Finance News

14PIRALogoNYC-based PIRA Energy Group believes that low crude price is impacting non-shale lower 48 production. In the U.S., demand recovers but stocks increase to new high. In Japan, crude runs and imports declined and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Demand Recovers but Stocks Increase to New High

Reported demand increased after two weeks of holiday depressed demand. Commercial stocks still managed to build making a new all-time high and expanding the stock surplus to last year. It is hard for oil prices to go up despite how low they currently are while stocks are building, especially in the current fragile macro environment which weakens the demand for inventory.

Supply Delays Emerge, but Do Not Erase Price Weakness

PIRA is pushing back some start up dates on LNG production over the next 24 months due to weaker prices and a lack of buying enthusiasm from key contract holders. Sellers with take or pay contracts in hand to sell LNG or tolling will be more eager to fire up the liquefaction than producers with non-contracted volumes faced with a crowded spot market.

Spark Spread Renaissance: How Wide Can Spread Sparks Go?

The widening of the spark spreads is now a reality across the Continent, with Germany now seeing the most efficient gas units starting to move in the money. While fossil fuel requirements continue to shrink further, due to weak demand and growing renewable output, German gas profitability has the potential to rebound to 2010 levels, but this outcome will be entirely driven by the movements in gas prices.

LPG Rebounds With Crude, Natural Gasoline Slide Continues

U.S. Gulf Coast LPG prices rebounded strongly with the broader energy markets. February Mt Belvieu propane prices improved by 12% to 33.6¢/gal and butane settled 5 cents higher on the week at 47.8¢. Natural gasoline prices continued to underperform last week as the blendstock’s value sagged to just 93% of WTI, after weeks of trading at a premium.

Coal Prices Rebound, Limited Upside on China Risks

Coal pricing ended its string of weeks in which prices declined week-on-week last week, with Atlantic Basin prices leading the charge upward. For 1Q16, API#4 (South Africa) rose by the greatest extent, followed by API#2 (Northwest Europe) which also rebounded strongly. A notable jump in FOB Richards Bay physical pricing, where one buyer reportedly pushed the market higher perhaps on short covering, likely fed into the notable rise in API#4. FOB Newcastle (Australia) prices moved up modestly compared to the prior week. Over the short term, coal prices will remain under considerable pressure due to depressed oil pricing and weak coal demand from China.

Impressive Corn Exports

A nice jump in corn sales was credited as the reason for last week’s rally but there’s a bit more to the story. The export number of 1.157M MT was for the week ending January 14th, so all the buying theoretically could have taken place on the 11th and 12th when the corn market tested sub-$3.50 futures pricing. While interest in corn at that level is supportive, it does not indicate interest at current levels which are 20 cents higher than the lows.

U.S. Ethanol Output Drops, but Stocks Rise to a Three-Year High

Ethanol production declined to a four-week low 983 MB/D the week ending January 22, as manufacturing margins were the poorest since 2013. Ethanol inventories, however, built for the tenth time in twelve weeks, rising by 533 thousand barrels to a three-year high 21.9 million barrels.

Deterioration of Russia’s Reserve Fund Signals Trouble Ahead

Russia’s Reserve Fund, which helps cover federal budget deficits, deteriorated rapidly in recent months, falling by nearly 30% in the final quarter of 2015. But despite mounting economic pressures on the Russian government, domestic oil producers have flourished. A favorable tax structure and currency depreciation insulated Russian producers from weak oil prices over the past year. PIRA expects this momentum to carry into 2016. But the Russian government, which shouldered the burden of collapsing oil prices (along with consumers), may be running out of policy options. Collectively, these economic pressures are casting a shadow over our 2017 outlook.

Financial Stress Elevated

Financial stress remains elevated. The S&P 500 declined for the third straight week on a weekly average basis, though it was higher Friday-to-Friday. The other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB) also continue to weaken. Total commodities continue to decline, and the U.S. dollar continues to generally strengthen.

Fracking Policy Monitor

Federal focus has moved to making sure already announced regulations are finalized and implemented. Regulation of activity on federal lands (fracking, methane emissions, changes to leasing) are expected to have limited impact on overall production volumes. Oklahoma legislators may soon be forced to address the impact of wastewater disposal. North Dakota continues to be responsive to industry concerns, relaxing regulations where production or profits are threatened. Limits on local control remain a key issue in Colorado where the state’s Supreme Court, new regulations, and submitted ballot initiatives will all soon collide.

Tepid Price Recovery Points to 2015 Weakness Transitioning to Even Weaker 2016

Over the past several months, Canadian dry gas production has been hammered by stiff competition in its traditional export markets, compounded by an extremely slow start to the traditional withdrawal season. Compared to the prior year, 4Q15 production declined, expanding the year-on-year losses experienced during the third quarter. More recently, a shift to colder temperatures across the U.S. and Canada seems to have alleviated fears of a record El Niño event, although PIRA still projects a milder-than-normal winter. The colder weather seems to have reinvigorated Canadian exports to the U.S. in the short term, but year-on-year production losses are expected to continue into 1Q16.

U.S. Ethanol Prices Rise/Margins Fall

Reversing a downward trend that pushed prices to a ten-week low the week ending January 22, ethanol prices rebounded driven by higher feedstock cost. Manufacturing margins declined as rising corn values overshadowed the increase in product assessments.

Global Equities Rebound

Global equities generally posted a positive week. In the U.S., energy and technology posted the strongest gains as energy prices staged a rally from multi-year lows. The banking and industrial tracking indices declined. Internationally, all the tracking indices posted gains. Emerging markets, BRICs, and China were the strongest. In the first three weeks of the New Year, global markets have declined about 8%.

Japanese Crude Runs Ease, Imports Fell and Stocks Drew

Crude runs eased fractionally, and implied imports fell back, such that stocks drew 0.92 MMBbls. Despite generally higher demand, finished product stocks rose 1.87 MMBbls. Refining margins remain strong, though they softened a bit on the week due to easing in all the cracks other than fuel oil. Other than middle distillates, all the cracks remain statistically strong.

Iran Cuts Gas Price for Petrochemical Producers

Iran's Oil Ministry cut the price of methane/ethane mix fed to the petrochemical industry by 38.5% on Saturday, sending most petrochemical stocks up. The price cut will boost petrochemical profits, though some industry managers say the pricing is still uncompetitive, putting Iran's sanctions-battered petrochemicals at a disadvantage vis–à–vis their foreign rivals, especially those in the Persian Gulf periphery.

Constructive Data from China, and Dovish Message from ECB

Recent Chinese data had a broadly constructive tone. Economic expansion remained solid, while receiving more contributions from the service sector. The labor market, meanwhile, generated a large number of new jobs. Some data were disappointing, however: the housing sector, for example, experienced a serious setback. The European Central Bank’s policy statements helped stabilize sentiments in financial markets. Global leading indicators for manufacturing remained weak.

Low Crude Price Impacting Non-Shale Lower 48 Production

PIRA estimates Lower 48 non-shale crude and condensate production decreased significantly through the course of 2015 primarily due to less drilling activity and less maintenance on base production. PIRA expects further declines in 2016 as drilling activity continues to decrease with depressed oil prices but does not expect material losses in stripper well production (a subset of non-shale Lower 48 production).

Iran Exports Increase Post Sanctions – Where Will They Go?

PIRA expects that Iranian production will increase by roughly 500 MB/D over the next couple of months. Although NIOC will try to quickly recover their former market export volumes into Europe that will initially be hindered by logistical and commercial issues. In addition, Iran will increase exports by drawing down some of their floating inventory, largely sour condensates, which are more likely to be placed into Asia. This all points to more initial incremental exports likely heading to Asia followed by a slower return to Europe.

Up, but Risk Premiums are Almost Gone, Will Storages Turn Off?

Absent the move up along with oil on Friday, European gas prices have been weakening in the face of quite a bit of added demand from power and heating. If a commodity is acting bearish to bullish factors, how can we expect gas to rise any time soon? The answer is sustainability. Pockets of short-term demand growth will not be enough to reverse course on spot prices. It's not exactly an issue of "too little too late;" at this point it's simply too little. Downward pressure on spot gas will remain due to emerging supply, economic uncertainty, and a lack of duration in weather-based increases in gas demand relative to a comfortable storage situation and relatively strong accessibility to gas imports.

Mild February Weather Forecasts Sustain Bearish Concerns

While Thursday’s pull from storage was the highest thus far this heating seating, it did fall below expectations in the mid-to-high 180s leading to an initial ~10¢ pullback of the nearby month NYMEX contract. Yet, the ~$2.14 settlement price (up ~2¢ D/D) underscored the resiliency of gas futures since the last week’s striking downturn. The explanation appears to reflect the market already pricing in prospects for mild February weather, the strength of HH daily cash prices, and growing expectations for tighter post-winter gas balances.

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.

12PIRALogoNYC-based PIRA Energy Group reported that the price of WTI dropped in December to the lowest monthly average since 2004. In the U.S., a large holiday week U.S. commercial stock build mirrors last year. In Japan, crude runs are at a new post-turnaround high while demands are impacted by the holiday. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

The price of WTI dropped $5.55/Bbl in December, averaging $37.25 — the lowest monthly average since 2004. Crude prices were continuing to drop in early January, in anticipation of more stock builds in the first quarter. Crude stocks rose in Cushing and in Western Canada, but generally fell in other regions — particularly in Texas, where ad valorem tax laws encourage minimizing year-end inventories.

Cold Spell Provokes Stronger Demand, Freezes Production

Thursday’s unexpectedly strong 117 BCF reported storage draw gave extra impetus to the already in place bullish price momentum underpinned by two important fundamental shifts since late December — colder weather and structurally weaker production relative to previous estimates. In sum, these developments provide justification for the dramatic upswing in Henry Hub (HH) cash prices after declining to a low of $1.54 over the extended Christmas holiday, as well as the former NYMEX weakness.

Spanish Flows Swing, Coal Dispatching Set to Decline in 2016

The Spanish market has seen increased price volatility so far this year, with lower day-ahead prices resulting in larger flows toward France. Spain has exported an average of over 400 MWs to France so far in 2016, which compares to imports averaging 2.2 GWs during December 2015. The outcome over the past few days has been led by exceptionally strong wind output (11.6 GWs in January to date) and extremely warmer-than-normal weather, as Spanish demand plummeted by over 6% year-on-year. Higher Spanish exports to France are contributing to undermine French prices, also lowering French imports from Germany.

Coal Fades Again; India Not Providing Uplift

The coal market experienced a modest rally midweek despite the notable decline in oil prices and the major selloff in Chinese equities, perhaps due to the wet weather in Australia and as market participants returned to activity in the New Year. However, the noted factors and continued unsupportive fundamentals were too much of a bearish influence on pricing for the market to end in positive territory for the most part last week. Fueled by weaker dry bulk freight rates, prompt pricing for API#4 (South Africa) and FOB Newcastle (Australia) moved up slightly W/W while API#2 (Northwest Europe) declined. Beyond 1Q16, all three forward curves declined, particularly the long-dated deferred prices, exacerbating the backwardation in the market.

Freight Market Outlook

OPEC continues to keep the taps open to force higher cost production from the market and there is no indication of any change in policy. This has helped the tanker sector in a number of ways. From August 2014, when the Saudis first indicated their intent to defend market share, bunker prices have fallen by 70% to the lowest level in more than 12 years, adding $30,000/day to vessel earnings for a typical VLCC. Higher OPEC production and expanding waterborne trade have added substantially to vessel demand, but a bloated supply chain has also contributed immensely. High inventories have caused excess port time and discharge delays, especially in China. While long-term floating storage is still not attractive, unintended floating storage is widespread as charterers knowing that discharge delays are inevitable on arrival are slowing vessels down on their laden legs, reducing fleet efficiency.

LPG Tanker Rates Swoon on Weaker Shipping Fundamentals

Spot VLGC freight rates have plunged to the lowest level since early 2014. Decreasing U.S. LPG export growth, a rapidly growing tanker fleet, and the fast approaching opening of the expanded Panama Canal will continue to plague rates throughout 2016. Rates fell to $52/MT on the benchmark Ras Tanura – Chiba, Japan route, an 18% decrease from the week earlier and a remarkable 62% lower than last year’s July high.

U.S. Ethanol Manufacturing Margins Rise

Most U.S. ethanol prices were steady in light trading during the final week of 2015. After declining for four straight weeks, manufacturing margins improved as corn costs moved lower.

It’s Go Time

Tuesday’s WASDE and QSR are two of the most critical reports of the year and will set the tone for 2016. While PIRA believes that next week’s reports will be bearish, we are also extremely cognizant of the short Non-Commercial positions going into the reports.

Global Equities Begin the Year Broadly Lower

Global equity markets began the year broadly lower for all of our tracking indices. In the U.S. the utility tracking index, largely a defensive play, was the best performer, down 0.8%. Banking, housing, and materials were almost 10% lower. Internationally, Japan faired the best but still declined about 5%. China was down over 10%.

Libya: ISIS Attacks Highlight Ongoing Risk; Expect to See More

ISIS militants launched a two-pronged attack on Libya’s largest oil export facilities early last week. Suicide bombers struck Es Sider (export capacity 340 MB/D), and an assault at Ras Lanuf (220 MB/D) left an oil storage tank holding 400,000 barrels ablaze. A storage tank at Es Sider was also hit. Neither attack will have an immediate impact on Libyan oil supply, as the terminals have been shut for over a year. But the development highlights the ongoing risk of a growing ISIS presence in Libya. We expect to see more attacks in the near future, which could do further damage to oil infrastructure, disrupt already-minimal oil supplies, or prevent any improvement in output. It may also exacerbate the security vacuum in Libya, igniting broader fighting between the two rival governments in the country. The lack of territorial gains by ISIS in other parts of the world (Iraq, Syria) may encourage more ISIS activity in Libya.

Large Holiday Week U.S. Commercial Stock Build Mirrors Last Year

Total commercial stocks built 7.3 million barrels this week, narrowing the surplus to 163.5 million barrels, or 14.2%. Crude stocks drew 5.1 million barrels this week, versus 3.1 million barrels last year; the four major refined products built 15.9 million barrels this year, versus a whopping 18.6 million barrels last year; and all other product stocks drew 3.5 million barrels versus drawing 5.7 million barrels last year. At 1,312.6 million barrels, total commercial stocks set a new weekly record. We think uncertainty in holiday week data (this year and last), along with a loss in trucking activity, and possibly minimal drawdowns from flooded PADD II terminals, contributed to this year’s large refined product stock build. Last year, the largest product build was in distillate, while this year, it was in gasoline, impacting demand growth rates.

Relocated Louisiana Methanol Plant Now Up and Running

The Methanex Corporation announced that on December 27, 2015, the company successfully produced the first methanol from its newly completed one million ton Geismar 2 methanol plant in Geismar, Louisiana. The plant was relocated from the company's production site in Punta Arenas, Chile. The total combined cost for the completion of the two Geismar plants is approximately $1.4 billion.

U.S. Coal Market Forecast

Record warmth in December drove natural gas pricing and coal burns lower, driving coal stocks to a record level for the month of December. With gas forwards in the $2.30/MMBtu range and coal stocks at limit levels, we foresee deep cuts in coal production. We have cut our outlook by 60 MMst since last month. This will likely push some producers into bankruptcy.

Financial Stress Builds

Financial stresses are building with financial markets starting the year with increased volatility and a definitive move to the downside. The ripples are being felt globally. The S&P 500 closed the week down 6%. Surprisingly, high yield debt (HYG) and emerging market debt (EMB) indices improved slightly again on a weekly average basis, but that will not hold up if markets remain under pressure.

Inventories Rise to an Eight-Year High

U.S. ethanol-blended gasoline manufacture plummeted to a two-year low. Due to the large decrease in demand and high output, ethanol inventories increased for the eighth time in 10 weeks, rising to an eight-month high.

Major Reports Ahead

As harvest was ending two to three months ago, prompt corn was trading around $3.75, soybeans were holding on around $9.00, and wheat was a $5.00+ commodity. The corn and soybean markets seemed to be taking the annual harvest pressure in stride at the time, with many looking forward to the possibility of a year-end rally as seen in 2014, or at least some stability going into the new calendar year as seen in 2013. Neither of those occurred, but there may be some light at the end of the tunnel.

Japanese Crude Runs at New Post-Turnaround High, Demands Impacted by the Holiday

Crude runs rose to a post-turnaround high, while crude stocks increased to just short of 100 MMBbls and then fell back slightly. Gasoline demand was helped by the holiday and stocks drew both weeks. Gasoil demand, after posting a gain, plunged with the New Year and stocks built. Kerosene stocks continued to draw seasonally. Refining margins remain strong, though distillate cracks continue under noticeable pressure but are offset by very strong gasoline and naphtha cracks.

Should Ukraine Be an Ongoing Concern?

Colder temperatures are finally returning to Europe after an incredibly warm 4Q 2015. Storages are being used as they should and demand numbers are starting to rise quickly. PIRA estimates residential and commercial demand figures will rise by 18% in Germany and 12% in the U.K. Looking farther east we can see that temperatures have already hit deep winter lows and storage draws have already shot up.

Healthy U.S. Job Growth Bodes Well for Outlook, but Weak ISM Is Source of Concern

The latest U.S. payroll data surpassed all expectations, and the pace of job growth accelerated significantly during the fourth quarter. Wage growth, however, remained tame. The ISM manufacturing index was disappointing, but the likelihood for now is that manufacturing’s difficulties will not spill over into other sectors. This week’s developments in China weighed on financial market confidence globally. Confusion over the country’s currency policy proved especially damaging.

Forward Brent Structure to Remain Under More Contango Pressure than Currently

While February-March Brent futures prices are under $0.40/Bbl contango, forwards like March-April and beyond are trading around $0.90/Bbl contango. This is very much related to misalignment between the futures contract and the forward BFOE market. This will change for the March and subsequent futures contracts, which will go off the board 15 days earlier than has been the case. Thus, unlike previous months, the whole March North Sea program will underlie the March futures contract, compared to just half earlier. In a contango market, having half the program go physical before expiration leaves the higher priced second half of the program to drive valuation of futures expiration, thereby directionally narrowing the contango. With the whole March program underlying futures expiration, almost double the volume previously, the contango will naturally be wider. Thus, March-April contango is already double that of February-March.

China Balancing Role in 2016: Positive, Negative or Neutral?

Long in the works, China announced a new financing source for Russian LNG supply at Yamal despite a recent stall in its actual LNG buying.

Aramco Pricing Adjustments for February — Maintaining Competitiveness

Saudi Arabia's formula prices for February were just released. The adjustments made to differentials against its key regional benchmarks were within market expectations and do not suggest a shift in Saudi export pricing policy. Pricing policy continues to be one of maintaining competitiveness, volumes, and liftings. Northwest European pricing was made more generous, Asia tightened in alignment with market circumstances and expectations, and U.S. prices left unchanged for all but the lightest grade, Saudi Extra Light. Pricing for delivery into the ports of the Mediterranean Sea was left mostly unchanged.

Mississippi River Flooding Is Not a Major Concern for Product Supply

There are fears that recent flooding along the Mississippi River will drive up gasoline prices out of concern that refineries either will shut or slow production as the flood waters head downriver. PIRA believes that those concerns are overblown. The last major flood along the Mississippi River occurred in April and May 2011. There was only one flood-related refinery outage then. The Krotz Springs refinery was idled when the Morganza Spillway was opened to relieve flood pressure on the Mississippi River.

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.

Pira LogoNYC-based PIRA Energy Group believes that oil prices have come under more downward pressure, as the global surplus looks likely to grow further through year-end. In the U.S., after a six-week run up, year-on-year U.S. inventory surplus had a significant decline. In Japan, crude runs continue to rise along with stronger demands. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

After Six-Week Run Up, Year-on-Year U.S. Inventory Surplus Has Significant Decline

Total U.S. commercial stocks, primarily crude, declined this week, narrowing the year-over-year surplus. Gasoline and jet stocks show a narrow surplus versus last year, although distillate still has a significant surplus. Total demand recovered to over 20.0 MMB/D this week, with strength is gasoline and jet, while distillate demand was very weak. PIRA (and others) were somewhat puzzled the change in sign of the crude balance item to -0.6 MMB/D, after averaging over 0.45 MMB/D for over 8 weeks. Since this balance item is a residual, all parts of the balance could have contributed to the move, but we suspect rebenchmarking to a new monthly final for December 4 data, along with some uncertainty in the timing of stocks versus import accounting, led to the big change.

LNG Price Drop Brings Out More Buyers

PIRA always likes to remind clients that even short- or medium-term changes in prices can have a long-term impact on both new contracts and decisions to build additional infrastructure. China aside, no place is this type of influence more on display than in the Mideast, which is offering the rare positive outlook for LNG demand amid domestic and regional gas shortages among countries looking to burn less oil, even at current prices.

Dry Weather and Looming Coal Retirements a Blessing for Gas-Fired Generation

PIRA remains optimistic about the recovery spark spreads. In Italy, the freshly updated official statistics suggest that extremely dry weather has contributed to drive the increases in day ahead prices over the past month, as hydro output is near a 10-year low. Going forward, Italian prices may also be impacted by the acute hydro shortfall in Switzerland, while Swiss nuclear output is still constrained.

Limited Bullish Catalysts for European Carbon

Warmer weather is suppressing short-term demand, but a short-term price rise (in thin markets) could follow the final 2015 auction, subsiding in January when auction volumes rise. Auction supply will be rising every year through 2018, and demand looks weak. We are not expecting any price reaction from the Paris talks. Long term implied CO2 prices are expected to be far lower for the rest of Phase III and Phase IV, limiting upward price potential for EUAs, absent further intervention.

Falling Oil Prices Push Coal Lower

Coal pricing once again experienced significant week-on-week declines, with 1Q16 API#4 and FOB Newcastle prices each sliding by $1.45/mt, while API#2 prices declined by just $0.70/mt after exhibiting the most downside in pricing over the previous several weeks. Plunging global oil prices and a sharp decline in China’s thermal coal imports were the impetus for the downturn in pricing this week. Potential for a rise in pricing is considerably limited with low oil prices and a lack of reaction by both supply and demand from the weakness in pricing.

U.S. LPG Prices Fall with Crude, Natural Gasoline Remains Stable

Mt Belvieu LPG prices fell in tandem with WTI last week, with January propane losing 10% week-on-week and butane falling 11% to 56.3¢/gal. Natural gasoline at the Gulf Coast market center held strong, decreasing by just 1.6%, having taken its cues from NYMEX RBOB which managed to gain fractionally in last week’s energy price carnage.

Better Data from Emerging Markets, but Challenges Remain

Chinese economic data releases for November were better-than-expected, though fragilities remained in key sectors (housing and exports). Most emerging economies reported third quarter GDP data by now, and they were constructive by and large. Looking to 2016, however, challenges remain. One issue is elevated private sector debt levels (especially in emerging Asia), and an increasing need to curb borrowing. There are also concerns about how emerging markets will actually react to the upcoming U.S. monetary tightening.

Inventories Drew After Building for Five Straight Weeks

The week ending December 4, U.S. ethanol production rebounded to 993 MB/D from a five-week low 956 MB/D during the preceding week. Inventories were drawn by 168 thousand barrels to 19.8 million barrels, breaking a streak of five consecutive weekly builds.

WASDE Offers Few Changes

PIRA doesn’t see the corn crop getting smaller in the all-important January report, so the obvious focus is on demand from here on out. This week’s reduction in exports was warranted, an increase in ethanol grind not so much.

Asia-Pacific Oil Market Forecast

Oil prices have come under more downward pressure, as the global surplus looks likely to grow further through year-end. Any substantial and sustained improvement will wait until Iran fully returns to oil markets and the global surplus, now pushing 500 MMBbls, shows signs of appreciably lessening.

3Q15 U.S. Gas Producer Survey: Appalachia Still Helping Keep Production Afloat

Despite extreme price weakness and steep related cuts in capital spending, the 51 companies included in PIRA’s Gas Producer Survey (“PIRA Group”) managed to realize moderate sequential and year-on-year U.S. gas production growth in 3Q15, in contrast to the Group’s marginal losses experienced in the prior quarter. Driven in large part by the continued ramp up of Appalachian production, total domestic production was up quarter-on-quarter by ~1 BCF/D and year-on-year by 4.3 BCF/D. Based on PIRA’s overall assessment, production gains outside of the survey (“non-group companies”) were again more substantial. Even so, PIRA Group companies reported a collective ~1.7 BCF/D year-on-year 3Q15 production increase; while less than prior quarters gains, an impressive feat considering the price environment.

Eastern Grid/ERCOT Market Forecast

A solid majority of eastern power markets saw m/m price declines in November as gas prices fell and loads remained weak. Gas prices were down in all markets with Henry Hub averaging below $2.10/MMBtu, the lowest monthly average since April 2012. On a year-on-year basis. Loads in the East fell by over 20 aGW as temperatures averaged above normal across the region. With gas prices down sharply, gas-fired generation rose by 20 aGW while coal dropped by over 30 aGW and oil also moved down. Looking ahead, gas prices have been revised down as continued mild weather may lead to a substantial storage overhang at the end of the heating season. Power prices are lower in all markets with the sharpest drops in New England and eastern NY winter prices.

EPA Regs in TX Pressuring Coal, Opportunity for Gas

EPA’s final Regional Haze Plan for Texas, did not change the costly requirements from last year’s proposal for new scrubbers and scrubber upgrades across 14 coal-fired units in a 3 to 5-year timeframe. The covered plant operating and retirement decisions can have major implications for reserve margins and natural gas demand. Litigation is inevitable, and PIRA believes the decision on the venue (which could come as early as 2Q16) could well determine whether the rule will ultimately be upheld.

Global Equities Broadly Lower

All our tracking indices lost ground on the week. In the U.S., utilities and consumer staples held up the best, but still declined. Banking and energy were the weakest performers. Internationally, all the tracking indices fared worse than the U.S. average. Emerging markets were the weakest, followed by China and emerging Asia.

D6 RIN Prices Come Back Down

U.S. ethanol prices were little changed the week ending December 4 as downside pressure from high ethanol inventories was balanced by soaring D6 RIN values, which are embedded in the assessments. D6 RIN assessments came down late in the week.

USDA Baseline Projections

Usually released during February in conjunction with its annual Outlook Forum, the USDA decided to release their so-called baseline projections for the next 10 years “early” this time around.

Japanese Crude Runs Continue to Rise, Along with Stronger Demands

Crude runs rose again in broad agreement with our turnaround schedules. Crude imports increased enough to provide for a small crude build. Finished product stocks also built slightly due to a large naphtha build more than offsetting declines in gasoline, gasoil and kerosene. There were strong demand gains in gasoil and kerosene which drove the resulting stock draws for those products. Refining margins remain strong, though cracks, other than naphtha, generally eased on the week.

Greek Gas Price Change to Impact Power Prices

An upcoming re-assessment in the price of Greek gas could depress power prices from Jan. by bringing down the cost of gas-fired generation below lignite-fired units, market participants said. Power producers in Greece buy gas from natural gas incumbent DEPA, with contracts indexed to Brent crude prices via an algorithm. DEPA carries out a readjustment every quarter.

Beyond the Capacity Auction, How the U.K. Mix is Changing

The second U.K. capacity auction – for delivery in 2019/20 – cleared at ₤18/KW versus ₤19.4/KW at last year’s auction. The outcome, once again, offers several implications for the U.K. energy mix, even in the shorter- and medium- term. While the future of several coal units is tied, in part, to the outcome of the auction, traditional combined cycle gas turbines (CCGTs) will now face additional competition from growing participation by distributed generation. A higher reliance on embedded generation adds a layer of risks – with the wholesale market most likely set to reflect those challenges down the road. Finally, the policy debate will continue to intensify on whether the introduction of the capacity market in the U.K. may effectively be beneficial for the system's reliability.

Financial Stress Grows

Financial stress grew substantially this past week. The S&P 500 fell sharply. All of the accompanying indicators also performed poorly, including Volatility (VIX), Russell 2000, high yield debt (HYG) and emerging market debt. The cautionary signal and underperformance that we noted last week with regard to high yield credit and emerging market debt proved prophetic this week. Commodities remain in a downtrend, though ex-energy has been rather flat as energy remains the strong drag to the overall complex.

Stock Surplus Widened in November

Commercial stocks in the three major OECD markets – United States, Europe and Japan – were close to flat in November, declining just 3 million barrels or 0.12% versus the prior month. So far in the fourth quarter stocks are down 4 million barrels, or 0.16%. This relatively flat stock profile compares with a typical decline over these two months. Also, the sharp increase in VLCC freight rates since September is clearly telling us there is more oil on the water. Thus, as expected, the global oil surplus continued to widen in November. By the end of the fourth quarter, PIRA is forecasting the global stock surplus will be 500 million barrels.

What will Drive the NBP–TTF spread for the Balance of Winter?

As we approach the midpoint of winter and the gas complex reaches new lows, it is easy to lose touch with the relationships among Europe’s multiple spot trading hubs. NBP and TTF remain the most important of these hubs, particularly now that the Dutch gas market’s role in the fundamental underpinning of the market is radically shifting. As absolute prices go down, spreads will narrow and when they do, implications will emerge on future flows and activity.

4Q15 Iraq Oil Monitor

The KRG stopped transferring crude to SOMO in Ceyhan, but ~600 MB/D of independent Kurdish exports continues to find its way to market. Meanwhile, a power struggle between Abadi and his political opponents persists, and the lack of reforms and fiscal stress are exacerbating tensions throughout the country. The fight against ISIS remains broadly stalemated. Ongoing Turkish military operations against the PKK in Syria, plus rising tensions between the PKK and KRG, are interrupting flows on the 650 MB/D export pipeline to Turkey. Southern operators are reviewing development plans after the oil ministry requested 2016 investment cuts at major fields. Strong November southern exports were supported by stocks accumulated in October (when bad weather limited exports) and the start of a fourth SPM.

Gas Flash Weekly

Despite Thursday’s bullish storage report, NYMEX price action underscores the market’s increasing concern over the intensity of the El Niño and the related potential for heating load shortfalls extending into next year. The evolving “super” El Niño clearly has increased the potential for unusually mild weather next quarter, but for the time being, PIRA’s Reference Case only assumes 5% fewer GWHDDs than the 10-year normal.

December Weather: The U.S., Europe and Japan Warm

At mid-month, December looks to be 21% warmer than the 10-year normal for the three major OECD markets, bringing the month oil-heat demand to 1030 MB/D below normal. On a 30-year-normal basis, the markets are 24% warmer.

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.

Click here for additional information on PIRA’s global energy commodity market research services.

14PIRALogoNYC-based PIRA Energy Group believes that entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. In the U.S., the commercial stock surplus made a new high. In Japan, crude runs eased and stocks corrected downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

The global oil surplus grew in 4Q15. Entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. Strong demand growth in 2016 and declines in non-OPEC supply eliminate the imbalance but excess inventory remains.

Ukraine to Align Gas Royalties with Market Rates

The Ukrainian parliament has amended the Tax Code and changed the conditions of calculating the sale price of natural gas for royalties for the use of deposits during gas production. The amendments to the Tax Code bring the calculation of the royalty in line with the requirements of the law on the natural gas market. Previously, the calculation of the royalty was pegged to the upper price of natural gas set by the National Commission for Energy, Housing and Utilities Services Regulation (NCER) before October 2015.

Switching Away from Coal

An extremely long LNG market is translating into a structural recovery of the spark spreads, while the dark spreads have collapsed, especially in the summer months, mirroring the ineluctable eclipse of coal in favor of gas. Our balances have now been changed to reflect a higher risk that French net power exports will be moving lower, especially during the summer. This shift means that French prices will eventually converge more closely toward Germany, also in light of the recent announcement that Belgium’s Doel 3 and Tihange 2 will be soon reconnected to the grid. Germany is relatively less affected by a bearish gas market, as it is pricing closer to marginal costs for efficient coal, which is relatively more difficult to displace.

Dry Bulk Freight Outlook Cut on Iron Ore Outage, China Weakness

The prospects of a late rally in Cape freight rates during the remainder of 2015 have faded. In the Atlantic, the disaster at Samarco’s 30 MMmt/year iron ore operations in Brazil will reduce cargo volumes and restrict long-haul shipments to the Far East. Over in the Pacific, a structural realignment in China’s steel industry finally appears to be taking place, with crude steel production, steel exports and iron ore imports all down in October. The Cape market looks grim for the rest of this year having hit bottom earlier compared to last year. We will be marking down our near-term Cape demand forecasts following the loss of Samarco exports plus its consequential impact on Atlantic to Pacific trade and ballasting patterns. We also have a more bearish outlook on China’s dry bulk demand and on the outlook for Cape freight rates in 2016.

Less-Than-Bullish WCI Auction with New 2016 Reserve Price

The California/Quebec joint carbon auction saw current vintage allowances clear at the projected 2016 minimum reserve price. This mirrored the November 2015 auction, but is lower than secondary market pricing at the time of the auction suggested. Though the future vintage auction saw solid bidding interest, it cleared a bit lower than expected. 88 bidders registered for the auction with 3 new bidders and a number of formerly active bidders taking a break. See PIRA’s excel sheet summary of the auction results and participants.

U.S. Ethanol Prices Decline

U.S. ethanol prices tumbled during most of November, although assessments bounced off the bottom the last few days. The market softened because of higher production and lower demand for ethanol-blended gasoline. As a result, stocks built to a 16-week high.

Corn Demand Picking Up

Export Sales for the week ending November 19th, as released Friday, showed strong corn sales as seasonality hopefully starts to takes over. Soybean sales were average, while wheat sales once again lagged. Corn sales/exports have made up significant ground against last year’s numbers but remain 23% behind, while soybeans are 17% behind last year’s pace at this point.

Global Equities Modestly Changed

Global equities were fractionally changed on the week. In the U.S., the indices were modestly higher. For individual sectors, retail, consumer staples, and energy all outperformed. Utilities were the weakest. Internationally, many of the tracking indices declined. The poorest performers were Latin America, BRIC’s, and emerging markets.

Freight Market Outlook

Wide monthly swings in tanker rates have become the new normal, and October was no exception. VLCC rates plunged from a high of WS 88 in early October to WS 46 by the end of the month, but they have bounced back since. Rates in other size sectors also experienced wide swings. The current glut of oil (500 MMB by end 4Q 15) has helped the tanker sector in a number of ways. Higher OPEC production and expanding waterborne trade have been added substantially to vessel demand, but a bloated supply chain has also contributed. Higher land inventories have caused excess port time and discharge delays, especially in China. In addition, charterers knowing that discharge delays are inevitable on arrival are slowing vessels down on their laden legs while capturing contango credits, reducing fleet efficiency. Floating storage economics are improving and the volume of crude stored in tankers will grow in 1Q16.

U.S. Stock Surplus Makes New High

The U.S. commercial stock surplus has increased to the highest surplus of the year. Coming out of turnarounds, crude runs continue to ramp up, and are now 1.0 MMB/D over early October run rates. This alters the balance to where refined product stock builds have been outpacing crude stock builds, and we expect the same for the week of November 27. Domestic crude supply, however, is remaining high, reflected by crude stocks posting small builds instead of draws, with the ramp up in crude runs.

Coal-to-Gas Switching Enters the Discussion

The central focus on gas demand growth should be on power generation. Lower spot and contract prices have reached the point where a competitive position versus coal is beginning to enter the conversation. The market for gas to replace the least efficient coal units with the most efficient gas units began to emerge in the U.K. in recent months and is now spreading to the Continent, as day ahead and front month prices slowly deteriorate on an absolute basis and relative to ARA coal, which has bottomed out to a greater extent.

U.S. Coal Stockpile Estimates

Power sector coal stocks continued to expand this month as mild weather east of the Rockies, and resulting slack gas prices, deflated coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 185 MMst as of the end of this month, their highest level in three years.

RGGI Fundamentals Weak but Policy Support Strong

Even with additional nuclear retirements, our latest modeling indicates a fundamental cumulative surplus in RGGI through 2020 without any CCR tons. The Dec. auction is expected to affirm prevailing higher price levels seen since the Sept. auction, though the market has also seen strong interest gains in put options. At its Stakeholder Meeting, RGGI confirmed that it wants lead on climate – offering a transition to a post-2020/CPP-compliant RGGI market that supports the value of currently-traded RGGI allowances.

Mixed Week for Key Indicators

The S&P 500 moved modestly higher on the week. Some of the related indicators also improved (Russell 2000, VIX, emerging market debt). The notable outlier was the decline in high yield credit for the third straight week. This is believed to be an important leading indicator with regard to overall market health. Commodities remain in a downtrend, both energy and ex-energy. Precious metals were again lower along with copper and aluminum. With regard to currencies, the U.S. dollar was again mostly stronger. The strength was focused against the euro and the British pound, along with key Eastern European currencies.



Record Ethanol Output

U.S. ethanol production soared to 1,008 MB/D last week, eclipsing the mark of 994 MB/D set in the third week of June. Record outputs were established both inside (916 MB/D) and outside (92 MB/D) of PADD II. Total manufacture was up from 975 MB/D in the prior week. Inventories rose for the fourth consecutive week, building by 378 thousand barrels to 19.6 million barrels.

Japan Crude Runs Ease, Crude Stocks Correct Downward

Crude runs eased in line with our turnaround schedules. Crude imports fell back sharply and produced a strong crude stock draw. Finished product stocks also drew due to a decline in gasoil and naphtha stocks. Kerosene stocks continued building. The most recent holiday appeared to have minimal impacts on the data. Refining margins remain strong with all the major product cracks improving further on the week.

LNG and Seasonal Storage: The Next Major Conflict

A delay of a few weeks here and a few months there on new supply is managing to support spot prices in Asia, but the second quarter of 2016 is sizing up as one of the weakest we have ever seen. Asia is capable of storing very little LNG on a seasonal basis, which will shift the burden to Europe.

Intangibles Sealed the Deal to Lower PIRA’s Reference Oil Prices

Lots of assumptions go into forecasting global supply/demand balances which are aggregated from data for over 140 countries of the world. In recently revising 2016 crude oil prices, PIRA was reflecting in prices a higher starting surplus stock position and higher end year 2016 stocks. Another important factor which contributed to the decision to lower prices was the intangibles associated with our forecast having more downside than upside risks. This is the case despite the greater surplus in our revised November balances.

More Extended Price Weakness

Directionally the answer to near-term HH price prospects is that aside from all important winter weather, prices should remain under enough downward pressure to keep gas competitive against coal for electric generation (EG) — a need reflected by PIRA’s price markdown for the first several months of 2016 tied partly to lower prices going into 1Q16.

OPEC to Meet Dec 4 with Little Flexibility

PIRA’s view is that the most likely outcome of the upcoming December 4 OPEC meeting is a rollover, continuing the current market share policy. The Organization faces four rather big problems which are unlikely to be resolved.

Another Bearish Bidweek Signals Weak Fundamentals Ahead

Last week's report revealed 4,009 BCF in the ground setting a new record for U.S. storage. With such high storage, the need for gas to continue to price low enough to stay competitive with coal in the EG queue remains paramount, though seasonally rising heating loads, however delayed at this point, will support sequential increases in demand and mitigate the overall tenor of substitution necessary.

Qatari Marketing Challenges Offer New Solutions to Pricing Conundrums

It’s back to the future for the Qatari marketers that just agreed in principle to a significant downward price revision on an existing long-term contract. The move will essentially halve the sales price for the 10.8-bcm/yr. (7.5 million tons) the Qatari's sell to India’s Petronet.



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.

15DWMondayThis week, we look at some of the key takeaways from an event held last Thursday in London, hosted by the Society of Underwater Technology. Douglas-Westwood (DW) presented its outlook for the offshore energy sector, including outputs from its latest, soon to be published studies, in the context of a highly-turbulent start to the year that saw oil prices on the day of $27/bbl.

Research Director Steve Robertson opened the event with an introduction that examined the current outlook for offshore expenditure in comparison to that of a year ago, highlighting the movement in overall number of projects expected and subsequent expenditure (look out for more on this in the coming weeks…).

Economist Matt Adams followed with a review of the macro-economic factors impacting the sector presently, examining key drivers for energy supply and demand and highlighting recent DW analysis concerning supply additions vs the demand outlook for 2016. Matt explained that whilst there were limited positive drivers for oil price in the near term (other than unpredictable geopolitical events), towards the end of the year we should see excess supply eroded by some 1 million bpd. Matt also highlighted the relative stock performance between firms in different sectors of the oil industry (land drilling, offshore drilling, subsea equipment, oilfield services, etc.) with subsea hardware providers faring the best (down 15%) and offshore drillers the worse (-64%).

Steve followed with a run-through of DW’s latest market forecasts in a number of key sectors including offshore drilling, oilfield services (OFS), oilfield equipment, floating production and offshore wind. He highlighted the underlying reason for the poor performance of offshore drillers is excess supply, with low levels of utilization for the fleet and dayrates for high-spec rigs falling from over $600,000/d at peak to less than $250,000/d for new fixtures in the last six months. The fragility of the subsea equipment providers was also highlighted, with most original equipment manufacturers (OEMs) having been somewhat insulated during 2015 as a function of high backlogs which are now rapidly declining. Order levels in the last 12 months have been very low and DW anticipates that the sector will see heightened competitive intensity and firms will need to position themselves accordingly for lower levels of activity in the coming years. The FLNG and Offshore Wind markets were presented as a positive growth story and a highlight amongst the more negative outlook in other sectors.

Geologist Matt Cook presented some highlights from his recent work with DW’s Drilling and Production offering, including in-depth country analysis for Egypt, Mozambique, Angola, and the USA, followed by analysis of anticipated subsea activity by operator type. ENI was highlighted as a company that stands out in terms of the volume of subsea development activity compared to previous years, with Matt highlighting projects such as Zohr, Coral, Mamba and Sankofa.

The session was wrapped-up with a summary proposing that 2016 would likely be a very difficult year for the offshore sector – for many firms the focus would be survival. However, for those in position to invest, it was suggested that this was an opportune moment to secure equipment, services and skilled labour at historically low prices and historically short lead times.

Steve Robertson, Douglas-Westwood London

13DWMondayOil prices have been extremely volatile since the first trading day of 2016 and hit 12-year lows last week with Brent dropping below $33 a barrel for the first time since 2005. The fall in the Chinese manufacturing index, the Saudi-Iran standoff and North Korean nuclear test have all had a significant impact on shaping oil price trends.

Brent crude rose to a three-week high of $38.91 a barrel on the 4th January as a consequence of the Saudi-Iran geopolitical risk but these gains were quickly diminished due to concerns over economic slowdown. Rising tensions in the Middle East typically trigger an increase in the price of oil, yet it seems that bearish sentiment elsewhere has prevailed over potential risk.

China’s manufacturing sector shrank for the fifth consecutive month and the Shanghai Composite stock index finished 10% down for the week; leading to uncertainty over the outlook for energy demand in China. It is a clear indication that oil demand from the world’s number two oil consumer is slowing and that the current oversupply of oil may be more persistent than expected.

Adding to uncertainty over the growth in China, news of the North Korean nuclear test came on the 6th January, which triggered Japanese and South Korean stocks in Asia to decrease overnight as investors looked to less risky assets. Whilst this has contributed to further geopolitical uncertainties, it is unlikely that it will have a sustained impact on oil prices.

Nevertheless, oil prices are likely to remain at low levels until the supply-demand balance tightens, with prospects of production declines or a pick up in the global state of the economy seeming unlikely in the short-term.

Fay Bridges, Douglas-Westwood London
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15DWMondayFollowing the announcement of Douglas-Westwood joining the ESIA Group on 7th December, we were delighted to be able to exhibit with our new colleagues at PROSPEX 2015 in London on 9th and 10th December. Together with ESIA members Hannon Westwood, Novas Consulting and Richmond Energy Partners, we looked to showcase the group’s well-established E&P consulting and analytics offering alongside DW’s respected oilfield service-focused capabilities.

PROSPEX 2015 commenced with the OGA’s Gunther Newcombe providing an overview of the current state-of-play in the North Sea and information on the upcoming 29th and 30th licensing rounds. The 29th round will feature acreage in the frontier Rockall basin, an area opened up considerably by a government-sponsored 3D seismic shot earlier this year. Additionally, Mr. Newcombe outlined the OGA’s strategy for the coming years – looking to encourage exploration in both mature and frontier areas as well as greater collaboration between operators.

Ireland proved to be a key theme over the two days of PROSPEX following the country’s most successful licensing round this year with 43 applications submitted – mostly for acreage on the Atlantic Margin. This is nearly three times the number of applications received in the 2011 offering.

As is the usual focus for PROSPEX, a host of independents exhibited oil & gas prospects from around the world. Many companies were advertising promising opportunities around the British Isles, whilst some players chose to introduce prospects from unexplored international regions. Tullow Oil demonstrated the potential of a number of blocks from either side of the Atlantic whilst Envoi showed-off finds from all corners of Africa.

Matt Cook, Douglas-Westwood London
+44 (0)1795 594 735
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15DWMondayWith a mere four orders so far this year the Floating Production System (FPS) sector is suffering. However, things are anticipated to be better next year, with the US Gulf of Mexico (GoM) in particular, having a surprisingly bright future. The area is expected to have as many orders next year as there were globally in 2015 and this positive upturn has already started with the Appomattox Floating Production Semi-Submersible (FPSS) being awarded in Q3, the most expensive unit ordered all year.

A few years ago this would have been unthinkable, with interest in the deepwater GoM waning as numerous companies gave up their offshore acreage to focus on the shale market onshore. Yet the declining oil price has, if anything, bolstered interest in the region. An employee of a major engineering company recently told Douglas-Westwood (DW) of their surprise at how many tenders they were invited for in the GoM.

This demonstrates the fact that the US GoM is an attractive investment area at a time of low oil prices, with field development approvals despite the low oil price. This highlights the appeal to operators of a well-established, politically stable investment climate and until the oil price improves, most frontier areas are likely to be ignored.

A crucial point found in DW’s new World Floating Production Market Forecast 2015-2019, Q4 update, however, was that units ordered next year will be significantly cheaper than those ordered before the downturn. For the US, cheaper developments were already the norm due to smaller reserves, leading to a preference for ‘mini-FPS’ developments. The downturn has seen even these costs slashed with the Mad Dog Phase 2 development that was uneconomical at $110 a barrel being ready for a final investment decision next year, after numerous front end engineering design revisions, despite the bleak oil price forecast.

Regardless, any upturn after a dismal 2015 will be greeted gratefully from the array of shipyards and suppliers who are hurting badly in the current environment.

Ben Wilby, Douglas-Westwood London
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11PIRALogo

NYC-based PIRA Energy Group believes that oil sands production will remain resilient despite low prices. In the U.S., a large commercial stock build matched last year. In Japan, crude runs and imports rose and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Large U.S. Commercial Stock Build Matches Last Year

This past week commercial oil inventories increased 10.0 million barrels, leaving the stock surplus to last year at 163 million barrels. Most of the build was in the key refined light products and these builds were even stronger than last year’s. Hence, the stock surplus for distillate widened and the stock deficit for gasoline virtually disappeared.

Demand Improves but Supplies Remain Overbearing

Going into a New Year, fear remains largely focused on additional price weakness, which is also reflected in the PIRA price forecast. Demand is definitely stronger, but still not strong enough to alleviate the pressure building behind burgeoning global gas supplies. The supply pressure is much more apparent in Asia spot prices, where LNG supplies are building and demand remains weak, but it will be coming to Europe in the weeks and months ahead.

Energy Markets Melt Down

The German and French year ahead contracts have plummeted to an all-time low, mirroring a large downward move in the energy pricing complex. While this move is reminiscent of the collapses seen in January 2009, the current market dynamics appear so far to be very different from the great recession of 2008-9, as the current price plunge appears to be driven by a major mismatch in oil supply/demand. Collapsing oil prices have ramifications all over the energy space, but they are also spooking the financial markets, as a financial upheaval is a possibility either in China or in other emerging markets. The trends in real-time electricity demand are an important signpost in the current market turmoil. While data is generally mixed across markets, demand is, so far, not falling as severely as it did back in 2008/2009. If the macroeconomic framework holds up, as it appears, then we should continue to expect relatively steady margins for power generators. The spark spreads could potentially benefit, considering that global oil and LNG balances are now extremely long. However, this length in the fuel markets implies that German power may nevertheless touch new lows.

Bearish Wave Pushes Coal Prices Even Lower

Notable declines in most equity and commodity markets caused coal prices to also move south last week. 1Q16 API#2 (Northwest Europe) prices lost more than $2.00/mt, and pushed below the $45/mt to finish the week at $43.85/mt. Both prompt FOB Newcastle (Australia) and API#4 (South Africa) prices are now below $50.00/mt, and the backwardation in these markets have Cal-17 prices at or below $40/mt. There is not much by way of support for pricing that would prevent further deterioration over the next 90 days.

California Carbon: Gas/Diesel Demand Up, Crude Production Emissions Down

CP1 reconciliation indicates a large allowance surplus with another expected for 2015. For 2016, with weak oil prices, potential lower emissions from shut-in of high-cost oil wells will be more than offset by stronger gasoline, diesel demand. El Nino rain will help CA hydro, though NW hydro may be adversely impacted. Pricing dynamics in early 2016 contrast to one year ago, when hedging from broad scope entities drove prices. Interest in futures will provide an indication of the likelihood of fully-subscribed V-19 auctions.

NGL Prices Dragged Lower by Weak Crude

LPG prices plunged with crude oil with Mt Belvieu propane losing 12% week-on-week. Butane and natural gasoline fared worse at the market center, despite motor gasoline’s slight outperformance on the week. February butane futures at the Texas market center fell 15% to 42.8¢/gal while C5s weakened to 67¢.

U.S. Ethanol Prices and Margins Decrease

U.S. ethanol prices started the year tumbling to the weakest level in over a decade. Manufacturing margins also declined.

Corn Gathers Interest

Between the Commitment of Traders report issued Friday and the market trading above its first hurdle of $3.65 overnight, corn gets our interest as a holiday-shortened trading week begins.

Implementation Day for the Iran Nuclear Deal: What it Really Means for Sanctions

The landmark nuclear deal between Iran and the P5+1 was officially implemented. With the IAEA verification that Iran has met its nuclear obligations, EU and U.S. nuclear-related sanctions are lifted. We summarize the major sanctions that will remain in place as the nuclear deal runs its course, and those that are now lifted.

Global Equities Again Broadly Lower

Global equity markets extended their losses in the New Year. All of our tracking indices moved lower, other than the domestic utility index, which moved higher by 0.8%. Banking, housing, and materials were again the worst performers. Internationally, all the indices lost 2.6-5.3% for the week. Even the strongest performer, Europe, still only performed in line with the U.S. S&P 500 tracking index, down 2.6%.

Japanese Runs and Imports Rose and Crude Stocks Built

Crude runs continued to rise and imports picked up sufficiently to build stocks. Except for kerosene, finished product stocks also built. Gasoil demand rebounded, but balances still produced a stock build. Gasoline demand eased despite a holiday. Refining margins remain very strong with higher gasoline, naphtha, and fuel oil cracks offsetting softer middle distillate cracks.

Tighter January Balances But Still Bearish February Risks

Thursday’s unexpectedly modest 168 BCF reported stock draw further tempered the upward HH price momentum, which already had been arrested earlier this week. Last week’s Gas Flash: Part II (1/8) discussed how colder weather and weaker production had sparked the former HH rally. While January gas balances now appear slightly less supportive, a more resilient backdrop remains, notwithstanding the latest weekly storage report.

Eastern Grid/ERCOT Market Forecast

December 2015 was the warmest and wettest December in the continental U.S. in the 121 year period of record. Eastern Interconnect (U.S.) loads fell by 5.8% (~19 aGW) from the prior year. On-peak energy prices declined in almost every market in December with the exceptions being NY-J, NY-G and the MN hub. Despite the weak prices, implied gas heat rates remained firm with CCGT units in the money everywhere except Ontario. This allowed the power market to absorb incremental volumes of gas that were not required by space heating customers.

Arch Coal Bankruptcy and Market Implications

To no great surprise, Arch Coal (ACI) filed for Chapter 11 bankruptcy in order to facilitate a restructuring of its financial debt load. ACI has entered into a restructuring support agreement with a group of lenders that currently hold more than 50% of the company’s first lien debt. While the typical assumption of a corporate bankruptcy in the commodity sector might seem to be bullish on first glance, this is not necessarily the case in the short-run in a cost-competitive region such as the PRB, and ACI may look to gain market share due to the cost relief. However, it may give ACI some flexibility to temporarily idle Coal Creek, the type of action PIRA believes is necessary (by ACI or another PRB producer) to balance supply and demand.

European Carbon Pushed Down As Gas Replaces Coal

The recent EUA price drop has brought into greater focus many of the existing downside risks: greater supply, weakening demand, and few new policy developments. Low gas prices raise the prospect of increased coal to gas fuel switching and greater uncertainty regarding forward EUA demand – in a market with a shorter appetite for hedging. However, EUA prices may be weather-supported for the remainder of January, following a record-warm December.

Significant Build in Financial Stresses

Financial stresses are building while markets broadly deteriorate. In addition to a decline in equities, the other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB) also performed poorly on the week. Total commodities continue to decline. Energy, palladium, aluminum and copper all extended their losses. The U.S. dollar continues to generally strengthen.

Ethanol Stocks Built to the Highest Level in Over 10-months

U.S. ethanol production advanced to 1,003 MB/D the week ending January 8, slightly less than the record high 1,008 MB/D set seven weeks earlier. The hefty output led to an inventory build of 246 thousand barrels to 21.3 million barrels, the highest level in over 10 months.

Time to Breathe

The “final” crop production report of the year gives the market some time to digest and breathe after a tumultuous end to the year for commodities in general. Relative performance for ags, especially in soybeans, has been very impressive given all the commodity and equity noise that surround these markets on a daily basis.

Iran Nuclear Sanctions Relief Imminent

PIRA sees Iranian nuclear sanction relief as imminent, in line with recent headlines that state the IAEA will confirm Iranian compliance with the P5+1 nuclear deal as early as Friday or early next week. We expect Iranian crude production will increase by 500 MB/D rather quickly.

Oil Sands Production to Remain Resilient Despite Low Prices

PIRA expects there to be no material shut-ins in Canadian oil sands despite oil prices below cash operating cost. High fixed cost, shut down/restart costs, and risk of reservoir damage make the potential for shut-ins unlikely. Rather, operators are likely to increase utilization rates to further drive down per barrel cost. PIRA expects oil sands production to grow 250 MB/D in 2016 in spite of low prices.

U.S. Set to Upend Atlantic Basic LNG Markets

The somnambulant nature of the Atlantic Basin LNG market is all about to change with a first cargo from the first of five 6.2-bcm/yr. trains at the Sabine Pass project. In contrast with the ongoing surge in Asian LNG volumes over the past 18 months, which so far have added some 15-bcm of new supplies since this time in 2014, Atlantic Basin LNG volumes have been in a years-long state of atrophy, with new liquefaction trains (Algeria, Angola) adding nothing to incremental regional supply; in the extreme case of Egypt, which added three “new” trains in 2005, the market had to quickly react to the sudden loss of 17-bcm of volumes over the course of seven months in 2013-14.

Some Latin American Refineries Might Benefit from U.S. Crude Oil

With the lifting of the U.S. crude export ban, Latin America would seem to be a logical destination for U.S. light sweet crude. However, besides Mexico, there are not many suitable refining candidates because only a few refineries currently process light sweet crude. Outside of Mexico, PIRA estimates that maximum penetration of U.S. crude exports into Latin America might be 50-75 MB/D. Mexico could take an additional 75-100 MB/D of light U.S. crude freeing up Mexican heavy crude for export. Beyond these volumes, European refiners are a larger potential market for U.S. crude as they already import substantial volumes of competing West African grades.

WA State Regs Propose Creation of Another Carbon Market

WA released its proposed Clean Air Rule, capping GHG emissions. Compliance will take place over 3-year compliance periods, starting in 2017-19 relying on domestic reductions, RGGI allowances, CCAs, offsets as well as RECs from the Pacific Northwest. This smaller market would draw on lowest-cost supply first - with more limited impacts on the allowance markets. Lower value supply could be some WA-specific reductions, RECs and offset types not eligible in the CA carbon market.

Asian Demand Update: Growth Slowing, but Still Robust

PIRA's latest update of Asian product demand shows continued slowing. PIRA's December update had shown growth of 1.1 MMB/D, which has now slowed to 0.74 MMB/D, with the four major products showing growth of about 0.5 MMB/D. Accounting for the slower growth was China, throttling back from 513 MB/D to 255 MB/D, Japan slowing from 29 MB/D to -98 MB/D, and India easing from growth of 444 MB/D to 396 MB/D. Looking at individual products, the overwhelming change in Asian demand growth has been in middle distillates, both gasoil and jet-kero.

Algerians Raise Gas Prices to Counter Effect of Currency Falls

CREG, the Algerian energy regulator, has increased electricity and gas tariffs for high-voltage electricity and high pressure gas (industry) by 20% and 35% respectively. Retro-active from 1 January 2016, increases in electricity prices cover nearly 76% of consumers while the gas price increase affect 57% of consumers, according to data released by the CREG. The 35% rise reverses prices in USD to Aug 2014 when the Algerian Dinar was 35% stronger than it is currently.

Latest Economic Data Have Downbeat Tone, but There Are No Imminent Signs of Danger

An onslaught of financial risk appetite continued for the second consecutive week, as major equity indices registered further declines. Market conditions have reflected broad-based nervousness about fragilities in the macro backdrop. Key economic data releases have been resilient recently, however, and there are no indications that global growth has weakened notably.

Potential Entities Covered Under WA Carbon Policy

This file offers a list of entities proposed to be covered under Washington State’s Clean Air Rule, designed to cap GHG emissions from covered sources. The list included 2014 CO2 emissions from stationary sources in WA as reported to EPA along with a designation of when facilities will be covered under the Clean Air Rule. This data is combined with estimates for emissions from petroleum products produced at WA refineries, and emissions from fuel importers to provide an overall size of the program.

January Weather: The U.S. Warm; Europe and Japan Near Normal

At midmonth, January looks to be warmer than the 10-year normal by 2% for the three major OECD markets with oil-heat demand weaker than normal by 158MB/D. The markets are roughly 7% warmer on a 30-year-normal basis.

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.

11PIRALogoNYC-based PIRA Energy Group believes that Brent crude prices continue to struggle and will remain weak in 1Q16. In the U.S., a surprising U.S. crude stock build leaves overall inventories flat. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices continue to struggle and will remain weak in 1Q16 with Iran’s return, refinery maintenance, and an ongoing stock overhang of nearly 500 million barrels above normal levels. Demand growth and slowly declining non-OPEC crude production will stabilize stocks in 2016 but not substantively reduce them until 2017. Gasoline cracks will stay unusually firm for the winter due to relatively tight inventory coverage which will persist into next year. That will underpin a strong 2016 gasoline season. Naphtha cracks will tag along for the ride at least in the first quarter. For middle distillates, stocks are very high and will stay well above average next year, capping distillate cracks.

Late Month NYMEX Rally “Rescues” Henry Hub Cash Prices

Notwithstanding the holiday-impaired liquidity in the futures and cash markets, the long-awaited arrival of more seasonable weather that also impaired production, prompted an outsized ~70¢ rebound in the NYMEX nearby futures contract that resulted in a HH Bidweek price of ~$2.37. Amidst the two-way volatility affecting Henry Hub (HH) this month, basis differentials were often distorted, especially out West where weather conditions happened to also be relatively cold in contrast to the rest of the county.

Western Grid Market Forecast

Despite a strong finish tied to cold weather and soaring gas prices late in the month, December spot on-peak energy prices are expected to average flat to slightly below November levels. Eastern U.S. weather was much warmer than normal and with gas storage already at high levels, gas prices plunged below $2/MMBtu. In the Northwest, the return to a more typical seasonal runoff pattern is expected to support heat rates in the mid-high 9,000s during Jan/Feb. Southwest heat rates have been revised down in response to somewhat improved California runoff prospects, the likelihood of incremental energy from the Northwest and weak December results. A tightening gas market during 2H16 and 2017 combined with higher renewable generation associated with tax credit extensions will maintain downward pressure on heat rates through 2017.

2016 Offers Little Hope of a Recovery in Coal Pricing

Coal prices remained on a downward trajectory this month, with weaker oil prices and a stronger U.S. dollar pushing the curve lower. While there have been some signs that fundamentals are recalibrating (weaker Russian exports, promises of supply cuts in Australia, and the reduction of the import tariff in China), PIRA continues to assert that there is limited upside for pricing over the next year. Substantially milder than normal weather in Europe and continued year-on-year declines in imports from China and India will weigh on balances and pricing over the short-term.

Tighter PJM REC Markets Now, But More Supply after 2018

The slowdown of growth in qualified renewable capacity and generation together with rising requirements will support PJM RECs in the near to midterm. The extension of the PTC/ITC boosts incentives for new renewable build, which along with major transmission projects will flood the market with supply, driving down REC prices after 2018. Post- 2020 carbon policies will offer additional incentives, so REC price support would need to come from tighter RPS policy requirements.

U.S. Ethanol-blended Gasoline Manufacture Soared to a Two-month High

The week ending December 25, ethanol inventories declined for only the second time in nine weeks. Ethanol output rose 19 MB/D from the prior week to 992 MB/D.

New Year, Same Story

Ags are suffering from a bit of a New Year’s hangover with HRW making new contract lows overnight, despite the flooding and unfavorable Midwest weather of late, while SRW sits within 5 cents of its contract low, March corn within just a few cents, and soybeans tread water.

Global Equities

Global equities were modestly lower on the week. In the U.S., the best performers were consumer discretionary and utilities. Energy and materials were the laggards. Internationally, only Japan moved higher on the week, with EEM, China, and BRICs all underperforming. For 2015, the global market fell 3.8%, with Asia outperforming, and down only 1%. Europe was near the global average, down 3.9%, while the Americas were down 5% and weighted down by poor performance in Brazil, Canada, Mexico, and Argentina. The U.S. market eased only 1.8%.

Surprising U.S. Crude Stock Build Leaves Overall Inventories Flat

With a rebound in crude imports and domestic crude supplied, crude stocks posted an unexpected build, and finished the last full week of the year about 102 million barrels higher than last year. The three light product stocks built, while the rest of the product barrel had a large draw, keeping the overall commercial stock profile flat. The impact of the Christmas and New Year’s holiday period should be felt primarily in data for the week ending January 1, with weaker gasoline and distillate demand. Crude runs moved up this week, and we expect them to move up again for the week of January 1, but then begin to fall, as refinery maintenance picks up during January.

Japan EG Losses Set to Accelerate on Eve of New Australia/ US Contracts

The imminent restart of two large scale nuclear reactors at Japan’s Kansai Takahama facility sends further shivers through Asian LNG markets and will serve to weaken the current spot price floor, which already is at 18 month lows.

Hydro Shortfall Limits Winter Downside

German exports surged to a new maximum of 9.3 GWs on average during December. We expect German exports to stay strong toward the Alpine region for the balance of the winter, given the sizable hydro deficit. France remains more exposed to bearish gas prices, but hydro/weather risks could still be countering this bearish impact – at least for 1Q 2016. We expect a further narrowing of the France-Germany spreads in 2Q and 3Q 2016.

Slight Ease on Financial Stress

On the holiday shortened week, financial stresses appear to have eased a bit. The S&P 500 closed higher on a weekly average basis, while high yield debt (HYG) and emerging market debt (EMB) indices also improved slightly. However, the S&P 500 was fractionally lower for the year. Total commodities posted another modest gain for the week and non-energy now appears rather flat for the past several weeks. The U.S. dollar looks mixed, and the U.S. 2-year yield continues to trend higher as the markets digest the higher Fed target interest rates.

U.S. Ethanol Prices Followed a “V-Shape” Pattern

U.S. ethanol prices fall early during the week ending December 25 before rebounding. Manufacturing margins worsened as average product prices declined more than corn costs.

E-Commerce Impact on U.S. Gasoline and On-Highway Diesel Demand

E-Commerce has been gaining market share from brick and mortar stores. We present evidence that as these on-line retailers grow and set up distribution centers closer to their end users, short haul truck distances traveled to deliver their clients' merchandise decline. The logistical efficiencies achieved may reach as far as long haul traffic with the combined effect implying reduced diesel consumption over earlier retail practices. By contrast, gasoline demand appears to be unaffected by E-Commerce.

Gas Flash Weekly

Thursday’s EIA reported 58 BCF storage draw was slightly on the lower end of an exceptionally wide outlook ranging from the high-teens to high-70s BCF. Yet, this week’s draw was strong in comparison to the prior-week and year-ago draws. The response of the newly minted February contract was initially muted following a pre-release rally, which had raised the price to ~$2.31 from yesterday’s $2.21 settlement. As forecasts for cooler weather persisted, the nearby contract settled at ~$2.34/MMBtu. This Gas Flash Weekly includes an update to our 2016 full-year price forecast.

U.S. October 2015 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly October 2015 (PSM) U.S. oil supply/demand data today. October 2015 demand came in at 19.35 MMB/D, which is 134 MB/D higher than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 284 MB/D. Even so, all of the major products were revised higher, while “other” was lowered. October 2015 versus October 2014 (PSA) demand declined 341 MB/D, or 1.7%. Kero-jet was the strongest performer, +7.1% (+105 MB/D) versus year-ago. Gasoline also outperformed the barrel average by gaining 102 MB/D, or 1.1%, but distillate was down over 6%. Compared to the weekly preliminary data, DOE raised commercial stocks 11.1 MMBbls, with products being raised 7.9 MMBbls.

Upward Revisions to Oklahoma Production and Record Crude Stocks in October PSM

The crude balances in the October 2015 PSM had upward revisions to Oklahoma production even as current production trends downward. October 2015 monthly crude stocks set a new record high.

Seven Issues Driving European Gas Fundamentals in 2016

Seven key issues will drive European gas fundamentals in 2016. At the top of the list will be coal-gas switching economics, along with the evolving role of European gas storage as a global force for balancing. Critical decisions made by Russian gas exporters will have the potential to impact gas prices from the Utica Basin to Tokyo Bay. The direct interaction between Russia pipeline gas and U.S. LNG in Europe will be met by a market that will struggle to grow beyond a correction for weather and the initial stages of recovery for gas use in the power sector.

Saudi Arabia Raises Domestic Fuel Prices

Saudi Arabia has just enacted an increase in domestic fuel prices, which will cover gasoline, diesel, and kerosene, potentially along with other fuels. Even with the increase, Saudi will still have among the lowest domestic fuel prices in the world. Heavy state subsidies in a time of falling oil revenues have put an increased burden on its fiscal balances. According to the IMF, the Saudi government net fiscal balance has gone from a surplus of 5.8% of GDP in 2013 to a 21.6% deficit of GDP in 2015. The Saudi currency has been pegged against the dollar since 1987 at 3.75 SAR/USD. Recent appreciation on a trade-weighted basis might argue for a devaluation versus the peg, but the negative implications would be significant, and as a policy option, appropriately rejected.

Saudi Arabia Increase Methane and Ethane Prices

On Monday, officials said the government ran a record deficit of nearly 367 billion Saudi riyals ($98 billion) this year, or about 15% of gross domestic product, as low oil prices depressed revenue, pushing it to cut planned spending by 14% in 2016 amid expectations that income from oil sales will remain under pressure. Shortly after unveiling the budget for 2016, Saudi Arabia increased domestic fuel prices in a move that suggests that the government is willing to adopt some difficult measures as it deals with cheap oil. Gas prices for local power generation increased on Tuesday and ethane, the main feedstock for petrochemicals, rose more than 100%.

December Weather: The U.S., Europe and Japan Warm

December was 25% warmer than the 10-year normal for the three major OECD markets with a loss of 1203MB/D of oil-heat demand versus normal. The markets were 28% warmer on a 30-year-normal basis.

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.

14PIRALogoNYC-based PIRA Energy Group believes that Brent crude prices will continue to struggle due to a large global commercial oil stock surplus. In the U.S., the commercial stock surplus increased. In Japan, crude runs resume rising and product demands improve. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices will continue to struggle due to a large global commercial oil stock surplus which PIRA estimates will total 500 million barrels above normal levels by end 2015. Oil markets are likely to run out of onshore crude storage in 1Q16. Brent will perform better than WTI over the very short term. Gasoline cracks will stay reasonably firm this winter due to relatively tight inventory coverage which will underpin a strong 2016 gasoline season. For middle distillates, stocks are very high and will stay well above average next year, capping distillate cracks. Europe has effectively assumed a larger role as swing regional refiner supplying gasoline to the Atlantic Basin as required but limited by oversupply and softer pricing for middle distillates.

Nearly All Prices Struggling Under Weight of High Storage, Especially Henry Hub (HH)

The debut of Jan-2016 futures as the NYMEX nearby contract was greeted with a wave of selling that resulted in new contract lows, albeit amidst light volume. Even so, it is still nearly 10% above cash Henry Hub (HH) prices, as well as many all other regional prices that are also near the $2 mark. More material heating loads would help HH cash reconnect with the NYMEX contract, but the benchmark may continue to exhibit weakness relative to other markers to promote gas burn that would absorbs residual supply surpluses in the region abetted by bloated South Central storage. While the MW was at the heart of the regional flow changes that unfolded this month, the South has been impacted as well — directly and indirectly. And more changes loom.

Western Grid Market Forecast

Spot energy prices fell at all hubs in November with on-peak price declines from October ranging from ~$3/MWh at Mid-Columbia to ~$4/MWh at Palo Verde and NP15 and $5/MWh at SP15. Off-peak markets saw smaller price declines with the largest drop about $2 at Mid-Columbia. Weaker gas prices and a sharp seasonal decline in the call on gas-fired generation were the major factors. In the Northwest, near term forecasts indicate above normal temperatures which will limit seasonal increases in heating loads and may lead to stronger runoff (i.e., rain vs. snow). As a result we have revised down near term heat rate projections. In the Southwest, the call on gas through the winter months is expected to increase year-on-year due to lower net imports from the Northwest and some gains from coal. Heat rate projections remain up year-on-year (by ~10%), but we have revised them down relative to last month.

Asian LPG Prices Roll Over Despite Higher CPs

Cash LPG prices cratered in Asia as the trading window transitioned to January arrivals. Propane cargoes were called an astonishing $66/MT lower at $457/MT while butane was felled by $61 to $481/MT. Such was the response to a hard to understand increase in Saudi contract prices, which were increased by $65 (to $460/MT) for propane cargoes loading in December. With spot VLGC tanker freight from the Middle East gulf to Japan around $70 currently, and the Asian propane premium to CP’s negative, contract holders can’t be too happy about these latest developments.

California Carbon: Reserve Price Guiding Prices

CA set the minimum auction reserve price for 2016, which was also the level at which the Nov. auction cleared. With 13 MT of offsets used for compliance, an allowance bank after CP1 of 50 MT will likely double after 2015 year results. The role of the cap and trade price signal post-2020 will depend on the Scoping Plan update and cost containment is a key issue. Linkage potential has been prominently discussed, with plans for Ontario coming into focus, and with WA state, Manitoba, and Northeastern U.S. states on the horizon.

OPEC Breakevens Flat at $100/Bbl in 2016, But Still No Impact On Oil Price

PIRA estimates OPEC budgetary breakeven prices will remain flat to slightly down at $100/Bbl in 2016. Breakevens are down $10/Bbl from 2014 levels, mostly due to currency depreciation and government spending cuts. Many OPEC countries still face significant budget deficits. Yet the widening gap to Brent oil prices (PIRA forecasts $49/Bbl in 2016) highlights the limitations of budgetary breakeven analysis in general. Breakevens provide interesting insight into countries’ budgetary pressures. However, we have long argued that breakevens are not a useful predictor of oil prices, or a price level (or floor) that OPEC will support. Countries are more likely to adjust to the reality of low oil prices by cutting spending or drawing on reserves, just as we’ve seen over the past year.

Biofuels Weekly Update

U.S. ethanol prices rose Monday and Tuesday November 23 and 24 boosted by higher corn and petroleum values. Assessments then declined before the Thanksgiving holiday, pressured by record production that led to the highest inventory in 16 weeks.

U.S. Job Growth Is Solid; the Euro Is Stronger After ECB Easing

U.S. job growth in November exceeded market expectations, though details were somewhat mixed. Latest data on the good-producing sector (the ISM index and exports) were disappointing, though the current U.S. industrial slump is not yet particularly severe from a historical perspective. The European Central Bank expanded its quantitative easing programs, yet the value of the euro area currency strengthened – apparently, some speculative financial positions for a weaker euro had to be unwound quickly after the action fell short of expectations. India’s economic growth was faster than China’s during the third quarter. Brazil’s recession deepened.

North American Midcontinent Oil Forecast

Crude stocks rose in November in Cushing, as well as in West Texas and Western Canada. Differentials vs. WTI were stronger for northern grades from Alberta to Clearbrook, in advance of two new pipeline start-ups. Differentials weakened in Midland and Guernsey – two locations where prices had been well above pipeline parity for several months.

Will Switching Economic Be Broad Enough to Offset Weather-Related Losses?

Coal-to-gas switching will remain the hot topic in Europe, as temperatures continue to cool. The problem for sellers is that temperatures are not cooling fast enough, so what is being gained in terms of demand growth from the power sector is being handed right back in terms of losses in the R/C sector. The dynamic is well under way in the U.K. and continues to spread to other markets. November was even warmer than normal than the previous year and the 10-day outlook is serving up more of the same in the early part of the month.

Exports to Southern Markets Underpin French Prices

While weather conditions have been milder than normal over the Continent, pockets of price strength have emerged. In France, nuclear output is now recovering, but stronger flows toward Switzerland and the Southern markets, in part due to drier weather and lower plant availabilities, are preventing French prices from moving lower.

Are RGGI Allowances Like “Forever Stamps”?

The December RGGI auction exceeded secondary market pricing on the day of the auction, with bullish implications for the market. Price increases are not tied to current program balances - PIRA projects RGGI to be oversupplied through 2020. Rather, they are tied to this year's Program Review to result in stricter post-2020 caps. RGGI representatives confirmed at the November Stakeholder Meeting that currently-traded RGGI allowances will carry forward at full value – potentially more similar to U.S. Post Office "forever stamps."

U.S. Commercial Stock Surplus Increases

Another overall U.S. inventory increase this past week pushed the stock surplus to last year up by 3 million barrels. The crude stock surplus hit a new 2015 high as inventories quickly approach last April’s all-time weekly high. The gasoline inventory surplus narrowed to just 8 million barrels (4%), as it remains the one standout in a rather glutted market.

Production Lags, Export Opportunities Narrow

Canadian dry gas production declined sequentially in 3Q15, a likely sign of things to come. The quarter-on-quarter loss was symptomatic of a shrinking export market, as gas from Appalachia displaces traditional TransCanada (TCPL) markets in eastern Canada and the northeastern U.S. These conditions are exacerbated as storage in eastern Canada is near capacity, leaving less appetite for new gas from Alberta or B.C. Consequently, production in Canada is expected to decline through 4Q15 and into next year.

Japanese Crude Runs Resume Rising, Product Demands Improve

Japanese crude runs rose in broad agreement with our turnaround schedules. Crude imports increased from very low levels, but crude stocks still posted a modest draw. Finished product stocks declined with all the products other than kerosene posting draws. Refining margins remain strong with gasoline, naphtha, and fuel oil cracks posting gains.

Chennai Refinery Flooded

Flooding has closed the Indian Oil Corporation’s Chennai refinery in southeast India. It is too early to determine the duration of the outage. Production lost is roughly 50 MB/D of naphtha/gasoline and 120 MB/D of middle distillates. However, with the new Paradip refinery (300 MB/D) now in the process of starting up, its production should cover some of the Chennai shortfall, particularly if it were to last into 2016.

What Will Paris Talks Mean for Gas Demand?

In the near term, Chinese gas growth has slowed significantly and LNG imports remain down YTD by around 3% or 2-mmcm/d. It’s not a large amount, but does help explain many of the supply tenders popping up around Asia for 2016. Since so much LNG demand growth hinges on new supply dedicated to the Chinese market, this lack of buying does not bode well for sellers. China, being the largest producers of solar panels in the world, also undermines the use of gas as a power generation fuel in the future, as the largest incremental buyer of LNG in the world is also trying to solve environmental problems at multiple levels. Gas will play a role in solving these issues, but it has moved from a starring role to being more of a supporting cast member.

Aramco Pricing Adjustments for January – Europe Tightened, Asia and U.S. More Generous

Saudi Arabia's formula prices for January were just released. The adjustments made to differentials against their key regional benchmarks suggests Saudi Arabia is striving to maintain volumes and liftings. European pricing was tightened, but terms for Asia and the U.S. were generally made more generous.

More Bearish Momentum

Weather is proving to be the prime driver in fundamentals as the market waited past the traditional start of the heating season for the first reported weekly withdrawal. Now, the latest mild turn in forecasts has rocked the prompt contract, bringing it to new lows. In line with these recent forecasts, PIRA has adjusted its GWHDD assumption for December to 12% milder than the 10-year normal.

EPA Finalizes Renewable Fuel Standards Through 2016

After long delay and under court order, the EPA on November 30th issued a regulatory announcement finalizing the overall renewable fuel requirements for 2014, 2015 and 2016 as well as the 2017 mandate for biomass-based diesel (BBD). Those looking for the EPA to match its earlier May 15th proposal, were disappointed. The mandates are significantly higher than proposed in May.

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.

14PIRALogoNYC-based PIRA Energy Group believes that oil sands and other high cost developments will be required to balance the market. In the U.S., the total commercial stock surplus widened to the largest of the year. In Japan, crude runs began rising and the stock bulge corrected back downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Longer-Term Oil Price Outlook Marked Down vs. August

We have brought the post-2020 price outlook down and are now limiting the upside. We still believe that oil sands and other high cost developments will be required to balance the market. However, price responsive US and global shale should limit the upside central tendency.

Growing Concern over Medium Term Downside Price Risk

We have not changed our longer-term Reference case for US natural gas prices vs. August. However, we have boosted the probability of the low case to reflect both demand side concerns and the potential for lower supply cost. If cost reductions in Haynesville are widely confirmed, we will reconsider the Reference case outlook.

As Gas Is Being Repriced along the Curve, European Power Is at a Turning Point

With spot and forward gas prices continuing to look for a bottom, European power appears to be moving toward a new dispatching equilibrium. While the recent years have seen plummeting spark spreads and large losses in gas-fired generation, the current fuel pricing dynamics suggest that gas will be moving back into the stack, displacing more efficient coal units. In other words, we expect a structural recovery in the spark spreads both in the U.K and the Continent.

European Carbon: Stronger Fundamentals Needed to Maintain Price Gains

Eastern European countries have started their 2015 power sector free allocations. Looking ahead, EUA auction volumes/supply will increase from 2016-2018 with the easing of backloading. Longer term emissions growth is expected to be weak, especially with the announced German lignite plan. Implied carbon prices from fuel switching have been moving strongly lower as well. Substantial Phase IV ETS reform discussions are not expected until next year.

Coal Pricing falls again Amid Wider Energy Market Weakness

Seaborne coal pricing faded yet again last week, with weaker oil and gas prices driving the market lower. API#2 (Northwest Europe) prices lost the most amount of ground as heavy European imports of LNG drove NBP gas prices down considerably from the prior week. With a lack of support from the oil market, and persistently weak coal fundamentals, it is difficult to envision a scenario where coal prices rise appreciably over the balance of the year, and into 2016. However, PIRA’s expectation of a rebound in 2H16 oil prices should give coal prices some uplift, if only from higher production cuts and technical trading factors.

Weaker Asian LPG Markets Search For Direction

Asian LPG prices were pulled lower with Crude oil last week. Cash and futures propane prices continue to look disconnected with physical cargoes arriving in December called near $465 while futures for the same month traded $30 lower. The front futures spread is now steeply backwardated at +$40/MT – the most since the end of last winter, indicating weaker demand lies behind the prompt needs. Butane prices were crushed more than 10% lower to be called near $475, just $10 above cash propane.

Ethanol Prices Tumble

U.S. ethanol prices plummeted the week ending November 6, as demand for ethanol-blended gasoline decreased the prior week, while plant output and inventories increased. Margins only dropped slightly as corn prices also fell.

New Data on Chinese Growth, Emerging Market Industrial Output, and European GDP

October Chinese data showed different sectors continuing to expand at different paces. Data on manufacturing remained disappointing, but vehicle sales experienced a major upturn as the government’s latest stimulus program kicked in. Emerging market industrial production data improved broadly in recent months, though there were some exceptions (most notably, Brazil). A modest pace of GDP growth continued in Europe during the third quarter.

Lows Not Safe

The November WASDE has made it even more difficult to be constructive across the board. While new lows were made this week in major contracts with the exception of SRW, those lows are very vulnerable in our opinion.

U.S. Stock Surplus Widens

The total commercial stock build for the week of November 6, compared to a draw last year, widened the total commercial stock surplus to the largest of the year. Crude stocks built in spite of crude runs increasing sharply, and we expect crude runs to continue to increase as refinery turnarounds rapidly decline in the next few weeks. Overall export-adjusted and HDD-normalized product demand growth has been struggling of late, down 1.1% over the most recent four weeks. Year-to-date adjusted product demand is up 0.46 MMB/D, or 2.5%. The most recent employment news is positive, even as the industrial sector lags.

Tighter Balances, But Still Anxious for More Seasonal Heating Loads

With November at nearly the halfway point, the market is being driven not only by weather that is on track to average ~15% milder than the 10-year normal, but also by a supply trajectory that for now appears aware of the market’s limitations with 4.0 TCF in stocks and its heavy reliance on price-induced gains from coal-to-gas substitution.

Eastern Grid/ERCOT Market Forecast: November 2015

On-peak prices fell month-on-month in most markets as cooling loads and gas prices both faded. Price increases were observed only in New England (the only market to see stronger gas prices) and at MISO's TX hub. Despite a strong October employment report suggesting a healthy economy, weather-adjusted loads declined across the East. Unadjusted loads fell by 2.8 aGW from the prior year. Gas prices have been revised down with larger adjustments at the front end of the forward curve, particularly in the Northeast markets. As a result, power price forecasts have also been reduced with the exception of the Ontario market (up about $2/MWh). Implied heat rate projections are mostly higher than in last month's report.

Ethanol Values Decrease Again

U.S. ethanol prices followed corn futures lower. In its World Agricultural Supply and Demand Estimate the USDA projected higher corn production and lower consumption, a bearish signal.

Nervous Markets

While the world rightfully focused on the horrific Paris attacks over the weekend, traders wondered what it would mean to U.S. equity markets, oil prices, and the dollar. Grain traders spent the weekend lamenting what Friday’s new low closes for corn and soybeans would mean come Sunday night.

Japanese Runs Begin Rising, Crude Stock Bulge Corrects Back Downward

Crude runs increased as turnarounds wind down. Crude imports moved sharply lower allowing crude stocks to correct back downward after the large build seen the previous week. Finished product stocks drew again due to declines in naphtha and kerosene stocks. Gasoline and gasoil stocks changed only slightly. Margins remain good and strengthened on the week due to higher cracks for middle distillates and naphtha.

It Will Take Time For U.S. Shale Oil Activity To Pick Up Once Crude Prices Recover

Massive industry layoffs and the reduction in inventory of working drilling rigs will contribute to a slow recovery in activity once oil prices start to rebound in 2016. Several sources estimate that the industry has so far lost around 200,000 jobs worldwide and many drilling rigs have been scrapped. In addition, banks and operators will want to see improved prices for a sustained period of time (i.e. several months) before increasing lending and drilling activity respectively. The high activity levels experienced in 2014, when WTI was close to $100/Bbl, will probably not be seen for many years.

Record Norwegian Exports for November Hint at Aggressive Defense against LNG

But this is not just a story of the traditional pas de deux between spot and oil-indexed gas prices, as plenty of fundamental evidence for weakness is also in plain sight. Let’s start on the supply side with Norwegian gas exports, which are not just well above normal for November; they are approaching an all-time high for any month on record. Why Norway would be exporting record amounts of gas when we are experiencing a year-on-year decrease in weather-based demand is a root issue here.

European Oil Demand Growth Finally Turns Positive in 2015

After a decade of negative oil demand growth, demand turned higher this year. Demand growth was centered in Mediterranean Europe and got a significant boost from oil demand in Turkey. While lower oil prices were clearly helpful in boosting demand, economic growth is still too anemic to account for all the positive growth. Our demand model includes only the key drivers of oil demand like price and GDP; other unspecified factors are implicitly included in our forecast error. Evidence points to the positive role these unspecified, non-traditional factors played in oil demand growth this year.

Asian Stock Levels Lend Support to Winter Spot Price Run-Up

Storage availability for Asia’s key utility buyers has played a role in the recent uptick in imports, though it is nowhere near as big as current estimates of available capacity might suggest. PIRA estimates for end Sept. storage levels across Asia show storage levels between 55% to 70% of capacity for the top buyers.

Key Indicators, Commodities Fall

The S&P 500 moved lower for the week, having its worst week in three months. Most of the related indicators deteriorated (Russell 2000, volatility, and U.S. high yield credit, emerging market bond credit). Overall, commodities declined rather sharply, both energy and ex-energy. With regard to currencies, the U.S. dollar was again mostly stronger. U.S. government bond yields have continued to inch higher on short and longer term maturities as markets continue to contemplate the Fed raising short-term rates at their next meeting which will conclude December 16th.

U.S. Shale Oil Operators Point Towards Continued Declining Activity & Production

Capex spending has fallen dramatically through the course of 2015, resulting in a lower rig count, and for the first time quarter-on-quarter (Q/Q) production decline of shale oil in the U.S. In 3Q15, PIRA estimates that U.S. shale crude and condensate production declined by about 3.2% Q/Q to 4,200 MB/D. Shale operators that have reported guidance (about a third of total shale oil production) point to a further 3.8% Q/Q decline in 4Q15.

Iran and Iraq Come to Deal on Natural Gas

Iran has signed a new contract with Iraq to export natural gas to the country’s southern port city of Basra. Based on the contract, Iran will pipe 20-25-mmcm/d of gas to Basra for a period of six years. The supply – that will increase to 45-60-mmcm/d in a later stage – will be used to feed the main power plant of the city. Exports will start with an initial supply of 7-mmcm/d for three years and will then increase to the target volume.

Global Equities Decline Broadly

On the week most of the tracking indices lost ground, with some falling back sharply. In the U.S, only “utilities” managed a small gain. The worst performers were retail, consumer discretionary, and energy. Most of the international indices also posted losses with only the Japanese tracking index able to post a largely neutral performance.

November Weather: U.S., Europe and Japan Warm

At midmonth, November looks to be 14% warmer than normal on the 10-year-normal basis for the three major OECD markets. On a 30-year-normal basis the markets are 21% warmer. The November forecast takes into account first half actual weather and the current forecast for the rest of the month.



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.

12DWMondaySaudi Arabia’s reluctance to cut production to maintain its share of the global crude market has paid off. By not “blinking first”, the Kingdom has succeeded in driving rigs out of the US shale market with current rotary rig counts down 65% from 2014 highs in September. This has led to significant decreases in production in the Bakken (-10%) and Eagle Ford (-20%) shale plays over the same period. The situation has been compounded by the retraction of Zero Interest Rate Policy (ZIRP) which is expected to limit further investment into small cap shale. This has caused many analysts (FT, CNBC, etc.) to sound a death knell for the once heralded tight oil industry, where up to half of US shale players could go bankrupt in 2016.

However, the strategy put forth by Saudi Arabia has come at a cost. Despite a massive $670bn sovereign wealth fund, the country is slipping into the red. With the government budget based on $106 oil, falling revenue from oil exports coupled with high spending on subsidies and support to foreign allies has led to a national budget deficit of 22% GDP in 2015. According to the IMF, the country may become bankrupt in five years if its expenditure patterns remain unchanged. With oil price expected to remain suppressed until 2017/18, the Kingdom needs to assess all of its options.

In addition to spending cuts, Deputy Crown Prince Mohammed bin Salman has recently spoken of the potential IPO of Saudi Aramco, as a part of the wider series of economic reforms. If successful, such a move would dwarf the other “mega-deals” of the current low oil price environment (e.g. HAL & BHI or Shell & BG). Estimated value of Aramco could reach up to $10 trillion based on its proven reserve at $40 oil price, which is about 12 times that of ExxonMobil ($357bn), Chevron ($197bn), Shell ($192bn) and Total ($118bn) combined.

Arguably, the timing could not possibly be worse for a listing of an E&P company, valuations are at a cyclical trough as a function of low oil prices and most major E&P firms are trading at prices not seen since the global crash in late 2008. It is clear, however, that Saudi Arabia is facing huge budget deficits and desperate times call for desperate measures.

Chen Wei, Douglas-Westwood Singapore
 

12DWMonday2015 was a tough year. Spending and headcounts have been slashed across the industry and the spectre of bankruptcy is an all too common concern. Recent trends in commodity prices have not helped. Late December saw Moody’s downgrade its price forecast for 2016 by 17% and a further dip in the price of oil – Brent falling to the lowest level since 2004. Producers have continued to produce and new Iranian output may result in even more oversupply. By all accounts, 2016 is shaping up to be just as challenging as 2015. Where does this uncertainty leave the industry and what lies ahead?

If prices remain low, one thing is clear – 2016 is lined up to be a year of consolidation. Cost savings are required to ensure future developments are economically viable. Project optimization and supply chain improvements will be key in reducing costs. However – at current prices – industry consolidation will play a large part in ensuring the cost-effective development of projects.

In all likelihood, 2016 will see the completion of two blockbuster E&P and OFS deals – with Shell and Halliburton acquiring BG and Baker respectively. Further M&A activity is expected – those with strong balance sheets are in line to benefit from a wealth of distressed assets. This is particularly clear in the drilling sector – since 2014’s drop, firms have relied on credit markets to keep rigs going. With prices below $40, this option will dry up, forcing a search for partners. 2016 looks to be a difficult year for all involved. Yet, for those well positioned, there is likely to be a plethora of opportunities.

Andy Jenkins, Douglas-Westwood London
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15DWMondayIn November, Energy Secretary Amber Rudd announced her vision for the energy system: to put consumers first, increase competition and secure electricity generation for the UK. In addition to a proposal to end unabated coal-fired power stations and prioritise gas-fired power stations, the Energy Secretary disclosed a commitment to offshore wind (OW) whereby the government will support the target of 10GW of capacity by 2020, if costs reduction conditions are met.

According to Rudd, the cost of contracts for OW have reduced by 20% over the last two years, but costs need to reduce further to secure government support. If the government’s conditions are met, there will be funding for three auctions by the end of 2016.

This is good news for companies involved in the OW supply chain who have already seen the benefits of increased activity in the sector in recent years. OW projects have been delivered on schedule and on budget: 3.7GW of capacity has been installed over the past five years, whilst costs have been reduced, resulting in a 38% reduction in government subsidy.

Given the current downturn in O&G activity, many companies are looking to diversity into the OW sector. Halfan Brustad, VP of Statoil recently noted that OW can learn from the O&G industry, and vice versa:

“Project management for OW farms can be learnt from O&G as well as marine & logistics"

“Renewables has a strong commercial mind set to specifications and materials choice which is key to keep low margins - we could take this back to oil and gas [during this period of cost-cutting]."

In addition to O&G companies moving into the OW supply chain, a number of start-ups are entering the OW sector. This has been evident to DW, who in addition to covering this sector via our Offshore Wind Market Forecast series, have recently provided bespoke consulting for new companies looking to take advantage of this growing sector. Given the announcement by the Energy and Climate Change secretary recently, the opportunities for investors wishing to cash-in on this rapidly growing sector are significant.

Celia Hayes, Douglas-Westwood London
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15DWMondayAs the end of October saw upstream operators release disappointing Q3 results, with Shell in particular announcing record losses, a completely different picture is being painted in the downstream sector. A host of North American refiners, including Tesoro, Valero Energy, Phillips 66 and Marathon Petroleum have seen profits soar as the low oil price has improved margins; WTI cracking margins for Q3 2015 averaged $22.02 compared to $14.01 in 2014.

With refiners benefiting from high margins amidst the oil price decline, the impact on those companies providing maintenance services to the sector is rather more complex. On one side, higher margins are increasing utilisation – Tesero reports that during Q3 their plants were running at 101% of their officially stated capacity – intensifying the level of maintenance required to prevent downtime. Conversely, refiners will seek opportunities to delay large turnaround programs in order to take advantage of the high margins.

This has been apparent as a number of refineries announced delays in their maintenance schedule, with some refiners, such as Cepsa, postponing to January 2016. However, the extent to which refiners are able to delay plans is limited due to both the project lead times, which can be up to 16 months in advance, and the vital nature of maintenance work, particularly when plants are run at an elevated capacity. North America has already seen a series of refinery shutdowns resulting from over utilisation, including the large BP Whiting plant and an explosion at Exxon Mobil’s Torrance refinery, highlighting the importance of routine maintenance work.

Whilst the effects on the downstream maintenance industry are somewhat complex, it is clear that the sector is currently an attractive industry for investment. Despite the prospect of some delays in maintenance work, Douglas-Westwood’s “World Downstream Asset Maintenance Market Forecast 2015-2019” expects the market to remain strong, growing at a 4.8% CAGR between 2015 and 2020. As maintenance remains particularly vital to the smooth running of plants during this period of above average utilisation, the sector is likely to remain relatively sheltered from the industry downturn and struggle that upstream has borne.

Kathryn Symes, Douglas-Westwood
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