As the year approaches the fourth quarter, many industry observers are dusting off their forecasts for 2016 and re-thinking. Last week, HSBC lowered its oil price outlook to $60/bbl for 2016. The EIA, in its latest Short Term Energy Outlook also revised its 2016 projection downward by $8/bbl to $59/bbl. As the oilfield community starts to reflect on 2015, the number one question will surely be: “where is the recovery?”

The problem is that oil remains in plentiful supply. Through the first half of 2015 we have seen a rapid increase in production globally, and particularly from the US and Saudi Arabia. US production peaked in the summer and is now declining but overall we still expect global production in 2015 to have increased by 1.5mmbpd over 2014.

The reasons we have such an overhang in supply are primarily twofold. We have seen record levels of upstream investment between 2011 and 2014 and given the scale of many of these projects there is a lag between the final investment decision (FID) and first production.Offshore projects can easily take four years from FID to first production.

OPEC for the last 12 months has been engaged in a war of attrition with US shale producers, not only refusing to cut supply but pressing ahead with its upstream investments. On the face of it this is a war that it appears OPEC will win, with the hedging positions taken by US producers now expired and many of them facing dire financial circumstances. However, if they do win it will be at the cost of substantial national deficits.

Furthermore, advances in downhole completions have significantly increased the initial flowrates achieved in shale plays in the USA, so whilst production is now declining, well productivity is increasing as the operators focus on the quality of plays.

However, there are signs that the supply / demand gap may start to narrow next year. The latest IEA Oil Market Report projects that oil demand will increase by 1.4mbpd next year whilst Douglas-Westwood’s latest analysis, published last week in Q3 of our World Drilling and Production Market Forecast, highlights additions of only 368kbpd in 2016, followed by additions of nearly 1mbpd in both 2017 and 2018. This tightening of the supply/demand outlook could well be the catalyst for a recovery in both oil prices and in-turn the oilfield services sector as a whole.

Semi-submersible accommodation vessel built in China and chartered in Gulf of Mexico to Cotemar



In its latest major transaction in Mexico’s energy sector, Milbank, Tweed, Hadley & McCloy LLP has advised Atlantis Finance Ltd. as borrower in a senior secured financing for the purchase of a semi-submersible oilfield maintenance, construction & accommodation vessel that will operate in the Gulf of Mexico. 



HSBC was lead arranger and administrative agent for the deal, which closed on August 26. 

The ship, named “Atlantis” and owned by Atlantis Offshore Ltd., will be chartered to Mexico oilfield services company Cotemar, S.A. de C.V., which will use it in connection with service contracts for the country’s state-owned oil company Pemex.

"Atlantis" was built at COSCO’s Nantong shipyard in China. 

Milbank Global Project Finance practice group leader Dan Bartfeld led the Atlantis deal team, assisted by Global Project Finance associates Alejandra Garcia Garcia and Mark Greenfogel. 


Mr. Bartfeld said, “This very successful financing highlights the opportunities in Mexico’s offshore energy sector – an area where we expect to see very significant growth in the coming years. Despite oil price volatility, this successful transaction shows that well-structured projects from top-tier sponsors can obtain successful cross-border financing.” 

Ms. Garcia Garcia added “We are thrilled to work with Atlantis, Cotemar, HSBC and the other lenders in developing a unique financing structure that supports Pemex and the Mexican energy sector.”

The financing for Atlantis is one of many successful Mexican energy-related financings handled by Milbank in 2015 – including most recently the financing of Fermaca’s El Encino-La Laguna natural gas pipeline project.

Further information on Milbank’s Latin America practice is available at www.milbank.com/practices/regions/latin-america.html.

PIRA Energy Group, a leader in global energy market analysis, announced today the official launch of its new website and complimentary subscription service called PIRA PERSPECTIVES. PERSPECTIVES combines a high-level, weekly overview of PIRA’s energy intelligence with a monthly video series featuring its top analysts. This complimentary subscription is now available online at: http://www.pira.com/insights.

Subscribers can access updates and video, spanning across 12 different commodity areas. PIRA’s fundamentals-based, integrated view of the market helps analysts to keep a pulse on the market. It will also serve media professionals who often request information from PIRA that can be shared with the general public. PIRA’s complete information services and data tools are reserved for its paid subscribers to its DIMENSIONS platform. Trials to that platform can also be requested through the new website at http://www.pira.com/dimensions.

“PERSPECTIVES is a significant step forward for PIRA as we start to share some of our market-leading energy intelligence with the outside world” said CEO Gemma Postlethwaite. “The energy industry has long regarded PIRA as being a valued partner in analyzing the markets. PERSPECTIVES allows energy professionals to get closer to PIRA’s market-leading intelligence.”

The launch of PERSPECTIVES is part of an ongoing, focused effort to deliver the deep expertise of PIRA’s leading team of experts in ways that best align with the needs of today’s energy professionals. “Our brand stands for delivering the total view of the energy market and now analysts can see what we mean by that every week, right in their inbox” said Jeff Mancini, PIRA’s Chief Marketing Officer. “PERSPECTIVES online is just the beginning. We are committed to sharing more of our deep industry knowledge through studies and live events as well.”

For more information about PIRA PERSPECTIVES, click here.

After almost eight decades of Pemex monopoly, the Mexican energy sector is entering a new era of foreign oil company participation. A decade of steady decline in domestic oil & gas production has incentivized the Mexican government to lift the regulations and allow international companies to start developing offshore projects in Mexican waters. The government is keen to attract private investors to its energy sector with the hope of kick starting its struggling economy.

Over the last decade Mexico’s oil production decreased at a compound annual growth rate (CAGR) of -3.3%. This was driven by a drop in drilling activity, which declined at a CAGR of -2.7% 2005-2014. In spite of the country’s offshore potential, DW continues to take a conservative view on the country’s future oil production. Whilst the drilling activity is expected to soar over the balance of the decade at a CAGR of 13.3% (as a function of Pemex offshore projects that are expected to come on stream in next years) Mexican production is expected to grow only at a modest CAGR of 0.3% through to 2020. Operating fields are mature and additional drilling activity is only expected to offset the loss in production.

Despite the low oil price environment, the government has remained committed to auctioning its offshore blocks, keen to drive international investment. Recent tenders failed to meet government expectations; out of 14 shallow water exploration blocks only 2 were awarded to a consortium of Sierra Oil & Gas, Talos Energy and Premier Oil, leaving the pre-qualified majors without new acreage despite previous recorded successes and infrastructure already in place.

Following a disappointing result in the first upstream tender for shallow water exploration, lessons have been learned. Raising the domestic flagging oil output is President Peña Nieto’s key economic target. The Mexican government will need to revise its expectations if it is to see more success for its subsequent auctions. Although it has been reported that the contract terms and requirements for future tenders have been improved, it remains to be seen if those are attractive enough for operators to splash their exploration budgets in Mexican offshore projects.

www.douglas-westwood.com

Caterpillar Oil & Gas is pleased to announce the introduction of Asset Financial Solutions, an innovative financial product that provides 100% financing new offshore or marine assets. The new solution enables Caterpillar to offer customers a tailored solution to optimize their business and expand their fleets without raising additional capital or taking on project construction risk.

“Our message is clear: we have a proprietary new financing model for the offshore industry that can help our customers succeed and grow despite down cycle market conditions,” Antti Ekqvist, Caterpillar Oil & Gas global offshore manager said. “The Asset Financial Solution was developed to be a simple, succinct financing source available for the complete duration of a customer’s project from the start of construction to post delivery and operation.”

The Asset Financial Solution affords customers zero project risk from the onset. The financial offering has the flexibility to account for all aspects of an offshore newbuild, including risk mitigation for unexpected construction or project costs. Strong collaboration between customers, Cat® dealers and Caterpillar is established at the project’s inception, with the asset being built to the customer’s requirements. Assets ideal, but not limited to, for the financing program include jackup and semi-submersible rigs, accommodation units, drillships, liftboats, offshore support vessels and tug boats . “At Caterpillar, we are firmly committed to partnering with our customers to help them win regardless of market conditions. It’s our job to design concise, easy solutions that help their bottom line and we believe the new Asset Financial Solution delivers on that promise and more."

The program is currently available for global oil & gas and marine offshore customers.

For more information on the new Asset Financial Solution, please contact Antti Ekqvist at This email address is being protected from spambots. You need JavaScript enabled to view it. or +1 713- 329-2232.

World Oil Market Forecast

Financial market turmoil is undermining global economic growth and reducing the demand for inventory which is especially negative for oil prices given over 300 million barrels of surplus inventory. This surplus is hardly eroded in 4Q15 making prices vulnerable to weakness if financial turmoil worsens. The lower prices are now, the stronger they will be later. Global light product demand has been strong and will remain so. Refining margins will continue to decline as gasoline cracks come off further and distillate stocks continue to build. Supply disruptions have ticked higher and significant political risks to supply remain.

Production Growth and Storage Limit Near-Term Price Upside

Since last month’s forecast, Henry Hub (HH) gas prices have taken a sizable hit reflecting the continuing storage surplus coupled with anticipated 4Q production growth led by Appalachia. Sagging prices come despite a late July/early August heat wave and lackluster production which helped boost gas-fired electricity generation (EG), narrowing the storage surplus somewhat faster than earlier expected. Yet, the market’s tepid response to those bullish weather episodes called attention to heightening concerns over bearish gas balances in the months ahead.

PJM 2018/2019 Capacity Auction: Results and Future Implications

PJM’s 2018/19 Base Residual Auction cleared the Capacity Performance product at $164/MW-day for the PJM RTO. This clear was over the high end of PIRA’s forecast range of ($130-$160/MW-day). However, EMAAC and ComEd areas cleared close to their offer caps as per our expectations. A total of about 13 GW of capacity was offered but not cleared in this auction. Despite the higher capacity price clear for the ComEd LDA, Exelon’s Quad Cities nuclear units did not clear in the auction. The inability of a large portion of DR to participate as a CP product implies significant upside to PJM RTO capacity prices when the share of CP resources required increase in the near future.

Downside Risks Outweigh Upside in Freight Market Outlook

The usual autumn pickup in Cape freight rates came earlier this year. The question is whether we are likely to see a second rebound as happened in late 2014. On the supply side, Australian iron ore exports are picking up and Brazil has the potential to boost exports after an expected dip last month. On the demand side, China’s steel production has slowed and there are currently some government imposed temporary mill shutdowns around Beijing. As of now, it looks like Cape rates will continue to slide in the short term.

Strong Demand at California/Quebec Carbon Auction

The Vintage-2015 allowance auction showed strong bidding interest supportive of the secondary market pricing gains that we expect in our forecast. As anticipated, the Vintage-2018 allowance auction was fully subscribed with a particularly strong coverage ratio, clearing well above the floor price.

Wide Range of Possible RGGI Auction Outcomes

Market prices have moved above the $6 trigger for the Cost Containment Reserve. The upcoming auction has potential for significant additional supply to enter the market. Unlike in California, there is plenty of demand for more allowances. While 1H15 emissions are down 8.5% year-on-year, total 2015 emissions are expected to be in line with 2014 levels. Coordinated procurement of large-scale hydro, renewables and transmission suggest a more sustained push to lower long term emissions.

U.S. Ethanol Prices Lower

U.S. ethanol prices edged down the week ending August 21, pressured by plunging oil prices. Manufacturing economics improved slightly due to lower corn costs, breaking a two-week slide.

U.S Ethanol Prices Decline

U.S. ethanol output dropped to a 15-week low 952 MB/D the week ending August 21 as some plants cut back production due to poor margins. Stocks increased slightly for the second consecutive week, building by 67 thousand barrels to 18.63 million barrels.

Japanese Crude Runs Ease, Holiday Impacts Fade

Crude runs eased back from peak levels and crude imports remained sufficiently high to build stocks slightly. Gasoline demand eased back following the holiday, which built stocks. Gasoil demand conversely rebounded, with lower yield and higher exports, so to draw stocks. Kerosene demand jumped a bit and moderated the seasonal stock building. The indicative refining margin remains acceptable, with lower gasoline, naphtha, and fuel oil cracks being mostly offset by higher middle distillate cracks.

U.S. Coal Stockpile Estimates

Power sector coal stocks drew modestly in August as mild weather conditions across the Midwest and Northern Plains was offset by continued weak coal supply. PIRA estimates U.S. electric power sector coal stocks will reach 157 MMst as of the end of this month, or 81 days of forward demand based on our forecast of Sep/Oct average coal burn (vs. 57 days one year ago).

Asia Demand Weakness No Guarantee for Low Spot Prices

The inefficient mechanisms that pervade LNG pricing, particularly in Asia, were once again highlighted in July. At this point, the fragmented nature of pricing should not come as a surprise given the even odder behavior of demand. The outlook on the demand front is simply not good, which will do little to boost future support for Asian prices, oil prices notwithstanding, particularly as overall global supply increases are inevitable.

U.S. Commercial Stocks Again Reach New Record Level, In Spite of Crude Draw

In spite of a larger than expected crude stock draw, total commercial stocks built a combined 2.9 million barrels this week, to a new record high level. With a smaller overall build last year, the year-on-year excess widened. Commercial stocks began to grow quickly the first week of September last year, and that is likely when we will see the surplus decline.

Producing Region (PR) Storage Congestion Getting Harder to Avoid

Thursday’s market miss and the expected rapidly increasing storage builds as the shoulder season starts to get underway highlight both a seasonal denouement of summer peak electric generation cooling demand, as well as the lack of any significant heating demand coming back into play until October.

3 Major OECD Crude Stocks Build in October But Then Continue Downward Trend

While Thursday’s crude market certainly reversed trend, the crude price sell-off over the last few weeks has obscured an important fundamental view: we expect crude stocks in the 3 Major OECD regions to continue cleaning up through the end of the year, although October will see stocks build because of refinery maintenance.

Bulgarian Gas Price Likely To Be Reduced

Natural gas prices in Bulgaria are expected to be cut by 13.65% as of next quarter. Chairperson of Bulgaria’s Energy and Water Regulatory Commission (EWRC) Ivan Ivanov announced the news speaking with journalists. “I believe that the natural gas price will be a total of 30% cheaper for the year. The initial reports of Bulgargaz show that the natural gas price for the next quarter should be 13.65% cheaper,” he said.

PIRA Urges Caution Regarding Expected Crude Production Revisions from the EIA’s Producer Survey

Since the collapse in crude prices some months ago, markets have been focused on the timing and magnitude of the peak in U.S. crude production, and its subsequent drop. On Monday, August 31, the EIA is scheduled to publish both the June 2015 Petroleum Supply Monthly, and the 2014 Petroleum Supply Annual. Traders and analysts have been focused on what the EIA, using their Form 914 for the first time, will do to recent reported crude production data. Even though PIRA and others have noted we think the EIA has overstating Texas production so far during 2015, we urge caution is assuming the new crude producer survey will revise down 2015 crude production.

German Power Sinking Into Unchartered Waters

In Germany, fundamental support to the front (September) and winter months prices will come from stabilizing power demand and stronger exports, especially as the Alpine region is seeing drier conditions this year. However, with no signs of major capacity closures, no clear anchor is in place for German deferred prices, which is to say that the back of the curve will sink further into unchartered waters. With the recent declines in French forward prices, cost recovery for the operational nuclear fleet starts being problematic, which is to say that French prices may be closer to a bottom.

Ample Supply Supports Demand Growth and Injection Gains

LNG did not flow to Europe in the volumes we expected during the third quarter, with only Qatar really pushing cargos into its own terminals. It is an important lesson for the future; global length does not necessarily mean that Europe will be a dumping ground for LNG in the years ahead, although the emergence of U.S. export volumes could change the equation. Well-priced pipeline supplies from contract sources have stepped in front of LNG to boost storage injections and meet incremental demand.

Financial Market Turbulence Is Not Yet Over in All Likelihood

A large part of the recent financial market stress was caused by growth worries about emerging markets. It is therefore crucial to track the performance of these economies, though timely information is hard to come by. Available indicators are still painting a negative picture of the emerging world. For developed economies, the key risk going forward is financial market contagion from emerging economies. Historical experiences provide very limited guidance on this subject. But the likelihood is that policymakers in the U.S. and Europe are taking this threat seriously.

Market Falls, Then Rallies

The S&P 500 and other key market indicators dropped drastically on a weekly average basis. They generally fell as the week started, but they recovered towards the end of the week and ended higher Friday-to-Friday. The dollar continues to strengthen against Asian currencies, the Russian ruble and many of the fragile emerging market economies. Commodities generally fell. US Baa corporate bond yields jumped significantly higher this week. Policy interest rates in China fell again from 4.85% to 4.60%.

Seaborne Coal Market Edges Higher amid Surge in Oil Pricing

Coal prices rebounded last week, carried higher by the sizeable recovery in equity and oil prices on Thursday and Friday following a collapse early in the week. In the prompt market, FOB Newcastle (Australia) prices strengthened the most, while gains for API#2 (Northwest Europe) and API#4 (South Africa) measured about half as strong. Further along the curve, API#2 and API#4 fared better than FOB Newcastle. The market remains in search for clear direction, and at the moment it appears as if pricing will follow the lead of oil, which is not expected to be supportive of a structural rebalancing in pricing until mid-2016.

U.S. LPG Prices Firm Ahead of Seasonal Demand

U.S. LPG prices ripped higher on Friday with crude prices. September propane futures jumped 9% higher to 41.6¢/gal and butane gained 2.4¢ to 54.2¢/gal. LPG prices, in anticipation of higher seasonal demand in the months to come, have outperformed vs crude oil thus far in August. Propane prices have gained 8.5%, and butane 2.5%, vs. a 4% decrease in crude prices. Ethane prices fell to 18.9¢/gal, sliding with natural gas, but remained above gas on a Btu basis. Ethane prices, after trading at a discount to gas for a year or so, are now approaching levels necessary to economically incentivize incremental production.

Corn Crop Maturing Fast

The end of meteorological summer brings a choice for many eastern Belt farmers; go to the Farm Progress Show in Decatur, Illinois which starts tomorrow, or start harvesting corn that turned very quickly over the last week or so.

Frustration Starting to Build

Unfortunately, there’s very little to do at these price levels. The market seems somewhat content around $3.75 in corn and above $8.75 in soybeans, while it does appear that wheat sellers are trying to re-establish a decent short position which may be a bad bet.

Global Equities Climb Higher

Global markets gained about 1% on the week following a 6% decline the previous week. In the U.S., energy, retail, and technology showed the strongest gains among the tracking sectors. Utilities and housing posted declines.

Internationally, most of the tracking indices improved with emerging markets and Japan doing the best. BRIC’s and Europe posted fractional declines. The information above is part of PIRA Energy Group's weekly Energy Market Recap- which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

NYC-based PIRA Energy Group believes that crude prices are setting the stage for a significant bounce from the recent downturn. In the U.S., the stock excess widens despite strong demand growth. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Pacific Oil Market Forecast

Crude prices are setting the stage for a significant bounce from the recent downturn. Product demand growth for the remainder of the year remains constructive, and products will get a lift from fall maintenance but the market will remain long product, which will make recovery in Asian refinery margins slow to materialize. Most noted will be a rotation out of gasoline crack strength, which has been leading and holding up the product barrel. Gasoil demand picks up the remainder of the year, but the overall uplift for gasoil balances and cracks will be notably muted due to rising supplies from new refinery startups, and high stock positions, particularly in Europe, but also in Asia.

U.S. Stock Excess Widens Despite Strong Demand Growth

Crude stocks drew this past week but this was more than offset by a product stock build, leaving stocks at a new record high and 157 million barrels higher than last year. Some 71% of the excess is in crude oil and distillate. Gasoline stocks are just 1.3% higher than last year despite historic refinery runs which is a tribute to strong demand growth.

European Oil Market Outlook

Brent crude prices lost ground over the last few weeks and are now under $50/Bbl for prompt cargos versus $60-65/Bbl in May and June. This decline has been led by the back of the market and is the result of a dramatic swing in market sentiment. However, PIRA expects prices to ultimately improve as physical balances tighten – more next year than in the remainder of 2015.

Spot U.S. Ethylene Prices Routed

Spot U.S. ethylene prices collapsed last week on worrying economic headwinds, lower feedstock prices, and high cracker utilization rates. Spot ethylene lost 7¢/lb or nearly 25% to settle at cycle lows of just 22.75¢/lb for September delivery. U.S. steam cracking margins plummeted with ethylene prices. LPG cracks, for both propane and butane dropped over 20% to near 26¢/lb ethylene. Ethane margins dropped to just 19¢, three cents better than natural gasoline cracks per PIRA calculations.

Medium Term Marked Down, Longer Term Unchanged

Recent upward revisions to the medium term supply outlook have caused us to slow the recovery in price over the next several years in our Reference case crude oil price outlook. However, post-2020, our balances still suggest a need for growing volumes of higher cost supply since US shale production is unlikely to maintain pace with global oil demand growth.

U.S. Ethanol Prices and Margins Fall

Ethanol prices resumed their descent the week ending August 7, pressured by plummeting oil values and a flood of imports from Brazil. After improving the two prior weeks, manufacturing margins also decreased.

U.S. Output Up; Inventories Down

Ethanol output increased to 965 MB/D, up from an eleven-week low 961 MB/D the week ending August 7. Stocks declined by 710 thousand barrels to 18.5 million barrels.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

NYC-based PIRA Energy Group believes that so far market sentiment has deteriorated more than oil balances. In the U.S., commercial stocks flat on the week while EIA revises down U.S. crude output. In Japan, crude runs recovered and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

There are more risks to the forecast lift in global economic growth in second half 2015. So far market sentiment has deteriorated more than oil balances. The back of the market has led prices lower as speculators are no longer convinced higher oil prices are required to balance future oil supply and demand. PIRA disagrees with this view, but a “show me” mindset regarding tightening balances will keep prices lower than forecast earlier.

Latin American Oil Market Report

Increased United States/Canada crude production has significantly reduced U.S. imports of Latin American crudes over the last few years. More Latin American crude moved to Asia, mainly India and China. Mexico has proposed an exchange of up to 100 MB/D Mexican heavy crude for U.S. light crude that if approved would help to reduce the light crude overhang in the U.S. and enhance Mexican gasoline/diesel production and thus reduce their product imports. Latin American gasoline/diesel product imports will rise even with new refinery start-ups in Brazil and Colombia, and the U.S. will supply the vast majority. Near term planned/unplanned refinery outages in Venezuela and Mexico along with seasonal demand impacts are adding to Atlantic Basin product strength in 3Q15. PIRA’s outlook is for generally weaker Atlantic Basin gasoline/diesel cracks over the remainder of the year.

Commercial Stocks Flat on the Week While EIA Revises Down U.S. Crude Output

A 4.2 million barrel commercial crude stock draw offset a similar sized product inventory build leaving stocks virtually flat on the week. The stock excess to last year stayed roughly the same at 145 million barrels. Noteworthy is that the EIA revised down its Lower-48 crude production by 151 MB/D in this week’s report. This is an indication that the upcoming May 2015 Petroleum Supply Monthly will most likely show downward revisions to crude production for some months of 2015. May 2015 U.S. total crude production should come in significantly lower than the 9.65 MMB/D shown in the most recent STEO forecast. 

Japanese Crude Runs Recover and Stocks Build

Crude runs and imports rebounded following the typhoons, which had resulted in operational and berthing disruptions. Crude stocks surged, while finished product stocks rose only slightly. Gasoline and gasoil stocks were marginally lower, while kerosene stocks continued building, though at a slower rate. The indicative refining margin has come well off its June peak, though it is in the upper half of its statistical range.

This Time is Different

It is PIRA’s belief that crude oil and product prices are set simultaneously in both the physical and paper markets. Commercial entities that have physical positions, which they hedge in the futures markets, are the connective tissue between these two markets. Post 2003, fears that the world would be running out of crude led speculators to increase their paper length, which raised deferred futures prices enough to allow physical players to find and develop higher cost crude. What is different this time is the role of prime mover has shifted from speculators to commercials. This time commercials have become increasingly short, encouraging through lower prices speculators to enter the long side of the market.

Petroleum Refining Remains an Important Market for Natural Gas

The EIA’s latest annual report of refinery fuel use for 2014 does not contain many surprises regarding natural gas use in the refining sector. Direct fuel use of natural gas averaged a little less than 2.5 BCF/Day, and natural gas use to produce hydrogen in refineries averaged a little more than 0.5 BCF/Day. This represented 14% of industrial sector natural gas use, and 4% of total U.S. natural gas consumption. Natural gas use per barrel of crude run seems to be related to the prevailing API in each PADD. The national average natural gas use of 0.2 MMBTU per barrel of crude run implies a 20¢ per barrel margin impact, for every $1.00/MMBTU change in the price of purchased natural gas.

Freight Market Outlook

Tanker markets entered the second half of 2015 on a high note, but they are due for correction as a number of temporary elements of support unwind. The Iranian nuclear agreement has the potential to significantly alter both the crude and tanker markets, but this will take time to unfold. Incremental Iranian crude exports estimated at 500 MB/D by the end of 2016 are not expected to hit the market until the second quarter of next year. Perhaps of more importance to shippers and tanker operators is the potential for the marginalized Iranian tanker fleet (including 37 VLCCs) to return to active service in 2016 adding to the already accelerating capacity growth.

Asian Ethylene Prices Drop in July

Ethylene prices in China and Southeast Asia fell over 20% in July. Exports from the mainland increased as poly plants slowed on greater uncertainty in the local economy. Chinese exports are facing muted demand in the north where prices are falling in tandem amid rising inventories. Supplies are likely to continue rising, and prices falling, as long as ethylene production margins remain robust.

Ethanol Inventories Decline

U.S. ethanol production has declined for three consecutive weeks, with last week's output dropping to a ten-week low 965 MB/D. After two straight weeks of falling stocks, inventories reversed course and built by 89 thousand barrels to 19.6 million barrels.

Ethanol Prices and Margins Bottom

U.S. ethanol prices were volatile in July, rising early in the month but then falling sharply, tracking corn’s reversal. Ethanol manufacturing margins bottomed mid-month after declining for nine consecutive weeks.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

NYC-based PIRA Energy Group reports that WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. In the U.S., the crude stock build propelled commercial stocks to a new record high. In Japan, crude stocks drew and kero-jet stocks led product stocks higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

The price of WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. Regional differentials were mixed, with inter-pipeline competition in the Permian Basin causing Midland grades to strengthen relative to Cushing WTI, while differentials for Western Canadian and other northern grades continued to weaken from very strong second quarter levels.

Storage Refills Set to Swell

After the NYMEX September futures contract limped off the board at its lowest settlement since the May contract, an outbreak of above-normal temperatures forecasts for a large swath of the U.S. in early September — particularly in the east — has for now lessened the risk of steeper price declines. With storage refills set to swell, sustained weather intervention remains necessary to temper seasonal gas-fired electricity generation (EG) declines and thereby reduce the need for still lower prices.

Western Grid Market Forecast

Western spot on-peak prices reverted to a more familiar summer pattern with Mid-Columbia at a discount to the Southwest hubs. That market shed $8/MWh to average ~$31.50/MWh. NP15 was down $2 to average ~$37.50. However, SP15, the West's premium market, was virtually unchanged at just under $39, and Palo Verde rose by $1.50 to just over $35. Inland Southwest price gains were driven by strong cooling loads with temperatures in the region's load centers averaging 2-4º F above normal. Weather in Southern California has also been hotter than normal this month, helping to propel the CAISO Balancing Authority to its strongest loads of the summer in late August. Mid-Columbia on-peak heat rates are expected to average 12,000 Btu/kWh in CY 2015 up from 8,900 in 2014. Heat rates are also expected to be up at the Southwest hubs for CY 2015 with the largest increase (~10%) at Palo Verde. However, going forward, growth in solar capacity, gradual improvement in hydro supply, and higher gas prices are expected to lead to downward pressure with modest year-on-year declines through 2017.

Cracker Margins Fall with Olefin Product Prices

U.S. steam cracker margins for all feedstocks fell last week with plunging ethylene prices. Propane and butane cracks weakened by nearly 26% to 20¢/lb ethylene. Pentanes plus margins lost 8¢ week-on-week and are now near 9¢/lb ethylene. Ethane cracks continue to trail LPG, falling to 19¢/lb ethylene per PIRA calculations.

Freight Market Outlook

The weakness in the midsized crude tanker groups seen in July was a harbinger that the counter-seasonal strength in VLCC rates was unlikely to persist much longer. VLCC rates followed suit and crashed in August, falling by 50 WS points (65%) from their July highs. The support from near record crude imports into China during June and July (7.2 MMB/D) and discharge delays in Asia related to high inventories and typhoons waned at the same time that September term crude nominations were being reduced to reflect crude runs cuts in Asia due to refinery maintenance and perhaps weaker underlying demand.

Seaborne Thermal Coal Pricing Falls, Retracing Gains from Prior Weeks

Despite a modest rebound in oil pricing last week, coal prices moved notably lower, mostly due to a bearish turn on Friday. For 4Q15 coal prices, FOB Newcastle (Australia) again held up better than API#2 (Northwest Europe) and API#4 (South Africa), as was also the case across the forward curve. The market seems to be saying (similar to PIRA’s view) that the rebound in pricing that occurred in the past two weeks was premature. Fundamentals remain soft, with major demand centers facing challenges, while supply is not backing off quickly enough. Rising oil prices limit the downside for coal pricing, but there is not enough bullish impetus to spark a sustained rally yet.

California Carbon: Choices for November Compliance To Impact Markets

The market response to auction results has been modest for the benchmark contract, though V-18s were boosted. Full reconciliation for 2013-2014 will be in November: choices regarding offset usage will impact the bank build/ stringency of the program (very few were used last November). Last-minute demand for offsets for compliance would temper CCA interest – but prices are supported by seasonal emissions, strong demand for transportation fuels, and by the increase in the floor price next year.

U.S. Ethanol Prices Lower in August

Ethanol prices were pushed down by oil values in August despite robust demand, lower stocks and reduced output. By the end of the month, prices were close to gasoline values in most of the country.

Emotions Remain High

The rhetoric this year is amped up due to a severely shrinking farm economy. Farmers and their landlords have been left to try to come together on land prices as the prospects of a better 2016 fade with each evening’s sunlight. Producers are trying to cut every penny of cost they can, getting no help so far from seed and fertilizer suppliers.

Whether the Fed Will Raise Rates in September Is Now a Toss-up

A few weeks ago, it appeared probable that the Fed would raise interest rates at its September policy meeting. But as global financial markets have turned volatile, policymakers indicated that the rate decision would depend not only on the tone of economic data, but also on financial market developments. This week’s U.S. data releases for August were not blockbusters, but showed sufficient strength to bolster the case for a September rate hike. But problematically, the current U.S. equity market performance does not yet indicate whether the economy is facing serious threats, or merely short-term difficulties.

Foreign Investment in Iran: Iraqi Experience Suggests Production Impact May Be Several Years Out

The removal of Iranian oil sanctions will eventually permit the return of many international oil companies to Iran. Long-term Iranian supply growth will likely depend on the timing and level of foreign investment. Although much remains unknown at this point, we look to the recent opening of Iraq’s oil sector to provide some insight into how the next few years may play out in Iran. While conditions differ in many ways between these two countries, Iraq’s experience suggests contract finalization may take longer than expected and new foreign investment may not translate into meaningful production gains until at least 2018. Development of Iran’s oil sector may also not proceed as planned. As such, PIRA maintains a cautious outlook on Iranian supply.

U.S. Crude Stock Build Propels Commercial Stocks to a New Record High

Crude imports coming in higher than expected and crude runs lower than expected drove a crude stock build that, in turn, drove total commercial stocks to a new record high. With a smaller overall build last year, the year-over-year excess widened. With a 9.5 million barrel build in commercial stocks the first week of September last year, we expect the surplus to decline when we see next week’s data.

Seasonal Demand Begins to Build Amid Loose Supply; Key Storage Deficits Remain

Hanging a bullish call on colder than normal weather in September is a bit of an analytical stretch for PIRA, but some members of the market are talking up less than 40-mmcm/d of additional weather-related demand (Continent wide) like it was the middle of January and supply was tight. Needless to say, this type of demand is fleeting at best and suggests that true underlying demand growth remains elusive to uncover. Nevertheless, this time of year is when seasonal gas demand begins to build and imports will have to build with them in order to cover both prompt use and top off what's left of injection season. Therefore, sensitivity to disruptions, versus what is deemed to be normal, will grow, even if underlying demand does not.

Italy-France Spreads Remain Compressed on a Forward Basis

Italian day-ahead prices have been quite resilient, with the PUN during September moving even higher than August, having averaged €56.6/MWh. The spreads with France also remain at historically high levels on a spot basis, and yet while widening slightly along the curve, the spreads on a forward basis have stayed extremely compressed.

Bearish Developments Predominate in the Beleaguered Thermal Coal Market

Physical coal prices moved lower during August, but have not been nearly as volatile as oil and equity price movements. Despite the devaluation of the yuan hurting the ability of Australian producers to compete in China, FOB Newcastle prices declined by the smallest extent of the major pricing points. Physical Atlantic Basin balances have experienced tightening over the YTD from warmer weather in Europe, and the supply constraint in Colombia, yet pricing has consistently faded. With European coal demand expected to recede while Colombian supply normalizes, it will be difficult for prices to rebound.

Ongoing CSAPR, MATS Uncertainty as EPA Ozone Efforts Move to Fore

Power plant SO2 and NOx emissions are down 1H15 (2014 emissions were already below the current CSAPR caps). SO2 allowance prices dropped dramatically, but NOx is a different story. EPA is implementing 2008 Ozone Standards and updated, stricter Ozone standards are also to be finalized October 1st, though it is unclear how these may interact with CSAPR. We may not see a DC Circuit ruling deciding how to proceed with the MATS rule until the end of the year or even into 2016.

Record Production of Ethanol-Blended Gasoline

Ethanol-blended gasoline production soared to a record 9,223 MB/D the week ending August 28. Ethanol manufacture dropped to a 16-week low 948 MB/D as more plants cut back due to poor margins.

Critical Corn Numbers on Tap

PIRA’s “final” numbers should look familiar as they have not changed month-over-month. Coming off Crop Tour, we commented that 164 bpa for a national average was a pretty solid number, but recent heat has our model back down to 163.8 bpa. We realize that we’re 175 million bushels below current WASDE demand, but also know that a 450 million bushel reduction in production has merit.

Key Market Indicators Drop

The S&P 500 and other key market indicators dropped sharply week-on-week, but on a weekly average basis various indices gained marginally. Market volatility as measured by the VIX increased week-on-week. Financial stress remains high. Credit spreads continue to widen, indicative of increasing strains in the debt markets. With regard to currencies, there continues to be weakness in the commodity producers, along with other currencies such as the Turkish lira, South African rand, Brazilian real and British pound. Commodities remain generally in decline, though there was some strength seen in palladium, aluminum and copper.

Japanese Crude Stocks Draw, Kero-jet Stocks Lead Product Stocks Higher

Crude runs eased due to planned maintenance and unplanned outages. Crude imports were very low and stocks drew strongly. Finished product stocks rose on higher kerosene and jet fuel stocks. Gasoline demand was fractionally changed with a big drop in yield such that stocks drew slightly. Gasoil demand was higher, but even with higher yield and lower incremental exports stocks still drew slightly. Kerosene demand rose again and seasonal stock building continued. The indicative refining margin remains acceptable, though on the week, most of the cracks eased.

Italians Find a Russian-Sized Gas Field Off the Coast of Egypt

Just as Egypt hits the twin milestones of 6 months as an LNG importer and the installation of a second regas terminal, also at Ain Sukhna, a significant domestic supply discovery has emerged to shift the long term supply balance significantly, this time in Egypt’s favor.

U.S. Coal Market Forecast

As producer bankruptcies and mine shut-ins continue to occur, financially stronger producers are reaping the spoils. Murray Energy (ME) just purchased Goldman-Sachs’ Colombian mining operations, with the intent to increase coal output. Whether this is an effective longer-term strategy remains to be seen. It definitely will add to the market’s oversupply woes.

Global Equities Hit Hard this Past Week

Global equities fell about 4% on the week, with all the major regions falling a similar amount. In the U.S., all the tracking indices fell, with housing doing the best, down only 0.7%. Utilities and materials were the weakest, with energy also down significantly. Internationally, again, all the tracking indices posted losses. China and Japan were the weakest performers.

EIA’s Long-Awaited Form 914 Crude Production Data Published

The EIA’s used their new Form 914 as the source of monthly crude production for Texas and a number of other states, for the first 6 months of 2015, with the August 31 release of their June 2015 Petroleum Supply Monthly. Texas production was revised down, closer to PIRA’s estimates. The downward revisions to U.S. production were offset by upward revisions to the crude balance item, resulting in domestic crude supply values that were largely unchanged. These data do show that reported crude production and domestic crude supply (production + balance item) both peaked in April 2015, and have fallen 0.42 MMB/D by June 2015.

EIA Upside Production Surprise

The EIA’s expanded monthly survey released on August 31st revealed a surprising jump in U.S. gas production from May to June that had not been fully reflected in earlier pipeline flow models. For the U.S. as a whole, the EIA reported that June dry production climbed to 74.5 BCF/D, up month-on-month by ~0.7 BCF/D. Although PIRA’s state-by-state estimates vary from the EIA, our upwardly adjusted June total virtually matches the above EIA estimate. PIRA’s state specific estimates cannot be strictly compared with EIA estimates, given they are not reported on a dry basis.

U.S. Refinery Turnarounds, September 2015 – June 2016

As anticipated the pace of U.S. refinery downtime picks up quite sharply in the coming months. This considers both scheduled turnaround activity as well as the carryover of unplanned events into the period. During June thru August 2015 the average distillation unit cutback was around 1.3-1.4 million B/D. This reaches around 1.7 MMB/D for September, before jumping to nearly 2.2 million B/D for October 2015. These are just some of the findings of PIRA's latest U.S. Refinery Turnarounds report.

Pakistan Raises Gas Rates and Targets Inefficient Use

The Pakistan government on Monday made the critical decision to begin converging domestic gas prices to international levels, as more and more of the nation’s gas supply is expected to come from imports. For the first time in recent memory, the hike in gas prices will include domestic consumers, the single largest, most inefficient block of users of natural gas, and one that has traditionally been exempt from prices increases in the past.

U.S. June 2015 DOE Monthly Revisions

DOE released its final monthly June 2015 (PSM) U.S. oil supply/demand data today, along with its annual PSA revisions for 2014. June 2015 demand came in at 19.59 MMB/D, identical to what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 362 MB/D. Total demand for June 2015 versus June 2014 (PSA) grew 701 MB/D, or 3.7%, compared to the final June 2014 data (year-on-year), and was even stronger than the 530 MB/D (2.9%) growth seen in May. For 2014, annual product demand was raised 70 MB/D, from what had been carried in the preliminary monthlies. End-June total commercial stocks stood at 1,277.4 MMBbls, spot-on with PIRA's assumption for end-June stocks on both crude and product.

U.S. Annual PSA Demand Revisions: Modest Increases

DOE released its Petroleum Supply Annual (PSA), yesterday, which finalized data, by month, for 2014. Annual demand was revised upward by an average of 71 MB/D compared to what had been reported in the Petroleum Supply Monthlies, which for 2014 are now supplanted by the PSA. The upward revisions began to kick in as prices began declining in the second half of the year. By product, the greatest upward revision was in NGL and liquid refinery gases (LRG) demand, which on an annual average basis accounted for 53 MB/D of the 71 MB/D increase. The second largest product increase was in distillate, revised on average 27 MB/D. As evidenced by the data, the magic of price continues to stimulate demand growth, not only in the U.S, but elsewhere.

Aramco Differential Adjustments for October — Generally More Generous

Saudi Arabia's formula prices for October were just released. Most of the terms to refiners were made more generous vis-à-vis their differentials to the key pricing benchmarks. Differentials in Asia and Europe were all lowered on Arab Light and heavier grades, with the biggest reductions on the heaviest grade, Arab Heavy. Differentials in Asia were tightened modestly on the lightest grade, Arab Super Light, and left unchanged for Arab Extra Light. In the U.S., the terms on all the grades were made more generous by $/0.50-0.60/Bbl.

Tight Oil Operator Review

Despite the weak oil price environment, Eagle Ford was the only one of the "Big Three" U.S. shale plays to see production decline on the quarter. Production continued to rise in the Permian and the Bakken was mostly flat as a drawdown in the inventory of drilled but uncompleted wells offset the impact of reduced drilling. Ongoing deflation in service costs, improved drilling times, high-grading, and enhanced completion techniques allowed operators to increase production using fewer capex dollars. As of the second quarter, full-year spending budgets were down 43% from 2014 levels, but spud-to-total depth (TD) times have come down 10-25% and drilling and completions costs down 15-25%. Operators expect to realize another 5-10% in savings by the end of the year. Most operators expect production to remain flat or decline slightly in 2H15.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

NYC-based PIRA Energy Group reports that the U.S. to allow exchange of Mexican heavy crude for domestic light crude. In the U.S., commercial inventories increased this past week, modestly widening the year-on-year stock surplus. In the Japan, crude runs continued rising, while low level of crude imports drew crude stocks back. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. to Allow Exchange of Mexican Heavy Crude for Domestic Light Crude

The U.S. is set to allow the exchange of up to 100 MB/D of Mexican heavy crude for U.S. light crude. PIRA believes this move will add modest support to U.S. crude prices relative to international levels by reducing the risk of price disconnects. A lighter crude slate in Mexico increases light product yields and allows for somewhat higher runs. In our view, this development represents another incremental step towards easing restrictions on U.S. crude oil exports, but not a fundamental change in policy.

A Slight U.S. Stock Build

Commercial inventories increased this past week, modestly widening the year-on-year stock surplus. In contrast to recent weeks, product stocks drew while crude inventories built. Crude stocks are now almost 94 million barrels higher than last year. The bulk of the remaining product excess to last year is in distillate and propane with the latter showing up in other products.

Japanese Holiday Supports Gasoline

Due to the mid-August holiday, two weeks of data were reported this past week. Crude runs continued rising, while low level of crude imports drew crude stocks back below 100 MMBbls. Gasoline demand was strong both weeks and stocks drew to near record lows. Gasoil demand was depressed in the latest week due to the holiday and stocks built. The kerosene stock build rate accelerated on low seasonal demand. The indicative refining margin has improved a bit on better gasoil cracks and gasoline cracks, which are still characterized as strong.

EIA Proposing Some Significant Changes to Petroleum Data

The EIA published a number of significant proposed changes to their petroleum forms and data in a recent Federal Register Notice. Adding complete balances for a PADD II split into PADD II-A (Northwestern PADD II), and PADD II-B, the balance of PADD II, is one of the major changes. They propose to consolidate the number of breakouts in jet and distillate balances. EIA also proposes to stop collecting crude oil stocks held at production lease storage – currently about 32 million barrels – and remove those volumes from all historical and forecast balances. They are proposing to add better coverage of in-transit stocks moved via rail, tanker, and barge. They are also proposing reorganizing the gasoline balance along the lines of gasoline blended with ethanol and gasoline not blended with ethanol.

U.S. Waterborne LPG Exports Slump

Waterborne LPG exports from the U.S., as tallied by PIRA shiptracking efforts were just 3.3 MMB (470 MB/D) last week, a significant 45% decrease from the previous week’s sailings. Approximately 60% of these shipments are headed to the Latin America/Caribbean region. Worsening arbitrage economics over the past few weeks help to explain this latest decrease in export activity.

U.S. Ethanol Recover some of the Midweek Loses

Ethanol prices were pulled down August 12 because of a USDA report that was bearish for corn values. Assessments rebounded by the end of the week as buyers returned.

U.S. Output Flat

The ethanol industry was stable the week ending August 14, with production remaining at 965 MB/D after having fallen to an eleven-week low 961 MB/D two weeks earlier. Stocks increased by 32 thousand barrels to 18.6 million barrels.

The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Today’s oil and gas environment has been impacted by a myriad of issues including restrained capital spending, curtailed investment and employment cuts for struggling companies across the supply chain. Recovery from current market conditions is expected to be slow, with oil prices likely not to return to pre-crash levels in the near term. However, such conditions are likely to prove beneficial for those private equity firms and strategic investors prepared to take a long-term view of the current downturn.

Constricted capital expenditure is directing Operator attention to maximizing efficiencies of their existing assets. Field redevelopment and production optimization of brownfield assets offers a comparatively low cost option to increase production. For example, Douglas-Westwood research shows that global offshore maintenance, modifications & operations (MMO) spend will decline by at least 12% in 2015 – driven by a combination of delayed projects and pricing. However, the underlying long-term trends remain favorable for brownfield developments – the need to ensure continued production levels holds strong and increased levels of spend are expected to return by 2017. This is recently illustrated by BP’s $1 billion investment into the Eastern Trough Area Project (ETAP). Further brownfield investment will be essential if the industry is to create a competitive cost base and sustain production.

Whilst not subject to the same magnitude of orderbook reduction as Capex-focussed businesses, service firms that cater to ongoing operations have not been immune to implications stemming from low oil price. Virtually all have initiated cost reduction processes to cater for reduced activity and margin pressure. This includes the implementation of downsizing measures.

Our recent discussions with the investment community show an increased focus on brownfield-leveraged companies, for whom margin levels are typically lower, but are not subject to the same risk of backlog collapse. The growing trend towards improving efficiency in the current oil price environment will benefit brownfield focussed firms in the years ahead. Furthermore, long-term investment in the MMO sector may also provide an upside in transferable skills to a potential decommissioning market; should this occur before oil prices rebound to field-prolonging levels.

MMO providers offer an improved investment case, particularly as we settle in for what could be an extended period of low oil price.

China’s stock markets have been suffering considerable volatility, sending the central government scrambling in an attempt to pick up the pieces to support the crashing market. Although Chinese economic growth slowed during the past year and local companies’ profits proved unsubstantial, investment in Chinese stocks remained high, creating a bubble which popped on June 12 with the Shanghai index losing a third of its value. Additional signs of market weakness have spread throughout the Chinese manufacturing industry as sector jobs are cut at a rate unobserved since February 2009. Likewise, the effects of slower than anticipated Chinese growth are already being felt by the energy industry, as China remains the world’s largest energy consumer.

China’s weakening economic prospects and stock market plunge have led crude oil futures to fall to uncommonly low levels in early July as evidence of weakening Chinese energy demand growth mounts. Despite significant reductions in Capex, many US producers are still reporting high crude output levels as operators develop and produce formerly drilled wells, although recent EIA data show declining output collectively in the seven major unconventional basins.

Supply growth is now focused on OPEC where crude production this past month increased to 31.7mbbl/d according to the IEA. Led by growth in output from Iraq, UAE and Saudi Arabia, OPEC is now producing an additional 1.6mbbl/d compared with January levels, approximately 85% of the current supply overhang. Iraq’s crude exports reached uncommonly high levels in July while a record outpour of UAE crude hit the market. Moreover, Saudi Arabia suggested further increasing production levels to retain market share.

As oversupply in the crude market continues, a sudden reduction in Chinese energy consumption growth may continue to apply downward pressure to crude prices. OPEC, however, seem more bullish, announcing last week that “signs of a more balanced market in 2016 may provide much desired stability to the oil market in the longer-term, a prerequisite for the continuity of timely and adequate investments.”

Amidst the gloomy days of August when Brent Crude bottomed out at $42/bbl, the acquisition of Cameron by Schlumberger ($14.8 billion) took place as one of the largest mergers in the oil patch, following the tie-up of Halliburton and Baker Hughes ($32 billion) in November 2014. This consolidation has resulted in an integrated service & equipment provider covering the full oil & gas lifecycle from reservoir to first flow.

Our latest research suggests that the Global Oilfield Services sector will face a 36% decline in expenditure in 2015, prompting industry players to cut costs and reposition themselves through shedding underperforming/non-core business units. Prior to the Cameron merger, Schlumberger had already cut 15% of its workforce while the former had been consolidating business lines since 2014, selling several business units to GE and Ingersoll Rand, and subsequently the Letourneau jackup rig designs, rig kits and aftermarket service businesses to Keppel in late August 2015.

This move suggests a strategic intention towards integration of equipment and service/engineering to improve on efficiency and cost effectiveness of field development. The market will be watching closely for the reaction to the ‘pore-to-pipeline’ proposition. Is this the future? Or is it taking the ‘one-stop-shop’ approach too far?

Low global crude prices have hit Saudi Arabia hard. With a considerable budget deficit, Saudi has been forced to begin borrowing from capital markets – $4bn in July. The kingdom is highly reliant on oil – accounting for more than 90% of budget revenues. Cuts have not been made to capital expenditure and Saudi has engaged in an expensive conflict within Yemen. Consequently, the decision to ride out lower prices has put a huge strain on finances – the IMF estimates $50 oil will lead to a deficit of ~$140bn (20% of GDP) this year. Plugging holes in the budget with bond issues is the clearest sign yet that the kingdom is feeling the pinch, the question is, how long can it continue?

At least for the time being, there seems to be room for more lending, with plans to raise $27bn by year end. Debt levels have been dramatically reduced since the late 1990s when borrowing reached 100% of GDP (prior to July’s bond issue, debt was 1.6% of GDP). At present, liquidity does not seem to be a problem with local banks easily absorbing bond issues. However, further borrowing into 2016 and beyond could prove problematic. Predicted rises in global interest rates over the coming years may make borrowing unattractive, forcing further withdrawals from the country’s foreign reserves. If current oil price trends continue, these reserves could fall to $200bn by 2018 – 70% less than pre-crash levels.

Where does this leave the country? Maintenance of oil output has secured market share and proved devastating for US onshore drilling. However, with a “bathtub” shaped recovery a very real possibility, Riyadh may be forced to make a number of difficult decisions regarding domestic subsidies and expenditure in order to reduce a potentially crippling budget deficit.

NYC-based PIRA Energy Group reports that crude prices plunged in July, with the WTI price averaging just over $50/Bbl. In the U.S., stocks are flat but excess widens. In Japan, crude runs moved higher, with still higher crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

Crude prices plunged in July, with the WTI price averaging just over $50/Bbl – down $9/Bbl from June. Canadian prices fell even more, some $12-15/Bbl. In early August, prices were continuing to slide, with WTI falling to the mid-$40s. Heavy Canadian grades have fallen below $30/Bbl, implying bitumen values approaching $20/Bbl.

U.S. Stocks Flat but Excess Widens

This past week's crude stock draw offset a product build leaving inventories flat for the week. Year-on-year the stock excess widened to 153 million barrels, up 8 million barrels on the week. The largest portion and bulk of the excess is in crude while the smallest excess is in gasoline.

Japanese Crude Runs Move Higher, with Still Higher Crude Stocks

Crude runs surged as maintenance wound down and storm impacts faded. Crude imports remained high and stocks built despite the run increase. Finished product stocks drew slightly, mostly on lower naphtha inventory and a slight draw on gasoline. Finished product demands were, on balance, higher. The indicative refining margin has come well off its June peak and continues to soften.

Aramco Differential Adjustments for September — Clearly Not Incentivizing Liftings

Saudi Arabia's formula prices for September were just released. The adjustments indicate no effort to incentivize increased liftings, even though there will be more avails as summer domestic crude burn begins to ease. Differentials to Asia were raised, Europe cut, and the U.S. were raised for the lightest and heavies grades. The Asian increase was against a backdrop of weaker refining margins and an eroding Saudi advantage against competing African crude for Asian refiners.

Asian LPG Prices Plumb New Lows

Propane futures in the Far East tumbled to $406/MT, the lowest price since March 2009. Saudi CP futures, instruments designed to hedge and speculate on the future direction of contract prices set by Aramco, fell to $326/MT – the lowest level since contract inception in Jan 2009.

Ethanol Prices and Margins Increase

Most U.S. ethanol prices managed small gains the week ending July 31 as production hit a ten-week low. Manufacturing margins improved for the second straight week because of lower corn costs.

Ethanol Output Reaches 11 Week Low

The U.S. ethanol industry reached several extremes the week ending July 31, with ethanol stocks dropping to a 2015-low and ethanol-blended gasoline production climbing to a record high.

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.

Adjusted 1st Half 2015 revenues increased 13.1% to €759 million at current rates (-1.7% at constant rates), which demonstrates good operational resilience in a very challenging market.

First Half 2015 adjusted revenues reached a company record of €758.8 million, confirming BOURBON’s position as a world leader in the OSV market.

Aside from the impact of a stronger US dollar on revenues, activity remained robust, despite adverse market conditions, on the back of a:

• 2.6% increase in the fleet size
• 3.4 point decrease in the average utilization rate
• 2.6% decrease in the average daily rate (in US$)

Compared with the second semester of 2014, adjusted Revenues decreased by 6.8% at constant rates Compared with the preceding quarter, adjusted revenues decreased 2.2%, reflecting the additional impact of average daily rate renegotiations and further stacking of vessels.

"The first half of 2015 was highlighted by a continued slowdown in activity in most regions and negotiations with clients on commercial terms. Throughout this difficult period, BOURBON has demonstrated resilience, evidenced by the revenue progression, thanks to our strategy of operating a safe, modern and efficient fleet", says Christian Lefèvre, Chief Executive Officer of BOURBON. "While the duration of this downturn is uncertain, BOURBON is constantly adapting to the market and is unwavering in its focus on excellence in service execution and reducing its costs. This focus will not only improve the group’s resilience in the current cycle but will make it even stronger going forward."

(a) Adjusted data:
The adjusted financial information is presented by Activity and by Segment based on the internal reporting system and shows internal segment information used by the principal operating decision maker to manage and measure the performance of BOURBON (IFRS 8). As of January 1, 2015, the internal reporting (and thus the adjusted financial information) records the performance of operational joint ventures on which the group has joint control using the full integration method. Adjusted comparative figures are restated accordingly.