Finance News

The new fund, Statoil Energy Ventures, will invest up to USD 200 million (around NOK 1.7 billion) over a period of four to seven years.

Potential investment themes include offshore and onshore wind, solar energy, energy storage, transportation, energy efficiency and smart grids.

12StatoilImage Courtesy: Statoil

The team initially consists of six investment professionals operating with a global mandate, initially based out of Statoil’s offices in London and Oslo.

The fund will take direct positions primarily as a minority shareholder in growth companies, preferably as a co-investor with other venture firms. Investment in selected fund will also be considered to gain a wider footprint.

The Statoil Energy Ventures team, focusing on growth-phase investments in renewable energy, will operate alongside Statoil’s existing venture entity, Statoil Technology Invest (STI), which focuses on early-phase investments in upstream oil and gas.

Statoil has a strong track record of successful technology implementations and financial return through exits. STI has since 2000 invested around USD 135 million, achieving a multiple of invested capital on realized deals of 2.5.

“We are pleased to announce Statoil Energy Ventures: One of the world’s largest corporate venture funds dedicated to renewable energy. The transition to a low carbon society creates business opportunities, and Statoil aims to drive profitable growth within this space. Through the new fund, we look forward to investing in attractive and ambitious companies and contribute to shaping the future of energy,” says Irene Rummelhoff, Statoil’s executive vice president for New Energy Solutions.

The fund is established as part of Statoil’s new business area New Energy Solutions, reflecting the company’s aspirations to gradually complement its oil and gas portfolio with profitable renewable energy and low-carbon solutions. The investments are included in Statoil’s overall investment outlook as presented on 4 February.

“Statoil Energy Ventures aims to be an attractive partner for growth companies. We offer a strong financial muscle and are ready to invest in three strategic areas: Supporting our current operations in renewables, positioning in renewable growth opportunities, and exploring new high impact technologies and business models. We look forward to engaging with ambitious entrepreneurs as an active investor and to build great companies,” says Gareth Burns, vice president in Statoil and managing director of Statoil Energy Ventures.

13PIRALogoNYC-based PIRA Energy Group reports that dated Brent traded below WTI in January, on a monthly average, for the first time since 2010. In the U.S., there was a new record high stock level. In Japan, crude runs fell, imports moved lower and stocks drew again. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

Dated Brent traded below WTI in January, on a monthly average, for the first time since 2010. Both crudes fell to new 12-year lows, dipping below $30/Bbl on occasion. Differentials of onshore crudes remained strong relative to LLS, as PADD III stocks also hit record highs. Cushing is struggling with oversupply and this will persist.

Updated Weather Outlook Prompts Price Meltdown

Judging from last week’s price correction, from a high in the nearby contract that topped $2.30/MMBtu last week to this week’s dip below $2.00/MMBtu, the market appears to have gleaned additional clarity on the weather to justify breaking out of its former holding pattern. The decided shift to even warmer temperatures this month and the related rapid decline of storage draws (from 200+ BCF last week to 152 BCF this week and next week’s projection for a draw less than half that) are the driving forces influencing price perceptions.

UK: More Coal Retirements Will Further Tighten the Market

The proposal to close three out of four Fiddler's Ferry units is quite bullish for the UK market. While retiring Fiddler's Ferry, SSE will have to unwind its capacity contract for delivery 2018-19, setting a precedent that other plant operators may follow as well. The fallout of these decisions will probably lead to a revision of the capacity market design, which will, however, take time to finalize while a messy policy debate will continue in the UK. In the meantime, power generators will be dashing to secure additional Supplemental Balancing Reserve contracts. From a wholesale pricing standpoint, we are wondering if there is a risk that the activation of this reserve may undermine price formation, but we believe this risk should be quite small, based on current information.

Coal Prices Deteriorate on Lack of Fundamentals, Weaker Gas Pricing

Coal pricing in the Atlantic Basin moved lower last week, with API#2 (Northwest Europe) prices falling by the largest extent. Another round of mild European weather, easing oil and natural gas prices, and news that more coal-fired generating capacity will likely be retired in the U.K. pushed 2Q16 API#2 prices down. API#4 (South Africa) prices also faded, although declines were more moderate than API#2, while FOB Newcastle (Australia) prices were mixed. Prices do not have a fundamental anchor at this point, and high stockpiles in many markets will make it difficult for prices to appreciate over the next 90 days.

U.S. Supreme Court to Decide on Stay of Clean Power Plan: Possible, But Not Likely

On January 21st, the D.C. Circuit Court of Appeals declined to stay EPA's Clean Power Plan pending legal review. In a highly atypical move, the state petitioners appealed the denial of the stay to the U.S. Supreme Court on January 26th. While granting the stay is a possibility, PIRA believes respect for the standard judicial process will persuade Chief Justice Roberts to vote to deny a stay, even if — as we believe — he would vote against the rule when it eventually comes before the Court. A decision by the Court could come as soon as this week.

U.S. LPG Prices Rising as Supply Tightens

March Mt. Belvieu LPG prices strengthened as another large national stock decline narrowed the year-on-year surplus appreciably. Winter heating demand and strong export flows are pulling LPG stocks down just as PIRA expects domestic production growth to wane, tightening supply levels throughout 2016. LPG shrugged off broader market declines with propane adding 2% to 36.6¢ and butane a healthy +5% to 53¢/gal.

No Love for the Dollar

The U.S. dollar appeared headed for its largest weekly decline (pre-NFP) since 2009, and yet grains/oilseeds remained mired in narrow trading ranges, presumably heading for lower weekly closes. Some would call it somnolence. Then again it was Groundhog Day last week.

Ethanol Stocks Build to Near a Four-Year High

Ethanol inventories soared to a near four-year high the week ending January 29. Ethanol production declined slightly.

Financial Stress Remains Elevated

The S&P 500 fell Friday to Friday, although the weekly average was higher for the second week in a row, as were the weekly averages for other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB). The U.S. dollar generally fell in value, and commodities were mixed.

Weaker Economic Projections Set the Tone for a Challenging Year in Latin America

Slower economic growth in Latin America signals flat to declining demand for diesel, but gasoline is still showing growth in 2016. Consumption of the four major products (gasoline, diesel, jet/kero and fuel oil) is projected to stay flat this year at about 7.24 MMB/D. Year-on-year gasoline demand is forecast to increase, while diesel is flat and fuel oil is lower. Product imports into the region are expected to contract but remain fairly high. Planned and unplanned refinery outages continue to impact the region. In 2015 regional CDU offline capacity averaged 625 MB/D, while FCC downtime reached 200 MB/D.

Gas-to-Renewables Switching Is Happening in the UK. Soon the Rest of Europe?

Coal-to-gas switching will continue to be a central focus of our analysis, as spot gas prices fall into an area (below 27p/th) where such switching will intensify. However, gas demand will depend on more than just what coal prices do. Focus on gas-to-wind switching is already playing out in the U.K. as a significant issue and may be a preview of additional switching issues on the Continent.

U.S. Coal Market Forecast

U.S. coal demand continues to erode in the face of persistently low natural gas prices and milder weather, as well as a weak international coal market. We are seeing growing signs of a supply-side response from producers, setting the stage for a market recovery in 2017.

Key Themes Impacting U.S. Distributed Solar PV Penetration

Policy, cost, and electricity market drivers will define the level and location of U.S. distributed solar photovoltaic (PV) penetration. Policy uncertainty remains, especially related to net metering changes, state-level renewable energy targets without an explicit carve-out, and grid modernization efforts. Flat to declining PV costs in the coming years will ultimately support increased penetration. Retail electricity prices under current rate design could support penetration, but potential changes to rates add risk.

U.S. Ethanol Prices and Margins Improve

Ethanol prices rose the week ending January 29 as production tumbled and the market tightened. Manufacturing margins rose as higher product values outweighed the increase in corn cost.

Global Equities Largely Negative

Global equities generally fell back on the week. In the U.S., most of the tracking indices lost ground, though materials and utilities were able to post gains. The weakest performers were consumer discretionary, retail, housing, and technology. Internationally, the Latin America tracking index posted a gain, while all the other tracking indices lost ground. China and the other BRICs posted the largest declines.

New Record High U.S. Stocks

Commercial U.S. oil inventories increased this past week, led mostly by crude oil, as runs made a marginally lower low and crude imports ramped up to the highest level in eight weeks. Product demand weakened on the week as the record snow storm took its toll on demand, turning the week earlier 9.4 million barrel product stock decline into a 1.7 million barrel build. One silver lining: the stock build was larger last year for this week so the year-on-year stock surplus narrowed.

Russia Looks at Lowering Contracted Gas Prices

Gazprom could lower its prices to keep European customers locked into long-term supply contracts, maintaining an arrangement that has for decades helped Moscow secure political leverage in Europe. However, Russia will only be able to preserve its long-term contracts for the next few years and will eventually have to sell more of its gas on the spot market, loosening its hold over customers. The long-term deals, some of which span 25 years, have been the bedrock of Gazprom's dealings with Europe.

Japanese Crude Runs Fell, Imports Moved Lower and Stocks Drew Again

Crude runs fell yet again reflecting the full impact of a known turnaround that had begun. Crude imports moved lower such that crude stocks drew again, this week by 4.6 MMBbls. Product stocks also drew, with over half their 3 MMBbl decline being in kerosene. In January, refining margins have come off their peak with further easing as we enter February. While all the major cracks softened on the week, margins remain statistically good.

Russian Outage Affects Japanese Markets More than Other Asian Buyers

Project delays and unplanned production outages will create support for Asian spot prices in the short term, but do not expect the rally to persist. The issue is not a shortage of volume; it is the repositioning of portfolios to adjust to the various outages and delays that will work themselves out in a few weeks. PIRA certainly foresaw this coming, as weak market conditions were not exactly a motivating force among the producer class to add incremental supply to the market in 2016 and 2017.

U.S. Recession Scenario Is Not Plausible

The view that the U.S. economy will experience a recession this year has found some traction in recent economic commentary. As recessions are difficult to forecast in advance, the possibility of significant economic disruptions should not be dismissed outright. But based on analysis of key data (including those pertaining to the January labor market conditions), it is difficult to make a case that a recession is under way. In fact, a reasonable assessment of the current condition is that the U.S. economy is not too hot (where aggressive monetary tightening by the Fed becomes a risk), nor too cold (where a recession is a risk).

Global Biofuel Supply and Demand to Increase

The driving forces for biofuels consumption still exist. However, the collapse of energy values will slow growth in consumption.

Atlantic Basin Gasoline Demand Outlook in 2016 and 2017

The decline in gasoline prices since mid-2015 has given a boost to gasoline demand on both sides of the Atlantic. PIRA's current forecast calls for gasoline demand in the U.S. to increase by 1.6% and 0.3% in 2016 and 2017, respectively. Gasoline demand in Europe is projected to grow 0.9% this year and by 0.3% in 2017. A key factor in our forecast for 2017 is the lagged positive effect that declining prices in 2015 and 2016 will have on demand in 2017. PIRA's analysis makes the case that these price declines could result in even faster demand growth next year.

Special Report: The Oil Market in 2017

The year 2017 is looking more and more like the year when the turnaround in fundamentals that have been depressing the oil market since mid-2014 will take hold. The imbalance between supply and demand will have been eliminated and declines in surplus inventories will occur. This turnaround has taken more time than initially expected. Over the past year, oil demand for 2015 was significantly revised up, but oil supply was revised up much more, putting oil prices on a downward path from their monthly 2015 high of $64/Bbl for Brent in May to $30.69/Bbl for January 2016. The year 2016 is seen as a transition year when monthly fundamentals swing to promote firming of the market.

Fire at Tupras's Izmit Refinery and Its Impact

A fire apparently broke out at Tupras’ 220 MB/D Izmit refinery in Turkey on February 3, and it is not clear how many and which units are affected. In a worst case scenario, light product losses would be 70 MB/D gasoline, 60 MB/D jet fuel, 90 MB/D diesel, and 20-30 MB/D more fuel oil would be produced.

Aramco Pricing Adjustments for March: — Staying the Course

Saudi Arabia's formula prices for March were just released. The adjustments made to differentials against their key regional benchmarks were within market expectations and do not suggest any change in Saudi export pricing policy, which has been to maintain competiveness with regard to volumes, liftings, and pricing in key markets. Pricing in both Asia and Europe was cut on the lighter grades and raised on the heavier grades, reflecting weaker light product cracks and firmer fuel oil cracks.

IMO Study Under Way — 2025 Implementation Is Reference Case, But Earlier Is Possible

The IMO has initiated a study to help decide when to implement a global requirement of 0.5% sulfur maximum for marine bunker fuels. Recent events such as the collapse in crude prices have increased the chances that the implementation date will be earlier rather than later. This change will be very disruptive commercially for the global bunkering business and would require significant changes in investment/operations for the global refining industry.

Projects Continue to Be Delayed in Low Crude Price Environment

New projects continue to be delayed or cancelled due to low oil prices. PIRA estimates a cumulative net impact of 600 MB/D of oil from these delays in 2016 and growing to 1,300 MB/D by 2018. As expected, most of the delays come from projects that have high development costs. The most affected areas are Canadian oil sands and offshore projects (GOM, North Sea, Angola, and Nigeria.

World Trade Growth and World Bunker Consumption

The slowdown in world trade growth in 2015 has been laid at the feet of a slowdown in Chinese economic activity. The reasons for last year's trade slowdown actually reflect generalized weakness in GDP in non-OECD apart from China. Applying PIRA forecast growth rates for GDP we expect world trade to grow 3.2% in 2016 and 6.0% in 2017. This implies world-wide bunker demand to grow 1.5% and 2.6% in 2016 and 2017, respectively.

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.

15DWMondayThe oil price collapse has been bad news for nearly every company involved in the industry, but one group that could actually benefit from it are specialist decommissioning companies. For these companies there is an opportunity to be part of removing the huge tonnage of infrastructure that exists in the North Sea. With oil prices forecast to remain low, life extension work that has kept many North Sea platforms producing long past their design life no longer makes commercial sense. The Dunlin platform (producing since 1978) is an early casualty having been abandoned last year.

Douglas-Westwood’s (DW) new North Sea Decommissioning Market Forecast 2016-2040 predicts that the UK will dominate decommissioning expenditure. Costs could exceed $50 billion (bn) using current removal methods or $43bn if SLVs (such as the Pioneering Spirit) are utilized. This $7bn saving is due to the number of extra-large platforms that will require removal, which would lead to high costs using current techniques. The most common decommissioning method is reverse installation and while this is well established and safe, it is time consuming, resulting in high costs. SLVs can complete lifts much quicker, lowering offshore costs substantially. This will only happen however, if the Pioneering Spirit is a success and embraced by the industry, something that will be required before other SLVs are commissioned.

DW anticipates that 146 platforms will be removed from the UK during 2019-2026 – 51% of all UK platform removals over the forecast. This is due to the high number of ageing platforms in the UK, which have an average age of over 20 years and are uneconomic at current commodity prices, as a result of high maintenance costs and the expensive production techniques required for mature fields. However, many of the largest platforms will remain in place until the 2030s, mainly due to tiebacks that have increased production late in life.

Ben Wilby, Douglas-Westwood London
+44 (0)1795 594724 or This email address is being protected from spambots. You need JavaScript enabled to view it.

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

13GlobalDatalogoDespite current low oil prices, the oil and gas industry in the Falkland Islands is continuing to go from strength to strength as its first project, Premier Oil’s Sea Lion, moves closer to commercialization, according to an analyst with research and consulting firm GlobalData.

Adrian Lara, GlobalData’s Senior Upstream Analyst covering the Americas, says that governmental changes in Argentina add to the favorable conditions supporting the Falkland Islands’ industry’s advance towards its first oil.

Lara comments: “During the previous Kirchner administration, the government discourse was one of sovereignty dispute. Companies operating in the territory were denied access to participating in Argentina. International oil companies with significant operating assets in Argentina, such as Total or Chevron, avoided damaging their working relationship with the government.

“In April 2015, a federal judge ordered the seizure of assets of companies drilling in the territory including Premier Oil, Rockhopper Exploration, Falkland Oil and Gas Ltd, Noble Energy and Edison International Spa. The new Argentinian government has indicated a clear position of enacting market-friendly reforms including rolling back regulations, re-accessing international financial markets and encouraging foreign direct investment.”

While only 15% of the total available blocks in the Falkland Islands have been awarded, farming into existing licenses has been the primary strategy for participation in the basin. With an extensive list of prospects identified in licensed blocks, farm-ins will continue to be the main entry tactic for new companies.

The analyst adds that the current landscape supports maturing existing prospects rather than developing new opportunities, with Sea Lion the most successful discovery in the region maturing towards commercial viability to date.

Lara continues: “The development strategy presented for Sea Lion is through use of a Floating Production Storage and Offloading vessel (FPSO), which adds flexibility and for which leasing costs have halved. The front-end engineering and design for the FPSO has been awarded to SBM Offshore.

“GlobalData estimates a rate of return of 8% under a flat US$40 oil price, and a breakeven price of US$36.85. Under the assumption of an escalating oil price, returning to US$60 in 10 years, the rate of return improves to 15%.”

The analyst concludes that while development in the Falklands will not carry the publicity of the recent Liza discovery in Guyana by ExxonMobil, the sector is moving forward at a steady pace and first oil is expected at Sea Lion within the decade.

14DWMondayBrent oil price reached lows of $27/bbl in mid-January, but has recovered over the past two weeks to above the $30/bbl mark. Nevertheless, volatility is expected to remain as the market is yet to find a new equilibrium. So far, only modest cuts in US shale production have been realized, and global oil supply has continued to increase.

Nevertheless, in spite of the oversupplied market, OPEC – led by Saudi Arabia – continues to pump in order to defend its market share against non-OPEC supply. With a coordinated change in strategy highly unlikely, prices will have to remain lower for longer to force the market to reach a new equilibrium.

However, a critical turning point – when a produced barrel no longer finds spare capacity within existing onshore storage – is approaching. According to the IEA, global oil stocks increased by 1 billion barrels in 2015, and the Agency expects a further increase of 285 million barrels over the course of this year.

In the case where onshore storage gets filled, the excess barrels will need to be stored in the form of floating storage, which is a more expensive option. Despite the high cost, this would not be without precedent: in 2009, trading companies stored circa 120 million barrels offshore in 64 tankers. In order to make this type of storage economical, the market would need to be in a state of “super-contango” – a situation in which the front few crude spreads are wide enough to cover the costs of storage in tankers. This implies that prices may need to remain lower for longer than previously anticipated. Current market trends suggest that widespread filling of offshore storage is likely before significant erosion of supply takes place and the market eventually starts to rebalance.

Iva Brkic, Douglas-Westwood London

11Seaborne PatrikWheatherCompanies serving the offshore energy sector must accept that crude oil prices are not going to bounce back anytime soon and look to diversify into other market areas in the same way the commercial shipping industry does when high crude oil prices squeeze its profit margins.

Patrik Wheater, the Managing Director (photo) of specialist maritime PR consultancy Seaborne Communications, said: “The commercial shipping industry has developed an uncanny ability to adjust to the historical boom and bust cycle of international seaborne trade and diversify into other maritime sectors that are more commercially favorable. But it seems those companies serving the offshore sector are just waiting for an upswing. This isn't going to happen anytime soon. The offshore marine sector must look at opportunities elsewhere.”

With Brent crude oil prices tumbling to less than US$30/bb and analysts predicting persistent low oil prices for the medium term, Wheater, a former shipping journalist, believes opportunities do exist for the offshore marine sector in other areas.

He said that while some equipment suppliers will inevitably struggle, particularly those pushing oil and gas processing and subsea equipment, other suppliers that have traditionally served the offshore sector could find opportunities in the commercial shipping market and the nascent offshore mining industry.

“With sanctions now lifted on Iran, increasing the flow of oil from the Middle East, there could be a requirement for additional FSO (floating storage and offloading) capacity, while offshore support vessels could find employment in the emergent offshore mining industry, particularly offshore Australia. This is a new area for both industries,” said Wheater in a blog on his website.

Offshore mining is nothing new but most activities are confined to shallow waters close the shore. However, more deep-sea mines are beginning to emerge as the industry looks to exploit higher yield concentrations for significantly less investment and infrastructure required of a land-based mine.

According to mining industry analysts there are massive sulphide deposits, manganese nodules and cobalt-rich crusts on the seabed that can be extracted relatively easily. “The mining industry knows little about sub sea exploration and shipping knows little of the requirements of the mining industry, so there is a need for a concerted marketing drive if these industries can combine their technical know-how to benefit commercially from the extraction of minerals and metals from the seabed.

“Certainly both sides have to placate environmentalists that the technology is available to ensure that the extraction process is contained and will not impact negatively on the marine ecosystem. But this is a potentially lucrative new market for the offshore shipping industry,” said Wheater.

Next year, Marine Assets Corporation will take delivery of what will be the world’s first deep sea mining ship. The 227m long, 40m wider vessel will operate the Solwara 1 project offshore Papua New Guinea, extracting high grade seabed metals and ore in water depths of 1,600 meters.


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.

14PIRALogoNYC-based PIRA Energy Group reports that oil prices have continued declining under the weight of growing oversupply. In the U.S., a sharp decline in crude imports minimizes commercial stock build. In Japan, crude runs rose while imports rebounded such that stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

Oil prices have continued declining under the weight of growing oversupply. In addition to the physical surplus, the macroeconomic environment has become more unsettled with increased downside risks now being factored into the pricing of "risk assets". Refining margins, which had been healthy, have now come under pressure, thus ultimately pushing back on crude demand which compounds the growing pressure to find a home for crude supply. Containing the surplus will require filling up the least economic onshore storage and using floating storage which will deepen contango structure, weighing on prompt prices.

Atlantic Coal-Gas Switching: Temporary or Structural?

Gas and power markets on both sides of the Atlantic are headed down similar paths in 2016. Storage surpluses are building, gas supply cuts are slow to emerge, and the development of greater gas use in the power sector will offer concrete stages of growth in the weeks and quarters ahead. While European spot and contract prices are still roughly twice the level of Henry Hub prices, both gas markets are competing for coal demand in a manner that suggests more than just a temporary emergence of substitution. Given the price difference, the U.S. market is much farther down the road, but a more structural change is under way within the power sectors of both North America and Europe that will be increasingly linked once LNG exports begin to add to gas demand in the U.S. and gas supply in Europe.

Load Weakness Continues, Renewable Build Grows

Eastern Interconnect weather-adjusted daily average peak loads fell by 1.3% in January. Load growth continued in ERCOT and several Southeast balancing authorities. Spot on-peak power prices increased m/m in most markets with the strongest gains in the Northeast (greater than 60%) as gas basis widened seasonally. On-peak energy prices increase year-on-year in most markets during 2H16 as gas prices move higher. Growth in wind, new TVA nuclear unit and modest forced coal burn limit gas burn gains during 1H16. Eastern coal generation falls by 1.2% in CY16 with a strong second half recovery.

Friday Rally Not Enough to Prevent Week-on-Week Slide for Coal

Despite a notable rally on Friday, coal prices again finished the week down from the end of the prior week. For most of last week, downward pressure on coal pricing came from a variety of sources, including steep declines inequity markets, weaker oil/gas pricing, and lower dry bulk freight rates. Looking forward, coal pricing generally, and FOB Newcastle (Australia) prices specifically, will heavily depend on China’s domestic consumption and import demand. This situation will be cloudy over the next 30-60 days due to the impacts of the Chinese Lunar New Year, and the corresponding lack of clarity in energy data.

Weak Asian LPG Prices Squeeze Global Export Economics

Cash propane cargoes arriving in the Far East in late March were assessed 3% lower near $320/MT. With Saudi Aramco propane CP futures currently expecting a contract price reduction of $5-$10 in March, and spot VLGC freight to Asia near $45, next month’s arbitrage economics look questionable at best. This winter’s milder conditions continue to hamper regional demand, just as the world’s LPG exporters increasingly look to the region to absorb higher flows. Cash butane prices were called 3.6% lower near $345/MT.

Global Equities Again Move Lower

Global equities again broadly fell back on the week. In the U.S., most of the tracking indices lost ground, though the defensive indicator, along with retail and consumer staples managed to post gains. The weakest performer was banking. Internationally, all the tracking indices lost ground. China was closed for their New Year, but Japan, India, and Hong Kong posted significant losses, along with Latin America.

U.S. Ethanol Assessments Strengthened to the Highest Level in about Seven Weeks

U.S. ethanol assessments strengthened to the highest level in about seven weeks. Assessments were boosted by prospects for higher exports, and prices gained despite rising stocks and lower oil and corn values. Production has dropped during the last few weeks, tightening the supply/demand balance. Manufacturing margins were sharply higher, surging as the weekend approached.

Major Contraction

Agri-giant Bunge confirmed this week what ADM said a few weeks ago; 2016 will be challenging. Other agri-related companies like The Anderson’s from Ohio, and Green Plains Energy from Nebraska had their equities decimated this week as earnings sank and major layoffs ensued. Processors of agricultural products are now starting to feel the pain that farmers are all too familiar with after 2015.

California Carbon Declines; Awaits Auction Court Decision

Going into this month’s allowance auction, benchmark contract prices declined again, reflecting oversupply and a lack of concrete long term cap and trade policy signals. Clarity on potential market drivers will begin to emerge in 2016, including the Scoping Plan Update and a verdict on the allowance auction lawsuit, expected any day. PIRA believes auctions would continue, even with an adverse decision, pending appeal to the CA Supreme Court. Otherwise, transportation sector emissions are expected to grow this year, while large declines anticipated for the power sector.

Sharp Decline in Crude Imports Minimizes U.S. Commercial Stock Build

Total commercial stocks built this week to a new record high stock level. With a larger stock build last year, the surplus narrowed to 160 million barrels. A decline in crude imports and another sharply lower domestic crude supply reading were reflected in the first crude stock draw since January 1, narrowing the crude surplus.

New Supply Regime Less Concerned with Adjusting to Weather Deviations

No reason can be seen in the fundamental outlook to expect anything but a further deterioration in spot prices for the balance of the quarter. A few colder than normal days next week and heavy snowfall across portions of the Alps are not going to be enough to turn around prices, which continue their slow deterioration in the face weaker gas demand outside the power sector. Residential/commercial use is clearly the dominant demand center for gas at this time of the year. On average, this week should be the coldest of the year, but nothing could be further from the truth at this point. Storage withdrawals remain well below normal and point toward an upcoming entrance to injection season where stocks will be above the five year average on April 1 despite showing significant deficits going into the previous winter.

No Bottom in Sight for Carbon, but Floor for German Power Approaching

EUA prices continued to fall through early February, and, in spite of Friday's rebound, they are at their lowest level since mid-2013. PIRA believes that downside risks for carbon prices remain: greater supply, a lack of policy action in 2017-2018, reduced demand from forward hedging, and lower gas prices that encourage fuel switching away from coal. There is no doubt that lower carbon compliance costs are a relief for high-emitting units, but in January and February thus far, German lignite units have been ramping down heavily in response of lower prices, suggesting some supply discipline has been emerging.

U.S. Supreme Court Stays Clean Power Plan

The Supreme Court voted 5-4 to stay implementation of the Clean Power Plan (CPP). No compliance efforts need be undertaken until legal review is completed. Efforts to develop CPP compliance approaches have now lost urgency. PIRA had not expected the CPP would survive as written and it was not in our reference case forecast. This decision is unlikely to change California's GHG approach, but it may make RGGI less ambitious in its current program review. Without a replacement for the CPP, prospects for another extension of the renewable tax credits improve.

Japanese Crude Runs Rose, Imports Rebounded Such that Stocks Built

Crude runs rose 103 MB/D on the week, while crude imports rebounded such that crude stocks built 4.4 MMBbls. Finished products drew 1.35 MMBbls, largely on a draw in kerosene stocks and supported by smaller draws for gasoline, gasoil, and fuel oil. Major product demand was higher with gains primarily in gasoil and gasoline. Refining margins continue to weaken from peak levels with gasoline and naphtha cracks falling sharply from lofty levels and fuel oil also easing. Margins, on balance, are still deemed acceptable but off significantly from earlier levels.

High Winter Stocks Warrant Low Prices — for Now

Following a price “correction” from a high north of $2.30 to a dip below $2.00, traders established a tighter range with the front-month contract retracing Monday’s rally on subsequent warmer forecast changes and an anemic inventory release.

Stay of Clean Power Plan Bearish for RGGI

With weakened prospects for carbon pricing for RGGI’s neighbors, the Supreme Court’s stay of the Clean Power Plan is bearish for RGGI pricing expectations, and RGGI allowance prices have declined in response. However, the RGGI program review, to be completed this year, will ultimately set post-2020 caps for the program, determining its stringency.

Negative Interest Rates Are Driving Market Nervousness

The Bank of Japan introduced a negative interest rate on bank reserves two weeks ago. While this move was intended as economic stimulus, it has instead turned out to be a destabilizing influence for financial markets. The prospect of competitive monetary easing by central banks has become more real, as different countries will begin to test how negative policy interest rates can feasibly go. Further, the BOJ action has highlighted the possibility that Japan is nearing the limit of quantitative easing. Key data releases for the U.S. were encouraging, but manufacturing data from Europe and India disappointed.

U.S. Ethanol Stocks Reach All-Time High

U.S. ethanol inventories spiked to a record 22.96 million barrels last week, surpassing the previous peak set in March 2012 by 243 thousand barrels. Stocks are 1.8 million barrels higher than they were at this time last year. Ethanol production increased to 969 MB/D from 959 MB/D during the preceding week, breaking a string of three consecutive weekly declines. The manufacture of ethanol-blended gasoline soared to 8,632 MB/D after having plummeted to 8,155 MB/D in the prior week because of higher overall gasoline output.

China Rally?

Global equity and commodity rallies (ex-gold) are being attributed to Chinese Central Bank currency support which continued after the conclusion of their New Year’s celebrations. A fundamental grain/oilseed problem continues to exist in China however, which could make this most recent “risk on” opinion in ags short-lived.

Financial Stress Remains Elevated

The S&P 500 fell Friday to Friday and on a weekly average basis, though Friday produced a large short covering rally ahead of the holiday weekend. All of the other indicators, such as volatility, high yield debt and emerging market debt, also worsened on the week. The U.S. dollar generally fell in value, particularly against the euro, yen, eastern European currencies and some of the Asian currencies. Commodities had a mixed week with some downward bias still remaining.

U.S. and Brazil Total Fuel Ethanol Exports Up in 2015

The U.S. shipped 799 million gallons of fuel ethanol in 2015, down 1.3% from 809 million gallons in 2014.Brazil exported 493 million gallons of ethanol in 2015, up 33.6% from 369 million in the preceding year.

Proposed Increase in Russian Taxes Would Significantly Reduce Operator’s Margins

PIRA estimates that a recent proposal to increase Mineral Extraction Tax (MET) in 2016 would cut operator’s margins by 40% and reduce drilling activity. The proposal would reduce by half the current $15/Bbl MET tax free allowance and would bring an additional $12 Billion in revenue to the government. On a yearly average, PIRA estimates Russian production to be slightly up in 2016 (140 MB/D decline January to December 2016) and decrease by 170 MB/D in 2017. Our forecast already anticipates a more burdensome tax regime in 2016 but we will continue to monitor the situation and revise our forecast as needed.

Plainly Spain: Europe's Number 1 Gets Knocked out of Position by UK

Having been nudged out of its place as the number one buyer of LNG in Europe, Spain will still play a critical role in balancing Atlantic Basin supply due to the considerable amount of contracted LNG in its portfolio (see chart below); contracted LNG that it has underlifted for many years. With limited pipeline access to the rest of Europe, Spain has quickly re-invented its role in the LNG market by re-exporting, diverting, or reselling to the wider spot market, in essence providing a key connection between the Atlantic Basin and Asian markets in a way that no pure portfolio player has been able to do thus far. It has been a lucrative business as well, but its role is fading now that both LNG producers and many buyers have taken to tendering unwanted volumes. The fact that LNG deliveries to the U.K. have surged past Spain is indicative of a supply push to Europe that is just beginning on the part of other Atlantic Basin and Mideast suppliers.

UK Gas Prices Set to be Reduced

British Gas and EDF Energy have announced they are cutting their gas prices, the last of the big six energy suppliers to do so. British Gas unveiled a 5.1% price reduction, followed swiftly by EDF's announcement of a 5% cut. British Gas's price change takes effect on 16 March, while EDF's kicks in eight days later. The moves benefit customers on a standard domestic gas tariff. Britain's big six energy suppliers have been under pressure to pass on savings to customers after a 57% drop in wholesale gas prices since this time last year. E.On was the first to announce a cut this year of 5.1%, followed by similar reductions by SSE, Scottish Power and Npower.

Euro Carbon Sensitive to Natural Gas Prices; Subject to Downward Price Triggers

EU ETS oversupply conditions have not changed: higher auction volumes, upcoming 2016 free allocations, and incentives for industrial sales. Weak structural demand is accompanied by low gas prices, reducing coal-fired generation competitiveness. EUAs are nearing parity with implied carbon values and will more closely track natural gas price movements. We do not currently expect near-term policy support for prices. A downward price trigger, like a cancelled auction, could have a sustained negative market impact.

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

At midmonth, February looks to be 6% warmer than the 10-year normal for the three major OECD markets with oil-heat demand weaker than normal by 279 MB/D. However, the three major regions are roughly 12% 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.

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

Distillate storage utilization rates have remained high in recent weeks at around 80-85 percent at non-refinery storage facilities in Amsterdam/Rotterdam/Antwerp, according to Genscape flight data. The high storage levels have prompted some oil product traders to turn to using clean product tankers as floating storage terminals, either sitting at anchor close to their load or likely discharge ports.

13 1Genscape ara gasoil stocks imageARA gasoil/ULSD stocks have trended upwards over the past 12 months.

Some recent reports have suggested that as much as 640,000 metric tons of gasoil and ultra-low sulphur diesel are currently being stored in oil tankers moored outside ARA ports or at offshore locations elsewhere in Europe, generally either close to some of the main load points or near key deviation points such as Gibraltar.

Using shipping AIS location data from Genscape Vesseltracker, it is possible to monitor both the up-to-date location of these ships, as well any possible changes in destination or draft that they declare. When onshore storage levels are as high as in ARA at present, it’s not uncommon for ships to have to wait outside ports either for a berth or for some tank capacity to come free, which may sometimes be confused with being used as floating storage. However, it is possible to monitor a number of tankers that have been stationary for longer time periods, which are more likely to be storing, rather just than “waiting their turn."

13 2Genscape vessel trackSome product tankers have brought gasoil and ULSD from the Mideast Gulf to Europe via the longer Cape route.

For example, the Captain Paris was late last year, reported by ship brokers to have been chartered by Vitol to load a cargo of gasoil either from Ventspils or ARA on around December 12, 2015. However, having left the export refinery of Ruwais in the Mideast Gulf as far back as September 27, 2015, the ship has continued to float at anchorage just outside Rotterdam since arriving in the English Channel on December 9, 2015, while still displaying a laden draft in her AIS data.

Other likely current gasoil/ULSD storage vessels of note include the STI Park, which left the Latvian export terminal of Ventspils on December 16, 2015, with a cargo reported to be around 100,000 MT of ULSD. The ship has since remained at anchor with a laden draft just outside the port of Ventspils since leaving the terminal.

The SKS Douro sailed from the major Indian refinery of Sikka on October 27, 2015, with a cargo reported to be around 87,500 MT of gasoil and headed to Northwest Europe the long way around, i.e. via the Cape of Good Hope, rather than via the Suez Canal. Since arriving off the northern French coast on December 3, 2015, the ship has been apparently at anchor outside Le Havre, again whilst maintaining a laden draft.

In contrast to the usual voyage shipments, none of the above storage vessels are currently displaying their next destination in its AIS, other than “drifting, keep clear”, “for orders”, or simply “Ventspils V2 anchor”.

As well as heating oil/diesel, large numbers of fuel oil cargoes have been monitored sitting at anchor off Rotterdam, generally after arriving from Baltic loadports, without current destinations.

Research reveals 86% of respondents expect oilfield services M&A to increase in the next 12 months, 30% anticipating major surge
- 67% see the UK as a prime opportunity for growth over the next three years

- Internationalization and tech acquisition to drive deals

- 96% say UKCS will recover to 'peak' levels of profitability, with a quarter expecting it within three years

12PinsentMasonslogo pmA desire to capitalize on distressed situations, grow international market share and acquire new technology will drive a surge in M&A activity in the oilfield services sector during 2016, according to major new research from international law firm Pinsent Masons.

A survey of 200 senior executives across the oilfield services industry has revealed that despite unprecedented price volatility, 86% of respondents expect a surge of deal activity in the next 12 months. Seventy per cent said they were actively considering an acquisition within the next year.

Almost three quarters (74%) pinpointed expansion of overseas operations as the main driving force behind deal activity, with 70% expecting opportunism around distressed assets to drive deals, while 60% are looking at technology-driven consolidation. Corporates operating in the offshore technology and equipment segments were seen as the most attractive targets.

Respondents revealed that Singapore, Mexico, Indonesia, China and Nigeria are the most attractive emerging markets with falling valuations and new strategic deal structures presenting lucrative outbound investment opportunities against the backdrop of continued oil price volatility.

In more mature markets, two thirds (67%) of respondents said the UK would be likely to yield opportunity for buyers over the next three years.

Notwithstanding that, the report reveals optimism in the industry with an overwhelming 96% predicting UKCS recovery to 'peak' levels of profitability. Almost half (48%) expect the UKCS to rebound within five years, while over a quarter (28%) predict recovery within three years subject to a general improvement in the oil price.

The research found that 83% of respondents have based their five year investment strategy on an oil price range of $60-$80 bpd in the face of the new 'lower for longer' consensus across the oil and gas industry.

Global Head of Energy at Pinsent Masons, Bob Ruddiman, said: "The new landscape is very different from other downturns. We are in a more complex world where supply and demand and significant geopolitical events conspire with unpredictable consequences. Despite that, it's encouraging to see a sense of optimism and long-termism in the sector as oilfield services companies seek to find opportunity amid the undoubted challenges.


David McEwing, a Partner in the oil and gas team at Pinsent Masons, said: "Much of the discourse around oil and gas deals has focused on the majors and how they will respond to a more volatile environment. However, it shouldn't be forgotten that the global oilfield services sector is on course to be worth $144bn by 2020, and is a significant employer and wealth creator.

"What our research shows is an industry on the cusp of transformation. Corporates are clearly looking to build out their international propositions and invest in technology which will maximize efficient recovery. It's no surprise that the UK stands out in that regard given the industry's focus on innovation and deep sea exploration – not least when we're seeing more of those types of projects in Asia.

"There is encouragement to be taken from the optimism surrounding UKCS. There has been discussion in some circles about whether UKCS could ever recover to previous levels of profitability, but an overwhelming majority of those we spoke to see a recovery within 3-5 years, and almost a third think this will happen before then.

"That said, there's no complacency and boards are clearly focusing hard on their corporate strategies. Yes there's challenge but for some that means a chance to challenge the status quo in a dynamic market."

The oilfield services sector is expected to be worth $144bn by 2020. Source:

According to the most recent estimates, in 2013 the UK the oilfield services was worth £27bn. Industry paid corporation tax of £0.6 billion, directly employed at least 134,000 people on an average salary of £50,000, and generated exports of £16.4 billion.

About the survey

Pinsent Masons engaged Mergermarket to surveyed 200 senior-level executives, drawn from 150 corporates and 50 private equity firms. Ten of the most prominent banks in the sector were also surveyed on a qualitative basis. Interviews were conducted during H2 2015.

Corporate revenues of respondent companies are split between $1bn+ (31%), $101-1bn (30%) and $20m-100m (39%). The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analyzed and collated by Mergermarket and all responses are anonymised and presented in aggregate.

All of the respondents have operations or investments in the UK oilfield services sector. 52% of respondents are headquartered in the UK, and the remaining 48% are headquartered outside of the UK but maintain offices in the UK – 26% in North America, 9% in the Nordic countries, 9% in other European countries, 2% in MENA, 1% in Australia and 1% in Russia.

Survey participants include: ACE Alfred Cheyne Engineering Ltd, Aker Solutions ASA, Archer Ltd, ARKeX Ltd, Awilco Drilling Plc, CETCO Energy Services, CIRCOR International, Inc., Crondall Energy Subsea Ltd, Dando Drilling International, Diamond Offshore, Drilling, Inc, DOF Subsea Group, Dolphin Drilling AS, EnerMech Ltd., Ensco Plc, Expro International Group, Flexlife Group Ltd, FoundOcean Limited, Geoquip Marine AG, Gulf Marine Services, Hunting Plc, KD Marine Ltd, MacDermid Offshore Solutions, Maersk Drilling Norge AS, MRC Global Inc, Noble Corporation Plc, N-Sea Group, Ocean Rig UDW Inc, Oilfield Solutions Ltd, PD&MS Energy, Petroleum Geo-Services ASA, Petroleum Technology Company, Prosafe SE, ROVOP Ltd, Saab Seaeye Ltd, Saipem Ltd, Saltire Energy Ltd, Sand Monitoring Services Ltd, Schlumberger, Scientific Drilling Controls Ltd., Sembmarine S L P, Technip S.A., Welltec UK Limited, Wood Group.

Private equity participants include:
Advent International Corporation, Cinven Limited, EQT Partners AB, Equistone Partners Europe Limited, Investcorp.

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

15DWMondayIran’s position in the international O&G market was expectedly one of the highlight topics of IP Week. Approximately one month after the lifting of EU and US nuclear sanctions on Iran, the country’s Energy Minister has announced Tehran needs to attract a huge $200 billion in international investment to modernize its existing oil infrastructure.

Unwinding of sanctions, coupled with discussions over a new Iranian Petroleum Contract offering more flexible terms and conditions, serve as direct incentives for international investors. Oil majors and former business partners of Iran including Total, ENI and Repsol have already expressed clearly their interest to resume business in the country. A sustained return of 500,000 barrels per day to the crude markets from Iran would create significant downside risk on Douglas-Westwood’s (DW’s) expectation of a slow-paced 2H2016 price recovery. The importance of Iran was confirmed recently by the US EIA’s Short-Term Energy Outlook: “most of the increase in global surplus crude oil production is attributed to Iran”.

DW holds a conservative view on the sustainability with which Iran can return significant additional crude volumes to the market. A degree of uncertainty on the timing, structure and implementation of the new oil contract model remains. Given the level of required investment, significant involvement will be required from international parties who will need clarity on the new Iranian operating environment before committing capital and resource. Given the remaining uncertainties and the enduring risk attached to operating in Iran, the sector will take time to attract required investment.

Nevertheless, as outlined in the recently published “Iran Oil & Gas Market Forecast 2015-2019”, DW anticipates a meaningful upside potential for drilling and production over the next five years from projects that were stalled, delayed or under-invested during the sanction period. Notably, the North Pars, Goldham and Ferdowsi gas fields, as well as the South Pars oil layer are likely to tender for international investment. Any immediate growth in Iranian petroleum exports, however, is likely to originate from existing storage capacity, whereas more significant rises in production will be coming to the market after depletion of storage oil reserves.

Marina Ivanova, Douglas-Westwood London

14PIRALogoNYC-based PIRA Energy Group believes that the oil market faces more price pressure and the rebalancing of the market faces headwinds. In Japan crude runs and imports declined and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

More Price Pressure, While Rebalancing Faces Headwinds

The global economy is expected to remain resilient amid challenges. But a more positive macro setting is unlikely to offset the negative price impact of further stock building. Oil markets are likely to run out of onshore crude tankage in March/April. Oil markets have no price anchor with the back of the market broken and no OPEC supply regulation. There are significant headwinds to rebalance oil markets with currency depreciation, new projects and ongoing spending slowing supply destruction.

Greater Clarity on Weather Still Needed

This month’s net South Central storage draw will finally top the year-ago mark. Despite that gain, the end-month position will still exceed the record high for January set in 2012. Moreover, the resulting and still large year-on-year surplus puts a premium on heating demand in the region — as well as in the Midwest and Northeast — given the structurally greater supply exposure the South Central now has to Appalachia supply. Yet, the outlook for February, especially the second half of the month, remains unsettled. By comparison, fundamentals for the remainder of the heating season point to tighter balances in the West. As a result, more upside than downside risks exist for basis in this West, especially if warm weather again takes hold in the East.

Spark Spread Renaissance

The pricing picture in Germany has deteriorated to a point to compromise the operational patterns of the least efficient units during the summer. In fact, more competitive gas-fired units are depressing German summer peak prices, leading to a further narrowing of the base-peak spreads. In the meantime, French prices have also collapsed to levels that we believe are unsustainable. History shows that nuclear output was cut in periods of depressed prices or lack of demand (i.e. 2009). We expect French prices to stay firmer.

As Thermal Coal Pricing Settles, PIRA Adopts a Slightly Bullish View of 2017

The downshift in oil price and concerns over China’s economy have driven the coal market lower over the past month, although price declines have been somewhat tame relative to the drop in oil. This suggests that coal prices may be finding a modest amount of support at current levels. However, with China’s imports continuing to fall and seasonal buying about to fade, there remains limited upside to pricing in 2016. In the Atlantic Basin, with European coal demand structurally falling in 2016 and 2017, it will be difficult for CIF ARA prices to rise much at all in absolute terms and relative to Pacific Basin prices.

European LPG Prices Remain Soft; Demand Drags as Forecast Warms

The recent brief bout of colder weather was insufficient in drawing regional LPG stocks, leaving Europe well supplied as milder conditions return. Price gains underperformed last week, further crimping import arbitrage economics. February propane cargo futures rose an anemic 2.2% to $261/MT while cash butane cargo prices added only $9 to end the week near $280 Friday.

U.S. Supreme Court Upholds FERC Rule on Demand Response

A U.S. Supreme Court ruling cemented FERC's authority to implement demand response (DR) rules and compensation of DR in capacity and energy markets. It has varying implications for the different kinds of regional markets. For PJM, NYISO, ISONE— with downward sloping demand curves for capacity auctions — higher DR participation would allow for procuring higher reserve margins at lower capacity price points. For MISO— with a vertical demand curve for capacity— the effect of an increase in DR participation would be more pronounced.

U.S. GDP Growth Slows, but 2016 Strengthening Is Anticipated

The pace of U.S. GDP growth decelerated for the second consecutive time during the fourth quarter. PIRA’s outlook expects the U.S. economy to rebound and record moderate growth during 2016. The business investment sector, which has disappointed lately, holds the key to the future. The Bank of Japan surprised financial markets by deciding to apply a negative interest rate on bank reserves. Recent aggressive easing postures from Europe and Japan create pressure on the U.S. Fed to adopt a more dovish message.

Ethanol Output and Stocks Drop

U.S. ethanol production declined sharply last the week ending January 22. Ethanol inventories fell for only the third time since October.

Farm Economy Concerns

Against the backdrop of a continuing spirited conversation on how many acres will get planted with this or that, and how many will be put in the Conservation Reserve Program as producers “give up” on these prices, came some news from the Kansas City Fed on the health of the farm economy.

Gasoline Cracks Will Lead the Way but Not as Strong as in 2015

Growing crude stocks with higher Iranian exports and spring refinery maintenance will weigh further on crude prices in 1Q16. Brent-WTI differentials will widen. Light-heavy crude differentials widen. Margins stay healthy and runs fairly high through the summer. Gasoline cracks, while strong now, should pause or even retrench in Feb./March before increasing for the summer, but remain much weaker than last year. Diesel cracks will be slow to recover.

Demand Brightens, but Price Impact Will Be Limited

The January resurgence in European gas demand is coming from two major sources: residential heating and power generation. The former relates to temperature and the latter relates to price. The combination has been strong enough to support spot gas prices relative to other fossil fuels and other gas markets, but support will be hard to repeat for the balance of the quarter, as the average number of heating degree days begins to wane in the second half of the month.

Western Grid Market Forecast

Spot on-peak power prices recorded modest gains at Mid-Columbia in January compared with December. Southwestern hub prices were little changed despite rising gas prices as gains in nuclear and hydro output displaced gas-fired generation. As of late January, California cumulative precipitation and snowpack for the water year to date are above normal, and we have revised up generation projections accordingly. Despite lower seasonal demand, with hydro output remaining down year-on-year through March we look for Mid-Columbia implied on-peak heat rates to be supported in the low-mid 9,000s. Reduced inflows from the Northwest and weaker gas prices year-on-year are expected to support modest gains in heat rates at the Southwest hubs through March. Thereafter, these conditions begin to reverse and, along with rising CA hydro output, lead to weaker heat rates year-on-year.

Weak Freight Rates Are Increasing the Viability of Ship Layups

In December, freight rates collapsed across the full spectrum of dry markets with record tripcharter lows for the month. Bunker fuel prices have continued to tumble, adding further downward pressure on spot rates. Both Australian and Brazilian iron ore exports recorded an end-year surge, but loadings then slowed in January. Weakness in China’s housing market and industrial sector, combined with an unprofitable steel industry, is hurting China’s appetite for raw materials, and coal trading activity is expected to slow. The sheer scale of the recent slump in freight rates has brought into focus the option of laying up ships on a longer basis.

Global Equities Continue to Post Gains

Global equities generally posted another positive week. In the U.S. all the tracking indices gained for the week. Energy, utilities, and industrials posted the strongest gains, while materials and housing lagged. Internationally, with the exception of China, all the tracking indices posted definitive gains. Latin America and emerging markets were the strongest performers. Global performance for the first month of the year is down 6.4% versus end-year 2015, but it's an improvement from what had been seen in the first half of the month.

Shocking Commitment of Traders

More than a few post-close beverages apparently were dropped to the floor Friday afternoon after the Commitment of Traders showed a surprising, some would say shocking, change in corn ownership. For the week ending January 26th, the Non-Commercial net short decreased by a total of 74.1K contracts, far more than anyone had expected.

Ethanol Values Jump as the Market Tightens

U.S. ethanol values climbed in the second half of January as manufacturers reduced output due to collapsing margins late last year and in early January.

Big U.S. Product Stock Decline; Crude Build

A large U.S. crude stocks build, almost entirely in PADD III, was more than offset by a large product stock draw, for a total commercial stock draw. A noticeable exception to the product draw was gasoline. A combination of strong demand and a sharp drop in crude runs drove the overall product stock draw. Next week the demand impact of the recent U.S. East Coast snowstorm and continued refinery outages should drive a crude, gasoline, and jet stock build, and a smaller distillate stock draw. Gasoline stocks could reach a new weekly record high next week and have certainly gained ground on distillate stocks since late last year.

Argentina Is Considering Raising Natural Gas Prices to Boost Production

Omar Gutierrez, governor of the gas-rich Neuquen province, said he is working on the plan for higher prices with Guillermo Pereyra, a national senator who also runs the Union of Private Oil and Gas Workers in the southwestern provinces of La Pampa, Neuquen and Rio Negro. Gutierrez said they have taken the proposal to national Energy Minister Juan Jose Aranguren and will meet with him again. "Neuquen has a very significant opportunity to provide the larger gas supplies that the country needs," Gutierrez said in a statement.

U.S. Coal Stockpile Estimates

Power sector coal stocks have drawn modestly this month as more seasonal weather conditions in the eastern U.S. have lifted coal burn month-on-month, and fuel deliveries have slowed. PIRA estimates U.S. electric power sector coal stocks will reach 190 MMst by the end of this month, a record level for January.

Some Relief Apparent for Financial Markets

Financial stress remains elevated, but some relief was very apparent this week. The S&P 500 posted a gain on the week and a very strong rally on Friday. The other key indicators, such as VIX, high yield debt (HYG) and emerging market debt (EMB), also staged impressive performances. Commodities had a better week, while the U.S. dollar was mixed. It remains to be seen if the positive action this past week is sustainable or is merely a short-term rally from oversold positions.

Japanese Crude Runs and Imports Decline and Stocks Drew

Crude runs fell reflecting a turnaround that began. Crude imports dropped back such that stocks drew a strong 4 MMBbls. Product demands posted solid gains, and finished product stocks also drew about 4 MMBbls. Kerosene demand was very strong with an accelerating stock draw rate. Refining margins remain strong. Fuel oil cracks firmed further, while light product cracks were modestly changed.

Japan Nuclear Restarts Roll Out, with Big LNG Buyer Next in Queue

The confirmation that Kansai Electric has been cleared to restart its 870-MW Takahama No. 3 nuclear reactor is the first clear indicator for 2016 that the Asian LNG demand situation could actually get worse before it gets better. While fossil fuel demand losses have been built into Japan’s oil and gas outlook as a result of nuclear restarts, the first of which occurred last August and the second in October, these losses were weighted towards the middle to end of the year and continuing at a modest pace through 2018. Kansai, which is Japan’s largest consumer of oil in power generation and third largest consumer of LNG, was in PIRA’s reference case for early in 2Q; Kansai expects to begin generating power by early February, and the sister unit Takahama 4 will probably not be that far behind. PIRA forecasts a May start-up for the second unit.

Proposed OPEC/Non-OPEC Cuts Are Supportive to Price for Now

Saudi Arabia is reported to have proposed 5% OPEC/non-OPEC cuts to support faltering oil prices. This is not new because this was proposed over a year ago but what is new is that very low prices, and the fear of them going lower, have apparently caused enough pain that the most important non-OPEC oil producer/exporter in the world, Russia, is seriously considering Saudi Arabia’s proposal. Until the outcome of the current deliberations by Russian authorities is known, the oil market will have to take the possibility of OPEC/non-OPEC cuts more seriously, thus providing some support for oil prices. PIRA’s best guess is that the probability of OPEC/non-OPEC is less than 50%, but going from zero to something less than 50% has to be somewhat positive for prices.

Weather-Driven Storage “Roulette”

Following a seemingly endless bearish North American gas market, analysts have begun to struggle over how seriously to take the potential for sustainably more bullish prices. Only a month ago, bearish Henry Hub (HH) fundamentals looked like a carbon copy of the entire past year or so thanks to a December collapse of gas-weighted heating degree days (GWHDDs) and expectations of more mild weather to come, in part thanks to the “monster” El Niño.

High Gasoline Stocks in PADD II Hurting Margins — Runs Cuts Likely

PADD II refinery margins are under pressure from high gasoline stocks and local crude that has lost its prior discount to other regions. Some trimming of runs is likely to occur. This will weigh on WTI in Cushing, directionally widening crude differentials.

Holding Pattern until Greater Near-Term Weather Clarity

Recent swings in near-term weather forecasts have been largely behind the gyrations in NYMEX futures: the March contract fell below $2.10/MMBtu before reversing course and breaching the $2.20 mark. Meanwhile, storage withdrawals have increased for five consecutive weeks, handily topping 200 BCF recently, but preliminary balances suggest that the reliance on storage will be sharply reduced for the next two storage releases, partly reflecting less-than-normal GWHDDs predicted through the second week of February.

November Domestic Crude Supply Equal to a Year Ago, Even as Monthly Crude Stocks Set a New Record

Friday’s November 2015 Petroleum Supply Monthly reported that domestic crude supply (production plus balance item) continues to trend down, to a rate equal with November 2014. End-November monthly U.S. Crude Inventories, however, set a new record high. Crude runs were revised up about 140 MB/D to 16.49 MMB/D, a crude run rate usually seen during summer run peaks.

What Could an OPEC/Non-OPEC Output Cut Look Like?

While it is far from clear whether an OPEC/non-OPEC production cut will occur, PIRA thought it worthwhile to outline what such a cut could look like and which countries would likely be involved. If there are cuts, PIRA believes they will be modest as to not disrupt the oil market rebalancing process. Azerbaijan, Kazakhstan, Mexico, Norway, Oman, and Russia are likely candidates to join in coordinated cuts with OPEC. We also demonstrate what a potential agreement may look like, assuming a 4% reduction in OPEC and non-OPEC output. A gross headline cut of 2 MMB/D would amount to a 1 MMB/D net reduction in supply, which would begin to reduce the stock surplus in 2Q16.

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

January’s heating degree days came out roughly 4% warmer than the 10-year normal for the three major OECD markets with a composite net oil-heat demand effect of -239 MB/D. On a 30-year-normal basis, the markets were roughly 8% warmer.

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

DOE released its final monthly November 2015 (PSM) U.S. oil supply/demand data last week. November 2015 demand came in at 19.19 MMB/D, which is 86 MB/D higher than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 511 MB/D. Total demand for November 2015 versus November 2014 (PSA) declined 182 MB/D, or 0.9%, less than the decline posted in October of 1.7%. End-November stocks stood at 1,326 MMBbls, which were 8 MMBbls higher than PIRA's assumption for end-November, with products higher by 11 MMBbls, but crude lower by 3 MMBbls. Compared to the weekly preliminary data, DOE raised commercial stocks 18.8 MMBbls, with products being raised 19.3 MMBbls, 10 MMBbbls being distillate which fed back into weak demand.

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 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.

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