Leading international energy logistics group Peterson Offshore Group BV (“Peterson”),has announced its consolidated results for the 12 months ending 31st December 2015.
Commenting on the Group’s performance Erwin Kooij, CEO of Peterson said:
“Peterson has remained profitable in what continues to be a challenging time for the energy sector. We remain committed to supporting our clients to deliver safe, innovative, cost effective solutions that enable collaboration and drive efficiency in the supply chain. Throughout the downturn we continue to invest in the design of unique concepts, technology, equipment, infrastructure and in our people. In 2015, we committed £3.1m which included new cranes, trucks, trailers and SPMT’s (self-propelled modular transporters).”
The group’s UK based companies, including Peterson UK Ltd, 80:20 Procurement Services, Peterson Freight Management and Streamba Ltd contributed 50% of the group’s operating profit, with Peterson investing in new international opportunities. North Sea revenue1 was down on 2014 at £207m generating profit before tax of £4.4m down 32% on 2014.
We successfully retained existing contracts with Maersk, BP, ENI, Centrica, and were awarded new contracts with TAQA, Transocean and ONE. We are working in close partnership with a number of operators to establish a vessel pool to share resources in the Central & Northern North Sea (CNNS), similar to our long-established and successful model in the Southern North Sea. Our decommissioning facility in Great Yarmouth, which we opened in 2015, is now fully operational, and secured its first substantial decommissioning contract. We were awarded2 two long term contracts to provide logistics support for Statoil’s Dudgeon offshore wind farm; and we are firmly into the operational phase with our nuclear industry business.
We continue to invest to take our North Sea experience overseas. We opened new offices in Trinidad and Malta to support customers in these regions and we successfully secured a number of international logistics projects. Significant investment has been made in expanding the geographic footprint of our procurement business 80:20 and we are now operating in Norway, the Netherlands, Houston and Malta.
Our ongoing commitment to technology is focused on driving efficiency and generating maximum value across our clients’ logistics operations. We made significant investment into broadening our eSuite technologies. With a continued focus on asset utilisation across the industry, our new eHire application provides simple and effective visibility and control over all third party rentals, whether regular or high cost rental; and our receipt, store and pack tools support bar coding and Warehouse Management.
Sitting above all our applications is our unique proprietary technology VOR that seamlessly connects people directly and in real time to inventory and assets throughout the supply chain. VOR provides transparency, from ordering a piece of equipment quickly, to seeing what space is available on a vessel to ship it offshore, enabling better, data driven decisions.
Our people are fundamental to our ability to deliver operational excellence and we increased our headcount by 6% in the last year and currently employ 400 people in the Aberdeen area. We made a number of key appointments to further strengthen our management team and support the next phase of the company's growth.
Our parent company approaches its centenary with a strong balance sheet, this enables us to take a long view, invest for the future and allows our clients to trust in Peterson.”
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1. Revenue, inclusive of vessel charters was down sharply on 2014, mainly driven by the reduction in vessel charter day rates with oversupply of vessels.
Last week we covered the OPEC announcement on production cuts, a strategy to reduce over-supply in the market and give a much needed boost to oil prices. Without higher oil prices, many new projects are thought to be uneconomic. Or are they? Douglas-Westwood has recently reviewed over 250 upstream capital projects sanctioned in the last four years to assess how industry costs are moving. The results are remarkable.
Oil & Gas Exploration & Production (E&P) companies have been under pressure in the downturn. Faced with much lower free cash flow from producing fields, the focus for many has been on managing costs so that dividends can be maintained through the downturn.
The sanctioning of many new projects has been deferred during this period as E&P firms instead focus on becoming leaner. However, three specific trends are driving a remarkable reduction in upstream capital costs, and bringing some uneconomic fields over the threshold of viability.
• The immediate impact of the downturn was a squeeze on the supply chain by the E&P companies. Demands of 10-15% price reductions to service and equipment companies were common. This trend was more or less immediate at the start of the downturn, and will most likely be eroded as soon as the market recovers.
• With reduced activity levels came massive over-supply of some asset classes. Rig utilization, vessel utilization, (amongst many other asset classes) has plummeted and day-rates have fallen in some cases over 60%. Over-supply will take some time to work its way out of the system as older units are scrapped.
• Re-engineering of existing projects, returning to conceptual or FEED studies to re-work the development scheme has also yielded substantial cost savings. Further gains are yet to be had from standardization of engineering approaches, equipment, and even people. These savings should be far more permanent in nature.
Our analysis of global upstream projects (onshore and offshore, including unconventional) shows that on average the spend per barrel recovered for newly-sanctioned projects has fallen an incredible 40% over the 2012 to 2016 period. In some locations, the cost reductions have been much greater than this average. The DW upstream capital projects study covering the 250 project previously mentioned will detail key drivers and initiatives that have led to this outcome. You can register your interest for updates on this study here.
Steve Robertson, Douglas-Westwood London
U.S. Crude Market Flat in August, But Tightening Is AheadCrude prices and regional differentials were nearly flat in August, but prices will improve through year-end, as an open export arb and closed import arb lead to a reduction in net crude imports and falling crude stocks. Production has returned to normal in Western Canada, but it continues to decline in the U.S. Midcontinent — except in the Permian Basin, where production is beginning to stabilize as the rig count rises.
U.S. production was again impacted by temporary shut-ins. While the losses tied to Tropical Storm Hermine were minor, it marked yet another of many events that have limited production during the injection season.
The large drop in French nuclear output so far this summer, by almost 7 GW year-on-year in September to date, is pushing gas plants to set French prices more often, and, in turn, this fact makes French prices naturally closer to its Italian counterparts, resulting in lower French flows to Italy. With the current Italy-France differential further narrowing for the upcoming winter months, we might not see a sustained flow from France. If the flows from France dry up, those from Switzerland, Austria and Slovenia might not be sufficient to fill the gap.
New England REC pricing has moved well below ACP levels, indicating adequate supply for the highest value markets. Near-term pricing may respond to expected load growth later this year into 2017. Between now and 2020, REC requirements increase, but they also fluctuate according to MA solar carve-outs. New wind development is critical: although there is significant capacity in the queue, additional wind build (beyond what is under construction) is required to meet demand. Longer term, valuing RECs depends on RPS policy and the desire for strong REC price signals — and initiatives such as IMAPP call this into question. Policies such as the recent MA law increasing clean energy purchasing and encouraging offshore wind can diminish the importance of RECs in incentivizing renewables.
Global equities were broadly lower on the week. In the U.S., only the energy tracking index posted a gain. Housing, consumer staples, and materials performed worse than the overall 2% decline. The international indices all did better than the U.S. The best performer was the Chinese tracking index, while Latin America was the worst performer.
For September, the markets should be focused on old crop/new crop soybean carry outs in the WASDE and new crop corn yield in the Crop Production report. How aggressive the World Board and NASS get in these two categories will set the tone moving forward, in our opinion. While both numbers should be objective, the bean carry out will certainly contain some subjectivity.
Manufacturing margins improved to the highest level in over five weeks. RIN values give back some of their recent gains.
Over the past 12 months, several large oil-exporting countries have been forced to address their subsidy burden and raise domestic fuel prices. Major policy changes for this group of countries have the potential to slightly dampen future oil demand, as most oil exporters still price domestic fuels at a fraction of the global average. But political pressure and internal dynamics are likely to prevent a widespread move towards market pricing. Recent history suggests that any further reforms will continue to be modest and gradual, while rising oil prices will relieve some of the urgency to raise domestic fuel prices. In the rest of the world, the vast majority of countries price domestic fuels at or above market levels. PIRA maintains its view that the threat to future oil demand from subsidy reform is overstated.
Despite a sizeable rise in pricing on Monday and Tuesday (pushing FOB Newcastle prices above $70/mt for the first time since mid-2014), coal prices closed on Friday down week-on-week, in response to the agreement between the Chinese government and coal producers to lift output. While PIRA believes that there will be some stimulation in China's coal production from the summit this week, import demand will likely remain strong over the next 30-60 days due to winter stocking requirements. However, beyond this period, we believe that if coal producers are given some discretion to fluctuate output (as it appears as if they have), they will exercise some discipline, as many mining companies in China are just now moving out of the red into the black. If this proves to be correct, import demand could remain fairly robust, perhaps even upward trending year-on-year over the next six to nine months.
Huge crude stock draw pulls overall commercial stocks down 13.7 million barrels this past week while the strongest reported product demand of the year limits product inventory build. Gasoline had its largest stock draw this summer as real demand was very strong, imports moderated and refiners substantially reduced refinery production. Crude stocks are forecast to decline again next week despite a rebound in crude imports with Cushing contributing 0.6 million barrels to the draw. Gasoline stocks to draw again, albeit at a much slower pace as seasonal demand weakness kicks in. Distillate demand should rebound, limiting its stock build in next week’s EIA data.
Significant power sector gas demand is starting to creep into European gas balances. The problem remains that this demand is not coming in fast enough to replace even the declining demand from storage injectors. While the month is still young, we are seeing how in late summer/early winter it sometimes has to be producers or Mother Nature (temperature) who save market balances from loosening, not power demand. We had forecast far more German gas-fired power demand coming in this month relating to the profitable hedging possibilities of the spark spread for the full month of September; however, as of yet this has not kicked in.
The EPA finalized regulations limiting May-September NOx emissions to assist with non-attainment problems for Ozone. It is generally similar to the proposal from last fall, though aggregate state-level caps/budgets have been relaxed slightly, and North Carolina is no longer covered under the program. Critical for currently traded allowances, EPA has finalized provisions to transition the accumulated CSAPR seasonal allowance surplus/bank with a discount factor. Current seasonal CSAPR allowance pricing is in the range of EPA’s high-end estimates of the costs needed to induce existing SCR controls to run harder and the costs of turning on idled SCRs/installing additional combustion controls. Assumptions regarding the cost of ammonia/urea are critical.
The S&P 500 moved significantly lower on the week as interest rates ticked higher and the market reflected on rising odds for a September rate hike by the FED. Volatility increased, but high yield debt and emerging market debt indices held firm. There was an uptick in longer-term interest rates in all the major countries we track, particularly Japan. The total commodity index was actually higher on the week, despite the decline in equities.
U.S. LPG prices gained as strong increases in propane demand led to a sharp drop in inventory gains. Mont Belvieu October propane futures prices improved by 2¢ or 4.4% to settle just above 49¢/gal Friday. Butane at the market center gained 4.6% to 65.2¢. Conway LPG prices outperformed those in TX, but remain about 3¢ lower on both species. Natural gasoline prices improved by 5.2%, easily beating out RBOB’s week-on-week gain. Ethane prices were also stronger, regaining a 20¢/MMBtu premium above Henry Hub gas –after dipping below it in recent weeks.
The production of ethanol-blended gasoline increased to 9,271 MB/D. Total inventories fell by 272 thousand barrels to 20.7 million barrels.
Technically, the books will not be closed on the 2015/16 Marketing Year until the end of this month, when the September 1 Quarterly Stocks report is released. Through a combination of various USDA reports as well as Census Bureau statistics, which often contradict USDA numbers, an almost final picture of the 2015/16 Marketing Year is getting clearer.
Runs eased only modestly, though maintenance should be gearing up. Runs will continue declining at an accelerating rate through much of the month. Crude imports remained little changed and a modest crude stock draw ensued. Finished product stocks built due to higher naphtha and kerosene. Demands were mostly lower. Refining margins have begun to improve from abysmal levels. For the most part, all the cracks improved on the week.
Poland’s state oil and gas company PGNiG does not foresee an out-of-court settlement with Russia’s Gazprom to reconsider natural gas prices, PGNiG Management Board President Piotr Wozniak said Sept. 8. PGNiG filed a lawsuit against Gazprom over gas prices last February, following its 2014 call for the energy giant to revise its gas price deal in line with recent gas market trends. Wozniak declined to disclose the terms acceptable for his company, saying that "only Gazprom knows the terms to which we will agree; it is not necessary to speak publicly about it."
The September RGGI auction cleared at $4.54, up one cent from June. Registered bidders numbered 50 — at the low end of the range for 2015/16. Players with compliance obligations picked up the majority of the allowances, but less than what was observed in recent auctions, suggesting that interest in speculative buying may be returning. Negotiations among RGGI partners regarding post-2020 caps have intensified, with some New England states favoring steeper reductions. Market players are still waiting for the next Stakeholder meeting date, scheduled for “early fall,” to get additional clues as to what the Model Rule could look like.
PIRA’s periodic survey of U.S. Refinery Turnarounds indicates that the next several months should see an above-average level of downtime. Planned crude unit outages are expected to amount to about 1.6 MMB/D in September, increasing to over 2.4 MMB/D for October. Outages are likely to be even higher because of unplanned events. On a weekly basis crude downtime peaks at around 2.6 MMB/D during early to mid-October. Upgrading unit downtime follows a similar but lower path, peaking at around 2.1 MMB/D in October. FCCs account for around one-half of the upgrading unit outages peaking in early October at about 900 MB/D. The first quarter of 2017 is also expected to be an active period for refinery turnarounds.
While last winter was characterized by energy demand losses due to the warming effects of El Nino, it's worthwhile to anticipate the reverse effects of the expected La Nina this winter, even though it may not be as strong as the stimulative 2010-12 La Nina. LNG demand outside of the growth markets of India and China is taking a hit on several fronts, not least of which has been caused by the weather.
Year-on-year growth in China’s fixed asset investment has decelerated sharply in recent periods. Investment in the manufacturing sector (which accounts for about a third of the total) was a key contributor to the slowing. The slump in this category, in turn, was related to the government’s push to reduce industrial overcapacity. China’s provincial GDP data for the first half of 2016 also pointed to the cost of economic restructuring, as provinces like Liaoning (a major producer of steel) and Shanxi (famous for its coal production) reported sluggish results. In Europe, economic data in the post-Brexit vote period have generally been better-than-expected.
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.
Royal Dutch Shell plc, through its affiliate Shell Offshore Inc. (Shell), announced on Monday that it has an agreement to sell 100 percent of its record title interest in Gulf of Mexico Green Canyon Blocks 114, 158, 202 and 248, referred to as the Brutus/Glider assets, to EnVen Energy Corporation, through its affiliate EnVen Energy Ventures, LLC. In line with Shell’s global divestment plans, this transaction includes $425 million in cash.
The transaction is expected to close in October.
Shell Brutus oil platform. Photo credit: NOAA Ocean Explorer
The Brutus/Glider assets include the Brutus Tension Leg Platform (TLP), the Glider subsea production system, and the oil and gas lateral pipelines used to evacuate the production from the TLP.
The Brutus/Glider assets have a combined current production estimate of approximately 25,000 barrels of oil equivalent per day (boe/d).
Shell is a leading, global deep-water operator, with a strong development pipeline and production on-stream in the Gulf of Mexico, Brazil, Nigeria, and Malaysia as well as exploration and appraisal opportunities. Shell currently produces approximately 600,000 boe/d and plans to increase production to more than 900,000 boe/d by the early 2020s from already discovered, established reservoirs.
Another Substantial U.S. Inventory RecoveryTotal commercial stocks fell 5.1 million barrels this past week led by an almost 10 million barrel stock decline in products, with refinery turnarounds near peak levels. The 3.7 million barrel reported distillate stock decline was one of the largest this year, signaling the U.S. is in the heart of the harvesting season. Reported U.S. crude stocks now exclude lease stocks, which lowered them by roughly 30 million barrels, and week to week crude inventories built 4.8 million barrels largely because of low runs. Cushing crude stocks fell 1.3 million barrels this past week and are forecast to decline 2.3 million barrels next week because of Basin pipeline maintenance. Another large stock decline is forecast for distillate next week (-580 MB/D) with another strong pull from the farm economy, while gasoline inventories modestly build from weaker demand because of the Columbus holiday and the aftereffects of Hurricane Matthew.
Dependency on Lower 48 gas will likely increase next year as expanding domestic production losses leave a widening import gap to serve incremental demand growth. In particular, another round of PEMEX budget cuts has recently been approved, setting the stage for oil and gas production to fall by more than 10% year-on-year. Fortunately, a host of critical infrastructure projects is set to emerge in 2017, enabling imports to meet the organic demand growth within the power and industrial sectors.
With APLNG T2, the last train of the six coalseam projects in Australia, starting production, China plays a key role. Not only does it have 25% equity in two of these unconventional projects, the second largest equity stake of any Asian buyer in any liquefaction project to date, but is also a big buyer from these projects. With a slowly recovering gas demand, LNG faces competition from increased domestic production and pipeline supplies.
Seaborne coal pricing was decidedly bullish this week, with continued tightness in the prompt market pushing forwards higher, particularly in Asia. 4Q16 and 1Q17 FOB Newcastle prices rose from last week as Chinese market players returned from the Golden Week holiday. FOB Newcastle prices are now up over 100% for the year. 4Q16 API#4 prices also jumped while API#2 prices finished the week down. Pricing in the Pacific Basin has shown virtually no signs of cooling off, particularly as coking coal price settlements have been confirmed at over $200/mt. With crossover supply moving into the coking coal market, there is not much prompt thermal coal supply that could come into the market to prevent further price gains.
The International Civil Aviation Organization agreed to adopt a market-based approach to cover global aviation GHG emissions, which requires acquiring and submitting carbon offsets to cover only the increases in international aviation emissions vs. 2019-2020 levels. Exact offsetting mechanisms eligible for compliance have yet to be specified, but the design of the program suggests that costs will be very low in the early years of the program. Voluntary country-level compliance begins in 2021, with mandatory compliance not starting until 2027. Efficiency initiatives also seek to reduce aviation fuel consumption, but PIRA expects aviation emissions to continue to grow, implying that increasing levels of offsetting will be necessary for compliance.
On-peak prices weakened in New England/Mid-Atlantic and Ontario but firmed in most other Eastern Interconnect markets — primarily due to warmer-than-normal weather. Loads in the East edged up 0.5% year-on-year, while ERCOT climbed 4.7%. Henry Hub prices through October have shown remarkable strength, especially in the context of waning shoulder season demand. In contrast, Appalachian prices have inflected sharply to the downside. Looking ahead, heating season power prices will likely lag year-on-year gas gains outside of the Northeast, reducing margins.
Regionally, Asian LPG markets performed best last week. Propane cargoes arriving in November were called 5% higher at $389/MT, and butane rose by the same amount in percentage terms to $418/MT. Butane’s discount to naphtha narrowed to just $27, a price at which it becomes increasingly non-competitive as a petrochemical feedstock.
The S&P 500 moved lower on the week, with volatility up slightly, while high yield debt and emerging market debt moved a bit lower in price. The dollar was generally stronger. For commodities, there continued to be a slight upward bias, but ex-energy appears to have weakened a bit. There continues to be noted declines in the precious metals complex and an upward movement in long-term yields for a host of countries, with a lesser rise on the short end of the curve.
With fairly good weather last week, PIRA expects a 10-15% increase in both corn and soybean harvest numbers today. After posting a 35% completion rate as of last Sunday, PIRA expects that between 45% and 50% of the corn should have been harvested as of Sunday. In soybeans we expect a number close to 55% in this afternoon’s report against 44% last week.
Crude runs eased once again, with higher crude imports such that crude stocks built 2 MMBBls. Finished product stocks drew, across the board, on higher demands. Gasoline demand was modestly higher and stocks drew 0.3 MMBbls to a new 2016 low. Gasoil demand was also modestly higher and helped draw stocks. Kerosene demand was hyped by secondary and tertiary inventories pulling on primary inventories. Stocks posted their first seasonal draw of 37 MB/D. Margins and cracks eased on the week for all the major products, but they staged a bit of improvement in the last few days. Margins in September and into October have improved nicely from the abysmal levels seen in August. Levels are now judged acceptable and supportive of rising runs, post-turnaround.
Coal-to-gas switching has been a big theme emerging in European energy since late last year, but only now are we seeing it come to a head. The switch has migrated from the U.K. to the Continent, which means a potentially larger swing in gas demand on a day-to-day basis. The major flag in recent weeks is that, despite a strong push in European gas prices of more than 50%, we haven’t seen gas-to-power demand disappear. Coal prices have also experienced similar, if not greater, strength due to supply reductions, and it looks like what was once a gas market that was desperate to encourage flexible demand with weak prices is now unable to jettison it.
U.S. ethanol prices rose the week ending October 7 after a bullish DOE report and support from higher corn and oil values. Manufacturing margins declined. D6 RIN values were higher as the EPA will finalize the 2017 margins soon.
Prices increased in September with continued weak trading, but they slipped in October, with the final auction at the 2016 reserve price a month away. Going into the November 1 partial surrender requirements, sources hold enough CP2 compliance instruments to cover emissions through 2016 and free allocations for 2017 are also on the way. A severely undersubscribed November auction could see unsold allowances go to the Reserve, reducing CP2 supply. The market may deem the federal Canadian carbon price proposal bearish, but PIRA believes it can be aligned with WCI cap and trade. Environmental justice concerns over cap and trade have intensified, the market awaits the auction court decision, and critical emissions data releases are expected in coming weeks (CA, QC, perhaps ON).
Permian Basin crude and condensate production growth, as in other U.S. tight oil plays, has slowed dramatically this year. But in contrast to other plays, growth is likely to remain positive, both in 2016 and 2017. In 2018, Permian crude and condensate production is projected to rise more than 300 MB/D. New pipelines out of West Texas have more than kept up with production growth so far. Nearly 1.5 million barrels per day of takeaway capacity have been added in the past four years, creating a pipeline surplus of around a half-million barrels per day this year. As production continues to grow, this pipeline surplus capacity will erode. The only new pipeline project currently planned is a 300 MB/D Enterprise Products line from Midland to Sealy, slated for completion in 2018.
The latest EIA Monthly Crude Oil and Natural Gas Production (914) report broadly reflects PIRA’s reference case, with all regions reported either flat or in month-on-month decline for July. However, the report fails to convey the complete narrative on real-time supply.
In September, global auto sales rose to their highest level on record. In the U.S., vehicle sales remained at elevated levels and played a key role in the expansion of consumer spending. In Europe, a jump in car sales during September sent an encouraging signal about industrial production. In China and India, major growth in car sales is driving gasoline demand substantially higher.
Pakistan’s Oil and Gas Regulatory Authority (Ogra) has said that no increase in the gas price for domestic as well as fertilizer feedstock was proposed by the authority. A spokesman clarified that a news item — that claimed an increase in gas prices by 36% was forthcoming — was not true. The spokesman further explained that the Ogra had issued its decisions with respect to SSGCL and SNGPL’s petitions for determination of prescribed price for FY 2016-17 on October 6, 2016. In the case of SSGCL, Ogra determined the average prescribed price at Rs354/MMBtu ($3.37/MMBtu). In the case of SNGPL, Ogra had determined its average prescribed price at Rs480/MMBtu ($4.57/MMBtu).
One side effect of the ongoing French nuclear issues is the disruption of the historical interconnector flows across Europe. Those French flows with Spain are no exception. Last week, Spain turned into a net exporter to France, reaching a daily flow of 2 GW on Wednesday, a multi-year high in the fourth quarter. This amount of exports is occurring even in the context of relatively stronger demand in Spain (weather-adjusted loads are reported to be up 1.6% year-over-year), together with low hydro and wind output, supporting domestic Spanish thermal generation from both coal and CCGTs.
The announcement of Mexico’s intention to export Maya to the USWC signals that the domestic refining system is struggling with operational issues and that the USWC could be an economically advantaged destination relative to Asia or Europe, the usual marginal Maya markets.
U.S. ethanol dropped 22 MB/D to 962 MB/D the week ending October 7, the lowest since June as some plants continue their seasonal maintenance. Stocks fell by 784 thousand barrels to 19.4 million barrels, the lowest level thus far in 2016. Ethanol-blended gasoline value was relatively flat.
Chinese car sales rose at a fast pace this year, and gains were particularly strong in September. The number of cars on the road, therefore, continues to expand rapidly, and gasoline demand is rising accordingly. PIRA’s model, comprised of car fleet size, distance traveled, and fuel efficiency, pointed to recent demand growth of about 300 MB/D year-on-year, and this estimate was roughly in agreement with reported demand figures. Recent gains in truck sales were more modest, and pointed to a small increase in transport-related diesel demand.
Global equities were broadly lower on the week. In the U.S., utilities posted a moderate gain and consumer staples were little changed, but all the other indices fell back. Energy basically matched the market decline of about 1%. Internationally, Latin America moved higher, but all the other tracking indices gave ground. Most of those declines exceeded that seen in the U.S. market.
The new heating season is off to a cold start in Europe and Japan while weather is warmer in the U.S. With half the month completed and a second half forecast, October is expected to be 6% colder than the 10-year normal and 7% warmer on a 30-year-normal basis.
French nuclear outages are an ongoing factor, but EU carbon prices also rose in early October in sympathy with strong rises in thermal fuels prices. Continued gains in thermal fuels prices should support carbon prices in their current range for the balance of 2016. An EU Parliamentary committee (ITRE) approval of post-2020 market reforms seems positive, but a lack of substantive progress in a more important committee (ENVI) ahead of a December vote is concerning. PIRA is not currently building in additional 2016 policy support, but constructive negotiations ahead of ENVI’s vote can push prices upward. Neither the supply nor the demand side support 2017 price gains, at a time when Brexit negotiations add policy risk.
At its Annual Client Seminar, October 6-7 in New York, PIRA tackled the subject of a challenging farm economy. Here is the presentation.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Oil Prices Are Supported by Surplus Stocks DecliningThe economic backdrop will continue to be constructive, with growth improving in 2017. OPEC is unlikely to agree to any market action in Algiers, and this will put short-term downward pressure on prices. Winter supply/demand fundamentals are tight enough to generally keep crude oil prices in a $40-$50/Bbl range. Surplus stocks will continue to decline, which should be supportive to prices. Supply creation will become the market’s focus in 2017, and this will require higher oil prices. Product markets have been rebalancing, and upcoming turnarounds will help the process. Refining margin outlook is generally healthy for the upcoming season. U.S. crude price differentials and export incentives are encouraging U.S. exports for now. While supply disruptions have eased, political risks to supply will remain high.
Outages continue to pile up in the Atlantic Basin, while Asian supply continues to climb at a faster rate than demand growth. Less and less Mideast LNG will be required to balance the Asian market, but if this gas continues to move to the East, the bearish impact on prices will begin to build.
With French nuclear output set to remain below historical minima, the French dark and spark spreads have gained considerably in the last few days, moving even closer or even above Italian counterparts. A stronger spark spread for 1Q17 in France could be easier to justify in light of the likely introduction of the carbon tax on coal units (30 euro/MT), but less so in October and 4Q16, even assuming nuclear will remain at historically low levels.
Seaborne coal prices continued to rally, with the market still adapting to the emergence of tightness in the prompt market, which has been absent from coal supply/demand balances for several years. It appears as though the Chinese government has activated the "Tier-1" plan, allowing 74 coal mines to increase output by 0.5 MMmt/day because prices hit 500 yuan/mt for two consecutive weeks. This development took an edge off of the rally in pricing this week. Interestingly, API#2 prices gained the most ground, with 4Q16 prices rising by nearly $2.50/mt while API#4 and FOB Newcastle prices rose by less, respectively. PIRA believes this upward adjustment in API#2 was due to a stronger outlook for coal burn from the French nuclear situation. In general, there is not much incremental supply that could be called upon quickly to deflate this pricing rally, particularly as crossover tons are being pulled out of the thermal market into the coking market.
Environmental justice concerns were front and center at the hearing on the proposed Cap and Trade Amendments to promote a “cap and no trade” agenda focused on achieving localized reductions of criteria and air toxins (non-GHG) pollutants. A new report has linked the location of GHG emitters to disadvantaged communities and to particulate emissions, with little improvement in GHG emissions from CA entities since the start of Cap and Trade. The upcoming Scoping Plan will need to rigorously investigate alternative options to the Cap and Trade and must make the case for Cap and Trade in the context of environmental justice. PIRA expects related ongoing legal challenges and further market uncertainty.
The outcome of the Fed policy meeting was as expected. The central bank’s decision to stay put owed substantially to Fed policymakers’ shifting perspective on the economy’s long-run capacity. Specifically, in the last few years, meeting participants substantially reduced estimates for the potential GDP growth rate and the neutral policy interest rate. This shift means that (even though a rate hike in December appears to be a given at this point) the pace of tightening during 2017 will likely be slow. The Bank of Japan decided to target the yield of 10-year government bonds as a policy objective. The purpose of this move is to make the central bank’s quantitative easing program sustainable.
U.S. LPG price outperformance continues unabated. Mt Belvieu propane futures (Oct.) strengthened by 5.8% to 52.8¢/gal — a point at which it’s just about 50% of WTI value. Butane at the market center punched up by 4.1% to 68.5¢. Conway prices outperformed those in the gulf with C3 and C4 jumping 7.1% and 5.6% respectively. Conway butane ended the week at a narrow 2.75¢ discount to Belvieu, the tightest since May of this year.
U.S. ethanol prices were higher the week ending September 16. August RIN generation reached a record high. Manufacturing margins jumped.
Filling sandbags replaced running a combine for some in Northeast Iowa over the weekend as the Cedar River crested Saturday night in Waterloo and is expected to peak at 23 feet Tuesday in Cedar Rapids. Levels on the river so far have been slightly lower than those seen in the historic floods of 2008 as the crest moves south towards Iowa’s second largest city and home to major area grain buyers, including Quaker Oats.
Latin America 3Q16 gasoline demand is estimated at 2670 MB/D, down 15 MB/D year-on-year. Distillate demand is bearish at about 75 MB/D less year-on-year. Mexican gasoline demand at 805 MB/D in 3Q16 is marginally better than 3Q15. Brazilian 3Q16 gasoline demand is forecast to be 5 MB/D higher year-on-year, while diesel demand is projected to be 40 MB/D lower. PIRA expects the region to import ~900 MB/D of gasoline and components in 3Q16. Diesel imports in 3Q16 are estimated to be 950 MB/D. Brazilian exports of heavy crudes are trending down: expected to be 140 MB/D in 2017. Medium crude exports spike and will reach 740 MB/D in 2017. Latin American refinery crude runs in 3Q16 are forecast to be 5,190 MB/D, 470 MB/D lower year-on-year. The likely end of Brazilian incentives to import fuels and the completion of domestic refinery maintenance cycle will help increase refinery runs. Distillate cracks are expected to move upwards, pulled by higher demand for heating but capped by the very high stocks on both sides of the Atlantic.
The Henry Hub (HH) cash price rally has carried the benchmark to $3.14/MMBtu — a high not seen since 1Q15 — as unseasonably warm weather and maintenance delays at Sabine Pass buoyed the call on supply. Accordingly, HH cash prices for the month may top $2.95, and post a M/M gain of more than 15¢. Cooling-degree days (CDDs) are on track to average a whopping ~30% above normal this month, a tally that would mark the second hottest September on record, rivaling last year’s atypical heat in the process. Consequently, gas-fired electric generation (EG) has outperformed prior estimates, with total EG loads outpacing the “norm” by ~4 BCFe/D. Given this backdrop, weekly storage refills have seen a noteworthy “pruning” month to date, and as a result, odds of a sub-3.9 TCF end-October U.S. storage carry have risen.
National Joint-Stock Company Naftogaz Ukrainy from October 1 will raise the price of gas sold to industrial customers on a prepayment basis by 5.1%. According to a company release, the price is relevant for consumers buying gas in the amount of more than 50,000 cubic meters per month and who have no debts to Naftogaz. The price for other customers will rise by 5%. After the increase of gas prices for industrial consumers in August by 9.3%, Naftogaz decreased the price by 7.9% in September. Compared with July, gas prices in October will be higher by 5.6-5.8%.
Cape freight rates have hit their highest level of the year as capesize fixing volumes have surged while bunker prices have remained largely flat. The 180,000 dwt Cape average has moved to over $15,000/day, well above the $5,000 - $10,000 range the market has been trading at for most of the year. On the supply side, Cape fleet growth remains positive as scrapping has decidedly slowed of late, although there is 5 MMdwt of Cape tonnage that was built in 2003 that is susceptible to scrapping as ships approach their third special survey in 2018 because of a need to retrofit to a BWM system under the IMO convention. We believe that Cape rates will show a second bounce in Q4 and will push above $20,000/day in late 2017.
As the clock continues to wind down on the Obama presidency, attention is shifting to finalizing what has been begun rather than new proposals. While the Clean Power Plan is on hold, EPA continues work on the rules for implementation, projected for December — despite opposition from Congress. An endangerment finding for aviation GHG emissions was finalized in July, with GHG standards for heavy duty vehicles following in August. The final Cross State Air Pollution Update Rule for seasonal NOx imposes tighter caps and higher allowance prices in 2017, while a proposal for implementation of the 2015 Ozone NAAQS is forthcoming. The new regional Haze strategy, proposed in May, is expected to be finalized by year end.
The S&P 500, High Yield Corporate Bond Index, Russell 2000 and EMB Index all gained on the week, despite falling slightly on Friday, and VIX receded significantly. Total commodities and commodities excluding energy were both higher on the week. Precious and industrial metals gained. Agricultural commodities fell slightly at the end of the week, though it was higher on a weekly average basis. Long-term interest rates were generally lower (especially the U.S. Baa corporate bond yield).
Output fell 23 MB/D to 981 MB/D the week ending September 16. Inventories drew to a 10-month low of 20 million barrels. Manufacturing of ethanol-blended gasoline dropped to a 15-week low 8,118 MB/D.
Overall commercial oil inventories fell 6.0 million barrels this past week, entirely in crude oil. East Coast (PADD I) gasoline stocks had an historic stock decline (-8.5 million barrels) because of the Colonial Pipeline outage and likely panic buying, while PADD III gasoline stocks not surprisingly built (+4.8 million barrels). Reported oil demand fell 800 MB/D, largely because the EIA revised up product exports by 1.4 MMB/D, 1.2 MMB/D of which was in products other than the four major products. Cushing stocks built 0.5 million barrels this past week but should revert back to drawing next week. Overall crude stocks also decline but at a much more modest pace of 1.2 million barrels versus this past week. Strong distillate demand pulls stocks down next week by 350 MB/D, while gasoline inventories build modestly (80 MB/D) because of much weaker demand.
4Q is traditionally the most volatile gas demand period of the year, and PIRA expects this year not to deviate from this pattern. If anything, the introduction of more wind capacity is creating even more volatility in the gas demand outlook. As October and 4Q arrives, we experience steady and ever-increasing gas demand build. For Europe as a whole, average demand growth between now and the end of the year is 1,000-mmcm/d.
Data were delayed two days because of a national holiday. Crude runs declined on the week. Runs will continue declining through much of the month. Crude imports rose and a crude stock build of 2.37 MMBbl ensued. Finished product stocks rose 0.6 MMBbls, with most of it being in the jet-kero complex. Gasoline demand was lower as were yields. Exports, on the other hand, rose and stocks built slightly. Gasoil demand, yields, and exports were higher and stocks drew slightly. Kerosene stocks continued to build. On the week, all the cracks gained, with gasoline and naphtha doing the best.
Unlike previous years, when farmers pre-stocked their diesel requirements well before the start of planting and harvesting, this year farmers are buying fuel on as-needed basis. During the planting season earlier this year, this hand-to-mouth buying created a bulge in diesel demand during May and June. With this fall's harvest just underway, farm demand for diesel should pick up substantially once again.
Baghdad and the KRG agreed to resume 150 MB/D of shipments from NOC fields to the Kurdish export pipeline. Flows are currently capped at 100 MB/D due to technical limitations, and greater uncertainty will surface upon the deal’s expiration in 2017. In the south, fiscal problems and delayed FIDs will likely prevent a notable near-term increase in production capacity. A military offensive to retake Mosul appears increasingly likely this fall. The involvement of Shiite militias will stoke sectarian tensions and create large security challenges down the road.
Global equities moved broadly higher on the week. All the U.S. tracking indices gained, with utilities, industrials, and housing being the best performers. Retail posted the weakest gain, while energy underperformed. All the international tracking indices also gained and outperformed the S&P 500. Latin America and Japan posting the largest gains, while the ex-U.S., and emerging markets tracking indices also did well.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
A key theme at the SMM Conference in Hamburg last week (and highlighted in Douglas-Westwood’s keynote address) was the innovation within both the offshore (oil & gas and renewables) and marine markets aimed at reducing costs and improving operational efficiency. This is bringing more oil and gas projects over the economic threshold of viability and also moving the offshore wind nearer the point where it can compete directly with other power generation options such as nuclear.
Douglas-Westwood (DW) has recently updated its work-class ROV outlook and sees potential for nearly 7.5% compound annual growth in expenditure from 2016 to 2020. This is function of recovery in the IRM, drill-support and construction support markets (which employ just over 900 WROV units), all of which have been impacted by the downturn.
Operating through the downturn has been a challenge for many ROV/vessel companies. We have seen distressed sales of units and expect more to come. Price pressure on the vessel contractors has reduced margins dramatically. Uptime of the vessel becomes highly critical – a few lost-days of vessel availability means the difference between a small margin or a loss on the project.
Moray Melhuish of ROV specialists ROVOP made this point in his address at the conference, highlighting that ROV technology is moving forward rapidly and a young fleet of units with modern (and manufacturer-supported) equipment and controls is key to ensuring uptime. Some of the technology drivers in the industry include the adoption of sonar and HD cameras and the ability to work in turbulent shallow-waters (to service the growing offshore wind market).
Like many other areas of the offshore market, footprint on the vessel (or platform) is also critical and development of electric tooling has the potential to reduce this, or allow the ROV to carry a greater payload.
Cost-efficient project development is of paramount importance to E&P companies and we continue to see projects re-evaluated and re-tendered. We are tracking this on a project-by-project basis and are already seeing the impact (in development costs/bbl capacity) for newly sanctioned projects.
Steve Robertson, Douglas-Westwood Faversham
Oil Markets Are Tightening and Bullish Catalysts AheadThe global economic backdrop has improved. Oil markets are tightening and there are many bullish catalysts ahead. Demand growth is accelerating while supply growth is declining. Non-OPEC crude/condensate output has declined 1.9 MMB/D between its 4Q15 peak and 3Q16. This, combined with expected strong demand growth, more than offsets OPEC production struggling to increase despite Iran’s return from sanctions and higher non-crude liquids supply, forcing surplus stocks significantly lower in 4Q 2016. PIRA has raised its crude oil price forecast by $3/Bbl over the next 9 months. The downstream is also in the process of rebalancing with the upcoming refinery turnaround season expected to pull product stocks lower. Crude price differentials have been cycling and now call for less U.S. imports and more exports, a substantial change from the last two months.
Henry Hub (HH) cash prices recently neared the $2.60/MMBtu mark — a level not seen since late June — before rebounding back towards $2.90 this week as even hotter weather still grips many regions this month. The concurrent forecasts that have extended the threat of additional above-normal cooling degree days (CDDs) into September are also fostering more downward revisions to weekly storage refill expectations, buoying NYMEX futures. Even so, for the month as a whole HH cash prices are still on track to be modestly lower than the July average of $2.80. The same can be said for most prices around the country outside of New England, and even more so in the case of price markers in western Canada.
With around 14 GW of installed wind capacity, of which 9.7 GW connect to the high-voltage transmission network, and an estimated 10.7 GW of solar P.V. plants connected between distribution and lower level networks, renewables are now more influential in U.K. price formation. The historical analysis of the past four quarters shows spark spreads turn negative as wind share moves to 15% of demand and above. It appears that the increase in the solar share has so far limited implications on spot power prices on average, judging from the last four quarters.
The coal market moved modestly lower for most of the week, with a slight downturn in the oil market and continued easing in Chinese buying activity weighing down pricing. After the sizeable rise in seaborne prices essentially since June stemming from the surge in Chinese demand, the market is questioning the ability for prices to continue to rise, particularly as the weather in China has become less destructive to production and less supportive to demand. The skepticism that market has had over the ability for the market to rise was the most evident by Glencore showing a $395 million loss by hedging coal output ahead of the price rise in 2Q16. After several years of prices falling, keeping coal supply in check, higher prices may incent some suppliers to bring tonnage back to the market. While PIRA is wary of supply returning to the market, we believe prices will be able to hold on to recent gains for several months, particularly if oil prices move higher.
The August WCI Current Vintage auction saw an improved coverage ratio, but no CA state-owned allowances were sold. This puts them at risk, under the proposed cap and trade amendments, of being moved to the Allowance Price Containment Reserve (APCR), accessible only at a very high price point. The State Assembly did not wait to see these results to pass SB 32, and the State Senate also passed companion bill AB 197. While chances are good that these bills make it to the Governor’s desk, they did not achieve the 2/3 majority that could have offered protections from legal challenges that consider cap-and-trade auctions as taxes. There was no explicit mention of continuing the cap and trade program in the bills.
Global equities eased modestly, though Europe in the aggregate was higher. In the U.S, housing and banking posted gains as money was reallocated into some sectors that had lagged in the most recent up leg. Utilities, retail and energy were the laggards for the week, with energy down about 1.5%. Internationally, all the tracking indices other than Japan, lost ground.
The most recently reported EIA domestic propane inventory increase of nearly 2.4 million barrels comes as little surprise as decreased export volumes out of the United States have been noted by PIRA shiptracking efforts. This was the highest build for this particular week since 2010. Propane moved into a 411,000 Bbl surplus stock position versus 2015 levels.
U.S. ethanol manufacturing margins improve the week ending August 19. Renewable identification number (RIN) values also increase.
Overall commercial stocks had their largest build in the last several weeks, up 6.6 million barrels with a surprising crude inventory increase of 2.5 million barrels. Most of the product build was once again in propane and other NGLs, a typical seasonal occurrence. Product demand remained strong, and this continues to be a regular feature in the current low price environment. For next week, crude imports are forecast to drop sharply, forcing crude stocks to decline. Light product demand remains strong, keeping major light product stocks roughly flat, despite somewhat higher crude runs.
While generally we’ve focused on optimization across all suppliers, recently a new form of optimization popped up in European trade: Algerian balancing between LNG and pipeline gas exports, which is further strengthening Europe’s connection to global gas pricing. This optimization play makes perfect sense, but it is just not something that has emerged on a month-to-month basis until quite recently.
Total U.S. coal stocks continue to normalize due to supportive weather conditions, as residual coal production cuts on an annualized basis draw inventories. Days burn has levelized, as the peak of the summer burn season has passed. In addition, coal burns remain off slightly year-on-year given growth in renewable capacity and coal unit retirements. Gas forwards (12-month-strip is just over $3/MMBtu) suggest further gas-to-coal switching for lower cost coals such as PRB, other western, and ILB coals (in that order) over this coming winter.
The RGGI Program is at a crossroads, as partners negotiate the post-2020 cap declines, with PJM states reportedly resisting the steeper reductions favored by New England. Allowance prices received a boost from the June Stakeholder Meeting, but declined on news of the NY nuclear subsidies in July. Average August prices are lower than July, but they have recently moved up towards the $5 mark. PIRA expects the Sept. auction to be dominated by compliance buying as the market continues to await a draft Model Rule, expected this fall. Longer term, it must be decided whether the RGGI price signal will be the primary mechanism to reach climate goals.
The S&P 500 was lower on the week, after having set record highs. As would be expected, volatility was higher, while high yield debt and emerging market debt indices declined. The dollar generally strengthened. It moved particularly higher versus the euro and yen, while only being modestly changed versus the British pound. It also strengthened against most of the commodity producers, including the South African rand, as commodities declined.
Stocks increased 392 thousand barrels to 20.817 million barrels, up 2.19 million from last year. Output dropped to 1,028 MB/D, just short of the record high 1,029 MB/D the prior week.
Two weeks of data were reported coming off the mid-August holiday hiatus. Crude runs dropped back slightly. Crude stocks built in the first week, but then dropped as expected. Gasoline demand was seasonally strong and performed as expected. There was a good stock draw, followed by a modest build. Gasoil demand was seasonally damped by the holiday and significant stock builds occurred in both weeks. Refining margins remain very weak with little overall improvement.
The Federal Antimonopoly Service (FAS) has no plans to revise the current wholesale price of gas before the end of this year, the head of Department of Regulation of Fuel and Energy Dmitry Makhonin told Interfax. According to the PIRA forecast, an increase in wholesale gas prices by 2% in July was scheduled, but that did not happen. Meanwhile, the regulator representative confirmed that a project on liberalization of prices for natural gas in three pilot regions can be implemented in the first half of 2017.
Cape freight rates are struggling to find momentum despite continued signs of expansion in iron ore trades, particularly to China. PIRA expects iron ore exports in August to increase from Brazil and hit record levels from Australia. Slow steaming makes economic sense in the current market even at relatively low bunker fuel prices, artificially inflating bulk demand. Speed switching is not expected in late 2017 unless rates push close to $26,000/day, but further structural gains beyond that level will be more difficult as the fleet accelerates.
U.S. GDP growth disappointed in recent periods, as the economy was hit by three separate negative influences: a slump in business investment a lengthy inventory adjustment process and the strong dollar weighing on trade activity. But PIRA’s expectation is that all three will reverse course soon, and GDP growth will strengthen meaningfully in the second half of 2016. This week’s July data releases on durable goods orders, trade, business inventories, and new home sales all had positive implications for the U.S. economic outlook.
PIRA's latest update of Asian product demand shows a continued slowdown in demand growth. Our latest assessment of growth is now 640 MB/D versus year-ago. Data actuals cover the three month period May-July for China, India, and Korea, while Japan and Taiwan pick up data April-June. Our last assessment, in July, indicated growth of about 1 MMB/D. The slowdown in demand growth is along the lines expected, but that slowdown will reverse as we move increasingly into 4Q.
2017 is poised to be a breakout year for pipeline development, with more than 40 BCF/D of additional capacity announced for next year. If just 15 BCF/D of these pipelines commence service, or those having FERC approval, the potential supply response would overwhelm nascent structural demand growth. Yet, downsizing the projects to just half the proposed capacity would still likely tip the fundamental balance back into surplus, raising valid concerns about the extent and duration of the forthcoming recovery.
We are entering a period when new supply is outpacing disruptions from existing producers, which means the balances will be stretched like never before. Now the issue will be whether newer buyers can grow faster than older ones are shrinking.
Long-awaited U.S. natgas production declines arrived in 2Q16, as the combined pressure of low rig counts, bloated storage, and poor prices finally caught up with U.S. producers. The E&P companies in PIRA’s Survey Group shrank volumes by 0.6 BCF/D, or about 1% compared to 1Q16. Most of these losses were concentrated outside the Northeast, but even Appalachia growth was essentially flat quarter-on-quarter. The recent subdued production levels (aided by transitory disruptions) together with the assistance of warm weather helped rebalance the market and push storage levels closer to seasonally normal levels. Looking ahead, producers seem optimistic about production growth resuming with forward-looking statements highlighting plans to ramp up drilling in time for the heating season and beyond.
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.
In a move to increase foreign investment amid the nation’s worsening economic position, Brazil’s Congress has approved legislation that will remove state-controlled Petrobras’ obligation as sole operator on the country’s pre-salt developments. Discovered in 2007, these ultra-deepwater fields represent a huge opportunity – they are the largest group of offshore reserves discovered this century.
Financial difficulties resulting from the ongoing low oil price environment, combined with the crippling impact from the “Operation Car Wash” corruption scandal, have slowed development in the prolific pre-salt fields, as mounting financial pressure has led the NOC to cut Capex plans and production targets. The opening of these deepwater assets to foreign investors is intended to increase development and production from the pre-salt fields, whilst allowing Petrobras to shift focus to more developed plays with existing infrastructure and lower Capex requirements.
Due to the significant potential the pre-salt fields offer, many international E&P companies can be expected to vie for a slice of the substantial pie – Shell has previously commented on the nation’s need to open up to foreign investment. However, E&P activities in Brazil are largely controlled by Petrobras – the few internationals currently active in deepwater Brazil, namely Shell and Anadarko, may see themselves tied to commitments elsewhere. Shell’s recent acquisition of BG sees the company bound to projects inherited through the deal; and Anadarko has the large Shenandoah discovery in the GoM, as well as advancing developments in Mozambique.
As such, the impact from last week’s legislation change may not be as significant as the nation’s government hopes. The current oil price environment has the potential to deter some operators from the huge Capex required for ultra-deepwater developments, particularly if not already present in the nation. However, if OPEC’s recent announcement to cut production results in a significant oil price rally next year, it may become somewhat of a moot point, increasing the attractiveness of the pre-salt fields to international investors.
Kathryn Symes, Douglas-Westwood London
Large U.S. Product Build 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. Crude Stocks Build AgainCrude stocks continued to build, rising by 2.3 million barrels this past week, as imports surged to a multi-year high while the inventories of the three major light products were about flat. For next week, PIRA sees lower crude imports, higher runs, and reduced production due to weather-related shut-ins, and causing a large crude stock decline. Cushing crude stocks declined 1.04 million barrels this past week, and lower Canadian imports should ensure another significant decline in next week’s EIA data.
On Tuesday, August 30, NYMEX October futures assumed prompt-month status and immediately saw a sharp bout of selling. In particular, prices have been in a steady state of erosion since topping ~$2.90/MMBtu to start the week, as Thursday’s outsized storage report and less supportive weather forecasts, showing potentially cooler temperatures aided by tropical storm activity, have weighed on sentiment.
While the eclipse of coal in the U.K. comes with little surprise, the behavior of coal units on the Continent is now more intriguing. While older and inefficient units have clearly moved out of the money, a more interesting issue is at which point the most efficient coal units will start switching off. Generation data show gas trending higher in Germany, although steam coal is still generally dominating the German mix.
Forward coal pricing moved notably higher this week, with prices rising initially due to the suspension of loading activity at Puerto Bolivar, although after the suspension was lifted, prices rose to even loftier highs. In fact, 4Q16 prices for FOB Newcastle and API#2 are now just marginally below their recent highs. For prompt pricing, API#4 forwards generally underperformed relative to API#2 and FOB Newcastle, giving FOB the premium spot back. Continued strength in the Chinese market remains the driving force for pricing, as it is becoming increasingly apparent that the limitation of working days at Chinese coal mines will not be relaxed.
The RGGI cap and trade program is at a crossroads, as partners negotiate the post-2020 cap declines, with PJM states reportedly resisting the steeper reductions favored by New England and NEPOOL looking at an alternate wholesale market structure. RGGI prices received a boost from the June Stakeholder Meeting, but declined on news of the NY nuclear subsidies in July. August prices averaged lower than July, but were moving towards the $5 mark. PIRA expects the Sept. 7th auction to be dominated by compliance buying as the market continues to await a draft Model Rule, expected this fall. Longer term, it must be decided whether the RGGI price signal will be the primary mechanism to reach climate goals.
Global equities posted another gain on the week. In the U.S., the “growth” indicator outperformed the “defensive” indicator. Banking, materials, and utilities, led the performance. Energy was down slightly, -0.4%. The international tracking indices also gained, with China, emerging markets, and Europe doing the best.
The seasonal meltdown in tanker markets in this year’s third quarter has been especially severe, and little relief is anticipated before 4Q 2016. OPEC production growth is slowing and is not adequate to offset rapid fleet growth this year or next. Nigerian production outages and competition from VLCCs have decimated rates in the Suezmax sector, which have been driven well below cash operating cost levels.
Asian LPG markets were the standout winners last week with notable outperformance vs. broader markets. Prices in the destination market were buoyed by increases in Saudi contract prices from September FOB loaders. Cash and futures prices for propane converged to near $300/MT after 3% declines last week. Butane prices were mostly unchanged, being called near $328/MT on Friday afternoon.
Stocks build to highest level in six weeks. Output of ethanol-blended gasoline dropped for the fourth straight week.
The first full week of metrological autumn will see both combines roll and a rather dramatic cool down in the NW Belt. Low temperatures will be in the mid-30’s as far south as Cedar Falls, Iowa, by Thursday, September 8 even though it would appear that freezing temperatures will not infringe on major growing areas.
This week saw finished stocks draw 1.7 MMBbls, with noted declines in naphtha and gasoil stocks. Crude stocks were only marginally lower. Runs also eased slightly, but they will show more significant drops in the next few weeks. Gasoline demand remained strong, but stocks built slightly on higher yield and lower exports. Gasoil demand rebounded with lower yield and strong exports, and stocks began to correct a four-week rise. Kerosene stocks continued to build. Refining margins remain very weak, though there was some improvement in cracks in the last week.
After a bottom for the year seen in July, a reversal in German gas generation is currently underway, and with 2.5 GW dispatched in August, gas is up by 37% month-on-month and 66% year-on-year. Lower power flows from historically cheaper France have been a major relief for German conventional/thermal generators, albeit August saw both higher solar generation (+1.1 GW), together with higher wind output (over 1 GW year-on-year), dampening the bullish impact of the lower French flows.
While France has been seen shifting toward net importer status from Belgium and Germany, PIRA sees an unprecedented market context in Germany during September, when gas units will be more competitive against coal, and gas will potentially be able to meet — together with lignite — the entire need for fossil fuel generation. We have seen coal units ramping down during renewable-induced power prices collapses, but will coal switch off to allow gas to generate? German prices appear vulnerable to downsides in the shorter term, considering the resilience of coal-fired generation and further weakness ahead for gas prices. However, German winter prices are largely undervalued assuming our expected thermal demand (~36 GW on average). This level of thermal demand requires prices in the low €30/MWh, at current fuel prices.
U.S. RIN values rise early in the month, but fall later. Brazilian ethanol output declines in the first half of August.
Corn yield comparisons to 2014 have given traders that déjà vu feeling all over again. Always searching for some sort of analog, the late-September/mid-December 50 cent corn rally in 2014 is starting to draw comparisons to 2016, although the Funds aren’t looking at it that way. With the 2016 rally a month earlier than in 2015, some are of the opinion that this year’s recovery can also be a month earlier than 2014.
We estimate that incremental gasoline demand over five U.S. public holidays averages about 290 MB/D. Downstream buying begins as early as two to three weeks before major holidays like the end-of-year Christmas/New Year period. Dealer buying for minor holidays appears to take place a week before or even in the same week.
Garnering perhaps more attention than the fact that YTD Indian LNG imports (uncontracted) of Australian LNG have registered 5 mmcm/d versus no first half buying in 2015, Chevron has announced the finalization of a long-sought supply contract with China's ENN for volumes from Gorgon. Although the volumes are, at just under 1-bcm/yr., low compared with previous China/Australia contracts, the contract is notable for several reasons.
Although on-peak prices remained volatile in August, weaker cooling loads in the Southwest reduced Palo Verde average prices by about $4/MWh from July. SP15 prices also edged lower, but warmer weather, lower hydro output and rising gas prices led to a small gain at NP15 and a sizable jump at Mid-Columbia (+$4). Implied heat rates have been supported this year by weak gas prices and strong cooling loads, but we expect heat rates to move lower through 2018 in response to a rebound in gas prices and rising solar capacity. Southwest coal and California gas retirements will not provide sufficient support to avert weakness.
The Chinese market continued to be a sizably net bullish factor for seaborne coal prices despite the normalization of weather conditions. Domestic coal production continues to fall; thermal coal imports are comfortably above prior-year levels for the year-to-date. Seaborne coal supply growth will remain limited, while the demand side is showing some improvement. While the considerable pricing rally that has occurred over the past eight months has started to fade, we believe that there continues to be more upside to prices, with a bullish oil pricing outlook providing much of the stimulus.
U.S. August job growth fell somewhat short of market expectations, but it did not represent a disappointment. On a trend basis, the labor market has picked up pace considerably. In spite of a tightening in labor conditions, wage growth (based on average hourly earnings) has not accelerated. There are flickering signs, however, that this may soon change. Recent data from emerging markets (such as the August confidence readings from China, and July industrial production for South Korea and Brazil) were constructive for the outlook.
EIA just released its final monthly June 2016 (PSM) U.S. oil supply/demand data. June 2016 demand came in at 19.83 MMB/D, which was 100 MB/D better than PIRA had assumed in its balances. Demand grew 1.2% versus year-ago, or 242 MB/D moving back closer to the 296 MB/D average growth seen Feb.-Apr. Gasoline and kerojet outperformed the barrel average, with gains of 2.9% (273 MB/D) and 4.7% (77 MB/D), respectively. Gasoline performance was in line with the improved June VMT growth, which was 3.2% versus 2% in May. End-June total commercial stocks stood at 1,382.4 MMBbls, which were 7.6 MMBbl higher than the preliminaries, but 9.5 MMBbls lower than PIRA had assumed in its balances.
The Argentinian government is set to propose a lower price hike for residential gas following a rejection of original increase by the Supreme Court. The new price model was decided September 1, Infobae reported, without saying how it obtained the information. The government will submit the new price increase in a non-binding national public hearing scheduled for Sept. 16. S&P 500 Moves Higher The S&P 500 closed slightly higher on the week. As would be expected, volatility moved lower, while high yield debt and emerging market debt indices generally held firm. The dollar mostly strengthened, and the total commodity index fell back on the week.
EIA recently released its June oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, declined to a new cyclical low of 8.81 MMB/D. This is the lowest figure seen since June 2014. From the April 2015 peak, the decline has been a cumulative 1.15 MMB/D, or about a 10%, annualized decline rate. Domestic field crude production also reached its lowest level since June 2014, and the year-on-year decline rate reaccelerated back to about 620 MB/D, or -6.6%.
Broader fundamental considerations will drive prices beyond $3/MMBtu before year end. While such levels are likely to be sustained into 2017, there is an “expiration date” attached to such heights, especially if end-March storage is left near 2 TCF.
Saudi Arabia's formula prices for October were just released. With more crude available for sale in October due to refinery maintenance, pricing in Asia and the U.S. was made less generous to customers. This sends a constructive message to the market.
The Rough outage announcement in June sent storage spreads to levels unseen for several years, encouraging a full Continent to inject as much as possible to help the U.K. with its storage shortfall. Now that Rough is back, there is a lot of gas in storage that is hedged to withdraw in 1Q, and it could spell trouble for deliveries.
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.
Hydraulic fracturing has been a hugely controversial subject in many countries and has increasingly become the focus of legislation in the US. The state of Colorado has seen the most recent push for new restrictions – activists have obtained over 200,000 signatures to introduce two new initiatives on Colorado’s November 8th ballot. If passed, these initiatives would impose the toughest regulations on the hydraulic fracturing industry to date – increasing local control and dramatically limiting where fracking can take place. Initiative 75 would provide local governments with the authority to regulate oil and gas development in a manner that supersedes statewide regulations, whilst initiative 78 would prohibit fracking within 2,500 feet of houses, parks, schools, playgrounds, and clean water sources.
Colorado accounts for a significant proportion of U.S. hydrocarbon reserves – more than ten percent of the nation’s largest natural gas fields. Amongst US states, Colorado ranks 7th in both natural gas and crude oil production. Upstream activity in the state relies heavily upon fracking, the proposed legislation, coupled with the slow oil price recovery would likely severely hinder hydrocarbon extraction in Colorado.
Strict limitations on fracking activity will also have severe consequences for the state budget. Pro-fracking groups argue that passing these initiatives in Colorado may cost the state 140,000 jobs and up to $217 billion in economic activity over the next 15 years. The implications of passing such a bill would likely reach much further than just the state of Colorado. With precedent set, increased regulation may be seen in other states. Greater regulation, combined with reduced activity as a result of the oil price downturn, could severely impact the future of the drilling sector in the US.
Both presidential candidates may also play a significant role in the future of fracking. Trump has stated that while he is in favour of fracking, he supports Colorado’s right to ban the activity as an issue of states’ rights. Clinton broadly supported fracking as Secretary of State – however, she has pledged support for increased investment in renewable energy and outlined a series of fracking “conditions”. With volatility shaking the industry, the United States presidential election could be decisive in deciding the industry’s direction.
Jacob Halevy, Douglas-Westwood Houston
U.S. Crude Stocks Decline on Favorable Import/Export ArbUS crude stocks fell in September, as prices between domestic and foreign grades incentivized crude exports while discouraging imports. Cushing stocks fell only about 1 million barrels, as a continuing narrow LLS-WTI differential limited flows from Cushing to the Gulf Coast.
The fundamental basis for the recently sustained run up in NBP prices to the high side is tied to U.K. gas consumption in power, weak French nuclear output, and Norwegian gas exports that remained well below last year until this week. Throw in an early colder than normal forecast for the upcoming week and what you are left with is limited downside risk for the moment, but considerably more later on this winter if weather normalizes. High storage levels on the Continent will not yet deter the prices from remaining strong. The stocks are there, but not the will to use them. It is well known that storage holders are exceedingly reluctant to use storage early in withdrawal season and prefer to hoard storage until the first quarter.
With colder weather approaching and so much uncertainty surrounding nuclear availability, French power prices keep climbing. A signpost of improving availability for the upcoming winter months would be the restarts in the upcoming week. Among those, Chinon 1, affected by the channel head anomaly, should be reconnected on October 10. Such restart might impact market psychology, bringing an end to the upward trend for French prices.
The rally in seaborne coal prices that has been going on essentially since the beginning of 2016 has been accelerating over the past two weeks, with additional bullish developments exacerbating an already tight prompt market. For near term pricing, API#2 prices moved up by the greatest extent this week, rising by over $4.00/mt, and pushing over $75/mt for the first time since 3Q14. The force majeure declaration in Colombia and a further reduction in the European nuclear outlook was likely behind this rise in pricing. FOB Newcastle prices rose sharply as well, increasing by $3.35/mt, despite China's buying activity being subdued due to Golden Week. The most important factor for short-term pricing is how much supply can come into the market to tamp down this pricing run. After several years of extreme amounts of excess tonnage in the market, the move to rationalize supply (or at least minimize new supply), and an uptick in demand from China and elsewhere have strained the market.
The pace of U.S. job growth in September was about as expected. A continuing rising trend in the labor force participation rate, however, was something of a surprise. This is an important development, since it has the potential to reshape the Fed’s view of the labor market. In developed markets, fiscal policy options to stimulate economic activity are in the spotlight. In fact, Canada and Japan recently adopted the policy of larger government spending. Political winds in other areas suggest that more countries may join this trend.
U.S. total propane stocks increased by 736 thousand barrels to 104 MMB. The annual stock surplus narrowed by 865 MB to 3.7 MMB. This surplus has been declining since the week ending September 18th. On the other hand, other NGLs have been registering small builds or draws as of late. The latest 2.6 MMB draw is the largest draw of the past five years for this particular week.
U.S. ethanol prices peaked the week ending September 30, but ended the week to the downside. Manufacturing margins improved supported by higher corn and oil prices. RIN values increased.
Total commercial stocks experienced a huge stock draw of over 11.2 million barrels for the latest week, one of the largest of the year. Stocks were pulled lower by both products, down over 8.2 million barrels, and crude, which was almost 3 million barrels lower. Stronger product demand at about 20.6 MMB/D, up 1.3 MMB/D from the prior week, contributed to the draw. Crude runs fell by around 300 MB/D for the week to 16.03 MMB/D, the lowest weekly level in months. It is anticipated that runs will fall further to about 15.6 MMB/D as turnarounds increase sharply for the next week. For the next week crude stocks are expected to build by almost 2.7 million barrels as key light product inventory declines by over 3 million barrels.
Slowly rising tanker rates over the past 6 months are offering an early warning mechanism for the bearish turn in the market's future. A steady increase in LNG tonnage on the water is underway – most of it is running ahead of the new trains to which it is dedicated. The tonnage represents the natural manifestation of two essential problems facing the LNG industry over the next five years; finding enough demand growth for new LNG supply and selling the LNG at a price that offers a reasonable netback. PIRA sees two distinct methods emerging to alleviate these problems, although by no means will they solve them completely. How well they will work will be a matter of waiting and seeing, but the process is already underway and offers some support to prices in the near term.
Global equities were modestly mixed on the week. In the U.S., the broad index fell back 0.6%, but banking and retail indices posted solid gains. Energy was neutral, while utilities was the weakest performer. Internationally, Latin America was the strongest performer, while Asia also had a good week, with China and emerging Asia posting gains.
The week ending September 30, production dropped to a three-month low as plants outside the Midwest went through scheduled maintenance. There was a large drop in inventories to the second lowest level of the year. Ethanol blended gasoline rose after falling in seven of the prior eight weeks.
On the week, total commercial stocks drew 6 MMBbls and have become increasingly tight, relative to seasonal trends. This has supported the recovery in Japanese refining margins over the last month. Runs dropped 186 MB/D as maintenance continues. Crude imports stayed sufficiently low to induce another crude stock draw. Finished product stocks also drew, with gasoline hitting its low for 2016. Aggregate demand improved by 161 MB/D and the current pattern looks improved. Margins were little changed on the week and remain acceptable.
The S&P 500 moved lower on the week, with volatility slightly higher, and high yield debt and emerging market debt moving a bit lower in price. The dollar was generally stronger, particularly against the Japanese yen and British pound. There was noted strengthening in the currencies of Russia, Mexico, and Indonesia, against the U.S. dollar. For commodities, a strong performance in energy and oil helped carry the overall index higher, but ex-energy moved definitively lower. Precious metals, including gold, silver, platinum, and palladium weighed on the ex-energy complex. Among industrial metals, aluminum moved higher.
Following the implementation of the modified Rangarajan committee formula, the price of Indian domestic gas has been reduced around 18% for the six month period from Oct 1, 2016 to Mar 31, 2017. For the Fertilizer sector, the lowering of the domestic gas prices is expected to reduce the pooled prices during H2 FY2017 which should lead to subsidy savings of ~Rs.7-8 billion ($100-120-million) for the Government for H2 FY2017 (assuming the currency to remain stable).
Saudi Arabia's formula prices for November were just released. While cuts were made to most crudes in the key markets, they were less than the market expected. Saudi had additional barrels to sell in November due to lower crude burn and the Yasref refinery being down for maintenance. The price cuts were not aggressive enough to push those extra avails into the market. In Asia, the cuts were consistent with a modestly wider contango in Dubai structure, and in Europe they were consistent with a wider discount on Urals-Brent.
EIA recently released their July oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, again declined to a new cyclical low of 8.77 MMB/D. This is the lowest figure seen since March 2014. From the April 2015 peak, domestic crude supply has declined 1.19 MMB/D, or an annualized decline rate of -9.7%.
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.
LNG technology evolved as a solution to the problem of transporting large quantities of gas over long distances. Developments in the market over the next five years are expected to have a significant impact on both the construction of LNG carriers and the primary LNG trading routes.
The LNG carrier market is currently over-supplied. A combination of low commodity prices and a reduction in imports from key consumers such as Japan (following the re-start of its nuclear power stations), has resulted in a substantial decline in charter rates for LNG carriers to approximately $25,000 a day – considerably below typical breakeven costs of $40,000. We note that 36 carriers were delivered in 2015, and only four newbuilds having been ordered in 2016 at the time of writing.
However, this trend is expected to change over the 2017-2021 period, due predominantly to liquefaction projects expected onstream in Australasia and North America. Notably, the USA is forecast to increase its LNG export capacity from 11mmtpa in 2016 to 77mmtpa by 2021. In the World LNG Market Forecast Report 2017-2021, DW forecasts the delivery of over 150 units yet to be ordered over the 2017-2021 period, in addition to the current order book, in order to satisfy this additional supply.
With the USA on track to be become one of the world’s largest exporters of LNG, this will result in a diversification of the primary trade routes for LNG transportation. Notably, the expansion of the Panama Canal enables it to accommodate larger LNG tankers, and also provides a means for vessels travelling to Asia and South America from the Gulf Coast to reduce their voyage times. This is ultimately expected to introduce greater competition to LNG trading routes.
Katy Smith, Douglas-Westwood London
Offshore surveys are a necessary precursor for both Oil & Gas (O&G) and renewable energy installations on the seafloor. Particularly for new projects in remote regions, surveys (oceanographic, geotechnical, geophysical etc.) are critical for successful project design and implementation. However, current market conditions are forcing all parties in the supply chain to rethink their approach.
Douglas-Westwood (‘DW’) has engaged with industry experts within the market on future strategy and operator expectations. Feedback includes the obvious – “outprice competitors”, “meet highest standards”, “be flexible to operators’ needs” and “specialise” – but this is tough advice for those who are already attempting to accommodate all of these factors whilst trying to remain afloat. Within the tech-heavy survey sector, however, utilisation of new, innovative technologies is particularly appreciated by technical teams within the offshore client base, and continues to be a source of differentiation in a crowded market place.
If widespread automation of offshore assets and survey tools can be accomplished, cost savings will be significant. Autonomous Underwater Vehicle (‘AUV’) developments are therefore likely to play an increasingly important part in the future of the offshore survey market – DW’s World AUV Market Forecast shows a bright future for AUV demand, both for O&G and renewables.
As inertial navigation systems are refined, there is greater scope for exciting new tools to be piloted subsea: the use of technologies such as synthetic aperture sonar, seafloor drills and sea drones is set to rejuvenate operational methods and provide efficiency gains to the wider survey market.
Fresh technology could significantly advance offshore survey operations, acting as a differentiator for smaller companies in a difficult market. However, the ability of tech-driven companies to both invest in R&D and successfully commercialise it through the downturn will have a major bearing on their future prospects.
Celia Hayes, Douglas-Westwood London
High Light Product Stocks Weigh on Refining MarginsAlthough the lows are already past, oil prices are stuck in a $40-50/Bbl range for now. The market is not yet worried about creating supply with the current large stock surplus, but that surplus will drop in 2H16 and 2017. Ultimately this will drive prices over $60/Bbl to create supply to cover global oil demand growth. Softer refinery margins may prompt some trimming of discretionary runs this autumn as refiners are walking a delicate balance between gasoline vs. distillate yields and runs levels. European gasoline yields will likely trend lower than last year, while distillate yields will trend higher. Gasoline, diesel, and jet stocks are at/above historical range, but they will trend lower. Product markets will shift from gasoline toward distillate. HFO supply is lower with reduced Russian production helping to support cracks.
Since the start of August, the natural gas market has endured a rapid bout of speculative selling, driving the prompt month NYMEX contract down by more than ~8% to ~$2.60/MMBtu. Moreover, entering Friday, the market had registered an impressive streak of six consecutive negative sessions, the first such occasion since 2014. Certainly, recent trading has begun to take on a rather bearish hue, as prices effortlessly (with volume) sliced through key moving averages this week, while breaching ~$2.60/MMBtu, near the low end of the trading range in place since June.
Warmer-than-normal weather led to solid gains in On-peak prices in nearly all markets in July as loads increased by 2.5% (9.6 aGW) from the prior year in the East and 3.3% (1.7 aGW) in ERCOT. The return of more normal winter heating demand coupled with challenges for growing supply pose upside price risks for natural gas and coal. Prices will move higher in CY 2017 and 2018 as gas and coal prices rebound but implied gas heat rates are mostly weaker. Weakness in 2017 reflects loss of market share to coal and renewables and incremental gas-fired capacity.
Volatility in coal pricing was on full display this week, with daily swings of more than $1.00/mt occurring for the three major forward curves. The market moved decidedly higher this week, with gains on the order of $4.00 - $6.00/mt, offsetting the declines observed in the previous week. Stronger oil prices, constructive data in China, and some modest disruptions in the supply chain (weather- and labor-related) all served to drive prices higher this week. A flurry of data from China were released this week which was on balance considerably bullish for the market. This was led by a 4.4% year-on-year increase in thermal generation which was a confirmation of PIRA's Spotlight last week. The Spotlight noted that hot weather would likely push loads up enough to offset the strength in hydro generation.
CCA prices continued the upward trend, pushing above the Auction Reserve Price. This is not being driven by robust market activity, as weak volumes and a first-time-ever year-on-year loss in open interest suggests players are staying on the sidelines. The re-offering of unsold consigned allowances raises the auction quantity in August and will require a higher bidding volume to clear. PIRA again expects the auction to be undersubscribed – though a strong undersubscription could prove bullish for longer term balances. It will also take strong undersubscription of the November auction for market supply for CP2 compliance to be impacted. California power generator data through 2Q are showing emissions strongly down year-on-year, in line with expectations. All eyes are on the legislative front this month, with SB 32 facing hard negotiations for passage.
In July, year-on-year growth in Chinese industrial production decelerated slightly from June. The manufacturing sector stayed resilient, but the mining sector recorded a large year-on-year drop in output. There were both positive and negative signals about the industrial sector outlook in the latest data. Encouraging developments included recent sequential movements in the producer price index and a moderate depreciation in the country’s currency. On the negative side, business investment is apparently losing steam rapidly. PIRA’s overall assessment is that Chinese manufacturing activity will prove resilient and support global economic growth.
Output increased to 1,029 MB/D the week ending August 5, the second highest on record. Stocks drew by 143 thousand barrels to 2.46 million barrels, cancelling most of the build that occurred during the previous week.
Rainfall amounts of 1.5 to 8 inches late last week, mostly in the western Belt, have proven to be a God-send for some but a headache for others. At this point the rains will have a minimal effect on corn, although some late-planted acres will benefit with better kernel fill. However, the effect on soybeans can be dramatic as August through mid-September is a critical time.
Asian LPG markets were the worst performers among the three key regions last week. The physical market remains largely oversupplied, with cargoes arriving from both the East and West routes from the US Gulf Coast on top of the steady flow of Arab Gulf originated cargoes which are increasingly focused almost entirely upon Asia as an outlet. Cash propane cargoes arriving in the Far East in September were called $4 lower near $280/MT while the corresponding physical butane stems were unchanged near $295.
This past week’s EIA data showed U.S. commercial stocks increasing 2.5 million barrels, roughly split 50/50 between crude and products. Expected crude stock declines have not materialized as crude imports have stayed exceptionally high, and even Cushing crude inventories increased 1.2 million barrels last week. Product demand has continued to be strong, led by gasoline. For next week’s EIA data, PIRA sees lower crude imports and finally a sizable crude stock draw of 480 MB/D with Cushing crude stocks declining 110 MB/D. Gasoline stocks continue to decline, helped by stronger exports (+170 MB/D) and lower imports (-260 MB/D), while distillate stocks build modestly.
Estimating the price of supply contracts is always a moving target, especially now, as a growing number of these contracts are shifting their indexing from oil to gas. Traditional contract gas deals are generally a series of lagged rolling oil prices, and the data is further lagged, but we are seeing new opportunities to access more information. In particular, gas supply contracts are becoming more exposed to spot gas, while oil moves into more a broader role. Is greater spot price exposure in gas supply contract coming with longer or shorter lags?
The number of days in each month with positive spark spreads – both at peak and base – has been increasing in Germany. The rebound in API#2 coal prices, hovering at a two year high, is also leading to this outcome, but the reduction in nuclear generation in France has contributed as well. Higher gas storage levels in several European markets create further downside risks for gas prices at a time when power needs to move up for seasonal reasons (solar starts moving lower, while demand starts recovering).
The Massachusetts Solar renewable credit markets, SREC I and SREC II, are managed to limit the extent of any oversupply. The annual Solar Clearinghouse Auction serves as a price support point, while the Alternative Compliance Payment level (ACP) serves as an upper bound. Tightness in the SREC I market for 2015 and 2016 has pushed pricing to ACP levels, while SREC II prices are currently tied to the auction price level. However, increasing compliance obligations going forward will work to eliminate the SREC II surplus, with deficits possible beginning in 2018. Recent emergency regulations are allowing new solar build to continue beyond the original cap/target. Also, new legislation raised MA net metering caps and calls for development of a successor solar program.
Global equities were higher on the week, with strength coming from the various international indices that are tracked. All such indices bested performance in the U.S. where energy led all the tracking indices, higher by 1.7%. Retail also outperformed. Banking was the laggard and moved lower.
Ethanol prices bottom the week ending August 5. It’s just a pause before the decline continues. RIN prices were sharply lower.
It’s impossible to argue with the advanced state of this year’s corn crop when compared to historical averages. What can be argued is the effect of a hot June on some of the corn crop, which was not reflected in the August WASDE as no husks were harmed in the compilation of said report. The effect of August heat on kernel fill also has yet to be determined and will be a big deal given the record weight expected.
Global oil supply disruptions currently stand at 5 MMB/D, and how quickly these outages return is critical to oil markets at this juncture. In our view, the potential for the return of disrupted oil is limited. Production gains are possible out of Nigeria, Libya, and Yemen in the very near future. But we do not expect increases from any of these countries to exceed 100 or 200 MB/D, and security risks will remain high. Meanwhile, political and security situations in Iraq, Neutral Zone, Venezuela, Syria, and South Sudan show no signs of improvement. Also, a recent uptick in violence in Nigeria and northern Iraq/Kurdistan suggests growing risk of more disruptions. PIRA’s end-July Reference Case may be understating global oil supply disruptions by 200-300 MB/D in 4Q16.
Crude runs continued their rise following the winding down of maintenance. Crude imports dropped sufficiently for crude stocks to draw 2.5 MMBbls. Finished product stocks built 1.4 MMBbls, largely due to higher naphtha stocks and a seasonal kero build. Gasoline demand was helped by the Mountain Day holiday impact. Refining margins have been poor and have been getting worse.
Japan’s announcement of an inquiry into the legality of destination restriction clauses and its possible agreement on all its contracted volumes would pave the way for Japanese buyers to play a much more active role in the global LNG traded market, much as we have seen with key European buyers following the easement of destination restrictions in 2004. It is likely to help other regional buyers of LNG as well. This could deliver a fatal blow to the integrated value chain as we know it.
EUA prices are rising in August as ongoing auction volumes are seasonally cut. The cancellation of several Common auctions late in the month and French nuclear outages also support prices. Bearish signals may soon return, including higher auction supply, and a lack of policy developments. However, the correlation between EUAs and both Brent oil and NBP gas, which kept prices above €5 after this year’s first dramatic but short-lived price drop (in January) is rising again. With prices for both oil and gas still expected to rise in the balance of 2016, this correlation may serve to support higher EUA prices following the second major drop of the year.
The S&P 500 extended its move into record territory on Thursday and then eased slightly on Friday. Volatility moved lower, while high yield debt and emerging market debt indices generally moved higher. The dollar was slightly weaker, but it strengthened against the British pound. The total commodity index was fractionally changed on the week, while energy gained.
Saudi Arabia's still has a financial cushion to weather the current price environment, though that cushion is diminishing and its sustainability is not endless. Perhaps this is behind the recent price supportive statement from the Saudi Oil Minister given earlier price weakness. The decline in Saudi foreign exchange reserves continues, now down $176 billion from its peak or almost 24%. At today's prices, further declines are occurring, probably about $8-16 billion per month. Saudi's vulnerability to prices at today's level or lower has increased significantly since the last time reserves were drawn down during the financial crisis.
The sharp decline in the price of domestic natural gas in the first half of the current fiscal year is likely to lead to a saving in the Indian government’s subsidy outgo on urea by up to Rs.9,000 crore ($1.34-billion) in 2016-17. According to official estimates, the 20% price cut on domestically produced gas for the April-September period and the renegotiated price of imported LNG from Qatar’s RasGas Co. Ltd has reduced the price of pooled gas available to fertilizer factories by nearly a third from a year ago. However, should the price of domestic fertilizer be lowered, the subsidy could reverse track.
Last winter was extremely mild because of a record breaking El Niño. U.S. and Europe lost a combined 270 MB/D of middle distillate heating fuel demand. This upcoming winter will be influenced by the dramatic shift from El Niño to La Niña, which should lead to a substantial increase in heating fuel demand compared to last winter.
The condensate market East of Suez was generally balanced to long from 2014 through mid-2016, but with new condensate splitters starting up in 2016/17, the market looks poised to be short of condensate supplies. Furthermore, with U.S. condensate production flat to down for now, incremental condensate from the U.S. will not be available to help balance East of Suez markets unless it were displaced from current uses. While condensate prices are well correlated with naphtha cracks and naphtha cracks are affected by a number of factors (e.g., petrochemical margins, alternative steam cracker feed economics), the tightening of the East of Suez condensate market should give support to higher condensate prices and should directionally help naphtha cracks (all else being equal).
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
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