NYC-based PIRA Energy Group reports that improving VMT and trucking trends confirm better highway fuel demand growth. On the week, U.S. product stocks declined again, while in Japan crude stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

 Improving VMT and Trucking Trends Confirm Better Highway Fuel Demand Growth

The Federal Highway Administration recently released vehicle miles traveled (VMT) data for August, while the American Trucking Association released its Truck Tonnage Index for September.  Both indicators showed improvements versus year-ago, and this confirms the improvement in both gasoline and estimated on-highway diesel demand growth.  PIRA's forecast through year-end, for both gasoline and diesel, suggests that both these indicators from FHA and ATA should continue their improving trend. 

Another Huge U.S. Product Inventory Decline

Overall commercial oil inventories in the United States fell almost 6 million barrels for the week ending November 8, with a product inventory decline more than offsetting a crude stock increase. Product inventories have declined for nine consecutive weeks, falling over 42 million barrels but are expected to moderate over the next few weeks. With crude runs strongly moving up, this should translate into crude stock declines, particularly at the Gulf Coast. The stock excess to last year narrowed this past week. 

In Japan, Runs Continue Rising, Crude Stocks Build

Runs continued rising post-turnaround and crude imports stayed sufficiently high to produce another large crude stock build. Gasoline and gasoil demands eased but their yields were notably lower so stocks of both were only modestly changed. Kerosene demand eased slightly but yield jumped such that stocks resumed building. Refinery margins moved slightly higher as light and heavy cracks showed modest improvement. 

Tight LPG Markets

U.S. propane markets remain quite tight as crop drying, exports, petchem feed use and meeting winter needs combine to pull stocks lower. Propane has reached its highest value relative to WTI so far this year. Various supply limitations are helping pressure international prices higher just as winter weather is approaching. LPG has been priced out of the chemical feedstock pool.

U.S. Ethanol Prices Decline

Most ethanol prices declined early the week ending November 8 before advancing thereafter due to strong domestic and export demand, as well as higher corn prices. Cash margins for ethanol manufacture fell to the lowest level in 11 weeks.

EPA Proposes Biofuel Requirements for 2014

Friday afternoon, the EPA issued a regulatory announcement that proposes to substantially reduce the 2014 biofuel requirements set forth in the Renewable Fuel Standard (RFS2). The Agency proposed specific volumes and is soliciting comments for selecting a value from specified ranges for total, advanced and cellulosic biofuels. 

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 markets are fundamentally supportive, but Atlantic basin imbalances remain. On the week, U.S. crude stocks built again, while Japanese crude stocks drew slightly. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asian Oil Market Fundamentally Supportive, but Atlantic Basin Imbalances Remain

After recovering in the first half of October, crude oil prices have come under pressure once again. Global physical balances are weak with stock building in progress which is undermining crude oil price time spreads. The stock builds have been larger than anticipated because refinery runs have been lower as margin pressure has lasted longer. The data out of China looks better and economic downside risks have lessened. Asian middle distillate cracks have held up relatively well and demand strength should continue to be supportive. 

U.S. Crude Stocks Build Again

U.S. crude stocks built for the week ending October 18, the fifth consecutive weekly increase. Some 70% of the build has been at the Gulf Coast and another 22% occurred in PADD II. Crude price time spreads signaled the October builds and they are doing the same for November. The expected tightening of global crude balances in November has been postponed by significantly lower crude runs than what was anticipated earlier. Crude markets in Europe are quite weak with a substantial overhang of North Sea barrels pressuring spreads, especially with the recent sharp increase in long haul freight. 

Storm Impacts and Turnarounds Continue

This week saw the impact of Typhoon Wipha, while next week will reflect Typhoon Francisco. Japanese runs dropped back further, but should soon start turning higher. Implied crude imports stayed low and crude stocks drew slightly. Gasoline demand was relatively strong, with lower yield that drew stocks. Gasoil demand fell back, but yield was much higher and stocks built off record lows. Refinery margins remain soft. 

U.S. Propane Stocks Being Drawn Down

Colder weather has arrived in the U.S. and will help pull propane stocks yet lower. Exports remain active, as does petchem feed use, as well as usage for crop drying. Propane has traded at the highest level in months relative to WTI. 

Ethanol Prices Higher

U.S. ethanol prices advanced during the week ending October 18 as supply was tight and corn rose after attracting large buying from China. RINs stabilized after a draft EPA memo lowering the 2014 biofuels mandates sent values plummeting during in the previous week. 

U.S. Ethanol Output Soars

U.S. ethanol production soared to 897 MB/D the week ending October 18, the highest output since June 2012, as the 2013/2014 corn harvest is progressing in the Midwest and more feedstock is available at extraordinarily low prices. Output was up 3.2% from 869 MB/D in the preceding 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. 

Transocean Ltd. (NYSE: RIG) will replace Dell Inc. (NASD:DELL) in the S&P 500 after the close of trading on Monday, October 28. Founder Michael Dell and Silver Lake Partners are acquiring Dell in a deal expected to be completed soon pending final conditions.

Transocean provides offshore contract drilling services for oil and gas wells. Headquartered in Zug, Switzerland, the company will be added to the S&P 500 GICS (Global Industry Classification Standard) Oil & Gas Drilling Sub-Industry index.

Following is a summary of the change:

Additions to and deletions from S&P  Dow Jones Indices do not in any way reflect an opinion on the investment merits of the companies involved.

About S&P Dow Jones Indices

S&P Dow Jones Indices LLC, a part of McGraw Hill Financial, is the world's largest, global resource for index-based concepts, data and research. Home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average™, S&P Dow Jones Indices LLC has over 115 years of experience constructing innovative and transparent solutions that fulfill the needs of investors. More assets are invested in products based upon our indices than any other provider in the world. With over 830,000 indices covering a wide range of asset classes across the globe, S&P Dow Jones Indices LLC defines the way investors measure and trade the markets. To learn more about our company, please visit www.spdji.com.  

By Steven Kopits, Douglas-Westwood, New York

Alaskan oil production peaked in 1988 at around 2 million bpd and has been falling since, possibly down to 510kbpd this year. Virtually all of this production flows through the 800 mile Trans-Alaska Pipeline (TAPS), to Valdez, in southern Alaska. But TAPS is struggling, operating below a quarter of its capacity, with fears that it will lose its viability below 300kbpd.

In the wake of the run-up in oil prices before the recession, then governor Sarah Palin brought in a 75% tax rate from 2007. This stalled investment and production decline rates increased to nearly 7% from 4% a decade earlier. Alarmed by this, the current governor, Sean Parnell reduced the top tax rate to 35%. This brought promises of investment by BP and ConocoPhillips. However, expectations remain modest, at best to reduce declines to 20kbpd / year from the current 40kbpd pace. If expectations are met, TAPS will reach the 300kbpd threshold in 2024, rather than 2020. Many Alaskans are unimpressed and are forcing a referendum to re-instate the higher tax rates – they see the end of the state’s golden age of oil and want to get all they can, while they can.

On the other hand, Shell has big plans, as much as 1.8 mbpd from Alaska’s Outer Continental Shelf, 40% more than Gulf of Mexico production today. But cost to first oil is in the $40-60 bn range, and one has to wonder whether Shell has the fortitude to hold out until initial production in 2025. Indeed, Goldman Sachs spent much of a recent report berating Shell for “overspending in low return assets and unproductive capital”. Shell’s incoming CEO, Ben van Beurden, comes from the chemicals division, where he managed to increase profitability and lower Capex. Will a downstream manager feel the exotic lure of Alaska as much as the upstream team has? Or will he decide that 2025 is just too long for investors who are looking for cash quarter by quarter? Alaskans have good cause to feel nervous.

NYC-based PIRA Energy Group believes that Brent crude prices likely to be poised to move back higher. On the week, U.S. product stocks declined, while in Japan crude stocks jumped. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Brent Crude Prices Likely To Be Poised To Move Back Higher

Brent crude prices have moved into the lower half of their recent trading range but are likely to be poised to move back higher as refiners return from maintenance. U.S. Gulf crudes are currently weaker compared to Brent with building U.S. inventories but should improve relatively over the next month. Atlantic Basin distillate cracks are firm and should strengthen further for another month with tight inventories in the Atlantic Basin in general despite large imports arriving into Europe. Gasoline cracks will stay seasonally weak. Refining margins in the U.S. are healthy with advantaged crude pricing but margins in Europe will stay thin.

Another Huge U.S. Product Inventory Decline

Continued strong product demand combined with an extraordinary decline in product output, namely gasoline, pulled product inventories down for the week ending November 1, the largest product stock decline of the year. The weekly gasoline output decline was largely due to a DOE adjustment of inventory from finished to blending components. Total commercial stocks fell as the crude inventory increase moderated. With crude runs set to move substantially higher, crude stock increases should disappear, and we are expecting a flat profile next week, although Cushing crude stocks build again.

Japanese Crude Stocks Jump on Higher Imports

Crude imports took a big jump on the week, which led to a large crude stock build despite higher runs. On the product side, gasoil stocks drew to another record low, with a big pickup in incremental exports. Kerosene demand was surprisingly strong for this time of year, and stocks drew for the second straight week.

Rising Crude Stocks Weaken U.S. Prices

Rising crude stocks in Canada, West Texas and the Gulf Coast weakened prices in those markets and began spilling over into Cushing – currently the strongest region, on a relative basis. North American Midcontinent crude prices have dropped sharply relative to global benchmarks, and have all moved into contango. With southern markets now reconnected, Cushing can't get strong until the Gulf Coast gets strong.

Lower Gasoline Prices Push U.S. Vehicle Sales Towards Light Trucks

Lower gasoline prices are not only helping to sustain the recovery in U.S. light vehicle sales, but have also helped boost the market share of light truck sales, which should have positive implications for gasoline demand growth. U.S. light vehicle sales for October were released last week and they showed resilience against the impact of the government shutdown and continued below trend growth in disposable income.

U.S. Alternative Fueled Vehicles Slow to Gain Traction

October U.S. light vehicle sales indicate purchases of hybrids, electrics, and diesels continue to languish as fuel prices have eased. Market shares remain low, but appear consistent at this point with PIRA's penetration assumptions used post 2014. The biggest category of alternative vehicle sales remains hybrids with 33,565 sold in October 2013, a gain of only 0.8% versus last year and lagging overall vehicle sales growth of 10.5%.

Saudi Formula Crude Prices for December Show No Breaks for Asian Refiners

Saudi’s formula prices for December were recently released. In Asia, differentials were raised for all crudes other than Arab Heavy which was left unchanged. This follows a lowering on light grades in November with a range of $0.20 (Arab Light) to $1.30/Bbl (Super Light). Heavier grades in November were raised. Asian margins have been soft, but runs will rise in November and December. The December tightening of terms came in more aggressively than a recent small survey of Asian refiners had been expecting.

Modest Indian Oil Demand Growth Is Expected, Provided Macro Stability Continues

The Indian economy has recently faced a triple-whammy of a falling currency, accelerating inflation, and weakening growth. The currency situation has made oil imports more costly, and this has contributed to a recent slowing in oil demand growth. With a new central bank governor firmly in charge and U.S. Fed’s monetary stimulus continuing for now, the economic situation is starting to look better. Oil demand should begin to see improvements, as long as the macro stability continues.

Both Near-Term and Longer Price Risks For Natural Gas Are Biased to the Downside

Both near-term and longer-price risks for global oil and North American natural gas are biased to the downside. In the case of oil, the potential for volume recovery in MENA coupled with an upside for shale production in Permian and elsewhere are key bearish factors. With regard to North American gas, strong growth in Marcellus is likely to further accelerate as infrastructure is added.

Positive U.S. Employment Shocker Changes Outlook for Growth and Monetary Policy

The most important take away from this week’s data was that U.S. employment growth is now clearly strengthening. This is very positive for the short-term outlook, as employment gains are basically synonymous with economic growth. It also has major implications for monetary policy.

Financial Stresses Continue to Ease and Remain Low

The European Central Bank (ECB) cut key interest rates this past week, somewhat unexpectedly, and the Euro sold off against the U.S. dollar. It remains to be seen if the rate cut will impact the trajectory of the ECB balance sheet which has been showing a steady decline and had been reinforcing a strengthening Euro versus the U.S. dollar. European yield spreads have trended lower and key CDS quotes remain very low (bottom quartile), with several hitting new lows. Gold broke below $1,300/oz.

Global Equities Mixed

U.S. markets were mostly higher on the week with the growth indicator strongly outperforming the defensive indicator on the back of a strong employment report and better than expected GDP for 3Q. Banking and materials were the best performers. Internationally most of the tracking indices fell back with Latin America posting the poorest performance. Brazil and Mexico showed sizeable declines on the week, but Argentina was higher.

U.S. Economy Continues to Display Good Growth

The U.S. economy is broadly displaying good growth on a host of fronts. The most recent GDP statistics for 3Q were stronger than expected at 2.8%, annualized, with all sectors contributing to growth. PIRA conservatively estimates 2013 GDP growth to be 1.7%, and 2014 at 2.5%. The ISM for October, both overall and new orders, moved modestly higher and clearly remains in a strong expansion mode. The Chicago PMI for October was very strong.

Tanker Operator’s Hopes Have Been Buoyed Recently

Tanker operator’s hopes have been buoyed recently by a sharp upturn in crude tanker rates.  Historically, tanker rates over the last two months of the year are the seasonally strongest, and this seems to be playing out this year.  VLCC rates have risen to the highest levels since November 2012, supported by the end of the Far East refinery maintenance period and record levels of Chinese imports.  Western fixtures are also high in November as term contract formula prices for Saudi, Kuwaiti and other Mideast grades, which are indexed to U.S. domestic sour crudes, are more than $10.00 per barrel below those for shipments to Europe and Asia.

U.S. Propane Market to Stay Tight

Propane continues to lead the way for the U.S. NGL complex. The midcontinent is still in dire need of material to dry the record corn crop, just as winter conditions are approaching.  Exports will remain quite high all through this year and beyond, keeping inventories relatively low.

Ethanol Values Tumble

U.S. ethanol prices decreased to a three-year low during the week ending November 1 due to higher output and lower corn costs. Falling gasoline values were also a drag on the market.

Ethanol Output Falls/ Inventories Rise

U.S. ethanol production fell to 902 MB/D the week ending November 1, dropping from an annual high of 911 MB/D in the preceding week.  Inventories rose by 204 thousand barrels to 15.2 million barrels from a four-year low of 15.0 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. 

Click here for additional information on PIRA’s global energy commodity market research services. 

With high operating and development costs surrounding many offshore Arctic fields, profit can only be achieved with decreased state taxation rates under current market conditions, says an analyst with research and consulting firm GlobalData.

Domagoj Baresic, GlobalData's Analyst covering Upstream Oil & Gas, states that the interplay between potential profit gains and high costs will likely be most evident in the Russian Federation, which has a strong state policy of developing upstream resources in its untapped Arctic frontier.
According to GlobalData, Russia has 27 confirmed offshore oil and natural gas planned fields in the Arctic Circle, some of which are among the last undeveloped large fields in the country, boasting more than 100 million barrels of oil equivalent.

In Russia, developers pay mineral extraction and export duty taxes dependent on oil prices and currency exchange rates, resulting in the state take reaching 90% of total revenue.
Baresic says: While operating and development costs cannot be significantly reduced, the best hope for turning discoveries into profitable producing fields is by decreasing state take through tax alleviation.

Projects such as the Prirazlomnoye field, which is expected to begin production in early 2014, could not have been developed without such tax alleviation, which was achieved mainly through reduced export duties and applying Mineral Extraction Tax (MET) relief.
Currently, a 50%-reduced export duty applies to oil produced from Prirazlomnoye, and since the field is located north of the polar circle, the first 257 million barrels of oil will not be subject to MET. These tax incentives are projected to reduce the state take from 90% to 50% and increase the Internal Rate of Return from 2% to 11%.
However, even with extra incentives, many fields in the Arctic could prove unprofitable under the current fiscal regime, giving rise to the possibility that the entire present system of tax alleviation measures might be reconsidered in the future, concludes the analyst.

PIRA Energy Group, a NYC-based energy markets consulting firm, reports that the U.S. is the world's largest producer of oil in 2013, according to data presented at PIRA's recent Retainer Client Seminarheld in New York City on October 10th and 11^th. 

U.S. total supply for 2013 is expected to average 12.1 MMB/D.  In 2012 the U.S. overtook Russia to become the second largest supplier of oil and was just behind Saudi Arabia.  Both the U.S. and Saudi Arabia increased their supply in 2013, though production in the U.S. grew at a faster pace.  U.S. total supply in 2013 is larger than that of Saudi Arabia by 0.3 MMB/D and ahead of Russia by 1.6 MMB/D.  The fourth through 10^th largest suppliers are: China, Canada, UAE, Iran, Iraq, Kuwait, and Mexico.

Total oil supply counts all forms of liquids supply.  The largest part is crude oil, including condensates.  In this category, the U.S. is expected to produce 7.4 MMB/D, which is less than that produced in Saudi Arabia and Russia by roughly 3 MMB/D each.  But the U.S. has substantial other forms of supply, including natural gas liquids (NGLs) at 2.5 MMB/D, biofuels at 1.0 MMB/D, and "refinery gain" at almost 1.3 MMB/D.  (Refinery gain measures the ability of a refinery to optimize its output through sophisticated high conversion capabilities.)

The U.S. has surged to be the world's lead oil supplier because of growth in shale oil.  Shale crude and condensate production at 2.5 MMB/D in 2013 is now slightly over one-third of total U.S. crude production, and shale NGL at 1.2 MMB/D is almost half of total NGLs.  Shale crude is seen growing by 0.8 MMB/D this year, while shale NGL grows 0.3 MMB/D versus 2012.  The U.S. shale liquids growth of 3.2 MMB/D over the last four years has been nearly unparalleled in the history of world oil; only Saudi Arabia in 1970-74 raised its production faster.

U.S. total supply growth in 2013 is seen at 1.0 MMB/D and about the same as last year's growth.  Its growth rate is greater than the sum of the growth of the next nine fastest growing countries combined and has covered most of the world's net demand growth over the past two years.

The U.S. position as the largest oil supplier in the world looks to be secure for many years.  Although growth rates of U.S. shale liquids are expected to become smaller in the future, PIRA's forecast sees the U.S. increasing the lead over the next two largest countries until after 2020 and retaining the lead to at least through 2030. 

For more information click here for additional informationon PIRA’s global energy commodity market research services.

NYC-based PIRA Energy Group reports that Brent crude prices came off their early September highs. On the week, the U.S. had strong product demand trend but a large crude stock build. In Japan, crude stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Brent Crude Prices Came Off Their Early September Highs

Brent crude prices came off their early September highs, but the further crude price declines will be limited by tighter near-term supply/demand balances. Supply losses remain huge. Refinery runs bottom in October as maintenance peaks but then runs recover. The WTI-Dated Brent spread is stabilizing near negative $5-6/Bbl. Atlantic Basin gasoline cracks should stay generally weak as inventory coverage remains ample. Middle distillate cracks should move higher over the next few months. Margins will recover in the weeks ahead, led by growing middle distillate strength.

Strong U.S. Product Demand Trend but Large Crude Stock Build

Product inventories declined for the week ending September 27, but this was overwhelmed by a crude inventory build. The resulting 5 million barrel inventory increase is in sharp contrast to last year's inventory decline for the same week last year. This widened the year-on-year inventory excess to 2.2%. Most of the excess is in gasoline.  

Japanese Crude Stocks Build; Turnarounds Continue

Crude stocks built due to imports rising following the impacts of the most recent typhoon, while gasoline and gasoil stocks drew. For gasoline, the draw was due to good demand, while for distillate it was driven by low refinery yield and higher incremental exports. The kerosene stock build rate increased, but the 4-week build rate remained about the same. Refining margins continue to slowly improve from poor levels.  

Saudi Formula Crude Prices for November Reflect Weak Asian Margins

Saudi’s formula prices for November were recently released. In Asia, differentials were lowered most aggressively on lighter grades, but the differentials for Arab Medium and Heavy were raised, with Heavy being raised the most. Asian margins have been poor, so the more generous terms on the lighter grades were in line with market economics.   

Latest Oil Inventory Update: Continued Low Stocks

The final June data and preliminary July data for OECD Europe were released this past Thursday and when combined with U.S. and Japanese estimates continue to point to low inventories in the three major OECD markets. The June stock data were revised lower and the second quarter is now showing an inventory decline compared to last month's increase. Relative to the year earlier, stocks began the year with an excess and ended August with a deficit. 

Ethanol Prices and Cash Margins Soar

Ethanol values in Chicago rose during the week ending September 6 because of the scarcity of corn in the Midwest, causing production to fall to a 22-week low and inventories to drop to the lowest level in two months. Cash margins for ethanol production rocketed to the highest level since November 2011.

Ethanol Production Rebounds

U.S. ethanol production rose to a 4-week high of 848 MB/D the week ending September 6 from 819 MB/D in the preceding week. Some plants restarted after routine summer turnarounds. In addition, facilities in the Midwest have been able to secure corn via barge and rail from as far south as Mississippi, where the 2013/2014 harvest has already begun.

Relatively Low Propane Stocks to Start Fourth Quarter

U.S. propane stocks entered the fourth quarter relatively low and are likely to remain so given crop drying activity, petchem feed use and growing exports. Ethane stocks continue relatively high, while butane inventory is dropping as gasoline blending picks up the pace. The contango in Asia has widened helping support winter stock building. Propane continues as a preferred olefin cracker feedstock in Europe, helping sustain demand until winter requirements pick up.

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. 

Click here for additional information on PIRA’s global energy commodity market research services. 

Recent Alaskan bill seeks to reduce tax burden on larger oil and gas operations

Incentive could result in increased production to mitigate North Slope declines, says analyst

Uncertainty surrounds the outlook for Alaska’s fiscal terms as a referendum seeking to repeal a new bill, which imposes a flat 35% production tax rate, will be held in 2014, says a new report from research and consulting firm GlobalData.

According to the company’s latest report*, Alaska has made several changes to the fiscal terms governing its upstream oil and gas operations in the past decade, mostly through amendments to the production tax and the introduction of a vast range of tax credits, resulting in a relatively unstable regime over this period.

Alaska’s new production tax, as laid out in Senate Bill 21 (SB 21), seeks to reduce the tax burden on larger oil and gas operations in the hope that this will promote exploration and development activity in the region, thereby boosting its economic growth and employment.

However, opposition to the tax change comes from those who believe it will significantly affect state finances, by reducing the tax take, and low-margin oil and gas producers in the state for whom the tax burden will increase.

Evan Turner, GlobalData’s Lead Analyst covering Upstream Oil & Gas, says: With almost nine months to go until the referendum is held, there is a high degree of uncertainty around the likely outcome of the vote. Currently, polls suggest that the vote will be close, with no clear majority yet formed on either side of the argument.

However, given that it is the larger producers who are likely to gain from the tax change, it is expected that the no campaign may benefit from considerable financial support, so that it can promote a message of economic and employment gains. For instance, BP Alaska has announced that due to the tax changes, it plans to add $1 billion of investment for the next five years.”

GlobalData expects this referendum to be the key determinant of the medium-term outlook for Alaska’s  upstream oil and gas fiscal regime.

Turner says: “If SB 21 is repealed, the tax will revert back to Alaska’s Clear and Equitable Share (ACES) system, with rates varying from 25-75%. If not, the new flat rate of 35% will mean an improvement in the investment climate for large oil and gas operations and the possible deterioration for smaller operators.

Incentivizing larger operators in the state to increase investment and the drilling of wells should result in increased production to mitigate North Slope declines, concludes the analyst.

*Alaska Upstream Fiscal and Regulatory Report

NYC-based PIRA Energy Group reports that the U.S. is now largest oil supplier in the world. On the week, continued low U.S. runs led to large product stock decline.  In Japan gasoil stocks drew to a new record low. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

 U.S. is Now Largest Oil Supplier in the World

2013 total liquids supply is expected to average 12.1 MMB/D in the U.S., making it the world’s largest oil producer, overtaking Saudi Arabia and Russia. Shale liquids development is the key driver of the growth, with a increase of 3.2 MMB/D over the last four years. In the history of the global oil industry only Saudi Arabia in 1970-74 raised its output faster.

Big Increase in 2014 (and 2015) Global Refinery Capacity

Despite the fact that the world currently has a surplus of refining capacity, new additions are on the way. In comparison to beginning-year 2013, world refining distillation capacity is set to increase by about 5%, or 2.6 MMB/D, by the end of this year; another 2.1 MMB/D will come online in 2014. The biggest capacity increase over the two years comes from new construction projects in China and the Middle East.

Storms Disrupt Operations

Storms and typhoons continue to track toward Japan with a fair bit of regularity, with Typhoon Danas impacting Okinawa, followed by Typhoon Wipha impacting the Tokyo area. Yet another typhoon (Francisco) is tracking toward Japan. Gasoline stocks drew modestly, while gasoil stocks drew to a new record low. The implied crude import figure was very low and this allowed crude stocks to draw. Refinery margins remain weak.

Overview of API Data

Continued low U.S. runs led to large product stock declines as forecast. Tropical Storm Karen apparently did not reduce crude imports, leading to a very large crude stock build. Cushing crude stocks build as the Basin pipeline dumped more crude into Cushing with Magellan throughput down and a narrow LLS-WTI spread attracted more rail barrels to Cushing.

Qatari Marketing Flexibility Provides Key Signals for Price Direction

Qatar has benefitted financially from placing more LNG into Asia and has managed to do so at a premium to Atlantic Basin spot prices in Asia. To date, Qatar has been able to place incremental volumes into Japan, Korea, and China at, or close to its relatively strong oil-linked prices. How much more gas Qatar can (or will) divert to Asia from Europe this winter is a key question for AB spot players, who have the most to lose if there turns out to be more “wiggle room” on the supply side than anticipated.

Ethanol Price Rebound/ RIN Values Plummet

U.S. ethanol prices increased for the first time in three weeks as production declined and inventories fell to the lowest level since the EIA began reporting weekly stock data in June 2010. Circulation of a purported draft of an EPA report setting lower biofuels mandates for 2014 sent RIN markets crashing. 

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 decline in production among Malaysia’s shallow-water reserves has prompted the country to shift its focus towards new development opportunities in deepwater areas and marginal fields. However, incentives designed to attract investors have only recently been introduced, indicating that further fiscal changes are unlikely to come soon, according to research and consulting firm GlobalData. 

The company’s latest report* states that as most of Malaysia’s oil production has historically come from shallow-water areas, the government has been pushed to introduce a number of tax incentives this year to help improve the attractiveness of the country’s fiscal terms and promote further development activity.

Under Production Sharing Contracts (PSCs), marginal fields – defined by reserves of up to 30 million barrels of oil, or 500 billion cubic feet of natural gas – are subject only to petroleum income tax at a rate of 25% instead of the usual rate of 35%.

Meanwhile, under Risk Service Contracts (RSCs), which are also offered for marginal fields, contractors only pay a corporate income tax of 25%, rather than the petroleum income tax.

GlobalData believes that the additional investment allowance introduced by recent legislation should prove to be a significant improvement to Malaysia’s fiscal regime.

Jonathan Lacouture, GlobalData’s Lead Analyst for the Asia-Pacific region, says: “Numerous measures have been involved in the government’s drive to increase production from its marginal fields. Since the introduction of RSCs in 2011, there have been two forms of contract into which investors may enter, and this, combined with reductions in the tax liability afforded to marginal fields under 2013 legislation for PSCs, should increase the attractiveness of investment opportunities.”

However, due to these recent changes to Malaysia’s fiscal terms, it is expected that any further alterations will be unlikely over the next few years.

If the terms do not achieve their desired investment amounts in the medium to long term, the government may decide to make additional changes, but this will depend on short to medium-term results. It is most probable that terms will remain stable until the effects of these recent policies can be assessed,concludes Lacouture.

*Malaysia Upstream Fiscal and Regulatory Report

Total announces that it has received approval from the South African authorities and has completed the acquisition of a 50% interest in Block 11B/12B, from CNR International (South Africa) Ltd., a wholly owned subsidiary of Canadian Natural Resources Limited.

The asset is located in the Outeniqua Basin, around 175 kilometers off the southern coast of the country, and covers an area of 19,000 square kilometers with water depths ranging from 200 to 1,800 meters.

Total also becomes Operator of Block 11B/12B and will drill an exploration well on the Block in 2014.

“Our acquisition in this extensive frontier exploration asset demonstrates our determination to establish ourselves in new plays. South Africa's deep offshore, in particular the Outeniqua Basin, is one of the few remaining under-explored offshore regions in Africa. Recent discoveries in the Falkland Islands (Malvinas Islands) together with the prospects identified on the block offer us very promising opportunities." commented Marc Blaizot, Senior Vice President, Exploration at Total. “The results of the upcoming exploration well will be decisive, especially in terms of operability of the area in such a harsh environment. As the Operator, we will leverage our recognized deep offshore expertise and experience in challenging waters such as the North Sea and the Barents Sea, to quickly appraise the potential of this acreage." This acquisition is aligned with Total’s strategy of expanding its exploration and production operations in under-explored countries with strong growth potential.

Total in South Africa

Present in South Africa since 1954, Total is now the country’s fifth-ranked marketer, with sales of 3.1 million tons of products each year, a network of 528 service stations, its biggest outside Europe, and a 36.6% interest in the Natref refinery alongside Sasol. The Group is also South Africa’s third-ranked LPG marketer and fifth-ranked coal exporter.

Total’s solar affiliate, SunPower, is active in ground-mounted solar power plants and off-grid solar facilities in South Africa. It is currently building two solar power plants near Douglas, in The Northern Cape. Total is also implementing decentralized rural electrification programs through KwaZulu Energy Services (KES).

The newly created exploration and production affiliate is based in Cape Town.

NYC-based PIRA Energy Group Reports that October’s oil demand weakness is deceptive and product demand will soon get a substantial lift to propel refining margins higher. On the week, U.S. commercial oil stocks fell, while Japanese crude runs have begun to rise and crude stocks build. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

October’s Oil Demand Weakness is Deceptive

PIRA projects world GDP growth will accelerate next year and believes with tail risks minimized and fiscal constraints declining, the risks to growth are to the upside. October's oil demand weakness is deceptive and product demand will soon get a substantial lift to propel refining margins higher and crude oil prices as well after a couple more weeks of softness. 

U.S. Commercial Inventories Fall W/W

Overall U.S. commercial inventories fell the week ending October 25, as a very strong increase in reported demand pulled product stocks down, leading to the largest weekly inventory decline of the year. This more than offset the crude stock increase. Crude stock increases will begin to moderate and turn into inventory declines as imports decline and runs increase in November. 

Japanese Runs Rise Out Post-Turnaround, Margins Still Soft

Japanese runs have begun to rise and implied crude imports moved higher building crude stocks. Gasoline demand decreased and stocks built slightly. Gasoil demand increased, stocks drew and remain just off record lows. Kerosene demand surprisingly was strong which produced a small stock draw. Refinery margins remain soft and were slightly lower on the week.

August DOE Monthly Revisions

Compared with the weekly preliminary data, total demand was revised 110 MB/D lower, with gasoline and distillate decreasing 31 MB/D and 21 MB/D, respectively. Compared to 2012 levels, demand has declined a modest 65 MB/D, or -0.3%. Kero-jet demand clearly outperformed, up 3.7%, while gasoline underperformed -0.7%. Total commercial stocks were revised higher by 2.7 MMBbls, with crude being raised 3.3 MMBbls. 

October Weather: All Regions Warmer than Normal

October turned out to be warmer than both the 10-year and the 30-year normal for the three major OECD markets. All three markets came in warmer than the 10-year normal and combined HDDs were 15% below the 10-year normal and 23% warmer than the 30-year normal. 

Competition for LPG Supply is Intensifying

The competition for product is intensifying. A frenzy is occurring in the U.S. mid-continent as farmers seek propane for drying the quite large and wet corn crop. On-going supply issues from the North Sea, strong pull from Latin America as well as seasonal and other needs for Asia and Europe are all pressuring markets, leading to higher prices. 

Corn, Ethanol, and RIN Prices Fall in October

U.S. corn and ethanol prices declined in October, as expected. Ethanol manufacturing cash margins remained healthy as the market was tight with four-year low inventories. 

Ethanol Output Soars

U.S. ethanol production rose for the third consecutive week, surpassing 900 MB/D for the first time since June 2012. Output was 911 MB/D, up from 897 MB/D in the prior week as the 2013/2014 corn harvest is more than half complete in several Corn Belt states and more feedstock is available. 

Biofuel Output Increases in 2013

After years of rapid growth, world biofuels production was flat in 2012. Growth has resumed this year, boosted by increases in Brazilian ethanol manufacture and U.S. biodiesel production, along with modest gains in other countries. 

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.

Newfield Exploration Company (NYSE: NFX) has announced the signing of a share purchase agreement to sell all of its equity interests in Newfield Malaysia Holdings to SapuraKencana Petroleum Berhad for a total cash consideration of $898 million, which is expected to close in early 2014. The agreement is subject to the approval of Petroliam Nasional Berhad (PETRONAS) under the applicable Production Sharing Contracts, the purchaser's shareholder approval and customary closing conditions. Newfield intends to offer preferential rights to its partners under the Joint Operating Agreements.  The agreement was executed after the Company undertook a thorough and rigorous bidding exercise involving over 40 companies.

"We have enjoyed significant success in Malaysia and had a great business partnership with PETRONAS in the region. In early 2013, however, we announced our intent to exit our international businesses and focus our investments on domestic resource plays," said Lee K. Boothby, Newfield Chairman, President and CEO. "Our year-to-date results build positive momentum and confidence in our ability to deliver on our three-year plan."

Newfield plans to use the proceeds from the sale of its Malaysian assets to pay down existing debt and general corporate purposes. Goldman, Sachs & Co. is acting as financial advisor on the sale of Newfield's international businesses.

Business Monitor has just released its latest findings on Nigeria’s volatile oil and gas sector in its newly-published Nigeria Oil and Gas Report.

The report notes that Nigeria's hydrocarbon sector continues to struggle amid a worsening political and business environment. Most recently, Chevron’s decision to move out of the OKLNG project signals that even the large upside potential of the Nigerian gas market is not sufficient to offset the degradation in investor sentiment. The weak output flows in 2012 were the consequence of flooding, repeated oil thefts and regulatory uncertainty. Business Monitor expects continued feeble production from 2013 and for the following two years. They note that output should ramp up more significantly as many large fields come online after 2014, more than offsetting current depletion. Adoption of the Petroleum Industry Bill, which they expect around Q413-Q114, would, Business Monitor believe, be a strong signal for investors that Nigeria's hydrocarbons sector is ready to move forward.
 

The main trends and developments Business Monitor highlight for Nigeria's oil & gas sector are as follows:
 

■ China agreed on a US$1.1bn loan deal with Nigeria bearing a very advantageous interest rate. In

exchange, the West African country will allow the lender to get a privileged access to natural resources

including oil. Business Monitor expect that, as such, further deals could be an occasion for Nigeria to revive its oil and gas sector by boosting export potential for producers.


■ Chevron decided to withdraw from the OKLNG project following the path Shell adopted last year. This brings another blow to Nigeria's gas market limiting further upside potential for liquefied natural gas (LNG) exports. The report notes, however, that the soon-to-open Escravos GTL plant could help monetise part of the gas currently flared.


■ Disturbances and outages due to oil thieves are continuing throughout 2013, with Shell having declared force majeure on Bonny Light exports several times since the beginning of the year. Business Monitor therefore forecast that 2013 production will be slightly lower than 2012 estimates, reaching 2.50mn barrels per day (b/d).


■ Business Monitor expects oil production to increase from an estimated 2.5mn b/d in 2012 to 2.70mn b/d by 2020, as ambitious projects such as Usan (180,000b/d) peak and Egina (150,000-200,000b/d) come on stream in the coming years.


■ Consumption of crude is forecast to rise at a compound annual rate of 7% year-on-year between 2012 and

2022, boosted by anticipated strong GDP growth. Business Monitor forecast consumption rising from an estimated

252,000b/d in 2012 to 495,000b/d by 2022.
 

■ Business Monitor forecasts gas production increasing from an estimated 36.4bn cubic metres (bcm) in 2012 to

56.2bcm by 2022, as the authorities and companies reduce the practice of flaring and start monetising associated gas resources.
 

■ Booming demand from the government's ambitious power sector plans and large export engagements will thus bolster production growth. The report sees Nigerian gas consumption rising from an estimated 5.8bcm in 2012 to 15.0bcm by 2022.
 

■ Nigeria National Petroleum Cooperation (NNPC) is aiming to more than double its annual production of LNG, from 22mn tonnes per annum (tpa), or 30.36bcm, to over 52mn tpa (71.76bcm). This was announced on September 19 2012, at a forum of LNG producers and consumers held in Japan. Group Nigeria managing director of NNPC, Andrew Yakubu, gave no deadline as to when this target would be met, but he did clarify that new LNG projects in Nigeria will help the company meet this goal.
 

■ In October 2012 Nigeria's Petroleum Minister, Diezani Allison-Madueke, announced that the government is planning to direct more than US$1.6bn towards the repair of three of its refineries. The maintenance work started in late 2012 and is due for completion in October 2014. The three refineries are located in Port Harcourt, Warri and Kaduna. The Port Harcourt refinery is currently halted indefinitely, as oil thieves damaged the feeding pipeline in early 2013.

Business Monitor is a leading, independent provider of proprietary data, analysis, ratings, rankings and forecasts covering 195 countries and 24 industry sectors. It offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities.

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A leading engineering consultant says the 2013 rate of investment in North Sea assets is unsustainable and that more carefully-targeted maintenance is now essential for the region to stay profitable.

Philip Lawson, of ABB Consulting in Aberdeen, says North Sea operators are only likely to achieve an acceptable return on investment if they maintain and invest in the right areas from now on.

Offshore industry body Oil & Gas UK recently revealed* that maintenance on ageing infrastructure had dented outputs for 2013, with levels at a record low. Average output for the year has been forecast at between 1.2m and 1.4m barrels of oil and gas per day (BOEPD), down from 1.54m in 2012.

The drop has been attributed to downtime caused by the extent of asset improvements and repairs that have taken place this year, with investment estimated at £13.5bn so far.

Lawson, who is due to address delegates at September’s Offshore Europe exhibition in Aberdeen, said: “There is no question the region can still be profitable for many years to come, but maintenance programmes must now be targeted very carefully in order to achieve those targets.

“There has been record investment in assets this year but it cannot continue at that rate if an acceptable ROI is to be achieved.

“Assets may be ageing but many of them are capable of safely reaching the end of their design life, particularly over the next two decades as activity in the North Sea slows down.

“It is possible, therefore, to target the right areas effectively – applying maintenance only to the right equipment and systems at the right time, and prioritising investment in areas that are most likely to fail.”

He said it could sometimes be difficult for those working offshore to identify priority areas, which meant onshore support and consultancy was playing an increasingly vital role in the industry.

“Sometimes it can be hard without an outside perspective to identify the most critical assets correctly. Resources and skills are currently at an absolute premium so strategies have to be implemented perfectly in order to achieve profitability for the next 20 years,” he added.

* Oil and Gas UK’s 2013 Economic Report