Investor & Financials

Cautious Optimism Returns to North Sea – Deloitte

Reacting to the latest Oil and Gas UK Economic Report, that was published on Wednesday September 6, Graham Hollis, Senior Partner for Deloitte in Aberdeen, said:

15Deloitte Graham HollisGraham Hollis, Senior Partner, Deloitte

“A cautious optimism has returned to the industry, as it weathers the storm of the past three years. The latest economic report from Oil and Gas UK demonstrates just how much progress the UKCS has made on reducing operational costs, and the encouraging level to which confidence is returning to the basin – most notably through a significant uptick in M&A activity across the sector. Assets are finding their way into the right hands and a new cohort of private equity-backed businesses is breathing new life into the basin.

“Nevertheless, challenges still remain for the North Sea and its recovery needs to be carefully fostered. The report shows there are a potential £40 billion worth of developments in companies’ business plans – it’s up to all of those involved in the industry to help these come to fruition, requiring a collaborative approach between government, the business community, the supply chain, and wider stakeholders.

“The UKCS is vitally important to our economy and still supports more than 300,000 jobs. To ensure its future, we need to set about anchoring that talent pool in Aberdeen and the surrounding areas. While it will mean keeping the skills we already have, it will also mean ensuring we continue to attract a new generation of talent, which can carve out a new path for the industry in the years ahead.”

PIRA Energy Market Recap for the Week Ending September 18, 2017

16PIRALogoRefinery Margins Remain Strong

Brent prices are effectively range-bound but are forecast to average over $50/Bbl for next few months. We see a relatively firmer near-term price for Brent, weaker for WTI. The U.S. stays in export parity. Narrow crude quality differentials to persist. Hurricane Harvey will cut U.S. crude runs by cumulative 60-70 million barrels resulting in strong refinery margins which will boost European runs. Product stocks will tighten for the next couple of months. Harvey pushed light product cracks higher similar to previous storms (e.g., Katrina) with high a sharp peak that eases in days/weeks. But some lingering strength will remain, particularly for diesel due in part to import pull by Latin America.

U.S. Data Surprise in Various Ways; Chinese Data About as Expected

In the U.S., the latest consumer price data showed a faster-than-expected increase for the first time in six months. The recent behavior of the so-called “sticky” CPI suggests a fading in the disinflationary pressure for the coming periods. Consumer spending disappointed in August. Industrial production also came in below expectations, but this was essentially due to distortions from Hurricanes Harvey and Irma. In China, manufacturing output has remained resilient, while growth in investment has increasingly become slower. Data on vehicle sales and credit were supportive of the growth outlook.

NGL Purity Product Prices Strengthen

Propane prices remain robust at 74% of the crude price. Natural gasoline, butane and ethane prices also had healthy gains last week. Propane storage volumes have grown by over eight million barrels the past two weeks to bring propane stocks in line with the five-year average. NGL raw mix production continues to rebound from the effects of Hurricane Harvey in PADD 3, and total US raw mix production set a new all-time record at 3.9 MMB/D. Gulf Coast petrochemical plants continue making progress in returning to normality, and all but two plants are expected to be back in operation by the end of this week with one of the two plants remaining down scheduled for planned maintenance.

U.S. Ethanol Values Higher the Week Ending September 8

Manufacturing margins in the U.S. rose. D6 RIN prices fell. U.S ethanol exports rose in July. Brazil remained a net exporter of ethanol in September. European ethanol prices bottomed. U.S. biodiesel prices reached a six-month high. Biodiesel manufacturing margins improve for the eight straight week.

Soybeans Remain THE Story

In addition to a strong Real, Brazilian soybean producers might be holding onto last year’s supplies as a sort of insurance policy against continuing dryness in the states of Parana, Goias, and slightly less so Mato Grosso. While both Uruguay to the south and Argentina to the southwest have more than adequate moisture, central Brazil is still waiting for “normal” mid-September rains which have failed to materialize so far and show little sign of arriving anytime during the month of September according to 2-week forecasts.

The Iranian Nuclear Deal Can Survive a Trump Decertification

The Trump administration issued oil sanctions waivers for Iran, as expected, despite President Trump’s clear displeasure with the agreement. But whether Trump will certify Iranian compliance with the JCPOA to Congress in mid-October (required by U.S. law every 90 days) remains the bigger question. Judging from his recent comments, a decertification looks likely. However, this alone would not end the nuclear deal. It would simply give Congress the option to reimpose sanctions, during which time Trump could continue to issue waivers. At this point, we do not believe either Trump or Congress will breach the JCPOA by reinstating nuclear sanctions, given IAEA verification of Iranian compliance and widespread international support for the agreement. But medium-term risks to the JCPOA (and Iranian oil sales) would rise if the U.S. attempts to renegotiate deal terms.

Robust Southeast Asian Oil Demand to Support Regional Market

The product deficits of Indonesia and the Philippines will provide a much needed outlet for surplus refined products in the Asia-Pacific region well into next year, but product imports into Vietnam should be lower in the latter half of 2018 with the start-up of the Nghi Son refinery. In Taiwan, key product exports eased in 1H17, but should increase with ramp up at CPC’s Talin refinery. Global kero/jet demand growth is forecast to remain robust in 2018, and Asia will account for half of the increase. Asia-Pacific net regional exports of gasoline, jet fuel and gasoil/diesel are expected to ease over 2017-18 after a surge last year. Regional refining margins should remain healthy through 2018.

2Q17 U.S. Producer Survey: Supply Recovery Takes Shape…Slowly

Domestic production continued to trend upwards in the second quarter, albeit at a decidedly muted pace relative to strengthening drilling activity during the period. Although production finally eclipsed the year-ago volumes in June, year-over-year comparisons remained negative for the quarter. Still, the surveyed operators grew production by ~0.6 BCF/D during the period, the largest Q/Q gain for the group since 1Q16. It appears that, for now, producers have cleared any residual hurdles to bringing their byproduct to market, as gas production essentially kept pace with oil growth during the quarter. With both Appalachian and associated gas production growth taking shape in the second quarter, further — and greater — gains may soon take hold in the latter half of 2017.

Influence of the Global Gas Revolution on Pricing: Suppliers vs. India Round 2

The revolution of LNG buyers against the historic status quo is heating up on a triumvirate of fronts this summer: commercial, regulatory and political. Nowhere is the carnage as great as on the commercial front, of which pricing is a critical component.

Petronet/Exxon Deal Shows Just How Tough It is for Europe to Land Volumes

Exxon recently renegotiated its LNG supply deal with Petronet, an Indian LNG Importer. The deal not only involved a price cut, but added an extra 1 million tons per year to 2.5 million tons. The price cut seems to put India in a strong buying position relative to the rest of Asia as measured by DES LNG deliveries as a percentage of Brent oil (a common price benchmark for LNG). This is especially true as it has been released that incremental volumes will be sold at 12.5% of Brent. There is a twofold issue here for European markets – a step towards more balanced global markets and a show of how even with price cuts, Asian buyers still have a significantly higher price tolerance. Placing extra volumes in Asia through price cuts will bring regional markets ever closer together, as it represents a reaction to growing oversupply that will further compresses global spreads. Some sellers are more concerned with securing market share than protecting traditional premiums in Asia, as releasing too much unsold volume into the spot market is considered a graver threat to LNG markets in the years to come.

China to Reduce Industrial Gas Prices

China’s National Development and Reform Commission (NDRC) announced that effective September 1 non-residential gas prices will be lowered by CNY100/Mcm ($0.42/MMBtu). The price has been justified by lower pipeline transportation costs as well as a change in VAT calculations for natural gas. The price reduction is around 5% which still leaves prices high by international standards – most city prices are $8+/MMBtu.

Japan Demand Takes a Holiday, before the Holiday

Aggregate product demand plunged 244 MB/D, with sizeable declines in gasoline and gasoil demand. Runs eased modestly, while a surge in crude imports, which was expected, built crude stocks 5.8 million barrels. Finished products built 0.75 million barrels on the weaker demand. Kerosene demand surprised to the upside and yield fell sharply to only 3.8%. Stocks posted a first contra-seasonal draw of 0.2 million barrels (27 MB/D), while the 4-week build rate eased slightly to 73 MB/D. Refining margins were slightly softer, but remain good.

Financial Stresses Very Low, Credit Constructive

Credit conditions remained highly constructive on the week, with the S&P 500 moving to a new record at the 2,500 level. Volatility (VIX) declined and high yield credit prices rose. High yield energy credit did particularly well and driven by a solid gain in the energy commodity space. The dollar generally strengthened. The St Louis financial stress indicator again moved lower after four straight minor weekly increases.

China and Vietnam’s Ambitious Plans for Ethanol Use are Likely to Fall Short of Targets

The Chinese government plans to expand the use of biofuels, requiring that all gasoline contain 10% ethanol (E10) by 2020, though it has yet to announce a formal policy. China’s neighbor Vietnam previously announced its intent to replace RON 92 gasoline with E5 next year and with E10 in 2019. If achieved, these goals would displace billions of liters of hydrocarbon fuel. PIRA believes, however, that these attempts to adopt E10 by 2019 (Vietnam) and 2020 (China) will fall short of their targets. Nevertheless, ethanol consumption will increase in these countries, but not as rapidly as desired.

Spanish Market Bullish on Increased Volatility in French Prices

Despite a relatively wet August and normal rainfall month-to-date, Spanish hydro reservoir levels continue to decline, adding further upside risks ahead for Spanish prices. With Spanish nuclear set to move down in October, Spain will need to import from France in the next month. While we have France still pricing below Spain in October, risks of a further deterioration in French nuclear availability cannot be ruled out.

EDF press release of Sep. 14 is bearish for prices. Despite a large number of new irregularities, EDF has confirmed that all the affected components can be used safely, a statement that will have to be confirmed by ASN, before receiving official clearance. This is the only unclear factor at this point, or to what extent, the operation of the plants could be affected by these additional anomalies.

Loads Washed Out!

Spot on-peak energy prices in Eastern-Grid and ERCOT were unanimously lower year-over-year. Eastern Interconnect average raw loads declined 8.1% year-over-year in August as cooling demand fell from the warmer than normal prior year. Despite declines in raw loads during the last few days in August due to Hurricane Harvey, total ERCOT raw loads in August were about flat year-over-year. The earlier than expected transition into the shoulder season has helped color deteriorating cash prices – with suppressed seasonal demand keeping Henry Hub pricing below the $3.0/MMBtu mark. The return to normal weather during the fourth quarter this year would likely usher in dramatically tighter fuel supply/demand balances. PIRA’s power price forecast though mostly lower than last month, is still above market, driven by higher (than market) gas price forecasts.

Domestic Demand Falls on August Weather, But Exports Remain High

Domestic U.S. coal demand fell on August weather and mild September temperatures signal another fall in coal burn, but elevated exports are keeping prices supported for now. However, slipping seaborne coal prices will hit Appalachian and ILB markets by year end.

EUA Prices Soar Amid Nuke Outages, Trialogue, and Brexit

European carbon (EUA) prices soared in early September on French nuclear uncertainty (impacting the wider European energy complex as well) and progress with post-2020 market reform talks. However, these drivers may not continue to sustain EUA price gains. With no immediate safety concerns, a new regulatory consultation may not lead to new delays/outages to French nuclear gen. Recent substantive developments in market reform talks may limit the upside potential of a final agreement, expected later this year. Parliament’s proposal to protect the EU ETS from Brexit has introduced new market uncertainty. Ultimately, EUA prices may have recalibrated above €6, but with lower potential for gains later this year.

U.S. Industry on the Road to Recovery

Crude runs fell almost 400 MB/D this past week to 14.1 MMB/D which should be the low from Hurricane Harvey as refiners come back online. Next week, runs are set to increase, reducing the extent of light product draws and the crude inventory build. This past week both gasoline and distillate inventories fell sharply for a combined 11.6 million barrel stock decline. Crude stocks built 5.9 million barrels and Cushing crude stocks built 1.0 million barrels this past week. Both are forecast to increase again in next week’s EIA data as flows continue to back up, waiting on the full return of Gulf Coast refining.

NYMEX Weathers Storms, but U.S. Balances Still Hit

The breakout this week might signal a willingness on behalf of the market to put the injection season in the rear-view mirror and focus once again on emerging structural tightness ahead. At a minimum, net increases in price this week appear at odds with the gas demand destruction that has unfolded in September — first, driven by Hurricane Harvey losses in Texas and Louisiana and more recently in Florida, with power outages related to Hurricane Irma. Overall, the storm-related losses have inflated our end-season projection to 3.751 TCF, a notable increase from last month’s 3.695 TCF guidance. For now, our October balances, which assumes 10-year normal temperatures return this year, support upwards of 2.5 BCF/D in year-over-year demand gains in the R/C and industrial sectors. The higher inventory levels likely to be in hand by end-September, however, leave less room for October to underperform, particularly with respect to heating loads next month. With this in mind, we have tempered our Reference Case price forecast for the heating season from ~$3.75 to $3.65/MMBtu.

Coal Market Continues to Ride High

The bullish run in the coal market that has prevailed since early July continued this week, with Atlantic Basin forward prices rising by the largest extent. The demand side continues to support coal balances and pricing, with colder temperatures in Europe and ongoing concerns regarding nuclear and hydro generation pushing CIF ARA higher. Low stockpiles in both China and India have kept Asian coal buying activity relatively strong of late. Despite the fact that coal demand has faded from the summer peak, concerns regarding supply adequacy in the upcoming winter are no doubt at the forefront of buyers’ minds. Forecasts of a colder European winter than last year, following such a strong summer for global coal demand, will prevent sizeable price declines over the very short-term. However, PIRA continues to assume that China’s thermal coal import demand will contract notably over the balance of the year, which should set the table for considerable price weakness throughout 2018.

Global Equities Setting More Record Highs

Global equity markets continue to set broad based record highs in a host of countries and across a host of market indices. In the U.S., the S&P 500 closed right at 2,500 for the first time. The best performers were banking, retail, and energy (+2.3%), while utilities was the lone decliner. Internationally, the best performing tracking indices were China, Latin America, and emerging Asia.

U.S. Ethanol Production Lower the Week Ending September 8

U.S. ethanol output declined by 13 MB/D to 1,047 MB/D last week as some manufacturers reduced production during the extended Labor Day weekend. Total inventories increased by 16 thousand barrels to 21.1 million barrels despite a large decline on the Gulf Coast. The West Coast received approximately 10.6 million gallons of imports. Ethanol-blended gasoline production plummeted for the second consecutive week, dropping to a 27-week low 8,932 MB/D from 9,132 MB/D in the preceding week.

U.S. Refinery Turnarounds: September 2017 – June 2018

Hurricane Harvey brought a number of refinery operations to a standstill, much as occurred in years past such as due to Hurricanes Katrina and Rita. The overall extent of the drop in crude runs ranks with previous events in 2005 and 2008 when overall U.S. downtime exceeded 3 MMB/D during September of those years – average outage of 3.35 MMB/D for the U.S. Hurricane Harvey is expected to lead to a similar average adverse impact on overall U.S refinery operations of around 3.37 MMB/D, with 2.33 MB/D of that in PADD III.

Asian Oil Demand: Growth Falling Back as Expected, with Further Slowing Likely

Our snapshot of Asian oil demand growth has begun to slow as expected, with further easing likely through year-end. Growth in our September snapshot was 956 MB/D, an incremental fallback of -257 MB/D from last month. The key drivers were slower growth in China and India, though better performance was noted in Korea, Taiwan, and Australia/New Zealand, along with a lesser decline in Japan. At this point, we expect further deceleration in the October snapshot.

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 September 5, 2017

10PIRALogoU.S. Stock Deficit Widens Again

Hurricane Harvey has certainly disrupted the lives of millions and led to the shutdown of refiners, steam crackers and other industrial operations. The deluge has created significant problems for refiners from the Houston area east, with Corpus Christi operations being largely spared the worst impact of the tropical storm. For the latest reporting week, which does not show the effects of Harvey, refinery runs increased to a new high of 17.7 MMB/D, driven by strong margins as well as firm demand and exports. Hurricane Harvey has led to a steep reversal in operations with runs expected to fall back to 14.7 MMB/D for the next week. Overall commercial stocks fell by 1.1 million barrels for the latest week, widening the deficit to last year to 70.7 million barrels. Major light products were little changed, with total product stocks up by 4.3 million barrels. This was offset by a 5.4 million barrel drop in crude stocks.

U.S. Manufacturing Margins Improved in August

D6 RIN values were lower. Brazil imposed a 20% tariff on U.S. ethanol imports above 600 million liters per year. Mills in Brazil’s South-Center region produced a higher percentage of ethanol in August. European ethanol prices continued to decline.

Early-Bird Outlook for 2018

A clear path for seasonal price recovery looms considering the positively skewed Y/Y heating demand risks — on top of ongoing structural expansion being driven by the “Big Three” that has been buoying the call on supply for more than a year now. The return to normal weather during the fourth quarter would dramatically tighten supply/demand balances, suggesting that prices will “lift off” well in advance of the official start to the 2017-18 heating season. While a more normal turnover in inventories during the 2017-18 heating season will largely be viewed as constructive for prices, the same cannot be said of the 2018 injection season. Indeed, when coupled with what appears to be an impending new record level of supply growth take root in 2017, the total supply picture is likely to be viewed as too top-heavy.

September RGGI Carbon Auction to Rebound vs. June

The August WCI current and future vintage auctions returned to full subscription, clearing at historic high prices. Auction pricing failed to reach highs seen in July, but is above the expected 2018 reserve price. Coverage ratios were strong and the number of registered bidders increased significantly. Compliance entities secured most of the winnings. Secondary market reaction to the results has been decidedly bullish. With August the second consecutive auction to clear above the reserve price, unsold allowances can start to be re-offered beginning with the November auction. This will increase supply and allow for the surplus/bank to build.

Nuclear Winter

The outlook remains generally constructive for Continental power prices, given the poor status of water reserves in major markets, while more surprises could still surface in the Creusot-Forge saga. The opaque ASN consultation document of Aug. 16 is clouding the French nuclear outlook, but our take is that the review of these irregularities was already underway and so far neither ASN nor EDF have made public specific safety concerns that would prevent plants from operating normally. At this point, with French prices already moving significantly higher, the upside for the winter contracts seems quite limited under normal weather. Our model shows the price impact of extended delays of plants restarts could be more significant in 4Q – in a range of € 6-7/MWh, but the market has already factored in more than half of it. Additionally, 1Q 2018 seems to be already trading at levels compatible with lower nuclear availability. Oddly, 2Q and 3Q 2018 do not appear to be factoring any major nuclear losses.

Disrupted Supplies and Undisrupted Injections Support Pricing

Summer is ending, and Sept. HDDs across Europe come quickly in percentage terms (316% M/M) followed by October in absolute terms (+4,900 HDDs M/M). This will sneak up quickly and will initially be balanced with lower injections. While gas demand has been hurt by a normalization of nuclear supplies, hydro continues to be supportive. This support is particularly true in the next several months, being the traditional seasonal low for hydro production – generally down 17% M/M in September and a further 10% M/M in October. Storage injections outturned 30% higher than forecasted in August at 13-BCM. German injections have been the second highest injection month ever. In addition, Austria, Denmark, Hungary, Poland, and Slovakia each had their top or second highest injection month. Up to this point in injection season, over 26.5 BCM of gas has been injected into storage in Northwest Europe, with another 5.1 BCM forecasted by PIRA on the way - contracting forward spreads. Additionally, as gas continues to price itself against coal, it becomes increasingly sensitive to developments in Asian coal restocking in the coming months that may continue to be quite supportive.

Temperatures and Prices Reach Triple Digits

Heat waves bookended August weather with temperatures reaching triple digits in California and Northwest load centers. CA ISO on-peak block prices breached the $100 mark on several days with DA LMPs for early evening hours in the CA ISO markets clearing in the $300-500 range. WECC US loads rose by 3 aGW from the prior year while hydro gains dwindled to just over 1 aGW. Solar output rose by nearly 1 aGW but nuclear generation declined due to an outage at the Columbia Station. As a result, coal-fired output was up and gas nearly matched its prior year level on average, far exceeding it on peak days. Bullish weather patterns are forecast to continue into September. The extended outlook for 2019 is for market implied heat rates to remain stable as neither gas prices nor resource mix are expected to change significantly.

U.S. Coal Stockpiles Continue Downward Trajectory

June 2017 electric power sector stockpiles came in at 160.5 MMst according to the EIA’s August 24 data release, down 4.4 MMst M/M. That was less than the five-year average M/M stock draw of 6.3 MMst for June, but put stockpiles 6% below the five-year average for the month. PIRA has estimated a July stock draw of 12 MMst, which exceeds the five-year average but falls short of last year’s nearly 14 MMst decline (a bullish draw that stoked 2016’s rally in coal prices). The M/M decline in stockpiles in July is typically the largest of the year and has averaged ~11 MMst over the most recent five-year period.

Japan Coming off the Holiday, Gasoline Demand Still Soft, Gasoil Rebounds

This week’s data takes us further from the mid-August holiday period. Total commercial stocks drew 2.35 million barrels, with both lower crude and product stocks, and a rebound in major product demand, in part due to much higher gasoil demand. Crude runs dropped 77 MB/D from peak levels. Gasoline demand fell back a modest 8 MB/D, but is still seen as soft. Gasoil demand rebounded sharply from its holiday induced low. Refining margins have continued to perform well and remain supportive of the high level of runs. Higher levels of maintenance and a tempering in runs should support margins, while demand softens a bit.

Familiar Sight in U.S. – Solid GDP / Job Growth, and Wage Riddle

The U.S. economy has appeared to be in good shape for a while – and after this week’s data releases, the picture looks even better. GDP growth for the second quarter was revised up, and growth for the third quarter is shaping up to be solid. As for the August labor market report, private-sector job growth was healthy, the unemployment rate stayed low, and wage pressure was absent. Going forward, Hurricane Harvey will create noise for a short period for some data. Outside the U.S., Chinese business confidence surprised positively in August. Canada and Brazil reported positive GDP data, but India disappointed.

Hurricane Harvey Shutters 50% of U.S. Steam Cracker Capacity

Hurricane Harvey’s historic rainfall caused the shutdown of 70% of Texas Gulf Coast steam cracker plant capacity, which represent 50% of total U.S. steam cracker capacity. The corresponding decrease in ethane demand was 550 MB/D. The duration of cracker outages will depend on any damage sustained at the plants and other infrastructure such as pipelines and terminals returning to service. Mont Belvieu ethane prices were down due to slack demand, while each of the other NGL purity products prices strengthened. Shipping terminal outages reduced Gulf Coast exports last week and also will reduce exports this week. However, global demand for U.S. LPG remains seasonally firm even in the face of challenging arbs.

Hurricane Harvey Offers Glimpse into Global Gas Loss Potential

In the wake of Hurricane Harvey, which swept through one of the world’s main energy producing hubs, much of the focus has been on the oil front in terms of US refining capacity outages owing to the seasonal impact of potential gasoline shortages in the final weeks of US summer driving season. And on the US domestic gas front, the concerns are heightened by the fact that compared with previous storms, much more US domestic gas production is in the South Texas/ Houston area and subject, for now, to force majeure.

Cape Freight Rates Ride a Wave of Chinese Speculation

Capesize dry bulk freight rates surged over the past month due to a variety of factors. Another bout of commodity speculation, and shift if steelmaking process in China certainly were major factors in lifting rates. On the supply side the expansion of the fleet has at least temporarily halted, driving up prompt rates and FFAs PIRA expects Cape rates to stay high over the next two months and to then fall back.

Global Equities Post a Positive Week

Global equity markets generally posted another positive week. In the U.S., among the tracking indices, housing, technology and materials did the best and outperformed. Energy posted a gain of 0.9%, but underperformed. The international tracking indices also generally gained on the week, but underperformed the U.S. Emerging Asia did the best, but underperformed the U.S. market.

Production and Supply Decreases

U.S. ethanol production declined the week ending August 25 (before the impact of Hurricane Harvey), falling 10 MB/D to 1,042 MB/D. The largest drop occurred in PADD III as some biofuel manufacturers near the coast prepared for the arrival of hurricane. Total inventories fell by 206 thousand barrels to 21.3 million barrels. Ethanol-blended gasoline production jumped to a nine-week high 9,447 MB/D from 9,392 MB/D during the preceding week.

Coal Pricing Remains Elevated, Downside Risks Gather

Coal pricing was mixed in August, with surging dry bulk freight rates pushing CIF ARA prices substantially higher, while the end of the Asian heat wave saw Pacific Basin price strength ease. While upside price risks remain, and should be respected for the prompt market, rising supply and easing demand fundamentals should see prices over 4Q17 into 2018 fall below market forwards.

U.S. Shale Oil Breakevens Down Despite Higher Costs

PIRA expects costs to increase by an average 11% between 2016 and 2017 driven primarily by tightness in fracking equipment (pressure pumping and proppants). However, continued improvement in well productivity appears to more than offset cost inflation. PIRA forecasts U.S. shale oil breakevens to be slightly lower in 2017 versus 2016. PIRA also forecasts U.S. shale oil production to continue to rise despite the recent flattening in oil rig growth.

Credit Conditions Remain Constructive & Stresses Low

It was generally another constructive week for financial stress with the S&P 500 gaining week-on-week, along with lower volatility (VIX), positive performance on credit pricing and commodities. The St Louis financial stress indicator posted a fourth straight weekly rise, but stress indicators remain very low.

U.S. Production in June Falls on Alaska and Gulf of Mexico Maintenance; Growth Slows in Texas

U.S. crude and condensate actuals for June 2017 came in at 9,112 MMB/D, down 72 MB/D month-on-month, up 164 MB/D year-on-year, and 73 MB/D below PIRA’s forecast. The miss relative to PIRA’s Reference Case was primarily due to Texas and the Gulf of Mexico.

Refined Product Implications/Outlook After Hurricane Harvey

Hurricane Harvey has finally moved on, but it has left record flooding in its wake. The impact has come as a wave starting in South Texas near Corpus Christi where it made landfall. Then, it moved on to horrific flooding near Houston and finally in the Beaumont/Port Arthur area in eastern Texas. PIRA has tracked the refinery outages and based on what information is currently available made an estimate for the likely recovery refinery-by-refinery. This is of course a preliminary estimate based on what we know now and it assumes that no major long-term damage will be found.

Tighter to Asia, but Reflective of Market

Saudi Arabia's formula prices for October were just released. Pricing offsets to Asia, vs. the Oman-Dubai benchmark, were raised for the second straight month, but generally reflective of less contango in the Dubai pricing structure. Pricing into the U.S. was raised on the lighter and heaviest grades, but left unchanged on Arab medium, which is key competing grade vs. the domestic barrel (Mars). There appears no consideration in setting prices with regards to hurricane Harvey. European pricing on Arab light was reduced $0.10/Bbl, but a widening in the Urals discount vs. Dated Brent would have suggested a slightly larger reduction.

High Utilization Rates Required in Swing Refining Capacity

Refinery utilization rates since 2015 are holding near “Golden Age” levels in swing refinery capacity. Utilization rates outside of these areas are lower, depressing global averages, but that has limited impact on market pricing since much of it cannot be brought to bear. This is a key factor supporting refinery margins.

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 August 28, 2017

17PIRALogoSurplus Stocks Substantially Reduced but Paper Supply Limits Upside

The global economy is accelerating. Oil demand is strong, helping to substantially reduce surplus stocks. Third quarter surplus stocks are expected to decline significantly, and much of it will be crude oil. But the largest surplus stock decline will be behind us after the third quarter because of increased U.S. shale oil production. Surplus stocks will stay a feature of the market through 2018, limiting the ability of crude oil prices to be backwardated. This particularly applies to WTI but much less so for Brent.

Tanker Rates in Crude Sector Stuck Near or Below Cash Breakeven Levels

Strong compliance to OPEC production agreement and fleet capacity growth have pushed crude tanker rates down to seasonal lows near cash break-even levels.

As Buyers Sharpen Pricing Terms, Suppliers Stall

The U.S. is the primary progenitor (with 80%) of the 53-mmcm/d of new volumes to appear in the Atlantic Basin to date in 2017, and concerns about the ability of buyers to keep buying at this level are growing. The third round of delays announced by Sempra recently on the 18.6-bcm/yr. three train U.S. Cameron project may well be more than just routine.

September RGGI Carbon Auction to Rebound vs. June

The August WCI current and future vintage auctions returned to full subscription, clearing at historic high prices. Auction pricing failed to reach highs seen in July, but is above the expected 2018 reserve price. Coverage ratios were strong and the number of registered bidders increased significantly. Compliance entities secured most of the winnings. Secondary market reaction to the results has been decidedly bullish. With August the second consecutive auction to clear above the reserve price, unsold allowances can start to be re-offered beginning with the November auction. This will increase supply and allow for the surplus/bank to build.

Economic and Market Data Both Suggest Healthy Growth for Trade

This week’s calendar featured crucial data releases from the U.S., Europe, and Asia. U.S. durable goods shipments and orders pointed to a strengthening in business investment, and the German IFO index hinted at solid growth in economic activity. Industrial production from Taiwan, however, was somewhat disappointing. Meanwhile, growth in global trade volume continued to accelerate in recent periods. Based on historical relationships, trade activity is likely to remain healthy in the second half of the year.

U.S. Stock Deficit Continues to Grow

Overall U.S. commercial inventories were flat last week, but nevertheless widened the year on year stock deficit by another 6.6 million barrels to 65.0 million barrels, or 4.8%. Four week average adjusted demand is inexplicably weak, given the strong U.S. economy, with demand essentially flat year on year. With refinery runs remaining very high, light product inventories were basically flat, though gasoline stocks did decline by 1.2 million barrels. For next week’s EIA data PIRA sees light product inventories modestly declining as demand strengthens. High runs cause crude stocks to substantially. All eyes will be on Tropical Storm Harvey since it could substantially impact refinery operations and trade.

Steam Cracker Margins Increase with Olefin Prices Outpacing NGL Feedstock Prices

NGL prices closed the week lower, except for propane, following the lead of declines in crude prices. On the other hand, propane prices increased 0.8% week-on-week due to seasonally strong demand and exports. With strength in olefin and aromatics prices, steam cracking margins increased from 13% (ethane) to 66% (normal butane) The Asia LPG arb remains closed, and current movement in Asian prices suggests no improvement in the export outlook. Reduction in domestic petrochemical demand and in export loadings due to Hurricane Harvey will likely outpace production shut-ins, leading to a strong storage injection of propane this coming week, pressuring propane prices, compared to crude.

U.S. Ethanol Prices Tumble

U.S. margins for manufacturing ethanol improved the week ending August 18. D6 RIN prices fell. A Federal Court vacated EPA’s denial of Sinclair Oil’s request for a small refiners exemption from the Renewable Fuel Standard. Brazilian ethanol prices rose as ethanol manufacture became more profitable than sugar production. European ethanol prices dropped to a four-month low.

Big Week of Corn Pricing Ahead?

With Crop Tour over, corn is looking at a big week of pricing with these so-called deferred pricing (DP) contracts rolling off as the Marketing Year comes to a close on Thursday. While it’s impossible to quantify exactly how many bushels need to be priced this week, a country elevator operator in Kentucky told us over the weekend that his operation alone has about 1.5 million bushels to price before Thursday and confided he’s a “bit nervous” about how many other elevators are in a similar situation.

The U.S. to Become North America Oil Independent by 2019

PIRA forecasts the U.S. to become a net oil exporter by 2023, as rising shale liquids output continues to outpace oil demand growth. In the meantime, rising Canadian imports will make the U.S. a net oil exporter to the world outside North America by 2019. Lower oil import dependence will likely have political implications, including a growing temptation to use SPR sales to fund non-energy items. Calls for a reduced military presence in the Middle East could also grow louder.

Cash Prices Retreat Amidst Unseasonably Mild August

Yesterday’s EIA lighter-than-consensus build in the mid-40s failed to stimulate NYMEX buying. Following yesterday’s decline, the nearby contract is now back trading toward the lower end of the weekly range at ~$2.90/MMBtu. In the context of the general trend in prices this summer, the season has thus far proved disappointing for gas bulls. Despite the fact that the population-weighted cooling degree days (CDDs) from June to August will likely register in the top twenty hottest on record, the heat has been restricted to the West. Moreover, the numbers are beginning to fade with August stand-alone CDDs now on track to be down Y/Y by ~20%, thanks to the likely ~10% shortfall versus the 10-year normal tally. As a result, physical prices are already facing downward pressures ahead of the normal seasonal falloff.

Newer Small Markets Come to LNG’s Rescue

Could we look on Pakistan, Thailand and Bangladesh for 2017-18 to be the Kuwait, Egypt and Jordan of 2016? How far will they go in trying to balance the market with the issues we have raised in our recent publications – slower Indian demand, the full force of Australian supply, and Japan and Korea trying to get rid of destination clauses? They will go far, especially in the short term though Dec. 2018.

As German Thermal Stack Steepens, More Bullish Risks Emerge for September

German baseload prices have been generally on a bearish trajectory so far in August, with month-to-date base prices well below our expectations. However, the hourly pricing has displayed great volatility, with hour 12 on Aug. 11 reaching €61.4/MWh, the highest level for August since 2013. Such an extreme settlement comes less than two weeks after the plunge to -€67.1/MWh, an all-time low for 3Q, while a repeat of negative hours occurred again on Aug. 19 and 20. While negatively priced hours are a rare occurrence in the summer months – the latest being in 2014 – the high price settlements seen throughout the month are perhaps more surprising and warrant closer attention.

Unusual Storage Inflexibility Driving High Prices

If current trends in storage nominations persist, it would be highest ever month-on-month change in injections and some of the highest ever seasonal injections. These injections have been surging, as German spot has been converging on local and British first quarter pricing. As you can see in the chart below, in the €3.50/MWh to €4/MWh range, injection sensitivity to pricing was relatively comparable to last year, but from there on, divergence only grows as pricing for spot and 1Q converges – making for a somewhat puzzling situation. The logic in evaluating this spread is that Germany is an important balancing market for peak winter across N.W. Europe, combined with the fact that the U.K. will be an important market draw for Continental storage with the loss of the Rough storage facility.

Bullish Momentum in the Coal Market Eases

Coal prices were relatively tame this week compared to the past several weeks of active bullish momentum. While CIF ARA prices tacked on $1.00/mt at the front of the curve, price gains moderated further along the curve. Prompt FOB Newcastle forward prices declined W/W this week, after rising by over $3.00/mt last week. The market seems to be looking for signs that tightness in the prompt is easing after such an extended run. PIRA continues to caution that after an extended period of tightness, prices remain susceptible to spikes if there are unforeseen interruptions in supply or if the Northern Hemisphere summer ends with a heat wave. However, PIRA believes that as the calendar turns into 4Q17, bearish price risks will surpass bullish ones.

WCI Carbon Auctions Clear at Historic Highs

The August WCI current and future vintage auctions returned to full subscription, clearing at historic high prices. Auction pricing failed to reach highs seen in July, but is above the expected 2018 reserve price. Coverage ratios were strong and the number of registered bidders increased significantly. Compliance entities secured most of the winnings. Secondary market reaction to the results has been decidedly bullish. With August the second consecutive auction to clear above the reserve price, unsold allowances can start to be re-offered beginning with the November auction. This will increase supply and allow for the surplus/bank to build.

Japan Holiday Impacts Noted, Gasoline Disappoints

Two weeks of data were reported due to the holiday period. Much of the data performed along seasonal trends. Runs continue rising post-turnaround with almost all capacity back onstream. Crude imports were very low and then surged, so stocks drew sharply and then built. Finished product stocks rose along seasonal lines, with middle distillate builds being the driver. Aggregate demand fell both weeks and was a bit weaker than seasonal norms. Gasoline demand failed to exhibit holiday uplift and declined both weeks. Gasoil demand held up reasonably well the first week and then predictably plunged. Refining margins have continued to perform strongly and remain supportive to rising runs, for the moment.

Generally Positive Week for Credit and Financial Stress

It was generally a constructive week for financial stress with the S&P 500 gaining week-on-week, along with lower volatility (VIX), positive performance on credit pricing and commodities, and a lower U.S. dollar. The St Louis financial stress indicator posted a third straight rise, but stress indicators remain very low.

U.S. Ethanol Production and Stocks Fall

U.S. ethanol production declined by 7 MB/D to 1,052 MB/D the week ending August 18, though output was still the sixth highest ever reported. Total inventories fell by 319 thousand barrels to 21.5 million barrels, with draws in the East Coast, Midwest and Gulf Coast. Ethanol-blended gasoline production was relatively flat, increasing slightly to 9,392 MB/D from 9,383 MB/D in the preceding week.

Crops Need Some Time

Both legs of the 2017 Tour, which had a record number of scouts pull a record number of samples this year, ended Thursday night in Rochester, Minnesota with a general consensus that soybeans were the story and many areas from Ohio to Minnesota need some sunlight and heat to finish or risk getting smaller. While a cool “break” was welcomed in August, a continuation of that pattern along with cloudy skies for an extended period of time, may have a negative effect on the yield estimates made this week.

RGGI Announces Program Changes

RGGI announced a consensus on “draft program elements”, seeking comments in advance of an end of September stakeholder meeting to discuss a revised Model Rule for adoption by individual states. It will help inform participants in the upcoming allowance auction. Agreement on a “full” banking adjustment starting in 2021 provides bullish sentiment, while PIRA believes that the size of the price-supporting Emissions Containment Reserve may not be large enough to ensure a strong impact on pricing, at least initially. The proposed approach will work to narrow the allowance surplus, but does not require dramatic emissions reductions vs. expectations.

Greater Weight to Developing Countries Lifts World GDP Growth Rates

PIRA has updated the global contribution of all the 142 individual countries it covers to reflect the new purchasing power parity results from the World Bank’s 2011 International Comparison Program (ICP). By incorporating those results, the impact raises the importance of developing countries, relative to the traditional OECD basket of countries. The overall impact raises global GDP growth going forward about 0.1%, each year. It does not impact the actual forecast of individual country GDP growth, nor the energy consumption figure associated with that growth. It also changes regional global aggregates to the extent those regions have greater contributions from developing countries, relative to developed countries.

Global Equities Post a Positive Week

Global equity markets generally rebounded on the week. In the U.S., among the tracking indices, retail and banking did the best and outperformed. Consumer staples declined and underperformed, while energy was a slight outperform, up 1.1%. The international tracking indices did even better than the U.S., with China, emerging markets, and emerging Asia were the best performers.

First Take on Hurricane Harvey Market Implications

Without knowing the duration of market disruption it is hard to judge its lasting impact but here are some initial thoughts. With a substantial amount of Texas refinery capacity shut down, crude demand in the United States will fall, backing up U.S. and Canadian supplies feeding the USG into northern storage in Cushing, other PADD II and Canada. Offshore crude inbound to the USG will stack up on the water. This will weaken WTI time spreads, and weaken WTI and Canadian grades relative to offshore crude (Brent). With some crude pipelines shut down, especially from Eagle Ford and West Texas, production will likely also face temporary losses, particularly in Eagle Ford, but not as much as crude refinery capacity closed. As the storm moves east more Texas, and perhaps Louisiana, refineries are possibly at risk.

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 August 21, 2017

16PIRALogoLatin American Refining Problems Lead to Strong Imports

Refining problems continue in Latin America. PIRA expects 3Q17 Latin American crude runs to average 180 MB/D down year-over-year. Salina Cruz restarted in late July but 3Q17 Mexican runs seen 30 MB/D lower year-over-year. Brazilian crude runs are expected to be flat year-over-year in 3Q17 but 150 MB/D higher year-over-year in 4Q17. Colombian crude runs are projected at 15 MB/D lower year-over-year with Barrancabermeja set to undergo a number of planned outages through the end of the year. Latin American gasoline demand is softer year-over-year. Distillate demand is projected to be flat year-over-year in 3Q17 but recover in 4Q17. PIRA expects gasoline imports to stay strong. Similarly, distillate imports are projected to be 115 MB/D higher year-over-year in 3Q17.

Mixed July Data from the Two Biggest Economies in the World

Chinese economic activity data for July were mixed. Statistics for the investment and housing sectors turned sharply weaker compared to the first half of the year. Vehicle sales data, on the other hand, were constructive, and suggested strength in consumer spending and industrial activity. All in all, given available information, it appears likely that economic growth in the second half of 2017 will be slower compared to the first half. In the U.S., retail sales for July were solid, suggesting strength in consumer spending. Manufacturing output was sluggish, while housing starts for single-family units were solid.

Ethane Prices Strengthen with Steam Cracker Capacity Coming Online

NGL prices were up last week with the exception of propane. Ethane prices gained on expectations of stronger demand from the ramp-up of Dow’s new steam cracker this fall. Propane prices fell in step with the decline in WTI crude prices and a 1.6 million barrel stock build. Waterborne LPG exports of 757 MB/D met our expectations and are expected to decline to about 650 MB/D for the week ending August 18. Steam cracker margins strengthened with increases in olefin co-product prices outpacing gains in NGL feedstock prices.

U.S. SPR: 14 MMBbl Likely to Begin Hitting the Market in 4Q17

The DOE will issue a Notice of Sale in late August for 14 million barrels of SPR sales in Fiscal 2018 (October 2017-September 2018). Judging from the timeline of similar transactions already completed in Fiscal 2017, we can expect the 14 million barrels to hit the market between October 2017 and February 2018. Additional sales are possible on top of this in Fiscal 2018, to help modernize the SPR infrastructure. $375.4 million (~6.3 million barrels) of such sales were already completed in Fiscal 2017. An additional $1.62 billion is permitted through Fiscal 2020, but must be allocated through the uncertain budget appropriations process.

Mexican Market Perhaps Bigger than Expected

PIRA’s bullish view on long-term price formation (relative to the strip) is fortified by growth in structural demand, with capacity driven expansions expected to appreciate significantly in the coming years. A key component to this view is growth in exports to Mexico — an important demand source for U.S. production. Indeed, net pipeline flows have increased four-fold from the start of the decade — from a 1 BCF/D annual average in 2010 to an annual figure in 2016 just under 4.0 BCF/D. Moreover, PIRA anticipates exports to swell to ~6 BCF/D by the end of the decade. Given this growth, PIRA welcomed the opportunity to attend the inaugural U.S. – Mexico LDC forum held in San Antonio earlier this week — where key trends and insights emerged.

India’s Industrial Sector Makes or Breaks Future LNG Consumption

Great expectations persist for India as a potential large scale LNG growth market in the long term. This year those promises have been dashed. With essentially no growth, India has been the weakest performing Asian market in a region that has overall seen extremely robust demand growth across the board from Japan to Pakistan. If this continues, winter balancing will be more difficult than usual.

July Coal Burn Falls Year-Over-Year, But Exports, Lower Stocks Boost Prices

U.S. coal prices rose on the month across the board, despite the fact that coal-fired generation was 6% lower year-over-year in July and was 13% below five-year average coal burn for the month. U.S. thermal coal exports that ran at elevated levels in June (up 1 MMst year-over-year) and a downward trend in stockpiles kept prices supported.

U.S. Ethanol Prices Reach 15-Week High

For the week ending August 11, U.S. ethanol values reached the highest level in 15 weeks. Margins for manufacturing ethanol improved. D6 RIN values jumped after a court vacated the 2016 biofuel requirements. Brazil sugarcane processing in the South-Central region was a record volume in the second half of July. European prices dropped to a 15-week low.

Asia’s Intake of Alternative Crudes to Rise as OPEC Cuts Restrict Mideast Supply Growth

Global stock surplus eased sharply in 2Q17, but declines will be more gradual over the next few quarters despite healthy demand as global supply growth increases. In the Asia-Pacific region, net crude imports increase by ~0.8 MMB/D in 2017 with higher refinery runs and lower local production. Asian refiners will seek to increase their intakes of alternative crudes as OPEC cuts continue to restrict Mideast supply and U.S. exports grow. Asian refining capacity continues to expand with more FCC units added in response to strong gasoline demand growth. Overall, Asian refining fundamentals should generally be constructive through 2018 as demand growth is expected to outpace incremental refinery runs.

Global Equities Generally Ease Again

Global equity markets generally fell again, though the international tracking indices performed better than the U.S. market. Gains were noted in emerging markets, China, and emerging Asia. The U.S. and Europe both declined about -0.5%. In the U.S., utilities posted a gain of 1.4%, while technology and consumer staples were unchanged and outperformed. Retail, energy, and housing all posted significant declines and underperformed.

Curve Indicating Heavy September Norwegian Flow

Nearly all of Europe, except for Spain, the U.K., and France, are having significantly greater than normal injections this month. Given current curve shaping, these high injections should be set to continue. During the market’s most recent bullish run, spot pricing in the U.K. has gone up 15% and TTF up 10%. Not only is this raising the level of overall pricing, but it is starting to encourage ever more Norwegian gas. Last August and September came with big Norwegian cuts, as spot levels got ever cheaper versus the curve in combination with maintenance. A year ago, front month encouraged significant North Sea cuts with the front month September contract trading as low as 10p/th below Summer 2017 and spot was trading as low as 15p/th below Summer 2017. Fast forward one year, spot and front month September is now around 3p/th over Summer 2018 – this should ensure significant export from Norway.

MA Finalizes New CO2 and Clean Energy Trading Programs

In response to the 2016 MA Supreme Court ruling requiring declining annual GHG limits to comply with the Global Warming Solutions Act, the MA DEP finalized a suite of GHG regulations (for power, transportation, natural gas distribution, etc.). Key power sector regulations include a new trading program for CO2 and a Clean Energy Standard. PIRA expects the CO2 cap to be binding through 2020, with allowance prices reflecting the cost of incremental generation from neighboring states, putting mild upward pressure on RGGI emissions. The Clean Energy Standard is expected to pressure Class I REC balances and pricing in the medium term, until supply from long-term procurements comes on line. The final solar SMART regulation is ultimately expected to supply the state with 2 TWh annually.

Strong Demand and Tight Supply Combine to Push Coal Prices Even Higher

The bullish run for coal prices continued this week, highlighted with physical FOB Newcastle prices for September delivery rising above $100/mt. Persistent labor strike activity at several Glencore-controlled operations in Australia has exacerbated the prevailing tightness in the Pacific Basin, and the release of strong demand data from China added further bullish momentum to pricing. Not surprisingly, FOB Newcastle forward prices rose by the greatest extent, rising by over $3.00/mt at the front of the curve, and over $2.00/mt at the back. Price gains for FOB Richards Bay and CIF ARA forwards were muted by comparison, although they were still considerable. The need for prompt supply in the Asian market is the driving force in the coal market, illustrated by in the $16/mt of backwardation in the FOB Newcastle curve between 4Q17 and 4Q18 prices.

Uncertainties Loom over French Nuclear Output, as ASN Issues New Guidelines on Review of Creusot-Forge Components

While early last week PIRA had already pointed out the looming uncertainties over the French nuclear outlook, the ASN has now published on Aug. 16 a consultation document requiring EDF to review all the components manufactured in the Creusot-Forge plant and installed across the fleet. Based on this document, EDF would now be required to submit the results of these reviews two months ahead of the planned restart of the reactors scheduled for maintenance, with the review process to be completed by the end of 2018. While irregularities in the quality control of the manufacturing of these components were found a while back in 2016, this formal review has fueled further fears that French nuclear output could remain at levels in proximity of the multi-year lows of 2016.

U.S. Stock Deficit Widens

Overall commercial stocks drew 7.3 million barrels last week, widening the year-on-year stock deficit to 58.5 million barrels, or 4.3%. Gasoline and distillate stocks were relatively flat while crude oil inventories continued their relentless decline, falling almost 9 million barrels and widening the deficit to last year to 24 million barrels, or 4.9%. Cushing crude stocks built 0.7 million barrels for the second consecutive weekly build, but for this week’s EIA data they should show a large decrease as flows to this important regional market sharply decline. Overall crude stocks should continue declining this week, while all three of the major light products are expected to show small stock declines as demand strengthens.

U.S. Ethanol Production Surges

U.S. ethanol production soared last week, rising 47 MB/D to a near-record 1,059 MB/D. This was the largest weekly increase in output since April 2013. Total inventories built by 481 thousand barrels to 21.8 million barrels, despite a 648 thousand barrel draw in PADD I. Imports (37 MB/D) were reported for only the third time this year. Ethanol-blended gasoline production jumped 87 MB/D to 9,383 MB/D.

U.S. Shale Growth Continues

The second quarter saw continued growth in U.S. shale crude and condensate production as a result of higher rig counts and continued efficiencies. Compared to 1Q17, production in 2Q17 increased by 7% (+280 MB/D) and averaged 4,540 MB/D in the quarter. Horizontal oil rigs in shale plays increased 25% from the previous quarter. Most operators across all major shale oil plays continued to report higher well IPs, longer well laterals, larger frack jobs and new wells exceeding Type Curve forecasts. With the exception of Pioneer, most operators that we follow kept or increased their 2017 production guidance. About half the operators we cover reduced Capex as a result of continued efficiencies (same or better production growth with less investment). Efficiencies appear to be offsetting service cost inflation.

Financial Stress Generally Increase Again, but Mixed

Stresses again moved higher this past week, with the St. Louis financial stress indicator posting a second straight rise and the broad equity market moving lower. Other indicators fared better, with week-on-week volatility (VIX) lower and high yield (HYG) debt modestly higher. Commodities were lower by -0.6%, with energy showing slightly lesser declines. The dollar was, on balance, slightly stronger.

Asian Oil Demand: Hitting Peak Demand Growth, Slowing Expected

PIRA’s snapshot of Asian oil demand growth continues to show a third straight broad based improvement. Growth in PIRA’s August snapshot reached 1,213 MB/D, an incremental gain of 120 MB/D from last month. The key drivers were faster growth for China and Australia/New Zealand, along with lesser declines in Japan and Taiwan. Growth for India and Korea slowed. Performance has generally been along PIRA’s expectation. At this point, there should be deceleration in the September snapshot and then further slowing in 4Q.

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 August 14, 2017

16PIRALogoU.S. Stock Deficit to Last Year Continues to Widen

Commercial oil inventories resumed their decline, falling 4.6 million barrels this past week led by a 6.5 million barrel decline in crude oil. The stocks of the four major products built 1.9 million barrels last week, the first build in eight weeks, and gasoline contributed 3.4 million barrels, a hefty build after seven consecutive weekly declines. Cushing crude inventories have generally drawn since early April and this past week they had their first significant build of 0.6 million barrels; next week’s inventory is forecast to show a slight increase, as the HollyFrontier Tulsa outage continues. Crude inventories are forecast to show another substantial decline next week.

Summer Over Already?

Spot on-peak energy prices were lower y/y (but higher m/m) in most Eastern markets with a few notable exceptions. Loads in the East fell by 2.8% as cooling demand fell from the warmer than normal prior year. ERCOT and SPP loads rose slightly. Henry Hub spot prices averaged near $2.96/MMBtu in July, up 4 cents from June levels. Milder forecast for August weather has colored recent NYMEX trading, with the market sending prices to an injection season low below ~$2.80/MMBtu. PIRA has revised down balance of year prices as well as some longer dated forecast. Longer term price recovery in 2018 and 2019 is still on the cards due to underlying structural tightness.

CA Carbon Pricing Tempered by Upcoming Auction

With cap and trade extended, California carbon allowances reached multi-year highs in July (though on low volumes). As the Aug. auction approaches, pricing has retreated to levels closer to the expected 2018 auction reserve. Inflation indicators that will set next year’s auction floor slowed in June. Upside pricing potential is limited in the near term by growing surpluses as unsold allowances return to the market - likely beginning in Nov. CARB must soon determine the implementation of moving allowances unsold after 24 mos. to the APCR. By the end of this year, CARB must adopt a Scoping Plan consistent with AB 398. The adopted Cap and Trade Amendments include linkage with ON, but a 2018 link is not a certainty.

U.S. Inflation Remains Sluggish; World Industrial Activity Is Solid

The U.S. core CPI stayed sluggish for the fifth consecutive month in July. Vehicle prices continued to fall at a faster pace than usual, and rent increases were unusually subdued. Global industrial production growth accelerated during the second quarter. In the developed world, the U.S., the euro area, Japan and Canada reported healthy results, while the U.K. disappointed. In emerging Asia, expansion in trade supported industrial activity, but an increase in the high-tech sector inventory was a negative influence.

LPG Prices Continue to Strengthen Relative to WTI

For the third consecutive week, propane and butanes prices have strengthened relative to WTI. The propane/WTI ratio of 67% is abnormally high for the stock build season and is more like the winter demand season ratio. Propane stock build for week ending August 4th was virtually non-existent, and propane stocks remain on the low side of the five-year average. This contributed to the 4.4% week-on-week increase in propane prices. The rise in ethane prices is tied to the commissioning of three world-scale steam crackers through the end of the year.

Margins for Manufacturing Ethanol in the U.S. Improve

The EPA announced it will reject the petition to shift the point of biofuels obligation from the refiner and importer to the blender. RIN assessments were lower during the week ending August 4. U.S. fuel ethanol exports declined to 85.3 million gallons in June. Brazil returned to a net export position in July. European ethanol prices declined.

Mild Weather and Growing Production Weigh on Market

Last week’s smaller-than-expected weekly storage report added fuel to this week’s NYMEX rally, with the Sep’17 contract recovering more than 20 cents off last Friday’s calendar year low. As supply gains continue to weigh on the market sentiment amidst seasonally waning power burns, we see little support for price gains in the immediate future. Contributing to price recovery headwinds are the August balances, currently shaping up to yield a ~25 BCF reduction in the Y/Y storage deficit. Even so, we remain steadfast in the underlying strength of demand due to structural growth.

Time To Move Along

Arguing with the August Crop Production report at this point is futile. The numbers will either be confirmed or disputed at the end of next week after a thousand samples are taken from Ohio to South Dakota during Crop Tour. The markets cannot sit around and wait however as other influences take over for the rest of August, especially in soybeans as wet weather over the next four weeks should have a dramatic effect on the national yield.

As India Stalls, China Quietly Sucks Up Global Excess within Limits

As active spot buyers and sellers, and as the only acknowledged “price sensitive” buyers, Indian companies get a lot of press in the global LNG trade as evidenced by the recent kerfuffle with US liquefaction developers regarding possible contract re-negotiations. The fact is, Chinese buyers have –without comment – been sucking up close to 30% of incremental global LNG supplies this year, the largest incremental buyer this year. While this 38% Y/Y increase in imports on the part of Chinese buyers is wholly sanctioned by contract obligations, it was not necessarily a given that these contracts would be honored to such an extent – at least not initially.

Improving Nuclear Availability in Continental Markets Bearish for Sept. and 4Q Prices

Since early spring, the markets have been focused on the drought in Southern Europe, which has led to increased tightness across Italy, Spain, Switzerland, and France. Moreover, the bullish sentiment has been sustained by record low nuclear output in France, with total generation of 225 TWh in the period January-July, the lowest level since at least 2001. While hydro remains well below year ago levels, nuclear outlook in France and surrounding markets is now turning bearish.

Russian Force Majeure Maintains Bullish Coal Market

Coal prices moved higher again this week, spurred on by a force majeure declaration in the Far East of Russia. Wet weather damaged railroad infrastructure, curtailing coal exports from the ports of Vostochny and Maly. This was the latest in a litany of several external forces that have served to tighten prompt physical balances and push market prices higher. CIF ARA forward prices increased by the largest extent, breaking the pattern of the previous several weeks. For the prompt market, the risks remain skewed to the upside as demand is seasonally high, although PIRA continues to assert that rebalancing fundamentals will exert downward pressure on balance of the year pricing, although the downside has been trimmed due to sizeable stock draws.

EUA Fundamentals Turning Bearish in Upcoming Months

Ongoing post-2020 market reform talks (with an upcoming meeting on September 13th) can offer a degree of price support for European Carbon prices, as can rising implied carbon prices from German coal-to-gas switching. However, PIRA expects that the increasingly poor supply-demand fundamentals in the EU ETS will outweigh those more positive indicators in the coming months. This includes the increases in auction supply starting in September, and expected decreases in power sector EUA demand for the remainder of the year.

Japan Gasoline Demand Kicks Higher for Upcoming Mountain Day Holiday

Japanese runs continue rising post-turnaround. Crude imports rose as expected and crude stocks built 5.1 million barrels. Finished product stocks were modestly lower, with good draws on gasoline, gasoil, and jet. Aggregate demand was higher and continues to rise, on trend. Gasoline demand kicked up 151 MB/D, which was close to expectations with the upcoming Mountain Day holiday and stocks resumed drawing by 0.35 million barrels (50 MB/D). Gasoil demand was surprisingly higher by 60 MB/D and stocks drew 0.37 million barrels (53 MB/D). Kerosene demand jumped 44 MB/D to a strong 125 MB/D. Refining margins were slightly lower on the week, but remain supportive to rising runs, for the moment.

Financial Stresses Move Higher Amid Global Tensions

Stresses ticked up significantly, this past week, largely because of the potential for conflict with North Korea. The St Louis financial stress indicator ticked slightly higher, but other indicators showed a much bigger rise in stress. Volatility (VIX) jumped much higher, while high yield (HYG) and emerging market debt (EMB), along with other non-Treasury credit indicators, all posted noted losses. Commodities were modestly higher, with energy pretty much in line with overall performance. The dollar was on balance, slightly weaker.

U.S. Inventories and Production Increase

U.S. ethanol inventories built in four of the five PADDs last week, reaching 21.3 million barrels. It was the first increase in three weeks. Domestic ethanol production jumped 10 MB/D to 1,012 MB/D though output outside the Midwest dropped to a three-month low 80 MB/D. Ethanol-blended gasoline production fell 116 MB/D to 9,296 MB/D as the summer driving season draws to a close.

August WASDE

If Yogi Berra was still alive today he’d probably reach into his famous bag of one-liners and proclaim, “It ain’t over ‘til it’s over”. That may be true but as a friend said yesterday, “Thursday is just another large hole poked in the already sinking boat that is the U.S. farm economy”. With fewer bushels to sell, and sinking prices, the last thing that a Midwestern farmer wanted to hear was that the SE U.S. was expected to harvest record yields, but that’s exactly what happened.

High Nuclear Production is Denting Gas Demand

Even though many coal and nuclear power stations will eventually be shut down, in the short-term gas still needs to contend with these other fuels for market share. With winter coming and the near market gas curve in contango, this competiveness looks at greater and greater risk. But these risks are only tempered by the fact that hydropower is still hobbled. Nevertheless, the story of gas demand over the past year has centered on the gas-to-power renaissance. A lot of it has been assisted not only by increased price competitiveness versus coal, but also the absence of cheaper thermal capacity in the form of hydro and nuclear production. Two of these supportive elements are disappearing at the moment. In August, we are seeing how not only nuclear is reasserting itself in European balances, but how gas is also pricing itself increasingly less competitively versus coal.

Seasonal NOx Emissions Fall in May/June

Preliminary Seasonal NOx data for the CSAPR Update program show emissions have fallen in May/June - in line with the lower 2017 cap. In particular, covered coal units with SCR saw their average NOx emissions rate drop. Individual states such as PA, IN and MO saw very large YOY emissions decreases, while others like TX were up, flagging the possibility of binding variability limits (AR and MS appear most challenged). Allowance pricing remains in the range of $600 to $650/ton. EPA recently announced it would not delay implementation of the 2015 Ozone NAAQS, which could tighten seasonal NOx limits down the line.

Saudi Arabia: Foreign Exchange Reserves Post a Small Increase in June

Saudi’s foreign exchange (fx) reserves for June increased $1.7 billion from May levels to $501 billion. It was the first increase seen since May 2016. The three month average draw rate of fx reserves slowed further to $2.6 billion, having been as high as $9.1 billion in March 2017. Since oil prices moved structurally lower in mid-2014, there have only been three other individual months where fx reserves have risen month-on-month. In this context, the increase posted for June is of itself noteworthy. More so, the slowdown in the fx reserve draw rate occurred during a period when oil prices had been generally declining.

Global Equities Ease on Increased Tensions

Global Equity markets fell back broadly on the week from record highs on increased global tensions. In the U.S., the S&P 500 eased -1.3%, with banking, retail, and energy being the weakest performers. Consumer staples and utilities managed to hold their ground, showed only modest changes and outperformed. Internationally, most of the tracking indices performed worse than the U.S, with Europe being the weakest performer, while the Latin America tracking index was the best and showed little change.

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.

Kosmos Energy Announces 2nd Quarter Results and Operational Update

14 1KosmosEnergyKosmos Energy Ltd. (“Kosmos”) (NYSE:KOS) has announced financial and operating results for the second quarter of 2017. For the second quarter of 2017, the Company generated a net loss of $8.5 million, or $0.02 per diluted share as compared to net loss of $108.3 million or $0.28 per diluted share in the same period last year. When adjusted for certain items that impact the comparability of results, the Company generated an adjusted net loss(1) of $8.4 million or $0.02 per diluted share for the second quarter of 2017.

“Kosmos is truly differentiating itself in 2017. In this lower-for-longer price environment, we are generating significant free cash flow and continuing to strengthen our balance sheet. This solid financial position enables us to execute our planned work program with the potential to drive significant growth,” said Andrew G. Inglis, Kosmos Energy’s chairman and chief executive officer. “Over the next 18 months, we plan to drill five prospects that are amongst the industry’s most significant exploration wells in the world’s two most promising offshore basins. We are also advancing the development of our large gas discoveries beginning with the low-cost Tortue project, which remains on schedule to reach FID in 2018 and first gas by 2021.”

Operational Update


During the second quarter of 2017, gross sales volumes from Ghana averaged approximately 131,000 barrels of oil per day (bopd), including volumes from the Jubilee and TEN fields which averaged approximately 86,000 bopd and 45,000 bopd, respectively.

The Jubilee FPSO turret remediation project has continued to make good progress during the year. Following the spread mooring of the FPSO at its current heading in late February, optimization of the offtake procedures has allowed the Jubilee field to regularly produce in excess of 100,000 bopd. The Jubilee partners and the Government of Ghana are now planning the next phase of remediation which will involve stabilizing the turret bearing. The operator estimates this will require a shut down of approximately five to eight weeks in late 2017.

However, the partnership continues to evaluate options to minimize downtime. Planning for the rotation of the vessel to its optimal heading and the installation of a deep water catenary anchor leg mooring (CALM) buoy is currently ongoing and these work programs are expected to occur in 2018 and 2019, respectively, subject to final partnership and government approval. The partnership is focused on minimizing field downtime, and the operator anticipates that the total shutdown duration for stabilization, rotation and CALM buoy installation is not expected to exceed 12 weeks as previously forecast by the operator.

14 2Kosmos senegal asset map2Image credit: Kosmos Energy

Mauritania and Senegal

In May, Kosmos announced a major gas discovery offshore Senegal at Yakaar-1, the first well in a series of four independent tests of the basin floor fan fairways, outboard of the proven slope channel trend opened with the Tortue-1 discovery. Located in the Cayar Offshore Profond block approximately 95 kilometers northwest of Dakar in approximately 2,600 meters of water, the well has been drilled to a total depth of approximately 4,900 meters. Yakaar-1 intersected a gross hydrocarbon column of 120 meters (394 feet) in three pools within the primary Lower Cenomanian objective and encountered 45 meters (148 feet) of net pay. Well results confirmed the presence of thick, stacked, reservoir sands over a very large area with very good porosity and permeability. Together with the Teranga-1 discovery made last year, we believe this resource will support a second cost-competitive LNG hub.

After completion of operations on the Yakaar-1 well, the Atwood Achiever mobilized to the Tortue-1 well to conduct a drill stem test (DST) on the Tortue discovery, which is expected to provide key information to support the Front End Engineering Design (FEED) in the second half of 2017, with Final Investment Decision (FID) in 2018 and first gas in 2021.

In June, Kosmos entered into a farm-in agreement to acquire a 15% non-operated participating interest in Block C18 offshore Mauritania. The farm-in is expected to close in the third quarter following customary government approvals.

PIRA Energy Market Recap for the Week Ending August 7, 2017

15PIRALogoAsian Refining Margins to Remain Healthy as Product Balances Look Constructive into 2H17

Oil markets are rebalancing slowly, hindered by higher output from Libya/Nigeria and weaker demand from China and Venezuela. Indian oil demand rebounded in 2Q17 with growth of 3.3%, but expansion in June was weaker at 1.5%. Despite demand slowing in China and India, the two populous countries will remain as the twin engines of Asian oil demand growth. Asian refining fundamentals should generally be constructive this year as demand growth is expected to outpace incremental refinery runs. Key Asian product balances, such as for gasoline and gasoil/diesel, also are constructive into 2H17.

Take-away Capacity to Lift Canadian Prices

Plummeting Canadian natural gas prices have raised concerns about the prospect for recovery. To be sure, benchmark prices hit an annual low last month and retested close to those levels this month — as a combination of pipeline maintenance and limited outlets for supply amplified the regional surplus. These developments and the resulting exaggerated cash weakness have cast a long shadow on deferred pricing. Yet, the worst of the summer-time blues for the producers might be in the rear-view mirror as pipeline expansion plans should help alleviate congestion-related blowouts. Moreover, completion of oil sands related turnarounds and evolving structural tightness stateside might provide further relief before year-end.

Asian Buyers and the Emerging Role of Storage

U.S. LNG capacity that has been bought and paid for by Asian utility and portfolio buyers will have major implications for the global LNG trade. It will provide a form of virtual storage for Asian importers, but will also create an enhanced need to trade. With the lackluster performance of NBP, Dutch TTF has a lot in its favor to replace NBP as a key European benchmark and balance 2Q/3Q markets – more storage, declining domestic production, close borders with Germany (Europe’s biggest gas consumer), and a highly evolved LNG import terminal.

Weather & Gas Disappoint, But Production Disciplined

June temperatures came in lower than normal and the year-over-year increase in gas prices at Henry Hub shrank from 65% in May to 16% in June, but slowing production helped keep markets in balance. 2Q17 PRB production came in at 76 MMst, down 9.6% Q/Q. With a gas price outlook above the forward curve, PIRA maintains its bullish bias on PRB.

Refinery Margins Remain Strong

Healthy refinery margins are expected to continue through year end. Net refinery utilization rates will stay high in both the U.S. and Europe but autumn maintenance will push runs lower. Product cracks will average stronger than last year. Atlantic Basin gasoline cracks are getting a boost from refinery problems in Latin America. Residual fuel oil cracks are getting a boost from refinery conversion capacity, lower Russian/other exports, and a lighter crude slate on the margin. Diesel cracks are slowly improving as inventory levels decline.

Cape Demand Prospects Dip While Cape Supply Expands

After sliding in early July, capsize dry bulk freight rates have recovered to over $9,000/day. However, the outlook for freight rates have dimmed over the past month as demand side prospects have faded, partially due to potential cuts in U.S. steel imports in response to the Trump Administration’s Section 232 investigation. The capsize fleet also continues to grow, which has dampened PIRA’s freight rate outlook. Despite these downward adjustments, rising bunker fuel prices along with year-over-year demand growth will see freight rates continue to rise from current levels, and generally outperform FFAs.

California Cap and Trade Extension Passes

AB 398, the bill to extend cap and trade through 2030, passed the CA Legislature with a two-thirds majority. CARB will now take up the Cap and Trade Amendments at the July Board Meeting and announced a new rulemaking process to implement AB 398. Apart from new limits on offsets, other Environmental Justice concerns dealing with toxic and criteria pollutants have been moved to separate legislation. AB 398 has provisions to set a hard price cap and also intermediate cost containment “speed bumps.” It also directs CARB to address banking and over-allocation. The handling of unsold allowances is a key lever to control supply of allowances and measures to address oversupply have the potential to significantly affect balances and pricing. Otherwise, industrial allocations are continued under this legislation and local air districts are prohibited from regulating GHGs from sources covered under the Cap and Trade.

Seasonal Decline in Tanker Rates During Summer Likely to be Steeper than in 2016

The seasonal decline in tanker rates during the summer will likely be steeper this year than in 2016, as vessel supply growth and OPEC reductions reduce fleet utilization rates.

China’s Economic Momentum Is Better-Than-Expected

China’s GDP growth was better-than-expected in the second quarter. The industrial sector was a source of strength, and recent machinery orders by Chinese businesses was a positive sign for the sector’s outlook. Consumer spending growth accelerated, in spite of a higher vehicle sales tax. This sector is expected to keep its momentum, given healthy job gains and recent signs of improvement in various spending data. Investment activity was softer during the second quarter, and spending on infrastructure showed a marked slowing. Growth in credit is decelerating gradually.

NGL Prices Post Week-on-Week Gains

The Mont Belvieu prices of all NGL purity products posted week-on-week gains for the week ending July 21st. Waterborne LPG exports remain relatively robust even with challenging Asian and European arbs. U.S. propane stocks appear to be well positioned going into the last half of the stock build season. The latest EIA stock data for the week ending July 14th report a propane inventory build of 3.5 million barrels, which brings total propane stocks 65.7 million barrels. The Dow Chemical 1.5 million tonnes per year steam cracker in Freeport, Texas continues operate in commissioning mode and is expected to begin commercial operation in August.

U.S. Stock Deficit to Last Year Will Continue to Grow

Stock deficit to last year continues to widen, increasing to almost 30 million barrels this past week, all of which is in products which is supporting strong refinery margins. Four week average adjusted demand is up 3.3%, or 640 MB/D, with gasoline and distillate contributing approximately half of this growth. Both gasoline and distillate stocks drew sharply this past week and another week of significant draws is anticipated. Crude stocks drew 4.7 million barrels this past week and is forecast to decline further next week with a pick-up in exports. Cushing crude stock draws had a respite this past week but should resume its substantial weekly declines in next week’s data.

Margins for Manufacturing Ethanol in the U.S. Improve

Margins for manufacturing ethanol in the U.S. rose the week ending July 14. RINs prices were sharply higher the week ending July 14. The Sugarcane Harvest in the South-Central region of Brazil ramped up, but ethanol production still lagged prior years. European ethanol manufacturing margins were lower due to higher wheat prices.

The Rains Came

With all the focus on Iowa and Illinois, Friday night’s rain event was the obvious talk of the weekend, and the driving force in a lower opening Sunday evening. In critical NW Iowa we’ve spoken with as many farmers who said they got rain as those who said they got nothing. According to one metrological source, western Iowa generally got 30% coverage. How many inches fell in that 30% coverage area is still being debated.

TTF Should Emerge as the New LNG Benchmark

Europe’s fickle relationship with LNG comes not only from an uneven record in providing enough demand, but also lack of clarity on how to price it. While NBP seems to be the benchmark of choice for Atlantic Basin spot trade, its emerging detachment from Continental prices is a cause for concern among sellers looking for protecting netback value in a low-priced environment. Enter TTF as the emerging long-term solution, as the Dutch market faces lower domestic production while also possessing one of the most flexible and innovative LNG import terminals in the world.

Pace of July Injections Imply Build Ahead Likely to Disappoint

The NYMEX nearby rallied more than 20¢ from the lows plumbed earlier in the month. Yet, the initial surge in buying has stalled keeping the August contract anchored near the $3 mark. With the climatological temperature peak traditionally occurring next week, the market appears to be looking beyond the current tightness to heftier injections ahead. While more normal weather ahead might enable incremental restocking, the aggregate additions will likely fall short of levels seen in recent years. This would more easily allow the market to shift attention beyond shoulder-season looseness to the more noted structural tightness that looms later this year.

Germany: Lower Renewables Support July Prices; Bearish Risks for August

With overall wind output so far in July averaging below expectations, or only 6.4 GW, and nuclear still below full capacity, German fossil fuel generation has been relatively more supported this month. However, even with lower renewables and nuclear, day ahead prices have been settling generally in line with forecasts, or in the mid €30/MWh. While gas units have been reported to be ramping up more significantly this month, both wind and nuclear are set to improve next month, providing some downward risks to prices.

Pacific Basin Coal Prices Rise Along With Asian Temperatures

Seaborne coal prices, led by the Pacific Basin, pushed notably higher this week, with 3Q17 FOB Newcastle prices surging by nearly $3.50/mt, despite slipping on Friday. Gains in FOB Richards Bay and CIF ARA prices were more muted by comparison, rising by $1.70/mt and $0.80/mt, respectively. The rise in pricing was driven by tighter Asian fundamentals on both the demand and supply side. Hot temperatures across Asia over July-to-date extended bullish energy demand in China, while both Australian and Indonesian exports have been underwhelming due to labor and weather issues. This tightness in the prompt market takes away some of the fundamental bearishness that is likely to occur later on in 2017, as restocking for the Northern Hemisphere winter will be more pronounced.

Upcoming Auction to Determine MA SREC Demand

The Massachusetts Solar Clearinghouse Auctions for compliance year 2016 will be held next week, for two Solar Renewable Energy Credit (SREC) programs. Quantities indicate a modest surplus for SREC I and a significant surplus for SREC II. Should the SREC II auction not clear in the first two rounds, the 2018 compliance obligation will be adjusted upward by the auction offering, tightening balances significantly and affecting market pricing. Current market pricing for SREC I is close to the fixed auction bid price after a spike in 2015/16 related to the 2013 auction, though this maxed-out program is now largely in balance. The SREC II program has a declining auction bid price schedule that may drive down SREC II prices over time. Pricing is currently lower in this market compared to SREC I, and in anticipation of the auction results. Emergency regulations were filed in June 2017 to support the SMART successor solar program that will replace SRECs as the chosen solar incentive program starting next year.

Japan Limited Holiday Impacts

The Sea Day holiday had limited impact on the data this past week. Japanese runs rose 53 MB/D on the week, as turnarounds continued to lessen. Crude imports were surprisingly low at 2.98 MMB/D, and crude stocks drew 1.05 million barrels. Finished product stocks rose a modest 0.3 million barrels. Aggregate demand was a modest 28 MB/D higher, with gasoline demand falling below expectations, but gasoil demand exceeding expectations. The 4-week average trend in demand continued to move seasonally higher. Kerosene demand fell back, but is within seasonal norms and the 4-week stock build rate remained just under July norms. Refining margins were lower on the week, but remain acceptable.

Financial Stresses Still Lower

Another very bullish week, with good performance on investment grade debt, emerging market debt, high yield debt, along with energy and high yield energy debt. Financial stresses remain exceedingly low, with the St. Louis financial stress indicator moving lower. Commodities had a positive week, though energy underperformed. The reflationary trade appears to be reaching a point of decision, as to whether it can continue momentum, or slips back into disinflation mode. The U.S. equity market continues to set new record highs.

Production and Inventories Rise

U.S. ethanol production rose 19 MB/D last week to a nine-week high 1,026 MB/D the week ending July 14. Inventories increased for the first time in five weeks, building by 956 thousand barrels to 22.1 million barrels. Ethanol-blended gasoline production fell 90 MB/D to 9,133 MB/D, the third consecutive decline after having reached a record high.

What’s Corn Really Worth?

With so many corn yield numbers being thrown around and some weather forecasters seemingly skewing their forecasts to meet some sort of subjective narrative, PIRA took a step back from the noise and added up the numbers as another critical weekend looms. Last week’s Crop Progress report showed that 40% of the corn crop nationally was silking, up 21% from the previous week. PIRA expects a similar 20% increase, if not more, occurred during the current week.

More Equity Records Being Set

More records are being set in world equity markets. In the U.S., a new record was set, while the strongest performers were utilities, retail, technology, and consumer discretionary. Energy eased -0.3% on the week, and underperformed. Banking was even weaker, dropping -1.5%. Internationally, most of the indices posted gains. Japan did particularly well, up 1.4%.

Significance of Mexico’s New Discoveries for Crude Production

Mexico’s crude production prospects are now brighter after two new discoveries. ENI and Talos each reported that Mexico’s historic decision to open exploration and production to foreign investment has resulted in new large shallow water discoveries and that each hold promise of over 1 billion barrels of oil in place. This was a surprising result because the major upside to future production was expected from deepwater and secondarily from shale while shallow waters close to shore were thought to be much less likely to yield large finds. PIRA has estimated that each new find could produce slightly over 100 MB/D at peak.

Asian Oil Demand: Achieving Peak Demand Growth, but Only a Minor Falloff Expected

Our snapshot of Asian oil demand growth continues to show broad based improvement. Growth in our July snapshot reached 1,093 MB/D, an incremental gain of 378 MB/D from last month. The key drivers were accelerating growth for China and India, a small gain in Korea, and a lesser decline in Japan. The profile was along the lines that PIRA expected. We specifically mentioned last month that growth should average 900 MB/D through August, which so far, it has.

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: Will New LNG Trade Routes Support Demand for LNG Carriers?

The Liquified Natural Gas (LNG) carrier market has been highly cyclical and is often driven by global macroeconomic events. The growth of LNG carriers over the past decade has been synonymous with the growth in global LNG import and export capacity. However, in recent years the increase in LNG cargos hitting the market has led to an oversupply problem, causing a significant decline in LNG spot prices. This oversupply has heavily impacted the LNG carrier market resulting in appetite for newbuild carriers to dwindle. In 2016, orders for newbuild LNG carriers amounted to only 6 units (excluding two optional orders) – a 92% decline compared to the number of LNG carriers ordered in 2014.

16 1WI Global LNG carrier fleet by year for the period 2011 2021Global LNG carrier fleet by year for the period 2011-2021

The recent focus on the LNG market oversupply and the continuous growth in LNG export capacity is, however, masking the continuous increase in LNG demand. Whilst increasing demand has been driven by traditional demand hubs, such as China and India, several new LNG importers including Poland, Jordan, Malta, and Pakistan have also emerged in the last two years. This is part of a trend of more countries seeking to utilise LNG to diversify their gas supply and improve power generation. Westwood expects this trend to continue, as 16 additional countries, including Bangladesh, India, Russia, and Sri Lanka, commission their first floating import units (FSRUs) over the 2017-2021 period. These units are expected to unlock new import markets by providing a quick and cost-effective solution to the increasing local gas demand.

16 2WI Average carrier capacity by year for study period 2011 2017 1024x555Average carrier capacity by year for study period 2011-2017

Over the forecast period, much of the LNG that will drive supply increase, will come from mega projects like Chevron’s Wheatstone in Australia, as well as North American projects such as Next Decade’s Rio Grande and Cheniere’s Corpus Christi. The increase in demand will be driven by small and medium sized projects dotted across the world. As a result, LNG carriers will have to travel longer distances from supply bases such as the US to Asia/Europe or East Africa to Asia and this could potentially lead to an increase in carrier demand.

This latter situation provides a silver lining to a recent gloomy market, as over 219 new-build LNG carriers are expected to be delivered over the 2017-2021 period, including 17 new units that have been ordered in since 2017. The expected deliveries also include 92 new-build LNG carriers, which are yet to be ordered. Over 80% of LNG carriers ordered in recent years have trended towards the large conventional carriers (150,000-179,999m3). This indicates the significant design improvements the industry has made for greater cost and operational efficiencies.

Whilst Westwood still expects oversupply to persist beyond the forecast period, continuous pro-gas energy policies in Asia in combination with expanding LNG trade routes are expected to support the demand for newbuild LNG carriers.

Mark Adeosun, Analyst, Westwood Energy

World LNG Market Forecast 2017-2021, view details here

PIRA Energy Market Recap, July 31, 2017

16PIRALogoStock Draws Counter Paper Selling Pressure

Global liquidity remains very supportive to economic growth and is leading to strong oil demand growth. Global supply/demand balances are tighter in the middle quarters but weaker in 4Q17 and 2018. The 3Q 2017 decline in surplus inventory will be mostly in products. The momentum or initiator for financial length has moved from the buyer to the seller of paper, undermining traditional oil price appreciation from increased financial length. Lower forecast inventory should allow prices to hold onto most of the recent gains, but a strong demand for inventory is required to offset the negative impact of increased paper supply. Geopolitical risks to supply are helping inventory demand despite supply disruptions falling. Refining margins will stay healthy through year end with distillate cracks taking the lead as demand increases and stocks continue to fall. Residual fuel oil cracks will stay firm due to supply side factors. Global crude quality is getting lighter.

Structural Limits to Shoulder Season Weakness

The call on U.S. supply this month will register a Y/Y gain for the first time this injection season — marking a key turning point in balance formation. Narrowing Y/Y losses in gas EG should facilitate continued overall growth for the remainder of the season — placing increased emphasis on supply growth to support storage injections ahead of the heating season. Even so, the ensuing restrained build in inventories has failed to elicit much NYMEX buying interest. That said, critical for the price recovery we see ahead is the timing of when the market puts the injection season in the “rearview mirror.” With this in mind, the market will likely look ahead to the next season before the air-conditioners are completely switched off. Nevertheless, this month’s failure to launch on patently lean inventory builds has forced reconsideration of our immediate price outlook.

Bullish Surprises Abound

Hotter and drier than normal weather boosted Mid-Columbia average on-peak prices to $30/MWh in July, nearly double June’s level. California on-peak prices recorded moderate gains, rising to the low $40s, but Palo Verde sank below the $40 mark as loads faded during the second half of the month. Alberta markets firmed as strong loads and outages led to several price spikes toward the end of the month. Sustained heat over much of the West will continue to support prices and implied heat rates in August but we look for heat rates at U.S. hubs to move toward the lower end of the historical range during Q4/Q1 squeezed by higher gas prices that lead to a temporary rebound in coal unit market share.

Coal Pricing Stays Hot, Along With Asian Temperatures

Seaborne coal prices, particularly in the Pacific Basin, continued to rally over the past month, stimulated by sweltering weather conditions in several Asian markets, and labor-related supply disruptions in Australia. In light of the stronger-than-expected coal demand, the prompt market will remain well supported, delaying the inevitable downward adjustment in pricing. However, pricing support from supply/demand fundamentals is expected to fade over next several months, and PIRA retains a bearish outlook for 4Q17 and beyond.

NGL Prices Continue to Advance with Crude

All Mont Belvieu NGL purity product prices advanced for the week ending July 28th and generally followed the lead of crude price increases. Ethane gained the least at 1 ¢/gal to close the week at 26.1 ¢/gal. Propane stocks were virtually unchanged at 65.9 million barrels. Propane stock builds were restrained by strong propane demand from wholesalers building winter stocks and steam cracker feedstocks. LPG exports remain robust at 768 MB/D. Steam cracker feedstock margins declined 2-6% as feedstock prices outgained olefin prices. Ethylene prices declined 1.9% to close the week at 19.6 ¢/lb, and propylene prices increased 2.1% to close the week at 28.5 ¢/lb. Two PDH turnarounds, Dow’s Freeport, Texas plant and Flint Hills Houston, Texas plant have supported propylene prices, and both plants will be back in full operation by the end of August.

Lack of News

The last trading day in July opened with corn in the same price range as posted on June 30th, although that was a major report day. Soybeans on the other hand were a good 50 cents above the June 30th price, continuing to be a much better story than corn for the bulls. Chicago wheat, which had the most movement during the month of July, is down roughly 30 cents. While the soybean market is respectful of its demand component, fully realizing that any sizeable loss in production could result in an extended rally, corn continued what could be described as a mindless walk due to onerous supplies both in the U.S. and Brazil.

Storage Deficits and Power Support Gas Pricing

Hydro and nuclear power production each down 5+GW YTD versus normal levels, which is heavily supporting gas demand. Gas demand across Europe’s biggest consuming nations is up by 47-mmcm/d YTD versus the past four years. While we see nuclear availability at/above normal levels by 4Q’16, PIRA is lowering forecasted hydro production for the balance of the year and will lend significant demand support throughout the winter. Meanwhile, Dutch storage stocks are entering August 3-BCM below last year. Thanks to a strong prompt, the Netherlands is being limited in its abilities to max inject this summer, which is particularly worrisome for a U.K. market that is increasingly reliant on imports. Stepping in to help balance Europe through discounted pricing and flexible supplies across Central Europe, Russia is cementing itself as a bigger baseload supplier of gas to much of Continental Europe. Contracted Russian supplies have been discounting similar Norwegian ones by €2/MWh since the beginning of the gas year in October.

Gas-Fired Output Surge Limits Summer Price Recovery

With nuclear setting a new multi-year minimum and hydro heavily down Y/Y, gas-fired output has surged across the board, with the five major markets (U.K., Spain, Italy, Germany and France) showing a gain by 18% Y/Y. However, the increase in gas-fired generation did not translate into a major power price surge, especially in Spain and Italy.

Going forward, we continue to see upside risks for the French market. In spite of recovering nuclear availability, hydro generation continues to disappoint. While not factored into our balances, policy risks remain constructive for the back of the curve, with Spain also impacted through lower French flows.

An increase in nuclear and wind availability over the next few months poses bearish risks for German prices, but stronger marginal costs for coal and lower-than-expected coal dispatch will be bullish, especially if gas units do not ramp up as often as in July.

U.S. Coal Stocks in May Decline Counter to Pattern Over Much of Last Decade

EIA coal stockpile data was released on July 25, showing that end-May stockpiles declined to 164.9 MMst, which ran counter to the five-year average May stock build of 3.6 MMst. MSHA data is trickling out and showing that 2Q17 production declined with the seasonal fall in demand, indicating some producer discipline that is supportive of prices.

U.S. Deficit to Last Year Widens

Commercial oil inventories again declined sharply this past week, falling 9.5 million barrels and bringing the year on year stock deficit to almost 42 million barrels (or 3.0%). Demand was also strong with adjusted product demand up 5.2%, or 1.0 MMB/D, in the latest four weeks. Crude oil stocks fell 7.2 million barrels this past week and for the first time this year are below year ago levels by 7.1 million barrels. Cushing crude stocks fell 1.7 million barrels for the tenth consecutive weekly decline. Next week’s EIA data will show another substantial crude stock decline (5.0 million barrels).

Global Economy Is on Solid Ground

As expected, U.S. GDP growth rebounded in the second quarter. Core inflation decelerated, while wage growth stayed subdued. Underlying data for consumer spending and business investment trended solidly. In China, evidence for the industrial sector rebound continued to accumulate. July survey results from Europe were generally encouraging. Data for global trade and vehicle sales were positive.

Ethanol Manufacturing Margins Improve

The cash margins for manufacturing ethanol improved the week ending July 21 due primarily to lower corn costs. D6 RINs were sharply higher. Brazilian based Petrobras raised the taxes on gasoline and ethanol manufacture in order to generate much needed revenue. European ethanol prices move lower.

What’s Normal?

This time of year agricultural analysts like ourselves are obsessed with normal, particularly in July for corn and mid-August through mid-September for soybeans. Whether it is temperature or moisture, our models are reliant on normal weather as the key to producing trend line yields. If you went away on holiday/vacation a week ago Monday when corn was trading at $3.90 and soybeans at $10.00, paid no attention to the markets, and then returned the past few days to look again, you’d think everything was normal as markets have strayed little from those price points. In fact, the situation is far from normal.

Shoulder Season Weakness Sets In

NYMEX futures are rounding out the month on a softer note, with the September contract establishing a new calendar-year low today — falling ~15¢ relative to Friday’s close. While milder forecast revisions have hastened the month-end sell-off, the market appears to be looking beyond the current tightness to heftier injections ahead. The drag on cash prices that has traditionally occurred as the industry enters the shoulder period probably is feeding such a bias.

Australia Provides a Bullish Sliver of Hope for LNG Markets this Winter

Heavier buying interest by Asian end users in the past week can be traced to growing concern over supply availability out of portions of Australia. If the Australian government goes through with it, the cuts could start as early as Jan 2018, which is the peak demand period for the Asian winter, when seasonal prices typically reach high points.

Japan Higher Runs and Higher Demand

Japanese runs continue to march higher, up 89 MB/D on the week. Crude imports rose sufficiently to build stocks 0.5 million barrels, much less than expected. Finished product stocks posted a second straight increase of 0.3 million barrels. Aggregate demand was again modestly higher, but is generally rising in sync with the run profile. Refining margins were higher on the week and are supportive to rising runs.

Stresses Remain Very Low

Another very bullish week, with the St Louis financial stress indicator moving to a new cyclical low, more record highs in the equity space, along with positive gains in commodities and also some of the debt pricing indicators. Energy had a solid week, with energy debt pricing doing well. The reflationary trade has been moving higher the last two weeks, with some traction being noted as the dollar has tended to weaken.

U.S. Ethanol Production and Stocks Drop

U.S. ethanol production dropped 14 MB/D the week ending July 21 to 1,012 MB/D, but remained above 1 MMB/D for the fifth consecutive week. Inventories decreased for the seventh time over the past ten weeks, falling by 608 thousand barrels to 21.5 million barrels. Ethanol-blended gasoline production jumped 234 MB/D to 9,367 MB/D, rebounding from a three-week losing streak.

Above-Normal Heat Fails to Support $3 Price

Yesterday, the Aug’17 natural gas futures contract exited the board below $3/MMBtu, despite the light build reported this week by the EIA. On balance, this month’s failure to launch on patently lean inventory builds suggests that prices might remained anchored in the current trading range, particularly as the industry transitions into the shoulder season. Taking stock of daily cash prices this month, Henry Hub (HH) barely rose relative to the June average of $2.93. This was largely the case in many regions given the large Y/Y declines in cooling degrees seen in most areas outside of the West.

Louisiana Offshore Oil Port (LOOP) to Offer Export Option

The Louisiana Offshore Oil Port (LOOP) is the only VLCC port in the United States. It announced on July 24th that it will be offering exports from their facility by early next year. This is a welcome optimization but not a transformation for the U.S. export industry. It will allow exporters to avoid reverse-lightering fees (roughly $0.50/Bbl) when packaging up VLCC lots and it will probably help sour exports more than sweet.

Still Setting Record Highs

More records are being set in world equity markets, though on the week, the U.S. market was unchanged from the week before. In the U.S., the strongest performing sectors, where the two sectors, which had been taking a beating. Retail and energy were the top performers, while housing was the laggard. Internationally, China and emerging Asia posted solid gains for the week.

Just Taking What the Market Allows

Saudi Arabia's formula prices for September were just released. The important take-away is that despite greater avails in September due to reduced domestic burn, Saudi generally tighten pricing in all the key markets. Most of the adjustments were in alignment with market drivers. Clearly, there is no impetus to push volume, despite available volumes that could be pushed.

U.S. Production Returns to Sequential Growth

U.S. crude and condensate actuals for May 2017 came in at 9184 MMB/D, up 89 MB/D month-on-month, up 302 MB/D year-on-year, and 24 MB/D below PIRA’s forecast. The miss relative to PIRA’s Reference Case was primarily due to the Gulf of Mexico coming in below forecast.

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

EIA just released its final monthly May 2017 (PSM) U.S. oil supply/demand data. May 2017 demand came in at 20.021 MMB/D, which is 79 MB/D higher than PIRA had assumed. Total product demand grew 4.3% versus year-ago or 819 MB/D, and the strongest performance since July 2015. Over the last three months, growth has averaged 500 MB/D. Among the components, gasoline demand was the only laggard, but still up 1.6% or 154 MB/D. The other products all had growth 6%, or higher. Compared to the weeklies, demand was lowered 194 MB/D, with distillate being lowered 109 MB/D.

Mexico’s Downstream Infrastructure Projects Set to Redefine the Country’s Supply and Distribution Landscape

A number of downstream infrastructure projects have been developing in Mexico in the context of the country’s energy reform. Somewhat less publicized than its upstream counterparts, these projects will change the landscape of fuels supply and distribution in Mexico in the next 1-3 years. So far the ventures have focused on increasing product imports and distribution, not on local refining.

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.