NYC-based PIRA Energy Group reports that accounting for the strength of U.S. jet fuel demand this summer. In the U.S., stock excess accelerates. In Japan, stocks draw, but finished product stocks continue to rise. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Accounting for the Strength of U.S. Jet Fuel Demand this Summer

Jet fuel demand spiked in June, July and early August. Because the economy's fundamentals do not support such a high level of domestic demand, we suspect that higher than currently assumed exports will result in a revision downward of the final demand numbers. There is already data from the Bureau of the Census that suggests that July exports will be revised up by 100 MB/D, which will put July demand back to levels more consistent with the underlying fundamentals.

U.S. Stock Excess Accelerates

The year-on-year stock excess widened this past week to the highest this year. The inventory increase was mostly in crude oil as weekly imports jumped to the second highest level this year. The recent relative weakness in dated Brent to U.S. crude prices is encouraging more imports to the United States. The product inventory increase was the smallest in several weeks as reported product demand increased compared to the week before and product imports remained quite low, eliminating most of the huge excess in products the week earlier. The entire excess in inventory over last year is outside of crude oil and the four major products, being mostly in NGLs, where production is soaring.

Japanese Crude Stocks Draw, but Finished Product Stocks Continue to Rise

Crude runs fell back and crude imports declined which drew crude stocks. Finished product stocks continued to rise. Demand impacts from the Respect for the Aged holiday, directionally came in as expected, with gasoline demand higher and gasoil demand lower, but the impacts were muted. Gasoline and gasoil stocks rose modestly, while the kerosene stock build rate came in slightly above seasonal norms. Refining margins improved slightly, but remain soft. Gasoline and fuel oil cracks improved, while middle distillate cracks were little changed.

Freight Market Outlook

A glut of crude oil in the Atlantic Basin has driven the flat price of dated Brent crude below $100 per barrel to its lowest level in over two years and shifted the market structure into contango, encouraging storage. These developments have conjured up memories of the large buildup of crude in floating storage in 2008-2009, when the unfolding financial crisis plunged the global economy into the great recession. At the peak in 2009, over 100 million barrels of crude were placed into floating offshore storage on VLCCs and Suezmax tonnage. Vessel operators are also benefitting from the lowest bunker prices since June 2012 as these have plunged along with the flat price of crude oil.

Inexpensive Naphtha to Check Further Asian LPG Price Gains

Propane contango in Asia widened $14/MT with the FEI curve catching up to consistently steeper Saudi CP structure. Reports of recently lowered Saudi crude production would lead to a corresponding drop in LPG exports. Spot large cargoes jumped 3%, being called at $857/MT for late October and 1st half November arrival. Butane followed, up $15/MT to $886. Naphtha held steady. Steepening Saudi CP structure and stronger seasonal Asian demand should support prices next week while increasingly inexpensive naphtha should limit upside in the region. European prices will trend with Asian and American markets.

Biofuel Demand is Slowing Down in the U.S., Europe and Brazil; Growing Elsewhere

Biofuels programs continue to proceed actively in many countries. Canada will need about 2.2 billon liters (580 million gallons) of ethanol this year to satisfy its 5% ethanol mandate.

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.

By: Arthur "Alex" Perez

Burleson LLP

Many non-U.S. companies may owe Uncle Sam federal income taxes if they conduct business on the US Outer Continental Shelf ("OCS"). And the IRS has indicated that it is actively seeking non US companies or individuals who may be performing a variety of activities for the energy industry on the OCS such as: providing services as contractors including seismic testing, drilling, repair, salvage, etc.; owners or operators of non US registered vessels that bareboat or time charter to others; or operating vessels to transport supplies or personnel between US ports and locations on the OCS.

A key question in determining US tax liability is whether a non-US company is considered to be "engaged in a US trade or business" for tax purposes. The IRS applies a fairly low threshold in determining whether companies are "engaged in a US trade or business" and therefore subject to US taxation and reporting requirements. And since the Outer Continental Shelf is considered to be part of the territory of the United States, any non-US business that provides services on the OCS may be subject to US taxation if they are engaged in a trade or business there.

Take for example the case of Bahrain based Adams Offshore Services Ltd, which recently challenged an IRS tax deficiency determination amounting to USD $24 million. The case will be decided in US Tax Court, however, many more companies may be in the same position and can expect to be contacted by IRS.

Even payments for vessels that are chartered out on a bareboat or time charter basis in US waters may be subject to US taxation. US tax law provides that such charter payments for the use of a vessel in US waters are subject to a 30% withholding tax on the gross rental payment. A US payor who fails to properly withhold such payments may be subject to penalties as well.

Foreign companies that fail to properly file tax returns reporting income from their US trade or business may be subject to liability for the delinquent income tax payments, as well as interest and penalties. A significant trap for such companies may include taxation on the GROSS amount of revenue generated by the US trade or business. In other words, foreign companies that fail to properly report their US trade or business may be taxed on gross revenue from the business, without deduction for expenses.

There may be ways to avoid or minimize US income tax liability, but such efforts are generally much more successful if foreign companies engage in tax planning before they receive a call from the IRS.

NYC-based PIRA Energy Group reports that there is potential for Iceland volcano eruption to disrupt North Atlantic air traffic and jet fuel demand.  In the U.S., crude stocks draw larger than the product stock build. In Japan, low demand builds product stocks.  Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Potential for Iceland Volcano Eruption to Disrupt North Atlantic Air Traffic and Jet Fuel Demand

Iceland’s Met Office warned that the country’s largest volcano might erupt, potentially posing a threat to air traffic in the North Atlantic. This is reminiscent of 2010’s eruption of Iceland’s Eyjafjallajökull volcano, which disrupted air traffic in the North Atlantic and Europe for about a week cutting oil demand.

U.S. Crude Stocks Draw Larger than Product Stock Build

The August 15 commercial stock draw was less than last year’s draw, widening the year-over-year stock excess. The crude draw exceeded last year’s, narrowing the crude excess versus last year. The four major refined product stocks built a collective 1.4 million barrels, and with a draw last year, their collective deficit narrowed. All other product stocks built less than last year so their excess narrowed. We remain in the pattern of the major refined products being in deficit, all other products being excess, and the crude stock position osculating from looser to tighter, especially when considering stocks required for crude infrastructure expansion.

Low Demand in Japan Builds Product Stocks

Two weeks of data were reported this past week due to the annual mid-August hiatus. Crude stocks rose over the last two weeks, but more troubling was a large build in finished stocks, much of it gasoil, but to a lesser extent kerosene (seasonal), and fuel oil. Demand in the latest week was extraordinarily low.

Asian LPG Prices Stronger

Recent strength in local South China prices helped lift LPG more than 2% in Asia this week. Propane cargoes for October delivery were called $18.50 higher at $836.50 while butane rose by the same amount to $876.50/MT. The October Propane FEI settled $6 higher than the cash market. Lower imports into China, in part due to a change in tax invoicing, has led to inventory draws – prompting a $32/MT rally in local prices last week. Strong discounts to naphtha and improved seasonal demand should support prices next week while recent price strength leaves room for a correction.

U.S. Ethanol Output and Stocks Rise

U.S. ethanol production reached 937 MB/D the week ending August 15, up from 931 MB/D during the previous week as more plants are operating near capacity. Stocks built 491 thousand barrels to 18.3 million barrels.

U.S. Ethanol Prices and Margins Increased

Ethanol prices soared the week ending August 15 as the market tightened. Demand in the domestic and export markets were strong, while production remained significantly below the June peak.

Global Political Risk - Political Risk Scorecard

Growing Libyan exports, continued U.S. intervention in Iraq, and reduced tensions in Ukraine will weigh on prices next week.

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.

Recent news headlines on the LNG sector in Australia seem to be centered around its unsustainable rising costs. Woodside Petroleum had to ditch plans last year for its Browse LNG plant, which had gone way over budget at an estimated cost of US$80bn. In the interest of continuing the development, Woodside and its partners have now turned to FLNG vessels as a practicable alternative. More recently, Santos and GDF Suez have also scrapped plans to build gas plants off the Northern Territory Coast of Australia. Projects that have gone ahead have seen significantly increased costs. At approximately 80% completion, the Gorgon LNG project is now estimated to cost US$54bn – a sharp contrast to the original budget of US$37bn (46% over-budget).

In the meantime, despite Australia's LNG cost challenges, the United States is moving forward with the possibility of bringing onstream an LNG plant that would cost between US$2.2bn and US$3.7bn. Magnolia LNG in Louisiana is expected to come onstream in 2018, potentially the nation's first LNG export plant with the capability of processing 8 million metric tons per annum. This shows the feasibility of constructing similar infrastructure at that price, but outside Australia!

Australia's Woodside is, at the same time, looking to make a move overseas in search of better economics. The country stands to lose US$97 billion of potential LNG projects to East Africa and North America unless radical cost reduction is applied. Furthermore, Russia and China's $400bn gas deal could possibly undermine several of Australia's gas projects.

Australia has actively been finding ways of implementing reforms in an attempt to reduce operating costs. Even with the recent Russia-China deal, pipeline gas from Russia will only be supporting 6% of China's gas demand by 2030. China cannot avoid seeking diversity in its energy sources. New technologies and innovations, such as the much-anticipated FLNG vessels, will present themselves as potential solutions. With these cost-reducing opportunities/ challenges, it proves to be interesting how the scenario will play out for Australia, new LNG producer entrants elsewhere and the potential for new gas pipeline suppliers to China.

www.douglas-westwood.com

Denmark is the European Union's (EU) only net exporter of oil. The Nordic state's oil exports totaled approximately 13.7 million barrels of oil equivalent in 2013. This is in stark contrast to the EU's only other significant oil producer, the UK, which became a net importer in 2004 and has experienced a steep decline in output since, as its historically productive North Sea fields reach extreme maturity. Denmark has maintained its status as a net exporter despite peak oil production in 2004. A strong shift towards wind power has seen a decrease in oil used for electricity generation while district heating systems traditionally fuelled by oil are now switching to natural gas and renewable sources.

Denmark's ability to hold on to its status as the EU's last net exporter is likely to diminish in the long-term. Its North Sea fields continue to stutter and decline in output, seeing production half from a peak of 389 kb/d in 2004 to just 192 kb/d in 2014. In 2013, a range of technical issues meant that only 12 of 19 operational fields were producing from August to December. A lack of large discoveries has also inhibited Denmark's upstream sector, seeing oil reserves fall from 1.3 Bnboe in 2006 to 0.8 in 2013. A lack of fresh developments has also led to a decline in drilling, just eight development wells have been drilled over the last three years. Well completions increase slightly in the medium-term with the development of the high-pressure-high-temperature Hejre field – however DW do not expect this to arrest the production decline.

Based on current trends, DW predict Denmark's ongoing issues with North Sea developments will see it become a net importer of oil by 2021. By this time, oil production will likely have waned to around 130 kb/d – the country's lowest daily output in 30 years.

www.douglas-westwood.com

From a peak of 396 in 1996, numbers of wells drilled offshore UK fell to 164 in 2013, a low not seen since 1979. Development wells were down from 289 in 1998 to 120 in 2013. Exploration & appraisal drilling, on which offshore production ultimately depends, saw numbers fall from 224 in 1990 to 44 last year. Of these the key driver is of course exploration wells, down from 157 in 1990 to just 15 last year.

However, drilling activity is now expected to increase over the next few years as government and industry reacts to the recommendations in Sir Ian Wood's report – the "Wood Review" – to maximise UK offshore oil & gas recovery. The most significant of these being the need for a new regulator to help industry to work collaboratively and furthermore, to implement various strategies to address problems with exploration drilling and improved oil recovery, amongst other issues. Also stemming from the Wood Review are proposals for a simplified fiscal regime to incentivise investment and drilling activity and ease the burden upon the new regulator.

So what does this mean for the future drilling market? To meet production forecasts, DW expects that total offshore wells drilled will need to grow from 164 last year to 241 in 2018. Whilst the majority of these would be in shallow water and drilled by jackups, deepwater developments in Northern North Sea and west of the Shetland Isles will provide opportunities for semi-submersible drilling rigs. However, in the longer-term drilling activity will again decline, unless the new regulator can effectively use its new powers to incentivise long-term investment from operators to drill more wells and fully exploit the remaining hydrocarbons offshore UK.

 www.douglas-westwood.com

HOUSTON, Aug. 14, 2014 /PRNewswire/ -- Deep Down, Inc. (OTCQX: DPDW) ("Deep Down" or the "Company"), an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, reported financial results for the quarter ended June 30, 2014.

OPERATING RESULTS

For the second quarter of 2014, Deep Down reported a net loss of $1.2 million, or $0.08 loss per diluted share, compared to net income of $1.0 million, or $0.10 income per diluted share, for the second quarter of 2013.

Revenues for the second quarter of 2014 and 2013 were $5.8 million and $9.2 million, respectively. The $3.4 million decrease (37 percent) is the result of the 2013 period being unusually high. Additionally, projects valued in excess of $17.0 million were delayed during the second quarter of 2014, resulting in lower revenues of approximately $7.0 million.

Gross profit as a percentage of revenues for the second quarter of 2014 and 2013 was 29 percent and 38 percent, respectively. The nine percentage point decrease in gross profit was due primarily to the delay of several lump sum projects just discussed. The delay of these projects negatively impacted the gross margin by approximately $2.6 million.

Selling, general and administrative expenses ("SG&A") for the second quarter of 2014 was $2.8 million, or 48 percent of revenues. SG&A for the second quarter of 2013 was $2.4 million, or 26 percent of revenues.

The $0.4 million increase in SG&A is due primarily to quality, project management, engineering, shop improvements related to safety systems, increased security costs and an increase in bad debt expense.

A significant portion of the increase was due to the impact of the decision to delay a Latin America regional operation in Panama, which included a $0.2 million accrual of all related costs, and an increase in security costs at the new facility of $0.1 million.

The Company's management evaluates its financial performance based on a non-GAAP measure, Modified EBITDA, which consists of earnings (net income or loss) available to common shareholders before net interest expense, income taxes, depreciation and amortization, and other non-cash and non-recurring charges. Modified EBITDA was $(0.3) million for the second quarter of 2014 vs. $1.7 million for the second quarter of 2013. The $2.0 million decrease in Modified EBITDA was due to a $1.8 million decrease in gross profit before depreciation due to reasons previously discussed, and a $0.2 million increase in SG&A before Panama exit costs and share-based compensation expense, also due to reasons previously discussed.

For more information, please visit: Deep Down, Inc.

NYC-based PIRA Energy Group reports that the July stock decline at Cushing strengthens WTI.  In the U.S., there was largest weekly stock draw since January.  In Japan, crude runs and stocks rose. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

July Stock Decline at Cushing Strengthens WTI

Stock levels for crude oil at Cushing dropped below 20 million barrels last month, for the first time since 2008. With logistical constraints still in place throughout much of the Midcontinent, most crude grades weakened relative to WTI, and even the Dated Brent premium shrank. However, the LLS premium strengthened, as Gulf Coast crude stocks dropped due to higher refinery runs.

Largest Weekly Stock Draw Since January

Overall U.S. commercial oil inventories fell this past week with a large product stock decline (the first since March) and a crude inventory decline. Crude stocks have fallen for six consecutive weeks. The large product inventory decline was supported by the strongest reported demand of the year. Overall inventories are now back below last year by 1.3 million barrels, with gasoline and distillate down roughly 10 and 2 million barrels, respectively.

Japanese Crude Runs and Crude Stocks Rise

Runs continued to rise in line with declining maintenance activity. Crude imports increased and crude stocks posted a modest build. Finished product stocks rose slightly. Gasoline demand fell back but lower yield allowed for a small stock draw. Gasoil demand was higher, but stocks still built on higher yield. Refining margins remain quite weak with the gasoline crack posting another sharp decline.

A Statistical Analysis of Cushing Crude Stocks and Storage Capacity Utilization

Different expressions of Cushing fundamentals, such a percent of storage capacity utilized, can have better relationships to WTI 1st – 2nd spreads than outright Cushing stocks. Over time, the strength in the correlation between Cushing fundamentals and WTI spreads has changed. Cushing fill ratios at either extreme of the historical range drive non-linear spread behavior.

Aramco Announces Crude Price Differentials for September

Saudi Arabia's formula prices for September were just released. Prices into the U.S. were cut, against the ASCI benchmark, across the board after two straight months at record highs. Pricing into Europe and the Med against the Bwave benchmark was raised. In Asia, not surprisingly, terms were made more generous.

BULLETIN: Market Dynamics Reflecting a New Reality

There is currently a crude surplus in the Atlantic Basin which has weighed on relative prices and narrowed light-sweet crude premiums. The development of this surplus during peak season Atlantic Basin runs and North Sea maintenance has caught a market by surprise typically conditioned for tightness at this time. Many people trade off historical relationships and expect them to continue. But supply/demand changes transform markets, even though it takes time for these markets to fully absorb the new reality.

Mt Belvieu Prices Stay Strong

The U.S. LPG complex remained strong in the face of falling energy prices worldwide. Cash propane at Mt Belvieu strengthened by over 2% to 102.4¢/gal. Propane prices dipped below $1 early in the weak, falling in sympathy with oil prices. Prices have rallied since Wednesday’s stocks report, as inventory increases have been decreasing in size. The prospect of a large crop drying season is also acting as a tailwind for prices.

Ethanol Prices Plunge

U.S. ethanol prices fell sharply the week ending August 1 after the DOE’s latest supply report showed that inventories had risen to a 16-month high the prior week. As a result, ethanol manufacturing margins were slightly lower.

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 Asian oil balances remain long, for now. In the U.S., product stock build outpaces crude draw, widening commercial stock excess. In Japan, both crude and finished product stocks rise. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Asian Oil Balances Remain Long, For Now
Oil prices are likely to remain soft. Asian oil demand will pick up in 4Q and support a rising run profile post-turnaround. The continued glut of Atlantic Basin crude will need to be moved to Asia which will keep Brent-Dubai narrow. Eventually, Asian crude demand will rise and some of the surplus should be drawn, thus presenting a floor to prices. Gasoil cracks should be supported by seasonal demand increases, while gasoline cracks will weaken seasonally. Refinery margins should show improvement from weak levels seen earlier, but new refinery capacity both in Saudi Arabia and the UAE will present challenges in arbing product out of the Asian theater.

U.S. Product Stock Build Outpaces Crude Draw, Widening Commercial Stock Excess
The stock data for the week of September 5 reflected a rebenchmarking to the latest (June 2014) monthly, raising the possibility that weekly stock changes might be distorted when one week is indexed to a new benchmark, and the prior week to an older one. We mention this because of the larger than expected light product builds, and the unusual propane draw. Looking at the data as reported, crude stocks drew more this year than last, slightly widening the year-over-year deficit.

Both Crude and Finished Product Stocks in Japan Rise
Crude runs fell back slightly and imports rose, thus building crude stocks. Finished product stocks continued rising, though gasoline and gasoil stocks posted a draw. Gasoline demand continues to come in below expectations, but gasoil demand was quite strong this past week. Kerosene demand was higher on the week and the stock building rate came in slightly less than seasonal norms. Refining margins remain poor, but there was a slight improvement in gasoline and middle distillate cracks.

U.S. LPG Strength Continues, Future Prices Increases Will Face Headwinds
Propane prices reacted to Wednesday's EIA surprise of near unchanged stocks by climbing an additional 2% this week. Butane was dragged a penny lower to $1.27/gal by a large drop in gasoline prices, although butane blending economics remain extremely robust. U.S. LPG price increases will likely moderate or re-trace as stock building resumes in the coming weeks, and as the spot arbitrage to Europe and Asia remains challenged, if not closed.

Ethanol Prices Plunge
Most U.S. ethanol assessments reached seven-month lows September 4 as the DOE reported that stocks built 356 thousand barrels and the production of ethanol-blended gasoline fell 1.1% from the previous week. Corn futures were also the lowest in over four years.

Production of Ethanol-blended Gasoline Declines
U.S. ethanol-blended gasoline manufacture plummeted to 8,553 MB/D the week ending September 5 from 8,802 MB/D during the previous week, as total gasoline output declined. U.S. ethanol output rose to 927 MB/D from 921 MB/D as production outside of PADD II reached another record high.

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

NYC-based PIRA Energy Group reports that oil inventories are higher and crude demand is lower.  In the U.S., stock surplus to last year is roughly flat. In Japan, crude stocks draw amid peak run rates.  Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Oil inventories are higher, crude demand is lower and PIRA is beginning to question the expected 2H 2014 and 2015 lift off in economic activity. Also, add in unrelenting upward revisions to U.S. oil supply growth with non-OPEC supply additions continuing to substantially outpace demand growth and you have a combination of factors pointing to lower prices.

Stock Surplus to Last Year Roughly Flat

This past week’s inventory increase kept the year-on-year overall stock surplus to around 4 million barrels. The crude inventory decline took crude stocks slightly below last year, and at current high run rates crude stocks are still relatively tight, which was reflected in September relative prices. The product stock change reflected lower product imports (to a new low for the year) being offset by weaker reported demand and higher product output.

Japanese Crude Stocks Draw Amid Peak Run Rates, Finished Product Stocks Continue Building

Runs rose fractionally on the week and lower crude imports led to a crude stock draw. Finished products, however, have continued rising amid peak runs. Gasoline demand was higher but is still seen as underperforming seasonal expectations. Gasoil demand rebounded from very low levels. Kerosene stocks continued to build along seasonal norms. All the product cracks improved on the week and our indicative margin indicator rose, but remains rather weak.

Impact of Russian Gas Flow Interruption on Oil Demand

In the low probability event of a complete Russian gas flow stoppage to Europe, oil demand could potentially increase 600 MB/D. In the more likely scenario, still just 30% probability, of a stoppage of flows through Ukraine to Europe, the impact on oil demand would not be material.

U.S. Refinery Turnarounds, September 2014 – December 2015

There was a relatively high level of crude unit downtime during August and the level of both planned turnarounds and other outages carrying over from the current month is expected to increase over the next couple of months.

Freight Market Outlook

A glut of crude oil in the Atlantic Basin has caused the flat price of crude to fall and regional grade differentials with Asia to narrow substantially. The Brent-Dubai spread has narrowed to its lowest value in four years, prompting a significant increase in the number of West African cargoes headed to Asia in August. In addition, the Dubai price structure is now in contango, with forward prices higher than those for the prompt month, making it easier to hedge cargoes on the long voyages from the Atlantic. This is a good omen for VLCC operators as more vessels are tied up on long voyages around the horn of Africa from the Atlantic to Asia. The flip side, of course, is that Mideast liftings to Asia in the fourth quarter will have to decline to make room for the added Atlantic Basin supplies.

Asian LPG Prices to Benefit from Lower Saudi CPs

LPG prices in Asia held steady this week, prior to this weekend’s imminent release of Saudi contract prices for Sept tons. CP futures prices indicate that the propane CP could fall while Asian destination markets show that the butane CP could remain flat or perhaps drop by $10/MT.

Ethanol Demand Soars

U.S. ethanol-blended gasoline manufacture soared to 8,904 MB/D the week ended August 22, up from 8,667 MB/D during the prior week and very close to the record 8,980 MB/D set in May. Ethanol output dropped to 913 MB/D, the second lowest rate of production since April.

U.S. Ethanol Prices Rise in August

Ethanol prices rose in August, after falling during the prior three months. The market tightened as stocks drew by the largest amount since March 2013.

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 there was the largest 2Q stock build in the last 10 years. In the U.S., there was a modest U.S. stock build. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Largest 2Q Stock Build in Last 10 Years

Last week’s release of IEA stock data, combined with weekly data in the United States and Japan, show that commercial oil inventories in the three major OECD markets increased in the second quarter. Weak economic activity has undermined oil demand, forcing supplies into inventory. Higher inventories are undercutting PIRA’s confidence in its most recent oil price forecast. In contrast to Brent, front-month WTI remains well supported relative to further-out contracts by extraordinarily low inventories and strong September refinery demand.

Modest U.S. Stock Build

Overall commercial inventories increased this past week, keeping stocks relatively flat to last year’s level. The inventories of the four major products are 22 million barrels below last year, while crude is 6 million barrels higher.

PIRA Lowers Price Outlook

While we have not formally updated our detailed supply/demand balances, which will be done later this month, it is becoming clear that, because of weaker demand, inventories will be much higher than last month’s forecast. We should note that some of today’s downward price pressure could be coming from producer hedging.

2Q14 Tight Oil Operator Review

Second quarter results were positive across the board. There were no lingering effects from the harsh winter with considerable production gains in the Bakken, the Eagle Ford, the Niobrara and the Permian. Many operators cited renewed gains in completion efficiencies in mature plays, as well as growing success in smaller plays like the Powder River. Bakken and Eagle Ford operators increased frac sizes and laterals, leading to higher IPs and EURs. Yet the focus of the industry was centered on the delineation and development of the Permian basin, where the production potential continues to grow with the identification of further productive layers.

U.S. Ethanol Output Tumbles

For the week ending August 8, most U.S. ethanol prices rebounded from the lowest level in several months after the DOE reported production had plummeted and inventories decreased during the week ending August 1. Manufacturing margins declined slightly as the lower average price for ethanol and co-product DDG outweighed the fall in corn costs. U.S. Ethanol Inventories Fell to a 11-Week Low 17.8 Million Barrels Ethanol-blended gasoline production soared to a seven-week high 8,902 MB/D the week ending August 8, fairly close to the record 8,980 MB/D set earlier this year. As ethanol demand rose, inventories fell to an 11-week low of 17.8 million barrels, down 500 thousand barrels from the previous week.

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.

*Increase in Non-OPEC production to exceed growth in Global Oil Demand in 2014, reducing call on OPEC productionGlobal oil demand in 2014 is forecast to increase by about 1.2 million barrels per day (mmbd) compared to 2013 levels, while non-Organization of the Petroleum Exporting Countries (OPEC) members' production will grow by approximately 1.6 mmbd, reducing the call for OPEC production, according to research and consulting firm GlobalData.

The company's report* states that a significant increase in non-OPEC production is forecast to occur, particularly in North America, where crude oil and condensate production will increase by about 1.3 mmbd.

Carmine Rositano, GlobalData's Managing Analyst covering Downstream Oil & Gas, says: "Crude oil production increases are also expected in South America, the Former Soviet Union and from the greater use of biofuels. This will more than offset slightly lower production anticipated in the North Sea and Mexico.

"The growth in US oil production of just over 1 mmbd, combined with the expansion of Canadian production, will continue to reduce imports into North America. These could then flow into Asia, where the rise in oil demand will greatly exceed the slight increase forecast in local production."

Venezuelan crudes are now more likely to end up in Asia than North America, as Asia imported just under 1 mmbd of Venezuelan crudes in 2013. This has increased tonne-mile demand in the tanker industry for Very Large Crude Carriers, while decreasing the need for shorter-haul tanker movements into North America, according to the analyst.

Rositano continues: "Crude oil supply patterns and pricing differentials, along with marine freight rates and refining margins, will continue to be impacted by North America's higher forecast production levels, especially if the current ban on exporting US crude oil remains in place.

"It will be interesting to see which OPEC member will reduce its production should Iraq's output continue to increase and when Libyan production comes back online. It also remains to be seen whether Iran's export level will increase, should it reach an agreement over the nuclear issue with the West.

 *Increase in Non-OPEC production to exceed growth in Global Oil Demand in 2014, reducing call on OPEC production

This report provides a comparison of global oil demand and supply for 2014 versus 2013, detailing the increases in non-OPEC oil production and its effect on the supply of OPEC crude oil. It includes an evaluation of geopolitical risks and details of demand levels by product (gasoline, diesel/gasoil and aviation jet fuel) in both regional and global terms.

This report was built using data and information sourced from proprietary databases, primary and secondary research, and in-house analysis conducted by GlobalData's team of industry experts.

NYC-based PIRA Energy Group reports that Cushing stocks to rise in 4Q, while pipeline projects relieve congestion in other midcontinent markets. In the U.S., slight stock build matches last year's. In Japan, crude stocks draw and finished product stocks continue rising. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:

Cushing Stocks to Rise in 4Q, While Pipeline Projects Relieve Congestion in Other Midcontinent Markets
Fourth quarter crude stock increases, both in Cushing and on the Gulf Coast, will very likely lead to contango for LLS and Mars and quite possibly for WTI as well. However, stronger fundamentals in other regions should lead to improved differentials for Canadian, Bakken, Rockies and Permian Basin crudes.

Slight U.S. Stock Build Matches Last Year's
Overall inventories built this past week, keeping stocks just 3.2 million barrels above year-ago levels. The product stock build was 2.4 million barrels, as strong product demand offset a one-week surge in product imports. Crude stocks drew about one million barrels less than the week before, largely because of the decline in run rates. Refinery margins are great and refiners have been running more crude than last year over the last four weeks.

Japanese Crude Stocks Draw; Finished Product Stocks Continue Rising
Runs continued to rise with a still lower crude import rate that allowed crude stocks to draw. Finished product stocks continued rising. Gasoline and gasoil demand fell, and for both products there were stock builds of about 0.4-0.5 MMBbls. Kerosene stocks continued to build along seasonal norms. Refining margins remain poor, but there was a slight improvement in gasoline and gasoil cracks.

China Quarterly Oil Demand Monitor
Growth in China's apparent oil demand exhibited extreme volatility in recent periods. On a smoothed (four-quarter moving average) basis, however, demand growth has been relatively stable and has tracked the path of GDP expansion. Physical indicators that can be tied directly to oil demand (such as car sales and ethylene production) have also expanded solidly of late. Looking forward, the short-term volatility in reported figures may very well persist, but the underlying pace of oil demand growth will remain constructive.

3Q14 Iraq Oil Monitor
Territorial gains by ISIS reignited Iraq's sectarian crisis. U.S. airstrikes have stalled ISIS's momentum for now, but the military stalemate is likely to persist. Current PM Maliki agreed to step down, but deep-rooted sectarian mistrust presents a challenge in forming a unified government. Flows through the Kurdish pipeline are nearing 200 MB/D and Kurdish cargoes continue to load from Ceyhan, but buyers are hesitant without U.S. approval. A new 1 MMB/D pipeline from the Halfaya and Missan fields to the Fao storage facilities removes one constraint from southern capacity expansion. However, bureaucratic holdups during government formation will likely constrain capacity growth. Furthermore, southern infrastructure could be at risk if ISIS switches to guerilla tactics.

What GDP Growth Rates Are Required for Positive Oil Demand Growth?
One commonly heard refrain in the oil industry is that GDP growth must exceed 2.5% in order to see positive oil demand growth. A recent PIRA report addresses this issue and determines that the GDP growth threshold is 2.1% for the U.S. and 2.3% for Europe. These results accord with PIRA's own rigorous bottoms-up approach, which includes fuel efficiencies, fuel substitution, lifestyle changes, etc. PIRA's long-term outlook, which calls for U.S. GDP to grow 2.7% per annum through 2020, forecasts oil demand growth of 0.4% per annum. Because European GDP growth lags at only 1.8% p.a., oil demand declines 0.5% per year.

Aramco Announces October Price Reductions for Differentials
Saudi Arabia's formula prices for October were just released. A reduction in differentials was enacted for all the key markets with the most aggressive reductions being to Asia. Prices into the U.S. were cut $0.40/Bbl, across the board, against the ASCI benchmark, after a $0.80/Bbl reduction for September barrels. Even with the reduction, Saudi barrels remain less competitive than like U.S. domestic grades by about $2-3/Bbl. In Asia, not surprisingly, terms were made more generous. The biggest reduction was for Arab Extra Light -$2.00/Bbl. Arab Heavy was reduced the least at -$1.20/Bbl. The reductions are seen as necessary to maintain refiner demand amid rising fall turnarounds and a very poor margin environment. Also, competiveness versus competing grades has waned, so a reduction in differentials was warranted.

U.S. LPG Prices Strengthen Despite Record High Stocks
U.S. LPG prices ripped higher this week despite sharply lower crude oil prices. Mt Belvieu propane futures increased 3.3% to the highest level since July 1 as open interest and trade volume soar to all-time highs on the contract. But with spot arbitrage movements to Europe and Asia turning flat to negative, U.S. prices make take a breather from recent strength and look to destination market prices for future direction.

Ethanol Prices Soar
U.S. ethanol prices jumped the week ending August 22 after a bullish DOE report indicated a huge inventory draw the prior week. Production was less than many expected, while the output of ethanol-blended gasoline was higher.

Ethanol Manufacture Increases
U.S. ethanol output rose to 921 MB/D the week ending August 29 as production outside of PADD II reached a record high 81 MB/D. Inventories increased to 17.7 million barrels, up 356 thousand from the prior week.

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.

A Chinese company with both the capital and ambition to strategically expand its influence is the most likely suitor for Citgo Petroleum Corporation (CITGO), which state-owned Petróleos de Venezuela, S. A. (PDVSA) is looking to sell for at least $10 billion, with a Canadian bid also possible, says an analyst with research and consulting firm GlobalData.

Carmine Rositano, GlobalData's Managing Analyst covering Downstream Oil & Gas, states that Chinese companies, such as Sinopec and China National Offshore Oil Corporation, have already invested billions of dollars in Canadian oil sands projects and could use their equity production to supply heavy sour crude oil to the CITGO refineries.

GlobalData asserts that while the assets on offer are strategic to the US energy complex, a Chinese bid would be more flexible in terms of structuring a deal that meets PDVSA and Venezuela's requirements.

Rositano says: "Venezuela currently exports 500 thousand barrels per day (mbd) of crude to China to pay off its $17 billion debts, but additional loans now require a further 100 mbd. Despite extensive reserves, PDVSA has struggled to meet production targets as the government has allocated increasingly less funding to upstream development.

"As such, freeing up crude that would otherwise be sold to CITGO would enable Venezuela to meet its obligations with China."

Another possibility is that a Canadian oil company will bid for CITGO's assets. Suncor and Husky Oil own refineries in the US, with Suncor processing Canadian crudes at its facilities and Husky Oil upgrading its refinery to increase the running of Canadian oil sand crudes.

Rositano explains: "Canadian oil sands crude production is forecast to increase steadily, and the status of proposed pipelines to transport crudes to Canada's west coast for exports is now uncertain, with lawsuits against the proposals pending.
"Purchasing the three CITGO refineries, which are already geared to run heavy sour oil sand crudes, would appear to be a good option for a Canadian oil company."

Although PDVSA has long considered selling CITGO, Rositano believes the timing is now better than ever, and says that reasonable offers are not only likely to be considered, but previous deals suggest that they will be lower than the reported $10 billion asking price.

Successful Transformation from an Oil Trading, Transportation and Storage Company to a Resource-based Energy Enterprise

Brightoil Petroleum (Holdings) Limited ("Brightoil Petroleum" or the "Group"; stock code: 933.HK) announced the closing of a stock purchase agreement (the "Agreement") with Anadarko China Holdings 2 Company Limited ("Anadarko China"), a wholly-owned subsidiary of Anadarko Petroleum Corporation ("Anadarko Petroleum"), to acquire a participating interest in two oil producing blocks in Bohai Bay (Contract Area 04/36 and Unit Area 05/36) at a consideration of USD
1.046 billion.

Following the signing of the agreement on 18 February, the acquisition was successfully completed on
8 August after six months of efforts put together by both parties. After the closing of the Agreement, the Group now holds a 40.09% participating interest in the 124km2 offshore block (Contract Area 04/36) and a 29.18% participating interest in the 88 km2 offshore block (Unit Area 05/36). The operator of both blocks is CNOOC China Limited ("CCL").

As a result of this, the Company's oil and natural gas resources extend from the ground to offshore, and the Company's oil and natural gas storage and production will increase immensely. Together with its originally owned Dina1 and Tuzi natural gas field, the Company's interest in 2P storage is expected to reach approximately 86 million boe. When all these three areas are in operation, Dina1 and Tuzi and Bohai will reach a daily net production of approximately 25,000 boe, and an annual net production of approximately 9 million boe. Upon this successful Closing, the Company will reach a solid step-out and broaden its activities into energy resources supply and operation.

Dr. Sit Kwong Lam, Chairman of Brightoil Petroleum, said, "We believe that the closing of the acquisition marks the successful transformation of the Group in its aim to become a resource-based energy enterprise. The Group will continue to strengthen its development in the upstream business, aiming to achieve sustainable growth of its reserves, production volume and revenue in the long run. This will accelerate the Group's development into an international integrated oil & gas conglomerate and at the same time enhance our returns to investors and create further shareholders' value. "

About Brightoil Petroleum
Brightoil Petroleum (Holdings) Limited is a resource-based energy enterprise focusing on upstream oil and gas resources exploration, along with further developments downstream. The Group is principally engaged in the Exploitation and Production of Upstream Oil and Gas Fields, Marine Transportation, Oil Storage and Terminal Facilities and International Trading and Bunkering Business.

The Group has three oil and gas field projects in its portfolio, including Dina1 Gas Field, Tuzi Gas Field and Caofeidian Field in Bohai Bay. The Company's interest in 2P storage is expected to reach approximately 86 million boe. When all these three areas are in operation, Dina1 and Tuzi and Bohai will reach a daily net production of approximately 25,000 boe, and an annual net production of approximately 9 million boe.

The Group currently operates four Aframax Oil Tankers and five VLCCs, and has a marine transportation capacity that will exceed 2 million tons.

The Group's oil storage facility on Waidiao Island in Zhoushan, with a total capacity of 3.16 million cubic meters, is under construction. The facility will be equipped with 13 berths which can accommodate vessels from 1,000 to 300,000 DWT. Meanwhile, the Group's oil storage facility on Changxing Island in Dalian, with a total capacity of 7.19 million cubic meters, is also under construction. The facility will be equipped with 13 berths to accommodate vessels from 1,000 to 300,000 DWT.

The Group is one of the largest marine bunkering service providers in China with services expanded to global ports. The Group's tradable range of products is diversified into fuel oil, crude oil, gas oil, as well as petrochemical and the related petroleum products. The annual trading and supplying volume has reached approximately 20 million tons.

The Group will continue to develop its upstream business by stretching its tentacles into the exploration, exploitation and production of oil fields with a view to becoming one of the leading resources-based energy conglomerates in the world.

The downing of flight MA17 has prompted calls for further sanctions on Russia targeted at its energy sector. Russia is the world's largest exporter of natural gas and second largest exporter of oil which together account for near 60% of its export earnings. Gazprom supplies 30% of Europe's gas - some 15% via Ukraine - and has warned exports will be affected if sanctions are expanded. But in its payments row with Ukraine Gazprom has already stated that it will "only be supplying the exact amount of gas requested by our European partners to the Russia-Ukraine border". Considering that Ukraine itself needs to draw gas supplies from the same pipelines, Europe is already threatened with gas shortages.

But Russia itself also faces challenges, namely in maintaining – let alone growing – production as existing fields deplete. In 2000, it drilled 3,770 wells and production was some 17 million boe/day. By 2013 it was drilling some 7,500 wells and achieved a production of 23 million boe/day – well numbers up 99% for a production gain of 35%. On this basis at DW we forecast it will need to be drilling over 8,800 wells in 2020 and in increasingly more difficult areas, hence the Exxon rig sailing to location in the Russian arctic (much to the embarrassment of some on Capitol Hill).

The Russian economy is already in a mess and to maintain its oil & gas production it increasingly needs to access western capital markets and advanced oilfield technologies. Sanctions that severely hit its energy production will indeed work and cripple the Russian economy, but could cause oil prices to soar and thereby impact the still fragile global economy.

But the real lesson of this whole affair is for Europe – it is far too reliant on imported energy. No single type of energy source or supplier is immune from problems and Douglas-Westwood have long warned that Europe is sleep walking into an energy crisis due to lack of investment in both 'home grown' base-load energy sources such as nuclear power and shale gas, in energy storage and Europe-wide integrated transmission networks.

www.douglas-westwood.com