Finance News

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

Longer-Term Oil Price Outlook Marked Down vs. August

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

Growing Concern over Medium Term Downside Price Risk

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

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

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

European Carbon: Stronger Fundamentals Needed to Maintain Price Gains

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

Coal Pricing falls again Amid Wider Energy Market Weakness

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

Weaker Asian LPG Markets Search For Direction

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

Ethanol Prices Tumble

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

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

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

Lows Not Safe

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

U.S. Stock Surplus Widens

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

Tighter Balances, But Still Anxious for More Seasonal Heating Loads

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

Eastern Grid/ERCOT Market Forecast: November 2015

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

Ethanol Values Decrease Again

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

Nervous Markets

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

Japanese Runs Begin Rising, Crude Stock Bulge Corrects Back Downward

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

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

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

Record Norwegian Exports for November Hint at Aggressive Defense against LNG

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

European Oil Demand Growth Finally Turns Positive in 2015

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

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

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

Key Indicators, Commodities Fall

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

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

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

Iran and Iraq Come to Deal on Natural Gas

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

Global Equities Decline Broadly

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

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

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

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

12Anadarko-LogoAnadarko Petroleum Corporation (NYSE: APC) has announced the following statement from Chairman, President and CEO Al Walker:

"We constantly strive to make Anadarko a better company. As part of these efforts to enhance value, and after extensive analysis of public information, we recently sent Apache Corporation a non-binding offer to acquire the company. The proposed all-stock transaction, which included a modest premium, would have been highly accretive to Anadarko on a cash flow per-share basis, even before synergies. Further, based on public information and Apache's historic financial and operating underperformance, the proposed transaction offered shareholders of both companies numerous value-creation opportunities given Anadarko's demonstrated success at building value through operational excellence, proven capital allocation, and active portfolio management.

"Our efforts to enter into a mutually acceptable confidentiality agreement for the purpose of exploring the merits of a potential transaction were summarily rejected and no discussions of substance occurred. We are unwilling to pursue the transaction without access to detailed non-public information, and based on our analysis, which shows that Apache appears to trade at or near full value currently, the offer was withdrawn."

17DWMondayLast week DW celebrated its 25-year anniversary with their DW25 Conference in London. Through the course of the afternoon, speakers offered insight into oil & gas business challenges and opportunities, spanning a multitude of industry sectors. The keynote speaker James West, Senior MD and Partner at Evercore, was joined by panelists Graham Bennett, Vice President at DNV GL, Bob Drummond, CEO at Hydrasun Group, Neil Hartley, Managing Director at First Reserve and Tony Hodgkins, Commercial Director at ORCAS. DW speakers were Chairman John Westwood, Research Director Steve Robertson, with Andrew Reid, CEO as moderator.

1.Saudi Arabia was noted as having major challenges including a huge budget deficit which can only be addressed by a significant rise in the oil price. Without this, its demographic situation holds potential for social unrest. Some other oil producers could already warrant the status of ‘failed states’.

2.The Middle East was, however, highlighted by several speakers as remaining a bright spot for both oilfield services and equipment.

3.Global E&P spending is expected to drop 20% in 2015. Onshore, North American drilling and oilfield services have been hit hardest by the oil price collapse, though offshore drilling tells a different story, with the long-forecast rig oversupply being the key issue.

4.In 2016 North American spending is expected to decline further and higher incentives are required to sustain drilling and exploration. However, a 2017 rise in the US onshore rig count is expected and a number of oilfield services & equipment sectors are forecast to show significant growth from their present lows.

5.In the offshore rig markets, new construction activity could be limited for the next five years.

6.The impact of the oil price downturn on the offshore segment has to some extent been masked by the long-lead time of field development projects.

7.Offshore, commercial relationships and business models must change. The FPSO sector for example, faced major challenges even before the oil price fall and there is now a real need to standardize the approach to design.

8.The North Sea is “stuck in a time warp”, with high costs and low productivity, a result of “poor planning and management”.

9.The oil price fall has raised the potential of North Sea decommissioning which is now “definitely going to happen”.

10.Emerging sectors such as FLNG and offshore wind are growing and now significant in scale.

11.The oil & gas supply chain is overpopulated by too many small companies and there is a major need for more corporate consolidation in order to improve efficiency.

12.Institutional equity energy allocations for the oil services industry are the lowest of all groups compared to historical averages.

13.Though hit by pricing pressure, the impact on MMO-related (Maintenance, Modifications and Operations) activity has been comparatively lower than others.

14.The downstream maintenance market will display a rapid recovery due to investment in new infrastructure for North American crudes and upgrades of international facilities.

15.It was noted from a private equity view however, that although there will be challenging investment decisions, significant opportunities do exist.

16.Fossil fuel investors are being targeted by organized opposition pushing for disinvestment; however, natural gas can play a key part in the move towards a greener future by displacing coal in power generation.

17.Oil & gas is a 155 million boe/d industry with major long-term prospects.

18.Ultimately, oil prices will increase due to growing demand outpacing supply.

19.“The decline curve never sleeps” and some 448,000 new development wells are needed from 2015-21 to offset production decline and rising oil & gas demand.

Finally, John Westwood closed the event, adding “When we formed Douglas-Westwood in January 1990 Brent crude was $23.73 a barrel. Applying the US $ inflation index this equates to a 2015 price of $43.20. Today (23rd October 2015) Brent Crude is $46.50.”

Douglas-Westwood extends its sincere thanks to everyone participating in the event and to all our clients and friends we have worked with over the last 25 years.

Hannah Lewendon, Douglas-Westwood Faversham
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15DWMondayIn the desert of New Mexico, just forty miles from producing wells in Artesia, lies an aircraft boneyard filled with the remains of once great aeroplanes. Like these planes, nearly 4,000 frac trucks are sitting idle throughout the United States as the demand for horsepower (HP) has fallen as quickly as WTI over the past year. Could there be potential for these trucks to be utilized again, or will frac trucks join aeroplanes in boneyards across Texas and North Dakota?

From 2011-2014 frac pump manufacturers were in a race to see how fast horsepower could be added to the United States’ frac fleet. Frac HP capacity rose from 12.6m HP (million horsepower) in 2011 to over 17m HP in 2014. With onshore wells drilled in the US expected to fall 42% in 2015 from 2014 highs, a glut of oilfield equipment is likely to continue in the US for some time.

With the major equipment glut in the US, are there opportunities outside of drilling-led completions or are North American pressure pumpers treading water until drilling activity picks back up? While some service companies are bullish on re-fracturing as a source of additional frac truck utilization, the process comes with a high price tag and relatively unproven benefits. Some hope may lie in the over 4,500 drilled but uncompleted wells in the United States that are awaiting a commodity price recovery to be completed, but the EIA’s forecast 2016 average price of $53.57 does not provide rosy economics. One of the only benefits of this underutilization for pressure pumpers is the ability to save money on replacement costs by switching an idle truck out for one requiring maintenance.

When the frac fleet was at its utilization peak in 2014, over 20,000 horizontal wells were drilled in the US, and it is highly unlikely that we will see such a high number of wells drilled before the North American pressure pumping market is restructured. The question on pressure pumpers’ minds is simple: what will it take to get utilization back up?

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

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

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

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

Kathryn Symes, Douglas-Westwood
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13PIRALogoNYC-based PIRA Energy Group reports that October crude prices traded within a narrow range. In the U.S., total commercial stocks drew again this week. In Japan, crude runs eased again while crude imports and stocks surged. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

October crude prices traded within a narrow range, with bullish sentiment related to declining domestic production offset by a bearish 20+ million barrel U.S. crude stock build associated with seasonal refinery maintenance. The majority of that stock build occurred in PADD III, resulting in weaker crude differentials in both West Texas and the Gulf Coast, relative to Cushing, where crude stocks were unchanged. Meanwhile, Bakken and Canadian light grades strengthened on the imminent start-up of two new northern pipelines.

Upside Production Surprise Before Abrupt Ongoing Downturn

Last Thursday's storage injection brings total inventories to 3,929 BCF assuring a new end-October record high. Updated balances now point to a 3.98-4.00 TCF weekly peak for the season with a daily foray above 4.0 TCF still in the cards. The inability to post an even higher peak underscores the extent to which supply and demand responses were needed to limit builds given feasible storage limits, namely within the Producing Region (PR), where stocks are projected to peak a bit above 1.4 TCF by mid-November. Such a level would be ~94% of demonstrated capacity — a figure that also highlights the need of incremental demand and the additional pullback in production of late needed to keep storage in check.

As Marginal Costs for Coal Units Hold Up, German Power Sets to Remain Firm

This week will see wind output rise well above normal levels, bringing German day-ahead prices down with them. There are, however, some structural factors that will continue to underpin German prices. While EUAs remain at multi-year highs, marginal costs for coal units are also relatively stronger than anticipated. In fact, critically low water levels in key stations along the Rhine River imply higher delivery costs by at least 0.8 to 2 euro/MWh. Power generators have announced possible disruptions, especially as water levels are moving further lower.

Brief Bullish Run Tamped Down, Market Returns to Downward Trajectory

The modest coal rally that occurred in late October into early November came to an end last week, with the entirety of the three major forward curves falling compared to the end of the previous week. FOB Newcastle (Australia) generally lost the most ground, while API#2 (Northwest Europe) and API#4 (South Africa) also fell, but to a lesser extent. API#5 prices (higher ash, lower cv FOB Newcastle coal) fell sharply to a new low for the year. This is a reflection of how weak buying activity, particularly from China, is in the current market. With underlying Chinese coal demand and thermal coal imports continuing to contract year-on-year, it will be very difficult for prices to structurally rise.

Interest in California Offsets Prior to Compliance

PIRA expects a continued slow escalation in carbon price — with upward pressure from the increasing reserve price will be muted somewhat by bearish emissions data, weak inflation figures (impacting reserve price), and compliance offset usage. November has seen the milestone Compliance Period 1 surrender and will see the final auction of 2015. Interest in offsets drove prices higher and narrowed the spread vs. allowances.

European LPG Prices Mixed

Large cargo butane import prices were crushed 9% lower to be called below $360/MT, as low Rhine River levels are stifling barge traffic to Germany. Although higher prices persist up the river, halted barge traffic has disconnected inland markets and the Amsterdam/Rotterdam/Antwerp cargo market. Propane prices gained $11/MT to $367/MT for December futures — a level that has the arbitrage from the United States wide open.

Ethanol Prices Higher

U.S. ethanol prices increased the week ending October 30. Assessments were supported by higher gasoline and corn values.

Dollar Pressure

With commodity indices struggling to maintain multi-year lows, and farmers extremely undersold on 2015 production, it’s hard to find much to be bullish about.

Strong U.S. Labor Market Report Significantly Raises Odds of December Fed Tightening

Last week’s better-than-expected U.S. data for October removed worries about the economy’s momentum. They also suggested that the country’s labor market is increasingly running out of slack. There were signs of faster wage growth, but they remained tentative. The relationship between unemployment and wage inflation is likely to be a key concern for U.S. policymakers going forward. Asian manufacturing confidence data for October showed encouraging improvements.

U.S. Commercial Stocks Draw Again

Total commercial stocks drew this week, the second draw in a row. A drop in crude and product imports seems to be the primary driver. Total commercial stocks are down 6.0 million barrels from the all-time high. With larger draws the same few weeks last year, the commercial stock excess. Crude stocks built and the surplus widened to the highest of the year. With crude runs still low due to maintenance, this is not an unexpected outcome.

U.K. Gas Enters the Switching Band with Coal, but Effect Limited at this Point

The slide in NBP prices is leading gas to a more competitive position relative to coal. At current market prices, PIRA will be upgrading the utilization of U.K. gas-fired generation by roughly 1 GW through the end of the year and about 2 GWs in 1Q 2016.

U.S. Coal Market Forecast

Warm weather (actual and balance of month) is depressing natural gas prices and inflating coal stock levels, stirring memories of 2012. The downside price risks for gas and coal, which we warned about the past few months, have already arrived. More supply-side destruction in fossil fuel markets is expected.

WCI Carbon Market to Carry Surplus Forward, 2015 With Record Expected Length

Newly released California and Quebec GHG emissions data, through 2014, contained few surprises. The Compliance Period 1 allowance surplus is at least 35 MT, not accounting for use of offsets. Should 2014 CA broad scope emissions levels persist for 2015, the surplus would be about 35 MT for that year alone. CCA prices were not affected by the release.

Key Ethanol Industry Indicators Reverse

The week ending October 30, U.S. ethanol and production and stocks rose and the manufacture of ethanol-blended gasoline fell.

Key Indicators Continue to Gain

The S&P 500 posted a fifth week of gains. Most of the related indicators improved again (Russell 2000, volatility, and U.S. high yield credit). Emerging market bond credit performance has been flat the last several weeks, while the U.S. indicators have continued to improve. Overall, commodities eased again, as did ex-energy. Oil was slightly higher. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro, yen, British pound, and key eastern European currencies. U.S. government bond yields have inched higher on short and longer-term maturities as markets continue to contemplate the Fed raising short-term rates at its next meeting, which will conclude December 16th.

Japanese Crude Runs Ease Again, Crude Imports and Crude Stocks Surge

Crude runs eased again and crude imports rose sharply from very low levels such that crude stocks ballooned 7.9 MMBbls. Finished product stocks posted a draw, though kerosene continued to build seasonally and there was a minor build in gasoline. Margins remain good and strengthened on the week due to higher cracks on all the major products.

Ukraine Receiving Gas Cheaper from Western Europe Despite Deal to Lower Russian Price

The price of natural gas (delivered to Ukraine) from the European Union under some contracts with national joint-stock company Naftogaz Ukrainy has fallen to the level that is lower than the price of Russia’s Gazprom, Business Development Director at Naftogaz Yuriy Vitrenko has stated. “Last week we’ve signed an agreement at the price lower than Gazprom’s [price]. This week we’ve also bought at a price lower than Gazprom’s [price],” he said.

CSAPR Emissions Below Cap — Awaiting New Regs

Emissions data for the Cross State Air Pollution Rule are complete through Q3 2015 (including the Ozone Season) and show significant year-on-year emissions decreases, with all programs set to finish 2015 at or below even tighter Phase II caps. The Seasonal NOx market awaits the new federal Transport Rule for 2008 Ozone NAAQS; it is unclear whether current allowances will be recognized. EPA must also address certain states’ budgets/caps, while a decision is soon expected from the D.C. Circuit on MATS.

Global Equities Gain on the Week

Global equities gained on the week. In the U.S., growth sectors led the complex higher. Banking and energy well outperformed and posted strong gains. Defensive sectors underperformed as evidenced by declines in consumer staples and utilities. Internationally, many of the tracking indices were higher, led by a strong gain for China.

Petrobras Oil Workers Strike — A Step Toward a More Politicized Movement

The Petrobras oil workers' strike has spread to producing fields in the Campos Basin, which account for 65% of Brazil’s crude oil output. Oil production losses on Monday and Tuesday averaged 226 MB/D and reportedly increased on Wednesday. The company is trying to reduce the damage to production by sending contingency teams to the affected platforms. The downstream impact of the strike is likely to be limited since, by law, refining operations must meet a minimum requirement in order to avoid serious disruptions of supply. Unlike most previous labor actions, which focused on wages and have ended with typically little impact, the unions this time are demanding a say in management business decisions. PIRA’s best guess is that the strike does not last more than two weeks. Production losses will mostly impact exports, but not initially because ample stocks can be drawn down, but inevitably they will be lower than they would have been because of the output losses.

Poor Showing in China LNG Will Remove Support for Asia Spot

The illusion of spot price support in Asia is bound to be short lived if only for a severe slowdown in China, which has subscribed to a large portion of the new regional LNG supplies on offer.

Aramco Pricing Adjustments for December: Europe More Generous, Asia Tightened

Saudi Arabia's formula prices for December were just released. The most significant change was more generous terms for European destinations, with Northwest Europe being cut more aggressively than the MED. U.S. pricing was lowered by a modest amount, while Asian pricing was raised. The adjustments, in a broad sense, were in line with what fundamental pricing drivers would have suggested.

Keystone XL Pipeline Rejected

On Friday, U.S. President Obama formally rejected TransCanada’s application to build an oil pipeline from Alberta to Steele City, Nebraska, where it would connect with the existing Keystone pipeline system, increasing its capacity by 830 MB/D. This was a political decision and the President made it clear that fighting climate change is a priority for his remaining 14 months in office. In the near term, this decision will not have much impact on Canadian price differentials. However, by the end of this decade, new capacity will be needed to avoid steeper discounts for Canadian grades.

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

14PIRALogoNYC-based PIRA Energy Group believes that Global economic momentum is stabilizing, which is supportive for the demand for inventory. In the U.S., peak refinery turnarounds drive DOE petroleum balances. In Japan, crude runs ease and stocks jump. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Global economic momentum is stabilizing, which is supportive for the demand for inventory. Global oil demand growth is strong, especially in China, India and the industrialized countries, and will remain so in 2016. Supply growth is quickly eroding. Capacity constraints limit OPEC growth while non-OPEC crude/condensate is about to fall below year-ago levels. Oil markets will need more oil and prices will have to signal this. However, short term, there are strong headwinds for oil prices, but once January is front month and December inventory declines are evident, prices will rally strongly. Political risks to supply are turning higher with more turmoil in Iraq and a rising potential for infrastructure attacks in Nigeria.

Less Potential for Weather-Driven Demand Erases Upside Risk; Supply Builds

The strong supply out of Russia and Norway, combined with the growing presence of unsold LNG in the Atlantic Basin, makes the short-term outlook continuously vulnerable to the downside. PIRA does not expect a major selloff to emerge, and if one were to come, it would not be until mid-December at the earliest due to the need to protect storage going into 1Q peak demand season.

Dutch Imports at Three-Year Lows in Spite of Coal Retirements Ahead; Weaker Gas Prices Will Keep Prices in Check

Total Dutch net imports plummeted to only roughly 100 MWs so far during October, or a three-year minimum. While 1.6 GWs of coal is set to be retired by the year end, the removal of the coal tax, combined with significant weakness in the gas pricing picture, will keep the Dutch prices in check, translating into structurally lower imports in the months ahead.

China’s Coal Demand Struggles Continue; Market Recovery Still Distant

The coal market pushed lower again last week on weaker oil pricing, a strong U.S. dollar (particularly relative to the euro), and continued softness in coal fundamentals. The weakness in pricing was most notably apparent for API#2 (Northwest Europe), likely due to the drop in the euro, while FOB Newcastle (Australia) prices also fell, but to a lesser degree. Demand continues remain soft in many key demand markets, and outside of India, there has been limited rationalization of uneconomic supply. Absent any unforeseen supply disruptions and/or mine idlings or closures, weakness in pricing will persist.

LPG Pulled Lower, Ethane Rebound Continues

U.S. NGL markets were pulled lower by the broader energy markets. November Mt Belvieu propane futures fell 3.5% to near 43¢/gal, outperforming to more than 5% decrease in global crude prices. Butane at the market center fared slightly better, losing 2.8% to settle near 58.5¢/gal on Friday. Ethane’s outperformance continues with prices flat week-on-week despite the plunge in Henry Hub prices, which led to ethane’s premium in Btu terms surging to 64¢/MMBtu — the largest premium in years.

Clean Power Plan Published, Additional Info Released

The Clean Power Plan is finally set to be published in the Federal Register, with regulations for new/modified power plants and the proposed Federal Implementation Plan (FIP) / Model Trading Rule. Stakeholders will have access to technical support documents on proposed free allocations for the individual covered units, "Gas Shift" ERCs for rate trading. Publication will start the 60-day clock to file legal challenges to final rules and the 90-day comment period for the proposed FIP/Model Rule.

U.S. Ethanol Prices and Margins Fall

U.S. ethanol prices decreased the week ending October 16 and manufacturing margins dropped to the lowest levels since January. D6 and D5 RIN values rose after the EPA implied that the final biofuels mandates will probably be higher than those proposed on May 29.

All About the Dollar

After spending most of the trading week eking out modest gains, the ECB’s forward guidance on rates resulted in an extended rally for the dollar and an apparent end to any immediate bullish hopes for the grain/oilseed quadrant.

Asia’s Manufacturing Indicators Remain Sluggish, but Other Data Are Looking Better

China’s economic data suggested that the country’s economic momentum was roughly stable. The recent resiliency came from the service sector, while the industrial sector continued to struggle. Housing indicators were encouraging. China’s latest rate was not a surprise and is basically seen as a calibration of the government’s policy stance. Data from Japan, Korea, and Taiwan were mixed, but contained encouraging signs.

Peak Refinery Turnarounds Drive DOE Petroleum Balances

We are still around the peak of the refinery turnaround season and this past week’s data, like the prior week, showed a large crude stock, which was almost offset by a large product draw. The resulting 1.5 million barrel overall stock increase was 2.9 less than the increase last year in the same week, narrowing the year-on-year stock excess slightly to 165 million barrels. Sixty percent of the stock excess is in crude oil and 21% is in the two major light products.

Gas Flash Weekly

Another all-time record high for salt storage helped pull total Producing Region inventories deeper into new high ground. Still, maneuverability remains considering that non-salt inventory is ~65 BCF below its high, and capacity remains available in the Consuming East and West. While space remains to absorb surplus supply, the pall of a mild start to the heating season is not only placing an effective cap on near-term prices, but keeping alive the risk of even lower levels.

U.S. Coal Stockpile Estimates

Power sector coal stocks saw a strong seasonal build this month as fall weather patterns and weaker gas prices sapped coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 180 MMst at the end of this month, or 85 days of forward demand based on our forecast of Nov./Dec. average coal burn (vs. 63 days one year ago).

U.S. Ethanol Production and Stocks Increase

The U.S. ethanol industry was stable the week ending October 16, with production rising only 2 MB/D from the previous week to 951 MB/D. Stocks built 84 thousand barrels to 18.9 million barrels, with the only draw occurring in PADD I.

Little Enthusiasm

The last week of the month usually brings with it an anticipation for the upcoming WASDE, but this month feels a little different than most. Whether it’s the general malaise around trading contracts that remain range-bound, or the realization that harvest is quickly coming to an end and with it any chances of a “surprise,” there’s just not a lot of enthusiasm about the November WASDE, scheduled to be released on Tuesday, November 10th.

S&P 500 Continues to Improve

The S&P 500 posted a third week of solid gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased slightly, as did ex-energy. Oil was also slightly lower. With regard to currencies, the most noted move was strength in the Korean won and Thai baht. Korea reported rather strong GDP growth in 3Q of 5% annualized, which was better than expected. China moved to lower interest rates last Friday morning in an attempt to further stimulate their growth prospects.

Japanese Crude Runs Ease; Crude Stocks Jump

Crude runs eased along the lines suggested by our maintenance schedules. Crude imports rose sharply and stocks built 4.9 MMBbls. Finished product stocks drew slightly, but gasoline, naphtha, gasoil, and kerosene stocks built as those demands eased back. The indicative refining margin remains good, though most cracks, other than naphtha, eased.

Seasonal Demand Rises, but Supply Gains Are Formidable

A wide disconnect between incremental, fully operational and functional liquefaction capacity and incremental buying is emerging with no signs of abatement in the coming years.

Global Equities Post a Another Strong Week

Global equities gained again. In the U.S., many of the tracking indices were positive on the week, with technology and industrials performing the best. Retail and energy lagged and were lower on the week. Internationally, many of the tracking indices gained. The Japanese tracking index did slightly better than the U.S. market, but most of the other international indices did not do as well. Latin America was the only index to post a decline.

China Using Carrot Rather than Stick to Rationalize Tea Kettle Refineries

For years, China has been trying to rationalize its inefficient tea kettle refining capacity despite opposition from local/provincial governments and the tea kettle refining companies. China seems to have now found an effective strategy by offering crude import quotas to those refiners rationalizing small CDUs. Eight refiners have already applied for or been granted crude import quotas. PIRA expects the total effect will be a rationalization of 500-600 MBD of capacity, higher utilization of remaining Chinese refining capacity, and higher quality products.

Azerbaijani Company AzMeCo Suspends the Purchase of Gas for Methanol

“Due to the fact that the world prices for methanol decreased, the purchase of gas from Gazprom at the current price has become unprofitable for the company,” said AzMeCo. “As a result, it was decided to suspend the purchase of gas, as methanol production is unprofitable under existing conditions.” During the contract period, AzMeCo received more than 100-mmcm of Russian gas. Azerbaijan Methanol Company (AzMeCo) planned to purchase up to 2-bcm/y of gas from Russia’s Gazprom Export.

U.S. Refiners Creep Capacity Faster

2014 was a banner year for U.S. distillation capacity creep; 2015 also appears to be a good year for creep, although below 2014. With favorable refining margins and crude runs approaching effective capacity, refiners are able to justify a greater amount of creep investment.

Costs Are Down in Low Price Environment, but Current and Future Supplies Are Still at Risk

The current low oil price environment has made it cheaper to operate existing oil fields and to develop new supplies. Compared to last year, Brent-equivalent costs to produce current supplies have decreased by around 9%, while costs to develop new supplies have been reduced by 25% for U.S. shale and 12% for non-shale projects worldwide. However, in spite of these reductions, some high-cost existing production remains at risk of being shut in were Brent prices to fall below $40/Bbl. Also, many new projects require Brent prices well above $50/Bbl to become profitable. Low-cost, non-OPEC supplies and the likely increase in OPEC supplies will not be sufficient to meet future demand. Therefore, higher-cost supplies, including oil sands and deepwater, will be required to balance global supply and demand, requiring prices to rise from current levels.

Analysts Obsession with Conventional Oil Discoveries May No Longer Be Warranted

Conventional oil discoveries have dropped significantly in the past 50 years in spite of record exploration activity, especially in recent years. In the past, this would have driven concerns over reserves replacement, R/P ratios and remaining years of production. However, as unconventional volumes (bitumen/extra heavy oil and shale oil) play a more significant role in meeting future oil demand, the focus increasingly shifts from reserves to costs. But, higher oil prices will still be required for development of high cost unconventional volumes needed to meet demand growth and decline from existing fields.

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.

11GlobalDatalogoAs Mexico’s first offshore bidding round for already discovered fields saw bids significantly higher than the minimum set up by the government, adding further transparency to the process would be positive for the round as it approaches its deepwater phase, according to an analyst with research and consulting firm GlobalData.

Adrian Lara, GlobalData’s Senior Upstream Analyst for the Americas, says that the Mexican government’s announcement of the minimum profit oil worked out well, especially in discovered fields, as opposed to the disappointment surrounding the exploration blocks on offer during the previous phase of Round 1.

The minimum for Area 1 of this second phase was established at 34.8% and the bids ranged from 46.7% to 86.7%. GlobalData’s assessments suggest that assuming a price of $60 per barrel, these fields would be profitable with bids of up to 65%. Four of the nine bids were above this threshold, and two were significantly higher.

The size of the winning bid indicates that competition drove bidding higher because the floor was known. The previous phase also involved determining the potential floor for bidding, which could have led to negative bidding strategies designed to minimize outlay.

Lara comments: “So far, the particular design of Round 1 with its phases has functioned well, as it incorporates lessons learned in the previous phase.

“The success of the last phase, for example, was in part due to the failures of the first phase, namely that not disclosing the minimum adds uncertainty to the geological risk and ultimately lowers the incentive to bid high, or even bid at all.”

While GlobalData believes that the most promising deepwater prospects are the three discoveries Trion, Exploratus and Maximino being offered by Pemex as farm-outs, bidding activity in the next deepwater exploration block phase could be positively impacted if at least the framework for the farm-out agreements is released.

Lara explains: “Building on the premise that disclosing the minimum decreased uncertainty and added a degree of transparency to the process, it would be positive for the next phase if CNH provided more transparency on the terms of the farm-outs.

“This would provide a more comprehensive perspective on the final deepwater phase of the Round 1 and finally set an optimistic precedent for future bidding rounds,” the analyst concludes.

17piper-jaffray-logoPiper Jaffray Companies (NYSE: PJC), a leading investment bank and asset management firm, today announced that it has reached a definitive agreement to acquire Simmons & Company International (“Simmons”).

Founded in 1974, Simmons is one of the largest and most experienced independent investment banks specializing in the energy industry, offering M&A advisory, capital markets execution and investment research. With over 170 investment banking, sales & trading, equity research and private equity professionals, the firm’s broad range of coverage spans the entire energy spectrum, including energy services & equipment, exploration & production, midstream and downstream. The average tenure for a managing director at Simmons is in excess of 15 years, and during its 41-year history, Simmons has executed more than 830 strategic advisory transactions, over 330 private and public financings, representing total transaction value of approximately $260 billion. Simmons also manages two private equity funds in the U.K. that specialize in energy. Headquartered in Houston, the firm also has a major presence Aberdeen, as well as offices in London and Dubai.

“Simmons is the preeminent firm in energy investment banking and we are proud to have the opportunity to partner with such an accomplished team. This addition represents a major step in our drive towards $500 million in annual investment banking revenue,” said Andrew Duff, chairman and CEO of Piper Jaffray.

“This is a milestone transaction as we meaningfully increase the firm’s investment banking footprint. Expanding into the energy sector has been a long-term goal for us and we are pleased to have found the ideal partner to fulfill this strategy,” added Scott LaRue, global co-head of Piper Jaffray investment banking. “We look forward to combining our broader product suite with Simmons’ sector expertise, unmatched reputation and extensive relationships to build on the firm’s long history of success.” “Simmons has been a name synonymous with excellence in energy investment banking and providing quality service to clients for over 40 years. This transaction is a logical step in taking our firm to the next level as we expect our entire investment banking and equities groups to transition to Piper Jaffray in a seamless manner. Our clients will greatly benefit from the enhanced breadth of products and capabilities that Piper brings to the table,” said Michael Frazier, Simmons’ chairman, president and CEO. “On behalf of my partners, we are additionally pleased to be combining with a firm that shares similar values and our client-focused culture.”

Transaction Overview
Piper Jaffray will acquire 100% of Simmons for a total consideration of approximately $139 million, consisting of $91 million in cash and $48 million in restricted stock. Also, Piper Jaffray has committed an additional $21 million in cash and stock for retention purposes. The restricted stock included in the total consideration includes non-compete and non-solicitation agreements. Additional compensation may be available to certain individuals subject to exceeding certain revenue thresholds during the first three years that Simmons is a part of Piper Jaffray. Key Simmons professionals have entered into employment agreements with Piper Jaffray that become effective concurrent with the transaction’s close.

Piper Jaffray intends to operate the business under the Simmons brand as a Piper Jaffray company and it will continue to run its energy practice from Simmons’ Houston and Aberdeen locations. The business will be integrated into Piper Jaffray’s equities and investment banking group, with senior leaders at the firm assuming senior leadership roles with Piper Jaffray. Fred Charlton will be appointed chairman of energy investment banking and will serve as co-head of energy investment banking together with James Baker. Bill Herbert will become head of global energy research, and Will Britt will continue to lead specialized energy equity sales. Ira Green will become head of energy capital markets and Coling Welsh will become head of international energy investment banking and executive chairman of Piper Jaffray’s U.K. subsidiary, and continue to lead Simmons’ international activities. Michael Frazier, Simmons’ chairman, president and CEO, has entered into a consulting agreement with Piper Jaffray and will continue to serve in a senior role that leverages his relationship and experience.

Simmons generated revenue of $96 million, including $65 million in advisory revenue, in its most recent fiscal year ended June 30, 2015. The transaction is expected to be accretive to Piper Jaffray’s non-GAAP earnings during the first full year of operation. Piper Jaffray intends to offset dilution from shares issued in the transaction with future share repurchases under its existing share repurchase program.

The transaction is subject to regulatory approval and customary closing conditions and expected to close in the first quarter of 2016.

14DWMondayHistory repeats itself. In January 1959 the first LNG vessel shipped out from Lake Charles, Louisiana to deliver its trial cargo to Europe. Soon, another important LNG shipment is going to leave the Gulf of Mexico. This time, the destination is Lithuania – one of the first deliveries from Cheniere’s Sabine Pass LNG export terminal will be sent to Port of Klaipėda in January 2016.

Driven by significantly higher natural gas prices compared within Western-Europe, Lithuania took the decision to reduce dependence on Russia by building an LNG import terminal. The project was executed within three years and the Independence FSRU (Floating Storage and Regasification Unit) started operations in December 2014. If planned gas infrastructure developments are delivered in the future, Lithuania will be able to cover domestic natural gas demand from LNG and even export gas to its neighbors. As a result, Gazprom has offered a gas price discount of almost 20% to the country.

Other Central-Eastern European countries are seeking to diversify their gas import sources through LNG. After a two-year project delay, the Polish LNG terminal is scheduled to start its commercial operation in May 2016. The Croatian Government has also announced the construction of an LNG import terminal as a strategic investment project which has recently received the location permit on Krk Island. If Hrvatska LNG passes the final investment decision next year, the plant could be commissioned in 2019.

Currently, 26 LNG import terminals are in operation in the EU-28 countries, with annual regasification capacity of 195bcm. An additional 23bcm/y of capacity is currently under construction with 13bcm/y expected to come online this year with the start of the Dunkerque LNG Terminal in France. Total European LNG import capacity already exceeds recent Russian exports volumes. With extensive LNG export infrastructure developments in North America and Australia, and slowing gas demand growth in China and Japan, more LNG is anticipated to be available to European gas markets, potentially reshaping the continent’s natural gas landscape significantly.

Patrik Farkas, Douglas-Westwood Houston
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15DWMondayThe recent JCPOA agreement reached between Iran and the P5 +1, and approval of by the Iranian Parliament, is a big step forward in normalizing Iran’s relations with the international community. In anticipation of the removal of the economic sanctions, Iran has produced a list of fifty oil & gas projects worth an estimated $185 billion that it intends to develop. These projects will be presented at a post-sanctions summit in London planned for February 2016, and auctioned to secure much-needed foreign investment in Iran’s oil & gas sector. A number of IOCs, including BP, Shell and ENI, have expressed interest in re-entering the Iranian market.

Despite these positive developments, DW takes a conservative view with regards to Iranian hydrocarbons production. Total onshore production post-2015 is expected to rise steadily at a 2% CAGR through to 2021, with additional output coming predominantly from projects in the Khuzestan region, including the North & South Azadegan field developments. Several phases of the giant South Pars gas and condensate field development are expected to come onstream within the next few years, contributing to a significant rise in offshore hydrocarbons production to over 5 mboe/d in 2019. However, DW does not expect Iran to reach its 2016 target of raising total oil production to over 4 mb/d until 2018.

There is significant upside potential for this forecast, with projects such as the North Pars, Golshan and Ferdowsi field developments listed amongst those Iran plans to auction for foreign investment. However, Iran’s ability to secure the necessary investment is dependent upon its compliance with the terms of the JCPOA, some of which could take several months to implement. Smooth implementation of the JCPOA will also depend on a continued dialogue between Iran and International Atomic Energy Agency. It is therefore unlikely that Iran will be able to fulfill the commitments needed to lift the sanctions before the end of 2015 or early 2016. Uncertainty also remains surrounding the structure of the new Iranian Petroleum Contract, due to be introduced at the London summit. Therefore, despite the positive outlook for hydrocarbons production, limitations to growth in the short-to-medium term remain.

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13PIRALogoNYC-based PIRA Energy Group reports that problems at Canadian oil sands facilities curtailed production and lifted northern differentials last month, while outright crude prices registered a very mild recovery. In the U.S., total commercial stocks built less than last week, albeit to a new record level. In Japan, crude stocks posted a large rise, but finished products drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

Problems at Canadian oil sands facilities curtailed production and lifted northern differentials last month, while outright crude prices registered a very mild recovery. Crude stocks declined from Alberta to Oklahoma, but rose along the Gulf Coast, lifting Cushing WTI values relative to foreign and coastal grades.

Weather Emerges to Add Demand Early in the Fourth Quarter; Supply Comes From…

The PIRA 10-day daily demand outlook shows a significant increase in demand emerging due to colder than normal weather. The colder-than-normal weather is not emerging in the heart of the winter, but it is emerging at a time when minor supply side questions have been raised on several fronts.

Colder Weather and Poor Wind Generation Underpin Short-term Prices

While French nuclear unavailability has returned well above year ago levels, colder weather will add about 5 GWs of demand on average in France in the upcoming week, firming day ahead prices. The upcoming week will provide some indications of the potential swings in French exports under a colder weather scenario, especially in light of the recent increase in the NTC with Spain and introduction of the FB Market Coupling with CWE.

U.S. NGLs Rally with Crude

The U.S. NGL complex rose with broader energy markets last week. Crude oil’s 9% rally helped Mt Belvieu propane prices to increase by 4.2% to 49.1¢/gal for November delivery – this despite a 1.6 MMB increase in stocks to a record 95.9 MMB. Butane at the market center improved by nearly the same amount, while purity ethane prices jumped to near the strongest levels of the year, just below 20¢/MMBtu.

Coal Moves Higher On Oil and Gas Rally, Labor Strike

The coal market experienced its first weekly rally since early August, with prices rising by between $0.70/mt to $1.45/mt across the forward curve. The rise in pricing was mostly due to the labor strike in South Africa, but also stronger oil and gas prices. While the loss of some South African coal is unquestionably bullish for pricing, the magnitude of the oversupply in the global seaborne market will limit the upside for pricing even if it lasts for several weeks. PIRA continues to believe that coal prices over the next 90 days have limited upside, although an expected rise in oil prices in the latter stages of 2016 should stimulate coal pricing somewhat as costs rise. However, until demand and supply structurally recalibrate, any bullish rally will likely be tamped down by the prevailing fundamentals.

California Emissions Trading System Market Outlook

The surrender for Compliance Period 1 (2013-14) will take place in less than a month, on Nov. 2nd. Offset usage will ultimately determine the size of the bank carryover. While the CP1 offset limit is about 26 MT, sources do not appear well-positioned to maximize offsets use. CARB is engaging stakeholders in developing post-2020 regulations to implement the 2030 target (Scoping Plan), to amend the cap and trade and to comply with the Clean Power Plan. While CARB is looking to streamline the offsets process, at the same time it has moved to invalidate additional offsets. In moving forward with its own ambitious, economy-wide and international climate agenda, CA does not appear to make interstate carbon trading under the CPP a priority. Allowance prices held steady in Sept., although moved up at the end of the month. PIRA continues to expect a rise in allowance prices through the end of the year, with floor price expectations for 2017 starting to play a larger role.

U.S. Ethanol Prices Increase

Prices rose the week ending October 2. Higher corn and oil assessments provided support, but manufacturing margins decreased partly due to lower co-product DDG values.

WASDE Corn Surprise

A decrease in corn acreage was expected, an increase in yield was not. In the end, carry-out for the current marketing year was reduced 31 million bushels, not enough for the Managed Money net long which added 50K longs in the week prior to the report. For now, the corn market seems once again stuck in the $3.75 to $4.00 range, making trading difficult to say the least.

China Is Not Facing Currency Crisis; Key Central Banks Update Their Message

After an unexpected currency devaluation in mid-August, China’s monetary authority has drawn down foreign exchange reserves aggressively to defend the post-devaluation exchange rate. Unlike high-flying emerging Asian economies in mid-1990s, China is not facing a balance-of-payment crisis. But the government is still likely to guide the currency lower in the not so distant future. Communication materials were released by the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan this week. Financial markets now widely expect the BOJ to expand its quantitative easing program in end-October.

U.S. Commercial Stock Build Slows

Total commercial stocks built less than last week, albeit to a new record level. They also built less than last year, so the surplus narrowed. Driven primarily by weakness in other demand, the latest four-week average of total petroleum demand was negative for the first time since earlier in the year. The decline in crude runs due to refinery maintenance dominates the crude balance, and we expect fall maintenance to peak the week of October 9. The latest monthly average of weekly domestic crude supply continues to decline.

US Gulf/ Mideast Gulf Competition to Emerge This Winter

The competition between Qatar and the U.S. for market share in N.W. Europe is about to heat up with first volumes from Sabine Pass coming this winter. Both suppliers have contract obligations to varying degrees for N.W. Europe specifically, where the spot market is going into the winter with relatively low stocks and is counting on LNG, to a larger extent, to balance seasonal increases.

U.S. Ethanol Production Higher

U.S. ethanol production climbed the week ending October 2, rising to 950 MB/D from 943 MB/D in the prior week. Inventories were essentially flat, building by only 30 thousand barrels to 18.8 million barrels.

Key Indicators Show Strength

The S&P 500 posted strong gains for the week, the best weekly performance since mid-December ‘14. All the related indicators also improved (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities improved, both energy and ex-energy. With regard to currencies, many of the currency groups that had been performing poorly posted noted strength. Emerging Asia, along with commodity producers such as Russia, Brazil, Canada and Australia all posted gains. Indian, South African and Turkish currencies also displayed strength.

Japanese Crude Stocks Post a Large Rise, but Finished Products Draw

For the week, crude runs eased slightly with higher imports such that crude stocks posted a large rise to begin October. Finished product stocks drew on lower gasoline, gasoil, and naphtha inventories. Gasoline demand eased, but so did yield and stocks drew slightly. Gasoil demand rebounded from holiday impacts, while yield rose, but exports ebbed and stocks posted a moderate draw. Kerosene demand rebounded with lower yield and the stock build rate moderated. Indicative refining margins remain good.

Global Equities Post Another Strong Rebound Global equity markets posted a solid rebound this week, the second in a row. In the U.S. market, energy, materials, and industrials all outperformed by a large margin. They utility index was the laggard, but still posted a gain. Internationally, all the tracking indices again advanced with Latin America and emerging markets doing the best.

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.

10MarathonlogoMarathon Oil Corporation (NYSE: MRO) announces that the Company has signed an agreement for the sale of its operated producing properties in the greater Ewing Bank area and non-operated producing interests in the Petronius and Neptune fields in the Gulf of Mexico for $205 million. The buyer will assume all future abandonment obligations for the acquired assets. These assets represent a majority of the Company's operated and non-operated producing properties in the Gulf of Mexico. The effective date of the transaction is Jan. 1, 2015. Closing is expected before year end.

Marathon Oil will retain its interests in certain other producing assets and acreage in the Gulf of Mexico, as well as its interests in the Gunflint development and Shenandoah discovery.

Marathon Oil Corporation is a global exploration and production company. Based in Houston, Texas, the Company had net proved reserves at the end of 2014 of 2.2 billion barrels of oil equivalent in North America, Europe and Africa. For more information, please visit the website here.

16PIRALogoNYC-based PIRA Energy Group reports that Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. In the U.S., commercial oil inventories fell this past week. In Japan, crude stocks posted a strong draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. However, the price increase of over $2/Bbl on October 28 could be an early taste of a rally that PIRA expects once the January contract is the front-month price and December inventory declines become evident. Refinery margins will hold up better than generally expected.

More Intensive Price Weakness at Henry Hub Overshadows Broader Market Weakness

The broader market downturn has gathered momentum despite many prices decoupling from Henry Hub in late October. While the dust has not settled, all upstream markers are now floundering near the $2 mark, closing this year’s longstanding gap between Dominion South and Westcoast St. 2 prices. The stepped-up assault against HH due to storage congestion in the Producing Region will end sooner rather than later, specifically when withdrawals commence. However, that is not likely until mid-November, and the timing and sustainability of a price recovery is murky given bearish weather risks.

Exports/Renewables Push Germany Up; France Bearish

PIRA’s price forecasts for Germany have been moved up on the back of a less bearish demand outlook, resilient exports, and a downgraded renewable generation outlook. The timing of the lignite stand-by reserve is slightly more bullish than expected, but the interaction between this stand-by reserve and market prices will depend on details of the dispatching. However, hedging of these units is no longer needed, which is bullish for the back of the forward curve.

Asian LPG Prices Push Higher

Asian LPG prices jumped higher on stronger crude and as speculators expected Saudi contract prices for November to increase by as much as $40/MT from current levels. The propane FEI gained 7.8% to $471 by Friday’s settle. Butane gained to widen its premium over propane to over $20/MT. With both LPG components trading at a premium to naphtha, the feedstock is priced out of petrochemical usage.

Near-Term Coal Pricing Outlook Remains Soft; 4Q16 Pricing Turns Somewhat Bullish

Despite some strengthening currencies vs. USD, Pacific Basin physical prices moved slightly lower in October due to a weaker oil market, Chinese coal pricing cuts, and insufficient supply discipline from Australia. With no clear evidence that China’s thermal coal imports will soon stabilize, PIRA maintains a bearish outlook for the Pacific Basin. Atlantic Basin prices moved somewhat higher in October, with stronger European coal burn giving CIF ARA (Northwest Europe) and FOB Richards Bay (South Africa) prices a boost. Similar to the Pacific, we have lowered our previously bearish forecast again, although we are now above forward for 4Q16.

Ethanol Prices Exhibited a “V-shaped” Pattern in October

U.S ethanol prices fell early in the month, but they rebounded during the second half as the market tightened. D6 RIN prices soared.

Wheat Shorts Cover

Friday’s Commitment of Traders report confirmed one worst kept secret in the markets while the heavily-watched wheat short declined enough to give the Chicago market a bit of a breather, though Kansas City saw the addition of more shorts.

Climate Policy in Flux in Canada

The victorious Liberals had the least specific climate platform and we do not expect changes to Canada’s GHG targets for global negotiations. Provincial premiers will join the talks. A broader climate policy discussion will follow. Ontario and Quebec announced aggressive 2030 goals, and Ontario continues planning for a carbon market link with California and Quebec. Alberta’s new government tightened the large emitter carbon program, impacting oil sector and pressuring coal. British Columbia began working to limit carbon intensity of LNG.

Canadian Elections: Liberal Victory Does Not Materially Change Oil Pipeline Outlook

The surprisingly decisive majority win of the centrist Liberal Party in Canada’s October 19 federal election does not materially change PIRA’s long-term outlook on new Canadian oil pipelines. PIRA still believes that at least one new Canadian pipeline project will come online at some point after 2020. This is in line with our view that crude price weakness and a slowdown in western Canadian production growth have delayed the urgency for new pipeline capacity until post-2020. That said, the Liberals’ support for a carbon price and promise to strengthen the environmental review process for oil projects have the potential to increase costs or contribute to delays for the oil industry.

Global Equities Slightly Lower

Overall global equities were down slightly on the week, though the U.S. S&P 500 gained a bit. For the U.S., retail and consumer discretionary were the best performers. Energy was little changed. Internationally, all the tracking indices lost ground with emerging markets, emerging Asia, and BRICs putting in the worst performances. With regard to individual markets, Argentina did the best for the week, posting a nearly 10% gain, and holds a 33% year-to-date gain, in dollar terms.

Asia-Pacific Oil Market Forecast

High stocks, both crude and product, along with October crude stock building because of refinery maintenance were enough to force prices to retrace earlier gains. Another short-term negative for price is the desire by some companies to reduce inventories for end-year accounting purposes (LIFO). Longer term, the market will increasingly need additional barrels, even after accounting for the return of Iranian barrels in spring 2016. By 2Q16, the market will have to begin signaling that more oil will be required and prices should begin a more sustained recovery.

Strong Supply Undermines Focus on Improving Demand

Buyers of Russian contract gas are not wasting any time in pursuing the minimum annual total even if they believe that oil-indexed prices will move lower. With LNG supply building on the water, pressure on spot prices will increase over the Gas Year and contract gas buyers want to be in a flexible place to take advantage of the price weakness.

Western Grid Market Forecast

Compared with September, spot on-peak power prices were down across the board in October, led by a $3/MWh drop at Mid-Columbia. Palo Verde prices fell by ~$2/MWh and the California hubs saw only slight declines. Warmer than normal weather and generation/transmission maintenance lent support to California electricity prices. Changes to the forecast include downward revisions to gas prices through the first half of 2016 and a lower hydro generation forecast based on early runoff projections. As a result, we remain bullish on Mid-Columbia heat rates through 1Q16. Southwest implied gas heat rates should also benefit from lower gas prices, with CCGTs again displacing higher cost coal units in the Southwest. However, all markets look weak during 3Q barring sustained hotter than normal conditions.

Dry Bulk Freight Market Struggles to Find Upward Momentum

Cape freight rates weakened during October with the 5TC average falling from just under $15,000/day to close to $9,000/day. Bunker fuel prices remain low, providing little support for rates. Australian iron ore exports dipped slightly month-on-month from strong September levels, with Brazilian iron ore loadings showing a similar trend. New Cape deliveries have started to outstrip Cape demolition, leading to a return to Cape fleet expansion. PIRA has taken a more bearish outlook for Cape freight rates through 2016, largely due to a notable drop in Cape port delays and low bunker prices capping rate increases.

U.S. Ethanol Demand Up; Stocks and Production Decline

U.S. ethanol-blended gasoline manufacture has risen for three consecutive weeks, reaching a near-record 9,162 MB/D the week ending October 23. Ethanol inventories declined by 599 thousand barrels to 18.3 million barrels, the lowest level of the year.

Constructive Tone of Economic Data Is Resulting in Improved Market Sentiments

The mood in global financial markets brightened considerably during October, as major market indices climbed back to levels last seen in mid-August. Recent dovish actions by developed world central banks likely played a role in boosting market confidence. But encouraging data from developed and emerging economies were much more important influences in all likelihood. This report also discusses U.S. GDP and other recently released third quarter data.

U.S. Commercial Stocks Draw

For the first time in several weeks, overall U.S. commercial oil inventories fell this past week. Strong reported demand, up 830 MB/D on the week, at the same time as refinery operations are still being impacted by large scale plant maintenance, caused product stocks to decline. The crude stock build moderated as runs increased and crude imports declined. The year-on-year stock surplus still managed to increase almost 5 million barrels to 170 million barrels as this week last year had an even larger stock decline.

Production Anemic, Demand Strong Implies More Upside Risk to U.S. Exports

Year-on-year net shipments of U.S gas into Mexico remains stout. For October, exports are projected to average ~2.9 BCF/D, a whopping gain of ~0.9 BCF/D year-on-year. Growth is being driven by both rising demand and dwindling supply. Notably, domestic natural gas production is running ~0.5 BCF/D lower year-on-year, a development that will likely persist as PEMEX budgets remain constrained and gas rig counts remain at record lows. But higher demand reflects a trend with staying power as new gas EG capacity and industrial projects come online. PIRA’s Reference Case exports to Mexico appear increasingly subject to upside risks if new pipeline interconnectivity comes online next year in a timely fashion.

Biofuels Programs Move Forward in Over 60 Countries

The market for ethanol in China has opened up. The country plans to resume building corn-based ethanol plants after a decade-long ban.

S&P 500 Continues to Gain

The S&P 500 posted a fourth week of gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased, as did ex-energy. Oil was also lower. Palladium, which had posted six straight weeks of gains, was modestly lower for the third straight week, while aluminum fell again. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro and key eastern European currencies.

Japan Crude Runs Soon to Rise, Crude Stocks Post a Strong Draw

Crude runs eased again and should be reaching a seasonal bottom as turnarounds begin to wind down. Crude imports were very low and stocks drew 5.5 MMBbls. Finished product stocks built slightly due to higher naphtha and kerosene stocks. Product demand, while lower for the single week, has begun to rise on a trend basis. The indicative refining margin was modestly higher on the week as all the cracks other than gasoline improved.

Bangladesh Revises Gas Rates in Preparation for LNG

The government of Bangladesh decided to combine the rate for locally extracted natural gas with re-gasified imported LNG as recommended by a six-member expert committee. Meanwhile, the government is set to prepare the final draft in consultation with Excelerate Energy (EE) for installing the LNG terminal at Moheshkhali. As per the deal, the company will implement the project on build-own-operate-transfer (BOOT) basis to meet the growing demand of the gas and it would be transferred to the government after the 15 years.

Lower Refinery Maintenance, Higher Crude Runs Drive Expected November and December Crude Stock Draw

The latest view of the October U.S. crude balance indicates that monthly end-October crude stocks will set a new U.S. record, surpassing the previous April 2015 peak by 1.3 million barrels, to 485.1 million barrels. We believe that stock levels will fall quickly from that level, however, as refinery CDU outages rapidly decline and crude runs pick up. We also expect domestic crude supply — crude production plus balance item — will continue to erode, while crude net imports should be largely unchanged from October levels. For the first quarter of 2016, higher crude runs, lower domestic crude supply, and somewhat lower crude oil net imports result in a significantly lower stock builds, compared to the first quarter of 2015.

Henry Hub Free Fall in the Face of New U.S. Supplies Implies Weakness for NBP

Extremely strong gas exports out of Norway and Russia are playing a role in cooling off NBP prices, but it is more LNG supply that would accelerate a decline in November and December assuming normal weather. Confidence levels regarding the speedy availability of attractively priced Atlantic Basin cargos are justifiably high given weak demand in Asia, combined with an ongoing surge in supply there.

Slow Capital Formation Has Inhibited Oil Demand

The decline in oil prices has not led to the promised increase in GDP. In fact, labor productivity growth, the presumptive engine of increased GDP growth, has actually slowed in the developed countries. Slower labor productivity growth is attributable to slower rates of capital formation. Because oil and capital are complementary factors of production, oil demand growth has also been adversely affected. We believe that capital formation has been delayed. The factors that pull the economy out of recession are out of sequence. Instead of residential and non-residential fixed investment being the prime movers for GDP growth, as has been the case in past recoveries, the current recovery in the U.S. was led by the household sector. Expansionary monetary policy repaired household balance sheets, which led to increased household consumption. We believe that in the next two years there will be a substantial pick-up in business fixed investment. Following the Keynesian paradigm, this will be followed by a new bout of consumer spending. Both the increase in capital formation and the subsequent increase in consumer spending will lead to increased oil demand growth.

North American GHG Quarterly Update: Canada

The victorious Liberal party had the least specific climate platform of the three major parties in the election, and we do not expect changes to Canada’s GHG targets for the global UNFCCC climate negotiations. Provincial premiers will join the Paris talks, highlighting the new focus on provinces. A broader climate policy framework will be discussed after Paris, as additional policies will be needed for Canada to meet 2020 and 2030 targets. Ontario in May announced an aggressive 2030 emissions target of a 37% reduction vs. 1990; Quebec followed in September with a 2030 target of a 37.5% reduction. Both provinces will likely need to address the transport sector to meet targets. Ontario continues planning for a carbon market link with California and Quebec, with the program start as early as 2017. Alberta’s new NDP government has set up a Climate Change Advisory Panel to drive discussions and advise the Minister. Alberta also tightened its large emitter carbon program, with greater intensity reductions and higher compliance fees impacting the oil sector and pressuring coal generation. British Columbia began work on regulations designed to limit the carbon intensity of LNG projects.

U.S. August 2015 DOE Monthly Revisions

DOE released its final monthly August 2015 (PSM) U.S. oil supply/demand data last week. August 2015 demand came in at 19.81 MMB/D, which is 50 MB/D lower than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 429 MB/D, largely a function of the 704 MB/D reduction in “other.” Distillate was revised higher by 201 MB/D and resid demand raised 82 MB/D. Total demand for August 2015 versus August 2014 grew 414 MB/D, or 2.1%, a slowdown from the 700 MB/D growth versus year-ago seen in June and July 2015. Kero-jet demand again outperformed the barrel average, higher by 4.9%, similar to what was seen in July. Distillate lagged the barrel average, up only 0.3%, while gasoline and “other” also underperformed slightly, but each still up about 1.7% versus year-ago.

North American Gas Forecast Monthly

For many months, PIRA has warned of an impending Producing Region (PR) “storage crisis” unfolding in the early stages of the heating season due to the capacity constraints and record high seasonal storage carries throughout the summer. With threadbare margin available to avoid extreme congestion and a related meltdown of Henry Hub (HH) prices, the past month’s mild weather, and more of the same expected for November have been more than the market could handle. Consequently, the past week’s HH cash price crash from the mid-$2.50s toward $2/MMBtu should not be perceived as an “out of the blue” shock.

October Weather: U.S. and Japan Warm, Europe Cold

October weather for the three major OECD markets turned out to be 3% colder than the 10-year normal and the resulting oil-heat demand effects were 64 MB/D above normal. On a 30-year-normal basis, the markets were 7% warmer.

Gas Flash Weekly

For some time, PIRA has emphasized downside Henry Hub (HH) prices risks as the heating season looms and available Producing Region storage capacity dwindles. The more than 40¢ plunge in the November contract in its last six days took it to its lowest level in more than three years. Together with this week’s acute weakness in the HH cash market, these issues have highlighted a transition of storage congestion from a near-term threat to a very real factor impacting both injections and HH prices.

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

14PIRALogoNYC-based PIRA Energy Group Reports that there are further markdowns to long-term fossil fuel prices. In the U.S., low runs and stronger demand pull product stocks lower and push crude stocks higher. In Japan, runs continue to ease and crude stocks are sharply lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Low Runs, Stronger Demand Pull Product Stocks Lower, Push Crude Stocks Higher

Refinery turnarounds continue to dominate the U.S. petroleum balance sheet. Low crude runs are causing crude stocks to build, and product stocks to draw. Total weekly petroleum inventories set a new record, and increased their surplus over last year. Recent trends in gasoline and distillate demand coming in under modeled values could be an indication of an upward revision when we see the monthly data, but it also could be an indication of weakening economic trends. We expect one more week of peak refinery maintenance, followed by crude runs trending back up.

Even Lower Price May be Needed

With October halfway through, U.S. balances remain on course to end the month with storage near 4 TCF, which would mark a new high and also best the year ago level by ~0.4 TCF. Underlying balances for the month are pointing to more of the same with production still largely range bound and gas burn in the power sector somewhat stronger year-on-year. In sum, though, storage refills have remained relatively stout.

Eastern Grid/ERCOT Market Forecast

On-peak prices recorded a strong m/m increase (+33%) in Ontario (nuclear outages), saw moderate weather-related gains in the Northeast (MA Hub, NY-J, NY-G and PJM-W), fell slightly in the Great Plains (rising wind generation), and declined more sharply in ERCOT and MISO South (fading cooling loads). Northeast winter prices have been revised down as weaker fuel oil and LNG prices are expected to limit upside risk in gas prices. Winter prices are down year-on-year in most markets assuming normal weather (Feb 2015 was much colder than normal).

Bearish Fundamentals Continue to Depress Coal Pricing

The coal market returned to its downward trajectory this week, with prices essentially giving back all the gains made last week. Weaker oil prices, the end of the labor strike in South Africa, the extension of the lifting of the rail ban in Colombia, and news that Chinese import declined again in September all served to push the market lower. The market continues to search for a bottom, but with no end in sight to the declines in Chinese imports (particularly with domestic producers cutting prices) and limited production cutbacks, PIRA believes that this bottom has not yet been reached.

Pakistan Reveals RLNG Prices

Pakistan’s Oil and Gas Regulatory Authority (Ogra) has issued the much awaited RLNG (Regasified liquid natural gas) prices and announced the provisional rates of the gas. The authority, however, refused final determination of the RLNG prices until certain condition are met…the authority has agreed to determine the RLNG prices on provisional basis, the notification said.

Asian LPG Outperforms, Arbs Open

Asian LPG markets were by far the best performers last week, especially considering they didn’t have a chance to perform in the West’s Friday afternoon rebound. Propane and butane both lost around 2.5% of value, far less than seen in Western markets. The relative strength in Asia led to the opening of the spot arbitrage from the U.S. by the largest amount since June.

RGGI Nuke Retirements Tighten Balances

Nuclear units are a key source of non-emitting generation in the RGGI cap and trade region. Entergy announced it would close Massachusetts’ Pilgrim nuclear plant (680 MW) no later than June 1, 2019 and the James A. Fitzpatrick plant in NY, is facing some of the same challenges. Replacing power from these two plants with in-region natural gas combined cycle generation would add to emissions, challenging the RGGI compliance cushion.

U.S. Ethanol Prices and Margins Lower

Ethanol prices fell the week ending October 9, pressured by lower corn prices. Margins also declined, partly due to a drop in co-product DDG values.

Iowa is Dry and Confused

After a brief two-day visit to Iowa last week, two things are certain; it’s extremely dry, resulting in little propane use for crop drying, and there’s a lot of uncertainty about what 2016 will bring acreage-wise with these below profitable-level-prices in corn.

Freight Market Outlook

Rising tonnage demand and modest fleet growth have allowed excess capacity to be absorbed in 2015 and this has produced the strongest tanker markets since 2008, helped further by very cheap bunker fuel prices. But volatility remains as evidenced by the wide swings in tanker rates. VLCC markets staged a remarkable rally rising from their lowest levels of the year in late August to their highest in early October. But so far the knock-on benefits of higher VLCC rates have not filtered down to the other tanker groups, creating some unusual rate spreads and perhaps signaling that the VLCC rally was overdone.

Euro Area’s Economy Is Strengthening Broadly, but U.S. Is Still Ahead of the Curve

The U.S. and the euro area updated data on consumer spending, inflation, and manufacturing output this week. Key takeaways: household spending data have been mostly solid; excluding energy and food prices, inflation has been trending resiliently; and a recent slowing in U.S. manufacturing growth is potentially a worrisome sign. Next week’s major data releases include third quarter GDP from China.

Canadian Federal Elections: Lack of Outright Majority Signals Political Uncertainty To Come

Only a few days remain until Canada’s October 19 federal election, and the race is looking increasingly tight. At this point, it appears unlikely that any party will win an outright parliamentary majority. But at the very least an end to the Conservative Party’s four years of majority rule would have implications on the energy sector. On balance, the Conservatives are more supportive of pipelines and LNG projects, while the centrist Liberals and center-left New Democratic Party (NDP) favor more stringent carbon policies. Although the makeup of the next government is highly uncertain, we believe the lack of an outright majority will make the government formation process more complicated and reaching a consensus on core issues may be more difficult over the coming years.

Japanese Runs Continue to Ease, Crude Stocks Sharply Lower

For the week, crude runs eased again with very low imports such that crude stocks drew a sharp 5.5 MMBbls. Finished product stocks rose mostly on a naphtha stock build. Gasoil and kerosene stocks posted draws. Indicative refining margins remain good but were lower on the week.

Suppliers Immediately Responds to Weather-Induced Demand and Then Some

The response to colder than normal weather has been immediate and decisive by a variety of suppliers and shows that even in a relatively bullish environment for storage in Germany, the price risk to the upside is limited. If just-in-time-supply can perform for the entire winter like it has over the past week, the relatively lean storage situation compared to last year is not going to be an issue.

French Front Month Dive in Spite of Early Cold Snap

With colder weather emerging this past week, the most interesting dynamic was the ability of all gas-fired markets connected with France to lower their call on French power, with Italy even shifting into a net exporting position - an outcome we have not seen in a while. However, is this dynamic justifying France pricing at €40/MWh for the balance of the year?

Ethanol Stocks Rise

U.S. ethanol Inventories built by 144 thousand barrels to 19.0 million barrels the week ending October 9. Production was relatively flat the week ending October 9, decreasing slightly to 949 MB/D from 950 MB/D in the prior week.

Interest Waning

A quick look at Fund interest shows very little interest in corn and beans on a net basis with a continuing short position in wheat. Consensus pointed towards a short bean/long corn position going into last week’s WASDE and when the numbers failed to confirm the positioning an exodus ensued.

Fracking Policy Monitor

EPA, in August, issued a significant regulation impacting fracking, implementing President Obama’s Methane Strategy. Another higher profile federal effort suffered a setback as a judge called into question BLM’s authority to regulate fracking at all. Fracking rules are the subject of policy riders on still-pending federal budget bills. North Dakota continues to be responsive to industry concerns, relaxing regulations where production or profits are threatened. Seismic activity in Oklahoma continues to be a growing issue. Local authority to regulate fracking remains in question.

Key Indicators Continue to Improve

The S&P 500 posted a second week of gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased slightly, but ex-energy was higher. Oil was slightly lower. With regard to currencies, many of the currency groups that had been performing poorly continued to post renewed strength. The U.S. dollar was slightly weaker against the euro and British pound. The Cleveland Fed released their expected inflation series for October, and all tracking maturities showed a lower rate of expected inflation.

Stock Build Slows

Commercial oil inventories in the three major OECD markets — United States, Europe and Japan — based on preliminary data increased 42 million barrels in the third quarter, down from 63 million barrels in 2Q and 92 million barrels in 1Q. The third quarter 2015 stock build was 9 million barrels less than the year earlier stock increase and, therefore, modestly reduced the year-on-year stock surplus to 181 million barrels (or 8%). While not a record, the end 3Q inventories were the highest level since 1990.

More Nuclear Restarts are Just the Beginning for Reduced Gas Demand in Japan

Almost everything about Japanese gas demand will be looked at to be some level of bearish at this point. Short of a full stop in nuclear restarts, both short and long-term considerations will mean the world's largest importer of LNG will be buying less and less in the months and years to come.

Saudi Arabia: Relying on Oil in Power Generation

Faced with rapidly increasing domestic demand for oil and gas in the power sector at still heavily subsidized prices, Saudi Arabia's stab at rebooting its energy policy squarely focuses at diversifying its supplies away from traditional sources. Such a transition is going to take time, but the goals are just as clear in Saudi as they are in Europe; a movement away from fossil fuel use in areas where both strategic and cost effective alternatives exist. An ambitious announcement of a large nuclear program of 16 reactors over the next several decades and a plan to bring online over 40 GWs of solar capacity by 2040 are the end game, but the Kingdom will continue to see increasing domestic oil and gas burning in the short- and medium-term in order to meet aggressive electricity demand growth.

Weak Fundamentals To Weigh on European Carbon Gains?

Higher auction volumes, combined with potential additional industrial sales, could increase EUA supply in 2016-2018. Emissions demand growth remains weak, and lower gas prices are leading to lower implied carbon prices. There are no upcoming policy developments until post-2020 reform discussions begin in earnest next year. Market sentiment can still play a major role, but stronger fundamentals may soon be needed to maintain the price increases of the last few months.

Global Equities Post a Third Straight Positive Week

Global equities gained again. In the U.S., many of the tracking indices were positive on the week, with utilities and technology performing the strongest. Energy was slightly higher, but underperformed. Internationally, all the tracking indices other than Latin America posted gains, with China doing the best.

Third Quarter Asian Demand Looking Robust

Partial third quarter demand data is now available for seven countries in Asia which represent over 24 MMB/D, or 77% of Asian oil demand. The data is admittedly preliminary but it is indicative and does show that this group of important Asian countries are growing 1.4 MMB/D, or 6% year on year. China and India account for 96% of the growth of the seven countries.

October Weather: U.S. Warm, Europe and Japan Cold

The new heating season is off to a cold start in Europe and Japan and warm weather in the U.S. With half the month completed and a second half forecast, October is expected to be 18% warmer than the 10-year normal and 5% warmer on a 30-year-normal basis.

Further Markdowns to Long-Term Fossil Fuel Prices

As a result of our bi-annual development of our long-term energy balances, PIRA has marked down its long-term fossil fuel price projections for crude oil, international gas (NBP and Asian LNG), and coal. In the case of oil, the principal driver was the view on long-run supply cost and price responsiveness. International gas price reductions reflected both lower crude prices and the impact of potential gas supply that looks likely to far exceed demand growth. The reductions in coal were primarily associated with greater competition from lower priced gas and lower costs associated with oil.

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.

14DWMondayLast week DW renewables delegates attended the RenewableUK Annual Conference and Exhibition. In wake of the Global Offshore Wind Conference in June, expectations were for an upbeat demonstration of what the UK could provide in terms of world-leading technology and renewable solutions. However, the last few months have been somewhat tumultuous for our renewables industry, with the general feeling among attendees that the government had abandoned the industry at short-notice.

Dealing with what RenewableUK Chief Executive Maria McCaffery noted as an “ideological entrenchment”, the UK renewables industry now has two main points of focus: to maintain current cost-cutting efficiencies in order to make home-grown renewable power more cost-competitive, and to bring the government back on-side. We are on the right path – in some regions onshore wind is becoming competitive with gas and coal whilst solar is also making inroads on the LCoE gap; the main hurdle is in ensuring a strong pipeline, through public and government support. As noted by several speakers throughout the two days, this industry has the potential to secure energy supply, provide jobs and bring investment to the UK.

On display at RenewableUK, new technologies showed just how quickly the industry is developing. The UK offshore wind market, now forecast by DW to reach 27GW by 2020, is forcing the supply chain to react and innovate at pace. The use of aviation in the form of both drones and helicopters is part of the next phase of progress, both reducing operational costs and enabling digital inspection of turbines. Helicopters and wind-specific SOVs will see growth in this market, catering to the demands of the huge round three projects which will lie farther offshore; and as our industry matures so will our understanding of best-practice, which will inevitably aid further development.

Celia Hayes, Douglas-Westwood London
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