Last 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.

Oil 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.

As the year approaches the fourth quarter, many industry observers are dusting off their forecasts for 2016 and re-thinking. Last week, HSBC lowered its oil price outlook to $60/bbl for 2016. The EIA, in its latest Short Term Energy Outlook also revised its 2016 projection downward by $8/bbl to $59/bbl. As the oilfield community starts to reflect on 2015, the number one question will surely be: “where is the recovery?”

The problem is that oil remains in plentiful supply. Through the first half of 2015 we have seen a rapid increase in production globally, and particularly from the US and Saudi Arabia. US production peaked in the summer and is now declining but overall we still expect global production in 2015 to have increased by 1.5mmbpd over 2014.

The reasons we have such an overhang in supply are primarily twofold. We have seen record levels of upstream investment between 2011 and 2014 and given the scale of many of these projects there is a lag between the final investment decision (FID) and first production.Offshore projects can easily take four years from FID to first production.

OPEC for the last 12 months has been engaged in a war of attrition with US shale producers, not only refusing to cut supply but pressing ahead with its upstream investments. On the face of it this is a war that it appears OPEC will win, with the hedging positions taken by US producers now expired and many of them facing dire financial circumstances. However, if they do win it will be at the cost of substantial national deficits.

Furthermore, advances in downhole completions have significantly increased the initial flowrates achieved in shale plays in the USA, so whilst production is now declining, well productivity is increasing as the operators focus on the quality of plays.

However, there are signs that the supply / demand gap may start to narrow next year. The latest IEA Oil Market Report projects that oil demand will increase by 1.4mbpd next year whilst Douglas-Westwood’s latest analysis, published last week in Q3 of our World Drilling and Production Market Forecast, highlights additions of only 368kbpd in 2016, followed by additions of nearly 1mbpd in both 2017 and 2018. This tightening of the supply/demand outlook could well be the catalyst for a recovery in both oil prices and in-turn the oilfield services sector as a whole.

Semi-submersible accommodation vessel built in China and chartered in Gulf of Mexico to Cotemar



In its latest major transaction in Mexico’s energy sector, Milbank, Tweed, Hadley & McCloy LLP has advised Atlantis Finance Ltd. as borrower in a senior secured financing for the purchase of a semi-submersible oilfield maintenance, construction & accommodation vessel that will operate in the Gulf of Mexico. 



HSBC was lead arranger and administrative agent for the deal, which closed on August 26. 

The ship, named “Atlantis” and owned by Atlantis Offshore Ltd., will be chartered to Mexico oilfield services company Cotemar, S.A. de C.V., which will use it in connection with service contracts for the country’s state-owned oil company Pemex.

"Atlantis" was built at COSCO’s Nantong shipyard in China. 

Milbank Global Project Finance practice group leader Dan Bartfeld led the Atlantis deal team, assisted by Global Project Finance associates Alejandra Garcia Garcia and Mark Greenfogel. 


Mr. Bartfeld said, “This very successful financing highlights the opportunities in Mexico’s offshore energy sector – an area where we expect to see very significant growth in the coming years. Despite oil price volatility, this successful transaction shows that well-structured projects from top-tier sponsors can obtain successful cross-border financing.” 

Ms. Garcia Garcia added “We are thrilled to work with Atlantis, Cotemar, HSBC and the other lenders in developing a unique financing structure that supports Pemex and the Mexican energy sector.”

The financing for Atlantis is one of many successful Mexican energy-related financings handled by Milbank in 2015 – including most recently the financing of Fermaca’s El Encino-La Laguna natural gas pipeline project.

Further information on Milbank’s Latin America practice is available at www.milbank.com/practices/regions/latin-america.html.

NYC-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.

NYC-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.

Caterpillar Oil & Gas is pleased to announce the introduction of Asset Financial Solutions, an innovative financial product that provides 100% financing new offshore or marine assets. The new solution enables Caterpillar to offer customers a tailored solution to optimize their business and expand their fleets without raising additional capital or taking on project construction risk.

“Our message is clear: we have a proprietary new financing model for the offshore industry that can help our customers succeed and grow despite down cycle market conditions,” Antti Ekqvist, Caterpillar Oil & Gas global offshore manager said. “The Asset Financial Solution was developed to be a simple, succinct financing source available for the complete duration of a customer’s project from the start of construction to post delivery and operation.”

The Asset Financial Solution affords customers zero project risk from the onset. The financial offering has the flexibility to account for all aspects of an offshore newbuild, including risk mitigation for unexpected construction or project costs. Strong collaboration between customers, Cat® dealers and Caterpillar is established at the project’s inception, with the asset being built to the customer’s requirements. Assets ideal, but not limited to, for the financing program include jackup and semi-submersible rigs, accommodation units, drillships, liftboats, offshore support vessels and tug boats . “At Caterpillar, we are firmly committed to partnering with our customers to help them win regardless of market conditions. It’s our job to design concise, easy solutions that help their bottom line and we believe the new Asset Financial Solution delivers on that promise and more."

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World Oil Market Forecast

Financial market turmoil is undermining global economic growth and reducing the demand for inventory which is especially negative for oil prices given over 300 million barrels of surplus inventory. This surplus is hardly eroded in 4Q15 making prices vulnerable to weakness if financial turmoil worsens. The lower prices are now, the stronger they will be later. Global light product demand has been strong and will remain so. Refining margins will continue to decline as gasoline cracks come off further and distillate stocks continue to build. Supply disruptions have ticked higher and significant political risks to supply remain.

Production Growth and Storage Limit Near-Term Price Upside

Since last month’s forecast, Henry Hub (HH) gas prices have taken a sizable hit reflecting the continuing storage surplus coupled with anticipated 4Q production growth led by Appalachia. Sagging prices come despite a late July/early August heat wave and lackluster production which helped boost gas-fired electricity generation (EG), narrowing the storage surplus somewhat faster than earlier expected. Yet, the market’s tepid response to those bullish weather episodes called attention to heightening concerns over bearish gas balances in the months ahead.

PJM 2018/2019 Capacity Auction: Results and Future Implications

PJM’s 2018/19 Base Residual Auction cleared the Capacity Performance product at $164/MW-day for the PJM RTO. This clear was over the high end of PIRA’s forecast range of ($130-$160/MW-day). However, EMAAC and ComEd areas cleared close to their offer caps as per our expectations. A total of about 13 GW of capacity was offered but not cleared in this auction. Despite the higher capacity price clear for the ComEd LDA, Exelon’s Quad Cities nuclear units did not clear in the auction. The inability of a large portion of DR to participate as a CP product implies significant upside to PJM RTO capacity prices when the share of CP resources required increase in the near future.

Downside Risks Outweigh Upside in Freight Market Outlook

The usual autumn pickup in Cape freight rates came earlier this year. The question is whether we are likely to see a second rebound as happened in late 2014. On the supply side, Australian iron ore exports are picking up and Brazil has the potential to boost exports after an expected dip last month. On the demand side, China’s steel production has slowed and there are currently some government imposed temporary mill shutdowns around Beijing. As of now, it looks like Cape rates will continue to slide in the short term.

Strong Demand at California/Quebec Carbon Auction

The Vintage-2015 allowance auction showed strong bidding interest supportive of the secondary market pricing gains that we expect in our forecast. As anticipated, the Vintage-2018 allowance auction was fully subscribed with a particularly strong coverage ratio, clearing well above the floor price.

Wide Range of Possible RGGI Auction Outcomes

Market prices have moved above the $6 trigger for the Cost Containment Reserve. The upcoming auction has potential for significant additional supply to enter the market. Unlike in California, there is plenty of demand for more allowances. While 1H15 emissions are down 8.5% year-on-year, total 2015 emissions are expected to be in line with 2014 levels. Coordinated procurement of large-scale hydro, renewables and transmission suggest a more sustained push to lower long term emissions.

U.S. Ethanol Prices Lower

U.S. ethanol prices edged down the week ending August 21, pressured by plunging oil prices. Manufacturing economics improved slightly due to lower corn costs, breaking a two-week slide.

U.S Ethanol Prices Decline

U.S. ethanol output dropped to a 15-week low 952 MB/D the week ending August 21 as some plants cut back production due to poor margins. Stocks increased slightly for the second consecutive week, building by 67 thousand barrels to 18.63 million barrels.

Japanese Crude Runs Ease, Holiday Impacts Fade

Crude runs eased back from peak levels and crude imports remained sufficiently high to build stocks slightly. Gasoline demand eased back following the holiday, which built stocks. Gasoil demand conversely rebounded, with lower yield and higher exports, so to draw stocks. Kerosene demand jumped a bit and moderated the seasonal stock building. The indicative refining margin remains acceptable, with lower gasoline, naphtha, and fuel oil cracks being mostly offset by higher middle distillate cracks.

U.S. Coal Stockpile Estimates

Power sector coal stocks drew modestly in August as mild weather conditions across the Midwest and Northern Plains was offset by continued weak coal supply. PIRA estimates U.S. electric power sector coal stocks will reach 157 MMst as of the end of this month, or 81 days of forward demand based on our forecast of Sep/Oct average coal burn (vs. 57 days one year ago).

Asia Demand Weakness No Guarantee for Low Spot Prices

The inefficient mechanisms that pervade LNG pricing, particularly in Asia, were once again highlighted in July. At this point, the fragmented nature of pricing should not come as a surprise given the even odder behavior of demand. The outlook on the demand front is simply not good, which will do little to boost future support for Asian prices, oil prices notwithstanding, particularly as overall global supply increases are inevitable.

U.S. Commercial Stocks Again Reach New Record Level, In Spite of Crude Draw

In spite of a larger than expected crude stock draw, total commercial stocks built a combined 2.9 million barrels this week, to a new record high level. With a smaller overall build last year, the year-on-year excess widened. Commercial stocks began to grow quickly the first week of September last year, and that is likely when we will see the surplus decline.

Producing Region (PR) Storage Congestion Getting Harder to Avoid

Thursday’s market miss and the expected rapidly increasing storage builds as the shoulder season starts to get underway highlight both a seasonal denouement of summer peak electric generation cooling demand, as well as the lack of any significant heating demand coming back into play until October.

3 Major OECD Crude Stocks Build in October But Then Continue Downward Trend

While Thursday’s crude market certainly reversed trend, the crude price sell-off over the last few weeks has obscured an important fundamental view: we expect crude stocks in the 3 Major OECD regions to continue cleaning up through the end of the year, although October will see stocks build because of refinery maintenance.

Bulgarian Gas Price Likely To Be Reduced

Natural gas prices in Bulgaria are expected to be cut by 13.65% as of next quarter. Chairperson of Bulgaria’s Energy and Water Regulatory Commission (EWRC) Ivan Ivanov announced the news speaking with journalists. “I believe that the natural gas price will be a total of 30% cheaper for the year. The initial reports of Bulgargaz show that the natural gas price for the next quarter should be 13.65% cheaper,” he said.

PIRA Urges Caution Regarding Expected Crude Production Revisions from the EIA’s Producer Survey

Since the collapse in crude prices some months ago, markets have been focused on the timing and magnitude of the peak in U.S. crude production, and its subsequent drop. On Monday, August 31, the EIA is scheduled to publish both the June 2015 Petroleum Supply Monthly, and the 2014 Petroleum Supply Annual. Traders and analysts have been focused on what the EIA, using their Form 914 for the first time, will do to recent reported crude production data. Even though PIRA and others have noted we think the EIA has overstating Texas production so far during 2015, we urge caution is assuming the new crude producer survey will revise down 2015 crude production.

German Power Sinking Into Unchartered Waters

In Germany, fundamental support to the front (September) and winter months prices will come from stabilizing power demand and stronger exports, especially as the Alpine region is seeing drier conditions this year. However, with no signs of major capacity closures, no clear anchor is in place for German deferred prices, which is to say that the back of the curve will sink further into unchartered waters. With the recent declines in French forward prices, cost recovery for the operational nuclear fleet starts being problematic, which is to say that French prices may be closer to a bottom.

Ample Supply Supports Demand Growth and Injection Gains

LNG did not flow to Europe in the volumes we expected during the third quarter, with only Qatar really pushing cargos into its own terminals. It is an important lesson for the future; global length does not necessarily mean that Europe will be a dumping ground for LNG in the years ahead, although the emergence of U.S. export volumes could change the equation. Well-priced pipeline supplies from contract sources have stepped in front of LNG to boost storage injections and meet incremental demand.

Financial Market Turbulence Is Not Yet Over in All Likelihood

A large part of the recent financial market stress was caused by growth worries about emerging markets. It is therefore crucial to track the performance of these economies, though timely information is hard to come by. Available indicators are still painting a negative picture of the emerging world. For developed economies, the key risk going forward is financial market contagion from emerging economies. Historical experiences provide very limited guidance on this subject. But the likelihood is that policymakers in the U.S. and Europe are taking this threat seriously.

Market Falls, Then Rallies

The S&P 500 and other key market indicators dropped drastically on a weekly average basis. They generally fell as the week started, but they recovered towards the end of the week and ended higher Friday-to-Friday. The dollar continues to strengthen against Asian currencies, the Russian ruble and many of the fragile emerging market economies. Commodities generally fell. US Baa corporate bond yields jumped significantly higher this week. Policy interest rates in China fell again from 4.85% to 4.60%.

Seaborne Coal Market Edges Higher amid Surge in Oil Pricing

Coal prices rebounded last week, carried higher by the sizeable recovery in equity and oil prices on Thursday and Friday following a collapse early in the week. In the prompt market, FOB Newcastle (Australia) prices strengthened the most, while gains for API#2 (Northwest Europe) and API#4 (South Africa) measured about half as strong. Further along the curve, API#2 and API#4 fared better than FOB Newcastle. The market remains in search for clear direction, and at the moment it appears as if pricing will follow the lead of oil, which is not expected to be supportive of a structural rebalancing in pricing until mid-2016.

U.S. LPG Prices Firm Ahead of Seasonal Demand

U.S. LPG prices ripped higher on Friday with crude prices. September propane futures jumped 9% higher to 41.6¢/gal and butane gained 2.4¢ to 54.2¢/gal. LPG prices, in anticipation of higher seasonal demand in the months to come, have outperformed vs crude oil thus far in August. Propane prices have gained 8.5%, and butane 2.5%, vs. a 4% decrease in crude prices. Ethane prices fell to 18.9¢/gal, sliding with natural gas, but remained above gas on a Btu basis. Ethane prices, after trading at a discount to gas for a year or so, are now approaching levels necessary to economically incentivize incremental production.

Corn Crop Maturing Fast

The end of meteorological summer brings a choice for many eastern Belt farmers; go to the Farm Progress Show in Decatur, Illinois which starts tomorrow, or start harvesting corn that turned very quickly over the last week or so.

Frustration Starting to Build

Unfortunately, there’s very little to do at these price levels. The market seems somewhat content around $3.75 in corn and above $8.75 in soybeans, while it does appear that wheat sellers are trying to re-establish a decent short position which may be a bad bet.

Global Equities Climb Higher

Global markets gained about 1% on the week following a 6% decline the previous week. In the U.S., energy, retail, and technology showed the strongest gains among the tracking sectors. Utilities and housing posted declines.

Internationally, most of the tracking indices improved with emerging markets and Japan doing the best. BRIC’s and Europe posted fractional declines. 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.

Oil 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.

For 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.

NYC-based PIRA Energy Group reports that WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. In the U.S., the crude stock build propelled commercial stocks to a new record high. In Japan, crude stocks drew and kero-jet stocks led product stocks higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

The price of WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. Regional differentials were mixed, with inter-pipeline competition in the Permian Basin causing Midland grades to strengthen relative to Cushing WTI, while differentials for Western Canadian and other northern grades continued to weaken from very strong second quarter levels.

Storage Refills Set to Swell

After the NYMEX September futures contract limped off the board at its lowest settlement since the May contract, an outbreak of above-normal temperatures forecasts for a large swath of the U.S. in early September — particularly in the east — has for now lessened the risk of steeper price declines. With storage refills set to swell, sustained weather intervention remains necessary to temper seasonal gas-fired electricity generation (EG) declines and thereby reduce the need for still lower prices.

Western Grid Market Forecast

Western spot on-peak prices reverted to a more familiar summer pattern with Mid-Columbia at a discount to the Southwest hubs. That market shed $8/MWh to average ~$31.50/MWh. NP15 was down $2 to average ~$37.50. However, SP15, the West's premium market, was virtually unchanged at just under $39, and Palo Verde rose by $1.50 to just over $35. Inland Southwest price gains were driven by strong cooling loads with temperatures in the region's load centers averaging 2-4º F above normal. Weather in Southern California has also been hotter than normal this month, helping to propel the CAISO Balancing Authority to its strongest loads of the summer in late August. Mid-Columbia on-peak heat rates are expected to average 12,000 Btu/kWh in CY 2015 up from 8,900 in 2014. Heat rates are also expected to be up at the Southwest hubs for CY 2015 with the largest increase (~10%) at Palo Verde. However, going forward, growth in solar capacity, gradual improvement in hydro supply, and higher gas prices are expected to lead to downward pressure with modest year-on-year declines through 2017.

Cracker Margins Fall with Olefin Product Prices

U.S. steam cracker margins for all feedstocks fell last week with plunging ethylene prices. Propane and butane cracks weakened by nearly 26% to 20¢/lb ethylene. Pentanes plus margins lost 8¢ week-on-week and are now near 9¢/lb ethylene. Ethane cracks continue to trail LPG, falling to 19¢/lb ethylene per PIRA calculations.

Freight Market Outlook

The weakness in the midsized crude tanker groups seen in July was a harbinger that the counter-seasonal strength in VLCC rates was unlikely to persist much longer. VLCC rates followed suit and crashed in August, falling by 50 WS points (65%) from their July highs. The support from near record crude imports into China during June and July (7.2 MMB/D) and discharge delays in Asia related to high inventories and typhoons waned at the same time that September term crude nominations were being reduced to reflect crude runs cuts in Asia due to refinery maintenance and perhaps weaker underlying demand.

Seaborne Thermal Coal Pricing Falls, Retracing Gains from Prior Weeks

Despite a modest rebound in oil pricing last week, coal prices moved notably lower, mostly due to a bearish turn on Friday. For 4Q15 coal prices, FOB Newcastle (Australia) again held up better than API#2 (Northwest Europe) and API#4 (South Africa), as was also the case across the forward curve. The market seems to be saying (similar to PIRA’s view) that the rebound in pricing that occurred in the past two weeks was premature. Fundamentals remain soft, with major demand centers facing challenges, while supply is not backing off quickly enough. Rising oil prices limit the downside for coal pricing, but there is not enough bullish impetus to spark a sustained rally yet.

California Carbon: Choices for November Compliance To Impact Markets

The market response to auction results has been modest for the benchmark contract, though V-18s were boosted. Full reconciliation for 2013-2014 will be in November: choices regarding offset usage will impact the bank build/ stringency of the program (very few were used last November). Last-minute demand for offsets for compliance would temper CCA interest – but prices are supported by seasonal emissions, strong demand for transportation fuels, and by the increase in the floor price next year.

U.S. Ethanol Prices Lower in August

Ethanol prices were pushed down by oil values in August despite robust demand, lower stocks and reduced output. By the end of the month, prices were close to gasoline values in most of the country.

Emotions Remain High

The rhetoric this year is amped up due to a severely shrinking farm economy. Farmers and their landlords have been left to try to come together on land prices as the prospects of a better 2016 fade with each evening’s sunlight. Producers are trying to cut every penny of cost they can, getting no help so far from seed and fertilizer suppliers.

Whether the Fed Will Raise Rates in September Is Now a Toss-up

A few weeks ago, it appeared probable that the Fed would raise interest rates at its September policy meeting. But as global financial markets have turned volatile, policymakers indicated that the rate decision would depend not only on the tone of economic data, but also on financial market developments. This week’s U.S. data releases for August were not blockbusters, but showed sufficient strength to bolster the case for a September rate hike. But problematically, the current U.S. equity market performance does not yet indicate whether the economy is facing serious threats, or merely short-term difficulties.

Foreign Investment in Iran: Iraqi Experience Suggests Production Impact May Be Several Years Out

The removal of Iranian oil sanctions will eventually permit the return of many international oil companies to Iran. Long-term Iranian supply growth will likely depend on the timing and level of foreign investment. Although much remains unknown at this point, we look to the recent opening of Iraq’s oil sector to provide some insight into how the next few years may play out in Iran. While conditions differ in many ways between these two countries, Iraq’s experience suggests contract finalization may take longer than expected and new foreign investment may not translate into meaningful production gains until at least 2018. Development of Iran’s oil sector may also not proceed as planned. As such, PIRA maintains a cautious outlook on Iranian supply.

U.S. Crude Stock Build Propels Commercial Stocks to a New Record High

Crude imports coming in higher than expected and crude runs lower than expected drove a crude stock build that, in turn, drove total commercial stocks to a new record high. With a smaller overall build last year, the year-over-year excess widened. With a 9.5 million barrel build in commercial stocks the first week of September last year, we expect the surplus to decline when we see next week’s data.

Seasonal Demand Begins to Build Amid Loose Supply; Key Storage Deficits Remain

Hanging a bullish call on colder than normal weather in September is a bit of an analytical stretch for PIRA, but some members of the market are talking up less than 40-mmcm/d of additional weather-related demand (Continent wide) like it was the middle of January and supply was tight. Needless to say, this type of demand is fleeting at best and suggests that true underlying demand growth remains elusive to uncover. Nevertheless, this time of year is when seasonal gas demand begins to build and imports will have to build with them in order to cover both prompt use and top off what's left of injection season. Therefore, sensitivity to disruptions, versus what is deemed to be normal, will grow, even if underlying demand does not.

Italy-France Spreads Remain Compressed on a Forward Basis

Italian day-ahead prices have been quite resilient, with the PUN during September moving even higher than August, having averaged €56.6/MWh. The spreads with France also remain at historically high levels on a spot basis, and yet while widening slightly along the curve, the spreads on a forward basis have stayed extremely compressed.

Bearish Developments Predominate in the Beleaguered Thermal Coal Market

Physical coal prices moved lower during August, but have not been nearly as volatile as oil and equity price movements. Despite the devaluation of the yuan hurting the ability of Australian producers to compete in China, FOB Newcastle prices declined by the smallest extent of the major pricing points. Physical Atlantic Basin balances have experienced tightening over the YTD from warmer weather in Europe, and the supply constraint in Colombia, yet pricing has consistently faded. With European coal demand expected to recede while Colombian supply normalizes, it will be difficult for prices to rebound.

Ongoing CSAPR, MATS Uncertainty as EPA Ozone Efforts Move to Fore

Power plant SO2 and NOx emissions are down 1H15 (2014 emissions were already below the current CSAPR caps). SO2 allowance prices dropped dramatically, but NOx is a different story. EPA is implementing 2008 Ozone Standards and updated, stricter Ozone standards are also to be finalized October 1st, though it is unclear how these may interact with CSAPR. We may not see a DC Circuit ruling deciding how to proceed with the MATS rule until the end of the year or even into 2016.

Record Production of Ethanol-Blended Gasoline

Ethanol-blended gasoline production soared to a record 9,223 MB/D the week ending August 28. Ethanol manufacture dropped to a 16-week low 948 MB/D as more plants cut back due to poor margins.

Critical Corn Numbers on Tap

PIRA’s “final” numbers should look familiar as they have not changed month-over-month. Coming off Crop Tour, we commented that 164 bpa for a national average was a pretty solid number, but recent heat has our model back down to 163.8 bpa. We realize that we’re 175 million bushels below current WASDE demand, but also know that a 450 million bushel reduction in production has merit.

Key Market Indicators Drop

The S&P 500 and other key market indicators dropped sharply week-on-week, but on a weekly average basis various indices gained marginally. Market volatility as measured by the VIX increased week-on-week. Financial stress remains high. Credit spreads continue to widen, indicative of increasing strains in the debt markets. With regard to currencies, there continues to be weakness in the commodity producers, along with other currencies such as the Turkish lira, South African rand, Brazilian real and British pound. Commodities remain generally in decline, though there was some strength seen in palladium, aluminum and copper.

Japanese Crude Stocks Draw, Kero-jet Stocks Lead Product Stocks Higher

Crude runs eased due to planned maintenance and unplanned outages. Crude imports were very low and stocks drew strongly. Finished product stocks rose on higher kerosene and jet fuel stocks. Gasoline demand was fractionally changed with a big drop in yield such that stocks drew slightly. Gasoil demand was higher, but even with higher yield and lower incremental exports stocks still drew slightly. Kerosene demand rose again and seasonal stock building continued. The indicative refining margin remains acceptable, though on the week, most of the cracks eased.

Italians Find a Russian-Sized Gas Field Off the Coast of Egypt

Just as Egypt hits the twin milestones of 6 months as an LNG importer and the installation of a second regas terminal, also at Ain Sukhna, a significant domestic supply discovery has emerged to shift the long term supply balance significantly, this time in Egypt’s favor.

U.S. Coal Market Forecast

As producer bankruptcies and mine shut-ins continue to occur, financially stronger producers are reaping the spoils. Murray Energy (ME) just purchased Goldman-Sachs’ Colombian mining operations, with the intent to increase coal output. Whether this is an effective longer-term strategy remains to be seen. It definitely will add to the market’s oversupply woes.

Global Equities Hit Hard this Past Week

Global equities fell about 4% on the week, with all the major regions falling a similar amount. In the U.S., all the tracking indices fell, with housing doing the best, down only 0.7%. Utilities and materials were the weakest, with energy also down significantly. Internationally, again, all the tracking indices posted losses. China and Japan were the weakest performers.

EIA’s Long-Awaited Form 914 Crude Production Data Published

The EIA’s used their new Form 914 as the source of monthly crude production for Texas and a number of other states, for the first 6 months of 2015, with the August 31 release of their June 2015 Petroleum Supply Monthly. Texas production was revised down, closer to PIRA’s estimates. The downward revisions to U.S. production were offset by upward revisions to the crude balance item, resulting in domestic crude supply values that were largely unchanged. These data do show that reported crude production and domestic crude supply (production + balance item) both peaked in April 2015, and have fallen 0.42 MMB/D by June 2015.

EIA Upside Production Surprise

The EIA’s expanded monthly survey released on August 31st revealed a surprising jump in U.S. gas production from May to June that had not been fully reflected in earlier pipeline flow models. For the U.S. as a whole, the EIA reported that June dry production climbed to 74.5 BCF/D, up month-on-month by ~0.7 BCF/D. Although PIRA’s state-by-state estimates vary from the EIA, our upwardly adjusted June total virtually matches the above EIA estimate. PIRA’s state specific estimates cannot be strictly compared with EIA estimates, given they are not reported on a dry basis.

U.S. Refinery Turnarounds, September 2015 – June 2016

As anticipated the pace of U.S. refinery downtime picks up quite sharply in the coming months. This considers both scheduled turnaround activity as well as the carryover of unplanned events into the period. During June thru August 2015 the average distillation unit cutback was around 1.3-1.4 million B/D. This reaches around 1.7 MMB/D for September, before jumping to nearly 2.2 million B/D for October 2015. These are just some of the findings of PIRA's latest U.S. Refinery Turnarounds report.

Pakistan Raises Gas Rates and Targets Inefficient Use

The Pakistan government on Monday made the critical decision to begin converging domestic gas prices to international levels, as more and more of the nation’s gas supply is expected to come from imports. For the first time in recent memory, the hike in gas prices will include domestic consumers, the single largest, most inefficient block of users of natural gas, and one that has traditionally been exempt from prices increases in the past.

U.S. June 2015 DOE Monthly Revisions

DOE released its final monthly June 2015 (PSM) U.S. oil supply/demand data today, along with its annual PSA revisions for 2014. June 2015 demand came in at 19.59 MMB/D, identical to what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 362 MB/D. Total demand for June 2015 versus June 2014 (PSA) grew 701 MB/D, or 3.7%, compared to the final June 2014 data (year-on-year), and was even stronger than the 530 MB/D (2.9%) growth seen in May. For 2014, annual product demand was raised 70 MB/D, from what had been carried in the preliminary monthlies. End-June total commercial stocks stood at 1,277.4 MMBbls, spot-on with PIRA's assumption for end-June stocks on both crude and product.

U.S. Annual PSA Demand Revisions: Modest Increases

DOE released its Petroleum Supply Annual (PSA), yesterday, which finalized data, by month, for 2014. Annual demand was revised upward by an average of 71 MB/D compared to what had been reported in the Petroleum Supply Monthlies, which for 2014 are now supplanted by the PSA. The upward revisions began to kick in as prices began declining in the second half of the year. By product, the greatest upward revision was in NGL and liquid refinery gases (LRG) demand, which on an annual average basis accounted for 53 MB/D of the 71 MB/D increase. The second largest product increase was in distillate, revised on average 27 MB/D. As evidenced by the data, the magic of price continues to stimulate demand growth, not only in the U.S, but elsewhere.

Aramco Differential Adjustments for October — Generally More Generous

Saudi Arabia's formula prices for October were just released. Most of the terms to refiners were made more generous vis-à-vis their differentials to the key pricing benchmarks. Differentials in Asia and Europe were all lowered on Arab Light and heavier grades, with the biggest reductions on the heaviest grade, Arab Heavy. Differentials in Asia were tightened modestly on the lightest grade, Arab Super Light, and left unchanged for Arab Extra Light. In the U.S., the terms on all the grades were made more generous by $/0.50-0.60/Bbl.

Tight Oil Operator Review

Despite the weak oil price environment, Eagle Ford was the only one of the "Big Three" U.S. shale plays to see production decline on the quarter. Production continued to rise in the Permian and the Bakken was mostly flat as a drawdown in the inventory of drilled but uncompleted wells offset the impact of reduced drilling. Ongoing deflation in service costs, improved drilling times, high-grading, and enhanced completion techniques allowed operators to increase production using fewer capex dollars. As of the second quarter, full-year spending budgets were down 43% from 2014 levels, but spud-to-total depth (TD) times have come down 10-25% and drilling and completions costs down 15-25%. Operators expect to realize another 5-10% in savings by the end of the year. Most operators expect production to remain flat or decline slightly in 2H15.

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

NYC-based PIRA Energy Group reports that the U.S. to allow exchange of Mexican heavy crude for domestic light crude. In the U.S., commercial inventories increased this past week, modestly widening the year-on-year stock surplus. In the Japan, crude runs continued rising, while low level of crude imports drew crude stocks back. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. to Allow Exchange of Mexican Heavy Crude for Domestic Light Crude

The U.S. is set to allow the exchange of up to 100 MB/D of Mexican heavy crude for U.S. light crude. PIRA believes this move will add modest support to U.S. crude prices relative to international levels by reducing the risk of price disconnects. A lighter crude slate in Mexico increases light product yields and allows for somewhat higher runs. In our view, this development represents another incremental step towards easing restrictions on U.S. crude oil exports, but not a fundamental change in policy.

A Slight U.S. Stock Build

Commercial inventories increased this past week, modestly widening the year-on-year stock surplus. In contrast to recent weeks, product stocks drew while crude inventories built. Crude stocks are now almost 94 million barrels higher than last year. The bulk of the remaining product excess to last year is in distillate and propane with the latter showing up in other products.

Japanese Holiday Supports Gasoline

Due to the mid-August holiday, two weeks of data were reported this past week. Crude runs continued rising, while low level of crude imports drew crude stocks back below 100 MMBbls. Gasoline demand was strong both weeks and stocks drew to near record lows. Gasoil demand was depressed in the latest week due to the holiday and stocks built. The kerosene stock build rate accelerated on low seasonal demand. The indicative refining margin has improved a bit on better gasoil cracks and gasoline cracks, which are still characterized as strong.

EIA Proposing Some Significant Changes to Petroleum Data

The EIA published a number of significant proposed changes to their petroleum forms and data in a recent Federal Register Notice. Adding complete balances for a PADD II split into PADD II-A (Northwestern PADD II), and PADD II-B, the balance of PADD II, is one of the major changes. They propose to consolidate the number of breakouts in jet and distillate balances. EIA also proposes to stop collecting crude oil stocks held at production lease storage – currently about 32 million barrels – and remove those volumes from all historical and forecast balances. They are proposing to add better coverage of in-transit stocks moved via rail, tanker, and barge. They are also proposing reorganizing the gasoline balance along the lines of gasoline blended with ethanol and gasoline not blended with ethanol.

U.S. Waterborne LPG Exports Slump

Waterborne LPG exports from the U.S., as tallied by PIRA shiptracking efforts were just 3.3 MMB (470 MB/D) last week, a significant 45% decrease from the previous week’s sailings. Approximately 60% of these shipments are headed to the Latin America/Caribbean region. Worsening arbitrage economics over the past few weeks help to explain this latest decrease in export activity.

U.S. Ethanol Recover some of the Midweek Loses

Ethanol prices were pulled down August 12 because of a USDA report that was bearish for corn values. Assessments rebounded by the end of the week as buyers returned.

U.S. Output Flat

The ethanol industry was stable the week ending August 14, with production remaining at 965 MB/D after having fallen to an eleven-week low 961 MB/D two weeks earlier. Stocks increased by 32 thousand barrels to 18.6 million barrels.

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

NYC-based PIRA Energy Group reports that 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.

NYC-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.

Amidst the gloomy days of August when Brent Crude bottomed out at $42/bbl, the acquisition of Cameron by Schlumberger ($14.8 billion) took place as one of the largest mergers in the oil patch, following the tie-up of Halliburton and Baker Hughes ($32 billion) in November 2014. This consolidation has resulted in an integrated service & equipment provider covering the full oil & gas lifecycle from reservoir to first flow.

Our latest research suggests that the Global Oilfield Services sector will face a 36% decline in expenditure in 2015, prompting industry players to cut costs and reposition themselves through shedding underperforming/non-core business units. Prior to the Cameron merger, Schlumberger had already cut 15% of its workforce while the former had been consolidating business lines since 2014, selling several business units to GE and Ingersoll Rand, and subsequently the Letourneau jackup rig designs, rig kits and aftermarket service businesses to Keppel in late August 2015.

This move suggests a strategic intention towards integration of equipment and service/engineering to improve on efficiency and cost effectiveness of field development. The market will be watching closely for the reaction to the ‘pore-to-pipeline’ proposition. Is this the future? Or is it taking the ‘one-stop-shop’ approach too far?

Low global crude prices have hit Saudi Arabia hard. With a considerable budget deficit, Saudi has been forced to begin borrowing from capital markets – $4bn in July. The kingdom is highly reliant on oil – accounting for more than 90% of budget revenues. Cuts have not been made to capital expenditure and Saudi has engaged in an expensive conflict within Yemen. Consequently, the decision to ride out lower prices has put a huge strain on finances – the IMF estimates $50 oil will lead to a deficit of ~$140bn (20% of GDP) this year. Plugging holes in the budget with bond issues is the clearest sign yet that the kingdom is feeling the pinch, the question is, how long can it continue?

At least for the time being, there seems to be room for more lending, with plans to raise $27bn by year end. Debt levels have been dramatically reduced since the late 1990s when borrowing reached 100% of GDP (prior to July’s bond issue, debt was 1.6% of GDP). At present, liquidity does not seem to be a problem with local banks easily absorbing bond issues. However, further borrowing into 2016 and beyond could prove problematic. Predicted rises in global interest rates over the coming years may make borrowing unattractive, forcing further withdrawals from the country’s foreign reserves. If current oil price trends continue, these reserves could fall to $200bn by 2018 – 70% less than pre-crash levels.

Where does this leave the country? Maintenance of oil output has secured market share and proved devastating for US onshore drilling. However, with a “bathtub” shaped recovery a very real possibility, Riyadh may be forced to make a number of difficult decisions regarding domestic subsidies and expenditure in order to reduce a potentially crippling budget deficit.