Overall U.S. Stocks Build While Crude Draw Disappoints

Commercial oil stocks built 5.2 million barrels this past week, sharply contrasting with last year’s 6.7 million-barrel inventory draw for the same week. The entire build was in NGLs but the expected large crude stock decline did not materialize onshore as crude imports were bloated by a drawdown of floating stocks. Floating crude and even onshore stocks in major entrepot areas pose a challenge to estimating onshore stocks in key price-setting markets. There is a huge surplus of inventory which will take time to eliminate. So while crude stocks are undoubtedly declining, declines might not show up in the weekly onshore data in a given week.

1Q16 U.S. Producer Survey Harkens Back to Better Times

In response to a fleeting improvement in market conditions, U.S. gas producers grew production once again in 1Q16. Appalachian producers led the change, delivering an additional 1.2 BCF/D versus 4Q15 through the utilization of infrastructure that had been built towards the end of last year. Yet, the combination of stronger production and weaker heating demand gave rise to record inventories by end March, necessitating a subsequent reversal in production as a means for rebalancing. Thus far, the trend in 2Q16 production data suggests that U.S. producers are taking heed of this requirement, establishing a definitive change in course for PIRA’s Survey Group.

Brexit Clouds Demand Outlook, Dark Spreads to Hold on Bearish EUAs

The Brexit vote starts a highly uncertain transition period for the U.K. and the rest of the European Union. This transition period will likely mean weaker economic growth, especially in the U.K., and with that, downside risks for demand. However, U.K. winter prices should be largely unaffected by the Brexit decision. We assume for now that a political contagion will remain in check, but the major risk to Continental power prices resides now in an even more bearish EU ETS. While the EU ETS could be severely wounded in the current environment, domestic carbon initiatives – the French carbon floor or the like – are likely to move forward.

Brexit Vote Stops Coal Pricing Rally

Global equity, currency, and commodity markets were dominated by the Brexit vote last week, coal included. Before the vote, coal prices has been volatile, although with a general upward trajectory. The decline in prices on Friday sent Atlantic Basin Prices into negative territory for the week, if only marginally, while FOB Newcastle (Australia) prices were able to manage to rise in the prompt, although deferred prices faded. With the vote kicking off a likely two-year negotiation period between the U.K. and the E.U., there are limited fundamental changes to the coal market over the short-term, aside from a prevailing sense of unease and a lower appetite for risk.

Fed-Centric Financial Markets Now Roiled by Brexit

Since March, Fed policy communications have generally supported market sentiment and kept the dollar’s value in check. However, U.K. voters unexpectedly chose to leave the European Union in the June 23 referendum, and this has placed financial markets in a new, uncertain phase. PIRA’s expectation is that the Fed will reassert its control over markets after the initial Brexit shock wears off. During previous episodes of financial stress and a stronger dollar, the Fed adjusted its message to alleviate market pressure; it should not act differently this time around.

Volatility to Remain High

After a trading week that included a limit down move in corn along with all the uncertainty of the Brexit vote, grain/oilseed markets should be staring at yet another volatile week as corn pollination inches closer and the “final” 2016 acreage numbers are released on Thursday, along with the 3Q16’s stocks of grain.

Latest Assessment of Nigerian Oil Supply Disruptions

The situation in Nigeria remains highly fluid. Reports of a 30-day ceasefire are conflicting, but at the very least suggest some kind of dialogue is taking place between the government and militants. Even if there is an agreement, disrupted volumes will not return immediately and the situation is likely to remain fragile. Fiscal problems will make it difficult for the Buhari administration to revive an amnesty program for Niger Delta militants, and it will be difficult for the government to go back on its anti-corruption campaign.

Ethanol-Blended Gasoline Manufacture Surges to Near Record

Inventories fell slightly the week ending June 17. Stocks in PADDs I and III increased.

Japanese Crude Runs Ease with Higher Crude and Product Stocks

Crude runs eased on the week as Hokkaido entered full turnaround. Crude imports rose and crude stocks built 2.7 MMBbls. Finished product stocks also rose by 0.7 MMBbls, with about half being kerosene. Gasoline demand was soft and stocks built slightly. Gasoil demand was stronger and stocks resumed drawing. Kerosene demand was seasonally low and the stock build rate remained about 50 MB/D. Refining margins have remained soft in June.

Supply Tempers Breadth of Rally Across Regions

The rebound in Henry Hub has buoyed all regional cash prices — but to considerably varying degrees. Indeed, the regional dispersion of CDDs accounts for some of the relative strength and weakness in prices/basis, but supply trends have also played a key role. The standout feature of this month’s regional price action is the need of further assistance from weather as the market awaits larger supply losses.

When Will LNG Balances Hit the Tipping Point?

The temporary loss of existing LNG production is masking the rise of new LNG production in much the same way that oil production disruptions around the world in 2014 delayed the bearish price effect of the rise of shale in the U.S. In late 2014, that tipping point on oil was reached when global disruptions crested even though U.S. shale production continued to rise. For LNG markets, the tipping point will occur late in the first quarter of 2017.

Energy Efficiency Puts Downward Pressure on U.S. Power Demand and Gas Growth

PIRA downgraded its latest long-term U.S. power demand forecast from a 0.83% compound annual growth rate (CAGR) between 2015 and 2035 to a 0.54% CAGR. A significant portion of this downgrade is due to anticipated load destruction from end-use electricity savings arising from recent developments in energy-efficient technologies, product efficiency standards, and state-level efficiency programs, as well as a lack of weather-adjusted load growth in essentially five years. These developments suggest additional headroom for savings beyond previously modeled energy efficiency potential, particularly in areas like lighting and space cooling in the commercial and residential sectors. PIRA expects this load destruction will be most acute for gas burn and new gas plant builds, which are also under increasing pressure from renewables.

Freight Rates Hold Steady as Cape Fleet Growth Picks Up

While the Brexit vote has added significant uncertainty regarding dry bulk demand growth in Europe and potentially elsewhere, there have been some fundamental developments in the sector of late, such as Winning International hauling 15 MMmt of Guinean bauxite to China this year using Capes loaded by floating transfer equipment. Continued growth in fleet supply will keep rates in check over the next several months, although PIRA has a tighter outlook going into 2017.

U.S. Ethanol Production Reaches All-Time High

The output of ethanol reached a record the week ending June 10. This essentially ended the rally in prices that began in February.

Old Crop Soybean Supplies in Focus

Validated moisture events will have a negative effect on new crop prices, so PIRA is bullish old crop/bearish new crop at the moment, after being bearish beans for a few weeks. As July heads into first notice day next week, focus will shift to the August/November spread as an indication of dwindling old crop supplies.

Global Equities Decline on Brexit Outcome

Global equities were broadly lower on the week. The U.S. market was down 1.6%, Friday-to-Friday. The growth indicator underperformed, and banking was the weakest single sector, down 3.4%. Consumer staples and utilities faired the best, while energy also outperformed, down only 0.5%. Internationally, many, but not all, the tracking indices were lower. Europe was the weakest. Latin America managed to post a gain, while China and the BRICs also outperformed and only posted modest changes for the week.

Energy Implications of the Brexit Vote

The IMF has recently developed two scenarios to gauge the economic impact of Brexit. PIRA estimates that in the "Limited" scenario, world oil demand in 2017 would be about 100 MB/D lower than in the IMF's Base Case, with the largest impact in Western Europe. In the "Adverse" scenario, world oil demand in 2017 would be 200 MB/D lower than the IMF Base Case. There would also be noticeable impacts on gas and coal demand. These impacts on energy demand might slow, but not reverse, the oil price recovery PIRA projects.

Can Norway Step in to Take Rough's Role this Winter? Will It?

Centrica’s decision to shut the Rough storage facility until August 3rd caused a huge spike in winter ‘16 prices and a weakening in the spot/front month pricing. The opportunity cost of injection over this period is around 1 BCM and will need to be made up whether from Rough itself or somewhere else. PIRA suggested that with a Rough maintenance coming up in September, a shortening or cancellation of this maintenance may be possible and would help relieve some of this pressure. Looking to the power side for some demand relief this winter seems to be a lost cause. While power demand tends to be very sensitive to price, recent strong developments in gas prices have been outperformed by spark spreads for this winter. Another way some or potentially all of this lost storage volume can be made up is by higher Norwegian volumes, which are very tied to NBP-TTF spreads.

Shale Rig Activity Has Likely Bottomed, But Production Declines To Continue

Production declines accelerated in the first quarter but output still came in above guidance. Shale operators raised 2016 production guidance to a 6.1% year-on-year decline (up 1.7% points from guidance given during 4Q15 calls). And with the increase in prices from February lows, operators began to detail plans to increase activity. Many operators indicated that at $45-50/Bbl rigs will be added in the Permian, while the Bakken and Eagle Ford will require $50-60/Bbl. In line with this guidance, the horizontal oil rig count appears to have bottomed in mid-May; rigs are up 7% in the past five weeks. Despite this, PIRA still expects production to decline for the remainder of the year as it will take time for the slowdown in activity to show up in production. 1Q16 costs continued to decline (down 25-30% since the downturn), but the pace slowed markedly. Much of the savings were attributed to service price concessions, and are likely to reflate as activity ramps up.

Supply Glitches Keep Legs Under Spot Prices for Now

LNG markets remain balanced at relatively high spot prices of $5/mmBtu thanks to supply disruptions from existing producers and delays emerging from new supply. The quality of buyer is dropping when it comes to bearable price, which is a sure sign that the overhang may be delayed, but it is inevitable.

Brexit Rattles Markets

The UK’s vote to leave the EU rattled financial markets on June 24th, setting back gains that had been made Monday through Thursday. While many weekly averages were higher, Friday-to-Friday data showed a steep drop in most key indicators.

Freight Market Outlook

Tanker markets are starting to suffer from the influx of new vessels with few offsetting deletions and the anticipated start of the slow drawdown of excess inventories which have built up over the past two years. The drip feeding of new tonnage and the withdrawal of excess stock from the supply chain will result in a pattern of lower peaks and deeper troughs in tanker rates as the year progresses.

Amid the Chaos, LPG Markets Strengthen

LPG traded on fundamental supply and demand factors last week, leading to strong gains across the complex. July Mt Belvieu propane futures added a solid 3.7% to bring its value to 47% of WTI. Butane outperformed, adding 5.1% to settle near 69¢ /gal Friday. Ethane futures ripped 7% while natural gasoline prices managed to hold near unchanged despite weaker broader markets.

Ukraine Confirms Default Industrial Gas Prices

Naftogaz Ukraine has published quotations for natural gas for industrial consumers and other economic entities, which will operate from July 1, 2016 as stated in the press release of the company. “The proposed price of natural gas from the resource companies can vary depending on the volume of purchases, payment terms and the status of previous calculations of “Naftogaz”. Levels of the final price for industrial consumers and other economic entities, depending on the specified conditions, compared to June prices remained unchanged (taking into account tariffs for transportation via trunk and distribution pipelines and VAT).”

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.

U.S. Commercial Stocks Build for First Time in Several Weeks

Total commercial inventories built for the first time since the end of April. The gain of 3.2 million barrels reflected a substantial 6.4 million-barrel build in overall product stocks, only partially offset by a 3.2 million crude inventory decline.

Recipe for Rebalancing? Just Add Weather

Last year, the U.S. market recorded an extended string of triple-digit injections during this period, with weekly builds averaging 109 BCF. This year, however, the record inventory overhang left little room for such outsized shoulder-season restocking. Yet, prior to Thursday’s inventory report, it appeared that the needed rebalancing might not occur fast enough to curtail the seasonal stock build. As if on cue, the timely arrival of summer heat has improved the odds for rebalancing, with the subsequent boost in electric generation (EG) gas burn more persuasively offsetting surplus supply.

Financial Stress Lower

Most key indexes rose on a weekly average basis, including the S&P 500 (although slightly lower Friday-to-Friday), U.S. High-Yield Corporate Bond, Russell 2000, Emerging Market Bond, and Commodities. The dollar fell in value against most countries, and most agricultural commodities and metals gained.

Northwest Europe Terminal Capacity Expands, But Where's the LNG?

After a year of delays, the Northwest European market is set to open more LNG import capacity; the question is whether or not this new capacity will be put to use in the form of expanded LNG imports to the region. PIRA believes that it will despite the current low levels of capacity utilization. To begin with, the supply side of the equation in the Atlantic Basin will improve, despite the heavy losses of the first quarter.

Recent Price Strength Has Not Scared Off Power Demand

With prompt gas prices rising around 25% so far this summer and LNG flows weakening, one might wonder if the great shift in gas-coal spreads from last year is reversing and eroding power demand. As power is sensitive to price, that would not be a ridiculous thought. However, this balancing function was not served by the power market; it has mostly been offered by storage facilities.

Weak Loads Stifling Otherwise Bullish Outlook

Power prices at most Eastern hubs fell in May as maintenance activity wound down. Lower wind generation bolstered western MISO and SPP Off-peak prices. Summer heat rates are expected to increase year-on-year in most markets due to lower gas prices, unit retirements, and warmer weather in the Midwest, though ERCOT summer on-peak prices seem to have priced in lot of upside risk at the current market levels. In PJM, significant participation by new gas generation build continued in the recent 2019-20 capacity auction while three of Exelon’s nuclear units failed to clear the auction. PIRA expects gas prices to advance further during 4Q, rising above the $3 mark during Dec. - March, reflecting sharp year-on-year gains.

U.S. Ethanol Prices Rose to the Highest Level Since Last Summer

The market tightened the week ending June 3, with inventories reaching a five-month low. Manufacturing markets remained healthy.

Spain: Prices Surge as Wind and Hydro Decline. Coal Set to Stay Weak

Discussions at PIRA's Client Seminar in London this past week centered on shifts taking place in the European power fuel mix, with switching from coal to gas now starting to emerge both as a result of structurally lower gas prices and changing policies. After the U.K., Spain is also featuring a fairly large drop of coal-fired dispatching so far this year. The policy framework is also very fluid in Spain, with the June 26 elections likely to be a negative for the coal-fired (and nuclear) outlook, especially as recent polls indicate that the left-wing parties and Podemos are gaining momentum and may be dictating the energy agenda of the upcoming government.

Coal Price Rally Runs Out of Steam

The extended rally coal prices had been on for the previous two weeks came to an end last week, with coal pricing moving lower while oil prices continued to move higher (until the notable pullback in the oil market on Friday). Prices in 3Q16 for all three major forward curves lost significant ground, while deferred prices were more mixed. As PIRA has been affirming since the beginning of 2015, the upside for short-term pricing lies squarely on the oil market, as fundamentals in the prompt are not expected to provide much support.

California Carbon Still Tied to Price Floor

Average WCI prices stayed below, but still tied to, the price floor in May, and the auction was severely undersubscribed. Unsold state-owned allowances will not be re-offered until two consecutive auctions clear above the floor. Unsold consigned allowances will be re-offered in August, in turn requiring higher bid volumes for that auction to clear. The final court decision on the auction will not come until 2017. A legislative fix could be a backstop measure to keep the auction in place, perhaps bolstered by the California Legislature facing reduced auction revenues in the budgeting process. The coming months will see a firming of signals for a tightening cap beyond 2020.

LPG Freight, Arbitrage Under Renewed Pressure

Delivered LPG price were stable in Asia last week. Propane for July delivery gained by just $2 to near $340/MT, while CFR cash butane was called at $20 premium to C3. Saudi propane CP futures added 1.2%, crimping the spread to the Far East to under $15. Despite spot VLGC freight on the benchmark rate from Ras Tanura to Chiba and Japan trading near five-year lows, current arbitrage spreads necessitate a further $10 freight decline for spot physical movements to work.

WASDE Supports, Weather Pushes

The convergence of speculative money and demand was once again on display Friday as witnessed by both the WASDE during the trading day and the Commitment of Traders after the close. Even though both corn and soybean supplies were below market consensus, the length in the markets mitigated much upside potential, although drier-than-expected weather forecasts in the 8-14 day timeframe issued this weekend have pushed corn and soybeans into overdrive again.

Japanese Crude Runs Little Changed; Crude Stocks Build

Crude runs changed fractionally on the week. Crude imports were also little changed and crude stocks built 2.9 MMBbls. Finished product stocks built marginally. Gasoline and kerosene stocks were up modestly, while gasoil drew moderately, but that offset by higher fuel oil, naphtha, and jet stocks. Demand were modestly mixed with the aggregate demand figure falling 80 MB/D. The four-week demand trend has turned higher. Refining margins had improved a bit, but gave back ground on the week.

Production Surged to a Near Record Level

Output jumped the week ending June 3, after plants returned to normal operation following spring maintenance. The manufacture of ethanol-blended gasoline fell after reaching a 10-week high the previous week.

U.S. SPR Sales Unlikely in 2016

Speculation has risen that the Obama administration could conduct SPR sales as early as October 2016, as permitted by two bills passed late last year. However, we believe sales in 4Q16 remain unlikely, judging from recent comments from the Energy Secretary and politics surrounding the November 2016 presidential election.

Global Equities Post Another Neutral Week

Global equities were again on balance, only modestly changed. In the U.S., the broad market was down marginally. The leading sectors were energy, utilities, and consumer staples, which posted good gains. Retail performed the poorest and declined about 2%. Internationally, most of the tracking indices declined, with Europe posting the biggest drop.

Petrobras to Get Full Domestic Pricing Control

Brazil's energy ministry has backed full independence for Petrobras to set domestic fuel prices, blaming past controls for saddling the state-controlled oil company with crippling debt that is the oil industry's largest. Petroleo Brasileiro SA, as the company is formally known, and other state-controlled companies, such as utility Eletrobras, with shares owned by non-government investors, should be free to act in their best interests without government interference, the ministry said in a statement.

Obama Administration in Race to Finalize Regulations

The clock is winding down on the Obama Presidency and the focus in on finalizing rules. Methane regulations for new oil and gas wells were finalized ahead of schedule; follow-through on rules for existing wells will fall to the next administration. This summer will see final one-hour SO2 designations affecting a number of coal units, particularly in Texas; the finalization of the aviation “endangerment finding” for GHG emissions; and final Heavy Duty Vehicle GHG Standards for model years beyond 2018. Renewable Fuel Standards for 2017 proposed in May were ambitious. A draft review of CAFE standards is also expected this summer. PIRA expects EPA to continue working on the Clean Power Plan model rule and FIP, although the stay will prevent formal finalization. The next PM NAAQS review and Secondary NAAQS for SO2/NOx will be punted to the next administration.

RIN Costs Higher

U.S. refiners paid at least $1.35 billion to acquire RINs in 2015. Most refiners had higher costs in the first quarter.

Implications of May Chinese Data on Economy and Oil Demand

In May, China’s industrial production matched expectations, while fixed asset investment disappointed. Housing indicators continued to show large improvements. Recent sequential increases in the producer price index are positive for corporate earnings and will also directionally reduce concerns about China’s debt burden. Meanwhile, physical activity indicators that can directly be related to oil demand (vehicle sales, ethylene production, and passenger air travel) recorded constructive gains.

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.

Coretrax, a leading engineered servicing company for wellbore clean and abandonment, has secured cost savings of nearly £10million in rig time for UK operators.

Focused on improving operational efficiencies and saving rig time in wellbore clean up and abandonment operations, Coretrax’s range of CX-products have been used extensively in decommissioning contracts with operators since 2012.

A Coretrax technician working at the company’s Aberdeen HQ. Credit: Coretrax

One solution from the product range used was the CX-2 bridge plug which is a versatile tool, suited to multiple applications in the oilfield, which reduces cement disturbance and rig time. In addition to this Coretrax have delivered time savings through drill pipe cleaning tools and by combining CX-2 bridge plugs with disposable scrapers to save trip time.

Earlier this year, Coretrax completed the setting of its 150th bridge plug as part of an ongoing abandonment campaign for an operator project in the UK sector. Approximately 40 bridge plugs have been run for the campaign to date, along with swarf recovery strings and drillpipe cleaning tools, and a 100% success rate achieved.

Coretrax global business development director, John Fraser said: “We’re proud that our innovative approach to well abandonment has saved operators almost £10million in rig time since 2012. In the current industry climate, cost savings are imperative and the fact that our technologies significantly contribute towards this is a key benefit for our customers worldwide.

“The design and versatility of the CX-products provide a sound solution for cementing operations. Achieving these cost savings as well as the setting of our 150th bridge plug are fantastic milestones, which not only highlights the reliability and effectiveness of the tool but further underpins our position as one of the leading suppliers of bridge plugs in the North Sea.”

Coretrax was established in 2008 to provide specialist wellbore clean up and wellbore abandonment tools, offering a wide range of downhole tools and services which provide up-to-date solutions to improve time efficiency, maximise cost reduction, reliability, damage prevention and technological advancement to the global oil and gas industry.

The company currently employs 42 people across its bases in Saudi Arabia, Abu Dhabi, Dubai, Kuwait and Aberdeen.

U.S. Commercial Stocks Draw as Demand Increases Sharply

U.S. commercial inventories drew for the second week in a row, the first time that has occurred this year. However, the decline was modest. Crude stocks saw a gain, while the four major products drew sharply; it was the largest weekly drop of the year and more than experienced at any weekly point in 2015.

Something Has to Give

NYMEX futures brief excursion back below $2/MMBtu suggests the market is having second thoughts about the industry’s ability to cope with surplus supplies this season. Though the largest weekly storage injections typically occur during the spring, when weather-related demand is at a low ebb, the recent acceleration in stockpiling has nevertheless reignited oversupply concerns.

Qatari LNG Pricing Is Getting More Competitive across Europe

LNG pricing around Europe is not so clear cut as Henry Hub + X or JKM – Y. As LNG globally is a continually maturing market, we are seeing gas pricing evolve in multiple ways across different regions of Europe. Based on volume of sales and available data, Qatari LNG prices offer the best window into the competitiveness of LNG on the Continent until now, but we are going to see U.S. LNG stake its claim in the months ahead and subvert the status quo.

U.S. Gulf LNG Cargos Ship Out; FOB Pricing Details Emerge. Liquefaction Costs?

As Shell’s first “contracted” cargo sets sail from Cheniere’s Sabine Pass terminal as part of a BG legacy tolling agreement, the first official FOB pricing data from February/March for U.S. Gulf-generated cargos at the export point at Sabine Pass is registering from U.S. government sources. The numbers, while striking, offer little in the way of information regarding the actual unit costs for U.S. liquefaction.

Indonesian Industrial End-Users Get Price Relief

The Indonesian government lowered the price of natural gas for seven industry sectors to accelerate economic growth and improve the competitiveness of national industry. The decline in gas prices retroactively from January 1, 2016, is contained in the Presidential Decree No. 40 of 2016. The seven industries that obtain the reduced gas prices are fertilizer, petrochemical, oleochemical, steel, ceramics, glass, and rubber gloves.

Italian Gas-Fired Dispatching Surges

In spite of a surprisingly low day-ahead price settlement, Italian day-ahead prices have been generally supported during May, in tandem with a significant recovery in the utilization of the Italian gas fleet, as shown by gas burn increasing over 25% Y/Y so far during May. While a lack of solar output has contributed to a larger increase in Italian gas dispatching over the past weeks, we see a structural trend toward a higher utilization of the CCGTs in the Italian market, in line with the recovery in the spark spread we have also seen along the curve. This is in part tied to the retirements of older steam units and, most likely, lower load factors of less efficient coal units.

A Tighter Market in 2017

PIRA’s outlook for the U.S. coal market in 2017 projects that the current trajectory of coal supply cuts will ultimately drive stockpile levels back into balance early next year. Rising natural gas (and oil) prices will result in potential coal market shortfall, as coal demand recovers against a backdrop of a much smaller and perhaps constrained coal logistics chain.

Massachusetts Supreme Court Decision: RGGI Is Not Enough

The Massachusetts Supreme Court handed down a unanimous opinion that found that the state’s DEP had failed to properly implement regulations as required under the state’s Global Warming Solutions Act. The DEP is now required to issue new regulations, but it is unclear how this can be enforced from a practical and political standpoint. The Court faulted the RGGI as inadequate because it allows Massachusetts entities to purchase out-of-state reductions. Massachusetts is the third-highest RGGI-emitting state and its emissions exceeded the state budget in 2015. More broadly, this decision highlights issues with the RGGI program review and its alignment with individual state climate goals.

Global Equities Fractionally Changed

Global equities were, on balance, modestly changed. The broad U.S. market was higher on a Friday-to-Friday basis. The growth indicator moved higher, while the defensive indicator gave ground. The strongest sectors were banking and energy. The weakest sectors were the defensive sectors of utilities and consumer staples. Internationally, most of the tracking indices moved higher, though Latin America posted a moderate decline.

Freight Market Outlook

Low oil prices are causing non-OPEC production to decline by 870 MB/D in 2016, offset by a near equal rise in OPEC output, benefiting the tanker sector. Most of the non-OPEC production declines in 2016 are for onshore grades in the U.S., China and Canada and shorter-haul grades from Mexico and the North Sea. These are being replaced by higher output from OPEC, mostly Iraq, Iran and Kuwait, boosting waterborne trade and ton-miles. While there are still substantial volumes of excess crude being contained on tankers via floating storage or operational slowdown, these will soon decline as excess stocks are worked down over the balance of 2016.

Propane Stocks in U.S. Build Slowly; Surplus Narrows

Strong export volumes and higher propane demand caused a relatively small build in propane (excluding propylene) stocks last week. The DOE reported the total propane inventory to be 70.2 MMB with a week-on-week build of 920,000 barrels. The year-on-year surplus narrowed by 1.3 MMB to a slim 4.6 MMB.

Stocks and Production Declined

Ethanol stocks declined for the ninth time in 13 weeks the week ending May 13. Output fell to 948 MB/D as several plants were undergoing routine maintenance.

Meal’s the Deal

Without question the meal market has been the bullish star since the May WASDE. The soybean complex is full of rumors as to why meal has outperformed everything else in the grain/oilseed sector, especially soybeans themselves. Speculative upside pressure continues to be strong despite an increase in futures margin last week, which seemed to do nothing but squeeze out some weak shorts. Traders appear desperate to find both a reason for the extended meal rally as well as searching for that elusive “top.”

Japanese Runs Ease; Both Crude and Product Stocks Build

Crude runs continued to fall amid increasing turnarounds. Crude imports fell back, but not sufficiently to prevent a crude stock build. Finished product stocks also built, largely due to middle distillate stocks moving higher. The kerosene stock build rate throttled back with higher demand and lower yield. Refining margins remain very soft, though on the week light product cracks improved.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter.

Biofuels Prices Increase the Week Ending May 13

The main driver of increased biofuels prices was sharply lower stocks. Rising corn and petroleum prices provided support. Margins jumped.

Freight Rates Hold Steady on China’s Solid Start to 2016

Cape fixing volumes have slowed and bunker prices have continued to climb, giving fundamental support to rates. In a rollercoaster month, 180,000 dwt Cape rates have generally covered typical operating costs although the Baltic 5TC average weakened recently to close at just under $7,000/day. With the Panama Canal Expansion now a reality, voyage calculations show that exporting Colombian coal to Asia via an expanded Panama Canal will prove hard to justify in comparison to sending fully-loaded Capes to Asia via the Cape of Good Hope.

D.C. Circuit Grants En Banc Appeal for Clean Power Plan Litigation

In another unusual move in a litigation that has been marked by unusual moves, the D.C. Circuit, of its own volition, decided to shorten the review of the Clean Power Plan by bypassing the three-judge panel and preemptively granting review to the entire D.C. Circuit Court en banc. PIRA had expected a review by the Court en banc in the event EPA lost in the initial panel decision. That it has been granted now does not change our expected timeline much. Key to whether the move actually impacts the CPP’s chances at being upheld is whether two Democrat-appointed judges on the D.C. Circuit — Merrick Garland, and Nina Pillard — will recuse themselves from considering the merits of the case, impacting the balance of power on the Court.

Saudi Arabia's Financial Cushion Remains Substantial

Saudi Arabia's ability to weather lower oil prices remains substantial. Foreign exchange reserves have been liquidated by $159 billion, or 21%, since peaking in August 2014. Even so, reserves of foreign exchange are $587 billion at end-March, still a substantial cushion. As oil prices have recovered from January lows, the rate of FX liquidation has slowed with the decline for March being $5.6 billion. However, if Saudi Arabia were forced to continue drawing down reserves, it would at some point put increased pressure to re-adjust (devalue) its currency, which has been pegged to the dollar at 3.75 SAR/USD since 1986.

Fed Inflation Expectations Rise

The Cleveland Fed released its assessment of inflation expectations for May, which showed a second straight rise in inflation across all the key timeframes. The S&P 500 eased slightly on a weekly average basis, but it was modestly higher Friday-to-Friday. High yield debt (HYG) and emerging market debt (EMB) rose slightly. The U.S. dollar was generally higher, and commodities continued their uptrend.

EPA Proposes Biofuels Requirements Higher Than this Year’s Mandates

The proposed total renewable fuel mandate for 2017 is 18.8 billion gallons, up from 18.11 billion in 2016. It is much less than the 26.0 billion gallons in RFS2. The proposal will be open to public comment through 2011.

Coal Pricing Moves Sideways Along with Oil

Prompt seaborne coal prices mirrored those of oil last week, with a modest rally on Monday largely negated by a downshift over the balance of the week. 3Q16 API#4 (South Africa) and FOB Newcastle (Australia) prices ticked up modestly, while API#2 (Northwest Europe) lost some ground. Coal fundamentals, specifically in the Atlantic Basin, offer minimal support to pricing currently, given weak demand from Europe and strong supply from Russia. The most bullish factor for coal pricing is the continued strengthening in the oil market.

Asian Demand Update: China Again Boosts Regional Growth

PIRA's latest update of Asian oil demand again shows improved growth due to further gains in Chinese apparent demand. The most recent demand growth assessment is 1.16 MMB/D. PIRA's April update of Asian demand had shown growth of 909 MB/D. China's most recent growth assessment, covering Feb.-Apr., is showing growth of 850 MB/D, an improvement from the 525 MB/D seen last month (Jan.-Mar.). It still needs to be emphasized that the Chinese improvement is not necessarily actual consumption, but is based on apparent demand calculations and reflects a crude import figure for April of 7.9 MMB/D.

RIN Balances to Tighten; Prices to Rise

The EPA’s proposed renewable fuel standards for 2017 is expected to tighten the RIN market and drive up prices. The volume of banked RINs is plummeting and is anticipated to be practically exhausted by the end of 2017. RIN prices are expected to surpass $1 by the beginning of next year.

Canadian Oil Sands Restart Plans Halted

The situation in and around Fort McMurray has degraded significantly. Fires are now moving north of Fort McMurray towards oil sands sites. On May 16 a mandatory evacuation was issued for the area north of Fort McMurray, affecting Syncrude and Suncor’s main operations. The Enbridge system has also been affected with fires encroaching within 1 km of the crucial Cheecham terminal. Given the deteriorating situation, PIRA now estimates the cumulative loss will be around 25 million barrels in a most optimistic scenario and 30 million barrels in a most likely scenario.

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.

The decision by 52% of the voters in the EU referendum last week to vote to leave the EU has had far-reaching impact across the globe. The oil and gas sector, bruised from nearly two years of low oil prices, is bracing itself for the fall out.

The immediate impact of the referendum outcome was a plunge in the value of the pound to a thirty-year low of $1.34, significant falls in all of the world’s stock exchanges and the price of Brent tumbling 5% to $48/bbl.

The greatest risk to the energy industry is surely a global economic slowdown, which would suppress oil prices for longer and delay investment in exploration and production. In the short-term, however, UK-listed oil companies such as Shell, BP and Tullow have fared (comparatively) well since the decision was announced – with a large proportion of dollar-denominated revenue from abroad the devaluation of Sterling actually benefits these companies and they will see in a boost in reported revenues as a result. The end-user at the pump in the UK will, of course, see the opposite effect for the same reason – we import a significant proportion of the oil we consume and prices will rise as a result of the exchange rate movement.

For now, we are left with a perception of risk generated by uncertainty over what ‘Brexit’ actually means. The negotiations on our exit are yet to happen and the timetable and extent of the UK withdrawal are yet to be seen. The Prime Minister has made it clear he will not trigger Article 50 of the Lisbon convention himself and will leave it for the next leader. Despite the outcome of the vote it remains entirely possible that the government (largely pro-Europe) will deliver a ‘Brexit-lite’ outcome or even no Brexit at all.

Steve Robertson, Research Director, Douglas-Westwood

With the referendum rapidly approaching, the question of what Brexit could mean for the UK oil & gas industry has become increasingly intriguing. As a market broadly regulated in London, many argue that an exit vote would lead to no significant changes – at least in the short term. However, new uncertainties for the energy industry may emerge, should the UK decide to part ways with Europe.

In 2013, the UK became a net importer of petroleum products. Traditionally the main sources of the UK imports are from EU countries including France and the Netherlands. An exit vote, along with increased economic instability could potentially lead to a sterling depreciation, resulting in higher import costs and increased uncertainty over future energy supply. This scenario could be a double edged sword – UK upstream businesses would see relatively lower operating costs compared to US competitors, yet, companies with revenues in sterling are likely to face higher repayments of dollar denominated debt.

Limited labor and capital mobility is another concern, which would arguably affect the UK’s ability to attract highly skilled oil and gas workers to the North Sea and potentially discourage foreign energy investment in the mid-to-long term. This risk would be exacerbated if a “Leave” vote were to trigger another Scottish Independence referendum. To ensure free movement of people and goods across borders, the UK could seek membership of the European Economic Area (similar to Norway) – a relatively favorable scenario when compared to the option of bilateral trade agreements (similar to Switzerland). Trade under these agreements is often subject to customs clearance processes, VAT and duties paid by the EU exporting country.

There will undoubtedly be a number of “Brexit” implications for UK oil & gas, however, the current low oil price environment is likely to play a far larger role in shaping the form and structure of the UK energy industry over the coming years. Market recovery may be impacted in part by changes to the UK’s relationship with Europe. Yet, as a mature and expensive play, the future of the UKCS will be largely decided by oil price.

Marina Ivanova, Douglas-Westwood London

Autonomous underwater vehicles (AUVs) have been in operation for a number of years and are an established part of underwater activity, particularly in research and military where they are utilized for activities such as mine clearance, hydrography and data collection. Despite widespread use, there is still potential for substantial growth – each new technological advance increases the viability of the vessels in different sectors. This is particularly clear in oil & gas, where AUVs remain niche assets.

Technological advancement has driven growth in the sector and in the last few years units have become increasingly flexible. AUVs are now capable of performing a range of tasks, which can be changed quickly by operators. Beyond flexibility, increasingly compact vessels have been introduced to the market, making units viable at greater water depths. However, there are still a number of limiting factors preventing wider uptake, these include: limited communication, lack of manipulation ability and low levels of endurance. Improving these areas will be key for increasing the use of AUVs in the future – reducing the requirement for human workers, and likely leading to increased accuracy, reliability and safety.

Fortunately, the sector has a strong research culture and there is constant work to create new concepts and push the current technologies further. There are numerous concepts that aim to improve previous limiting factors, including Eelume’s subsea intervention “snakes” which allow inspection work in areas too small for typical tools, as well as potentially being able to manipulate and adjust subsea valves and chokes. This is a small step toward a fully autonomous subsea development – a likely boon for oil & gas companies. Statoil have recently signed an agreement with Eelume to help accelerate the technology, demonstrating that there is clear interest within the oil & gas sector for autonomous vessels.

In the near term, it is expected that the military will continue to be the biggest user of AUVs – their importance with regards to surveillance continuing to grow. Oil & Gas and renewables should also see an increase in the use of these vessels while they will remain integral to many research efforts. As DW explores in its new World AUV Market Forecast, the future for AUV units appears bright.

Ben Wilby, Douglas-Westwood London

Markets React Positively to Just Modest Stock Declines as Concerns Grow of System Failure

U.S. commercial oil inventories fell just this past week, but markets reacted very positively to the data. First, crude and the four major products had an inventory decline, the largest this year. Also, the crude stock decline came before any impact from the Canadian wildfires. Furthermore, product demand put in another strong performance. Finally, oil markets are beginning to get the sense of a growing problem of system failure. Oil prices are just too low and circumstances are unraveling in places like Venezuela and Nigeria, while Libya is in chaos and Iraq may be there any day. Very low oil prices are not just undermining supply and encouraging stronger oil demand, they are eating away at the social fabric in many oil exporting countries.

Cause for Pause

Although the first round of hot weather has arrived in some markets last week, as per recent temperatures readings in Houston and Dallas, conditions in many other areas have been relatively benign as underscored by near equal national cooling degree day (CDD) and heating degree day (HDD) counts. The lack of a more material assist from weather explains in part the ongoing tug of war between the nearby NYMEX futures contract and cash Henry Hub (HH) prices, with the latter struggling to hold above $2/MMBtu so far, as was the case for May Bidweek.

Renewable Surge and Lower Exports Undermine German Spot Prices, but Bearish Risks Already Factored in the German Curve

The price crash in the German day-ahead auctions recently are not changing our price outlook for 2017, which remains constructive for German power, as a result of a more supported fuel pricing complex, led by the gains in the oil market.

Oil Moves Coal Higher; Limited Fundamentals Support for Now

Taking a cue from the oil market, coal prices largely moved higher last week, although prices did not move higher across the board, with deferred prices mostly losing ground (except for South African prices) compared to the end of the prior week. Looking forward, PIRA believes that aside from the linkage with oil pricing, there will be little support for coal pricing over the next several months, particularly as demand is moving toward seasonal lows. We do retain a bullish outlook for 2017 prices, however, as fundamentals will be more balanced next year.

EPA Regulates Oil and Gas Sector Methane

On May 12th the EPA issued a suite of rules directly regulating methane for the first time and expanding 2012’s NSPS for fracked gas to oil wells as well as other parts of the supply chain. A number of changes from proposal to final were made, in many cases strengthening the rule in response to concerns from environmental groups. EPA estimates 11 MT CO2e of methane emissions reductions in 2025 mostly from fugitive emissions and oil well completions. The annualized compliance cost is estimated between $530 MM and $800 MM.

U.S. Ethanol Prices Slide the Week Ending May 6

A main driver was a lower output of ethanol blended gasoline. Lower corn values also put downside pressure on prices.

Global Equities Post Another Decline

Global equities generally fell back again on the week. Defensive sectors again did the best with utilities posting a gain, while consumer staples and technology were flat. Energy performed in line the overall market, down about 0.4%. Retail was the worst performer. Internationally, all the indices, other than Japan, posted a decline. China and emerging Asia were the weakest performers.

LPG Price Gains in Asia Lag Other Markets

Asian markets, while easily besting broader crude’s gains, increased by less than those in the West. Cash propane cargoes arriving in the Far East during June were called 6% higher near $350 and butane improved to $380/MT. Smaller gains in Asia vs. the U.S. translate to a further narrowing of the physical arbitrage, which has become increasingly uneconomic — posing significant challenges for long-term U.S. export contract holders.

Japanese Crude and Product Stocks Rose

Two weeks of data were reported due to the string of Japanese holidays. Broadly speaking, both crude and product stocks rose. Gasoline demand was helped by the holiday and then fell back. Gasoil demand fell slightly pre-holiday, but then dropped sharply, as would be expected. Gasoil stocks rose both weeks with an average build rate of 148 MB/D. Kerosene stocks continued to build at an average rate of 73 MB/D. Refining margins continue under pressure with little support within the barrel.

NBP Has Breached Contract Pricing: Has Anything Changed?

While Russian gas pricing is far from monolithic, data indicate that NBP breached Russian delivered prices to Germany for March and April of this year. This inversion is unusual territory for the gas market, as we’ve traditionally seen a reversal for only a month at a time, either sparked by weather or supply disruption. This time seems to be different and is certainly a warning call that raises the broader question of whether contract gas can still be considered a sustainable ceiling for spot gas down the road.

Power Prices Catching Up on the Rally

Spot on-peak power prices increased from March levels in nearly all Eastern markets, supported by higher gas prices and maintenance outages. Colder weather in the Northeast and Midwest nearly offset the impact of weaker cooling demand across the South. Given lackluster March heating loads, demand was only slightly weaker in April, and the loss was countered by lower hydro generation and imports. Gas prices are projected to increase for the balance of 2016, with Henry Hub spot moving above $3/MMBtu in December. Seasonal basis strength in the Northeast lift New England and NY prices above $5/MMBtu in December with further increases in Jan.-Feb. 2017. As a result, we look for a significant improvement in coal unit competitiveness during the 2016-17 winter.

EUA Prices See Volatility, Correlation to Nat Gas Emerges

The supply picture has not changed, and power sector EUA demand remains very weak. The market may be looking for price support in the form of policy developments, but this is overly optimistic. The recent lack of clear EU ETS fundamental indicators resulted in high volatility, but a high correlation with natural gas prices has also emerged. As such, we maintain a EUA price forecast in sympathy with natural gas prices that fall through summer 2016.

Ethanol Production Rebounds from 51-Week Low

U.S. ethanol stock draw was the largest this year. Output rebounded as plants returned to normal operation after spring maintenance.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter. In Japan, economic uncertainty is elevated.

Canadian Oil Sands Production to Resume

Oil sands operators have begun to resume production following the devastating Fort McMurray wildfires that started early last week. The fires continue to burn but have moved eastward away from Fort McMurray and oil companies are allowing workers to return to sites. The pace at which production returns will depend on pipeline restarts, power availability, and labor availability. PIRA expects most production will return by the end of this week, putting the cumulative loss around 15 MMB.

Asian LNG Buyers Shrug off Late-June Opening of Panama Canal

The Panama Canal Authority finally set a target date of June 27 for a first plus-sized cargo to transit the newly expanded locks. After years of anticipation and much hand wringing on the part of global LNG suppliers, particularly Trinidad and the U.S., both of which had long eyed the much more attractively priced Asia-Pacific market, including Chile in South America, the reality is that at this point Asian markets have lost all of their allure for Atlantic Basin suppliers.

Financial Stress Stable

The S&P 500 was modestly higher on a weekly average basis but declined Friday-to-Friday. Many of the other indicators were fractionally changed. High yield debt (HYG) was slightly lower, while emerging market debt (EMB) was slightly higher. The yield on the BAA-rated corporate bond was also slightly lower, extending its trend towards lower rates and narrower credit spreads. The U.S. dollar was generally higher, particularly against the euro, pound and yen.

OPEC Supply Reductions Providing Support for Oil Prices

OPEC supply disruptions surged in early May and show no sign of abating. In Venezuela, delinquent payments to service providers have caused companies to curtail activity in the country, reducing crude production to ~2 MMB/D in May. Similarly, economic problems in Nigeria have reduced amnesty payments to Niger Delta militants. This is the likely driver of a recent spike in oil infrastructure attacks, which have reduced output by upwards of 100 MB/D. In Libya, ongoing political disintegration is shutting in even greater export volumes, resulting in a ~100 MB/D output cut versus the April average. The situations in all three countries appear to be worsening, which will be constructive for oil prices amid the ongoing supply rebalancing.

Thailand’s Natural Gas Supplier Wants to Up Industrial Prices

PTT Plc is in talks with Thailand’s Energy Regulatory Commission (ERC) to restructure the price of natural gas sold to the industrial sector after the company suffered huge losses from current pricing, says a senior PTT official. Noppadol Pinsupa, senior executive vice-president for gas business, said the oil and gas conglomerate suffered a loss of about 3 billion baht ($85 million) in 2015 from selling gas at a price below market level. The price of gas sold to the industrial sector is pegged to the bunker oil price, which moves in line with the oil price, depressing the gas price 7% below the market price.

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.

U.S. Commercial Stocks Slightly Decline

Overall commercial inventories declined this past week with the entire decrease due to a decline in crude stocks. The crude stock decline was much smaller than expected, about equally caused by both higher-than-forecast crude imports and the balancing item. The latter could have been related to EIA re-benchmarking. The year-on-year stock surplus did narrow by 3.4 million barrels to 113.5 million barrels (or 9.1%).

Exports Expected to top 4.5 BCF/D in 2017

Since 2014, Mexican energy policy reforms, coupled with low oil prices, have accelerated the nation’s dependency on U.S. gas exports. Indeed, net shipments to Mexico remain upward trending, with June flows projected to average ~3.7 BCF/D, an increase of ~0.7 BCF/D versus the prior year. Equally striking is our expectation for 2017, which should see exports average ~4.5 BCF/D and yield a year-on-year gain of ~0.9 BCF/D. Notably, the upgrading and development of new critical infrastructure, including gas pipelines, electric generation and transmission capacity, are anticipated to significantly shape cross-border flows in 2017, providing a rich environment for gas demand.

Italy: Nord Prices Trade a Huge Discount versus PUN

Italian day-ahead prices have been generally firmer during June, but day ahead prices in the Northern regions have been settling at a significant discount relative to the PUN, coming closer to the other Continental markets. While Italy has switched to a net exporting position to Slovenia, flows from the other Continental markets, most notably France, remain generally resilient.

Gas Prices Lead Coal Higher

U.S. coal pricing has seen a modest lift from the recent move in natural gas forwards. Coal market balances, however, will require a bit more time to readjust (i.e. trim elevated stock levels). PIRA still sees U.S. coal markets realigning over the course of the next seven to nine months even current forces remain on track.

EUAs Correlated with Fuels, EU ETS Reform Talks Continue

A continued closer relationship between EUAs and thermal fuels could limit downside price movements. However, we still expect EUA prices to decline over the next few months in line with summer natural gas prices, bearish fundamentals, and a lack of policy support as talks on post-2020 ETS reforms continue. A small gain should come starting in August, when auction volumes are lower than in other months. Longer term, a positive Brexit vote could have implications for the ETS.

Fed Projections Suggest Interest Rates Will Stay Lower for Longer

At this week’s policy meeting, the Fed stayed put, as widely expected. Its updated macro forecast also did not surprise, showing little changes from the previous version three months ago. Projections on the future policy rate from meeting participants, however, contained noteworthy developments — in short, their estimate of the neutral interest rate has gone through significant changes, suggesting that rates will likely stay lower for longer in the future. The British referendum about whether to remain in the European Union will take place June 23, with the result expected by the next morning. The outcome of the vote has the potential to create uncertainties on several different levels.

U.S. LPG Prices Outperform

Improving fundamentals, namely tightening propane inventories, helped U.S. LPG prices improve last week. Mt Belvieu propane easily outperformed broader energy markets by logging a 1.5% gain, bringing C3’s value to 45% of WTI. Gulf Coast butane prices also rose 1.2%. Meanwhile ethane prices plunged 10% to 22¢/gal, perhaps as markets digest the large 3+ million barrel improvement in inventories reported for end March.

U.S. Prices and Margins Soar

The week ending June 10, U.S. prices reached the highest level since December 2014. Manufacturing margins were the strongest in over a year.

All Eyes on Corn

2015/16 export sales/shipments in corn have now surpassed last year’s pace by 2%, a remarkable achievement considering the lag for most of the year. Ethanol production set a weekly high for the previous week while Funds turned seller’s midweek after an early week buying spree.

Japan Runs Rise, Inventories Draw

Crude runs rose a bit on the week due to a restarting of units down previously for unplanned maintenance. Crude imports declined sufficiently to draw crude stocks 1 MMBbls. Finished product stocks drew a similar amount. There were modest builds in gasoline and gasoil stocks, and a more moderate build in jet-kero. Naphtha and fuel oil stocks drew moderately and were more than offsetting. Refining margins had improved a bit, but have continued to soften as June unfolds.

Structural Tightness Raises the Floor for Gas Prices

Despite Thursday’s slightly higher-than-expected storage release of 69 BCF, the general momentum in structural tightness appears to be adequate to safeguard the ~15% rally in natural gas prices this month. To be sure, sequential domestic production losses and early cooling demand have raised the floor for the prompt futures contract as well as cash prices.

Financial Stress Builds

Most key indexes fell on a weekly average basis as stress grew due to concerns over the possibility of the United Kingdom leaving the European Union. The S&P 500, US High-Yield Corporate Bond, Russell 2000, and Emerging Market Bond indexes were all lower, while VIX rose substantially. The dollar was mostly stronger, while commodities were mixed. Short- and long-term bond yields in a host of major countries fell. The Cleveland Fed released their inflation expectations for the month, which showed decreases in all the major maturities.

Production Reaches a Record High the Week Ending June 10

Stocks rise for the first time in six weeks. Ethanol demand in blended gasoline remains strong.

Weather Volatility Increases

After a strong close Friday, which saw notable volume of 5K December ’16 corn contracts in the last five minutes and 3K more during the post-close, weekend weather forecasts literally had something for both bulls and bears. Consensus continues to point to hot temperatures, but precipitation forecasts were drier, wetter, and then drier again, and finally wetter, pushing markets lower Sunday evening.

Iraq Oil Monitor, 2Q16

The oil dispute between Baghdad and the KRG resurfaced in March, resulting in the suspension of 150 MB/D from NOC-controlled fields to the Kurdish pipeline. We believe a $5.4 billion IMF package will facilitate an agreement by 2017. Government requests for spending cuts are delaying development plans at large southern fields. Investment reductions and infrastructure constraints underpin our belief that capacity growth will be limited. We also see risks that additional government forces will be diverted north to combat ISIS, leaving more of a security vacuum in Basra.

Lagging LNG Flows Support Prices amid Dutch Output Weakness and Temporary Outsized Impact of Disrupted Norwegian Volumes

After 14 straight months of increases highlighting a new and more aggressive marketing strategy, Norway’s first year-on-year export decrease in June (down 27-mmcm/d) is largely being driven by unplanned outages (Kvitebjorn), not any notion of a change in the new way the gas is being marketed. All of the year-on-year cuts are coming from flows to the Continent instead of to the U.K., where a price premium makes it the last place a marketer wants to cut. Flows to Germany tested a five-year low in early June, but they appear to be on the rebound in the past week. Put in proper perspective, the loss of Kvitebjorn flows are not going to change the trajectory of the market on a fundamentals basis, but do justify short-term price support amid other lingering issues affecting supply.

Global Equities Decline on Heightened Brexit Fears

Global equities were broadly lower on the week. The U.S. market was down 1.7%, with banking and technology posting the sharpest losses. Energy was down about 1%, but outperformed. Internationally, all the tracking indices were lower, with World, ex-US, being the weakest. Europe also posted greater-than-average declines.

Venezuela: Risks Rising, But No Change to PIRA Reference Case

PIRA estimates delinquent payments to service companies have reduced Venezuelan crude production to 2-2.15 MMB/D in May and June, from 2.3 MMB/D in 1Q16. Our Reference Case assumes these issues will be gradually resolved by the end of the year. Recent reports on agreements with Schlumberger and China are marginally encouraging. Higher oil prices may also help. However, worsening economic conditions present more risk to our 2017 forecast, where we have output averaging 2.2 MMB/D. Venezuelan debts are even higher next year, which will leave the government facing increasingly difficult choices between debt payments, oil sector spending, funding for social programs, and imports of consumer products. This raises the risk of social and political unrest, which have the potential to disrupt oil operations. We are watching events closely, as more payments come due and protests worsen.

Domestic Gas Producers in Romania Could Be Challenged by Imports

Romanian Regulatory Authority for Energy (ANRE) president Niculae Havrilet said that the local gas industry might incur some losses due to price liberalization. According to the price liberalization calendar, natural gas prices should increase by 10% on July 1; the suppliers of households will have to make a pool at the lowest price, and with cheaper imports, they will incur losses because of costs of building up stocks. The gas pool for households includes quotas of the current domestic production, stored gas, and imports. As the ANRE sets these quotas to obtain the minimum end price, the president urged for the continuing of the liberalization process. “The end price of gas will definitely not increase by 10%,” he stated.

Nigeria Devaluation Will Lower Oil Production Costs

The recent announcement from the Nigerian Central Bank to devalue the naira could result in lower costs for operators in Nigeria. The Central Bank had previously pegged the naira at around 200 to the U.S. dollar. Several sources estimate the market value of the naira to be around 300 to the U.S. dollar. Assuming a 300 exchange rate and an increase in inflation as a result of the devaluation (from the current rate of 14% to around 22%), costs to produce existing oil supplies and to develop new ones (denominated in U.S. dollars) could be reduced by around 14%. However, the reduction in costs will be a function of how the exchange rate and inflation develop over time.

Despite Weaker Oil Market, Coal Prices Continue to Gain

Coal pricing surged last week, continuing the market rally that has been occurring essentially since February. API#2 (Northwest Europe) and API#4 (South Africa) increased by the largest extent, while gains for FOB Newcastle (Australia) prices were less pronounced. While a recovering oil market has been the primary factor in the surge in pricing for most for the year-to-date, the oil market lost ground last week, with the coal market gaining ground for other reasons. It will be difficult for the coal market to hold on to these gains, unless the oil market continues its upward trajectory, as Atlantic Basin coal fundamentals are on shaky ground.

Asian Refiners Shift Yields to Cope with Strong Gasoline Demand

Asia-Pacific’s oil demand remained robust in 1Q16, with an increase of 1.12 MMB/D year-on-year. China and India contributed almost the entire growth, driven by gasoline and LPG. Asian refiners responded to higher gasoline demand by shifting their yields from gasoil/diesel to gasoline. While there will likely be a temporary shift back to gasoil now because of its recent relative price strength, refiners will soon return to emphasizing gasoline because of relatively strong demand.

Stabilizing Hydro, Destabilizing Finances Threaten Brazil LNG outlook

Long a staple player among counter-seasonal buyers, Brazil’s role as a key 2Q/3Q buyer of LNG is coming under question, as it recovers from a severe years-long drought. YTD LNG import levels through May are down by 40%, or the equivalent of some 20 cargos (11-mmcm/d through May), as the hydro reservoir levels in Brazil show a significant improvement over last year.

Asian Demand Update: Acceleration in Growth Continues

PIRA's latest update of Asian product demand again shows improved growth due to further gains in Chinese demand. This acceleration in Chinese growth was pointed out in our "Spotlight" piece issued June 8th titled "Soaring China Crude Imports Driving Strong Apparent Demand." The latest year-on-year Asian demand growth is now 1.35 MMB/D, with China apparent demand up 1.1 MMB/D. This marks the fourth monthly improvement in Asian demand growth. The low point was in our February assessment, when growth had only been about 0.3 MMB/D. That steady improvement suggests that low prices earlier in the year, have in fact stimulated growth, while economic performance in Asia appears to be improving.

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

N.A. Crude Stocks Fall on Wildfires, Refiner Demand

Canadian oil sands production losses from last month’s wildfires, along with declining U.S. production, led to stock declines and higher crude prices last month, particularly for Western Canadian and Bakken grades. In addition to stock declines in Canada, U.S. crude stocks fell 10 million barrels in May, and are forecast to drop another 90 million barrels through year-end, including a 20-25 million barrel decline in Cushing.

U.S. Gas Market Heats Up

NYMEX price volatility had been muted, due in large part to residual weakness still plaguing the physical markets in all regions, particularly in the case of Henry Hub (HH) in the South. Both futures and cash prices, however, should heat up sooner rather than later with the cooling season now getting under way. While U.S. storage inventories are more akin to Labor Day than Memorial Day, especially in the South Central, seasonally stronger electric generation loads will highlight the increased structural reliance on gas-fired EG and help stifle congestion worries — for the time being at least. As a result, a stronger bid should underpin cash prices not just for HH, but across the South despite ongoing challenges facing the Midwest and Northeast.

Runoff Peaks Early…Again

Reversing recent weakness, Mid-Columbia on-peak rebounded to the mid-teens as hydro output came in below expectations. SP15 also increased, climbing back above the $20 mark as the discount to NP15 narrowed. The latter market was unchanged as California hydro output reached a three year high. Palo Verde was also unchanged as cooler-than-normal conditions again prevailed in the Southwest. Mid-Columbia summer heat rate forecasts have been revised up due to weaker runoff expectations. Unavailability of Aliso Canyon for gas supply balancing in SP15 remains a bullish wildcard for summer.

Coal Prices Move Higher on Oil Market Rally

Both physical and paper prices moved higher this month, with a strengthening oil market providing much of the stimulus for coal pricing. We look for coal pricing to continue to track the oil market over the next several months, although coal supply and demand fundamentals are expected to continue to tighten, and we retain a bullish outlook for 2017 pricing in particular.

RGGI Auction Dominated by Compliance Buying

As PIRA expected, the June RGGI auction was dominated by compliance-oriented buying and reinforced the lower pricing environment of late. In contrast to recent undersubscribed CA/WCI auctions, a strong coverage ratio of 3.1 was observed. As with the March auction, significant bid quantities were observed at low prices; however, the results demonstrated solid price support well over $4. PIRA continues to expect that the 2016 RGGI Program Review will translate to tighter caps post-2020 and provide price support.

Global Equities Post a Neutral Week

Global equities were, on balance, only modestly changed. In the U.S., the broad market was unchanged, though certain sectors posted strong gains, including utilities, consumer staples, and materials. Energy lagged and was lower by 0.8%. Internationally, the strongest performers were BRICs, emerging markets, emerging Asia, and China.

Propane Inventories Enter a Year-on-Year Deficit

Despite a modest weekly build of 1.4 million barrels, propane inventories fell into a 280 thousand barrel deficit to the previous year. Between the end of June 2014 until the week ending on May 20th, propane stocks had been in a constant annual surplus position. PIRA believes that the reversal into a year-on-year decline in stocks is evidence of a change in direction for the propane market. Not only will prices begin to rise and strengthen against broader energy markets, but exports will decline while stocks continue to fall further into deficit.

U.S. Ethanol Prices and Manufacturing Margins Rise in May

The demand for ethanol blended gasoline was robust as the peak driving season approached. At the same time, plants were shut down for spring maintenance.

New Week, New Highs

A WASDE week starts with new highs of $4.25 in new crop corn, $11.00 in new crop soybeans, and a recent Financial Times story touting “commodities (as) the best performing asset class” of 2016. While UK-based pension player Schroders said they have invested their “entire agriculture allocation” after “years and years” of negativity, U.S.-based PIMCO relayed a much more neutral view of commodities in general. As usual, comments around “free money” chasing “returns” in commodities are concerning. Regardless of investor opinion at this point, one look at the positioning of sell orders in the marketplace shows that producers are rewarding this most recent rally, specifically in corn.

Latin America Under Economic Pressure

Consumption of diesel in Latin America is expected to fall vs. 2015 while gasoline stays flat. Diesel demand is expected to contract by 50 MB/D in 2016 to reach 2,850 MB/D led by decreases in Venezuela (20 MB/D) and Brazil (35 MB/D). Imports of diesel into the region are set to be lower in 2016 while gasoline imports stay flat. PIRA projects 2016 Latin American imports of distillates to be around 915 MB/D, about 45 MB/D lower year-on-year. Regional refinery crude runs are projected to track the 2015 average of ~5,600 MB/D. Operational issues continue to affect Venezuelan crude runs: we project throughput to be 550 MB/D in May and 660 MB/D on average for the year. 2016 Brazilian refinery runs are projected to be 1,950 MB/D, down from 1,985 MB/D in 2015 as incentives to import gasoline and diesel remain attractive. Gasoline demand in the Atlantic Basin is good and should support cracks throughout the summer, but production and imports into the U.S. PADD I are high. Diesel cracks are starting to improve and are projected to gradually recover into the fall.

The Invisible Hand: Non-Core Domestic European Gas Production?

Much attention is paid to British, Dutch, and Norwegian gas production, but what is happening outside these main centers in “non-core production” does stack up and should not be ignored. Surprisingly, it adds up to a significant amount. Not surprisingly, it is slowly moving in the same direction as most other European gas production – down.

Rebound Continues Due to Fuel and Evidence of Supply-Side Response

German Calendar 2017 baseload power prices continue to move up, recovering to levels previously seen at the end of December and early January, and moving closer to the forecasts in our latest Monthly Outlook. While a buoyant fuel pricing complex is driving the price recovery, the balances in Germany and the rest of Europe are slightly tightening, as supply is starting to be negatively impacted by squeezed margins and policy intervention is starting to move directionally in favor of conventional generators.

Tighter Atlantic Balances, Higher Oil Prices Push Coal Higher

Coal prices again made sizable gains last week, with Atlantic Basin prices moving particularly higher. Rising oil prices again provided for much of the increase, although there has been some tightening in Atlantic Basin coal balances of late, which explains the relative rise in API#2 (Northwest Europe) and API#4 (South Africa) relative to FOB Newcastle (Australia). PIRA's prevailing market view has been that deferred pricing is undervalued and that backwardation in the forward curve is misplaced. Weakness in demand will keep a lid on further price increases over the near term, but as long as the oil marker keeps rising, coal prices will be pulled along.

What Does Weak U.S. Job Report Mean for GDP and Fed Policy?

The latest report on U.S. nonfarm payrolls disappointed, and a sharp deceleration in the recent pace of job growth raised two questions: what does this mean for the economic growth outlook, and what is the Fed likely to do now? Outside the U.S., the European Central Bank’s latest economic projections hinted at future monetary easing; the Japanese government directionally eased fiscal policy; and recent activity data from India, Brazil, and Russia turned encouraging.

Inventories Drop to 2016 Low

Production increased as plants returned to normal operation. There was a large build in PADD I.

Soybean Run Continues

“’Over’? Did you say ‘over’? Nothing is over until we decide it is!" Movie fans will remember this famous line from Animal House, wherein it was delivered by a seventh-year college senior named Bluto, played by John Belushi. Soybean longs seem to be channeling their most-inner Bluto this week as prompt beans have tacked on an additional dollar since the weekly low just this past Wednesday. The total gain for July beans now stands at $2.50+ in less than two months of trading.

U.S. Commercial Stocks Show Big Decline

Overall commercial inventory fell by the most since mid-February. The decline of over 2.7 million barrels was nearly equal to the combined drops over the previous three weeks. Both crude and product stocks fell by roughly the same amount, with crude down by 1.37 million barrels.

Ukraine Looks to Shore Up Future Gas Supplies

State owned Naftogaz Ukrainy is inviting companies to tender for contracts to supply gas, which will be awarded in the period from June 20, 2016, to January 20, 2017, it said on May 27. This will involve buying gas using Ukraine’s interconnections with the European Union, although it is open to companies or consortia from any country. It has also invited companies and consortia to apply for prequalification for gas supplies, by a deadline of June 10, but it says that "In order to maximize the number of qualified tenderers under this facility, new applicants may apply for prequalification throughout the duration of the facility."

U.S. Labor Market Slows

A surprisingly sluggish U.S. labor market report for May has affected expectations for future Fed policy, and the dollar weakened against most key currencies. The labor market disappointment should be directionally negative for risk assets, but reaction was apparently muted on Friday. On a weekly average basis, sensitive financial market indicators that we track (such as the S&P 500 index and the high-yield corporate bond index) registered week-on-week gains. In commodity markets, metal prices generally moved lower this week, while prices of agricultural goods moved higher.

Japanese Crude Runs Fell, Imports Rose and Stocks Built

Crude runs fell again amid turnarounds and unplanned outages that have yet to restart. Crude imports rose and stocks built 3.3 MMBbls, about half of the decline seen the previous week. Finished product stocks fell and the decline was underpinned by good draws for jet fuel and gasoil. Gasoline demand was strong, but an equally high supply side led to only a fractional stock draw. The kerosene stock build rate moved up from 75 MB/D to 93 MB/D on seasonally weaker demand. Refining margins have begun to improve a bit, but remain soft. On the week, major light product cracks firmed, while fuel oil and naphtha eased.

Supply-Side Balancing Under Way

Beyond price-induced demand growth, accelerating production declines are playing an increasingly important role in limiting this year’s stock build. To be sure, this week’s EIA Crude Oil and Monthly Natural Gas Production report validates the supply-side balancing under way. More specifically, the EIA data for March indicated U.S. dry gas production was down M/M by ~1.3 BCF/D and up year-on-year by only ~0.1 BCF/D. These figures were in line with our estimates for the month.

March 2016 U.S. Domestic Production Decline Accelerates, Now Very Close to PIRA Estimate

DOE recently released its March oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, fell 56 MB/D month-on-month and shows a year-on-year decline of 381 MB/D. In contrast, the weekly data had posted monthly equivalent rise of 237 MB/D, Mar. vs. Feb. This implies domestic crude supply was reduced 131 MB/D from what the weekly data had been showing. The balancing item has been running negative the last three of four months, with March coming in at -147 MB/D, after being -97 MB/D in February. PIRA has been pointing out that the DOE monthly collection methodology tends to overstate production since its survey universe lacks full coverage of smaller producers. It is the balancing item that reflects this bias and this is why PIRA adds it to reported production to estimate domestic crude supply.

Lack of Send-Out in N.W. Europe Reflects Weaker LNG Supply Growth and More Norwegian and Russian Gas

The lack of LNG send out in N.W. Europe will continue to act as a major support for NBP prices and, by extension, spot prices around the world. Stronger NBP prices have become the benchmark for LNG netbacks elsewhere, which is a theme worth repeating no matter how many times you see us write it.

U.S. March 2016 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly March 2016 (PSM) U.S. oil supply/demand data. March 2016 demand came in at 19.62 MMB/D. Growth again was particularly strong for gasoline (+3.8%, 344 MB/D), while the barrel average was up 2%, or 378 MB/D. Distillate and kero-jet both underperformed the barrel average. Distillate was lower by 2.1% versus year-ago, while weather in March was 17% warmer-than-normal and 37% warmer than last year, so there was an apparent influence from an HDD standpoint. Even at the end-of the season, such an impact on heating oil demand is calculated by PIRA as a reduction of 280 MB/D versus year-ago.

Anadarko SCOOP/STACK: Emerging U.S. Shale Play

The Anadarko SCOOP/STACK is emerging as a leading shale play with prolific well productivity, relatively high oil content, and superior netbacks. Breakevens are currently on par with the Permian and Eagle Ford ($45-50/Bbl) and stand to improve as operators further drive efficiencies. The play is still in the delineation phase, with much of current drilling activity focused on holding acreage. Full-scale development mode will likely start by 2018 as prices improve. We believe the long-term potential of the play is promising, with liquids production reaching 800 MB/D by 2030, from the current 180 MB/D.

Aramco Pricing Adjustments for July Indicate Saudi Is Not Pushing Volume

Saudi Arabia's formula prices for July were just released. There is no indication that Saudi desires to sell more oil into the market. Differentials into Asia were tightened for all grades expect Arab Extra Light, which was left unchanged. Pricing differentials for the U.S, were also tightened for all but the lightest grade, Arab Extra Light, whose differential was reduced $0.30/Bbl. For Europe, differentials were lowered for both Northwest Europe and the Med.

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

Hercules Offshore, Inc. (Nasdaq: HERO) (the "Company" or "Hercules") has announced, following a review of its strategic alternatives led by a Special Committee comprised of all of its independent Board members, that the Company has entered into a Restructuring Support Agreement ("RSA") with lenders holding approximately 99 percent of the indebtedness under its first lien credit agreement. The agreement seeks to maximize value for the Company's stakeholders and provide a smooth transition for employees, customers and suppliers through an orderly sale of the Company's assets.

Under the terms of the RSA, Hercules and certain of its U.S. subsidiaries will solicit acceptances and rejections of its pre-packaged Chapter 11 plan from first lien lenders and shareholders, file voluntary Chapter 11 petitions to compromise the Company's obligations to its first lien lenders and provide a recovery to its shareholders, and then place all of the Company's unsold assets into a wind-down vehicle to ensure their continued, safe operation until they can be sold. The Company's international subsidiaries will not be included as part of the Chapter 11 cases but will be part of the sale process.

Hercules's Chapter 11 Plan (the "Plan") provides that unsecured creditors will be paid in full. The Company expects to file the typical First Day Motions to, among other things, maintain employee wages and benefits and insurance throughout the Chapter 11 process and will file a separate First Day Motion to continue paying its suppliers' pre-petition claims under normal payment terms. If the Company's shareholders vote as a class to accept the Plan, shareholders will receive cash recoveries over time including a payment of $12.5 million upon the completion of the Chapter 11 process and additional cash distributions thereafter depending on the success of the sale of the Company's assets through interests in the post-Chapter 11 wind-down vehicle. The secured lenders likewise are projected to receive cash payments largely dependent on the success of the sale process.

As part of the process, Hercules also announces that it has entered into a definitive agreement to transfer the right to acquire the newbuild harsh environment jack-up rig, formerly named Hercules Highlander, to a subsidiary of Maersk Drilling (CPH: MAERSK). The rig is ready for immediate delivery from Jurong Shipyard Pte Ltd ("Jurong") in Singapore. According to the agreement, Maersk Highlander UK Ltd. succeeds to the right to take delivery of the rig and will settle the final payment of approximately $196 million with Jurong.

On November 6, 2015, Hercules completed its initial financial restructuring under Chapter 11 of the U.S. Bankruptcy Code with a new $450 million senior secured credit facility in place. Since this time, the ongoing decline in oil prices, the consolidation of its U.S. customer base and the addition of new capacity have negatively impacted dayrates and demand for Hercules's services. On February 11, 2016, the Company announced a Special Committee comprised of all the independent members of its Board of Directors to explore strategic alternatives. Today's RSA announcement is the outcome of that process and follows a thorough sale process, which did not yield results that would have been better for stakeholders than what is contemplated by the Plan.

Additional information regarding the RSA and events leading up to its execution are available at http://www.herculesoffshore.com and will be filed with the Securities Exchange Commission. This information is not an offer or the solicitation of an offer for any transaction and may not be used or relied on in connection with any transaction.

The Company has engaged Akin Gump Strauss Hauer & Feld LLP as its legal counsel, PJT Partners as its financial advisor and FTI Consulting as its restructuring advisor.

The Middle East has been a relative bright spot for upstream activity during the oil price downturn. International land rig contractors, such as Saipem, are actively focusing their strategy and drilling campaigns on the region in the attempt to limit the negative impact of low oil prices.

Looking at drilling activity, it is clear why the Middle East is a good prospect for contractors hit by the falling rig count. Between 2014 and 2015, Douglas-Westwood’s Drilling & Production Market Forecast saw global onshore wells drilled fall by a staggering 32% as operators slashed drilling campaigns. The Middle East – characterised by low lifting costs and containing almost half of the OPEC membership – was relatively immune from this decline, growing at 3%. Douglas-Westwood expects the Middle East to continue to buck global trends, anticipating another 3% increase in the number of onshore wells drilled this year.

Despite this growth, the region has not been completely exempt from the impact of the downturn – NOCs such as Saudi Aramco have slowed progress at a number of projects. Indeed beyond drilling & production, heavily commodity dependent Gulf producers have felt the strain on their finances. Non-OPEC member Oman has been hit particularly hard, with both Moody’s and Standard & Poor lowering their credit rating – the latter to just one notch above junk status.

However, a regional reliance on oil exports is expected to support continued activity and there are clear bright spots within the region. Since economic sanctions were lifted in January, Iran has stood out as a potential golden opportunity for international rig contractors – Douglas-Westwood’s Iran Oil & Gas Market Forecast expects demand for land rigs to increase at 6% to 2020. However, some bilateral US sanctions remain. This has created uncertainty with regards to payment – understandably a key concern for any potential entrant. This may restrict US based contractors from entering the market directly, therefore, the opportunity – at least in the short term – is likely to be most accessible to indigenous contractors based in the Middle East. As a result, it may be contractors in neighbouring markets that find themselves with an early mover advantage.

Kathryn Symes, Douglas-Westwood London

In recent years, Liquefied Natural Gas (LNG) has become integral to meeting global energy demand. However, as the oil & gas industry continues to navigate the prolonged downturn, capital intensive export LNG projects have been in the spot light due to questionable economic viability. A key driver is oversupply in the global LNG market – spot prices are expected to remain low in the near-term (Henry Hub averaged $1.92MMBtu in May 2016 a 58% decline from May 2014). This gloomy scenario presents limited economic incentives for companies to commit to capital intensive projects in a period plagued with budget austerity.

With the world’s LNG export capacity currently above 310.8 mmtpa, an additional 30.8 mmtpa is expected to be added by the end of 2016 – annual additions are expected to increase by 37% in 2017. However, demand is expected to plateau over the next two years. Reduced demand from Japan will likely be made up by growth from China and India. Both of these factors increase the risk of a short-term demand – supply imbalance. Massive investment prior to the industry downturn on large Australian and US LNG projects has driven this growth. Other projects expected over the same period include the PFLNG-Satu (Malaysia), Prelude FLNG (Australia), Yamal LNG Train 1(Russia) and Bintulu LNG train 9 (Malaysia).

Despite near term concerns of oversupply, natural gas is expected to play a vital role as a bridge fuel between environmentally damaging coal and oil to renewables. This will be vital to ensuring that the COP21 commitment to limiting global temperature increase to 1.5 degrees by the middle of the century is achievable. There is plentiful gas supply, as well as massive yet to be developed gas reserves in the Mediterranean Sea, East African Basin, and various unconventional reserves. This is the window of opportunity to implement constructive legislative strategies to help switch industries with heavy carbon footprints, such as the maritime industry to gas. Such a shift in legislative strategy and improvement in technology will increase both the appeal and use of a fuel that could help lower the global carbon footprint.

Mark Adeosun, Douglas-Westwood London

As an indicator of the turmoil that has hit the US oil & gas services sector the Baker Hughes rig count is hard to beat. From 1,931 rigs drilling in September 2014 the count has declined to a total of 408, dramatically reducing activity and jobs for drillers, service companies and suppliers alike.

Unconventional activity has been hit hard. Higher horsepower rigs, ever-longer laterals and costly stimulation services increased well costs by millions of dollars compared with conventional, vertical wellbores. Despite impressive cost savings across the US, non-core unconventional assets have been among the main casualties of the current energy crisis. Even core areas of the prolific Eagle Ford and Williston Basins saw market declines in active rigs.

Those declines may have finally hit bottom. The last four Baker Hughes rig count updates have horizontal rigs targeting oil at 248, 249, 249 and 257 units. Larger unconventional drillers have stated that $50/bbl WTI will be enough for them to add rigs to the fleet, albeit in modest numbers, a price now within reach. While vertical rigs continue to decline slightly, the US service sector has now reached, or very nearly reached, what appears to be the trough. This is good news for oilfield employment with data suggesting up to 200 workers are employed for each active rig, either directly or indirectly.

While the unconventional oilfield services and new equipment sectors appear to have finally hit the lowest point in the cycle, their path to profitability remains distant. The balance of 2016 is set to remain testing as the unconventional rig count grinds upward.

Matt Loffman, Douglas-Westwood Houston

Sky-Futures, a leading provider of drone inspection services for the oil and gas industry, has raised £2.5m from award-winning venture capital fund, MMC Ventures.

The Series A investment – the largest ever into drone technology in Europe – comes after a year of significant expansion for the business, growing by 700% in FY2014. This investment will enable Sky-Futures to continue its rapid growth and continue building out its integrated technology inspection platform.

Image Courtesy: Sky-Futures

Founded in 2009, Sky-Futures is the world leader in oil and gas drone inspections, working with more than 30 of the biggest oil and gas companies in the world including Apache, BG Group, BP, ConocoPhillips, Shell and Statoil. The drones collect high definition video, stills and thermal imagery data, which is analysed in a proprietary data platform and delivered to the client as a technical report written by highly qualified, in-house global industry experts. Sky- Futures now delivers drone inspection services in the North Sea, the Middle East, South East Asia and North Africa, and has recently opened an office in Houston, Texas to serve clients in the Gulf of Mexico, having been one of the first companies to receive FAA regulatory approval to operate in the US.

This investment follows two significant seed rounds, which included prominent angel investors Nick Robertson (CEO of ASOS) and Jon Kamaluddin (former International Director of ASOS).

James Harrison, co-founder and CEO of Sky-Futures, said: “We have experienced a fantastic level of growth in the past year, expanding our global reach and further establishing ourselves as the world leaders in oil and gas drone inspection. We recently received the permit to use our drones in United States National Air Space, an incredibly significant development, allowing us to further expand our international operations footprint.”

“Today’s funding announcement marks the next stage for Sky-Futures, and we are looking forward to working with the MMC Ventures team as we further develop our technology- driven commercial drone services.”

Simon Menashy, Investment Director at MMC Ventures, said: “Drone technology is an exciting area of innovation, but it’s only now that we are seeing leading commercial operators emerge. Sky-Futures’ use of drone technology in the oil and gas market is world-leading and changes the game for platform operators in terms of cost, safety and depth of data analysis. We’re excited to work with an exceptional trio of founders in James, Chris and Nick, and look forward to helping the team to take the business to the next level of global scale.”

The Maersk Group delivered a profit of USD 224m (USD 1.6bn) and an underlying profit of USD 214m (USD 1.3bn).

The result was negatively impacted by the low oil price and low average container freight rates. The return on invested capital (ROIC) was 2.9% (13.8%).

The underlying profit was significantly lower than same period last year due to all businesses except Maersk Drilling, Maersk Tankers and Damco being lower and Svitzer being at the same level.

The Culzean gas field project is on track within budget and according to plans.Image courtesy:  Maersk Group

“The Maersk Group delivered an underlying profit of USD 214m in the first quarter. While market conditions remain challenging, we continue to adjust our cost base to the new conditions and maintain a good operational performance across our businesses. We maintain our focus on strengthening the Group’s position in the market and have completed acquisitions within APM Terminals and Maersk Oil, and in Maersk Line we have defended our market leading position,” says Group CEO Nils S. Andersen.

Highlights:

• The Maersk Group delivered an underlying profit of USD 214m with six out of eight businesses returning a profit.

• Though profit remains challenged by the market conditions, Maersk Group continues to see good operational performance resulting from cost and optimization programs.

• Reduced cost levels bring break-even to the range of USD 40-45 per barrel from previous USD 45–55 per barrel in Maersk Oil.

• Maersk Line improved utilization, lowered unit costs by 16% year on year and defended their market leading position, delivering an underlying profit of USD 32m.

We are strengthening the Group’s position in the market and have completed acquisitions within APM Terminals and Maersk Oil.