Investor & Financials

PIRA Energy Market Recap for the Week Ending May 22, 2017

16PIRALogoRising Prominence of the Asia-Pacific Region as a Global Refining Center

Oil markets are rebalancing. PIRA expects that with the ongoing OPEC output cuts likely to be extended and strong demand growth, it is just a matter of time before it shows up in reported onshore stock declines. Asian refiners are likely to keep buying more barrels from the Atlantic Basin as the Brent-Dubai price spread will stay narrow. Asia’s oil demand growth will outpace incremental refinery runs, and net exports of key products are expected to stabilize over 2017-18. Asian refineries are getting larger and more sophisticated, helping them to be more competitive in a volatile and challenging refining environment.

Byproduct Gas Picks Up Steam, But Obstacles Persists

The market has given back some of last week’s gains as uncertainty over relative supply/demand tightness resurfaces with the foreseeable pick-up in inventory restocking. Among other factors, the seemingly inevitable shale oil renaissance in Texas and Oklahoma — and its subsequent impact on byproduct gas volumes — weighs heavily on market sentiment. Yet, some recent producer earnings calls may help ease concerns about a fast-approaching deluge of associated dry gas production growth in the region, at least in the immediate term. Producers in the region have been guiding towards relatively muted Y/Y gas growth in comparison to their oil targets, citing ongoing price, pipe, and processing issues — the resulting risk to byproduct gas production during the injection season may help alleviate fears of oversupply.

Egypt LNG Cargo Deferments Suggest Diminishing Role in Balancing the Global LNG Market

As quickly as it swept into the LNG market in mid-2015, Egypt appears to be preparing for an almost equally sudden exit by end-2018. Moreover, the sudden loss of Egypt as a key demand center will be amplified by how quickly it will build on the resumption of its LNG exports since mid-2016.

Appointment of Energy Minister Moves the Back of the French Curve

The recently elected French president, Emmanuel Macron, appears to confirm his commitment to the French energy transition. On May 17, Nicolas Hulot was appointed as the minister responsible for energy in the new government. Considered an environmentalist in favor of renewable energy, Hulot had been arguing earlier during the electoral campaign that EDF needs to re-align its strategy to the French energy transition, supporting the idea that nuclear’s share within the mix must be reduced. The markets have been quick to react to the news, with the back of the French curve moving up substantially.

Prices Slip in Shoulder, But Upside Factors Mount

Coal-fired generation fell seasonally in April, but with natural gas prices ~60% higher Y/Y, coal burn was up 14% Y/Y. Though U.S. coal prices have slipped over the last month on shoulder season demand, an upward revision to PIRA’s injection season natural gas price forecast and other factors point to higher PRB and ILB coal prices this summer.

U.S. Internals of Data Constructive

Overall commercial stocks built 4.3 million barrels this past week as crude oil stocks fell 1.8 million barrels, the four major product inventories drew 2.2 million barrels and all other products built by 8.2 million barrels, the majority of which was NGLs. Adjusted product demand was up 3.3%, 630 MB/D, over last year in the latest four weeks. Crude runs surged 360 MB/D this past week to 17.12 MMB/D, supported by strong refining margins.

Broad-Based World Industrial Turnaround Becoming More Evident

Global industrial production and trade activity slowed throughout 2015, but it began to stage a comeback last year. Recent country-level manufacturing data were mixed. But in PIRA’s judgment, positive readings far outweighed disappointing ones – the current global manufacturing turnaround, therefore, is expected to gather further strength and become more broad-based. A sharp strengthening in U.S. manufacturing output during April was particularly encouraging.

Propane Stocks Just Above Five-Year Lows for This Time of Year

Propane inventories increased last week by 580 MB, but the total propane inventory of 42.2 MMB is close to the five-year average low for this time of the year. The EIA reported that propane exports soared last week to 1.25 million barrels per day. This is contrary to the number of propane cargo cancellations reported. A source states that the cancelled cargoes were picked up at a discount and routed to build Asian inventories. PADD II inventories grew, PADD III inventories were unchanged, and PADD I inventories declined.

U.S. Ethanol Prices Rally

Ethanol reached an eight-month low Wednesday May 10, but rebounded later in the week. Manufacturing margins were sharply lower. The EPA sent the proposed biofuel requirements for 2018 and biomass-based diesel to the OMB for approval. D6 RIN prices rebounded. Kinder-Morgan redirected ethanol from its Argo, Illinois terminal. The harvest in to the South-Central region of Brazil got off to a slow start to the 2017/2018 season.

Opening Print

47 degrees Fahrenheit with a cold and steady rain greeted us Saturday at our first stop in northern Illinois, about an hour west of Chicago’s city limits. Our producer-friend, who farms on the border of DeKalb and Kane counties, said “not much to see around here” as we climbed into his pickup truck. No, there was not much to see, but there was plenty to talk about.

A Weaker U.S. Dollar Propels the Coal Market to a Considerable Rebound

Coal pricing rebounded notably last week, with front end CIF ARA forward prices in particular rebounding to levels not seen since the aftermath of Cyclone Debbie on an over $4.00/mt W/W increase. A weaker USD, largely in response to political turmoil in the U.S. was a driving force behind the strength in pricing this week. The release of Chinese energy data was a confirmation of PIRA’s reference case; strength on the demand side will continue for the time being, although a continuation in the recovery in domestic coal production will be a harbinger of weaker balances and prices for 2H17.

Stresses Low, Commodities Rebound

In general, financial stresses remain extremely low, though there was increased drama this past week. The S&P 500 managed to climb above and hold the 2,400 level, but then hit an air pocket, from which it tried to climb back. With that air pocket, the noted divergence between bank equity performance (higher) and a flatter yield curve, began to come back into better alignment, though the divergence remains. Commodities had a positive week, and energy outperformed. The dollar was particularly weak, down 2% on the week.

Japan Returning to Norms, Post-Holiday

Following the Golden Week holidays most of the S/D data reflected a return to more normal patterns. That means gasoline demand ebbed from holiday hyped levels and gasoil demand began to rebound. Runs continued to reflect increased maintenance. Crude oil stocks posted a 5.4 million barrels draw, while finished products built 1.6 million barrels. The weekly stock build rate remained about 32 MB/D, like the previous week.

U.S. Ethanol Inventories Build for the First Time in Three Weeks

Ethanol-blended gasoline manufacture soared last week, rising to a 40-week high 9,408 MB/D from 9,161 MB/D in the preceding week. Domestic ethanol production rose 21 MB/D to 1,027 MB/D as more plants came back on line following seasonal maintenance. Inventories built by 359 thousand barrels to 23.4 million barrels, up 2.3 million barrels (11.0%) from this time last year.

Storage Spreads are Not Building in Inherent Risks

Given low stocks across Europe, the biggest seasonal storage facility in the U.K. out of commission, and the biggest seasonal storage facility in Benelux experiencing operating issues, you’d expect some interesting storage spreads to start developing – particularly for Germany. These opportunities are not leaping out just yet despite the country’s key position. Looking at historical costs of capacity from the capacity trading platform PRISMA, in combination with forward gas pricing in Germany vs. Britain, an overwhelming reason to max out injections at the moment for peak winter withdrawals does not yet seem to exist as of yet. However, TTF is already being priced to be an important supply source for NBP in the peak cold months of December ’17 to February ’18 at 1Q’18 TTF-NBP spread of -€1.63/MWh.

U.S. Refiners’ RIN Costs down Year-on-Year; April RIN Generation Little Changed

Approximately 5.93 billion RINs were generated in the first four months of 2017, up from 5.89 billion over the comparable period in 2016. D6 RIN generation was up only 0.2% over that period, while D4 and D5 RINs were up 2.4% and 30.6%, respectively. Several public companies with large RIN expenditures over the past few years had a lighter burden in the first quarter of 2017 due to lower RIN prices, profitable trading, and/or the granting of a small refinery exemption for one or more of their facilities. In some cases, companies that have historically suffered large costs due to hefty RIN requirements experienced a net gain last quarter.

Global Equities Still Setting Record Highs

Many of the benchmark equity indices continue to set record highs. After doing so, the U.S. market hit a bit of a downdraft, but then began to recover. Consumer staples, utilities, and energy performed the best on the week, while retail was the clear laggard. International indices outperformed the U.S, with Europe, emerging Asia, China, and Japan doing the best. A significant retrenchment in Brazil’s equity market led to a drop in Latin American performance.

Asian Oil Demand: Temporary Fallback in Demand Growth

Our snapshot of Asian oil demand growth shows a slowdown, which is viewed as temporary and driven by a drop in growth of Chinese apparent demand. PIRA's update of major country Asian product demand indicates that year-on-year growth slowed to 210 MB/D, vs. 740 MB/D in our April snapshot. Reacceleration is expected May-July, with demand growth currently forecast to push 1 MMB/D by mid-summer.

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.

PIRA Energy Market Recap for the Week Ending May 15, 2017

14PIRALogoU.S. Inventory Deficits to Last Year Likely to Widen

U.S. product demand was very strong this past week, pulling up the four week average adjusted demand growth to 4.1%, or almost 800 MB/D over last year. Total commercial stocks drew 3.6 million barrels this past week led by a 5.2 million barrel crude stock draw, the largest weekly decline this year. Cushing crude stocks surprisingly drew 0.4 million barrels last week and another stock decline of 0.3 million barrels is forecast for this week’s data. Inventories of the two major light products are forecast to decline next week, along with another significant crude inventory decline.

Peak Restocking Month Set to Disappoint

After faltering early in the week, NYMEX futures quickly regained lost ground and have now tested the calendar highs set back in early April. Helping to feed the bulls was yesterday’s EIA weekly storage report showing an unexpectedly low build that took the market by surprise — widening the year-over-year storage deficit to 372 BCF. Indeed, it appears that the aggregate storage refill will fall 100 BCF short of the 5-year average — roughly in line with last year’s anemic levels. Yet, while the net monthly build will likely be similar to last May, such a comparison belies the notably different year-over-year trends at work — particularly on the demand side of the U.S. balances, but also in the case of supply given signs a turnaround is finally unfolding.

NBP is Pricing Out U.S. LNG – Should Henry Hub be Concerned?

Current deliveries to N.W. Europe vs. the balance of the Continent highlights a vulnerability to LNG producers and a challenge to marketers, in particular American ones (given the proximity) during shoulder months. In the previous weeks, we highlighted this issue for global LNG markets, but it also is true for Europe on its own. Pipeline producers will try to lock in utilities into high minimum takes to block LNG deliveries in these shoulder months, but there will be an increasing desire for companies to gain ever more flexibility in order to take advantage of LNG length in these vulnerable periods. This pattern has certainly been evident in portions of Southern and Eastern Europe, where the legacy of oil indexation in gas pricing has made it relatively vulnerable to immediate competition from attractively priced spot LNG.

Japan Power Generation Growth Surge Still Threatened by Nuclear Capacity Increases

Japan did an impressive job by stepping up to keep its new LNG contract commitments early this year. But the increased imports may have been temporary – caused by lower LNG prices, colder weather patterns, higher oil prices and in the future, the lingering issue of nuclear restarts could further threaten LNG consumption. The restart of the two Takahama nuclear reactors in Fukui Prefecture (total of 1.7 GW) appears imminent, with Kansai planning to restart unit 4 on May 19. This will have a potentially large downside impact on LNG consumption as opposed to oil going forward.

Back to a Weather Watch

With the May WASDE behind us, the markets will focus on weather and planting progress for the next 6-7 weeks until the end of June and the Acreage report. However, planting progress numbers can be a bit misleading moving forward as they do not take into consideration the number of acres that will need to be replanted.

Malaysia Approves New Ammonia Plant

Malaysia’s Union Cabinet has approved the signing of a Memorandum of Understanding (MoU) for the development of a US$2.1 billion ammonia and urea manufacturing plant in Malaysia. The plant’s capacity is expected to total 1.35 million tpy of ammonia and 2.4 million tpy of urea. Supply will be focused on the Indian market. "The Union Cabinet today gave its ex-post-facto approval to the signing of MoU with Malaysia on the development of a urea and ammonia manufacturing plant in Malaysia," an official release said.

Ethanol Stocks Slightly Lower

U.S. ethanol production rose 20 MB/D last week to 1,006 MB/D. East Coast stocks jumped to a five-year high 8.6 million barrels, though total inventories fell a relatively small 158 thousand barrels to 23.1 million barrels. For the first time in nine months, imports were reported, all of which were received in PADD V. Ethanol-blended gasoline manufacture dipped to 9,161 MB/D from 9,203 MB/D in the preceding week. June ethanol futures were up 0.1¢ to $1.45 per gallon today as of 11:55 A.M. CT.

Propane Inventories Begin to Build

Propane stocks registered a 2 million barrel build, which is the first significant build of the injection season. Total inventories rose to 41.6 MMB, which is 31.5 MMB below last year’s levels. Propane inventories increased in all PADDs. Exports will curb within the upcoming month based on reported cancellations and will most likely remain relatively low through the summer. Declines in exports may not be noticeable in the next several weeks, although should begin by mid-May.

Slower Debt Growth in China Not Yet Hitting Economic Activity

In April, the amount of credit in the Chinese economy continued to increase, but at a slower pace compared to earlier. The Chinese government is likely to maintain its restrictive stance on credit creation, as worries about the debt-to-GDP ratio continue to loom. While credit growth has been a leading indicator of economic activity in China, a slowing in the economy’s momentum has not yet materialized. In the U.S., retail sales for April pointed to a rebound in consumer spending. A reading on core inflation stayed soft, but this is not expected to influence the Fed’s deliberations on policy.

Lower Renewables Firm German Prices. Signs of Flexibility of Wind to Negative Prices Emerge

German day ahead prices have been quite firm so far in May, with reported solar output down by over 2.7 GW year-over-year and wind 0.3 GW year-over-year. However, the German power system has actually seen another period of negative prices, between April 30 and May 1. Coal, lignite, gas, and even nuclear plants have ramped down during the period of negative prices, while German exports have reached a peak for the year at 12.2 GW on April 30. Unlike thermal plants, renewable plants have been typically sheltered by their remuneration structure, but large negative prices are also unveiling some degree of flexibility.

Shoulder Season Slumber; Focus on Capacity Markets

Spot power prices increased year-over-year in April in most Eastern markets driven by rising gas prices, higher cooling loads across the South, and nuclear outages. Henry Hub spot prices continued to hover around the $3 mark in April reflecting a 60% year-over-year increase. PIRA is neutral to near term gas market forwards but remains bullish during heating season 2017-18. Year-over-year power price increases continue through the forecast period but generally fail to keep pace with gas prices as the call on gas-fired generation continues to weaken while efficient CCGT capacity grows. Implied heat rates fell in nearly every market, led by a 36% average drop at PJM-W which is fast becoming the poster child for the dangers of overbuilding.

Japan Holiday Impacts, Pluses and Minuses

Two weeks of data were reported due to the Golden Week holidays. Runs declined, on balance, as further maintenance kicked in. Crude imports ran particularly high and then plunged, which ballooned crude stocks at month-end April, but then corrected lower as we entered May. Finished product stocks fell in the latest week but generally continue their seasonal rise. Demand trends remain largely seasonal and have held up well. Gasoline demand was hyped by the holidays in the latest week with demand besting 1 MMB/D. Gasoil demand fell both weeks as the holiday reduced industrial and commercial activity. Stocks built both weeks by an almost cumulative 1 MMBbls, and 2.28 MMBbls over the last five consecutive weeks. Refining margins have looked increasingly sloppy. The implied marketing margin has improved the past three weeks, which has helped to partially offset the developing weakness in refining.

Coal Prices Continue to Shift Lower, Chinese Demand Fundamentals Strong... For Now

Coal prices continued to shift lower last week despite a notable rebound in the oil market. FOB Newcastle prices declined by the greatest extent, with the entire curve losing more than $2.50/mt compared to the end of last week. The coal market in general continues to search for a new short-term equilibrium following pricing surges both last year and last month. Clear signals out of the Chinese market remain elusive, as imports have remained strong, although domestic production continues to rebound.

European Carbon Prices Stay Low, Trialogue Talks Coming Up

Breaking the trend from prior years, European carbon (EUA) prices failed to rise during the April compliance period, suggesting existing market positions were adequate for compliance. Prices have moved lower in May, with a price rise not expected until August (when auction volumes are lower). “Trialogue” talks on post-2020 market reforms remain the major market wildcard, with EUA price swings possible both ahead of and following the upcoming May 30th meeting. At the same time, the widening EUA delivery spread for 2019 suggests that EUA prices increasingly reflect an ambitious reform package – as well as continuing poor fundamentals in the balance of 2017 and 2018.

Credit Conditions Remain Positive With Low Stress

Financial stresses remain extremely low. The S&P 500 is still trying climb over and hold the 2,400 level. There still remains noted divergence between bank equity performance (higher) and a flatter yield curve. This is still occurring in the major regions (U.S., Europe, and Japan). Commodities remain soft, but energy perked up this week, and we had noted that cash energy had been acting weaker than energy credit would have suggested. Price trends in non-energy-high yield debt still look positive.

U.S. Ethanol Prices Mostly Lower

U.S. ethanol prices declined most of the week ending May 5, but there was some rebound Friday. Manufacturing margins tumbled. 2017-D6 RINS decreased to 41.0 cents. Brazil returned to an export position in April. The vote on imposing a tariff on U.S. ethanol imports was postponed until June. European ethanol values increased to a six-week high.

Long Term Models Remain Wet

The recently concluded California drought began on December 27, 2011 but it wasn't until August 13, 2013 when the category "extreme drought" made its debut in the southwestern part of the state. In 2014, 2015, and 2016, major portions of the so-called Golden State were covered by both extreme and exceptional drought. With this past winter's heavy rains, just over 5 years of drought ended with an official gubernatorial declaration on April 4, 2017. Unless you're a vegetable/fruit producer or consumer, that stretch of intense drought probably didn't mean much. However, given the predominant west to east pattern flow, we started to wonder aloud a few months ago what the impact of a non-drought stricken California would have on Midwest weather this summer.

Tighter Seasonal NOx Limits Begin in the East as Other Rules are Targeted

A number of rules finalized under the Obama EPA are being targeted under the Trump administration. The tighter CSAPR Update rule NOx limits associated with 2008 Ozone NAAQS attainment have managed to survive and are in effect as of May 1st for units across much of the Eastern half of the country. Seasonal NOx allowance prices have risen in response. With court challenges outstanding, questions remain over whether EPA will defend the CSAPR Update rule. EPA has delayed litigation on the stricter 2015 Ozone NAAQS. Pressure to reduce cross-state emissions continues to come from petitions under the “good neighbor” provisions of the Clean Air Act.

B.C. Voters Decide - Almost

Last week, British Columbia voters went to the polls but the outcome remains uncertain. Prior to the inclusion of absentee ballots and the likely call for a recount in some tight ridings, the Liberals have captured 43 seats, the NDP 41 and the Greens, holding the balance of power, with 3 seats. Several ridings had very slim margins of victory and still await absentee ballots and possible calls for recounts leaving the final outcome in doubt between a slight Liberal majority or a minority government decided by Green Party support. The closest vote was in the riding of Courtenay-Comox where the NDP hold a nine-vote lead in a riding with a large military base that should have many absentee ballots from soldiers stationed out of the province. The Liberal candidate in the riding is the former base commander which suggests this riding could swing to the Liberals and produce a Liberal majority.

Global Equities Remain at or Near Record Highs

The broad U.S. market flirted at or set new record highs but was lower week-on-week. Technology and energy were the best performing sectors, while retailing was the weakest. Internationally, many of the emerging market sectors posted strong gains. World equity capitalization moved to a new record high this past week, something that had eluded it since the mid-July 2015 peak.

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.

Westwood Insight: Exploration Turns the Corner in 2017

15 1WestwoodGlobalenergylogoIf the industry is out of the emergency room in 2017, it is not yet out of hospital. Even if oil prices recover further, explorers will need to focus on finding low cost oil and gas profitable to develop at $40 per barrel or less. Low cost oil will always find a market, never mind the current stranded assets mantra. Finding costs need to be kept below $1–2/bbl, or perhaps a bit higher for near field discoveries where development costs are lower. Being the average explorer of the past few years will not be good enough – companies will need to believe they have the acreage portfolio, technology, people and processes to create value. This means an efficient exploration process with larger prospect portfolios and fewer, better wells targeting bigger prospects at higher commercial success rates.

It also means making discoveries that will not be stranded commercially or politically. In mature areas like the North Sea, it means exploring efficiently for oil and gas near late life fields to delay abandonment.

15 2Westwood Insight 15 05 17 Exploration Turns the Corner in 2017

Left: REP40 benchmark companies gross wells drilled and success rates for the period 2012-2016 showing a drop in number of well penetrations, but an increase in success rates for 2016, implying greater pre-drill screening and selection of prospects. Right:, REP40 companies gross volume discovered for oil and gas with finding costs for oil only and overall hydrocarbons. Source: WILDCAT Database.

The industry is emerging leaner and fitter from this latest down-cycle, but it must be able to remain disciplined during the bull oil market to come (whenever that might be). Decreased competition means lower access costs for exploration acreage and more opportunity to create value from exploration for the accomplished explorer. 

The eighth edition of the State of Exploration Report1 provides a detailed analysis of the exploration sector and the challenges it faces in 2017.

Westwood Global Energy Group (WGEG) has produced its eighth annual State of Exploration Report1, the definitive global benchmark for conventional oil & gas exploration, which covers 991 completed conventional wildcat wells at a total drilling cost of $43.5bn. The most detailed report of its kind, it spans five years of global high impact exploration and also benchmarks the performance of 40 international E&P companies.

  • Westwood Global Energy Group (WGEG)’s annual State of Exploration report analyses the last five years of conventional oil & gas exploration and forecasts exploration drilling plans for 2017.
  • The analysis confirms that 2016 saw a nine-year low in oil & gas exploration in both wells drilled and discoveries made.
  • But it expects a brighter outlook with exploration efficiencies starting to deliver results.
  • Conventional exploration can compete with North American unconventional oil and gas in full cycle breakeven costs.
  • Decreased competition means lower access costs and greater opportunity for accomplished explorers, tempered somewhat by the lack of new oil plays to explore.

To arrange a demonstration of the latest WILDCAT data or to purchase the report, please visit Westwood Global Energy Group.

PIRA Energy Market Recap for the Week Ending May 8, 2017

17PIRALogoEuropean Refinery Margins & Runs Will Remain Healthy Through the Mid-Year

Oil prices are still consolidating but will go over $60 late this year as surplus stocks are drawn down. Refinery margins and runs will stay strong for now, but high gasoline stocks will cap further improvement. Gasoline cracks will ease and diesel cracks will increase in 2H17. HFO cracks will trend a bit lower but still remain relatively firm. European runs will decline in 2H17 with higher expected maintenance and seasonally softening margins.

Key Data Continue to Suggest Broad-based Global Expansion

There were three main takeaways from the latest U.S. labor market data release: first, there are no signs of slowing in the pace of job creation; second, people who are not in the labor force are still not rushing to be a part of it; and third, wages are growing only at a moderate pace. This was a positive release for the U.S. economic outlook, but it may also reignite debate at the Fed about possible overheating in the labor market. This week’s other economic releases (European GDP, and confidence readings from various sources) were also mostly positive.

U.S. Propane Stocks see Second Consecutive Build

Propane stocks increased a meager 16 MB to 39.7 MMB. For the past two weeks, stocks are basically unchanged. The y-o-y deficit continued to widen to 32.2 MMB. This is the seventh consecutive week that y-o-y deficits have increased, largely due to robust exports. The EIA reported that exports declined to 764 thousand barrels, which is the lowest level since early December 2016. Cargos are expected to temporarily remain relatively low in May due to weak arbitrage economics, as well as declining heating demand overseas.

U.S. Ethanol Prices Fall

U.S. ethanol prices were lower the week ending April 28. Manufacturing margins worsened. 2017 D6 RIN values plunged to April 28. Brazil began its 2017/2018 sugarcane harvest in April, but heavy rain limited output. The Latin American country is considering tariff of 17% on U.S. ethanol imports. Hydrous ethanol prices are now competitive with gasoline at the retail level in parts of the Southeast region. European ethanol prices have bottomed and are increasing.

Wheat Tour’s Results Questioned

The 2017 Kansas Wheat Tour barely finished before many started to discount the findings, some entirely. While a somewhat typical response to Tours in general if the results don’t fit a specific narrative, this year’s Tour was hampered by the much-publicized spring snowstorm which resulted in an inordinate amount of subjectivity in the reports. Some have claimed that scouts drove for 90 miles without taking a sample on Wednesday due to poor weather conditions, invalidating the results. From the number of samples taken in the hardest hit areas out west, which were well below normal, that concern seems legitimate.

Fundamentals Warrant Price Support Despite Production Uptick

NYMEX futures prices have held up relatively well this week with the June 2017 contract barely down. Nevertheless, the slow descent from early April highs is largely a factor of the market’s uncertainty surrounding structural tightness — with the latest U.S. production data likely failed to assuage any such concerns. The EIA Monthly Crude Oil and Natural Gas Production Report, reflecting the first pass at February 2017, showed a sizeable ~1.4 BCF/D increase in dry production compared to the prior month, marking the largest sequential gain since 2014. Yet, this month’s “surprise” was not limited to just one side of the ledger; the EIA observed concurrent strengthening on the demand side, in effect expanding the size of the market rather than merely balancing on storage.

U.S. Cargos Steer Clear of Europe Even as Sabine 4 Ramps Up

Atlantic Basin trading maneuvers are set to become more intricate, as more LNG is pushed out of Sabine Pass into the region in a lower priced 2Q/3Q environment. At the same time, keeping gas out of N.W. Europe to support NBP netbacks will remain a priority. Or looked at another way, N.W. European netbacks have not been large enough to secure U.S. cargos, and spot marketers are seeking more attractive markets.

Indian Producer Keeps Gas In House

Reliance Industries (RIL) will sell the natural gas it produces from coal seams in Madhya Pradesh to its own units in Gujarat and Maharashtra. After last month's government decision to give coal bed methane (CBM) producers freedom to discover market price, RIL invited bids from users of gas. Five companies including RIL participated in the bidding process, according to the bid evaluation report the company posted on its website. The bidders besides RIL were Deepak Fertilizer & Petrochemicals Corp Ltd., state-owned gas utility GAIL India Ltd and GMR's Rajahmundry and Vemagiri power plants. While RIL bid for using the gas at its petrochemical plants at Patalganga and Nagothane in Maharashtra and Jamnagar in Gujarat, Deepak Fertilizer was a close second.

Warmer Weather Undermined Demand in April, but U.K. Losses Larger than Expected

Demand in April declined by 5% across the largest markets (France, Germany, Italy, Iberian Peninsula and the U.K.), with April this year not as cold as last year, while seasonal factors are also in part to blame. However, the declines reported for the U.K. and, to some extent, France, have been relatively wider than the rest of Europe. The more contained demand losses in Spain and Italy suggest that macroeconomic conditions outside of the U.K. appear relatively stable. While intra-month volatility in temperatures could explain the large fall in French demand, the trend still warrants closer attention in the upcoming months.

Long-Term Gas Demand Rests on Winning a War of Attrition vs. Other Thermals

Even though gas plants will gradually dominate the non-renewable (shrinking) slice of the power generation pie, PIRA does not predict that Western Europe will ever have the gas-to-power demand it achieved in 2008. To reach such heights, gas would have to become over 42% of non-renewable power generation in 2017 – 8% higher than forecasted. For the moment, though, gas is on a trend towards greater dominance in power generation over other thermal technologies, which not only means that fuel switching potential becomes gradually limited, but that gas demand becomes more a function of renewable supplies.

Coal Prices Shift Lower on Weaker Oil Prices

The coal market moved considerably lower this week, with weaker oil prices adding further bearish momentum to the downward correction in coal supply/demand fundamentals. The decline in pricing was particularly acute for prompt FOB Newcastle and FOB Richards Bay prices, flattening their respective forward curves. India’s electricity generation increased by 3.9% year-over-year, although resurgent hydro generation suppressed coal-fired generation growth to just 2.4%, which is not sufficient to stimulate thermal coal imports. U.S. thermal coal exports hit a three year high in March, but should shift lower.

WCI Carbon Market Challenged by Legislative Proposals

WCI carbon prices reset to a higher level after the auction verdict, averaging $14.20 in April. Early May has seen a retreat from end-April levels, as proposed legislation threatens the market framework and the Scoping Plan/Cap and Trade amendments are yet to be finalized. Significant buying needs for CP2 should give the May auction a boost vs. the severe undersubscription in February. However, given that one set of uncertainties has been replaced by another, continued undersubscription is a real possibility.

2Q17 Latin American Gasoline & Diesel Imports Higher

2Q17 Latin American gasoline demand is 35 MB/D lower year-on-year. Mexican demand is slowing, Brazil is flat and Venezuela is down. The diesel market is also softer, we expect 2Q17 consumption to be 40 MB/D lower year-on-year. We see demand picking up again later in the year. Overall Latin American refinery crude runs are forecast to decline year-on-year in 1H17 but improve in 2H17. PIRA estimates Latin American gasoline and diesel imports to be up on the year in 2Q17. Attractive import incentives continue to support high imports of diesel into Brazil, keeping domestic refinery runs unusually low.

Stresses Low, Energy Credit Holding Up

Financial stresses remain extremely low, as evidenced by the St Louis Fed stress indicator continuing to trend down, the DOW breaking above 21,000, and the S&P 500 nudging up against the 2,400 level. Commodities remain soft, particularly energy. However, energy credit indicators are not as soft as cash oil prices might suggest. Price trends in non-energy high yield debt still look positive.

Ethanol Stocks Remained Near Record Levels

U.S. ethanol production fell 1 MB/D the week ending April 28 to 986 MB/D, matching the six-month low achieved three weeks earlier. Output outside of the Midwest was just 68 MB/D, the lowest since June 2014. Total inventories fell by 56 thousand barrels to 23.3 million barrels as East Coast stocks retreated from a five-year high. Ethanol-blended gasoline manufacture dipped to 9,203 MB/D from a 2017-high 9,220 MB/D in the preceding week.

Crude Stocks Fall on High Refinery Runs, Syncrude Fire

U.S. crude stocks declined in April, for the first time this year, falling 8 million barrels as refinery crude runs topped 17 MMB/D – a full 1 MMB/D higher than last year. Cushing stocks also fell, 2 million barrels, on higher shipments out to the Gulf Coast and to the Midwest, where refiners had to replace sweet crude supplies following the fire at Syncrude’s oil sands facility in March. Western Canadian stocks also fell in April, as the Syncrude shutdown affected both light and heavy supplies – the latter due to the need for synthetic light crude in bitumen synbit blends.

Global Equities at or Near Record Highs....

Again, most equity tracking indices posted a positive week. The broad U.S. market set another record high. Banking, technology, and retailing indices did the best, while energy was the only sector giving ground. International indices were also mostly higher, with Europe doing the best, though China eased.

Fracking Policy Monitor

The opening months of the Trump administration have been positive for industry as federal regulations have been rolled back. The EPA has withdrawn its request for data on methane emissions and has temporarily stayed implementation while the rules are reevaluated. The BLM intends to let its well integrity rules die in the court system. In response, states and localities are tightening their own regulations. PIRA expects further loosening at the federal level and further tightening at state and local levels. However, the primary oil producing states such as Texas and North Dakota are expected to remain friendly to industry and not tighten regulations further.

U.S. Commercial Stocks Flat with Last Year

Overall commercial stocks built 1.3 million barrels with another disappointing crude stock draw, at just 0.9 million barrels, which was more than offset by a product build. Adjusted product demand continues to grow at about 2.4% (or 470 MB/D) year-on-year in the latest four weeks. Cushing crude inventories drew 0.7 million barrels. Crude stocks should show a larger decline next week, but the major light products are forecast to build.

Heavy North Sea Maintenance Forecast for Q2 and Q3

PIRA forecasts another year of heavy maintenance in the North Sea in 2017. Oil production loss due to maintenance is expected to rise to 230 MB/D in Q2 and 360 MB/D in Q3, up from 40 MB/D in Q1. Maintenance will taper at the end of the year to 100 MB/D in Q4.

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.

PIRA Energy Market Recap for the Week Ending May 1, 2017

17PIRALogoOil Prices to Recover

The reflation narrative has come back to life supported by a broad based economic expansion which is in progress. The lack of visible stock declines have undermined oil market confidence and dragged prices lower. Market jitters are unwarranted; oil on the water is declining, OPEC output is declining and surplus stocks are declining. Onshore stock declines are inevitable, though the exact timing is tricky. Refinery runs worldwide have been contained by refinery outages, closures and a heavy maintenance schedule. The resulting very strong refinery margins are creating pent up demand for crude. Gasoline cracks stay healthy for now while diesel crack continue to slowly recover. Geopolitical risks to supply are growing.

Prices Struggle to “Weather” Initially Robust Storage Refills

Mild temperatures in April have resulted in robust initial inventory builds, raising questions on the relative tightness of supply/demand balances. With the heaviest restocking typically occurring in May, the more modest inventory builds we see beginning next month will likely revive ongoing underlying supply concerns, along with upward price pressures. Moreover, it is growing increasingly clear that, as the window closes on potential supply gains this season, the overall dependency on demand destruction will increase. Consequently, we revised the front of our price curve to better reflect the slower than anticipated supply recovery — as per the guidance given during the N.A. Gas webinar given live on Wednesday, April 18th. Note that the recording is now available on Dimensions, PIRA’s website.

U.S Ethanol Prices Traded in a Narrow Range During April

Manufacturing margins were also steady. D6 RIN prices plunged as March RIN generation was higher than many expected. The 2017/2018 sugarcane harvest in the South Central region of Brazil officially started in April, but rain caused delays in output. European T2 ethanol prices bottomed.

June Setting Up as Pivotal Month for Summer Balances

The U.K. is no longer a source of incremental gas-to-power growth, as its fleet has completely switched, however, Continental demand has proven to be well correlated with weather, and even political developments in Europe and abroad. In the U.K., Power is not the only flexible demand disappearing, especially with the loss of Rough and limited slack Interconnector capacity at times. However, the bigger current issue has been the cold April weather across much of Europe that has displaced storage injections in favor of satisfying residential/commercial demand. Injections came in at nearly half of PIRA expectations, however, June looks to pick up a lot of the slack and spot levels versus daily injections are cementing this point.

Worsening Drought Drives Price Recovery

With hydro reservoirs remaining at multi-year lows, we have revised the French hydro for 3Q to 4.9 GW (-1.9 GW versus our prior monthly report), which is bullish for prices, as this is the lowest ever recorded for 3Q since 2001. With French exports to Italy and Spain set to reach new highs, there are risks of higher utilizaton of the gas fleet in France, especially as lower water levels could also lead to cooling-related losses at nuclear plants. Spain continues to offer the most upside in the near term, with higher CCGT dispatching bullish for the spark spreads in the upcoming months. As for Italy, recent official data shows that the Italian system can become easily strained under a lower hydro availability, with imports necessary to guarantee sufficient reserve margins at on-peak hours, especially if renewable availability is below normal as well. As coal plants continue to be squeezed out of the mix, German plant operators are increasingly opting for a way out of the market by submitting closure notices to the regulator. With the latest notifications, German total firm thermal capacity is set to drop below maximum winter peak demand for the first time in 1Q 2018.

Stockpiles Rise in Feb, Slight Uptrend in Place for Mar, Apr

Electric power sector coal stockpiles rose in February to sit at 162 MMst according to a Tuesday report by the EIA, which was consistent with PIRA’s estimate of 162.4 MMst in last month’s stockpile report. We foresee a slight uptick in stockpiles over March and April, though the forecast is below the normal stockpile build for this time of year.

Markets Ease Post-Cyclone, Asian Demand Robust

Coal prices initially surged in early April in the immediate aftermath of Cyclone Debbie making landfall, although prices have moved largely in line with end-March levels. Strength in Asian demand, led by China, should support prompt pricing, although this support is expected to fade in 2H17, at which PIRA shifts to a bearish outlook.

U.S. Product Stocks Gain as Crude Inventory Declines

Overall commercial stocks built by 6.6 million barrels for the latest reporting week, led by products which added about 10.3 million barrels. Overall commercial storage is about even with last year. Gasoline led the build with an inventory increase of 3.4 million barrels, with distillate gaining almost 2.7 million barrels. By contrast crude stocks declined by 3.6 million barrels, with Cushing storage falling by 1.2 million barrels. The spike in crude imports to 8.9 MMB/D was partly offset by the sharp increase in crude runs to a weekly record of 17.3 MMB/D.

Excluding U.S. Consumer Spending, Recent Data Are All Very Healthy

During the first quarter, U.S. GDP expanded at a sluggish pace, as consumer spending became stagnant. In PIRA’s judgement, this slump was a temporary soft patch, and the household sector will recover solidly in the second quarter. In fact, given the recent strength in U.S. business investment, second quarter growth is expected to accelerate substantially. In South Korea, first quarter GDP growth accelerated on the back of higher business spending. In the euro area, consumer inflation turned faster in April, but the European Central Bank maintained its dovish policy stance.

Propane Inventories Draw Due to High Exports

Propane stocks registered an 8 thousand barrel build, the first build of the injection season after continuous draws through most of April. Total inventories amounted to 39.6 million barrels which is 31.5 million barrels below last year’s levels. Exports continued to exert downward pressures on PADD III inventories which drew by 1 million barrels to 23.6 million barrels.

Wild Weekend Weather Reawakens Grain Bulls

In theory problems for this year’s HRW crop began some 8-10 weeks ago, in February, when record high temperatures of 80F+ were seen in many parts of Kansas and Oklahoma. Not expecting a late-April snowstorm the crop broke dormancy fairly early, as if it had a choice, and had settled in for an expected easy transition to spring. Instead, the western Kansas crop received over 12” of snow yesterday to go with sub-freezing temperatures and up to 50 MPH winds. While a moist blanket of snow wouldn’t be the worst thing that ever happened to a HRW crop, the depth and weight of yesterday’s snow has certainly caused irreversible damage to some of the Kansas crop given the advanced stage of development, heading, of much of the affected plants.

Prices Headed Higher on Further Affirmation of Tightness

Mild temperatures in April have resulted in robust initial U.S. inventory builds, raising questions on the relative tightness of supply/demand balances. Yet, with little signs of a production turnaround, most regional cash prices, along with Henry Hub (HH) should remain well bid as demand competition with storage injection heats up. In Appalachia, production volumes merely ramped up by merely a little more than 0.1 BCF/D compared to March. Such an increase may seem minor compared to sequential gains seen in years past — especially given the partial completion of the Transco Dalton expansion — but is more representative of the “new reality” limiting gas production growth in Appalachia. This is an important contributing factor behind the bullish price risks we see ahead.

U.S. Ethanol Stocks Rise

U.S. ethanol inventories rose by 235 thousand barrels to 23.3 million barrels the week ending April 21, as PADD I stocks reached a five-year high. Domestic ethanol production decreased by 6 MB/D to 987 MB/D, only 1 MB/D higher than the six-month low achieved two weeks earlier. Ethanol-blended gasoline manufacture soared to a 2017-high 9,220 from 9,044 MB/D in the preceding week.

India/China FSRU Market Swap as Niche Market Matures

Regas tanker maneuvers between the largest emerging new LNG buyers reveal a new dimension to an aspect of trade that has, for the most part, been relegated to buyers that have been smaller, short term, more remote, or seasonal. India and China, both of which boast multiple large-scale conventional regas facilities, will be essentially swapping FSRU capacity, which shows a different scenario for such capacity utilization. The deal indicates that such niche markets have expanded considerably and are being strategically utilized by large growing conventional long term LNG buying markets as well as less stable, seasonal, and short term buyers.

Ukraine's Industrial Gas Prices Get Price Reduction

Naftogaz of Ukraine from May 1, 2017 will reduce the price for gas supplied to industrial customers and other economic entities, the company’s press service reports. “The offered prices for natural gas from the Company's resource are differentiated depending on the volume of purchases, terms of payment and the state of previous settlements with Naftogaz. In May 2017, prices will be reduced by 3% compared with the prices in April of this year,” reads a report.

Heat, Outages, Gas Buoy Southwest Markets

Neither snowmelt nor rainfall nor light of day could keep SP15 prices from rising in April. Driven by heat in inland markets, generation outages, and rising gas prices, SP15 on-peak climbed $3.50/MWh to average $27/MWh. In contrast, Northwest and Northern California markets remained submerged near March levels. With precipitation more than twice the normal level in April, the Northern Sierra 8 station index has risen above 90 inches, the highest level ever recorded. This did not translate into much incremental generation, in part due to outages at the Oroville complex undergoing repairs to the damaged spillway. NW precipitation remained above normal and runoff increased, but much of the incremental flow will likely be spilled.

Huge Japanese Crude Stock Build, Along With Higher Runs

Japanese crude runs rose 143 MB/D on the week and crude imports surged, which ballooned crude stocks 6.6 million barrels. Finished product stocks also built 1.8 million barrels, with stock increases in all the major products. Demand trends remain largely seasonal, but are holding up well. Kerosene demand fell back modestly, and the stock change rate transitioned from a modest draw to a modest build of 8 MB/D. Margins improved again, this week by $0.53/Bbl, and are now verging on acceptable, but not exceptional. All the major cracks improved on the week.

Reduced European Risks Keep Stresses Low

Financial stresses remain extremely low. Most noted is an increased divergence between bank equity performance (higher) and a flatter yield curve. This is noted in the major regions (US, Europe, and Japan). The election outcome in French was extremely bullish for Europe. Their equity market moved sharply higher, while sovereign and “fragile bank” CDS quotes eased noticeably. Energy credit indicators are not as soft as cash oil prices, with high yield energy credit still looking solid. Emerging market debt performance was noticeably higher on the week. There still is a good level of comfort in the higher yield debt instruments, both in general, in energy, and in emerging markets.

Peak Seasonal Build Likely to Disappoint

With the heaviest restocking typically occurring in May, we expect that the more modest builds we see ahead for inventories next month will likely revive supply concerns. Our provisional projections through May suggest weekly builds will more often be below the five-year average levels, and also often below the corresponding 2016 builds, thereby enabling the Y/Y storage deficit to re-widen.

U.S. February 2017 DOE Monthly Revisions: Demand and Stocks

EIA just released its final monthly February 2017 (PSM) U.S. oil supply/demand data. February 2017 demand came in at 19.188 MMB/D, 515 MB/D lower than the weeklies. Total product demand declined -2.5% versus year-ago (-492 MB/D), compared to the February 2016 PSM data. It was the first decline since July 2016. Resid demand showed growth of 70 MB/D (35%), while kero-jet was flat with year-ago. Distillate demand declined -1.4%, but outperformed, while gasoline fell -2.4% (218 MB/D), and was near the barrel average. End-February total commercial stocks stood at 1,357.2 million barrels. Compared to final February 2016 PSA data, total commercial stocks were higher than year-ago by 36.3 million barrels, versus an excess of 43.5 million barrels seen at end-January.

Global Equities Post a Broadly Positive Week

Again, most equity tracking indices posted a positive week. The broad U.S. market rallied back towards record highs. Technology and consumer discretionary did the best. Energy was only modestly changed. International indices also were mostly higher, with Europe doing the best.

Can Offshore Projects Compete with U.S. Shale?

Shale breakevens have fallen dramatically over the last several years, displacing offshore and other higher cost projects on the supply cost curve. Rightsizing, efficiency gains, and service price reductions have lowered breakevens for both shale and offshore. However, relative to offshore, shale has seen a larger portion of its breakeven reductions come from structural efficiency gains versus cyclical pricing adjustments. Offshore will likely see costs continue to deflate in the near-term as long-term contracts continue to roll-off and move to lower spot pricing but it seems unlikely that offshore breakevens will move significantly lower or again move below shale.

Indonesia will Remain a Major Outlet for Refined Products

Indonesia is the largest importer of refined products in Southeast Asia. Indonesia’s oil demand has far outpaced its domestic production due to a lack of refinery capacity additions, leading to large and growing import requirements, particularly for gasoline and gasoil/diesel. However, net imports for the two products have weakened over the past few years due to factors such as economic slowdown, subsidy reduction, and re-start of a mothballed refinery, as well as the commissioning of a new RFCC unit at Pertamina’s Cilacap refinery. This declining trend is likely to continue this year before reversing next year.

Earthquake Activity Subsiding in Oklahoma

The significant increase in earthquake activity in Oklahoma in recent years became a growing concern for the state’s oil industry. There appears to be a strong link between increased salt water disposal and seismic activity which has caused regulators to impose restrictions on the disposal of produced water. These restrictions, which impacted a small amount of Oklahoma’s oil production (<30MB/D), appear to be working as shown by a recent study from the Oklahoma Geological Survey. The study shows a significant decrease in earthquake activity (from 5 per day in 2015 to around 1 per day now) as water injection in the Arbuckle formation was cut in half (1.5 MMB/D now versus 2.8 MMB/D in 2015).

February 2017 U.S. Crude Production Rises On Strong Texas

U.S. crude and condensate actuals for February 2017 came in at 9.03 MMB/D, up 193 MB/D month-on-month, down 116 MB/D year-on-year and 160 MB/D above PIRA’s forecast. The miss relative to PIRA’s Reference Case was driven by strong growth from the Lower 48, up 222 MB/D month-on-month, with Texas alone growing 119 MB/D.

Aramco Pricing Adjustments: Further Discouraging U.S. Liftings, Staying Competitive in Asia

Saudi Arabia's formula prices for June were just released. Pricing for the U.S. was raised for the second straight month on all grades as Saudi continues to discourage liftings. Differentials in Asia were cut reflecting a wider Dubai structure, while Europe was tightened in line with a lessening in the Urals discount to Dated Brent. Aside from the tightening in the U.S., the adjustments were reflective of the key regional drivers used to set pricing. As such, Saudi is choosing to remain competitive with market fundamentals as exports have already been cut to agreed levels.

April Weather: U.S. Warm, Europe Normal and Japan Cold

April weather was warmer than normal by 8% in the three major OECD markets, bringing the month’s oil-heat demand below normal by 69 MB/D. The three-region composite was almost 17% warmer on a 30-year-normal basis.

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.

DW Monday, May 1, 2017: Unpicking the Outlook for the OFS Sector

18 1DW Monday Logo PNG 300x75 copyThe oilfield service industry can, at times, be intimidating in its complexity and depth. Furthermore, mega-mergers (e.g. GE – Baker, Technip – FMC, Wood Group – Amec Foster Wheeler) have created a supply chain that no-longer has homogenous competition that can be easily-grouped and segmented. All the leading players in OFS now have a materially different business mix and service line provision.

The launch of Douglas-Westwood’s major update to the Sectors online service provides a good opportunity to reflect on the outlook for the OFS business. We have added expenditure data for 103 service lines to SECTORS, covering Capex and Opex – totalling over $8tn of spend across 2005-2023. Our users are now able to look across multiple industries to create tailored views that fit their needs, rather than applying a ‘one-size-fits-all’ approach that is no longer relevant for many of the larger OFS businesses.

18 2DW SECTORS Database May 2017(Top-Right to Bottom-Left, displayed by DW Region) Annual Drilling Volumes, Annual Drilling & Well Services Expenditure, Annual Oilfield Equipment Expenditure, Annual Offshore Maintenance, Modifications & Operations Expenditure Source: SECTORS Database

The overall story is one of mixed fortunes for the OFS sector. A North American led recovery in onshore drilling activity is expected to boost the onshore Drilling & Well Services (D&WS) sector over the coming years, while offshore spending is likely to be sluggish in rebounding. SECTORS data shows strong growth for D&WS expenditure through to 2023, with a cumulative total of $1.6tn to be spent – 76% of which is allocated to the onshore sector.

Oilfield equipment, on the other hand, is expected to see stagnation in terms of dollar demand through to early next decade before signs of a recovery emerge. This is primarily due to the marked oversupply across the vast scope of equipment covered by the new SECTORS data – comprising 59 equipment components. Most critically, the newbuild offshore rig market (comprising jackups, semisubs, and drillships) is expected to continue to decline from a peak of $24bn in 2013 to just $4.2bn by 2023. This is a result of the substantial number of rigs currently idle, with offshore drilling volumes expected to be insufficient to warrant a new build cycle without wholesale rig scrapping. Similar stories are seen across the oilfield equipment sector, with operators and service companies alike expected to concentrate on bringing idle units back to the market before placing new orders.

In terms of growth rates, offshore MMO looks to be the most promising sector, with a substantial and sustained recovery in expenditure likely to be seen through to 2023. This is a result of the return of previously delayed non-essential workscopes, such as platform modifications, in addition to continued growth in the installed production platform population. This, coupled with the supply chain shifts which have and will continue to shape the MMO sector, presents a prosperous market outlook for Opex focused players within the OFS supply chain.

To arrange a demonstration of the latest SECTORS data, please visit Douglas-Westwood, a Westwood Global Energy Group company, here.

Matt Adams, Douglas-Westwood London

Seadrill - Agreement with Archer

16seadrill logo for web rgb jpgSeadrill Limited ("Seadrill" or "the Company"), as part of its restructuring plans, has signed and closed an agreement with Archer and its lenders to extinguish approximately $253 million in financial guarantees provided by Seadrill in exchange for a cash payment of approximately $25 million. The Company remains in constructive discussions with Archer and its lenders to extinguish the remaining $25 million of financial guarantees in exchange for a cash payment representing 10% of their face value.

As part of Archer's restructuring plans the Company has also agreed to convert $146 million in subordinated loans provided to Archer into a $45 million subordinated convertible loan. The subordinated convertible loan will bear interest of 5.5%, matures in December 2021 and have a conversion right into equity of Archer Limited in 2021 based on a strike price of US$2.083 per share (subject to appropriate adjustment mechanics), which is approximately 75% above the subscription price in Archer's private placement on February 28, 2017.

PIRA Energy Market Recap for the Week Ending April 24, 2017

17PIRALogoAsian Product Markets to Tighten

PIRA expects India’s oil demand to recover and post growth this year as the effect of demonetization wanes. China’s crude imports will stay high this year, supported by rising crude runs and declining domestic crude production. At the same time, PIRA expects China’s net exports of gasoline, kero/jet and gasoil (including blending components) to ease due to the tightening of export quotas. Asian product markets in general look reasonably constructive in 2017.

Henry Hub Gains Assist Broader Price Strength

This month’s average daily Henry Hub (HH) price is $3.09/MMBtu to date, in line with PIRA’s forecast of $3.10. In consideration of the warmer-than-normal temperatures that have been so prevalent this April, the maintenance of price support is remarkable. No doubt, the impact from the early end to heating demand is significant and is the primary factor behind the upwards of 100 BCF of additional storage that will be on hand by end-month. Even so, the broader market price strength seen across most regions — sans the NE — stems from the market’s emphasis on the challenges U.S. balances face for the upcoming injection season tied to structural demand growth amidst the ongoing year-on-year supply losses.

Lower Water Levels Leave Upside to French Peak Prices

French hydro output is down 32% year-on-year month-to-date to 6.0 GW. Our latest Monthly Outlook has assumed that the French hydro situation would normalize by the third quarter, but there are clear risks that the hydro output will remain low in the upcoming months, in France and across South-Western Europe. Under a scenario with lower hydro levels, French gas units, and even more, the French interconnector flows would respond, ultimately impacting prices, especially at on-peak hours.

Coal Markets in Holding Pattern As Queensland Infrastructure Recovers

Physical coal prices and front-end paper prices generally moved lower this week, following news that the recovery in the Queensland rail network will occur ahead of schedule. The coal market has been searching for an equilibrium for nearly a year now, after being swayed by a periodically overheated coking coal market and shifting paradigms in coal demand and supply in China. PIRA believes that the backwardation in coal forward markets is well founded, due to falling import demand in the Atlantic Basin, flagging Indian imports, and a risk that Indonesian exporters will overproduce this year. However, the strength in Asian demand led by China will offer some support to pricing, particularly if PIRA’s bullish outlook on crude oil prices is correct.

Global Equities Post a Mostly Positive Week

Most equity tracking indices posted a positive week. The broad U.S. market rallied almost 1%, with banking, retail, housing, and industrials, all outperforming by a solid margin. Energy was the clear laggard, down -2.2%, while utilities were fractionally changed. International indices also were mostly higher, but tended to lag the U.S. performance.

U.S. Ethanol Prices Increase

U.S. ethanol prices climbed to a record high the week ending April 14. RIN prices were steady. Output and sales of ethanol in the Brazilian South-Central harvest year of 2016/2017 were sharply lower. European ethanol manufacturing margins increased because of lower raw material cost.

Modest U.S. Decline

Overall commercial inventories drew 1.7 million barrels this past week but the crude stock draw of 1.0 million barrels was disappointingly low. Cushing crude stocks drew almost 0.8 million barrels, somewhat more than expected. Overall inventories are now slightly below last year and this deficit should widen with next week’s data. Higher imports and higher runs have eliminated gasoline stock draws for now, while for distillate continued strong demand from improving economic activity (including rig growth) and the start of planting season along with contained imports will limit the extent of inventory builds.

Slowing Appalachian Production Momentum Likely Underestimated

The potential supply impact of an additional ~20 BCF/D of near-term Appalachian takeaway capacity weighs heavily on price structure — particularly beyond the 2017-2018 heating season. Yet, the recent relationship between production and takeaway suggests something more than a “if we build it, they will come” association is at work here. Signs seem to point toward more measured production gains. Moreover, a more rationalized approach to delivering low-cost supply has already tightened balances. Consequently, slower-than-anticipated Appalachian production growth, opens the door to for further upside ahead.

PRB Firm on NG Prices, Little Impact from Cyclone Debbie

With demand entering shoulder season, higher gas prices and cyclone activity in Australia are having a muted impact on U.S. coal market sentiment. Prices, except in the PRB, have been slipping in quiet trade. As with last month, PIRA remains most bullish on PRB prices and we expect subdued market activity in the other U.S. coal contracts until summer.

Financial Stresses Remain Low, Commodities Weaken, but Energy Credit Holding Up

While stresses remain low, there has been an uptick as measured by the St. Louis Fed Stress indicator. The recent disinflation trends have not yet reversed, despite the equity market rally this week. Energy performed very poorly on the week, but is still showing month-on-month gains. Commodities, in general, weakened as noted by the posted declines for the spot commodity index, copper, iron ore, aluminum, and ags.

U.S. Ethanol Production and Stocks Rise

U.S. ethanol production rebounded the week ending April 14, increasing by 7 MB/D to 993 MB/D though several plants remained closed for spring maintenance. Stocks rose by 131 thousand barrels to 23.0 million barrels, up from 22.0 million at this time last year. Ethanol-blended gasoline manufacture increased slightly to 9,044 MB/D from 9,005 MB/D in the preceding week.

Seasonal Japanese Demand Declines Still Tempered and Margins Better

Japanese crude runs rose 37 MB/D on the week. Crude imports rose sufficiently to build crude stocks 2.2 million barrels. Finished product stocks built 1.3 million barrels as seasonal demand declines continue. The rate of seasonal demand declines remains tempered. Margins improved $0.63/Bbl on the week, and while still somewhat subpar, they have improved. Our marketing margin indicators eased again for the third straight week, but they remain slightly above average.

2017 Rate Decline Moderating

The tanker market decline seen from end 2016 moderated in March. The persistent decline in VLCC rates seen since the beginning of the year was halted in April by a flurry of long-haul Atlantic Basin movements to Asia, including U.S. grades and by record imports by China. But the rebound in VLCC rates is unlikely to persist into 2Q/3Q 2017. At the other end of the size spectrum, MR product tanker rates were strong globally in March on heightened activity with rates in the Atlantic Basin rising to multi-year highs, driven by a wide open gasoline arb and rising U.S. exports.

Rough Outage Was Clearly Expected – What Are Markets Expecting Next?

The Rough outage caused little-to-no-uproar in European natural gas prices – it was already priced-in and then some. Rough has been an active and key part of winter infrastructure since 1975, but it’s tired and needs to either be fixed or retire. This winter the U.K. will have to make do without it. Over the past 10 years, the facility has supplied winter months with 25-mmcm/d of gas on average, up to a maximum of just about 46-mmcm/d on peak demand days. These volumes won’t be cheaply or easily replaced - after all, the Rough gas was bought at summer prices and now it will have to be bought at spot winter prices from the Continent or abroad. Problems with the storage facility have been going on for long before last summer and the ailing facility has made it more than clear that problems keep on popping up. Worst of all, the problems may persist forcing the market to look towards a United Kingdom without a seasonal storage facility, but with significantly higher risk premiums come winter time.

Bauxite Trade + VLOC Loss Set to Boost the Cape Market

Cape rates have weakened this month following a drop in the number of fixtures. Cape traffic at Kamsar in Guinea has jumped this month and is developing into a 50 MMmt/year long-haul trade and is now a major driver of Cape demand and prompted PIRA to raise the outlook for rates. The loss of the converted VLOC Stellar Daisy is raising doubts over the continued employment of 50 other similar ships. PIRA believes that Cape freight rates will push higher in late 2017 and outperform current FFA rates.

Chinese Data Upbeat; U.S. Manufacturing Looks for Upturn

Based on the latest GDP, industrial production, retail sales, and fixed asset investment, economic activity in China picked up pace broadly in early 2017. There were three major reasons for this: stronger momentum in construction activity; positive effects from industrial price reflation; and the improving landscape for global trade. Based on expected future trends, however, the pace of Chinese growth will probably moderate somewhat in the coming period. U.S. industrial production for March was weak: the performance of capital-intensive industries was especially disappointing, though energy-intensive industries registered sharp gains. Manufacturing confidence in the U.S. and Europe ran high during April.

Lower U.S. Refinery Gasoline Yield during the Driving Season

Summer grade gasoline season has arrived; terminals need to be ready by May 1, 2017. Typically, refinery yield of gasoline is reduced during this transition period. The average yield decline was 0.6 percentage points between March and April over 2012-2016. With historically high runs expected this summer, refinery gasoline yields will be only around 50%.

LNG Can Run to the Baltics, but Can’t Hide from Central European Hubs

Long considered isolated and squarely part of Gazprom territory – Northeast Europe is diversifying its supply mix and this will eventually impact Central & Western European balances, despite the hopes and dreams of LNG producers. The LNG marketer strategy of placing LNG carefully in isolated and illiquid markets may have somewhat of an expiration date even though it is working reasonably well for now.

Asian Demand Growth: Accelerating Demand Growth Returns

After an expected slowdown, PIRA's update of major country Asian product demand indicates that year-on-year growth has again accelerated. However, the improvement needs to be put in proper context, as it is driven by China’s apparent demand improvement. PIRA had been expecting Asian demand growth acceleration to evolve over the next several months, but the narrowness of the foundation in this month’s snapshot needs to be acknowledged.

Supply Surge Adds Liquidity, Subtracts Contracts, FIDs

The conclusions to be drawn for 2017 are that we are still not in a place where FIDs are expected to be concluded, the Qatar moratorium notwithstanding. Last year only 8.7-bcm/yr. of FIDs were signed according to GIIGNL (Tangguh train 3 and Elba Island). PIRA also has Canada’s 3 BCM/Yr. Woodfibre LNG in its database for FIDs in 2016. Regardless of location, the most critical feature of this new supply will be its unquestionable cost competitiveness vs. other contenders.

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.

PIRA Energy Market Recap for the Week Ending April 17, 2017

13PIRALogoU.S. Commercial Stocks Flat Year-On-Year

U.S. commercial stocks drew 4.7 million barrels this past week, roughly split equally between crude and products. Crude stocks had their first significant weekly stock decline this year and this begins an expected trend for the weeks ahead with next week’s EIA data forecast to show a 4.9 million barrel stock decline. Cushing crude stocks built 0.3 million barrels last week and they too should begin to decline showing a 0.5 million barrel decline in next week’s EIA report. Both gasoline and distillate have had inventory declines for the last 8 weeks and for next week PIRA sees another distillate inventory decline while gasoline stocks are flat. Crude runs were up 760 MB/D year-on-year this past week and with next week’s forecast 240 MB/D run increase, they will be up 840 year-on-year, a reflection of much stronger refining margins and lower outages.

Delays Limit Cross-Border Flows

For much of 2017, net shipments to Mexico have been in a holding pattern, with volumes vacillating tightly between 3.9 and 4.2 BCF/D. Looking ahead, maintenance on Net Mexico this month will likely push volumes below this cemented trend. Thereafter, seasonally growing cooling loads will help drive pipeline utilization higher, with summer heat triggering record export volumes. Nevertheless, recently announced downstream infrastructure delays pose some downside risks to our outlook. That said, with most of the major pipeline delays likely resolved by 2018, a resolution is in sight. Accordingly, while near-term risks to 2017 pipeline deliveries exist, we remain steadfast with our conviction that export growth should approach ~1 BCF/D year-on-year in 2018.

Late Winter March Springs Up

March spot power prices increased from February levels in most Eastern markets as cold weather and the start of an active nuclear maintenance schedule boosted the call on gas-fired generation in the East by 18%. Henry Hub prices recovered above the $3 mark by the end of March as cold weather boosted heating loads while production continued to tread water. Northeast prices topped February averages by ~15%. For the balance of 2017, gas price gains ranging from ~25% in the Midwest and Southeast to over 50% in the Mid-Atlantic region will pressure gas-fired generation, reducing implied heat rates. Margin weakness will be especially pronounced in PJM as the gas buildout continues.

Coal Prices Ease As Market Adjusts to Cyclone Debbie

Seaborne coal pricing cooled considerably this week, as the market seems to be deciding that the impact of Cyclone Debbie on thermal coal balances and prices will not be as severe as previously thought. This was particularly the case for FOB Newcastle prices, which dropped by over $4.50/mt at the front of the curve. In terms of key developments this week, import demand in both South Korea and China for March came in strong, and this resurgence should underpin strength in the Asian coal market. With this backdrop of demand strength, and the actual impact of Cyclone Debbie on thermal output not yet known, PIRA believes that the downward adjustment in pricing this week was an overcorrection.

Court Freezes Diezel Portion of California LCFS

The California Fifth District Court of Appeal issued an opinion in the years-long legal battle between ethanol producer POET and the California Air Resources Board (CARB). The Court found that the Low Carbon Fuel Standard (LCFS) violated California’s Environmental Quality Act (CEQA), focusing specifically on CARB’s flawed analysis of NOx emissions from biodiesel. The Court froze the regulations addressing diesel fuel and its substitutes (i.e., biodiesel and renewable diesel) at 2017 levels while CARB reattempts to fix the violations.

U.S. Ethanol Prices Increase Again

RIN prices climbed the week ending April 7 as the likelihood of a quick change in the RFS waned. The 2017/2018 harvest in the South-Central region of Brazil began. The Latin American country is considering a tariff on U.S. imports of about 20%. European prices continued to slide.

Benign U.S. Inflation; Strengthening Activity in China and India

In the U.S., the Consumer Price Index revealed a surprising drop in inflation during March. A combination of different factors was responsible for this outcome – for example, March declines in apparel and new car prices were a pullback from high inflation readings in early 2017. The bottom line: U.S. core inflation is still remarkably steady on a year-on-year basis, and the underlying price pressure remains under control. In China, latest data on trade, vehicle sales, and oil demand indicated that the economy is in solid shape. In India, weakness in vehicle sales and oil demand during early 2017 will likely turn out to be just a blip.

Wet Forecast Ignored

The corn market’s reaction to a continuing wet forecast after a three-day weekend is certainly disappointing in the early going. Where it was dry enough to plant in states like Nebraska and some parts of Illinois, conditions were described as ideal over the weekend. However, there remains a wide swath of the Belt that’s “unplantable” at the moment with very little relief for the next week.

U.S. Propane Inventories Continue to Draw

Propane inventories continue to be pushed down by exports and products supplied. U.S. stocks totaled 40.4 MMB at the end of last week, down by 1.2 MMB from the week prior. The year-over-year deficit widened by 4 MMB and was 27.3 MMB last Friday. Exports remained in the 900-MB/D range and have been in this range for the past three weeks. There have been about 20 days of supply (adjusted for exports) since the beginning of February.

Seasonal Japanese Demand Declines Tempered, but Margins Soft

Crude runs eased on the week, while crude imports remained low enough to induce another small crude stock draw. Finished product stocks rose modestly off record lows. The seasonal decline in aggregate demand is less than has been seen in past years. Gasoil and kerosene demands are holding up exceedingly well against typical seasonal demand declines. Refining margins eased modestly on the week and remain very mediocre, in spite of the low finished stock position. Our marketing margin indicators eased again for the second straight week, but they remain above average.

Pipeline Delays Signal More Rationalized Supply Growth

If all of the currently Appalachian midstream pipelines commence timely service, the North American market could be awash in low cost gas — quickly tilting the fundamental balance from tightness back into surplus by 2018. This sentiment appears to underpin the sub-$3 prices reflected in the deferred futures contracts. Yet, despite a flurry of recent federal approvals, every road out of the Appalachian basin appears to be plagued with a unique set of challenges, suggesting a more rationalized approach for delivering low-cost supply to the market.

In Spite of Low Water Levels, Growing Swiss Exports to Italy in the Evening Hours

While Swiss nuclear output has recovered to prior year levels, hydro is still a major bullish driver for the Swiss power market. Switzerland has been experiencing very low water levels in its reservoirs over the past few months, while recent flow data also shows Italy still pulling more power from Switzerland this month to meet its evening peaks.

European Carbon Prices Stay Low, Bearish 2016 Emissions Data Released

A lack of recent policy developments and the release of 2016 EU ETS verified emissions data, down about 2.5% year-over-year, has diverted attention away from post-2020 market reform efforts and towards near-term trends. Market fundamentals, driven by declining power sector EU Carbon Allowance (EUA) demand and higher auction volumes, are poor and may be overshadowing a rise in compliance-related EUA purchasing (which occurred in previous years even with year-over-year emissions declines). EUAs are also currently in line with implied carbon prices from coal-to-gas switching. PIRA maintains a generally flat view for EUA prices in 2017. However, positive Trialogue talks on post-2020 reforms in May-June could offer a degree of price support, should policymakers use the bearish 2016 emissions data to focus attention on the need for stronger supply-side reforms.

U.S. Output Plummets

U.S. ethanol production fell 33 MB/D to a 26-week low of 986 MB/D the week ending April 7 as more plants shut down for spring maintenance. The 68 MB/D decline over the past fortnight was the largest ever reported. Domestic inventories drew by 802 thousand barrels to 22.9 million barrels, the largest drop in 48 weeks. Ethanol-blended gasoline manufacture decreased to 9,005 MB/D, down 100 MB/D from a 14-week high of 9,105 MB/D in the preceding week.

Financial Stresses Remain Low and Credit Conditions Constructive

Energy and precious metals performed well on the week, along with many of the debt tracking metrics, both energy and non-energy. Industrial metals, equities and the dollar moved lower. There continues to be unwinding of the “reflation” trade, which was confirmed by the release of inflation expectations by the Cleveland Fed. Disinflation tendencies have reappeared in the U.S. and Europe, though in the UK, implied inflation is continuing its uptrend. Banking stocks have continued to retrench as the yield curve has tended to flatten. Volatility has increased of late, both VIX (equities) and government bond market volatility. The market skew/vix indicator has fallen, which is interpreted as the market pricing in increased tail uncertainty. Even so, financial stresses remain low.

Resource Control Policies Still Loosening, Despite Rising Prices

PIRA’s analysis of resource nationalism around the world indicates that the low oil price environment is causing oil producers to implement more investor-friendly policies. Most notably, a Saudi Aramco IPO appears likely in 2018, while new leaders in Brazil and Argentina are adopting market-oriented reforms. On a broader scale, it will take a few more years of relatively depressed oil prices to overcome long-held tendencies to maintain government control and trigger a more widespread policy shift. Ingrained resource nationalism in Russia and elsewhere has offset attempts to attract foreign investment, while presidential elections in Iran and Mexico could set back efforts to open their oil sectors. But with many exporters forecast to continue running budget deficits, PIRA expects the balance to continue shifting toward policies designed to attract greater foreign and private investment.

April Weather: U.S. and Europe Warm; Japan Cold

At mid-month, April looks to be warmer than normal (-9% versus 10-year normal) in the three major OECD markets with a net effect on oil-heat demand to be -105 MB/D. On a 30-year-normal basis, the markets are almost 19% warmer.

Rough Storage Extended Closure Will Have Ripple Effect on Global Gas this Winter

The U.K. became a little more like Japan this week, as we now have another large gas market with virtually no seasonal gas storage. The U.K. Rough storage facility is not closed for good, but betting on its return anytime soon would not be wise and so we add the U.K. as a potentially larger LNG buyer this winter and beyond. The long LNG market is not exactly dodging a bullet here by adding more U.K. demand into the mix, but every little bit helps.

Global Equities Retrench a Bit

The overall U.S. market fell back on the week. With disinflation influences picking up a bit, the tracking indices of banking, materials and industrials lagged in performance. The defensive indicator held up better than the growth indicator. Internationally, all the tracking indices moved lower, though the World Index, excluding the U.S., was down only marginally.

China’s Crude Output to Stay in Decline Despite Increased Spending

The low price environment of last year hit China’s crude production especially hard. Output fell from 4.13 MMB/D in January 2016 to 3.89 MMB/D in December 2016. With prices near $50 currently, PIRA forecasts less production will be shut in. But a lack of new projects, relatively high cost of production, and a base decline close to 4% per year leads PIRA to forecast that China’s crude production will continue to decline this year and next year. We expect crude output at 3.80 MMB/D in 2017 and 3.77 MMB/D in 2018. Beyond 2018, production is expected to stay relatively flat until 2025.

Rough Outage Was Clearly Expected – What Are Markets Expecting Next?

The Rough outage caused little-to-no-uproar in European natural gas prices – it was already priced-in and then some. Rough has been an active and key part of winter infrastructure since 1975, but it’s tired and needs to either be fixed or retire. This winter the U.K. will have to make do without it. Over the past 10 years, the facility has supplied winter months with 25-mmcm/d of gas on average, up to a maximum of just about 46-mmcm/d on peak demand days. These volumes won’t be cheaply or easily replaced - after all, the Rough gas was bought at summer prices and now it will have to be bought at spot winter prices from the Continent or abroad. Problems with the storage facility have been going on for long before last summer and the ailing facility has made it more than clear that problems keep on popping up. Worst of all, the problems may persist forcing the market to look towards a United Kingdom without a seasonal storage facility, but with significantly higher risk premiums come winter time.

Belarus Gas Price Fixed Until Year End

The price of Russian gas for Belarus will remain at the same level until the end of the year, Belarusian President Alexander Lukashenko said commenting on the results of his recent talks with Russian President Vladimir Putin in St. Petersburg. "The Russian side suggested completing this year the execution of the current contract with Gazprom" Lukashenko said. "I would not say that we managed to achieve the intended result and reach the goal that we had initially set," the president said, commenting on the Moscow talks. "It was a kind of compromise, but a compromise that resulted in the terms that are very favorable for us."

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

DW Monday, April 17, 2017: Will Smaller Hedged U.S. E&Ps Feel the Squeeze as Service Companies Warn of Higher Costs?

14DWMondayNewLast month, Dave Lesar of Halliburton noted that the domestic market is short of fracture (frack) sand, equipment and experienced personnel. The No. 1 North American pressure pumper is adding 2,000 people to the payroll and putting idled equipment back to work at a frenetic pace. While the company continues to place an emphasis on protecting the market share it built up in the downturn, it is also warning of the eagerness of its suppliers to raise prices.

Following the downturn, oilfield service companies slashed prices to survive. Layoffs, asset retirements and CAPEX reductions were all necessary to stay afloat. Since that repositioning for a depressed environment, oil prices have rebounded requiring a ramp up in spending on people and equipment necessary to execute new projects.

So when, and how much of these cost increases for oilfield service companies will creep into the market and out of the pockets of E&P companies? Currently, many small E&P companies are hedging their commodity price positions to raise capital and execute their development programs while minimizing their exposure to volatile revenue streams. On the cost side, improvements have certainly been made in technology and streamlining the supply chain, but the question remains – how much of this can be maintained? Many of the “new normal” breakeven figures coming out are often calculated with respect to a depressed service cost environment.

Some believe that true technological gains might account for as account for as little as 10% (or less) of the service cost savings. But with nearly three quarters of a million barrels per day of daily production hedged this year alone by small to medium sized companies, a sharp uptick in service costs driven by increased activity from a sharp oil price upsurge could put those highly hedged into a bind. Large companies with healthier balance sheets are less likely to hedge large proportions of their production and could absorb (and ultimately create) rising service costs with a sharp uptick in oil prices. But how will smaller hedged companies face this scenario.

One analyst noted, “The only danger is that (hedged) companies will miss out on higher prices if crude moves above $60 per barrel.” This of course assumes that service cost remain manageable.

Andrew Meyers, Douglas-Westwood Houston