Finance News

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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14DWMondayOil prices have finally crept up on drilling and production levels in the US. The onshore rig count has continued to soften as many operators, particularly some large independents, have chosen to wait for improved economics to continue operations. In other cases, smaller companies such as Sampson and Quicksilver Resources, have filed for bankruptcy protection amid economic stress – and more are likely coming with bank borrowing base assessments in October.

Slowing operations have led to a half a million bpd decrease in US production since April. While oil prices are very difficult to predict in the short-term and many do not expect a rapid price recovery, added confidence in the global oil supply/demand balance could help push some larger scale projects forward.

Large-scale developments with proprietary designs do not have the optionality of shale developments. Many long-lead offshore and oil sands projects have already been sanctioned and some have much of the major capital costs sunk – making full project break-even figures much less relevant than shale investments with steep production curves. In this case, long-term high-capital cost developments are likely to be pushed forward as they can be 30-year producing prospects and are not easily scalable to the short term environment.

So what does this mean for unsanctioned projects? Numerous IOCs are waiting to see if the U.S. production decline is signaling a bottoming out of the oil price slide. Then begins a process of reevaluation of their own asset portfolio in the new price and development cost environment. Schlumberger’s acquisition of Cameron displayed their observed importance of reducing costs for their customers through supply chain efficiencies. Future commitments to new developments will be driven not just by the oil price but also through the ability of the supply chain to deliver cost efficiencies.

Andrew Meyers, Douglas-Westwood Houston
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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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13PIRALogoNYC-based PIRA Energy Group Reports that global oil stocks will draw less than normal in 4Q15, increasing the inventory excess. U.S. commercial crude stocks built the week ending September 25th to a new record high. In Japan, crude runs dropped, but imports stayed sufficiently low to contain crude stock change. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Global oil stocks will draw less than normal in 4Q15, but the demand for inventory should set a floor for prices, limiting deterioration in the first half of the quarter. PIRA expects prompt crude prices to actually rally with stock draws later in the quarter but a sustainable rally will have to wait on physical balances substantially tightening in 2016. Gasoline cracks are declining seasonally. For middle distillates, high stocks will linger into next year capping diesel cracks. European refinery margins were the best in many years over the summer but are now coming off.

Bearish Storage Risks Ahead of Structurally Tighter Balances

Thanks to hot-weather-aided gas-fired electricity generation and tepid sequential production growth, concerns over storage congestion have diminished for the remainder of the injection season. Yet, bearish Henry Hub price risks persist in the near-term landscape; in particular, Producing Region stocks are still headed to an all-time end-October high.

Western Grid Market Forecast: September 2015

Strong cooling loads helped maintain California prices near July/August levels despite weaker gas prices. Mid-Columbia and Palo Verde markets both declined month-on-month. In the Northwest, below normal temperatures sapped late summer cooling loads while hydro output and net imports from BC held up well, supported by much above normal precipitation in the province. In the Southwest, seasonal cooling load declines reduced the call on less efficient generation and implied heat rates tumbled.

Coal Pricing Sinks Further on Softening Global Demand Growth Prospects

Physical coal prices again moved lower over the past month with weak macroeconomic data coming out of China, softness in the oil market, and generally unsupportive fundamentals. So long as China’s thermal coal imports decline year-on-year, it will be difficult for FOB Newcastle prices to rally. Both CIF ARA (Northwest Europe) and FOB Richards Bay (South Africa) prices also fell this past month, with slack demand from India driving the latter price lower. While Pacific Basin balances have the potential for tightening, weaker import demand in Europe and robust supply will keep Atlantic prices weak relative to Pacific.

European Electricity Markets Scorecard

The short-term pricing picture remains heavily tied to the French nuclear availability. Lower French nuclear availability adds a layer of risk, especially since colder weather is expected from the middle of the week. In addition, Belgium's nuclear output is now set to stay closer to 2014 levels, which is to say that we expect no change in the total Belgium net imports through the balance of the year. The increase in the NTC with Spain is also broadly bullish, but flows have been typically volatile in 4Q15, depending on Spanish wind conditions.

U.S. Crude Stocks Grind Higher W/W

U.S. commercial crude stocks built the week ending September 25th to a new record high, a level 167.3 million barrels over 2014 levels. Crude stocks had the highest surplus of the year. Demand growth has begun to sputter, with the latest four weeks of adjusted demand basically flat year-on-year. Gasoline demand and jet demand - possibly driven by accumulations for non-commercial uses - remain strong performers. Refinery turnarounds will continue to dominate crude balances for the next few weeks, although not enough to cause containment issues.

India Presses Forward with Gas Price Reduction

The Indian government reduced the price of the locally-produced natural gas by 18% for six months beginning Thursday (Oct-1), following a global slide in commodity prices. This is the second six-month revision since November when the government introduced a gas price formula linking it with international prices following demands from the industry that prices were too low to incentivize producers. Following the introduction of the formula, the prices went up by a third, but fell about 8% in the first revision in April.

Aramco Pricing Adjustments for November- Lower for Asia and the U.S., Europe Higher

Saudi Arabia's formula prices for November were released. Significant discounts were extended for Asian pricing, more modest cuts to the U.S., while European prices were mostly raised. The more generous terms to Asia suggest a desire to encourage more Asian refiner liftings, especially with imminent 2016 contract discussions. Pricing fundamentals in Asia suggested a less aggressive stance could have been taken. Refining margins in Asia had strengthened over the month, as had the economic incentive of running Saudi crude against competing grades.

Sluggish Tone of September U.S. Jobs Data Is Potentially Worrisome

The U.S. employment situation report for September was discouraging in key respects. The reported pace of job growth decelerated sharply in recent months, and the sluggishness was widespread across major industries. The unemployment rate was flat month-to-month, but a fall in the labor force participation rate was disappointing. As for GDP, the underlying pace of growth was probably decent in the third quarter, even though the drag from the trade and inventory sectors was substantial. Outside the U.S., August industrial production in Japan and Brazil had negative implications for growth.

Gas Regional Basis Monthly, September 2015

Mother Nature proved to be no match for gas market bears despite a valiant effort on her part in the form of record-breaking CDDs this month. Even so, many cash price markers, including Henry Hub are near, if not at, new lows for the year. And headwinds remain that could warrant even lower prices. In the South, the Producing Region set record highs for injections in both September and October last year, yet end-October storage still only reached 1,120 BCF — the lowest level since 2008. With September refills set to rival last year’s record, and stocks already nearing record highs, refills need to be upwards of 1 BCF/D lower than a year ago this October.

Asia-Pacific Oil Market Forecast

The global oil surplus has not materially diminished. PIRA’s 4Q15 balances now show a smaller commercial stock draw in the three major OECD markets than our previous estimate. The forecast draw is less than normal. Global economic weakness, centered in Asia, is a growing concern.

U.S. Ethanol Prices Increased During September

U.S. ethanol values rose during most of September as the market tightened, with inventories falling to the lowest level of the year. Manufacturing margins fell early in the month, though some improvement was achieved the last week of the month.

Pricing Parity Between Regions Strongly Implies More European Buying in 4Q/1Q

At this week's PIRA Client Seminar in New York, we will take an expansive look at the short and long-term outlook for LNG gas balances in the broader context of the global gas market. It is a story that will be making buyers smile and sellers looking for answers to difficult questions in the years to come.

U.S. July 2015 DOE Monthly Revisions

DOE released its final monthly July 2015 (PSM) U.S. oil supply/demand data today. July 2015 demand came in 430 MB/D higher than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 253 MB/D. Total demand for July '15 versus July '14 (PSA) grew 696 MB/D, or 3.6%, which maintained similar growth from June. End-July total commercial stocks stood at 1,273.5 MMBbls, lower than the PIRA's assumption for end-July by 13.9 MMBbls, with product lower by 10.2 MMBbls. Compared to the weekly preliminary data, DOE lowered total commercial stocks 0.4 MMBbls. While both crude and product remain in excess relative to last year, the crude excess grew only slightly, while the product excess fell a more significant 8.6 MMBbls.

U.S. Coal Market Forecast

U.S. Consumer stocks of both natural gas and coal are poised to remain above comfortable target levels (especially for the latter), with downside weather risks a notable concern for this coming winter given prospects for continued El Niño conditions through early 2016. This poses downside price risks for gas, and thus coal over this coming winter.

Japan Data Show Storm and Holiday Impacts

Two weeks of data were reported due to the string of holidays September 21-23. Japanese crude runs dropped both weeks, but imports stayed sufficiently low to contain crude stock changes. Gasoline demand was disappointing driven lower by a typhoon and then displayed only modest holiday uplift, with stock builds for both weeks. Gasoil demand was much higher in the first week, and then sharply lower. Kerosene stocks drew marginally the first week, on continuing good seasonal demand and then compensated with a sizable stock build on lower demand. Refining margins are strong and supported by a late-season resurgence in gas cracks.

Weather-adjusted Balances Fueling Renewed Downward Price Momentum

In spite of a major leg-up from September CDDs, more than 30% above normal, PIRA’s balances show considerable weakness in weather-adjusted gas-fired electrical generation along with further weakness in the industrial sector.

Harvest Low Chatter

Every year around this time we hear the seasonal traders talking about harvest lows. Last year it happened on October 1st for both corn and soybeans, so the short memories are still intact.

International Coal Markets Scorecard

Coal prices continue to test new lows last week, with the temporary lifting of the Fenoco rail ban in Colombia and weaker oil prices pressuring the coal market lower. There has been a decided lack of bullish developments in this market, with very limited upside for demand (with considerable downside if China’s imports continue to implode), and not enough supply coming off the market. The gas and oil markets are not providing any support for coal prices either, with input costs for coal producing dragging valuations lower.

Global LPG Weekly Scorecard

Recent fundamentals developments in global LPG, including price issues, international arbitrage, trade flows, petrochemical margins, operating rates, spot and forward feedstock preferences, as well as the divergent regional weather influences.

European Economy

Europe experienced a constructive pace of economic growth during 3Q15, according to recent activity and confidence indicators. Credit data also improved markedly, as the European Central Bank’s aggressive policy easing has begun to bear fruit. But the economic outlook has become somewhat uncertain recently, due to several worrisome developments. The list of concerns includes possible negative spillover effects from emerging market weakness, volatility in financial markets, and declining long-term inflation expectations.

Global Equities Rebound W/W

Global equity markets largely advanced the week ending October 2nd. In the U.S. equity market, materials and energy led the way. They had previously been two of the biggest laggards. Housing was the weakest performer and declined. Internationally, all the tracking equity indices advance strongly, other than Japan, which was neutral. On the week, the international equity tracking indices outperformed the advances made in the U.S.

Harvest Lows?

PIRA is not in the business of calling harvest lows, but we certainly respect the seasonality of these markets. Corn has held up better than beans for the loud chorus promoting a bottom, but corn has most definitely benefited from a wheat market that has led the way on many occasions over the past two weeks. Corn remains stuck between soybean weakness and wheat strength, not a great trading environment.

U.S. Ethanol Output Up/ Stocks Down

U.S. ethanol production rose 6 MB/D the week ending September 25 to 943 MB/D, rebounding from a 19-week low. Inventories declined by 118 thousand barrels to 18.8 million barrels, slightly lower than stocks at the same time last year.

European Gas Price Scorecard

Russian exports in September were the second highest of the year and will move higher as the weather becomes colder. With the ruble weakened and prices falling in dollars, the incentive for Russia to export as much gas as possible is both a strategic and financial imperative. Russian gas prices are more or less dead even with spot prices, although some buyers seem to have a discount to current NGC and Gaspool levels.

S&P 500 Higher at Week End

The S&P 500 declined on a weekly average basis. However, a strong performance on Friday allowed the market to close higher on a Friday-to-Friday basis even in the wake of a weak employment report. Volatility was higher, while high yield credit (HYG) and emerging market credit weakened (higher yields). Overall, commodities declined again, but ex-energy was flat. With regard to currencies, many of the emerging Asia currencies continued to weaken against the U.S. dollar, as did the Brazilian real and British pound. The Russian ruble strengthened.

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 the oil export and revenue sharing agreement between the KRG and Baghdad has all but collapsed, but the Kurds are ramping up independent exports. In the U.S., stocks increased this past week marking a new all-time high. In Japan, crude stocks drew strongly, thus reversing the previous week’s rise. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Oil Market Ignores Overall Stock Build, Focusing on Large Cushing Draw

Total commercial U.S. stocks increased this past week, marking a new all-time high. Higher crude runs drove a crude stock draw, but those higher crude runs and sharply weaker product demand drove a product stock build. Wednesday’s WTI rally was most likely driven by the largest Cushing stock draw of the year. In addition, ongoing supply outages in Canada, declining U.S. sweet production, and the pending Line 9 startup have markets less worried about October maintenance-driven containment problems, and more focused on a tightening Midcontinent sweet balance later in the year.

2Q15 Producers Bogged Down, But Year-on-Year Gains Still Being Realized

Hampered by not only the mud season but also plant maintenance and forest fires, 2Q15 Canadian production retreated from the robust volumes witnessed in 1Q15. Despite the sequential decline, PIRA Survey Group companies still managed to achieve growth compared to the same period last year. However, year-on-year growth is not expected to continue into the second half of 2015, with declines forecast to begin in 3Q and enlarging in 4Q.

Eastern Grid/ERCOT Market Forecast

On-peak prices increased from July in the Northeast and Gulf Coast markets but were mostly lower in the Midwest and Southeast. Prices were consistent with weather patterns as Midwest temperatures remained below normal. One additional factor in the Northeast was a rebound in gas prices that boosted eastern NY markets close to prior year levels ($2.40s/MMBtu).

Week-on-Week Losses Persist in Bloated Thermal Coal Market

Despite a modest midweek rally when rising oil prices pushed the market higher, coal prices yet again moved lower last week. FOB Newcastle (Australia) prices again held up relative to API#2 (Northwest Europe) and API#4 (South Africa) across the forward curve, with marginal week-on-week increases for 1Q15 and Cal-18 recorded as well. The market still remains generally oversupplied, as evidenced by the fact that any rally in pricing is generally short-lived, with ample supply chasing limited demand. PIRA believes that coal prices will continue to balances on costs, which will keep the coal market following the trail cut by the oil market. This is not expected to provide much of an uplift over the next 90 days.

European LPG Demand Improving

LPG demand in the UK and France has increased noticeably this year. First half 2015 LPG demand in the UK of 1.399 million MT was 26% stronger than a year ago. Meanwhile, first half 2015 demand in France of 2.053 million MT was 18% higher year-on-year. A combination of lower prices and higher competitiveness vs competing feedstocks is supporting increased use of LPG, particularly in the petrochemicals sector.

Flurry of Activity as Obama Regulatory Window Closing

This summer was busy, led by the final Clean Power Plan, the new/modified unit NSPS rule, and proposed model FIP. President Obama's Methane Strategy was advanced with proposed rules for fracked oil wells and landfills. The controversial Ozone NAAQS, is due Oct. 1, while Renewable Fuel Standards for 2014-16 look to be finalized by their end-November deadlines. Truck emissions standards (beyond 2018) have a planned May 2016 finalization. Information on priority rulemakings will be available with the Fall Regulatory Agenda release.

Ethanol Prices Rise

U.S. ethanol prices moved higher last week, tracking rising corn values. Ethanol is selling at a premium to gasoline in most of the country.

Demand Remains the Question

Seasonal lows are typically put in for corn and beans within the next 6 weeks, with corn doing it last year on October 1st. Our concern this year, if you haven’t figured it out already, is demand. General malaise over most commodities resulting in the single largest week of Index liquidation on record a few weeks ago, along with a strong dollar, low gas prices, and relatively poor exports do not make us over-friendly.3.75 corn or 8.75 beans.

Worries about Emerging Economies (Particularly China) Delay Fed Tightening for Now

In a press conference after this week’s policy meeting, Fed Chair Yellen was explicit about why the central bank stayed put: growth concerns about China and other major emerging economies, and the resultant volatility in global financial markets. The Fed’s stance clouds the monetary policy outlook, since worries about emerging markets will probably not dissipate quickly. In particular, concerns about China are likely to linger, as the country’s latest data releases turned out to be disappointing.

Iraq Oil Monitor, 3Q15

The oil export and revenue sharing agreement between the KRG and Baghdad has all but collapsed, but the Kurds are ramping up independent exports. Multiple attacks on the ~650 MB/D northern export pipeline stopped flows to Turkey for nine days in August, increasing the risks to 750 MB/D of combined Kurdish and NOC production. Southern exports averaged 3 MMB/D from June to August, as the installation of new infrastructure facilitated the segregation of a Basrah Heavy grade. However, capex cuts at major southern fields could endanger additional production growth.

Making Sense of How Dutch Supply Will Be Replaced this Winter

Dutch gas production. We've always called it the invisible hand of the European gas market, but due to current circumstances it's not so invisible anymore and needs to be a focus for the emerging balances. Additional data on storage in Germany and the U.K. shows that each country will head into winter with lower-than-normal storage that will require a stronger pull on prompt supply if the weather turns colder than normal.

The Low Gas Price Effect on India Power Generation

Asian import prices overall have been on a steep downward trajectory since January, yet a corresponding uptick in demand has not been forthcoming to date. This is about to change, at least in one country. In India, a new government program to provide subsidies to power generators to import LNG for use in domestic power plants is now underway and garnering considerable interest.

China Looks to Reduce Industrial While Raising Residential Gas Prices

China’s National Development and Reform Commission (NDRC) could adjust downward non-residential gas prices by CNY0.5-0.6/cm ($2.18-2.62/MMBtu) within one to two months, sources close to the NDRC said. Meanwhile, the NDRC, the country’s top economic planner and price-setter of key commodities as oil and gas, would continue to optimize multi-tier pricing of residential natural gas, and overall prices of residential gas would go up. The adjustment of natural gas prices is based on performance of international oil prices in 2015 and would factor into environmental protection, economic stability, interests of energy companies as well as readjustment of energy structure.

Fuel Pricing Makes French Units More Competitive this Winter

Weather represents a major driver for French pricing during the upcoming months, with this year also featuring dry hydro conditions. The latest RTE monthly bulletin confirms that hydro output has plummeted to minimum levels in history, especially as a result of the July heat wave. However, other factors will be countering the likely lack of water in the upcoming months, with increasing wind capacity and plenty of cheaper fuel options likely keeping French power prices in check.

Stress Rises on Friday Selloff

On a weekly average basis, the S&P 500 gained for the third straight week, but Friday-to-Friday was little changed due to the selloff at end-week. Volatility also fell on a weekly average basis but rose on Friday’s selloff. High yield credit (HYG) and emerging market credit improved modestly for the week. Overall, commodities declined, but ex-energy was higher. The Cleveland Fed released their inflation estimates for September which were higher on all maturities.

Ethanol Inventories Fall

U.S. ethanol stocks dropped last week to the lowest level of 2015. Ethanol-blended gasoline manufacture fell to a 15-week low 8,788 MB/D as the peak driving season came to a close.

Shaky Soybeans

The soybean market feels like it’s holding on by its fingertips. Last night saw another test of the $8.65 area, a place that’s been tested a half-dozen times in the last month. If you throw out the spike lows of $8.55 on August 24th (Chinese equity collapse) and $8.5325 on September 11th (WASDE), you have what looks like a pretty good base, inferring to many that demand is strong between $8.65 and $8.75, something PIRA has commented on quite often of late.

Japanese Crude Stocks Draw Strongly, thus Reversing Previous Rise

Crude runs eased, but crude imports dropped sharply and crude stocks corrected back down following the surge of the previous week. Finished product stocks built despite modest draws on gasoline, gasoil, jet, and fuel oil. Kerosene demand eased and the stock build rate accelerated from 84 MB/D to 108 MB/D. The indicative refining margin remains good and cracks this past week again firmed.

Fast-Falling Power Loads to Accelerate Storage Builds

Thursday’s reported build served as a continuation of trends seen in recent EIA weekly releases — namely strong gas-fired electrical generation (EG) alleviating fears of storage congestion as the heating season approaches. Our projected end-October storage carry has hovered between 3.90 and 3.95 TCF for some time. While record heat in September has given weather-induced demand a healthy lift and tempered injections, wildcards in October do not take the threat of congestion completely off the table.

Global Equities Mixed

Global equities markets, on average, were modestly changed. In the U.S., the broad market declined due to the sell off on Friday. Utilities moved higher, while banking was the weakest performer. Energy largely matched the U.S. market average performance. Consumers staples and discretionary out performed. Internationally, Latin America posted a decent gain, while Europe and Japan declined, underperforming the average.

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.

14DWMondayOil prices have stabilized in the $45-50 range over the last month, however, performances of major oilfield stocks have continued to suffer. According to analysis undertaken by DW, decline of a further 8% has been seen through September, down 39% year-on-year.

As E&P firms start to plan for 2016, the current oil price is driving expectations of further cutbacks in industry investment. Drillers have borne the brunt of oil price decline since June 2014. Declining rig utilization has been compounded by industry-wide cost deflation which has hit all companies reliant on providing services to the oilfield. According to DW’s World Oilfield Services Market Forecast total OFS expenditure has declined 36% over 2014-2015, while onshore and offshore drillers have seen an average of 57% and 51% of their value been wiped off stock markets respectively.

The oilfield equipment sector, however, appears to be faring better, with average stock performance declining only 20% according to DW analysis. Falling input prices, particularly steel, has led to an ability to better accommodate the tightening of operator purse strings.

Exposure to multiple upstream segments has aided the majority of manufacturers, particularly those involved in subsea manufacturing. The current subsea hardware backlog is high at $13.4bn (due to a significant number of contracts being agreed in the years preceding oil price decline) and this will take some 18-24 months to work-through, by which time we may see a raft of new orders if oil prices recover.

Manufacturers with capabilities outside of upstream oil and gas have fared better still, with healthy activity remaining in both midstream and offshore production systems. According to initial outputs from DW’s World Oilfield Equipment Market Forecast, only a 4% decline in midstream spend is expected in 2015, compared to 26% in upstream equipment. A detailed analysis of some 60 categories of equipment spend is due to be launched later this month. We will continue to follow the sector with keen interest.

Matt Adams, Douglas-Westwood London
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15DWMondayFor much of the period since the year 2000 – characterized by high and rising oil prices, and long-term concerns over global oil supply – decommissioning took a backseat. Asset lives were extended through improved recovery, enhanced maintenance, and, critically, successful divestment. Smaller, more agile operators found success extracting from fields that had ceased to be profitable under original ownership, and with market fundamentals pointing towards continued high prices, many agreed to the transfer of decommissioning liabilities.

But with oil at $45/bbl, the model no longer works. Buyers cannot absorb the liabilities associated with big oil fields whilst returning value for shareholders. For sellers, other options do exist: bundling of legacy assets alongside new, promising acreage has worked in the past, whilst the model of selling assets without the transfer of decommissioning liabilities has precedents and real scope to reduce the gap between buyer and seller.

DW believes, however, that the current fundamentals will lead to significant growth in decommissioning activity on the UKCS. Operators are under increasing pressure to reduce exposure to high-cost regions, and remove decommissioning liabilities from balance sheets. Without traditional sale routes, operators will increasingly make strategic decisions to push forward with asset decommissioning. Advantages for first movers are evident, with the opportunity to avoid constraints in the supply chain, and take advantage of suppressed rig rates for P&A.

Opportunities for related investment exist. Decommissioning is a nascent part of the industry, and represents a huge technical and operational challenge. The Wood Report estimates costs of up to $50bn for UKCS decommissioning. The final figure may be far higher. Companies offering solutions – products, services, or assets – that improve safety and efficiency will thrive. Companies involved in P&A will benefit, whilst maintaining an underlying level of demand associated with normal field operations.

For the North Sea, it’s not all doom and gloom: the region has extensive infrastructure in place, investment continues for the most promising fields, and the best existing assets remain profitable. But the region is mature. And producing in the North Sea remains expensive in a world awash with oil. For North Sea decommissioning, it appears that this time, it’s different.

Alec Mitchell, Douglas-Westwood London
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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.

13PIRALogoNYC-based PIRA Energy Group reports that improved sentiment is important to support demand for crude inventory and price, especially with the global stock surplus expanding in 4Q15. U.S. total commercial crude stocks drew the week ending September 18th, lowering stocks from prior week’s record. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Global Stock Surplus Increases and the Problem for Oil Prices

Improved sentiment is important to support demand for inventory and price, especially with the global stock surplus expanding in 4Q15. Supply/demand revisions also reduce 2016’s anticipated stock decline, but it still remains substantial and important to driving prices higher. Nevertheless, higher inventories lead to roughly 3-4% mark down in 2016 crude oil prices. Rig count declines must translate into inventory declines for prices to move higher on a sustainable basis. The problem for prices is production growth still remains strong, benefitting from local currency declines and legacy projects. Refinery margins will continue to benefit from demand growth outpacing refinery capacity (ex-China) and crude price contango.

Gas Flash Weekly

The prior Gas Flash Weekly published on September 17th indicated a string of triple-digit builds were on the horizon and the latest report confirmed how imminent those hefty builds were. Aside from the 106 BCF figure, preliminary balances suggest builds in the 100+ vicinity for at least the next two weeks. PIRA’s projected end-September carryout is now ~3.63 TCF and easily puts the market back on course for a new record end-October carry in excess of the 3.93 TCF set in 2012.

French Nuclear Availability to Keep Prices Strong in the Shorter-Term

French nuclear availability is a concern in the shorter-term and will keep French prices strong, but EDF's incentive to run the fleet harder is unchanged, considering Belgium's nuclear output remains down year-on-year for the time being. Availability of French oil and gas units is now more certain and bearish for French winter prices, especially given the weakness in the oil and gas balances.

Busy Week with Chinese PMI, U.S. / Europe Momentum Indicators, and Yellen Speech

As expected, latest indicators from the emerging Asia region (such as China’s purchasing managers’ index) turned weaker. Momentum indicators from the U.S. and the euro area, in contrast, were constructive, suggesting that the regions are largely insulated from difficulties in emerging markets. Policymakers from the U.S. and Europe are concerned about potential negative spillovers from emerging economies. An apparent message from Fed chair Yellen’s speech this week was that the Fed would not wait too long before making up its mind about monetary tightening – but the speech also contained dovish elements.

U.S. Commercial Crude Stocks Draw for the First Time Since End-July, Narrowing Surplus

U.S. total commercial crude stocks drew the week ending September 18th, lowering stocks from prior week’s record. This is the first weekly draw in total commercial stocks since July 31. U.S. total commercial stocks built this week last year, narrowing the year-on-year excess. Total reported petroleum demand spiked back up for the week following the period containing the Labor Day holiday. The latest four-week average of export-adjusted total petroleum demand, however, is up only 140 MB/D, or 0.7%.

Pakistan to Look to Offer Subsidized LNG for Fertilizer Industry

The Pakistan government is mulling over providing a subsidy on imported LNG supply to fertilizer plants that have been shut because of dearth of domestically produced natural gas – a significant move that will make urea available to farmers at affordable prices. Four fertilizer plants connected to the pipeline network of state-owned Sui Northern Gas Pipelines Limited (SNGPL) have been encountering gas supply problems because of shortage since the days of previous Pakistan People’s Party government.

European LPG Prices Push Higher W/W

Propane prices in Europe rose 6.1% the week ending September 25th, as seasonal demand increases and markets look tighter in October. Prices will have to continue to increase to attract additional volumes from the U.S. as current spot arbitrage economics remain challenged. Butane prices creeped higher, after larger increases in the prior week.

U.S. Ethanol Prices and Margins Higher W/W

U.S. ethanol prices rose the week ending September 18 as inventories drew to the lowest level of the year the prior week. Ethanol manufacturing margins were slightly lower, as co-product DDG values fell sharply.

U.S. Coal Stockpile Estimates

U.S. power sector coal stocks commenced a seasonal build this month despite warmer than normal weather conditions across the central U.S. on through the Northeast. PIRA estimates U.S. electric power sector coal stocks will reach 165 MMst as of the end of this month, or 86 days of forward demand based on our forecast of Oct/Nov average coal burn (vs. 60 days one year ago).

Low Natural Gas Stock Levels in Europe

Low natural gas stock levels in Europe validate both a comfort with the supply outlook and a lack of concern over peak demand this winter. A conscious decision has been made to rely on incremental imports to balance during peak winter gas demand with the decision tied to broader financial constraints as well as comfort with alternate fuels and forms of power generation available.

S&P 500 & Commodity Prices Fall W/W

The S&P 500 declined the week ending September 25th. Volatility was little changed, but high yield credit (HYG) and emerging market credit fell back. Overall, commodities declined for the third straight week. With regard to currencies, many of the emerging Asia currencies weakened again, particularly the Indonesian rupiah, while the Brazilian real also posted a noticeable decline. Bond yields on longer term Japanese debt continued their easing trend, while U.S. and Euro longer-term yields also eased on the week. Greek bond yields also continue to decline.

China’s 2017 Emissions Trading Scheme Spooks CY18 FOB Newcastle Prices Lower

International coal prices continued to move lower last week, with flat oil prices and a lack of fundamental support allowing for further reductions across the forward curve. Losses for CY18 FOB Newcastle (Australia) prices were most pronounced, likely as a result of China announcing a nationwide emissions trading scheme starting in 2017. Without a rebound in Chinese import demand, the market will remain over supplied, as there isn’t enough seaborne demand to offset continued losses in Chinese import s. With India’s imports exhibiting softness as well, PIRA continues to believe that the risks remain to the downside, although a recovery in oil prices would provide some upside to pricing.

Supply Length Drags Down Price; Will Demand Respond?

Balancing the LNG market is becoming a tougher and tougher proposition in the short term and if the new government-issued METI numbers for Japanese LNG imports by 2030 are anywhere near accurate, a perpetually soft market is not out of the question.

Global Equities Decline W/W

Global equity markets largely declined the week ending September 25th. U.S. equities out performed global equity averages, but still fell. The best performing equity sectors in the U.S. were banking, utilities, and consumer staples, which all posted gains for the week. The weakest performer was materials. Internationally, Japan equities moved higher, while Latin America was the worst performer, dragged down by big drops for Brazil and Argentina.

Dry Bulk Freight Market Forecast

There was a bounce back in Cape market sentiment the week ending September 18 with freight rates increasing sharply as evidence arose of increased iron ore loadings this month in both Brazil and Australia. Iron ore stock levels at Chinese iron ore ports also increased recently however, and with more iron ore afloat this month bound for China, there may be some downward pressure on iron ore prices. With little sign of a recovery in Chinese domestic steel demand and high volumes of Chinese steel exports, PIRA believes current FFA value for Q4 is slightly on the high side.

Stocks Up/Production Down W/W

U.S. ethanol production dropped to a 19-week low 938 MB/D the week ending September 18 as manufacturing margins remained relatively poor, largely due to low gasoline values. Ethanol inventories rebounded after having declined sharply to the lowest level since December 2014.

Brazilian Real Trumps Chinese Buys

13.18 million MT was a stunning number to come out of the Chinese delegation’s ceremonial soybean purchase yesterday in Des Moines, surpassing even the most aggressive estimates, but it was the Brazilian Finance Minister who is really responsible for Friday’s price support.

Soybeans Yields Getting Bigger

PIRA is re-issuing our expected soybean yields this week after inputting the all-important August 15-September 25 weather data in our model over the past few days. PIRA’s current objective yield model showed a similar gain to late August, but still didn’t quite get to the NASS Crop Production number in the September WASDE.

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 U.S. commercial stock set a new record high, but surplus narrowed week-on-week. On the week, Japanese crude runs eased fractionally. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Commercial Stocks set New Record High, but Surplus Narrows W/W

Total U.S. commercial stocks built to a new weekly record the week ending September 4th. However, with a much larger overall build last year, the year-on-year excess narrowed. The commercial stock surplus should narrow again this week. The DOE weekly crude production number reflected their new lower Short Term Energy Outlook forecast, but another large crude balance item resulted in domestic crude supply of 9.50 MMB/D. Total petroleum demand growth rates remained strong, with declining gasoline growth offset by increased distillate growth.

North America Natural Gas Market Takes on Shade of Optimism

The hot weather initially expected through the first week of September has not only packed a big punch, but extended into a second week bringing with it intense heat normally not associated with the shoulder season. The week-in-progress will have the highest CDD accumulation since records dating back to 1950. Electric generation burns in excess of 32 BCF/D for the Reference Week and the week-in-progress tied to hot weather, together with now complete storage data for August, should quell if not entirely eliminate storage congestion concerns ahead of the heating season.

U.S. Coal Prices Sustain Downward Trend W/W

Coal price again moved lower last week, primarily due to a downshift in oil prices early in the week, as well as a ruling that the Colombian rail constrain is effectively over. Despite this freeing up of Atlantic Basin supply, API#2 (Northwest Europe) held up by the largest extent in the prompt, compared to greater declines for API#4 (South Africa) and FOB Newcastle (Australia). Coal market fundamentals remain unconstructive to price gains, with slack demand and insufficient supply tightening. PIRA continues to assert that the coal market will move in concert with oil pricing over the short term, limiting the upside for coal over the next 90 days.

U.S. Ethanol Prices and Manufacturing Margins Higher

After being stable for over a month, U.S. ethanol prices were higher the week ending September 4. Manufacturing economics also improved, boosted by lower corn costs.

WASDE Review

So, what now? We heard a lot of comments this weekend from grain merchandisers that producers should “reward” this post-WASDE rally with additional sales, both in 2015 and 2016. The reason for this is both technical and the general negativity that continues to surround commodities.

Mixed Climate/Energy Legislation in California

A bill to set Greenhouse Gas reduction targets for California beyond 2020 did not pass, largely due to intra-governmental turf battles. The short-term impacts of the bill’s failure are muted; long term targets have been in place via executive orders (unlikely to be altered soon). Carbon markets remained largely unfazed and regulatory efforts to achieve reductions post 2020 are ongoing. A pared-down SB350 did pass, enshrining ambitious 2030 renewables and energy efficiency targets. Failure to cement long-term emissions goals adds to policy uncertainty.

Japanese Crude Runs Ease Fractionally W/W

Japanese crude runs eased fractionally the week ending September 5th, while crude imports surged and crude stocks more than recaptured the large stock draw in the prior week. Finished product stocks drew modestly. Gasoline demand was slightly lower, while higher yield was largely offset by a rise in exports, and stocks drew a bit. Gasoil demand was higher, but so was yield, and stocks built slightly.

U.S. Ethanol Production Rises for the First Time in Four Weeks

U.S. Ethanol output increased to 958 MB/D from 948 MB/D as more plants completed their summer turnarounds. Ethanol inventories were drawn by 360 thousand barrels to 18.6 million barrels, which was 621 thousand higher year-on-year.

U.S. LPG Prices Strengthen with Seasonal Demand

Strength in U.S. LPG prices is persistent. As the off-season inventory building season comes to an end with doomsday scenarios of soaring inventories never materializing, prices are recovering ground lost due to these fears. Propane and butane at Mt Belvieu outperformed broader energy markets by logging gains of 2% to 44.8¢ and 57.6¢/gal, respectively. Ethane gained 1% in line with natural gas prices to maintain a 13¢/MMBtu premium above Henry Hub prices.

Russian Natural Gas Prices at Excellent Value

It has been a good time for Russian gas marketers and policymakers to test the waters on both short- and long-term structural changes to how gas is marketed. Russian gas prices are an excellent value right now relative to competitors and it is an enticing "buy low" moment for its customers. And when we use the term "buy" in the European gas market context, the definition ranges from the buying of more gas now to the buying of the idea that auction sales and Nord Stream II are positive concepts for the future.

Financial Volatility Lessens W/W

Financial volatility as measured by the VIX index lessened the week ending September 11th, but stresses are still seen as elevated. With regard to currencies, there continues to be local currency weakness in the Asian export economies, the commodity producers, along with other currencies such as the Turkish lira and South African rand. Commodities remain generally in decline, though there was again strength in palladium, aluminum and copper. The non-energy commodity index was higher on the week.

Summer’s Last Gasp for Counter-Seasonal Market Balancers?

The vital role in balancing the market played by counter-seasonal Mideast and South American markets, as well as newcomers Egypt, Jordan and Pakistan, cannot be understated in a world that should have seen a large-scale supply surge with the addition of three new production trains in Asia. All this without a corresponding uptick in demand for contracted buyers of those new volumes.

Global Equities Mostly Positive W/W

Global equities posted mostly gains the week ending September 11th. In the U.S., the strongest performers were housing and technology, while the laggards were energy and retail. Internationally, gains were also posted, with China, emerging markets, and emerging Asia being the best performers, while Latin America was down slightly.

U.S. NGL Production Slightly Higher in June

U.S. NGL production inched higher in June compared to prior month. Strong NGL production implies that field producers are still focused on wet gas production. The small observed increase in total NGL production would have been significantly greater with deep cut ethane and propane recovery. As robust as the latest data are, year-on-year NGL production growth declined.

Vladivostok Fertilizer Producer Signs Gas Supply Agreement with Gazprom

Gazprom Mezhregiongaz and NChG have signed a 20-year contract for the supply of natural gas to the Nakhodka Mineral Fertilizers Plant at the Eastern Economic Forum in Vladivostok. Gas supplies will begin in 2019 and, from 2021, will amount to 3.15-bcm/y.

U.K. Spark Spreads Remain Compressed

U.K. spark spreads remain very compressed along the curve, with demand destruction and growing renewable generation hitting load factors for CCGTs and, generally, thermal assets. Numbers are looking slightly more constructive now than a few months ago, but fundamentals are still not strong enough to allow for a price recovery.

RGGI Auction Exhausts Reserve

The September Regional Greenhouse Gas Initiatives (RGGI) carbon auction cleared at $6.02, exhausting the entire Cost Containment Reserve. Players without compliance needs were active bidders again. PIRA believes the additional supply should soften post-auction secondary market demand, limiting further significant upside for allowance prices. A willingness to continue to build allowance inventories suggests expectations that policy developments will provide value for RGGI allowances beyond what is implied by the current program.

Fuel Price Subsidies: Subsidy Removal in Oil Exporting Nations to Remain Gradual

Over the past 12 months, weak oil prices drove several governments to reform fuel subsidy policies. The countries that moved first were those taking advantage of depressed oil prices to provide political cover to remove subsidies. Many of these countries faced a growing fiscal burden from rising oil imports, and the move away from fixed (and previously subsidized) prices often coincided with retail price cuts. Then, earlier this year large oil exporting countries also joined in on the moves. But in many cases fuel prices increased. Further subsidy removal from this group has the potential to dampen future oil demand. The group accounts for nearly 30% of global oil demand growth through 2020. Yet PIRA believes political pressure and internal dynamics will prevent a widespread move towards market pricing, at least for now.

WASDE Needs Answers

Fun with numbers. Report day came Friday with corn, soybeans, and wheat all trading at or near prices that end in .75. Corn was trading $3.75, wheat was $1.00 more expensive, while soybeans had a $5.00 premium to corn. Significant?

Power Sector CO2 Emissions Ease; Auction Supply Ramps Up

Overall demand for EU carbon at auctions remains weak—even as weather-driven (hot/dry) power sector fundamentals (except for Scandinavia and the U.K.) have been bullish. PIRA expects a slight EU Allowance price correction with the easing of weather-driven demand and the return of regular, higher auction volumes. Looking ahead, the level of back-loading drops (and auction supply increases) as of Jan 1. While upcoming Paris climate talks can buoy general sentiment, exactly how an agreement can support EU Emissions Trading System prices is less clear.

Gas Producers Quarterly Earnings Call 2Q15

PIRA’s Gas Producers Quarterly Earnings Call highlights and summarizes the operational achievements of the top publicly traded U.S producers and delineates current activity by resource play from the 2Q15 earnings season.

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

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