In recent years, fishing communities in North West Europe have reaped numerous benefits from the rise of offshore wind – fishing vessels and their crews have been regularly employed for the transfer of technicians and equipment to wind farms off the coast. As the industry has evolved, there has been rapid growth in the use of purpose-build Personnel Transfer Vessels (PTV) for the same purpose. This remains a viable and low-cost option for many projects, but developers are now exploring innovative logistics solutions for rapid access to wind farms – the industry is modernizing rapidly and looking to the sky.

In the UK, use of helicopters for offshore wind operations and maintenance (O&M) is still relatively rare – limited to the Greater Gabbard and Westermost Rough projects. However, for our North Sea neighbors, it is more commonplace. In Germany and Denmark, helicopters regularly service offshore wind farms – rapid response time and lack of dependence on sea conditions are both key motives for use. As such, helicopters are expected to feature in many future projects within the region, factored into a new style of O&M strategy.

The next phase of offshore wind farms in the UK are expected to drive increased use of helicopters offshore. Upcoming projects like Hornsea are both larger in scale and farther from shore, requiring a strategy beyond the use of personnel transfer vessels. There is no one-size fits all O&M approach for these giant windfarms, and risk-averse operators may see helicopters as a high risk alternative to vessels. However, the benefits are clear – time saving on turbine repair (i.e. minimizing downtime) is crucial and helicopters enable rapid access to turbines in harsher weather conditions.

DW expect helicopters to become an integral part of the offshore wind industry’s O&M mix. Consequently, we forecast steady growth in helicopter demand to 2025, primarily in Western European markets with experience in offshore aviation derived from a long history of oil and gas.

NYC-based PIRA Energy Group reports that Asia continues to drive global oil demand growth. In the U.S., product stocks drew. In Japan, crude runs are little changed; imports fell and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Continues to Drive Global Oil Demand Growth

Oil markets remain structurally weak for the near term due to turnarounds and as Iranian crude oil exports increase and will take time to rebalance. Asia continues to drive global oil demand growth despite the economic slowdown in China. Asian refinery runs will increase this year with capacity expansions and higher runs in Chinese “tea kettle” refineries. Gasoline cracks will continue to outperform diesel cracks this year.

Gas Prices Collapse Underweight of Outsized Storage Inventories

After briefly breeching the former low set in late December, the NYMEX nearby contract went off the board at ~$1.71/MMBtu — setting the stage for a March Henry Hub Bidweek price that will be ~50¢ below February and also marking a low for the benchmark not seen since March 1999. Much is riding on the demand and supply response to such prices considering the fallout on U.S. and Canadian storage tied to the collapse in heating loads during February. The South Central will account for ~50% of this month’s overall expansion in the year-on-year U.S. storage surplus. The resulting end-February overhang is clearly an impediment standing in the way of a near-term price recovery, especially after considering the South’s increased exposure to Appalachia supply tied to pipeline capacity additions between the regions. Still, given the lack of any draw last March, that surplus is likely to start to contract. Moreover, the acute price weakness now in effect also stands to accelerate U.S. production weakness — even in Appalachian.

February Blows Warm and Is Gone with the Wind

German forward prices are no longer allowing the most efficient coal units to fully recover their fuel, transportation, and carbon costs. Hedging strategies are in part to blame, as power generators continue to sell to secure cash. French prices are more likely to firm, as France will see a heavier nuclear outage schedule this year, while draconian cost cutting measures will undermine nuclear output. Italian prices have been undermined by improving hydro (not only in Italy itself, but also Alpine region) and higher imports from both France and Switzerland. 3Q contract is trading with a €2-3/MWh risk premium.

Coal Pricing Mixed Despite Stronger Oil Market

A general increase in oil pricing helped give the coal market an uplift, although API#2 (Northwest Europe) prices actually lost ground last week. API#2 gave back some, but not all, of the sizeable gains made last week when the market surged on labor strike risk from Colombia. In the Pacific, some signs of stabilization in China’s buying activity along with the rise in oil prices allowed API#4 (South Africa) and FOB Newcastle (Australia) to rise modestly. PIRA continues to believe that API#4 prices remain too strong relative to FOB Newcastle, and we expect more downside for API#4 over the next 90 days, barring unforeseen supply disruptions.

California Carbon Auctions Undersubscribed

With CA/QC allowance prices having fallen below the auction floor in the secondary market, auction results released today indicate both the current and future vintage auctions were undersubscribed — a first for California. Demand was more than sufficient to allow for the sale of all allowances consigned to auction on behalf of CA entities. Unsold allowances will be offered at future auctions — generally when/if auction pricing exceeds the reserve price for two consecutive auctions.

Production Rises, But Stocks Fall

U.S. ethanol production has increased for three consecutive weeks, reaching 994 MB/D, the fifth highest level ever reported. Ethanol inventories dropped from a record high in the previous week, falling by 113 thousand barrels to 23.1 million barrels.

Pressure Continues

Late Friday afternoon saw the wheat short set a record in one COT category while Nidera registered 227 new certificates for delivery against the March soybean contract. No wonder that SRW made a new low last week while soybeans had five losing days in a row.

Currency Depreciation Offsetting Some, But Not All, of the Consumer Benefit of Low Crude Prices

PIRA’s analysis of retail fuel prices around the world shows that the decline in fuel prices is not keeping pace with that of Brent. On a demand-weighted average basis, we estimate that global gasoline and diesel prices are down 40% from July 2014 to January 2016 in U.S. dollar terms, compared to Brent’s 70% fall. Part of the discrepancy can be attributed to subsidy and pricing reforms, fixed taxes, relatively stable downstream margins, and tight gasoline supplies in some locations. But currency depreciation is also having a notable impact. Gasoline and diesel prices in local currency terms are down less than 30% over the period. We estimate that currency weakness versus the dollar is offsetting roughly a third of the price benefit of low crude prices for local consumers. Even so, realized fuel price declines are still substantial and, in our view, will continue to support global oil demand this year.

Financial Stress Eases

Financial stresses eased again this past week. For the second straight week, the S&P 500 rose Friday-to-Friday and on a weekly average basis. All of the other indicators, such as volatility, high yield debt and emerging market debt, also staged varying degrees of improvement. The U.S. dollar has been increasingly mixed. Debate on a U.K. withdrawal from the EU has fed weakness in sterling. Commodities ex-energy are looking significantly better the last several weeks.

Gasoline Cracks Will Strengthen, But Not as Strongly as in 2015

Growing crude stocks continue to weigh on Brent structure for next few months, but fundamentals are starting to improve. Gasoline strength will return and will outperform diesel, partially echoing 2015. Product stock levels grow, but not uniformly as refiners shift yields from middle distillates toward gasoline. Refining margins will recover from recent decline and stay generally healthy, and runs stay reasonably high through the summer before weakening.

North American Gas Forecast Monthly

North American gas market fundamentals have assumed a much less bullish posture, starting with an end-March storage carryout now expected to be within striking distance of 2.3 TCF, ~0.2 TCF above our month-earlier Reference Case. A collapse of February gas-weighted heating degree days relative to normal was the principal cause, but other factors have played a role. Production, led by Appalachian Basin, has made a strong recovery of late, fostering doubts about a near-term Lower 48 rollover. PIRA’s Reference Case sees limited marketing opportunities and capital spending, making the region’s growth prospects even more vulnerable. Sequentially stronger western Canadian gas production of late, coupled with unusually flush inventories, also poses a greater perceived supply side threat to tighter U.S. gas balances.

European LPG Prices Pulled Higher by Broader Markets

European LPG prices firmed, but mostly due to the strength in crude and naphtha prices and not as a result of a tightening supply and demand situation. The region remains well supplied, particularly as larger fully refrigerated cargoes are now loading in Marcus Hook, Pennsylvania, and will be increasingly pointed at the region due to proximity. March propane futures added $22/MT to $256/MT, while cash butane cargoes were called a somewhat narrow $20 higher.

Outlook Forum Mission Accomplished

On paper, the USDA was able to keep carry-outs below 2 billion, 500 million, and 1 billion, its goal going into the Outlook Forum. The questions remains, however, can it last? Without a major weather disruption during the upcoming growing season, prospects for a price recovery seem bleak.

U.S. Ethanol Prices Increase

Ethanol prices rose last week despite record inventories. Manufacturing margins were steady and sufficient for most plants to operate at high rates.

Global Equities Post Another Positive Week

Global equities posted a second straight week of gains, rising 1.1%. The Americas continue to outperform. In the U.S, almost all the tracking indices were higher on the week. Retail, housing and materials all outperformed, while utilities lagged and were neutral on the week. Internationally, the tracking indices were more mixed. Japan, Latin America, and BRICs all outperformed.

Dry Bulk Shipping Market in Crisis Mode

Last month, we discussed the unprecedented collapse in dry bulk freight rates highlighting the breadth, speed, and extent of the rate declines. It is much the same story this month. Hopes that the Chinese, on returning to work after their Lunar New Year holidays, would provide some market momentum have been all but dashed. While Chinese economic data have been delayed by the holidays, the dry bulk freight market has provided its own measure on China’s faltering physical demand for raw materials and it remains ugly. As hopes of a demand-led shipping recovery dwindle, the focus is shifting to supply-side responses. The sheer scale of the dry bulk shipping crisis is starting to have some significant consequences.

U.S. Commercial Stocks Draw

Strong product demand was reflected in a product stocks draw for the week of February 19, while lower crude runs contributed to a crude stock build. This build in crude stocks occurred in spite of mounting evidence that the pace of declines in domestic crude supply has quickened. Gasoline production has begun to transition to a lower RVP content, and this will be reflected by lower butane use and lower gasoline yield. Next week we expect flat crude runs to contribute to another crude stock build, but low runs also contribute to product stock draws.

The Tug of Oil and the Weight of Supply/Demand

Gas is continuing its search for demand as it sets to enter the last month of the winter. February has been another warm month across major gas-consuming markets in Europe. Temperatures are up significantly over last month and are quite high historically.

California Allowances Can Be a Source of Cash for Challenged Oil Producers

California carbon allowance prices dropped dramatically, crashing through the auction floor, indicating expectations that the current vintage auction was undersubscribed — a first for CA. Environmental commodity markets well beyond California have also been sliding over the past two months. For California carbon, financially challenged oil producers that receive free allowance allocations but do not face immediate allowance surrender requirements could sell allowances to raise cash, in turn boosting near-term supply — a phenomenon observed in the EU ETS in the past.

Japanese Crude Runs Little Changed; Imports Fell and Stocks Drew

Crude runs showed very little change for the second straight week. Imports fell back and stocks posted a draw. Finished product stocks drew due to declines in naphtha, fuel oil, and jet-kero more than offsetting lesser builds in gasoline and gasoil. Demands were broadly lower and considered soft. Margins continued to weaken, extending their decline from peak December levels.

The U.S. Is Better, but It Can’t Carry the World Economy Alone

U.S. economic growth is picking up pace, powered by strengthening consumer spending. GDP growth for the fourth quarter was revised up, and households significantly increased their spending during January. Manufacturing-related activity data (such as industrial production and durable goods orders) were constructive in January. But based on a historical pattern, the U.S. strength is probably not sufficient by itself to lift the slumping global manufacturing sector. Important economic events pack the calendar for the next few weeks.

U.S. Exports Debut Amid Unstable Arbitrage Outlook

The recent plunge in Henry Hub prices, combined with some support for NBP prices at current levels, has made this U.S.-Europe trade look quite appealing — so appealing that it is hard to make a case for the U.S. LNG to go anywhere else other than to South America, which is typically looking at paying the netback equivalent that would be captured by sending the cargos to Europe. Europe also has several buyers in the Mediterranean gauging the relative value of LNG versus oil-indexed prices.

Gulf of Mexico Production to Demonstrate Short-Term Resilience, Medium-Term Weakness

Gulf of Mexico crude production has grown at a 7% CAGR since 2012 and is expected to continue to grow at this pace until 2017. The resilience is the result of the ramp-up of recent projects and the start-up of new projects already under construction. However, low prices will have medium-term impacts as project sanctioning has slowed, causing few projects to come online in the 2018-2020 period. PIRA expects GOM crude production to grow from 1,550 MB/D in 2015 to 1,800 MB/D in 2017, then decline by 200 MB/D to 1,600 MB/D in 2020. Longer term, we expect production to breach its 2017 highs by 2023 as projects currently in the appraisal/definition stage come online.

Supply Growth Becomes Increasingly Unaffordable

While March signals the approaching official end of the heating season, the dearth of degree days in February has seemingly convinced the market that the winter has already concluded — given the improbability of clearing excess seasonal inventories. Thursday’s extraordinarily light 117 BCF draw, relative to expectations pinned ~20 BCF higher, likely represents the final triple-digit draw of the season. The fundamentals for the week-in-progress suggest that withdrawals have plummeted to a historically bearish seasonal level in the low-30s, with only three other sub-40 weekly readings ever recorded in February (1995, 2006 and 2009). Thereafter, milder weather and the transition to spring will significantly limit the call on storage through end March.

Oil Substitution Re-Enters the Debate as U.S. LNG Turns South Before East

PIRA sees every reason for the deterioration of bids in Asian spot markets to continue in the month ahead. Regional gas markets will be entering the lowest period of the year for seasonal gas demand and, additional LNG supply from Gladstone, APLNG, and Gorgon is scheduled to emerge from Australia alone. Buyers may not be in too much of a hurry to lock down spot volumes given the circumstances and the position of buyers to lift more contract LNG as the new trains emerge.

Russia and Turkey’s Gas Price Dispute Leaves Gas Flows Lower

Russian Gazprom reduced daily natural gas supplies to Turkey by around 50% from Feb. 10 along the western line. The company decided to reduce its natural gas flow after a price dispute with private buyers in Turkey. Earlier it was reported that Gazprom, which was in discussions with six Turkish private companies on Jan. 29, cancelled the 10.25% discount applied on natural gas supplies from Gazprom from Jan. 1 this year.

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. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.

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.

Image 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.

NYC-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.

Douglas-Westwood (DW) forecasts deepwater expenditure to total $137 billion (bn) between 2016 and 2020. This represents a 35% decline compared to DW’s previous edition of the deepwater forecast issued March 2015.

The prolonged low oil price has impacted the deepwater market, with operators considering alternative development options and delaying the sanctioning of new projects, whilst trying to protect returns on their existing investments in the sector. However, projects already under construction are unlikely to be affected. The largest proportion (38%) of the total spend will be attributed to drilling and completion. Subsea production equipment, SURF (subsea umbilicals, risers and flowlines), pipelines and trunklines will represent 34% of total expenditure combined; whilst floating production units will account for 28% of spend over the forecast period.

Expenditure will predominantly be driven by Africa and the Americas, which will account for a combined 87% of total deepwater Capex. Though all regions will be adversely affected by low oil prices, projects that were sanctioned before the oil price downturn will help sustain activity levels in these regions and in addition we expect to see the development of East African gas basins towards the end of the forecast period.

Record levels of backlog established over the 2011-2014 period have somewhat insulated subsea hardware manufacturers from the oil price downturn. However, DW expects a further decline in subsea hardware installations in 2017 and 2018 with backlog falling rapidly and new orders trickling in at very low levels. We expect that the subsea OEM’s will feel the full impact of the downturn in 2016/2017 and will face strong competition for the lower volume of projects. In total, it is forecast that the number of deepwater wells to be drilled over the next five years will decline by 3% compared to the preceding five-year period.

From a supply-chain perspective, this point in the cycle is an opportunity to bring through new approaches and technology for deepwater developments to improve efficiency and lower cost. In the long run, we remain of the view that deepwater will be a cost competitive source of world-class hydrocarbon reserves.

DW’s 14^th edition of the World Deepwater Market Forecast covers all key commercial themes relevant to players across the value chain in the deepwater sector:

Key drivers – discussion of factors affecting deepwater activity, including: sustained low oil & gas prices; deepwater production to offset declining production from onshore and shallow water basins; E&P spend of international operators; and Petrobras’ activity in Brazil.

Supply chain – detailing the financing of deepwater developments and local content issues. Includes analysis of contracting strategies (e.g. frame agreements), the deepwater drilling rig fleet and day rates, key players and capabilities of each sector within the deepwater market (drilling, FPS and subsea hardware).

Procurement – factors affecting the decisions facing FPS operators, whether to lease or own vessels and details of major leasing contractors.

Regional forecasts – forecast Capex within each region, including examples of notable projects and operators within the region and countries with most activity.

Component forecasts – drilling and completion (subsea and surface completed wells), subsea production hardware, SURF, pipelines and trunklines and floating production.

List of deepwater prospects – includes information on all identified prospects coming onstream from 2016 to 2020 by operator, location, water depth, number of trees, status category and onstream year.

Saudi Arabia and Russia agreed to freeze production at January levels on February 16th in the first coordinated effort to stabilize prices for 15 years. Expectations of an output cut were rife in the days leading up to the meeting in Doha, with Brent gaining 10.9% on February 12th. However, traders were left disappointed, given January’s near-record production levels and any output freeze contingent on other producers following suit. Consequently, there has been little change in day-to-day commodity price volatility.

Production has continued to soar in recent months. January saw a post-Soviet record high of 10.9 million barrels per day (mmbbl/d) pumped from Russian oil fields and both Saudi Arabia and Iraq broke output records in mid-2015. Despite high breakeven prices, other OPEC members such as Venezuela, Nigeria and Angola have been forced to maintain output to sustain cash flows.

The chances of a sanctions free Iran freezing production are slim. Recent reports from the Islamic Republic indicate production capacity has already grown by some 400 thousand barrels per day (kbbl/d), with a further 300 kbbl/d to be added in the near future. DW’s Iranian oil production forecast (inclusive of condensate and NGLs) shows a 2016 average production rate of 3.9 mbbl/d, with output rising above pre-sanction levels in 2017. Consequently, any production freeze is likely to thaw – and quickly – as Saudi Arabia continues to priorities market share. Conversely, production cuts from non-OPEC countries are likely to determine the direction of the market through 2016. According to the IEA, Non-OPEC supply contracted by 0.5 mmbbl/d in January 2016.

Given demand growth expectations of only 1.2 mmbbl/d this year and an output freeze which is unlikely to stick, any potential oil price recovery in late 2016 continues to rest on the US’s shoulders.

Matt Adams, Douglas-Westwood Faversham

Despite 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.

Brent 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.

NYC-based PIRA Energy Group reports that oil market rebalancing has begun, price lows are in. In the U.S., there was a flat profile for stocks of four major oils. In Japan, crude runs declined, imports plunged and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

With Oil Market Rebalancing Begun, Price Lows Are in

Oil market rebalancing has indeed begun with the stock surplus about to level off. OPEC/non-OPEC freeze is a change in strategy and positive for prices. Expect a new price anchor of $50/Bbl to be talked about. Prices will move higher like a step ladder, as required supply creation becomes more evident. Refinery margins and runs will generally be healthy through the summer before weakening. Political risks to supply are growing.

How Important Are LNG Price Levels to NBP Price Potential

The last time that storage came out of February at this high of the level was in 2014, which led to all-time storage highs by the end of October of that year. While high storage did not automatically translate into a collapse in spot prices, it is somewhat interesting that spot prices have been on a consistent decline from November 2014 to yesterday (except for February 2015).

U.K. Spark Spreads Remain Weak in Spite of Extremely Tight Market

With the market conditions changing considerably since the Capacity Market was established, the U.K. DECC has launched this week a new consultation with the aim of reforming the Capacity Market design. The proposed changes do not come totally as a surprise, but from a trading standpoint, the proposals do not change the big picture in the electricity market until at least the winter 2017-18, basically leaving the U.K. market still extremely vulnerable, with razor-thin spare capacities through the upcoming winter.

Litigation Around CA Cap and Trade Auction

Auctions have been a key feature of the California’s cap and trade program, with the auction reserve price offering guidance for a price floor in the secondary market. The ability of the state to sell allowances via auction has been under legal attack with news on developments expected soon. PIRA believes that in the event of an adverse decision, eventual market impacts may be limited — particularly if the auction of consigned allowances is allowed to continue. We also expect the California legislature would act to explicitly authorize auctions for all allowances. Quebec’s auction would be unaffected by this court ruling and Ontario will be offering a significant part of its cap at auctions when its program is slated to start — though both have significantly lower reserve prices.

Freight Market Outlook

Coming off their best year since 2008, tanker markets in 2016 have turned sharply lower over the first two months. VLCC markets led the slide with rates in the benchmark Mideast/Asia trade plunging by 50% as China reduced crude imports substantially in January from record levels in December and market sentiment turned negative. Rates in the other vessel groups have also registered significant declines since the start of the year. Furthermore, PIRA expects the rise in global stocks will reverse and start to decline in second half 2016, putting additional pressure on tanker rates as volumes contained via slowdown and floating storage start to shrink.

Thermal Coal Market Beginning to Show Signs of Moving Back into Balance

Physical coal pricing was mixed in February, with coal prices continuing to follow the lead of oil, although coal price movements remained relatively muted compared to oil. On top of the upward momentum in oil prices, the potential for a labor strike in Colombia gave pricing some tailwinds at the front of the curve, particularly in the Atlantic Basin, while the balance of the curve shifted lower, likely due to the announcement of the additional U.K. coal-fired capacity closures. In the Pacific Basin, Chinese thermal coal imports declined only marginally in January, a notable departure from the sizeable drops that occurred in every month in 2015. PIRA has long held the belief that it will be nearly impossible for coal pricing to recover appreciably in 2016 or 2017 if China's imports continue to fall.

Ethanol Production and Stocks Decline

U.S. ethanol production declined for the first time in four weeks, dropping to 987 MB/D from 994 MB/D during the preceding week. Ethanol inventories continued to sink from the record high set earlier in February, falling by 481 thousand barrels to 22.6 million barrels.

Dollar Weakness

All three grain and oilseed price reversals last week coincided with a double top formation Tuesday/Wednesday around 98.60 in the dollar index. The markets remain both starving for any new information and devoid of any spring weather risk premium. Option volatility is low and should remain that way this coming week despite a WASDE release.

Global Equities Post Another Positive Week

Global equities posted a third straight week of gains, rising 3.5%. Many of the tracking indices are now displaying significantly better looking trends. In the U.S., all the tracking indices were again higher on the week. Banking and energy outperformed, while consumer staples lagged. Internationally, the tracking indices also moved higher. The best performer was Latin America, specifically, Brazil, which posted an 18% gain in local currency and 21% gain in dollar terms.

Midcontinent Production Falls as Crude Stocks Rise

Crude prices bottomed out in early February, before recovering in the second half of the month. U.S. crude stocks continued to build, including a 2 million barrel build at Cushing. Brent and LLS both rebounded relative to WTI, and Canadian differentials rose sharply on upcoming oil sands maintenance. An open export arb for much of February should lead to record crude exports in March.

Japan EG Deregulation Looms Large Over Plummeting EG Demand

With Japan not operating a country-wide gas grid, it is the electricity grid and its future that will play a key role in determining the position of gas in a deregulated market. From the government on down, Japanese gas demand (and LNG imports) appears to be headed for a long, steady decline, one that is well under way and already applying downward pressure to spot prices in Asia.

Bearish Fundamentals, but LT Support From Program Review

RGGI pricing has recovered somewhat since the mid-February sell-off, but prices are still lower than they were going into last December’s auction. PIRA expects the March 9th auction to clear in line with the secondary market - without triggering CCR allowances available at $8/ton. We anticipate a weaker than usual coverage ratio – as a portion of demand was satisfied by sales from the price plunge. RGGI emissions fell 4% in 2015 and are expected to be down this year as well. While compliance players are not challenged by near-term allowance surrender requirements, a bank draw is required each year. PIRA expects prices will climb over the course of the year, particularly with forthcoming details from the 2016 Program Review.

Western Grid Market Forecast

Spot on-peak power prices saw significant declines at major Western hubs in February as temperatures rose well above normal and gas prices tumbled. Mid-Columbia prices averaged below $17/MWh, down $6 from January. Palo Verde fell by ~$2.50/MWh to average $19 while the California hubs averaged in the mid $20s. Above-normal temperatures also contributed to strong runoff in the Northwest despite below-normal precipitation. Continued above-normal temperatures will depress heating loads and boost runoff and hydro output in March, but we do not expect hydro generation to approach prior-year levels. Meanwhile, weak gas prices will sustain high gas-fired generation and implied heat rates. However, beginning in June several factors will converge to drive implied heat rates below prior-year levels including rising gas prices, stronger hydro and solar generation, higher imports from the Northwest, and weaker cooling loads in California.

Shortage Risks in Colombia Add Upward Pressure on Coal Pricing

Coal prices moved notable higher last week, on news that union members at the Cerrejón mine in Colombia voted overwhelmingly to strike. On top of this shortage risk, coal producers in China increased their prices this week to 10 yuan/mt ($1.54/mt) on some prompt tightness in supply. While a potential labor strike in Colombia would certainly be a phenomenon, PIRA is skeptical that the tightness in Chinese coal supply and the related rise in pricing is sustainable either. Outside of the potential shortage risk in Colombia, there is not much bullish support for pricing over the next 90 days.

U.S. Biofuels Manufacturing Margins Improve in February

U.S. ethanol prices were range-bound in February, with Chicago values varying between a ceiling of $1.42 and a floor of $1.35 per gallon. Recovering gasoline values and robust gasoline demand provided support, but record stocks kept a lid on the upside.

BRL Rally Helps Soybeans

A noticeable rally in the Brazilian real Friday was followed up by a Commitment of Traders report that saw some large additions to the already bearish positioning held by Non-Commercials. Soybeans had the largest reaction to the real move, in conjunction with a more muted peso rally, while corn and wheat failed to garner much upside enthusiasm on their own.

Belt-Tightening Continues in Latin America

The low oil price environment has continued to inflict pain to players in Latin America, triggering budget cuts and affecting oil production plans. Output from Mexico, Colombia and Venezuela remains on a downward trend while Brazil’s production is still going up thanks to ongoing projects (namely, sub-salt production). 2016 Latin America GDP is now projected to be negative 0.26%. This is impacting consumption of the four major refined products, which collectively, are expected to decrease in 2016. With expected sluggish demand, the region’s imports are also anticipated to shrink. In Brazil, higher crude runs and lower demand will reduce diesel and gasoline imports to 40 MB/D and zero, respectively. Budget cuts increase the risk of operational issues in refineries across the region.

Flat Profile for U.S. Stocks of Four Major Oils

The highest crude imports since mid-December drove a 10.4 MMBbl crude stock build. A sharp decline in reported product demand was reflected by a reduction in the rate of product draw from -8.5 MMBbls last week, to -0.5 MMBbls this week. Recent average demand growth is still strong, with the notable exception of distillate demand, whose decline is much beyond anything that warmer weather can explain.

Japanese Crude Runs Declined, Imports Plunged and Stocks Drew

Crude runs declined 113 MB/D on the week and crude imports plunged such that stocks drew 5.3 MMBbls. Finished products also drew strongly, by 3.4 MMBbls, with sizable draws on all the major products other than naphtha. Product demands were strongly higher. The indicative refining margin remains good. This week saw higher gasoline and naphtha cracks, more than offsetting weaker middle distillate and fuel oil cracks.

Awaiting Producers Response to Storage Glut/Price Collapse

Despite Thursday’s surprisingly “hefty” EIA-reported 48 BCF stock draw, fundamentals of late, weather in particular, have given gas bears lots to cheer about. Following a now “official” 12% milder-than-normal February, the latest guidance for March points to a stunning 20-25% shortfall versus the 10-year normal. Consequently, PIRA’s latest end-March storage is now projected to reach 2.42 TCF, aligning closely to the end of the 2011-12 “winter that wasn’t” heating season. If verified, post-March 2016 balances will require continued strength in gas-fired electric generation (EG) as well as weaker domestic production to keep the industry operating within system limits.

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

February’s heating degree days came in below the 10-year normal by 7% for the three major OECD markets with a composite net oil-heat demand loss of 347 MB/D. On a 30-year-normal basis, the markets were roughly 13% warmer than normal.

Global LPG Weekly Scorecard

April propane futures at Mt Belvieu gained 8.4% to settle at 45.2¢/gal. Butane at the market center underperformed, gaining only 2.4% week-on-week as winter gasoline blending demand diminished.

U.S. Light Product Exports Continued to Grow in 2015

U.S. exports of both distillate and gasoline increased by 8.2% (90 MB/D) and 12.6% (70 MB/D), respectively, in 2015 compared to the year earlier. Volumes of distillate shipped were about twice the size of gasoline shipments in both years. As in the past, Latin America continues to be the most common destination for both products.

Ukrainian Fertilizer Plant Signs New Gas Deals

Ukrainian Public joint-stock company Odesa Port-Side Plant has contracted gas supply in March from Slovakia. The conditions of shipment is DAP – Budince (Slovakia), 20 MMCM. Odesa Port-Side Plant will have to pay an additional charge for entering the Ukrainian gas transport system. In previous weeks the plant operators agreed a new loan facility and had gas agreements laid out with Gaz de France.

Decline in December 2015 Lower-48 Onshore Crude Production Leads Way in Falling Domestic Crude Supply

What is noteworthy in the December 2015 Petroleum Supply Monthly (PSM) is confirmation of declines in domestic crude supply seen in the weekly data. Lower 48 onshore production is leading the way, falling 154 MB/D during December, to 7.11 MMB/D, a production rate 350 MB/D lower than December 2014. The monthly decline in U.S. production was partially offset by a 110 MB/D increase in Offshore Gulf of Mexico production, which at 1.63 MMB/D stands at 180 MB/D over last year. The December 2015 crude balance item turned negative for only the second time in the last 15 months and, at -200 MB/D, stands -575 MB/D lower than December 2014. Domestic crude supply (production + balance item) for December of 9.06 MMB/D was 740 MB/D lower than December 2014, perhaps indicating that more declines are occurring, even if production data have not fully caught up.

Aramco Pricing Adjustments for April — Minor Tuning

Saudi Arabia's formula prices for April were just released. The changes made to differentials against its key regional benchmarks were all relatively small and do not suggest any change in Saudi export pricing policy, which has been to maintain competiveness with regards to volumes and pricing in key markets.

U.S. Coal Stockpile Estimates

While power sector coal stocks have fallen by as much as 20 MMst year-to-date due to falling production levels, milder shoulder season weather and cheap natural gas are limiting coal burn, thereby elevating days cover. PIRA estimates U.S. electric power sector coal stocks stand at 176 MMst as of the end of this month.

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

The primary light products of gasoline and distillate had strong upward demand revisions in the December 2015 PSM versus the preliminary weekly data, but all other products were revised down strongly. Most of the downward revision to other product demand was due to higher-than-assumed exports. While December 2015 commercial stocks were revised up 8.1 MMBbls, this was a significantly smaller upward revision than last month, and the year/year surplus commercial inventory narrowed from last month.

Global Data Are Mixed, but Key Areas Remain Supportive

In the U.S., healthy job growth during February was the latest in string of positive economic releases. But data on wages and the number of hours worked showed unexpected declines. The latest ISM manufacturing confidence index told a mixed story. China is apparently attempting to increase positive sentiments in financial markets on the heels of the successful G20 meeting in Shanghai last week. India’s 2016 government budget apparently managed to reconcile two conflicting goals. Activity data in Brazil remained weak.

Negative Cash Flows for U.S. Shale and Canadian Oil Sands in 2016

Globally, oil remains cash flow positive, with low cost regions like OPEC and non-OPEC conventional offsetting the cash burn in U.S. shale and Canadian oil sands. In 2016, shale and oil sands are expected to be cash flow negative despite significant capex reductions. Shale would be cash flow positive on further reduced capex, but oil sands cannot even cover operating expenses at PIRA's projected 2016 prices. Based on current spending plans, $50 Brent would be needed for shale to be cash flow neutral and $55 is required by Canadian oil sands.

Financial Stresses Continue to Ease

For the third straight week, the S&P 500 rose Friday to Friday and on a weekly average basis. All of the other indicators such as volatility, high yield debt and emerging market debt posted solid gains. The U.S. dollar has been increasingly mixed. It has strengthened against the euro and eastern European currencies, but has weakened against some of the commodity and precious metals producers. Commodities ex-energy are looking significantly better the past several weeks (a seven-week uptrend). Energy has also moved modestly higher the last few weeks.

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NYC-based PIRA Energy Group reports that U.S. consumer spending share on energy will hit record low. In the U.S., stocks make a new high. In Japan, crude imports fell back and stocks moved up fractionally. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Stocks Make New High

This past week’s inventory build pushed stocks to a new all-time high. The crude surplus to last year has been narrowing as more of it is converted into products. The overall surplus to last year is about flat versus the beginning of the year, but the crude surplus is down 21 million barrels while the products surplus is up by a similar amount. Within products, the gasoline surplus versus the start of the year is up 21 million barrels, the distillate surplus is up 12 million barrels, while year-on-year surplus in the rest of the products is down 11 million barrels.

Low Oil Prices Strain PEMEX; Budget Likely to Come Under Fire

U.S. gas exports into Mexico remain impressive early in 2016. Indeed, February exports are projected to again be near 3.4 BCF/D, ~1 BCF/D more than the prior year. These stout gains have been primarily facilitated by weaker domestic production and increased gas-fired electric generation — a trend that should continue well into this year. PIRA’s Reference Case calls for exports to average ~3.6 BCF/D in 2016, which would mark yet another record-breaking year.

Takes from E-world in Essen: "For they will drink and forget what is decreed."

This issue of plant retirements was brought up in several of PIRA's discussions during E-world, with concerns that even some lignite units may be shut down. We have noted in our prior EES scorecard that daily average lignite output declined substantially over the past 30 days, as day-ahead prices moved lower. So far, with average daily data from Jan. 1, 2016, we want to note that lignite output moved down to about 11.2 GWs, as day-ahead prices settled at €12/MWh on Jan. 30, equivalent to a loss of 7.5 GWs.

Colombian Labor Strike Risk Buoys Coal Pricing

The coal market rebounded notably last week, with API#2 (Northwest Europe) and API#4 (South Africa) prices recording similarly strong gains at the front of the curve, while FOB Newcastle (Australia) price increases were more subdued. A modest rebound in oil/gas pricing provided some of the updrafts for coal pricing, although a growing likelihood of a labor strike at the Cerrejón mine in Colombia gave Atlantic Basin pricing the extra amount of stimulus. In the Pacific Basin, a reduction in Australia’s thermal coal exports in December/January, coupled with news that Anglo American is looking to divest its coal assets globally, is showing that pressures to curtail coal supply are becoming more binding.

Indian LPG Imports Set to Drop in 2016

India’s domestic LPG production is jumping a step change higher as the Indian Oil Corporation inaugurates its eighth refinery in Paradip on the east coast. The refinery includes a one-of-a-kind heavy oil-to-LPG conversion unit that is ramping to a production capacity of 1 million MT of LPG/year. Indian LPG production is climbing 11% higher this year as a result of Paradip’s startup, effectively backing out 24 VLGC cargo imports/year.

Global Equities Stage a Broad and Strong Rebound

Global equities posted solid and broad gains on the week. In the U.S., all of the tracking indices gained ground, with the retail, consumer discretionary, housing, and technology indices outperforming. Internationally, all the tracking indices also gained. The best performers were China, the other BRICs, Emerging Asia, and Japan.

Ethanol Stocks Soar

U.S. ethanol inventories set another record last week, building by 262 thousand barrels to 23.2 million barrels. Ethanol production increased for the second consecutive week, rising to a four-week high 975 MB/D.

Annual Outlook Forum this Week

Focus this week will be on the USDA’s Outlook Forum generally and how government analysts keep the corn carry out below 2 billion bushels and soybeans below 500 million specifically. All this in preparation for the Prospective Plantings report at the end of March, which last year showed a combined 173.8 million acres intended to be planted with either corn or soybeans, a fact that seems lost on many estimating the 2016 acreage mix.

Justice Scalia’s Passing Improves Prospects for Clean Power Plan’s Survival

With the recent unexpected passing of Supreme Court Justice Antonin Scalia, the chances that EPA's Clean Power Plan will survive legal review have improved. The 5-4 decision to stay the CPP last week indicated the Court would likely strike down the rule. With the current court split 4-4, the identity of that last justice is critical to the prospects of the CPP and may not be determined until after the 2016 elections. In the event the CPP is ultimately upheld by the Supreme Court, we would expect EPA to toll the CPP's deadlines for both filing SIPs and compliance by roughly two to three years.

Japanese Crude Imports Fell Back and Stocks Moved Up Fractionally

Crude runs showed very little change on the week. Crude imports fell back, and on balance crude stocks moved up fractionally. Finished products drew 2.4 MMBbls with almost half the decline in kerosene. Gasoline, gasoil, jet-kero, and fuel oil demands all fell back, but stocks still drew to varying degrees. Major product demand was lower on the week, but it continued rising slightly on a trend basis. Margins have softened in January and into February, but on the week were slightly higher.

How Will the European Gas Market Cope with the Ever Lengthening LNG Market?

With winter nearing an end, is it still worth staying short? The answer looks to be yes. Even though spot prices have come down by 8% M/M and by 16% quarter-on-quarter, prices can still go lower. As always, significant risks remain in place, especially as we enter the summer period, when injection account for over 20% of what happens to supply.

Stress Eases this Week

Financial stress appears to have eased up a bit this week. The S&P 500 rose Friday to Friday and on a weekly average basis. All of the other indicators, such as volatility, high-yield debt and emerging market debt, also staged varying degrees of improvement. The U.S. dollar has been increasingly mixed. Commodities ex-energy are looking marginally better. The Cleveland Fed released its inflation expectations for February, which showed a ratcheting down across all time frames.

U.S. Ethanol Prices Fall; Margins Trending Downward

Record-high inventories and lower oil values drove ethanol prices to a three-week low last week. High demand on the export market prevented sharper declines, though prices are expected to fall further in upcoming weeks. Manufacturing margins were up slightly last week, but they were trending downward by the weekend.

U.S. Consumer Spending Share on Energy Will Hit Record Low

U.S. consumer spending on energy will soon hit a record low as a share of total consumer expenditures. Variations in the consumer energy spending share have been largely driven by oil prices, and the decline in retail gasoline prices should push the share below 3.5% this quarter. As consumers have spent less of their budget on energy goods and services, they have spent more on healthcare goods and services and in restaurants. As oil prices start to recover later in 2016, as PIRA projects, these industries may well face headwinds as the share of consumer spending on energy increases.

End to 2015-16 Heating Season Already in Sight

The mild-weather forecasts weighing on gas prices are reinforcing perceptions of an “early end” to the heating season. As it now stands, the next EIA weekly storage report is likely to feature the last triple-digit withdrawal of this heating season. While the books have not yet closed on February, PIRA’s balances are coalescing around an end-month storage position of ~2.48 TCF, which would yield a year-on-year surplus of ~840 BCF. Consequently, March, largely viewed as a bookend to the season with its seasonally dwindling degree days, is front and center.

The Good, the Bad, and the Potentially Ugly of the U.S. Economy

Recent U.S. data releases on manufacturing, jobs, consumer spending, and housing have been encouraging and pointed to an acceleration in economic activity during the first quarter. Business investment, on the other hand, may experience a contraction in the near term. A firmer-than-expected inflation reading for January is likely to embolden hawkish members of the Federal Reserve policy committee.

Japan’s SPR Will Be Drawn Down Under a New Proposal

The Japanese government released a new proposal about the management of its strategic petroleum reserve. A government stock sale of at least 20 MB/D on average over the next four years is in store, since the current official reserve level is elevated according to the new rule. Separately, the draft recommended an expansion of government storage for LPG by 4.2 MMB in the next two years, based on the positive demand outlook for the fuel.

UK Businesses Will See Lower Gas Prices Later this Year

British firms can expect to see their energy bills fall by between 10-20% this summer as turmoil in the oil market pays dividends for customers. The wholesale cost of gas on the UK market has plummeted by more than 40% in the last year due to a global oversupply and depressed oil prices. The weaker gas price has also caused wholesale electricity prices to slump by more than 30%, because a large amount of the UK's power network is gas fired.

Asian Demand Update: Growth Continues to Slow

PIRA's latest update of Asian product demand shows continued slowing. PIRA's January update had shown growth of 741 MB/D, down from over 1 MMB/D in the December update. The latest average three-month data indicate growth of only 294 MB/D. Looking at the upside, India and Korean growth is still good at 335 MB/D and 179 MB/D (vs. 396 MB/D and 154 MB/D last month). A weak performance was registered by China with growth of only 48 MB/D (255 MB/D last month), while Japan now posts a decline of -274 MB/D (-98 MB/D last month). The current growth assessment for Asia picks up preliminary January data on China and India and full 4Q15 data for all the other countries other than Thailand. Looking at individual products, gasoline accounts for 223 MB/D of the growth, but down from growth of 308 MB/D in our last assessment. Weakness continues in middle distillate demand performance, both gasoil and jet-kero. Asian gasoil demand growth is now 77 MB/D, down from 149 MB/D last month, while Asian jet-kero demand growth has also slowed.

Tighter Europe-Asia Spreads Feed AB Supply Glut Concerns

The specter of JKM dipping below NBP in the coming months looms large, particularly as Japan appears to be contemplating the restart of Tepco’s Kashiwazaki-Kariwa (KK) nuclear facility. It is highly unlikely that such a thing would happen this year; in fact, any restart at KK is not built into the PIRA nuclear forecast in Japan at all at this point, owing to the very high political hurdles that are in place for Tepco in particular. But the fact that it is now on the table is worrisome for Asian gas consumption.

Rising U.S. VMT Growth Supports Strong Gasoline Demand

Since mid-2013, growth in U.S. vehicle miles traveled has displayed accelerating growth. Even with that growth, the pace has been below what traditionally has occurred out of a deep recession and compared to what PIRA’s modeling efforts would indicate. In the most recent VMT data, year-on-year gains remain robust, up over 4% in November. The good year-on-year growth in VMT, seen in the most recent data for 2015, helps explain the strong gasoline demand that has been witnessed. For 2015, PIRA estimates gasoline demand grew 2.5%, or 227 MB/D, the strongest since 2002, when year-on-year growth was 2.8%, or 238 MB/D.

Competition Is Heating Up for Product Exports to Australia

Australia has emerged as a major importer of refined products in the Asia-Pacific region over the past few years due to refinery closures there. Net imports more than doubled from some 233 MB/D in 2010 to about 506 MB/D last year, led by diesel, gasoline and jet fuel. Competition is heating up among exporters to supply Australia, with China and India entering the market Down Under. But Australia’s imports of refined products are expected to only increase slowly from here due to relatively slow demand growth, unless there are more refinery closures, and none are currently expected. Australia alone will not correct the surplus of refined product production capacity in Asia-Pacific.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

NYC-based PIRA Energy Group 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.

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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.

ARA 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."

Some 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.

Douglas-Westwood (DW) held their inaugural Business Breakfast event in London last week at Southwark Cathedral. The purpose of the event was to showcase DW’s latest research and to offer a network opportunity for their financial sector and energy industry clients.

DW founder John Westwood chaired the proceedings and also gave an introductory talk focusing on macro challenges and opportunities in the current cycle including skills transfer, geographic and sector diversity and cost-effective technical innovation. John also highlighted the significant drive towards the use of natural gas and the potential for the supply/demand gap for oil to narrow later this year.

Research Director Steve Robertson provided a summary of trends in a number of key offshore sectors including floating production, LNG, subsea, offshore logistics and compared the outlook for the onshore and offshore production, noting that we should expect significant extra oil production from long-lead time projects that were committed to prior to the downturn. A comparison was also made between the previous outlook for Deepwater expenditure one year ago and the current view now, with some 92 projects having been delayed/deferred or cancelled. It was also suggested that 2016 and 2017 could be very difficult years for subsea equipment providers that to-date have been partially-insulated from the downturn by significant backlogs – these backlogs are now rapidly declining and order levels remain low.

Ben Wilby provided an in-depth review of DW’s North Sea Decommissioning report, explaining the underlying data, methodology and outputs by country. Ben illustrated how the UK will provide the bulk of decommissioning opportunity overall and the vast majority of North Sea removal work that will occur in the next decade, as Norway (a less-mature producing province with significantly less installed infrastructure) sees most of its respective activity post-2030. The various approaches to decommissioning (including offshore and onshore ‘deconstruction’ and single-lift & transport to shore) were discussed along with potential cost savings from single-lift operations – providing they become commonplace.

Katy Smith finished the session by sharing DW’s latest views on Iran, including an update on sanctions, the outlook for oil and gas production, specific projects that are known to be moving ahead and the expectations for rig requirements, both offshore and onshore. It was explained how DW has taken a conservative view of the potential activity, given a number of evident challenges in working in Iran not least the bilateral US sanctions that remain in place, the caution amongst foreign banks regarding the processing of Iranian payments and the uncertainty surrounding the structure of the Iranian Petroleum Contract.

DW would like to thank everyone that attended – this will be the first of a series of such events throughout the year. If you are interested in attending, please register your interest with Ellie Pickering.

Steve Robertson, Douglas-Westwood Faversham

The protracted low price environment is pushing the offshore marine supply chain to breaking point. Rig managers, OSV contractors and subsea vessel owners are trading at 60-70% discounts to 2013 highs and every week seems to usher in a new wave of profit warnings, impairments or defaults. Although E&P customers are also taking a beating, they are firmly in the driving seat when it comes to bargaining power.

Taking the jack-up market as a microcosm of the wider offshore marine industry, DW estimate that average jack-up fixtures have fallen by 50% whereas average O&M costs per rig have seen reductions of just 25-35. In short, buyers have shown far greater efficiency in cutting their supply chain costs. Whilst E&P companies are able to take advantage of major oversupply throughout the entire offshore marine segment, contractors are left footing the labor bill. Since 2014, labor costs have fallen just 10% as compared to R&M or SG&A associated costs at 35% and 30% respectively. Despite lower demand, there is still a limited number of competent crews (particularly highly trained personnel for DP operations and subsea work) and contractors are loathe to cut ties with capable people for fear of losing out in the (inevitable) upturn or jeopardizing LTI and HSE performance, which in turn reduces the marketability of their assets.

With dayrate growth unlikely over the next 12-18 months and the supply/demand situation expected to only get worse, offshore marine players need to optimize their bottom line strategies and breakaway from prevalent operating models. Mid-sized owners may be evaluating the potential of greater outsourcing and the scale players may see merit in vertical integration. The answers will be unique for everyone but when the market does rebound from current depths, we can expect those that adapted to be the ones still standing.

Iran’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

NYC-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.