractionally lower and stocks built slightly. Gasoil demand was strong and stocks drew. Kerosene demand was surprisingly strong and yield declined, such that stocks built only fractionally and less than would have been expected. Refining margins remain soft with all the major product cracks weakening modestly.

World LPG Prices Plummet
Prices of LPG fell by 10% or more in most key markets last week amid broader energy and financial market weakness. U.S. LPG stocks continue to build to ever higher record levels. Strong price competition by naphtha in Asia has led to subdued petrochemical purchasing, while an unplanned cracker upset in the Netherlands has left the NWE butane market looking long. Perhaps the only bright spot is increased propane demand in Europe in a tighter prompt market, as U.S. arrivals of the product have remained low.

Ethanol Prices and Margins Decline
The descent in U.S. ethanol prices continued though Thursday October 2, driven by building inventories and falling consumption. Cash margins for ethanol manufacture declined for the seventh consecutive week to the poorest level since the beginning of February.

Ethanol Output Increases
U.S. ethanol production rebounded to 901 MB/D the week ending October 3 from a six-month low 881 MB/D during the preceding week as some plants completed their maintenance turnarounds. Stocks were down 177 thousand barrels to 18.7 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.

Deals decrease as operators wait for clarity over the future of the UKCS

Oil and gas operators may be sitting on new investment decisions until the future of the North Sea becomes clearer, according to the latest report from business advisory firm Deloitte.

The report, which details drilling, licensing and deal activity across North West Europe over the third quarter of 2014 and was compiled by Deloitte's Petroleum Services Group (PSG), found that four deals were announced offshore UK. This is slightly down on the five transactions reported in Q2 2014 and substantially lower than the 14 registered during Q3 2013.

Derek Henderson, senior partner in Deloitte's Aberdeen office, said the drop in deals may be down to North Sea operators continuing to wait for further clarity about the future of the UK Continental Shelf (UKCS).

In particular, firms are waiting for more detail about the implementation of the Wood Review, including formation of the Oil & Gas Authority, and changes to the North Sea's fiscal regime. These measures are due to be detailed in Chancellor George Osborne's Autumn Statement on 3 December.

Henderson said: "The industry continues to wait and see how the future of the North Sea will take shape. This is a particularly interesting year for the UKCS as it goes through a period of transition. There remains much change on the horizon and, as a result, many companies will be biding their time.

"All eyes will be on the Chancellor's Autumn Statement, where industry will be looking for measures which support the challenges of operating in this mature basin. Having spoken to a range of investors in the North Sea*, we know that a fiscal regime which is more predictable, with a lower tax burden is key for improving investor confidence. Incentives which will encourage exploration and appraisal activity, as well as new entrants to the region, are also a vital part of the equation.

"Ultimately, the UKCS needs to be internationally competitive if it is to attract the investment it requires to boost its future prospects. We've made all of these views clear in our submission to the fiscal consultation. This is the most important Autumn Statement for some time now, as it could be the last chance to get the fiscal regime right."

Meanwhile, the report also found 11 exploration and appraisal wells were drilled during Q3, up on the seven reported in the previous three months. This is consistent with the 11 announced during the same period last year.

However, price pressure and access to finance have remained issues on the UKCS. A large number of North Sea assets are on the market from some of the larger operators. Smaller companies, in some cases with limited budgets, tend to be the most likely buyers, creating a price differential in the market and potentially stalling deal activity.

Graham Sadler, managing director of Deloitte's PSG, said that although the number of new wells drilled was higher this quarter compared with the previous three months, the figures have been at a steady low for some time.

He said: "While it's encouraging to see an increase in the number of new wells drilled this quarter, we are starting from a low base. Until we see the incentives required to encourage further exploration and appraisal activity, drilling could remain muted in the short to medium term.

"During this period of transition, costs have remained high for North Sea firms, access to finance has remained difficult and the price of oil has dropped to as low as US$95 this quarter. This combination of factors continues to make the economics of extraction more difficult for operators."

The report also found that one field had been approved on the UKCS in Q3 2014, down on the five reported the previous quarter. However, this was consistent with the same period last year when just one field received development approval.

Deloitte will release its report "Making the most of the UKCS: The oil and gas fiscal framework: Is it fit for purpose?" later this month. The report draws insight from interviews conducted with companies from across the oil & gas industry about their views on the North Sea's current fiscal regime.

NYC-based PIRA Energy Group reports that midcontinent differentials strengthen. In the U.S., first large stock decline since early August. In Japan, crude runs decline with higher turnaround activity. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Midcontinent Differentials Strengthen
In September, the WTI discount to Brent and LLS narrowed, while differentials to WTI improved for Canadian, Rockies and Midland grades, as crude stocks fell in each of those regions. Forecasts of growth in U.S. shale production next year have been reduced. Higher crude runs, lower imports, more exports, pipeline line fill, and more rail east and west are absorbing this year's production growth.

First Large Stock Decline Since Early August
This past week a dramatic swing in product stocks from a week earlier build to a draw contributed to pulling overall commercial inventories lower. The sharpest week to week decline in runs this year, lower product imports and stronger product demand all contributed to the substantial product inventory decline. The crude stock decline added to the overall decline despite runs falling and despite a recovery in imports.

Japanese Crude Runs Decline with Higher Turnaround Activity
Crude runs dropped as turnarounds gear up. Crude imports rose which built crude stocks. Finished product stocks finally declined after having risen steadily since mid-June. Gasoline and gasoil demands were slightly higher, with small stock draws for each. Kerosene demand perked up due to consumer restocking and the stock build rate came in at 135 MB/D. Refining margins remain soft. Light product cracks were slightly weaker, while fuel oil cracks firmed.

Aramco Announces Another Round of Price Reductions for Differentials in November
Saudi Arabia's formula prices for November were just released. Another round of reductions in differentials was enacted for all the key markets with the most aggressive reductions again being to Asia. U.S. pricing was lowered $0.40/Bbl, for all but the lightest grades, but Saudi crude is still disadvantaged versus domestic grades by $1.50-2.50/Bbl. In Europe, against Urals crude in both NWE and the MED, Saudi crude was competitive based on current pricing in August, but that advantage eroded sharply in September, so the reductions were warranted to restore competitiveness. In Asia, the reduction will be welcome news to refiners as refining margins have only recovered to statistical means after extreme weakness seen during the summer, and have again begun to erode.

U.S. LPG Prices Rebound
U.S. propane prices shrugged off crude oil and gasoline price weakness and rebounded strongly last week from the prior week's selloff. Stronger demand and a smaller stock build propelled prices higher. Butane prices were unchanged, despite RBOB gasoline's 4.2% rout. Next week, U.S. prices should find support in higher seasonal and agricultural demand and the nearing end of inventory increases.

Ethanol Stocks Soar
U.S. ethanol production fell to a six-month low 881 MB/D last week as some plants underwent routine maintenance turnarounds. Stocks were up 236 thousand barrels to 18.8 million barrels, the highest level 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.