Canadian Differentials Remain Strong Post-WildfiresCanadian oil sands supplies partially recovered in June, with production volumes approaching normal in early July. Canadian, Bakken and Rockies differentials remained strong, supported by the reduced supplies. A small Cushing crude stock draw in June will be followed by another small draw in July.
Gazprom is offering Ukraine’s Naftogaz somewhat lower gas prices than European suppliers for the third quarter, the head of the Ukraine's national oil and gas company Naftogaz has said. "The price offered by Gazprom is somewhat lower as of today than the one offered by European suppliers, though the market is very volatile and the price on the European market has started to lower," Andriy Kobolyev told reporters. Gas supplies from Europe are sufficient to provide Ukraine with reserves for the winter season.
Warmer weather so far during July has added 2 GWs of demand in Italy, with the week starting also with extra cooling needs of roughly 4 GWs. Day-ahead prices have, however, been generally in line with expectations so far in July, with maximum hourly prices also under check, most likely as thermal demand is being undermined by a weaker economy, generally healthy hydro levels, and more favorable gas pricing.
Coal pricing was mixed last week, although the fact that the market was able to hold onto sizeable gains posted in the prior week despite weaker oil prices illustrates that the market has found a vein of structural strength. Interestingly, deferred pricing for API#2 (Northwest Europe) and API#4 (South Africa) strengthened relative to the prompt, while the opposite was true of FOB Newcastle (Australia). PIRA continues to assert that 2017 prices are undervalued, although we are doubtful that prices can maintain the recent run in pricing. While China's thermal coal imports have turned positive year-on-year, India's imports remain notably below prior-year levels and do not look poised to emerge any time soon, particularly during the monsoon season.
The U.S. EPA finalized designations for the 2010 SO2 NAAQS, classifying 61 areas, compared to 66 areas from February’s proposal. The five areas where EPA has backed off for now (no final action is being taken) include four in Texas and one in Oklahoma — all of which had been targeted in February’s proposal (contrary to those states’ own recommendations). EPA’s final four non-attainment regions include areas with coal plants in Illinois, Maryland and Michigan. All but one of EPA’s finalized designations for Texas agree with state recommendations, bearish for longer-term gas demand and power prices in ERCOT, though Regional Haze regs still await the outcome of legal challenges.
With pollination in full swing for many, weather forecasts offer something for both the bull and the bear. Expected hot temperatures this week will be somewhat offset by additional precipitation for almost everyone in the Eastern Belt. Those west of the Mississippi River are forecast to receive even more rain on top of last weeks’ very impressive totals.
Production was over 1 MMB/D for the third time in four weeks. Corn prices tumbled after bearish USDA reports, boosting manufacturing margins. 2016-D6 RIN prices soar.
PIRA’s analysis of resource control policies around the world suggests a marked trend towards more investor-friendly policies in the upstream oil sector. Most notably, Saudi Arabia, Russia, and Nigeria all announced plans to sell stakes in state-owned upstream operators, and improved contractual terms could soon materialize in major producers, including Iran, the UAE, and Venezuela. The moves are being partially offset by prohibitive tax increases in some countries, in an attempt to support government revenues. But if prices remain below the levels of the past decade, as PIRA forecasts, we would not be surprised to see more widespread implementation of policies favorable for foreign or private investment.
This week’s economic developments highlighted the global economy’s resiliency as well as its potential vulnerabilities. The U.S. jobs data for June were constructive: they showed healthy gains in payrolls, but did not point to overheating in the labor market. The latest data on Chinese foreign exchange reserves were also positive for the outlook. At the same time, the U.S. dollar continued to strengthen, a fallout from the Brexit decision two weeks ago. In addition, the European banking sector remained under pressure.
Crude stocks drew just 320 MB/D this past week, about one third the level PIRA expected. We believe floating stocks in the Gulf of Mexico were reduced to support the high import level. With floating stocks now likely more normal, PIRA expects July imports to reflect FOB cargo loadings, which imply lower than June imports and larger stock declines. For next week, we have crude stocks falling 620 MB/D with imports at 7.85 MMB/D.
The prospects for heavy summer cooling loads should favor a market “buying the dips,” despite prices retracing last week’s gains. Indeed, a sea change in sentiment has been on display as of late, whereby expectations for expanding cooling degree days (CDDs) have positively colored speculative positioning and price. Certainly, the latest snapshot of open interest in NYMEX/ICE futures encapsulates the shifting environment, which has seen Henry Hub (HH) prices rally ~30% month-on-month. Most notably, the long-to-short ratio between non-commercial longs and shorts continues to push deeper into new high ground, rising to ~1.1, the highest level since 2014.
In recent months, several utility-scale solar PV projects have been announced at ultra-low prices, raising questions about downside risk to natural gas and other power sources. As a result, PIRA recently raised its 2025 U.S. solar generation outlook 41% above the previous outlook from fall 2015. However, PIRA does not see substantial downward medium-term flexibility for U.S. utility-scale solar PPA prices below current subsidized levels, assuming a link to fundamental economics. Nevertheless, in regions with strong insolation and meaningful incentive mechanisms, solar will continue to pressure other power sources as it continues to grow from its small base.
California carbon prices were up in June vs. May, but remained below the auction floor. Declines in open interest suggest that market players are not switching to the secondary market for procurement, but rather refraining from taking new positions altogether. There is little incentive to purchase allowances at the August auction. Re-offering of unsold consigned allowances raises the auction quantity and will require a higher bidding volume to clear. PIRA does see pricing once again exceeding the auction reserve this year. Cap-and-trade regulatory amendments will be released July 12th, addressing post-2020 caps and allocations, linkages and also unsold allowances.
Inventories build by 390 thousand barrels the week ending July 1. PADD V received approximately 2.9 million gallons of imported ethanol from Brazil, only the second week this year in which imports were reported.
The 2016/2017 corn and soybean acreage numbers have turned into “knowns” for the July WASDE, but higher-than-expected old crop corn and soybean supplies in the Quarterly Stocks report just a few days ago may have more than a few scratching their heads at the World Board. Add to the mix these extremely fragile markets, and Tuesday’s outcome is far from a certainty in PIRA’s opinion.
Financial stress continues to lessen post-Brexit. On the week, the S&P 500 flirted with record highs, while volatility declined and emerging market debt prices rose sharply. The dollar retains a mixed upward bias. It has continued to strengthen against the British pound and some of the Eastern European currencies. However, it has weakened against a host of Asian currencies.
Crude runs rose on the week as maintenance continues winding down. Crude imports moved higher by 0.9 MMB/D and crude stocks built 1.5 MMBbls. Finished product stocks built 1.1 MMBbls, with increases in all the products other than gasoline. Gasoline demand was relatively strong and stocks drew, while gasoil posted a significant stock build on lower yield and exports. Refining margins have remained soft with little barrel support other than fuel oil and naphtha.
Even with send-outs sputtering into the N.W. European market during the shoulder months of the late second and early third quarters, the need for access to the liquid pricing hubs at the Dutch Title Transfer facility (TTF) U.K. NBP has never been more pronounced. The Atlantic Basin market stands poised to absorb some 90-bcm/yr. of new supplies by 2020 (not including Yamal), and sellers are extremely active in securing a portion of this total.
The horizontal oil rig count reached a trough in mid-May. Despite this, shale production is not expected to immediately return to growth. PIRA expects the rig count to continue increasing at a gradual pace for the balance of the year and beyond. An estimated 400 horizontal oil rigs are currently needed to maintain production, which is 128 rigs higher than the current count of 272. Production is expected to shift to growth by 2Q17. On an annual basis, PIRA expects shale crude and condensate production to decline 330 MB/D in 2016 and 60 MB/D in 2017. This represents a 70 MB/D upward revision in 2017 versus our June Reference Case.
After gas demand in the U.K. finally grew last year for the first time since 2010, many hailed it as a case when demand finally bottomed out. Gas burn is now getting strong support in the U.K. in the form of a £18.08/ton carbon floor and coal-fired power stations are getting shut down. Future growth prospects hang on power sector growth, but the upside appears to be limited, particularly from the perspective of National Grid.
Mont Belvieu propane prices narrowly beat out broader energy markets by declining 5.7% on the week to settle near 50¢/gal (August). Butane futures fell in line with WTI (-7.3%) while ethane prices dropped nearly two cents to 21¢, the lowest level since May.
The overall global equity market was unchanged for the week, with U.S. market gains offsetting weakness elsewhere. Gains in the U.S. market were broad based across most of the tracking sectors, except energy. Housing, retail, and consumer discretionary were the strongest performers. Internationally, the performance was mixed and tended to be weaker. Asia and Europe both displayed aggregated declines on the week of 1.2-1.5%.
Oil prices fell $3.70/Bbl this past week with time spreads getting crushed on both sides of the Atlantic. There was not a specific story to point to but just a host of negative news. PIRA's outlook for the week ahead is that the market will continue to be range bound and should therefore find support within a couple of dollars from here.
In June 2006, PIRA put forward a simple model to approximate the method used by some major oil companies to evaluate long-term investment projects. We have updated the results and not surprisingly prices are a lot lower.
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.
Overall U.S. Stocks Build While Crude Draw Disappoints
Commercial oil stocks built 5.2 million barrels this past week, sharply contrasting with last year’s 6.7 million-barrel inventory draw for the same week. The entire build was in NGLs but the expected large crude stock decline did not materialize onshore as crude imports were bloated by a drawdown of floating stocks. Floating crude and even onshore stocks in major entrepot areas pose a challenge to estimating onshore stocks in key price-setting markets. There is a huge surplus of inventory which will take time to eliminate. So while crude stocks are undoubtedly declining, declines might not show up in the weekly onshore data in a given week.
1Q16 U.S. Producer Survey Harkens Back to Better Times
In response to a fleeting improvement in market conditions, U.S. gas producers grew production once again in 1Q16. Appalachian producers led the change, delivering an additional 1.2 BCF/D versus 4Q15 through the utilization of infrastructure that had been built towards the end of last year. Yet, the combination of stronger production and weaker heating demand gave rise to record inventories by end March, necessitating a subsequent reversal in production as a means for rebalancing. Thus far, the trend in 2Q16 production data suggests that U.S. producers are taking heed of this requirement, establishing a definitive change in course for PIRA’s Survey Group.
Brexit Clouds Demand Outlook, Dark Spreads to Hold on Bearish EUAs
The Brexit vote starts a highly uncertain transition period for the U.K. and the rest of the European Union. This transition period will likely mean weaker economic growth, especially in the U.K., and with that, downside risks for demand. However, U.K. winter prices should be largely unaffected by the Brexit decision. We assume for now that a political contagion will remain in check, but the major risk to Continental power prices resides now in an even more bearish EU ETS. While the EU ETS could be severely wounded in the current environment, domestic carbon initiatives – the French carbon floor or the like – are likely to move forward.
Brexit Vote Stops Coal Pricing Rally
Global equity, currency, and commodity markets were dominated by the Brexit vote last week, coal included. Before the vote, coal prices has been volatile, although with a general upward trajectory. The decline in prices on Friday sent Atlantic Basin Prices into negative territory for the week, if only marginally, while FOB Newcastle (Australia) prices were able to manage to rise in the prompt, although deferred prices faded. With the vote kicking off a likely two-year negotiation period between the U.K. and the E.U., there are limited fundamental changes to the coal market over the short-term, aside from a prevailing sense of unease and a lower appetite for risk.
Fed-Centric Financial Markets Now Roiled by Brexit
Since March, Fed policy communications have generally supported market sentiment and kept the dollar’s value in check. However, U.K. voters unexpectedly chose to leave the European Union in the June 23 referendum, and this has placed financial markets in a new, uncertain phase. PIRA’s expectation is that the Fed will reassert its control over markets after the initial Brexit shock wears off. During previous episodes of financial stress and a stronger dollar, the Fed adjusted its message to alleviate market pressure; it should not act differently this time around.
Volatility to Remain High
After a trading week that included a limit down move in corn along with all the uncertainty of the Brexit vote, grain/oilseed markets should be staring at yet another volatile week as corn pollination inches closer and the “final” 2016 acreage numbers are released on Thursday, along with the 3Q16’s stocks of grain.
Latest Assessment of Nigerian Oil Supply Disruptions
The situation in Nigeria remains highly fluid. Reports of a 30-day ceasefire are conflicting, but at the very least suggest some kind of dialogue is taking place between the government and militants. Even if there is an agreement, disrupted volumes will not return immediately and the situation is likely to remain fragile. Fiscal problems will make it difficult for the Buhari administration to revive an amnesty program for Niger Delta militants, and it will be difficult for the government to go back on its anti-corruption campaign.
Ethanol-Blended Gasoline Manufacture Surges to Near Record
Inventories fell slightly the week ending June 17. Stocks in PADDs I and III increased.
Japanese Crude Runs Ease with Higher Crude and Product Stocks
Crude runs eased on the week as Hokkaido entered full turnaround. Crude imports rose and crude stocks built 2.7 MMBbls. Finished product stocks also rose by 0.7 MMBbls, with about half being kerosene. Gasoline demand was soft and stocks built slightly. Gasoil demand was stronger and stocks resumed drawing. Kerosene demand was seasonally low and the stock build rate remained about 50 MB/D. Refining margins have remained soft in June.
Supply Tempers Breadth of Rally Across Regions
The rebound in Henry Hub has buoyed all regional cash prices — but to considerably varying degrees. Indeed, the regional dispersion of CDDs accounts for some of the relative strength and weakness in prices/basis, but supply trends have also played a key role. The standout feature of this month’s regional price action is the need of further assistance from weather as the market awaits larger supply losses.
When Will LNG Balances Hit the Tipping Point?
The temporary loss of existing LNG production is masking the rise of new LNG production in much the same way that oil production disruptions around the world in 2014 delayed the bearish price effect of the rise of shale in the U.S. In late 2014, that tipping point on oil was reached when global disruptions crested even though U.S. shale production continued to rise. For LNG markets, the tipping point will occur late in the first quarter of 2017.
Energy Efficiency Puts Downward Pressure on U.S. Power Demand and Gas Growth
PIRA downgraded its latest long-term U.S. power demand forecast from a 0.83% compound annual growth rate (CAGR) between 2015 and 2035 to a 0.54% CAGR. A significant portion of this downgrade is due to anticipated load destruction from end-use electricity savings arising from recent developments in energy-efficient technologies, product efficiency standards, and state-level efficiency programs, as well as a lack of weather-adjusted load growth in essentially five years. These developments suggest additional headroom for savings beyond previously modeled energy efficiency potential, particularly in areas like lighting and space cooling in the commercial and residential sectors. PIRA expects this load destruction will be most acute for gas burn and new gas plant builds, which are also under increasing pressure from renewables.
Freight Rates Hold Steady as Cape Fleet Growth Picks Up
While the Brexit vote has added significant uncertainty regarding dry bulk demand growth in Europe and potentially elsewhere, there have been some fundamental developments in the sector of late, such as Winning International hauling 15 MMmt of Guinean bauxite to China this year using Capes loaded by floating transfer equipment. Continued growth in fleet supply will keep rates in check over the next several months, although PIRA has a tighter outlook going into 2017.
U.S. Ethanol Production Reaches All-Time High
The output of ethanol reached a record the week ending June 10. This essentially ended the rally in prices that began in February.
Old Crop Soybean Supplies in Focus
Validated moisture events will have a negative effect on new crop prices, so PIRA is bullish old crop/bearish new crop at the moment, after being bearish beans for a few weeks. As July heads into first notice day next week, focus will shift to the August/November spread as an indication of dwindling old crop supplies.
Global Equities Decline on Brexit Outcome
Global equities were broadly lower on the week. The U.S. market was down 1.6%, Friday-to-Friday. The growth indicator underperformed, and banking was the weakest single sector, down 3.4%. Consumer staples and utilities faired the best, while energy also outperformed, down only 0.5%. Internationally, many, but not all, the tracking indices were lower. Europe was the weakest. Latin America managed to post a gain, while China and the BRICs also outperformed and only posted modest changes for the week.
Energy Implications of the Brexit Vote
The IMF has recently developed two scenarios to gauge the economic impact of Brexit. PIRA estimates that in the "Limited" scenario, world oil demand in 2017 would be about 100 MB/D lower than in the IMF's Base Case, with the largest impact in Western Europe. In the "Adverse" scenario, world oil demand in 2017 would be 200 MB/D lower than the IMF Base Case. There would also be noticeable impacts on gas and coal demand. These impacts on energy demand might slow, but not reverse, the oil price recovery PIRA projects.
Can Norway Step in to Take Rough's Role this Winter? Will It?
Centrica’s decision to shut the Rough storage facility until August 3rd caused a huge spike in winter ‘16 prices and a weakening in the spot/front month pricing. The opportunity cost of injection over this period is around 1 BCM and will need to be made up whether from Rough itself or somewhere else. PIRA suggested that with a Rough maintenance coming up in September, a shortening or cancellation of this maintenance may be possible and would help relieve some of this pressure. Looking to the power side for some demand relief this winter seems to be a lost cause. While power demand tends to be very sensitive to price, recent strong developments in gas prices have been outperformed by spark spreads for this winter. Another way some or potentially all of this lost storage volume can be made up is by higher Norwegian volumes, which are very tied to NBP-TTF spreads.
Shale Rig Activity Has Likely Bottomed, But Production Declines To Continue
Production declines accelerated in the first quarter but output still came in above guidance. Shale operators raised 2016 production guidance to a 6.1% year-on-year decline (up 1.7% points from guidance given during 4Q15 calls). And with the increase in prices from February lows, operators began to detail plans to increase activity. Many operators indicated that at $45-50/Bbl rigs will be added in the Permian, while the Bakken and Eagle Ford will require $50-60/Bbl. In line with this guidance, the horizontal oil rig count appears to have bottomed in mid-May; rigs are up 7% in the past five weeks. Despite this, PIRA still expects production to decline for the remainder of the year as it will take time for the slowdown in activity to show up in production. 1Q16 costs continued to decline (down 25-30% since the downturn), but the pace slowed markedly. Much of the savings were attributed to service price concessions, and are likely to reflate as activity ramps up.
Supply Glitches Keep Legs Under Spot Prices for Now
LNG markets remain balanced at relatively high spot prices of $5/mmBtu thanks to supply disruptions from existing producers and delays emerging from new supply. The quality of buyer is dropping when it comes to bearable price, which is a sure sign that the overhang may be delayed, but it is inevitable.
Brexit Rattles Markets
The UK’s vote to leave the EU rattled financial markets on June 24th, setting back gains that had been made Monday through Thursday. While many weekly averages were higher, Friday-to-Friday data showed a steep drop in most key indicators.
Freight Market Outlook
Tanker markets are starting to suffer from the influx of new vessels with few offsetting deletions and the anticipated start of the slow drawdown of excess inventories which have built up over the past two years. The drip feeding of new tonnage and the withdrawal of excess stock from the supply chain will result in a pattern of lower peaks and deeper troughs in tanker rates as the year progresses.
Amid the Chaos, LPG Markets Strengthen
LPG traded on fundamental supply and demand factors last week, leading to strong gains across the complex. July Mt Belvieu propane futures added a solid 3.7% to bring its value to 47% of WTI. Butane outperformed, adding 5.1% to settle near 69¢ /gal Friday. Ethane futures ripped 7% while natural gasoline prices managed to hold near unchanged despite weaker broader markets.
Ukraine Confirms Default Industrial Gas Prices
Naftogaz Ukraine has published quotations for natural gas for industrial consumers and other economic entities, which will operate from July 1, 2016 as stated in the press release of the company. “The proposed price of natural gas from the resource companies can vary depending on the volume of purchases, payment terms and the status of previous calculations of “Naftogaz”. Levels of the final price for industrial consumers and other economic entities, depending on the specified conditions, compared to June prices remained unchanged (taking into account tariffs for transportation via trunk and distribution pipelines and VAT).”
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 Build for First Time in Several Weeks
Total commercial inventories built for the first time since the end of April. The gain of 3.2 million barrels reflected a substantial 6.4 million-barrel build in overall product stocks, only partially offset by a 3.2 million crude inventory decline.
Recipe for Rebalancing? Just Add Weather
Last year, the U.S. market recorded an extended string of triple-digit injections during this period, with weekly builds averaging 109 BCF. This year, however, the record inventory overhang left little room for such outsized shoulder-season restocking. Yet, prior to Thursday’s inventory report, it appeared that the needed rebalancing might not occur fast enough to curtail the seasonal stock build. As if on cue, the timely arrival of summer heat has improved the odds for rebalancing, with the subsequent boost in electric generation (EG) gas burn more persuasively offsetting surplus supply.
Financial Stress Lower
Most key indexes rose on a weekly average basis, including the S&P 500 (although slightly lower Friday-to-Friday), U.S. High-Yield Corporate Bond, Russell 2000, Emerging Market Bond, and Commodities. The dollar fell in value against most countries, and most agricultural commodities and metals gained.
Northwest Europe Terminal Capacity Expands, But Where's the LNG?
After a year of delays, the Northwest European market is set to open more LNG import capacity; the question is whether or not this new capacity will be put to use in the form of expanded LNG imports to the region. PIRA believes that it will despite the current low levels of capacity utilization. To begin with, the supply side of the equation in the Atlantic Basin will improve, despite the heavy losses of the first quarter.
Recent Price Strength Has Not Scared Off Power Demand
With prompt gas prices rising around 25% so far this summer and LNG flows weakening, one might wonder if the great shift in gas-coal spreads from last year is reversing and eroding power demand. As power is sensitive to price, that would not be a ridiculous thought. However, this balancing function was not served by the power market; it has mostly been offered by storage facilities.
Weak Loads Stifling Otherwise Bullish Outlook
Power prices at most Eastern hubs fell in May as maintenance activity wound down. Lower wind generation bolstered western MISO and SPP Off-peak prices. Summer heat rates are expected to increase year-on-year in most markets due to lower gas prices, unit retirements, and warmer weather in the Midwest, though ERCOT summer on-peak prices seem to have priced in lot of upside risk at the current market levels. In PJM, significant participation by new gas generation build continued in the recent 2019-20 capacity auction while three of Exelon’s nuclear units failed to clear the auction. PIRA expects gas prices to advance further during 4Q, rising above the $3 mark during Dec. - March, reflecting sharp year-on-year gains.
U.S. Ethanol Prices Rose to the Highest Level Since Last Summer
The market tightened the week ending June 3, with inventories reaching a five-month low. Manufacturing markets remained healthy.
Spain: Prices Surge as Wind and Hydro Decline. Coal Set to Stay Weak
Discussions at PIRA's Client Seminar in London this past week centered on shifts taking place in the European power fuel mix, with switching from coal to gas now starting to emerge both as a result of structurally lower gas prices and changing policies. After the U.K., Spain is also featuring a fairly large drop of coal-fired dispatching so far this year. The policy framework is also very fluid in Spain, with the June 26 elections likely to be a negative for the coal-fired (and nuclear) outlook, especially as recent polls indicate that the left-wing parties and Podemos are gaining momentum and may be dictating the energy agenda of the upcoming government.
Coal Price Rally Runs Out of Steam
The extended rally coal prices had been on for the previous two weeks came to an end last week, with coal pricing moving lower while oil prices continued to move higher (until the notable pullback in the oil market on Friday). Prices in 3Q16 for all three major forward curves lost significant ground, while deferred prices were more mixed. As PIRA has been affirming since the beginning of 2015, the upside for short-term pricing lies squarely on the oil market, as fundamentals in the prompt are not expected to provide much support.
California Carbon Still Tied to Price Floor
Average WCI prices stayed below, but still tied to, the price floor in May, and the auction was severely undersubscribed. Unsold state-owned allowances will not be re-offered until two consecutive auctions clear above the floor. Unsold consigned allowances will be re-offered in August, in turn requiring higher bid volumes for that auction to clear. The final court decision on the auction will not come until 2017. A legislative fix could be a backstop measure to keep the auction in place, perhaps bolstered by the California Legislature facing reduced auction revenues in the budgeting process. The coming months will see a firming of signals for a tightening cap beyond 2020.
LPG Freight, Arbitrage Under Renewed Pressure
Delivered LPG price were stable in Asia last week. Propane for July delivery gained by just $2 to near $340/MT, while CFR cash butane was called at $20 premium to C3. Saudi propane CP futures added 1.2%, crimping the spread to the Far East to under $15. Despite spot VLGC freight on the benchmark rate from Ras Tanura to Chiba and Japan trading near five-year lows, current arbitrage spreads necessitate a further $10 freight decline for spot physical movements to work.
WASDE Supports, Weather Pushes
The convergence of speculative money and demand was once again on display Friday as witnessed by both the WASDE during the trading day and the Commitment of Traders after the close. Even though both corn and soybean supplies were below market consensus, the length in the markets mitigated much upside potential, although drier-than-expected weather forecasts in the 8-14 day timeframe issued this weekend have pushed corn and soybeans into overdrive again.
Japanese Crude Runs Little Changed; Crude Stocks Build
Crude runs changed fractionally on the week. Crude imports were also little changed and crude stocks built 2.9 MMBbls. Finished product stocks built marginally. Gasoline and kerosene stocks were up modestly, while gasoil drew moderately, but that offset by higher fuel oil, naphtha, and jet stocks. Demand were modestly mixed with the aggregate demand figure falling 80 MB/D. The four-week demand trend has turned higher. Refining margins had improved a bit, but gave back ground on the week.
Production Surged to a Near Record Level
Output jumped the week ending June 3, after plants returned to normal operation following spring maintenance. The manufacture of ethanol-blended gasoline fell after reaching a 10-week high the previous week.
U.S. SPR Sales Unlikely in 2016
Speculation has risen that the Obama administration could conduct SPR sales as early as October 2016, as permitted by two bills passed late last year. However, we believe sales in 4Q16 remain unlikely, judging from recent comments from the Energy Secretary and politics surrounding the November 2016 presidential election.
Global Equities Post Another Neutral Week
Global equities were again on balance, only modestly changed. In the U.S., the broad market was down marginally. The leading sectors were energy, utilities, and consumer staples, which posted good gains. Retail performed the poorest and declined about 2%. Internationally, most of the tracking indices declined, with Europe posting the biggest drop.
Petrobras to Get Full Domestic Pricing Control
Brazil's energy ministry has backed full independence for Petrobras to set domestic fuel prices, blaming past controls for saddling the state-controlled oil company with crippling debt that is the oil industry's largest. Petroleo Brasileiro SA, as the company is formally known, and other state-controlled companies, such as utility Eletrobras, with shares owned by non-government investors, should be free to act in their best interests without government interference, the ministry said in a statement.
Obama Administration in Race to Finalize Regulations
The clock is winding down on the Obama Presidency and the focus in on finalizing rules. Methane regulations for new oil and gas wells were finalized ahead of schedule; follow-through on rules for existing wells will fall to the next administration. This summer will see final one-hour SO2 designations affecting a number of coal units, particularly in Texas; the finalization of the aviation “endangerment finding” for GHG emissions; and final Heavy Duty Vehicle GHG Standards for model years beyond 2018. Renewable Fuel Standards for 2017 proposed in May were ambitious. A draft review of CAFE standards is also expected this summer. PIRA expects EPA to continue working on the Clean Power Plan model rule and FIP, although the stay will prevent formal finalization. The next PM NAAQS review and Secondary NAAQS for SO2/NOx will be punted to the next administration.
RIN Costs Higher
U.S. refiners paid at least $1.35 billion to acquire RINs in 2015. Most refiners had higher costs in the first quarter.
Implications of May Chinese Data on Economy and Oil Demand
In May, China’s industrial production matched expectations, while fixed asset investment disappointed. Housing indicators continued to show large improvements. Recent sequential increases in the producer price index are positive for corporate earnings and will also directionally reduce concerns about China’s debt burden. Meanwhile, physical activity indicators that can directly be related to oil demand (vehicle sales, ethylene production, and passenger air travel) recorded constructive gains.
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.
Coretrax, a leading engineered servicing company for wellbore clean and abandonment, has secured cost savings of nearly £10million in rig time for UK operators.
Focused on improving operational efficiencies and saving rig time in wellbore clean up and abandonment operations, Coretrax’s range of CX-products have been used extensively in decommissioning contracts with operators since 2012.
A Coretrax technician working at the company’s Aberdeen HQ. Credit: Coretrax
One solution from the product range used was the CX-2 bridge plug which is a versatile tool, suited to multiple applications in the oilfield, which reduces cement disturbance and rig time. In addition to this Coretrax have delivered time savings through drill pipe cleaning tools and by combining CX-2 bridge plugs with disposable scrapers to save trip time.
Earlier this year, Coretrax completed the setting of its 150th bridge plug as part of an ongoing abandonment campaign for an operator project in the UK sector. Approximately 40 bridge plugs have been run for the campaign to date, along with swarf recovery strings and drillpipe cleaning tools, and a 100% success rate achieved.
Coretrax global business development director, John Fraser said: “We’re proud that our innovative approach to well abandonment has saved operators almost £10million in rig time since 2012. In the current industry climate, cost savings are imperative and the fact that our technologies significantly contribute towards this is a key benefit for our customers worldwide.
“The design and versatility of the CX-products provide a sound solution for cementing operations. Achieving these cost savings as well as the setting of our 150th bridge plug are fantastic milestones, which not only highlights the reliability and effectiveness of the tool but further underpins our position as one of the leading suppliers of bridge plugs in the North Sea.”
Coretrax was established in 2008 to provide specialist wellbore clean up and wellbore abandonment tools, offering a wide range of downhole tools and services which provide up-to-date solutions to improve time efficiency, maximise cost reduction, reliability, damage prevention and technological advancement to the global oil and gas industry.
The company currently employs 42 people across its bases in Saudi Arabia, Abu Dhabi, Dubai, Kuwait and Aberdeen.
Reducing drilling and development spend has largely been the focus of services and equipment providers in the Gulf of Mexico – with the aim of lowering costs at the most capital intensive period of asset lifecycles. Often overlooked, Opex costs have grown in line with other upstream costs – 7% CAGR from 2010 to 2014 in the Gulf of Mexico. The North American offshore market has some of the highest overall MMO costs per barrel – more than twice the global average.
Historically, offshore Opex has been largely ignored as a critical driver of deepwater project economics, yet this is beginning to change. The current rate of growth combined with the overall operational cost in the Gulf of Mexico is not sustainable. Operators are deferring and cancelling many historically routine operational objectives as long as they stay within safety and regulatory guidelines. Budgets for maintenance and modification projects are now being revisited and contractors will feel the impact. Within our offshore support sector clients, many firms typically point to the large proportion of revenue that is production-linked, implying that this insulates from the effect of oil price cycles. Whilst this may be true up to a point, the effect of the current prolonged downturn clearly reaches far further than exploration and development activities.
Mergers and acquisitions are likely to be a result of this operational spending compression, but there are still many efficiencies to be shaken out. Practices such as consolidating projects and optimising contracting processes are already producing results in many cases. With breakeven economics at $70 per barrel or higher at some Gulf of Mexico prospects, recognition of operational costs and streamlining the value chain can no longer be overlooked.
Andrew Meyers, Douglas-Westwood Houston
The decision by 52% of the voters in the EU referendum last week to vote to leave the EU has had far-reaching impact across the globe. The oil and gas sector, bruised from nearly two years of low oil prices, is bracing itself for the fall out.
The immediate impact of the referendum outcome was a plunge in the value of the pound to a thirty-year low of $1.34, significant falls in all of the world’s stock exchanges and the price of Brent tumbling 5% to $48/bbl.
The greatest risk to the energy industry is surely a global economic slowdown, which would suppress oil prices for longer and delay investment in exploration and production. In the short-term, however, UK-listed oil companies such as Shell, BP and Tullow have fared (comparatively) well since the decision was announced – with a large proportion of dollar-denominated revenue from abroad the devaluation of Sterling actually benefits these companies and they will see in a boost in reported revenues as a result. The end-user at the pump in the UK will, of course, see the opposite effect for the same reason – we import a significant proportion of the oil we consume and prices will rise as a result of the exchange rate movement.
For now, we are left with a perception of risk generated by uncertainty over what ‘Brexit’ actually means. The negotiations on our exit are yet to happen and the timetable and extent of the UK withdrawal are yet to be seen. The Prime Minister has made it clear he will not trigger Article 50 of the Lisbon convention himself and will leave it for the next leader. Despite the outcome of the vote it remains entirely possible that the government (largely pro-Europe) will deliver a ‘Brexit-lite’ outcome or even no Brexit at all.
Steve Robertson, Research Director, Douglas-Westwood
With the referendum rapidly approaching, the question of what Brexit could mean for the UK oil & gas industry has become increasingly intriguing. As a market broadly regulated in London, many argue that an exit vote would lead to no significant changes – at least in the short term. However, new uncertainties for the energy industry may emerge, should the UK decide to part ways with Europe.
In 2013, the UK became a net importer of petroleum products. Traditionally the main sources of the UK imports are from EU countries including France and the Netherlands. An exit vote, along with increased economic instability could potentially lead to a sterling depreciation, resulting in higher import costs and increased uncertainty over future energy supply. This scenario could be a double edged sword – UK upstream businesses would see relatively lower operating costs compared to US competitors, yet, companies with revenues in sterling are likely to face higher repayments of dollar denominated debt.
Limited labor and capital mobility is another concern, which would arguably affect the UK’s ability to attract highly skilled oil and gas workers to the North Sea and potentially discourage foreign energy investment in the mid-to-long term. This risk would be exacerbated if a “Leave” vote were to trigger another Scottish Independence referendum. To ensure free movement of people and goods across borders, the UK could seek membership of the European Economic Area (similar to Norway) – a relatively favorable scenario when compared to the option of bilateral trade agreements (similar to Switzerland). Trade under these agreements is often subject to customs clearance processes, VAT and duties paid by the EU exporting country.
There will undoubtedly be a number of “Brexit” implications for UK oil & gas, however, the current low oil price environment is likely to play a far larger role in shaping the form and structure of the UK energy industry over the coming years. Market recovery may be impacted in part by changes to the UK’s relationship with Europe. Yet, as a mature and expensive play, the future of the UKCS will be largely decided by oil price.
Marina Ivanova, Douglas-Westwood London
Autonomous underwater vehicles (AUVs) have been in operation for a number of years and are an established part of underwater activity, particularly in research and military where they are utilized for activities such as mine clearance, hydrography and data collection. Despite widespread use, there is still potential for substantial growth – each new technological advance increases the viability of the vessels in different sectors. This is particularly clear in oil & gas, where AUVs remain niche assets.
Technological advancement has driven growth in the sector and in the last few years units have become increasingly flexible. AUVs are now capable of performing a range of tasks, which can be changed quickly by operators. Beyond flexibility, increasingly compact vessels have been introduced to the market, making units viable at greater water depths. However, there are still a number of limiting factors preventing wider uptake, these include: limited communication, lack of manipulation ability and low levels of endurance. Improving these areas will be key for increasing the use of AUVs in the future – reducing the requirement for human workers, and likely leading to increased accuracy, reliability and safety.
Fortunately, the sector has a strong research culture and there is constant work to create new concepts and push the current technologies further. There are numerous concepts that aim to improve previous limiting factors, including Eelume’s subsea intervention “snakes” which allow inspection work in areas too small for typical tools, as well as potentially being able to manipulate and adjust subsea valves and chokes. This is a small step toward a fully autonomous subsea development – a likely boon for oil & gas companies. Statoil have recently signed an agreement with Eelume to help accelerate the technology, demonstrating that there is clear interest within the oil & gas sector for autonomous vessels.
In the near term, it is expected that the military will continue to be the biggest user of AUVs – their importance with regards to surveillance continuing to grow. Oil & Gas and renewables should also see an increase in the use of these vessels while they will remain integral to many research efforts. As DW explores in its new World AUV Market Forecast, the future for AUV units appears bright.
Ben Wilby, Douglas-Westwood London
Laden by corruption scandals and falling oil prices, Petrobras is struggling to repay $130 billion (bn) worth of debt – nearly $24bn will mature by 2017. Efforts to sell non-core assets (pipelines, powerplants, bonds etc.) have been slow going and any attempt to divest upstream operations impeded by red tape. Mandatory operatorship (30%) for Petrobras in the pre-salt basin not only limits the company’s options for raising cash from existing upstream assets but also increases the NOC’s capital outlay. Foreign investment in upstream operations has been made less appealing due to Brazil’s unitization rules, which can make outside operators susceptible to additional financial risks.
Offshore Brazil was once known as a “safe haven” for oil field service companies, yet almost half of all indigenous companies are now facing insolvency issues according to KPMG (e.g. Queiroz Galvao, OGX). Macro-economic factors, inefficiencies (low quality of goods and services, failure to fulfil contract deadlines etc.) and stringent local content rules have created a number of obstacles to growth in the sector.
However, despite these challenges, new opportunities may emerge as the national government and Petrobras re-think the O&G industry’s growth strategy. In early 2016, the government launched the ‘PEDEFOR’ program – relaxing local content rulings and incorporating new financial incentives for foreign companies. The response from industry participants has been largely positive – with Aker Solutions opening another subsea manufacturing center in April 2016.
As Petrobras puts upstream assets (Bauna, Golfinho and Tartaruga fields) into the market, it appears further amendments to pre-salt requirements and licensing methods may take place. If implemented, these changes could lead to another wave of foreign investment. Drawing parallels to the mooted IPO of Saudi Aramco, NOCs are beginning to reevaluate their relationship with both national governments and foreign E&P investors. In the current price environment, experimenting with various options and methods of collaboration is likely to be the most sensible approach to dealing with the challenges of today’s oil & gas market.
Chen Wei, Douglas-Westwood Singapore
U.S. Commercial Stocks Slightly Decline
Overall commercial inventories declined this past week with the entire decrease due to a decline in crude stocks. The crude stock decline was much smaller than expected, about equally caused by both higher-than-forecast crude imports and the balancing item. The latter could have been related to EIA re-benchmarking. The year-on-year stock surplus did narrow by 3.4 million barrels to 113.5 million barrels (or 9.1%).
Exports Expected to top 4.5 BCF/D in 2017
Since 2014, Mexican energy policy reforms, coupled with low oil prices, have accelerated the nation’s dependency on U.S. gas exports. Indeed, net shipments to Mexico remain upward trending, with June flows projected to average ~3.7 BCF/D, an increase of ~0.7 BCF/D versus the prior year. Equally striking is our expectation for 2017, which should see exports average ~4.5 BCF/D and yield a year-on-year gain of ~0.9 BCF/D. Notably, the upgrading and development of new critical infrastructure, including gas pipelines, electric generation and transmission capacity, are anticipated to significantly shape cross-border flows in 2017, providing a rich environment for gas demand.
Italy: Nord Prices Trade a Huge Discount versus PUN
Italian day-ahead prices have been generally firmer during June, but day ahead prices in the Northern regions have been settling at a significant discount relative to the PUN, coming closer to the other Continental markets. While Italy has switched to a net exporting position to Slovenia, flows from the other Continental markets, most notably France, remain generally resilient.
Gas Prices Lead Coal Higher
U.S. coal pricing has seen a modest lift from the recent move in natural gas forwards. Coal market balances, however, will require a bit more time to readjust (i.e. trim elevated stock levels). PIRA still sees U.S. coal markets realigning over the course of the next seven to nine months even current forces remain on track.
EUAs Correlated with Fuels, EU ETS Reform Talks Continue
A continued closer relationship between EUAs and thermal fuels could limit downside price movements. However, we still expect EUA prices to decline over the next few months in line with summer natural gas prices, bearish fundamentals, and a lack of policy support as talks on post-2020 ETS reforms continue. A small gain should come starting in August, when auction volumes are lower than in other months. Longer term, a positive Brexit vote could have implications for the ETS.
Fed Projections Suggest Interest Rates Will Stay Lower for Longer
At this week’s policy meeting, the Fed stayed put, as widely expected. Its updated macro forecast also did not surprise, showing little changes from the previous version three months ago. Projections on the future policy rate from meeting participants, however, contained noteworthy developments — in short, their estimate of the neutral interest rate has gone through significant changes, suggesting that rates will likely stay lower for longer in the future. The British referendum about whether to remain in the European Union will take place June 23, with the result expected by the next morning. The outcome of the vote has the potential to create uncertainties on several different levels.
U.S. LPG Prices Outperform
Improving fundamentals, namely tightening propane inventories, helped U.S. LPG prices improve last week. Mt Belvieu propane easily outperformed broader energy markets by logging a 1.5% gain, bringing C3’s value to 45% of WTI. Gulf Coast butane prices also rose 1.2%. Meanwhile ethane prices plunged 10% to 22¢/gal, perhaps as markets digest the large 3+ million barrel improvement in inventories reported for end March.
U.S. Prices and Margins Soar
The week ending June 10, U.S. prices reached the highest level since December 2014. Manufacturing margins were the strongest in over a year.
All Eyes on Corn
2015/16 export sales/shipments in corn have now surpassed last year’s pace by 2%, a remarkable achievement considering the lag for most of the year. Ethanol production set a weekly high for the previous week while Funds turned seller’s midweek after an early week buying spree.
Japan Runs Rise, Inventories Draw
Crude runs rose a bit on the week due to a restarting of units down previously for unplanned maintenance. Crude imports declined sufficiently to draw crude stocks 1 MMBbls. Finished product stocks drew a similar amount. There were modest builds in gasoline and gasoil stocks, and a more moderate build in jet-kero. Naphtha and fuel oil stocks drew moderately and were more than offsetting. Refining margins had improved a bit, but have continued to soften as June unfolds.
Structural Tightness Raises the Floor for Gas Prices
Despite Thursday’s slightly higher-than-expected storage release of 69 BCF, the general momentum in structural tightness appears to be adequate to safeguard the ~15% rally in natural gas prices this month. To be sure, sequential domestic production losses and early cooling demand have raised the floor for the prompt futures contract as well as cash prices.
Financial Stress Builds
Most key indexes fell on a weekly average basis as stress grew due to concerns over the possibility of the United Kingdom leaving the European Union. The S&P 500, US High-Yield Corporate Bond, Russell 2000, and Emerging Market Bond indexes were all lower, while VIX rose substantially. The dollar was mostly stronger, while commodities were mixed. Short- and long-term bond yields in a host of major countries fell. The Cleveland Fed released their inflation expectations for the month, which showed decreases in all the major maturities.
Production Reaches a Record High the Week Ending June 10
Stocks rise for the first time in six weeks. Ethanol demand in blended gasoline remains strong.
Weather Volatility Increases
After a strong close Friday, which saw notable volume of 5K December ’16 corn contracts in the last five minutes and 3K more during the post-close, weekend weather forecasts literally had something for both bulls and bears. Consensus continues to point to hot temperatures, but precipitation forecasts were drier, wetter, and then drier again, and finally wetter, pushing markets lower Sunday evening.
Iraq Oil Monitor, 2Q16
The oil dispute between Baghdad and the KRG resurfaced in March, resulting in the suspension of 150 MB/D from NOC-controlled fields to the Kurdish pipeline. We believe a $5.4 billion IMF package will facilitate an agreement by 2017. Government requests for spending cuts are delaying development plans at large southern fields. Investment reductions and infrastructure constraints underpin our belief that capacity growth will be limited. We also see risks that additional government forces will be diverted north to combat ISIS, leaving more of a security vacuum in Basra.
Lagging LNG Flows Support Prices amid Dutch Output Weakness and Temporary Outsized Impact of Disrupted Norwegian Volumes
After 14 straight months of increases highlighting a new and more aggressive marketing strategy, Norway’s first year-on-year export decrease in June (down 27-mmcm/d) is largely being driven by unplanned outages (Kvitebjorn), not any notion of a change in the new way the gas is being marketed. All of the year-on-year cuts are coming from flows to the Continent instead of to the U.K., where a price premium makes it the last place a marketer wants to cut. Flows to Germany tested a five-year low in early June, but they appear to be on the rebound in the past week. Put in proper perspective, the loss of Kvitebjorn flows are not going to change the trajectory of the market on a fundamentals basis, but do justify short-term price support amid other lingering issues affecting supply.
Global Equities Decline on Heightened Brexit Fears
Global equities were broadly lower on the week. The U.S. market was down 1.7%, with banking and technology posting the sharpest losses. Energy was down about 1%, but outperformed. Internationally, all the tracking indices were lower, with World, ex-US, being the weakest. Europe also posted greater-than-average declines.
Venezuela: Risks Rising, But No Change to PIRA Reference Case
PIRA estimates delinquent payments to service companies have reduced Venezuelan crude production to 2-2.15 MMB/D in May and June, from 2.3 MMB/D in 1Q16. Our Reference Case assumes these issues will be gradually resolved by the end of the year. Recent reports on agreements with Schlumberger and China are marginally encouraging. Higher oil prices may also help. However, worsening economic conditions present more risk to our 2017 forecast, where we have output averaging 2.2 MMB/D. Venezuelan debts are even higher next year, which will leave the government facing increasingly difficult choices between debt payments, oil sector spending, funding for social programs, and imports of consumer products. This raises the risk of social and political unrest, which have the potential to disrupt oil operations. We are watching events closely, as more payments come due and protests worsen.
Domestic Gas Producers in Romania Could Be Challenged by Imports
Romanian Regulatory Authority for Energy (ANRE) president Niculae Havrilet said that the local gas industry might incur some losses due to price liberalization. According to the price liberalization calendar, natural gas prices should increase by 10% on July 1; the suppliers of households will have to make a pool at the lowest price, and with cheaper imports, they will incur losses because of costs of building up stocks. The gas pool for households includes quotas of the current domestic production, stored gas, and imports. As the ANRE sets these quotas to obtain the minimum end price, the president urged for the continuing of the liberalization process. “The end price of gas will definitely not increase by 10%,” he stated.
Nigeria Devaluation Will Lower Oil Production Costs
The recent announcement from the Nigerian Central Bank to devalue the naira could result in lower costs for operators in Nigeria. The Central Bank had previously pegged the naira at around 200 to the U.S. dollar. Several sources estimate the market value of the naira to be around 300 to the U.S. dollar. Assuming a 300 exchange rate and an increase in inflation as a result of the devaluation (from the current rate of 14% to around 22%), costs to produce existing oil supplies and to develop new ones (denominated in U.S. dollars) could be reduced by around 14%. However, the reduction in costs will be a function of how the exchange rate and inflation develop over time.
Despite Weaker Oil Market, Coal Prices Continue to Gain
Coal pricing surged last week, continuing the market rally that has been occurring essentially since February. API#2 (Northwest Europe) and API#4 (South Africa) increased by the largest extent, while gains for FOB Newcastle (Australia) prices were less pronounced. While a recovering oil market has been the primary factor in the surge in pricing for most for the year-to-date, the oil market lost ground last week, with the coal market gaining ground for other reasons. It will be difficult for the coal market to hold on to these gains, unless the oil market continues its upward trajectory, as Atlantic Basin coal fundamentals are on shaky ground.
Asian Refiners Shift Yields to Cope with Strong Gasoline Demand
Asia-Pacific’s oil demand remained robust in 1Q16, with an increase of 1.12 MMB/D year-on-year. China and India contributed almost the entire growth, driven by gasoline and LPG. Asian refiners responded to higher gasoline demand by shifting their yields from gasoil/diesel to gasoline. While there will likely be a temporary shift back to gasoil now because of its recent relative price strength, refiners will soon return to emphasizing gasoline because of relatively strong demand.
Stabilizing Hydro, Destabilizing Finances Threaten Brazil LNG outlook
Long a staple player among counter-seasonal buyers, Brazil’s role as a key 2Q/3Q buyer of LNG is coming under question, as it recovers from a severe years-long drought. YTD LNG import levels through May are down by 40%, or the equivalent of some 20 cargos (11-mmcm/d through May), as the hydro reservoir levels in Brazil show a significant improvement over last year.
Asian Demand Update: Acceleration in Growth Continues
PIRA's latest update of Asian product demand again shows improved growth due to further gains in Chinese demand. This acceleration in Chinese growth was pointed out in our "Spotlight" piece issued June 8th titled "Soaring China Crude Imports Driving Strong Apparent Demand." The latest year-on-year Asian demand growth is now 1.35 MMB/D, with China apparent demand up 1.1 MMB/D. This marks the fourth monthly improvement in Asian demand growth. The low point was in our February assessment, when growth had only been about 0.3 MMB/D. That steady improvement suggests that low prices earlier in the year, have in fact stimulated growth, while economic performance in Asia appears to be improving.
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
N.A. Crude Stocks Fall on Wildfires, Refiner Demand
Canadian oil sands production losses from last month’s wildfires, along with declining U.S. production, led to stock declines and higher crude prices last month, particularly for Western Canadian and Bakken grades. In addition to stock declines in Canada, U.S. crude stocks fell 10 million barrels in May, and are forecast to drop another 90 million barrels through year-end, including a 20-25 million barrel decline in Cushing.
U.S. Gas Market Heats Up
NYMEX price volatility had been muted, due in large part to residual weakness still plaguing the physical markets in all regions, particularly in the case of Henry Hub (HH) in the South. Both futures and cash prices, however, should heat up sooner rather than later with the cooling season now getting under way. While U.S. storage inventories are more akin to Labor Day than Memorial Day, especially in the South Central, seasonally stronger electric generation loads will highlight the increased structural reliance on gas-fired EG and help stifle congestion worries — for the time being at least. As a result, a stronger bid should underpin cash prices not just for HH, but across the South despite ongoing challenges facing the Midwest and Northeast.
Runoff Peaks Early…Again
Reversing recent weakness, Mid-Columbia on-peak rebounded to the mid-teens as hydro output came in below expectations. SP15 also increased, climbing back above the $20 mark as the discount to NP15 narrowed. The latter market was unchanged as California hydro output reached a three year high. Palo Verde was also unchanged as cooler-than-normal conditions again prevailed in the Southwest. Mid-Columbia summer heat rate forecasts have been revised up due to weaker runoff expectations. Unavailability of Aliso Canyon for gas supply balancing in SP15 remains a bullish wildcard for summer.
Coal Prices Move Higher on Oil Market Rally
Both physical and paper prices moved higher this month, with a strengthening oil market providing much of the stimulus for coal pricing. We look for coal pricing to continue to track the oil market over the next several months, although coal supply and demand fundamentals are expected to continue to tighten, and we retain a bullish outlook for 2017 pricing in particular.
RGGI Auction Dominated by Compliance Buying
As PIRA expected, the June RGGI auction was dominated by compliance-oriented buying and reinforced the lower pricing environment of late. In contrast to recent undersubscribed CA/WCI auctions, a strong coverage ratio of 3.1 was observed. As with the March auction, significant bid quantities were observed at low prices; however, the results demonstrated solid price support well over $4. PIRA continues to expect that the 2016 RGGI Program Review will translate to tighter caps post-2020 and provide price support.
Global Equities Post a Neutral Week
Global equities were, on balance, only modestly changed. In the U.S., the broad market was unchanged, though certain sectors posted strong gains, including utilities, consumer staples, and materials. Energy lagged and was lower by 0.8%. Internationally, the strongest performers were BRICs, emerging markets, emerging Asia, and China.
Propane Inventories Enter a Year-on-Year Deficit
Despite a modest weekly build of 1.4 million barrels, propane inventories fell into a 280 thousand barrel deficit to the previous year. Between the end of June 2014 until the week ending on May 20th, propane stocks had been in a constant annual surplus position. PIRA believes that the reversal into a year-on-year decline in stocks is evidence of a change in direction for the propane market. Not only will prices begin to rise and strengthen against broader energy markets, but exports will decline while stocks continue to fall further into deficit.
U.S. Ethanol Prices and Manufacturing Margins Rise in May
The demand for ethanol blended gasoline was robust as the peak driving season approached. At the same time, plants were shut down for spring maintenance.
New Week, New Highs
A WASDE week starts with new highs of $4.25 in new crop corn, $11.00 in new crop soybeans, and a recent Financial Times story touting “commodities (as) the best performing asset class” of 2016. While UK-based pension player Schroders said they have invested their “entire agriculture allocation” after “years and years” of negativity, U.S.-based PIMCO relayed a much more neutral view of commodities in general. As usual, comments around “free money” chasing “returns” in commodities are concerning. Regardless of investor opinion at this point, one look at the positioning of sell orders in the marketplace shows that producers are rewarding this most recent rally, specifically in corn.
Latin America Under Economic Pressure
Consumption of diesel in Latin America is expected to fall vs. 2015 while gasoline stays flat. Diesel demand is expected to contract by 50 MB/D in 2016 to reach 2,850 MB/D led by decreases in Venezuela (20 MB/D) and Brazil (35 MB/D). Imports of diesel into the region are set to be lower in 2016 while gasoline imports stay flat. PIRA projects 2016 Latin American imports of distillates to be around 915 MB/D, about 45 MB/D lower year-on-year. Regional refinery crude runs are projected to track the 2015 average of ~5,600 MB/D. Operational issues continue to affect Venezuelan crude runs: we project throughput to be 550 MB/D in May and 660 MB/D on average for the year. 2016 Brazilian refinery runs are projected to be 1,950 MB/D, down from 1,985 MB/D in 2015 as incentives to import gasoline and diesel remain attractive. Gasoline demand in the Atlantic Basin is good and should support cracks throughout the summer, but production and imports into the U.S. PADD I are high. Diesel cracks are starting to improve and are projected to gradually recover into the fall.
The Invisible Hand: Non-Core Domestic European Gas Production?
Much attention is paid to British, Dutch, and Norwegian gas production, but what is happening outside these main centers in “non-core production” does stack up and should not be ignored. Surprisingly, it adds up to a significant amount. Not surprisingly, it is slowly moving in the same direction as most other European gas production – down.
Rebound Continues Due to Fuel and Evidence of Supply-Side Response
German Calendar 2017 baseload power prices continue to move up, recovering to levels previously seen at the end of December and early January, and moving closer to the forecasts in our latest Monthly Outlook. While a buoyant fuel pricing complex is driving the price recovery, the balances in Germany and the rest of Europe are slightly tightening, as supply is starting to be negatively impacted by squeezed margins and policy intervention is starting to move directionally in favor of conventional generators.
Tighter Atlantic Balances, Higher Oil Prices Push Coal Higher
Coal prices again made sizable gains last week, with Atlantic Basin prices moving particularly higher. Rising oil prices again provided for much of the increase, although there has been some tightening in Atlantic Basin coal balances of late, which explains the relative rise in API#2 (Northwest Europe) and API#4 (South Africa) relative to FOB Newcastle (Australia). PIRA's prevailing market view has been that deferred pricing is undervalued and that backwardation in the forward curve is misplaced. Weakness in demand will keep a lid on further price increases over the near term, but as long as the oil marker keeps rising, coal prices will be pulled along.
What Does Weak U.S. Job Report Mean for GDP and Fed Policy?
The latest report on U.S. nonfarm payrolls disappointed, and a sharp deceleration in the recent pace of job growth raised two questions: what does this mean for the economic growth outlook, and what is the Fed likely to do now? Outside the U.S., the European Central Bank’s latest economic projections hinted at future monetary easing; the Japanese government directionally eased fiscal policy; and recent activity data from India, Brazil, and Russia turned encouraging.
Inventories Drop to 2016 Low
Production increased as plants returned to normal operation. There was a large build in PADD I.
Soybean Run Continues
“’Over’? Did you say ‘over’? Nothing is over until we decide it is!" Movie fans will remember this famous line from Animal House, wherein it was delivered by a seventh-year college senior named Bluto, played by John Belushi. Soybean longs seem to be channeling their most-inner Bluto this week as prompt beans have tacked on an additional dollar since the weekly low just this past Wednesday. The total gain for July beans now stands at $2.50+ in less than two months of trading.
U.S. Commercial Stocks Show Big Decline
Overall commercial inventory fell by the most since mid-February. The decline of over 2.7 million barrels was nearly equal to the combined drops over the previous three weeks. Both crude and product stocks fell by roughly the same amount, with crude down by 1.37 million barrels.
Ukraine Looks to Shore Up Future Gas Supplies
State owned Naftogaz Ukrainy is inviting companies to tender for contracts to supply gas, which will be awarded in the period from June 20, 2016, to January 20, 2017, it said on May 27. This will involve buying gas using Ukraine’s interconnections with the European Union, although it is open to companies or consortia from any country. It has also invited companies and consortia to apply for prequalification for gas supplies, by a deadline of June 10, but it says that "In order to maximize the number of qualified tenderers under this facility, new applicants may apply for prequalification throughout the duration of the facility."
U.S. Labor Market Slows
A surprisingly sluggish U.S. labor market report for May has affected expectations for future Fed policy, and the dollar weakened against most key currencies. The labor market disappointment should be directionally negative for risk assets, but reaction was apparently muted on Friday. On a weekly average basis, sensitive financial market indicators that we track (such as the S&P 500 index and the high-yield corporate bond index) registered week-on-week gains. In commodity markets, metal prices generally moved lower this week, while prices of agricultural goods moved higher.
Japanese Crude Runs Fell, Imports Rose and Stocks Built
Crude runs fell again amid turnarounds and unplanned outages that have yet to restart. Crude imports rose and stocks built 3.3 MMBbls, about half of the decline seen the previous week. Finished product stocks fell and the decline was underpinned by good draws for jet fuel and gasoil. Gasoline demand was strong, but an equally high supply side led to only a fractional stock draw. The kerosene stock build rate moved up from 75 MB/D to 93 MB/D on seasonally weaker demand. Refining margins have begun to improve a bit, but remain soft. On the week, major light product cracks firmed, while fuel oil and naphtha eased.
Supply-Side Balancing Under Way
Beyond price-induced demand growth, accelerating production declines are playing an increasingly important role in limiting this year’s stock build. To be sure, this week’s EIA Crude Oil and Monthly Natural Gas Production report validates the supply-side balancing under way. More specifically, the EIA data for March indicated U.S. dry gas production was down M/M by ~1.3 BCF/D and up year-on-year by only ~0.1 BCF/D. These figures were in line with our estimates for the month.
March 2016 U.S. Domestic Production Decline Accelerates, Now Very Close to PIRA Estimate
DOE recently released its March oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, fell 56 MB/D month-on-month and shows a year-on-year decline of 381 MB/D. In contrast, the weekly data had posted monthly equivalent rise of 237 MB/D, Mar. vs. Feb. This implies domestic crude supply was reduced 131 MB/D from what the weekly data had been showing. The balancing item has been running negative the last three of four months, with March coming in at -147 MB/D, after being -97 MB/D in February. PIRA has been pointing out that the DOE monthly collection methodology tends to overstate production since its survey universe lacks full coverage of smaller producers. It is the balancing item that reflects this bias and this is why PIRA adds it to reported production to estimate domestic crude supply.
Lack of Send-Out in N.W. Europe Reflects Weaker LNG Supply Growth and More Norwegian and Russian Gas
The lack of LNG send out in N.W. Europe will continue to act as a major support for NBP prices and, by extension, spot prices around the world. Stronger NBP prices have become the benchmark for LNG netbacks elsewhere, which is a theme worth repeating no matter how many times you see us write it.
U.S. March 2016 DOE Monthly Revisions: Demand and Stocks
DOE released its final monthly March 2016 (PSM) U.S. oil supply/demand data. March 2016 demand came in at 19.62 MMB/D. Growth again was particularly strong for gasoline (+3.8%, 344 MB/D), while the barrel average was up 2%, or 378 MB/D. Distillate and kero-jet both underperformed the barrel average. Distillate was lower by 2.1% versus year-ago, while weather in March was 17% warmer-than-normal and 37% warmer than last year, so there was an apparent influence from an HDD standpoint. Even at the end-of the season, such an impact on heating oil demand is calculated by PIRA as a reduction of 280 MB/D versus year-ago.
Anadarko SCOOP/STACK: Emerging U.S. Shale Play
The Anadarko SCOOP/STACK is emerging as a leading shale play with prolific well productivity, relatively high oil content, and superior netbacks. Breakevens are currently on par with the Permian and Eagle Ford ($45-50/Bbl) and stand to improve as operators further drive efficiencies. The play is still in the delineation phase, with much of current drilling activity focused on holding acreage. Full-scale development mode will likely start by 2018 as prices improve. We believe the long-term potential of the play is promising, with liquids production reaching 800 MB/D by 2030, from the current 180 MB/D.
Aramco Pricing Adjustments for July Indicate Saudi Is Not Pushing Volume
Saudi Arabia's formula prices for July were just released. There is no indication that Saudi desires to sell more oil into the market. Differentials into Asia were tightened for all grades expect Arab Extra Light, which was left unchanged. Pricing differentials for the U.S, were also tightened for all but the lightest grade, Arab Extra Light, whose differential was reduced $0.30/Bbl. For Europe, differentials were lowered for both Northwest Europe and the Med.
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
Hercules Offshore, Inc. (Nasdaq: HERO) (the "Company" or "Hercules") has announced, following a review of its strategic alternatives led by a Special Committee comprised of all of its independent Board members, that the Company has entered into a Restructuring Support Agreement ("RSA") with lenders holding approximately 99 percent of the indebtedness under its first lien credit agreement. The agreement seeks to maximize value for the Company's stakeholders and provide a smooth transition for employees, customers and suppliers through an orderly sale of the Company's assets.
Under the terms of the RSA, Hercules and certain of its U.S. subsidiaries will solicit acceptances and rejections of its pre-packaged Chapter 11 plan from first lien lenders and shareholders, file voluntary Chapter 11 petitions to compromise the Company's obligations to its first lien lenders and provide a recovery to its shareholders, and then place all of the Company's unsold assets into a wind-down vehicle to ensure their continued, safe operation until they can be sold. The Company's international subsidiaries will not be included as part of the Chapter 11 cases but will be part of the sale process.
Hercules's Chapter 11 Plan (the "Plan") provides that unsecured creditors will be paid in full. The Company expects to file the typical First Day Motions to, among other things, maintain employee wages and benefits and insurance throughout the Chapter 11 process and will file a separate First Day Motion to continue paying its suppliers' pre-petition claims under normal payment terms. If the Company's shareholders vote as a class to accept the Plan, shareholders will receive cash recoveries over time including a payment of $12.5 million upon the completion of the Chapter 11 process and additional cash distributions thereafter depending on the success of the sale of the Company's assets through interests in the post-Chapter 11 wind-down vehicle. The secured lenders likewise are projected to receive cash payments largely dependent on the success of the sale process.
As part of the process, Hercules also announces that it has entered into a definitive agreement to transfer the right to acquire the newbuild harsh environment jack-up rig, formerly named Hercules Highlander, to a subsidiary of Maersk Drilling (CPH: MAERSK). The rig is ready for immediate delivery from Jurong Shipyard Pte Ltd ("Jurong") in Singapore. According to the agreement, Maersk Highlander UK Ltd. succeeds to the right to take delivery of the rig and will settle the final payment of approximately $196 million with Jurong.
On November 6, 2015, Hercules completed its initial financial restructuring under Chapter 11 of the U.S. Bankruptcy Code with a new $450 million senior secured credit facility in place. Since this time, the ongoing decline in oil prices, the consolidation of its U.S. customer base and the addition of new capacity have negatively impacted dayrates and demand for Hercules's services. On February 11, 2016, the Company announced a Special Committee comprised of all the independent members of its Board of Directors to explore strategic alternatives. Today's RSA announcement is the outcome of that process and follows a thorough sale process, which did not yield results that would have been better for stakeholders than what is contemplated by the Plan.
Additional information regarding the RSA and events leading up to its execution are available at http://www.herculesoffshore.com and will be filed with the Securities Exchange Commission. This information is not an offer or the solicitation of an offer for any transaction and may not be used or relied on in connection with any transaction.
The Company has engaged Akin Gump Strauss Hauer & Feld LLP as its legal counsel, PJT Partners as its financial advisor and FTI Consulting as its restructuring advisor.
BHP Billiton has outlined its value-focused approach to exploration which will see the Company target opportunities across copper and oil to enhance its long-life, tier 1 portfolio.
Speaking at Citigroup’s Mining Exploration Day in Sydney, BHP Billiton Head of Geoscience, Laura Tyler, said the Company is focusing its exploration approach through targeted analysis and the establishment of a Geoscience Centre of Excellence.
Ms. Tyler said exploration is seen as a key source of value creation for BHP Billiton.
Laura Tyler, Chief of Staff, Head of Geoscience. Photo credit: BHP Billiton
“We are investing at a time when most in our sector continue to reduce discretionary spend,” she said.
“Next financial year, we intend to invest approximately US$900 million dollars in exploration, which represents 18 per cent of our overall capital budget.
“We are also challenging existing paradigms with a scientific based and disciplined approach to exploration. We have reduced exploration operating costs by 70 per cent since 2013, and this year we have increased the targets tested by 44 per cent.”
“Over the last four years we have developed a new approach to Petroleum exploration that is much more focused,” Ms Tyler said.
“We have commenced drilling in Trinidad and Tobago and have secured an additional rig which will soon commence drilling in a prospective block north of our Shenzi operations in the Gulf of Mexico.”
BHP Billiton’s Copper exploration program is targeting tier 1 greenfield mineral deposits, with a particular focus on:
copper porphyry and skarn deposits in Chile, Peru and the south west of the United States,
sedimentary hosted copper deposits in the north of Canada, and
Iron Oxide Copper Gold deposits in South Australia’s Stuart Shelf, adjacent to Olympic Dam.
“We execute our Copper exploration both directly and through investment in joint venture opportunities and we continue to seek partnerships with junior explorers,” Ms. Tyler said.
The Company’s regionally based exploration teams are supported by a globally integrated geoscience team to facilitate a faster adoption of best practice and new technology.
“Internal collaboration is very important and we are leveraging our Petroleum business geoscience to identify prospective sediment hosted copper deposit basins,” Ms. Tyler said.
“Similarly, we are adopting technology from Petroleum and applying directional drilling techniques to copper exploration.”
In recent years, Liquefied Natural Gas (LNG) has become integral to meeting global energy demand. However, as the oil & gas industry continues to navigate the prolonged downturn, capital intensive export LNG projects have been in the spot light due to questionable economic viability. A key driver is oversupply in the global LNG market – spot prices are expected to remain low in the near-term (Henry Hub averaged $1.92MMBtu in May 2016 a 58% decline from May 2014). This gloomy scenario presents limited economic incentives for companies to commit to capital intensive projects in a period plagued with budget austerity.
With the world’s LNG export capacity currently above 310.8 mmtpa, an additional 30.8 mmtpa is expected to be added by the end of 2016 – annual additions are expected to increase by 37% in 2017. However, demand is expected to plateau over the next two years. Reduced demand from Japan will likely be made up by growth from China and India. Both of these factors increase the risk of a short-term demand – supply imbalance. Massive investment prior to the industry downturn on large Australian and US LNG projects has driven this growth. Other projects expected over the same period include the PFLNG-Satu (Malaysia), Prelude FLNG (Australia), Yamal LNG Train 1(Russia) and Bintulu LNG train 9 (Malaysia).
Despite near term concerns of oversupply, natural gas is expected to play a vital role as a bridge fuel between environmentally damaging coal and oil to renewables. This will be vital to ensuring that the COP21 commitment to limiting global temperature increase to 1.5 degrees by the middle of the century is achievable. There is plentiful gas supply, as well as massive yet to be developed gas reserves in the Mediterranean Sea, East African Basin, and various unconventional reserves. This is the window of opportunity to implement constructive legislative strategies to help switch industries with heavy carbon footprints, such as the maritime industry to gas. Such a shift in legislative strategy and improvement in technology will increase both the appeal and use of a fuel that could help lower the global carbon footprint.
Mark Adeosun, Douglas-Westwood London
As an indicator of the turmoil that has hit the US oil & gas services sector the Baker Hughes rig count is hard to beat. From 1,931 rigs drilling in September 2014 the count has declined to a total of 408, dramatically reducing activity and jobs for drillers, service companies and suppliers alike.
Unconventional activity has been hit hard. Higher horsepower rigs, ever-longer laterals and costly stimulation services increased well costs by millions of dollars compared with conventional, vertical wellbores. Despite impressive cost savings across the US, non-core unconventional assets have been among the main casualties of the current energy crisis. Even core areas of the prolific Eagle Ford and Williston Basins saw market declines in active rigs.
Those declines may have finally hit bottom. The last four Baker Hughes rig count updates have horizontal rigs targeting oil at 248, 249, 249 and 257 units. Larger unconventional drillers have stated that $50/bbl WTI will be enough for them to add rigs to the fleet, albeit in modest numbers, a price now within reach. While vertical rigs continue to decline slightly, the US service sector has now reached, or very nearly reached, what appears to be the trough. This is good news for oilfield employment with data suggesting up to 200 workers are employed for each active rig, either directly or indirectly.
While the unconventional oilfield services and new equipment sectors appear to have finally hit the lowest point in the cycle, their path to profitability remains distant. The balance of 2016 is set to remain testing as the unconventional rig count grinds upward.
Matt Loffman, Douglas-Westwood Houston
Sky-Futures, a leading provider of drone inspection services for the oil and gas industry, has raised £2.5m from award-winning venture capital fund, MMC Ventures.
The Series A investment – the largest ever into drone technology in Europe – comes after a year of significant expansion for the business, growing by 700% in FY2014. This investment will enable Sky-Futures to continue its rapid growth and continue building out its integrated technology inspection platform.
Image Courtesy: Sky-Futures
Founded in 2009, Sky-Futures is the world leader in oil and gas drone inspections, working with more than 30 of the biggest oil and gas companies in the world including Apache, BG Group, BP, ConocoPhillips, Shell and Statoil. The drones collect high definition video, stills and thermal imagery data, which is analysed in a proprietary data platform and delivered to the client as a technical report written by highly qualified, in-house global industry experts. Sky- Futures now delivers drone inspection services in the North Sea, the Middle East, South East Asia and North Africa, and has recently opened an office in Houston, Texas to serve clients in the Gulf of Mexico, having been one of the first companies to receive FAA regulatory approval to operate in the US.
This investment follows two significant seed rounds, which included prominent angel investors Nick Robertson (CEO of ASOS) and Jon Kamaluddin (former International Director of ASOS).
James Harrison, co-founder and CEO of Sky-Futures, said: “We have experienced a fantastic level of growth in the past year, expanding our global reach and further establishing ourselves as the world leaders in oil and gas drone inspection. We recently received the permit to use our drones in United States National Air Space, an incredibly significant development, allowing us to further expand our international operations footprint.”
“Today’s funding announcement marks the next stage for Sky-Futures, and we are looking forward to working with the MMC Ventures team as we further develop our technology- driven commercial drone services.”
Simon Menashy, Investment Director at MMC Ventures, said: “Drone technology is an exciting area of innovation, but it’s only now that we are seeing leading commercial operators emerge. Sky-Futures’ use of drone technology in the oil and gas market is world-leading and changes the game for platform operators in terms of cost, safety and depth of data analysis. We’re excited to work with an exceptional trio of founders in James, Chris and Nick, and look forward to helping the team to take the business to the next level of global scale.”
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