Anadarko Petroleum Corporation (NYSE: APC) announces it has closed the acquisition of Freeport-McMoRan Oil & Gas's deepwater Gulf of Mexico assets. The transaction is effective Aug. 1, 2016. Anadarko also increased its oil-growth expectations and discussed plans to further accelerate its rig activity in the Delaware and DJ basins. In addition, the company provided an update on its deepwater drilling activities in the Gulf of Mexico, highlighted by successes at Warrior and Phobos, which add to its inventory of future tieback opportunities, as well as a successful development well in the Heidelberg field.
"As a result of closing this transaction, Anadarko now operates the largest number of floating production facilities in the deepwater Gulf of Mexico, which provides a competitive advantage to leverage this infrastructure into attractive new investment opportunities," said Anadarko Chairman, President and CEO Al Walker. "This region continues to play a key role in our portfolio by contributing to our higher-margin oil growth profile, while generating substantial future free cash flow to accelerate the growth of our world-class U.S. onshore assets in the Delaware and DJ basins. The expanded portfolio of deepwater facilities provides numerous hub-and-spoke opportunities that can generate rates of return of better than 50 percent at today's prices. Given our industry-leading capabilities in deepwater project management, production solutions and exploration success, adding these high-quality assets greatly improves our ability to deliver strong performance in a volatile commodity environment."
At the time the acquisition was announced, Anadarko indicated the acquired assets would generate substantial free cash flow over time, which would facilitate increased investment in the U.S. onshore and position the company to deliver a five-year compounded oil growth rate of 10 to 12 percent in a $50 to $60 oil-price environment. As previously announced, in anticipation of closing the acquisition, Anadarko added two rigs in each of its Delaware and DJ basin positions early in the fourth quarter. Going forward, the company plans to further increase activity in each area, with expectations of ending the first quarter of 2017 with 14 operated rigs in the Delaware Basin and six operated rigs in the DJ Basin. This compares to seven operated rigs and one operated rig in each of these basins, respectively, at the end of the third-quarter 2016. The company's new investments in these basins generate rates of return of 35 percent to more than 60 percent at today's prices.
"As a result of our large and well-located acreage positions, improving cost structure, midstream infrastructure advantages, and commodity-price outlook, we now believe we have the ability to deliver a five-year compounded annual oil growth rate of 12 to 14 percent, while investing within expected cash inflows," said Walker.
Further highlighting the value of Anadarko's deepwater Gulf of Mexico tieback and exploration program, the company also has announced its Warrior exploration well encountered more than 210 net feet of oil pay in multiple high-quality Miocene-aged reservoirs. The Warrior discovery is located approximately 3 miles from the Anadarko-operated K2 field and is expected to be tied back to its Marco Polo production facility. Anadarko is the operator at Warrior with a 65-percent working interest. Other partners include Ecopetrol (20 percent) and Mitsubishi Corporation Exploration Co., Ltd. (15 percent).
At the Phobos appraisal well, which is located approximately 12 miles south of the Anadarko-operated Lucius facility, the company has already encountered more than 90 net feet of high-quality oil pay in a Pliocene-aged reservoir similar to the nearby Lucius field. This secondary accumulation was present in the Phobos discovery well and will be evaluated for tieback to the Lucius facility. Meanwhile, drilling is ongoing toward the primary objective in the Wilcox formation. Anadarko has a 100-percent working interest at Phobos.
At the Heidelberg field, the fifth production well currently being drilled has encountered the reservoir sand with more than 150 net feet of oil pay to date. The well will be completed immediately following drilling operations and is expected to be brought on production early next year.
"The successes to date at Warrior and Phobos further demonstrate the value of our assets in the deepwater Gulf of Mexico and our tieback strategy. It also illustrates why we have tremendous confidence in the potential of our '3 Ds' – the Deepwater, Delaware and DJ – to drive growth and value for many years to come," added Walker. "We look forward to providing further details on these successful developments and other results during the first quarter of next year."
OPEC Deal, Trump Election Boost Industry OutlookWTI curve moves into backwardation for 2018, forming a “humped” pattern. Cushing stocks to rise again in December, with declines for 2017. Arbs moving to export mode for January, after closed Nov/Dec export arb. Improved outlook for pipeline projects with energy-friendly Trump administration. Light Canadian/Bakken differentials weak now, stronger by spring. Midland Sweet differential goes positive with all pipelines restored.
Wintry weather and stalled supply has prompted yet another week of heavy buying, with the Jan’17 gas futures contract adding ~0.30¢ week-on-week. In a little over three weeks, the prompt contract has gained ~$1, and is now trading at a two-year high at ~$3.80/MMBtu on renewed expectation of wintertime rebalancing. The buying spree appears to be a testament that producers have finally reached a critical inflection point in restraining surplus shale supplies, with the related bullish price implications exacerbated by the acute cold now taking hold across a large swath of the U.S. Indeed, as of this week — to be reflected in the next EIA weekly storage report — the industry officially eliminated the year-on-year inventory surplus that emerged exactly two years ago.
This week saw French 1Q 17 contract price dropping significantly. While prevailing warmer weather has contributed as well, concerns over French nuclear availability have eased, following the French Regulator ASN’s updates on the reactors affected by the channel head anomaly. While the ASN announcement has been a bearish development, PIRA argues that the market may be now underestimating a number of bullish risks for the French market for 1Q 2017.
The bearish trend from last week continued into the first half of this week, with 1Q17 FOB Newcastle prices falling from $80.00/mt to a low of $74.75/mt. A shift from cold temperatures to mild temperatures in Europe and in some areas of Asia, coupled with the restart of nuclear generation capacity in South Korea added further bearish impetus to pricing. However, after the release of China's import data for November, showing imports of nearly 27 MMmt, the market recovered strongly on Thursday into Friday, with FOB Newcastle prices recovering back to just under $78/mt by Friday. To PIRA, the pricing action of the past two weeks illustrates the battle that has been raging between market sentiment and fundamentals. On the sentiment side, the moves taken by the Chinese government to tamp down pricing (encouraging producers to sign term contracts with power producers and cracking down on speculation) has clearly spooked the market into a bearish turn. On the fundamental side, the reality on the ground is that Chinese domestic production is rebounding, but slowly.
A Trump EPA (with Scott Pruitt as proposed head) could exercise discretion in implementing older final rules but replacing them through standard regulatory procedure would be more difficult. Regs finalized after May (CSAPR Update, SO2 designations, Regional Haze Amendments) could be overturned under the Congressional Review Act. Inaction from Trump EPA will spur environmental lawsuits and petitions from states (MD already filed to force plants in upwind states to run NOx controls). The Obama EPA has moved to drop Texas from the CSAPR Annual programs but there are Haze implications; they also designated Texas coal/lignite plants for SO2 nonattainment. Emissions data indicate bearish CSAPR fundamentals. CSAPR seasonal NOx prices have fallen since the election and would collapse in the case of a CSAPR Update repeal.
In North Dakota, a major energy-producing state, two main surveys of the employment condition have produced conflicting estimates regarding labor market slack. The weight of evidence, at this point, suggests that the state’s labor market is relatively tight; the implication is that the state’s mining sector may not be able to increase hiring rapidly. Two main downside risks for 2017 are potential political surprises in Europe and possible negative spillovers of Fed tightening on emerging economies. For now, though, these risks look manageable. The U.S. and China reported encouraging data this week.
U.S. LPG markets continue to be driven mostly by the broader energy markets, with little catalyst to march to their own drumbeat. This may change in the months ahead, particularly if a colder winter presents itself and stocks begin to draw at substantially higher rates. Mt Belvieu propane prices gained 1.8% to 63¢/gal and butane improved less than a penny to 84.3¢.
Prices were supported by a robust export market. Manufacturing margins improved week-on-week. Brazilian ethanol is in short supply as mills in the Center-South region are shutting down for the inter-harvest period. The factories still operating are focusing on sugar production.
When domestic balance sheet changes are limited to soybean oil, you really need to dig deep to find anything noteworthy in the December WASDE. While the absolute lack of changes to corn, soybeans, and wheat was expected by many, the World Board’s demand passivity may offer a hint towards understanding what January’s “final” report, and beyond, will look like on the demand side.
On December 4, the U.S. Army Corps of Engineers announced it will not approve an easement for the 470 MB/D Dakota Access Pipeline, pending the exploration of alternate routes and an environmental assessment. At a minimum, the latest delay will push back final approval until the early part of President-elect Trump’s administration, with construction postponed by an additional 90-120 days. In a best-case scenario, the project would start up around mid-2017. However, the method through which the Trump administration will choose to approve construction remains unclear, and the high probability of legal challenges increases the uncertainty. More broadly, a galvanized environmentalist movement raises the odds of more organized pipeline protests and legal delays to future projects.
Light products built substantially this past week as reported demand weakened while crude stocks drew 2.4 million barrels. Cushing crude stocks showed a huge 3.8 million barrel build as Canadian shipments remained very strong and pipeline maintenance reduced flows south. For next week, crude stocks are expected to draw again but Cushing crude stocks build 1.8 million barrels as Cushing becomes a convenient holding point to reduce Gulf Coast end year inventory taxes.
The supply shortfalls cited for the recent jump in Asian spot price assessments don’t hold up under close scrutiny in general: global supplies (delivered, not nameplate) were up by 60-mmcm/d as of last month and are on track to continue on a residual growth trend, even if no new trains start up over the winter. Shortfalls from Gorgon are real after a few months of steady output, but volumes were still in the early, pre-contracted ramp up phases and are thus not to be considered out and out losses.
The equity market rose on the week and set another record high. Volatility fell and debt performance strengthened, particularly in the high yield and emerging markets. The U.S. dollar was generally stronger against the euro, British pound, and yen. It weakened, however, against the Russian ruble and a host of non-yen Asian currencies. On the commodity front, most of the changes were modest. Globally, bond yields continue to generally rise, particularly for longer-term maturities.
Tanker markets have benefited in 4Q16 from seasonal delays and record OPEC production ahead of planned cuts in January. But lower tanker rates in 2017 are likely in the face of lower OPEC output, rapid fleet growth, and the drawdown of excess stocks.
Ethanol-blended gasoline manufacture fell sharply for the second consecutive week, plunging to a ten-month low 8,646 MB/D. U.S. ethanol production rose 11 MB/D to a near-record 1,023 MB/D. Inventories built by 82 thousand barrels to 18.5 million barrels, rebounding from an annual low.
The December RGGI auction cleared well below September auction prices and below the secondary market. Demand for allowances exceeded supply, but the coverage ratio was down and the auction saw a sharp drop in participation. Of the registered bidders, a smaller than usual percentage participated in the auction, with almost all awarded allowances. Volumes won by compliance players continues to decline. The results reflect the lack of market price signals from the 2016 Program Review. Secondary market prices responded by dropping strongly toward the new clearing price in a flurry of trades. Price support will wait for the release of the Model Trading Rule next year.
On December 7, the Senate passed the 21st Century Cures Act, following overwhelming approval in the House last week. President Obama’s signature appears highly likely in the coming days. Notably for oil markets, the bill will be partially funded through 25 MMBbl of SPR sales between Fiscal 2017 and Fiscal 2019. This SPR provision is the latest indication of Congress’ attraction to non-emergency SPR sales to fund unrelated items. Collectively, three bills passed since November 2015 will require 149 MMBbl to be drawn down from the SPR between 2017 and 2025. A stopgap funding bill introduced on December 6 includes a provision to sell an additional $375 million (~6 MMBbl) in 2017, to upgrade SPR infrastructure.
Crude runs rose again as turnarounds wind down. Crude imports increased such that stocks built. Finished product stocks drew to another new cyclical low. Compared to year-ago, the deficits on product and total commercial stocks widened; crude narrowed slightly. There were moderate stocks draws on gasoil, naphtha, and kerosene, and lesser draws on gasoline and jet. Margins and cracks eased slightly, and down from their November average. Margins remain statistically very good but have settled back to September and October averages.
Despite the almost perpetual build in renewable output across Europe in recent years, 2016 marks the point when gas-to-power demand has finally been able to buck the sustained downtrend on thermal use and attain some very real growth. How long will it last? The short answer will come from a combination of policy changes (nuclear and coal shutdowns) and weather (temperatures and sun/wind availability). One thing is for certain: price volatility, as it relates to gas use in the power sector, is certainly here to stay and will increase.
Global equity markets broadly surged on the week. In the U.S., among the key tracking indices, banking, housing, retail, and tech had very strong performances with gains of 4-6%. Energy actually lagged slightly, but still posted a good gain. Internationally, all the tracking indices were higher, other than Japan. Latin America and Europe outperformed.
Several non-OPEC countries are set to attend joint OPEC-non-OPEC meetings in Vienna on December 10 to commit to production cuts agreed upon at the November 30 OPEC meeting. OPEC’s pledge to cut 1.2 MMB/D is contingent on non-OPEC agreeing to another 0.6 MMB/D of cuts. Russia has already stated plans to reduce by 300 MB/D. PIRA expects the other non-OPEC members including Mexico, Kazakhstan, Oman, and Azerbaijan to announce reductions for the remaining amount. Cuts will be directionally in line with countries’ expected production declines. History suggests that compliance is not assured. But in our view, cooperation to meet the non-OPEC cut target will be sufficient to support prices.
U.S. transportation indicators remain largely bullish. VMT growth still relatively strong through September. October VMT should show good growth, but then slow in November and December. Our expectation for 2017 is conservative. Gasoline demand growth is expected to slow into 1Q and then reaccelerate. Transportation diesel indicators suggest that distillate demand declines will continue to slow, then turn moderately positive in 1Q. Air travel data show cargo trends are influencing the strong growth seen in jet fuel demand.
India is in early talks with Russia to swap natural gas with China and Myanmar as an alternative to building world's most expensive pipeline costing close to $25 billion. The two nations had in October signed an initial pact for building a 4,500 km to 6,000 km long pipeline from Siberia to the world's third biggest energy consuming nation. ONGC Videsh Ltd Managing Director Narendra K Verma said talks are on with Russian gas monopoly Gazprom for an alternative swap.
One of the components of the House GOP's Tax Reform Blueprint proposal, outlined by Speaker Paul Ryan and consistent with statements by President-elect Trump, is a border adjustment provision which would effectively eliminate the tax deductibility of expenditures on imported goods (and services) including imported raw materials used in manufacturing. If this were to become law it would effectively raise the cost of imported crude relative to domestic crude by the tax rate (say 20%) times the cost of crude. At today’s prices, that would be above $10/barrel. U.S. crude producers would benefit either because refiners would have a huge incentive to purchase domestic rather than imported crude, thereby bidding up the price to import equivalent, or by exporting to foreign markets thereby avoiding income taxes. Refineries dependent on imported crude would be disadvantaged under this plan. Moreover, all refiners would face higher feedstock costs and U.S. consumers would see higher retail prices.
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.
E&P deepwater exploration and appraisal activity has dramatically declined. In line with falling E&A activity, Reserve Replacement Ratios (RRRs) have been declining for the majority of major E&P companies. This week, we highlight some of the positive newsflow from offshore E&A activity in recent times.
Myanmar, once impeded by political and economic trade embargoes, has seen a dramatic turnaround in fortunes since the lifting of international sanctions in 2012. A number of Western E&P players such as Shell, ENI and Chevron, as well as Independents including Reliance Industries and Oil India amongst others, have been drawn to the country’s gas potential, most notably in the deepwater Rakhine basin. Following the discovery of the Thalin-1 well in the AD7 block in Feb 2016, Woodside has shown significant commitment to exploring and developing acreage (up to 4-7 E&A drilling campaigns). The Australian operator has recently contracted the Dhirubhai Deepwater KG2 (a deepwater drillship), scheduled for a year-long campaign in 2017.
In June 2016, an Exxon-Hess alliance has upgraded the total reserves for its Liza field discovery offshore Guyana to 1.4 billion barrels; twice the size of previous estimates. The find represents the first commercial discovery in the country for the past 50 years. The success of the Liza field has injected strong enthusiasm for exploration activities offshore neighboring Suriname, where Petronas has begun an exploration drilling campaign in May 2016, while Apache has commenced seismic acquisition on block 58 in June 2016. Compared to the tepid reaction in 2015, the current round of acreage offered by Staatsolie, a state-owned oil company, has garnered widespread interest amongst the international E&P community.
Current oil prices do not support major stand-alone deepwater developments. All of the sanctioned deepwater projects in 2016 are subsea tie-backs to shore. However, it is evident that as the market recovers there are substantial reserves that can be brought into development as oil prices allow. We expect operators to develop these finds through conceptual / front-end engineering during the downturn if they wish to be a ‘first mover’ when the market conditions allow sanctioning.
Chen Wei, Douglas-Westwood Singapore
As we moved into the festive period last month, BP-operated AIOC and SOCAR were busy signing a letter of intent on the future development of Azerbaijan’s Azeri-Chirag-Gunashli (ACG) project.
Latin American Gasoline Imports Inch Higher in 1Q17PIRA projects 1Q17 Latin American gasoline demand to average 2.7 MMB/D, 15 MB/D higher year-on-year. Diesel demand is also expected to grow by 10 MB/D. Mexican gasoline demand is forecast to grow, while Mexican and Venezuelan combined demand of diesel is expected to be lower on the year. 1Q17 Latin American gasoline and distillate imports are projected to increase. Regional refinery runs are forecast down year-on-year. Brazilian refinery runs are expected to increase in the next few months as import incentives for automotive fuels are expected to limit imports. Petrobras raised its ex-refinery prices for both gasoline and diesel in December.
Despite the ongoing inability to move gas optimally in Mexico, the nation’s dependency on Lower 48 gas will continue to increase in 2017, as domestic output of oil and gas is expected to remain on a protracted structural downtrend. Clearly, PEMEX’s ability to invest in exploration and production remains limited. Accordingly, with a large swath of cross border capacity set to commence in 1H17, Lower 48 gas should be primed and ready to fill such void.
PIRA released a U.S. Solar Market Outlook examining major trends shaping the U.S. solar power sector, providing a five-year forecast of penetration (annual capacity build for both utility-scale and distributed systems) for key regions. Recent capacity installations, technology and system costs, policy and rate design, and other market trends are reviewed. Solar build is a key element of PIRA’s views and forecasts of North American Electricity power market balances and prices, and PIRA’s new U.S. Solar Market Outlook offers more detailed coverage of this key technology. PIRA forecasts strong build-out between 2016-2021 and does not expect substantial negative impacts on U.S. solar from policies under the Trump administration and 115th Congress.
After the Fed raised the policy interest rate this week as expected, the focus is now on how often the central bank will tighten during 2017. The Summary of Economic Projections for December pointed to a somewhat more hawkish Fed. But projections have not yet incorporated possible effects from the incoming administration’s policy. Fed meeting participants remain in a wait-and-see mode, and the chance that the central bank will become overaggressive in raising rates next year appears low for now. U.S. data were encouraging this week. The Chinese government’s announcement on the car sales tax was positive for the vehicle sector outlook.
Phillips 66 announced on December 16th that the Freeport, TX LPG terminal is fully operational, and has loaded its first contracted cargo on the 530-MB VLGC named the Commander. The terminal has nameplate export capacity of near 150 MB/D. The ship is headed to Cristobal, Panama but its final destination is likely China, via the Panama Canal. PIRA has observed that the terminal has been operating since mid-November and the company has loaded four VLGCs prior to the Commander. PIRA does not believe this facility will operate near capacity for sustained periods in 2017 due to expected challenging export arbitrage economics.
U.S. ethanol values were boosted by a robust export market and low inventories the week ending December 9. Assessments were supported by stronger corn and oil values. Margins jumped Friday. RIN prices tumbled after Scott Pruitt was nominated for Administrator of the EPA.
After a Nov and early Dec where European carbon (EUA) prices traded in a wide €4.30-6.50 range, EUAs stabilized at €5 ahead of the EU Parliament’s European Committee vote on EU ETS post-2020 reforms – but moved down soon afterwards. EU ETS supply-demand fundamentals will remain poor in 2017, but policy developments could drive EUA prices. Positive post-2020 negotiations could offer some price support starting in 1Q17. However, progress on the EU’s 2030 efficiency and renewables targets will likely weigh on prices, although legislative schedules for those proposals have not been set.
Seaborne coal prices rebounded sharply this week, with the threat of strike activity in Colombia (which has seemingly been averted) pushing CIF ARA forwards up by the greatest extent. Further evidence of strength in Chinese electricity and coal demand were released this week, providing the market with considerable upside support. Despite the fact that the slowdown in China's demand from the Lunar New Year is looming, there is still several weeks of strong winter demand to get through, and buyers are likely still focused on ensuring adequate fuel supply. While the end of the labor strike threat in Colombia may pull down prices into next week, potential supply disruptions remain, particularly in the Pacific Basin, with the la Niña conditions potentially causing above normal rainfall in Australia and Indonesia over the next few months. This should keep prices supported into the New Year. However, if buyers can make it through the winter peak season unscathed following a year of largely unexpected growth in Chinese demand, 2Q and 3Q17 prices will face considerable downside pressure.
As traders become more and more impatient with the continuing resilience being exhibited in soybeans, more “negative” news last Friday and over the weekend has confounded the bears once again. On Friday, Brazilian agro-consultancy Safras & Mercado published a 106.1M MT production estimate, 4.1M MT above the December WASDE and 5M MT larger than PIRA.
Overall commercial stocks declined some 2 million barrels this past week compared to a 5 million barrel build the same week last year. This past week’s inventory decline was led by crude oil’s 2.6 million barrel drop even though Cushing crude stocks built 1.2 million barrels. Real product demand was not as weak as the EIA suggests, because of its inflated estimated exports. Next week PIRA sees another overall stock decline, this time led by distillates. Crude stocks are expected to show a small decline while Cushing builds.
Without the guarantee of cold weather ahead this season, it appears that erstwhile buyers might be having second thoughts about last week’s winter-time rally. To be sure, the market is making significant progress toward reversing the month-to-date gains, with the Jan’17 futures contract currently trading at $3.40/MMBtu or a W/W decline of ~$0.35. Moreover, the absence of “blue” weather forecast maps suggests the possibility that futures prices might be capped at $3.50/MMBtu until colder temperatures re-emerge in January.
German pricing has seen some increased volatility, with the baseload spot price having reached €60/MWh on Dec 14, a level not seen for the past 3 years. This is the result of low wind output (2 GW onshore and 600 MW offshore) and outages at coal plants, which has lowered the overall availability of conventional generation. The patterns of Dutch interconnector flows have also significantly changed versus the history, with the Dutch market turning overall in a net exporting position since September. Even if German flows to the Netherlands are restored to historically higher levels, the increased role of Dutch flows toward Belgium and France will still prevent downsides for the Dutch market.
The S&P 500 posted a record high on Tuesday and then spent the remainder of the week consolidating that peak. Financial stresses remain very low with ongoing low volatility. The U.S. dollar was generally stronger. On the commodity front, energy has remained strong, and precious metals have continued to give ground. The Cleveland Fed released their December report on inflation expectations, and there was a notable increase across all of the tracked maturities as the post-election reflation theme continues to play out in the market data.
With 10 days of trading left until 2017 and bearish fundamentals no matter where you look, it’s difficult to get too excited about the prospects of a year-end rally, although Fund money flow will have the ultimate say on that topic.
On December 9th, EPA proposed new requirements for Texas under the Regional Haze program. The rule would require significant upgrades at 8 coal-fired plants - similar to those in the previous Regional Haze rule for Texas, which EPA voluntarily withdrew last month after it had been stayed by the 5th Circuit Court. While these developments present a downside for Texas coal, PIRA anticipates that the new administration will not finalize the rule as proposed. This development is one of several Texas-specific rules issued as of late, including finalized SO2 nonattainment designations. EPA on December 14th also finalized a rule affecting the broader implementation of the Regional Haze program during 2018-28.
U.S. ethanol production increased by 17 MB/D the week ending December 9 to a record 1,040 MB/D, eclipsing the previous high of 1,029 MB/D established earlier this year. Inventories built by 546 thousand barrels to 19.1 million barrels, though they are still 1.25 million barrels lower than this time last year. Ethanol-blended gasoline manufacture rose to 8,864 MB/D, rebounding from a ten-month low of 8,646 MB/D.
Japanese crude runs continued their rise as turnarounds wrap up. Crude imports fell back such that stocks drew 3.1 MMBbls. Finished products built a slight 0.3 MMBbls off their cyclical low. Compared to year-ago, the deficit on total commercial stocks was little changed at ~17 MMBbls, though the deficit on crude and finished products both widened slightly. Kerosene demand was much lower, as tertiary and secondary pull on primary inventory ebbed. The stock draw rate moderated, but the deficit relative to last year widened. Margins and cracks eased slightly on the week, and down from their November average.
The LNG market is falling into an intriguing trap if it does not pay attention; price support now is largely being caused by supply disruptions that are not necessarily sustainable. While it is possible that production problems will persist, it eerily reminds us of the crude oil price trap of 2014, when supply disruptions in the Mideast masked a significant surge in new supply emerging from North America.
In November, loads in the East fell by 1.7% year-on-year as heating degree days in the U.S. fell by 6%. However, ERCOT loads increased by 2.3% due to much above normal cooling demand. Stronger heating loads and higher gas prices are driving energy prices up year-on-year at all hubs in December. December Henry Hub is likely to average more than $1/MMBtu above November. However, PIRA expects adequate supply to keep a lid on gas prices. Despite the price gains, implied gas heat rates are down across the board and margins are weaker in most markets.
The 2017 Auction Reserve Price for CA has been set and the V-17 Dec-17 benchmark is averaging mid-way between the 2016 and 2017 ARPs. The Appellate Court decision in the auction lawsuit could come shortly following the January oral arguments date and will move the market; the CA Supreme Court will have the final say in 2017. Bidding interest in the Feb 22 auction could be diminished by a lack of news from the courts and a desire to “wait and see.” The Nov 2016 partial compliance surrender showed increased interest in offsets. Levels of offset usage will be a key driver of auction allowance demand (and allowance prices) under either legal scenario.
Global equity markets posted a mixed week following the setting of record highs. In the U.S., among the key tracking indices, energy, consumer staples, and technology all outperformed and were little changed in an overall market that moved lower. Utilities gained on the week, while retail fell back the most. Internationally, pretty much all the tracking indices moved lower with noticeable weakness emanating from Asia and Latin America.
In the coming weeks, Japan will take delivery of its first U.S. sourced cargo. Not coincidentally, the arbitrage between the U.S. Gulf and Asia has recently opened up to the point where even full cost recovery can be made- assuming that cargo is being sold at or near the levels being quoted for spot volumes in Asia of around $9.00/mmBtu.
The third UK capacity market auction, completed on December 8, represented a milestone for battery storage systems – with 501 MW in batteries awarded contracts, or 10% of the 4.8 GW in total contracts for new capacity. The 28 successful batteries are all new-build assets and will use the 15-year contracts to finance their construction. However, PIRA’s analysis suggests that the final clearing price is insufficient to build and operate a li-ion battery economically, suggesting that operators will have to complement these contracts with significantly larger revenue streams.
Fuel oil movements southbound through the Suez Canal have declined since mid-2015 in response to lower Russian fuel oil exports out of the Black Sea. Middle distillate movements northbound have increased over the same period, mainly because of additional Middle East refining capacity. Gasoline movements northbound are down slightly.
Confirming our early guidance of shale production declines in 2016, the 3Q16 U.S. Producer Survey reveals a year-on-year loss for the reporting group — notably, the first decline since the surge in shale production began in 2008. Given the relative weighting of the Survey (toward those companies active in unconventional plays), the retrenchment speaks volumes about the depth that prices have fallen this year. In contrast to prior quarters, U.S. production activity during the reporting period was defined by stagnation in the Appalachian basin — a region which has consistently offset declines occurring in other basins.
In December 2015, the U.S. government repealed restrictions limiting the export of U.S. crude oil. Until then, Canada was the only significant exception to the rule and exports to Canada averaged 430 MB/D in 2015. Since easing trade limitations, the range of destinations has broadened, though Canada still continues to serve as a major recipient of U.S. crude. Over the ten-month period from January to October 2016, Canada accounted for 60% of U.S. crude exports, followed by Europe at 20%, Latin America at 10%, and Asia at 10%.
PIRA's latest update of major country Asian product demand shows growth remaining strong, though there was some easing in the latest snapshot. Our latest assessment of growth is now 800 MB/D versus year-ago. Versus the assessment last month, there was noted slowing of growth in China and India, which remain the key drivers. In China, gasoline demand remains strong and dominates performance in Asia, supported by strong car sales and signs of economic reacceleration in latest Chinese data.
PIRA sees some chance that Libyan oil exports will start to rise in the coming weeks, following the Zintani militias’ agreement to end their blockade of key western pipelines. However, any gains remain highly uncertain and, in our view, unsustainable. Local militias currently control the Sharara and El Feel fields that feed the pipelines to the Mellitah and Zawiya western export terminals, and they are embattled in their own conflict. Fighting is likely to break out and disrupt any production increases. We may also see Ibrahim Jathran (head of the facilities guards that lost control of the main eastern terminals to Khalifa Haftar) get involved with more counterattacks.
The impending Trump administration is likely to push for better relations with Russia which could result in the lifting of sanctions. Even if the efforts are successful, it will take time before significant additional production either from shale oil or from the Artic comes to market. Shale oil is likely to be developed faster than the Artic. But Russian shale remains in its infancy and it will take time to build up sufficient drilling and completion infrastructure, and achieve significant cost reductions. Russian Arctic development will likely take much longer due to higher costs, logistics and environmental concerns. Even if sanctions are lifted, long lead times between discovery and production suggest significant new Arctic volumes are not likely for another 8-10 years.
At mid-month, December looks to be 3% colder than the 10-year normal for the three major OECD markets, bringing the month oil-heat demand to 120 MB/D above normal. On a 30-year-normal basis, the markets are 2% warmer.
U.S. mining sector employment boomed during the 2010–2014 period (increasing by roughly 220,000 jobs, or 35%), as oil production rose substantially. Slack in the labor market made it easy to fill drilling jobs in this period – coming off the 2008–2009 recession, the national unemployment rate was almost at 10% in early 2010. In the last two years, mining shed jobs at a fast pace as lower oil prices and a collapse in rig counts took their toll. But the overall labor market performed well and the unemployment rate came down to a historically low level of 4.6% last month. With low unemployment, increasing drilling activity will very likely result in wage pressure, raising the cost of producing shale crude.
It is unclear whether Iraq will implement the November 30 agreed cut of 210 MB/D because of an internal conflict between Baghdad and the South Oil Company. PIRA expects the export agreement between the KRG and Baghdad to hold through 2017, but northern security risks will persist long after the expulsion of ISIS. Irregular export payments prompted warnings of lower investment from operators in Kurdistan, where former Baghdad-controlled fields account for an increasing share of oil production. In the south, contract negotiations continue with operators, delaying targeted production ramps.
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.
With OPEC Delivering on Cuts, Prices to Move HigherReflation backdrop together with OPEC cuts are very bullish for oil prices. OPEC cuts and the momentum of supply losses will make it difficult for the supply chain to turnaround fast enough to avoid very low oil inventories in second half 2017. Geopolitical risks suggest downside to PIRA’s supply forecast. Refining margins to stay relatively healthy with help from increased light product pull by Latin America. Global bunker spec changes will be a game changer in three years, but will affect investment plans long before then.
Cash prices this month have been whipsawed by exaggerated NYMEX volatility, with abnormally mild weather the driving force. Yet, colder forecast changes on the horizon have restored a bid under cash prices, with further price appreciation waiting on December storage withdrawals.
There’s historical context attached to every comment in today’s report, and here’s one more. An old CBOT saying goes “Bulls feast on Thanksgiving, Bears feast on Christmas”. This year the bulls had a good Turkey Run in corn and beans while wheat lagged, setting up the possibility of the old adage coming true again.
Prices were supported by robust exports resulting in a large drop in stockpile. Manufacturing margins increased as product prices rose faster than corn costs. The EPA set the final biofuels mandates and standards for 2017. RIN prices soared.
The November U.S. payroll report was constructive for the economic outlook, as most industries reported solid job growth. A separate household survey of the labor market, however, was potentially worrisome: the unemployment rate fell sharply, as a result of unemployed people dropping out of the labor force in significant numbers. How Fed policymakers assess this development will have a large bearing on monetary policy in the coming periods. In emerging economies, India reported solid GDP growth for the third quarter. Brazil’s activity data disappointed. China’s industrial confidence indicators continued to improve.
Coal pricing was mixed this week, with the bullish rally that prevailed last week extended into Monday/Tuesday, although prices then moved lower over the balance of the week. The news that several major Chinese coal producers were signing term deals with consumers at the coal trade fair in Hebei this week gave the market a bearish push. Additionally, the chairman of the China National Coal Association stated this week that China's coal prices will stabilize in the 550-600 yuan/mt range ($80-$87/mt), further underscoring the push from China to deflate high coal prices. 1Q17 FOB Newcastle prices declined by the largest extent, falling by over $2.00/mt while API#2 and API#4 prices managed slight week-on-week increases despite downward pressure over the second half of the week. Looking forward, coal demand is on firm fundamental footing with recent cold weather boosting electricity demand and with hydro generation likely to remain soft into 1Q17. Additionally, seasonal risks to coal production and transportation have not yet peaked, which should prevent much further price erosion and may foster a pricing rebound.
The Obama Administration is finalizing regulations, despite threats of Congressional Review Act repeal. EPA continues to work on the Clean Power Plan’s FIP and the model trading rules. Amendments to the Regional Haze Rule, are being finalized. Final GHG emission standards for heavy-duty vehicles were published, along with the CSAPR rule impacting power plant NOx emissions. RFS standards for 2017 and 2018 have been finalized but not yet published. EPA released a proposed determination not to revise CAFE standards for 2022-2025. DOI regulation of venting and flaring on federal lands has been published. Final rules after May 30, 2016, may fall under CRA review. Since mid-May, 49 "major" rules and 973 non-major rules have been received by GAO.
Downside risks noted last month came to fruition in November, but they quickly dissipated as gas prices reversed course during the second half of the month and precipitation declined to below-normal levels. Precipitation above The Dalles averaged 56% of normal through November 25; the water year to date remains above normal, but runoff projections have been trimmed. Although implied heat rates remain down year-on-year through the first half of 2017 as the market digests solar capacity additions, higher gas prices, and increases in hydro supply (even after the markdown), we expect a rebound during the second half of the year.
Prices will move higher with ongoing rebalancing. Demand growth is healthy. Relatively firm gasoline cracks support margins. Light product stock levels are still high but declining. Product price spreads shift from favoring gasoline toward distillate but gasoline comes back quickly in 2017. Global bunker sulfur limits drop to 0.5%beginning in 2020. No near term impact on prompt prices, but it will affect forward curves and investment decisions; European sour crude refiners will need to adapt.
European gas markets are demand focused at the moment — focusing on increasing gas-to-power demand and cooler-than-normal temperatures. Power demand across Central and Western Europe is up 70 mmcm/d year-on-year; however, the big shift, really happened in September. Much of the current increases in demand are seasonal. At the same time, heating demand for residential and commercial sectors is seeing the first higher-than-normal numbers in consecutive months for six years. The last time we saw this sort of continued cold was in 2010, which coincidentally was also a La Nina year.
Global equity markets posted a degree of consolidation from record highs. In the U.S., among the key tracking indices, energy performed the best on the back of higher oil prices in the wake of the OPEC agreement to cut output. Banking and materials also outperformed, while housing was the weakest performer. Internationally, the tracking indices were mostly lower, with Latin American displaying the greatest retrenchment. Japan was modestly higher.
U.S. LPG prices mostly rose in line with the broader energy markets. January Mt Belvieu propane prices gained 7.4¢ to settle at 62¢/gal Friday, the highest level yet in 2016. Similarly, n-butane at the market center gained 12.7% to 83.6¢. Cash isobutane continued to rally last week, encouraged higher by the latest EIA inventories, which for September put iC4 stocks at 8.3 MMB vs 9.5 in the year ago period. Isobutane prices ended the week at a strong 19¢ premium to normal. Ethane prices rose faster than Henry Hub natural gas, and thus C2’s premium to gas in BTU terms gained to 26¢ from 12¢ a week ago.
The week ending November 25, U.S. ethanol stocks dropped to the lowest level since October 2015. Ethanol production decreased by 2 MB/D to a still-high 1,012 MB/D. Ethanol-blended gasoline manufacture fell to 8,998 MB/D, dipping below 9 MMB/D for only the second time over the last six months.
4Q16 Latin American gasoline demand is set to decrease by ~10 MB/D year-on-year while diesel consumption declines by ~50 MB/D year-on-year. 4Q16 Latin American crude runs are forecast to fall 335 MB/D year-on-year. Petrobras’ Brazilian automotive fuel pricing policy changed and will drive domestic ex-refinery prices to converge towards their respective opportunity costs. In the U.S., gasoline cracks have weakened but remain healthy for the season. Distillate cracks remain relatively soft but should rise in the short term as the heating season progresses.
The OPEC production cut has sent Brent crude screaming up more than $11/bbl ($1.88/MMBtu) higher than recent lows. This increase will have strong implications for gas flows in the coming months due to the relative value of spot versus oil-indexed gas. Recently, the latter had been selling well under hub pricing in certain markets, enjoying a significant price advantage for many buyers — something that has never in modern times been consistently enjoyed by major supply contract holders. This advantage is withering quickly and the price response to the OPEC meeting will extend the effect well into 2017.
French nuclear availability for December has been further downgraded. While the outlook for nuclear in January and February 2017 is very similar to our prior monthly report, we still see risks of further outage extensions. This is to say that France will remain heavily dependent on imports to balance the system at on-peak hours during December and, almost certainly, January. The partial cut-off of France-U.K. interconnector availability through February/March enhances the risks of exceptional measures and/or systemic balancing failures on both sides. As French and U.K. prices will remain even more weather-driven, German peak prices are already factoring in a bullish market context, with price upsides only emerging under a scenario of poor wind availability for extended periods.
The rally in coal pricing continued into the early stages of November, although on news of supply contracts being signed in China, pricing dropped significantly. Prices have recovered in recent days, although remain well below last month’s peaks. Sort-term fundamentals remain strong, particularly with asymmetrical pricing risks to the upside from the potential of winter weather boosting demand and curtailing supply (production and transportation). PIRA remains bullish into 2017, although we note that some of the frictional factors boosting prices (misaligned supply/demand domestically in China) will evaporate over 2017, and 2018 will be a more bearish picture, particularly if the supply side cannot hold discipline.
This week saw the European Commission publish the Winter Package, a set of proposals that aims at delivering on the global climate deal reached with the 2015 Paris Agreement. The package details the vision of the EC regarding the decarbonization of the energy sector with the integration of renewables, outlines energy efficiency targets by 2030 and 2050, and discusses the potential effects on the security of supply in the transition phase. While these may be seen as long-term issues, nevertheless we thought the documents offer some important medium-term implications for coal and other higher emitting capacities.
This week’s OPEC meeting reminds us that while Saudi Arabia does not control the price of global crude markets, its underlying influence on the price of Brent and WTI is without question. And so it goes with Qatar and its influence on LNG prices. Qatari prices do not play an active role in the price of NBP or JKM, but without question, Qatari prices reflect the state of the market.
The equity market eased slightly off its record close from last Friday. Volatility increased, and debt performance weakened. All of the adjustments are seen as within the bounds of consolidation. Fears of the outcome of the Italian referendum over the past weekend did not appear to have rattled the markets too badly this past week. The big winner of the week was energy, due to the OPEC agreement to cut output and the subsequent rise in oil prices.
Total commercial stocks only added 0.5 million barrels for the latest week. Crude stocks drew by 0.9 million barrels as crude imports were flat. The four major products experienced a 7.6 million barrel stock build, led by distillate’s nearly 5 million barrel increase. The major product build was partly offset by the large declines in NGL storage. The net total product inventory gain was 1.4 million barrels. Next week’s EIA data is expected to see another crude stock draw. The three major light products are anticipated to build by 5.8 million barrels, led by a build in gasoline stocks.
A rather abrupt change in the weather forecast has unleashed heavy natural gas futures buying, with the current week on track to add yet another ~0.25¢ to the Jan 2016 contract. Since establishing a near-term low of $2.88/MMBtu back on November 17, the Jan 2016 contract has since recovered ~0.60¢ to ~$3.50/MMBtu as the forecast (initially heralding a warmer-than-normal start to December) has given way to a much cooler outlook. Yet, with the front of the curve now closing in on the calendar-year high established mid-October, there is a risk that these newly minted wagers on winter-time rebalancing could likewise prove premature.
Pakistan’s Economic Coordination Committee (ECC) of the cabinet approved a nearly 33% cut in prices of natural gas, the first such slash this year, for the industrial sector. A statement said that Ishaq Dar, minister for finance, chaired the ECC meeting, which “… approved reduction of gas price for industry. In accordance with Fertilizer Policy 2001, the industrial sector's gas sale price will also be applicable to the fertilizer sector and only for fuel and not feed stock,” it added.
EIA data estimates for electric power sector stockpiles as of end-September came in at 158.2 MMst, slightly higher than PIRA expected, but 4.4 MMst lower than August and 4.5 MMst lower than last September. As stocks generally build in September due to shoulder season weather, news of a September drawdown is positive for stockpile normalization. We maintain that U.S. power sector coal burn will rise year-on-year steadily through June 2017, and we will see stockpiles descend further toward normal levels.
Crude runs rose with turnarounds winding down. Crude imports fell back such that crude stocks corrected back down 2.4 MMBbls. Finished products built 1.1 MMBbls off their cyclical low. Compared to year-ago, the deficits on crude, finished products and total commercial stocks narrowed a bit. Both gasoline and gasoil stocks built, while the draw rate on kerosene stocks was cut from 72 MB/D to 31 MB/D. Margins and cracks eased slightly on the week, but remain statistically very good and still holding above averages seen in September and October.
PIRA assigns coefficients to measure the effect of Heating Degree Days on distillate demand in many regions of the world. There are, however, no comparable coefficients for residential demand only, nor are there any estimates of heating oil inventories held by U.S. households as is the case with German tertiary gasoil inventories. This note estimates HDD coefficients for U.S. residential consumers and derives the profile of additions and withdrawals from home heating oil storage tanks.
November weather for the three major OECD markets turned out to be 5% colder than the 10-year normal and the resulting oil-heat demand effects were 86 MB/D above normal. On a 30-year normal basis, the markets were 4% warmer.
EIA recently released their September oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, fell sharply, month-on-month by -470 MB/D, the largest monthly drop since supply peaked in April 2015. The year-on-year decline accelerated from -500 MB/D in August to -950 MB/D in September, and steeper than the previous steepest decline of -932 MB/D seen in April 2016. The September declines, both month-on-month and year-on-year, were about 50 MB/D steeper than PIRA's initial estimates.
EIA recently released its final monthly September 2016 (PSM) U.S. oil supply/demand data. September 2016 demand came in at 19.864 MMB/D. Overall demand was revised lower by only 92 MB/D, compared to the weeklies. Total product demand increased 2.3% versus year-ago or 450 MB/D, compared to the September 2015 PSA data, doubling the growth seen in August. End-September total commercial stocks stood at 1,352.5 MMBbls. Compared to final September 2015 PSA data, total commercial stocks are higher than year-ago by 76.3 MMBbls, versus an excess of 101.2 MMBbls seen at end-August and a 123.2 MMBbls excess seen at end-July.
Chinese refiners have been exporting increasing volumes of key refined products such as gasoline, jet fuel and gasoil/diesel since 2012. However, it is important to note that Chinese refiners have also been importing increasing amounts of mixed aromatics and light cycle oil over the past two years, which are generally used as blending components for gasoline and gasoil/diesel, respectively. Taking these blending components into consideration, the product balance for total gasoline is more neutral (perhaps at times even bullish), and the product balance for total gasoil/diesel is only moderately bearish. PIRA expects China’s net exports of gasoil, jet fuel and gasoline (excluding blending components) to increase by another 10% in 2017.
Saudi Arabia's formula prices for January were just released. The adjustments were in alignment with what the pricing drivers would dictate. This means Saudi will resort to cutting allocations to refiners and let the market tighten that way, as opposed to initially tightening differentials and reducing the competitive attractiveness of Saudi crude. Consequently, Saudi crude remains priced competitively from an economic standpoint, but less avails will be released to the market as refiner's allocations will fall short of their nominations. Specifically, Asian terms were made more generous in line with the change in Dubai structure, while pricing into Northwest Europe was tightened in line with the narrower discount on Urals vs. Dated Brent.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
U.S. Commercial Stocks Led Lower by Product DrawComing after a build the previous week, total commercial stocks commenced drawing, this week by almost 7 million barrels. Stocks have now declined for seven of the past eight weeks. Product stocks fell by 9.4 million barrels, while crude inventory added 2.4 million barrels. The four major products drew by 5.9 million barrels, led by gasoline off by 2.8 million barrels and distillate down over 1.9 million barrels. Colonial Pipeline’s gasoline line was restored to service on October 6th, as the outage prompted downstream product movement from primary storage.
Predominately warm weather forecasts have primed the market for a fourth consecutive weekly loss, with the nearby December futures contract targeting an 11¢ decline. The extended sell-off that began in mid-October is now approaching $1 in cumulative losses, with prices currently breaching key technical support levels. Indeed, the 50-day moving average has now fallen below the 100-day moving average. This indicator is also colorfully referred to as the ‘death cross’ and commonly signals the onset of a bear market on the horizon. Putting aside price data as a market barometer, current economics are likewise skewed negatively to price recovery. To be sure, the mild weather unfolding this month has extended the traditional injection season, placing an even larger premium on weather conditions in the months ahead to help work off the expanding inventory overhang.
On-peak prices were mostly higher year-on-year in October as above normal temperatures supported demand across the south and gas prices rose (outside of the Northeast). Loads in the East increased by 0.7% with much of the gain in the south as cooling degree days increased year-on-year in every region. ERCOT loads were up by nearly 8%. Gas prices have eased sharply from October highs amid mild actual and forecasted weather. Adding to bearish pressures were latest gas production estimates. With normal weather, year-on-year stock deficiencies should emerge before year-end and cause prices to firm again. In contrast, eastern coal prices strengthened due to soaring international met and thermal coal markets. In our view, the only regions where coal stocks could tighten to near long-term averages are ERCOT and SPP. Sharp price increases in power prices are expected in all markets through Q1 due to rising space heating loads and higher gas prices (once withdrawals begin).
The coal market moved decidedly lower this week along with the oil market in the wake of the uncertainty surrounding the aftermath of the U.S. election and on news that Chinese producers were signing term deals with major domestic consumers. For prompt pricing, FOB Newcastle prices retreated by the greatest extent, with 1Q17 prices falling by nearly $6.00/mt from the end of last week, while API#4 prices fell by $2.75/mt and API#2 prices only dipped marginally. Beyond the prompt market, the curves shifted $2.00/mt - $3.00/mt from the end of last week. While it is tempting to think that the bullish run prices have been on has run its course and the market is now starting to correct back lower, PIRA would caution against this view. While Chinese production is showing some signs of recovery and Indonesian output has also rebounded, coal demand in most markets is rising seasonally, and there are notable supply side risks within China and for seaborne supply from disruptive weather conditions.
A more balanced European LPG market has led to its outperformance versus other regions last week. A dearth of U.S. large cargo arrivals over the next few weeks has tightened the supply situation, leading to a 3.4% gain in NWE propane coaster prices and an unchanged cash large cargo price of $343/MT. Butane prices in the region were affected by a possible strike at the Shell Moerdijk cracker complex. Cash coaster butane was called 7.4% lower week-on-week at $364/MT while larger cargoes eased $8 to $352.
The week ending November 4, U.S. ethanol values were pressured by lower corn and oil values and a sharp rise in output. Manufacturing margins were slightly lower week on week. U.S. ethanol exports soared in September, due to a shortage and high prices in Brazil.
Usually not advisable to sell slow markets but that’s not a good enough reason for optimism. Seasonally we do see year-end rallies with frequency in grains/oilseeds, only to be disappointed in January, but this year there’s more uncertainty than usual with the election of an outsider to the White House.
The election of Donald Trump as the next U.S. president, combined with Republican majorities in both chambers of Congress, signals potentially notable changes to U.S. energy policy and oil markets. Much remains uncertain at this point. PIRA laid out Trump’s energy policy platform in a prior piece. The more likely changes we can point to at this time are fewer regulations and more support of the oil and gas industry while pursuing a pro-growth macro agenda. Still, we see little impact to near term domestic oil and gas production, as states remain the primary regulator of fracking on private lands. President Trump is likely to approve the Dakota Access pipeline and rejuvenate Keystone XL. He may also revisit and ultimately moderate 2017 renewable fuel mandates planned to be issued by November 30. Oil demand will be stronger under President Trump from faster economic growth, and longer term because of a potential roll back in fuel economy standards. Foreign policy is more opaque. Questions have been raised about the future of the Iran oil deal. President Trump may attempt to roll back the suspension of Iranian financial and banking sanctions which would make it difficult for Iran to sell oil. Imposing effective new multi-lateral sanctions would be very hard given the lack of international support. Meanwhile, political discord in the U.S. may bring OPEC together to reach a deal on November 30, in a show of political unity as an organization.
On the whole, financial markets’ initial reactions to the unexpected outcome of the U.S. presidential election were positive for the economic outlook. Developments in U.S. equity markets were constructive. Long-term U.S. interest rates jumped, as markets anticipated the new administration to pursue reflationary policies. These policies, when enacted, will trigger substantially faster growth in the U.S, and there will also be positive spillovers through global economic linkages. This week’s currency market movements were not worrisome, but equity market actions in the emerging economies raised some concern.
Crude runs rose with a vengeance by 371 MB/D, as refinery restarts entered the data. Crude imports rose from a very low 2.6 MMB/D to 3.6 MMB/D and stocks rose 2.3 MMBbls, despite the run rise. Finished products rose 0.7 MMBbls, with builds in gasoline, naphtha, and gasoil more than offsetting draws in jet-kero and fuel oil. Kerosene demand was again higher, and is still thought to be reflecting secondary and tertiary inventory pull on primary. The stock draw rate accelerated. Margins and cracks again improved on the week, with all the major product cracks showing gains.
In the wake of the U.S. election results, there were some major shifts in a number of key indicators. The broad market rallied strongly, with banking, financial, and industrial related drivers doing best. Many of the emerging equity markets did not participate in the broad equity rally. The U.S. dollar was generally stronger, while commodities were generally lower.
U.S. ethanol production declined 20 MB/D to 1,002 MB/D last week, giving back some of its recent gains. Inventories were drawn for the second consecutive week, falling by 510 thousand barrels to 19.2 million barrels. Ethanol-blended gasoline manufacture rose to 9,178 MB/D, up 5.3% from this time last year.
The loss of Dutch production has not only given a green light to Norway and Russia to sell more gas into Northwest Europe, but it has also given an important role to Bergermeer and other Dutch storage facilities to fill in those lost winter volumes. Dutch storage has taken the opportunity recently with net withdrawals this winter that are 480% higher than at the same point last year and this is linking well to gas exports from Holland. We are not talking small volumes either - according to the grid operator GTS, net Dutch gas exports to Belgium, Britain, and Germany reached 152 mmcm/d on November 8th. The market has not seen flow rates out of the Netherlands like that in November since 2013, when Groningen produced 5.8 BCM of gas.
PIRA’s first U.S. Power Storage Outlook examines recent developments in the power storage industry and provides a market penetration forecast through 2024. PIRA sees a convergence of technology, market, and policy factors that will propel substantial growth in the U.S. energy storage market, from 1.5 GW of installed non-pumped hydro storage capacity today to 5.0 GW by 2024. Power storage technologies are already reshaping ancillary services markets, deferring investment in transmission and distribution infrastructure, changing peak load profiles for large commercial users, and enabling greater behind-the-meter solar consumption.
With the recent start of production at the Kashagan field and the sanctioning of the new Tengiz field expansion, Kazakhstan is ready to start growing oil production. Long-term growth is expected to come primarily from these two oil fields. Kazakhstan has a very large resource base. However, the complicated conditions at Kashagan (reservoir, weather, sour gas), where most of the growth is expected, constrain larger or faster growth than what we have assumed.
The reduced system margins following the closure of a number of coal plants earlier in the year are adding an important premium to U.K. power prices and, in turn, are underpinning the spark spreads. In fact, the output of U.K. CCGTs has surged to levels not seen since January 2011. Looking at the Elexon data, week 49 looks particularly tight, with usable nuclear capacity in the U.K. reducing from Dec. 5 to 7 GW out of the nominal 8.9 GW. The latest RTE winter outlook, shows France is expected to be equally tight in the same week 49, and might need exceptional measures to balance the system with temperatures as cold as 3C below normal. The 2 GW interconnector between France and the U.K. is looking increasingly vital in balancing both markets, especially given the uncertainty over the German ability to export to France during the peak hours.
Global equities, in the aggregate, staged a broad gain on the week. Developed / industrial market performance was strong, but emerging markets weakened. In the U.S, the stellar performer was banking, up 14% on the week, but industrials and retail indices were also very strong. Defensive and interest sensitive sectors, such as utilities and consumer discretionary, declined. Internationally, many of the individual emerging market equity markets declined. Latin America was particularly weak.
Strong and stable winter pricing indicators out of Asia appear to have newfound fundamental support from Korea. Do not assume this support is sustainable post-winter, but it appears to be a fixture in the months to come due to weather- and power generation-based drivers.
World refining capacity (crude distillation plus condensate splitters) reached a milestone in 2016, moving beyond 100 MMB/D for the first time. Capability has been steadily increasing each year of this century gaining by an average of about 1.1 MMB/D per year to reach this benchmark. The capacity increases have outpaced the change in demand especially if factoring out the largely non-refinery production of biofuels and NGLs. As such, refinery utilization has been trending downward over the years.
Gas prices for Ukraine’s industrial consumers will increase through mid-winter. A key role at the moment is, of course, a seasonal factor. Moreover, the dynamics of gas prices is largely similar to the dynamics of oil prices. A significant increase in Naftogaz of Ukraine natural gas prices for industrial consumers in November was caused by wider regional factors. As reported, Naftogaz of Ukraine from November 1, raised the price of gas supplied to industrial consumers, on a prepayment basis, by 16.3%.
PIRA notes that Saudi's finances have improved since earlier in the year due to a mixture of higher oil prices, a very successful $17.5 billion sovereign debt issuance, and a lower expenditure burden. This improvement has allowed it to lessen the burn rate on its foreign exchange reserves. A lot of financial flexibility still remains on a host of fronts that can be employed with measures designed to find that sweet spot with regards to setting oil policy, along with balancing fiscal and social pressures. We see the Kingdom on a stable and sustainable glideslope as they approach the next decade.
State oil companies own around 64% of current crude and condensate supplies of 81 MMB/D and its share is expected to remain at that level for the next twenty years. They operate mostly large assets with lower base decline rates (2.5% versus 4% for oilfields held by public companies). As a result, they require less volume growth to increase net production. We estimate that 54% of future growth volumes will come from state companies. In addition, the cost to develop the new volumes is much cheaper than for public companies (81% of future growth at <$50/Bbl versus 55% for public companies). However, higher growth volumes from state companies are unlikely due to the political and economic constraints that they face.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
The fatal helicopter crash in April 2016 near Turøy, Norway, involving the H225 / EC225, has created uncertainty surrounding the future supply of Airbus’s heavy aircraft. In spite of the European safety regulator’s decision to lift the flight ban on the Super Puma models, the Super Pumas continue to be grounded by the UK and the Norwegian Civil Aviation Authorities, with operators such as Statoil dropping the Super Pumas for good.
In its soon to be published World Offshore Helicopters Market Forecast 2017-2021, Douglas-Westwood (DW) has analyzed the impact of the H225 issues. Should the grounding of the H225 continue, the most significant effect would be seen in Western Europe. As of December 2016, the H225 alone accounts for 65% of the region’s total large helicopter supply. In 2016, helicopter utilization across the medium (including next generation medium) and large aircraft is estimated to have averaged 58%. The large segment is anticipated to have seen a higher utilization at 68%, compared to medium units at 49%. This implied utilization rate is inclusive of the 52 Airbus Super Puma units in Western Europe.
In 2017, DW forecasts large helicopter utilization at 59%. In the event that all 52 units are removed from Western Europe’s supply, the utilization rate is projected to improve considerably to 105% for large helicopters (i.e. implying a slight under-supply) – the most significant increase in utilization compared to other regions.
This undersupply in Western Europe creates an opportunity for helicopter manufacturers to address the potential gap in the market. The undersupply would most likely be met by a combination of large helicopters from other regions and a surplus of medium and next generation medium aircraft already in Western Europe. As of December 2016, CHC has announced its new contract with Wintershall Norge As for the provision of helicopter drilling support services off Norway using a Sikorsky S-92 from March 2017.
Whilst the market for helicopter support services has been hit significantly since the oil price crash, and recent helicopter accidents have amplified this effect, for some aircraft manufacturers, the potential of a shift from an oversupply to undersupply will present opportunities for suitably-placed suppliers.
Marina Ivanova, Analyst, Douglas-Westwood, London
Eni has agreed to sell to BP a 10% participating interest in the Shorouk Concession, offshore Egypt, where the supergiant gas field Zohr is located. The deal was struck for 375 million USD and a 150 million USD pro-quota reimbursement of past capital expenditures.
Eni has agreed to sell to BP a 10% participating interest in the Shorouk Concession, offshore Egypt, where the supergiant gas field Zohr is located. Eni, through its subsidiary IEOC, currently holds a 100% stake in the block.
Egyptian offshore where Eni discovered Zohr. Image courtesy: Eniday
The agreed conditions include a consideration of 375 million US dollars and the pro-quota reimbursement of past expenditures, which amount so far at approximately 150 million US dollars. In addition, BP has an option to buy a further 5% stake under the same terms. This transaction is in line with the Eni’s “dual exploration model” aiming at an early monetization of the value through the dilution of recent huge exploration discoveries owned with high participating interests.
The completion of the transaction is subject to the fulfillment of certain standard conditions, including all necessary authorizations from Egypt’s authorities.
The Zohr field, located in the Shorouk Concession, was discovered by Eni in August 2015 and is the largest natural gas field ever found in the Mediterranean, with a total potential of 850 billion cubic meters of gas in place. On February 2016, the authorization process for the development of field was completed, while the first gas is expected by the end of 2017.
Eni has been present in Egypt since 1954 where it operates through IEOC Production BV. The equity production was about 200,000 barrels of oil equivalent per day in 2015.
The end of one of the worst downturns in the history of oil & gas may be in sight, as OPEC’s November meeting looms large – bringing with it fresh hopes of a production cut and consequent market rebalancing. In this context, DW has recently undertaken analysis of 15 major upstream players, to understand prospects for the industry should we see a near-term upswing in oil prices.
Since the downturn began, cutting Capex across all business segments has been one of the primary methods of improving profitability and free cash flow for E&P companies – with spend in the first nine months of 2016 ~45% lower than that of 2014. Over the same period, cash flow from operating activities has been squeezed, as falling oil prices have reduced revenues and price hedges have expired.
Despite the downturn, IOC dividend pay-outs have remained fairly steady, due to an emphasis on maintaining investor confidence in future performance – thus sustaining access to liquidity and credit. However, IOCs have had to pay a heavy price, cutting Capex, selling assets and increasing debt, with free cash flows generally turning negative, despite relatively strong downstream performance. While IOC free cash flows have generally made movements back to neutrality in Q3 2016, only Shell, ExxonMobil and Chevron have returned to the black. Given that dividend payments are unlikely to be cut by the group, a significant uptick in oil price after OPEC’s meeting will be required to spur new large-scale investment.
Non-OPEC NOCs, on the other hand, have generally been quick to cut dividend payments during the downturn, alongside Capex reductions, as greater emphasis is placed on profitability and free cash flow. The group had the highest free cash flow in Q3 2016 of the 15 companies studied by DW (5 of which Non-OPEC NOC), amounting to $10bn. As a result, this group is particularly well placed in the current market, as well as being able to quickly react to any improvements in project economics in the wake of the OPEC meeting.
Matt Adams, Douglas-Westwood London
The past year has undoubtedly been one of the toughest for the oil & gas industry in recent memory. As we enter 2017 we consider three key themes that could shape the industry over the year ahead.
Chevron Corporation (NYSE:CVX) has announced a $19.8 billion capital and exploratory investment program for 2017. Included in the 2017 program are $4.7 billion of planned affiliate expenditures.
"Our spending for 2017 targets shorter-cycle time, high-return investments and completing major projects under construction. In fact, over 70 percent of our planned upstream investment program is expected to generate production within two years," said Chairman and CEO John Watson. "This is the fourth consecutive year of spending reductions. Construction is nearing completion on several major capital projects, which are now online or expected to come online in the next few quarters. This combination of lower spending and growth in production revenues supports our overall objective of becoming cash balanced in 2017."
The 2017 budget represents a reduction of 42 percent from 2015 outlays and is expected to be at least 15 percent lower than projected 2016 capital investments. Details of the 2017 Capital and Exploratory Spending Program include:
Chevron 2017 Planned Capital & Exploratory Expenditures:
| $ Billions | |
|---|---|
| U.S. Upstream | 5.7 |
| International Upstream | 11.6 |
| Total Upstream | 17.3 |
| U.S. Downstream | 1.6 |
| International Downstream | 0.6 |
| Total Downstream | 2.2 |
| Other | 0.3 |
| TOTAL (Including Chevron's Share of Expenditures by Affiliated Companies) | 19.8 |
| Expenditures by Affiliated Companies | (4.7) |
| Cash Expenditures by Chevron Consolidated Companies | 15.1 |
In the Upstream business, approximately $8.5 billion of planned capital spending relates to base-producing assets, including about $2.5 billion for shale and tight investments, the majority of which is slated for Permian Basin developments in Texas and New Mexico. Another $7 billion of the planned upstream program is related to major capital projects currently underway, including approximately $2 billion toward the completion of the Gorgon and Wheatstone LNG projects in Australia and $3 billion of affiliate expenditures associated with the Future Growth Project-Wellhead Pressure Management Project (FGP-WPMP) project at the Tengiz field in Kazakhstan. Global exploration funding accounts for approximately $1 billion of the total upstream budget, and the remainder is primarily related to early stage projects supporting potential, future development opportunities.
Asia's Refinery Cracking Capacity Additions Slowing, but India Continues to UpgradeOil rebalancing is slowing due to higher October OPEC output and lower China demand, but supply creation will become the market’s focus in 2017 as the market tightens. Asia’s refinery cracking additions are slowing, but India continues to upgrade and catch up with China's cracking capability. China’s crude imports are expected to recover from the low in October for the next two months as refineries return from maintenance to meet seasonal demand and utilize unused product export quotas. PIRA expects Asian cracking margins to stay healthy for the next couple of months, with prospects for better margins in 1Q17 assuming normal winter weather.
The mild weather that has unfolded this month that extended the traditional injection season has placed an even larger premium on weather demand in the months ahead to help work off the expanding inventory overhang. Moreover, much is riding on conditions during December in particular. On that front, even if the industry manages to pull working gas in storage toward 3.4 TCF before exiting 2016, a more convincing stock reduction will still be required early in 1Q17 to propel prices decidedly into new high ground.
As French nuclear availability remains at historically lower levels, French total commercial flows collapsed by 94% year-on-year to a mere 420 MW so far in the fourth quarter. The impact of lower French nuclear to flows toward Italy is particularly interesting. Italian PUN prices have been settling only about €4 below France in October and November to date, although the NORD region has been coupling more often with France (45% of the hours in November to the 21, or about 227 hours, while in Oct. about 299 were coupled with France). More interestingly, the Italian forward curve is trading at a large discount relative to France for the balance of the winter, raising the broader question of whether this is really sustainable.
Forward coal prices had a volatile week this week, with the market posting several dollar moves on four out of five trading days. The net result was upward, with prices, particularly in the Pacific Basin, recovering a portion of the sizeable losses posted last week. The market continues to look for firm direction, with a bullish fundamental picture facing off against powerful interests (including the Chinese government and at least one major trading company) in keeping prices somewhat low. However, it appears as if the market, like PIRA, has become somewhat wary of such a downward move.
The November WCI current vintage auction saw a much-improved coverage ratio and participation (80 unique registered bidders vs. 51 in August). Secondary market pricing remains above the $12.73 auction reserve price, which is poised to increase at next February’s auction. If subsequent auctions are fully subscribed, there may be minimal potential supply implications for CP2 (if CARB adopts amendments to move unsold allowances to the reserve). Oral arguments will be held January 24th in the CA auction litigation, with a decision expected in spring 2017 and an appeal to follow. The November Election results help prospects for a legislative fix should the auction be invalidated, but are not a guarantee.
The equity market moved further into record territory, with the S&P 500 moving above 2,200. Volatility (VIX) continued to ease and the price of domestic high yield debt (HYG) rose. Emerging market debt (EMB) was little changed. The U.S. dollar remained strong, and commodities were higher. Bond yields continued to rise globally, particularly for longer-term maturities.
The EPA increased the mandate for biofuels to 19.28 billion gallons for 2017. The new mandate is up 6.5% from 8.11 billion in 2016. The total is also up from 18.8 billion proposed in May, but much less than the 24 billion gallons originally set forth in RFS2.
Last week’s “working theory” on soybean strength came from those who said there was very little confidence the Chinese would be able to halt their currency slide anytime soon. The theory went on that end users, who were afraid the Yuan would continue to decrease in value, were buying up soybean supplies before their currency became “worthless”.
U.S. adjusted oil demand continues to be relatively strong, up 3.6% or 680 MB/D year-on-year in the latest four weeks. Gasoline stocks are building seasonally despite robust demand because of high imports and high production, with the latter inflated by butane blending. Distillate stocks built just slightly as increased heating demand supplemented the last bit of harvest demand.
North American spare production capacity is light this winter with dry powder largely limited to the WCSB and Appalachia. The dearth of heating demand over the past month has meant that Canadian imports have had to more aggressively compete with Appalachian for the limited market opportunities. Moreover, TransCanada’s withdrawal of its Long Term Fixed Toll plan suggests that the challenge to find a home for surplus WCSB production will continue.
RGGI pricing declined sharply following the elections, with the next auction on Dec 7th. PIRA does expect the auction to be fully subscribed, helped by required annual bank draws resulting from banking adjustments to the cap. Given unclear signals from the Program Review process, PIRA does not see significant price recovery until a draft Model Rule is released next year that clarifies cap declines post-2020 and price support mechanisms, such as banking adjustments and the proposed soft price floor “Emissions Containment Reserve.” Longer term, the RGGI price signal appears likely to take a back seat to individual state/regional clean energy policy initiatives. RGGI could play a more significant role, however, should these complementary policies face implementation challenges.
Over the last month, eastern coal prices were pulled up by hot international markets for both metallurgical and thermal coal, a trend that is likely to remain in place in the near term and one factor leading us to adopt a bullish bias through 1H17. Even though natural gas prices have recently given back some gains, we still expect gas prices to rise over the heating season, tightening coal balances by mid-2017. Beyond that, our pricing views turn bearish as we forecast that gas prices will fall on increased drilling and we expect continued CCGT and renewables build out.
U.S. equity markets posted solid gains across the board and pushed into record territory. Among the tracking indices, retail, materials, and industrials did the best. Both growth and defensive tracking indices posted strong increases of about 2%. Internationally, those tracking indices also gained with emerging markets, Latin America, and China doing the best. Japan performance was the laggard and neutral.
Inventories grew by 1.8 MMB to 102.7 MMB, despite relatively high export volumes of 5.8 MMB for the week ending November 18. The deficit to last year narrowed slightly by 108 MB to nearly 3.5 MMB. Last year for this reference week, stocks rebounded by 1.7 MMB to 106 MMB. The following week, stocks declined by 2.1 MMB and largely continued drawing until mid-March.
U.S. ethanol stocks built the week ending November 18, following three consecutive weeks of decline. Production increased by 3 MB/D to 1,014 MB/D. Ethanol blended gasoline manufacture jumped to 9,100 MB/D from 8,955 MB/D the prior week.
The EPA’s announcement last Wednesday that the 2017 biofuel quota will be raised to 19.28 billion gallons, including 15 billion gallons of corn-based ethanol, was more dramatic for soybean oil, which traded limit up on the news, than corn. While widely hailed as a victory for the ethanol lobby and U.S. farmers, should gasoline consumption in 2017 match projected 2016 consumption of 144 billion gallons, the 15 billion gallons of ethanol still results in a blend rate of just 10.4%.
Crude runs eased slightly on the week and crude imports surged, thus building crude stocks 4.9 MMBbls. Finished products drew 1 MMBbls and set a new cyclical low. Gasoline demand was modestly higher. Stocks drew slightly. Gasoil demand was lower but a jump in exports left stocks little changed. Kerosene demand was little changed and remained seasonally normal.
U.S. ethanol prices rose the week ending November 18. Values were supported by higher corn and oil. Manufacturing margins increased, boosted by a strong demand for exports. RIN values rebounded in anticipation of final 2017 mandates and standards that were to be set by November 30.
Shipped LNG has eluded Northwest Europe to a great extent since 1Q, in favor of higher deliveries to Southern Europe. Price is the main driver. With much of the spiking risk ending up on the isolated southern shores of Southern Europe – these markets certainly have made the better case so far. Spanish, Italian, and Southern French gas prices have all, at one time or another, made themselves price competitive on a global scale to try and attract volumes and have succeeded at the expense of the U.K. Instead, N.W. Europe has relied on pipeline supplies. Opting for pipeline gas in N.W. Europe instead of LNG has highlighted just how much pipeline suppliers have done to make their gas attractive.
PIRA is kicking off its global weather monitor, which will track weather anomalies in the U.S., Europe, Russia, and Asia. PIRA has analytically tabulated daily degree day data for key countries and for Europe and Asia; they have been aggregated into regional measures. We look at a cumulative comparison to last heating season, and the 10-year normal, expressed as a percent deviation. We also look at daily degree days, relative to a 10-year range, including the norm and last heating season. Charts will be issued regularly on a weekly basis during the heating season.
The recent run up in Asian spot prices appears to have crested, as buyers are done with their winter planning. Adding more length does not seem to be in the cards, although the myriad of nuclear problems among Japan, Korea, and Taiwan is giving LNG a second and third life in the power sector. Japan continues to be largely nuclear free, while South Korea and Taiwan have also seen nuclear load factors collapse largely due to natural disasters (storms & earthquakes). Korea is seeing significant gains for LNG and coal burn, and Taiwan’s reserve capacity margin is extremely tight.
The decline in gasoline prices since mid-2015 has given a significant boost to gasoline demand on both sides of the Atlantic. While the lagged effects of this decline are expected to provide further support through 2018, U.S. gasoline demand growth is expected to slow to 0.5% in 2017 as crude oil prices recover. Faster economic growth in 2018 should lead to a pick-up in demand growth to 0.9% in 2018. In Europe, the end to dieselization of the car fleet in addition to the lagged price effect causes gasoline demand growth to accelerate to 1-1.5% in 2017 and 2018.
State-owned energy giants PetroChina and China National Offshore Oil Corp. (CNOOC) have hiked their wholesale gas prices for non-residential users. The move reflects tighter supplies of the fuel and follows the end on Sunday of a one-year moratorium on price adjustments. PetroChina’s gas sales branch for northern China informed customers on 7 November that it would raise non-residential citygate prices by 15% from 20 November until 15 March 2017.
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.
Gasoline Strength Supporting Refining MarginsOil prices are expected move higher with ongoing rebalancing, with non-OPEC supply still declining and demand growth healthy. OPEC cuts are not necessary for rebalancing but they would accelerate the drawdown of surplus stocks. Relatively firm gasoline cracks are supporting margins and runs despite the season. The IMO decided to implement tighter global bunker limits beginning in 2020. Gasoil-fuel oil spreads, sulfur spreads, crude quality differentials and freight costs will all increase substantially but not until ~2019/20.
Natural gas futures are headed for the largest weekly decline since January, with week-to-date selling postponing $3/MMBTU prices until mid-2017. With most of the sell-off occurring in the front of the curve, the Dec 2016 contract is now more aligned with injection season prices. The Q1 2017 strip has fared little better, maintaining only a slight premium to 2017 injection strip. To be sure, the contraction in the Mar17/Apr17 widow-maker spread — trading at a mere 6 cents, or the lowest recorded price — is a testament of how little concerned the market is about the industry meeting upcoming seasonal demand. Given how U.S. balances have shaped up so far, the market’s reassessment is more than understandable, especially with the storage carry-in shifting from less than 3.9 TCF to more than 4.0 TCF.
In a week when the front-month baseload German contract prices temporarily reached €50/MWh on the back of a new EDF statement on further delays for the restart of five units, STEAG provided some additional details around the future of its coal fleet. STEAG plans to close the units at West 1 and 2, Herne 3, Weiher and Bexbach, for a total capacity of 2.3 GW (BNetZA data) before the end of 2017. These closures are on top of the two units at Voerde already planned for closure by April 2017, whose combined capacity is 1.4 GW. PIRA calculated the additional coal capacity across Germany, other than STEAG, that may be at risk of closure.
The bullish march of seaborne coal prices continued this week, with 1Q17 FOB Newcastle prices rising by $7.00/mt from the end of last week, while API#4 and API#2 prices rose by $6.65/mt and $5.15/mt, respectively. With China's import demand remaining strong on a sluggish supply response to the strength in pricing, there are not many fundamental factors blocking further pricing increases. However, in a change from the past several weeks, the back of the forward curve gained more than the front, in a seeming acknowledgement of the view that the backwardation in the curve was too pronounced.
California 2015 cap-and-trade emissions data released today showed a slight decline year-on-year in overall emissions. In their first year with a compliance obligation, broad-scope emissions were up. However, narrow-scope emissions dropped, with imported power emissions coming in strongly lower. PIRA estimates that the cumulative California market surplus reflects a few months of emissions. Quebec recently released 2015 emissions data, but only for the narrow-scope sectors, which were flat year-on-year. We are awaiting Quebec’s first-time reporting of covered transport emissions, which could impact market outlooks and prices.
For the second consecutive week, Asian LPG markets performed best globally. December propane eased less than 1% to $382/MT. Meanwhile January and February Saudi Propane CP futures made big moves lower – dropping 4.5% and 5.8% respectively in last week’s trading. These futures track market expectations for Saudi contract prices, and their move lower is in opposition to the mostly flat market structure seen in MT Belvieu C3 markets.
Global equities generally were lower again on the week. In the U.S, all the tracking sectors lost ground. Materials and housing fared the best, while technology, retail, energy, and consumer staples were the weakest. Many of the sectors, now, have a cautionary tone. Internationally, all the indices also lost ground.
Ethanol prices rose to a four month high in October as the markets tightened. Manufacturing margins decreased slightly as co-product DDG values dropped while corn prices advanced. Brazilian ethanol prices soared but are leveling off as hydrous ethanol is becoming non-competitive with gasoline in most states.
Much like Chicago Cubs fans, the markets felt a bit hung over to end the week. Poor late-week volume can be attributed to the lack of interested traders but there’s also the most bitter U.S. election to “look forward” to next week as well as the November WASDE. Funds have reduced their positioning to very little in corn while remaining bullish beans and especially the over-priced soybean oil market. Wheat shorts are heavy as usual.
Amid evolving OPEC talks, Iraq’s field-level accounting of its own crude production has garnered significant attention. The Iraqi oil ministry claims that September output averaged 4.77 MMB/D, over 300 MB/D higher than both the volumes estimated by the OPEC Secretariat’s secondary sources and PIRA’s own calculations. The accounting discrepancy comes from estimates for northern Iraq, where the ministry is double counting (and overestimating) production from two fields formerly operated by NOC. Specifically, the Bai Hassan and Avana fields, under KRG control since 2014, are included in Baghdad’s calculations for both NOC and KRG production.
Latin American gasoline demand is projected to grow slightly in 4Q16 while distillate demand is estimated to be ~50 MB/D lower than 4Q15. Brazilian gasoline demand is forecast to increase vs. 4Q15, stimulated by lower pump prices. On the crude side, Brazilian heavy crude exports are falling but medium crude exports are rising fast. Castilla Blend exports from Colombia were partially displaced by Basrah Heavy in the Indian market but have found a home in China. On the refining space, PIRA expects L. American crude runs to drop 370 MB/D year-on-year in 4Q16.
Thanks to gas seasonality and increased power demand, spot gas pricing has risen 57% and is back over the coal switching price in Germany. Recently, coal has acted as a ceiling to gas pricing – this ceiling has finally been punctured. However, PIRA does not anticipate a huge divergence of gas over coal and expects this anchor to remain important and close to gas pricing for the moment. The shift north of the coal switching level has led to some declines in gas-to-power demand and is already relieving some pressure off of gas. Without gas rising drastically over coal and continued pressure on the European electrical grid relating to French nuclear outages, PIRA does not expect a major step back in gas-to-power demand.
Tesla introduced the residential storage Powerwall 2.0 unit, along with a new integrated rooftop solar design and updated specifications for its commercial-scale Powerpack product. The Powerwall 2.0, with a capacity of 7 kW-14 kWh, is double the size of the original Powerwall. The total installed price offers a 15% price reduction versus the original Powerwall system on a kWh basis. Although increasing the overall system costs, pairing storage with residential can also address ongoing changes to peak demand charges and net metering policies that may limit residential solar penetration.
CA Carbon trading activity has picked up, but is well below prior levels, with pricing on a halting upward path. Reported 2015 CA emissions were down slightly year-on-year and the implied surplus/bank after 2015 is at about 4 months’ worth of emissions. First time broad scope QC emissions and ON emissions are still to be released. An undersubscribed Nov auction could see unsold allowances moved to the reserve reducing CP2 supply. Inflation indicators have been creeping up, pointing to an even higher 2017 reserve price Through the Scoping Plan, CARB is pursuing a preferred option based on cap and trade, with new refinery measures to help address environmental justice concerns.
The S&P 500 moved lower by about 2%, while volatility increased. High yield debt and emerging market debt both moved lower in price. The U.S. dollar was generally weaker, and commodities were mixed.
Tanker rates are expected to improve seasonally in 4Q16 but weaken in 2017 as vessel supply growth outpaces demand.
U.S. ethanol production rose 31 MB/D to a nine-week high of 1,022 MB/D the week ending October 28, just 7 MB/D short of the record set earlier this year. Inventories fell by 180 thousand barrels to 19.7 million barrels following a large build in the preceding week. Ethanol-blended gasoline manufacture rose for the second consecutive week, reaching 9,160 MB/D, up 3.3% from this time last year.
A Republican or Democrat in the White House should make no difference to these markets in the near term; discounting a huge move in the dollar if the unexpected occurs. Then again grains, and especially oilseeds, have been disconnected from the expected inverse effect of the dollar for a while now.
PIRA estimates the average OPEC budgetary breakeven price will fall to $80/Bbl in 2017, marking the third consecutive decrease in annual breakevens since the 2014 peak of nearly $110/Bbl. The gap between Brent oil prices and breakevens is poised to narrow. Breakevens have been coming down on fiscal reforms and higher net oil exports out of Iraq, Iran, and Saudi Arabia. Currency depreciation has also played an important role. Even so, most OPEC members still face significant budget shortfalls, which is driving material policy reforms. We have already started to see some major OPEC countries cut fuel subsidies, loosen resource control policies, and make moves to reduce economic dependence on oil. More immediately, we believe the pinch from low oil prices is behind OPEC’s newfound spirit of cooperation, and will likely facilitate a production agreement on November 30.
While overall U.S. crude stocks rose in October, Cushing stocks declined 4 million barrels on reduced incoming flows from West Texas due to pipeline maintenance. The price of WTI climbed above $50/Bbl, before falling off at the end of the month. Differentials for Canadian and Bakken crudes declined, while Midland differentials strengthened.
Any possible concern about the profitability of sending cargoes into N.W. Europe has completely evaporated for the moment. European gas prices are spiking due to a combination of French nuclear problems, cross-border power constraints, below-normal temperature forecasts, and production problems in Norway. If there will ever be a moment to open the flood gates between the U.S. Gulf Coast and N.W. Europe, now appears to be the time.
Total commercial stocks built by 9.05 million barrels this past week, as crude stocks gained by 14.4 million barrels, partly offset by a 5.4 million barrel product draw. Highest weekly crude oil imports since 2012 of about 9 MMB/D led to the large crude oil stock build. Three major light product stocks declined by 5.5 million barrels. For the next week the key light product stocks are expected to continue falling. This week’s temporary outage of the Colonial Pipeline will lead to additional product imports in the following two weeks.
The price of natural gas sold domestically to Egypt’s industrial sector increased by about 50% as a result of floating of the Egyptian pound against the U.S. dollar. Factories’ agreements for gas were signed according to the official market rate at the time. The price of the U.S. dollar currently stands at EGP 14, while at the time of signing the agreement the price was EGP 8.88. The source expected industrial sectors to request maintaining a fixed price for the US dollar in contracts signed with EGAS and lifting their products on the market to cope with the increase.
In the U.S., after last week’s GDP data indicated solid growth for the third quarter, this week’s releases (job growth, business confidence, and vehicle sales) showed the momentum persisting in October. Medium-term drivers of economic growth pointed to further expansion in the future: the housing sector’s recovery still has a way to go; the recent pace of household formation has been constructive; and the labor market likely contains sufficient slack. The Fed is not likely to get in the way of continuing expansion.
Crude runs fell back to near the lows seen in early October as maintenance continues. Crude imports came in very low and crude stocks drew 2.1 MMBbls, after the large 9.2 MMBbl build the previous week. Finished products again drew. Gasoline demand was modestly lower and appeared to lack any uplift from the Culture Day holiday. Gasoil demand was fractionally lower, although stocks still drew. Margins and cracks again improved on the week with overall levels remaining very healthy.
China’s gasoil/diesel demand growth weakened over the past few years. Based on traditional apparent demand calculations, that slowdown continued into 2016 with gasoil/diesel apparent demand growth weaker versus last year. However, on a closer look at China Customs Statistics, imports of light cycle oil have increased sharply over the past two years.
The economy of Burma / Myanmar is going through a major transformation. After a long period of international isolation, political liberalizations in recent years have opened up doors for foreign investment in a major way. Oil demand growth has also picked up strongly in recent years, and there are no obvious reasons to expect a slowing.
Saudi Arabia's December formula prices for Asia and Europe tightened. The pricing adjustments were largely within market expectations. Our Saudi market share calculations for Asia are at the low end of recent history. If restoring market share was a tactical goal at this time, less aggressive tightening would have been necessary.
The Colonial Pipeline Company is dealing with a halt of flows of gasoline supplies from the USGC to the North and South East due to a fire. This is the second incident involving Colonial’s gasoline line in less than 2 months.
October weather for the three major OECD markets turned out to be normal compared to the 10-year normal and the resulting oil-heat demand impacts were 46 MB/D below normal. On a 30-year-normal basis, the markets were 11% warmer.
EIA recently released their August oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, rose off its July cyclical low by 203 MB/D, while the year-on-year decline in supply lessened to -494 MB/D for August, from -871 MB/D in July. This jump in domestic crude supply is viewed as a one-month occurrence, rather than sustained trend change.
EIA recently released its final monthly August 2016 (PSM) U.S. oil supply/demand data. August 2016 demand came in at 20.13 MMB/D, very slightly below what PIRA had assumed. Overall demand was revised lower by 536 MB/D, compared to the weeklies. Distillate demand was raised 150 MB/D. Total product demand increased 1.0% versus year-ago or 201 MB/D, compared to the August 2015 PSA data, and a snap back from the -2.1%, or 414 MB/D decline seen in July. End-August total commercial stocks stood at 1,367.7 MMBbls, which was 4 .1 MMBbls lower than PIRA had assumed in its balances, with product stocks coming in 5 MMBbls lower than assumed. Compared to final August 2015 PSA data, total commercial stocks are higher than year-ago by 101.2 MMBbls, versus an excess of 123.2 MMBbls seen at end-July.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
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